Watson v Malloy
Watson v Oldrey
[1988] 3 All ER 459
Categories: LOCAL GOVERNMENT: SALE OF GOODS
Court: QUEEN’S BENCH DIVISION
Lord(s): WOOLF LJ AND HUTCHISON J
Hearing Date(s): 26 APRIL, 5 MAY 1988
Street trading – Pedlar – Trading as pedlar – Street trader travelling from place to place to trade from portable stand – Whether trading as a ‘pedlar’ – Pedlars Act 1871, s 3 – Local Government (Miscellaneous Provisions) Act 1982, Sch 4, para 1(2)(a).
A person who travels from place to place in order to trade by selling goods from a portable stand is not a ‘pedlar’ within the meaning of s 3a of the Pedlars Act 1871, since he is not an itinerant seller who trades as he travels, going to his customers rather than them coming to him. Accordingly, he may be subject to the restrictions contained in Sch 4 to the Local Government (Miscellaneous Provisions) Act 1982 against street trading and cannot claim exemption under para 1(2)(a)b of Sch 4 to the 1982 Act from those restrictions on the ground that he is a pedlar (see p 462 j to p 463 d, post).
Notes
For the meaning of ‘pedlar’, see 29 Halsbury’s Laws (4th edn) para 711, and for cases on the subject, see 33 Digest (Reissue) 251, 2094–2098.
For the Pedlars Act 1871, s 3, see 27 Halsbury’s Statutes (4th edn) 374.
For the Local Government (Miscellaneous Provisions) Act 1982, Sch 4, para 1(2), see 47 Halsbury’s Statutes (4th edn) 546.
Case referred to in judgments
Sample v Hulme [1956] 3 All ER 447, [1956] 1 WLR 1319, DC.
Cases also cited
Baker v Bradley (1910) 103 LT 253, DC.
Howard v Lupton (1875) LR 10 QB 598.
Keep v St Mary’s Newington Vestry [1894] 2 QB 524, CA.
Summers v Holborn District Board of Works [1893] 1 QB 612, DC.
Cases stated
Watson v Malloy
Andrew Forbes Watson, on behalf of the Plymouth City Council, appealed by way of case stated by the justices for Plymouth in respect of their adjudication as a magistrates’ court sitting at St Andrew Street, Plymouth on 28 January 1987 whereby they dismissed an information laid by the appellant alleging that the respondent, Walter Malloy, on 8 November 1986 at Plymouth, had engaged in street trading, namely the selling of gift wrapping paper from a portable stand in the pedestrian area of Old Town Street, Plymouth without being authorised to do so, contrary to para 10(1) of Sch 4 to the Local Government (Miscellaneous Provisions) Act 1982. The questions for the opinion of the High Court were (i) whether there was any evidence to support the finding that the respondent took all reasonable precautions and exercised all due diligence to avoid the commission of the offence; and (ii) whether, if there was no such evidence, the justices’ determination was correct in law. The facts are set out in the judgment of Hutchison J.
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Watson v Oldrey
Andrew Forbes Watson, on behalf of the Plymouth City Council, appealed by way of case stated by the justices for Plymouth in respect of their adjudication as a magistrates’ court sitting at St Andrew Street, Plymouth on 28 January 1987 whereby they dismissed an information laid by the appellant alleging that the respondent, Tina Oldrey, on 8 November 1986 at Plymouth, had engaged in street trading, namely the selling of gift wrapping paper from a portable stall in New George Street, Plymouth being a street designated for the purposes of s 3 of and Sch 4 to the Local Government (Miscellaneous Provisions) Act 1982 as a street in which street trading was prohibited, contrary to para 10(1) of Sch 4 to the 1982 Act. The questions for the opinion of the High Court were: (i) whether there was any evidence to support the finding that the respondent was acting as a pedlar under the authority of a pedlar’s certificate granted under the Pedlars Act 1871; and (ii) whether, if there was no such evidence, the justices’ determination was correct in law. The facts are set out in the judgment of Hutchison J.
Stephen Hockman for the appellant;.
Jeremy Griggs for the respondents.
Cur adv vult
5 May 1988. The following judgments were delivered.
HUTCHISON J (delivering the first judgment at the invitation of Woolf LJ). There are before the court two appeals by the prosecutor by way of case stated by Plymouth City justices in respect of their dismissal on 28 January 1987 of informations laid on behalf of the Plymouth City Council alleging unlawful street trading by the respondents. Before the justices and before us the cases were heard together, and while there are some factual differences between them, they are not in my view material.
It is convenient to mention first the case concerning Mr Walter Malloy. The information alleged that on 8 November 1986 at Plymouth Mr Malloy engaged in street trading, namely the selling of gift wrapping paper, from a portable stand in Oldtown Street, which was a ‘consent street’, without being authorised to do so under Sch 4 to the Local Government (Miscellaneous Provisions) Act 1982.
I shall in a moment refer to the relevant statutory provisions, but before I do so, and in order that those references may be better understood, I mention that the defences relied on by Mr Malloy were that he was a pedlar trading as such, that accordingly he did not need authority from Plymouth City Council pursuant to the relevant street trading legislation, and that if, and in so far as, the absence of a current certificate prima facie prevented reliance on that line of defence, he could take advantage of a saving provision in the relevant statute by reason of having taken all reasonable precautions and exercised all due diligence to avoid the commission of an offence by having applied for such a certificate.
Before this court counsel for the respondents (for whose carefully researched and erudite arguments on the law relating to pedlars and hawkers we should like to express our admiration) suggested that the argument before the justices on the point of reasonable precautions and due diligence had been directed not merely to the circumstances in which Mr Malloy found himself without a pedlar’s certificate, but involved also the contention that, having for years sought and been granted one and traded, Mr Malloy believed lawfully, as the holder of such a certificate, he had taken all reasonable precautions and exercised all due diligence not to break the law as to street trading.
As to that, on our reading of the cases stated, the point was not taken in this way before the magistrates. Furthermore, the argument is plainly unsustainable, amounting as it does to no more than an assertion that a person who erroneously believes that he is entitled to do that which is in fact unlawful has taken all reasonable precautions and
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exercised all due diligence to avoid breaking the law. It is not even as though Mr Malloy had taken legal advice on the subject. I shall say no more about that particular aspect of the case.
The offence charged arises under para 10 of Sch 4 to the Local Government (Miscellaneous Provisions) Act 1982. Section 3 of that Act provides that a district council may resolve that Sch 4 shall apply to their district and that where they do so it shall come into force on the day specified in the resolution. That was apparently done in this case. The result is that by virtue of para 10 of Sch 4 a person who in Plymouth engages in street trading in a prohibited street or in a consent street without being authorised to do so under the schedule commits an offence.
Paragraph 1(a) of Sch 4 defines a prohibited street as one in which street trading is prohibited and a consent street as one in which street trading is prohibited without the consent of the district council. Paragraph 1(2) provides that for the purposes of the schedule ‘trading by a person acting as a pedlar under the authority of a pedlar’s certificate granted under the Pedlars Act 1871’ is not to be regarded as street trading. Paragraph 10(2) of the schedule provides a defence to a person charged with an offence under para 10(1) if he proves that he took all reasonable precautions and exercised all due diligence to avoid the commission of the offence.
Section 3 of the Pedlars Act 1871 defines a pedlar as follows:
‘The term “pedlar” means any hawker, pedlar, petty chapman, tinker, caster of metals, mender of chairs, or other person who, without any horse or other beast bearing or drawing burden, travels and trades on foot and goes from town to town or to other men’s houses, carrying to sell or exposing for sale any goods, wares, or merchandise, or procuring orders for goods, wares, or merchandise immediately to be delivered, or selling or offering for sale his skill in handicraft.’
The justices found the following facts. (a) On 8 December 1986 Mr Malloy sold wrapping paper from a portable stand in a stationary position in Old Town Street, Plymouth, which was a consent street. They had before them a photograph, which we have been shown, which depicts a not unfamiliar scene: Mr Malloy standing in some sort of recess on the side of the pavement remote from the street, with his sheets of Christmas wrapping paper displayed over plastic coated wire ladder rails which look not unlike the sort of thing that can be used for spreading out washing to dry indoors. The picture is, as this finding of the justices established, of a man conducting his business from one position, rather than of someone carrying and selling goods as he moves around.
The justices’ findings continue: (b) Mr Malloy travelled all over the country by motor vehicle to Leeds, Manchester and London selling merchandise from a portable stand, but spent the greater part of the year in the West Country. There he travelled around to Tavistock, Plymouth, Tintagel, Bude and Torquay selling merchandise from a portable stand, sunglasses in the summer and Christmas wrapping paper in the winter.
The justices go on to describe how Mr Malloy, despite having applied for renewal of his pedlar’s certificate, came through some mischance or oversight to find himself without a valid certificate on 8 November. The justices, on the basis of the matters to which those findings relate, found the defence of all reasonable precautions etc made out. Implicit in that finding is their acceptance of the proposition on which the argument on this appeal has concentrated, that Mr Malloy was acting as a pedlar at the material time.
In the course of argument I suggested to counsel for the appellant that if that conclusion were correct he might be disposed to concede the point on due diligence. He was not prepared to do so. However, he never returned to the matter in argument, and since, on the view I take, this appeal succeeds on the principal ground argued by counsel for the appellant, I propose to say no more about the facts relating to the absence of a pedlar’s certificate than that, as at present advised, I should have required a lot of persuasion to interfere with the justices’ conclusion.
The point in this appeal which gives rise to general interest, and on which we are told
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it is regarded as a test case, is whether on the facts found by the justices it was open to them to hold that Mr Malloy was acting as a pedlar.
On this issue the respondent, Mr Malloy, taking the view that the case stated by the justices did not contain sufficient information to enable this court properly to adjudicate on it, successfully invoked his right to invite the court to remit the case to the justices for amendment. This was done by virtue of an order of 12 October 1987 whereby the justices were directed to amend the case by setting out a summary or annexing a note of all the evidence. This they did on 10 February 1988, stating in effect that the evidence for the prosecution was formal and unchallenged and that the evidence for the defence consisted of that of Mr Malloy himself, who gave evidence on oath along the lines of his statement, which they annexed.
In the circumstances I should read that part of the statement material to what I have described as the real point in this appeal:
‘I am a pedlar by trade and have been for about 30 years, holding a pedlar’s certificate since 1957, except for a break of 6 years from 1970. On the 8th November, 1986 I was selling Christmas wrapping paper as I have done for years from my stall outside Boots Chemist in Old Town Street. I travel all over the country by motor vehicle to Manchester, Leeds and London selling merchandise from a portable stand but I spend the greater part of the year in the West Country. In the West Country I travel around to Tavistock, Plymouth, Tintagel, Bude and Torquay selling merchandise from a portable stand. I sell sunglasses in the summer and Christmas wrapping paper in the winter. I produce a photograph, Exhibit 1, of my stall [that is the photograph to which I have earlier referred]. I have always traded in this manner under my pedlar’s certificate which I thought covered me.’
The argument for the appellant is simple, and was succinctly put by counsel. The vital words of s 3 of the Pedlars Act 1871 are, he submits, ‘travels and trades on foot’. Those words are not to be found in the analogous provision in s 2 of the (now repealed) Hawkers Act 1888. Travelling and trading on foot is of the essence. The succeeding words of the section impose additional, not alternative, requirements. Counsel submits that the words of the section recognise the clear distinction between a pedlar in the classic sense, and someone who sets up his stall for a day and cannot realistically be described as travelling and trading on foot.
Counsel for the appellant, while acknowledging that considerations of this sort cannot be decisive on an issue which is essentially one of construction, points to the fact that if Mr Malloy is a pedlar then the restrictions imposed on street trading are virtually ineffective. If Mr Malloy is a pedlar, then so are market traders who set up their stalls on different days of the week in different towns. To obtain a pedlar’s certificate presents no difficulty: all that is required is that the police should be satisfied that the applicant is above 17 years of age, of good character and bona fide intends to carry on the trade of a pedlar (see s 5 of the 1871 Act), and it may be assumed that in the case of persons of good character the issue of a certificate in response to an application is virtually automatic. The answer, counsel suggests, is that people trading in the way Mr Malloy trades simply are not pedlars, either in the popular conception of that word or in the terms of the definition in the 1871 Act.
Counsel for the respondents began by drawing our attention to the distinction in the statutes between the hawker, who, with his horse, is entitled to trade countrywide and is subject to more stringent requirements for the grant of a certificate, and the humbler pedlar. I have to say that, interesting though I found this review of distinct but related forms of activity, one entirely and one largely superseded by modern social and commercial developments, it does not seem to me to elucidate the problem.
Then counsel for the respondents proceeded to suggest that the essential distinction was between people with portable stands on the one hand and people with permanent shops on the other. This, as it seems to me, identified a distinction which might have been, but was not, drawn in the relevant legislation.
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Turning to the definition in s 3 of the 1871 Act, counsel for the respondents submitted that there were five elements in the section: that he should be without a horse or beast bearing or drawing burden; that he should travel; that he should trade on foot; that he should either go from town to town or to other men’s houses; and that he should carry or expose for sale goods etc. Taking each of these individually, he was able to argue that Mr Malloy filled the bill. He had no horse; he travelled; he traded on foot; he went from town to town; and he exposed goods for sale.
The fallacy, as it seems to me, in this piecemeal approach is that it entirely disregards (i) the overall purport of the definition and (ii) the vital conjunctive ‘and’ between ‘travels’ and ‘trades’. The definition in s 3, so far from extending or varying, in my view entirely conforms with the ordinary conception of the meaning of the term ‘pedlar’, as one would expect with a definition which includes as part of the meaning the very word sought to be defined. The popular conception of a pedlar is someone who goes around selling things or services, who sells on the move; he is an itinerant seller.
If the distinction is to be encapsulated in an aphorism, one might say that a pedlar is one who trades as he travels as distinct from one who merely travels to trade. I do not mean that he must not stop. As Woolf LJ suggested during the argument, the chair mender stops in order to mend chairs, but the feature which makes him a pedlar is that he goes from place to place, mending a chair here and a chair there; he comes to the owners of the distressed chairs, rather than setting up his pitch and allowing them to come to him.
I hope that I have said enough to show why I cannot accept that Mr Malloy, trading in Christmas paper, or for that matter sunglasses in the summer, in the way described in the amended case stated, is acting as a pedlar. I have derived no real help from the cases to which we were referred, even from the decision of Lord Goddard CJ in Sample v Hulme [1956] 3 All ER 447, [1956] 1 WLR 1319, relied on by both sides. On the facts found by the justices, and applying the definition in s 3 of the 1871 Act, Mr Malloy simply was not trading as a pedlar.
I can deal very shortly with the case of Miss Oldrey, where the position is, if anything, plainer. In her case too there was an order from this court which led the justices to augment the case stated. As originally drawn it recorded the finding that she on 8 November 1986 sold wrapping paper from a stand in New George Street, Plymouth, a prohibited street; and that at other times during the year she travelled around in a motor vehicle to various West Country towns and there sold merchandise from a portable stand. She had a current pedlar’s certificate. Her statement, added to the case as a result of the order, records that she normally works from 9 am to 4 pm, and when in Plymouth sells goods from a stall in the same position. She plainly is not a pedlar.
It follows that in my judgment both appeals must be allowed. Since these appeals were brought in order to obtain a ruling on a point of principle and that end has now been achieved I would, as a matter of discretion, make no order remitting the matter to the justices.
WOOLF LJ. I agree.
Appeals allowed. The court refused leave to appeal to the House of Lords and refused to certify, under s 1(2) of the Administration of Justice Act 1960, that a point of law of general public importance was involved in the decision.
Solicitors: Sharpe Pritchard agents for A Forbes Watson, Plymouth (for the appellant); Peter Fox & Co, Taunton (for the respondents).
Sophie Craven Barrister.
Lonrho plc v Fayed and Others
[1988] 3 All ER 464
Categories: TORTS; Other Torts
Court: QUEEN’S BENCH DIVISION
Lord(s): PILL J
Hearing Date(s): 28, 29, 30 MARCH, 22 JUNE 1988
Tort – Interference with business interest – Take-over bid – False statements made to third party to prevent rival’s take-over bid succeeding – Whether opportunity to make take-over bid a legal right – Whether false statements which prevent take-over bid giving rise to cause of action.
The plaintiffs and the defendants were competing bidders to take over a public company. By 1979 the plaintiffs had acquired almost 30% of the company and their bid was referred to the Monopolies and Mergers Commission by the Secretary of State. In 1981 the plaintiffs gave an undertaking to the Secretary of State not to purchase any more shares in the company. In 1985 the defendants made a bid for the company while the plaintiffs were still subject to their undertaking. The defendants’ bid was not referred by the Secretary of State to the commission. The plaintiffs alleged that the Secretary of State had been influenced in his decision not to refer the defendants’ bid by fraudulent misrepresentations made by the defendants about themselves to him and they brought an action against the defendants claiming that the defendants, by their fraudulent misrepresentations, had induced the Secretary of State to act in a manner which had damaged the plaintiffs’ business by depriving them of the opportunity to bid for the company and they had thereby committed the innominate tort of inducing another by illegal means perpetrated against him but directed against the plaintiffs to act so that a legal or property right or other business interest of the plaintiffs was damaged. The plaintiffs also claimed that the defendants were guilty of conspiracy and that the defendants’ merchant bank was liable to the plaintiffs for negligent misstatements made to the Secretary of State. The defendants and the merchant bank applied to have the action struck out as disclosing no reasonable cause of action. The master refused to strike out the action and the defendants and the merchant bank appealed to the judge in chambers.
Held – The appeal would be allowed and the statement of claim struck out, for the following reasons—
(1) The opportunity to make a take-over bid was not a legal right which the law would protect against a competitor who made false statements about himself to a third party with the aim of preventing the take-over bid. Accordingly, the plaintiffs had no cause of action in tort on which to base their claim. In any event, there had not been sufficient nexus between the defendants’ misrepresentations and the damage suffered by the plaintiffs to support a cause of action. Furthermore, if the plaintiffs had no cause of action under the innominate tort the claim in conspiracy to commit that tort was also bound to fail (see p 472 c d g to j and p 475 a, post); dicta of Bowen and Fry LJJ in Mogul Steamship Co v McGregor Gow & Co [1891–4] All ER Rep 263 at 279, 285 and National Phonographic Co Ltd v Edison-Bell Consolidated Phonograph Co Ltd [1904–7] All ER Rep 116 considered.
(2) The plaintiffs had no cause of action in negligence against the merchant bank because it had not been shown that the bank had assumed any responsibility towards the plaintiffs and the necessary relationship of proximity between the parties did not exist (see p 474 j, post).
Notes
For damage without infringement of a legal right and damage arising out of trade rivalry, see 45 Halsbury’s Laws (4th edn) paras 1204, 1206, and for cases on the subject, see 46 Digest (Reissue) 228–229, 589, 1928–1931, 6396.
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Cases referred to in judgment
Allen v Flood [1898] AC 1, [1895–9] All ER Rep 52, HL.
Allied Arab Bank Ltd v Hajjar (No 2) [1988] 3 All ER 103, [1988] 3 WLR 533.
Bromage v Prosser (1825) 4 B & C 247, 107 ER 1051.
Business Computers International Ltd v Registrar of Companies [1987] 3 All ER 465, [1988] Ch 229, [1987] 3 WLR 1134.
Caltex Oil (Australia) Pty Ltd v Dredge Willemstad (1976) 136 CLR 529, Aust HC.
Candlewood Navigation Corp Ltd v Mitsui OSK Lines Ltd, The Mineral Transporter, The Ibaraki Maru [1985] 2 All ER 935, [1986] AC 1, [1985] 3 WLR 381, PC.
Capital and Counties Bank Ltd v George Henty & Sons (1882) 7 App Cas 741, [1881–5] All ER Rep 86, HL.
Chasemore v Richards (1859) 7 HL Cas 349, [1843–60] All ER Rep 77, 11 ER 140.
Crofter Hand Woven Harris Tweed Co Ltd v Veitch [1942] 1 All ER 142, [1942] AC 435, HL.
D v W (29 March 1988, unreported), Ch D.
Greater Nottingham Co-op Society Ltd v Cementation Piling and Foundations Ltd [1988] 2 All ER 971, [1988] 3 WLR 396, CA.
Hadmor Productions Ltd v Hamilton [1982] 1 All ER 1042, [1983] 1 AC 191, [1982] 2 WLR 322, HL; rvsg [1981] 2 All ER 724, [1983] 1 AC 191, [1981] 3 WLR 139, CA.
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465, [1963] 3 WLR 101, HL.
Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294, [1970] AC 1004, [1970] 2 WLR 1140, HL.
Island Records Ltd, Ex p [1978] 3 All ER 824, [1978] Ch 122, [1978] 3 WLR 23, CA.
Jasperson v Dominion Tobacco Co [1923] AC 709, PC.
Lonrho Ltd v Shell Petroleum Co Ltd [1981] 2 All ER 456, [1982] AC 173, [1981] 3 WLR 33, HL.
Lumley v Gye (1853) 2 E & B 216, [1843–60] All ER Rep 208, 118 ER 749.
McLoughlin v O’Brian [1982] 2 All ER 298, [1983] 1 AC 410, [1982] 3 WLR 982, HL.
Mahesan v Malaysia Government Officers’ Co-op Housing Society Ltd [1978] 2 All ER 405, [1979] AC 374, [1978] 2 WLR 444, PC.
Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1988] 3 All ER 116, [1988] 3 WLR 548.
Midland Bank Trust Co Ltd v Green (No 3) [1981] 3 All ER 744, [1982] Ch 529, [1982] 2 WLR 1, CA.
Mogul Steamship Co v McGregor Gow & Co (1889) 23 QBD 598, [1891–4] All ER Rep 263, CA; affd [1892] AC 25, [1891–4] All ER Rep 263, HL.
Muirhead v Industrial Tank Specialities Ltd [1985] 3 All ER 705, [1986] QB 507, [1985] 3 WLR 993, CA.
National Phonographic Co Ltd v Edison-Bell Consolidated Phonograph Co Ltd [1908] 1 Ch 335, [1904–7] All ER Rep 116, CA.
Peabody Donation Fund (Governors) v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529, [1985] AC 210, [1984] 3 WLR 953, HL.
Perestrello e Cia Ltda v United Paint Co Ltd [1969] 3 All ER 479, [1969] 1 WLR 570, CA.
Quinn v Leathem [1901] AC 495, [1900–3] All ER Rep 1, HL.
RCA Corp v Pollard [1982] 3 All ER 771, [1983] Ch 135, [1982] 3 WLR 1007, CA.
Rogers v Rajendro Dutt (1860) 13 Moo PCC 209, 15 ER 78.
Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 All ER 791, [1988] 2 WLR 761, CA.
Sorrell v Smith [1925] AC 700, [1925] All ER Rep 1, HL.
Takaro Properties Ltd v Rowling [1986] 1 NZLR 22, NZ CA.
Ward v Lewis [1955] 1 All ER 55, [1955] 1 WLR 9, CA.
Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1986] 1 All ER 129, [1986] AC 368, [1986] 2 WLR 24, HL.
Page 466 of [1988] 3 All ER 464
Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175, [1987] 3 WLR 776, PC.
Z Ltd v A [1982] 1 All ER 556, [1982] QB 558, [1982] 2 WLR 288, CA.
Appeal
The defendants, Mohamed Fayed, Salah Fayed, Ali Fayed, House of Fraser Holdings plc, John MacArthur and Kleinwort Benson Ltd, appealed against the decision of Master Topley on 30 July 1987 dismissing the defendants’ summonses to strike out the statement of claim in the action brought by the plaintiffs, Lonrho plc, against the defendants, on the ground, inter alia, that it disclosed no reasonable cause of action. By their statement of claim the plaintiffs alleged that they had suffered loss and damage by reason of false statements made by the defendants or a conspiracy between the defendants or the negligence of the sixth defendants which had deprived the plaintiffs of the opportunity to acquire the House of Fraser plc. The facts are set out in the judgment.
John Beveridge QC and Edward Bannister for the plaintiffs.
Andrew Morritt QC, David Oliver QC and Alastair Walton for the first to fourth defendants.
Anthony Grabiner QC and Nicolas Bratza for the fifth and sixth defendants.
Cur adv vult
22 June 1988. The following judgment was delivered.
PILL J. This is an appeal by all six defendants from a decision of Master Topley, given on 30 July 1987, whereby he refused to strike out the statement of claim. The defendants claim that the statement of claim discloses no reasonable cause of action. The plaintiffs claim that they have a cause of action: first, under an innominate tort, which they defined in the course of the hearing second, under the tort of conspiracy and, third, against the sixth defendants in negligence.
I heard argument in this case on 28, 29 and 30 March and reserved judgment. I was subsequently asked in correspondence to receive and consider the transcript of a judgment given in chambers by Sir Nicolas Browne-Wilkinson V-C on 29 March 1988 in D v W (unreported). That transcript became available to me during the week of 23 May, and I understand that today was the first date this term, convenient to the parties, to take a judgment on circuit.
The claims are fully pleaded in a statement of claim which contains 58 paragraphs, and I propose to state briefly the material points as they appear in the pleadings. For present purposes, I assume that the allegations in the statement of claim can be proved.
In considering the present appeals, I have borne in mind recent statements in the House of Lords, in Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1986] 1 All ER 129 at 138, 143, [1986] AC 368 at 436, 441 per Lord Templeman and Lord Mackay, as to the circumstances in which argument on striking out should be heard. I have borne in mind that allegations of fraud are made against the defendants, and also that discovery is likely to be wide-ranging if the action proceeds. I also bear in mind that a plaintiff should not be driven from the judgment seat by the striking out of his pleading, on the ground that it discloses no reasonable cause of action, unless the court is satisfied that the action as pleaded has no realistic prospect of success at the trial: see Slade LJ in RCA Corp v Pollard [1982] 3 All ER 771 at 783, [1983] Ch 135 at 155.
I turn to the allegations in the statement of claim. The plaintiffs, on the one hand, and the first, second and third defendants (the Fayeds), on the other hand, each wished to acquire control of the House of Fraser plc (House of Fraser). The fourth defendants House of Fraser Holdings plc (Holdings) is a company set up by the Fayeds to achieve that object, and the company is owned by them. The sixth defendants, who are merchant bankers,
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have acted as financial advisers to the first to fourth defendants, and the fifth defendant is the director of the sixth defendants responsible for the provision of such advice.
The first to fourth defendants were represented at the hearing by counsel, and no attempt was made to distinguish between their responsibilities, if any. The fifth and sixth defendants were represented by counsel, and no attempt was made to distinguish between them, save that the allegation of negligence (which I will consider subsequently) was made only against the sixth defendants.
Between 1977 and 1979, the plaintiffs had acquired almost 30% of the share capital of House of Fraser. A merger situation (within the meaning of the Fair Trading Act 1973) arose and was referred to the Monopolies and Mergers Commission (the MMC). The plaintiffs undertook to the Secretary of State for Trade and Industry (the Secretary of State) not to acquire shares which would result in its holding an interest of 30% or more of the share capital of House of Fraser.
In November 1984 the plaintiffs sold almost all their shares in House of Fraser to Holdings. In March 1985 Holdings made a cash offer for the whole of the share capital of House of Fraser, and the bid was recommended by the directors of House of Fraser.
A merger situation arose, but the Secretary of State decided not to refer the bid to the MMC. By 11 March 1985, while the plaintiffs were still subject to their undertakings, Holdings had acquired more than 50% of the issued ordinary shares of House of Fraser. On 14 March 1985 the plaintiffs were released from their undertakings, a report favourable to their acquiring House of Fraser having been published on 7 March 1985.
The plaintiffs’ claim can be stated briefly. The first to fourth defendants made fraudulent misrepresentations about themselves, with the intention of influencing the Secretary of State not to refer the merger situation to the MMC. They achieved that object and, as a result, the plaintiffs were deprived of an opportunity to acquire House of Fraser and to bid without competition from the Fayeds. The opportunity, it is submitted by counsel for the plaintiffs, was a business asset of the plaintiffs. The alleged misrepresentations were that the Fayeds had built up substantial wealth over several generations, had more than adequate funds of their own to finalise an acquisition of the whole share capital of House of Fraser and had investment capital available for the development of the business. The fifth and sixth defendants made similar statements on behalf of the other defendants, and it is submitted that they made them in circumstances such that the statements were made fraudulently.
It is also submitted that the defendants conspired together to deprive the plaintiffs of the opportunity mentioned above. It is further submitted that the sixth defendants owed a duty of care to the plaintiffs to take reasonable care to ensure that statements made by them to the Secretary of State and other public bodies were accurate, and in making the false statements they acted negligently, whereby the plaintiffs were deprived of the above opportunity.
Subsequent similar statements are also relied on against the defendants in the same manner as those already mentioned.
The plaintiffs’ counsel’s definition of the tort on which the plaintiffs relied as a cause of action was refined in the course of argument. He finally stated it as follows:
‘Where one induces another by illegal means perpetrated against that other but directed against the plaintiff to act so that a legal right, a property right or other business interest is damaged, he is liable to the plaintiffs.’
Applied to the facts alleged in the statement of claim, counsel for the plaintiffs submitted that the defendants had induced the House of Fraser board to recommend their (the defendants’) bid to shareholders by assurances relating to their financial capacity and intention to carry out the bid. The same assurances had induced the Secretary of State not to refer the bid to the MMC. These frauds and misrepresentations were perpetrated against the board and the Secretary of State, but were directed against the
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plaintiffs, and they damaged the plaintiffs’ business by depriving the plaintiffs of the business asset of the opportunity to bid for House of Fraser.
Counsel for the plaintiffs relied heavily on the Court of Appeal decision in National Phonographic Co Ltd v Edison-Bell Consolidated Phonograph Co Ltd [1908] 1 Ch 335, [1904–7] All ER Rep 116. The defendants in that case obtained goods of the plaintiffs from factors by falsely representing themselves as independent dealers and dealing in fictitious names. The factors were under contract to the plaintiffs not to sell the goods to the defendants. Counsel submitted that general principles were laid down in that case which gave rise to specific torts, including the tort defined above. He relied on the statements of Lord Alverstone CJ ([1908] 1 Ch 335 at 355–357, [1904–7] All ER Rep 116 at 117–118):
‘It is, in my opinion, clearly established that an illegal act causing injury to a person, or to his rights of property, is an actionable wrong and affords ground for an action on the case … They [that is the defendants] wanted them [that is the goods] for the purposes of competition, and they adopted fraudulent means to get them. In my opinion, if such fraudulent action has caused injury to the plaintiffs’ trade, or is likely to cause injury to the plaintiffs’ trade, an injunction ought to be granted to put a stop to such a practice, and, if damage is proved, then there ought to be an inquiry as to damages.’
Counsel submitted that this was the principle on which the judgments were founded. The words were clear, and there was no need to look at later cases. The particular decision, he submitted, was merely an application of that principle, and the fact that in the particular case the injunction granted was to restrain the defendants from inducing the factors to break their agreement with the plaintiffs did not detract from the force of the statement of principle. The expression ‘the plaintiffs’ trade’ was wide enough to cover the present plaintiffs’ opportunity to bid. Reliance was also placed on Buckley LJ’s analysis of ‘interference with rights of property’ (see [1908] 1 Ch 335 at 361, [1904–7] All ER Rep 116 at 120).
That case on its facts was concerned with an interference with the contractual relations existing between the plaintiffs and the factors. Buckley LJ so posed the question, as did Kennedy LJ (see [1908] 1 Ch 335 at 358–359, 366, [1904–7] All ER Rep 116 at 119, 123). In my judgment, the case was so plainly concerned with alleged interference with contractual relations that it cannot be binding authority for the much broader proposition advanced by counsel for the plaintiffs. However, both Buckley and Kennedy LJJ referred to statements of principle in earlier cases, and these need to be considered, with a view to deciding whether the alleged tort can be said to exist and, if so, what is its scope.
Mogul Steamship Co v McGregor Gow & Co (1889) 23 QBD 598 concerned a trading association formed to keep trade in the members’ own hands. The plaintiffs, who were rival traders, were excluded from all the benefits of the association and, in consequence, sustained damage. Bowen LJ stated (23 QBD 598 at 613–614, [1891–4] All ER Rep 263 at 279):
‘The English law, which in its earlier stages began with but an imperfect line of demarcation between torts and breaches of contract, presents us with no scientific analysis of the degree to which the intent to harm, or, in the language of the civil law, the animus vicino nocendi, may enter into or affect the conception of a personal wrong; see Chasemore v. Richards ((1859) 7 HL Cas 349, [1843–60] All ER Rep 77). All personal wrong means the infringement of some personal right. “It is essential to an action in tort,” say the Privy Council in Rogers v. Rajendro Dutt ((1860) 13 Moo PCC 209, 15 ER 78), “that the act complained of should under the circumstances be legally wrongful as regards the party complaining; that is, it must prejudicially affect him in some legal right; merely that it will, however directly, do a man harm in his interests, it not enough.” What, then, were the rights of the plaintiffs as traders as against the defendants? The plaintiffs had a right to be protected against
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certain kind of conduct and we have to consider what conduct would pass this legal line or boundary. Now, intentionally to do that which is calculated in the ordinary course of events to damage, and which does, in fact, damage another in that other person’s property or trade, is actionable if done without just cause or excuse. Such intentional action when done without just cause or excuse is what the law calls a malicious wrong (see Bromage v. Prosser ((1825) 4 B & C 247, 107 ER 1051); Capital, and Counties Bank v. Henty ((1882) 7 App Cas 741, [1881–5] All ER Rep 86), per Lord Blackburn. The acts of the defendants which are complained of here were intentional, and were also calculated, no doubt, to do the plaintiffs damage in their trade. But in order to see whether they were wrongful we have still to discuss the question whether they were done without any just cause or excuse. Such just cause or excuse the defendants on their side assert to be found in their own positive right (subject to certain limitations) to carry on their own trade freely in the mode and manner that best suits them, and which they think best calculated to secure their own advantage. What, then, are the limitations which the law imposes on a trader in the conduct of his business as between himself and other traders? There seem to be no burdens or restrictions in law upon a trader which arise merely from the fact that he is a trader, and which are not equally laid on all other subjects of the Crown. His right to trade freely is a right which the law recognises and encourages, but it is one which places him at no special disadvantage as compared with others. No man, whether trader or not, can, however, justify damaging another in his commercial business by fraud or misrepresentation. Intimidation, obstruction, and molestation are forbidden; so is the intentional procurement of a violation of individual rights, contractual or other, assuming always that there is no just cause for it.’
Bowen LJ then cited examples of conduct he had in mind. Fry LJ stated (23 QBD 598 at 630, [1891–4] All ER Rep 263 at 285):
‘It remains to inquire whether the authorities assist in the decision of the question before us. As regards an individual, I have already pointed out that for one man to interfere with the lawful trade or business of another by molestation or any physical interference, or by fraud or misrepresentation, may be an actionable wrong. But no authority appears to shew that for one man to injure the business of another by mere competition, even though it may be successfully directed to driving the rival out of the town where he dwells or out of the business which he carries on, is actionable. And the silence of the books is strong evidence that such acts are not actionable.’
In Allen v Flood [1898] AC 1 at 96, [1895–9] All ER Rep 52 at 69 Lord Watson stated:
‘There are, in my opinion, two grounds only upon which a person who procures the act of another can be made legally responsible for its consequences. In the first place, he will incur liability if he knowingly and for his own ends induces that other person to commit an actionable wrong. In the second place, when the act induced is within the right of the immediate actor, and is therefore not wrongful in so far as he is concerned, it may yet be to the detriment of a third party; and in that case, according to the law laid down by the majority in Lumley v. Gye ((1853) 2 E & B 216, [1843–60] All ER Rep 208), the inducer may be held liable if he can be shewn to have procured his object by the use of illegal means directed against that third party.’
Counsel for the plaintiffs relied on the second of Lord Watson’s categories. He submitted that the defendants have damaged the plaintiffs’ commercial business by depriving them by fraud of a business asset, namely the right to bid for House of Fraser undisturbed by wrong doing. They had a legal right to have that business asset protected. The opportunity lost is pleaded as an opportunity to bid without competition from the defendants. In
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developing this argument, counsel stated that it was not his submission that the opportunity to bid was a legal right. It was a business asset and the plaintiffs had a legal right in the protection of that business asset. The unlawful means, he submitted, were the fraud on the Secretary of State and the board of House of Fraser, resulting in the plaintiffs’ loss of the opportunity to bid. The conduct was ‘directed against’ (Lord Watson’s words) the plaintiffs, even though the unlawful means were perpetrated against the Secretary of State.
In Quinn v Leathem [1901] AC 495 at 510, [1900–3] All ER Rep 1 at 9 Lord Macnaughten stated that Lumley v Gye was correctly decided ‘on the ground that a violation of a legal right committed knowingly is a cause of action.' Lord Lindley, when considering what the plaintiffs’ rights were, stated that the principle in Lumley v Gye was not confined to inducements to break contracts of service but ‘reaches all wrongful acts done intentionally to damage a particular individual and actually damaging him’ (see [1901] AC 495 at 535, [1900–3] All ER 1 at 16). That statement was repeated by Viscount Haldane in Jasperson v Dominion Tobacco Co [1923] AC 709 at 713, another case in which plaintiffs suffered damage when the defendants knowingly induced the plaintiff’s agent, D, to commit a breach of his duty to them. In giving the judgment of the Judicial Committee of the Privy Council, Viscount Haldane also stated (at 712):
‘Interference directed to bringing about a violation of a legal right, such as that of the respondent company [that is the plaintiffs] to have their contract with Deacon duly observed, is a cause of action, and it is a violation of legal right to interfere with contractual relations recognized by law if there be no sufficient justification for the interference.’
Counsel for the plaintiffs relied on the words ‘such as’ in support of his submission, and I accept that the principle is not confined to inducements to break contracts.
More recently, in Hadmor Productions Ltd v Hamilton [1982] 1 All ER 1042 at 1052, [1983] 1 AC 191 at 229, Lord Diplock recognised the existence of the tort of interference with the plaintiff’s trade or business by unlawful means. That was a case, very different on its facts from the present case, where the plaintiffs were seeking an interlocutory injunction. For that purpose, Lord Diplock was prepared to hold, ‘although not without considerable misgivings, that Hadmor does manage to scramble over the first hurdle in its path’, that is whether the defendant had committed a tort at common law (see [1982] 1 All ER 1042 at 1050, [1983] 1 AC 191 at 225). The injunction sought was to restrain the defendant, a trade union official, from ‘blacking’ films made by them for transmission by a television company (Thames). Thames were not under a contractual obligation to transmit the programmes, so there could be no cause of action for inducing a breach of that contract. However, Hadmor had a commercial expectation that its programmes would be transmitted by the televison company (see [1982] 1 All ER 1042 at 1048, [1983] 1 AC 191 at 223 per Lord Diplock). In the Court of Appeal Lord Denning MR had used the expression ‘every expectation’ (see [1981] 2 All ER 724 at 728, [1983] 1 AC 191 at 197), and that expectation appears to have been treated as a legal right of a kind that the courts might protect.
As already stated, the legal right claimed to be entitled to the protection of the law in the present case is the business asset said to be constituted by the oppportunity to bid for House of Fraser. Counsel for the first to fourth defendants submitted that an opportunity to bid was something which everyone was free to exercise and a particular party’s opportunity was not susceptible to, or capable of, protection by the law of tort. If there was such a tort as claimed by the plaintiffs, an unsuccessful bidder for anything would have an action against a successful bidder who had misled the vendor. In any event, he submitted, the opportunity to bid in this case was not interfered with by any act of the defendants but by the Secretary of State’s requirement that the plaintiffs should give an undertaking. Further, he submitted, there was no sufficient nexus between the alleged misrepresentations, which were made to the Secretary of State, and the plaintiffs. There
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was no relationship between the plaintiffs and the Secretary of State, or between the plaintiffs and other shareholders of House of Fraser, such as that which existed between the relevant parties in the cases mentioned above, including Hadmor. There was, he submitted, a missing link. Counsel also submitted that once the concept of a wrong perpetrated against one person but directed against another is introduced by the plaintiffs, it imported an argument about the defendants’ predominant intention, and that cannot, in the present case, have been to damage the plaintiffs, as distinct from advancing their own interests: see Bowen LJ in Mogul Steamship Co v McGregor Gow & Co (1889) 23 QBD 598 at 615, [1891–4] All ER Rep 263 at 280.
That point leads into the plaintiffs’ submission that they have a cause of action in conspiracy, where the relevance of predominant intention has been considered in the cases. I will consider conspiracy before stating my conclusions on the innominate tort. The submission is that there was what is known as an unlawful means conspiracy and that even if the plaintiffs failed under the first head, the innominate tort, they have a cause of action on the basis that a conspiracy between defendants to do this kind of thing is unlawful. I say at once that I have difficulty in accepting the plaintiffs’ submission on this point when, in reply, counsel for the plaintiffs accepted the approach followed by Gatehouse J in Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1988] 3 All ER 116, [1988] 3 WLR 548, to which I refer below. Counsel for the first to fourth defendants submitted that the case in conspiracy stood or fell with that on the innominate tort.
In Crofter Hand Woven Harris Tweed Co Ltd v Veitch [1942] 1 All ER 142 at 158, [1942] AC 435 at 462 Lord Wright stated that the rule that the conspiracy is the gist of the wrong—
‘may seem anomalous so far as it holds that conduct by two may be actionable if it causes damage, whereas the same conduct by one, causing the same damage, would give no redress. In effect, the plaintiff’s right is that he should not be damnified by a conspiracy to injure him, and it is in the fact of the conspiracy that the unlawfulness resides. It is a different matter if the conspiracy is to do acts in themselves wrongful.’
For present purposes I am fully prepared to prefer the narrower view of the effect of the decision in Lonrho Ltd v Shell Petroleum Co Ltd [1981] 2 All ER 456, [1982] AC 173, stated by Gatehouse J in Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1988] 3 All ER 116, [1988] 3 WLR 548 as opposed to the wider view taken by Hirst J in Allied Arab Bank Ltd v Hajjar (No 2) [1988] 3 All ER 103, [1988] 3 WLR 500. Sir Nicolas Browne-Wilkinson V-C in a judgment given in chambers on 29 March 1988 in D v W, which I have already mentioned, and the transcript of which I have by consent of the parties, also took the view that the law was not sufficiently clear to justify striking out a conspiracy claim on the basis of the judgment of Hirst J. However, as Gatehouse J stated in the Metall case [1988] 3 All ER 116 at 123, [1988] 3 WLR 548 at 556:
‘The House of Lords in the Lonrho case was not concerned with other types of civil conspiracy, e g intimidation, where the damage-causing act is a threat to procure breaches of contract, or the simple conspiracy to commit any other act which would be tortious if committed by one person alone, e g a conspiracy to steal or defraud or deceive. It is, therefore, only in the “anomalous” type of conspiracy, where the damage-causing act would not be tortious if committed by one person alone, that a combination to commit the act may make those so combining liable. It will then do so only if the plaintiff alleges and proves that the sole or predominant purpose of the conspirators was to injure his commercial interests, not to advance their own interests.’
The present case is one in which the damage-causing act is claimed to be tortious if committed by one person alone. If it is not tortious when committed by one person alone, it will be so as a conspiracy only if the plaintiffs allege and prove that the sole or
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predominant purpose of the conspirators was to injure the plaintiffs’ commercial interests and not to advance their own interests (see Crofter Hand Woven Harris Tweed Co Ltd v Veitch [1942] 1 All ER 142 at 149, 162–163, [1942] AC 435 at 445, 471 per Viscount Simon LC and Lord Wright). That is not alleged in this case and not surprisingly, in my view. Indeed, it would be surprising if, in the circumstances of the present case, the first defendant’s conduct is held not to be tortious, but the same conduct tortious because followed in agreement with his brothers, acting in pursuit of the same object, with a company owned by them and set up to further that object and also with their professional advisers. The position is quite different from that in the Metall case where the defendants’ part in a conspiracy was the gist of the wrong.
In my judgment, the plaintiff’s claim (save that of negligence, which I consider later) stands or falls on whether a cause of action exists on the basis of the innominate tort. I bear in mind that there is a tort of interfering with business by unlawful means, that its boundaries are not comprehensively defined and that the action should be allowed to proceed if it is reasonably arguable that the tort is broad enough to cover the facts pleaded. In my judgment, however, it is not. Counsel for the plaintiffs accepted that there must be a legal right, capable of infringement. That accords with Lord Wright’s analysis in the Crofter case [1942] 1 All ER 142 at 160, [1942] AC 435 at 466. Lord Wright cited Lord Macnaghten’s statement in Quinn v Leathem [1901] AC 495 at 510, [1900–3] All ER Rep 1 at 9 that—
‘a violation of legal right committed knowingly is a cause of action and … it is a violation of legal right to interfere with contractual relations recognised by law if there be no sufficient justification for the interference.’
That was something substantially different, added Lord Wright, from—
‘a person’s qualified right to exercise his free will in conducting his trade. A legal right was violated and that violation needed justification, if it could be justified.’
Lord Wright concluded that—
‘Damage done intentionally, and even malevolently, to another thus, it was held, gives no cause of action so long as no legal right of the other is infringed … the principle … must, I think, be accepted at present as the law in England.’
I add that counsel for the plaintiffs also referred to the New Zealand case of Takaro Properties Ltd v Rowling [1986] 1 NZLR 22 at 66 per Woodhouse P in support of the proposition that a lost opportunity can be a ‘business asset’. However, the fact that a lost opportunity can be a head of damage in an action for negligence does not, in my judgment, establish that it is a legal right which founds the cause of action here alleged.
I do not consider that the right or freedom to bid was a business asset, in the sense advocated by counsel for the plaintiffs. It still has to be considered, however, whether it is arguable that there is a legal right to bid which has been interfered with unlawfully. The law allows all a freedom to bid, in competition with each other, if there is more than one bid. I cannot accept that the freedom or opportunity to bid in present circumstances amounts to a legal right which the law will protect against the defendants’ alleged conduct. Even if there is a legal right to bid, or to bid free from the defendants’ competition, as pleaded, which is entitled to protection as part of the general right to trade freely, the right does not, in my judgment, extend to protection against a competitor making false statements about himself. I cannot, in any event, accept that there is sufficient nexus between the defendants’ alleged misrepresentations and the damage to the plaintiffs’ business alleged to have been suffered. The interference would have to be more direct than that alleged to exist in the present case to support a cause of action.
If the plaintiffs, contrary to my view, do have a cause of action, it covers a very broad field. I state that not primarily as a ‘floodgates’ reason, but because I find it surprising that
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such a cause of action based, if it exists at all, on judicial statements made almost a century ago (in particular that of Bowen LJ in Mogul Steamship Co v McGregor Gow & Co (1889) 23 QBD 598 at 615, [1891–4] All ER Rep 263 at 280) is not supported by cases in the reports. The principle would, as counsel for the plaintiffs I think had to accept, cover any case of a bidder who was unsuccessful by reason of misrepresentations made to a vendor by a successful bidder. Indeed, it would cover a wider field, because, in the present case, the Secretary of State, to whom the representations were essentially directed, was not the vendor. Further, the tortfeasor would, on counsel’s definition, not even have to be a bidder himself.
I do not consider that the judgments in the Court of Appeal in RCA Corp v Pollard [1982] 3 All ER 771, [1983] Ch 135(in which Ex p Island Records Ltd [1978] 3 All ER 824, [1978] Ch 122 was analysed) support the existence of a cause of action which covers the present facts. Oliver LJ considered the tort of interferences with business by unlawful means, in that case criminal means (see [1982] 3 All ER 771 at 780–782, [1983] Ch 135 at 151–153). He cited the judgment of Bowen LJ in the Mogul case and pointed out that the cases required the damage to be a direct, as well as intended, consequence of the defendant’s act. I find no support in that or other cases cited to establish a tort of the scope for which counsel contends. I would respectfully echo the sentiments of Lord Wright in the Crofter case [1942] 1 All ER 142 at 163, [1942] AC 435 at 472 where he said:
‘If further principles of regulation or control are to be introduced, that is a matter for the legislature,’
and statements to a similar effect by the members of the court in RCA Corp v Pollard.
Negligence is alleged against the sixth defendants as merchant bankers. The nature of the alleged duty of care to the plaintiffs is set out at para 45 of the statement of claim. It is alleged that the defendants well knew that a high degree of reliance would be placed on statements made by them during the course of the bid as to the circumstances of their client. It was submitted that any misstatement made by them which came to the notice of, among others, the Secretary of State could injure the plaintiffs. The breach of duty was in making the alleged misstatements already mentioned, and the alleged damage was the loss of the opportunity to bid and also expenses.
The defendants contended that the plaintiffs had no reasonable prospect of establishing at the trial that the sixth defendants owed them a duty of care. Counsel for the plaintiffs, on the other hand, submitted that the law of negligence had always been accepted to be in constant flux and development. It could not be said that one way of putting the law on the modern authorities was right and another wrong, he said. The sixth defendants had put their imprimatur on the assertion of the other defendants, which they could be expected to have checked, and the Secretary of State had relied on the sixth defendants. The sixth defendants were entitled to serve the interests of their clients but not to the extent of being negligent towards other persons.
Counsel for the sixth defendants submitted (1) that the close relationship of proximity between the parties required to establish the duty of care was missing (2) that the case was one of pure economic loss, so that a voluntary assumption of responsibility to the particular plaintiff had to be established and could not be established on the facts, and (3) that, in any event, it would not be just and reasonable to impose a duty of care to the particular plaintiffs to avoid economic loss.
It was pointed out on behalf of the defendants that the relevant statements were not made to the plaintiffs, not relied on by the plaintiffs, and had nothing to do with the plaintiffs, but were statements made about other defendants. The plaintiffs were competitors of the sixth defendants’ clients and there was no duty of care to rival bidders. Applying the principles in the cases, there could be no duty to the plaintiffs not to make statements which might have the effect of deterring the reference of a bid to the MMC, it was submitted.
Reference was made in support of the above submissions to Governors of the Peabody
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Donation Fund v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529, [1985] AC 210 and Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175 and to the recent Court of Appeal decisions in Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 All ER 791, [1988] 2 WLR 761 and Greater Nottingham Co-op Society Ltd v Cementation Piling and Foundations Ltd [1988] 2 All ER 971, [1988] 3 WLR 396. The decision of Scott J in Business Computers International Ltd v Registrar of Companies [1987] 3 All ER 465, [1988] Ch 229 was also cited.
In the Peabody case [1984] 3 All ER 529 at 534, [1985] AC 210 at 240–241 Lord Keith stated:
‘A relationship of proximity in Lord Atkin’s sense must exist before any duty can arise, but the scope of the duty must depend on all the circumstances of the case.’
He cited the speech of Lord Morris in Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294 at 307–308, [1970] AC 1004 at 1038–1039 and added:
‘So in determining whether or not a duty of care of particular scope was incumbent on a defendant it is material to take into consideration whether it is just and reasonable that it should be so.’
In Simaan’s case [1988] 1 All ER 791 at 805, [1988] 2 WLR 761 at 778–779 Dillon LJ stated:
‘It is clear, as Lord Keith pointed out in Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705 at 710, [1988] AC 175 at 191 by reference to the speech of Lord Wilberforce in McLoughlin v O’Brian [1982] 2 All ER 298 at 303, [1983] 1 AC 410 at 420, that foreseeability of harm or loss does not of itself and automatically lead to a duty of care. Foreseeability of harm is a necessary ingredient of a relationship in which a duty of care will arise, but not the only ingredient. Foreseeability of harm does not become enough to make the harm recoverable by the plaintiff just because what was foreseeable was harm to the plaintiff as an individual rather than as a member of a general and unascertained class, otherwise Lord Fraser could not in Candlewood Navigation Corp Ltd v Mitsui OSK Lines Ltd [1985] 2 All ER 935 at 943, [1986] AC 1 at 22 have rejected the views which he cited from the judgments of Gibbs and Mason JJ in Caltex Oil (Australia) Pty Ltd v The Dredge Willemstad (1976) 136 CLR 529. If, however, foreseeability does not automatically lead to a duty of care, the duty in a Hedley Byrne type of case must depend on the voluntary assumption of responsibility towards a particular party giving rise to a special relationship, as Lord Keith held in Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705 at 714, [1988] AC 175 at 196(see also his statement at [1987] 2 All ER 705 at 711, [1988] AC 175 at 192 that Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465 was concerned with the assumption of responsibility and as Robert Goff LJ had earlier held in Muirhead v Industrial Tank Specialities Ltd [1985] 3 All ER 705 at 715, [1986] QB 507 at 528 in a passage which would have been before Lord Keith in Yuen Kun-yeu.’
In Business Computers International Ltd v Registrar of Companies [1987] 3 All ER 465, [1988] Ch 229 Scott J held that no duty of care was owed by one litigant to another as to the manner in which litigation is conducted.
In my judgment, for the plaintiffs to have a cause of action in negligence they must establish an assumption of responsibility by the sixth defendants towards them. There is no material on which responsibility to the plaintiffs can be said to have been assumed. In any event, the necessary relationship of proximity, of which the court is the arbiter, does not exist. I do not consider that the claim based on negligence has any realistic prospect of success.
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In my judgment, the statement of claim should be struck out as disclosing no reasonable cause of action. The appeal is allowed.
Appeal allowed. Claims struck out.
Solicitors: Stephenson Harwood (for the plaintiffs); Herbert Smith (for the first to fourth defendants); Slaughter & May (for the fifth and sixth defendants).
K Mydeen Esq Barrister.
Shanning International Ltd v George Wimpey International Ltd
[1988] 3 All ER 475
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): NOURSE AND GLIDEWELL LJJ
Hearing Date(s): 5, 6, 8 SEPTEMBER 1988
Practice – Pre-trial relief – Interim payment – Defendant having arguable defence of set-off or counterclaim exceeding claim – Whether court required to take into account likelihood of defence of set-off succeeding at trial when deciding whether plaintiff would obtain judgment for substantial sum – Whether set-off defence only to be taken into account when court deciding whether to exercise discretion to make interim payment – RSC Ord 29, rr 10, 12(c).
The defendant was the main contractor for the construction of a hospital in Oman and the plaintiff was a sub-contractor for the supply and installation of medical equipment. In the course of carrying out the main contract and the sub-contract a dispute arose between the parties which resulted in the plaintiff issuing a writ against the defendant claiming sums totalling £969,000 in respect of goods supplied and retention money. The plaintiff issued a summons claiming summary judgment under RSC Ord 14 or, alternatively, an interim payment under RSC Ord 29, rr 10a and 12(c)b. The defendant admitted that it owed the plaintiff £904,000 but claimed that the amount owing was subject to a set-off and a counterclaim which together would extinguish the admitted claim. The judge refused to enter judgment for the plaintiff under Ord 14, on the ground that the defendant had an arguable defence of set-off, but he ordered the defendant to make an interim payment of £350,000. In making the interim payment order the judge held that Ord 29, r 12(c) required the court to consider the matter in two stages, namely first deciding whether it was satisfied that if the action proceeded to trial the plaintiff would obtain judgment for a substantial sum and then exercising its discretion whether to make the award and only at that stage taking into account any defence of set-off or counterclaim on which the defendant might be entitled to rely. The defendants appealed, contending that the court was required by r 12(c) to take into account any defence of set-off at both stages, and, taking into account the set-off defence, the judge could not have been satisfied that if the action proceeded to trial the plaintiff would obtain judgment for a substantial sum and therefore he should not have made the interim payment order.
Held – When considering whether to make an order for an interim payment under Ord 29, r 12(c) the court was required to approach the matter in two stages, first by determining whether, if the action proceeded to trial, the plaintiff would obtain
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judgment for a substantial sum and, second, by deciding whether in its discretion it should make an order and, if so, for what amount; and at both stages the court was required to take into account the likelihood of a set-off or other defence succeeding at the trial. Accordingly, if the court was not satisfied at the first stage that, taking into account any defence of set-off, the plaintiff would obtain judgment for a substantial sum, it could not then proceed to the second stage and exercise its discretion by making an interim payment order. Moreover, in order to satisfy the first stage, the plaintiff had to satisfy the court on a balance of probabilities but to a high standard. Since the defendant had a genuinely arguable cross-claim which might equal the plaintiff’s claim, the judge could not have been satisfied, after taking into account the defendant’s counterclaim and set-off, that the plaintiff would obtain judgment for a substantial sum if the case proceeded to trial and accordingly he ought not to have made an order for an interim payment. The appeal would therefore be allowed (see p 482 b to e, p 483 c d and p 484 d to g, post).
Dictum of Lloyd LJ in Shearson Lehman Bros Inc v Maclaine Watson & Co Ltd [1987] 2 All ER 181 at 187 applied.
Notes
For interim payments, see 37 Halsbury’s Laws (4th edn) paras 364–370, and for cases on the subject, see s 37(2) Digest (Reissue) 477, 2963–2965.
Cases referred to in judgments
Breeze v R McKennon & Son Ltd (1985) 32 Build LR 41, CA.
Hanak v Green [1958] 2 All ER 141, [1958] 2 QB 9, [1958] 2 WLR 755, CA.
Imodco Ltd v Wimpey Major Projects Ltd [1987] CA Transcript 1312.
Radford v de Froberville [1978] 1 All ER 33, [1977] 1 WLR 1262.
Shearson Lehman Bros Inc v Maclaine Watson & Co Ltd [1987] 2 All ER 181, [1987] 1 WLR 480, CA.
Case also cited
Associated Bulk Carriers Ltd v Koch Shipping Inc, The Fuohsan Maru [1978] 2 All ER 254, CA.
Interlocutory appeal
The defendant, George Wimpey International Ltd (Wimpey), appealed against the judgment of his Honour Judge Lewis Hawser QC hearing official referees’ business on 20 October 1987 whereby he ordered the defendant to make an interim payment of £350,000 under RSC Ord 29, rr 10 and 12 to the plaintiff, Shanning International Ltd (Shanning), in an action in which the plaintiff claimed three sums of money from the defendant under a building sub-contract dated 26 June 1984 as supplemented by contract dated 17 May 1985 for the supply and installation of medical equipment in a hospital in Oman. The facts are set out in the judgment of Glidewell LJ.
Robert Akenhead for Wimpey.
Geoffrey Vos for Shanning.
Cur adv vult
8 September 1988. The following judgments were delivered.
GLIDEWELL LJ (giving the first judgment at the invitation of Nourse LJ). The defendant, George Wimpey International Ltd (Wimpey), was the main contractor for the construction of a hospital in Oman. The plaintiff, Shanning International Ltd (Shanning), was the sub-contractor to Wimpey for the supply and installation of medical equipment. Letters of intent to enter into contractual relations between the Oman government and Wimpey were sent in June 1983, and from Wimpey to Shanning in August 1983. The
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main contract was signed on 12 January 1984, the sub-contract between Wimpey and Shanning on 26 June 1984, and there was a supplemental sub-contract on 17 May 1985.
The main contract was completed in January 1987, and the sub-contract on 17 April 1987. By then a dispute had arisen between the parties. On 28 May 1987 Shanning issued the writ in the present action claiming from Wimpey (I will talk in round thousands) three sums: (i) for goods supplied, £236,000;(ii) in respect of retention money, £733,000; and (iii) in respect of a discount which was alleged to have been wrongly deducted, £239,000. The third of these claims was not pursued in the proceedings. The first and second total £969,000.
On 25 June 1987 Shanning issued a summons for summary judgment under RSC Ord 14 or, alternatively, for an order for interim payment under RSC Ord 29, rr 10 and 12. This came before his Honour Judge Lewis Hawser QC, who gave judgment on 20 October 1987. He refused to enter judgment under Ord 14 but ordered Wimpey to make an interim payment of £350,000.
The first affidavit on behalf of Wimpey is that of a Mr Tunstall dated 18 September 1987. Of the claim for £969,000 Wimpey admits that it is liable to pay £904,000 but subject to a counterclaim, the amount of which it seeks to set off so as to extinguish the £904,000. In his affidavit Mr Tunstall advanced a number of points by way of counterclaim against Shanning under some 15 heads, which totalled £3·476m. If these claims were all substantiated, Wimpey asserted not merely, of course, that they would extinguish the admitted claim for £904,000 but that it had overpaid Shanning by some £1·313m. Shanning disputes most of the items and claimed at that time that there was in total due to it some £2·134m. As I have said, Wimpey claims to set off an appropriate part of the sums it cross-claimed, so as to extinguish Shanning’s claim.
The order which the judge made did not formally give leave to defend to Wimpey, as in my view it should have done, but nothing turns on that because counsel for Shanning concedes that Wimpey is permitted to defend Shanning’s claim just as if it had been given unconditional leave to defend. So one can approach the matter on that basis.
At the time of the summons in June 1987, Shanning had not drawn its final account. It has now done so, and now claims that the total sum due to it from Wimpey (after deducting the £350,000 interim payment) is £3·432m. Another writ claiming this amount was issued on 12 July 1988.
I will deal first with what I consider to be a subsidiary argument. Counsel for Shanning argues that although this claim on its face is only for £969,000, the judge in his judgment took the whole of Shanning’s claim as then formulated, that is to say the £2·134m, as the basis for deciding whether or not to order an interim payment. If the judge had taken this course, he would in my judgment have been in error. But I am satisfied that he did not. It is true that in his judgment the judge did refer to the total claimed by Shanning as being £2·133m (as he put it). Nevertheless, he correctly made it clear that he was dealing with Shanning’s claim as set out in the statement of claim in this action. He said:
‘Shanning in its summons claims for judgment for £904,000 under Ord 14, partly in respect of retention money and partly in respect of goods which have been invoiced. Alternatively, it claims the like or a similar or appropriate sum under Ord 29, r 12. It is admitted that sums of £732,000 and an amount of £172,000 are due to Shanning under its claims and there is no dispute about the liability in respect of these amounts. The sums totalling £732,000 are due under the last certificate issued by Wimpey in March 1987. I understand that Wimpey has itself been paid by the employers the retention money amounting to £732,000. Wimpey has alleged set-off against these amounts and say that in the result its claims and counterclaims would over-top the sum of £904,000.’
It is clear to me, therefore, that the judge was dealing with this matter on the basis of the claim being £904,000 and no greater sum, or the admitted part of the claim as being for that sum. Moreover, I notice that RSC Ord 29, r 10(3) provides:
Page 478 of [1988] 3 All ER 475
‘An application under this rule shall be supported by an affidavit which shall—(a) verify the amount of the damages, debt or other sum to which the application relates and the grounds of the application … ’
The first affidavit on behalf of Shanning in this matter is that of Mr Neill, its commercial manager. At para 34 of that affidavit he says:
‘… I verily believe that [Wimpey] has no defence to [Shanning’s] claim for the sums claimed in paragraphs (i) and (ii) of the prayer to the Statement of Claim. If an arguable defence is established to the satisfaction of this Honourable Court, I humbly request that an Order for interim payment be made in respect of a substantial part of those sums.’
‘Those sums’ are the two sums which total £969,000 and thus it is quite clear to me that Mr Neill was treating this as being a claim for that amount and no more. In my view, therefore, we must decide this appeal on the basis that Shanning’s claim in this action is £969,000, of which Wimpey admits £904,000, subject to the counterclaim and set-off.
The main issue argued before us depends on the proper construction of parts of the provisions in the Rules of the Supreme Court which provide for interim payment. By Ord 29, r 10:
‘(1) The plaintiff may, at any time after the writ has been served on a defendant and the time limited for him to acknowledge service has expired, apply to the Court for an order requiring the defendant to make an interim payment.
(2) An application under this rule shall be made by summons but may be included in a summons for summary judgment under Order 14 … ’
I have already referred to r 10(3), at least in part.
The next two rules provide, respectively, for interim payments in respect of damages and for interim payments in respect of sums other than damages.
‘11.—(1) If, on the hearing of an application under rule 10 in an action for damages, the Court is satisfied—(a) that the defendant against whom the order is sought (in this paragraph referred to as “the respondent”) has admitted liability for the plaintiff’s damages, or (b) that the plaintiff has obtained judgment against the respondent for damages to be assessed; or (c) that, if the action proceeded to trial, the plaintiff would obtain judgment for substantial damages against the respondent or, where there are two or more defendants, against any of them, the Court may, if it thinks fit and subject to paragraph (2), order the respondent to make an interim payment of such amount as it thinks just, not exceeding a reasonable proportion of the damages which in the opinion of the Court are likely to be recovered by the plaintiff after taking into account any relevant contributory negligence and any set-off, cross-claim or counterclaim on which the respondent may be entitled to rely …
12. If, on the hearing of an application under rule 10, the Court is satisfied—(a) that the plaintiff has obtained an order for an account to be taken as between himself and the defendant and for any amount certified due on taking the account to be paid; or (b) that the plaintiff’s action includes a claim for possession of land and, if the action proceeded to trial, the defendant would be held liable to pay to the plaintiff a sum of money in respect of the defendant’s use and occupation of the land during the pendency of the action, even if a final judgment or order were given or made in favour of the defendant; or (c) that, if the action proceeded to trial; the plaintiff would obtain judgment against the defendant for a substantial sum of money apart from any damages or costs, the Court may, if it thinks fit, and without prejudice to any contentions of the parties as to the nature or character of the sum to be paid by the defendant, order the defendant to make an interim payment of such amount as it thinks just, after taking into account any set-off, cross-claim or counterclaim on which the defendant may be entitled to rely.’
This application is made under para (c) of r 12.
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It is common ground before us that if a defendant has a claim against a plaintiff arising out of the same contract or transaction, that may give rise not merely to a counterclaim but to a set-off which, if it is proved to equal or exceed the plaintiff’s justified claim, wholly extinguishes that claim and entitles the defendant to judgment not merely on the counterclaim but on the claim itself.
On the Ord 14 summons counsel for Shanning advanced the argument that on the wording of a clause in the sub-contract in this case any set-off was excluded. The judge concluded:
‘I do not think that Shanning’s contention as to the interpretation of the terms is sufficiently clear to warrant my giving judgment on the £904,000.’
He added:
‘It seems to me that Wimpey has raised matters which for Ord 14 purposes perhaps give rise to set-off counterclaims on which Wimpey can rely. Accordingly, I would hold that it would not be right to give judgment under Ord 14.’
He then turned to consider the alternative claim for an interim payment and said:
‘I think that the effect of the rule is that the court, in circumstances such as the present case, is required to consider the matter in two stages: first, there is the question of whether the court is satisfied that if the action proceeded to trial Shanning would obtain judgment against Wimpey; second, if the court is so satisfied, then the court must exercise its discretion as to whether it would be just to award any interim payment, taking account of the various matters set out there, namely set-off, cross-claim or counterclaim.’
As to the first stage, he said:
‘In my view, therefore, the correct approach should be for the court to ask itself first: Has Shanning a prima facie right to obtain a judgment for a substantial sum of money? The onus is clearly a heavy one (see Breeze v R McKennon & Son Ltd (1985) 32 Build LR 41 at 49–50). Liability for the £904,000 has been admitted. My answer to the first question is, therefore, Yes.’
As to the second stage, he said:
‘Second, the court must ask itself: To what extent is it right for this to be modified by any set-offs, cross-claims or counterclaims? I shall answer that at a later stage. This does involve, in my view, a consideration by the court of the strength or weakness of the individual items, but one should not apply a mechanical test by saying that if there is credible evidence or a possible argument about an individual item it necessarily follows that it should be set off or set off in full against Shanning’s prima facie entitlement to an interim payment. I think that the tests which the court has to use under Ord 29 are different from the tests which the court has to use in order to determine an issue under Ord 14. The court is given a discretion as to interim payments which seems to me to be wider than its powers under Ord 14. The case has lasted for three days and the majority of this time has been taken up over complicated detailed arguments relating to each of the individual items. I think that in the exercise of the court’s discretion one should look at the picture as a whole, taking into account the particular set-offs, cross-claims and counterclaims and one should reach a broad conclusion. I do not intend to express a view about any individual item. I do not think that it would be right for me to do so at this stage. Taking a broad view, it seems to me that there should be an interim payment here and that the proper amount should be £350,000.’
And he so ordered.
It is clear that when the judge answered the first question ‘Yes’, having referred to Shanning’s prima facie right to obtain judgment for a substantial sum of money, he was
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of the view that para (c) of r 12 required him to consider whether ‘… if the action proceeded to trial, the plaintiff would obtain judgment against the defendant for a substantial sum of money … ’ without at that stage taking the claimed set off into account at all.
The first and major issue before us was, was the judge right so to interpret para (c) of r 12? Counsel for Wimpey argues that the judge was wrong. A set-off, he submits, is a defence. Therefore, the judge must take a set-off into account in deciding whether the ‘plaintiff would obtain judgment’ etc. If the set-off exceeds the plaintiff’s claim, the plaintiff will not obtain judgment because judgment will be for the defendant.
Counsel for Shanning advances two arguments. First, the reference in the later part of the rule to ‘taking into account any set-off, cross-claim or counterclaim’ means that a set-off is not to be taken into account at the first stage but only at the second stage. Second, if the interpretation of counsel for Wimpey is correct, r 12(c) is of no effect, in this sense, that it does not add anything to Ord 14. If, after taking the set-off into account, it is clear that there is still a sum due to the plaintiff, then the plaintiff is entitled to judgment under Ord 14 for that sum, and he submits that Ord 29, r 12 would add nothing in such circumstances.
Counsel for Wimpey relies on a decision of the majority of this court in Imodco Ltd v Wimpey Major Projects Ltd [1987] CA Transcript 1312, a judgment given on 18 December 1987. The majority consisted of Slade LJ and myself. I note that that judgment was given in this court two months after the judge in the present case gave his judgment and so, of course, he did not have the Imodco judgment as any guidance to him. We have a Lexis report of the judgments in Imodco’s case which has otherwise not been reported. That was a case in which the plaintiffs made application for judgment under Ord 14 or, alternatively, for an order for an interim payment under Ord 29, and also applied for the action to be stayed under an arbitration clause in the contract. His Honour Judge Hawser QC refused to order summary judgment but he ordered the defendants to make an interim payment of some £600,000, and he stayed the proceedings in order that there should be arbitration as to the balance.
There were two issues in that case: (1) had the judge jurisdiction to make an order for interim payment, followed by a stay as to the balance and (2) if so, was he right on the facts to order an interim payment? The defendants in that case admitted that, subject to their right to counterclaim and set-off, they owed Imodco £1·45m. They claimed, however, that, as a result of Imodco’s breach of contract, they (the defendants) might be obliged to put right defective work at a cost of £1·72m, and that setting off this sum as damages would extinguish Imodco’s claim. The main argument for Imodco was that the defendants’ counterclaim and set-off had not crystallised. It was neither reasonable for them to do the work of rectification nor certain that they would be required to do it. The judge accepted this argument but, on the facts, the majority in the Court of Appeal rejected it.
Having concluded that the judge had jurisdiction, both to order an interim payment and to stay the balance of the claim, in my judgment, I considered whether on the evidence the judge should have ordered the interim payment. I quoted passages from two earlier decisions, first, a part of the judgment of Croom-Johnson LJ in Breeze v R McKennon & Son Ltd (1985) 32 Build LR 41 at 49, a judgment with which Parker LJ agreed, in which Croom-Johnson LJ said:
‘What the court must be satisfied of under rule 11(1)(c) is that the plaintiff will recover substantial damages from the respondent against whom the order is made, and the damages “likely to be recovered” means recovered from that respondent and not from somebody else. The onus of proof to “satisfy” the court on liability under 11(1)(c) is high. It is equivalent to being sure that the plaintiffs will recover. A mere prima facie case is not enough … ’
In the later case of Shearson Lehman Bros Inc v Maclaine Watson & Co Ltd [1987] 2 All ER
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181 at 187, [1987] 1 WLR 480 at 489 Lloyd LJ referred to Croom-Johnson LJ’s dictum, and said:
‘But in the context it is plain that the court was drawing a contrast between being satisfied on the one hand and a mere prima facie case on the other. Something more than a prima facie case is clearly required, but not proof beyond reasonable doubt. The burden is high. But it is a civil burden on the balance of probabilities, not a criminal burden. This involves no lasting hardship on the defendant, since there is provision for readjustment at the trial in the case of an overpayment.’
In Imodco’s case, having quoted those passages, I adopted, as again I do in this case, Lloyd LJ’s formulation. I concluded:
‘(i) Imodco are in breach of their contract with WTW [the defendant companies]. (ii) As a result of that breach WTW have suffered damage, in that they in turn are under a liability to the Property Services Agencies of the Department of the Environment. (iii) The extent of WTW’s liability is uncertain, but it might be very large. It is therefore arguable that WTW are entitled to seek to mitigate greater future loss by requiring Imodco to rectify the defects now, or to carry out the work of rectification themselves. WTW swear, by Mr Addiscott [their London manager], that they intend to do this. If they do, the cost may well exceed Imodco’s claim against WTW. (iv) Imodco could in turn mitigate if they offered a suitable guarantee of their ability to rectify defects in the future, but they have not done so, and thus it has not been shown that it would be unreasonable to do the work now. It follows, in my judgment, that on the evidence the court could not and cannot be satisfied that, after taking account of WTW’s counterclaim and set-off, Imodco would obtain judgment for a substantial sum of money. Accordingly, no interim payment should have been ordered.’
Although I did not say so in terms, it is apparent that my judgment was on the basis that Wimpey’s claimed set-off had to be taken into account when deciding whether the court could be satisfied that the plaintiff would obtain judgment against the defendant for a substantial sum of money.
Slade LJ in his judgment in Imodco’s case said:
‘In this context it is in my judgment of crucial importance to consider the second possible outcome (the more favourable to WTW) if WTW’s claim for damages against Imodco were to proceed to a final hearing under present circumstances. This second possible outcome, which the judge wholly discounted, is that the court might award WTW a sum by way of damages representing the cost of doing the remedial work to the pipes themselves … In my judgment, however, with all respect to the judge, it was not right for him on this application under RSC Ord 14 or Ord 29, under which the burden of proof throughout lay on Imodco, to draw an inference against WTW that, despite their stated intention deposed to on oath, they would not carry out the work and that in any event “having regard to the attitude taken by the PSA” it would be unreasonable for them to do so. As to the latter, point, it seems to me on the evidence that the reasonableness or unreasonableness of taking such a course is a wide open question … For all these reasons, I think the court must proceed on the footing that there is a real possibility (I put it no higher) that at the final hearing WTW, in accordance with the principles referred to by Oliver J in Radford v de Froberville [1978] 1 All ER 33, [1977] 1 WLR 1262, will receive an award on their counterclaim of a sum in the region of £1·7m and that the judge erred in discounting this possibility … I have already given my reasons for concluding that on the evidence there is a real possibility that at the final hearing WTW will recover a sum in the region of £1·7 on their counterclaim, which would eliminate the whole of Imodco’s claim against them. In these circumstances, I do
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not for my part think that there was sufficient evidence to justify the judge in being satisfied that, if the action proceeded to trial, Imodco would obtain against WTW judgment “for a substantial sum“. In my judgment, therefore, this was not a proper case for an order for interim payment … ’
Slade LJ therefore made clear that in his view the set-off must be taken into account in deciding whether the plaintiff would obtain judgment. Counsel for Wimpey argues that this decision is binding on us.
In Imodco’s case it was not argued on behalf of the plaintiffs that the issue must be approached in two stages, nor that a set-off should not be taken into account at the first stage. I am prepared to accept therefore that, strictly, the decision in Imodco may not bind us on the issue we have to determine. Nevertheless, I remain clearly of the view that a set-off must be taken into account at the first stage and that in the present case, with all respect to the judge, he was wrong to take a different view.
I agree with the judge that it was correct for him to consider the matter arising on the application for an interim payment in two stages. The first stage was to answer the question, was he satisfied that, if the action proceeded to trial, the plaintiff would obtain judgment for a substantial sum? If the action did proceed to trial, the court would, of course, have to rule on Wimpey’s counterclaim and set-off. As I have said, if the amount set off exceeded the amount found to be due to Shanning in the first instance, there would be no judgment for the plaintiff. In my judgment, on the wording of the rule it is inescapable that, at stage 1, the likelihood of a set-off or any other defence succeeding must be considered by the court.
If, but only if, the court is satisfied at stage 1, then it proceeds to consider at stage 2 whether, in its discretion, it should order an interim payment and, if so, of what amount. At that stage the rules again require the court to take any set-off claimed by the defendant into account or any counterclaim arising out of some other transaction and not available as a defence and, in an application under r 11, any alleged contributory negligence.
Counsel for Shanning, as I have said, argues that such a construction renders r 12, or at least para (c), ineffective. He submits that if the court is satisfied that, after taking into account a set-off, a substantial quantified sum would be due to the plaintiff, there should be summary judgment under Ord 14 for that sum. What then, he asks forensically, is the point of Ord 29, r 12, since it would not add anything to Ord 14?
It may be correct that, where both claim and set-off (or counterclaim) are for liquidated sums, it will rarely be necessary to rely on Ord 29, r 12. But in a case in which the plaintiff’s claim is for a liquidated sum but the set-off or counterclaim is for an unliquidated sum, the rule maybe a useful alternative to Ord 14. If the maximum amount of the set-off is known, and it is appreciably smaller than the amount of the plaintiff’s claim, then the first test under r 12(c) is satisfied. The judge must then turn to the second stage. If at the same time it is apparent that the defendant has an arguable case for counterclaiming or setting off some amount but it is uncertain whether he will achieve his maximum claim, the court could (as it seems to me, though this has not been argued and I must not be taken as deciding it finally) order in its discretion an interim payment greater than the difference between the amount of the plaintiff’s claim and the maximum suggested amount of the set-off. In other words, I envisage that in those circumstances the court should venture into the area of uncertainty and award not merely the amount it would award on a judgment under Ord 14 but some greater sum representing the uncertainty of the claimed set-off. Thus an interim payment might exceed the amount for which judgment would be given under Ord 14 and be more beneficial to the plaintiff.
This hypothetical situation does not, of course, arise in the present case. For the reasons I have sought to explain, I conclude that the judge was wrong not to take Wimpey’s set-off into account in deciding whether he was satisfied that Shanning would obtain judgment for a substantial sum.
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As a second and alternative argument, counsel for Wimpey submits that, if the judge had construed r 12(c) in accordance with the view I have just expressed, he could still, on a detailed consideration of the various matters which together make up Wimpey’s counterclaim and set-off, have concluded that he was so satisfied. On the facts of this case I do not understand how this could be. Counsel for Wimpey asserts that substantial parts of Wimpey’s claim and set-off are ‘shadowy’ but nevertheless he accepts that Wimpey has an arguable case for a set-off of at least £904,000. It is for this reason that the judge properly refused to give judgment under Ord 14. But, submits counsel for Wimpey, the test the plaintiff must satisfy under Ord 29, r 12 is less stringent than under Ord 14.
I do not find it necessary to compare the wording of the two rules in order to answer this argument. Adopting Lloyd LJ’s formulation from the Shearson Lehman case [1987] 2 All ER 181 at 187, [1987] 1 WLR 480 at 489, Shanning, in order to bring itself within r 12(c), in order to satisfy the first stage, must satisfy the court on the balance of probabilities but to a high standard. Once it accepts that Wimpey has a genuinely arguable claim for an amount which may equal or exceed its admitted claim, that is to say £904,000, it cannot in my view satisfy this burden.
It is, therefore, my view that the judge was wrong to order an interim payment in this case. I would allow the appeal and set aside his order.
NOURSE LJ. I agree that this appeal must be allowed on the grounds stated by Glidewell LJ. Since our decision indorses the view of RSC Ord 29, r 12(c) which was taken by Slade and Glidewell LJJ in Imodco Ltd v Wimpey Major Projects Ltd [1987] CA Transcript 1312, it is appropriate that I should make an independent statement of my reasons for joining in that indorsement.
I start by looking at para (c) in isolation from the final words of r 12. What it requires is that the court should be satisfied that at trial the plaintiff (Shanning) would ‘obtain judgment’ against the defendant (Wimpey) for a substantial sum of money. There being no occasion for a loose construction of those words, it is first necessary to consider what Shanning has to achieve in order to obtain judgment in circumstances such as these.
In the case of a building contract, where the amount of the claims established by the plaintiff is exceeded by the amount of the cross-claims established by the defendant, the plaintiff does not obtain judgment on the claim. The defendant is entitled to judgment on both claim and counterclaim. This rule is a consequence of the right of equitable set-off, which arises where a defendant’s cross-claim for a sum of money is so closely connected with the money claim made by the plaintiff as to make it unfair that the defendant should pay the plaintiff without deducting the amount of the cross-claim. The defendant can therefore raise the cross-claim as a defence pro tanto to the claim. Accordingly, if the cross-claim is adjudged to exceed the claim in amount, it is only the defendant who obtains judgment: on the claim by way of its dismissal and on the counterclaim for the amount of the excess. The application of this rule to cases of building contracts is illustrated by the decision of this court in Hanak v Green [1958] 2 All ER 141, [1958] 2 QB 9.
In the present case counsel for Shanning accepts that Wimpey has arguable cross-claims in an aggregate amount exceeding the £904,000 to which Shanning is admittedly entitled. That was the view of his Honour Judge Lewis Hawser QC, who refused Shanning judgment under RSC Ord 14. If therefore para (c) could be looked at in isolation from the final words of r 12, it would in my view follow that the court could not be satisfied that at trial Shanning would obtain judgment against Wimpey for a substantial sum, or indeed for any sum. I will return to that point later. However, counsel for Shanning submits, correctly, that para (c) cannot be so looked at. He further submits that the final words of the rule, by expressly providing for any set-off, cross-claim or counterclaim to be taken into account at a stage later than that with which para (c) is concerned, necessarily require that they be left out of account at the earlier stage.
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Thus, he submits, the particular two-stage approach adopted by the judge was correct, his decision at the second stage being one which involved the exercise of a judicial discretion and therefore unimpeachable in this court unless, which is not suggested, it proceeded on some error of principle or was plainly wrong.
In my judgment the submissions of counsel for Shanning give undue force and effect to the final words of r 12. Although I understand the argument that the contrary view would render those words superfluous, at all events so far as set-offs and cross-claims are concerned, I think that a sufficient role can be construed for them in two ways. First, it must be remembered that they apply not only to para (c) but also to paras (a) and (b) as well. It is not clear to me that they would in all circumstances be superfluous in their application to the earlier paragraphs. Second, and more important, I think that the positioning of the material words is significant. It is to be observed that, although they might have been brought in earlier, they follow immediately after the words ‘… order the defendant to make an interim payment of such amount as it thinks just’. This suggests to me that the primary function of the material words is to direct the court to take into account set-offs etc in fixing the amount of the interim payment, a direction which is by no means inconsistent with the notion that they must also be taken into account in deciding whether Shanning would obtain judgment for a substantial sum. For these reasons, I am of the opinion that the final words of r 12 do not modify the independent effect of para (c) as I have stated it to be. Moreover, it seems to me that that is the effect which one would have expected it to have. It would to my mind be surprising, in the absence of clear words, if the court could, as a matter of discretion, order an interim payment in a case where it took the view that there were arguable cross-claims which would exceed the amount of the claim. Counsel for Shanning submits that if that is right r 12 has added nothing to the court’s powers under Ord 14. For the reasons given by Glidewell LJ, I very much doubt that that is the case. Be that as it may, I do not see how, as a matter of language and common sense, the court can, to the high standard required, be satisfied that Shanning would obtain judgment, when Wimpey has arguable cross-claims which, if established at trial, would exceed Shanning’s claims in amount. That is the view which, without argument, was assumed to be correct by Slade and Glidewell LJJ in Imodco Ltd v Wimpey Major Projects Ltd [1987] CA Transcript 1312. Having heard full argument, I am in no doubt that their assumption was correct. The assumption of a trained mind, always valuable, proved by argument becomes invaluable.
Such being my reasons for rejecting the principle argument of counsel for Shanning, it becomes unnecessary for me to add anything to Glidewell LJ’s rejection of his alternative argument.
Appeal allowed. Leave to appeal to House of Lords refused.
Solicitors: R W Grey (for Wimpey); Memery Crystal (for Shanning).
Mary Rose Plummer Barrister.
Carne and another v Debono
[1988] 3 All ER 485
Categories: LAND; Sale of Land
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): SIR NICOLAS BROWNE-WILKINSON V-C AND STUART-SMITH LJ
Hearing Date(s): 27 JUNE 1988
Sale of land – Contract – Rescission – Completion statement – Completion statement received two hours before notice to complete due to expire – Completion statement failing to specify correct purchase price – No tender of purchase price by purchaser – Whether purchaser in breach of contract.
By a contract dated 21 February 1985 the vendors agreed to sell their house to the purchaser. On 13 January 1987 the vendors served notice requiring completion of the contract and making time of the essence. The notice to complete expired at midday on 5 February 1987 and at 10.10 am on that day the purchaser’s solicitor received a completion statement from the vendors’ solicitors. The statement contained a number of mistakes regarding the amount of additional interest payable. No tender of the purchase money was made. By a letter dated 6 February the vendors’ solicitors purported to terminate the contract and stated that the deposit would be retained. On the same day the purchaser registered a land charge against the property. The vendors issued a summons claiming declarations that the contract had been rescinded and the deposit paid by the purchaser forfeited and sought an order vacating the registration of the land charge. The master granted the vendors the relief sought. The purchaser appealed, contending that the vendors were in breach of contract because they had failed to send a completion statement specifying the correct sum due on completion.
Held – Although it was customary for a completion statement to be sent to the purchaser of property and agreed between the parties prior to completion so that the parties would know in advance of completion what their respective obligations were, there was no legal obligation on a vendor’s solicitor to provide a purchaser with a completion statement. Furthermore, the purchaser was under a duty to tender the correct purchase price notwithstanding any error in the completion statement as to the amount due. Since the purchaser had not tendered the purchase price on the due date he was in breach of contract and the appeal would therefore be dismissed (see p 489 c to j and p 490 a, post).
Dictum of Megarry J in Schindler v Pigault (1975) 30 P & CR 328 at 335 applied.
Notes
For date for completion and notice to complete, see 42 Halsbury’s Laws (4th edn) paras 126, 127, and for cases on the subject, see 40 Digest (Reissue) 178–187, 189–194, 1282–1325, 1384–1407.
Cases referred to in judgments
Aberfoyle Plantations Ltd v Cheng [1959] 3 All ER 910, [1960] AC 115, [1959] 3 WLR 1011, PC.
Schindler v Pigault (1975) 30 P & CR 328.
Appeal
Malcolm David Debono (the purchaser) appealed against the decision of Chief Master Munrow given on 19 April 1988 whereby he held that a contract dated 21 February 1985 for the sale of 79 Eaton Avenue, High Wycombe, Buckinghamshire by Brian George Carne and Louise Anne Carne (the vendors) to the purchaser had been rescinded. The facts are set out in the judgment of Sir Nicolas Browne-Wilkinson V-C.
Page 486 of [1988] 3 All ER 485
The purchaser appeared in person.
Richard Walford for the vendors.
27 June 1988. The following judgments were delivered.
SIR NICOLAS BROWNE-WILKINSON V-C. This is an appeal from the Master, Master Munrow, in proceedings concerning a contract for the sale of a property, 79 Eaton Avenue, High Wycombe, Buckinghamshire. The property belonged to the vendors, Mr and Mrs Carne. On 21 February 1985 they entered into a contract to sell the property to the purchaser, Mr Debono. The contract was subject to two conditions: it was conditional, first, on the obtaining of planning permission and, second, on the release of restrictive convenants.
The contract incorporated the National Conditions of Sale (20th edn). There were also a number of special conditions to which I should refer. They are as follows:
‘1. In condition 22(2) and 22(3) the words 10 working days shall be substituted for the words 16 working days …
11. The balance purchase monies shall be received by the Vendors Solicitors not later than 12 noon on the date of completion.
12.a. This Agreement is conditional upon the Purchaser obtaining planning permission (hereafter called “Planning Permission”) to carry out development of the property hereby contracted to be sold within 6 months from the date of this Contract … [There are then provisions regulating the position if planning permission should not be obtained.] e. In the event of Planning permission as aforesaid being granted either on the initial application for planning permission or on appeal to the appropriate Minister in such terms and upon such conditions (if any) as are acceptable to the Purchaser completion of this agreement shall take place within a period of 56 days of the receipt in writing by the Purchaser of such planning permission as aforesaid or earlier by agreement … h. Any notice given by either party to the other under the provisions of this Agreement shall be in writing and shall be deemed to have [been] served at the expiration of forty eight hours after it has been posted … i. This Agreement is further conditional upon the release by the Liverpool Victoria … of the covenants and conditions restricting the development of the property as contained in the conveyance the consideration for such release not to exceed £5,000. In the event of the Liverpool Victoria or other such party as aforesaid requiring a sum in excess of £5,000(inclusive of costs) for the release of the said covenants and conditions then upon receipt by the Vendors Solicitors of such written notification from the Liverpool Victoria or other such party as aforesaid then this Agreement shall be null and void whereupon the Vendors Solicitors shall forthwith refund to the Purchaser the said deposit of £7,000 with interest as aforesaid.’
Pursuant to the provisions as to planning permission, the purchaser applied for and eventually obtained on appeal a grant of planning permission on 17 October 1985, which was communicated to him on 21 October 1985. As a result of the contractual provisions, the contractual date of completion became a date 56 days thereafter, namely 16 December 1985. The progress of the transaction thereafter was extraordinarily lethargic. The only event of importance is that on 5 November 1986, or thereabouts, the vendors learned that terms for the release of the restrictive covenants had been agreed between the purchaser and those entitled to such covenants. At no stage was a formal release of the covenants given.
On 13 January 1987 the vendors gave a notice under condition 22 of the National Conditions of Sale requiring completion of the contract and making time of the essence. Bearing in mind the modification of condition 22 in special condition 1, that notice, according to the terms of the contract, expired on 28 January 1987, namely ten days later. For reasons which are wholly unexplained, the parties’ solicitors treated that notice
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to complete as not expiring until 5 February 1987. There is a finding by the master who tried the case that both sides were working towards 5 February as the expiry of the notice to complete.
It appears from the documents that on 4 February 1987 there was a telephone call between the vendors’ solicitors and the purchaser’s solicitors. In the course of that telephone call, the vendors’ solicitors gave the amounts required for completion and was told by the purchaser’s solicitors that they were in funds and were ready to complete. However, there is some evidence which indicates that the purchaser’s solicitors were objecting to the interest which was being claimed by the vendors.
On 5 February (ie the very date on which the notice to complete was being treated as expiring) a fax was sent by the vendors’ solicitors to the purchaser’s solicitors in the following terms:
‘We refer to our telephone conversation of yesterday in respect of this matter relating to our Notice to Complete served on 13th January. You indicated that you were in funds and ready to complete this matter … Having regard to the terms of the Contract and your clients’ delay in obtaining an Agreement with Liverpool Victoria, we require interest calculated from 16th December being 56 days from your receipt of the successful planning decision. We therefore calculate the balance to complete as follows.’
There then follows a calculation of the principal money, below which appears a calculation of the interest. Contrary to what had been said above in the letter, interest was first claimed from 21 October 1985(not 16 December 1985) to 9 January 1986 in the sum of £642·08. The total interest was calculated at £10,710·87, giving a total balance due on completion, according to that letter, of £76,661·37. The faxed letter concludes with the words: ‘We await to hear from you.' That fax was received at 10.10 am on the morning of 5 February: completion was due by midday.
There are a number of comments to be made on that letter. First, by ordinary standards, to produce a completion statement in writing for the first time rather less than two hours before the last moment of completion is, to say the least, unconventional. Second, there is an internal conflict as to the interest being demanded. At one point, it is said that it is interest from 16 December (ie the date which had become the contractual date of completion); that conflicts with the later claim for interest from 21 October, which was the date on which notification of planning permission was received. Finally, we were told by counsel for the vendors that the calculation of interest for the period starting 21 October is mathematically incorrect and in fact the amount of £642·08 claimed was less than the sum which would have been due from 16 December 1985 to 9 January 1986 if properly calculated.
That letter having been sent, the time for completion under special condition 11 expired at 12 o’clock on 5 February. No tender of the purchase money was made. On the following day, the vendors’ solicitors wrote saying:
‘We write further to our fax of 5th February. We must now treat this Contract as terminated. Under the terms of the Contract we will retain the deposit. We will now be re-selling this property.’
On the same day, 6 February, the purchaser’s solicitors applied to register an estate contract as a class C(iv) land charge, which land charge was in due course registered and is still on the register. On 19 May 1987 the vendors started these proceedings by originating summons. They claimed, first, a declaration that the contract had been rescinded, second, a declaration that the deposit of £7,000 paid to the vendors by the purchaser had been forfeited and, third, an order vacating the registration of the land charge. It was ordered that the action should be tried before the Chief Master. He heard
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the case and gave judgment on 19 April 1988 granting the relief claimed by the vendors. The purchaser, Mr Debono, now appeals.
The purchaser appeared in person before the Chief Master and before us. According to the best traditions of the Bar, counsel for the vendors has given us every assistance not only in advancing his clients’ case, but also in drawing to our attention any points which might favour the purchaser. I am very grateful for that help. The fact remains that there has not been full argument on both sides on the legal issues which arise in this case; therefore, I am anxious to limit any decision to those matters which are absolutely essential for the determination of this appeal between the parties.
As a preliminary, I seek to get out of the way the provision in special condition 12.i relating to the removal of the covenants and conditions on the property. Looking at the matter in the abstract, one might have thought it was for the vendors to negotiate the removal of those covenants from the title. But it is clear that they were not so treated and that all negotiations relating to those covenants and the price to be paid for them were conducted by the purchaser. When the vendors purported to rescind the agreement, the purchaser’s solicitors objected to the validity of the notice to complete on the grounds that:
‘The conditions of the contract have not been fully complied with in that although we have agreement from the Rent Charge owners that the covenants referred to in Special Condition i of the contract will be released upon payment of a consideration and costs, this is purely an agreement and we do not yet have a formal release of the same.’
That objection is, in my judgment, groundless in the circumstances of this case. In Aberfoyle Plantations Ltd v Cheng [1959] 3 All ER 910 at 914, [1960] AC 115 at 124 Lord Jenkins, in giving the opinion of the Privy Council, said:
‘… their Lordships would adopt, as warranted by authority and manifestly reasonable in themselves, the following general principles:—(i) Where a conditional contract of sale fixes a date for the completion of the sale, then the conditions must be fulfilled by that date … ’
At first sight, therefore, 16 December 1985 having become fixed under the terms of the contract as the date for completion, the fulfillment of the condition involving the removal of the covenants would have to take place by that date. However, counsel for the vendors has quite rightly drawn to our attention the fact that in the circumstances of this case, it is probably impossible for the vendors so to contend since they have encouraged the purchaser to go on with the transaction long after 16 December 1985. Even so, in my judgment, the purchaser cannot rely on the vendors’ failure to obtain a formal release since the purchaser had assumed the obligation to procure the release and he had not done so.
Master Munrow reached the contrary view. He held that as there was an agreement to release, that was as good as a formal release. If the master were right on that point, then, as a defence to this claim, it becomes irrelevant since the condition had been satisfied. If he is wrong, as in my judgment he was, the failure to satisfy the condition by the date at which the notice to complete expired at the latest rendered the contract void in any event.
I can now turn to the main point which the purchaser himself urged. It is clear on the master’s finding that time was of the essence for the completion of the contract on 5 February. That being so, it is surprising to find no completion statement and no attempt to agree the sum due on completion until 10.10 am on that morning, apart from a telephone communication the previous day. What is more, in the respects that I have mentioned, the completion statement was wholly defective. What had proceeded in an
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extremely dilatory matter had suddenly become the most urgent procedure that I personally have come across, viz no completion statement being provided until the very morning of the crucial day. The purchaser asks what was he to do; his solicitors were in funds but what had been asked from them was the payment of a sum which, on the face of the completion statement, was the wrong sum. The purchaser submitted, in effect, that the vendors were in breach of contract in that they failed to send in good time a completion statement specifying the right amount due. He also relied on special condition 12.h which deems any notice given by other parties under the agreement to have been served on the expiration of 48 hours after it had been posted. Applying that to the faxed completion statement he said it had to be deemed not to have been received until two days after the crucial date on 5 February.
I have no doubt that he is wrong on that latter ground. Condition 12(h) is a deeming provision which does not exclude the possibility of proving an earlier receipt. It is not a statement that for all purposes the document shall only be treated as having been received at a particular time.
Sympathise though I do with the purchaser, I do not think his general submission can be right either. Although it is a customary step in conveyancing procedure that completion statements should be sent and agreed so that the parties should be clear well in advance of the date of completion what their respective obligations are, so far as I am aware, that is merely a matter of practice and not of law. So far as the authorities drawn to our attention are concerned, there is no legal obligation on a solicitor to provide a completion statement.
In those circumstances, what was the purchaser to do when faced with an erroneous completion statement? The master held that it was his duty to tender the correct amount of the purchase money and that as the purchaser had done nothing and had not tendered the purchase price, he was in breach. The master reached that conclusion in reliance on a statement by Megarry J in Schindler v Pigault (1975) 30 P & CR 328. In that case, time had been made of the essence for completion on 5 November. The contract had not been completed on that day. An action by the purchaser claiming that he had rescinded the contract and for return of his deposit was successful. The claim was based on a number of different grounds. One of the grounds put forward, which was not successful, was that the vendor had submitted a completion statement demanding interest to which he was not entitled under the contract. Megarry J, in addressing that point, held that, notwithstanding the error in the completion statement, it was the purchaser’s duty to attend at the time and place fixed for completion and to tender the correct amount of the purchase money (at 335).
I agree with that view. There being no contractual obligation to provide a completion statement, in my judgment, it is not a repudiation by the vendor if in the completion statement he asks for more than that to which he is entitled. So to hold would give rise to great disputes in vendor/purchaser matters since the exact calculation of the purchase money is often a matter of some difficulty. The completion statement is often the subject of negotiation between the parties to arrive at the correct figure.
What then happens if there is no agreement as to that amount? In my judgment, there would be a complete stalemate in the conveyancing procedure if it were open to the purchaser merely to say: ‘I do not agree your statement and I will therefore do nothing.' In my judgment, Megarry J was right in saying that the duty then is for the purchaser to come forward and tender the money which he says is the amount due if he wishes to avoid being in breach of contract. It may be, although I express no concluded view on the matter, that if a purchaser is unable to calculate the amount which is due under the contract without information provided from the vendor (for example in working out any necessary apportionments), the vendor might be deprived of his ability to rely on the default in tendering, but that is not this case. It is clear in this case that the purchaser would make his calculation of the sums which he said were due on completion.
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For those reasons, in my judgment, the master reached the right conclusion and I would dismiss the appeal.
STUART-SMITH LJ. I agree.
Appeal dismissed.
Solicitors: Winter-Taylors, High Wycombe (for the vendors).
Celia Fox Barrister.
Rochdale Borough Council v Anders
[1988] 3 All ER 490
Categories: CIVIL PROCEDURE
Court: QUEEN’S BENCH DIVISION AT MANCHESTER
Lord(s): CAULFIELD J
Hearing Date(s): 23 MAY 1988
Injunction – Interlocutory – Undertaking as to damages – Undertaking by local authority – Proceedings to enforce compliance with statute – Local authority having power to enforce statute by prosecution or action for injunction – Whether local authority may be required to give cross-undertaking in damages where it commences proceedings for injunction – Shops Act 1950.
Where a local authority (as opposed to the Crown) has power to enforce the provisions of a statute, eg the Shops Act 1950, or other public law either by prosecution for a breach thereof or by an action for an injunction, the court has a discretion to require the local authority to give a cross-undertaking in damages where it has chosen to commence proceedings for an injunction.
F Hoffmann-La Roche & Co AG v Secretary of State for State for Trade and Industry [1974] 2 All ER 1128 distinguished.
Notes
For an undertaking in damages as a condition of being granted an interlocutory injunction, see 24 Halsbury’s Laws (4th edn) paras 1072–1076, and for cases on the subject, see 28(2) Digest (Reissue) 1133–1136, 1332–1377.
For the Shops Act 1950, see 19 Halsbury’s Statutes (4th edn) 349.
Cases referred to in judgment
Hoffmann-La Roche (F) & Co AG v Secretary of State for Trade and Industry [1974] 2 All ER 1128, [1975] AC 295, [1974] 3 WLR 104, HL.
London City Corp v Bovis Construction Ltd (1988) Times, 21 April, CA.
Stoke-on-Trent City Council v B & Q (Retail) Ltd [1984] 2 All ER 332, [1984] AC 754, [1984] 2 WLR 929, HL.
Summonses
By a summons dated 20 March 1988 and amended and redated 16 May 1988 Stewart John Anders, who was the defendant to an action commenced by the plaintiffs, Rochdale Borough Council, by writ issued from the Rochdale District Registry of the High Court on 5 February 1988 seeking an injunction restraining the defendant by himself, his servants or agents from opening a shop or causing or permitting others to open a shop at Dale Mill, Dale Street, Milnrow for the serving of customers there or elsewhere in the district of the metropolitan borough of Rochdale in contravention of the provisions of the Shops Act 1950, sought the stay of all further proceedings in the action under the
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inherent jurisdiction of the court on the ground that the validity of Pt IV of the 1950 Act was subject to a reference to the Court of Justice of the European Communities under art 177 of the EEC Treaty and/or that the matter be referred to the Court of Justice pursuant to art 177. By a summons dated 13 May 1988 the council sought an interlocutory injunction in the action. The summonses were heard in chambers but judgment was given by Caulfield J in open court. The facts are set out in the judgment.
David Vaughan QC and William Elland for the defendant.
Michael Beloff QC and Stephen Sauvain for the council.
23 May 1988. The following judgment was delivered.
CAULFIELD J. I am about to deliver judgment. I would have preferred a little time to consider the judgment that I am about to give, but it is in the interests of the parties that they should know the result today so that they can go to the Court of Appeal without any delay.
There are two applications before the court. The first is an application by the defendant, Stewart John Anders, to stay this action brought by Rochdale Borough Council seeking an injunction to restrain breaches of the Shops Act 1950. The second application is brought by the council by way of riposte for an interlocutory injunction pending the determination of the action.
The council are the authority with the obligation for enforcing the Shops Act 1950. They have a power to prosecute to enforce that Act. They also have the power to bring proceedings by way of an injunction by virtue of s 222 of the Local Government Act 1972.
In this action the council say that the defendant has been opening Dale Mill on Sundays contrary to the law. They say that he has broken the law many times. Prosecuting him does no good. He pays the fines and continues to open his premises in breach of the 1950 Act. The question whether an injunction should be granted is a very important matter as the defendant can be sent to prison for breach of such an injunction. It is therefore a very grave step to take.
The action was originally ordered to be tried speedily, whatever that means. Unfortunately there has been a certain amount of delay, not by the court, possibly on the part of the defendant, although I do not hold this against him. It is obviously in the defendant’s interests as he can carry on his profitable business meanwhile.
Counsel for defendant began by opening his case but I stopped him not because I supported his argument but because I felt intellectually that it was easier to hear counsel for the council first.
I will now make a summary of the submissions which have been made. Counsel for the council submitted on a variety of authorities that the court’s jurisdiction to grant interlocutory relief should be exercised. He relies on Stoke-on-Trent City Council v B & Q (Retail) Ltd [1984] 2 All ER 332, [1984] AC 754. I accept his submissions on that authority. I approach this case on the basis that there was a breach of the 1950 Act and that the defendant intends to continue. I also accept that I do not need to find that there has been a flagrant and deliberate flouting of the law, but I approach this matter bearing in mind the decision of London City Corp v Bovis Construction Ltd (1988) Times, 21 April.
The real difficulty is not in deciding whether or not an injunction should be granted to the council. I think it should. There has been a clear breach of the 1950 Act subject only to the question which has already been referred by other courts to the Court of Justice of the European Communities whether that Act contravenes art 30 of the EEC Treaty.
I find however the second submission of counsel for the council more difficult to accept, although I hope I understand it perfectly. For the first time it is argued that on the particular facts the local authority should not have to be saddled with a cross-undertaking as to damages which is normally imposed on a local authority.
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Counsel makes his submission exclusively on the basis of the decision of the House of Lords in F Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry [1974] 2 All ER 1128, [1975] AC 295. All the facts of that case can be deemed to be incorporated in this judgment. In that case the Secretary of State sought to compel Hoffmann-La Roche to reduce the price of drugs whose prices were contrary to an order made under the provisions of the Monopolies and Mergers Act 1965. A relevant provision was s 11 of the Monopolies and Restrictive Practices (Inquiry and Control) Act 1948. Section 11(1) of the 1948 Act reads as follows:
‘No criminal proceedings shall lie against any person by virtue of the making of any order under the last preceding section on the ground that he has committed or aided, abetted, counselled or procured the commission of, or conspired or attempted to commit, or incited others to commit, any contravention of the order.’
I should say here that the relevant order was an order made pursuant to the 1948 Act. Section 11 continues:
‘(2) Nothing in subsection (1) shall limit any right of any person to bring civil proceedings in respect of any contravention or apprehended contravention of any such order, and, without prejudice to the generality of the preceding words, compliance with any such order shall be enforceable by civil proceedings by the Crown for an injunction or for any other appropriate relief … ’
Those words which I have emphasised are important. In the Hoffmann-La Roche case the drug manufacturers said they would not obey the order as it was invalid. That is why the Secretary of State tried to ensure compliance by taking injunctive proceedings under s 11. The only remedy that could be taken was by way of injunction.
The House of Lords (Lord Wilberforce dissenting) said that, when the Crown in these circumstances was seeking injunctive relief, the Crown should not be put on terms. Lord Reid said ([1974] 2 All ER 1128 at 1134, [1975] AC 295 at 341):
‘A person who is prosecuted and found not guilty may have suffered serious loss by reason of the prosecution, but in general he has no legal claim against the prosecutor. In the absence of special circumstances I see no reason why the Crown, in seeking to enforce orders of this kind, should have to incur legal liability to the person alleged to be in breach of the order. It must be borne in mind that an order made under statutory authority is as much the law of the land as an Act of Parliament unless and until it has been found to be ultra vires. No doubt procedure by way of injunction is more flexible than procedure by prosecution and there may well be cases when a court ought to refuse an interim injunction or only to grant it on terms. But I think that it is for the person against whom the interim injunction is sought to show special reason why justice requires that the injunction should not be granted or should only be granted on terms.’
Lord Reid then went on to deal with several special features of the case.
Lord Morris gave his reasons for not requiring the Crown to give the cross-undertaking as to damages. He said ([1974] 2 All ER 1128 at 1142–1143, [1975] AC 295 at 351–352):
‘In the present case we are concerned with law enforcement and with law enforcement by the one and only method decreed by Parliament. The proceedings do not in any way lose the character of being law enforcement proceedings merely because the law to be enforced will result in a reduction of sums to be paid by one limb of the public service. What the court is asked to enforce is a statutory instrument which each House of Parliament has had the opportunity to reject but which each House has positively affirmed. Accepting for present purposes that in certain events the court could declare that what had been laid before Parliament was something which was laid before it in excess of a Minister’s powers, it must remain
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true that unless and until that is shown the statutory instrument is part of the law of the land. The approach of the court must be that the law is to be enforced.’
This theme goes through all the speeches of the majority of the House of Lords save that of Lord Wilberforce. What they are saying is that even if there is a doubt about a particular piece of legislation, and I add such as the Shops Act 1950 because of art 30, the court must proceed on the basis that the legislation or the Act is valid, and the 1950 Act must be enforced. I cannot work on the basis that the 1950 Act might be unlawful.
But the Hoffmann-La Roche case is dealing with the case where the Crown is enforcing a public law. Rochdale Borough Council are not the Crown, although they are also responsible for enforcing the public law. In the Hoffmann-La Roche case the important factor was that, under s 11 of the Monopolies and Restrictive Practices (Inquiry and Control) Act 1948, the only way the Crown could enforce the order was by injunction. In this particular case, before 1972, the local authority could not have enforced the 1950 Act by injunction except by way of a relator action. Such power as they have arises only by the later provisions of the Local Government Act 1972, s 222. The 1950 Act does however give them specific powers to prosecute. I think that this is the important part of the distinction. Consequently I do not think that I am bound by the Hoffmann-La Roche case to assume that a cross-undertaking in damages should not be required as a matter of course where the local authority have chosen to commence injunction proceedings.
I think that the proper approach is to decide whether in my discretion a cross-undertaking should be required before the court should grant interlocutory relief. I will decide this point at the end of this judgment.
Counsel for the defendant has argued that there should be no injunction and certainly no injunction should be granted in the case of a reference to the Court of Justice of the European Communities. I shall come back later in this judgment to the point that counsel for the defendant has argued that the 1950 Act contravenes art 30 of the EEC Treaty. Counsel for the council concedes that there is an arguable case on this point.
This is the view I have reached on the cross-undertaking. The Hoffmann-La Roche case does not bind me to demand a cross-undertaking from the local authority before I can grant interlocutory relief. I think I am free to consider the merits. I have taken into account all the material matters. Certainly before today no one has argued that there should be no cross-undertaking given. That is not conclusive. There are other reasons more compelling than the history of cross-undertakings which lead me to say that a cross-undertaking should be required in this case.
On the evidence before me, speaking generally, there are in this area a fair number of shops breaking the law but not being prosecuted, although no criticism of the council is being made in this regard. It seems to me that to grant an injunction now, with no cross-undertaking, would seriously damage if not demolish the defendant’s business. I do not see why this one defendant should be placed at such a disadvantage when all around him he can see the 1950 Act being broken every week. The harm done would be enormous. The potential loss would be tremendous. The length of time to trial is likely to be very long, and I see no reason why the defendant should run the risk of the demolition of his business in the mean time.
The council seek an injunction but will not take the responsibility of paying compensation if they are wrong. Counsel for the council says that this is justified. He says that local authorities are entitled to do this by reason of their being enforcers of public law. That submission is right as regards the Crown but wrong as regards Rochdale Borough Council and it denies them the relief they seek.
No great harm will occur as a result of the injunction being denied in the absence of a cross-undertaking. No one is particularly bothered. The council have known for years about the defendant opening his premises on a Sunday, but have only decided to take proceedings relatively recently.
It follows that there will be no order on the council’s application for an injunction and
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no order on the application to stay. I cannot see any reason why there should be a reference to the Court of Justice of the European Communities. There are already enough references.
Beloff QC for the council. Your Lordship has placed us in a difficult position. Both parties had wanted a reference to the European Court. The fact that your Lordship has made no order on the application for a stay means that this same issue will not be raised at trial.
CAULFIELD J. A reference can of course be made by consent.
Vaughan QC for the defendant. The defendant’s position is that he is prepared to consent to a reference being made, but of course we reserve our position if there were to be an appeal against your Lordship’s judgment.
CAULFIELD J. On that basis I will order that a reference should be made. I will order that the council pay the defendant’s costs on the injunction in any event. There should be no order for costs on the stay. I grant liberty to apply in respect of the reference during the time allowed for an appeal against my judgment and liberty to apply generally.
Council’s application for an interlocutory injunction refused. By consent, questions referred to the Court of Justice of the European Communities for a preliminary ruling and all further proceedings in cause stayed pending ruling or further order.
17 August. The following questions were referred to the Court of Justice of the European Communities for a preliminary ruling pursuant to art 177 of the EEC Treaty: (1) Where a member state prohibits retail premises from being open on Sunday for the sale of goods to customers, save in respect of certain specified items sales of which are permitted, and where the effect of the prohibition is to reduce in absolute terms the sales of goods in those premises including goods manufactured in other member states, and correspondingly to reduce the volume of imports of goods from other member states, is such a prohibition a measure having equivalent effect to a quantitative restriction in imports within the meaning of art 30 of the EEC Treaty? (2) If the answer to question 1 is in the affirmative, does such a measure benefit from any of the exceptions to art 30 contained in art 36, or from any other exception recognised by Community law? (3) Is the answer to question 1 or question 2 above affected by any factor so as to render the measure in question a means of arbitrary discrimination or a disguised restriction on trade between member states or a measure lacking in proportionality or otherwise unjustified? (4) If the prohibition referred to in question 1 contravenes art 30 and is not justified under art 36, is it totally unenforceable against a trader in the member state or only unenforceable to the extent that it prohibits transactions involving goods manufactured in or imported from other member states?
Solicitors: Jackson Stoney & Co, Rochdale (for the defendant); David Shipp, Rochdale (for the council).
M Denise Chorlton Barrister.
Craven (Inspector of Taxes) v White and related appeal
Inland Revenue Commissioners v Bowater Property Developments Ltd
Baylis (Inspector of Taxes) v Gregory
[1988] 3 All ER 495
Categories: TAXATION; Capital Gains Tax, Tax Avoidance, Other Taxation
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD TEMPLEMAN, LORD OLIVER OF AYLMERTON, LORD GOFF OF CHIEVELEY AND LORD JAUNCEY OF TULLICHETTLE
Hearing Date(s): 16, 17, 18, 19, 23, 24, 25 MAY, 21 JULY 1988
Capital gains tax – Tax avoidance scheme – Composite transaction – Preordained series of transactions – Commercial purpose – Linear transactions – Second transaction not certain when first transaction carried out – Steps in series of transactions dependent on uncertain events – Steps having commercial purpose other than tax avoidance – Whether series of transactions to be treated as single composite transaction – Whether taxpayer liable for capital gains tax.
Development land tax – Tax avoidance scheme – Composite transaction – Preordained series of transactions – Taxpayer company wishing to sell land – Taxpayer company first fragmenting ownership of land among five other companies in same group in order to utilise tax exemptions available to each – Purchaser ending negotiations before sale agreed – Purchaser resuming negotiations some months later after change of circumstances – Purchase completed on terms different from those previously proposed – Whether series of transactions to be treated as single composite transaction – Whether taxpayer company liable for development land tax.
In three separate cases where there were a series of linear transactions in which execution of an intermediate transaction with tax saving consequences was not certain at the time the first transaction was effected the question arose whether the transactions were to be treated for tax purposes as preordained and therefore a single composite transaction so that the tax saving consequences were to be disregarded when tax was assessed.
In the first case the taxpayers owned a family company, Q Ltd, which in 1973 they decided to sell. Their initial attempts to dispose of the company were not successful but in 1976 they entered into negotiations, first with a public company, O Ltd, for the sale of the company and then, when those negotiations were inconclusive, with CNC for a merger. In anticipation of the merger the taxpayers incorporated M Ltd in the Isle of Man and agreed that M Ltd should acquire the share capital of Q Ltd from the taxpayers in exchange for shares in M Ltd. However, before the merger with CNC was completed, negotiations with O Ltd were resumed with the result that it was agreed between the taxpayers and O Ltd that M Ltd would sell its Q Ltd shares to a subsidiary of O Ltd for £2·2m. When the transaction was completed M Ltd, whose only assets were the proceeds of the sale, distributed the proceeds to the taxpayers by means of interest-free loans. The taxpayers were assessed to capital gains tax for 1976–77 and 1977–78 on the basis that the sale of the shares by M Ltd had given rise to chargeable gains on disposals by the taxpayer. On appeal by the taxpayers, the Special Commissioners made a finding that the transfer of the Q Ltd shares to M Ltd, M Ltd’s sale of those shares a month later to O Ltd’s subsidiary and the lending of the proceeds of sale to the taxpayers was a single composite transaction but since the agreements between the taxpayers and M Ltd and between the taxpayers and O Ltd were both genuine the taxpayers could not be said to have disposed of their shares directly to O Ltd’s subsidiary.
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In the second case the taxpayer company entered into negotiations with MP Ltd for the sale of certain land and in anticipation of the sale the taxpayer company sold the land in equal shares to five associated companies with the aim of taking advantage of the £50,000 exemption from development land tax afforded by s 12 of the Development Land Tax Act 1976. MP Ltd withdrew from the negotiations but subsequently reopened them and by a contract of sale in which the five associated companies were named as vendors the land was then sold to MP Ltd at a higher price and on different terms. The taxpayer company was assessed to development land tax on the basis that it had disposed of the land direct to MP Ltd. On appeal by the taxpayer company, the Special Commissioners discharged the assessment on the grounds that the true disponors of the land were the five associated companies.
In the third case the taxpayers were shareholders of a family company. They entered into negotiations for the sale of the company to CSI Ltd and in anticipation of the sale, made arrangements to incorporate an Isle of Man company with which the company’s shares would be exchanged so that when the sale was effected payment of capital gains tax would be postponed indefinitely. Before the Isle of Man company was incorporated CSI Ltd broke off the negotiations but the taxpayers decided to continue with the incorporation of the Isle of Man company and the exchange of shares. At the time there was no other purchaser in prospect but 18 months later the taxpayers arranged a sale to a new purchaser and eventually the Isle of Man company sold the shares in the family company to that purchaser and then distributed the proceeds of sale to the taxpayers by way of interest-free loans. The taxpayers were assessed to capital gains tax on the basis that the share exchange was a chargeable disposal by the taxpayers and the sale of the shares by the Isle of Man company was a disposal by the taxpayers for capital gains tax purposes. On appeal, the Special Commissioners found that the share exchange and subsequent sale were not linked and accordingly allowed the appeal.
In all three cases appeals by the Crown to the High Court and then to the Court of Appeal were dismissed. The Crown appealed to the House of Lords.
Held – (1) (Lord Templeman and Lord Goff dissenting) The test of whether a series of transactions which contained a tax saving step was nevertheless liable to tax was whether the transactions were preordained, in the sense that, looking at the transactions as a whole, realistically they constituted a single and indivisible whole and were to be treated as such, and was not whether the tax saving step was effected for the purpose of avoiding tax on a contemplated subsequent transaction. A linear series of transactions which contained an intermediate tax saving step would be held to be susceptible to tax if, but only if, (a) the series of transactions was, at the time when the intermediate transaction was entered into, preordained in order to produce a given result, (b) that transaction had no other purpose than tax mitigation, (c) there was at that time no practical likelihood that the preplanned events would not take place in the order ordained, so that the intermediate transaction was not even contemplated practically as having an independent life, and (d) the preordained events did in fact take place. Accordingly, the disposal of property by a taxpayer by means of a series of transactions which had the effect of avoiding capital gains tax would not be treated as a composite transaction or a preordained series of transactions by which the taxpayer was deemed for capital gains tax purposes to have made a direct disposal if at the time when the transactions were entered into it was not certain that they would be carried through (see p 500 e f, p 501 e f, p 503 b c, p 520 e g, p 523 d e, p 525 c d, p 527 b c, p 528 d e, p 540 j to p 541 b and p 544 a, post); W T Ramsay Ltd v IRC [1981] 1 All ER 865 and Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530 explained.
(2) Applying that principle, the appeals would be dismissed for the following reasons—
(a) (Lord Templeman and Lord Goff dissenting) In the first appeal, at the time it was agreed that M Ltd would acquire the share capital of Q Ltd from the taxpayers in exchange for shares in M Ltd it was not certain that the sale to O Ltd’s subsidiary would
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take place since at that date the taxpayers were not in a position to secure that the sale went through. Accordingly, it could not be said that at that stage there was a preordained series of transactions and therefore the share exchange between the taxpayers and M Ltd was an independent transaction and there was no disposal for capital gains tax purposes by the taxpayers to O Ltd’s subsidiary (see p 501 f g, p 503 a b, p 527 d, p 530 e f and p 543 b c, post).
(b) In the second and third appeals, there was no connection between the disposal by the taxpayers and the eventual sale to a third party and therefore it could not be said that the disposals and sales were part of a preordained series of transactions (see p 501 j, p 502 b c, p 513 a d f, p 527 d, p 529 g h, p 535 h j and p 543 g j, post).
Per Lord Keith and Lord Oliver. There is no moral dimension by which tax avoidance is to be judged so that any step undertaken with a view to the avoidance or mitigation of tax on an anticipated transaction or disposition is for that reason to be ignored or struck down (see p 500 g h, p 518 j and p 521 e f h j, post).
Decision of the Court of Appeal [1987] 3 All ER 27 affirmed.
Notes
For the rules applying, for capital gains tax purposes, to the reorganisation of a company’s share capital, see 5 Halsbury’s Laws (4th edn) para 64.
For errors which do not invalidate assessments, see 23 ibid para 1581.
For the Development Land Tax Act 1976, s 12, see 46 Halsbury’s Statutes (3rd edn) 1445.
As from 19 March 1985 development land tax was abolished and outstanding deferred liability was extinguished by the Finance Act 1985, s 93, and the 1976 Act was repealed by s 98(6) of and Pt X of Sch 27 to the 1985 Act.
Cases referred to in opinions
Aberdeen Construction Group Ltd v IRC [1978] 1 All ER 962, [1978] AC 885, [1978] 2 WLR 648, HL.
Black Nominees Ltd v Nicol (Inspector of Taxes) [1975] STC 372.
Chinn v Collins (Inspector of Taxes) [1981] 1 All ER 189, [1981] AC 533, [1981] 2 WLR 14, HL.
Edwards (Inspector of Taxes) v Bairstow [1955] 3 All ER 48, [1956] AC 14, [1955] 3 WLR 410, HL.
Floor v Davis (Inspector of Taxes) [1978] 2 All ER 1079, [1978] Ch 295, [1978] 3 WLR 360, CA; affd [1979] 2 All ER 677, [1980] AC 695, [1979] 2 WLR 830, HL.
Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530, [1984] AC 474, [1984] 2 WLR 226, HL; rvsg [1984] AC 474, [1983] WLR 635, CA; affg [1982] STC 267.
IRC v Burmah Oil Co Ltd [1982] STC 30, HL.
IRC v Duke of Westminster [1936] AC 1, [1935] All ER Rep 259, HL.
IRC v Plummer [1979] 3 All ER 775, [1980] AC 896, [1979] 3 WLR 689, HL.
Ramsay (W T) Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] 1 All ER 865, [1982] AC 300, [1981] 2 WLR 449, HL.
Conjoined appeals
Craven (Inspector of Taxes) v Stephen White
Craven (Inspector of Taxes) v Brian White
The Crown appealed with the leave of the Court of Appeal against the order of that court (Slade, Parker and Mustill LJJ) ([1987] 3 All ER 27, [1987] 3 WLR 660) dated 24 March 1987 dismissing the Crown’s appeal against the order of Peter Gibson J ([1985] 3 All ER 125, [1985] 1 WLR 1024) entered on 3 June 1985 whereby he dismissed the appeals by the Crown by way of cases stated (set out at [1985] 3 All ER 126–148) from determinations of the Commissioners for the Special Purposes of the Income Tax Acts adjusting various assessments to capital gains tax made on Stephen White, Archibald Henry White and Brian White arising out of the exchange by them on 19 July 1976 of their shares in
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S White & Sons (Queensferry) Ltd (Queensferry) for shares in Millor Investments Ltd (Millor), an Isle of Man company, and the sale by Millor on 9 August 1976 to Morris & David Jones Ltd of the shares in Queensferry which it had acquired on 19 July 1976. Although the Crown had appealed against the commissioners’ decisions in respect of all three Whites, Archibald Henry White died prior to the hearing in the High Court and, no personal representative of his estate having been appointed by the date of the hearing of the appeals, the appeals in the High Court related only to Stephen White and Brian White. The facts are set out in the opinion of Lord Keith.
IRC v Bowater Property Developments Ltd
The Crown appealed with the leave of the Appeal Committee of the House of Lords given on 16 July 1987 against the order of the Court of Appeal ([1987] 3 All ER 27, [1987] 3 WLR 660) dated 24 March 1987 dismissing the Crown’s appeal against the order of Warner J ([1985] STC 783) entered on 7 November 1985 whereby he dismissed the appeal by the Crown by way of case stated (set out at [1985] STC 784–794) from a determination of the Commissioners for the Special Purposes of the Income Tax Acts that Bowater Property Developments Ltd (the taxpayer) should not be treated for the purposes of development land tax as the disponor in relation to the disposal of an interest in some 23 acres of land at Cooks Lane, Milton Regis, Sittingbourne, Kent to Milton Pipes Ltd effected by a contract dated 23 October 1981. The facts are set out in the opinion of Lord Keith.
Baylis (Inspector of Taxes) v Gregory
The Crown appealed with the leave of the Appeal Committee of the House of Lords given on 16 July 1987 against the order of the Court of Appeal ([1987] 3 All ER 27, [1987] 3 WLR 660) dated 24 March 1987 dismissing the Crown’s appeal against the order of Vinelott J ([1986] 1 All ER 289, [1986] 1 WLR 624) entered on 30 December 1985 whereby he dismissed the appeal by the Crown by way of case stated (set out at [1986] 1 All ER 302) from a determination of the Commissioners for the Special Purposes of the Income Tax Acts discharging assessments to capital gains tax made on Robert Felix Gregory (the taxpayer) for the years 1973–74 and 1975–76, both in the sum of £785,000. The facts are set out in the opinion of Lord Keith.
The appeals were ordered to be conjoined on 12 October 1987.
Edward Nugee QC, Jules Sher QC and Alan Moses for the Crown.
Leolin Price QC and Grant Crawford for the taxpayers in the first appeal.
Andrew Park QC and David Goy for the taxpayer in the second appeal.
Michael Flesch QC for the taxpayer in the third appeal.
Their Lordships took time for consideration.
21 July 1988. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, these conjoined appeals raise questions as to the nature and scope of the principle which emerged from Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530, [1984] AC 474 (Dawson). That case was founded on but represented an advance from what was laid down in W T Ramsay Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] 1 All ER 865, [1982] AC 300 (Ramsay) and IRC v Burmah Oil Co Ltd [1982] STC 30 (Burmah).
The latter two decisions were concerned with a situation where the taxpayer had sought to create an allowable loss with a view to setting it off, for purposes of capital gains tax or corporation tax on a capital gains basis, against chargeable gains. The transactions into which the taxpayer had entered for that end were entirely artificial. They were of a circular self-cancelling character so that the taxpayer ended up no worse off from a
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financial point of view than before the transactions were entered into. Each successive transaction in the series must inevitably, in order to achieve the desired result, follow on its predecessor and none of them had any other purpose than tax avoidance. It was held that each set of transactions had to be regarded as a whole and that when it was completed there was no real financial loss such as the relevant legislation allowed to be set off against chargeable gains.
Neither in Ramsay nor in Burmah was there any commercial purpose whatever in the transactions entered into. However, Lord Diplock in Burmah [1982] STC 30 at 32 indicated that the new approach adopted by the House in Ramsay to a preordained series of transactions which included steps that had no commercial purpose apart from tax avoidance might apply whether or not there were also included the achievement of a legitimate commercial end. In Dawson the taxpayers purpose was directed to the achievement of a legitimate commercial end, namely the sale to an independent party of their shareholdings in two family companies. In order, however, to defer capital gains tax on the sale they arranged that an Isle of Man company controlled by them (Greenjacket) should acquire the shareholdings in exchange for an issue to the taxpayers (the Dawsons) of its own shares, and should immediately sell the shareholdings on to the outside purchaser (Wood Bastow) for a price payable to itself. The taxpayers thus hoped to take advantage of the provisions of paras 4(2) and 6(1) of Sch 7 to the Finance Act 1965. This House held, however, that the insertion into the sale transaction of the share exchange arrangement with the Isle of Man company fell to be disregarded for fiscal purposes, with the result that for those purposes the taxpayers must be treated as having made a direct disposal to the purchaser. Lord Brightman, with whose speech the rest of their Lordships agreed, said ([1984] 1 All ER 530 at 542–543, [1984] AC 474 at 526–527):
‘My Lords, in my opinion the rationale of the new approach is this. In a preplanned tax saving scheme, no distinction is to be drawn for fiscal purposes, because none exists in reality, between (i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and (ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatim. In a contractual case the fiscal consequences will naturally fall to be assessed in the light of the contractually agreed results. For example, equitable interests may pass when the contract for sale is signed. In many cases equity will regard that as done which is contracted to be done. Ramsay says that the fiscal result is to be no different if the several steps are preordained rather than precontracted. For example, in the instant case tax will, on the Ramsay principle, fall to be assessed on the basis that there was a tripartite contract between the Dawsons, Greenjacket and Wood Bastow under which the Dawsons contracted to transfer their shares in the operating companies to Greenjacket in return for an allotment of shares in Greenjacket, and under which Greenjacket simultaneously contracted to transfer the same shares to Wood Bastow for a sum in cash. Under such a tripartite contract the Dawsons would clearly have disposed of the shares in the operating companies in favour of Wood Bastow in consideration of a sum of money paid by Wood Bastow with the concurrence of the Dawsons to Greenjacket. Tax would be assessed, and the base value of the Greenjacket shares calculated, accordingly. Ramsay says that this fiscal result cannot be avoided because the preordained series of steps are to be found in an informal arrangement instead of a binding contract. The day is not saved for the taxpayer because the arrangement is unsigned or contains the magic words “this is not a binding contract“. The formulation by Lord Diplock in Burmah expresses the limitations of the Ramsay principle. First, there must be a preordained series of transactions, or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (ie business) end. The composite
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transaction does, in the instant case: it achieved a sale of the shares in the operating companies by the Dawsons to Wood Bastow. It did not in Ramsay. Second, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax, not “no business effect“. If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied. In the instant case the inserted step was the introduction of Greenjacket as a buyer from the Dawsons and as a seller to Wood Bastow. That inserted step had no business purpose apart from the deferment of tax, although it had a business effect. If the sale had taken place in 1964 before capital gains tax was introduced, there would have been no Greenjacket. The formulation, therefore, involves two findings of fact: first, whether there was a preordained series of transactions, ie a single composite transaction; second, whether that transaction contained steps which were inserted without any commercial or business purpose apart from a tax advantage. Those are facts to be found by the commissioners. They may be primary facts or, more probably, inferences to be drawn from the primary facts. If they are inferences, they are nevertheless facts to be found by the commissioners. Such inferences of fact cannot be disturbed by the court save on Edwards (Inspector of Taxes) v Bairstow [1955] 3 All ER 48, [1956] AC 14 principles.’ (Lord Brightman’s emphasis.)
This passage appears to embody the ratio decidendi of the case.
My Lords, in my opinion the nature of the principle to be derived from the three cases is this: the court must first construe the relevant enactment in order to ascertain its meaning; it must then analyse the series of transactions in question, regarded as a whole, so as to ascertain its true effect in law; and finally it must apply the enactment as construed to the true effect of the series of transactions and so decide whether or not the enactment was intended to cover it. The most important feature of the principle is that the series of transactions is to be regarded as a whole. In ascertaining the true legal effect of the series it is relevant to take into account, if it be the case, that all the steps in it were contractually agreed in advance or had been determined on in advance by a guiding will which was in a position, for all practical purposes, to secure that all of them were carried through to completion. It is also relevant to take into account, if it be the case, that one or more of the steps was introduced into the series with no business purpose other than the avoidance of tax.
The principle does not involve, in my opinion, that it is part of the judicial function to treat as nugatory any step whatever which a taxpayer may take with a view to the avoidance or mitigation of tax. It remains true in general that the taxpayer, where he is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision such as s 460 of the Income and Corporation Taxes Act 1970.
In Ramsay and in Burmah the result of application of the principle was to demonstrate that the true legal effect of the series of transactions entered into, regarded as a whole, was precisely nil from the point of view of creating an allowable loss such as the relevant legislation intended to make deductible in computing chargeable gains. In Dawson the result was that the two interconnected transactions under consideration were held to be equivalent in legal effect to a tripartite contract between the Dawsons, Greenjacket and Wood Bastow under which the Dawsons transferred the shares in the family companies to Wood Bastow in consideration of a price paid by the latter to Greenjacket. The result of that was that Greenjacket never acquired control of the family companies within the meaning of para 6(2) of Sch 7 to the Finance Act 1965. Accordingly, para 4(2) of Sch 7 did not apply to the Greenjacket shares acquired by the Dawsons. There was no question but that the Dawsons had disposed of their shares in the family companies so as to be
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liable for capital gains tax if they were not saved by paras 4(2) and 6(2) of Sch 7. In the event they were not so saved.
As regards the scope of the principle, for present purposes attention should be confined to cases broadly similar in character to Dawson. Cases of different character will have to be considered when they arise. The main problem concerns the circumstances under which all the transactions involved in a series may properly fall to be regarded as ‘preordained’. In Dawson the Dawsons had arrived at a complete informal agreement with Wood Bastow, and the transactions designed to give effect to that informal agreement were all settled in a very short space of time in the course of one morning. It was in that context that Lord Brightman found that what had happened was equivalent to a tripartite contract. Is it enough that the original owners of the shares, being minded to dispose of them, decide to do so through an intermediary company under their control, carry through a share exchange and thereafter seek and successfully find a purchaser? In that situation there is certainly a scheme on the part of the holders of the shares to dispose of them in such a way that any capital gains tax liability is deferred. According to circumstances, there may be varying degrees of interconnection between the disposal to the intermediary company and the disposal to the ultimate purchaser. It may be many months before a possible purchaser is found and many more before a bargain is concluded. Again, the share exchange may be entered into without any immediate intention of selling but so that it may stand in good stead for tax purposes if and when a decision to sell is made. Or it may take place when negotiations with a particular purchaser are under way but the outcome is still open. In all these cases it is clear that the owner of the shares has so arranged matters that if and when a sale of the shares does take place it will not be a direct disposal of the shares by him but a disposal by an intermediary company which he controls. But I do not think that the transaction embodied in the final disposal can be said to be preordained, a matter to be ascertained as at the time of the share exchange, when at that time it is wholly uncertain whether that disposal will take place, or a fortiori when neither the identity of the purchaser nor the price to be paid nor any of the other terms of the contract are known. In my opinion both the transactions in the series can properly be regarded as preordained if, but only if, at the time when the first of them is entered into the taxpayer is in a position for all practical purposes to secure that the second also is entered into.
It follows that on the facts of the three appeals I do not consider that any of them is caught by the Ramsay principle as extended by Dawson. In IRC v Bowater Property Developments Ltd, a case under the Development Land Tax Act 1976, a sister company of the taxpayer company in November 1978 negotiated, subject to contract, the sale of certain land to Milton Pipes Ltd (MPL). No contract was ever concluded and on 7 July 1980 MPL withdrew. In the mean time the sister company had sold the land to the taxpayer company on 7 March 1979 for 97 1/2% of its market value. On 25 March 1979 the taxpayer company sold the land in equal shares to five other associated companies for its then market value. The purpose was to take advantage of the development land tax exemption of £50,000 available at the time to each of the five companies. In February 1981 MPL reopened negotiations and on 23 October 1981 contracts of sale at a price of £259,750 were exchanged between them and the five companies. The Revenue sought to assess the taxpayer company to development land tax on the basis of a sale by it direct to MPL, but failed before the commissioners, Warner J in the High Court ([1985] STC 783) and the Court of Appeal ([1987] 3 All ER 27, [1987] 3 WLR 660). It is clear that there was no such connection between the sale to the five companies and the sale by the latter to MPL as to permit of any possible finding that the two transactions were part of a preordained series.
In Baylis (Inspector of Taxes) v Gregory the taxpayers prior to 13 February 1974 were negotiating the sale of shares in a family company to a company called Cannon Street Investments Ltd (Cannon). It was envisaged that the sale would be carried out through an Isle of Man company as in Dawson. However, on that date negotiations were broken
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off. On 19 February 1974 an Isle of Man company (Holdings) was incorporated and on 11 March 1974 the taxpayers exchanged their shares in the family company for shares in Holdings. No other purchaser was on the horizon at the time. Another potential purchaser called P G Hawtin did appear by chance in May 1975 and sporadic negotiations ensued. Eventually on 30 January 1976 binding agreement was reached for the sale by Holdings to Hawtin of the family company shares. Assessments to capital gains tax were raised on the taxpayers on the basis that they had sold directly to Hawtin, but these were discharged by the commissioners and their decision was upheld by Vinelott J ([1986] 1 All ER 289, [1986] 1 WLR 624) and by the Court of Appeal ([1987] 3 All ER 27, [1987] 3 WLR 660). Here again there was clearly no such connection between the two transactions as could properly lead to the conclusion that they were preordained.
In Craven (Inspector of Taxes) v White the facts were considerably closer to the line. The taxpayers owned all the shares in the family company S White & Sons (Queensferry) Ltd (Queensferry) and in 1973 were advised by their accountant that they should either merge the company with a similar business or sell it. Up until 1976 they sought without success to achieve one or the other. The prospects of a merger with a company called Cee-N-Cee Supermarkets (Cee-N-Cee) were inconclusively investigated, but in early 1976 a company called Oriel Foods Ltd (Oriel) showed an interest in purchasing Queensferry. Negotiations were pursued and by May 1976 broad agreement on price had been reached. A meeting with Oriel on 17 June 1976, however, had the result that the prospects of a sale did not look good. So negotiations with Cee-N-Cee for a merger were again taken up. On 21 June 1976 arrangements were made to acquire an off-the-shelf Isle of Man company called Millor Investments Ltd (Millor) with a view to its being a holding company for a merger with Cee-N-Cee. On the same date Oriel asked for a further meeting on 25 June and further proposed sending a draft contract for the acquisition of Queensferry. They were requested to send the draft to the Isle of Man solicitors acting for Millor, and did so. Negotiations with Oriel proceeded purposefully from 25 June, but talks with Cee-N-Cee still continued. On 9 July Queensferry’s share capital was reorganised with a view to saving stamp duty. About 14 July Millor offered to acquire the shares in Queensferry in exchange for its own shares, and the offer was accepted by the taxpayers on 19 July. On 9 August there was a meeting with Oriel, described as stormy, which resulted in an agreement for the acquisition by a subsidiary of Oriel called Morris & David Jones Ltd (Jones) of all the shares in Queensferry for £2·2m subject to adjustment and payable by instalments. Millor, having received the proceeds of sale, later lent most of them to the taxpayers. Since Millor was an Isle of Man company the loans were not caught by s 286 of the Income and Corporation Taxes Act 1970. The commissioners’ decision was given after the Court of Appeal decision in Dawson but before that of this House. They held that Millor had acquired control of Queensferry and that the taxpayers had not disposed of their shares in Queensferry direct to Jones. However, they held that the share exchange with Millor, the disposal by the latter to Jones and the loans by Millor to the taxpayers together constituted a composite transaction which had the effect that on each occasion when one of the taxpayers received a loan from Millor he made for capital gains tax purposes a part disposal of the shares which he formerly owned in Queensferry. The Crown appealed to the High Court, where Peter Gibson J ([1985] 3 All ER 125, [1985] 1 WLR 1024) held that the Ramsay principle did not apply to the facts of this case, principally on the ground that at the time of the share exchange there was no practical certainty that the subsequent sale by Millor to Jones would take place. His decision was affirmed by the Court of Appeal ([1987] 3 All ER 27, [1987] 3 WLR 660).
The taxpayers had stated in evidence before the commissioners that their sole purpose in acquiring Millor was to use it as a vehicle for merger with Cee-N-Cee. The commissioners did not accept that such was their sole purpose, and found that a sale to Oriel was their primary objective. They also found that the taxpayers were keeping their options open, and this warrants the inference that a possible merger with Cee-N-Cee was a subsidiary purpose of the acquisition of Millor, in addition to indicating that on 19 July
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the sale to Oriel was by no means a certainty. Indeed, at the meeting on 9 August Oriel’s proposal for deferred payment of part of the consideration seriously threatened the negotiations and caused a temporary walk-out by the White team. It is clear, in my opinion, that Peter Gibson J was right in his view that on 19 July there was no certainty that the sale to Oriel would take place. On that date the taxpayers were by no means in a position for all practical purposes to secure that the sale went through. The commissioners’ finding of a composite transaction including the share exchange, the sale to Oriel and the loans was made before the decision of this House in Dawson and so without regard to Lord Brightman’s formulation in that case of the applicable principle. Accordingly it cannot, in my view, be regarded as conclusive against the taxpayers.
My Lords, for these reasons, and for those expressed in the speech of my noble and learned friend Lord Oliver, which I have had the advantage of reading in draft, I would dismiss all three appeals.
LORD TEMPLEMAN. My Lords, an artificial tax avoidance scheme is carried out by an individual taxpayer to avoid (or reduce or postpone) payment of the tax exigible in respect of a taxable transaction by means of one or more tax avoidance transactions which serve no business purpose apart from the avoidance of the tax on the taxable transaction. This House has on four occasions decided that an artificial tax avoidance scheme does not alter the incidence of the tax sought to be avoided.
In Black Nominees Ltd v Nicol (Inspector of Taxes) [1975] STC 372 the taxpayer actress failed to avoid income tax on her future earnings, the taxable transaction, by tax avoidance transactions which had no business purpose apart from avoiding income tax on the earnings of the actress.
In Floor v Davis (Inspector of Taxes) [1978] 2 All ER 1079, [1978] Ch 295 the dissenting judgment of Eveleigh J held that the taxpayer failed to avoid a tax on capital gains in respect of a taxable transaction by a tax avoidance transaction which had no business purpose apart from avoiding that tax by means of an exchange of shares with a company in the Isle of Man.
In Chinn v Collins (Inspector of Taxes) [1981] 1 All ER 189, [1981] AC 533 this House held that a taxpayer failed to avoid a tax on capital gains in respect of a taxable transaction by tax avoidance transactions which had no business purpose apart from the avoidance of that tax by means of the sale of a reversion to and purchase of shares from a company in the Channel Islands.
In W T Ramsay Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] 1 All ER 865, [1982] AC 300 (Ramsay) this House held that a taxpayer failed to avoid a tax on capital gains in respect of a taxable transaction by a tax avoidance transaction which had no business purpose apart from avoiding that tax by the creation of an allowable loss matched by a non-taxable gain. In Ramsay this House approved the decision in Black Nominees Ltd v Nicol (Inspector of Taxes) and the dissenting judgment of Eveleigh LJ in Floor v Davis.
In IRC v Burmah Oil Co Ltd [1982] STC 30 (Burmah) this House held that a taxpayer failed by means of an artificial tax avoidance scheme to convert a bad debt into a deductible loan for the purpose of tax on capital gains.
In Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530, [1984] AC 474 (Dawson) this House rejected the argument that the taxpayer had avoided tax on a taxable transaction which was not contractually binding and not within the power of the taxpayer to command at the time of the preceding tax avoidance transaction which was part of an artificial tax avoidance scheme.
A principle emerges from the authorities and in particular from Ramsay, Burmah and Dawson. The principle is that an artificial tax avoidance scheme does not alter the incidence of tax.
Ramsay, Burmah and Dawson concerned the Finance Act 1965 or its successors whereby capital gains tax, or in the case of companies corporation tax, was:
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‘19.—(1) … charged … in respect of capital gains, that is to say chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets.’
By s 20(4):
‘Capital gains tax shall be charged … on the total amount of chargeable gains accruing to the person chargeable in the year of assessment, after deducting any allowable losses accruing to that person … ’
In Ramsay the taxpayer sought by the scheme to reduce his liability to tax without suffering the loss which entitled him to a reduction. The taxpayer began by a taxable transaction when he made a real chargeable gain on the sale and ‘disposal’ of a farm. To reduce the liability to an assessment of tax engendered by that disposal the taxpayer entered into a tax avoidance transaction. The tax avoidance transaction was planned to produce and did produce a gain which was not a ‘chargeable gain’, matched by an equal ‘allowable loss’. By this tax avoidance transaction the taxpayer made neither a loss nor a gain. The taxpayer claimed to deduct the allowable loss from the chargeable gain on the farm. This would have enabled the taxpayer to enjoy the chargeable gain made on the disposal of the farm without paying any tax. This House held that the taxpayer was not entitled to deduct the allowable loss. The artificial tax avoidance scheme did not alter the incidence of tax.
In Burmah also an ‘allowable loss’ was held not to be ‘deductible’ where the taxpayer, in the words of Lord Fraser, achieved—
‘The apparently magical result of creating a tax loss that would not be a real loss … by arranging that the scheme included a loss which was allowable for tax purposes and a matching gain which was not chargeable.’
(See [1982] STC 30 at 38.)
The artificial tax avoidance scheme did not alter the incidence of tax.
The Ramsay principles were set forth in the speech of Lord Wilberforce in Ramsay [1981] 1 All ER 865 at 871, [1982] AC 300 at 323–324:
‘If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing … to prevent it being so regarded; to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded … For the commissioners considering a particular case it is wrong, and an unnecessary self-limitation, to regard themselves as precluded by their own finding that documents or transactions are not “shams” from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transaction is. They are not … bound to consider individually each separate step in a composite transaction intended to be carried through as a whole … the commissioners should find the facts and then decide as a matter (reviewable) of law whether what is in issue is a composite transaction or a number of independent transactions.’
In Burmah [1982] STC 30 at 32 Lord Diplock warned:
‘It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax-avoidance schemes to assume, that Ramsay’s case did not mark a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transactions (whether or not they include the achievement
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of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable.’
Both in Ramsay and in Burmah there was a scheme but no contractual obligation to carry out any of the transactions which made up the scheme. The scheme was capable of being wholly or partly abandoned at any time but in fact was carried through. The scheme was treated as a whole. The scheme was ‘preordained’ in the sense that it was planned as a whole and carried through as a whole. The scheme failed to alter the incidence of tax.
The Ramsay principles were applied in Dawson. The taxpayers, the Dawsons, negotiated for the sale of their shares in an operating company to Wood Bastow. Such a sale would have involved the Dawsons in a liability to capital gains tax resulting from the ‘disposal’ of the shares and was therefore a taxable transaction. A scheme was evolved for the taxpayers. The Dawsons transferred the shares in the operating company to Greenjacket, an Isle of Man company, in exchange for shares in Greenjacket. The exchange was a tax avoidance transaction. The exchange did not involve a liability for capital gains tax and had no business purpose apart from the avoidance of a liability to tax which in the absence of the exchange would become payable on a disposal of the shares in the operating company to Wood Bastow. There was at the time of the exchange no binding contract with Wood Bastow for the disposal of the shares in the operating company but the Dawsons controlled Greenjacket and therefore could after that exchange and in agreement with Wood Bastow procure a sale of the shares in the operating company to Wood Bastow. Immediately after the exchange the Dawsons procured and Wood Bastow accepted a sale of the shares in the operating company to Wood Bastow for cash paid to Greenjacket. This sale considered in isolation did not involve a claim to capital gains tax. The sale completed the scheme. There was a scheme consisting of two transactions, a tax avoidance transaction whereby the Dawsons exchanged their shares in the operating company for shares in Greenjacket and a taxable transaction whereby the Dawsons procured a sale of the Dawson shares in the operating company to Wood Bastow in consideration for cash paid to Greenjacket. This House held that on the true construction of the taxing statute the scheme effected a ‘disposal’ by the Dawsons. Similarly, on the true construction of the statute the scheme resulted in an ‘acquisition’ by the Dawsons of their shares in Greenjacket in consideration for and at the value of the purchase price procured by the Dawsons to be paid by Wood Bastow to Greenjacket for the shares in the operating company. The scheme resulted in a taxable transaction, namely a disposal by the Dawsons of the shares in the operating company to Wood Bastow in consideration of cash paid to Greenjacket.
Lord Fraser said ([1984] 1 All ER 530 at 532, [1984] AC 474 at 513):
‘The series of two transactions in the present case was planned as a single scheme, and I am clearly of opinion that it should be viewed as a whole.’
Lord Roskill said ([1984] 1 All ER 530 at 534, [1984] AC 474 at 515):
‘… there was a disposal by the Dawsons to Wood Bastow Holdings Ltd in consideration of the payment to be made by Wood Bastow to Greenjacket at the behest of the Dawsons. This disposal is not exempt. Capital gains tax is payable.’
Lord Bridge said ([1984] 1 All ER 530 at 535, [1984] AC 474 at 517):
‘When one moves, however, from a single transaction to a series of interdependent transactions designed to produce a given result, it is, in my opinion, perfectly legitimate to draw a distinction between the substance and the form of the composite transaction without in any way suggesting that any of the single transactions which make up the whole are other than genuine.’
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Lord Brightman said ([1984] 1 All ER 530 at 542–543, [1984] AC 474 at 526–527):
‘In a preplanned tax saving scheme, no distinction is to be drawn for fiscal purposes, because none exists in reality, between (i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and (ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatim … in the instant case tax will, on the Ramsay principle, fall to be assessed on the basis that there was a tripartite contract between the Dawsons, Greenjacket and Wood Bastow under which the Dawsons contracted to transfer their shares in the operating companies to Greenjacket in return for an allotment of shares in Greenjacket, and under which Greenjacket simultaneously contracted to transfer the same shares to Wood Bastow for a sum in cash. Under such a tripartite contract the Dawsons would clearly have disposed of the shares in the operating companies in favour of Wood Bastow in consideration of a sum of money paid by Wood Bastow with the concurrence of the Dawsons to Greenjacket. Tax would be assessed, and the base value of the Greenjacket shares calculated, accordingly. Ramsay says that this fiscal result cannot be avoided because the preordained series of steps are to be found in an informal arrangement instead of in a binding contract. The day is not saved for the taxpayer because the arrangement is unsigned or contains the magic words “this is not a binding contract” … First, there must be a preordained series of transactions, or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (ie business) end. The composite transaction does, in the instant case: it achieved a sale of the shares in the operating companies by the Dawsons to Wood Bastow. It did not in Ramsay. Second, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax, not “no business effect“. If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied.’ (Lord Brightman’s emphasis.)
Dawson reaffirmed the Ramsay principle that the courts will construe and apply a taxing statute so that a taxpayer who seeks to carry out a taxable transaction which will involve him in an assessment to tax cannot escape that assessment by combining the taxable transaction with a tax avoidance transaction which has no business purpose apart from the saving of the tax involved. The two transactions together constitute a scheme which produces a taxable transaction.
The circumstances in which the court will either in the Ramsay or Dawson type of case construe and apply the taxing statute to a scheme as a whole and not to the constituent parts have been variously described. Lord Wilberforce referred to ‘a nexus or series of transactions, or an ingredient of a wider transaction intended as a whole … a series or combination of transactions, intended to operate as such … a composite transaction intended to be carried through as a whole.' Lord Diplock referred to ‘elaborate tax-avoidance schemes’ and to ‘a preordained series of transactions’. Lord Fraser referred to ‘a series of two transactions … planned as a single scheme … [which] should be viewed as a whole’. Lord Bridge referred to ‘a series of interdependent transactions’ and to a ‘composite transaction’. Lord Brightman referred to a ‘preplanned tax-saving scheme’ and a ‘preordained series of transactions, or, if one likes, one single composite transaction’. All these requirements can be summed up by saying that the Ramsay and Dawson principles apply where the taxpayer plans and carries out an artificial tax avoidance scheme to avoid (or reduce or postpone) an assessment to tax by combining a taxable transaction with a tax avoidance transaction whose purpose is the avoidance of the assessment.
Ramsay decided that, where a taxpayer adopts and carries into effect a scheme to avoid
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an assessment to tax on a taxable transaction by a subsequent transaction which serves no business purpose apart from the avoidance of tax which would otherwise be payable in respect of the taxable transaction, the court will construe and apply the taxing statute to the scheme as a whole and not to the separate transactions which make up the scheme. In Ramsay the taxable transaction (the sale of the farm) was followed by the tax avoidance transaction (the matching loans). Dawson decided that, where a taxpayer adopts and carries into effect a scheme to avoid an assessment to tax on an intended transaction by a prior tax avoidance transaction which serves no business purpose apart from the avoidance of tax which would otherwise become payable if the taxable transaction were carried out, the court will construe and apply the taxing statute to the scheme as a whole and not to the separate transactions which make up the scheme. In Dawson the taxpayers, the Dawsons, adopted a scheme whereby a tax avoidance transaction (the exchange of shares with Greenjacket) was carried out to avoid an assessment to tax on an intended taxable transaction (the sale to Wood Bastow). The tax avoidance transaction had no business purpose apart from the avoidance of tax on the intended transaction. This House construed and applied the taxing statute to the scheme as a whole and not to the separate transactions, which made up the scheme and concluded that by the scheme the Dawsons ‘disposed’ of the shares in the operating company to Wood Bastow in consideration for cash paid to Greenjacket and that the Dawsons ‘acquired’ the shares in Greenjacket at a value equal to the price paid by Wood Bastow for the shares in the operating company.
The Revenue only levy tax on a taxable transaction but a taxpayer cannot escape tax on a taxable transaction. Where a taxpayer plans and achieves two transactions, the question is whether the transactions are independent of one another or whether the two transactions are part of a scheme which produces a taxable transaction. In Dawson the exchange with Greenjacket and the sale to Wood Bastow were parts of a scheme which produced a taxable transaction, namely a disposal of the shares in the operating company by the Dawsons to Wood Bastow in consideration of cash paid to Greenjacket. The two transactions formed part of a scheme although they did not involve the same parties: the exchange of shares involved the Dawsons and Greenjacket, the disposal of the shares to Wood Bastow involved Wood Bastow and Greenjacket. The two transactions formed part of a scheme although the Dawsons had no control, direct or indirect, over Wood Bastow and could at no stage oblige Wood Bastow to buy the shares in the operating company. But both transactions were part of a scheme which was planned by the Dawsons, which in the event was successful and which produced a taxable transaction. Two transactions can form part of a scheme even though it is wholly uncertain when the first transaction is carried out whether the taxpayer who is responsible for the scheme will succeed in procuring the second transaction to be carried out at all. If the exchange with Greenjacket had taken place after the negotiations with Wood Bastow had been begun but while it was still uncertain whether the negotiations with Wood Bastow would succeed, there would still have been a scheme planned by the Dawsons to produce a taxable transaction. If the negotiations with Wood Bastow succeeded then the scheme would succeed and would result in a taxable transaction. If the negotiations with Wood Bastow failed the scheme would fail, there would be no taxable transaction and any subsequent independent and genuine sale to Wood Bastow or to anybody else would not be a taxable transaction. If the Dawsons had carried out an exchange of shares with Greenjacket at a time when the Dawsons were not planning a sale to Wood Bastow there would have been no scheme and a sale to Wood Bastow would not be a taxable transaction. The principle is that a taxable transaction which results from an artificial tax avoidance scheme is liable to tax. Put another way, an artificial tax avoidance scheme does not alter the incidence of tax.
In these appeals the Revenue argued that Dawson decided that, whenever a taxpayer carries out a tax avoidance transaction, that transaction must be ignored for the purpose of computing the liability of the taxpayer to tax. This argument would prevent a taxpayer from availing himself of the fiscal immunities, privileges, allowances and other
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mitigating factors provided or permitted by Parliament. If a taxpayer mindful of the immunity from taxation enjoyed by an Isle of Man company transfers assets to a company in the Isle of Man, the immunity of that company will continue and may be enjoyed indirectly by the taxpayer subject to an express provision by Parliament to the contrary. Parliament intends that a taxpayer shall be free to place an asset out of reach of the taxing provisions. The courts have neither the power nor the desire to interfere. Ramsay, Burmah and Dawson, however, decided that there is a distinction between an independent transaction carried out to avoid the ambit of a taxing statute in a manner authorised by Parliament and a transaction which is not an independent transaction but forms part of an artificial tax avoidance scheme designed to enable the taxpayer to carry out a taxable transaction and to avoid an assessment to tax. Parliament cannot have intended that an individual taxpayer should be able to elect to carry out a taxable transaction without paying the tax which Parliament has imposed proportionately on all taxpayers. The court is entitled and bound to construe the taxing statute and to apply the taxing statute in relation to the scheme as a whole.
The taxpayers involved in the present appeal put forward a submission which is as extreme in their favour as the argument for the Revenue is extreme in favour of the Revenue. The taxpayers submitted that Dawson is confined to its own facts. A scheme indistinguishable from Dawson in every respect will suffer the same fate as Dawson. But a scheme which is modelled on Dawson and is indistinguishable from Dawson in every respect save the time factor will, it is said, enable the taxpayer to avoid tax. Where there is a scheme which involves two transactions, the first of which serves no business purpose apart from the avoidance of an assessment to tax on the second transaction, the court cannot, it is submitted, view the scheme as a whole unless both transactions are carried out simultaneously or contemporaneously, where, for example, as in Dawson, both transactions are carried out on the same day. If there is an interval of time, deliberate or accidental, between the two transactions the court, it is said, must ignore the scheme and apply the taxing statute to each transaction separately unless, perhaps, at the date of the first transaction it is ‘practically certain’ that the second transaction will take place or there is no ‘practical likelihood’ that the second transaction will not take place or unless the interval between the first and second transactions is so short that ‘the first transaction is not even contemplated practically as having an independent life’. It is to be observed, however, that in an artificial tax avoidance scheme the first transaction is never contemplated as having an independent life because Dawson never applies unless the first transaction has no business purpose apart from the avoidance of a tax assessment on an intended second transaction.
If the shadowy, undefined and indefinable expressions ‘practically certain’, ‘practical likelihood’ and ‘practical contemplation’ possess any meanings, those expressions and those meanings are not to be derived from Dawson. The speeches in Dawson consciously applied and extended the principles enunciated by Lord Wilberforce and others in Ramsay and by Lord Diplock and others in Burmah. In Dawson this House did not labour to bring forth a mouse. The taxpayers rely on the references in the speech of Lord Brightman in Dawson to a ‘tripartite contract’, to a ‘preordained series of steps’ and to ‘a single composite transaction’. But Lord Brightman was vehement in asserting that the scheme in Dawson could be viewed as a whole although the Dawsons never controlled Wood Bastow by contract or otherwise. Lord Brightman and his colleagues were not concerned with the time factor of a scheme but with the identification and result of a scheme which Lord Brightman described as ‘a preplanned tax saving scheme’. Lord Brightman was saying that if two transactions are part of a scheme to avoid an assessment to a tax on the second transaction then the scheme must be viewed as though there had been one tripartite contract instead of two transactions. It is inconceivable that the Dawsons would have succeeded before this House in Dawson if the exchange with Greenjacket had taken place after negotiations with Wood Bastow had commenced and about a week or a month before the negotiations with Wood Bastow were concluded.
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When the exchange with Greenjacket took place, the Dawsons and Wood Bastow might still have been haggling about the purchase price for the operating company shares; or, if the purchase price had been agreed in principle, Wood Bastow might have been waiting for a valuation and survey report on properties owned by the operating company; or the Dawsons’ solicitors and Wood Bastow’s solicitors might have been discussing proposed amendments, essential, important or trivial, to a draft contract. Even if the whole arrangement with Wood Bastow had been agreed ‘subject to contract’, either the Dawsons or Wood Bastow would remain free to resile from the arrangement until Greenjacket, under the control of the Dawsons and Wood Bastow, an independent third party, exchanged binding contracts. But the result in Dawson would have been the same whatever the state of negotiations between the Dawsons and Wood Bastow at the date when the exchange with Greenjacket was effected. The result would have been the same because Dawson decides that a taxing statute must be applied to an artificial tax avoidance scheme which seeks to avoid an assessment to tax on a taxable transaction by combining it with a prior tax avoidance transaction. An interval of time between two transactions is irrelevant save as evidence to be taken into account by the commissioners when they are asked to decide whether the two transactions were independent of one another or whether the two transactions form part of a preplanned tax avoidance scheme. The taxpayers’ submission in the present appeal that Dawson only applies to the scheme where negotiations for the second transaction have reached an advanced stage at the date of the first transaction are devoid of logic and contrary to the principles established by all our predecessors in Ramsay, Burmah and Dawson. Accordingly I reject the taxpayers’ submissions just as I have rejected the Revenue’s argument.
I have read the drafts of the speeches to be delivered in these present appeals. Three of those speeches accept the extreme argument of the taxpayer that Dawson is limited to its own facts or is limited to a transaction which has reached an advanced stage of negotiation (whatever that expression means) before the preceding tax avoidance transaction is carried out. These limitations would distort the effect of Dawson, are not based on principle, are not to be derived from the speeches in Dawson, and if followed would only revive a surprised tax avoidance industry and cost the general body of taxpayers hundreds of millions of pounds by enabling artificial tax avoidance schemes to alter the incidence of taxation. In Dawson Lord Brightman was not alone in delivering a magisterial rebuke to those judges who sought to place limitations on Ramsay because they disliked the principle that an artificial tax avoidance scheme does not alter the incidence of tax. In my opinion, a knife-edged majority has no power to limit this principle which has been responsible for four decisions of this House approved by a large number of our predecessors. Adapting the words of Lord Diplock in Burmah, it remains disingenuous to suggest, and dangerous on the part of those who advise taxpayers to assume, that Ramsay and Dawson did not mark a significant change in the approach adopted by this House in its judicial role to artificial tax avoidance schemes (whether or not they include the achievement of a legitimate commercial end) which include steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable.
Of course, if there are two transactions separated in time, the commissioners may conclude that the two transactions did not form part of an artificial tax avoidance scheme planned at the time of the first transaction and completed by the second transaction. If at the date of the first transaction no arrangements or negotiations are in train for the second transaction the commissioners may conclude that both transactions were independent and were not part of a scheme. Each case will depend on the totality of the evidence accepted by the commissioners, who must ask themselves whether the two transactions were part of a scheme or were independently conceived and carried out. In most cases where there is a scheme, there will be evidence that arrangements or negotiations for the second transaction were commenced before the first transaction was carried out, and in most cases where there is a scheme the interval between the first and
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second transactions will be short. Sometimes the commissioners on the evidence will conclude that there was no scheme. Sometimes the commissioners will conclude on the evidence that, although there was an initial scheme at the time of the first transaction, that scheme foundered and that the second transaction was not part of the scheme. The Dawsons would have come to no harm if, after the exchange with Greenjacket, the negotiations with Wood Bastow had broken down. The scheme would have foundered and a subsequent sale of the shares in the operating company by Greenjacket would not be part of the scheme. Two of the present appeals are illustrations of a scheme which foundered. The commissioners will consider, wherever appropriate, whether the alleged breakdown of a scheme was contrived or was only a temporary interruption. This complication is not present in the appeals now before the House and this complication will be of infrequent occurrence. The commissioners should have no difficulty in deciding whether there was a scheme at the time of the first transaction and, if so, whether it was that scheme which was completed by the second transaction.
The trilogy of tax avoidance cases, Ramsay, Burmah and Dawson, decided that a scheme to avoid an assessment to tax on a taxable transaction by a tax avoidance transaction which serves no business purpose apart from the avoidance of the tax which would otherwise be payable in respect of the taxable transaction must be viewed as a whole; the taxing statute must be applied to the scheme and not to the constituent transactions comprised in the scheme. In the case of a Dawson scheme where the tax avoidance transaction precedes the taxable transaction four essential conditions must be satisfied. First, the taxpayer must decide to carry out, if he can, a scheme to avoid an assessment of tax on an intended taxable transaction by combining it with a prior tax avoidance transaction. Second, the tax avoidance transaction must have no business purpose apart from the avoidance of tax on the intended taxable transaction. Third, after the tax avoidance transaction has taken place, the taxpayer must retain power to carry out his part of the intended taxable transaction. Fourth, the intended taxable transaction must in fact take place. In Dawson the taxpayers, the Dawsons, adopted a scheme with the object of avoiding an assessment to tax on a sale to Wood Bastow then under negotiation. The exchange of shares with Greenjacket had no business purpose apart from the avoidance of tax on the intended sale to Wood Bastow. After the exchange with Greenjacket the Dawsons retained power to carry out their part of the intended sale to Wood Bastow because they had power through their shareholding in Greenjacket to ensure that Greenjacket sold to Wood Bastow if the Dawsons and Wood Bastow agreed. Finally, the sale to Wood Bastow took place, thus completing the scheme. The scheme as a whole effected a disposal of the shares in the operating company by the Dawsons to Wood Bastow in consideration of cash paid to Greenjacket. The scheme as a whole effected an acquisition by the Dawsons of the shares in Greenjacket at the value paid by Wood Bastow for the shares in the operating company.
In Ramsay the scheme left a taxable transaction remaining liable to tax. In Dawson the scheme resulted in a taxable transaction. Dawson does not require a taxpayer to pay the maximum amount of tax and does not prevent a taxpayer from taking steps to mitigate tax. A ‘bed and breakfast’ scheme which consists of a sale and reacquisition of shares is not affected by Dawson because the scheme does not create a taxable transaction apart from the sale which the taxpayer brings into his tax computation by exercising his right to sell when he pleases. If a taxpayer strips a company of dividend before selling the company’s business or its shares then, without more, and subject to any statutory provisions to the contrary, the two transactions only involve one disposal, namely the sale of the business or the shares for the price paid by the purchaser. Dawson only requires that a scheme which satisfies the four essential conditions present in Dawson shall be viewed as a whole and that any taxable transaction which results from that scheme shall be taxed. The taxable transaction which resulted from the scheme in Dawson, viewed as a whole, was a disposal by the Dawsons of the shares in the operating company to Wood Bastow in consideration of cash paid to Greenjacket.
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It has been suggested that the Dawson principle interferes with the freedom of a taxpayer. This suggestion is based on a misunderstanding. A taxpayer is free to enter into any transaction he chooses. In Dawson the shares in the operating company were first acquired by Greenjacket and then acquired by Wood Bastow. The shares in the operating company were exchanged by the Dawsons for shares in Greenjacket. The purchase price paid by Wood Bastow for shares in the operating company was received by Greenjacket. All these transactions were genuine and the court did not interfere with them or their effect. But the two transactions constituted a scheme for avoiding an assessment to capital gains tax by combining a tax avoidance transaction and a taxable transaction. Viewing the scheme as a whole and construing and applying the taxing statute this House held that there was a capital gains tax ‘disposal’ by the Dawsons of the shares in the operating company in consideration for the price paid by Wood Bastow to Greenjacket and there was an ‘acquisition’ by the taxpayers of the shares in Greenjacket for the price paid by Wood Bastow.
In Ramsay [1981] 1 All ER 865 at 872, [1982] AC 300 at 325 Lord Wilberforce dealt with the submission that the courts should not concern themselves with tax avoidance and he concluded that it was permissible and necessary—
‘to apply to new and sophisticated legal devices the undoubted power and duty of the courts to determine their nature in law and to relate them to existing legislation. While the techniques of tax avoidance progress and are technically improved, the courts are not obliged to stand still. Such immobility must result either in loss of tax, to the prejudice of other taxpayers, or to Parliamentary congestion or (most likely) to both. To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the parties themselves may have negated would be a denial rather than an affirmation of the true judicial process.’
(See [1981] 1 All ER 865 at 873, [1982] AC 300 at 326.)
It was also argued that Dawson involves double taxation This argument is based on a misunderstanding. Dawson only construed and applied the capital tax legislation. By the scheme the Dawsons ‘disposed’ of the shares in the operating company for the price paid by Wood Bastow to Greenjacket. The Dawsons made a capital gain of the difference between the price originally paid by the Dawsons when they acquired the operating company shares and the price paid by Wood Bastow to Greenjacket at the behest of the Dawsons. The scheme also effected an ‘acquisition’ by the Dawsons of the shares of Greenjacket in consideration for the price paid by Wood Bastow to Greenjacket. If and when the Dawsons dispose of their shares in Greenjacket they will make a capital gain or loss of the difference between the price received by Greenjacket from Wood Bastow for the shares in the operating companies and the price obtained by the Dawsons on their disposal of the Greenjacket shares. There is no double taxation.
It was also argued that in certain circumstances Dawson might introduce fiscal complications. A substantial interval of time might elapse between the transfer of the operating company shares from the Dawsons to Greenjacket and the transfer of the operating company shares from Greenjacket to Wood Bastow. The transfer to Wood Bastow might never take place. But if the transfer to Wood Bastow never took place there would be no completed scheme. If there was an interval of time between the two transactions it was suggested that the Revenue might assess the parties to tax on the basis that there had been a disposal from the Dawsons to Greenjacket of the operating company shares and that it would be difficult or impossible to revise those estimates when the transfer to Wood Bastow took place. But the whole point of the transfer from the Dawsons to Greenjacket was that there would appear to be no disposal. No tax can be assessed unless and until the scheme is completed when Greenjacket transfers to Wood Bastow. If there is a substantial interval of time between two transactions there is probably no scheme.
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The courts below, dealing with the three cases now under appeal, were faced with the choice between the wide construction of Dawson advanced by the Revenue and the narrow construction favoured by the taxpayers. The courts understandably chose the latter construction. In the result all the courts below decided in favour of the taxpayers. The Revenue now appeal and the question in each case is whether there was a scheme and, if so, whether the essential conditions were satisfied so that the taxing statute must be construed and applied to the scheme as a whole.
In Craven (Inspector of Taxes) v White the taxpayers held the issued shares in S White & Sons (Queensferry) Ltd (Queensferry), which carried on a family grocery business on the mainland. In 1976 the taxpayers were negotiating for a merger of the business of Queensferry with the business of a company called Cee-N-Cee Supermarkets (Cee-N-Cee). The taxpayers were, at the same time, negotiating for a sale of the Queensferry shares to a subsidiary of a company called Oriel Foods Ltd (Oriel). It was quite uncertain whether the negotiations with Cee-N-Cee would succeed or whether the negotiations with Oriel would succeed or whether both negotiations would fail. The taxpayers acquired Millor Investments Ltd (Millor), an Isle of Man company, which was planned to be employed with the merger with Cee-N-Cee or in the sale to Oriel should either set of negotiations succeed. In July 1976, as the commissioners found, the taxpayers were advised that if the Queensferry shares were transferred to Millor, and if Millor then sold the Queensferry shares to Oriel, capital gains tax would be avoided and the purchase price could then be loaned by Millor to the taxpayers, who would control Millor. On 19 July 1976 the taxpayers exchanged their shares in Queensferry for shares in Millor. This was a classic Dawson scheme. The object was to avoid an assessment to tax on the intended taxable sale to Oriel by means of the prior exchange. In the context of that sale, the exchange with Millor had no business purpose apart from the avoidance of tax on the intended taxable sale to Oriel. The taxpayers retained power to procure a sale to Oriel. On 9 August 1976 the taxpayers procured Millor to sell the Queensferry shares to Oriel for cash on terms arrived at between the taxpayers and Oriel. The scheme was thus completed. This indeed is admitted but the taxpayers argue that on 19 July 1976 it was possible that the taxpayers might have achieved a merger with Cee-N-Cee instead of sale to Oriel. If there had been a merger with Cee-N-Cee it is said, whether accurately or inaccurately I know not, that the transaction of 19 July 1976 would have served a business purpose and the scheme would not have succeeded. In my opinion the fact, if it be a fact, that the exchange with Millor on 19 July 1976 might have served a business purpose if the negotiations with Cee-N-Cee had succeeded is immaterial. In the event, the only negotiations which succeeded were the negotiations with Oriel and the transfer of the Queensferry shares to Millor served no business purpose apart from the avoidance of tax on the sale of the Queensferry shares to Oriel. There is no relevant distinction between the facts in Dawson and the facts in Craven (Inspector of Taxes) v White and accordingly the sale of the Queensferry shares to Oriel was a disposal by the taxpayers.
In Baylis (Inspector of Taxes) v Gregory the taxpayers held a majority of the shares in a company called Planet Gloves (Industrial) Ltd (PGI), which dealt in industrial gloves and other protective clothing. In the autumn of 1973 the taxpayers negotiated with a company called Cannon Street Investments Ltd (Cannon) for the sale of the PGI shares. The sale was planned to be carried out through an Isle of Man company on the Dawson model. Cannon broke off negotiations for the purchase of the PGI shares on 13 February 1974. On 19 February 1974 an Isle of Man company, Holdings, was incorporated and on 11 March 1974 the shareholders in PGI exchanged their shares for shares in Holdings. The plan to sell to Cannon was at an end but, as the commissioners found, the taxpayers ‘saw no disadvantage (rather the possibility of a future advantage)’ in the share exchange. Following a later initiative from a company, Hawtin, the taxpayers procured a sale of the PGI shares by Holdings to Hawtin for cash on 30 January 1976. The commissioners held that there was no such connection between the first transaction of 19 February 1974 and the second transaction of 30 January 1976 as sufficed to make them part of a composite
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transaction. The two transactions were not part of a single scheme. At the date of the first transaction the taxpayers had abandoned the plan to sell the PGI shares. The taxpayers placed themselves in a position to escape tax in the future but there was no scheme. The sale by Holdings was a transaction independent from the exchange of shares.
In IRC v Bowater Property Developments Ltd the Bowater Group negotiated for the taxpayer company, which was part of the Bowater Group, to sell land at Crafts Marsh to a company, Milton Pipes Ltd (MPL), for £202,500. On 25 March 1980 the taxpayer company sold Crafts Marsh for £180,000 to five companies which were also part of the Bowater Group in equal shares. If the five companies sold Crafts Marsh each would be entitled to claim £50,000 exemption from development land tax afforded by s 12 of the Development Land Tax Act 1976. Under that Act the tax is payable on a ‘disposal’. The Bowater Group continued to negotiate with MPL until July 1980 when MPL broke off negotiations saying that they no longer wished to purchase the land. In February 1981 MPL reopened negotiations and purchased Crafts Marsh on 23 October 1981 for £260,000. The commissioners concluded that the sale of 25 March 1980 and the sale of October 1981 were not parts of a single composite transaction. When the first transaction was undertaken the scheme was to sell to MPL but that scheme was frustrated when MPL abandoned the negotiations. The eventual sale was an independent transaction and the Dawson principle does not apply.
On behalf of the taxpayers, counsel took the additional point that the taxpayer company sold Crafts Marsh to five companies at a fair price and that the purchasing companies were not subsidiaries of the taxpayer company although they were all members of the Bowater Group and subject to ultimate group management and control. I do not consider that this would have made any difference if the five companies had sold to MPL in July 1980 in accordance with the original scheme. There would have been a scheme by the taxpayer company to sell to MPL for £202,500, of which £180,000 would be payable to the taxpayers and £22,500 to the five companies. The taxpayer company would have ‘disposed’ of Crafts Marsh for £202,500 just as in Dawson the taxpayers disposed of the shares in the operating company to Greenjacket for the price paid by Wood Bastow.
The Court of Appeal found in favour of all three respondents. I would allow the appeal of the Revenue in Craven v White and dismiss the appeals in Baylis v Gregory and in the Bowater case.
LORD OLIVER OF AYLMERTON. My Lords, in each of these three appeals, property originally acquired by the respondent taxpayer has been sold at a price considerably in excess of the original acquisition cost. In none of them has the purchase price been directly received by the taxpayer from the purchaser because in each case, before the sale was completed or even agreed, the property had been vested in a company or companies controlled by or associated with the taxpayer which entered into the contract with the purchaser, completed the sale and received the proceeds. In each case the appellant, the Revenue, claimed tax from the taxpayer in reliance on the decision of your Lordships’ House in Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530, [1984] AC 474 (Dawson) and in each case that claim has been rejected both in the High Court and in the Court of Appeal.
It will be remembered that in that case the transactions which had to be considered by your Lordships’ House substantially reproduced the first (and, at that time, successful) stage in Floor v Davis (Inspector of Taxes) [1978] 2 All ER 1079, [1978] Ch 295. The controlling shareholders in a family company had negotiated a sale of their shares to the point at which nothing further required to be agreed, although there was no binding contractual commitment of either side. That, in fact, was the only element that was lacking. At that stage, having taken advice with regard to the tax implications of the proposed sale, they resolved to channel the sale through a company to be formed in the
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Isle of Man and thus, by taking advantage of the provisions of Sch 7 to the Finance Act 1965, to postpone the payment of capital gains tax on the sale until such time as they came to sell their shares in the Isle of Man company, if that ever occurred. They obtained the consent of the purchaser to this change of plan and the arrangements for the incorporation of the Isle of Man company, an agreement to issue shares in that company in exchange for shares in the operating company, the approval and signature of an agreement for the sale of those shares on to the ultimate purchaser and the transfers of the shares were all carried through in a single afternoon, the transaction being actually completed four days later by the appropriate issues and the approval of the transfers or allotment of the shares and the payment of the price. The whole operation was, to use Lord Brightman’s words, ‘planned and executed with faultless precision’ (see [1984] 1 All ER 530 at 538, [1984] AC 474 at 520). This House concluded unanimously that the transactions into which the taxpayers and the intermediate company had entered constituted in fact one single transaction which involved a disposal of shares in the operating companies from the taxpayers to the ultimate purchaser on which capital gains tax was payable by the taxpayers. The rationale of the decision is contained in the following passage from the leading speech of Lord Brightman ([1984] 1 All ER 530 at 542–543, [1984] AC 474 at 526–527):
‘My Lords, in my opinion the rationale of the new approach is this. In a preplanned tax saving scheme, no distinction is to be drawn for fiscal purposes, because none exists in reality, between (i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and (ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatim. In a contractual case the fiscal consequences will naturally fall to be assessed in the light of the contractually agreed results. For example, equitable interests may pass when the contract for sale is signed. In many cases equity will regard that as done which is contracted to be done. Ramsay says that the fiscal result is to be no different if the several steps are preordained rather than precontracted. For example, in the instant case tax will, on the Ramsay principle, fall to be assessed on the basis that there was a tripartite contract between the Dawsons, Greenjacket and Wood Bastow under which the Dawsons contracted to transfer their shares in the operating companies to Greenjacket in return for an allotment of shares in Greenjacket, and under which Greenjacket simultaneously contracted to transfer the same shares to Wood Bastow for a sum in cash. Under such a tripartite contract the Dawsons would clearly have disposed of the shares in the operating companies in favour of Wood Bastow in consideration of a sum of money paid by Wood Bastow with the concurrence of the Dawsons to Greenjacket. Tax would be assessed and the base value of the Greenjacket shares calculated, accordingly. Ramsay says that this fiscal result cannot be avoided because the preordained series of steps are to be found in an informal arrangement instead of in a binding contract. The day is not saved for the taxpayer because the arrangement is unsigned or contains the magic words “this is not a binding contract“. The formulation by Lord Diplock in Burmah expresses the limitations of the Ramsay principle. First, there must be a preordained series of transactions, or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (ie business) end. The composite transaction does, in the instant case: it achieved a sale of the shares in the operating companies by the Dawsons to Wood Bastow. It did not in Ramsay. Second, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax, not “no business effect“. If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied.’ (Lord Brightman’s emphasis.)
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The transactions which are before your Lordships in these three appeals all display the same basic pattern as the Dawson transactions in the sense that there has been an ultimate purchase of property originally in the beneficial ownership of the taxpayer which, before the completion of the purchase, has been vested in an intermediate company or companies controlled by the taxpayer or, in the IRC v Bowater Property Developments Ltd appeal, by the parent company of the taxpayer. In each case, however, one or more of the salient features present in the Dawson transactions is missing. In particular the transactions which, in each appeal, the Revenue seek now to reconstruct into a single direct disposal from the taxpayer to an ultimate purchaser were not contemporaneous. Nor were they preordained or composite in the sense that it could be predicated with any certainty at the date of the intermediate transfer what the ultimate destination of the property would be, what would be the terms of any ultimate transfer or even whether an ultimate transfer would take place at all. In none of the three appeals therefore do the facts match with the criteria set out in Lord Brightman’s speech. The findings of the Special Commissioners are fully set out in the report of the three cases below (see [1985] 3 All ER 125, [1985] STC 783 and [1986] 1 All ER 289) and it is unnecessary for present purposes to do more than summarise them very briefly, although it will be necessary at a later stage to look rather more closely at the circumstances in Craven (Inspector of Taxes) v White, which bears a much closer resemblance to Dawson than do the other two appeals.
In Craven v White the sequence was that the taxpayers, who owned a controlling interest in a family food-retailing company called S White & Sons (Queensferry) Ltd (Queensferry), were, in 1976, engaged in negotiations with two interested parties. One such negotiation was a possible merger with another similar group, Cee-N-Cee Supermarkets (Cee-N-Cee), which did not have the resources available for an out-and-out purchase. The other was with a company called Oriel Foods Ltd (Oriel) and was for a sale of the Queensferry shares at a price which, it was expected, would be in excess of £2m. The instructions for the acquisition of the intermediate company were given at a time when the latter negotiation (which was the preferred option) had gone cold and the evidence was that at least one purpose of those instructions was to provide a convenient vehicle for the suggested merger with Cee-N-Cee, if it took place, although there is no doubt that the taxpayers had very much in mind the advantages from the point of view of capital gains tax if they achieve the preferred option of a sale. The negotiations to that end resumed after the instructions had been given but before the Queensferry shares were exchanged for shares in the intermediate company, an event which took place on 19 July. At that date the negotiations were being actively pursued but without any certainty that they would prove successful and the Special Commissioners, whilst rejecting the taxpayers’ evidence that the sole purpose of the formation of the intermediate company was to act as a holding company for the merger with Cee-N-Cee, nevertheless found as a fact that the taxpayers were then keeping their options open. There were at that time considerable difficulties and uncertainties and contemporaneous negotiations with Cee-N-Cee continued. The operation, at that stage therefore, served two alternative purposes. The negotiations with Oriel finally resulted in an agreement for sale on 9 August 1976 between the intermediate company and a subsidiary of Oriel which agreement the Revenue claim is to be treated as a disposal by the taxpayer directly to Oriel.
In IRC v Bowater Property Development Ltd the sequence was very different. Here the taxpayer company had been in negotiation for the sale of a parcel of land to a purchaser, Milton Pipes Ltd (MPL), at a price which had been agreed subject to contract, a sale which, had it then taken place, would have caused the taxpayer to incur a liability for development land tax. It had also been agreed that the sale would be conditional on a suitable planning permission having been obtained. Those negotiations ran into difficulties and the purchaser pulled out. Prior to this, however, in March 1980, solely with a view to avoiding development land tax on any ultimate sale and in the firm
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expectation that the sale would go through ultimately, the taxpayer sold its interest in the land to five different companies within the same group at a proper commercial price, each company taking a one-fifth undivided share. Each company was entitled to an exemption under s 12 of the Development Land Tax Act 1976, as amended, the amount of which, when added to the exemptions of the other four, was sufficient to absorb the whole probable gain, thus insuring that no development land tax would become payable on the proposed sale. Fresh draft contracts were submitted to the proposed purchaser which were subsequently returned when the negotiations fell through. Some 11 months later the same purchaser again evinced interest in the land and ultimately purchased it from the five intermediate companies in October 1981.
In the third appeal, Baylis (Inspector of Taxes) v Gregory, the taxpayers, with a view to selling their shares in the family company to a prospective purchaser, arranged for those shares to be exchanged for shares in an intermediate company. Before that took place the purchaser withdrew but the intermediate company was formed and the share exchange completed in March 1974. Some 18 months later and without any relation whatever to the prior negotiations, a different purchaser approached the taxpayers with a view to acquiring the shares in the operating company. These were eventually sold by the intermediate company to that purchaser on 30 January 1976.
Thus in each case one or more of the criteria enunciated by Lord Brightman is missing and the appeals raise essentially three questions for your Lordships’ decision. First, are those criteria definitive as they appear to have been intended by Lord Brightman to be or are they capable of expansion so as to embrace all or any of the transactions here in question either because they merely exemplify some wider principle or because it may be thought politic that they should be so expanded? Second, ought they to be expanded by your Lordships as a matter of judicial intervention into an area in which Parliament is demonstrably capable of legislating effectively but has not sought to do so? Third, and if the answer to the second question is affirmative, what formula or principle are your Lordships to evolve which will be at once certain, effective and easy to apply and on what legal foundation is such a principle to be based?
As to the first question, the features of the transactions the subject matter of these appeals which are said to produce the result for which the Crown contends are, on analysis, first an initial contemplation by the taxpayer of a transaction of the kind which has in fact taken place and second that what I will call for convenience the intermediate transfer was effected with the dominant, if not the sole, motive of saving or minimising the tax which would become payable if that contemplated transaction took place without it. It is said that the result for which the Crown contends in these circumstances is merely the logical application of the principle enunciated by your Lordships’ House in Dawson and no more than an invocation of the recently emerging role of the courts as an agency for preventing taxpayers from taking advantage of the statutory consequences which the legislature has seen fit to attach to certain actions for the purpose of avoiding, minimising or postponing the tax which would attach to a transaction if it were carried out in some other manner.
What has clearly emerged from the arguments and the discussion in your Lordships’ House is that there are two different and, to some extent, conflicting views about what Dawson decided. On one view it decided that any transaction having as its purpose, or as one of its purposes, the avoidance, minimisation or postponement of a liability to tax on another transaction of a kind which was then in contemplation and which subsequently takes place is to be ignored for fiscal purposes because it has been planned to take place and therefore forms part of a ‘scheme for the avoidance of tax’, a proposition said to derive from W T Ramsay Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] 1 All ER 865, [1982] AC 300 (Ramsay). On this view of the matter, the state of negotiation achieved in Dawson at the date of the share exchange and the likelihood or otherwise of that negotiation resulting in a final agreement were entirely immaterial. It was sufficient that the share exchange was effected with that contemplation or anticipation for it then
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became part of a ‘scheme’. On the other view, Dawson decided no more than that the approach to the construction of interdependent transactions sanctioned by Ramsay is properly to be applied to what has been described as a ‘linear’ transaction as well as to a circular self-cancelling transaction if the necessary conditions exist enabling the court realistically to regard the two transactions together as constituting one single composite and indivisible whole involving only a single disposal for tax purposes.
Now it has, I think, to be accepted that Dawson, whilst it purported to do no more than apply the Ramsay principle to a different set of facts, involved in fact an extension of the principle and it did so not simply because it applied the principle to a ‘linear’ transaction as opposed to a circular transaction. The Ramsay principle is simply that you look at the result which the parties actually intended to and did produce and apply to it the ordinary fiscal consequences which flow from that result. Dawson involved going a considerable step further than this and, by reconstituting the actual constituent transactions into something that they were not in fact, attributing to the parties an intended result which they did not in fact intend. To that unintended result there are then attached the fiscal consequences which would have flowed if the transaction had actually taken the form into which it is deemed to be reconstituted. It has to be borne in mind that the particular transaction with which Dawson was concerned, and with which each of the three appeals before your Lordships is concerned, was one in which an actual exchange of shares had taken place, a transaction which had permanent legal and fiscal results and to which certain fiscal provisions applied from the moment at which the transaction was effected. The critical question is that of identifying the circumstances in which such a transaction can be simply ignored and in which so radical a reconstruction of the actual events as that undertaken in Dawson is permissible and is to be undertaken by the court and whether, apart from the concept of tripartite contract on which reliance was placed in reaching the decision in Dawson, such a reconstitution is rationally and logically possible within the accepted principles of construction provided by Ramsay or, indeed, any other principle.
It has been urged, in the course of the argument, that in Dawson this House crossed the Rubicon and that your Lordships should not be astute to confine the bridgehead thus created. That event, of course, constituted a declaration of war on the Republic of Italy and I confess that I do not find the analogy drawn from so partisan an exercise an altogether happy one. I do not, however, quarrel with the general proposition, but before embarking even on a reconnaissance into republican territory it is at least desirable to test what the bridge will support by an analysis of the means by which the crossing was effected. The first essential, therefore, appears to me to be to analyse the true basis and the legal justification for the decision in Dawson in order to see whether it does in fact rest on or establish some wider principle of law which justifies the Crown’s claim to recover tax from the respondents on gains from which, no doubt, they benefited but which did not in fact directly accrue to them. The second is to construe the relevant statute and to apply it to such facts as have been found or as may properly be inferred.
My Lords, I confess to having been a less than enthusiastic convert to Dawson because I found, initially at any rate, some difficulty in following the intellectual process by which, in contradistinction to the cases which preceded it, it reconstructed the transaction which had taken place in that case in a way which disapplied the specific statutory consequences which, on the face of them, attached to the intermediate transfer which had in fact taken place and which the Special Commissioners had found as a fact was a genuine transaction. It has been said in the course of argument on the present appeals that Dawson is ‘judge-made law’. So it is, but judges are not legislators and, if the result of a judicial decision is to contradict the express statutory consequences which have been declared by Parliament to attach to a particular transaction which has been found as a fact to have taken place, that can be justified only because, as a matter of construction of the statute, the court has ascertained that that which has taken place is not, within the meaning of the statute, the transaction to which those consequences attach. It seems to me, therefore, that the first and critical point to be borne in mind in considering the true ratio of Dawson is that it
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rests not on some fancied principle that anything done with a mind to minimising tax is to be struck down but on the premise that the intermediate transfer, whose statutory consequences would otherwise have resulted in payment of tax being postponed, did not, on the true construction of the Finance Act 1965, constitute a disposal attracting the consequences set out in paras 4 and 6 of Sch 7 to that Act. That is the first point. The second is that, in reaching that conclusion as a matter of construction, this House did not purport to be doing anything more than applying and explaining the principle which had been laid down two years previously in Ramsay. It was that decision which explains why and how the question of construction raised in Dawson came to be answered in the way that it did and it is, as it seems to me, only if these two considerations are borne in mind that Dawson itself can be properly understood or rationally justified as a proper exercise of the judicial function.
The genesis of and, indeed, the legal basis for Dawson is Ramsay and in the course of the argument there has been a good deal of discussion about what has been termed the ‘Ramsay principle’. Since this really lies at the root of the matter it is essential initially to identify what the principle is. It is easy to select words from the speeches and by attributing to them a significance which divorces them from their context to construct a principle of law which bears no necessary relation to the actual ratio of the decision. First, it can be said that in Ramsay the taxpayer’s object of saving tax was frustrated by the court and that Ramsay was concerned with a ‘scheme’. But a scheme in its ordinary signification means no more than a conscious plan to take a particular action for the purpose of producing an intended result. Second, Ramsay was concerned specifically with ‘a tax-saving scheme’ which means no more than that there was an intended action for the purpose of saving tax. Third, it was a scheme involving a ‘series’ of events. But a series means no more than a succession of related matters, a description that applies to virtually every human activity embarked on with a view to producing any rational result. And so one ends up with the broad proposition of law that the court will frustrate any transaction deliberately undertaken with a view to saving tax and involving successive steps or events which are the result of conscious volition. But this, in my view, is to ignore what is the true underlying ratio of the case. Ramsay was concerned with a scheme of a particular but familiar type, that is to say an artificially contrived concatenation of individual transactions linked together with the purpose of producing an end result entirely different from that which, on the face of it, would have been achieved by each successive link in the preconceived chain if such a link fell to be considered in isolation from its partners. That the enterprise was undertaken with an intention of saving tax and was thus categorised as a ‘tax-saving scheme’ was of course important and relevant in three senses. In the first place, this sort of artificial loss creation is not normally undertaken in any other context. Second, the lack of any discernible object other than the saving of tax underlines the total artificiality of the design. And third, of course, the court was concerned specifically with the construction of a taxing statute and its application to the structure artificially brought into being. But the essence of the decision lay not in the fact that the object of the exercise was to save tax but in the approach of the court as a matter of construction to a devised combination of events designed to produce an actual result quite different from that which, for fiscal purposes, it was intended to display. It is, therefore, of critical importance to appreciate what was the ‘emerging principle’ which was enunciated in that case in the speeches of Lord Wilberforce and Lord Fraser.
It is equally important to bear in mind what the case did not decide. It did not decide that a transaction entered into with the motive of minimising the subject’s burden of tax is, for that reason, to be ignored or struck down. Lord Wilberforce was at pains to stress that the fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides (see [1981] 1 All ER 865 at 871, [1982] AC 300 at 323). Nor did it decide that the court is entitled, because of the subject’s motive in entering into a genuine transaction, to attribute to it a legal effect which it did not have.
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Both Lord Wilberforce and Lord Fraser emphasise the continued validity and application of the principle of IRC v Duke of Westminster [1936] AC 1, [1935] All ER Rep 259, a principle which Lord Wilberforce described as a ‘cardinal principle’. What it did decide was that that cardinal principle does not, where it is plain that a particular transaction is but one step in a connected series of interdependent steps designed to produce a single composite overall result, compel the court to regard it as otherwise than what it is, that is to say merely a part of the composite whole. In the ultimate analysis, most, if not all, revenue cases depend on a point of statutory construction, the question in each case being whether a particular transaction or a particular combination of circumstances does or does not fall within a particular formula prescribed by the taxing statute as one which attracts fiscal liability. As part of that process it is, of course, necessary for the courts to identify that which is the relevant transaction or combination before construing and applying to it the statutory formula. Reduced to its simplest terms that is all that Ramsay did. Referring to the Crown’s contention Lord Wilberforce observed ([1981] 1 All ER 865 at 873, [1982] AC 300 at 326):
‘That does not introduce a new principle: it would be to apply to new and sophisticated legal devices the undoubted power and duty of the courts to determine their nature in law and to relate them to existing legislation.’
The question in issue in Ramsay was in fact a very simple one, and it was whether the appellants had suffered an allowable loss within the meaning of s 23 of the 1965 Act which they were entitled to set against the capital gains which they had admittedly made. In each of the two schemes with which the appeals were concerned, there was no purpose in view other than the artificial manufacture of what was intended to be an allowable loss in such a way that the taxpayer suffered no loss at all in fact because, by another integrated and preplanned transaction, the artificially contrived loss was balanced precisely by a non-chargeable gain. To find in these circumstances that the ‘loss’ is found not to be a loss within the meaning of the statute when properly construed is neither very surprising nor very revolutionary. In Lord Wilberforce’s words ([1981] 1 All ER 865 at 873, [1982] AC 300 at 326):
‘To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the parties themselves may have negated would be a denial rather than an affirmation of the true judicial process. In each case the facts must be established; and a legal analysis made; legislation cannot be required or even be desirable to enable the courts to arrive at a conclusion which corresponds with the parties’ own intentions … To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, is not such a loss (or gain) as the legislation is dealing with is in my opinion well, and indeed essentially, within the judicial function.’
The taxpayers in Ramsay assumed the burden of establishing that they had sustained allowable losses within the meaning of the statute and they did so by isolating two artificially contrived transactions which would, if taken on their own and isolated from every other feature of the schemes which had been purchased, demonstrate that they were arithmetically worse off at a particular point of time if the continuous series of operations were treated as then interrupted. But the fact was, as was plain to see, that those transactions not only were not intended to be interrupted or to stand in isolation but could not in fact have done so in the real world. They were totally dependent on and integrated with other transactions whose purpose, and whose only purpose, was to nullify their effects and to leave the taxpayer in exactly the same position as they were before. In the one case there was actually a contractual obligation to carry the steps through to the end, in the other there was the confident expectation that they would be carried through
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to the end and no likelihood whatever that they would not. In the words of Lord Fraser ([1981] 1 All ER 865 at 881, [1982] AC 300 at 338):
‘… it is perfectly clear that neither of these disposals would have taken place except as part of the scheme, and, when they did take place, the taxpayer and all others concerned in the scheme knew and intended that they would be followed by other prearranged steps which cancelled out their effect. In Rawling the intention was made explicit as the supplier of the scheme, a company called Thun Holdings Ltd, bound itself contractually, if the scheme was once embarked on, to carry through all the steps. There is, therefore, no reason why the court should stop short at one particular step. In Ramsay the supplying company, Dovercliffe Ltd, did not undertake any contractual obligation to carry the scheme through, but there was a clear understanding between the taxpayer and Dovercliffe that the whole scheme would be carried through; that was why the taxpayer had purchased the scheme. The absence of contractual obligation does not in my opinion make any material difference.’
In these circumstances it is easy to understand why and how the conclusion was reached that the appellants had failed to discharge the burden which they had undertaken. Indeed the contrary conclusion would have been surprising. What the case does demonstrate, as it seems to me, is that the underlying problem is simply one of the construction of the relevant statute and an analysis of the transaction or transactions which are claimed to give rise to the liability or the tax exemption. But it does not follow that, because the court, when confronted with a number of factually separate but sequential steps, is not compelled, in the face of the facts, to treat them as if each of them had been effected in isolation, all sequential steps must invariably be treated as integrated, interdependent and without individual legal effect. Indeed, IRC v Plummer [1979] 3 All ER 775, [1980] AC 896 was a case in which, although the transactions effected were integrated as part of a preconceived scheme which was commercially marketed and had no other conceivable purpose than that of saving tax, the construction of the statute compelled the acceptance of a fiscal result which accorded very ill with the true ‘substance’ of the transactions taken as a whole. Every case has to be determined on its own facts and every series of transactions has to be examined and analysed to determine whether, in truth, it constitutes a single composite and integrated whole entitling the court, in construing the statute, to ignore the legal effect of individual steps because they are not and never were contemplated as other than part of a single whole. No doubt the fact that neither the transaction as a whole nor any ingredient in it, taken on its own, serves or is intended to serve any purpose other than that of avoiding a liability to or attracting an exemption from a charge to tax facilitates an analysis of the transaction as an integrated whole, both in fact and in intention, but the appellants in Ramsay failed not because they had engaged in an exercise designed to eliminate their tax liability, but because the planned and integrated steps which they took and the intended and actual outcome of those steps did not, on analysis, achieve the fiscal purpose which it was hoped to achieve. And the reason why it did not achieve it was that, on its true construction, the word ‘loss’ in the statute meant an actual loss and not merely a manipulated arithmetical difference.
The judicial approach as exemplified by Ramsay was carried one stage further in IRC v Burmah Oil Co Ltd [1982] STC 30 (Burmah), but the salient features of that case were not essentially different. There again the taxpayer assumed the burden of demonstrating an allowable loss and it did so by a preplanned and interrelated series of book entries, backed by a completely circular series of payments, the result of which was to transmute a bad debt into share capital. Once again this House analysed the transactions as a single composite whole and had regard to the actual end result. Once again there was a single prearranged scheme and a finding by the Special Commissioners that the progressive steps took place in order and according to a timetable prepared in advance. Theoretically,
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of course, there was no compulsion to proceed with the scheme to the end but, to use the words of Lord Fraser ([1982] STC 30 at 37):
‘… the reality was that the decision had already been taken to carry it through to completion, and that was unquestionably the intention of the directors in this case, just as it was the intention of all parties concerned in Ramsay and in Chinn v Collins (Inspector of Taxes) [1981] 1 All ER 189, [1981] AC 533.’
What was significant about the case, however, was the comment of Lord Diplock in relation to the Ramsay approach, which he related specifically to tax avoidance schemes. He said ([1982] STC 31 at 32):
‘It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax-avoidance schemes to assume, that Ramsay’s case did not mark a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transactions (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable. The difference is in approach.’
It is this reference to the motive of the taxpayer in engaging in a particular transaction which represents the significant alteration in approach and which raises immediately the question why the taxpayer’s motive for an action, otherwise lawful and effective, should lead to its being disregarded. It does not, I think, arise from a moral judgment which the court is called on to make, for Lord Fraser in his speech stressed that the fact that the purpose of a scheme is tax avoidance does not carry any implication that it is in any way reprehensible or other than perfectly honest and respectable (see [1982] STC 30 at 37). The reason must, therefore, be something else and it is, I think, simply this: that the absence of any commercial motive underlines the artificiality of the interrelated transactions and entitles the court to disregard them because they are not intended to produce anything other than an artificial fiscal result.
It is this aspect of motive which assumes great importance in Dawson. That case disclosed a number of important distinctions from its predecessors. In the first place, the series of transactions there under consideration was evolved with a commercial object in view. Second, quite apart from the fiscal consequences attaching to the end result if analysed as a single disposal by the taxpayer, there were permanent legal, practical and fiscal consequences attaching to the intermediate step, however analysed, which could not be simply ignored but had to be rationalised in a permissible way within the framework of the statutory provisions. This is, I think, a very important factor to be borne in mind, because it both compels and limits the analysis on which the decision of your Lordships’ House was based and provides a statutory framework within which the limits of the scope for further permissible extension can be observed. Third, and this assumes a particular importance in the light of the Crown’s submissions in the instant appeals, there appears to be introduced, in the speech of Lord Scarman at least, a moral dimension by which the court is to identify what he described as ‘unacceptable tax evasion’ (see [1984] 1 All ER 530 at 532, [1984] AC 474 at 513). On the face of it this might be taken to suggest that the long accepted distinction between tax avoidance and tax evasion is to be elided and that the fiscal effect of a transaction is no longer to be judged, as in Ramsay and Burmah, by the criterion of what the taxpayer has actually done, but by whether what he has done is ‘acceptable’. It may be doubted whether this was indeed what Lord Scarman intended to suggest, but if it was, he was, I think, alone in expressing this view. Indeed Lord Brightman, who delivered the leading speech from which the ratio of the decision is to be deduced, expressly affirmed ([1984] 1 All ER 530 at 536, [1984] AC 474 at 518):
‘The scheme before your Lordships is a simple and honest scheme which merely
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seeks to defer payment of tax until the taxpayer has received into his hands the gain which he has made.’
The suggestion that there should be introduced a moral dimension into the equation is important, however, since it forms the basis of the suggestion implicit in the Crown’s submission on the instant appeals that the limits expressed by Lord Brightman in his speech are too narrowly drawn because, when so drawn, ‘it would be easy for the taxpayer to circumvent them’. Your Lordships are thus invited not simply to analyse the transaction, to construe the statute and then to apply it to the analysis of what the taxpayer has really done, but to construct a general catch-all formula for rendering ineffective any step undertaken with a view to the avoidance or minimisation of tax on an anticipated transaction or disposition. That is an invitation to legislate and it goes a very long way beyond what, at any rate, was expressed to be the ratio of Ramsay and of Dawson itself, where the emphasis throughout was on the preordained sequence of the transactions which took place, their dependence on one another and the necessity of their being capable of being construed as one single composite whole. This is graphically underlined in the speech of Lord Russell in Chinn v Collins (Inspector of Taxes) [1981] 1 All ER 189 at 196, [1981] AC 533 at 550, where he described as a matter ‘of crucial importance’ that ‘the record on the turntable which was switched on contained the whole story from beginning to end, and there was no provision for switching it off half way’. It is an aspect of the matter also which emerges clearly from the speeches of Lord Fraser, Lord Bridge and Lord Brightman in Dawson itself. Lord Fraser said ([1984] 1 All ER 530 at 532, [1984] AC 474 at 512):
‘The true principle of the decision in Ramsay was that the fiscal consequences of a preordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately.’
Lord Bridge referred to ‘a series of interdependent transactions’ (see [1984] 1 All ER 530 at 535, [1984] AC 474 at 517). And Lord Brightman in the passage to which I have already referred stated in unequivocal terms the limits of the doctrine which he was expounding and on which his decision was based. In other parts of his speech Lord Brightman explained that in essence the problem is one of construction of the statute and he emphasised the importance of the essential links between the preordained steps which enabled them to be brought within the concept of the tripartite contract, an aspect of the matter which is also stressed in the speeches of Lord Fraser, Lord Roskill and Lord Bridge. The critical question was whether the intermediate company, Greenjacket, did genuinely acquire control of the operating companies within the meaning of the statute. Lord Brightman said ([1984] 1 All ER 530 at 538, [1984] AC 474 at 520):
‘Section 19 of the Finance Act 1965 charges tax in respect of capital gains accruing to a person on the disposal of assets. There is no definition of disposal and it scarcely needs definition. Paragraph 6 of Sch 7 provides certain exceptions in the case of company amalgamations. One exception applies to shares in a company transferred to another company which thereby acquires control, in exchange for shares in the transferee company … In the instant case [the Dawsons] were assessed to capital gains tax in respect of the year 1971–72 … The then argument on the part of the Crown was that Greenjacket did not acquire control of the operating companies within the meaning of para 6 of Sch 7, because Greenjacket was a nominee or bare trustee for the Dawsons. If on the other hand, as the taxpayers contended, Greenjacket did acquire control of the operating companies, any charge to capital gains tax would, it was contended, be deferred until such time as the taxpayers disposed of their shareholdings in Greenjacket and thereby realised a chargeable gain. At this point the one and only question at issue was whether Greenjacket acquired control of the operating companies within the meaning of the 1965 Act.
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Indeed, that is in a sense the only question at issue now, but it falls to be answered in a very different legal context from that in which it originally fell to be considered.’
It was this question which highlights the importance of the concept of the tripartite contract and this very clearly emerges from the passage from Lord Brightman’s speech to which I have already referred. The suggestion implicit in the Crown’s submissions is that the limitations expressed by Lord Brightman were simply those that were, as it were, thrown up by the facts of the particular case then under consideration and that there is in fact a much broader principle at work which rests not on the possibility of analysing a series of transactions as a single composite whole from which can be ascertained the reality of the transaction which is claimed as giving rise to tax liability, but simply on the carrying out of a transaction which has no other purpose than that of conferring a tax advantage. Thus the shift of the submission is away from the Ramsay principle towards the element introduced in the speech of Lord Diplock in Burmah. By concentrating on this as the key element, there is sought to be substituted for the concept of the single composite transaction (the Ramsay principle) the statutory concept, applicable in certain other specified situations, of ‘associated operations’ having the effect of avoiding or minimising tax.
My Lords, for my part I find myself unable to accept that Dawson either established or can properly be used to support a general proposition that any transaction which is effected for the purpose of avoiding tax on a contemplated subsequent transaction and is therefore ‘planned’ is, for that reason, necessarily to be treated as one with that subsequent transaction and as having no independent effect even where that is realistically and logically impossible. The particular question which fell to be determined in Dawson was, as it is in the present appeals, whether an intermediate transfer was, at the time when it was effected, so closely interconnected with the ultimate disposition that it was properly to be described as not, in itself, a real transaction at all but merely an element in some different and larger whole without independent effect. That is, I think, necessarily a question of fact but it has to be approached within the bounds of what is logically defensible. Ramsay, as developed in Dawson, merely established that the fiscal consequences of a preordained series of transactions carried to their preordained conclusion are generally to be determined by looking at the preordained end result of the series. The emphasis was, throughout, on the unbroken and predestined chain from start to finish and, in the ultimate analysis, the divergence of view to which I have referred comes down, I think, to the meaning to be attributed in this context to the expressions ‘preordained’ and ‘a composite transaction.' The wider view interprets ‘preordained’ simply as ‘preconceived’ or ‘planned to take place in the future’ so that all events which occur sequentially, which contain a tax saving element and which result from the same initial conscious volition or contemplation on the part of the taxpayer form part of ‘a scheme’, are therefore ‘preordained’ and accordingly fall to be construed as part of, and indivisible from, the ultimate disposition whether or not, at the time of the transaction in question, the ultimate disposition was certain, uncertain, anticipated or merely hoped for, provided that there was some particular type of disposition in view. On this footing the concept of the ‘single composite transaction’ is a Procrustean bed into which events or transactions are to be forced even at the expense of a total distortion of their actual nature.
I have not felt able to accept this wider view of the effect of Dawson for four reasons. In the first place, no such novel general proposition was expressed in terms. Dawson did not purport to do anything more than to apply the Ramsay principle of construction to a different chain of events and Ramsay itself, as I have endeavoured to show, is no authority for any proposition wider than this: that, where it can be shown that successive transactions are so indissolubly linked together, both in fact and in intention, as to be properly and realistically viewed as a composite whole, the court is both bound and entitled so to regard them. Second, if it had been intended to formulate the wider
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proposition which the Crown urges, the very close and meticulous analysis by Lord Brightman in Dawson of the successive steps which were taken, the way in which they were carried out and the close relationship between them was entirely unnecessary. It would have been sufficient to say simply that the share exchange with Greenjacket was effected in anticipation of the sale to Wood Bastow taking place and in order to defer the tax which would have been exigible if that had been effected directly by the Dawsons as individual shareholders. Simply to assert, as has been suggested, that it is inconceivable that the result would have been any different if the Greenjacket transaction had taken place at some earlier stage of the contemplated sale to Wood Bastow is, if I may say so respectfully, to beg the very question which has to be answered. Third, on the footing which I believe to be correct, and which I understand to be accepted by all your Lordships, that the question dealt with in all three of the cases of Ramsay, Burmah and Dawson is essentially one of statutory construction, I cannot for my part follow from what principle of statutory construction the proposition for which Dawson is now said to be authority derives. Essentially, Dawson was concerned with a question which is common to all successive transactions where an actual transfer of property has taken place to a corporate entity which subsequently carries out a further disposition to an ultimate disponee. The question is: when is a disposal not a disposal within the terms of the statute? To give to that question the answer ‘when, on an analysis of the facts, it is seen in reality to be a different transaction altogether’ is well within the accepted canons of construction. To answer it ‘when it is effected with a view to avoiding tax on another contemplated transaction’ is to do more than simply to place a gloss on the words of the statute. It is to add a limitation or qualification which the legislature itself has not sought to express and for which there is no context in the statute. That, however, desirable it may seem, is to legislate, not to construe, and that is something which is not within judicial competence. I can find nothing in Dawson or in the cases which preceded it which causes me to suppose that that was what this House was seeking to do. Fourth, I find myself quite unable to discern any rational basis for the proposition which, if the Crown is to succeed in any of the appeals now before your Lordships, has to be derived from Dawson or has to be formulated by your Lordships. The proposition has to be capable of being stated with a degree of certainty before it can be applied. I do not think that it was ever formulated in terms in the Crown’s argument except in so far as it could be deduced from what was submitted to be the result in a number of different hypothetical situations, but, as originally advanced in its widest form, the underlying proposition may be paraphrased thus:
‘In applying a taxing statute to a transaction which is effected with the sole intention of avoiding tax on some other transaction then in view the former is to be treated as having no independent fiscal effect but as a single indivisible transaction with the latter, if and when the latter takes place.’
It was, perhaps a little reluctantly, acknowledged that that produces the manifestly absurd result of negating even what has been called ‘strategic tax planning’ undertaken months or possibly years before the event in anticipation of which it was effected and the Crown’s most extreme formulation was then abandoned. I have sought to state the proposition, not for the purpose of reviving it simply in order to demolish it, but in order to test whether it can rationally be modified in any intelligible way and whether the argument on which reliance continues to be placed is not simply repeating the same proposition in a different form which depends for its effect simply on the temporal proximity of the end result. It is said that there is no logical distinction to be drawn between a tax saving transaction effected when a negotiation is complete and one effected when it is incomplete. But equally what is the logical distinction between a tax saving transaction effected immediately before and one effected immediately after the inception of a negotiation? Or between a tax saving transaction effected when a further transaction
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is contemplated but not formulated and one effected when the shape of the ultimate transaction is envisaged with a reasonable degree of clarity? The truth is that once one seeks to substitute for the test of preordination in the sense embraced in Lord Wilberforce’s reference to a ‘single continuous operation’ and in the concept of the tripartite contract relied on in Dawson a test simply of whether there is a plan to produce a foreseen result of saving tax there is no logical stopping place short of the wider formulation. Every formulation ultimately comes back to the same underlying proposition: that any transaction effected for the sole purpose of saving tax payable on another transaction is to be treated fiscally as indivisible from that other transaction. No such tax saving transaction is ever entered into without some preconception of its ultimate purpose, so that it is, by definition, a ‘planned’ transaction and one ultimately ends with the proposition that a tax saving transaction is ‘preordained’ and therefore indivisible because it is a tax saving transaction.
This result follows from standing the decision in Ramsay on its head and concentrating on the tax saving purpose as the key element rather than, as Ramsay teaches, on looking at the transactions as a whole and asking whether realistically they constitute a single and indivisible whole and whether it is intellectually possible so to treat them. It does not appear to me to be either a rational or a permissible approach because it involves substituting a determination to prevent the avoidance of tax for which there is no statutory, moral or logical basis for a rational, factual and intellectually possible appraisal of what is the reality of the position at the time when the relevant transaction is undertaken. I cannot, for my part, derive this from Dawson and I am quite sure that this House was not seeking to construct so irrational a doctrine.
I do not, of course, suggest that the Ramsay principle is applicable only to transactions displaying the precise sequence which occurred in Dawson. There are, no doubt, many circumstances in which transactions are so closely linked as realistically to be regarded as a single indivisible composite whole, a concept which may be summed up in homely terms by asking the question whether at the material time the whole is already ‘cut and dried’. Where, however, the question arises in relation to the type of transaction here in question, I cannot, for my part, easily envisage such circumstances outwith the limitations expressed in the speech of Lord Brightman, which seems to me, for the reasons which I will endeavour to express, to be essential to any rational analysis of the decision.
Those limitations echoed in fact what had been clearly stated by Lord Wilberforce in Ramsay [1981] 1 All ER 865 at 873, [1982] AC 300 at 326 in his references to ‘an indivisible process’ and ‘a single continuous operation’ and cannot, I think, be properly regarded simply as references to the facts of the particular case. They were fundamental to the decision if it is to be rationally explained, just as it was basic to the analysis which produced the result in Dawson not simply that the intermediate step was effected with the sole purpose of procuring a tax advantage but that it could legitimately be treated, on the facts, as part of a tripartite contract, for it was only by such analysis that the single composite transaction would be constructed and the suggested consequence of the double taxation on the same gain overcome.
In Dawson this House was confronted with a transaction which the Revenue claimed was a sale by the Dawsons directly to Wood Bastow on which the Dawsons had realised the gain but where, as a matter of fact and as a matter of law, both the legal and the beneficial interest in the property had passed through Greenjacket. The only possible way in which the Revenue could succeed therefore was by eliminating the legal consequences of the transfer to Greenjacket and the payment to Greenjacket of the consideration for the sale of the shares to Wood Bastow. But the difficulty was that the Finance Act 1965 had, in Sch 7, clearly and compulsively attached to that transfer statutory and fiscal consequences which, so long as the transaction stood as a genuine transaction, could not be reversed or ignored. So there were two problems. First, how do you turn genuine contractual arrangements for the sale by A to B and the subsequent sale by B to C, with the consideration being paid by C to B, into a disposition by A to C
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resulting in a gain realised by A? Second, how do you reconcile that result with the fiscal and legal consequences which have already attached, and permanently attached, to the genuine transfer which has actually taken place from A to B? The rationale of the answer to the first of these questions is simply this: that, if the transactions A to B and B to C, which were in fact contemporaneous, had been linked not merely by contemporaneity but also by a simultaneous contractual obligation binding all three participants, there would be no difficulty in regarding them as no more than a tripartite agreement under which A accepted ab initio an obligation to C to transfer the property to B and to procure B to transfer to C; B accepted an obligation ab initio to transfer the property to C; and C accepted ab initio an obligation to A to pay the agreed price for the property to B. In other words, a sale by A to C through the instrumentality of B, the purchase price (and hence the gain) being paid to B at A’s behest. The equitable interests would pass eo instanti with the contract and the motive for the intermediate transfer would be entirely immaterial. But there were not in fact contractual obligations and it is at this point that the Ramsay approach comes into the picture. How, in the absence of contractual obligation, is the Revenue’s sought for result to be obtained? The answer is to be arrived at in two stages. First of all through Ramsay, because that establishes that where there is (i) a scheme involving a series of transactions plus (ii) an expectation that it will be carried through from beginning to end and (iii) no likelihood that it will not, the court is not bound, in assessing the fiscal consequences, to consider each step individually and accord to it its individual legal result but is entitled to look at the composite transaction as a single transaction having a single legal result. This dispenses with the need for a contractual obligation but to achieve that result all three of the enumerated elements must be present. They were present in Dawson, and, there being in the exercise no necessity for contractual obligation linking the beginning with the end but merely a confident expectation, the court was able to look at the overall transaction and to assess its legal result as a composite whole. But it was able to do this because it was in fact not only conceived but carried out as one indivisible transaction. However, that in itself was not enough, because if you merely did that you still ended up with the statutory fiscal results of an actual disposition by the Dawsons via Greenjacket to Wood Bastow and the price firmly locked in Greenjacket. You have to go one stage further and nullify the intermediate transfer to Greenjacket which has its own permanent fiscal consequences unless it can be totally disregarded, for Ramsay merely ‘enables the courts to arrive at a conclusion which corresponds with the parties’ intentions’ (see [1981] 1 All ER 865 at 873, [1982] AC 300 at 326). In Dawson the parties’ intention was to produce a sale by Greenjacket instead of a sale by the Dawsons. So a further ingredient has to be supplied, and that is found in Burmah. This establishes the further proposition that, if you find in what, ex hypothesi, is an integrated and interdependent series of transactions a step inserted which has no other purpose than that of avoiding or minimising a liability to tax which, without that step, would be attracted by the transactions, you are entitled for fiscal purposes to ignore that step in assessing what is the true legal result of the series taken as a whole. So, in reliance on these two authorities, the House set about considering the true legal effect of the transactions undertaken and they were able to arrive at the conclusion that, although there was in fact no contractual connection between the steps making the tripartite contract, the circumstances were such that the steps could be treated together in exactly the same way as if they were. The tripartite contract concept is an essential feature of the decision because it was only in this way that the House was able to deal with the statutory consequences which otherwise, willy-nilly, would have attached to the share exchange and would have resulted in a double taxation on the same gain. To avoid that it had to be shown that the transfer of the shares to Greenjacket was not a ‘disposal’ by Dawsons which attracted the provisions of Schs 6 and 7. If those shares fell to be treated, when transferred to Greenjacket, as Greenjacket’s shares with no subsisting arrangement (to use a neutral phrase) for their onward transmission to Wood Bastow, then it is impossible not to conclude that they had been ‘disposed of’ to
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Greenjacket with the consequence that paras 4 and 6 of Sch 7 would apply. Thus the concept of the tripartite contract and the limitations so clearly stated by Lord Brightman in his speech were not merely exemplary of the wider doctrine of Ramsay but were essential to the decision of the case.
As the law currently stands, the essentials emerging from Dawson appear to me to be four in number: (1) that the series of transactions was, at the time when the intermediate transaction was entered into it, preordained in order to produce a given result, (2) that that transaction had no other purpose than tax mitigation, (3) that there was at that time no practical likelihood that the preplanned events would not take place in the order ordained, so that the intermediate transaction was not even contemplated practically as having an independent life, and (4) that the preordained events did in fact take place. In these circumstances the court can be justified in linking the beginning with the end so as to make a single composite whole to which the fiscal results of the single composite whole are to be applied.
I do not, for my part, think that Dawson goes further than that. The intellectual basis for the decision was Ramsay and the criteria for the application of the Ramsay doctrine were those enunciated by Lord Brightman. On those criteria, I see no escape from the conclusion reached in all the three appeals in the High Court and in the Court of Appeal that the Crown must fail. Nor do I readily see that the criteria are logically capable of expansion so as to apply to any similar case except one in which, when the intermediate transaction or transactions take place, the end result which in fact occurs is so certain of fulfilment that it is intellectually and practically possible to conclude that there has indeed taken place one single and indivisible process. To permit this it seems to me essential that the intermediate transaction bears the stamp of interdependence at the time when it takes place. A transaction does not change its nature because of an event, then uncertain, which subsequently occurs and Ramsay is concerned not with reforming transactions but with ascertaining their reality. There is a real and not merely a metaphysical distinction between something that is done as a preparatory step towards a possible but uncertain contemplated future action and something which is done as an integral and interdependent part of a transaction already agreed and, effectively, predestined to take place. In the latter case, to link the end to the beginning involves no more than recognising the reality of what is effectively a single operation ab initio. In the former it involves quite a different process, viz that of imputing to the parties, ex post facto, an obligation (either contractual or quasi-contractual) which did not exist at the material time but which is to be attributed from the occurrence or juxtaposition of events which subsequently took place. That cannot be extracted from Dawson as it stands nor can it be justified by any rational extension of the Ramsay approach. It involves the invocation of a different principle altogether, that is to say the reconstruction of events into something that they were not, either in fact or in intention, not because they in fact constituted a single composite whole but because, and only because, one or more of them was motivated by a desire to avoid or minimise tax. That may be a very beneficial objective but it has to be recognised that the rational basis of Ramsay and Dawson then becomes irrelevant and is replaced by a principle of nullifying a tax advantage derived from any ‘associated operation’. The legislature has not gone this far and the question is: should or can your Lordships?
My Lords, I do not think so. I am at one with those of your Lordships who find the complicated and stylised antics of the tax avoidance industry both unedifying and unattractive but I entirely dissent from the proposition that, because there is present in each of the three appeals before this House the element of a desire to mitigate or postpone the taxpayers’ tax burdens, this fact alone demands from your Lordships a predisposition to expand the scope of the doctrine of Ramsay and of Dawson beyond its rational basis in order to strike down a transaction which would not otherwise realistically fall within it.
Nor do I consider that the Ramsay approach, which is no doubt applicable to a much wider variety of transactions than those embraced in the instant appeals, requires further
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exposition or clarification. Its basis is manifest and has been clearly explained by Lord Wilberforce. What the Crown urges on your Lordships is a restatement of the approach in a formula based, as it seems to me, not on seeking to identify the reality of sequential transactions, but on a much wider, but at the moment undefined, general principle of judicial disapprobation of the lawful rearrangement of the subject’s affairs designed to produce a result which is fiscally advantageous to him in relation to a transaction into which he anticipates entering. That is essentially a legislative exercise and one on which, in my opinion, your Lordships should hesitate long before embarking.
In the course of argument various suggestions were made for the evolution of some wider suggested formula which would operate as a touchstone for the determination of whether successive transactions, one of which is undertaken for the sole or dominant purpose of alleviating the burden of tax, fall to be treated as one single composite whole within the Ramsay principle. It was suggested, for instance, that any such step taken at a time when some further or ultimate transaction is ‘in contemplation’ or ‘under negotiation’ falls, without more, to be treated as merely a step in a single composite transaction. I confess, however, that I cannot, for my part, see how there can be any logical difference between intelligent tax planning before commencing negotiations for an ultimate disposition and intelligent tax planning after a particular disposition is contemplated or after negotiations which may lead to it have commenced, so long as the outcome of such negotiations remains wholly uncertain. I doubt, therefore, whether any such universal formula either can be satisfactory or is desirable. Essentially the question in every case is going to be: what has the taxpayer actually done and does it amount to a single composite transaction which is different from the constituent parts? I do not think that that can be answered by any formula more clearly expressed than it has already been expressed in Dawson.
Nor do I believe that the Special Commissioners will, in practice, encounter difficulty in reaching a conclusion. Certain points of reference have been and are clearly identified. One critical feature is that what I have referred to as the intermediate step serves no purpose other than that of saving tax. Thus, for instance, counsel for the Crown accepted in the course of argument that if, in Dawson, the Dawsons had formed Greenjacket for the purpose of carrying on a building business in the Isle of Man to be financed out of the proceeds of the shares in the operating company it would not have been permissible to disregard the share exchange as an effective disposition for tax purposes even though the identical events occurred in the identical sequence. But whilst this feature opens the door to what may be called the Ramsay approach and may, indeed, even be a sine qua non for it, its presence does not, of itself, affect the nature of the transaction. A disposal is no less a disposal within the statute because the motive for it is to minimise tax; but the motive for it may and often will indicate that what appears on its face as a disposal is no more than an interdependent part of some other or larger transaction.
Another identifying feature is that all the stages of what is claimed as the composite transaction are preordained to take place in an orchestrated sequence and, in my opinion, that must mean more than simply ‘planned or thought out in advance’. It involves to my mind a degree of certainty and control over the end result at the time when the intermediate steps are taken. That does not, I think, mean absolute certainty in the sense that every single term of the transaction which ultimately takes place must then be finally settled and agreed. But it does seem to me to be essential at least that the principal terms should be agreed to the point at which it can be said that there is no practical likelihood that the transaction which actually takes place will not take place. Nor is it sufficient, in my opinion, that the ultimate transaction which finally takes place, though not envisaged at the intermediate stage as a concrete reality, is simply a transaction of the kind that is then envisaged, for the underlying basis of the Ramsay doctrine is that it must, on the facts, be possible to analyse the sequence as one single identifiable transaction and if, at the completion of the intermediate disposition, it is not even known to whom or on what terms any ultimate disposition will be made I simply do not see how such an
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analysis is intellectually possible. It is an essential part of the analysis that there is but one disposal and not two and that the transfer to the intermediate company is not a ‘disposal’ within the meaning of the statute. Whatever the ultimate transaction the fact is that the transfer to the intermediate company has taken place and its shares have been acquired by the taxpayer. That transaction not, clearly, being an arm’s length transaction, the consideration is statutorily deemed to be the value of the shares transferred as of that date. Unless at that point of time it is possible to account for the transaction as a subscription in cash for the shares issued at a price equal to the ultimate purchase price of the shares transferred (an impossible exercise if that sum is not even known), it seems to me to be quite impossible to say that there has been no disposal to the intermediate company attracting the statutory consequences set out in Sch 7.
A third identifying feature, at any rate in the Dawson type of transaction, is in my opinion that there should be no sensible and genuine interruption between the intermediate transaction and the disposal to an ultimate purchaser. If such an interruption occurs I cannot for my part see on what possible basis of statutory construction the intermediate transaction can, as it were, be held in limbo once it has been completed. The shares have been transferred. The shares in the intermediate company have been issued and s 22(4) of the 1965 Act compulsively attributes to that issue a price equal to the value of the transferred shares at that time. Any significant temporal interruption between the conclusion of the intermediate share exchange and the completion of the negotiation for an ultimate disposition must, if the whole is to be treated as one single transaction, inevitably open the door to the possibility of double taxation referred to in the argument before your Lordships, for instance in the event of the ultimate disposition taking place at a price in excess of the value of the shares at the date of the exchange, for it would not then be possible without flatly contradicting the provisions of s 22(4) of the 1965 Act to treat the ultimate price as the base value of the shares in the intermediate company. It is possible to do this only by the tripartite contract analysis which, in turn, would only be possible if in some way the intermediate transfer could be treated as suspended in its operation until completion of the final disposition. That, I suppose, might be possible if it could be demonstrated that the interval in the negotiation could be shown to have been fabricated for the very purpose of preventing such an analysis, for that would itself be cogent evidence of the tripartite nature of the overall transaction. Short of this, however, I do not see how the doctrine can be applied where a sensible and genuine interruption in the negotiations takes place after completion of the intermediate step, for it is, as I understand the Ramsay doctrine, inherent in it that the steps which are welded together form part of a preplanned continuum. If a formula is to be devised which will serve as a touchstone for the guidance of the Special Commissioners, I do not, for my part, think that it can or should go beyond that suggested by my noble and learned friend Lord Jauncey, whose speech I have had the advantage of reading in draft.
It follows that in my view it is quite impossible to apply a Ramsay analysis on any intellectually acceptable basis to the transactions with which the Bowater and Gregory appeals are concerned and I would therefore dismiss both those appeals. Craven (Inspector of Taxes) v White displays features more akin to those present in Dawson than do the other two cases, but it clearly does not satisfy either Lord Brightman’s test or the formula referred to above. The taxpayers had been attempting for years to find a purchaser for their business and the project of vesting the shares in an Isle of Man company was conceived and put into operation at a time when two mutually exclusive sets of negotiation were in progress. On no analysis could it be said that at that stage there was a ‘preordained’ series of transactions, for it was not even known what the ultimate transaction would be, if indeed it eventuated at all. The Special Commissioners rejected the evidence of the taxpayers that the sole purpose of its formation was as a vehicle for an amalgamation with Cee-N-Cee, but their evidence was that it was at least one of the purposes, and there was the express and important finding of the commissioners that Mr Stephen White was keeping his options open, though the sale of the shares to Oriel which
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ultimately took place was the preferred choice and the one to which the taxpayers’ efforts were principally directed. It was not, however, suggested that the possibility of a merger with Cee-N-Cee was not seriously under consideration even if it was faute de mieux or that the formation of a holding company was not regarded as a convenient vehicle for such a purpose, quite apart from the tax advantages flowing from the proposed company’s Isle of Man residence. Undoubtedly the taxpayers had it in mind that if the hoped for sale took place part at least of the proceeds would be made available to them free of tax by way of loans. Undoubtedly too they had it in mind when the original instructions for the acquisition of Millor, the Isle of Man company, were given that it would be the vendor of the operating company’s shares if a sale eventually took place. Millor made an offer for the taxpayers’ shares on 14 July 1976 and it is beyond doubt that at that time there was at least a hopeful anticipation that an ultimate sale to Oriel would be agreed, for the offer was expressed to remain open until 9 August 1976, a date which appears to have been agreed for a meeting with Oriel’s representatives which, it seems, was regarded as the ‘make or break’ point at which, if there was to be an agreement at all, it would be concluded. But at the time when the share exchange took place on 19 July there was no certainty whatever that the sale would take place. A draft sale contract had been brought into being and submitted to the Isle of Man solicitors, but it does not appear that the price had been agreed and the purchaser was expressing concern at a downturn in the profits of the business and suggesting that payment of part of the consideration ought to be deferred. The most that can be said is that the sale was in active contemplation at a price in excess of £2m on some terms not yet finalised but that there was also in contemplation a merger with another concern, whichwas regarded as a second best option. In no ordinary use of language can it be said that the sale which actually took place was actually then ‘preordained’ although no doubt it was preconceived, nor can it be said that there was then ‘no likelihood that it would not take place’. It was not then even ‘arranged’ in any accepted sense of the word. Quite apart from the fact that the intermediate transfer was in part for a commercial purpose I can see no ground on which it could legitimately be said that the transfer of the Queensferry shares to Millor was not a disposal of them within s 22 of the 1965 Act to which the provisions of Sch 7 accordingly applied. I would accordingly dismiss this appeal also.
LORD GOFF OF CHIEVELEY. My Lords, these appeals raise in an acute form the question of the true scope of what has come to be known as the Ramsay principle (see W T Ramsay Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] 1 All ER 865, [1982] AC 300).
It would be naive in the extreme to imagine that that principle is not concerned with the outlawing of unacceptable tax avoidance. It plainly is. But it would be equally mistaken to regard the principle as in any sense a moral principle, or having any foundation in morality. It plainly is not. We can see this clearly from Lord Brightman’s description of the scheme in Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530 at 536, [1984] AC 474 at 518 (Dawson) as an honest scheme; and I would likewise so describe the schemes in the present three appeals. What the courts have established, however, is that certain tax avoidance schemes, although not shams in the sense of not being what they purport to be, are nevertheless unacceptable because they embrace transactions which are not ‘real’ disposals or do not generate ‘real’ losses (or gains) and so are held not to attract certain fiscal consequences which would normally be attached to disposals or losses (or gains) under the relevant statute. It is these unacceptable tax avoidance schemes which Lord Scarman described as ‘tax evasion’ (in Dawson [1984] 1 All ER 530 at 532, [1984] AC 474 at 513), a label which is perhaps better kept for those transactions which are traditionally so described because they are illegal.
Nevertheless it would not, I believe, be right to represent the submissions of the Crown in the present appeals as being that the mere existence of a motive to avoid tax is sufficient to bring the relevant transaction within the Ramsay principle, or that the
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principle should be construed as a catch-all formula whose purpose is to render ineffective any step which is taken to avoid tax. To some extent, I recognise, the Crown courted trouble of this kind. Before the Court of Appeal, the Crown appears to have submitted that at least some kinds of ‘strategic tax planning’ might be caught by the principle, a submission which was, in my opinion, rightly rejected by that court (see [1987] 3 All ER 27 at 40, 71–72, [1987] 3 WLR 660 at 678–679, 712–713 per Slade and Mustill LJJ). Before your Lordships’ House, a similar submission was at first advanced, but was abandoned by the Crown before the end of the argument. In these circumstances, it does not, in my opinion, assist the solution of the problem in the present case now to resurrect any such suggestion and then to demolish it.
Any idea that the principle in Ramsay is a moral principle, or that it is designed to catch any step taken to avoid tax, is, in my opinion, destroyed by the recognition of the Ramsay principle as a principle of statutory construction. Indeed the principle cannot be independent of the statute, for the obvious reason that your Lordships have no power to amend the statute. That it is essentially a principle arising from the construction of the statute appears from a number of passages in the speeches in the cases. For example, in Ramsay [1981] 1 All ER 865 at 873, [1982] AC 300 at 326 itself Lord Wilberforce stated that it was within the judicial function to conclude that there was not such a loss (or gain) as the legislature was dealing with; see also an earlier passage in his speech in that case ([1981] 1 All ER 865 at 870–871, [1982] AC 300 at 323). In the same case Lord Fraser stated that he was prepared to dismiss the appeals on the ground that the relevant asset was not disposed of in the sense required by the statute (see [1981] 1 All ER 865 at 870, [1982] AC 300 at 339), and in IRC v Burmah Oil Co Ltd [1982] STC 30 at 37 (Burmah) he used language reminiscent of Lord Wilberforce’s statement of the law in Ramsay (referred to above) to identify the relevant question, which he epitomised as being whether the scheme, when completely carried out, did or did not result in a real loss. But, that being so, it follows that tax avoidance schemes are only unacceptable for present purposes if, on a true construction of the statute, they are held to be so.
As Lord Diplock recognised in Burmah (at 32), the Ramsay principle involves a new judicial approach. Furthermore, we have seen the ambit of the principle, once recognised in Ramsay, being gradually extended in Burmah and more significantly extended in Dawson, as your Lordships’ House has proceeded, in the ordinary way, to develop the principle from case to case. It follows, however, that no case should be read as completely encapsulating the law. Every case is, as always, a decision on its own facts; and every statement of legal principle tends to be coloured by the facts of the particular case and in any event is, in the ultimate analysis, no more than a working hypothesis. But it must not be thought that, as a consequence, the courts have gone beyond their proper function in these cases and have indulged, illegitimately, in legislation. That some lawyers have believed this to be so is evident not only from the relevant literature but even from certain judgments in the cases. These lawyers have found it difficult first to swallow Ramsay itself, and then even more difficult to swallow Dawson; and then, having reluctantly swallowed both, they conscientiously conceive their function thereafter to be essentially one of damage limitation. We have seen evidence of this attitude in the present appeals, both in Parker LJ’s vigorous criticism of Dawson (see [1987] 3 All ER 27 at 65–68, [1987] 3 WLR 660 at 704–708), and in the statement by counsel for one of the respondents in the course of argument that it was now accepted that Ramsay was rightly decided, a belated concession which failed to accord any recognition to the significant later development of the law in Dawson. This I believe, with all respect, to be a mistaken approach, although I fear that it exercises a potent influence on the minds of those who adopt it.
In each case, your Lordships’ House has been seeking to ascertain the true intention of Parliament when it has applied the words of the statute to the facts of the case before it; and, in so far as your Lordships have been attempting, in any particular case, a statement of principle, that statement of principle has been an attempt to formulate the
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parliamentary intention with an eye to the facts of that particular case. We have therefore to exercise great care before we assume that every feature referred to in any particular statement of the law is necessarily applicable in later cases. Of course, as the cases have been decided, one by one, we have been enabled to perceive more clearly how the principle should be stated; but the process of formulation can never be absolutely complete, and that it is in fact still in a state of active development was expressly recognised in Dawson [1984] 1 All ER 530 at 532–533, 535, [1984] AC 474 at 513–514, 516 both by Lord Scarman and by Lord Bridge. It follows that it would be quite wrong to regard Dawson as containing any definitive statement of the law, or as marking the final limit of the development of the Ramsay principle; so to hold would, in my opinion, not only fly in the face of the express statements in that case to which I have just referred, but in truth constitute a rejection of the spirit of the decided cases.
Even so, we can now see, from the statements of the law in the decided cases, what broadly constitutes the Ramsay principle. It is that there is no real disposal, or no real loss (or gain) within the meaning of the statute, if the relevant step has been inserted into a preordained series of transactions or a composite transaction for no commercial purpose other than the avoidance of a liability to tax (see Burmah [1982] STC 30 at 32 per Lord Diplock and Dawson [1984] 1 All ER 530 at 542–543, [1984] AC 474 at 527 per Lord Brightman). We can see from this broad principle that a distinction has to be drawn between a composite transaction of that kind and a series of independent transactions of which the first constitutes a step taken to prepare for the avoidance of tax, such avoidance being achieved by later, independent, steps. It is that latter type of scheme which is usually known as strategic tax planning, which must be distinguished from unacceptable tax avoidance caught by the Ramsay principle. So understood, the Ramsay principle can be identified as not merely consistent with the statute, but as achieving a result which is sensible in terms of policy.
It is easy now to see how the ‘circular’ schemes in Ramsay and Burmah fell foul of the principle. Dawson marks a significant extension, in that it recognises that the principle is applicable not only in the ‘circular’ cases, where the relevant asset ends up with the taxpayer exactly as before, but also in so-called ‘linear cases’, where it ends up at a different destination. As appears from the speech of Lord Brightman in Dawson [1984] 1 All ER 530 at 543, [1984] AC 474 at 527, linear cases may be caught by the principle, just as circular cases may be. In both types of case, the application of the principle may involve the ‘disregarding’ for certain fiscal purposes of one or more steps in the composite transaction, even though such steps otherwise have legal effect. The difference between the two types of case is that, in the linear cases, the composite transaction does have the commercial object of achieving a transfer of the relevant asset to another party; so that, in those cases, the court has not merely to ‘disregard’ for certain fiscal purposes the intermediate step or steps, but it has also to recognise, for fiscal purposes, a real disposal direct from the taxpayer to the ultimate transferee. This is a most substantial distinction. Simply to ‘disregard’ certain intermediate transactions, as in Ramsay, is a far less drastic step than the short-circuiting across an intermediate step or steps to recognise a new transaction as the real disposal, as in Dawson. It is this recognition which has generated most opposition to the development of the law by your Lordships’ House. Indeed it has been thought to create problems of its own; but in both types of case the nature of the exercise is essentially the same: the asset ends up at the ultimate destination intended by the taxpayer, and the intermediate step or steps are ‘disregarded’ for the relevant fiscal purposes, whilst otherwise having legal effect.
I do not, for my part, consider that the Ramsay principle can sensibly be restricted, in any of the manners suggested in the course of argument. In particular it cannot, in my opinion, be restricted to one type of composite transaction, comprising a tripartite arrangement very close to being an arrangement binding in contract, for example an arrangement which is only not binding in law because it is expressed to be subject to contract. This would be a true exercise in damage limitation, really restricting the
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application of the Ramsay principle in linear cases to the facts of Dawson itself. Certainly no trace of so narrow a construction as that suggested is to be found in any of the written cases of the three taxpayers in the appeals before your Lordships’ House. Indeed, so to restrict Dawson would, in my opinion, be wholly artificial and such a restriction cannot, in my opinion, be justified by reference to the underlying principle. Nor do I, with all respect, consider that it is necessary to impose the requirement that negotiations for the last stage of the scheme should have reached an advanced stage, or even have been embarked on, before the principle applies. Likewise, I do not consider it necessary that the intermediate transfers which, in law, effect the real disposal to the ultimate transferee should be more or less instantaneous. That was doubtless a feature of the highly artificial schemes in the earlier cases, which understandably attracted the attention of those considering them; but I can see no logical reason why it should constitute a prerequisite of the application of the Ramsay principle. Matters of this kind constitute, in my opinion, no more than useful evidence that the relevant transactions have been planned as a whole and so, if successfully performed, amount to a composite transaction. But they are not, in my opinion, prerequisites. Indeed the very number of alternative restrictions canvassed in the course of argument reveals, to me, their lack of foundation in principle. In truth, in Dawson the House of Lords crossed the Rubicon from the circular cases to the linear cases; once the Rubicon was crossed, the function of your Lordships’ House is not to restrict the crossing to the narrowest possible bridgehead, but rather to recognise it as having occurred and then to interpret the principle sensibly so as to accommodate both groups of cases. In Dawson the intermediate disposal was held not to be a real disposal within the meaning of the statute; once that had been held to be so, it was necessary to face up to the consequences and to hold that, for the relevant fiscal purposes, there must be deemed to be a disposal direct from the taxpayer to the ultimate transferee. In the same way, answers must be found to other problems which might conceivably arise (some pretty unlikely examples of which were canvassed in the course of argument) in the case of linear transactions. Lord Brightman himself indicated in Dawson [1984] 1 All ER 530 at 541–542, [1984] AC 474 at 525 how the supposed problem of double taxation could be dealt with. I cannot for my part see that matters of this kind should be allowed artificially to inhibit the identification of the applicable principle.
There remains, however, the question: what is meant by a preordained series of transactions or a composite transaction? To me, the two expressions mean the same thing, although in each the word ‘transaction’ is being used in a different sense. In the expression ‘series of transactions’ the word ‘transaction’ refers to each step in an overall transaction, including any intermediate step inserted only for the purpose of avoiding tax; whereas in the expression ‘composite transaction’ the word ‘transaction’ refers to the overall transaction embracing all the steps within it. The word ‘preordained’ in the expression ‘preordained series of transactions’ means simply ‘decided in advance’ or, to adopt the words of Lord Fraser in Dawson [1984] 1 All ER 530 at 532, [1984] AC 474 at 513, ‘planned as a single scheme’. Of course, in a composite transaction each step must, by definition, be planned in advance; but where one refers not to the composite transaction but to the series of transactions which constitute it the word ‘preordained’ is added to show that that series of transactions does indeed constitute a composite transaction.
But how does one identify any particular transaction (in the overall sense) as being for present purposes a composite transaction? That the overall transaction should have been preordained, in the sense of planned in advance, is (as I have indicated) by definition essential; but it is, I consider, no more than a prerequisite, for there may (for example) be cases in which the whole transactionis planned in advance, and yet there may be such delay or such significant interruption before the last step is taken that it would not be right to describe the transaction, as performed, as a composite transaction. If I take the simple example of a case in which there are two steps in the alleged composite transaction, the first step being that which is alleged to be the step inserted solely for the purpose of
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avoiding tax, it is to me essential, before the whole transaction can amount to a composite transaction for present purposes, not only that the whole transaction should have been planned in advance, but also that the last step in the transaction as performed should both be put into effect as part of that plan and sufficiently correspond to the transaction as planned, both in its terms and in the time within which it takes place, that it is appropriate to describe the whole transaction as a composite transaction. I wish however to add this, that, for the whole transaction to be planned in advance, it is not necessary that the details of the second step should be settled at the time when the first step was taken, or that they should exactly correspond with those planned in advance. Furthermore, I can see no reason why, when the second step involves a transfer to a third party C, the mere fact that the taxpayer has in mind an alternative purchaser D should of itself prevent there being a composite transaction involving the transfer to C; nor do I see why, when the second step involves an auction sale, the mere fact that the ultimate purchaser and the price are not therefore identified at the date of the first step should prevent that step together with the auction sale constituting a composite transaction. Indeed I would find it a most remarkable conclusion that a transfer of an asset to an Isle of Man company controlled by the taxpayer for the express purpose that such company should forthwith dispose of the relevant asset by auction, which it then does, should not constitute a composite transaction within the Ramsay principle. It follows that I find myself in respectful disagreement with the formulation of principle by Slade LJ in the Court of Appeal (see [1987] 3 All ER 27 at 41, [1987] 3 WLR 660 at 679–680). In the end, the question whether or not the overall transaction constitutes for present purposes a composite transaction is very much one of common sense, which the commissioners are well equipped to decide. I do not for myself regard this as giving rise to any unacceptable uncertainty in practice. I have no doubt that, in practice, the animal is easily recognisable. What is indeed unacceptable is that the principle should be artificially restricted in its meaning and effect.
A prominent feature of the submissions of the taxpayers before your Lordships, and indeed one which found favour with Peter Gibson J in Craven (Inspector of Taxes) v White at first instance, is that there can be no composite transaction within the principle unless there is, at the time of taking the first step, a practical certainty that the whole transaction will proceed right through to the end. This was indeed a feature of the schemes in cases such as Ramsay itself, and attracted much attention in the earlier cases. But, like Slade LJ in the Court of Appeal (see [1987] 3 All ER 27 at 46, [1987] 3 WLR 660 at 685–686), I do not regard the ‘practical certainty’ test as apposite. This is because ‘preordained’ does not mean ‘predestined’; it means decided or planned in advance, but not foredoomed, unless the expression is used in connection with a decision by some supernatural agency, such as fate. The mere fact that a series of transactions planned as part of a single scheme may not in fact be carried out to the end does not prevent those transactions, if performed, constituting a composite transaction for the purposes of the principle. If a taxpayer transfers an asset to an Isle of Man company for auction, the mere fact that the asset may not, at the auction, reach its reserve does not, in my opinion, prevent the transfer and the auction sale, if successful, from together constituting a composite transaction.
With these principles in mind, I turn to the three appeals now before your Lordships. In the first, Craven v White, the commissioners found that the agreements in question were—
‘to be looked on as parts of a composite transaction comprising those two agreements, if no more; it is irrelevant that the terms of the August agreement were not finally settled until the day it was executed.’
(See [1985] 3 All ER 125 at 144.)
The decision of the commissioners in the case was however coloured by the fact that, at the date of the decision, the speeches of the House of Lords in Dawson had not been delivered. Peter Gibson J held that the commissioners, in concluding that there was a composite transaction, had misdirected themselves in law; he considered this to be so in
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particular because they failed to have regard to the question whether there was any practical certainty that all the planned steps would be completed. For the reasons I have already given, I do not, with all respect, consider that the ‘practical certainty’ test adopted by the judge is appropriate. Slade LJ considered the criterion of a composite transaction to be that, at the time when the first step is taken, all the essential features, not merely the general nature, of the second transaction had already been determined by a person or persons who had the firm intention, and for practical purposes the ability, to pursue the implementation of the second step; and he further considered that the facts of Craven v White did not satisfy that test (see [1987] 3 All ER 27 at 41, 46, [1987] 3 WLR 660 at 679–680, 685–686). I for myself feel, with all respect, that the approach adopted by Slade LJ is at the same time too narrow and too wide. On the one hand, I can envisage a composite transaction which does not comply with his test, as for example where the plan embraces a transfer followed by an auction sale, the first transfer being solely for the purposes of avoiding tax. On the other hand the test does not, I think, allow for the possibility that a significant interruption between the first step and the achievement of the planned second step may be regarded as preventing the whole from constituting a composite transaction. Mustill LJ, after commenting on certain features of the case, concluded ([1987] 3 All ER 27 at 73, [1987] 3 WLR 660 at 714–715):
‘Whatever the precise boundaries of the word “preordained”, it cannot, in my view, be stretched to cover a series of dealings so intermittent in execution and so unformed at the outset.’
Although I find myself to be in respectful agreement with substantially all the reasoning in the judgment of Mustill LJ, I am unable to agree with his conclusion on this appeal. As it seems to me, the primary facts of the case are such that it would not be right to interfere with the finding of the commissioners that there was here a composite transaction. It is true that the Whites had, at all material times, two strings to their bow: a merger with Cee-N-Cee and a sale to Oriel; it is also true that when, on 21 June 1976, arrangements were made for the purchase of Millor this was with a view to Millor acting as a holding company for the projected merger with Cee-N-Cee, because, following a meeting with Oriel on 17 June, the Whites were ‘despondent’ about the prospects of acquisition by Oriel. But, by the time when, on 19 July, the transfer of the shares in Queensferry to Millor was agreed, it was plain that Oriel was once again the front runner, a draft contract having been submitted by Oriel, and negotiations with Oriel thereafter having proceeded with increased purposefulness, although talks with Cee-N-Cee also continued. Final agreement for the sale by Millor to Oriel was reached at a ‘stormy meeting’ on 9 August. In these circumstances it was in my opinion open to the commissioners to hold that, at the time of the transfer to Millor, it was planned by the Whites that the whole transaction (the transfer to Millor followed by a transfer to Oriel) should be put into effect, and that the last step (the transfer to Oriel) was put into effect as part of that plan and sufficiently corresponded to the transaction as planned that it was appropriate to describe the whole transaction as a composite transaction. The facts that the final negotiation between the Whites and Oriel was stormy and that, at the time of the transfer to Millor, the Whites had in mind the alternative possibility of a merger with Cee-N-Cee do not, in my opinion, invalidate that conclusion. For these reasons, I would allow the appeal of the Crown in this case.
So far as the other two appeals are concerned I would, in agreement with the remainder of your Lordships, dismiss both appeals.
LORD JAUNCEY OF TULLICHETTLE. My Lords, these three appeals raise the question of whether transactions in which the three respondent taxpayers were involved constituted disposals by them which were chargeable to capital gains tax or development land tax. To answer this question it is necessary in the first place to look at three decisions in your Lordships’ House, namely W T Ramsay Ltd v IRC, Eilbeck (Inspector of Taxes) v
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Rawling [1981] 1 All ER 865, [1982] AC 300 (Ramsay), IRC v Burmah Oil Co Ltd [1982] STC 30 (Burmah) and Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530, [1984] AC 474 (Dawson).
In Ramsay a taxpayer who had made a chargeable gain in an accounting period sought to avoid payment of tax thereon by establishing an allowable loss. To this end a ready-made scheme was bought whose sole purpose was to avoid tax. Without going into details, suffice it to say that the scheme involved certain self-cancelling operations carried out to a timetable. To quote the words of Lord Wilberforce ([1981] 1 All ER 865 at 870, [1982] AC 300 at 322):
‘At the end of the series of operations, the taxpayer’s financial position is precisely as it was at the beginning, except that he has paid a fee, and certain expenses, to the promoter of the scheme.’
Lord Fraser used similar words ([1981] 1 All ER 865 at 881, [1982] AC 300 at 337):
‘The essential feature of both schemes was that, when they were completely carried out, they did not result in any actual loss to the taxpayer. The apparently magic result of creating a tax loss that would not be a real loss was to be brought about by arranging that the scheme included a loss which was allowable for tax purposes and a matching gain which was not chargeable.’
This House dismissed the taxpayer’s appeal, thereby effectively concluding that the loss thrown up by the scheme was not such a loss as the legislation was dealing with. Lord Wilberforce said ([1981] 1 All ER 865 at 871, [1982] AC 300 at 323):
‘Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well-known principle of Inland Revenue Comrs v Duke of Westminster [1936] AC 1, [1935] All ER Rep 259. This is a cardinal principle but it must not be overstated or over-extended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transactions to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded.’
Lord Wilberforce went on to say ([1981] 1 All ER 865 at 871, [1982] AC 300 at 324):
‘For the commissioners considering a particular case it is wrong, and an unnecessary self-limitation, to regard themselves as precluded by their own finding that documents or transactions are not “shams” from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transaction is. They are not, under the Duke of Westminster doctrine or any other authority, bound to consider individually each separate step in a composite transaction intended to be carried through as a whole. This is particularly the case where (as in Rawling) it is proved that there was an accepted obligation, once a scheme is set in motion, to carry it through its successive steps. It may be so where (as in Ramsay or in Black Nominees Ltd v Nicol (Inspector of Taxes) [1975] STC 372) there is an expectation that it will be so carried through, and no likelihood in practice that it will not. In such cases (which may vary in emphasis) the commissioners should find the facts and then decide as a matter (reviewable) of law
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whether what is in issue is a composite transaction or a number of independent transactions.’
The first two sentences of this passage were described by Lord Fraser in Dawson [1984] 1 All ER 530 at 532, [1984] AC 474 at 512 as Lord Wilberforce’s statement of the principle in Ramsay. Lord Wilberforce said ([1981] 1 All ER 865 at 873, [1982] AC 300 at 326):
‘The capital gains tax was created to operate in the real world, not that of make-believe. As I said in Aberdeen Construction Group Ltd v Inland Revenue Comrs [1978] 1 All ER 962 at 996, [1978] AC 885 at 893, it is a tax on gains (or, I might have added, gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, is not such a loss (or gain) as the legislation is dealing with is in my opinion well, and indeed essentially, within the judicial function.’
This passage was described by Lord Fraser in Burmah [1982] STC 32 at 37 as the ratio of the decision in Ramsay.
Pausing there it is apparent that Lord Wilberforce was considering a scheme, of which the totality had no purpose other than tax avoidance, where steps fell to be taken in accordance with a closely regulated timetable and as a result of which the taxpayer’s position at the end of the day was for all practical purposes identical to that of his position at the beginning. Furthermore, Lord Wilberforce in enunciating the proposition that the commissioners were not bound to consider individually each separate step in a composite transaction had in mind particularly cases where there was a contractual obligation to carry through a scheme once started to its completion and cases where there was an expectation that it would be carried through ‘and no likelihood in practice that it [would] not’ (see [1981] 1 All ER 865 at 871, [1982] AC 300 at 324).
Ramsay was followed in Burmah, wherein the taxpayer company sought by means of a prearranged scheme to convert a capital loss which was not deductible for corporation tax purposes into one which was. The scheme involved a sum of money going round in a circle and returning to its starting point on one day and the same sum going round the same circle in the opposite direction some six days later. The taxpayer company ended up precisely as it had started and this House decided that it had sustained no real loss and no loss in the sense contemplated by the legislation. Lord Diplock said ([1982] STC 30 at 32):
‘It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax-avoidance schemes to assume, that Ramsay’s case did not mark a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transactions (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable. The difference is in approach. It does not necessitate the overruling of any earlier decisions of this House; but it does involve recognising that Lord Tomlin’s oft-quoted dictum in IRC v Duke of Westminster [1936] AC 1 at 19, [1935] All ER Rep 259 at 267, “Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be”, tells us little or nothing as to what methods of ordering one’s affairs will be recognised by the courts as effective to lessen the tax that would attach to them if business transactions were conducted in a straightforward way.’
Lord Diplock said (at 33):
‘I agree with Lord Fraser that the approach to tax avoidance schemes of this
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character sanctioned by Ramsay entitles your Lordships to ignore the intermediate circular book entries and to look at the end result … ’
I understand Lord Diplock in this passage to be referring particularly to circular schemes which had no purpose other than tax avoidance. Lord Fraser, after referring to the ratio of the decision in Ramsay, said (at 38):
‘The question in this part of the appeal is whether the present scheme, when completely carried out, did or did not result in a loss such as the legislation is dealing with, which I may call for short, a real loss. In my opinion it did not.’
Both Lord Fraser and Lord Wilberforce in the passage which he cites and to which I have already made reference used words such as ‘a loss such as the legislation is dealing with’. In so doing they were implicitly recognising that what has become generally known as the Ramsay principle is a principle of construction to be applied in determining what is meant by such words as ‘loss’ or ‘disposal’ in a taxing statute. I mention this because counsel for the taxpayers advanced the proposition that the Ramsay principle was not one of the statutory construction but of some other sort. In the light of the foregoing dicta I consider this proposition to be unsound.
In Dawson the facts were somewhat different and there was involved not a circular scheme as in Ramsay and Burmah but a linear scheme whereby assets passed from the taxpayer into the permanent beneficial ownership of a third party. The facts may be summarised as follows. In September 1971 the taxpayers, who, for practical purposes, owned all the shares in two companies (the operating companies), agreed in principle to sell those shares to another company, Wood Bastow. The taxpayers were advised not to sell directly to Wood Bastow but first to exchange their shares for shares in an investment company to be incorporated in the Isle of Man, which company, it was contemplated, would then sell the shares to Wood Bastow. The solicitors acting for Wood Bastow agreed to this proposal and on 16 December 1971 a company, Greenjacket, was incorporated in the Isle of Man and all the necessary arrangements were immediately made (i) for the exchange with the taxpayers of the shares in the operating companies and (ii) for the subsequent sale of those shares by Greenjacket to Wood Bastow. On 20 December there took place within a short time both the exchange between the taxpayer and Greenjacket and the sale by Greenjacket to Wood Bastow. The exchange of shares necessarily involved a disposal by the taxpayers but if it were an independent transaction it would not, by virtue of paras 4(2) and 6(1)of Sch 7 to the Finance Act 1965, be treated as a disposal for the purposes of the Act. The Crown contended that the share exchange had no purpose other than tax avoidance, that it fell to be ignored and that for the purposes of capital gains tax there was a disposal by the taxpayers direct to Wood Bastow. This House upheld the Crown’s contention. The leading speech was that of Lord Brightman, who commented on the Ramsay principle as follows ([1984] 1 All ER 530 at 542, [1984] AC 474 at 526):
‘My Lords, in my opinion the rationale of the new approach is this. In a preplanned tax saving scheme, no distinction is to be drawn for fiscal purposes, because none exists in reality, between (i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and (ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatim. In a contractual case the fiscal consequences will naturally fall to be assessed in the light of the contractually agreed results. For example, equitable interests may pass when the contract for sale is signed. In many cases equity will regard that as done which is contracted to be done. Ramsay says that the fiscal result is to be no different if the several steps are preordained rather than precontracted. For example, in the instant case tax will, on the Ramsay principle, fall to be assessed on the basis that there was a tripartite contract between the Dawsons, Greenjacket and Wood Bastow.’
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Lord Brightman later observed ([1984] 1 All ER 530 at 543, [1984] AC 474 at 527):
‘The formulation by Lord Diplock in Burmah expresses the limitations of the Ramsay principle. First, there must be a preordained series of transactions, or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (ie business) end. The composite transaction does, in the instant case: it achieved a sale of the shares in the operating companies by the Dawsons to Wood Bastow. It did not in Ramsay. Second, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax, not “no business effect“. If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied.’ (Lord Brightman’s emphasis.)
The decision in Dawson thus involved extending the application of the Ramsay principle from circular transactions which had no purpose other than tax avoidance to linear transactions which had a legitimate commercial end purpose but into which had been inserted a step whose sole purpose was tax avoidance. The question involved in these three appeals is where the line should be drawn between linear transactions which do and those which do not fall within the ambit of the Ramsay principle and in particular what constitutes a preordained series of transactions or a composite transaction which amounts to a single disposal for the purposes of the relevant charging section. It is not disputed that in each of the appeals the transactions under scrutiny included a step which had no commercial purpose other than the avoidance of tax.
It may be convenient to consider the foregoing question in the light of a transaction such as that in Dawson where there was a disposal by A to B followed by a disposal by B to C, B having been introduced into the scheme solely for tax avoidance or deferment purposes. In the Court of Appeal Slade LJ drew the line in the following manner ([1987] 3 All ER 27 at 41, [1987] 3 WLR 660 at 679):
‘As things are, as a matter of general principle, I conclude that two successive transactions, each of which has legal effects, are not properly to be regarded as a preordained series or as a single composite transaction within the meaning of the first Ramsay condition as stated in the House of Lords unless, at the time when the first transaction was effected, all the essential features (not merely the general nature) of the second transaction had already been determined by a person or persons who had the firm intention, and for practical purposes the ability, to procure the implementation of the second transaction.’
The Crown contended that this was far too narrow a construction of the principle laid down in Ramsay and applied in Dawson. Counsel for the Crown suggested four possible situations which might fall within the ambit of the principle: (1) where at the time when the first disposal takes place (the relevant time) all the terms for the second disposal had been agreed subject to contract, ie the position precisely as in Dawson; (2) where at the relevant time the first disponor has a particular intention such as a particular sale in mind, not necessarily confined to known ultimate disponees, for example a sale by auction or the conclusion of current negotiations with a number of different people; (3) where at the relevant time the first disponor has a genuine intention to effect a disposal but has neither decided on the method of disposal nor identified a possible disponee; (4) where the first disposal is merely a step in a strategic tax planning exercise which may not be completed for a period of years. Counsel for the Crown submitted that situations (1) to (3) should be covered by the principle but did not press for the inclusion of (4). On the other hand, counsel for the taxpayers argued broadly that only situation (1) should be covered.
My Lords, when Lord Wilberforce in Ramsay referred to the task of the court being to
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ascertain the legal nature of any transaction to which it is sought to attach a tax he no doubt had in mind the relevant provisions of the taxing statute since it is the provisions thereof which ultimately determine whether a transaction or series of transactions is chargeable to tax. In the context of his observation that the commissioners were not bound to consider individually each step in a composite transaction Lord Wilberforce referred to two types of scheme, namely one where there was an accepted obligation to carry out all steps in the scheme once it started and the other where there was an expectation that it would be so carried through and no likelihood in practice that it would not. In that part of his speech which Lord Fraser in Burmah described as the ratio of the decision Lord Wilberforce used the words ‘indivisible process’ and ‘what was bought as, and planned as, a single continuous operation’. These words were echoed by Lord Fraser in Dawson [1984] 1 All ER 530 at 532, [1984] AC 474 at 512, where he said:
‘The true principle of the decision in Ramsay was that the fiscal consequences of a preordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately.’
It is against the background of these observations that there falls to be considered what is meant by a preordained series of transactions or one single composite transaction, of which the existence was considered by Lord Brightman in Dawson to be a prerequisite of the application of the Ramsay principle.
In a linear transaction involving third parties over whom the first disponor has no absolute control mere contemplation or intention by him at the time of completion of the first transaction to complete the second transaction will not suffice to make the first part of a single composite transaction. Further steps towards the second transaction must have been taken at the time of completion of the first transaction before the latter can be said to form part of a composite transaction. The character of the first transaction falls to be determined at the time when it takes place. Was it then an independent transaction or was it an interdependent part of a composite transaction? I do not consider that a transaction which was initially independent in fact could properly be rendered interdependent ex post facto by subsequent events although it is possible that a transaction which judged at the time had the character of an interdependent transaction could lose that character by the subsequent and unexpected failure to materialise of the second transaction. It must be remembered that in Dawson when the first transaction took place all the arrangements for the second transaction had already been made and indeed that transaction was completed within a very short time, possibly within only minutes, after the first. There was accordingly, to quote the words of Lord Wilberforce in Ramsay, at the time of completion of the first transaction ‘no likelihood in practice’ that the second would not be completed. I therefore have no difficulty in concluding that situation (3) suggested by counsel for the Crown does not fall within the ambit of the principle.
On the other hand, I consider that Slade LJ in the Court of Appeal confined the ambit of the Ramsay principle too closely by his reference to all the essential features of the second transaction having been determined at the time when the first was effected (see [1987] 3 All ER 27 at 41, [1987] 3 WLR 660 at 679). There might be circumstances in which at the time of the first transaction arrangements for the effecting of the second transaction had reached a stage at which it could properly be found as a fact that the first transaction was interdependent although a final price or specific buyer had not then been identified. Arrangements for a sale by auction might be such a situation. I read his reference to ability to procure the implementation of the second transaction as covering both the case where there was a binding contract to effect the second transaction as well as the case where there was no such contract but where there was an expectation that it would be effected and no likelihood in practice that it would not.
My Lords, in determining whether a number of transactions of which at least one had no purpose other than tax avoidance (the tax step) should be treated for fiscal purposes
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not as independent but as forming part of one composite linear transaction from which tax consequences flow certain factors must be taken into account. These include (1) the extent to which at the time of the tax step negotiations or arrangements have proceeded towards the carrying through as a continuous process of the remaining transactions, (2) the nature of such negotiations or arrangements, (3) the likelihood, at the time of the tax step, of such remaining transactions being carried through and (4) the extent to which after the tax step negotiations or arrangements have proceeded to completion without genuine interruptions. I do not suggest that this list is exhaustive and there may well be other factors of equal or greater importance in particular cases.
If it were appropriate to prepare a formula defining ‘composite transaction’ in the light of the passages in the speeches in Ramsay, Burmah and Dawson to which I have referred I should be tempted to suggest the following:
‘A step in a linear transaction which has no business purpose apart from the avoidance or deferment of tax liability will be treated as forming part of a pre-ordained series of transactions or of a composite transaction if it was taken at a time when negotiations or arrangements for the carrying through as a continuous process of a subsequent transaction which actually takes place had reached a stage when there was no real likelihood that such subsequent transaction would not take place and if thereafter such negotiations or arrangements were carried through to completion without genuine interruption.’
However, I am conscious that this may well constitute too rigid an approach to the problems and I therefore put it forward as a tentative guide rather than as a definitive exercise.
It may be said that any formula of the type such as I have suggested would make it easy for the taxpayer to avoid tax liability merely by postponing arrangements for the second transaction until after the first had been completed. That is, however, to beg the question. The function of the court is to construe the relevant charging section and to apply it to the facts found. I do not conceive it to be the function of the court to act as the third arm of the Revenue in seeking to attack tax avoidance at large. If a series of transactions involving a pure tax avoidance step can, within the principles already laid down, properly be regarded as constituting a ‘disposal’ or other chargeable event for the purposes of the relevant charging section then the court must so regard them. But if they cannot then Parliament alone can extend the ambit of the charging section.
There is one further matter which I consider to be of importance. That is the question of possible double taxation. This was raised in Dawson but Lord Brightman considered that it could not arise because there would be no capital gains tax payable in respect of disposals from the taxpayers to Greenjacket and from Greenjacket to Wood Bastow in addition to that paid in respect of the disposal from the taxpayers to Wood Bastow (see [1984] 1 All ER 530 at 541–542, [1984] AC 474 at 525). Lord Brightman accepted that there would be a charge to capital gains tax when the taxpayers sold their shares in Greenjacket, for which purpose the base cost of these shares ‘would be the price which they paid for them, namely the value of the shares in the operating companies at the date of the transactions’ (see [1984] 1 All ER 530 at 542, [1984] AC 474 at 525). Counsel for the taxpayers submitted that if in a Dawson type of transaction there was a gap in time between the first and second transactions during which the shares originally held by A, the taxpayer, appreciated in value double taxation would arise inasmuch as A would pay capital gains tax (i) on the disposal to C on the whole gain which had accrued on those shares between his acquisition thereof and the date of such disposal and (ii) on a subsequent disposal of his shares in B on so much of the gain in B’s shares between the date of his acquisition of them and subsequent disposal which was directly attributable to the increase in value of the original shares while held by B. A would thus be paying tax twice over on the increase in value of the original shares while in B’s hands. This is a
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rather different situation to that which Lord Brightman was considering in Dawson, where the first and second transactions took place on the same day.
At first counsel for the Crown was inclined to maintain that for the purposes of a sale by A of his shares in B the base value must be taken as the value of the original shares at the date of the actual exchange. However, later on he was persuaded that the base value would be the value of the original shares at the date of their disposal by B to C. If the latter base value were correct then the fears of the taxpayers would probably be groundless. However, I have considerable doubt whether counsel for the Crown’s latter approach was correct. The exchange of shares of the Dawson type between A and B is disregarded as an inserted step or telescoped into the next step for the purposes of determining the relevant taxable transaction of which it forms a part. However, it cannot be totally disregarded since it has produced lasting consequences in the form of A’s shareholding in B. If the inserted step formed part of a composite transaction and was not therefore such an independent transaction as fell within the scope of paras 4(2) and 6(1) of Sch 7 to the Finance Act 1965 how is A to be deemed to have acquired his shares in B for the purpose of calculating the base value thereof? The taxpayers say that the matter is quite simple. A acquired his shares in B on the date of the exchange and for a consideration equal to their then market value, which was the value of the original shares transferred by him to B on that date. The Crown argues that he must be treated as acquiring the shares on the date of the disposal of the original shares by B to C and for a consideration equal to the market value on that date of the original shares. Thus the Crown’s argument involves the assumption that A acquired shares in B on a date on which he did not acquire them and for a market value which did not obtain on the true date of their acquisition. Thus not only does the Ramsay principle involve disregarding or telescoping interposed steps for the purposes of taxing one transaction but it also involves hypothesising as to events which did not occur for the purposes of taxing other transactions. I have considerable doubts whether the application of the Ramsay principle should involve such consequences. But it is not necessary for me to reach a conclusion on the matter as it is not directly in issue in these appeals. Possible double taxation is, however, relevant in considering the time taken to complete the stages of a composite transaction. If the taxpayers’ assessment of the position is correct it follows that the risk of double taxation increases as the time taken to complete the stages lengthens. This is a further reason for concluding that the Ramsay principle should not be extended to a series of transactions which are not planned from the outset to take place as a continuous uninterrupted process.
I conclude my analysis of the three cases by emphasising that the Ramsay principle is a principle of construction, that it does not entitle the courts to legislate at large against specific acts of tax avoidance where Parliament has not done so and that at the end of the day the question will always be whether the event or combination of events relied on amount to a chargeable transaction or give rise to allowable relief within the meaning of the relevant statutory provisions.
I turn briefly to consider the three individual appeals.
Craven (Inspector of Taxes) v White
The scheme here was in outline very similar to that in Dawson. The taxpayers, who owned all the share capital of S White & Sons (Queensferry) Ltd (Queensferry), exchanged their shares in Queensferry for shares in an Isle of Man company called Millor Investments Ltd (Millor), which had been acquired for the purpose, and Millor thereafter sold the Queensferry shares to Morris & David Jones Ltd (Jones). However, implementation of the scheme did not proceed along a path so smooth or so short as that in Dawson. The facts are set out in detail by the Special Commissioners (see [1985] 3 All ER 125 at 127–138) and are summarised by Peter Gibson J (see [1985] 3 All ER 125 at 149–150, [1985] 1 WLR 1024 at 1027–1028). I do not propose to rehearse them. What is in my view important is (1) that in May 1976 broad agreement on a price for the sale of the Queensferry shares on Jones’ parent company, Oriel Foods Ltd (Oriel), had been agreed
Page 543 of [1988] 3 All ER 495
in principle, (2) that after a meeting on 17 June 1976 with Oriel the taxpayers were despondent as to the prospects of a sale and reopened negotiations for the merger with another company, (3) that Oriel then asked for a further meeting with the taxpayers to be held on 25 June, (4) that negotiations between the taxpayers and Oriel were continuing, as were negotiations with the other company for merger, when the agreement to exchange shares in Queensferry for shares in Millor was concluded on 19 July.
Against this factual background if, at the date of the share exchange agreement, the question had been asked whether, to use Lord Wilberforce’s words, there was any likelihood in practice that the sale to Jones would not be completed I think that it would have been very difficult to say that there was no such likelihood. In these circumstances, although the issue is very narrow, I think that the share exchange between the taxpayers and Millor was an independent transaction and that there was accordingly no disposal by the taxpayers to Jones for the purposes of s 19(1) of the Finance Act 1965. I would dismiss the appeal.
IRC v Bowater Property Developments Ltd
This appeal concerns the charge to development land tax on realised development value accruing to the taxpayer company on the disposal by them of an interest in land. The relevant transactions concerned a number of companies in the Bowater group and an outside company called Milton Pipes Ltd (MPL) and the facts are set out in the judgment of Slade LJ (see [1987] 3 All ER 27 at 47–48, [1987] 3 WLR 660 at 687–689). In summary the following events occurred. (1) By November 1978 agreement had been reached subject to contract for the sale by Bowaters United Kingdom Paper Co Ltd (BUKP) of land to the outside company of MPL. (2) On 7 March 1979 the taxpayer company exercised an option to purchase the land from BUKP. (3) On 25 March 1980 the taxpayer company sold the land to five other companies in the Bowater group in equal shares. None of these five companies had used any part of its annual exemption of £50,000 and the sole purpose of the sale was to avoid development land tax on any sale of land to MPL. On that date there was a firm expectation that the sale to MPL would take place but no possibility that MPL would then have signed the contract. (4) On 7 July 1980 MPL intimated that they were giving up the proposal to purchase the land. (5) In February 1981 MPL’s circumstances altered and they reopened negotiations. (6) On 25 November 1981 sales of the land by the five companies to MPL were completed.
In this case not only could it not have been said on 25 March 1980 that there was no reasonable likelihood that the sale to MPL would not take place but thereafter there was a complete and genuine interruption of all dealings for a period of seven months followed by further negotiations for nine months before the sale took place. I do not consider that it could possibly be said that in these circumstances the sales of March 1980 and November 1981 were part of a composite transaction which constituted a disposal for the purposes of s 1 of the Development Land Tax Act 1976. I would dismiss this appeal.
Baylis (Inspector of Taxes) v Gregory
This is another scheme of the Dawson type but the path to fruition was even longer and rougher than in Craven v White. The facts are set out in the judgment of Slade LJ (see [1987] 3 All ER 27 at 50, [1987] 3 WLR 660 at 691). The critical fact is that at the time when the taxpayers exchanged the relevant shares for shares in the Isle of Man company prior negotiations with a particular purchaser had broken down and no other purchaser was then in view. Not until more than a year later did a potential purchaser emerge and a further six months elapsed before a sale was finally concluded. The first transaction accordingly took place as an exercise in strategic planning rather than with any particular subsequent transaction in mind and I did not understand that the Crown really disputed this. There can in these circumstances be no question of there being any nexus between the two transactions whereby they could together form any composite transaction for capital gains tax purposes. I would dismiss the appeal.
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My Lords, I will only add that since giving the foregoing reasons I have had the advantage of reading in draft the speech of my noble and learned friend Lord Oliver, with whose reasons for dismissing the appeals I am in agreement.
Appeals dismissed.
Solicitors: Solicitor of Inland Revenue; Berwin Leighton (for the taxpayers in the first and third appeals); Gray Marshall & Campbell, Croydon agents for C W S Goodger, Chalfont St Peter (for the taxpayers in the second appeal).
Mary Rose Plummer Barrister.
Practice Direction
(probate: caveat)
[1988] 3 All ER 544
PRACTICE DIRECTIONS
FAMILY DIVISION
12 July 1988.
Probate – Practice – Non-contentious probate – Grant of representation – Caveat – Warnings and appearances – Removal of caveats – Non-Contentious Probate Rules 1987, r 44(5)(6)(10)(12), Sch 1, Form 4.
1. Warnings
As from 1 August 1988 the index of caveats will be moved from the Principal Registry to the Leeds District Probate Registry, 3rd Floor, Coronet House, Queen Street, Leeds LS1 2BA, DX 2651 Leeds Park Square, and as a consequence warnings to caveats under r 44(5) of the Non-Contentious Probate Rules 1987, SI 1987/2024, will, from that date, be issued only on lodging Form 4 in Sch 1 to the rules either personally, through the post or through the document exchange at Leeds District Probate Registry.
2 Appearance to warning
Appearances to warnings may, from 1 August 1988, be entered only at Leeds District Probate Registry at the address above. Rule 44(10) of the 1987 rules requires the person entering an appearance to make an entry in the appropriate book and accordingly personal attendance is necessary.
3. Removal of caveat
If no appearance is entered by the caveator and no summons has been issued by him under r 44(6) of the 1987 rules the caveat will cease to have effect if theperson warning files an affidavit under 44(12) in the Leeds District Probate Registry.
12 July 1988.
C F Turner, Senior Registrar
Attorney General v Guardian Newspapers and others (No 2)
[1988] 3 All ER 545
Categories: CONSTITUTIONAL; Civil Rights and Liberties, Crown
Court: CHANCERY DIVISION
Lord(s): SCOTT J
Hearing Date(s): 23, 24, 25, 26, 27, 30 NOVEMBER, 1, 2, 3, 4, 7, 21 DECEMBER 1987
COURT OF APPEAL, CIVIL DIVISION
SIR JOHN DONALDSON MR, DILLON AND BINGHAM LJJ
18, 19, 20 21, 22, 25 JANUARY, 4, 10 FEBRUARY 1988
HOUSE OF LORDS
LORD KEITH OF KINKEL, LORD BRIGHTMAN, LORD GRIFFITHS, LORD GOFF OF CHIEVELEY AND LORD JAUNCEY OF TULLICHETTLE
14, 15, 16, 20, 22, 23 JUNE, 13 OCTOBER 1988
Confidential information – Injunction against disclosure of information – Information relating to security service – Public interest in preventing disclosure – Publication and dissemination of information overseas – Whether injunction should be granted preventing disclosure in United Kingdom – Whether Crown showing that it was in public interest not to disclose confidential information.
W, a former member of the British security service who had had access to highly classified information and who was subject to the Official Secrets Act 1911, proposed to publish his memoirs in Australia describing his experiences in the security service. The Attorney General, on learning of the intended publication of the book, brought proceedings in New South Wales against W and his publishers to restrain its publication. Pending the trial in New South Wales the publishers and their solicitors undertook not to reveal the contents of the book. In June 1986 two national newspapers, the Observer and the Guardian, published articles on the forthcoming trial which included an outline of some of the allegations made by W in his unpublished manuscript. The Attorney General obtained interlocutory injunctions in England against the newspapers restraining them until trial from disclosing or publishing any information obtained by W in his capacity as a member of the British security service which they knew or had reasonable grounds for believing had come or been obtained, either directly or indirectly, from W. On 12 July 1987 the Sunday Times, having purchased the serialisation rights, published the first extract of an intended serialisation of the book. The next day the book was published in the United States of America. On the same day the Attorney General obtained an interlocutory injunction in England restraining the Sunday Times from publishing further extracts from the book pending trial. The book was later published in a number of other countries, and its contents disseminated worldwide. No attempt was made to ban its importation into the United Kingdom. The Attorney General brought actions against the three newspapers seeking permanent injunctions restraining them from publishing information obtained directly or indirectly from W and, in the case of the Sunday Times, an account of profits made from serialising W’s book. The Attorney General also sought a general injunction restraining future publication of material derived from W or other members of the security service. The Attorney General contended that W owed a duty to the Crown not to disclose information obtained by him while a member of the security service and that publication of such information by him and the newspapers was a breach of confidence. At the trial the judge discharged the interlocutory injunctions and held that the Attorney General was not entitled to injunctions against the Observer and the Guardian because the publication of W’s book overseas had already caused the damage which the injunctions sought to prevent. The
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judge further held that the Sunday Times had been in breach of its duty of confidence when it published the first extract of its intended serialisation and was therefore accountable for the profits resulting from that serialisation. The judge also refused the Attorney General an injunction restraining future publication of information derived from W or other members of the security service. The Sunday Times cross-appealed against the order for an account of profits. The Court of Appeal dismissed the appeal and the cross-appeal. The Attorney General appealed and the Sunday Times cross-appealed to the House of Lords.
Held – (1) The court would not grant an injunction restraining the publication of confidential information acquired by a Crown servant in the course of his employment by the Crown if it could be shown that publication of the information would not be contrary to the public interest. Thus it was incumbent on the Crown to show not only that the information was confidential but also that it was in the public interest that it should not be published if it wished to restrain the disclosure of government secrets. Accordingly, an injunction would not be granted if all possible damage to the Crown’s interest had already been done by publication of the information abroad (see p 640 d to h, p 642 b, p 646 j, p 647 c d, p 654 b c, p 660 d d and p 668 a post).
(2) It followed that the appeal and cross-appeal would be dismissed for the following reasons—
(a) (Lord Griffiths dissenting) On the facts, the articles published by the Guardian and the Observer in June 1986 were not damaging to the public interest and therefore the Crown would not have been entitled to a permanent injunction in respect of those articles. Furthermore (Lord Griffiths concurring), future reviews and comment on W’s book would not be damaging to the public interest and should not be subject to an injunction because the information in the book had entered the public domain and the information in it was no longer confidential (see p 643 c d, p 646 j p 647 g h, p 654 h j, p 665 d to j and p 668 a, post).
(b) The Sunday Times article on 12 July 1987 was a breach of confidence since it included material prejudicial to national security which had not been published elsewhere and the fact that the information was about to be published elsewhere (ie the United States) in breach of confidence did not relieve the Sunday Times of its own obligation to respect the confidentiality of the material. Under the principle that the Sunday Times should not be permitted to gain from its own wrongdoing the Crown was entitled to an account of profits from the Sunday Times in respect of the publication on 12 July 1987. However (Lord Griffiths dissenting), having regard to the fact that W’s book had been published and any damage to national security arising therefrom had already occurred an injunction should not be granted restraining the Sunday Times from continuing with future serialisation of the book. Furthermore, because the subject matter of the Sunday Time’s proposed future serialisation of W’s book had since become generally available and the Sunday Times was not responsible for that having happened the Sunday Times was not liable to account for the profits arising from any future serialisation (see p 643 h to p 644 c j to p 654 a c d j, p 646 j, p 647 j to p 648 a c to f, p 655 b c, p 667 d to f h and p 668 a g h, post).
(c) It would not be appropriate to issue a general injunction restraining future publication of material relating to the security services since the most appropriate means of preventing publication of such material lay in the observance by members of the security services of their lifelong duty of confidentiality. Furthermore, an injunction should not be issued to prevent wrongdoing in general but only to prevent a specific wrong, since there might in a particular case be a valid defence (see p 646 b to e j, p 658 c d, p 667 j and p 668 a g h, post).
Quaere. Whether a person under a duty of confidence who in breach of that duty places confidential information in the public domain remains under a duty thereafter not to exploit for his own benefit the information so disclosed or whether he is released
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from his duty of confidence because the confidentiality no longer exists, notwithstanding that it was his own wrongful act that destroyed the confidentiality (see p 643 f to j, p 646 j, p 647 e, p 650 f g, p 651 j, p 654 g h, p 662 g h, p 664 c j to p 665 b and p 668 a g h, post).
Notes
For injunctions restraining disclosure of confidential information, see 24 Halsbury’s Laws (4th edn) para 1014, and for cases on the subject, see 28(2) Digest (Reissue) 1081–1090, 868–917.
For proceedings by the Attorney General to protect a public right, see 24 Halsbury’s Laws (4th edn) paras 1030–1031.
Cases referred to in judgment
AB Consolidated Ltd v Europe Strength Food Co Pty Ltd [1978] 2 NZLR 515.
A-G v BBC [1980] 3 All ER 161, [1981] AC 303, [1980] 3 WLR 109, HL.
A-G v Guardian Newspapers Ltd [1987] 3 All ER 316, [1987] 1 WLR 1248, Ch D, CA and HL.
A-G v Jonathan Cape Ltd [1975] 3 All ER 484, [1976] QB 752, [1975] 3 WLR 606.
A-G v Newspaper Publishing plc [1987] 3 All ER 276, [1987] 3 WLR 942, Ch D and CA.
A-G v Observer Ltd (1986) 136 NLJ 799, [1986] CA Transcript 696.
A-G v Observer Ltd [1988] 1 All ER 385.
A-G v Wellington Newspapers Ltd (28 April 1988, unreported), NZ CA.
A-G (UK) v Heinemann Publishers Australia Pty Ltd (1988) 78 ALR 449, Aust HC; affg (1987) 75 ALR 353, NSW CA; affg (1987) 8 NSWLR 341, NSW SC.
Albert (Prince) v Strange (1849) 1 Mac & G 25, 41 ER 1171, LC.
Amber Size and Chemical Co Ltd v Menzel [1913] 2 Ch 239.
Annesley v Earl of Anglesea (1743) 17 State Tr 1139.
Argyll (Margaret), Duchess of v Duke of Argyll [1965] 1 All ER 611, [1967] Ch 302, [1965] 2 WLR 790.
Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223.
Bile Bean Manufacturing Co v Davidson (1906) 23 RPC 725, Ct of Sess.
Beloff v Pressdram Ltd [1973] 1 All ER 241.
British Nylon Spinners Ltd v Imperial Chemical Industries Ltd [1952] 2 All ER 780, [1953] Ch 15, CA.
Burmah Oil Co Ltd v Bank of England (A-G intervening) [1979] 3 All ER 700, [1980] AC 1090, [1979] 3 WLR 722, HL.
Calcraft v Guest [1898] 1 QB 759, [1895–9] All ER Rep 346, CA.
Coco v A N Clark (Engineers) Ltd [1969] RPC 41.
Commonwealth of Australia v John Fairfax & Sons Ltd (1980) 32 ALR 485, Aust HC.
Conway v Rimmer [1968] 1 All ER 874, [1968] AC 910, [1968] 2 WLR 998, HL.
Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935, [1985] AC 374, [1984] 3 WLR 1174, HL.
Cranleigh Precision Engineering Ltd v Bryant [1964] 3 All ER 289, [1965] 1 WLR 1293.
Exchange Telegraph Co Ltd v Central News Ltd [1897] 2 Ch 48.
Faccenda Chicken Ltd v Fowler [1986] 1 All ER 617, [1987] Ch 117, [1986] 3 WLR 288, CA.
Franchi v Franchi [1967] RPC 149.
Francome v Mirror Group Newspapers Ltd [1984] 2 All ER 408, [1984] 1 WLR 892, CA.
Fraser v Evans [1969] 1 All ER 8, [1969] 1 QB 349, [1968] 3 WLR 1172, CA.
Fraser v Thames Television Ltd [1983] 2 All ER 101, [1984] QB 44, [1983] 2 WLR 917.
Gartside v Outram (1856) 26 LJ Ch 113.
Glyn v Weston Feature Film Co [1916] 1 Ch 261.
Initial Services Ltd v Putterill [1967] 3 All ER 145, [1968] 1 QB 396, [1967] 3 WLR 1032, CA.
ITC Film Distributors v Video Exchange Ltd [1982] 2 All ER 241, [1982] Ch 431, [1982] 3 WLR 125.
Page 548 of [1988] 3 All ER 545
Lamb v Evans [1893] 1 Ch 218, CA.
Lingens v Austria (1986) 8 EHRR 407, E Ct HR.
Lion Laboratories Ltd v Evans [1984] 2 All ER 417, [1985] QB 526, [1984] 3 WLR 539, CA.
Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026, [1977] 1 WLR 1472, CA.
McNicol v Sportsman’s Book Stores (1930) MacG Cop Cas (1928–35) 116.
Moorgate Tobacco Co Ltd v Philip Morris Ltd (1984) 56 ALR 193, Aust HC.
Morris (Herbert) Ltd v Saxelby [1916] 1 AC 688, [1916–17] All ER Rep 305, HL.
Mustad (O) & Son v S Allcock & Co Ltd and Dosen (1928) [1963] 3 All ER 416, [1964] 1 WLR 109, HL.
Peter Pan Manufacturing Corp v Corsets Silhouette Ltd [1963] 3 All ER 402, [1964] 1 WLR 96.
Pride of Derby and Derbyshire Angling Association Ltd v British Celanese Ltd [1953] 1 All ER 179, [1953] Ch 149, [1953] 2 WLR 58, CA.
Printers and Finishers Ltd v Holloway [1964] 3 All ER 731, [1965] 1 WLR 1.
R v Chief Registrar of Friendly Societies, ex p New Cross Building Society [1984] 2 All ER 27, [1984] QB 227, [1984] 2 WLR 370, CA.
R v Tompkins (1977) 67 Cr App R 181, CA.
Reading v A-G [1951] 1 All ER 617, [1951] AC 507, HL; affg sub nom Reading’s Petition of Right, Re [1949] 2 All ER 68, [1949] 2 KB 68, CA.
Reid & Sigrist Ltd v Moss and Mechanism Ltd (1932) 49 RPC 461.
Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) [1963] 3 All ER 413, CA.
Sankey v Whitlam (1978) 21 ALR 505, Aust HC.
Schering Chemicals Ltd v Falkman Ltd [1981] 2 All ER 321, [1982] QB 1, [1981] 2 WLR 848, CA.
Seager v Copydex Ltd [1967] 2 All ER 415, [1967] 1 WLR 923, CA.
Slingsby v Bradford Patent Truck and Trolley Co [1905] WN 122 affd [1906] WN 51, CA.
Snepp v US (1980) 444 US 507, US SC.
Speed Seal Products Ltd v Paddington [1986] 1 All ER 91, [1985] 1 WLR 1327, CA.
Sunday Times v UK (1979) 2 EHRR 245, E Ct HR.
Terrapin Ltd v Builders’ Supply Co (Hayes) Ltd (1959) [1967] RPC 375 affd [1960] RPC 128, CA.
Vokes Ltd v Heather (1945) 62 RPC 135, CA.
Williams v Williams (1817) 3 Mer 157, 36 ER 61.
Woodward v Hutchins [1977] 2 All ER 751, [1977] 1 WLR 760, CA.
Worsley (E) & Co Ltd v Cooper [1939] 1 All ER 290.
Cases also cited
A-G v Colney Hatch Lunatic Asylum (1868) LR 4 Ch App 146.
A-G v Times Newspapers Ltd [1973] 3 All ER 54, [1974] AC 273, HL.
Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37, Vict SC.
Ashburton (Lord) v Pape [1913] 2 Ch 469, [1911–13] All ER Rep 708, CA.
Associated Minerals Consolidated Ltd v Wyong Shire Council (1974) 48 ALJR 464, PC.
Boos v Barry (1988) 108 S Ct, 1157, US SC.
British Steel Corp v Granada Television Ltd [1981] 1 All ER 417, [1981] AC 1096, HL.
Commonwealth of Australia v Walsh (1980) 147 CLR 61, Aust HC.
Donoghue v Allied Newspapers Ltd [1937] 3 All ER 503, [1938] Ch 106.
Garland v British Rail Engineering Ltd [1982] 2 All ER 402, [1983] 2 AC 751, CJEC and HL.
Gilbert v Star Newspaper Co Ltd (1894) 11 TLR 4.
Hubbard v Vosper [1972] 1 All ER 1023, [1972] 2 QB 84, CA.
Leander v Sweden (1987) Times, 25 April, E Ct HR.
Marshall (Thomas) (Exports) Ltd v Guinle [1978] 3 All ER 193, [1979] Ch 227.
My Kinda Town Ltd v Soll [1983] RPC 15.
Northern Securities Co v US (1903) 193 US 197, US SC.
Pollard v Photographic Co (1888) 40 Ch D 345.
Rootkin v Kent CC [1981] 2 All ER 227, [1981] 1 WLR 1186, CA.
Page 549 of [1988] 3 All ER 545
Secretary of State for Defence v Guardian Newspapers Ltd [1984] 3 All ER 601, [1985] AC 339, HL.
Shaw v Applegate [1978] 1 All ER 123, [1977] 1 WLR 970, CA.
Stevenson Jordan & Harrison Ltd v MacDonald & Evans (1951) 68 RPC 190.
Thomas (P A) & Co v Mould [1968] 1 All ER 963, [1968] 2 QB 913.
Thomson (D C) & Co Ltd v Deakin [1952] 2 All ER 361, [1952] Ch 646, CA.
Waddington v Miah [1974] 2 All ER 377, sub nom R v Miah [1974] 1 WLR 683, HL.
Weld-Blundell v Stephens [1919] 1 KB 520, CA affd [1920] AC 956, [1920] All ER Rep 32, HL.
Western Fish Products Ltd v Penwith DC [1981] 2 All ER 204, CA.
Actions
By writs issued on 27 and 30 October 1987 and rereamended statements of claim dated 22 December 1987 the Attorney General brought actions against (1) the Observer Ltd, Donald Trelford, David Leigh and Paul Lashmar and (2) Guardian Newspapers Ltd, Peter Preston and Richard Norton-Taylor claiming: (i) orders restraining the defendants and each of them from disclosing or publishing or causing or permitting to be disclosed or published to any person all or any of the information obtained by Peter Maurice Wright in his capacity as a member of the British security service and which they knew, or had reasonable grounds to believe, to have come or been obtained, whether directly or indirectly, from Mr Wright and attributing, in any disclosure or publication made by them to any person, any information concerning the British security service to Mr Wright whether by name or otherwise; (ii) a declaration that any information or material obtained by Mr Wright in his capacity as a member of the British security service was impressed with a quality of confidentiality of which the plaintiff was the beneficiary and whose observance the plaintiff was entitled to enforce against any person into whose hands such information or material might come, whether directly or indirectly, from Mr Wright; (iii) an order restraining the defendants from (a) disclosing or publishing or causing or permitting to be disclosed or published to any person any information obtained by Mr Wright in his capacity as a member of the British security service and which they knew, or had reasonable grounds to believe, to have come or been obtained, whether directly or indirectly, from Mr Wright, (b) attributing, in any disclosure or publication made by them to any person, any information concerning the British security service to Mr Wright whether by name or otherwise without giving the plaintiff two clear working days’ notice of their intention to do so, and provided that the order should not prohibit direct quotation of or reference to the contents of the book Spycatcher.
By a writ issued on 27 October 1987 and reamended statement of claim dated 22 December 1987 the Attorney General claimed as against the defendants, Times Newspapers Ltd (who were the publishers of the Sunday Times) and Andrew Ferguson Neil: (i) an order restraining the defendants from disclosing or publishing or causing or permitting to be disclosed or published to any person any information obtained by Peter Maurice Wright in his capacity as a member of the British security service and which they knew, or had reasonable grounds to believe, to have come or been obtained, whether directly or indirectly, from Mr Wright, attributing, in any disclosure or publication made by them to any person, any information concerning the British security service to Mr Wright whether by name or otherwise, making any payment to or for the benefit of Mr Wright and/or Heinemann Publishers Australia Pty Ltd and/or Viking Penguin Inc in consideration of or in connection with the defendants’ purchase of the serialisation rights concerning the manuscript; (ii) a declaration that any information or material obtained by Mr Wright in his capacity as a member of the British security service was impressed with a quality of confidentiality of which the plaintiff was the beneficiary and whose observance the plaintiff was entitled to enforce against any person into whose hands such information or material might come, whether directly or indirectly, from Mr Wright; (iii) an order restraining the defendants from disclosing or publishing or causing or permitting to be disclosed or published to any person any information
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obtained by Mr Wright in his capacity as a member of the British security service and which they knew, or had reasonable grounds to believe, to have come or been obtained, whether directly or indirectly, from Mr Wright, attributing, in any disclosure or publication made by them to any person, any information concerning the British security service to Mr Wright whether by name or otherwise without giving the plaintiff two clear days’ notice of their intention to do so, and provided that the order should not prohibit direct quotation of or reference to the contents of the book Spycatcher; (iv) an account of all profits made by the defendants from the publication of the alleged extracts from the manuscript; (v) an order for the payment by the defendants to the plaintiff of any sum found due to the plaintiff from the defendants on taking such account. The facts are set out in the judgment of Scott J.
Robert Alexander QC, John Laws, Philip Havers and Paul Walker for the Attorney General.
Charles Gray QC, Desmond Browne and Heather Rogers for Observer Ltd and Guardian Newspapers Ltd.
Anthony Lester QC and David Pannick for Times Newspapers Ltd.
Cur adv vult
21 December 1987. The following judgment was delivered.
SCOTT J.
1. INTRODUCTION
There are before me two actions. In each, the Crown, suing by the Attorney General, is plaintiff. The defendants in one action include the proprietors and editors of the Observer and the Guardian and the journalists who wrote the articles that prompted the action. The defendants in the other action are the proprietor and editor of the Sunday Times.
The cases concern the book Spycatcher written by one Peter Wright, an ex-officer of MI5. The book purports to be his memoirs of his service in MI5. The Attorney General desires to prevent or restrict not only publication of the book but also publication of any comment on or report of its contents. He does so on the ground of national security and on the ground that the publication of the book represented a breach by Mr Wright of the duty of confidence he owed to the Crown. The Attorney General has commenced proceedings for injunctions not only in this jurisdiction but in every other jurisdiction where publication has been threatened and in which he regards the proceedings as having some prospect of success. Thus there are pending proceedings in Australia, New Zealand and Hong Kong as well as in this country.
The hearing before me has been the trial of the action in this country. It has been preceded, however, by several interlocutory applications, with appeals to the Court of Appeal and to the House of Lords. There have been reported judgments at all stages, attended by great public interest and publicity. The consequences of this litigious history are, like the curate’s egg, good in parts. One consequence is that the important issues raised by the case have already been analysed and commented on in the judgments to which I have referred. I am not short of judicial guidance as to the approach I should adopt. Another consequence is that preconceptions about the case and about its underlying facts have been formed and hardened and lie in the way of a clear and analytical look at the issues in the case.
The British security service is responsible for the defence of the realm from dangers arising from espionage, sabotage and subversion. It is, and has to be, a secret service in the sense that its affairs and operations require, if it is to operate efficiently, to be protected by a cloak of secrecy. The importance of the service and of its efficiency to the safety of the realm and of its citizens is not in doubt and is the premise on which any arguments about the issues thrown up by this litigation must be based. MI5 is not the only organisation established under the Crown with responsibilities of a security nature.
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There is, in addition, an organisation which Sir Robert Armstrong, the Cabinet Secretary, referred to in his evidence as ‘the other Service’ and is sometimes referred to as MI6. The obligations of confidentiality and secrecy which bind the members of MI5 must surely, as to breadth and duration, apply also to the members of the other service. They may also apply to other servants of the Crown.
The operations of MI5 are largely confined to operations within the United Kingdom. MI5 is headed by a director general who is answerable to the Home Secretary but is entitled to have direct access at any time to the Prime Minister. On 24 September 1952 Sir David Maxwell Fyfe, the then Home Secretary, issued to the Director General these directions:
‘1. In your appointment as Director-General of the Security Service you will be responsible to the Home Secretary personally. The Security Service is not, however, a part of the Home Office. On appropriate occasion you will have a right of direct access to the Prime Minister.
2. The Security Service is part of the Defence Forces of the country. Its task is the Defence of the Realm as a whole, from external and internal dangers arising from attempts at espionage and sabotage, or from actions of persons and “organisations whether directed from within or without the country, which may be judged to be subversive of the State.
3. You will take special care to see that the work of the Security Service is strictly limited to what is necessary for the purposes of this task.
4. It is essential that the Security Service should be kept absolutely free from any political bias or influence and nothing should be done that might lend colour to any suggestion that it is concerned with the interests of any particular section of the community, or with any other matter than the Defence of the Realm as a whole.
5. No enquiry is to be carried out on behalf of any Government Department unless you are satisfied that an important public interest bearing on the Defence of the Realm, as defined in paragraph 2, is at stake.
6. You and your staff will maintain the well-established convention whereby Ministers do not concern themselves with the detailed information which may be obtained by the Security Service in particular cases, but are furnished with such information only as may be necessary for the determination of any issue on which guidance is sought.’
These directions, known as the Maxwell Fyfe Directive, are still in force.
Mr Wright joined MI5 on 1 September 1955 as a scientific adviser in its counter-espionage branch. He remained a member of the service until his resignation on 31 January 1976. During the last three years of his service, 1973 to 1976, he was on the personal staff of the Director General as a consultant on counter-espionage.
When he joined the Service in 1955, Mr Wright signed a declaration acknowledging that his attention had been drawn to the provisions of s 2 of the Official Secrets Act 1911, as amended. When he left the service in 1976, Mr Wright signed a declaration which provided, inter alia, as follows:
‘My attention has been drawn to the provisions of the Official Secrets Acts which are set out on the back of this document, and I am fully aware that serious consequences may follow any breach of those provisions. I understand (1) that the provisions of the Official Secrets Acts apply to me after my appointment has ceased; (2) that all the information which I have acquired or to which I have had access owing to my official position is information which is covered by Section 2 of the Official Secrets Act, 1911, as amended, and that the Official Secrets Acts apply to all such information which has not already officially been made public … I hereby declare that I have surrendered any sketch, plan, model, article, note or document (whether classified or not) made or acquired by me during the tenure of my appointment save such as I have written Departmental authority to retain.’
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The Crown’s case against the three newspapers is based on the premise that Mr Wright in writing the manuscript of Spycatcher and taking steps to have it published was guilty of a breach of the obligations of confidence and secrecy imposed on him by the nature of his employment in MI5 and the terms of the declarations he signed. The defendants have not argued, save perhaps very faintly, that this was not so.
But the defendants before me are the newspapers, not Mr Wright. The question for me is whether and to what extent the newspapers are under a duty to the Crown not to repeat or further disseminate the contents of Mr Wright’s book. I propose to approach that question in the following way. First, I will describe the circumstances that have led to the two actions that are now before me and the events that have followed the commencement of the actions. Second, I will describe the contents of the book. I will also trace the emergence of many of the allegations in other published works predating the writing by Mr Wright of his book. Third, I will outline the nature of the Crown’s case against the newspapers and the nature of the newspapers’ defence. Fourth, I will endeavour to express my view on the principles of law that must be applied. Fifth, I will examine the respective cases of the Crown and the newspapers in the light of those principles. Finally, I must deal with the consequences for these two actions of the conclusions that I will by then have expressed.
There are, however, two incidental matters that I should first mention. In order that further publication and dissemination of the information contained in Spycatcher should not take place by means of the reporting of the trial, I made an order under s 4(2) of the Contempt of Court Act 1981 postponing the reporting of the parts of Sir Robert Armstrong’s evidence or of the questions put to him that revealed details of the contents of the book. At the end of his evidence, however, I reviewed the matter and concluded that nothing had been said in court that, if disclosed, would damage national security or prejudice the Attorney General’s case for permanent injunctions. The legitimate public interest in the fair reporting of the case outweighed, in my opinion, any countervailing considerations. I therefore discharged the reporting restrictions.
Second, on 24 November 1987 the Home Secretary, Mr Douglas Hurd MP, signed a certificate to the effect that certain evidence would, if given, damage national security. No evidence of the sort specified was, in the event, given. Dangerous questions were avoided. This restraint did not, in my opinion, prevent all the relevant and proper evidence necessary for the decision of the case from being adduced.
2. THE HISTORY
In 1985 the Attorney General began proceedings in New South Wales against Mr Wright and his Australian publishers, Heinemann Publishers Australia Pty Ltd. At this stage the completed manuscript of the book was in the hands of the publishers but the book had not yet been published. The Attorney General sought an injunction restraining publication or, alternatively, an account of profits. Pending trial, undertakings restraining publication of the book or disclosure of information obtained by Mr Wright in his capacity as an officer of MI5 were given by Mr Wright, the publishers and the solicitor acting for them. Trial of the New South Wales action commenced on 17 November 1986.
On 22 June 1986 the Observer and on 23 June 1986 the Guardian published articles reporting on the forthcoming hearing in Australia. The articles included an outline of some of the allegations contained in the unpublished manuscript. The editor of each newspaper gave evidence before me. It was clear from the evidence of each editor, Mr Trelford of the Observer and Mr Preston of the Guardian, that he was aware well before June 1986 that the Attorney General was suing in Australia for an injunction restraining publication of Mr Wright’s manuscript and that, pending trial, restraints on publication were in force in Australia.
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The Observer article was written by two journalists. It stated that ‘The Observer has obtained details of what is disclosed in the manuscript … ’ and contained a summary of four specific allegations made in the book. The Observer article went on to say that ‘Lawyers for Heinemann … will argue before a Sydney court on Tuesday that all these disclosures are in the public interest’. The Guardian article was on the same lines. It gave a summary of some of the allegations in the manuscript, quoted verbatim a passage from an affidavit sworn by Sir Robert Armstrong and said: ‘Mr. Malcolm Turnbull, Heinemann’s Australian solicitor, will tell the New South Wales Supreme Court that much of the information is already public or is known to the Russians.’
None of the journalists who wrote these articles was called to give evidence. The articles were, it has transpired, accurate both in their summary of the allegations in the book and in their forecast of the line taken by the defence lawyers. Counsel for the Attorney General was, naturally, at some pains to discover how the newspapers had come by their information. The editors, Mr Trelford and Mr Preston, gave evidence. But neither knew the answer. Neither had received or seen a copy of the manuscript. In the circumstances, I am prepared to infer, on the balance of probabilities, that the journalists must have received the information on which they based the respective articles either from someone in the offices of the publishers or from someone in the office of the solicitors acting for Mr Wright and the publishers. The articles led to two writs issued on 30 June 1986, one against the Observer, the other against the Guardian. The actions were later consolidated.
Ex parte interlocutory injunctions against each newspaper were granted by Macpherson J on 27 June 1986. On 11 July 1986 Millett J inter partes granted injunctions in a modified form until trial or further order. The Millett injunctions restrained the newspapers from publishing or disclosing any information obtained by Mr Wright in his capacity as a member of MI5 or from attributing any information about MI5 to him. There were, however, three important provisos. First, the order permitted the direct quotation of attributions to Mr Wright already made by Mr Chapman Pincher in published books of which he was the author, or already made by Mr Wright in a Granada TV programme broadcast in 1984. These matters are very important to one of the defences relied on by the newspapers and I will return to them in due course. Second, the order permitted the disclosure or publication of material disclosed in open court in the course of the New South Wales action; and, third, the fair and accurate reporting of proceedings in either House of Parliament in this country or of any public court proceedings in this country was excepted from the scope of the injunctions.
On 25 July 1986 the Court of Appeal dismissed an appeal from the judgment of Millett J but slightly modified the injunctions.
It is worth repeating that at this stage Mr Wright’s book was still only in manuscript form. A precursor to some of its contents had been given by the two newspaper articles, but the contents of the book as a whole were certainly not in the public domain in any significant sense. Whether specific allegations contained in the book had already found their way into the public domain is a separate question.
On 13 March 1987 the Attorney General’s action in New South Wales was dismissed by Powell J. The Attorney General appealed to the Court of Appeal of New South Wales and the undertakings which had been given pending trial were continued pending the hearing of the appeal. The manuscript remained unpublished.
On 27 April 1987, however, the Independent published an article taking up virtually the whole of its front page and describing some of the more sensational allegations in the manuscript. The article stated that ‘a copy of the manuscript … was passed unsolicited to the Independent … ' On the same day, 27 April, the Evening Standard and the London Daily News followed suit. Each paper carried on its front page an article based on the contents of the book. Both these papers based their stories on what had appeared in the Independent. There does not seem to have been any direct disclosure of the contents of the book to either of them.
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The 27 April 1987 articles in the three newspapers would, if they had appeared in the Guardian or the Observer, have represented clear breaches of the injunctions granted by Millett J. The injunctions had not, however, been granted against the three newspapers. None was a party to the action in which the injunctions had been granted. But the Attorney General moved to commit the Independent for contempt of court on the ground that its actions in publishing the article were calculated to frustrate the purpose of the Millett injunctions and to render them worthless. On 7 May 1987 Sir Nicolas Browne-Wilkinson V-C ruled that the Attorney General’s contempt application could not succeed since the Independent was not a party enjoined by the Millett injunctions. On 15 July 1987 the Court of Appeal reversed his ruling and held that the Independent’s article of 27 April was capable of being held a contempt of court. It constituted the actus reus of contempt. The Attorney General’s contempt application was remitted to Sir Nicolas Browne-Wilkinson V-C for a decision as to whether the Independent had the necessary intent, mens rea, to be found guilty of contempt. An appeal to the House of Lords on this preliminary point is still possible. The contempt of court preliminary point has obvious implications in the present action. If the law as stated by the Court of Appeal is upheld by the House of Lords (or, I suppose, if there is no appeal) any injunction I grant against the three newspaper defendants before me, restraining them from any further publication of any part of Spycatcher or disclosure of any part of its contents, will bind every other newspaper circulating within the jurisdiction and, potentially, booksellers and libraries as well.
To return, however, to the history, the articles of 27 April either provoked, or were simply accompanied by, similar articles in other parts of the world. Articles were published on 28 and 29 April in the Melbourne Age and the Canberra Times. On 3 May 1987 the Washington Post published extracts from the manuscript.
These articles were obviously of concern to the Attorney General in his attempt to prevent dissemination of the contents of the book. Even more serious, however, was the announcement on 14 May 1987 by Viking Penguin Inc, a US subsidiary of an English publishing house, of its intention to publish the book in the United States. Correspondence between the Treasury Solicitor and the English parent company failed to induce the English parent company to restrain its subsidiary from continuing with its plans to publish the book. So the Attorney General was faced with an imminent major publication of the book in a jurisdiction in which he had been advised there were no prospects of obtaining a court order to restrain publication. Expert evidence of United States law placed before me has confirmed the correctness of that advice. The First Amendment to the United States Constitution and the guarantee of freedom of speech therein contained has resulted in it becoming settled law in the United States that prior restraints against publications by newspapers cannot be obtained.
In this climate the editor of the Sunday Times, Mr Neil, negotiated with the Australian publishers for the right to serialise the book in the Sunday Times. Terms were reached and were set out in a letter dated 4 June 1987 which Mr Neil wrote to the publishers. A price of £150,000 was agreed, of which £25,000 was payable at once and the balance after serialisation. If serialisation were delayed a lesser sum would be payable. Three or four extracts were contemplated, comprising together 20,000 to 25,000 words. The letter of 4 June 1987 contained a paragraph emphasising the need for secrecy. It was clear from Mr Neil’s evidence that he well understood that if anyone on the government side smelt any whiff of the Sunday Times’ intention to serialise, an application for a restraining injunction would immediately have been made by the Attorney General.
Mr Neil wanted the serialisation of Spycatcher in the Sunday Times to coincide with the publication of the book in the United States. So liaison with Viking Penguin Inc was necessary. Further, Mr Neil knew that the undertakings which had been given to the court in Australia, and which continued pending the hearing of the appeal, would prevent the Australian publishers from sending him a copy of the manuscript. Mr Neil had to obtain a copy of the manuscript in order to prepare the serialisation but could not
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obtain one from Australia. His solution was to obtain one from the United States publishers, Viking Penguin Inc. The launch of the book in the United States was due to take place on Monday, 13 July. On 7 July 1987 Mr Neil flew to the United States and obtained a copy of the manuscript with the intention that the first extract would appear in the Sunday Times on Sunday, 12 July 1987. It did so. The publication of 12 July was accompanied by special measures to throw the government off the scent. The first edition of the newspaper, comprising some 76,000 copies, was published without the Spycatcher extracts. The extracts were included in the later editions. This was to prevent the government, on reading the first edition, from obtaining an immediate injunction to restrain the printing of the later editions. By the time the later editions came to the government’s attention it would be too late for any action to be taken to restrain publication. That was the plan and it worked. The presses printing the later editions ran from 7.08 pm to 4.23 am, during which time some 1·25m copies carrying the Spycatcher extracts were produced. There was evidence that sales of the Sunday Times of 12 July 1987 were slightly above average.
The next day, Monday 13 July 1987, the Attorney General commenced proceedings against the Sunday Times for contempt of court. Those proceedings are still pending. The Court of Appeal judgments of 15 July, to which I have already referred, have the consequences, if upheld, that the Sunday Times’s action in publishing the Spycatcher extracts in its edition of 12 July constituted the actus reus of contempt of court. The judgments had the immediate effect of preventing the Sunday Times from continuing with its serialisation of Spycatcher. Whatever argument as to the absence of mens rea there might be regarding the publication on 12 July, there could be none if further Spycatcher extracts, in the face of the Court of Appeal judgments, had been published. As I have already mentioned, the Court of Appeal judgments, in effect, extended the application of the Millett injunctions to all newspapers. The Sunday Times’s reaction to the Court of Appeal judgments was to make an application on 31 July 1987 to the European Commission of Human Rights alleging violation of arts 10, 13 and 14 of the European Convention for the Protection of Human Rights and Fundamental Freedoms (Rome, 4 November 1950; TS 71 (1953); Cmd 8969). Those proceedings, too, are pending.
Monday, 13 July 1987 was also the date on which Spycatcher went on sale in bookshops throughout the United States. Details of the number of copies printed and sold have been given in evidence. I will refer to this evidence in a moment.
The publication of the book in the United States prompted the Guardian and the Observer to apply for the discharge of the Millett injunctions. The ground of the application, put shortly, was that the injunctions had been granted in order to preserve, pending trial, the confidentiality of the information contained in the book and that, by reasons of the United States publication and its consequences, that object could not be achieved any longer. The injunctions could no longer, it was contended, serve any legitimate or useful purpose and so ought to be discharged.
On 22 July 1987 Sir Nicolas Browne-Wilkinson V-C acceded to the application and discharged the Millett injunctions. He took the view that:
‘Once the news is out by publication in the United States and the importation of the book into this country, the law could, I think be justifiably accused of being an ass and brought into disrepute if it closed its eyes to that reality and sought by injunction to prevent the press or anyone else from repeating information which is now freely available to all. It is an old maxim that equity does not act in vain.’
(See A-G v Guardian Newspapers Ltd [1987] 3 All ER 316 at 332, [1987] 1 WLR 1248 at 1269–1270.)
The Vice-Chancellor’s decision was reversed by the Court of Appeal on 24 July 1987. Sir John Donaldson MR said ([1987] 3 All ER 316 at 338, [1987] 1 WLR 1248 at 1276):
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‘Quite apart from other publications, the publication of Spycatcher itself will have given every national intelligence agency information, whether true or false, which cannot be retrieved by injunction or otherwise. To grant or maintain an injunction with this object in view would be a totally empty gesture and wholly wrong.’
But he took the view that the Attorney General had an arguable case that further publication would in various ways damage the British security service and thereby national security and that although the original purpose of the Millett injunctions, ‘the actual protection of national secrets’, could no longer be achieved, the secondary object of the injunctions, namely the avoidance of damage to the security service, justified the maintenance of injunctive relief pending trial. He took the view, however, that the Millett injunctions should be modified in view of the limited objective they could still serve. Sir John Donaldson MR proposed to substitute for the Millett injunctions a new injunction restraining the newspapers from publishing any extract from Spycatcher or any statement about MI5 purporting to emanate from Mr Wright but with a proviso that ‘This order shall not prevent the publication of a summary in very general terms of the allegations made by Mr Wright’ (see [1987] 3 All ER 316 at 339, [1987] 1 WLR 1248 at 1277). The purpose of the proviso was to enable newspapers to report and comment on the contents of the book while restraining them from lining the pockets of Mr Wright by serialising the book. Ralph Gibson and Russell LJJ agreed with the course proposed by Sir John Donaldson MR.
There was then an appeal to the House of Lords (see [1986] 3 All ER 316 at 343–376, [1987] 1 WLR 1248 at 1282–1321). A minority, Lord Bridge and Lord Oliver, would have allowed the appeal and taken the same course as was taken by Sir Nicolas Browne-Wilkinson MR. Their reasons were, like his, that the interlocutory injunctions, although rightly granted in the first place, had been overtaken by supervening events and could no longer serve any legitimate purpose. Lord Brandon, Lord Templeman and Lord Ackner, on the other hand, took the view, expressed with variations in emphasis, that the Attorney General had an arguable case for a permanent injunction in that the defendant newspapers had been and would be in breach of duty in publishing extracts from or commenting on information contained in Spycatcher, a work published by an ex-officer of MI5 in apparently flagrant breach of the duty of confidence he owed to the Crown. They concluded, therefore, that a temporary injunction, pending trial, should remain. None of their Lordships thought that the modified injunction introduced by the Court of Appeal provided a workable formula. ‘A summary in very general terms’ was too imprecise a yardstick to be satisfactory. The majority in the House of Lords took the view that, in order to be sure that publication of extracts from Spycatcher would be prevented, the proviso to the Millett injunctions, whereby the reporting of what had taken place in open court in the Australian proceedings was permitted, should be deleted. Otherwise passages from the book read out in open court in Australia might be reproduced in English newspapers (see [1987] 3 All ER 316 at 358, [1987] 1 WLR 1248 at 1300 per Lord Templeman). The result of the appeal to the House of Lords was, therefore, that the Millett injunctions were restored and, in the respect I have mentioned, strengthened. The interlocutory injunctions have been continued by me, pending delivery of this judgment.
On 24 September 1987 the New South Wales Court of Appeal (see A-G (UK) v Heinemann Publishers Australia Pty Ltd (1987) 75 ALR 353) dismissed the Attorney General’s appeal from the dismissal by Powell J of the New South Wales action ((1987) 8 NSWLR 341). The decision was a majority one. Street CJ dissented. It is of interest, however, to notice that all three members of the court agreed that the Attorney General’s case depended on an assertion not of private right, such as an ordinary employer might have against his employee, but of a public right. As it was put by Kirby P (75 ALR 353 at 404):
‘I have no doubt that the action is one, directly or indirectly, for the enforcement
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of the public law of secrecy imposed by the statutes, common law and prerogative in the United Kingdom upon officers and former officers of the security services of that country, including MI5.’
He and McHugh JA held that the Attorney General’s case was not justiciable in an Australian court. As McHugh JA said (at 448):
‘… the Attorney General could only succeed by establishing that the disclosure of the information would be detrimental to the public interest of the United Kingdom and that the courts of this country will not hear an action which requires them to make such a judgment.’
Street CJ agreed (at 357) that ordinarily a foreign government would not be allowed access to the courts of Australia to enforce a public law claim but regarded the case as justiciable in Australia because the Australian government supported the Attorney General’s case on the ground that disclosure would harm Australian public interest. The undertakings which had continued in force pending the hearing of the appeal accordingly lapsed.
The Attorney General has applied for leave to appeal to the High Court of Australia against the decision of the New South Wales Court of Appeal. The application for leave may by now have been heard but, if so, I have not been told the result. On 29 September 1987 Deane J in the High Court of Australia declined to grant temporary injunctions pending the hearing of the application for leave. So the position in Australia is that since 24 September 1987 there has been no impediment obstructing publication of the book or disclosure of its contents in Australia.
Proceedings against newspapers for injunctions have been brought by the Attorney General also in Hong Kong and in New Zealand. In Hong Kong the position, as I understand it, is that the Attorney General has obtained from the Hong Kong Court of Appeal a temporary injunction pending trial of the action. In New Zealand the trial of the action took place in November 1987 before Davison J. Judgment was reserved. It was reported last week that the Chief Justice had given judgment in favour of the defendants and refused to grant permanent injunctions. Temporary injunctions pending appeal have been discharged.
In the meantime, publication and dissemination of Spycatcher and its contents has continued worldwide. Extensive publication and distribution has taken place in the United States and Canada. The total number of copies printed by Viking Penguin Inc in the United States by the end of October 1987 was 715,000. Virtually all have been sold. In Canada, Stoddard Publishing Co Ltd of Toronto had printed over 100,000 copies by 27 October 1987. Additional copies have been ordered and must, I infer, by now have been printed. The commercial success of the publication may be gauged by the fact that Spycatcher, from 2 August 1987 to 25 October 1987, featured continuously in the New York Times Book Review’s hard cover best-seller lists and for nine weeks of that period was no 1. Publishers Weekly, the principal trade magazine for the United States publishing industry, also compiles and publishes a best-seller list. Spycatcher entered its lists at no 6 on 7 August 1987, rose to no 2 the next week, then spent nine weeks at no 1 and by the end of October was again at no 2. Best-seller lists for sales in Canada show the same picture.
A large number of copies of Spycatcher have found their way into this country. Inquiries made on behalf of the defendants of a leading bookseller in New York and of another in Los Angeles have revealed that by the end of October approximately 1,200 copies had been dispatched to England by these two booksellers in response to orders they had received. Other booksellers, too, have been receiving from England mail orders for the book. The book has been advertised for sale in various English newspapers and periodicals. Private Eye carried such advertisements in July, August, September and October. The result of inquiries made by the defendants justifies the inference that
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hundreds of copies have been sold as a result of these advertisements. It is impossible to estimate with any accuracy how many copies of Spycatcher have found their way into this country, but the number must, I think, run to several thousands. According to the Observer of 9 August 1987, Heinemann UK estimated that about 10,000 copies of the book were entering the jurisdiction every week.
It is a puzzling feature of the history, convenient to be mentioned at this juncture, that the government has taken no steps to exercise the statutory powers available to it to prohibit importation of Spycatcher into this country. It has taken steps, by means of warning letters to booksellers in this country, to keep copies of Spycatcher off the United Kingdom bookstalls. It has taken steps to prevent public libraries from making copies of the book available to the public (see A-G v Observer Ltd [1988] 1 All ER 385, on an application in the Guardian and the Observer action made by Derbyshire County Council). It has taken, and is taking, strenuous steps to prevent newspapers in the country from carrying extracts from the book or commenting on its contents. But it has not sought to prevent importation of the book. Anyone who wants a copy is at liberty to order one from one of the United States booksellers. Hundreds of people in this country have done so.
I must complete my review of the evidence regarding worldwide publication of Spycatcher. Heinemann Publishers Australia Pty Ltd have printed 145,000 copies of the book for distribution in Australia. The book went on sale on 13 October 1987. By November 1987, 70,000 copies had been sold, 60,000 had been distributed to booksellers and 15,000 had been retained by Heinemann in Australia to cater for future sales to booksellers. Spycatcher went on sale in the Republic of Ireland on 12 October 1987. Heinemann printed 20,000 copies in Dublin. These have been distributed in the Republic. A further 10,000 were in November 1987 being printed in Dublin. I imagine they have by now been distributed. A substantial number of copies of Spycatcher intended for distribution in Europe have been printed for Heinemann in the United States. Thirty thousand copies; have been sent to Holland, 10,000 to Germany, 500 to Norway, 2,000 to Malta and 1,000 to Cyprus. Some 2,750 copies of the book, printed in Australia, have been distributed in Asian countries as follows: Malaysia, 1,000 copies; Japan, 500 copies; Hong Kong, 750 copies; Indonesia, 250 copies; Pakistan, 250 copies. One thousand copies have been sent to South Africa for distribution by Heinemann South Africa Pty Ltd.
The dissemination in Europe of the contents of Spycatcher has not been limited to the sale of the book. Danish radio broadcast on 14 August 1987 some ten pages of Spycatcher. The broadcast was in English and could be heard in the United Kingdom as well as many other European countries. Swedish radio has on four occasions broadcast, in English, extracts from Spycatcher. I was told that there are plans to repeat these broadcasts.
Finally, the evidence before me has disclosed that Mr Wright has sold rights to publish Spycatcher in the following languages: Japanese, Spanish, Catalan, French, German, Swedish, Italian, Danish, Icelandic, Dutch, Finnish and Portuguese. These translations are expected to be published at the end of 1987 or the beginning of 1988. This is the background against which I must consider the case for permanent injunctions made by the Attorney General against the newspaper defendants and, indirectly, against all English newspapers.
3. THE CONTENTS OF Spycatcher
I have already said that Spycatcher purports to be Mr Wright’s memoirs of his 20 years of service in MI5. He names colleagues, most of whom must now have left the service, some of whom are dead but some of whom may still be serving members of MI5. He names individuals in the CIA and the FBI with whom he had dealings. He describes the dealings that he or his MI5 colleagues or the CIA had with a number of persons who purported to be defectors from the Soviet security agencies. He describes some of the operational techniques used by MI5. He describes a number of specific operations mounted by MI5. These include the electronic surveillance of foreign embassies in
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London by means of hidden microphones and the bugging of telephones and the investigation of left-wing groups in the United Kingdom. He describes a plan, never implemented, hatched by MI6 to assassinate President Nasser.
Other allegations made in the book include the following: (i) that certain members of MI5 plotted an attempt to destabilise the Wilson administration in the period 1974 to 1976; (ii) that either Sir Roger Hollis, Director General of MI5 from 1956 to 1965, or Mr Graham Mitchell, Deputy Director General from 1956 to 1963, was a Soviet agent. I have mentioned only those allegations that I will wish to refer to specifically later in this judgment.
Many of the allegations contained in Spycatcher, and I think all of the more obviously important ones, had been made previously in one or more of the many published books or television programmes purporting to deal with the affairs of MI5 and MI6 in the post-war period. I have been supplied with two bundles, the contents of which are agreed to be accurate, from which the extent to which the allegations in Spycatcher have been previously made can be ascertained.
One bundle is entitled ‘Agreed Statement of Facts’ and deals with 12 books and three television programmes. In relation to each book or programme the allegations contained or made therein, relevant to the contents of Spycatcher, are summarised, and the believed connection of the author to the security services is stated. The 12 books include A Matter of Trust by Nigel West and Their Trade is Treachery and Too Secret Too Long, both by Chapman Pincher. The television programmes include a Granada TV programme broadcast on 16 July 1984 entitled ‘The Spy Who Never Was’, which featured a long interview with Mr Wright. The summaries of the 15 works demonstrate that, in general terms, most of the allegations to be found in Spycatcher had been previously made in one or other, and in the case of some of the allegations, in several, of these sources.
The second bundle contains a comparison of the contents of Their Trade is Treachery, Too Secret Too Long and Spycatcher. It bears out that all the allegations in Spycatcher I have mentioned, and many others besides, had appeared in one or other, and most had appeared in both, of the Chapman Pincher books published respectively in 1981 and 1984.
The strenuous actions taken by the Attorney General to prevent publication of Spycatcher or of any newspaper comment on its contents bear a marked contrast to the action, or lack of it, taken in relation to many of these 15 works. Thus (i) Sir Percy Silitoe’s autobiography Cloak Without Dagger was published with the permission of the authorities, notwithstanding that it contained discussion of the workings of the service and named a member of MI5.
(ii) The Climate of Treason by Andrew Boyle was published in 1979. It dealt with the Burgess, Philby and Maclean defections and discussed the existence of a possible ‘fourth man’ and ‘fifth man’ in the service. It gave a number of names of alleged members of the service, one of whom, Nicholas Elliott, was specifically acknowledged as a source. There were in the text direct attributions to him. Nicholas Elliott has been named as a member of MI5 in both the Chapman Pincher books.
(iii) On 23 February 1981 a Panorama programme was broadcast. The programme featured an interview with one Tony Motion, an ex-MI5 officer. The programme, and Tony Motion in particular, dealt with MI5 and MI6 practices and operations. Tony Motion’s participation in the programme and his status as a former MI5 officer was the subject of press comment before the programme was broadcast. There is no evidence of any attempt by the government to prevent the broadcast. The government did, however, after the broadcast had taken place, obtain an undertaking from Tony Motion that he would not give such interviews again.
(iv) Their Trade is Treachery by Chapman Pincher was published on 23 March 1981. It deals, inter alia, with alleged Soviet penetration of MI5 and MI6 and contains details of a number of alleged MI5 operations, including most of those alleged in Spycatcher. The book purports to be based on information given to the author by members of the security
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services (see p (xi) of the foreword). It was serialised in the Daily Mail at about the same time as it was published as a book. An interesting feature of the contents of the book is that, after a discussion in detail of the allegations that had been made regarding Sir Roger Hollis, the author concluded that a further inquiry into the allegations was unnecessary and stated that he could find no evidence of the presence of any spies at any high level in the security service. Nonetheless Sir Robert Armstrong confirmed in his evidence that it was the Government’s view at the time of publication that the contents of the book were damaging to national security. That evidence prompts the question why the government took no steps to restrain publication.
The facts surrounding the government’s decision not to attempt to restrain publication are, as they emerged in the evidence given before me, very curious. Not the least curious is that the full facts were not known to Sir Robert Armstrong when he gave evidence in the New South Wales action, notwithstanding that there must have been those in government to whom the facts were known. Sir Robert was not fully briefed. Even now there is reason to question whether Sir Robert has been told the full story.
His improved knowledge now, as compared with his state of knowledge when he gave evidence in New South Wales, has resulted from disclosures made by Chapman Pincher in a book published in early 1987, A Web of Deception. The evidence given before me by Sir Robert has been the product of inquiries he made after reading A Web of Deception. His evidence was as follows.
The publisher of Their Trade is Treachery was Sidgwick & Jackson of London. Nearly two months before publication took place a two-page synopsis of the contents of the book was placed by an intermediary acting on behalf of Sidgwick & Jackson in the hands of Sir Arthur Franks, the then head of MI6. Sir Arthur was asked whether the book would be damaging to national security interests and was given to understand by the intermediary that he, the intermediary, was in a position to prevent publication of the book by Sidgwick & Jackson if the government had serious objections to it. Sir Arthur asked to see the full text of the proposed book. The intermediary supplied a copy of the manuscript to Sir Arthur. The exchanges between the intermediary and Sir Arthur took place on the understanding that the identity of the intermediary would not be disclosed. Sir Robert, indeed, still does not know the identity of the intermediary. Shortly after a copy of the manuscript was handed over to Sir Arthur, Sir Robert saw the copy. This was in early February 1981, some six weeks before the eventual publication date. High-level discussions took place as to what, if any, action should be taken to prevent publication of the book. The background to these discussions was that the book contained a wealth of confidential information about the security services and their affairs and personnel which the author claimed to have obtained, and which was intrinsically likely to have been obtained, from insiders. There were two possible courses of action. One was to take up the intermediary’s offer to stop the publication by Sidgwick & Jackson. Sir Robert told me that this offer was not taken up because it would not have prevented publication. Chapman Pincher would simply have taken his book to some other publisher. But Sir Robert was not party to the discussions which led to this decision and, indeed, did not know of the offer until very recently. The other possibility was to take legal action against Chapman Pincher for an injunction. Sir Robert was party to the discussions about this possibility. He told me that this course was rejected on legal advice given, as he understood it, for two reasons. The first reason was that the manuscript had been obtained from a confidential source, the identity of which was not to be disclosed or compromised. The second reason was that the government was not able to identify the insider or insiders who had given Chapman Pincher his information. I do not doubt Sir Robert’s evidence that these were the reasons given for the legal advice that an injunction could not be obtained. But neither reason stands up to scrutiny. As to the first reason, Sir Robert was unable to explain why the possession by the government of a copy of the manuscript would compromise the intermediary. After all, the government’s possession of the manuscript has been public knowledge ever since Sir Robert gave evidence in New South Wales, but the identity of the intermediary is still a well-kept secret. As to the
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second reason, the book itself claimed to be based on information obtained from insiders. Sir Robert told me that the nature of the information had enabled the government to narrow the possible insider sources down to a list of three names. One of these, of course, was Mr Wright. How it can have been thought necessary, in order for an injunction to be obtained, to identify the specific insider source, defeats me. The high calibre of legal advice available to the government leaves me the more puzzled.
Be that as it may, the evidence before me has made it clear that the government had it in its power to prevent publication of Their Trade is Treachery. The intermediary could have been taken up on his offer to prevent publication by Sidgwick & Jackson. An action against Chapman Pincher for an injunction restraining publication of the book on the same legal base as has been strenuously argued before me could have been instituted. I do not have much doubt but that, at the least, an interlocutory injunction restraining publication until trial could have been obtained. The reasons put forward explaining the government’s inaction are shallow and unconvincing.
The result of the inaction has been the publication of the book with its wealth of insider sourced information. The information was, by the publication, placed before the public. Public discussion, including questions and statements in Parliament, resulted: see 1 HC Official Report (6th series) cols 1079–1085.
(v) On 10 December 1982 a book by Nigel West, a pseudonym for Rupert Allason, entitled A Matter of Trust was published. The book purports to be a history of MI5 from 1945 to 1972. It lists the Directors General and Deputy Directors General during that period. It discusses the Soviet penetration of MI5 and raises the question of whether Sir Roger Hollis and Mr Mitchell were Soviet agents. It discusses the cases of such well-known Soviet agents as Philby, Blunt, Vassall and Golytsin. Many alleged members of MI5 are named.
On 12 October 1982 the Attorney General applied for ex parte relief and was granted an injunction restraining publication. The affidavit in support of the application did not disclose the source from which the government had obtained a copy of the manuscript. It asserted that in the belief of the deponent, the legal secretary to the Attorney General, publication—
‘would cause damage to the Security Service of the nature and upon the grounds set out hereinafter:—(a) The manuscript contains previously unpublished information classified as “secret” and identifies, inter alios, present members of the Security Service who have not previously been identified in any publication. The manuscript includes charts which purport to describe in detail the main organisation of the Security Service up to and including 1965. (b) There are many references in the manuscript to incidents, operations and investigations which are said to have taken place since the end of the Second World War, and which can only have been related to the defendant by past (or present) members of the Security Service. Some of these references relate to incidents, operations, investigations and other matters which have not previously been made public.’
The affidavit went on to state that no authority to disclose the information contained in the manuscript had previously been given, that the disclosure would constitute a breach of confidentiality owed to the Crown and that if publication took place the conduct of investigations and operations might be prejudiced and put at risk.
It is not surprising that an ex parte injunction was granted. The comment, already made, that an interlocutory injunction could have been obtained against Chapman Pincher to restrain publication of Their Trade is Treachery is underlined. After the ex parte injunction had been granted discussions took place between the author and those acting for the Attorney General. Deletions from the manuscript were agreed on. On 19 November 1982 the action was disposed of by a consent order whereunder the author undertook not to publish the manuscript otherwise than in the version which had been agreed between the parties. The contents of the book, as published, resulted from that agreement. Sir Robert’s evidence was that the government had taken the view that no
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legal objection to the contents could be maintained, notwithstanding that it was clear from the context that the information must originally, unless invented, have come from an insider.
(vi) On 16 July 1984 the Granada television programme ‘The Spy Who Never Was’ was broadcast at 8.30 pm. The broadcast was preceded by an article in the Times of the same day in which the programme was discussed. The article was entitled ‘Security Head was a Soviet Agent’. The programme consisted of a long interview with Mr Wright who expressed his views on the extent and continuing problems of Soviet penetration of MI5. The events and matters dealt with included the MI5 investigation of Mr Mitchell, certain evidence which was alleged to point to Sir Roger Hollis having been a Soviet agent and a report which had been made by Sir Burke Trend to the then Prime Minister, Mr Harold Wilson MP in 1974. The Trend Report had been referred to both in Their Trade is Treachery and in A Matter of Trust. Other matters relating to Soviet penetration of MI5 were also discussed in the course of the interview. In addition, in the interview, Mr Wright gave details of an MI5 operation ‘Party Piece’, alleged to have taken place in 1955, whereby a flat was burgled for the purpose of obtaining membership files of the Communist Party of Great Britain. So far as I know this allegation had not previously been publicly made. Further, a number of persons were, in the course of the interview, named by Mr Wright as members or ex-members of the security services.
Sir Robert agreed in cross-examination that the broadcasting of the interview with Mr Wright had disclosed a good deal of information, disclosure of which he regarded as damaging to national security. He gave evidence of why it was that no steps had been taken to attempt to prevent the broadcast taking place.
He said that the security service had learnt in May 1984 that Mr Wright was proposing to participate in a World in Action programme on Granada TV. By 3 July the service learnt that the programme would take the form of an interview with Mr Wright. It was understood that Mr Wright would press for a further investigation of the allegation that Sir Roger Hollis was a Soviet agent. Sir Robert said, however, that legal action for an injunction was not possible because of the need to protect the source of MI5’s information. He said that the government had no usable knowledge until the morning of 16 July, when the article to which I have referred appeared in the Times. There was a hurried discussion between the Treasury Solicitor and representatives of MI5 from which emerged a decision not to take legal action to prevent the broadcast taking place. Sir Robert was not a party to that discussion and made it clear that he regarded the decision as a mistake. He was, therefore, unable to give at first hand the reasons why the decision was taken. His understanding was that the pressure of time and the anticipation of resolute opposition from Granada TV influenced the decision. Be that as it may, the government was in a position to have applied for an injunction to restrain the broadcast. It did not do so. The broadcast took place and apparently confidential information was publicly disclosed.
There was, however, a background to the broadcast of which Sir Robert was unaware. Evidence was given before me by one of the co-producers of the programme, Mr John Ware. He told me that the interview with Mr
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Wright was filmed in February 1984. Mr Ware was anxious to present a balanced programme which would include points of view opposed to those of Mr Wright. This was particularly so in connection with Mr Wright’s views about Sir Roger Hollis. Mr Ware told me that on 2 April 1984 he had approached a person known to him to be an ex-senior officer in MI5 and to have been Mr Wright’s immediate superior from 1964 to 1970. He said he had told this person about the programme and the allegations made by Wright in the interview which had been filmed and that he wanted a point by point rebuttal of Mr Wright’s allegations from someone in a position to give that rebuttal. The person in question agreed to take up the matter with MI5. Later, said Mr Ware, he contacted the person again to discover the result of the representations he had said he would make. Mr Ware was told that the response from MI5 was that the service was aware that Granada TV had filmed an interview with Mr Wright, that the decision had been taken to let the proposed broadcast take place and that authority to this person to appear on the programme in order to deal with Mr Wright’s allegations had been refused. Mr Ware told me that he persevered with his efforts to include in the programme someone who could counterbalance Mr Wright’s views. He said that he and his co-producer raised the matter with a number of ex-officers of MI5 but without success. In particular, Mr Ware told me, he approached an ex-Director General of MI6 and asked him to intercede with MI5 and endeavour to persuade those in authority to change their mind and authorise the appearance on the programme of some suitable person. This approach took place, he told me, in mid-June 1984. A report came back to Mr Ware shortly afterwards to the effect that the answer from MI5 was still ‘No’.
The relevance of these unsuccessful approaches made by Mr Ware to obtain some authorised MI5 voice on the programme is, I think, twofold. First, MI5’s prior knowledge of the programme did not need to be attributed to a confidential source. The difficulty said to have been the reason why on, or shortly after, 3 July 1984 an injunction to restrain the broadcast taking place was not sought, seems to have been non-existent. Second, some official participation in the programme would surely have enabled at least some of the damage to national security said to have attended the disclosures made by Mr Wright to have been mitigated.
No action, following the broadcast of the programme, was taken by the Attorney General to prevent a repeat of the broadcast. The programme was broadcast again in December 1986. Twice, therefore, the information disclosed by Mr Wright in the course of his interview has been placed before the public without any attempt at interference by the government.
(vii) I have described the circumstances in which Their Trade is Treachery came to be published in 1981 and, in very broad outline, the contents of the book. In October 1984 Chapman Pincher published another book, Too Secret Too Long. This book has been described as a rehash of Their Trade is Treachery. The description, although somewhat discourteous, is sufficiently accurate to suffice for present purposes. The contents of the book, like the contents of Their Trade is Treachery, must, unless invented, have come from insider sources. The book, indeed, includes some 50 pages identifying the sources of the information contained in the book. There are instances in which the source is identified as ‘confidential information’; others where the source is identified as ‘confidential information from former MI5 officer’. There are several instances in which the source is identified as a named person, not stated to be but by now known to be a former MI5 or MI6 officer. In the introduction to the book, the author attributes some of the information to ‘Secret Service officers whom I have consulted … ' In addition, the book contains a postscript stating:
‘Since this book was completed, Peter Wright, the former MI5 counter-intelligence officer, has not only confirmed publicly much of what appeared in Their Trade is Treachery but has provided a 150 page document confirming and extending the rest.’
The reference to public confirmation is presumably a reference to what was said by Mr Wright in the course of his interview broadcast by Granada TV on 16 July 1984. The ‘150 page document’ is a reference to a dossier compiled by Mr Wright in 1984 and to which I will later refer.
(viii) On 8 March 1985 a programme was broadcast on Channel 4 entitled ‘MI5’s Official Secrets’. In advance of the programme the intention to broadcast was known and the Attorney General made an announcement that no proceedings would be taken against anyone connected with the programme. The programme dealt with allegations that members of MI5 broke the rules imposed by the Maxwell Fyfe Directive under which MI5 was supposed to operate. It incorporated an interview with an MI5 officer, Cathy Massiter, who was described as ‘an intelligence officer who actually ran MI5’s investigation into CND’. In the course of the interview Cathy Massiter made allegations
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as to the manner in which MI5 investigated members of the National Council for Civil Liberties, trade unions, industrial disputes and the Campaign for Nuclear Disarmament.
(ix) In 1986 a book called Conspiracy of Silence written by Barrie Penrose and Simon Freeman was published. It dealt mainly with the Anthony Blunt story but examined also the defection of Burgess, Philby and Maclean. It contains direct quotations from and attributions to former members of the security services. It names as members of the security services some 46 people. It claims to be insider sourced. It must have been unless its contents were invented.
The wearisome reference to these publications and broadcasts has been necessary for three reasons. First, it demonstrates the extent to which information contained in Spycatcher had already been placed before the public. Second, it demonstrates the extent to which that state of affairs has resulted from deliberate decisions taken by the government not to interfere. I have in mind A Matter of Trust, Their Trade is Treachery, ‘The Spy Who Never Was’ and Too Secret Too Long. Third, it demonstrates the government’s previous tolerance of authors or broadcasters who, claiming insider sources, have placed apparently confidential information before the public.
Finally, in this section of my judgment, I want to describe the previous inquiries that have taken place into the two allegations in Spycatcher that have received the most attention, namely, the allegations regarding Sir Roger Hollis and the allegation of activities by certain MI5 officers with the intention of destabilising the Harold Wilson administration and of surveillance of Mr Harold Wilson.
The allegations against Sir Roger Hollis
As the summary I have given of the various books and broadcasts has indicated, these allegations have been in circulation for some time. They arose out of the Burgess, Maclean and Philby defections and the unmasking of Blunt. The suspicion was expressed that there might be yet another Soviet agent in the security services and a high placed one at that.
Mr Wright, before his resignation from MI5 in 1976, entertained suspicions of Sir Roger Hollis. He expressed his suspicions and the reasons for them to persons in authority within the security services, or so he says in Spycatcher. But he was not satisfied with the internal inquiries which were made into the matter. His complaint in Spycatcher was not that no investigations were made but that such investigations as were made were inadequate.
In 1974 Sir Burke Trend, who had previously been Cabinet Secretary, was asked by the then Prime Minister, Mr Harold Wilson MP, to review the investigations which had been undertaken of Soviet penetration of the security services. Sir Burke Trend’s inquiry took about a year, after which he made a report to the Prime Minister. The report has never been published. None the less, what purport to be its findings were described in A Matter of Trust, Their Trade is Treachery and Too Secret Too Long.
The revelation that Anthony Blunt was a traitor, the so-called ‘fourth man’, brought the matter of Soviet penetration of the security services once more to public attention. A long statement was made on the matter by the Prime Minister, Mrs Margaret Thatcher MP, on 21 November 1979. At the end of her statement, the Prime Minister said (974 HC Official Report (5th series) col 409):
‘… the events of this case began well over 40 years ago. Many of the principal figures concerned, some of whom I have mentioned, have long since retired, and some have died. For obvious reasons, it is therefore not possible, and never will be, to establish all the facts accurately.’
In her statement to the House of Commons on 26 March 1981, occasioned by the publication of Their Trade is Treachery and the allegations contained therein concerning, inter alios, Sir Roger Hollis, the Prime Minister referred to the previous investigations that had been carried out within the security services and to Lord Trend’s review. She corrected the version of Lord Trend’s conclusions, purported to have been given in Their
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Trade is Treachery, and said (1 HC Official Report (6th series) 1080):
‘He reviewed the investigations of the case and found that they had been carried out exhaustively and objectively. He was satisfied that nothing had been covered up. He agreed that none of the relevant leads identified Sir Roger Hollis as an agent of the Russian intelligence service, and that each of them could be explained by reference to Philby or Blunt.’
Then after a few lines I need not read, the Prime Minister went on:
‘Lord Trend, with whom I have discussed the matter, agreed with those who, although it was impossible to prove the negative, concluded that Sir Roger Hollis had not been an agent of the Russian intelligence service.’
In response to a question from Sir Harold Wilson, who, as Prime Minister, had commissioned the Trend Report, the Prime Minister said (1 HC Official Report (6th series) col 1083): ‘It was an exhaustive inquiry, in that it examined all the documents and also interviewed people.’
In 1984 Mr Wright prepared a 150-page dossier setting out his beliefs about Sir Roger Hollis and his reasons for them. He supplied a copy of this dossier to Sir Anthony Kershaw MP. He did so because he hoped that the contents would persuade Sir Anthony to give publicity in the House of Commons to his allegations. But Sir Anthony, instead, very properly passed the dossier over to Sir Robert Armstrong so that the government could consider its contents. Sir Robert said in evidence that the contents were investigated and considered very carefully by the security service. I have no reason to doubt that that was so.
The allegations regarding Mr Harold Wilson MP
These allegations had been made in various publications and places before the publication of Spycatcher. They were made in a book Inside Story written by Chapman Pincher and published in 1978 and were repeated in Their Trade is Treachery and Too Secret Too Long. In July 1977 allegations appeared in the press that MI5 had put 10 Downing Street under electronic surveillance during Mr Wilson’s tenure of office as Prime Minister. These allegations led to questions in the House of Commons. The then Prime Minister, Mr James Callaghan MP, responded by conducting an inquiry into the allegations and on 23 August 1977 a press notice was issued by Downing Street in these terms:
‘The Prime Minister has conducted detailed inquiries into the recent allegations about the Security Service and is satisfied that they do not constitute grounds for lack of confidence in the competence and impartiality of the Security Service or for instituting a special inquiry. In particular, the Prime Minister is satisfied that at no time has the Security Service or any other British intelligence or security agency, either of its own accord or at someone else’s request, undertaken electronic surveillance in 10 Downing Street or in the Prime Minister’s room in the House of Commons.’
The Home Secretary concurred in the conclusions reported in the press notice.
The allegations contained in Spycatcher of activities by certain MI5 personnel, unauthorised by the Director-General, to undermine the Wilson administration went beyond the allegations of electronic surveillance made in 1977 that had been the subject of the inquiry ordered by Mr Callaghan. On 6 May 1987 the matter was raised in the House of Commons and a statement was made by the Prime Minister, Mrs Margaret Thatcher MP. The Prime Minister referred to the 1977 allegations and inquiry and said (115 HC Official Report (6th series) col 724):
‘I can, however, tell the House that the director-general of the Security Service has reported to me that, over the last four months, he has conducted a thorough
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investigation into all these stories, taking account of the earlier allegations and of the other material given recent currency. There has been a comprehensive examination of all the papers relevant to that time. There have been interviews with officers in post in the relevant parts of the security service at that time, including officers whose names have been made public. The director-general has advised me that he has found no evidence of any truth in the allegations. He has given me his personal assurance that the stories are false. In particular, he has advised me that all the security service officers who have been interviewed have categorically denied that they were involved in, or were aware of, any activities or plans to undermine or discredit Lord Wilson and his Government when he was Prime Minister. The then director-general has categorically denied the allegation that he confirmed the existence within the security service of a disaffected faction with extreme Right-wing views. He has further stated that he had no reason to believe that any such faction existed. No evidence or indication has been found of any plot or conspiracy against Lord Wilson by or within the security service. Further, the director-general has also advised me that Lord Wilson has never been the subject of a security service investigation or of any form of electronic or other surveillance by the security service.’
Counsel for the Attorney General in cross-examination asked each editor in turn if he accepted that the contents of this statement were factually correct. Each editor said that he did.
4. THE PARTIES CASES
(1) The Crown’s case
The Crown’s case against the newspapers is built step by step by means of these propositions. (1) Mr Wright owed a duty to the Crown not, unless authorised to do so, to disclose any information obtained by him in the course of his employment in MI5. The duty derived from the nature of his employment in MI5 and the requirements of national security. (2) Mr Wright broke that duty by writing Spycatcher and submitting it for publication in 1985. (3) The publication of the book in July 1987 and its subsequent dissemination represented a further and continuing breach by Mr Wright of that duty. (4) The three newspapers and their respective editors have at all material times well known that the contents of Spycatcher consisted of information obtained by Mr Wright in the course of his employment in MI5. (5) They knew, therefore, all the facts which imposed on Mr Wright his duty not to disclose that information and knew, or must be taken to have known, that the disclosure by Mr Wright of that information was a breach of his duty to the Crown. (6) Accordingly, the newspapers, when the information disclosed by Mr Wright came into their possession, themselves came under a duty not to disclose the information, corresponding to the duty which had been owed by Mr Wright and which he had broken. (7) Mr Wright could not by his own continuing breach of his duty not to disclose the information, ie by the United States publication and the subsequent dissemination of the book, rid the information of its confidential character or free himself of his duty not to disclose the information. (8) Today, in December 1987, no less than in June 1986, the information contained in Spycatcher is in the possession of the three newspapers because of Mr Wright’s original and continuing breach of duty. It follows that the newspapers are no more entitled now than they were in June 1986 to disclose that information. An alternative way of putting this proposition is that confidential information disclosed to third parties does not thereby lose its confidential character if the third parties know that the disclosure has been made in breach of a duty of confidence.
The Attorney General relies on propositions 1 to 6 in support of his case against the Guardian and the Observer as at the date in June 1986 when the action against those two newspapers was commenced. The same propositions are relied on in support of the case
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against the Sunday Times as at 13 July 1987 when the action against the Sunday Times was commenced. Propositions 7 and 8 are relied on by the Attorney General in support of the case against all three newspapers today. Notwithstanding the worldwide dissemination of the book following the United States publication, the newspapers know that that represents a continuing breach by Mr Wright of his duty to the Crown, and cannot treat the information as freed by Mr Wright’s breach of duty from its confidential character. They remain, therefore, themselves under a duty not to disclose the information further.
For these reasons permanent injunctions against disclosure of the information ought, it is argued, to be granted against the newspapers, notwithstanding the extent to which the book has been distributed and is freely available outside this country.
In addition to injunctions, the Attorney General has claimed against the Sunday Times an account of profits. No such claim is made against the Guardian or the Observer. The distinction is this. The Guardian and the Observer propose to report and comment on the contents of Spycatcher, with verbatim quotations as may be necessary for that purpose. But the Sunday Times proposes to serialise the book and has, indeed, paid a considerable sum for the right to do so.
The logic of the distinction seemed to me at an early stage in the hearing to be based on copyright. Mr Wright wrote the book, so he is the original proprietor of the copyright. He has, presumably, either assigned the copyright to the Australian publishers or granted them an exclusive licence (it does not matter which) and, through the publishers, the Sunday Times has acquired a licence to serialise the book. The Guardian and the Observer have no such licence. They are, however, entitled to quote verbatim from the book provided they keep within the ‘fair dealing’ defence made available by s 6 of the Copyright Act 1956. I had supposed that the claim against the Sunday Times for an account would be based on the proposition that in equity the Crown should be treated as the owner of the copyright. Prima facie, this approach would seem to have some merit. If Mr Wright in writing the book was acting in breach of a continuing duty of confidence and fidelity that he owed to the Crown, there would, in my view, be a strong argument for regarding the product of the breach of duty as belonging in equity to the Crown. If that were so, and on the footing that the Sunday Times could not claim to be a bona fide purchaser without notice of the Crown’s equity, it would follow that the Sunday Times would be accountable to the Crown for any profit it made in serialising Spycatcher. It would also follow that the Crown would, in this jurisdiction at least, be entitled to prevent further publication of the book by anyone who could be shown to be on notice of the Crown’s equity. The Crown would be entitled to do so on straightforward proprietary grounds. The equitable owner of copyright in a book can choose to suppress the book and forego any profit thereform if he chooses.
However, counsel for the Attorney General, both in the course of his opening and in the course of his reply, expressly disavowed any claim by the Crown to be entitled in equity to the copyright in the book. It would, therefore, be wrong of me to pursue the point any further. The disavowal has, however, the consequence that the claim against the Sunday Times to an account of profits must be based on some other proprietary interest. The alternative is to base the claim on the use by the Sunday Times of confidential information which, in equity, must be regarded as belonging to the Crown. That basis for the claim would, if it is sound, apply equally, in my view, to the Guardian and to the Observer. Each newspaper has, if the Crown’s case is right, made an unauthorised use of confidential information belonging to the Crown. If the basis of the claim for an account of profits is misuse of confidential information, the distinction between the relief claimed against the Guardian and the Observer and that claimed against the Sunday Times, in my opinion, lacks logic. However, the account of profits claimed against the Sunday Times is, although persisted in, a very minor part of the case.
In describing the Crown’s case, it may come as a surprise that I have so far said next to nothing about national security. A fear of damage to national security, if publication of
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Spycatcher and disclosure of the information contained therein is not restrained, has been the main theme both of Sir Robert Armstrong’s evidence and of the submissions of counsel for the Attorney General. In the way counsel for the Attorney General puts the Crown’s case, national security and its requirements comes in at a very early and critical stage. It determines the breadth and the duration of the duty of confidence placed on Mr Wright by his employment in MI5. It is basic, therefore, to proposition 1. It underlies each successive proposition. It also underlies the need, in the Crown’s view, for permanent injunctions. It undergoes, however, a curious metamorphosis. Initially, for the purposes of proposition 1, it is based on a need for a secret service to be secret. MI5 is a service essential to national security. Its efficiency depends on its operations, affairs and personnel being kept secret. So its personnel must accept a potentially life-long obligation to secrecy. This is a national security case that it is easy to understand. The information contained in Spycatcher as a whole was, let it be assumed, still secret and confidential when Mr Wright wrote the book. But by reason of the publication of the book in the United States and its subsequent worldwide dissemination, the contents have, the Attorney General accepts, ceased to be secret within any normal meaning of that word. The Crown does not now put its case for permanent injunctions on the national security requirement that MI5 secrets should be kept secret. That would have been the basis in June 1986, and probably also in July 1987. It is not and cannot be so now.
The permanent injunctions to restrain the further publication or disclosure of information that is no longer secret are sought for quite different national security reasons. The case is put thus. National security requires an efficient MI5 and unless permanent injunctions are granted MI5 and its efficiency will be damaged in the following ways: the morale of loyal members of the service will suffer; other members of the service may be tempted to breach their duty by publishing memoirs; publishers of illegal memoirs will be encouraged; media pressure on other members of the service to reply to allegations in Spycatcher will mount; security services in other countries will lose confidence in MI5; and potential informers will lose confidence in MI5. In short, the permanent injunctions are sought not in order to preserve the secret character of information that ought to be kept secret but in order to promote the efficiency and reputation of MI5. I must consider later the weight to be given to these national security factors now relied on. Suffice, for the moment, to notice the contrast with the national security reasons that would normally be prayed in aid to justify an injunction against disclosure of secret information.
(2) The newspapers’ case
The newspapers do not dispute that Mr Wright, by reason of his employment in MI5, came under a duty to the Crown of non-disclosure of information. They do not, however, accept that the duty was of the breadth and duration contended for by the Crown. But the newspapers, naturally, have concentrated not on the duty owed by Mr Wright and his breach of it but on the nature and extent of the duty falling on themselves. There were three main contentions.
(1) Some of the information in Spycatcher, if true, disclosed that members of MI5 in their operations in England had committed serious breaches of domestic law. The bugging of foreign embassies is an example. Unlawful entry into private premises is another. Most serious of all is the allegation that members of MI5 embarked, albeit unofficially, on activities designed to destabilise the administration of Mr Harold Wilson. The newspapers contend that the duty of non-disclosure, to which newspapers coming into the unauthorised possession of confidential state secrets may be subject, does not extend to allegations of serious iniquity of this character. This is the so-called ‘iniquity’ defence. The same defence applies to Mr Wright’s allegation that Sir Roger Hollis or Mr Mitchell was a spy. A matter so serious as that the Director General or Deputy Director General of MI5 was a spy cannot be kept suppressed by enforcement of a duty of confidence.
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(2) Whatever was the position in June 1986, when the action against the Guardian and the Observer was commenced, or in July 1987, when the action against the Sunday Times was commenced, the position today is that Spycatcher has been published in the United States, that over a million copies have been distributed and that dissemination of the information contained therein has taken place on a worldwide scale. Anyone in this country who wants the book can obtain a copy. Thousands of people in this country have read the book. In these circumstances, whatever duty newspapers and others may originally have had to refrain from disclosing the information contained in the book, the information has lost its confidential or secret character and the newspapers’ duty has evaporated and gone.
(3) A more general point is that the duty of non-disclosure sought to be enforced against the newspapers makes unacceptable inroads into freedom of speech and freedom of the press. Counsel for the Sunday Times prayed in aid in this connection art 10 of the European Convention on Human Rights to which the British government adheres. The Attorney General could not, he argued, justify a duty of non-disclosure which conflicted with its treaty obligations.
Just as Sir Robert Armstrong’s evidence had concentrated on the damage to the efficiency of MI5 that, in his view, would follow on the Crown’s failure to obtain permanent injunctions, so the three editors in their evidence challenged the weight of the national security factors relied on by Sir Robert and emphasised the legitimate public interest in the allegations made by Mr Wright and the implicatons for freedom of speech and freedom of the press if permanent injunctions were granted.
(3) The Crown’s reply
(1) The Attorney General accepted the existence of an ‘iniquity’ defence and accepted that some of the allegations contained in Spycatcher would, if true, represent iniquity that warranted disclosure. But the iniquity defence, it was argued, did no more than to permit disclosure to a proper recipient. It did not justify wholesale disclosure to the public at large. In relation to the allegation in Spycatcher of attempts by MI5 members to undermine the Wilson administration, Mr Wright’s proper course was to report the matter to some proper authority. The Director General, the Home Secretary, the Prime Minister, the Cabinet Secretary would each have been a proper recipient of the complaint. Sir Robert Armstrong did, in evidence, accept that the time might arrive when a member of one of the security services would be justified in disclosing publicly a serious iniquity that had come to his attention in the course of his duties. But that course, Sir Robert emphasised, would be very much a matter of last resort after all proper avenues had been tried and had failed. He could not envisage that, in practice, that point could ever be reached. It had not been reached in the case of any of the allegations made by Mr Wright.
(2) To the newspapers’ defence that the information in Spycatcher was no longer either secret or confidential and that permanent injunctions could not replace the genie in the bottle and could now serve no useful purpose, two answers have been given. First, propositions 7 and 8 were repeated. Second, Sir Robert’s national security case based on preserving the efficiency of MI5 was relied on. Even if the information were no longer secret or confidential, none the less permanent injunctions were required in order to preserve the efficiency of MI5.
The respective cases of the Crown and the three newspapers do not depend on any contested version of the facts. The best part of five days of the hearing was occupied by the time spent in the witness box by Sir Robert Armstrong, Mr Trelford, Mr Preston and Mr Neil. The editors gave evidence of the circumstances in which the offending editions of their newspapers had been published. That was evidence of fact. Sir Robert gave evidence of the circumstances, from the government’s point of view, in which A Matter of Trust and Their Trade is Treachery had come to be published and ‘The Spy Who Never Was’ had been broadcast. That, too, was evidence of fact, albeit some of it secondhand. But the bulk of their respective evidence was not evidence of fact. It was a justification of
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their stances in this litigation. Sir Robert was seeking to justify the Attorney General’s desire to prevent any further dissemination of the book or the information in it. He was speculating, informed speculation but speculation nonetheless, on the consequences of further dissemination. The editors were seeking to justify their decision to publish. They challenged the accuracy of Sir Robert’s speculation. But at the core of the disagreement between Sir Robert and the editors was a clash of rival philosophies. Sir Robert, on behalf of the government, was concerned to protect the efficiency of MI5. Whenever the achievement of that end became inconsistent with freedom of speech or freedom of the press, the latter lost. This was particularly apparent when Sir Robert was dealing with questions from counsel for the Sunday Times about the practice in the United States when ex-CIA members want to publish information about their work in the service. An absolute bar based on the enforcement of a duty of confidence or secrecy is excluded by the First Amendment to the United States Constitution. So a practice has been adopted of requiring the ex-CIA member to submit his manuscript for vetting by the CIA before publication. Deletion can be sought of sensitive or secret material damaging to United States national security. Some discussion between author and authorities no doubt takes place as to what is to be deleted but, in practice, eventually agreement is reached on what may be published. Sir Robert was asked why a similar practice should not be adopted in this country. His answer was that the vetted work, as published in the United States, would nevertheless be likely to contain information about the CIA that the CIA would prefer was not made public. But the CIA had to put up with the First Amendment as (although not as Sir Robert put it) a necessary evil. Sir Robert would not accept that any freedom of speech or of publication should be permitted so as to allow any information about the security service to be discussed publicly by an insider. No question of a balance between the proper requirements of national security, on the one hand, and of freedom of speech or of the press, on the other hand, arose. I found myself unable to escape the reflection that the absolute protection of the security services that Sir Robert was contending for could not be achieved this side of the Iron Curtain.
The editors, on the other hand, and, it seemed to me, Mr Trelford in particular, regarded as unacceptable the suggestion that prior restraints might, in the interests of national security, be placed on newspapers’ freedom to publish what they wished. Prior restraints were regarded as an unacceptable fetter on the freedom of the press and on editorial discretion.
In my opinion, neither view is acceptable. Society must pay a price both for freedom of the press and for national security. The price to be paid for an efficient and secure security service will be some loss in the freedom of the press to publish what it chooses. The price to be paid for free speech and a free press in a democratic society will be the loss of some degree of secrecy about the affairs of government, including the security service. A balance must be struck between the two competing public interests. Each side, the government on the one hand and the press on the other, is entitled to assert its view of the relative values of these particular interests and of the extent to which one must give way to the other. It is open to Parliament, if it wishes, to impose guidelines. The United States Congress has done so in the form of the First Amendment. Parliament has not. And so it is for the courts to strike the balance. It is, in my judgment, unacceptable that newspapers and their editors should be judges in their own cause of the restraints on freedom of the press that the national security may require. It is equally unacceptable that the government’s assertion of what national security requires should suffice to decide the limitations that must be imposed on freedom of speech or of the press. I repeat that, in my judgment, there is a balance to be struck and the courts must strike it. I now turn to examine the principles of law relied on in this case and that I must apply in striking the balance I have mentioned.
5. THE LAW
(1) The duty of confidence
The Crown’s case against the newspapers is built on the duty owed by Mr Wright.
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That duty has been described throughout the case as a duty of ‘confidence’. This is a natural description, given the analogies that have been drawn with duties of confidence arising out of the imparting and receiving of confidential information in commercial cases and in domestic cases: see eg Margaret, Duchess of Argyll v Duke of Argyll [1965] 1 All ER 611, [1967] Ch 302. But in cases like the present the description is, in my opinion, apt to be misleading. The duty contended for by the Crown would apply to information which had not been imparted to Mr Wright by anyone, but which he himself had unearthed by his own endeavours. There would be no ‘confider’ or ‘confidant’ in relation to information of that character. The duty would apply also to information which had been imparted to Mr Wright by someone to whom he owed no duty of confidence at all. The duty contended for would, prima facie, apply to all information acquired by Mr Wright in his capacity as a member of MI5. The duty is more a duty of secrecy than a duty of confidence.
Counsel for the Attorney General has drawn heavily on the cases in which a duty of confidence in a commercial context has been held to exist. In the commercial cases one of the questions that has often arisen has concerned the nature of the information or documents entitled to protection under the duty of confidence. The most recent examination of this question was by the Court of Appeal in Faccenda Chicken Ltd v Fowler [1986] 1 All ER 617, [1987] Ch 117. Neill LJ, giving the judgment of the court, said ([1986] 1 All ER 617 at 625, [1987] Ch 117 at 135–136):
‘It is not necessary, however, for us for the purpose of this judgment to travel this ground again. It is sufficient to set out what we understand to be the relevant principles of law. Having considered the cases to which we were referred, we would venture to state these principles as follows. (1) Where the parties are, or have been, linked by a contract of employment, the obligations of the employee are to be determined by the contract between him and his employer: cf Vokes Ltd v Heather (1945) 62 RPC 135 at 141. (2) In the absence of any express term, the obligations of the employee in respect of the use and disclosure of information are the subject of implied terms.’
I can omit (3), but (4) is important:
‘(4) The implied term which imposes an obligation on the employee as to his conduct after the determination of the employment is more restricted in its scope than that which imposes a general duty of good faith. It is clear that the obligation not to use or disclose information may cover secret processes of manufacture such as chemical formulae (see Amber Size and Chemical Co Ltd v Menzel [1913] 2 Ch 239), or designs or special methods of construction (see Reid & Sigrist Ltd v Moss and Mechanism Ltd (1932) 49 RPC 461), and other information which is of a sufficiently high degree of confidentiality as to amount to a trade secret. The obligation does not extend, however, to cover all information which is given to or acquired by the employee while in his employment, and in particular may not cover information which is only “confidential” in the sense that an unauthorised disclosure of such information to a third party while the employment subsisted would be a clear breach of the duty of good faith.’
After referring to the judgment of Cross J in Printers and Finishers Ltd v Holloway [1964] 3 All ER 731, [1965] 1 WLR 1, Neill LJ continued ([1986] 1 All ER 617 at 626, [1987] Ch 117 at 137):
‘The same distinction is to be found in E Worsley & Co Ltd v Cooper [1939] 1 All ER 290, where it was held that the defendant was entitled, after he had ceased to be employed, to make use of his knowledge of the source of the paper supplied to his
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previous employer. In our view it is quite plain that this knowledge was nevertheless “confidential” in the sense that it would have been a breach of the duty of good faith for the employee, while the employment subsisted, to have used it for his own purposes or to have disclosed it to a competitor of his employer. (5) In order to determine whether any particular item of information falls within the implied term so as to prevent its use or disclosure by an employee after his employment has ceased, it is necessary to consider all the circumstances of the case. We are satisfied that the following matters are among those to which attention must be paid. (a) The nature of the employment. Thus employment in a capacity where “confidential” material is habitually handled may impose a high obligation of confidentiality because the employee can be expected to realise its sensitive nature to a greater extent than if he were employed in a capacity where such material reaches him only occasionally or incidentally. (b) The nature of the information itself. In our judgment the information will only be protected if it can properly be classed as a trade secret or as material which, while not properly to be described as a trade secret, is in all the circumstances of such a highly confidential nature as to require the same protection as a trade secret eo nomine. The restrictive covenant cases demonstrate that a covenant will not be upheld on the basis of the status of the information which might be disclosed by the former employee if he is not restrained unless it can be regarded as a trade secret or the equivalent of a trade secret: see for example Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 710, [1916–17] All ER Rep 305 at 317 per Lord Parker and Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026 at 1037, [1977] 1 WLR 1472 at 1484 per Megaw LJ.’
Neill LJ later said ([1986] 1 All ER 617 at 627, [1987] Ch 117 at 138):
‘It is clearly impossible to provide a list of matters which will qualify as trade secrets or their equivalent. Secret processes of manufacture provide obvious examples, but innumerable other pieces of information are capable of being trade secrets, though the secrecy of some information may be only short-lived. In addition, the fact that the circulation of certain information is restricted to a limited number of individuals may throw light on the status of the information and its degree of confidentiality.’
There are two particular points which emerge from Neill LJ’s judgment that illustrate the nature of the duty of confidence.
First it is clear that an express contractual duty of confidence will not necessarily be enforceable. It may be in restraint of trade or may represent an unreasonable fetter on the ability of the ex-employee to earn his living in the manner of his choosing. The information may, in the eyes of the employer, be confidential. It may be information disclosure of which during the currency of the employment would represent a breach of the employee’s express or implied duty of fidelity. But, none the less, express restraints on use or disclosure of the information after the termination of the employment will not necessarily be enforceable. As in all restraint of trade cases the court will balance competing interests. On the one hand there will be the legitimate commercial interest of the employer to have his confidential information, on which the goodwill of his business may depend, protected. On the other hand there will be the private interest of the ex-employee in being allowed to exploit, for his own benefit and as he may see fit, the knowledge he has acquired during his employment. In many cases, of course, the answer will be obvious.
Where there is no express term and an implied term must be relied on to protect the allegedly confidential information, as in Faccenda Chicken Ltd v Fowler [1986] 1 All ER 617, [1987] Ch 117, the juridical nature of the question at issue is, in my opinion, the same. The court would obviously never, by means of an implied term, impose on an ex-employee a duty which would have been unenforceable if it had been incorporated into
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an express term. But in deciding on the ambit of the implied term the same considerations will, in my view, be relevant as would be relevant to an examination of whether an express term was enforceable. The passages set out in paras 5(a) and (b) in Neill LJ’s judgment ([1986] 1 All ER 617 at 626, [1987] Ch 117 at 137) seem to me to bear this out.
I conclude, therefore, that in cases with a commercial content, the ambit of the duty of confidentiality that will be enforced against an ex-employee will depend, whether the obligation is imposed by express or implied term, on the court’s judgment as to the balance to be struck between the respective interests of the employer and ex-employee.
Not all the confidential information cases in a commercial context are cases involving an employer and ex-employee. Seager v Copydex Ltd [1967] 2 All ER 415, [1967] 1 WLR 923 involved confidential information about the design of a carpet grip disclosed in confidence to the defendant in the course of negotiations with a view to the defendant manufacturing the carpet grip. The negotiations came to nought but the defendant subsequently used the confidential information for the purpose of manufacturing a rival carpet grip. The Court of Appeal held that the defendant had infringed its duty of confidence and ordered an account of profits. Lord Denning MR said ([1967] 2 All ER 415 at 417, [1967] 1 WLR 923 at 931):
‘The law on this subject does not depend on any implied contract. It depends on the broad principle of equity that he who has received information in confidence shall not take unfair advantage of it. He must not make use of it to the prejudice of him who gave it without obtaining his consent.’
In Moorgate Tobacco Co Ltd v Philip Morris Ltd (1984) 56 ALR 193 it was alleged that the plaintiff had sought to interest the defendant in manufacturing and distributing low tar cigarettes under the name ‘Kent Golden Lights’. The defendant then applied in its own name for registration of the name ‘Golden Lights’ as a trade mark. The plaintiff sued for an injunction on the ground, inter alia, that its proposal to market cigarettes under the name ‘Kent Golden Lights’ was confidential information and that this information had been misused by the defendant. The plaintiff failed. Deane J in the High Court of Australia said (at 208):
‘It is unnecessary, for the purposes of the present appeal, to attempt to define the precise scope of the equitable jurisdiction to grant relief against an actual or threatened abuse of confidential information not involving any tort or any breach of some express or implied contractual provision, some wider fiduciary duty or some copyright or trade mark right. A general equitable jurisdiction to grant such relief has long been asserted and should, in my view, now be accepted (see Commonwealth of Australia v John Fairfax & Sons Ltd ((1980) 32 ALR 485 at 491–493)). Like most heads of exclusive equitable jurisdiction, its rational basis does not lie in proprietary right. It lies in the notion of an obligation of conscience arising from the circumstances in or through which the information was communicated or obtained.’
The dicta in these two cases place the origin of the duty of confidence not in contract, express or implied, but in equity. But the ambit of the duty of confidence imposed by equity will depend, in my view, on the same type of judicial approach to the surrounding circumstances of the case as that adopted where implied term is treated as the basis of the duty. As long ago as 1893 the Court of Appeal concluded that there was no distinction between the duty of confidence placed on an agent by implied contract and that imposed on him by equity: see Lamb v Evans [1893] 1 Ch 218.
In the present case there is some doubt whether the relationship between Mr Wright and the Crown is contractual. Counsel have, in my view rightly, treated this as of academic interest only. It is not in dispute that Mr Wright was under a duty of confidence by reason of his employment in MI5 nor is it in dispute that his duty continued after his resignation. The duty, if not contractual, is a duty recognised and imposed by equity, co-extensive
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with the duty that would have been imposed by implied term had the relationship been contractual.
The breadth and duration of the duty that binds ex-officers of MI5 depends, in my judgment, as does the breadth and duration of the duty of confidence in any other context, on all the circumstances of the case. The requirements of national security and the need for secrecy about the affairs and personnel of MI5 are of very great weight indeed. But the breadth and duration of the duty cannot, none the less, be divorced from the circumstances of the particular case. Counsel for the Crown submitted that there was, where the duty of confidence of an ex-MI5 officer was concerned, no balance to be struck. The duty of confidence applied, he said, to all information, however apparently trivial and however much, by reason of disclosures made by others, the information might have become publicly known. I am unable to accept that such an extreme, absolute approach is correct.
The proposition may be tested by a number of examples, some more fanciful than others.
Sir Percy Sillitoe’s autobiography was published with the permission of the authorities. It contained information about the workings of MI5. Could it be argued that, notwithstanding the publication of the autobiography, other MI5 officers were under a duty not to disclose the information therein contained? I think not. In relation to that information there would be no ‘obligation of conscience’.
Suppose an ex-officer desired to mount a campaign against waste in government departments and revealed the quantity of paper used and shredded weekly by MI5. What national security interest would require that information to be suppressed? The same point was made by Kirby P in the New South Wales Court of Appeal, the so-called ‘canteen menu’ point. Could the duty of non-disclosure be thought to apply to the contents of the daily canteen menu in MI5’s London offices?
My selection of examples of trivia to illustrate the point has been deliberately far-fetched. I would readily accept that, in the field of intelligence, of espionage and counter-espionage, of terrorism, subversion and countermeasures thereto, apparently innocuous details may have significance. The line to be drawn between significant information that should not be disclosed and trivial information that can safely be disclosed should normally be drawn by the relevant authorities within the security services themselves. As Lord Diplock said in the GCHQ case, Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935 at 952, [1985] AC 374 at 412:
‘National security is the responsibility of the executive government; what action is needed to protect its interests is, as the cases cited by my noble and learned friend Lord Roskill establish and common sense itself dictates, a matter on which those on whom the responsibility rests, and not the courts of justice, must have the last word. It is par excellence a non-justiciable question. The judicial process is totally inept to deal with the sort of problems which it involves.’
But if the authorities refuse to draw any line at all, they mistake, in my view, the nature of the duty of confidence they seek to enforce.
It is obvious that, as a general proposition, a duty of confidence will not be imposed so as to protect useless information. In McNicol v Sportsman’s Book Stores [1928–35] MacG CC 116 the plaintiff was the originator of a betting system that was based on the age of the moon. Maugham J described the information about the system as ‘confidential’ but refused to restrain a threatened breach of confidence. The ground for the refusal was that the information was ‘perfectly useless’: see [1928–35] MacG CC 116 at 125.
The public accessibility of the information sought to be protected by the duty of confidence is another factor of relevance. In general, a duty of confidence will not extend to protect information which is in the public domain. But here, too, there are and can be no absolutes. In O Mustad & Son v S Allcock & Co Ltd (1928) [1963] 3 All ER 416, [1964]
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1 WLR 109 the plaintiff sought to restrain the defendant from making use of a confidential manufacturing process. After the action had been commenced the plaintiff applied for a patent in respect of the process and a patent specification was published. It was held by the House of Lords that the specification had published the process to the world and that the plaintiff could not restrain the defendant from disclosing or using what had become common knowledge.
In Exchange Telegraph Co Ltd v Central News Ltd [1897] 2 Ch 48 the plaintiff was a news agency which disseminated to subscribers information about the results of horse races. The subscribers were contractually bound to use the information for their private purposes only. Stirling J found that the defendant was surreptitiously obtaining the information, presumably from one of the subscribers, and granted an injunction restraining the defendant from using the information so obtained. The race meetings in question were public race meetings. The results of the races were known to all the members of the public who had attended the races. None the less the information was confidential in the hands of the subscribers and was being misused by the defendant.
Schering Chemicals Ltd v Falkman Ltd [1981] 2 All ER 321, [1982] QB 1 was a more recent case where the confidential information sought to be protected was in the public domain in the sense that it could have been gleaned by a diligent and painstaking search through scientific literature. None the less the defendant, who had not made that search, was restrained from misusing the information.
The question, therefore, whether the public accessibility of the information sought to be protected is fatal to an attempt to restrain the use or disclosure of the information by enforcing a duty of confidence cannot be answered in any absolute terms. The answer will depend on the circumstances of the particular case. It will depend on the nature of the information, the nature of the interest sought to be protected, the relationship between the plaintiff and the defendant, the manner in which the defendant has come into possession of the information and the circumstances in which and the extent to which the information has been made public.
Counsel for the Attorney General argued that the duty which lay on an ex-member of MI5 prevented the ex-member from making any comment, whether by way of confirmation or denial, of any allegation concerning MI5 no matter what the extent to which or the means by which the statement had reached the public domain. I do not accept that this approach is correct.
The cases I have so far mentioned have been cases in which the duty of confidence relied on has arisen in a commercial context. There are relatively few authorities in which the duty of confidence has been discussed in connection with secrets of government. But such cases as there are support, in my opinion, the principle and approach I have endeavoured to state.
A-G v Jonathan Cape Ltd [1975] 3 All ER 484, [1976] QB 752 was the case in which an injunction to restrain publication of the Crossman diaries was sought. In the diaries the author, Mr Richard Crossman, gave details of various confidential discussions at meetings of the cabinet. Lord Widgery CJ refused an injunction. He said ([1975] 3 All ER 484 at 495–496, [1976] QB 752 at 770–771):
‘In these actions we are concerned with the publication of diaries at a time when 11 years have expired since the first recorded events. The Attorney-General must show (a) that such publication would be a breach of confidence (b) that the public interest requires that the publication be restrained, and (c) that there are no other facets of the public interest contradictory of and more compelling than that relied upon. Moreover, the court, when asked to restrain such a publication, must closely examine the extent to which relief is necessary to ensure that restrictions are not imposed beyond the strict requirement of public need … The court should intervene only in the clearest of cases where the continuing confidentiality of the material can be demonstrated.’
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Commonwealth of Australia v John Fairfax & Sons Ltd (1980) 32 ALR 485 concerned the publication by the defendants of a book entitled Documents on Australian Defence and Foreign Policy 1968–1975. The book contained previously unpublished memoranda, assessments, briefings and cables passing between the Australian and Indonesian governments. Mason Jin the High Court of Australia granted an interlocutory injunction restraining the defendant on breach of copyright grounds from publishing but declined to grant an injunction on breach of duty of confidence grounds. Mason J said (at 490):
‘The plaintiff’s case is that it is the owner of the copyright in most of the documents in the book, that they are classified documents which contain confidential information the disclosure of which will in a number of instances prejudice Australia’s relations with other countries, especially Indonesia, and that it has not authorized or consented to publication.’
He then said (at 492–493):
‘The plaintiff had within its possession confidential information comprised in the documents published in the book. The probability is that a public servant having access to the documents, in breach of his duty and contrary to the security classifications, made copies of the documents available to Walsh and Munster or to an intermediary who handed them to Walsh and Munster. In drawing this inference I am mindful that no claim is made that copies of the documents came into the possession of Walsh and Munster with the authority of the plaintiff. No attempt has been made to suggest that the defendants were unaware of the classified nature of the documents or of the plaintiff’s claim that it had not authorized publication. The book records the security classification of many of the documents. Mr Pritchett made it clear to the defendants on Friday evening that, on his view, the material had been obtained without the plaintiff’s authority, if not improperly. Basic to the plaintiff’s argument is the proposition that information which is not “public property and public knowledge”, in the words of Lord Greene MR in Saltman Engineering Co Ltd v Campbell Engineering Co Ltd ((1948) [1963] 3 All ER 413 at 415) is protected by the principle. Even unclassified government information would fall within the protection claimed, so long as it is not publicly known. According to the plaintiff, no relevant distinction is to be drawn between the government and a private person. A citizen is entitled to the protection by injunction of the secrets of his or her private life, as well as trade secrets (see Margaret, Duchess of Argyll v Duke of Argyll ([1965] 1 All ER 611, [1967] Ch 302)). So, with the government, it is entitled to protect information which is not public property, even if no public interest is served by maintaining confidentiality. However, the plaintiff must show, not only that the information is confidential in quality and that it was imparted so as to import an obligation of confidence, but also that there will be “an unauthorised use of that information to the detriment of the party communicating it” (Coco v A N Clark (Engineers) Ltd ([1969] RPC 41 at 47)). The question then, when the executive government seeks the protection given by Equity, is: What detriment does it need to show? The equitable principle has been fashioned to protect the personal, private and proprietary interests of the citizen, not to protect the very different interests of the executive government. It acts, or is supposed to act, not according to standards of private interest, but in the public interest. This is not to say that Equity will not protect information in the hands of the government, but it is to say that when Equity protects government information it will look at the matter through different spectacles. It may be a sufficient detriment to the citizen that disclosure of information relating to his affairs will expose his actions to public discussion and criticism. But it can scarcely be a relevant detriment to the government that publication of material concerning its actions will merely expose it to public discussion and criticism. It is unacceptable, in our democratic society, that there
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should be a restraint on the publication of information relating to government when the only vice of that information is that it enables the public to discuss, review and criticize government action. Accordingly, the court will determine the government’s claim to confidentiality by reference to the public interest. Unless disclosure is likely to injure the public interest, it will not be protected.’
Lord Widgery CJ’s approach in A-G v Jonathan Cape Ltd [1975] 3 All ER 484, [1976] QB 752 and Mason J’s approach in the Fairfax case (1980) 32 ALR 485 were considered by Street CJ in his dissenting judgment in the New South Wales Court of Appeal in the Spycatcher case (see A-G (UK) v Heinemann Publishers Australia Pty Ltd (1987) 75 ALR 353). Having done so, Street CJ said (at 367):
‘Where, as here, the government claim is an assertion of sovereign right to protect the public interest of the State, in contrast to an ordinary claim arising out of a transaction affecting property rights between the government and the other party, the enforceability of the claim will be determined by the approach enunciated by the Chief Justice in Fairfax. Detriment, in the sense of harm to the national interest, not outweighed by countervailing public interest, is the foundational ingredient if the United Kingdom Government is to succeed in enforcing an obligation of confidence against Wright. The essential core of litigation such as this requires a balancing of the government’s assertion of public interest against proved or judicially noticed countervailing considerations of public interest.’
Earlier in his judgment he had said (at 364):
‘In the view that I have formed, doctrines of equity, based as they are on proprietary interests, do not provide any more than a broadly analogous field. The appropriate form of remedy, if one be granted, is equitable in that it is in personam—a remedy directed to restraining Wright’s freedom of action. But the United Kingdom Government’s entitlement is to enforce confidentiality in the public interest. If that claim is made good, the conventionally equitable form in which such relief is cast is no safe guide to the identification of the true nature of the United Kingdom Government’s claim.’
The majority judgments in the New South Wales Court of Appeal did not disagree with the principles expressed by Street CJ in the passages I have cited. I respectfully agree with the Chief Justice’s analysis.
Useful guidance as to the right approach in the present case can, in my view, be drawn from the speeches in the House of Lords in Burmah Oil Co Ltd v Bank of England (A-G intervening [1979] 3 All ER 700, [1980] AC 1090. The issue in question arose out of discovery. The Bank of England disclosed in its list a number of relevant documents in its possession or control but, on government instructions, resisted production of 62 of them. A certificate objecting to production was signed by the chief secretary to the Treasury. In it he expressed his opinion that production of the documents would be injurious to the public interest. The issue before the House of Lords was whether the objections to production of the documents on public interest grounds should be upheld. Lord Wilberforce said ([1979] 3 All ER 700 at 708, [1980] AC 1090 at 1113):
‘Counsel for the Attorney-General did not contend for any such rigorous proposition, ie that a high level public interest can never, in any circumstances, be outweighed. In this I think that he was in line with the middle of the road position taken by Lord Reid in Conway v Rimmer [1968] 1 All ER 874 at 910, [1968] AC 910 at 987 and also with the median views of the members of the High Court of Australia in Sankey v Whitlam (1978) 21 ALR 505: see particularly the judgment of Gibbs ACJ. I am therefore quite prepared to deal with this case on the basis that the courts may, in a suitable case, decide that a high level governmental public interest must give way to the interests of the administration of justice. But it must be clear
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what this involves. A claim for public interest immunity having been made, on manifestly solid grounds, it is necessary for those who seek to overcome it to demonstrate the existence of a counteracting interest calling for disclosure of particular documents. When this is demonstrated, but only then, may the court proceed to a balancing process.’
Lord Edmund-Davies said ([1979] 3 All ER 700 at 719, [1980] AC 1090 at 1127):
‘My Lords, it follows, as I think, that the Attorney-General was wrong in submitting that, if Burmah are to succeed in this interlocutory appeal, they must establish that the Chief Secretary’s certificate is probably inaccurate. On the contrary, disclosure may well be ordered even though its accuracy is not impugned, for the Minister’s view is one-sided and may be correct as far as it goes but is yet not to be regarded as decisive of the matter of disclosure.’
He said ([1979] 3 All ER 700 at 721, [1980] AC 1090 at 1129):
‘A judge conducting the balancing exercise needs to know, in the words of Lord Pearce in Conway v Rimmer [1968] 1 All ER 874 at 911, [1968] AC 910 at 987): ”… whether the documents in question are of much or little weight in the litigation, whether their absence will result in a complete or partial denial of justice to one or other of the parties or perhaps to both, and what is the importance of the particular litigation to the parties and the public. All these are matters which should be considered if the court is to decide where the public interest lies.”’
Lord Keith, too, referred to the balancing exercise that had to be undertaken. He said ([1979] 3 All ER 700 at 725, [1980] AC 1090 at 1134):
‘The courts are, however, concerned with the consideration that it is in the public interest that justice should be done and should be publicly recognised as having been done. This may demand, though no doubt only in a very limited number of cases, that the inner workings of government should be exposed to public gaze, and there may be some who would regard this as likely to lead, not to captious or ill-informed criticism, but to criticism calculated to improve the nature of that working as affecting the individual citizen.’
Lord Scarman referred, as the other members of the House of Lords had done, to Conway v Rimmer. He then said ([1979] 3 All ER 700 at 732, [1980] AC 1090 at 1143):
‘In reaching its decision the House did indicate what it considered to be the correct approach to the clash of interests which arises whenever there is a question of public interest immunity. The approach is to be found stated in two passages of Lord Reid’s speech … The essence of the matter is a weighing, on balance, of the two public interests, that of the national or the public service in non-disclosure and that of justice in the production of the documents.’
In my judgment, an analogous balancing exercise is necessary in the present case. The breadth and duration of the duty of confidence that lies on officers and ex-officers of the security service, including Mr Wright, is dependent, in relation to the information sought to be protected, on the relative weight of the needs of national security that the information should be kept secret, and the public or private interest, as the case may be, that the information should be free to be disclosed.
(2) The duty owed by third parties
It is clear and well-established law that a third party who comes into possession of confidential information may come under a duty to respect the confidence. Here, too, counsel for the Attorney General formulated his submissions in absolute terms. If the third
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party knows the information to be confidential, then, he submitted, the third party’s duty not to disclose or use the information is co-extensive with the duty owed by the confidant who supplied the information to the third party.
Counsel for the Attorney General referred me to a number of authorities in support of this submission. Schering Chemicals Ltd v Falkman Ltd [1981] 2 All ER 321, [1982] QB 1 concerned a drug, Primodos, marketed by the plaintiff company. Confidential information about the drug was supplied by the plaintiff to the second defendant for the purposes of public relations work, which the defendant was to carry out for the plaintiff. The second defendant wanted to use that confidential information in a television programme to be made by Thames Television, the third defendant. An interlocutory injunction restraining the second and third defendants, pending trial, from using the information was granted at first instance. The Court of Appeal, Lord Denning MR dissenting, dismissed the appeal. Shaw LJ said ([1981] 2 All ER 321 at 337, 338, [1982] QB 1 at 27):
‘As I see the position, the communication in the commercial context of information which at the time is regarded by the giver and recognised by the recipient as confidential, and the nature of which has a material connection with the commercial interests of the party confiding that information, imposes on the recipient a fiduciary obligation to maintain that confidence thereafter unless the giver consents to relax it … While it is true that Thames Television were not the direct recipients of confidential information conveyed in a fiduciary situation, it is not in controversy that they were at all times aware of the circumstances in which Mr Elstein first became possessed of it. If Mr Elstein was in breach of duty in seeking to use it at all, Thames Television cannot be entitled to collaborate with him by taking advantage of his repudiation of his fiduciary obligations.’
Templeman LJ said ([1981] 2 All ER 321 at 347, [1982] QB 1 at 40):
‘Mr Elstein voluntarily placed himself under a duty to refrain from using information which he received from Scherings. By composing the film “The Primodos Affair” Mr Elstein acted in breach of that duty. Thames Television cannot knowingly take advantage of that breach of duty by Mr Elstein.’
In Fraser v Thames Television Ltd [1983] 2 All ER 101, [1984] QB 44 Hirst J had to consider whether the duty of confidence could apply so as to protect an idea for a television programme that had been communicated in confidence. He held that it could. He said ([1983] 2 All ER 101 at 121, [1984] QB 44 at 65):
‘… in order to be fixed with an obligation of confidence, a third party must know that the information was confidential; knowledge of a mere assertion that a breach of confidence has been committed is not sufficient … ’
In addition, counsel for the Attorney General reminded me of the passage in Nourse LJ’s judgment in the Court of Appeal on the appeal from Millett J in A-G v Observer Ltd [1986] CA Transcript 696, where he said:
‘As for the newspapers and any other third party into whose hands the confidential information comes, an injunction can be granted against them on the simple ground that equity gives relief against all the world, including the innocent, save only a bona fide purchaser for value without notice.’
But, on the other hand, there are cases where third parties coming into possession of confidential information are not only entitled to use that information but may even be under a duty to do so. A striking example of this is R v Tompkins (1977) 67 Cr App R 181. A confidential note passed by the defendant to his counsel fortuitously found its way into the hands of prosecuting counsel. It was held that prosecuting counsel was entitled to use the note. The public interest in the administration of justice outweighed the private interest of the defendant that the confidentiality of his note should be preserved. By
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contrast in ITC Film Distributions v Video Exchange Ltd [1982] 2 All ER 241, [1982] Ch 431, a defendant who had by improper means obtained confidential documents belonging to the plaintiff, was held by Warner J not to be entitled to use them in the action. He accepted the submission of counsel for the plaintiff that he should—
‘balance the public interest that the truth should be ascertained, which is the reason for the rule in Calcraft v Guest [1898] 1 QB 759, [1895–9] All ER Rep 346, against the public interest that litigants should be able to bring their documents into court without fear that they may be filched by their opponents, whether by stealth or by a trick, and then used by them in evidence.’
(See [1982] 2 All ER 241 at 246, [1982] Ch 431 at 440.)
These cases show, in my opinion, that the duty of confidence owed by the original confidant will not necessarily lie on every third party who comes into possession of the confidential information. For it to do so, the circumstances must be such as to raise ‘an obligation of conscience’ affecting the third party. Public interest factors may apply to the information in the hands of the third party that did not apply to the information in the hands of the original confidant.
In the present case the third parties are newspapers. Newspapers have a legitimate role in a free society in bringing before the public information which might not otherwise be accessible to the public. That is not to say that the weight of other public interests, such as national security, may not from time to time require that role to be curtailed. But the balance to be struck as between the government and an ex-officer of MI5 is not, in my view, an identical balance to that which has to be struck between the government and the press.
Where a duty of confidence is sought to be enforced against a newspaper which has come into possession of confidential information knowing it to be confidential, the existence and scope of the alleged duty will depend, in my judgment, on the relative weight of the public or private interests for the protection of which the duty is claimed, on the one hand, and of the public or private interests to be served by disclosure of the information on the other hand. I do not accept that the newspaper’s duty will necessarily be coterminous with the duty on its informant, the confidant.
(3) Article 10 of the European Convention on Human Rights
Article 10 is in these terms:
‘(1) Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers …
(2) The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.’
The government adheres to the convention, but the convention has not been incorporated into English domestic law. Counsel for the Sunday Times submitted, however, that in striking the balance between the public interest in national security on the one hand and freedom of speech and of the press on the other hand the convention obligations accepted by the government should be taken into account. He submitted that the propriety of taking art 10 into account was established by the reference to art 10 in the speech in the House of Lords on the interlocutory appeal in the Spycatcher case: see A-G v Guardian Newspapers Ltd [1987] 3 All ER 316 at 355, [1987] 1 WLR 1248 at 1296, where Lord Templeman said: ‘This appeal therefore involves consideration of the
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European Convention … to which the British government adheres.' He then gave the text of art 10 and said ([1987] 3 All ER 316 at 356, [1987] 1 WLR 1248 at 1297):
‘The question is therefore whether the interference with freedom of expression constituted by the Millett injunctions was, on 30 July 1987 when they were continued by this House, necessary in a democratic society in the interests of national security, for protecting the reputation or rights of others, for preventing the disclosure of information received in confidence or for maintaining the authority and impartiality of the judiciary having regard to the facts and circumstances prevailing on 30 July 1987 and in the light of the events which had happened. The continuance of the Millett injunctions appears to me to be necessary for all these purposes.’
Lord Ackner agreed with Lord Templeman’s remarks about art 10 (see also [1987] 3 All ER 316 at 346, 348, 375–376, [1987] 1 WLR 1248 at 1286, 1288, 1320–1321 per Lord Bridge, Lord Brandon and Lord Oliver). In an earlier case, Lion Laboratories Ltd v Evans [1984] 2 All ER 417 at 422–423, [1985] QB 526 at 536–537, the Intoximeter case, Stephenson LJ said:
‘The problem before the judge and before this court is how best to resolve, before trial, a conflict of two competing public interests. The first public interest is the preservation of the right of organisations, as of individuals, to keep secret confidential information. The courts will restrain breaches of confidence, the breaches of copyright, unless there is just cause or excuse for breaking confidence or infringing copyright. The just cause or excuse with which this case is concerned is the public interest in admittedly confidential information. There is confidential information which the public may have a right to receive and others, in particular the press, now extended to the media, may have a right and even a duty to publish, even if the information has been unlawfully obtained in flagrant breach of confidence and irrespective of the motive of the informer. The duty of confidence, the public interest in maintaining it, is a restriction on the freedom of the press which is recognised by our law, as well as by art 10(2) of the European Convention for the Protection of Human Rights and Fundamental Freedoms … the duty to publish, the countervailing interest of the public in being kept informed of matters which are of real public concern, is an inroad on the privacy of confidential matters.’
It seems to me that the submission of counsel for the Sunday Times both as to its substance and as to the authority he claimed for it is well founded.
The courts, in adjudicating on disputes as to the relative weight and requirements of different public interests ought, in my judgment, to endeavour to strike the balance in a manner that is consistent with the convention obligations accepted by the government, the guardian of the public interest in national security. There is, in my view, a clear analogy with the well-known rule of construction of statutes that requires statutes to be construed, if possible, consistently with the government’s treaty obligations.
As to the manner in which art 10 should be taken into account in the present case, counsel for the Sunday Times referred to two authorities of the European Court of Human Rights. One was the majority judgment in Sunday Times v UK (1979) 2 EHRR 245. The case concerned the desire of the Sunday Times to publish an article about the drug, thalidomide. An injunction had been granted restraining publication on the ground that publication might interfere with the administration of justice in pending proceedings concerning the drug. The Sunday Times complained that the injunctions represented an infringement of art 10. The majority judgment said (at 275 (para 59)):
“The Court has noted that, whilst the adjective “necessary”, within the meaning of Article 10(2), is not synonymous with “indispensable”, neither has it the flexibility of such expressions as “admissible”, “ordinary”, “useful”, “reasonable” or “desirable” and that it implies the existence of a “pressing social need“.’
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This passage introduced, or, perhaps, adopted the ‘pressing social need’ criterion to be applied where a question arose whether a restriction on freedom of expression was ‘necessary’ for one or other of the various matters specified in para (2) of art 10. The judgment referred to the position of the press (at 280 (para 65)):
‘… whilst the mass media must not overstep the bounds imposed in the interests of the proper administration of justice, it is incumbent on them to impart information and ideas concerning matters that come before the courts just as in other areas of public interest. Not only do the media have the task of imparting such information and ideas: the public also has a right to receive them. To assess whether the interference complained of was based on “sufficient” reasons which rendered it “necessary in a democratic society”, account must thus be taken of any public interest aspect of the case.’
The court concluded (at 282 (para 67)):
‘Having regard to all the circumstances of the case and on the basis of the approach described in paragraph 65 above, the Court concludes that the interference complained of did not correspond to a social need sufficiently pressing to outweigh the public interest in freedom of expression within the meaning of the Convention.’
In Lingens v Austria (1986) 8 EHRR 407 the European Court of Human Rights confirmed the ‘pressing social need’ criterion: ‘The adjective “necessary”, within the meaning of Article 10(2), implies the existence of a “pressing social need“.' The judgment contains this guidance (at 418 (para 40)): ‘The Court must determine whether the interference at issue was “proportionate to the legitimate aim pursued“.' And the position of the press is dealt with as follows (at 418 (para 41)):
‘These principles are of particular importance as far as the press is concerned. Whilst the press must not overstep the bounds set, inter alia, for the “protection of the reputation of others”, it is nevertheless incumbent on it to impart information and ideas on political issues just as on those in other areas of public interest. Not only does the press have the task of imparting such information and ideas: the public also has a right to receive them. (See Sunday Times v United Kingdom ((1979) 2 EHRR 245 at 280).)’
Counsel for the Attorney General submitted that the judgments of the European Court of Human Rights did not bind an English court as to the manner in which para (2) of art 10 should be construed or applied. But if it is right to take into account the government’s convention obligations under art 10, the article must, in my view, be given a meaning and effect consistent with the rulings of the court established by the convention to supervise its application.
Accordingly, in my judgment, counsel for the Sunday Times is entitled to invite me to take into account art 10, as interpreted by the two judgments of the European Court that I have mentioned. These authorities establish that the limitation of free expression in the interests of national security should not be regarded as ‘necessary’ unless there is a ‘pressing social need’ for the limitation and unless the limitation is ‘proportionate to the legitimate aims pursued’.
(4) The iniquity defence
Counsel for the Attorney General submitted that a consideration of the iniquity defence came, logically, after it had been established that there was a duty of confidence owed by the defendant and a breach of that duty. This analysis corresponds with the manner in which the defence would be raised on the pleadings. The plaintiff would allege the
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facts relied on as subjecting the defendant to a duty of confidence and the facts relied on as constituting the breach. The iniquity defence would be raised by way of confession and avoidance and the facts relied on as raising the defence would have to be pleaded and proved by the defendant. But once the relevant facts had been proved in evidence, the question would be whether a duty of confidence existed and had been broken. The iniquity defence would be subsumed in that question.
I agree with counsel for the Attorney General that a prior question will be whether the defendant has a relationship with the plaintiff that justifies imposing on the defendant a duty not to disclose confidential information. But the question whether there has been a breach of that duty cannot be answered in general terms. It can only be answered in relation to specific information that the defendant has dealt with in some way or another. Whatever general duty not to disclose confidential information the defendant may have been under, an allegation of a breach must be based on what the defendant has done with specific information. It will raise the question whether the general duty of confidence extended to that information. If the information was trivial and useless, or if it was public knowledge anyway, or if it was of serious iniquity, the conclusion may follow that the defendant was never under a duty to disclose the information. In my judgment, the nature of the information forms an important part of the circumstances that must be taken into account in deciding whether, in relation to that information, the defendant owed a duty of nondiscloure.
In Gartside v Outram (1856) 26 LJ Ch 113 at 115 Page Wood V-C said:
‘If he is employed as an attorney in any unlawful or wicked act, his duty to the public obliges him to disclose it; no private obligations can dispense with that universal one which lies on every member of the society to discover every design which may be formed, contrary to the laws of the society, to destroy the public welfare.’
Lord Denning MR said in Initial Services Ltd v Putterill [1967] 3 All ER 145 at 148, [1968] 1 QB 396 at 405–406:
‘The exception should extend to crimes, frauds and misdeeds, both those actually committed as well as those in contemplation, provided always—and this is essential—that the disclosure is justified in the public interest. The reason is because “no private obligations can dispense with that universal one which lies on every member of the society to discover every design which may be formed, contrary to the laws of the society, to destroy the public welfare“. See Annesley v. Earl of Anglesea ((1743) 17 State Tr 1139 at 1223–1246). The disclosure must, I should think, be to one who has a proper interest to receive the information. Thus it would be proper to disclose a crime to the police or a breach of the Restrictive Trade Practices Act, 1956, to the registrar. There may be cases where the misdeed is of such a character that the public interest may demand, or at least excuse, publication on a broader field, even to the press.’
Lord Denning MR referred to ‘crimes, frauds and misdeeds’. But the defence is not necessarily limited to iniquities of that character. In Beloff v Pressdram Ltd [1973] 1 All ER 241 at 260 Ungoed-Thomas J, after reviewing the authorities, said:
‘The defence of public interest clearly covers and, in the authorities, does not extend beyond, disclosure, which as Lord Denning MR emphasised must be disclosure justified in the public interest, of matters carried out or contemplated, in breach of the country’s security, or in breach of law, including statutory duty, fraud, or otherwise destructive of the country or its people, including matters medically dangerous to the public and doubtless other misdeeds of similar gravity.’
And in Lion Laboratories v Evans [1984] 2 All ER 417 at 432–433, [1985] QB 526 at 550 Griffiths LJ said:
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‘I can see no sensible reason why this defence should be limited to cases in which there has been wrongdoing on the part of the plaintiffs. I believe that the so-called iniquity rule evolved because in most cases where the facts justified a publication in breach of confidence the plaintiff had behaved so disgracefully or criminally that it was judged in the public interest that his behaviour should be exposed. No doubt it is in such circumstances that the defence will usually arise, but it is not difficult to think of instances where, although there has been no wrongdoing on the part of the plaintiff, it may be vital in the public interest to publish a part of his confidential information.’
It will be recalled that in his judgment in Initial Services Ltd v Putterill [1967] 3 All ER 145 at 148, [1968] 1 QB 396 at 405 Lord Denning MR referred to ‘disclosure … to one who has a proper interest to receive the information’. This limitation to the scope of the iniquity defence was applied by the Court of Appeal in Francome v Mirror Group Newspapers Ltd [1984] 2 All ER 408, [1984] 1 WLR 892. Unidentified persons tapped telephone conversations to and from the home of the plaintiff, the then champion National Hunt jockey. The Mirror acquired the tapes and the plaintiff sued for an injunction to restrain their publication. The conversations eavesdropped on were obviously private conversations. The Mirror had notice of their private, confidential character. So the injunction was sought on the ground that the Mirror were under a duty to preserve the confidentiality of the conversations. The Mirror’s defence was that disclosure was justified in the public interest on the ground that the tapes revealed breaches by the plaintiff of the rules of racing. The Court of Appeal declined, pending trial of the action, to allow the contents of the tapes to be disclosed to the public at large but were prepared to allow disclosure to the police and to the stewards of the Jockey Club. The iniquity defence had the effect, therefore, of limiting the duty. The duty would be broken by general disclosure to the public. It would not be broken by disclosure to the police or to the Jockey Club.
(5) The obligation to account
The obligation to account for profits made by the misuse of confidential information is an equitable discretionary remedy based on the proposition that, in equity, the profits belong to the claimant. It is well settled that an account of profits is a possible form of relief: see Peter Pan Manufacturing Corp v Corsets Silhouette Ltd [1963] 3 All ER 402 at 410, [1964] 1 WLR 96 at 106 per Pennycuick J and AB Consolidated Ltd v Europe Strength Food Co Pty Ltd [1978] 2 NZLR 515.
In principle, therefore, Mr Wright is liable to account for any profit he has made out of Spycatcher. And if a newspaper’s use of the contents of or the information contained in Spycatcher involved a breach of duty of confidence lying on the newspaper, the newspaper too would be accountable for any profit made by that breach of duty.
The cases dealing with an account of profits in this field have, with one exception, all been cases in a commercial context. If confidential information of a commercial character is misused, the account of profits serves to compensate the owner of the information for the unauthorised use that has been made of it. The profit, in equity, belongs to the owner of the information. There is, however, also a deterrent effect provided by the remedy. The wrongdoer, who has misused the information, is not permitted to retain a profit made by means of his own wrongdoing.
Where the confidential information consists of information about the affairs or activities of one of the security services and where the duty of confidence is imposed for reasons of national security, no question of compensation can arise. The information does not serve any commercial purpose. If confidential information of that character has been misused the only legitimate purpose of an account of profits, in my judgment, is the purpose of ensuring that the wrongdoer does not benefit from his wrongdoing.
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The judgment of Street CJ in the New South Wales Court of Appeal in the Spycatcher appeal (A-G (UK) v Heinemann Publishers Australia Pty Ltd (1987) 75 ALR 353) supports this approach to an account of profits. He said (at 364–365):
‘The United Kingdom Government’s entitlement to protection originates from the confidential relationship into which it took Wright by appointing and retaining him in a position of confidence as an officer of MI5. There are two ways in which this could confer rights on the United Kingdom Government … A public interest based injunction would be protective; a public interest based account of profits would be retributive and deterrent—directed not to compensating the Government but to depriving the defendant of the fruits of the breach of the public obligation of confidence deriving from his relationship with the Government as an officer of MI5 … The importance of the distinction is that the approach to granting or withholding an account of profits is, in the present public interest based claim, to be decided by the same approach as the granting or withholding of an injunction—specifically, ordinary proprietary, compensatory considerations applied by equity form no part of the basis upon which an account of profits will be ordered.’
I respectfully agree with this analysis of the account of profits.
6. APPLICATION OF THE LAW
(1) Mr Wright
Mr Wright, in writing his memoirs and submitting them for publication was, in my judgment, in clear and flagrant breach of the duty of confidence he owed the Crown.
I am easily persuaded that the nature of employment in the security services justifies the conclusion that its members on entering the service come under a duty of confidence. The book deals with many matters that took place between 20 and 30 years ago. But the proposition than an ex-member of MI5 can, by lapse of time, be relieved of his obligations of secrecy must, in my judgment, be rejected.
In para 3 of his written statement, read from the witness box, Sir Robert Armstrong said:
‘The effective functioning of the British Security Service requires that its affairs be kept secret. Thus the records and all other papers of the service are and at all times have been kept confidential. If they are ever disclosed, it is only very rarely, and then only with proper authority and after careful consideration … In respect of the records of the service the Lord Chancellor has granted a dispensation removing without limit of time any obligation which the service would otherwise have under the Public Records Acts to deposit records in the Public Record Office for public access. The effect of this is that there are no Security Service records available for inspection in the Public Record Office.’
In para 9(c) he said:
‘Material relating to the work of the Security Service very often remains sensitive for many years. Individual officers do not have access to enough information to decide what safely and properly may be released.’
This part of his evidence was not challenged. In the light of this evidence, I conclude that counsel for the Attorney General was correct in his submission to me that, prima facie, members and ex-members of the security services must carry their secrets with them to the grave.
Mr Wright’s duty of confidence would not extend to information of which it could be said that, notwithstanding the needs of national security, the public interest required disclosure. Nor, in my opinion, would the duty extend to information which was trivial or useless or which had already been disclosed under the authority of the government.
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Sir Percy Sillitoe asked for and received authority to publish his memoirs. Mr Wright did not ask for any comparable authority for the publication of Spycatcher. What, if anything, he would have been permitted to publish if he had done so, is a matter of speculation. If Mr Wright had asked for authority to publish and had been refused, the refusal would, in my opinion, have been amenable to judicial review (cf the GCHQ case, Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935, [1985] AC 374). What the result would have been if that had happened is, likewise, speculation. Some parts of the contents of Spycatcher may be capable of being described as trivial or useless information. What the result would have been if Mr Wright had published only those parts is speculation. Some parts of Spycatcher contain allegations about wrongdoing by MI5 or members of MI5. Whether, if only those allegations had been published, the publication would have represented a breach of Mr Wright’s duty of confidence, is a matter that does not arise and that I need not decide. Many of the allegations contained in Spycatcher had appeared in previously published works. What would have been the position if Mr Wright had confined himself to repeating those allegations is another matter of speculation.
The fact of the matter is that Mr Wright, an ex-officer of MI5, published his memoirs of his years of service and did so without authority, well knowing, I infer, that if he had asked for authority it would have been refused.
The interests of national security require that MI5 officers do not write their memoirs of their years in the service. The ‘pressing social need’ to justify a limitation on Mr Wright’s freedom to write his memoirs is, in my judgment, plainly present.
If the writing and publication of the book represented a breach of duty owed by Mr Wright to the Crown, he cannot, in my judgment, by his own wrongdoing, have relieved himself of his duty and provided for himself a freedom to publish that he did not previously enjoy. The question whether, in view of the United States publication and subsequent worldwide distribution of the book, injunctions restraining publication in England can still serve any proper purpose is not, in my judgment, a question that presents any difficulty so far as Mr Wright is concerned. He cannot be allowed to benefit from his own wrong. For the same reason he would, if sued in this country, be accountable to the Crown for any profit he had made out of his own breach of duty (cf Reading v A-G [1951] 1 All ER 617, [1951] AC 507). But the Crown cannot be required to make a profit it does not want. As Lord Templeman said in A-G v Guardian Newspapers Ltd [1987] 3 All ER 316 at 357, [1987] 1 WLR 1248 at 1299:
‘The public interest does not lie in making profits but in preventing profits from being made in this country from treachery to this country.’
For those reasons, the Attorney General remains, in my opinion, entitled to an injunction against Mr Wright, or any agent of his, to restrain publication of Spycatcher in this country. It follows that, in my judgment, propositions 1, 2 and 3 in the summary I gave of the Crown’s case are established.
(2) The Guardian and the Observer: the Crown’s case in June 1986
The question to be answered is whether the articles in the Guardian on 23 June 1986 and the Observer on 22 June 1986 represented a breach of an obligation of confidence owed to the Crown.
I have already referred in general terms to the contents of the articles. Each article was a report of the forthcoming court hearing in Australia. Each article referred to some of the more newsworthy allegations made by Mr Wright in the book which was the subject of the litigation.
The litigation in Australia was a matter of legitimate interest to the United Kingdom public and of legitimate comment by the United Kingdom press. The Attorney General of this country was suing in a foreign country for an injunction to restrain the publication of the memoirs of an ex-officer of one of the security services of this country. The press
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of this country were, in my opinion, entitled and bound to report that that was happening, to inform the public of the issues raised by the litigation and to comment on those issues. In the course of so doing, it would be inevitable that the press would have to give an indication in general terms of the contents of the book.
I must, therefore, examine the article and ask myself whether they represent a fair report of the forthcoming Australian trial. In my judgment, they do. The allegations made by Mr Wright in Spycatcher are referred to in the articles only in very general descriptive terms. Very little, if anything, in the way of detail is disclosed. The articles do not go beyond the fair reporting of the nature of the case. In my judgment the duty of confidence lying on the newspapers as the recipients of Mr Wright’s unauthorised disclosures was not broken by fair reporting of this character. If that were not so, it would require the conclusion that the press of this country could not inform the public of this country of the court action being brought by the Attorney General in Australia. I am unable to accept this conclusion. The public interest in freedom of the press to report the court action outweighs, in my view, the damage, if any, to national security interests that the articles might, arguably, cause. I can see no ‘pressing social need’ that is offended by these articles. The claim for an injunction against these two newspapers in June 1986 was not, in my opinion, ‘proportionate to the legitimate aim pursued’.
It was contended also, by the Guardian and the Observer, that the articles were justifiable, on the ground that Mr Wright’s allegations referred to in the articles had already reached the public domain and on the ground that they were covered by the iniquity defence. I should deal with those contentions.
In June 1986 Spycatcher had not yet been published. Not all the allegations disclosed in the articles had, previously, been made in published works. (1) The allegation that the security services had bugged foreign diplomatic premises had been made by Chapman Pincher in Inside Story in 1978 and in Their Trade is Treachery in 1981. There was, however, much more detail in Spycatcher than there had been in the Chapman Pincher books. (2) The allegation that diplomatic conferences at Lancaster House, including the Zimbabwe negotiations in 1979, had been bugged had not been previously publicly made. Nor had the allegation that Burgess had, on Soviet instructions, attempted unsuccessfully to seduce Winston Churchill’s daughter. Nor had the allegation that Kruschev’s suite at Claridges during his visit to Britain in the 1950s had been bugged. (3) The allegation of a plot to assassinate President Nasser of Egypt had, on the other hand, been previously made. It had appeared in Inside Story in 1978 and in Their Trade is Treachery in 1981. It had been referred to by Tony Motion in the course of his Panorama interview in 1981. (4) Allegations about activities by MI5 officers directed against Harold Wilson and his administration had been made in Inside Story, Their Trade is Treachery and Too Secret Too Long. (5) The articles also make general reference to allegations of ‘routine burglary and bugging by MI5 officers’. Allegations of this character are to be found in the three Chapman Pincher books, and were made by Mr Wright in the course of his Granada TV interview broadcast in 1984.
It is of importance to notice that, save in the course of the Granada TV broadcast, none of the allegations that had previously been publicly made had been publicly made by an ‘insider’. Counsel for the Attorney General is, in my view, entitled to say that allegations acquire, when made by an insider, a ring of authenticity that they do not previously possess.
The allegations of ‘bugging’ to which I have referred under (1) and (2) above, were not, in my opinion, in June 1986 in the public domain. They related to the sort of activities that may seem very distasteful to many right-thinking people but that it would be naive in the extreme to suppose were not carried out by all security services from time to time. Whether in relation to any particular occasion or any particular premises the operations described were justifiable is a matter for the security services and those to whom they are accountable, namely the Director General, the Home Secretary and the Prime Minister. Operations of this particular sort require, in my opinion, to be protected by a cloak of
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secrecy. I do not understand how a security service could operate if that were not so.
References to these allegations in the course of fair reporting of the Australian litigation was, in my view, permissible. These apart, I am unable to find a legitimate public interest to be served by disclosure. There is, in my view, a ‘pressing social need’ that confidence in relation to security service operations be maintained. A strong countervailing public interest would have to be shown if disclosure were to be justified.
One of the main arguments put forward by the editors in favour of a conclusion that would permit the press to report unauthorised disclosures about the security services was the so-called unaccountability of the security services. But the security services are not unaccountable. They are accountable to ministers of the Crown, who in turn, through the ballot box, are accountable to the public. MI5 is accountable to the Home Secretary and to the Prime Minister. The Prime Minister is the leader of a democratically elected government. The editors’ complaints of unaccountability come to no more than that, in their view, the Home Secretary and Prime Minister do not exercise a sufficiently close control and that they desire ministerial control to be more openly exercised.
These are matters of legitimate public debate. But they do not, in my opinion, create any legitimate public interest requiring the public disclosure of the operations of the security services. Nor do I think there is any legitimate public interest served by the disclosure of Burgess’s activities with Churchill’s daughter. It is difficult to think what damage to national security could be caused by the disclosure of this allegation but neither I, nor the editors or the journalists who wrote the articles, are in a position to judge. MI5 itself would have been in a position to judge but it was not given the chance to do so.
As to the allegation of ‘routine burglary’, it is difficult either to bring such a generalised allegation within the ‘iniquity’ defence or to represent the disclosure of it as damaging to national security. No specific attention was paid to this part of the articles in the submissions made to me, and I express no conclusion as to whether, if it had stood alone, it would have represented a breach of duty.
I turn to the two remaining allegations, each of which has previously been publicly made. The question of what allegations represent allegations of ‘iniquity’ that cannot be protected by a duty of confidence is, at least where the security services are concerned, a question that is likely to receive a somewhat subjective answer. The allegations that a plot to assassinate President Nasser was hatched and was being seriously considered by those in authority is, in my opinion, an allegation of iniquity of a high order. It would have been a monstrous thing and a stain on this country’s honour if such a plot had been put into execution. I hope the allegation is untrue. But whether the allegation is true or untrue the duty of confidence cannot, in my opinion, be used to prevent the press from informing the public that the allegation has been made.
The allegations of the plot by MI5 officers to destabilise the Wilson government raise analogous but different considerations. The activities of the MI5 officers, if they took place, could not, in my judgment, be protected by a duty of confidence. They would have been in breach of the Maxwell Fyfe Directive. They would have been potentially damaging to, and, unless checked, destructive of, our democratic system of government. The allegations are not new. They have been made before and the Prime Minister has reported to Parliament that they have been investigated and been found to be groundless. None the less the editors contend that if the allegations are repeated by an insider the press ought to be entitled to report that fact. I agree. The press has a legitimate role in disclosing scandals in government. An open democratic society requires that that be so. If an allegation be made by an insider that, if true, would be a scandalous abuse by officers of the Crown of their powers and functions, and the allegation comes to the attention of the press, the duty of confidence cannot, in my opinion, be used to prevent the press from reporting the allegation. I do not think it is an answer to say that the allegation has been investigated and been found to be groundless. Where that is the case, public belief in the allegation will, no doubt, be reduced. Nor is it, in my opinion, necessarily an
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answer to say that the allegation should not have been made public but should have been reported to some proper investigating authority. In relation to some, perhaps many, allegations made by insiders, that may be the only proper course open to the press. But the importance to the public of this country of the allegation that members of MI5 endeavoured to undermine and destroy public confidence in a democratically elected government makes the public the proper recipient of the information.
Counsel for the Attorney General submitted that the government ought not to be exposed to the pressure and embarrassment that mischievous and untrue allegations by insiders might produce. I accept that pressure and embarrassment might follow on the reporting of allegations of the sort I am considering. But there are two answers, in my view, to his point. The first is that the legitimate purpose of the duty of confidence imposed on members and ex-members of MI5 is to preserve the secrecy of MI5’s affairs and thereby to enable it to operate efficiently. The purpose is not to save the government of the day from pressure or embarrassment. Second, and more important, the ability of the press freely to report allegations of scandals in government is one of the bulwarks of our democratic society. It could not happen in totalitarian countries. If the price that has to be paid is the exposure of the government of the day to pressure or embarassment when mischievous and false allegations are made, then, in my opinion, that price must be paid.
In my judgment, a newspaper which comes into the possession of confidential information known to emanate from a member or ex-member of the security services must ask itself whether and to what extent public disclosure of the information can be justified. Prima facie, the information should not be disclosed. A strong case is, in my view, needed to outweigh the national security interest in the material remaining confidential. Mr Trelford and Mr Preston gave me to understand that they did ask themselves this question. I think they came to the right answer. In my view the articles represented the legitimate and fair reporting of a matter that the newspapers were entitled to place before the public, namely the court action in Australia. Further, and for different reasons, disclosure of two of the allegations was, in my view, justified.
(3) The Sunday Times: the Crown’s case in July 1987
The Sunday Times on 12 July 1987 published the first extract of an intended serialisation of Spycatcher. Mr Neil’s justification for his intended serialisation was expressed in his statement, read from the witness box, as follows:
‘My intention … was to inform the readers of the Sunday Times of the contents of the book so as to assist them to form a judgment for themselves on the important issues which Mr Wright had raised. My intention was also to … contribute to an informed debate on important matters of public interest.’
But neither he nor any member of his editorial staff gave any critical assessment as to what parts of Spycatcher raised issues of ‘important matters of public interest’ on which the public should ‘form a judgment for themselves’, and what parts were simply unauthorised disclosures of confidential information. The contents of the extracts published on 12 July 1987 include a good deal of material that could not be represented as raising any issue on which the public should be invited to judge or in respect of which the public interest to be served by disclosure could be thought to outweigh the interests of national security. True it is that the extract contains also material that, in my opinion, it was legitimate to place before the public. I need not repeat what I have already said in relation to the articles in the Guardian and in the Observer. But the extract published in the Sunday Times was indiscriminate.
Accordingly, in my judgment, the publication of the extract represented a breach of the duty owed by the Sunday Times. For the same reasons, the Attorney General was, in my view, entitled, in the circumstances as they stood in July 1987, to injunctions to restrain the Sunday Times from continuing with the serialisation.
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A further consequence of the publication of the extract on 12 July 1987 is, in my judgment, that the Attorney General is entitled to an account of profits made by the Sunday Times out of the publication of that extract and the payment of the amount of the profit, if any. There is sufficient inferential evidence before me of increased circulation attributable to the Spycatcher extract to justify the taking of the account if the Attorney General thinks it worthwhile to pursue the matter.
I have already said that the extract contains material that, if it had stood alone, the Sunday Times would, in my judgment, have been entitled to publish. I have, therefore, asked myself whether the newspaper’s accountability for profits should be limited by apportioning any profit. In my judgment, accountability should not be so limited.
The Sunday Times published the Spycatcher extract well knowing that the Attorney General would, if he had wind of what was afoot, seek, and be likely to obtain, an interlocutory injunction restraining publication. The Sunday Times published the service memoirs of an ex-officer of MI5 indiscriminately. The breach of duty was the publication of the extract as a whole. An account of profits is an equitable remedy. It does not follow as of course on a breach of duty. In the circumstances of this case, and particularly in view of the Sunday Times’ endeavours to keep the government in the dark and to prevent the court from adjudicating on the propriety of the publication until it was too late, the Sunday Times is in no position to argue against the equity of an order that it account for the profit, if any, made out the publication.
(4) The three newspapers: the Crown’s case today
The Guardian and the Observer want complete freedom to comment on any part of Spycatcher. The Sunday Times wants to complete its serialisation. But counsel for the Attorney General accepted that it was in no worse position than the other two newspapers. If they are entitled to comment ad lib on the contents of Spycatcher, the Sunday Times is entitled to serialise the contents. Counsel for the Attorney General submitted that the newspapers could be in no better position than Mr Wright. For two reasons I do not accept that that is so. First, Mr Wright is impaled on the consequences of his own wrongdoing. He cannot pray in aid of his case the worldwide distribution of Spycatcher that has taken place. That worldwide distribution has not been caused or contributed to by anything done by the three newspapers. I set aside as de minimis the effect of the Sunday Times edition of 12 July 1987 in disseminating the contents of Spycatcher. The newspapers are not barred by their own wrongdoing from relying on the worldwide distribution of the book as a reason why permanent injunctions should not be granted. Second, for reasons I have already expressed, the balance to be struck between national security needs and the freedom of the press is not, in my opinion, the same balance as that to be struck by national security needs and Mr Wright’s freedom of expression. The press has a legitimate and important role. I would respectfully echo Sir Nicolas Browne-Wilkinson V-C in his remark that I have already read: see A-G v Guardian Newspapers Ltd [1987] 3 All ER 316 at 332, [1987] 1 WLR 1248 at 1269–1270. I would refer also to, but without repeating, Stephenson LJ’s remarks about the press in Lion Laboratories Ltd v Evans [1984] 2 All ER 417 at 422, [1985] QB 526 at 536.
I must examine the national security factors relied on as justifying permanent injunctions and weigh them in the scales against the public interest in the freedom of the press.
The national security factors were expounded by Sir Robert Armstrong in his evidence. They were these.
(1) The unauthorised disclosure of information is likely to damage the trust which members of the service have in each other. This damage must already have occurred.
(2) Other members of the security services may break faith and follow suit, but unless they depart from the jurisdiction of these courts they will be unable to follow Mr Wright’s example. And if they do leave the country, Mr Wright’s example is already in place as a lamentable beacon.
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(3) Unless permanent injunctions are granted pressure will be exerted by the media on other members or ex-members of the security services to tell their side of the Spycatcher allegations. This is speculation but, on the evidence I heard, is likely to happen. Whether the pressure will be resisted is impossible to tell. Whether, if anyone were to succumb to the pressure, publication would follow would depend on several other imponderables. The point does, however, deserve weight in the scales.
(4) Intelligence and security services of friendly foreign countries may, if permanent injunctions are not granted, lose confidence in the British security services. This loss of confidence may already have taken place as a result of the publication of Spycatcher. But the notion that the grant or withholding of permanent injunctions will make any difference seems to me somewhat unreal.
(5) The confidence of informers, who rely on their identity and activities being kept confidential, will be damaged. Here, too, the loss of confidence may already have happened. If it has, it is a regrettable fait accompli. Sir Robert did, I should record, give evidence that individuals who had assisted MI5 in the past, had, since the publication of Spycatcher, expressed anxiety about the risk of exposure. All this evidence was given by Sir Robert third hand but I found it inherently believable. Sir Robert’s evidence did not, however, suggest that if permanent injunctions were granted, the individuals would feel any safer.
(6) Detriment will flow from the publication of information about the methodology, personnel and organisation of MI5. This is a point of real substance and justifies the conclusion that MI5 officers cannot be allowed to publish their service memoirs. But it does not bear on the position today. The detriment is a fait accompli and I do not follow how the granting or withholding of permanent injunctions can make any difference.
(7) Publication of Spycatcher has damaged the morale of members of MI5. A permanent injunction, depriving Mr Wright of the profits to be made on the home market, would go some way to restoring morale. I find this point made by Sir Robert difficult to weight. I did not understand Sir Robert to be repeating views that had been actually expressed by members of MI5. Rather he was expressing his own belief as to the likely effect on morale of permanent injunctions. There may well, I think, be resentment felt by loyal MI5 members at the spectacle of Mr Wright reaping very substantial financial rewards from his disloyalty. And the removal of any impediment on dissemination in this country of the book or its contents might well add fuel to that resentment. But I am not clear that this is a factor which can weigh in the balance as between the Attorney General and the newspapers. The purpose of the duty of confidence owed by officers of MI5 is to protect information about the affairs of MI5. If unauthorised disclosures are made to newspapers, the ‘obligation of conscience’ owed by the newspapers is owed for the same reason, namely to protect the confidentiality of information that, for national security reasons, must be kept confidential. The duty of confidence is not, in my opinion, imposed on newspapers in order to maintain the morale of members of MI5. If, in relation to particular information, the maintenance of secrecy or confidence is not needed or has become impossible, a duty of confidence cannot, in my opinion, be imposed on newspapers on the ground that disclosure would adversely affect the morale of MI5.
The factors I have referred to were those advanced by Sir Robert as justifying permanent injunctions. The maintenance of the secrecy or confidentiality of the information contained in the book was, for obvious reasons, not among them. Sir Robert accepted that damage must already have been caused by the publication of the book. But he described that damage as ‘limited’ and as likely to be greatly increased if permanent injunctions were not granted. In particular, Sir Robert stressed that Spycatcher was the first unauthorised book of memoirs written by an insider. I have found it difficult to follow Sir Robert’s point that greatly increased damage would follow publication of Spycatcher in this country and unrestricted press comment on its contents and I do not think the proposition stands much examination. The damage to national security
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interests must, in my view, have already been inflicted. The spectacle of Mr Wright making money out of the unrestricted sale of his book in this country would, I accept, be offensive and an affront to most decent people. But I am not satisfied that it will cause any additional damage to national security interests.
I must turn to the press freedom factors on the other side of the scales. They are, in my judgment, of overwhelming weight.
(1) The book and its contents have been disseminated on a worldwide scale. The information contained therein has been commented on by newspapers throughout the world. So what duty of confidence, ‘obligation of conscience’, can be held to lie now on third parties in this country? It is no answer, in my opinion, to say that in this country the dissemination of the book and its contents has been limited. Virtually anyone who wants a copy of the book can obtain one. There may be some people who want a copy but do not know how to set about obtaining one. There may be others who want a copy but are inhibited by the cost of obtaining one. Many more, I imagine, are inhibited by a combination of inertia and disinterest. But a duty of confidence that operates to keep away from the mass of people information which is freely available to the more sophisticated or better off is not, I think, a duty that a court of equity would be likely to construct.
(2) The allegations in the book on which most attention has been concentrated during the hearing have been the allegations about the plot to destabilise the Wilson government and the allegation about Soviet penetration of MI5. The former allegations are, in my opinion, for reasons I have already given, proper to be placed before the British public. A situation in which those allegations were being placed before the citizens of virtually every other country in the world but could not be placed before the citizens of this country would, in my view, be additionally objectionable. As to the allegations about Sir Roger Hollis, they have been placed before the British public in the Chapman Pincher books. The first of these was Their Trade is Treachery. The government had the opportunity to stop publication but did not pursue it. The second of these, Too Secret Too Long, specified Mr Wright as the source of the allegations. Mr Wright himself repeated the gist of the allegations in the Granada TV programme broadcast in 1984. The government had the opportunity to apply for an injunction to stop the broadcast but did not do so. So far as these allegations are concerned, the fact that Mr Wright, an insider, is making them is nothing new. In my judgment, there can be no ‘obligation of conscience’ requiring the newspapers now to refrain from reporting on these allegations.
However, the main point is the first point. I would borrow from the speech of Lord Oliver in A-G v Guardian Newspapers Ltd [1987] 3 All ER 316 at 375–376, [1987] 1 WLR 1248 at 1320–1321 where he said:
‘We do not have a First Amendment but, as Blackstone observed, the liberty of the press is essential to the nature of a free state. The price that we pay is that that liberty may be and sometimes is harnessed to the carriage of liars or charlatans, but that cannot be avoided if the liberty is to be preserved. No one contends that the liberty is absolute and there are occasions when it must yield to national emergency, to considerations of national security and, on occasion, to private law rights of confidentiality where they are not overborne by some countervailing public interest. I do not for a moment dispute that there are occasions when the strength of the public interest in the preservation of confidentiality outweighs even the importance of the free exercise of the essential privileges which lie at the roots of our society. But, if those privileges are to be overborne, then they must be overborne to some purpose … Once information has travelled into the public domain by whatever means and is the subject matter of public discussion in the press and other public media abroad, I emphasise again without fault on the part of the appellants, I find it unacceptable that publication and discussion in the press in this country should be further restrained … Ideas, however, unpopular or unpalatable, once released and
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however released into the open air of free discussion and circulation, cannot for ever be effectively proscribed as if they were a virulent disease. Facilis est descensus Averno and to attempt, even temporarily, to create a sort of judicial cordon sanitaire against the infection from abroad of public comment and discussion is not only, as I believe, certain to be ineffective but involves taking the first steps on a very perilous path.’
For the reasons expressed by Lord Oliver in that passage the newspapers are not, in my judgment, under any duty now to refrain from disclosing or reporting on the information contained in Spycatcher. The Attorney General’s case for injunctions does not draw any distinction between reporting on the contents of the book and serialisation of the book. It follows, therefore, that the claim for permanent injunctions fails.
7. SUMMARY
My conclusions are these. (1) Mr Wright committed a breach of his duty of confidence in writing Spycatcher and in having it published. His breach of duty has made him accountable for any profit thereby made. If sued in this country, permanent injunctions would be granted against him. (2) The Guardian and the Observer were not in breach of duty in publishing the articles about the Australian Spycatcher case in their respective editions of 23 June 1987 and 22 June 1987. (3) The Sunday Times was in breach of duty in publishing in the edition of 12 July 1987 the first instalment of its intended serialisation of Spycatcher. The Attorney General’s claim for an account of profits thereby made succeeds. (4) The duty of confidence incurred by the newspapers when they respectively received information about the contents of Spycatcher or a copy of the manuscript of Spycatcher, as the case may be, did not extend to the allegations about the plot to assassinate President Nasser, nor to the allegations about the plot to destabilise the Wilson government, nor, for different reasons, to the allegations about Soviet penetration of MI5. (5) The publication and worldwide dissemination of Spycatcher and the information therein contained which has taken place since July 1987 has had the result that there is no longer any duty of confidence lying on newspapers or other third parties in relation to the information contained in the book. The Attorney General’s claim for permanent injunctions, therefore, fails.
The consequence of these conclusions is that third parties can publish and distribute Spycatcher in this country, notwithstanding that Mr Wright and his agents could still be restrained from doing so. The position of third parties does not depend on whether they have purchased from Mr Wright the right to publish the book or whether they have simply elected to do so. The Sunday Times is in no worse position than other newspapers on account of its agreement with Mr Wright to pay him for serialisation rights. This anomaly arises, in my opinion, because the Crown does not claim to be entitled in equity to the copyright. If it were entitled in equity to the copyright it could, in reliance on its proprietary equitable right, restrain, if it wished, publication or serialisation of the book, leaving newspapers free to comment and report thereon as permitted by s 6 of the Copyright Act 1956. But confidential information, unlike copyright, has no firm proprietary existence and cannot be supported by proprietary remedies once the duty of confidence has gone.
There is one final matter I must deal with. The Attorney General fears that Mr Wright is nursing in his bosom a second volume of his memoirs, a Spycatcher 2. The Attorney General does not want publication of this volume to take place in this country, at least until the courts have had an opportunity to adjudicate on the propriety of publication. He fears that the newspapers may seek to pre-empt any court decision by publishing without any advance publicity that might alert the Attorney General and enable him to seek an interlocutory injunction. I do not think these fears are without foundation. Mr Trelford made it very clear that he opposes in principle any judicially imposed prior restraint. So counsel for the Attorney General invited me to grant an injunction
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restraining the newspapers from publishing any part of Spycatcher 2, without first giving some suitable notice of their intention to the Attorney General.
I have a good deal of sympathy for the Attorney General. In my view, a responsible newspaper ought not to publish unauthorised disclosures made by ex-MI5 officers without first giving careful consideration to the question whether the public interest factors in favour of publication outweigh the national security interest that such disclosures should not be made public, and, second, without giving notice to the Attorney General or to the Treasury Solicitor so that the courts can resolve any dispute. The editors have forcefully represented that the government ought not to be allowed to wield national security interests so as to stifle newspapers in placing before the public matters which require in the public interest to be so placed. The other side of that coin is that editors of newspapers should not abuse press freedom by making public disclosure of confidential information that, in the interests of national security, should remain secret. For these reasons I am in sympathy with the purpose of the proposed injunction. But it is an established rule of long-standing that the courts do not answer hypothetical questions and do not grant injunctions on issues that have not yet arisen. None of the newspapers has threatened to publish Spycatcher 2. There is nothing to suggest that Spycatcher 2 has yet been written. No one knows what, if it has been written, it contains. No one knows what part or parts of it, if it has been written, the newspapers may want to publish. So I decline to grant the injunction. I would draw attention, however, to the availability of the remedy of an account of profits and the deterrent effect of that remedy.
Actions dismissed. Order for account of profits in the action against the Sunday Times.
Jacqueline Metcalfe Barrister.
Appeal and cross-appeal
The Attorney General appealed to the Court of Appeal against the dismissal of the claims for injunctions and Times Newspapers Ltd cross-appealed against the order for an account of profits.
Robert Alexander QC, John Laws and Philip Flavers for the Attorney General.
Charles Gray QC, Desmond Browne and Heather Rogers for Observer Ltd and Guardian Newspapers Ltd.
Anthony Lester QC and David Pannick for Times Newspapers Ltd.
Cur adv vult
10 February 1988. The following judgments were delivered.
SIR JOHN DONALDSON MR.
Introduction
This appeal from a judgment of Scott J constitutes the latest, but assuredly not the last, episode in the Spycatcher saga. Previously the courts have been concerned with two quite different aspects of the problem. The first was how to preserve the status quo or ‘hold the ring’ pending a full investigation of the legal rights and duties of all those concerned (the interlocutory proceedings). These ended in the House of Lords in July 1987: see A-V v Guardian Newspapers Ltd [1987] 3 All ER 316, [1987] 1 WLR 1248. The second concerned the effect of injunctive orders on third parties and took the form of contempt proceedings against the independent and two other newspapers: see A-G v Newspaper Publishing Ltd [1987] 3 All ER 276, [1987] 1 WLR 942. These proceedings (the contempt proceedings) have not yet reached a final conclusion. Contempt proceedings have also been brought against the Sunday Times, but are temporarily in abeyance. The judgment of Scott J and
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this appeal, by contrast, are concerned with the final determination of the rights and duties of the parties.
I mention this at the outset lest it be thought that this court is not free to reach a decision which might be thought to be inconsistent with its earlier decisions or inconsistent with those of the House of Lords in the interlocutory proceedings. This would be a profound misconception. The earlier decisions were concerned with different situations, and different principles applied. The only exception to this general proposition is that this court is bound by its earlier decision in the contempt proceedings that an injunction addressed to one defendant newspaper may bind all the media of communication. This is only relevant to this appeal to the extent that it requires the court to take account of this potentially wider effect, if it contemplates imposing any injunction.
The history
Scott J, in section 2 of a judgment of conspicuous clarity (pp 552-558, ante), has reviewed the history of Spycatcher. I could not begin to improve on it and gratefully adopt it. My only comment is that, as I understand the position, the government’s decision not to apply the statutory powers available to prohibit specific imports of Spycatcher probably stems from doubts whether the use of such powers in the unique situatIon which has arisen was within the intendment of the legislation and consideration of whether the resources of the customs service should be diverted from other essential duties for the purpose of enforcing such a prohibition. Nevertheless the fact that there is no such prohibition is an important factor of which full account should be taken.
The domestic law of confidentiality
This is the subject of an exhaustive report by the Law Commission on Breach of Confidence (Law Com no 110), but for present purposes I think that it can be summarised as follows.
(1) A right to have the confidentiality of information maintained is well,recognised the domestic law of this country.
(2) The right can arise out of a contract whereby one party (the confidant) undertakes that he will maintain the confidentiality of information directly or indirectly made available to him by the other party (the confider) or acquired by him in a situation, eg his employment, created by the confider. But it can also arise as a necessary or traditional incident of a relationship between the confidant and the confider, eg priest and penitent, doctor and patient, lawyer and client, husband and wife. Finally, I would agree with Lord Widgery CJ in A-G v Jonathan Cape Ltd [1975] 3 All ER 484 at 495, [1976] QB 752 at 769 that ‘the court must have power to deal with publication which threatens national security’. In other words, the Crown, as the embodiment of the nation as a whole, has an enforceable right to the maintenance of confidentiality arising out of the very nature of such information and the consequences of its disclosure without regard to any contract binding the confidant to any relationship between him and the Crown or to the Official Secrets Act 1911 or any other legislative provision. This special right in the Crown is not relied on in the present proceedings, but it is right that it should be noted and affirmed.
(3) As a general proposition, that which has no character of confidentiality because it has already been communicated to the world, ie made generally available to the relevant public, cannot thereafter be subjected to a right of confidentiality: see O Mustad & Son v S Allcock & Co Ltd and Dosen (1928) [1963] 3 All ER 416, [1964] 1 WLR 109n. However, his will not necessarily be the case if the information has previously only been disclosed a limited part of that public. It is a question of degree: see Franchi v Franchi [1967] RPC 149 at 152–153 per Cross J. Furthermore, if the confidant could by great exertion have acquired the information for himself, but the confider is in fact the source of the confidant’s knowledge, the law may confer a right of confidentiality unless and until the formation is acquired by the confidant from other sources: see Schering Chemicals Ltd v Falkman Ltd [1981] 2 All ER 321, [1982] QB 1.
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(4) Since the right to have confidentiality maintained is an equitable right, it will (in legal theory and practical effect if the aid of the court is invoked) ‘bind the conscience’ of third parties, unless they are bona fide purchasers for value without notice (per Nourse LJ on 25 July 1986 in the interlocutory proceedings: ie A-G v Observer Ltd [1986] CA Transcript 696).
(5) The right will be lost or, at all events, the courts will not uphold and enforce it, if there is just cause or excuse for communicating the information in circumstances which would otherwise constitute a breach of the right. However, the nature and degree of the communication must be proportionate to the cause or excuse. Thus communication to those who have a duty to receive and act on the information may be justified in circumstances in which indiscriminate communication would not: see Francome v Mirror Group Newspapers Ltd [1984] 2 All ER 408, [1984] 1 WLR 892.
(6) The right will also be lost if the information which is subject to a right of confidentiality is published to the world by or with the consent of the confider, but it will not necessarily be lost if such publication is by or with the consent of the confidant: see Speed Seal Products Ltd v Paddington [1986] 1 All ER 91, [1985] 1 WLR 1327.
(7) There is an inherent public interest in individual citizens and the state having an enforceable right to the maintenance of confidence. Life would be intolerable in personal and commercial terms, if information could not be given or received in confidence and the right to have that confidence respected supported by the force of law. In the context of state confidentiality, the safety of the realm would be threatened if the confidentiality of secret security information could never be safeguarded. Equally, the processes of government would become impossible if, for example, the confidentiality of advice could never be safeguarded. But the weight to be attached to this factor will vary greatly according to the circumstances of the confidant and the nature of the case. However, there will be just cause or excuse for breaking confidence when there are countervailing public interests supporting publication which outweigh those supporting the right to confidentiality.
The European Convention on Human Rights
The United Kingdom has ratified the Convention for the Protection of Human Rights and Fundamental Freedoms (Rome, 4 November 1950; TS 71 (1953); Cmnd 8969). Article 10 of the convention provides:
‘(1) Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. This Article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises.
(2) The exercise of these freedoms, since it carries with it duties and responsibilities, may he subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.’
The starting point of our domestic law is that every citizen has a right to do what he likes, unless restrained by the common law, including the law of contract, or by statute. If, therefore, someone wishes to assert a right to confidentiality, the initial burden of establishing circumstances giving rise to this right lies on him. The substantive right to freedom of expression contained in art 10 is subsumed in our domestic law in this universal basic freedom of action. Thereafter, both under our domestic law and under the convention, the courts have the power and the duty to assess the ‘pressing social need’ for the maintenance of confidentiality ‘proportionate to the legitimate aim pursued’
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against the basic right to freedom of expression and all other relevant factors. In so doing they are free to apply ‘a margin of appreciation’ based on local knowledge of the needs of the society to which they belong: see Sunday Times v UK (1979) 2 EHRR 245 and Lingens v Austria (1986) 8 EHRR 407. For my part I can detect no inconsistency between our domestic law and the convention. Neither adopts an absolute attitude for or against the maintenance of confidentiality. Both contemplate a balancing of competing private and public interests.
The contents of Spycatcher and prior publication
In section 3 of his judgment (pp 558–566, ante) Scott J summarised the contents of Spycatcher, reviewed the evidence of the extent to which Mr Wright’s allegations had previously been made publicly by others and indeed by Mr Wright himself in the Granada TV programme broadcast on 16 July 1984 and chronicled the opportunities which the Attorney General had had of seeking to restrain such publications by injunction. Again I should like to express my admiration for the comprehensiveness and clarity of the judge’s exposition and, being wholly unable to improve on it, to adopt it in toto.
The appeal
Despite the fact that there have been times when the Spycatcher story has seemed to have an unique quality in its ability to raise blood pressures, metaphorically if not literally, and that no one could ever accuse any of the parties of understating their respective cases, the arguments before us were models of moderation, succinctness and assistance to the court. I am sure that I speak for my brethren as well as for myself when say that we are very much indebted to all concerned.
The position of Mr Wright
Before Scott J the Crown contended (1) that Mr Wright owed a duty to the Crown not, unless authorised to do so, to disclose any information obtained by him in the course of his employment in MI5. The duty derived from the nature of his employment in MI5 and the requirements of national security; (2) that Mr Wright broke that duty by writing Spycatcher and submitting it for publication in 1985; (3) that the publication of the book in July 1987 and its subsequent dissemination represented a further and continuing breach by Mr Wright of that duty.
The judge held that all three propositions were established and that, notwithstanding the worldwide distribution of the book, the Attorney General would be entitled to an injunction against Mr Wright, or any agent of his, restraining publication of Spycatcher in this country (p 586, ante).
In reaching this conclusion he accepted that ‘The requirements of national security and the need for secrecy about the affairs and personnel of MI5 are of very great weight indeed’ (p 574, ante), that on entering the service members of MI5 come under an obligation of secrecy of which they would not be relieved by lapse of time (p 585, ante) or by publication, however widespread, for which they were responsible (p 586, ante). However, he rejected the absolutist approach that nothing connected with a member’s life in the service could be considered too trivial to be subject to a strict obligation of secrecy and that no countervailing consideration of public interest could ever override this obligation.
Quite apart from the fact that no one has challenged these conclusions, I think that they are plainly correct, subject to two comments.
The first comment is in relation to triviality. In an intelligence or counter-intelligence context, there is great difficulty in knowing what is and what is not trivial. Intelligence and counter-intelligence operations have much in common with a jigsaw puzzle. A single piece of information viewed in isolation may indeed appear trivial. Viewed in the context of other seeming trivia, it may remain trivial or it may be of vast significance as illuminating the entire picture. Indeed, only a few members of the security service may
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know the full potential significance of particular pieces of information, if, as I assume to be the case, the service operates a strict policy of limiting the internal dissemination of information on a ‘need to know’ basis. A fortiori it will be difficult, if not impossible, for outsiders to assess what is and is not trivial. Nevertheless, subject to the difficulty inherent in classifying any particular information as trivial, the judge was obviously right.
The second concerns ‘just cause or excuse’ for publishing information which prima facie was subject to a lifelong obligation of secrecy. One such excuse would be that the publication was authorised. As the judge pointed out (p 586, ante), it was open to Mr Wright to have sought authority to publish his memoirs. This has been done by others, and, subject to deletions in the interests of national security, permission has on occasion been granted. Mr Wright did not adopt this course and it is nothing to the point to consider what, if anything, he would have been authorised to publish had he done so. Whatever else may be in doubt, it is clear that he would never have been authorised to publish the entire book which, as the judge found, was ‘in clear and flagrant breach of [Mr Wright’s] duty of confidence’ (p 585, ante).
Equally, even if it is possible to imagine a situation in which a member or ex-member of the service would be justified in publishing information about some part of his work without authority (the ‘iniquity’ defence, a matter which I shall have to consider later), no one could suggest, or does suggest, that Mr Wright was justified in publishing Spycatcher as a whole and again it is nothing to the point to consider what would have been his position if he had published a quite different and much abbreviated edition.
Fortunately or unfortunately, Mr Wright is not a party to these proceedings. The reason is that, in view of the Crown, there were insuperable procedural difficulties in the way of joining him as a party, when not only was he resident outside the jurisdiction but also the Crown had already begun proceedings against him in New South Wales. This may well be correct, but the likely position of Mr Wright if he had been a party is not without relevance.
The issues
There are five live issues.
(1) Were the Observer and the Guardian in breach of their duty of confidentiality when, on 22 and 23 June 1986, they respectively published articles on the forthcoming hearing in Australia? If so, would they have been restrained from publishing if the Attorney General had been able to seek the assistance of the court? The judge held that they were not in breach of this duty (pp 587, 589, ante) and accordingly no question arose of their being liable to be restrained.
(2) Was the Sunday Times in breach of its duty of confidentiality when, on 12 July 1987, it published the first extract of an intended serialisation of Spycatcher? The judge held that it was and that at that time the Attorney General was entitled to injunctions to restrain the Sunday Times from continuing with the serialisation (p 589, ante).
(3) Is the Attorney General now entitled to such an injunction (a) in relation to the Observer and the Guardian and (b) in relation to the Sunday Times, with special consideration to further serialisation? The judge held that he was not (p 593, ante).
(4) Is the Attorney General entitled to an account of the profits accruing to the Sunday Times as a result of the serialisation of Spycatcher? The judge held that he was (p 590, ante).
(5) Is the Attorney General entitled to some general injunction restraining future publication of information derived from Mr Wright or other members or ex-members of the security service? The judge held that he was not (p 594, ante).
The reports by the Observer and the Guardian in June 1986
In 1985 the Attorney General had begun proceedings in New South Wales seeking an injunction restraining the disclosure of any information obtained by Mr Wright in his capacity as an officer of the security service. The Australian courts were faced with the
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same problem as was to confront the British courts at a later date, namely, that if the information was published before they had had an opportunity of investigating the Attorney General’s claim, the action would become pointless and the administration of justice would be frustrated. The solution adopted by the Australian court was the same as that later adopted by the British court. An order was made that neither Mr Wright nor his publishers, nor any servant or agent of theirs, should make any such disclosure pending the trial of the action, which in the event began in November 1986. In addition, and this had no parallel in the British proceedings, perhaps because it was deemed unnecessary, the Australian court required the legal representatives of Mr Wright and his publishers to give personal undertakings not to divulge any such information acquired by them, whilst permitting them to discuss such matters amongst themselves in the course and for the purposes of preparing their clients’ defence.
The reports complained of were published by the Observer on 22 June 1986 and by the Guardian on the following day. They are so similar that it suffices to set out the Observer report alone. This was in the following terms:
‘MI5 memoirs to be revealed in courtroom
by DAVID LEIGH and PAUL LASHMAR
STARTLING allegations against MI5, the British security service, are due to be disclosed in an Australian court this week in a bid to defeat the British Government’s attempts to ban publication of an MI5 man’s memoirs.
The Observer has obtained details of what is disclosed in the manuscript, written by retired senior MI5 officer Peter Wright, who now lives in Tasmania.
Wright alleges:
—All diplomatic conferences at Lancaster House in London throughout the 1950s and 1960s were “bugged” by MI5, as were the Zimbabwe negotiations in 1979.
—Britain has bugged diplomats from France, Germany, Greece and Indonesia, and used microphones planted behind cipher machines.
—Soviet leader Nikita Khruschev’s suite at Claridges was bugged during his 1950s visit to Britain.
—The Soviet spy Guy Burgess attempted unsuccessfully to seduce Churchill’s daughter on Soviet instructions.
Wright reveals in his book not only a pattern of alleged routine burglary and bugging by MI5 men, but the details of two of the biggest potential unresolved post-war MI5 scandals.
The first was the unsuccessful plot to assassinate President Nasser of Egypt at the time of Suez. Wright reveals not only how Egyptian codes were broken by GCHQ, but how poisons were prepared and tested on sheep.
The second was what Wright’s lawyers reportedly describe as the “Ml5 plot” against Harold Wilson when he became Prime Minister in 1974.
Lawyers for Heinneman, the Australian would-be publishers of Wright’s manuscript, will argue before a Sydney court on Tuesday that all these disclosures are in the public interest.
The book reveals evidence of alleged treason within M15, breaches of international law, impropriety and misconduct. Even MI5’s habit of switching number-plates on cars is a breach, they say, of the British Road Traffic Act.
The British Government, in the unusual position of defending its traditional attitudes to secrecy before a relatively unsympathetic Australian court, has refused to discuss these issues.
It claims that, whatever the book says, it is all confidential and should not be published because Wright had a contractual obligation to his former employers. The Sydney court is expected to rule on whether Britain must answer Mr Wright’s claims.’
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The position of newspapers
The judge held that publication was justified on the comparatively narrow ground that the reports were a fair report of the forthcoming Australian trial, but he also examined other grounds on which the newspapers claimed to be justified in publishing. These are of wider significance for the future and it is therefore convenient to examine them in the context of this issue. All involve the weighing of conflicting aspects of the public interest.
In an earlier passage in his judgment Scott J had considered whether the duty to maintain confidentiality was in all circumstances the same in relation to third parties who became possessed of confidential information as it was in relation to the primary confidant. He referred to Schering Chemicals Ltd v Falkman Ltd [1981] 2 All ER 321, [1982] QB 1, Fraser v Thames Television Ltd [1983] 2 All ER 101, [1984) QB 44, R v Tompkins (1977) 67 Cr App R 181 and ITC Film Distributors v Video Exchange Ltd [1982] 2 All ER 241, [1982] Ch 431. His conclusion was that it was not necessarily the same. I agree. The reason is that the third party recipient may be subject to some additional and conflicting duty which does not affect the primary confidant or may not be subject to some special duty which does affect that confidant. In such situations the equation is not the same in the case of the confidant and that of the third party and accordingly the result may be different.
The judge then went on to hold (p 580, ante) that a newspaper’s duty is not necessarily coterminous with that of its informant, the confidant, and, more specifically, that the duty of the Observer and the Guardian was not necessarily the same as that of Mr Wright or any other member or ex-member of the security service. Giving appropriate emphasis to the word ‘necessarily’, I think that this is probably correct, because newspapers, unlike members of the service, have not voluntarily submitted themselves to a virtually all- embracing regime of secrecy, but the difference may be small because the public interest requirement for secrecy in relation to work which is undertaken for the protection of the realm is of outstanding importance and applies as much to disclosure by newspapers as to disclosure by a member of the service. Indeed it may apply with greater force in the context of a newspaper, because of the extensive nature of the publication. In words well known in the Second World War, ‘careless talk costs lives’ and careless talk by or through a national newspaper has a far greater potential for disaster than such talk between individuals.
This passage in the judge’s judgment may have been misunderstood and misinterpreted as constituting an affirmation that newspapers have a special status and special rights in relation to the disclosure of confidential information which is not enjoyed by the public as a whole. This is not the case. I yield to no one in my belief that the existence of a free press, in which term I include other media of mass communication, is an essential element in maintaining parliamentary democracy and the British way of life as we know it. But it is important to remember why the press occupies this crucial position. It is not because of any special wisdom, interest or status enjoyed by proprietors, editors or journalists. It is because the media are the eyes and ears of the general public. They act on behalf of the general public. Their right to know and their right to publish is neither more nor less than that of the general public. Indeed it is that of the general public for whom they are trustees. If the public interest in the safety of the realm, or other public interest, requires that there be no general dissemination of particular information, the media will be under a duty not to publish. This duty is owed to the public as much as to the confider. If the public interest forbids indiscriminate publication, but permits or requires that disclosure be to a limited category of persons, eg the police, the government, the opposition, or members of Parliament, the media will have a correspondingly limited right and duty.
Fair report of the Australian proceedings
The defence that the reports were a fair report of the Australian proceedings was, as I have said, upheld by the judge. He said (pp 586–587, ante):
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‘The litigation in Australia was a matter of legitimate interest to the United Kingdom public and of legitimate comment by the United Kingdom press. The Attorney General of this country was suing in a foreign country for an injunction to restrain the publication of the memoirs of an ex-officer of one of the security services of this country. The press of this country were, in my opinion, entitled and bound to report that that was happening, to inform the public of the issues raised by the litigation and to comment on those issues. In the course of so doing, it would be inevitable that the press would have to give an indication in general terms of the contents of the book. I must, therefore, examine the articles and ask myself whether they represent a fair report of the forthcoming Australian trial. In my judgment, they do. The allegations made by Mr Wright in Spycatcher are referred to in the articles only in very general descriptive terms. Very little, if anything, in the way of detail is disclosed. The articles do not go beyond the fair reporting of the nature of the case. In my judgment the duty of confidence lying on the newspapers as the recipients of Mr Wright’s unauthorised disclosures was not broken by fair reporting of this character. If that were not so, it would require the conclusion that the press of this country could not inform the public of this country of the court action being brought by the Attorney General in Australia. I am unable to accept this conclusion. The public interest in freedom of the press to report the court action outweighs, in my view, the damage, if any, to national security interests that the articles might, arguably, cause. I can see no “pressing social need” that is offended by these articles. The claim for an injunction against these two newspapers in June 1986 was not, in my opinion, “proportionate to the legitimate aim pursued“.’
Here I regret to say that I find myself in profound disagreement with the judge. It is, in my judgment, vitally important to remember that the question which he was asking himself, and the question which we have to ask ourselves, in relation to this issue has to be answered in the context of the situation as it existed on 22 and 23 June 1986.
At that time Mr Wright had already appeared on a Granada television programme, on 16 July 1984, and had alleged Soviet penetration of MI5 and ‘burglary’ directed against the Communist Party of Great Britain. He had also purported to identify certain members and ex-members of the security service. In addition, there had been twelve books and two other television programmes which included allegations also made in Spycatcher. A more detailed consideration of these matters and of the opportunities which the Crown had had to restrain these publications and broadcasts appears in Scott J’s judgment (pp 558–564, ante). However, the right to publish Spycatcher, containing as it did allegations which had not previously been made and a wealth of detail which was entirely novel, all under the authorship of a retired senior officer of the service, was being vigorously contested by the Attorney General and the widespread publication of the book in the United States, which in many respects transformed the situation, was at least 12 months into the future.
Faced with this situation and, I assume, the same knowledge of prior publication, the Australian court considered that the interests of justice required a temporary total ban on publication of the Spycatcher allegations in Australia. It was not at that stage concerned with the public interest in secrecy in relation to the United Kingdom security operations, or the public interest in the exposure of ‘iniquity’. Nor was it concerned with any differences which may exist between Australian and United Kingdom public interests. Its sole concern lay in protecting the rights of both parties on an interim basis in the interests of the administration of justice.
Now it is trite law that the jurisdiction of the Australian courts does not extend to the United Kingdom and vice versa. But the concept of justice is the same in both jurisdictions and, if, at that time, it was just to make such an order in Australia, and if there was any confidentiality in the allegations reported as being about to be made in the Australian proceedings, the United Kingdom public interest in justice being done between the Crown, Mr Wright and his publishers required that the orders of the Australian court be not undermined.
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As the judge pointed out (pp 587–588, ante), the reports in the Observer and the Guardian contained allegations which had never previously been made and elaboration on other allegations which had already been made elsewhere. Furthermore, the reports for the first time gave even the previously published reports the added authority of Mr Wright’s name, save in so far as he had himself made them in the Granada TV programme.
In these circumstances I cannot regard the prima facie right of the Crown to have its confidence maintained as having, at that stage, been eclipsed by an overriding public interest in publication, when account is taken of the public interest in the due administration of justice. In saying this I do not mean to suggest, and do not suggest, that some different and less specific report might not have been justifiable in the public interest of the British public being informed of the litigation undertaken by the Attorney General in Australia. Thus I would have regarded as wholly permissible a report that the Attorney General had begun proceedings in New South Wales with a view to obtaining an injunction restraining the publication by Mr Wright of his memoirs as a former member of the British security service. Further, the report could, in my judgment, have properly added that Mr Wright and his publishers were resisting the injunction on the grounds that the publication was in the public interest and that, in any event, the period under review was of some antiquity and some of the material had already been published. It could, and perhaps should, have added that as and when further information was given in open court, this would be reported, but that meanwhile the Australian court had decided that the interests of justice required that nothing further be disclosed.
At one time I thought that Scott J was mistakenly regarding the Observer and the Guardian reports as being, or being the equivalent of, ‘fair and accurate reports of judicial proceedings’, ie a report of what had occurred in open court. In this I was clearly in error, but, if only for completeness, I should add a word about such reports.
I accept, and indeed assert, that one of the foundations of a parliamentary democracy and of our way of life is that the administration of justice should be conducted not only on behalf of the public, which it always is, but also, whenever possible, in public. There is currently some controversy concerning the extent to which the administration of justice is in practice conducted otherwise than in public and this is very healthy. However, no one has ever contended that there can be no exceptions to the general rule. Thus no one has criticised the extreme secrecy which surrounded the hearing and the appeal in R v Chief Registrar of Friendly Societies, ex p New Cross Building Society [1984] 2 All ER 27, [1984] QB 227, the judgments in which, when published, revealed the reasons for the secrecy and the criteria which the court applied. In brief, in the absence of secrecy, the savings of depositors might have been threatened by unproved and possibly mistaken allegations.
If a litigant seeks the assistance of the courts or, in the case of a defendant, is subject to their jurisdiction, he must accept that the court may permit confidential information to be revealed and that, if so revealed, anyone will be free to disseminate it. It is on this basis that the media are free to publish fair and accurate proceedings of court proceedings, subject to the restrictions and special protections conferred upon them by the Contempt of Court Act 1981. But it is the court, not the media, which has the right and duty to pull aside the veil of secrecy or confidentiality by allowing the information to be revealed in open court.
Previous publication and ‘iniquity’
The judge also considered two alternative potential justifications for the reports, namely, that (a) some of the reported allegations by Mr Wright had already reached the public domain and had lost their character of confidentiality and (b) they were covered by the iniquity defence. The latter is essentially an allegation that in all the circumstances the public interest in preventing, exposing and punishing wrongdoing is of more weight than the public interest in maintaining secrecy or confidentiality.
As he, rightly, regarded these justifications as having a potentially cumulative effect,
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the judge dealt with them together in the following passage from his judgment. [Sir John Donaldson MR then set out the passage at pp 587-589, ante of Scott J’s judgment and continued:]
The rejection of the submission based on the alleged lack of accountability of the security service is now accepted. However, the newspapers have submitted that the judge should have held that the iniquity defence applied to all the allegations other than that relating to Sir Winston Churchill’s daughter and that all the allegations had been published previously, save three, namely, that allegation, that relating to the switching of number plates and that relating to Mr Kruschev’s suite at Claridges.
The short answer is the same as that which Scott J rightly gave in relation to Mr Wright himself and Spycatcher, namely, that it is nothing to the point that the newspapers might have been justified in publishing some different or shorter report. What is under consideration is the report which they in fact published.
Wrongdoing in the context of the security service
That said, the Spycatcher saga has underlined a real problem, namely, how should any wrongdoing by the security service be exposed and what role can the media properly play in such exposure.
In considering this problem, it is important not to lose sight of the legitimate, and the only legitimate, role of the service. This was defined by the Maxwell Fyfe Directive of 24 September 1952 to the Director-General in the following terms:
‘2. The Security Service is part of the Defence Forces of the country. Its task is the Defence of the Realm as a whole, from external and internal dangers arising from attempts at espionage and sabotage, or from actions of persons and organisations whether directed from within or without the country, which may be judged to be subversive of the State.
3. You will take special care to see that the work of the Security Service is strictly limited to what is necessary for the purposes of this task.
4. It is essential that the Security Service should be kept absolutely free from any political bias or influence and nothing should be done that might lend colour to any suggestion that it is concerned with the interests of any particular section of the community, or with any other matter than the Defence of the Realm as a whole.
5. No enquiry is to be carried out on behalf of any Government Department unless you are satisfied that an important public interest bearing on the Defence of the Realm, as defined in paragraph 2, is at stake.’
It will be seen that not only is its role confined to the defence of the realm, but it is directed to refuse to carry out instructions from the government of the day, unless the Director General is satisfied that the operation is necessary for this purpose. No one could possibly object to the existence of an organisation with a role thus limited. It is central to the maintenance of all our liberties.
Next it is important to bear in mind the controls which exist. The first line of control is the Director-General and those serving in the chain of command under him. Given that he, and all who serve under him, are aware of the directive, it would be difficult for the activities of the service to be diverted from their true role without objection at some level. This raises the question of to whom they should object. If the Director General were not himself believed to be involved, he is the obvious person to whom to complain. If he was involved, the obvious person is the Home Secretary or the Prime Minister to whom the service is responsible. If they were thought also to be involved, the objection would be taken to the Leader of the Opposition or to previous holders of the office of Home Secretary outside the government.
In fact the controls are even more extensive. There exists a Security Commission, of which the chairman is a Lord of Appeal in Ordinary and the vice-chairman a Lord Justice of Appeal. Although technically the function of the commission is to undertake
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investigations into the efficiency and proper working of the service at the request of the Prime Minister, I find it difficult to conceive of the members failing to take appropriate action if convincing evidence of wrongdoing was submitted to them. In addition, in the context of allegations of bugging, Parliament has passed the Interception of Communications Act 1985, under which a judicial commissioner has been appointed to review the carrying out by the Secretary of State of his duties under the Act. The Act also established a tribunal to receive and investigate complaints.
With such extensive control mechanisms and channels for complaint, all of which preserve the overwhelming public interest in preserving secrecy in this area, it might be thought that there could never be any justification for wider dissemination of allegations of wrongdoing. This, in my judgment, is too sweeping an answer. The public is entitled to demand, and the public interest requires, that the security service does not step outside its legitimate role, namely, the defence of the realm. This would, I am sure, be accepted by the government and the opposition alike. So it is inherently unlikely that any serious allegation known to both government and opposition will not be fully investigated and appropriate steps taken, if wrongdoing had occurred, to prevent any recurrence and to punish those responsible. Nevertheless, there must be a theoretical possibility that this may not occur. What then? The newspapers’ answer is that if the complaints are rejected, the only remaining way to expose wrongdoing is by unrestricted publication to the public at large.
This also is far too sweeping a proposition, for it assumes that which has still to be proved, namely, that the complaints have any real foundation. The fact that the complaints are by members or ex-members of the service is one, but only one, factor in assessing their credibility. In a service whose motto might well be ‘Their Trade is Suspicion’, it would be surprising if, from time to time, a member did not suspect the activities and motives of his own service. Truth or falsity can only be established by a secret investigation. Whether such an investigation is justified, and how it should be undertaken, are not matters to be decided by the media, but by the Director-General and the Prime Minister and Home Secretary of the day. If their decision is not acceptable to the opposition, it has its remedy in Parliament. The argument that the public interest is likely to be better served by a media decision to publish than by a parliamentary decision whether or not to order an inquiry, I find as surprising as it is arrogant. Is it really to be said that this is a media democracy rather than a parliamentary democracy?
That said, if the newspapers seriously concluded that parliamentary control had broken down and that the allegation of significant wrongdoing was supported by compelling evidence, I would accept their right and duty to make the allegation public, but even then I would restrict it to the allegation itself and would exclude any reporting of the detailed evidence of what was alleged, since such evidence could, even if the allegations were well-founded, do immense damage by revealing the operational methods of the service. We really cannot afford to lose an immensely valuable national baby in an indiscriminate outpouring of allegedly dirty bathwater. But I very much doubt whether any of the newspapers would suggest that we are in a situation in which parliamentary control has broken down.
In the course of preparing this judgment I have had the advantage of reading in draft the judgment to be delivered by Bingham LJ. In it he rightly suggests that, when this matter was last before this court, I went too far, or, as I would prefer to put it, did not express myself clearly when I said ([1987] 3 All ER 316 at 337, [1987] 1 WLR 1248 at 1275): ‘… mere allegations of iniquity can never override confidentiality. They must be proved and the burden of proof will lie on the newspapers.’ He then not unnaturally inquires how they can be expected to prove the allegations. What I should have said, and what I hope that I meant to say, was that the publication of bare allegations which clearly involve a breach of confidence cannot be justified simply because, if true, they would support a defence based on the public interest in the exposure of ‘iniquity’. The greater the degree and importance of the confidentiality which the newspapers would be
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breaching, and prima facie it can hardly be greater than in the context of revealing matters concerning the security service, the more sure they must be that the allegations are likely to be true before they can justify publication. This involves looking for independent corroboration and, in a national security context, considering what opportunity the government has had of investigating the allegations, what investigations have taken place and the result (if known), the extent to which the opposition is aware of the allegations, the extent to which the opposition accepts the government’s conclusions and the extent to which the ordinary process of parliamentary control of the executive is operating and may be relied on to safeguard the public interest. Just as it is not for the media to usurp the constitutional function of the courts, so it is not their right, duty or role to usurp that of Parliament.
Thus far I have not considered what is ‘wrongdoing’. Again there is a problem. Lord Denning’ Report into the Profumo affair (Cmnd 2152 (1963)) stressed that:
‘The members of the Service are, in the eye of the law, ordinary citizens with no powers greater than anyone else. They have no special powers of arrest such as the police have. No special powers of search are given to them. They cannot enter premises without the consent of the householder, even if they may suspect a spy is there.
He went on to say that this deficiency of powers was made up for by close co-operation with the police forces.
It would be a sad day for democracy and the rule of law if the service were ever to be considered to be above or exempt from the law of the land. And it is not. At any time any member of the service who breaks the law is liable to be prosecuted. But there is a need for some discretion and common sense. Let us suppose that the service has information which suggests that a spy may be operating from particular premises. It needs to have confirmation. It may well consider that, if he proves to be a spy, the interests of the nation are better served by letting him continue with his activities under surveillance and in ignorance that he has been detected rather than by arresting him. What is the service expected to do? A secret search of the premises is the obvious answer. Is this really ‘wrongdoing’?
Let us test it in a mundane context known to us all. Prior to the passing of s 79 of the Road Traffic Regulation Act 1967, fire engines and ambulances, unlike police vehicles, had no exemption from the speed limits. Their drivers hurrying to an emergency broke the law. So far as I am aware that is still the position in relation to crossing traffic lights which are showing red and driving on the wrong side of the road to bypass a traffic jam. The responsible authorities in a very proper exercise of discretion simply do not prosecute them.
Even in the context of the work of the security service which, I must stress, is the defence of the realm, there must be stringent limits to what breaches of the law can be considered excusable. Thus I cannot conceive of physical violence ever coming within this category. Or physical restraint, other than in the powers of arrest enjoyed by every citizen or under the authority of a lawful warrant of arrest. But covert invasions of privacy, which I think is what Mr Wright means by ‘burglary’, may in some circumstances be a different matter.
It may be that the time has come when Parliament should regularise the position of the service. It is certainly a tenable view. The alternative view, which is equally tenable, is that the public interest is better served by leaving the members of the service liable to prosecution for any breach of the law at the instance of a private individual or of a public prosecuting authority, but they may expect that prosecuting authorities will exercise a wise discretion and that in an appropriate case the Attorney General would enter a nolle prosequi, justifying his action to Parliament if necessary. In so acting, the Attorney General is not acting as a political minister or as a colleague of ministers. He acts personally and in a quasi-judicial capacity as representing the Crown (see the article
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entitled ‘How the security services are bound by the rule of law’ by Lord Hailsham in the Independent, 3 February 1988). It is not for me to form or express any view on which is the most appropriate course to adopt in the interests of the security of the nation and the maintenance of the rule of law. However that problem is resolved, it is absurd to contend that any breach of the law, whatever its character, will constitute such ‘wrongdoing’ as to deprive the service of the secrecy without which it cannot possibly operate.
The Sunday Times publication of extracts from Spycatcher on 12 July 1987
In holding that this publication constituted a breach of the Sunday Times’s duty to maintain confidentiality Scott J said (p 589, ante):
‘Mr Neil’s justification for his intended serialisation was expressed in his statement, read from the witness box, as follows: “My intention … was to inform the readers of the Sunday Times of the contents of the book so as to assist them to form a judgment for themselves on the important issues which Mr Wright had raised. My intention was to … contribute to an informed debate on important matters of public interest.” But neither he nor any member of his editorial staff gave any critical assessment as to what parts of Spycatcher raised issues of “important matters of public interest” on which the public should “form a judgment for themselves”’and what parts were simply unauthorised disclosures of confidential information. The contents of the extracts published on 12 July 1987 include a good deal of material that could not be represented as raising any issue on which the public should be invited to judge or in respect of which the public interest to be served by disclosure could be thought to outweigh the interests of national security. True it is that the extract contains also material that, in my opinion, it was legitimate to place before the public. I need not repeat what I have already said in relation to the articles in the Guardian and in the Observer. But the extract published in the Sunday Times was indiscriminate. Accordingly, in my judgment, the publication of the extract represented a breach of the duty owed by the Sunday Times. For the same reasons, the Attorney General was, in my view, entitled, in the circumstances as they stood in July 1987, to injunctions to restrain the Sunday Times from continuing with the serialisation.’
As a judge sitting in an appellate court, I am acutely aware of the advantages enjoyed by the trial judge in seeing and hearing the witnesses and appreciating the real meaning and credibility of their evidence. Nevertheless, mistakes can occur, particularly in a long and difficult case such as this. Counsel for the Sunday Times submits that such a mistake has occurred in that Scott J, in preparing his judgment, concentrated on Mr Neil’s proof of evidence, which was treated as part of his evidence-in-chief, and overlooked a question and answer in examination-in-chief:
‘Q. On what basis did you select the extracts? That is to say, what were your criteria in selecting them? A. I selected the extracts on the basis of what I considered to be of major public importance and of public interest. The major extract that I chose involved Peter Wright’s allegation that a group of agents inside MI5 had plotted to destabilise and, maybe, even attempt to topple the Wilson government in the early 1970s and I considered that a matter of major public importance and that was the basis on which I chose the extracts.’
He points out, correctly, that there was no cross-examination on this point. There is no suggestion that the judge did not believe Mr Neil. With some hesitation, I think that I am justified in approaching this issue on the footing that Mr Neil may in fact have discriminated to the extent indicated by this answer, when deciding what extracts to publish.
Whether this should lead us to any different conclusion from that reached by the judge is quite another matter.
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In April 1987 the Sunday Times began negotiations with Mr Wright’s Australian publishers, which led on 4 June 1987 to their obtaining the United Kingdom serialisation rights in Spycatcher for a down payment of £25,000 with further payments, depending on when publication took place, up to a maximum of £1500,000 in all. The letter which records the bargain stresses the need for total secrecy concerning the transaction, and I will assume in their favour that their sole intention was to preserve their investment against hostile actions by their competitors. I will also assume, again in their favour, that at that time they had no immediate intention of publishing.
No such assumption can be made concerning the intentions of Mr Neil and the newspaper when, in the first week of July 1987, they learned that Viking Penguin were proposing to publish Spycatcher in the USA on Monday, 13 July. They had no copy of the manuscript and Heinemanns, Mr Wright’s Australian publishers, were enjoined by the Australian courts not to let them have a copy. Mr Neil then conceived the idea that he might fly to the USA, obtain an advance copy of the Viking Penguin edition, bring it back to this country and use it as the manuscript for his serialisation. This he did.
No one knew better than Mr Neil that if the Attorney General got wind of any intention to publish, he would at once have applied to the courts for an interlocutory injunction to restrain publication and would have obtained it. He therefore resorted to the strategem of keeping the serialisation out of the first few thousand copies of the 12 July edition, some of which are circulated to other newspapers and to government departments, and including it only in the remainder of the 1,450,000 copy print run.
Counsel for the Sunday Times very frankly admitted that this conduct could fairly be described as ‘surreptitious and deliberately devious’. But it was much more than that. I accept that Mr Neil firmly and conscientiously believes that in a democracy no court should be entitled to make an order restraining an intended publication. In his view it should be left to the editors to decide what can be published, provided only that, if they make a judgment which involves a breach of the criminal law or infringes the rights of others, they are prepared to take the consequences. I also accept and assert that Mr Neil is fully entitled to hold this view, to express it and to support it with all the arguments and energy at his command. What he must not do is to seek to place himself above and beyond the reach of the law and the rule of law. This is exactly what he sought to do and to some extent succeeded in doing. Quite apart from whether it has any consequences in law, it was disreputable and irresponsible conduct, unworthy of him and of his newspaper.
I might add that the doctrine of ‘publish and be damned’ or ‘publish and take the consequences’ overlooks the fact that in some circumstances it is inevitably the nation rather than the editor which has to take the consequences.
I have already said that on 12 July 1987 the Attorney General would have been entitled to an interlocutory injunction restraining the serialisation which occurred on that day. I am further satisfied that if an instant trial could have been held, which it never can be, or if the situation was today as it was then, the Attorney General would have obtained a final permanent injunction.
For the Sunday Times it is argued that the public interest required that the allegations relating to attempts to undermine the Labour government in 1974-75, the activities which they describe as being those of ‘MI5’s dirty tricks department’, the plan to assassinate President Nasser of Egypt and the interrogation of Anthony Blunt, are all matters on which the public was entitled to be informed and to form its own judgment.
That some of these activities, if they occurred, would constitute the most serious wrongdoing is beyond dispute. Thus an attempt to overthrow the lawful government of this country could by no stretch of the imagination be within the remit of the security service to defend the realm. However, it is at this point that we come up against the fallacy of the Sunday Times approach to the problem of unrestricted publication. It fails to recognise these allegations for what they are, mere allegations. At that time all that the Sunday Times knew, and all that I know now, is that Mr Wright was making them.
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He may have been right; he may have been wrong. He may have been mad; he may have been bad.
The Sunday Times seems to think that the objection to publication was that it would embarrass the government or the security service. It was nothing of the sort. If either are guilty of wrongdoing, they deserve to be embarrassed and more. Indeed, embarrassing the government of the day is an essential part of the democratic process and one of the primary functions of the parliamentary opposition. No, the objection is quite different and the difference is fundamental. Let me explain.
It is most unlikely that an insider, such as Mr Wright, would write a book of memoirs which was wholly fictional from cover to cover, but quite possible that every single allegation of wrongdoing is the product of misunderstanding, mistake, inadequacy of information, malice or mental degeneration. The security service is thus faced with a situation in which it could not issue a blanket denial. On the other hand, anything less, if truth, would involve it in confirming details of, for example, what may be described as ‘fieldcraft’ which can be, and no doubt is, employed in the wholly legitimate activities of the service. Even firm denials may assist others who do not wish this country well by eliminating possibilities which they had under consideration. It is for this reason that successive governments of different political persuasions have refused to give any information on the work of the security service.
So we have this position. Mr Wright makes allegations. They are rejected by the government. Some of these had been made when previous and different governments were in power. They were similarly rejected. Mr Neil and the Sunday Times say that the inquiries which preceded these rejections were inadequate or failed to cover the whole ground. I have no knowledge of whether this is correct. That is a matter for Parliament and not for the courts. But the logic of the Sunday Times’s approach is that any disgruntled member of the security service has only to make sufficiently serious allegations of wrongdoing and, never mind whether they are wholly false, if they are rejected by the government of the day, the newspapers become entitled to publish them with the fullest supporting details of the secret workings of the service ‘in the public interest’. Never mind what damage is done to the ability of the service to function in defence of the realm. The bottom line is that, if the complainant is not satisfied with the response of the government, he can appeal to the public at large and have his allegations investigated by them with the assistance of the media. This is a travesty of the concept of the public interest.
Accordingly, I am in no doubt that, if circumstances had not changed since 12 July, the Attorney General would have been entitled to a permanent injunction restraining the serialisation of Spycatcher. The fact that a change, but not the only change since then, was to occur next day with the United States publication of Spycatcher is nothing to the point. Serialisation could not have been excused, if at all, until that publication had taken place on a significant scale.
Crown copyright in Spycatcher
ScottJ said that there were strong grounds for contending that, since Spycatcher was produced by Mr Wright in breach of his duty to the Crown, the copyright in the work was in equity that of the Crown. The Sunday Times being unable to contend that it was a purchaser of the serialisation rights without notice of the Crown’s equity, would be liable to account for any profits and could have been restrained from further serialisation. Accordingly, he expressed surprise that the claim was not made in copyright, but instead was based upon a right of confidence. It is, I think, a fair reading of his judgment to say that, if it had been based on copyright, he would have granted an injunction.
During the course of the original argument, counsel for the Attorney General gave a reason why the Attorney General had not relied on a contention that the Crown was the owner in equity of the copyright in Spycatcher. The reason was simple. The vice of Spycatcher is, in the view of the Attorney General, that it purports to tear away the veil of
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secrecy from what the Crown was entitled in the public interest to have kept secret. A remedy based on copyright would not meet this evil. It would limit the extent to which others could quote from the text of Spycatcher, but, because of the statutory right of ‘fair dealing’ contained in s 6 of the Copyright Act 1956, it would leave the media free to reveal and comment on much of its contents. In the circumstances the Attorney General’s attitude was wholly understandable.
In the course of reconsidering the arguments of the parties with a view to preparing these judgments, it appeared conceivable that our decision on the right of the Sunday Times to serialise Spycatcher in July 1987 and to further serialise it hereafter might be affected by consideration of copyright. We therefore invited further argument.
This argument made it clear that, not only had the Crown never in any respect based its claim on Crown copyright, but it did not wish to do so now. The reason was not only the pragmatic one to which I have already referred. The view taken by those advising the Crown was that, inter alia: (a) it would not be right to invite the court to rule on the Crown’s right in equity to the copyright in Spycatcher in the absence as parties of at least Mr Wright and his Australian publishers; (b) the Crown has throughout the proceedings based its claim, both here and abroad, solely on a right to confidentiality or the fiduciary duty of Mr Wright; (c) a Crown copyright, legal or equitable, would be difficult to sustain in law, since it would have to be based on a proprietary right in the literary form rather than the substance of Spycatcher. Any reliance solely on the substance of the book would represent a very considerable extension of the law of copyright; (d) neither respondent had submitted that the Crown’s case was adversely affected by the absence of a claim based on copyright.
Quite apart from the fact that it is not, in general, for the courts to take a point which is not taken by a party to the litigation, I find these reasons wholly compelling and fully accept that our decision should be based on an acceptance of the proposition that the Crown has no copyright interest in Spycatcher.
The entitlement of the Attorney General to injunctions at the present time
I find myself in complete agreement with Scott J that the worldwide distribution of Spycatcher by Mr Wright or by his licence or that of his Australian publishers has transformed the situation.
However, an analysis of the legal effect of this distribution is of crucial importance. Publication which was expressly or impliedly authorised by the Crown as confider would destroy the confidential character of any information so published. There would be no question of balancing public interests, no question of injunctive restraints on further publication and no question of accounts of profits arising from further publication.
A similar position would be reached if there was just cause or excuse for publishing Spycatcher in the public interest of exposing ‘wrongdoing’. The stamp of confidentiality on its contents would then have been deleted. The Crown’s right to confidentiality would have gone. But whatever may be said of individual allegations in Spycatcher, this is manifestly not the case so far as Spycatcher as a whole is concerned.
Large scale publication by a third party in ignorance of the confidentiality of the information might also destroy that confidentiality, but that is an unreal situation in the context of Spycatcher.
The reality is that Mr Wright, as confidant, his publishers as his agent or as third parties with notice of the Crown’s right to confidentiality or licensees with similar notice, have been solely responsible for the worldwide dissemination of the information contained in Spycatcher. Such dissemination undertaken knowingly in breach of the Crown’s right, cannot undermine that right. All that it can do is to affect the remedies which it is appropriate to make available to the Crown, and, in particular, the appropriateness of injunctive restraint on further publication or distribution of Spycatcher is a whole or of extracts from or comments on it.
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Injunctive relief relating to Spycatcher
This is an equitable remedy. Equity in this context equates with fairness and common sense. The publication which has already taken place has destroyed all secrecy as to the contents of Spycatcher. I doubt not that it is required reading in the security services of all countries throughout the world, although whether it appears in the fiction or the non-fiction sections of their respective libraries I do not know. It may appear in a special section labelled ‘Object lessons in treachery and its consequences’.
There has always been a legitimate public interest in all the citizens of this country knowing of Mr Wright’s allegations, but in my judgment, until publication took place abroad in circumstances in which neither the Crown nor the British courts could prevent it, the public interest in maintaining secrecy as to the operations of the security service, and being seen by the nation’s allies to be able to do so, wholly overwhelmed that other public interest. I would add, parenthetically, that in the light of the impossibility of ever publicly confirming or denying the truth of specific allegations, because of the comfort which it would give to the nation’s enemies, the duty of confidentiality must and does extend to false allegations as much as to those which are true.
In this new situation in which all secrecy has gone, no injunction could be granted if based on the secrecy factor. It would have no weight and would be overwhelmed by the legitimate public interest in being fully informed. But the Attorney General’s claim is not based solely on the secrecy factor. On his behalf it is accepted that, quite apart from the loss of secrecy which is total and irremediable, the successful launch of Spycatcher must also have led to some loss of the trust which members of the security service have in each other, it must have increased the likelihood that other members will break faith and follow suit, if only to deny Mr Wright’s allegations, it must have resulted in a loss of the trust reposed in the British service by intelligence and security services of friendly countries, it must have created a loss of confidence in informers that their identity would never be revealed (a revelation which in some circumstances would put their lives at risk), it must have damaged the service and the nation by making public the methodology and personnel and organisation of MI5 and it must in general have damaged the morale of the service. But these latter consequences, although serious, may not be wholly irremediable. A damage limitation exercise can be mounted by making it clear to the world that every possible step has been taken, and, if such a thing ever again occurred, will be taken to prevent publication or further publication and to deprive the primary confidant and all third parties affected by the duty of confidence of any profit from their action.
Mr Wright is the primary confidant and all three newspapers are affected by his duty of confidence, having received the information as to the contents of Spycatcher with knowledge that it had been published in breach of his duty to the Crown. Mr Wright is not a party to the proceedings and no injunction can therefore be granted directly restraining him from further disclosure in breach of his duty. The newspapers are, however, before the court and injunctions could be granted against them and, depending how they were framed, would affect the rest of the media.
I have some sympathy with this submission. As Lord Ackner put it ([1987] 3 All ER 316 at 363, [1987) 1 WLR 1248 at 1306):
‘English justice will have come to a pretty pass if our [inability) to control what happens beyond our shores is to result in total incapacity to control what happens within our very own jurisdiction.’
In principle I agree. But justice is only blind or blindfolded to the extent necessary to hold its scales evenly. It is not, and must never be allowed, to become blind to the reality of the situation, lamentable though that situation may be.
The reality is that there are no import restrictions on Spycatcher. Individual members of the public can therefore purchase the book from abroad and those who travel abroad
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on business or pleasure can purchase it there and import their copy on their return. The only reason why booksellers cannot import it in bulk and sell individual copies in this country and why libraries cannot stock it, is that this might constitute publication or distribution of Spycatcher and infringe the terms of the current temporary injunction.
Against that background we have to balance the public right and interest in freedom to receive information and ideas against the benefit to the Crown in terms of the public interest in obtaining final injunctions in substantially the same terms as those at present temporarily in force. There is without doubt some weight in the Attorney General’s submission that something may still be rescued from the wreck, but in my judgment it has little weight against the countervailing public interest. In truth the Crown’s relentless defence of its right to confidentiality has probably done more than anything else which has been or can be done to limit the damage which has been done.
That said, there is a very great public interest in seeking to discourage other Mr Wrights by, so far as possible, seeing that neither Mr Wright, his agents or licensees of the copyright in Spycatcher ‘get away with it’. This involves considering whether it is possible to limit their profits and recover such profits as they may succeed in making. If a bookseller were to buy copies of the book abroad, import them and resell them in this country, he would undoubtedly contribute indirectly to the profits of Mr Wright or his publishers, but in no real sense could he be regarded as an agent or licensee of Mr Wright. Similarly with a library which bought copies of Spycatcher to put on its shelves. This process of discouragement must, I think, be limited to action which will bear directly on Mr Wright, his agents and licensees. I would therefore rescind the present injunctions.
This is not, however, the end of the matter. All newspapers would then be free to comment on Spycatcher and to print limited extracts from it in the exercise of their right of ‘fair dealing’ under s 56 of the Copyright Act 1956 to exactly the same extent as they could in relation to any other copyright work without the benefit of some licence or authority from the copyright owner. This would not directly increase Mr Wright’s profits, although it might stimulate interest in Spycatcher. However that may be, the balance of public interest in my judgment favours allowing this freedom to be exercised by all, including the Sunday Times.
Where the Sunday Times is in a different position is in relation to serialisation. There they stand in the shoes of Mr Wright by virtue of a contract with and licence granted by his publishers. In serialising Spycatcher the Sunday Times becomes ‘Mr Wright in newsprint’ just as a British publisher of Spycatcher would stand in his shoes as ‘Mr Wright in hard or (as the case may be) soft covers’. Here the public interest in preventing Mr Wright or his publishers profiting from their respective breaches of the Crown’s right of confidence is very much stronger and, given the media’s right of ‘fair dealing’ in relation to the book, an unrestricted right in booksellers to sell the book if acquired from abroad and of libraries to stock it, the countervailing public interest in there being yet another source for obtaining the book and the information contained therein is much weaker. Balancing these factors, I have no doubt that the Sunday Times should be restrained from further serialisation, an injunction which would bind any other person within the jurisdiction who obtained serialisation rights.
I know that it will be said, and indeed it was said in argument, that this is but to revive part of the order made by this court at the interlocutory stage, an order which the House of Lords dismissed summarily as being unworkable and probably contrary to law. I do not see why it is unworkable, bearing in mind the well-known distinction between ‘fair dealing’ and publishing under licence from the copyright holder. The Sunday Times says that the distinction causes problems for the newspaper’s lawyers, but, if so, they have to live with the problem in relation to all works in respect of which they have no licence from the copyright holder, and I see no reason why they should not live with it in relation to Spycatcher. As to this being an approach which is contrary to law, no reason was given for this assertion and I have spelt out why, in my judgment, it is fully justifiable and indeed right.
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Is the Attorney General entitled to an account of the profits accruing to the Sunday Times?
The judge held that he was, and, for the reasons which I have already expressed, I agree. If my view were to prevail, this would necessarily be limited to the profits from the serialisation which took place on 12 July 1987, because no further serialisation would be permitted. I find it both ironic and distasteful that in calculating those profits the Sunday Times will be able to deduct the payment made to Mr Wright or his publishers for the right to serialise, but I can see no escape from this conclusion. It may, however, provide an additional reason for restraining any further serialisation by the Sunday Times.
Is the Attorney General entitled to some general injunction restraining the future publication of information derived from Mr Wright or other members or ex-members of the security service?
In the court below Scott J was asked to grant an injunction restraining the newspapers from publishing Spycatcher 2, a book which, so far as is known, has not yet been written, but which the Attorney General feared that Mr Wright might be nursing in his bosom. Whilst expressing considerable sympathy with this claim, the judge rejected it on the well-established ground that the courts do not grant injunctions on issues which have not yet arisen.
In this court, the same plea was put forward, but on a more realistic basis. It is perhaps unlikely that there is, or will be, a Spycatcher 2. But it is highly likely that Mr Wright will be induced to give interviews in amplification of Spycatcher 1. Indeed in July 1987 the Sunday Times was seeking just such an interview, and I have little doubt that it was only the existence of the Australian court injunctions which prevented their being successful. With the removal of those restraints, such an interview may already have taken place. It is also likely that interviews have been, or will be, sought with other members or ex-members of the service who may well be tempted to respond, if only to give the lie to Mr Wright’s allegations.
There is undoubtedly a case to be made for restraining the three newspapers, and thus the media, from seeking to induce Mr Wright and other members and ex-members of the service to break their obligation of life long secrecy. Furthermore, there will be many inducements to them to succumb, some financial, but also, what is superficially more justifiable, a burning desire to set the record straight.
I confess that I have found this a difficult problem, but on balance I have come to the conclusion that such an injunction should not be granted. The injunction would be aimed at enforcing the legal duty not to induce conduct which would constitute a breach of confidentiality. So far so good. But the courts should not make orders whose scope depends on first determining disputable issues of fact or law. A person who is the subject of an injunction must know precisely where he stands. Any injunction of the type sought by the Attorney General might expose the media to penalties for contempt of court according to how issues as to prior publication and justification on grounds of established wrongdoing were decided. This is too uncertain to permit of such an injunctive order.
Notwithstanding this conclusion, I hope that it is not too late to make two very serious pleas. The first is to members and ex-members of the security service. When you entered the service you must have been told that there would be no great financial rewards and that your efforts in defence of the realm had of necessity to be unheralded and unsung. In agreeing to serve on these terms, you made great sacrifices and you deserve the thanks of the nation. In the months and perhaps years to come, you will on occasion be sorely tempted to break faith with the service and thus with the nation. Rewards and blandishments will be offered to you. It will be suggested that you owe it to your colleagues to speak out. Do not succumb. If you feel moved to reply at all, let me commend for your consideration: ‘Get thee behind me … ’
My second plea is to the media. Ponder the needs of the nation for a security service
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which is indeed secret. Ponder the consequences of breaches of this essential secrecy. Do not underestimate the desire of at least the majority of the members of the security service and of senior politicians of all parties to ensure that the service serves the nation strictly in accordance with the Maxwell Fyfe Directive. Never forget how easy it is to confuse the word ‘self’ with that of ‘public’ when attached to the word ‘interest’.
Finally, Parliament may wish to reconsider the D notice machinery. It has worked well in the past, but if any part of the media is not only going to ignore it, but also to resort to subterfuges to prevent any adjudication by the courts, the time may have come to think again. Subject to any revision of the Official Secrets Acts, which may be an alternative approach, what, as it seems to me, may now be required is some right in the Home Secretary to issue instructions equivalent to a D notice, but having the force of an ex parte injunction, the media being entitled to appeal to the courts or to some special tribunal to have it set aside or modified, the proceedings necessarily being held in camera.
I would allow the Crown’s appeal in relation to the June 1986 reports of the Observer and the Guardian and in relation to the further serialisation of Spycatcher, but would otherwise dismiss both the appeal and cross-appeal.
DILLON LJ. I would at the outset pay tribute to the clarity with which the facts and arguments have been set out in the judgment of Scott J in the court below. His judgment was given at the trial of the actions, and on this appeal the most obvious issue that we have to decide is whether he was right to refuse, because of the publication of Spycatcher in the United States and elsewhere, to continue the interlocutory injunctions (referred to in the House of Lords as ‘the Millett injunctions’) which had previously been granted against the three newspapers until judgment in the actions or further order.
We have also, however, to decide a number of further issues, viz: (1) were the Observer and Guardian entitled to publish their articles of 22 and 23 June 1986 when they did? (2) was the Sunday Times entitled to publish on 12 July 1987 the first instalment of its proposed serialisation of Spycatcher under licence from Mr Wright’s Australian publishers? (3) even if the Millett injunctions are not continued, should the Sunday Times be restrained from any further serialisation of Spycatcher? and (4) even if the Millett injunctions are not continued in relation to Spycatcher, should the three newspapers or any of them be restrained from publishing without prior official clearance any further information as to security service activities which they may obtain hereafter from Mr Wright or any other officer or ex-officer of the security service?
These are all important issues and some of them I have found extremely difficult, particularly the issue numbered (i) above, the implications of which are perhaps the most important of all.
It has been common ground between all the parties to this appeal that Mr Wright owed a duty of secrecy to the British government. That was a duty which he voluntarily assumed when he accepted appointment to the security service. It precluded him, and, subject to the matters canvassed below, still precludes him, from disclosing to anyone else, unless duly authorised by his department, any information which he had obtained or to which he had access owing to his position as an officer of the security service. Whether or not he had justification, on the principles discussed below, for publishing some particular parts of the contents of Spycatcher, the publication of the book as a whole was a flagrant breach on his part of his duty of secrecy. The subsequent widespread distribution of the book, without the consent of the British government, by Mr Wright or his various publishers in the United States, Canada, Ireland and elsewhere did not automatically absolve Mr Wright from his duty of secrecy or from the consequences of his breaches of that duty: see the decision of this court in Speed Seal Products Ltd v Paddington [1986] 1 All ER 9 1 at 94-95, [1985] 1 WLR 1327 at 1331 to 1332. He could not automatically release himself from his duty by breaking it.
The duty of secrecy owed by Mr Wright differs from the duty of confidence which an employee or ex-employee may owe to a private employer, in that the duty of confidence
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owed to a private employer is founded on the need to protect some proprietary interest of the employer, characteristically the goodwill of the business, whereas the duty of secrecy owed by Mr Wright and all other officers of the security services is founded on the need to protect the public interest, specifically in national security. It therefore incidentally follows that matters covered by Mr Wright’s duty of secrecy are more likely to be of interest to the media in this country than are the commercial secrets of a private employer, since the media and its readers have a greater concern with the public interest than with the commercial affairs of private employers.
The media have greater powers of disseminating information widely than other people have, but it has not been suggested by any party to this appeal that the media have any special privileges in law in the matter of freedom of speech. They have the same rights of free speech as anyone else, subject to the same constraints.
One of those constraints is that anyone who receives information from a person bound by an obligation of secrecy or confidence, and who knows that the information has been passed to him by his informant in breach of that obligation, becomes automatically prima facie himself bound by a like obligation of secrecy or confidence which will prevent his disseminating the information any further, or making any use of it without the consent of the person to whom the obligation of secrecy or confidence was owed by the informant. That applies whether the recipient of the information be a new employer to whom an employee chooses to divulge the trade secrets of his former employer, or a newspaper to whom an ex-officer of the security service chooses to divulge, whether gratuitously or for a fee, secret information about the activities of MI5.
The Crown accepts that the obligation of secrecy binding Mr Wright had one exception, in that Mr Wright might in some circumstances have been entitled to disclose some secret information on the grounds of what has for convenience been labelled ‘iniquity’. That refers to the defence to an action for breach of confidence which was discussed by Griffiths LJ in Lion Laboratories Ltd v Evans [1984) 2 All ER 417 at 432-433, [1985) QB 526 at 550, where he said:
‘The first question to be determined is whether there exists a defence of public interest to actions for breach of confidentiality and copyright, and, if so, whether it is limited to situations in which there has been serious wrongdoing by the plaintiffs, the so-called “iniquity” rule. I am quite satisfied that the defence of public interest is now well established in actions for breach of confidence … I can see no sensible reason why this defence should be limited to cases in which there has been wrongdoing on the part of the plaintiffs. I believe that the so-called iniquity rule evolved because in most cases where the facts justified a publication in breach of confidence the plaintiff had behaved so disgracefully or criminally that it was judged In the public interest that his behaviour should be exposed. No doubt it is in such circumstances that the defence will usually arise, but it is not difficult to think of instances where, although there has been no wrongdoing on the part of the plaintiff, it may be vital in the public interest to publish a part of his confidential information.’
Griffiths LJ also accepted in Lion Laboratories Ltd v Evans [1984] 2 All ER 417 at 433, [1985] QB 526 at 550 that there is a public interest of a high order in preserving confidentiality within an organisation, and that loyalty is a virtue that it is in the public interest to encourage rather than to destroy by tempting disloyal employees to sell confidential documents to the press. It was held in the Lion Laboratories case that it was the function of the court at trial to balance the public interest in disclosure against the duty of confidentiality and the virtues of preserving confidence and loyalty. That that balancing is the court’s function, rather than anyone else’s, is accepted by all parties to this appeal. It is in line with the view taken in Conway v Rimmer [1968) 1 All ER 874, [1968] AC 910 on the balancing of the public interest involved, where the Crown has claimed that on grounds of public interest particular documents ought not to be disclosed in litigation: see especially the speech of Lord Reid ([1968] 1 All ER 874 at 88o-881,
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[1968] AC 910 at 940-941) and his emphasis on the word ‘necessary’ in considering whether keeping a class of documents secret was necessary for the proper functioning of the public interest.
With that preliminary, I turn to the main English authority relied on as showing what the court’s approach should be to the balancing exercise when the Crown seeks to restrain publication of confidential material on grounds of protecting the public interest. That is the decision of Lord Widgery CJ in the Crossman diaries case, A-G v Jonathan Cape Ltd [1975] 3 All ER 484, [1976) QB 752. The issue there was that the Crown sought to restrain, on public interest and confidentiality grounds, the publishing of the diaries which a cabinet minister had kept while in office and which included his accounts of the proceedings of cabinet committees whose meetings he had attended. Lord Widgery CJ said ([1975] 3 All ER 484 at 492, [1976] QB 752 at 767):
‘… it seems to me that the degree of protection afforded to cabinet papers and discussion cannot be determined by a single rule of thumb. Some secrets require a high standard of protection for a short time. Others require protection until a new political generation has taken over. In the present action against the literary executors, the Attorney-General asks for a perpetual injunction to restrain further publication of the diaries in whole or in part. I am far from convinced that he has made out a case that the public interest requires such a draconian remedy when due regard is had to other public interests, such as the freedom of speech.’
He commented that secrets relating to national security ‘may’ require to be preserved indefinitely (see [1975] 3 All ER 484 at 495, [1975] QB 752 at 700) and, after considering other matters of secrecy, he expressed his conclusions ([1975) 3 All ER 484 at 495, [1976] QB 752 at 770-771):
‘It is evident that there cannot be a single rule governing the publication of such a variety of matters. In these actions we are concerned with the publication of diaries at a time when 11 years have expired since the first recorded events. The Attorney-General must show (a) that such publication would be a breach of confidence; (b) that the public interest requires that the publication be restrained, and (c) that there are no other facets of the public interest contradictory to and more compelling than that relied on. Moreover, the court, when asked to restrain such a publication, must closely examine the extent to which relief is necessary to ensure that restrictions are not imposed beyond the strict requirement of public need.’
Lord Widgery CJ’s judgment was accepted as a correct statement of the common law, and was applied by Mason J in the High Court of Australia in Commonwealth of Australia v John Fairfax & Sons Ltd (1980) 32 ALR 485. In my judgment the passage which I have quoted set out the tests in law which we should apply to the issues which we have to decide in the present case. They recognise, not for the first time, that there is an important public interest in freedom of speech which has in any balancing exercise to be weighed against the other interests involved.
We have been referred in the course of argument to art 10 of the European Convention for the Protection of Human Rights and Fundamental Freedoms (Rome, 4 November 1950; TS 71 (1953); Cmd 8969), as interpreted by the European Court of Human Rights in Sunday Times v UK (1979) 2 EHRR 245, and in Lingens v Austria (1986) 8 EHRR 407. Article 10 is set out in the judgment of Scott J and I do not propose to repeat it. Although the United Kingdom government adhered to the convention, it is technically not part of English law. But that does not matter, since in my judgment there is no significant difference between art 10, as interpreted by the European Court, and the law of England as declared by Lord Widgery CJ; I do not find this in the least surprising, since at any rate since 1688 it has been a major concern of the courts to present a barrier to inordinate claims by the executive, as Lord Roskill pointed out in Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935 at 958, [1985) AC 374 at 420.
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I accordingly turn to consider, by the criteria in Lord Widgery CJ’s judgment, the issue set out at the very beginning of this judgment, whether the judge was right to refuse to continue the Millett injunctions because of the publication of Spycatcher in the United States and elsewhere. This involves considering the publication of the book Spycatcher as a whole. Accordingly, questions which have been discussed in argument, such as how far publication is franked by the ‘iniquity’ defence, how far particular allegations of iniquity have already been inquired into and whether there is any genuine basis for regarding previous inquiries as unsatisfactory, whether the subject matter of particular allegations can no longer be regarded as secret because they have been published in this country before the publication of Spycatcher without objection by the Crown, and whether the events (or alleged events) the subjects of other allegations took place so long ago that publication of Mr Wright’s account of them now cannot sensibly affect national security are all merely aspects of Lord Widgery CJ’s general test, and not, so far as the book as a whole is concerned, separate questions that the court has to answer.
Obviously the fact that Spycatcher has been so widely published in the United States and other countries has had the effect that all the contents of Spycatcher are now well known to every hostile, or potentially hostile, power which is at all interested in the activities of the British security services. Obviously also any adverse effect which the publication of Spycatcher would have been likely to have on the readiness of the intelligence services of friendly powers to impart confidential information to the British security services has by now largely been suffered; for my part, however, I doubt whether this adverse effect can really have been all that great, since the intelligence services of friendly powers must already have been all too well aware of the case of Maclean, Burgess, Philby, Blunt, Blake and others whom I need not name who had been members of the British security services and had traitorously supplied secret information to the USSR or its agents, and the friendly intelligence services must also have been aware of the publication of Mr Chapman Pincher’s books.
The Crown relies, however, on other aspects of injury to the public interest in the field of national security, which, it is persuasively submitted, are likely to be suffered if the Millett injunctions are not continued permanently. These are set out in the evidence of Sir Robert Armstrong, the Cabinet Secretary. Among the more important are the risk that Mr Wright may be moved to make yet further disclosures in breach of his duty of secrecy if suitably remunerated, and the risk that other present or past members of the security services may be harassed or cajoled by the media into disclosing further secrets, either for gain and from greed or from a more honourable, if in my judgment misplaced, desire to set the record straight and refute statements made by Mr Wright in Spycatcher which they believe to be calumnies. It is also argued that the morale of the members of the British security services will be seriously affected if the members of those services see even the English court failing to grant injunctions against the further dissemination of Spycatcher and all its contents.
As against these factors, it is urged that any former member of the security services who was minded to make any major disclosure of secret information would have to emigrate and leave this country for good in order to avoid prosecution under the Official Secrets Act 1911. Moreover, if a former member disclosed secrets to a newspaper on a non-attributable basis, he could not safely assume that the newspaper would not be compelled by the courts to disclose its source.
More fundamentally, however, there is the point that (whether or not anything contained in the book is technically still confidential) for the courts to continue the Millett injunctions further would be futile and just plain silly, now that Spycatcher has been so widely circulated, in the English language, throughout the world. Everyone anywhere else in the world can read and discuss its contents and the Crown has accepted that it is impracticable to prevent the importation of individual copies into this country, with the result that anyone in this country who wants one can obtain his own copy from the United States or, I apprehend, Ireland and possibly elsewhere.
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The arguments for or against the continuation of the Millett injunctions after the trial of the actions are set out as persuasively as possible each way in the speeches of Lord Templeman and Lord Ackner on the one hand and Lord Bridge and Lord Oliver on the other hand on the recent interlocutory hearing in the House of Lords (see A-G v Guardian Newspapers Ltd [1987) 3 All ER 316, [1987) 1 WLR 1248). Nothing said by any of their Lordships about the continuation of the injunctions after the trial binds us, since the actual decision of the majority in the House was merely to continue the Millett injunctions on an interlocutory basis until trial. But I find no difference of any significance between the evidence given at the trial to which our attention has been drawn, and the evidence which was before the House of Lords on the interlocutory application. The views expressed by their four Lordships are therefore available to us for their persuasive value. For my part I prefer, without any hesitation, the views of Lord Bridge and Lord Oliver.
Accordingly, I agree with Scott J that the Millett injunctions should not be continued against any of the three newspapers. It follows that no injunction should be granted to restrain any public library in this country from stocking copies of Spycatcher and lending them out, or to restrain booksellers in this country from selling copies of Spycatcher bought from abroad. I would regard it as manifestly unfair, and unjustifiable by any consideration of national security, that those who have sufficient opportunity, means or initiative can get copies of Spycatcher from abroad and read them and lend them around here whereas others here cannot read the book.
I reach this conclusion by the balancing exercise indicated by Lord Widgery CJ, on which the appropriateness of the remedy must often be one of the factors for consideration. I do not therefore find it necessary to rule on the somewhat arid question how far information disclosed in Spycatcher is technically still secret or confidential, because the publication of Spycatcher is known by everyone to have been a wrongful act by Mr Wright. Wherever, as in A-G v Jonathan Cape Ltd [1975] 3 All ER 484, [1976] QB 752 or Lion Laboratories Ltd v Evans [1984] 2 All ER 417, [1985] QB 526 or in the present case, or in the slightly different context of Conway v Rimmer [1968)1 All ER 874, [1968] AC 910 the court has to perform a balancing exercise between conflicting interests, the Crown’s right to enforce secrecy or withhold disclosure cannot be absolute.
The court is not, in my judgment, constrained to follow beyond the point of absurdity the logic of counsel’s argument for the Attorney General that any person who comes into possession of information contained in Spycatcher, knowing as he must that that information has been published by Mr Wright in breach of his duty of secrecy, necessarily comes under the same duty of secrecy and is precluded in conscience thereby from disseminating that information any further. I would pray in aid the passage in Lord Bridge’s speech A-G v Guardian Newspapers Ltd [1987] 3 All ER 316 at 345, [1987) 1 WLR 1248 at 1285:
‘The legal basis for the Attorney General’s claim to enjoin the newspapers is that any third party who comes into possession of information knowing that it originated from a breach of confidence owes the same duty to the original confider as that owed by the original confidant. If this proposition is held to be of universal application, no matter how widely the original confidential information has been disseminated before reaching the third party, it would seem to me to lead to absurd and unacceptable consequences. But I am prepared to assume for present purposes that the Attorney General is still in a position to assert a bare duty binding on the conscience of newspaper editors which is capable of surviving the publication of Spycatcher in America. The key question in the case, to my mind, is whether there is any remaining interest of national security which the Millett injunctions are capable of protecting and, if so, whether it is of sufficient weight to justify the massive encroachment on freedom of speech which the continuance of the Millett injunctions in present circumstances necessarily involves.’
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The question Lord Bridge poses I would answer as he did, viz that the remaining interest of national security does not justify the massive encroachment on freedom of speech which the continuance of the Millett injunctions in present circumstances would necessarily involve. In Lord Widgery CJ’s terms the continuation of the Millett injunctions is not necessary to protect the public interest in national security and would go beyond any strict requirement of public need, when due regard is had to the public interest in freedom of speech.
I turn therefore to the further issues which I numbered (1) to (4) earlier in this judgment.
(i) Were the Observer and Guardian entitled to publish their articles of 22 and 23 June 1986 when they did?
The judge held that they were, because the articles were legitimate and fair reporting of the proceedings in the Australian courts. He added that Mr Trelford and Mr Preston had selected the matters to be mentioned in the articles and had considered whether public disclosure of those matters was indeed justified. He held that the editors’ answer to that question was the right answer.
It is necessary to consider a little carefully what the judge meant when he said that the articles represented the legitimate and fair reporting of the court action in Australia. It is generally accepted that matters stated or read out in open court in the course of legal proceedings may be taken down and then published as part of a fair report of the proceedings in the court unless the particular court has, in the exercise of some relevant power, ordered otherwise. That general principle has, however, nothing whatever to do with the Observer and Guardian articles of 22 and 23 June, since, as Scott J obviously realised, it is apparent from the wording of the articles, they were published before any hearing in open court of the Australian proceedings had begun.
The newspapers were, however, fully entitled to report, as a matter of public interest to their readers, that proceedings were due to be heard in court in Sydney in the following week in which the British government was attempting to ban the publication of the memoirs of a retired senior MI5 officer, Mr Wright, on the grounds of breach of confidence and breach of contractual obligations to his former employers, and Mr Wright’s Australian publishers would be arguing that all disclosures in Mr Wright’s memoirs were in the public interest, and that much of the information in his memoirs was already public or known to the Russians. The question is whether the newspapers were entitled to go further and include the brief descriptions they did include in their articles of some of the matters mentioned in Mr Wright’s memoirs.
This, on the principles discussed above, involves a balancing act in the light of all the circumstances, including such matters as the extent to which the matters mentioned in the articles had already been made public in this country, the extent to which they involved ‘iniquity’ on the part of the security services, the extent to which they were trivial and were matters of old history and so forth. It also involves consideration, both as part of the overall balancing exercise and separately as an arguably conclusive overall reason against publication of any details of the nature of any of Mr Wright’s allegations, of the injunctions and undertakings in the Australian proceedings which precluded disclosure of any information obtained by Mr Wright, as an officer of the British security service. Since none of the journalists who wrote the articles was called to give evidence, the court was fully entitled to infer, as Scott J did, that the journalists must have received the information on which they based the respective articles either from someone in the offices of the Australian publishers or from someone in the offices of the Australian solicitors for Mr Wright and the publishers. The court should also, in my judgment, infer that the Observer and the Guardian were aware of the injunctions and undertakings against disclosure then subsisting in the Australian proceedings.
For my part, however, I cannot see how the injunctions and undertakings in the Australian proceedings can operate extra-territorially so as to bind persons outside
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Australia, who were not in any way before the Australian court, such as the Observer and the Guardian, and preclude those persons from publishing information in England if by English law they were entitled to publish that information here. Comity does not require the English court to give extra-territorial effect here to orders of the courts of friendly foreign states: see British Nylon Spinners Ltd v Imperial Chemical Industries Ltd [1952] 2 All ER 780, [1953] Ch 19. I do not therefore regard the Australian injunctions and undertakings as a conclusive overall reason against the publication by the Observer and the Guardian of the details of any of Mr Wright’s allegations. The question is whether on a proper balancing exercise the Observer and the Guardian were entitled by English law to publish such details as they did publish in the two articles.
The extent to which the allegations of Mr Wright referred to in the two articles went beyond what had by June 1986 been previously published in this country by Mr Chapman Pincher’s books and on television is analysed by Scott J (see p 559, ante).
One of the fresh allegations is the allegation in the Observer article that the Soviet spy Guy Burgess attempted unsuccessfully to seduce Churchill’s daughter on Soviet instructions. For my part I would regard the publication of that allegation, in the brief terms used in the Observer as late as June 1986, as a matter of the utmost triviality, whether or not the Russians then knew that the British knew that Burgess had had such instructions. We are of course reminded of, and accept, Sir Robert Armstrong’s evidence that there may be pieces of information which appear to be entirely trivial in themselves, but may yet be of great value to a potentially hostile power because they enable the intelligence officers of that power to link up other bits of information those officers already have. But the Crown cannot therefore claim that the courts, in carrying out the balancing exercise required of them, must assume that there is a real likelihood that any piece of information, however apparently trivial, has an undetected value to a potentially hostile power. There is indeed an understandable ambivalence in the Crown’s position, in that, while it accepts that it is for the court to carry out the balancing exercise in such a case as this, it is also urging that the court must accept, or assume, from the Crown the weight to be attached to each piece that goes into the Crown’s side of the scales.
I should mention two other allegations under the general heading of iniquity’. In the first place I agree with Scott J that the allegation that a plot to assassinate President Nasser was hatched and was being seriously considered by those in authority is an allegation of iniquity of a very high order. In the second place, I regard allegations of the bugging by MI5 of the London embassies of friendly foreign powers as an allegation of ‘iniquity’ since the bugging of an embassy must be a breach of all or some of arts 22, 24 and 27 of the Vienna Convention on Diplomatic Relations (Vienna, 18 April 1961; TS 19 (1965); Cmnd 2565), and the provisions of these arts of the convention (to which the United Kingdom is a party) have the force of law in the United Kingdom under the Diplomatic Privileges Act 1964.
But I would enter a caveat against the view that where what is in question is the disclosure to the public on the grounds of ‘iniquity’ of information which is claimed by the Crown to be confidential in the public interest for reasons of national security, the mere fact that there is an allegation of ‘iniquity’ automatically justifies disclosure. In a normal case, where there is no such special factor as in the case of the Observer and the Guardian that they were seeking to report very briefly in the public interest the nature of the pending proceedings in Australia rather than to report the allegations of Mr Wright for their own sake, any editor who is minded to disclose such information to the public on the ground of iniquity on the part of the Crown or its servants will have to carry out a delicate balancing exercise and to have in mind that under art 10(2) of the European Convention on Human Rights the right to freedom of expression is declared to carry with it duties and responsibilities. He would have to consider at the least that he had a credible allegation of iniquity from a source who ought to know and could fairly be regarded as reliable. He would also have to consider, for instance, what ill-consequences to the national interest might follow from publication, whether by strengthening the
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nation’s enemies or, for example, by upsetting diplomatic or trading relations with other powers, and he would have to consider whether any disclosure ought in the first place to be only to the appropriate security or police authorities rather than to the public at large.
In the cases of the Observer and Guardian, however, they were only seeking in June 1986 to report the nature of the Australian proceedings, which was a matter of public interest. There is nothing at that stage, before the allegations in Spycatcher had received the publicity which they have since received, to suggest that they then intended to go beyond reporting the nature of the proceedings and then reporting the proceedings as they came on. The articles are brief and give little detail of the allegations. In so far as the detail given goes beyond what had previously been published, I cannot see any detriment to national security or the public interest, to outweigh the benefit of free speech and the advantage in the public interest of restrained and responsible, but adequately detailed, reports of the Australian proceedings.
Applying once again Lord Widgery CJ’s test, I agree with Scott J that the Observer and the Guardian were entitled to publish these June 1986 articles.
An editor must act responsibly, particularly in matters of secrecy or confidence or where he knows that the Crown considers that matters of national security are involved. But if he asks himself the right questions and gives them the right answers, that is enough; he is not required to submit his copy to the authorities for clearance before publication.
(2) Was the Sunday Times entitled to publish on 12 July 1917 the first instalment of its proposed serialisation of Spycatcher?
The judge distinguished between the articles in the Observer and Guardian and the serialisation in the Sunday Times on the ground that the extract published in the Sunday Times was ‘indiscriminate’. Obviously Mr Neil, the editor of the Sunday Times, had ‘discriminated’ in one sense, in that he had decided what should go into the first instalment of the serialisation, what should go into later instalments, if published, and what was of insufficient interest to his readers to be brought into a serialisation which was limited to a maximum number of words. But what the judge meant by ‘indiscriminate’, as I understand him, is that Mr Neil made no attempt to assess what parts of Spycatcher raised important issues of public interest on which the public should be able to form a judgment for themselves and what parts were merely unauthorised disclosures of confidential information.
It is urged that such a finding of the judge was inconsistent with certain passages in Mr Neil’s oral evidence, and that the judge must in the relevant sections of his judgment have forgotten those passages. The judge had, however, had the advantage, which we have not, of seeing and hearing Mr Neil give evidence, and for my part I see no basis for rejecting his finding about Mr Neil. It is indeed plain that Mr Neil’s overriding objective was to anticipate the United States publication of Spycatcher and publish his first instalment of serialisation before the effects of the US publication had made themselves felt in this country.
But the important question, as it seems to me in the context of this case, is not whether Mr Neil published ‘indiscriminately’ without asking himself the right questions, but whether he is saved by having by instinct, intuition or otherwise got the right answers.
I have no doubt at all that there is a public interest in national security which requires that former officers in the security service should not be allowed to trumpet abroad as much as they choose of their reminiscences of their time in the security service and of the service’s activities in those times. The same public interest must equally preclude national newspapers from trumpeting abroad by licence from him as much as they, the newspapers, choose of the disloyal security officer’s reminiscences published by him in breach of duty. Where national security is involved, the press can have no unfettered right to publish state secrets.
The fact that an editor published confidential matter derived from a breach of duty on the part of an ex-officer of the security service, without giving any consideration to the
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public interest in national security, might not matter if what he actually published was such as could not do any harm to national security. But that could not, in my judgment, be said of Spycatcher as a whole or of the instalment of serialisation published by the Sunday Times on 12 July 1987. It is undesirable to elaborate on this in a judgment which will be handed down publicly, but I have in mind in particular: (i) the disclosure of names of people who, it is said, at one time worked for the security service, their names may not previously have been known in Eastern Europe as the names of members of the security service and their connection with the security service may still be covertly continuing, (ii) the disclosure of information about the sections into which MI5 was divided, how those sections operated and what their responsibilities were and any other details of the methodology of the service, and (iii) the disclosure of information supplied to the security service by defectors from Eastern Europe.
Since the whole object of the Sunday Times in publishing the instalment when it did was to get in ahead of the consequences of the US publication of the book, I do not for my part accept it as a justification for the Sunday Times that hostile eyes would shortly get a full sight of the book from the US publication. The pending publication in the United States would not, in my judgment, have justified Heinemanns in publishing Spycatcher in the United Kingdom on the date of the Sunday Times’s first instalment, and the Sunday Times, serialising by licence from Heinemanns, were not then in any better position than Heinemanns or Mr Wright himself.
For these reasons I agree with the conclusion of Scott J that the Sunday Times was not entitled to publish the instalment. Its publication, in substance on behalf of Mr Wright and in furtherance of his exploitation of Spycatcher, was a breach of the duty of secrecy which the Sunday Times owed the Crown, since the Sunday Times knew that the information in the instalment was confidential, that Mr Wright had entered into obligations of secrecy to the Crown and that the publication was without the leave of the Crown and in breach of those obligations.
The judge’s order for an account of profits follows, for what it is worth, and I would uphold it. I would also dismiss the cross-appeal of the Sunday Times.
It has seemed to me throughout the hearing of this appeal that there could have been strong arguments for saying that, as Mr Wright wrote and published Spycatcher in breach of his duty of secrecy to the Crown and was only able to do so by the misuse of secret information which had come to him in the course of his employment as an officer in the security service of the Crown, the copyright in Spycatcher belongs in equity to the Crown and is held on a constructive trust for the Crown with whatever consequences may follow from that. Since, however, the Crown has in the most explicit terms disclaimed any reliance on equitable copyright, I put such thoughts out of mind. So far as newspapers other than the Sunday Times are concerned, to claim in copyright would have done the Crown no good, as it would have left open to the newspapers the statutory defence of fair dealing under s 6 of the Copyright Act 1956.
(3) Should the Sunday Times be restrained from any further serialisation of Spycatcher?
In the present circumstances, and as there is no claim in copyright in these proceedings, I would not be prepared to grant an injunction to restrain the Sunday Times from further serialisation of Spycatcher. To grant such an injunction would, in my judgment, be futile when the media generally are free to discuss and comment on Spycatcher and copies of the book imported from abroad are likely to be available for anyone in the bookshops and public libraries.
(4) Should the three newspapers, or any of them, be restrained from publishing without prior official clearance any further information as to security service activities which they may obtain hereafter from Mr Wright or any other officer or ex-officer of the security service?
The judge was asked to grant injunctions which would prevent the publication of a supposed second volume of Mr Wright’s memoirs, a Spycatcher 2. He declined to do so,
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primarily on the ground that the courts do not answer hypothetical questions and do not grant injunctions on issues that have not yet arisen.
In this court the argument has ranged more widely and has covered three possibilities, viz: (a) that Mr Wright is preparing, or may have it in mind to prepare, Spycatcher 2, a second volume of memoirs, (b) that if the Millett injunctions are not continued Mr Wright will be eager to hold court to the media, and the media will be eager to ask him for further disclosures, particularly if they can persuade other officers or former officers of the security service to refute publicly parts of what Mr Wright has said in Spycatcher, and (c) that, if the Millett injunctions are not continued, other officers or ex-officers of the security services will be harassed or cajoled by the media into disclosing further confidential information about the security service.
I would not be troubled by (a) if it stood alone. There is no evidence that Mr Wright has written or is writing Spycatcher 2, or that anyone (let alone any of the three newspapers) is proposing to publish its contents. Moreover, I find it hard to believe that Mr Wright and his ghost-writer deliberately kept any sensational disclosures out of Spycatcher 1. However, (b) and (c) are very real possibilities.
Unfortunately there is now a complete barrier of mistrust between the press and the government. The press believe that the government (any government of any political party) will seek to impose an altogether too rigid ban to prevent the use of information emanating from the security services where the ban is not necessary, or is no longer necessary, in the interests of national security and the information would be of interest to their readers. The government know, not least from their experience with the Sunday Times in the present case, that there are newspapers which cannot be trusted. Outsiders may suspect that the media are trying to establish themselves as above the law.
Counsel for the Attorney General produced in the course of argument a draft of the wide form of injunction, not limited to future disclosures by Mr Wright alone, which the Crown would seek quia timet to cover all the possibilities (a), (b) and (c) above. The production of that draft has helped me considerably on this aspect of the appeal. The form of injunction is very stringent. Moreover, the effect of granting it would seem to be to transfer from the courts to the Crown the function of holding the balance between the public interest in national security and the public interest in freedom of speech and, possibly, the public interest in the exposure of iniquity in the security service. If such an injunction was granted and some newspaper felt aggrieved at a refusal of permission to publish particular information, the only courses open to the aggrieved newspaper would seemingly be either (i) to apply for judicial review of the refusal on Wednesbury grounds (see Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948) 1 KB 223), or (ii) to apply by some means for a relaxation of the injunctions so as to permit publication of what was in dispute, which could involve procedural difficulties if the newspaper was not one of the three who are respondents to this appeal, but was only indirectly bound by the injunction because of the decision of this court in A-G v Newspaper Publishing plc [1987] 3 All ER 276, [1987] 3 WLR 942. In view of these considerations, I would not be prepared to grant the wide form of injunction proposed by counsel for the Attorney General.
As for a form of quia timet injunction limited to further disclosures by Mr Wright alone, but which would cover future interviews with, or articles by, Mr Wright as well as any possible Spycatcher 2, that also I would not at this juncture grant, because there is no indication that the press will be wishing to quote him on anything further which would cause significant damage to national security, beyond the damage which has been already done by the publication of Spycatcher.
I would not, however, entirely rule out the possibility that at some future stage, if there is further devious conduct, the court may be minded to grant some form of stringent quia timet injunction against a particular newspaper. Subject to that, any question which may arise in the future about the publication by the press of confidential information about the security services will have to be decided by the courts when it
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arises, and the courts will then have to carry out the balancing exercise which I have indicated earlier. It is impossible to generalise in advance, as the answer is likely to depend on what it is that someone is then claiming to publish. Counsel for the Attorney General seemed at one point to be asking that the court should give some form of rule of thumb directions about future proposed publications of confidential matter relating to the security services, so as to avoid consideration of details and blue pencil treatment on each occasion. In my view that is not possible because, like the cabinet papers to which Lord Widgery CJ referred in AG v Jonathan Cape Ltd [1975] 3 All ER 484, [1976] QB 752, secrets relating to the security service may vary enormously in the standard of protection they require and the length of time for which they require it.
For the foregoing reasons, I would for my part affirm the decision of Scott J on all points and dismiss the Crown’s appeal.
BINGHAM LJ. This case presents a sharp clash between two competing assertions of the public interest. The Attorney General, suing as the representative of the Crown in right of the government of the United Kingdom, asserts the public interest in a leak- proof, reliable and efficient security service. The newspapers assert the public interest in freedom of speech and of the press. Each side acknowledges the validity in principle of the public interest asserted by the other. But each contends that on the facts of this case the public interest which it asserts should prevail. I do not regard this clash as the result of an authoritarian attempt by the government to muzzle the press or of contemptuous disregard by the press of the legitimate needs of government. It has in my view come about because the functions of the two sides are quite different and each, understandably enough, is most responsive to that aspect of the public interest which impinges most closely and directly on its own function.
The clash having occurred, and the parties having reached no accommodation between themselves, the courts must resolve it. Many would think it desirable for Parliament to lay down rules for resolving clashes of this kind, touching as they do on fundamental interests and rights. But Parliament has not done so. The courts must therefore resolve the issue according to principles derived from the decided cases. But it must be acknowledged that those principles have in the main been established in cases decided on facts markedly different from those of the present case which is, and one hopes will remain, unique.
The national importance of a leak-proof, reliable and efficient security service is not open to question. It has been repeatedly recognised by judges in the earlier stages of these proceedings and by Scott J in the judgment under appeal. It is not challenged by the newspapers. It is indeed obvious that a security service whose members were free to write and publish their professional memoirs would be not only worthless in protecting the security of the state, but a source of danger to it.
The liberty of the press is accepted now, as by Blackstone, as essential to the nature of a free state. A distinguished American author, Archibald Cox, recently wrote in Freedom of Expression (1981) p 3:
‘Only by uninhibited publication can the flow of information be secured and the people informed concerning men, measures, and the conduct of government. Only by freedom of expression can the people voice their grievances and obtain redress. Only by speech and the press can they exercise the power of criticism. Only by freedom of speech, of the press, and of association can people build and assert political power, including the power to change the men who govern them.’
But the same author went on to accept at (p 4):
‘Freedom of expression, despite its primacy, can never be absolute … At any time unrestrained expression may conflict with important public or private interests … Some balancing is inescapable. The ultimate question is always, Where has—and should—the balance be struck?’
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Before the judge and before us the argument has centred on the questions whether a balance is to be struck and if so, in this case, with what result.
I propose to begin by summarising what I believe to be the principles of law applicable to this case. I shall then seek to apply those principles to the questions which fall for decision.
The relevant principles of law
It is a well-settled principle of law that where one party (the confidant) acquires confidential information from or during his service with, or by virtue of his relationship with, another (the confider), in circumstances importing a duty of confidence, the confidant is not ordinarily at liberty to divulge that information to a third party without the consent or against the wishes of the confider.
The essence of the confidant’s duty is to preserve the confidentiality of the confider’s information (in which expression I include information learned not from but during a period of service with the confider). It is thus an essential ingredient of the duty, and of any cause of action arising on breach of threatened breach, that the information should, when imparted, have been and should remain confidential. This requirement has been put in a number of different ways, but has always been insisted on.
In Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) [1963) 3 All ER 413 at 415 Lord Greene MR said:
‘The information, to be confidential, must, I apprehend, apart from contract, have the necessary quality of confidence about it, namely, it must not be something which is public property and public knowledge.’
The information must not be ‘public knowledge’ (Seager v Copydex Ltd [1967] 1 WLR 923 at 931 per Lord Denning MR) or in the public domain (Woodward v Hutchins [1977] 2 All ER 751 at 755, [1977] 1 WLR 760 at 764 per Lord Denning MR). To be confidential information must have what Francis Gurry recently called the basic attribute of inaccessibility: see Gurry Breach of Confidence (1984) p 70. The information must have been acquired in circumstances importing a duty of confidence (Coco v A N Clark (Engineers) Ltd [1969) RPC 41 per Megarry J) but ‘However confidential the circumstances of communication, there can be no breach of confidence in revealing to others something which is already common knowledge’ ([1969] RPC 41 at 47).
It is, I think, clear that the duty of confidence ceases to apply to information which, although originally confidential, has ceased to be so otherwise than through the agency of the confidant. Forty-four years ago there can have been few, if any, national secrets more confidential than the date of the planned invasion of France. Any Crown servant who divulged such information to an unauthorised recipient would plainly have been in flagrant breach of his duty. But it would be absurd to hold such a servant bound to treat the date of the invasion as confidential on or after, say, 9 June 1944 when the date had become known to the world. A purist might say that the allies, as confiders and owners of the information, had by their own act destroyed its confidentiality and so disabled themselves from enforcing the duty, but the commonsense view is that the date, being public knowledge, could no longer be regarded as the subject of confidence.
The duty of confidence is not absolute and comprehensive. The judge held (see p 574, ante), and counsel for the Attorney General accepted, that it would not extend to information which is useless or trivial, but counsel rightly pointed out that information which would be utterly trivial in one context might be of significance in another. It is also plain that the duty of confidence does not extend to confidential information of which disclosure is required in the public interest because, as it was once put, ‘there is no confidence as to the disclosure of iniquity’: see Gartside v Outram (1856) 26 LJ Ch 113 at 114 per Page Wood V-C. To this exception I shall return.
The cases show that the duty of confidence does not depend on any contract, express or implied, between the parties. If it did, it would follow on ordinary principles that
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strangers to the contract would not be bound. But the duty ‘depends on the broad principle of equity that he who has received information in confidence shall not take unfair advantage of it’: Seager v Copydex Ltd [1967] 2 All ER 415 at 417, [1967) 1 WLR 923 at 931 per Lord Denning MR. ‘The jurisdiction is based, not so much on property or on contract, but rather on the duty to be of good faith’: Fraser v Evans [1969] 1 All ER 8 at 11, [1969) 1 QB 349 at 361 per Lord Denning MR. It accordingly ‘affects the conscience of the person who receives the information with knowledge that it has originally been communicated in confidence’: per Sir Nicolas Browne-Wilkinson V-C at the interlocutory stage of this case (see [1987] 3 All ER 316 at 329, [1987] 1 WLR 1248 at 1265). So it is appropriate that the enforceability of rights of confidence against third parties should be analysed in the traditional terms of equitable rights over property, as Sir Nicolas Browne-Wilkinson V-C did (see [1987] 3 All ER 316 at 327, [1987] 1 WLR 1248 at 1264) and Nourse LJ did at an even earlier stage of this case (see A-G v Observer Ltd [1986] CA Transcript 696).
The English law on this subject could not, I think, be more clearly or accurately stated than it was by the High Court of Australia in Moorgate Tobacco Co Ltd v Philip Morris Ltd (1984) 56 ALR 193 at 208:
‘It is unnecessary, for the purposes of the present appeal, to attempt to define the precise scope of the equitable jurisdiction to grant relief against an actual or threatened abuse of confidential information not involving any tort or any breach of some express or implied contractual provision, some wider fiduciary duty or some copyright or trade mark right. A general equitable jurisdiction to grant such relief has long been asserted and should, in my view, now be accepted (see Commonwealth of Australia v John Fairfax & Sons Ltd ((1980) 32 ALR 485 at 491-493)). Like most heads of exclusive equitable jurisdiction, its rational basis does not lie in proprietary right. It lies in the notion of an obligation of conscience arising from the circumstances in or through which the information was communicated or obtained.’
A third party coming into possession of confidential information is accordingly liable to be restrained from publishing it if he knows the information to be confidential and the circumstances are such as to impose on him an obligation in good conscience not to publish. No such obligation would in my view ordinarily arise where the third party comes into possession of information which, although once confidential, has ceased to be so otherwise than through the agency of the third party.
I do not think there is any English authority inconsistent with these principles as I have tried to summarise them so far. Our attention was drawn to Schering Chemicals Ltd v Falkman Ltd [1981] 2 All ER 321, [1982] QB 1. In that case Falkman undertook for a fee to organise a training course for the executives of Schering to enable them to handle unfavourable publicity arising from one of Schering’s products. The second defendant, Elstein, was employed by Falman as an instructor, for which purpose he received information which Schering regarded as confidential. The third defendant, Thames Television, made a film based on the information which Elstein had received from Schering and which he had passed on to Thames. This information was already available to the public when Elstein received it, having been the subject of press and television coverage. A majority of the Court of Appeal (Shaw and Templeman LJJ, Lord Denning MR dissenting) upheld the grant of an interlocutory injunction against Falkman, Elstein and Thames. The basis of the majority decision was, I think, that Thames were unlawfully conniving at a breach of duty by Elstein. Shaw LJ said ([1981] 2 All ER 321 at 338, [1982] QB 1 at 27):
‘If Mr Elstein was in breach of duty in seeking to use it at all, Thames Television cannot be entitled to collaborate with him by taking advantage of his repudiation of his fiduciary obligations.’
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Templeman LJ said ([1981] 2 All ER 321 at 346, [1982] QB 1 at 38):
‘Thames Television made the film … with full knowledge of all the circumstances and with knowledge of the claim by Scherings that the film would constitute a breach of confidentiality and could not be broadcast without the prior consent of Scherings.’
If that was not the basis of a majority decision, its authority is somewhat weakened by the observations of Lord Oliver in the present case ([1987] 3 All ER 316 at 374, [1987] 1 WLR 1248 at 1319):
‘In so far as the majority judgments suggest that, apart from direct obligation or complicity in the breach of a direct obligation, information in the public domain can be the subject matter of a claim for breach of confidence, I would, for my part, prefer the powerful dissenting judgment of Lord Denning MR.’
In Speed Seal Products Ltd v Paddington [1986] 1 All ER 91, [1985] 1 WLR 1327 the plaintiffs (as confiders) sought an injunction to restrain the defendants (as confidants) from divulging the plaintiffs’ confidential information. The defendants applied to strike out the claim for an injunction contending (among other things) that the confidential information had been published to the world by the defendants themselves. The plaintiffs replied that the defendants could not rely on their own wrongdoing. At first instance the claim for an injunction was struck out, but this order was reversed on appeal. The Court of Appeal held that where confidential information is published by the confider, the confidant is released from his previous duty: O Mustad & Son v S Allcock & Co Ltd (1928) [1963] 3 All ER 416, [1964] 1 WLR 109. It also held, although more tentatively, that publication by a stranger ‘does not necessarily’ release the confidant from his duty of confidence (see [1986] 1 All ER 91 at 95, [1985] 1 WLR 1327 at 1332). It held, thirdly, that where publication is by or with the consent of the confidant he cannot be in a better position than if the publication had been made by a stranger. Thus, as Sir Nicolas Browne-Wilkinson V-C held in this case ([1987] 3 All ER 316 at 328, [1987] 1 WLR 1248 at 1264):
‘As between the confider and the confidant there may be a duty, either under contract or in some other way, which remains enforceable by injunction notwithstanding that the information in relation to which it arose has since come into the public domain, as in Schering Chemicals Ltd v Falkman Ltd and Speed Seal Products Ltd v Paddington.’
But the survival of such a duty, where the information is no longer confidential, will not necessarily affect the conscience of a third party.
In the ordinary case where an employer, principal or other confider sues to restrain the disclosure of confidential information confided in a commercial context, the role of the court is very limited. It will consider whether the information was and remains confidential, whether it was imparted or acquired in circumstances giving rise to a duty of confidence and whether there has been a breach or threatened breach of the duty. If those ingredients of the cause of action are established, and in the absence of an iniquity defence, a restraint on disclosure would ordinarily be imposed unless the confider would be adequately compensated by damages which the other party could pay. There would in such a case be no public interest in favour of disclosure which could outweigh or counter-balance the public interest in upholding the confider’s right to preserve the confidentiality of his information. Indeed, such a case between two private citizens would not be seen as involving the public interest at all. But the nature of the proceeding inevitably changes when the plaintiff/confider is a government; even though the government asserts a private law interest in the confidentiality of its information, such information is likely to pertain to the conduct of national affairs and so a conflict readily arises between the public interest in preserving the confidentiality of the information and the public interest in freedom of speech and of the press.
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Such a conflict arises the more readily where the defendant is a newspaper. It is elementary that our constitution provides no entrenched guarantee of freedom of speech or of the press, and neither the press nor any other medium of public communication enjoys (save for exceptions immaterial for present purposes) any special position or privileges. The rule is that anyone and any newspapers and any other medium of public communication may say and write anything they like unless there is some legal reason why they should not. This means that a government seeking an order to restrain future publication must show cause why such publication would or might be unlawful.
This approach is, I think, clearly reflected in the judgment of Lord Widgery CJ in the Crossman diaries case, A-G v Jonathan Cape Ltd [1975] 3 All ER 484 at 495, [1976] QB 752 at 770-771, where he said:
‘In these actions we are concerned with the publication of diaries at a time when 11 years have expired since the first recorded events. The Attorney-General must show (a) that such publication would be a breach of confidence; (b) that the public interest requires that the publication be restrained, and (c) that there are no other facets of the public interest contradictory to and more compelling than that relied on. Moreover, the court, when asked to restrain such a publication, must closely examine the extent to which relief is necessary to ensure that restrictions are not imposed beyond the strict requirement of public need.’
This passage was cited with approval by Mason J in the High Court of Australia in Commonwealth of Australia v John Fairfax & Sons Ltd (1980) 32 ALR 485 at 493, the case which is perhaps on its facts closest to the present.
I think that this approach is also in accord with art 10 of the Convention for the Protection of Human Rights and Fundamental Freedoms (Rome, 4 November 1950; TS 71 (1953); Cmd 8969), which the United Kingdom has never incorporated into its domestic law but was the first state to ratify. Article 10 (so far as relevant) provides:
‘(1) Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers …
(2) The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.’
To be valid under the convention any restriction must accordingly be prescribed by law and necessary in a democratic society for one at least of the purposes mentioned. ‘Necessary’ is a strong word, and in Sunday Times v UK (1979) 2 EHRR 245 at 275 (para 59) the majority of the European Court of Human Rights held:
‘The Court has noted that, whilst the adjective “necessary”, within the meaning of Article 10(2), is not synonymous with “indispensable”, neither has it the flexibility of such expressions as “admissible”, “ordinary”, “useful”, “reasonable” or “desirable” and that it implies the existence of a “pressing social need“.’
This interpretation was affirmed by a unanimous court in Lingens v Austria (1986) 8 EHRR 407. The majority in the Sunday Times case also observed (1979) 2 EHRR 245 at 280 (para 65):
‘Furthermore, whilst the mass media must not overstep the bounds imposed in the interests of the proper administration of justice, it is incumbent on them to impart information and ideas concerning matters that come before the courts just as in other areas of public interest. Not only do the media have the task of imparting such information and ideas: the public also has a right to receive them.’
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In any given case it is necessary to consider whether the interference at issue is proportionate to the legitimate aim pursued: see the Lingens case (1986) 8 EHRR 407 at 418 (para 40).
When the present case was before the House of Lords, four of their Lordships referred to the convention and none suggested that its terms were in conflict with the common law: (see [1987] 3 All ER 316 at 346, 348, 355-357, 364, [1987] 1 WLR 1248 at 1286, 1288, 1296-1299, 1307 per Lord Bridge, Lord Brandon, Lord Templeman and Lord Ackner). Indeed, Lord Templeman’s analysis, which Lord Ackner expressly adopted, appears to assume the absence of conflict. If, however, the common law were unclear, it would be appropriate to heed Lord Fraser’s observation in A-G v BBC [1980] 3 All ER 161 at 176, [1981] AC 303 at 352:
‘This House, and other courts in the United Kingdom, should have regard to the provisions of the Convention for the Protection of Human Rights and Fundamental Freedoms and to the decisions of the Court of Human Rights in cases, of which this is one, where our domestic law is not firmly settled.’
Lord Scarman added ([1980] 3 All ER 161 at 183, [1981) AC 303 at 362):
‘But the prior restraint of publication, though occasionally necessary in serious cases, is a drastic interference with freedom of speech and should only be ordered where there is a substantial risk of grave injustice. I understand the test of “pressing social need” as being exactly that.’
I should be very sorry to conclude that the common law protection of free speech fell below the norm agreed among states party to the European Convention on Human Rights, but it was not contended before us that this was so.
As the judgment of Lord Widgery CJ and the terms of the convention make clear, it is for the party seeking to restrain publication to show cause why restraint is necessary. Where national security is the ground relied on, the burden on a government seeking restraint is a light one for the reason given by Lord Diplock in Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935 at 952, [1985] AC 374 at 412:
‘The reason why the Minister for the Civil Service decided on 22 December 1983 to withdraw this benefit was in the interests of national security. National security is the responsibility of the executive government; what action is needed to protect its interests is, as the cases cited by my learned friend Lord Roskill establish and common sense itself dictates, a matter on which those on whom the responsibility rests, and not the courts of justice, must have the last word. It is par excellence a non-justiciable question. The judicial process is totally inept to deal with the sort of problems which it involves.’
This does not, I think, mean that even in this highly sensitive field the court will act on a mere assertion on behalf of the government, but it does mean that where national security is in issue the court will readily acknowledge the obvious limitations on its own knowledge and expertise. The Attorney General relied on Lord Scarman’s summary ([1984] 3 All ER 935 at 948, [1985] AC 374 at 406-407):
‘My Lords, I conclude, therefore, that where a question as to the interest of national security arises in judicial proceedings the court has to act on evidence. In some cases a judge or jury is required by law to be satisfied that the interest is proved to exist; in others, the interest is a factor to be considered in the review of the exercise of an executive discretionary power. Once the factual basis is established by evidence so that the court is satisfied that the interest of national security is a relevant factor to be considered in the determination of the case, the court will accept the opinion of the Crown or its responsible officer as to what is required to meet it, unless it is possible to show that the opinion was one which no reasonable minister
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advising the Crown could in the circumstances reasonably have held. There is no abdication of the judicial function, but there is a commonsense limitation recognised by the judges as to what is justiciable; and the limitation is entirely consistent with the general development of the modern case law of judicial review.’
In the paradigm national security case the outcome of a governmental application to restrain publication is likely to be a foregone conclusion in favour of the government, but the further the case is from the paradigm the more real will the court’s balancing function become, and the court’s approach will not, because of the competing interests involved, be the same as in a private dispute between citizen and citizen. So much is, I think, clear from Lord Widgery CJ’s judgment in A-G v Jonathan Cape Ltd [1975] 3 All ER 484, [1976] QB 752 and from the judgment of Mason J in Commonwealth of Australia v John Fairfax & Sons Ltd (1980) 32 ALR 485 at 492-493:
‘The equitable principle has been fashioned to protect the personal, private and proprietary interests of the citizen, not to protect the very different interests of the executive government. It acts, or is supposed to act, not according to standards of private interest, but in the public interest. This is not to say that Equity will not protect information in the hands of the government, but it is to say that when Equity protects government information it will look at the matter through different spectacles. It may be a sufficient detriment to the citizen that disclosure of information relating to his affairs will expose his actions to public discussion and criticism. But it can scarcely be a relevant detriment to the government that publication of material concerning its actions will merely expose it to public discussion and criticism. It is unacceptable, in our democratic society, that there should be a restraint on the publication of information relating to government when the only vice of that information is that it enables the public to discuss, review and criticize government action. Accordingly, the court will determine the government’s claim to confidentiality by reference to the public interest. Unless disclosure is likely to injure the public interest, it will not be protected. The court will not prevent the publication of information which merely throws light on the past workings of government, even if it be not public property, so long as it does not prejudice the community in other respects. Then disclosure will itself serve the public interest in keeping the community informed and in promoting discussion of public affairs. If, however, it appears that disclosure will be inimical to the public interest because national security, relations with foreign countries or the ordinary business of government will be prejudiced, disclosure will be restrained. There will be cases in which the conflicting considerations will be finely balanced, where it is difficult to decide whether the public’s interest in knowing and in expressing its opinion, outweighs the need to protect confidentiality.’
How the balance will be struck will of course depend on all the facts and circumstances of the particular case.
The rationale of the iniquity exception to a confidant’s duty of confidence is plain:
‘You cannot make me the confidant of a crime or a fraud, and be entitled to close up my lips upon any secret which you have the audacity to disclose to me relating to any fraudulent intention on your part: such a confidence cannot exist.’
(See Gartside v Outram (1856) 26 LJ Ch 113 at 114 per Page Wood V-C.)
But the exception is squarely based on public interest considerations. It is not confined to misdeeds on the part of the plaintiff (Lion Laboratories Ltd v Evans [1984] 2 All ER 417 at 432, [1985] QB 526 at 550 per Griffiths LJ), nor is it limited to criminal misconduct. The true rule was stated by Ungoed-Thomas J in Beloff v Pressdram Ltd [1973] 1 All ER 241 at 260:
‘The defence of public interest clearly covers and, in the authorities does not extend beyond, disclosure, which as Lord Denning MR emphasised must be
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disclosure justified in the public interest, of matters carried out or contemplated, in breach of the country’s security, or in breach of law, including statutory duty, fraud, or otherwise destructive of the country or its people, including matters medically dangerous to the public; and doubtless other misdeeds of similar gravity. Public interest, as a defence in law, operates to override the rights of the individual (including copyright) which would otherwise prevail and which the law is also concerned to protect. Such public interest, as now recognised by the law, does not extend beyond misdeeds of a serious nature and importance to the country and thus, in my view, clearly recognisable as such.’
The iniquity, or public interest, exception is, however, subject to two well-established rules. The first is that, even where public interest grounds exist for disclosing iniquity, it by no means follows that disclosure may be to the public at large:
‘The disclosure must, I should think, be to one who has a proper interest to receive the information. Thus it would be proper to disclose a crime to the police; or a breach of the Restrictive Trade Practices Act, 1956, to the registrar. There may be cases where the misdeed is of such a character that the public interest may demand, or at least excuse, publication on a broader field, even to the press.’
(See Initial Services Ltd v Putterill [1967] 3 All ER 145 at 148, [1968] 1 QB 396 at 405-406 per Lord Denning MR.)
Francome v Mirror Group Newspapers Ltd [1984] 2 All ER 408, [1984] 1 WLR 892 is a good example of a case where disclosure was held to be justified but on a restricted basis. The existence of an internal procedure for inquiry or complaint may plainly have a bearing on the need, in the public interest, for wider dissemination of the confidential information.
The second rule is that the duty of confidence is not overridden or ousted by the mere making of allegations, however wild and unsubstantiated, or misconduct, however grave. When this case was last before this court, Sir John Donaldson MR said ([1987] 3 All ER 316 at 337, [1987] 1 WLR 1248 at 1275): ‘… mere allegations of iniquity can never override confidentiality. They must be proved and the burden of proof will lie on the newspapers.' With the first of those sentences I respectfully agree, but I venture to wonder if the second does not go somewhat too far. This is a field in which, in practical terms, newspapers could rarely, if ever, ‘prove’ the truth of their allegations. Public interest immunity considerations would deny them the ordinary right to inspect documents and call witnesses. But there could arise cases (leaving the present case entirely on one side) where there was a real public interest in disclosure of iniquity even in this field. It would not be satisfactory if the law were to acknowledge a right of disclosure but subject its exercise to a condition which could never in practice be met. I would prefer to hold that merely to allege iniquity is not of itself enough to oust or override the duty of confidentiality; the prospective publisher should have attempted to verify the truth of the allegation so far as he reasonably could; and the allegation should have such appearance of truth as it would be reasonable in all the circumstances to expect.
It is unnecessary to rehearse at length the principles on which permanent injunctions are granted and refused. If a plaintiff shows that a defendant has infringed his legal rights and intends to continue doing so, the plaintiff will ordinarily be granted an injunction to restrain the defendant’s unlawful conduct in future unless the plaintiff will be adequately compensated by damages: Pride of Derby and Derbyshire Angling Association Ltd v British Celanese Ltd [1953] 1 All ER 179 at 197, [1953] Ch 149 at 181 per Evershed MR. But, as Sir Nicolas Browne-Wilkinson V-C stated in this case ([1987] 3 All ER 316 at 332, [1987] 1 WLR 1248 at 1270):
‘It is an old maxim that equity does not act in vain. To my mind that is good law and the court should not make orders which would be ineffective to achieve what they set out to do.’
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The court will not seek to emulate the fifteenth-century pope who issued a papal bull against Halley’s comet. Thus in Williams v Williams (1817) 3 Mer 157 at 160, 36 ER 61 at 62 Lord Eldon LC said: ‘If the Defendant has already disclosed the secret, the injunction can be of no use.’ And in the Fairfax case (1980) 32 ALR 485 at 494 Mason J said:
‘In any event, the question whether an injunction should be granted on this ground is resolved against the plaintiff by the publication that has taken, and is likely to take, place.’
It is well settled that a party who has misused confidential information may be ordered to account to the confider for any profit earned by his wrongful conduct.
The application of the law to the issues
Having summarised at some considerable length what I think to be the relevant legal principles, I hope I can be briefer in applying them to the facts of this case.
(1) Should Scott J have granted the Attorney General a permanent injunction in substantially the terms sought against the Observer and the Guardian?
(1) By the time of the trial before Scott J the information contained in Spycatcher had ceased to be confidential. As Lord Buckmaster put it in O Mustad & Son v S Allcock & Co Ltd (1928) [1963] 3 All ER 416 at 418, [1964] 1 WLR 109 at 111: ‘The secret, as a secret, had ceased to exist.’ This the Attorney General accepts. About one million copies of the book had been published and were in circulation throughout the free world. Many copies had reached this country, where some bookshops had stocked and sold it. The book was obtainable by anyone in this country who wanted to read it. Translation rights had been granted in 12 languages. Extracts from the book had been broadcast in English by Swedish and Danish radio. Extracts and reports of the book had been published by newspapers in Australia, the United States and elsewhere, several of them after the House of Lords hearing in July 1987. The world press had been free to comment on the book and had done so. There had been much publicised hearings in Australia and additional but less well publicised hearings in New Zealand and Hong Kong. All this disclosure had occurred without any complicity on the part of these two newspapers.
Of course there will be those in this country who are still unaware of the contents of Spycatcher. Some people are impermeable to information or wholly out of touch with the topical subjects of the day. But anyone with the slightest interest in the subject matter of Spycatcher is likely either to have read the book or to be aware of its contents. It is in my view a conclusive answer to this claim that the confidentiality the Attorney General seeks to protect, through no act of the newspapers, no longer exists. I do not accept that an action for breach of confidence against third parties can succeed in those circumstances, whatever the position as between confider and confidant. The same conclusion can be put another way. I do not think that the editors of these newspapers can be said to be subject to a duty in conscience not to publish material which is freely available in the marketplace and publishable by other newspaper editors the world over.
(2) If I am wrong to regard (1) as a conclusive answer to this claim, it is necessary to weigh the public interest asserted by the Attorney General against the competing public interest asserted by the newspapers. This exercise the judge carried out, as I think fairly, judiciously and unassailably. It was not, of course, the paradigm national security case where the government’s claim would all but carry the day, because the disclosure described above inevitably meant that any secret of value to an enemy was already available to him. The contact of the case with national security has indeed become rather remote.
Into the scales on the Attorney General’s side the judge put the seven matters expounded by Sir Robert Armstrong in his evidence (see pp 590-591, ante). They were these.
(1) ‘The unauthorised disclosure of information is likely to damage the trust which
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members of the service have in each other.’ The judge concluded that this damage must already have occurred.
(2) ‘Other members of the security services may break faith and follow suit.’ The judge pointed out that they would have to leave the country, and if they did so Mr Wright’s example already existed.
(3) ‘Unless permanent injunctions are granted pressure will be exerted by the media on other members or ex-members of the security services to tell their side of the Spycatcher allegations.’ The judge accepted this as a likelihood and regarded the consideration as having weight. But the outcome of such pressure could not be predicted.
(4) ‘Intelligence and security services of friendly foreign countries may, if permanent injunctions are not granted, lose confidence in the British security services.’ The judge accepted that this might already have happened, but thought it unreal to suppose that the grant or refusal of permanent injunctions would make any difference.
(5) ‘The confidence of informers, who rely on their identity and activities being kept confidential, will be damaged.’ The judge accepted Sir Robert’s evidence that this loss of confidence might already have occurred, but pointed to the lack of evidence that informers would feel any safer if permanent injunctions were granted.
(6) ‘Detriment will flow from the publication of information about the methodology, personnel and organisation of MI5.’ The judge accepted this as a very important reason why MI5 officers could not be allowed to write their memoirs. But he regarded the detriment as a fait accompli to which the grant of permanent injunctions could make no difference.
(7) ‘Publication of Spycatcher has damaged the morale of member of M15. A permanent injunction, depriving Mr Wright of the profits to be made on the home market, would go some way to restoring morale.’ The judge found this difficult to weigh, but concluded (p 591, ante):
‘If, in relation to particular information, the maintenance of secrecy or confidence is not needed or has become impossible, a duty of confidence cannot, in my opinion, be imposed on newspapers on the ground that disclosure would adversely affect the morale of M15.’
The judge referred to the offensive spectacle of Mr Wright making money out of the unrestricted sale of his book in this country, but was not satisfied that it would cause additional damage to national security interests.
Counsel for the Attorney General relied on the practice of the security services of not answering allegations made concerning them as an additional reason for restraining publication. I can of course understand the wisdom of this practice. But it is not, I think, beyond the power or ingenuity of a government to ensure, if it wishes, that its views are made known, even on a subject as sensitive as this, in an appropriately guarded way.
On the newspapers’ side of the scales the judge placed three press freedom factors which he regarded as of overwhelming weight. These were, put briefly, (i) the worldwide publication of the book and its contents, (ii) the general importance of press freedom and (iii) the interest of the British public to receive information of an alleged plot to undermine the Wilson government and concerning Soviet penetration of MI5, the latter allegation having already been extensively publicised.
The question for the judge was whether the permanent injunctions sought were justified by (in Lord Widgery CJ’s words) ‘the strict requirement of public need’ or (on the convention test) ‘pressing social need’. I agree with the judge that they were not. The freedom of the press is not an optional extra. It is a right to be recognised unless compelling reasons for restraint are shown. Here they were not.
(3) Permanent injunctions would be futile. They would not achieve their object. The traffic in Spycatcher as a lawful but (in this country) faintly risque possession would continue. The fact that damages are an inadequate remedy is no reason for granting an alternative but even more inadequate remedy.
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(2) Should Scott J have granted the Attorney General a permanent injunction restraining the Sunday Times from further serialising Spycatcher?
The Sunday Times is of course free to report and comment on the contents of Spycatcher to the same extent as any other newspaper or other medium of communication, But this issue specifically concerns further serialisation. The judge understood that the Sunday Times’ right to serialise stood or fell with the newspapers’ right to report and comment (pp 590, 593, ante). That was, as I thought, how the matter had earlier proceeded (see [1987] 3 All ER 316 at 319, 347, [1987] 1 WLR 1248 at 1254, 1287 per Sir Nicolas Browne-Wilkinson V-C and Lord Brandon). But before us counsel for the Attorney General challenged the judge’s understanding and addressed arguments specifically directed to serialisation.
I do no intentional violence to the cogent argument of counsel for the Attorney General on this point in summarising it thus. Mr Wright was, and remains, as all agree, subject to a life-long duty of loyalty to the Crown. He was, and is, in flagrant breach of that duty. He cannot be permitted to publish in this country, nor may he rely on his own repudiation of his duty and the disclosure resulting from it to escape from his duty. His Australian publishers, who have fully collaborated in his breach of duty, are in no different position. The Sunday Times bought the right to serialise from Mr Wright’s Australian publishers for a substantial fee ultimately payable, in whole or in part, to him. It is irrelevant that the Sunday Times obtained its copy of the book from the American licensee of the Australian publishers. For all practical purposes the Sunday Times would, in serialising, stand in the shoes of the Australian publishers and thus of Mr Wright himself. This would erode the Crown’s rights against Mr Wright and (I think counsel for the Attorney General would add) outrage right-thinking opinion in this country. I agree that Mr Wright’s conduct deserves the severe condemnation it has consistently received. It is, I agree, to some extent anomalous that the Sunday Times should be free to do what Mr Wright and his Australian publishers could not. But it would also be anomalous if a citizen of this country could read reports and reviews of the book and comments on it in the newspapers, and could buy it in a bookshop or borrow it from a public library, but could not read a serialised extract of the book in a newspaper. And the Sunday Times is, like the Observer and the Guardian, entitled to say that it has played no part in the worldwide publication of the book which would (but for its initial instalment) have occurred even if it had played no part at all.
I do not for my part think that the questions raised by this issue are very different from those already considered. The points on confidentiality and obligation of conscience are the same. An injunction would be no more effective in this context than in that one in preserving the confidentiality of the government’s information. The ingredients in the balancing exercise are the same, save only that the additional profit to Mr Wright and the additional affront to the public are to be added. But Mr Wright will anyway make additional profits from sales of the book, and I question whether affront to the public is a relevant consideration. The case still does not involve national security in any ordinary sense. The fundamental question is whether there is, in existing circumstances, a pressing social need to restrict the right which the Sunday Times would otherwise have to exercise the rights of serialisation it has bought. I do not think that denial of profit to Mr Wright, even when added to the considerations already in the Attorney General’s scale, begins to outweigh the press freedom factors which the judge held, rightly in my view, to be of overwhelming weight.
I understand the views of those who cannot stomach the prospect of Mr Wright profiting from his disloyalty and flourishing like the green bay-tree. But Mr Wright’s disservice to this country would, I think, be compounded if revulsion from his conduct were to lead the law into paths not indicated by an objective application of settled and very important principles.
In my judgment further serialisation of Spycatcher by the Sunday Times should not be restrained.
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(3) Should Scott J have granted, or should this court grant, a further general injunction restraining publication of information not contained in Spycatcher?
Before the judge the Attorney General’s application was directed to possible publication of a sequel to Spycatcher, referred to as Spycatcher 2. The judge was sympathetic to the Attorney General’s fear that the newspapers might publish the contents of such a book without careful consideration of the public interest in non-disclosure and without giving him the opportunity, if he challenged the editors’ judgment, to have the issue determined by the court. But he ruled against the application (p 594, ante):
‘It is an established rule of long-standing that the courts do not answer hypothetical questions and do not grant injunctions on issues that have not yet arisen. None of the newspapers has threatened to publish Spycatcher 2. There is nothing to suggest that Spycatcher 2 has yet been written. No one knows what, if it has been written, it contains. No one knows what part or parts of it, if it has been written, the newspapers may want to publish. So I decline to grant the injunction. I would draw attention, however, to the availability of the remedy of an account of profits and the deterrent effect of that remedy.’
I do not think the judge’s reasoning can be faulted, and I agree with it. The application had of course to be judged against the known background, but even against that background I do not think it could have succeeded as an independent application. If that is so, I do not think, bearing in mind the general undesirability of any restraint on freedom of expression, that the application should have succeeded as the tailpiece to a contested trial.
Before us application was made for a more far-reaching injunction, the breadth of which is shown by the following selective quotation from the terms proposed:
‘An order whereby the Defendants … be restrained from: (a) … publishing … any material obtained by any member or former member of the British Security and Intelligence Services in his capacity as a member thereof and which they know, or have reasonable grounds to believe, to have come or been obtained, whether directly or indirectly, from … such other member or former member of the said Services … ’
The proposed order contains certain provisos relating in particular to the existing publicity achieved by Mr Wright. It would, however, prohibit publication of material from such a source even if it was not confidential and even if it did not relate in any way to national security, and even if it was trivial and even if it disclosed iniquity of the gravest kind. Despite the provisos, the proposed order amounts in substance to a comprehensive ban on publication. As such it effectively undermines the burden cast by Lord Widgery CJ’s judgment and by the convention on the party seeking to restrain publication. In this area the rule would then be that there was no right to freedom of expression, and any organ of the British media wishing to publish would have to move the court for leave to do so (because the order, if made, would not bind these newspapers only). Such a regime might be tolerable in time of war or grave national emergency. In any other situation it would in my view be intolerable, and contrary to the law as it stands. Despite the protracted course of this litigation, the Attorney General and his distinguished advisers have not seen a pressing social need for this sweeping relief until now. I would refuse it.
(4) Should Scott J have held the Observer and the Guardian in breach of a duty of confidentiality in publishing articles on 22 and 23 June 1916?
When those articles were published the book itself had not been, and the flood of publicity which Spycatcher has since provoked lay very largely in the future. They were relatively brief and relatively unsensational articles summarising in very general terms some of the allegations in Mr Wright’s book. Some of the allegations, in particular of the alleged plot to undermine the Wilson government and an alleged plan to assassinate
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President Nasser, had been widely publicised before by Chapman Pincher, although without the authority of attribution to a former member of the security service. Other allegations, such as the alleged bugging of Kruschev’s suite in Claridges, an alleged attempt by Guy Burgess on Soviet instruction to seduce Churchill’s daughter and an alleged habit of switching car number plates had not been published before. These three allegations appeared only in the Observer and did not in one respect accurately report the effect of the book. When the reports were published the Attorney General’s action in New South Wales was due to begin in a day or two. The precise source of the information fed to these newspapers is not known, but the judge inferred that it might have come from someone in the office of either Mr Wright’s Australian publishers or his Australian lawyers (p 553, ante). In either case the source was bound not to disclose in Australia, either by injunction or undertaking.
The judge expressed his conclusion in this way (pp 587, 589, ante):
‘I must, therefore, examine the articles and ask myself whether they represent a fair report of the forthcoming Australian trial. In my judgment, they do. The allegations made by Mr Wright in Spycatcher are referred to in the articles only in very general descriptive terms. Very little, if anything, in the way of detail is disclosed. The articles do not go beyond the fair reporting of the nature of the case. In my judgment the duty of confidence lying on the newspapers as the recipients of Mr Wright’s unauthorised disclosures was not broken by fair reporting of this character. If that were not so, it would require the conclusion that the press of this country could not inform the public of this country of the court action being brought by the Attorney General in Australia. I am unable to accept this conclusion. The public interest in freedom of the press to report the court action outweighs, in my view, the damage, if any, to national security interests that the articles might, arguably, cause. I can see no “pressing social need” that is offended by these articles. The claim for an injunction against these two newspapers in June 1986 was not, in my opinion “proportionate to the legitimate aim pursued” … In my judgment, a newspaper which comes into the possession of confidential information known to emanate from a member or ex-member of the security services must ask itself whether and to what extent public disclosure of the information can be justified. Prima facie, the information should not be disclosed. A strong case is, in my view, needed to outweigh the national security interest in the material remaining confidential. Mr Trelford and Mr Preston gave me to understand that they did ask themselves this question. I think they came to the right answer. In my view the articles represented the legitimate and fair reporting of a matter that the newspapers were entitled to place before the public, namely the court action in Australia. Further, and for different reasons, disclosure of two of the allegations was, in my view, justified.’
I have not found this an easy issue to resolve, but I do not dissent from the judge’s conclusion. I share his doubt whether this general summary of allegations, several of them not new and none of them touching on recent history, would damage national security interests, but I cannot decide that. More importantly, I share his view that a pressing social need for restraint was not shown and that such restraint was not proportionate to the legitimate aim pursued. I do not think these summaries contained information going beyond what the citizens of a mature democracy were reasonably entitled to receive.
The judge did not accept that the iniquity exception applied to most of these allegations, but held that it did apply to two. One was the Nasser allegation, of which he said (p 588, ante):
‘But whether the allegation is true or untrue the duty of confidence cannot, in my opinion, be used to prevent the press from informing the public that the allegation has been made.’
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The other was the Wilson government plot, of which he said (p 589, ante):
‘But the importance to the public of this country of the allegation that members of MI5 endeavoured to undermine and destroy public confidence in a democratically elected government makes the public the proper recipient of the information.’
I agree with the judge on both these points and would for my part give iniquity even in this special field a somewhat less restricted meaning than the judge did. I do not think it an answer to say that the newspapers have not proved the truth of these allegations, although they certainly have not. The Attorney General’s case against the newspapers rests in large part on the fact that the Spycatcher allegations, many of them not new in themselves, gain apparent credibility when made by a man who served in MI5 for 21 years and ended in a senior position. That is entirely understandable; but I think the newspapers are also entitled to rely on that apparent credibility, unless the allegations are palpably or demonstrably false or could be disproved by investigation which the newspapers could, but have chosen not to, carry out. These exceptions do not in my view apply.
Nor do I think it an answer to say that these allegations should not have been published in the press, but should have been passed to a proper authority for investigation. The judge found (p 565, ante) that Mr Wright did compile a long dossier which he passed to the chairman of the House of Commons Select Committee on Foreign Affairs, who in turn passed the dossier on to Sir Robert Armstrong. Sir Robert said, and the judge accepted (p 565, ante), that the contents were investigated and considered very carefully by the security service. It is difficult to see what further step Mr Wright or the newspapers could have taken through official channels. It does not, however, appear that these two allegations of iniquity have been the subject of inquiry by any authority outside the security service.
I would uphold the judge’s decision on this point.
(5) Was Scott J wrong to hold the Sunday Times in breach of a duty of confidentiality in publishing a serialised extract of Spycatcher on 12 July 1917 and to conclude that the Attorney General was then entitled to an injunction to restrain further serialisation?
The Sunday Times published this extract on the day before Spycatcher was distributed in the United States. At that date the book had not been published anywhere. The decision of Powell J at first instance in New South Wales had been given, but the appeal from his decision had not been determined. The materials before us show that the Spycatcher allegations had by that date received coverage in the Independent, the Evening Standard, the London Daily News, Independent Television News, Today, the Daily Mirror, the Times, the Age, the Canberra Times, the Washington Post, the New York Times and in news agency releases. There had been reports of the Australian hearing, and Spycatcher had been raised in Parliament. But there had not, in this country or elsewhere, been coverage as long and detailed as in the Sunday Times extract.
The judge found against the newspaper on two grounds. The first was that the publication was indiscriminate, no attempt having been made to concentrate on matters of important public interest (p 589, ante). The second was that the extract included a good deal of material which could not be said to raise a public interest in disclosure capable of outweighing the interest of national security in non-disclosure (p 589, ante).
I do not think either of these conclusions is justified. The editor’s evidence was that he selected the extracts on the basis of what he considered to be of major public importance and interest. The publication itself seems to me broadly to bear that out. The extract was a very long one, but concentrated on what may for brevity be called the Wilson plot, Mr Wright’s allegations of bugging and burglary (the Communist Party of Great Britain, the French Embassy, the Egyptian Embassy, Lancaster House), the Nasser assassination plot, and the unmasking of Blunt. I think that these could, apart from alleged Soviet penetration of MI5, reasonably be regarded as the significant subjects covered by the
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book. Two of them (Wilson and Nasser) the judge held to be proper subjects of disclosure, and I agree. Blunt was the subject of a long book, Conspiracy and Silence, by Barrie Penrose and Simon Freeman, published in 1986, which no attempt was made to stop. The judge did not regard the bugging and burglary allegations as capable of amounting to iniquity. It would, he said, be naive in the extreme to suppose that such activities were not carried out by all security services from time to time (pp 587-588, ante). Perhaps. But I think there may be a distinction to be drawn between the treatment of those who pose a threat to the security of the country and the safety of its citizens and those who do not.
I do not, however, regard these as the crucial considerations, because, even if disclosure of Mr Wright’s major allegations was in principle justified on the iniquity ground, that would not of itself justify publication of this long and detailed extract. The question whether on 12 July the Sunday Times should have been restrained from publishing this serialisation in my view turns on the correct view to be taken of the impending publication of the book in the United States.
On 12 July 1987 it was, I think, a virtual certainty that widespread publication of the book in the United States would imminently take place. But it was not yet known whether the United Kingdom government would seek to prohibit import of the book into this country, nor, if it did, how effective such prohibition would be. So it would have been fair to assume that circulation of the book here might have been relatively small. Whether on the assumption of limited circulation in this country but widespread circulation in the United States an injunction should have been granted I find a difficult question. It is made no easier by the editor’s devious and surreptitious behaviour. No doubt he feared, rightly as it turned out, that if alerted to his intentions the Attorney General would successfully move the court for relief. But that does not predispose one to favour his newspaper’s cause. I do not, however, think that disapproval of the means employed to publish should pre-empt the substantial question whether, on the assumptions made, there was a pressing social need to restrain the Sunday Times’ freedom to publish in the interests of national security. I conclude that there was not. The intercourse between this country and the United States is so close and so constant that I do not think it can be necessary to restrain here the publication of information which relates to this country and is circulating freely in the United States. As Sir Nicolas Browne- Wilkinson V-C put it ([1987] 3 All ER 316 at 332, [1987] 1 WLR 1248 at 1269): ‘The truth of the matter is that in the contemporary world of electronics and jumbo jets news anywhere is news everywhere.’ I agree also with Lord Oliver ([1987] 3 All ER 316 at 376, [1987] 1 WLR 1248 at 1321):
‘Ideas, however unpopular or unpalatable, once released and however released into the open air of free discussion and circulation, cannot for ever be effectively proscribed as if they were a virulent disease. Facilis est descensus Averno and to attempt, even temporarily, to create a sort of judicial cordon sanitaire against the infection from abroad of public comment and discussion is not only, as I believe, certain to be ineffective but involves taking the first steps on a very perilous path.’
Most of the great works of the French Enlightenment were, for good reason, published outside France. But the Bastille still fell.
On this point I disagree with the judge. I would accordingly allow the Sunday Times’s cross-appeal and quash the order for an account of profits. For the rest I agree almost completely with Scott J’s judgment, to which I would pay an admiring tribute.
I end on a cautionary note. The media are entitled to claim recognition of their rights. The European Convention on Human Rights also speaks of duties and responsibilities. The crucial feature of this case is the disclosure which, independently of these newspapers, has occurred. Had the case concerned information relating to national security which remained confidential, the situation would have been quite different. This is a very relevant fact when approaches to present or former members of the security services are
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under consideration. Unless due weight is given to it, the guerrilla warfare now in progress will continue indefinitely.
Appeal dismissed. Cross-appeal dismissed. Leave to appeal to the House of Lords.
Frances Rustin Barrister.
Appeal and cross-appeal
The Attorney General appealed to the House of Lords against the Court of Appeal’s decision dismissing its appeal and Times Newspapers Ltd cross-appealed against the dismissal of its appeal against the order for an account of profits.
Lord Alexander of Weedon QC, John Laws and Philip Havers for the Attorney General.
Charles Gray QC, Desmond Browne and Heather Rogers for Observer Ltd and Guardian Newspapers Ltd.
Anthony Lester QC and David Pannick for Times Newspapers Ltd.
Their Lordships took time for consideration
13 October 1988. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, from 1955 to 1976 Peter Wright was employed in a senior capacity by the counter-espionage branch of the British security service known as MI5. In that capacity he acquired knowledge of a great many matters of prime importance to the security of the country. Following his retirement from the service he went to live in Australia and later formed the intention of writing and publishing a book of memoirs describing his experiences in the service. He wrote the book in association with a man named Paul Greengrass, and it was accepted for publication by Heinemann Publishers Australia Pty Ltd, the Australian subsidiary of a well-known English publishing company. The Attorney General in right of the Crown, learning of the intended publication of the book, in 1985 instituted proceedings in New South Wales against Mr Wright and Heinemann claiming an injunction to restrain the publication in Australia or, alternatively, an account of profits. Pending trial, Mr Wright, the publishers and their solicitors gave undertakings not to reveal the contents of the book. The Attorney General’s action failed before Powell J (see A-G (UK) v Heinemann Publishers Australia Pty Ltd (1987) 8 NSWLR 341) and again before the Court of Appeal of New South Wales (see (1987) 75 ALR 353). Special leave to appeal was granted by the High Court of Australia, but the respondents were released from their undertakings. So the book was published in Australia on 13 October 1987, under the title of Spycatcher. On 2 June 1988 the High Court dismissed the Attorney General’s appeal on the sole ground that an Australian court should not accept jurisdiction to enforce an obligation of confidence owed to a foreign government so as to protect that government’s intelligence secrets and confidential political information (see (1988) 78 ALR 449). In the mean time Spycatcher had on 14 July 1987 been published in the United States of America by Viking Penguin Inc, a subsidiary of an English publishing company. Her Majesty’s government had been advised that, in view of the terms of the First Amendment to the United States Constitution, any attempt to restrain publication there would be certain to fail. Publication also took place in Canada, the Republic of Ireland and a number of other countries. Her Majesty’s government decided that it was impracticable and undesirable to take any steps to prevent the importation into the United Kingdom of copies of the book, and a very substantial number of copies have in fact been imported. So the contents of the book have been disseminated worldwide and anyone in this country who is interested can obtain a copy without undue difficulty.
The earlier history of the litigation in England, of which the present appeals are the culmination, is set out in the judgment of Scott J (pp 552-556, ante). There is no need
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to recapitulate it. The issues raised in the litigation are thus summarised in the judgment of Sir John Donaldson MR in the Court of Appeal (p 598, ante):
‘(1) Were the Observer and the Guardian in breach of their duty of confidentiality when, on 22 and 23 June 1986, they respectively published articles on the forthcoming hearing in Australia? If so, would they have been restrained from publishing if the Attorney General had been able to seek the assistance of the court? … (2) Was the Sunday Times in breach of its duty of confidentiality when, on 12 July 1987, it published the first extract of an intended serialisation of Spycatcher? … (3) Is the Attorney General now entitled to an injunction (a) in relation to the Observer and the Guardian and (b) in relation to the Sunday Times with special consideration to further serialisation? … (4) Is the Attorney General entitled to an account of the profits accruing to the Sunday Times as a result of the serialisation of Spycatcher? … (5) Is the Attorney General entitled to some general injunction restraining future publication of information derived from Mr Wright or other members or ex-members of the security service? … ’
As regards issue (1), Scott J and the majority of the Court of Appeal (Dillon and Bingham LJJ; Sir John Donaldson MR dissenting) held that the publication of the articles in question was not in breach of an obligation of confidence. On issue (2), Scott J and the majority of the Court of Appeal (Bingham LJ dissenting) held that the publication of the first extract from Spycatcher was in breach of an obligation of confidence. On issue (3), Scott J and the Court of Appeal held that the Attorney General was not entitled to an injunction against the Observer and the Guardian nor (Sir John Donaldson MR dissenting) against further serialisation of Spycatcher by the Sunday Times. As to issue (4), Scott J and the majority of the Court of Appeal (Bingham LJ dissenting) decided this in favour of the Attorney General. Issue (5) was decided against the Attorney General both by Scott J and by the Court of Appeal.
The Attorney General now appeals to your Lordships’ House on all the issues on which he failed below. The Sunday Times cross-appeals against the decision on account of profits.
The Crown’s case on all the issues which arise invokes the law about confidentiality. So it is convenient to start by considering the nature and scope of that law. The law has long recognised that an obligation of confidence can arise out of particular relationships. Examples are the relationships of doctor and patient, priest and penitent, solicitor and client, banker and customer. The obligation may be imposed by an express or implied term in a contract but it may also exist independently of any contract on the basis of an independent equitable principle of confidence: see Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) [1963] 3 All ER 413. It is worthy of some examination whether or not detriment to the confider of confidential information is an essential ingredient of his cause of action in seeking to restrain by injunction a breach of confidence. Presumably that may be so as regards an action for damages in respect of a past breach of confidence. If the confider has suffered no detriment thereby he can hardly be in a position to recover compensatory damages. However, the true view may be that he would be entitled to nominal damages. Most of the cases have arisen in circumstances where there has been a threatened or actual breach of confidence by an employee or ex-employee of the plaintiff, or where information about the plaintiff’s business affairs has been given in confidence to someone who has proceeded to exploit it for his own benefit: an example of the latter type of case is Seager v Copydex Ltd [1967] 2 All ER 415, [1967] 1 WLR 923. In such cases the detriment to the confider is clear. In other cases there may be no financial detriment to the confider, since the breach of confidence involves no more than an invasion of personal privacy. Thus in Margaret, Duchess of Argyll v Duke of Argyll [1965] 1 All ER 611, [1967] Ch 302 an injunction was granted against the revelation of marital confidences. The right to personal privacy is clearly one which the law should in this field seek to protect. If a profit has been made through the revelation in breach of confidence of details of a person’s private life it is appropriate that the profit should be
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accounted for to that person. Further, as a general rule it is in the public interest that confidences should be respected, and the encouragement of such respect may in itself constitute a sufficient ground for recognising and enforcing the obligation of confidence even where the confider can point to no specific detriment to himself. Information about a person’s private and personal affairs may be of a nature which shows him up in a favourable light and would by no means expose him to criticism. The anonymous donor of a very large sum to a very worthy cause has his own reasons for wishing to remain anonymous, which are unlikely to be discreditable. He should surely be in a position torestrain disclosure in breach of confidence of his identity in connection with the donation. So I would think it a sufficient detriment to the confider that information given in confidence is to be disclosed to persons whom he would prefer not to know of it, even though the disclosure would not be harmful to him in any positive way.
The position of the Crown, as representing the continuing government of the country, may, however, be regarded as being special. In some instances disclosure of confidential information entrusted to a servant of the Crown may result in a financial loss to the public. In other instances such disclosure may tend to harm the public interest by impeding the efficient attainment of proper governmental ends, and the revelation of defence or intelligence secrets certainly falls into that category. The Crown, however, as representing the nation as a whole, has no private life or personal feelings capable of being hurt by the disclosure of confidential information. In so far as the Crown acts to prevent such disclosure or to seek redress for it on confidentiality grounds, it must necessarily, in my opinion, be in a position to show that the disclosure is likely to damage or has damaged the public interest. How far the Crown has to go in order to show this must depend on the circumstances of each case. In a question with a Crown servant himself, or others acting as his agents, the general public interest in the preservation of confidentiality, and in encouraging other Crown servants to preserve it, may suffice. But, where the publication is proposed to be made by third parties unconnected with the particular confidant, the position may be different. The Crown’s argument in the present case would go the length that in all circumstances where the original disclosure has been made by a Crown servant in breach of his obligation of confidence, any person to whose knowledge the information comes and who is aware of the breach comes under an equitable duty binding his conscience not to communicate the information to anyone else irrespective of the circumstances under which he acquired the knowledge. In my opinion that general proposition is untenable and impracticable, in addition to being unsupported by any authority. The general rule is that anyone is entitled to communicate anything he pleases to anyone else, by speech or in writing or in any other way. That rule is limited by the law of defamation and other restrictions similar to those mentioned in art 10 of the Convention for the Protection of Human Rights and Fundamental Freedoms (Rome, 4 November 1950 TS 71(1953) Cmd 8969). All those restrictions are imposed in the light of considerations of public interest such as to countervail the public interest in freedom of expression. A communication about some aspect of government activity which does no harm to the interests of the nation cannot, even where the original disclosure has been made in breach of confidence, be restrained on the ground of a nebulous equitable duty of conscience serving no useful practical purpose.
There are two important cases in which the special position of a government in relation to the preservation of confidence has been considered. The first of them is A-G v Jonathan Cape Ltd [1975] 3 All ER 484, [1976] QB 752. That was an action for injunctions to restrain publication of the political diaries of the late Richard Crossman, which contained details of Cabinet discussions held some ten years previously, and also of advice given to ministers by civil servants. Lord Widgery CJ said ([1975] 3 All ER 484 at 495, [1976] QB 752 at 770–771):
‘In these actions we are concerned with the publication of diaries at a time when 11 years have expired since the first recorded events. The Attorney-General must show (a) that such publication would be in breach of confidence, (b) that the public
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interest requires that the publication be restrained, and (c) that there are no other facets of the public interest contradictory to and more compelling than that relied on. Moreover, the court, when asked to restrain such a publication, must closely examine the extent to which relief is necessary to ensure that restrictions are not imposed beyond the strict requirement of public need.’
Lord Widgery CJ went on to say that, while the expression of individual opinions by Cabinet ministers in the course of Cabinet discussions were matters of confidence, the publication of which could be restrained by the court when clearly necessary in the public interest, there must be a limit in time after which the confidential character of the information would lapse. Having read the whole of volume one of the diaries he did not consider that publication of anything in them, ten years after the event, would inhibit full discussion in the Cabinet at the present time or thereafter, or damage the doctrine of joint Cabinet responsibility. He also dismissed the argument that publication of advice given by senior civil servants would be likely to inhibit the frankness of advice given by such civil servants in the future. So, in the result, Lord Widgery’s decision turned on his view that it had not been shown that publication of the diaries would do any harm to the public interest.
The second case is Commonwealth of Australia v John Fairfax & Sons Ltd (1980) 32 ALR 485. That was a decision of Mason J in the High Court of Australia, dealing with an application by the Commonwealth for an interlocutory injunction to restrain publication of a book containing the texts of government documents concerned with its relations with other countries, in particular the government of Indonesia in connection with the ‘East Timor crisis’. The documents appeared to have been leaked by a civil servant. Restraint of publication was claimed on the ground of breach of confidence and also on that of infringement of copyright. Mason J granted an injunction on the latter ground but not on the former. Having mentioned an argument for the Commonwealth that the government was entitled to protect information which was not public property, even if no public interest is served by maintaining confidentiality, he continued (at 492–493):
‘However, the plaintiff must show, not only that the information is confidential in quality and that it was imparted so as to import an obligation of confidence, but also that there will be “an unauthorized use of that information to the detriment of the party communicating it” (Coco v A N Clark (Engineers) Ltd ([1969] RPC 41 at 47)). The question then, when the executive government seeks the protection given by Equity, is: What detriment does it need to show? The equitable principle has been fashioned to protect the personal, private and proprietary interests of the citizen, not to protect the very different interests of the executive government. It acts, or is supposed to act, not according to standards of private interest, but in the public interest. This is not to say that Equity will not protect information in the hands of the government, but it is to say that when Equity protects government information it will look at the matter through different spectacles. It may be a sufficient detriment to the citizen that disclosure of information relating to his affairs will expose his actions to public discussion and criticism. But it can scarcely be a relevant detriment to the government that publication of material concerning its actions will merely expose it to public discussion and criticism. It is unacceptable, in our democratic society, that there should be a restraint on the publication of information relating to government when the only vice of that information is that it enables the public to discuss, review and criticize government action. Accordingly, the court will determine the government’s claim to confidentiality by reference to the public interest. Unless disclosure is likely to injure the public interest, it will not be protected. The court will not prevent the publication of information which merely throws light on the past workings of government, even if it be not public property, so long as it does not prejudice the community in other respects. Then disclosure will itself serve the public interest in keeping the community informed and
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in promoting discussion of public affairs. If, however, it appears that disclosure will be inimical to the public interest because national security, relations with foreign countries or the ordinary business of government will be prejudiced, disclosure will be restrained. There will be cases in which the conflicting considerations will be finely balanced, where it is difficult to decide whether the public’s interest in knowing and in expressing its opinion, outweighs the need to protect confidentiality.’
I find myself in broad agreement with this statement by Mason J. In particular I agree that a government is not in a position to win the assistance of the court in restraining the publication of information imparted in confidence by it or its predecessors unless it can show that publication would be harmful to the public interest.
In relation to Mr Wright, there can be no doubt whatever that had he sought to bring about the first publication of his book in this country, the Crown would have been entitled to an injunction restraining him. The work of a member of MI5 and the information which he acquires in the course of that work must necessarily be secret and confidential and be kept secret and confidential by him. There is no room for discrimination between secrets of greater or lesser importance, nor any room for close examination of the precise manner in which revelation of any particular matter may prejudice the national interest. Any attempt to do so would lead to further damage. All this has been accepted from beginning to end by each of the judges in this country who has had occasion to consider the case and also by counsel for the respondents. It is common ground that neither the defence of prior publication nor the so-called ‘iniquity’ defence would have availed Mr Wright had he sought to publish his book in England. The sporadic and low-key prior publication of certain specific allegations of wrongdoing could not conceivably weigh in favour of allowing publication of this whole book of detailed memoirs describing the operations of the security service over a lengthy period and naming and describing many members of it not previously known to be such. The damage to the public interest involved in a publication of that character, in which the allegations in question occupy a fairly small space, vastly outweigh all other considerations. The question whether Mr Wright or those acting for him would be at liberty to publish Spycatcher in England under existing circumstances does not arise for immediate consideration. These circumstances include the worldwide dissemination of the contents of the book which has been brought about by Mr Wright’s wrongdoing. In my opinion general publication in this country would not bring about any significant damage to the public interest beyond what has already been done. All such secrets as the book may contain have been revealed to any intelligence services whose interests are opposed to those of the United Kingdom. Any damage to the confidence imposed in the British intelligence services by those of friendly countries brought about by Mr Wright’s actions would not be materially increased by publication here. It is, however, urged on behalf of the Crown that such publication might prompt Mr Wright into making further disclosures, would expose existing and past members of the British intelligence services to harassment by the media and might result in their disclosing other secret material with a view, perhaps, to refuting Mr Wright’s account and would damage the morale of such members by the spectacle of Mr Wright having got away with his treachery. While giving due weight to the evidence of Sir Robert Armstrong (the Secretary to the Cabinet) on these matters, I have not been persuaded that the effect of publication in England would be to bring about greater damage in the respects founded on than has already been caused by the widespread publication elsewhere in the world. In the result, the case for an injunction now against publication by or on behalf of Mr Wright would in my opinion rest on the principle that he should not be permitted to take advantage of his own wrongdoing.
The newspapers which are the respondents in this appeal were not responsible for the worldwide dissemination of the contents of Spycatcher which has taken place. It is a general rule of law that a third party who comes into possession of confidential
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information which he knows to be such, may come under a duty not to pass it on to anyone else. Thus, in Margaret, Duchess of Argyll v Duke of Argyll [1965] 1 All ER 611, [1967] Ch 302 the newspaper to which the duke had communicated the information about the duchess was restrained by injunction from publishing it. However, in that case there was no doubt but that the publication would cause detriment to the duchess in the sense I have considered above. In the present case the third parties are the Guardian and the Observer on the one hand and the Sunday Times on the other hand. The first two of these newspapers wish to report and comment on the substance of the allegations made in Spycatcher. They say that they have no intention of serialising it. By virtue of s 6 of the Copyright Act 1956 they might, without infringing copyright, quote passages from the book for purposes of ‘criticism or review’. The Sunday Times for their part wish to complete their serialisation of Spycatcher. The question is whether the Crown is entitled to an injunction restraining the three newspapers from doing what they wish to do. This is the third of the issues identified by Sir John Donaldson MR in the court below. For the reasons which I have indicated in dealing with the position of Mr Wright, I am of the opinion that the reports and comments proposed by the Guardian and the Observer would not be harmful to the public interest, nor would the continued serialisation by the Sunday Times. I would therefore refuse an injunction against any of the newspapers. I would stress that I do not base this on any balancing of public interest nor on any considerations of freedom of the press, nor on any possible defences of prior publication or just cause or excuse, but simply on the view that all possible damage to the interest of the Crown has already been done by the publication of Spycatcher abroad and the ready availability of copies in this country.
It is possible, I think, to envisage cases where, even in the light of widespread publication abroad of certain information, a person whom that information concerned might be entitled to restrain publication by a third party in this country. For example, if in the Argyll case the duke had secured the revelation of the marital secrets in an American newspaper, the duchess could reasonably claim that publication of the same material in England would bring it to the attention of people who would otherwise be unlikely to learn of it and who were more closely interested in her activities than American readers. The publication in England would be more harmful to her than publication in America. Similar considerations would apply to, say, a publication in America by the medical adviser to an English pop group about diseases for which he had treated them. But it cannot reasonably be held in the present case that publication in England now of the contents of Spycatcher would do any more harm to the public interest than has already been done.
In relation to future serialisations by the Sunday Times, Sir John Donaldson MR took the view that this newspaper stood in the shoes of Mr Wright by virtue of the licence which it had been granted by the publishers. The cost of this licence was £150,000 of which £25,000 was to be paid at once and the balance after the serialisation. So Mr Wright and his publishers will benefit from future instalments of it. The Master of the Rolls considered that there was a strong public interest in preventing Mr Wright and his publishers from profiting from their wrongdoing. There can be no doubt that the prospect of Mr Wright receiving further sums of money from the Sunday Times as a reward for his treachery is a revolting one. But a natural desire to deprive Mr Wright of profit does not appear to me to constitute a legally valid ground for enjoining the newspaper from a publication which would not in itself damage the interests of the Crown. Indeed, it appears that Mr Wright would have no legally enforceable claim against the Sunday Times for payment, on the principle of ex turpi causa non oritur actio. Whether the Sunday Times is bound to account for the profits of serialisation I shall consider later.
The next issue for examination is conveniently the one as to whether the Sunday Times was in breach of an obligation of confidentiality when it published the first serialised extract from Spycatcher on 12 July 1987. I have no hesitation in holding that it
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was. Those responsible for the publication well knew that the material was confidential in character and had not as a whole been previously published anywhere. Justification for the publication is sought to be found in the circumstance that publication in the United States of America was known to be imminent. That will not hold water for a moment. It was Mr Wright and those acting for him who were about to bring about the American publication in breach of confidence. The fact that a primary confidant, having communicated the confidential information to a third party in breach of obligation, is about to reveal it similarly to someone else, does not entitle that third party to do the same. The third party to whom the information has been wrongfully revealed himself comes under a duty of confidence to the original confider. The fact that his informant is about to commit further breaches of his obligation cannot conceivably relieve the third party of his own. If it were otherwise, an agreement between two confidants each to publish the confidential information would relieve each of them of his obligation, which would be absurd and deprive the law about confidentiality of all content. The purpose of the Sunday Times was of course to steal a march on the American publication so as to be the first to reveal, for its own profit, the confidential material. The evidence of Mr Neil, the editor of the Sunday Times, makes it clear that his intention was to publish his instalment of Spycatcher at least a full week before the American publication and this was in the event reduced to two days only because circumstances caused that publication to be brought forward a week. There can be no question but that the Crown, had it learned of the intended publication in the Sunday Times, would have been entitled to an injunction to restrain it. Mr Neil employed peculiarly sneaky methods to avoid this. Neither the defence of prior publication nor that of just cause or excuse would in my opinion have been available to the Sunday Times. As regards the former, the circumstance that certain allegations had been previously made and published was not capable of justifying publication in the newspapers of lengthy extracts from Spycatcher which went into details about the working of the security service. As to just cause or excuse, it is not sufficient to set up the defence merely to show that allegations of wrongdoing have been made. There must be at least a prima facie case that the allegations have substance. The mere fact that it was Mr Wright, a former member of MI5 who, with the assistance of a collaborator, had made the allegations, was not in itself enough to establish such a prima facie case. In any event the publication went far beyond the mere reporting of allegations, in so far as it set out substantial parts of the text of Spycatcher. For example, the alleged plot to assassinate Colonel Nasser occupies but one page of a book, in paperback, of 387 pages, and the alleged plot to destabilise Mr Wilson’s government about five pages. In this connection it is to be noted that counsel for the Sunday Times accepted that neither of the two defences would have availed Mr Wright had he sought to publish the text of Spycatcher in England. There is no reason of logic or principle why the Sunday Times should have been in any better position acting as it was under his licence.
This leads on to consideration of the question whether the Sunday Times should be held liable to account to the Crown for profits made from past and future serialisation of Spycatcher. An account of profits made through breach of confidence is a recognised form of remedy available to a claimant: see Peter Pan Manufacturing Corp v Corsets Silhouette Ltd [1963] 3 All ER 402, [1964] 1 WLR 96; cf Reading v A-G [1951] 1 All ER 617, [1951] AC 507. In cases where the information disclosed is of a commercial character an account of profits may provide some compensation to the claimant for loss which he has suffered through the disclosure, but damages are the main remedy for such loss. The remedy is, in my opinion, more satisfactorily to be attributed to the principle that no one should be permitted to gain from his own wrongdoing. Its availability may also, in general, serve a useful purpose in lessening the temptation for recipients of confidential information to misuse it for financial gain. In the present case the Sunday Times did misuse confidential information and it would be naive to suppose that the prospect of financial gain was not one of the reasons why it did so. I can perceive no good ground why the remedy should not be made available to the Crown in the circumstances of this case, and I would
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therefore hold the Crown entitled to an account of profits in respect of the publication on 12 July 1987. I would add that in my opinion the Sunday Times, in the taking of the account, is not entitled to deduct in computing any gain the sums paid to Mr Wright’s publishers as consideration for the licence granted by the latter, since neither Mr Wright nor his publishers were or would in the future be in a position to maintain an action in England for recovery of such payments. Nor would the courts of this country enforce a claim by them to the copyright in a work the publication of which they had brought about contrary to the public interest: cf Glyn v Weston Feature Film Co [1916] 1 Ch 261 at 269. Mr Wright is powerless to prevent anyone who chooses to do so from publishing Spycatcher in whole or in part in this country, or to obtain any other remedy against them. There remains, of course, the question whether the Crown might successfully maintain a claim that it is in equity the owner of the copyright in the book. Such a claim has not yet been advanced, but might well succeed if it were to be.
In relation to future serialisation of further parts of the book, however, it must be kept in mind that the proposed subject matter of it has now become generally available and that the Sunday Times is not responsible for this having happened. In the circumstances the Sunday Times will not be committing any wrong against the Crown by publishing that subject matter and should not therefore be liable to account for any resultant profits. It is in no different position from anyone else who now might choose to publish the book by serialisation or otherwise.
The next matter for consideration, though the point is not now of any practical importance, is whether the Observer and the Guardian were in breach of an obligation of confidence by the publication of their articles on 22 and 23 June 1986. The circumstances were that Mr Wright and Heinemann and their solicitors had given to the New South Wales court, pending trial of the action there, undertakings not to disclose any information gained by Mr Wright in the course of his service with MI5. Scott J found, and it has never been disputed by counsel for the two newspapers, that information about the allegations described in the two articles must have been obtained from someone in the office of the publishers or in that of their solicitors. Scott J also inferred that the newspapers must have known of the undertakings that had been given. There can be no question of the articles having been a fair and accurate report of proceedings in the New South Wales court. Such a report could only cover matters which had actually been divulged in open court. The newspapers knew that the information in question was of a confidential nature, deriving as it did from Mr Wright and relating to his experiences in MI5. Some of the allegations, albeit of minor significance, had never previously been published at all. The allegations about Sir Roger Hollis had received quite widespread publicity in various books and newspapers and had been made by Mr Wright himself in a Granada television programme in July 1984. Allegations about the Nasser plot and the Wilson plot and the bugging of embassies and other places had been made in a number of published books, but had been attributed to Mr Wright only in an Observer article of 15 March 1985 and another of 9 February 1986, and then only in a somewhat oblique fashion. I do not consider that an injunction would have been granted against publication of the fact that Mr Wright was repeating in his memoirs the allegation about Sir Roger Hollis, because it was quite well known that he had been making that allegation for a considerable time. The specific attribution to Mr Wright of the other allegations is perhaps a different matter. But I would regard it as highly doubtful that the publication of that attribution could reasonably be regarded as damaging to the public interest of the United Kingdom in the direct sense that the information might be of value to unfriendly foreign intelligence services, or as calculated to damage that interest indirectly in any of the ways spoken of in evidence by Sir Robert Armstrong. I consider that, on balance, the prospects are that the Crown would not have been held entitled to a permanent injunction. Scott J and the majority of the Court of Appeal took that view, and I would not be disposed to differ from them.
The final issue is whether the Crown is entitled to a general injunction against all three
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newspapers restraining them from publishing any information concerned with the Spycatcher allegations obtained by any member or former member of the security service which they know or have reasonable grounds for believing to have come from any such member or former member, including Mr Wright, and also from attributing any such information in any publication to any member or former member of the security service. The object of an injunction on these lines is to set up a second line of defence, so to speak, for the confidentiality of the operations of the security service. The first and most important line of defence is obviously to take steps to secure that members and ex-members of the service do not speak about their experiences to the press or anyone else to whom they are not authorised to speak. Obviously the Director General of the service is in a position to impose a degree of discipline on the existing members of the service so as to prevent unauthorised disclosures, and it is reasonable to suppose that in any event the vast majority of these members are conscientious and would never consider making such disclosures. In so far as unconscientious ex-members are concerned, in particular Mr Wright, the position under existing circumstances is more difficult, although measures may now be introduced which are apt to discourage breaches of confidence by such people. There are a number of problems involved in the general width of the injunction sought. Injunctions are normally aimed at the prevention of some specific wrong, not at the prevention of wrongdoing in general. It would hardly be appropriate to subject a person to an injunction on the ground that he is the sort of person who is likely to commit some kind of wrong, or that he has an interest in doing so. Then the injunction sought would not leave room for the possibility that a defence might be available in a particular case. If Mr Wright were to publish a second book in America or Australia or both and it were to become readily available in this country, as has happened in regard to his first book, newspapers which published its contents would have as good a defence as the respondents in the present case. It would not be satisfactory to have the availability of any defence tested in contempt proceedings. In my opinion an injunction on the lines sought should not be granted.
A few concluding reflections may be appropriate. In the first place I regard this case as having established that members and former members of the security service do have a lifelong obligation of confidence owed to the Crown. Those who breach it, such as Mr Wright, are guilty of treachery just as heinous as that of some of the spies he excoriates in his book. The case has also served a useful purpose in bringing to light the problems which arise when the obligation of confidence is breached by publication abroad. The judgment of the High Court of Australia ((1988) 78 ALR 449) reveals that even the most sensitive defence secrets of this country may not expect protection in the courts even of friendly foreign countries, although a less extreme view was taken by Cooke P in the New Zealand Court of Appeal (A-G v Wellington Newspapers Ltd (28 April 1988, unreported). The secrets revealed by Mr Wright refer to matters of some antiquity, but there is no reason to expect that secrets concerned with matters of great current importance would receive any different treatment. Consideration should be given to the possibility of some international agreement aimed at reducing the risks to collective security involved in the present state of affairs. The First Amendment to the United States Constitution clearly poses problems in relation to publication in the United States of America, but even there there is the prospect of defence and intelligence secrets receiving some protection in the civil courts, as is shown by the decision of the Supreme Court in Snepp v US (1980) 444 US 507. Some degree of comity and reciprocity in this respect would seem desirable in order to promote the common interests of allied nations.
My Lords, on the whole matter and for the reasons I have expressed, I would dismiss both appeals and also the cross-appeal by the Sunday Times.
LORD BRIGHTMAN. My Lords, I am in agreement with the majority of your Lordships that the two appeals and the cross-appeal fail on all issues. The ground is so
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comprehensively covered by the speeches of your Lordships that I intend that my contribution to the debate shall be brief.
It is clear beyond argument that Mr Peter Wright, by making Spycatcher available for serialisation and publication in July 1987, flagrantly breached the duty of confidence which, as a former member of the British security service, he owed to the Crown. It is equally clear that as a result of that publication and the ensuing worldwide dissemination of the facts and surmises therein contained, the initial confidential quality of the contents of the book has been totally destroyed. Against that background, the question which arises is, what are the duties and liabilities of the three newspapers in relation to their past and intended future publication and discussion of matter to be found in Spycatcher.
A member of the security service is under a lifelong duty of confidence towards the Crown. The purpose of that duty is to preserve intact the secrets of the service which it would be against the public interest to disclose. If the member departs abroad and publishes his memoirs there, he breaches his lifelong duty of confidence. Thereafter such duty is incapable of existing quoad the matter disclosed. The reason why the duty of confidence is extinguished is that the matter is no longer secret and there is therefore no secrecy in relation to such matter remaining to be preserved by the duty of confidence. It is meaningless to talk of a continuing duty of confidence in relation to matters disclosed worldwide. It is meaningful only to discuss the remedies available to deprive the delinquent confidant or his successors-in-title of benefits flowing from the breach, or in an appropriate case to compensate the confider.
In my opinion the reason why the court would, or might, grant an injunction against Wright if he now brought himself within the jurisdiction and sought to publish Spycatcher here, is not that such an order would recognise a subsisting duty of confidence, but that it would impede the unjust enrichment of Wright, or preclude him from benefiting, tangibly or intangibly, from his own wrongdoing, or perhaps that the copyright of the work would in equity be vested in the Crown, as suggested by three of your Lordships.
The Crown is bound to face the uncomfortable fact that a disloyal intelligence officer is free to emigrate to a safe haven overseas, and from there to give worldwide publicity, in pursuit of money or activated by malice, to the closest secrets of the organisation which he once purported to serve. After that has been done, secrecy is lost and the Crown is inevitably left with, at best, the highly unsatisfactory and totally inadequate remedies of the nature sought in the present case, or, at worst, with no remedy at all. This situation is inescapable. Fortunately, exceedingly few intelligence officers are cast in the same mould as Wright.
I turn to the five issues identified by Sir John Donaldson MR (p 598, ante).
(1) Articles in the Observer and the Guardian issues of 22 and 23 June 1986
I agree with the majority of your Lordships that, despite the reprehensible leakage of information which was the source of these articles about the then forthcoming Australian proceedings, the articles were not in fact damaging to the public interest and are not therefore a proper foundation for any case by the Crown against these newspapers. There are concurrent findings of fact to this effect by the High Court and the Court of Appeal, which for my part I would be unwilling to disturb.
(2) and (4) First instalment (12 July 1987) of the intended serialisation by the Sunday Times
I am in complete agreement with your Lordships, as with the courts below, that this serialisation, which shortly preceded the entry of the contents of Spycatcher into the public domain, constituted a breach of confidence on the part of the Sunday Times. The only remedy available to the Crown is the inadequate remedy of an account of profits, on the basis that the Sunday Times unjustly enriched itself and should therefore be stripped of the riches wrongfully acquired: cf Reading v A-G [1951] 1 All ER 617, [1951] AC 507. I see no reason why the Sunday Times should not account for a due proportion of the
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entirety of the total net profits of the issue of 12 July 1987, with possibly an allowance for those copies of the paper which omitted the offending instalment as part of a deceit to hoodwink the government.
(3) Future serialisation by the Sunday Times
This aspect of the case raises the most controversial of the questions with which your Lordships are concerned. One starts with the knowledge that the first instalment of Spycatcher published by the Sunday Times on 12 July 1987 was a breach of confidence by the Sunday Times and that a second instalment, if one is ever published, will in a broad sense stem from the same tainted source as the first instalment, namely the purchase of serialisation rights from Heinemann Publishers Australia Pty Ltd in June 1987. If, as all your Lordships agree, the first instalment would have been restrained by the court on the application of the Crown had the Sunday Times not successfully hoodwinked the government, my first impression was that any future instalment should be similarly restrained.
However, on second thoughts I do not think this conclusion is correct, attractive though it may be on moral grounds. The Crown is only entitled to restrain the publication of intelligence information if such publication would be against the public interest, as it normally will be if theretofore undisclosed. But if the matter sought to be published is no longer secret, there is unlikely to be any damage to the public interest by reprinting what all the world has already had the opportunity to read. There is no possible damage to the public interest if Tom, Dick or Harry, or the Sunday Times reprints in whole or part what is already printed and available within the covers of Spycatcher. Therefore it seems to me that no injunction should be granted to restrain further serialisation. I think it would be particularly inappropriate to prohibit the Sunday Times from serialising a book which every other newspaper proprietor in the land is at liberty to serialise or publish, and may furthermore so do without reference to Wright or Heinemann for it is certain that neither of the latter has any copyright in Spycatcher which would be recognised by the courts of this country. I do not see how the public interest would be realistically served by a selective ban on the reprinting of non-confidential matter in these circumstances.
(5) General injunction against the Sunday Times
I confess that at one time I felt disposed in favour of granting an injunction to restrain the Sunday Times, as a proven wrongdoer, from seeking or publishing confidential information concerning the work of the British security service, or inviting the Sunday Times to give an undertaking to the like effect. However, this course does not appeal to your Lordships, and the point is not one which I wish to waste your Lordships’ time pursuing.
As indicated, I would dismiss the appeals and the cross-appeal.
LORD GRIFFITHS. My Lords, In this appeal we are concerned to discover the circumstances in which the government can invoke the civil law to prevent the publication of the contents of the memoirs of a member of the security service.
In the course of the argument we have been taken over the whole of the law of confidence as it has developed over the last century. It is judge-made law and reflects the willingness of the judges to give a remedy to protect people from being taken advantage of by those they have trusted with confidential information. With two exceptions the cases have been concerned with the protection of individual rights and provide no sure guide to the approach that should be adopted when it is the government that seeks the protection of the law. It is nevertheless helpful to see in which way the authorities point.
Although the terms of a contract may impose a duty of confidence the remedy is not dependent on contract and exists as an equitable remedy. Megarry J identified the three essentials to found the duty in Coco v A N Clark (Engineers) Ltd [1969] RPC 41 at 47:
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‘… three elements are normally required if, apart from contract, a case of breach of confidence is to succeed. First, the information itself, in the words of Lord Greene, M.R. in the Saltman case [Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) [1963] 3 All ER 413 at 415] must “have the necessary quality of confidence about it.” Secondly, that information must have been imparted in circumstances importing an obligation of confidence. Thirdly, there must be an unauthorised use of that information to the detriment of the party communicating it.’
The first of these elements will not normally be present if the information is in the public domain: ‘… it must not be something which is public property and public knowledge’ (per Lord Greene MR in Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) [1963] 3 All ER 413 at 415). Furthermore, information may lose its original confidential character if it subsequently enters the public domain. If the confider publishes the information this releases the confidant from his duty of confidence: see O Mustard & Son v S Allcock & Co Ltd (1928) [1963] 3 All ER 416, [1964] 1 WLR 109. The courts have, however, so far refused to extend this principle where the confidential information is published by a third party (see Cranleigh Precision Engineering Ltd v Bryant [1964] 3 All ER 289, [1965] 1 WLR 1293) or to the case of publication of the information by the confidant (see Speed Seal Products Ltd v Paddington [1986] 1 All ER 91, [1985] 1 WLR 1327).
The duty of confidence is, as a general rule, also imposed on a third party who is in possession of information which he knows is subject to an obligation of confidence: see Prince Albert v Strange (1849) 1 Mac & G 25, 41 ER 1171 and Margaret, Duchess of Argyll v Duke of Argyll [1965] 1 All ER 611, [1967] Ch 302. If this was not the law, the right would be of little practical value; there would be no point in imposing a duty of confidence in respect of the secrets of the marital bed if newspapers were free to publish those secrets when betrayed to them by the unfaithful partner in the marriage. When trade secrets are betrayed by a confidant to a third party it is usually the third party who is to exploit the information and it is the activity of the third party that must be stopped in order to protect the owner of the trade secret.
The courts have, however, always refused to uphold the right to confidence when to do so would be to cover up wrongdoing. In Gartside v Outram (1856) 26 LJ Ch 113 it was said that there could be no confidence in iniquity. This approach has been developed in the modern authorities to include cases in which it is in the public interest that the confidential information should be disclosed: see Initial Services Ltd v Putterill [1967] 3 All ER 145, [1968] 1 QB 396, Beloff v Pressdram Ltd [1973] 1 All ER 241 and Lion Laboratories Ltd v Evans [1984] 2 All ER 417, [1985] QB 526. This involves the judge in balancing the public interest in upholding the right to confidence, which is based on the moral principles of loyalty and fair dealing, against some other public interest that will be served by the publication of the confidential material. Even if the balance comes down in favour of publication, it does not follow that publication should be to the world through the media. In certain circumstances the public interest may be better served by a limited form of publication perhaps to the police or some other authority who can follow up a suspicion that wrongdoing may lurk beneath the cloak of confidence. Those authorities will be under a duty not to abuse the confidential information and to use it only for the purpose of their inquiry. If it turns out that the suspicions are without foundation, the confidence can then still be protected: see Francome v Mirror Group Newspapers Ltd [1984] 2 All ER 408, [1984] 1 WLR 892. On the other hand, the circumstances may be such that the balance will come down in favour of allowing publication by the media: see Lion Laboratories Ltd v Evans [1984] 2 All ER 417, [1985] QB 526. Judges are used to carrying out this type of balancing exercise and I doubt if it is wise to try to formulate rules to guide the use of this discretion that will have to be exercised in widely differing and as yet unforeseen circumstances. I have no doubt, however, that in the case of a private claim to confidence, if the three elements of quality
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of confidence, obligation of confidence and detriment or potential detriment are established, the burden will lie on the defendant to establish that some other overriding public interest should displace the plaintiff’s right to have his confidential information protected.
With these features of the private law of confidence in mind, I now turn to examine the Attorney General’s submissions. The starting point of his argument is that a member of the security service owes a lifelong duty to the Crown not to disclose any secret or confidential information he acquired during his service. This obligation has been accepted by every judge who has considered this case and is clearly right. The security and intelligence services are necessary for our national security. They are, and must remain, secret services if they are to operate efficiently. The only practical way to achieve this objective is a brightline rule that forbids any member or ex-member of the service to publish any material relating to his service experience unless he has had the material cleared by his employers. There is, in my view, no room for an exception to this rule dealing with trivia that should not be regarded as confidential. What may appear to the writer to be trivial may in fact be the one missing piece in the jigsaw sought by some hostile intelligence agency. The only possible exception that I would countenance would be the public interest defence. Frankly, I find it very difficult to envisage the circumstances in which the facts would justify such a defence. But, theoretically, if a member of the service discovered that some iniquitous course of action was being pursued that was clearly detrimental to our national interest, and he was unable to persuade any senior members of his service or any member of the establishment, or the police, to do anything about it, then he should be relieved of his duty of confidence so that he could alert his fellow citizens to the impending danger. However, no such considerations arise in the case of Spycatcher. It is true that grave accusations are made against both MI5 and MI6, but they occupy only a few pages of the book and cannot possibly justify publishing in great detail the operational organisation, the methods and the personnel of MI5, with which this book is mostly concerned. If Peter Wright had intended to publish the book in this country before it was published abroad, the Attorney General would have been entitled to an injunction to restrain him and would also have been entitled to an injunction to restrain any newspapers or other person who wished to publish it.
The next step in this argument is to assert that if Peter Wright wished to publish Spycatcher in this country today, the government would still be entitled to an injunction to stop him doing so. I agree that the government would be entitled to such an injunction but at this stage the argument becomes more difficult and the reason for granting the injunction must be carefully examined. The Attorney General accepts that so far as betraying secret confidential information to our enemies is concerned, the damage has been done, and no further damage of that kind will result from publishing Spycatcher in this country. Nevertheless, the Attorney General, as I understand the case, advances three separate arguments each of which, it is submitted, would justify the grant of an injunction against Peter Wright.
First, it is submitted that detriment to the confider is not an essential element that has to be proved in support of the action for breach of confidence. Counsel for the Attorney General gave as an example a marital confidence which showed some friend of the husband in a very bad light and suggested that a court would, at the suit of the husband, restrain a wife from publishing such information even though it did not harm the husband. I daresay the court would protect such a confidence but I do not accept that the husband would suffer no detriment if the confidence was breached. The husband would be likely to lose a friend and friends can be precious. I am of the opinion that detriment, or potential detriment to the confider, is an element that must be established before a private individual is entitled to the remedy. The remedy has been fashioned to protect the confider not to punish the confidant, and there seems little point in extending it to a confider who has no need of the protection. But whatever may be the position between private litigants, we have in this litigation to consider the position when it is the
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government that seeks the remedy. In my view, for reasons so cogently stated by Mason J in Commonwealth of Australia v John Fairfax & Sons Ltd (1980) 32 ALR 485, which I will not repeat because they are fully cited in the speech of Lord Keith, a government that wishes to enforce silence through an action for breach of confidence must establish that it is in the public interest to do so. This is but another way of saying that the government must establish, as an essential element of the right to the remedy, that the public interest will suffer detriment if an injunction is not granted. This approach also has the support of Lord Widgery CJ in the Crossman diaries case (A-G v Jonathan Cape Ltd [1975] 3 All ER 484, [1976] QB 752), which is the only reported decision of the government seeking this remedy in our courts. I therefore do not accept the first line of argument.
The second line of argument is that if it is necessary to show detriment, this is demonstrated by the evidence of Sir Robert Armstrong (the Secretary to the Cabinet) which gives details of a number of respects in which it is alleged that the efficient future operation of the security service would be adversely affected if publication of Spycatcher were permitted in this country. I shall have to deal with these matters in more detail when I consider the position of the newspapers, but so far as Mr Wright is concerned, I would accept that they have sufficient weight to justify the grant of an injunction to restrain him from publishing Spycatcher in this country, for I can see no countervailing public interest that he could legitimately put in the scales against such detriment.
The third argument is that even if publication of Spycatcher in this country would cause no further harm to the security service, Mr Wright nevertheless remains bound by his duty of confidence because he cannot free himself from this duty by breaking it, or to put the matter in more colourful language, he cannot be permitted to profit from his own wrongdoing. All the judges who have so far considered this case have accepted this argument. The Law Commission after an exhaustive study of the law of confidence came to the opposite conclusion; they recommended that once confidential information has come into the public domain (and there can be no doubt that Spycatcher is in the public domain) the obligation of confidence should come to an end even if the confidant is responsible for the publication: see the Law Commission’s Report on Breach of Confidence (Law Com no 110(1981)). The Law Commission were, however, considering the problem in terms of breaches of commercial confidences and the ‘springboard doctrine’ which prevents a confidant responsible for commercial information becoming public knowledge reaping any financial benefit from his breach. There may be sound reasons for not granting an injunction after a breach of a commercial confidence when it may be possible to provide recompense by way of damages, and some of the difficulties that arise in such circumstances are discussed in the judgment of Megarry J in Coco v A N Clark (Engineers) Ltd [1969] RPC 41, but they do not fall for consideration now. So far as members of the security service are concerned, damages would be a wholly inappropriate remedy for their breach of faith and although it would provide some disincentive to make them account for any profits they might make, we have the example of Mr Cavendish who published a private memoir, at his own expense, to show that liability to account for profits is not the answer. It would make a mockery of the duty of confidence owed by members of the security and intelligence services if they could discharge it by breaching it. I would therefore hold that whatever publication may have been achieved abroad, Peter Wright remains bound by his duty of secrecy and confidence and will not be allowed to publish Spycatcher in any form in this country.
Having established that Peter Wright remains bound by his duty of confidence, the Attorney General then submits that any third party who receives the confidential information, knowing of his breach of confidence, is likewise bound by the same duty not to disclose the contents of Spycatcher. The Attorney General therefore submits that despite the fact that Spycatcher has received worldwide publication and is in fact available in this country for anyone who wants to read it, the law forbids the press, the media and indeed anyone else from publishing or commenting on any part of it, saving only that which has already been referred to in the judgments of the courts. If such was the law
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then the law would indeed be an ass, for it would seek to deny to our own citizens the right to be informed of matters which are freely available throughout the rest of the world and would in fact be seeking in vain because anyone who really wishes to read Spycatcher can lay his hands on a copy in this country.
The position of a third party who receives information that has been published in breach of confidence will vary widely according to the circumstances of the case. In a case of commercial secrets with which the development of the law of confidence has been mostly concerned, a third party who knowingly receives the confidential information directly from the confidant, which is the usual case, is tainted and identified with the confidant’s breach of duty and will be restrained from making use of the information. If, however, before the confider can act, his confidential information has spread far and wide and is read in, say, some trade magazine by a rival manufacturer, that manufacturer is in no way tainted or associated with the original breach of confidence and he will not be restrained from making use of information that is now public knowledge even though he may realise that the information must have been leaked in breach of confidence. The courts have to evolve practical rules and once the confidential information has escaped into the public domain it is not practical to attempt to restrain everyone with access to the knowledge from making use of it. That is not, however, to say that the original confidant may not be restrained or even a third party in the direct chain from the confidant. Each case will depend on its own facts and the decision of the judge as to whether or not it is practical to give injunctive protection and whether the third party should, as a matter of fair dealing, be restrained or, to use the language of the equity lawyer, whether the conscience of the third party is affected by the confidant’s breach of duty. There is certainly no absolute rule even in the case of a breach of a private confidence that a third party who receives the confidential information will be restrained from using it.
The Observer and the Guardian wish to publish so much of Spycatcher as they are permitted to do under the fair dealing exception in copyright law and to comment on the contents of the book. These newspapers have played no part in the publication of Spycatcher and will draw solely on the contents of a book now firmly in the public domain. They assert that the information in Spycatcher has lost the quality of confidentiality and, this having occurred without their assistance, they are in no way tainted by Peter Wright’s breach of confidence and must be free to publish. In the context of a claim to protect a private confidence, this would be a conclusive answer to the claim. But we are not here dealing with a claim to protect a private confidence. We are dealing with an undoubted breach of confidence by a member of the security service and a claim that to continue that breach by further publication of Spycatcher in this country would damage the future operation of our security and intelligence services and thus imperil national security. The court cannot brush aside such a claim supported as it is by the evidence of the Secretary to the Cabinet, Sir Robert Armstrong. This is the detriment to the public interest that the Attorney General identifies as justifying a continuing ban on Spycatcher. It must be examined and weighed against the other countervailing public interest of freedom of speech and the right of the people in a democracy to be informed by a free press.
Article 10 of the Convention for the Protection of Human Rights and Fundamental Freedoms (Rome, 4 November 1950; TS 71 (1953) Cmd 8969) identifies ‘the interests of national security’ and ‘preventing the disclosure of information received in confidence’ as separate grounds on which the right to freedom of expression may, in some circumstances, have to be restricted. I see no reason why our law should take a different approach and so, quite apart from the law of confidence, I turn now to the question of whether the ban can be justified in the ‘interests of national security’.
The reasons given in the evidence of Sir Robert Armstrong for fearing that the future efficiency of the security and intelligence services would be damaged by publication of Spycatcher in this country were summarised and dealt with in the following passage of the judgment of Scott J(see pp 590–592, ante):
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‘The national security factors were expounded by Sir Robert Armstrong in his evidence. They were these. (1) The unauthorised disclosure of information is likely to damage the trust which members of the service have in each other. This damage must already have occurred. (2) Other members of the security services may break faith and follow suit. But unless they depart from the jurisdiction of these courts they will be unable to follow Mr Wright’s example. And if they do leave the country, Mr Wright’s example is already in place as a lamentable beacon. (3) Unless permanent injunctions are granted pressure will be exerted by the media on other members or ex-members of the security services to tell their side of the Spycatcher allegations. This is speculation but, on the evidence I heard, is likely to happen. Whether the pressure will be resisted is impossible to tell. Whether, if anyone were to succumb to the pressure, publication would follow, would depend on several other imponderables. The point does, however, deserve weight in the scales. (4) Intelligence and security services of friendly foreign countries may, if permanent injunctions are not granted, lose confidence in the British security services. This loss of confidence may already have taken place as a result of the publication of Spycatcher. But the notion that the grant or withholding of permanent injunctions will make any difference seems to me somewhat unreal. (5) The confidence of informers, who rely on their identity and activities being kept confidential, will be damaged. Here, too, the loss of confidence may already have happened. If it has, it is a regrettable fait accompli. Sir Robert did, I should record, give evidence that individuals who had assisted MI5 in the past, had, since the publication of Spycatcher, expressed anxiety about the risk of exposure. All this evidence was given by Sir Robert third hand but I found it inherently believable. Sir Robert’s evidence did not, however, suggest that if permanent injunctions were granted, the individuals would feel any safer. (6) Detriment will flow from the publication of information about methodology, personnel and organisation of MI5. This is a point of real substance and justifies the conclusion that MI5 officers cannot be allowed to publish their service memoirs. But it does not bear on the position today. The detriment is a fait accompli and I do not follow how the granting or withholding of permanent injunctions can make any difference. (7) Publication of Spycatcher has damaged the morale of members of MI5. A permanent injunction, depriving Mr Wright of the profits to be made on the home market, would go some way to restoring morale. I find this point made by Sir Robert difficult to weigh. I did not understand Sir Robert to be repeating views that had been actually expressed by members of MI5. Rather he was expressing his own belief as to the likely effect on morale of permanent injunctions. There may well, I think, be resentment felt by loyal MI5 members at the spectacle of Mr Wright reaping very substantial financial rewards from his disloyalty. And the removal of any impediment on dissemination in this country of the book or its contents might well add fuel to that resentment. But I am not clear that this is a factor which can weigh in the balance as between the Attorney General and the newspapers. The purpose of the duty of confidence owed by officers of MI5 is to protect information about the affairs of MI5. If unauthorised disclosures are made to newspapers, the “obligation of conscience” owed by the newspapers is owed for the same reason, namely to protect the confidentiality of information that, for national security reasons, must be kept confidential. The duty of confidence is not, in my opinion, imposed on newspapers in order to maintain the morale of members of MI5. If, in relation to particular information, the maintenance of secrecy or confidence is not needed or has become impossible, a duty of confidence cannot, in my opinion, be imposed on newspapers on the ground that disclosure would adversely affect the morale of MI5. The factors I have referred to were those advanced by Sir Robert justifying permanent injunctions. The maintenance of the secrecy or confidentiality of the information contained in the book was, for obvious reasons, not among them. Sir Robert accepted that damage must already have been caused by the publication of the book. But he described that damage as “limited”
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and as likely to be greatly increased if permanent injunctions were not granted. In particular, Sir Robert stressed that Spycatcher was the first unauthorised book of memoirs written by an insider. I have found it difficult to follow Sir Robert’s point that greatly increased damage would follow publication of Spycatcher in this country and unrestricted press comment on its contents and I do not think that proposition stands much examination. The damage to national security interests must, in my view, have already been inflicted. The spectacle of Mr Wright making money out of the unrestricted sale of his book in this country would, I accept, be offensive and an affront to most decent people. But I am not satisfied that it will cause any additional damage to national security interests.’
I am broadly in agreement with the assessment of the judge. The one point at which I adopt a slightly different approach is in his appraisement of the suggestion that the morale of the security service would be damaged by permitting publication in this country. The judge obviously thinks little of the suggestion but ultimately he rejects it on the grounds that ‘the duty of confidence is not, in my opinion, imposed on newspapers in order to maintain the morale of members of MI5’. The worldwide publication of Spycatcher disposes of the Attorney General’s claim based on the protection of confidential information, but the claim based on national security remains to be examined. If I had thought that further publication would so damage the morale of the security service that they could not operate efficiently I would have been prepared to grant the injunction in the interests of national security. Of course, I think no such thing.
Whatever may have been the position in the past when the likes of Philby, Burgess, Maclean and Blunt were recruited things are very different today. The most rigorous positive vetting procedures are applied before any man or woman is accepted as a member of the security and intelligence services and their security status is reviewed regularly throughout their service. These procedures are designed to ensure, so far as is humanly possible, that only those of the highest integrity and emotional stability serve in our security and intelligence services. I have no doubt that all loyal members of the security service past and present were outraged by Peter Wright’s betrayal of trust which was all the more offensive because of the money that he and others made out of it. But I reject as quite unrealistic the suggestion that the morale of this close-knit and dedicated group of men and women will collapse or indeed be in any way affected by a further publication that they know can do no further damage to the operation of their service. In so far as the possibility of Peter Wright making any more money out of publication in this country is concerned I can offer them a little comfort. Neither Peter Wright nor any agent of his will be permitted to publish Spycatcher in this country. If Peter Wright owns the copyright in Spycatcher, which I doubt, it seems to me extremely unlikely that any court in this country would uphold his claim to copyright if any newspaper or other third party chose to publish Spycatcher and keep such profits as they might make to themselves. I would expect a judge to say that the disgraceful circumstances in which he wrote and published Spycatcher disentitled him to seek the assistance of the court to obtain any redress: see Glyn v Weston Feature Film Co [1916] 1 Ch 261. I say I doubt if Peter Wright owns the copyright because as at present advised I accept the view of Scott J and Dillon LJ that the copyright in Spycatcher is probably vested in the Crown.
In my judgment the balance in this case comes down firmly in favour of the public interest in freedom of speech and a free press. The interlocutory injunction must be lifted leaving the Observer and the Guardian free to publish and comment on Spycatcher.
The position of the Sunday Times is different and presents a more difficult problem. The Sunday Times is more closely identified with Peter Wright’s attempts to publish Spycatcher abroad than any other newspaper. On 4 June 1987 the Sunday Times bought the serialisation rights in Spycatcher from Peter Wright’s Australian publishers, Heinemann. Although judgment had by that date been given in Australia in favour of publication an appeal was pending and Spycatcher could not yet be published in Australia.
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The Sunday Times, however, knew that Viking Penguin Inc intended to publish the book in the United States and it was their intention to publish the first instalment of Spycatcher more or less contemporaneously with the American publication. Presumably the Sunday Times thought that the American publication would put the book so firmly in the public domain that all confidentiality would be destroyed. In fact, however, the Sunday Times did not wait for the American publication and published the first serialisation on 12 July 1987, a few days before the book was published in the United States. I agree with Lord Keith that, for the reasons he gives, the Sunday Times was in breach of its duty of confidence to the Crown in publishing the extracts from Spycatcher on 12 July 1987 and that it was not protected by either the defence of prior publication or disclosure of iniquity. I also agree that it is liable to account to the Crown for any profits it may have made from that publication.
But should the Sunday Times be permitted to continue the serialisation of Spycatcher? For reasons that I have already given, further serialisation will cause no significant damage to national security and the confidential information in Spycatcher is now public knowledge. If there is to be a further restraint on the Sunday Times it can only be by extending to the Sunday Times the principle that a member of the security service cannot discharge himself from his duty of confidence by breaking it. The question is whether the Sunday Times has so closely associated itself with Wright’s attempts to publish abroad that it now stands in the shoes of Wright for the purpose of publication in this country and should be similarly restrained. As Sir John Donaldson MR put it: ‘In serialising Spycatcher the Sunday Times becomes “Mr Wright in newsprint“.' It seems to me that the Sunday Times by entering into negotiations to serialise Spycatcher in this country actively encouraged Wright and his publishers to get the book published abroad. The negotiations started in April 1987 when the book was still under embargo in Australia. They ended in a letter of 4 June written by Mr Andrew Neil the editor of the Sunday Times from which I quote the opening paragraphs:
‘We are now agreed on the following re Spycatcher. We will pay £150,000 for UK serial rights that includes a payment of £25,000 toward Heinemann Publishers Australia’s legal expenses. (i) We pay £25,000 now to secure UK serial rights. (ii) We pay the balance of £125,000 if we serialise within one month of first publication of Spycatcher anywhere in the world.’
It was publication abroad that did the real damage to our security service. The Sunday Times encouraged that publication and in my view its conscience is affected by its action in so doing. The High Court of Australia have by their judgment in this litigation made it plain that we cannot look to the law in Australia for any assistance when a member of our security service wishes to betray the secrets of his service (see A-G (UK) v Heinemann Publishers Australia Pty Ltd (78 ALR 449). The Court of Appeal in New Zealand has not followed this decision of the High Court of Australia. Cooke P in his judgment has made it plain that in an appropriate case New Zealand law would protect the secrets of our security services (see A-G v Wellington Newspapers Ltd (28 April 1988, unreported)). It will come as little surprise that I emphatically prefer the reasoning of Cooke P. Whether other friendly states would follow the Australian decision I do not know, but there must at least be a risk that they would take the same view. It therefore seems to me that our own law should do what it can to discourage such publication. One obvious way to discourage publication is to render it unprofitable to those who actively encourage the publication. If the Sunday Times is restrained from further serialisation of Spycatcher it will be placed at a unique disadvantage compared with the rest of the press but that is the price it will pay for being prepared to encourage Wright in his attempts to publish abroad. The public will not suffer. If they have any interest left in Spycatcher, they will be able to turn to a host of other newspapers for information. An alternative might be to allow the Sunday Times to complete the serialisation but make it liable to account to the Crown for any profits that it makes. I reject this alternative because it would be unseemly
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for the law to permit a course of action which it deemed to be wrong on condition that the wrongdoer paid a price for his wrongdoing. It is one thing to say you have done wrong therefore you must be deprived of any profit you have made; it is quite another to say we will let you go on doing wrong provided you hand over any profit you make out of the wrongdoing.
For the Sunday Times it is said that to prevent the completion of the serialisation would be a futile exercise when Spycatcher is freely available and will be commented on by the media as a whole. It is not the function of the law of confidence to punish the confidant but to protect the confider, and in the present circumstances, no effective protection will be given to the Crown by stopping the remainder of the serialisation.
Although I have not found this to be an easy decision I have come to the conclusion that the Sunday Times should not be permitted to continue this serialisation. Peter Wright will not be permitted to publish Spycatcher in this country nor will any publisher on his behalf. If Peter Wright approached a newspaper today to sell serial rights to publish Spycatcher he would be restrained and so would the newspaper. It cannot in principle make any difference that the rights were sold by Peter Wright’s publisher rather than by Peter Wright. If Heinemann today is to be restrained so must anyone in the direct contractual chain with Heinemann. The Sunday Times deliberately placed itself in that contractual chain and in doing so gave encouragement to the publication of Spycatcher abroad and thereby associated itself with Peter Wright’s breach of duty. If the Sunday Times, which is tainted with Peter Wright’s breach of confidence, is to be free to serialise, on what possible ground can the court restrain Peter Wright from selling Spycatcher to any other newspaper yet all the judges who have previously considered this case are agreed that Peter Wright should not be entitled to do so. This is, in my opinion a case in which the Sunday Times is so closely associated with Peter Wright’s breach of duty that equity should place the same restraint on the Sunday Times as it does on Peter Wright. In coming to this decision I have, of course, balanced the loss to freedom of expression but that seems to me to be of relatively little weight when the media as a whole will be free to publish and comment and thus inform the public of the contents of the book.
We are next asked to consider the stale question of whether the Observer and the Guardian were justified in publishing the accounts of the Australian proceedings on the 22 and 23 June 1986. I use the word ‘justified’ because at that date Spycatcher had not yet been published anywhere in the world and the two newspapers had received information of the contents of the book either from Wright’s publishers or lawyers which they knew constituted both a breach of the duty of secrecy and confidence owed by Wright to the Crown and a breach of the undertaking given to the court in New South Wales not to reveal the contents of the book pending trial of the action. In these circumstances the newspapers were bound by the same duty of confidence as Wright unless publication could be justified either on the grounds that previous publication had destroyed the confidentiality of the material they published, or that it was in the public interest that they should publish and this overrode their duty of confidence and any other considerations of national security.
My starting point is to consider what would have been the position if Heinemann had been attempting to publish the book in this country. The court would be faced with the first attempt by a member of the security service to publish his memoirs and an interlocutory injunction would undoubtedly have been granted to restrain publication on the grounds that it would be damaging to the public interest. Indeed, we have the example of the interlocutory injunctions granted by Millett J (on 11 July 1986). The judge expressly provided in his order that—
‘this Order shall not prohibit direct quotation of attributes to Peter Maurice Wright already made by Mr Chapman Pincher in published works, or in a television programme or programmes broadcast by Granada Television.’
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The judge excepted publication of these matters on the ground that they had already been published without any attempt by the government to stop them and therefore would be neither a breach of confidence by the newspapers nor do any further damage to national security. However, Millett J made it quite clear that this proviso did not entitle either newspaper to republish the two articles. The articles went far beyond mere repetition of what had previously appeared in the press or on television as direct attribution to Peter Wright. I have no doubt that the judge made the right decision.
If that decision was right, I can see no reason why the newspapers were justified in publishing the articles because the attempt was being made to publish Spycatcher abroad rather than in this country. Of course the public had a legitimate interest in knowing that the government were attempting to stop the publication of the memoirs of a member of MI5 in Australia but that could be reported without setting out the contents of the memoirs. The public would have had an even greater interest if the attempt had been made to publish in this country but it would not have been permissible to report the contents of the book before the action had been tried. I therefore cannot agree that the articles could be justified as a report of the Australian proceedings. I would add that, although our courts were not bound by the Australian court’s decision that the contents of Spycatcher should not be disclosed pending trial of the action, it was a factor that a judge would be entitled to take into account when weighing the balance between upholding confidentiality and allowing publication. Comity requires that we should give weight to the desirability of upholding the decisions of the courts in other countries.
Finally on this aspect to the case, I of course agree that if Sir Roger Hollis was a spy or if MI6 plotted to kill President Nasser or if a cabal in MI5 had plotted the overthrow of the Wilson government it reveals a very serious state of affairs requiring immediate and effective action to identify and deal with all those concerned with such activities. I do not, however, agree that if a member of the service made such an allegation to a journalist that it would necessarily be in the public interest that it should immediately be published in a newspaper. I have tried to see if I could evolve some suggested course of action that an editor should follow before taking a decision to publish in his newspaper. I have to confess that, save in the most general terms, I have been unable to formulate any such guidance because circumstances will vary so infinitely from case to case. Ideally, of course, an editor would inform the Treasury Solicitor that he was in the possession of such information and intended to publish it. This would enable the government to apply for an injunction so that a judge could decide whether the balance came down in favour of preserving secrecy or publication. If this is too much to hope for, and I suspect it is, then at least I would hope that an editor would first consider very closely the motive of his informant in making what was on the face of it a disloyal disclosure. If the motive was apparently financial the disclosure would obviously be suspect. Even if satisfied that the motive was not financial the possibility that the information was untrue and a deliberate attempt to discredit the service would still remain to be considered. And even if the editor concluded that there were serious reasons for believing that the information might be true he should pause long before publishing it rather than taking it to the responsible minister so that it could be investigated and dealt without causing unnecessary public disquiet and possibly unjustified loss of confidence in the security services. As has been said time and again in this litigation, there are no absolutes and I recognise that in very exceptional circumstances publication may be justified. But not, I assert again, on the mere fact that the allegation has been made by a member of the security service for that, it seems to me, would be to adopt the philosophy of Dr Goebbels that the bigger the lie the more likely it is to be believed. If the allegations about Sir Roger Hollis, the Nasser plot and the Wilson plot had been revealed for the first time to a journalist by Peter Wright I have no doubt that it would have been the duty of an editor in the first instance to report the allegations immediately to the appropriate minister and only to consider publication in his newspaper if convinced that no effective action had been taken. On
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this aspect of the case I am in agreement with the views expressed by Sir John Donaldson MR in his judgment in the Court of Appeal.
Finally, what of the future? The editors said in their evidence that they might try to persuade other members of the security service to draw on their service experience and comment on the allegations in Spycatcher. The government therefore asks for an injunction in wide terms that will restrain the publication of any material that the media may obtain from such sources. The object of this injunction is to stop the media from tempting other members of the security service from breaking their obligation of secrecy. The editors were, however, giving evidence at the trial of this action and not in the light of the judgments that have now been delivered. It has now been made clear beyond peradventure that members of the security service owe a lifelong duty not to discuss their service experience with the media. I would not be prepared to grant an injunction on the premise that both the media and members of the security service are likelyto disregard this obligation. If a journalist should try to tempt a member of the security service to follow Wright’s example I would expect that journalist to be seen off in peremptory terms. If unhappily a journalist should find another weak link then I would trust the journalist’s editor not to publish unless he was convinced that it was in the public interest to do so. Ultimately, if we are to have an efficient security service we have to trust its members and if we are to have a free press we have to trust the editors.
I would therefore dismiss this appeal save for the two issues relating to future serialisation by the Sunday Times and the propriety of the articles in the Observer and the Guardian in June 1986.
LORD GOFF OF CHIEVELEY. My Lords, it is tempting in this case to embark on an exegesis of the law relating to breach of confidence. That temptation must, however, in my opinion, be resisted, if only because, as I see the case, subject to one important and difficult point (which, to my mind unfortunately, does not seem to have been the subject of argument in the courts below), the applicable principles of law appear to me to be relatively straightforward and non-controversial. This may well be because I have derived so much assistance from the judgments in the courts below though that provides yet another reason why I should not attempt to do more than state the applicable principles of law in broad terms.
I start with the broad general principle (which I do not intend in any way to be definitive) that a duty of confidence arises when confidential information comes to the knowledge of a person (the confidant) in circumstances where he has notice, or is held to have agreed, that the information is confidential, with the effect that it would be just in all the circumstances that he should be precluded from disclosing the information to others. I have used the word ‘notice’ advisedly, in order to avoid the (here unnecessary) question of the extent to which actual knowledge is necessary, though I of course understand knowledge to include circumstances where the confidant has deliberately closed his eyes to the obvious. The existence of this broad general principle reflects the fact that there is such a public interest in the maintenance of confidences, that the law will provide remedies for their protection.
I realise that, in the vast majority of cases, in particular those concerned with trade secrets, the duty of confidence will arise from a transaction or relationship between the parties, often a contract, in which event the duty may arise by reason of either an express or an implied term of that contract. It is in such cases as these that the expressions ‘confider’ and ‘confidant’ are perhaps most aptly employed. But it is well-settled that a duty of confidence may arise in equity independently of such cases and I have expressed the circumstances in which the duty arises in broad terms, not merely to embrace those cases where a third party receives information from a person who is under a duty of confidence in respect of it, knowing that it has been disclosed by that person to him in breach of his duty of confidence, but also to include certain situations, beloved of law teachers, where an obviously confidential document is wafted by an electric fan out of a
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window into a crowded street, or when an obviously confidential document, such as a private diary, is dropped in a public place, and is then picked up by a passer-by. I also have in mind the situations where secrets of importance to national security come into the possession of members of the public, a point to which I shall refer in a moment. I have however deliberately avoided the fundamental question whether, contract apart, the duty lies simply ‘in the notion of an obligation of conscience arising from the circumstances in or through which the information was communicated or obtained’ (see Moorgate Tobacco Co Ltd v Philip Morris Ltd (1984) 56 ALR 193 at 208 per Deane J, and see also Seager v Copydex Ltd [1967] 2 All ER 415 at 417, [1967] 1 WLR 923 at 931 per Lord Denning MR), or whether confidential information may also be regarded as property (as to which see Dr Francis Gurry’s valuable monograph on Breach of Confidence (1984) pp 46–56 and Professor Birks’s Introduction to the Law of Restitution (1985) pp 343–344). I would also, like Megarry J in Coco v A N Clark (Engineers) Ltd [1969] RPC 41 at 48, wish to keep open the question whether detriment to the plaintiff is an essential ingredient of an action for breach of confidence. Obviously, detriment or potential detriment to the plaintiff will nearly always form part of his case but this may not always be necessary. Some possible cases where there need be no detriment are mentioned in the judgment of Megarry J in Coco’s case (at 48) to which I have just referred, and in Gurry Breach of Confidence (1984) pp 407–408. In the present case, the point is immaterial, since it is established that in cases of government secrets the Crown has to establish not only that the information is confidential, but also to its ‘detriment’ in the sense that the public interest requires that it should not be published. That the word ‘detriment’ should be extended so far as to include such a case perhaps indicates that everything depends on how wide a meaning can be given to the word ‘detriment’ in this context.
To this broad general principle, there are three limiting principles to which I wish to refer. The first limiting principle (which is rather an expression of the scope of the duty) is highly relevant to this appeal. It is that the principle of confidentiality only applies to information to the extent that it is confidential. In particular, once it has entered what is usually called the public domain (which means no more than that the information in question is so generally accessible that, in all the circumstances, it cannot be regarded as confidential) then, as a general rule, the principle of confidentiality can have no application to it. I shall be reverting to this limiting principle at a later stage.
The second limiting principle is that the duty of confidence applies neither to useless information, nor to trivia. There is no need for me to develop this point.
The third limiting principle is of far greater importance. It is that, although the basis of the law’s protection of confidence is that there is a public interest that confidences should be preserved and protected by the law, nevertheless that public interest may be outweighed by some other countervailing public interest which favours disclosure. This limitation may apply, as the judge pointed out, to all types of confidential information. It is this limiting principle which may require a court to carry out a balancing operation, weighing the public interest in maintaining confidence against a countervailing public interest favouring disclosure.
Embraced within this limiting principle is, of course, the so-called defence of iniquity. In origin, this principle was narrowly stated, on the basis that a man cannot be made the ‘confidant of a crime or a fraud’ (see Gartside v Outram (1856) 26 LJ Ch 113 at 114 per Page Wood V-C). But it is now clear that the principle extends to matters of which disclosure is required in the public interest (see Beloff v Pressdram Ltd [1973] 1 All ER 241 at 260 per Ungoed-Thomas J and Lion Laboratories Ltd v Evans [1984] 2 All ER 417 at 432–433, [1985] 1 QB 526 at 550 per Griffiths LJ). It does not however follow that the public interest will in such cases require disclosure to the media, or to the public by the media. There are cases in which a more limited disclosure is all that is required (see Francome v Mirror Group Newspapers Ltd [1984] 2 All ER 408, [1984] 1 WLR 892). A classic example of a case where limited disclosure is required is a case of alleged iniquity in the security service. Here there are a number of avenues for proper complaint; these are set out in
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the judgment of Sir John Donaldson MR. Like my noble and learned friend Lord Griffiths, I find it very difficult to envisage a case of this kind in which it will be in the public interest for allegations of such iniquity to be published in the media. In any event, a mere allegation of iniquity is not of itself sufficient to justify disclosure in the public interest. Such an allegation will only do so if, following such investigations as are reasonably open to the recipient, and having regard to all the circumstances of the case, the allegation in question can reasonably be regarded as being a credible allegation from an apparently reliable source.
In cases concerned with government secrets, as appears from the judgments of two Chief Justices (Lord Widgery CJ in A-G v Jonathan Cape Ltd [1975] 3 All ER 484 at 495, [1976] QB 752 at 770 and Mason CJ (then Mason J) in Commonwealth of Australia v John Fairfax & Sons Ltd (1980) 32 ALR 485 at 492–493), it is incumbent on the Crown, in order to restrain disclosure of government secrets, not only to show that the information is confidential, but also to show that it is in the public interest that it should not be published. The relevant passages in the above judgments are set out in the speech of my noble and learned friend Lord Keith, and I need not repeat them. The reason for this additional requirement in cases concerned with government secrets appears to be that, although in the case of private citizens there is a public interest that confidential information should as such be protected, in the case of government secrets the mere fact of confidentiality does not alone support such a conclusion, because in a free society there is a continuing public interest that the workings of government should be open to scrutiny and criticism. From this it follows that, in such cases, there must be demonstrated some other public interest which requires that publication should be restrained.
Finally, I wish to observe that I can see no inconsistency between English law on this subject and art 10 of the Convention for the Protection of Human Rights and Fundamental Freedoms (Rome, 4 November 1950; TS 71 (1953); Cmd 8969). This is scarcely surprising, since we may pride ourselves on the fact that freedom of speech has existed in this country perhaps as long as, if not longer than, it has existed in any other country in the world. The only difference is that, whereas art 10 of the convention, in accordance with its avowed purpose, proceeds to state a fundamental right and then to qualify it, we in this country (where everybody is free to do anything, subject only to the provisions of the law) proceed rather on an assumption of freedom of speech, and turn to our law to discover the established exceptions to it. In any event I conceive it to be my duty, when I am free to do so, to interpret the law in accordance with the obligations of the Crown under this treaty. The exercise of the right to freedom of expression under art 10 may be subject to restrictions (as are prescribed by law and are necessary in a democratic society) in relation to certain prescribed matters, which include ‘the interests of national security’ and ‘preventing the disclosure of information received in confidence’. It is established in the jurisprudence of the European Court of Human Rights that the word ‘necessary’ in this context implies the existence of a pressing social need, and that interference with freedom of expression should be no more than is proportionate to the legitimate aim pursued. I have no reason to believe that English law, as applied in the courts, leads to any different conclusion.
In the present case, it is possible to start with two simple propositions. First, Peter Wright, as a member of the security service, owed to the Crown a lifelong duty not to disclose confidential information which came into his possession in the course of his period of service with the security service. Second, as appears to have been common ground in these proceedings, whether or not he may have been justified in disclosing certain matters to an appropriate person on the ground of iniquity, nevertheless by publishing the book as a whole he committed a clear and flagrant breach of his duty. So far as this lifelong duty of confidence is concerned, I am in respectful agreement with the observations made on it in the speech of my noble and learned friend Lord Griffiths, subject only to this, that I suspect that, although there may be a theoretical exception relating to trivia of the most humdrum kind, nevertheless in practice any such exception
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is of no importance and can be ignored. Be that as it may, these two propositions provided the starting point for the argument for the Crown so powerfully expressed by counsel for the Attorney General. His basic submission was as follows. Although the effect of Peter Wright’s breach of confidence was that the confidential information in Spycatcher has been widely disseminated throughout the world, nevertheless he remains to this day, and apparently for ever, under a duty of confidence in respect of that information, because he cannot by his own wrongful act destroy his own obligation of confidentiality. Anybody who has put the book in circulation knowing that the information in it derived from Peter Wright who had disclosed it in breach of confidence must likewise have committed a breach of confidence and since Peter Wright’s duty of confidence still exists, the same must be true to this day. The pith of the argument of counsel for the Attorney General can be extracted from the following paragraphs in the Crown’s printed case:
‘27. In so far as there are suggestions in the judgments so far that Mr. Wright’s position is different because he cannot profit from his own wrong, this cannot provide the basis of an independent entitlement running against Mr. Wright but not against the other defendants. It can only mean that since dissemination of ”Spycatcher” is entirely the result of Mr. Wright’s wrongdoing, the duty of confidence has not been destroyed and the Crown is entitled to enforce it. If a good claim runs against Mr. Wright, it does so because of the surviving duty of confidentiality in respect of the contents of ”Spycatcher” and this continues to attach in conscience to third parties.
28. Publication of the book in other countries by or on behalf of Mr. Wright does not therefore affect the obligation of confidence owed by Mr. Wright and his agents or by third parties. In relation to Mr. Wright it is submitted that his duty is not affected by publication abroad. The Sunday Times being agents of Mr. Wright remain similarly bound. In relation to the Observer and the Guardian it is submitted that the proper view is that as the obligation of confidence is still attached to Mr. Wright and his agents, it also continued to attach in conscience to third parties … ’
This appeared to me at the time of the hearing, and still appears to me, to be a formidable argument, which requires to be addressed. It has caused me therefore to consider the basic premise on which it rests, viz the continuing duty of confidence said to be owed by Peter Wright.
As I have already indicated, it is well established that a duty of confidence can only apply in respect of information which is confidential: see Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) [1963] 3 All ER 413 at 415 per Lord Greene MR. From this it should logically follow that, if confidential information which is the subject of a duty of confidence ceases to be confidential, then the duty of confidence should cease to bind the confidant. This was held to be so in O Mustad & Son v S Allcock & Co Ltd (1928) [1963] 3 All ER 416, [1964] 1 WLR 109. That was however a case in which the confidential information was disclosed by the confider himself and stress was placed on this point in a later case where the disclosure was not by the confider but by a third party and in which Mustad’s case was distinguished (see Cranleigh Precision Engineering Ltd v Bryant [1964] 3 All ER 289, [1965] 1 WLR 1293). It was later held, on the basis of the Cranleigh Precision Engineering case, that, if the confidant is not released when the publication is by a third party, then he cannot be released when it is he himself who has published the information (see Speed Seal Products Ltd v Paddington [1986] 1 All ER 91, [1985] 1 WLR 1327). I have to say however that, having studied the judgment of Roskill J in the Cranleigh Precision Engineering case, it seems to me that the true basis of the decision was that, in reliance on the well-known judgment of Roxburgh J in the ‘springboard’ case, Terrapin Ltd v Builders’ Supply Co (Hayes) Ltd (1959) [1967] RPC 375, the defendant was in breach of confidence in taking advantage of his own confidential relationship with the plaintiff company to discover what a third party had published and
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in making use, as soon as he left the employment of the plaintiff company, of information regarding the third party’s patent which he had acquired in confidence (see [1964] 3 All ER 289 at 302, [1965] 1 WLR 1293 at 1319). The reasoning of Roskill J in this case has itself been the subject of criticism (see eg Gurry Breach of Confidence (1984) pp 246–247); but in any event it should be regarded as no more than an extension of the springboard doctrine, and I do not consider that it can support any general principle that, if it is a third party who puts the confidential information into the public domain, as opposed to the confider, the confidant will not be released from his duty of confidence. It follows that, so far as concerns publication by the confidant himself, the reasoning in the Speed Seal case (founded as it is on the Cranleigh Precision Engineering case) cannot, in my mind, be supported. I recognise that a case where the confider himself publishes the information might be distinguished from other cases on the basis that the confider, by publishing the information, may have implicitly released the confidant from his obligation. But that was not how it was put in Mustad’s case [1963] 3 All ER 416 at 418, [1964] 1 WLR 109 at 111, in which Lord Buckmaster stated that, once the disclosure had been made by the confider to the world, ‘the secret, as a secret, had ceased to exist’. For my part, I cannot see how the secret can continue to exist when the publication has been made not by the confider but by a third party.
Even so, it has been held by the judge, and by all members of the Court of Appeal in the present case, that Peter Wright cannot be released from his duty of confidence by his own publication of the confidential information, apparently on the basis that he cannot be allowed to profit from his own wrong. I feel bound to say that, in my opinion, this proposition calls for careful examination.
The statement that a man shall not be allowed to profit from his own wrong is in very general terms, and does not of itself provide any sure guidance to the solution of a problem in any particular case. That there are groups of cases in which a man is not allowed to profit from his own wrong, is certainly true. An important section of the law of restitution is concerned with cases in which a defendant is required to make restitution in respect of benefits acquired through his own wrongful act: notably cases of waiver of tort of benefits acquired by certain criminal acts; of benefits acquired in breach of a fiduciary relationship; and, of course, of benefits acquired in breach of confidence. The plaintiff’s claim to restitution is usually enforced by an account of profits made by the defendant through his wrong at the plaintiff’s expense. This remedy of an account is alternative to the remedy of damages, which in cases of breach of confidence is now available, despite the equitable nature of the wrong, through a beneficent interpretation of the Chancery Amendment Act 1858 (Lord Cairns’s Act), and which by reason of the difficulties attending the taking of an account is often regarded as a more satisfactory remedy, at least in cases where the confidential information is of a commercial nature, and quantifiable damage may therefore have been suffered.
I have to say, however, that I know of no case (apart from the present) in which the maxim has been invoked in order to hold that a person under an obligation is not released from that obligation by the destruction of the subject matter of the obligation, on the ground that that destruction was the result of his own wrongful act. To take an obvious case, a bailee who by his own wrongful, even deliberately wrongful, act destroys the goods entrusted to him, is obviously relieved of his obligation as bailee, though he is of course liable in damages for his tort. Likewise, a nightwatchman who deliberately sets fire to and destroys the building he is employed to watch; and likewise also, the keeper at a zoo who turns out to be an animal rights campaigner and releases rare birds or animals which escape irretrievably into the countryside. On this approach, it is difficult to see how a confidant who publishes the relevant confidential information to the whole world can be under any further obligation not to disclose the information, simply because it was he who wrongfully destroyed its confidentiality. The information has, after all, already been so fully disclosed that it is in the public domain: how, therefore, can he thereafter be sensibly restrained from disclosing it? Is he not even to be permitted
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to mention in public what is now common knowledge? For his wrongful act, he may be held liable in damages, or may be required to make restitution but, to adapt the words of Lord Buckmaster in Mustad’s case, the confidential information, as confidential information, has ceased to exist, and with it should go, as a matter of principle, the obligation of confidence. In truth, when a person entrusts something to another, whether that thing be a physical thing such as a chattel or some intangible thing such as confidential information, he relies on that other to fulfil his obligation. If he discovers that the other is about to commit a breach, he may be able to impose an added sanction against his doing so by persuading the court to grant an injunction; but if the other simply commits a breach and destroys the thing, then the injured party is left with his remedy in damages or in restitution. The subject matter is gone; the obligation is therefore also gone; all that is left is the remedy or remedies for breach of the obligation. This approach appears to be consistent with the view expressed by the Law Commission in their Report on Breach of Confidence (Law Com no 110(1981)), para 4.30 (see also the Law Commission’s working paper, Breach of Confidence (Working Paper no 58 (1974)) paras 100–101). It is right to say, however, that they may have had commercial cases in mind, rather than a case such as the present. It is however also of interest that, in the Fairfax case (1980) 32 ALR 485 at 494 Mason J was not prepared to grant an injunction to restrain further publication of a book by the defendants on the ground of breach of confidence, because the limited publication which had taken place was sufficient to cause the detriment which the plaintiff, the Commonwealth of Australia, apprehended. If, however, the defendants had published the book in breach of confidence, it is difficult to see why, on the approach so far accepted in the present case, the defendants should not have remained under a duty of confidence despite the publication and so liable to be restrained by injunction.
It is not to be forgotten that wrongful acts can be inadvertent, as well as deliberate and yet it is apparently suggested that, irrespective of the character of his wrongdoing, the confidant will be held not to be released from his obligation of confidence. Furthermore, the artificial perpetuation of the obligation, despite the destruction of the subject matter, leads to unacceptable consequences. Take the case of confidential information with which we are here concerned. If the confidant who has wrongfully published the information so that it has entered the public domain remains under a duty of confidence, so logically must also be anybody who, deriving the information from him, publishes the information with knowledge that it was made available to him in breach of a duty of confidence. If Peter Wright is not released from his obligation of confidence neither, in my opinion, are Heinemann Publishers Australia Pty Ltd, nor Viking Penguin Inc, nor anybody who may hereafter publish or sell the book in this country in the knowledge that it derived from Peter Wright, even booksellers who have in the past, or may hereafter, put the book on sale in their shops, would likewise be in breach of duty. If it is suggested that this is carrying the point to absurd lengths, then some principle has to be enunciated which explains why the continuing duty of confidence applies to some, but not others, who have wrongfully put the book in circulation. Such a distinction cannot however be explained by reliance on the general statement that a man may not profit from his own wrong.
I have naturally been concerned by the fact that so far in this case it appears to have been accepted on all sides that Peter Wright should not be released from his obligation of confidence. I cannot help thinking that this assumption may have been induced, in part at least, by three factors: first, the fact that Peter Wright himself is not a party to the litigation, with the result that no representations have been made on his behalf; second, the wholly unacceptable nature of his conduct; and third, the fact that he appears now to be able, with impunity, to reap vast sums from his disloyalty. Certainly, the prospect of Peter Wright, safe in his Australian haven, reaping further profits from the sale of his book in this country is most unattractive. The purpose of perpetuating Peter Wright’s duty of confidence appears to be, in part to deter others, and in part to ensure that a man
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who has committed so flagrant a breach of his duty should not be enabled freely to exploit the formerly confidential information, placed by him in the public domain, with impunity. Yet the real reason why he is able to exploit it is because he has found a safe place to do so. If within the jurisdiction of the English courts, he would be held liable to account for any profits made by him from his wrongful disclosure, which might properly include profits accruing to him from any subsequent exploitation of the confidential information after its disclosure: and, in cases where damages were regarded as the appropriate remedy, the confidant would be liable to compensate the confider for any damage, present or future, suffered by him by reason of his wrong. So far as I can see, the confider must be content with remedies such as these.
I have considered whether the confidant who, in breach of duty, places confidential information in the public domain, might remain at least under a duty thereafter not to exploit the information, so disclosed, for his own benefit. Suppose that the confidant in question was a man who, unwisely, has remained in this country, and has written a book containing confidential information and has disposed of the rights to publication to an American publishing house, whose publication results in the information in the book entering the public domain. The question might at least arise whether he is free thereafter to dispose of the film rights to the book. To me, however, it is doubtful whether the answer to this question lies in artificially prolonging the duty of confidence in information which is no longer confidential. Indeed, there is some ground for saying that the true answer is that the copyright in the book, including the film rights, are held by him on constructive trust for the confider, so that the remedy lies not in breach of confidence, but in restitution or in property, whichever way you care to look at it (see, in this connection, p 621, ante per Dillon LJ).
At all events, since the point was not argued before us, I wish to reserve the question whether, in a case such as the present, some limited obligation (analogous to the springboard doctrine) may continue to rest on a confidant who, in breach of confidence, destroys the confidential nature of the information entrusted to him. It must not however be forgotten that cases of breach of confidence may well involve questions of property (in particular, copyright) as well as questions of personal liability; and that, in a case involving national security rather than a personal or commercial secret, where disclosure in breach of confidence may be damaging to the whole community rather than to an individual or a corporation, the guilty confidant may be liable to criminal prosecution. It is only if we take all these matters into account that we can see such a case in the round. Even so, let us not forget that we have in the past seen convicted criminals, on release from prison, being invited by newspapers to give an account of their experiences, no doubt for substantial sums. This is highly offensive to many people but I doubt whether the mere fact that such activities are offensive provides of itself an appropriate basis for defining the scope of a confidant’s civil obligations at common law. And let us not forget that, in the present case, it is Peter Wright’s absence from this country which renders him immune from prosecution, and, in Australia, it now appears, also immune from a claim to restitution, founded on his unjust enrichment from his undoubted wrong at the expense of the whole community. It is perhaps this immunity from process which prompts a temptation to continue his duty of confidence, despite the destruction of the subject matter of that duty.
I fear that I have dealt at too great length with this point, which has troubled me very much. I need not, however, decide it in the present case (and I stress that, in the absence of argument, I am most reluctant to do so) for a very simple reason. Even if my provisional view on the point is wrong, and Peter Wright remains under a continuing duty of confidence, so that those who derive the information in the book from him would prima facie also be under a duty of confidence, I nevertheless take the view in the present case that to prevent the publication of the book in this country would, in the present circumstances, not be in the public interest. It seems to me to be an absurd state of affairs that copies of the book, all of course originating from Peter Wright, imported
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perhaps from the United States, should now be widely circulating in this country, and that at the same time other sales of the book should be restrained. To me, this simply does not make sense. I do not see why those who succeed in obtaining a copy of the book in the present circumstances should be able to read it, while others should not be able to do so simply by obtaining a copy from their local bookshop or library. In my opinion, artificially to restrict the readership of a widely accessible book in this way is unacceptable: if the information in the book is in the public domain and many people in this country are already able to read it, I do not see why anybody else in this country who wants to read it should be prevented from doing so.
For these reasons, I would reject the main argument of counsel for the Attorney General; and I therefore feel able to consider the specific issues in this case unfettered by its otherwise considerable force. Those issues are as follows.
(1) PUBLICATION BY THE OBSERVER AND THE GUARDIAN
(a) Publication on 22 and 23 June 1986
This issue has justly been described as stale by my noble and learned friend Lord Griffiths and the extent of the disclosure of information on this occasion appears to be slight in comparison with what has since taken place. Indeed, the point appears now to be, at most, of only marginal relevance. In these circumstances, I trust that I will be forgiven if I deal with it comparatively briefly.
On a point such as this I am reluctant to hold that Scott J, whose decision was upheld by a majority of the Court of Appeal, erred in concluding that, on balance, there was no breach of confidence, and that the publications should not be restrained by injunction. He said (p 587, ante):
‘The public interest in freedom of the press to report the court action outweighs, in my view, the damage, if any, to national security interests that the articles might, arguably, cause. I can see no “pressing social need” that is offended by these articles. The claim for an injunction against these two newspapers in June 1986 was not, in my opinion, “proportionate to the legitimate aim pursued“.’
Like Dillon and Bingham LJJ, I agree that the judge, as a result of his having performed the balancing exercise which he was bound to perform, was entitled to reach that conclusion. I confess that I, like Bingham LJ, have not found the point easy and I have of course taken into account the strong dissent of Sir John Donaldson MR on this point. But the articles were very short: they gave little detail of the allegations; a number of the allegations had been made before; and in so far as the articles went beyond what had previously been published, I do not consider that the judge erred in holding that, in the circumstances, the claim to an injunction was not proportionate to the legitimate aim pursued.
(b) Further publication
The most important, and yet to me the most straightforward, issue in the case is whether the Observer and the Guardian should now be free to comment on the book, and to publish as much of Spycatcher as they are permitted to do, under the fair dealing exception in the law of copyright. The judge, and all three members of the Court of Appeal, have held that both should be free to do so. I have no doubt that they were right to reach this conclusion. The extent of the publication of Spycatcher which had taken place at the date of trial is set out in the judgment of the judge (see pp 557–558, ante). No doubt its publication has continued unabated since that date. On any sensible view the information contained in the book was, at the date of trial, in the public domain. For this reason alone, in my opinion, the injunctions against the Observer and the Guardian should now be discharged.
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For the Crown it was submitted, on the basis of the evidence of Sir Robert Armstrong, that, despite the worldwide circulation of Spycatcher, nevertheless the injunction should be continued having regard to certain matters, which can broadly be described as matters of national security. Scott J rejected this argument on the facts, and his conclusion was accepted by the Court of Appeal I, too, agree with his conclusion on the facts, subject to the rider contained in the speech of my noble and learned friend Lord Griffiths. In my opinion, however, these matters are all in any event irrelevant, having regard to the fact that the information is now in the public domain and therefore no longer confidential.
I need not set out these various matters again: they are all listed in the judgment of Scott J (See pp 590–591, ante), and repeated in the speech of my noble and learned friend Lord Griffiths. What is striking about the comments of the judge on them, is that they reflect the fact that such damage as can be done to the national security by Peter Wright’s breach of confidence, or indeed by others who have published or may hereafter publish Spycatcher, has already been done. We read such comments as ‘This damage has already occurred’ or ‘The detriment is a fait accompli’ and so on. These comments reflect, to my mind, the irrelevancy of these matters to the issue before your Lordships’ House, once the information had entered the public domain.
In our civil law there is, so far as I am aware, no ground for restraining publication of information relating to national security other than breach of confidence. Information relating to national security is, of its very nature, prima facie confidential. If a person into whose possession it comes publishes it, and is (as he usually will be) aware of its confidential nature, he will prima facie be guilty of a breach of confidence; any such publication, if threatened, can therefore be restrained by injunction as a threatened breach of confidence, subject of course to the usual limitations on the duty of confidence. One of these limitations is that information is no longer confidential once it has entered the public domain; once information relating to national security has entered the public domain, I find it difficult to see on what basis further disclosure of such information can be restrained.
I realise that art 10 of the European Convention on Human Rights draws a distinction between national security and matters of confidence. It is very understandable that it should do so, since national systems may draw the same distinction, especially in their criminal laws, and in any event national security is one of the most important areas in which secrecy is justified. But, as I have said, so far as I am aware English civil law draws no such distinction of this kind, all confidential matters (including matters of national security) being protected as such.
It follows that I find myself to be in agreement with the opinion expressed by Lord Oliver in the interlocutory proceedings, that the injunction against these two newspapers involved a misuse of the injunctive remedy against them (see A-G v Guardian Newspapers [1987] 3 All ER 316 at 373, [1987] 1 WLR 1248 at 1317). Later in his speech Lord Oliver said with reference to publication by these two newspapers ([1987] 3 All ER 316 at 374, [1987] 1 WLR 1248 at 1318):
‘The injunction was originally imposed in order to preserve the confidentiality of the then unpublished allegations. That confidentiality has now, without fault on the part of the appellants, been irrevocably destroyed and, no doubt, destroyed as a result of a calculated policy adopted by Mr Wright and those associated with him. I am as reluctant as any of your Lordships to acknowledge that the intention of the court has been effectively flouted by a public dissemination which the courts in this jurisdiction are powerless to prevent. But, once that has occurred and the proscribed material is available for public ventilation and discussion by everybody except those subject to the existing restraint, I question whether it can be right to continue that restraint against parties in no way concerned with flouting the court’s orders and to interfere with their legitimate business of publishing and commenting on matters already in the public domain for the purpose, not of preventing that which can no longer be prevented, but of punishing Mr Wright and providing an example to
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others. I can well see, and this equally applies to the second argument to which I have referred, that the denial to Mr Wright of the audience that he most desires to reach may provide a cogent reason why the Attorney General may wish to maintain the injunctions, but I am not persuaded that, as against these appellants, it constitutes a proper justification for them. It does so only if, in seeking further to publish what is already public, they can properly be said to be threatening some invasion of private law right of the Crown.’
I respectfully agree. The point does not, in my opinion, require further comment or elaboration.
(2) THE SUNDAY TIMES
(a) Publication on 12 July 1987
All the relevant facts are set out in the judgment of Scott J. He and a majority of the Court of Appeal have held this publication to have constituted a breach of confidence. Only Bingham LJ formed a different view, on the basis that it was then a virtual certainty that widespread publication of the book in the United States would amost immediately take place. I am, with all respect, unable to accept Bingham LJ’s generous approach. In my opinion, he has promoted a plea in mitigation to the status of a substantive defence. The simple fact is that, on 12 July, publication in the United States had not taken place certainly, on 12 July, the information in Spycatcher was not yet in the public domain. The substantial extract from Spycatcher published in the Sunday Times included, as the judge held, a good deal of material in respect of which the public interest to be served by disclosure would not be thought to outweigh the interests of national security. I have no doubt that it was in this sense that the judge described the extract as ‘indiscriminate’, whatever exercise the editor may himself have undertaken in making his choice. In my opinion, therefore, the publication in the Sunday Times was plainly in breach of confidence so, if discovered in time, it could have been restrained by injunction. I can see no reason why the Sunday Times should not be liable to account for profits flowing from its wrong, subject, however, to all the difficulties attendant on this remedy and its (perhaps excessively) technical nature.
(b) Subsequent serialisation
If it were correct that Peter Wright owed the Crown a continuing duty of confidence in respect of the information contained in Spycatcher, I do not know how it would be possible to escape the conclusion that the Sunday Times, deriving as it does its right to publish from Peter Wright, and having by its own breach of confidence contributed significantly to putting Spycatcher into the public domain in this country, should not likewise be subject to such a continuing duty. I echo the observation of Bingham LJ that it would be ‘to some extent anomalous that the Sunday Times should be free to do what Mr Wright and his Australian publishers could not’ (see p 633, ante). However, for the reasons I have already given, even if (subject to my doubts) Peter Wright remains under a continuing duty of confidentiality, the public interest does not now require that the Sunday Times, despite the fact that its right to publish in the past and today derives from Peter Wright, and despite its previous breach of confidence, should be restrained from serialising further extracts from the book.
(3) INJUNCTION AS TO THE FUTURE
For the reasons given by my noble and learned friends Lord Keith and Lord Griffiths, I too would refuse to grant such an injunction.
For these reasons, I find myself to be in agreement on all issues with the conclusions reached by the judge and by differing majorities of the Court of Appeal. I would therefore dismiss the appeal by the Attorney General and the cross-appeal by the Sunday Times.
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LORD JAUNCEY OF TULLICHETTLE. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Keith, and I agree that both appeals and also the cross-appeal of the Sunday Times should be dismissed. I further agree with the reasons which my noble and learned friend has given for this result subject only to the one qualification hereinafter mentioned.
I should like to add a few words about the position of the Sunday Times in relation to the future serialisation of Spycatcher. In the absence of full argument I find it very difficult to accept the proposition that Peter Wright can, by his own breach of duty, discharge himself from any further restraint on publication of the information confided to him during and in the course of his service. I agree therefore with my noble and learned friend Lord Griffiths that the question of future serialisation should be approached on the basis that neither he nor any publisher on his behalf would be permitted to publish Spycatcher in this country. Like my noble and learned friend I find the question a difficult one but, if I had been of opinion that the Sunday Times alone had the present ability in the United Kingdom to serialise Spycatcher without let or hindrance from Peter Wright or his publishers and that such ability derived solely from the licence which that newspaper had obtained from one or other of those persons, I would have been in favour of restraining the Sunday Times from further serialisation for the reasons which he has given. However, I do not consider that such is the position.
The courts of the United Kingdom will not enforce copyright claims in relation to every original literary work. Equitable relief has been refused where the work contained false statements calculated to deceive the public (Slingsby v Bradford Patent Truck and Trolley Co [1905] WN 122; affd [1906] WN 51) and where the work was of a grossly immoral tendency (Glyn v Weston Feature Film Co [1916] 1 Ch 261). In a passing-off action, Bile Bean Manufacturing Co v Davidson (1906) 23 RPC 725, the Second Division of the Court of Session refused relief to a company which had perpetrated a deliberate fraud on the public by a series of false factual statements about its product. The Lord Justice Clerk (Macdonald) said (at 734):
‘No man is entitled to obtain the aid of the law to protect him in carrying on a fraudulent trade, but the cases quoted at the debate by the Lord Ordinary establish, as I think, very clearly that the Courts have in the past given effect to the principle which allows nothing to the man who comes before the seat of justice with a turpis causa.’
The publication of Spycatcher was against the public interest and was in breach of the duty of confidence which Peter Wright owed to the Crown. His action reeked of turpitude. It is in these circumstances inconceivable that a United Kingdom court would afford to him or his publishers any protection in relation to any copyright which either of them may possess in the book. That being so anyone can copy Spycatcher in whole or in part without fear of effective restraint by Peter Wright or those claiming to derive title from him. It follows that the future ability of the Sunday Times to serialise Spycatcher does not derive solely from their licence. They are free to publish without reference thereto and are thus for practical purposes in no better position than any other newspaper.
Appeals and cross-appeal dismissed.
Solicitors: Treasury Solicitor; Lovell White Durrant (for Observer Ltd and Guardian Newspapers Ltd); Theodore Goddard (for Times Newspapers Ltd).
Mary Rose Plummer Barrister.
R v Southampton Magistrates’ Court, ex parte Newman
[1988] 3 All ER 669
Categories: CRIMINAL; Criminal Procedure
Court: QUEEN’S BENCH DIVISION
Lord(s): WATKINS LJ AND MACPHERSON J
Hearing Date(s): 22, 23 JUNE, 22 JULY 1988
Magistrates – Property in possession of Customs and Excise – Power of magistrates’ court – Property taken from arrested person’s premises – Power to order Customs and Excise to return seized property – Whether magistrates have power to order Customs and Excise to return property or documents taken from arrested person’s premises – Whether magistrates restricted to ordering return of property found on arrested person and ‘taken from him’ on his arrest – Magistrates Courts’ Act 1980, s 48.
Magistrates have no jurisdiction under s 48a of the Magistrates’ Courts Act 1980 to order the Customs and Excise to return an arrested person’s property or documents unless the property or documents were found on the arrested person and ‘taken from him’ on or after his arrest. Accordingly, magistrates have no power to order the return of property or documents taken from his premises on or after his arrest, although they can adjourn the case and refuse to proceed if they are satisfied that the documents are necessary for the conduct of the arrested person’s defence (see p 671 j and p 672 b c e, post).
Dicta of Field J in R v D’Eyncourt (1888) 21 QBD 109 at 119–120 and of Humphreys J in Arnell v Harris [1944] 2 All ER 522 at 524 applied.
Notes
For magistrates’ power to order the return of an arrested person’s property, see 29 Halsbury’s Laws (4th edn) para 424, and for cases on the subject, see 33 Digest (Reissue) 92, 95, 452, 508.
For the Magistrates’ Courts Act 1980, s 48, see 27 Halsbury’s Statutes (4th edn) 211.
Cases referred to in judgments
Arnell v Harris [1944] 2 All ER 522, [1945] KB 60, DC.
R v D’Eyncourt (1888) 21 QBD 109, DC.
Application for judicial review
Paul Anthony Newman applied with the leave of Nolan J given on 19 April 1988 for judicial review by way of an order of certiorari to quash the decision of the Southampton justices to refuse to make an order under s 48 of the Magistrates’ Courts Act 1980 requiring the Commissioners of Customs and Excise to return to the applicant certain property removed from the applicant’s home by customs officers following his arrest on 11 January 1988. The facts are set out in the judgment of Macpherson J.
Kenneth Craig for the applicant.
Christopher Gardner for the Customs and Excise.
Cur adv vult 22 July.
22 July 1988. The following judgments were delivered.
MACPHERSON J (giving the first judgment at the invitation of Watkins LJ). Paul Anthony Newman was arrested on 11 January 1988. At the time of his arrest he was at home in bed. He first appeared before the Southampton justices on 13 January 1988,
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charged with conspiracy to import cannabis into England. Other charges are also made against him under the Customs and Excise Management Act 1979 and Drug Trafficking Offences Act 1986. The allegation is that drugs worth £18m are involved. Since he was in his pyjamas at the moment of arrest he had no property on his person.
When the applicant was arrested (by customs officers) a considerable amount of property was taken by those officers from his home. A full list of the property was made and is before this court. That arrest and seizure were done under the relevant provisions of ss 17 and 19 of the Police and Criminal Evidence Act 1984 which apply to customs officers because of the operation of the Police and Criminal Evidence Act 1984 (Application to Customs and Excise) Order 1985, SI 1985/1800. There is no suggestion that this seizure of the applicant’s property was in any way unlawful.
After his arrest the applicant instructed a solicitor, who took steps to obtain the return of documents which the applicant says are necessary for the preparation of his defence. By 16 March 1988 the solicitor says that the documents had not been returned, and no copies had been provided. Accordingly, the solicitor applied on that date for the documents to be returned. That application was made solely and expressly under the provisions of s 48 of the Magistrates’ Courts Act 1980.
The application was adjourned to 23 March 1988, and on that day the justices made no order, and thus in effect ruled that s 48 did not empower them to make any order in respect of property seized from the applicant’s home. The justices’ clerk must have advised that the section was restricted to property taken from the person of an arrested man at the time of or immediately following his arrest. This was the primary argument advanced by counsel for the Customs and Excise.
Section 48 of the 1980 Act reads as follows:
‘Return of property taken from accused. Where a summons or warrant has been issued requiring any person to appear or be brought before a magistrates’ court to answer to an information, or where any person has been arrested without a warrant for an offence, and property has been taken from him after the issue of the summons or warrant or, as the case may be, on or after his arrest without a warrant, the police shall report the taking of the property, with particulars of the property, to the magistrates’ court which deals with the case; and, if the court, being of opinion that the whole or any part of the property can be returned to the accused consistently with the interests of justice and the safe custody of the accused, so directs, the property, or such part of it as the court directs, shall be returned to the accused or to such other person as he may require.’
The applicant argues that the justices’ interpretation of s 48 is too restrictive. He argues that there is no other machinery whereby he can directly apply to the magistrates’ court for the return of any property taken from his house. He says (through his solicitor) that the Inner London magistrates’ courts regularly exercise power (purportedly under s 48) to order the return of property taken from accused persons or their premises, other than that found on the person on or after arrest. And he says that this should also apply at Southampton.
Neither side can point to any authority which resolves the point at issue.
Nearly all the property seized has now been returned, but there remain in the hands of the Customs eight address-books which the accused now wishes to use. The Customs are understandably unwilling to hand them over until their own investigations are complete. The accused man says that he should have them, or copies of them, before the committal proceedings begin, and in effect he wants them at once.
If the accused’s property had been seized by the police and had thus come into the possession of the police, it appears that an application could be made to a magistrates’ court for its return under the provision of s 1(1) of the Police (Property) Act 1897, which empower a court of summary jurisdiction to ‘… make an order for the delivery of the property to the person appearing to the magistrate or court to be the owner thereof … '
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Such applications can be made either ‘by an officer of police or by a claimant of the property’.
Often applications under this section are made by third parties whose property has found its way into the possession of the police during ‘investigation of a suspected offence’. But I accept that an accused person can claim to recover his own property from the police under this section.
Sections 21 and 22 of the Police and Criminal Evidence Act 1984 deal with access and copying and retention of documents seized. And in cases involving the police, both s 22(5) and the codes of practice issued under s 66 (see Code B: Code of Practice for the Searching of Premises by Police Officers and the Seizure of Property found by Police Officers on Persons or Premises Note for Guidance 6A) indicate expressly the availability of the procedure under s 1 of the Police (Property) Act 1897.
But s 22(5) is not one of the provisions applied to customs and excise, and s 1 of the 1897 Act cannot help the present applicant, because it applies only to property in the possession of the police. There is no comparable section elsewhere applicable to property held by officers of the customs and excise, and the 1897 Act has not been made to apply in such circumstances.
In this context it can be seen that s 48 of the 1980 Act requires that ‘the police shall report the taking of the property, with particulars of the property, to the magistrates’ court which deals with the case … ’
Where property is taken by customs officers, this would mean, if the applicant’s argument is correct, that the police would have to find out what property had been taken and report in full to the magistrates’ court the particulars of the property. And the same would apply in a case involving the police themselves where large quantities of property or documents were seized, although only some of those documents might eventually be used in committal or trial proceedings.
Section 48 of the Magistrates’ Courts Act 1980 had its statutory origins in the Summary Jurisdiction Act 1897, s 44, and more recently in s 39 of the Magistrates’ Courts Act 1952. We were referred to two cases in which the 1879 provisions were considered: R v D’Eyncourt (1888) 21 QBD 109 and Arnell v Harris [1944] 2 All ER 522, [1945] KB 60. In each case different points arose for decision.
But in R v D’Eyncourt the court does appear to have regarded the ambit of s 44 as limited. Field J said (at 119–120):
‘The legislature, therefore, provided that so long as the accused was not tried and convicted he ought not to be deprived of all the money found upon him, and left it to the magistrate to say what portion of that money ought to be given over to the accused in order to enable him to conduct his defence. That is the whole purport of s. 44, which clearly applies only before trial and conviction.’
In Arnell v Harris [1944] 2 All ER 522 at 524 Humphreys J said:
‘But this is a power which, if it exists, enables the magistrates to deal with money or other property, it may be a large sum of money found upon a person who has in fact at the time when they order it to be returned to him been charged with a serious criminal offence.’ (My emphasis.)
Again the court seems to have suggested a restricted interpretation of s 44.
On consideration of the words of s 48 and its history, and with the limited help given by these cases, I have come firmly to the conclusion that s 48 was not applicable to the instant case, and that the Southampton justices were correct to give it a restricted meaning.
‘Taken from him’ means, in my judgment, exactly what it says, and applies only to property found on a person and taken from him in the prescribed circumstances. Such property is then (as is customary) listed on the charge-sheet or other formal document given to the court, and the court can then decide whether all or part of the property can
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be returned to the accused ‘consistently with the interests of justice and the safe custody of the accused’. In older days ‘property’ in this sense was usually only money. But it could be anything carried on the person. And (for example) personal diaries or papers and money would presumably be restored, but stolen goods or drugs or knives would not be restored.
All this does not mean that a person in the applicant’s position is without remedy. The magistrates’ court has inherent jurisdiction and can to some extent control its own procedures. For example if an accused person indicates to a court that without his documents, or without certain identified documents, he cannot prepare his case or his defence, either before committal or trial, that court could always adjourn or refuse to go ahead until the police or customs or any prosecutor handed over such documents as the court found necessary to be in the hands of the defence in order that justice should be done. Alternatively, a civil action can be brought.
I have already indicated that there is in any event procedure which allows an application to be made in cases where the police have possession of property (see the Police (Property) Act 1897, s 1). It could well be desirable that such procedures should be made available in customs and other cases. But this is of course entirely a matter for the legislature. The absence of such procedures in customs cases does not, in my judgment, affect the interpretation of s 48.
If magistrates’ courts are using s 48 in the wide manner described in the solicitor’s evidence in this case, then in my judgment they are in error. And so was the editor of the Justice of the Peace Journal who suggested a wider application for s 48 than that which in my judgment is permissible (see (1956) 120 JPN 205).
I would accordingly dismiss this application.
WATKINS LJ. I agree. It ought not to be necessary for a person whose property has been taken away from him by officers of customs and excise to bring a civil action to recover it. There is so much activity, in the investigation of drug offences, especially by these officers, these days during which they seize documents and other things from the homes of persons suspected of crime that a magistrates’ court should, in my view, have a statutory power to deal effectively at any time with applications for restoration of such property. The lack of that power following seizure of property by customs and excise officers is an anomaly which ought to be speedily disposed of.
This application is dismissed.
Application dismissed.
Solicitors: Tom McGoldrick (for the applicant); Solicitor for the Customs and Excise.
Sophie Craven Barrister.
Director of Public Prosecutions v Hawkins
[1988] 3 All ER 673
Categories: CRIMINAL; Police
Court: QUEEN’S BENCH DIVISION
Lord(s): PARKER LJ AND SIMON BROWN J
Hearing Date(s): 17, 27 MAY 1988
Arrest – Arrest without warrant – Constable – Failure to inform arrested person of reason for arrest – Constable entitled to arrest person at time of arrest – Impracticable for constable to inform arrested person of reason for arrest at time of arrest – No or wrong reason for arrest given when it became practicable to give reason – Whether constable acting outside execution of duty if reason for arrest not given as soon as practicable – Police and Criminal Evidence Act 1984, s 28(3).
If it is not practicable for a police officer to inform an arrested person of the reason for the arrest at the time the arrest is made and the officer gives the wrong reason or no reason at all when it becomes practicable for him to inform the arrested person, he is nevertheless acting in the execution of his duty during the period between the arrest and the time when it becomes practicable for him to inform the arrested person of the reason for the arrest, notwithstanding the requirement in s 28(3)a of the Police and Criminal Evidence Act 1984 that an arrested person is to be ‘informed of the ground for the arrest at the time of, or as soon as is practicable after, the arrest’ if the arrest is to be valid. Accordingly, an assault committed on the officer by the arrested person before it becomes practicable to inform him of the reason for his arrest is a criminal offence even though the officer subsequently fails to inform him of the reason for his arrest when it becomes practicable to do so (see p 674 g to j, p 675 a b d and p 676 e to g, post).
Notes
For informing an arrested person of the reason for his arrest, see 11 Halsbury’s Laws (4th edn) para 100, and for cases on the subject, see 14(1) Digest (Reissue) 190, 1354–1357.
For the Police and Criminal Evidence Act 1984, s 28, see 12 Halsbury’s Statutes (4th edn) 977.
Cases referred to in judgments
Christie v Leachinsky [1947] 1 All ER 567, [1947] AC 573, HL.
Cases also cited
Brazil v Chief Constable of Surrey [1983] 3 All ER 537, [1983] 1 WLR 1155, DC.
Coffin v Smith (1980) 71 Cr App R 221, DC.
R v Kulynycz [1970] 3 All ER 881, [1971] 1 QB 367, CA.
Pedro v Diss [1981] 2 All ER 59, DC.
Appeal
The Director of Public Prosecutions appealed by way of a case stated by the justices for the County of Buckingham acting in and for the petty sessional division of Wycombe in respect of their adjudication as a magistrates’ court sitting at High Wycombe on 6 November 1987 whereby they dismissed informations laid by the Thames Valley Police charging the respondent, David John Hawkins, with three offences of assault on a constable in the execution of his duty, contrary to s 51(1) of the Police Act 1964 and one offence of using threatening, abusive or insulting words or behaviour, contrary to s 5 of the Public Order Act 1986. The facts are set out in the judgment of Parker LJ.
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Rhodri Price Lewis for the Director of Public Prosecutions.
Martin Wilson QC and Edward Bishop for the respondent.
27 May 1988. The following judgments were delivered.
PARKER LJ. The prosecution appeal by way of case stated from an adjudication of the justices for the County of Buckingham sitting as a magistrates’ court in Easton Street, High Wycombe on 14 September 1987.
So far as immediately relevant the facts (provisionally) found by the magistrates were as follows. (1) At about midnight on 1 August the respondent committed an offence for which he could lawfully be arrested. (2) Pc Seeby, who was on patrol duty in a marked police car, left the car and arrested him, taking him by the arm and saying, ‘You are under arrest.’ (3) A struggle ensued immediately and in the course of the struggle the respondent assaulted Pc Seeby by kicking him in the groin. He also assaulted Inspector Ashby by head butting him and Pc Taylor by kicking him in the face. Those two officers were on duty at the time. (4) The respondent was eventually put into the police car and driven to High Wycombe police station. (5) The respondent was not at the time of his arrest informed of the reason for his arrest. In view of the struggle it was impractical to inform him. It remained so impractical until arrival at the police station. (6) When it then became practical the respondent was not informed of the reason for his arrest or was given a wrong reason.
For the respondent, who had been charged in respect of each of the assaults mentioned in para 3 above with assaulting a police officer in the execution of his duty contrary to s 51(c) of the Police Act 1964, it was submitted that on such facts there was no case to answer.
This submission was simply based and consists in the following elements. (a) Section 28(3) of the Police and Criminal Evidence Act 1984 provides:
‘Subject to subsection (5) below, no arrest is lawful unless the person arrested is informed of the ground for the arrest at the time of, or as soon as is practicable after, the arrest.’
(b) As the respondent was not informed of the ground of his arrest as soon as it was practicable to do so the arrest was unlawful. (c) Since the arrest was unlawful the three officers could not have been acting in the execution of their duty at the time of the assaults on them. This submission was accepted by the magistrates, who dismissed the three charges.
The case stated raises this question for the opinion of this court:
‘Where it is not practicable for Police Constables to inform an arrested person of the reason for his arrest are those Constables acting outside the execution of their duty during the period when it is not practicable so to inform the Defendant if the Arresting Officer does not subsequently inform the Defendant of the true reasons for the arrest when it becomes practicable so to do?’
Despite the ingenious arguments presented on behalf of the respondent I have no hesitation in answering the question in the negative.
When a police officer makes an arrest which he is lawfully entitled to make but is unable at the time to state the ground because it is impracticable to do so, it is plain on the wording of the section that it is his duty to maintain the arrest until it is practicable to inform the arrested person of that ground. If, when it does become practicable, he fails to do so, then the arrest is unlawful, but that does not mean that acts, which were previously done and were, when done, done in the execution of duty, become, retrospectively, acts which were not done in the execution of duty. The 1984 Act
Page 675 of [1988] 3 All ER 673
certainly does not say so and contentions founded upon other consequences of an arrest being unlawful do not assist.
In my judgment the position is clear. It is impossible to contend that an officer who makes an arrest which he could lawfully make but is prevented by immediate violence from stating the ground of the arrest is not under a duty to state the ground of arrest as soon as he can. It is also impossible to contend that he is not under a duty to maintain the arrest until that moment arrives. If, when it does arrive, he then fails to carry out his duty to state the ground I am quite unable to see that such failure can have any effect on what has gone before unless specific provision is made. Here it is not.
The essential fallacy in the respondent’s argument is, in my view, in the assumption that the right to resist an arrest which could not from the start have been lawfully made confers a right to resist an arrest which could be lawfully made and which was being lawfully pursued at the time when the person concerned committed assaults on the arresting officer or his colleagues.
I would therefore allow the appeal, answer the question in the negative, set aside the dismissals and send the case back to the magistrates with a direction to continue the hearing.
SIMON BROWN J. I agree and add a short judgment of my own merely because the narrow point of law raised on this appeal arises in an area of acknowledged high constitutional importance.
The appeal is brought by the Crown against a justices’ decision, on a defence submission of no case to answer, to dismiss three informations each alleging an assault by the respondent on a named police officer in the execution of his duty. From the facts found (or rather assumed) by the justices the following matters are clear: (1) that the police officers were entitled to arrest the respondent for an offence of common assault; (2) that one of the officers duly did arrest the respondent by taking his arm and saying, ‘You are under arrest’; (3) that immediately on his arrest the respondent struggled violently in an attempt to secure his release. The other two officers immediately came to the arresting officer’s assistance so as to prevent the respondent’s escape. It was during the course of this struggle that the respondent committed the three assaults charged; (4) because of the respondent’s conduct it was not practicable to inform him of the ground of his arrest (namely the common assault which he had earlier committed) until he had been brought to the police station; (5) at the police station the respondent was not told the ground of his arrest. Either he was told nothing as to this or he was told, plainly wrongly, that he had been arrested for the three assaults committed during the struggle, it matters not which.
Central to this appeal is s 28(3) of the Police and Criminal Evidence Act 1984. So far as relevant this provides:
‘… no arrest is lawful unless the person arrested is informed of the ground for the arrest at the time of, or as soon as is practicable after, the arrest.’
The question raised on this appeal may therefore be stated thus: is a police officer acting in the execution of his duty during the period of time between his arresting a person and it first thereafter becoming practicable for him to inform that person of the ground of arrest, given that, at this later time, he in fact gives the wrong ground or no ground at all? If so, then clearly an assault on him by the person arrested during that period of time would constitute a criminal offence. Otherwise not.
The respondent submits not, arguing essentially as follows. (1) It is the plain effect of s 28(3) that the arrest here was unlawful. True, that fact would not be ascertainable until the end of the period in question; only then could it be known whether or not the arresting officer’s earlier conduct was to be validated. But there is no reason why the lawfulness or otherwise of the arrest should not meanwhile remain in limbo. Rather the unambiguous language of s 28(3) requires that it must. (2) It is well established on the
Page 676 of [1988] 3 All ER 673
highest authority that a prisoner need not submit to an unlawful arrest but may instead use all reasonable force to free himself from the police officer’s custody. (I may call this the Christie v Leachinsky [1947] 1 All ER 567, [1947] AC 573 principle, although of course that case concerned damages for false imprisonment rather than a defence to a charge of assaulting a police officer in the execution of his duty; the principle has, however, often been applied in this latter context.) (3) The arrest in the instant case ultimately proved to be unlawful. The respondent was, therefore, entitled to resist it.
Forcefully and attractively although this argument was advanced I unhesitatingly reject it. Its central fallacy seems to me to lie in the unwarranted assumption that the Christie v Leachinsky principle can properly be extended to determine retrospectively the legal character of the conduct in question, ie to legalise by reference to subsequent events what at the time was apparently a criminal assault on a police officer attempting to execute his duty. I say ‘apparently a criminal assault’ because there can be no doubt here but that the police officer was entitled to approach the respondent with a view to arresting him (it is common ground, indeed, that an assault on the officer at that stage would have been unlawful irrespective of what thereafter occurred), then to arrest him and then to restrain him. Indeed his duty required him to take such actions. I recognise of course that by virtue of s 28(3) the arrest ultimately proved to be unlawful. But that is not to say that all the earlier steps taken during the course of events leading to that ultimate position must themselves be regarded as unlawful. Still less does it follow that conduct on the part of the police officer which at the time was not only permitted but positively required of him in the execution of his duty can become retrospectively invalidated by reference to some later failure (a failure which, I may add, could well have been that of some officer other than himself).
The answer to the question posed in this appeal is, I have no doubt, this. Section 28(3) plainly dictates the circumstances in which an arrest may be found to have been unlawful and it determines decisively the consequences following the time at which that becomes apparent. In my judgment, however, it says nothing in respect of the intermediate period during which it is not practicable to inform the person arrested of the ground for his arrest. Least of all does it supply the answer to the question, hitherto unconsidered by the authorities, whether a police officer is acting in the execution of his duty during that intermediate period. That is a question which I regard as logically separate and apart from the eventual lawfulness or otherwise of the arrest on which he is engaged. Unless I were driven inexorably by the statute to accept the respondent’s argument I would decline to do so: it would certainly produce the most bizarre and unwelcome results. I feel no such compulsion. In the result I concur with Parker LJ’s conclusion that this appeal must be allowed.
Appeal allowed. Case remitted to justices to continue hearing. The court refused leave to appeal to the House of Lords but certified, under s 1(2) of the Administration of Justice Act 1960, that the following point of law of general public importance was involved in the decision: when a constable arrests a person and it is not practicable at the time of the arrest to inform the person of the ground for the arrest is the constable acting in the execution of his duty during the period until it does become practicable if when it does become practicable to inform the person he fails to do so?
Solicitors: Crown Prosecution Service, Abingdon; Cripps & Shone, Marlow (for the respondent).
Sophie Craven Barrister.
Re Brompton Securities Ltd [No 2]
[1988] 3 All ER 677
Categories: LANDLORD AND TENANT; Tenancies
Court: CHANCERY DIVISION
Lord(s): VINELOTT J
Hearing Date(s): 28, 29 APRIL 1988
Landlord and tenant – Relief against forfeiture – Company – Insolvency of company – Forfeiture of company’s lease because of winding up – Procedure to be followed to obtain relief against forfeiture.
The respondent was the lessee of premises of which it had granted an underlease to B Ltd (the company). P guaranteed the performance of the company’s obligations under the underlease. The respondent experienced difficulties in recovering rent under the underlease and had to bring a number of actions against the company and P in order to recover payment of the rent. An order for the winding up of the company was made and subsequently the respondent obtained a default judgment for non-payment of rent by the company. Shortly before that judgment was given, the liquidator of the company agreed to sell the underlease to P and also agreed to do all things required to obtain relief against forfeiture of the underlease. The respondent subsequently obtained an order for possession of the leased premises. Eventually all arrears of rent were paid to the respondent and the liquidator applied for relief against forfeiture of the underlease. The issues before the court were (1) whether an order granting relief against forfeiture should be made and (2) whether such an application for relief could appropriately be made by a summons in the winding-up proceedings.
Held – (1) Save in exceptional circumstances the court would grant relief against forfeiture to a tenant on payment of all rent in arrears and costs, notwithstanding that the tenant had in the past been a bad payer. It was not an objection to granting relief against forfeiture that the company was insolvent and held the lease as bare trustee for P, since once the arrears of rent had been brought up to date, as they had, the respondent was in no different position from any other lessor with an impecunious tenant. Accordingly, the court would grant relief against forfeiture (see p 680 f to p 681 a, post).
(2) Where application for relief against forfeiture was made on behalf of a company which was being wound up, there was no reason why the application should not be made by way of summons in the winding up. Accordingly, the application had been properly made (see p 682 h, post); dictum of Brightman J in Re Shilena Hosiery Co Ltd [1979] 2 All ER 6 at 9–10 applied; dictum of Oliver J in Re Blue Jeans Sales Ltd [1979] 1 All ER 641 at 646 distinguished.
Notes
For relief against forfeiture for non-payment of rent, see 27 Halsbury’s Laws (4th edn) para 442, and for cases on the subject, see 31(2) Digest (Reissue) 816–819, 6790–6815.
For procedure for recovery of possessions for an insolvent company’s failure to pay rent, see 7(2) Halsbury’s Laws (4th edn) para 1887.
Cases referred to in judgment
Blue Jeans Sales Ltd, Re [1979] 1 All ER 641, [1979] 1 WLR 362.
Brompton Securities Ltd, Re (1988) 4 BCC 189.
Gill v Lewis [1956] 1 All ER 844, [1956] 2 QB 1, [1956] 2 WLR 962, CA.
Lovelock v Margo [1963] 2 All ER 13, [1963] 2 QB 786, [1963] 2 WLR 794, CA.
Newbolt v Bingham (1895) 72 LT 852, CA.
Public Trustee v Westbrook [1965] 3 All ER 398, [1965] 1 WLR 1160, CA.
Rolls Razor Ltd, Re (No 2) [1969] 3 All ER 1386, [1970] Ch 576, [1970] 2 WLR 100.
Shilena Hosiery Co Ltd, Re [1979] 2 All ER 6, [1980] Ch 219, [1979] 3 WLR 332.
Page 678 of [1988] 3 All ER 677
Cases also cited
Ladup Ltd v Williams & Glyn’s Bank plc [1985] 2 All ER 577, [1985] 1 WLR 851.
Adjourned summons
By summons dated 1 February 1988 Ian Solomon Robert Franses, the liquidator of Brompton Securities Ltd (the company), applied for relief from forfeiture on such terms as the court thought fit of the underlease of premises at 5, 6 and 7 Dover Street, London W1 dated 22 November 1977, and made between the respondent, Langham House Developments Ltd (Langham House) of the first part, the company of the second part and Campbell Ian Palmer of the third part. The facts are set out in the judgment.
Matthew Collings for the liquidator.
Paul de la Piquerie for Langham House.
29 April 1988. The following judgment was delivered.
VINELOTT J. This is an application for relief against forfeiture. It is the latest, and I hope the last, chapter in a long history of litigation between a company called Langham House Developments Ltd (Langham House) and a company now in compulsory liquidation called Brompton Securities Ltd (Brompton). The history of the litigation is set out in a judgment of Mervyn Davies J (see (1988) 4 BCC 189). However, to make this judgment intelligible, I should, I think, summarise the salient events.
Langham House is the lessee under a long lease of premises at 5–7 Dover Street, London, W1. In 1977 Langham House granted an underlease to Brompton for a term of 42 years from 24 June 1973 at a rent of £47,000 subject to review. The rent was subsequently increased from 25 December 1982 to £90,000 per annum. The next review is due to take place on 25 December next. It is said by Langham House that it will be increased to something over £200,000, that being, it is said, the current market rent. A Mr C J Palmer was joined in the underlease to guarantee the performance by Brompton of its obligations. The order for the compulsory winding up of Brompton was made on 1 February 1982.
Langham House has experienced difficulty in recovering rent from Brompton since the commencement of the winding up. After the winding up the rent was paid for some years by Mr Palmer but it was not always, if ever, paid promptly. A summary of the actions that have been brought by Langham House to recover rent is set out in an affidavit by a partner in the firm of solicitors acting for Langham House. Shortly stated, since 1978 Langham House has commenced eleven actions in all. The first six actions were brought against Brompton and Mr Palmer. The next three actions were brought after the order for the winding up of Brompton and were brought against Mr Palmer alone. The last was brought, with the leave of the court, against both Brompton and Mr Palmer. That was on 16 May 1986. The claim was for just under £50,000, a substantial sum but, of course, £45,000 was a six-monthly instalment of rent. Langham House obtained judgment in default of appearance on 16 August 1986. Shortly before judgment was given, on 22 July, Brompton, by its liquidator, agreed to sell the lease to Mr Palmer for £9,000. The contract included ‘the right to apply at [Mr Palmer’s] expense to the court for relief against forfeiture’, and Brompton agreed that it and the liquidator would, at Mr Palmer’s expense—
‘do all things required and necessary … (ii) to obtain relief against forfeiture of the lease and/or such other relief as may appropriate; (iii) to obtain the consent of the reversioner to the assignment of the lease to the purchaser or as he may direct.’
Under the special conditions the purchase price was payable in full on exchange of contracts. There was no completion date, the date being at the discretion of Mr Palmer. The underlease, of course, contained the usual qualified covenant against assignment without consent, but the usual provision in the National Conditions of Sale making a contract for the sale of leasehold property subject to the reversioner’s consent being obtained where necessary was excluded. So the contract was an unconditional contract
Page 679 of [1988] 3 All ER 677
and, the purchaser having paid the purchase price, Brompton became a bare trustee for him.
Returning to the action, Brompton applied for relief against forfeiture. An order was made by Master Warren on 19 March 1987 giving Brompton relief, substantially all the arrears having then been paid, but on condition that a small sum of arrears of rent was paid forthwith and that works were done to comply with a schedule of delapidations served by Langham House within three months. These works were not carried out promptly. On 8 July 1987 Brompton applied to Master Bickford Smith for an extension of time. That application was refused. Brompton appealed The appeal came before his Honour Judge George Dobry QC sitting as a judge of the High Court. That was on 13 October 1987. The repairs had then been done. He extended the time up to the date of the hearing, so effectively giving Brompton relief against forfeiture. That was the end of that action.
In the mean time further rent accrued. The rent is payable quarterly in advance. Langham House applied to the registrar of the Companies Court for leave to bring a further action. Mr Registrar Bradburn, on 14 May 1987, following a decision of Oliver J in Re Blue Jeans Sales Ltd [1979] 1 All ER 641, [1979] 1 WLR 362, gave leave for the application to be amended to ask for an order for possession. The application so amended came on for hearing on 10 December 1987 and Mr Registrar Bradburn made an order for possession. An appeal to Mervyn Davies J was dismissed. It was argued on behalf of Brompton that Mr Palmer—
‘has a right to seek relief against forfeiture of the underlease in that he is interested in the premises as being his home and place of business and having the rights acquired under the agreement dated 22 July 1986. As well it is said that he has spent about £20,000 in building works at the premises pursuant to a condition imposed when relief against forfeiture was allowed in the Queen’s Bench Division.’
Mervyn Davies J referred to the judgment of Oliver J in Re Blue Jeans Sales Ltd, where Oliver J made an order for possession against a company in compulsory liquidation on an application by the landlord for leave to issue proceedings for forfeiture on the ground that the landlord would have to give notice to the persons in occupation before issuing a writ of possession, and that those persons would then have an opportunity of applying for relief against forfeiture. He concluded ([1979] 1 All ER 641 at 646, [1979] 1 WLR 362 at 369):
‘If the sub-tenant or a mortgagee does take proceedings against the landlord for relief, then presumably the landlord will not make an application for the writ of possession to issue unless and until those proceedings have been concluded and any claim for relief has been refused because, if a claim for relief is granted, the matter becomes academic.’
Mervyn Davies J held that that principle was applicable in the instant case because—
‘Mr Palmer is not prejudiced because if and when Langham House seek to enforce their possession order Mr Palmer will be notified and he will then be able, if so advised, to apply in the Queen’s Bench Division or in the Chancery Division for relief against forfeiture. I wish to add that [counsel for the liquidator] fully appreciated the importance of the Blue Jeans case. He sought a distinction on the facts contending, as I understand it, that the Blue Jeans occupiers appeared to be less closely connected with the premises there than is Mr Palmer here, bearing in mind Mr Palmer’s residence at the premises, his place of business there, his past payments of rent and his agreement to buy for £9,000. To my mind those facts do not detract from Langham House’s right to obtain a possession order against the liquidator, albeit that such facts may strengthen Mr Palmer’s position if and when he is advised to seek relief against forfeiture.’
That judgment was given on 13 January 1988. On 21 January Langham House applied
Page 680 of [1988] 3 All ER 677
for leave to issue a writ of possession in the Companies Court and served notice on the occupiers, including, of course, Mr Palmer. The liquidator’s solicitors then sent Langham House’s solicitors a banker’s draft which had been provided by Mr Palmer for the arrears of rent which had been unpaid since March 1987, and on 1 February 1988 the liquidator issued the application which is now before me for relief against forfeiture. A further banker’s draft covering rent due on 25 March 1988 was sent to Langham House’s solicitors on 24 March and was accepted as a contribution towards mesne profits falling due after 25 March 1988. A sum has also been agreed and set aside to cover the costs of this application.
The question has been raised whether or not the application for relief against forfeiture can properly be made, or is appropriately made, by a summons in winding-up proceedings. I will return to this point later. I think it will be convenient to deal first with the substantial question whether Brompton has established grounds for relief.
It is trite law that, save in very exceptional circumstances, the court will grant relief against forfeiture to a tenant on payment of all rent in arrears and costs, and will do so notwithstanding that actions have had to be brought on previous occasions to recover the rent. The court may refuse to grant relief against forfeiture if the parties have altered their position in the mean time and, in particular, where the rights of third parties have intervened relief ought not to be granted where the effect of it would be to defeat the new rights of third parties or be unfair to the landlord having regard to the way in which he has altered his position (see Gill v Lewis [1956] 1 All ER 844 at 850, [1956] 2 QB 1 at 10 per Jenkins LJ). There are exceptions to this rule, for instance (an example given by Jenkins LJ) where—
‘the court, on being appraised that the premises were being consistently used for immoral purposes, would decline to give the tenant any relief or assistance which would in any way further his use or allow the continuance of his use of the house for those immoral purposes.’
(See [1956] 1 All ER 844 at 852, [1956] 2 QB 1 at 14.)
However, as Gill v Lewis shows, the circumstances must be very exceptional. In that case the Court of Appeal treated the facts that ‘the tenants having been bad payers in the past, and the fact that they have been elusive when attempts have been made to serve them’ as irrelevant matters for consideration (see [1956] 1 All ER 844 at 854, [1956] 2 QB 1 at 17 per Hodson LJ). One of them had been convicted for indecent assault on the demised premises.
Applying those principles to the present case, it is quite plain that, apart from the fact that Brompton is in compulsory winding up and has admittedly no assets with which to meet the rent, there is simply no ground on which the court could refuse to grant relief. In the words of Lord Esher MR in Newbolt v Bingham (1895) 72 LT 852 at 853, ‘there is no longer any real discretion in the matter.' Counsel for Langham House submitted that a time must come when persistent failure to pay rent until proceedings are commenced and prosecuted to judgment may justify the court in refusing relief. The lapse of a very long period (22 years) where rent had remained unpaid was one of the factors relied on by the Court of Appeal in refusing relief against forfeiture in Public Trustee v Westbrook [1965] 3 All ER 398, [1965] 1 WLR 1160. That of course, is miles away from the present case. Master Warren granted relief against forfeiture a year ago, and although the rent later fell into arrears, the arrears have since been brought up to date and security for costs has been given. Counsel for Langham House submitted that principles established in the nineteenth century when the value of money was stable may have to re-examined now that we have become accustomed to perpetual inflation (albeit at a lower rate than a few years ago); it is no longer true that a lessor is fully compensated by a payment in full in depreciated currency with an order for costs which may not fully recompense him for expenses incurred. However, that is not a re-examination which it is open to me to undertake.
The case for Langham House, in substance, is that it is unfair and unjust that Langham
Page 681 of [1988] 3 All ER 677
House should have to continue to look for payment of rent and performance of the other convenants in the lease to a company which is admittedly insolvent and which is, in effect, a trustee of the benefit of the lease for another. I do not think that that is a ground for refusing relief. Once arrears are brought up to date Langham House will be in no different position from any other lessor with an impecunious tenant. It would be an entirely new departure for the court to decline to grant relief on the ground that a tenant has been a bad payer in the past and is likely to continue to be a bad payer in the future. If Mr Palmer continues to put Brompton in funds to pay the rent (and as the beneficial owner of the lease it will be in his interests to do so) Langham House will get all that the law says it is entitled to. If he does not, cadit quaestio: Langham House will be entitled to possession. In fact it is probable the rent will be paid in the future. An application has recently been made to Langham House for consent to an assignment to another company, and the inference must, I think, be that Mr Palmer has succeeded into entering into a conditional contract for the further assignment of the lease. If the proposed assignee can satisfy Langham House that he is likely to be a satisfactory tenant, Langham House will have all the protection that it is entitled to.
However, a question has been raised whether it is appropriate for an order for relief to be made in winding-up proceedings. Counsel for Langham House, in his very helpful argument, conceded, I think rightly, that the question is not one of jurisdiction. Although winding-up proceedings are not ‘an action’ within s 38 of the Supreme Court Act 1981, the court has an inherent jurisdiction to grant relief against forfeiture: see Lovelock v Margo [1963] 2 All ER 13, [1963] 2 QB 786. Further, the jurisdiction can be exercised by a High Court judge hearing company business. That latter jurisdiction has been fully considered in two recent cases: Re Rolls Razor Ltd (No 2) [1963] 3 All ER 1386, [1970] Ch 576 and Re Shilena Hosiery Co Ltd [1979] 2 All ER 6, [1980] Ch 219.
I need only refer to one passage in the latter case, where Brightman J said ([1979] 2 All ER 6 at 9–10, [1980] Ch 219 at 224):
‘The Companies Court is not a court separate and distinct from the High Court with its own peculiar jurisdiction. The jurisdiction to wind up a company is conferred on the High Court, not the Companies Court (see s 218(1) of the Companies Act 1948); nor is the Companies judge invested with a special jurisdiction not possessed by a High Court judge sitting elsewhere. The Companies Court is a way of describing the High Court when dealing with matters originating in the chambers of the bankruptcy registrar dealing with company matters, and the Companies judge is a way of describing a High Court judge when trying such matters. If authority is needed for this proposition it will be found in Re Rolls Razor Ltd (No 2). Once it is accepted that the Companies Court is merely a description of the High Court when operating through the chambers of the bankruptcy registrar dealing with company matters, the question of jurisdiction is greatly narrowed because every judge of the High Court has jurisdiction to grant relief under s 172 of the 1925 Act whether he is or is not sitting as the Companies judge. All that remains is a procedural question, namely whether relief under s 172 is capable of being granted in proceedings begun by a summons issued in the Companies Court as distinct from some other form of procedure.’
In that case Brightman J came to the conclusion that he had jurisdiction to hear the application and that as it was an application in a matter which arose in consequence of the liquidation and was one which it was necessary to decide before the winding up was completed, there was no reason to require it to be litigated outside the Companies Court.
The question is whether it is similarly appropriate that the application for relief against forfeiture should be determined in a summons by the liquidator of Brompton, or whether Brompton should be required to issue a writ or originating summons claiming relief against forfeiture in the Chancery Division, a step which in the context of this case would be no more than a formality.
Page 682 of [1988] 3 All ER 677
A similar question arose in Re Blue Jeans Sales Ltd [1979] 1 All ER 641 at 646, [1979] 1 WLR 362 at 368–369, and Oliver J sought further argument on it. He said:
‘After I considered the matter the other day, it occurred to me that, if it be the situation that when the landlord applies for the enforcement of the order of possession by the issue of a writ of possession, there is left an opportunity for third parties to apply to the Companies Court for relief from forfetiture, that would be an extremely inconvenient way of proceeding because it would mean that the registrar would be trying, in effect, proceedings between third parties which really had nothing whatever to do with the company, the company being no longer concerned in the matter because the order for possession had been made against it. So far as it is concerned, the lease has been forfeited. But I am satisfied that that is not in fact the position. The only right that the third party, whether he be a mortgagee or a sublessee, has to claim relief from forfeiture, (and that is really what all this is about) is the right which is conferred by s 146 of the Law of Property Act 1925 which enables such a person to apply for relief in the action of the landlord, if any, or otherwise by action of his own. It is, I think, clear that a winding-up proceeding (and ex hypothesi the order here is made in the winding-up) is not an “action” and therefore this is not a case where the sub-tenant or mortgagee could apply for relief in the landlord’s summons in the winding-up. It is a case where, if relief is sought to be granted at all, it has to be applied for by a separate proceeding. That proceeding would be something taking place altogether outside the liquidation and therefore the registrar would not, as I see it, be concerned with the matter at all.’
In the instant case the application for relief against forfeiture is made by Brompton. It is at best doubtful, notwithstanding the argument before Mervyn Davies J, whether Mr Palmer is entitled to apply for relief against forfeiture. The issue is thus between litigants who are already parties to an application for leave to issue a writ of possession. Counsel for Langham House submitted that it would none the less be right as a matter of practice to require a company in the position of Brompton to apply in the Companies Court for leave to commence proceedings for relief against forfeiture; the landlord could then ask that leave should only be given conditionally on security for costs being provided. There may be cases where that would be the appropriate course. I must decline the invitation to lay down any general rule. On the facts of the instant case the issue is one which arises in connection with the winding up. It arises in consequence of Langham House’s application there for leave to issue a writ of possession. The issue arises only between the landlord and a company in liquidation, and the evidence in support of an application for leave to commence proceeding would necessarily cover all the facts relevant to the question whether relief against forfeiture should be given. In these circumstances it would be pointless to put Brompton to the expense of making a separate application. Counsel for Langham House very helpfully, if I may say so, accepted that that was so and he put these arguments before me because, as he said, the question is one which not infrequently arises. I understand that cases where an insolvent company is put in funds to pay rent in arrears so as to avoid forfeiture of a lease which may be a valuable and realisable asset are not uncommon. In my judgment, save in exceptional circumstances, there is no reason why in such cases the application for relief against forfeiture should not be made by summons in the winding up. It would, as I see it, create needless duplication of costs for the judge to hear the application for leave in the winding-up proceedings and review the same evidence in the application for relief.
Application granted. No order for costs of the hearing.
Solicitors: Jerrard Saunders Donn (for the liquidator); Bower Cotton & Bower (for Langham House).
Jacqueline Metcalfe Barrister.
Director of Public Prosecutions v Marshall and another
[1988] 3 All ER 683
Categories: CRIMINAL; Criminal Evidence
Court: QUEEN’S BENCH DIVISION
Lord(s): WOOLF LJ AND HUTCHISON J
Hearing Date(s): 18 APRIL 1988
Criminal evidence – Exclusion of evidence – Adverse effect on fairness of proceedings – Test purchase made by police officer in plain clothes – Whether police officer’s evidence having adverse effect on fairness of proceedings – Whether police officer’s evidence should be excluded – Police and Criminal Evidence Act 1984, s 78(1).
Police officers in plain clothes purchased four cans of lager and a bottle of wine from the respondents’ shop. The respondents were licensed to sell liquor by the case but not to sell individual cans or bottles of liquor. The respondents were charged with having sold the lager and the wine without having the requisite justices’ licence, contrary to s 160 of the Licensing Act 1964. At the hearing before the magistrates the respondents contended that the police officers’ evidence should be excluded under s 78(1)a of the Police and Criminal Evidence Act 1984 as having ‘an adverse effect on the fairness of the proceedings’ since it had been unfairly obtained because the officers had not at the time of the purchase revealed the fact that they were police officers. The magistrates accepted that contention and the prosecution was unable to proceed. The Director of Public Prosecutions appealed by way of case stated against the magistrates’ decision to exclude the police officers’ evidence.
Held – The evidence of the police officers had been wrongly excluded by the magistrates, since it had not been shown that the evidence of police officers who made test purchases in plain clothes would have an adverse effect on the fairness of the proceedings. The appeal would therefore be allowed and the case remitted to the magistrates with a direction to proceed with the hearing of the information (see p 685 b c e g h, post).
Notes
For the exclusion of unfair evidence, see 11 Halsbury’s Laws (4th edn) para 364.
For the Licensing Act 1964, s 160, see 24 Halsbury’s Statutes (4th edn) 434.
For the Police and Criminal Evidence Act 1984, s 78, see 17 ibid 215.
Cases referred to in judgments
R v Mason [1987] 3 All ER 481, [1988] 1 WLR 139, CA.
R v Sang [1979] 2 All ER 1222, [1980] AC 402, [1979] 3 WLR 263, HL.
Case stated
The Director of Public Prosecutions appealed by way of a case stated by the justices for the petty sessional area of Barking in respect of their adjudication as a magistrates’ court at Barking, Essex, on 29 October 1987 whereby on an information preferred against the respondents, Robert Dennis Marshall and Robert John Downes, they held that the evidence of police officers in support of the information was inadmissible. The facts are set out in the judgment of Woolf LJ.
John Hobbs for the Director of Public Prosecutions.
Kevin De Haan for the respondents.
Page 684 of [1988] 3 All ER 683
18 April 1988. The following judgments were delivered.
WOOLF LJ. This is an appeal by way of case stated by the justices for the petty sessional area of Barking and Dagenham. It is a consequence of an adjudication by the magistrates for that area who heard an information on 29 October 1987. The information alleged that the respondents on 21 July 1987 sold four cans of lager without having a justices’ licence to do so, contrary to s 160 of the Licensing Act 1964, and that on 23 July 1987 they sold one bottle of wine without having a justices’ licence to do so, contrary to s 160 of the 1964 Act.
The respondents carried on a business under the name of ‘Buy the Case’ at 76 Whalebone Lane, Dagenham, where they were entitled to sell liquor by the case but not in the quantities of the sort referred to in the information.
The proceedings took a slightly unusual form because the magistrates were told at the outset that the case for the prosecution rested entirely on test purchases which were made from the premises by police officers and that the police officers had made those purchases in plain clothes without revealing that they were police officers, presumably for the obvious reason that if they had revealed the fact that they were police officers they would not have been able to make the purchases which they did and thus establish the basis for the laying of the information.
It was contended by counsel for the respondents that this evidence should not be admitted in evidence by the justices on the basis that the justices were entitled to exclude it under s 78(1) of the Police and Criminal Evidence Act 1984, which provides:
‘In any proceedings the court may refuse to allow evidence on which the prosecution proposes to rely to be given if it appears to the court that, having regard to all the circumstances, including the circumstances in which the evidence was obtained, the admission of the evidence would have such an adverse effect on the fairness of the proceedings that the court ought not to admit it.’
The justices came to the conclusion that the evidence should not be admitted under that section. They were of the opinion, as appears from the case stated—
‘that the evidence of the police officers should not be admitted as we were satisfied that it had been unfairly obtained and therefore would have had an adverse effect on the fairness of the proceedings … ’
That being their decision, the prosecution were unable to proceed. It was this decision which gave rise to this appeal. The question which the justices have posed for the opinion of this court is:
‘Where in a “test purchase” of intoxicating liquor from premises in respect of which no Justices Licence or Canteen Licence or occasional permission authorising the sale of intoxicating liquor has been granted, with a view to adducing evidence for a prosecution under Section 160 of the Licensing Act 1964 a police constable making such a “test purchase” has to announce his office to the person from whom he made such purchase before so making it, and whether, if he did not so announce his office, the evidence of such purchase should be excluded and held inadmissible under the provisions of Section 78 of the Police and Criminal Evidence Act 1984 as being a deception upon the defendant and therefore unfair.’
If the justices are entitled to exclude evidence on the basis which the justices in this case decided to exclude the evidence, that could have wide-reaching implications on the methods adopted of obtaining evidence in a large range of criminal offences of this sort. In regard to the particular offences which were alleged in this information, one can conceive that by keeping the premises under observation the police could have obtained the evidence without adopting the strategem which was adopted in this case. Clearly, while that could have been done it would have been much more time consuming and difficult than adopting the simple procedure which was adopted in this case of trying to make a purchase which would contravene the law in the way alleged in the information.
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Counsel for the Director of Public Prosecutions urged that the justices were not entitled to take the view which they did about test purchases of this kind.
Counsel for the respondents contended that the matter was entirely one for the discretion of the justices and they having exercised the discretion in the way that they did this court cannot interfere.
In my view the answer to the question posed by the justices is derived from the words of the section itself, to which I have already made reference. In a case of the sort which was before the justices, the justices were only entitled to exclude the evidence if they came to the conclusion that the admission of the evidence would have such an adverse effect on the fairness of the proceedings that the court ought not to admit it. In considering that question they are entitled to have regard to all the circumstances, including the circumstances in which the evidence was obtained. Perhaps unfairly, I invited counsel for the respondents to indicate how it could be said that the admission of the evidence of the police officers in this case would have an adverse effect on the fairness of the proceedings. Counsel for the respondents was unable to give an indication as to why it would have any adverse effect on the fairness of the proceedings and was candid enough to accept that it is difficult to see, if those words of the section are focused on, how the evidence in question could have an adverse effect on the fairness of the proceedings.
Counsel for the Director of Public Prosecutions, very properly, referred us to the decision of the Court of Appeal, Criminal Division, in R v Mason [1987] 3 All ER 481, [1988] 1 WLR 139. In that case a deceit was practised by the police on the appellant and on his solicitor with regard to the police having evidence of a fingerprint which had not in fact been found and in those circumstances the Court of Appeal, Criminal Division, indicated that the evidence could be inadmissible under s 78 of the 1984 Act. There, however, there was an express misrepresentation and a clear deception practised and you can understand how, if a deception of this type occurs, it could have an effect on the fairness of the trial, but here it is difficult to see how the fact that the police officers did not reveal their identity could have any effect on the trial.
It has clearly been established by R v Sang [1979] 2 All ER 1222, [1980] AC 402, to which the justices were referred, that there is no question of their being any defence of entrapment under English law and merely knowing that the police officers obtained the evidence by taking part themselves in a sale which contravened the law does not mean that the evidence must be excluded under s 78 of the 1984 Act.
It is clear to me that either the justices misinterpreted the terms of s 78 to which I have referred or this was one of the cases where their decision is so unreasonable that this court can intervene on that basis. I apprehend it is the former reason that probably explained the decision.
For those reasons I am of the view that this is a case where the question which the justices have posed has to be answered in the negative and accordingly this case will be remitted to the justices with the direction that they should proceed with the hearing of the information, if this is a course which is required by the Crown Prosecution Service.
HUTCHISON J. I agree.
Appeal allowed. Case remitted to justices with direction to continue hearing.
Solicitors: Crown Prosecution Service, London North; E Edwards Son & Noice (for the respondents).
Raina Levy Barrister.
R v Civil Service Appeal Board, ex parte Bruce
[1988] 3 All ER 686
Categories: ADMINISTRATIVE
Court: QUEEN’S BENCH DIVISION
Lord(s): MAY LJ AND ROCH J
Hearing Date(s): 29, 30 APRIL, 1 MAY, 19 JUNE 1987
Judicial review – Availability of remedy – Employee of public authority – Employment by Crown – Dismissal of civil servant – Appeal to Civil Service Appeal Board – Board giving no reasons for decision that dismissal was fair – Whether board’s decision susceptible to judicial review.
The Inland Revenue offered the applicant an appointment as an executive officer by letter which stated that the appointment was subject to the conditions of service for civil servants and to the appointment being held at the pleasure of the Crown. The applicant accepted the appointment but was later considered not to be suitable and he was given notice terminating the appointment. He appealed to the Civil Service Appeal Board which upheld the dismissal without giving any reasons for coming to that decision. The applicant applied for judicial review of the board’s decision on the ground that the board was required to give reasons for its decisions. The board contended that it was not amenable to judicial review because the applicant’s employment with the Crown was a contract of service and lacked the necessary public law element to attract judicial review.
Held – The applicant’s service with the Inland Revenue was not pursuant to any contract of employment enforceable in the courts but was instead merely an appointment on the terms of his letter of appointment. In the absence of a contract of employment there was a sufficient public law element connected with the applicant’s dismissal and appeal to the board to entitle him to apply for judicial review of the board’s decision. However, since the most appropriate forum for resolving dismissal disputes was an industrial tribunal, it was only in very exceptional circumstances that leave to apply for judicial review of the board’s decisions would be granted. In the circumstances, the court would exercise its discretion by dismissing the application (see p 694 d f to h, p 696 j to p 697 c g and p 699 c to p 701 g, post).
R v East Berkshire Health Authority, ex p Walsh [1984] 3 All ER 425 and Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935 considered.
Per curiam. There is nothing unconstitutional about the Crown entering into contracts of employment with civil servants, subject (per Roch J) to the qualification that the Crown cannot deprive itself by contract of its prerogative power to dismiss civil servants (see p 694 e and p 698 e, post).
Quaere. Whether the Civil Service Appeal Board ought to give reasons for its decisions (see p 696 g h and p 701 h, post).
Notes
For the nature and exercise of the royal prerogative, see 8 Halsbury’s Laws (4th edn) para 889–993, and for cases on the subject, see 11 Digest (Reissue) 662–665, 36–56.
For judicial control of administrative action, see 1 Halsbury’s Laws (4th edn) para 46–47.
For a civil servant’s right of appeal against dismissal, see 8 ibid paras 1303, 1309.
Cases referred to in judgments
Alexander Machinery (Dudley) Ltd v Crabtree [1974] ICR 120, NIRC.
Rederiaktiebolaget Amphitrite v R [1921] 3 KB 500, [1921] All ER Rep 542.
Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223, CA.
Page 687 of [1988] 3 All ER 686
Council of Civil Service Unions v Minister for Civil Service [1984] 3 All ER 935, [1985] AC 374, [1984] 3 WLR 1174, HL.
Dunn v R [1896] 1 QB 116, [1885–9] All ER Rep 907, CA.
IRC v Hambrook [1956] 1 All ER 807, [1956] 2 QB 641, [1956] 2 WLR 919; affd [1956] 3 All ER 338, [1956] 2 QB 641, [1956] 3 WLR 643, CA.
Kodeeswaran v A-G of Ceylon [1970] AC 1111, [1970] 2 WLR 456, PC.
Lucas v Lucas [1943] 2 All ER 110, [1943] P 68.
Mulvenna v The Admiralty 1926 SC 842, Ct of Sess.
Osmond v Public Service Board of New South Wales [1984] 3 NSWLR 447, NSW CA; rvsd (1986) 63 ALR 559, Aust HC.
R v East Berkshire Health Authority, ex p Walsh [1984] 3 All ER 425, [1985] QB 152, [1984] 3 WLR 818, CA.
R v Immigration Appeal Tribunal, ex p Khan (Mahmud) [1983] 2 All ER 420, [1983] QB 790, [1983] 2 WLR 759, CA.
R v Panel on Take-overs and Mergers, ex p Datafin plc [1987] 1 All ER 564, [1987] 2 WLR 699, CA.
Reilly v R [1934] AC 176, [1933] All ER Rep 179, DC.
Cases also cited
A-G for Guyana v Nobrega [1969] 3 All ER 1604, PC.
Cresswell v Board of Inland Revenue [1984] 2 All ER 713.
Denning v Secretary of State for India in Council (1920) 37 TLR 138.
Ford Motor Co Ltd v Amalgamated Union of Engineering and Foundry Workers [1969] 2 All ER 481, [1969] 2 QB 303.
Hales v R (1918) 34 TLR 589, CA.
Nixon v A-G [1930] 1 Ch 566, CA: affd on other grounds [1931] AC 184, [1930] All ER Rep 487, HL.
Payne v Lord Harris of Greenwich [1981] 2 All ER 842, [1981] 1 WLR 754, CA.
Preston v IRC [1985] 2 All ER 327, [1985] AC 835, HL.
R v BBC, ex p Lavelle [1983] 1 All ER 241, [1983] 1 WLR 23.
R v Chief Constable of the Merseyside Police, ex p Calveley [1986] 1 All ER 257, [1986] QB 424, CA.
R v Criminal Injuries Compensation Board, ex p Lain [1967] 2 All ER 770, [1967] 2 QB 864, DC.
R v Secretary of State for Home Dept, ex p Benwell [1984] 3 All ER 854, [1985] QB 554.
R v Secretary of State for Home Dept, ex p Broom [1986] QB 198.
R v Secretary of State for Social Services, ex p Connolly [1986] 1 All ER 998, [1986] 1 WLR 421, CA.
Ridge v Baldwin [1963] 2 All ER 66, [1964] AC 40, HL.
Riordan v War Office [1959] 3 All ER 552, [1959] 1 WLR 1046; affd [1960] 3 All ER 774n, [1961] 1 WLR 210, CA.
Rodwell v Thomas [1944] 1 All ER 700, [1944] 1 KB 596.
Sutton v A-G (1923) 39 TLR 294, HL.
Terrell v Secretary of State for the Colonies [1953] 2 All ER 490, [1953] 2 QB 482.
Thomas v A-G of Trinidad and Tobago [1982] AC 113, PC.
Westminster City Council v Great Portland Estates plc [1984] 3 All ER 744, [1985] AC 661, HL.
West Midlands Co-op Society v Tipton [1986] 1 All ER 513, [1986] AC 536, HL.
Application for judicial review
Vaughan Maurice Synnott Bruce applied with leave of the Court of Appeal given on the 24 February 1986 for judicial review of the decision of the Civil Service Appeal Board made on 8 January 1986 that the Commissioners of Inland Revenue’s decision to terminate the applicant’s employment as an executive officer was fair. The grounds of
Page 688 of [1988] 3 All ER 686
the application were that the board had given no reasons for its decision. The applicant sought (i) a declaration that the board’s decision was ultra vires and void, (ii) an order of certiorari to bring up and quash the decision and (iii) an order of mandamus requiring the board to rehear the appeal and give reasons for its decision. The Attorney General was given leave to intervene as second respondent. The facts are set out in the judgment of May LJ.
Anthony Lester QC and David Pannick for the applicant.
Nigel Pleming for the board.
John Laws for the Attorney General.
Cur adv vult
19 June 1987. The following judgments were delivered.
MAY LJ. In this matter counsel moved on behalf of the applicant, Mr Bruce, with leave of the Court of Appeal, for judicial review of a decision of the Civil Service Appeal Board made on 8 January 1986. The applicant seeks a declaration that that decision was ultra vires and void, certiorari to quash it and mandamus to require the board to rehear his appeal according to law.
The original respondent to this application was the board itself. In the course of the proceedings the Attorney General sought and obtained leave to intervene as second respondent and counsel has appeared on his behalf and made certain submissions to us for which we are grateful. The principal purpose of the intervention by the Attorney General was to enable him to argue the contention that civil servants are employed under contracts of service by the Crown. We have also heard counsel for the board itself and are equally grateful to him for his help.
By a letter dated 10 November 1982 the Inland Revenue offered the applicant an appointment as an established excutive officer in their enforcement office at Worthing. The letter told the applicant that ‘details of conditions of service applicable to Civil Servants are to be found in the Inland Revenue Staff Handbook a copy of which may be consulted in each office’. It also referred to a schedule attached to the letter which contained the following relevant provisions:
‘The following terms and conditions also apply to your appointment in the Civil Service. It should be understood, however, that in consequence of the constitutional position of the Crown, the Crown has the right to change its employees’ conditions of service at any time, and that they hold their appointment at the pleasure of the Crown. In consequence of the constitutional position of the Crown, the Crown’s employees cannot demand a period of notice as of right when their appointments are terminated.’
The applicant accepted the appointment but unfortunately after due trial he was not considered satisfactory for it. Consequently, by a letter of 2 August 1985 the Revenue terminated his appointment with effect from 14 September 1985. This letter also reminded him that he had a right of appeal against the termination of his appointment to the board. The applicant did so appeal and this was heard on 18 December 1985. What were described as ‘The Board’s Findings’ comprised principally the submissions and contentions adduced before the board on behalf of the Revenue and the applicant, but concluded:
‘Having considered very carefully the written statements and oral submissions made at the hearing the Board conclude that the Department’s decision to terminate Mr. Bruce’s appointment was fair.’
Page 689 of [1988] 3 All ER 686
The applicant now seeks judicial review of the board’s decision on the one ground that it gave no reasons for it.
The Civil Service Pay and Conditions of Service Code current at all material times was promulgated by the Minister for the Civil Service pursuant to powers given her by the Civil Service Order in Council 1982. In so far as is material for present purposes, this provided by art 4:
‘As regards Her Majesty’s Home Civil Service—(a) the Minister for the Civil Service may from time to time make regulations or give instructions … (ii) for controlling the conduct of the Service, and providing for the classification of all persons employed therein and, so far as they relate to matters other than remuneration, expenses and allowances, the conditions of service of all such persons; and (b) the Treasury may from time to time make regulations or give instructions providing for the number of and grading of posts in the Service, the remuneration, expenses and allowances of all persons employed therein and, so far as they relate to remuneration, expenses or allowances, the conditions of service of all such persons.’
I now quote the relevant parts of some of the paragraphs in the code which are also material to this case:
‘11. The Civil Service has evolved under the Royal Prerogative and, except as regards superannuation, does not rest on a codified statutory basis. In legal theory, all civil servants form part of the personal staff of the Sovereign and it is still true to say that on appointment civil servants, as servants of the Crown, hold office during the pleasure of the Crown …
14. For the most part, the relationship between the civil servant and the Crown remains one regulated under the prerogative and based on personal appointment. As such, a civil servant does not have a contract of employment enforceable in the Courts but rather a letter of appointment, and technically the Crown still retains the right to dismiss a civil servant at pleasure. Recently, however, the legal position of civil servants has been radically changed by the growing trend for legislation to apply to the Civil Service either directly, by the provisions of the Acts themselves or by Government assurances that the conditions applying to civil servants will not be less favourable than those applying to other employees.’
In so far as the board is concerned and a civil servant’s right of appeal to it (para 10120): the code provides ‘A UK-based civil servant under notice of dismissal or compulsory premature retirement (other than on medical grounds) may appeal to the Civil Service Appeal Board … ' Succeeding paragraphs provide for a notice of appeal to the board by the civil servant and for his submission of a full case in writing to the secretary of the board setting out his contentions. The code then continues (para 10132):
‘The Board will then send the employing department a copy of the appellant’s full case and will invite them to explain the reasons for their action and to comment, if they wish, on any points made by the appellant. The department should reply within 21 days and the Appeal Board will send a copy of the reply to the appellant.’
Then in so far as procedure is concerned the relevant parts of the code are as follows:
‘10133 In considering each case, the Appeal Board will apply the following procedure: a. The Board may invite either party to give further evidence orally (see sub-paragraph b. below) or in writing. If, as he is entitled to do, the appellant has asked a friend, who may be a colleague or a representative of his Trade Union, to assist him with his case, that person may submit evidence on his behalf. b. The appellant is entitled, if he wishes, to appear before the Appeal Board in person, whether or not he is invited to do so, and to be assisted by a friend. (The Secretary of the Appeal Board will notify the appellant in advance of the date on which the Board is to consider his case and will ask him if he intends to exercise his right to
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appear.) If he does appear before the Board his department will be invited to be represented. c. The appellant is entitled to receive a copy of his department’s statement, which should contain all the relevant facts, explaining the reason for its decision, and the Appeal Board will, if the appellant wishes and subject to consideration of security, require the department to give him access to other papers which the Board considers he should use for the purpose of presenting his case. Access to annual reports should not be opposed on grounds of security.
10134 The Appeal Board for each case will consist of 3 people sitting together: a permanent Chairman (or Deputy Chairman as alternate), and 2 members, one drawn from a panel nominated by the Official Side, and one from a panel nominated by the Staff Side. The Appeal Board will operate without undue formality. Its purpose is to decide whether the decision to retire prematurely or to dismiss is fair. If the Board decides that it is not, it may recommend to the head of the employing department either that the appellant shall not be retired or dismissed; or that compensation, or additional compensation in a case of premature retirement, should be paid. If the Board considers that some other action is more appropriate it will recommend accordingly.
10135 If a recommendation not to retire or dismiss is made, the head of the appellant’s department will decide whether the decision must stand, and his decision will be final … If a recommendation not to retire or dismiss is rejected by the department, the Appeal Board will consider whether to recommend compensation, or additional compensation in the case of premature retirement.
10136 The Secretary to the Appeal Board will notify the appellant of the Board’s recommendation, or its revised recommendation if any, and the employing department will notify him and the Appeal Board of the decision of the head of the department.
10137 The employing department shall pay any compensation recommended by the Appeal Board.’
The board performs two other functions under the provisions of the code (see paras 4286 to 4289). The Treasury has power to withhold superannuation benefits in whole or in part if a civil servant or former civil servant is convicted of an offence under the Official Secrets Acts 1911 to 1939, or an offence in connection with any employment to which the Principal Civil Service Pension Scheme 1974 applies, being an offence certified by a minister either to have been gravely injurious to the state or to be liable to lead to serious loss of confidence in the public service. If the Treasury proposes to exercise such powers the individual concerned is entitled to appeal to the board ‘whose judgment on whether or not superannuation benefits should be forfeited will be accepted by the Treasury’.
Third, paras 9923 to 9934 of the code relate to political activities by civil servants. Paragraph 9923 points out that from the nature of the work which a civil servant is required to do and the context in which he has to do it, there must be certain restrictions on the type of political activities in which a civil servant is allowed to participate and the extent to which he may do so will of course depend on his position and seniority. For these reasons the paragraphs provide that certain civil servants require specific permission from their department to engage in certain specific political activity. By para 9942 it is provided that ‘Civil servants may appeal against a department’s refusal to grant them permission to undertake political activities to the Civil Service Appeal Board’. The remainder of that paragraph and the following ones lay down the procedure for such appeals in such circumstances, which is very much the same as the procedure adopted by the board on an appeal by a civil servant subject to a notice of dismissal.
In summary, therefore, the board is given jurisdiction by the code to hear appeals by civil servants against notices of intention to dismiss, against proposals by the Treasury to withhold superannuation benefits on conviction of specific offences and against refusals
Page 691 of [1988] 3 All ER 686
by a department to grant a civil servant permission to undertake certain political activities.
In addition to appealing to the board in the way I have indicated, on 15 August 1985 the applicant issued an originating application for the determination by an industrial tribunal of the question whether his dismissal by the Inland Revenue was fair. That application was due to be heard on 11 to 13 March 1986, but the hearing has now been postponed pending the outcome of the present proceedings. Nevertheless, the applicant also contends that his application to the industrial tribunal was compromised by an agreement between him and the Revenue on 24 February 1986 under which the latter agreed to pay him £5,000 and to give him a reference stating the reason for the determination of his employment as: ‘contract terminated due to the unsuitability of the job due to my disability.' In so far as the reference was concerned, this was, so the applicant contends, to ensure that he would not be prejudiced in his search for alternative employment by any suggestion that he had been unfit for the job with the Revenue. On 21 March 1986 the applicant issued a writ in the Queen’s Bench Division seeking to enforce the compromise which he alleges he reached with the Revenue of his industrial tribunal proceedings. This last litigation is continuing and has reached the stage of an order for directions and discovery.
In these circumstances, the substance of the applicant’s contentions is that the decision of the board on the Inland Revenue’s notice to determine his employment is subject to judicial review and that, as the board gave no or no adequate reasons for their decision upholding the determination, this court should order such review and that the decision of the board should be brought up and quashed. For the respondents, the first contention is that the applicant had what I may describe as an ‘ordinary’ contract of employment with the Crown, albeit that it was determinable at will. Second, on the authority of R v East Berkshire Health Authority, ex p Walsh [1984] 3 All ER 425, [1985] QB 152, the decision of the board in the instant case was not one within the public domain and consequently not subject to judicial review by this court. Third, and in any event, having regard to the applicant’s proceedings before the industrial tribunal and his litigation about their alleged compromise, this court ought not to exercise its discretion to grant judicial review, even if in all the circumstances it had the power to do so.
The first issue in this case, therefore, is whether the board’s decision on the applicant’s appeal against his dismissal is capable of challenge in this court by means of judicial review. This will only be if there was a public or administrative element in the board’s jurisdiction to hear and decide such an appeal, in other words, whether an issue of public law was involved. The test is relatively simple to state, but by no means easy to apply. As Sir John Donaldson MR said in R v Panel on Take-overs and Mergers, ex p Datafin plc [1987] 1 All ER 564 at 577, [1987] QB 815 at 838:
‘In all the reports it is possible to find enumerations of factors giving rise to the jurisdiction, but it is a fatal error to regard the presence of all of those factors as essential or as being exclusive of other factors. Possibly the only essential elements are what can be described as a public element, which can take many different forms … ’
Further, the decision of this court in Walsh’s case makes it clear that the mere fact that an applicant is employed by a public authority does not of itself inject the necessary element of public law so as to attract the remedies of administrative law or judicial review.
It was argued in the first place in the instant case that the board’s decision was amenable to judicial review because its powers derived from the exercise by the Crown of the prerogative. The board was set up by the Minister for the Civil Service under powers delegated by the 1982 Order in Council and thus it was suggested on the authority of Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935, [1985] AC 374 the CCSU case that its decisions were amenable to judicial review. I cannot accept this argument. Certainly the House of Lords decided in the CCSU case that the fact that a
Page 692 of [1988] 3 All ER 686
decision is made or action is taken in exercise of the prerogative is no reason why such a decision or action should not be amenable to the control of the courts by way of judicial review. What they did not decide, however, was that every decision made or action taken in exercise of the prerogative was for that reason alone amenable to judicial review.
A material, but by no means decisive consideration on this issue may be whether the applicant had in law a contract of service with the Crown. Although each case must depend on its own particular facts, we were shown many decided cases relevant to the position of civil servants generally. In 1820 it was apparently taken for granted by Chitty in The Prerogatives of the Crown that a petition of right would lie ‘where the King does not pay a debt, as an annuity, or wages etc., due from him’ (see Kodeeswaran v A-G of Ceylon [1970] AC 1111 at 1119 per Lord Diplock). Nevertheless, due substantially to the procedural difficulties involved in bringing suit against the Crown before 1947, we were shown no authority decisive of the question whether the Crown can, or indeed ever has entered into a contract of employment with its servants, in the absence of a statutory power to do so. The great majority of the authorities to which we were referred dealt with and were decided by recourse to the principle that the Crown always has power under the prerogative to terminate the service of any of its servants at will and at any time. If any authority were needed for this proposition, which is in truth axiomatic, it can be found in Dunn v R [1896] 1 QB 116, [1895–9] All ER Rep 907.
Because of this and because the Crown cannot fetter or restrict its prerogative powers (see Rederiaktiebolaget Amphitrite v R [1921] 3 KB 500 at 503–4, [1921] All ER Rep 542 at 544) it was submitted for the applicant that the Crown cannot enter into a contract of employment with its servants. An ‘agreement’ which can at least be determined, if not varied, at will by one of the parties to it, could not be a contract because it did not create rights and obligations enforceable in the courts of England and Wales. Our attention was drawn to the dictum of Lord Goddard CJ in IRC v Hambrook [1956] 1 All ER 807 at 811, [1956] 2 QB 641 at 654:
‘If I may be bold enough to express a conclusion on a matter on which the Judicial Committee hesitated in Reilly v. R. ([1934] AC 176, [1933] All ER Rep 179), it is that an established civil servant is appointed to an office and is a public officer, remunerated by moneys provided by Parliament, so that this employment depends not on a contract with the Crown but on appointment by the Crown, though there may be, as indicated in Reilly v. R. exceptional cases, as for instance an engagement for a definite period where there is a contractual element in or collateral to his employment.’
Nevertheless, Lord Goddard clearly recognised that even in 1956 there was no definite and clear decision whether there is a contract of service between the Crown and its officers in the Civil Service. Further, the view he expressed in the passage just quoted formed no essential part of his decision in that case, nor was it one adopted or repeated by the members of the Court of Appeal, who affirmed Lord Goddard’s decision that the action per quod servitium amisit was not available to the Crown for the loss of the services of a civil servant because that cause of action was limited to the loss of the services of domestic and personal servants (see [1956] 3 All ER 338, [1956] 2 QB 641).
Further, in Reilly v R [1934] AC 176 at 180, [1933] All ER Rep 179 at 181 Lord Atkin said that the Crown’s power to dismiss its servants without notice at will ‘is not inconsistent with the existence of a contract until so determined’. In addition in Kodeeswaran’s case [1970] AC 1111 the Privy Council expressly disapproved of Lord Blackburn’s conclusion in Mulvenna v The Admiralty 1926 SC 842 that an eluctable consequence of the prerogative power to dismiss at will was that a civil servant had no claim in law to arrears of salary accrued due before his dismissal. Lord Diplock said (at 1123):
‘In their Lordships’ view this is a non sequitur. A right to terminate a contract of service at will coupled with a right to enter into a fresh contract of service may in
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effect enable the Crown to change the terms of employment in futuro if the true inference to be drawn from the communication of the intended change to the servant and his continuing to serve thereafter is that his existing contract has been terminated by the Crown and a fresh contract entered into on the revised terms. But this cannot affect any right to salary already earned under the terms of his existing contract before its termination.’
Counsel for the applicant also submitted that Parliament seems to have taken the view that no contract of employment exists between the Crown and civil servants. If it did there would have been no need to include s 138 in the Employment Protection (Consolidation) Act 1978, nor s 1(8) in the Equal Pay Act 1970, nor ss 85(2) and 75(2) respectively in the Sex Discrimination Act 1975 and the Race Relations Act 1976.
It is no doubt because of the substantial amount of employment legislation that there has been in recent years and the tendency that has clearly emerged to treat employment more and more as a matter of contract rather than a question of status, that in Chitty on Contracts (25th edn, 1983) paras 692–693, on the general principles of Crown employment, the editors write:
‘In Kodeeswaran v. Att.-Gen. of Ceylon ([1970] AC 1111), on appeal from Ceylon, the Privy Council held that a person in Crown employment could sue the Crown for arrears of pay in respect of services rendered as a civil servant, and Lord Diplock said that the Crown’s right to terminate at will cannot affect any right to salary already earned under the terms of his existing contract before its termination (at 1123).” It is submitted that the reasoning of Lucas v. Lucas ([1943] 2 All ER 110, [1943] P 68) would not now be followed and that a civil servant is entitled to recover arrears of pay. An action may also be brought against the Crown to recover either a reasonable or (probably) the agreed remuneration due for professional services … There is no authority on the questions whether the Crown can sue its employees for breach of contract, or a third party for inducing such breach. It is submitted that such actions should lie. This is certainly so if the modern view, that the relationship between the Crown and its employees is contractual but subject to the Crown’s right to dismiss at pleasure, is correct. However, even if it is not, the rule entitling the Crown to dismiss its employees at pleasure exists for the protection of the Crown; and the policy of the rule does not require reciprocal protection to be given to Crown employees. A fortiori, third parties who induce Crown employees to break their engagements with the Crown should not be protected.’
In this confused and uncertain state of the law, counsel for the Attorney General submitted that we should go back to first principles. In so far as the present applicant is concerned, there was clearly an offer and acceptance of the post with the Inland Revenue from which he was subsequently dismissed. Clearly also the second necessary contractual element of consideration was present. The critical question, however, was whether there was indeed an intent to create legal relations, namely in the context of the present case, a contract between the Crown and the applicant which was to be enforceable in the courts. On behalf of the applicant, counsel argued that there was not in the light of the provisions in the schedule attached to the letter making the original offer and, for instance, paras 11 and 14 of the Civil Service code, all of which I have quoted earlier in this judgment.
In reply, counsel for the Attorney General submitted that where the incidents of a relationship are clear, the law does not concern itself overmuch with how the parties have described the nature of that relationship. There are many cases in the books in which the courts have held to be a tenancy that which the parties have called a licence. Thus although the Crown was disclaiming the existence of any contract of service in the instant case, if one found that all the incidents of such a relationship were present, then the courts should not be averse to holding that such a contract existed.
Whilst the legal principle is certainly well established, I do not find it easy to apply in
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the context of an inquiry whether or not one party had the intention to create legal relations. Further, in the present case I think that other evidence before us has an important bearing on this question.
It is clear from paras 14 to 17 of the affidavit of Miss Anne Mueller, the second Permanent Secretary of the Cabinet Office (MPO) that in recent years the Cabinet Office (Management and Personnel office) has been reappraising the nature of the relationship between civil servants and the Crown, particularly in the light of the rapid increase and development of legislation and decided cases in the employment field. Having decided in about July 1985 to take legal advice, its tenor when received was that the relationship between the Crown and its employees was indeed contractual. As a result, it was realised that passages in the code, particularly those to which I have already referred, would require revision. As Miss Mueller deposed, ‘The current versions did not reflect the advice given on the true relationship in law between a civil servant and the Crown’. Draft replacement pages which make it clear that civil servants do have a contract of employment are currently being considered.
On this evidence and the relevant paragraphs of the code, I do not think that it is shown that prior to about 1985 the Crown intended that civil servants should have contracts of employment. Thus, in my opinion, the applicant’s service with the Inland Revenue was not pursuant to any contract of employment enforceable in the courts, but merely as an appointment on the terms of the letter of 10 November 1982 to which I have already referred.
Nevertheless, there is in my view nothing unconstitutional about civil servants being employed by the Crown pursuant to contracts of service, and if the Cabinet Office’s reappraisal continues on the present lines I anticipate that this is what will happen. Such a situation would in my view be wholly consistent with a modern and realistic view of the position of civil servants vis-à-vis the Crown.
In the instant case, however, in the absence of a contract of service between him and the Crown I think that one is bound to hold that there was a sufficient public law element behind the applicant’s dismissal from his appointment with the Inland Revenue and the hearing of this appeal by the board to entitle him to apply for judicial review of the latter and he has obtained leave to do so. Indeed, even in a case of a civil servant employed under a contract with the Crown, I think that the circumstances of his dismissal and any appeal to the board might still be susceptible to judicial review by the courts under RSC Ord 53. Nevertheless, as I said in Walsh’s case [1984] 3 All ER 425, [1985] QB 152, I think that at the present time in at least the great majority of cases involving disputes about the dismissal of an employee by his employer, the most appropriate forum for their resolution is an industrial tribunal. The courts should not be astute to hold that any particular dispute is appropriate for consideration under the judicial review procedure. I would hope and expect, therefore, that where a civil servant was alleging unfair dismissal by the Crown it would only be in the very exceptional case, whether his employment was founded in contract or not, that a single judge would grant leave to proceed by way of judicial review rather than by way of complaint to an industrial tribunal.
As I said earlier in this judgment, the only ground on which the applicant now seeks to challenge the decision of the board is that it failed to give reasons for its decision that the determination of his appointment was fair. In so far as the Civil Service code is concerned, there is no express requirement placed on the board to give reasons for any decision of it. According to Mr Forman, the chairman of the board, who has deposed to two affidavits put before us—
‘the purpose of the Board is to provide a non-legalistic and fairly informal means for civil servants to appeal against certain management decisions affecting them, to a body which is independent but experienced in civil service matters.’
In the case of appeals against dismissals for unsatisfactory performance, the board does not attempt to substitute its own view for the views of management. Its primary concern
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is to discover whether assessments of an appellant’s performance were undertaken systematically, with reasonable objectivity and fairness, and in accordance with any agreed or established practice and procedure. As in the instant case, the decision of the board is contained in a report. This itemises the documents submitted by each party and summarises the essential facts and arguments put foward in the written representations and at the hearing. The board considers it inappropriate for its report to include full reasons for its decision with an assessment of every point made. The members of the board have no legal or forensic training; the hearing is not governed by detailed rules of practice or evidence; if the board were to give reasons for its decisions, it is likely that comparisons would be drawn between apparently similar cases and for a body of precedent to be generated. This would detract from the non-legalistic and objective approach taken by the board to the merits of an individual case.
An affidavit sworn by Mr Peter Jones, the secretary of the Council of Civil Service Unions, was also put before us. This fully supported the present approach of the board and Mr Forman and stressed that the board is concerned ‘to elicit the relevant facts in an atmosphere of informality’. It is interesting in passing to observe that this paragraph of Mr Jones’s affidavit continues:
‘If a more formal examination is required, civil servants (apart from those employed at GCHQ and Prison Officers) have the right of access to industrial tribunals and, thereafter, the full panoply of higher appeal arrangements.’
Nevertheless it must be remembered that one of the considerations which an industrial tribunal might take into account on an unfair dismissal complaint would be the manner in which and the reasons why the board had upheld a dismissal.
In the present case the board produced a report precisely on the lines described by Mr Forman in his affidavit. This concluded:
‘Having considered very carefully the written statements and the oral submissions made at the hearing the Board conclude that the Department’s decision to terminate Mr. Bruce’s appointment was fair.’
It is the absence of any expressed reasons for that conclusion of which the applicant complains in this case.
The question whether a domestic tribunal, statutory or set up under the prerogative, should give reasons for its decisions, and whether a failure to do so can form the ground of a challenge in the courts, has been considered in a considerable number of cases, to some of which we have been referred. Although the decision of the Court of Appeal of New South Wales in Osmond v Public Service Board of New South Wales [1984] 3 NSWLR 447 was overruled, in so far as the common law of Australia is concerned, by the decision of the High Court of Australia (1986) 63 ALR 559 in the same case, the majority judgments in the Court of Appeal contained a detailed analysis of many of the authorities not only in this country but throughout the Commonwealth which respectfully I have found of substantial assistance.
In this country the obligation on a tribunal to give reasons arises from the application of the principles of natural justice which, as Lord Roskill suggested in the CCSU case [1984] 3 All ER 935 at 954, [1985] AC 374 at 414, might be better replaced by speaking of a duty to act fairly. Of necessity what is fair in a given case will depend on its particular facts and circumstances and may not be the same as in the next case. One of the considerations of fairness in this context was expressed by Donaldson P in the National Industrial Relations Court in Alexander Machinery (Dudley) Ltd v Crabtree [1974] ICR 120 at 122 in these terms:
‘… in the absence of reasons it is impossible to determine whether or not there has been an error of law. Failure to give reasons therefore amounts to a denial of justice and is itself an error of law … The overriding test must always be: is the
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tribunal providing both parties with the materials which will enable them to know that the tribunal has made no error of law in reaching its findings of fact?’
However, in R v Immigration Appeal Tribunal, ex p Kahn (Mahmud) [1983] 2 All ER 420 at 423, [1983] QB 790 at 794 Lord Lane CJ added his own gloss:
‘Speaking for myself, I would not go so far as to indorse the proposition set forth by Donaldson P that any failure to give reasons means a denial of justice and is itself an error of law. The important matter which must be borne in mind by tribunals in the present type of circumstances is that it must be apparent from what they state by way of reasons first of all that they have considered the point which is at issue between the parties, and they should indicate the evidence on which they have come to their conclusions. Where one gets a decision of a tribunal which either fails to set out the issue which the tribunal is determining either directly or by inference, or fails either directly or by inference to set out the basis on which it has reached its determination on that issue, then that is a matter which will be very closely regarded by this court, and in normal circumstances will result in the decision of the tribunal being quashed. The reason is this. A party appearing before a tribunal is entitled to know, either expressly stated by it or inferentially stated, what it is to which the tribunal is addressing its mind. In some cases it may be perfectly obvious without any express reference to it by the tribunal; in other cases it may not. Second, the appellant is entitled to know the basis of fact on which the conclusion has been reached. Once again in many cases it may be quite obvious without the necessity of expressly stating it, in other cases it may not.’
Where they would be otiose, therefore, reasons need not be given. Where they are obvious, there is no need to be repetitious. Where the circumstances are such that if reasons were given they are likely to become stereotyped, then the duty to be fair does not require over-elaboration; in most cases, such as the present, it will not require the board to make detailed or lengthy findings of fact. Further, where by s 138 of the Employment Protection (Consolidation) Act 1978 a civil servant, who has had his appointment terminated, has the right to complain to an industrial tribunal that his ‘dismissal’ has been unfair, then the desirability of the domestic tribunal, the board, to give reasons for its decision on an appeal against a dismissal, will not be as cogent as it would be if no complaint to an industrial tribunal could be made. Thus in my opinion, apart from the question of reviewability, whether or not a civil servant has a contract of employment with the Crown cannot in logic affect the answer to the question whether the board should give reasons for its decision on an appeal against termination. In addition, given the right to proceedings before an industrial tribunal, I myself would hesitate to require the board to give reasons when none might be required from the similar domestic appeal tribunal in ICI or some other organisation of the size and complexity of the civil service, but in the private sector.
In these circumstances, as any view which I expressed on the desirability of the board giving reasons might have potentially wide consequences in relation to the obligations of similar tribunals in the private sector, and as I have formed a clear view whether in any event this court should exercise its discretion to grant any relief in the instant case, I prefer to leave any final conclusion whether the board should give reasons for its decisions in circumstances such as the present to another case.
Even if the failure of the board in the instant case to give any reasons for its decision did mean that in law that decision was open to challenge by way of judicial review I have no doubt whatever that it would be a wholly wrong exercise of this court’s discretion to grant the present applicant any relief. Simultaneously with his application to us he has not only started proceedings before an industrial tribunal, but also, as he alleges, he has compromised those proceedings with the board itself and has then started and continued to prosecute civil proceedings in the High Court based on that alleged compromise. In
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my opinion the right course for us to take is to leave the applicant to the other remedies which he seeks in those other proceedings.
I would therefore dismiss this application.
ROCH J. There are two questions in this case. First, can the applicant’s claim to relief be brought by way of judicial review? Second, if it can, should the relief sought by the applicant be granted?
Let me say at once that I agree with May LJ, that the answer to the second question in the present case is that the applicant’s claim to relief should not proceed by way of judicial review; that the discretion which the court has in deciding to grant or withhold relief by way of judicial review should in this case be exercised against the granting of relief, because the applicant has a sufficient opportunity for redress, if indeed he has been wronged, in the proceedings which he has started before the industrial tribunal, or, if those proceedings have been compromised as the applicant now contends, in the High Court action which the applicant has commenced to enforce the alleged settlement.
On the first question my view is that the applicant’s claim for relief can be brought by way of judicial review. The answer to the first question turns on whether the applicant is seeking to enforce some public right or the performance or proper performance by some public or other similar authority of a public duty on the one hand, or a private right arising by contract or statute or under the common law on the other hand. If it is the first, then judicial review is available, subject to the court’s discretion. If the second, then judicial review is not available. As Purchas LJ said in R v East Berkshire Health Authority, ex p Walsh [1984] 3 All ER 425 at 441, [1985] QB 152 at 179:
‘In order that there should be a remedy sought by Mr Walsh which makes available to him the relief granted by Ord 53, it is clear that there must be something more than a mere private contractual right on which the court’s supervisory functions can be focused. Section 31 of the Supreme Court Act 1981, although recognising the wider remedies available under Ord 53, is no statutory justification for extending the area of jurisdiction beyond that of a supervisory function which is to be directed in relation to remedies sought against public or similar authorities whose actions under their statutory or other powers call for the court’s intervention.’
What the applicant seeks in the present case is judicial review of the process and decision of the Civil Service Appeal Board, the decision being that given on 8 January 1986.
Is the board a public or similar authority whose actions under its powers call for the court’s intervention? In my judgment, it is. However, the question requires some exposition of the origin, functions and powers of the board.
Before looking at these aspects of the board, the issue which occupied much of the argument before this court, namely was there a contract of employment between the applicant and the Crown, requires some comment. We were referred to many authorities relevant to this issue. Surprisingly there is no authority which is decisive of the question can the Crown enter into a contract of employment with its servants, in the absence of a statutory power to do so?
For the applicant it was submitted that the Crown cannot enter into a contract of employment with its servants because the Crown cannot divest itself of its prerogative powers, which include the power to alter at any time the terms on which its servants serve the Crown and the power to terminate such service at any time. Nor, it was argued, can the Crown fetter or restrict these prerogative powers. These powers stem from the constitutional principle that the Crown cannot limit its future executive actions. An ‘agreement’ which can be altered or terminated by one of the parties to it, at will, was not a contract, because it did not create rights and obligations enforceable in the law courts of England and Wales.
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For my part, I am not convinced that an ‘agreement’ containing such terms would not amount to a contract in the legal sense. Even with such terms, the servant might be able to recover sums which had accrued due under primary obligations in the agreement prior to the alteration of the terms of the primary obligations or the termination of the contract by the Crown. Moreover, whereas the decided cases establish beyond doubt the Crown’s prerogative power to terminate the services of one of its servants instantly and at will, the decided cases do not establish, in my view, the existence of a prerogative power in the Crown to alter the terms of service of one of its servants at will, save in certain special cases such as the armed forces.
Lord Atkin in Reilly v R [1934] AC 176 at 180, [1933] All ER Rep 179 at 181 indicated that the Crown’s power to dismiss its servants without notice at will, ‘is not inconsistent with the existence of a contract until so determined’.
Lord Goddard CJ in IRC v Hambrook [1956] 1 All ER 807 at 810–812, [1956] 2 QB 641 at 652–654 concluded that civil employment under the Crown did not, in the absence of some special term, include a contractual relationship between the civil servant and the Crown, although he recognised that there was no definite and clear decision as to whether there is a contract of service between the Crown and its officers in the Civil Service. The view that Lord Goddard CJ expressed was not an essential part of the decision in that case, which was a claim brought by the Crown for loss of its servant’s services. Nor was it a view adopted and repeated by the members of the Court of Appeal (see [1956] 3 All ER 338, [1956] 2 QB 641), who affirmed Lord Goddard CJ’s decision that the action per quod servitium amisit was not available to the Crown for the loss of the services of a civil servant because that cause of action was limited to the loss of services of domestic and personal servants.
Thus, in my judgment the Crown can enter into contracts of service with its civil servants, subject to the qualification that it cannot deprive itself by contract of its prerogative power to dismiss its civil servants.
That conclusion as to the power of the Crown does not mean that in the present case there was a contract of employment between the Crown and the applicant. Clearly, the contractual elements of offer and acceptance and consideration were all present. But, as counsel for the Attorney General conceded, a fourth element must be present, namely an intention to create legal relations on the part of the parties.
In my opinion, in this case on 10 November 1982 when the Inland Revenue’s management division offered the applicant ‘formally an appointment as an Established Executive Officer in the Inland Revenue Enforcement Office Worthing’ the Crown did not intend to create legal relations, ie a contract between itself and the applicant which was enforceable in the courts. That letter also contained this section:
‘… if you are willing to accept employment on the basis of the terms contained or referred to in this letter (which include the conditions of service applicable to civil servants set out in the Inland Revenue Staff Handbook) and the attached schedule, will you please sign one copy of the schedule and return it to me together with the enclosed Acceptance Form.’
The schedule contained these words:
‘It is understood however, that in consequence of the constitutional position of the Crown, the Crown has the right to change its employees’ conditions of service at any time, and that they hold their appointments at the pleasure of the Crown.’
In my judgment, those passages make it clear that the Crown did not consider itself or intend itself to be bound by the applicant’s ‘conditions of service’.
Further evidence that the Crown did not in November 1982 intend to create legal relations with its civil servants is to be found in the Civil Service Pay and Conditions of Service Code. Paragraph 11 of that code gives a short account of the evolution of the Civil Service, and para 12 recounts the origins of Treasury control over the organisation and
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regulation of the Civil Service, and refers to the source of the Minister for the Civil Service’s power to make regulations and give instructions from time to time for controlling the conduct of Her Majesty’s Home Civil Service. Then para 14 states:
‘For the most part, the relationship between the civil servant and the Crown remains one regulated under the prerogative and based on personal appointment. As such, a civil servant does not have a contract of employment enforceable in the Courts but rather a letter of appointment and technically the Crown still retains the right to dismiss a civil servant at pleasure. Recently, however, the legal position of civil servants has been radically changed by the growing trend for legislation to apply to the Civil Service either directly, by the provision of the Acts themselves or by Governmental assurances that the conditions applying to civil servants will not be less favourable than those applying to other employees.’
This paragraph makes clear the Crown’s position that the civil servant does not have a contract of employment enforceable in the courts, merely a letter of appointment. The terms of the letter of 10 November 1982 to the applicant are wholly consistent with its being a letter of appointment.
The stance taken by counsel for the Minister of the Civil Service in the case of Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935, [1985] AC 374 was consistent with the Crown in the autumn of 1984 being of the view that no contract of employment existed between itself and those employed at Government Communications Headquarters.
In her affidavit at paras 14 to 17 Miss Anne Mueller, the second Permanent Secretary of the Cabinet Office (MPO), recounts the gradual dawning of a new approach by the Cabinet Office to this question. The sun seems to have peeped over the eastern horizon in early 1985, and the decision to take legal advice seems to have been made in July 1985. At some stage the Cabinet Office received advice, the general tenor of which was that the relationship between the Crown and its employees was indeed contractual. In the light of this new dawn, it was perceived that the code and the schedule in their current versions did not reflect the advice given on the true relationship in law between a civil servant and the Crown, and that redrafting would be necessary. Clearly the first two sentences of para 14 of the current code have to be deleted and the newly revealed truth substituted.
I appreciate that the Crown’s belief as to the legal position between itself and its civil servants is not the same thing as its intention to create legal relations. I bear in mind the authorities which say that it is the substance and not the form of the transaction to which courts must have regard. Nevertheless, I do not see how the Crown can be heard to say that despite its assertions that no contract existed between its civil servants and itself, nevertheless it intended to create legal relations, so that the fourth element required for the formation of a contract existed.
I am prepared to accept that the Crown now believes that the public interest is better served by there being contracts between itself and its civil servants; contracts which will contain terms which the Crown will be able to enforce in the courts, and that the Crown now intends to create contracts with its civil servants. But I do not accept that that change in approach had taken place before November 1982. There is no evidence that it had. The evidence has failed to persuade me that in 1982 the Crown was, like M Jourdain speaking prose, making contracts without knowing it.
Turning to the board itself, this body was set up by an administrative act of the Minister for the Civil Service acting pursuant to power which he enjoys under art 4 of the Civil Service Order in Council 1982. That article provides:
‘… (a) The Minister for the Civil Service may from time to time make regulations or give instructions … (ii) for controlling the conduct of the service, and providing for the classification of all persons employed therein and, so far as they relate to matters other than remuneration, expenses and allowances, the conditions of service of all such persons … ’
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The Civil Service Pay and Conditions of Service Code, which I shall call the code, is promulgated by the minister in pursuance of these powers. Paragraphs 10120 to 10149 of the code set out the jurisdiction, powers and constitution of the board. The minister promulgated these paragraphs of the code following an agreement between the official and staff sides of the Civil Service National Whitley Council reached in the context of continuing labour relations discussions and negotiations. The board is an independent body. The appeal board for each case consists of three people sitting together being either the permanent chairman or deputy chairman as alternate and two members, one being drawn from a panel nominated by the official side and one being drawn from a panel nominated by the staff side.
The board has three functions. First, it hears appeals by civil servants against decisions by the department employing the civil servant to dismiss or retire prematurely the civil servant concerned. Its purpose in such cases is to decide whether the decision to retire prematurely or to dismiss is fair. The evidence indicates that the board looks at the fairness of the procedure leading to the decision as well as the fairness of the decision itself.
The second function of the board is contained in para 9942 of the general principles of conduct section of the code. It is to hear appeals by civil servants against a department’s refusal to grant them permission to undertake political activities. The section of the code dealing with political activities begins with a statement of intent. That statement of intent reads:
‘Civil servants owe their allegiance to the Crown. In its executive capacity, the authority of the Crown is exercised through its Government of the day. Civil servants are therefore required to discharge loyally the duties assigned to them by the Government of the day of whatever political persuasion. For the Civil Service to serve successive Governments of different political complexions it is essential that Ministers and the public should have confidence that civil servants’ personal views do not cut across the discharge of their official duties. The intent of the rules governing political activities by civil servants is to allow them the greatest possible freedom to participate in public affairs without infringing these fundamental principles. The rules are concerned with political activities liable to give public expression to political views, rather than the privately held beliefs and opinions.’
The code then goes on to set out certain rules governing political activity by civil servants.
Paragraphs 9943 and 9944 of the code lay down the procedure for the hearing of the appeals. The procedure, in effect, requires the appellant to submit a case in writing, which is forwarded to the employing department, which in turn submits a written case, a copy of which is sent to the appellant. This stage is followed by the receipt by the board of evidence and argument. That evidence and argument may be oral or in writing or partly oral and partly in writing. The board has the power to invite evidence from the employing department and to require the department to give the appellant access to papers which the board consider the appellant should see for the purpose of presenting his or her case. The board then decides whether the activity would or would not be inadvisable in the circumstances of the case, and it can recommend to the head of the employing department that the political activity concerned should be allowed and may recommend and specify conditions that the board considers should be applied to the permission. If the head of department does not accept the board’s recommendation that permission should be granted, if that is the board’s recommendation, the case must be submitted to the minister in charge of the department concerned.
The third function of the board is to hear appeals by individual civil servants from a decision by the Treasury to withhold superannuation benefits in whole or in part from a civil servant (which includes a former civil servant) who has been convicted of an offence under the Official Secrets Acts and has been sentenced to a term of imprisonment of at
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least ten years or to terms of imprisonment on the same occasion which in aggregate amount to at least ten years, or of an offence in connection with any employment to which the Principal Civil Service Pension Scheme 1974 applies, being an offence which is certified by a minister of the Crown either to have been gravely injurious to the state or to be liable to lead to serious loss of confidence in the public service. In this case the judgment of the board on whether or not superannuation benefits should be forfeited will be accepted by the Treasury (see para 4289 of the disciplinary procedures section of the code).
In my judgment the board is a board or tribunal exercising functions of a judicial character and as such is a public or similar authority whose actions under its powers may call for the court’s intervention.
The board was created by a minister of the Crown using the prerogative power of the Crown conferred on him by the 1982 Order in Council. It is, as the code states, an independent body set up to hear appeals by servants of the Crown against decisions of the executive which affect those civil servants. The method of its creation and the functions it has to perform make the board totally different from an appeal body created by a large commercial corporation to hear appeals by its employees against decisions by the management of such a corporation to discipline or dismiss its employees.
There is no contract between the individual civil servant and the board, whatever may be the position between the civil servant and the Crown. If the board refused to entertain an appeal by an individual civil servant, there is no private right on which the civil servant could rely to require the board to hear his appeal from, for example, a decision to dismiss him or a decision to refuse him permission to participate in political activity or a decision by the Treasury to forfeit his superannuation benefits.
All three of the board’s functions, and I do not consider that for the purpose of deciding whether the board is a body amenable to the court’s supervision by way of judicial review these three functions can be considered separately, relate to the fair and proper administration of the civil service. In the case of each function the issue could go beyond a simple dispute between the individual civil servant and the ministry in which he works, and involve the public interest that the civil service should be administered in a way which is free of political bias or other improper motive. Again, if I may echo the words of Purchas LJ in Walsh’s case [1984] 3 All ER 425 at 441, [1985] QB 152 at 179, the board’s actions under the powers given to the board by the code could, in a proper case, call for the court’s intervention.
I have no doubt that in the overwhelming majority of cases of dismisal or premature retirement, no infringement of a public law right will arise. The present case is one such case. In such cases the court can and will in its discretion refuse an application for judicial review, if such an application is made, and leave the civil servant to his other remedies. That does not mean that the existence of the supervisory jurisdiction of the court should be denied. The application of the Wednesbury principles (see Associated Provincial Picture Houses v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223) will ensure that the court’s functions in relation to the board will not involve the court in substituting its own views for those of the board but will be strictly supervisory.
On the issue whether the board is required to give reasons for its decision, I agree with May LJ that it is not necessary for that matter to be decided in this instance. I would nevertheless make two observations on that question. The first is that the functions of the board in hearing appeals against decisions of dismissal and early retirement are not confined to reviewing the procedure by which the decision was reached. If Mr Forman, the chairman of the board, in para 6 of his second affidavit, sworn on 29 September 1986, intended to say that, then in my view he was wrong.
The board is given power to recommend reinstatement and, if that recommendation is not accepted by the ministry concerned, to award compensation to the appealing civil servant. To discharge those functions the board must look at the merits of the decision
Page 702 of [1988] 3 All ER 686
to dismiss or retire prematurely. Further, at para 10134, the code states, ‘The Appeal Board will operate without undue formality. Its purpose is to decide whether the decision to retire prematurely or to dismiss is fair’.
The second observation is this: the board in the present case set out the evidence and submissions which it received and heard ‘in extenso’. Their conclusion is contained in the final paragraph of three lines. The addition of one or two equally short paragraphs stating in outline the reasons which must have existed for that conclusion would ask little of the board, would give a greater sense of fairness and, if the reasoning is stated shortly and factually, would avoid the creation of a body of precedent, which, I would agree with Mr Forman, is a result devoutly to be wished.
For these reasons I agree with May LJ that this application should be dismissed.
Application dismissed.
Solicitors: Marsh & Ferriman, Worthing (for the applicant); Treasury Solicitor.
Carolyn Toulmin Barrister.
Re Charge Card Services Ltd
[1988] 3 All ER 702
Categories: SALE OF GOODS
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): SIR NICOLAS BROWNE-WILKINSON V-C, NOURSE AND STUART-SMITH LJJ
Hearing Date(s): 7, 8, 9 JUNE, 4 JULY 1988
Sale of goods – Payment – Credit card – Nature of credit card transaction – Effect of credit card company’s liquidation – Company operating credit card system for purchase of petrol at garages – Company going into liquidation – Debts outstanding from cardholders not paid by company to garages – Whether cardholders’ debts due to company or to garages – Whether liquidator bound to pay garages from money collected from cardholders before company had paid garages.
A company operated a charge card scheme under which it issued charge cards to cardholders who could obtain petrol and other products from garages by presenting the card and signing a sales voucher completed by the garage. The cardholder and the garage retained a copy of the voucher and a copy was sent to the company. The company then paid the face value of the voucher, less agreed commission, to the garage and the cardholder paid the full face value to the company. The company financed its business by factoring its debts to a finance company under an agreement whereby all present and future debts owed by cardholders to the company were assigned to the finance company, which paid to the company the amount of the debts less a discounting charge. The company went into liquidation owing almost £2m to unsecured creditors. At the date of liquidation the company owed substantial sums to garages which had supplied fuel on customers’ charge cards, while a substantial sum due from cardholders was outstanding for petrol and other products purchased on charge cards prior to the liquidation. On a summons issued by the liquidator of the company, the issue arose whether the receivables due from the cardholders were debts due to the finance company as assignees of the company’s receivables or belonged to the garages. The garages contended that they had only accepted payment for petrol by means of the charge card as a conditional discharge of the purchasers’ obligation to pay the price of the petrol and since they had not been paid by the company they were entitled to recover payment directly from the cardholders as purchasers of the petrol. The judge rejected the garages’ claim and held that the price owed for the purchase of petrol from the garages was unconditionally discharged by the acceptance of the charge card. He accordingly held that the finance company was
Page 703 of [1988] 3 All ER 702
absolutely entitled to the moneys collected by the liquidator from cardholders. The garages appealed.
Held – The appeal would be dismissed for the following reasons—
(1) There was no general principle of law that, whenever a method of payment was adopted which involved a risk of non-payment by a third party, there was a presumption that the acceptance of payment through the third party was conditional on the third party making the payment and that, if he failed to pay, the original obligation of the purchaser remained. Instead, each method of payment had to be considered in the light of the consequences and other circumstances attending that type of payment (see p 707 a d e h and p 711 f, post); W J Alan & Co Ltd v El Nasr Export and Import Co [1972] 2 All ER 127 considered.
(2) Underlying a credit card or charge card transaction was a contractual scheme consisting of three separate bilateral contracts between the credit company and the supplier, the credit company and the cardholder, and the cardholder and the supplier respectively, all of which predated the individual contracts of sale by credit card. Before entering into the contract made between the cardholder and the garage both parties had entered into their respective contracts with the company and their underlying assumption must have been that on completion of the sale of the petrol by use of the charge card the parties’ future rights and obligations would be regulated by those underlying contracts. Accordingly, the transaction was one in which the garage, by accepting payment by card in substitution for payment by cash as an unconditional discharge of the price, was to be taken to have accepted the company’s obligation to pay in place of the customer’s liability to pay (see p 706 b to e, p 708 f to j and p 711 f, post).
(3) On the true construction of the agreement between the company and the cardholder the company’s authority to debit the cardholder’s account was an authority to debit the account in respect of liabilities incurred as well as payment made. Therefore the cardholder was liable to pay the company whether or not the company had paid the garage. Accordingly, payment by credit card was an absolute, not a conditional, discharge of the buyer’s liability and the cardholder’s obligations to the garages were absolutely, not conditionally, discharged by the garage accepting the voucher signed by the cardholder (see p 710 e to h and p 711 d f, post).
Decision of Millett J [1986] 3 All ER 289 affirmed.
Notes
For payment of the price of goods, see 41 Halsbury’s Laws (4th edn) para 800, and for cases on the subject, see 39(2) Digest (Reissue) 413, 3325–3330.
Cases referred to in judgments
Alan (W J) & Co Ltd v El Nasr Export and Import Co [1972] 2 All ER 127, [1972] 2 QB 189, [1972] 2 WLR 800, CA.
Allen v Royal Bank of Canada (1925) 95 LJPC 17.
Bolt and Nut Co (Tipton) Ltd v Rowlands Nicholls & Co Ltd [1964] 1 All ER 137, [1964] 2 QB 10, [1964] 2 WLR 98, CA.
London Birmingham and South Staffordshire Banking Co Ltd, Re (1865) 34 Beav 332, 55 ER 663.
Man (E D & F) Ltd v Nigerian Sweets and Confectionery Co Ltd [1977] 2 Lloyd’s Rep 50.
Maran Road Saw Mill v Austin Taylor & Co Ltd [1975] 1 Lloyd’s Rep 156.
Moorcock, The (1889) 14 PD 64, [1886–90] All ER Rep 530, CA.
Romer & Haslam, Re [1893] 2 QB 286, CA.
Sayer v Wagstaff (1844) 14 LJ Ch 116, LC.
Cases also cited
Lewis v Great Western Rly Co (1877) 3 QBD 195, CA.
Liverpool City Council v Irwin [1976] 2 All ER 39, [1977] AC 239, HL.
Page 704 of [1988] 3 All ER 702
Metropolitan Police Comr v Charles [1976] 3 All ER 112, [1977] AC 177, HL.
Ornstein v Hickerson (1941) 40 F Supp 305, US DC, ED La.
Prenn v Simmonds [1971] 3 All ER 237, [1971] 1 WLR 1381, HL.
Reardon Smith Line Ltd v Hansen-Tangen [1976] 3 All ER 570, [1976] 1 WLR 989, HL.
Richardson (Inspector of Taxes) v Worrall [1985] STC 693.
Sale Continuation Ltd v Austin Taylor & Co Ltd [1967] 2 All ER 1092, [1968] 2 QB 849.
Shell UK Ltd v Lostock Garage Ltd [1977] 1 All ER 481, [1976] 1 WLR 1187, CA.
Vivacqua Irmaos SA v Hickerson (1939) 193 La 495, La SC.
Appeal
Copes Service Stations Ltd, on their own behalf and as representing all the garages which were or had been franchisees under the Motor Agents Association Fuel Card Scheme, appealed against the decision of Millett J ([1986] 3 All ER 289, [1987] Ch 150) given on 12 June 1986 whereby he held, on a summons issued by the liquidator of Charge Card Services Ltd (the company), that debts due from holders of Motor Agents Association Fuel Cards issued by the company in respect of petroleum and other products obtained by the cardholders with the use of such charge cards from the franchisee garages were due to Commercial Credit Services Ltd as assignees of the company’s receivables. The facts are set out in the judgment of Sir Nicolas Browne-Wilkinson V-C.
Robin Potts QC and Michael Todd for the garages.
J M Chadwick QC and Richard Gillis for Commercial Credit.
Richard Hacker for the liquidator.
Cur adv vult
4 July 1988. The following judgments were delivered.
SIR NICOLAS BROWNE-WILKINSON V-C. This is an appeal from the judgment of Millett J ([1986] 3 All ER 289, [1987] Ch 150). The litigation arises out of the winding up of Charge Card Services Ltd (the company), which ran a scheme, the Motor Agents Association Fuel Card Scheme, for the purchase of petrol and other products from approved garages with the use of charge cards issued by the company. The company ceased to trade on 21 January 1985 and went into creditors’ voluntary liquidation on 4 February 1985 with an anticipated deficiency of some £1·9m. At the date of the liquidation, the company owed substantial sums to garages which had supplied fuel in return for vouchers signed by Fuel Card holders. There were also substantial sums owing to the company from card holders who had purchased fuel with the use of Fuel Cards before the date of the liquidation. Under a factoring agreement the company had assigned all its receivables to the respondent to this appeal, Commercial Credit Services Ltd.
Soon after the winding up, there were disputes as to who was entitled to the moneys owed to the company by the cardholders. Under an order of the court made in the winding up, the liquidator of the company has collected rather over £2m net from the cardholders, which moneys have been paid into a separate account pending the determination in these proceedings of the question to whom they belong.
The dispute is between the garages who supplied fuel but have not been paid by the company on the one hand and Commercial Credit, as assignees of the company’s receivables, on the other. Under a representation order made by the court, the appellants, Copes Service Stations Ltd, are representatives of such garages. The garages claim that the garages only accepted payment for fuel by means of the Fuel Card as a conditional discharge of the purchasers’ obligation to pay the price for the fuel and that accordingly, since the company had failed to honour its obligation to pay the garages, the garages were entitled to recover the price direct from the purchasers of the fuel, ie the
Page 705 of [1988] 3 All ER 702
cardholders. So, say the garages, the sums collected by the liquidator belong to the garages as representing payments of the purchase price due to the garages. Commercial Credit, on the other hand, contend that the moneys collected by the liquidator represent the debts due from the cardholders to the company of which they are the assignees.
The judge rejected the garages’ claim that the payment by credit card was conditional and held that the price owed for the purchase of fuel from the garages was unconditionally discharged by the acceptance of the Fuel Card. He accordingly held that Commercial Credit were absolutely entitled to the moneys collected by the liquidator under the order of the court. The garages appeal against that decision. The judge at the same time decided a question as between the liquidator and Commercial Credit as assignees; there is no appeal against that part of his decision.
The detailed facts (which are agreed) are so fully set out in the judgment of the judge that I will not repeat them here.
The case raises fundamental questions as to the legal character of credit card sales. It is therefore convenient, before turning to the specific questions argued, to set out what, in my judgment, are the normal features of credit card or charge card transactions, there being no relevant distinction between charge cards and credit cards for present purposes.
(1) The general features of credit card transactions
(A) There is an underlying contractual scheme which predates the individual contracts of sale. Under such scheme, the suppliers have agreed to accept the card in payment of the price of goods purchased; the purchasers are entitled to use the credit card to commit the credit card company to pay the suppliers.
(B) That underlying scheme is established by two separate contracts. The first is made between the credit company and the seller: the seller agrees to accept payment by use of the card from anyone holding the card and the credit company agrees to pay to the supplier the price of goods supplied less a discount. The second contract is between the credit company and the cardholder: the cardholder is provided with a card which enables him to pay the price by its use and in return agrees to pay the credit company the full amount of the price charged by the supplier.
(C) The underlying scheme is designed primarily for use in over-the-counter sales, ie sales where the only connection between a particular seller and a particular buyer is one sale.
(D) The actual sale and purchase of the commodity is the subject of a third bilateral contract made between buyer and seller. In the majority of cases, this sale contract will be an oral, over-the-counter sale. Tendering and acceptance of the credit card in payment is made on the tacit assumption that the legal consequences will be regulated by the separate underlying contractual obligations between the seller and the credit company and the buyer and the credit company.
(E) Because the transactions intended to be covered by the scheme would primarily be over-the-counter sales, the card does not carry the address of the cardholder and the supplier will have no record of his address. Therefore the seller has no obvious means of tracing the purchaser save through the credit company.
(F) In the circumstances, credit cards have come to be regarded as substitutes for cash; they are frequently referred to as ‘plastic money’.
(G) The credit card scheme provides advantages to both seller and purchaser. The seller is able to attract custom by agreeing to accept credit card payment. The purchaser, by using the card, minimises the need to carry cash and obtains at least a period of free credit during the period until payment to the card company is due.
(2) The particular features of this scheme
In the present case, the Fuel Card scheme run by the company contained all those features. The scheme and the contracts in which it is contained draws a distinction between the account holder and the cardholders, the former being the company or
Page 706 of [1988] 3 All ER 702
person who contracts with the company, the latter being the persons authorised by the account holder to use the card. The distinction is of no significance in the present case and I will refer to both classes as ‘the cardholder’. It merely reflects the fact that many account holders were haulage and fleet operators rather than individuals.
The underlying scheme is constituted by two bilateral contracts. (a) The contract between the garage and the company (the franchise agreement). By the franchise agreement the garage undertook to honour the company’s Fuel Card. There were two different ways in which the garage could claim payment; nothing turns on the difference between them. The company in effect undertook that on receipt of vouchers signed by the cardholders together with a claim form, payment of the price (less commission) would be made to the garage within five days at the latest. (b) The contract between the cardholder and the company (the subscriber agreement). There is a major issue as to the proper construction of the subscriber agreement to which I will have to revert. In essence, the cardholder authorised the company to pay for fuel supplied to the cardholder and to debit the cardholder. The company was to send to the cardholder a monthly statement of the amount debited and the cardholder was bound to pay to the company within 14 days the full amount shown owing in the statement.
In addition there was a third contract (the forecourt agreement) made between the cardholder and the garage. This contract came into existence when the cardholder bought fuel at the garage. It was necessarily an oral agreement. In the present case, the forecourt agreement has a special feature not to be found in the majority of credit card purchases. At a self-service garage, the petrol is put into the tank by the purchaser/cardholder before there is any contact between him and the staff of the garage. It is common ground that the contract for the sale of the petrol is made at that stage, the garage having made an open offer to sell at pump prices which is accepted by the motorist putting petrol in the tank. Having done so, the motorist then goes to pay for the petrol and produces the Fuel Card. That is the first time at which the garage knows that payment is to be made not in cash but by using the card. There is a dispute between the parties whether, in those circumstances, the purchaser ever becomes liable to the garage to satisfy the price by payment in cash.
(3) The issues
The following principal points were argued. (a) Commercial Credit contended that self-service forecourt sales do not at any stage give rise to a primary obligation on a Fuel Card holder to pay cash for the petrol. It is said that the garage makes an open offer (by exhibiting the Fuel Card sign on the forecourt) that it will accept payment either in cash or by means of the card. Therefore, it is said, there is no primary obligation to pay cash which can revive when the company fails to honour the Fuel Card. The judge rejected this contention (see [1986] 3 All ER 289 at 300, [1987] Ch 150 at 164). I find it unnecessary to decide the point since, on the view I take of the case, it makes no difference. (b) Is there a general principle of law that whenever a method of payment is adopted which involves a risk of non-payment by a third party there is a presumption that the acceptance of payment through a third party is conditional on the third party making the payment, and that if he does not pay the original obligation of the purchaser remains? (c) If there is no such general principle, was the acceptance of the Fuel Card by garages merely conditional payment or was it an absolute payment? (d) Counsel for the garages put forward an alternative argument. He submitted that on the true construction of the subscriber agreement the cardholder was only liable to pay the company if and when the company had paid the garage. On this basis he submitted that since the company had not paid the garages, the sums recovered from the cardholders by the liquidator ought either to be applied in paying the garages or alternatively should be returned to the cardholders since the cardholders were never liable to pay either the garages or the company. On the view which I have formed on the construction of the subscriber agreement (see at 5 below) this point does not arise for decision.
I will deal with points (b) and (c) in turn.
Page 707 of [1988] 3 All ER 702
(4) Is there a general presumption of conditional payment?
Counsel’s argument for the garages is founded on the law applicable to cheques, bills of exchange and letters of credit. It is common ground that where a debt is ‘paid’ by cheque or bill of exchange, there is a presumption that such payment is conditional on the cheque or bill being honoured. If it is not honoured, the condition is not satisfied and the liability of the purchaser to pay the price remains. Such presumption can be rebutted by showing an express or implied intention that the cheque or bill is taken in total satisfaction of the liability: see Chitty on Contracts (25th edn, 1983) para 1436 ff, Sayer v Wagstaff (1844) 14 LJ Ch 116, Re London Birmingham and South Staffordshire Banking Co Ltd (1865) 34 Beav 332, 55 ER 663, Re Romer & Haslam [1893] 2 QB 286, Allen v Royal Bank of Canada (1925) 95 LJPC 17 and Bolt and Nut Co (Tipton) Ltd v Rowlands Nicholls & Co Ltd [1964] 1 All ER 137, [1964] 2 QB 10.
There is a similar presumption applicable to payments made by means of letters of credit. If the seller does not receive payment under the letter of credit, it is presumed that the buyer is still liable to pay the price although this presumption can be rebutted by express or implied agreement to the contrary: see W J Alan & Co Ltd v El Nasr Export and Import Co [1972] 2 All ER 127 at 139, 147, [1972] 2 QB 189 at 212, 221 per Lord Denning MR and Stephenson LJ, Maran Road Saw Mill v Austin Taylor & Co Ltd [1975] 1 Lloyd’s Rep 156 and E D & F Man Ltd v Nigerian Sweets and Confectionery Co Ltd [1977] 2 Lloyd’s Rep 50.
Like the judge, I cannot detect from the authorities any such general principle as counsel for the garages suggests which is applicable to all cases where payment is to be effected through a third party (see [1986] 3 All ER 289 at 301, [1987] Ch 150 at 166). The cases on cheques and bills of exchange do not contain any reference to such a principle. They are all cases where there was an obligation to pay a sum of money which predated the tendering of the cheque. The principle applied is that the obligation to discharge the pre-existing debt has not been satisfied unless the creditor has expressly or impliedly agreed to accept the cheque or bill in final satisfaction.
When a similar rule was applied to letters of credit in W J Alan & Co Ltd v El Nasr Export and Import Co [1972] 2 All ER 127, [1972] 2 QB 189, Lord Denning MR (with whom Stephenson LJ agreed) did not treat the matter as decided by any existing general principle of law. He described the question as one of construction to be determined in the light of the consequences (see [1972] 2 All ER 127 at 136, [1972] 2 QB 189 at 209). He then considered the consequences of treating a letter of credit as being an absolute or conditional payment in the light of the circumstances affecting the type of commercial transaction in which letters of credit are used. He reached the conclusion that in those circumstances payment by letters of credit should be treated as conditional. Although he referred to the position as being analogous to that applicable to cheques and bills of exchange, he did not treat those cases as establishing any such general principle as counsel for the garages relies on.
In my judgment, there is no such general principle. Each method of payment has to be considered in the light of the consequences and other circumstances attending that type of payment. When, as with credit cards, a new form of payment is introduced applicable to new sets of circumstances, it is necessary to consider whether such payment should be treated as absolute or conditional in the light of the consequences and circumstances of such new type of payment, not according to any general principle.
(5) Was the acceptance of the Fuel Card by the garages conditional or absolute payment?
The answer to this question must depend on the terms of the forecourt agreement since this is the only contract made between the garage and the cardholder. The terms on which the garage accepted payment from the cardholder must be determined by the only contract to which they are parties. To determine the terms of the forecourt agreement is not an easy task. Such agreement is at best oral and, in the majority of cases, not even that. The sale contract is made by putting the fuel in the tank before the parties have met; tender of the card and the making out of the signature of the voucher for the
Page 708 of [1988] 3 All ER 702
sale is often conducted in complete silence. Moreover, although both garage and cardholder are in general aware that some underlying contract exists between the garage and the company and between the cardholder and the company, neither the garage nor the cardholder is aware of the exact terms of the contract to which they are not a party. Therefore the terms of the forecourt agreement have to be inferred from the surrounding circumstances known to the parties.
At the time of the sale, it is almost inconceivable that either party addressed its mind to the question: what will be the position if the company does not pay the garage? At one stage in the argument, both parties were contending that The Moorcock test (see (1889) 14 PD 64, [1886–90] All ER Rep 530) should be applied to determine what term should be implied in the agreement. If such test were to be applied, one would be looking for a term that any reasonable garage proprietor and cardholder would have agreed should be the result. On such a test, it is most unlikely that any term could properly be implied. But, in my judgment, this is not the right test since in a case such as the present there has to be some term regulating the legal effect of the acceptance of the card. The law has to give an answer to the problem. In my judgment, the correct approach in such a case is that the court should seek to infer from the parties’ conduct and the surrounding circumstances what is the fair term to imply; this approach became common ground between the parties.
A sale using the Fuel Card for payment did not, in my judgment, differ in any material respect from an ordinary credit card sale. The one peculiarity of the transaction (viz that the contract for sale of the petrol took place when the tank was filled and not, as in a supermarket, at the till) does not make any relevant difference. The question remains: on what terms did the supplier accept the card in payment?
Although neither party to the forecourt agreement knew the exact terms of the other party’s contract with the company, both parties were aware of the underlying contractual structure. The customer/cardholder knew that, if he signed the voucher, the supplier/garage would be entitled to receive a payment for the petrol which would fully discharge the customer’s liability for the price; depending on his sophistication, the customer/cardholder might or might not have known that the company would deduct commission in paying the garage. On the other side, the garage knew that on signing the voucher the cardholder rendered himself liable to the company to pay to the company the price of the petrol. Before entering into the forecourt agreement, both parties had entered into their respective contracts with the company and their underlying assumption must have been that on completion of the sale of the petrol by use of the Fuel Card, the parties’ future rights and obligations would be regulated by those underlying contracts. In the majority of cases, the garage had no record of the address of the customer and no ready means of tracing him.
To my mind, all these factors point clearly to the conclusion that, quite apart from any special features of the Fuel Card Scheme, the transaction was one in which the garage was accepting payment by card in substitution for payment in cash, ie as an unconditional discharge of the price. The garage was accepting the company’s obligation to pay instead of cash from a purchaser of whose address he was totally unaware. One way of looking at the matter is to say that there was a quasi-novation of the purchaser’s liability. By the underlying scheme, the company had bound the garage to accept the card and had authorised the cardholder to pledge the company’s credit. By the signature of the voucher all parties became bound: the garage was bound to accept the card in payment; the company was bound to pay the garage; and the cardholder was bound to pay the company. The garage, knowing that the cardholder was bound to pay the company and knowing that it was entitled to payment from the company which the garage itself had elected to do business with, must in my judgment be taken to have accepted the company’s obligation to pay in place of any liability on the customer to pay the garage direct.
In the present case, there are two additional features which point the same way. First,
Page 709 of [1988] 3 All ER 702
under the franchise agreement, the company undertook to provide a guarantee of its obligations to the garage. This undertaking unhappily was not honoured. But the inclusion of the term in the franchise agreement provides some support for the view that, in the event of the company being unable to pay, the garage was looking for payment, not to the customer, but to the guarantor lying behind the company.
Second, there is a feature of great importance which may or may not be common to all credit card sales. Counsel for the garages in effect accepted that neither party could have envisaged that the cardholder/customer would have to pay twice: once to the company and again to the garage. To avoid this result, he submitted that the acceptance of the card by the garage was conditional on either the company paying the garage or the cardholder paying the company. A condition to that effect is wholly different to that applicable in the case of cheques or letters of credit. I find it an impossible condition to imply. I fully see the force of implying a condition that payment is conditional on the actual discharge of the price by a third party; such condition is based on the fundamental premise that a seller expects to be paid for the goods sold. But I can see no reason for implying a condition that the seller is not to be so paid if the buyer had discharged another obligation to a different party. In truth, the suggestion of this additional condition is merely a forensic device designed to avoid what everyone looking at the transaction feels, viz that in no circumstances can the result be that the cardholder has to pay both the garage and the company.
The question therefore is whether, under the subscriber agreement, the cardholder could be required to pay the company even though the company had not paid the garage. The relevant clauses of the subscriber agreement are:
‘1. Use of the Card will authorise Charge Card Services Limited (CCS) to pay for petrol … supplied to the Account Holder or the Authorised Signatory …
2 … The Account Holder or the Authorised Signatory must sign a sales bill (bearing an imprintation of the Card) every time the Card is used but neither the failure to do so, nor the breach of any of these Terms and Conditions shall relieve the Account Holder from liability to CCS for the reimbursement of any payment made by it in respect of fuel or oil supplied to the Account Holder or Authorised Signatory by any garage …
3. A statement showing all amounts debited, less any credits or refunds, will be sent to the Account Holder by CCS each month. The Account Holder will pay to CCS, within 14 days from the date to which such statement is made up, the whole of the amount shown to be owing by that statement …
6. If any Card is lost or stolen, the Account Holder shall immediately notify CCS … The Account Holder will remain liable to CCS for any payments made by it to suppliers arising from the use of the Card by any person before such confirmation is received.’
It is to be noted that the company does not undertake any obligation to the cardholder to pay the garage; cl 1 merely confers authority on the company to do so. Under cl 3, the cardholder’s liability is to pay the amounts debited on the monthly statement. The agreement does not expressly provide when or what the company is entitled to debit. The dispute between the parties is whether the company is entitled to debit the cardholder before the company has paid the garage. If so, under cl 3 the cardholder becomes bound to pay the company whether or not the garage is paid by the company. On this issue, the subscriber agreement is ambiguous.
If one were simply to construe the words of the agreement divorced from the factual matrix in which it was entered into, there is considerable force in counsel’s argument for the garages that the company is only entitled to debit the cardholder with sums actually paid to the garage. Clause 1 only expressly confers on the company an authority to pay and it is therefore reasonable to construe the reference to debits in cl 3 as references to debits of sums actually paid to the garage. This view is strengthened by the reference in
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cl 2 to ‘relieving’ the cardholder from liability to the company for ‘reimbursement’ of any payment made by it; those words are wholly consistent with an obligation only to make good payments already made by the company to the garages. To the same effect are the references in cl 6 to the cardholder remaining liable to the company for any payments made by it.
However the subscriber agreement must be construed in the context of the facts known to the parties. In fact, the scheme operated as follows. The garage sent a number of vouchers (signed by cardholders) together with a claim form to the company. The company credited the garage and debited the cardholder in its books with the price of the petrol, such credit and debit being made as at the date of the supply transaction, ie the date entered on the voucher signed by the cardholder. The company thereafter paid the garage within five days of the receipt of the claim. The company sent a weekly invoice to the cardholder showing all purchases made by use of the card during such week, each voucher being separately recorded and showing a total of the sum due for VAT for that week. The monthly statement sent to the cardholders set out the individual invoices and the total for that month, less cash received.
What was actually done under the agreement would not, of course, have been known to the cardholder at the time he entered into the subscriber agreement. But the evidence is that there were included in the publicity material sent to prospective cardholders examples of the weekly value added tax invoice and monthly statements. From such material, it could be seen by the cardholder that he was to be debited according to the date of the transaction of purchase and that the monthly statement showed debits made on that basis, there being no reference of any kind to amounts being paid to the garages.
Against that factual background known to both parties I contrue the ambiguous word ‘debit’ in the subscriber agreement as meaning sums which the company had become liable to pay in respect of supplies of fuel to the cardholder irrespective of the date of payment by the company to the garage. Such construction accords with the commercial common sense of the transaction, and there is nothing in the subscriber agreement which contradicts this construction. References to the cardholder’s liability to repay or reimburse the company, although pointing the other way, are not inconsistent with the construction I favour. Both those clauses are dealing with cases of irregular debits where it might be said that the cardholder was not liable to pay the company. The clauses merely provide that if in those cases the company has paid the garage, the cardholder must reimburse.
In my judgment, therefore, the cardholder is liable to pay the company whether or not the company has paid the garage. It follows that, on the garages’ argument, the cardholder might be liable to pay twice, once to the company and again to the garage. That is a result which no one could have intended in the context of a credit card transaction. Accordingly, apart from any guidance to be obtained by analogy with the authorities on cheques and letters of credit, I would reach the conclusion that payment by credit card is normally to be taken as an absolute, not a conditional, discharge of the buyer’s liability and that the particular features of the present case support this conclusion.
I do not find the analogy with cheques at all close or helpful. Payments by cheque involve the unilateral act of the buyer and his agent, the bank on which the cheque is drawn. The buyer’s basic obligation to pay the price is sought to be discharged through a third party, the bank, which is in no contractual relationship with the seller. Moreover, the seller has had no say in the selection of the bank. It is very far from the position in a credit card sale where the seller has agreed to rely on the credit of the credit card company and there is a pre-existing contractual obligation on the credit card company to pay the supplier quite separate from any obligation of the buyer.
The analogy with letters of credit is much closer. In both, there are three parties to the arrangement and, once the letter of credit is issued, the bank is contractually bound to pay on the presentation of the documents. But the whole commercial context of the two types of transaction is totally different. The letter of credit is primarily an instrument of
Page 711 of [1988] 3 All ER 702
international trade issued pursuant to an individually negotiated contract of considerable substance made in writing; the credit card is used for small, over-the-counter transactions between strangers, there being, at best, an oral agreement and more often an agreement by conduct. In the case of credit card sales, the seller does not even know the address of the purchaser, which makes it hard to infer an intention that he will have a right of recourse against the purchaser. It is normally the buyer, not the seller, who selects the bank issuing the letter of credit; if, unusually, the seller does select the bank, this factor may rebut the presumption of conditional payment by letter of credit: see W J Alan & Co Ltd v El Nasr Export and Import Co ([1972] 2 All ER 127 at 137, [1972] 2 QB 189 at 210). In contrast, in a credit card transaction the seller has decided long before the specific supply contract is made whether or not to accept the cards of the credit card company and has entered into an overall contract with it, under which the seller is obliged to accept the card and the credit card company is bound to pay him. With letters of credit, the issuing bank is the agent of the buyer and not the seller and it is the buyer who pays for the facility; in credit card transactions the credit card company is in a contractual relationship with both but it is the seller who pays for the facility by allowing the deduction of the commission. These differences are, in my judgment, so fundamental that the law affecting letters of credit is not of great assistance in deciding what law should apply to credit card transactions.
Accordingly, I agree with the judge, and broadly for the same reasons, that the cardholder’s obligations to the garages were absolutely, not conditionally, discharged by the garage accepting the voucher signed by the cardholder and that accordingly the appeal should be dismissed. I reach this conclusion with satisfaction since I think it reflects the popular perception of the role of credit cards in modern retail trade as ‘plastic money’.
The judge expressed certain views as to the effect of payment by use of a cheque supported by the production of a bank card (see [1986] 3 All ER 289 at 301, [1987] Ch 150 at 166). As the point is not directly material in the present case and there may well be features of such transactions of which I am ignorant, I prefer to express no view on that point.
NOURSE LJ. I agree.
STUART-SMITH LJ. I agree.
Appeal dismissed.
Solicitors: Sebastian Coleman & Co, agents for Wragge & Co, Birmingham (for the garages); Cameron Markby (for Commercial Credit); Alsop Wilkinson (for the liquidator).
Celia Fox Barrister.
Crossland v Director of Public Prosecutions
[1988] 3 All ER 712
Categories: CRIMINAL; Road Traffic
Court: QUEEN’S BENCH DIVISION
Lord(s): BINGHAM LJ AND HUTCHISON J
Hearing Date(s): 9 JUNE 1988
Road traffic – Excessive speed – Evidence – Opinion of one witness – Police officer’s evidence of excessive speed based on inspection of damage to vehicle and skid marks – Whether police officer’s evidence merely an opinion of excessive speed – Whether accused properly convicted solely on police officer’s evidence – Road Traffic Regulation Act 1984, s 89(2).
The defendant collided with a pedestrian while accelerating across a junction before the traffic lights turned red. She was charged with driving at a speed exceeding 30 mph on a restricted road, contrary to ss 81 and 89(1) of and Sch 7 to the Road Traffic Regulation Act 1984. At the hearing of the information the only witness as to the defendant’s speed was a police officer who inspected the scene of the accident shortly after it had occurred and the damage to the defendant’s car and the skid marks made by the defendant’s braking and who carried out speed and braking tests on the defendant’s car, from which he calculated that the defendant had been driving at not less than 41 mph before she started to brake. The defendant was convicted. She appealed by way of case stated, contending that she had been convicted ‘solely on the evidence of one witness to the effect that, in the opinion of the witness’, she had been driving at excessive speed and therefore her conviction was contrary to s 89(2)a of the 1984 Act.
Held – Although the police officer’s evidence included a significant element of expert opinion, his evidence did not amount solely to his opinion that the defendant had been driving at excessive speed since he also described in detail the objectively determined phenomena on which his expert opinion was based, namely the inspections and tests he had carried out at the scene of the accident. Accordingly, the defendant had been properly convicted and her appeal would be dismissed (see p 715 h j and p 716 d to g, post).
Notes
For evidence of speeding, see 40 Halsbury’s Laws (4th edn) para 397, and for cases on the subject, see 39(1) Digest (Reissue) 467–468, 3537–4546.
For the Road Traffic Regulation Act 1984, s 89, see 54(2) Halsbury’s Statutes (3rd edn) 1596.
Cases referred to in judgments
Kent v Stamps [1982] RTR 273, DC.
Penny v Nicholas [1950] 2 All ER 89, [1950] 2 KB 466, DC.
Plancq v Marks (1906) 70 JP 216, DC.
Swain v Gillett [1974] RTR 446, DC.
Weatherhogg v Johns (1931) 95 JP 364, DC.
Cases also cited
R v Burchill (1977) cited in 141 JP Jo 403, Crown Ct at Kingston.
Case stated
Iona May Crossland appealed by way of a case stated by Mr C R Seymour, in respect of his decision whereby, sitting as an acting stipendiary magistrate for the Inner London area at the Tower Bridge Magistrates’ Court, he convicted the appellant, on an information
Page 713 of [1988] 3 All ER 712
preferred by Pc David Norley, of unlawfully driving a motor vehicle on a restricted road at a speed exceeding 30 mph, contrary to ss 81 and 89(1) of and Sch 7 to the Road Traffic Regulation Act 1984. The respondent to the appeal was the Director of Public Prosecutions. The facts are set out in the judgment of Bingham LJ.
Rosalind Foster for the appellant.
Jeremy Carter-Manning for the Director of Public Prosecutions.
9 June 1988. The following judgments were delivered.
BINGHAM LJ. This appeal arises on a case stated for the opinion of the court by Mr C R Seymour, sitting as the acting stipendiary magistrate at Tower Bridge Magistrates’ Court. The question raised is whether on the true construction of s 89(2) of the Road Traffic Regulation Act 1984, the acting stipendiary magistrate was right in law to find that there was a case to answer when the sole prosecution evidence on the question of speed was that given by a single expert in post-accident reconstruction.
Section 89(1) and (2) of the 1984 Act reads as follows:
‘(1) A person who drives a motor vehicle on a road at a speed exceeding a limit imposed by or under any enactment to which this section applies shall be guilty of an offence.
(2) A person prosecuted for such an offence shall not be liable to be convicted solely on the evidence of one witness to the effect that, in the opinion of the witness, the person prosecuted was driving the vehicle at a speed exceeding a specified limit.’
The question which falls for consideration is the following: is a person prosecuted for an offence of speeding under s 89(1) of the Road Traffic Regulation Act 1984 liable to be convicted on the evidence of one witness to the effect that, having inspected damage to the vehicle driven by the person prosecuted following a collision and having inspected and measured marks on the road at the place of collision and inspected marks on such vehicle, and having carried out certain tests, and having made calculations based on the physical signs observed and the tests carried out (such damage, marks, tests and calculations being described in evidence), he was of opinion that the person prosecuted was driving the vehicle at a speed exceeding a specified limit before the collision?
The primary facts of the present case are short and unremarkable. At 7.20 pm on 20 March 1987 the appellant was driving a Ford Cortina motor car. She approached traffic lights at the junction between Southwark Street and Great Guildford Street, London SE7. She saw that the lights were green and accelerated across the junction. In so doing she collided with a pedestrian. There were no witnesses to the incident. It was conceded at the hearing that the appellant was not to blame for the accident and no charge of careless driving was preferred against her, but an information was preferred alleging that the appellant unlawfully drove a motor vehicle on a restricted road at a speed exceeding 30 mph, contrary to ss 81 and 89(1) of and Sch 7 to the 1984 Act.
A hearing duly took place on 24 November 1987 when two witnesses were called by the prosecutor. The first witness was a police constable who visited the scene of the accident after the collision had occurred. He took the injured pedestrian to hospital and took an oral statement from the appellant. He gave no evidence bearing in any way on the appellant’s speed at the time of the incident. The only other prosecution witness was a Pc Killick. He is an acknowledged expert on accident reconstruction. He was at the time attached to the south east traffic area. He had been engaged on traffic duties for 24 years attending accidents constantly. He had attended a number of courses of instruction and was fully conversant with the examination of vehicles and with traffic control duties. He attended the scene of the incident very shortly after the collision.
In evidence he described the road, weather and light conditions. On the road he found two virtually straight parallel skid marks caused by the skidding of the front tyres of the Ford Cortina. The skid mark made by the offside front tyre he found to be 22.1 metres in length and that made by the nearside front tyre he found to be 7.1 metres in length.
Page 714 of [1988] 3 All ER 712
He found burn marks of somewhat uncertain severity on the front tyres of the vehicle. He found damage to the front of the car and found that this damage had been transferred to the windscreen and higher up on the car. On the application of calculations derived from Dr Ashton, whom I understand to be a scientific expert in this field, these signs of damage to the car indicated to Pc Killick that the car had been travelling at a speed of at least 30 mph at the time of the collision. Pc Killick then inspected the skid marks made by the vehicle but was unable to determine the point of impact. He inspected the Ford Cortina and found no relevant mechanical defects and found that the controls of the car were in quite good condition. He then carried out skid tests using the Ford Cortina for purposes of the tests in the very place where the collision had occurred and within an hour of the accident. He carried out three tests using the police car as a pace vehicle and using a chalk gun to measure the stopping distances. For purposes of his calculations he needed to achieve two stopping distances within 10% of each other and he achieved two such results although the third result was outside the limit. He then applied recommended calculations and deduced that the speed of the car had been not less than 41 mph at the start of the skid marks.
He was duly cross-examined at the hearing and defended the manner in which the tests had been carried out, the accuracy of the results achieved and the reliability of the calculations. It was not found, but I believe it to be the case, that the calculations that he carried out were of a standard nature based on essentially straightforward physical principles. That was the prosecution case at the hearing.
At the conclusion of the prosecution case, it was submitted on behalf of the appellant (who was then of course the defendant) that there was no case to answer because the prosecution evidence consisted of the opinion evidence of one witness only and accordingly that the appellant was not liable to be convicted by virtue of s 89(2). The prosecutor resisted that submission, contending that Pc Killick’s opinion was additional to direct evidence of fact derived from the observations and tests referred to.
The acting stipendiary magistrate reached two conclusions. First he held, in reliance on Plancq v Marks (1906) 70 JP 216 and Phipson on Evidence (13th edn, 1982) para 27–08, that Pc Killick’s evidence was properly to be treated as evidence of fact and not evidence of opinion. Alternatively, he held that if Pc Killick’s evidence was evidence of opinion, that opinion was corroborated by material evidence of fact arising from the observations of the damage to the vehicle, the tyre burns and the skid marks. He accordingly held that the appellant did have a case to answer and the case proceeded. Having heard all the evidence he convicted the appellant. Hence this appeal.
Those being the facts, I return to s 89(2), the terms of which I recited at the outset. It is plain, and indeed common ground between the parties, that the subsection is intended to prevent the conviction of a defendant on evidence given by a single witness of his unsupported visual impression of a defendant’s speed. That is so whether the witness is an untutored bystander or a police officer who may have considerable expertise in visually assessing the speed of moving vehicles. This parliamentary intention goes back at least to 1903, when s 9 of the Motor Car Act 1903 was enacted and provided:
‘… but a person shall not be convicted under this provision for exceeding the limit of speed of twenty miles merely on the opinion of one witness as to the rate of speed.’
Thus, construing that section, Lord Alverstone CJ in Plancq v Marks (1906) 70 JP 216 said:
‘The words of s.9 of the Motor Car Act, 1903, were inserted for the purpose of preventing a person from being convicted under the section on the mere opinion of one person as to the rate of speed. The test in such cases is whether the evidence of the witness is matter of opinion or matter of fact.’
More recently, in Penny v Nicholas [1950] 2 All ER 89 at 91, [1950] 2 KB 466 at 471
Page 715 of [1988] 3 All ER 712
Lord Goddard CJ, construing s 2(3) of the Road Traffic Act 1934, which is substantially identical to the present subsection, observed:
‘Therefore, if there is only the evidence of a police officer or any other person who says: “I saw the car, and, in my opinion it was exceeding thirty miles an hour”, that is not enough, although if two people give that evidence, it is in law sufficient to justify a conviction.’
There is, and can be, no doubt but that the evidence of two witnesses as to their unsupported visual impression of speed will, if the evidence is accepted, suffice to support a conviction. That highlights one of the anomalies of the appellant’s argument before the magistrate, repeated in this court, for if she is right and Pc Killick’s evidence alone falls foul of s 89(2), the prosecutor could have overcome the problem by calling another expert police constable to opine that, on the basis of Pc Killick’s measurements and observations, the appellant’s vehicle must have been travelling at over 30 mph before the collision. The effect of a ruling in the appellant’s favour would not therefore be to eliminate evidence of this kind but in all probability to double its volume.
We were referred to a number of cases which reveal a high degree of consistency over the years. A defendant is not regarded as being convicted on the opinion evidence of a single witness if there is evidence of the time taken by his car, timed by stop watch, to travel over a certain distance (Plancq v Marks (1906) 70 JP 216), or of the speedometer reading on a following vehicle (Weatherhogg v Johns (1931) 95 JP 364, Penny v Nicholas [1950] 2 All ER 89, [1950] 2 KB 466, Swain v Gillett [1974] RTR 446) or a reading calculated from signals fed into a computer by an electronic trip wire device (Kent v Stamps [1982] RTR 273). The same, it would seem, is true where readings are obtained from radar speed meters, radar guns and Vascar (see Wilkinson on Road Traffic Offences (13th edn, 1987) vol 1, pp 362–365). In all these cases the accuracy and reliability of the readings will of course be open to challenge, but the authorities in my view make it plain that evidence of this kind is not evidence of opinion.
It does not appear that the problem which now arises has been considered in any reported case. We should therefore construe the section according to its natural meaning, bearing in mind the decided cases and the apparent object of the subsection, and having regard to familiar legal principles.
In my judgment counsel for the appellant is correct in her submission that Pc Killick’s evidence included a significant element of expert opinion. He did not see or hear the accident. He was not present at the time. His evidence was not confined to factual observation. In civil proceedings leave would be required to adduce his evidence as the opinion evidence of an expert. Unless his opinion on the probable speed of the vehicle were regarded as expert, it would not I think be admissible.
But did the evidence which he gave at the hearing amount solely to the evidence of one witness to the effect that in his opinion the appellant was driving at an excessive speed? In my view it did not because his evidence also described in some detail the objectively determined phenomena on which his expert opinion was based. Those objectively determined phenomena did not of themselves show that the vehicle was being driven at an excessive speed, although in an extreme case they might do so, but having been described in evidence they did, in my judgment, prevent the conviction resting, in the language of the 1903 Act, ‘merely on the opinion of one witness as to the rate of speed’. The phenomena were, at the time of collision, verifiable by the appellant. She, or her advisers, were in principle as well able as the prosecutor to draw relevant scientific inferences from them and to challenge the prosecutor’s calculations. She was not in jeopardy on the strength only of the unsupported visual impression of a single witness and this is the risk against which the subsection is in my judgment intended to give protection.
I would accordingly give an affirmative answer to the question posed by the acting stipendiary magistrate and uphold the conviction.
Page 716 of [1988] 3 All ER 712
In an admirable argument, counsel for the appellant emphasised the possible prejudice to defendants arriving for a summary hearing to find themselves confronted by expert evidence of this kind. An advocate might not be able to tackle the evidence without expert instruction, and considerations of cost would usually prevent him seeking an adjournment to obtain such expert instruction. This problem does not arise directly on this appeal since, as I have said, it is accepted that the opinion evidence of two experts would not in any event be objectionable under s 89(2), but there is a real problem. In this case the prosecutor very properly indicated in his statement of facts delivered before the hearing that speed had been calculated from skid marks. This is a desirable practice because it alerts a defendant to the way in which the prosecution case is to be proved. In a case where it is proposed to prove speed by evidence of the kind adduced here, it would I think ordinarily be good practice for a prosecutor, if asked, to disclose at least the basic measurements and observations made by the inspecting officer at the scene of the incident. It might well have the effect of shortening the hearing or avoiding a contested hearing altogether if more detailed calculations were disclosed.
HUTCHISON J. I agree.
Counsel’s argument on behalf of the appellant involves the contention that on the issue of speed there was only one witness and that the evidence he gave was evidence of his opinion as to the appellant’s speed, albeit that opinion was based on the observations he made and the tests he carried out at the scene; therefore, she argues, the appellant was convicted solely on the evidence of that one witness to the effect that in his opinion the appellant had been exceeding the speed limit, the very thing which s 89(2) of the Road Traffic Regulation Act 1984 prohibits.
However, while it must be accepted that, without the evidence of Pc Killick as to the conclusions he drew from what he observed at the scene and the tests he there carried out, there would have been insufficient evidence to prove the charge, it by no means follows from that that the sole evidence on which the appellant was convicted was the evidence Pc Killick gave as to his conclusions. There was much factual evidence given by that officer as to the condition of the road and the marks on it, the condition of the vehicle and its tyres and the tests carried out with the vehicle later at the scene. Even if, as to which I express no concluded view, the results obtained by him when he applied what he calls ‘the recommended calculations’ to the observations and measurements he had made in that way, are properly to be described as his opinion as to the speed at which the appellant had been driving, that opinion was certainly not the sole evidence on which she was convicted. Indeed, I should have said that the principal evidence leading to her conviction was the length of the skid marks left by her vehicle on that particular piece of road, a piece of factual evidence derived from observation and measurement.
The subsection, as it seems to me, and as the cases show, is aimed at preventing convictions for speeding on the basis of the mere opinion of one witness. It does not require that the evidence of a witness in a speeding case must always be corroborated, nor does it preclude a conviction where the evidence of a single witness includes, as part of his observations and conclusions, an expression of opinion. In short, in my view counsel for the Director of Public Prosecutions is correct when he submits that the subsection is directed at preventing convictions on the basis of what he called ‘mere impression evidence’.
Appeal dismissed. The court refused leave to appeal to the House of Lords but certified, under s 1(2) of the Administration of Justice Act 1960, that the following point of law of general public importance was involved in the decision: is a person prosecuted for an offence of speeding under s 89(1) of the Road Traffic Regulation Act 1984 liable to be convicted on the evidence of one witness to the effect that, having inspected damage to the vehicle driven by the person prosecuted following a collision and having inspected and measured marks on the road at the place of collision and inspected marks on such vehicle, and having carried out certain tests, and having made
Page 717 of [1988] 3 All ER 712
calculations based on the physical signs observed and the tests carried out (such damage, marks, tests and calculations being described in evidence), he was of the opinion that the person prosecuted was driving the vehicle at a speed exceeding a specified limit?
Solicitors: Amery-Parkes & Co (for the appellant); Crown Prosecution Service, Inner London.
Dilys Tausz Barrister.
Practice Direction
(Crown Court: solicitor: right of audience)
[1988] 3 All ER 717
PRACTICE DIRECTIONS
CROWN COURT
26 August 1988.
Crown Court – Practice – Solicitor – Right of audience – Supreme Court Act 1981, ss 75, 83.
In exercise of the power conferred on him by s 83 of the Supreme Court Act 1981 the Lord Chancellor hereby gives the following direction.
1. Solicitors may appear in, conduct, defend and address the court in proceedings mentioned in para 2 of this direction at any sitting of the Crown Court at Caenarvon, Barnstaple, Truro, Doncaster or (subject to para 3 hereof) Lincoln.
2. The proceedings in which solicitors may exercise the right of audience conferred by para 1 of this direction are: (a) appeals from magistrates’ courts; (b) proceedings on committal of a person for sentence or to be dealt with; (c) proceedings in respect of the offences included in class 4 in the directions given by the Lord Chief Justice with the concurrence of the Lord Chancellor under s 75 of the Supreme Court Act 1981 (see Practice Note [1987] 3 All ER 1064, [1987] 1 WLR 1671) and (d) proceedings under the original or appellate civil jurisdiction of the Crown Court.
3. The right of audience conferred by para 1 of this direction in respect of sittings of the Crown Court at Lincoln shall extend only to proceedings falling within para 2 hereof: (a) on appeal from, or on committal by, a magistrates’ court in the County of the Parts of Holland, or (b) which would, but for the passing of the Courts Act 1971, have fallen to be heard by the court of quarter sessions for that county in the exercise of its original or appellate civil jurisdiction.
4. This direction shall supersede the direction of 7 December 1971 ([1972] 1 All ER 144, [1972] 1 WLR 5) and shall come into force on 5 September 1988.
Mackay of Clashfern C, Barrister
Chaudhry v Prabhakar and another
[1988] 3 All ER 718
Categories: CONTRACT; TORTS; Negligence
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): MAY, STOCKER AND STUART-SMITH LJJ
Hearing Date(s): 27, 28, 29 APRIL, 20 MAY 1988
Agent – Gratuitous agent – Duty of care – Gratuitous agent finding secondhand car for friend – Car unroadworthy and valueless – Whether agent in breach of duty of care owed to friend – Whether standard of care required of gratuitous agent to be measured objectively or subjectively.
The plaintiff, who had recently passed her driving test and knew nothing about cars, asked the first defendant, a close friend who, although not a mechanic, had some knowledge of cars, to find a suitable secondhand car for her to buy. She stipulated that such a car should not have been involved in an accident. The first defendant found a one-year-old low-mileage car being offered for sale by the second defendant, a car sprayer and panel beater. The first defendant noticed that the bonnet had been crumpled and straightened or replaced but thought that the car was in good condition and recommended that the plaintiff buy it, which she did for £4,500. A few months later it became apparent that the car had been involved in a very bad accident, had been poorly repaired and was unroadworthy. The plaintiff sued the defendants and was awarded damages against both defendants by the judge, who held that the first defendant was in breach of his duty to take reasonable care and the second defendant was in breach of the implied term that the car was of merchantable quality. The first defendant appealed.
Held (May LJ dubitante) – A gratuitous agent who offered to purchase a secondhand car on behalf of another owed the buyer a duty of care to exercise the degree of care and skill which could reasonably be expected of him in all the circumstances, that degree of care and skill being measured objectively and not subjectively. Since the first defendant knew that the plaintiff was relying on him and since he ought to have been put on inquiry, by the crumpled bonnet and the second defendant’s trade, as to whether the car had been involved in an accident, he was in breach of that duty. The appeal would therefore be dismissed (see p 721 b c, p 722 d to f h j, p 723 e h to p 724 a c e and p 725 e f, post).
Dictum of Ormerod LJ in Houghland v R R Low (Luxury Coaches) Ltd [1962] 2 All ER 159 at 161 and Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575 applied.
Per Stuart-Smith LJ. When considering the question of whether a duty of care arises, the relationship between the parties is material: if they are friends the true view may be that the advice or representation is made on a purely social occasion and that the circumstances show that there is no voluntary assumption of responsibility (see p 721 j to p 722 a, post).
Notes
For the diligence required of a gratuitous agent, see 1 Halsbury’s Laws (4th edn) para 777, and for cases on the subject, see 1(2) Digest (Reissue) 606–607, 4160–4166.
Cases referred to in judgments
Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728, [1977] 2 WLR 1024, HL.
Donoghue (or M‘Alister) v Stevenson [1932] AC 562, [1932] All ER Rep 1, HL.
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465, [1963] 3 WLR 101, HL.
Page 719 of [1988] 3 All ER 718
Houghland v R R Low (Luxury Coaches) Ltd [1962] 2 All ER 159, [1962] 1 QB 694, [1962] 2 WLR 1015, CA.
Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175, [1987] 3 WLR 776, PC.
Cases also cited
Avery v Salie (1972) 25 DLR (3d) 495, Sask QB.
Beal v South Devon Rly Co (1864) 3 H & C 337, [1861–73] All ER Rep 972, 159 ER 560, Ex Ch.
Moffat v Bateman (1869) LR 3 PC 115, 16 ER 765.
Shiells v Blackburne (1789) 1 Hy Bl 159, 129 ER 94.
Thompson v Nanaimo Realty Co (1973) 44 DLR (3d) 254, BC Co Ct.
Appeal
The first defendant, Kamal K Prabhakar, and the second defendant, Bhupinder Singh Jandoo (trading as Jandoo Auto Crafts), appealed against the order of Mr John Gorman QC sitting as a deputy judge of the High Court in the Queen’s Bench Division whereby in an action brought by the plaintiff, Nazma Chaudhry, claiming damages in respect of the sale by the second defendant of a Volkswagen Golf car to the plaintiff on the recommendation of the first defendant, the judge gave judgment for the plaintiff against the first defendant for £5,526·58 plus £200 interest and against the second defendant for £6,570·20 plus £200 interest. The second defendant abandoned his appeal shortly before the hearing. The facts are set out in the judgment of Stuart-Smith LJ.
Mark Hoyle for the first defendant.
Timothy Scott for the plaintiff.
Cur adv vult 20 May. The following judgments were delivered.
20 May 1988. The following judgments were delivered.
STUART-SMITH LJ (giving the first judgment at the invitation of May LJ). This is an appeal from the judgment of Mr John Gorman QC, sitting as a deputy judge of the High Court in the Queen’s Bench Division in which he held the first defendant liable for the sum of £5,526·58. He held the second defendant also liable in a somewhat larger sum. Both defendants appealed against the judgment, but the appeal of the second defendant was abandoned shortly before the hearing.
The case concerns a Volkswagon Golf motor car sold by the second defendant to the plaintiff, the first defendant acting as an unpaid agent for the plaintiff. The sale price was £4,500. Unfortunately the car turned out to be unroadworthy and quite valueless.
The circumstances in which the sale arose were these. The plaintiff is a young woman of 26; she is an accountant; she knew nothing about the mechanical side of motor cars, but she had recently passed her driving test and was minded to buy a secondhand car.
The first defendant was a close friend; he was not a mechanic, but worked in a grocer’s shop. Nevertheless he had had quite a bit to do with motor cars. He had helped a cousin of the plaintiff to buy a car; he had not infrequently bought and sold cars for himself, seemingly making a profit on the transactions. The plaintiff clearly regarded him as someone who knew a good deal more about motor cars than she did. She asked him if he could see if he could find her a suitable car and she stipulated that such car should not have been involved in an accident. He agreed to do so. He was not to be paid and he acted solely out of friendship.
Shortly after this the first defendant came across the car. He was talking to a friend in the presence of the second defendant who said that he had a Golf motor car for sale which was available outside. The first defendant went to look at it. It looked very attractive. It
Page 720 of [1988] 3 All ER 718
had what the first defendant described as a ‘lot of make-up’ and he thought it would be a nice car for a lady to drive. He became aware that the second defendant was a car sprayer and panel beater and that the bonnet of the car had been crumpled and either straightened or replaced.
With the consent of the second defendant he took the car round to the plaintiff. He told her that it was in very good condition it was one year old and had 8,000 miles on the clock and that he highly recommended it. He also said that the owner was a friend of his and had a garage and no way would he give him a car that was not a good one. This was not correct, since he had never met the second defendant before.
The plaintiff asked the first defendant if the car had been involved in an accident and he said no. He commended the car and assured her that she need not have it examined by a mechanic. As a result of these assurances the plaintiff did not have it examined by a mechanic and she decided to buy it. She paid £100 to the first defendant, which he handed to the second defendant. The balance of the price was paid by banker’s draft direct to the second defendant.
Although there was some superficial appraisal by the plaintiff’s brother before the plaintiff decided to buy, the judge found that the plaintiff had relied on the first defendant.
Over the next few weeks the car did not perform satisfactorily, but it was not until about two months after the sale that the major defects came to light. While the plaintiff’s brother was driving the car it was involved in an accident. When the insurance company’s engineer, a Mr English, examined the car, he discovered that it had been involved in a previous accident. In his evidence he said that it had been involved in a very severe frontal impact such that the whole of the vehicle would need to be stripped out and the engine rebuilt. Some very bad attempt had been made to repair the vehicle, but it remained very severely damaged and unroadworthy. He likened it to a can of beans that had been cut open, it having in effect broken its back. Moreover, accessories had been fitted such as a battery, water bottles and cables, so that the repair was invisible unless the accessories were removed, and the underseal had been put over the chassis repair in an attempt to disguise it. The break or cut in the chassis was left open with ragged edges and the repair had left it distorted and misaligned. It was not economical to repair it.
The car had indeed been involved in a serious previous accident and had been bought as salvage. The repairs had been carried out by or on behalf of the second defendant. His claim that he had done them properly was rejected by the judge, who held that the positioning of the accessories and use of the underseal were intended to disguise and conceal the true state of affairs. The second defendant also alleged that he had told the first defendant that the car was a salvaged car which had been repaired. This was also rejected, and the judge held the second defendant liable on the basis that there was a breach of the implied term under s 14(2) of the Sale of Goods Act 1979 that the car was of merchantable quality.
The judge held that the first defendant was in breach of his duty to take reasonable care. He regarded him as a person who was more skilled than someone with no knowledge of cars, though not putting him in the same position as a factor or seller. The gist of his finding is that, having been specially asked to find a car that had not been involved in an accident, the least he could do was to ask if it had been, that he had been put on notice in respect of the crumpled bonnet which he should have followed up further and that he was commending as attractive and accident free a car that was neither.
Counsel for the first defendant accepts that he was under a duty of care to the plaintiff, but he submitted that the judge had imposed too high a standard of care and when the correct standard was applied the first defendant was not in breach. In the forefront of his argument is the proposition that the first defendant was a gratuitous or unpaid agent and that the duty on such a person is to take such care towards his principal as he would in relation to his own affairs and to exhibit such skill as he actually possesses. He further
Page 721 of [1988] 3 All ER 718
submitted that this standard is an entirely subjective one. This appears to mean in the context of this case that if the first defendant would have bought the car himself, as he said he would, and is an honest man, as the judge found him to be, he cannot be held liable because he has acted up to the standard expected of an unpaid agent.
I cannot accept this. The degree of care and skill owed by a gratuitous agent is stated to be—
‘such skill and care as persons ordinarily exercise in their own affairs or, where the agent has expressly or impliedly held himself out to his principal as possessing skill adequate to the performance of a particular undertaking, such skill and care as would normally be shown by one possessing that skill.’
(See Bowstead on Agency (15th edn, 1985) p 152, art 44(3).) But I am quite satisfied that this is an objective standard and is not simply to be measured by the agent’s honest statement that he would have similarly acted if he had been transacting the business on his own account, however foolish that may be. For my part, I would prefer to state an agent’s duty of care as that which may reasonably be expected of him in all the circumstances. This was the approach of the Court of Appeal in Houghland v R R Low (Luxury Coaches) Ltd [1962] 2 All ER 159 at 161, [1962] 1 QB 694 at 698 on the somewhat analogous case of a gratuitous bailee, where Ormerod LJ said:
‘I have always found some difficulty in understanding just what was “gross negligence”, because it appears to me that the standard of care required in a case of bailment, or any other type of case, is the standard demanded by the circumstances of that particular case. It seems to me that to try to put a bailment, for instance, into a watertight compartment—such as gratuitous bailment on the one hand, and bailment for reward on the other—is to overlook the fact that there might well be an infinite variety of cases which might come into one or the other category. The question that we have to consider in a case of this kind (if it is necessary to consider negligence) is whether in the circumstances of this particular case a sufficient standard of care has been observed by the defendants or their servants.’
I have no doubt that one of the relevant circumstances is whether or not the agent is paid. If he is, the relationship is a contractual one and there may be express terms on which the parties can rely. Moreover, if a paid agent exercised any trade, profession or calling, he is required to exercise the degree of skill and diligence reasonably to be expected of a person exercising such trade, profession or calling, irrespective of the degree of skill he may possess. Where the agent is unpaid, any duty of care arises in tort. Relevant circumstances would be the actual skill and experience that the agent had, although, if he has represented such skill and experience to be greater than it in fact is and the principal has relied on such representation, it seems to me to be reasonable to expect him to show that standard of skill and experience which he claims he possesses. Moreover, the fact that principal and agent are friends does not in my judgment affect the existence of the duty of care, although conceivably it may be a relevant circumstance in considering the degree or standard of care.
Counsel for the plaintiff has submitted that the duty of care arises not only because of the relationship of principal and agent, but also under the doctrine enunciated in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465. The House of Lords held that a negligent, although honest, misrepresentation, spoken or written, may give rise to an action for damages for financial loss caused thereby, apart from any contract or fiduciary relationship, since the law will imply a duty of care when a party seeking information from a party possessed of special skill trusts him to exercise care, and that party knew, or ought to have known, that reliance was being placed on his skill and judgment.
When considering the question of whether a duty of care arises, the relationship
Page 722 of [1988] 3 All ER 718
between the parties is material. If they are friends, the true view may be that the advice or representation is made on a purely social occasion and the circumstances show that there has not been a voluntary assumption of responsibility.
Lord Reid said ([1963] 2 All ER 575 at 580, [1964] AC 465 at 482):
‘The law ought so far as possible to reflect the standards of the reasonable man, and that is what Donoghue (or McAlister) v. Stevenson ([1932] AC 562, [1932] All ER Rep 1) sets out to do. The most obvious difference between negligent words and negligent acts is this. Quite careful people often express definite opinions on social or informal occasions, even when they see that others are likely to be influenced by them; and they often do that without taking that care which they would take if asked for their opinion professionally, or in a business connexion. The appellants agree that there can be no duty of care on such occasions, and we were referred to American and South African authorities where that is recognised, although their law appears to have gone much further than ours has yet done.’
But where, as in this case, the relationship of principal and agent exists, such that a contract comes into existence between the principal and the third party, it seems to me that, at the very least, this relationship is powerful evidence that the occasion is not a purely social one, but, to use Lord Reid’s expression, is in a business connection. Indeed the relationship between the parties is one that is equivalent to contract, to use the words of Lord Devlin, save only for the absence of consideration (see [1963] 2 All ER 575 at 611, [1964] AC 465 at 530).
It seems to me that all the necessary ingredients are here present. The plaintiff clearly relied on the first defendant’s skill and judgment and, although it may not have been great, it was greater than hers and was quite sufficient for the purpose of asking the appropriate questions of the second defendant. The first defendant also knew that the plaintiff was relying on him. Indeed he told her that she did not need to have it inspected by a mechanic and she did not do so on the strength of his recommendation. It was clearly in a business connection, because he knew that she was there and then going to commit herself to buying the car for £4,500 through his agency.
If, as I think, the duty of care in this case can equally be said to arise under the Hedley Byrne principle, then logically the standard of care, or the nature and extent of the duty, should be the same as that required of an unpaid agent. And this is an additional reason why I prefer to state the duty as I have, namely to take such care as is reasonably to be expected of him in all the circumstances.
Was there a breach of this duty? Counsel for the plaintiff submits that this is a question of fact and one to be decided by the jury, had there been one, and that we should not interfere with the judge’s decision. Where the conclusion depends on an issue of primary fact, this court will not normally interfere. The judge has seen and heard the witnesses and is in a far better position to decide such issues than this court. But, where, as here, the conclusion that the appellant has been negligent depends on inferences drawn from the primary facts, this court may well conclude that the judge has drawn the wrong inference or imposed too high a standard. But for my part I wholly agree with the judge’s conclusion. It seems to me that, whatever standard of care is required, the first defendant fell below it. The plaintiff had stipulated that the car should not have been involved in an accident. The first defendant never asked the second defendant about this, and in answer to the plaintiff’s question he assured her that it had not. When he was asked about this in evidence he said that, since he had no knowledge of the matter, he said ‘No’, and he went on to tell her that she need not have the car examined by a mechanic. I do not think that this answer and advice can possibly be justified simply on the basis that the first defendant honestly thought that it had not been so involved because the car looked nice and well got up. When one adds to this the judge’s finding that the first defendant was put on notice by the crumpled bonnet, the case against him was in my judgment a powerful one.
Page 723 of [1988] 3 All ER 718
I must, however, deal with two arguments advanced by counsel for the first defendant. First, he submits that the question whether the car had been involved in an accident was far too vague. It might cover a scratch or a bump going in or out of the garage or minor damage resulting from a slight collision which could easily be put right. I am not impressed with this argument. The plaintiff’s stipulation must be given a reasonable interpretation. It is common knowledge that sometimes attempts are made to stitch together motor cars that have been involved in serious collisions affecting their roadworthiness; unless the repairs are done scrupulously, there is a serious risk that the value, performance or roadworthiness of the rehabilitated car will be affected. To my mind this is what the plaintiff’s stipulation and inquiry was directed to and was so understood.
Second, counsel for the first defendant submitted that, if the first defendant had asked the second defendant the question whether the vehicle had been involved in an accident, he would have received a negative answer. In the light of the judge’s findings that the second defendant’s purpose in carrying out the repairs in the way he did was to conceal the true state of the vehicle, I am prepared to accept that as a matter of probability, although not certainty, this is so. If the first defendant had asked the question and reasonably believed the answer, then in my view he would have discharged his duty to the plaintiff. I emphasise the words ‘reasonably believed’ because it seems to me that the first defendant showed a remarkably degree of naivety when dealing with an unknown second hand car dealer, whose trade was that of panel beater and paint sprayer. But I do not think it is helpful to speculate on this question. The fact is that the first defendant did not ask the question and the judge has held, rightly in my judgment, that the plaintiff bought the car in reliance on what the first defendant did and said.
I would dismiss the appeal.
STOCKER LJ. I adopt, with gratitude, the exposition of the facts given by Stuart-Smith LJ in his judgment, which I have read in draft, and which, accordingly, I do not repeat.
This appeal does not raise any question whether or not any duty was owed at all, since it was conceded that the first defendant was a gratuitous agent and owed the appropriate duty. On the facts of this particular case I agree that the concession was properly made, although the incidence of the duty may be a matter of dispute.
In many cases in which actionable negligence is claimed in respect of the voluntary giving of advice, the first question that arises is whether any duty of care is owed in respect of such advice where the relationship of the parties is such that no voluntary assumption of legal responsibility was intended or can properly be imputed and where the giving of the advice was motivated solely out of friendship. Thus, in my view, in the absence of other factors giving rise to such a duty, the giving of advice sought in the context of family, domestic or social relationships will not in itself give rise to any duty in respect of such advice. The existence of the duty would depend on all the circumstances in which the advice was sought or tendered. This problem does not arise in this case because of the concession referred to that the duty of care did exist. Whether the duty arises out of a gratuitous agency or by reason of the extension of the Donoghue v Stevenson [1932] AC 562, [1932] All ER Rep 1 principle to economic loss sustained as a result of negligent advice as enunciated in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465, on the facts of this case, even if the existence of the duty had not been conceded, I should, for my part, have felt bound to conclude that it did.
The first defendant accepted the task of finding a motor car suitable for the plaintiff in respect of which a specific characteristic was stipulated, viz that it had not been involved in an accident. The first defendant purported to have done so and stated specifically in answer to the plaintiff’s question that it had not been involved in any accident and assured her that there was no need to have it examined by a mechanic. He gave her information with regard to its provenance which was incorrect since he did not know the vendor before seeing the car. In making these assertions to the plaintiff he went
Page 724 of [1988] 3 All ER 718
beyond what was required of him in his capacity as a friend and it seems to me he owed a duty of care to the respondent. The issue arising on this appeal, therefore, relates not to the existence of a duty of care but to its extent.
Counsel for the first defendant submits that the duty was that of a gratuitous agent which is stated in Bowstead on Agency (15th edn, 1985) p 152, art 44(3) to be ‘such skill and care as persons ordinarily exercise in their own affairs.' I doubt whether this is an adequate formulation, at least in the circumstances of this case, when applied to advice given to another. However, even if it be the appropriate duty, the words ‘ordinarily exercise in their own affairs’ seem to me to postulate an objective and not a subjective standard. If a subjective standard be correct, then in my view the duty so expressed becomes virtually meaningless and would cover circumstances in which no care at all had been taken. Objectively regarded, there was sufficient evidence before the judge from which he could properly conclude that the first defendant did not exercise such care, and the fact that he honestly asserted that he would have been happy to purchase the car himself begs the question rather than resolving it. In my view, the fact that he did not ask the vendor specifically whether or not the car had been involved in any accident did not itself establish a breach provided that he had reasonable grounds for belief that it had not and if he had such reasonable grounds it would not necessarily follow that his assertion to this effect to the plaintiff amounted to actionable negligence. This, however, is to consider this aspect of his advice to her in isolation. He did not, in fact, contrary to his assertion, know the vendor. He did not ask for, or examine, any registration documents, or make any inquiries as to the previous owner of the car or its provenance. He bought it from a person whose trade was that of a panel beater and observed that the car had a crumpled bonnet. In my view, any purchaser of a car in these circumstances, however naive, would be put on inquiry. Thus, judged even by the standard of care for which counsel for the first defendant contends, if objectively considered, the first defendant failed to discharge it.
In my opinion, in the circumstances such as prevailed here, a more appropriate test is that suggested by Ormerod LJ in Houghland v R R Low (Luxury Coaches) Ltd [1962] 2 All ER 159 at 161, [1962] 1 QB 694 at 698: ‘ … whether in the circumstances of this particular case a sufficient standard of care has been observed … ' On either formulation of the duty, in my view, the first defendant failed to discharge the duty and was accordingly liable for actionable negligence as the judge had found.
I have sympathy for the first defendant. He was, as the judge found, acting honestly and without any apparent motive to mislead the plaintiff. Common prudence would indicate that he should have explained the circumstances in which he obtained the car and not voluntarily have accepted a duty which otherwise might well not have been imposed on him.
Accordingly, I agree that this appeal should be dismissed.
MAY LJ. I too have had the opportunity of reading the judgment of Stuart-Smith LJ in draft and I adopt, with equal gratitude, his recital of the relevant facts of this case.
In developing his arguments in support of the appeal counsel for the first defendant began to lead the court into the field of gratuitous agents and the duty owed in law by such agents to their principals, referring us to authorities decided as long ago as 1789, 1864 and 1869. Counsel will I am sure forgive my comment that I found such an attempted exegesis somewhat unreal in 1988, when the relevant facts were in brief that a young woman of 26 asked a close friend of hers and her family, albeit one who knew something about motor cars, to look out for a suitable secondhand car for her to buy and on which to try out her newly qualified skills.
The real questions in this case, looked at with common sense and avoiding unnecessary legal jargon, were, first, did the friend seeking the car owe the intending purchaser any duty of care in and about his search, second, if he did, what was its nature and extent and, third, did he commit any breach of that duty causing the respondent any damage?
Page 725 of [1988] 3 All ER 718
As Stuart-Smith and Stocker LJJ have recorded in their judgments, counsel for the first defendant conceded that his client owed the intending purchaser at least the duty to take such care in and about her business, namely the search for a suitable car for her, as he would have done about his own affairs had he been looking for a car for himself. In the light of the more cautious approach taken in recent cases by the House of Lords and the Privy Council to the question whether a duty of care exists, as expressed by Lord Wilberforce in the familiar passage from his speech in Anns v Merton London Borough [1977] 2 All ER 492 at 498, [1978] AC 728 at 751–752 (see, for instance, the opinion of the Privy Council in Yuen Kun Yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175), I for my part respectfully doubt whether counsel’s concession in the instant case was rightly made in law. I do not find the conclusion that one must impose on a family friend looking out for a first car for a girl of 26 a Donoghue v Stevenson [1932] AC 562, [1932] All ER Rep 1 duty of care in and about his quest, enforceable with all the formalities of the law of tort, entirely attractive.
Nor do I think, on the facts of this case, that but for the concession one can apply to the young man’s answer to the girl’s inquiry about the car’s history—
‘the principle that a duty of care arises where a party is asked for and gives gratuitous advice on a matter within his particular skill or knowledge and knows or ought to have known that the person asking for the advice will rely on it and act accordingly.’
(See Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705 at 711, [1988] AC 175 at 192, referring to Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465.) To do so in this and similar cases will make social regulations and responsibilities between friends unnecessarily hazardous.
However, the concession was made, and I agree with Stuart-Smith and Stocker LJJ that we must accordingly decide this appeal on that basis. In those circumstances I think that one is driven to the conclusion that the findings by the deputy judge that the plaintiff did ask the first defendant if the car had been involved in an accident and that he had answered that it had not without any direct inquiry to the vendor, whereas in truth it had been involved in a serious accident and been extensively but unskilfully repaired, inevitably led to the conclusion that the first defendant did breach his conceded duty of care and that the purchaser suffered the damage alleged in consequence.
I too would therefore dismiss this appeal.
Appeal dismissed. Leave to appeal to House of Lords refused.
Solicitors: Khans (for the first defendant); Benson Mazure & Co (for the plaintiff).
Carolyn Toulmin Barrister.
R v Birmingham Juvenile Court, ex parte G and others (minors)
R v Birmingham Juvenile Court, ex parte R (a minor)
[1988] 3 All ER 726
Categories: FAMILY; Children
Court: QUEEN’S BENCH DIVISION (CROWN OFFICE LIST)
Lord(s): SIR STEPHEN BROWN P
Hearing Date(s): 18, 19 APRIL, 6 MAY 1988
Children and young persons – Care proceedings in juvenile court – Care order – Application for order – Dismissal of application – Local authority offering no evidence in support of application – Guardian ad litem wishing to adduce evidence in support of application – Whether juvenile court required to dismiss application if local authority offering no evidence to support its application – Whether guardian ad litem entitled to be heard.
A local authority made separate applications to the juvenile court for care orders under s 1 of the Children and Young Persons Act 1969 in respect of four children from two families. The children were suspected of having suffered abuse. A guardian ad litem was appointed to represent the interests of the children in both cases. Before the hearing of the applications the local authority decided that there was no longer any need for care orders and at the commencement of the proceedings the authority applied to withdraw the applications. When the court refused that application the authority offered no evidence at the hearing. The guardian ad litem opposed the authority’s course of action and sought to adduce evidence to support the making of care orders but the court held that the guardian ad litem could not initiate care proceedings and that in the absence of any evidence put forward by the local authority it had no option but to dismiss the applications. The guardian ad litem applied for judicial review to quash the juvenile court’s decision.
Held – Care proceedings were not adversarial in nature despite their form, since the local authority and the children involved were not adversaries. Accordingly, even if the local authority decided not to offer any evidence as a means of having its own application for a care order dismissed, the juvenile court could and should hear any evidence the guardian ad litem wished to adduce before dismissing the application, since the children were entitled to be heard in the proceedings by their guardian ad litem. Since the juvenile court had failed to hear the guardian ad litem its decision to dismiss the applications would be quashed and the applications remitted for further hearing (see p 731 e to j and p 732 b c e, post).
Notes
For the procedure in care proceedings, see 24 Halsbury’s Laws (4th edn) paras 764–765, and for cases on the subject, see 28(2) Digest (Reissue) 944–945, 2447–2451.
For the Children and Young Persons Act 1969, s 1, see 6 Halsbury’s Statutes (4th edn) 229.
Cases referred to in judgment
Humberside CC v DPR (an infant) [1977] 3 All ER 964, [1977] 1 WLR 1251, DC.
R v Wandsworth West Juvenile Court, ex p S [1984] FLR 713, CA.
Cases also cited
A v Liverpool City Council [1981] 2 All ER 385, [1982] AC 363, HL.
Page 727 of [1988] 3 All ER 726
Bond v Bond [1964] 3 All ER 346, [1967] P 39, DC.
D (a minor) (justices’ decision: review), Re [1977] 3 All ER 481, [1977] Fam 158.
M v Westminster City Council [1985] FLR 325, DC.
R v Birmingham Juvenile Court, ex p P and S [1984] FLR 343.
R v Croydon Juvenile Court, ex p N [1987] 1 FLR 252.
R v Milton Keynes Justices, ex p R [1979] 1 WLR 1062, DC.
Applications for judicial review
The guardian ad litem appointed by the court applied for judicial review by way of orders of certiorari to quash decisions made by the Birmingham Juvenile Court on 10 August 1987 and 11 September 1987 dismissing applications made by the Birmingham City Council under s 1(2) of the Children and Young Persons Act 1969 in respect of four minors without giving the guardian ad litem the opportunity of being heard in support of the applications. The guardian ad litem also sought an order of mandamus requiring the juvenile court to hear evidence and determine the applications on the merits. The first application concerned three young children, N, C and B, who were the children of two sisters, JG and TG, who lived together, with the children, in a flat. The second application concerned a child, DR. The facts are set out in the judgment.
Joanna Hall for the guardian ad litem.
Peter Haynes for the mother of DR.
Roger D H Smith for JG and TG.
Margaret Hodgson for the juvenile court.
Jeremy Posnansky (who did not appear below) for the local authority.
Cur adv vult
6 May 1988. The following judgment was delivered.
SIR STEPHEN BROWN P. The court has before it two separate applications for judicial review by a guardian ad litem appointed by the Birmingham Juvenile Court in respect of two separate decisions of the Birmingham Juvenile Court, differently constituted, on 10 August 1987 and 14 September 1987. Both applications raise the same point and with the consent of all the parties concerned have been heard together. In each case, the juvenile court was sitting to hear an application by the Birmingham City Council for a care order under s 1 of the Children and Young Persons Act 1969, and in each case, the court was hearing an application for a full care order following the issue of proceedings by the Birmingham City Council as the local authority under s 1(2) of the 1969 Act. The court had previously made interim care orders in and/or adjourned the hearing of the respective applications.
The first application which has been argued before me concerns three little girls, N, C and B. At the relevant time, N was five years of age, C and B were both four years of age. N and C are the children of JG. B is the child of TG, the sister of JG. They all lived together in a flat which was rented by JG. In May 1987 it was noticed that two of the girls, N and C, had vaginal discharges when they visited a health centre. Swabs were taken and these showed that C had gonorrhoea and that N had a slight infection. It was also reported that the child B had previously received treatment for gonococcal gonorrhoea.
The children were referred to a special clinic for treatment, and the parents were interviewed. However, no explanation was offered as to the likely cause of C’s gonorrhoea infection. The local authority’s social services department was naturally concerned at the presence of a gonorrhoea infection, which was, of course, a sexually transmittable disease. Place of safety orders were sought and made. The mothers were interviewed, and it was
Page 728 of [1988] 3 All ER 726
then discovered that the children had been left alone with a man at times who had acted as a baby sitter. The view formed after investigation both by social workers and after referral to a psychologist was that sexual abuse may well have occurred in these cases.
The social inquiry report of the City of Birmingham social services department shows that the conclusion of the social services department was that the medical evidence showed that C suffered from a sexually transmitted disease, the most likely cause being sexual abuse. Further, and I quote from the report:
‘… there is also no question that [B] has a history of having suffered from gonococcal gonorrhoea, an infection which had entered her body through her eyes, and the most likely explanation given was poor hygiene ([TG] had gonorrhoea at the same time). For these type of infections to be found in children of their young age is a matter of serious concern.’
Accordingly, on 3 June 1987 the local authority issued proceedings in the juvenile court under s 1(2) of the 1969 Act. The justices made interim care orders in respect of all three children. At the same time they also made an order under the provisions of s 32A of the 1969 Act that the mothers should not be treated as representing the children, and they made an order under s 32B appointing a guardian ad litem who is the applicant in these proceedings.
In accordance with her statutory duties, the guardian carried out extensive investigations into the background and circumstances of the three children and their families. She prepared a comprehensive report with a view to presenting it to the juvenile court. It is dated 4 September 1987 and is exhibited to her affidavit. In her affidavit she states that as a result of her inquiries she was seriously concerned for the welfare of all three children. In summary, she states that her reasons were as follows: (a) all three children had a history of vaginal infections, (b) the available medical evidence and opinion could not exclude the possibility that all three children had been sexually abused, (c) the child B was found to have a damaged hymen for which no adequate explanation was given by her mother, (d) N and C had told their mother and four professional interviewers that C had been sexually abused in N’s presence by a male friend of their mother, (e) in August 1985, TG, the mother of the child B, had been convicted of loitering for the purposes of prostitution and had admitted to the guardian that she had been forced into prostitution by B’s father and (f) voluntary supervision by the social and health services in the past had, in the opinion of the guardian, failed to afford adequate protection to the children.
On 6 July 1987 the local authority returned the children to the day-to-day care and control of their respective mothers. This was done without any consultation with the guardian. On 27 July the matter came before the juvenile court in respect of an application for a further interim care order and, on that occasion, the guardian states in her affidavit that the solicitor on behalf of the local authority stated that she intended to seek leave to withdraw the proceedings in respect of B. However, the guardian expressed concern because she had not completed her inquiries, and in the event, the court made interim care orders in respect of N and C and adjourned B’s case.
In August B developed a further vaginal infection. The full care hearing was fixed for 14 September. By this time, the relevant notices indicated that the grounds on which the local authority was seeking care orders were those expressed to be under s 1(2)(c): that the children were ‘exposed to moral danger’ and were in need of care and control which they were unlikely to receive unless the court made an order under the section.
The guardian, in her affidavit, states that as a result of her inquiries she was of the view that there was evidence on which the justices could find the conditions established for the making of care orders and that she wished to recommend that a supervision order for a period should be made so that control could be exercised and, in particular, regular medical examinations ensured.
Page 729 of [1988] 3 All ER 726
On 14 September, the cases came before the juvenile court for a full hearing. The Birmingham City Council, the applicants, were represented by counsel; JG was represented by a solicitor, as was TG. The father was also represented by a solicitor, and the guardian ad litem for all the three children was also represented by a solicitor.
Counsel for the local authority outlined the previous history of the proceedings and then applied to the court to withdraw the application. He stated that both mothers were now co-operating with the social services department on a voluntary basis and that the male person who had been the subject of suspicion relating to allegations of possible abuse was no longer in contact with the household. Accordingly, he said the local authority had come to the conclusion that there was no longer any need for an order to be made under s 1 of the 1969 Act. He added that if the court refused to permit him to withdraw the application, he would offer no evidence.
The solicitor appearing for the guardian ad litem opposed the application to withdraw the proceedings. He told the bench that the guardian was not satisfied that voluntary supervision would adequately safeguard the interests of the children, particularly having regard to past failure to respond to supervision on the part of the mothers. He submitted that the court should not grant leave to the applicant to withdraw the application in the absence of hearing evidence. He further said that if leave to withdraw was refused, and thereafter the local authority proceeded to offer no evidence, then in that situation he would ask to be permitted to call evidence on behalf of the children in support of the application.
After hearing argument, the justices retired to consider their decision. When they returned to court they refused to grant leave to the local authority to withdraw the application. Counsel for the local authority then formally offered no evidence. The justices declined to permit the solicitor for the guardian to adduce evidence in support of the application, and they dismissed the application. In the result, no evidence at all was heard and the guardian was not permitted to place her report before the justices.
The chairman of the juvenile court has sworn an affidavit which is before this court. In his affidavit, he states that when the justices retired to consider their decision, they sought the advice of their clerk and acted on the advice which she gave to them. In para 12 of his affidavit, he sets out fully and carefully the details of the advice which was given. He states that it was on the basis of that advice that the justices decided to dismiss the proceedings without affording to the guardian ad litem an opportunity to adduce evidence or to place her report before the court.
In summary, the advice was to the effect that the Magistrates’ Courts (Children and Young Persons) Rules 1970, SI 1970/1792, provide that r 14(order of evidence and speeches: complaint) of the Magistrates’ Courts Rules 1981, SI 1981/552, is to apply as if references to the complainant were references to the applicant and references to the defendant were references to the respondent, and that the effect of this is to make care proceedings adversarial in form. He further states that the justices were advised that the guardian was not one of the persons authorised to commence care proceedings under s 1(1) of the 1969 Act, and accordingly could only respond to an application for a care order. Secondly, he states that the court had no power to compel the local authority to call evidence.
Counsel for the guardian submits that the tactics employed by counsel for the local authority and the order made by the justices in the result, dismissing the application, prevented her from exercising her statutory duty to safeguard the interests of the children. She referred to s 32B(3) of the 1969 Act, which specifically provides:
‘A guardian ad litem appointed in pursuance of this section shall be under a duty to safeguard the interests of the child or young person in the manner prescribed by rules of court.’
She submitted that the justices had been made aware of the fact that the guardian had material evidence to put before the court, but by dismissing the proceedings, they had
Page 730 of [1988] 3 All ER 726
effectively prevented consideration of the application on its merits to the consequent detriment of the welfare of the children concerned. She submitted that by purporting to follow the letter of the rules as advised by their clerk, the court misunderstood the nature of care proceedings. Despite the adversarial form of the proceedings, she submitted that care proceedings are essentially non-adversary, non-party proceedings as indicated by Lord Widgery CJ in Humberside CC v DPR (an infant) [1977] 3 All ER 964 at 967, [1977] 1 WLR 1251 at 1255.
Further, she submitted that the justices failed to act judicially in the exercise of their discretion to dismiss the proceedings. She cited a passage from the judgment of Ackner LJ in R v Wandsworth West Juvenile Court, ex p S [1984] FLR 713 at 717–718. The effect of the decision of the justices was, she submitted, to give the local authority absolute discretion to decide what should be done or not done to safeguard the interests and welfare of the children. In fact, the children by their guardian were parties to the proceedings but were effectively denied a hearing.
Counsel for the local authority made four principal submissions: firstly, that care proceedings are a matter of last resort and that the local authority cannot be required to pursue an application when it regards it as no longer appropriate to do so; secondly, that the only persons specified in the 1969 Act as persons who can bring proceedings are a very limited class and that guardians ad litem are not such persons; thirdly, that if a local authority should decide not to call evidence then the court can dismiss the application; finally, that he that if there had been an error, then this court, in the exercise of its discretion, should not remit the matter for a further hearing after the lapse of time since the relevant hearing.
He adopted the position taken by the chairman of the bench as set out in his affidavit to which I have referred. He contended that the relevant rules applicable to these proceedings made the proceedings adversarial. He questioned the validity of Lord Widgery CJ’s dictum in the Humberside case [1977] 3 All ER 964 at 967, [1977] 1 WLR 1251 at 1255. He contended that the Magistrates’ Courts (Children and Young Persons) Rules 1970 brought into operation the Magistrates’ Courts (Children and Young Persons) (Amendment) Rules 1978, SI 1978/869, and the Magistrates’ Courts Rules 1981 with the result that the appropriate procedure was that provided for in the 1978 and 1981 rules. In particular, he relied on r 14(1) of the Magistrates’ Courts Rules 1981. This rule sets out the order of evidence and speeches on the hearing of a complaint. He contended that it did not provide for the intervention of any other party in the proceedings before the conclusion of the evidence called for by the complainant. Further, rr 19 and 20 of the Magistrates’ Courts (Children and Young Persons) Rules 1970 provided that the respondents to an application should put forward their case after the court had heard evidence in support of the applicant’s case, and only after the evidence adduced had established a prima facie case. Rule 20 provides for the procedure to be followed after the applicant’s case has been proved. In particular, it provides that where a guardian ad litem has been appointed, the court shall then take into consideration his written report to the court.
Counsel for the local authority argued that a two-stage process in the proceedings was contemplated. That is to say, first, the establishing of the necessary conditions under s 1 of the 1969 Act to enable a care order to be made, and then, second, consideration of what steps should be taken, or order made, in the best interests of the child concerned. Until and unless a prima facie case had been made out by the applicant, he contended that the guardian could not be heard.
The second case before this court relating to the minor, DR, raises a similar issue. This little boy was born on 2 June 1986. He has two half sisters, C and S. Place of safety orders were obtained by the Birmingham City Council social services department at the end of January 1987 in respect of all three children following the complaint of an assault by the father of DR on his half sister, CR. Care proceedings in respect of all three children were commenced in February 1987, and interim care orders were made by the justices. In due
Page 731 of [1988] 3 All ER 726
course, further interim care orders were made and an order was made appointing a guardian ad litem under s 32B of the 1969 Act. The guardian ad litem was and is the same person as the guardian in the first case to which I have referred.
On 10 August 1987 the case came before the justices for a final hearing, and counsel for the local authority applied to withdraw the proceedings in respect of DR. He told the justices that if they did not allow the proceedings to be withdrawn, he would offer no evidence. The solicitor acting on behalf of the guardian ad litem opposed that application and indicated that he would wish to present evidence on behalf of the minor in support of the application for a care order if no evidence was in fact called by the local authority.
As in the previous case to which I have referred, the justices, after consideration, refused to accede to the application to withdraw the proceedings. Thereafter, the local authority offered no evidence and the justices declined to hear any evidence at the instance of the guardian ad litem. The same arguments have been raised in relation to this application as were addressed to the court in the previous application. Once again, the guardian ad litem had prepared a comprehensive report after a thorough investigation and desired to place evidence before the court with a view to supporting a recommendation that a supervision order should be made in the case of DR. As in the previous case, this was never able to be placed before the court in the light of the decision of the justices to dismiss the application.
In both the cases before this court, the local authority had considered that there were grounds for bringing care proceedings in respect of the relevant children. Under s 2(2) of the 1969 Act, it became the duty of the authority to exercise their power to bring care proceedings in respect of the children unless they were satisfied that it was neither in the children’s interest nor the public interest to do so. On each of the relevant occasions at the full care hearing before the juvenile court, the court refused to grant leave to the authority to withdraw the proceedings. The children were parties by their guardian ad litem to the proceedings. In my judgment they should have been heard. The magistrates in fact dismissed the applications without hearing any evidence at all. The justices considered that since the proceedings were adversarial, the rules which regulated the procedure for the hearing should be strictly applied. However, in these proceedings, the children were not adversaries at all. They were the subject of the proceedings and it was in respect of their welfare that the proceedings had been brought before the court.
This is not a case where a party to an issue before the court is complaining of prejudice because of a failure to follow the provisions of the rules. In the absence of hearing any evidence at all, it would seem to me to be quite impossible for the magistrates to exercise their discretion judicially. In the light of the course which the local authority indicated it proposed to take, it would have been open to the justices to require evidence to be adduced before considering the question of whether to allow the withdrawal of the proceedings. However, having dealt with the matter in good faith on the basis of argument at that stage, it would seem to be a nonsensical result if the decision of the magistrates not to permit the withdrawal of the proceedings could simply be thwarted by the action of the local authority in declining to call evidence.
The evidence sought to be adduced by the guardian in both these cases was in effect evidence to be tendered in support of the local authority’s application for a care order. The application had not been withdrawn and was still before the court when the justices declined to hear the guardian. The justices, in my view, could have received evidence therefore in support of the application. It was their court and their discretion which had to be exercised. They should have had it clearly in mind that the interests of the children were of primary importance. In my judgment, it would not have been a case of permitting the guardian to substitute herself for the local authority. The application had been brought to the court by the local authority and leave to withdraw it had been refused. Therefore, it was still alive and a matter which had to be determined.
I am bound to say that I find the action of the local authority in these two cases to be highly questionable. It is true that, as has been said, these applications for judicial review
Page 732 of [1988] 3 All ER 726
are not specifically directed to the action of the local authority. However, the local authority precipitated by its action the course which the justices took. Despite the criticism which has been levelled at the dictum of Lord Widgery CJ in Humberside CC v DPR (an infant) [1977] 3 All ER 964 at 967, [1977] 1 WLR 1251 at 1255, I, for my part, would wish to indorse its validity. These proceedings are not adversarial in their nature, although in form there is an applicant and a respondent. The council and the children are not adversaries.
In my judgment, in each case, the decision to dismiss the application was not made in the proper exercise of the justices’ discretion and accordingly should be quashed. I would add that I have sympathy with the justices who were confronted with a situation which should never have arisen. The local authority has a grave responsibility in the matter of children. It should never have applied to withdraw the proceedings without full consultation with the guardian ad litem who represented the children. It should certainly not have offered no evidence in order, so it would seem, to force the magistrates’ hands. Tactics of this nature undermine the very purpose of the statute which is designed for the protection of children. Accordingly, the application for judicial review in each case will be allowed, and certiorari will go to quash the decisions of the two juvenile courts.
As to what should happen now, counsel for the local authority has submitted that since time has passed since the relevant decisions of the courts were made, it would be inappropriate to remit these cases to be reheard. I have been assured by counsel that voluntary supervision in each case is working satisfactorily. It might well have been that after a full hearing, the magistrates would have agreed to make no order on the basis that voluntary supervision would be satisfactory and appropriate. That is not, of course, the point which has been argued before the court. However, once the decisions are quashed, then the applications remain alive and, accordingly, I feel that I am bound to remit each case to be heard by a panel differently constituted.
I hope that in the light of this judgment, it will be possible for those interested in these children to investigate the present position and to come to a satisfactory common view on it. If that can be done, then, of course, the matter can be dealt with satisfactorily without the necessity of a lengthy hearing. I shall not make an order for mandamus. I shall remit each case to be reconsidered by a bench differently constituted.
Orders accordingly.
Solicitors: Penningtons Ward Bowie agents for Young & Lee, Birmingham (for the guardian ad litem); Anthony Collins & Co, Birmingham (for the mother of DR); Plunkett Lohmus & Co, Birmingham (for JG and TG); M A Walker, Birmingham (for the juvenile court); G W T Pitt, Birmingham (for the local authority).
Bebe Chua Barrister.
Practice Note
(Crown Court: distribution of court business: serious and complex fraud)
[1988] 3 All ER 733
Categories: PRACTICE DIRECTIONS
Court: COURT OF APPEAL, CRIMINAL DIVISION
Lord(s): LORD LANE CJ AND TUCKER JJ
Hearing Date(s): 22 SEPTEMBER 1988
Crown Court – Distribution of court business – Serious and complex fraud cases – Places of trial – Supreme Court Act 1981, s 75(1) – Criminal Justice Act 1987, s 5(1).
LORD LANE CJ gave the following direction at the sitting of the court.
1. With the concurrence of the Lord Chancellor and pursuant to s 75(1) of the Supreme Court Act 1981 I make with effect from 31 October 1988 the following direction with regard to the place of trial for cases of serious and complex fraud transferred to the Crown Court under the Criminal Justice Act 1987.
2. The proposed place of trial specified in the notice of transfer under s 5(1) of the Criminal Justice Act 1987 shall be one of the following Crown Court centres:
Circuit Centres
Midland and Oxford Birmingham, Nottingham, Oxford, Stafford
North Eastern Leeds, Newcastle (Kenton Bar)
Northern Liverpool
South Eastern Aylesbury, Central Criminal Court, Chelmsford, Guildford, Isleworth, Knightsbridge, Maidstone, Middlesex Guildhall, Norwich, Snaresbrook, Southwark
Wales and Chester Cardiff, Mold, Swansea
Western Bristol, Exeter, Portsmouth, Winchester
Sophie Craven, Barrister
Practice Direction
(costs: taxation: matrimonial causes)
[1988] 3 All ER 734
PRACTICE DIRECTIONS
FAMILY DIVISION
23 August 1988.
Costs – Taxation – Matrimonial causes – Form of bill – Lodging of bill – Calderbank offer – Matrimonial Causes (Costs) Rules 1988.
1. The Matrimonial Causes (Costs) Rules 1988, SI 1988/1328, come into force on 3 October 1988. Save in respect of work done before that date, they revoke and replace the Matrimonial Causes (Costs) Rules 1979, SI 1979/399. The new rules will apply to all work done on and after that date in respect of matrimonial proceedings whenever instituted save that, as provided in r 1(3), it will be possible for a period of three months after 3 October 1988 for a party to lodge a bill and have it taxed as if the new rules had not been made and as if all the work to which the bill related had been done before that date.
Form of bill
2. Where the bill covers work done before and after 3 October 1988 it should be drawn in separate parts. Where such a bill deals with both inter partes and legal aid costs, it should be drawn as a four-column bill. Two-column bills in such cases are not acceptable.
3. All bills should commence with a brief, succinct narrative summarising the issues and relevant circumstances, followed by a statement showing the status of the fee earners concerned and the expense rates claimed for each.
4. The bill should then set out in chronological order, with dates, all the relevant events, whether or not they are chargeable items. Where an event is one which does constitute a chargeable item, the allowance claimed should be charged against it. The amount claimed for any disbursement should be entered against the appropriate event.
5. The item for general preparation should be placed after all other items except the taxation item, which should appear as the last item.
6. Items 2 and 3 in Pt II of Sch 1 to the 1988 rules should show separately the time engaged and the allowances claimed for care and conduct and for the time engaged in travelling and waiting. In the case of a hearing, reference should be made to any order for costs and any certificate for counsel granted.
7. Items 7, 9 and 10 in Sch 2 do not attract a separate element of care and conduct. It is therefore only necessary to show the time engaged and refer to the hourly rate charged.
8. Item 1 in Pt II of Sch 1 and item 4 in Pt I of Sch 2 should be divided into three separate parts:
Part A: Preparation In this part the work done and the amount claimed for it should be set out in separate sections according to the nature of the work set out in the above items. If necessary (as, for example, where there is more than one witness) these sections should be subdivided. Each section or subsection should contain a breakdown by cost of the work comprised in it and should have its own separate sub-total. At the foot of the last of these sections there should be shown a total Part A figure.
Part B: Care and conduct The amount claimed for general care and conduct should be claimed as a separate monetary amount which should also be expressed as a percentage of the total Part A figure. This part should include a statement, where appropriate, identifying those factors in para 1(2) of Pt I of Sch 1 which are relied on in relation to the assessment of the claim for general care and conduct.
Part C: Travelling and waiting In this part an amount should be claimed for time engaged in travelling and waiting in connection with the work comprised in Part A only. Details should be given showing to which part of that work the claim or claims relate. Where travelling and waiting time is being taxed under Sch 1 it will normally be allowed
Page 735 of [1988] 3 All ER 734
at the full amount of the expense rate. Neither allowance will, however, attract any additional amount for care and conduct. Travelling and waiting time remunerated under Sch 2 will be taxed in accordance with the amounts there prescribed.
9. Where work is done under a legal aid certificate costs will be taxed in accordance with Sch 2. In such bills items 1 and 2 should be set out as appropriate in Part A referred to in para 8 above, showing the numbers of routine letters written and received and routine telephone calls, and the respective amounts claimed.
Where a case or an application to which the taxation refers has proceeded in a court on the South-Eastern Circuit as well as a court on any other circuit, the bill should be split to show the work done in each so that the appropriate rates may be allowed.
10. Where the taxing officer is asked to exercise discretion in respect of any item to which Sch 2 applies, practitioners should include the justification claimed in the bill.
When considering whether the standard fee payable to counsel is appropriate, or by how much it (or the maximum fee) should be exceeded, considerations such as the following (in addition to those set out in para 1(2) of Pt I of Sch 1) are relevant: (i) unusually long preparation time for the length of hearing involved, eg where a case was settled after being fully prepared; (ii) the time spent in negotiation immediately prior to the hearing (iii) unusually long waiting time at court.
11. The time allowed for conferences under item 15 in Sch 2 should include time reasonably spent in preparation to the extent that preparation time is not adequately remunerated under another item. Preparation time is reasonably spent to the extent that it reduces the time taken in conference or in court. There is no longer an allowance for short formal conferences held at court immediately preceding the hearing. Counsel will therefore need to provide justification when claiming for a conference held on the same day as the hearing.
12. Additional fees may be allowed to counsel in respect of travelling time and expenses where there is no local Bar in the court town or within 25 miles of that town. These additional fees are not allowable in any court within 25 miles of Charing Cross. Where such a fee is allowable it will be limited to the amount that would be payable to counsel from the nearest local Bar town at which suitably experienced counsel is available. The cost of first class travel will be paid whenever a journey has been undertaken on public transport. Where it is essential to travel by private car, the standard rate mileage allowance will be paid, but, where the use of a private car is not essential, then the public transport rate will be paid. Where it is essential to stay overnight, reasonable hotel costs should be allowed. Details of current travel and night subsistence allowances are attached at Annex A.
Lodging of bill
13. (i) Attention is particularly drawn to the provisions of r 4 as to the time for commencement of taxation proceedings.
(ii) The supporting papers should be placed in strict chronological order.
(iii) The bill should be signed by the solicitor whose bill it is or by a partner in the firm and should be accompanied by a certificate (a) identifying any person who has a financial interest in the taxation for the purpose of r 6(8) and (b) that any amounts claimed in respect of travelling time were wholly attributable to the business transacted.
14. The bill of costs must be accompanied by accounts for all payments claimed (other than court fees or minor out-of-pocket disbursements) whether or not these payments have later to be vouched. In the case of substantial witness expenses and professional fees (other than fees to counsel or to medical experts) the account must be accompanied by details showing the work done and the computation of the charge.
15. Where travelling expenses are claimed they should be shown as a disbursement and details supplied. Local travelling expenses will not be allowed. The definition of ‘local’ is a matter for the discretion of the taxing officer, but will, in general, be taken to mean within a radius of ten miles from the Royal Courts of Justice.
Page 736 of [1988] 3 All ER 734
16. There is no longer any provision for copy documents since the making of copies of documents is in general to be considered as part of a solicitor’s normal overhead expense. The taxing officer may in his discretion make an allowance for copying in unusual circumstances or when the documents copied are unusually numerous in relation to the nature of the case. Where this discretion is invoked the number of copies made, their purpose and the charge claimed must be set out in the bill. If copies have been made out of the office the cost should be shown as a disbursement. If made in the office, a profit cost equivalent to the commercial cost should be claimed. A charge based on the time expended by a member of the solicitor’s staff will not be allowed.
17. Charges as between a principal solicitor and a solicitor agent will continue to be dealt with on the established principle that such charges, where appropriate, form part of the principal solicitor’s charges. Where these charges relate to the items for attendance at hearings or at conferences with counsel they should be included in their chronological order. Where they relate to work done under the preparation item they may either be included in the principal solicitor’s item or be shown as a separate item properly detailed following afterwards. Solicitors are reminded that agency charges for advising the principal how to proceed are not recoverable inter partes.
18. (i) No details of the work done need be provided for the purpose of the taxation items, but on taxation the party entitled to the costs must justify the amount claimed. In general the drawing of a bill of costs is not fee earners’ work and, save in exceptional circumstances, no charge should be sought for such work. Charges paid to an agent for drawing the bill will not be allowed.
(ii) Details of work done should be provided for any charge claimed under items relating to a review of taxation.
19. A party liable to pay costs to a party other than an assisted person may make a ‘Calderbank’ offer (see Caldberbank v Calderbank [1975] 3 All ER 333, [1976] Fam 93) under the provisions of r 4(4) at any time before the expiry of 14 days after the delivery to him of a copy of the bill of costs under r 6(2). If the offer is accepted, the party whose bill it is may apply for the bill to be withdrawn and for the taxing fee to be abated in whole or in part. The existence of a ‘Calderbank’ offer must not be made known personally to the taxing officer to whom the taxation has been allocated.
Issued with the concurrence of the Lord Chancellor.
23 August 1988.
C F Turner, Barrister
Page 737 of [1988] 3 All ER 734
Annex A
Mileage allowance
Standard rate 34.4p
Public transport rate 15.6p
Night subsistence £47.20
Rush & Tompkins Ltd v Greater London Council and another
[1988] 3 All ER 737
Categories: CIVIL PROCEDURE
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD BRANDON OF OAKBROOK, LORD GRIFFITHS, LORD OLIVER OF AYLMERTON AND LORD GOFF OF CHIEVELEY
Hearing Date(s): 26, 27 JULY, 3 NOVEMBER 1988
Evidence – Without prejudice correspondence – Correspondence forming part of negotiations – Privilege – Settlement of action – Negotiations resulting in compromise of action between plaintiffs and first defendants – Whether second defendants entitled to discovery of without prejudice correspondence passing between plaintiffs and first defendants.
The plaintiffs entered into a contract with the first defendants for the construction of 639 houses and engaged the second defendants as sub-contractors on the project. A dispute arose between the parties as the result of claims made by the second defendants against the plaintiffs and the plaintiffs’ claim against the first defendants for reimbursement of the amount, if any, owing to the second defendants. When the parties failed to reach agreement the plaintiffs issued proceedings against the first defendants and the second defendants. The proceedings between the plaintiffs and the first defendants were settled by the payment of £1·2m by the first defendants, which included a sum representing an assessment of the value of the second defendants’ claim. The plaintiffs then discontinued their action against the first defendants. The second defendants applied for discovery of the ‘without prejudice’ correspondence which had passed between the plaintiffs and the first defendants leading up to the settlement in order to ascertain the value which had been placed on their claim by the plaintiffs and the first defendants. The plaintiffs conceded that the correspondence might be relevant to the issues between themselves and the second defendants but claimed that it was privileged from disclosure because it had been written without prejudice. The judge upheld that claim but was reversed on appeal by the Court of Appeal. The plaintiffs appealed to the House of Lords. The second defendants contended that the correspondence was either admissible as evidence in the plaintiffs’ action against them or, alternatively, was discoverable by them.
Held – Without prejudice correspondence entered into with the object of effecting the compromise of an action remained privileged after the compromise had been reached and accordingly the correspondence was inadmissible in any subsequent litigation connected with the same subject matter whether between the same or different parties and, furthermore, was also protected from subsequent discovery by other parties to the same litigation. It followed that the second defendants were not entitled to discovery of the without prejudice correspondence which had passed between the plaintiffs and the first defendants leading up to the settlement of their action. The appeal would therefore be allowed (see p 738 g h, p 741 c d and p 744 a to f, post).
Rabin v Mendoza & Co [1954] 1 All ER 247 considered.
Teign Valley Co Ltd v Woodcock (1899) Times, 22 July and Stretton v Stubbs Ltd (1905) Times, 28 February doubted.
Decision of the Court of Appeal [1988] 1 All ER 549 reversed.
Notes
For communications without prejudice, see 17 Halsbury’s Laws (4th edn) paras 212–213, and for cases on the subject, see 22 Digest (Reisue) 407–410, 4082–4108.
Page 738 of [1988] 3 All ER 737
Cases referred to in opinions
Chocoladefabriken Lindt & Sprungli AG v Nestle Co Ltd [1978] RPC 287.
Cie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55, CA.
Cutts v Head [1984] 1 All ER 597, [1984] Ch 290, [1984] 2 WLR 349, CA.
Daintrey, Re, ex p Holt [1893] 2 QB 116, [1891–4] All ER Rep 209, DC.
Derco Industries Ltd v A R Grimwood Ltd [1985] 2 WWR 137, BC CA.
Kitcat v Sharp (1882) 48 LT 64.
O’Rourke v Darbishire [1920] AC 581, [1920] All ER Rep 1, HL.
Rabin v Mendoza & Co [1954] 1 All ER 247, [1954] 1 WLR 271, CA.
Schetky v Cochrane [1918] 1 WWR 821, BC CA.
Scott Paper Co v Drayton Paper Works Ltd (1927) 44 RPC 151; on appeal 44 RPC 529, CA.
Stretton v Stubbs Ltd (1905) Times, 28 February, CA.
Teign Valley Co Ltd v Woodcock (1899) Times, 22 July.
Tomlin v Standard Telephones and Cables Ltd [1969] 3 All ER 201, [1969] 1 WLR 1378, CA.
Waldridge v Kennison (1794) 1 Esp 143, 170 ER 306, NP.
Walker v Wilsher (1889) 23 QBD 335, CA.
Waxman (I) & Sons Ltd v Texaco Canada Ltd [1968] 2 OR 452, Ont CA; affg [1968] 1 OR 642, Ont HC.
Whiffen v Hartwright (1848) 11 Beav 111, 50 ER 759.
Appeal
The plaintiffs, Rush & Tompkins Ltd, appealed with leave of the Court of Appeal against the decision of the Court of Appeal (Slade, Balcombe and Stocker LJJ) ([1988] 1 All ER 549, [1988] 2 WLR 533) on 21 December 1987 allowing the appeal of the second defendants, P J Carey Plant Hire (Oval) Ltd (Careys), against the decision of his Honour Judge Esyr Lewis QC hearing official referees’ business on 12 February 1987 in which he dismissed Careys’ application for discovery against Rush & Tompkins of ‘without prejudice’ correspondence which had passed between Rush & Tompkins and the first defendants, the Greater London Council, prior to the settlement of the action as between those two parties. The facts are set out in the opinion of Lord Ackner.
John Dyson QC and Charles Hollander for Rush & Tompkins.
Richard Fernyhough QC and Timothy Elliott for Careys.
Their Lordships took time for consideration.
3 November 1988. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Griffiths. I agree with it and, for the reasons he gives, I would allow the appeal.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given by my noble and learned friend Lord Griffiths I would allow the appeal.
LORD GRIFFITHS. My Lords, this appeal raises a novel point on the right to discovery of documents. It arises out of a dispute under a building contract in the following circumstances. The appellants, Rush & Tompkins Ltd, entered into a building contract in December 1971 with the Greater London Council (the GLC) to build 639 dwellings on the Hanwell Estate in Ealing. In January 1973 Rush & Tompkins engaged the respondents, P J Carey Plant Hire (Oval) Ltd (Careys), as sub-contractors to carry out ground works required under the main contract.
The completion of the contract was subject to much disruption and delay and between
Page 739 of [1988] 3 All ER 737
June 1976 and January 1979 Careys put in claims for loss and expense to Rush & Tompkins. Rush & Tompkins for their part maintained that they were entitled to be reimbursed by the GLC in respect of these claims for loss and expense under the sub-contract. It appears that the GLC would not agree Careys’ claim and consequently Rush & Tompkins would not pay it. Eventually in order to resolve the deadlock Rush & Tompkins commenced proceedings in August 1979 against the GLC as first defendant and Careys as second defendant in which they claimed an inquiry into the loss and expenses to which Careys were entitled under the sub-contract and a declaration that they were entitled to be reimbursed that sum by the GLC.
However, before these proceedings came to trial Rush & Tompkins entered into a compromise with the GLC on 12 October 1981 in which Rush & Tompkins accepted the sum of £1,200,000 in settlement of all outstanding claims under the main contract. It was a term of this settlement that Rush & Tompkins would accept direct responsibility for all the sub-contractors’ claims. This settlement embraced matters which ranged far beyond those raised in the action with which this appeal is concerned. Rush & Tompkins then discontinued the action against the GLC.
The terms of this settlement were disclosed to Careys but the settlement did not show what valuation had been put on Careys’ claim in arriving at the global settlement of £1,200,000.
The action then went to sleep but eventually it awoke and Careys added a counterclaim to recover their loss and expense which they quantified at £150,582·86. In their statement of claim Rush & Tompkins had pleaded that the architect had withheld consent to the settlement of Careys’ claim and that the GLC had stated in writing that the claim did not exceed a value of approximately £10,000. So on the face of it the gap between the parties was very wide.
Careys, however, believed that in the negotiations between Rush & Tompkins and the GLC documents must have come into existence which showed the basis on which Careys’ claim was valued for the purpose of the global settlement and they suspected that they might show that the figure was very much larger than the sum of £10,000 which had been alleged as the value of the claim in the statement of claim.
Rush & Tompkins admit that there are such documents and that they relate to the issues in the action, presumably because they cast light on the value of Careys’ claim, but they maintain that Careys are not entitled to discovery of these documents because they came into existence for the purpose of settling the claim with the GLC and are thus protected from discovery by the ‘without prejudice rule’.
Careys took out a summons for the specific discovery of this without prejudice correspondence but the official referee, his Honour Judge Esyr Lewis QC, accepted the argument of the main contractors and refused discovery. The Court of Appeal reversed his decision and ordered discovery of the without prejudice correspondence passing between Rush & Tompkins and the GLC, holding that the protection given by the without prejudice rule ceased once a settlement had been reached (see [1988] 1 All ER 549, [1988] 2 WLR 533).
The ‘without prejudice rule’ is a rule governing the admissibility of evidence and is founded on the public policy of encouraging litigants to settle their differences rather than litigate them to a finish. It is nowhere more clearly expressed than in the judgment of Oliver LJ in Cutts v Head [1984] 1 All ER 597 at 605–606, [1984] Ch 290 at 306:
‘That the rule rests, at least in part, on public policy is clear from many authorities, and the convenient starting point of the inquiry is the nature of the underlying policy. It is that parties should be encouraged so far as possible to settle their disputes without resort to litigation and should not be discouraged by the knowledge that anything that is said in the course of such negotiations (and that includes, of course, as much the failure to reply to an offer as an actual reply) may be used to their prejudice in the course of the proceedings. They should, as it was expressed Clauson J
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in Scott Paper Co v Drayton Paper Works Ltd (1927) 44 RPC 151 at 157, be encouraged freely and frankly to put their cards on the table … The public policy justification, in truth, essentially rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability.’
The rule applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence. A competent solicitor will always head any negotiating correspondence ‘without prejudice’ to make clear beyond doubt that in the event of the negotiations being unsuccessful they are not to be referred to at the subsequent trial. However, the application of the rule is not dependent on the use of the phrase ‘without prejudice’ and if it is clear from the surrounding circumstances that the parties were seeking to compromise the action, evidence of the content of those negotiations will, as a general rule, not be admissible at the trial and cannot be used to establish an admission or partial admission. I cannot therefore agree with the Court of Appeal that the problem in the present case should be resolved by a linguistic approach to the meaning of the phrase ‘without prejudice’. I believe that the question has to be looked at more broadly and resolved by balancing two different public interests, namely the public interest in promoting settlements and the public interest in full discovery between parties to litigation.
Nearly all the cases in which the scope of the without prejudice rule has been considered concern the admissibility of evidence at trial after negotiations have failed. In such circumstances no question of discovery arises because the parties are well aware of what passed between them in the negotiations. These cases show that the rule is not absolute and resort may be had to the without prejudice material for a variety of reasons when the justice of the case requires it. It is unnecessary to make any deep examination of these authorities to resolve the present appeal but they all illustrate the underlying purpose of the rule which is to protect a litigant from being embarrassed by any admission made purely in an attempt to achieve a settlement. Thus the without prejudice material will be admissible if the issue is whether or not the negotiations resulted in an agreed settlement, which is the point that Lindley LJ was making in Walker v Wilsher (1889) 23 QBD 335 at 337 and which was applied in Tomlin v Standard Telephones and Cables Ltd [1969] 3 All ER 201, [1969] 1 WLR 1378. The court will not permit the phrase to be used to exclude an act of bankruptcy (see Re Daintrey, ex p Holt [1893] 2 QB 116, [1891–4] All ER Rep 209), or to suppress a threat if an offer is not accepted (see Kitcat v Sharp (1882) 48 LT 64). In certain circumstances the without prejudice correspondence may be looked at to determine a question of costs after judgment has been given: see Cutts v Head [1984] 1 All ER 597, [1984] Ch 290. There is also authority for the proposition that the admission of an ‘independent fact’ in no way connected with the merits of the case is admissible even if made in the course of negotiations for a settlement. Thus an admission that a document was in the handwriting of one of the parties was received in evidence in Waldridge v Kennison (1794) 1 Esp 143, 170 ER 306. I regard this as an exceptional case and it should not be allowed to whittle down the protection given to the parties to speak freely about all issues in the litigation both factual and legal when seeking compromise and, for the purpose of establishing a basis of compromise, admitting certain facts. If the compromise fails the admission of the facts made for the purpose of the compromise should not be held against the maker of the admission and should therefore not be received in evidence.
I cannot accept the view of the Court of Appeal that Walker v Wilsher is authority for the proposition that if the negotiations succeed and a settlement is concluded the privilege goes, having served its purpose. In Walker v Wilsher the Court of Appeal held that it was not permissible to receive the contents of a without prejudice offer on the question of costs and no question arose as to the admissibility of admissions made in the negotiations in any possible subsequent proceedings. There are many situations when parties engaged
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on some great enterprise such as a large building construction project must anticipate the risk of being involved in disputes with others engaged on the same project. Suppose the main contractor in an attempt to settle a dispute with one sub-contractor made certain admissions, it is clear law that those admissions cannot be used against him if there is no settlement. The reason they are not to be used is because it would discourage settlement if he believed that the admissions might be held against him. But it would surely be equally discouraging if the main contractor knew that if he achieved a settlement those admissions could then be used against him by any other sub-contractor with whom he might also be in dispute. The main contractor might well be prepared to make certain concessions to settle some modest claim which he would never make in the face of another far larger claim. It seems to me that if those admissions made to achieve settlement of a piece of minor litigation could be held against him in a subsequent major litigation it would actively discourage settlement of the minor litigation and run counter to the whole underlying purpose of the without prejudice rule. I would therefore hold that as a general rule the without prejudice rule renders inadmissible in any subsequent litigation connected with the same subject matter proof of any admissions made in a genuine attempt to reach a settlement. It of course goes without saying that admissions made to reach settlement with a different party within the same litigation are also inadmissible whether or not settlement was reached with that party.
In arriving at my opinion on this aspect of the case I have taken into account the reports of two cases in The Times newspaper around the turn of the century. The first is a decision of Darling J in Teign Valley Co Ltd v Woodcook (1899) Times, 22 July, which is cited in both Phipson on Evidence (13th edn, 1982) paras 19–11, 20–04 and 17 Halsbury’s Laws (4th edn) para 212 as authority for the proposition that the protection afforded by ‘without prejudice’ does not extend to third parties. The report is short and unclear, but it appears that the claim was by a company for money owed on calls on its shares. The defendant, Woodcock, admitted liability to the company but claimed against a Captain Rising that he held the shares as his nominee. The judge admitted in evidence terms of the negotiation between the plaintiffs and Captain Rising in which Captain Rising admitted ownership of the shares standing in the name of the nominee. The judge expressed doubts whether he should have admitted the evidence and said he did so because he had been pressed to do so by counsel. I agree with the comment of the Court of Appeal that ‘The report is such that it is not worthy of citation as constituting authority for any proposition of law … ’ (see [1988] 1 All ER 549 at 553, [1988] 2 WLR 533 at 538).
The other case is Stretton v Stubbs Ltd (1905) Times, 28 February, which was an action for libel and slander arising in the following circumstances. Mr Stretton was an artist and judgment had been obtained against him in the sum of £16 in the City of London Court by a picture frame maker. That judgment had been entered by consent pursuant to a without prejudice agreement with the plaintiff’s solicitor that no publicity should be given to the result of the action. The defendants published the judgment in Stubbs’ Weekly Gazette and the plaintiff alleged that their canvasser had gone round to various tradesmen pointing out the importance of subscribing to the Gazette, directing their attention to the plaintiff’s name and saying that he could not be worthy of credit. The jury returned a verdict for the plaintiff of £25. As part of his case the plaintiff had relied on the contract between himself and the solicitor for the plaintiff in the City of London Court action that the judgment should not be made public. This contract was contained in two without prejudice letters. The offer was contained in a letter from the plaintiff and the acceptance in a letter from the solicitor. The judge permitted the second letter to be put in evidence and read but refused to admit the first letter which had contained admissions by the plaintiff that he was absolutely insolvent. From a reading of the report it appears that the ground on which it was submitted to the Court of Appeal that the judge had erred in refusing to admit the first letter was that putting in the second letter as part of the without prejudice correspondence rendered the first letter admissible. It
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was also submitted that it would be wrong for the plaintiff not to be allowed to be cross-examined on his assertion that he was insolvent and at the same time to allow him to put himself before the jury as being quite solvent and of good credit. The Court of Appeal allowed the first letter to be read to the court. The report does not say why Henn Collins MR permitted it but Mathew LJ is recorded as saying ‘that in his opinion a letter written with regard to an action and marked “without prejudice” was only privileged for the purpose of that particular action’. No citation of authority or reasoning is given in support of that opinion. There may well have been good grounds for admitting the first letter in that action on the ground that it was a part of a correspondence which the plaintiff had chosen to put in evidence, and possibly also on the ground of establishing an independent fact, namely the plaintiff’s insolvency, which was unconnected with the merits of the dispute about the amount owed to the frame maker and was obviously of central importance to the issue of libel or slander. I cannot however regard it as an authority of any weight for the proposition that without prejudice negotiations should in all circumstances be admissible at the suit of a third party.
The only issue that now survives in the present litigation is Careys’ counterclaim. For the reasons I have given the contents of the without prejudice correspondence between Rush & Tompkins and the GLC will not be admissible to establish any admission relating to Careys’ claim. Nevertheless, Careys say they should have discovery of that correspondence which one must assume will include admissions even though they cannot make use of them in evidence. They say that the correspondence is likely to reveal the valuation put on the claim by Rush & Tompkins and the GLC and that this will provide a realistic starting point for negotiations and therefore be likely to promote a settlement. This is somewhat speculative because for all we know Careys’ claim may have been valued in the without prejudice correspondence at no more than the figure of £10,000 pleaded in the statement of claim leaving the parties as far apart as ever. However, it is of course a possibility that it appeared at a much higher figure.
It was only at a late stage in Careys’ argument that the distinction between discoverability and admissibility was taken. In the courts below the question appears to have been considered solely on the question of admissibility. But the right to discovery and production of documents does not depend on the admissibility of the documents in evidence: see O’Rourke v Darbishire [1920] AC 581, [1920] All ER Rep 1.
The general rule is that a party is entitled to discovery of all documents that relate to the matters in issue irrespective of admissibility and here we have the admission of the head contractors that the without prejudice correspondence would be discoverable unless protected by the without prejudice rule. There is little English authority on this question but I think some light on the problem is to be gained from a consideration of the decision in Rabin v Mendoza & Co [1954] 1 All ER 247, [1954] 1 WLR 271. In that case the plaintiff sued the defendants for negligence in surveying a property. Before the action commenced a meeting had taken place between the plaintiff’s solicitor and a partner in the defendants’ firm of surveyors to see if the matter could be settled without litigation. The defendants agreed at the meeting to make inquiries to see if they could obtain insurance cover against possible risk of damage to the house so that litigation could be avoided. After the interview the defendants obtained a report from another surveyor for the purpose of attempting to obtain insurance cover. No settlement was reached and the action commenced. The defendants disclosed the existence of the report in their affidavit of documents but claimed privilege from production on the ground that it was made in pursuance of a without prejudice discussion between the plaintiff’s solicitor and the defendants’. The master, the judge and the Court of Appeal all upheld the defendants’ claim to privilege. Denning LJ, after referring to Whiffen v Hartwright (1848) 11 Beav 111, 50 ER 759, said ([1954] 1 All ER 247 at 248, [1954] 1 WLR 271 at 273–274):
‘LORD LANGDALE, M.R., there affirms the undoubted proposition that production can be ordered of documents even though they may not be admissible in evidence.
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Nevertheless, if documents come into being under an express, or, I would add, a tacit, agreement that they should not be used to the prejudice of either party, an order for production will not be made. This case seems to me to fall within that principle. This report was clearly made as a result of a “without prejudice” interview, and it was made solely for the purposes of the “without prejudice” negotiations. The solicitor for the plaintiff himself says in his affidavit that at the time of the interview it was contemplated that steps such as these should be undertaken. I find myself, therefore, in agreement with the decision of Master BURNAND and the learned judge that this is not a case where production should be ordered.’
Romer LJ put the matter even more strongly, saying ([1954] 1 All ER 247 at 249, [1954] 1 WLR 271 at 274):
‘It seems to me that it would be monstrous to allow the plaintiff to make use—as he certainly would—for his own purposes as against the defendants of a document which is entitled to the protection of “without prejudice” status.’
This authority shows that even as between the parties to without prejudice correspondence they are not entitled to discovery against one another.
In Canada there are conflicting decisions. In Schetky v Cochrane [1918] 1 WWR 821 the Court of Appeal in British Columbia ordered oral discovery to be given to a defendant of negotiations between the plaintiff and another defendant in the action but held that on the trial there would be no higher right to use the statements or admissions than that which a party to the negotiations would have who sought to introduce them in evidence. This decision was followed in British Columbia in Derco Industries Ltd v A R Grimwood Ltd [1985] 2 WWR 137 at 142, in which Lambert JA said:
‘… to the extent that there is a rule that prevents the production of documents that were prepared in the course of negotiations leading to a concluded settlement, it is my opinion that the rule does not extend to the prevention of the production of those documents at the instance of a litigant who was not a party to the settlement and whose claim for production comes under the rule in [Cie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55].’
Schetky v Cochrane was not followed by the Court of Appeal of Ontario in I Waxman & Sons Ltd v Texaco Canada Ltd [1968] 2 OR 452. The Court of Appeal in a short judgment upheld a long reasoned judgment by Fraser J, who expressed the following opinion ([1968] 1 OR 642 at 656):
‘… I am of opinion that in this jurisdiction a party to a correspondence within the “without prejudice” privilege is, generally speaking, protected from being required to disclose it on discovery or at trial in proceedings by or against a third party.’
I suspect that until the present decision of the Court of Appeal the general understanding of the profession was that without prejudice negotiations between parties to litigation would not be discoverable to other parties and that admissibility and discoverability went together. For instance The Supreme Court Practice 1988 vol 1, para 24/5/17 under ‘Discovery and Inspection of Documents’ reads:
‘Without prejudice communications—Any discussions between the parties for the purpose of resolving the dispute between them are not admissible, even if the words “without prejudice” or their equivalent are not expressly used (Chocoladefabriken Lindt & Sprungli A. G. v. Nestlé Co. Ltd. ([1978] RPC 287)). It follows that documents containing such material are themselves privileged from production.’
I would refer also to the critical note on this decision of the Court of Appeal written by one of the Law Commissioners, Mr Brian Davenport QC, in which he states that the
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decision will be received ‘with surprise and dismay by many practitioners’ (see (1988) 104 LQR 349).
I have come to the conclusion that the wiser course is to protect without prejudice communications between parties to litigation from production to other parties in the same litigation. In multi-party litigation it is not an infrequent experience that one party takes up an unreasonably intransigent attitude that makes it extremely difficult to settle with him. In such circumstances it would, I think, place a serious fetter on negotiations between other parties if they knew that everything that passed between them would ultimately have to be revealed to the one abdurate litigant. What would in fact happen would be that nothing would be put on paper, but this is in itself a recipe for disaster in difficult negotiations which are far better spelt out with precision in writing.
If the party who obtains discovery of the without prejudice correspondence can make no use of it at trial it can be of only very limited value to him. It may give some insight into his opponent’s general approach to the issues in the case but in most cases this is likely to be of marginal significance and will probably be revealed to him in direct negotiations in any event. In my view, this advantage does not outweigh the damage that would be done to the conduct of settlement negotiations if solicitors thought that what was said and written between them would become common currency available to all other parties to the litigation. In my view, the general public policy that applies to protect genuine negotiations from being admissible in evidence should also be extended to protect those negotiations from being discoverable to third parties. Accordingly, I would allow this appeal and restore the decision of the official referee.
LORD OLIVER OF AYLMERTON. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Griffiths. I agree with it and would allow the appeal for the reasons which he has given.
LORD GOFF OF CHIEVELEY. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Griffiths. I agree with it and, for the reasons he gives, I would allow this appeal.
Appeal allowed.
Solicitors: McKenna & Co (for Rush & Tompkins); Summers & Co, Beaconsfield (for Careys).
Mary Rose Plummer Barrister.
Bulk Transport Group Shipping Co Ltd v Seacrystal Shipping Ltd; The Kyzikos
[1988] 3 All ER 745
Categories: SHIPPING
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD BRANDON OF OAKBROOK, LORD TEMPLEMAN, LORD ACKNER AND LORD OLIVER OF AYLMERTON
Hearing Date(s): 22, 23 JUNE, 20 OCTOBER 1988
Shipping – Commencement of lay days – Arrived ship under berth charterparty – Notice of readiness – Charterparty providing that notice of readiness could be given ‘whether in berth or not’ – Vessel arriving at port but unable to berth because of fog although berth available – Notice of readiness given on arrival – Whether notice of readiness could be given on arrival if berth available but unable to be reached because of bad weather.
The charterers chartered the owners’ vessel for the carriage of a cargo of steel from Italy to Houston, Texas, under a berth charterparty which provided that the master was entitled on reaching the discharging port to give notice of readiness to discharge ‘whether in berth or not’. The charterparty also provided that ‘Time lost in waiting for berth to count as discharging time’. When the vessel arrived at Houston a berth was available but the vessel was prevented from berthing because of fog. The master nevertheless gave notice of readiness to discharge immediately on arrival although discharge could not begin until three days later. The charterers refused to pay demurrage for those three days but when the owners’ claim was referred to arbitration the arbitrator held that the ‘whether in berth or not’ clause converted the berth charter into a port charter so that the master was entitled to give notice of readiness to discharge as soon as the vessel arrived at the discharging port and therefore the owners were entitled to demurrage based on the notice of readiness. On appeal by the charterers the judge held that the owners were not entitled to the demurrage, but on further appeal by the owners the Court of Appeal held that the charterers were liable to pay the demurrage because the charterparty had been converted from a berth charter into a port charter by the inclusion of the ‘whether in berth or not’ clause and the master was entitled to give notice of readiness to discharge on arrival at the place in port where the vessel was at the charterers’ immediate and effective disposal, which was the place in the port where ships waiting for a berth usually lay. The charterers appealed to the House of Lords.
Held – A ‘whether in berth or not’ clause in a berth charterparty applied only where a berth was not available, eg because of congestion at the port of discharge, and did not apply where a berth was available but was unreachable because of bad weather. Accordingly, where a berth was available but unreachable because of bad weather the ship’s master was not entitled to give notice of readiness to discharge. It followed that since the vessel could not reach the berth available on its arrival at Houston because of fog the master had not been entitled to give notice of readiness to discharge immediately on arrival and the charterers were not liable for demurrage calculated by reference to that notice. Furthermore, in the context of the particular charterparty it was to be inferred that the ‘whether in berth or not’ clause did not modify or replace the provision that time lost in waiting for a berth was to count as discharging time. The appeal would therefore be allowed (see p 746 f and p 749 j to p 750 a f to p 751 b j to p 752 a h j, post).
Decision of the Court of Appeal [1987] 3 All ER 222 reversed.
Notes
For arrival of a ship at the discharging port, see 43 Halsbury’s Laws (4th edn) paras 664–654, and for cases on the subject, see 43 Digest (Reissue) 379–383, 9290–9328.
For readiness to discharge, see 43 Halsbury’s Laws (4th edn) para 655.
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Cases referred to in opinions
Federal Commerce and Navigation Co Ltd v Tradax Export SA, The Maratha Envoy [1977] 2 All ER 849, [1978] AC 1, [1977] 3 WLR 126, HL.
Johanna Oldendorff, The, E L Oldendorff & Co GmbH v Tradax Export SA [1973] 3 All ER 148, [1974] AC 479, [1973] 3 WLR 382, HL; rvsg [1972] 3 All ER 420, [1974] AC 479, [1972] 3 WLR 623, CA.
Northfield Steamship Co v Cie L’Union des Gaz [1912] 1 KB 434, CA.
Sociedad Financiera de Bienes Raices SA v Agrimpex Hungarian Trading Co for Agricultural Products, The Aello [1960] 2 All ER 578, [1961] AC 135, [1960] 3 WLR 145, HL.
Appeal
Bulk Transport Group Shipping Co Ltd (the charterers) appealed with leave of the Appeal Committee of the House of Lords given on 29 October 1987 against the decision of the Court of Appeal (Lloyd, Glidewell LJJ and Sir John Megaw) ([1987] 3 All ER 222, [1987] 1 WLR 1565) on 15 May 1987 allowing the appeal of Seacrystal Shipping Ltd (the owners), against the decision of Webster J ([1987] 1 Lloyd’s Rep 48) on 31 July 1987 setting aside the award of the arbitrator, Mr Bruce Harris, dated 26 November 1985 in the arbitration of a dispute between the owners and the charterers arising out of the charter in the Gencon (Box Layout 1974) form of the vessel Kyzikos for the carriage of a cargo of steel or steel products from Italy to the US Gulf in which he decided that the owners were entitled to the full amount of the demurrage claimed by them. The facts are set out in the opinion of Lord Brandon.
A E Diamond QC and Bernard Eder for the charterers.
Martin Moore-Bick QC and Charles Priday for the owners.
Their Lordships took time for consideration.
20 October 1988. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Brandon. I agree with it and, for the reasons he gives, I would allow the appeal.
LORD BRANDON OF OAKBROOK. My Lords, by a voyage charterparty dated 26 October 1984 the appellants (the charterers) chartered the m v Kyzikos (the ship) owned by the respondents (the owners) to carry a cargo of steel and/or steel products from Italy to the US Gulf. The ship was ordered to discharge at the port of Houston. She arrived and anchored there at 0645 hrs on 17 December 1984, and at some time before 1200 hrs the master gave notice of readiness to discharge. Then, and at all material times afterwards, the berth at which the ship was to discharge was available for her use. She was, however, prevented from proceeding to it immediately because of fog, which resulted in the pilot station being closed. Because of this the ship did not arrive in her berth until 1450 hrs on 20 December 1984.
A dispute arose between the owners and the charterers with regard to the liability of the latter for demurrage at the port of discharge. The owners claimed $US30,435·72 in respect of a balance of demurrage remaining unpaid. The charterers denied liability. The essential question governing the validity of the claim was whether time for discharging counted during the period for which the ship was prevented from proceeding to her berth by reason of fog.
The dispute was referred, pursuant to a London arbitration clause contained in the charterparty, to Mr Bruce Harris as sole arbitrator. By a reasoned award dated 26 November 1985 the arbitrator decided that the owners’ claim succeeded in full. The charterers obtained leave to appeal against the award and on 31 July 1986 Webster J in
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the Commercial Court gave a reserved judgment ([1987] 1 Lloyd’s Rep 48) allowing the appeal and dismissing the owners’ claim. The owners appealed with the leave of Webster J to the Court of Appeal (Lloyd, Glidewell LJJ and Sir John Megaw). That court on 15 May 1987 gave reserved judgments allowing the appeal and restoring the arbitrator’s award (see [1987] 3 All ER 222, [1987] 1 WLR 1565). The charterers now bring this further appeal against the decision of the Court of Appeal by leave of your Lordships’ House.
The charterparty was on the Gencon (Box Layout 1974) printed form, which contains 21 boxes, each with a printed heading, followed by a series of printed clauses. Typed entries were made in the boxes and typed amendments were made to a number of the printed clauses. A large number of typed clauses were also added by way of rider. The material provisions, with typed entries and typed amendments indicated by italics, were as follows. Box 11:
‘Discharging port or place (Cl.1) 1/2 safe always afloat, always accessible berth(s) each port—1/2 safe port(s)U.S. GULF excluded Brownsville and no port North of Baton Rouge.’
Box 15:
‘Laytime allowed for loading (Cl. 5) See clause 17.’
Box 17:
‘Laytime allowed for discharging (Cl. 6) See clause 17.’
Box 18:
‘Demurrage rate (load and disch.) (Cl. 7) USD.3.000,—per day/pro rata … ’
Clause 1:
‘… the vessel shall proceed to the discharging port or place stated in Box 11 or so near thereto as she may safely get … ’
Clause 5:
‘Loading … Time to commence at 2 p.m. if notice of readiness to load is given BEFORE NOON AND AT 8 a.m. next working day if notice given during office hours after noon … Time lost in waiting for berth to count as loading time. Time to count as per Clause 5 Wipon/Wibon/Wifpon/Wccon and Master to have the right to tender Notice of Readiness by cable, both in the loading and discharging port(s).’
Clause 6:
Discharging Cargo to be received by Merchants … and to be discharged in the number of running working days stated in Box 17. Time to commence at 2 p.m. if notice of readiness to discharge is given before noon and at 8 a.m. next working day if notice given during office hours after noon. Time lost in waiting for berth to count as discharging time.’
Clause 7:
Demurrage Demurrage at the rate stated in Box 18 per day or pro rata for any part of a day to be allowed at ports of loading and discharging.’
Clause 17:
‘… The cargo to be loaded … and discharged … within 18 total weather workingdays of 24 consecutive hours, Saturdays/Sundays/Holidays excepted, unless used, in which case actual time used to count half … ’
The acronyms used in cl 5 have the following meanings: ‘wipon’, whether in port or
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not; ‘wibon’, whether in berth or not; ‘wifpon’, whether in free pratique or not; ‘wccon’, whether cleared customs or not. Clause 17 is one of the additional typed clauses referred to in box 21.
Much of the argument in this case has revolved round the difference between two kinds of voyage charterparty, a port charterparty on the one hand and a berth charterparty on the other. The characteristics of a port charterparty are these. First, the contractual destination of the chartered ship is a named port. Second, the ship, in order to qualify as having arrived at the port, and therefore entitled to give notice of readiness to discharge, must satisfy two conditions. The first condition is that, if she cannot immediately proceed to a berth, she has reached a position within the port where waiting ships usually lie. The second condition is that she is at the immediate and effective disposition of the charterers. By contrast, the characteristics of a berth charterparty are these. First, the contractual destination of the chartered ship is a berth designated by the charterers within a named port. Second, the ship, in order to qualify as an arrived ship, and therefore entitled to give notice of readiness to discharge, must (unless the charterparty otherwise provides) have reached the berth and be ready to begin discharging.
The basis of the arbitrator’s decision in the present case is to be found in para 7 of his reasons, where he said:
‘Box 11, as completed, appeared to make this a berth charter … But the point is of no significance since, on well established authority, the reference in clause 5 to “Wibon” (whether in berth or not) has the effect of making the charter into a port charter.’
It is common ground that the charterparty here concerned is, as the arbitrator said that it appeared to be, a berth and not a port charterparty. With regard to the ‘well established authority’ referred to by the arbitrator, it will be necessary later to examine what exactly was decided by that authority, and whether it supports the conclusion which he reached on the basis of it.
It was no doubt because the arbitrator expressed the ground of his decision in the way stated above, and also because the case was argued before him on the basis that the arbitrator had correctly identified the essential question for decision, that Webster J, when he gave the owners leave to appeal from his decision, formulated the question of law for decision by the Court of Appeal in the way in which he did. That question, as formulated by him in para 4 of his order dated 31 July 1986, was:
‘whether the provision “whether in berth or not” has the effect of converting a berth charterparty into a port charterparty in circumstances where a berth is available for the vessel.’
In my view this formulation of the question, while agreeably succinct, and derived, as I have indicated, from authority, tends to telescope the legal issues involved. Lloyd LJ, who gave the leading judgment in the Court of Appeal, considered that the appeal raised, potentially at least, two questions in relation to a voyage charterparty which it was common ground was a berth and not a port charterparty, but contained a provision allowing the ship to give notice of readiness to discharge ‘whether in berth or not’. The first question was whether the ship could give a valid notice of readiness to discharge when, on her arrival in the discharging port, a berth for her was vacant but she was prevented from reaching it by bad weather, in this case fog. The second question, which only arose if the first question was answered in the affirmative, was whether the ship, in the situation postulated, could properly be said to be at the ‘immediate and effective disposition of the charterers’ as would be required to enable her to qualify as an arrived ship under a port charterparty (see [1987] 3 All ER 222 at 223–224, [1987] 1 WLR 1565 at 1568).
I agree with this analysis and it will be convenient to examine what Lloyd LJ described as the first question first. In doing so I shall treat the amendment to cl 5 of the charterparty
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(loading) as applying also to cl 6 (discharging). That it was intended to do so appears to have been accepted by both sides at the arbitration. The contrary view seems to have been raised, to some extent at least, before Webster J, who was not impressed by it. Before the Court of Appeal and in your Lordships’ House the matter was common ground.
Two views have been advanced, at each stage of the proceedings, with regard to the meaning of the phrase ‘whether in berth or not’ in a berth charterparty. One view, put forward by the charterers and accepted by Webster J, is that the phrase covers cases where the reason for the ship not being in berth is that no berth is available, but does not cover cases where a berth is available and the only reason why the ship cannot proceed to it is that she is prevented by bad weather such as fog. The other view, put forward by the owners and accepted by the arbitrator and the Court of Appeal, is that the phrase covers cases where a ship is unable to proceed to a berth either because none is available or because, although a berth is available, the ship is prevented by bad weather such as fog from proceeding to it.
The proposition that the inclusion in a berth charterparty of the phrase ‘whether in berth or not’ has the effect of converting it into a port charterparty appears to have had its origin in the judgment of Roskill LJ in the Court of Appeal in The Johanna Oldendorff, E L Oldendorff & Co GmbH v Tradax Export SA [1972] 3 All ER 420, [1974] AC 479. That case was concerned with the question of what conditions need to be satisfied to enable a ship to qualify as an arrived ship under a port charterparty when no berth is available for her in the discharging port. The decision of the House on that question was of the greatest importance because by it the House altered the law as it had earlier declared it to be in Sociedad Financiera de Bienes Raices SA v Agrimpex Hungarian Co for Agricultural Products, The Aello [1960] 2 All ER 578, [1961] AC 135. For present purposes, however, the only significance of the case lies in certain observations made by Roskill LJ in his judgment in the Court of Appeal. He said ([1972] 3 All ER 420 at 445, [1974] AC 479 at 515):
‘The phrase “whether in berth or not” was designed to convert a berth charterparty into a port charterparty and to ensure that under a berth charterparty notice of readiness could be given as soon as the ship had arrived within the commercial area of the port concerned so that lay time would start to run on its expiry. It has no proper place in a port charterparty.’
It has since been said that there was a difference of view between Roskill and Buckley LJJ with regard to that point. However, for the reasons given by Lloyd LJ in the present case (see [1987] 3 All ER 222 at 226–227, [1987] 1 WLR 1565 at 1571–1572), I agree that no real difference can be established.
In evaluating the observations of Roskill LJ cited above it is essential to appreciate that he made them, and made them only, with reference to a case where no berth was available for the ship concerned on her arrival at the port of discharge. It follows that, when he said that the phrase ‘whether in berth or not’ was designed to convert a berth charterparty into a port charterparty, he was saying it only in relation to a case where no berth was available for the ship on arrival. He had no reason to consider whether the words which he used would have been appropriate in a case where a berth was available for the ship on arrival but she was prevented by bad weather such as fog from proceeding to it. I do not, therefore, consider that his observations are of any assistance in answering the first question in the present case.
In order to answer that question it is, in my view, necessary to have regard to two considerations. The first consideration is the meaning which has been given to the phrase ‘whether in berth or not’ in the authorities relating to it. The second consideration is the context in which the acronym ‘wibon’ is to be found in the charterparty with which your Lordships are here concerned.
So far as the authorities are concerned, they present two aspects, one positive and the
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other negative. The positive aspect of the authorities is that in them the phrase ‘whether in berth or not’, when used in berth charterparty, has uniformly over a long period been interpreted as relating to the availability or unavailability of a berth. In other words the phrase has been interpreted as dealing with the problem of congestion in ports, and putting on the charterers rather than the owners the risk of delay caused by such congestion.
In Northfield Steamship Co v Cie L’Union des Gaz [1912] 1 KB 434 a ship was chartered under what would today be called a berth charterparty. On arrival at the port of discharge she was unable to go to a berth because all the berths were occupied by other ships. The master gave notice of readiness to discharge, relying on a clause in the charterparty which provided: ‘Time to commence when steamer is ready to unload and written notice given, whether in berth or not.' It was held by the Court of Appeal, affirming Hamilton J, that the notice of readiness was effective to start laytime running. Farwell LJ said (at 440):
‘There was no berth vacant at Savona at which the steamer could be unloaded until four days after her arrival, and accordingly she did not get a berth until the fifth day … In my opinion the words “whether in berth or not” were inserted to meet this very case.’
In Federal Commerce and Navigation Co Ltd v Tradax Export SA, The Maratha Envoy [1977] 2 All ER 849, [1978] AC 1 the House was concerned with questions arising out of a charterparty which, although a port charterparty and not a berth charterparty, contained in relation to the commencement of laytime the phrase ‘whether in berth or not’. Referring to that phrase Lord Diplock, after pointing out that it was surplusage in a port charterparty, went on to say ([1977] 2 All ER 849 at 857, [1978] AC 1 at 14):
‘The effect of this well-known phrase in berth charters has been settled for more than half a century. Under it time starts to run when the vessel is waiting within the named port of destination for a berth there to become vacant.’
The negative aspect of the authorities is this. The phrase ‘whether in berth or not’ has been used in berth charterparties at least since 1908, the date of the charterparty in Northfield Steamship Co v Cie L’Union des Gaz [1912] 1 KB 434. Yet counsel for the owners was unable to point to any reported case in which it had ever been contended that the phrase covered a case where a berth was available for a ship but she was prevented by bad weather from proceeding to it.
The inference which it seems to me to be right to draw from these two aspects of the authorities, the one positive and the other negative, is that the phrase ‘whether in berth or not’ has over a very long period been treated as shorthand for what, if set out in longhand, would be ‘whether in berth (a berth being available) or not in berth (a berth not being available)’. There is, in my view, nothing unusual in commercial men, knowing the purpose for which a phrase is inserted into a particular type of contract, expressing their common intention in a shorthand form in this way.
I turn to the context in which the acronym ‘wibon’ is to be found in the charterparty here concerned. There are, as it seems to me, two significant features about that context. The first significant feature is this. The general procedure followed when making typed amendments to the printed clauses of the charterparty was to delete so much of the printed clauses as was modified or replaced by such amendments. Examples of this general procedure can be seen in cl 2 (partial deletion of lines 25 and 26), cl 4 (total deletion) and cl 5 (deletion of the first two paragraphs, lines 57–67). The final line of cl 5 as printed (line 72) reads: ‘Time lost in waiting for berth to count as loading time.' The final line of cl 6 as printed (line 80) reads: ‘Time lost in waiting for berth to count as discharging time.' If the introduction of the acronym ‘wibon’ in the typed addition to cll 5 and 6 had been intended to modify or replace the two final lines of those clauses to which I have referred, one would have expected those lines to have been similarly deleted. In fact, however, those lines were not deleted but left in place. The inference to be drawn
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is that the introduction of the acronym ‘wibon’ by the typed addition to cll 5 and 6 was not intended to modify or replace the final lines of those two clauses as printed.
The second significant feature about the context in which the acronym ‘wibon’ is to be found is the close association in the typed addition to cll 5 and 6 of that acronym with the three other acronyms, ‘wipon’, ‘wifpon’ and ‘wccon’. These last three acronyms all seem to me to be directed at the problem of congestion in the loading or discharging port, rather than the problem of delay to the ship due to bad weather. It is therefore reasonable to infer that the acronym ‘wibon’ is similarly directed.
These two features of the context in which the acronym ‘wibon’ is to be found appear to me to support the view which I expressed earlier about the inference to be drawn from the authorities as to the effect in a berth charterparty of the phrase ‘whether in berth or not’.
Lloyd LJ, with whom both Glidewell LJ and Sir John Megaw agreed, explained his decision on the first question in this way ([1987] 3 All ER 222 at 225, [1987] 1 WLR 1565 at 1570–1571):
‘I do not doubt that the reason why the provision was originally included in berth charters was to cater for the case where the port is congested and a berth unavailable. But there is nothing in the wording of the provision which limits the operation to such a case. The wording is quite general. Notice of readiness may be given in berth or not. Ex hypothesi, therefore, notice of readiness may be given before the vessel has reached its contractual destination. Some limit must, of course, be placed on the provision. Nobody suggests that notice of readiness can be given while the vessel is still at sea (I say nothing as to the effect of “whether in port or not”, which was also included in this charterparty, but as to which we heard no argument). If then a limit is to be placed on the clause, it is to my mind better that the limit should be by reference to the place at which notice of readiness may be given rather than the reason why the vessel is unable to proceed to her berth. Certainty, as has been said so often, is of great importance in these matters. The traditional view of “whether in berth or not” has always been that it becomes operative so as to enable a valid notice of readiness to be given as soon as the vessel has arrived in port, provided the other conditions of a valid notice of readiness are satisfied. The traditional view is preferable as a matter of construction and affords a greater degree of certainty in practice. I would hold that “whether in berth or not” enables a valid notice of readiness to be given once the vessel has arrived in port, even though the reason why she is prevented from proceeding further is not the unavailability of a berth but bad weather.’ (Lloyd LJ’s emphasis.)
In this passage Lloyd LJ supports the conclusion which he reaches by reference to three main matters. The first matter is the absence of any words of qualification in the phrase ‘whether in berth or not’. The second matter is what he described as the traditional view of the effect of the phrase. The third matter is the importance of certainty in relation to a commercial contract of the kind here concerned. I shall address myself to each of these matters in turn.
First, as to the absence of any words of qualification. I accept, of course, that the phrase ‘in berth or not’ does not of itself indicate that being in berth or not is related to the availability or unavailability of a berth. I do not, however, think it possible, when interpreting a phrase which has been regularly included in berth charterparties over a long period, to disregard long-established authority as to the purpose intended to be served by it. The authorities to which I referred earlier show that, since 1912 at least, it has been recognised that the purpose of the phrase was to deal with the problem of a ship chartered under a berth charterparty arriving at her port of destination and finding no berth available for her. There is further no reported case prior to this one in which it has ever been suggested that the phrase was intended to deal with the problem of a ship chartered under a berth charterparty arriving at a port where a berth is available for her
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but being prevented by bad weather from proceeding to it. As I indicated earlier, the phrase has been treated as shorthand for what, if set out in longhand, would be ‘whether in berth (a berth being available) or not in berth (a berth not being available).' The phrase has been interpreted and applied in that way for so long that I think that it should continue to be so interpreted and applied.
Second, the traditional view of the effect of the phrase. Lloyd LJ said that this view had always been that the phrase became operative so as to enable a valid notice of readiness to be given as soon as the vessel has arrived in the port provided that the other conditions of a valid notice are satisfied. I cannot accept this generalisation as correct. So far as cases where no berth is available when the ship arrives are concerned, that has certainly been the traditional view. But, so far as cases where a berth is available for the ship on arrival but unreachable by reason of bad weather are concerned, no traditional view has ever been established, for the simple reason that the question of the effect of the phrase in that situation has never previously arisen for decision by any court. As I said earlier, Roskill LJ’s statement in The Johanna Oldendorff [1972] 3 All ER 420 at 445, [1974] AC 429 at 515 that the effect of the phrase was to convert a berth charterparty into a port charterparty was made, and made only, in relation to a case where a berth was not available for the ship on her arrival, and I can see no good reason for applying that statement to the wholly different kind of case where a berth is available for the ship on her arrival but she is prevented by bad weather from proceeding to it.
Third, the need for certainty. I accept that certainty of interpretation is a most desirable characteristic of any contract, especially a commercial contract containing expressions commonly in use. I cannot see, however, that a decision that the phrase ‘whether in berth or not’ only takes effect when a berth is not available provides any less certainty than a decision that it also takes effect when a berth is available but is unreachable by reason of bad weather.
With great respect to Lloyd LJ and the other members of the Court of Appeal who agreed with him, I do not consider, in the light of the examination which I have made of the three main matters relied on by Lloyd LJ, that they provide the support for his conclusion which he regarded them as providing. On the contrary, I am of opinion, having regard to the authorities to which I referred earlier and the context in which the acronym ‘wibon’ is to be found in the charterparty here concerned, that the phrase ‘whether in berth or not’ should be interpreted as applying only to cases where a berth is not available and not also to cases where a berth is available but is unreachable by reason of bad weather.
Since I have reached that conclusion on what Lloyd LJ described as the first question, what he described as the second question does not arise.
In the result I would allow the appeal, set aside the judgment of the Court of Appeal and restore the judgment of Webster J.
LORD TEMPLEMAN. My Lords, for the reasons given by my noble and learned friend Lord Brandon I would allow this appeal.
LORD ACKNER. My Lords, I have had the advantage of reading the speech of my noble and learned friend Lord Brandon and I would allow this appeal.
LORD OLIVER OF AYLMERTON. My Lords, I have had the advantage or reading in draft the speech prepared by my noble and learned friend Lord Brandon. I agree with it and would allow the appeal for the reasons which he has given.
Appeal allowed.
Solicitors: Holman Fenwick & Willan (for the charterers); Middleton Potts (for the owners).
Mary Rose Plummer Barrister.
Dawson v Inland Revenue Commissioners
[1988] 3 All ER 753
Categories: TAXATION; Income Tax
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): KERR, DILLON AND NICHOLLS LJJ
Hearing Date(s): 29 April, 25 May 1988
Income tax – Foreign possessions – Income arising from possessions out of United Kingdom – Trustee – Discretionary settlement – Principal beneficiaries not resident in United Kingdom – No beneficiary entitled to income as it accrued – Trust assets and income administered outside United Kingdom – No income remitted to United Kingdom – Three trustees – Only one trustee resident in United Kingdom – Whether single United Kingdom trustee liable for assessment to income tax on income derived from trust assets – Income and Corporation Taxes Act 1970, s 108, Sch D, para 1(a), s 114(1).
Three trusts were made, on dates between 1946 and 1965, by settlors who were domiciled and resident in the United Kingdom, the principal beneficiaries under each being members of the family of C, who in 1969 emigrated to and became (with his family) permanently resident in Switzerland. Between 12 February 1974 and 14 March 1977 the taxpayer was the only trustee of the trusts who was resident in the United Kingdom, the other trustees being a Swiss bank and a Liechtenstein company. During that period by far the larger part of the funds of the trusts was invested in shares etc of non-United Kingdom companies, the income therefrom being paid into accounts of the trustees maintained at the same Swiss bank. Distributions of income were decided at meetings of the trustees held in Switzerland, no beneficiary having any absolute vested interest in any of the trusts’ income and none of that income being remitted to the United Kingdom. The taxpayer was assessed for the year 1975–76 to basic rate tax under Sch D, Case V on ‘income arising from possessions out of the United Kingdom’ and to additional rate tax under s 16 of the Finance Act 1973 in respect of the trust income. The taxpayer appealed, contending that, even if it were accepted that the trust income arose or accrued to him, no assessment could be made to him because he was not a person ‘receiving or entitled to’ that income within s 114(1)a of the Income and Corporation Taxes Act 1970 and that income did not arise or accrue to him within s 108, Sch D, para 1(a)b of that Act and was not within the charge to tax under that schedule. A special Commissioner upheld the assessments but, on appeal, the judge reversed his determination. The Crown appealed to the Court of Appeal.
Held – Where trustees had no beneficial interest in a trust fund and no beneficiary had an absolute vested interest in its income, trust income was income ‘accruing to’ them within para 1(a) of Sch D in s 108 of the 1970 Act which they ‘received’ or which they were ‘entitled to’ within s 114(1) of that Act jointly, not severally. Accordingly, where one or more such trustees resided out of the United Kingdom, the other trustee (or trustees) could not be assessed to income tax under Case V by virtue of para 1(a)(i) of Sch D. The Crown’s appeal would therefore be dismissed (see p 756 a e, p 757 c d j and p 759 c d g h, post).
Notes
For tax in respect of income arising from possessions out of the United Kingdom, see 23 Halsbury’s Laws (4th edn) paras 611–618, and for cases on the subject, see 28(1) Digest (Reissue) 301–311, 1031–1082.
For the liability to tax of non-resident trustees, see 23 Halsbury’s Laws (4th edn) para, 850.
Page 754 of [1988] 3 All ER 753
For the Income and Corporation Taxes Act 1970, ss 108, 114, see 33 Halsbury’s Statutes (3rd edn) 150, 165.
For the Finance Act 1973, s 16, see 43 ibid 1413.
In relation to tax for the year 1988–89 and subsequent years of assessment and for companies’ accounting periods ending after 5 April 1988 ss 108 and 114 of the 1970 Act and s 16 of the 1973 Act were replaced by ss 18, 59 and 686 of the Income and Corporation Taxes Act 1988.
Cases referred to in judgments
Baker v Archer-Shee [1927] AC 844, HL.
Clark (Inspector of Taxes) v Oceanic Contractors Inc [1983] 1 All ER 133, [1983] 2 AC 130, [1983] 2 WLR 94, HL.
Colquhoun (Surveyor of Taxes) v Brooks (1889) 14 App Cas 493, [1886–90] All ER Rep 1063, HL; affg (1888) 21 QBD 52, CA.
IRC v TW Law Ltd [1950] 2 All ER 196.
Kelly (Inspector of Taxes) v Rogers [1935] 2 KB 446, CA.
National Bank of Greece SA v Westminster Bank Exor and Trustees Co (Channel Islands) Ltd [1971] 1 All ER 233, [1971] AC 945, [1971] 2 WLR 105, HL.
Reid’s Trustees v IRC 1929 SC 439, Ct of Sess.
Williams v Singer [1921] 1 AC 65, HL.
Appeal
The Commissioners of Inland Revenue appealed against the order of Vinelott J ([1987] STC 371, [1987) 1 WLR 716) dated 10 March 1987 allowing an appeal by Oliver Nainby Dawson (the taxpayer) by way of case stated (set out at [1987] STC 372–378) from a determination of a Commissioner for the Special Purposes of the Income Tax Acts upholding assessments to income tax made on him for the year 1975–76 at basic rate under Case V of Sch D and at additional rate under s 16 of the Finance Act 1973 on trust income derived from foreign possessions, none of which income was remitted to the United Kingdom, on the ground that a trustee residing in the United Kingdom but whose co-trustees resided abroad was liable to income tax on the income of a trust fund arising from investments situated outside the United Kingdom. The facts are set out in the judgment of Nicholls LJ.
John Mummery for the Crown.
Stephen Oliver QC and James Kessler for the taxpayer.
Cur adv vult 25 May. The following judgments were delivered.
25 May 1988. The following judgments were delivered.
NICHOLLS LJ (giving the first judgment at the invitation of Kerr LJ). This appeal raises a question concerning tax on trust income in which at the relevant time no beneficiary had an indefeasible vested interest. The question is whether a trustee residing in the United Kingdom, but whose co-trustees reside abroad, is liable to income tax on the income of the trust fund arising from investments situated outside the United Kingdom. The Special Commissioner answered Yes to that question. The taxpayer appealed and Vinelott J answered No (see [1987] STC 371, [1987] 1 WLR 716). The Crown has now further appealed to this court.
The answer to the question turns on the true construction of para 1(a)(i) in Sch D, as set out in s 108 of the Income and Corporation Taxes Act 1970. Nothing turns on the detailed facts concerning the three trust funds with which this appeal is concerned. The facts are summarised succinctly by the judge in the opening paragraphs of his judgment (see [1987] STC 371 at 378–379, [1987] 1 WLR 716 at 717–719). It is sufficient for me to note that the three trusts were made, on dates between 1946 and 1965, by settlors who
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were domiciled and resident in the United Kingdom. The principal beneficiaries under each of the three trusts were members of the family of Mr Gordon Cotton. In 1969 he emigrated to Switzerland and became permanently resident there with his family. In 1974 each trust had three trustees, all resident in the United Kingdom. On 12 February 1974 two of the trustees retired from each trust. They were replaced by non-resident trustees: a Swiss bank and a Liechtenstein company. The third trustee was the taxpayer, Mr Oliver Dawson. He is a stockbroker. He remained in office as one of the trustees of each trust until 14 March 1977, when he too retired and was replaced by another Swiss banker.
The assessments under appeal are assessments for the year 1975–76, that is to say within the period when the taxpayer was a trustee along with two other trustees neither of whom was domiciled or ordinarily resident in the United Kingdom. The judge summarised the facts regarding the investment of the trust funds and the administration of the trusts during this period as follows ([1987] STC 371 at 379, [1987] 1 WLR 716 at 719):
‘During this period the funds or some of them comprised some small holdings of stocks and shares of United Kingdom companies and land in the United Kingdom. However, by far the larger part of each of the funds was invested in stocks, shares and securities of non-United Kingdom companies. Stock and share certificates were, at the direction of the trustees, registered in the name of a Swiss bank or in the name of nominees to its order and were held by that bank or by banks and recognised depositories in the country where the relevant companies were incorporated or resident. The income was paid into accounts of the trustees maintained for each of the three funds with the same Swiss bank. Distributions of income were decided at meetings of the trustees held in Switzerland.’
The assessments under appeal are based on the estimated income of the trust funds derived from sources outside the United Kingdom in the fiscal year 1975–76. In that year Mr Gordon Cotton was paid altogether 150,000 Swiss francs from the income of two of the trusts, for the benefit of his infant children, but otherwise all the income of the three trusts was accumulated.
The difficulty in the present case arises because the legislation relating to income tax makes no express provision regarding income accruing to persons as trustees. This is in marked contrast to the position regarding some other taxes, such as capital gains tax. So far as is material, s 108 is in these terms:
‘The Schedule referred to as Schedule D is as follows:-
SCHEDULE D
1. Tax under this Schedule shall be charged in respect of—(a) the annual profits or gains arising or accruing—(i) to any person residing in the United Kingdom from any kind of property whatever, whether situated in the United Kingdom or elsewhere, and … (iii) to any person, whether a British subject or not, although not resident in the United Kingdom, from any property whatever in the United Kingdom … ’
Section 109 then provides for tax under Sch D to be charged under several cases, in the familiar way. The relevant two cases are Cases IV and V, which apply to income arising respectively from securities out of the United Kingdom and from possessions out of the United Kingdom. Section 114 identifies the persons chargeable to income tax under Sch D omitting immaterial words, s 114(1) provides:
‘… income tax under Schedule D shall be charged on and paid by the persons receiving or entitled to the income in respect of which the tax is directed by the Income Tax Acts to be charged.’
These provisions raise the question of whether the income relevant on these appeals was income which accrued to the taxpayer (s 108) and which he received or to which he
Page 756 of [1988] 3 All ER 753
was entitled (s 114). The relevant income was trust income, and the entitlement of trustees to trust property is joint, not joint and several. Accordingly this trust income accrued, not-to the taxpayer alone, but to him jointly with his co-trustees: ‘each joint tenant holds the whole and holds nothing, that is, he holds the whole jointly and nothing separately’ (Co Litt 186a). Joint entitlement to income does not give rise to any difficulty where all those entitled are resident in the United Kingdom, because the singular ‘person’ in para 1(a)(i) of SchD is to be read as including the plural ‘persons’ by virtue of what is now s 6 (c) of the Interpretation Act 1978(replacing a similar provision in s 1(1)(b) of the Interpretation Act 1889). So construed, para 1(a)(i) applies to annual profits or gains ‘arising or accruing to any person or persons residing in the United Kingdom’. That it is proper so to construe para 1(a)(i) was common ground before us. The correctness of this construction is confirmed by noting that before the enactment of an interpretation Act of general application the initial charging section in the Income Tax Acts spelt out the plural ‘persons’ expressly. Section 1 of the Income Tax Act 1853 provided for tax to he charged on—
‘the annual Profits or Gains arising or accruing to any Person or Persons whatever resident in the United Kingdom, from any Kind of Property whatever, whether situate in the United Kingdom or elsewhere … ’
Section 2 introduced the schedules, and Sch D did not differ, in any respect material for the purposes of this appeal, from para 1(a)(i) in s 108 of the 1970 Act. Thus arises the crucial-question of construction: how is para 1(a)(i) to be interpreted when the income accrues to persons jointly, one (or more) of whom resides in the United Kingdom and the other (or others) of whom resides out of the United Kingdom? The Crown contended that in such a case para 1(a)(i) is satisfied if any of the persons were residing in the United Kingdom. The taxpayer contended that in such a case para 1(a)(i) is not satisfied unless all the persons were residing in the United Kingdom.
Let me say at once that neither of these contentions produces a wholly satisfactory result. Whichever of the contentions is correct, the end result will be surprising and unattractive in some circumstances. There is no problem with trust income accruing from property situate in the United Kingdom. In such a case the income will be chargeable under para 1(a)(iii), even if the trustees are all resident outside the United Kingdom. The difficulty arises with regard to trust income derived from non-United Kingdom sources. In argument, the taxpayer instanced an accumulation trust whereunder everything is ‘foreign’: the settlor, the proper law of the trust, the beneficiaries and the location of the trust property. In such a case if all the trustees reside abroad none of them is chargeable to income tax in respect of the income of the trust property. But on the Crown’s construction, if one of them is or becomes resident in the United Kingdom, that trustee then becomes chargeable to tax on all the income remitted to this country and, subject to s 122, even on the income which is not remitted. This is a surprising result. But the converse is equally true and equally anomalous. Suppose a settlor, resident here, of a trust whose proper law is English and whose income is currently being accumulated. Suppose further that the beneficiaries are all resident here. In such a case, if all the trustees are resident and ordinarily resident here they are chargeable to income tax in respect of the income of the trust even if it derived wholly from sources outside the United Kingdom and even if none of it is remitted to the United Kingdom. But if an additional trustee, resident abroad, were to be appointed, on the taxpayer’s argument the effect would be that thenceforth none of that income would be chargeable to tax under para 1(a)(i).
The same point can be made with regard to the three trusts in question on the present appeal. If the taxpayer had been the sole trustee in 1975–76 the Crown’s claim would have been unanswerable. The judge so observed, and I agree with him. Conversely, if the taxpayer had retired a few years earlier, the Crown’s claim could not have got off the ground. So what is to be done with cases of ‘mixed residences’? Which is the crucial factor: is it the residence in the United Kingdom of one of the trustees or is it the residence out of the United Kingdom of one of the trustees?
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Since neither of the two alternatives produces a satisfactory result, it is tempting to consider whether a more robust interpretation of para 1(a)(i) might not be called for. For example, where the income accrues to persons jointly as trustees, their residence as trustees is to be taken to be the country where the general administration of the trust is ordinarily carried on, by analogy with the provision in s 153 concerning partnerships. Or again, by analogy to s 52 of the Capital Gains Tax Act 1979, the trustees are to be taken to be resident in the United Kingdom unless the general administration of the trust is ordinarily carried on abroad and the trustees or a majority of them are not resident or ordinarily resident in the United Kingdom. Rightly, in my view, neither party sought to advance any such construction of para 1(a)(i). There are several differing ways in which such a provision might sensibly be drawn, and to attempt to choose between them would be to go far beyond the legitimate bounds of construction of this paragraph.
So I return to the two alternatives. In my view, the taxpayer’s construction is to be preferred. On a natural reading of para 1(a)(i) the necessary qualification ‘residing in the United Kingdom’ is a qualification which, when the income accrues to one person, applies to that person and, when the income accrues to persons jointly, applies to all those persons, they must all possess the attribute of ‘residing in the United Kingdom’. I can see no justification for reading the statutory provision, as expanded by the Interpretation Act 1978, as satisfied, where the income accrues to more than one person jointly, if any one of them possesses the necessary attribute of residing in the United Kingdom even though the other or others do not.
To this conclusion, which is sufficient to dispose of this appeal, I append three footnotes. First, I have referred to the fact that at the relevant time no beneficiary had an absolute, vested interest in the income in question. If the facts had been otherwise, and there had been such a beneficiary, nice questions might have arisen on whether indeed there was any income ‘accruing’ to the trustees (para 1(a)(i)) as distinct from, or in addition to, the beneficiary, and on whether the trustees, as distinct from, or in addition to the beneficiary, received or were entitled to the income within s 114(1). ‘In such a case consideration would have to be given to the guidance afforded by a trilogy of cases: Williams v Singer [1921] 1 AC 65, Baker v Archer-Shee [1927] AC 844 and IRC v TW Law Ltd [1950] 2 All ER 196. That point does not arise in this case. It is sufficient to note that there is nothing in those authorities which assists on the short, narrow point of construction with which the present appeal is concerned.
Second, and following from the first point, it is to be noted that in this case the trustees had no beneficial interest in the trust fund. This is not a case where, for example, the trustees were holding property on trust for themselves as tenants in common or, even, as beneficial joint tenants. I express no view on whether the position would be different in either of those instances.
Third, I have already noted that my preferred answer to the question of construction, as much as the rival answer contended for by the Crown, produces some surprising results. Lest it be thought that the answer I would give to the question of construction leaves the door wide open for wholesale tax avoidance, I mention in passing that over 50 years ago Parliament addressed itself to the question of the avoidance of tax by means of the transfer of assets whereby income becomes payable to persons resident out of the United Kingdom (see s 18 of the Finance Act 1936, now replaced by ss 45 and 46 of the Finance Act 1981). To what extent, and in what circumstances, these provisions would avail the Crown where a non-resident trustee is appointed to act with trustees resident in the United Kingdom was, rightly, not a matter explored before us, and I express no view on this.
I agree with the conclusion of the judge. I would dismiss this appeal.
DILLON LJ. Section 108 of the Income and Corporation Taxes Act 1970 sets out the charge to tax under Sch D, which is the only schedule relevant to the present case. So far as material to the present case, tax under the schedule is to be charged in respect of—
Page 758 of [1988] 3 All ER 753
‘(a) the annual profits or gains arising or accruing—(i) to any person residing in the United Kingdom from any kind of property whatever, whether situated in the United Kingdom or elsewhere, and … (iii) to any person, whether a British subject or not, although not resident in the United Kingdom, from any property whatever in the United Kingdom … ’
It is implicit in this that tax is not chargeable under Sch D in respect of the annual profits or gains arising to any person not resident in the United Kingdom from any property whatever not situated in the United Kingdom; that is in accordance with the general principle stated by Lord Herschell in Colquhoun (Surveyor of Taxes) v Brooks (1889) 14 App Cas 493 at 504, [1886–90] All ER Rep 1063 at 1067:
‘The Income Tax Acts … themselves impose a territorial limit; either that from which the taxable income is derived must be situate in the United Kingdom or the person whose income is to be taxed must be resident there.’
That general principle was regarded as still broadly correct by Lord Wilberforce in Clark (Inspector of Taxes) v Oceanic Contractors Inc [1983] 1 All ER 133 said 143–144, [1983] 2 AC 130 at 151–152; it had earlier been approved by Lord Hailsham LC (with whose speech all the other members of the House agreed) in National Bank of Greece SA v Westminster Bank Exor and Trustee Co (Channel Islands) Ltd [1971] 1 All ER 233, [1971] AC 945. The reason why tax legislation is in general territorially limited can be attributed, as it was by Lord Esher MR in Colquhoun v Brooks (1888) 21 QBD 52 at 57, to the comity of nations, and the recognition by each nation of the field over which it can properly legislate, or it can be attributed, as it was by Lord Scarman in Clark v Oceanic Contractors [1983] 1 All ER 133 at 139, [1983] 2 AC 130 at 145, to a recognition by Parliament of the almost universally accepted principle that fiscal legislation is not enforceable outside the limits of the territorial sovereignty of the kingdom. Either approach leads to the same general principle, which is to my mind the very, important background to this case.
On the authorities, there is no doubt at all that the trust income from the foreign investments of the trusts arose or accrued, within the meaning of those words as used in s 108, to all the three trustees jointly: see Reid’s Trustees v IRC 1929 SC 439 and Kelly (Inspector of Taxes) v Rogers [1935] 2 KB 446. Counsel for the Crown submits that the corollary of that is that the trust income arose or accrued to the taxpayer, who is resident in the United Kingdom, and so is taxable; but, if that is correct, the corollary is equally that the trust income arose or accrued to the two other trustees who are not resident in the United Kingdom, and so is not taxable.
It is of course clear that if all the trustees were resident in the United Kingdom the income would be taxable under Sch D, but if none of them was so resident it would not be taxable. It is irrelevant to tax liability that the trustees resident outside the jurisdiction happen to be majority. It is equally irrelevant to tax liability that, when the settlements were made, the settlors were domiciled in the United Kingdom. The Crown has apparently been operating a practice of not seeking to tax a trustee resident in the United Kingdom on income from property out of the United Kingdom if the majority of the trustees are resident outside the United Kingdom and the fund was settled by a person domiciled outside the United Kingdom; it has been common ground on the argument of this appeal, however, that the domicile of the settlor is in strict law irrelevant to the taxability of trust income arising from foreign investments.
What is important, in my judgment, is the nature of the joint ownership by trustees of the trust investments, and their joint entitlement to the income of those investments.
In IRC v TW Law Ltd [1950] 2 All ER 196, where a mother and her two sons held shares in a company jointly as trustees, the court had to consider, for certain tax purposes, whether the sons were ‘working proprietors’ of the company who ‘owned’ the shares. Romer J said (at 198–199):
‘… it was argued before me on behalf of the company that the sons and their
Page 759 of [1988] 3 All ER 753
mother were joint tenants of the trust holding of 1,485 shares; that the interest of each joint tenant is an interest in an undivided whole; and that accordingly it may fairly be said that in law each of the trustees owns the entirety of the trust holding. I am quite unable to accept this argument. The fact that a joint tenant has a legal interest in the entirety of the subject-matter of the joint tenancy seems to me to be far removed from the conception that each such tenant “owns” the subject-matter, whatever the meaning that may be attributed to the word “own.” It is difficult to think of any act of ownership in relation to the shares that either of the sons can perform on his own. He cannot sell them, transfer them, mortgage them, or give a discharge to the company for dividends declared on them … ’
So, in the present case, in the judgment under appeal Vinelott J said, and I agree with him, that no one of the trustees was entitled to call for the income to be paid to him. As it is put in Megarry and Wade Law of Real Property (5th edn, 1984) p 418 and in 39 Halsbury’s Laws (4th edn) para 529, note 5, by reference in each case to Coke on Littleton (Co Litt 186a), each joint tenant holds nothing by himself and yet holds the whole together with his fellows.
Because of the very limited nature of the interest of one only of several trustees in the trust investments and in the income of such investments and because also of the general principle of the territorial basis of tax legislation to which I have referred, I for my part am unable to hold that the trust income from foreign investments has arisen or accrued to the taxpayer, a person residing in the United Kingdom, so as to render that income chargeable to tax under s 108(1)(a)(i). The income has arisen or accrued to all the three trustees jointly, but they are not all persons residing in the United Kingdom.
To put it the other way round, the court cannot regard the income as having accrued to the taxpayer alone, and disregard the two other trustees because they were not resident in the United Kingdom.
Some support for this view is perhaps afforded by the comment of Viscount Cave in Williams v Singer [1921] 1 AC 65 at 72 that, if the Income Tax Acts are examined, it will be found that the person charged with the tax is neither the trustee nor the beneficiary as such but the person in actual receipt and control of the income which it is sought to reach. Of course Viscount Cave did not have a situation such as that of the present case in mind, and his comment is not to be pressed too far. He was concerned with the antithesis between the trustees as a whole, who were all resident in the United Kingdom, and a single beneficiary, resident abroad, who had received the trust income direct from the foreign companies in which the trust funds were invested. In that context it was the beneficiary who was in receipt and control of the trust income. In the present case, I do not regard the taxpayer alone as in receipt or control of the trust income, since the entitlement of the trustee was joint.
For these reasons I agree with the conclusion of Vinelott J, and I would dismiss this appeal.
KERR LJ. I agree that this appeal should be dismissed for the reasons stated in the judgments of Dillon and Nicholls LJJ, to which I cannot usefully add anything.
Appeal dismissed. Leave to appeal to House of Lords refused.26 October. The Appeal Committee of the House of Lords cave leave to appeal on terms as to costs.
Solicitors: Solicitor of Inland Revenue; Simmons & Simmons (for the taxpayer).
Rengan Krishnan Esq Barrister.
Gisborne and another v Burton
[1988] 3 All ER 760
Categories: AGRICULTURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): DILLON, RALPH GIBSON AND RUSSELL LJJ
Hearing Date(s): 20, 21 JUNE, 21 JULY 1988
Agricultural holding – Notice to quit – Counter-notice – Exclusion of right to give counter-notice – Contemporaneous grant of tenancy to nominee and grant of subtenancy by nominee to person renting land – Scheme intended to avoid granting secure tenancy to person renting land – Whether scheme to be disregarded – Whether person renting land to be treated as a tenant having security of tenure – Agricultural Holdings (Notices to Quit) Act 1977, s 2(1).
The owner of certain farmland decided that he no longer wished to farm it himself. The defendant, a neighbouring farmer, offered to farm the land as the owner’s tenant but the owner was unwilling to grant the defendant a tenancy which would be subject to s 24(1) of the Agricultural Holdings Act 1948, under which a tenant of an agricultural holding could restrict the operation of a notice to quit by serving a counter-notice thereby requiring the minister or latterly the Agricultural Land Tribunal to consent to the notice. The owner was advised that subtenants did not have protection under the 1948 Act and accordingly he granted a tenancy of the land to his wife at a rack rent and on the usual covenants relating to agricultural land and on the same day the wife sublet the land to the defendant at the same rent. All three parties were aware that the purpose of the arrangement was to enable the defendant to farm the land as a tenant without having security of tenure. When the owner died his personal representatives, the plaintiffs, served a notice to quit on the wife, who did not serve any counter-notice under s 2(1)a of the Agricultural Holdings (Notices to Quit) Act 1977(consolidating s 24(1) of the 1948 Act). Her tenancy accordingly expired and the plaintiffs, without serving a notice to quit, claimed possession from the defendant on the ground that his subtenancy had expired when the head tenancy expired. In an action for possession the judge upheld the plaintiffs’ claim and made an order for possession against the defendant. The defendant appealed, contending (i) that the tenancy and subtenancy were a sham and the reality was the grant of a tenancy to him and (ii) that it would be contrary to public policy to permit an agricultural landlord to evade the 1977 Act by the device of granting a tenancy to a nominee who then granted a subtenancy to the person who wished to rent the land.
Held (Ralph Gibson LJ dissenting)—Where there were a series of transactions which taken together constituted a composite scheme intended to avoid a mandatory statutory provision the court would look at the overall result sought to be achieved by the scheme rather than considering the individual transactions in isolation. Accordingly, the tenancy granted to the wife and the subtenancy granted to the defendant were to be considered together, and since the wife had no intention of farming the land under the tenancy she was merely a nominee and since the intended effect of the scheme was to deprive the defendant of the statutory protection given by s 2(1) of the 1977 Act, the tenancy granted to the wife and the subtenancy granted to the defendant were to be disregarded and the defendant was to be treated as the tenant of the owner and was accordingly entitled to statutory protection under s 2(1). The appeal would therefore be allowed (see p 765 h to p 766 c j to p 767 b f, p 773 j to p 774 h and p 775 a, post).
Johnson v Moreton [1978] 3 All ER 37 applied.
W T Ramsay Ltd v IRC [1981] 1 All ER 865 and Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530 considered.
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Notes
For restrictions on the operation of a notice to quit an agricultural holding, see 1 Halsbury’s Laws (4th edn) paras 1053–1054, and for cases on the subject, see 2 Digest (Reissue) 20–22, 70–81.
For the Agricultural Holdings (Notices to Quit) Act 1977, s 2, see 1 Halsbury’s Statutes (4th edn) 892.
As from 18 June 1986 s 2 of the 1977 Act was replaced by s 26 of and Sch 3 to the Agricultural Holdings Act 1986.
Cases referred to in judgments
Antoniades v Villiers [1988] 2 All ER 309, [1988] 3 WLR 139, CA.
Dando (S L) Ltd v Hitchcock [1954] 2 All ER 335, [1954] 2 QB 317, CA.
Featherstone v Staples [1986] 2 All ER 461, [1986] 1 WLR 861, CA.
Firstcross Ltd v East West (Export/Import) Ltd (1980) 255 EG 355, CA.
Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530, [1984] AC 474, [1984] 2 WLR 226, HL.
Gladstone v Bower [1960] 3 All ER 353, [1960] 2 QB 384, [1960] 3 WLR 575, CQ.
Hadjiloucas v Crean [1987] 3 All ER 1008, [1988] 1 WLR 1006.
Johnson v Moreton [1978] 3 All ER 37, [1980] AC 37, [1978] 3 WLR 538, HL.
Quennell v Maltby [1979] 1 All ER 568, [1979] 1 WLR 318, CA.
Ramsay (WT) Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] 1 All ER 865, [1982] AC 300, [1981] 2 WLR 449, HL; affg W T Ramsay Ltd v IRC [1979] 3 All ER 213, [1979] 1 WLR 974, CA, and Eilbeck (Inspector of Taxes) v Rawling [1980] 2 All ER 12, CA.
Shell-Mex and BP Ltd v Manchester Garages Ltd [1971] 1 All ER 841, [1971] 1 WLR 612, CA.
Sherwood (Baron) v Moody [1952] 1 All ER 389.
Short Bros (Plant) Ltd v Edwards (1978) 249 EG 539, CA.
Snook v London and West Riding Investments Ltd [1967] 1 All ER 518, [1967] 2 QB 786, [1967] 2 WLR 1020, CA.
Somma v Hazlehurst [1978] 2 All ER 1011, [1978] 1 WLR 1014, CA.
Street v Mountford [1985] 2 All ER 289, [1985] AC 809, [1985] 2 WLR 877, HL.
Appeal
The defendant, Ronald Burton, appealed against the judgment of his Honour Judge Willcock QC given in the Shaftesbury County Court on 6 April 1987 whereby, on the trial of an action brought by the plaintiffs, Colin Henry Beaumont Gisborne and John Beckly, who were the personal representatives of Mr Dick Christopherson deceased who had been the owner of a farm known as Berywood Farm, Donhead St Mary, Wiltshire, claiming possession of the farm from the defendant, he ordered that the defendant give up possession of the farm by 11 May 1987. The defendant sought an order that the claim for possession be dismissed. The grounds of the appeal were that the judge had erred in law in holding, inter alia, (1) that an arrangement entered into in April 1963 between Mr Christopherson, his wife and the defendant, whereby Mr Christopherson had let the farm to his wife and she had sublet it to the defendant, was not a sham, (2) that the letting and subletting constituted legitimate separate transactions and (3) that the arrangement did not constitute the defendant as Mr Christopherson’s direct tenant and thus did not entitle the defendant to receive a notice to quit and to the protection afforded to a tenant of an agricultural holding. The facts are set out in the judgment of Dillon LJ.
D J Elvin for the defendant.
O P Albery for the plaintiffs.
Cur adv vult
Page 762 of [1988] 3 All ER 760
21 July 1988. The following judgments were delivered.
DILLON LJ. This appeal, by the defendant in the action, Mr Burton, against a decision of His honour Judge Willcock QC given in the Shaftesbury County Court on 6 April 1987, raises issues of law of general importance and, to my mind, of considerable difficulty in relation to the statutory provisions which under successive statutes since 1948 have conferred security of tenure on the tenants of agricultural holdings.
It will be in mind that one of the most important provisions of the Agricultural Holdings Act 1948, and indeed the nub of the security of tenure provisions of the 1948 Act, was s 24, which provided by sub-s (1):
‘Where notice to quit an agricultural holding or part of an agricultural holding is given to the tenant thereof, and not later than one month from the giving of the notice to quit the tenant serves on the landlord a counter-notice in writing requiring that this subsection shall apply to the notice to quit, then, subject to the provisions of the next following subsection, the notice to quit shall not have effect unless the Minister consents to the operation thereof.’
Subsection (2) of s 24 then set out a limited number of cases where sub-s (1) was not to apply, ie where the tenant was not to be entitled to stay the operation of a notice to quit by serving a counter-notice, and s 25 set out a limited number of grounds on which alone the minister could give his consent to the operation of a notice to quit an agricultural holding or part of an agricultural holding.
By a later amendment by the Agriculture Act 1958 the powers of the minister were transferred to a quasi-judicial body, the Agricultural Land Tribunal.
Sections 24 and 25 of the 1948 Act, as previously amended, were replaced by ss 2 and 3 of, and subsequent provisions in, the Agricultural Holdings (Notices to Quit) Act 1977, which is the Act directly applicable to the present case. The provisions of the 1977 Act have themselves in turn been recently replaced by provisions in ss 26 and 27 of the Agricultural Holdings Act 1986. Though details, however, have been altered and elaborated, the scheme of the three Acts has remained the same, viz that, save in a limited number of cases in which a tenant is not to be entitled to stay the operation of a notice to quit by serving a counter-notice, a notice to quit an agricultural holding or part of an agricultural holding will not have effect, if the tenant serves a counter-notice, unless the tribunal consents to its operation on one or more of certain specified grounds.
In Johnson v Moreton [1978] 3 All ER 37, [1980] AC 37 the House of Lords held, for reasons based on the policy of the 1948 Act and the vital importance, both to the national economy and security, that the level of production and the efficiency of farms in this country should be maintained and improved, that a tenant of an agricultural holding could not deprive himself in advance or contract out of his right to give a counter-notice under s 24 of the 1948 Act. The particular scheme which the House had to consider in Johnson v Moreton, and held ineffective to deprive the tenant of his statutory rights under s 24, was the inclusion in a tenancy agreement of an agricultural holding, with the tenant’s full knowledge and consent, of a covenant by the tenant not to serve any counter-notice under s 24. When the landlords in due course served a first notice to quit on the tenant, the tenant served a counter-notice. The landlords accepted that the counter-notice was effective, by the mandatory terms of s 24, to stay the operation of the first notice to quit, but they claimed, unsuccessfully, that the service of the counter-notice was a breach of a term or condition of the tenancy and that consequently the landlords were entitled to serve a second notice to quit, by reason of that breach, to which under s 24(2) of the 1948 Act no second counter-notice could be given. Lord Hailsham, regarded the relevant clause in the tenancy agreement as an open, not to say brazen, attempt to get round the provisions of the agricultural holdings legislation so far as they provided security of tenure to the tenant (see [1978] 3 All ER 37 at 44, [1980] AC 37 at 54); all their Lordships held that the attempt failed.
Page 763 of [1988] 3 All ER 760
In the present case the court is faced with an equally open attempt to get round those provisions, albeit by a different route. The question is whether this attempt, however brazen, succeeds, as Judge Willcock held, or fails.
To understand the present scheme it is necessary to appreciate that under the common law a subtenancy comes automatically and simultaneously to an end, without the need for any notice to quit or notice of termination, when the head tenancy, out of which the subtenancy was carved, comes to an end by any means (other than surrender by the head tenant to the head landlord). Consequently it was held by Ormerod J in Sherwood (Baron) v Moody [1952] 1 All ER 389(which has never since been doubted) that a subtenant of agricultural land has no protection, and no power to serve a counter-notice under s 24(1) of the 1948 Act, if the tenancy of his immediate landlord, the head tenant, has been effectively determined by the head landlord; in Sherwood v Moody the determination of the head tenancy was by a notice to quit given to the head tenant by the head landlord, to the operation of which the minister gave his consent.
Unlike the Rent Acts, the agricultural holdings legislation contains no special provision for the protection of subtenants against head landlords. Section 26(1)(e) of the 1948 Act gave the minister power to make regulations for making provision for the purpose of safeguarding the interests of subtenants, including provision enabling the minister or the Agricultural Land Tribunal, where the interest of a tenant is terminated by notice to quit, to secure that a subtenant will hold from the landlord on the same terms as he held from the tenant. That power was transferred from the minister to the Lord Chancellor by the Agriculture Act 1958. When s 26 of the 1948 Act was repealed by the 1977 Act, a similar power was conferred on the Lord Chancellor by s 5(1)(d) of the 1977 Act, and it is now to be found in s 29 of, and para 7 of Sch 4 to, the 1986 Act. But none of these powers has ever been exercised.
Accordingly, on the advice of his solicitors, the owner of the land in question in the present case set about constructing, if he could, a situation in which the defendant, Mr Burton, would farm the land, but as a subtenant only in a situation in which the subtenancy could be terminated by termination of the head tenancy whenever the owner of the land wanted. The land in question is a farm known as Berrywood Farm, at Donhead St Mary in Wiltshire, and at the relevant time in 1963 its owner was a Mr Dick Christopherson. He died in February 1984 at the age of 90 and the plaintiffs in this action, respondents to the present appeal, are his personal representatives. In and just before 1963 Mr Christopherson was having difficulties over farming Berrywood Farm and the defendant, who owned another farm in the neighbourhood, proffered his help, and offered to take Berrywood Farm off Mr Christopherson’s hands as his tenant. Mr Christopherson consulted his solicitor, Mr Wilson of Messrs Francis & Crookenden. Mr Wilson’s proposals are clearly set out in a letter of 13 December 1962. The avowed object of the proposals was that the defendant should not be entitled, if the scheme worked, to the benefit of the security provisions of the 1948 Act.
Mr Wilson prepared the necessary documents and what was done was that on 6 April 1963 Mr Christopherson granted his wife, Mrs Kathleen Christopherson, a tenancy on conventional terms of Berrywood Farm and on the same day she granted the defendant a tenancy, which was therefore intended to be a subtenancy, of the same land at the same rent. The evidence of Mrs Christopherson at the trial in the county court was, whether relevant or not to any of the issues, that she thought it was a straightforward tenancy between her husband and the defendant, and that she used to give her husband the cheques which the defendant gave her for rent.
The artificial nature of this tenancy/subtenancy arrangement is emphasised by the fact that there was some other land in the locality known as the Watery Lane land which the defendant was also going to farm. The Watery Lane land happened, however, to belong to Mrs Christopherson and not to her husband and so by a tenancy agreement, also of 6 April 1963, Mrs Christopherson granted her husband a tenancy of the Watery Lane land and on the same day he granted the defendant a tenancy of the same land at the same
Page 764 of [1988] 3 All ER 760
rent. The Watery Lane land is not itself the subject of this litigation since it was sold, subject to the defendant’s tenancy, many years ago.
So far as Berrywood Farm is concerned, the plaintiffs, as personal representatives of Mr Christopherson after his death, served notice to quit on Mrs Christopherson and she, predictably, did not serve any counter-notice. Her tenancy accordingly expired and the plaintiffs then claimed possession from the defendant without serving any notice to quit on him to which he could give a counter-notice. The judge upheld that claim, and the defendant now appeals to this court.
The judge found, and this is not disputed, that at the time of the grant of his tenancy of Berrywood Farm the defendant was well aware of the details of the scheme and that its object was that he should not enjoy the usual security of tenure of an agricultural tenant. It is likely that he had, as the judge found, taken advice from local solicitors and the correspondence shows that he negotiated certain improvements in the terms to compensate him for not having security of tenure. The tenant in Johnson v Moreton [1978] 3 All ER 37, [1980] AC 37 had also, however, known perfectly well that the scheme adopted in his tenancy agreement was intended to deprive him of the protection of the 1948 Act, and that did not prevent him establishing that in law the scheme failed and he was entitled to security. The question for us is not whether the defendant is acting as an honourable man in reneging on a scheme to which he had agreed, and of which he has had the benefit for over 20 years, but whether the scheme is effective in law to deprive him of the security of tenure a tenant of an agricultural holding would ordinarily have. Does the scheme work?
I have no doubt, for my part, that the scheme can properly be described, as counsel for the defendant submitted, as an artificial device to prevent the defendant having security of tenure. So indeed the judge concluded. That does not, however, without more, lead to the conclusion that the device must fail.
The appeal has been presented on two grounds, which the judge dealt with separately but which, to my mind, really run together. First it is said that the two tenancy agreements of 6 April 1963 in respect of Berrywood Farm were a sham and the true transaction was the grant of a tenancy by Mr Dick Christopherson to the defendant. Second it is said that, even if the two tenancy agreements were not strictly a sham, none the less, for the reasons of policy indicated in the speeches in Johnson v Moreton and in the light of the approach of the appellate courts in recent tax cases to artificial schemes for evading mandatory statutory provisions, the agreements can only have effect as the grant of a tenancy by Mr Dick Christopherson to the defendant.
Conversely, it is argued for the plaintiffs that the two tenancy agreements should have effect according to their strict wording as the parties intended and that, if the result is to throw a glaring spotlight on a fundamental flaw in the security of tenure provisions in the 1948 Act and subsequent Acts, then any corrective action that is thought appropriate is a matter for the Lord Chancellor in the exercise of the rule-making power which I have mentioned, or for Parliament, and not for the courts.
In relation to ‘sham’, reference is made, as usual, to the passage in the judgment of Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 1 All ER 518 at 528, [1967] 2 QB 786 at 802 where he said:
‘… it is, I think, necessary, to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities … that for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents
Page 765 of [1988] 3 All ER 760
are not to create the legal rights and obligations which they give the appearance of creating.’
That passage has, of course, been often considered in relation to the more complex tax avoidance schemes. In relation to such schemes it has been held that the documents were not a sham, because the parties intended to create, if they could, the complex of rights and liabilities which the documents appeared to create. So in the present case and, as I read his judgment, using the term ‘sham’ in that sense the judge came unhesitatingly to the conclusion that the arrangement in the present case, whatever it might be called, could not justly be said to be a sham.
There is, however, a slightly different aspect of sham which is exemplified by Somma v Hazlehurst [1978] 2 All ER 1011, [1978] 1 WLR 1014 as interpreted by Lord Templeman in Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825, where the actual decision of this court in Somma v Hazlehurst was disapproved. In Somma v Hazlehurst a landlord, being desirous of avoiding certain statutory provisions in the Rent Acts in relation to furnished lettings, required a young couple who wanted to occupy a particular room to execute two separate forms of licence agreement. The young couple, who urgently wanted accommodation, signed the agreements without query but, on the findings of the judge, ‘understood what they were letting themselves in for’. It seems clear that the landlord, at any rate, had the intention that the documents would if that was at all possible create the legal rights and obligations which they gave the appearance of creating, and the young couple went along with that intention. None the less the documents were a sham because they did not reflect what was actually happening; in essence the documents, and the parties by entering into the documents, were trying to do what in law cannot be done, viz to give the young couple exclusive possession of furnished residential accommodation without the statutory protection for tenants of such accommodation which are mandatory under the Rent Acts.
We have been taken thoroughly by counsel through the recent tax cases which illustrate what has been referred to as ‘the Ramsay principle’ from W T Ramsay Ltd v IRC [1981] 1 All ER 865, [1982] AC 300. In these cases, the question has not been whether the documents in question were a sham, but whether on a proper appreciation of the relevant taxing Act they could have the fiscal effect which their authors desired. The Ramsay principle, as summarised by Lord Fraser in Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530 at 532, [1984] AC 474 at 512, is that the fiscal consequences of a preordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately. In many of the tax cases the individual transactions in the scheme have been self-cancelling, which no doubt makes it easier to consider the result or effect of the series as a whole (cf the reasoning of Templeman LJ in Eilbeck (Inspector of Taxes) v Rawling [1980] 2 All ER 12 at 21 and of Lord Bridge in Furniss v Dawson [1984] 1 All ER 530 at 535, [1984] AC 474 at 517), but Lord Fraser’s comments in Furniss v Dawson [1984] 1 All ER 530 at 532, [1984] AC 474 at 512 show that the fact that such a scheme has some enduring legal consequences and is not wholly self-cancelling is not sufficient to render the Ramsay principle inapplicable. It seems to me that a similar principle must be applicable wherever there is a preordained series of transactions which is intended to avoid some mandatory statutory provision, even if not of a fiscal nature. You must look at the effect of the scheme as a whole, instead of concentrating on each preordained step individually, and you do not, as it were, blow the whistle at half-time.
If that approach is made in the present case, the effect, or in the words of Lord Bridge in Furniss v Dawson the substance, of what was done in relation to Berrywood Farm on 6 April 1963 is that by two preordained steps, rather than a single step, Mr Dick Christopherson has granted an agricultural tenancy to the defendant. This links up with the second aspect of the sham argument, referred to above, in that I find in the tenancy
Page 766 of [1988] 3 All ER 760
agreement granted by Mr Dick Christopherson to Mrs Christopherson agreements by Mrs Christopherson—
‘(3) TO farm and cultivate the said land in accordance with the rules of good husbandry as defined by the Agriculture Act 1947 and to keep and leave the same in good heart and condition (4) TO keep all hedges ditches drains watercourses gates and things (if any) forming part of the demised premises trimmed cut scoured cleansed and repaired [and] (10) NOT to assign charge underlet or part with the possession of the said land or any part thereof without the previous consent in writing of the Landlord’
when it was perfectly clear that Mrs Christopherson was not going to farm the land at all, because the farming had got too difficult for the Christophersons and the defendant was going to take it over, and when it was equally clear that the land was being sublet contemporaneously to the defendant. In such circumstances the conclusion must be, in my judgment, that Mrs Christopherson was at highest a mere nominee or agent for Mr Christopherson to grant a tenancy to the defendant, and what actually happened was that Mr Christopherson granted such a tenancy.
In Johnson v Moreton [1978] 3 All ER 37 at 43, [1980] AC 37 at 52–53 Lord Salmon commented in relation to the particular clause, cl 27, there in question by which the tenant had covenanted not to serve a counter-notice under s 24 of the 1948 Act:
‘If any clause such as cl 27 was valid landlords might well insist on a similar clause being introduced into every lease; and prospective tenants, having no money with which to buy the land they wanted to farm, would, in reality, have little choice but to agree. Accordingly, if cl 27 is enforceable the security of tenure which Parliament clearly intended to confer, and did confer, on tenant farmers for the public good would have become a dead letter.’
Lord Hailsham said ([1978] 3 All ER 37 at 50, [1980] AC 37 at 61):
‘At the end of the day I feel convinced that to allow this appeal would be, adopting the phrase used in some of the authorities, to permit s 24 of the 1948 Act, which was designed in the public interest to give the agricultural tenant security of tenure, and for a generation has been thought appropriate to do so, to become a dead letter. If the landlords are right there is no reason why a cl 27 should not be written into every agricultural lease.’
He went on to cite from the Mikado in the Gilbert and Sullivan opera.
Lord Russell said ([1978] 3 All ER 37 at 58, [1980] AC 37 at 72):
‘It is, in my opinion, inconceivable that Parliament should have intended that this tremendous advance in protection of tenant farmers from the ordinary impact of the law as to occupancy should be one of which the tenant should be at liberty to deprive himself by advance bargaining when the lesser advantages conferred by ss 3 and 23 were conferred notwithstanding any agreement to the contrary. The contrary would introduce a ludicrously lopsided operation of the statute. Secondly, I find it inconceivable that it was the intention in 1947 of Parliament that the equivalent of ss 24 and 25 should bite on all existing tenancies, in which of course there could be no equivalent of the present cl 27, but not on future tenancies. I say not on future tenancies, because would-be tenant farmers in need of a tenancy, anxious to farm but unable to buy farming land, would be at the mercy of landlords who could insist on agreement to a cl 27. I do not doubt that tenants would be forthcoming prepared to so agree, and if the agreement were sustainable the protection afforded by the counter-notice system would, as farming tenancies fell in, become a dead letter.’
This reasoning is fully applicable to the present case. If the present artificial scheme,
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avowedly adopted for the sole purpose of depriving the defendant of statutory security of tenure, is effective to that end, any owner of agricultural land who is well advised will apply it and, instead of granting a tenancy to his proposed agricultural tenant, will grant a head tenancy to his wife, his solicitor, John Doe, or Richard Roe, who will contemporaneously and by prearranged step grant, as a subtenancy, the proposed tenancy to the agricultural tenant. Security for tenants will thus be at the whim of the landlord. I cannot regard this as consistent with the policy of the 1948 Act and the succeeding Acts. Indeed, it is easy to adapt the words of Donaldson LJ in the tax case of Eilbeck v Rawling [1980] 2 All ER 12 at 24: ‘… this is too good to be true, even in a sophisticated and ingenious tax avoidance scheme.' Essentially the scheme must fail because the Christophersons were trying to do by the documents what, for the reasons given in Johnson v Moreton, the law does not permit, viz to grant the defendant an agricultural tenancy without the statutory protection.
It is said that none the less if there is a lacuna in the Acts it is not for the court to fill it, but for the Lord Chancellor in exercise of his rule-making power or for Parliament, and reference is made (as it was in Johnson v Moreton) to Gladstone v Bower [1960] 3 All ER 353, [1960] 2 QB 384. In that case a tenancy of agricultural land had been granted for a fixed term of 18 months; it was held, on the construction of the 1948 Act, that such a tenancy was outside the protection of the Act, and it was also held that that result was probably due to an oversight on the part of Parliament, but it was for Parliament to fill the lacuna, and not for the court. In fact Parliament has never done so, but that may well be because an 18-month tenancy of farming land is inconvenient and unpractical, and there has been no hint of any common practice developing of landlords granting such tenancies to take advantage of the lacuna.
In the present case, on the view I take of the effect of what was done on 6 April 1963, there is no lacuna to be filled: the defendant has a protected tenancy of agricultural land. The Lord Chancellor’s rule-making powers can remain to be exercised, if and when he thinks fit, in respect of the quite different, if not very common, problem where there is genuinely a subtenancy which is quite separate and independent from a head tenancy which has been terminated.
We have been referred to many other decisions, particularly under the Rent Acts, but I do not find it necessary to comment on them since they were concerned with different issues on different facts.
For the foregoing reasons, I would for my part allow this appeal, set aside the order of the judge, and dismiss the action.
RALPH GIBSON LJ. I have reached the opposite conclusion. I would dismiss the appeal and uphold the order of the judge. The issues raised by this appeal are of much importance and I, too, have found them difficult to decide, the more so because I find myself with diffidence differing from Dillon and Russell LJJ.
The facts have been stated and the relevant statutory provisions have been set out by Dillon LJ in his judgment and I shall not repeat them.
The defendant’s pleaded case was that the arrangement, by which Mr Christopherson let the land to Mrs Christopherson, and Mrs Christopherson sublet to the defendant, was a sham, and, in the alternative, was an artificial transaction the purpose of which was to deprive the defendant of statutory protection which he would otherwise have enjoyed as the tenant of Mr Christopherson. It was alleged that the true legal effect of the arrangement was that the defendant was the direct tenant of Mr Christopherson. The judge held the two transactions which made up the arrangement to be real; the arrangement was not a sham and was exactly what it purported to be. The only real question before the court, in the judge’s view, was whether that real transaction was such a contrivance as would not be given effect to in our law. He held that the transaction did validly avoid the operation of the Agricultural Holdings Act 1948 in favour of the defendant after determination of Mrs Christopherson’s tenancy. In my judgment, the
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judge has not been shown to be wrong in law in his approach to the issues or in his conclusions.
The purpose, to achieve which the form of the arrangement was derived, namely of preventing the consequences in law which would follow if Mr Christopherson let his land direct to the defendant, is not unlawful or against public policy. No law prohibits the devising of an arrangement whereby Mr Christopherson lets his land to his wife so that she may let it to Mr Burton. Although the law requires the court to be ‘astute to detect and frustrate sham devices and artificial transactions whose only object is to disguise the grant of a tenancy’ and to evade statutory provisions such as the Rent Acts (see per Lord Templeman in Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825), the courts have never claimed the power to treat a transaction in private law between private individuals as something other than it really is merely because the social purpose of some legislation would be served by so treating it. Legislation might, of course, so require, but this legislation does not. The problem raised by this case is by what process and principles the court is to test what ‘a transaction really is’.
Counsel for the defendant submitted that the judge was wrong not to treat the transaction as ‘sham’, and cited the well-known passage from the judgment of Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 1 All ER 518 at 528, [1967] 2 QB 786 at 802 and the phrase of Bingham LJ in Antoniades v Villiers [1988] 2 All ER 309 at 316, [1988] 3 WLR 139 at 147 that ‘a sham exists where the parties say one thing intending another … ' Counsel for the defendant invited this court to be astute and to detect that the transaction had ‘no purpose save avoidance’ and that, therefore, the parties really intended that the land should be let to Mr Burton, the defendant, by Mr Christopherson and that the subletting was a sham. There is no claim in the notice of appeal that the judge was wrong on any finding of primary fact. But this court was invited to find the transaction to be a sham, in the sense conveyed by Diplock LJ in Snook’s case, because the note of evidence before the court shows that Mrs Christopherson said in evidence that she ‘thought it was a straight-forward tenancy between my husband and Burton’ and that she ‘used to give my husband the cheque which Burton gave me’, and because of the judge’s finding that the purpose of the transaction was as stated above. Reference was also made in argument to the fact that Mrs Christopherson was clearly not going to farm the land herself as contemplated by the terms of the tenancy granted to her by her husband. For my part, I find this submission to be impossible of acceptance. The judge had the contemporary documents and the evidence of Mrs Christopherson that she had gone along with what she was advised to do, and the evidence of Mr Wilson, the solicitor, who had given the advice. Mr Burton, indeed, gave evidence that he thought from the beginning that it was an agricultural tenancy from Mr Christopherson and that he never had any indication that it was a subtenancy, but the judge rejected his evidence because it was not consistent with what was said and done at the time according to the documents. It follows, in my judgment, inevitably that in the ordinary meaning of the terms the parties did not intend that Mr Burton should be the direct tenant of Mr Christopherson but they all intended that he should not be. The statements in evidence of Mrs Christopherson as to what she thought and as to what she did with the cheques are nothing to the point. What she thought in 1987 was the effect of what was done in 1963, and what she did with the cheques, could not affect the reality of what was agreed to in 1963 as recorded in the written agreements and explained in the contemporary documents. It is, therefore, plain, in my view, that this was not a case of ‘sham’ in the sense that the parties said one thing in the documents but meant another.
Having thus settled what, in his view, the parties in reality intended to do, and what they had done by their acts in law set out in the agreements, the judge proceeded to the next question, which he had described as the only real question, namely whether the law would give effect to what they had done. He accepted (there was no issue about it) that the purpose of Mr Christopherson in not granting a tenancy to Mr Burton and in granting a tenancy to his wife so that she could grant a subtenancy to Mr Burton was to avoid the
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consequence which would follow if Mr Christopherson had granted the tenancy direct to Mr Burton. The judge directed himself to be astute in the terms of Lord Templeman’s dictum in Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825; but he held that there was no disguise of the grant of a tenancy, that the arrangement was not an evading of the Agricultural Holdings Acts but an avoiding of them. He distinguished Johnson v Moreton [1978] 3 All ER 37, [1980] AC 37 as being a case of ‘tinkering with rules which apply to known categories such as a provision prohibiting the proper service of a counter-notice’. In my judgment Johnson v Moreton was rightly distinguished by the judge. That case does not justify a holding in this case that Mr Christopherson granted a tenancy to Mr Burton when he did not. In Johnson’s case there was the grant of a tenancy to which the provisions of the 1948 Act applied. The question was whether a term in the lease, by which the tenant covenanted not to serve a counter-notice, was valid and enforceable. It was argued for the landlords that the tenant could validly contract not to exercise the right to serve a counter-notice because the tenant was entitled to renounce a right which existed solely for his own use or benefit. Their Lordships held that on the true construction of s 24(1) of the 1948 Act the tenant could not validly bind himself not to exercise the right to give a counter-notice and that that right was not given as a merely private right but in furtherance of the policy of the Act to provide security of tenure to agricultural tenants. The attempt there by the landlords was to deprive the tenant of an agricultural holding of a right which Parliament intended such a tenant to have. But the transaction which the parties in this case carried out was not a device to deprive Mr Burton of any right which Parliament intended him to have in or under the tenancy which he took. He has no right under the legislation until a tenancy is granted. When the subtenancy, which all the parties intended him to have, was granted, it secured to him all the rights under the legislation which are given to a tenant of an agricultural holding who holds by a lawful subtenancy from a head tenant: no more and no less. The reason that Mr Burton has no right effective against the freeholders, under the real arrangement as the judge held it to be, is because the legislation now in force provides to him no such right. The power to make such provision has been created by Parliament but not exercised. If this court is to exercise a power to create such a right in this appellant by treating the arrangement made by the parties as different from what it was according to their actual intentions as found by the judge it must be derived, in my judgment, from a source other than the authority of Johnson v Moreton.
Counsel for the defendant’s alternative submission was based on what he called ‘artificial device’. If the device is shown to have no purpose other than the evasion of the protection which Parliament intended the tenant of an agricultural holding to have, then, pursuant to the public policy which the court is enjoined to apply by the terms of the legislation, the court must treat as void those parts of the device which serve only the purpose of evasion; and the result is a direct tenancy between Mr Christopherson and Mr Burton. The power of the court so to act was said to be derived from Johnson v Moreton, and Featherstone v Staples [1986] 2 All ER 461, [1986] 1 WLR 861. Support was said to be found in Street v Mountford [1985] 2 All ER 289, [1985] AC 809, Quennell v Maltby [1979] 1 All ER 568, [1979] 1 WLR 318 and Hadjiloucas v Crean [1987] 3 All ER 1008, [1988] 1 WLR 1006. It was submitted further that guidance is to be found on how to treat artificial devices from the decisions of the courts on tax avoidance such as Furniss v Dawson [1984] 1 All ER 530, [1984] AC 474.
As to Featherstone v Staples, this court applied the principle established in Johnson v Moreton to a condition contained in a partnership agreement between three co-tenants of an agricultural holding. The tenants were two brothers who were the active farmers and a company which was wholly owned by the freeholders of the holding. The restrictive condition in the partnership agreement was that no partner should serve a counter-notice under the 1948 Act without the consent of the company. Slade LJ, with whose judgment Stocker LJ and Sir Roualeyn Cumming-Bruce agreed, held that condition to be ineffective and said ([1986] 2 All ER 461 at 477, [1986] 1 WLR 861 at 881):
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‘… if a landowner chooses to grant other persons a tenancy of agricultural land (whether or not including himself as a tenant), public policy (affirmatively) requires that those other tenants should have authority, or be treated as having authority, to serve an effective counter-notice under s 2(1) of the 1977 Act on behalf of all the tenants without his concurrence, and thus (negatively) requires the avoidance of any contractual condition … which purports to deny those other tenants such authority.’
Thus, as in Johnson v Moreton, public policy was applied so as to ensure that the tenants retained the rights which the legislation intended them to have by reason of the tenancy which had in fact been granted to them. But in that case, despite an acknowledgement that the agreements were not sham devices, a submission based on the artificiality of the transaction was put forward in substantially the same terms as the submission made to this court and based on Lord Templeman’s dictum in Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825. Slade LJ said that, whatever be the proper meaning to be attached to the word ‘artificiality’ in this context, it could not be applied to the transactions in question because the suggestion had not been explored in oral evidence and there was no finding to support it (see [1986] 2 All ER 461 at 476, [1986] 1 WLR 861 at 879). He added that, if the suggestion had been explored in evidence, it might have been borne out. Counsel for the defendant has rightly submitted that, at least, Slade LJ was not dismissing the submission as impossible; but there is no more support than that to be derived from that case.
So far as the concept of artificiality is to be derived from Lord Templeman’s dictum in Street v Mountford it is not clear to me that there is any significant distinction, for the purposes of this case, between a ‘sham device’ whose only object is to disguise the grant of a tenancy and to evade the Rent Acts and an ‘artificial transaction’ having the same sole object: see per Mustill LJ in Hadjiloucas v Crean [1987] 3 All ER 1008 at 1022, [1988] 1 WLR 1006 at 1023. Each has the purpose of disguising what is granted and making it appear to be other than what it is. The rejection of the allegation by the judge that this transaction was sham, which I would uphold, seems to me to require rejection also of the contention that it was ‘artificial’ in this sense.
As to Quennell v Maltby [1979] 1 All ER 568, [1979] 1 WLR 323, counsel for the defendant invited the court to find support for his submission in that case and to hold that in reality Mrs Christopherson was the agent of her husband to grant a tenancy on his behalf to the defendant. In Quennell’s case the owner of a house, who had mortgaged it to his bank to secure a loan of £2,500, let the house to the defendants, who, as against him, were entitled to the protection of the Rent Acts. The house was worth some £40,000 and the owner wished to sell with vacant possession. Since the mortgage contained a term prohibiting any letting without the consent of the bank as mortgagees, the tenancy of the defendants would not be effective against the bank but the bank refused a request by the owner that the bank should take proceedings for possession. The owner’s wife therefore paid off the mortgage, took a transfer of the benefit of the mortgage and claimed possession. On appeal by the defendants, against an order for possession, the court (Lord Denning MR, Bridge and Templeman LJJ) allowed the appeal. Lord Denning MR held that equity prevented a mortgagee from getting possession contrary to the justice of the case. The mortgagee would be restrained from getting possession except when it is sought bona fide and reasonably for enforcing the security. The owner and his wife had in the transaction the ulterior motive of avoiding the protection which the Rent Acts afford to tenants in their occupation. Bridge LJ agreed and added that the purpose of the proceedings by the wife was not to protect or to enforce the security but for the benefit of her husband: ‘In substance she is suing as his agent’ (see [1979] 1 All ER 568 at 572, [1979] 1 WLR 318 at 323). The essential difference between that case and this, in my judgment, is that in Quennell’s case the defendants had rights under the Rent Acts under the original tenancy which had been granted to them. The
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court refused to permit the device which the owner and his wife had devised to defeat those rights. It was not a case of treating the defendants as entitled to rights under a tenancy which had not been granted to them.
The problem in this case has arisen from the use by the parties of a form of transaction which, if upheld, reduces the nature and effectiveness of the statutory protection enjoyed by Mr Burton as occupier of the agricultural holding from what he would have had if the parties had used a different form of transaction. A similar problem has, of course, arisen under other statutory schemes, namely the Rent Acts for residential accommodation and the Landlord and Tenant Act 1954 for business premises. Landlords seek to permit occupation of living accommodation and of business premises on terms which cause the occupier to be a licensee only and not a tenant. Once the real transaction has been proved the court may not allow the purpose of the landlord to avoid the consequences of statutory protection to alter or influence the construction of the agreement: see Lord Templeman in Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825 and Buckley LJ in Shell-Mex and BP Ltd v Manchester Garages Ltd [1971] 1 All ER 841 at 846, [1971] 1 WLR 612 at 619. Still less, as it seems to me, can the court disregard the real transaction which has been proved and treat the parties as having made some other transaction, for the sole reason that the purpose of the parties in making the transaction which they did, and not some other transaction, was to avoid the consequences of statutory provisions which would have attached to that other transaction.
A similar problem has arisen under the Rent Acts in many cases. Under the Rent Acts a limited company cannot be a statutory tenant of residential accommodation. In Firstcross Ltd v East West (Export/Import) Ltd (1980) 255 EG 355 a flat was let to a company on terms that it was for occupation by a named director only. The named director, who was in occupation, claimed to be the statutory tenant on termination of the contractual tenancy. Stephenson LJ, with whom Dunn LJ and Sir Stanley Rees agreed, held that it was impossible to hold that the director became a statutory tenant without holding the tenancy agreement to the company to be a sham, and that was impossible because such a contention had been disclaimed before the county court judge. Stephenson LJ continued (at 359):
‘… he [the director] did not say that he understood that he was the tenant, though the judge asked him a question which he might have so answered as to have supplied evidence that the agreement was a sham and he was the real party to whom the flat was being let. He could have told the judge, if it were true, that the defendant company were merely his agent or nominee, and if the judge had believed him he could and should have given effect to the real agreement and dismissed the claim. But instead the second defendant told the judge that it did not seem to matter that the tenancy was not in his name. I suspect it mattered very much to [the landlords] that it was not, because if it had been he would have had what the defendant company’s tenancy cannot give him—the security of a protected statutory tenancy.’
As already mentioned above, in this case the defendant did say that he thought that what he was getting was an agricultural holding from Mr Christopherson, and that he never had any indication that it was a subtenancy, but the judge rejected his evidence. As in the Firstcross Ltd case, I cannot see how this court can accede to the submission that the defendant had a direct tenancy from Mr Christopherson without treating the subletting as a sham and, in addition, also treating Mr Christopherson as having made the grant of a tenancy which he did not make.
If the court is to be free to accede to the submission made for this defendant it will be free, as I understand it, where there is the real grant of a tenancy of residential accommodation to a limited company for occupation by a named person and where the landlord proves that he did not grant any tenancy to that person, to hold, if the purpose
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of the landlord in making the transaction was to avoid the obtaining by that person of the protection of the Rent Acts in his occupation, that the tenancy was granted to that person and not to the company. So to hold would be, as I understand it, contrary to the principles applied in such cases as the Firstcross Ltd case.
As I said at the beginning of this judgment the essential question is by reference to what principles the court must determine the ‘reality’ of a transaction which has the effect of depriving an occupier of statutory protection which he would have got if a different transaction had been made. As I understand the cases such as the Firstcross Ltd case and S L Dando Ltd v Hitchcock [1954] 2 All ER 335, [1954] 2 QB 317, which was considered by Stephenson LJ in the Firstcross Ltd case, the reference to ‘the real party’ to whom and by whom property is let is a reference to that party to and by whom on the facts it was the intention of the parties to the transaction that the tenancy be granted. There has been no detailed attempt, so far as I know, to lay down tests dealing with such an issue. If, however, it is proved, as it was in this case, that the nature of the transaction was made clear to both sides, together with the consequences which would follow by way of reduced statutory protection for Mr Burton as a subtenant, and that there was thus informed assent and understanding by all parties, then, as it seems to me, it has been proved that Mr Burton was the real party to whom a subtenancy had been granted and that it was granted by Mrs Christopherson. Such a test, of course, is not an effective weapon for preventing the avoidance of the protection which would be provided to a tenant if the transaction was made in a different way. It is possible for a landlord to design the transaction in an effective manner and to ensure that it is properly explained to the intended occupier, who will very frequently be in no position to bargain or to obtain any significant alteration in the transaction. But that, as I understand it, is the law. Bingham LJ in Antoniades v Villiers [1988] 2 All ER 309 at 315, [1988] 3 WLR 139 at 146, where the question was whether the occupier of residential accommodation was a licensee or a tenant, said:
‘To stigmatise these agreements as “artificial transactions designed to evade the Rent Acts” (unless this amounts to a finding that the agreements were sham) is to leave unanswered the question whether they succeed in their object. The task of the court, where this issue arises, is to decide whether the owner has succeeded or not.’
I agree with that observation and it seems to me to be equally applicable to a case concerned with the Agricultural Holdings Acts.
It was said that to uphold the validity of this transaction, as it was devised and carried out, would be to provide the landlords with a ready means of evading the provisions for security of tenure contained in the legislation, and thus of defeating the policy of the legislation which Parliament has enacted. I do not know how widespread such evasion has been or would be. The position in law of the tenant of an agricultural holding who is a subtenant has long been known. If the device were upheld, and the consequences were seen as damaging, the remedy is at hand by use of the existing powers. But the answer to this point, in my view, is that it is irrelevant. Such a consideration is relevant if it is open to the court to prefer one course over another as a matter of policy. If I am right, in this case, it is not. There is no basis in law on which a court can decline to give effect to the real transaction between the parties as it was found to be.
Lastly, counsel for the defendant relied on the decisions of the court in the tax avoidance cases such as Furniss (Inspector of Taxes v Dawson [1984] 1 All ER 530, [1984] AC 474. I am not persuaded that the principles there stated are applicable to the construction and enforcement of a transaction in private law between private citizens.
RUSSELL LJ. The facts of this case and the legislative framework relating to agricultural holdings have been set out in the judgment of Dillon LJ and I do not need to repeat them.
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There is no doubt that in 1963 Mr Christopherson wished to avoid the consequences of granting a lease to Mr Burton. Both gentlemen were aware that such a lease would give a measure of protection to Mr Burton that would not be enjoyed by a subtenant.
There is also no doubt that Mr Christopherson’s solicitor drafted the lease to Mrs Christopherson and the sublease to Mr Burton with the expressed intention of avoiding the impact of the Agricultural Holdings Act 1948. As for Mrs Christopherson, her understanding was encapsulated in a sentence she used during the course of her evidence, the judge’s note of which reads: ‘I thought it was a straight-forward tenancy between my husband and Burton.' She was not deceived, however, in any sinister sense, and if the true position had been explained to her I have no doubt that she would readily have given her consent to and co-operation in the exercise devised by the solicitor, Mr Wilson. He acknowledged in evidence: ‘Object was to let Burton have the land but to get it back if they [meaning Mr and Mrs Christopherson] wished.’
The question for this court is whether we are entitled to have regard to the object of the exercise, or whether we should accept both the lease and sublease at their face value as documents creating a valid tenancy (with protection to Mrs Christopherson) and a valid subtenancy (with no protection to Mr Burton). On their face there is nothing to indicate anything other than perfectly straightforward transactions. No one was deceived. Hence, submits counsel for the plaintiff, there was no sham as defined by Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 1 All ER 518 at 528, [1967] 2 QB 801 at 802. The documents could have evidenced a perfectly straightforward arrangement whereby Mrs Christopherson undertook the agricultural obligations to be found in her lease by way of tenant’s covenants, whilst requiring the physical performance of those covenants to be the responsibility of Mr Burton pursuant to the sublease.
The converse argument advanced on behalf of the defendant is that it is to fly in the face of reality not to look behind the agreements so as to ascertain what was the true contractual relationship between the three parties. The relevant passage in the judgment of Diplock LJ in Snook’s case [1967] 1 All ER 518 at 528, [1967] 2 QB 786 at 802 reads as follows:
‘As regards the contention of the plaintiff that the transaction between himself, Auto-Finance, Ltd. and the defendants were a “sham”, it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities … that for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.’ (My emphasis.)
It is submitted by counsel for the defendant that deception of one of the parties is not crucial. If the court can be given, by documents executed by the parties, a false impression of legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create, then a ‘sham’ as defined by Diplock LJ is made out. Whatever pejorative epithet is applied to this arrangement, the documents were never intended to be that which they purported to be.
In my view one needs to look no further than the head lease to determine whether it can be realistically claimed that Mrs Christopherson was the tenant of her husband. In the very nature of things it was never intended or contemplated that Mrs Christopherson would serve a counter-notice in the event of her husband, during his lifetime, or his personal representatives after his death, serving a notice to quit (as ultimately happened).
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Nor would Mrs Christopherson be concerned in practice with whether she or her ‘subtenant’ were so farming the land as to be in accordance with the rules of good husbandry. Mr Christopherson and Mr Burton were the farmers, not Mrs Christopherson. One asks rhetorically: what was the purpose of introducing Mrs Christopherson into the arrangement? There was no predominant and no secondary reason. The only reason was to enable Mr Burton to be created, on paper at least, a subtenant. And the only reason for the ‘subtenancy’, when Mr Burton’s occupation of the farm had all the characteristics of a full tenancy, was to avoid the consequences of the 1948 Act. In a different context in Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825 Lord Templeman said:
‘Although the Rent Acts must not be allowed to alter or influence the construction of an agreement, the court should, in my opinion, be astute to detect and frustrate sham devices and artificial transactions whose only object is to disguise the grant of a tenancy and to evade the Rent Acts.’
I am firmly of the view that the lease to Mrs Christopherson was an artificial device the only object of which was to disguise the grant of a tenancy to Mr Burton and to evade the 1948 Act. In striking down the lease to Mrs Christopherson as an artificial device, I do not think the court is guilty of a procedure which it is not entitled to take; on the contrary, in one sense it is giving effect to the true intention of the parties, although in the process not permitting the legal consequences to flow to which the parties were prepared to accede.
For my part I have not derived a lot of assistance from the tax avoidance cases to which we were referred. But I gratefully acknowledge that the theme in those cases is that where there are a number of transactions creating a composite whole the court should be astute not to consider the individual transactions in isolation but should look at the overall result of what is achieved. In the instant case the lease to Mrs Christopherson and the sublease to Mr Burton should be looked at together. They bear the same date and their drafting by the solicitor in the circumstances described in the judgment of Dillon LJ confirms the view I have formed of the composite nature of the two individual transactions.
Assuming artificiality, there remains for consideration what course the court should follow. Are there good social reasons for depriving the personal representatives of Mr Christopherson of the right to possession in the absence of a counter-notice which a tenant would be entitled to serve? In Johnson v Moreton [1978] 3 All ER 37 at 48, [1980] AC 37 at 59 Lord Hailsham dealt with the philosophy underlying legislation involving agricultural holdings. The House of Lords held that a tenant could not by agreement deprive himself of the option to serve a counter-notice, and that any such agreement in advance was unenforceable. In my judgment, although not in express terms, Mr Burton, by consenting to the arrangement proposed, was effectively depriving himself and being deprived of the option available to a tenant of an agricultural holding. The submission that Parliament has not thought fit to grant the option to a subtenant is, in my view, to beg the very question raised by this appeal. If Mr Burton had been a genuine subtenant he would have no right to exercise the option. So long as he remained in reality a tenant of Mr Christopherson and his successors in title there was no right, even by consent, to deprive Mr Burton of the protection of the legislation. As Geoffrey Lane LJ commented in Short Bros (Plant) Ltd v Edwards (1978) 249 EG 539 at 542, another case where there was an attempt to overcome provisions in the 1948 Act: ‘The farmer cannot bargain away in advance his statutory rights in this way.’
Accordingly, I, too, am of the opinion that the decision of his Honour Judge Willcock QC cannot be sustained on the facts as found by him and such irresistible inferences as we are entitled to draw from these facts.
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I, too, would allow this appeal and make the order proposed by Dillon LJ.
Appeal allowed. Order of judge set aside. Leave to appeal to the House of Lords granted.
Solicitors: Porter Bartlett & Mayo, Sturminster Newton (for the defendant); Payne Hicks Beach (for the plaintiffs).
Wendy Shockett Barrister.
Francis & Francis (a firm) v Central Criminal Court
[1988] 3 All ER 775
Categories: CRIMINAL; Criminal Evidence
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD BRANDON OF OAKBROOK, LORD GRIFFITHS, LORD OLIVER OF AYLMERTON AND LORD GOFF OF CHIEVELEY
Hearing Date(s): 13, 14, 18, 19 JULY, 2 NOVEMBER 1988
Criminal evidence – Drug trafficking – Investigations into drug trafficking – Order to make material available – Legal privilege – Items subject to legal privilege – Intention of furthering criminal purpose – Intention – Conveyancing documents held by solicitor – Documents arising out of transaction intended to launder drug trafficking proceeds – Solicitor not holding documents with intention of furthering criminal purpose – Whether client’s or third party’s intention relevant – Whether documents ‘held with the intention of furthering a criminal purpose’ – Whether documents privileged from production – Police and Criminal Evidence Act 1984, s 10 – Drug Trafficking Offences Act 1986, s 27(9)(a).
The police, while investigating the affairs of a person suspected of large-scale drug trafficking, formed the view that he had laundered the proceeds of his trafficking by providing substantial sums of money to members of his family for the purchase of properties. The police wished to investigate the purchase of a particular property by a member of the suspect’s family, who was a client of the appellant solicitors, and applied ex parte to a circuit judge for an order under s 27a of the Drug Trafficking Offences Act 1986 requiring the solicitors to produce all files in their possession relating to the transaction. The judge made the order and the solicitors applied for judicial review to have it quashed, contending, inter alia, that the files were ‘items subject to legal privilege’ within s 10(1)b of the Police and Criminal Evidence Act 1984, as applied by s 29(2) of the 1986 Act, and were therefore protected from disclosure by virtue of s 27(9)(a) of the 1986
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Act. The Divisional Court dismissed the application on the ground that the files were ‘items held with the intention of furthering a criminal purpose’ and were therefore excluded from legal privilege by s 10(2) of the 1984 Act. The solicitors appealed. The question arose whether the relevant intention referred to in s 10(2) referred solely to the intention of the person holding the documents or whether it included the intention of any other person irrespective of whether the person holding the documents was a party to that intention.
Held (Lord Bridge and Lord Oliver dissenting) – Having regard to the purpose of the 1984 Act and the context in which s 10(2) of that Act appeared, on the true construction of s 10(2) documents which would otherwise be subject to legal privilege within s 10(1) were excluded from being privileged if they were held with the intention of furthering a criminal purpose regardless of whether the intention was that of the person holding the documents or any other person. Accordingly, conveyancing documents which were intended by a third party to be used to further the criminal purpose of laundering the proceeds of illegal drug trafficking and which were innocently held by a solicitor were not subject to legal privilege and were not protected under s 27(9)(a) of the 1986 Act from disclosure to the police. The solicitors’ appeal would therefore be dismissed (see p 787 d, p 788 a to d, p 789 j, p 790 f g, p 791 c d, p 792 e f, p 796 j to p 797 a h to p 798 a and p 800 a b e h, post).
R v Cox and Railton [1881–5] All ER Rep 68 considered.
Dictum of Glidewell LJ in R v Crown Court at Snaresbrook, ex p DPP [1988] 1 All ER 315 at 319–320 doubted.
Per Lord Bridge and Lord Griffiths. The jurisdiction to make an order under s 27 of the 1986 Act or Sch 1 to the 1984 Act is conferred on circuit judges as such and therefore recorders sitting in the Crown Court have no jurisdiction to make such orders (see p 778 a b and 788 g, post).
Decision of the Divisional Court sub nom R v Central Criminal Court, ex p Francis & Francis (a firm) [1988] 1 All ER 677 affirmed.
Notes
For investigation into drug trafficking, see Supplement to 11 Halsbury’s Laws (4th edn) para 1099A.2.
For police access to excluded material and special procedure material, see Supplement to ibid para 125B.
For the Police and Criminal Evidence Act 1984, s 10, see 12 Halsbury’s Statutes (4th edn) 958.
As from 30 December 1986 the Drug Trafficking Offences Act 1986, ss 27 and 29 make provision for a constable to obtain an order for the production of and access to material likely to be of substantial value to the investigation of a drug trafficking offence.
Cases referred to in opinions
Barnard v Gorman [1941] 3 All ER 45, [1941] AC 378, HL.
Greenough v Gaskill (1833) 1 My & K 98, [1824–34] All ER Rep 767, 39 ER 618, LC.
IRC v Hinchy [1960] 1 All ER 505, [1960] AC 748, [1960] 2 WLR 448, HL.
New Plymouth BC v Taranaki Electric-Power Board [1933] AC 680, PC.
R v Cox and Railton (1884) 14 QBD 153, [1881–5] All ER Rep 68, CCR.
R v Crown Court at Snaresbrook, ex p DPP [1988] 1 All ER 315, [1988] QB 532, [1987] 3 WLR 1054, DC.
Spillers Ltd v Cardiff Assessment Committee [1931] 2 KB 21, [1931] All ER Rep 524, DC.
Appeal
Messrs Francis & Francis, a firm of solicitors, appealed with the leave of the Divisional Court against the decision of that court (Lloyd LJ and Macpherson J) ([1988] 1 All ER 677, [1988] 2 WLR 627) on 21 December 1987 dismissing the appellants’ application for
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judicial review by way of an order of certiorari to quash the order of his Honour Judge Machin QC made at the Central Criminal Court made on 18 June 1987 under s 27 of the Drug Trafficking Offences Act 1986 for production of all documents, accounts and records relating to the purchase of a property by a named client, and a declaration that the order was invalid on the ground that it was in breach of natural justice or related to items subject to legal privilege and either the person holding the items (being a person entitled to possession of them) did not himself have the intention of furthering a criminal purpose or the person on whose behalf they were held did not herself have the intention of furthering a criminal purpose. On 28 June 1988 the House of Lords granted leave to the Law Society to intervene in the appeal. The facts are set out in the opinion of Lord Bridge.
Alan Newman and Paul Infield for the appellants.
Michael Worsley QC and David Spens for the respondent.
Duncan Matheson for the Law Society as intervener.
Their Lordships took time for consideration.
2 November 1988. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, the appellants are a firm of solicitors. On 2 June 1987 Mr Recorder Crespi QC, on the ex parte application of a detective constable in the Metropolitan Police Central Drug Squad, made an order under s 27 of the Drug Trafficking Offences Act 1986 requiring them to give the police access to all material in their possession relating to the affairs of one of their clients, who has been referred to in the proceedings as Mrs G. The appellants applied to discharge the order. On 12 June the order was varied by his Honour Judge Machin QC to limit its application to materials relating to the purchase by Mrs G of a particular named property. On 18 June Judge Machin, at a further hearing, extended the time for compliance with the order to 22 June. On 22 June the appellants made application for leave to move for judicial review on the ground that the documents required by the order to be produced were ‘items subject to legal privilege’ as defined by s 10 of the Police and Criminal Evidence Act 1984 which is adopted by reference for the purposes of s 27 of the 1986 Act by s 29(2). This came before Otton J, who considered the documents and divided them into categories which he listed in schedules A and B to his order. Schedule A lists documents arguably subject to legal privilege; schedule B lists documents clearly not subject to legal privilege. Otton J gave leave to move to quash the order so far as it related to the documents in schedule A.
The substantive application for judicial review was refused by the Divisional Court (Lloyd LJ and Macpherson J) ([1988] 1 All ER 677, [1988] 2 WLR 627) on the ground that the documents were ‘items held with the intention of furthering a criminal purpose’ which are excluded from privilege by s 10(2) of the 1984 Act. The court certified a point of law of general public importance in the following terms:
‘Whether upon the true construction of Section 10(2) of the Police and Criminal Evidence Act 1984, items which would otherwise fall within the definition of “items subject to legal privilege” are excluded from that definition if, but only if the Solicitor or other person holding the item in question has the intention of furthering a criminal purpose, or whether the relevant intention may include the intention of the client, or of a third party?’
The appellants now appeal by leave of the Divisional Court.
Before addressing the main issue raised by the appeal some peripheral and introductory matters call for mention. The jurisdiction to make orders under s 27 of the 1986 Act for production or disclosure of material is conferred on a circuit judge, as such, not on the Crown Court. The same is true of the jurisdiction under Sch 1 to the 1984 Act to make
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orders for the production or disclosure of ‘excluded material’ or ‘special procedure material’ as defined by ss 11 and 14. This may be because applications for such orders may sometimes need to be made to a judge not sitting in court but wherever he can be found. Be that as it may, recorders, as such, have no jurisdiction to make such orders. Reference was made in argument to s 24 of the Courts Act 1971. This clothes deputy circuit judges and assistant recorders with the jurisdiction of circuit judges and recorders respectively, but it does not clothe recorders with the jurisdiction of circuit judges. Thus the order of Mr Recorder Crespi was made without jurisdiction and was a nullity, but the defect was fortuitously cured when the varied order was made by Judge Machin.
It is right to point out that the appellants have at no time sought the instructions of their client, Mrs G, in relation to the order under s 27. Section 31 of the 1986 Act makes it an offence for a person on whom an order under s 27 has been served, who therefore knows that an investigation into drug trafficking is taking place, to make ‘any disclosure which is likely to prejudice the investigation’. The section provides a defence to a person who had ‘lawful authority or reasonable excuse for making the disclosure’. The appellants were nevertheless apprehensive that they might fall foul of s 31 if they disclosed the order to Mrs G. For all we know, she still knows nothing of the proceedings.
I must not be taken as criticising any of the parties, but I regard it as unfortunate that in an appeal of such far-reaching importance as this the factual material on which the order under attack is based comes before us in such an exiguous form. No note was taken of the hearing before Judge Machin on 12 June 1987, which was the substantive hearing, and all we know of the evidence before him and of his reasons for making the order he did must be collected from the affidavit, sworn in the judicial review proceedings, of Det Con Hill, the applicant for the order and presumably the officer in charge of the investigation. This sets out, in summary, that a drug trafficker on a very large scale was believed to be ‘laundering’ the proceeds of drug trafficking by enabling Mrs G, who is a member of his family and who has a flower shop business, to purchase the property named in the order for £330,000 with the benefit of a mortgage to be paid out of the proceeds of the drug trafficking through the flower shop business. The concluding paragraph of the affidavit states, somewhat cryptically:
‘His Honour Judge Machin Q.C. ruled that [Mrs G’s] business was being used to launder the proceeds of drug-trafficking, and that monies to be used for the purchase of the aforesaid particular house were the proceeds of drug-trafficking and that [Mrs G] had benefited therefrom either knowingly or unknowingly. He said he was satisfied that the items which were the subject of the Order he made, were held with the intention of furthering a criminal purpose.’
On the basis of this material the case has been argued both before the Divisional Court and before your Lordships on the following assumptions: (1) that the suspected drug trafficker had the intention, by acquiring property for Mrs G, of furthering the criminal purpose of concealing the proceeds of drug trafficking; (2) that Mrs G was innocent of complicity in that criminal purpose; (3) that the appellants, in advising Mrs G in connection with the acquisition of the property in question, have acted throughout with complete propriety and with no suspicion of any illegality affecting the transaction.
Part II of the 1984 Act, under the heading ‘Powers of Entry, Search and Seizure’, contains a code of important powers to enable police in the conduct of criminal investigations to obtain access to relevant evidential material. Sections 27 to 32 of the 1986 Act provide a particular code for investigations into drug trafficking. Although the 1986 Act embodies its own special procedure and in some respects amplifies and fortifies the powers under Pt II of the 1984 Act, the two codes have much in common and, in particular, throughout both codes runs a consistent thread that items subject to legal privilege’ as defined in s 10 of the 1984 Act are placed beyond the reach of any of the investigative powers conferred.
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The code embodied in Pt II of the 1984 Act divides material to which the police, in the course of criminal investigation, may seek to obtain access into four broad categories. The first general category includes all material not subject to the special limitations affecting the other three. Access to this unrestricted category of material may be obtained by search warrant issued on application by a constable to a justice of the peace who is satisfied of the criteria prescribed by s 8 of the Act or by a search warrant issued in pursuance of any other statute. But s 9 excludes other statutory powers of search under any Act passed before the 1984 Act for the purposes of a criminal investigation in relation to the three categories ‘items subject to legal privilege’, ‘excluded material’ and ‘special procedure material’. These categories are defined respectively in ss 10, 11 and 14. By s 9 access to excluded material and special procedure material may only be obtained under the special procedure prescribed by Sch 1 to the 1984 Act. It is unnecessary to examine in detail the definition of excluded material, which by its nature does not include items subject to legal privilege. ‘Special procedure material’ is defined by s 14 and includes:
‘… (2) … material, other than items subject to legal privilege and excluded material, in the possession of a person who—(a) acquired or created it in the course of any … profession … and (b) holds it subject—(i) to an express or implied undertaking to hold it in confidence … ’
Thus it is clear that all documents and other records in the possession of a solicitor in relation to the affairs of his clients are special procedure material unless they are subject to legal privilege.
The procedure for obtaining access to special procedure material under Sch 1 is by application inter partes to a circuit judge on notice to the person in possession of the material sought. The judge, if satisfied that the appropriate conditions are fulfilled, may make an order under para 4 of Sch 1 that—
‘the person who appears [to him] to be [the person] in possession of the material to which the application relates shall—(a) produce it to a constable for him to take it away; or (b) give a constable access to it … ’
Failure to comply with an order under para 4 falls to be treated as a contempt of the Crown Court. In certain exceptional circumstances defined in the schedule, including in particular that service of notice of application for an order under para 4 may seriously prejudice the investigation, the judge, instead of making an order under para 4, may issue a warrant to search the premises where the special procedure material is believed to be.
It is further to be noted that a constable who is lawfully on any premises has, in addition to any specific powers conferred by other provisions, the wide powers of seizure conferred by s 19(2) and (3) subject only to the restriction imposed by s 19(6), which provides:
‘No power of seizure conferred on a constable under any enactment (including an enactment contained in an Act passed after this Act) is to be taken to authorise the seizure of an item which the constable exercising the power has reasonable grounds for believing to be subject to legal privilege.’
It is against this background and in this overall context that s 10 of the 1984 Act falls to be construed. This section provides:
‘(1) Subject to subsection (2) below, in this Act “items subject to legal privilege” means—(a) communications between a professional legal adviser and his client or any person representing his client made in connection with the giving of legal advice to the client; (b) communications between a professional legal adviser and his client or any person representing his client or between such an adviser or his client
Page 780 of [1988] 3 All ER 775
or any such representative and any other person made in connection with or in contemplation of legal proceedings and for the purposes of such proceedings; and (c) items enclosed with or referred to in such communications and made—(i) in connection with the giving of legal advice; or (ii) in connection with or in contemplation of legal proceedings and for the purposes of such proceedings, when they are in the possession of a person who is entitled to possession of them.
(2) Items held with the intention of furthering a criminal purpose are not items subject to legal privilege.’
At the very outset the key question arises: to whose intention does sub-s (2) refer? If the language is to be given its ordinary, grammatical meaning, it seems to me that the answer must be the holder. But I note that some of your Lordships do not accept this. The question, accordingly, warrants some analysis. The verb ‘held’ is used in the passive voice and connotes that the items are held by somebody. The phrase ‘with the intention of furthering a criminal purpose’ is an adverbial phrase qualifying the verb ‘held’: it describes the intention with which the items are held; it must therefore refer to the intention of the person by whom the items are held. If I write the sentence ‘A holds an item with the intention of using it for a criminal purpose’, the intention must be that of A. To write ‘A holds an item with the intention of any person including A of using it for a criminal purpose’ is simply ungrammatical. The sentence does not become grammatical by being expressed passively in the form ‘The items are held by A with the intention of any person including A of using it etc’. My noble and learned friend Lord Griffiths gives the example: ‘Ammunition held in the armoury with the intention of firing it at Bisley must be inspected.' Here the context is designed to demonstrate that the phrase ‘held with the intention’ cannot refer to the intention of the holder. But all this shows, with respect, is that the sentence is expressed in slipshod and ungrammatical English. To convey the writer’s evident meaning accurately and grammatically it must read: ‘Ammunition held in the armoury and intended to be fired at Bisley must be inspected.' This analysis may sound pedantic, but it is a basic rule of statutory construction that the draftsman is presumed to use the English language accurately and grammatically.
The next question is: who is the holder? It was strenuously argued for the respondent that, where a solicitor holds documents communicated to him by a client or recording communications with the client, he holds them on behalf of the client and, just as if the communications are privileged at common law the privilege is that of the client and not of the solicitor, so also it is a proper use of language to speak of the documents being held by the client, not by the solicitor. This, it was urged, must be the meaning intended in the context of s 10, because the section is intended as a compendious statement of the common law of legal professional privilege and only if sub-s (2) is construed in the manner suggested would it have the appropriate effect of expressing the principle expounded in the leading case of R v Cox and Railton (1884) 14 QBD 153, [1881–5] All ER Rep 68. This argument, even if well founded, is not, of course, of itself sufficient to enable the respondent successfully to resist this appeal. I acknowledge that, in contradistinction to any construction of s 10(2) which requires the relevant intention to be imputed to some person other than the holder of the items in question, a construction which identifies a solicitor’s client as the holder of documents which are in the possession of his solicitor is one which the language is capable of bearing. But I reject the argument for three principal reasons.
First, looking at Pt II of the 1984 Act as a whole, I find the verb to ‘hold’ used by the drafstman repeatedly in contexts which identify the holder with the person in possession of material to which access is sought by an application under Sch 1. It is the person in possession on whom the application is served; it is the person in possession to whom an order under para 4 of the schedule is addressed and who must comply with it by producing or giving access to the material. But throughout ss 11 and 14 we find the material to which access can only be obtained by resort to the procedure under Sch 1
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identified by reference to the relevant circumstances in which the person in possession of the material holds it. In s 11 repeated reference to material of different kinds ‘which a person holds in confidence’ appear in contexts which can only refer to the person in possession. In s 14(2), to which I have already referred, this becomes clear and express in the reference to ‘material … in the possession of a person who … (b) holds it subject to an express or implied undertaking to hold it in confidence’. Reading the two sections and the schedule together, the identity between holder and possessor is so plain that I cannot think that the draftsman used the word ‘held’ in s 10(2) in any different sense.
Second, I do not see any sound basis for making the assumption that in s 10 Parliament set out to reproduce in the form of a statutory code every aspect of the common law relating to legal professional privilege. On the contrary, if a true codification had been intended, something substantially more elaborate would clearly have been required. If, on the other hand, Parliament had intended, without codification, that the common law rules should determine whether or not material was to be immune from discovery under the powers of Pt II on the ground that it was subject to legal professional privilege, it would have been simple to say so. For example, s 20B(8) of the Taxes Management Act 1970, as inserted by the Finance Act 1976, exempts from compulsory disclosure to the revenue authorities by a solicitor without his client’s consent ‘any document with respect to which a claim to professional privilege could be maintained’. The question whether the mere fact that the language of the statute draws the boundary of privilege otherwise than the common law would draw it justifies the court in departing from the ordinary meaning of the language in order to avoid absurdity is one to which I must return later.
The third, and to my mind perhaps the most cogent, reason for rejecting the argument based on the common law rule is this. The rule as laid down in R v Cox and Railton (1884) 14 QBD 153, [1881–5] All ER Rep 68 and as followed ever since, excludes the protection of legal professional privilege from communications made by a client to his solicitor with the intention of furthering a criminal purpose. In this situation, as it is put in the judgment of the court, delivered by Stephen J (14 QBD 153 at 168, [1881–5] All ER Rep 68 at 72): ‘The client must either conspire with his solicitor or deceive him.' Now I take it, subject to a point which I will consider later, that communications between client and solicitor in the course of a criminal conspiracy to which both are party are the primary target at which the language of s 10(2) is aimed. But if the draftsman of this section intended equally to exclude privilege in the case where the solicitor has been deceived, the language appropriate to effect that intention was staring him in the face in sub-s (1). The definition of ‘items subject to legal privilege’ in sub-s (1) refers throughout to communications made. Substitute the word ‘made’ for the word ‘held’ in sub-s (2) and it immediately becomes apt to cover both the case where the solicitor has conspired and the case where he has been deceived. The contrast between the use of the two different verbs in the two subsections is far too strking to be attributable to slipshod draftsmanship. On this ground alone I should find it impossible to construe sub-s (2) as intended to deny legal privilege to communications of a kind otherwise privileged made by a client to his solicitor with the intention of furthering a criminal purpose but held by the innocent solicitor with no such intention and in ignorance of the purpose.
Lloyd LJ in the Divisional Court said ([1988] 1 All ER 677 at 681, [1988] 2 WLR 627 at 632):
‘On the face of it, s 10(2) corresponds to the exception grafted on the common law by R v Cox and Railton (1884) 14 QBD 153, [1881–5] All ER Rep 68 and followed on numerous occasions ever since.’
This was the essential foundation for his conclusion that ‘the relevant intention for the purpose of s 10(2) must at least include the client’s intention’ (see [1988] 1 All ER 677 at 682, [1988] 2 WLR 627 at 633). For the reasons I have indicated I cannot, with respect,
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agree. Lloyd LJ went on from this premise to point out that ‘a criminal purpose’ means ‘any criminal purpose’, a reading with which I see no reason to disagree. But he then continued ([1988] 1 All ER 677 at 682, [1988] 2 WLR 627 at 633):
‘If so, then the logic of the argument, which I have accepted so far, leads to the conclusion that the criminal purpose may be the purpose of a third party as well as the client, at any rate if the client is the innocent instrument or beneficiary of the third party’s criminal purpose.’
It was on the basis of this chain of reasoning that he felt able to hold that s 10(2) could be paraphrased: ‘items held by the solicitor or any person entitled to possession of them which are intended to further any criminal purpose are not items subject to legal privilege.’
The fallacy in this reasoning arises from asking the question: whose is the criminal purpose? The criminal purpose may certainly be that of a third party, but the problem is to identify the person whose intention to further that purpose is embraced by the language of the subsection. Lloyd LJ’s ‘paraphrase’ rewrites the subsection in such a way as to embrace the intention of third parties at large, without identifying the nature of the nexus which must exist between the intention of the third party and the holder of the item for which privilege is claimed. Such a widening of the ambit of the subsection cannot, in my respectful opinion, be justified by any legitimate process of implication of terms.
Counsel for the respondent, invited in argument to indicate what terms he submitted could properly be implied in s 10(2) to enable it to yield the meaning for which he contended, submitted a document indicating that the crucial phrase should read by implication:
‘held [by some person or persons] [solely] [jointly] [as agent or instrument of another or others] with the intention [on the part of] [the person holding] [or some other person or persons] [or both] of furthering a purpose [of the holder] [some other person or persons] [or both] [which is] criminal [in fact] [to the knowledge of the holder] or [without the knowledge of the holder].’
Given, as I take to be the case, that all the words and phrases separately enclosed in square brackets are put forward as options from which the House is invited to choose such as may be necessary to sustain the respondent’s argument, the document certainly offers a bewildering variety of choice. My Lords, in making that comment, I do not intend to be in the least flippant. It does seem to me of the utmost importance that before construing statutes in a sense which the words in their ordinary grammatical meaning do not convey, a court should be in a position confidently to spell out the additional words which can be implied into the statutory language and to identify the ground on which it relies as justifying the necessity for making such an implication. In this case I must say frankly that I have seen no suggested reading of s 10(2) which spells out appropriate implied terms nor have I heard any argument which would justify an implication sufficient to sustain the meaning contended for by the respondent.
I have naturally read with the utmost concern and respect the speech of my noble and learned friend Lord Goff in which he expresses a conclusion at variance with my own. He construes the words ‘items held with the intention of furthering a criminal purpose’ as—
‘a shorthand expression for (in the case of items held by a solicitor) items (1) which have come into the possession of the solicitor “with the intention of furthering a criminal purpose”, and (2) which are still in his possession at the time when he is required to give production of them.’
In the light of the reasoning in the paragraph of my noble and learned friend’s speech which immediately precedes the passage I have quoted, I take it that his ‘shorthand
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expression’ when applied to documents in the possession of a solicitor, will read, if fully written out in longhand, ‘items held [by a solicitor, being communications which were made to him] with the intention of furthering a criminal purpose’. Nothing less than an implication in these terms would, in my opinion, suffice to surmount the main obstacle which stands in the way of the respondent’s proposed construction. I have already indicated my reasons for rejecting the view that the draftsman used the word ‘held’ to convey the quite different meaning he would have signified by the use of the word ‘made’. The suggested implication achieves the same result, so to speak, by the back door. But I must now turn to consider whether the doctrine of construction to avoid absurdity can be invoked to justify making such an implication.
The essence of the argument advanced on behalf of the respondent, although presented with many variants and elaborations, was that it would be absurd to suppose that Parliament should not have made accessible to police engaged in any criminal investigation whatsoever material would eventually be admissible in evidence as unprotected by the common law rules governing legal professional privilege. I would observe first that I believe there is a distinction to be drawn between what I would call a positive and a negative absurdity. It is one thing to abstain from giving to the language of a statute the full effect of its ordinary grammatical meaning in order to avoid some positively harmful or manifestly unjust consequence. This I would describe as a legitimate process of construction to avoid a positive absurdity. But it is quite another thing to read into a statute a meaning which the language used will not bear in order to remedy a supposed defect or shortcoming which, if not made good, will make the statutory machinery less effective than the court believes it ought to be in order to achieve its proper purpose. Even if the lacuna appears to the court as absurd, this is what I describe, inelegantly but in order to point the contrast, as a negative absurdity. I know of no legitimate principle of construction which permits such a negative absurdity to be remedied by implying words which the court thinks necessary to enhance the operation of the statutory machinery. In Barnard v Gorman [1941] 3 All ER 45 at 48, [1941] AC 378 at 384 Viscount Simon LC expressed the principle concisely:
‘Our duty in the matter is plain. We must not give the statutory words a wider meaning merely because, on a narrower construction, the words might leave a loophole for frauds against the revenue. If, on the proper construction of the section, that is the result, it is not for judges to attempt to cure it. That is the business of Parliament.’
No one doubts the importance to the administration of justice of an effective system of criminal investigation on the one hand or of the privilege which the law accords to confidential communications made for the purpose of obtaining legal advice on the other. At some points the two interests may come into conflict. There appear to me to be a number of considerations which might not unreasonably have induced the legislature to suppose that the protection of material of a kind prima facie entitled to privilege, and perhaps more particularly the protection of solicitors in the performance of their primary duty to safeguard the privilege to which their clients are entitled, required the application of criteria in the statutory process of criminal investigation differing in some respects from those which the court would apply in deciding whether or not a claim of privilege should prevent material being received in evidence. The court in the latter case may be presumed to know all the relevant facts on which the issue depends. Where the issue turns on whether the client was seeking advice for a criminal purpose, the importance of a full and careful assessment of the facts is emphasised by the judgment in R v Cox and Railton (1884) 14 QBD 153 at 175–176, [1881–5] All ER Rep 68 at 76 itself, where Stephen J said:
‘We were greatly pressed with the argument that, speaking practically, the admission of any such exception to the privilege of legal advisers as that it is not to
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extend to communications made in furtherance of any criminal or fraudulent purpose would greatly diminish the value of that privilege. The privilege must, it was argued, be violated in order to ascertain whether it exists. The secret must be told in order to see whether it ought to be kept. We were earnestly pressed to lay down some rule as to the manner in which this consequence should be avoided. The only thing which we feel authorized to say upon this matter is, that in each particular case the Court must determine upon the facts actually given in evidence or proposed to be given in evidence, whether it seems probable that the accused person may have consulted his legal adviser, not after the commission of the crime for the legitimate purpose of being defended, but before the commission of the crime for the purpose of being guided or helped in committing it. We are far from saying that the question whether the advice was taken before or after the offence will always be decisive as to the admissibility of such evidence. Courts must in every instance judge for themselves on the special facts of each particular case, just as they must judge whether a witness deserves to be examined on the supposition that he is hostile, or whether a dying declaration was made in the immediate prospect of death.’
The position of a judge ruling on an application for an order under Sch 1 to the 1984 Act will be very different from that of a court ruling on admissibility. The applicant will be a police officer seeking, on the basis of information and belief, to satisfy the judge under para 2(a) of the schedule that ‘there are reasonable grounds for believing’, inter alia, that the material to which he seeks access satisfies the definition of special procedure material in that it does not include items subject to legal privilege. The respondent will be the solicitor in possession of the material who may or may not have been able to obtain the instructions of his client and will, in any event, know nothing of the intentions of any third party. In this situation the judge will be quite unable to make the assessment of the ‘special facts of the particular case’ which Stephen J commended as necessray. Moreover, the respondent solicitor who is ignorant of any criminal intention on the part of his client or anyone else will be unable, on the basis of his own knowledge, to do anything to protect a privilege which it is his primary duty to protect. If for any reason a warrant to search the solicitor’s office has been issued without resort to the full Sch 1 procedure, the innocent solicitor will be placed in a dilemma unless he can with confidence claim privilege in due performance of his duty for material which he honestly believes to be privileged. I do not necessarily attach any great weight to these considerations, but I do think they are of sufficient weight to make it impossible to say that Parliament cannot have intended that there should be any difference between the scope of legal privilege as defined by s 10 and that of legal professional privilege as laid down by the common law and on that ground to imply in s 10(2) whatever words are necessary to bring them into conformity.
My noble and learned friend Lord Goff bases his conclusion that s 10(2) must be read as referring to the intention of some person other than the holder of the items in dispute on a quite different absurdity which he says would follow from giving the language of the subsection its ordinary or literal meaning. The starting point in the reasoning, as I understand it, is this. A person can only hold an item with the intention of furthering a criminal purpose up to the time when the purpose has been achieved. Thus, where a solicitor has conspired with his client in advising with the intention of furthering a criminal purpose, he initially holds the relevant communications with that intention. But once the purpose has been achieved it would be absurd that the items should attract privilege on the ground that they are then no longer held by the solicitor with the relevant intention. So far I agree. This indeed would be an absurd result. But whether and how s 10(2) can be construed to avoid this result is not the issue in this appeal. Where I part company with my noble and learned friend is in the next step of the reasoning
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which proceeds immediately to the conclusion that the avoidance of the absurdity he envisages requires so drastic a remedy in construing s 10(2) as the outright rejection of the holder of the items in dispute as the party whose intention is referred to and the substitution, in the case of a solicitor, whether fraudulent or innocent, of his client or some third party. In the unlikely event that any court should ever be confronted with the submission that items originally held by a solicitor with the intention of furthering a criminal purpose attracted privilege for the first time when the criminal purpose was achieved, I do not think that the court would have much difficulty in rejecting it. Without doing any violence to language, it is surely not difficult to say that items held by a solicitor with the intention of furthering a criminal purpose when they first come into his possession and at that time excluded from privilege by s 10(2) remain subject to the exclusion so long as he holds the items. If an implication is required to be spelt out to cover this situation, it would read, I think: ‘Items held with the intention [entertained by the holder at any time] of furthering a criminal purpose.' This implication involves no such radical departure from the ordinary meaning of the statutory language as is required by an implication capable of sustaining the meaning contended for by the respondent.
For these reasons I have reached the conclusion that in order to obtain an order under either Sch 1 to the 1984 Act or s 27 of the 1986 Act for access to material in the possession of a solicitor which would be subject to legal privilege under s 10(1) unless excluded by s 10(2), the constable applying must satisfy the judge that there are reasonable grounds for suspecting not only that the items are or were intended to further a criminal purpose but also that the solicitor is or was party to that intention. I realise, of course, that this construction renders the powers of investigation available to the police for the purpose of the two statutes significantly less effective than some might think they should be. On the other hand, the construction has the merit of ensuring that what may be an entirely legitimate claim to privilege is not violated before the court can possibly be in possession of adequate material to determine its validity. We are concerned with two interests which are both of profound concern to the proper administration of justice and which here inevitably come into conflict. I do not think the resolution of the conflict in the manner which results from the construction I put on s 10(2) can be condemned out of hand as absurd.
If the decision of the majority of your Lordships stopped short at construing s 10(2) of the 1984 Act as embracing the intention of a client who has deceived his solicitor, and thus bringing the statute into line with the common law as expounded in R v Cox and Railton (1884) 14 QBD 153, [1881–5] All ER Rep 68, I should be content to indicate my dissent for the reasons I have already sought to explain. But your Lordships take the very large further step of deciding that otherwise privileged communications between an innocent solicitor and his innocent client may lose their privilege, both under the statute and at common law, by reference to the intention of some third party to further a criminal purpose. As the case has been presented throughout, this is a necessary step if the decision of the Divisional Court is to be upheld and I well understand your Lordships’ concern to give every assistance to the police in pursuit of drug traffickers, who are rightly regarded as enemies of society scarcely less deadly than terrorists. But this development of the law goes well beyond any previous authority and, if it is a legitimate extension of a previously accepted principle, it should be capable of being expressed in language sufficiently precise to make clear the boundary within which the new principle is to apply that the criminal intention of one party may operate to deprive another innocent party seeking legal advice of the protection of legal professional privilege. The answer proposed by your Lordships to the certified question in terms suggests that the relevant intention for the purposes of s 10(2) may be that of ‘any other person’ without limitation. The only other language which I find in any of your Lordships’ speeches to indicate the required nexus between the criminal party and the innocent party, who is to be deprived of legal professional privilege for communications with his legal adviser, is
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that the latter is the ‘innocent tool’ of the former. If this is intended to serve as a sufficient definition of a new legal principle, I must say, with all respect, that I find it totally inadequate.
As I have earlier pointed out the facts on which we are required to decide this appeal are exiguously stated. All that is certain is that we are required to assume that Mrs G was the innocent beneficiary of the suspected drug trafficker’s unconditional largesse. On this basis I can see that Mrs G may be described as the ‘innocent tool’ of the drug trafficker in receiving his ill-gotten gains which he wished to ‘launder’. I find it much more difficult to say that she acted as his ‘innocent tool’ in seeking legal advice in relation to the details of the property transaction effected with the proceeds. Be that as it may, the result in the instant case is of minor importance compared to the use which will be made of your Lordships’ decision in future unforeseen and unforeseeable circumstances. Counsel in his forceful submissions for the respondent made no secret of the fact that the police regard this as a test case of crucial importance and seek to open a very wide door in favour of criminal investigation at the expense of privilege. If s 10(2) were to be construed as embodying his suggested implied terms at their widest, it would seem to give the police unlimited access to privileged material which they could plausibly suggest to be intended to serve a criminal purpose irrespective of any connection between the party claiming privilege and the party whose criminal purpose was alleged to be served.
It is for these reasons that I am apprehensive that your Lordships’ decision will open the door to a spate of applications to obtain access to privileged material on the ground that the privilege is vitiated by a criminal intention on the part of some third party. It will then fall to circuit judges, on a case by case basis, to seek to define the limits of application of the new principle in the absence of guidance from your Lordships. It is for their benefit that I feel obliged to sound this note of warning. Whilst loyally accepting the authority of your Lordships’ decision on the facts, I cannot for a moment accept the wide terms of your Lordships’ answer to the certified question as a satisfactory statement of the law without further limitation and definition.
For my part, I would allow the appeal and remit the case to the Divisional Court to determine which, if any, of the documents listed in schedule A to Otton J’s order are items subject to legal privilege under s 10(1) of the 1984 Act. I would answer the certified question as follows: on the true construction of s 10(2) of the Police and Criminal Evidence Act 1984 items which would otherwise fall within the definition of items subject to legal privilege are excluded from that definition if, but only if, the solicitor or other person holding the item in question has the intention of furthering a criminal purpose.
LORD BRANDON OF OAKBROOK. My Lords, Pt II of the Police and Criminal Evidence Act 1984, which comprises ss 8 to 22, is headed ‘Powers of Entry, Search and Seizure’. Under s 8 a justice of the peace, if satisfied of certain specified matters, may issue a warrant authorising a constable to enter and search premises for material likely to be of evidential value in relation to a serious arrestable offence, and a constable, acting on such a warrant, may seize and retain any such material. Items subject to legal privilege, however, are expressly excluded from the ambit of material which may be the subject matter of such a warrant.
The expression ‘items subject to legal privilege’ as used in s 8 is defined in s 10, which provides:
‘(1) Subject to subsection (2) below in this Act “items subject to legal privilege” means—(a) communications between a professional legal adviser and his client or any person representing his client made in connection with the giving of legal advice to the client; (b) communications between a professional legal adviser and his
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client or any person representing his client or between such an adviser or his client or any such representative and any other person made in connection with or in contemplation of legal proceedings and for the purposes of such proceedings; and (c) items enclosed with or referred to in such communications and made (i) in connection with the giving of legal advice; or (ii) in connection with or in contemplation of legal proceedings and for the purposes of such proceedings, when they are in the possession of a person who is entitled to possession of them.
(2) Items held with the intention of furthering a criminal purpose are not items subject to legal privilege.’
It is clear that the person by whom items are held in terms of sub-s (2) is the person in whose possession they are and who is entitled to possession of them in terms of sub-s (1). That person is the holder of the items and will in most cases be a solicitor.
The question for decision in this appeal is to whose intention the expression ‘with the intention of furthering a criminal purpose’ contained in sub-s (2) refers. Does it refer to the intention of the holder only (the first meaning)? Or does it refer to the intention of any person including the holder (the second meaning)?
It has been suggested that the first meaning is the literal meaning of the expression, and even that it is the only meaning which the expression is, as a matter of grammar, capable of having. With great respect to those of your Lordships who are of that opinion, I do not agree with it. It would have been possible for the draftsman to have inserted the qualifying words ‘of the holder’ between the word ‘intention’ and the words ‘of furthering’. Subsection (2) would then have read ‘Items held with the intention of the holder of furthering a criminal purpose are not items subject to legal privilege’, and the first meaning would then with certainty have been the meaning intended. The draftsman could on the other hand have inserted the qualifying words ‘of the holder or any other person’ in the same place. Subsection (2) would then have read ‘Items held with the intention of the holder or any other person of furthering a criminal purpose are not items subject to legal privilege’. There would have been nothing ungrammatical in making the latter insertion, and the result of it would have been that the second meaning would with certainty have been intended.
What then is the consequence of the draftsman having inserted no qualifying words between the word ‘intention’ and the words ‘of furthering’? It is not, in my view, that the expression is only capable of having the first meaning. It is rather that the expression is capable of having either the first meaning or the second meaning, and that a choice between the two meanings has to be made by reference to the purpose of Pt II of the 1984 Act.
That purpose is to give the police the power, when so authorised on proper grounds by the appropriate judicial authority, to enter premises, search for material likely to be of evidential value in relation to a serious offence, and to seize and retain such material. That power is conferred on the police in the public interest, so that serious crimes may be more easily and effectively investigated and the perpetrators of them more easily and effectively prosecuted. If the first meaning of the expression ‘with the intention of furthering a criminal purpose’ is adopted, the result will be that items held by a solicitor will only be subject to search, seizure and retention if the solicitor himself has the intention concerned. If the second meaning of the expression is adopted, the result will be that items held by a solicitor will be subject to search, seizure and retention not only in cases where a solicitor himself has the intention concerned, but also in cases where a client, or another person making use of a client as an intermediary, has the intention concerned.
Because cases of solicitors having the intention of furthering a criminal purpose are happily rare, the first result referred to above would do little to assist in achieving the purpose of Pt II of the Act, and would allow the principle of legal privilege to be used to
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protect the perpetrators of serious crimes. By contrast, the second result referred to above would materially assist in achieving the purpose of Pt II of the Act, and would prevent the principle of legal privilege being used to protect the perpetrators of serious crimes.
The conclusion to which I am led by these considerations is that the legislature must have intended to bring about the second result rather than the first, and that the expression ‘with the intention of furthering a criminal purpose’ should therefore be given the second meaning rather than the first. I would therefore answer the certified question as follows: on the true construction of s 10(2) of the Police and Criminal Evidence Act 1984 items which would otherwise come within the definition of ‘items subject to legal privilege’ contained in s 10(1) are excluded from that definition if they are held with the intention of either the holder or any other person of furthering a criminal purpose; I would dismiss the appeal accordingly.
LORD GRIFFITHS. My Lords, it is only because of the difference of opinion as to the true construction of the relevant section disclosed in your Lordships’ speeches, that I venture to set out some of the considerations that lead me to prefer the construction adopted by my noble and learned friends Lord Brandon and Lord Goff. I would otherwise have been content to say that I entirely agree that the appeal should be dismissed for the reasons contained in the speech of Lord Goff.
The police suspect a man of being an illegal drug dealer on a very large scale; they also suspect that he is laundering the money that he makes from his drug dealing. In particular, they suspect that he has passed money through a florist’s business run by a female relative which has then been used to buy a property. The police therefore wish to inspect all the documents relating to the purchase of the property which are presently in the possession of the appellants, a firm of solicitors that acted on behalf of the female relative when she purchased the property. The police do not allege that the appellants were aware that ‘drug money’ was being used for the purchase of the house and we are also to assume, which I confess I find somewhat unlikely, that the female relative is also unaware that ‘drug money’ has been used to assist in the purchase of the property. It is, however, notorious that vast profits are made out of illegal drug trafficking under the cover of apparently respectable businesses and it is possible that even the relatives of a drug dealer may be unaware of the true source of his wealth.
In order to obtain access to these documents in the possession of the appellants which the police believe may help to prove that the drug dealer is laundering his money, they made an application for an order pursuant to s 27 of the Drug Trafficking Offences Act 1986. The application originally came before a recorder of the Crown Court who made an order in very wide terms. This was an error as Lord Bridge has explained, but, fortunately, it was corrected because when the appellants applied to set aside the recorder’s order, their application was heard by a circuit judge who made an order in narrower terms requiring them to give access to the documentation relating to the purchase of the particular property.
Before a judge makes an order under s 27, he must be satisfied that the conditions set out in sub-s (4) are fulfilled, namely:
‘… (a) that there are reasonable grounds for suspecting that a specified person has carried on or has benefited from drug trafficking, (b) that there are reasonable grounds for suspecting that the material to which the application relates (i) is likely to be of substantial value (whether by itself or together with other material) to the investigation for the purpose of which the application is made, and (ii) does not consist of or include items subject to legal privilege or excluded material, and (c) that there are reasonable grounds for believing that it is in the public interest, having regard—(i) to the benefit likely to accrue to the investigation if the material
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is obtained, and (ii) to the circumstances under which the person in possession of the material holds it, that the material should be produced or that access to it should be given.’
We have no copy of the evidence given to the judge by the police on the application but there is no suggestion that these conditions were not fulfilled in so far as there are reasonable grounds for suspecting that a named person is drug trafficking, that access to the documentation is likely to be of substantial value to establish that drug money is being laundered by that person and that it is in the public interest that the police should have access to the documents. The sole challenge to the judge’s order is that the documentation included items subject to legal privilege which, by virtue of s 4(b)(ii), cannot be made the subject of an order under s 27.
The 1986 Act incorporates the definition of legal privilege contained in s 10 of the Police and Criminal Evidence Act 1984, which provides:
‘(1) Subject to subsection (2) below, in this Act “items subject to legal privilege” means—’ (a) communications between a professional legal adviser and his client or any person representing his client made in connection with the giving of legal advice to the client; (b) communications between a professional legal adviser and his client or any person representing his client or between such an adviser or his client or any such representative and any other person made in connection with or in contemplation of legal proceedings and for the purposes of such proceedings; and (c) items enclosed with or referred to in such communications and made—(i) in connection with the giving of legal advice; or (ii) in connection with or in contemplation of legal proceedings and for the purposes of such proceedings, when they are in the possession of a person who is entitled to possession of them.
(2) Items held with the intention of furthering a criminal purpose are not items subject to legal privilege.’
The definition corresponds closely with the established common law principles that govern the existence of legal privilege. Section 10(1) sets out the scope of legal privilege in terms that would be instantly recognised by any lawyer as covering the position at common law, and when I first read s 10(2) I was in no doubt that it was setting out the exception to legal privilege established in R v Cox and Railton (1884) 14 QBD 153, [1881–5] All ER Rep 68, which provides that no legal privilege attaches to legal advice obtained for the purpose of committing crime.
It is, however, submitted that this is not the meaning of s 10(2) and that the language compels one to construe it so that legal privilege is only lost if the solicitor or other person ‘holding’ the document is himself party to the criminal purpose for which the advice was obtained. This seems to me to be such an extraordinary result that I would only adopt such a construction if driven to it. Let us see where it leads. A drug dealer making vast profits wishes to move his money to a foreign country out of the reach of the police. He goes to a solicitor to seek legal advice about the transfer of the money. The drug dealer runs an apparently respectable business and the solicitor does not realise he is being asked to advise on the disposal of drug money and accordingly he sets up a scheme for the transfer of the money. This advice given by the solicitor would not be protected from disclosure by legal privilege at common law because it was advice obtained for the purpose of furthering illegal drug trafficking. But, if the appellants’ construction is right, the police cannot get access to this documentation to prepare the case against the drug trafficker because it is legal advice within the meaning of s 10(1)(a) and is not excepted by s 10(2). I cannot believe that this was the intention of Parliament.
With all respect to those who hold the opposite view, I do not think that s 10(2) is capable of only one meaning. I concede of course that read in isolation it is capable of bearing the meaning for which the appellants contend, namely that the only relevant
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intention is that of the holder. So construed it will in practice mean that almost all applications to have access to documentation held in a solicitor’s office are likely to be unsuccessful, for it is surely only in rare cases that solicitors will be party to the crime and it is in still rarer cases that it will be possible to satisfy the judge that this is so; but it will be the innocent solicitor’s duty to take the point of privilege on behalf of his client and, of course, the criminal solicitor will also take the point.
Words and phrases must be construed in their context, according to their subject matter and, in the case of a statute, against a background of the existing law, which in this case is the law relating to legal privilege, including the rule that the privilege is that of the client and not the solicitor, although it is the duty of the solicitor to protect his client’s privilege unless the client waives it. I am also mindful that the use of the passive tense of a verb may convey a different shade of meaning to the use of the active tense. For example, if I write ‘I hold ammunition with the intention of firing it at Bisley’, it is obvious that I am referring to my intention to fire the ammunition at Bisley. If, however, I gave the following instruction, ‘Ammunition held in the armoury with the intention of firing it at Bisley must be inspected’, I would not expect the man in charge of the armoury to think that only the ammunition that he intended to fire at Bisley need be inspected; I would expect him to understand that all ammunition earmarked for use at Bisley must be inspected no matter who intended to fire it.
I am not persuaded by the argument that the draftsman could have made the meaning of s 10(2) clear by using the word ‘made’ for ‘held’, so that sub-s (2) read ‘Items made with the intention of furthering a criminal purpose are not items subject to legal privilege’. Surely the same argument would be advanced by the appellants, namely that the intention must be the intention of the maker of the item. The solicitor would therefore say in respect of his advice as to how to further the criminal purpose: ‘I wrote this advice, I am therefore the maker of this item, but I had no idea that it was connected with “drug money”, therefore it remains privileged because I had no intention of furthering a criminal purpose.' The argument seems to me to be exactly the same whether the word ‘hold’ or ‘made’ is used.
Lord Goff demonstrates that s 10(2) cannot be given a literal meaning because this would rob it of virtually all content by limiting its application to situations in which the documentation was to be used for some future criminal purpose, whereas in the nature of things, the police are almost always investigating past crimes. We must, therefore, apply a purposive rather than a literal construction to the clause. I cannot believe that it was the intention of Parliament to protect from inspection documentation that came into existence for the purpose of furthering crime, in this case the laundering of drug money, which would be admissible at the trial, but such would be the effect of the clause if it is construed as excluding the intention of anyone other than the holder.
I can also see very considerable practical difficulties in applying the section if only the intention of the holder is relevant. If the police wish to have access to documents in a solicitor’s office, they will serve notice on the firm, as they did in this case. It may be a very large firm; who is the holder whose intention is relevant to destroy the privilege? Do the police have to identify the person in the firm charged with the safe custody of the documents and show that he was party to a criminal conspiracy? Or is it sufficient that anyone working in the firm was party to the criminal conspiracy no matter who ‘holds’ the documents? And what if the conspiring solicitor has taken fright and fled the country? Are the documents protected because they remain in the custody of his innocent partners?
Furthermore, a construction limiting the intention to that of the holder would lead to the strange result that whether or not legal privilege could be claimed for a document would depend on whether that document happened to be in the hands of the solicitor or the client. On the assumption that the solicitor is innocent but that his client is a drug dealer, copies of letters written by the solicitor to his client, but retained in his office,
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which contained advice that facilitated laundering drug money would be subject to legal privilege, but the originals of that advice, in the hands of the client, would not be subject to legal privilege. What sense is there in protecting the copy but not the original?
Finally, I am impressed by the fact that Parliament when applying this Act to Scotland has provided that legal privilege should be governed by the same rules of law in relation to the inspection of documents as would apply to their admissibility at the trial: see s 29(3). I am unable to think that it was Parliament’s intention that there should be a radically different rule applied in Scotland to that applied in England.
My Lords, I am convinced that Parliament was not seeking to enact a special code of legal privilege of different import to the common law position. I believe the draftsman was seeking to spell out the common law position for the benefit of those unacquainted with it and that s 10(2) must be construed with this in mind. The object of s 10(2) is in my view to explain that there is no privilege in material prepared for a criminal purpose.
I am in entire agreement with the analysis of the language of the section contained in the speech of my noble and learned friend Lord Goff, and for the reasons he gives I would construe the words as applying to all documents prepared with the intention of furthering a criminal purpose whether the purpose be that of the client, the solicitor or any other person. I can see no reason why the law should seek to protect such a document and thus shield the criminal from detection and prosecution.
Anxiety was expressed on behalf of the appellants and the Law Society about the difficulties with which a solicitor would be faced by such a construction. I do not think that the honest solicitor should have any cause for concern. If the police wish to gain access to documentation in the solicitor’s possession which is prima facie privileged, they will as a first step have to make an ex parte application to a circuit judge, identifying the suspected drug trafficker and the documents they wish to inspect. If the documents fall into the class that are prima facie privileged, the judge must not make the order unless satisfied that the documents were in fact brought into existence for the purpose of furthering a criminal purpose. If the judge is so satisfied and makes the order, s 27(3) the 1986 Act provides that he should make the order to take effect at some future date, generally seven days, the purpose of which is to give the solicitor the opportunity to apply to the judge to discharge the order as specifically provided for by r 25B of the Crown Court Rules 1982, SI 1982/1109, as inserted by the Crown Court (Amendment) Rules 1986, SI 1986/2151. Before making such an application, the solicitor will have the opportunity to ask his client if he has any objection to the police having access to the documentation and whether he is prepared to waive privilege if it exists. If the client does object to the police seeing the documents, then the solicitor, or counsel, will appear before the judge and seek to persuade the judge to discharge the order on the grounds that legal privilege attaches to the documents. If the judge overrules the objections, no blame can attach to the solicitor.
In the present case, the appellant solicitors did not seek their client’s instructions before objecting to the judge’s order because they were afraid that if they did so they might be in breach of s 31 of the 1986 Act, which provides:
‘(1) Where, in relation to an investigation into drug trafficking, an order under section 27 of this Act has been made or has been applied for and has not been refused or a warrant under section 28 of this Act has been issued, a person who, knowing or suspecting that the investigation is taking place, makes any disclosure which is likely to prejudice the investigation is guilty of an offence.
(2) In proceedings against a person for an offence under this section, it is a defence to prove—(a) that he did not know or suspect that the disclosure was likely to prejudice the investigation, or (b) that he had lawful authority or reasonable excuse for making the disclosure.
(3) A person guilty of an offence under this section shall be liable—(a) on
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conviction on indictment, to imprisonment for a term not exceeding five years or to a fine or to both, and (b) on summary conviction, to imprisonment for a term not exceeding six months or to a fine not exceeding the statutory maximum or to both.’
In the course of these proceedings an application was made to Webster J for leave to move for judicial review to quash the judge’s order on the ground that it was invalid as being obtained in breach of the rules of natural justice because the client had not been told by the appellants about the judge’s order and therefore was deprived of a fair hearing when the application was made to discharge the order. Webster J dismissed the application on paper and observed: ‘A solicitor-client relationship must constitute reasonable excuse, I would have thought. The application seems to me to be unarguable.’
Whilst I can understand the apprehension of the appellants on this occasion, I have no doubt that the observation of Webster J was correct and that if an order to give access to documentation is made under s 27, the solicitor-client relationship provides a reasonable excuse within the meaning of the section for the solicitor to take his client’s instructions whether the order should be contested.
If the police believe that this would hinder their investigation, then they will have to try to persuade a judge to grant them a warrant to make an immediate search of the premises pursuant to an application under s 28 of the 1986 Act. The judge will bear in mind that such a warrant does not entitle the police to seize items subject to legal privilege and should be careful not to grant a warrant too readily if the material sought by the police is, prima facie, subject to legal privilege. The judge will have to be satisfied that the material is not in fact subject to legal privilege because it was prepared for the purpose of furthering a criminal purpose and in making his decision take into account the fact that there will be no opportunity for the solicitor to argue in favour of the privilege. In practice, I would have thought that the issue of an immediate search warrant of a solicitor’s office would be justified in comparatively rare occasions and generally confined to cases in which the solicitor was suspected of complicity in the crime.
My Lords, for these reasons I support the construction preferred by my noble and learned friends Lord Brandon and Lord Goff and by the Divisional Court and I would dismiss this appeal, and answer the certified question as they propose.
LORD OLIVER OF AYLMERTON. My Lords, the problem raised by this appeal is one which has given me very great difficulty and I have to confess to having changed my opinion more than once both in the course of and after the conclusion of the argument. I have also to confess, however, that in the end I have become convinced that the problems which have been canvassed arise rather from the arguments which have been addressed than from any inherent difficulty in construing the simple, straightforward and perfectly clear words of the statute which your Lordships are called on to interpret.
I take it to be a primary canon of statutory construction that words are to be read in their ordinary, natural meaning unless there is some compulsive reason for reading them in some other and secondary sense. There is here no doubt about the ordinary, natural meaning of the words of s 10(2) of the Police and Criminal Evidence Act 1984. They are clear; they are concise; and they are unequivocal. There is no ambiguity about them. ‘Items held with the intention of furthering a criminal purpose’ cannot, as a matter of plain, ordinary English, refer to items in relation to which the holder has no such intention but which figure in the intentions of some quite different person who is not the holder. Equally, there is no difficulty about giving the subsection a perfectly sensible operation. If the holder of an item otherwise the subject matter of privilege under sub-s (1) holds the item with the intention of furthering a criminal purpose, the privilege is destroyed. That much, at the least, is the clear intent of the subsection.
Thus one starts from the position that the words used are simple and sensible and they have a simple and sensible operation, producing a result that one would expect, namely that of denying privilege from production to material which is held by, for instance, a;
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solicitor who intends to further a criminal purpose. What is said, however, is that although this is exactly what one would expect, it is not all that one would expect. Parliament, in conferring powers on the police to compel production and, in certain circumstances, to enter and search, evidently intended to facilitate and assist the investigation, detection and prevention of crime. That intention is not fully and effectively implemented unless privilege is denied not only where the holder of otherwise privileged material has the intention of furthering a criminal purpose but where the holder is entirely innocent and the relevant intention is that of the person who consigned the material to him or even of some third person of whom an equally innocent consignor is the unwitting instrument. If Parliament did not intend this, it ought to have done, for otherwise there is a anomalous omission and the purpose of the legislation will not be fully and effectively fulfilled. To deny legal professional privilege in cases where the holder of the document is innocent but the maker of the document harbours a criminal intent which is unknown to the holder would, it is said, make much better sense and assist in furthering the general purpose for which the 1984 Act was passed. So, the argument runs, because it would have been more sensible for Parliament to have done that, Parliament must be deemed, despite what it has said in clear language, to have intended to do it. The words must then, by interpretation, be construed as giving effect to that intention by attributing to them a meaning which they cannot possibly bear as a matter of ordinary English. It is not clear to me by what principle of statutory construction such a process is regarded as permissible unless it be by the invention of a new doctrine of judicial rectification, in exercise of which the court, by virtue of its superior perception of what public policy requires, is entitled to arrogate to itself the function of legislating where Parliament has not seen fit to do so. Such a principle appears to me to be entirely contrary to established principle which I take to be encapsulated in the words of Lord Reid in IRC v Hinchy [1960] 1 All ER 505 at 512, [1960] AC 748 at 767:
‘What we must look for is the intention of Parliament, and I also find it difficult to believe that Parliament ever really intended the consequences which flow from the Crown’s contention. But we can only take the intention of Parliament from the words which they have used in the Act, and therefore the question is whether these words are capable of a more limited construction. If not, then we must apply them as they stand, however unreasonable or unjust the consequences, and however strongly we may suspect that this was not the real intention of Parliament.’
The process is, it is claimed, justified because there can be discerned in the section an intention to define legal privilege by reference to the existing position at common law. But this is, with respect, pure speculation. There is not, so far as I am aware, any authority in the common law dealing with the question of whether a criminal intent on the part of a stranger to the relationship of solicitor and client destroys the privilege of the client. If, therefore, the subsection does indeed bear the meaning now sought to be ascribed to it by the respondent, it is breaking new ground and the legislative intent has to be gathered not from some supposed logical extension of the common law rule but from the words which Parliament has chosen to use.
My Lords, I accept, of course, that to read into the subsection after the word ‘intention’ words such as ‘of any person’ is grammatically permissible, but for my part I doubt whether much assistance is to be obtained from grammatical analysis. Whatever addition is made the intention is connected inevitably to the holding by the conjunctive ‘with’ and one cannot sensibly as a matter of language speak of doing anything ‘with’ someone else’s intention any more than one can sensibly speak of acting ‘with’ someone else’s malice. Intention is a state of mind. No doubt it can and usually does relate to an object of some kind. So, in the subsection under consideration, it is implicit that the intention relates to the holding of the item or to some use that is to be made of the item. It cannot, for instance, be relevant that the holder of the item harbours some criminal intention
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entirely unrelated to the item, such as robbing the gas meter. But, having said that, the intention, though it relates to the items which are the subject of the sentence, cannot sensibly be separated from the mind in which the intention is formed and made to hover, like the Cheshire Cat’s grin in Alice in Wonderland, over the items and travel with them into the hands of some other person so that they then become held ‘with’ that intention. In the ultimate analysis, the construction contended for by the respondent involves the substitution of some other word (for instance ‘made’) for the word ‘held’. That would have been so simple and would have achieved what the respondent asks your Lordships to suppose was the parliamentary intention. But that is exactly what Parliament did not do and the contrast between ‘held’ in sub-s (2) and ‘made’ repeatedly used in sub-s (1) is so striking that I, for my part, find difficulty in accepting that it was unintentional. As Lord Hewart CJ observed in Spillers Ltd v Cardiff Assessment Committee [1931] 2 KB 21 at 43, [1931] All ER Rep 524 at 528–529 in a passage approved and adopted by the Judicial Committee of the Privy Council in New Plymouth BC v Taranaki Electric-Power Board [1933] AC 680 at 682:
‘It ought to be the rule, and we are glad to think that it is the rule, that words are used in an Act of Parliament correctly and exactly, and not loosely and inexactly. Upon those who assert that that rule has been broken the burden of establishing their proposition lies heavily. And they can discharge it only by pointing to something in the context which goes to show that the loose and inexact meaning must be preferred.’
I can find nothing in the context of this Act which satisfies that burden.
As to the argument that the ordinary and natural meaning of the words leads to absurdity, I respectfully question this. It certainly produces in practice a very limited set of circumstances in which privilege is denied, for solicitors with criminal intentions are, happily, not ordinarily encountered. It may even be said to be anomalous and incomplete having regard to the overall purpose of the legislation. But it has to be remembered that this is legislation authorising a constable to call for production of material from a solicitor who will be under a duty to claim privilege if it exists and who may be unable to seek his client’s instructions and there is nothing necessarily absurd in limiting the denial of the privilege prima facie attaching to documents to cases where the solicitor himself is a party to the criminal purpose.
I am equally unimpressed by the argument (which I think is simply another way of expressing the same concept) that Parliament ‘cannot’ or ‘cannot sensibly’ have intended to restrict the denial of legal professional privilege within so narrow a compass. I confess that I do not see why. There is a respectable body of informed and sensible opinion in the Law Society and, I suspect, many, if not all, of its members, that whilst it is perfectly right and sensible that a solicitor should answer for his own intentions, he should not be put in a position where the correctness or otherwise of his decision whether his duty to his client requires him to take his stand on legal professional privilege is made to depend on an intention of which he knows nothing, particularly where he may be held liable for contempt of court if he gets it wrong. This may, for aught that your Lordships know, have been a consideration which Parliament, in framing the legislation, had very much in mind. Indeed, had the subsection been phrased in the way in which the respondent urges your Lordships now to paraphrase it, it might very well have attracted representations and objections from interested professional bodies during the passage of the Bill through Parliament.
The fact is that the whole of the respondent’s case rests on a speculation about parliamentary intention in using quite unambiguous language. If that speculation is to lead the court to substitute for the clear and unequivocal words used a sense which, in ordinary usage, they are quite incapable of bearing in order to fill a supposedly unintentional lacuna, this, in my opinion, involves stepping outside the judicial role and;
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assuming, without the benefit of public discussion or debate, that mantle which is properly reserved to the legislature alone.
For these reasons and for the reasons contained in the speech delivered by my noble and learned friend Lord Bridge, which I have had the advantage of reading in draft, I would, for my part, allow the appeal and answer the certified question in the sense which he has indicated.
LORD GOFF OF CHIEVELEY. My Lords, the question at issue in this case is whether the appellant solicitors are entitled to an order for judicial review quashing an order made for production by the solicitors of certain documents. That order was made under s 27 of the Drug Trafficking Offences Act 1986. The police are carrying out investigations into the affairs of a man whom they believe to be trafficking in drugs on a very large scale, and whom they also believe to be salting away the proceeds of his drug trafficking in property, using members of his family for that purpose. One of those persons is a Mrs G, who is a client of the appellant solicitors. The police originally obtained an order, ex parte, from Mr Recorder Crespi QC for production by the appellants of all files in their possession relating to Mrs G’s financial transactions and dealings. The appellants applied for the variation or discharge of that wide order and, after an inter partes hearing before his Honour Judge Machin QC, he varied the order so as to limit it to Mrs G’s dealings relating to the purchase of a particular property. The appellants then applied for leave to apply for judicial review to quash the order, as so varied, on the ground that the documents specified in the order were subject to legal privilege as defined in s 10 of the Police and Criminal Evidence Act 1984 and so, by virtue of s 27(4)(b)(ii) of the 1986 Act, should be excluded from the order. Otton J gave leave to apply but, at the same time, took the opportunity to divide the documents specified in the order into two classes: those which could not possibly be the subject of legal privilege and those which might be. It is therefore in relation to documents within that latter category that the order for judicial review was sought. The appellants’ application was dismissed by a Divisional Court (Lloyd LJ and Macpherson J) ([1988] 1 All ER 677, [1988] 2 WLR 627) on 21 December 1987. It is against that decision that the appellants now appeal to your Lordships’ House by leave of the Divisional Court.
The appeal raises a by no means easy question of construction of s 10 of the 1984 Act. That section provides as follows:
‘(1) Subject to subsection (2) below, in this Act “items subject to legal privilege” means—(a) communications between a professional legal adviser and his client or any person representing his client made in connection with the giving of legal advice to the client; (b) communications between a professional legal adviser and his client or any person representing his client or between such an adviser or his client or any such representative and any other person made in connection with or in contemplation of legal proceedings and for the purposes of such proceedings; and (c) items enclosed with or referred to in such communications and made—(i) in connection with the giving of legal advice; or (ii) in connection with or in contemplation of legal proceedings and for the purposes of such proceedings, when they are in the possession of a person who is entitled to possession of them.
(2) Items held with the intention of furthering a criminal purpose are not items subject to legal privilege.’
The issue before the Divisional Court, and now before your Lordships, does not relate to the question whether some or all of the documents within the second of Otton J’s categories are or may be subject to legal privilege within s 10(1) of the 1984 Act. The issue relates to the question whether, on the assumption that they are within that category, they are nevertheless excluded by s 10(2). The question of construction therefore relates to the meaning of s 10(2), as set in its statutory context.
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Reduced to their essentials, the rival submissions advanced by the parties were as follows. For the appellants it was submitted that the natural and ordinary construction of s 10(2) led inevitably to the conclusion that the words ‘held with the intention of furthering a criminal purpose’ meant that the relevant intention must be the intention of the person holding the documents, which in the present case is the intention of the solicitors. There is no question here of the solicitors having the intention of furthering a criminal purpose; on the contrary, the only person alleged to have such an intention was neither the solicitors nor their client Mrs G, but a third party. For the respondent it was submitted that a literal construction of the subsection led to absurd results, and that, on a true construction of the subsection, it must be read and intended to reflect the common law position and so as referring to the intention of the client whether or not the solicitors were party to that intention; and further that the intention can even be the intention of a third party who is using the client as an innocent tool in order to further his criminal purpose. It was the submission of counsel for the respondent which found favour with the Divisional Court.
In order to consider these rival submissions, it is necessary to have a regard, first of all, to the relevant words of the subsection, viz ‘Items held with the intention of furthering a criminal purpose’. Those words refer to items held by a certain person, ie in his possession, and refer to the items as being held by that person, ie being in his possession, with the intention of furthering a criminal purpose. It is suggested that, on a literal interpretation, not only must the intention be that of the person holding the items, but that it is his act of holding them, ie of having them in his possession, which must be with that intention. It was this interpretation which found favour with the Divisional Court in R v Crown Court at Snaresbrook, ex p DPP [1988] 1 All ER 315 at 319–320, [1988] QB 532 at 538–539 per Glidewell LJ.
Now in my opinion this construction does indeed lead to absurd consequences. It is only necessary to point out that, on this construction, if, at the time when the production of the items is called for, the relevant criminal purpose has been fulfilled, it must follow that, at that time, the items cannot then be held, ie be in the possession of the holder, with the intention of furthering a criminal purpose. Yet it is obvious that the main purpose of Pt II of the 1984 Act, in which s 10 falls, is to confer powers on the police to enable them to detect the perpetrators of crime. In the vast majority of cases the police are engaged in so doing after, not before, the crime is perpetrated. It is therefore unlikely in the extreme that an absolutely literal construction of s 10(2) reflects the intention of Parliament. In these circumstances it is necessary to consider the subsection in its statutory context in order to ascertain whether, as a matter of construction, a more sensible meaning can properly be attributed to it.
If I turn to sub-s (1) I find that the words ‘items subject to legal privilege’ are there defined. They relate (consistently with the common law position, to which the subsection must therefore be presumed to be intended to give effect) to (a) certain communications made in connection with the giving of legal advice, (b) certain communications made in relation to legal proceedings and (c) items enclosed or referred to in such communications and made in connection with the purposes referred to in (a) and (b). It is the making of communications in the specified circumstances (or of enclosures with or references in such communications) which confers legal privilege. Subsection (2) is concerned to negative the legal privilege which would otherwise be so conferred. By far the most likely moment when it would operate to negative such privilege is at the time when the relevant communication is made, which, in the case of a solicitor, will be the time when it comes into his possession, either through delivery to him by his client or by coming into existence in his own office. It follows that, if legal privilege is negatived under s 10(2), this is the point of time when that will occur.
It is at once apparent that the words ‘items held with the intention of furthering a criminal purpose’ must be a shorthand expression for (in the case of items held by a solicitor) items (1) which have come into the possession of the solicitor ‘with the intention
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of furthering a criminal purpose’ and (2) which are still in his possession at the time when he is required to give production of them. No other meaning can sensibly be ascribed to the words of the subsection. It is in relation to such items, therefore, that the question has to be asked: does the relevant intention have to be the intention of the person (ie in this example the solicitor) who has the items in his possession at the time when production of them is called for?
When one looks at the full meaning of the words, there is no compelling reason why the words should be so read. If documents are said to have come into the possession of a solicitor with the intention of furthering a criminal purpose, that intention could just as well be the intention of some person other than the solicitor, and in particular, the intention of his client. Furthermore, there are overwhelming reasons which favour that interpretation. First, the interpretation would reflect the common law position (see R v Cox and Railton (1884) 14 QBD 153, [1881–5] All ER Rep 68); and since in my opinion sub-s (1) is intended to reflect the common law position, it would be most surprising if sub-s (2) was not likewise intended so to do. (I observe in parenthesis that in Cross on Evidence (6th edn, 1985) p 395 the opinion is expressed that s 10(1)(c) extends the scope of legal professional privilege beyond the common law; because at common law ‘the privilege was regarded as that of the client, and if the document or thing were not protected in the hands of the client it could not attract protection merely by being submitted to a legal adviser’. I respectfully question whether that opinion is correct, because in s 10(1)(c) the protection is restricted to cover only items made in connection with the purposes specified in the paragraph.) Second, it would be equally surprising if, in the context of Pt II of the 1984 Act, and its evident purpose, the legislature should have intended to restrict the effect of sub-s (2), and therefore the powers of the police in their efforts to detect crime, by confining sub-s (2) (which is expressly directed towards a case where there is an intention to further a criminal purpose) only to those cases where the solicitor has such an intention, and so extending legal privilege to protect the criminal. It is not to be forgotten that the privilege is the privilege of the client, not of the solicitor; and so it is to be expected that the privilege should be negatived where the client has the intention to further a criminal purpose, whether or not his intention is shared with his solicitor. Indeed, one of the most important points established in the leading case of R v Cox and Railton was that legal professional privilege does not exist where the client has such an intention, even though his intention is unknown to his solicitor; and it would surely be most extraordinary if s 10(2) was drafted with the intention of excluding that principle, thereby substantially extending the scope of the privilege to protect the dishonest client. Furthermore, the opposite conclusion would not merely lead to the remarkable result that two different versions of legal privilege would have to coexist, the common law version, which has long been entrenched in our law, and the statutory version encapsulated in s 10; but also that, in consequence, the extraordinary position would be reached that in certain circumstances the police would be prevented by legal privilege from calling for the production of certain documents, although such documents, if obtained, would not be protected by legal privilege when placed in evidence before the court.
For these reasons I find myself to be in agreement with the conclusion reached by the Divisional Court that the ‘intention of furthering a criminal purpose’ referred to in sub-s (2) cannot, by a process of literal construction, be restricted to the intention of the person having the items in his possession at the time when delivery of them is called for.
I wish to add that, in my opinion, the words should not be read as limited to an intention of furthering the commission of a criminal offence. This is not what the subsection provides; and so to read it would exclude those cases where the criminal offence has been committed and the purpose of the criminal is to salt away, for his own benefit, the proceeds of his crime. The purpose of a bank robber is not just to rob a bank: it is to obtain the money for his own benefit. His criminal purpose is still being furthered when he is concealing the money which he has stolen, or otherwise salting it away. So if
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a drug trafficker, having unlawfully trafficked in drugs, is salting away his ill-gotten gains in the purchase of property, he is still acting with the intention of furthering his criminal purpose (even if he is acting through a person who is his innocent tool). It follows that no difficulty arises in the present case from the mere fact that, at the relevant time, the drug trafficker may have completed the commission of the criminal offence of trafficking in drugs.
In the course of argument, your Lordships were referred to s 29 of the Drug Trafficking Offences Act 1986, in sub-s (2) of which it is provided that, in ss 27 and 28 of the Act, the expression ‘items subject to legal privilege’ shall have the same meaning as in the Police and Criminal Evidence Act 1984(i e in s 10 of that Act), and in sub-s (3) that, as respects Scotland, in ss 27 and 28 the same expression shall mean certain communications ‘being communications which would in legal proceedings be protected from disclosure by virtue of any rule of law relating to the confidentiality of communications’. It follows that, so far as Scotland is concerned, Parliament intended that confidentiality of documents should, as my noble and learned friend Lord Griffiths has pointed out, be governed by the same rules of law in relation to inspection of the documents as applied in relation to their admissibility at trial. Furthermore, it is well established in the Scots law of confidentiality of communications, as in the English law of legal privilege, that the protection does not apply where the transaction as to which the communication passed is fraudulent or criminal, whether the solicitor in possession of the documents is an innocent instrument or an accomplice: see Dickson Law of Evidence in Scotland (3rd edn, 1887) vol 2, para 1678 and 4 Encyclopaedia of the Laws of Scotland (ed Lord Dunedin and J Wark, 1927) para 795 and cases there cited. Thus it is stated in Dickson (a work of authority):
‘One who consults a legal adviser, with a view to committing a fraud or other crime, makes him either an innocent instrument of his guilt or an accomplice. In neither case will so important a part of the history of the crime be excluded on account of confidentiality; for the ground of policy on which the privilege is founded in ordinary cases must give way, where preserving it would prevent crime from being detected.’
The inference is inescapable that, in s 29 of the 1986 Act, Parliament, by preferring to adopt the statutory definition of legal privilege (rather than the common law principle) for English law, and at the same time retaining the Scots common law principle of confidentiality of communications for Scots law (without qualifying it by providing that such confidentiality shall exist despite the criminal purpose of the client in cases where the solicitor is innocent), must have understood the statutory definition of legal privilege not to provide for any such qualification of the English common law principle. I must confess that I am not surprised. Strictly speaking, it may not be permissible to pray in aid the later statute in order to discover the legislative intention in the earlier statute; however, my conclusion on the construction of the earlier statute has been reached without reference to the later. Likewise, for the reasons given by my noble and learned friend Lord Griffiths, I do not consider that opinions held by certain solicitors as to what they see to be the desirable effect of this legislation provide (with all respect to those who hold such opinions) any useful guide to its construction.
There remains, however, a further question. Does the exemption in sub-s (2) apply (in the case of items in the possession of a solicitor) where the intention of furthering a criminal purpose is not the intention of the client, but is the intention of a person who is using the client as an innocent tool for the purpose of effecting his intention?
That the words of the subsection are wide enough to embrace such an intention, I have no doubt. But once again a literal reading cannot provide, of itself, a satisfactory answer. It is necessary to consider the words in their context, including in that context not only the remainder of the section but also the evident legislative purpose.
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As I have already indicated, it appears to me, having regard to the contents of sub-s (1) and the construction which I have considered must be placed on sub-s (2), that the intention of the legislature was to encapsulate in s 10 the common law principle relating to what used to be called legal professional privilege. It is appropriate therefore to turn to the common law for guidance. Unfortunately, however, there is no authority directly in point, for, so far as the researches of counsel have revealed, the point has never before arisen for legal decision. It follows that it is necessary to consider the point as a matter of first impression.
The crucial question is whether the third party’s criminal intention should have the effect of excluding the privilege of the client whom the third party is using as an innocent tool. The Divisional Court answered this question in the affirmative. Lloyd LJ said ([1988] 1 All ER 677 at 682, [1988] 2 WLR 627 at 633):
‘I feel great hesitation about this. But I am fortified by the concession of counsel for the applicants that “a criminal purpose” in s 10(2) must mean “any criminal purpose“. If so, then the logic of the argument, which I have accepted so far, leads to the conclusion that the criminal purpose may be the purpose of a third party as well as the client, at any rate if the client is the innocent instrument or beneficiary of the third party’s criminal purpose. That is indeed the position in the present case on the facts alleged by the police.’
In considering this question, it is necessary to inquire what is the rationale of this exception to legal professional privilege at common law. This is to be discovered from R v Cox and Railton (1884) 14 QBD 153, [1881–5] All ER Rep 68 itself. In that case the judgment of the Court for Crown Cases Reserved (Grove J, Pollock, Huddleston BB, Lopes, Hawkins, Stephen, Watkin Williams, Mathew, Day and Smith JJ) was delivered by Stephen J. He referred to the judgment of Lord Brougham LC in Greenough v Gaskell (1833) 1 My & K 98 at 103, [1824–34] All ER Rep 767 at 770, in which he stated the foundation of the rule of legal professional privilege to be as follows:
‘… it is out of regard to the interests of justice, which cannot be upholden, and to the administration of justice, which cannot go on, without the aid of men skilled in jurisprudence, in the practice of the Courts, and in those matters affecting rights and obligations which form the subject of all judicial proceedings.’
Stephen J then continued (14 QBD 153 at 167, [1881–5] All ER Rep 68 at 71):
‘This rule has been accepted and acted upon ever since, and we fully recognise its authority, but we think that the present case does not fall either under the reason on which it rests, or within the terms in which it is expressed. The reason on which the rule is said to rest cannot include the case of communications, criminal in themselves, or intended to further any criminal purpose, for the protection of such communications cannot possibly be otherwise than injurious to the interests of justice, and to those of the administration of justice. Nor do such communications fall within the terms of the rule. A communication in furtherance of a criminal purpose does not “come into the ordinary scope of professional employment.” ’
Now, when I have regard both to the purpose which has long been understood to underline the principle of legal professional privilege, and to the reason why communications passing between a client with a criminal purpose and a solicitor who is innocent of any such purpose are held not to be protected by such privilege, it appears to me to be immaterial to that exception whether it is the client himself, or a third party who is using the client as his innocent tool, who has the criminal intention. In either case, to adopt the words of Stephen J, the communications are intended to further a criminal purpose; in either case the protection of such communications cannot be otherwise than injurious to the interests of justice; and in either case the communications
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are in furtherance of a criminal purpose, and so cannot come within the ordinary scope of professional employment. Accordingly, unless there is some authority, or compelling reason, leading to an opposite conclusion, I would hold that the criminal intention of the third party will, in the circumstances under consideration, exclude the application of the principle of legal professional privilege at common law, even though the privilege, if it attached, would be the privilege of the client and not of the third party.
I have already stated that, so far as I am aware, there is no authority which points to the opposite conclusion. Is there any compelling reason which does so? The only reason suggested in the course of argument was that the client (as opposed to the third party) might be making the relevant communication to his solicitor in circumstances in which he was entitled to assume that the matter was protected by privilege, and in which he therefore felt able to communicate with his solicitor freely and without fear that his communications might thereafter be disclosed without his consent. To that objection there are, I consider, a number of answers. The first is that his privilege will only be excluded in so far as it relates to communications (or items enclosed with such communications, or to which reference is made in them) made with the third party’s intention of furthering a criminal purpose. No other communication will be excluded from the application of the privilege; and the client’s confidence will to that extent be protected. Second, the client is ex hypothesi innocent of the criminal purpose; disclosure of the circumstances will not in that respect be to his disadvantage. Third, the type of case under consideration must surely be most exceptional. Fourth, and most important of all, it seems to me that the disclosure of the third party’s iniquity must, in the interests of justice, prevail over the privilege of the client, innocent though he may be.
Such being the principle at common law, I can see no reason why s 10(2) of the 1984 Act should not be construed to the same effect. The words of s 10(2) are amply wide enough to embrace the common law principle; and the subsection should surely be construed, where the words are wide enough, to embrace that principle.
For these reasons, I find myself to be in agreement with the conclusion of the Divisional Court on this aspect of the case also.
I have to recognise that, as I have already indicated, my conclusion in the present case undermines part of the reasoning of Glidewell LJ in R v Crown Court at Snaresbrook, ex p DPP [1988] 1 All ER 315 at 319–320, [1988] QB 532 at 538–539. But it does not necessarily undermine the conclusion of the Divisional Court in that case. This is because I am inclined to agree with Glidewell LJ that the common law principle of legal professional privilege cannot be excluded, by the exception established in R v Cox and Railton, in cases where a communication is made by a client to his legal adviser regarding the conduct of his case in criminal or civil proceedings, merely because such communication is untrue and would, if acted on, lead to the commission of the crime of perjury in such proceedings. As at present advised I would be minded, if the matter arose for decision, to interpret s 10(2) of the 1984 Act in accordance with the common law in this respect also. However, the point does not arise for decision in the present case, and I need say no more about it.
For the reasons I have given, I would dismiss the appeal, and I would answer the certified question in the manner proposed by my noble and learned friend Lord Brandon.
Appeal dismissed.
Solicitors: Francis & Francis, Wembley; Crown Prosecution Service; Christopher Snowling, Director, Legal Aid (for the Law Society).
Mary Rose Plummer Barrister.
Edwin Hill & Partners (a firm) v First National Finance Corp plc
[1988] 3 All ER 801
Categories: TORTS; Other Torts
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): SIR NICOLAS BROWNE-WILKINSON V-C, NOURSE AND STUART-SMITH LJJ
Hearing Date(s): 28, 29, 30 JUNE, 22 JULY 1988
Tort – Interference with contractual relations – Justification – Equal or superior right – Mortgagee entering into arrangement with mortgagor for development of property – Mortgagee requiring mortgagor to terminate contract with architect as condition of development – Whether mortgagee justified in interfering with contract between mortgagor and architect.
The defendant finance company provided a substantial loan, secured by a legal charge, to a property developer, P, to enable him to develop a property. P engaged the plaintiffs as architects but was unable to get the development started. In the mean time the interest on the loan accrued to such an extent that he was unable to repay the loan while the proceeds of the property if it were to be sold in its undeveloped state would be insufficient to cover the loan. The defendants agreed in those circumstances to finance the development themselves instead of exercising their power of sale but as a condition of their becoming involved in the development they insisted that P should dismiss the plaintiffs as architects for the development. The plaintiffs brought an action against the defendants alleging that they had unlawfully procured P to breach his contract with the plaintiffs. The judge dismissed their claim on the grounds that the defendants’ interference with the plaintiffs’ contract with P was justified. The plaintiffs appealed.
Held – If the defendant had an equal or superior right which would justify him in interfering with the plaintiff’s contractual rights with a third party he would not be liable to the plaintiff if instead of exercising his strict legal rights he reached an accommodation with the third party which had the effect of interfering with the contract between the plaintiff and the third party. Thus if a mortgagee chose to enter into an arrangement with the mortgagor for the development of the property instead of exercising his power of sale or appointing a receiver and as a condition of the development required an existing contract between the mortgagor and an architect to be terminated the architect had no cause of action against the mortgagee. On the facts, the defendants’ right to receive payment of principal and interest on the loan to P was a superior right which justified their interference with the plaintiffs’ contract with P. The appeal would therefore be dismissed (see p 805 h j, p 807 e to p 808 b e to h, p 809 b to e g h and p 810 a b, post).
Read v Friendly Society of Operative Stonemasons of England Ireland and Wales [1902] 2 KB 732, South Wales Miners’ Federation v Glamorgan Coal Co Ltd [1904–7] All ER Rep 211 and Winters v University District Building and Loan Association (1932) 268 Ill App 147 considered.
Notes
For interference with contractual relationships, see 45 Halsbury’s Laws (4th edn) paras 1518–1523, and for cases on the subject, see 46 Digest (Reissue) 571–589, 6326–6396.
Cases referred to in judgments
Brimelow v Casson [1924] 1 Ch 302, [1923] All ER Rep 40.
De Jetley Marks v Lord Greenwood [1936] 1 All ER 863.
Merkur Island Shipping Corp v Laughton [1983] 2 All ER 189, [1983] 2 AC 570, [1983] 2 WLR 778, HL.
Mogul Steamship Co Ltd v McGregor Gow & Co (1889) 23 QBD 598, [1891–4] All ER Rep 263, CA; affd [1892] AC 25, [1891–4] All ER Rep 263, HL.
Page 802 of [1988] 3 All ER 801
Pratt v British Medical Association [1919] 1 KB 244, [1918–19] All ER Rep 104.
Read v Friendly Society of Operative Stonemasons of England Ireland and Wales [1902] 2 KB 732, CA varying [1902] 2 KB 88, DC.
Smithies v National Association of Operative Plasterers [1909] 1 KB 310, [1908–10] All ER Rep 455, CA.
South Wales Miners’ Federation v Glamorgan Coal Co Ltd [1905] AC 239, [1904–7] All ER Rep 211, HL affg [1903] 2 KB 545, CA.
Thomson (D C) & Co Ltd v Deakin [1952] 2 All ER 361, [1952] Ch 646, CA.
Winters v University District Building and Loan Association (1932) 268 Ill App 147, Ill App Ct, 3rd Dist.
Cases also cited
Barretts & Baird (Wholesale) Ltd v Institution of Professional Civil Servants [1987] IRLR 3.
Camden Nominees Ltd v Slack [1940] 2 All ER 1, sub nom Camden Nominees Ltd v Forcey [1940] Ch 352.
Crofter Hand Woven Harris Tweed Co Ltd v Veitch [1942] 1 All ER 142, [1942] AC 435, HL.
Dirassar & James v National Trust Co Ltd (1966) 58 WWR 257, BC CA; affd 62 WWR 128, Can SC.
Greig v Insole [1978] 3 All ER 449, [1978] 1 WLR 302.
Independent Oil Industries Ltd v Shell Co of Australia Ltd (1937) 37 SR (NSW) 394, NSW SC.
Knapp v Penfield (1932) 256 NYS 41, NY SC.
Appeal
The plaintiffs, Edwin Hill & Partners (a firm), appealed against the order of Rose J made on 31 July 1987 dismissing their claim for damages against the defendants, First National Finance Corp plc, for procuring breach of a contract between the plaintiffs and Leakcliff Properties Ltd and Alan Pulver. The facts are set out in the judgment of Stuart-Smith LJ.
Igor Judge QC and Richard Davies for the plaintiffs.
Colin Smith QC and Andrew Onslow for the defendants.
Cur adv vult
22 July 1988. The following judgments were delivered.
STUART-SMITH LJ (giving the first judgment at the invitation of Sir Nicolas Browne-Wilkinson V-C). This is an appeal from the judgment of Rose J in which he dismissed the plaintiffs’/appellants’ claim for damages against the defendants/respondents for procuring breach of a contract between the plaintiffs on the one hand and Leakcliff Properties Ltd (Leakcliff) and Mr Alan Pulver on the other.
The plaintiffs are a firm of surveyors who for several years before 1973 had provided architectural services for their clients. Among such clients was Mr Pulver, a solicitor and property developer. Mr Pulver’s property developments were carried out through various companies, of which Leakcliff was one. The finance for these developments was raised from the defendants who are bankers.
In November 1973 the defendants provided an on-demand overdraft facility to enable Mr Pulver to purchase freehold and leasehold property in Waterloo Road, which became known as Wellington House. The facility was originally made available to another of Mr Pulver’s companies, but it was switched to Leakcliff. Repayment was guaranteed by Mr Pulver. At about the same time Mr Pulver agreed with the plaintiffs that if the development of Wellington House went ahead they would be the architects who would see the development through to a conclusion. And when it was decided that Leakcliff were to be the developers, the plaintiffs’ contract was with them, as well as with Mr Pulver.
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Shortly after the purchase of the property, the market collapsed and the government imposed the need for office development permits (ODPs). These two events effectively put an end to the immediate prospects of developing the site. Over the next five and a half years Mr Pulver and the plaintiffs struggled to put together schemes that would enable the development to go ahead. They did so against the inexorable increase in the interest due to the defendants. It is only necessary to recite a few of the events in the history.
As a term of the loan agreement the defendants were entitled to a charge on the properties; initially there were two such charges, one for the freeholds and one for the leaseholds. In due course the freehold reversion was purchased, the overdraft being extended to cover this and one legal charge on all the property was executed on 21 August 1976. Meanwhile an ODP had been obtained. In March 1977 planning permission for the redevelopment of the site was granted, based on the plaintiffs’ drawings. The original loan was for a sum not exceeding £5m, but from time to time it was extended. Mr Pulver’s attempts to raise finance from other sources to finance the development were unsuccessful. The reason for this was that since the property was already mortgaged up to the hilt and beyond, to secure the overdraft with the defendants, no security could be offered to another financier unless the defendants would give up their first mortgage, which understandably they were unwilling to do. Suggestions by Mr Pulver to the defendants that they themselves should finance the development, or ‘build out’ to use the jargon, were rejected.
By 1979 the overdraft had reached about £9m, mostly in accumulated interest. But the market in office property had considerably improved. The defendants were faced with three alternatives. First they could call in the loan, which neither Leakcliff nor Mr Pulver could begin to pay, and exercise their power of sale under the charge; this would result in a substantial loss. Second they could agree to finance being raised elsewhere. By about February 1979 a deal was very close with Manufacturers Hanover Trust which would have enabled the development to go ahead. Third the defendants could finance the build-out themselves out of their own cash flow. In effect this would involve further advances to Leakcliff with the prospect that at the end of the day all their outlay together with interest would be recouped. In the event the defendants chose the third alternative; but in so doing they insisted that the plaintiffs should be replaced as architects by a prestigious firm. The defendants considered that this was necessary if the development was to be successfully marketed. They insisted therefore that Mr Pulver should dismiss the plaintiffs; he was reluctant to do so; but he had no alternative. Their contract was terminated about 6 March 1979. It is important to emphasise that there has never been any complaint or criticism of the plaintiffs’ competence or skill.
In the course of an admirably clear and concise judgment the judge made the following important findings and in so doing held that four of the five necessary ingredients of the tort of wrongful interference with contract were established: (1) that there was direct interference by the defendants with the plaintiffs’ contract with Leakcliff. There was inducement, pressure and procuration. Mr Pulver only dispensed with their services because the defendants insisted that he did so; (2) that the defendants knew that the plaintiffs were employed by Leakcliff under a binding contract to the end of the development and had sufficient knowledge that their conduct would interfere with that contract; (3) that the defendants intended to bring the plaintiffs’ contract to an end. This conclusion is challenged by the defendants in their cross-notice. In this connection the judge found (a) that the defendants had decided to finance the ‘build-out’ by about 20 February 1979 and that it was an integral part of the decision that the plaintiffs should not be the architects, (b) that the defendants knew that Mr Pulver had no effective choice but to dismiss the plaintiffs; it was not just foreseeable, but an inevitable consequence of their decision; (4) that the defendants’ interference had caused damage to the plaintiffs. This was not in issue; if liability is established the extent of the damage remains to be determined by the official referee.
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But he held that the plaintiffs failed on the last ingredient, namely that the defendants’ conduct must not have been justified. It is in relation to this conclusion that the plaintiffs appeal.
The judge held that the onus of proving justification was on the defendants. There is no dispute before us that this is correct; but nothing turns on it.
I propose to set out in full the judgment in this matter. Rose J said:
‘As I have indicated, the question here is: did the defendants have an equal or superior right? This, in my judgment, is an entirely separate matter from intention. It is clear from the evidence of Mr Rutter, to which I have just referred, that the defendants deliberately chose, for commercial reasons, not to exercise their rights under the legal charge. Mr Dyer, too, said, “I wouldn’t have been very keen on building out with a receiver under the mortgage because we, like Mr Pulver, liked people working alongside us.” [Mr Rutter and Mr Dyer were both acting for the defendants.] And it cannot, in my judgment, be said that the defendants believed they were, or indeed gave any thought to the possibility that they might be, exercising rights equivalent to those under the legal charge. But that is not the end of the matter, for the defendants’ belief about their rights does not provide the proper test. What is, in my judgment, material in the present case is not just that the defendants had a legal charge at the time they interfered with the plaintiffs’ contract, but that they had agreed to provide Mr Pulver with finance, subject to a first legal charge, at the very outset in November 1973. It is common ground that such a charge would give the defendants the right to sell the property and appoint a receiver and therefore that such rights were implicit in the defendants’ provision of finance from the beginning. Had the defendants not provided finance, Mr Pulver would not have been in a position to retain the plaintiffs’ services for this project. He required financial backing in order to purchase the property; and the defendants’ backing came at or about the time when the property market started to collapse and only a month before the government’s embargo on office development. If the defendants had not provided finance at the time they did, it is inconceivable that others would have done so, shortly afterwards. In my view this timetable of events points at least to priority in the defendants’ rights. Furthermore, both as envisaged in November 1973 and as ultimately executed, this charge was not for a specific sum. It secured all the moneys due to the defendants on the overdraft. It is not therefore apt to describe the defendants as entering into a new contract when they financed the development. They were making further advances on the basis of a security which already existed. In these circumstances, I am satisfied that the defendants did have equal or superior rights to those of the plaintiffs and that (to the extent that this is material) they acted reasonably to protect their interests in accordance with those rights. It follows that, in my judgment, the defendants were legally justified in acting as they did. Accordingly, the plaintiffs’ claim fails.’
Counsel for the plaintiffs submits that although the judge posed the correct test, namely whether the defendants had an equal or superior right to that of the plaintiffs, he reached the wrong conclusion in law, because he confused the defendants’ commercial interests with the required legal right sustainable under the civil law deriving from their contract. He accepted that if the defendants had exercised their rights under the legal charge, such exercise might have had the effect of interfering with the plaintiffs’ contract and had that been the case the defendants would have been justified. For example if they had called in the loan and exercised their power of sale, this would have had the inevitable consequence of putting an end to the plaintiffs’ contract; but such action would have been justified. But, he submits, if for their own commercial advantage they elect not to exercise any of their legal rights but instead adopt a course of conduct which intentionally interferes with the plaintiffs’ contract, they are not justified and must pay.
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Counsel for the defendants submitted that the judge’s approach was correct. He contended that where the interferer’s conduct is within the ambit or compass of his legal rights he is justified. By this phrase he means that if the defendants, instead of exercising their full legal rights of calling for repayment of the loan and exercising their powers of sale or appointment of a receiver, reach some accommodation with the mortgagor, which is more beneficial both to themselves and the mortgagor, they should not be held to lose the justification which they would have had if they had exercised the remedies available to them in the strict sense.
Alternatively he submits that the question of justification should be approached by what he called the ‘broad brush’ approach adumbrated by Romer LJ in Glamorgan Coal Co Ltd v South Wales Miners’ Federation [1903] 2 KB 545. This is a convenient starting point for a consideration of the authorities. Romer LJ said (at 574):
‘I respectfully agree with what Bowen L.J. said in [Mogul Steamship Co Ltd v McGregor Gow & Co (1889) 23 QBD 598 at 618, [1891–4] All ER Rep 263 at 281], when considering the difficulty that might arise whether there was sufficient justification or not: “The good sense of the tribunal which had to decide would have to analyze the circumstances and to discover on which side of the line each case fell.” I will only add that, in analyzing or considering the circumstances, I think that regard might be had to the nature of the contract broken; the position of the parties to the contract; the grounds for the breach; the means employed to procure the breach; the relation of the person procuring the breach to the person who breaks the contract; and I think also to the object of the person in procuring the breach. But, though I deprecate the attempt to define justification, I think it right to express my opinion on certain points in connection with breaches of contract procured where the contract is one of master and servant. In my opinion, a defendant sued for knowingly procuring such a breach is not justified of necessity merely by his shewing that he had no personal animus against the employer, or that it was to the advantage or interest of both the defendant and the workman that the contract should be broken.’
Stirling LJ’s judgment is to the same effect (at 577).
When the case reached the House of Lords ([1905] AC 239, [1904–7] All ER Rep 211) nothing was said by any members of the House to suggest that this was the wrong approach. Lord Lindley expressed entire agreement with the judgments of Romer and Stirling LJJ (see [1905] AC 239 at 252, [1904–7] All ER Rep 211 at 218). The other members of the House contented themselves with saying that the alleged justification did not amount to such in law. In my judgment it matters not that some of their Lordships treated the case as both conspiracy and wrongful interference with contracts (see for example [1905] AC 239 at 244, [1904–7] All ER Rep 211 at 244 per the Earl of Halsbury LC).
Counsel for the plaintiffs submitted that in the Glamorgan case the supposed justification was a duty to act in what was conceived to be the interests of both parties to the contract and that accordingly Romer LJ’s test or approach should be confined to such cases, and should not extend to cases where the interferer’s conduct is sought to be justified by reference to some equal or superior legal right. But I cannot see that the proposition should be so limited; in my judgment the courts have over the years worked on this principle, holding that some cases fall on one side of the line, others on the other.
Thus the following matters have been held not to amount to justification. (1) Absence of malice or ill-will or intention to injure the person whose contract is broken: Smithies v National Association of Operative Plasterers [1909] 1 KB 310, [1908–10] All ER Rep 455 and South Wales Miners’ Federation v Glamorgan Coal Co Ltd [1905] AC 239, [1904–7] All ER Rep 211. (2) The commercial or other best interests of the interferer or the contract breaker: Read v Friendly Society of Operative Stonemasons of England Ireland and Wales [1902] 2 KB 88 at 97, [1902] 2 KB 732 at 737 per Darling J and Collins MR, the Glamorgan
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case [1905] AC 239 at 252, [1904–7] All ER Rep 211 at 217–218 per Lord James, Pratt v British Medical Association [1919] 1 KB 244 at 266, [1918–19] All ER Rep 104 at 115 per McCardie J and De Jetley Marks v Lord Greenwood [1936] 1 All ER 863 at 873 per Porter J. (3) The fact that A has broken his contract with X does not of itself justify X in revenge procuring a breach of an independent contract between A and B: Smithies v National Association of Operative Plasterers [1909] 1 KB 310 esp at 337, [1908–10] All ER Rep 455 esp at 467 per Buckley LJ.
On the other side of the line justification has been said to exist where (1) there is a moral duty to intervene, as for example in Brimelow v Casson [1924] 1 Ch 302, [1923] All ER Rep 40, where it was held that the defendants were justified in their actions since they owed a duty to their calling and its members to take all necessary steps to compel the plaintiff to pay his chorus girls a living wage so that they were not driven to supplement their earnings through prostitution, (2) where the contract interfered with is inconsistent with a previous contract with the interferer: see per Buckley LJ in Smithies’s case [1909] 1 KB 310 at 337, [1908–10] All ER Rep 455 at 467:
‘No doubt there are circumstances in which A. is entitled to induce B. to break a contract entered into by B. with C. Thus, for instance, if the contract between B. and C. is one which B. could not make consistently with his preceding contractual obligations towards A., A. may not only induce him to break it, but may invoke the assistance of a Court of Justice to make him break it. If B. having agreed to sell a property to A. subsequently agrees to sell it to C., A. of course may restrain B. by injunction from carrying out B.’s contract with C., and the consequence may ensue that B. will be liable to C. in damages for breaking it.’
This leads one to a consideration of the important case of Read v Friendly Society of Operative Stonemasons of England Ireland and Wales [1902] 2 KB 88. Darling J said (at 96–97):
‘I think their sufficient justification for interference with plaintiff’s right must be an equal or superior right in themselves, and that no one can legally excuse himself to a man, of whose contract he has procured the breach, on the ground that he acted on a wrong understanding of his own rights, or without malice, or bonâ fide, or in the best interests of himself, nor even that he acted as an altruist, seeking only the good of another and careless of his own advantage.’
Rose J adopted this test, namely whether the defendants had an equal or superior right in themselves. And much of the argument before us has been directed to the question whether he was right to hold that they did.
It is important to appreciate some of the salient facts in Read’s case and the course which was taken in the courts. The plaintiff was 25 years old and the son of a mason. He entered into a contract with Wigg & Wright under which he agreed to work for three years at 15s a week, which were ordinary labourer’s wages; in return Wigg & Wright were to instruct and teach him in the trade and business of a mason. Wigg & Wright were members of the defendant society. One of the rules of the society provided that—
‘boys entering the trade shall not work more than three months without being legally bound apprentice, and in no case to be more than sixteen years of age, except mason’s sons and stepsons. Employers to have one apprentice to every four masons on an average.’
On learning of the plaintiff’s contract the defendants threatened that their members employed by Wigg & Wright would strike if the plaintiff started work on the terms of his contract. As a result Wigg & Wright terminated the plaintiff’s contract.
The county court judge held that the defendants were justified because they had acted in the best interests of their society. The majority of the Divisional Court, consisting of Darling and Channell JJ, ordered a retrial on the basis that it could not be determined
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whether the contract between Wigg & Wright and the defendants was a valid enforceable contract or was in restraint of trade or affected by the Trade Union Act 1871. It is clear however that they considered that if it was a valid contract it might have afforded justification for what the defendants did. Lord Alverstone CJ would have allowed the appeal. He said ([1902] 2 KB 88 at 97–98):
‘In my opinion, the evidence establishes that in this case the defendants, instead of taking action against Messrs. Wigg & Wright for a supposed breach by them of the contract (if any) embodied in the rules of the association, did for their own ends procure and induce Messrs. Wigg & Wright to commit an actionable wrong—that is to say, to break the terms of a special contract made with the plaintiff.’
He doubted whether the first part of the rule had any application; but held that if there was a breach of the second part, as to there being one apprentice to every four masons, the defendants were confined to taking action to enforce this, and were not justified in procuring a breach of the plaintiff ‘s contract.
In the Court of Appeal ([1902] 2 KB 732) Collins MR, with whom Cozens-Hardy LJ agreed, considered the case to be one of conspiracy and that even if the defendants had an enforceable contract with Wigg & Wright and the latter were in breach of its terms, which he doubted, that could not justify both the illegal act and the illegal means adopted, ie the coercion of Wigg & Wright by the threat of strike action.
Stirling LJ held that on the true construction of the rule it did not apply to the plaintiff and therefore Wigg & Wright were not in breach. Consequently a mistaken, albeit honest, belief that Wigg & Wright were in breach was no justification. He specifically reserved his opinion on the question whether, if the contract had been such as the defendants believed it to be, they would have been justified in point of law in doing what they did.
The submission of counsel for the plaintiffs to us is to the effect that the words ‘sufficient justification for interference with plaintiff’s right must be an equal or superior right in themselves’ must be confined to the exercise of that right by the defendant. But I can find no warrant for this proposition and in my judgment it confuses right with the remedies available to protect the right. The defendants had the rights of a secured creditor, that is to say the right to be repaid their loan together with interest; in support of that right they had the remedies or rights granted by the legal charge and the law, namely to sell the land or appoint a receiver. They were not bound to exercise these remedies in defence of their rights, but they could do so. Had they done so, it is common ground, at least in so far as the power of sale and I think probably also on the appointment of a receiver, that the plaintiffs’ contract would have come to an end. If instead of exercising these remedies in their full rigour, they reach an accommodation with the mortgagor in defence and protection of their right as secured creditor, which has the same result of putting an end to the plaintiffs’ contract, it would in my judgment be anomalous and illogical if they were justified in the one case but not in the other. Nor can it make any difference that the accommodation reached is one that is more beneficial to the defendants and Mr Pulver than the straightforward exercise of the right of sale or appointment of a receiver.
Why, it may be asked, should the defendants be justified in interfering with the plaintiffs’ contract if they exercise their power of sale as mortgagee in possession, but not if by agreement they permit the mortgagor to conduct the sale in the hope of achieving a better deal for both? Why should they be justified if they appoint a receiver, who has power to build-out the development and appoint architects, but not if they agree to finance the mortgagor to perform this task? I cannot find any logical answer to these questions.
Moreover, I think it would be undesirable if the law were to insist that a mortgagee in such a position should exercise his strict legal rights if he is to be justified in interference with contracts between the mortgagor and third parties, and could not be justified if he;
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reached some sensible and reasonable accommodation which may be to the benefit of both himself and the mortgagor, but which has the same effect on the third parties’ contract. The accommodation is designed to protect or defend the mortgagee’s equal or superior right as a secured creditor, who had in this case financed the entire purchase and development of the site so far. And the accommodation was reached against the background of the remedy of sale or the appointment of a receiver. There can be no doubt that these rights existed once a formal demand for payment was made, a demand which could not have been met.
We have been referred to a number of cases in foreign jurisdictions. In my judgment none are of any assistance save Winters v University District Building and Loan Association (1932) 268 Ill App 147. The plaintiff entered into a written contract with S to convey his land in Champaign County, Illinois to S subject to a mortgage indebtedness to the defendants in the sum of $9,500 (which may well have exceeded the value of the property) in consideration of S conveying land in Bond County to the plaintiff, subject to an indebtedness of $1,500. The defendants, by their secretary B, procured a breach of this contract by telling S that the land at Champaign had depreciated in value and that the defendants would require double security, which apparently meant that payment was to be made a year in advance. Shurtleff J, giving the judgment of the Illinois Appellate Court, said (at 159):
‘The “gist” of all these cases is that defendant in error has the right to look after all of its interests in the property in question and protect its rights willfully and conclusively, and if defendant in error, while engaged lawfully and legally within its legal rights, even with malice interferes with the contracts and combinations of others, it is not actionable.’
This case appears to me to be the nearest case on the facts to the present.
Justification for interference with the plaintiff’s contractual right based on an equal or superior right in the defendant must clearly be a legal right. Such right may derive from property real or personal or from contractual rights. Property rights may simply involve the use and enjoyment of land or personal property. To give an example put in argument by Sir Nicolas Browne-Wilkinson V-C, if X carries on building operations on his land, they may to the knowledge of X interfere with a contract between A and B to carry out recording work on adjoining land occupied by A. But, unless X’s activity amounts to a nuisance, he is justified in doing what he did. Alternatively, the law may grant legal remedies to the owner of property to act in defence or protection of his property; if in the exercise of these remedies he interferes with a contract between A and B of which he knows, he will be justified. If instead of exercising those remedies he reaches an accommodation with A, which has a similar effect of interfering with A’s contract with B, he is still justified notwithstanding that the accommodation may be to the commercial advantage of himself or A or both. The position is the same if the defendant’s right is to a contractual as opposed to a property right, provided it is equal or superior to the plaintiff’s rights.
In my judgment that is the position in this case; I therefore agree with the judge’s conclusion and would dismiss the appeal.
In these circumstances it is not necessary to deal with the cross-appeal on the issue of intent. But, since I have reached a clear conclusion on this matter, in deference to counsel’s argument I propose to state it shortly. The submission of counsel for the defendants was that the necessary intention to interfere with the plaintiff’s contract is not established unless the defendant’s conduct is aimed at the plaintiff and there is a desire to injure him. In support of this proposition he relied on the dictum of Evershed MR in D C Thomson & Co Ltd v Deakin [1952] 2 All ER 361 at 367, [1952] Ch 646 at 676–677.
I cannot accept this submission. It plays no part in the formulation of the tort propounded by Jenkins or Morris LJJ (see [1952] 2 All ER 361 at 379–380, 384, [1952]
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Ch 646 at 696–697, 702). Jenkins LJ’s statement of the tort was indorsed by the House of Lords in Merkur Island Shipping Corp v Laughton [1983] 2 All ER 189 at 196, [1983] 2 AC 570 at 608 per Lord Diplock. Moreover it seems to me to be directly contrary to the binding authority of the Court of Appeal in Smithies v National Association of Operative Plasterers [1909] 1 KB 310 at 316, where there was an express finding of fact that the defendants did not intend to injure the plaintiff or the dismissed workman Gibbs; yet nevertheless the claim succeeded.
NOURSE LJ. I agree. The principal question is whether the defendants’ interference with the plaintiffs’ contract with Leakcliff was justified by an equal or superior right in themselves. Immediately before the interference the defendants were at liberty to demand from Leakcliff the principal moneys then owing on the overdraft, plus interest to date. If a demand had been made, the defendants’ right to payment would have been perfected. If payment had not been made, they could have either sued on the personal covenant or, as legal mortgagees, exercised one or other of the statutory powers to sell the property or appoint a receiver under s 101(1)(i) and (iii) of the Law of Property Act 1925 as supplemented by the terms of the legal charge dated 31 August 1976. If the power of sale had been exercised, the plaintiffs’ contract with Leakcliff would necessarily have come to an end, and it was accepted by counsel for the plaintiffs that that interference would have been justified by the superior right vested in the defendants by virtue of the legal charge. Equally, I am of the opinion that on the true construction of cl 4(A)(i) and (ix) and (D) of the legal charge, the terms of which need not be recited, a receiver appointed by the defendants would have had power to employ new architects and that that form of interference would likewise have been justified.
The defendants did not demand payment from Leakcliff and they did not seek to sell the property or appoint a receiver. Instead they agreed to make further advances to Leakcliff, but on terms that Leakcliff’s contract with the plaintiffs was terminated and new architects appointed in their place.
Was that interference justified by an equal or superior right in the defendants? To my mind the most formidable of the plaintiffs’ arguments were, first, that the defendants had entered into a new contract with Leakcliff and, second, that they had done so in their own commercial interests. No doubt it is correct to say that there was a new contract. But any variation of an existing contract has that result and I cannot think that the defence of justification is so circumscribed as to apply only where the pre-existing contract has not been varied in any respect. Here the more important consideration is not the variation in the amount of the advances, but the existence of the relationship between Leakcliff and the defendants of mortgagor and mortgagees. It was that relationship which enabled the defendants reasonably to request the dismissal of the plaintiffs. It was that relationship which, if the request had been refused, would have enabled them to take some other course leading, albeit incidentally, to the same result. The superior right in the defendants, to which the remedies of a secured creditor were merely ancillary, was to receive payment from Leakcliff of principal and interest. The new contract, no less than the alternative steps which could have been taken under the old, was solely intended to support and assist that right. The interference was therefore justified.
As for the second objection, no doubt it is again correct to say that the new contract was entered into in the defendants’ own commercial interests, in the sense that they had an interest in getting their money back plus interest. But that was an interest under the pre-existing contract and not the extraneous kind of general commercial interest which was under consideration in the authorities to which Stuart-Smith LJ has referred. Had the purpose of the new contract been to give the defendants a profit over and above that which would have come to them through a return of principal plus interest at a normal rate, the position might have been different. But that was not what happened in the present case and this objection therefore fails.
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For these reasons, as well as for those stated by Stuart-Smith LJ, I think that the conclusion at which Rose J arrived was entirely correct and I have nothing to add on the issue of intent. Accordingly, I too would dismiss this appeal.
SIR NICOLAS BROWNE-WILKINSON V-C. I agree with both judgments.
Appeal dismissed. Leave to appeal to the House of Lords refused.
Solicitors: Rowe & Maw (for the plaintiffs); Titmuss Sainer & Webb (for the defendants).
Celia Fox Barrister.
The Evpo Agnic
[1988] 3 All ER 810
Categories: SHIPPING
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): LORD DONALDSON OF LYMINGTON MR, BUTLER-SLOSS LJ AND SIR ROUALEYN CUMMING-BRUCE
Hearing Date(s): 7, 8, 14 JULY 1988
Admiralty – Jurisdiction – Action in rem – Arrest of ship – Ship belonging to sister company of owner – Whether power of arrest extending to ship owned by sister company – Supreme Court Act 1981, s 21.
The right to arrest a ship in rem under s 21a of the Supreme Court Act 1981 is restricted to the particular ship in connection with which a claim arose, ships in the same ownership as the particular ship and ships which the owner of the particular ship has transferred into different legal ownership while retaining beneficial ownership of the shares in that ship, but does not extend to a ship of a sister company of the owner of the particular ship (see p 815 e to g, post.
Notes
For the arrest of ships in actions in rem, see 1 Halsbury’s Laws (4th edn) para 366, and for cases on the subject, see 1(1) Digest (Reissue) 294, 1762–1763.
For the Supreme Court Act 1981, s 21, see 1 Halsbury’s Statutes (4th edn) 23.
Cases referred to in judgments
Aventicum, The [1978] 1 Lloyd’s Rep 184.
I Congreso del Partido [1978] 1 All ER 1169, [1978] QB 500, [1977] 3 WLR 778, CA.
Jade, The, The Eschersheim [1976] 1 All ER 920, [1976] 1 WLR 430, HL.
Maritime Trader, The [1981] 2 Lloyd’s Rep 153.
Saudi Prince, The [1982] 2 Lloyd’s Rep 255.
Cases also cited
IRC v Sansom [1921] 2 KB 492, CA.
R v Arnand (1846) 9 QB 806, 115 ER 1485.
Interlocutory appeal
The defendants, the owners of the vessel Evpo Agnic, appealed with the leave of the judge against the decision of Sheen J on 23 February 1988 whereby he ordered the defendants to disclose all documents relating to the ownership of the vessels Skipper 1 and Evpo Agnic and adjourned, pending discovery, further consideration of the
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defendants’ application to set aside (i) a writ in rem obtained by the plaintiffs, the owners of a cargo of shredded steel scrap lately laden on board the Skipper 1, claiming, inter alia, damages for breach of contract after that cargo was lost when the Skipper 1 sank in 1987, and (ii) a warrant of arrest for the Evpo Agnic, also obtained by the plaintiffs on the basis of affidavit evidence which indicated that the defendants also owned the Skipper 1. The facts are set out in the judgment of Lord Donaldson MR.
M N Howard QC and Nigel Meeson for the defendants.
Kenneth Rokison QC and Stephen Ruttle for the plaintiffs.
Cur adv vult
14 July 1988. The following judgments were delivered.
LORD DONALDSON OF LYMINGTON MR. This appeal from an order of Sheen J, sitting as Admiralty judge, concerns the arrest of a putative sister ship and is said, probably rightly, to raise novel and important issues.
The story begins on some unrevealed date in 1987 when, in unrevealed circumstances, the Skipper 1 sank at some unrevealed place. The plaintiffs’ claim, in the time-honoured phrase, to be ‘the owners of the cargo lately laden on board the ship Skipper 1’. The cargo was shredded steel scrap shipped at Boston under a bill of lading dated 24 April 1987 for carriage to Turkey. The bill of lading was signed on behalf of the master.
On 28 January 1988 the plaintiffs issued a writ in an Admiralty action in rem against ‘the Owners of the Ship or Vessel “Evpo Agnic”’ and on 1 February 1988 they applied for a warrant for the arrest of that ship. The application was supported by an affidavit sworn by Miss Fairhurst, a legal assistant in the employ of Messrs Clyde & Co, the plaintiffs’ solicitors. She swore two further affidavits at later stages, but this was the affidavit which led to the issue of the warrant and to the arrest of the Evpo Agnic.
Miss Fairhurst made the following points. (i) The plaintiffs’ claim against the owners of the ship or vessel Evpo Agnic, who are, or were, at all material times the owners of the ship or vessel Skipper 1, is for damages for breach of an oral and/or written contract and/or duty in and about the loading, handling, custody and care of the plaintiffs’ cargo and the carriage thereof on board the defendants’ ship or vessel Skipper 1 in the year 1987. (ii) The person who would be liable in an action in personam (the relevant person) when the cause of action arose against the Skipper 1 is also the beneficial owner as respects all the shares in the ship or vessel Evpo Agnic at the time the writ was issued. (iii) The Skipper 1 was at all material times owned by Skipper Shipping Co SA of Panama and was managed by Pothitos Shipping Co SA of Panama. (iv) The shareholders in Skipper Shipping Co SA were Rodolfo Silva Batista and Jose Ignacio de Sedas, each holding one share in the company. The president/director and vice-president/director were respectively Evangelos Pothitos and Dimitrios Kapsarachis. In a subsequent affidavit Miss Fairhurst corrected this information, having been told that the two alleged shareholders may only have a right to become shareholders which, it appears, is sufficient for the purposes of the formation of a Panamanian company. Nothing turns on this. (v) The Evpo Agnic is and was at all material times owned by Agnic Shipping SA of Panama. (vi) The shareholders, or those having a right to become shareholders, in Agnic Shipping SA and that company’s president/director and vice-president/director were the same individuals as was the case with Skipper Shipping Co SA.
Miss Fairhurst’s conclusion was expressed in the following terms:
‘(13) Thus, although prima facie the “SKIPPER 1” and “EVPO AGNIC” are owned by separate one ship-owning companies, it becomes clear on lifting the veil of incorporation that the shareholders in each of these companies are the same, and their President/Director and Vice President/Director are also the same.
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(14) In the circumstances it is my belief that the owners of the Vessel “SKIPPER 1” were on the date of the issue of the Writ herein beneficial Owners as respects all shares in the Ship or Vessel “EVPO AGNIC”, and that it is clearly the case that the two separate companies which are the registered owners according to Lloyd’s Records, are part of an arrangement which has the effect of covering up the true ownership of these Vessels. Such being the case I respectfully submit that the Court should lift the corporate veil in order to determine that the “relevant person”, who would be liable on an action in personam, is also the present beneficial owner of all shares in the “EVPO AGNIC“.’
The warrant was issued on 18 February 1988 and the Evpo Agnic was arrested in Cardiff on the following day. It is only fair to say that if there was any doubt about whether Miss Fairhurst was alleging that the registered owners of the Skipper 1 were the beneficial owners of the Evpo Agnic or that both vessels were in the same beneficial ownership, which could, of course, be that of a third party, she made the latter allegation in a telex message to the defendants’ solicitors immediately before the arrest.
On 23 February 1988 Sheen J heard an application by the defendants to set aside the writ and the warrant for arrest. In the light of the fact that the matter was very urgent, he gave his decision without reasons. That decision was to order the defendants to disclose all documents relating to the ownership of the vessels Skipper 1 and Evpo Agnic and to adjourn further consideration of the application to set aside the writ and warrant until after such disclosure. He also gave leave to appeal to this court.
Subsequently, with a view to assisting this court, Sheen J sent the parties a note of his reasons. He recorded that counsel appearing for the defendants had submitted that this was a simple case of two ships owned by different corporate entitities which could not be sister ships. He then referred to his own decision in The Maritime Trader [1981] 2 Lloyd’s Rep 153 in which he had held that the only vessels which might be arrested in respect of a maritime claim were the particular ship in respect of which the claim arose and any other ship in the same ownership, and that a shareholder had no property, legal or equitable, in the assets of a company, adding that he did not wish to retract anything which he had said in that judgment. He then referred to the judgment of Slynn J in The Aventicum [1978] 1 Lloyd’s Rep 184 at 187 and reviewed the evidence, including evidence relating to mortgages. It is not entirely clear what evidence he had as to mortgages and it may well be that he had all or some of the information given to this court in a further affidavit by Miss Fairhurst sworn after the hearing before him. This tended to show that a number of Panamanian vessels, including the Skipper 1 and the Evpo Agnic, each of which had a different Panamanian company as the registered owner, were all managed as a fleet by Pothitos Shipping Co SA, also of Panama, but carrying on business in Greece, and that part of the money required to enable the fleet to be acquired or run was raised by something in the nature of a fleet loan secured by mortgages of individual vessels in the fleet, including the Evpo Agnic, but not the Skipper 1. Sheen J’s conclusion was expressed in these terms:
‘[Counsel] says that the totality of the evidence shows that there is good reason to investigate the true beneficial ownership of the Evpo Agnic. He persuaded me that this is one of those cases in which such an investigation is called for.’
The basis of the Admiralty jurisdiction of the High Court is to be found in ss 20 to 24 of the Supreme Court Act 1981, the power of arrest being contained in s 21. The forerunner of s 21 is to be found in Pt I of the Administration of Justice Act 1956, the purpose of which, not entirely achieved, was to bring the right of arrest in rem in the English courts into conformity with the International Convention relating to the Arrest of Sea-going Ships signed on behalf of the United Kingdom in 1952 (Brussels, 10 May 1952; TS 47(1960); Cmnd 1128) (see The Jade, The Eschersheim [1976] 1 All ER 920, [1976] 1 WLR 430). It follows that, as Lord Diplock said in The Jade [1976] 1 All ER 920 at 924, [1976] 1 WLR 430 at 436—
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‘if there be any difference between the language of the statutory provision and that of the corresponding provision of the convention, the statutory language should be construed in the same sense as that of the convention if the words of the statute are reasonably capable of bearing that meaning.’
The relevant article of the 1952 convention is expressed in the following terms:
‘Article 3
(1) Subject to the provisions of paragraph (4) of this Article and of Article 10, a claimant may arrest either the particular ship in respect of which the maritime claim arose, or any other ship which is owned by the person who was, at the time when the maritime claim arose, the owner of the particular ship, even though the ship arrested be ready to sail; but no ship other than the particular ship in respect of which the claim arose, may be arrested in respect of any of the maritime claims enumerated in Article 1, (1)(o), (p) or (q).
(2) Ships shall be deemed to be in the same ownership when all the shares therein are owned by the same person or persons …
(3) A ship shall not be arrested, nor shall bail or other security be given more than once in any one or more of the jurisdictions of any of the Contracting States in respect of the same maritime claim by the same claimant: and, if a ship has been arrested in any one of such jurisdictions, or bail or other security has been given in such jurisdiction either to release the ship or to avoid a threatened arrest, any subsequent arrest of the ship or of any ship in the same ownership by the same claimant for the same maritime claim shall be set aside, and the ship released by the Court or other appropriate judicial authority of that State, unless the claimant can satisfy the Court or other appropriate judicial authority that the bail or other security had been finally released before the subsequent arrest or that there is other good cause for maintaining that arrest.
(4) When in the case of a charter by demise of a ship the charterer and not the registered owner is liable in respect of a maritime claim relating to that ship, the claimant may arrest such ship or any other ship in the ownership of the charterer by demise, subject to the provisions of this Convention, but no other ship in the ownership of the registered owner shall be liable to arrest in respect of such maritime claims. The provisions of this paragraph shall apply to any case in which a person other than the registered owner of a ship is liable in respect of a martime claim relating to that ship.’
Section 21(1) to (4) of the 1981 Act is in the following terms:
‘21. Mode of exercise of Admiralty jurisdiction.—(1) Subject to section 22, an action in personam may be brought in the High Court in all cases within the Admiralty jurisdiction of that court.
(2) In the case of any such claim as is mentioned in section 20(2)(a), (c) or (s) or any such question as is mentioned in section 20(2)(b), an action in rem may be brought in the High Court against the ship or property in connection with which the claim or question arises.
(3) In any case in which there is a maritime lien or other charge on any ship, aircraft or other property for the amount claimed, an action in rem may be brought in the High Court against that ship, aircraft or property.
(4) In the case of any such claim as is mentioned in section 20(2)(e) to (r), where—(a) the claim arises in connection with a ship; and (b) the person who would be liable on the claim in an action in personam (“the relevant person”) was, when the cause of action arose, the owner or charterer of, or in possession or in control of, the ship, an action in rem may (whether or not the claim gives rise to a maritime lien on that ship) be brought in the High Court against—(i) that ship, if at the time when the action is brought the relevant person is either the beneficial owner of that ship as
Page 814 of [1988] 3 All ER 810
respects all the shares in it or the charterer of it under a charter by demise; or (ii) any other ship of which, at the time when the action is brought, the relevant person is the beneficial owner as respects all the shares in it.’
It is common ground that the plaintiffs’ claim falls within s 20(2)(g)of the 1981 Act, being a ‘claim for loss of or damage to goods carried in a ship’ and that the ship concerned, ‘the particular ship’ in convention terminology, was the Skipper 1. The first issue to be confronted and decided is therefore who is ‘the relevant person’ for the purposes of s 21(4)(b). Such a person has to meet two criteria. First, he must be the (or possibly a) person who would be liable on the claim in personam. Second, he must, at the time when the cause of action arose, have been the owner or charterer of, or in possession or control of, the ship. ‘Charterer’ in this context, which includes the 1952 convention, must I think mean demise charterer and the words ‘or in possession or in control of, the ship’ must refer to a person who is in the position of a demise charterer, albeit not under a demise charter; a salvor might be such. However, for present purposes, what is in issue is what is meant by ‘owner’. Does it refer to the registered owner who necessarily is the legal owner, or to someone who has only an equitable property in the ship?
In answering this question I bear in mind three important considerations. First, it is a basic rule of construction that where a statute employs different terminology in different provisions, prima facie a different meaning is intended and this is particularly the case if the differing terminology occurs within a single subsection. ‘Owner’ in para (b) thus falls to be contrasted with ‘beneficial owner’ in sub-paras (i) and (ii). Second, all maritime nations maintain registers of shipping which record the names of the owners. These registers are of fundamental importance as establishing the flag of the vessel, thereby making it for some purposes part of the floating territory of that country and subjecting it to the laws of that country. I would therefore regard the concept of a registered owner as being a nominal owner as a contradiction. Third, the 1952 convention clearly looks to ownership and registered ownership as one and the same, although as Robert Goff J pointed out in I Congreso del Partido [1978] 1 All ER 1169 at 1203, [1978] QB 500 at 541, the ‘trust’ concept involving a dichotomy between legal and equitable ownership may be unknown to some, and perhaps most, other jurisdictions. My conclusion is that, in relation to a registered ship, ‘owner’ in s 21(4)(b) means ‘registered owner’.
Counsel appearing for the plaintiffs submits that this cannot be right because if it were, even the particular ship could not be arrested if it could be shown that the registered owner was not the beneficial owner of all the shares in the ship. If this is so, it is an understandable casus omissus, because in real commercial life, thus far at least, registered owners, even when one-ship companies, are not bare legal owners. They are both legal and beneficial owners of all the shares in the ship and any division between legal and equitable interests occurs in relation to the registered owner itself, which is almost always a juridical person. The legal property in its shares may well be held by A and the equitable property by B, but this does not affect the ownership of the ship or of the shares in that ship. They are the legal and equitable property of the company.
I conclude therefore that Skipper Shipping Co SA is the relevant person. No one has suggested that it was not the employer of the master and crew and the contractual carrier of the cargo, although counsel for the plaintiffs did suggest, without any supporting evidence, that it was acting as the agent for an undisclosed principal. This would not, of course, render it any less liable and thus the, or a, relevant person. Even if others may be liable in an action in personam, they would not be owners or demise charterers of the Skipper 1 and so would not be relevant persons.
I therefore turn to consider whetherSkipper Shipping Co SA can be said to have been the beneficial owner of the Evpo Agnic as respect all the shares in that ship or its demise charterer at the time when this action was brought, and of that there is no evidence whatsoever.
The plaintiffs’ real case is that Mr Evangelos Pothitos, who describes himself as a Greek
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shipowner, or his company, Pothitos Shipping Co SA, is the real owner of both ships and indeed of all the ships in the Pothitos fleet. This involves the proposition that the registrations are shams. I am as realistic as most judges who have served in the Commercial Court, but I really do not see the commercial advantage of the creation of sham registered ownerships. Mr Pothitos no doubt has a legitimate interest in running these ships, including the two with which we are concerned, as a fleet, but he can do this by running a series of genuine one-ship ship owning companies as a group. He does not need a structure involving a holding company and subsidiaries, and still less sham companies. As governing shareholder in each ship owning company, he can cause them to use their individual assets to the mutual advantage of the members of the group and of Mr Pothitos.
I would be most reluctant to interfere with the exercise of judicial discretion in an Admiralty action by a judge of the experience of Sheen J and there can be no doubt that discovery can be ordered if there is any real indication that this may uncover a situation which will confirm, or for that matter negative, the court’s jurisdiction. But there has to be some real indication that further facts may exist which will affect the issue. Ironically the plaintiffs put the point much higher, and possibly too high, in their skeleton argument when they said that a judge should order discovery—
‘where the plaintiffs raise a strong prima facie case of the same beneficial ownership and when, in the absence of co-operation by the defendants—either voluntarily or as a result of a court order—there are no further steps that the plaintiffs can reasonably take to ascertain the true position.’
Something less than a strong prima facie case might well suffice in such a situation, but here there is no indication of any case at all.
The truth of the matter, as I see it, is that s 21 does not go, and is not intended to go, nearly far enough to give the plaintiffs a right of arresting a ship which is not ‘the particular ship’ or a sister ship, but the ship of a sister company of the owners of ‘the particular ship’. The purpose of s 21(4) of the 1981 Act is to give rights of arrest in respect of ‘the particular ship’, ships in the ownership of the owners of ‘the particular ship’ and those who have been spirited into different legal, ie registered, ownership, the owners of ‘the particular ship’ retaining beneficial ownership of the shares in that ship. This was the situation in The Saudi Prince [1982] 2 Lloyd’s Rep 255 and was alleged to be the situation in The Aventicum [1978] 1 Lloyd’s Rep 184.
I would allow the appeal and set aside the writ and the warrant of arrest.
BUTLER-SLOSS LJ. I agree and have nothing to add.
SIR ROUALEYN CUMMING-BRUCE. I also agree.
Appeal allowed.
Solicitors: Holman Fenwick & Willan (for the defendants); Clyde & Co (for the plaintiffs).
Frances Rustin Barrister.
British Coal Corp v Dennis Rye Ltd and another (No 2)
[1988] 3 All ER 816
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): DILLON, NEILL AND STOCKER LJJ
Hearing Date(s): 23, 24, 25 FEBRUARY 1988
Discovery – Legal professional privilege – Waiver – Documents created by plaintiff for purpose of civil proceedings – Disclosure of documents to defendant in criminal proceedings – Plaintiff handing over documents to police to assist criminal investigation – Documents disclosed to defendants by police – Plaintiff required to disclose additional documents to defendants during criminal trial – Whether plaintiff’s privilege in civil proceedings waived by disclosures.
The plaintiff brought an action against the defendants claiming a substantial sum of money which, it was alleged, had been overpaid on invoices issued by the defendants. The plaintiffs also claimed damages for fraudulent or negligent misrepresentation and conspiracy to defraud. The plaintiff subsequently handed over to the police certain documents which had been created for the purpose of the action in order to assist the police in their investigation into the allegations of fraud. The police subsequently brought criminal charges against the defendants. Before the criminal trial began, the prosecution supplied the documents to the defendants in accordance with the established guidelines for the disclosure of documents to the defence and during the trial the plaintiff was ordered to disclose to the defendants a further set of documents which had been created for the purposes of the civil action, and which were relevant to the criminal proceedings. The defendants were acquitted. In the civil proceedings which followed, the plaintiff applied for the return of both sets of documents and an injunction restraining the defendants from using the documents, or any information taken from them, in the action brought by the plaintiff or in any other legal proceedings involving either or both parties, on the ground, inter alia, that the documents were protected by legal professional privilege. The judge granted the relief sought. The defendants appealed, contending that the privilege had been lost because the documents had come into their possession either with the approval or acquiescence of the plaintiff or in circumstances where the plaintiff should have foreseen that they would be disclosed to the defendants and the plaintiff had failed expressly to reserve its privilege.
Held – Since the plaintiff had made the two sets of documents available in accordance with its duty to assist in the conduct of criminal proceedings against the defendants, it would be contrary to public policy if that disclosure could then be construed as an express or implied waiver of the privilege to which the plaintiff was entitled in the civil action for which the documents had been created. Accordingly, the documents remained privileged and could not be used by the defendants in the civil action. The defendants’ appeal would therefore be dismissed (see p 821 h to p 822 a d to f, post).
Notes
For legal professional privilege, see 13 Halsbury’s Laws (4th edn) paras 71–73, and for cases on the subject, see 18 Digest (Reissue) 99–103, 741–757.
For waiver of privilege, see 13 Halsbury’s Laws (4th edn) para 84, and for cases on the subject, see 18 Digest (Reissue) 163, 1303–1308.
Cases referred to in judgments
Distillers Co (Biochemicals) Ltd v Times Newspapers Ltd [1975] 1 All ER 41, [1975] QB 613, [1974] 3 WLR 728.
Page 817 of [1988] 3 All ER 816
Goddard v Nationwide Building Society [1986] 3 All ER 264, [1987] QB 670, [1986] 3 WLR 734, CA.
Guinness Peat Properties Ltd v Fitzroy Robinson Partnership (a firm) [1987] 2 All ER 716, [1987] 1 WLR 1027, CA.
Home Office v Harman [1982] 1 All ER 532, [1983] 1 AC 280, [1982] 2 WLR 338, HL.
Practice Note [1982] 1 All ER 734.
Riddick v Thames Board Mills Ltd [1977] 3 All ER 677, [1977] QB 881, [1977] 3 WLR 63, CA.
Waugh v British Rlys Board [1979] 2 All ER 1169, [1980] AC 521, [1979] 3 WLR 150, HL.
Interlocutory appeal
The plaintiff, British Coal Corp (formerly the National Coal Board), brought an action against the defendants, Dennis Rye Ltd and Dennis Rye, claiming, inter alia, £2,047,836 being the total sum alleged to have been overpaid by the plaintiff on invoices for building repair work issued by the first defendant between January 1980 and September 1985. By summonses in the action dated 16 and 17 July 1987 the plaintiff sought, inter alia, orders (i) requiring the defendants to deliver to the plaintiff the documents listed in the schedules to the two summons (which documents had come into existence for the purpose of the action and had been disclosed to the defendants to assist in a criminal investigation and trial) and all documents in the possession or control of the defendants or their servants or agents which were protected by the plaintiff’s legal professional privilege, including all written notes taken from the documents or copies thereof and all copies of the documents or notes in their custody, possession or control or that of their solicitors, and (ii) restraining the defendants, whether by themselves or their servants or agents, from making any use of the documents, notes or copies or any information derived therefrom for the purpose of pleading, evidence, cross-examination or otherwise for the purpose of or in connection with those or any other legal proceedings between the plaintiff and the defendants or either of them. Those orders were subsequently made by his Honour Judge Fox-Andrews QC hearing official referee’s business in chambers on 3 August 1987. The defendants appealed. The facts are set out in the judgment of Neill LJ.
Michael Driscoll for the defendants.
John Dyson QC and David Lloyd Jones for the plaintiff.
25 February 1988. The following judgments were delivered.
NEILL LJ (delivering the first judgment at the invitation of Dillon LJ). The defendants appeal by leave of the judge against two orders of his Honour Judge Fox-Andrews QC hearing official referee’s business on 3 August 1987. By these orders, which were made on the plaintiff’s summonses dated 16 and 17 July 1987, the defendants were required to deliver to the plaintiff the documents listed in the amended schedules to the two summonses, and also—
‘all documents in the possession or control of the Defendants their servants or agents which are protected by the legal professional privilege of the Plaintiff, all written notes taken from the said documents or copies thereof, and all copies of the said documents or notes, in their custody, possession or control or that of their Solicitors, their servants or agents.’
In addition the judge granted an injunction (I quote from the notice of appeal)—
‘restraining the Defendants whether by themselves, their servants or agents or otherwise howsoever from making any use of the said documents notes or copies or any information derived therefrom for the purpose of pleading, evidence, cross-examination or otherwise for the purpose of or in connection with these or any other legal proceedings between the Plaintiff and the Defendants or either of them … ’
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These orders were made in an action which was commenced by a writ issued on 28 November 1986, whereby the plaintiff (formerly the National Coal Board) claims the sum of approximately £2m from the first defendant as money had and received, being the total sum alleged to have been overpaid by the plaintiff on invoices issued by the first defendants between January 1980 and September 1985. The plaintiff also claims damages against the defendants for fraudulent, or alternatively negligent, misrepresentations made by the defendants, and damages for an alleged conspiracy to defraud. Put shortly, the plaintiff’s claim is that it was grossly overcharged by the defendants for work carried out by the first defendants and that the invoices which were sent to them, and which they paid, misrepresented the work which had in fact been done by the first defendants. The action is due to be heard in two parts, the first part being fixed for trial beginning on 24 October 1988.
The defendant company, which was incorporated in 1976, carries on business as a building contractor from premises in Tibshelf in Derbyshire. The second defendant, Mr Rye, is and has been at all material times the chairman and managing director of the defendant company. He is also the majority shareholder. Mrs Rye is the only other director and shareholder.
Between June 1979 and October 1985 the defendant company was engaged by the plaintiff under a series of contracts to carry out certain works in the north Nottinghamshire area. The works fell into two categories: (a) works of repair to fissures in the ground which had opened up as a result of subsidence caused by mining and (b) works of repair to buildings which had been damaged as a result of subsidence caused by mining. The works were carried out in accordance with orders issued by the plaintiff from time to time, and from time to time payments were made against invoices. The last order for work was issued on 13 June 1985; the last payment was made by the plaintiff on 4 July 1985.
In or about 1985 the plaintiff formed the opinion that it had been overcharged in a number of different ways for the work which had been carried out between 1980 and 1985. It instructed a firm of quantity surveyors, Messrs Faithful & Gould, to carry out some investigations. In due course the police were informed and subsequently a number of documents were handed by the plaintiff to the police. These are the documents which are, as I understand it, listed in the amended schedule to the summons dated 16 July 1987. They consist of statements from a number of named individuals, and also five reports from Faithful & Gould. It is common ground that these documents came into existence for the purpose of civil proceedings against the defendants which were then already contemplated, and that at that stage, at any rate, they were protected by legal professional privilege of the kind considered by the House of Lords in Waugh v British Rlys Board [1979] 2 All ER 1169, [1980] AC 521 and more recently by this court in Guinness Peat Properties Ltd v Fitzroy Robinson Partnership (a firm) [1987] 2 All ER 716, [1987] 1 WLR 1027.
As a result of the police investigations criminal charges were brought against the defendant company and against Mr Rye, and also against some of the plaintiff’s employees and other persons with whom the defendant company and Mr Rye had had dealings, in connection with the works which the defendant company had carried out for the plaintiff. The precise date when criminal proceedings were started against Mr Rye is not clear; the proceedings against the defendant company were commenced by a voluntary bill of indictment preferred on 22 December 1986.
The trial against the defendants began in the Crown Court at Nottingham on 5 May 1987. Before the trial began a bundle of committal documents had been prepared. None of the category A documents, as the documents which had been handed to the police by the plaintiff were described, were included in this bundle. However, copies of the category A documents had been supplied to the defendants pursuant to the guidelines on the disclosure of information to the defence issued in December 1981. Those guidelines,
Page 819 of [1988] 3 All ER 816
which were issued by the Attorney General, are set out in Practice Note [1982] 1 All ER 734. Paragraph 2 of those guidelines provides that in all cases which are due to be committed for trial all unused material as defined in para 1 should normally be made available to the defence solicitor if it has some bearing on the offence or offences charged. But there are a number of discretionary exceptions mentioned in para 6, to which we were referred in the course of argument. I do not consider it necessary, however, for the purposes of this judgment to make a further detailed reference to that Practice Note.
The criminal trial against the defendants concluded on 11 June 1987, when both defendants were acquitted. During the course of the trial and during the course of the case for the Crown, a Mr Tomlinson, an employee of the plaintiff in its audit department, gave evidence on behalf of the Crown. I should refer to the evidence of what happened when Mr Tomlinson was in the witness box on 7 May 1987 and to the subsequent events.
This evidence is contained in an affidavit sworn on behalf of the plaintiff on 21 July 1987 by Mr James Tyrell, the regional solicitor for the plaintiff, and in an affidavit sworn on 31 July 1987 by Mr George Brown, another solicitor employed by the plaintiff.
I turn first to para 23 of Mr Tyrell’s affidavit. He said this:
‘Mr David Bernard Tomlinson, an employee of the Plaintiff in its Audit Department, was called to give evidence on behalf of the prosecution at the trial of the Defendants at Nottingham Crown Court on 7 May 1987. At the request of the Nottinghamshire Constabulary he took with him to Court a number of boxes of papers relating to these present proceedings. In the course of his evidence Mr Tomlinson referred to the existence of these documents. He did not refer to these documents for the purpose of giving his evidence. When Mr Tomlinson referred to their existence, Mr Gilbert Gray QC, on behalf of the Defendants, requested the Court and the prosecution for permission to inspect the documents. Mr Scott Baker QC initially objected but later indicated that the prosecution had no objection and the prosecution and defence agreed that the documents would remain in the confines of the Court. The following morning there was an adjournment to enable Counsel and Mr Tomlinson to identify the documents and to decide which documents the Defendants’ advisers were to see. Mr Gray required to see all the documents in Court plus all further documents in the Plaintiff’s possession relating to work allegedly done by the Defendants. Mr Baker objected to the Defence inspecting documents which did not relate to the matters the subject of criminal proceedings. Mr Tomlinson consulted the Plaintiff’s Legal Department by telephone and was authorised to allow the Defendants to examine only those documents which related to the criminal matters. Mr Tomlinson was instructed to tell Mr Baker that if the Defence wished to see any other documents the Plaintiff considered that they should apply for an order of the Court and the Plaintiff would wish to appear to oppose such an application. Mr Tomlinson conveyed this message to Mr Baker. Mr Baker and Mr Gray then raised the matter with the Judge. The Judge ordered [that] the Defence should be allowed access to those documents relevant to the criminal proceedings. Subsequently, the Defendants, their legal advisers and expert witness were given access to the files which included material relating to the criminal matters. However, the files also included material not relevant to the criminal matters. The documents disclosed to the Defendants, their legal advisers and expert engineer including two categories of documents which are protected by legal professional privilege as documents brought into existence in contemplation of or in pursuance of the civil proceedings:—(1) Statements of witnesses taken by members of the Plaintiff’s Legal Department. (2) Surveyors’ Reports commissioned by the Plaintiff for the purposes of pursuing their civil claim.’
I turn next to Mr Brown’s affidavit. Mr Brown said this:
‘2. On the morning of 29 July 1987 I interviewed Mr T S G Baker Q.C. for the
Page 820 of [1988] 3 All ER 816
purpose of obtaining information relating to the disclosure of the Plaintiff’s privileged documents to the First and Second Defendants in the course of criminal proceedings at Nottingham Crown Court in May 1987.
3. Mr Baker confirmed that when Mr Tomlinson gave evidence it became apparent that he had brought to court with him a quantity of documents relating to fissures. These documents were not limited to documents relating to the 32 invoices which formed the subject of criminal charges against the First and Second Defendants. Mr Gilbert Gray Q.C. on behalf of the Defendants, wanted to see all documents which Mr Tomlinson had brought with him to Court and all other documents in the possession of the Plaintiffs relating to the execution of repair works by the First and Second Defendants. Mr Baker said that he had replied that he did not wish to hide anything from the Defendants, that the prosecution had never seen Mr Tomlinson’s documents and he queried the relevance of any documents not relating to the properties which were the subject of criminal proceedings. Mr Baker said that whilst he did not consider himself to be in the Coal Board’s corner he was not prepared to disclose voluntarily documents which were not in the Crown’s possession but were in the possession of a witness and which might be privileged unless there was an order of the Court. Mr Baker said that no point on privilege had been taken before the Judge. Arguments had been limited to the relevance of the documents. He took a neutral position and said it was for the Judge to decide what should be disclosed. The Judge ordered that there be disclosed to the Defendants those documents relating to the 32 matters which were the subject of criminal charges.
4. Mr Baker reported that the documents were then examined on the Judge’s direction and two categories of documents were found to be relevant. (i) Witness statements obtained by the Plaintiffs’ Solicitors; (ii) Faithful & Gould reports.
5. It was agreed that other documents in the boxes were not relevant. Mr Baker stressed that the documents which were handed over to the Defence were delivered pursuant to the order of the Court.’
The documents which were disclosed to the defendants on and after 7 May 1987 during the course of the criminal trial have been called the category B documents. They are identified in the amended schedule to the summons dated 17 July 1987. It is common ground that the category B documents, like the category A documents, are prima facie protected by legal professional privilege, and that they were so protected at the time they came into existence.
Following the defendants’ acquittal on 11 June 1987, the plaintiff’s solicitors sought the return of the copy documents which had been disclosed to the defendants. Their efforts were unsuccessful and on 16 and 17 July the summonses to which I have already referred were issued. The summonses came before Judge Fox-Andrews at the beginning of August.
Both before the judge and in this court the plaintiff based its claim for relief on two grounds: (i) on the basis that, as the documents had been disclosed in the course of the criminal proceedings, the defendants were bound by an implied undertaking not to make any use of them for a collateral purpose, and therefore could not use them in the civil proceedings; and (ii) on the basis that the documents had been, and remained, protected by legal professional privilege, which had either not been waived at all or had been waived only to the extent of allowing them to be used by the defendants if they so required in the criminal proceedings. In the alternative it was argued that even if the court came to the conclusion that the privilege had been waived altogether, the court had a discretion to grant the relief sought and that in the circumstances this discretion should be exercised in favour of the plaintiff.
In support of the first ground we were referred, as was the judge, to a number of authorities, including Distillers Co (Biochemicals) Ltd v Times Newspapers Ltd [1975] 1 All
Page 821 of [1988] 3 All ER 816
ER 41, [1975] QB 613, Riddick v Thames Board Mills Ltd [1977] 3 All ER 677, [1977] QB 881 and Home Office v Harman [1982] 1 All ER 532, [1983] 1 AC 280.
These authorities show that where discovery is made in civil proceedings the party to whom disclosure is made is bound by an implied undertaking not to use the documents disclosed for any collateral purpose. Such a collateral purpose would include the use of the disclosed documents in other proceedings. We were also referred to the recent 1987 amendment to the Rules of the Supreme Court whereby a new r 14A was wanted in Ord 24(see RSC (Amendment) Act 1987, SI 1987/1423).
Basing itself on the existence of this implied undertaking in civil proceedings, the plaintiff argued that where documents are disclosed to the police for the purpose of the investigation of a possible criminal offence, and then made available to the defence in subsequent criminal proceedings in accordance with the practice authorised by the Attorney General in the guidelines issued in December 1981, or are disclosed to the defence in the course of a criminal trial either by an order of the court or otherwise, the defendants to whom the documents are disclosed are bound by an implied undertaking analogous to that which exists in a civil action. In view, however, of the clear conclusion which I have reached on the question of legal professional privilege, I do not find it necessary to reach any decision on this aspect of the case. Furthermore, in the present case any relief based on this ground alone would be of little or no use to the plaintiff. Thus, if the statements and reports referred to as the category A and category B documents are no longer protected by legal professional privilege, they are clearly relevant documents in the present action and would have to be disclosed in Pt I rather than in Pt II of the first schedule of the plaintiff’s list of documents. Any order for the delivery up of copies of the documents disclosed in the criminal proceedings would be senseless because, if the documents are no longer privileged, the same documents will have to be disclosed in the next few weeks in the course of the ordinary discovery in the present action.
I turn, therefore, to the second ground relied on by the plaintiff. This ground, which may not have been as fully developed before the judge as it was before us, seems to me, on the facts of the present case, to be of much more importance than the first ground. Legal professional privilege of the kind which is relied on in this case is a rule of evidence which protects a party to civil litigation from being obliged to give discovery of documents which have come into existence for the dominant purpose of being used in and for that litigation. The documents with which we are concerned, witness statements and experts’ reports, clearly fall within this category. So much is common ground. The issue is whether this privilege has been waived or is otherwise no longer available to the plaintiff. Thus it is said on behalf of the defendants that the privilege has been lost because these copy documents have come into their hands quite properly and in circumstances in which the plaintiff either gave its approval or acquiescence, or at any rate (in the case of the category A documents) where the plaintiff ought to have foreseen that by making the documents available to the police copies might reach the defendants in accordance with the practice authorised by the Attorney General’s guidelines. It is further argued that if the plaintiff had wished to preserve its privilege it should have declined to make any documents available in the criminal proceedings, except pursuant to an order of the court, and even then only on the basis that it expressly reserved its privilege.
In my opinion this part of the case can be dealt with quite shortly. The documents, when they came into existence, were plainly protected by legal professional privilege of the kind to which I have referred. The privilege was a privilege from discovery in the action for which they were prepared, that is, the present action. Has anything happened which has caused that privilege to be waived or otherwise lost?
In my judgment the answer to this question is plainly No. Let it be assumed that all the documents have come into the possession of the defendants with the implied consent of the plaintiff and that it could be established that it would have supplied the category B documents even without an order of the court. Nevertheless, it is clear that the plaintiff
Page 822 of [1988] 3 All ER 816
made the documents available for a limited purpose only, namely to assist in the conduct first of a criminal investigation and then of a criminal trial. This action by the plaintiff, looked at objectively as it must be, cannot be construed as a waiver of any rights available to it in the present civil action for the purpose of which the privilege exists.
In two recent cases in this court, Goddard v Nationwide Building Society [1986] 3 All ER 264, [1987] QB 670 and Guinness Peat Properties Ltd v Fitzroy Robinson Partnership (a firm) [1987] 2 All ER 716, [1987] 1 WLR 1027, consideration has been given to the circumstances in which privilege may be lost, where a privileged document has come into the hands of the other party by inadvertence or by chance. It is clear that it is necessary to examine the facts in each case, and that, in the words of Nourse LJ in Goddard’s case [1986] 3 All ER 264 at 271, [1987] QB 670 at 685:
‘… the right of the party who desires the protection to invoke the equitable jurisdiction does not in any way depend on the conduct of the third party into whose possession the record of the confidential communication has come.’
It is also clear that even where a document has been disclosed by inadvertence and has actually been inspected, the court may in certain circumstances intervene by the grant of an injunction to protect the privilege: see the Guinness Peat case [1987] 2 All ER 716 at 730–731, [1987] 1 WLR 1027 at 1044–1045 per Slade LJ. It is not necessary, however, to examine this residual discretion in this case.
In my judgment the action of the plaintiff in making documents available for the purpose of the criminal trial did not constitute a waiver of the privilege to which it was entitled in the present civil proceedings. Its action in regard to both the category A and the category B documents was in accordance with its duty to assist in the conduct of the criminal proceedings, and could not properly be construed as an express or implied waiver of its rights in its own civil litigation. Indeed, it would in my view be contrary to public policy if the plaintiff’s action in making the documents available in the criminal proceedings had the effect of automatically removing the cloak of privilege which would otherwise be available to them in the civil litigation for which the cloak was designed.
Accordingly, though I have reached the same conclusion as the judge by a different route from that which he followed, for my part I would dismiss this appeal.
STOCKER LJ. I agree so entirely with the judgment of Neill LJ that I do not wish to add any comments of my own.
DILLON LJ. I also agree.
Appeal dismissed. Leave to appeal to the House of Lords refused.
Solicitors: Beachcrofts agents for King & Brook, Chesterfield (for the defendants); J G Tyrrell, Eastwood (for the plaintiff).
Vivian Horvath Barrister.
Hunt v R M Douglas (Roofing) Ltd
[1988] 3 All ER 823
Categories: CIVIL PROCEDURE
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD BRANDON OF OAKBROOK, LORD GRIFFITHS, LORD ACKNER AND LORD JAUNCEY OF TULLICHETTLE
Hearing Date(s): 4, 5, 6 OCTOBER, 3 NOVEMBER 1988
Costs – Interest on costs – Date from which interest payable – Taxation of costs – Whether interest payable on costs from date of judgment or date taxation is completed.
A litigant who has been awarded costs is entitled to interest on those costs from the date of judgment rather than the date the taxation of costs is completed (see p 824 b to d, p 832 j to e g h, post).
Pyman & Co v Burt Boulton [1884] WN 100 and Boswell v Coaks (1887) 57 LJ Ch 101 approved.
K v K (divorce costs: interest) [1977] 1 All ER 576 and Erven Warnink BV v J Townend & Sons (Hull) Ltd (No 2) [1982] 3 All ER 312 overruled.
Notes
For the date from which interest runs on judgments and orders, see 37 Halsbury’s Laws (4th edn) para 753, and for cases on the subject, see 30 Digest (Reissue) 248–250, 540–564.
Cases referred to in opinions
Ashworth v English Card Clothing Co Ltd (No 2) [1904] 1 Ch 704.
Borthwick v Elderslie Steamship Co Ltd (No 2) [1905] 2 KB 516, CA.
Boswell v Coaks (1887) 57 LJ Ch 101, CA.
Erven Warnink BV v J Townend & Sons (Hull) Ltd [1979] 2 All ER 927, [1979] AC 731, [1979] 3 WLR 68, HL.
Erven Warnink BV v J Townend & Sons (Hull) Ltd (No 2) [1982] 3 All ER 312, CA.
Fisher v Dudding (1841) 9 Dowl 872.
Jefford v Gee [1970] 1 All ER 1202, [1970] 2 QB 130, [1970] 2 WLR 702, CA.
K v K (divorce costs: interest) [1977] 1 All ER 576, [1977] Fam 39, [1977] 2 WLR 55, CA; affg [1976] 2 All ER 774, [1976] Fam 279, [1976] 3 WLR 201.
Landowners’ West of England and South Wales Land Drainage and Inclosure Co v Ashford (1884) 33 WR 41.
London Wharfing and Warehousing Co, Re (1885) 54 LJ Ch 1137.
Newton v Grand Junction Rly Co (1846) 16 M & W 139, 153 ER 1133.
Pyman & Co v Burt Boulton [1884] WN 100.
Schroeder v Cleugh (1877) 46 LJQB 365.
Taylor v Roe [1894] 1 Ch 413.
Appeal
John Vincent Hunt appealed direct to the House of Lords pursuant to a certificate granted under s 12(1) of the Administration of Justice Act 1969 by Sir Neil Lawson sitting in chambers as a judge of the High Court in the Queen’s Bench Division and with the leave of the Appeal Committee given on 13 November 1986 against the decision of the judge on 20 May 1986 whereby he dismissed the appellant’s appeal from the decision of Master Turner on 19 March 1986 dismissing the appellant’s summons for an order that the respondents, R M Douglas (Roofing) Ltd, pay interest on the appellant’s taxed costs from the date of judgment on 1 November 1984 in the action for personal injuries sustained by the appellant in the course of his employment with the respondents. The facts are set out in the opinion of Lord Ackner.
Page 824 of [1988] 3 All ER 823
Jeffrey Burke QC and John Foy for the appellant.
Simon Goldblatt QC and Colin Edelman for the respondents.
Their Lordships took time for consideration.
3 November 1988. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Ackner. I agree with it and, for the reasons he gives, I would allow the appeal.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given by my noble and learned friend Lord Ackner I would allow the appeal.
LORD GRIFFITHS. My Lords, I agree that this appeal should be allowed for the reasons given in the speech of my noble and learned friend Lord Ackner, and I agree with the order that he proposes.
LORD ACKNER. My Lords, this appeal raises an important issue with regard to costs, namely whether a litigant who has been awarded costs is entitled to interest on the amount of the costs from the date on which judgment is pronounced (referred to hereafter as ‘the incipitur rule’) or from the date on which the taxation of costs is completed by the issue of the taxing master’s certificate (the ‘allocatur rule’).
The facts
This issue has twice been considered in the past 12 years by the Court of Appeal and accordingly this appeal has come before your Lordships’ House by what is known as the ‘leap frog’ procedure. Hence the material facts can be stated quite shortly. On 24 September 1982 the appellant suffered personal injuries in an accident in the course of his employment with the respondents. On 28 March 1983 he issued his writ claiming damages. This was followed on 26 May 1983 by the statement of claim and thereafter by further pleadings to which there is no need to make any reference. On 1 November 1984 the action was settled and by consent Master Prebble ordered that all further proceedings in the action be stayed, except for the purpose of carrying into effect the terms of the agreement, which terms included:
‘4. That the Defendants do pay to the Plaintiff his costs of this action, including the costs of this application, to be taxed as between party and party on the High Court Scale, failing agreement.’
It is common ground that the master’s order is a judgment or an order which carries interest as if it were a judgment.
On 12 July 1985 the appellant commenced proceedings for the taxation of his costs and on 14 August 1985 rendered his bill, the total claim being £24,471·08 inclusive of value added tax. On 9 December 1985 the appellant’s solicitors gave notice of intention to claim interest on the taxed costs, to run from the date of pronouncement of judgment. On 15 January 1986 taxation took place and the sum allowed was £17,788·67 (inclusive of value added tax). On 28 January 1986 a review of taxation was sought by the appellant. On 18 March 1986 the taxing master overruled the appellant’s objections and on 4 June 1986 his certificate (the allocatur) for £17,788·67 including value added tax was issued.
On 19 March 1986 the appellant applied to Master Turner for an order that, pursuant to s 17 of the Judgments Act 1838, interest on the taxed costs of the action should run from the date of pronouncement of judgment. The master dismissed this application, concluding that he was bound by the decisions of the Court of Appeal in K v K (divorce costs: interest) [1977] 1 All ER 576, [1977] Fam 39 and Erven Warnink BV v J Townend &
Page 825 of [1988] 3 All ER 823
Sons (Hull) Ltd (No 2) [1982] 3 All ER 312. On 20 May 1986 the appellant’s appeal against this decision was heard by Sir Neil Lawson, sitting in chambers as a judge of the High Court in the Queen’s Bench Division. He dismissed the appeal on the ground that he too was bound by these decisions of the Court of Appeal, but he granted a certificate pursuant to s 12(1) of the Administration of Justice Act 1969 and subsequently your Lordships granted to the appellant leave to appeal to your Lordships’ House.
The Judgments Act 1838 and its application to interest on costs, prior to 1976
Prior to the passing of the Judgments Act 1838 interest on costs could not be recovered. The material provisions of the Act are ss 17, 18 and 20, which are in the following terms:
‘XVII … every Judgment Debt shall carry Interest at the Rate of Four Pounds per Centum per Annum from the Time of entering up the Judgment … until the same shall be satisfied, and such Interest may be levied under a Writ of Execution on such Judgment. [The statutory rate of interest has been increased from time to time]
XVIII … all Decrees and Orders of Courts of Equity, and all Rules of Courts of Common Law … whereby any Sum of Money, or any Costs, Charges, or Expences, shall be payable to any Person, shall have the Effect of Judgments in the Superior Courts of Common Law, and the Persons to whom any such Monies, or Costs, Charges, or Expences, shall be payable, shall be deemed Judgment Creditors within the Meaning of this Act; and all Powers hereby given to the Judges of the Superior Courts of Common Law with respect to Matters depending in the same Courts shall and may be exercised by Courts of Equity with respect to Matters therein depending … and all Remedies hereby given to Judgment Creditors are in like Manner given to Persons to whom any Monies, or Costs, Charges, or Expences, are by such Orders or Rules respectively directed to be paid …
XX … such new or altered Writs shall be sued out of the Courts of Law, Equity, and Bankruptcy as may by such Courts respectively be deemed necessary or expedient for giving Effect to the Provisions herein-before contained, and in such Forms as the Judges of such Courts respectively shall from Time to Time think fit to order … ’
Section 20 was repealed by the Civil Procedure Acts Repeal Act 1879, s 2, Sch, Pt I.
The Act nowhere defines the vital words in s 17 ‘entering up the Judgment’. A different view was taken by the common law courts as opposed to the Chancery courts as to when the judgment could be said to have been entered up and s 20 was apparently relied on as giving a power to the courts to regulate their practice in accordance with the view they took. The Court of Common Pleas awarded interest on costs from the date of the incipitur: see Fisher v Dudding (1841) 9 Dowl 872 at 874 per Tindal CJ:
‘The question is, what is the meaning of the words that interest shall be allowed from “the time of entering up judgment?” And it appears to me, that the legal meaning of those words must be taken to be the time of signing judgment, or making the entry of the incipitur in the Master’s book.’
Erskine J said (at 875–876):
‘In putting an interpretation upon this clause of the statute, we must look at the practice of the Court to see what is the “entering up” of the judgment, and it appears to me that the entry of the incipitur in the Master’s book must be taken to be that entering up which is contemplated, and although the judgment may be afterwards more formally entered on the roll, yet that is not the entering of the judgment from which interest must be calculated.’
Maule J said (at 876):
‘I am also of the same opinion. In the contemplation of law, entering up of the judgment is the writing down something in a book which is kept by the Master for
Page 826 of [1988] 3 All ER 823
that purpose. That is called the incipitur, and the entry is only so made for the convenience of the parties, but it guides what is drawn up afterwards in a more formal manner on the record. The record, it is to be observed, is not usually drawn up, unless it is necessary that it should be so for the use of the parties for any particular purpose, and the incipitur, at the same time, that it is generally alone sufficient for all ordinary purposes, affords the materials for drawing up that more minute form on parchment, which on account of the expense, is usually dispensed with. In criminal cases, the same course is commonly pursued, and the record is only filled up in instances where from some circumstances it is requisite that it should be so. The fact of this not being generally done then, affords a clue to the intentions of the legislature, and shews that the statute was not meant to refer to the entering up of the judgment on the roll, which would often produce more expense than the interest would amount to, but to the general entering up of judgment in the Master’s book in the form of an incipitur. With regard to the justice of the case, the Court cannot look to particular cases in laying down a general rule of practice; but I confess that I do not see that any injustice will be worked by the decision at which the Court has arrived.’
That decision was approved in Newton v Grand Junction Rly Co (1846) 16 M & W 139 at 141, 153 ER 1133 at 1134, a decision of the Court of Exchequer, where Alderson B observed in the course of argument:
‘Then, as to the interest, there is an uncertain amount, which is in the wrong pocket, and is there bearing interest; I see no injustice in saying, that as soon as it is reduced to certainty, that interest should be paid. Whatever be the sum, it is fructifying in the wrong pocket.’
However the Court of Chancery apparently took a different view, its practice being referred to in Boswell v Coaks (1887) 57 LJ Ch 101 at 105 by Lindley LJ, who said:
‘The right to interest on costs depends on the statutory enactment 1 & 2 Vict. c. 110. [the Judgments Act 1838] ss. 17 and 18, and by section 20 of that Act the Court is empowered to make orders framing new rules, and under that section the Court of Chancery by consolidated orders issued a form of writ of fi. fa. according to which interest on costs was to run from the date of the Taxing Master’s certificate. There was no similar practice at common law, where the interest ran always from the date of the judgment.’
The Supreme Court of Judicature Acts 1873 and 1875 set up the High Court of Justice. Section 16 of the 1875 Act is in the following terms:
‘The Rules of Court in the First Schedule to this Act shall come into operation at the commencement of this Act, and as to all matters to which they extend shall thenceforth regulate the proceedings in the High Court of Justice and Court of Appeal … ’
Section 33(2) of the 1875 Act repealed ‘Any other enactment inconsistent with this Act or the [Supreme Court of Judicature Act 1873].’
In Sch 1 to the 1875 Act there appeared, in App F, Form 1. That form directed the sheriff to levy the amount of costs allowed on taxation ‘together with interest thereon at the rate of 4l. per centum per annum from the day of ’. There was then a reference to a footnote which stated: ‘The date of the certificate of taxation. The writ must be so moulded as to follow the substance of the judgment or order.’
In Schroeder v Cleugh (1877) 46 LJQB 365 there was a motion to vary an order of the master which gave interest on costs only from the date of his certificate. The order was affirmed, it being held that the effect of the 1875 Act was to apply the Chancery practice throughout the High Court.
Page 827 of [1988] 3 All ER 823
Some five years after the decision in Schroeder v Cleugh, that is in 1883, there were enacted new Rules of the Supreme Court. Order 42, r 14 provided, inter alia: ‘… The Forms in Appendix H shall be used with such variations as circumstances may require.’
Form 1 in App H was for a writ of fieri facias, where the party entitled elected to execute by one writ for both judgment debt and costs. This directed the sheriff to levy the judgment debt and costs in the same form as in App F to the 1875 rules but the old footnote was replaced. The new footnote said:
‘Day of the judgment or order, or day on which money directed to be paid, or day from which interest is directed by the order to run, as the case may be.’
Form 2, which related to an order for costs only, and which gave the sheriff the same direction as to interest, leaving the day from which it was to run blank, contained no footnote.
The following year there was an application before Field J to determine the effect of the alteration of the statutory footnote: see Pyman & Co v Burt Boulton [1884] WN 100, where he said:
‘By Order XLII., r, 14, the form of writ of execution given in Appendix (H) is ordered to be used. That form, therefore, may be taken to express what the judgment and execution are to be for. Then what is the form given in Appendix (H)? It must be read in conjunction with the note appended to it. It provides for execution for the amount of the debt and interest from a day to be inserted, and for the amount of the costs with interest from a day to be inserted. By the note, which applies both to the interest on the debt and to the interest on the costs, it is provided that the day to be inserted shall be the day of the judgment or order, or day on which money directed to be paid, or day from which interest is directed by the order to run, as the case may be. The meaning of that is that there may be a judgment simply, in which case the interest on the debt and on the costs will begin to run at once; or there may be a judgment directing money to be paid on a future day, in which case the interest will begin to run from that day; or there may be a judgment with a special direction as to the day from which interest on the debt or on the costs is to run. In any particular case I could order that the interest on the costs should not begin to run until after they have been taxed. In the absence of any special order, no distinction is made between interest on the debt and interest on the costs. Both begin to run from the day of the judgment.’
Some months later Pearson J in the Chancery Division in Landowners’ West of England and South Wales Land Drainage and Inclosure Co v Ashford (1884) 33 WR 41, having been referred to the decision in Schroeder’s and Pyman’s cases and having had the benefit of the submissions of Mr Farwell as an amicus curiae, followed the decision of Field J and held that interest must be paid from the date of judgment. Chitty J did likewise in the following year in Re London Wharfing and Warehousing Co (1885) 54 LJ Ch 1137 and in 1887 in Boswell v Coaks 57 LJ Ch 101 the Court of Appeal upheld the decision of North J, who had followed the decisions of Pearson and Chitty JJ. In his judgment Cotton LJ said (57 LJ Ch 101 at 105):
‘The previous order altered the common law rule which gave interest as from the date of the judgment. The case of Schroeder v. Cleugh shews that that order allowed the time at which the interest is to be calculated to be varied to the prejudice of a successful party by postponing the date from which the interest could be claimed. Therefore it is wrong to say that there is anything like a vested interest at the moment when the judgment is delivered, but it is only an interest to be worked out by the rules in existence at the time when the judgment is to be enforced. Whether it was right or wrong to vary the old rule I give no opinion, but we have this rule which applies here; and therefore, without entering into the question which is the better form and which would better satisfy the claim of justice, I will only say here
Page 828 of [1988] 3 All ER 823
is the rule which applies here, and by that we are bound. I am therefore of opinion that the decision of Mr. Justice North is right, and the appeal must be dismissed.’
In his judgment Lindley LJ said (at 105–106):
‘When the Rules of 1875 were settled, the Chancery rules were left alone, and the old practice remained untouched, and that accounts for the fact that the practice was not touched till 1883. Then came the Rules of 1883; they struck out the old rules and made one code applicable to all divisions of the Court, and then we find the writ of fi. fa. varied, and the present form made applicable to all divisions under which interest is made to run from the date of the judgment, not the allocatur … I think that the Rules of 1883 apply, and that the proper form of the writ of fi. fa. is that given in appendix H., under which interest on costs runs from the date of the judgment, and not from the date of the Taxing Master’s certificate.’
There are two later reported decisions of the Chancery Division where interest has been awarded on costs from the incipitur: see Taylor v Roe [1894] 1 Ch 413 and Ashworth v English Card Clothing Co Ltd (No 2) [1904] 1 Ch 704.
K v K (divorce costs: interest) [1977] 1 All ER 576, [1977] Fam 39
From 1884 to 1965 the principle that interest on costs ran from the date of judgment became firmly established. Throughout this period The Annual Practice contained a note to the effect that interest on costs ran from the date of judgment and not from the date of the taxing master’s certificate.
In 1965 new writs of execution were introduced by the Rules of the Supreme Court (Revision) 1965, SI 1965/1776: see RSC Ord 45, r 12 and App A, Forms 53 and 54, which replace the old Forms 1 and 2 respectively. The footnote to Form 1 was omitted altogether. The note in The Annual Practice, subsequently The Supreme Court Practice, continued in the same form until after the decision of the Court of Appeal in K v K (divorce costs: interest) [1977] 1 All ER 576, [1977] Fam 39, a case in the Family Division. Since the Court of Appeal was, understandably, much concerned with the merits of the wife’s claim to interest on costs awarded to her, it is convenient to set out the summary of the facts given by Lord Denning MR ([1977] 1 All ER 576 at 578–579, [1977] Fam 39 at 46–47):
‘The parties were married in 1962 and divorced in 1972. The first part of the divorce proceedings took place in the county court. That was up to decree absolute. The husband was ordered to pay the wife’s costs of those proceedings. The second part of the divorce proceedings took place in the High Court. These were the ancillary proceedings about periodical payments or a lump sum for the wife. On 17th May 1974 the husband was ordered to pay the wife a lump sum of £50,000 on or before 1st September 1974; and also to pay her costs, including those of American advisers and accountants in connection with the application. The husband paid the £50,000 promptly on the due date, 1st September 1974. The wife’s solicitors in October 1974 lodged a bill of costs (both for the county court and the High Court) amounting to over £34,000. On taxation in August 1975 the amount was knocked down to about one-half. The amount allowed was only £16,651·67. For example, the American lawyers’ fees were claimed at £9,500, but only allowed at £3,500. The American accountants’ fees were claimed at £6,750, and only allowed at £2,400. On 18th August 1975 the husband was ordered to pay within 28 days the sum of £16,651·67, the amount of the taxed costs. He paid it on 1st September 1975, well within the 28 days. Now the wife’s solicitors claim interest on these costs. They do not claim any interest on the £50,000 lump sum. They claim it on the costs of £16,651.67. Although that sum was paid promptly, on the due date, they claim that the husband ought to pay interest on that amount for the previous 15 months. That is, interest on it for 15 months from 17th May 1974. That was the date when
Page 829 of [1988] 3 All ER 823
the order for costs was made, although the amount of those costs was not ascertained until August 1975. The wife’s solicitors base their claim on a note in the Supreme Court Practice 1976, vol 1, p 997, para 62/35/7 which, I have discovered, has appeared in every edition since 1884–85: “Interest [on costs] now runs from the date of the order or judgment in the absence of any order to the contrary … and not, as formerly decided, from the date of the Taxing Master’s certificate.” Sir George Baker P rejected the wife’s claim for interest on the costs (see [1976] 2 All ER 774, [1976] Fam 279). The wife appeals to this court. Since the president’s judgment, the husband’s solicitors have asked for information as to the date on which the wife’s solicitors paid the disbursement for the fees of counsel and the bills of the English and American lawyers and accountants. These were all paid after August 1975, when the bills were taxed. This shows the extraordinary nature of the wife’s claim. She is claiming interest on those disbursements from 17th May 1974 to 10th August 1975, although she did not pay them until afterwards. And she is claiming that interest for her own benefit. If she were to recover that interest, she could not hand it over to the counsel or lawyers or accountants. She would keep it herself and pay tax on it. It would be taxable in her hands as unearned income at the highest rates. The husband would not be able to deduct it from his gross income for tax purposes. So the real beneficiary would be the tax gatherer.’
In order to decide whether the wife’s claim was sustainable in law Lord Denning MR considered in some detail the history of the legislation as set out above, observing, despite the views expressed by Maule J and Alderson B which I have quoted, that the common law rule was but an ‘old technical view’, whereas in contrast courts of equity ‘took a sensible view’ (see [1977] 1 All ER 576 at 580, [1977] Fam 39 at 47). Having accepted that the consequence of the 1883 rules was that interest on costs ran from the date of the incipitur and not from the date of the allocatur, he then considered the effect of the new forms of writ of execution prescribed in 1965. He said ([1977] 1 All ER 576 at 580–581, [1977] Fam 39 at 48–49):
‘In 1965, however, the offending note of 1883 was removed. The old rules were revised and a new set of rules enacted. The old 1883 note (on which Pyman v Burt and Bolton [1884] WN 100 was decided) was omitted altogether. What is the result? I do not suppose that the framers of the 1965 rules gave any thought to it. But the plain fact is that we are rid of the 1883 note; and with it we are rid of Pyman v Burt and Bolton, which was founded on that note alone; and we are rid of the cases which followed Pyman v Burt and Bolton. In those circumstances, I think we are entitled to go back to the time before 1883. We can go back to the note which appeared in the 1875 Act, which says that the date to be inserted is “The date of the certificate of taxation“. Alternatively, we are entitled to say that the rule of equity should prevail. In the further alternative, we are entitled to apply a little commonsense. Interest should be payable whenever money is “wrongly withheld” from the one who is entitled to it: see Jefford v Gee [1970] 1 All ER 1202, [1970] 2 QB 130. When the sum is unascertained, the debtor cannot be expected to pay it until it is quantified. He cannot make a tender until he knows how much it is. He cannot be said to be “wrongfully withholding” the money until it is fixed. So in all fairness interest should only run from the date of quantification: see the instances given in Jefford v Gee. If he is given time to pay, it should only run from the time when payment falls due. That is admittedly the case with the lump sum of £50,000 which was payable on 1st September 1974. It should also be the case with the costs of £16,651·67 which was payable on taxation.’
Stephenson LJ having also considered the history said in regard to the new forms substituted by the 1965 rules ([1977] 1 All ER 576 at 584–587, [1977] Fam 39 at 53–56):
‘I can detect no change of substance in the new forms themselves; the period
Page 830 of [1988] 3 All ER 823
from which interest was to run was still left blank in both, but the footnote to the first form disappeared. There may be more than one explanation of that, although there is nothing in the explanatory note to the new rules to indicate the true explanation. Was it carelessness? Or economy? Or an intention to change the law and alter the practice, as the president held? According to the Supreme Court Practice 1976 vol 1, p 997, para 62/35/7 the law is unchanged and interest on costs still runs from the date of the order or judgment in the absence of any order to the contrary; and I should have found it hard to infer so large an intention from so small a disappearance if the statutory footnote to a prescribed form of writ of fi fa had not been given this very same effect by the Court of Common Pleas in Schroeder v Cleugh (1877) 46 LJQB 365 and the Court of Appeal in Boswell v Coaks (1887) 57 LJ Ch 101. I cannot assume that when the Rules of the Supreme Court (Revision) 1965 revoked all the previous rules and orders made since 1883 a footnote with such a history as this was accidentally dropped without regard to its origin and its juducially declared importance. But what was the unexplained reason for its disappearance? It was not replaced by the footnote which preceded it. Did the incipitur rule go with it? If it did, did the allocatur rule return to fill the blank left by its disappearance? Or was the blank left to be filled by the courts? With or without regard to the unrepealed ss 17 and 18 of the 1838 Act? I am inclined to infer from the abolition of the footnote and the failure to replace it uncertainty as to what the practice in 1965 was and a recognition that it was no longer settled, perhaps because claims to interest on costs had fallen out of use and so the date from which it should be paid was no longer being considered. It may have been thought, on the other hand, that the 1838 Act itself laid down the incipitur rule without the aid of the footnote, that the footnote had not been needed for form 2 and was superfluous for form 1, and that in the absence of a footnote there was nothing to prevail over the 1838 Act. But though the 1883 footnote was based on the 1838 Act (see particularly the judgment of Lindley LJ in Boswell v Coaks), the Act had not been taken literally as laying down the incipitur rule for interest and binding the courts to enforce it either on judgment debts or on costs. For it was never considered that the 1875 rules and footnote laying down the allocatur rule were ultra vires or that when the incipitur rule replaced it in 1883 the new footnote was ultra vires insofar as it laid down that when a judgment directed payment of money on a future date, interest ran only from that date and not from the date of entering the judgment. It is curious that the same treatment was not applied to an order for costs, even apparently where a separate writ of fi fa was taken out for them … Are we then freed by the removal of the statutory footnote to depart from the incipitur rule? Can we consider where justice and convenience lie, and having considered them prefer, as the president did, the allocatur rule and dismiss this appeal? We cannot, in my opinion, declare the allocatur rule to be again the law because it was the law before 1883 and the abolition of the 1883 footnote restores the earlier law; for the 1875 footnote, which was the foundation of the earlier law, has not been put back. We have to go back to the pre-existing law before the 1875 footnote and that was, as I have shown, not uniform … If we are free to choose the better rule, my choice would not be North J’s; I would choose the allocatur. True the payer of costs can invest the sum required to pay them at a rate of interest more profitable than 7 1/2 per cent per annum, but the payee may not have paid out large parts of the costs as early as the incipitur, for instance the fees of the wife’s American lawyers and accountants in the present case. I regard it as on the whole more just and convenient that the costs (to borrow the language of Alderson B’s interjection in Newton v Grand Junction Railway Co (1846) 16 M & W 139 at 141, 153 ER 1133 at 1134) should fructify in the pocket of the payer where they still are through no fault of his, than in the pocket of the payee where they, or a part of them, may still be because he (or she) has not yet expended them. We are, in my judgment, free to choose the better rule and are no longer bound by the prescribed form to the incipitur rule. Indeed we
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ought to apply the principle laid down by this court for interest generally to interest on costs, unless there is some statutory provision which prevents us; and applied to interest on costs that principle reintroduces the allocatur rule because costs are not wrongfully withheld until quantification. At first sight ss 17 and 18 of the Act of 1838 appear to bar the allocatur rule. But they did not prevent the courts from applying the allocatur rule both before and after 1875 and, if I am right in the reason I have given for that, I am of opinion that the court has power to make the allocatur rule a rule of its practice.’
Orr LJ agreed with both judgments. It will thus be seen that the Court of Appeal was unable to detect any change of substance in the new forms except the removal of the footnote from Form 53 which replaced the old Form 1. Accordingly, it concluded that the principle which had been established for some 80 years had thus been removed and it was accordingly able to reach the decision which it considered met the justice of the particular case. As counsel for the appellant correctly points out the Court of Appeal overlooked that in the previous fi fa forms there were two separate blanks, one which related to the date from which interest on the damages or debt the subject matter of the judgment was to run and the other which related to the date from which interest on costs was to run. In such circumstances it was necessary to provide a footnote as to how those blanks were to be filled in. In the new form there is only one blank for the date from which interest is to run and this has therefore to be calculated on the aggregate of the damages or debt together with the costs allowed on taxation. The possibility of differentiation between the two having been removed the form was thus a simplified version of its predecessor and the simplification removed the necessity for the note. Accordingly there was no warrant for the Court of Appeal to depart from the previous decision of the Court of Appeal in Boswell v Coaks (1887) 57 LJ Ch 101, which was accepted to have been a correct decision when made and consistently applied for nearly a century thereafter.
Erven Warnink BV v J Townend & Sons (Hull) Ltd (No 2) [1982] 3 All ER 312
Nearly six years later, the contest between the incipitur rule and the allocatur rule fell to be considered again by the Court of Appeal in a case where the merits this time strongly favoured the incipitur rule. The plaintiffs bought a passing-off action in which after 25 days before Goulding J they succeeded. They lost in the Court of Appeal but succeeded in the House of Lords ([1979] 2 All ER 927, [1979] AC 731). The judgment of Goulding J was given on 29 July 1977, when he made an order granting the plaintiffs an injunction, an inquiry as to damages and their taxed costs of the action. In accordance with the usual practice, because an appeal to the Court of Appeal was pending, the plaintiffs did not proceed to tax their costs. After the decision of the House of Lords the plaintiffs proceeded to taxation and certificates were granted as follows: (i) on 25 February 1980 a certificate in the sum of £53,937·16 was granted pursuant to the order of Goulding J; (ii) on 25 February 1980 a certificate in the sum of £25,953·22 was granted pursuant to the order of 18 July 1979 in respect of costs of the appeal to the Court of Appeal; (iii) on 25 February 1980 a certificate was granted in the sum of £15,181·31 in respect of the costs of the appeal to the House of Lords; the total of the three certificates was thus £95,071·69. The defendants paid thatsum on 28 March 1980, together with the sum of £982·26 in respect of interest on the taxed costs (other than costs in the House of Lords) from the date of the relevant certificates to payment. The plaintiffs had themselves made various payments to their solicitors on account of costs during the course of the proceedings, namely between 15 July 1976 and 8 October 1979, totalling £146,810·57. They had thus lost interest, not only on sums paid on account of costs prior to the judgment of Goulding J, and no one suggested that they could claim interest on such costs, but also interest which could have been earned on the substantial sum, well in excess of the costs allowed on taxation, which they had paid well before the certificates of taxation. The plaintiffs appealed against the order of Slade J refusing their application
Page 832 of [1988] 3 All ER 823
for an order that the defendants pay to them interest at the statutory rate on the taxed costs from the date of the order for costs. Fox LJ, in giving the judgment of the Court of Appeal ([1982] 3 All ER 312), again went through the history as recited earlier in this speech, and repeated the same error as was made by the Court of Appeal in K v K [1977] 1 All ER 576, [1977] Fam 39, when he said that the new forms introduced in 1965 were unchanged except that the footnote to Form 1 had gone (see [1982] 3 All ER 312 at 317). The court having concluded that it was bound by the decision in K v K and that it had no discretion in the matter, set out its own views on the basis that it was free to consider the matter generally and gave leave to appeal to your Lordships’ House, a facility of which advantage was not taken. Fox LJ said ([1982] 3 All ER 312 at 319–320):
‘We do not think that either rule is satisfactory as to costs in all circumstances. We can see no sensible reason why the appellant wife in K v K should have succeeded (as she would have done if the incipitur rule had been applied) or why the present plaintiffs should wholly fail (as they must if the allocatur rule is applied). Nor does it seem to us that either rule is satisfactory in relation to interest generally. The incipitur rule cannot be satisfactorily applied to a judgment for payment at a future date (such as the order for the payment of the £50,000 in K v K). Nor can the “quantification” rule be satisfactorily applied to a judgment for unliquidated damages. It is not a useful approach in such a case to say that a person cannot be expected to pay until the liability has been quantified. The litigant who obtains a judgment for damages to be assessed has already suffered damage at the date when the judgment is pronounced. That he should have to wait for the damages until after they are quantified is necessary, but there is no reason why he should not have interest when, in the end, they are paid. In Borthwick v Elderslie Steamship Co Ltd (No 2) [1905] 2 KB 516, the Court of Appeal held that, in the case of a judgment for damages to be assessed, interest was payable from the date of the judgment. Romer LJ, after saying that the plaintiff was held entitled to recover damages the amount of which remained to be ascertained, continued (at 522): “The amount has since been ascertained, and must be treated as if it had been mentioned in the judgment of the Court; and the result is that the plaintiff has a judgment for an ascertained sum, dated on the day on which it is pronounced.” Whichever rule is adopted, therefore, some violence will have to be done to the general principle in order to secure a just result in certain cases … the purpose of an order for costs is to give an indemnity, or partial indemnity, to the successful litigant in respect of his expenses of the litigation. If, therefore, he has made payments to his lawyers in respect of costs prior to taxation (and it is likely nowadays that he will) it is difficult to see why he should be denied interest as from the judgment or later payment on the amounts from time to time paid (up to the aggregate ultimately allowed on taxation). On the other hand, interest cannot be allowed in the K v K situation. It seems to us that the court is entitled to consider the purpose of the statute and to construe it as not permitting interest in such circumstances. If the date of judgment is accepted as the general principle, such a construction would merely be a limitation on the general principle in order to avoid absurd results, just as in the case of interest on a judgment on a fixed sum to be paid at a future date … The only alternative, we think, is to apply the allocatur rule rigidly in the case of costs.’
Conclusion
The Court of Appeal in K v K [1977] 1 All ER 575, [1977] Fam 39 misapprehended the nature of the amendment made to the new form by the Rules of the Supreme Court (Revision) 1965, for the reasons already stated. The decision in Pyman & Co v Burt Boulton [1884] WN 100 as to the effect of the 1883 rules, as approved by the Court of Appeal in Boswell v Coaks (1887) 57 LJ Ch 101, was correct. Accordingly the incipitur rule prevails. I respectfully agree with the observations of the Court of Appeal that a satisfactory result
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cannot be achieved in every case, but in my judgment the balance of justice favours the incipitur rule for the following reasons. (1) It is the unsuccessful party to the litigation who, ex hypothesi, has caused the costs unnecessarily to be incurred. Hence the order made against him. Since interest is not awarded on costs incurred and paid by the successful party before judgment, why should he suffer the added loss of interest on costs incurred and paid after judgment but before the taxing master gives his certificate? (2) Since, as the Court of Appeal rightly said in the Erven Warnink case [1982] 3 All ER 312, payments of costs are likely nowadays to be made to lawyers prior to taxation, then the application of the allocatur rule would generally speaking do greater injustice than the operation of the incipitur rule. Moreover, the incipitur rule provides a further necessary stimulus for payments to be made on account of costs and disbursements prior to taxation, for costs to be more readily agreed and for taxation, when necessary, to be expedited, all of which are desirable developments. Barristers, solicitors and expert witnesses should not be expected to finance their clients’ litigation until it is completed and the taxing master’s certificate obtained. If interest is not payable on costs between judgment and the completion of taxation, then there is an incentive to delay payment, delay disbursements and taxation. (3) It is common ground between the parties that the unsatisfactory situation illustrated in K v K can be simply dealt with by an express agreement between the solicitor and his client that any interest recovered on costs and disbursements after judgment is pronounced but before the taxing master’s certificate is obtained, which costs and disbursements have not in fact been paid prior to taxation, shall as to the interest on the costs belong to the solicitor and as to the interest on disbursements be held by him for and on behalf of the person or persons to whom the disbursements are ultimately paid.
For the sake of completeness I should add that counsel for the respondents strongly argued that an order for payment of costs to be taxed cannot be a judgment debt within s 17 of the 1838 Act because until taxation has been completed there is no sum for which execution can be levied. This point appears to have been raised in the Erven Warnink case and disposed of at the end of the judgment on the basis that the courts have accepted since its enactment that s 17 does apply to such a judgment and accordingly the law has gone too far for that argument (see [1982] 3 All ER 312 at 320). I agree. This acceptance is because a judgment for costs to be taxed is to be treated in the same way as a judgment for damages to be assessed, where the amount ultimately ascertained is treated as if it was mentioned in the judgment, no further order being required. A judgment debt can therefore in my judgment be construed for the purpose of s 17 as covering an order for the payment of costs to be taxed.
I accordingly would allow this appeal with costs, both in your Lordships’ House and in the courts below, and would order that interest on the costs of this action should be payable by the respondents at the appropriate rates from 1 November 1984.
LORD JAUNCEY OF TULLICHETTLE. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Ackner. I agree with it, and for the reasons that he has given I too would allow the appeal with costs, both in your Lordships’ House and in the courts below, and that interest on the costs of this action should be payable by the respondents at the appropriate rates from 1 November 1984.
Appeal allowed.
Solicitors: Robin Thompson & Partners, Ilford (for the appellant); Davies Arnold & Cooper (for the respondents).
Mary Rose Plummer Barrister.
R v Grays Magistrates, ex parte Low
[1988] 3 All ER 834
Categories: CRIMINAL; Criminal Procedure: ADMINISTRATION OF JUSTICE; Judiciary
Court: QUEEN’S BENCH DIVISION
Lord(s): WATKINS LJ AND NOLAN J
Hearing Date(s): 8, 9 MARCH, 19 MAY 1988
Magistrates – Summons – Issue of summons – Issue of second summons for same offence – Abuse of process – Applicant bound over to keep the peace at hearing of first summons – Complainant laying fresh information and magistrates issuing fresh summons in respect of same offence – Whether issue of second summons an abuse of process.
Following a fracas between the applicant on the one hand and the complainant and members of her family on the other, the police laid an information which resulted in a summons being issued against the applicant alleging assault against the complainant. On 2 April 1987 the matter came before the magistrates and the applicant agreed to be bound over to keep the peace. The Crown Prosecutor then withdrew the summons. On 8 April the complainant laid an information which resulted in a fresh summons being issued by a different bench of magistrates against the applicant repeating the charge made by the police in the first summons. The second bench was not informed that the earlier summons for the same offence had been withdrawn. The applicant subsequently applied to the magistrates for the second summons to be dismissed but the magistrates refused to do so, on the ground that it was in the interests of justice for the complainant to have recourse to the court to have her complaint determined and that she should not be bound by the decision of the Crown Prosecutor, over which she had no control, to withdraw the first summons. The applicant applied for judicial review of the magistrates’ decision by way of an order of prohibition to restrain the magistrates from proceeding to hear the second summons.
Held – Although the withdrawal of a summons did not of itself bar the issue of a further summons in respect of the same charge if the defendant had never been put in peril of conviction on the first summons the magistrates considering the second information were required to determine, in the light of the circumstances surrounding the withdrawal of the first summons, whether the issue of a second summons would be vexatious or an abuse of process. Since the magistrates considering the information laid by the complainant had not been aware of the previous summons or the fact that the applicant had been bound over the decision to issue the second summons was erroneous and would be quashed (see p 837 h to p 838 a c to h, post).
Notes
For the withdrawal of a summons, see 29 Halsbury’s Laws (4th edn) para 328, and for a case on the subject, see 33 Digest (Reissue) 129, 882.
Cases referred to in judgments
Davis v Morton [1913] 2 KB 479, [1911–13] All ER Rep 369, DC.
Owen v Minoprio [1942] 1 All ER 30, [1942] 1 KB 193, DC.
Pickavance v Pickavance [1901] P 60, DC.
R v Aubrey-Fletcher, ex p Thompson [1969] 2 All ER 872, [1969] 1 WLR 872, DC.
R v Bury Justices, ex p Anderton (1987) Times, 4 April, DC.
R v Central Criminal Court, ex p Boulding [1984] 1 All ER 766, [1984] QB 813, [1984] 2 WLR 321, DC.
R v Tyrone Justices [1912] 2 IR 44, Ir KB DC.
R v Phipps, ex p Alton [1964] 1 All ER 972, [1964] 2 QB 420, [1964] 2 WLR 802, DC.
R v Redbridge Justices, ex p Sainty [1981] RTR 13, DC.
Page 835 of [1988] 3 All ER 834
Cases also cited
Land v Land [1949] 2 All ER 218, [1949] P 405.
R v Ashton under Lyme Justices, ex p Potts (1964) Times, 29 March, DC.
R v Brentford Justices, ex p Wong [1981] 1 All ER 884, [1981] QB 445.
R v Derby Justices, ex p Brooks (1984) 80 Cr App R 164.
R v Grays Justices, ex p Graham [1982] 3 All ER 653, [1982] QB 1239, DC.
Application for judicial review
Michael John Low applied, with the leave of the Divisional Court (Lloyd LJ and Macpherson J) on 11 December 1987, for judicial review of a decision of the Gray’s justices on 30 September 1987 refusing to withdraw a summons issued against the applicant on 8 April 1987 on an information laid by the complainant, Queenie Violet Zervos, alleging that he had assaulted the complainant causing her actual bodily harm. The applicant sought an order of prohibition to restrain the justices from proceeding to hear the information. The facts are set out in the judgment of Nolan J.
Richard Germain for the applicant.
Nigel Pleming as amicus curiae.
The complainant did not appear.
Cur adv vult
19 May 1988. The following judgments were delivered.
NOLAN J (giving the first judgment at the invitation of Watkins LJ). Michael John Low, the applicant in this case, seeks an order of prohibition to restrain the Grays justices from proceeding with the trial of an information laid against him by Queenie Violet Zervos. The information alleges that the applicant assaulted Mrs Zervos on 28 December 1986, occasioning her actual bodily harm. On the basis of that information a summons, directed to the applicant, was issued by the Grays Magistrates’ Court on 8 April 1987.
When the matter first came before this court the applicant was represented by counsel, but the justices were not represented. We were troubled by that, and also by the relative sparseness of the evidence before us concerning the course of events in the Grays Magistrates’ Court which had given rise to these proceedings. Accordingly we adjourned the hearing and requested the Treasury Solicitor to instruct counsel on behalf of the justices. At the adjourned hearing the justices were represented by counsel, and both he and counsel for the applicant have been of great assistance to the court in elucidating the relevant law and the relevant facts.
The history of the matter begins with a fracas which evidently occurred between the applicant on the one hand and Mr and Mrs Zervos and their son Nicholas on the other, on 28 December 1986. On 26 January 1987, on the basis of informations laid by the Chief Constable of Essex, summonses were issued at Grays Magistrates’ Court against the applicant alleging that on that occasion he had assaulted Mr and Mrs Zervos and their son Nicholas occasioning each of them actual bodily harm, and against Nicholas Zervos alleging assault occasioning actual bodily harm on the applicant.
Subsequently the Crown Prosecutor suggested that the best method of disposing of the case would be for the applicant and Nicholas Zervos to agree to be bound over to keep the peace. The applicant accepted that suggestion. Consequently, when the matter came before the Grays justices on 2 April 1987, the Crown Prosecutor withdrew all the summonses against the applicant with the leave of the justices, and the applicant consented to be bound over by the justices to keep the peace for a period of two years in the sum of £500.
Nicholas Zervos on the other hand did not agree to be bound over. The proceedings against him were therefore adjourned. We were told that at a later stage he elected for
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trial by jury on the charge against him, but that in the event the charge was not pursued.
On 8 April 1987 a fresh summons was issued at the Grays Magistrates’ Court against the applicant alleging an assault occasioning actual bodily harm on Mrs Zervos on 28 December 1986. This second summons was based on an information laid by Mrs Zervos rather than by the Chief Constable of Essex, but in substance it repeated the charge contained in the original summons against the applicant in respect of Mrs Zervos which had been withdrawn on 2 April 1987. We were told that Mrs Zervos was represented on 8 April 1987 by the solicitor who had represented Nicholas Zervos on 2 April 1987, and who has acted for the Zervos family throughout. The court which sat on 8 April 1987 was differently composed from that which had sat on 2 April 1987, and we were told that the justices were not informed, and were not aware, of the existence and withdrawal of the original summons.
On 30 September 1987 an application was made to the Grays justices on behalf of the applicant for them to decline to proceed on the summons issued on 8 April 1987, or alternatively to dismiss it. The grounds on which the application was made were that the withdrawal of the original summons was in the circumstances equivalent to a dismissal, and was therefore a bar to further proceedings, or alternatively that to proceed with the summons issued on 8 April 1987 would be an abuse of the process of the court.
The application was refused. The chairman of the bench has sworn an affidavit stating that—
‘the application was refused as the court considered it to be more in the interests of justice that an individual should have recourse to the courts, to have an allegation considered than to be bound by a decision, taken by a third party, in this case the Crown Prosecution Service over which he has no control.’
So it comes about that the applicant now seeks to prevent the Grays justices from proceeding to deal with the charge contained in the summons issued on 8 April 1987.
In support of the applicant counsel referred us first to Pickavance v Pickavance [1901] P 60. In that case the view was expressed by the Divisional Court of the Probate Division that the withdrawal of a summons under the Summary Jurisdiction (Married Women) Act 1895 had the effect of putting an end to the complaint in respect of which it was issued, so that after the withdrawal no fresh summons could be issued on the same cause of complaint.
In the course of his judgment, with which Gorell Barnes J agreed, Jeune P made it clear that he considered this principle to apply to the criminal law as well as to matrimonial proceedings. He said (at 64):
‘It is to be remembered as a very important element in these cases, that the withdrawal of a summons can only take place by leave of the justices or magistrate: a complainant cannot put an end to a criminal proceeding except by leave of the Court, and if that leave is given and the summons is withdrawn that amounts to a consent by the Court; and that involves the obvious effect that the complaint upon which the summons was founded necessarily falls to the ground.’
The actual decision in the Pickavance case appears however to have been based on the simple proposition that the second summons was, in any event, issued out of time.
In R v Tyrone Justices [1912] 2 IR 44 the King’s Bench Divisional Court of Ireland dissented from the proposition that the view expressed in the Pickavance case could be applied to the criminal law. The court held that an order of the justices permitting a summons for a summary offence to be withdrawn did not amount to an acquittal, and was no bar to the issue of fresh summons for the same offence.
Palles CB said (at 48):
‘In my opinion, the permission given by the Justices to withdraw the first complaint did not amount to an acquittal. The order involved no more than the
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consent of the justices that the question of the guilt or innocence of the defendant in the summons should be withdrawn from their cognizance, that is, that they should not adjudicate upon it. There was therefore an absence of adjudication; whilst, to amount to an acquittal, it was necessary that there should be an adjudication on the merits.’
Gibson J expressed himself in similar terms, and Boyd J concurred.
The same approach was adopted by this court in Davis v Morton [1913] 2 KB 479 and Owens v Minoprio [1942] 1 All ER 30, [1942] 1 KB 193, both of these being cases in which the justices had agreed to the withdrawal of the original summonses because of procedural defects.
More recently, in R v Phipps, ex p Alton [1964] 1 All ER 972, [1964] 2 QB 420 this court was concerned with a summons which had been withdrawn by leave of the justices simply because the prosecution decided to offer no evidence in support of the charge. Lord Parker CJ quoted the judgments of Palles CB and Gibson J in the Tyrone Justices case in support of the proposition that ‘an application for withdrawal and the consent to the withdrawal is in no sense a part of an enquiry if it be an indictable offence or a summary trial if it be a summary offence’ (see [1964] 1 All ER 972 at 975, [1964] 2 QB 420 at 427). The result in that case was that, as the law then stood, there could be no order for costs in favour of the defendant.
Finally, in R v Redbridge Justices, ex p Sainty [1981] RTR 13 this court held once again that the withdrawal of a summons was not a bar to the issue of a second summons against the defendant in respect of the same incident because ‘he was never put in peril’ as a result of the first summons (at 18 per Ackner LJ).
The report of the facts in Sainty’s case is not entirely clear. It seems that the original summons related to three charges, but was withdrawn because the prosecution decided that they only wished to proceed on two of those charges. The second summons was concerned with those two charges alone. The case is thus distinguishable in that the prosecution seem to have made it clear throughout that, although they sought the withdrawal of the original summons, they had no intention of abandoning the two charges with which the second summons was concerned. None the less, in the light of Sainty’s case and of the earlier cases in this court to which I have referred, I think it must now be regarded as settled law that, despite the dicta to the contrary in Pickavance v Pickavance the withdrawal of a summons with the consent of the justices will not of itself operate as a bar to the issue of a further summons in respect of the same charge where there has been no adjudication on the merits of the charge in the original summons, and the defendant has not been put in peril of conviction on it. Accordingly, submits the amicus curiae, the justices in the present case were right in deciding that they could and should deal with the summons issued on 8 April 1987, notwithstanding the withdrawal of the original summons.
There are, however, two factors in this case which appear to me to take it outside the scope of the authorities to which I have referred. The first is that the court which issued the summons on 8 April was not made aware of the withdrawal of the original summons against the applicant, nor of the circumstances in which that withdrawal occurred. These were considerations which should have been brought to the attention of the court, so that it could consider whether the application for the fresh summons was a proper use of the process, or was merely vexatious. We do not known why the background to the matter was not disclosed to the court, but it is not necessary to inquire further because it is now established that the withholding of material information is in itself a critical factor in determining whether a summons should be set aside as an abuse of the process of the court: see R v Bury Justices, ex p Anderton (1987) Times, 4 April, a decision of this court. This decision is not reported elsewhere and so was not brought to the attention of the justices on 30 September 1987.
Secondly, the present case is not a simple case of the justices having consented to the
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withdrawal of a summons without embarking on any consideration of the merits of the case. We have no details of precisely what took place at the hearing on 2 April 1987 when the original summonses against the applicant were withdrawn, but it seems clear that their withdrawal was conditional on the applicant consenting to be bound over. It is well settled that the power to bind over should not be exercised unless there is material before the justices on which they can conclude that there is a risk of a breach of the peace in future: see, for example, R v Aubrey-Fletcher, ex p Thompson [1969] 2 All ER 846, [1969] 1 WLR 872. Further, the person to be bound over must not only consent, but may have a right to make representations on specific features of the proposed order, such as the amount of the recognisance: see R v Central Criminal Court, ex p Boulding [1984] 1 All ER 766, [1984] QB 813.
With these considerations in mind, I must respectfully dissent from the reason given by the justices in the present case for refusing to dismiss or discharge the summons issued on 8 April 1987 as an abuse of the process of the court. It will be remembered that the gist of their reasoning, as set out in the affidavit of the chairman, was that it was more in the interests of justice that Mrs Zervos should have recourse to the courts, to have an allegation considered, than be bound by a decision, taken by a third party, in this case the Crown Prosecution Service, over which she had no control. This line of reasoning ignores the vital considerations not only that the justices sitting on 2 April 1987 had been a party to that decision, but that it had been conditional on the agreement of the applicant to accept the obligation of being bound over. It would not be right to say that the fact that an earlier summons has been withdrawn in return for the defendant consenting to be bound over is necessarily a bar to subsequent proceedings in respect of the same alleged offence, but it is something which the justices should take carefully into account in considering whether or not a fresh summons in respect of the same alleged offence is an abuse of the process of the court.
In fairness to the justices I must add that the history of the matter, as well as the relevant case law, has been deployed in this court much more fully than it evidently was before them.
In the circumstances as they now appear, it seems to me that the decision of the justices was erroneous in law and cannot stand. It would be unjust to the applicant, and an abuse of the process of the court, for the complaint of Mrs Zervos to be further pursued. For my part I would grant the applicant the relief sought.
WATKINS LJ. I entirely agree. I think the Crown Prosecutor acted very wisely at the hearing on 2 April 1987. So did the justices sitting on that day. The Crown Prosecutor was equally sensible in not pursuing the matter with respect to Nicholas Zervos. To do so would clearly have been a waste of time and money and to no useful purpose.
Quarrels among neighbours are notorious for producing long-standing feelings of resentment, hostility and sometimes a desire for revenge of one kind or another, including punishment. Justices must be astute to see to it that they are not used for such a purpose unless the contemplated proceedings are apparently justified. Otherwise the court’s process will be abused and that cannot be tolerated. That there was such an abuse here I do not doubt.
The decision to proceed against the applicant will be quashed.
Application allowed.
Solicitors: Bates & Partners, Southend-on-Sea (for the applicant); Treasury Solicitor.
Sophie Craven Barrister.
Boeing Co v PPG Industries Inc
[1988] 3 All ER 839
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): O’CONNOR, WOOLF LJJ AND SIR ROGER ORMROD
Hearing Date(s): 30 JUNE 1988
Evidence – Proceedings in other jurisdictions – Examination of witness in relation to matters pending before foreign tribunal – Objection to evidence being taken – Whether opposing party in foreign proceedings having locus standi to apply to set aside order for examination of witness – Evidence (Proceedings in Other Jurisdictions) Act 1975.
In proceedings in the United States between the plaintiff and the defendant a United States court issued letters rogatory on the application of the defendant requesting that evidence be taken in England from, and documents produced by, two English companies. Pursuant to the letters rogatory the master made an ex parte order under the Evidence (Proceedings in Other Jurisdictions) Act 1975 directed to the two English companies requiring them to attend for evidence to be taken and for them to produce certain documents. The plaintiff applied to have the order set aside, but the judge held that the plaintiff had no standing to object to the order and that the only person who could do so was the person to whom the order was addressed. The plaintiff appealed to the Court of Appeal.
Held – A party to foreign proceedings had locus standi to apply to set aside an ex parte order obtained under the 1975 Act by the other party to the proceedings directing a third party to attend for examination or to produce documents. The plaintiff was therefore entitled to apply to have the order directing the two English companies to give evidence set aside. The appeal would accordingly be allowed (see p 841 h to p 842 f j to p 843 b, post).
Notes
For evidence for proceedings in other jurisdictions, see 17 Halsbury’s Laws (4th edn) paras 326–330, and for cases on the subject, see 22(2) Digest (2nd reissue) 350–356, 10327–10342.
For the Evidence (Proceedings in Other Jurisdictions) Act 1975, see 17 Halsbury’s Statutes (4th edn) 190.
Cases referred to in judgments
Asbestos Insurance Coverage Cases, Re [1985] 1 All ER 716, [1985] 1 WLR 331, HL.
Rio Tinto Zinc Corp v Westinghouse Electric Corp [1978] 1 All ER 434, [1978] AC 547, [1978] 2 WLR 81, HL.
Cases also cited
Harmony Shipping Co SA v Davis [1979] 3 All ER 177, [1979] 1 WLR 1380, CA.
Sullivan v West Yorkshire Passenger Transport Executive (1980) [1985] 2 All ER 134, CA.
Interlocutory appeal
The plaintiff, Boeing Co, appealed against the decision of Schiemann J on 29 June 1988 refusing to allow the plaintiff to apply to set aside an ex parte order made by Master Lubbock on 15 June directed to British Airways plc and Triplex Aircraft and Special Products Ltd requiring them to produce certain documents and witnesses for examination under the Evidence (Proceedings in Other Jurisdictions) Act 1975 pursuant to a letter rogatory issued by the United States District Court for the Western District of Washington in proceedings between the plaintiff and the defendant, PPG Industries Inc, at whose request the letter was issued. The facts are set out in the judgment of Woolf LJ.
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Mark Howard for Boeing.
Charles Hollander for PPG.
30 June 1988. The following judgments were delivered.
WOOLF LJ (giving the first judgment at the invitation of O’Connor LJ). This is an appeal from an order made yesterday by Schiemann J in proceedings which arise out of the Evidence (Proceedings in Other Jurisdictions) Act 1975. In the United States proceedings are taking place between Boeing Co and PPG Industries Inc. In those proceedings a request was made by the American court for evidence to be taken in this country and for documents to be produced, that request being under the 1975 Act.
Pursuant to the letters rogatory which emanated from the American court, an order was made ex parte by Master Lubbock on 15 June 1988. An application to set aside that order was made by Boeing Co The orders were twofold, one against British Airways plc and the other against Triplex Aircraft and Special Products Ltd (Triplex). The matter was due to be heard by a master, but, by agreement between the parties, it was arranged that the application should be heard by a judge in chambers.
The matter was mentioned to the judge on 28 June, and came before him yesterday. The point was taken by PPG that there was no locus standi on the part of Boeing to apply to set aside the ex parte order. By the time the matter was before the judge on 29 June, a summons had been taken out by Triplex to set aside the order; and, in so far as the order affected Triplex, he accepted that he had jurisdiction to hear that company. On the basis of submissions of counsel (who has appeared before this court) who was appearing not only on behalf of Boeing but also Triplex, the judge deleted certain parts of the order which were made pursuant to the letters rogatory, as will appear hereafter, but he refused to take the same action with regard to the order which affected British Airways and he gave short reasons for coming to that conclusion. He said:
‘The right person to take objection to an order made at the request of a foreign court pursuant to the Evidence (Proceedings in Other Jurisdictions) Act 1975 is the person to whom the order is addressed. That person not having taken objection it would not be right to set aside the order. I do not say that I have no jurisdiction. It is a matter for my discretion. I am satisfied that British Airways are capable of looking after their own interests.’
On behalf of Boeing counsel submits (i) that the company has locus standi to make the application to set aside the ex parte order and (ii) that, in so far as there is any discretion in the court to refuse to allow the company to make such an application, the only proper way in the circumstances of this case that that discretion could be properly exercised is by allowing the company to make the application and then to make the order sought.
The application which Boeing wished to pursue only related to part of the order. It related to the order so far as it required the production before the examiner of documents. The order was drawn in a form which had a schedule attached to it. That schedule listed the documents under various paragraphs, in some of which appeared, after the mention of specific documents, phrases which commenced with the words ‘together with’. I read para 2 of the schedule as an example of the phrase to which objection is taken as not being sufficiently specific:
‘A letter believed to have been mailed by Boeing to British Airways on or about March 31, 1983, enclosing a proposed amendment to the Spare Parts General Terms Agreement between Boeing and British Airways, together with letters, notes, and minutes of communications between British Airways and Boeing concerning the above-described letter.’
The application which was made both by Boeing and Triplex in relation to the order which had been made ex parte in respect of Triplex was in very similar terms to the order which had been made in relation to British Airways. The judge, having heard
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Triplex on the terms of that order, deleted the references in that order to the references to documents which followed the word ‘together’ in the sort of paragraph to which I have already made reference.
It is understandable that the judge took that view, because the power of the United Kingdom courts to give effect to an application for assistance is contained in s 2 of the 1975 Act. Subsection (4)(b) of that section, which is the relevant subsection, provides as follows:
‘An order under this section shall not require a person … (b) to produce any documents other than particular [and I emphasise the word ‘particular’] documents specified in the order as being documents appearing to the court making the order to be, or to be likely to be, in his possession, custody or power.’
The proper interpretation of that section, which I emphasise goes to the jurisdiction of the court, which is purely statutory, has now been considered by the House of Lords at least on two occasions. The first occasion was in Rio Tinto Zinc Corp v Westinghouse Electric Corp [1978] 1 All ER 434, [1978] AC 547 and the second in Re Asbestos Insurance Coverage Cases [1985] 1 All ER 716, [1985] 1 WLR 331. I need not refer in detail to the speeches of the House of Lords in those cases. It is sufficient if I indicate that they emphasise that, when the subsection says that is to refer to particular documents, that is what it means the order. It can clearly be seen that there are difficulties which are obvious in relation to the wording of the schedule which was taken from the letters rogatory which came from the United States having regard to the provision to which I have referred. In my view, there is no doubt at all that the judge was absolutely right on the application of Triplex to make the deletions which he did from the order which had previously been made ex parte by the master. Indeed, I am bound to say that I am not surprised to hear that the master himself had queried this part of the schedule. However, he thought, in my view, wrongly thought, that it would be appropriate to allow the order to go forth in the way in which it was submitted to him, leaving it to the recipients of the order to take objection if they chose to do so.
If the jurisdiction of the court is limited in the way that I have indicated, then it is not right that the court should allow an order to be made ex parte when it is one which it clearly has no jurisdiction to make. In my view, if the master had been referred to the terms of the speeches in the Asbestos case in particular, he would not have allowed the order to be made ex parte. That is confirmed by the fact that counsel appearing on behalf of PPG before the judge (I emphasise that he did not appear before the master), although he made no concession as to the invalidity of that part of the order, in fact was unable to advance any argument to sustain that part of the order and, indeed, before this court, although anxious to adopt the same attitude as he had before the judge, when forced to indicate whether or not he had any argument to advance to sustain its validity, conceded that he had no such argument.
Turning then to the question whether or not Boeing had locus standi to appear before the judge in the inter partes hearing in which it was sought to set aside the ex parte order which had been made, in my view there can be no doubt at all that Boeing was entitled to be heard. The company is a party in the proceedings in the United States. When the letters rogatory were issued by the United States court, Boeing was heard. The United States court at that time took the view that the precise form of the letters rogatory should be adjudicated on by the English courts rather than by the American courts. It is understandable that that view should be taken because, of course, what is a matter of English law is more readily ascertained by the courts in this country. Furthermore, if the order stood, Boeing would be entitled to appear and would have received notice of the hearing which was to take place pursuant to the letters rogatory in this country. It would be entitled to cross-examine witnesses and, in relation to documents, to take points with regard to privilege and matters of that sort, albeit that the examiner’s powers are extremely limited. It, in my view, was clearly affected by this order, and the order was
Page 842 of [1988] 3 All ER 839
one which it contends was made without jurisdiction, and, indeed, which it was contending on the face of the order disclosed the fact that it was made without jurisdiction.
In these circumstances it seems to me, with the greatest respect to the judge, that he should have taken the view that he was required to hear the submissions which Boeing had to make in the circumstances of this case, and, having come to the view which he did, which was the only view having regard to the proper way to deal with the order affecting Triplex, he should have come to exactly the same view in relation to the order which affected British Airways.
One can well understand that a company such as British Airways, which is served with an order, would not itself necessarily want to get involved in litigation about the validity of the order. That could have adverse affects in relation to costs. If an English company or an English individual is not involved in litigation in the United States, it may well take the view that the simplest way of dealing with an order of this sort is to comply with it. In my view, it is important that the parties to the original proceedings should be entitled to be protected against orders which are made under an English Act of Parliament without jurisdiction. It seems in this case that the only way that could be achieved is by hearing Boeing. It was not heard before the judge. It has been heard before this court. Although again it was a matter which counsel for PPG submitted should not be dealt with by this court, it seems also to me that the only course this court can take is now to make the same order as the judge made in relation to Triplex in respect of the British Airways order.
Counsel for PPG submitted that the matter should go back to the judge. That, in my view, would be a wholly purposeless exercise. Once it is shown that the judge went wrong in the way that I have indicated, this court should deal with the whole matter when it can conveniently do so as it can in this obvious case.
Accordingly I would allow this appeal and make an order as indicated.
SIR ROGER ORMROD. I agree and there is nothing that I wish to add.
O’CONNOR LJ. I also agree. In Re Asbestos Insurance Coverage Cases 1985] 1 All ER 716 at 721, [1985] 1 WLR 331 at 337 Lord Fraser stated in detail the reasons for restricting s 2(4)(b) of the Evidence (Proceedings in Other Jurisdictions) Act 1975. It will be seen that sub-s (4)(a) reads:
‘An order under this section shall not require a person—(a) to state what documents relevant to the proceedings to which the application for the order relates are or have been in his possession, custody or power … ’
That is giving effect to the rule that the court will not order discovery against persons who are not parties to the litigation.
Counsel for PPG submitted that this case was on all fours with a subpoena duces tecum issued in this country. For my part I cannot accept that submission. That is an entirely different matter which is within the jurisdiction of this court and, if the process is abused in any particular case, it may very well be that the court will interfere to restrict or set aside the subpoenas that have been issued. The fact that in the ordinary course of events the opposite party cannot and does not apply to the court to set aside a subpoena means that the party’s right course there is to object to the production and admissibility of the documents when the subpoena is complied with in the court. That is nothing whatever to do with the form which an order made under letters rogatory should take. That is entirely a creature of statute, and the present order did not conform with the requirements of the statute.
It was in my judgment not only in the power of Boeing which was a party to the litigation, to bring that to the attention of the court, but it was its duty to do so.
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The judge fell into error in taking the view that it had no right to be heard and in then exercising his discretion which he should not have done in that way. He had come to the correct conclusion as to the validity of the order in the Triplex case. He should have come to exactly the same conclusion in the British Airways case and struck out the offending part of the letters.
Counsel for PPG submitted that we should send the matter back to the judge. That is quite unnecessary and undesirable in this case. The evidence is being taken under that request at this very moment, and it would be quite wrong to send this pure question of law back to him.
I am satisfied that this court has the power and, indeed, the duty to do what is wanted, namely to strike out the offending paragraphs.
Appeal allowed.
Solicitors: Lovell White Durrant (for Boeing); Clifford Chance (for PPG).
Raina Levy Barrister.
Procter & Gamble Philippine Manufacturing Corp v Peter Cremer GmbH & Co
The Manila
[1988] 3 All ER 843
Categories: CONTRACT
Court: QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
Lord(s): HIRST J
Hearing Date(s): 15, 16, 17, 24 MARCH 1988
Contract – Breach – Waiver – Conduct amounting to waiver – Bills of lading dated on last day of contractual period for shipment – Shipping documents including survey report showing shipment of cargo may have been outside contractual period – Buyers taking up and paying for shipping documents without reservation – Whether buyers’ conduct constituting waiver of right to reject cargo on ground of incorrect bills of lading.Contract – Restitution – Contract for shipment of cargo – Shipowners becoming insolvent after loading of cargo – Buyers paying additional freight to ensure sailing of ship – Buyers later repudiating contract on ground of sellers’ breach – Whether sellers liable to reimburse buyers for additional freight – Whether sellers deriving financial benefit from payment of additional freight.
By two contracts on the GAFTA 100 form, the sellers agreed to sell two lots of copra cake for shipment cif Rotterdam to Hamburg from the Philippines. Bills of lading dated on the last day of the contractual period for shipment were subsequently issued purporting to evidence shipment of both lots of copra cake on board the appointed vessel on that date as part of a bulk cargo. In order to ensure that the vessel commenced its voyage, the buyers paid additional freight to the ship’s owners, whose insolvency had prevented the vessel from sailing after the cargo had been loaded. On presentation of the shipping documents in Hamburg, the buyers paid 98% of the purchase price for the copra in accordance with the contracts, despite the fact that the documents included, although it was not contractually required, a survey report which stated that the loading of the vessel’s cargo had not been completed until 11 days after the shipment date shown on the bills of lading. Shortly after the vessel arrived in Rotterdam, the buyers sought to repudiate the contracts on the ground that the bills of lading were incorrectly dated and
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therefore in breach of a contract term which provided that the bills of lading were to be dated when the cargo was actually on board the vessel. The sellers denied any breach and claimed the balance of the purchase price, alleging that the buyers’ conduct in taking up and paying for the shipping documents without reserving their right to reject the cargo on arrival constituted a waiver of that right, particularly since it was reasonably clear from the survey report that the bills of lading were incorrectly dated. The arbitrators held in favour of the sellers. The GAFTA board of appeal allowed an appeal by the buyers, holding that the buyers had not waived their right to reject the cargo on arrival because the details in the survey report were not such as to cast doubt on the validity of the date shown on the bills of lading. The board of appeal awarded the buyers repayment of the money paid against the shipping documents and, on the principle of restitution, repayment of the additional freight which they had paid to the shipowners. The sellers appealed against the award.
Held – (1) The appeal board’s conclusion that the buyers had not waived their right to reject the cargo could not be overruled, since that conclusion was based on the finding that the details of the survey report were not sufficient to cast doubt on the validity of the date shown on the bills of lading which, being a finding of fact and not law, was not open to attack on appeal. Accordingly, the appeal against the finding in the award that the buyers were entitled to repayment would be dismissed (see p 853 a b h to p 854 b f, post); Panchaud Fréres SA v Ets General Grain Co [1970] 1 Lloyd’s Rep 53, dicta of Roskill LJ in V Berg & Son Ltd v Vanden Avenne-Izegem PVBA [1977] 1 Lloyd’s Rep 499 at 504, of Lord Denning MR in Bremer Handelsgesellschaft mbH v C Mackprang Jr [1979] 1 Lloyd’s Rep 221 at 226 and of Robert Goff J in BP Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 925 at 946–947 considered.
(2) There was no basis for an award founded on the principle of restitution requiring the sellers to reimburse the buyers for the additional freight paid to the shipowners, since the sellers had not derived an incontrovertible financial benefit as a result of that payment and the consequent completion of the voyage. Accordingly, the appeal against the second part of the award would be allowed (see p 855 h to p 856 a c, post).
Notes
For waiver in general, see 9 Halsbury’s Laws (4th edn) paras 571–574, and for cases on the subject, see 12 Digest (Reissue) 544–545, 3796–3906.
For the principle of restitution, see 9 Halsbury’s Laws (4th edn) para 630.
Cases referred to in judgment
Alan (W J) & Co Ltd v El Nasr Export and Import Co [1972] 2 All ER 127, [1972] 2 QB 189, [1972] 2 WLR 800, CA.
Berg (V) & Son Ltd v Vanden Avenne-Izegem PVBA [1977] 1 Lloyd’s Rep 499, CA; rvsg [1976] 1 Lloyd’s Rep 348.
BP Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 925, [1979] 1 WLR 783; affd [1982] 1 All ER 925, [1981] 1 WLR 232, CA; affd [1982] 1 All ER 925, [1983] 2 AC 352, [1982] 2 WLR 253, HL.
Bremer Handelsgesellschaft mbH v C Mackprang Jr [1979] 1 Lloyd’s Rep 221, CA.
Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109, HL.
Central London Property Trust Ltd v High Trees House Ltd (1946) [1956] 1 All ER 256, [1947] KB 130.
Central Newbury Car Auctions Ltd v Unity Finance Ltd (Mercury Motors, third party) [1956] 3 All ER 905, [1957] 1 QB 371, [1956] 3 WLR 1068, CA.
Chao (trading as Zung Fu Co) v British Traders and Shippers Ltd (NV Handelmaatschappij J Smits Import-Export, third party) [1954] 1 All ER 779, [1954] 2 QB 459, [1954] 2 WLR 365.
Page 845 of [1988] 3 All ER 843
Edwards (Inspector of Taxes) v Bairstow [1955] 3 All ER 48, [1956] AC 14, [1955] 3 WLR 410, HL.
Hughes v Metropolitan Rly Co (1877) 2 App Cas 439, [1874–80] All ER Rep 187, HL.
Panchaud Frères SA v Ets General Grain Co [1970] 1 Lloyd’s Rep 53, CA; rvsg [1969] 2 Lloyd’s Rep 109.
Pioneer Shipping Ltd v BTP Tioxide Ltd, The Nema [1981] 2 All ER 1030, [1982] AC 724, [1982] 3 WLR 292, HL.
Procter & Gamble Philippine Manufacturing Corp v Kurt A Becher GmbH & Co KG [1988] 2 Lloyd’s Rep 21, CA.
Raiffeison Hauptgenossenschaft v Louis Dreyfus & Co Ltd [1981] 1 Lloyd’s Rep 345.
Rickards (Charles) Ltd v Oppenheim [1950] 1 All ER 420, [1950] 1 KB 616, CA.
Société Italo-Belge pour le Commerce et l’Industrie SA v Palm and Vegetable Oils (Malaysia) Sdn Bhd, The Post Chaser [1982] 1 All ER 19.
Appeal
Procter & Gamble Philippine Manufacturing Corp (the sellers) of Manila appealed against the decision of the board of appeal of the Grain and Feed Trade Association given on 12 February 1987 and 9 November 1987 allowing an appeal by Peter Cremer GmbH & Co (the buyers) of Hamburg against an arbitration award dated 24 September 1986 whereby it was adjudged, inter alia, (i) that the sellers should pay $US145,265 to the buyers, being the money paid to the sellers against incorrect bills of lading which purported to evidence shipment on board the vessel Manila of two lots of 500 tonnes of copra cake on 31 January 1984, and (ii) that the sellers should pay $US28,500 to the buyers in respect of additional freight paid by the buyers to the insolvent owners of the vessel to ensure that it commenced the chartered voyage from Manila to Rotterdam. The facts are set out in the judgment.
Graham Dunning for the sellers.
Nicholas Hamblen for the buyers.
Cur adv vult
24 March 1988. The following judgment was delivered.
HIRST J.
Introduction
This is an appeal with leave by the appellant sellers, Procter & Gamble Philippine Manufacturing Corp, against an award of the board of appeal of the Grain and Feed Trade Association dated 12 February 1987, together with a supplemental award of the board dated 9 November 1987 in favour of the respondent buyers, Peter Cremer GmbH & Co.
The arbitration proceedings arose out of two contracts dated respectively 14 October 1983 and 18 November 1983 each for the sale by the sellers of 500 metric tons of copra cake for shipment cif Rotterdam to Hamburg in December 1983 to January 1984, both contracts being on the GAFTA 100 form. Bills of lading dated or purportedly dated 31 January 1984 (the last day of the contractual period for shipment) were issued each evidencing shipment on board the mv Manila of 500 tonnes in bulk on 31 January 1984. Sometime in February or March shipping documents were presented in Hamburg and the buyers paid $US145,265 in accordance with the contracts, being 98% of the purchase price, less a deduction (also as provided by the contract) for freight already paid by the buyers on the sellers’ behalf and without any exceptions. One of the documents included but not contractually required was a weight certificate and report of survey for each consignment furnished by SGS Far East Ltd (the survey report).
Loading having been completed on about 11 February (according to the survey report) the vessel did not sail, the shipowners having meantime become insolvent. After investigation the buyers, in May 1984, decided to pay the shipowners additional freight
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to ensure that the vessel sailed from the Philippines, which eventually it did on 28 May 1984, arriving in Rotterdam on 8 July 1984. Two days later on 10 July 1984 the buyers telexed the sellers stating that the bills of lading were wrongly dated and holding the sellers responsible. After various exchanges in which the sellers denied breach, the buyers eventually sold the goods under court authorisation, the proceeds being held pending the arbitration.
In the original GAFTA arbitration, in which the sellers claimed the balance of the purchase price, the arbitrators awarded in the sellers’ favour on the grounds that it was apparent from information contained in the survey report that there could be ‘a reasonable and fair doubt at the time of presentation [of the shipping documents] in Hamburg that neither [of the two] parcels were shipped on the dates shown on the bills of lading’, so that by their conduct in taking up the shipping documents the buyers precluded themselves from rejecting the goods on the grounds of late shipment or defective bills of lading.
The board of appeal allowed the buyers’ appeal, holding that while there was evidence that the bills of lading were incorrectly dated, the details in the survey report were not sufficient to cast doubts on their validity, so that there was no waiver by the buyers. It followed that they awarded to the buyers repayment of the $US145,265 paid against the shipping documents. In addition, for the first time, they found that the sellers were liable to repay the buyers the additional freight paid to the shipowners to enable the vessel to sail from Manila. No explanation was given for the latter finding, and this led to the supplemental award which was made as a result of an order of Webster J on 1 July 1987.
The issues
The issues which I shall deal with quite separately are as follows. 1. (a) Whether the board of appeal were obviously wrong in concluding that the survey report was not sufficient to cast doubt on the validity of the bill of lading date. (b) Whether the board should have directed themselves (in accordance with the conclusion of the original arbitrators) that the buyers’ conduct in taking up and paying for the shipping documents without reservation constituted a waiver of their right to reject the goods on the grounds that they had not been shipped within the contractual shipping period. 2. Whether the board erred in law and/or misdirected themselves in holding that the sellers were liable to compensate the buyers in respect of the additional freight payment.
Questions 1(a) and (b) above were amalgamated by Evans J when granting leave under one composite heading, namely the issues as to the validity of the relevant finding of the board of appeal.
The contracts
In addition to the salient points mentioned above in the introduction, the following clauses of the contracts are relevant. Clause 6, headed ‘Period of shipment’, provided:
‘As per Bills of Lading dated or to be dated December 1983 to January 1984. Bills of Lading to be dated when the goods are actually on board. Date of Bills of Lading shall be accepted as proof of date of shipment in the absence of evidence to the contrary.’
Clause 26, headed ‘Pro Rata’, provided:
‘Should any of the above-mentioned quantity form part of a larger quantity of the same or a different period of shipment, whether in bag or bulk, no separation or distinction shall be necessary.’
These two clauses are important, since in combination they clearly justify the issue of separate bills of lading notwithstanding that the cargo was shipped in bulk with no division, either by bags or compartments, of the individual parcels destined for individual buyers.
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The bills of lading
Each stated in terms ‘shipped on board Jan 31 1984’ and showed the date and place of issue to be ‘Manila Republic of the Philippines Jan 31 1984’.
Other contractual shipping documents
These comprised the certificate of insurance which is of no relevance, and the invoices, which are relevant, being dated 1 February 1984, and describing the goods as shipped via Manila, under bills of lading dated 31 January 1984.
The survey reports
These are for present purposes in identical terms and stated (i) that the surveyors attended, inter alia, on board the vessel to inspect the condition of the cargo, ascertain the weight and supervise the loading, (ii) that their attendance was between 12 January and 11 February 1984, (iii) that the total cargo relevant to each certificate was 500 tonnes, as part of a bulk cargo of 4,000 tonnes and (iv) that the time log (which for present purposes is the critical part of the report) was as follows:
‘Vessel’s arrival = 0600 hours January 22 1984
Hatch/Hold inspected and accepted = 1000 hours January 23 1984
Commenced loading = 2200 hours January 30 1984
Completed loading = 1630 hours February 11 1984’
Waiver
The full text of the relevant findings in the award of the board of appeal is as follows:
‘1. From the evidence before us the Bills of Lading are incorrectly dated. 2. From the evidence before us the Bills of Lading could not have been dated before 1st February 1984. 3. The details contained in the weight and survey certficate … [were] not sufficient to cast doubt on the validity of the Bill of Lading date, therefore the Buyers did not waive their rights by taking up and paying for the documents without making reserves.’
Counsel for the sellers submitted that the survey report showed that it was unlikely that more than about 350 tonnes had been loaded up to and including 31 January, since the loading of the cargo comprising 4,000 tonnes in all was not completed until 11 February, consequently on a straight line assumption neither of the two parcels of 500 tonnes each was likely to have been loaded during the contract period. As a result, he submitted, it was or should have been reasonably clear to the buyers from the survey report that the bills of lading which purported to evidence shipment of two lots of 500 tonnes in bulk on 31 January were falsely dated and that the goods were shipped late. The buyers should therefore either have rejected the shipping documents on tender or, if they wished to preserve their right to reject the goods on arrival, they should have reserved that right. By failing to do so, the buyers so conducted themselves as to lead the sellers reasonably to believe that the buyers would not be relying on the late shipment of the goods appropriated to their contract; indeed, when the buyers purported to reject after the goods arrived at Rotterdam, the sellers had responded ‘you have been aware of all the circumstances surrounding the shipment of the goods and agreed with the same’. It would be inequitable to allow the buyers to reject the goods on the ground of late shipment, since the sellers might well have chosen to make quite different arrangements for the disposal of the goods if the buyers had either rejected at the moment of tender of the shipping documents or at least reserved their position.
In support of these arguments counsel for the sellers began by citing the classic judgment of Devlin J in Chao (trading as Zung Fu Co) v British Traders and Shippers Ltd (NV Handelmaatschappij J Smits Import-Export, third party) [1954] 1 All ER 779 at 791, [1954] 2 QB 459 at 480, where he stated, concerning the respective rights to reject goods and documents, as follows:
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‘… there are distinct obligations, and the right to reject the documents arises when the documents are tendered, and the right to reject, or the moment for rejecting, the goods arises when they are landed and when, after examination, they are found not to be in conformity with the contract. There are many cases where the documents are accepted, but the goods are subsequently rejected. It may be that, if the actual date of shipment is not in conformity with the contract, the buyer, by accepting the documents, loses not only his right to reject the documents but also his right to reject the goods, but that would be because he had waived in advance the date of shipment.’
This last point arose directly in the decision of the Court of Appeal in Panchaud Frères SA v Ets General Grain Co [1970] 1 Lloyd’s Rep 53, which was the cornerstone of counsel’s argument. In that case the buyers rejected the goods on a ground which was later held to be unsound. The case went to arbitration, and when it reached the committee of appeal of the London Corn Trade Association the buyers for the first time contended they were entitled to reject the goods on a completely different ground, namely that they were not shipped during the contractual shipping period (i e not later than 31 July 1965). The bill of lading was dated 31 July 1965; however, other contractual shipping documents tendered included a certificate of quality which stated ‘loaded on August 10th to 12th 1965’. The committee of appeal held:
‘In so far as they are questions of fact we further find, and in so far as they are questions of law we hold, subject to the decision of the Court, as follows: (a) Whilst neither the Buyers nor their agents had appreciated until the later stages of the hearing before us that the Rio Grande cargo had been shipped in August 1965, they cannot be deemed to have been unaware, from the contents of the Certificate of Quality which formed part of the shipping documents, for which they paid without complaint, that the maize in bags shipped at Rio Grande was loaded between 10th and 12th August 1965 and that the date of the Rio Grande Bill of Lading was incorrect. (b) The Buyers by their conduct impliedly waived the irregularity in the date of the Rio Brande Bill of Lading and were not entitled, on that ground, to reject the goods thereby covered or purported to be covered or to claim damages therefor, or the return of the purchase price.’ (My emphasis.)
The case first came before Roskill J by way of case stated in which he reversed the decision of the committee of appeal (see [1969] 2 Lloyd’s Rep 109). Roskill J first had to consider the argument that the decision of the committee of appeal was a pure question of fact and therefore not assailable; this he rejected as follows (at 123):
‘For my part, I do not think it is possible to generalize. In some cases the ultimate decision whether or not one party has in the strict sense of the word waived his rights must depend upon the conclusion in law from specific facts found by the tribunal of fact. In others it may perhaps be a question of mixed law and fact, but I would not accept the view that waiver is in every case a question of fact. The weight of high authority is against that submission.’
He then proceeded to reverse the committee’s conclusion on two grounds: (a) that in the circumstances it lacked an essential finding of fact; and (b) that there was in any event no finding of actual knowledge in the minds of the buyers and the court should not lightly impute constructive knowledge to businessmen.
This decision was reversed in the Court of Appeal, where Lord Denning MR stated as follows (at 57–58):
‘The present case is not a case of “waiver” strictly so called. It is a case of estoppel by conduct. The basis of it is that a man has so conducted himself that it would be unfair or unjust to allow him to depart from a particular state of affairs which another has taken to be settled or correct, see the cases I referred to in Central
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Newbury Car Auctions Ltd. v. Unity Finance Ltd. and Another, Mercury Motors, Third Parties ([1956] 3 All ER 905 at 909, [1957] 1 QB 371 at 380). Applied to the rejection of goods, the principle may be stated thus: If a man, who is entitled to reject goods on a certain ground, so conducts himself as to lead the other to believe that he is not relying on that ground, then he cannot afterwards set it up as a ground of rejection, when it would be unfair or unjust to allow him so to do. [He than gave an instance of that and proceeded:] Another instance can be given from the ordinary sale of goods. If a buyer does not choose to examine the goods when they arrive and puts it off beyond a reasonable time, he loses his right to reject; see sect. 35 of the Sale of Goods Act, 1893. Although he did not know they were not in conformity with the contract, nevertheless, by letting a reasonable time go by, he loses his right to reject. It seems to me that this case falls within that principle. If the buyers had read the shipping documents when they took them up and paid for them—as they could and should have done—they would have read this certificate of quality and seen that the date of shipment was really Aug. 12: and that someone had put July 31 on to the bill of lading so as to make it appear that the goods had been shipped in accordance with the contract, whereas, in fact they had not. If the buyers choose not to read the documents, they must put up with the consequences. They must be treated as if they had read them. This was clearly the view of the Committee of Appeal of the London Corn Trade Association Ltd.: and, in a commercial matter like this, I like to hear the views of commercial men, just as Lord Mansfield did with his special jurymen. The Committee of Appeal held that the buyers “cannot be deemed to have been unaware” that the maize was loaded between Aug. 10 and 12, 1965. By taking up the documents and paying for them, they are precluded afterwards from complaining of the late shipment or of the defect in the bill of lading. That seems to me to be the finding of the Committee of Appeal, and I see no error in law in it. They used the word “waiver” but that does not matter. The buyers are precluded, by their conduct, from relying on the late shipment as a ground for rejecting the goods.’
Winn LJ stated as follows (at 59–60):
‘I too would deprecate any excessively scholastic approach to problems such as were presented to the commercial men in this Appeal Committee. I do not think they did use the word “waive” correctly, if the correctness of their use of it is to be judged by criteria which are familiar to and adopted by lawyers. But I do not attach any importance to this fact albeit I agree with the learned Judge’s view of it. Their use of the word was not technically precisely correct, but their meaning seems to be reasonably clear. There is a very good discussion of waiver in Chitty on Contracts, 23rd ed., General Principles volume, at par. 1241 and the following paragraphs. I do not take time to quote from those paragraphs: it is quite clear on referring to them that the learned authors treat, and I think rightly treat, “waiver” as derived either from agreement or from a quasi estoppel. In my own judgment it does not seem possible in this case to say affirmatively that there was here either a fresh agreement, to rescind or vary the original contract, or anything which, within the scope of the doctrine as hitherto enunciated, could be described as an estoppel or a quasi estoppel. I respectfully agree with my Lord that what one has here is something perhaps in our law not yet wholly developed as a separate doctrine—which is more in the nature of a requirement of fair conduct—a criterion of what is fair conduct between the parties. There may be an inchoate doctrine stemming from the manifest convenience of consistency in pragmatic affairs, negativing any liberty to blow hot and cold in commercial conduct … So I come to exactly what my Lord has been resting upon as one of the main bases of his judgment—and I respectfully adopt it myself—that by their conduct—in the opinion of this Appeal Committee dealing with the matter as a matter of fact from their experience and
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knowledge of how men in their trade act—the buyers had shown by their conduct that they were not relying upon any breach consisting of late shipment of these goods outside the agreed contract period. It is a case in which, as I read it, in the clearest terms this Appeal Committee was saying: having adopted this course of conduct in accepting these documents with that notice which they had, the buyers cannot properly thereafter turn round and say subsequently—when maybe there has been quite a change in commercial factors: “We want now, belatedly, to say that we now complain that the goods tendered to us are not to be accepted because they are not contract goods”; they are not goods described in the contract.’
Cross LJ stated as follows (at 61):
‘What they were saying was that any reasonable man who read the contractual documents would have formed the view that the goods had not been shipped within the contractual period; and that although these particular buyers did not read the certificate of inspection carefully and did not notice the date of loading stated in it, they ought not to be allowed to rely on that fact. The second question which arises is, whether that conclusion is wrong in law? If it were the law that a man who takes up documents of this sort cannot be adversely affected by anything in them unless he has actual knowledge of the matter in question then, of course, their finding would be wrong in law. But it is not suggested that is the law. [Counsel for the buyers] admitted that if the bill of lading itself had borne a date in the middle of August, then, even though these buyers had not read the bill, or if they read it, had not noticed the date, they could not have been heard to complain that the goods were not shipped within the contract period. But he invited us to draw a line between matters which had to be included in the contractual documents if they were to play their proper part in the contractual scheme and matters such as the date of loading in the certificate of inspection, which did not have to be there, but just happened to be there. I think that it would be wrong to draw such a distinction, as a matter of law. The whole question is to my mind one of degree and therefore one of fact for the Committee. Mr. Justice Roskill made the point that, even if these buyers had noticed the discrepancy between the two dates, there was no reason why they should have accepted the date in the certificate of inspection rather than the date in the bill of lading as being the true date. I see the force of the observation; but the Committee may have said to themselves: “There are strong motives for antedating a bill of lading. It is all too common for such documents to be antedated; on the other hand there is no reason for suspecting the date in the certificate of inspection“. But whatever was in their minds the conclusion seems to me to be eminently a matter for them and one with which the Court should not interfere.’
With this marked diversity of reasoning between the three judgments, it is perhaps not surprising that the Panchaud case has led to a number of conflicting explanations as to what the case actually decided.
In V Berg & Son Ltd v Vanden Avenne-Izegem PVBA [1976] 1 Lloyd’s Rep 348 the judge at first instance applied the test of commercial fair dealing enunciated by Winn LJ. This was disapproved in the Court of Appeal, where Roskill LJ stated as follows at the conclusion of his judgment ([1977] 1 Lloyd’s Rep 499 at 504):
‘That is sufficient to dispose of this appeal. But the learned Judge sought to get round the point with which I have just dealt by saying that anyhow the so-called principles laid down by this Court in the Panchaud case prevented the buyers from relying upon the absence of any reference in this telex to the intended port of shipment. With respect to the Judge, I think he has misunderstood the effect of that decision. This Court then laid down no new principles of law. It merely applied well-established principles of law to the particular facts of that case, and those principles, as my Lord has just said, are no more than if in the course of the working
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out of a contract one party by his conduct leads the other party to think that he will not insist on the strict performance of a particular term in the contract so that the other party alters his position, the former party will not be permitted to resile and to seek to insist upon strict performance—at least without notice. That has nothing to do with the present case. As I see it, in the present case there was no representation of any kind by the buyers. With all respect to [counsel for the seller’s] argument, I cannot see that merely because they did not complain or make any inquiry about the port of shipment when they got the telex the buyers in any way estopped themselves from insisting on strict compliance with the force majeure clause.’
Lord Denning MR and Lawton LJ made similar statements, the latter adding (at 505): ‘There must be more robustness in the application of the Panchaud principle.' This same explanation was put forward by Lord Denning MR in Bremer Handelsgesellschaft mbH v C Mackprang Jr [1979] 1 Lloyd’s Rep 221 at 226 as follows:
‘I regard the decision of the House in Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA ([1978] 2 Lloyd’s Rep 109) as a most important decision on waiver. As [counsel for the sellers] said, it is the final step in the series of Central London Property Trust Ltd. v. High Trees House ((1946) [1956] 1 All ER 206, [1947] KB 130); Rickards v. Oppenheim ([1950] 1 All ER 420, [1950] 1 KB 616); Panchaud Freres S.A. v. Etablissements General Gain Co. ([1970] 1 Lloyd’s Rep 53); and W. J. Alan & Co. v. El Nasr Export & Import Co. Ltd. ([1972] 2 All ER 127, [1972] 2 QB 189). Applied to cases of waiver in GAFTA cases, it may be stated thus: If a buyer, who is entitled to reject goods or documents on the ground of a defect in the notices or the timing of them, so conducts himself as to lead the seller reasonably to believe that he is not going to rely on any such defect—whether he knows of it or not—then he cannot afterwards set up the defect as a ground for rejecting the goods or documents when it would be unfair or unjust to allow him to do so. It is unfair and unjust to allow it when the sellers all down the line have acted on the belief that the notices were good and have presented shipping documents accordingly. The sellers here allowed the buyers to have the goods at the very low contract price instead of the higher market price which they might otherwise have obtained. Fair dealing requires that the buyer should take them rather than seize upon some defect to reject them: simply to get more damages.’
Shaw LJ gave a similar explanation (at 230). Stephenson LJ dissented.
On the other hand, in BP Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 925 at 946–947, [1979] 1 WLR 783 at 810–811 Robert Goff J said that the Panchaud case had nothing to do with estoppel, but (echoing Lord Denning MR’s analogy with s 35 of the Sale of Goods Act 1893) stated:
‘The principle, therefore, presupposes three things: (1) a legal relationship between the parties; (2) a representation, express or implied, by one party that he will not enforce his strict rights against the other; and (3) reliance by the representee (whether by action or by omission to act) on the representation, which renders it inequitable, in all the circumstances, for the representor to enforce his strict rights, or at least to do so until the representee is restored to his former position. Now I do not understand the Panchaud case to fall within that principle. The case was concerned with a cif contract of sale of goods; and the question which arose for decision was whether the buyer, who had received a tender of documents including a bill of lading which inaccurately stated the goods to have been shipped within the contract period, and a certificate of quality which accurately stated that they had been shipped late, and who (having failed to observe the late date in the certificate of quality) took up the documents without question, could thereafter reject the goods on the ground that they were shipped late. The Court of Appeal, reversing Roskill J, held that the buyer could not do so. Now it is well established in contracts
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for the sale of goods that, if a buyer accepts the goods (within the meaning of that expression as used in the Sale of Goods Act 1893), he cannot thereafter reject them; he has a choice, and if he chooses to accept the goods his decision is final. In a cif contract of sale, he has two opportunities of rejection: a right to reject the documents, and a right to reject the goods, if they are not in accordance with the contract. All that the Panchaud case decided was that if, in a cif contract, the documents show that the goods were shipped late, and the buyer nevertheless accepts the documents, then, even if he has failed to notice the late shipment date when he took up the documents, he will be precluded from thereafter rejecting the goods for that reason. The decision stems from the need for finality in commercial transactions, as does the doctrine of acceptance in contracts for the sale of goods, an analogy relied on by Lord Denning MR in his judgment in the Panchaud case [1970] 1 Lloyd’s Rep 53 at 57. I do not read the Panchaud case as arising from the principle in Hughes v Metropolitan Rly Co because the Panchaud case does not depend in any way on the representee having relied on any representation by the buyer; indeed, on the facts of the Panchaud case itself, the goods were (as is usually the case) on the high seas at the time when the documents were taken up by the buyer. In a much-quoted passage in the Panchaud case [1970] 1 Lloyd’s Rep 53 at 59, Winn LJ, having expressed the opinion that it was not possible to say that there was anything in the case which could be described as estoppel or quasi-estoppel, went on to say that he agreed with Lord Denning MR that “what one has here is something perhaps in our law not yet wholly developed as a separate doctrine—which is more in the nature of a requirement of fair conduct—a criterion of what is fair conduct between the parties. There may be an inchoate doctrine stemming from the manifest convenience of consistency in pragmatic affairs, negativing any liberty to blow hot and cold in commercial conduct.” This passage is frequently invoked by parties, often as an argument of last resort, when they find it difficult to bring their case within the established principles of estoppel, waiver, or election. But, as I read the words of Winn LJ, he was not attempting to state any principle of general application: he was simply expressing the principle of finality which underlies the doctrine of acceptance in contracts of sale of goods.’
This seems to be the explanation preferred by the editors of the current edition of Benjamins’ Sale of Goods (3rd edn, 1987) para 1739, where it is also stated that the Panchaud case has been viewed with some scepticism.
Perhaps the best lesson to be drawn from all this subsequent commentary is that no distinctive principle of law can be distilled from the Panchaud case, which, as Robert Goff J stated, is so often cited as an authority of the last resort. There the buyers, having lost their case on the main point, sought to rescue it by a forlorn eleventh hour submission which was rejected by the committee of appeal, whose expertise and suitability to decide the point was strongly emphasised by all three judges in the Court of Appeal; indeed this was placed by Cross LJ at the very forefront of his judgment, making it clear that he regarded it as a matter of degree and therefore as one of fact for the committee, so that their conclusion was one eminently a matter for them with which the court should not interfere (see [1970] 1 Lloyd’s Rep 53 at 61).
Counsel for the sellers invited me to accept the interpretation in BP Exploration Co (Libya) Ltd v Hunt, but if I have to choose, I should feel bound to prefer the estoppel explanation, since it has the greater weight of authority behind it. On this basis too, the Panchaud case adds nothing new in principle to existing doctrines, as Roskill LJ emphasised in the Berg case.
How then does the decision of the board of appeal in the present case stand? Counsel for the sellers submits that the present case is on all fours with the Panchaud case and that, since this is essentially a question of mixed fact and law, it is incumbent on the court to hold that there was a similar waiver with similar knowledge here, thus in effect overruling the board of appeal and reinstating the award of the original arbitrators. The
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primary submission of counsel for the buyers is that the key conclusion of the board of appeal was essentially one of fact.
I, for my part, am prepared to found my judgment in the present case on the same considerations as those cited by Cross LJ in the Panchaud case [1970] 1 Lloyd’s Rep 53 at 61. It seems to me that there is in the board of appeal’s decision one essential conclusion on a question of degree and therefore of fact, namely their critical finding that the details contained in the survey report were not sufficient to cast doubt on the validity of the bill of lading date. This is the substratum of their ensuing conclusion that there was no waiver; since this finding is a question of fact and not of law, I uphold the primary submission of counsel for the buyers that it is not open to attack on appeal (see s 1(2) of the Arbitration Act 1979). This in itself is fatal to this part of the appeal.
If however that is too narrow a view, and counsel for the sellers is, contrary to my primary conclusion, right in his view that the critical finding of the board was not one of fact but rather a ‘legal conclusion’ so that it is open to me to review the board of appeal’s finding in this respect, then the proper approach, in accordance with the submission of counsel for the buyers, is that laid down by Lord Roskill in his speech in Pioneer Shipping Ltd v BTP Tioxide Ltd, The Nema [1981] 2 All ER 1030 at 1047, [1982] AC 724 at 752 (with which Lord Fraser, Lord Russell and Lord Keith agreed). Lord Roskill stated as follows in relation to the question of frustration, which was one of mixed law and fact:
‘My Lords, in Edwards (Inspector of Taxes) v Bairstow [1955] 3 All ER 48 at 57, [1956] AC 14 at 36 Lord Radcliffe made it plain that the court should only interfere with the conclusion of special commissioners if it were shown either that they had erred in law or that they had reached a conclusion on the facts which they had found which no reasonable person, applying the relevant law, could have reached. My Lords, when it is shown on the face of a reasoned award that the appointed tribunal has applied the right legal test, the court should in my view only interfere if on the facts found as applied to that right legal test no reasonable person could have reached that conclusion. It ought not to interfere merely because the court thinks that on those facts and applying that test it would not or might not itself have reached the same conclusion, for to do that would be for the court to usurp what is the sole function of the tribunal of fact.’
Counsel for the sellers submits that the board of appeal’s critical finding was wrong to a degree of perversity, since, he says, it is obvious that the survey report must have sown doubts. In support of this argument he cites a passage from the judgment of Kerr LJ in another case arising out of the selfsame shipment on the Manila, but turning on an entirely different set of facts, namely Procter & Gamble Philippine Manufacturing Corp v Kurt A Becher GmbH & Co KG [1988] 2 Lloyd’s Rep 21. In the course of his judgment, Kerr LJ, with reference to an identical survey report, stated that it ‘suggested that [the goods] had only been shipped in February’ (at 24). This however was a case where a similar waiver/estoppel point was not in issue, and where, so far as I can judge, none of the arguments which in the present case have focussed on this particular point were addressed.
In my judgment this present case falls very far short of this very stringent criterion, having regard to a number of features which also distinguish it radically from the facts in the Panchaud case. (i) There was no statement in the survey report that the goods were loaded outside the shipment period. (ii) There was confirmation in the survey report that loading commenced within the shipment period. (iii) There was no mention in the survey report of when the various parcels of cargo were loaded, or the rate at which they were loaded, or whether or not the loading was continuous. Thus, in my judgment the assumption of counsel for the sellers of a ‘straight-line’ pattern of loading is unjustifiable, since the rate of loading could have been affected by any number of factors, such as unavailability of cargo, industrial action, sheer inefficiency, or bad weather. (iv) The survey report was not a contractual document. (v) The accuracy of the bills of lading date
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was confirmed by the sellers’ own invoices, which were dated 1 February and referred in terms to bills of lading dated 31 January. Why should the buyer disregard these invoices and the bills of lading and give preference to the survey reports?
All these factors seem to me strongly supportive of the board of appeal’s conclusion, and negative the suggestion that the survey report was anything like sufficient to justify, let alone require, the buyers to conclude that there was sufficient evidence to defeat the presumption laid down in cl 6 that the date of the bills of lading must be accepted as proof of the date of shipment.
There is one further important consideration I wish to mention which distinguishes this case from the Panchaud case. There, as the Court of Appeal found, the committee of appeal imputed constructive knowledge to the buyers that the bills of lading were wrongly dated; here all that is suggested is that the survey report should have raised doubts in their mind. If this was a correct basis for a finding of waiver/estoppel it would I think be productive of serious confusion and uncertainty which would be commercially most undesirable. In particular, the buyer would be confronted with the greatest difficulty in deciding what further inquiries, investigations, examination of documents or other detective work he was obliged to pursue in order to determine whether or not to take the very grave step of mounting a challenge to the validity of the bill of lading.
Finally, it is plain on the authorities that in a waiver/estoppel situation of this kind, in order to succeed the sellers must show that it would be unfair or inequitable for the buyers to be allowed to take the point on the validity of the bill of lading, having regard to the fact that the sellers acted on the faith of the buyers’ previous conduct. There are no such findings in the present award, as counsel for the sellers recognises, and in my judgment it would be quite impossible for me to accede to his invitation that such must be inferred. As an alternative he invites me at this late stage to remit the matter for further consideration on this aspect, but in my judgment it is much too late for me to make any such order. Consequently in this respect also, counsel’s case is defective (see Raiffeisen Hauptgenossenschaft v Louis Dreyfus & Co Ltd [1981] 1 Lloyd’s Rep 345 at 351 and Société Italo-Belge pour le Commerce et l’Industrie SA v Palm and Vegetable Oils (Malaysia) Sdn Bhd, The Post Chaser [1982] 1 All ER 19 at 26–27).
I therefore dismiss the appeal on this first point.
Restitution
I now turn to the issue of restitution which I can consider very much more shortly. It turns on the conclusions set out in the supplemental award, which arose as a result of an order of Webster J which required further elucidation of the award as follows:
‘(a) Stating the Board’s reasons for holding that the “Sellers are liable to repay to buyers the additional freight contributed to the Buyers as Bill of Lading holders to finance M.V. “Manila” proceeding to Rotterdam as a result of owners’ bankruptcy’ dealing in particular with causation and remoteness or forseeability of damage; and (b) Making such findings of fact as will enable the Court to decide whether the Board’s reasons given under (a) above are correct in law.’
The supplemental award responded as follows:
‘(i) The owner of the “MANILA” was a company called Maritime Company of the Phillipines (M.C.P.”).
(ii) After the “MANILA” was loaded and after the insurance of the Bills of Lading, M.C.P. was found to be in financial difficulties.
(iii) On the 26th April 1984, as a result of the “MANILA” failing to sail with its cargo, the cargo interests instructed Recourse & Recovery Bureau M.V. of Rotterdam (“R.R.B.”) to conduct an investigation into the reasons for the vessel failing to sail and to consider solutions to the problems as found by them.
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(iv) R.R.B. found in its report that the vessel owners, M.C.P., were hopelessly insolvent and that therefore the ship could not sail. On behalf of the cargo interests, they considered a number of possible alternatives, including local sales of the cargo, and they concluded that the best solution was for the vessel to be sailed to Rotterdam at the expense of the cargo interests and the Banks involved.
(v) This course of action was followed with the result that the vessel duly arrived at Rotterdam on 8th July 1984 as above stated.
(vi) The Buyers’ contribution as holders of the two Bills of Lading before mentioned amounted to U.S. $28,500·00, which they duly paid.
(vii) WE FIND that this payment by the Buyers which was to enable the holder of the Bills of Lading to obtain the goods in Rotterdam was for the benefit and protection of the holder (whoever he may be) of the Bills of Lading. As we have found by our said Award that the Buyers were entitled to reject the Bills of Lading, it follows in our view that the Buyers are entitled to be reimbursed for this sum as it was paid for the benefit of goods which we hold they can now reject and further that as between the Buyers and the Sellers, the Buyers are entitled to be put in the position in which they would have been had they been able to reject the documents on presentation.
(viii) Our Award in this respect is on the principle of Restitution on the grounds that the payment made by the Buyers under (vi) above was commercially justified and for the benefit of the goods and the holder of the Bills of Lading. Consequently, “causation and remoteness or foreseeability of damage” do not arise and are not applicable.’
It is thus manifest that the supplemental award was based wholly and exclusively on restitution and not at all on common law damages for breach of contract.
The relevant principles are common ground between the two parties, and are conveniently set out in the leading textbook on the law of restitution, Goff and Jones The Law of Restitution (3rd edn, 1986) p 148, as follows:
‘The general principle should be that restitution should always be granted when, as a result of the plaintiff’s services, the defendant has gained a financial benefit readily realisable without detriment to himself or has been saved expense which he inevitably must have incurred’.
This forms part of a section headed ‘Restitutionary Claims; where the defendant has gained an incontrovertible benefit’, a neat phrase which in my judgment epitomises the whole doctrine under consideration here.
Counsel for the buyers submits that the board of appeal have found, and rightly found, that the sellers did indeed obtain an incontrovertible benefit, in that, as a result of the buyers’ funding the extra freight, they had the advantage of being able to sell the goods in Rotterdam rather than locally, and were saved expense.
In my judgment this is not a proper interpretation of the supplemental award. I am unable to derive any findings from it that an incontrovertible benefit was conferred; at most it amounted to the finding that, in the difficult circumstances of the shipowners’ insolvency, RRB, on behalf of the (presumably European) cargo interests collectively, formed the view that, to make the best of a bad job, the most favourable solution all round was for the vessel to sail to Rotterdam. This falls far short even of a general finding of incontrovertible benefit, still less of a finding (which in my judgment would be essential to justify relief under this heading) that the present sellers viewed in isolation received an incontrovertible benefit. It is not surprising that the board of appeal did not focus on this critical point, since the question of restitution was, it seems clear, never argued before them. Nor is there any finding that the sellers were saved any expense which they would ‘inevitably have incurred’; indeed it is by no means clear that such was the case, since, as a corporation themselves based in the Philippines, they might well have
Page 856 of [1988] 3 All ER 843
thought it prudent from their own point of view to withdraw the cargo there in the hope of an upturn in the market. It follows, in my judgment, that there was no proper basis for the award based on restitution.
Counsel for the buyers, as an alternative, invites me to conclude that his case under this heading can be rescued on the alternative footing that he is entitled to damages for breach of contract. There is no such finding in the award, indeed quite the contrary since the board of appeal expressly disowned this basis. In a field where the normal measure of damages is well established as the difference between the contract and the market price, the award of additional damages under this head would be to say the least, problematical, particularly as it is difficult to see why the insolvency of the shipowners was a reasonably foreseeable event.
Frankly recognising these difficulties, counsel’s final submission for the buyers was that I should remit this part of the case to the board of appeal for a finding on common law damages; but, quite apart from the fact that it is in my judgment far too late so to do, I consider this course would be a complete waste of time because the arbitrators have already made it clear that they ruled out an award on this basis.
It follows that on this second aspect of the case I shall allow the sellers’ appeal.
Appeal relating to rejection of cargo dismissed. Appeal relating to payment of freight allowed.
Solicitors: Ingledew Botterell Roche & Pybus, Newcastle upon Tyne (for the sellers); Richards Butler (for the buyers).
K Mydeen Esq Barrister.
Halvanon Insurance Co Ltd v Central Reinsurance Corp and another
[1988] 3 All ER 857
Categories: PROFESSIONS; Lawyers: CIVIL PROCEDURE
Court: QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
Lord(s): HOBHOUSE J
Hearing Date(s): 22, 26 JULY 1988
Solicitor – Lien – Property recovered or preserved in action – Property paid into joint account held in names of parties’ solicitors – Defendants given leave to defend on condition they paid amount in dispute into joint account – Plaintiffs changing solicitors – Whether plaintiffs’ new solicitors could be substituted for their former solicitors as holders of joint account – Whether plaintiffs’ former solicitors having lien over fund in joint account.
The plaintiffs brought an action against the defendants under certain reinsurance policies and applied for summary judgment under RSC Ord 14. The defendants were given leave to defend the plaintiffs’ summons for summary judgment on condition that they paid the amount in dispute between the parties into a joint account held in the names of the parties’ solicitors. The plaintiffs subsequently went into liquidation and the liquidator appointed new solicitors to act for the plaintiffs. The plaintiffs and the defendants applied for an order that the account-holders of the joint account be changed to substitute the plaintiffs’ new solicitors for their former solicitors, who opposed the application on the ground that the order would deprive them of their lien over the money in the joint account in respect of fees which were still owed to them.
Held – (1) Money paid by the defendant into court or into a joint account in the names of the parties’ solicitors as a condition of being granted leave to defend RSC Ord 14 proceedings remained the general property of the defendant although charged with the liability, if any, of the defendant to the plaintiff. Where the money was paid into a joint account in the names of the parties’ solicitors, the parties’ solicitors had no interest or rights in the fund but held it as bare trustees and were not entitled to deal with it except pursuant to an order of the court. It therefore made no difference who the trustees were and since it was convenient for the trustees to be the solicitors currently on the record and since the former solicitors would not be affected by any change in the trustees the order substituting the plaintiffs’ new solicitors for their former solicitors would be granted (see p 860 g j, p 861 j to p 862 f and p 866 d e, post); Re Ford, ex p the trustee [1900] 2 QB 211 and Pearlberg v May [1951] 1 All ER 1001 applied.
(2) In any event, the plaintiffs’ former solicitors could not assert a lien as such over the fund because they had no proprietary or possessory right to the fund. Instead, the solicitors had the right to ask the court to interfere equitably to protect their right to be paid out of property which was recovered or preserved by the work done by the solicitors in the action. Accordingly, since the fund was under the court’s control, the court could order that no money be paid out of the account to the plaintiffs without payment of their former solicitors’ unpaid costs, but since the solicitors’ equity attached to the plaintiffs’ interest in the fund they could not recover out of the fund an amount greater than the amount to which the plaintiffs were entitled. The court would therefore order that no money be paid out of the account without the consent of the plaintiffs’ former solicitors or an order of the court on an application of which they had been given notice (see p 862 g to p 863 b e f and p 864 b c, post).
Notes
For a solicitor’s lien on property recovered in an action, see 44 Halsbury’s Laws (4th edn) para 236, and for cases on the subject, see 44 Digest (Reissue) 367–384, 3999–4222.
Page 858 of [1988] 3 All ER 857
Cases referred to in judgment
Banner, Ex p, re Keyworth (1874) LR 9 Ch App 379.
Berdan v Greenwood (1878) 3 Ex D 251, CA.
Bird v Barstow [1892] 1 QB 94, CA.
Bouchard, Ex p, re Moojen (1879) 12 Ch D 26, CA.
Clover v Adams (1881) 6 QBD 622, DC.
Emden v Carte (1881) 19 Ch D 311, CA.
Ford, Re, ex p the trustee [1900] 2 QB 211.
Fuld (decd), Re [1967] 2 All ER 649, [1968] P 727, [1967] 3 WLR 314.
Gordon, Re, ex p Navalchand [1897] 2 QB 516.
Mason v Mason (Cottrell cited) [1933] P 199, [1933] All ER Rep 859, CA.
Mercer v Graves (1872) LR 7 QB 499.
Moxon v Sheppard (1890) 24 QBD 627, DC.
Pearlberg v May [1951] 1 All ER 1001, [1951] Ch 699, CA.
Polish Steam Ship Co v Atlantic Maritime Co, The Garden City [1984] 3 All ER 59, [1985] QB 41, [1984] 3 WLR 300, CA.
Potters (a firm) v Loppert [1973] 1 All ER 658, [1973] Ch 399, [1973] 2 WLR 469.
Schroeder v Accountant General [1980] 2 All ER 648, [1980] 1 WLR 1314.
Stumore v Campbell & Co [1892] 1 QB 314, [1891–4] All ER Rep 785, CA.
Tomlinson v Hampson (1894) 38 SJ 401, DC.
Wadsworth, Re, Rhodes v Sugden (1885) 29 Ch D 517.
Westacott v Bevan [1891] 1 QB 774, DC.
Wimbourne v Fine [1952] 2 All ER 681, [1952] Ch 869.
Applications
The plaintiffs, Halvanon Insurance Co Ltd, and the defendants, Central Reinsurance Co Ltd and Ming Tie Fire and Marine Insurance Co Ltd, applied by summonses in the actions between the parties for an order that the respondents, Messrs Peter Carter-Ruck & Partners, the former solicitors acting for the plaintiffs, release moneys held in a joint account by the respondents and Messrs Ince & Co, the defendants’ solicitors, into a joint account held by the plaintiffs’ current solicitors, Messrs Hewitt Woollacott & Chown, and Messrs Ince & Co The respondents opposed the application. The summonses were heard in chambers but judgment was given by Hobhouse J in open court. The facts are set out in the judgment.
Gavin Kealey for the plaintiffs.
Jonathan Mance QC and Roderick Cordara for the defendants.
Julian Malins for the respondents.
Cur adv vult
26 July 1988. The following judgment was delivered.
HOBHOUSE J. There are formally two actions but they may be treated as one. I have before me four summonses, two issued in each action. The summonses in each action have been issued respectively by the plaintiffs and the defendants. The relevant respondents to the summonses are Messrs Peter Carter Ruck & Partners, who are the firm of solicitors who, until 18 April 1988, were the solicitors on the record for the plaintiffs in these actions. I will refer to them simply as ‘the solicitors’. The relevant facts can be shortly stated. The plaintiffs have claims against the defendants under various reinsurance treaties. The defendants dispute their liability to the plaintiffs. The defendants’ solicitors are, and have been throughout, Messrs Ince & Co On 18 March 1983 the solicitors on behalf of the plaintiffs issued the writs in the actions. After points
Page 859 of [1988] 3 All ER 857
of claim had been served the plaintiffs obtained an RSC Ord 14 judgment against the defendants for damages to be assessed and an order for an interim payment pending the assessment of those damages. The defendants appealed. The Court of Appeal gave the defendants leave to defend on terms that effectively the whole of the sums in dispute in the two actions should be paid into a joint account. The sums of money involved are, as one might expect, very substantial; their quantity is not presently material and it suffices to say that they can be expressed as a seven figure sum of United States dollars. The joint account had been fully constituted by July 1985.
The orders of the Court of Appeal were dated 25 February 1985. Each order gave the defendant leave to defend on terms that it paid the relevant sums into a joint account held in the names of two representatives each of the solicitors and Ince & Co at the Midland Bank plc St Clement Danes Branch which sums together with all the other relevant sums are ‘to abide the event of the action’. The account is in the names of the two firms with the four representatives being the authorised signatories. In the latter part of 1985 the plaintiffs went into liquidation and a liquidator was appointed who had the conduct of the litigation. In April 1988 the plaintiffs changed their solicitors and they are now represented on the record by Messrs Hewitt Woollacott & Chown.
By their summonses the plaintiffs and defendants ask for an order that:
‘Notice of change having been filed by Messrs Hewitt Woollacott & Chown on 18th April 1988 that they had been appointed to act as the solicitor for the above-named Plaintiff in the place of Peter Carter Ruck & Partners, the firm of Peter Carter Ruck & Partners do release forthwith the monies presently held on a joint account in the names of Peter Carter Ruck & Partners and Ince & Co pursuant to the terms of the Court of Appeal Order dated 25 February [1985] into the joint custody of Messrs Hewitt Woollacott & Chown and Ince & Co.’
The substance of this application is therefore simply for a change in the names of the account-holders by deleting the name of the firm Peter Carter-Ruck & Partners and substituting there the name of the firm Hewitt Woollacott & Chown; by necessary implication the mandate will have to be changed as well by substituting as two of the four signatories representatives of Hewitt Woollacott & Chown in place of the representatives of the solicitors.
The solicitors oppose these applications. They say that to make the order would deprive them of their solicitors’ lien in respect of the money standing to the credit of the joint account. They say that in respect of these two actions the outstanding fees due to them which remain unpaid by the plaintiffs amount to £2,956·76:
‘Through the work and effort of this firm, while instructed by the plaintiff, the defendants were ordered by the court to pay various substantial sums of money into a joint bank account … The sums today remain in the joint bank account and this firm hereby exercises a particular lien over those sums to the extent of £2,956·76 being the unpaid costs in relation to this litigation.’
The plaintiffs do not dispute that the sum stated is owing to the solicitors in respect of the work which the solicitors have done on behalf of the plaintiffs in these actions. The plaintiffs dispute that the solicitors have any lien on the sums in the joint account or have any grounds for opposing the order that is asked. The defendants, despite having issued summonses themselves, have taken no active part in the hearing before me but have contented themselves with adopting so much of the plaintiffs’ submissions as is relevant to protecting their own interests. The solicitors for their part do not seek to assert any right which would prejudice the defendants, but they nevertheless continue to oppose the defendants’ applications.
The lien claimed by the solicitors that is relevant to the present applications is not a general lien but is the so-called ‘particular lien’. The subject matter of such a ‘lien’ is property recovered or preserved or the proceeds of any judgment obtained by the work
Page 860 of [1988] 3 All ER 857
of the solicitor in the relevant proceedings. It corresponds to the right of a solicitor to apply for a charging order under s 73(1) of the Solicitors Act 1974, under which—
‘any court in which a solicitor has been employed to prosecute or defend any suit, matter or proceedings may at any time—(a) declare the solicitor entitled to a charge on any property recovered or preserved through his instrumentality for his taxed costs in relation to that suit, matter or proceeding; and (b) make such orders for the taxation of those costs and for raising money to pay or for paying them out of the property recovered or preserved as the court thinks fit; and all conveyances and acts done to defeat, or operating to defeat, that charge shall, except in the case of a conveyance to a bona fide purchaser for value without notice, be void as against the solicitor.’
The argument before me has concentrated on whether or not the sums in the joint account can at present properly be described as ‘property recovered or preserved’. I will question whether this is the criterion decisive of the determination of these applications but I have in any event been asked by the plaintiffs and the solicitors to state what, if any, rights the solicitors have in respect of the fund and it is clearly convenient that I should do so since to decline to decide that point would be merely deferring the argument to another occasion and cause the parties to incur still further expense in its resolution. No point arises on the applications which I am considering today regarding whether the solicitors discharged themselves or were discharged by the plaintiffs. In the present context this makes no difference to the solicitors’ rights: see Clover v Adams (1881) 6 QBD 622.
The first matter to be considered is the status of the fund and the relationship of the solicitors to that fund. Further, it is appropriate to start by stating what is the character of a fund which has been paid into court as a condition of that defendant being given leave to defend under Ord 14, r 4. Any such sum will normally be paid into court ‘to the credit of the action’. It is thereafter governed by Ord 22, r 8 which among other things provides that it shall not be paid out except in pursuance of an order of the court. However, that rule also provides that where the party who has paid money into court has done so in pursuance of an order made under Ord 14 he may by notice to the other party in the action appropriate the money, or any part of it, to a particular claim made in the writ or he may plead tender and by his pleading appropriate the whole or a part of the money to that tender, and in either case the money is thereafter to be treated as if it had been paid into court in accordance with Ord 22, r 1 and/or Ord 18, r 16. The provisions of Ord 22, r 8 reflect the fact that the money, although paid into court, is still the defendant’s money. The defendant has the general property in that money. Referring to the ordinary position where money has been paid into court under Ord 22, Eveleigh LJ in Polish Steamship Co v Atlantic Maritime Co, The Garden City [1984] 3 All ER 59 at 64, [1985] QB 41 at 50 said:
‘… generally money in court was not treated as belonging to the person claiming damages. He could take out the money in court, although if he delayed doing so leave was required. He did not at the same time take out any interest which had accrued: the interest, if any, belonged to the person who had paid the money in.’
(See also Schroeder v Accountant General [1980] 2 All ER 648, [1980] 1 WLR 1314, which was a case specifically arising from the serving of a notice of appropriation under Ord 22, r 8.)
The status of the money in court as the defendants’ money and the nature of the rights which the plaintiffs have in respect of that money are further confirmed by cases concerning defendants who have gone bankrupt after making the payment into court. The plaintiff is still a creditor of the insolvent defendant but to the extent of the payment into court he is a secured creditor. The leading cases on the subject were followed and applied by Wright J in Re Ford, ex p the trustee [1900] 2 QB 211, which arose from a
Page 861 of [1988] 3 All ER 857
payment into court which had been made as a term of the defendant obtaining leave to defend under Ord 14. The plaintiffs in the action were Messrs Jay. Wright J said (at 213):
‘The trustee in the bankruptcy now claims the money on the ground that, as he alleges, the 1000l. still remained the money of the bankrupt at the time when the trustee’s title accrued, and that the plaintiffs at that time and now were and are mere ordinary creditors for whatever debt they may be able to prove … It seems plain in principle and on the authorities that Messrs. Jay are for the present entitled to the benefit of the security which they obtained by the order of September 21, 1899, and the payment into court in compliance with that order. The order must be treated as an order that the right to the money when paid into court shall abide the event: see Bird v. Bastow ([1892] 1 QB 94), where the order appears to have been in the same form as in this case; and it is settled that where money is ordered to be paid into court to abide the event it must be treated as a security that the plaintiff shall not lose the benefit of the decision of the Court in his favour: Ex parte Banner ((1874) LR 9 Ch App 379); Ex parte Bouchard ((1879) 12 Ch D 26); Ex parte Navalchand ([1897] 2 QB 516); Tomlinson v. Hampson ((1894) 38 SJ 401). The very object of such an order is that the plaintiff shall be in as good a position, so far as the money paid in extends, against contingencies such as a bankruptcy as if he had got an immediate judgment; and the cases cited shew that, where the plaintiff has without default on his part failed to get judgment before the bankruptcy, “the event” is the decision of his right in the bankruptcy. The money must remain in court until “the event” is decided by the trial of the action, if that is to be tried, or by adjudication upon a proof by the plaintiffs in the bankruptcy.’
The money in court has not ceased to be the property of the bankrupt but the plaintiff in the action has acquired the right to treat it as security for his claim. The right of the plaintiff is thus analogous to having an equitable charge on the money. The precise nature of the plaintiff’s interest in the fund may depend on the cause of action which he is asserting and the claim that he is making in the action. Where he is claiming in debt, or claiming an identified sum, there may be some basis for treating him as if he is in the position of asserting a title to the sum in court. Where the plaintiff’s claim, as in the present action, is a claim for unliquidated damages no such proprietary interest could arise, and the plaintiff’s interest can at best be of the nature of an equitable charge giving him a right after judgment to have recourse to that fund to satisfy his judgment.
The decision of the Court of Appeal in Pearlberg v May [1951] 1 All ER 1001, [1951] Ch 699 is consistent with these conclusions. That case concerned the sale of land where the purchaser was already in possession of the land but had not paid the purchase price. The vendor threatened to sell the land to another and the purchaser claimed specific performance but was required by the court to pay the purchase price into court. The question which the Court of Appeal had to consider was whether the payment into court ended the vendor’s right to claim contractual interest and simply confined him to whatever interest was earned by the money in court. The Court of Appeal held that the effect of the order for payment in was—
‘merely to place the purchase price and interest into the keeping of the court to abide the result of the action so that both purchaser and vendor had equitable interests in the fund, and the vendor had no such paramount interest therein that the payment-in constituted a quittance of the purchaser so as to deprive the vendor of his right to interest.’
In other words, even in such a case the payment in did not transfer the title to the money to the vendor or discharge the purchaser’s liability. But it did give the vendor equitable rights in respect of that fund.
Therefore, if this money had been paid into court to the credit of the present actions the position, in my judgment, would be that the money remained the general property
Page 862 of [1988] 3 All ER 857
of the defendants but was charged with whatever may be found to be the liability of the defendants to the plaintiffs. When the money is in court it is not necessary or profitable to consider the relationship of the court or its officials to that fund. The fund can only be dealt with in accordance with orders or authorisations of the court.
In the present case the money has not been paid into court, but into a joint account in the names of the parties’ then solicitors ‘to abide the event of the action’. I consider that the use of this phrase is intended to create a situation which is equivalent to that where the money has been paid into court to the credit of an action. The difference is simply a ministerial difference for the convenience and benefit of the parties. It reduces the formality and it enables the fund to be managed in a way that will enable the maximum amount of interest to be earned. But it does not, in my judgment, give the two firms of solicitors any interest or rights over the fund. They are officers of the court and are bare trustees. They are not entitled to deal in any way with the money, save pursuant to an order of the court. They are not entitled to any of the interest earned on the account. (Contrast the position of a stake-holder: see Potters (a firm) v Loppert [1973] 1 All ER 658, [1973] Ch 399.) The purpose of the trust is defined by the phrase ‘to abide the event of the actions’. The beneficiary of the trust is primarily the defendants, but the trustees are also affected by and are bound to have regard to the equitable charge of the plaintiffs. But it is probably not appropriate to discuss the position in terms of beneficiaries, since the trustees are, under this form of order, simply holding the account on behalf of the court.
This being the relationship of the solicitors to the account, it can be seen that it makes no difference whatsoever who are the individual trustees. Being one of the trustees of this account gives the trustee no rights over or in respect of the fund. If the solicitors have any rights in respect of the fund, those rights exist whoever may be the trustees or nominal account-holders. The solicitors’ objection to these applications is misconceived and has derived from a misunderstanding of their relationship to the account and the trust nature of a solicitor’s particular ‘lien’. By acceding to these applications I will not be diminishing or altering the rights of the solicitors, whatever they may be. The question in whose names the account should now be held is simply a matter of convenience and the clear balance of convenience is that the account-holders should be representatives of the two firms of solicitors that are currently on the record in these actions. There should therefore be an order that there be substituted for the name of the solicitors the name of Hewitt Woollacott & Chown.
But as indicated earlier, this decision does not fully cover the matters which have been argued before me by counsel for the plaintiffs and the solicitors, nor does it dispose of the matter which they have asked me to decide: whether or not the solicitors have any rights in respect of this fund. As will be appreciated, the solicitors submitted that their rights were dependent on their being named account-holders. It is a submission I do not accept. They assert what is called a solicitor’s particular ‘lien’, but it is not in truth a lien properly so called at all. It is a right to ask the court to interfere equitably to protect the rights of the unpaid solicitor.
In Mercer v Graves (1872) LR 7 QB 499 at 503 Cockburn CJ said:
‘… there is no such thing as a lien except upon something of which you have possession … although we talk of an attorney having a lien upon judgment, it is in fact only a claim or right to ask for the intervention of the Court for his protection, when having obtained judgment for his client, he finds there is a probability of the client depriving him of his costs.’
In Mason v Mason (Cottrell cited) [1933] P 199 at 214, [1933] All ER Rep 859 at 868 Lord Hanworth MR said: ‘It is merely a right to claim the equitable interference of the Court.' It does not depend on any proprietory or possessory relationship of the solicitor to the property. It simply requires that the property must have been in some definable way part of the subject matter of the action (see Re Wadsworth, Rhodes v Sugden (1885) 29 Ch D 517) which can be said to have been recovered or preserved by the work done in
Page 863 of [1988] 3 All ER 857
the action by the solicitor. Where the solicitor has acted for the plaintiff, the question ultimately arises at the time of the enforcement or satisfaction of any judgment that the plaintiff has obtained, or if the action is settled before judgment at that time. If the plaintiff by a compromise with a defendant seeks to achieve a sitution whereby he,the plaintiff, will get the fruits of the action without having to pay the solicitor, the unpaid solicitor may intervene and apply to the court for an order that he nevertheless be paid (see Wimbourne v Fine [1952] 2 All ER 681, [1952] Ch 869) and where there has been collusion with the defendant, get an order against the collusive defendant as well.
Such a situation is illustrated by Moxon v Sheppard (1890) 24 QBD 627, where a solicitor was able to prevent money being paid out of court pursuant to such a collusive compromise between the plaintiff and the defendant and was able to get an order charging the money in court with the payment of his fees. Whether such a charging order was necessary is open to doubt; there would appear to have been no reason why the court should not have simply ordered that a sum be paid out of court to the plaintiff’s solicitor sufficient to settle his claim for his fees. Where the fund is already under control of the court and cannot be disposed of save by an order of the court, then the concept of a charging order is otiose and inappropriate; the equities can be dealt with directly.
Where there are successive solicitors employed by a party in a particular piece of litigation and it is as a result of the work of those successive solicitors that the plaintiff makes a recovery then the rights of those successive solicitors to be paid out of such recovery can be regulated by the court, the earlier solicitor’s interests being preserved subject to the rights of the later solicitor who actually accomplishes the final recovery: see Re Wadsworth (1885) 25 Ch D 517 and Wimbourne v Fine [1952] 2 All ER 681, [1952] Ch 869. Similarly the court can give practical protection to the solicitor by making an order that no sum be paid out of court without his first being given notice of the application for such payment out: see Re Fuld (decd) [1967] 2 All ER 649, [1968] P 727.
In the present actions no sum will be paid out of the joint account save pursuant to an order of the court following either a determination of the plaintiffs’ rights against the defendants or some compromise or other settlement of those rights. If the application is that part of the money should be paid out to the plaintiffs, then the solicitors will be able to intervene and ask that it should not be paid out to the plaintiffs until the plaintiffs have satisfied whatever is their relevant outstanding liability to the solicitors. If necessary, I consider that it would be within the power of the court to order that an appropriate sum should be paid out direct to the solicitors in reduction of whatever sum would otherwise be paid to the plaintiffs. At that time there could be no argument but that the relevant sum had been ‘recovered’ in the action.
If, of course, after the determination of liability, or an unobjectionable settlement, the position was that the plaintiffs were not entitled to any sum from the defendants and therefore not entitled to have paid out to them any part of the sums in the joint account, then the solicitors would have no equitable right to ask that they should receive any sum themselves out of the account. No sum or property would in any relevant sense have been ‘recovered or preserved’. To argue to the contrary would be to adopt the error which was rejected by the Divisional Court in Westacott v Bevan [1891] 1 QB 774. In that case the defendant had paid a sum of money into court under RSC Ord 22 with a denial of liability. The sum was not accepted by the plaintiff and in the subsequent litigation the plaintiff was held to be entitled to a lesser sum. The solicitor sought to rely on a statement in The Annual Practice 1890–91, p 174, which said:
‘The principle is this, if a man by the exertions he is employed to give has recovered or preserved—i.e. created—a fund which but for these exertions would not have existed, the costs incurred by him ought to be the first charge upon it; the charge will be upon the whole fund whether it all belongs to the client or not, and will be for costs taxed and to be taxed.’
The whole of the sum was not recovered by or preserved for the plaintiff. The plaintiff
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had no right to the whole of the sum. The solicitor’s rights could not be greater than the plaintiff’s rights. The lien gives the solicitor no greater rights than his client has and is subject to all the equities between his client and other parties interested in the property. So long as the plaintiff’s rights in respect of the relevant fund remain unascertained and contingent, the solicitor’s indirect rights are equally unascertained and contingent; but it could be said without an abuse of language that, in so far as the plaintiff has an equitable charge on the fund, so also does the solicitor have an equity in the fund to the extent of his relevant fees. However, as I have previously stated, it is not necessary to formalise the situation in such language: the fund is under the control of the court and the court can by its own orders ensure that, at the time that any sum is paid out, the payment out takes proper account of whatever equitable rights the solicitor has.
I therefore decide that on the material before me the solicitors do have a right to have their interests taken into account when any sum comes to be paid out of the joint account. But the making of the orders asked will not in any way prejudice or diminish that right.
I must finally deal briefly with certain of the authorities which were cited to me and on which the plaintiffs and solicitors founded their rival arguments. They were authorities dating from the last century and were concerned with payments into court. In considering the cases relied on by the plaintiffs it is important to appreciate that the procedural law was radically different at the time of certain of those decisions.
In Berdan v Greenwood (1878) 2 Ex D 251 the Court of Appeal held under the Rules of the Supreme Court then in force that where a payment into court was made by a defendant accompanied by a denial of liability, the plaintiff was entitled, among the various options which were open to him, to take out the money not in full satisfaction of his claim but only in part satisfaction of his claim and to continue with the litigation seeking to assert a greater liability of the defendant, and further that even if at the subsequent trial it was held that the defendant was either under no liability or under a lesser liability to the plaintiff, the plaintiff could still retain the whole of the sum which he had taken out of court. In other words it could truly be said that if a sum was paid into court it was wholly at the disposal of the plaintiff and his right to it was in no way contingent on any subsequent determination of the rights of the parties. Such a state of the procedural law is of course radically different from that to which we are accustomed today; now, the plaintiff must either accept the payment into court in satisfaction of the causes of action in respect of which it has been paid in, in which case no trial of the plaintiff’s rights in respect of those causes of action even takes place, or if the plaintiff does not take the sum out of court the matter proceeds to trial where the plaintiff has to establish his right to recover any sum from the defendant and will only receive a payment out if and to the extent that he succeeds in doing so.
Berdan v Greenwood was decided in 1878 and was the leading authority on the new procedure following the Judicature Acts. In 1881 there were two decisions on the question of solicitors’ liens in relation to voluntary payments into court. The first was Clover v Adams (1881) 6 QBD 622 where the Divisional Court expressed the view that money paid into court under such circumstances (and it may be that the defendant had made the payment into court together with an admission of liability) could be described as money which had been ‘recovered’. The other case was Emden v Carte (1881) 19 Ch D 311, which was a decision of the Court of Appeal. The plaintiff was at all material times an undischarged bankrupt and the solicitor had been acting for the plaintiff in the litigation. The defendant had made a payment into court together with a denial of liability which the plaintiff had initially taken no steps to take out of court. His trustee in bankruptcy then intervened and competing applications for payment out were made both by the plaintiff and by the trustee, and the solicitor intervened with a view to asserting a lien on the moneys in court. The solicitor’s lien was upheld on the basis that the money in court had been recovered. The decision of the Court of Appeal was clearly
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based on Berdan v Greenwood, which is referred to in all the judgments (see 19 Ch D 311 at 320–322, where Baggallay and Brett LJJ expressly referred to the fact that once such a payment into court has been made, the plaintiff is unconditionally entitled to it regardless of how the merits of the case may subsequently be determined). Accordingly, they considered that the money paid in was properly described as having been ‘recovered or preserved in the action’. These decisions are therefore clearly distinguishable from the situation which exists in the present case where the plaintiffs have yet to establish any right to any of the money which is in court.
The other decision on voluntary payment into court to which I was referred was Westacott v Bevan [1891] 1 QB 774, decided by the Divisional Court. It is a puzzling decision because it contains an expression of view which is directly at variance with Emden v Carte. Thus the headnote says: ‘ … the sum paid into court was not property “recovered or preserved” by the exertion of the plaintiff’s solicitor … ' Wills J distinguished Emden v Carte on the ground that the money there had already been paid out to the client, a distinction which seems to be based on a misreading of the report of that case. In reality he seem to have arrived at a different conclusion, because he took a different view about the effect of a voluntary payment into court from that stated in Emden v Carte and Berdan v Greenwood. He said (at 777):
‘It was said that the defendants, having paid into court 500l. with a denial of liability, the plaintiff was then entitled to take that sum out of court in satisfaction of his claim, and therefore that it became a fund “preserved” by the exertions of the solicitor. I think that is an entire fallacy. The plaintiff did not take the money out of court, but proceeded with his action. He was claiming more than 500l., and he could only take the 500l. out of court by abandoning the rest of his claim. The result of proceeding further with the action was not to preserve but to jeopardize the plaintiff’s chances of getting the 500l.’
Such a view of the effect of refusing to accept a payment into court accords with the modern procedural law and would support the conclusion that an unaccepted payment into court could not without more be treated as money which had been ‘recovered’. However, the actual points arising for decision in Westacott v Bevan were different. They related to whether in a case of claim and counterclaim it should be the net sum that was to be treated as recovered and whether, where there was a payment into court which was not accepted, there was a lien on the totality of that sum or only such part of that sum as the client was ultimately entitled to. The lien was upheld in respect of the lesser net sum.
The solicitors before me relied on Moxon v Sheppard (1890) 24 QBD 627. The actual decision related to preventing a collusive plaintiff and defendant attempting to avoid the payment of the plaintiff’s solicitors’ fees. But there had been a payment into court as a condition of leave to defend under Ord 14 and Huddleston B was prepared to say (at 629):
‘It is contended that under the circumstances the money was not recovered. Well, perhaps it was not; but it was in process of recovery, and but for the collusive proceedings would have been recovered. At all events, it was so much preserved out of the Defendant’s estate.’
He used this language because he was also concerned with the question of the validity of a charging order which had been made by the master. It is clear that he considered that the money in court, although it had not been recovered, might be described as having been preserved. For the reasons already given I consider that it is otiose and unnecessary to become involved in making formal charging orders against money in court. Where money is in court and about to be paid out, it is clearly appropriate that a solicitor who has been engaged in the action on behalf of the relevant party and has not been paid should have his interests taken into account before any order for payment out is made.
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The equity which the solicitor invokes is a broad one and, in such a situation, is not assisted by an unnecessary attempt to bring it within a statutory definition. The strained language of Huddleston B in Moxon v Sheppard and indeed the reasoning in Westacott v Bevan fully support this conclusion.
In my judgment when money has been paid into court to the credit of an action, as on conditional leave to defend under Ord 14, the plaintiff has acquired a right in respect of that money of the nature of an equitable charge by way of security for his claim and the solicitor also has an equity which attaches to the plaintiff’s interest and which the solicitor is entitled to have taken into account whenever it is necessary to do so in order to protect his interests.
Another line of authority relied on by the plaintiffs before me was that illustrated by Stumore v Campbell & Co [1892] 1 QB 314, [1891–4] All ER Rep 785. If a solicitor has received money or other property for the specific purpose of discharging a particular trust in relation to that money or property, the solicitor cannot apply that money or property to the payment of his own fees even if the trust for some reason should fail. Such authorities are relevant to a general lien of a solicitor and do not have any relevant application to the claim for a ‘particular lien’ such as that I am concerned with in the present case.
The order which I make on each of the summonses is therefore that there be substituted for the name of the firm Peter Carter-Ruck & Partners the name of the firm Hewitt Woollacott & Chown as the account-holders (together with Ince & Co) of the joint account constituted pursuant to the order of the Court of Appeal dated 25 February 1985. I further order on the two summonses issued by the plaintiffs that, until further order, no sum shall be paid out of such account without the prior written consent of Peter Carter-Ruck & Partners save pursuant to an order of the court made on an application of which Peter Carter-Ruck & Partners have been given 14 days’ notice. The defendants’ costs of the two summonses which they issued shall be paid by Peter Carter-Ruck & Partners, such costs to be taxed if not agreed on the basis of representation by junior counsel only. On the two summonses issued by the plaintiffs the costs of Peter Carter-Ruck & Partners of and occasioned by the issue of those summonses and of the hearing which has taken place on para 1 of the relief claimed under those summonses shall be paid by the plaintiffs to Peter Carter-Ruck & Partners, such costs to be taxed if not agreed. The plaintiffs’ application under para 2 of the said summonses is adjourned generally with liberty to restore on 14 days’ notice to Peter Carter-Ruck & Partners together with copies of any further evidence on which the plaintiffs may seek to rely on such further hearing.
Order accordingly.
Solicitors: Hewitt Woollacott & Chown (for the plaintiffs); Ince & Co (for the defendants); Peter Carter-Ruck & Partners.
K Mydeen Esq Barrister.
General Engineering Services Ltd v Kingston and Saint Andrew Corp
[1988] 3 All ER 867
Categories: TORTS; Tortious Liability
Court: PRIVY COUNCIL
Lord(s): LORD BRIDGE OF HARWICH, LORD TEMPLEMAN, LORD ACKNER, LORD OLIVER OF AYLMERTON AND SIR JOHN STEPHENSON
Hearing Date(s): 26 OCTOBER, 21 NOVEMBER 1988
Vicarious liability – Master and servant – Authorised act done in improper manner – Mode of performing authorised act – Fire brigade operating ‘go slow’ policy as part of industrial action in support of pay claim – Fire brigade stopping and starting on way to fire and taking five times longer than normal to arrive at fire – Appellants’ premises completely destroyed by fire – Appellants suing local authority responsible for fire brigade – Whether fire brigade performing authorised act in wrongful and unauthorised manner – Whether mode and manner of fire brigade’s driving to fire unconnected with authorised act – Whether local authority vicariously liable for fire brigade’s default.
A fire broke out in the appellants’ premises at Kingston, Jamaica. The local fire brigade were called but instead of taking the normal time of 3 1/2 minutes to cover the 1 1/2 miles from the fire station to the appellants’ premises the fire brigade took 17 minutes. The reason for the delay was that the firemen were operating a ‘go slow’ policy as part of industrial action in support of a pay claim and had driven to the fire by moving slowly forward, stopping, then moving slowly forward again, then stopping and so on until they reached the fire. The appellants’ premises were completely destroyed as the result of the delay by the brigade in arriving at the fire. The appellants brought an action against the local authority responsible for operating the fire brigade, claiming that the authority was vicariously liable for the fire brigade’s default. The Supreme Court of Jamaica dismissed the appellants’ action and their appeal was dismissed by the Court of Appeal of Jamaica. The appellants appealed to the Privy Council.
Held – The mode and manner in which the fire brigade drove to the fire at the appellants’ premises could not be categorised as merely a wrongful and unauthorised mode of doing an act authorised by their employers but was instead so unconnected with that which they were authorised to do, namely drive to the scene of a fire as expeditiously as reasonably possible, that it was not a mode of performing the authorised act at all and was therefore conduct outside the fire brigade’s course of employment. The authority was accordingly not liable for the fire brigade’s default and the appeal would be dismissed (see p 869 f to p 870 a, post).
Notes
For an employer’s liability for an employee’s wrongful mode of doing an authorised act, see 16 Halsbury’s Laws (4th edn) para 741, and for cases on the subject, see 20 Digest (Reissue) 527–531, 4096–4120.
Appeal
General Engineering Services Ltd appealed with final leave to appeal granted by the Court of Appeal of Jamaica given on 2 March 1987 against the decision of that court (Carey, White and Wright JJA) on 2 October 1986 dismissing the appellants’ appeal from the decision of Malcolm J in the Supreme Court on 14 December 1984 dismissing the appellants’ claim against the respondents, the Kingston and Saint Andrew Corp, for damages for breach of statutory duty in negligently failing to extinguish a fire at the appellants’ property at 27 Dunrobin Avenue, Kingston on 13 October 1977. The facts are set out in the judgment of the Board.
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Eugene Cotran and Clark Cousins (of the Jamaican Bar) for the appellants.
Lloyd Barnett, John Vassell (both of the Jamaican Bar) and Frederick Philpott for the respondents.
21 November 1988. The following opinion was delivered.
LORD ACKNER. The appellants carry on the business of mechancial and electrical engineers and at all material times owned 27 Dunrobin Avenue, Kingston, Saint Andrew where they stored specialised medical-electrical equipment and other material connected with their business. At about 5.45 am on 13 October 1977 Mrs Enid Holding, who lived at 29 Dunrobin Avenue, heard a slight crackling sound coming from no 27. On looking through her bedroom window she saw smoke and flames coming from a section of the building. She dialled the fire brigade at Half Way Tree, which is only 1 1/2 miles away, involving a journey which normally takes the fire engine no more than 3 1/2 minutes. When some 15 minutes later the fire brigade had not arrived, she telephoned again and was told the unit was on its way. It arrived shortly after the telephone call, having taken some 17 minutes to drive this short distance. It was common ground that if the fire brigade had arrived with its usual expedition, the fire would have been speedily extinguished and the complete destruction not only of the office and store room, but also of its contents involving a total loss of approximately $6·2m, would have been avoided.
The reason why it took some five times longer for the fire brigade to reach this fire than normally was that the firemen, in furtherance of an industrial dispute, were operating a ‘go slow’ policy in order to bring pressure on their employers to satisfy their grievances. Mrs Holding, who became very anxious at the non-arrival of the fire brigade after making her second telephone call, went up the road along which she was expecting them to arrive. She saw them turn the corner, enter Dunrobin Avenue and then noticed the fire engine slowly moving forward, then stopping, then moving slowly again and then once more stopping. Evidence was given by Mr Dixon, the appellants’ managing director, who arrived at the scene of the fire about an hour later, that he asked the chief officer in charge of the fire brigade, ‘Why did you let the place burn down?' This question elicited the reply, ‘We are on a go slow and, even if my mother was in there, it would have to burn down. I want my raise of pay.' Although this reply was denied, counsel for the appellants did not seek to challenge that the clear inference from the facts was that the firemen had, in pursuance of their go slow policy, decided to take so long to get to the fire that by the time of their arrival the property would have been substantially destroyed.
On 17 August 1978 the appellants issued a writ against the respondents alleging that, under the Kingston and Saint Andrew Fire Brigade Act, the respondents had a statutory duty to extinguish this fire, that, in breach of this duty, they failed to respond promptly to the emergency call and were vicariously responsible for the negligence of the members of the fire brigade. Had the respondents complied with their statutory duty and had the fire brigade travelled to the scene of the fire with due expedition, the fire, so it was alleged, would have been extinguished with minimal damage and loss to the appellants.
On 14 December 1984 Malcolm J in the Supreme Court of Jamaica dismissed the appellants’ claim with costs and on 2 October 1986 the Court of Appeal of Jamaica (Carey, White and Wright JJA) unanimously dismissed their appeal with costs.
Counsel for the appellants, in opening the appeal before the Board, accepted that in order to succeed he had a number of findings in the Court of Appeal to overturn, eg that on a true construction of the Act the duty to extinguish fires was directly imposed on the members of the fire brigade and had not been merely delegated to them by the respondents, and that no cause of action against the respondents had been conferred on the appellants by the Act (the views of the majority in the Court of Appeal (White and Wright JJA)). His main and principal hurdle, however, was the court’s unanimous
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decision that the respondents could not properly be held to be vicariously liable for the default of the members of the fire brigade. Accordingly, with characteristic realism, counsel for the appellants elected to concentrate his submissions initially on that issue, since, if he failed to persuade their Lordships that the respondents were vicariously liable, the appeal would be bound to fail and there would be no useful purpose in his making further submissions.
It is, of course, common ground that a master is not responsible for a wrongful act done by his servant unless it is done in the course of his employment. Further, it is well established that the act is deemed to be so done if it is either (1) a wrongful act authorised by the master, or (2) a wrongful and unauthorised mode of doing some act authorised by the master. Counsel for the appellants contended that the conduct of the members of the fire brigade could properly be categorised as a wrongful and unauthorised mode of doing some act, ie driving to the scene of a fire, which was authorised by the respondents, their employers. He relied on the much quoted and approved passage in Salmond and Heuston on the Law of Torts (19th edn, 1987) para 176:
‘But a master, as opposed to the employer of an independent contractor, is liable even for acts which he has not authorised, provided they are so connected with acts which he has authorised that they may rightly be regarded as modes—although improper modes—of doing them. In other words, a master is responsible not merely for what he authorises his servant to do, but also for the way in which he does it. If a servant does negligently that which he was authorised to do carefully, or if he does fraudulently that which he was authorised to do honestly, or if he does mistakenly that which he was authorised to do correctly, his master will answer for that negligence, fraud or mistake. On the other hand, if the unauthorised and wrongful act of the servant is not so connected with the authorised act as to be a mode of doing it, but is an independent act, the master is not responsible: for in such a case the servant is not acting in the course of his employment, but has gone outside of it.’
Their Lordships have no hesitation in agreeing with the unanimous decision of the Court of Appeal, upholding that of Malcolm J, that the members of the fire brigade were not acting in the course of their employment when they, by their conduct described above, permitted the destruction of the building and its contents. Their unauthorised and wrongful act was so to prolong the time taken by the journey to the scene of the fire, as to ensure that they did not arrive in time to extinguish it, before the building and its contents were destroyed. Their mode and manner of driving, the slow progression of stopping and starting, was not so connected with the authorised act, that is driving to the scene of the fire as expeditiously as reasonably possible, as to be a mode of performing that act.
For all the practical difference that it would have made, they might, after answering Mrs Holding’s call, just as well have waited in the fire station, until they were confident that the building and its contents were beyond saving and then to have proceeded expeditiously to the scene of the fire: or having arrived expeditiously, then to have refused to take any action until it was too late. The negligence which would then have been asserted, namely the failure to answer the alarm or extinguish the fire with proper expedition, could not have been said to have been so connected with the authorised act, that is, immediately answering the alarm, or extinguishing the fire on arrival at the scene, as to be a mode of performing the acts.
Here the unauthorised and wrongful act by the firemen was a wrongful repudiation of an essential obligation of their contract of employment, namely the decision and its implementation not to arrive at the scene of the fire in time to save the building and its contents. This decision was not in furtherance of their employers’ business. It was in furtherance of their industrial dispute, designed to bring pressure on their employers to satisfy their demands, by not extinguishing fires until it was too late to save the property.
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Such conduct was the very negation of carrying out some act authorised by the employer, albeit in a wrongful and unauthorised mode. Indeed in preventing the provision of an essential service, members of the fire brigade were, by virtue of the provisions of the Jamaican Labour Relations and Industrial Disputes Act 1975, guilty of a criminal offence.
Their Lordships will accordingly humbly advise Her Majesty that the appeal should be dismissed. The appellants must pay the respondents’ costs.
Appeal dismissed.
Solicitors: Ziadies (for the appellants); Lovell White Durrant (for the respondents).
Mary Rose Plummer Barrister.
Hodgson v Trapp and another
[1988] 3 All ER 870
Categories: CIVIL PROCEDURE
Court: HOUSE OF LORDS
Lord(s): LORD MACKAY OF CLASHFERN LC, LORD BRIDGE OF HARWICH, LORD BRANDON OF OAKBROOK, LORD OLIVER OF AYLMERTON AND LORD GOFF OF CHIEVELEY
Hearing Date(s): 11, 12, 18 JULY, 10 NOVEMBER 1988
Damages – Personal injury – Cost of past and future care – Deduction from damages – Deduction of attendance and mobility allowances payable to plaintiff – Social Security Act 1975, ss 35(1), 37A(1).Damages – Personal injury – Cost of past and future care – Multiplier – Effect of taxation on award – Higher-rate tax payable on income from large award – Whether multiplier should be increased to allow for higher tax payable on income from large award.
When assessing damages for personal injuries to meet past and future expenses of providing for the care of the plaintiff, attendance and mobility allowances payable to the plaintiff pursuant to ss 35(1)a and 37A(1)b of the Social Security Act 1975 are deductible from the award (see p 876 f g, p 877 a b e f and p 886 d e, post); Bowker v Rose (1978) 122 SJ 147 and Gohery v Durham CC [1978] CA Transcript 236 overruled.
When assessing damages for severe personal injuries, the judge should not, after he has assessed the multiplicands for future cost of care and future loss of earnings and selected the appropriate multipliers, then increase the multipliers to take account of the fact that the income likely to be produced by the investment of a very substantial award may attract higher rates of tax. It should ordinarily be assumed that the future incidence of taxation will be satisfactorily taken care of by the conventional assumption of an interest rate applicable to a stable currency and the selection of a multiplier appropriate to that rate (see p 877 b e, p 885 b to f j and p 886 b to e, post); Thomas v Wignall [1987] 1 All ER 1185 overruled.
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Notes
For deduction for benefits received or receivable in assessing measure of damages for personal injuries, see 34 Halsbury’s Laws (4th edn) para 83, and for cases on the subject, see 36(1) Digest (Reissue) 313–327, 1265–1343.
For the Social Security Act 1975, ss 35, 37A, see 45 Halsbury’s Statutes (3rd edn) 1120, 1124.
Cases referred to in opinions
Bowker v Rose (1978) 122 SJ 147, CA.
Bradburn v Great Western Rly Co (1874) LR 10 Exch 1, [1874–80] All ER Rep 195.
British Transport Commission v Gourley [1955] 3 All ER 796, [1956] AC 185, [1956] 2 WLR 41, HL.
Cookson v Knowles [1978] 2 All ER 604, [1979] AC 556, [1978] 2 WLR 978, HL.
Daish v Wauton [1972] 1 All ER 25, [1972] 2 QB 262, [1972] 2 WLR 29, CA.
Gohery v Durham CC [1978] CA Transcript 236.
Hussain v New Taplow Paper Mills Ltd [1988] 1 All ER 541, [1988] AC 514, [1988] 2 WLR 266, HL.
Lim Poh Choo v Camden and Islington Area Health Authority [1979] 2 All ER 910, [1980] AC 174, [1979] 3 WLR 44, HL affg [1979] 1 All ER 332, [1979] QB 196, [1978] 3 WLR 895, CA.
Lincoln Hayman [1982] 2 All ER 819, [1982] 1 WLR 488, CA.
Lyndale Fashion Manufacturers v Rich [1973] 1 All ER 33, [1973] 1 WLR 73, CA.
Mallett v McMonagle [1969] 2 All ER 178, [1970] AC 166, [1969] 2 WLR 767, HL.
National Insurance Co of New Zealand Ltd v Espagne (1961) 105 CLR 569, Aust HC.
Parry v Cleaver [1969] 1 All ER 555, [1970] AC 1, [1969] 2 WLR 821, HL.
Parsons v BNM Laboratories Ltd [1963] 2 All ER 658, [1964] 1 QB 95, [1963] 2 WLR 1273, CA.
Redpath v Belfast and County Down Rly [1947] NI 167, NIHC.
Taylor v O’Connor [1970] 1 All ER 365, [1971] AC 115, [1970] 2 WLR 472, HL.
Thomas v Wignall [1987] 1 All ER 1185, [1987] QB 1098, [1987] 2 WLR 930, CA.
Westwood v Secretary of State for Employment [1984] 1 All ER 874, [1985] AC 20, [1984] 2 WLR 418, HL.
Young v Percival [1974] 3 All ER 677, [1975] 1 WLR 17, CA.
Appeal
By an amended writ issued on 26 November 1982 the plaintiff, Christine Elizabeth Hodgson, a patient suing by her husband the next friend, Keith Elliot Hodgson, brought an action against the defendants, Maurice Alan Trapp and Stratford on Avon District Council, claiming damages for personal injuries sustained and loss and expenses incurred as a result of an accident which occurred on or about 4 March 1982 on the Foss Way, nr Leamington, Warwickshire, through the negligent driving of a motor vehicle owned and driven by the first defendant in the course of his employment with the second defendants. By orders dated 21 November 1986 that action and an action brought by Keith Elliot Hodgson were consolidated. On 8 May 1987 Taylor J in the Queen’s Bench Division ordered that judgment be entered for the plaintiff in the sum of £431,840 damages including interest. The defendants appealed against the award of damages direct to the House of Lords pursuant to a certificate under s 12 of the Administration of Justice Act 1969 that points of law of general public importance were involved in the decision and that those points of law were ones in respect of which the judge was bound by the decisions of the Court of Appeal in previous proceedings. Leave to appeal was given by the Appeal Committee of the House of Lords on 30 July 1987. The facts are set out in the opinion of Lord Bridge.
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Piers Ashworth QC and William Pusey for the defendants.
Robin Stewart QC and Michael Heywood for the plaintiff.
Their Lordships took time for consideration.
10 November 1988. The following opinions were delivered.
LORD MACKAY OF CLASHFERN LC. My Lords, I have had the advantage of reading in draft the speeches to be delivered by my noble and learned friends Lord Bridge and Lord Oliver. I agree with both speeches and for the reasons given in them I too would allow the appeal on both grounds.
LORD BRIDGE OF HARWICH. My Lords, on 4 March 1982 the respondent plaintiff sustained catastrophic injuries in a road accident for which the appellant defendants admit liability. At the time of the accident the plaintiff was aged 33, a wife and mother and a woman of many talents and wide-ranging interests. It is unnecessary for the purpose of any issue arising in this appeal to describe in detail her pathetic condition as a result of the accident. It was graphically summarised by Taylor J:
‘[She] has been reduced to a vegetative existence. Her physical activity is minimal. Mentally she functions at the level of a young child. She is wholly dependent on others and will permanently remain so.’
The judge awarded damages, inclusive of interest, in the sum of £431,840. The defendants now appeal from that award directly to your Lordships’ House pursuant to the judge’s certificate under s 12 of the Administration of Justice Act 1969 and by leave of the House. The appeal raises issues with respect to the judge’s assessment of the elements included in the aggregate award as follows: cost of care to date of trial, £53,871; future cost of care, £154,000; future loss of earnings, £75,123.
Two distinct points of law arise for determination. First, in assessing damages to meet the expenses, past and future, of providing for the appropriate care of the plaintiff, the judge made no deduction in respect of the attendance and mobility allowances payable to the plaintiff pursuant to ss 35 and 37A of the Social Security Act 1975. He rightly held himself bound to disregard those allowances pursuant to the decisions of the Court of Appeal in Bowker v Rose (1978) 122 SJ 147 and Gohery v Durham CC [1978] CA Transcript 236. On the first point the present appeal is an invitation to the House to reverse those decisions. Second, having assessed the multiplicands for future cost of care and future loss of earnings and indicated that he considered multipliers of 13 and 11 respectively to be appropriate, the judge increased the multipliers to 14 and 12 to take account of the incidence of higher rates of taxation likely to be attracted by interest on the capital sum of his award. This was the course approved by the Court of Appeal in Thomas v Wignall [1987] 1 All ER 1185, [1987] QB 1098 and the correctness of that decision is also now called in question.
The basis of the statutory entitlement to attendance allowance under s 35 of the 1975 Act is that the claimant is so severely disabled physically or mentally that he requires, by day, frequent, by night, prolonged or repeated attention in connection with his bodily functions, or continual supervision to avoid substantial danger to himself or others. Thus the allowance is clearly intended to meet, in whole or in part, the necessary cost of care of a person as severely disabled as the plaintiff in the instant case, irrespective of the cause of the disability. The basis of entitlement to mobility allowance under s 37A is that the claimant is unable or virtually unable to walk but is in such a condition as to permit him to benefit from enhanced facilities for locomotion. Here again, the allowance is intended, subject to a point of detail which I must consider later, to contribute to the cost of care of a person who, like the plaintiff, cannot walk, in so far as that cost is incurred in providing means to alleviate the hardship of immobility.
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It is necessary first to consider Daish v Wauton [1972] 1 All ER 25, [1972] 2 QB 262. That was a case where the plaintiff, a boy of five, suffered severe injuries in an accident for which the defendants admitted partial liability. The boy was likely to spend the rest of his life in a national health service institution. In awarding a single global sum for general damages the trial judge substantially discounted the element representing future loss of earnings on the ground that the plaintiff’s earnings would have been mainly spent in maintaining himself, whereas in the event he would be maintained by the state. The Court of Appeal increased the award to take full account of future loss of earnings on the ground that the benefit of free maintenance in a state institution was to be disregarded.
In Bowker v Rose the trial judge, in awarding damages in respect of the cost of care of a severely incapacitated plaintiff, had declined to make any deduction in respect of attendance and mobility allowances payable under the 1975 Act. The leading judgment in the Court of Appeal affirming the judge’s award was delivered by Roskill LJ. Having referred to passages from the speech of Lord Reid in Parry v Cleaver [1969] 1 All ER 555, [1970] AC 1 and from the judgment of Windeyer J in National Insurance Co of New Zealand Ltd v Espagne (1961) 105 CLR 569, to both of which I shall have to refer later, he concluded that the key to the question whether the allowances were to be deducted lay in discerning the purpose of the legislation under which the allowances were payable. He said:
‘In my view we should look at the relevant section and ask what is the purpose of this legislation. Is it a benefit conferred by the state on the individual, so that the individual shall receive it when the event occurs which entitles him to it, irrespective of the cause of that event and irrespective of what other compensation he may receive to compensate him for his loss?’
On further consideration of the authorities, and in particular Daish v Wauton [1972] 1 All ER 25, [1972] 2 QB 262, Roskill LJ answered his own question in the affirmative. Having recited the argument in favour of deduction of the allowances in mitigation of damage, he concluded:
‘I would reject the argument both in principle and on authority. I reject it in principle because I think that to give effect to it would be to ignore the purpose of this part of the relevant social security legislation. I would reject it on authority because I think that to accept it would fail to follow, as it is our duty in this court to follow, the decision in Daish v Wauton.’
Gohery v Durham CC [1978] CA Transcript 236, another case involving attendance allowance, had been decided at first instance before the decision of the Court of Appeal in Bowker v Rose, but came before the Court of Appeal some two months later. The court inevitably held itself bound by Bowker v Rose, though Ormrod LJ expressed a doubt, with which I am inclined to agree, whether that decision followed necessarily from the earlier decision in Daish v Wauton.
An ironic twist is added to the story by the enactment of s 5 of the Administration of Justice Act 1982, which reverses the effect of Daish v Wauton, but does not touch the point at issue in the present appeal.
My Lords, it cannot be emphasised too often when considering the assessment of damages for negligence that they are intended to be purely compensatory. Where the damages claimed are essentially financial in character, being the measure on the one hand of the injured plaintiff’s consequential loss of earnings, profits or other gains which he would have made if not injured, or on the other hand, of consequential expenses to which he has been and will be put which, if not injured, he would not have needed to incur, the basic rule is that it is the net consequential loss and expense which the court must measure. If, in consequence of the injuries sustained, the plaintiff has enjoyed receipts to which he would not otherwise have been entitled, prima facie, those receipts are to be set against the aggregate of the plaintiff’s losses and expenses in arriving at the
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measure of his damages. All this is elementary and has been said over and over again. To this basic rule there are, of course, certain well-established, though not always precisely defined and delineated, exceptions. But the courts are, I think, sometimes in danger, in seeking to explore the rationale of the exceptions, of forgetting that they are exceptions. It is the rule which is fundamental and axiomatic and the exceptions to it which are only to be admitted on grounds which clearly justify their treatment as such.
The classic heads of exception to the basic rule are: (1) moneys accruing to the injured plaintiff under policies of insurance for which he has paid the premiums: see Bradburn v Great Western Rly Co (1874) LR 10 Exch 1, [1874–80] All ER Rep 195; and (2) moneys received by the plaintiff from the bounty or benevolence of third parties motivated by sympathy for his misfortune: see Redpath v Belfast and County Down Rly [1947] NI 167. The reasoning relied on by courts in support of other exceptions has, I think, invariably been based on the application to a greater or lesser degree by analogy of the same reasons as are thought to justify the primary exceptions. These reasons were fully examined by Lord Reid in Parry v Cleaver [1969] 1 All ER 555 at 558, [1970] AC 1 at 14. I ventured myself to suggest in Hussain v New Taplow Paper Mills Ltd [1988] 1 All ER 541 at 545, [1988] AC 514 at 528 that the common sense of the two primary exceptions was obvious and I do not resile from that view. The difficulty, which has been widely recognised, is to articulate a single precise jurisprudential principle by which to distinguish the deductible from the non-deductible receipt. As Lord Reid said in Parry v Cleaver [1969] 1 All ER 555 at 557, [1970] AC 1 at 13: ‘The common law has treated this matter as one depending on justice, reasonableness and public policy.’
I hope I may be forgiven for repeating an observation I made in Hussain v New Taplow Paper Mills Ltd [1988] 1 All ER 541 at 545, [1988] AC 514 at 528:
‘Given the inevitable divergencies of judicial opinion as to what justice, reasonableness and public policy require, it is not surprising that courts in different common law jurisdictions should sometimes have solved similar problems in this field in different ways … ’
In Hussain’s case it was necessary to examine the extent to which the analogy of the insurance exception to the general rule against double recovery could be pressed. Your Lordships now have to examine the question how far it is appropriate to treat statutory benefits as analogous to the proceeds of voluntary benevolence intended to alleviate the plight of the victims of misfortune.
The main support for the view that statutory benefits in aid of those in need should be disregarded in assessing damages as being a form of ‘public benevolence’ comes from a passage in the speech of Lord Reid in Parry v Cleaver [1969] 1 All ER 555 at 557–558, [1970] AC 1 at 14 and from some observations of Windeyer J in National Insurance Co of New Zealand Ltd v Espagne (1961) 105 CLR 569 at 599–600. In Parry v Cleaver Lord Reid said:
‘So I must enquire what are the real reasons, disregarding technicalities, why these two classes of receipts are not brought into account. I take first the case of benevolence. I do not use the word “charity” because, rightly or wrongly, many people object to it. I know of no better statement of the reason than that of SIR JAMES ANDREWS, L.C.J., in Redpath v. Belfast and County Down Ry. ([1947] NI 167 at 170). There the company sought to bring into account sums received by the plaintiff from a distress fund. SIR JAMES ANDREWS, L.C.J., said that the plaintiff’s counsel had submitted: “that it would be startling to the subscribers to that fund if they were to be told that their contributions were really made in ease and for the benefit of the negligent railway company. To this last submission I would only add that if the proposition contended for by the defendants is sound the inevitable consequence in the case of future disasters of a similar character would be that the springs of private charity would be found to be largely, if not entirely, dried up.” It would be revolting
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to the ordinary man’s sense of justice, and therefore contrary to public policy, that the sufferer should have his damages reduced so that he would gain nothing from the benevolence of his friends or relations or of the public at large, and that the only gainer would be the wrongdoer. We do not have to decide in this case whether these considerations also apply to public benevolence in the shape of various uncovenanted benefits from the welfare state, but it may be thought that Parliament did not intend them to be for the benefit of the wrongdoer.’
Espagne’s case concerned a question whether an invalid pension paid to a blind person under complex statutory provisions which involved a substantial discretionary element was to be taken into account in assessing the general damages and damages for loss of earnings awarded to the plaintiff for injuries including the loss of his sight. The decision, as I read the judgments, turned largely on the unusual provisions of the statute in question which both Menzies and Windeyer JJ subjected to exhaustive examination and analysis. The passage from the judgment of Windeyer J on which particular reliance was placed by Roskill LJ in Bowker v Rose (1978) 122 SJ 147 is as follows:
‘… In assessing damages for personal injuries, benefits that a plaintiff has received or is to receive from any source other than the defendant are not to be regarded as mitigating his loss, if: (a) they were received or are to be received by him as a result of a contract he had made before the loss occurred and by the express or implied terms of that contract they were to be provided notwithstanding any rights of action he might have; or (b) they were given or promised to him by way of bounty, to the intent that he should enjoy them in addition to and not in diminution of any claim for damages. The first description covers accident insurances and also many forms of pensions and similar benefits provided by employers: in those cases it is immaterial that, by subrogation or otherwise, the contract may require a refund of moneys paid, or an adjustment of future benefits, to be made after the recovery of damages. The second description covers a variety of public charitable aid and some forms of relief given by the State as well as the produce of private benevolence. In both cases the decisive consideration is, not whether the benefit was received in consequence of, or as a result of the injury, but what was its character: and that is determined, in the one case by what under his contract the plaintiff had paid for, and in the other by the intent of the person conferring the benefit. The test is by purpose rather than by cause.’
It is important, however, to note the cautionary words, not cited in the judgment of Roskill LJ in Bowker v Rose, which Windeyer J added immediately following the passage cited above. He said:
‘Nevertheless it is not, I think possible, to enunciate an exhaustive rule for all parts of this vexed topic. And the questions that arise can never be determined in the abstract. Each must depend on the terms of the particular contract, pension scheme, charitable benefaction or statute governing the benefit conferred.’
Whatever may be the position with regard to discretionary statutory pensions of the kind with which the High Court of Australia was concerned in Espagne’s case, when I turn to consider statutory benefits for the relief of various forms of need which are payable as of right to those who fulfil the qualifying conditions, I find the concept of ‘the intent of the person conferring the benefit’ a somewhat elusive one. Statutory benefits of the kind in question come either directly from the pocket of the taxpayer or from some fund to which various classes of citizens make compulsory contributions. The legislation providing for the benefits is prompted by humanitarian considerations directed to meeting certain minimum needs of the disadvantaged, irrespective of their cause. It is, of course, always open to Parliament to provide expressly that particular statutory benefits shall be disregarded, in whole or in part, and s 2 of the Law Reform (Personal Injuries)
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Act 1948 is the most familiar instance where it has done so. But in the absence of any such express provision, where statutory benefits are payable to one whose circumstances of qualifying need arise in consequence of a tort of which he was the victim, I can certainly discern no general principle to support Lord Reid’s tentative ‘that Parliament did not intend them to be for the benefit of the wrongdoer’.
As regards statutory benefits intended to relieve purely financial hardship, it is now settled that unemployment benefit is to be taken into account as mitigating loss of earnings occasioned by wrongful dismissal: see Parsons v BNM Laboratories Ltd [1963] 2 All ER 658, [1964] 1 QB 95; affirmed by this House in Westwood v Secretary of State for Employment [1984] 1 All ER 874, [1985] AC 20. In delivering a speech in the latter case with which the rest of their Lordships adjudicating agreed, I observed ([1984] 1 All ER 874 at 879, [1985] AC 20 at 43):
‘I do not see any analogy at all between the generosity of private subscribers to a fund for the victims of some disaster, who also have claims for damages against a tortfeasor, and the state providing subventions for the needy out of funds which, in one way or another, have been subscribed compulsorily by various classes of citizens. The concept of public benevolence provided by the state is one I find difficult to comprehend.’
Parsons v BNM Laboratories Ltd [1963] 2 All ER 658, [1964] 1 QB 95 was followed by the Court of Appeal in Lincoln v Hayman [1982] 2 All ER 819, [1982] 1 WLR 488, in holding that supplementary benefit paid to the plaintiff in a personal injury action was to be set off against his loss of earnings in assessing special damages. Counsel for the plaintiff in this appeal did not challenge the decision in Lincoln v Hayman. He sought instead to distinguish it on the ground that payments from public funds to provide the indigent with a minimum acceptable level of subsistence are essentially different in kind from payments to meet the needs of those suffering from particular disabilities. I am unable to see any rational basis for this distinction.
In the end the issue in these cases is not so much one of statutory construction as of public policy. If we have regard to the realities, awards of damages for personal injuries are met from the insurance premiums payable by motorists, employers, occupiers of property, professional men and others. Statutory benefits payable to those in need by reason of impecuniosity or disability are met by the taxpayer. In this context to ask whether the taxpayer, as the ‘benevolent donor’, intends to benefit ‘the wrongdoer’, as represented by the insurer who meets the claim at the expense of the appropriate class of policy holders, seems to me entirely artificial. There could hardly be a clearer case than that of the attendance allowance payable under s 35 of the 1975 Act where the statutory benefit and the special damages claimed for cost of care are designed to meet the identical expenses. To allow double recovery in such a case at the expense of both taxpayers and insurers seems to me incapable of justification on any rational ground. It could only add to the enormous disparity, to which the advocates of a ‘no-fault’ system of compensation constantly draw attention, between the position of those who are able to establish a third party’s fault as the cause of their injury and the position of those who are not.
A separate and subordinate point was raised on behalf of the plaintiff in relation to mobility allowance. It was submitted that the allowance was intended exclusively to meet the cost of providing transportation for the claimant whether by invalid carriage, car or otherwise. The only specific item of damages included in the judge’s award to the plaintiff referrable to the provision of transportation for the plaintiff in that sense was a sum of £2,000 for additional expenditure on a family car. It is submitted that this limits to £2,000 the amount that may be deducted from the plaintiff’s damages in respect of mobility allowance. I am unable to read the phrase ‘enhanced facilities for locomotion’ in s 37A(s)(b) of the 1975 Act in the narrow and restricted sense necessary to support this submission. There is no doubt that the plaintiff qualifies for the full mobility allowance on the footing that her condition permits her to benefit from such enhanced facilities.
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The facilities may take a variety of forms and would certainly include whatever outings are provided for her by those who care for her. I see no reason why the whole of the mobility allowance should not be regarded, just as the attendance allowance, as available to meet the cost of her care generally and thus as mitigating the damages recoverable in respect of the cost of that care.
It follows, in my opinion, that Bowker v Rose (1978) 122 SJ 147 and Gohery v Durham CC [1978] CA Transcript 236 were wrongly decided and should be overruled.
On the second point raised by the appeal relating to the multipliers used by the judge in assessing future loss of earnings and future cost of care, I have had the advantage of reading the speech of my noble and learned friend Lord Oliver and I entirely agree with it.
These conclusions have the following effect on the quantum of damages awarded under the relevant heads in dispute. The aggregate of attendance and mobility allowances received by the plaintiff to date of trial, £9,671, is to be deducted and reduces the award for cost of care to date of trial to £44,180. The judge’s estimate of the annual future cost of care, £11,000, falls to be reduced by the annual aggregate of the allowances at the agreed figure of £2,792. The resulting multiplicand, £9,208, multiplied by 13 instead of 14, gives the figure for future cost of care of £119,704. The reduction of the multiplier applied to future loss of earnings from 12 to 11 reduces the award under this head to £68,856. The interest element in the award of damages will also require consequential adjustment.
I would allow the appeal by reducing the judge’s award of damages to the extent indicated.
LORD BRANDON OF OAKBROOK. My Lords, I have had the advantage of reading in draft the speeches prepared by my noble and learned friends Lord Bridge and Lord Oliver. I agree with both speeches and for the reasons given in them I would allow the appeal by reducing the damages awarded by the judge to the extent indicated by Lord Bridge.
LORD OLIVER OF AYLMERTON. My Lords, the tragic factual history which has given rise to this appeal has been fully rehearsed in the speech of my noble and learned friend Lord Bridge. As regards the first grounds of appeal relating to the question of mobility and invalidity allowances, I entirely agree with everything that has fallen from my noble and learned friend.
The second ground of appeal raises a quite distinct issue which arises in this way. It was agreed at the trial before Taylor J that the plaintiff had suffered a continuing loss of salary of £3,267·77 per annum and there was, in addition, an assessed loss of £3,000 per annum in respect of freelance work in which the plaintiff had engaged prior to the accident. To these multiplicands Taylor J applied a multiplier of 11, which is not challenged. That figure, however, he increased to 12 in order to take account of the fact that the income likely to be produced from conventional investment of the sums awarded would attract income tax at the higher rate, a course which had been approved by the Court of Appeal in Thomas v Wignall [1987] 1 All ER 1185, [1987] QB 1098. Similarly in relation to the prospective costs of nursing care and attendance, the judge adopted a multiplicand of £11,000 to which he applied a multiplier of 13, which again is not challenged. To that, however, he again added a further one year in order to take account of the incidence of taxation at the higher rates. The defendants do not challenge the general proposition that the prospective incidence of higher-rate income tax may, in exceptional circumstances, be a factor which can legitimately tip the scales in favour of selecting a multiplier at the higher end of the conventional scale. They do, however, challenge the correctness of an approach which involves, after the calculation of the appropriate multiplier in accordance with the conventional scale, the making of a specific addition to the multiplier in order to take account, as a separate and individual feature,
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of the higher taxation rates which may be attracted by the income likely to be produced by the investment of a very substantial award. The same point arises in relation to the future costs of the Court of Protection, agreed at £850 per annum, to which, for the same reason, the judge again applied an increased multiplier of 14.
The point arose directly for decision in Thomas v Wignall, a case in which the total sum awarded was just short of £680,000, which included sums of £435,000 for future care and £39,000 for loss of future earnings. The trial judge, Hutchison J, had taken a life expectancy of 28 years and a multiplier of 14, to which he had added a further year to take account of the effect which higher taxation would have on the income from such a large award. This was challenged on appeal on the grounds that such an addition was both wrong in law and unsupported by evidence. In the Court of Appeal, the leading judgment was delivered by Nicholls LJ and the ratio of his approach, with which Sir John Donaldson MR concurred, is encapsulated in the following passage ([1987] 1 All ER 1185 at 1188–1189, [1987] QB 1098 at 1104–1105):
‘Higher rates of income tax are a fact of life. In general, the larger an individual’s income, the greater is the percentage of it which goes in tax. Further, all the signs are that a taxation system having this broad effect will continue to exist in this country for the foreseeable future, although the figures and the percentages will vary from time to time. Thus, other things being equal, taxation bears and will continue to bear more heavily on the income of a large award of damages than on the income of a small one. In percentage terms, the net yield after tax of a substantial fund is likely to be lower than the net yield after tax of a small fund the income whereof is subject to little or no tax. Hence, and still speaking in general terms, there is, in this respect, a material distinction from the outset between a very large award and a comparatively modest one. In principle one would expect that distinction to be taken into account by the court when determining the amount of the award. Take two examples, at opposite ends of the spectrum. In one the court is concerned with assessing the amount of an award to make good an income loss of £3,500 pa, or to provide for annual expenditure at that rate. In the other, the facts are the same save that the income loss or expenditure is £35,000 pa. If 14 were the appropriate multiplier in the first case, in my view it would be wrong, and import an inflexible rigidity neither justifiable nor necessary, if the court were not able to make some adjustment to the multiplier in the second case to reflect the increased incidence of tax.’
Lloyd LJ dissented. In his view, in the absence at least of expert evidence that the discount rate allowed for in the conventional multiplier was insufficient to allow for the incidence of taxation, the general principle laid down by this House in Lim Poh Choo v Camden and Islington Area Health Authority [1979] 2 All ER 910, [1980] AC 174 as regards allowance for future inflation applied equally to future taxation which, like inflation, is covered by the ordinary discount rate of 4% to 5% on the basis of which the multiplier is selected. That, the defendants submit, is the correct approach and one which is inherent in the decision of this House in Lim’s case.
My Lords, the question can, I think, only be answered by a consideration of the princples behind the exercise on which the court is called on to embark in assessing damages in a case such as the present. The underlying principle is, of course, that damages are compensatory. They are not designed to put the plaintiff, or his estate in the event of his death, in a better financial position than that in which he would otherwise have been if the accident had not occurred. At the same time, the principle of making a once for all award necessarily involves an assessment both of the probable duration and extent of the financial disadvantages resulting from the accident which the plaintiff will suffer in the future and of the present advantage which will accrue to him from payment in the present of a capital sum which he would not otherwise have and which represents his future income loss. In the making of that assessment, account has also to be taken of a
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number of unpredictable contingencies and in particular that the life expectancy from which the calculation starts may be falsified in the event by supervening illness or accident entirely unconnected with the event for which compensation is being awarded. Such an assessment cannot, therefore, by its nature be a precise science. The presence of so many imponderable factors necessarily renders the process a complex and imprecise one and one which is incapable of producing anything better than an approximate result. Essentially what the court has to do is to calculate as best it can the sum of money which will on the one hand be adequate, by its capital and income, to provide annually for the injured person a sum equal to his estimated annual loss over the whole of the period during which that loss is likely to continue, but which, on the other hand, will not, at the end of that period, leave him in a better financial position than he would have been apart from the accident. Hence the conventional approach is to assess the amount notionally required to be laid out in the purchase of an annuity which will provide the annual amount needed for the whole period of loss. The process cannot, I think, be better described that it was in the speech of Lord Diplock in Cookson v Knowles [1978] 2 All ER 604, [1979] AC 556. He was there concerned with a claim under the Fatal Accidents Acts and, in particular, with the extent to which future inflation ought to be taken into account in assessing damages under the Acts, but his description of the approach to and method of assessment of damages is equally applicable to claims for future loss of earnings and future expenses by the injured party himself. Lord Diplock said ([1978] 2 All ER 604 at 608, [1979] AC 556 at 567–568:
‘When the first Fatal Accident Act was passed in 1846, its purpose was to put the dependants of the deceased, who had been the bread-winner of the family, in the same position financially as if he had lived his natural span of live. In times of steady money values, wages levels and interest rates this could be achieved in the case of the ordinary working man by awarding to his dependants the capital sum required to purchase an annuity of an amount equal to the annual value of the benefits with which he had provided them while he lived, and for such period as it could reasonably be estimated they would have continued to enjoy them but for his premature death. Although this does not represent the way in which it is calculated such a capital sum may be expressed as the product of multiplying an annual sum which represents the “dependency” by a number of years’ purchase. This latter figure is less than the number of years which represents the period for which it is estimated that the dependants would have continued to enjoy the benefit of the dependency, since the capital sum will not be exhausted until the end of that period and in the meantime so much of it as is not yet exhausted in each year will earn interest from which the dependency for that year could in part be met. The number of years’ purchase to be used in order to calculate the capital value of an annuity for a given period of years thus depends on the rate of interest which it is assumed that money would earn, during the period. The higher the rate of interest, the lower the number of years’ purchase. Thus to give an illustration that is relevant to the instant case, the capital value of an annuity for the full 16 years which would have elapsed if the deceased had lived to work until he was 65 would require the 11 years’ purchase adopted as multiplier by the judge at an assumed interest rate (whether he worked it out or not) of 4 3/4 per cent; whereas it would need only seven years as multiplier if the assumed interest rate were 12 per cent.’
Then, after providing some calculations related to the award in that particular case in the light of interest rates then currently obtainable, Lord Diplock continued ([1978] 2 All ER 604 at 610–611, [1979] AC 556 at 571–572):
‘My Lords, calculations such as these are artificial, but so is the measure of damages called for by the Fatal Accidents Act 1976. The kinds of security with which the calculations are concerned are not typical of the way in which a dependent widow (who will have other sources of income as well) is likely to invest the damages she
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receives; but they represent the kinds of security most appropriate for providing the annuity on the capital cost of which the assessment of damages in fatal accident cases has to be based. They demonstrate that even in periods of inflation much higher than those contemplated at the time of Mallett v McMonagle [1969] 2 All ER 178, [1970] AC 166 and Taylor v O’Connor [1970] 1 All ER 365, [1971] AC 115, the greater part of its effect on the real value of damages recovered in respect of future annual loss would be counteracted by a compensating increase in interest rates. Quite apart from the prospects of future inflation, the assessment of damages in fatal accident cases can at best be only rough and ready because of the conjectural nature of so many of the other assumptions on which it has to be based. The conventional method of calculating it has been to apply to what is found on the evidence to be a sum representing “the dependency”, a multiplier representing what the judge considers in the circumstances particular to the deceased to be the appropriate number of years’ purchase. In times of stable currency the multipliers that were used by judges were appropriate to interest rates of four per cent to five per cent whether the judges using them were conscious of this or not. For the reasons I have given I adhere to the opinion Lord Pearson and I had previously expressed (see Taylor v O’Connor [1970] 1 All ER 365 at 379, [1971] AC 115 at 143 and Mallett v McMonagle [1969] 2 All ER 178 at 190, [1970] AC 166 at 175 respectively), which was applied by the Court of Appeal in Young v Percival [1974] 3 All ER 677 at 686–688, [1975] 1 WLR 17 at 27–29, that the likelihood of continuing inflation after the date of trial should not affect either the figure of the dependency or the multiplier used. Inflation is taken care of in a rough and ready way by the higher rates of interest obtainable as one of the consequences of it and no other practical basis of calculation has been suggested that is capable of dealing with so conjectural a factor with greater precision.’
It is, I think, important to bear in mind that this passage was not intended to be prescriptive for the future but merely to describe and analyse the result of an approach to the problem of compensation which has come conventionally to be adopted by the courts and which has been found over the years to produce a substantially just result. In an area in which, as Lord Diplock observed, the conjectural nature of the exercise necessarily renders the computation at best rough and ready, it is not to be expected that the process will or can be precise or entirely logical. So far as taxation is concerned, for instance, there is already a degree of illogicality in the process even as regards the incidence of standard rate tax. The decision of this House in British Transport Commission v Gourley [1955] 3 All ER 796, [1956] AC 185 compels the court, in determining the amount of the plaintiff’s actual loss of earnings to which the multiplier is to be applied, to take account specifically of the income tax which, if the plaintiff had continued to work, he would actually have had to pay on his annual salary. Yet your Lordships have not been referred to any case, and I have certainly found none, in which the court has taken any specific account of the fact that if the amount of the award is invested, standard rate tax will, in many cases, be payable on the income produced by the investment. So that it may fairly be said that the tax-paying plaintiff suffers tax twice, first by having the notional tax deducted from his earnings for the purpose of computing the award and then again by suffering the actual tax which is deducted from the income earned by the award. Indeed, on this analysis logic would demand that, in the case of a plaintiff with a substantial private income or a wealthy spouse, the award would require to be increased in order to compensate for the increased rate of tax payable on its income by reason of the existence of these other resources which may or not be permanently available. This is yet a further illustration of the complications and difficulties which arise if one seeks to take account, as if the computation were an exact science, of individual factors which are themselves imponderable.
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Now, of course, in the assessment of what an injured party has lost and of what is required to compensate him, the incidence of the higher rates of taxation may appear in the equation in three different ways. In the first place, the injured person’s current and likely future earnings lost as a result of the accident may be of an amount which by itself attracts higher rates of tax in the fiscal regime current at the date of assessment. This presents no difficulty. What the court is required to do is to assess the net amount of the loss in accordance with the principles enunciated in Gourley’s case. Second, the injured person may already be possessed of other resources quite unaffected by the accident which, either alone or when added to the earnings lost as a result of the accident, would result in the lost earnings being subjected to higher rate tax. In calculating the actual loss of earnings, it is, as I understand it, the normal practice to look at the plaintiff’s actual tax position and to treat the earnings lost as forming the top slice of his income (see Lyndale Fashion Manufacturers v Rich [1973] 1 All ER 33, [1973] 1 WLR 73). But even here the authorities speak with a somewhat uncertain voice on the extent to which other sources of income are to be taken into account. That they fall to be taken into account to some extent seems clear from the speeches of Lord Goddard and Lord Reid in Gourley’s case [1955] 3 All ER 796 at 805, 809, [1956] AC 185 at 208, 214, but Lord Goddard was at pains to point out the unscientific nature of the exercise and suggested that possibly less (even, perhaps, very little) regard should be paid to income from disposable investments, which could be paid to income from disposable investments, which could be sold or transferred at any time, than to permanent and less readily realisable sources of income (see [1955] 3 All ER 796 at 806, [1956] AC 185 at 208–209). For my part, I entertain some doubt whether it can be right in calculating the injured person’s net loss of earnings for the future, to take into account higher rate tax currently payable on income to which he or his wife is entitled from independent resources on the assumption that he or she will continue to be possessed of them indefinitely. Since, however, the point has not been argued, I express no concluded view on it. Third (and it is with this situation that the instant case is concerned), the application to the net loss and to future expenses of the conventional formula may produce a capital sum of such proportions that, if it is assumed now to be invested in ordinary income-bearing securities, its net income will, at current tax rates, be subjected to higher rates of tax on the assumption either that the present fiscal regime continues unaltered or that it is altered to the disadvantage of the taxpayer. What is said by the defendants is an echo of the majority judgments in Thomas v Wignall [1987] 1 All ER 1185, [1987] QB 1098. The purpose of an award of damages is to compensate the injured party for his net loss as a result of the accident. If the calculated sum required for that purpose is of such an amount that the income likely to be produced by it will attract a high rate of tax it follows that a smaller proportion of the annual loss or expense will be capable of being met from income, that a higher proportion will therefore have to be met from capital and that, accordingly, the danger of the fund being exhausted before the end of the period for which it is calculated to endure will be correspondingly increased. The risk ought, therefore, to be met by an increase in the sum which would otherwise be awarded and that can most conveniently be done by a modest increase in the multiplier. The defendants answer to this is that it rests on the unproven and unprovable assumptions, first, that the current tax regime will either remain unchanged or will be altered to the disadvantage of the plaintiff as a taxpayer and, second, that the effect of higher rate tax is not in any event capable of being counteracted by a careful investment policy. Future taxation, the defendants argue, is as much an imponderable as future inflation. Indeed the two go hand in hand for, in the ordinary way, inflation results in a corresponding increase in actual interest rates, so that, apart from the incidence of tax, the disadvantage of an increased cost of living can be expected to be substantially met by an increased actual income. If, therefore, it is wrong, as the authorities establish that it is, to increase an award to allow for inflation, it follows that it is equally wrong to increase it to allow for the possibility of future taxation. Both
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are, the defendants argue, already embraced in and covered by the conventional multiplier.
My Lords, the question has been touched on in a number of cases prior to Thomas v Wignall. In Taylor v O’Connor [1970] 1 All ER 365, [1971] AC 115, a Fatal Accidents Acts case, the question in issue was whether the trial judge, who had adopted a multiplier of 12, had manifestly awarded too much. The impact of taxation on the calculation, whilst not directly in issue, was adverted to by all the members of the Appellate Committee. It is not, however, possible to derive a consistent theme from the speeches either as to the extent to which tax should be taken into account or, if taken into account, how it should be allowed for. Lord Reid expressed the view that damages ought to be increased to allow for taxation, although he would have done it by an increase in the multiplicand (see [1970] 1 All ER 365 at 367–368, [1971] AC 115 at 128–129). His view at that time, however, was that future inflation should also be taken into account, a view which conflicts with subsequent authority in this House. Lord Morris appears also to have thought that tax should be taken into account but again by way of increasing the multiplicand (see [1970] 1 All ER 365 at 371, [1971] AC 115 at 133). Lord Guest was of the view that the prospect of inflation did not justify an increase in the award but that a higher multiplier could be justified by uncertainty as to the incidence of tax (see [1970] 1 All ER 365 at 373, [1971] AC 115 at 136). Viscount Dilhorne thought it inappropriate to increase the award to cover inflation, but would have increased the multiplicand to provide for tax (see [1970] 1 All ER 365 at 376, [1971] AC 115 at 139). Finally, Lord Pearson thought that inflation ought to be left to be met by investment policy, but catered for by assuming a low net yield from the fund (see [1970] 1 All ER 365 at 380, [1971] AC 115 at 144). On the other hand, he thought also that it would be right to cater for the incidence of graduated income tax by an increase in the multiplier (see [1970] 1 All ER 365 at 379, [1971] AC 115 at 143).
All of these views were obiter and none can be taken as authoritative and it has to born in mind that they were expressed in a case in which the only question was whether the trial judge’s award was manifestly too high and at a time when there had been no authoritative pronouncement on the extent to which future inflation was to be taken into account.
In Young v Percival [1974] 3 All ER 677, [1975] 1 WLR 17 it seems to have been assumed that increased interest rates would be a sufficient counterbalance to the disadvantages of inflation regardless of the incidence of standard rate tax, but there does not appear to have been any consideration in that case of the effect of higher rate tax. In Cookson v Knowles [1978] 2 All ER 604, [1979] AC 556 this House held that it would be wrong for the court to make a further specific allowance for inflation in an award of damages. The reason is that inflation, because of the high rate of interest to which it gives rise, is automatically taken into account by the use of multipliers based on rates of interest related to a stable currency (see per Lord Fraser ([1978] 2 All ER 604 at 616, [1979] AC 556 at 577). Lord Fraser went on, however, to express the view that inflation might possibly be taken into account as justifying an increase in the award in very exceptional cases where the evidence established that the impact of higher rate taxation would render the assumed annuity inadequate, in which event the problem might be dealt with by an increase in the multiplier.
Cookson v Knowles preceded by only a few months the decision of the Court of Appeal in Lim’s case [1979] 1 All ER 332, [1979] QB 196. In that case the trial judge had increased the multiplier in order to provide for future inflation, a course which the Court of Appeal indorsed, on the ground that, having regard to the fact that he had had expert evidence as to the incidence of taxation, he was justified in treating the case as exceptional by reference to Lord Fraser’s speech in Cookson v Knowles. The Court of Appeal’s decision was reversed by this House, where it was again affirmed that no allowance ought to be made for future inflation, although there was no specific mention in the speech of Lord
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Scarman of higher taxation rates as a specific ingredient of inflation. Lord Scarman said ([1979] 2 All ER 910 at 922–923, [1980] AC 174 at 193–194):
‘The trial judge said he made allowance for future inflation in the multiplier for cost of future care and in the multiplier for loss of future earnings. The Court of Appeal, in holding that he had made no mistake in principle, relied on a recent decision of this House, Cookson v Knowles. In that case Lord Diplock made the comment that future inflation “is taken care of in a rough and ready way” because the conventional multipliers applied by the judges assume a rate of interest of 4% or 5%, whereas actual rates of interest are much higher (see [1978] 2 All ER 604 at 611, [1979] AC 556 at 571). Lord Fraser of Tullybelton added the comment that in “exceptional cases, where the [assumed] annuity is large enough to attract income tax at a high rate … it might be appropriate to increase the multiplier, or to allow for future inflation in some other way” (see [1978] 2 All ER 604 at 616, [1979] AC 556 at 577–578). My Lords, I do not read these passages in the speeches in that case of my noble and learned friends as modifying the law in any way. The law appears to me to be now settled that only in exceptional cases, where justice can be shown to require it, will the risk of future inflation be brought into account in the assessment of damages for future loss. Of the several cases to this effect I would cite as of particular importance Taylor v O’Connor [1970] 1 All ER 365, [1971] AC 115 and Young v Percival [1974] 3 All ER 677, [1975] 1 WLR 17. It is perhaps incorrect to call this rule a rule of law. It is better described as a sensible rule of practice, a matter of common sense. Lump sum compensation cannot be a perfect compensation for the future. An attempt to build into it a protection against future inflation is seeking after a perfection which is beyond the inherent limitations of the system. While there is wisdom in Lord Reid’s comment in Taylor v O’Connor [1970] 1 All ER 365 at 368, [1971] AC 115 at 130 that it would be unrealistic to refuse to take inflation into account at all, the better course in the great majority of cases is to disregard it. And this for several reasons. First, it is pure speculation whether inflation will continue at present, or higher, rates, or even disappear. The only sure comment one may make on any financial prediction is that it is as likely to be falsified as to be borne out by the event. Secondly, as Lord Pearson said in Taylor v O’Connor [1970] 1 All ER 365 at 378, [1971] AC 115 at 143, inflation is best left to be dealt with by investment policy. It is not unrealistic in modern social conditions, nor is it unjust, to assume that the recipient of a large capital sum by way of damages will take advice as to its investment and use. Thirdly, it is inherent in a system of compensation by way of a lump sum immediately payable, and, I would think, just, that the sum be calculated at current money values, leaving the recipient in the same position as others, who have to rely on capital for their support to face the future. The correct approach should be, therefore, in the first place to assess damages without regard to the risk of future inflation. If it can be demonstrated that, on the particular facts of a case, such an assessment would not result in a fair compensation (bearing in mind the investment opportunity that a lump sum award offers), some increase is permissible. But the victims of tort who receive a lump sum award are entitled to no better protection against inflation than others who have to rely on capital for their future support. To attempt such protection would be to put them into a privileged position at the expense of the tortfeasor, and so to impose on him an excessive burden, which might go far beyond compensation for loss.
In the light of the reversal by this House in Lim’s case [1979] 2 All ER 910, [1980] AC 174 of the Court of Appeal’s decision that provision should be made for future inflation in the light specifically of the tax position, it is arguable that the question raised by this appeal and that raised in Thomas v Wignall [1987] 1 All ER 1185, [1987] QB 1098 is
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already concluded against the defendants by that decision. That, indeed, was, as I read his judgment, the view of Lloyd LJ in Thomas v Wignall.
It is, however, the case that there is no authority which deals specifically with the question of the extent to which higher rate tax simpliciter ought to be taken into account as an element in itself divorced from inflation and that matter has been argued before your Lordships on the basis that the question remains open. For my part I am certainly content to deal with it on that footing, because I see some intellectual difficulty in the bare assertion that a careful investment policy may be assumed to be capable of dealing both with future inflation and with higher rate taxation. The two considerations do in fact pull in opposite directions. What is said about inflation is that it is generally accompanied by increased interest rates. Since the capital sum arrived at on the notional annuity purchase basis is reached by assuming interest rates very much below actual rates the argument is that any decrease in the value of the fund and any increase in living costs due to inflation can be compensated by the increased yield which correspondingly reduces the need to resort to capital. But if one assumes the continuation of graduated higher tax rates, increased yield means simply that a greater proportion of the income is absorbed in tax and the investment policy has therefore to perform the double duty of maintaining the capital value of the fund and of providing sufficient realisable capital gains to compensate both for increased taxation and for higher living costs. This may, of course, be possible, but it is by no means self-evidently practicable. I approach the problem, therefore, on the footing that, as regards the question of an allowance specifically for higher rate taxation, such authority as there is provides at best no more than guidance. That guidance seems to me however to point strongly against the making of any such specific allowance.
There are, I think, four considerations which have to be borne in mind at the outset. First and foremost is the fact that the exercise on which the court has to embark is one which is inherently unscientific and in which expert evidence can be of only the most limited assistance. Average life expectations can be actuarially ascertained, but to assess the probabilities of future political, economic and fiscal policies requires not the services of an actuary or an accountant but those of a prophet. Second, the question is not whether the impact of taxation is a factor legitimately to be taken into account at all but to what extent, if at all, it is right to treat it as a separate, individual and independent consideration which justifies the making of additional provision conditioned not by the loss sustained but by the way in which the provision made for that loss is assumed to be dealt with by the recipient. Third, what the court is concerned with is the adequacy of a fund of damages specifically designed to meet the loss of future earnings and the cost of future care. It cannot, I think, be right in assessing the adequacy of that fund to take into account what the plaintiff may choose to do with other resources at his command, including any sums which he may receive by way of compensation for other loss or injury. If he chooses, for instance, to retain other sums awarded to him for, for example, loss of amenity or pain and suffering, and to supplement his income by investing them so as, incidentally, to put himself into a higher tax bracket, that cannot, in my judgment, constitute a legitimate ground for increasing the compensatory fund for loss of future earnings and future care. That fund must, in my judgment, be treated as a fund on its own for the purposes of assessing its adequacy. Fourth, it must not be assumed that there is only one way in which the plaintiff can deal with the award and there has, I think, to be borne in mind Lord Diplock’s analysis of the underlying basis of the method by which the multiplier is selected. In practice, of course, the probability is that the plaintiff who receives a high award will treat the fund as a capital fund to be retained and invested in the most advantageous way. But the award has been calculated by reference to the cost of purchasing an appropriate annuity; and since the fund is at his complete disposal it is open to the plaintiff actually so to apply it either in whole or in part. If that were done, the capital proportion of each annual payment, calculated by dividing the cost of the annuity by the life expectation of the annuitant at the date of purchase, would be free
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from tax and the balance alone would be taxable. It is, I suppose, conceivable that that proportion could attract tax at the higher rate but it would require a very large annuity before a significant additional fiscal burden was attracted.
I am, as I have said, content to deal with the question raised on the footing that the answer is not already subsumed in the answer given by this House in Lim’s case [1979] 2 All ER 910, [1980] AC 174 to the allied question of whether specific allowance should be made for inflation. The principle, however, appears to me to be much the same. That tax will be levied is, no doubt, as Benjamin Franklin observed, one of the two certainties of life, but the extent and manner of its exaction in the future can only be guessed at. It is as much an imponderable as any of the other uncertainties which are embraced in the exercise of making a just assessment of damages for future loss. The system of multipliers and multiplicands conventionally employed in the assessment takes account of a variety of factors, none of which is or, indeed, is capable of being worked out scientifically, but which are catered for by allowing a reasonably generous margin in the assumed rate of interest on which the multiplier is based. There is, in my judgment, no self-evident justification for singling out this particular factor and making for it an allowance which is not to be made for the equally imponderable factor of inflation. Essentially, the question is whether the discount provided by the assumption of interest rates of from 4% to 5% applicable to a stable currency, on which the conventional multipliers are based, is likely, because of the rates of tax payable on income above a certain figure under the current fiscal regime, to prove to be so ungenerous in comparison to the actual net return from the fund as to produce a shortfall. Counsel for the defendants has put before your Lordships figures which demonstrate that, in practice, this simply has not happened and, of course, recent fiscal changes have shown the falsity of any necessary assumption that higher rates of tax will remain unreduced. Counsel’s figures were in fact based on the supposition that the relevant income to be considered was that arising from the total global sum of damages. But, as I have already mentioned, what your Lordships are concerned with is the adequacy of the specific sums awarded for future loss of earnings and for future support and it cannot be right that the adequacy or inadequacy of that provision should be linked to what a plaintiff chooses to do with damages awarded under other heads. On this footing, your Lordships are concerned in the instant case with an aggregate fund of, in round figures, £240,000, without taking into account the reductions in the multiplicand proposed in the speech of my noble and learned friend Lord Bridge. Invested at 8% (the assumption made in counsel’s tables) this produces an income of £19,200 pa gross. Personal allowances would reduce the taxable element of this to something less than £17,000, a figure which is below the starting point for the higher rate of tax in the year 1987 in which judgment was delivered. On this analysis, therefore, the problem of higher-rate tax did not in fact arise. If one takes into account the reduction in the multiplicand for future care referred to in the speech of my noble and learned friend Lord Bridge, the case is a fortiori. The additions made to the multipliers by the judge was therefore, in any event, unjustified. I should add, in addition, that I am not persuaded that it was by any means self-evident in Thomas v Wignall [1987] 1 All ER 1185, [1987] QB 1098 that the incidence of higher rate tax would have resulted in a deficiency in the fund. There is certainly no indication in the report that the court had before it any evidence to that effect.
In my opinion, the incidence of taxation in the future should ordinarily be assumed to be satisfactorily taken care of in the conventional assumption of an interest rate applicable to a stable currency and the selection of a multiplier appropriate to that rate.
Both in Cookson v Knowles [1978] 2 All ER 604, [1979] AC 556 and in Lim’s case [1979] 2 All ER 910, [1980] AC 174 this House was prepared to envisage that there might be very exceptional cases, where it could be positively shown by evidence that justice required it, in which special allowance might have to be made for inflation and, inferentially, for tax. Such cases are not, I suppose, impossible, although for my part I do not find it easy to envisage circumstances in which evidence could satisfactorily establish
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that which is inherently uncertain. It would, I think, be extremely undesirable that trials of personal injury cases should be encumbered with evidence from actuaries and accountants directed to demonstrating the unprovable as scientific fact for the purposes of an exercise which is, in its very nature, incapable of being scientific. Moreover, I cannot think that such evidence would in the end be of any real assistance to the trial judge in making his assessment. Tax is merely one of the many imponderables that are taken care of in the conventional method of assessing damages. There may, I suppose, be cases, although, again, I cannot for my part readily imagine one arising in an exercise in its nature imprecise, where the considerations pointing to the selection of one of two possible multipliers are so finely balanced that the future incidence of taxation may be taken into account as one, but only one, of the factors which might properly tip the balance in favour of selecting the higher rate rather than the lower, but the course sanctioned in Thomas v Wignall of making a specific addition on account of this factor alone is, in my judgment, as incorrect as would be a specific addition to cover the risk of future inflation. The dissenting view on this point of Lloyd LJ in that case was, in my opinion, correct. I would accordingly allow the appeal on this ground as well as on the ground canvassed in the speech of my noble and learned friend Lord Bridge, with the consequential reductions to which he has referred. In addition, the reduction to 13 of the multiplier of 14 applied to the agreed Court of Protection costs will result in the award under this head being reduced from £11,900 to £11,050.
LORD GOFF OF CHIEVELEY. My Lords, I have had the advantage of reading the speech of my noble and learned friends Lord Bridge and Lord Oliver, and I would allow the appeal on both grounds.
Appeal allowed.
Solicitors: Sharpe Pritchard, agents for T H Ekins & Son, Birmingham (for the defendants); Cohen Jackson, Stockton-on-Tees (for the plaintiff).
Mary Rose Plummer Barrister.
Smith Kline & French Laboratories Ltd v Long
[1988] 3 All ER 887
Categories: TORTS; Deceit
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): SLADE, CROOM-JOHNSON AND RALPH GIBSON LJJ
Hearing Date(s): 14, 15, 27 JULY 1988
Deceit – Damages – Measure of damages – Plaintiffs induced to part with goods on basis of false representation – Measure of damages recoverable by plaintiffs against defendant – Whether damages to be assessed by reference to market value of goods or cost of replacing them.
Where a plaintiff has been permanently deprived of his goods as the result of the defendant’s deceit, the correct measure of the plaintiff’s damages is the same as in conversion, namely the market value of the goods and not the cost of replacing them.
Doyle v Olby (Ironmongers) Ltd [1969] 2 All ER 119 considered (see p 891 j, p 892 c, p 894 e f j and p 896 d, post).
Notes
For the measure of damages in actions for deceit, see 12 Halsbury’s Laws (4th edn) para 1173 and 13 ibid para 1107, and for cases on the subject, see 17 Digest (Reissue) 82, 16–17 and 34 ibid 383, 3126.
Cases referred to in judgments
Ash v Dickie [1936] 2 All ER 71, [1936] Ch 655, CA.
Caxton Publishing Co Ltd v Sutherland Publishing Co Ltd [1938] 4 All ER 389, [1939] AC 178, HL affg [1936] 1 All ER 177, [1936] Ch 323, CA.
Chabbra Corp Pte Ltd v Jag Shakti (owners), The Jag Shakti [1986] 1 All ER 480, [1986] AC 337, [1986] 2 WLR 87, PC.
Doyle v Olby (Ironmongers) Ltd [1969] 2 All ER 119, [1969] 2 QB 158, [1969] 2 WLR 673, CA.
Jewson & Sons Ltd v Arcos Ltd (1933) 47 Ll L Rep 93, CA.
Mediana (owners) v Comet (owners), The Mediana [1900] AC 113, [1900–3] All ER Rep 126, HL.
Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 1 All ER 796, [1952] 2 QB 246, CA.
Cases also cited
Building and Civil Engineering Holidays Scheme Management Ltd v Post Office [1965] 1 All ER 163, [1966] 1 QB 247, CA.
Heskell v Continental Express Ltd [1950] 1 All ER 1003.
Appeal
The plaintiffs, Smith Kline & French Laboratories Ltd, appealed against the decision of Whitford J given on 16 March 1988 dismissing their claim for damages for deceit against the defendant, David Adam Long. The facts are set out in the judgment of Slade LJ.
Simon Thorley for the plaintiffs.
Leslie Joseph QC and Gerald Rabie for the defendant.
Cur adv vult
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27 July 1988. The following judgments were delivered.
SLADE LJ. This is an appeal by the plaintiffs in an action, Smith Kline & French Laboratories Ltd, from a judgment of Whitford J given at the trial on 16 March 1988. In the action the plaintiffs claimed damages for deceit against the defendant, Mr David Adam Long. The judge found deceit proved, but was not satisfied that the plaintiffs had proved any damage and accordingly dismissed the action.
The plaintiffs are engaged in the manufacture and sale of pharmaceutical products, in particular tablets which are used in the treatment of ulcers and are widely sold in many countries under their trade name ‘Tagamet’. They are part of a group operating throughout the world through a chain of subsidiaries, each of which is allocated areas of operation. The plaintiffs’ area covers the United Kingdom, the Middle East and Central Africa. They sell a variety of drugs to customers in countries within their area of operation, as do the other associated companies. As a matter of policy, if inquiries are made concerning sales to ultimate consumers in countries outside the area of a company within the group, these are referred to the relevant associated company no sales are made in respect of goods for onward transmission to countries outside the area of a company within the group without the consent of the associated company which is responsible for the area. The plaintiffs, like many other commercial organisations, are keenly interested in maintaining their price structures in the various parts of the world where they operate, but nothing improper in their pricing arrangements has been demonstrated.
At the material time, starting in the autumn of 1979, the plaintiffs were anxious to exploit the potential market for pharmaceuticals in Central Africa, since their sales of such products in that area were negligible. We have not been referred to any evidence relating to their sales in the Middle East. Of the sales in this country, the great majority were to distributors at an ‘ex factory’ price of £56·66 per pack of 500, though a small proportion were to other persons, such as dispensing doctors and hospitals, at a standard wholesale trade price of £63·45 (which itself represented a price of £64.75 less 2% bulk discount). The price of £63·45 was the price at which the distributors themselves would habitually sell to their customers. The plaintiffs were prepared to sell to their distributors at a discount because they found it convenient that the distributors should bear the burden of stocking, supplying and distributing the full range of their various products.
The defendant was the managing director of a company called Swift Exports Ltd (Swift). In or about September 1979, on behalf of Swift, he approached the plaintiffs with a view to buying quantities of Tagamet. Then and thereafter, by a series of fraudulent misrepresentations, he led the plaintiffs to believe that Swift was intending to sell, or were actually selling, the tablets purchased in Central Africa. The defendant had business connections in that part of the world and the plaintiffs were attracted by this proposition. Much of the difficulty in dealing with Central African countries arose out of problems connected with foreign exchange. They assumed that the defendant had contacts which would be useful in making foreign exchange available. They hoped that Swift would be able to build up sales of Tagamet in Zambia and other Central African countries. In reliance on the defendant’s false representations, which the judge found proved, the plaintiffs entered into 15 contracts for the sale of Tagamet to Swift which are listed in the statement of claim. The contracts thus listed extended over a period from March 1980 to May 1982. In all they provided for the supply of 16,800 packs of 500 tablets of Tagamet, in each case at a price of £56·66 per pack. These contracts were concluded only on the understanding that the goods were going to Central Africa, where they would be distributed. The judge accepted on the evidence that, if the plaintiffs had known the tablets would be sold by Swift not in Central Africa but to customers in Holland, which was outside their area of operation, they would never have sold them to Swift at any price. In the event, Swift itself sold all the tablets on to a Dutch company, Centrafarm BV, at a price of £58 per pack. Counsel for the plaintffs invited us to infer that this was a sale at a quick profit designed to disguise the defendant’s fraud, and counsel on his behalf did not challenge this inference.
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The total consideration due to the plaintiffs for the sale of the 16,800 packs at a price of £56·66 per pack was £951,888. Of that sum they were paid £794,860, but they extended credit to Swift to the amount of £157,028 in respect of the three latest contracts.
In the event Swift failed to discharge the debt of £157,028. In or about October 1982 the plaintiffs entered judgment in default of defence against Swift, but owing to its insolvency they recovered no more than their out-of-pocket legal expenses. Swift went into creditor’s voluntary liquidation in or about December 1982 and the plaintiffs were never paid this sum of £157,028.
Having learnt of the falsity of the representations made by the defendant, which had led them to enter into the sale contracts, the plaintiffs issued proceedings against him for damages for deceit.
In their statement of claim they alleged that, while the price at which they were prepared to sell Tagamet for supply to the Central African market was £56·66 per pack, the ‘normal price’ charged by their United Kingdom wholesale distributors, less 2% bulk discount, was £63·45. They pleaded that they had been induced to enter into the contracts for the sale of the 16,800 packs of Swift at a price of £56·66 per pack by the defendant’s fraudulent misrepresentations that they were destined for the Central African market. They alleged that, if they had known that they were destined for the continent of Europe, they would not have sold to Swift at a price of £56·66 per pack or at all.
In para 6(2) of their statement of claim the plaintiffs alleged a further misrepresentation. They asserted that they extended to Swift the credit of £157,028 because the defendant led them to believe that Swift was having difficulty in getting moneys remitted from Central Africa and because they were willing to undergo the disadvantage in order to build up goodwill for their products in Central Africa. They alleged that they would not have extended credit but for their belief in those special circumstances.
On the basis of these assertions, the plaintiffs by their pleading in its original form claimed damages for deceit against the defendant under four heads. (1) They claimed the difference between the total consideration payable for the 16,800 packs on the basis of a price of £56·66 per pack (£951,888) and the consideration payable for them on the basis of the ‘normal’ price of £63·45 per pack (£1,065,960). This difference amounted to £114,072. (2) They made a claim for ‘economic loss’ estimated at £133,764, said to have been suffered by the plaintiffs’ group of companies on the grounds that Tagamet had been sold to Swift at an undervalue, which was then sold on to Centrafarm BV, who placed it on the market in Europe, thereby giving rise to such economic loss. (3) They claimed that they had lost two years in themselves developing a Central African market for their products generally, because they relied on Swift to do so. (4) They claimed the amount of credit of £157,028 extended by them to Swift and never recovered.
Following an amendment to the defence, the plaintiffs amended the statement of claim by deleting the second of these four heads of claim. The third of them was not pursued at the trial. The judge rejected the first head of claim because, although he found that the defendant had indeed made a series of fraudulent misrepresentations as to the destination of the goods in question, and that these had induced the plaintiffs to enter into all the relevant contracts, he did not consider that the plaintiffs had established any resulting loss. He rejected the further head of claim because he was not satisfied that the misrepresentation alleged in para 6(2) of the statement of claim had ever been made.
The plaintiffs now appeal from this judgment. Counsel, in the course of his excellent argument on their behalf, told us that he would no longer be pursuing the last-mentioned allegation, namely that the defendant falsely led the plaintiffs to believe that Swift was having difficulty in getting moneys remitted from Africa. Nevertheless, he told us that he would be relying on the judge’s finding that all the relevant contracts (including the three contracts in respect of which extended credit was given) were procured by the continuing misrepresentation that the goods were destined for Central Africa. In these circumstances he explained that he would be pursuing the plaintiffs’ claim to the full sum of £271,100 (£114,072 plus £157,028), which has never been paid to them.
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The broad nature of the plaintiffs’ claim for damages was stated in response to a request for further and better particulars of their statement of claim, as follows:
‘Their case is that the Defendant induced them to part with property by deception. The property was chattels, namely packs of Tagamet, whose market value was £63·45. Their case goes on to give credit of £56.65 per pack, to the extent that they actually received the money.’
In a letter dated 1 October 1987 accompanying these further and better particulars, the plaintiffs’ solicitors said:
‘With respect, we feel that you may not have understood the nature of our clients’ claim for damages. As is perhaps made clearer in our enclosed Particulars, our clients’ case is simple. It is that Mr. Long obtained their property in the United Kingdom by fraud. That property had a value. That value is the market value. If people are prepared regularly to pay £63·45 for a parcel of goods, that parcel has a value of £63·45. True it is that Mr. Long’s company did pay (sometimes) the amount of £56.65 per pack. To the extent that it did so, credit has been given therefor. What the goods cost to make is quite irrelevant … So much is this so, that at the trial our clients will conduct their case on the basis that the Tagamet in question cost them exactly nothing to produce. You may take this as a formal notification to that effect.’
The trial was in the event conducted on this basis. It was also common ground at the trial that the plaintiffs were in a position to produce sufficient stocks of Tagamet tablets to meet all demand.
Where a fraudulent misrepresentation amounts to a term of the contract, the plaintiff, if he can prove damage, will have a claim for damages in contract, the damages being measured by reference to the position in which he would have been if the representation had been true: McGregor on Damages (15th edn, 1988) para 1718. In the present case the plaintiffs’ claim has always been put forward as a claim arising in tort. The measure of damages for fraudulent misrepresentation in tort was considered by this court in Doyle v Olby (Ironmongers) Ltd [1969] 2 All ER 119, [1969] 2 QB 158. This court there held that the measure of damages for deceit was not the same as that of damages for breach of contract. McGregor para 1718 says:
‘… the correct measure of damages in the tort of deceit is an award which serves to put the plaintiff into the position he would have been in if the representation had not been made to him … ’
This much, I think, has been common ground on this appeal and at the trial. The judge himself summarised the plaintiffs’ submission on the law and his conclusions, based on that submission, thus in the following passages of his judgment:
‘You must assume that the misstatements leading to deception were never made and on that assumption you must decide what the plaintiffs’ position would have been if the representations had not been made and acted on. I did not understand the general nature of this approach to be suggested as being wrong. If the representations had not been made, on the plaintiffs’ evidence there would have been no sales to Mr Long’s company at all. It was not suggested that, if there had been no such sales, the Tagamet in fact sold to Mr Long’s company would have been sold in the United Kingdom at any price, let alone a price over that at which it was sold to Mr Long’s company, or that it could have been sold elsewhere at some better price. The result of Mr Long’s misrepresentation was to bring about sales which, far from causing any loss, brought a profit to the plaintiffs. If, as [counsel for the plaintiffs] submitted, so far as any consideration of price is concerned all the plaintiffs would want to do is to recover a pecuniary loss, they have in my view failed to make
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out any case. If the representations had not been made, they would not have sold 16,800 packs at £56·66 or any other price. Their claim that they are entitled to damages based on a price of £63·45 per pack founders on this simple fact, that but for this misrepresentation they would, as I have already indicated, never have made any sales to Mr Long’s company at all. By reason of the onward transmission of the Tagamet to Centrafarm, the Dutch subsidiary, there may or may not in the result have been a loss so far as the Dutch subsidiary is concerned, but I cannot see that there was anything that could sensibly be described as a loss to the plaintiffs.’
Counsel for the defendant has made submissions to the like effect in this court. As a matter of economics and arithmetic, he submitted, the plaintiffs have proved no loss. It was they who had elected to proceed at the trial on the ‘fictional’ hypothesis that the tablets had cost them nothing to produce. On the basis of this hypothesis, the transactions with the defendant, so far from causing them loss, had left them with a ‘windfall’ of nearly £800,000, being the sums actually paid to them by Swift. Those transactions had not prevented them from satisfying any of their other customers’ demands for Tagamet since their supplies of Tagamet were a ‘bottomless pit’. If anyone was the loser from the transactions, said counsel for the defendant, it was the plaintiffs’ Dutch associate company, inasmuch as Swift, which had purchased at a price of £58 per pack, had been placed in a position where it could undercut the Dutch company when selling Tagamet in Holland. However, the plaintiffs had abandoned any attempts to claim for the loss suffered by their associate.
The cogently presented submissions of counsel for the defendant have a superficial logical attraction, which the judge found compelling, notwithstanding his stated reluctance to follow them to their conclusion. In my judgment, however, they are fallacious.
It is first necessary to make one point for the sake of clarity. Two sentences in the passage from Whitford J’s judgment quoted above would at first sight suggest a finding that, if the particular 16,800 packs sold to Swift had not been sold to Swift, the plaintiffs could have found no other purchasers for these packs at £56·66 or any other price. Since at the material time there was an extensive demand for Tagamet, any such finding would have borne no relation to reality. When this point was put to him, counsel for the defendant, fairly as always, accepted that the judge cannot have intended to make any such finding. On this appeal it is common ground that all the judge was intending to find was that, if the representations had not been made and the sales to Swift had accordingly not taken place, the aggregate of all sales made by the plaintiffs would have been reduced by 16,800 packs in other words, if the representations had not been made, the plaintiffs would not have sold an additional 16,800 packs at £56·66 or any other price.
The essence of the argument of counsel for the plaintiffs in support of this appeal has been as follows. If one compares the position in which the plaintiffs would have found themselves in the absence of the defendant’s misrepresentation as to the destination of the goods with the position into which the misrepresentation put them, one sees that they have been deprived of goods which on any footing the plaintiffs could have sold and which on any footing had a market value (though the quantum of that market value is a matter for argument). In these circumstances, in counsel’s submission, the proper measure of the plaintiffs’ loss is the fairly assessed market value of the goods, though in the light of Jewson & Sons Ltd v Arcos Ltd (1933) 47 Ll L Rep 93 he concedes that in the calculation of the final figure of their loss the plaintiffs should give credit for the sums totalling £794,860 actually received by them by way of consideration.
Counsel for the defendant on the other hand has submitted that the plaintiffs’ approach to the measure of damages is wrong in principle. The yardstick, he suggested, is not the market value of the goods but the cost of their replacement. The plaintiffs (and any plaintiffs in a similar position who had inexhaustible sources of supply) always could and should mitigate their damage by replacing the goods, of which they had been deprived by the
Page 892 of [1988] 3 All ER 887
defendant’s deceit, with other similar goods. If the plaintiffs sought damages in a sum exceeding the cost of replacing the goods, they would be seeking compensation in an amount exceeding their true economic loss. In the present case, on the hypothesis put forward by the plaintiffs that Tagamet cost them nothing to produce, the cost of replacement would be nil. Therefore, it was submitted, the judge was right in holding that the plaintiffs had proved no loss, because the goods were replaceable and they had not proved that it would cost them anything to replace them. If the plaintiffs had sought exemplary damages and had adduced sufficient evidence to prove some loss (and thus liability) the court could have awarded them exemplary damages in an amount exceeding their true economic loss. However, at the trial the plaintiffs’ counsel told the judge that a claim for exemplary damages was deliberately not made because all they wanted was compensation. In the absence of such a claim, counsel for the defendant submitted, it would not have been right for the judge to make an award exceeding the plaintiffs’ proven true economic loss, ie nil.
I cannot accept those contentions. Though it is common ground that we should apply the general principle established by Doyle v Olby (Ironmongers) Ltd [1969] 2 All ER 119, [1969] 2 QB 158 relating to the measure of damages in deceit, we have been referred to no cases giving guidance as to the proper mode of application of that principle in a case where the deceit in question had led to the plaintiff being deprived of goods. As counsel for the plaintiffs has pointed out, there are obvious similarities between such a case and the case where a person had been deprived of his goods by the tort of conversion. It would be a dangerous and potentially misleading generalisation to say that the measure of damages would be the same in all cases, whichever was the relevant tort. Nevertheless, statements relating to the principles applicable in conversion, contained in a number of judgments to which counsel for the plaintiffs had referred us, in my judgment give useful guidance as to the principles applicable in the present case.
First, in Ash v Dickie [1936] 2 All ER 71 at 74, [1936] Ch 655 at 663 Lord Wright MR (who was speaking in the context of a case such as the present where the value of the article exceeded the cost of production) said:
‘… in conversion the question is not what it cost to produce the article, and I do not accept the view that items of expense should be considered, but only what the article is actually worth.’
Second, in Caxton Publishing Co Ltd v Sutherland Publishing Co Ltd [1938] 4 All ER 389 at 397, [1939] AC 178 at 192 Lord Roche said:
‘There is no dispute that the measure of damages is the value of the thing converted at the time of the conversion.’
Third, there must be a degree of flexibility in the test which the court is to apply in ascertaining the value of the thing converted. At least in some cases it may be misleading to speak of the value of the thing converted ‘to the owner’. As Lord Porter said in the Caxton case [1938] 4 All ER 389 at 404–405, [1939] AC 178 at 203–204:
‘Such a qualification is, I think, inaccurate, and likely to lead to confusion of thought. I do not accept the view that an article has no value, or a diminished value, to its owner because he has no machinery for selling it. Has a book a different and diminished value to me, who have just purchased it, from that which it had a moment before, in the hands of the bookseller, even though the bookseller will not take it back, and I have no market for its sale? The value is not necessarily the price for which the owner can sell the article … Even the loss of the use for a time of a chattel which the owner would not have used during that time may give rise to substantial damage, whether in an action for damages or in an action for conversion: The Mediana ([1900] AC 113, [1900–3] All ER Rep 126). It is the value, known or unknown, which has to be paid, and that value is not necessarily the price which the
Page 893 of [1988] 3 All ER 887
owner could have obtained or would have taken. It may have to be ascertained by finding out what price for the infringing matter, in the form in which it is offered, the public or some individual is prepared to pay, or in some other way in the light of after events.’
Lord Roche said ([1938] 4 All ER 389 at 397, [1939] AC 178 at 192):
‘It is true enough to say that the value is the value to the owner, but it is wrong to say this if you mean that which the owner will make out of the thing in money if it is not taken away from him. This latter idea was repelled by this House in a series of cases dealing with such trespasses to goods as temporarily deprived the owner of them. They were cases where the owner either did not use the things at all or did not use them for money gain—for example, spare lightships and dredgers. The Mediana is an instance. It was said in the opinion of the EARL OF HALSBURY, L.C., in that case that, if the owner of a chair was deprived of it, it was no ground for giving nominal damages that he did not want to sit upon it, and that it might be necessary in such cases to resort to a variety of tests of value during the time of deprivation. One such suggested test was what would have to be paid by way of hire for such a chair or any chattel in question. It is true that that was a case of trespass, and not one of conversion, but the EARL OF HALSBURY, L.C., said that the same principles applied. So with permanent deprivation or wrongful appropriation of a chattel one of a variety of tests may be the best available test of value according to circumstances.’
Fourth, in a recent case, Chabbra Corp Pte Ltd v Jag Shakti (owners), The Jag Shakti [1986] 1 All ER 480 at 484, [1986] AC 337 at 345, Lord Brandon, delivering the judgment of the Privy Council, made this statement of principle, which was said to be applicable to cases of conversion and negligence:
‘It has further, in their Lordships’ opinion, been established, by authority of long standing, that where one person, A, who has or is entitled to have the possession of goods, is deprived of such possession by the tortious conduct of another person, B, whether such conduct consists in conversion or negligence, the proper measure in law of the damages recoverable by A from B is the full market value of the goods at the time when and the place where possession of them should have been given. For this purpose it is irrelevant whether A had the general property in the goods as the outright owner of them, or only a special property in them as pledgee, or only possession or a right to possession of them as a bailee. Furthermore, the circumstance that, if A recovers the full market value of the goods from B, he may be liable to account for the whole or part of what he has recovered to a third party, C is also irrelevant, as being res inter alios acta. The only exception to the general principle just stated is when B has one or more cross-claims against A arising out of the same or some connected transaction. In that case B may be entitled to set off or deduct the amount of any such cross-claim or cross-claims from the full market value of the goods in arriving at the amount of the damages recoverable from him by A.’
Sufficient authority has been cited to show that, at least in the common case of conversion, the court will ordinarily assess damages by reference to the market value of the goods without reference to the cost of production.
It is obvious that the application of this criterion in cases of conversion will not infrequently result in a plaintiff obtaining damages higher than he could do if his claim was limited to recovering his true economic loss. However, the cases where our law of tort permits a plaintiff to do this, even in the absence of a claim for exemplary damages, are by no means confined to cases of conversion. A number of other instances are given in McGregor on Damages (15th edn, 1988) para 18, which begins as follows:
‘The third variety concerns primarily cases in which the wrong committed by the defendant has involved an interference with the plaintiff’s property, whether land,
Page 894 of [1988] 3 All ER 887
goods or shares, whereby the defendant has gained the use of the property for a period of time. In such circumstances the courts award the plaintiff a sum representing the value of the user for that period even where it is clear that the plaintiff would not have used the property himself, so that he has not suffered a pecuniary loss by being deprived of it. This result has been reached in the case of both wrongful user of land and wrongful user of goods, while the same type of measure has been sketched out for wrongful user of shares and has been hinted at in relation to wrongful infringement of patents.’
If a theoretical justification is sought for decisions such as those referred to in the passage just quoted, where the plaintiff is permitted to recover damages in the absence of proved pecuniary loss, I think it is that in such cases it does not lie in the mouth of the defendant to suggest that the owner might not have found a purchaser or hirer.
In Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 1 All ER 796 at 802, [1952] 2 QB 246 at 257 Romer LJ said:
‘… for in using [or taking] the property he showed that he wanted it and he cannot complain if it is assumed against him that he himself would have preferred to become the hirer [or purchaser] rather than not have had the use of it at all.’
See also Caxton Publishing Co Ltd v Sutherland Publishing Co Ltd [1938] 4 All ER 389 at 398, [1939] AC 178 at 193 per Lord Roche.
As counsel for the defendant pointed out, if any claim in conversion had been made by the plaintiffs in the present case, it would have had to be made against Swift. Nevertheless, the deceit of the defendant, Mr Long, had had the result of permanently depriving the plaintiffs of their goods. To place them in the position in which they would have been in if the deceit had not been perpetrated, in accordance with Doyle v Olbyprinciples, must, in my judgment, necessitate an attempt fairly and properly to ascertain the value of the goods in question. In the absence of any authority compelling a contrary conclusion, I think the fair and proper test to apply is that which we would have applied if the defendant had deprived the plaintiffs of their goods by converting them, in other words the market value and not the cost of replacing them.
In the course of the letter dated 1 October 1987 referred to above, the plaintiffs’ solicitors said:
‘In the case of a research-based pharmaceutical house, the chief cost of a product is not the value of the chemicals or the material. Probably the chief cost element is research and development. Tagamet was discovered, developed and tested in England by the Plaintiff company over many years large numbers of highly qualified scientists and technicians were involved. Yet, for every commercially viable drug our clients have introduced to the market, incomparably more (which they have also discovered) have been rejected by them as unsuitable. It is clearly out of the question to attempt an exercise in which the cost of producing the Tagamet was arrived at. The result would probably be meaningless for any present purpose … ’
I see no reason to doubt the correctness of these statements, which I think give a fair idea of what the proof of ‘true economic loss’ would have involved for the plaintiffs, if the defendant’s contentions as to the relevant law were correct.
In a case such as the present, I do not think it would be just or reasonable to require the plaintiffs to have to adduce evidence as to the cost of producing the goods or of replacing them, for the purpose of establishing any loss. Authority does not, in my judgment, compel us so to hold. If it is clear that the plaintiffs could have sold the 16,800 packs in question for £X, but in the event they have only received £Y, then, subject to what is said below, £X—£Y is the measure of their loss.
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I now turn to consider the market value of these 16,800 packs. Any assessment of this value must have an element of artificiality about it, bearing in mind the restricted nature and conditions of the market in which the plaintiffs chose to operate. But, on the particular facts of this case, I think the right test to apply here is: what price would the plaintiffs have been able to obtain for the 16,800 packs if they had not been deceived into selling them to Swift?
The judge found that there was no evidence that there was a better market price than £56·66 per pack which ‘could have been secured in the United Kingdom or indeed in any other territory in which the plaintiffs were entitled to sell’. Counsel for the plaintiffs challenged this finding, submitting that the plaintiffs could have sold at £63·45 per pack. On the evidence before us, I do not think that the plaintiffs have shown that they would have been able to sell these 16,800 packs at that price. Though their vice-president, Mr R D Eberstein, gave evidence that they would have sold some Tagamet at a higher price than £56·66 to people like dispensing doctors and small hospitals, he was unable to give any firm estimate of the proportion involved. He accepted that the ‘large bulk’ of the product sold in this country would be sold at £56·66. Mr Rees, the director of business planning development for the plaintiffs’ United Kingdom overseas group, likewise accepted that the vast bulk of the product in this country would have gone to the wholesalers at £56·66. With reference to sales to wholesalers, Mr Heron, the plaintiff’s commercial manager, accepted by his last answer in cross-examination that ‘the English company never sold any goods at a higher price that £56.67’. In re-examination Mr Heron said that supplies direct to the hospital section constituted ‘about 4% of our ex factory’. According to the transcript the following question and answer then ensued:
‘Q. Is the answer you gave to my friend a moment ago with respect to supplying to wholesalers, was that or was that not intended to include the institutional sector of the trade? A. [after a pause] No, I suppose not.’
There had been a suggestion in the plaintiffs’ solicitors’ letter of 1 October 1987 that people were prepared regularly to pay £63·45 for a parcel of 500 tablets, but the judge found that there is ‘absolutely no evidence’ that this was so. This finding is unassailable. The somewhat vague available evidence to the effect that unspecified quantities of Tagamet were on an unspecified number of relatively few occasions sold to doctors and institutions at a price of £63·45 per pack does not, in my opinion, establish that the 16,800 packs now under consideration had this market value.
Counsel for the plaintiffs submitted in the alternative that the fair market value of the goods was £58 per pack, being the price which Swift itself obtained on its own resales in Holland. In some cases the price obtained on a resale by the wrongdoer may be the best evidence of the market value of the goods, but not, I think, in this one. It would not, in my judgment, be correct to order the defendant to compensate the plaintiffs on the basis of a price obtained on sales on a market in Holland where they never sold and ordinarily never would sell. In my judgment, the best evidence of the market value properly attributable to the 16,800 packs is the ‘ex factory’ price at which the plaintiffs habitually and without difficulty succeed in selling to distributors in this country. As the judge said it is their policy so far as this country is concerned to sell to such persons ‘save for what was agreed to be a negligible exception’. The market value should, in my opinion, be regarded as £56·66.
Prima facie, therefore, the plaintiffs should be given an award of damages in the sum of £157,028, representing the above-mentioned sum of £951,888 based on that market value, but after giving the defendant credit for the sum of £794,860 which they have actually received in respect of the purchase price due from Swift. Counsel for the defendant submitted that, even if he failed in his principal submissions based on cost of replacement, the plaintiffs should still recover nothing, on the grounds that there is no reliable evidence as to why they gave Swift credit. In his submission, the extension of credit was not the result of the defendant’s misrepresentation as to the destination of the
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goods and it broke the chain of causation between that misrepresentation and the loss of the £157,028.
With due respect to this submission, I will deal with it as succinctly as it was presented. As counsel for the plaintiff pointed out, it was the plaintiffs’ case at the trial that each and every one of the contracts of sale had been induced by the defendant’s fraud. The judge accepted this submission, finding that there had been a ‘series of misrepresentations’. The misrepresentations as to the destination of the goods were continuing misrepresentations which induced the last three contracts of sale, in respect of which the credit was extended, just as much as they had induced the earlier contracts. It was those misrepresentations, not the extension of credit, which caused the ultimate loss to the plaintiffs of the £157,028 by depriving them of the goods which were the subject matter of those three contracts.
For the reasons stated, I respectfully disagree with the judge’s conclusion that the plaintiffs have proved no loss in the present case. I would set aside his order and order that judgment be entered for the plaintiffs in the sum of £157,028. I would be prepared to hear further submissions on the question of interest.
CROOM-JOHNSON LJ. I have had the advantage of reading the judgment of Slade LJ, with which I agree.
RALPH GIBSON LJ. I also agree.
Appeal allowed. Leave to appeal to the House of Lords refused.
Solicitors: Woodham Smith (for the plaintiffs); Tarrants (for the defendant).
Celia Fox Barrister.
Practice Direction
(interest: money in court)
[1988] 3 All ER 896
PRACTICE DIRECTIONS
QUEEN’S BENCH DIVISION
5 October 1988
Practice – Payment out of court – Interest – Destination of interest accruing on money paid into court – Court Funds Rules 1987, r 28(1).
Ian Warren, Senior Master
Pursuant to r 28(1) of the Court Funds Rules 1987, SI 1987/821, all money paid into court is placed to the basic account.
When money is to be paid out of court under a judgment or order, a direction of the court is necessary as to interest, whether accruing before or after the date of judgment or order. In the absence of such a direction, the Accountant General has no power to deal with interest whenever accruing.
In most cases it will be appropriate to order: (a) any interest accruing between the date of payment into court and the date of the judgment or order for payment out to go to the party who made the payment in and (b) any interest accruing thereafter to follow capital payments proportionately.
In cases where the destination of any interest has not been provided for, application should be made in the first instance to the Practice Master.
This Practice Note supersedes that of Master Bickford Smith dated 29 November 1983 (127 SJ 844).
Prekookeanska Plovidba v LNT Lines Srl
[1988] 3 All ER 897
Categories: PROFESSIONS; Lawyers: CIVIL PROCEDURE
Court: QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
Lord(s): HIRST J
Hearing Date(s): 20, 27 JUNE 1988
Solicitor – Lien – Money in client account – Client’s assets subject to Mareva injunction – Whether solicitor having lien over money in client account – Whether solicitor entitled to payment of costs out of money in client account.
A dispute between the plaintiffs and the defendants was referred to arbitration. The defendants were represented initially by a firm of solicitors, C & Son, who held £6,000 in their client account and were owed £32,500 for fees and disbursements. In the course of the arbitration the defendants instructed new solicitors, HD & Co, who held £31,000 in their client account and were owed a substantial sum for fees and disbursements. HD & Co gave C & Son a personal undertaking to pay C & Son’s costs up to £20,000 in order to obtain the release of C & Son’s lien over the defendants’ papers. The arbitration resulted in the plaintiffs being awarded $80,000 plus costs. The plaintiffs were granted orders entitling them to enforce the award as a judgment and restraining the defendants from dealing with assets within the jurisdiction except to the extent that they exceeded $125,000. The injunction expressly applied to the sums held in the client accounts of C & Son and HD & Co but without prejudice to their right of set-off for legal fees. The two firms applied for orders permitting them to use the monies in their client accounts to pay their outstanding costs including the payment of the £20,000 by HD & Co to C & Son pursuant to their undertaking. The plaintiffs opposed the applications.
Held – Money held in a solicitor’s client account for a client against whom judgment had been given and over which the solicitor had a lien for unpaid costs should not be included within the ambit of an injunction granted in favour of the judgment creditor freezing the client’s assets pending satisfaction of the judgment debt. Accordingly, the court would order the release of all the client account funds held by the two firms. However, the defendants would not be ordered to pay the balance of C & Son’s costs which would then remain outstanding, since that would conflict with the enforcement of the plaintiffs’ judgment.
Notes
For a solicitor’s lien on property recovered in an action, see 44 Halsbury’s Laws (4th edn) para 236, and for cases on the subject, see 44 Digest (Reissue) 367–384, 3999–4222.
Cases referred to in judgment
A v C (No 2) [1981] 2 All ER 126, [1981] QB 961, [1981] 2 WLR 634.
American Cyanamid Co v Ethicon Ltd [1975] 1 All ER 504, [1975] AC 396, [1975] 2 WLR 316, HL.
Loescher v Dean [1950] 2 All ER 124, [1950] Ch 491.
Maclaine Watson & Co Ltd v International Tin Council (No 2) [1988] 3 All ER 257, [1988] 3 WLR 1190, CA.
Oceanica Castelana Armadora SA v Mineralimportexport (Barclays Bank International Ltd intervening) The Theotokos [1983] 2 All ER 65, [1983] 1 WLR 1294.
Rapid Road Transit Co, Re [1909] 1 Ch 96.
Applications
Messrs Hill Dickinson & Co and Messrs William A Crump & Son, the present and former solicitors acting for the defendants, LNT Lines Srl, in an arbitration between the plaintiffs,
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Prekookeanska Plovidba, and the defendants, applied by separate summonses for orders permitting them to use moneys in their client accounts standing to the credit of the defendants to pay the outstanding costs of the two firms. The plaintiffs opposed the applications. The summonses were heard in chambers but judgment was given by Hirst J in open court. The facts are set out in the judgment.
Adrian Hughes for Hill Dickinson & Co.
Andrew Hillier for William A Crump & Son.
Joseph Smouha for the plaintiffs.
Cur adv vult
27 June 1988.
HIRST J.
Introduction
This case raises an important point of principle concerning the rights of solicitors who hold moneys in their client account to the credit or order of an unsuccessful defendant whose assets within the jurisdiction up to the amount of a judgment or award against him have been frozen by an injunction obtained at the suit of the successful plaintiff. I am giving this judgment in open court at the request of all parties concerned.
Factual background
On 30 April 1988 the plaintiffs, Prekookeanska Plovidba, as claimants in an arbitration obtained an award against the defendants, LNT Lines Srl, who were the respondents in the arbitration, in the sum of $80,000 approximately, including interest, plus their costs and the costs of the award. The details of the underlying dispute are irrelevant for present purposes.
On 11 May 1988 Phillips J granted the plaintiffs an injunction restraining them until further order whether by themselves their servants or agents from in any way dealing with any of their assets within the jurisdiction save to the extent that they exceed $125,000, including, without prejudice to the generality of the order, sums held to the defendants’ account in the client accounts of Messrs Hill Dickinson & Co and Messrs William A Crump & Son (who are respectively the defendants’ present and former solicitors) in circumstances which I shall shortly describe in more detail. The order further provided that nothing in it should prevent the exercise by the two firms of solicitors of any right of set-off which they may have in respect of legal services which they have rendered to the defendants and for which they have delivered bills to the defendants, which have neither been challenged nor are the subject of any outstanding application for taxation prior to the date of the order.
In addition, Phillips J’s order (a) required the defendants within 14 days to give discovery of all their assets within the jurisdiction and (b) gave the plaintiffs leave to enforce the arbitration award in the same manner as a judgment or order pursuant to s 26 of the Arbitration Act 1950.
Until 22 September 1987 William A Crump & Sons (Crumps) represented the defendants as solicitors in a number of arbitrations including the one above referred to. On that date the defendants withdrew their instructions from Crumps and directed them to transfer the files to their new and present solicitors, Hill Dickinson & Co (Hill Dickinson). At that date Crumps held in their client account the sum of approximately £6,000 to the credit or order of the defendants. On ceasing to act as the defendants’ solicitors, Crumps of course in the normal way held a lien over the defendants’ papers, documents and files to secure the costs then properly owing to them by the defendants. After discussion with Hill Dickinson, this lien was released in consideration of a personal undertaking given by letter dated 9 November 1987 by Hill Dickinson that they would
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pay on demand to Crumps all sums by way of legal costs or disbursements due to Crumps from the defendants as might be either taxed or agreed up to a maximum of £20,000. This undertaking remains in force today.
Crumps’ total bill for outstanding accounts on all matters handled by them on behalf of the defendants, including the above-mentioned arbitration, totalled approximately £37,650, but after negotiations between them and Hill Dickinson on behalf of the defendants, there was reached an agreement by the defendants to pay Crumps £32,500 in full and final settlement of their outstanding legal charges. Hill Dickinson have continued to act as solicitors to the defendants in the above-mentioned arbitration and in a number of other matters since 22 September 1987.
Prior to 11 May 1988, the date of Phillips J’s order, Hill Dickinson had received on account of legal fees from the defendants a number of payments which totalled by that date approximately £31,000, which is now held by Hill Dickinson in their client account to the credit or order of the defendants. Of this sum, £20,000 is of course earmarked for the purpose of refunding Hill Dickinson when they fulfil their personal undertakings to Crumps. The balance of £11,000-odd is, as is common ground and as the defendants have acknowledged, substantially less than the total amount now owing by the defendants to Hill Dickinson for legal services provided by them prior to 11 May 1988.
Since the issue of the arbitration award on 30 April its fulfilment by the defendants has been the subject matter of numerous discussions in which it has become clear on the evidence before me that the defendants are in serious financial straits.
The orders now sought
Hill Dickinson now seek orders that would permit them (i) on payment to Crumps of the sum of £20,000 to reimburse themselves from the money held to the defendants’ credit or order in their client account, (ii) to apply the balance standing in their client account in part payment of, or reimbursement for, their legal services rendered before 11 May 1988.
Crumps seek orders (i) to enable Hill Dickinson to pay the £20,000 to Crumps in pursuance of their undertaking, (ii) to enable Crumps to transfer from their client account the £6,000 odd held therein to the credit or order of the defendants in part payment or reimbursement of their legal services rendered before 11 May 1988, (iii) to enable the defendants to pay to Crumps the balance of their agreed liability to costs (ie a further £6,500 approximately) for such services.
All these applications are strongly opposed by the plaintiffs, who submit there should be no variation of Phillips J’s order.
All but the last of Crumps’ applications relate to client account moneys, with which the main point of principle is concerned, and I shall resolve them first, leaving over to the last Crumps’ final application which raises different issues.
The law relating to client accounts
Under the Solicitors’ Accounts Rules 1986, made on 11 December 1986 by the Council of the Law Society and approved by the Master of the Rolls pursuant to s 32 of the Solicitors Act 1974, a solicitor is obliged to hold client’s money (ie money held or received by a solicitor on account of a person for whom he is acting) in a client account, ie a separate account in the name of the solicitor and in the title of which the word ‘client’ appears. Rule 14 of these rules provides:
‘Nothing in these Rules shall deprive a solicitor of any recourse or right, whether by way of lien, set off, counterclaim, charge or otherwise, against moneys standing to the credit of a client account.’
A solicitor’s lien entitles him at common law ‘to retain property already in his possession until he is paid costs due to him in his professional capacity’, property in this context including, inter alia, money held in a client account: see 44 Halsbury’s Laws of
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England (4th edn) paras 226–227 and Loescher v Dean [1950] 2 All ER 124, [1950] Ch 491. As a result, a garnishee order in respect of debts due by a solicitor to his client can only be made absolute subject to the priority of that lien: see Loescher’s case. The lien is also available against a trustee in bankruptcy in the case of a bankrupted individual, or, in the case of an insolvent company, against the liquidator, in respect of costs incurred before the bankruptcy or liquidation: see Re Rapid Road Transit Co [1909] 1 Ch 96 and the Insolvency Rules 1986, SI 1986/1925, r 4.90, preserving a right of set off in a company liquidation.
Rival submissions
Counsel on behalf of Hill Dickinson and Crumps submit that, having regard to the well-established position in law described above, any proceedings by way of execution (e g garnishee proceedings) against the moneys held by the solicitors in their respective client accounts would be bound to fail on the strength of their respective liens on those moneys. Consequently, they submit it would be wrong as a matter of principle to include these client account moneys in any injunction at the present interlocutory stage. Further or alternatively, they submit that these moneys properly fall within the right of set-off expressly preserved in Phillips J’s order as set out above (compare the standard order invariably included nowadays in Mareva injunctions protecting the right of set-off for banks and similar institutions: see Oceanica Castelana Armadora SA v Mineralimportexport (Barclays Bank International Ltd intervening), The Theotokos [1983] 2 All ER 65 at 71, [1983] 1 WLR 1294 at 1301 per Lloyd J. In truth, they argue, these moneys are not effectively the defendants’ moneys at all, but are only held by the solicitors in the present manner because of the mandatory requirements of the Solicitors’ Accounts Rules 1986.
Counsel on behalf of the plaintiffs did not address any argument on the question of the solicitors’ lien, or the validity of garnishee proceedings, submitting that it would be wrong to come to any decision thereon prior to the stage where actual enforcement was sought against the moneys in the client accounts by way of execution. At the present juncture, he argued, the proper approach is simply and solely to balance the issues of justice and convenience. He contrasted the present position with that prevailing under Mareva injunctions, pointing out that the latter relief is granted when the plaintiff’s claim has still not been established by judgment, whereas in the former case (of which the present is an example) the injunction relates to a judgment debt. Where there is a judgment debt, the authorities show that it is the policy of the law to do all that it can to assist judgment creditors: see Maclaine Watson & Co Ltd v International Tin Council (No 2) [1988] 3 All ER 257, [1988] 3 WLR 1190. If the defendants were making the same application it would, he submitted, be refused, unless the defendants made full disclosure of all their assets within and outside the jurisdiction: see A v C (No 2) [1981] 2 All ER 126, [1981] QB 961. Not only is there no such evidence here, but the defendants are in fact in breach of Phillips J’s explicit discovery order. On the balance of convenience, he submitted, the refusal of the present applications would cause no prejudice to the two firms of solicitors, since the money would remain safely in their client accounts granting of the order, on the other hand, would cause great hardship to the plaintiffs, since it would enable the defendants to carry on their other arbitrations while defying the judgment embodying the arbitration award.
Conclusion
I fully accept the submissions of counsel for the plaintiffs as to the policy of the law to support by all reasonable means, such as the present injunction, efforts by the plaintiffs to enforce judgments entered in their favour, and as to the problems which the defendants would face in the present situation if they themselves sought to vary the injunction. However, in my judgment this is of no avail to the plaintiffs in relation to moneys in a solicitor’s client account over which they have a lien for unpaid costs. In my judgment it would be quite wrong in principle for such moneys to be included within the ambit of the injunction for the reasons given by counsel for the two firms of solicitors.
Page 901 of [1988] 3 All ER 897
Counsel for the plaintiffs’ invitation to me to disregard the lien, and the insuperable difficulties which would confront any garnishee proceedings, seems to me completely unrealistic.
Approaching the matter on the straight forward principles of American Cyanamid Co v Ethicon Ltd [1975] 1 All ER 504, [1975] AC 396, the first hurdle which the plaintiffs must surmount is to show that they have a real prospect of ultimately succeeding in a claim to the moneys at present held in the client accounts in part satisfaction of the judgment based on the arbitration award this they have failed to do since the solicitors’ respective liens on these sums are clearly paramount, and would be a complete answer to any attempt eitherby the plaintiffs to attach these sums in garnishee proceedings, or, should there be an insolvency, to any attempt by the liquidator to recover them. These sums are also in my view covered by the exception for set-offs in Phillips J’s order.
It follows from the above that in my judgment questions affecting the balance of convenience or the exercise of my discretion do not enter the present picture. If, however, I am wrong on this, the balance of convenience would seem to me to be overwhelmingly in favour of releasing these funds in the client accounts from the injunction here and now, and I should do so in the exercise of my discretion, since I can see no useful purpose in presently withholding access by the solicitors to funds where their rights under liens will always remain impregnable.
As a result I shall make orders releasing all the client account funds held by both the firms of solicitors, which will enable Hill Dickinson to transfer the £20,000 to Crumps, and will also enable both firms to withdraw the balances out of their respective client accounts in part payment of their outstanding costs, and in the case of Hill Dickinson, to recoup the £20,000.
The balance owing to Crumps
This leaves the question of the small balance still outstanding to Crumps, which is in no way affected by the principles which I have just been considering, but depends on general considerations of balance of convenience. If I were to vary the injunction in order to allow the defendants to make and Crumps to receive this payment, at a time when the defendants are hard pressed financially, and furthermore are wholly in default not only in satisfying the judgment on the award, but also through non-compliance with Phillips J’s discovery order, I should I think be in conflict with the general policy of the law to support plaintiffs in their reasonable efforts to enforce judgments in their favour. It follows that in the exercise of my discretion I am not prepared to vary the injunction in this respect.
I should like to stress in conclusion that the plaintiffs’ criticisms of the defendants’ conduct were directed simply and solely against the defendants themselves, and in no shape or form against either firm of solicitors, who have throughout conducted this affair impeccably, and with complete candour towards the plaintiffs.
Order accordingly.
Solicitors: Elborne Mitchell (for the plaintiffs); William A Crump & Son Hill Dickinson & Co.
K Mydeen Esq Barrister.
Associated Japanese Bank (International) Ltd v Credit du Nord SA and another
[1988] 3 All ER 902
Categories: BANKING AND FINANCE
Court: QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
Lord(s): STEYN J
Hearing Date(s): 7, 8, 9, 10, 14 MARCH, 13 APRIL 1988
Guarantee – Construction – Sale and leaseback transaction with lessee’s obligations secured by guarantee – Parties to guarantee mistaken about existence of subject matter of transaction – Subject matter of lease and guarantee non-existent – Lessee failing to pay rental under lease and later adjudged bankrupt – Whether express or implied condition precedent of guarantee that subject matter of transaction existed – Whether guarantor excused from liability by non-fulfilment of condition precedent.Mistake – Mistake of fact – Common mistake – Subject matter of contract essentially and radically different from that which both parties believed to exist at time contract executed – Sale and leaseback transaction with lessee’s obligations secured by guarantee – Parties to guarantee mistaken about existence of subject matter of transaction – Subject matter of lease and guarantee non-existent – Whether guarantee void ab initio for common mistake.
Under a sale and leaseback transaction the plaintiff bank purchased four specified precision engineering machines from B and then leased them back to him. B received £1,021,000 from the plaintiff bank under the transaction. As a condition of the transaction, B’s obligations under the leaseback agreement were guaranteed by the defendant bank. At all times both banks believed that the four machines existed and were in B’s possession. After B failed to keep up payments under the lease it was discovered that the machines did not in fact exist and that the transaction was a fraud perpetrated by B. The plaintiff claimed the outstanding balance due under the lease from B but he went bankrupt and the plaintiff then sued the defendant on the guarantee. The defendant refused to pay, contending, inter alia, that the guarantee was subject to an express or implied condition precedent that the machines in fact existed and therefore the guarantee was void ab initio for common mistake.
Held – On its true construction the guarantee was subject to an express condition precedent that there was a lease in respect of four existing machines. Alternatively, it was reasonable to conclude that the guarantee contained an implied condition precedent that the lease related to existing machines. It followed, therefore, that since the machines did not exist the plaintiff bank’s claim failed and would be dismissed (see p 908 f to h and p 909 b c, post).
The Moorcock [1886–90] All ER Rep 530 and dictum of MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 All ER 113 at 124 applied.
Per curiam. A contract will be void ab initio for common mistake if a mistake by both parties to the contract renders the subject matter of the contract essentially and radically different from that which both parties believed to exist at the time the contract was executed. However, the party seeking to rely on the mistake must have had reasonable grounds for entertaining the belief on which the mistake was based (see p 910 h j and p 912 j to p 913 c, post); dicta of Lord Atkin and Lord Thankerton in Bell v Lever Bros Ltd [1931] All ER Rep 1 at 28, 36 applied dictum of Denning LJ in Solle v Butcher [1949] 2 All ER 1107 at 1119 considered.
Notes
For common mistake as to the existence of subject matter or its essential element, see 32 Halsbury’s Laws (4th edn) paras 15–17, 20, and for cases on the subject, see 34 Digest (Reissue) 434–437, 3553–3562.
Page 903 of [1988] 3 All ER 902
Cases referred to in judgment
Bell v Lever Bros Ltd [1932] AC 161, [1931] All ER Rep 1, HL.
Davis Contractors Ltd v Fareham UDC [1956] 2 All ER 145, [1956] AC 696, [1956] 3 WLR 37, HL.
Grist v Bailey [1966] 2 All ER 875, [1967] Ch 532, [1966] 3 WLR 618.
Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd (1867) LR 2 QB 580.
London General Omnibus Co Ltd v Holloway [1912] 2 KB 72, [1911–13] All ER Rep 518, CA.
McRae v Commonwealth Disposals Commission (1951) 84 CLR 377, Aust HC.
Magee v Pennine Insurance Co Ltd [1969] 2 All ER 891, [1969] 2 QB 507, [1969] 2 WLR 1278, CA.
Moorcock, The (1889) 14 PD 64, [1886–90] All ER Rep 530, CA.
National Carriers Ltd v Panalpina (Northern) Ltd [1981] 1 All ER 161, [1981] AC 675, [1981] 2 WLR 45, HL.
Sheikh Bros Ltd v Ochsner [1957] AC 136, [1957] 2 WLR 254, PC.
Shirlaw v Southern Foundries (1926) Ltd [1939] 2 All ER 113, [1939] 2 KB 206, CA.
Solle v Butcher [1949] 2 All ER 1107, [1950] 1 KB 671, CA.
Taylor v Caldwell (1863) 3 B & S 826, [1861–73] All ER Rep 24, 122 ER 309.
Action
The plaintiffs, Associated Japanese Bank (International) Ltd (AJB), brought an action against the defendant guarantors, Crédit du Nord SA (CDN), claiming, inter alia, the sum of £901,687·66, being the outstanding balance under a sale and leaseback agreement for four micro textile compression packaging machines concluded by AJB and Mr Jack Bennett (trading as British Consolidated Engineering Co) pursuant to the terms of a written guarantee dated 29 February 1984 under which CDN had guaranteed Mr Bennett’s obligations as lessee. In the alternative AJB asserted tracing claims against CDN on the ground that various sums (£301,312·80 and £706,000) paid to CDN by Mr Bennett were part of the proceeds of the £1,012,000 purchase price paid by AJB to Mr Bennett for the four machines under a mistake of fact as to their existence. In July 1984 Mr Bennett was adjudicated bankrupt. The trustee in bankruptcy was subsequently added as a second defendant but later withdrew following settlement of the tracing claims. The facts are set out in the judgment.
Michael Crystal QC and Richard Adkins for AJB.
Anthony Thompson QC and Mark Barnes for CDN.
Cur adv vult
13 April 1988. The following judgments were delivered.
STEYN J. Throughout the law of contract two themes regularly recur: respect for the sanctity of contract and the need to give effect to the reasonable expectations of honest men. Usually, these themes work in the same direction. Occasionally, they point to opposite solutions. The law regarding common mistake going to the root of a contract is a case where tension arises between the two themes. That is illustrated by the circumstances of this extraordinary case.
In broad but necessarily imprecise terms the shape of this case is as follows. In February 1984 Mr Jack Bennett concluded a sale and leaseback transaction with Associated Japanese Bank (International) Ltd (AJB) in respect of four machines which were described by serial numbers. In other words, Mr Bennett sold the machines to AJB, and AJB then leased the machines to Mr Bennett. AJB had been unwilling to enter into the transaction unless the lessee’s obligations were guaranteed by an acceptable guarantor. Crédit du Nord SA
Page 904 of [1988] 3 All ER 902
(CDN) proved to be an acceptable guarantor, and for a guarantee fee CDN guaranteed the obligations of the lessee under the lease agreement. AJB paid a sum in excess of £1m to Mr Bennett. Out of the proceeds of the sale Mr Bennett paid the first quarterly rental. But in May 1984 he was arrested. The second quarterly rental was never paid and it was subsequently discovered that the machines which were the subject matter of the sale and lease did not exist. Mr Bennett had committed a fraud on both AJB and CDN. Pursuant to the terms of the lease, AJB claimed the total outstanding balance from Mr Bennett. In July 1984 Mr Bennett was adjudged bankrupt. AJB sued CDN on the guarantee. In the alternative, AJB asserted proprietary or tracing claims against CDN on the grounds that various sums paid to CDN by Mr Bennett were part of the proceeds of the purchase price paid by AJB to Mr Bennett. The trustee in bankruptcy was given leave to be added as a second defendant and appeared by counsel at the trial. On the fourth day of the hearing the parties arrived at a settlement of the proprietary or tracing claims. Counsel for the trustee accordingly withdrew.
The central remaining question to be resolved is whether AJB is entitled under the guarantee to judgment in the sum of £1,012,000 together with interest. The principal issues to which most of counsel’s submissions were directed related to the questions (a) whether the guarantor was excused from liability by the non-fulfilment of an express or implied condition precedent of the guarantee, viz the existence of the machines, or (b) whether the guarantee was void ab initio by reason of a common mistake affecting the guarantee, viz the existence of the machines.
THE COMMERCIAL BACKGROUND
Before I turn to the sequence of events which led to the present dispute, a brief sketch of the commercial background should be given. The principal transaction was a sale and leaseback of equipment. That is a transaction whereby a person who owns equipment raises money by selling the equipment to another for cash and leases it back for a fixed term. It is to be distinguished from a direct lease where the lessor buys the equipment from a third party and leases it to the user, the lessee, for a fixed term. In 1984 both forms of equipment leasing offered fiscal advantages. The advantage to the lessor was that the lessor could claim 100% first year capital allowance or 25% writing down allowance against the equipment, enabling the lessor to defer payment of corporation tax. The saving to the lessor from the delay in payment of corporation tax could be reflected in the rental payment charged to the lessee. The lessee could thus obtain finance for the acquisition and use of the equipment at a lower interest rate than if the lessee had to borrow the money to buy the machines outright and repay it over the period of the lease.
THE STORY OF THE NON-EXISTENT MACHINES
The story starts with Mr Jack Bennett, a professional engineer, who had by 1984 become the sole proprietor of British Engineering Co (BEC), British Consolidated Engineering Co (BCEC) and British Precision Engineering Industries (BPEI). BEC, BCEC and BPEI were trading names for Mr Bennett. In early 1984 Mr Bennett made contact with National Leasing and Finance Co (National Leasing), a firm of lease brokers. He dealt with Mr Mark Kulesza, the marketing manager. He wanted to raise money. In early February 1984 Mr Kulesza approached AJB and CDN, trying to interest the former in concluding a sale and leaseback in respect of four specific machines and the latter in acting as guarantor for reward of the lessee’s obligations. AJB is a Japanese-owned institution which carries on banking business in the City of London. Its business includes leasing equipment. CDN is a French bank with a London branch. Initially, it had been suggested to AJB that BEC would be the lessee, and BPEI the guarantor. That was unacceptable to AJB. Mr Kulesza tried to interest CDN in acting as guarantor. On 15 February a meeting took place between Mr Bennett, Mr Kulesza and two London-based employees of CDN, viz Mr David Brown (the credit manager) and Ms Jennifer Broadley
Page 905 of [1988] 3 All ER 902
(a credit officer). At that stage CDN was asked to guarantee the obligations of BEC under a five-year equipment lease for the lease of four textile compression packaging machines. The limit of the guarantee was to be £1,058,894. The guarantee fee was to be 1% quarterly paid in advance. During the meeting the CDN representatives probed Mr Bennett’s background, and they were impressed with Mr Bennett’s financial standing and his asserted proven ability to obtain government contracts. Subsequently, CDN obtained satisfactory status reports on Mr Bennett and BEC from a branch of Midland Bank plc. Mr Brown and Ms Broadley reported to Mr Bernard Lengrand, the general manager of the London branch of CDN. Mr Lengrand was in principle in favour of the transaction. On 24 February a further meeting took place between Mr Bennett and CDN employees. Mr Bennett signed a personal counter-guarantee in blank in favour of CDN he agreed to open a current account with CDN and agreed to deposit £250,000 with CDN. At this stage CDN was unaware of the identify of the proposed lessor.
On 27 February Mr Kulesza phoned Mr Kirosha Kobayashi, the assistant general manager in AJB’s loan department. BCEC (as opposed to BEC) was now put forward as the seller and lessee of the equipment. That was not a point of any great materiality. Mr Kulesza said that CDN would be prepared to guarantee the lessee’s obligations. AJB had spare ‘capacity’, and therefore a commercial incentive to conclude the transaction. AJB viewed CDN as a most acceptable guarantor. On 27 February Mr Kulesza wrote to AJB enclosing, inter alia, documents described as lease documentation, guarantee wording, guarantee structure and accounts of CDN. On the same day Mr Kulesza wrote to CDN enclosing documents described as guarantee proposal, guarantee structure and lease document. The documentation so forwarded to AJB and CDN respectively identified the subject matter of the lease as four specific machines, which were identified by serial numbers. Subject to minor drafting points, the transaction was acceptable to AJB and CDN, the latter having obtained the necessary authority from its Paris head office.
Pausing there in the chronology, the position is that both AJB and CDN were proceeding on the basis that Mr Bennett was an honest and substantial businessman. AJB had relied on what it was told by National Leasing. No AJB employees ever met Mr Bennett until the completion of the transaction. CDN, on the other hand, relied both on what it was told by National Leasing and on the impressions gathered in meetings with Mr Bennett. On the basis of the oral evidence of Mr Brown and Ms Broadley, which I accept, it is clear that at no stage until after the eventual completion of the transaction did CDN know that the proposed transaction was to be a sale and leaseback, and CDN had no reason to infer it. But both parties assumed that the machines existed.
On 29 February, at the offices of National Leasing, the transaction was completed. The meeting was attended by, inter alios, Mr Bennett, Mr Kobayashi of AJB and Mr Kulesza of National Leasing. No employee of CDN was present. The sale agreement and the lease were executed. On behalf of CDN, Mr Kulesza handed over the signed guarantee. AJB then handed over to Mr Bennett a cheque for £1,012,000 payable to BCEC.
The transaction consisted of three separate agreements. The first was the agreement whereby BCEC sold the four machines to AJB for a total price of £880,000 together with any applicable value added tax payable thereon. Under that agreement BCEC warranted that the machines were new and unused. The second agreement was the lease. It identified AJB as the owner and lessor of the machines. BCEC was the lessee of the goods. The term of the lease was five years, and rental was payable in quarterly instalments. The following provisions of the lease are relevant to an understanding of the present dispute:
‘Termination
10.1 The Lessor shall be entitled to terminate this Lease on the expiry of thirty days notice, in writing to the Lessee only upon the occurrence of any of the following events and notwithstanding any subsequent acceptance of rent: (a) If the Lessee fails to pay any rental, interest or other sum due hereunder within seven days of the due
Page 906 of [1988] 3 All ER 902
date, fourteen days of the due date if the Schedule states that there is to be a Sub-Lessee (b) if the Lessee shall make default in the performance or observance of any terms and conditions hereof (all of which provisions shall for all purposes be regarded as fundamental conditions of this Agreement)
10.2 On the termination of this Lease by the Lessor:—(a) the Lessor or its agents may without notice repossess the Goods and may for that purpose enter upon any land or buildings on which the Goods are located and the Lessee shall be responsible for all damage which may be caused by any severance or removal of the Goods provided that reasonable care shall be taken by the Lessor or its agents (b) the Lessee shall then be liable for the payment to the Lessor forthwith on demand of: (i) any sums due from the Lessee to the Lessor under this Lease Agreement at the date of such termination whether by way of unpaid rent or arising from any breach of the obligations of the Lessee under this Lease prior to such date together with any investment or regional development grants (on a grossed up basis, if necessary, to maintain the after tax return of the Owner) which the Lessor or the Owner is required to repay as a result of such termination (ii) the cost of all repairs to the Goods to render it in good working order and condition (iii) all costs and expenses of the Lessor in repossessing and remarketing the Goods howsoever occasioned (iv) as agreed compensation for loss of profit an amount equal to the entire amount of the unpaid rent in respect of the Goods for the unexpired balance of the Primary Period hereunder discounted at the rate of 5% per annum on such unpaid rent in respect of the early payment thereof.’
The foregoing provisions must be read with para 8 of the schedule. It reads as follows:
‘Refund The Lessor will appoint the Lessee agent to dispose of the goods to a third party. At such a time, the Lessor shall refund to the Lessee 971/2% of the Net Sale proceeds of the sale of the goods.’
That brings me to the third agreement, the guarantee. It is addressed to AJB. The following provisions are material:
‘We, Credit du Nord, whose place of business in the UK is at 10 Old Jewry, London EC2R 8DU in consideration of your leasing 4 Textile Compression Packaging Machines to British Consolidated Engineering Company whose registered office is at PO Box 168, London NW5 1TJ (hereinafter called “the Lessee”) pursuant to Leasing Contract dated 29th February 1984 Reference no. … (hereinafter called “the Agreement”) hereby unconditionally guarantee to and agree with you as follows:—1. For the duration of the Primary Period (as such expression is defined in the Leasing Contract referred to above) we hereby guarantee that if for any reason the Lessee shall make any default in paying any lease rental or any other sum that becomes due to you thereunder we will pay the amount thereof to you forthwith upon demand in writing … 11. As a separate and independent stipulation we agree that any sums mentioned in Clause (1) hereof which may not be recoverable on the footing of a guarantee whether by reason of any legal limitation disability or incapacity on or of the Lessee or any other fact or circumstance and whether known to you or not shall nevertheless be recoverable from us as sole or principal debtor in respect thereof and shall be paid by us on demand.’
The truth was, of course, that there were no machines. The lessee, BCEC, repudiated the lease, and AJB called on CDN to pay under the guarantee.
THE WITNESSES
This is a case in which the documents tell their own story. A few interstices were filled by the oral testimony of three witnesses: (a) Mr Gerald Birch, the assistant manager of the loan department of AJB in 1984 (b) Mr Brown and Ms Broadley, of the London branch of CDN.
Page 907 of [1988] 3 All ER 902
To the extent to which they testified to matters of fact which were within their personal knowledge, I accept the evidence of all these three witnesses. Statements made under the Civil Evidence Act 1968 by Mr Kobayashi (the assistant general manager of AJB) and Mr Lengrand (the London manager of CDN) were placed before me but these statements were largely uncontroversial. In addition, and by agreement, there were placed before me three experts’ reports, viz the reports of Mr N A Roberts, Mr A E Stern and Mr W T Hender. By agreement none of these experts were called, but I was informed that by agreement their reports constituted evidence in the case which I was asked to assess in the light of counsel’s submissions. In a civil case that was, of course, a perfectly proper course to adopt. And it had the merit of avoiding the rehearsal of the very same arguments on several occasions during the same trial. One can only hope that such a course is adopted more often in Commercial Court cases where the expert evidence is not of central importance. But in this case I have not found it necessary to choose between the rival expert opinions except to the very limited extent which will emerge when I turn to the substantive issues.
THE ISSUES
AJB’s case is simple and straightforward. The principal debtor has defaulted and repudiated the lease. AJB therefore seeks a judgment against the guarantor, CDN. The issues which arise can perhaps best be defined by listing the defences which have been raised by CDN. Inevitably, the arguments have become somewhat more refined during speeches. In the light of the pleadings and speeches, it seems to me that the extant issues are as follows.
(A) The construction point
It was submitted that it was an express or, alternatively, an implied condition precedent of the guarantee that the machines which were the subject matter of the lease in fact existed. Alternatively, it was submitted that the guarantee never became effective because the lease without machines was not the transaction guaranteed.
(B) Mistake
It was submitted that, if the construction point failed, the guarantee was void ab initio at common law for common or mutual mistake, or, alternatively, the guarantee was voidable in equity and was avoided.
(C) Non-disclosure
It was submitted that the guarantee was voidable, and was avoided, because AJB failed to disclose to CDN a material fact which relates to the intrinsic features of the principal transaction, viz that it was a sale and leaseback transaction. This must be a reference to the principle enunciated in London General Omnibus Co Ltd v Holloway [1912] 2 KB 72 at 85–88, [1911–13] All ER Rep 518 at 524–525 but I was not in fact referred to that decision. Factually, this submission was based on assertions by Mr Hender in his report.
(D) Negligence
It was submitted that AJB was in breach of a duty of care owed to CDN to investigate whether the machines existed. Accordingly, it was submitted, CDN is entitled to set off that claim against AJB’s claim, or, in any event, CDN is entitled to judgment against AJB in the same sum as AJB is entitled to recover under the guarantee and the claim of AJB should therefore fail for circuity of action.
(E) The penalty point
Finally, it was submitted that cl 10.2 of the lease is a penalty which is unenforceable. If that is right, the consequence is that AJB can only recover unliquidated damages
Page 908 of [1988] 3 All ER 902
against CDN. On the supposition that this submission is well founded it was agreed that the assessment of the sum of unliquidated damages recoverable by AJB from CDN should stand over for subsequent adjudication.
THE CONSTRUCTION POINT
The first question to be considered is whether the guarantee was expressly made subject to a condition precedent that the four machines existed. The factual matrix, which is relevant to this question of construction, is that both parties, the creditor and the guarantor, were induced to commit themselves by information supplied by the lease brokers employed by Mr Bennett. That information included the statement, which was made expressly or by necessary implication, that the four machines existed. And it matters not that AJB thought that Mr Bennett owned the machines, while CDN thought that AJB owned the machines. The fact is that both parties were informed, and believed, that the machines existed. Against that contextual scene, CDN provided a guarantee to AJB—
‘in consideration of your leasing 4 Textile Compression Packaging machines to British Consolidated Engineering Company … pursuant to a Leasing Contract dated 29th February 1984 … ’
The only other provision of the guarantee which is relevant to this question of construction is cl 6 of the guarantee. It reads as follows:
‘This Guarantee and your rights under it shall not be affected or prejudiced by your holding or taking any other or further securities or by your varying releasing or omitting or neglecting to enforce any such securities or by your giving time for payment or granting any other indulgence to or making any other arrangements with or accepting any composition from the Lessee or subject to our prior consent to any such variation by your varying the terms of the Leasing Contract made between yourselves and the Lessee or by the substitution of any other goods comprised in such contract.’ (My emphasis.)
On behalf of AJB it was submitted that the words ‘subject to our prior consent’ govern only variations of the lease other than variations entailing a substitution of goods. In other words, it was submitted that consent of the guarantor was required for any variation except one of the most important of all variations, viz substitution of goods. That interpretation is not justified by the language of cl 6, and it is a wholly unreasonable interpretation. I reject it. Clause 6 of the guarantee therefore contemplated the existence of the machines, and made provision for a right of substitution only if the guarantor granted consent. Against that background the question is whether it was expressly agreed that the guarantee would only become effective if there was a lease of four existing machines. The point is not capable of elaborate analysis. It is a matter of first impression. On balance, my conclusion is that, sensibly construed against its objective setting, the guarantee was subject to an express condition precedent that there was a lease in respect of four existing machines. If this conclusion is right, AJB’s claim against CDN as guarantor or as sole or principal debtor under cl 11 fails.
If my conclusion about the construction of the guarantee is wrong, it remains to be considered whether there was an implied condition precedent that the lease related to four existing machines. In the present contract such a condition may only be held to be implied if one of two applicable tests is satisfied. The first is that such an implication is necessary to give business efficacy to the relevant contract, ie the guarantee. In other words, the criterion is whether the implication is necessary to render the contract (the guarantee) workable. That is usually described as the Moorcock test (see The Moorcock (1889) 14 PD 64, [1886–90] All ER Rep 530). It may well be that this stringent test is not satisfied because the guarantee is workable in the sense that all that is required is that the guarantor who assumed accessory obligations must pay what is due under the lease. But
Page 909 of [1988] 3 All ER 902
there is another type of implication which seems more appropriate in the present context. It is possible to imply a term if the court is satisfied that reasonable men, faced with the suggested term which was ex hypothesi not expressed in the contract, would without hesitation say, ‘Yes, of course, that is so obvious that it goes without saying’: see Shirlaw v Southern Foundries (1926) Ltd [1939] 2 All ER 113 at 124, [1939] 2 KB 206 at 227 per MacKinnon LJ. Although broader in scope than the Moorcock test, it is nevertheless a stringent test, and it will only be permissible to hold that an implication has been established on this basis in compratively rare cases, notably when one is dealing with a commercial instrument such as a guarantee for reward. Nevertheless, against the contextual background of the fact that both parties were informed that the machines existed, and the express terms of the guarantee, I have come to the firm conclusion that the guarantee contained an implied condition precedent that the lease related to existing machines. Again, if this conclusion is right, AJB’s claim against CDN as guarantor or as sole or principal debtor under cl 11 fails.
The alternative way in which CDN puts its case, viz that the guarantee to which CDN committed itself was not in respect of a lease of non-existent machines, seems to me to be simply a different way of expressing the points which I have already considered.
Notwithstanding these conclusions, which are determinative of the case, I will now consider the arguments as to common or mutual mistake which played such a large part at the hearing of this case.
MISTAKE
The common law regarding mutual or common mistake
There was a lively debate about the common law rules governing a mutual or common mistake of the parties as to some essential quality of the subject matter of the contract. Counsel for CDN submitted that Bell v Lever Bros Ltd [1932] AC 161, [1931] All ER Rep 1 authoritatively established that a mistake by both parties as to the existence of some quality of the subject matter of the contract, which makes the subject matter of the contract without the quality essentially different from the subject matter as it was believed to be, renders the contract void ab initio. Counsel for AJB contested this proposition. He submitted that at common law a mistake even as to an essential quality of the subject matter of the contract will not affect the contract unless it resulted in a total failure of consideration. It was not clear to me that this formulation left any meaningful and independent scope for the application of common law rules in this area of the law. In any event, it is necessary to examine the legal position in some detail.
The landmark decision is undoubtedly Bell v Lever Bros Ltd. Normally a judge of first instance would simply content himself with applying the law stated by the House of Lords. There has, however, been substantial controversy about the rule established in that case. It seems right therefore to examine the effect of that decision against a somewhat wider framework. In the early history of contract law, the common law’s preoccupation with consideration made the development of a doctrine of mistake impossible. Following the emergence in the nineteenth century of the theory of consensus ad idem it became possible to treat misrepresentation, undue influence and mistake as factors vitiating consent. Given that the will theory in English contract law was cast in objective form, judging matters by the external standard of the reasonable man, both as to contract formation and contractual interpretation, it nevertheless became possible to examine in what circumstances mistake might nullify or negative consent. But even in late Victorian times there was another powerful policy consideration militating against upsetting bargains on the ground of unexpected circumstances which occurred before or after the contract. That was the policy of caveat emptor which held sway outside the field of contract law subsequently codified by the Sale of Goods Act in 1893. Nevertheless, principles affecting the circumstances in which consent may be vitiated gradually emerged. The most troublesome areas proved to be two related areas,
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viz common mistake as to an essential quality of the subject matter of the contract and post-contractual frustration. Blackburn J, an acknowledged master of the common law, who yielded to no one in his belief in the sanctity of contract, led the way in both areas.
In Taylor v Caldwell (1863) 3 B & S 826, [1861–73] All ER Rep 24 Blackburn J first stated the doctrine of frustration in terms which eventually led to the adoption of the ‘radical change in obligation’ test of commercial frustration in modern law: see Davis Contractors Ltd v Fareham UDC [1956] 2 All ER 145, [1956] AC 696 National Carriers Ltd v Panalpina (Northern) Ltd [1981] 1 All ER 161, [1981] AC 675. In the field of mistake as to the essential quality of the subject matter Blackburn J also gave the lead. In Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd (1867) LR 2 QB 580 the issue was whether a contract for the purchase of shares was vitiated by an untrue representation that the company had secured a contract to carry mail for the New Zealand government. The court upheld the contract. In passing it must be noted that the case was decided on a restrictive approach as to the circumstances in which a contract can be rescinded for innocent misrepresentation that, of course, was remedied in due course by equity. But in the present context the importance of the case lies in the remarks of Blackburn J about mistakes as to quality (at 586–590). Given the fact that there was no direct authority on the point (and certainly none which could not be explained on other grounds) he turned to the civil law. He referred to the civilian doctrine of error in substantia. That doctrine seeks to categorise mistakes into two categories, viz mistakes as to the substance of the subject matter or mistakes as to attributes (sometimes classified as mistakes in motive). Blackburn J, delivering the judgment of the court, held (at 588):
‘… the principle of our law is the same as that of the civil law and the difficulty in every case is to determine whether the mistake or misapprehension is as to the substance of the whole consideration, going, as it were, to the root of the matter, or only to some point, even though a material point, an error as to which does not affect the substance of the whole consideration.’
That test did not avail the plaintiff, for it was held that he got what he bought.
None of the cases between the decisions in Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd and Bell v Lever Bros Ltd significantly contributed to the development of this area of the law. But Bell v Lever Bros Ltd was a vitally important case. The facts of that case are so well known as to require no detailed exposition. Lever Bros had, in the modern phrase, given two employees ‘golden handshakes’ of £30,000 and £20,000 in consideration of the early termination of their service contracts. Subsequently, Lever Bros discovered that the contracts of service had been voidable by reason of the two employees’ breach of fiduciary duties in trading for their own account. Lever Bros argued that the contracts pursuant to which the service agreements were terminated were void ab initio for common mistake, and sought recovery of the sums paid to the employees. The claim succeeded at first instance and in the Court of Appeal but by a three to two majority the House of Lords held that the claim failed. Lord Atkin held ([1932] AC 161 at 218, [1931] All ER Rep 1 at 28):
‘… a mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.’
In my view none of the other passages in Lord Atkin’s speech detract from that statement of the law. Lord Thankerton came to a similar conclusion. He held that common mistake ‘can only properly relate to something which both must necessarily have accepted in their minds as an essential and integral part of the subject-matter’ (see [1932] AC 161 at 235, [1931] All ER Rep 1 at 36).
That seems to me exactly the same test as Lord Atkin enunciated. Clearly, Lord Atkin did not conceive of any difference between his formulation and that of Lord Thankerton, for he observed ([1932] AC 161 at 227, [1931] All ER Rep 1 at 32):
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‘To apply the principle to the infinite combinations of facts that arise in actual experience will continue to be difficult, but if this case results in establishing order into what has been a somewhat confused and difficult branch of the law it will have served a useful purpose.’
Lord Blanesburgh’s speech proceeded on different lines. It must not be forgotten that the issue of common mistake was only put forward at the eleventh hour. Lord Blanesburgh would have refused the necessary amendment, but he expressed his ‘entire accord’ with the substantive views of Lord Atkin and Lord Thankerton (see [1932] AC 161 at 198–199, [1931] All ER Rep 1 at 18–19). The majority were therefore in agreement about the governing principle.
It seems to me that the better view is that the majority in Bell v Lever Bros Ltd had in mind only mistake at common law. That appears to be indicated by the shape of the argument, the proposed amendment placed before the House of Lords (see [1932] AC 161 at 191, [1931] All ER Rep 1 at 15) and the speeches of Lord Atkin and Lord Thankerton. But, if I am wrong on this point, it is nevertheless clear that mistake at common law was in the forefront of the analysis in the speeches of the majority.
The law has not stood still in relation to mistake in equity. Today, it is clear that mistake in equity is not circumscribed by common law definitions. A contract affected by mistake in equity is not void but may be set aside on terms: see Solle v Butcher [1949] 2 All ER 1107, [1950] 1 KB 671 Magee v Pennine Insurance Co Ltd [1969] 2 All ER 891, [1969] 2 QB 507 Grist v Bailey [1966] 2 All ER 875, [1967] Ch 532. It does not follow, however, that Bell v Lever Bros Ltd is no longer an authoritative statement of mistake at common law. On the contrary, in my view the principles enunciated in that case clearly still govern mistake at common law. It is true that in Solle v Butcher [1949] 2 All ER 1107 at 1119, [1950] 1 KB 671 at 691 Denning LJ interpreted Bell v Lever Bros Ltd differently. He said that a common mistake, even on a most fundamental matter, does not make the contract void at law. That was an individual opinion. Neither Bucknill LJ (who agreed in the result) nor Jenkins LJ (who dissented) even mentioned Bell v Lever Bros Ltd. In Magee v Pennine Insurance Co Ltd [1969] 2 All ER 891 at 893, [1969] 2 QB 507 at 514 Lord Denning MR returned to the point. About Bell v Lever Bros Ltd he simply said: ‘I do not propose … to go through the speeches in that case. They have given enough trouble to commentators already.' He then repeated his conclusion in Solle v Butcher. Winn LJ dissented. Fenton Atkinson LJ agreed in the result but it is clear from his judgment that he did not agree with Lord Denning MR’s interpretation of Bell v Lever Bros Ltd (see [1969] 2 All ER 891 at 896, [1969] 2 QB 507 at 517–518). Again, Lord Denning MR’s observation represented only his own view. With the profoundest respect to the former Master of the Rolls, I am constrained to say that in my view his intepretation of Bell v Lever Bros Ltd does not do justice to the speeches of the majority.
When Lord Denning MR referred in Magee v Pennine Insurance Co Ltd to the views of commentators he may have had in mind comments in Cheshire and Fifoot Law of Contract (6th edn, 1964) p 196. In substance the argument was that the actual decision in Bell v Lever Bros Ltd contradicts the language of the speeches. If the test was not satisfied there, so the argument runs, it is difficult to see how it could ever be satisfied: see the latest edition of this valuable textbook for the same argument (Cheshire, Fifoot and Furmston Law of Contract (11th edn, 1986) pp 225–226). This is a point worth examining because at first glance it may seem persuasive. Bell v Lever Bros Ltd was a quite exceptional case all their Lordships were agreed that common mistake had not been pleaded and would have required an amendment in the House of Lords if it were to succeed. The speeches do not suggest that the employees were entitled to keep both the gains secretly made and the golden handshakes. The former were clearly recoverable from them. Nevertheless, the golden handshakes were very substantial. But there are indications in the speeches that the so-called ‘merits’ were not all in favour of Lever Bros. The company was most anxious, because of a corporate merger, to terminate the two service agreements.
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There was apparently a doubt whether the voidability of the service agreements if revealed to the company at the time of the severance contract would have affected the company’s decision. Lord Thankerton said ([1932] AC 161 at 236, [1931] All ER Rep 1 at 37):
‘… I do not find sufficient material to compel the inference that the appellants, at the time of the contract, regarded the indefeasibility of the service agreements as an essential and integral element in the subject-matter of the bargain.’
Lord Atkin clearly regarded it as a hard case on the facts, but concluded ‘on the whole’ that the plea of common mistake must fail (see [1932] AC 161 at 223, [1931] All ER Rep 1 at 30). It is noteworthy that Lord Atkin commented on the scarcity of evidence as to the subsidiaries from the boards of which the two employees resigned (see [1932] AC 161 at 212, [1931] All ER Rep 1 at 25). Lord Blanesburgh’s speech was directed to his conclusion that the amendment ought not to be allowed. He did, however, make clear that ‘the mistake must go to the whole consideration’, and pointed to the advantages (other than the release from the service agreements) which Lever Bros received (see [1932] AC 161 at 181, 197, [1931] All ER Rep 1 at 10, 18). Lord Blanesburgh emphasised that Lever Bros secured the future co-operation of the two employees for the carrying through of the amalgamation (see [1932] AC 161 at 181, [1931] All ER Rep 1 at 10). And the burden, of course, rested squarely on Lever Bros. With due deference to the distinguished authors who have argued that the actual decision in Bell v Lever Bros Ltd contradicts the principle enunciated in the speeches it seems to me that their analysis is altogether too simplistic, and that the actual decision was rooted in the particular facts of the case. In my judgment there is no reason to doubt the substantive reasons emerging from the speeches of the majority.
No one could fairly suggest that in this difficult area of the law there is only one correct approach or solution. But a narrow doctrine of common law mistake (as enunciated in Bell v Lever Bros Ltd), supplemented by the more flexible doctrine of mistake in equity (as developed in Solle v Butcher and later cases), seems to me to be an entirely sensible and satisfactory state of the law: see Sheikh Bros Ltd v Ochsner [1957] AC 136. And there ought to be no reason to struggle to avoid its application by artificial interpretations of Bell v Lever Bros Ltd.
It might be useful if I now summarised what appears to me to be a satisfactory way of approaching this subject. Logically, before one can turn to the rules as to mistake, whether at common law or in equity, one must first determine whether the contract itself, by express or implied condition precedent or otherwise, provides who bears the risk of the relevant mistake. It is at this hurdle that many pleas of mistake will either fail or prove to have been unnecessary. Only if the contract is silent on the point is there scope for invoking mistake. That brings me to the relationship between common law mistake and mistake in equity. Where common law mistake has been pleaded, the court must first consider this plea. If the contract is held to be void, no question of mistake in equity arises. But, if the contract is held to be valid, a plea of mistake in equity may still have to be considered: see Grist v Bailey [1966] 2 All ER 875, [1967] Ch 532 and the analysis in Anson’s Law of Contract (26th edn, 1984) pp 290–291. Turning now to the approach to common law mistake, it seems to me that the following propositions are valid although not necessarily all entitled to be dignified as propositions of law.
The first imperative must be that the law ought to uphold rather than destroy apparent contracts. Second, the common law rules as to a mistake regarding the quality of the subject matter, like the common law rules regarding commercial frustration, are designed to cope with the impact of unexpected and wholly exceptional circumstances on apparent contracts. Third, such a mistake in order to attract legal consequences must substantially be shared by both parties, and must relate to facts as they existed at the time the contract was made. Fourth, and this is the point established by Bell v Lever Bros Ltd, the mistake must render the subject matter of the contract essentially and radically different from
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the subject matter which the parties believed to exist. While the civilian distinction between the substance and attributes of the subject matter of a contract has played a role in the development of our law (and was cited in the speeches in Bell v Lever Bros Ltd), the principle enunciated in Bell v Lever Bros Ltd is markedly narrower in scope than the civilian doctrine. It is therefore no longer useful to invoke the civilian distinction. The principles enunciated by Lord Atkin and Lord Thankerton represent the ratio decidendi of Bell v Lever Bros Ltd. Fifth, there is a requirement which was not specifically discussed in Bell v Lever Bros Ltd. What happens if the party who is seeking to rely on the mistake had no reasonable grounds for his belief? An extreme example is that of the man who makes a contract with minimal knowledge of the facts to which the mistake relates but is content that it is a good speculative risk. In my judgment a party cannot be allowed to rely on a common mistake where the mistake consists of a belief which is entertained by him without any reasonable grounds for such belief: cf McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 at 408. That is not because principles such as estoppel or negligence require it, but simply because policy and good sense dictate that the positive rules regarding common mistake should be so qualified. Curiously enough this qualification is similar to the civilian concept where the doctrine of error in substantia is tempered by the principles governing culpa in contrahendo. More importantly, a recognition of this qualification is consistent with the approach in equity where fault on the part of the party adversely affected by the mistake will generally preclude the granting of equitable relief: see Solle v Butcher [1949] 2 All ER 1107 at 1120, [1950] 1 KB 671 at 693.
Applying the law to the facts
It is clear, of course, that in this case both parties, the creditor and the guarantor, acted on the assumption that the lease related to existing machines. If they had been informed that the machines might not exist, neither AJB nor CDN would for one moment have contemplated entering into the transaction. That, by itself, I accept, is not enough to sustain the plea of common law mistake. I am also satisfied that CDN had reasonable grounds for believing that the machines existed. That belief was based on CDN’s discussions with Mr Bennett, information supplied by National Leasing, a respectable firm of lease brokers, and the confidence created by the fact that AJB were the lessors.
The real question is whether the subject matter of the guarantee (as opposed to the sale and lease) was essentially different from what it was reasonably believed to be. The real security of the guarantor was the machines. The existence of the machines, being profit-earning chattels, made it more likely that the debtor would be able to service the debt. More importantly, if the debtor defaulted and the creditor repossessed the machines, the creditor had to give credit for 971/2% of the value of the machines. If the creditor sued the guarantor first, and the guarantor paid, the guarantor was entitled to be subrogated to the creditor’s rights in respect of recovery against the debtor: see Goff and Jones Law of Restitution (3rd edn, 1986) pp 533–536). No doubt the guarantor relied to some extent on the creditworthiness of Mr Bennett. But I find that the prime security to which the guarantor looked was the existence of the four machines as described to both parties. For both parties the guarantee of obligations under a lease with non-existent machines was essentially different from a guarantee of a lease with four machines which both parties at the time of the contract believed to exist. The guarantee is an accessory contract. The non-existence of the subject matter of the principal contract is therefore of fundamental importance. Indeed the analogy of the classic res extincta cases, so much discussed in the authorities, is fairly close. In my judgment, the stringent test of common law mistake is satisfied the guarantee is void ab initio.
Clause 11 of the guarantee
On behalf of AJB it was submitted that my conclusion as to common mistake cannot apply to AJB’s claim under cl 11 of the guarantee. Under that clause AJB seeks to hold
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CDN liable as ‘sole or principal debtor’. The question is whether cl 11 applies. For convenience I set out cl 11 again, with numbering introduced in order to facilitate discussion:
‘As a separate and independent stipulation we agree that any sums mentioned in Clause (I) hereof which may not be recoverable on the footing of a guarantee whether by reason of [a] any legal limitation [b] disability or [c] incapacity on or of the Lessee or [d] any other fact or circumstance and whether known to you or not shall nevertheless be recoverable from us as a sole or principle debtor in respect thereof and shall be paid by us on demand.’
On the footing that the sums guaranteed are irrecoverable because the guarantee is void ab initio for common mistake it was submitted that AJB can recover on the independent stipulation under cl 11 because the unrecoverability arises from ‘any other fact or circumstance and whether known to you or not’. AJB asserts that those words are all embracing. Boldly, it was argued that those words are wide enough to impose liability even where the principal transaction, or even the guarantee itself, is voidable for misrepresentation, undue influence or duress by AJB. And it also covers, it is said, the case where AJB repudiates the principal transaction. Literally, that may be right but it is so absurd a construction that common sense will not allow it to prevail. What is the answer? In my judgment one answer is to be found by reading the wide general words in their context, that is as following particular words (limitation, disability and incapacity) which all fall within one genus. In the context the general words following the particular words must be read ejusdem generis. So interpreted cl 11 can plainly not avail AJB. But there is an even more fundamental reason why cl 11 is inapplicable. Clause 11 contemplates the ‘irrecoverability’ of rentals from the lessee due to matters which would afford the lessee a defence. In those circumstances, as limited by the language of cl 11, the guarantor is liable as sole or principal debtor. But the present case is quite different: the common mistake affecting the innocent parties to the guarantee (viz the non-existence of the machines) would not have afforded the fraudulent lessee with any defence when sued under the lease. The rentals under the lease were fully ‘recoverable’ at law from the lessee although, in the result, they proved not to be collectible. For this further reason, I hold, that cl 11 does not assist AJB.
Equitable mistake
Having concluded that the guarantee is void ab initio at common law, it is strictly unnecessary to examine the question of equitable mistake. Equity will give relief against common mistake in cases where the common law will not, and it provides more flexible remedies, including the power to set aside the contract on terms. It is not necessary to repeat my findings of fact save to record again the fundamental nature of the common mistake, and that CDN was not at fault in any way. If I had not decided in favour of CDN on construction and common law mistake, I would have held that the guarantee must be set aside on equitable principles. Unfortunately, and counsel are not to blame for that, the question of the terms (if any) to be imposed (having regard particularly to sums deposited by Mr Bennett with CDN) were not adequately explored in argument. If it becomes necessary to rule on this aspect, I will require further argument.
THE REMAINING ISSUES
Having come to a clear conclusion in a judgment which is already too long, I propose to state my conclusions on the remaining issues in summary form. That should cause no difficulty on any appeal since the primary facts are largely agreed.
Non-disclosure
In my view the plea of non-disclosure was not sustainable.
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Negligence
In my view CDN has not established that AJB owed CDN a legal duty of care to inquire into the existence of the machines.
Penalty
Bearing in mind that under the lease AJB was obliged to refund 971/2% of the proceeds of the goods, and that the lessee repudiated the lease, I am of the opinion that CDN’s argument under this heading must fail.
CONCLUSION
Subject to any observations by counsel as to the form of the order, my conclusion is that AJB’s claim must be dismissed and that no order should be made on CDN’s cross-claim.
Claim dismissed.
Solicitors: Freshfields (for AJB); Denton Hall Burgin & Warrens (for CDN).
K Mydeen Esq Barrister.
Lloyds Bank plc v Rosset and another
[1988] 3 All ER 915
Categories: LAND; Land Registration, Property Rights
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): PURCHAS, MUSTILL AND NICHOLLS LJJ
Hearing Date(s): 22, 23, 24, 26, 29 FEBRUARY, 13 MAY 1988
Land registration – Overriding interest – Rights of person in actual occupation of land – Actual occupation – Relevant date for determining actual occupation – Occupation through agent – Husband exchanging contracts for purchase of house requiring repairs and renovation – Common intention of husband and wife that wife should have beneficial interest in property – Vendors permitting builders engaged by husband and wife to enter onto property prior to completion – Husband executing charge over property on completion without wife’s knowledge to secure overdraft – Bank seeking possession and sale of property to obtain repayment of overdraft – Whether wife having rights in property – Whether relevant date for ascertaining wife’s rights date of execution or date of registration of charge – Whether wife in actual occupation of property – Whether wife having beneficial interest in property – Whether wife having overriding interest which took priority over bank’s charge – Land Registration Act 1925, ss 20(1), 70(1)( g).
In 1982 a husband and wife decided to buy a semi-derelict farmhouse for £57,000 using money given to the husband by the trustees of a family trust, who insisted that the house be in the sole name of the husband. It was the common intention of the parties that the renovation of the house would be a joint venture and that the wife should have a beneficial interest in the property under a constructive trust. The vendors permitted builders engaged by the husband and wife to enter on the property on 7 November 1982 prior to completion to begin the extensive repairs that were necessary to make the house habitable. The wife spent almost every day at the property from the beginning of November helping the builders. The husband, without the wife’s knowledge, obtained a bank overdraft to provide £15,000 towards the purchase price and the cost of repairs to the property. Contracts for the purchase were exchanged on 23 November. The purchase was completed on 17 December and on the same day the husband executed a charge in favour of the bank. After completion the husband was away on business for much of the time. The wife spent some nights at the house but the children did not move in until the middle of February 1983. The transfer and the bank’s charge were not registered until
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7 February. The amount owing on the husband’s overdraft continued to rise and in February 1984 the bank demanded repayment of the amount outstanding, which was then nearly £23,000. The husband made no payment, with the result that the bank commenced proceedings for possession and an order for the sale of the property. The wife resisted the bank’s claim on the ground that she had an overriding interest under s 70(1)(g)a of the Land Registration Act 1925 because she had been in ‘actual occupation’ of the land on the date when the bank’s charge was registered. The judge upheld the bank’s claim for possession on the ground that the wife could not have an overriding interest since she had not been in actual occupation at the date the charge was executed. The wife appealed. The bank contended (i) that the relevant date for determining whether the wife had been in actual occupation was the date the charge was executed, at which date the wife had not been in actual occupation and (ii) that, if she had been, she had had no subsisting ‘rights’ at that date for the purposes of s 70(1)(g), because her beneficial interest had come into existence at the moment of completion simultaneously with the bank’s legal charge and as between the competing equities the bank had priority.
Held – (1) Although s 20(1)b of the 1925 Act conferred the legal estate on a transferee subject to any entries on the register and any overriding interests under s 70(1)(g) of that Act the ‘overriding interests’ thereby protected were the interests of persons who were in actual occupation of the land at the time when the transferee’s estate or interest was created. Accordingly, where a wife claimed that she had a beneficial interest in a house registered in her husband’s name and that her interest had priority over the rights of a mortgagee under a legal charge executed by the husband without her knowledge, she had to have been in actual occupation of the house at the time the mortgagee’s charge was executed rather than merely when it was registered, if her interest was to be protected as an overriding interest under ss 20(1) and 70(1)(g) of the 1925 Act (see p 921 j to p 22 a j to p 923 a b d to g, p 934 c and p 944 f g, post).
(2) (Mustill LJ dissenting) On the facts, the husband and wife had taken over the property prior to completion under a revocable licence granted by the vendors and were in actual occupation by virtue of the presence of their builders on the property at the time the charge was executed. The wife was therefore a person in ‘actual occupation’ at that date. Moreover, if prior to executing the charge the bank had made inquiries at the house the presence of the builders or the wife would have put it on notice as to the wife’s interest (see p 925 j, p 926 b d j to p 927 d, p 496 f to p 947 h and p 948 a to c, post).
(3) (Mustill LJ dissenting) Furthermore, the wife had subsisting ‘rights’ at the date of the execution of the charge by virtue of having a subsisting but defeasible equitable interest arising out of the husband’s equitable interest based on his right to specific performance of the contract with the vendors and the common intention of the husband and wife that the wife should have a beneficial interest in the property, and that equitable interest had arisen before the bank had lent any money to the husband. The wife’s equitable interest arising prior to completion therefore had priority over the bank’s equitable interest whether the latter arose when money was first lent to the husband or when the charge was executed on completion. Accordingly, the wife’s appeal would be allowed (see p 932 a to h, p 944 h to p 945 b and p 948 d to g, post); Re Connolly Bros Ltd (No 2) Wood v The company [1912] 2 Ch 25, Church of England Building Society v Piskor [1954] 2 All ER 85, and Security Trust Co v Royal Bank of Canada [1976] 1 All ER 381 considered.
Notes
For overriding interests, see 26 Halsbury’s Laws (4th edn) paras 987–991, and for cases on the subject, see 39(1) Digest (Reissue) 145–152, 1597–1617.
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For the Land Registration Act 1925, ss 20, 70, see 37 Halsbury’s Statutes (4th edn) 538, 578.
Cases referred to in judgments
Barnhart v Greenshields (1853) 9 Moo PCC 18, 14 ER 204.
Boyle’s Claim, Re [1961] 1 All ER 620, [1961] 1 WLR 339.
Bristol and West Building Society v Henning [1985] 2 All ER 606, [1985] 1 WLR 778, CA.
Caunce v Caunce [1969] 1 All ER 722, [1969] 1 WLR 286.
Church of England Building Society v Piskor [1954] 2 All ER 85, [1954] Ch 553, [1954] 2 WLR 952, CA.
Connolly Bros Ltd, Re (No 2), Wood v The company [1912] 2 Ch 25, CA.
Coventry Permanent Economic Building Society v Jones [1951] 1 All ER 901.
Eves v Eves [1975] 3 All ER 768, [1975] 1 WLR 1338, CA.
Gissing v Gissing [1970] 2 All ER 780, [1971] AC 886, [1970] 3 WLR 255, HL.
Grant v Edwards [1986] 2 All ER 426, [1986] Ch 638, [1986] 3 WLR 114, CA.
Greasley v Cooke [1980] 3 All ER 710, [1980] 1 WLR 1306, CA.
Holmes v Powell (1856) 8 De GM & G 572, 44 ER 510.
Hunt v Luck [1902] 1 Ch 428, [1900–3] All ER Rep 295, CA affg [1901] 1 Ch 45.
Jones (A E) v Jones (F W) [1977] 2 All ER 231, [1977] 1 WLR 438, CA.
Kemmis v Kemmis (Welland intervening) (1988) Times, 22 February, CA.
Midland Bank plc v Dobson and Dobson [1986] 1 FLR 171, CA.
National Provincial Bank Ltd v Ainsworth [1965] 2 All ER 472, [1965] AC 1175, [1965] 3 WLR 1, HL rvsg sub nom National Provincial Bank Ltd v Hastings Car Mart Ltd [1964] 1 All ER 688, [1964] Ch 665, [1964] 2 WLR 751, CA rvsg [1963] 2 All ER 204, [1964] Ch 9, [1963] 2 WLR 1015.
Paddington Building Society v Mendelsohn (1985) 50 P & CR 244, CA.
Pascoe v Turner [1979] 2 All ER 945, [1979] 1 WLR 431, CA.
Security Trust Co v Royal Bank of Canada [1976] 1 All ER 381, [1976] AC 503, [1976] 2 WLR 437, PC.
Strand Securities Ltd v Caswell [1965] 1 All ER 820, [1965] Ch 958, [1965] 2 WLR 958, CA.
Taylor v Stibbert (1794) 2 Ves 437, [1775–1802] All ER Rep 382, 30 ER 713.
Williams & Glyn’s Bank Ltd v Boland [1980] 2 All ER 408, [1981] AC 487, [1980] 3 WLR 138, HL affg [1979] 2 All ER 697, [1979] Ch 312, [1979] 2 WLR 550, CA.
Woolwich Equitable Building Society v Marshall [1951] 2 All ER 769, [1952] Ch 1.
Cases also cited
Blacklocks v JB Developments (Godalming) Ltd [1981] 3 All ER 392, [1982] Ch 183.
Burns v Burns [1984] 1 All ER 244, [1984] Ch 317, CA.
Clarke v Ramuz [1891] 2 QB 456, [1891–4] All ER Rep 502, CA.
Epps v Esso Petroleum Co Ltd [1973] 2 All ER 465, [1973] 1 WLR 1071.
Grace Rymer Investments Ltd v Waite [1958] 2 All ER 777, [1958] Ch 831, CA affg [1958] 1 All ER 138, [1958] Ch 314.
Hodgson v Marks [1971] 2 All ER 684, [1971] Ch 892, CA.
Kling v Keston Properties Ltd (1985) 49 P & CR 212.
Lever Finance Ltd v Trustee of property of Needleman [1956] 2 All ER 378, [1956] Ch 375.
Linden v Department of Health and Social Security [1986] 1 All ER 691, [1986] 1 WLR 164.
London and Cheshire Insurance Co Ltd v Laplagrene Property Co Ltd [1971] 1 All ER 766, [1971] Ch 499.
R v Inhabitants of St Nicholas, Rochester (1833) 5 B & Ad 219, 110 ER 773.
Rayner v Preston (1881) 18 Ch D 1, CA.
Ridout v Fowler [1904] 1 Ch 658 affd [1904] 2 Ch 93, CA.
Schwab (E S) & Co Ltd v McCarthy (1975) 31 P & CR 196, CA.
Winkworth v Edward Baron Development Co Ltd [1987] 1 All ER 114, [1986] 1 WLR 1512, HL.
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Appeal
The second defendant, Diana Irene Rosset (the wife), appealed against the order of his Honour Judge Scarlett sitting in the Thanet County Court on 22 May 1987, whereby the judge granted the plaintiff, Lloyds Bank plc (the bank), possession of the property known as Vincent Farmhouse, Manston Road, Manston, Kent, which was occupied by the wife. The first defendant, Gerard Marcel Rosset (the husband), who was the legal owner of the property, did not appeal. The facts are set out in the judgment of Nicholls LJ.
Leolin Price QC and T J Bowles for the wife.
Michael Crystal QC, Alastair Walton and Simon Browne-Wilkinson for the bank.
Cur adv vult
13 May 1988. The following judgments were delivered.
NICHOLLS LJ (giving the first judgment at the invitation of Purchas LJ). This is another case concerned with the operation of s 70(1)(g ) of the Land Registration Act 1925 in the context of a claim by a wife that she has a beneficial interest in a house registered in the sole name of her husband and that her interest has priority over the rights of a bank under a legal charge executed without her knowledge. The case raises a point of importance in the law of registered conveyancing. Shortly stated, the point is whether, to have the protection afforded to overriding interests in respect of registered land, the wife needs to be in actual occupation of the house when the legal charge is executed as distinct from being in actual occupation by the later date on which the bank’s charge is registered in the Land Registry.
The case also raises the question of what is meant by actual occupation within s 70(1)(g) in the case of a semi-derelict house which is in the course of being renovated, and a further question as to the order of priority between a wife who has a beneficial interest in a house and a bank which takes a legal charge simultaneously with completion of the purchase of the house. A point also arises on the necessary ingredients of a common intention before a constructive trust can arise.
The principal facts
With that brief introduction I must outline the facts. The defendants, Mr Gerard Rosset and Mrs Diana Rosset, to whom I shall refer as the husband and the wife, were married on 15 August 1972. After living in temporary accommodation, in 1976 they moved into an extension built on to a bungalow, 61 Salisbury Avenue, Broadstairs, Kent, owned by the wife’s parents, Mr and Mrs Gardner. The written agreement between the four of them provided that the Rossets could leave on giving notice, in which event they were to be entitled to be paid £3,850 by Mr and Mrs Gardner. It was the common intention of the husband and the wife that the wife should have an interest in the extension, although the funds for the construction of the extension were provided by the husband from his family in Switzerland (he is Swiss).
In 1981 and 1982 the husband and the wife looked for a more permanent home for themselves and their children, of whom there were two, Natasha, who was nine years old, and a baby boy, Simeon, who was born in August 1981. They decided to buy the property with which this action is concerned, Vincent Farmhouse, Manston Road, Manston, Kent. This was a few miles away from their home in Broadstairs. Vincent Farmhouse was semi-derelict. It had not been lived in for several years and was not in a fit state for living in. On 23 November 1982 the husband exchanged contracts with the vendors for the purchase of the property for £57,500.
Meanwhile, on 2 November the husband paid £59,200 into an account which he had recently opened at the Broadstairs branch of the plaintiff, Lloyds Bank plc. That money had been sent to him from a family trust in Switzerland. The trustees insisted that the
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property should be purchased in his name alone, otherwise the money would not be forthcoming. For this reason the purchase proceeded in the sole name of the husband. Nevertheless, as the judge found, it was the common intention of the husband and the wife that the renovation of the house should be a joint venture, after which it was to become a family home to be shared by them and their children. The judge was satisfied that there was a common intention that the wife should have a beneficial interest in the property under a constructive trust and that, before completion of the purchase on 17 December, she acted to her detriment on the faith of that common intention.
What happened was this. A surveyor’s report, prepared in September 1982, estimated the cost of the necessary works of refurbishment, modernisation and so forth at £25,000. On 14 December the husband sought a short-term loan of £15,000 from the bank to help to meet the cost of these works. He signed a standard form legal charge. The branch manager asked the husband whether the property was to be purchased in joint names and was told by him and his solicitors that it would be in the husband’s name alone. The reason given by the husband was that the wife and the children were away, living with her parents. The manager accepted this and did not pursue the matter further. Three days later, on 17 December, the purchase was completed, and the charge to the bank was dated accordingly. Of the purchase price, the sum of £2,267 was provided by the bank by way of overdraft on the husband’s bank account. The wife provided no part of the purchase price. The property is registered land. The transfer and the charge were not lodged at the Land Registry for registration until 7 February 1983.
Meanwhile, in advance of completion, renovation work had been going ahead at the property. The vendors had given permission for this. Indeed, work had begun even before contracts were exchanged. The Rossets had hoped to move in before Christmas. A builder, Mr Griffin, and his men started work on 7 November. He or his men stayed there until 17 January 1983. Throughout this period one of the men, a carpenter, slept in the farmhouse on most nights. The wife, for her part, spent almost every day at the property from the beginning of November. She arrived there at about 10 a m, after taking Natasha to school. She stayed there until shortly after 4 p m, when she left to take Natasha home from school. Simeon was looked after by his grandmother, Mrs Gardner. The wife did her best to urge on the builders, get necessary materials and generally assist and keep things moving. She was an enthusiastic and skilful decorator and she wallpapered some of the rooms. In November electricity and Calor Gas supplies were connected and provided and a telephone was installed. Before Christmas she slept in the property on two nights.
After completion the wife was responsible for the design and installation of some special pens for horses in the outbuildings, and for coping with choosing and ordering the furnishings needed for their home, carpets, linoleum, beds and so on.
The husband was not able to spend so much time at the property. He was a courier, accompanying coach parties abroad. He was away in Switzerland for ten days in November and December, and he was away again over Christmas and also for some days from 28 January 1983. It was while he was away in February that the children moved in. That was by the middle of the month. The precise date was not established by the evidence. After Christmas, and before the children had moved in, the wife herself slept at the property to a far greater extent than before completion on 17 December.
Unhappily, in the following year there were matrimonial problems. The husband left the property in May 1984 and matrimonial proceedings are now pending. The wife is still living in the property with the children.
The action
On 22 February 1984 the bank formally demanded repayment. By then the amount outstanding, including interest, had grown to nearly £23,000. Payment was not made, and so the bank started this action, claiming possession and an order for sale. The husband was not in a position to resist the bank’s claims. The wife counterclaimed that she had a
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beneficial interest in the property, that this was an overriding interest, and that, accordingly, the bank’s charge took effect subject to her interest. So the bank was not entitled to evict her from the farmhouse. The husband denied that the wife was entitled to any beneficial interest in the property.
The action was tried by his Honour Judge Scarlett sitting at Canterbury. In a thorough and careful judgment, given on 22 May 1987, he held, first, that the relevant date at which the wife needed to be in actual occupation for any interest she had in the farmhouse to gain the protection afforded to overriding interests was the date of the charge (17 December 1982) and, second, that at that date the wife was not in actual occupation of the property. Accordingly, the bank’s claim for possession succeeded.
The judge made two further findings. He held that the wife was in actual occupation when the charge was registered on 7 February 1983. And he held that she did have a beneficial interest in the property. The exact quantum of that interest was not an issue which had been raised in the proceedings. Accordingly, the judge made a declaration to the effect that the husband held the property on trust for himself and the wife as beneficial tenants in common in such proportions as the court might thereafter determine. He adjourned the question of what directions should be given for the determination of that issue.
From that decision the wife appealed. There was no appeal by the husband in respect of the declaration, and he did not appear and was not represented on the hearing of the wife’s appeal.
The property is now worth about £150,000. The bank’s debt has now risen to about £47,000 and interest continues to accrue.
Actual occupation: the relevant date
The first question arising on this appeal can be identified as follows. Section 18 of the 1925 Act confers powers of disposition on the proprietor of a freehold estate. His powers include power to transfer the fee simple and to charge and mortgage the land. Section 19 provides that such dispositions ‘shall be completed’ by the registrar entering on the register the transferee as proprietor of the estate or interest transferred or created but ‘until such entry is made the transferor shall be deemed to remain proprietor of the registered estate’. Section 20(1), which is one of the two key provisions on the first point arising on this appeal, provides for the effect of registration of dispositions of freeholds. The material parts read:
‘In the case of a freehold estate registered with an absolute title, a disposition of the registered land or of a legal estate therein … for valuable consideration shall, when registered, confer on the transferee or grantee an estate in fee simple … or other legal estate expressed to be created in the land dealt with, together with all rights, privileges, and appurtenances belonging or appurtenant thereto, including (subject to any entry to the contrary in the register) the appropriate rights and interests which would, under the Law of Property Act 1925, have been transferred if the land had not been registered, subject—(a) to the incumbrances and other entries, if any, appearing on the register and (b) unless the contrary is
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expressed on the register, to the overriding interests, if any, affecting the estate transferred or created, but free from all other estates and interests whatsoever … ’
‘Disposition’ includes a charge or mortgage (s 18(5)). Comparable provisions regarding leasehold interests appear in ss 21 to 23. ‘Overriding interests’ are defined in s 3(xvi) as ‘all the incumbrances, interests, rights, and powers not entered on the register but subject to which registered dispositions are by this Act to take effect … ' They are set out in section 70(1), in what is aptly described in Ruoff and Roper Registered Conveyancing (5th edn, 1986) p 102, as a somewhat inconsequential and jumbled list. Section 70(1) is the other crucial provision on this part of the appeal, and the opening words read:
‘All registered land shall, unless under the provisions of this Act the contrary is expressed on the register, be deemed to be subject to such of the following overriding interests as may be for the time being subsisting in reference thereto … (that is to say) … (g) [which is the material paragraph] The rights of every person in actual occupation of the land or in receipt of the rents and profits thereof, save where enquiry is made of such person and the rights are not disclosed … ’
Under the Land Registration Rules 1925, SR & O 1925/1093, as amended, registration takes effect from the day on which the application for registration was delivered at the Land Registry (rr 83 to 85). As I have already mentioned, in the present case the judge found that, although the wife was not in actual occupation of the property on the date, 17 December 1982, on which the husband completed his purchase and executed the charge in favour of the bank, she was in actual occupation on the date, 7 February 1983, on which the bank’s application for registration was delivered at the office of the Land Registry. Hence the wife’s submission that the bank’s charge took effect subject to her beneficial interest in the property, because on 7 February she was in occupation and her interest was an overriding interest under s 70(1)(g) and on registration the bank’s charge took effect subject to that overriding interest by virtue of s 20(1)(b).
The judge rejected this submission. He held that s 20(1)(b) is to be construed as though it read ‘subject … (b) … to the overriding interests, if any, affecting the estate transferred or created at the time it is transferred or created’. In agreement with the judge I also am unable to accept the wife’s submission on this point. But I have reached that conclusion by a slightly different route.
It was common ground on the appeal that para (a) in s 20(1) is looking at the point of time at which the disposition in question is registered. The disposition, when registered, takes effect subject to the entries then on the register. In the nature of things there will be some interval of time, usually a few days, between the execution of a transfer or mortgage and the lodging of the necessary application for registration at the Land Registry. A purchaser or a mortgagee can obtain protection in respect of this period by making an official search of the register, under r 3 of the Land Registration (Official Searches) Rules 1981, SI 1981/1135. Any entry made on the register during the period of 30 days thereafter, called ‘the priority period’, is postponed to a subsequent application by the purchaser or mortgagee to register the transfer or mortgage (r 5). So the purchaser or mortgagee is not at risk under s 20(1)(a) in respect of the hiatus which exists between paying over the purchase price and obtaining the transfer, or lending all or part of the purchase price and taking a mortgage, on the one hand, and lodging the transfer or mortgage for registration on the other hand. All this is very familiar to conveyancers, but I mention it as part of the setting against which s 20(1)(b) has to be interpreted.
Equally wellknown is the concept of overriding interests. Such interests are not peculiar to registered land although the nomenclature (overriding interests) is. The register is intended to be a substitute for the title deeds. The register is not intended to record, as a matter of course, interests which would not normally be recorded on the title deeds in unregistered conveyancing. Hence the general description of overriding interests by Cross J in National Provincial Bank Ltd v Hastings Car Mart Ltd [1963] 2 All ER 204 at 207, [1964] Ch 9 at 15:
‘Overriding interests are, speaking generally, matters which are not usually shown on title-deeds or mentioned in abstracts of title and as to which, in consequence, it is not possible to form a trustworthy record on the register. As to such matters, persons dealing with registered land must obtain information outside the register in the same manner and from the same sources as people dealing with unregistered land would obtain it.’
Against that background it seems to me that the natural construction of s 20(1) is that para (b), as much as para (a), is referring to the point of time at which the disposition in question is registered. Section 20 is concerned with the effect of registration. The effect of registration is to confer the relevant legal estate on the transferee or grantee subject (a)
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to any entries on the register and (b) to any interests which may be subsisting but whose protection is not dependent on their being entered on the register (viz overriding interests). In both instances s 20(1) is focusing on the position at the time of registration.
That construction gives rise to an acute difficulty over para (g) of s 70(1). Paragraph (g) is a statutory application to registered land of the well-known principle protecting the rights of persons in actual occupation (see, for example, Lord Wilberforce in National Provincial Bank Ltd v Ainsworth [1965] 2 All ER 472 at 502, [1965] AC 1175 at 1259). That principle is the one discussed in Hunt v Luck [1901] Ch 45 at 51, on appeal [1902] 1 Ch 428 at 433, [1900–3] All ER Rep 295 at 297, where Vaughan Williams LJ observed:
‘It means that, if a purchaser or a mortgagee has notice that the vendor or mortgagor is not in possession of the property, he must make inquiries of the person in possession—of the tenant who is in possession—and find out from him what his rights are, and, if he does not choose to do that, then whatever title he acquires as purchaser or mortgagee will be subject to the title or right of the tenant in possession.’
That principle, of course, is concerned with the rights of a person who is in occupation of the land at the time when the purchaser or mortgagee acquires his estate or interest. The purchaser or mortgagee is expected to inspect the property and to make inquiries of the occupant as to his rights. If he fails to do so he is none the less affected with notice of the occupant’s rights just as much as if he had been told of those rights in response to his inquiries. Conversely, he is not affected by notice of rights which an occupant fails to disclose in answer to inquiry from a purchaser or mortgagee.
The difficulty which exists over para (g) arises because of the interval between execution of a transfer or mortgage and registration. Once the transfer or mortgage has been executed the die has been cast. The purchaser or mortgagee may have done all he should have done. He has searched the register. He has inspected the property and made inquiry of the occupant. He then parted with his money against a duly-executed instrument. Thereafter, within days or maybe hours, someone moves into the property, and he or she is there when the transfer or mortgage is duly presented to the Land Registry for registration. The official search of the purchaser or mortgagee will not help him, because that only gives him priority over entries made on the register and, as already observed, overriding interests do not need to be entered on the register. If s 20(1)(b) is to be construed as having the effect that in such a case the estate of the purchaser or mortgagee takes effect subject to the interest of the newly-arrived occupant, the result, self-evidently, would be a conveyancing absurdity. I am unable to accept that Parliament can have intended that the Land Registration Act 1925 should have that effect.
I shall return to para (g) presently, but first I should state why I feel unable to accept the judge’s solution of the difficulty. The construction of s 20(1)(b) adopted by the judge would have the consequence that on registration a transferee or mortgagee would acquire a legal estate subject to the entries on the register and to any overriding interests affecting the estate transferred or created at the time it was transferred or created, but free from all other estates and interests. On this construction he would, on registration, take free from all overriding interests, whatever their nature, which came into being after the execution of the transfer or mortgage and before registration. I am not persuaded of the correctness of a construction which has that effect. For example, one of the categories of overriding interests (para (i)) is ‘Rights under local land charges unless and until registered or protected on the register in the prescribed manner’. I am not persuaded that s 20(1)(b) was intended to have the effect that a purchaser or mortgagee should take free from local land charges coming into being after execution of the transfer or mortgage.
In my view it is not necessary, in order to avoid the absurdity produced by the wife’s construction of the legislation, to construe s 20(1)(b) in a manner which would itself give rise to this further problem. For my part, I prefer to give to s 20(1) the meaning I have
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mentioned above as the natural construction of that subsection. Overriding interests are such of the interests of the defined classes ‘as may be for the time being subsisting’ in reference to the land. If there are any such interests subsisting when the disposition is registered, in my view the title conferred is subject thereto.
But to determine whether or not an interest of one of the defined classes is subsisting at the date of registration one has to look outside the register. When one looks at para (g) one finds a provision intended to protect the rights of those in actual occupation, or in receipt of the rents and profits. Paragraph (g) is designed to protect occupants against estates or interests acquired while they are in actual occupation. As Lord Wilberforce said in National Provincial Bank Ltd v Ainsworth [1965] 2 All ER 472 at 502, [1965] AC 1175 at 1260–1261:
‘… all that s. 70(1)(g) of the Land Registration Act, 1925, does is to adapt the system of registration, and the modified form of enquiry which is appropriate to that system, to the same kind of right as under the general law would affect a purchaser finding a person in occupation of his land.’
Consistently with conveyancing sense and the underlying conveyancing principle which is being carried forward into para (g), it seems to me that para (g) is concerned with persons who are in actual occupation of the land at the time when the estate or interest which is said to be subject to the rights of the occupant was created. For example, on completion of a purchase or a mortgage in the usual way. This is so despite the need for a further step to be taken (registration) before the legal estate will be acquired by the purchaser or mortgagee. In line with this is the exception provided for in para (g). Explicitly, the rights of an occupant are not protected if inquiry is made of him and the rights are not disclosed. That exception, implicitly, contemplates an inquiry by or on behalf of the person whose estate or interest is said to be subject to the rights of the occupant and, again implicitly, an inquiry made before he acquired his estate or interest. Otherwise the provision makes no sort of sense.
If this is right, the pieces of the jigsaw fit together reasonably well. A purchaser or mortgagee inspects and inquires before completion, in the established fashion. Or he fails to do so, at his own risk. He than completes the transaction, taking an executed transfer or mortgage. Whether or not an overriding interest under para (g) subsists so far as his freehold or mortgage is concerned falls to be determined at that moment. If an overriding interest does subsist, then his estate when registered takes subject to that interest. If it does not, then subsequent entry of a person into occupation before the transfer or mortgage has been registered (and ‘completed’ for the purposes of s 19) does not have the consequence of creating an overriding interest under para (g) in relation to that freehold or mortgage.
Somewhat surprisingly, the point seems never to have arisen previously, save in Building Society v Mendelsohn (1985) 50 P & CR 244. There his Honour Judge McCarraher, sitting in the Bristol County Court, decided that the relevant date for occupation was the date of execution of the building society’s charge. On appeal the case was decided on a different point.
Our attention was drawn to several cases in which distinguished judges made observations which were said to support one or other of the views canvassed on this appeal. With one exception I need not refer to these, because in none of them was the point now under consideration material and in none of them were the judges directing their minds at this point. The one exception is the observation of Wilberforce J in Re Boyle’s Claim [1961] 1 All ER 620, [1961] 1 WLR 339. That case concerned a claim by Mr Boyle for compensation in respect of a rectification of the register by removal from his title of land belonging to a neighbour. Since Mr Boyle’s registered title was subject to overriding interests, he would not have been entitled to compensation if the land removed from the title was in the actual occupation of the neighbour. On that Wilberforce J said ([1961] 1 All ER 620 at 623–624, [1961] 1 WLR 339 at 344):
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‘It seems to me that the relevant date for considering the question whether there was a person in actual occupation of the land as to which the rectification was ordered must be the date when the person prejudiced by the rectification, i.e., the [claimant], acquired his registered title … ’
In Wolstenholme and Cherry’s Conveyancing Statutes (13th edn, 1972) vol 6, p 25, that dictum is cited as authority for the proposition that under para (g) the relevant date for occupation is not that of inspection of the property or of completion but of registration. Likewise in Emmet on Title (19th edn, 1986) para 5.197. So also in the Law Commission’s report on Property Law: The Implications of Williams & Glyn’s Bank Ltd v Boland (Law Com no 115) paras 16, 18, 32, 34, 40. Despite these weighty commentaries I do not think that Wilberforce J was considering the point now in issue, which was not material in that case.
To the above I add three points. First, counsel for the wife sought to minimise the awkward consequences which would flow from his construction of ss 20 and 70 by stressing the speed with which a diligent purchaser or mortgagee can register his disposition. In my view, this does not provide an adequate answer. Documents need to be stamped. The procedure regulated by r 95 of the 1925 rules would not apply in ordinary, straightforward cases of transfers on sale and mortgages. Documents have to be sent to the appropriate Land Registry office. The 1925 Act and the rules which have been made envisage, and the practicalities of conveyancing normally will dictate, that a transfer and a mortgage will not be lodged for registration on the same day as they are executed. A submission which depends for its force on same day registration is unrealistic.
Second, for completeness, I mention s 37. The powers of disposition conferred by s 18 are conferred on proprietors. Until registration the transferor is deemed to remain the proprietor. How then did the bank acquire any estate or interest on 17 December 1982? The answer lies in s 37. This empowers a person on whom the right to be registered as proprietor has been conferred by a disposition to dispose of or charge the land before he himself is registered. Subject to some exceptions, a disposition or charge so made has the same effect as if the person making it were registered as the proprietor. Under r 81 such an instrument cannot be registered until the person executing the same (the husband, in the present case) has himself been registered as proprietor, or his right to be so registered has been shown to the satisfaction of the registrar.
Third, some reliance was placed by counsel for the bank on s 27(3). It is not necessary to pursue this point in this case, having regard to the conclusion I have already expressed on the meaning and effect of ss 20 and 70.
Actual occupation: a semi-derelict house
Having regard to the conclusion I have reached regarding the relevant date it becomes necessary to consider the wife’s appeal against the judge’s decision that she was not in actual occupation of the property on 17 December 1982.
The judge appears to have accepted, although he did not expressly so find, that at that date the husband, through the builder, was in actual occupation of the property. But he declined to find that the builder was the wife’s agent for this purpose or that, apart from the builder, the wife’s own presence was sufficient to constitute actual occupation by her. He said:
‘What constitutes actual occupation of land and premises must turn on the nature and condition of the premises and land concerned. Clearly residential property, in a habitable condition, can only be actually occupied by being occupied as a residence. Residential property in a semi-derelict condition is capable of being actually occupied, but the nature of the required occupation must be different if the property is uninhabitable. An obvious example of the required occupation in the case of semi-derelict property must be occupation by those engaged in renovating the property to make it habitable. The vital question is, on whose behalf do those
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renovating a property occupy? As far as Mr Griffin was concerned, he believed that both Mr and Mrs Rosset had contracted with him, and when moneys alleged to be due to him were not paid, he pressed his claim against both defendants. On the other hand he agreed that Mr Rosset had told him that the house was his, that he was providing the money for the contract works and that he was “the governor“.’
He concluded:
‘I am not satisfied that [Mrs Rosset] has established that she was in actual occupation of Vincent Farmhouse prior to 17 December 1982 through the builder being her agent to occupy Vincent Farmhouse on her behalf. The matter may be tested by posing the question, if a person had approached the builder after finding his employees at Vincent Farmhouse and asked the question “Who occupies this building?” he would have received the answer, “I have a contract with Mr and Mrs Rosset but Mr Rosset is buying the house and he gives the orders and he is paying for my work“. These circumstances fall short of there being actual occupation of Vincent Farmhouse by [Mrs Rosset] either by herself or through Mr Griffin the builder as her agent prior to 17 December 1982.’
Lord Wilberforce observed in Williams & Glyn’s Bank Ltd v Boland [1980] 2 All ER 408 at 412, [1981] AC 487 at 504 that the words ‘actual occupation’ are ordinary words of plain English and that they should be interpreted as such. Counsel for the bank submitted that in ordinary, everyday speech the wife would not have been regarded as being in occupation of Vincent Farmhouse on 17 December. Residential premises are occupied only by those who live in them.
I agree with this submission to the extent that I accept that in ordinary speech one normally does equate occupation in relation to a house with living there. If a person is intending to move into a house but has not yet done so, he would not normally be regarded as having gone into occupation. That is the normal position with a house which is fit for living in. But that does not provide the answer in the present case, where the house was semi-derelict. In the first place, I do not think that in everyday speech actual occupation of a house can never exist short of residence. Take Vincent Farmhouse. I do not think that it is as clear as the bank suggests that in everyday speech the wife would not have been regarded as being in occupation on 17 December 1982 when the purchase was completed. Had the Rossets been asked on the day, ‘Are you in occupation?' I am not sure that their answer would have been a simple, ‘No’. Their answer might well have been to the effect, ‘We are not living there yet. The farmhouse was semi-derelict when we found it. No one could have lived there with the house as it was then. But we have the builders in. They have been there for over five weeks now. Diana spends almost every day there. Progress has been slower than we had hoped. We had intended to move in by Christmas but that will not be possible now’. Second, if the words ‘actual occupation’ are given the rigid, restricted meaning submitted by the bank in relation to residential premises, and that meaning is applied to a house in course of being built or renovated, the result in some cases will be to defeat the purpose intended to be achieved by para (g). If, day after day, workmen are actively building a house on a plot of land, or actively and substantially renovating a semi-derelict house, it would be contrary to the principle underlying para (g) if a would-be purchaser or mortgagee were entitled to treat that site as currently devoid of an occupant for the purpose of the paragraph. If, for example, the owner had granted a tenancy in return for a premium, so that the tenancy did not qualify as an overriding interest under s 70(1)(k), but the tenant himself and workmen employed by him were on site, building or renovating as I have described, why should he not be as much entitled to the protection afforded to occupants by s 70(1)(g) as he would be once the work had been finished and he was living in the house?
In my view, the test of residence propounded by counsel for the bank is too narrow. As the judge observed, what constitutes occupation will depend on the nature and state of the property in question. I can see no reason, in principle or in practice, why a semi-derelict
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house such as Vincent Farmhouse should not be capable of actual occupation while the works proceed and before anyone has started to live in the building.
Counsel for the bank further submitted that the presence of the builder and his men in the property could not constitute actual occupation by the Rossets. I am unable to agree. I can detect nothing in the context in which the expression ‘actual occupation’ is used in para (g) to suggest that the physical presence of an employee or agent cannot be regarded as the presence of the employer or principal when determining whether the employer or principal is in actual occupation. Whether the presence of an employee or agent is to be so regarded will depend on the function which the employee or agent is discharging in the premises in the particular case. I am fortified in this approach by noting that it accords with the view, espoused in passing by Ormrod LJ in the Boland case in the Court of Appeal, that a person may be in occupation through another (see [1979] 2 All ER 697 at 710–711, [1979] Ch 312 at 338), and with the views expressed in Strand Securities Ltd v Caswell [1965] 1 All ER 820 at 827, 829, [1965] Ch 958 at 981, 984. In the latter case both Lord Denning MR and Russell LJ accepted that, if a tenant puts a resident caretaker into a residential flat to look after it, that would be actual occupation by the tenant. Russell LJ observed that the caretaker, by her occupation for which she was employed, would be the representative of the tenant and her occupation might therefore be regarded as his. Likewise, in my view, the presence of a builder engaged by a householder to do work for him in a house is to be regarded as the presence of the owner when considering whether or not the owner is in actual occupation.
In the Boland case [1980] 2 All ER 408 at 413, [1981] AC 487 at 505 Lord Wilberforce explained the significance of the word ‘actual’ in the phrase ‘actual occupation’ as merely emphasising that what is required is physical presence, not some entitlement in law. He referred to the origin of the phrase ‘actual possession’, and commented that in the judgment of the Privy Council in Barnhart v Greenshields (1853) 9 Moo PCC 18 at 34, 14 ER 204 at 210 the expression was used to distinguish the case of a person who was in some kind of legal possession, as by receipt of the rents and profits, from that of a person actually in occupation as tenant. I can see nothing in that exposition inconsistent with the views expressed in Strand Securities Ltd v Caswell or with those I have sought to state.
I turn to the facts of the present case, which I have already summarised. The vendors had ceased to be in actual occupation long before 17 December. The house was empty and semi-derelict. They permitted the husband to go on to the property before completion. From 7 November until after Christmas the builder and his men were there every working day. One of them slept in the property on most nights. The wife spent almost every weekday at the property, from 10 am to 4 p m. Thus there was physical presence on the property throughout the period leading up to completion on 17 December, and that physical presence was to the extent that one would expect of an occupier, having regard to the then state of the property.
Thus far I am in agreement with the judge. Where I feel obliged to part company from him is his conclusion that, although (as I read his judgment) the husband, through the presence of the builder and his men, was in actual occupation of the property on 17 December, the wife was not. As appears from the second extract from his judgment that I have quoted above, in reaching that conclusion the judge attached importance to the answer which Mr Griffin would have given to the question ‘Who occupies the building?' With all respect to the judge, I do not think that was the right question to pose. What mattered was not the builder’s views on who occupied the building, but on whose behalf the builder was in the building. The judge himself had observed earlier that that was the vital question. As to that, the facts seem reasonably clear. Mr Griffin regarded himself as being employed by both the husband and the wife. There was no clear evidence that in this he was mistaken. Mr Griffin addressed his invoices to both Mr and Mrs Rosset. He looked to both of them for payment. In those circumstances, even though the husband alone was the contracting purchaser of the property, it seems to me that the presence of the builder and his men on the property was as much on behalf of
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the wife as it was on behalf of the husband. Mr Griffin was working there under a contract made with both of them, renovating the property for both of them. He was there on behalf of both of them. There was no sound basis for distinguishing between the two of them. If the builder’s presence was sufficient to constitute occupation by the husband, it was equally sufficient to constitute occupation by the wife. This was so even after the incident mentioned by the judge. A stage was reached when the workmen complained that both the husband and the wife were giving them instructions. The husband then ‘laid it down’ that the workmen should take their instructions from him alone.
So the position was that the builder and his men were in the building, carrying out a contract made with the husband and the wife. Additionally, the wife herself was there almost every weekday. In my view, those facts amounted to actual occupation of the property by the wife on 17 December 1982. There was, I repeat, physical presence on the property by the wife and her agent of the nature, and to the extent, that one would expect of an occupier having regard to the then state of the property, namely the presence involved in actively carrying out the renovation necessary to make the house fit for residential use.
In my view, therefore, the judge erred in the inference he drew from the primary facts which he found. The reality was that before completion the husband and the wife had already taken over this semi-derelict house, under a revocable licence granted to the husband by the vendors. By 17 December renovation was well under way. Completion took place on 17 December, but no physical change then took place in their use of the property, save that the wife slept there more frequently. Eventually in February the family began to live there.
This conclusion has the attraction that it gives effect to the purpose of para (g). Had a representative of the bank inspected the property before 17 December to check if anyone was in actual occupation, he would have seen that, indeed, someone was there. Builders were working there, day after day, plainly on behalf of someone. Had he gone up to the door, he would probably have found the wife in the house. In such circumstances the bank really has only itself to blame if it lends money without looking into the position further. In particular, I find it surprising that the bank, knowing that this was to be the matrimonial home, did not seek the wife’s written consent to the grant of the charge. This was in December 1982. Williams & Glyn’s Bank Ltd v Boland [1980] 2 All ER 408, [1981] AC 487 was decided by the House of Lords over two years earlier, in June 1980.
The wife’s beneficial interest
I turn next to consider whether the wife did have any beneficial interest in the property on 17 December. The bank’s submissions on this were threefold. First, it was submitted that the evidence before the judge did not sufficiently show a common intention on the part of the husband and the wife that the wife was to have an interest in the property. The judge rejected the wife’s pleaded case that before contracts to buy the property were exchanged on 23 November 1982 the parties had agreed, or there was a common intention, that the property should be owned jointly. There was no sufficient evidence that nevertheless there was such a common intention by completion on 17 December. I cannot accept this. This question was, par excellence, a question for the fact-finding tribunal. The husband and the wife both give evidence. Having read and reread the judge’s notes of evidence, I am in no doubt there was evidence on which the judge was entitled to reach his ultimate conclusion. I mention some passages from the wife’s evidence:
‘As soon as we heard he was likely to get the money. We looked round, looked for suitable home for us and children. I always understood we were going to share whatever we had, big or little. We always discussed it as being ours. The only discussion was in very general terms. We needed a house we would go out and look
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for one we could own as a couple for a family. When we found Vincent Farmhouse, he said he was glad he would be able to provide a proper home, a place which would be secure. I understood it would be jointly ours. He’d always indicated it would be a joint venture. Everything we did in the past had been jointly done. If you live with someone, you don’t “dissect” it. It was an accepted thing … I understood going into husband’s name was to appease the Swiss. If that had not been done we could not have got the money.’
On this evidence, and although the husband’s evidence was to the contrary effect, the judge was justified in concluding, as he did, first, that both parties intended that the purchase should be in the sole name of the husband because of the requirements of the Swiss trustees and, second, that, in addition, there was a common intention regarding the beneficial interests.
As to the latter, I am in no doubt that, contrary to counsel for the bank’s submission, the judge did make a finding that there was a common intention that the wife was to have a beneficial interest in the property. The judge carefully applied the approach expounded by Nourse LJ in Grant v Edwards [1986] 2 All ER 426 at 431–433, [1986] Ch 638 at 646–648. He considered, first, whether it was the common intention of the parties that the wife should have a beneficial interest in Vincent Farmhouse and, second, whether she acted to her detriment on the faith of such a common intention. In his judgment the judge found that it was the parties’ common intention ‘that the renovation of the house should be a joint venture, after which the house was to become a family home shared by [them] and their children’. Read by itself that passage may not be altogether free from ambiguity. But his conclusion leaves no room for doubt: ‘… there was a common intention between [the husband and the wife] that [she] should have a beneficial interest in the property under a constructive trust … ' There is no justification for reading that explicit finding otherwise than at its face value.
Counsel for the bank’s second submission was that in order to transfer an interest in land under a constructive trust it is necessary for there to be an agreement involving reciprocal obligations. Here there was no evidence, and the judge did not find, that it was agreed between the husband and the wife that, if she acted in a particular way, she would have an interest in the property. I am unable to accept the first limb of this submission. I can see no reason in principle why, if the parties’ common intention is that the wife should have a beneficial interest in the property, and if thereafter to the knowledge of the husband she acts to her detriment in reliance on that common intention the wife should not be able to assert an equitable interest against the husband just as much as she could in a case where the common intention was that, by acting in a certain way, she would acquire a beneficial interest. In each case the question is whether, having regard to what has occurred, it would be inequitable to permit the party in whom the legal estate is vested to deny the existence of the beneficial interest which they both intended should exist. We were referred to various passages in Gissing v Gissing [1970] 2 All ER 780 at 789–790, 793, [1971] AC 886 at 904–905, 909–910, Eves v Eves [1975] 3 All ER 768 at 775, [1975] 1 WLR 1338 at 1345 and Midland Bank plc v Dobson and Dobson [1986] 1 FLR 171 at 175–176. Suffice to say I do not read any of these passages as negativing this view. I refer to only one authority, in which this point was directly addressed, Grant v Edwards [1986] 2 All ER 426, [1986] Ch 638. The first judgment was given by Nourse LJ. He, indeed, did not directly deal with this point, but his observations seem to me to support, rather than negative, the view I have expressed (see [1986] 2 All ER 426 at 431–432, [1986] Ch 638 at 646–647). Mustill LJ expressed no opinion on this point. Sir Nicolas Browne-Wilkinson V-C said ([1986] 2 All ER 426 at 439, [1986] Ch 638 at 657):
‘As at present advised, once it has been shown that there was a common intention that the claimant should have an interest in the house, any act done by her to her detriment relating to the joint lives of the parties is, in my judgment, sufficient
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detriment to qualify. The acts do not have to be inherently referable to the house: see Jones v Jones [1977] 2 All ER 231, [1977] 1 WLR 438 and Pascoe v Turner [1979] 2 All ER 945, [1979] 1 WLR 431. The holding out to the claimant that she had a beneficial interest in the house is an act of such a nature as to be part of the inducement to her to do the acts relied on. Accordingly, in the absence of evidence to the contrary, the right inference is that the claimant acted in reliance on such holding out and the burden lies on the legal owner to show that she did not do so: see Greasley v Cooke [1980] 3 All ER 710, [1980] 1 WLR 1306.
The first sentence in that passage supports the view I have expressed above.
Counsel for the bank’s third submission was that the evidence did not justify a finding that the wife acted to her detriment. It was submitted that all the activities carried out by the wife were equally referable to her moving into a new house requiring renovation prior to use as the family home. On this all I will say is that I do not see why, if a wife acts as did the wife in the present case, attending the property and busying herself about the property day after day for weeks before completion, with the background of a common intention that she should share beneficially in the house, that activity is not capable of making it inequitable for the husband subsequently to deny the existence of her beneficial interest.
Completion: competing equities
I come now to the fourth point raised by the appeal. So far I have concluded that at the material date (17 December 1982) the wife was in actual occupation of the property. This being so, the bank’s legal charge took effect subject to the rights of the wife then subsisting. But in this case there is the complication that there was no distinct interval of time between completion of the purchase of the property by the husband, through whom the wife claims, on the one hand and the creation of the bank’s legal charge on the other hand. The bank’s legal charge was created as part of one transaction with the completion of the purchase on 17 December, in that payment of the price, handing over of the executed transfer by the vendor and delivery to the bank of the executed charge all took place, in the usual way, as simultaneously as the practicalities permitted. This gives rise to the questions (a) whether prior to completion the wife had in the property any interest which the bank’s legal charge ranked behind when it was created and, if not, (b) whether the interest the wife acquired on completion ranks ahead of or behind the bank’s legal charge which also was created on completion.
Before discussing these questions I must mention three authorities, two of the Court of Appeal and one of the Judicial Committee of the Privy Council. First is the decision of the Court of Appeal in Re Connolly Bros Ltd (No 2), Wood v The company [1912] 2 Ch 25. This was prayed in aid by the bank in a way I shall explain. In Connolly’s case a company issued a series of debentures which created a floating charge over all its property, both present and future. The company was not entitled to create any charge ranking equally with or in priority to the debentures. Thereafter the company bought a property with the assistance of a loan from Mrs O’Reilly. On completion the title deeds were retained on her behalf by the solicitor who acted for all parties. He did not know of the existence of the debentures. The court held that Mrs O’Reilly’s charge had priority over the debenture holders’ charge. At first instance Warrington J said (at 28–29):
‘… these debentures and the trust deed, so far as this after-acquired property is concerned, amount to nothing more than a contract by the company to give to the debenture-holders a security upon this particular item of property by its description as appearing in the conveyance, but only on such interest as the company may in fact acquire in that and their other after-acquired property. Now, in my judgment, the company on the facts of this case never acquired as against Mrs. O’Reilly any interest in this property at all, except subject to the obligation of giving to her a charge for the amount of the purchase-money which she so advanced.’
In dismissing an appeal Cozens-Hardy MR said (at 31):
‘Did the company as between themselves and Mrs. O’Reilly ever become the absolute owners of the property? Or was not the bargain that Mrs. Reilly was to have a first charge, and the company was only to get the property subject thereto? In my opinion we should be shutting our eyes to the real transaction if we were to hold that the unincumbered fee simple in the property was ever in the company so that it became subject to the charge of the debenture-holders.’
Buckley LJ agreed. He held that on completion the company did not acquire an unincumbered fee simple in the property. It obtained the property subject to a contractual obligation to give a first charge on it to Mrs O’Reilly, and the debenture holders could get no more. Thus the court there declined to dissect completion of the purchase and the grant of the charge into two notionally separate and successive stages, with the company acquiring, at stage one, a property unincumbered by Mrs O’Reilly’s charge. I pause to observe that, if completion on 17 December 1982 in the present case were to be analysed in the same way as was done in Connolly’s case, the bank would rank ahead of the wife. On this analysis the husband, through whom the wife claimed, never acquired more than an equity of redemption.
Connolly’s case was followed by the Privy Council in Security Trust Co v Royal Bank of Canada [1976] 1 All ER 381, [1976] AC 503. There the essential facts were closely comparable to those in Connolly’s case save that the mortgage with which completion was partly financed was in favour of the vendor. The opinion of the Board was delivered by Lord Cross. He observed that the debenture holder’s charge was a charge on the company’s interest under the company’s purchase contract and that it could give the debenture holder no greater interest than the company had (see [1976] 1 All ER 381 at 391, [1976] AC 503 at 518). The company could not obtain a conveyance of the property free from the obligation to grant back the mortgage to the vendor, and the charge on its interest gave the debenture holder rights which were subject to the prior rights of the vendor.
By way of contrast is the third decision in this trilogy, Church of England Building Society v Piskor [1954] 2 All ER 85, [1954] Ch 553. There a purchaser, let into possession before completion, granted weekly tenancies to Captain Hamilton and others. The plaintiff building society loaned the sum of £1,600 to assist the purchaser with completion, the money being paid over on completion in return for a legal charge. The Court of Appeal held that the tenants had priority over the building society. Evershed MR observed that, although the transaction might fairly be said to be one in substance, it could not be said to be one and indivisible in the eyes of the law. He said ([1954] 2 All ER 85 at 89, [1954] Ch 553 at 561):
‘It is, no doubt, true to say that in one sense the transaction was one transaction but it is equally true to say that it consists necessarily of certain defined steps which must take place in a certain defined order if the result intended is eventually to be achieved. That seems to me not an artificiality, but a necessary result of the law and of the conveyancing practice which was involved.’
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Romer LJ expressed the same view ([1954] 2 All ER 85 at 91, [1954] Ch 553 at 564–565):
‘The theory that a purchase, which is completed by payment of money which has been provided in part by a third party, and a mortgage by the purchaser of the property sold to secure the repayment of that money to the lender, constitutes only one transaction if the instruments are executed at more or less the same time is a conception which has a prima facie appeal, but it does not, on analysis, in my opinion, truly reflect the legal effect of what takes place. The mortgage of the purchased property cannot have any operation in law (whatever rights it may give rise to in equity or by estoppel) unless and until the purchaser is in a position to vest a legal term in the property, as security, in the mortgagee, and he is not and cannot
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be in a position to do this until he himself has acquired from the vendor the legal estate out of which the mortgage term is capable of being created. From this it follows that the execution and delivery of the conveyance (if the property is freehold) or of the assignment (in the case of a leasehold) by the vendor to the purchaser must of necessity constitute an essential preliminary to the vesting in the mortgagee of a subsidiary interest in the property.’
He added ([1954] 2 All ER 85 at 91, [1954] Ch 553 at 566):
‘I find myself unable to treat as one what were, in law, two palpably distinct transactions merely for the purpose of enabling the society to evict persons who were already in occupation but whose existence or rights the society had never troubled to inquire about.’
Thus in that case the court adopted a ‘successive steps’ analysis of completion. On that analysis, any beneficial interest of the wife in the property, at any rate if it existed before completion, would rank ahead of the bank’s legal charge which came into being after the husband had become owner of the property on completion, even though the bank had to some extent funded completion of the purchase.
In the Piskor case [1954] 2 All ER 85 at 90, [1954] Ch 553 at 563 Evershed MR distinguished Connolly’s case as a case in which the question was one of equitable priorities. Fastening on to this, counsel for the bank submitted that in the present case also there was a question of equitable priorities and that, accordingly, on completion the husband should be regarded as having acquired only an equity of redemption (as in Connolly’s case) rather than having acquired the property followed, momentarily later, by the grant of a legal charge to the lender (as in the Piskor case). His submission on what were the competing equitable interests, and on when they arose, was to the following effect. As to the wife, the only rights she has to prevent the bank from obtaining possession are the rights of an equitable co-owner of the property, and those rights came into existence on completion and not before. Until then the vendors were entitled to possession and to the rents and profits. Until then neither the husband nor the wife had a beneficial interest in the property. As to the bank, it financed completion to the extent of £2,267. It did so pursuant to a loan arrangement made before completion. On completion it acquired an immediate equitable charge by reason of the agreement by the husband to execute a legal charge. As between these two competing equitable interests, both of which arose on completion, the bank has priority because (a) the husband could not have obtained a transfer of the property free from the specifically enforceable obligation to grant the legal mortgage to the bank and (b) the wife’s equitable interest is an interest derived through and under the husband.
I cannot accept this submission. In the first place, I do not think that the bank is assisted either by Connolly’s case or by the Security Trust case. In Connolly’s case effect was given to the intention of the parties to the contract created by the debentures by recognising that, on completion of the purchase of the after-acquired property, the company’s interest therein was subject to and ranked behind Mrs O’Reilly’s contract. For the purposes of that contract that, and that alone, was the interest which the company obtained in that after-acquired property. It was that interest alone, therefore, which was subject to the debenture holders’ charge. In the present case, to accord the bank priority would not be to give effect to any intention, actual or imputed, of the wife. On the contrary, she thought Vincent Farmhouse was being purchased without the aid of any loan. In the Security Trust case the mortgagee’s claim to have priority was, if anything, even stronger than in Connolly’s case, because in the Security Trust case the company was not entitled to an unincumbered fee simple as against the vendor even on completion. There one of the terms of the contract of purchase was for the vendor to have a mortgage over the property to secure the balance of the price.
I turn, therefore, from those two authorities to consider whether, applying established principles, this is a case in which, quite apart from the bank’s claim as legal chargee, there
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is competition between two equitable interests with, as the bank claims, its equitable interest having priority.
The wife’s equitable interest before completion
I am unable to accept that the wife had no beneficial interest in the property before completion. Prior to completion, the husband had the benefit of a specifically enforceable contract to purchase the property, whereunder, subject to payment of the balance of the price, the property as between him and the vendors was his. Accordingly, prior to completion the husband had an equitable interest in the property, although this interest was defeasible and would not blossom into absolute ownership until the balance of the price was paid on completion.
As to the wife’s interest prior to completion, it is a little unfortunate that the judge’s findings are not complete in that, for the reason I have stated, the judge made no finding on the extent of the wife’s beneficial interest. This is unfortunate, because the route followed by him in quantifying her interest would have been of assistance in identifying more clearly the point in time at which she first acquired any beneficial interest. Despite this, on the facts found there was a common intention that the wife should have a beneficial interest in the property, and before completion the wife did acts which would have made it inequitable for the husband to have denied that beneficial interest. On those facts I think that the wife had some equitable interest in the property before completion, carved out of the husband’s interest just described. Moreover, she was in occupation with the husband and as against the husband was entitled to remain so, even though neither of them had any right to remain in occupation before completion as against the vendors. It was that subsisting but defeasible equitable interest of the wife which automatically swelled into an indefeasible equitable interest in the property on completion when the balance of the price was paid to the vendors and the transfer was handed over by the vendors.
The bank’s equitable interest before completion
The conclusion I have just stated regarding the wife having an equitable interest prior to completion suffices to dispose of the bank’s claim in so far as its claim is that immediately on completion it acquired an equitable charge. Being first in time, the wife’s equitable interest has priority over the equitable interest which (rightly or wrongly) the bank claims to have acquired on completion. But I must mention a further argument which, although somewhat tortuous, might be thought to arise if it is correct that the wife had some equitable interest prior to completion. The argument would be that, in the same way as the wife had an equitable interest prior to completion carved out of the husband’s equitable interest, so did the bank in so far as it had loaned money to the husband against his agreement to create a legal charge on completion. On that I need say only that, on the facts, such an argument would not assist the bank here because the first borrowing was not until 15 December. It was on that date that the money required for completion was debited to the husband’s bank account, which thereupon went into overdraft to the extent of £2,267. That does not antedate the wife’s acquisition of some beneficial interest in the property.
Having regard to these conclusions regarding the parties’ equitable interests prior to completion it is not necessary to decide what would be the position between the bank and the wife if the wife had acquired no interest in the property until completion. Nor, for the same reason, does anything turn in this case on the ‘competing equities’ point on distinctions between registered and unregistered land.
The justice of the case
I turn to the final point in this appeal. Underlying these submissions by the bank was, expressly, an appeal to the broad justice of the case. The wife is claiming an equitable interest in the property, and she is claiming this in priority to the bank whose money
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was used in part to enable the purchase of the property to be completed. Without the use of the bank’s money the wife’s rights in the property would not have come into existence. The bank submitted that it would be unjust and inequitable for her to be able to claim priority in reliance on a ‘successive steps’ analysis of what occurred on completion on 17 December.
It may be that in this area the law is, or should be, moving towards adopting a more flexible response to particular circumstances, so that the end result of a dispute between a wife and a bank which has provided part of the price would not depend on notions as technical as the ‘successive steps’ analysis of completion. The way ahead here may be the analogy with proprietary estoppel suggested by Sir Nicolas Browne-Wilkinson VC in Grant v Edwards [1986] 2 All ER 426 at 439, [1986] Ch 638 at 656–657. The protection which equity gives in cases where such an estoppel is found to exist depends on all the circumstances: see the authorities collected in Snell’s Principles of Equity (28th edn, 1982) p 562. However, as in Grant v Edwards, so also in this case, the relationship of implied, resulting or constructive trusts and equitable estoppel was only touched on in passing in the course of the arguments. This is not the case, therefore, in which it would be desirable to express any views on this point, because I have come to the conclusion that, even if the court has jurisdiction to make whatever order it considers just as between the wife and the bank, on the facts here it would not be just, as matters now stand, to make an order for possession. It is to be borne in mind, as I have observed, that in the present case the wife did not know that any part of the purchase price was being provided by way of loan. So far as she was concerned the whole price was being made available to the husband by his family trust in Switzerland. In the court below the bank abandoned its plea that the wife knew or intended that the bank should have a first charge on the property. Had the facts been otherwise, as in many cases they will be, where a wife or other occupant claiming a beneficial interest knows that part of the price is being obtained by a mortgage loan, the bank’s position would have been very different. In such a case the court will impute to the parties the intention that the rights of the wife or other occupant are to be subject to the rights of the bank or building society (see Browne-Wilkinson LJ in Paddington Building Society v Mendelsohn (1985) 50 P & CR 244 at 247–248 and also Bristol and West Building Society v Henning [1985] 2 All ER 606 at 608, [1985] 1 WLR 778 at 781).
Thus this is a case between an occupant and a lender, each of whom was ignorant of the other’s interest in the property at the time. But the bank knew the husband was married and that the property was being renovated as a family home. It was put on inquiry. The wife was not. Further, there is no evidence on how much, if any, of the money advanced by the bank to the husband after 17 December 1982 was spent on the property. That leaves only the sum of £2,267 advanced on completion. Against that, while (here also) it would have been helpful if the extent of the wife’s beneficial interest had been quantified at the hearing before the judge, the facts establish, as I have concluded, that before completion the wife had already acquired some beneficial interest in the property which she was expecting to be bought by her husband without the assistance of a loan. One can speculate on what her attitude would have been on 17 December had she known of the bank borrowing, but, here again, this was not a matter investigated at the trial. She continued to act to her detriment after completion. As matters now stand, she is claiming the right, as a beneficial tenant in common, to remain in occupation, and the bank is seeking to evict her. For its part, the bank has unexhausted remedies against the husband. Having regard to the value of the property and the husband’s interest therein (there is no suggestion that the wife’s interest would exceed a half share), the bank will be paid the sum of £2,267 with interest, sooner or later. Indeed, sooner or later the bank is likely to be paid all or most of what is owned by the husband. Does ‘equity’ require that the bank should be able to obtain immediate possession of the property? On the whole I think not. The wife is having the use of the property whose purchase was financed, as to £2,267, by the bank. On the other hand, the observations of Romer LJ in the second extract which I have quoted above from his
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judgment in Church of England Building Society v Piskor [1954] 2 All ER 85 at 91, [1954] Ch 553 at 566 are pertinent.
Accordingly, whatever might be the position in other cases, in the present case I do not feel an appeal to what is ‘right’ or ‘just’ assists the bank.
Conclusion
For these reasons I would allow the wife’s appeal, and set aside the order for possession. Subject to any submissions counsel may wish to make, the appropriate form of order would seem to be for the matter to be remitted to the county court for further hearing on the question of the extent of the wife’s beneficial interest.
MUSTILL LJ. Nicholls LJ has already set out the facts and the issues which arise, and I gratefully adopt his exposition. So also with his account of the question arising under the headings ‘Actual occupation: the relevant date’ and ‘The wife’s beneficial interest’. I agree both with the conclusions expressed by him and the reasons given for them, and have nothing to add.
I have, however, been much perplexed by the problems identified as ‘Actual occupation: a semi-derelict house’ and ‘Completion: competing equities’ and must state in a little detail the conclusions which I have eventually reached.
Is is convenient to begin with the latter problem which I will approach on the following assumptions: (1) at or from 17 December 1982 the husband had an equitable interest in the property, which was destined to ripen into a legal interest when the transfer was lodged at the Land Registry on 7 February 1983 (2) the wife also had an equitable interest in the property from the moment of completion by the husband, at the latest (3) the bank also had an equitable interest from the moment when the husband executed the charge. In the first instance, I will approach the problem of the competing interests of the wife and the bank as if we were concerned with unregistered land, since this was the situation in each of the trio of cases round which the argument revolved.
I will first state the facts and decisions in each case, beginning with Re Connolly Bros Ltd (No 2), Wood v The company [1912] 2 Ch 25. A company created in favour of debenture holders a charge by way of floating security on the undertaking of the company and its property both present and future. There is nothing in the report to suggest that the description of the property charged was in any way unusual, the debentures had been issued, the company sought to purchase certain premises, but had insufficient money to do so, and therefore applied to a Mrs O’Reilly for a loan. She agreed to make an advance of £1,000 on terms that she would have a charge on the property. The company thereupon entered into a contract for the purchase of the property for £1,000 and paid a deposit of £150. At the completion, in which Mrs O’Reilly took part, she drew a cheque for £1,000 in favour of the company, and the company drew a cheque for £950 which was immediately cashed, and the cash was paid over to the vendor. The same solicitor acted for all three parties. He had no knowledge of the debentures and made no search. Equally, there is nothing in the report to suggest that the debenture holders had any knowledge of this transaction. Subsequently, the company executed a memorandum of deposit of title deeds with intent to create an equitable charge in favour of Mrs O’Reilly. Defaults being made by the company, there was a contest of priorities between the estate of Mrs O’Reilly and the debenture holders. The estate prevailed at first instance and on appeal.
Next, there was Church of England Building Society v Piskor [1954] 2 All ER 85, [1954] Ch 553. The purchasers of a leasehold interest entered into possession before completion, with the consent of the vendors. They immediately granted weekly tenancies of part of the premises. Later, the purchase was completed and on the same day the purchasers entered into a legal charge, in exchange for an advance paid direct to the vendors, without which the vendors would not have completed the assignment (see the evidence summarised by Evershed MR (see [1954] 2 All ER 85 at 88, [1954] Ch 553 at 560). The
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charge recited that the property was vested in the mortgagors free from incumbrances. In a possession action the sole remaining tenant prevailed at first instance and in the Court of Appeal.
The last of this trio of cases was Security Trust Co v Royal Bank of Canada [1976] 1 All ER 381, [1976] AC 503. The appellants sold land to Fisher on terms involving a cash deposit at the same time as Fisher charged the land to them for the balance of the price. The completion date was extended, the documents being retained by the appellants in escrow until payment of the deposit. Fisher then created debentures in favour of the respondents, and the debentures were lodged for registration during July 1970. Four months later, the debenture holders appointed a receiver. Then, during January 1971, the time for completion of the sale was further extended until a date when the receiver paid the deposit, and the documents were released from escrow. The appellants thereupon registered the mortgage. It was held, first, that when the debenture was created Fisher had no interest in the property and, second, that, although Fisher did later obtain an equitable interest to which the respondents’ equitable charge could attach, this interest was merely an equity of redemption, so that the respondents had no rights which could prevail over the appellants’ mortgage.
These cases were all decided by equity lawyers of the greatest distinction, and it would be imprudent as well as lacking in respect to express reservations with any but the greatest caution. Yet I must confess to finding it hard to see how the decisions can live together. The Security Trust case is the easiest to understand. The shape of the agreement made between Fisher and the vendor appellants prior to the postponed completion made it clear that Fisher could not fulfil his side of the bargain without what amounted to a loan from the appellants, and that the latter would not grant this loan without a mortgage. Thus, in both a theoretical and a practical sense, Fisher never received more from the appellants than an equity of redemption, and therefore could not effectively charge to the respondent debenture holders anything more than an interest which was already incumbered.
Connolly’s case is a different matter. Here the transactions were in the reverse order. The debentures came first, and the mortgage which was held to prevail was not executed until later. The first ground of Warrington J’s decision was that Mrs O’Reilly succeeded to the vendor’s lien. This had no bearing on the present case. Second, that—
‘the company on the facts of this case never acquired as against Mrs. O’Reilly any interest in this property at all, except subject to the obligation of giving to her a charge for the amount of the purchase money which she so advanced … the security acquired by Mrs. O’Reilly takes priority over the debentures because it takes priority over the interest of the company itself, and that nothing was ever subject to the trust deed except what one may describe as the equity of redemption, subject to the security created in favour of Mrs. O’Reilly.’
(See [1912] 2 Ch 25 at 29.)
The judgments on appeal were brief. In essence, the judge’s interpretation of the facts was upheld, Cozens-Hardy MR saying (at 31):
‘In my opinion we should be shutting our eyes to the real transaction if we were to hold that the unincumbered fee simple in the property was ever in the company … ’
On the face of it, this case seems very different from the Security Trust case in two respects. In the Security Trust case the conveyance and the concurrent mortgage took place between the same parties. As regards each of them an unincumbered interest never passed, and the transaction was precisely the same as if the transfer had explicitly conveyed the equity of redemption and no more. This was not so at least in theory, in the Connolly transaction, where the subject matter of the conveyance by the vendors to the company was the unincumbered fee simple. Furthermore, in the Security Trust case,
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the conveyance and remortgage were knitted together from the outset, in a complete deal which had already precluded an unincumbered transfer, before the debenture holders came on the scene, whereas Mrs O’Reilly’s transaction took place after the creation of the debenture. These distinctions might seem to make all the difference, but in the Security Trust [1976] 1 All ER 381 at 391, [1976] AC 503 at 518 the two cases were treated as being exactly parallel. The explanation must, I believe, have been that the Board regarded the dealing in Connolly’s case as having created a triangular relationship which, if spelt out, would have comprised a transfer direct from the vendor to Mrs O’Reilly of an interest by way of charge, and a simultaneous transfer of the equity of redemption to the company. On this view, the debentures would have attached to nothing more than the company’s limited interest. (There are reasons to doubt whether the debenture holders’ interests could be defeated even by an express tripartite agreement to the effect just described, but these raise a different point, not explored in argument before us: see an unsigned article ‘Lease by estoppel’ (1957) 101 SJ 438 at 439 and Emmet on Title (19th edn, 1986) para 25.037.)
Church of England Building Society v Piskor [1954] 2 All ER 85, [1954] Ch 553 was argued against the background of three recent decisions in the same field, including in particular Coventry Permanent Economic Building Society v Jones [1951] 1 All ER 901, where on similar facts Harman J had held that the whole transaction was one in substance, and that the rights of the mortgagees took precedence. Two judgments were delivered in the Court of Appeal. Each assumed, as was evidently taken for granted in argument, that the circumstances in which the tenants entered into possession were such as to estop the purchaser from denying, as against the tenants, that they would have the rights of tenants as and when he acquired a legal interest in the property. Evershed MR began by discussing the Coventry case, saying that Harman J’s decision might well have been justified on the facts, on the ground that the tenants knew that the landlord was raising money by falsely representing to the lenders that she had unincumbered title (see [1954] 2 All ER 85 at 86, [1954] Ch 553 at 557). He then continued with the broader question, whether the transaction in the instant case was in law one and indivisible. In effect, it was held that the estoppel in favour of the tenants was ‘fed’ at the moment when the purchasers argued the legal estate, so as to give the tenants rights which were fully enforceable against the purchasers’ interest, and since the mortgagee’s own rights derived from that interest of the purchasers, they must be subject to the tenants’ newly consummated tenancies. Evershed MR continued ([1954] 2 All ER 85 at 89, [1954] Ch 553 at 561):
‘It is, no doubt, true to say that in one sense the transaction was one transaction but it is equally true to say that it consists necessarily of certain defined steps which must take place in a certain defined order if the result intended is eventually to be achieved.’
He concluded by accounting for Connolly’s case as a case on competing equities.
The major part of the judgment of Romer LJ was concerned with rejecting the proposition that where there is a purchase which in practice is made possible only because a lender is willing to advance the price, and where the loan is secured by a mortgage on the newly-acquired property, the law must treat the conveyance and the mortgage as if they amounted to a single transaction, if the instruments are executed at more or less the same time. As Romer LJ said, the mortgage of the purchased property cannot have any operation in law unless and until the purchaser is in a position to vest a legal term in the property, as security, in the mortgagee, so that the execution and delivery of the conveyance by the vendor to the purchaser must of necessity constitute an essential preliminary to the vesting in the mortgagee of a subsidiary interest in the property (see [1954] 2 All ER 85 at 91, [1954] Ch 553 at 564–565). Romer LJ concluded by indicating his present view: that even if the purchasers had, previously to the sale but after the grant of the tenancies, entered into an immediately binding agreement to give the plaintiffs a
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charge on the property, the legal estate which passed to the purchasers, subject to the equity in favour of the plaintiffs would have sufficed to feed the estoppel in favour of the tenants (see [1954] 2 All ER 85 at 92, [1954] Ch 553 at 566).
Now, it is well possible to explain the differing results of Connolly’s case and Piskor’s case on the ground foreshadowed by Romer LJ at the end of his judgment, namely that in Piskor’s case even an unincumbered legal interest in the purchaser would suffice to consummate the estoppel and create a legal tenancy which outranked the legal charge in favour of the mortgagees whereas in Connolly’s case the debenture holders had derived no legal interest at the time when the purchaser became the owner of the land, and Mrs O’Reilly’s interest attached. But this was not the actual ground of decision, which seems to me undeniably to have been the rejection of the idea that the purchase and mortgage were simultaneous and indivisible transactions. Yet there is nothing in the facts of Piskor’s case as reported to explain why the contrary proposition should have been preferred.
This being so, if the line of authority had ceased with Piskor’s case, I would have been impelled to hold that there was a conflict of authority, and, faced with a choice, would have preferred the reasoning in Piskor. In fact, however, the opinion of the Board in Security Trust Co v Royal Bank of Canada [1976] 1 All ER 381, [1976] AC 503 (where the judgment under appeal had adopted a similar analysis of the reported cases to the one just suggested) shows that this approach must be wrong, since it was there held that Connolly’s case and Piskor’s case were clearly distinguishable, primarily on the ground that—
‘in cases such as Re Connolly Bros Ltd (No 2) and this case the charge under the debenture only bites on property which is already fettered by the agreement to give the other charge, whereas on the facts of the Piskor case the tenancy was created out of an interest which was then unfettered by any such agreement.’
(See [1976] 1 All ER 381 at 392, [1976] AC 503 at 520.)
This passage from the opinion seemed at first sight to point the way to a solution of the present problem. Continuing for the moment to treat the appeal as if it concerned unregistered land, the analysis would proceed as follows. It is clear law and indeed obvious that an incumbrance cannot obtain rights over the property charged if someone has already taken a slice of the cake, a subsequent mortgagee has no more than a charge over the cake less the slice. The explanation of Piskor’s case given by Lord Cross shows that this principle applies even where the first person has not actually cut the slice from the cake, but has already acquired in advance a right to take the slice at the moment the cake comes into the mortgagor’s hands. Here, so the analysis would run, the wife had a right (through the combination of the common intent with her acts done in reliance thereon) to have a slice of the husband’s interest in the farm, at and from the instant when he obtained his own legal interest on completion, and the bank’s mortgage never attached to anything more than the ‘cake’ as thus depleted.
Unfortunately, it now seems to me that this analysis is unsound, because it fails to take account of the fact that the wife’s interest was never at any stage more than equitable. Even if the bank had never come into the picture, the wife would not (continuing the metaphor) actually have subtracted the slice from the cake, which the husband would have retained throughout, with however an enforceable obligation to hold it, or any proceeds of sale, for the benefit of the wife to the extent of her equitable interest. Thus, the bank would have an entire interest in the subject matter charged, and would take free of the wife’s rights unless (and this is the crucial point) it had notice of those rights at the time when it acquired its own. Thus, the case would come down to notice. If the bank had notice of the wife’s rights, the wife would have priority. If not, the bank would have priority.
If this is right, then it must follow that, at least in the case of unregistered land, the perplexing trio of cases to which such careful attention was given in argument have in truth no bearing on the problem, which can be approached simply as a traditional
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conflict between a prior equitable right and a legal interest acquired by a subsequent purchaser for value.
What then is the solution as regards registered land? Here, the position differs in that the wife’s equitable interest did co-exist with an equitable interest on the part of the bank, after completion, since all the interests remained equitable until the instruments were lodged for registration. But this does not take the case back into Piskor’s case since (as Nicholls LJ has explained) the test of actual occupation, which for registered land takes the place of notice, is to be answered as at the date of completion. It seems to me that for this purpose alone the bank must be regarded as if it had acquired a full legal interest on that date, and that the question of actual occupation must be decisive. If the wife was then in actual occupation of the property, her equitable interest prevails over the legal interest of the bank. If not, her interest is subordinate to that of the bank.
Accordingly, I must now turn to the question whether the judge was right to hold that on 17 December 1982 the wife was not in ‘actual occupation’ of Vincent Farmhouse within the meaning of s 70(1)(g) of the Land Registration Act 1925. This expression is nowhere defined and its meaning must therefore be ascertained by considering the ordinary meaning of the words (if in fact they have one), the context in which they are used and the judicial history of this aspect of land law.
As to the word ‘occupation’ all are agreed that no conclusive guidance can be obtained from reported cases in other branches of the law, since it has different meanings in different contexts. The addition of the epithet ‘actual’ does, however, provide a clue. It must have been included for a purpose. That purpose must, as it seems to me, have been to distinguish the person who is in fact there, occupying the property, from someone who is not in fact occupying it, but who stands in such a relation to the property that for the purpose of exercising certain rights or being subjected to certain duties, he is treated in law as if he were the occupier.
The context in which the words appear also yields some guidance. In the first place, the miscellaneous interests listed in s 70(1) have this in common, that they are all interests which bind persons with a legal interest in land, even though they are not entered in the register, and even if the proprietor is a bona fide purchaser without notice. (I omit for the moment the special situation contemplated by the concluding words of s 70(1)(g).) These rights can bear harshly on the purchaser if they are given too wide a scope, and the words under consideration must be construed on the assumption that, when Parliament decided in 1925 to add para (g) to the list of overriding interests in registered land already created by the Land Transfer Acts 1875 and 1897, it intended to produce a result which did reasonable justice to the bona fide purchaser.
Second, the reference to ‘every person’ in para (g) shows that the notion of actual occupation is wide enough to embrace a situation where more than one person is in occupation at the same time.
Third, the inclusion in the list of overriding interests of a specific reference to a person in receipt of the rents and profits of the land, an amendment which brought about a change in the law (see p 940 f g, post), demonstrates that the occupation of land pursuant to a contract by one person does not by itself suffice to put the other party in actual occupation.
Fourth, the concept of actual occupation as an ingredient in an overriding interest seems, to my mind at least, to involve some notion of continuity. The interest can hardly override the legal estate intermittently, according to momentary changes in the proprietor’s degree of actual physical connection with the land.
Fifth, para (g) cannot be read as if Parliament had simply enacted the section with some other formula, such as ‘in residence at’ in place of ‘in actual occupation of’, for the paragraph applies to all types of land, and the acts which constitute actual occupation of a dwelling house, a garage or woodland cannot all be the same.
Finally, although the paragraph does not actually say that the acts constituting actual occupation must be such that a purchaser who went to the land and investigated would
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discover the fact of occupation and thereby be put on inquiry, the closing words of the paragraph are at least a hint that this is what Parliament principally had in mind.
Note may also be taken of s 14 of the Law of Property Act 1925, which preserves the interest of ‘any person in possession or in actual occupation’ of land to which he may be entitled in right of such possession or occupation. It is legitimate to assume that, when the list of overriding interests was extended by the other 1925 Act, actual occupation was not intended to be synonymous with the kind of constructive occupation denoted by the concept of possession.
These fragments of guidance must be set against the judicial history of the legislation. As Lord Wilberforce observed in Williams & Glyn’s Bank Ltd v Boland [1980] 2 All ER 408 at 412, [1981] AC 487 at 504, the word ‘actual’ in conjunction with ‘possession’ appears in the judgment of Lord Loughborough LC in Taylor v Stibbert (1794) 2 Ves 437 at 440, [1775–1802] All ER Rep 382 at 383, one of the earliest in a line of cases which determined that notice of the presence of a person on the land is notice of his interests, but not of the interests of another person from whom that occupation is derived so that, in particular, notice of the presence of a tenant on the land is not notice of the landlord’s rights. These cases were rehearsed in Barnhart v Greenshields (1853) 9 Moo PCC 18, 14 ER 204 where the appellant’s land was managed for him by his father, who for a time put in tenants and received rents, and then went into occupation himself. It was held that a mortgagee who acquired his interest at a time when a tenant was on the land did so free of the appellant’s rights. Delivering the opinion of the Board, T Pemberton Leigh said (9 Moo PCC 18 at 32–33, 14 ER 204 at 209):
‘With respect to the effect of possession merely, we take the law to be, that if there be a tenant in possession of land, a purchaser is bound by all the equities which the tenant could enforce against the vendor … the principle being … that the possession of the tenant is notice that he has some interest in the land, and that a purchaser having notice of that fact, is bound, according to the ordinary rule, either to inquire what that interest is, or to give effect to it, whatever it may be.’
There was then citation of the line of cases of which Taylor v Stibbert formed part, and the opinion continued (9 Moo PCC 18 at 34, 14 ER 204 at 210):
‘In all the cases to which we have referred, it will be observed, that the possession relied on was the actual occupation of the land and that the equity sought to be enforced, was on behalf of the party so in possession.’
Then, in the course of a discussion of the facts, Mr Pemberton Leigh said (9 Moo PCC 18 at 35–36, 14 ER 204 at 210–211):
‘There is not the least pretence for saying that the Appellant was ever in the actual possession of the land … It is sufficient to say, that on any view of the case there was no possession of the land, which could in any manner affect the Respondent with notice of the Appellant’s title.’
Next, there was Hunt v Luck [1902] 1 Ch 428, [1900–3] All ER Rep 295. The contest was between the personal representatives of a Dr Hunt and the mortgagees of a group of houses let on weekly tenancies. The rents of these houses had for a substantial time been collected by an agent named Woodrow and remitted by them to Dr Hunt. A document subsequently came to light purporting to be a conveyance of the properties for value by Hunt to Gilbert, who subsequently raised a loan using a deposit of the title deeds as security. The case is not easy to follow, because the prime issue of fact at the trial was whether the conveyance was invalid, as being either a forgery or procured dishonestly by Gilbert at a time when Dr Hunt was incapable. The judge found that fraud and incapacity was not established, and one might have thought this to be the end of the case. There was, however, argument both before Farwell J and the Court of Appeal on the question whether the mortgagees had constructive notice of the alleged defects in Gilbert’s title,
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because they knew that the tenants were paying their rents to Woodrow, a stranger to the paper title. The argument for the personal representatives was to the following effect ([1901] 1 Ch 45 at 47):
‘… it is clear that a purchaser has constructive notice of the rights of the tenant: Holmes v Powell ((1856) 8 De GM & G 572, 44 ER 510) and this rule is not limited to the terre-tenant, who is in the actual occupation, but it extends also to the person who is known to receive the rents from the occupier of the land … ’
At first instance, Farwell J rejected this contention, holding that a tenant’s occupation is notice of all that tenant’s rights, but not of his lessor’s tenants or rights. This view was indorsed by Vaughan Williams LJ delivering the leading judgment in the Court of Appeal and was explained as meaning that—
‘if a purchaser or a mortgagee has notice that the vendor or mortgagor is not in possession of the property, he must make inquiries of the person in possession—of the tenant who is in possession—and find out from him what his rights are, and, if he does not choose to do that, then whatever title he acquires as purchaser or mortgagee will be subject to the title or right of the tenant in possession.’
(See [1902] 1 Ch 428 at 433, [1900–3] All ER Rep 295 at 297.)
He continued ([1902] 1 Ch 428 at 434, [1900–3] All ER Rep 295 at 298):
‘I do not think that there is, for the purpose of ascertaining the title of the vendor, any obligation on the purchaser to make inquiries of the tenant in reference to anything but protection against the rights of the tenant.’
These decisions formed the background to the addition by the 1925 Act of para (g) to the existing list of overriding interests. A person coming to the legislation without the benefit of subsequent authority might, I believe, have been justified in arriving at the following tentative conclusions. (1) The reversal of the previous law brought about by the addition of the lessor’s rights to the list of overriding interests shows that the question is no longer one of a reasonable opportunity to make inquiry, as it had been under Hunt v Luck. (2) Equally, the fact that the overriding character of the occupier’s rights is taken away only if the purchaser actually makes fruitless inquiry of the occupier, and not where he does not even try to inquire, shows that we are no longer in the realm of constructive notice. (3) At the same time, the reference to the person in receipt of rents shows (as previously suggested) that the physical presence of one person on the land pursuant to a contract with another does not give the latter’s rights an overriding character, for otherwise the reference would be unnecessary. (4) The choice of the expression ‘actual occupation’, appearing as it had done in the earlier cases, was not accidental, and this consideration, taken together with the retention of a reference to inquiry, which would be meaningless if ‘actual occupier’ embraced those whose existence it would be impractical to detect, and in respect of whom attempts at inquiry would be fruitless, supports the view that, even if constructive notice no longer applies in this field, the old law still gives a flavour to the new words of the section. (5) If the words are not given this flavour, there will be a marked, and it may be said unacceptable, contrast with the manlike solution arrived at for unregistered land in cases such as Caunce v Caunce [1969] 1 All ER 722, [1969] 1 WLR 286. (On this aspect, see the discussion by Mr Ian Leeming in ‘Engines of Fraud and Occupational Hazards’ (1971) 35 Conv NS 255 and also the brief comments in Brickdale and Stewart-Wallace The Land Registration Act 1925 (3rd edn, 1927) p 225.) (6) For want of a better synonym, the person in occupation could be identified as the person who is ‘there’ on the property, although what this entails will be dependent on the nature of the property, and the circumstances of the individual case.
We must now see how this interpretation will fit with the subsequent cases. Certainly it accords well enough with dicta of Lord Denning MR in Strand Securities Ltd v Caswell [1965] 1 All ER 820 at 825–826, [1965] Ch 958 at 979–980 and National Provincial Bank
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Ltd v Hastings Car Mart Ltd [1964] 1 All ER 688 at 697, [1964] Ch 665 at 689 and of Lord Wilberforce in the Hastings Car Mart case on appeal: see National Provincial Bank Ltd v Ainsworth [1965] 2 All ER 472 at 501, 503, [1965] AC 1175 at 1259, 1261 per Lord Wilberforce, where s 70(1)(g) is treated as applying to registered land the same rule as already applied to unregistered land. But these dicta cannot be pressed too far, since the present question was not in issue.
So also with the decision in the Strand Securities case, which was that where a relative was permitted to live in the flat of an unregistered sub-lessor rent free, the latter was not in actual occupation for the purposes of s 70(1)(g).
There are, however, dicta in Strand Securities on which the wife relies. Both Lord Denning MR and Russell LJ dealt with the hypothetical case of a person who has installed a paid caretaker in the premises, and each expressed the view that the employer, as well as the caretaker, would be in actual occupation, the reason being that ‘his agent would have actual occupation on his behalf’ (see [1965] 1 All ER 820 at 827, [1965] Ch 958 at 981) and that the caretaker ‘by her occupation for which she [was] employed, [was] the representative of the [employer], and her occupation may therefore be regarded as his’ (see [1965] 1 All ER 820 at 829, [1965] Ch 958 at 984). These observations are not technically binding on this court, but I unhesitatingly adopt them as deciding that someone may be in occupation through another although I would add this gloss, that the other must be someone who is specifically employed for a purpose which entails their being in occupation.
At length, we arrive at the present case. The judge had held that the wife was not in actual occupation. We must ask whether he has directed himself correctly in law, and whether on the evidence his conclusion was sustainable.
As to the law, the judge advanced two propositions: first, that ‘Residential property in a semi-derelict condition is capable of being actually occupied, but the nature of the required occupation must be different if the property is uninhabitable’ second, that ‘before there can be actual occupation by an agent on behalf of the principal, there must be, in the relationship of principal and agent, a requirement that the agent shall occupy the premises on behalf of the principal’. To my mind, these propositions are unexceptionable. I would add my own impressions, previously described, about the flavour of the words in the statute.
As to the facts, I will begin with the position of the builders, in deference to the arguments addressed to us, which took the question of occupation by the builders as the starting point for analysing the occupation of the wife. While I understand this, I do not agree, since it seems to me that the activities of persons on the property may form an element
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in occupation by the persons who have caused them to be there, irrespective of whether they themselves are to be regarded as being occupiers themselves. Furthermore, I do not really appreciate the utility of asking whether the builders were in actual occupation, since these words are directed to the position of persons having a potentially overriding interest, which of course the builders in the present case did not possess. Assuming, however, that the inquiry is capable of being fruitful, I would for my part hold that the builders were not in actual occupation of Vincent Farmhouse. Certainly, they were present there on a regular basis. But were they there in a way which made their own status relevant when assessing the rights of a bona fide purchaser for value? I would think not. Nobody who arrived on the site to make inquiries about possible interests adverse to those of the person with paper title, and this is surely what s 70(1)(g) is really about, would imagine that masons and plasterers working on the fabric, with vans parked outside bearing names which were obviously those of tradesmen rather than people who might have adverse claims to the property, could be in occupation of the site, in any relevant sense, rather than coming and going to work on it. This is not, of course, to say that the presence of the builders is entirely irrelevant, since this might add an element of continuity to a presence by someone else (be it the husband or the wife) which was otherwise too intermittent to amount to occupation. It is, however, only one element in the equation. At the end of the day one must ask this. Acknowledging that the test for actual occupation for a derelict building is not the same as for a habitable house, did the wife have sufficient continuity of presence through herself and the builders whom she and her husband had installed, to mean that she, in distinction from her husband, was ‘there’ on the land, in the sense which I would ascribe to s 70(1)(g)? In company with the trial judge I think not. Her presence there would seem to me to indicate no more than that she and the builders were getting on with the job of putting the farm in order with a view to her going into occupation when it was ready and that her daily presence did not, any more than that of the builders, disclose anything about the possibility of interests adverse to the holder of the paper title. Even if the statute had referred to no more than ‘occupation’, and even if the various clues to the meaning of para (g) to which I have previously referred had not been available, I would still have held that the wife was preparing the home for occupation, but was not in occupation on the relevant date and with these further considerations added, I conclude with less hesitation (although acknowledging the difficulty of the issue) that the wife did not have an overriding interest within the meaning of s 70(1).
Accordingly, in the light of the views previously expressed concerning the relationship between the equitable interest of the wife and the defeasible interest of the bank to be judged as at the date of completion, I would conclude that the interest of the bank should prevail, and would accordingly dismiss the appeal.
PURCHAS LJ. The history and statutory background to this appeal have already been detailed in the judgment of Nicholls LJ and, save for the purposes of ease of reference, need not be repeated here. The appeal raises a number of points of importance in the law relating to registered land, one at least of which has never been directly decided notwithstanding the passage of more than 60 years since the passing of the Land Registration Act 1925. In order, however, to consider these issues in their proper context, it is important to bear in mind the not entirely usual history as found by the judge.
The penultimate matrimonial home was an extension to a bungalow owned by the wife’s parents at 61 Salisbury Avenue, Broadstairs. The extension was paid for by the husband’s family, who were Swiss. Under an agreement between the husband and wife and the latter’s parents, on notice being given after 31 December 1980 and on the parties giving up possession of the extension, both the husband and the wife were entitled to a sum of £3,850 to be paid by the wife’s parents. It was the common intention of the parties that the wife should have an interest in the extension.
In 1981 the husband and wife were looking for a permanent home away from her parents. At that stage it was the intention of both parties that any property which was acquired ‘should be a permanent home for the family as a whole’ but that the question whether it should formally be held in their joint names or in the sole name of the husband was not specifically discussed. The wife was aware that the husband’s grandmother had died in Switzerland leaving a substantial sum of money in a trust of which the husband’s uncle and an accountant and legal adviser were trustees. The wife found what was to be the final matrimonial home before the breakdown of the marriage, Vincent Farmhouse, Manston, Kent (which I shall refer to as ‘the property’). The asking price was £57,000. The house was in a derelict condition. It was uninhabitable and had not been lived in for some seven or eight years. Both parties wished to purchase the property. They made an offer in the amount of the asking price before the end of July 1982. This was accepted. The wife paid a preliminary deposit of £100, the money for which was provided by the husband.
It was recognised by both the husband and the wife that in order to obtain the consent of the trustees for the purchase money from Switzerland to be made available to the husband, the house had to be transferred into his name alone. A large amount of work was necessary to the house before it would be fit for occupation. The amount transferred was, therefore, well in excess of the asking price, namely £70,200 of which the judge
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traced an amount of £59,200 paid into the account in the husband’s name with the plaintiff bank at Broadstairs on 2 November 1982. The judge found as a fact, which was not challenged on appeal:
‘… she [the wife] genuinely believed that the first defendant would hold the property in his name as something which was a joint venture, to be shared between them as the family home and the reason for it being held by the first defendant alone was to ensure that the first defendant’s uncle would sanction the export of trust funds from Switzerland to England for the purchase.’
In my judgment there was, therefore, an unassailable finding that a common intention existed between the parties before the purchase of the house that the wife should have a beneficial interest in whatever property might eventually become the matrimonial home.
Various dates are of significance. (a) The preliminary deposit of £100 was paid to the vendor’s agents on 3 August 1982. (b) The surveyor’s report dated 14 September 1982 showed that the anticipated cost of works was £25,000. This was sent by the wife to the husband for his approval. (c) On 26 September there was an estimate for the works to the property from a builder, Mr Griffin, in the sum of £13,000. (d) On 4 November Mr Griffin entered the site and started work on 7 November. (e) Contracts were exchanged on 23 November 1982. (f) The vendors had given permission for Mr Griffin and the husband and wife to enter on the site and start work prior to the exchange of contracts. (g During August and September the wife resided at the matrimonial home in the extension to her parents’ bungalow. She began negotiations with the vendors for changes in the boundaries of the property so as to provide for livery stables and paddocks. These negotiations were not successful. (h) Between November and completion on 17 December 1982 the wife engaged on a number of activities which contributed to the joint venture of establishing the new home. These are listed in eight paragraphs in the judgment in respect of which the judge made this finding:
‘Of these works some would be carried out by a person with no particular skill, in the ordinary course of moving house, namely items (6), (7) and (8). To items (1) to (5) the second defendant brought skills which were particular to her, namely her skill and enthusiasm for painting and decorating. The defendants no doubt never paused to think of the special contribution made by the second defendant and to distinguish it in this fashion. They regarded the renovation of a semi-derelict property as a challenge and hoped to achieve it by Christmas 1982, although in the end that objective had to be postponed.’
(j) On 14 December 1982 the husband, unbeknown to the wife, approached the bank manager, Mr Darling, for a loan of £15,000 ‘for works of renovation to the house’. This was granted and in support the husband executed a charge in favour of the bank on the same date. The manager, Mr Darling, had inquired of the husband whether the house was to be in his sole name and was assured that it was, and received confirmation from the husband’s solicitors to that effect. (k) The charge was dated 17 December 1982. Under an arrangement made between the bank and the husband’s solicitors the registration of the charge was left to the latter who did not in fact achieve this until 7 February 1983.
The questions which arise on this appeal, therefore, are: (a) what interest if any had the wife acquired in the property (i) by 17 December 1982 and (ii) by 7 February 1983? (b) did that interest receive protection under s 70(1)(g) of the 1925 Act? (c) what was the effective date of the interest created by the bank’s charge on the property for the purposes of s 70(1)(g) of the Act?
The effective date of the land charge for the purposes of s 70(1)(g)
Counsel for the wife mounted an impressive argument to the effect that a charge was not
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effective for the purposes of the 1925 Act which included s 70(1)(g) until it was registered. He submitted that in the case of registered land the basic concept was ‘the paramountcy’ of registration and pointed especially to the fact that the title in the registered land remained with the vendor until the date of registration. The transfer of title, therefore, was not complete until that date although the vendor’s title prior to that date was subject to an equitable interest in the purchaser just as the purchaser acquires an equitable interest at and from the exchange of contracts and if the circumstances justify it even prior to an exchange of contracts such as may have occurred in this case by the payment of an initial deposit on 3 August.
Persuasive as counsel for the wife’s argument based on paramountcy of registration is as a general approach to the 1925 Act, it cannot, in my judgment, be used as a determinative canon of construction in every case if other circumstances in the context and purpose of the provision give a contrary indication. For the purposes of this appeal it is necessary only to consider the provisions of s 70(1) of the 1925 Act. This section provides a catalogue of ‘overriding interests’. These do not require to be registered but yet if they are in existence at the material time any interest acquired by the purchaser or mortgagee is subject to them. While it would be constructively tidy to treat the various interests listed in the sub-paras (a) to (h) of s 70 in the same way, there are obviously inconsistent and unreliable results if this is done. As Nicholls LJ has pointed out in his judgment, although for any of the categories of interest listed the date of registration would be the obvious and logical date from which the overriding interest should be effective to defeat the interest to be registered (e g a local land charge under para (i)), this does not apply to para (g). To allow an overriding interest to arise after the completion of a sale or the creation of a legal charge on registered land which does not itself have to be registered and of which the purchaser has no notice would be a conveyancing absurdity.
One is, therefore, driven to the conclusion that, for the various purposes disclosed in the subsections of s 70, the effective date on which to consider the existence of the overriding interest may differ. The historical background of s 70(1)(g) was to prevent the case of persons living in the property transferred or charged whose presence was obvious and should put an intending purchaser or chargee on notice from having their interests prejudiced by the registration of a subsequent charge or transfer. If the effective date at which the presence of the overriding interest for the purposes of s 70(1)(g) is taken as the date of registration, then the underlying purpose of protecting the interest of an occupant in being at the time when the purchaser is making his decision to buy is frustrated. I agree, with respect, with Nicholls LJ that, unless for the purposes solely of s 70(1)(g) the effective date is taken to be the date at which the interest to be registered is created, then the subsection has little value or effect. I agree also that counsel for the wife’s argument to mitigate this effect on the basis that it is easy to make an expeditious registration of the charge after its completion is no real answer to the difficulty.
The wife’s interest
The effective date at which the wife’s interest, if any, is to be considered is, therefore, 17 December 1982. From the facts found by the judge, to which I have already referred in this judgment, there was clearly a common intention, whatever might be the position as regards the name in which the property was bought, that it should become the family home and the creation both materially and otherwise of the joint efforts of the husband and wife. This intention is, in my judgment, a sufficient basis on which the law should hold that the first element necessary to create an equitable interest is satisfied: see Grant v Edwards [1986] 2 All ER 426 at 431, [1986] Ch 638 at 646. In the case of husband and wife, before equity will intervene to protect the wife, her contribution must exceed that normally expected of a wife carrying out her normal matrimonial role and to this distinction the trial judge clearly directed his attention and found that that additional element was established. As Nicholls LJ has pointed out, it is somewhat unfortunate that on his approach it was not necessary to analyse the material contribution made by the
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wife in relation to the critical date of 17 December 1982. However, I agree with Nicholls LJ that there is ample evidence of the wife acting to her detriment in the pursuance of the common intention to build from the semi-derelict house their family home by way of reconstruction, design and decoration and that substantial proportions of this effort took place prior to 17 December 1982. There was, therefore, an equitable interest enjoyed by the wife prior to the completion of the purchase. If the question is asked, ‘An equitable interest in what?' the answer lies in the concept that her equitable interest rests in the equitable interest enjoyed by the husband prior to completion.
Was the wife in ‘actual occupation’?
The application of the words ‘in actual occupation’ in s 70(1)(g) is the aspect of this appeal that has given me the most concern. The provisions of the section clearly were intended to import into the law relating to registered land the equitable concept of constructive notice. Thus, a purchaser or a chargee acquiring the title to or an interest in the land where the vendor was not in actual possession in order to protect his interest had to make appropriate inquiries if he found someone else in occupation of the property. Thus, a tenant in occupation was protected under the old rules as being an owner of an overriding interest and his presence put the purchaser on inquiry: see Woolwich Equitable Building Society v Marshall [1951] 2 All ER 769 at 773, [1952] Ch 1 at 9 and the passage cited in the judgment of Nicholls LJ from Vaughan Williams LJ in Hunt v Luck [1902] 1 Ch 428 at 433, [1900–3] All ER 295 at 297:
‘It means that, if a purchaser or a mortgagee has notice that the vendor or mortgagor is not in possession of the property, he must make inquiries of the person in possession—of the tenant who is in possession—and find out from him what his rights are, and, if he does not choose to do that, then whatever title he acquires as purchaser or mortgagee will be subject to the title or right of the tenant in possession.’
and per Lord Wilberforce in National Provincial Bank Ltd v Ainsworth [1965] 2 All ER 472 at 502, [1965] AC 1175 at 1260–1261, again as cited by Nicholls LJ:
‘… all that s. 70(1)(g) of the Land Registration Act, 1925, does is to adapt the system of registration, and the modified form of enquiry which is appropriate to that system, to the same kind of right as under the general law would affect a purchaser finding a person in occupation of his land.’
In more recent decisions the position of a purchaser or mortgagee where the vendor or mortgagor is not in possession has been made more vulnerable by the approach of the House of Lords to the position of a person buying from husband who is known to have a wife living who may well have acquired an interest in the property involved: see Williams & Glyn’s Bank Ltd v Boland [1980] 2 All ER 408 at 415–416, [1981] AC 487 at 508–509 per Lord Wilberforce:
‘I would only add, in conclusion, on the appeal as it concerns the wives a brief observation on the conveyancing consequences of dismissing the appeal. These were alarming to Templeman J, and I can agree with him to the extent that whereas the object of a land registration system is to reduce the risks to purchasers from anything not on the register, to extend (if it be an extension) the area of risk so as to include possible interests of spouses, and indeed, in theory, of other members of the family or even outside it, may add to the burdens of purchasers, and involve them in inquiries which in some cases may be troublesome. But conceded, as it must be, that the Act, following established practice, gives protection to occupation, the extension of the risk area follows necessarily from the extension, beyond the paterfamilias, of rights of ownership, itself following from the diffusion of property and earning capacity. What is involved is a departure from an easy-going practice of
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dispensing with inquiries as to occupation beyond that of the vendor and accepting the risks of doing so. To substitute for this paractice or more careful inquiry as to the fact of occupation, and, if necessary, as to the rights of occupiers cannot, in my view of the matter, be considered as unacceptable except at the price of overlooking the widespread development of shared interests of ownership. In the light of s 70 of the Act, I cannot believe that Parliament intended this, though it may be true that in 1925 it did not foresee the full extent of this development.’
The evidence given by Mr Darling, the bank manager, on this aspect of the case as appears from the note of the judge is:
‘He had purchase money, needed help for £25,000 to be paid on renovations. He asked for £15,000 I took view I did not know all that much about Mr Rossett. I asked, is property being purchased in your sole name? Unusual for property not to be in joint names. He said it was to be in his sole name—reason Mrs Rossett and the children were away living with her parents. I did not know then when property would be purchased—did not know if contracts had been exchanged. We still had funds for purchase in bank. Contracts might have been exchanged. At time of purchase I believe funds for purchases were coming from Switzerland. It did not seem possible Mrs Rossett had an interest. After signing of charge I telephoned Rogers he confirmed Mr Rossett purchasing in his own name.’
From the notes of evidence three features appear. The reason given by the husband for having the property in his own name was not entirely frank and certainly was not a basis on which it could be said that the wife was not to have an interest in the property or be concerned with the renovations. Second, the bank manager was content merely to inquire of the husband in whose name the property was to be registered and to confirm this by a telephone call to the husband’s solicitors. And, third, although he understood that the money was really meant for the renovations, he assumed that they had not already been put in hand and made no inquiry as to what part the husband and the wife were respectively to play in this matter.
In order for the wife’s interest in the property to qualify as an overriding interest under s 70(1)(g) two things must be established: (a) was she in actual occupation? and (b) would appropriate inquiries made by the bank have elicited the fact of her interest? I have found neither of these questions easy to answer. The fact that the bank chose merely to rely on the word of the husband to the effect that the property was to be transferred solely into his name is not, in my judgment, a sufficient answer to the requirements of s 70(1)(g) applying by analysis the extract from the speech of Lord Wilberforce in Boland’s case [1980] 2 All ER 408 at 415–416, [1981] AC 487 at 508–509 already cited in this judgment. If a representative of the bank had visited the site in accordance with the hypothetical approach both under the old conveyancing law as to constructive notice and under the provisions under s 70(1)(g) what would he have seen to put him on inquiry? In the case of an inhabitable house which clearly is not occupied by a tenant licensee or anyone else the answer to the problem is simple but does not assist in the particular circumstances of this case. The question must be posed against the facts established in this case, namely a semi-derelict and clearly uninhabitable house on which daily work of an extensive nature is being carried out as anticipated in the discussions between the husband and the bank manager. During normal days he would have found the wife present in person on the scene presumably busily engaged on the work being carried out and also he would have found Mr Griffin’s workmen professionally engaged on the renovations and evidence that at least one of those workmen slept there frequently at night during the working week. Neither the husband nor the wife could be said to be physically living as a tenant or licensee in the property in circumstances which would in the traditional conveyancing concept put a purchaser on notice that there might be a tenant or other person with an interest in the property, but is this an answer to the
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problem? In order to constitute ‘occupation’ there must be occupation in person or by someone occupying as an agent for the purposes of the proprietor and not merely as his bare licensee. This position is clear from the judgments in Strand Securities Ltd v Caswell [1965] 1 All ER 820 at 826–827, 829, [1965] Ch 958 at 981, 984. Thus occupation may be enjoyed through a resident caretaker put in the property by a tenant to look after it for him but occupation by a friend for her own purposes with the leave and licence of the tenant is no ‘actual occupation’.
Applying the principles in the Strand Securities case I see no reason why the physical presence of the builders in connection with the uninhabitable, semi-derelict state of the house should not amount to occupation on behalf of both the husband and the wife, for they were the joint paymasters and employers of the builder to whom he looked jointly for payment. In addition, the occupation by the physical presence of the wife during such times in view of the state of the premises it was reasonable for her visibly to be seen to be concerned in the renovation of those premises would qualify for ‘actual occupation’ within s 70(1)(g). It is a fine point of distinction when set against the concept of an inquiring and prudent purchaser seeing these activities going on and in particular noticing the presence of the wife to decide whether there was evidence of occupation both by the husband and the wife on the premises. An inquiry of the wife when found on the premises would most likely disclose her interest in the creation of the family home. On the findings of the judge, I think that there was evidence of actual occupation by the wife.
It is now necessary to turn to the second aspect of the problem, namely what answer would be given to reasonable inquiries made by the observant and prudent bank about to create a charge? This problem has been considered in detail in the judgment of Nicholls LJ and with respect I agree with his approach. Bearing in mind the warning of Lord Wilberforce in Williams & Glyn’s Bank Ltd v Boland [1980] 2 All ER 408, [1981] AC 487 of which Mr Darling in fact admitted knowledge in his cross-examination and knowing that he was dealing with a husband and wife notwithstanding the information that the property was to be held solely in the husband’s name he ought to have been aware of possible interests on the part of the wife. His remedy, easily obtained, was to ensure that the wife was joined with the husband in the charge. On the facts of this case the wife not only was ignorant of the husband’s activities in relation to the charge but was entitled to assume that a charge would not be taken out on the property since, so far as she knew, all the necessary money was being made available from Switzerland. It was after all for this purpose that she consented to the house not being in joint names. Therefore, reasonable inquiries from the wife would have immediately elicited that she knew nothing about the proposed charge and that the house and its renovations were a joint enterprise. Even inquiries on the more limited front of those physically on the site if it happened to be on one of the occasions when the wife was not there would have elicited that it was a joint effort by the husband and the wife and that the builder was carrying out works on their behalf.
As I have already commented, Mr Darling, the bank manager, might well say that he was put off by the somewhat less than frank remarks made by the husband. Such a comment must merit a degree of sympathy. Unfortunately, however, less than honest husbands when relating to financial matters involved with the family are not unknown and ought to be within the general experience of prudent men of finance. A somewhat analogous situation arose in Kemmis v Kemmis (Welland intervening) (1988) Times, 22 February and other cases which have been concerned with setting dispositions aside under s 37 of the Matrimonial Causes Act 1973. However, this is not a true analogy for the purposes of the present case since misleading or deceptive husbands will exist in financial matters quite apart from the breakdown of a marriage and should, therefore, be within the contemplation in any event of bank managers and others in a like position. The wife on her side equally merits sympathy since she was entitled to act in good faith on the representations of the husband and to assume that he would do nothing behind
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her back to prejudice the interest which she was to acquire in the property under the common agreement.
Perhaps the most satisfactory method of resolving the conflict between the equitable interests of two innocent people is to consider the question of timing. On the facts found in this case the wife was in the course of acquiring an equitable interest albeit indirectly in the property by virtue of conduct which in equity it would be wrong to ignore. The bank’s interest really materialised at 17 December at a time when the wife must be taken to have acquired an interest, albeit a minor interest, in the property. As Nicholls LJ has pointed out, unfortunately owing to the absence of findings by the judge the extent of the interest is not ascertainable on the evidence at the moment. This, however, should not prejudice the wife’s interest as a question of priority, qua the bank’s interest. This interest is an undivided interest in the property in which the wife is in possession and would, in my judgment, be a ground for preventing a possession order being made against her in favour of the bank.
Competing equitable interests
This brings me to the submissions made on behalf of the bank in relation to a trinity of cases, namely Re Connolly Bros Ltd (No 2), Wood v The company [1912] 2 Ch 25, Security Trust Co v Royal Bank of Canada [1976] 1 All ER 381, [1976] AC 503 and Church of England Building Society v Piskor [1954] 2 All ER 85, [1954] Ch 553. These three cases have been fully analysed in the judgment of Nicholls LJ, an analysis which I gratefully adopt. In the event, as a result of that analysis I agree with Nicholls LJ that Connolly’s case and the Security Trust case are distinguishable from the facts of this case. The bank’s participation in creating the charge was to secure an overdraft, the money from which was essentially to be used for the purposes of renovation and not for the acquisition of the property. In fact, an analysis of the bank statement involved shows that at the moment of paying the moneys for completion the account went into overdraft by a little over £2,000 and no more. If any interest was thereby created as a condition precedent to the transfer of the property to the husband it can only be to the extent of this limited amount. I do not, however, think that the bank’s interest in securing the overdraft can in any way be said to be equivalent to the interest obtained by Mrs O’Reilly in Connolly’s case or the debenture holder’s charge in the Security Trust case. In my judgment, the effect of the completion of the purchase of the property was to transfer an entire interest in the property subject to registration. In these circumstances this court is bound by the decision in Piskor’s case and to that extent that decision supports the analysis which I have ventured to make in agreeing with the views expressed by Nicholls LJ. For these reasons I agree that the wife’s appeal should be allowed and the order for possession set aside.
Appeal allowed without prejudice to rights of the bank against the husband. Leave to appeal to House of Lords refused. 20 October. The Appeal Committee of the House of Lords gave leave to appeal on terms as to costs.
Solicitors: Gregory Rowcliffe & Co agents for Daniel & Edwards, Ramsgate (for the wife); Collyer-Bristow agents for Walmsley & Barnes, Margate (for the bank).
Raina Levy Barrister.
Interlego AG v Tyco Industries Inc and others
[1988] 3 All ER 949
Categories: INTELLECTUAL PROPERTY; Copyright
Court: PRIVY COUNCIL
Lord(s): LORD KEITH OF KINKEL, LORD TEMPLEMAN, LORD ACKNER, LORD OLIVER OF AYLMERTON AND LORD JAUNCEY OF TULLICHETTLE
Hearing Date(s): 15, 16, 17, 18, 22, 23, 24, 25, 29 FEBRUARY, 1, 2, 3 MARCH, 5 MAY 1988
Copyright – Infringement – Design excluded from copyright – Design ‘capable of registration’ at time work was made – Design having eye appeal – Design purely functional – Whether functional design having eye appeal capable of registration – Registered Designs Act 1949, s 1(3) – Copyright Act 1956, Sch 7, para 8(2).
Copyright – Infringement – Design excluded from copyright – Design ‘capable of registration’ at time work was made – New or original design – Whether design lacking novelty capable of registration – Registered Designs Act 1949, s 1(2) – Copyright Act 1956, Sch 7, para 8(2).
Copyright – Infringement – Artistic work – Copy of earlier drawing – Copy substantially reproducing salient features of earlier drawing – Process of reproduction requiring considerable labour and skill – Copy containing new design information – Whether skill involved in reproduction converting copy into original artistic work – Copyright Act 1956, s 3(2).
The appellant company owned the intellectual property rights for a well-known children’s model-building system consisting of interlocking plastic bricks. The appellant had purchased those rights from the estate of the originator of the system and its associate companies manufactured and marketed the system throughout the world. In 1983 the respondents, by a process known as reverse engineering, copied elements of the appellant’s system with the aim of manufacturing and marketing a compatible but competing system. The respondents’ reverse engineering indirectly copied the drawings from which the appellant’s bricks were made. The respondents notified the appellant of their intention to manufacture their competing system in Hong Kong through a subsidiary and the appellant brought an action in Hong Kong seeking an injunction restraining the respondents from infringing copyright in its design drawings whether made before (the pre-1973 drawings) or after (the post-1972 drawings) 1 January 1973, the date from which the Copyright Act 1956 was extended to Hong Kong. Under the 1956 Act, as applied to Hong Kong, any copyright work made before 1 January 1973 was subject to the transitional provisions of para 8(2)a of Sch 7 to the 1956 Act, which provided that copyright could not subsist in an artistic work which ‘at the time when the work was made, constituted a design capable of registration under the Registered Designs Act 1949’. By s 1(2)b of the 1949 Act a design could not be registered unless it was ‘new and original’ and by s 1(3)c nothing qualified as a design unless it had ‘features … which appeal to and are judged solely by the eye’ and, furthermore, ‘features of shape or configuration which are dictated solely by the function which the article … has to perform’ were expressly excluded. At the trial of the action in Hong Kong the judge upheld the appellant’s claim for infringement of copyright in their design drawings for all but one item and granted them an injunction. The Court of Appeal of Hong Kong reversed his decision so far as it related to the appellant’s pre-1973 drawings, on the ground that they were designs ‘capable of registration’ under the 1949 Act and were therefore excluded from copyright under para 8(2) of Sch 7. The Court of Appeal upheld his decision in relation to the post-1972 drawings, on the ground that they were original artistic works which qualified for copyright under s 3(2)d the 1956 Act. The appellant
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appealed to the Privy Council, contending that the pre-1973 drawings were not capable of registration under the 1949 Act because (i) part of the articles to which the designs related were purely functional and (ii) the designs were not new and original since they reproduced earlier drawings made by the originator of the system. The respondent cross-appealed, contending that since the post-1972 drawings were merely copies of previous drawings they could not be original artistic works.
Held – (1) An article qualified as a design within the definition in s 1(3) of the 1949 Act if its features or configurations, taken as a whole, had ‘eye-appeal’ even though there were some features of it which were dictated purely by functional requirements. Since the shape of the appellant’s brick clearly had not only eye-appeal but also significant features both of outline and proportion which were not dictated by any mechanical function which the article had to perform as part of a construction set, each of the pre-1973 drawings constituted a registrable ‘design’ within s 1(3) of the 1949 Act. Furthermore, even though the pre-1973 designs were not ‘new or original’ and, by virtue of s 1(2) of the 1949 Act could not for that reason have been registered when made, they were ‘capable of registration’ under para 8(2) of Sch 7 to the 1956 Act since they had the essential characteristics which qualified them as ‘designs’ under the 1949 Act. Since, therefore, they were ‘capable of registration’, it followed that by virtue of para 8(2) copyright no longer subsisted in them and the appellant’s appeal in respect of them would be dismissed (see p 956 e to h, p 959 f, p 960 b c f g, p 961 d e, p 964 c j to p 965 a g h and p 976 j to p 977 a, post); Amp Inc v Utilux Pty Ltd [1972] RPC 103 applied; Usher v Barlow [1952] 1 All ER 205 explained; dictum of Eve J in Stephenson Blake & Co v Grant Legros & Co Ltd (1916) 33 RPC 406 at 415 doubted.
(2) The monopoly conferred by copyright in designs or drawings could not be enjoyed beyond the permitted period by claiming new periods of copyright protection for every minor alteration to such a design or drawing. Since the post-1972 drawings were merely copies, with modifications, of the pre-1973 drawings and substantially reproduced their salient features with visually insignificant alterations, the fact that much labour and skill might have gone into the process of reproducing the copies or that new design information on the drawings was technically significant was not sufficient to confer originality on them as artistic works. Accordingly, the drawings were not entitled to copyright under s 3(2) of the 1956 Act as original artistic works and the respondents’ cross-appeal in respect of them would be allowed. However, in regard to two items which the respondents had reproduced with modifications the cross-appeal would be dismissed because, although the respondents’ versions displayed obvious differences on casual inspection, they would appear to the non-expert to be reproductions of the appellant’s drawings and therefore the respondents could not rely on the defence under s 9(8)e of the 1956 Act in respect of those two items (see p 966 d e h to p 967 b, p 968 b e f, p 971 j, p 972 a to c, p 972 j, p 974 b c and p 975 j to p 976 a to c f h to p 977 a, post); dicta of Peterson J in University of London Press Ltd v University Tutorial Press Ltd [1916] 2 Ch 601 at 608–609, of Lord Atkinson in Macmillan & Co Ltd v Cooper (1923) 40 TLR 186 at 188–190, of Lord Reid and Lord Hodgson in Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 All ER 465 at 469, 475, 477 and of Whitford J in LB (Plastics) Ltd v Swish Products Ltd [1979] RPC 551 at 567–569 considered.
Per curiam. (1) The mere coincidence of eye-appeal with functional efficiency will not confer the right to protection under s 1(3) of the 1949 Act if every feature of the design is dictated by the function which the article is to perform; however, the incorporation into the shape of some or even a majority of features dictated only by functional requirements will not deprive the article of protection under s 1(3) if there are also some features of the shape which are not attributable solely to function (see p 957 h and p 958 h j to p 959 a, post); dictum of Lord Reid in Amp Inc v Utilux Pty Ltd [1972] RPC 103 at 110 explained.
(2) Even a relatively small alteration or addition quantitatively may, if material,
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suffice to convert that which is substantially copied from an earlier work into an original work. Whether it does so is a question of degree depending on the quality rather than the quantity of the addition (see p 976 b, post).
Notes
For registrable designs, see 48 Halsbury’s Laws (4th edn) paras 371–387, and for cases on the subject, see 47(2) Digest (Reissue) 264–285, 1775–1893.
For copyright in artistic works and infringement of copyright by copying and reproduction, see 9 Halsbury’s Laws (4th edn) paras 842, 911–912, and for cases on the subject, see 13 Digest (Reissue) 67–71, 125–127, 643–660, 1031–1054.
For the Registered Designs Act 1949, s 1, see 33 Halsbury’s Statutes (4th edn) 75.
For the Copyright Act 1956, ss 3, 9, Sch 7, para 8, see 11 ibid 243, 257, 325.
As from a day or days to be appointed the Copyright, Designs and Patents Act 1988 restates the law of copyright with amendments, confers a design right in original designs, amends the Registered Designs Act 1949 by, inter alia, substituting a new s 1, repeals the Copyright Act 1956 and makes other connected provision.
Cases referred to in judgment
Allibert SA v O’Connor [1981] FSR 613, Ir HC.
Amp Inc v Utilux Pty Ltd [1972] RPC 103, HL; rvsg [1970] RPC 397, CA.
Bayliner Marine Corp v Doral Boats Ltd [1987] FSR 497, Can Fed CA.
Black v Murray & Son (1870) 9 M 341, Ct of Sess.
British Leyland Motor Corp v Armstrong Patents Co Ltd [1984] FSR 591, CA; rvsd [1986] 1 All ER 850, [1986] 1 AC 577, [1986] 2 WLR 400, HL.
British Northrop Ltd v Texteam Blackburn Ltd [1974] RPC 57.
Catnic Components Ltd v Hill & Smith Ltd [1982] RPC 183, CA and HL.
Coca-Cola Co’s Applications, Re [1986] 2 All ER 274, [1986] 1 WLR 695, HL.
Cramp (G A) & Sons Ltd v F Smythson Ltd [1944] 2 All ER 92, [1944] AC 329, HL.
Emerson v Davies (1845) 3 Story 768, US 1st Cir.
Interlego AG v Alex Folley (Vic) Pty Ltd [1987] FSR 283.
Kestos Ltd v Kempak Ltd (1935) 53 RPC 139.
King Features Syndicate Inc v O & M Kleemann Ltd [1941] 2 All ER 403, [1941] AC 417, HL.
Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 All ER 465, [1964] 1 WLR 273, HL.
LB Plastics Ltd v Swish Products Ltd [1979] RPC 551, Ch D, CA and HL.
Macmillan & Co Ltd v Cooper (1923) 40 TLR 186, PC.
Pytram Ltd v Models (Leicester) Ltd [1930] 1 Ch 639.
Rose Plastics GmbH v William Beckett & Co (Plastics) Ltd (2 July 1987, unreported), Ch D.
Stenor Ltd v Whitesides (Clitheroe) Ltd [1947] 2 All ER 241, [1948] AC 107, HL; affg [1946] 1 All ER 176, CA.
Stephenson Blake & Co v Grant Legros & Co Ltd (1916) 33 RPC 406; on appeal (1917) 34 RPC 192, CA.
Tecalemit Ltd v Ewarts Ltd (No 2) (1927) 44 RPC 503.
Temple Instruments Ltd v Hollis Heels Ltd [1973] RPC 15.
University of London Press Ltd v University Tutorial Press Ltd [1916] 2 Ch 601.
Usher v Barlow [1952] 1 All ER 205, [1952] Ch 255, CA; affg (1951) 69 RPC 27.
Appeal
The plaintiff, Interlego AG (Lego), a Swiss holding company, appealed by leave of the Court of Appeal of Hong Kong granted on 6 May 1987 against the decision of that court (Huggins V-P, Fuad and Clough JJA) ([1987] FSR 409) on 26 March 1987 and final order dated 6 May 1987 allowing in part an appeal by the respondents, the first and second defendants Tyco Industries Inc and Tyco (Hong Kong) Ltd (referred to together as ‘Tyco’), against the judgment of Jones J in the High Court of Hong Kong given on 20 March 1986 and amended final order dated 4 July 1986 whereby he granted Lego an injunction
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restraining Tyco from infringing their copyright in the design drawings of various components of their toy construction sets. The Court of Appeal reversed the judge’s decision so far as it related to Lego’s pre-1973 drawings. Tyco cross-appealed. The third and fourth defendants, Refined Industry Co Ltd and Denifer Technology Ltd, who were mould makers and manufacturers under the direction of Tyco, took no part in the action but agreed to be bound by the outcome. The facts are set out in the judgment of the Board.
William Aldous QC, Anthony Rogers QC and Andrew Liao (both of the Hong Kong Bar) for Lego.
Robin Jacob QC and Peter Clayton (of the Hong Kong Bar) for Tyco.
5 May 1988. The following judgment was delivered.
LORD OLIVER OF AYLMERTON. The apellant in this appeal is one of a group of companies engaged in the manufacture and sale of what must be one of the most universally known and used children’s toys in this country. ‘Lego’ is a system of model-building consisting in the main of plastic brick-shape blocks (although there are other shapes) so designed that they are capable of being joined together so as to form a stable structure but one which is capable of being disassembled without damage to the constituent elements. This is accomplished by providing on the upper surface of each block one or more cylindrical studs or knobs which are so spaced and designed as to fit tightly into the base of another similar block, such base being hollow and furnished with a skirt and tubes positioned so as to bear on the studs and hold them in position. The system was originally designed by a Mr Hilary Page, who marketed it under the trade name ‘Kiddicraft’. It was the subject matter of United Kingdom patents which expired in 1954 and 1959 respectively.
The appellant is a Swiss company holding the intellectual property rights of the group which was originally founded by a Mr Christiansen and has its headquarters in Denmark. It will be convenient to refer to the appellant and the group to which it belongs as ‘Lego’. The Kiddicraft design was not protected by patent in Denmark and it is not in dispute that the original Lego bricks were, for practical purposes, a precise copy of the Page design. No point arises on this. Prior to these proceedings Lego purchased from Mr Page’s executors any copyright still subsisting in the Page designs. The Lego bricks were attractively presented and advertised and were marketed with considerable success. The basic design, with minor improvements, was the original Page design, which consisted simply of the studs fitting into the hollow skirt of the upper brick. That is conveniently referred to as ‘the first generation’ brick. Modifications were made, producing a second generation brick, but these are irrelevant for present purposes. In 1958, however, Lego devised an improved design, the ‘third generation’ brick, the salient feature of which was that there were inserted within the skirt forming the base of the brick three hollow tubes so positioned as to bear on the upright side of the studs of the brick below and thus to improve ‘clutch-power’. The elements concerned are conveniently referred to by reference to the number and arrangements of the studs. Lego protected the design both by patent and by registering a design under the Registered Designs Act 1949, designs being registered for the 2 x 4, 2 x 2, 1 x 2 and 1 x 4 bricks. The patent and the design registration both expired in 1975.
In addition to the ordinary range of Lego bricks, Lego also devised a system of model-building designed for smaller children and marketed under the name ‘Duplo’. This consisted broadly of a large-scale Lego, the block being substantially larger than Lego bricks so that they could be easily handled by smaller children. They operated in the same way, the blocks being held together by studs on the lower block bearing on the skirt of the upper block. They were so designed and proportioned that they could also be used in conjunction with blocks from the Lego range. Duplo was patented in Denmark in 1967 and was subsequently patented in the United Kingdom. Its initial launch in 1969
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was not successful but it was subsequently repackaged and relaunched in 1971 and has since sold very successfully.
Although other manufacturers have attempted to launch and market competing products operating on broadly similar principles, none has achieved anything like the success of the Lego and Duplo ranges, which, for the past 30 years or more, have completely dominated the market in children’s model-building systems.
The first respondents, Tyco Industries Inc, are a United States corporation established some 50 years ago. They carry on a successful business of toy manufacturers with factories in the United States and Hong Kong. The second respondent is the Hong Kong subsidiary of the first respondent and they can conveniently be referred to together as ‘Tyco’. In 1983 Tyco resolved to break into the model-building market. They concluded, no doubt correctly, that the dominance of Lego in that market was such that no model-building system could be successfully marketed unless it was so designed as to be compatible and capable of being combined with Lego. Lego’s patents and designs in the United States had, by this time, expired by effluxion of time and Tyco were advised that there was nothing to prevent them from manufacturing and marketing model-building elements which were precise copies of the principal Lego elements. They accordingly purchased examples of these elements in the United States and in Hong Kong in 1983, and it is common ground that they copied elements of the old design which form the core of the Lego system. They also manufactured elements of their own design which were so proportioned and devised as to conform with the basic dimension of the Lego system. It should be emphasised that there was nothing underhand about this. Tyco exhibited the prototypes of their modular elements at the New York toy fair in February 1984 and informed Lego representatives of what they were proposing to do, that is to say to manufacture and sell a model-building system openly advertised as looking like Lego, working like Lego and capable of combination with Lego but sold at a competitive price. It was part of Tyco’s marketing strategy that some or all of the modular units should be manufactured in Hong Kong and an open letter dated 25 May 1984 was addressed by their attorneys to Lego setting out what they proposed to do. As a result of this Lego instituted proceedings in Hong Kong for infringement of copyright and it is from those proceedings that the present appeal arises. Lego claim that in producing, by a process of what is called ‘reverse engineering’, what are, in all essential features, replicas of Lego and Duplo construction units, Tyco have infringed Lego’s copyright in the design drawings from which the Lego and Duplo units were manufactured. It is not suggested nor could it be suggested that Tyco ever had or even saw the design drawings themselves. Their elements were made simply by measuring and reproducing the configuration of the three-dimensional Lego elements. There was originally a claim also for infringement of copyright in the moulds from which the Lego bricks were produced but that is no longer material and the appeal has been pursued only in relation to Lego’s design drawings. These divide, for relvevant purposes, into two categories, that is to say those produced before 1 January 1973 and those produced after that date. The significance of that date lies in the application to Hong Kong of the provisions of the United Kingdom Copyright Act 1956. That Act was first extended to Hong Kong by the Copyright (Hong Kong) Order 1972, SI 1972/1724, the effective commencement date for present purposes being 1 January 1973. Any work made prior to that date was subject to the transitional provisions which are contained in Sch 7 to the 1956 Act and it is the impact of those provisions on Lego’s pre-1973 drawings which raises the first question in this appeal.
In the action, which was tried before Jones J in the High Court of Hong Kong, Lego were successful in their claim for infringement of copyright in all their design drawings, save that, on their counterclaim, Tyco obtained a declaration of their entitlement to manufacture one item, a new version of the 2 x 2 x 2 roof tile. On 20 March 1986 an order was made restraining Tyco from infringing copyright in all the drawings specified in Lego’s amended pleading and granting consequential relief by way of delivery up and an inquiry as to damages. On an appeal by Tyco to the Court of Appeal of Hong Kong, that court (Huggins V-P, Faud and Clough JJA), on 26 March 1987, reversed the decision
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of the trial judge so far as it related to Lego’s pre-1973 drawings but affirmed it as to the remainder (see [1987] FSR 409), leave being given to both Lego and Tyco to appeal to Her Majesty in Council.
It will be convenient to deal with Lego’s appeal and Tyco’s cross-appeal separately since the former raises a quite distinct point and one which, if it is decided in Lego’s favour, renders the questions raised on the cross-appeal academic save for a few minor items.
Section 10 of the 1956 Act contains a code for regulating the extent and subsistence of copyright in relation to an artistic work where a design corresponding to such work is applied industrially. Paragraph 8(1) of Sch 7 to the Act, however, provides that the section is not to apply to artistic work made before the commencement of the section, that is to say in the instant case 1 January 1973. Paragraph 8(2) is in the following terms:
‘Copyright shall not subsist by virtue of this Act in any artistic work made before the commencement of section ten which, at the time when the work was made, constituted a design capable of registration under the Registered Designs Act, 1949, or under the enactments repealed by that Act, and was used, or intended to be used, as a model or pattern to be multiplied by any industrial process.’
The United Kingdom Registered Designs Act 1949 was not extended to Hong Kong in exactly the same way as the 1956 Act, but the United Kingdom Designs (Protection) Ordinance provides that, subject to certain provisions which are immaterial for present purposes, the registered holder of a design in the United Kingdom is to enjoy, in Hong Kong, the same privileges and rights as if the United Kingdom certificate of registration had been issued with an extension to Hong Kong. Thus, for practical purposes, the parallel rights conferred by the 1949 and 1956 Acts are both extended to Hong Kong. The questions raised by Lego’s appeal are, therefore, first, whether the pre-1973 drawings constituted, as the Court of Appeal held, ‘designs’ as defined by the 1949 Act and were thus excluded from the ambit of copyright by the provisions of para 8(2) and, second, whether, assuming that they constituted ‘designs’ as defined, they were ‘capable of registration’ inasmuch as, in Lego’s contention, they lacked the essential quality of novelty without which a design cannot properly be registered under the 1949 Act. As has already been observed, designs for some of the third generation Lego bricks were in fact registered under the Act. Lego encountered some difficulty in persuading the registrar to effect the registration and their present argument necessarily involves their now contending that the designs were improperly registered, a circumstance which gives rise to a subsidiary argument that they are now estopped from taking the point.
No issue is raised as regards the originality of the pre-1973 drawings for the purposes of copyright under the 1956 Act and it is not in dispute that, in copying the later version of the Lego elements, Tyco infringed Lego’s copyright in the pre-1973 drawings, if such copyright still subsisted at the date when the copying took place. The sole issue, therefore, on this part of the appeal, and subject always to the question of estoppel arising from the prior registration, is whether, under the provisions of Sch 7, any copyright subsisted after 1 January 1973 in any of the pre-1973 drawings or in the Page designs. Were they, as Lego originally asserted but now deny, designs capable of registration under the 1949 Act?
The relevant provisions of the 1949 Act are contained in ss 1, 7 and 8. Section 1(1) provides that a design may, on application by a person claiming to be the proprietor, be registered in respect of a specified article or set of articles. Section 1(2) sets out the conditions for registration and is in these terms:
‘Subject to the provisions of this Act, a design shall not be registered thereunder unless it is new or original and in particular shall not be so registered in respect of any article if it is the same as a design which before the date of the application for registration has been registered or published in the United Kingdom in respect of the same or any other article or differs from such a design only in immaterial details or in features which are variants commonly used in the trade.’
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The critical provision in the present context is the definition of design contained in s 1(3), which is as follows:
‘In this Act the expression “design” means features of shape, configuration, pattern or ornament applied to an article by any industrial process or means, being features which in the finished article appeal to and are judged solely by the eye, but does not include a method or principle of construction or features of shape or configuration which are dictated solely by the function which the article to be made in that shape or configuration has to perform.’
Section 1(4) confers a power on what was then the Board of Trade to make rules excluding certain articles primarily of a literary or artistic character from registration. It is unnecessary to set out the terms of ss 7 and 8 in full. Section 7 describes the monopoly conferred by registration as the exclusive right—
‘to make or import for sale or for use for the purposes of any trade or business, or to sell, hire or offer for sale or hire, any article in respect of which the design is registered, being an article to which the registered design or a design not substantially different from the registered design has been applied.’
The period of this copyright is limited by s 8 to five years from the date of registration in the first instance, such period being renewable for two further successive periods of five years.
Lego’s argument is that, although the registrar allowed himself, contrary to his initial inclination, to be persuaded to permit the registration of the designs for the third generation bricks, he ought never in fact to have done so, first, because the drawings were never ‘designs’ as defined in s 1(3) of the 1949 Act, since they were, so it is argued, configurations wholly dictated by functional requirements, and, second, that, even if they were designs, they lack novelty (though not originality), having already been anticipated by the Page pattern and were thus not designs ‘capable of registration’. Thus, the argument runs, they were simply original artistic works in which copyright under the Copyright Act 1956 subsisted and unaffected by the provisions of para 8(2) of Sch 7 to the 1956 Act.
The definition of ‘design’ in s 1(3) of the 1949 Act is hardly a model of parliamentary draftsmanship and this is by no means the first case in which its meaning and application have been called in question. In approaching the question of construction there has to be borne in mind that the purpose of the Act, as appears both from its terms and its legislative history, is to protect novel designs devised to be ‘applied to’ (or, in other words, to govern the shape and construction of) particular articles to be manufactured and marketed commercially. It is not to protect principles of operation or inventions which, if protected at all, ought to be made the subject matter of a patent. Nor is it to prevent the copying of the direct product of original artistic effort in producing a drawing. Indeed, the whole purpose of a design is that it shall not stand on its own as an artistic work but shall be copied by embodiment in a commercially produced artefact. Thus, the primary concern is what the finished article is to look like and not what it does and the monopoly provided for the proprietor is effected by according not, as in the case of ordinary copyright, a right to prevent direct reproduction of the image registered as the design but the right, over a much more limited period, to prevent the manufacture and sale of articles of a design not substantially different from the registered design. The emphasis therefore is on the visual image conveyed by the manufactured article. The essential features of the definition in the 1949 Act first appeared in the Patents and Designs Act 1919, which, by s 19, substituted a new definition for that previously contained in s 93 of the Patents and Designs Act 1907, where ‘design’ was, somewhat unhelpfully, defined in terms of itself. The positive part of the new definition was substantially in the same terms as the first part of the definition in the 1949 Act, but there was excluded ‘any mode or principle of construction, or anything which is in
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substance a mere mechanical device’. In Kestos Ltd v Kempak Ltd (1935) 53 RPC 139 at 151 Luxmoore J, in adverting to the definition introduced by the 1919 Act, observed:
‘A mere mechanical device is a shape in which all the features are dictated solely by the function or functions which the article has to perform.’
It seems probable therefore that it was this restatement of the meaning of ‘mere mechanical device’ which the draftsman of the 1949 Act sought to substitute for the previous reference to a ‘mechanical device’ and that it was not intended that any new or different principle should be applied to determine whether a particular shape or pattern was to be excluded from the definition. The starting point remains the same as it always was, visual appearance. Nothing is to qualify as a design at all unless it has ‘features … which appeal to and are judged solely by the eye’, a requirement conveniently paraphrased by saying that the finished article must have ‘eye-appeal’. That much is clear from the definition. What is less clear is the ambit of the exclusion. There are, apart from authority, three possible constructions of the definition taken as a whole, as was pointed out by Megaw LJ in the Court of Appeal in Amp Inc v Utilux Pty Ltd [1970] RPC 397 at 433. It could mean that all that is registrable or is to be considered in connection with an application for registration is that part of the shape or configuration which has eye-appeal, any purely functional feature being excluded from registration. Alternatively, it could mean that any design which includes any feature which is dictated solely by function is to be excluded from registration. Or, finally, it could mean that a design which, ex hypothesi, has eye-appeal will be excluded from registration only if every feature of it is one which is dictated solely by function.
No one has contended for the first of these possibilities and such a construction would, indeed, make very little sense. In approaching the definition it is always to be borne in mind what is to be registered. It is a shape, configuration or pattern to be applied to a particular specified article and it is the shape or configuration of the whole article in respect of which there is to be a commercial monopoly. That necessarily involves taking the design and the article as a whole. Thus, the effective choice must be between excluding the whole shape or configuration from registration because there is a part of it that is purely functional or treating the whole shape or configuration as registrable (assuming that it has eye-appeal) unless the whole of it is dictated solely by functional considerations.
In their Lordships’ view the latter construction is the one which makes better sense and it is in fact the construction which is supported by the authorities. Harking back to the 1919 Act, the evident intention is to exclude a ‘mere’ mechanical device, that is to say an article fulfilling a mechanical function and nothing more, and that is reflected in the words ‘the function which the article to be made in that shape or configuration has to perform’ (see s 1(3) of the 1949 Act). What is contemplated here is that an article (and that must mean the whole of the article and not simply a part of it) is to be made in a particular shape or configuration. Thus, the shape or configuration as a whole is being ‘applied to’ the article as a whole. It then has to be asked: is that shape or configuration (ie the shape or configuration of the whole article) dictated solely by the functional purpose? Moreover, it makes no sense to exclude from registration designs for articles which have, and, indeed, may be intended to have as their principal attraction, a distinctive and novel appearance merely because they contain also features, perhaps even very minor ones, which are dictated by functional requirements.
This construction accords with the original paraphrase by Luxmoore J, in Kestos Ltd v Kempak Ltd (1939) 53 RPC 139 at 151, of the expression ‘mere mechanical device’ as a ‘shape in which all the features are dictated solely by the function’. He added:
‘… the particular form must possess some features beyond those necessary to enable the article to fulfil the particular purpose, but the fact that some advantage is
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derived from the adoption of a particular shape does not exclude it from registration as a design.’
It accords also with the views expressed in the House of Lords in Stenor Ltd v Whitesides (Clitheroe) Ltd [1947] 2 All ER 241, [1948] AC 107. There Viscount Simon (with whom Lord Macmillan agreed) expressed his concurrence with the views of Morton LJ in the Court of Appeal that the design there in issue was excluded from registration because it possessed ‘no features beyond those necessary to enable the article to fulfil its function’ (see [1947] 2 All ER 241 at 245, [1948] AC 107 at 122). Lord Porter expressed broadly the same view (see [1947] 2 All ER 241 at 249, [1948] AC 107 at 128). Lord Uthwatt observed ([1947] 2 All ER 241 at 255, [1948] AC 107 at 139):
‘Every feature in the design was apt to serve a mechanical object and no feature had any other substantial quality. In the sum of the qualities of the design there was a mechanical device and nothing else.’
Finally, it accords, on analysis, with the views expressed by the House of Lords in Amp Inc v Utilux Pty Ltd [1972] RPC 103. That is a decision which has given rise to a little difficulty because the views expressed by the Lords who composed the committee in that case do not altogether coincide, with the result that both parties seek to avail themselves of the decision as support for different propositions. Counsel for Tyco derives from it the proposition that the mere co-existence of eye-appeal and functional efficiency is sufficient to entitle a design to registration, a proposition which appears to have been accepted in the instant case at least by Huggins V-P in the Court of Appeal in Hong Kong. Counsel for Lego dervives from it, first, the proposition that eye-appeal involves something more than mere distinctiveness of shape and, second, that, given that there are features of shape which are dictated solely by function, the fact that there is also present in the shape, whether intentionally or not, also an element of eye-appeal is not sufficient to confer on the shape the essential quality requisite for registrability as a design. To put it another way, a shape has to be tested by two criteria, one positive and one negative, and both must be satisfied in full before it can qualify as a design within the definition of the Act.
Accepting that there are differences of emphasis in the speeches of the various members of the committee in the Amp case, their Lordships are nevertheless of the view that the principles to be deduced from it are tolerably clear. First, the primary essential before a shape can be registered as a design is that it should have eye-appeal and in this context (a) the eye is that of the prospective customer and (b) the appeal is that created by a distinctiveness of shape, pattern or ornamentation calculated to influence the customer’s choice. This, at least, emerges from the speeches of Lord Reid (with whom Lord Donovan agreed), Lord Morris and Viscount Dilhorne (see [1972] RPC 103 at 108, 112, 118). Second, the negative part of the definition does not involve, in order to demonstrate that a particular shape is ‘dictated solely’ by function, showing that that function could not have been performed by an article in some other shape. All that has to be shown is that the relevant features of the shape were brought about only by, or are attributable only to, the function which the article in that shape is to perform, even if the same function could equally well be performed by an article of a different shape. Third, if every feature of the shape is one which is attributable solely to the function which the finished article is to perform, then the exclusion operates even though the shape may also have eye-appeal.
It is this third proposition which has been the subject matter of a good deal of debate before their Lordships, principally because the views of Lord Reid which were expressed with less than his customary clarity in the last two paragraphs of his speech. The point is not dealt with in the speeches of Lord Morris and Lord Pearson, neither of whom considered that the shape in question in the case had any eye-appeal. Viscount Dilhorne was of the view that it did have eye-appeal, although he differed from the majority in his view of what constituted eye-appeal. Nevertheless, he was quite clear that the mere
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existence of eye-appeal did not preserve the registrability of a shape where every feature was in fact dictated solely by functional considerations. The doubt is created by the final two paragraphs of the speech of Lord Reid, where he observed (at 110):
‘There must be a blend of industrial efficiency with visual appeal. If the shape is not there to appeal to the eye but solely to make the article work then this provision excludes it from the statutory protection. I would add to avoid misunderstanding that no doubt in the great majority of cases which the Act will protect the designer had visual appeal in mind when composing his design. But it could well be that a designer who only thought of practical efficiency in fact has produced a design which does appeal to the eye. He would not be denied the protection because that was not his object when he composed the design.’
At first sight this looks as if Lord Reid was expressing a view directly contrary to that expressed by Viscount Dilhorne and advancing the proposition that, even in a case where every feature of the shape in question is dictated solely by functional requirements, nevertheless it qualifies for protection under the Act, if fortuitously, it also has eye-appeal. Their Lordships do not think that that can possibly be what Lord Reid intended. It is the essential requirement of a ‘design’ as defined by the Act that it has eye-appeal. If it does not have that, then it fails to qualify without reference to the exclusion at all. There can be no purpose in an exclusion which applies only to a subject matter already excluded. To give the exclusion any operation one has to postulate at least a situation in which the need for the exclusion arises. Thus, the necessary condition for the exclusion to operate at all is the existence of a shape which has eye-appeal but which, because of features falling within the latter part of the definition, is nevertheless not to be treated as a design. If the mere coincidence of visual appeal with industrial efficiency were sufficient to entitle the shape to protection as a design, the negative part of the definition would have no scope for operation. It seems clear, therefore, that when Lord Reid said there ‘must be’ a blend of efficiency with visual appeal he was simply indicating either that this was a requirement before the question of exclusion could arise at all or that there must be cases in which a coincidence of eye-appeal and function will occur and that, when they do, the inquiry is whether the shape is there solely to make the article work. If it is, then the exclusion operates. Equally, when he postulates the case of the designer who fortuitously produces something with eye-appeal, it seems clear that what he had in mind was the addition, perhaps even unintended, of some features not solely dictated by function. This is the same situation as that envisaged by Lord Morris when he said (at 113):
‘I would not, however, exclude from possible validity for registration a case where someone set out to produce an article that would perform a particular function but where in producing it he added or applied … some feature of shape that was additional to or supplementary to what was functionally needed, with the result that in the finished article there was a feature that appealed to the eye.’
Whether or not this is the right interpretation of Lord Reid’s words, their Lordships are clearly of the opinion that the mere coincidence of eye-appeal with functional efficiency will not confer the right to protection if, in fact, every feature of the design is dictated by the function which the article is to perform. But what is the position where the shape has eye-appeal but where some only of its features are dictated solely by functional considerations? If the interpretation placed on Lord Reid’s remarks is correct, then he and Lord Donovan would clearly have contemplated that in these circumstances the exclusion would not operate to deprive the shape of protection as a design. Lord Morris clearly contemplated that it would not (at 113) and Viscount Dilhorne too appears to have contemplated that any feature which went beyond those dictated solely by function and provided eye-appeal would entitle the shape as a whole to protection (at 118). This is, in their Lordships’ view, clearly right in principle. The incorporation into
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the shape as a whole of some (perhaps a majority of) features dictated only by functional requirements will not bring the exclusion into operation so as to deprive it of protection, if there are also some features of the shape which are not attributable solely to function.
The principles are easy enough to state. They are not, however, so easy to apply and the difficulty is aptly illustrated by the opposite conclusions reached by Jones J and the Court of Appeal in the instant case. There was a considerable body of evidence adduced by Tyco at the trial for the purpose of demonstrating that the Lego bricks in their finished form had eye-appeal. That, however, was not the right question and a good deal of the testimony was thus misconceived and was directed to such considerations as smoothness of texture, finish, colour and weight. None of that had any relevance to the only question with which the court was concerned, namely whether the features of the shape or configuration of the Lego bricks were such as to appeal to and to be judged solely by the eye. Jones J was not impressed by the evidence. He did not consider that the article had any feature which appealed to the eye and in any event found himself unable to distinguish any feature in the shape or configuration which was not dictated solely by the function which the brick had to perform as a brick designed to fit with and hold to other similar bricks. The Court of Appeal, influenced largely by the evidence, took a contrary view.
There are obvious difficulties involved in the application of the statutory definition to a shape whose principal features are largely conventional. Inevitably a designer who sets out to make a model brick is going to end up by producing a design, in essence, brick-shaped and there is clearly scope in the instant case for the argument that what gives the Lego brick its individuality and the originality without which it would fail for want of novelty as a registrable design is the presence of features which serve only the functional purpose of enabling it to interlock effectively with the adjoining bricks above and below. But the question of whether the design has eye-appeal cannot, in their Lordships’ view, properly be approached by isolating those features which may be said to be novel and those which may be said to be conventional and asking whether the former appeal to the eye. The design has, as previously mentioned, to be looked at as a whole and the question asked: do these features of shape or configuration, taken as a whole and in combination, appeal to the eye? In answering that question, an inevitable difficulty arises when the article in question is a child’s toy designed as or to be incorporated in a model. Such an article has of its very nature to appeal to the eye. It is designed to be looked at. Indeed, in one sense, that is its primary ‘function’. The Lego brick could not have achieved the commercial success that it has if it did not look as much like an authentic building brick as is consistent with its technical function. In this sense, its function is to appeal to the eye. That, of course, cannot be the type of function referred to in the negative part of the definition, which can only sensibly be construed as referring to what the article is intended mechanically to do.
In relation, however, to an assessment of whether a particular shape or configuration satisfies the former and positive part of the definition, the fact that an important part of the very purpose of the finished article is to appeal to the eye cannot be ignored. That factor was one which was conspicuously absent from the articles on which the courts were required to adjudicate in Tecalemit Ltd v Ewarts Ltd (No 2) (1927) 44 RPC 503, the Stenor and Amp cases and in the more recent Irish case of Allibert SA v O’Connor [1981] FSR 613, in all of which the claim to registration failed. It was one which was present in the Kestos case, where the claim to the validity of the design succeeded. It is present in the instant case. One starts with the expectation of eye-appeal, for part of the very purpose of the article is to have eye-appeal. That was aptly expressed by Whitford J in relation to the same subject matter as in this appeal in Interlego AG v Alex Folley (Vic) Pty Ltd [1987] FSR 283 at 298:
‘I would have expected a designer designing toys to have the question of the appeal of the toy to the eye, even in the case of a functional toy, in mind. Mr. Rylands
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who gave evidence for the defendants said that when designing a functional toy it is necessary to have regard not only to suitability for purpose but to overall appearance. You have to design so that the article in question will make an immediate visual appeal to a child or to the parent or other person buying for a child.’
Furthermore, although the expert evidence given at the trial was, in the opinion of the trial judge, largely misdirected (an opinion which their Lordships share), there was nevertheless other evidence of some significance. In assessing eye-appeal the motive or purpose of the designer, whilst not conclusive, is clearly of relevance. Thus, in Amp Inc v Utilux Pty Ltd the evidence given by Mr Collier, who actually designed the article there in question, as to his purpose in selecting the particular shape which the article there took was treated as significant both in the courts below and in the House of Lords. In the instant case there was a not insubstantial body of evidence that, in arriving at their design, Lego’s draughtsman had in mind not simply the functional efficiency of the brick, although that was clearly of primary importance, but its visual appearance. In the light of this and having regard to the very nature of the finished article under consideration, their Lordships conclude that the first and positive part of the definition is satisfied in the instant case.
For the reasons already given, however, that is not conclusive. It means merely that the question raised by the second and negative part of the definition falls to be answered. Given that the overall design has eye-appeal, are there any features of that overall design which are not solely dictated by the function which the article in that shape has to perform? Again the question is not susceptible of a simple and immediately apparent answer. The features which stand out on a casual inspection are, of course, the knobs on the upper surface of the article and the tubes within the skirt. Quite clearly those are not embellishments added to the basic brick-shape for the primary purpose of ornamentation. They serve a functional purpose, that of interlocking and holding the bricks together, and it is difficult to conceive of any other purpose which they serve which is not purely functional. But so to conclude does not in itself answer the relevant question. Is the whole shape or configuration for which registration was sought (and, in fact, achieved) a shape dictated solely by the function of interlocking and holding together? That question is not, of course, answered by the contention that there are various other ways in which the same result could be achieved, for instance by square protuberances, crenellated tubes, and so forth. Nevertheless, one has only to look at the overall design to see that there are features of it which have no necessary relation to function.
There is, to begin with, an important finding of fact in the judgment of Jones J in the High Court when describing the evolution of the Lego bricks by the original founder of the Danish company:
‘The original decision made by the Christiansens was to make the bricks in the same way as the Kiddicraft brick, but to be designed to look like a Danish brick. Some changes became necessary in order to achieve the effect that was required, which included the introduction of sharp edges and flat knobs, and an alteration in the measurements from inches into millimetres to conform to the metric system that was used on the continent.’
This was based on the evidence of Mr Godtfred Christiansen, the president of the appellant company, and on that of Mr Bernhard Bodnia, who was responsible for making the moulds. The latter was particularly significant because it not only made it quite clear that the basic outline of the shape with its sharp edges and corners was a matter of deliberate choice for visual purposes, ie to make the end result look more like a Danish brick, but that the knobs on the original Page design, which had small blisters on top serving no functional purpose, were flattened partly for ease of manufacture and partly because it was thought that they would thus have a better appearance. It was, Mr Bodnia said, always the intention to make ‘a good-looking brick’. So right from the start the
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design was evolved, at least in part, with visual appeal in mind. Exactly the same consideration applied equally to the Duplo brick, which was, as Mr Christiansen observed, evolved with the intention ‘to look exactly the same way as the original eight knob brick’. In another part of his evidence he stressed the importance of the appearance of a toy and asserted that he had always paid particular attention to the appearance of the Lego bricks.
It has already been mentioned that, in registering their designs, Lego had to overcome objections by the registrar that there were no features of ornament on the designs. Reliance had, at that time, been placed on the knobs as ornamental features and Mr Christiansen in his evidence asserted that they fulfilled both functional and ornamental purposes. Again in relation to the tubes, which in earlier versions of the brick were castellated and were equal to the length of the skirt, Mr Christiansen’s evidence was that these were replaced by an amended design in which the tubes were circular and did not go to the level of the bottom of the skirt because the castellated version was ‘messier’ and the new version looked nicer. Thus, although the presence of knobs and tubes is no doubt attributable simply and solely to the functional purpose of providing clutch-power, the actual shape and dimensions of the particular knobs and tubes employed for that purpose were not dictated solely by their function but, in part at least, with a view to the appearance of the article as a whole. This evidence cannot be ignored and in their Lordships’ view it necessarily negatives any conclusion that the shape or configuration of the Lego brick is dictated solely by the function which it has to perform. It is a shape which, in their Lordships’ opinion, not only clearly has eye-appeal but has also significant features, both of outline and proportion, which are not dictated by any mechanical function which the article has to perform as part of a construction set.
It is, however, Lego’s submission that, even on this hypothesis, the pre-1973 drawings are not excluded from copyright by the operation of para 8(2) of Sch 7 to the 1956 Act, because they are not designs ‘capable of registration under the Registered Designs Act 1949’. Section 1(2) of the 1949 Act, it is argued, authorises the registration only of a design which is ‘new or original’. These drawings reproduced, with modifications, the Page designs which had been previously published and used as the basis for manufactured articles. Thus, at the time when they were made, they ought not to have been registered and reliance is placed on a decision of the Eve J in Stephenson Blake & Co v Grant Legros & Co Ltd (1916) 33 RPC 406, a decision based on s 22(1) of the Copyright Act 1911, which provided that the Act should not apply to designs ‘capable of being registered’ under the 1907 Act. In that case it had been held, on agreed preliminary issues, that the plaintiffs had, when the 1911 Act came into operation, a subsisting copyright under the Copyright Act 1842 in what was assumed to be a design which could have been registered under the Patents, Designs and Trade Marks Act 1883. One question raised was whether the effect of s 22 was to deprive them of all protection, since they could then no longer register under the 1907 Act for want of novelty. Eve J held that, since, at the coming into operation of the 1911 Act, the plaintiffs’ design was no longer new, it was then not ‘capable of registration’ and thus was not excluded from copyright under the 1911 Act. That decision has been criticised as leading to the absurd conclusion that a person who had a design registrable under the 1907 Act but had not troubled to protect himself by registration retained his artistic copyright and was thus put in a better position than a person who had registered and who would so be deprived of his artistic copyright. Moreover, the status of the decision as an authority is open to doubt because, when the case went to the Court of Appeal, that court discharged the order on the ground that the questions raised were entirely hypothetical at the stage at which they were decided, Lord Cozens-Hardy MR observing that the discharge was ‘without prejudice to any question so that it cannot be used as a precedent’ (see (1917) 34 RPC 192 at 195).
The contrary conclusion was reached in the Canadian case of Bayliner Marine Corp v Doral Boats Ltd [1987] FSR 497, where the Federal Court of Appeal of Canada, construing s 46(1) of the Canadian Copyright Act 1970 (which was in substantially the same terms as s 22(1) of the 1911 Act) held that a ‘design capable of being registered’ did not mean
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‘registrable’ but meant only a design which complied with the criteria necessary to qualify as a ‘design’ within the meaning of the Act. To hold the contrary would, it was pointed out, involve the absurdity that a design sufficiently novel to be entitled to registration would be excluded from copyright protection whilst one lacking novelty would be entitled to copyright for the full period of the life of the author plus 50 years. The reasoning of the Canadian court was followed by Whitford J in Interlego AG v Alex Folley (Vic) Pty Ltd [1987] FSR 283 at 302 and by the Court of Appeal in Hong Kong in the instant case.
In seeking to support the reasoning of Eve J in the Stephenson Blake case, counsel for Lego prays in aid also the decision of the Court of Appeal in Usher v Barlow [1952] 1 All ER 205, [1952] Ch 255. That was a case concerned with the design of a wall plaque, an article which was excluded from registration under the 1949 Act by rules made by the Board of Trade under s 1(4) of the Act. The design was one which had been published before the 1949 Act came into force and was admittedly one which had been devised for the making of articles produced commercially. It had not, however, been registered under the 1907 Act and would thus have been excluded from copyright by s 22(1) of the 1911 Act. The question was whether, on the coming into force of the 1949 Act and the rules, it had become entitled to copyright as an artistic work which was not capable of being registered. It was held by the Court of Appeal, affirming the decision at first instance, that the effect of the Interpretation Act 1889 was that the 1911 Act had, after the coming into force of the 1949 Act, to be read as if references therein to the 1907 Act were references to the 1949 Act and that, since under that Act the design was excluded from registration, it was not a design ‘capable of registration’ and therefore was not excluded from copyright by the operation of s 22(1) of the 1911 Act. The practical effect was thus that a work which previously had enjoyed no copyright protection by reason of s 22(1) became, on the coming into force of the 1949 Act and the rules, entitled for the first time to such protection, a result which could hardly have been intended when the 1949 Act was passed.
That decision is not, of course, directly in point in the instant case, but counsel for Lego prays it in aid as logically supporting Eve J’s approach to the construction of s 22(1). If an order under s 1(4) of the 1949 Act is to be treated as determinative of the question whether, for the purposes of para 8(2) of Sch 7 to the 1956 Act, a design is ‘capable of registration’, why, it is asked, does it not logically follow that the requirement of novelty in s 1(2) of the 1949 Act is equally relevant to such determination? Certainly, at first blush, the literal words of the paragraph lend support to this view and it can be said that, even though Eve J’s decision in the Stephenson Blake case is reduced by the decision of the Court of Appeal to mere dictum, it had been reported and was referred to in the textbooks when the 1956 Act was enacted and the legislature nevertheless adopted substantially the same wording for relevant purposes as that previously employed in the 1911 Act.
However, there are, in their Lordships’ opinion, powerful arguments to the contrary, quite apart from the absurd position to which attention was drawn in Bayliner Marine Corp v Doral Boats Ltd. In construing para 8 regard must be had both to its purpose and to the legislative background. The 1956 Act enacted, in s 10, new provisions regarding artistic works made after the Act came into force where corresponding designs, both registered and unregistered, were applied industrially. Those provisions were not to apply to existing works and the evident purpose of para 8(2), which incorporates an exclusion broadly in the same terms as that previously contained in s 22(1) of the Copyright Act 1911, was to ensure that the Act did not have the effect of conferring a new copyright on existing works previously excluded from copyright under that section. Whilst the subject matter of exclusion is not expressed in precisely identical terms, the only alterations of substance are the reference to ‘an artistic work which … constituted a design’ (an alteration made necessary by the definition of ‘artistic work’ in the 1956 Act) and the inclusion of the words ‘at the time when the work was made’. The latter was clearly intended to serve the dual purpose of reversing, so far as existing works were
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concerned, the effect of Usher v Barlow and of stating expressly what was clearly implicit in the 1911 Act but had been clarified by the House of Lords in King Features Syndicate Inc v O & M Kleemann Ltd [1941] 2 All ER 403, [1941] AC 417, namely that the question of whether a work was used or intended to be used as a model for an industrial process was to be determined at the date when the work was made. Special provision was made by s 44 for amendment of the 1949 Act to cater for the possible registration of works which, though not used or intended to be used as such a model when made, subsequently came to be applied for that purpose.
Thus, to find, consistently with the purpose of para 8, what existing works are to be excluded from copyright, reference back has to be made to s 22 of the 1911 Act, which provided, in sub-s (1):
‘This Act shall not apply to designs capable of being registered under the Patents and Designs Act, 1907, except designs which, though capable of being so registered, are not used or intended to be used as models or patterns to be multiplied by any industrial process.’
The background to this section is important in the context of the questions raised on this appeal. Prior to the 1911 Act there was no single provision covering the various forms of artistic copyright. Engravings and prints were protected by a number of eighteenth century statutes, works of sculpture by the Sculpture Copyright Act 1814 and paintings, drawings and photographs by the Fine Arts Copyright Act 1862, under which registration was necessary before the copyright could be enforced. Moreover, the concept of infringement by three-dimensional reproduction of two-dimensional works had not yet been developed. The philosophy behind the concept of artistic copyright during the nineteenth century was that it was not conceived of as a protection for purely industrial designs. These were provided with their own code of protection in the form of a series of statutes from 1842 onwards, finally consolidated in the Patents, Designs and Trade Marks Act 1883, which provided for registered designs not merely a protection against copying but a short-term monopoly consisting of an exclusive right to make use of the design. These provisions were amended and re-enacted in the 1907 Act. Immediately before the commencement of the 1911 Act, therefore, the protection of a design applied industrially to the manufacturer of artefacts was to be found only in the Patents and Designs Act 1907, and the provisions of s 22(1) of the 1911 Act were clearly intended to exclude such designs from the scope of artistic copyright, the various forms of which were, for the first time, brought under a single umbrella.
The exclusion in s 22 involves the fulfilment of two conditions, that is to say, first, that of being a design ‘capable of being registered’ under the 1907 Act and, second, that the designs were actually used or were intended to be used as a model for industrial production. It is this latter requirement which emphasises the purpose of the section, that is to say the exclusion of that type of work which is actually used industrially and which, prior to the commencement of the Act, would not have been protected apart from registration under the 1907 Act or its predecessor.
It seems in the highest degree improbable that the framers of the 1911 Act intended not only to confer on designs intended for industrial reproduction and unregistered because already familiar as a result of prior publication an artistic copyright which they had not previously enjoyed but actually to make want of novelty an essential qualification for entitlement to such a copyright. There might, perhaps, have been a logic, in enacting what was intended to be a new and exhaustive code for according copyright to the various manifestations of artistic work, in excluding from the ambit of the Act designs in respect of which the author had chosen to avail himself of the enhanced protection provided by registration under the 1907 Act. There does not, however, appear to be any logic at all in according the copyright provided by the Act to works possessing all the relevant features for registration but which are denied protection for want of novelty or originality and at the same time denying it to works possessing those same features but
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which the author does not choose to register. To exclude from the ambit of the Act all works possessing the essential features of a ‘design’ and which are actually brought into being for the purpose of industrial application not only makes better sense but is both consistent with the legislative background and in accordance with the statutory scheme. This certainly appears to have been the view of Lord Romer in King Features Syndicate Inc v O & M Kleemann Ltd [1941] 2 All ER 403 at 420, [1941] AC 417 at 445:
‘In my opinion, the only object and the only effect of sect. 22(1) are to ensure that the Act shall not confer upon a work which is a design within the meaning of the Patents and Designs Act, 1919, s. 19, artistic copyright under the Copyright Act, 1911.’
See also Viscount Maugham ([1941] 2 All ER 403 at 408, [1941] AC 417 at 427). The view that s 22(1), in referring to designs ‘capable of registration’, was referring simply to those works which possessed the essential characteristics needed to qualify as ‘designs’ was similarly expressed by Clauson J in Pytram Ltd v Models (Leicester) Ltd [1930] 1 Ch 639 at 647. The contrary view represented by the obiter dictum of Eve J seems entirely inconsistent with the statutory scheme and was in any event based on an assumption of the concurrent existence, prior to 1907, of an artistic copyright which may have very well been erroneous in fact.
It is noticeable that although para 8(2) of Sch 7 to the 1956 Act refers to designs capable of registration under the 1949 Act ‘or under the enactments repealed by that Act’, s 22(1) of the 1911 Act refers only to designs capable of being registered under the 1907 Act, with no mention of its predecessor statutes. That Act was a consolidating enactment which merely continued a system of registration for designs applied or intended to be applied industrially. Given the manifest purpose of s 22(1) of excluding such designs from artistic copyright under the 1911 Act, there is no rational distinction to be drawn between those designs which were, when made, registrable under the earlier legislation and those which, because made after the 1907 Act came into force, were registrable under that Act. Accordingly, to give the section a sensible meaning which accords with its object the words ‘designs capable of being registered under the Patents and Designs Act, 1907’ cannot reasonably be construed as confined solely to post-1907 designs which could actually have been properly registered under the Act of that year. That does not, of course, demonstrate conclusively that novelty was not contemplated as a sine qua non of exclusion from artistic copyright, but it does indicate that the words cannot sensibly be read literally and that what the legislature had in contemplation was the kind of design for which the 1907 Act was intended to cater. Clearly s 22(1) was not and was not intended to be confined to designs actually registered. It was applicable equally to unregistered designs and the omission of the draftsman to refer to any of the earlier legislation indicates that he thought it unnecessary to do so (because the criteria were the same in any event) and renders it likely that what was contemplated was a test of registrability of a design (as opposed to the test of intention of industrial application) which would be universal, independent of the date on which the design came into being and capable of application at whatever point of time the question arose. If this is right, it is, so far at least as unregistered designs are concerned, inconsistent with the importation into the concept of ‘capability of registration’ of any requirement of novelty, for otherwise no design which was applied industrially but which had not been registered in fact would ever be ‘capable of registration’. It was para 8(2) of Sch 7 to the 1956 Act which related both capability of registration and intention of industrial application specifically to the date on which the design was made and which thus rendered necessary the reference to the earlier legislation. It is, however, highly improbable that, in so doing, the draftsman could have intended to exclude from copyright a narrower class of design than that excluded by the 1911 Act.
Reference to the provisions of the 1949 Act and its predecessors strengthens the improbability of the legislature, either in 1911 or in 1956, having intended to import
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the concept of novelty into the exclusion. Section 49 of the 1907 Act, repeating in substance that provisions of s 47 of the 1883 Act, provided for the registration of a design as defined by the Act ‘on the application … of any person claiming to be the proprietor of any new or original design not previously published in the United Kingdom’. ‘Design’ at that time was defined simply as—
‘any design applicable to any article of manufacture, or to any substance … not being a design for a sculpture, or other thing within the protection of the Sculpture Copyright Act of the year 1814 … ’
(See s 60 of the 1883 Act; cf s 93 of the 1907 Act.)
There were provisions (in ss 50 and 55 of the 1907 Act) enabling designs previously published (and therefore not novel) to be registered where registration of an existing registered design was sought in respect of a different class of goods or where publication had taken place in breach of faith. Curiously there was no express provision for the cancellation of a registration except that contained in s 58 on the ground that the design was used for manufacture mainly outside the United Kingdom. It was not until the Patents and Designs Act 1919, which substituted a new definition of ‘design’, that provision was made, in a substituted s 58, for cancellation on the ground of prior publication in the United Kingdom. The question of whether the design was new was, therefore, originally one to be determined once and for all by the registrar on the application for registration and it seems in the highest degree improbable that the draftsman of s 22(1) of the 1911 Act could have contemplated that the existence or non-existence of copyright in a particular subject matter was to be determined by going through all the factual inquiries, possibly very extensive, which the registrar would make on a hypothetical application to determine whether the work should actually be registered.
Whilst it is true that the 1949 Act replaces the previous reference to the proprietor’s ‘claim’ by the specific prohibition contained in s 1(2), this is ‘Subject to the provisions of this Act’. Again, the monopoly is conferred from the date of registration, which remains in effect even if the design in fact lacks novelty unless and until application is successfully made for cancellation under s 11 or the register is rectified under s 20. Section 4(2) contemplates the registration of a design which, though not new or original when made, becomes capable of registration nevertheless by reason of the acquisition by the proprietor of the proprietorship of a similar existing registered design. It can hardly have been contemplated, when para 8 of Sch 7 to the 1956 Act was enacted, that in such a case the design, although properly registered under the 1949 Act and therefore entitled to the privileges conferred by registration, should nevertheless simultaneously enjoy copyright under the 1956 Act because, at the time when it was made, it could not have been registered because of want of novelty.
In their Lordships’ opinion, the Court of Appeal correctly concluded that the only sensible construction of the words ‘constituted a design capable of registration’ in para 8, having regard to the evident purpose of the statute, is that it refers to designs possessing, when they were made, those essential characteristics which qualify them as ‘designs’. If such designs are, at that time, used or intended to be used for the purpose of industrial reproduction, they are not to qualify for copyright under the Copyright Act 1956. It follows that no copyright now subsists in Lego’s pre-1973 drawings.
There is, of course, in the instant case, the further consideration that the design was in fact registered and has, for the whole of the permitted period, enjoyed the privileges conferred by registration. The Court of Appeal was disposed to consider that the registrar’s decision to effect registration demonstrated, at least prima facie, that the registered designs were not only ‘designs’ but complied also with s 1(2) of the 1949 Act. However, counsel for Tyco has not sought before their Lordships to press any contention that the designs registered by Lego were in fact novel. He did, however, advance an interesting argument, rejected by the Court of Appeal, to the effect that Lego, having in
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fact registered the design represented by the pre-1973 drawings and having maintained the registration throughout the period provided by the 1949 Act, are now prevented by what he has called ‘public estoppel’ from contending that the registration ought never to have taken place so as to entitle themselves to a copyright under the 1956 Act which they had thus previously disclaimed. The proposition, as counsel for Tyco frankly admits, is a novel one and involves obvious difficulties. Having regard, however, to the view which their Lordships have formed with regard to the application of para 8(2) of Sch 7, it is unnecessary to express any concluded opinion on the question.
Turning now to Tyco’s cross-appeal, their Lordships observe, at the outset, that the simple but ingenious invention by Mr Page of interlocking toy bricks was more than adequately rewarded by patents which expired in 1954 and 1959. Unfortunately, Lego obtained further protection for what was basically the same invention by patents and designs which expired in 1975. In the result Lego secured an extended monopoly in the invention, with the result that other manufacturers of toys can now effectively compete with Lego only by manufacturing interlocking bricks which interlock with the products of Lego and which must, therefore, conform with the basic shapes and dimensions of those products. Such competition has hitherto been resisted successfully by Lego on the grounds that competing bricks which are compatible with Lego bricks infringe the intellectual property rights of Lego. In these proceedings Lego base their monopoly on copyright asserted not for the bricks but for the uninspired and uninspiring engineering drawings of bricks. By attributing new periods of copyright protection to every minor alteration in the form of a brick which is recorded in such a drawing they seek to obtain, effectively, a perpetual monopoly. In Re Coca-Cola Co’s Applications [1986] 2 All ER 274 at 275, [1986] 1 WLR 695 at 697 the House of Lords drew attention to the undesirable practice of seeking to expand the boundaries of intellectual property rights beyond the purposes for which they were created in order to obtain an unintended and undeserving monopoly. These proceedings are a further illustration of that undesirable practice.
Tyco do not deny that the bricks which they have manufactured and marketed were produced as a result of ‘reverse engineering’ from the 1983 Lego bricks. It is thus not in issue that Tyco have, indirectly, copied the drawings from which those bricks were manufactured, those drawings having been produced after 1 January 1973. There are some subsidiary issues relating to particular articles, but the main burden of the appeal is directed to two issues. (1) Are the post-1972 drawings, which substantially reproduce the salient features of the pre-1973 drawings, entitled to copyright as original artistic works? (2) If so, have Tyco, in manufacturing their products (which display significant differences from the post-1973 drawings), copied a substantial part of those drawings and thus infringed Lego’s copyright?
Engineering drawings are no doubt ‘artistic works’ within the broad meaning of that expression in the Copyright Act 1956, but it has to be remembered that they are essentially no more than manufacturing instructions for a three-dimensional artefact. Their claim to artistic copyright rests solely on the fact that they are drawings and not on the technical significance of the instructions by which they can be interpreted, which are frequently represented only by conventional symbols or figures. In the nature of things the original drawings come to be reproduced, probably many times, and updated from time to time as minor modifications are made in design or methods of manufacture. To accord an independent artistic copyright to every such reproduction would be to enable the period of artistic copyright in what is, essentially, the same work to be extended indefinitely. Thus, the primary question on Tyco’s appeal can be expressed in this way: can Lego, having enjoyed a monopoly for the full permitted period of patent and design protection in reliance on drawings in which no copyright any longer subsists, continue their monopoly for yet a further, more extensive period by redrawing the same designs with a number of minor alterations and claiming a fresh copyright in the redrawn designs?
Both before the trial judge and in the Court of Appeal there was an exhaustive
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investigation of the circumstances in which the various post-1972 drawings came into existence. With one or two exceptions, they all have the characteristic that they were modifications of and were very largely copied from pre-1973 drawings and represented an updating of the pre-existing designs which incorporated only small (but technically significant) modifications. The matter is best exemplified by reference to the 2 x 4 brick, the basic design of which was produced in 1968 and is represented by a drawing number 300100 dated 4 March 1968. That contains five images, that is to say: (1) a depiction of the underside of the brick showing the walls of the skirt, the tubes and a ‘flow-rib’ rendered necessary by the shape of the moulds then used in manufacture; (2) a cross-section of the side view of the brick showing the knobs on top, the walls of the skirt at each end and the walls of the tubes; (3) a cross-section of the end view, showing the side walls of the skirt, the tube and the knobs; (4) a depiction of the top of the brick showing the outline of the eight knobs; and (5) a representation of the side view of the brick not in cross-section. The first four of these are to a scale of 2:1 but the fifth is drawn to the actual size of the brick, apparently for the purpose of enabling the design to be easily identified by those unskilled in reading technical drawings. In each case, save the last two, dimensions and design tolerances are indicated by figures and arrows.
The primary facts are not in dispute. This drawing formed the design for bricks manufactured up to 1971 or 1972. At that time Lego evolved a new design with a thinner wall and redrew their drawing showing thinner walls, a split in the tubes, ribs on the inner walls to provide co-operation with the existing range of bricks and no flow-rib. The last was an important change brought about by the evolution of a different method of moulding. The thin-wall version was not a success and Lego reverted to the basic 1968 design, which was modified in what were technically a number of important respects. The 1968 drawing was redrawn in 1976, the new drawing being dated 27 April 1976 and incorporating the modifications. The way in which this was done was described by Mr Pucek, the head of Lego’s element construction department, in the following passage from his evidence:
‘If I made the drawing myself it was because it was an urgent matter. So I probably took the original drawing, number three, and glued it onto my drawing table because the dimensions were indicated on that drawing and all I had to do was to put in the tolerances. Then I made the drawing, directly using ink. I never used a pencil first; I just used ink immediately to make the drawing. I made the pictures first, the outline of the element, then I put the measurements on and, finally, I added the figures.’
His estimate of the time taken was half a day. In cross-examination he agreed that the same method was applied in drawing the 1976 drawing of the 2 x 2 brick and that it was basically a copy of the 1968 drawing. In relation to this, he averred in re-examination that, in principle, the 1976 drawing was a tracing of the 1968 drawing. The points of distinction between the 1968 and the 1976 drawings of the 2 x 4 brick are helpfully summarised by Clough JA in his judgment in the Court of Appeal ([1987] FSR 409 at 476–477):
‘(1) Sharp edges on outer diameter of inner fixing tubes to reduce jumping effect. (2) No flow rib. (3) Change in point of entry of plastic from end walls to one of the knobs, consequently thickness of top wall reduced from 1·2 mm. to 1·1 mm. for better filling. (4) Change in tolerances & hence change in skirt dimension from 0·83 mm. to 0·84 mm. (5) Adding a small radius of 0·1 mm. to the corners of the brick for safety reasons. (6) Height of cylindrical part of inner fixing tube to base line reduced from 2·2 mm. to 2·1 mm. (a question of up-dating to have the same dimensions on all drawings). (7) Inner coring out of knob has been increased from 2·5 mm. to 2·6 mm. in diameter. (8) Knob radius increased from 0·2 mm. to 0·3 mm.’
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There was a good deal of evidence, again helpfully summarised by Clough JA, regarding the technical importance of these alterations, the most significant of which was that whereas in the 1968 brick the tubes had a radius or rounded edge of 0·4 mm on the inner and outer diameter of the tubes, that radius was confined in the 1976 brick to the inner diameter, the edge of the outer diameter being sharpened in order to provide a longer surface for contact with the knobs of the adjoining brick and thus increase ‘clutch-power’. Apart from this, Mr Moller, Lego’s technical witness, admitted that the differences between the two drawings were very small although he insisted on the importance of tolerances in overall functional efficiency.
The significant thing about all these changes is that they involve no substantial alteration to the drawing as such. The outline of the object depicted is, in each case, virtually identical save for the minute differences occasioned by the abandonment of the flow-rib, the depicting of radii on the edges of the knobs and the abandonment of the radius on the outer diameter of the tubes. The significant changes, however important technically, are not indicated by any substantial alteration of the drawing as an artistic work. That remains basically the same and was admittedly copied from the 1968 drawing in the same way as if it had been actually traced. The changes are indicated not by altering the drawing but by substituting for the figures shown on the original for the purpose of indicating dimensions and tolerances new figures which will constitute manufacturing instructions for those who will design the moulds from which the finished articles will be produced. It may be and no doubt is the case that that information involves important functional concepts, and even a good deal of technical research, but counsel for Tyco stresses that what this case is concerned with is not an idea or a concept but artistic copyright claimed in the drawings. Nobody draws a tolerance nor can it be reproduced three-dimensionally. What is important about a drawing is what is visually significant and the redrawing of an existing drawing with a few minimal visual alterations does not make it an original artistic work, however much labour and skill may have gone into the process of reproduction or however important the technical significance of the verbal information that may be included in the same document by way of information or instruction.
The leading judgment in the Court of Appeal on this aspect of the case was delivered by Clough JA and it is the criticism of counsel for Tyco of that judgment that it places great stress, indeed the whole stress, on the amount of skill and labour that went into a consideration of the technical aspects of modifications proposed to the existing design and none at all on the visual results. If, counsel for Tyco argues, it is right to categorise every copy of an existing design with no substantial alterations as an original artistic work entitling the draughtsman to copyright simply on the basis of the skill and labour involved in the copying, then copyright can be perpetuated indefinitely. It does indeed appear from Clough JA’s judgment that he did not draw any distinction between the skill and labour employed by the draughtsman in making an acknowledged copy and the engineering expertise required for evolving and evaluating the fresh information conveyed in a non-artistic form, information which, counsel for Tyco submits, is more properly the subject matter of a patent application if such an application were appropriate. This appears from two passages from his judgment ([1987] FSR 409 at 476, 478):
‘On the appeal no challenge has been made to the acceptance by the judge of the evidence of Mr. Moller, Mr. Pucek and relevant Lego draughting personnel on these factual details. If their evidence establishes that the production of the relevant post-1972 drawings in fact required more than negligible labour, skill and judgment, as the judge clearly concluded, then his decision is sustainable notwithstanding the evidence of Mr. Pucek agreeing that “In principle the production of the 1976 drawing of the 2 x 2 element was a ‘copy in the sense of a tracing,’” whatever that may be taken to mean … The degree of skill, labour and judgment was, in my judgment, not only more than negligible but substantial. There was no question of
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slavish copying here but to the basic skilled “penmanship” of Mr. Pucek, there was added the functional or engineering design skill and experience of Mr. Pucek and those of his colleagues who made the decision to adopt the sharp edge and also the altered tolerances for the 1976 drawing to improve the functional capacity of the element. In my judgment copyright protection extends to the whole of the 1976 drawing and not merely to those parts of it which portrayed changes in relation to the 1968 drawing.’
The question is: was it right not to draw any distinction between the original artistic image, which was to all intents and purposes traced into the copy, and the written design or engineering information substituted on the copy for the purposes of reinterpreting the original artistic image? The matter can, perhaps, best be tested by asking whether, if there had been a total and literal tracing of the visual image of the 1968 design and the substitution on the copy for the original instructions of different and technically significant written instructions, that substitution would in itself warrant the conclusion that the copy had now become an original ‘artistic’ work.
Section 3(2) of the 1956 Act provides that ‘Copyright shall subsist, subject to the provisions of this Act, in every original artistic work which is unpublished … ’ and ‘artistic work’ is defined in sub-s (1) of the same section as meaning ‘irrespective of artistic quality … paintings, sculptures, drawings, engravings and photographs’. ‘Drawing’ includes ‘any diagram, map, chart or plan’ (s 48(1)). Not altogether surprisingly there is no statutory definition of the word ‘originality’ but there is a classical statement of what is comprised in the concept of originality in the context of copyright in the judgment of Peterson J in University of London Press Ltd v University Tutorial Press Ltd [1916] 2 Ch 601 at 608–609:
‘The word “original” does not in this connection mean that the work must be the expression of original or inventive thought. Copyright Acts are not concerned with the originality of ideas, but with the expression of thought, and, in the case of “literary work,” with the expression of thought in print or writing. The originality which is required relates to the expression of the thought. But the Act does not require that the expression must be in an original or novel form, but that the work must not be copied from another work—that it should originate from the author.’
That statement is, of course, not complete in itself because there may clearly be original work which makes use of material obtained by the author from pre-existing sources. Perhaps the most useful exegesis is to be found in three passages from the opinion of the Board delivered by Lord Atkinson in the Privy Council case of Macmillan & Co Ltd v Cooper (1923) 40 TLR 186, a case concerned with university textbooks consisting of abridgments of or excerpts from existing works with appropriate notes for students. Lord Atkinson observed (at 188):
‘… it is the product of the labour, skill, and capital of one man which must not be appropriated by another, not the elements, the raw material, if one may use the expression, upon which the labour and skill and capital of the first have been expended. To secure copyright for this product it is necessary that labour, skill, and capital should be expended sufficiently to impart to the product some quality or character which the raw material did not possess, and which differentiates the product from the raw material.’
A little later, he quoted with approval the following passage from the judgment of Story J in Emerson v Davies (1845) 3 Story 768 at 778–779:
‘The question is not, whether the materials which are used are entirely new, and have never been used before; or even that they have never been used before for the same purpose. The true question is, whether the same plan, arrangement, and combination of materials have been used before for the same purpose or for any
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other purpose. If they have not, then the plaintiff is entitled to a copy-right, although he may have gathered hints for his plan and arrangement, or parts of his plan and arrangement, from existing and known sources. He may have borrowed much of his materials from others, but if they are combined in a different manner from what was in use before … he is entitled to a copy-right … It is true, that he does not thereby acquire the right to appropriate to himself the materials which were common to all persons before, so as to exclude those persons from a future use of such materials; but then they have no right to use such materials with his improvements superadded, whether they consist in plan, arrangement or illustrations, or combinations; for these are strictly his own.’
Lord Atkinson continued:
‘This decision is, of course, not binding on this tribunal; but it is, in the opinion of the Board, sound, able, convincing and helpful. It brings out clearly the distinction between the materials upon which one claiming copyright has worked and the product of the application of his skill, judgment, labour and learning to those materials; which product, though it may be neither novel or ingenious, is the claimant’s original work in that it is originated by him, emanates from him, and is not copied.’
Finally, he observed (at 190):
‘What is the precise amount of the knowledge, labour, judgment or literary skill or taste which the author of any book or other compilation must bestow upon its composition in order to acquire copyright in it within the meaning of the Copyright Act of 1911 cannot be defined in precise terms. In every case it must depend largely on the special facts of that case, and must in each case be very much a question of degree.’
In that context he cited with approval a passage from the judgment of Lord Kinloch in Black v Murray (1870) 9 M 341 at 355:
I think it clear that it will not create copyright in a new edition of a work, of which the copyright has expired, merely to make a few emendations of the text, or to add a few unimportant notes. To create a copyright by alterations of the text, these must be extensive and substantial, practically making a new book. With regard to notes, in like manner, they must exhibit an addition to the work which is not superficial or colourable, but imparts to the book a true and real value, over and above that belonging to the text.’
That case was, of course, concerned with literary copyright, but there is no distinction in principle in the case of artistic copyright, although obviously the opportunities for the creation of an original work by way of compilation of existing materials are here more limited. In British Northrop Ltd v Texteam Blackburn Ltd [1974] RPC 57 at 68 the principle was conveniently summarised by Megarry J as follows:
‘Copyright is concerned not with any originality of ideas but with their form of expression, and it is in that expression that originality is requisite. That expression need not be original or novel in form, but it must originate with the author and not be copied from another work … A drawing which is simply traced from another drawing is not an original artistic work: a drawing which is made without any copying from anything originates with the artist.’
The question of how far a drawing which was substantially copied from a previous drawing was itself entitled to copyright as an ‘original’ work was raised in that case but did not fall to be decided because the previous and undoubtedly original drawing was owned by the plaintiffs and was put in evidence. LB (Plastics) Ltd v Swish Products Ltd
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[1979] RPC 551 was likewise concerned, as regards one of the drawings relied on, with a copy from a previous original owned by the plaintiffs but not, in that case, introduced in evidence. Whether it was original or not, however, did not require to be decided because it was conceded by the defendants that it was entitled to an independent copyright. That case is of importance, however, because of certain observations by Whitford J at first instance which were heavily relied on Clough JA in the Court of Appeal in the instant case for the view which he expressed that the whole question of originality depended on the amount of labour, skill and judgment which went into the drawings in respect of which copyright was claimed. Whitford J said (at 567):
‘The cases since the Act of 1911 have, however, I think quite plainly established that no originality of thought is needed to sustain a claim to copyright. Under copyright ideas are not protected, only the skill and labour needed to give any given idea some particular material form, for it is the form in which the work is presented that is protected by copyright. That need only be original in the sense that it is all the author’s own work.’
He observed (at 568–569):
‘There is another aspect of originality which must be dealt with, and can conveniently be dealt with at this stage. That is the question as to whether there can be copyright in a copy. Here again it must be in my judgment a question of degree. It arises in this case because of a suggestion that some of the drawings relied upon by the plaintiffs may have been made from models first produced in three dimensions, which models, not being works of artistic craftsmanship, would not attract copyright … There is this further point to be considered that some of the drawings undoubtedly derive in part from earlier drawings, but on the evidence I am still of the opinion that each work relied upon can claim to be a separate original artistic work attracting copyright … The draughtsman called on both sides made it quite plain that even where there has been a previous drawing or some sketches have been made which are in part redrawn, the making of any drawing of the kind I have to consider is a skilled business involving hours of labour, although the end result may seem relatively simple.’
These observations are unexceptionable so far as they go but they must be kept in context and they are open to the criticism that they do not identify the type of skill, labour or talent involved. Originality in the context of literary copyright has been said in several well-known cases to depend on the degree of skill, labour and judgment involved in preparing a compilation. Macmillan & Co Ltd v Cooper (1923) 40 TLR 186 was such a case. So was G A Cramp & Son Ltd v F Smythson Ltd [1944] 2 All ER 92, [1944] AC 329. Similarly, in the speeches of Lord Reid and Lord Hodson in Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 All ER 465 at 469, 475, 477, [1964] 1 WLR 273 at 277, 285, 287 it is stressed that the amount of skill, judgment or labour is likely to be decisive in the case of compilations. To apply that, however, as a universal test of originality in all copyright cases is not only unwarranted by the context in which the observations were made but palpably erroneous. Take the simplest case of artistic copyright, a painting or a photograph. It takes great skill, judgment and labour to produce a good copy by painting or to produce an enlarged photograph from a positive print, but no one would reasonably contend that the copy painting or enlargement was an ‘original’ artistic work in which the copier is entitled to claim copyright. Skill, labour or judgment merely in the process of copying cannot confer originality. In this connection some reliance was placed on a passage from the judgment of Whitford J in LB (Plastics) Ltd v Swish Products Ltd [1979] RPC 551 at 568–569 where he expressed the opinion that a drawing of a three-dimensional prototype, not itself produced from the drawing and not being a work of artistic craftsmanship, would qualify as an original work. That may well be right, for there is no more reason for denying originality to the depiction of a three-dimensional
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prototype than there is for denying originality to the depiction in two-dimensional form of any other physical object. It by no means follows, however, that that which is an exact and literal reproduction in two-dimensional form of an existing two-dimensional work becomes an original work simply because the process of copying it involves the application of skill and labour. There must in addition be some element of material alteration or embellishment which suffices to make the totality of the work an original work. Of course, even a relatively small alteration or addition quantitatively may, if material, suffice to convert that which is substantially copied from an earlier work into an original work. Whether it does so or not is a question of degree having regard to the quality rather than the quantity of the addition. But copying, per se, however much skill or labour may be devoted to the process, cannot make an original work. A well-executed tracing is the result of much labour and skill but remains what it is, a tracing. Moreover, it must be borne in mind that the Copyright Act 1956 confers protection on an original work for a generous period. The prolongation of the period of statutory protection by periodic reproduction of the original work with minor alterations is an operation which requires to be scrutinised with some caution to ensure that that for which protection is claimed really is an original artistic work.
The other important consideration which has also to be borne in mind in any case of three-dimensional copying by reverse engineering is that the plaintiff’s claim to protection in the case of a non-patented industrial article not registered under the Registered Designs Act 1949 rests solely on artistic copyright, that is to say on the visual image in the form of a drawing of the article from which that which is claimed to be an infringement is produced. It does not rest on the copyright owner’s inventiveness or method of working, on the confidentiality of his instructions to his engineering or production staff or on his literary copyright in any written communication of those instructions. Essentially artistic copyright is concerned with visual image. This is of particular importance in the instant case, which has the unusual feature that the artistic copyright claimed stems in origin from drawings which are themselves out of copyright and therefore available for copying. The post-1972 drawings do demonstrate some very minor visual deviations from the original pre-1973 drawings from which they are derived, but they are visually insignificant, with the possible exception of the omission of the radii on the outer diameters of the tubes. Taking the 2 x 4 brick as the first example, the alterations described as technically significant were (i) the sharpening of the outer edges of the tubes, (ii) the changes in tolerances and (iii) the increase in the radii on the outer edges of the knobs from 0·2 mm to 0·3 mm. Of these, (i) is shown pictorially, although it is not altogether easy to discern unless the two drawings are transposed on one another and examined closely, (ii) are not shown visually but are indicated by figures and (iii) are shown simply by substituting for ‘R=0.20’ in the 1968 drawing the letter and figures ‘R=0·3+0–0·05’. Of the remaining alterations, (i) the elimination of the flow-rib and consequent reduction in the top wall are not claimed as having any technical materiality but result simply from the adoption of a new moulding process, (ii) the addition, for safety reasons, of a minute radius to the outer corners of the brick is indicated simply by arrows and figures superimposed on the drawings, (iii) the minute change in the height of the fixing tube in relation to the base line is again indicated by altering the figure 2·2 in the 1968 drawing to 2·1 in the 1976 drawing and showing it in a different place; and (iv) the increase in the inner coring of the knobs is, again, indicated simply by altering the figure 2·5 shown in the 1968 drawing to 2·6 in the 1976 drawing. Unless, therefore, it can be said that the addition or substitution on the sheet onto which the 1968 drawing was copied of what are essentially new manufacturing instructions constitutes a material alteration in the drawing itself, it is really impossible to sustain the proposition that the 1976 drawing constitutes, as a drawing, an original artistic work. It is simply the 1968 drawing reproduced for the purpose of illustrating and explaining new design information. It has been suggested by counsel for Tyco that the alterations were, in any event, of a very minor nature even as design information, but their
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Lordships see no reason to doubt the conclusion in both the courts below that they were technically significant and were the result of considerable labour and expertise.
It is, however, submitted on behalf of Lego that the information conveyed by the figures is an integral part of the drawing and as much an artistic work as the outline of the physical features of the article depicted. In this connection reliance is placed on a number of cases in which the significance of written material on a drawing has fallen to be considered in the context of whether that which has been translated into three-dimensional form is the drawing itself or the information contained in it. The question has arisen particularly in relation to the question whether a three-dimensional object produced from a drawing would appear to a non-expert to be a reproduction of the artistic work for the purposes of s 9(8) of the 1956 Act. It has been held, in considering that question, that an explanatory legend on the drawing in the form of words or figures is not to be ignored (see Temple Instruments Ltd v Hollis Heels Ltd [1973] RPC 15 at 17). In other words, the hypothetical non-expert, in assessing whether the object appears to resemble the drawing, is entitled to supplement his understanding by reference to the explanatory material. LB (Plastics) Ltd v Swish Products Ltd [1979] RPC 551 was likewise a case where the drawings concerned were supplemented by explanatory written material which the hypothetical non-expert was entitled to take into account in assessing whether the object made appeared to be a reproduction of the drawing. Reliance is, however, principally placed, in this context, on the decision of the Court of Appeal in British Leyland Motor Corp v Armstrong Patents Co Ltd [1984] FSR 591 (reversed in the House of Lords on other grounds: see [1986] 1 All ER 850, [1986] 1 AC 577). There the argument was that what had been copied was not the artistic work but the co-ordinates shown on the drawing in the form of figures. That argument was rejected. Thus, it is argued, the explanatory legend forms part of the drawing and substantial alterations to the explanatory legend are substantial alterations to the drawing.
It has, however, to be borne in mind that all these cases were concerned with a very different question from that with which this appeal is concerned. It is one thing to say that the explanatory figures and legend, because they are of value (and, indeed, perhaps essential) to an informed understanding of the drawing, cannot be ignored in considering whether copyright in the drawing has been infringed by the making of a three-dimensional article or whether the article would appear to a non-expert to be a reproduction of the drawing. It is quite another to say that explanatory material, in the form of words or figures, which are clearly the subject of literary copyright, can confer on an artistic work an originality which it does not possess in its own right. It has always to be borne in mind that infringement of copyright by three-dimensional copying is restricted to artistic copyright (s 48(1)). To produce an article by following written instructions may be a breach of confidence or an infringement of patent, but it does not infringe the author’s copyright in his instructions. This is a distinction of crucial importance and it is well brought out in the following passage from the judgment of Buckley LJ in Catnic Components Ltd v Hill & Smith Ltd [1982] RPC 183 at 223:
‘I do not question the principle that in deciding whether what has been reproduced by an alleged infringer is a substantial part of the work allegedly infringed, one must regard the quality (that is to say the importance) rather than the quantity of the part reproduced (see Ladbroke (Football) Ltd. v. William Hill (Football) Ltd. ([1964] 1 All ER 465 at 469, 481, [1964] 1 WLR 273 at 276, 293) per Lord Reid and Lord Pearce); but what is protected is the plaintiffs’ “artistic work” as such, not any information which it may be designed to convey. If it is said that a substantial part of it has been reproduced, whether that part can properly be described as substantial may depend upon how important that part is to the recognition and appreciation of the “artistic work“. If an “artistic work” is designed to convey information, the importance of some part of it may fall to be judged by how far it contributes to conveying that information, but not, in my opinion, by how important the
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information may be which it conveys or helps to convey. What is protected is the skill and labour devoted to making the “artistic work” itself, not the skill and labour devoted to developing some idea or invention communicated or depicted by the “artistic work“. The protection afforded by copyright is not, in my judgment, any broader as counsel submitted, where the “artistic work” embodies a novel or inventive idea than it is where it represents a commonplace object or theme.’
The essence of an artistic work (to adopt the words of Whitford J in Rose Plastics GmbH v William Beckett & Co (Plastics) Ltd (2 July 1987, unreported), of which their Lordships have seen only an approved transcript) is that which is ‘visually significant’; and counsel for Tyco asks, forensically, what is there in the 1976 drawings which is visually significant and which was not contained in and directly copied from the 1968 drawings? With deference to the Court of Appeal and accepting both the importance of and the skill involved in producing the design information transmitted to the mould makers by the revised figures substituted on the drawing, their Lordships can see no alteration of any visual significance such as to entitle the drawing, as a drawing, to be described as original.
In the argument before their Lordships the 2 x 4 brick was taken as the exemplar because, it was said, there was no significant distinction between that case and the other bricks in the Lego range. In deference to the argument of Mr Rogers QC for Lego and to the judgment of Clough JA, where the items were dealt with individually, these items should be briefly considered. It will be convenient to take first three elements which were treated by Clough JA as broadly following the same pattern.
(i) The 1 x 2 brick The drawing from which the 1983 version of this was manufactured was also produced in 1976. Again it was admittedly copied from a 1968 drawing via an intermediate drawing produced in 1972. It is drawn to a different scale but it was accepted in the evidence that scale was of no materiality. Apart from small differences in tolerance and in the width of the central pin, which are indicated by the insertion of revised figures, there is no significant variation from the 1968 drawing.
(ii) The one-knob brick There is no visual difference between the 1968 and the 1976 drawings, the only modifications being in tolerances and an increase in the inside width from 4·83 mm to 4·84 mm.
(iii) The 1 x 4 brick This again was based on a 1976 drawing derived from a drawing in 1968. The 1976 drawing, although drawn to a scale of 5:1 instead of 2:1, appears, to all intents and purposes, to be merely a scaled-up version of the 1968 drawing with a small variation in dimension and tolerance indicated by figures and the addition of a 1 degree taper on the internal pins. Again, this is merely the 1968 drawing reproduced and adapted to illustrate new manufacturing and design instructions.
In relation to these three elements, all of which were drawn by the same draughtswoman, Hanne Fabrin, the considerations which led Clough JA to hold that they were original drawings entitled to copyright, although clearly copied in each case from the 1968 original, were (i) the technical skill of Miss Fabrin and the time taken by her in producing the copy, (ii) the technical skill of Mr Pucek in instructing her in the dimensions and tolerances to be shown on the drawings and (iii), in the case of the 1 x 4 brick, the fact that the middle cross-sectional view was enlarged and that a second cross-sectional view shown in the 1968 version was omitted. For the reasons already given, their Lordships cannot agree that these three matters were sufficient to establish originality in the drawings as artistic works.
The 2 x 2 brick is almost a precise parallel of the 2 x 4 brick, save that in this case an intermediate drawing was produced in 1973 which was to a larger scale than the 1968 drawing and showed some modifications. The 1976 drawing, however, preserved the scale of the 1973 drawing but otherwise reverted in all its essential features to the 1968 drawing. The only differences of any significance are in the depiction of a radius only on the inner diameter of the tube and the substitution of altered figures in respect of one or two of the dimensions and tolerances. It was this drawing which Mr Pucek in his
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evidence accepted as ‘in principle’ a tracing but Clough JA accorded it originality because of the functional significance of the substituted design information and the elimination of the outer radius on the tube. Their Lordships do not consider that this drawing can be differentiated from that of the 2 x 4 brick. It cannot, therefore, properly be regarded as an original drawing entitled to copyright.
In respect of two further elements, the 1 x 3 brick and the 3 x 4 roof-tile, there was no 1968 drawing. The former was first produced in 1971 when Lego were manufacturing thin-walled bricks. The first drawing was made in 1973, but it is important to note that Lego have not claimed that there has been any infringement of the copyright in this drawing if any such exists. Their case is founded entirely on the 1976 drawing and the question is whether originality can be claimed for that drawing. It was admittedly copied directly from the 1973 drawing and is, in substance, visually indistinguishable from it. Much of the design information is the same and such material alterations as there are consist only in alterations to the original figures. As regards the 3 x 4 roof-tile, this was first drawn in 1971 as a thin-walled version and redrawn in 1976. Again the 1976 drawing was copied from it by Miss Fabrin and again the visual image, whilst not identical as regards the depiction of all features, is substantially indistinguishable, the important modifications of thickness, tolerance and radii being shown by means of arrows and figures. An enlarged section of the wall of the fixing tube has been added in order to illustrate the radius on the inner diameter. Again, therefore, what is claimed as conferring originality on what are admittedly copies is (1) the inclusion of additional or different design information and (2) the skill and time of the draughtsman in producing the copy and inserting the information on it.
Turning now to the Duplo range, the position is similar. In the case of the Duplo 2 x 4 brick Clough JA in his judgment summarised Mr Pucek’s evidence how the original drawing was made in 1971. A revised drawing, again produced by copying, was made in 1973 and up dated in 1977. There were several amendments made necessary by improvements in the moulding process, in particular the introduction of a flow-rib running laterally. Dimensions were added to indicate the flow-rib, the dimensions of ribs between the walls and the tubes were altered and the depth of the hollow knobs was increased. A small depression in the top surface was also shown, this being rendered necessary by the moulding process; and a ground surface on the underside of the brick is indicated by stipling. Mr Pucek and the subsequent draughtswoman, Mrs Jensen, gave evidence of the time taken, which was substantial, and, as Clough JA observed, the evidence clearly sufficed to establish the application of more than negligible skill, labour and judgment. But that, with respect to him, was not the right question. The amendments no doubt embodied valuable technical concepts and improvements but the question was whether the skill and labour was directed to the production of an original artistic work rather than the insertion of manufacturing instructions into an existing artistic work.
The same applies to the 2 x 2 Duplo brick, the 1973 and 1976 drawings of which were redrawings from previously existing drawings. Again there seem to have been no significant alterations apart from the insertion of different or additional dimensions or tolerances. It took Mr Pucek about a day to make the drawing in 1973. Clough JA observed that ‘he therefore contributed at least his more than negligible skilled penmanship and labour to the making of the drawing which thereby acquired originality’. Similarly in relation to the redrawing in 1976, which was carried out by Miss Fabrin and involved showing an increase in the height of the knobs by substituting the measurement 4·6 mm for the previous 3·6 mm and the introduction of four wings on the inner tubes. Her evidence was that the production of the amended drawing would have taken about four hours. The Court of Appeal was of the view that the combination of her and Mr Pucek’s skill and labour established originality. In their Lordships’ opinion the case of these two elements is the same as that of the Lego elements. There may have been and no doubt was a great deal of labour and skill involved in the evolution of the right
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dimensions and tolerances, the concept of the best clutch power, and the actual process of copying from the original drawing and inserting onto the copy the figures and symbols resulting from the technical calculations, but the artistic work remained the original artistic work without any substantial visual alteration.
In their Lordships’ view, Lego’s claim for infringement of copyright in their post-1972 drawings fails as regards such of those drawings as were copied either from drawings made prior to 1973 or from other drawings in respect of which no infringement has been claimed. It is not sufficient to confer originality on them that labour and skill was employed in the process of copying them or in the addition to them of fresh written manufacturing instructions. The claim in the action is for infringement of artistic copyright only, not a claim for patent infringement or for the poaching of confidential design information.
It is admitted in fact that the Tyco brick, although reproduced from Lego’s 1983 bricks and thus from the 1976 drawings from which those bricks were manufactured, more closely resembled the 1968 drawing. Tyco’s alternative submission is that this demonstrates that in fact they did not reproduce any substantial part of the 1976 drawings, even on the supposition that those drawings can claim originality, and so did not infringe. Their Lordships see considerable difficulty in the way of such a submission if it is once established that the 1976 drawings were original artistic works entitled to copyright in their own right. In the light of the conclusion at which their Lordships have arrived, however, it is unnecessary to pursue this point. That conclusion also renders it unnecessary to determine the interesting question of estoppel in relation to such of the elements as were previously registered as designs under the 1949 Act and a further point argued by counsel for Tyco as regards the operation of s 10 of the 1956 Act.
There remains, therefore, to be dealt with only a point raised by counsel for Tyco and determined by the Court of Appeal in Lego’s favour in relation to s 9(8) of the 1956 Act. This arises in relation to two further items in the Lego range, namely the Duplo 6 x 12 base-plate and the trailer wheel. Section 9(8) provides:
‘The making of an object of any description which is in three dimensions shall not be taken to infringe the copyright in an artistic work in two dimensions, if the object would not appear, to persons who are not experts in relation to objects of that description, to be a reproduction of the artistic work.’
It is not in dispute that the original wheel proposed to be manufactured by Tyco would have been an infringement of Lego’s drawing. It was, however, modified to incorporate certain alterations which make it less like the Lego wheel. Both the trial judge and the Court of Appeal found that the modified version was a substantial reproduction of the Lego drawing and granted an injunction in respect of it. There are obvious differences on casual inspection. The Tyco wheel has a different wall thickness, it has no radius on the inside and there is a different design of axle entry. Similarly in relation to the base-plate, Tyco have produced a version which is smaller in size than the Duplo plate and incorporates certain differences in the number of connectors to the tubes. Additionally, the knobs are not hollowed out as the Lego ones. It is clear, however, that Tyco produced their base-plate simply by taking a section of the Duplo plate and copying the appropriate dimensions from it, and the question is not whether the end products display differences, but whether the finished article would, to the non-expert, appear to be a reproduction of Lego’s drawings. The defence under s 9(8) in a case of acknowledged copying is notoriously difficult to establish, for it starts from a position that the object does in fact reproduce a substantial part of the drawing, the only question being whether it would appear to the non-expert that it does. The trial judge was clearly of the opinion that both elements did appear to reproduce the Lego drawings and, it seems, so were Faud and Clough JJA, though Huggins V-P entertained some doubts. Their Lordships, having inspected the articles and the drawings, agree with the trial judge that the defence is not made out in relation to these two articles.
In the result their Lordships will humbly advise Her Majesty that Lego’s appeal should
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be dismissed and that Tyco’s cross-appeal should be allowed in respect of all the elements enumerated in schedule B annexed to the order of the Court of Appeal save for items (L) and (M), in respect of which the cross-appeal should be dismissed and the order of the Court of Appeal should stand. In the context of the totality of the subject matter of the appeal, those two items are of relatively trifling significance and the main argument, both on the appeal and the cross-appeal, having been devoted to issues on which, in the event, Tyco have succeeded, Lego must pay Tyco’s costs both before the Board and in the courts below.
Appeal dismissed. Cross-appeal allowed in part.
Solicitors: Clifford Chance (for Lego); Denton Hall Burgin & Warrens (for Tyco).
Mary Rose Plummer Barrister.
Arnold and others v National Westminster Bank plc
[1988] 3 All ER 977
Categories: CIVIL PROCEDURE
Court: CHANCERY DIVISION
Lord(s): SIR NICOLAS BROWNE-WILKINSON V-C
Hearing Date(s): 27, 28 APRIL, 1 JULY 1988
Res judicata – Estoppel – Issue estoppel – Rent review clause – Subsequent change in law showing earlier decision was wrong – Unsuccessful party seeking to reopen case – Whether change in law capable of bringing case within exception to issue estoppel – Whether justice requiring point to be reopened – Whether issue estoppel arising.
In 1983 on the first rent review date of a lease a dispute arose between the landlords and the tenants over whether the ‘fair market rent’ defined in the lease meant the rent under a hypothetical lease containing the same provision for five-yearly rent reviews as the actual lease or the rent under a hypothetical lease containing no provision for reviews. The judge held that the hypothetical lease was to be treated as containing no provision for rent reviews. Shortly before the second review date the lessees instituted proceedings seeking rectification of the lease and a determination of the true construction of the rent review clause on the ground that subsequent cases had shown the judge’s decision on the first rent review to be wrong. The landlords applied to strike out the claim on the ground that there was an issue estoppel between the parties which prevented the tenant from relitigating the matter.
Held – A subsequent change in the law which indicated that an earlier decision on a point sought to be reopened in a second action was wrong was capable of bringing the case within the exception to the doctrine of issue estoppel where the injustice of not allowing the matter to be relitigated outweighed the hardship to the successful party in the first action in having to relitigate the point. However, whether such a change operated to bring the case within the exception depended on the exact circumstances of each case. In the circumstances, justice required the matter to be relitigated and the lessees were not estopped from raising the matter of construction of the rent review clause. Accordingly, the application to strike out the claim would be dismissed (see p 982 f and p 983 b to d g, post).
Henderson v Henderson [1843–60] All ER Rep 378, Carl-Zeiss-Stiftung v Rayner & Keeler Ltd (No 2) [1966] 2 All ER 536 and Mills v Cooper [1967] 2 All ER 100 considered.
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Notes
For the doctrine of res judicata and issue estoppel, see 16 Halsbury’s Laws (4th edn) paras 1527–1535, and for cases on the subject, see 21 Digest (Reissue) 56–62, 368–390.
Cases referred to in judgment
Amax International Ltd v Custodian Holdings Ltd [1986] 2 EGLR 111.
British Gas Corp v Universities Superannuation Scheme Ltd [1986] 1 All ER 978, [1986] 1 WLR 398.
Carl-Zeiss-Stiftung v Rayner & Keeler Ltd (No 2) [1966] 2 All ER 536, [1967] 1 AC 853, [1966] 3 WLR 125, HL.
Dallal v Bank Mellat [1986] 1 All ER 239, [1986] QB 441, [1986] 2 WLR 745.
DPP v Humphrys [1976] 2 All ER 497, [1977] AC 1, [1976] 2 WLR 857, HL.
Equity and Law Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR 124, CA.
Henderson v Henderson (1843) 3 Hare 100, [1843–60] All ER Rep 378, 67 ER 313, V-C.
Hoystead v Taxation Comr [1926] AC 155, [1925] All ER Rep 56, PC.
Hunter v Chief Constable of West Midlands [1981] 3 All ER 727, [1982] AC 529, [1981] 3 WLR 906, HL affg sub nom McIlkenny v Chief Constable of West Midlands Police Force [1980] 2 All ER 227, [1980] QB 283, [1980] 2 WLR 689, CA.
Mills v Cooper [1967] 2 All ER 100, [1967] 2 QB 459, [1967] 2 WLR 1343, DC.
National Westminster Bank plc v Arthur Young McClelland Moores & Co (a firm) [1985] 2 All ER 817, [1985] 1 WLR 1123, CA; refusing to hear appeal from [1985] 1 EGLR 61.
New Brunswick Rly Co v British and French Trust Corp Ltd [1938] 4 All ER 747, [1939] AC 1, HL.
Phosphate Sewage Co Ltd v Molleson (1879) 4 App Cas 801, HL.
Property and Reversionary Investment Corp Ltd v Templar [1978] 2 All ER 433, [1977] 1 WLR 1223, CA.
Waring (decd), Re, Westminster Bank Ltd v Burton-Butler [1948] 1 All ER 257, [1948] Ch 221.
Yat Tung Investment Co Ltd v Dao Heng Bank Ltd [1975] AC 581, [1975] 2 WLR 690, PC.
Cases also cited
Badar Bee v Habib Merican Noordin [1909] AC 615, PC.
Datastream International Ltd v Oakeep Ltd [1986] 1 All ER 966, [1986] 1 WLR 404.
Fidelitas Shipping Co Ltd v V/O Exportchleb [1965] 2 All ER 4, [1966] 1 QB 630, CA.
Gueret v Audouy (1893) 62 LJQB 633, CA.
Koenigsberg (decd), Re, Public Trustee v Koenigsberg [1948] Ch 727; rvsd [1949] 1 All ER 804, [1949] Ch 348, CA.
Thoday v Thoday [1964] 1 All ER 341, [1964] P 181, [1964] 2 WLR 371, CA.
Summons
By a summons dated 1 October 1987 the defendant, National Westminster Bank plc (the landlords), applied to strike out para 20 of the statement of claim in proceedings commenced by the plaintiffs, Michael John Arnold, Peter Robert Edwards and Simon Francis Phillips (the lessees), on the ground that it disclosed no reasonable cause of action. During the hearing the parties agreed that a preliminary issue should be tried, namely whether the lessees were estopped by the judgment of Walton J from putting forward the case pleaded in para 20 of the statement of claim. The summons was heard in chambers but judgment was given by Sir Nicolas Browne-Wilkinson V-C in open court. The facts are set out in the judgment.
Donald Rattee QC and Jonathan Gaunt for the lessees.
T L G Cullen QC and Hazel Williamson QC for the landlords.
Cur adv vult
Page 979 of [1988] 3 All ER 977
1 July 1988. The following judgment was delivered.
SIR NICOLAS BROWNE-WILKINSON V-C. This is an action brought by the plaintiffs as the present lessees of 7 Rolls Buildings, Fetter Lane, London EC4. They hold under a sub-underlease for a term of 32 years from 28 October 1976. The defendants are their present landlords. The rent reserved was originally £800,000 pa but there are provisions for review of the rent on 24 June 1983, 1988, 1993, 1998 and 2004 (the review dates). The dispute relates to that rent review clause.
Under the rent review provisions the rent payable as from each review date is whichever is the greater of £800,000 or the fair market rent, which is defined as follows:
‘Such amount as shall represent a yearly rent at which the demised premises might reasonably be expected to be let at the Relevant Review Date in the open market by a landlord to a tenant without a premium with vacant possession and subject to the provisions of this Sub-Underlease other than the rent hereby reserved … ’
The sub-underlease contains provision for arbitration as to the fair market rent in case of dispute between the parties.
Such a dispute arose at the first review date and was referred to an arbitrator. Among the matters in dispute was whether under the definition of ‘fair market rent’ the rent under the hypothetical lease had to be fixed on the basis (a) that it contained the same provisions for five year rent review as the actual sub-underlease or (b) contained no provision for review. The arbitrator was asked to refer that matter for decision to the court under s 2(1) of the Arbitration Act 1979 but he declined. The arbitrator decided that the hypothetical lease should be treated as containing provisions for five-yearly rent reviews. On that basis he fixed the rent at £1·003m pa. However, in case he was wrong on the question of construction, he also determined that if there were no rent review clause in the hypothetical lease the rent should be some 20% higher, viz £1·209m.
The landlords appealed the point of law and their appeal came before Walton J. He held that the arbitrator was wrong and that the hypothetical lease should be treated as not containing any provision for rent review. As a result of that decision the rent payable was £1·209m (see [1985] 1 EGLR 61). The lessees asked Walton J for leave to appeal and for a certificate under s 1(7)(b) of the Arbitration Act 1979 that the question of law was either one of general public importance or one which for some other special reason should be considered by the Court of Appeal. The judge refused both. Notwithstanding such refusal, before his order was drawn up the lessees renewed their application for a certificate and introduced evidence showing that the matter was one of general public importance. Walton J rejected this further application.
The lessees then sought to appeal to the Court of Appeal against the refusal of Walton J to grant a certificate. The Court of Appeal held that they had no jurisdiction to entertain such an appeal (see [1985] 2 All ER 817, [1985] 1 WLR 1123).
Therefore as from the first review date the rent payable was £1·209m. Now the second review date has arrived. Not unnaturally, the lessees are anxious to reopen the same question as to the true construction of the rent review clause. They therefore started the present proceedings by which they claim, first, rectification of the sub-underlease so as to produce the result they desire and further or in the alternative a determination as to the true construction of the rent review clause, ie the very point decided by Walton J.
By this application, the landlords seek to strike out the claim for a declaration on construction on the basis that there is an issue estoppel on the matter and that, accordingly, it is vexatious for the lessees to seek to relitigate the matter.
It is common ground, first, that Walton J determined the exact question of construction which is sought to be reopened and, second, that save for exceptional circumstances there would be an issue estoppel as to the construction of the rent review clause which would render it vexatious to relitigate the matter. However, the lessees contend that issue
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estoppel is not an absolute doctrine and that, in exceptional circumstances such as those which here apply, the plaintiff is not precluded from relitigating the same point.
The special circumstances relied on by the lessees are that, subsequent to the decision of Walton J, there have been decisions on the construction of rent review clauses which show his decision to be wrong. There was a division of opinion among the judges as to the proper approach to the construction of rent review clauses. One group considered that each rent review clause had to be construed in isolation, there being no presumption that the intention of such clauses was to give the landlord the current open market rent of the demised premises if let on the same terms as under the actual lease. Walton J belonged to that group and in his judgment on this rent review clause expressly said that there was no presumption either way. The other group (to which I am an adherent) took the contrary view. In British Gas Corp v Universities Superannuation Scheme Ltd [1986] 1 All ER 978 at 981–982, [1986] 1 WLR 398 at 403, having referred to the difference in judicial approach (including the decision of Walton J in this case), I said:
‘In my judgment the correct approach is as follows: (a) words in a rent exclusion provision which require all provisions as to rent to be disregarded produce a result so manifestly contrary to commercial common sense that they cannot be given literal effect; (b) other clear words which require the rent review provision (as opposed to all provisions as to rent) to be disregarded … must be given effect to, however wayward the result; (c) subject to (b), in the absence of special circumstances it is proper to give effect to the underlying commercial purpose of a rent review clause and to construe the words so as to give effect to that purpose by requiring future rent reviews to be taken into account in fixing the open market rental under the hypothetical letting.’
In Equity and Law Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR 124 Dillon LJ, in giving the decision of the Court of Appeal, quoted that passage and stated that he welcomed and approved it as a rough guideline, while stressing that it was only a guideline and the function of the court in each case was to construe the lease before it.
It does therefore appear that the Court of Appeal has approved the general approach to construction expressly rejected by Walton J. To put it no higher, there is a very substantial chance that if the rent review clause in this sub-underlease were now to be construed in the light of the Court of Appeal decision, the opposite result would be achieved. Indeed, in Amax International Ltd v Custodian Holdings Ltd [1986] 2 EGLR 111 Hoffmann J construed a rent review clause the terms of which are virtually indistinguishable from that in the present sub-underlease so as to require the new rent to be fixed on the basis that the hypothetical lease did contain a rent review clause.
It is therefore said that there has been a change in the law. Moreover it is pointed out that the question of construction in relation to which the issue estoppel is said to arise governs the legal relationship between landlord and tenant for the residue of the term; unless the matter can be reopened there will be an issue estoppel on all rent reviews as a result of which the lessees will be wrongly required to pay 20% more rent throughout the remainder of the term, costing them several million pounds in all. All this, they say, follows from a decision which the lessees did everything possible to challenge but against which they were held to have no right of appeal.
During the hearing, the parties agreed that I should treat as being before me a preliminary issue whether in the circumstances I have recited the plaintiffs are estopped by the judgment of Walton J from putting forward the case pleaded in para 20 of the statement of claim.
I confess that, until counsel for the lessees made his submissions in this case, I had thought that the doctrine of issue estoppel was an absolute one; although it might be difficult to decide whether or not the earlier decision did expressly or impliedly decide the very point sought to be litigated in the second action, once that had been demonstrated an issue estoppel necessarily arose. However, the authorities show clearly that from the
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first the doctrine has been expressed to be subject to exceptions. Thus in Henderson v Henderson (1843) 3 Hare 100 at 115–116, [1843–60] All ER Rep 378 at 381–382 Wigram V-C stated the rule to apply ‘except in special cases’ and investigated whether there were ‘special circumstances … sufficient to take the case out of the operation of the general rule’. The classic modern statement of the law is that given by Diplock LJ in Mills v Cooper [1967] 2 All ER 100 at 104, [1967] 2 QB 459 at 468–469:
‘… a party to civil proceedings is not entitled to make, as against the other party, an assertion, whether of fact or of the legal consequences of facts, the correctness of which is an essential element in his cause of action or defence, if the same assertion was an essential element in his previous cause of action or defence in previous civil proceedings between the same parties or their predecessors in title and was found by a court of competent jurisdiction in such previous civil proceedings to be incorrect, unless further material which is relevant to the correctness or incorrectness of the assertion and could not by reasonable diligence have been adduced by that party in the previous proceedings has since become available to him.’
That formulation of principle was approved by the House of Lords in DPP v Humphrys [1976] 2 All ER 497 at 505, 522, 529, [1977] AC 1 at 19, 39, 48, Lord Hailsham particularly stressing the proviso at the end of the passage I have quoted. See also Hunter v Chief Constable of West Midlands [1981] 3 All ER 727 at 733, [1982] AC 529 at 541 per Lord Diplock, New Brunswick Rly Co v British and French Trust Corp Ltd [1938] 4 All ER 747 at 756, [1939] AC 1 at 21 and Dallal v Bank Mellat [1986] 1 All ER 239, [1986] QB 441.
It is therefore clearly established (and counsel for the landlords accepts) that there can be exceptional circumstances which prevent an issue estoppel from arising. In my judgment it is equally clear that in order for such special circumstances to exist it must be shown either that the first decision is impeachable on the usual grounds (that is to say fraud, collusion, etc) or that the first decision was a default judgment, or that relevant new material, not available at the time of the first decision, has since become available.
Counsel for the lessees accepts that there being no ground for attacking the decision of Walton J on the grounds of collusion, fraud, etc, in order to avoid an issue estoppel he has to show that further relevant material has since become available. He contends that such material may be either new facts or a change in the law.
Counsel for the landlords on the other hand submits (a) that the exception relating to further material only applies in cases where the plaintiff in the second action is alleged to be estopped from arguing a point that could have been, but was not in fact, argued in the first action, and (b) that in any event only the discovery of new facts (as opposed to a change in the law) brings the matter within the exception.
As to counsel’s first point for the landlords, he relies on the fact that in Spencer Bower and Turner on Res Judicata (2nd edn, 1969) pp 160–162 the exception is discussed only in the context of cases where the relevant point was not taken in the first action; the authors do not mention any such exception when dealing with issue estoppel by matters which were actually raised and decided in the first action. Counsel for the landlords submits that the many passages in the authorities referring to the exception must be read as referring only to cases where the point was not raised in the first action and not as referring to cases where the point was actually raised and decided.
I do not accept this submission. First, the decided cases give no hint that the exception is so limited. True it is that it may be easier to show special circumstances bringing the case within the exception where, in the first action, the point was not taken at all than where the point was argued. But the legal principle as stated in Henderson v Henderson (1843) 3 Hare 100, [1843–60] All ER Rep 378 was stated to be the law even where the point was taken in the first action: see for example Hoystead v Taxation Comr [1926] AC 155, [1925] All ER Rep 56. Moreover I can see no reason for drawing such a distinction. Take a case where the issue decided in the first action was a pure question of fact and then
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facts are subsequently discovered which show that the first decision was wrong. Why should it make any difference to the merits of allowing the matter to be reopened whether in the first action the exact issue of fact had been argued (on what, ex hypothesi, was inadequate material) or assumed (because no evidence to the contrary was then available)?
As to counsel’s second point for the landlords, I feel considerably greater difficulties. Although many of the statements of the exception are in such general terms as to cover both the discovery of new facts and subsequent changes in the law, there are others which do expressly limit the exception to the case where new facts have been discovered: see Phosphate Sewage Co Ltd v Molleson (1879) 4 App Cas 801 and McIlkenny v Chief Constable of West Midlands Police Force [1980] 2 All ER 227 at 237–238, [1980] QB 283 at 319–320 per Lord Denning MR. However, those were cases in which the plaintiff had only sought to bring himself within the exception by relying on the discovery of new facts (as opposed to some change in the law) and the judgments must be read in that light. I was not referred to any case which directly decides that a change in the law subsequent to the first decision does not suffice to bring the case within the exception. In Re Waring (decd), Westminster Bank Ltd v Burton-Butler [1948] 1 All ER 257, [1948] Ch 221 Jenkins J held that a legal decision as to the effect of a statute on a will made in the first action was res judicata as against a party to the first action notwithstanding a subsequent House of Lords decision which demonstrated that the first decision was wrong in law. But so far as I can see the argument advanced in the present case was not before the judge and I cannot treat that decision as decisive.
Accordingly, I must decide the question on first principles. Res judicata, whether cause of action estoppel or issue estoppel, is based on the fundamental principle that it is unjust for a man to be vexed twice with litigation on the same subject matter coupled with the public interest in seeing an end to litigation. So far as cause of action estoppel is concerned, the rule is absolute: you cannot sue twice for the same relief based on the same cause of action even if new facts or law have subsequently come to light. But it is clear that the rule as to issue estoppel is different as the authorities which I have quoted demonstrate; there are circumstances in issue estoppel where the injustice of not allowing the matter to be relitigated outweighs the hardship to the successful party in the first action in having to relitigate the point.
The rules applicable to issue estoppel and the proper exceptions to it are in course of development: see Carl-Zeiss-Stiftung v Rayner & Keeler Ltd (No 2) [1966] 2 All ER 536 at 554, [1967] 1 AC 853 at 917. The authorities show that the exception applying to ‘special circumstances’ is designed to ensure that where justice requires the non-application of issue estoppel, it shall not apply: see Yat Tung Investment Co Ltd v Dao Heng Bank Ltd [1975] AC 581 at 590; [1975] 2 WLR 690 at 696–697. In the Carl-Zeiss case [1966] 2 All ER 536 at 573, [1967] 1 AC 853 at 947 Lord Upjohn said:
‘All estoppels are not odious but must be applied so as to work justice and not injustice, and I think that the principle of issue estoppel must be applied to the circumstances of the subsequent case with this overriding consideration in mind.’
The question therefore is whether, given a subsequent change in the law indicating that the earlier decision was wrong, the injustice of holding the plaintiff in the second action bound by the erroneous decision in law in the first action outweighs the hardship to the other party in having to relitigate the matter and the public interest in the finality of legal proceedings. To hold a man bound by what is subsequently shown to be an erroneous decision in law is harsh. The Court of Appeal will grant leave to appeal long out of time if there has been a change in the law and if, but only if, there is a continuing contractual relationship between the parties (such as a rent review clause) governing their relationship for the future: see Property and Reversionary Investment Corp Ltd v Templar [1978] 2 All ER 433, [1977] 1 WLR 1223. However, there are great dangers in allowing allegations that the law has changed (as opposed to allegations of new facts) to be the basis
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of allowing a case to be relitigated. There will be many cases in which the decisive effect of the new authority on the law will be a matter of dispute.
For the purposes of this case, it is not necessary for me to say that in all circumstances a subsequent change in the law showing the earlier decision to be wrong will enable that point to be reopened in a later action. It is sufficient for my purposes in the present case to decide whether, in some circumstances, a change in the law can constitute ‘further material which is relevant to the correctness or incorrectness’ of the earlier decision and then to consider the special circumstances of this case to see whether justice requires the point to be reopened.
In my judgment a change in the law subsequent to the first decision is capable of bringing the case within the exception to issue estoppel. If, as I think, the yardstick of whether issue estoppel should be held to apply is the justice to the parties, injustice can flow as much from a subsequent change in the law as from the subsequent discovery of new facts. In both cases the injustice lies in a successful party to the first action being held to have rights which in fact he does not possess. I can, therefore, see no reason for holding that a subsequent change in the law can never be sufficient to bring the case within the exception. Whether or not such change does or does not bring the case within the exception must depend on the exact circumstances of each case.
Turning again to the circumstances of the present case, I have no doubt that justice does require the matter to be relitigated. The following factors are in my judgment relevant. (1) There is a continuing contractual relationship of landlord and tenant under which (if there is an issue estoppel) the decision of Walton J will regulate four further rent reviews and thereby affect the rent payable until the end of the term. (2) Because of the peculiarities of the procedure applicable to appeals from arbitrators, unlike the ordinary case of a prior decision by a judge, the decision of Walton J was not subject to appeal. Therefore a matter of very great financial importance involving millions of pounds will, if an issue estoppel applies, be decided on a point of law which the lessees have never had the opportunity to test in the higher courts. (3) The decision whether or not to permit an appeal was the decision of Walton J himself and there was no right of appeal against his refusal to certify the matter fit for appeal. The lessees took every possible step to test the decision in the earlier case in the higher courts but without success. (4) Subsequent decisions, in particular that of the Court of Appeal in Equity and Law Life Assurance Society Ltd v Bodfield Ltd [1987] 1 EGLR 124, make it, at the lowest, strongly arguable that the decision of Walton J was wrong. These factors taken together satisfy me that this is a case in which justice requires that issue estoppel should not apply. I therefore hold that the plaintiffs are not estopped from raising the matter of construction pleaded in para 20 of the statement of claim and accordingly dismiss the application to strike out that paragraph.
Order accordingly.
Solicitors: Freshfields (for the lessees); Stephenson Harwood (for the landlords).
Celia Fox Barrister.
Practice Direction
(Chancery 5/88)
(bankruptcy: individual insolvency)
[1988] 3 All ER 984
PRACTICE DIRECTIONS
CHANCERY DIVISION
6 October 1988.
Bankruptcy – Practice – Individual insolvency – Applications – Applications to judge – Applications to registrar – Matters to be heard in open court – Listing of petitions – Applications to Chief Clerk – Bankruptcy Act 1914, ss 26(1), 108(1), 109(3), 129, Sch 1, para 1 – Insolvency Act 1976, s 8(3) – Insolvency Act 1986, ss 268, 280, 293, 376 – Regulations as to the Conduct of Business in Bankruptcy in the High Court (dated 1 January 1884) – Bankruptcy Rules 1952, rr 8, 21, 172(1), 188, 193, 218 – Insolvency Rules 1986, rr 6.35, 6.50, 6.172, 6.216(2), 6.217(2), 7.13, 13.2(2).
1. As from 29 December 1986 (the appointed day) and until further order, the order of Cave J dated 1 January 1884 as amended (see SR & O Rev 1948, II, p 39) shall cease to have effect, and the following directions shall apply to insolvency proceedings in relation to individuals.
2. The following applications shall be made direct to the judge and unless otherwise ordered shall be heard in open court: (i) applications for the committal of any person to prison for contempt; (ii) applications for injunctions or for the modification or discharge of injunctions; (iii) applications for interlocutory relief or directions after the matter has been referred to the judge.
3. All other applications shall be made to the registrar in the first instance. He shall give any necessary directions and may, if the application is within his jurisdiction to determine, in his discretion hear and determine it himself or refer it to the judge.
4. The following matters shall be heard in open court: (i) the public examination of debtors; (ii) opposed applications for discharge or for the suspension or the lifting of the suspension of discharge; (iii) opposed applications for leave to be a director; (iv) in any case where the petition was presented or the receiving order or order for adjudication was made before the appointed day, those matters and applications specified in r 8 of the Bankruptcy Rules 1952, SI 1952/2113; (v) all matters and applications heard by the judge, except matters and applications referred by the registrar to be heard by the judge in chambers or directed by the judge to be so heard.
5. All petitions presented on or after the appointed day shall be listed under the name of the debtor and shall be heard in chambers.
6. In accordance with directions given by the Lord Chancellor the registrar has authorised certain applications to be dealt with by the Chief Clerk of the Bankruptcy Court pursuant to r 13.2(2) of the Insolvency Rules 1986, SI 1986/1925. The applications are: (1) by petitioning creditors to extend time for hearing petitions (1952 rules, r 172(1); Insolvency Act 1986, s 376); (2) by the official receiver: (i) to transfer proceedings from the High Court to a county court (1952 rules, r 21; 1986 rules, r 7.13); (ii) to extend time for holding first meeting of creditors (Bankruptcy Act 1914, Sch 1, para 1); (iii) to extend time for giving notice of a creditor’s meeting for the appointment of a trustee or of his decision not to summon such a meeting (1986 Act, s 293); (iv) to administer a debtor’s estate in a summary manner (1914 Act, s 129); (v) to amend the full title of the proceedings (1914 Act, s 109(3); 1986 rules, r 6.35); (vi) to revoke a certificate of summary administration (1986 rules, r 6.50). (3) by the official receiver to fix a venue for: (i) public examination of debtors (including restoring or reinstating) (1952 rules, rr 188, 193; 1986 rules, r 6.172); (ii) applications for adjudication (1952 rules, r 218); (iii) applications for discharge reviews under s 8(3) of the Insolvency Act 1976); (4) by bankrupts or debtors to fix
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a venue for: (i) applications for discharge (1914 Act, s 26(1); 1986 Act, s 280; 1986 rules, r 6.217(2)); (ii) applications to vary an order granting or refusing a discharge (1914 Act, s 108(1)) (iii) applications to lift the suspension of a discharge (1986 rules, r 6.216(2)).
7. The Practice Direction dated 10 December 1986 ([1987] 2 All ER 1000, [1987] 1 WLR 1202) is hereby revoked.
(Explanatory note. Applications for extension of time to apply to set aside a statutory demand under s 268 of the 1986 Act need no longer be made direct to the judge, but should be made to the registrar unless the applicant seeks to restrain the presentation of a petition under para 2(ii) of this Practice Direction and para 4(ii) of the Practice Direction (Chancery 3/88) dated 29 April 1988 ([1988] 2 All ER 511, [1988] 1 WLR 633). Injunctive relief should not normally be necessary.)
Nicholas Browne-Wilkinson V-C Barrister.
Bechal and another v Kitsford Holdings Ltd
[1988] 3 All ER 985
Categories: LAND; Sale of Land
Court: CHANCERY DIVISION
Lord(s): SIR NICOLAS BROWNE-WILKINSON V-C
Hearing Date(s): 28 JULY 1988
Sale of land – Contract – Completion – Notice to complete – Validity – Material misdescription of area in conditions of sale – Whether vendors ready and willing to fulfil own outstanding obligations – Whether notice to complete valid – National Conditions of Sale (20th edn), condition 22.
By a contract made at auction on 24 June 1987 the plaintiff vendors agreed to sell a property to the defendant purchaser. The contract incorporated the National Conditions of Sale (20th edn) and disclaimed responsibility for any incorrect statement, error or omission in the particulars or special conditions of sale. The particulars described the property as a shop with a ground floor area of 385 sq ft. On 30 November 1987 the vendors served a notice to complete under condition 22 of the National Conditions of Sale, making time of the essence of the contract. The purchaser failed to complete the purchase notwithstanding several extensions of the time for completion. By a letter dated 16 February 1988 the purchaser’s solicitors alleged that the surface area of the property was not 385 sq ft but 240 sq ft. On 19 February the vendors purported to rescind the contract and forfeit the deposit. The purchaser registered a caution at the Land Registry and the vendors applied to the court to vacate it. The purchaser contended that a valid notice under condition 22 could not be served where there had been a material misdescription of the area in the conditions of sale.
Held – A notice to complete under condition 22 was validly served if at the time of service the vendor was ready and willing to fulfil his own outstanding obligations under the contract. On the facts, the vendors could fulfil the contract they had entered into since the area sold was merely part of the description of the property and was not a matter of title featuring in the conveyance. Accordingly, the notice to complete had been validly served on 30 November 1987 and the contract had been validly rescinded. It followed that the caution on the register would be vacated (see p 988 e to h, post).
McGrath v Shah (1987) Times, 22 October applied.
Pagebar Properties Ltd v Derby Investment Holdings Ltd [1973] 1 All ER 65 distinguished.
Page 986 of [1988] 3 All ER 985
Notes
For date of completion and notice to complete, see 42 Halsbury’s Laws (4th edn) paras 126–127, and for cases on the subject, see 40 Digest (Reissue) 178–194, 1282–1407.
Cases referred to in judgment
McGrath v Shah (1987) Times, 22 October.
Pagebar Properties Ltd v Derby Investment Holdings Ltd [1973] 1 All ER 65, [1972] 1 WLR 1500.
Cases also cited
Carne v Debono [1988] 3 All ER 485, [1988] 1 WLR 1107, CA.
Motion
By notice of motion dated 22 July 1988 the plaintiffs, Golda Bechal and Maisie Lebor, sought a declaration that the contract dated 24 June 1987 for the sale of 225 East India Dock Road, Poplar, London E14 to the defendant, Kitsford Holdings Ltd, had been rescinded and an order that the caution registered at HM Land Registry by the defendant on 5 November 1987 be vacated. The facts are set out in the judgment.
Geoffrey Zelin for the plaintiffs.
James Behrens for the defendant.
28 July 1988. The following judgment was delivered.
SIR NICOLAS BROWNE-WILKINSON V-C. This is a motion aimed at procuring the vacation of a caution registered at the Land Registry by the defendant, Kitsford Holdings Ltd against a property, 225 East India Dock Road, Poplar, London E14. By a contract made at auction on 24 June 1987 the plaintiffs, Golda Bechal and Maisie Lebor, contracted to sell that property to the defendant company for £28,000. The contract incorporates the National Conditions of Sale (20th edn), subject to the modification that the time specified under condition 22 should be 10, not 16, working days as the time within which completion has to take place. In addition, general condition 9 provided as follows:
‘The property is believed to be, and shall be taken as, correctly described and any incorrect statement, error or omission found in the particulars or Special Conditions of Sale shall not annul the sale or entitle the purchaser to rescind the contract, nor shall the purchaser claim or be allowed any compensation in respect thereof.’
The contract simply described the property sold as ‘Lot 70’. In the particulars ‘Lot 70’ was said to be a shop investment they give the address of the property and the ground floor area as being 385 sq ft, but beyond that are silent.
The history thereafter is long and lamentable. There was considerable earlier failure to complete and discussion about the form in which title should be made by the plaintiffs. On 30 November 1987 notice under condition 22 was served on the purchaser, as a result of which time became of the essence of completion of the contract on or about 16 or 17 December 1987.
Thereafter there were extensions of that date. On 5 January it was agreed completion should be on 8 January. It was not completed. On 18 January what was said to be ‘a final extension’ was granted, but again the date passed. On 21 January there was a further extension permitting completion down to 29 January ‘at the latest’ and it was said that unless completion took place on 29 January the contract would be rescinded. 29 January passed and the contract was still not completed.
On 5 February the vendors’ solicitors wrote, again complaining of the failure to complete, saying:
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‘We must therefore give you formal notice that unless we hear from you within the next seven days with a definite date on which this purchase is to be completed we shall take such further steps as our clients may be advised in order to enforce their rights under the contract.’
That letter was acknowledged and it was said by the purchaser’s solicitors that they were taking immediate instructions: but in fact nothing happened within the seven day period.
By a letter of 16 February the purchaser’s solicitors for the first time (some seven months after the date of contract) raised an allegation that the surface area of the property was not the 385 sq ft stated in the particulars of sale but some 240 sq ft. If that is correct, in the context of the size of the property as a whole, that is a most substantial misdescription, being an error of some 60% in area.
Notwithstanding that, on 19 February the vendors eventually said that they were rescinding the contract and forfeiting the deposit.
This is a motion to vacate the caution registered protecting the contract which the defendant purchaser alleges is still in existence. I should not grant that relief unless satisfied that it is clear that the contract is at an end.
Provided that at the time the notice to complete was served on 30 November 1987 the vendors were able to say of themselves that they were ready and willing to fulfil their own outstanding obligations under the contract, a valid notice to complete was served; there has been a failure to comply with it, as extended, and a rescission of the contract which is valid. Counsel for the defendant argued the case on that basis.
His defence to the claim is this. He says that if the true area of the property is, as the purchaser alleges, most substantially different from that referred to in the contract, then at the time at which the notice under condition 22 was served, the vendors were not ready and willing to fulfil their obligations under the contract, and therefore the condition 22 notice could not be validly served and was invalid.
I should mention that counsel for the defendant asked for an adjournment to put in evidence as to the area of the property and as to the fact that his clients relied on the area stated. I would certainly have granted such adjournment if it had been a relevant factor for making my decision today. But the plaintiffs accepted that if no adjournment were granted they would have to argue the case on the footing that what the defendant alleges is true, namely that there is a material error in the area of the property stated in the conditions of sale. The case has today been argued on that assumption, though that assumption is for the purposes of this motion only.
The short question therefore is whether, if there has been a material misdescription or misstatement of the area in the conditions of sale, it is possible to serve a valid notice to complete under condition 22, which reads as follows:
‘At any time on or after, the completion date, either party, being ready and willing to fulfil his own outstanding obligations under the contract, may (without prejudice to any other right or remedy available to him) give to the other party or his solicitor notice in writing requiring completion of the contract in conformity with this condition … ’
It is unnecessary for me to read the rest of the condition since nothing turns on it. If a valid notice is served, then under condition 22 time becomes of the essence of the completion of the contract normally within 16 working days, but in the present case 10 working days, after service of the notice.
Counsel for the defendant relies on the decision of Goulding J in Pagebar Properties Ltd v Derby Investment Holdings Ltd [1973] 1 All ER 65, [1972] 1 WLR 1500 for his contention that in a case where there is a misdescription in a contract it is not possible for the vendor to serve a valid condition 22 notice.
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In Pagebar the vendors had contracted to sell a property subject to six leases, particulars of which were set out in the contract. As with the present case, the sale was subject to the National Conditions of Sale, which provide that—
‘no error, mis-statement or omission in any preliminary answer concerning the property, or in the sale plan or the Special Conditions, shall annul the sale nor … shall any damages be payable, or compensation allowed by either party, in respect thereof.’
The tenancy to which part of the property was subject was misdescribed in the particulars of sale. Goulding J held that in those circumstances the vendor could not be heard to say that he was ready and willing to fulfil his own outstanding obligations and that accordingly he could not serve a valid condition 22 notice.
It is to be noted in that case that the matter in question, viz the leases to which the property was subject, was a matter of title. If one asked of the vendor in that case, ‘Could he fulfil his contract, was he able and willing to fulfil his contract?' the answer would be, ‘No, he could not make good title to the property subject only to the leases to which under the contract the land was said to be subject.’
That case is to be contrasted with the decision of Mr John Chadwick QC, sitting as a deputy judge of the High Court in this division, in McGrath v Shah (1987) Times, 22 October. In that case it was said by the purchasers that the vendors had made a misrepresentation as to the area of part of the property, and on that ground it was said that the vendors could not serve a valid notice under condition 22. The judge rejected that submission and rejected in particular a submission that whenever the circumstances were such that a purchaser might be entitled to rescind, the vendor was not entitled to serve a notice to complete. The judge therefore held that there was a valid notice to complete under condition 22. The question was could the vendors carry out their contract? The answer was: Yes, they could. They could sell the property which they had contracted to sell and they could make title to it. What they might have been required to do was to pay damages for misrepresentation.
In the present case it seems to me one must ask the same question. On the facts of this case, on 30 November 1987 when they served the notice to complete, could the vendors fulfil the contract they had entered into? In my judgment they plainly could. The area sold is merely part of the description of the property and not a matter which would have featured in any way in the conveyance. To have performed that contract they would have had to tender a conveyance of all the property at 225 East India Dock Road, and if they did tender that, that would be a performance of their contract. If, contrary to the facts, somebody had raised the question that there was a misdescription of its area, they might have been required to accept an abatement in the purchase price referable to the reduction in the area stated. But in any event they were able and willing to fulfil that contract. Accordingly, I can see no ground on which it can be said that the notice to complete under condition 22 was invalidly served on 30 November. The contract has been validly rescinded. It follows that the caution on the register must be vacated.
Order accordingly.
Solicitors: G Lebor & Co (for the plaintiffs); Guy Clapham & Co (for the defendant).
Celia Fox Barrister.
R v South Molton Justices, ex parte Ankerson and Others
[1988] 3 All ER 989
Categories: CRIMINAL, Criminal Procedure
Court: QUEEN’S BENCH DIVISION
Lord(s): TAYLOR LJ AND MCCOWAN J
Hearing Date(s): 28 JUNE 1988
Magistrates – Binding over – Conditions to be satisfied before binding-over order may be made – Magistrates’ duties.
Before justices may make an order binding over a person to be of good behaviour there must be material before them which justifies the conclusion that there is a risk of a breach of the peace unless action is taken to prevent it, they must indicate to the defendant their intention to bind him over and the reasons for it so that representations can be made on his behalf, the consent of the defendant himself to the binding over must be obtained, the justices must determine the defendant’s means before fixing the amount of the recognisance and the binding over must be for a finite period (see p 990 g h p 991 c f g j and p 992 c to e, post).
Notes
For binding over to be of good behaviour, see 29 Halsbury’s Laws (4th edn) para 494 and for cases on the subject, see 33 Digest (Reissue) 167–169, 1318–1328.
Cases referred to in judgment
R v Aubrey-Fletcher, ex p Thompson [1969] 2 All ER 846, [1969] 1 WLR 872, DC.
R v Central Criminal Court, ex p Boulding [1984] 1 All ER 766, [1984] QB 813, [1984] 2 WLR 321, DC.
R v Edgar (1913) 9 Cr App R 13, DC.
R v North London Metropolitan Magistrate, ex p Haywood [1973] 3 All ER 50, [1973] 1 WLR 965, DC.
R v South London Magistrates’ Court, ex p Brown [1974] Crim LR 313 DC.
R v Wilkins [1907] 2 KB 380, DC.
Wilson v Skeock (1949) 113 JP 294, DC.
Application of judicial review
Paul Ankerson, Shaun Hulland and Paul Vickery applied, with the leave of Mann J given on 15 December 1987, for judicial review by way of certiorari to quash binding-over orders made against them by magistrates sitting at South Molton on 2 September 1987. The facts are set out in the judgment of McCowan J.
Nigel Seed for the applicants.
Andrew Massey for the magistrates.
28 June 1988. The following judgment was delivered.
MCCOWAN J (delivering the first judgment at the invitation of Taylor LJ). This is an application for certiorari in respect of a binding over of the three applicants, the application being made pursuant to leave given by Mann J.
The story shortly is this. There were four defendants all charged jointly with assault occasioning actual bodily harm. One of them, Paul Vickery, was also charged with unlawful wounding. There were apparently a number of abortive hearings, and on each adjournment the four defendants were given unconditional bail.
On 2 September 1987 the three applicants were before the justices. The fourth defendant, Mark Vickery, was unable to be there. On that day Paul Vickery elected trial. Accordingly, it became necessary to adjourn the case for a date to be fixed for committal proceedings. In fact the case in respect of the three who had appeared was adjourned to
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7 October 1987, while the case against the missing defendant, Mark Vickery, was adjourned to 16 September 1987.
The three applicants were bound over each in his own recognisance in the sum of £150 to be of good behaviour. We were told by counsel who appeared before us for the applicants that it was believed by the applicants’ solicitors that the three were being bound over because of the nature of the charges. He says it was not until the affidavit of the clerk to the court was served on his instructing solicitors that it was realised that it was said that it was because these applicants had misbehaved in court that they were bound over to be of good behaviour. He made it clear that the applicants do not accept that that was the true reason. Speaking for myself, I can understand his lack of conviction that that is the true reason when I look at the record of what happened in the case of Mark Vickery the record shows in manuscript that he was remanded to 16 September for arrangement of bind-over. That is very remarkable phraseology if the reason for the bind-over of the three applicants was their misbehaviour in court since it obviously could not have been anticipated that Mark Vickery would also misbehave in court.
The suggestion made by counsel for the applicants is that this was really using a bind-over as a form of bail in order to avoid the requirements of the Bail Act 1976, and he further relies on the lack of a finite period for the binding over as an indication that that is so. Clearly, in my judgment, if that was the object, it was unlawful.
Counsel accepts that on a hearing of an information there is from the Justices of the Peace Act 1361 an inherent power in justices to bind over provided they have the necessary material on which to do this. He drew the court’s attention to R v South West London Magistrates’ Court ex p Brown [1974] Crim LR 313. I do not think it would assist to read the facts of that case, but what was held was (at 313–314):
‘… refusing the applications, that following Wilson v. Skeock ((1949) 113 JP 294), before a court could exercise the jurisdiction of preventive justice by binding over there had to be material before the court causing it to fear that, unless steps were taken to prevent it, there might be a breach of the peace. Following Aubrey-Fletcher, ex p Thompron ([1969] 2 All ER 846, [1969] 1 WLR 872) and North London Metropolitan Magistrate, ex p Haywood ([1973] 3 All ER 50, [1973] 1 WLR 965), the material, which did not have to be sworn evidence, had to be such that, when considered carefully and not capriciously, it justified a conclusion that there was a risk of a breach of the peace unless action was taken to prevent it.’
Counsel for the applicants’ first submission therefore is that there was no material in this case to justify the imposition of a bind-over, I have looked to see what it is alleged on behalf of the justices was the material. In a nutshell it can be summed up as dumb insolence in the face of the court. The only particulars that have been given of that is that they displayed a disrespectful and casual attitude. However, as the insolvence was said to be dumb, this attitude obviously did not manifest itself in words. In my judgment such behaviour could not possibly justify the imposition of a bind-over because it simply would not provide material on which it could reasonably be judged that there was a danger of them committing a breach of the peace if they were not bound over.
The second point that counsel takes is that the nature of the case was not explained to his clients. They were not told the reason for the bind-over. As I have indicated, their understanding was it was because of the nature of the case, not because they had shown dumb insolence in court. For this proposition he relies on R v Wilkins [1907] 2 KB 380, and in particular on words in the judgment of Lord Alverstone CJ (at 383):
‘Justices have a general power under their commission to bind over any person if it appears that that person has been guilty of violent conduct tending to a breach of peace, even though there is no proof of a threat towards any particular person, provided, of course, that the person bound over has had a reasonable opportunity of knowing the nature of the charge brought against him and of making his answer to it.’
Page 991 of [1988] 3 All ER 989
Support for the proposition can also be found in R v Aubrey-Fletcher, ex p Thompson [1969] 2 All ER 846 at 847, [1969] 1 WLR 872 at 873, where Lord Parker CJ said:
‘An order under the Act of 1361 can, however, be made at any time during the proceedings, subject of course to an opportunity being given to the applicant or his advisors to argue against it.’
There is clearly authority for that proposition. It seems to me that consent is an important element in this matter and that, if the man in question is going to be asked whether he consents to a bind-over, he must be given the opportunity of explaining his conduct. If he consents to a bind-over, he must be given the opportunity of explaining his conduct. If he had been told in this case that it was because of dumb insolence he might have been able to give some explanation for it. In any event, he must be afforded the opportunity through his legal representative of arguing that such conduct in fact did not amount to the necessary conduct for the purposes of the bind-over. So again it seems to me that that point is a good one.
Third, counsel says that there must be consent by the man concerned. The argument against it is that their solicitors consented. In the bundle before the court the clerk to the court says in his affidavit:
‘I distinctly recollect that on this occasion, in view of the apparent state of unpreparedness of the defence I said words to the effect “Did the defence consent to a bind-over or not?” The defence used to words to the effect that “They did not want to consent but reluctantly did so”.
There is also an affidavit from Mr Green, who was the solicitor appearing for the prosecution, and he says;
‘The three defence lawyers addressed the court to the effect that in view of the custodial alternative their clients would be reluctantly advised to agree to be bound over. I am again certain that the three defendants were never directly asked by the Clerk, there was no enquiry as to their means … ’
Plainly this was a consent, in so far as it was a consent, which was given under protest, one might almost say under threat, that in the absence of consent they would be committed to prison. It was not a consent in any event given by the defendants themselves, and in my judgment the defendants themselves should be asked for their consent. Accordingly, again, I find that reason established.
Fourth, counsel relies on the fact that no inquiry was made into their means. For the proposition that there should have been he relies on R v Central Criminal Court, ex p Boulding [1984] 1 All ER 766, [1984] QB 813. Suffice it if I read from the headnote what was there held ([1984] 1 All ER 766):
‘Where the Crown Court intended to impose a binding-over order on a convicted defendant requiring him to enter into a recognisance in a substantial sum, natural justice required the court to give the defendant or his legal representative an opportunity to make representations against the imposition of such an order, and also required the court to inquire into the defendants means before imposing such an order.’
It is argued for the justices that £150 is by no means an unusual sum these days. It is said to be quite a low sum. Be that as it may. In my judgment an inquiry must be made into the means, however small the figure may appear to the justices to be.
The final point taken by counsel for the applicants is that the period of the bind-over must be finite. In this case the case was adjourned to 7 October 1987, but without any indication that that would be the date of the committal proceedings. In fact we are told that it was not the date of the committal proceedings. Those occurred on 6 and 7 January 1988. The only authority which has been drawn to our attention on that matter is R v
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Edgar (1913) 9 Cr App R 13 at 14, where giving the judgment of the court, Pickford J said:
‘Objection is taken in the case to the fact that the defendant has been ordered to enter into a recognisance for an indefinite period. It is not necessary to decide whether there is power to order a recognisance to be entered into for life; we do not decide that there is not such power. It seems, however, that in all cases it has been the practice to limit the time for recognisance, and in no case has an indefinite time been inserted in the order. The court thinks it is better, whether there is power to leave the time indefinite or not, that the usual practice should be followed, and a time inserted.’
I would not myself seek to make a general pronouncement on this matter, but certainly I would say that it was not appropriate to bind over until the date of committal. There ought to have been a finite date expressed in this case. I therefore would accept counsel’s fifth point. I find them all established, and for my part I would grant the application and quash the orders.
TAYLOR LJ. I agree with the conclusions stated by McCowan J and the reasons he has given. When justices have it in mind to order a binding over, before they do so (1) there should be material before them justifying the conclusion that there is a risk of a breach of the peace unless action is taken to prevent it, (2) they must indicate to the defendant their intention to bind him over and the reasons for it so that he or his lawyer can make representations, (3) they must obtain consent to the bind-over from the defendant himself, (4) before fixing the amount of the recognisance they should inquire as to the defendant’s means and (5) the binding over should be for a finite period.
I agree that certiorari must go to quash these orders of bind-over.
Application granted.
Solicitors: Kidd Rapinet agents for Chanters, Barnstaple (for the applicants); Annear, Ilfracombe (for the magistrates).
N P Metcalfe Esq Barrister.
Read v Secretary of State for the Home Department
[1988] 3 All ER 993
Categories: CRIMINAL; Sentencing: PRISONS
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD BRANDON OF OAKBROOK, LORD GRIFFITHS, LORD OLIVER OF AYLMERTON AND LORD GOFF OF CHIEVELEY
Hearing Date(s): 19, 20, 21, 25 JULY, 3 NOVEMBER 1988
Prison – Repatriation of prisoner – Transfer into United Kingdom – Continued enforcement of sentence – Compatibility of sentence – Sentence incompatible with law of United Kingdom – Basis on which compatibility to be determined – Transfer of prisoner from Spain to England – Prisoner sentenced in Spain to 12 years’ imprisonment for counterfeiting offence – Maximum sentence in England for similar offence 10 years’ imprisonment – Sentence in England unlikely in practice to exceed 4 years’ imprisonment – Whether compatibility of sentence to be determined by comparing maximum sentences or sentences likely to be imposed in practice – Repatriation of Prisoners Act 1984, s 1 – Convention on the Transfer of Sentenced Persons 1983, art 10.
Prison – Repatriation of prisoner – Transfer into United Kingdom – Continued enforcement of sentence – Remission of sentence – Basis on which remission to be determined – Whether basis for determining any remission earned by prisoner limited to period in custody in England – Whether remission can be granted in respect of period in foreign custody.
In 1985 the respondent was convicted in Spain of the offence of introducing counterfeit money into the country and was given the minimum sentence under Spanish law of 12 years and a day. In England the maximum sentence under s 22 of the Forgery and Counterfeiting Act 1981 for a similar offence was ten years although in practice an English court would have been unlikely to have imposed a term of greater than four years’ imprisonment for an offence of the gravity of that committed by the respondent. In 1987 the respondent was repatriated to the United Kingdom to serve the balance of his sentence pursuant to a warrant issued by the Secretary of State under s 1 of the Repatriation of Prisoners Act 1984 and the provisions of the Convention on the Transfer of Sentenced Persons 1983, to which the United Kingdom and Spain were parties. Under art 10a of the convention the administering state (sc the United Kingdom) was bound by the nature and duration of the sentence as determined by the sentencing state but was entitled, if the sentence imposed by the sentencing state was ‘by its nature or duration incompatible with the law of the administering State’, to adapt the sentence to the sentence prescribed by its own law for a similar offence. In fixing the term to be served by the respondent in England the Secretary of State decided that art 10 only permitted him to reduce the sentence to ten years, less the time already spent in custody in Spain. Furthermore, in calculating remission for good behaviour the Secretary of State refused to take into account the time spent in custody in Spain. The respondent applied for judicial review of the Secretary of State’s decision, contending, inter alia, that his sentence to be served in the United Kingdom ought to be reduced to the sentence he would in practice have received in England, namely four years’ imprisonment, and that the time spent in custody in Spain should count towards remission of sentence. The Divisional Court granted the respondent relief by way of declarations on the ground, inter alia, that compatibility of sentences between a sentencing state and the United Kingdom as an administering state was to be determined by comparing the sentence imposed by the sentencing state with the actual sentence which would have been passed by an English court for a similar offence rather than by comparing the maximum sentences in the two countries. The Secretary of State appealed to the House of Lords.
Held – The ‘similar offence’ contemplated by art 10(1) of the 1983 convention was an
Page 994 of [1988] 3 All ER 993
offence defined by the law of the administering state which had legal characteristics similar to those of the offence under the law of the sentencing state for which the prisoner had been convicted, irrespective of the circumstances in which the particular offence had been committed. For such a similar offence there could only be one maximum sentence prescribed by the law of the administering state, which for an English statutory offence would be the statutory maximum. Accordingly, where the court in a sentencing state imposed a sentence in excess of the statutory maximum sentence prescribed for a corresponding offence in England, the Secretary of State, in adapting the sentence under art 10 of the convention, could not reduce the sentence below the maximum prescribed for the United Kingdom offence, notwithstanding that an English court would have imposed a lesser term for the particular offence and, furthermore, where a court in the sentencing state imposed a sentence which did not exceed the English statutory maximum for a corresponding offence, the Secretary of State had no power to reduce the sentence. If followed that the Secretary of State had not misdirected himself as to the term of imprisonment required to be served by the respondent following his transfer and the appeal would therefore be allowed (see p 998 g to p 999 c, p 1000 b c and p 1001 g to j, post).
Semble. Where a prisoner is repatriated, any remission for good behaviour is restricted to the period spent in custody in the United Kingdom (see p 1000 j and p 1001 g to j, post).
Decision of the Divisional Court of the Queen’s Bench Division sub nom R v Secretary of State for the Home Dept, ex p Read [1988] 1 All ER 759 reversed.
Notes
For the transfer of prisoners to the United Kingdom, see Supplement to 37 Halsbury’s Laws (4th edn) para 1130A.4.
For the Repatriation of Prisoners Act 1984, s 1, see 34 Halsbury’s Statutes (4th edn) 740.
For the Forgery and Counterfeiting Act 1981, s 22, see 12 ibid 836.
Appeal
The Secretary of State for the Home Department appealed with the leave of the Divisional Court of the Queen’s Bench Division given on 6 November 1987 against the decision of that court (Parker LJ and Kennedy J) ([1988] 1 All ER 759, [1988] 2 WLR 236) on 30 October 1987 granting the respondent, Gary John Read, declarations that the Secretary of State was entitled under the Repatriation of Prisoners Act 1984 and the Convention on the Transfer of Sentenced Persons 1983 (i) to fix the term to be served by the respondent since his transfer at less than the term fixed by a warrant authorising the respondent’s transfer under the 1984 Act and (ii) to determine earliest release date on the basis of one-third of the whole period of detention and not merely on the period to be served in the United Kingdom. The Divisional Court had certified under s 1(2) of the Administration of Justice Act 1960 that points of law of general public importance (set out at p 998 c d and p 1000 f g, post) were involved in the decision. The facts are set out in the opinion of Lord Bridge.
John Dyson QC and Nigel Pleming for the Secretary of State.
Anthony Lester QC, Edward Fitzgerald and A Weereratne for the respondent.
Their Lordships took time for consideration
3 November 1988. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, the Secretary of State appeals by leave of the Divisional Court (Parker LJ and Kennedy J) from the order of that court made on 30 October 1987 on the application of the respondent in judicial review proceedings
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declaring, in effect, that the terms of a warrant issued by the Secretary of State pursuant to the Repatriation of Prisoners Act 1984, authorising the transfer of the respondent from a Spanish prison to Her Majesty’s Prison Wandsworth and his subsequent detention there, were vitiated by an error of law in that the Secretary of State misdirected himself as to the term of imprisonment required to be served in the United Kingdom following the transfer (see [1988] 1 All ER 759, [1988] 2 WLR 236).
On 23 October 1985 the respondent was convicted before a Spanish court of competent criminal jurisdiction of an offence of introducing forged currency into Spain. He and two accomplices had flown to Alicante with counterfeit English bank notes with a face value of £14,000. They were caught red-handed by the Spanish police when seeking to exchange some of the notes for Spanish money. The court imposed the minimum sentence for the offence required by the Spanish penal code, which is imprisonment for 12 years and one day, but recommended to the Spanish government the grant of a ‘partial amnesty’ to reduce the length of the sentence to six years and one day. No action was taken on this recommendation until after the respondent had been transferred to England on 5 February 1987 pursuant to the warrant of the Secretary of State under the 1984 Act. Eventually, on 6 November 1987, the competent Spanish ministerial authority reduced the Spanish sentence to one of ten years’ imprisonment. But this was after the order of the Divisional Court now appealed from.
The long title of the 1984 Act reads:
‘An Act to make provision for facilitating the transfer between the United Kingdom and places outside the British Islands of persons for the time being detained in prisons, hospitals or other institutions by virtue of orders made in the course of the exercise by courts and tribunals of their criminal jurisdiction.’
Pursuant to the Act, British citizens convicted and sentenced to be detained in foreign countries may be transferred to the United Kingdom and foreigners convicted and sentenced here may be transferred to their own countries, in each case to serve the balance of their sentences in their home countries in accordance with international arrangements to which the United Kingdom is a party. The appeal is concerned solely with the provisions affecting the return to this country of prisoners subject to sentences passed abroad. It is fundamental that in every case before transfer can be effected the sentencing state must have agreed to the transfer and the prisoner himself must have consented to it. Elaborate provision is made to ensure that the prisoner, before giving his consent, shall have been fully informed as to the effect which the transfer will have in terms of the sentence which he will be required to serve in the United Kingdom on his return: see s 1(1), (4) and (5). Section 3(1)(c) provides that the effect of a warrant for the transfer of a prisoner to the United Kingdom issued by the Secretary of State under s 1 shall be to authorise—
‘the detention of the prisoner in any part of the United Kingdom in accordance with such provisions as may be contained in the warrant, being provisions appearing to the Secretary of State to be appropriate for giving effect to the international arrangements in accordance with which the prisoner is transferred.’
The Act is framed in terms which would enable it to be operated in accordance with any international arrangements which the United Kingdom government may make with other countries, either by adherence to some general international convention on the subject, or by ad hoc agreements with particular foreign governments. Some governments with draconian sentencing policies for the suppression of crime or of particular classes of crime in their countries might be reluctant to agree to the transfer of prisoners sentenced by their courts save on terms which would ensure that the length of their sentences remained unaltered, and the Act appears to contemplate that the Secretary of State may, if necessary to secure the return of a prisoner pursuant to ad hoc international arrangements, authorise his imprisonment on return for a term in excess of the maximum to which he would have been subject if he had committed a
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corresponding offence in this country: see s 3(3)(a). Similarly, there is nothing in the terms of the statute to prevent the Secretary of State from authorising the return to this country of a prisoner to continue to serve a sentence for an offence, eg consumption of alcohol contrary to Islamic law, which would have been no offence at all in this country.
The international arrangements under which the present respondent’s transfer from Spain to the United Kingdom was effected are contained in the Convention on the Transfer of Sentenced Persons (Strasbourg, 21 March 1983; TS 51 (1985); Cmnd 9617), to which the United Kingdom is a signatory, and it is on the provisions of the convention that the outcome of this appeal turns. But it may be important to bear in mind, in considering the effect of those provisions, that the primary policy objective of the United Kingdom statute, which is equally reflected in the preamble to the convention, is the obviously humane and desirable one of enabling persons sentenced for crimes committed abroad to serve out their sentences within their own society, which, irrespective of the length of sentence, will almost always mitigate the rigour of the punishment inflicted.
In art 1 of the convention ‘sentencing State’ is defined as meaning ‘the State in which the sentence was imposed on the person who may be, or has been, transferred’ and ‘administering State’ is defined as meaning ‘the State to which the sentenced person may be, or has been, transferred in order to serve his sentence’.
Two radically different procedures are provided under the convention affecting the nature of the sentence to be served by a prisoner after his transfer to the administering state. These are described in arts 9, 10 and 11, which, so far as relevant, provide as follows:
‘Article 9
Effect of transfer for administering State
1. The competent authorities of the administering State shall: a. continue the enforcement of the sentence immediately or through a court or administrative order, under the conditions set out in Article 10, or b. convert the sentence, through a judicial or administrative procedure, into a decision of that State, thereby substituting for the sanction imposed in the sentencing State a sanction prescribed by the law of the administering State for the same offence, under the conditions set out in Article 11.
2. The administering State, if requested, shall inform the sentencing State before the transfer of the sentenced person as to which of these procedures it will follow.
3. The enforcement of the sentence shall be governed by the law of the administering State and that State alone shall be competent to take all appropriate decisions …
Article 10
Continued enforcement
1. In the case of continued enforcement, the administering State shall be bound by the legal nature and duration of the sentence as determined by the sentencing State.
2. If, however, this sentence is by its nature or duration incompatible with the law of the administering State, or its law so requires, that State may, by a court or administrative order, adapt the sanction to the punishment or measure prescribed by its own law for a similar offence. As to its nature, the punishment or measure shall, as far as possible, correspond with that imposed by the sentence to be enforced. It shall not aggravate, by its nature or duration, the sanction imposed in the sentencing State, nor exceed the maximum prescribed by the law of the administring State.
Article 11
Conversion of sentence
1. In the case of conversion of sentence, the procedures provided for by the law of
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the administering State apply. When converting the sentence, the competent authority: a. shall be bound by the findings as to the facts insofar as they appear explicitly or implicitly from the judgment imposed in the sentencing State; b. may not convert a sanction involving deprivation of liberty to a pecuniary sanction; c. shall deduct the full period of deprivation of liberty served by the sentenced person; and d. shall not aggravate the penal position of the sentenced person, and shall not be bound by any minimum which the law of the administering State may provide for the offence or offences committed … ’
Article 3(3) provides:
‘Any State may, at the time of signature or when depositing its instrument of retification, acceptance, approval or accession, by a declaration addressed to the Secretary General of the Council of Europe, indicate that it intends to exclude the application of one of the procedures provided in Article 9.1.a and b in its relations with other parties.’
The United Kingdom has indicated, in accordance with art 3(3), that it intends to exclude the application of the procedure provided in art 9(1)(b). The nature and duration of any sentence, therefore, to be served in the United Kingdom as the administering state by a prisoner transferred here under the convention is governed by the procedure for continued enforcement under art 10 to the exclusion of the procedure for conversion of sentence under art 11.
The view taken by the Secretary of State was that, with respect to duration of sentence, the only authority given by art 10 to the administering state to ‘adapt the sanction to the punishment or measure prescribed by its own law for a similar offence’ was to reduce the sentence to the statutory maximum laid down for the corresponding offence in this country. In this case the offence corresponding to that of which the respondent was convicted in Spain is an offence under s 15 of the Forgery and Counterfeiting Act 1981, for which the maximum penalty is ten years’ imprisonment. Accordingly, when the warrant was issued for the transfer of the respondent, it authorised his detention in the United Kingdom for a term appropriate to a sentence of ten years’ imprisonment after giving credit for the time spent in custody in Spain from the date of his arrest.
The primary argument advanced on the respondent’s application for judicial review of the warrant and that which prevailed with the Divisional Court was that the process of adapting a sentence under art 10(2) to the punishment prescribed by our law for a similar offence and the prohibition against exceeding the maximum prescribed by law both required the Secretary of State to assess the ‘range’ or ‘bracket’ of sentences appropriate to the circumstances of the particular offence committed by the transferred prisoner by reference to the practice of the Court of Appeal, Criminal Division and any guidelines laid down by that court and to reduce the foreign sentence to the extent necessary to confine it within the upper limit so ascertained. Here, it was said, the appropriate range within which a sentence required to be selected having regard to the circumstances of the offence was from two to four years and the Secretary of State should have adapted the Spanish sentence to bring it within this range. Accepting the substance of this argument, Parker LJ said ([1988] 1 All ER 759 at 764, [1988] 2 WLR 236 at 242–243):
‘If there is incompatibility art 10 empowers the administering state to “adapt the sanction to the punishment or measure prescribed by its own law for a similar offence“. It then provides that “as to its nature” the adaption shall “so far as possible, correspond with that imposed by the sentence to be enforced” and is not to “aggravate, by its nature or duration, the sanction imposed by the sentencing State, nor exceed the maximum prescribed by the law of the administering State“. Since the ten-year sentence under s 15 of the 1981 Act is to be reserved for the gravest offence and the Spanish offence was far from the gravest it must in my view follow
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that in fixing the term to be served on the basis of a ten-year sentence the Secretary of State has infringed the final prohibition.’
In its formal order the Divisional Court gave effect to this view on the first point by declaring that the Secretary of State was entitled under the 1984 Act and the convention ‘to fix the term to be served by the [respondent] since his transfer at less than the term fixed by the warrant’. In relation to this first point the Divisional Court certified two points of law of general public importance in accordance with s 1(2) of the Administration of Justice Act 1960 in the following terms:
‘1. Where the sentence imposed by the Sentencing Court exceeds the maximum sentence prescribed by an English Statute for even the gravest of offences of a similar kind, is the Secretary of State in adapting the sentence under Article 10, limited to reducing the sentence to the maximum allowed by statute or can he, if the offence is one for which no English Court could, in conformity with English Law, impose the statutory maximum, further reduce it? 2. (a) If he is not so limited and can reduce it further would a reduction to at or near the top of the range of sentences established by the Court of Appeal for an offence of similar gravity be within the power of the Secretary of State? (b) If so, does this power exist where the sentence imposed by the sentencing Court does not exceed the statutory maximum but does exceed the top of the range aforesaid.’
My Lords, it is, no doubt, correct to say of the ten-year sentence imposed for the respondent’s offence that it is in one sense incompatible with English law, to the extent that such a sentence, if imposed by an English court on the respondent for an offence committed here in similar circumstances to those in which his offence was committed in Spain, would undoubtedly have been reduced by the Court of Appeal, perhaps to something even less than four years’ imprisonment. But this, with all respect, does not enable the interpretation adopted by the Divisional Court to be derived from the language of art 10(2), read as a whole and in its context. In the first place, when the Court of Appeal, Criminal Division, either lays down guidelines for the assistance of sentencers or reduces a particular sentence on the ground that it was excessive in all the relevant circumstances applicable to the offence and the offender, it seems to me a misuse of language to say that it is prescribing by law a maximum sentence for an offence. But, that apart, the key phrase in art 10(2) on which, in my opinion, the meaning of the whole ultimately depends is found in the concluding words of the first sentence, ‘for a similar offence’. Does this phrase refer merely to similarity between an offence having certain legal characteristics, as defined by the law of the sentencing state, of which the prisoner has been convicted in the sentencing state and the corresponding offence, as for example theft, burglary, robbery, forgery etc, as defined by the law of the administering state and having similar legal characteristics, of which he might have been convicted in the administering state? Or does it go much further and refer to similarity in all the circumstances relating both to the offence and the offender which are relevant to sentence in any particular case? I have no hesitation in reading it as conveying the former, not the latter, meaning. This seems to me to follow clearly from the contrast between the provision of art 10(1) that the administering state ‘shall be bound by the … duration of the sentence’ and the provision of art 11(1)(a) that the administering state ‘shall be bound by the findings as to the facts in so far as they appear explicitly or implicitly from the judgment imposed in the sentencing State’. In the light of this contrast, it cannot be intended that the administering state, when adapting a sentence under art 10(2), as opposed to converting a sentence under art 11, will need to be concerned with the detailed circumstances in which the offence was committed. Accordingly, the ‘similar offence’ contemplated by art 10(2) can only be an offence as defined by the law of the administering state which has legal characteristics similar to those of the offence, as defined by the law of the sentencing state, of which the prisoner was convicted,
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irrespective of the circumstances in which the particular offence was committed. For a ‘similar offence’ in this sense there can only be one maximum sentence prescribed by the law of the administering state, which in the case of an English statutory offence will be the statutory maximum. The process of adaptation by the administering state of ‘the sanction to the punishment or measure prescribed by its own law for a similar offence’ can only contemplate such adjustment of the sentence as may be necessary to bring it within that maximum. If the quite different process of adaptation presupposed by the argument for the respondent and the judgments of the Divisional Court is to be sustained, art 10(2) must be read as permitting, and indeed requiring, the administering state to examine for itself all the relevant circumstances in which the offence was committed and effectively to engage in a complete process of resentencing. To interpret art 10(2) in this sense would in practical terms eliminate any significant distinction between the continued enforcement procedure under art 10 and the conversion of sentence procedure under art 11. This seems to me quite inconsistent with the inlcusion in the convention of such elaborate provisions designed to make these two distinct procedures available as alternatives at the option of the administering state.
I reach this conclusion by giving to art 10, read in the context of arts 9 and 11, the meaning which the language seems to me clearly intended to convey. But, if I felt any doubt, it would be resolved for me by the text of the Explanatory report on the Convention on the Transfer of Sentenced Persons (Council of Europe, Strasbourg 1983) published with the text of the convention by the committee by whom the convention was drawn up within the Council of Europe under the authority of the European Committee on Crime Problems. The text of the explanatory report was prepared on the basis of the committee’s discussions and submitted to the Committee of Ministers of the Council of Europe. Although it does not purport to be an authoritative interpretation of the convention, it is available as an aid to construction as part of the ‘travaux préparatoires’ and under art 31 of the Vienna Convention on the Law of Treaties (Vienna, 23 May 1969; TS 58 (1980); Cmnd 7964).
Article 10 of the convention is discussed in paras 49 and 50 of the explanatory report as follows:
‘49. Where the administering state opts for the “continued enforcement” procedure, it is bound by the legal nature as well as the duration of the sentence as determined by the sentencing state (paragraph 1): the first condition (“legal nature”) refers to the kind of penalty imposed where the law of the sentencing state provides for a diversity of penalties involving deprivation of liberty, such as penal servitude, imprisonment or detention. The second condition (“duration”) means that the sentence to be served in the administering state, subject to any later decision of that state on, for example, conditional release or remission, corresponds to the amount of the original sentence, taking into account the time served and any remission earned in the sentencing state up to the date of transfer.
50. If the two states concerned have different penal systems with regard to the division of penalties or the minimum and maximum lengths of sentence, it might be necessary for the administering state to adapt the sanction to the punishment or measure prescribed by its own law for a similar offence. Paragraph 2 allows that adaptation within certain limits: the adapted punishment or measure must, as far as possible, correspond with that imposed by the sentence to be enforced; it must not aggravate, by its nature or duration, the sanction imposed in the sentencing state; and it must not exceed the maximum prescribed by the law of the administering state. In other words: the administering state may adapt the sanction to the nearest equivalent available under its own law, provided that this does not result in more severe punishment or longer detention. As opposed to the conversion procedure under Article 11, under which the administering state substitutes a sanction for that imposed in the sentencing state, the procedure under Article 10.2 enables the
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administering state merely to adapt the sanction to an equivalent sanction prescribed by its own law in order to make the sentence enforceable. The administering state thus continues to enforce the sentence imposed in the sentencing state, but it does so in accordance with the requirements of its own penal system.’ (The explanatory report’s emphasis.)
It seems to me that the whole tenor of these paragraphs and, more particularly, the opening sentence of para 50 and the statement that ‘the administering state may adapt the sanction to the nearest equivalent available under its own law’ are consistent only with the interpretation I have adopted.
I would accordingly answer the first two certified questions compendiously, if not precisely according to their terms, by stating that where the court in a sentencing state imposes a sentence in excess of the maximum sentence prescribed by an English statute for a corresponding offence the Secretary of State adapting the sentence under art 10 of the convention has power to reduce the sentence to that maximum but no further, and that where a court in the sentencing state imposes a sentence which does not exceed the English statutory maximum for a corresponding offence, the Secretary of State has no power to reduce the sentence.
At the time when the respondent’s application was before the Divisional Court, not only had no reduction been made by the Spanish authorities in the original sentence of 12 years and one day in response to the recommendation of the sentencing court, but no information had been forthcoming from the Spanish authorities, despite repeated applications made by the United Kingdom government, as to what, if any, remission of sentence had been earned by the respondent during the time he had spent in custody in Spain. In these circumstances it was argued for the respondent and accepted by the Divisional Court, albeit for reasons expressed in the judgments of Parker LJ and Kennedy J which differed in some respects, that it was open to the Secretary of State to grant remission equivalent to one-third of the time spent in custody in Spain. The court included in its formal order a second declaration that under the Act and the convention the Secretary of State was entitled ‘to determine earliest release date on the basis of one third of the whole period of detention and not merely on the period to be served in this country’. The Divisional Court further certified as a third point of law of general public importance a question in the following terms:
‘In the absence of information from a sentencing state as to what if any remission a prisoner has earned, can the Secretary of State grant remission in accordance with the principles of English law on the whole of the sentence as adapted, including that part of it which has been served abroad?’
Before the appeal reached your Lordships’ House this point had become wholly academic, since the Spanish authorities had given notice that the respondent had earned remission in respect of the time spent in custody in Spain which, it is accepted on behalf of the respondent, is not less favourable than such remission as might have been granted by the Secretary of State. It is accordingly no longer contended that the Secretary of State has any power to grant further remission in this respect.
In these circumstances it would be inappropriate to examine the point raised by the third certified question in any detail or to offer an answer to the question which would be purely obiter. As at present advised, however, it appears to me that both the 1984 Act and the convention contemplate that any remission of sentence in respect of time spent by a prisoner in custody in a sentencing state is intended to be governed by the rules applicable in that state. If under those rules a prisoner has, for any reason, failed to earn remission equivalent to that which he might have expected to earn under r 5 of the Prison Rules 1964, SI 1964/388, as amended, had he been in prison here, I have not found any provision in the Act or the convention under which the Secretary of State could appropriately grant remission under the relevant English rule in respect of the period of foreign detention.
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The outcome, in my opinion, is that the appeal should be allowed and the order of the Divisional Court set aside.
I cannot leave the case without adding a word about one aspect of it which may give rise to a genuine sense of grievance on the part of the respondent. The respondent is presently on bail granted at the time when the Divisional Court made its order. The warrant under which the respondent’s return was ordered provides, pursuant to para 2 of the schedule to the 1984 Act, that for the purpose of calculating his eligibility for parole the whole period spent in custody in Spain is to be taken into account. Even with the benefit of this provision, however, when the respondent surrenders to his bail your Lordships were informed that he will still have 131 days to serve before the earliest date when his release on parole can be considered.
At the time when the respondent consented to his return to the United Kingdom on the terms proposed to be included in the warrant by the Secretary of State, he had every reason to expect, according to the advice he received from his Spanish lawyers, that the recommendation of the sentencing court for the reduction of his sentence to six years and one day would in due course be fully implemented by the appropriate Spanish ministerial authority. If this had happened, the respondent would have been eligible for release on parole immediately following his transfer to England in February 1987 or so soon thereafter as the decision of the Spanish authorities was notified to the Home Office.
We do not know, of course, what caused the long delay before the appropriate Spanish ministerial authority made a decision on the sentencing court’s recommendation. But it is impossible not to speculate that when the decision was eventually taken, long after the respondent’s transfer to the United Kingdom, it may have been influenced, if not determined, by the knowledge that ten years was the term of imprisonment to which the sentence had been reduced under art 10 of the convention, rather than by a proper examination of the merits of the case in the light of the recommendation of the sentencing court. If this was indeed the case, as the respondent himself is likely to believe, then he has every cause to feel aggrieved. Regrettably the injustice, if such it was, is not one which it lies within your Lordships’ power to remedy, but this may be a matter which the Secretary of State will wish to consider in relation to the possible exercise of any powers available to him either under the convention or otherwise which may affect the length of the further term of imprisonment which the respondent will in fact now have to serve.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given in the speech of my noble and learned friend Lord Bridge I would allow the appeal.
LORD GRIFFITHS. My Lords, for the reasons given in the speech of my noble and learned friend Lord Bridge, I would allow the appeal.
LORD OLIVER OF AYLMERTON. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Bridge, and I agree that the appeal should be allowed for the reasons which he has given.
LORD GOFF OF CHIEVELEY. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Bridge, and I agree that the appeal should be allowed for the reasons which he has given.
Appeal allowed.
Solicitors: Treasury Solicitor; Sampson Parker (for the respondent).
Mary Rose Plummer Barrister.
George v Devon County Council
[1988] 3 All ER 1002
Categories: EDUCATION
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD OLIVER OF AYLMERTON, LORD GOFF OF CHIEVELEY AND LORD LOWRY
Hearing Date(s): 2, 3 NOVEMBER, 1 DECEMBER 1988
Education – Local education authority – Provision of transport for pupils – Transport to and from school – Facilitating attendance of pupil at school – Unsafe route for child to walk unaccompanied – Reasonably practicable for child to be accompanied – Whether local education authority entitled to take into account fact that child could be accompanied – Whether local education authority entitled to refuse to provide free transport to and from school – Education Act 1944, s 55(1).
The applicant, who was a child aged nine, lived 2·8 miles from his school. The route between his school and his home was an unlit rural road which had no footpath and was used by tractors, milk tankers and cattle trucks. The applicant’s stepfather was unemployed. After the applicant reached the age of eight the local education authority refused to provide him with free transport to and from school as it previously had, on the ground that he could walk to school and his stepfather could accompany him. The applicant sought judicial review of the authority’s decision but his application was dismissed. On appeal the Court of Appeal granted the application. The authority appealed to the House of Lords. The applicant contended that, a local education authority, in carrying out its duty under s 55(1)a of the Education Act 1944 to make such arrangements for the provision of free transport as it considered necessary ‘for the purpose of facilitating the attendance of pupils at schools’ was not entitled to take into account whether a pupil could be accompanied if he or she walked to school by an otherwise unsafe route and if so whether that would make it unnecessary for the authority to provide transport.
Held – Where a schoolchild lived within the statutory walking distance but the route by which he would walk to school would be unsafe if he was unaccompanied, the local education authority was entitled, when exercising its discretion under s 55(1) of the 1944 Act whether to provide free transport to and from school, to refuse to provide free transport if it was reasonably practicable for the child to be accompanied to school. Since it was reasonably practicable for the applicant to be accompanied to school by his unemployed stepfather the local education authority had been entitled to refuse to provide him with free transport to and from school. The authority’s appeal would therefore be allowed (see p 1007 d to f j and p 1008 a c to g, post).
Notes
For the provision of transport to school, see 15 Halsbury’s Laws (4th edn) para 171, and for a case on the subject, see 19 Digest (Reissue) 541, 4104.
Cases referred to in opinions
Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223, CA.
Company Securities (Insider Dealing) Act 1985, Re an inquiry under [1988] 1 All ER 203, [1988] AC 660, [1988] 2 WLR 33, HL.
Rogers v Essex CC [1986] 3 All ER 321, [1987] AC 66, [1986] 3 WLR 689, HL.
Surrey CC v Ministry of Education [1953] 1 All ER 705, [1953] 1 WLR 516.
Westminster Corp v London CC [1906] 2 KB 379.
Page 1003 of [1988] 3 All ER 1002
Appeal
The Devon County Council appealed with leave of the Court of Appeal against the decision of that court (Lord Donaldson MR, Parker and Taylor LJJ) ([1988] 3 WLR 49) given on 16 March 1988 allowing the appeal of the applicant, Christopher Noel George, suing by his stepfather and next friend, Paul George, against the decision of Mann J ([1988] FLR 185) on 13 April 1987 dismissing the applicant’s application for judicial review by way of an order of certiorari to quash a decision made by the council’s school transport panel on 18 March 1987 refusing to provide free transport to and from school for the applicant. The facts are set out in the opinion of Lord Keith.
Conrad Dehn QC and Raymond Cox for the council.
Lord Campbell of Alloway QC and John Friel for the applicant.
Their Lordships took time for consideration.
1 December 1988. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, this appeal concerns an application for judicial review of the decision of a local education authority not to provide free transport to and from school for a nine-year-old boy (the applicant).
The facts at the material time were that the applicant’s family included his stepfather, his mother, a twelve-year-old brother and a four-year-old sister. The applicant and his brother were registered pupils at a school in Holsworthy, Devon. The family home lay 2·8 miles by road from that school. The route between them was rural, being unlit and having no footpath and used to some extent by tractors, milk tankers and cattle wagons. The applicant’s mother was a housewife whose activities included looking after the four-year-old sister. His stepfather was unemployed, and the family subsisted on welfare benefits. The elder brother suffered from asthma and for that reason was provided with free transport to and from school by Devon County Council as local education authority.
I will now set out the relevant statutory background, omitting immaterial words, as set out in the Education Act 1944:
‘36. It shall be the duty of the parent of every child of compulsory school age to cause him to receive efficient full-time education … either by regular attendance at school or otherwise …
39.—(1) If any child of compulsory school age who is a registered pupil at a school fails to attend regularly thereat, the parent of the child shall be guilty of an offence against this section.
(2) In any proceedings for an offence against this section in respect of a child who is not a boarder at the school at which he is a registered pupil, the child shall not be deemed to have failed to attend regularly at the school by reason of his absence therefrom with leave or—(a) at any time when he was prevented from attending by reason of sickness or any unavoidable cause … (c) if the parent proves that the school at which the child is a registered pupil is not within walking distance of the child’s home, and that no suitable arrangements have been made by the local education authority either for his transport to and from the school or for boarding accommodation for him at or near the school or for enabling him to become a registered pupil at a school nearer to his home …
(5) In this section the expression “leave” in relation to any school means leave granted by any person authorised in that behalf by the managers, governors or proprietor of the school, and the expression “walking distance” means, in relation to a child who has not attained the age of eight years two miles, and in the case of any other child three miles, measured by the nearest available route …
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55.—(1) A local education authority shall make such arrangements for the provision of transport and otherwise as they consider necessary … for the purpose of facilitating the attendance of pupils at schools … and any transport provided in pursuance of such arrangements shall be provided free of charge.
(2) A local education authority may pay the whole or any part, as the authority think fit, of the reasonable travelling expenses of any pupil in attendance at any school … for whose transport no arrangements are made under this section.
(3) In considering whether or not they are required by subsection (1) above to make arrangements in relation to a particular pupil, the local education authority shall have regard (amongst other things) to the age of the pupil and the nature of the route, or alternative routes, which he could reasonably be expected to take.’
Subsection (3) was added by amendment under s 53 of the Education (No 2) Act 1986, which came into force on 7 January 1987.
Before the applicant attained the age of eight years the council provided him with free transport to and from school, because the distance between home and school exceeded two miles. In Surrey CC v Ministry of Education [1953] 1 All ER 705, [1953] 1 WLR 516 Lynskey J decided, in effect, that where a child resided more than two or, as the case might be, three miles from school it was the duty of the local education authority under s 55(1) to provide free transport for the child all the way from home to the vicinity of the school, and not merely to within two or three miles of it. If the local education authority did not do so, the parent would have an excuse under s 39(2)(c) for the non-attendance of the child. So transport must be provided in order to preclude such excuse.
After the applicant attained the age of eight years the council refused to provide him with free transport to and from school. The decision was taken by the school transport panel on 6 January 1986, and approved by the resources subcommittee of the education committee on 28 January 1986. On 4 February 1986 the education committee declined to reverse it. Application for leave to move for judicial review of these decisions was made by the applicant, acting through his stepfather as next friend, and leave was granted by McCowan J on 8 July 1986. The decision of this House in Rogers v Essex CC [1986] 3 All ER 321, [1987] AC 66, given on 16 October 1986, and the coming into force on 7 January 1987 of s 53 of the 1986 Act, led the council to reconsider its policy on free transport to and from school and also the decision in the applicant’s case. In the result, the school transport panel on 18 March 1987 confirmed its previous decision. I shall be referring later to Rogers’s case, to the council’s formulation of its policy and to the terms of the minutes of the school transport panel’s meeting.
Thereafter the judicial review proceedings proceeded on the basis that the decision of 18 March 1987 was the one under attack. On 13 April 1987 Mann J dismissed the application (see [1988] 1 FLR 185). He gave a certificate under s 12 of the Administration of Justice Act 1969 (the ‘leap frog’ procedure) to the effect that his decision involved a point of law of general public importance relating to the construction of an enactment. However, on 22 July 1987 this House dismissed the applicant’s petition for leave to appeal directly to it. He proceeded with an appeal to the Court of Appeal (Lord Donaldson MR, Parker and Taylor LJJ), which was allowed by that court on 16 March 1988, though without quashing the impugned decision (see [1988] 3 WLR 49). Matters were left on the basis that the decision would be reconsidered, in the light of the judgment of the court. The council now appeals, with leave given in the Court of Appeal, to your Lordships’ House.
The council’s policy on school transport is set out in a document including a para 3(d) which was revised on 12 March 1987 and is now in these terms:
‘Transport to be provided without charge to children within the statutory walking distance where (i) having regard amongst other things to the age of the child and the nature of the route or alternative route, which he could reasonably be expected to take, they consider it necessary for the purpose of facilitating his attendance at
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school. (ii) an authorised officer of the school health service certifies that transport is required for a child on medical grounds. (iii) the Director of Social Services advises that there are overriding social needs that make the provision of transport essential. (iv) the Education Committee decides, on the merits of a particular case, that special arrangements should be made.’
The minutes of the school transport panel’s decision of 18 March 1987 read:
‘Christopher George. We have read the affidavits and exhibits filed in the Court proceedings and the correspondence between the Council and Mr. George’s solicitors. We have had regard amongst other things to Christopher’s age (9) and the nature of the route which he could reasonably be expected to take. We are satisfied that the route in question which is 2.8 miles long and therefore within the statutory walking distance for a child of that age is one which an accompanied child can walk and walk with reasonable safety and that the Council is not required by S. 55(1) of the Education Act 1944 as amended to make arrangememts in relation to him. Further in our opinion this is not a case where in the Council’s discretion transport should be provided free of charge. None of the circumstances set out in paragraphs 3(d)(i)—(iv) of the Council’s policy exist. There is no suggestion that Christopher is not a normal healthy boy for his age. We would expect a child of Christopher’s age walking this route to be accompanied but are not satisfied that it would not be reasonably practicable for one of Christopher’s parents to accompany him or otherwise secure his regular attendance at school.’
The reference to the child being accompanied clearly has an eye to the decision of this House in Rogers v Essex CC [1986] 3 All ER 321, [1987] AC 66. The issue in that case was whether or not a route to school was properly to be regarded as ‘available’, within the meaning of s 39(5) of the 1944 Act, where that route was unsafe for an unaccompanied child but safe for an accompanied one. That question was answered in the affirmative. Lord Ackner, in the course of a speech concurred in by his colleagues, said ([1986] 3 All ER 321 at 326, [1987] AC 66 at 78):
‘In my judgment a route to be “available” within the meaning of s 39(5) must be a route along which a child accompanied as necessary can walk and walk with reasonable safety to school. It does not fail to qualify as “available” because of dangers which would arise if the child is unaccompanied.’
The argument for the applicant sought to make out that in reaching its decision the school transport panel had mistaken its legal duties and powers under s 55(1) of the 1944 Act, or alternatively that the decision was unreasonable in the sense of Associated Provincial Picture House Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223.
The judgment of Lord Donaldson MR, concurred in by the other members of the Court of Appeal, appears to have accepted the first of these alternative arguments. In the first place, Lord Donaldson MR expressed the view that the revised para 3(d) of the council’s policy was based on the premise that Parliament had decided that prima facie all children over the age of five could walk to a school that was no more than two miles away and that all children over the age of eight could walk to one that was no more than three miles away. This premise, he said, was a mistaken one, since the correct statement of the parliamentary view was that no children could be expected to walk more than those distances (see [1988] 3 WLR 49 at 58). Lord Donaldson MR also stated that the reference to ‘the council’s discretion’ in the decision of 18 March 1987 betrayed a fundamental error in respect that under s 55(1) the council had no discretion, but instead had to exercise judgment on whether the statutory criteria existed, which was quite a different exercise (see [1988] 3 WLR 49 at 59). He went on to criticise para 3(d)(ii) of the policy document on the ground that it appeared to make the qualification for free transport on medical grounds soley dependent on the certificate of an authorised officer
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of the school medical service, which he regarded as an abrogation by the council of its statutory responsibility, which could only be discharged by a committee, and not by an officer. He further criticised para 3(d)(iii) of the document on the ground that it made the entitlement to free transport on the basis of social need solely dependent on the advice of the director of social services.
Section 55(1) requires the local education authority to make such arrangements for free transport as they consider necessary, for the purpose of facilitating attendance of pupils at school. To ‘facilitate’ means to ‘makes easy’, ‘promote’, ‘help forward’ (see Concise Oxford Dictionary). As to the word ‘necessary’, in Re an inquiry under the Company Securities (Insider Dealing) Act 1985 [1988] 1 All ER 203 at 209, [1988] AC 660 at 704, Lord Griffiths, in a different context, paraphrased it as ‘really needed’, which is a helpful way of expressing the concept. It is s 55(1) under which a local education authority provides free transport to and from school for pupils who reside outside the statutory walking distance. In the case of such pupils a local education authority would be acting unreasonably if it decided that free transport was unnecessary for the purpose of promoting their attendance at school, because if it were not provided the parents of these pupils would be under no legal obligation to secure their attendance. Obviously the local education authority, in reaching its decision in relation to such pupils, would have to ascertain that they lived outside the statutory walking distance, and for that purpose to consider the age of each pupil and the length of the route, which must be an aspect of its nature, ie long or short, which he or she could reasonably be expected to take. So s 55(3), which calls attention to these matters among others, has some relevance to the decision to be taken in relation to pupils living outside the statutory walking distance.
As regards pupils living within the statutory walking distance, s 55(1) gives the local education authority a wider scope. The question is whether the authority considers arrangements for free transport to be necessary for the purpose of facilitating their attendance. Obviously free transport will make the attendance of every such pupil easier, however close to the school he or she happens to live. But that cannot determine the matter. It is for the authority, and no one else, to decide whether free transport is really needed for the purpose of promoting the attendance at school of a particular pupil. That must depend on the authority’s view of the circumstances of the particular case, to which the authority is directed by s 55(3) to have regard. The authority’s function in this respect is capable of being described as a ‘discretion’, though it is not, of course, an unfettered discretion but rather in the nature of an exercise of judgment. In Westminster Corp v London CC [1906] 2 KB 379 a statute required the Metropolitan Board of Works to make ‘such Sewers and Works as they may think necessary’ for certain purposes. Bray J said that it was for the board to decide what sewers and works were necessary (at 384). A later Act altered in certain respects the wording of the board’s statutory duties. Bray J said of this enactment (at 384): ‘It was not, in my opinion, intended by this section to take away from the Board the discretion they formerly had’. There are other instances where the words ‘think necessary’ or ‘consider necessary’ have been judicially described as conferring a discretion. Indeed, in Rogers v Essex CC [1986] 3 All ER 321 at 326, [1987] AC 66 at 78 Lord Ackner said:
‘Under s 55 of the Act … the local education authority has a discretion to provide free transport where the relevant walking distance is less than three miles (or, as the case may be, two miles).’
It is clear that the mere description of the authority’s function as a ‘discretion’ in the decision on 18 March 1987 is not capable of vitiating that decision. I shall consider later whether the school transport panel in fact mistook the nature of the discretion.
Paragraph 3(d)(i) of the amended policy document echoes the words of s 55(3) of the 1944 Act. It would therefore appear to be unexceptionable. Lord Donaldson MR, however, thought in the light of certain other paragraphs of the policy document that this sub-paragraph wrongly assumed that Parliament expected all pupils living within
Page 1007 of [1988] 3 All ER 1002
the statutory walking distance to walk to school. I am unable to trace any such assumption. The intention of Parliament clearly was that pupils living outside the statutory walking distance would in all cases be provided with free transport, and that pupils living within that distance would normally walk to school but would be provided with free transport if the local education authority considered it necessary for the purpose of facilitating their attendance. I can find nothing in the policy document inconsistent with that intention.
Paragraphs 3(d)(ii) and (iii) of the policy document are criticised by Lord Donaldson MR on the ground that they make the provision of free transport for medical or social reasons dependent in the one case on the certificate of an authorised officer of the school health service and in the other on the opinion of the director of social services. The sub-paragraphs in question do not say that. They say no more than that free transport will be provided in the one case if the appropriate certificate is given and in the other if the director of social services advises it. There is nothing to preclude the provision of free transport in other cases, where, for example, there is other medical evidence before the panel or evidence of social need from a source other than the director of social services. Such cases are capable of being accommodated within sub-paras (i) or (iv).
Turning to the actual decision of the school transport panel, it is apparent that it took into account the applicant’s age and the nature of route he would be expected to take, in particular its length. The senior assistant education officer, Mr Grigg, had inspected the route and his description of it was contained in an affidavit before the panel. The panel considered whether for safety reasons a child walking the route should be accompanied, taking the view that this was so, and whether it was reasonably practicable for the applicant to be accompanied. The panel was not satisfied that this would not be reasonably practicable. There was material on which the panel might properly have concluded affirmatively that it was in fact reasonably practicable for the boy to be accompanied, in respect that his stepfather had stated in an affidavit that he was unemployed and available for the purpose. As to the use of the word ‘discretion’, I am of opinion, in common with Mann J, that, taking the word in its context and looking to the terms of the decision as a whole, there is nothing to suggest that the panel was not exercising a judgment as to whether free transport was necessary for the purpose of facilitating the applicant’s attendance at school. Lord Donaldson MR said that the minute of decision did not in terms record that the panel concluded—
‘not only that the applicant could walk to school with reasonable safety if accompanied, but that he could do so sufficiently easily that it was not necessary to provide him with transport in order to facilitate his attendance.’ (Lord Donaldson MR’s emphasis.)
(See [1988] 3 WLR 49 at 59.)
The minute does say, however, that none of the circumstances set out in para 3(d)(i)—(iv) of the council’s policy exist. Under reference to sub-para (i), this means that the panel did not consider free transport to be necessary for the purpose of facilitating the applicant’s attendance at school. The words desiderated by Lord Donaldson MR would not have conveyed any additional meaning.
It was argued for the applicant that the matter of the accompaniment of a child was relevant only to the question of the availability of a route under s 39(5) of the 1944 Act, and that a local education authority was not entitled to take into account in making a decision under s 55(1) even the possibility of a child being accompanied. So if a route, however short, was unsafe for an unaccompanied child, then the local education authority was obliged to provide free transport. This argument must be rejected. By virtue of s 39 of the Act the parent of a child is under a legal duty to bring about the attendance of the child at a school where he is a registered pupil, and, subject to the statutory excuses, is guilty of an offence if he fails to do so. There are various things which a parent may have to do to bring about the child’s attendance at school, such as seeing that he gets up in the
Page 1008 of [1988] 3 All ER 1002
morning and sets out in reasonable time. In the case of an unwilling child it may be necessary for the parent to take the child to school in order to bring about his attendance. In general, the parent must do these things which are reasonably practicable to be done and which an ordinary prudent parent would do. This may include accompanying the child in situations where it would be unsafe for the child to go to school unaccompanied. In a case where the child lived 100 yards from school but the route involved crossing a busy trunk route, and the parent, although available to do so, refused to accompany the child and refused to allow him to go to school on the ground that it would be dangerous, there can be no doubt that the parent would be guilty of an offence under s 39(1). Neither para (a) nor para (b) of the subsection would avail him. It must follow, I think, that Parliament contemplated that in appropriate circumstances a child would be accompanied to school. So a local authority is fully entitled, when making a decision under s 55(1), to take into account whether or not there are any circumstances which prevent its being reasonably practicable for the child to be accompanied to school over a route which would fall to be treated as not available to an unaccompanied child. That is one of the questions which the panel asked itself in the present case, and which it answered by expressing itself as not satisfied that there were any such circumstances. It was suggested that the panel should have taken into account that the applicant’s parents could not afford to pay someone to accompany him to school. But in view of the evidence about the availability of the stepfather that matter did not arise, and the general relevance of such a consideration is in any event open to serious doubt.
On the whole matter I am of opinion that it has not been demonstrated that the local education authority made any mistake in law as to the nature and extent of its duties and powers. Further, I am in agreement with Mann J that the impugned decision was not unreasonable in the Wednesbury sense (see Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223). I would therefore allow the appeal and restore the order of Mann J.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given by my noble and learned friend Lord Keith, I would allow the appeal and restore the order of Mann J.
LORD OLIVER OF AYLMERTON. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Keith, and would allow the appeal for the reasons which he has given.
LORD GOFF OF CHIEVELEY. My Lords, for the reasons given in the speech of Lord Keith I would allow the appeal and restore the order of Mann J.
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Keith. I entirely agree with it and would accordingly allow the appeal and restore the order of Mann J.
Appeal allowed.
Solicitors: Sharpe Pritchard agents for W A Burkinshaw, Exeter (for the council); Teacher Stern Selby (for the applicant).
Mary Rose Plummer Barrister.
R v Hackney London Borough Council, ex parte S G Warburg Group Management Ltd
[1988] 3 All ER 1009
Categories: LOCAL GOVERNMENT
Court: QUEEN’S BENCH DIVISION
Lord(s): BINGHAM LJ AND HUTCHISON J
Hearing Date(s): 21, 25 MARCH 1988
Rates – Proposal for alteration of current valuation list – Proposal by valuation officer – Rating authority levying rates on proposed rateable value prior to amending rateable value on valuation list – Whether rating authority empowered to levy rates on proposed rateable value – General Rate Act 1967, ss 2(4)(b), 6, 19(3), 67(6).
On the true construction of s 6a of the General Rate Act 1967 a rating authority is empowered to levy rates on the basis of new or revised rateable values proposed by the valuation officer prior to the corresponding amendment being made to the valuation list notwithstanding that the proposed value is the subject of a pending and unresolved objection by the ratepayer, since the rating authority’s responsibility under s 19(3)b of the 1967 Act to ensure that the rateable value of a property, and thus the assessment of its rate, reflects its estimated rental value in any given period qualifies its general duty under ss 2(4)(b)c and 67(6)d of that Act to levy rates on the basis of the valuation list in force at the date of assessment (see p 1014 j to p 1015(b), post).
Notes
For amendment of the rate, see 39 Halsbury’s Laws (4th edn) para 225.
For the General Rate Act 1967, ss 2, 6, 19, 67, see 36 Halsbury’s Statutes (4th edn) 622, 626, 643, 700.
Cases referred to in judgments
Debenhams Ltd v Ealing London BC [1981] RA 194.
Kettle (B) Ltd v Newcastle under Lyme BC [1979] RA 223, CA; affg [1977] RA 181, DC.
Society of Medical Officers of Health v Hope (Valuation Officer) [1960] 1 All ER 317, [1960] AC 551, [1960] 2 WLR 404, HL.
Cases also cited
Ferris v Secretary of State for the Environment (1988) Times, 21 January.
Miller-Mead v Minister of Housing and Local Government [1963] 1 All ER 459, [1963] 2 QB 196, CA.
Application for judicial review
S G Warburg Group Management Ltd applied with the leave of Simon Brown J given on 14 December 1987 for judicial review of the decision of the respondent rating authority, Hackney London Borough Council, whereby they sought to recover from the applicants occupied general rates on the fourth to seventh floors of 1 Finsbury Avenue, London EC2 for the period 1 April 1987 to 31 March 1988 based on the rateable value of £1,182,472 proposed by the valuation officer on 30 April 1987 and not on the rateable value of £694,763 set out in the valuation list for the Hackney rating area. The applicants sought a declaration that the respondents were not entitled to recover occupied general rates
Page 1010 of [1988] 3 All ER 1009
based on the rateable value proposed by the valuation officer. The facts are set out in the judgment of Bingham LJ.
Michael FitzGerald QC and Christopher Lewsley for the applicants.
Nigel MacLeod QC and John Male for the respondents.
Cur adv vult
25 March 1988. The following judgments were delivered.
BINGHAM LJ. This application for judicial review raises a short but important and difficult question: where a rateable value for a given hereditament appears in the valuation list, and during the rating year the valuation officer proposes to increase the rateable value, such proposal being accepted by the rating authority but challenged by the ratepayer, is the sum of rates recoverable by the rating authority for that year to be assessed on the rateable value appearing in the valuation list or the proposed new rateable value?
The applicants, S G Warburg Group Management Ltd, are the ratepayers. The hereditament in question is the fourth to seventh floors of 1 Finsbury Avenue, London EC2 which the applicants occupy. The respondents are the rating authority for the area which includes this hereditament, which is spiritually within but geographically outside the City of London.
The applicants challenge a decision of the respondents to seek to recover from the applicants occupied general rates on the hereditament for the period 1 April 1987 to 31 March 1988 based on the value of £1,182,472 proposed by the valuation officer in his proposal dated 30 April 1987 and not based on the rateable value of £694,763 currently appearing in the valuation list for the Hackney rating area. The applicants seek a declaration that the respondent rating authority is not entitled to recover from the applicants occupied general rates in respect of the hereditament based on the rateable value of £1,182,472 proposed by the valuation officer in his proposal dated 30 April 1987. The grounds on which relief is sought are succinctly summarised in the application:
‘(1) at all material times the hereditament known as 4th to 7th Floors, 1 Finsbury Avenue, London EC2 was entered in the relevant valuation list at £694,763 rateable value.
(2) in the circumstances, the respondent rating authority must levy its rate in accordance with the valuation list which is conclusive on value.
(3) the amendment of the 1987/88 rate to include the rateable value of £1,182,472 proposed by the valuation officer in respect of the above hereditament was not necessary in order to make the rate conform with the enactments relating thereto.’
It is common ground that the answer to the question before the court is to be found in a correct interpretation and application of the General Rate Act 1967. But before turning to the rival submissions on the 1967 Act I should briefly summarise the facts as agreed between the parties.
The general rate set by the respondents for the period 1 April 1987 to 31 March 1988 was 234·97p in the pound ‘on the rateable value of each hereditament as shown in the Valuation List and also such altered or added hereditaments as may be the subject of a proposal and come within section 6 of the General Rate Act 1967 … ' This rate was set on 25 March 1987. Before that date, in October 1986, the valuation officer reached an agreement with the applicants’ surveyor that the property should have attributed to it a gross value of £833,759 and a rateable value of £694,763. Those values were subsequently proposed by the valuation officer in a proposal dated 13 February 1987 and entered in the valuation list. So the entry then read:
Page 1011 of [1988] 3 All ER 1009
‘Offices and premises (Affected by
adjoining building works). 1 Finsbury Avenue
4th-7th Floors. £833.759 g.v.
£694.763 r.v.’
On 30 April 1987 the valuation officer made a proposal to delete the words ‘(Affected by adjoining building works)’ and to increase the gross value to £1,419,000 00 and the rateable value to £1,182,472 00 on the ground that ‘the present assessment is incorrect and insufficient’. There has been no material alteration to the property itself. The applicants objected to the proposal and the valuation officer’s appeal against the objection is proceeding to the local valuation court. It has not yet been heard.
The respondents have demanded the rate payable on the new proposed rateable value; the applicants have paid the amount due on the rateable value which appears in the valuation list. Magistrates’ court proceedings have been adjourned pending the decision on this application.
We have affidavit evidence before us from the respondents’ chief rating officer. This is not agreed but nor is it challenged. We have no reason to doubt what is said. The respondents received, as is normal practice, a copy of the valuation officer’s proposal of 30 April 1987 relating to the applicants. It was considered by a rating officer. The valuation officer’s assessment and his grounds for making the assessment were taken to be correct, there being no reason to suspect that either was incorrect. It accordingly appeared to the respondents that the former assessment was incorrect and did not conform with the provisions of the 1967 Act. The respondents therefore amended the rate and sought to recover rates from the applicants on the basis of the increased value.
There is further evidence before us which makes plain the far-reaching importance of the point now in issue. Mr Palmer, the respondents’ principal rate recovery officer, deposed in his affidavit:
‘3. If the Court is minded to grant leave to apply for judicial review, then I respectfully ask the Court to order the hearing of this matter to be expedited. The point raised by the Applicants is a fundamental point which affects the way in which all rating authorities levy rates. To my knowledge it is the general practice of rating authorities to levy rates on the basis of new or revised rateable values of rateable hereditaments proposed by the valuation officer before the resulting alteration is made in the valuation list. The challenge made by the Applicants to this practice puts the practice in doubt. It is therefore of great importance to all rating authorities that the point be decided by the Court as quickly as possible so that rating authorities may know whether or not this particular practice is lawful. I am aware that there is considerable concern amongst rating authorities about this challenge because if it should succeed it could encourage ratepayers to object to proposals to increase rateable values. In my experience, such objections take, on average, between 18 and 36 months to determine by reason of the possibility of appeals to the Local Valuation Court and the Lands Tribunal. Interest is not payable on arrears of rates. If the challenge succeeds, it could have serious financial implications for rating authorities.
4. In addition to raising a point of general application, the Applicants’ challenge has serious financial implications for the Respondents. The amount outstanding from the Respondents is £1,962,212·15p. It was due and payable on the 1st April 1987. Under the General Rate Act 1967, no interest is payable on arrears of general rates. Therefore each day of delay involves the Respondents suffering a substantial financial loss. I would calculate, using the interest rate of the Public Works Loan Board, that over a year the Respondents would lose interest of £130,767·83 on rates owed by the applicants. Also, the Respondents are not alone in raising this particular point of challenge. In the same building as the Respondents (Number 1 Finsbury Avenue, London EC2) there are two other ratepayers raising the same point. These
Page 1012 of [1988] 3 All ER 1009
ratepayers take up some 90–95% of the building. The total arrears involved, including the arrears due from the Respondents, are £2,507,957.10p. These represent a significant proportion of the annual income which the Respondents raised through levying rates.
5. Excluding 1 Finsbury Avenue the respondents envisage, by collecting on proposed values, raising £3,000,000 by the end of the financial year (March 1988). I would further add that the sums which the respondents say are due, have been budgeted for and, if not collected by way of rates would have to be found by borrowing on the open market. Interest charged on this borrowing would ultimately have to be met by the ratepayers. This would be a further strain on scarce resources.’
Those considerations form the background against which this question falls to be decided. But we must of course, as in any other exercise of statutory construction, seek to derive the intention of Parliament as expressed in the 1967 Act. We cannot allow the interpretation of the Act to be dictated by considerations of administrative convenience or expediency.
In a very clear and succinct argument for the applicants counsel relied in particular on two subsections of the 1967 Act. The first was s 2(4)(b), which is in these terms:
‘Subject to the provisions of this Act, the general rate for any rating area … (b) shall be made and levied in accordance with the valuation list in force for the time being, except that, where a new valuation list is to come into force for that area, a rate for the year beginning with the day on which the new list is to come into force shall be made, and applied in relation to particular hereditaments, by reference to that new list.’
The second was s 67(6), which provides:
‘Subject to subsection (7) of this section, the valuation list in accordance with which, under section 2(4)(b) of this Act, any rate falls or fell to be made, as in force (or about to come into force) at the date of the making of the rate, shall be conclusive evidence for the purposes of the levying of that rate of the values of the several hereditaments included in the list.’
Section 67(7) provides:
‘As respects any period during which, under this Act, an alteration of the valuation list referred to in subsection (6) of this section is for the time being to be treated as having had effect, the reference in the said subsection (6) to that list shall be construed as a reference to that list as so altered.’
Accordingly, it was argued, the applicants’ hereditament was at all material times in the valuation list at a rateable value of £694,763 and the rate could only be made and levied in accordance with that rateable value. The respondents could only escape from that conclusion by virtue of s 6 of the 1967 Act, and s 6 did not apply on the facts of this case.
Counsel for the applicants referred us to two authorities. In the first, B Kettle Ltd v Newcastle under Lyme BC [1979] RA 223 at 229, Geoffrey Lane LJ referred to s 2(4)(b) of the 1967 Act and said:
‘The form of the Act is, as Lord Denning MR has already said, to set out in s 2 and in particular in s 2(4)(b) the normal way in which the rating procedure should be carried out; and, under that general procedure, no general rate can be levied except in accordance with the values which are currently shown in the valuation list. [But Geoffrey Lane LJ added] But that is not overriding because by the terms of s 6 there are certain ways in which the procedures can be carried out not strictly in accordance with s 2.’
Page 1013 of [1988] 3 All ER 1009
In the second case, Debenhams Ltd v Ealing London BC [1981] RA 194 at 204, Glidewell J said:
‘On this question, counsel … made two submissions on behalf of the ratepayers: (a) The general rule is to be found in s 2(4) of the 1967 Act, ie that the general rate shall be made and levied in accordance with the valuation list in force for the time being. Only if the particular circumstances of a case bring it within the term[s] of s 6 can a rate be demanded on the basis of a proposed amendment. Counsel for the rating authority accepted, as I do, that this general proposition is correct.’
In the course of his most helpful argument for the respondents counsel accepted that his first task was to bring himself within s 6 of the 1967 Act. The first two subsections of that section, set out in full, provide:
‘(1) Subject to the provisions of this section, the rating authority may at any time make such amendments in a rate (being either the current or the last preceding rate) as appear to them necessary in order to make the rate conform with the enactments relating thereto, and in particular may—(a) correct any clerical or arithmetical error in the rate; or (b) correct any erroneous insertions or omissions or any misdescriptions; or (c) make such additions to or corrections in the rate as appear to the authority to be necessary by reason of—(i) the coming into occupation of any hereditament which has been newly erected or which was unoccupied at the time of the making of the rate; or (ii) any change in the occupation of any hereditament; or (iii) any property previously rated as a single hereditament becoming liable to be rated in parts.
(2) Where the effect of the amendment would be either—(a) to alter, otherwise than by way of correction of a clerical or arithmetical error, the value on which a hereditament is rated; or (b) to charge to the rate a hereditament not shown, or not separately shown, in the valuation list, the rating authority shall not make any amendment of the rate unless either the amendment is necessary to bring the rate into conformity with the valuation list or a proposal for a corresponding alteration to the valuation list has been made by the valuation officer; and if effect, or full effect, is ultimately not given to such a proposal, and the amount of the rate levied in pursuance of the amendment is affected, the difference—(i) if too much has been paid, shall be repaid or allowed; or (ii) if too little has been paid, shall be paid and may be recovered as if it were arrears of the rate.’
Counsel, however, accepted (I am sure rightly) that there was much in those subsections on which he could not rely. He relied on sub-s (1) only in so far as it provided:
‘Subject to the provisions of this section, the rating authority may at any time make such amendments in a rate (being either the current or the last preceding rate) as appear to them necessary in order to make the rate conform with the enactments relating thereto … ’
Reliance was placed on sub-s (2) only in so far as it provided:
‘Where the effect of the amendment would be … (a) to alter, otherwise than by way of correction of a clercial or arithmetical error, the value on which a hereditament is rated … the rating authority shall not make any amendment of the rate unless … a proposal for a corresponding alteration to the valuation list has been made by the valuation officer; and if effect, or full effect, is ultimately not given … ’
The respondents argued that the amendment was one which appeared to them to be necessary in order to make the rate conform with the enactments relating thereto. The particular enactments relied on were sub-ss (1) and (3) of s 19 of the 1967 Act, which are in these terms:
Page 1014 of [1988] 3 All ER 1009
‘(1) Subject to the provisions of this Part of this Act and of any scheme for the time being in force such as is mentioned in section 117(7) of this Act, the rateable value of a hereditament shall be taken to be the net value of that hereditament ascertained in accordance with subsections (2) to (4) of this section …
(3) The net annual value of any other hereditament shall be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year if the tenant undertook to pay all usual tenant’s rates and taxes and to bear the cost of the repairs and insurance and the other expenses, if any, necessary to maintain the hereditament in a state to command that rent.’
Reference was also made to s 67, providing for maintenance of a valuation list, and to s 67(2) governing the valuation officer’s power (and, it would seem, duty: see Society of Medical Officers of Health v Hope (Valuation Officer) [1960] 1 All ER 317 at 322–323, [1960] AC 551 at 565 per Lord Radcliffe) to propose alterations.
Thus, on this point, the argument was in a nutshell this. The rateable value shall be the amount defined in s 19(3). The valuation list is to be maintained showing the rateable value of each hereditament (s 67(1) and (2)). The valuation officer, as an independent and neutral official, is to propose alterations to the valuation list when and as he thinks necessary to maintain the list in correct and legal form. The rating authority may at any time make such amendments in a rate as appear to it to be necessary in order to make the rate conform with the correct rateable value. B Kettle Ltd v Newcastle under Lyme BC [1979] RA 223 and Debenhams Ltd v Ealing London BC [1981] RA 194 show that in certain (albeit different) circumstances rates can be collected on the strength of a proposal, not an entry in the valuation list. Our attention was drawn to two observations of Lord Widgery CJ when Kettle’s case [1977] RA 181 was heard in the Divisional Court. The first was (at 185):
‘So one finds there, without any doubt at all, that Parliament in passing the General Rate Act 1967 did contemplate that in the circumstances set out in s 6 the rating authority could amend the rate—not the valuation list, but the rate—with the result that the rate would then bear the obligations attributable to its new form.’
And then, with reference to s 6(2), Lord Widgery CJ said (at 186):
‘The effect of this somewhat complex provision, as I see it, is to enable the rating authority to obtain payment more quickly in cases of this kind, because that would be the consequence if the argument of counsel for the rating authority succeeds.’
The respondents’ second task was to show that s 67(6) did not override the construction of s 6 which they advanced. Their argument was that s 67(6) was to be read with s 2(4)(b), the later section directing how the earlier section was to be operated. The object was to ensure that the general rate was levied in accordance with the valuation list. But s 2(4) was prefaced by the words ‘Subject to the provisions of this Act’, and the provisions of the Act included s 6(1) and (2), which enabled the respondents to follow the course they did unfettered by ss 2(4)(b) and 67(6). Alternatively, it was argued that s 67(6) only applied to rateable values included in the valuation list and it had no application because the respondents did not rely on the valuation list to support the amount they claimed.
I have not found this an easy question to resolve. I see force in the argument that if s 6 had been intended to enable rating authorities to levy rates on the basis of proposed valuations it could very simply have said so. I am not quite sure that the draftsman would have been likely to foresee a proposal to double a rateable value agreed little more than a year before. It is, however, plain from s 6(2) that the 1967 Act intended ratepayers to pay first and argue later. The subsection also makes plain that rating authorities may amend the rate where a proposal for a ‘corresponding’ alteration to the valuation list has been made by the valuation officer. I conclude that the present case falls within the
Page 1015 of [1988] 3 All ER 1009
general words of s 6(1) and enables a rating authority to amend the rate if (as with the respondents here) it appears to it to be necessary in order to make the rate conform with (in particular) s 19(3) and the authority’s power or duty to make a rate. Section 67(6) is, I think, directed to enforcement of s 2(4)(b), but that subsection is in my view subject to the authority’s general powers under s 6 to amend the rate in appropriate circumstances.
For these reasons I would refuse the applicants the relief sought and dismiss this application.
HUTCHISON J. I agree.
Application dismissed.
Solicitors: Macfarlanes (for the applicants); J M Thomas (for the respondents).
Raina Levy Barrister.
Chief Constable of Leicestershire v M and another
[1988] 3 All ER 1015
Categories: CRIMINAL; Criminal Procedure
Court: CHANCERY DIVISION
Lord(s): HOFFMANN J
Hearing Date(s): 26, 27, 30 SEPTEMBER 1988
Injunction – Interlocutory – Preservation of proceeds of crime – Appointment of receiver – Extent of court’s powers to grant injunction in favour of police – Accused obtaining mortgage advances by deception – Accused using advances to buy houses – Houses sold leaving substantial profit – Whether police entitled to injunction restraining dealings with surplus proceeds made from sale of houses pending criminal proceedings.
The first defendant, M, was indicted on a number of counts of obtaining mortgage advances by deception. The police alleged that M had applied for the advances under false names and had provided forged references for the imaginary applicants and forged powers of attorney giving himself authority to act on their behalf. Some of the houses which M bought using those advances were sold and, after the building societies and other lenders had been repaid in full, he was left with a substantial profit. The chief constable sought an injunction restraining M from dealing with the surplus proceeds of the houses pending the criminal proceedings and the appointment of a receiver to take control of the houses and their proceeds.
Held – The court had no jurisdiction to grant an injunction to prevent the proceeds of crime being dissipated unless those proceeds could be identified as having been obtained in breach of the criminal law. On the facts, the money which the chief constable sought to restrain was not money which allegedly was obtained by fraud but was profit made by the use of money obtained by fraud. It followed that the police were not entitled to the injunction sought (see p 1018 c f, post).
Chief Constable of Kent v V [1982] 3 All ER 36 and Chief Constable of Hampshire v A [1984] 2 All ER 385 considered.
Page 1016 of [1988] 3 All ER 1015
Notes
For the grant of interlocutory injunctions generally, see 24 Halsbury’s Laws (4th edn) para 953, and for cases on the subject, see 28(2) Digest (Reissue) 968–980, 67–161.
Cases referred to in judgment
Chic Fashions (West Wales) Ltd v Jones [1968] 1 All ER 229, [1968] 2 QB 299, [1968] 2 WLR 201, CA.
Chief Constable of Hampshire v A [1984] 2 All ER 385, [1985] QB 132, [1984] 2 WLR 954, CA.
Chief Constable of Kent v V [1982] 3 All ER 36, [1983] QB 34, [1982] 3 WLR 462, CA.
Malone v Comr of Police of the Metropolis [1979] 1 All ER 256, [1980] QB 49, [1979] 3 WLR 936, CA.
Siskina (cargo owners) v Distos Cia Naviera SA, The Siskina [1977] 3 All ER 803, [1979] AC 210, [1977] 3 WLR 818, HL.
Cases also cited
West Mercia Constabulary v Wagener [1981] 3 All ER 378, [1982] 1 WLR 127.
Motion
By a notice of motion dated 19 September 1988 the Chief Constable of Leicestershire sought an order restraining the first defendant, M, and the second defendant, M’s solicitor, from receiving and/or disposing of the net proceeds of sale of certain properties in Leicester pending the trial of criminal proceedings against M and the appointment of a receiver of those proceeds. The facts are set out in the judgment.
Alison Hampton for the chief constable.
Jane Giret for the defendants.
Cur adv vult
30 September 1988. The following judgment was delivered.
HOFFMANN J. The issue in this application is whether the police are entitled to an interlocutory order restraining a defendant from dealing with assets and the appointment of a receiver of those assets on the ground that they represent profits made from the use of property which he obtained by dishonest means. In my judgment they are not so entitled and the application must be dismissed with costs.
The first defendant Mr M has been indicted on a number of counts of obtaining mortgage advances by deception. It is alleged that he applied for the advances under false names and provided forged references for the imaginary applicants and forged powers of attorney giving himself authority to act on their behalf. He used the advances to buy houses in Leicester. Now the houses are being sold, either by the building societies or other lenders or by Mr M, who has instructed the second defendant, a solicitor, to carry out the conveyancing on his behalf. The recent rise in the housing market means that all the lenders are likely to be repaid in full, leaving a substantial profit which in the ordinary course of events will be paid into the hands of Mr M. None of the lenders have made any claim by way of constructive trust or otherwise to the profits made on the houses bought with their money. They have preferred to affirm the advances and enforce their rights under the mortgages. But the Chief Constable of Leicestershire seeks an interlocutory injunction restraining Mr M from dealing with the surplus proceeds of the houses pending the criminal proceedings. He also asks for the appointment of a receiver to take control of the houses and their proceeds. The object is to ensure that the court will be able, if it thinks fit, to strip Mr M of his profits by imposing an appropriate fine or making an order for payment of costs. The chief constable says that unless such an
Page 1017 of [1988] 3 All ER 1015
order is made, Mr M will be able to remove the money from the reach of the court, possibly by sending it abroad, and thereby profit from his frauds. An injunction is also sought against the second defendant, Mr M’s solicitor, but I must make it clear that there is no suggestion that he intends to do anything improper. The chief constable says that he seeks the injunction only to arm the solicitor with a reason for refusing to hand over the assets if Mr M should withdraw his instructions.
The charges against Mr M remain to be proved and the evidence produced on this application was in some respects unsatisfactory, but I shall proceed on the assumption that the chief constable has made out a good arguable case that the mortgage advances were obtained by fraud and that Mr M is likely, unless restrained, to deal with the profits in such a way as to put them out of the reach of any orders which may be made at the criminal trial. The question is whether on that assumption the court has jurisdiction to grant the relief which the chief constable seeks. If there is jurisdiction to grant an injunction, I think that there must also be jurisdiction to appoint a receiver.
In Chief Constable of Kent v V [1982] 3 All ER 36, [1983] QB 34 the defendant was alleged to have stolen some cheque forms from a Mrs Raikes, forged her signature and paid the proceeds of the cheques into his bank account, where they were mixed with other money of his own. Neither Mrs Raikes nor the bank which had paid the cheques brought any proceedings. The chief constable applied for an interlocutory injunction to restrain the defendant from dealing with the money in the account. The difficulty which faced the Court of Appeal was that the House of Lords in Siskina (cargo owners) v Distos Cia Naviera SA, The Siskina [1977] 3 All ER 803, [1979] AC 210 had said that a plaintiff could not obtain an interlocutory injunction restraining a dealing with property unless he could show some legal or equitable right in respect of that property and it was not obvious what right the chief constable had to the money in the defendant’s bank account. Each member of the Court of Appeal dealt with this point in a different way. Lord Denning MR said that the principle itself had been destroyed by s 37(1) of the Supreme Court Act 1981 and that all that was now necessary was that the applicant should have a sufficient interest in the matter to be entitled to move the court. Neither Donaldson LJ nor Slade LJ accepted this reasoning. Both proceeded on the assumption that the principle in The Siskina still applied and that the Supreme Court Act 1981 had made no change in the law. Donaldson LJ noted that in Chic Fashions (West Wales) Ltd v Jones [1968] 1 All ER 229, [1968] 2 QB 299 the Court of Appeal had decided that a constable who seized goods which he reasonably suspected to have been stolen could not be sued in tort for wrongful detention of the goods. On the basis of this case, Donaldson LJ inferred that a constable who had not seized such goods would be entitled to a mandatory injunction to require them to be delivered up and having established the existence of such a right to obtain possession of suspected stolen property, extended it by analogy to a chose in action such as a bank account. This gave the chief constable a right in respect of the money in the account sufficient to satisfy the Siskina principle. Slade LJ felt unable to make the conceptual leap from the public law immunities attached to the office of constable to a private law ‘right’ in the sense of a legally enforceable claim to possession. He therefore dissented from the order granting the injunction.
This diversity of reasoning makes it difficult to state the principle for which Chief Constable of Kent v V is authority. It cannot, I think, be authority for the broad jurisdiction suggested by Lord Denning MR, since his reasoning was rejected by the other two members of the court. This was the view of Oliver LJ in Chief Constable of Hampshire v A [1984] 2 All ER 385, [1985] QB 132. On the other hand, the case did decide that in some circumstances the police do have a right to an injunction. What are the limits of that right? In Chief Constable of Hampshire v A the Court of Appeal appears, without finally deciding the point, to have proceeded on the assumption that common ground could be found in the judgment of Donaldson LJ and I shall take a similar course. He defined the extent of the chief constable’s right in the following terms ([1982] 3 All ER 36 at 44, [1983] QB 34 at 47):
Page 1018 of [1988] 3 All ER 1015
‘… I consider that the common law can and should similarly invest the police with a right to “detain” moneys standing to the credit of a bank account if and to the extent that they can be shown to have been obtained from another in breach of the criminal law.’
Applying that principle, Donaldson LJ limited the injunction to moneys ‘traceable as coming from the account of Mrs Raikes’ and required the chief constable to issue a writ claiming a declaration that the money had been transferred from her account.
Counsel, in her admirable submissions on behalf of the chief constable, accepted that the order she was seeking could not be brought within this principle. She did not wish to detain the money identifiable with that which was alleged to have been obtained by fraud. On the contrary, that money and the interest thereon will be repaid to the lenders and no order of the court is necessary to protect their position. The money which the chief constable wants to detain is not money ‘obtained from another in breach of the criminal law’ but profits which he would not have been able to make except by the use of money so obtained.
In my judgment there is no authority for the police having any ‘right’ in respect of such money which could found a claim for an injunction. Counsel for the chief constable said that there was equally no authority against the court having such a power and that on grounds of public policy I should assert one. Otherwise criminals would be free to profit from their crimes. But the decision of the Court of Appeal in Malone v Comr of Police of the Metropolis [1979] 1 All ER 256, [1980] QB 49 contains powerful arguments against the extension on grounds of public policy of the common law powers of the court to interfere with the property of persons who may be but have not yet been convicted of criminal offences. Those arguments have since been reinforced by the enactment of the sections in the Drug Trafficking Offences Act 1986 which make elaborate provision for enabling the courts to restrain dispositions of assets suspected of being derived from dealings in drugs and the even more recent enactment of similar provisions applicable to all indictable offences in the Criminal Justice Act 1988, which is not yet in force. The recent and detailed interventions of Parliament in this field suggest that the courts should not indulge in parallel creativity by the extension of general common law principles. For these reasons I dismiss the application.
Order accordingly.
Solicitors: Crown Prosecution Service, Leicester; Moon Beever agents for Myerson Callaghan & Law, Leicester (for the defendants).
Celia Fox Barrister.
Re Aveling Barford Ltd and others
[1988] 3 All ER 1019
Categories: COMPANY; Insolvency: PROFESSIONS; Lawyers: CIVIL PROCEDURE
Court: CHANCERY DIVISION (COMPANIES COURT)
Lord(s): HOFFMANN J
Hearing Date(s): 1, 2, 3 AUGUST 1988
Company – Receiver – Powers –Investigation of company’s affairs – Power to require information about company – Receiver requesting documents held by company’s solicitors – Solicitors having lien over documents in respect of unpaid costs – Whether solicitors required to produce documents to receiver – Insolvency Act 1986, s 236.
Solicitor – Lien – Retaining lien – Lien over documents in respect of unpaid costs – Receiver of company requesting documents held by company’s solicitors – Whether solicitors able to assert lien as against receiver.
The receivers of a group of companies, all of which were in receivership, requested the group’s solicitors to show them their files relating to the group and when the solicitors refused the receivers obtained an ex parte order from the registrar under s 236a of the Insolvency Act 1986 requiring them to produce the documents. The solicitors applied to the judge to discharge the order on the ground that they had a lien over the documents for unpaid costs.
Held – When seeking an order under s 236 of the 1986 Act for the production by a company’s solicitors of documents relating to the company, the company’s receiver was not acting on behalf of the company alone but was in the same position as a third party who was entitled to production of the documents as against the client. Accordingly, since the solicitors could not assert a lien as against a third party they could not refuse to produce the documents to the receivers on the ground that they had a lien over the documents for the companies’ unpaid costs. The application would therefore be dismissed (see p 1021 f, p 1023 b to d and p 1024 j, post).
Re South Essex Estuary and Reclamation Co, ex p Paine & Layton (1869) LR 4 Ch App 215, Re Toleman and England, ex p Bramble (1880) 13 Ch D 885 and Re Hawkes, Ackerman v Lockhart [1895–9] All ER Rep 964 applied.
Notes
For a receiver’s power to require information about a company, see 7(2) Halsbury’s Laws (4th edn reissue) para 1677, and for cases on the subject, see 10 Digest (Reissue) 1013–1019, 6163–6205.
For a solicitor’s lien for unpaid costs, see 44 Halsbury’s Laws (4th edn) paras 226–235, and for cases on the subject, see 44 Digest (Reissue) 341–366, 3728–3998.
For the Insolvency Act 1986, s 236, see 4 Halsbury’s Statutes (4th edn) (1987 reissue) 886.
Cases referred to in judgment
Gold Co, Re (1879) 12 Ch D 77, CA.
Hawkes, Re, Ackerman v Lockhart [1898] 2 Ch 1, [1895–9] All ER Rep 964, CA.
Page 1020 of [1988] 3 All ER 1019
Norwich Pharmacal Co v Customs and Excise Comrs [1973] 2 All ER 943, [1974] AC 133, [1973] 3 WLR 164, HL.
Rolls Razor Ltd, Re (No 2) [1969] 3 All ER 1386, [1970] Ch 576, [1970] 2 WLR 100.
South Essex Estuary and Reclamation Co, Re, ex p Paine & Layton (1869) LR 4 Ch App 215, LC.
Toleman and England, Re, ex p Bramble (1880) 13 Ch D 885.
Cases also cited
Appleton French & Scrafton Ltd, Re [1905] 1 Ch 749.
Rhodes (J T) Ltd, Re [1987] BCLC 77.
Waddell, Ex p, re Lutscher (1877) 6 Ch D 328, CA.
Motion
Albery Chapman, a firm of solicitors, applied to discharge an order made ex parte by Mr Registrar Buckley on 12 July 1988 under s 236 of the Insolvency Act 1986 requiring them to produce documents and furnish information relating to the affairs of Aveling Barford Ltd and two associated companies, Aveling Barford International Ltd and Latchrose Engineering Ltd, for whom Albery Chapman had acted. The order had been made on the application of the administrative receivers of the companies. The motion also sought disclosure of a confidential memorandum exhibited to an affidavit sworn on behalf of the receivers in support of their application and an order that Albery Chapman be indemnified against all costs incurred by them in complying with the order. The facts are set out in the judgment.
Simon Goldblatt QC and Robert Jay for Albery Chapman.
Simon Mortimore for the receivers.
3 August 1988. The following judgment was delivered.
HOFFMANN J. There is before the court a motion by Messrs Albery Chapman, a firm of solicitors of Gray’s Inn, to discharge an order made ex parte by Mr Registrar Buckley under s 236 of the Insolvency Act 1986 requiring them to produce documents and furnish information relating to the affairs of Aveling Barford Ltd and two associated companies. The order had been made on the application of the administrative receivers of the companies. The motion also seeks disclosure of a confidential memorandum exhibited to an affidavit sworn on behalf of the receivers in support of their application and an order that the solicitors be indemnified against all costs incurred by them in complying with the order.
Aveling Barford Ltd is a well-known company based in Grantham, where it has for many years made vehicles and equipment used for earth moving and road construction. Latterly its fortunes have been in decline. For some time it was a member of the British Leyland group, during which period it made substantial losses. In about 1983 it was acquired by a company controlled by a Singapore businessman known as Dr K T Lee. Aveling Barford did not recover and on 14 June 1988 its principal banker and debenture holder, Standard Chartered Bank, appointed two partners in Messrs Arthur Andersen & Co to be administrative receivers. The bank also appointed them to be receivers of an associated company called Aveling Barford International Ltd and a week later Barclays Bank plc appointed them receivers of another group company called Latchrose Engineering Ltd.
Albery Chapman acted as solicitors to the Aveling Barford group and to other companies controlled by Dr Lee. On their appointment, the receivers obtained information from former directors about transactions with related companies which made them anxious to know more. They asked Albery Chapman to show them their files. The request met with a flat refusal. On 1 July 1988 the receivers applied to Mr Registrar Buckley for an order under s 236 of the Insolvency Act 1986 requiring Albery Chapman to produce for inspection—
‘all books papers and other records in their possession or under their control relating to the Companies, their promotion, formation, business, dealings, affairs or
Page 1021 of [1988] 3 All ER 1019
property; provided that such inspection shall be without prejudice to any lien claimed by Albery Chapman.’
The application was supported by an affidavit by an employee of Arthur Andersen & Co which exhibited, first, the debentures and the instruments of appointment of the receivers and, second, a confidential statement setting out the facts known to the receivers about the matters which they particularly wished to investigate. The registrar made the order.
Albery Chapman at first applied to vary the order but on 7 July they abandoned the application and offered inspection. It soon emerged, however, that they gave a somewhat narrow interpretation to their obligations under the order and on 12 July the receivers applied, again ex parte, for a more detailed order which Albery Chapman now apply to discharge. In addition to the general description of documents in the earlier order, it specifies particular classes of documents and also requires Albery Chapman within five working days to file and serve an affidavit containing ‘an account of the full particulars of all dealings by Albery Chapman with the companies [in receivership].’
The lien
By the end of the hearing of the motion all disputes over the various classes of documents included in the order had been cleared up and counsel for Albery Chapman was able to confine his attack on the order for production to a single point, namely that Albery Chapman were entitled to refuse production on the ground that they had a lien over the documents for unpaid costs.
The order under s 236 is made by the court on the application of an ‘office-holder’, an expression which is defined to include an administrative receiver as well as an administrator, liquidator and provisional liquidator (see ss 234(1) and 236(1)). The section gives the court jurisdiction to summon to appear before it various classes of persons, including ‘any person whom the court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company’. Such persons may also be required to submit an affidavit to the court ‘containing an account of his dealings with the company’ or to ‘produce any books papers or other records in his possession or under his control relating to the company’ or its promotion, formation etc.
A solicitor’s lien entitles him to retain the documents as against his client and includes the right to refuse to produce the documents under subpoena duces tecum at the instance of a client who has become involved in litigation. But this right cannot be asserted against a third party who would be entitled to production as against the client (see Re Hawkes, Ackerman v Lockhart [1898] 2 Ch 1, [1895–9] All ER Rep 964). In Re South Essex Estuary and Reclamation Co, ex p Paine & Layton (1869) LR 4 Ch App 215 Lord Hatherley LC had to consider whether a liquidator seeking an order for production under s 115 of the Companies Act 1862 was for this purpose the client or a third party. Section 115 is the statutory ancestor of s 236 of the 1986 Act and its material provisions read as follows:
‘The Court may, after it has made an Order for winding up the Company, summon before it … any Person whom the Court may deem capable of giving Information concerning the Trade, Dealings, Estates or Effects of the Company; and the Court may require any such … Person to produce any Books, Papers, Deeds, Writings, or other Documents in his custody or power relating to the Company … nevertheless, in Cases where any person claims any Lien on Papers, Deeds or Writings or Documents produced by him, such production shall be without Prejudice to such Lien, and the Court shall have Jurisdiction in the Winding-up to determine all Questions relating to such Lien.’
Lord Hatherley LC decided that the liquidator was in the same position as a third party (LR 4 Ch App 215 at 217):
‘The official liquidator had therefore now to act for the benefit of the creditors as well as the shareholders, and therefore the Legislature might well have considered
Page 1022 of [1988] 3 All ER 1019
it right to give him this power. His Lordship could not, in fact, read the section in any way except as saying that production might be ordered, but must be without prejudice to any lien; though in many instances, of course, this would render the lien valueless.’
Whether production under s 115 would render the lien valueless or not depended on whether value attached to the instrument itself (as in the case of a title deed or negotiable instrument) or merely to the information which it contained. In neither case would production destroy the lien in the sense of the right to possession of the document, but only in the former case would that right continue to have any value.
Re Toleman and England, ex p Bramble (1880) 13 Ch D 885 was concerned with s 96 of the Bankruptcy Act 1869, which gave the court a power to summon—
‘any person whom the Court may deem capable of giving information respecting the bankrupt, his trade dealings or property, and the Court may require any such person to produce any documents in his custody or power relating to the bankrupt, his dealings or property.’
As can be seen, this provision was in substantially the same terms as s 115 of the 1862 Act but without any mention of the effect of an order on a lien. Bacon CJ nevertheless came to the same conclusion as Lord Hatherley LC had done (13 Ch D 885 at 886–887):
‘The solicitor is, no doubt, entitled to his lien, and the objection would have been valid if it had been sought to take this deed out of his possession. But inspection, and not delivery up of the deed, is what is wanted.’
The provisions of s 115 of the 1862 Act were reproduced in successive consolidating Companies Acts until they became s 561 of the Companies Act 1985. That section was, however, replaced by the provisions in the Insolvency Act 1985 which have now been consolidated in s 236 of the Insolvency Act 1986. For present purposes, the following changes may be noted. First, the power is exercisable not merely in a winding up but also at the instance of an administrator, administrative receiver and provisional liquidator. Second, the reference to the power being without prejudice to any lien has been omitted. Third, on the recommendation of the Insolvency Law Review Committee the power to interrogate is extended to include power to require the submission of an affidavit (see Insolvency Law and Practice (Cmnd 8558) para 903).
Why has the reference to a lien been omitted? Two explanations were suggested. Counsel for the receivers said that it was superfluous because Ex p Bramble showed that even without a special proviso, an order for production to the court would not affect the lien. Counsel for Albery Chapman said that the reason was to be found in s 246 of the 1986 Act, which rendered a lien over ‘any of the books, papers or other records of the company’ unenforceable to the extent that its enforcement would deny possession of those documents to an administrator, liquidator or provisional liquidator. As against those office-holders, the lien was therefore in any case ineffective and did not need to be mentioned in s 236. But s 246 did not apply to an administrative receiver and therefore in his case the omission of any reference to the lien in s 236 meant that it could still be asserted to resist an order for production. Counsel for Albery Chapman said that this distinction was reasonable because the administrative receiver was simply an agent for the company and should therefore be treated as the client seeking production by his solicitor rather than given the third party status which Lord Hatherley LC gave the liquidator in Re South Essex Estuary and Reclamation Co.
In my judgment ss 236 and 246 are dealing with different concepts and the one throws no light on the construction of the other. Section 236 is concerned with obtaining information while s 246 deals with rights of property to documents. An office-holder who is able to assert the company’s proprietary right to a document under s 246 will have no need to obtain an order for its production under s 236. But that circumstance does not mean that when resort is had to s 236 it should be construed more narrowly than its ordinary meaning would require. For example, s 246 does not apply to
Page 1023 of [1988] 3 All ER 1019
‘documents which give a title to property and are held as such’. A solicitor who has a lien over such a document cannot be required to deliver it up to a liquidator. If the solicitor will not disclose the document and the liquidator wants to know what it says, he will have to seek an order for production under s 236. There is, I think, no doubt that he could have obtained production under s 561 of the Companies Act 1985 and its predecessors. If the submission of counsel for Albery Chapman is right, he can do so no longer. I think that this is an improbable conclusion and there is nothing in the language of s 236 which requires it.
Thus the reasoning of Bacon CJ in Ex p Bramble still applies to the powers conferred by s 236, whether invoked at the instance of a liquidator, an administrator or an administrative receiver. There is nothing surprising in Parliament having given the administrative receiver greater powers to obtain information from the company’s unpaid solicitor than the company itself could have obtained. Although the administrative receiver is an agent of the company, that agency is little more than an administrative convenience to enable the receiver better to discharge his primary duty to the debenture holder and his duties to other creditors. The explanation which Lord Hatherley LC gave for Parliament having conferred third party status on the liquidator can be applied with equal plausibility to the administrative receiver. It follows that in my judgment the lien is no answer to the order for production made by Mr Registrar Buckley in this case.
Privilege
Albery Chapman have refused to produce certain documents on the grounds that they are subject to professional privilege. Counsel for the receivers accepts that a proper claim of privilege by a client other than the companies in receivership is a sufficient reason for withholding a document. But he says, and I agree, that the claim must be made with sufficient particularity to enable the receivers to form a view on whether or not the claim is valid. Albery Chapman must specify the nature of the document, the client who claims privilege and the grounds on which the claim is made.
The affidavit
Albery Chapman challenge the terms in which they were ordered to make an affidavit as oppressively wide. The firm acted for the Aveling Barford group in numerous transactions of varying complexity over several years. The order requires them to submit an affidavit containing ‘an account of the full particulars of all dealings by Albery Chapman with the companies’. Such a narrative might occupy a substantial volume containing relatively little material of any value to the receivers. The power to order an affidavit is expressed in general terms (‘an account of his dealings with the company’) but r 9.2(3)(c) of the Insolvency Rules 1986, SI 1986/1925 says that an application for an order that the respondent submit an affidavit should give ‘particulars … of the matters to which he is required to swear’ and r 9.3(3)(a) says that the order itself ‘shall specify … the matters which are to be dealt with in his affidavits’.
There may be cases in which the respondent’s dealings with the company have been so limited that an order framed in the terms of this order would cause him no difficulty. But counsel for the receivers accepted that in the circumstances of this case the order was far too wide and lacking in specificity. What the receivers want in the first instance is a list of the matters in which Albery Chapman have dealt with or on behalf of the companies in receivership, preferably by reference to identified files or otherwise giving just enough detail to enable the receivers to decide whether to pursue their inquiries any further. Once such a list has been provided, they can decide whether to ask for an affidavit or affidavits dealing with specific matters. The order will be amended accordingly.
Costs
Albery Chapman ask by their motion for an order that they should be indemnified against all costs incurred in compliance with the registrar’s order. Rule 9.6(4) of the 1986 rules provides that a person ‘summoned to attend for examination under this Chapter’ shall be tendered a reasonable sum in respect of travelling expenses but that ‘other costs
Page 1024 of [1988] 3 All ER 1019
falling on him are at the court’s discretion’. Counsel for the receivers said that this discretion is limited to the costs of persons summoned to attend for examination. It has no application to a respondent who has not been summoned to attend but, as in this case, required to comply with an order for production of books and papers by allowing their inspection by the receivers’ solicitors or required to submit an affidavit. In my judgment there could be no reason for such a distinction. I think that in the context of the rule, a ‘person summoned to attend for examination’ includes a person required to give information by the alternative methods permitted under s 236.
It would however be premature in this case to make an order for the payment of Albery Chapman’s costs. An order under s 236 seems to me to have stronger analogies with a subpoena duces tecum or ad testificandum, by which a citizen is required to perform a public duty in aid of the administration of justice, than with, say, a Norwich Pharmacal order (see Norwich Pharmacal Co v Customs and Excise Comrs [1973] 2 All ER 943, [1974] AC 133) or Mareva injunction affecting a third party at the instance of a private litigant. I therefore see no reason why there should be a presumption under s 236, any more than there was under s 561 of the Companies Act 1985, that a respondent is entitled to be indemnified against his costs of complying with the order. I do not however wish to say anything to inhibit Albery Chapman from making an application for costs at an appropriate time which would in my view be after they have complied fully with the order.
The confidential memorandum
The motion seeks an order for disclosure of the confidential memorandum exhibited to the affidavit sworn in support of the application for the first order under s 236. Since the Companies Act 1862 it has been the practice for applications by a compulsory liquidator under s 115 and its successor provisions to be supported by an unsworn confidential memorandum which, for reasons explained by Jessel MR in Re Gold Co 12 Ch D 77 at 82 is not disclosed to the party who it is sought to examine. The liquidator’s statement was accepted without an oath because he is an officer of the court but, in cases in which the application was made by a voluntary liquidator or a creditor or contributory, the practice was for the statement to be verified by affidavit (see Re Rolls Razor Ltd (No 2) [1969] 3 All ER 1386, [1970] Ch 576). It was nevertheless also withheld from the respondent.
Counsel for Albery Chapman did not press for disclosure of the memorandum in this case and I think that he was right not to do so, because as I understood it, the only basis for the application was the fact that it formed an exhibit to an affidavit instead of being unsworn. Under the former practice this would not have made the memorandum liable to production and I do not think that it should do so now. I should say, however, that the distinction between applications by officers of the court and others appears to have been abolished by r 9.2(1) of the 1986 rules which prescribes, in the case of any application under s 236, that it should be made in writing, accompanied by ‘a brief statement of the grounds upon which it is made’. No mention is made of an affidavit. It would therefore have been open to the administrative receivers to have submitted their memorandum unsworn.
Conclusion
Paragraph 2(a) of the order of Mr Registrar Buckley requiring the submission of an affidavit will be varied to require a list verified by affidavit giving brief particulars of all matters in which the firm has dealt with or on behalf of the companies in receivership, identifying any files held by the firm in respect of those matters. The motion is otherwise dismissed.
Motion dismissed.
Solicitors: Albery Chapman; Cameron Markby (for the receivers).
Jacqueline Metcalfe Barrister.
R v Conway
[1988] 3 All ER 1025
Categories: CRIMINAL; Criminal Law, Road Traffic
Court: COURT OF APPEAL, CRIMINAL DIVISION
Lord(s): WOOLF LJ, MCCULLOUGH AND AULD JJ
Hearing Date(s): 24 JUNE, 28 JULY 1988
Criminal law – Duress as a defence – Reckless driving – Whether duress available as defence to charge of reckless driving.
Necessity can only be a defence to a charge of reckless driving where, objectively, the facts establish duress of circumstances, ie that the defendant was constrained by circumstances to drive as he did to avoid the threat of death or serious injury to himself or some other person (see p 1029 e, post).
R v Denton (1987) 85 Cr App R 246 distinguished.
Notes
For duress as a defence to a criminal charge, see 11 Halsbury’s Laws (4th edn) para 24, and for cases on the subject, see 14(1) Digest (Reissue) 57–69, 266–280.
For reckless driving, see 40 Halsbury’s Laws (4th edn) para 472.
Cases referred to in judgment
R v Denton (1987) 85 Cr App R 246, CA.
R v Graham [1982] 1 All ER 801, [1982] 1 WLR 294, CA.
R v Howe [1987] 1 All ER 771, [1987] AC 417, [1987] 2 WLR 568, HL.
R v Lawrence [1981] 1 All ER 974, [1982] AC 510, [1981] 2 WLR 524, HL.
R v Willer (1986) 83 Cr App R 225, CA.
Case also cited
R v Seymour [1983] 2 All ER 1058, [1983] 2 AC 493, HL.
Appeal against conviction
Francis Gerald Conway appealed with leave of Steyn J against his conviction on 30 March 1988 in the Crown Court at Reading before his Honour Judge Murchie and a jury on a count of reckless driving for which he was sentenced to six months’ imprisonment, and disqualified from driving for 18 months. The facts are set out in the judgment of the court.
John Perry (who did not appear below) (assigned by the Registrar of Criminal Appeals) for the appellant.
Hugh Torrance for the Crown.
Cur adv vult
28 July 1988. The following judgment was delivered.
WOOLF LJ. This is an appeal by the appellant against his conviction, at the Crown Court at Reading on 30 March 1988, of reckless driving contrary to s 2 of the Road Traffic Act 1972. He was sentenced to six months’ imprisonment and disqualified from driving for 18 months. He was granted leave to appeal against conviction, but his application for leave to appeal against his sentence was refused and has not been renewed.
The appeal has been ably argued on behalf of the appellant by counsel, who did not appear in the court below. His argument does not accord precisely with the grounds of appeal. The notice of appeal contains two grounds. The first can be summarised as
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alleging that on the evidence before the jury the defence of necessity was raised and the jury should have been, but were not, directed as to that defence. The second ground of appeal is that the jury should have been, but were not, directed that they should first of all consider whether or not the appellant’s manner of driving was reckless and, if so, that they should then go on to consider whether they believed the appellant bona fide believed he was acting in an emergency to save the life of his passenger and, if so, whether the manner of driving would be reasonable in the circumstances, and as to the extent that a bona fide belief could operate as a defence.
In relation to the second ground of appeal counsel submitted that to establish that driving was reckless involves establishing that the defendant took an unreasonable risk, and that there could be circumstances in a case such as the present which would justify what would otherwise be reckless driving. Whether or not it was justified would depend on whether the risk was one which a reasonably prudent man would have taken to avoid what he, the defendant, believed was an emergency giving rise to a probability of serious harm to his passengers or himself.
Not surprisingly, counsel did not submit that on the direction which was given to the jury the appellant was not properly convicted. The prosecution evidence was that on the day in question, 6 July 1987, two police officers were on duty in an unmarked police vehicle when they saw the appellant’s car parked. The appellant was in the driving seat, there was a passenger in the front seat, and another passenger, named Giulio Tonna, in the rear seat. Tonna was known to the police officers as being the subject of a bench warrant and, having seen him in the appellant’s car, they pulled their vehicle up alongside his car, blocking the vehicle, and one of the police officers leaned over towards the appellant, showed him his warrant card, and said to him: ‘Police; wait there, I want to have a word with your passenger.' He then walked to the rear passenger door of the appellant’s car to speak to Tonna, when he heard Tonna shout, ‘Go, I am wanted,’ and, subsequently, ‘It’s the Old Bill, go, I am wanted,’ at which the appellant drove off at speed. The police officers followed and saw the appellant’s car being driven in a way which would undoubtedly normally be regarded as reckless. The appellant’s car performed a four-wheel skid around a corner, and drove down a very narrow road, in which there were cars parked on both sides, at speeds in excess of 40 miles per hour. At one stage a car had to move on to the footway to avoid a collision. The appellant approached a junction on the wrong side of the road, forcing another car to swerve onto the pavement to avoid a collision. He also turned sharp left at a junction without stopping, cutting directly in front of a car on the nearside, causing that car to perform an emergency stop, and drove through a ‘No Entry’ sign round a blind corner and along a one-way street until forced to stop by traffic coming in the opposite direction. He was then apprehended by the officers, but Tonna was no longer in the car, and when asked what he was doing he indicated that he wanted to avoid the police catching Tonna.
The appellant’s evidence, which was supported by his witnesses, who included his passenger, differed substantially as to detail from that of the prosecution witnesses. The effect of the defence evidence is accurately summarised in the grounds of appeal as follows. A few weeks before 6 July Tonna had been in a vehicle when another man was shot by a 12-bore shotgun and severely injured and on that occasion Tonna was chased and narrowly escaped. That this event had occurred was not disputed by the prosecution. The appellant understood that Tonna was the main target and intended victim of that incident. Immediately before the alleged reckless driving, two young men in civilian clothes came running towards the vehicle and Tonna then screamed hysterically, ‘Drive off.' The men never identified themselves as police officers, and the appellant drove off because he feared a fatal attack on Tonna. When he drove off the two persons whom he assumed to be intended attackers gave chase in a motor vehicle. It was only after he had dropped off Tonna and ceased driving that he realised the persons were police officers. At all times during the chase he had believed the two men were potential assassins. He did, however, deny many of the details of the alleged reckless driving, maintaining that
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although he drove at excessive speeds he did not carry out many of the dangerous manoeuvres alleged by the police. He accepted that nevertheless, were it not for the believed emergency, his manner of driving might well have been reckless. He was, however, petrified and when he saw the ‘No Entry’ sign he took no notice because he was in a panic.
It is not suggested that the judge did not sum up the evidence fairly. He reviewed the evidence, including that evidence given by the appellant and his witnesses, in a way to which no objection is taken. He also directed the jury about the elements of the offence of reckless driving in accordance with the speech of Lord Diplock in R v Lawrence [1981] 1 All ER 974, [1982] AC 510, and it is not suggested that, but for the special circumstances which were alleged by the defence to exist, his direction as to the law would not have been adequate. However, because of those circumstances counsel submits that the jury should have been given an additional direction. He says that the jury should be directed to consider whether the prosecution had proved beyond reasonable doubt that the appellant did not believe that he was acting in an emergency to save Tonna from serious bodily injury. If the jury found that the appellant so believed or may have so believed the jury should be directed to consider whether the manner of the appellant’s driving was justified or excused having regard to the circumstances in which he drove.
Although counsel in his careful and helpful submissions was anxious not to put forward any proposition which was wider than was absolutely necessary for the purposes of this appeal, it appears from this suggested direction that what he is contending for is a defence of necessity based on subjective belief which would justify what would otherwise amount to reckless driving. In doing this he is departing from the approach which was adopted by counsel who appeared for the appellant in the Crown Court. In submissions made at the end of the evidence and prior to the summing up counsel then accepted that it would be ‘impossible to run the defence of necessity in this particular case’, and that the judge was not required to leave it to the jury. However, he contended that the jury none the less could consider whether the appellant’s explanation was reasonable and, if it was, find him not guilty.
The judge, in our view, correctly rejected this contention. It appears from the transcript of the interchange between the judge and counsel that it was also accepted that this case could not be distinguished from R v Denton (1987) 85 Cr App R 246. In R v Denton the trial judge refused to leave to the jury the defence of necessity, on facts which bear some similarity to those in this case, and the Court of Appeal dismissed the appeal. In giving the judgment of the court Caulfield J, having indicated that the court had been referred to a number of authorities on the subject of necessity, went on to say (at 248):
‘In view of our ultimate decision it is not necessary to review, still less to comment, on the law on this alleged defence of necessity. This is so because this court takes the view that even if necessity as a defence can be raised in a charge of reckless driving, it certainly could not be raised on the facts relied upon by the appellant in his defence. The appellant did not assert that he had to take risks of causing harm to others to escape from his pursuers or that he had to drive recklessly or that he did not give the nature of his driving a thought. He asserted in terms, “I did not take risks, I drove carefully throughout.” In our view such assertions exclude any possible defence of necessity, even assuming there is such a defence. The necessity, if any, was to drive, not to drive recklessly.’
Counsel submits that this case can be distinguished from R v Denton (which we accept), because here, unlike in R v Denton, although the appellant disputed much of the police evidence about the manner of driving he accepted that because he was ‘in a panic’ he did not drive in a normal manner, in that he drove fast, over the speed limit, and not as carefully as otherwise he would.
In R v Denton the court went on to comment on another recent decision of this court, R v Willer (1986) 83 Cr App R 225. In R v Willer the appellant had been convicted of
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reckless driving. As he drove up a narrow road he was confronted with a gang of shouting and bawling youths, 20 to 30 strong. He heard one of them shouting, ‘I’ll kill you, Willer,’ and another threatening to kill his passenger. He stopped and tried to turn the car around. The youths surrounded him. They banged on the car. One of the youths dived on the passenger who was sitting in the back and, in the words of Watkins LJ (at 226):
‘The appellant realised that the only conceivable way he could somehow escape from this formidable gang of youths, who were obviously bent on doing further violence, was to mount the pavement on the righthand side [of the road] and on the pavement to drive through a small gap into the front of the shopping precinct (which he did at about 10 miles per hour.)’
Subsequently he returned, driving back very slowly, because he realised one of his passengers was missing from the car. Throughout this period there was still a youth fighting with one of his rear passengers in the car, so the appellant drove to the local police station and reported the matter. During the course of the trial Willer changed his plea after a ruling that he was not entitled to rely on the defence of necessity. In dealing with this change of plea, Watkins LJ said (at 227):
‘Returning to how the appellant came to change his plea, one begins with the reasons advanced by the assistant recorder for declaring that the defence of necessity was not available to the appellant. He seems to have based himself upon the proposition, though saying that necessity was a defence known to English law, that it was not, albeit available to the appellant in respect of the journey through the gap into the car park in front of the shopping precinct, available to him upon the return journey because he was not at that stage being besieged by the gang of youths. We feel bound to say that it would have been for the jury to decide, if necessity could have been a defence at all in those circumstances, whether the whole incident should be regarded as one, or could properly be regarded as two separate incidents so as to enable them to say that necessity applied in one instance but not in the other. For that reason alone the course adopted by the assistance recorder was we think seriously at fault. Beyond that upon the issue of necessity we see no need to go for what we deem to have been appropriate in these circumstances to raise as a defence by the appellant was duress. The appellant in effect said: “I could do no other in the face of this hostility than to take the right turn as I did, to mount the pavement and to drive through the gap out of further harm’s way, harm to person and harm to my property.” Thus the defence of duress, it seems to us, arose but was not pursued. What ought to have happened therefore was that the assistant recorder upon those facts should have directed that he would leave to the jury the question as to whether or not upon the outward or the return journey, or both, the appellant was wholly driven by force of circumstance into doing what he did and did not drive the car otherwise than under that form of compulsion, i.e. under duress.’
It will be noted from the passage in Watkins LJ’s judgment that in R v Willer it was apparently accepted by the assistant recorder and counsel that there could be a defence of necessity to reckless driving. This may explain why the report does not suggest that any authorities were cited to the Court of Appeal, although apparently authorities, including American and Australian authorities, were cited to the assistant recorder.
It is convenient to refer to the ‘duress’ of which Watkins LJ spoke as ‘duress of circumstances’.
In R v Denton 85 Cr App R 246 at 248, in relation to R v Willer, the court said:
‘This authority might be taken to suggest that the court assumed that on the facts of the case the defence of necessity could have been raised to a charge of reckless driving. We do not think this authority goes so far. We think it shows that the court doubted whether necessity as a defence could have been raised on the facts of
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that case but the court saw no need to decide whether such a defence existed as a matter of law. The court said a very different defence was available, which was duress, which should have been left to the jury. It should be observed that where the headnote says ((1986) 83 Cr App R 225) “Further the judge erred in ruling that the defence of necessity was not available to the defendant” it is referring to the argument advanced by the appellant and not to the decision of the appellate court.’
The judgment in R v Denton, while making this reservation on the decision in R v Willer so far as the defence of necessity is concerned, made no similar reservation with regard to what was said in R v Willer as to duress. In R v Willer there were a number of grounds on which this court disapproved of the way in which the case had been dealt with in the Crown Court. However, in relation to duress we regard the decision as binding on this court.
We have, in addition, had the advantage of having been referred to such other authorities as there are on the subject. In particular, we have been referred to the views of Professor Glanville Williams in his Textbook of Criminal Law (2nd edn, 1983) p 517 and Smith and Hogan Criminal Law (6th edn, 1988) p 224. We have also been referred to the Law Commission’s Report on Defences of General Application (Law Com no 83 (1977)), which recommended that ‘there should be no general defence of necessity and if any such general defence exists at common law, it should be abolished’. This conclusion was in striking contrast to the commission’s provisional proposals in its Working Paper no 55 (1974), to which we were also referred. We have also seen the Law Commission’s report on the Codification of the Criminal Law (Law Com no 143 (1985)), which took the view that necessity should remain as a defence at common law, in so far as it is one already. It appears that it is still not clear whether there is a general defence of necessity or, if there is, what are the circumstances in which it is available.
We conclude that necessity can only be a defence to a charge of reckless driving where the facts establish ‘duress of circumstances’, as in R v Willer, ie where the defendant was constrained by circumstances to drive as he did to avoid death or serious bodily harm to himself or some other person.
As the learned editors point out in Smith and Hogan Criminal Law (6th edn, 1988) p 225, to admit a defence of ‘duress of circumstances’ is a logical consequence of the existence of the defence of duress as that term is ordinarily understood, ie ‘do this or else’. This approach does no more than recognise that duress is an example of necessity. Whether ‘duress of circumstances’ is called ‘duress’ or ‘necessity’ does not matter. What is important is that, whatever it is called, it is subject to the same limitations as the ‘do this or else’ species of duress. As Lord Hailsham LC said in his speech in R v Howe [1987] 1 All ER 771 at 777, [1987] AC 417 at 429:
‘There is, of course, an obvious distinction between duress and necessity as potential defences: duress arises from the wrongful threats or violence of another human being and necessity arises from any other objective dangers threatening the accused. This, however, is, in my view a distinction without a relevant difference, since on this view duress is only that species of the genus of necessity which is caused by wrongful threats. I cannot see that there is any way in which a person of ordinary fortitude can be excused from the one type of pressure on his will rather than the other.’
No wider defence to reckless driving is recognised. Bearing in mind that reckless driving can kill, we cannot accept that Parliament intended otherwise. When Parliament intended a wider defence it made express provision. Section 36(3) of the Road Traffic Act 1972, in relation to the lesser offence of driving motor vehicles elsewhere than on roads, provides:
‘A person shall not be convicted of an offence under this section with respect to a vehicle if he proves to the satisfaction of the court that it was driven in contravention
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of this section for purposes of saving life or extinguishing a fire or meeting any other like emergency.’
It follows that a defence of ‘duress of circumstances’ is available only if from an objective standpoint the defendant can be said to be acting in order to avoid a threat of death or serious injury. The approach must be that indicated by Lord Lane CJ in R v Graham [1982] 1 All ER 801, [1982] 1 WLR 294. Lord Lane CJ, in a passage of his judgment approved by the House of Lords in R v Howe, said ([1982] 1 All ER 801 at 806, [1982] 1 WLR 294 at 300):
‘As a matter of public policy, it seems to us essential to limit the defence of duress by means of an objective criterion formulated in terms of reasonableness. Consistency of approach in defences to criminal liability is obviously desirable. Provocation and duress are analogous. In provocation the words or actions of one person break the self-control of another. In duress the words or actions of one person break the will of another. The law requires a defendant to have the self-control reasonably to be expected of the ordinary citizen in his situation. It should likewise require him to have the steadfastness reasonably to be expected of the ordinary citizen in his situation. So too with self-defence, in which the law permits the use of no more force than is reasonable in the circumstances. And, in general, if a mistake is to excuse what would otherwise be criminal, the mistake must be a reasonable one. It follows that we accept counsel for the Crown’s submission that the direction in this case was too favourable to the appellant. The Crown having conceded that the issue of duress was open to the appellant and was raised on the evidence, the correct approach on the facts of this case would have been as follows: (1) was the defendant, or may he have been, impelled to act as he did because, as a result of what he reasonably believed King had said or done, he had good cause to fear that if he did not so act King would kill him or (if this is to be added) cause him serious physical injury? (2) if so, have the prosecution made the jury sure that a sober person of reasonable firmness, sharing the characteristics of the defendant, would not have responded to whatever he reasonably believed King said or did by taking part in the killing?’
Adopting the approach indicated by Lord Lane CJ, and not that argued by counsel, which involved a subjective element, we ask ourselves whether the judge in the Crown Court should have left the defence of ‘duress of circumstances’ to the jury, notwithstanding the submission made by his counsel that it was ‘impossible to run the defence of necessity … or indeed leave it to the jury’.
On the facts alleged by the appellant we are constrained to hold that the judge was obliged to do so, notwithstanding the appellant’s counsel’s submission at the hearing. The judge was referred to both R v Denton and R v Willer, and it appears that the explanation for counsel not relying on R v Willer is that he was wrongly of the view that the facts of this case are indistinguishable from those in R v Denton. However, in fact, as indicated by the judge, his client’s defence was that he drove as he did because he was in fear for his life and that of Tonna. Although it is unlikely that the outcome of the jury’s deliberations would have been any different, they should have been directed as to the possibility that they could find the appellant not guilty because of duress of circumstances, although they were otherwise satisfied that he had driven recklessly.
The jury not having received this direction, this is not a case in which we can properly apply the proviso. On the facts the non-direction related in reality to the appellant’s only conceivable defence, and, although unlikely, it is just possible that the jury, if properly directed, would have found the appellant not guilty because of this defence.
Accordingly, we allow this appeal and quash the conviction.
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Appeal allowed. Conviction quashed. The court refused leave to appeal to the House of Lords, but certified, under s 33(2) of the Criminal Appeal Act 1968, that the following point of law of general public importance was involved in the decision: whether, and if so in what circumstances, a driver who would otherwise be guilty of reckless driving is entitled to rely on a defence of necessity or duress of circumstances.
Solicitors: Crown Prosecution Service, Reading.
Kate O’Hanlon Barrister.
Spittle and others v Bunney
[1988] 3 All ER 1031
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): DILLON, CROOM-JOHNSON AND WOOLF LJJ
Hearing Date(s): 26, 27 NOVEMBER 1987, 5 FEBRUARY 1988
Fatal accident – Damages – Death of mother – Loss of services as mother – Dependant aged three – Method of calculating damages based on commercial cost of hiring notional nanny – Child becoming more independent as he gets older and less in need of services of nanny – Method of calculation to take account of change.
Interest – Damages – Personal injury – Fatal accident – Guidelines to be applied in awarding interest – Two years’ interest deducted for unjustifiable delay in prosecuting case – Interest deducted in respect of its investment return element and not at full short-term investment account rate – Whether analysis of investment return and inflation elements of interest constituting special reason for departing from guidelines – Law Reform (Miscellaneous Provisions) Act 1934, s 3 – Fatal Accidents Act 1976.
A mother was killed and her three-year-old child injured when a vehicle driven negligently by the defendant mounted the pavement and hit them. The child subsequently lived with her aunt, who, as joint administrator of the deceased’s estate of which the child was the sole beneficiary, brought an action against the defendant claiming damages under the Fatal Accidents Act 1976 for the death of the deceased and the loss of expectation of life and consequential loss caused to the deceased and her estate as a result of the defendant’s negligent driving. The child, a minor suing by her aunt as next friend, also brought an action claiming damages for personal injuries. The trial took place seven and a half years after the accident. At its conclusion the judge ordered the defendant to pay the child £8,000 damages for personal injuries (being £3,000 for physical injuries and £5,000 for psychological injuries) and the estate £47,500 damages for the loss of the mother’s services together with interest thereon. The judge arrived at the figure of £47,500 by (i) calculating the commercial cost of hiring a notional nanny to look after the child for seven and a half years (to the date of the trial), which he assessed at £27,000 plus £3,000 to compensate the aunt for services provided over and above those which could be expected of a commercially hired nanny, and (ii) adding £17,500, representing the cost of future dependency calculated by applying a multiplier of eleven years, less the seven and a half years which had already elapsed by the time of the trial, to the appropriate rate of compensation (£5,000). In awarding interest pursuant to s 3a of the Law Reform (Miscellaneous Provisions) Act 1934 the judge deducted two years’ interest on the ground of unjustifiable delay in the prosecution of the case, but held that the interest would be deducted only on the basis of its investment return element (ie the loss of the use of the money) and not at the full short-term investment account rate,
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which included an inflation element. The defendant appealed against the quantum of damages awarded and the rate used in the deduction of interest.
Held – The appeal would be allowed to the following extent—
(1) Although the award for the psychological effects of the accident was high, it was one which the judge had made within his discretion and should be allowed to stand. However, the award of £3,000 damages for physical injuries was too high and would be reduced in line with similar awards for comparable injuries (see p 1035 d e and p 1044 b c, post).
(2) When assessing damages under the 1976 Act for the loss of a mother’s services on the basis of the commercial cost of hiring a nanny to look after a child, a judge, directing himself as he would a jury, ought to take account of the fact that a child became more independent as he got older and less in need of the services of a nanny and ought to reduce the damages awarded accordingly. A jury taking that fact into consideration would not have awarded more than £25,000 for the multiplier period and therefore the damages awarded would be reduced to that amount (see p 1040 f to p 1041 a and p 1044 b c, post); Hay v Hughes [1975] 1 All ER 257 and Regan v Williamson [1976] 2 All ER 241 considered.
(3) Apart from exceptional cases, judges should adhere to the guidelines laid down by the appellate courts on the rates of interest payable on an award of damages under the 1976 Act and, in particular, should adhere to the guidelines relating to the reduction of the amount of interest where the plaintiff had been guilty of an unjustifiable delay in bringing the case to trial unless there was a special reason, ie a reason special to the individual case, which entitled the judge in the exercise of his discretion to depart from those guidelines. The judge’s deduction of only the investment return element in the interest to reflect the plaintiffs’ two-year delay, rather than a deduction at the full short-term investment account rate, had not been made for a reason which was special to the individual case, since it was based on an analysis of the investment return and inflation elements of the interest which applied to every case. The deduction of interest for the two-year period would therefore be made at the full rate and the judge’s award reduced accordingly (see p 1043 b h j and p 1044 b c, post); Jefford v Gee [1970] 1 All ER 1202, dicta of Lord Diplock in Cookson v Knowles [1978] 2 All ER 604 at 611–612 and of Watkins LJ in Birkett v Hayes [1982] 2 All ER 710 at 717 applied.
Notes
For the measure of damages under the Fatal Accidents Acts, see 12 Halsbury’s Laws (4th edn) para 1150, and for cases on the subject, see 36(1) Digest (Reissue) 360–365, 1456–1483.
For interest payable on damages, see 12 Halsbury’s Laws (4th edn) para 1204, and for cases on the subject, see 34 Digest (Reissue) 533–544, 4430–4439.
For the Law Reform (Miscellaneous Provisions) Act 1934, s 3, see 11 Halsbury’s Statutes (4th edn) 580.
For the Fatal Accidents Act 1976, see 31 ibid 202.
Cases referred to in judgments
Abrams v Cook (1987) Times, 26 November, [1987] CA Transcript 1157.
Birkett v Hayes [1982] 2 All ER 710, [1982] 1 WLR 816, CA.
Burton v Wright (23 March 1982) referred to in Kemp and Kemp The Quantum of Damages vol 2, para 9–865/1.
Cookson v Knowles [1978] 2 All ER 604, [1979] AC 556, [1978] 2 WLR 978, HL.
Daly v General Steam Navigation Co Ltd [1980] 3 All ER 696, [1981] 1 WLR 120, CA.
Daniels v Jones [1961] 3 All ER 24, [1961] 1 WLR 1103, CA.
Dexter v Courtaulds Ltd [1984] 1 All ER 70, [1984] 1 WLR 372, CA.
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Donnelly v Joyce [1973] 3 All ER 475, [1974] QB 454, [1973] 3 WLR 514, CA.
Gilbert v Meccano Ltd (14 May 1980) referred to in Kemp and Kemp The Quantum of Damages vol 2, para 9–867.
Hay v Hughes [1975] 1 All ER 257, [1975] QB 790, [1975] 2 WLR 34, CA.
Housecroft v Burnett [1986] 1 All ER 332, CA.
Jefford v Gee [1970] 1 All ER 1202, [1970] 2 QB 130, [1970] 2 WLR 702, CA.
Jones v Fell and Bryant (18 January 1980) referred to in Kemp and Kemp The Quantum of Damages vol 2, para 9-866.
Monarch Steamship Co Ltd v AB Karlshamns Oljefabriker [1949] 1 All ER 1, [1949] AC 196, HL.
Pritchard v J H Cobden Ltd [1987] 1 All ER 300, [1988] Fam 22, [1987] 2 WLR 627, CA.
Regan v Williamson [1976] 2 All ER 241, [1976] 1 WLR 305.
Taylor v O’Connor [1970] 1 All ER 365, [1971] AC 115, [1970] 2 WLR 472, HL.
White v Brand’s (Bakers) Ltd (29 March 1981) referred to in Kemp and Kemp The Quantum of Damages vol 2, para 9-865.
Wright v British Rlys Board [1983] 2 All ER 698, [1983] 2 AC 773, [1983] 3 WLR 211, HL.
Appeal
The first and second plaintiffs, Daphne Spittle and William Henry James, joint administrators of the estate of Glynis Ann Hall (deceased), by a writ issued on 21 May 1982, claimed against the defendant, Clive Bunney, damages for the death of the deceased and the loss of expectation of life and consequential loss caused to the deceased and her estate as a result of negligent driving by the defendant on 18 June 1979 at Common Road, Brierley, Barnsley, South Yorkshire, under the Fatal Accidents Act 1976. The third plaintiff, Kate Elizabeth Hall, the deceased’s daughter and a minor suing by her aunt and next friend, the first plaintiff, claimed damages for personal injuries sustained as a result of the defendant’s negligent driving. In a judgment given on 9 and 17 December 1986, Turner J ordered the defendant to pay, inter alia, £8,390·13 to the third plaintiff, being £8,000 damages for personal injuries and £390·13 interest on that sum and £60,744·44 to the first and second plaintiffs, being £30,000 special damages plus £181·68 funeral expenses with interest calculated on that sum at the reduced rate of 46% (allowing for a deduction of two years’ interest for the plaintiffs’ unjustifiable delay in the prosecution of the case) totalling £13,092·76, and £17,500 general damages. The defendant appealed against the quantum of damages awarded and the rate used in the deduction of interest. The facts are set out in the judgment of Croom-Johnson LJ.
Richard Clegg QC and Harold Halliday for the defendant.
Robin Stewart QC and Timothy Hartley for the plaintiffs.
Cur adv vult
5 February 1988. The following judgments were delivered.
CROOM-JOHNSON LJ (giving the first judgment at the invitation of Dillon LJ). On 18 June 1979 Kate Elizabeth Hall, then aged three years and two months, was with her mother Glynis Ann Hall on the pavement in Brierley, Barnsley, when a van driven by the defendant mounted the pavement, injured Kate, and killed her mother who was aged 28. Kate’s father and mother were not married but were living together. He seems to have been the support of the little family. Since the accident he has assumed no responsibility towards his child, and he has fallen completely out of the picture.
After the accident Kate was detained in hospital overnight and was discharged the following day. Her mother’s sister, Mrs Daphne Spittle, lives with her husband and their own two young children, one older and one younger than Kate. She took Kate into her
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family, and Kate has lived with them ever since. Mrs Spittle has been a loving substitute mother, and Kate now calls her ‘Mum’.
The first and second plaintiffs are the administrators of the estate of Glynis Hall. They brought proceedings under the Fatal Accidents Act 1976, the sole beneficiary being Kate Hall. Those proceedings are the subject of this appeal. Proceedings were also brought on behalf of the estate under the Law Reform (Miscellaneous Provisions) Act 1934 for the funeral expenses of £181 and for the loss of the mother’s expectation of life (which last does not seem to have received an award). There is no appeal in respect of that claim. Thirdly, Kate sued for damages for her personal injuries, and there is an appeal against that award. In addition, there was an assessment of interest payable on the damages awarded under the 1976 Act; that is also the subject of appeal. The writ was issued on 21 May 1982. The trial did not take place until December 1986, seven and a half years after the death, by which time Kate was ten and a half years old.
It will be convenient to deal with the three appeals in the order in which they were argued.
The personal injuries of Kate Hall
There was an injury to her left index finger, resulting in some loss of pulp at the end, but not exposing the bone. It healed in two weeks. According to an agreed medical report dated 2 October 1980, the pulp is foreshortened slightly and the nail is short. There was still some remaining tenderness. The surgeon reported:
‘There is minimal tissue loss and manual dexterity in the future should not be impaired. The alteration in the shape of the nail and the finger end will constitute a minor cosmetic deformity when she reaches her teens.’
He forecast that the injury would return to total comfort. The trial judge inspected the finger, and recorded his observation that the end joint of the finger is short by about one-third of its natural length as compared with the right index finger, and about half of the length of the nail missing. He concluded that between the surgeon’s examination and his own inspection the finger had returned to total comfort.
Besides the finger, there were other trivial physical injuries. There was a small laceration in the left parietal region with a large haematoma underneath it, and abrasions in the left temporal and frontal regions of the head. There were further abrasions over the face and both legs. After healing there remained no obvious residual damage.
The major injury from the accident was emotional. Her aunt gave evidence about Kate’s immediate reaction to the death of her mother. She would not eat or drink. She would wake screaming and crying, and had difficulty in going back to sleep. She lost her bladder and bowel control for a year. For the first year and a half after the accident she was extremely difficult to raise and her behaviour was disturbed. At five years of age she went to school. Her scholastic ability was in the high average range, but she would not mix with other children. Mrs Spittle cared for her very competently, patiently and intelligently, and by 1984 Kate’s behavioural and sleep problems had settled.
Kate’s progress was traced in two agreed psychological reports dated 28 September 1982 and 20 May 1986. Her intelligence is high, but she would not in the early days mix with other children at school and was therefore socially isolated. By the time of the second report, when she was ten years old, the report was as follows:
‘Kate’s behavioural and sleep problems have been settled for the last two years although she is still unable to deal with small problems on her own. She is a steady, sensible, loving and helpful child whom the Spittles enjoy very much. However, for her age, she does still need an extra bit of security and confidence boosting from time to time. Kate can still feel insecure when subjected to any kind of change or stressful situation but the Spittles are able to handle these occasions by providing her with extra support.’
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The conclusion was that Kate was happy and well-adjusted, making friends and mixing well both at home and at school, but would still need extra support and careful handling when in situations of stress or change.
The judge awarded £8,000 general damages, divided as to £3,000 for the purely physical, and £5,000 for the psychological, effects. The defence submits this was too high.
The finger injury was slight indeed, even allowing for the age and sex of the plaintiff, and in my view the sum awarded was excessive. We have been referred, by way of a cross-check, to four cases in Kemp and Kemp The Quantum of Damages vol 2 (White v Brand’s (Bakers) Ltd, 29 March 1981, para 9-865, Burton v Wright, 23 March 1982, para 9-865/1, Jones v Fell and Bryant, 18 January 1980, para 9-866 and Gilbert v Meccano Ltd, 14 May 1980, para 9-867), all of which were since 1979 and in three of which the injuries can be said to be more serious than Kate’s. Even after updating the awards to allow for the decline in the value of money, in none of those cases was the award as much as half the sum awarded to her. In the case which on its facts was most near to Kate’s, Gilbert v Meccano Ltd, the updated award was approximately one-quarter of hers and the Court of Appeal declined to increase it. The sum awarded for the finger injury was appealably high. I would reduce it to £1,500.
The emotional or psychological damage was not of a kind which fits readily into a bracket of damages. No comparable case was referred to us. The sum awarded was high. The description of Kate’s behaviour given by Mrs Spittle was necessarily in the early period after the accident. Thereafter, there was improvement which by the time of trial had left very little indeed by way of residual effects. As the judge said, the kind and sympathetic mothering by Mrs Spittle was largely responsible for the improvement, and Kate was fortunate to have so good an aunt who, by her kindness and sympathy, has produced a good result. Although I have said the award seems high, it is a sum which I am not sufficiently confident is appealably high. Such damages must otherwise be left to the trial judge to assess, and I would not reduce this part of the award.
The Fatal Accidents Act 1976
The particulars in the statement of claim were:
‘Prior to her death the deceased was aged 28 years and used to look after the Third Plaintiff. She intended when the Third Plaintiff began to attend school to obtain employment and would by her wages therefrom have maintained the Third Plaintiff.’
No evidence was led to prove the second sentence of those particulars and no assessment was made on that basis. No actual financial loss was alleged. The case was advanced on the possibly more remunerative ground that Kate had lost the services provided to her by her mother and that those services should be evaluated and quantified as a capital sum. If they had been replaced, such as by hiring someone to perform them, the reasonable cost of hire might be claimed, but that has not happened.
Where orphans are claimants under the 1976 Act, what happens to them may vary, and the valuation of their loss must depend on the facts of the case. First, there must be a loss which is capable of being evaluated in money terms. Hay v Hughes [1975] 1 All ER 257, [1975] QB 790 was a case where both parents were killed in a motor accident, and the case was brought on behalf of two small children aged four and a half and two and a half, alleging loss of dependency in the usual financial way from the death of their father, and also the loss of the services of their mother. Buckley LJ said ([1975] 1 All ER 257 at 268, [1975] QB 790 at 810):
‘Mr and Mrs Hay’s children doubtless suffered grievously in a variety of ways in consequence of their parents’ death … They have lost the benefits and happiness it was to be expected they would derive as they grew up from the companionship of
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their father and mother. They have lost parental love. They have lost the joys of a happy home. These losses cannot be assessed in monetary terms and so cannot support a claim for damages.’
After dealing with the loss of the financial support from the father, he continued ([1975] 1 All ER 257 at 268–269, [1975] QB 790 at 810–811):
‘Although damages cannot be recovered for the loss of their mother’s love, they can be recovered for the loss of those services capable of being valued in terms of money which she would have rendered to them as their mother had she survived. About these matters there is no dispute in this action, but there is dispute about how the losses capable of evaluation should be valued.’
Section 2 of the Fatal Accidents Act 1846 provides that—
‘the jury may give such damages as they may think proportioned to the injury resulting from such death to the parties respectively for whom and for whose benefit such action shall be brought … ’
In Hay v Hughes the two orphans had been taken in by their grandmother to live with her. Their claim arising from their mother’s death was that they had been dependent on her for services capable of being valued in terms of money. Nobody had been engaged at a commercial wage to perform the services which had hitherto been performed by her, but it was held that the value of those services should be arrived at by using what the cost of hiring a nanny would have been; that the children had suffered the loss of their mother’s services was not seriously disputed. The real issue was whether the services rendered to them by being taken in by their grandmother should equally be valued and regarded as a deductible benefit to the children resulting from the death of their mother. The Court of Appeal held that they did not ‘result from the death’ and so should not be taken into account.
It was held that the fact that no nanny had actually been engaged did not matter. If one had been hired, her reasonable wages would have been recoverable as a loss to the dependent children, whether they or somebody else had been the paymasters, applying Donnelly v Joyce [1973] 3 All ER 475, [1974] QB 454. In Donnelly’s case it was held that in a personal injury action medical or other expenses are recoverable by the injured plaintiff even if the expense has actually been incurred by somebody else. By analogy, the same principle applies to Fatal Accidents Act cases. In the one case, the loss is the injured plaintiff’s loss; in the other, the loss is that of the dependants. Accordingly, in Hay’s case the wages payable to a notional nanny were taken as the measure of the services which would have been provided by the dead mother.
As was emphasised in Hay v Hughes, the whole assessment is a jury matter. Now that such actions are no longer tried by juries, the judge who tries them has to direct himself as he would a jury and then put himself in the position of the jury to decide the facts. There are principles laid down which must be applied, but very often the reasoning of the judge is directed to the facts of the individual case. Sometimes with a similar set of facts a pattern emerges; sometimes not.
In cases where an orphan has been taken in by a close relative there has been a general, though not universal, reluctance to say either that the orphan has suffered no loss or has acquired a benefit. The logical reason for not saying ‘no loss’ is that no services can really replace the services of a mother (I repeat that the loss is one of actual services, not of love).
In the present case, no point was taken that Kate had suffered no loss at all. I cannot help thinking that if it had been, it would have been open to the jury to find that on the facts she was, if anything, better off with Mrs Spittle than with Mrs Hall. She left the insecurity of a way of life (whatever it was) in which her natural father took so little interest in her that he abandoned her as soon as her mother was killed. She acquired instead a stable home and family relationship with her uncle and aunt and cousins. The
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trial judge spoke in glowing terms of the care devoted by Mrs Spittle to Kate. But the point was not taken, nor was the matter fully investigated in the evidence, as would have been necessary. And, in view of the decision in Hay v Hughes, the question of ‘benefit resulting from the death’ was not argued either.
The whole question in this appeal is how properly to evaluate the loss of Mrs Hall’s services. Where a very young child is orphaned, and no substitute is provided, there is a practice of valuing the lost services of the mother by having regard to the cost of hiring a nanny. It is not a measure which is satisfactory in every case, but is one which is usually adopted, presumably because the legal profession or litigants have so far been unable to think of anything better. It was used in Hay v Hughes. But in that case Ormrod LJ made a suggestion that it would be worth looking at the costs of providing a foster home as an alternative measure on which to calculate the damages (see [1975] 1 All ER 257 at 275, [1975] QB 970 at 818–819). Later, in Daly v General Steam Navigation Co Ltd [1980] 3 All ER 696 at 703, [1980] 1 WLR 120 at 130, Ormrod LJ said:
‘… in trying to assess what is a fair compensation in an internal family situation, it is not necessarily at all reliable to have regard to market values of housekeepers or other comparable people. It introduces a wildly artificial concept if one resorts to that and talks about compensating the husband in this case at a rate of a daily woman at so many hours a week. It simply does not represent reality at all.’
Accordingly, in the present case the defendant, taking the hint from Ormrod LJ, did provide evidence of what the cost of providing a foster home for Kate would be. The plaintiff relied on the cost of a nanny which, needless to say, was a good deal more. The artificiality of the exercise is emphasised if one appreciates that, had there been no Mrs Spittle to come to the rescue when Kate’s mother was killed, Kate would probably have had to be fostered, but there was never any chance that her father would have engaged a nanny at commercial rates to look after her while he was at work.
Since there was no claim for direct financial loss, nor any claim for loss of dependancy on Kate’s father, this case presents in an acute form the question of how to assess damages for the loss of a mother’s services.
The judge adopted the ‘nanny’ formula. Figures were provided of the wage which a commercially hired nanny could have expected to receive ‘net in hand’ each week. By ‘net in hand’ was meant the sum actually receivable by the nanny after she had paid her tax and national insurance contribution. Owing to the time which the case took to come on for trial, this meant taking an annual figure for each year from the death down to the trial, beginning at a weekly net rate of £50 in 1979 and rising by £5 per week each year to £85 per week in 1986. The total figure for those seven and a half years in round terms was £27,000. The judge did not accede to a submission made on behalf of the plaintiffs that the ‘net in hand’ figure was too low, and that the cost of the nanny should in effect be doubled by charging her gross wages and insurance contribution and something for her food. In this he must have been right because there never was going to be a nanny, and such items of expenditure will never have been incurred by anybody at all.
The judge then (as he said) stood back and looked at the figure of £27,000 in the round, regarding it as a jury question. He added to it because he was satisfied ‘that Mrs Spittle [had] gone way beyond that which could have been reasonably expected of a commercially hired nanny’. He did not say so, but it may be presumed that he was applying the method in Regan v Williamson [1976] 2 All ER 241, [1976] 1 WLR 305 where a nanny was engaged but Watkins J raised the weekly ‘loss’ partly on the basis that the mother would have put in longer hours and given better service than the commercial nanny. In the instant case the judge was equating the services given by Mrs Spittle with those of the lost mother. After ‘standing back’ the judge raised the £27,000 to £30,000.
The judge then considered what the multiplier should be. He found that on the evidence it was more likely than not that Kate would proceed to tertiary education of
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some sort, ‘be it sixth form college, polytechnic or university’. If she did, it would mean her dependence would continue until she was 22 years old. On that basis, he adopted a multiplier of 11, of which, applying the principles of Cookson v Knowles [1978] 2 All ER 604, [1979] AC 556, seven and a half years had already elapsed by the time of trial. That left three and a half years to come.
At the time of trial the yearly net wage of a commercial nanny had reached £4,520. The judge then applied the remaining three and a half years of the multiplier, not to £4,520, but to £5,000, which he called ‘the current approximate annual rate of compensation’, so that for the remaining three and a half years he awarded a further £17,500. Therefore the total award under the 1976 Act was £47,500. By way of illustration only, it may be said that, if this case had come on for trial two and a half years after the death (which was the interval in Cookson v Knowles), the multiplicand for the remaining number of years would have been about £3,400. The resulting damages would then have been substantially less. This illustrates the distortion which is introduced into the calculation of damages where a case takes a long time to come on for trial.
The defendant has urged that the multiplier of 11 was too large, and that it should have been 9 or (at most) 10. I have considered this. The whole question of the multiplier in this case is unusual, because its length is normally based on the prospective length of the joint lives of the deceased and the dependant. Had she lived, Mrs Hall might well have rendered services to her daughter as long as she lived. In 15 years’ time Kate, having married and being in childbirth, or being ill, might have had the benefit of the services of her mother, but such matters are far too speculative to be considered when deciding on the multiplier.
From a realistic point of view, the maximum period to be covered by the award is until Kate will be 22 years old, which is 18 1/2 years from the death.
In my view the multiplier, although on the high side, is not too long. It is true that these damages are not replacing money which Kate was once receiving but will now receive no more, as happens in the usual type of Fatal Accidents Act case or in a claim by a living plaintiff for loss of future earnings. In such cases they form, in theory, a gradually dwindling fund which, as the years go on, is both reduced by current expenditure and added to by the interest on the remaining capital. The fund of damages is not expected to be preserved intact. It is expected to be used up gradually over the relevant period, so as to be exhausted by the end of the period: see Taylor v O’Connor [1970] 1 All ER 365 at 379, [1971] AC 115 at 143 per Lord Pearson. Reference has also been made to the possibility adverted to by O’Connor LJ in Housecroft v Burnett [1986] 1 All ER 332 at 343 that an injured plaintiff who is being looked after by a relative or friend may give presents from her damages to recompense that person. That could be done by Miss Housecroft, who was a patient, subject to the approval of the Court of Protection. In the present case Kate’s damages are also subject to court control, and the chances are that when she becomes 18 she will have at her disposal a sizeable sum of capital. I find these considerations uncertain, and I am not persuaded that the multiplier of 11 was too long, particularly when the defendant’s suggested reduction is so small. I would leave it at 11. Nevertheless, the function of both multiplier and multiplicand in these cases does require consideration.
Before this court the defendant submitted that the Fatal Accidents Act damages were too large. He repeated the argument that the cost of fostering is a better guide than the wages of a nanny. Agreed documents show the sums payable by the Barnsley Social Services Department to foster parents in respect of children of various ages. They include weekly maintenance, pocket money and clothing. They are intended to cover the out-of-pocket expenses incurred by the foster parents, but they do not include any payments made to the foster parents as a financial reward for acting as such, or for the equivalant of maternal ‘service’, expended by them on the children. The trial judge did not find that they gave any guidance which would help him to put a money value on the services provided by Kate’s mother. He said the cost of fostering was not, therefore, comparing
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like with like. I find myself in agreement with the trial judge about this. There may be in existence other, relevant, figures relating to foster parents. All I can say is that none were put before this judge.
The defendant also cited to this court awards in other cases, updated where suitable. They were unquestionably lower than the award in this case, although the circumstances were different in each case. In Hay v Hughes the wages of the notional resident housekeeper (who did not exist) were £15 a week and with other expenses were assessed at £1,000 a year. That was in 1970. Updated for inflation that would now be £28,530 on a multiplier of 9. Regan v Williamson was not a case of a notional housekeeper. One had been employed to look after the widower and four children, of whom the youngest was aged three and a quarter. Watkins J deducted the cost of the dead mother’s keep and expenses, and added to the basic sum a further figure because there was a possibility that the mother might have gone out to work again and because she was otherwise available all day, whereas the housekeeper was not. The figure awarded, if it is updated, would be £31,606.
In dealing with the multiplier, I said that it would be necessary to return to that question and that of the multiplicand. It is the question again of comparing like with like. With a little girl aged three and a half a mother’s service is full-time. She must be fed, bathed, dressed, kept occupied and not left alone where she may get into trouble. For a time, the wage of a full-time nanny is a fair standard to take, if there are no other circumstances to alter the picture. In Hay v Hughes [1975] 1 All ER 257 at 266, [1975] QB 790 at 808) Lord Edmund-Davies quoted from the speech of Lord du Parcq in Monarch Steamship Co Ltd v AB Karlshamns Oljefabriker [1949] 1 All ER 1 at 19, [1949] AC 196 at 232:
‘… in the end what has to be decided is a question of fact, and therefore a question proper for a jury. Circumstances are so infinitely various that, however carefully general rules are framed, they must be construed with some liberality and not too rigidly applied. It was necessary to lay down principles lest juries should be persuaded to do injustice by imposing an undue, or, perhaps, an inadequate, liability on a defendant. The court must be careful, however, to see that the principles laid down are never so narrowly interpreted as to prevent a jury, or judge of fact, from doing justice between the parties. So to use them would be to misuse them.’
Lord Edmund-Davies said ([1975] 1 All ER 257 at 268, [1975] QB 790 at 810):
‘… although some arithmetical calculations are necessarily involved in the assessment of the loss in such cases as the present, much of the calculation must be in the realm of hypothesis. As Holroyd Pearce LJ said in Daniels v Jones [1961] 3 All ER 24 at 28, [1961] 1 WLR 1103 at 1110, arithmetic is a good servant but a bad master. The loss suffered by the dependants must be assessed as best they can in the light of their particular facts. But, having done his arithmetic, there comes a stage when the judge has to stand back and look at the result. When he does, he should bear in mind the wise words of Willmer LJ who said in the last mentioned case ([1961] 3 All ER 24 at 30, [1961] 1 WLR 1103 at 1113): “In what is essentially a jury question the over-all picture is what matters. It is the wood that has to be looked at, and not the individual trees.”’
Lord Edmund-Davies rejected a defence submission that as a matter of law the loss of a mother’s services could not be compensated in damages, and he also held that on the facts of that case the grandmother’s services were not a benefit ‘resulting from the death’. The actual cost of the nanny’s services was not attacked by the defence.
Buckley LJ, in dealing with the submission that no loss had been suffered, said ([1975] 1 All ER 257 at 270, [1975] QB 790 at 813):
‘… it would surely be necessary at least to compare and take into account the
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comparative qualities of the services and benefits afforded in these respects by the parents in their lifetime and by the grandmother since the parents’ death.’
For reasons which I propose to give, when one looks into the future at the prospective value of a mother’s services to a child then still at the tender age of three and a half, one cannot value them at a constant figure for the whole of the child’s dependency. Still less can one value them by taking services, such as those of a nanny, which for a time are closely analogous but cease to be so as time goes on, and simply go through an arithmetical exercise in which the multiplicand (the nanny’s wages) are automatically increased year by year to keep step with actual or anticipated inflation. There are cases where the dependency may be expected to vary, and where the remedy is an adjustment in the multiplicand. In my view, in the absence of firm figures met by using figures of money actually spent and going to be spent, this is one such case.
What, then, should have been the direction given to the jury trying the facts of the present case? They would be told that they should award such sum as they might think was proportioned to the injury to Kate resulting from her mother’s death. They should be told that the services which had been given and which would have been given to Kate by Mrs Hall had a monetary value and they could proceed on the basis that by the time Kate reached the age of 22 there would be no further deprivation by the loss of her mother’s services, and they could take whatever number of years, short of 18 1/2, which they thought represented the value at the time of death of the lost services up to that age. They should be told that the fact that nobody was being paid or would be paid as a substitute mother made no difference, and that Mrs Spittle’s services, given free, were not to be set against any sum which they assessed. As to how they should value Mrs Hall’s services, they were not to use as a measure the evidence of the cost of fostering services. They should be told that they were to use what other evidence (the cost of a nanny) as they thought best, and that if they thought that did not properly reflect the true value of the services of Mrs Hall they should stand back and use their common sense.
What they ought also to be reminded of is that as children get older they may also get more independent of their parents and less in need of being looked after. In the early years the services rendered by a mother to her small child may be valued by the cost of a hired nanny. The requirements are to some degree comparable. As the child grows older, and reaches school age, the valuation by commercial standards becomes less and less appropriate, and to use them is again not comparing like with like. Once the child has begun school, at least by the age of six, the extent of the services decreases in amount. She needs, for a time, to be taken to and from school. Later on, she may go there by herself. Not only is the yardstick of a nanny’s wage less appropriate, but the services rendered by the mother change in nature.
The judge did not give himself any such direction, and in my view it was required. In Hay v Hughes [1975] QB 790 at 796 counsel for the defendant tentatively advanced this matter, but it was not persisted in and formed no part of the decision of the court in that case.
I do not believe that a jury directed on those lines would have finished up with a total of £47,500. A juryman would be very likely to ask himself, ‘Why would a girl of 11 need a nanny at a cost of £4,520 a year?’ and ‘Why should such a figure form the basis of valuing the services of the mother to a girl of that age?' I do not believe that a jury would have assessed the services of a mother to a daughter between the ages of 10 and 13 to be valued at £5,000 a year, let alone when she will be receiving higher education.
I think it probable that a jury which had taken these matters into consideration would have come to the conclusion that the total damages could not exceed £25,000 for the whole of the multiplier period. It must be remembered that the figures up to trial, be it £27,000 or £30,000, are not true ‘special damage’ in the Cookson v Knowles [1978] 2 All ER 604, [1979] AC 556 sense. They are the product of arithmetical calculation based on figures which have been projected up to the date of trial without taking into consideration a matter which was material.
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I would accordingly set aside the award of £47,500 in the instant case, and substitute for it the sum of £25,000.
It is necessary, in order to calculate interest in accordance with Cookson v Knowles, to divide that sum. Where the action has come on so long after the death that most of the multiplier has already been used up, any such apportionment must be artificial. I would apportion it as to £22,000 down to trial and £3,000 thereafter. In substituting those figures for the figures assessed by the trial judge, I have taken into account the special qualitative factor dealt with by Watkins J in Regan v Williamson [1976] 2 All ER 241, [1976] 1 WLR 305, and approved, at least by implication, in this court in Abrams v Cook (1987) Times, 26 November.
Interest
The third matter on which the defendant has appealed is against the award of interest. The judge heard special submissions and gave a further judgment on this on 17 December 1986.
This discretion to award interest given by s 3 of the Law Reform (Miscellaneous Provisions) Act 1934 was made mandatory by s 22 of the Administration of Justice Act 1969 ‘unless the court is satisfied that there are special reasons why no interest should be given in respect of those damages’ (see s 3(1A)). Section 3(1B) reads:
‘Any order under this section may provide for interest to be calculated at different rates in respect of different parts of the period for which interest is given, whether that period is the whole or part of the period mentioned in subsection (1) of this section.’
In Jefford v Gee [1970] 1 All ER 1202 at 1208, [1970] 2 QB 130 at 146, which first established the guidelines on which interest should be awarded in personal injury actions, it was explicitly stated by Lord Denning MR that interest should not be ‘awarded as compensation for the damage done’, but should only be ‘awarded to a plaintiff for being kept out of money which ought to have been paid to him’. Where the case takes a long time to come on for trial because there has been unjustifiable delay by the plaintiff, he has been kept out of his money by his own default for part of the period. It is a ‘special reason’ for not giving some of the interest. Birkett v Hayes [1982] 2 All ER 710, [1982] 1 WLR 816 made that addition to the guidelines.
The principal point in Birkett v Hayes was in establishing a new guideline as to the rate at which interest should be awarded on damages for pain and suffering and loss of amenity, in other words, for non-economic loss. This was because there had been a conflict of judicial opinion about that, and it was necessary to establish a new rate. The Court of Appeal decided that the rate should be 2%. At the end of his judgment, in a passage with which both the other members of the court agreed, Watkins LJ dealt with the question of delay by the plaintiff in prosecuting his case. After stating that the amended s 3 gives the court a discretion to decide what part of an award of damages shall carry interest, the rate of that interest and the period for which it should be given, he said ([1982] 2 All ER 710 at 717, [1982] 1 WLR 816 at 825):
‘Usually this period will run from the date of the writ to the date of trial, but the court may in its discretion abridge this period when it thinks it is just so to do. Far too often there is unjustifiable delay in bringing an action to trial. It is, in my view, wrong that interest should run during a time which can properly be called unjustifiable delay after the date of the writ. During that time the plaintiff will have been kept out of the sum awarded to him by his own fault. The fact that the defendants have had the use of the sum during that time is no good reason for excusing that fault and allowing interest to run during that time.’
Lord Denning MR thereupon added a short passage to his judgment, saying:
‘It means that there can be an addition to the guideline. The interest, even at 2%,
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should not necessarily be awarded for the whole period … The period may be reduced considerably: and only awarded for a lesser time according to the circumstances of the case.’
Birkett v Hayes was not a case itself concerned with delay. The statements were, however, made in the context of a case which was solely dealing with the rate of interest on non-economic loss. Lord Denning MR was echoing what he had already said in Jefford v Gee [1970] 1 All ER 1202 at 1212, [1970] 2 QB 130 at 151, where he had briefly summarised all the guidelines then being laid down. There, at the end of his conclusions, he added:
‘Exceptional cases. In exceptional cases, such as when one party or the other has been guilty of gross delay, the court may depart from the above suggestions by diminishing or increasing the award of interest, or altering the periods for which it is allowed.’
Lord Denning MR was applying that general observation to all the guidelines listed.
Birkett v Hayes, on the 2% point, was approved in Wright v British Rlys Board [1983] 2 All ER 698, [1983] 2 AC 773. In both cases it was pointed out that rates of interest at present contain a large inflationary element as well as an investment element representing the return on the capital. This was analysed in detail, particularly by Lord Diplock, in order to arrive at the 2% figure (see [1983] 2 All ER 698 at 703–706, [1983] 2 AC 773 at 781–786). His speech was dealt with by the trial judge in the present case, in which the plaintiff was asking him to go above 2% in awarding interest on Kate’s damages for non-ecomonic loss. The judge declined to go above the guideline figure.
The judge held that there had been unjustifiable delay of something over three years, but he was unable to adjudicate on which the three years were. This had some relevance, because the plaintiff had been represented in turn by two firms of solicitors, who (or their insurers) would presumably have in the end to make good to the plaintiff any deficiency in her interest. He eventually ordered that he would deduct two years’ interest from that which, had there been no relevant delay, he would have been obliged to order under the 1934 Act. So far as the interest on the damages for personal injury was concerned, this meant a deduction of 4% on the total interest which would otherwise have been awarded. There is no dispute that such a deduction was proper and in accordance with the guidelines.
The judge did not deduct the full amount of the interest payable according to the guideline for the Fatal Accidents Act damages, which would have been half the short-term investment rates averaged over the seven and a half years. Presumably because of the difficulty in identifying which were the two years which had to be deducted, the parties had grossed up the whole sum recoverable for such interest to 48·25% of the relevant damages. The judge then deducted only half of 4% of that figure, that is 2%, rounding down the award to 46%. The reason why he did so was that justice required that ‘abatement should be only in respect of the investment rate element’ in the interest receivable on the Fatal Accidents Act damages, because—
‘If the inflation element is [also] taken out of the rate of interest, it must follow that if the interest at the full rate is abated, the plaintiff will be penalised by an award that falls short of not only the current money equivalent but also of the investment rate appropriate to the award.’
The defendant, in his appeal, submits that in doing what he did the judge was departing from the guidelines originally laid down in Jefford v Gee and later referred to again in Birkett v Hayes. Since the rates of the short-term investment account come out at 12%, he submits that a deduction of half that rate for two years would have been 12%. The plaintiffs’ reply to that submission is that the judge was exercising his discretion, and his finding should stand unless he misdirected himself.
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Cases in which plaintiffs are penalised for delay by forfeiting some of this interest occur from time to time, but reports of them are rare. One such was Pritchard v J H Cobden Ltd [1987] 1 All ER 300, [1988] Fam 22, a case where the plaintiff was still living but economic loss was large. It took nine and a half years to come to court. The trial judge disallowed all interest for two years on the straight Jefford v Gee rules as amended. The defendants appealed, saying that two years was not enough, but the Court of Appeal dismissed the appeal. The present point was not argued, and I do not regard that case as much help, save to the extent that nobody ever thought of it.
The trial judge undoubtedly has a discretion under the amended s 3, and although the principles of assessment according to Jefford v Gee may occasionally be departed from in occasional cases, they should normally be adhered to. Dexter v Courtaulds Ltd [1984] 1 All ER 70, [1984] 1 WLR 372 was a case where the plaintiff wanted to depart from the Jefford v Gee guideline relating to special damage. Lawton LJ said that the court clearly intended to lay down general principles for application in personal injury cases (see [1984] 1 All ER 70 at 73, [1984] 1 WLR 372 at 375). He said that they should be departed from only in unusual circumstances (see [1984] 1 All ER 70 at 74, [1984] 1 WLR 372 at 376). In Cookson v Knowles [1978] 2 All ER 604, [1979] AC 556 Lord Diplock made the leading speech. He asserted the right of the trial judge to exercise his discretion by departing from guidelines laid down by an appellate court, in special circumstances. He summarised the way in which thereafter damages under the Fatal Accidents Acts and the interest on those damages should be assessed and awarded in normal cases (see [1978] 2 All ER 604 at 611–612, [1979] AC 556 at 572–573). He said the interest on the pre-trial loss should be awarded at half the short-term interest rates current during that period. In other words, the interest is to be awarded in the same way as on special damage under Jefford v Gee. Lord Fraser said that guidelines are required in order that the judicial discretion may be exercised with reasonable consistency (see [1978] 2 All ER 604 at 616, [1979] AC 556 at 578).
Lord Diplock returned to the same subject in Wright v British Rlys Board [1983] 2 All ER 698 at 705, [1983] 2 AC 773 at 784:
‘… it is an important function of the Court of Appeal to lay down guidelines both as to the quantum of damages appropriate to compensate for various types of commonly occurring injuries and as to the rates of “interest” from time to time appropriate to be given in respect of non-economic loss and of the various kinds of economic loss.’
He went on to say:
‘The purpose of such guidelines is that they should be simple and easy to apply though broad enough to permit allowances to be made for special features of individual cases which make the deprivation caused to the particular plaintiff by the non-economic loss greater or less than in the general run of cases involving injuries of the same kind.’
In my opinion that reasoning applies equally to economic loss.
I can detect no special circumstances in the present case which would justify a departure from the guidelines as laid down in Cookson v Knowles. The ‘special reason’ which entitles the judge, in the exercise of his discretion, to depart from them must be a reason special to the individual case. The ‘special reason’ here is not that the interest on the damages is partly composed of an inflation element and partly of an investment value element. That applies to every case. The special reason is that the plaintiffs’ advisers let two years go by through unjustifiable delay.
The submission by the plaintiffs’ counsel that this decision was in the judge’s discretion raises two possibilities. One is that it would be equally in the discretion of every other judge. They might not exercise their discretion in the same way, and that would be the end of consistency. The other is that he is inviting this court to lay down fresh guidelines different from Jefford v Gee, which was referred to without disapproval in Cookson v
Page 1044 of [1988] 3 All ER 1031
Knowles. It is primarily for the Court of Appeal to lay down or amend the guidelines: see Wright v British Rlys Board [1983] 2 All ER 698 at 705–706, [1983] 2 AC 773 at 784–785 per Lord Diplock. To reduce the part of the interest which is to be forfeited by a dilatory plaintiff in Fatal Accidents Act cases or from his special damages in personal injury actions (where the same reasoning applies) would remove a large part of the incentive to get on with the action quickly.
I would allow the defendant’s appeal on the question of interest, and deduct two years of the total interest on the lost dependency at the full rate up to trial.
WOOLF LJ. I agree.
DILLON LJ. I also agree and have nothing further to add.
Appeal allowed in part. Judgment for the third plaintiff to be varied on the personal injury claim. Judgment for the first and second plaintiffs to be entered for £39,609 inclusive of interest on the claim under the Fatal Accidents Act 1976. Appeal allowed on the question of interest.
Solicitors: W I Corlett, Manchester (for the defendant); Dibb & Clegg, Barnsley (for the plaintiffs).
Vivian Horvath Barrister.
Porter v Honey
[1988] 3 All ER 1045
Categories: TOWN AND COUNTRY PLANNING
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD ELWYN-JONES, LORD BRANDON OF OAKBROOK, LORD GRIFFITHS AND LORD GOFF OF CHIEVELEY
Hearing Date(s): 13 OCTOBER, 1 DECEMBER 1988
Town and country planning – Advertisement – Display without consent – For sale boards – Estate agent displaying for sale board at property – Subsequently another estate agent displaying second board at property – Whether first estate agent committing offence of displaying for sale board without consent having been granted – Town and Country Planning Act 1971, s 109(2) – Town and Country Planning (Control of Advertisements) Regulations 1984, regs 6, 14, class III(a) – Town and Country Planning (Control of Advertisements) (Amendment No 2) Regulations 1987.
The appellant was an estate agent who erected ‘for sale’ boards outside two properties. At the time he erected his boards no other boards were displayed on the properties. A second board was later erected at each house by another agent without the knowledge or consent of the appellant. The appellant was charged with, and convicted by magistrates of, displaying a sale board, being one of two boards at each property, without consent being granted under reg 6a of the Town and Country Planning (Control of Advertisements) Regulations 1984, contrary to s 109(2)b of the Town and Country Planning Act 1971. An appeal by the appellant was dismissed by the Divisional Court. The appellant appealed to the House of Lords.
Held – On the true construction of reg 6 of the 1984 regulations, where an estate agent who had been instructed to sell or let a residential property displayed a board outside the property at a time when no other board was displayed, he did not commit an offence if another agent, either to his knowledge or without it, thereafter displayed a second board outside that property. The appeal would therefore be allowed (see p 1046 e f, p 1049 a e and p 1050 d e, post).
Per curiam. There is to be read into the 1984 regulations an implication that the deemed consent to the erection of a single ‘for sale’ board given by regs 6(2) and 14(1), class III(a)c (as substituted by the Town and Country Planning (Control of Advertisements) (Amendment No 2) Regulations 1987) is not lost by the unlawful erection of subsequent sale boards.
Decision of the Divisional Court of the Queen’s Bench Division [1988] 2 All ER 449 reversed.
Notes
For the control of advertisements generally, see 46 Halsbury’s Laws (4th edn) paras 344, 346.
For the Town and Country Planning Act 1971, s 109, see 46 Halsbury’s Statutes (4th edn) 389.
Appeal
Anthony Harold Porter, a partner in the firm of Whitman Porter Estate Agents of Oriel House, The Quadrant, Richmond, Surrey, appealed, with the leave of the Appeal Committee of the House of Lords given on 30 June 1988, against the decision of the Divisional Court of the Queen’s Bench Division (Bingham LJ and Hutchison J) ([1988] 2
Page 1046 of [1988] 3 All ER 1045
All ER 449) dismissing an appeal by the appellant by way of a case stated by the justices for the county of South West London acting in and for the petty sessional division of Richmond upon Thames in respect of their adjudication as a magistrates’ court sitting at the Courthouse, Parkshot, Richmond upon Thames, Surrey on 13 May 1987 whereby on two informations relating to two houses preferred by the respondent, Michael John Honey, they convicted the appellant of displaying advertisements, namely estate agents’ sale boards, being one of two such boards displayed at the premises without consent having been granted in that behalf in accordance with reg 6 of the Town and Country Planning (Control of Advertisements) Regulations 1984, SI 1984/421, contrary to reg 8 of the regulations and s 109(2) of the Town and Country Planning Act 1971. The Divisional Court had refused the appellant leave to appeal to the House of Lords but it certified, under s 1(2) of the Administration of Justice Act 1960, that a point of law of general public importance (set out at letter g, below) was involved in the decision. The facts are set out in the opinion of Lord Griffiths.
Frederic Reynold QC and Terence Bergin for the appellant.
David Lamming for the respondent.
Their Lordships took time for consideration.
1 December 1988. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Griffiths. I agree with it and for the reasons he gives would allow the appeal.
LORD ELWYN-JONES. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Griffiths. I agree with it and for the reasons which he has given I too would allow this appeal.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons to be given by my noble and learned friend Lord Griffiths I would allow the appeal.
LORD GRIFFITHS. My Lords, the certified question to be answered in this appeal is in the following form:
‘If an estate agent, instructed to sell or let a residential property, displays a board outside the property no other board being at that time displayed, does he commit an offence if another agent (to his knowledge or without it) thereafter displays a second board?’
In other words, the question for your Lordships is whether on the true construction of the relevant legislation an estate agent who lawfully places a ‘for sale’ board on a property should be held to have committed a criminal offence because another estate agent unlawfully and without the knowledge or consent of the first estate agent places a second ‘for sale’ board on the same property. I suggest that any layman would not hesitate to answer, ‘No, Parliament cannot have intended such an unjust and absurd result’. Unfortunately, the legislation poses a more difficult problem of construction for the lawyer which is raised by the following facts.
The appellant is an estate agent who, after receiving instructions to sell two properties in Richmond, displayed a for sale board outside 18 The Vineyard, Richmond, in November 1986 and another for sale board outside 25–28 The Hermitage, Richmond, in January 1987. In the case of each property the appellant’s boards were the first to be displayed. Thereafter the owners of the properties each instructed a second estate agent
Page 1047 of [1988] 3 All ER 1045
and these estate agents erected their own boards on the properties without the knowledge or consent of the appellant.
On 23 February 1987 the respondent, acting on behalf of the local authority, laid informations relating to each house against the appellant and against the other two estate agents. Each information charged the offence in the following terms:
‘did … display an advertisement, namely an Estate Agents “Sale” Board being one of two such boards displayed at the said premises without consent having been granted in that behalf in accordance with Regulation 6 of the Town and Country Planning (Control of Advertisements) Regulations 1984 [SI 1984/421] contrary to Regulation 8 of the said Regulations and Section 109(2) of the Town and Country Planning Act 1971.’
The other two estate agents, who had erected their signs after the appellant, each pleaded guilty and were fined £100 in respect of each information. The appellant pleaded not guilty, but was found guilty by the magistrates, who imposed a fine of £200 in respect of each information on him.
The appellant appealed by way of case stated to the Divisional Court, which dismissed the appeal (see [1988] 2 All ER 449). Before the Divisional Court the appellant submitted two arguments: first, that the regulations permitted one board per advertiser and not one board per house; this construction was rejected by the Divisional Court and has not been pursued before your Lordships; second, that, on the assumption that only one advertisement is permitted per sale or letting, no offence is committed unless it is proved that the defendant knew that two boards were displayed on the premises; this construction was also rejected by the Divisional Court and it, too, has not been pursued. The argument on which the appellant now relies was not presented to the Divisional Court although it was referred to in passing by Bingham LJ who said (at 453):
‘It was not argued (I think rightly) that a first board erected with deemed consent continues to enjoy that deemed consent even after the erection of a second board if the second board was erected without deemed consent.’
It is now necessary to set out the relevant legislation which I take from the judgment of Bingham LJ (at 450–451):
‘Section 63 of the 1971 Act provides for regulations to be made “for restricting or regulating the display of advertisements so far as appears to the Secretary of State to be expedient in the interests of amenity or public safety“. Such regulations may provide “for requiring the consent of the local planning authority to be obtained for the display of advertisements” (s 63(2)(b)). The offence of which the appellant was convicted was created by s 109(2) of the Act:
“Without prejudice to any provisions included in regulations made under section 63 of this Act by virtue of subsection (1) of this section, if any person displays an advertisement in contravention of the provisions of the regulations he shall be guilty of an offence and liable on summary conviction to a fine of such amount as may be prescribed by the regulations, not exceeding level 3 on the standard scale and, in the case of a continuing offence, £40 for each day during which the offence continues after conviction.”
Regulation 8 of the Town and Country Planning (Control of Advertisements) Regulations 1984, SI 1984/421, increased the maximum penalty on contravention. Section 109(3) of the Act is also important:
“For the purposes of subsection (2) of this section, and without prejudice to the generality thereof, a person shall be deemed to display an advertisement if—(a) the advertisement is displayed on land of which he is the owner or occupier; or (b) the advertisement gives publicity to his goods, trade, business or other concerns: Provided that a person shall not be guilty of an offence under that
Page 1048 of [1988] 3 All ER 1045
subsection by reason only than an advertisement is displayed on land of which he is the owner or occupier, or that his goods, trade, business or other concerns are given publicity by the advertisement, if he proves that it was displayed without his knowledge or consent.”
The heart of the problem before this court lies in the 1984 regulations. Regulation 6(1), (2) and (3), so far as relevant, provides:
”(1) No advertisement may be displayed without consent granted by the local planning authority or by the Secretary of State on an application in that behalf (referred to in these Regulations as ‘express consent’), or deemed to be granted under paragraph (2) below.
(2) Consent shall be deemed to be granted for the display of any advertisement displayed in accordance with any provision of these Regulations whereby advertisements of that description may be displayed without express consent …
(3) In so far as the nature of the consent permits, consent for the display of advertisements shall enure for the benefit of the site to which the consent relates and of all persons for the time being interested in that site … ”
No express consent was in this case sought or given, so one must inquire whether under the 1984 regulations consent is to be deemed to have been granted. Regulation 14 specifies the classes of advertisements which may be displayed without express consent. Only one class is relevant. This is class III, headed “Certain advertisements of a temporary nature“. Paragraph (a) reads:
“Advertisements relating to the sale or letting of the land on which they are displayed, limited, in respect of each such sale or letting, to one advertisement consisting of a board (whether or not attached to a building) not exceeding 2 square metres in area, or of two conjoined boards, together not exceeding 2·3 square metres in area … ”
Paragraphs (b) and (c), dealing with sales of goods or livestock and building works, contain a similar limitation to one advertisement. Paragraphs (d) and (e), dealing with certain local events, specify a maximum area of advertisement only.’
Now the first feature of this legislation to which I would draw attention is that Parliament did not wish a person to be convicted of an offence if an advertisement was displayed on his land or gave him publicity when it was displayed without his knowledge or consent: see the proviso to s 109(3). It is true that the burden of proving this defence is placed on the defendant but it should not be difficult to discharge in a genuine case. It would therefore seem unlikely that Parliament would have intended to create an offence of strict liability in relation to advertisements without giving an opportunity to the advertiser to escape liability by proving that he was blameless; but such is the effect of the regulations as they have so far been construed.
Let me demonstrate one extraordinary result that would follow from this construction. As is well known, there are companies that specialise in the erection of sale boards. Let us suppose that such a company mistakenly places a sale board on property A which estate agent X has instructed them to place on property B. Let it also be assumed that at the time the board was erected the sale board of another estate agent Y was already in place on property A and had been placed there with deemed consent pursuant to the regulations. The local authority then prosecutes both estate agents because there are two boards displayed on the property. Estate agent X escapes conviction because he proves that his board had been erected on property A without his knowledge and consent. But estate agent Y is convicted because his board was erected with his knowledge and consent and he cannot take advantage of the mistaken erection of the second board. So X is protected from conviction by the mistake of his agent but that same mistake makes Y guilty of a criminal offence.
The difficulty of construction is created by the fact that in reg 14, Class III(a) limits the deemed consent in respect of each sale or letting to one advertisement. The local authority
Page 1049 of [1988] 3 All ER 1045
therefore argue that if there are two advertisements in respect of the same sale there is no deemed consent in respect of either of them. However, in my view these regulations only make sense and do justice if they are read as continuing the deemed consent for the display of the first board despite the unlawful display of subsequent boards. I would therefore, as a matter of necessary implication, read para (a) of class III as if it contained the following italicised words:
‘Advertisements relating to the sale or letting of the land on which they are displayed; limited, in respect of each such sale or letting, to one advertisement that being the first advertisement displayed when more than one is displayed consisting of a board (whether or not attached to a building) not exceeding 2 square metres in area, or of two conjoined boards, together not exceeding 2·3 square metres in area: no such advertisement, when displayed on a building, to project further than one metre from the face of the building.’
It was submitted on behalf of the local authority that such a construction would raise grave practical difficulties in enforcing the legislation because of the difficulty of proving which board was erected first. I appreciate the effort that will be required of local authorities to enforce these regulations and thus to reduce the unsightly proliferation of estate agents’ boards that now deface many streets, but I cannot believe that in the vast majority of cases it will not be possible to establish which board was erected first by a simple inquiry from the owner of the property or from the estate agents themselves or from the records of the company that erected the boards. Of course it would be easier to bring every estate agent before the court and find them all guilty but to accept such a construction would, in my view, be to promote injustice in the interests of administrative convenience, and I cannot believe that it was the intention of the Secretary of State to invite Parliament to approve regulations that would provide for such a result.
The respondent also placed reliance on the wording of the substituted definition of class III(a) contained in the Town and Country Planning (Control of Advertisements) (Amendment No 2) Regulations 1987, SI 1987/2227, which was due to come into force on 28 October 1988. The new definition of class III(a) now reads:
‘(i) An advertisement relating to the sale or letting, for agricultural, industrial or commercial use or for development for such use of the land or premises on which it is displayed consisting of a single board not exceeding 2 square metres in area, or of two joined boards, together not exceeding 2·3 square metres in area, which, if displayed on a building, does not project from the face of the building by more than one metre. (ii) An advertisement relating to the sale or letting for residential use or for development for such use of the land or premises on which it is displayed consisting of a single board not exceeding 0·5 square metre in area, or of two joined boards together not exceeding 0·6 square metre in area, which, if displayed on a building, does not project from the face of the building by more than one metre: Provided that nothing in paragraph (i) or (ii)—(i) shall permit more than one advertisement to be displayed at any one time on the land or premises concerned; (ii) shall authorise the display of an advertisement indicating that land or premises have been sold or let other than by the addition to an existing advertisement of a statement that a sale or letting has been agreed or that the land or premises have been sold or let, subject to contract.’
The respondent points in particular to the words of sub-para (i) of the proviso and submits that, whatever view might be taken of the construction of the 1984 regulations, the amended regulations now make it plain that permission is limited to one advertisement and therefore a deemed permission for the first advertisement cannot survive once a second advertisement is displayed. From this it is argued that Parliament have now made it plain that it was prepared in the interests of enforcing the legislation to impose a harsh and possibly unjust result on the first advertiser and therefore your
Page 1050 of [1988] 3 All ER 1045
Lordships should not shrink from so construing the 1984 regulations to produce the same result.
My Lords, I do not accept this construction of the 1987 regulations. As I read the explanatory note to the amendment it was introduced to scotch the argument advanced in this case in the Divisional Court to the effect that the regulations permitted each advertiser to have one board rather than limit the permission to one board for each sale or letting. It is now clear beyond peradventure that the deemed consent is limited to one board at any one time. Nevertheless, I would read the amended regulations as subject to a similar implication so that the first advertisement attracted the deemed consent and was not lost by the unlawful erection of subsequent sale boards.
The courts should surely be slow to impute to Parliament so harsh an intention as to impose criminal liability on a citizen acting lawfully because another citizen, over whom he has no control, acts unlawfully. We are dealing here with delegated legislation which does not receive the scrutiny of primary legislation and if in the interests of administrative convenience such an apparently unjust rule is to be introduced it should be in the clearest possible language so that the purport of the legislation can be readily recognised and the need for such a measure can be carefully considered before it is approved.
My Lords, in the absence of such clear language, I am quite unable to impute to the Secretary of State or Parliament the intention that an estate agent in the position of the appellant should be held guilty of a criminal offence. I would therefore answer the certified question in the negative and allow this appeal with costs in this House.
LORD GOFF OF CHIEVELEY. My Lords, for the reasons given by my noble and learned friend Lord Griffiths I would allow this appeal.
Appeal allowed.
Solicitors: Axelrods, Richmond, Surrey (for the appellant); G S McGowan, Twickenham (for the respondent).
Mary Rose Plummer Barrister.
Hilton v Plustitle Ltd and another
[1988] 3 All ER 1051
Categories: LANDLORD AND TENANT; Rent
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): CROOM-JOHNSON AND STUART-SMITH LJJ
Hearing Date(s): 14, 17 OCTOBER, 3 NOVEMBER 1988
Rent restriction – Premises not within Acts – Company tenancy – Flat let to company and occupied by company’s nominee – Whether tenancy a sham – Whether occupier a protected tenant.
The second defendant wished to rent a flat from the plaintiff landlord, whose policy was to let his flats only to limited companies. The second defendant, at the landlord’s suggestion, accordingly purchased an off-the-shelf company for £150 and the landlord entered into an agreement with the company to let the flat for six months at £345 per month. The second defendant signed the agreement in her capacity as managing director of the company. The agreement gave the company the right to nominate the occupier of the property. The agreement was subsequently extended for three months, after which the landlord asked for possession. The second defendant refused to leave and the landlord brought proceedings in the county court against the company and the second defendant for possession. The judge granted the landlord possession. The second defendant appealed, contending that the tenancy granted to the company was a sham to evade the Rent Acts and that the second defendant ought to be treated as a statutory tenant who was entitled to the protection of the Rent Acts.
Held – An agreement between a landlord and a company to allow a flat rented to the company to be occupied by an occupier nominated by the company in order to avoid granting a statutory tenancy to the occupier would not necessarily be treated as a sham by the court. Since it had been the intention of the parties that the flat should be let to the company and occupied by the second defendant as the company’s nominee and since that was the reality of the situation the court would not treat the tenancy granted to the company as a sham. The landlord was accordingly entitled to possession and the second defendant’s appeal would therefore be dismissed (see p 1054 j and p 1056 d, post).
Gisborne v Burton [1988] 3 All ER 760 distinguished.
Antoniades v Villiers [1988] 2 All ER 309 considered.
Notes
For the protection accorded to statutory tenants and the position of a tenancy granted to a company, see 27 Halsbury’s Laws (4th edn) para 591, and for cases on the subject, see 31(2) Digest (Reissue) 984, 7903–7904.
Cases referred to in judgment
Aldrington Garages Ltd v Fielder (1978) 37 P & CR 461, CA.
Antoniades v Villiers [1988] 2 All ER 309, [1988] 3 WLR 139, CA.
Dando (S L) Ltd v Hitchcock [1954] 2 All ER 335, [1954] 2 QB 317, [1954] 3 WLR 76, CA.
Donald v Baldwyn [1953] NZLR 313, NZ SC.
Firstcross Ltd v East West (Export/Import) Ltd (1980) 255 EG 355, CA.
Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530, [1984] AC 474, [1984] 2 WLR 226, HL.
Gisborne v Burton [1988] 3 All ER 760, [1988] 3 WLR 921, CA.
Hiller v United Dairies (London) Ltd [1934] 1 KB 57, [1933] All ER Rep 667, CA.
Johnson v Moreton [1978] 3 All ER 37, [1980] AC 37, [1978] 3 WLR 538, HL.
Ramsay (W T) Ltd v IRC [1981] 1 All ER 865, [1982] AC 300, [1981] 2 WLR 449, HL.
Shell-Mex and BP Ltd v Manchester Garages Ltd [1971] 1 All ER 841, [1971] 1 WLR 612, CA.
Page 1052 of [1988] 3 All ER 1051
Snook v London and West Riding Investments Ltd [1967] 1 All ER 518, [1967] 2 QB 786, [1967] 2 WLR 1020, CA.
Stoneleigh Finance Ltd v Phillips [1965] 1 All ER 513, [1965] 2 QB 537, [1965] 2 WLR 508, CA.
Street v Mountford [1985] 2 All ER 289, [1985] AC 809, [1985] 2 WLR 877, HL.
Yorkshire Rly Wagon Co v Maclure (1882) 21 Ch D 309, CA.
Cases also cited
Buchmann v May [1978] 2 All ER 993, CA.
Conqueror Property Trust Ltd v Barnes Corp [1944] 1 All ER 34, [1944] KB 96, DC.
Facchini v Bryson [1952] 1 TLR 1386, CA.
Otter v Norman [1988] 2 All ER 897, [1988] 3 WLR 321, HL.
Appeal
The second defendant, Helen Rose, appealed against the order for possession made by his Honour Judge Dobry QC sitting in the Bloomsbury County Court on 16 May 1988 whereby he granted the plaintiff, Robert Hilton, possession of a flat at 45 Priory Road, London NW6 which was let to the first defendant, Plustitle Ltd, and occupied by the second defendant, who was the managing director of the first defendant. The facts are set out in the judgment of the court.
Christopher Coney for Mr Hilton.
Philip Walter for Miss Rose.
Cur adv vult
3 November 1988. The following judgment was delivered.
CROOM-JOHNSON LJ. If a dwelling house is let to a limited company the company cannot become a statutory tenant under the terms of s 2 of the Rent Act 1977 on the termination of the tenancy. This has been so since Hiller v United Dairies (London) Ltd [1934] 1 KB 57, [1933] All ER Rep 667. This rule has remained unchanged during re-enactments of the Rent Acts ever since. If a tenancy is granted to one person (e g a company) on terms that someone else is to reside in the house, there will be no statutory tenancy in favour of that other person: S L Dando Ltd v Hitchcock [1954] 2 All ER 335, [1954] 2 QB 317. In Firstcross Ltd v East West (Export/Import) Ltd (1980) 255 EG 355 the tenants’ nominee was their director and was actually named in the agreement; it was held he acquired no statutory tenancy. Accordingly, if a landlord does not want to be saddled with a statutory tenant he lets on what is known as a ‘company let’.
The plaintiff in this action, Mr Hilton, is a civil engineer who has in recent years reconstructed a number of premises in London and therein created flats which are high quality flats. They also contain built-in furniture made in his own workshop. They are not let at excessive but market rents for flats of that quality. He is a good landlord who provides value for money. His policy is to let only as company flats, and his flats are advertised as such.
The defendant, Miss Rose, is an actress. She saw in an evening newspaper on 8 August 1986 an advertisement referring to one of Mr Hilton’s flats. The advertisement made it clear that it was to be a company let. She knew what that meant. She got in touch with Mr Hilton and saw several flats. Eventually she saw one at 45 Priory Road, London NW6. Miss Rose, as an actress, had no need for a company, but Mr Hilton made it clear that any letting would have to be a company let and that the rent would have to be guaranteed by a third party. He gave her the name and telephone number of his accountant, who would be able to provide her with a company which could become the tenant and then nominate her as the person who would reside in its flat. As the judge found, Mr Hilton
Page 1053 of [1988] 3 All ER 1051
told her that the letting to the company would be for a limited period, with a possibility of renewal if everything was satisfactory.
Miss Rose did not go to the accountant. She took advice from her solicitors, and went to a firm called Jordan & Sons Ltd, from whom she bought a company off the shelf. It was called Plustitle Ltd. It cost her £150. She became a shareholder and a director.
On 1 September 1986 Plustitle entered into a written agreement with Mr Hilton to take the flat for an initial term of six months at a rent of £345 per month. Miss Rose signed the agreement as managing director of Plustitle. The agreement gave Plustitle the right to nominate the occupiers of the property, who would pay no rent. The agreement contained all the usual tenant’s covenants. The landlord consented to maintain the services in good condition. The rent and fees to be paid by Plustitle were guaranteed by John Rose, who is Miss Rose’s brother.
Before that agreement was made, Mr Hilton obtained a banker’s reference for Miss Rose for an amount which was the obligation to pay the monthly rent of £345.
In February 1987 the term was by mutual agreement extended for three months till May. It was followed by an offer for a further three months’ extension. There was a dispute about a slight increase in the rent and so the offer was withdrawn by Mr Hilton. He asked for possession. Miss Rose sought legal advice, and refused to leave. The result has been the present proceedings, in which Mr Hilton has asked for an order for possession on the basis that this was a company letting. Miss Rose defends the claim on the basis that the letting to Plustitle was a sham. That has been the only issue before the court.
The judge found the defence was not made out, and made an order for possession. He gave a long and careful judgment. He found that Miss Rose fully understood what she was doing, and acted after obtaining legal advice. After moving in she paid the rent by her personal cheques, the company not having a bank account.
After reviewing all the evidence, the judge said:
‘… I find without the slightest hesitation that it was both parties’ clear intention with all knowledge of what this involved that the flat should be let to a company and not to Miss Rose personally. I find that as a fact having heard the evidence, and having noted submissions made on behalf of Miss Rose in that respect.’
In his judgment he listed 16 items of fact, all of which indicated that Miss Rose entered into the whole transaction with the intention that this was to be a company let in the normal way, and that in the agreement there were no provisions inconsistent with the letting being to a company and not to Miss Rose. The judgment concluded:
‘… the reality was indeed the factual matrix that the company was the tenant and Helen Rose was not liable personally for anything at all. There is no disagreement between the parties that at all material times [Mr Hilton] insisted on a limited company as his tenant. It is quite plain on the construction of the written agreement that its object was to create a letting to a company. [Miss Rose] has the burden of showing that this prima facie construction is either deliberately deceptive or in any way wrong. There is no evidence before me, and I mean no evidence, to support that contention, thus in the end on the basis of the agreement itself and also the factual matrix I find this was a letting to a limited company which came to an end and that the contention that this was a sham fails in limine. At no time did the landlord purport to create or create any rights in Helen Rose.’
Counsel for Miss Rose says that the employment of the company was a sham in that it was a device to prevent Miss Rose from being the tenant, and so far from her being the company’s nominee, the company was her agent. Accordingly, he submits, the reality of the letting was that it was to her and not to the company.
The mere fact that the purpose of the legal arrangement was to prevent the creation of
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the statutory tenancy is by itself not enough. In Aldrington Garages Ltd v Fielder (1978) 37 P & CR 461 at 468 Geoffrey Lane LJ said:
‘There is no reason why, if it is possible and properly done, agreements should not be entered into which do not fall within the Rent Acts, and the mere fact that those agreements may result in enhanced profits for the owners does not necessarily mean that the agreements should be construed as tenancies rather than as licences.’
Roskill LJ said (at 473):
‘… persons are entitled to arrange their affairs to their best advantage so long as the law allows it. That has long been the position in tax cases, and equally long been the position in Landlord and Tenant and Rent Act cases.’
This subject was given a detailed summary by Bingham LJ in Antoniades v Villiers [1988] 2 All ER 309 at 316, [1988] 3 WLR 139 at 147, where he added to the quotations from Geoffrey Lane and Roskill LJJ his own observation:
‘It is not a crime, nor is it contrary to public policy, for a property owner to license occupiers to occupy property on terms which do not give rise to a tenancy.’
Nevertheless, as Bingham LJ stated ([1988] 2 All ER 309 at 316, [1988] 3 WLR 139 at 146):
‘The court should be astute to detect and frustrate sham devices and artificial transactions whose only object is to disguise the grant of a tenancy and to evade the Rent Acts (see Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825). The court has to be especially wary and especially careful to see that things like premiums are not being used to conceal payments of rent … ’
‘Shams’ must be considered in many contexts. The accepted definition, to which the judge in the present case was referred, is that given by Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 1 All ER 518 at 528, [1967] 2 QB 786 at 802:
‘As regards the contention of the plaintiff that the transactions between himself, Auto-Finance, Ltd. and the defendants were a “sham”, it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing I think, however, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co. v. Maclure ((1882) 21 Ch D 309); Stoneleigh Finance, Ltd. v. Phillips ([1965] 1 All ER 513, [1965] 2 QB 537), that for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.’
As Bingham LJ expressed it in Antoniades v Villiers [1988] 2 All ER 309 at 316, [1988] 3 WLR 139 at 147: ‘Put more shortly, a sham exists where the parties say one thing intending another (Donald v Baldwyn [1953] NZLR 313 at 321 per F B Adams J).’
In the present case the judge found as a fact that it was the intention of both parties, with all knowledge of what this involved, that the flat should be let to the company and not to Miss Rose personally. This finding has not been challenged. Directing himself in accordance with the law as stated by Diplock LJ in Snook’s case, he held that this transaction was not a sham. We do not find it possible to fault this reasoning.
Once the letting has been found not to be a sham, the lease has to be construed. In Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825 Lord Templeman
Page 1055 of [1988] 3 All ER 1051
said that the Rent Acts must not be allowed to alter or influence the construction of an agreement. In Shell-Mex and BP Ltd v Manchester Garages Ltd [1971] 1 All ER 841 at 846, [1971] 1 WLR 612 at 619 Buckley LJ said:
‘It may be that this is a device which has been adopted by the plaintiffs to avoid possible consequences of the Landlord and Tenant Act 1954, which would have affected a transaction being one of landlord and tenant, but in my judgment one cannot take that into account in construing such a document to find out what the true nature of the transaction is.’
In the present case, the judge pointed out, the only construction of the lease was that the letting was to Plustitle and not in any way to Miss Rose.
Counsel for Miss Rose has relied on the decision in Gisborne v Burton [1988] 3 All ER 760, [1988] 3 WLR 921. In that case, in order to circumvent the provisions as to security of tenure conferred on the tenant of an agricultural holding under the relevant legislation, the owner of a farm intending that it should be let to Mr Burton, first let it to his own wife who on the same day sublet it to Mr Burton. When a notice to quit was served on the wife by the husband’s personal representatives, she served no counter-notice. Her lease therefore came to an end, and so did the sublease in accordance with common law. The Court of Appeal, Dillon and Russell LJJ (Ralph Gibson LJ dissenting) held that the headlease to the wife was a sham and that the subtenant was in reality the tenant and he was entitled to the protection of the Agricultural Holdings Acts, notwithstanding that he had fully understood that the whole purpose of the transaction was to avoid his having such security.
Dillon LJ dealt with the facts as being analogous to those in Johnson v Moreton [1978] 3 All ER 37, [1980] AC 37. In Johnson’s case the agricultural tenant had entered into a covenant not to serve a counter-notice under the Agricultural Holdings Act 1948. The House of Lords held that to allow such a covenant to be effective would be contrary to public interest as defeating the purpose for which the Act had been passed. It was not possible for tenants to contract out of the protection which Parliament had intended that they should have. The covenant was therefore unenforceable. Dillon LJ compared Gisborne’s case with Johnson’s case. He concluded that the inclusion of the landlord’s wife in the series of leases had the effect at the highest of making her ‘a mere nominee or agent for [the husband] to grant a tenancy to [Mr Burton], and what actually happened was that [the husband] granted such a tenancy’ (see [1988] 3 All ER 760 at 766). In coming to that conclusion, he took into account the result of Street v Mountford [1985] 2 All ER 289, [1985] AC 809, where Lord Templeman stated that on the true interpretation of the facts of that case the tenants obtained a tenancy and not a licence because what they received was exclusive occupation, notwithstanding that the document was called a licence. He also took into account the recent tax cases based on W T Ramsay Ltd v IRC [1981] 1 All ER 865, [1982] AC 300, such as Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 530, [1984] AC 474, where it was stated that the fiscal consequences of a series of transactions should be examined. Dillon LJ said ([1988] 3 All ER 760 at 765, [1988] 3 WLR 921 and 927):
‘It seems to me that a similar principle must be applicable wherever there is a preordained series of transactions which is intended to avoid some mandatory statutory provision, even if not of a fiscal nature. You must look at the effect of the scheme as a whole … ’
It was in applying that test that Dillon LJ concluded that the landlord’s wife had been only the agent of the landlord.
Russell LJ also concluded that the inclusion of the landlord’s wife in the series of transactions was only in order to prevent Mr Burton from having the right to serve a counter-notice. He concluded that since there was never any intention that the landlord’s wife should farm the land, her inclusion in the transactions was tantamount to an
Page 1056 of [1988] 3 All ER 1051
agreement on the part of Mr Burton to a promise not to serve a counter-notice, and so was contrary to Johnson v Moreton.
Counsel for Mr Hilton submits that this appeal is concluded by the judge’s findings of fact and that there was no ‘sham’ within the Snook test. He submits that the real ratio of Street v Mountford was that the finding in the agreement that the occupation was to be exclusive was crucial; after that the agreement could only be construed so as to mean that the occupation was under a tenancy. Here, looking at the substance and not only at the form, the letting was one to Plustitle, as both parties always intended that it should be. He distinguishes Gisborne v Burton on the very ground on which the Court of Appeal decided it, that the documents were never intended to be acted on. The device of including the landlord’s wife meant that she was in effect acting as her husband’s agent. In this case, the company was not Mr Hilton’s agent. It was the only tenant to whom he was prepared to let, and the covenants in the lease were perfectly capable of being complied with by the company through its nominee (Miss Rose) and enforced against the company by Mr Hilton. Unlike Street v Mountford the transaction did represent the true position. The company obtained a protected tenancy with the benefits attached to that but neither it nor Miss Rose obtained a statutory tenancy when the protected tenancy came to an end.
We conclude that if the facts are consistent with the purported transaction, we see no reason why, by analogy with Gisborne’s case, public policy should override the transaction which was deliberately intended to avoid, but not evade, the Rent Acts. Otherwise, public policy would be contradicting the Rent Act 1977, s 2 and all the decisions which have preceded it.
We would dismiss the appeal.
Appeal dismissed. Leave to appeal to the House of Lords refused.
Solicitors: Graham Harvey & Co (for Mr Hilton); S Newman & Co (for Miss Rose).
Carolyn Toulmin Barrister.
Allen & Hanburys Ltd v Generics (UK) Ltd (Note)
[1988] 3 All ER 1057
Categories: EUROPEAN COMMUNITY; Free movement of goods
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD FRASER OF TULLYBELTON, LORD BRIGHTMAN AND LORD TEMPLEMAN
Hearing Date(s): 28 NOVEMBER, 8 DECEMBER 1988
Appeal
28 November. In an appeal to the House of Lords brought by the plaintiff, Allen & Hanburys Ltd (Allen & Hanburys), with the leave of the Court of Appeal and a cross-appeal by the defendant, Generics (UK) Ltd (Generics), against the order of that court (May, Slade and Lloyd LJJ) ([1986] RPC 203) on 23 May 1985 setting aside an order of Falconer J in the Patents Court ([1985] FSR 229) on 7 December 1984 for summary judgment for Allen & Hanburys in an action brought by it in which it sought an injunction to restrain Generics from importing into the United Kingdom salbutamol, a pharmaceutical product, in infringement of Allen & Hanburys’ new existing patent of which the original 16-year period had expired on 15 September 1983, the House of Lords, having received the answers given by the Court of Justice of the European Communities (Case 434/85 [1988] 2 All ER 454) on a reference thereto of four questions (set out at [1988] 2 All ER 472–473) for a preliminary ruling under art 177 of the EEC Treaty, heard further submissions from the parties.
Roger Henderson QC, Anthony Watson QC and Guy Burkill for Allen & Hanburys.
Jeremy F Lever QC, Nicholas Pumfrey and Richard Hacon for Generics.
Their Lordships took time for consideration.
8 December 1988. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, in the light of the answers given by the Court of Justice of the European Communities in its judgment delivered on 3 March 1988 ([1988] 2 All ER 454) to the questions put to them by your Lordships’ House on 31 July 1985 and of the further submissions of counsel for the parties, I propose that the appeal and cross-appeal be now disposed of by orders of the House in the following terms: 1. that the action be dismissed in so far as it concerns (a) an application for an injunction restraining Generics from importing into the United Kingdom salbutamol or any other compound falling within claim 1 of letters patent no 1,200,886 and (b) delivery up by Generics to Allen & Hanburys of any salbutamol imported into the United Kingdom in infringement of the said letters patent; 2. that the order of Falconer J dated 7 December 1984 whereby he granted summary judgment in favour of Allen & Hanburys on its motion brought pursuant to RSC Ord 14 be restored in so far as he ordered (i) that an inquiry be held as to what damages (if any) Allen & Hanburys suffered up to the date of such inquiry by reason of Generics’ infringement of letters patent no 1,200,886, (ii) that Generics do pay to Allen & Hanburys any sum found due on the said inquiry together with interest thereon and (iii) that the costs of the inquiry be reserved; 3. that the order of the Court of Appeal of 23 May 1985 be set aside in so far as it ordered (i) that the foregoing part of the said order of Falconer J be set aside and (ii) that Generics have leave to defend this action; 4. that Allen & Hanburys be at liberty to proceed with the said inquiry notwithstanding the stay ordered by Falconer J in his said order; 5. that save as aforesaid there be no order on the appeal or on the cross-appeal; 6. that there be remitted back to the High Court of Justice, Chancery Division, Patents Court, all
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questions arising out of the cross-undertakings in damages given to that court by Allen & Hanburys on 3 October 1984 and 10 July 1986; 7. that Allen & Hanburys do pay to Generics’ costs of (a) Allen & Hanburys’ application for interlocutory relief; (b) Allen & Hanburys’ appeal to the Court of Appeal, (c) Allen & Hanburys’ appeal and Generics’ cross-appeal to this House and (d) the reference herein to the Court of Justice of the European Communities, such costs to be taxed if not agreed.
LORD FRASER OF TULLYBELTON. My Lords, I agree.
LORD BRIGHTMAN. My Lords, I agree.
LORD TEMPLEMAN. My Lords, I agree.
Order accordingly.
Solicitors: Bristows Cooke & Carpmael (for Allen & Hanburys); S J Berwin & Co (for Generics).
Mary Rose Plummer Barrister.
AG Securities v Vaughan and others
Antoniades v Villiers and another
[1988] 3 All ER 1058
Categories: LANDLORD AND TENANT; Tenancies
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD TEMPLEMAN, LORD ACKNER, LORD OLIVER OF AYLMERTON AND LORD JAUNCEY OF TULLICHETTLE
Hearing Date(s): 10, 11, 12, 13 OCTOBER, 10 NOVEMBER 1988
Landlord and tenant – Tenancy – Tenancy distinguished from licence – Agreement to occupy furnished flat – Flat-sharing arrangement – Occupancy of furnished flat granted to four occupants under separate short-term agreements – Agreements made at different times on different terms – Occupants paying different monthly amounts – Agreements expressed to be ‘licences’ – Agreements providing that occupants having no right to exclusive possession of any part of flat – Whether occupants jointly having exclusive possession of accommodation – Whether tenancy or licence created.
Landlord and tenant – Tenancy – Tenancy distinguished from licence – Agreement to occupy furnished flat – Occupancy of small flat granted to unmarried couple by two contemporaneous agreements – Agreements expressly not granting exclusive possession and stating intention of parties was to create licence – Whether tenancy or licence created.
In two separate cases the question arose whether agreements to occupy flats created tenancies or licences.
In the first case, the appellant granted the right to occupy a furnished four bed-roomed flat to four individual flat-sharers under separate short-term agreements, termed ‘licences’, which were made at different times and on different terms but were normally for six months’ duration. Each agreement provided for a different monthly rent and further provided that each occupant had ‘the right to use [the flat] in common with others who have or may from time to time be granted the like right … but without the right to exclusive possession of any part of the … flat’. When an occupant left a new occupant was mutually agreed by the appellant and the remaining occupants. In 1985 the appellant served notices to quit on the four occupants. The occupants applied to a rent officer to
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have a fair rent registered for the flat on the basis that they were tenants of the flat but the appellant obtained a declaration that they were merely licensees and not tenants. Three of the occupants appealed to the Court of Appeal, which allowed their appeal. The appellant appealed to the House of Lords.
In the second case, the respondent let a flat to the appellants, a young unmarried couple, under separate but identical agreements termed ‘licences’, which were executed contemporaneously and stipulated with reiterated emphasis that the appellants were not to have exclusive possession. In particular, by cl 16, the agreements stated that ‘The licensor shall be entitled at any time to use the rooms together with the licensee and permit other persons to use all of the rooms together with the licensee’ and further stated that the real intention of the parties in all the circumstances was to create a licence which did not come under the Rent Acts. The rental payable was £87 per month by each occupant and the agreements were determinable by one month’s notice by either party. The respondent never attempted to use any of the rooms or authorised any other persons to use the rooms. In July 1986 the respondent gave the appellants notice to quit and applied to the court for an order for possession, but his claim was dismissed on the ground that the appellants were tenants who were entitled to the protection of the Rent Acts. The respondent appealed to the Court of Appeal, which allowed his appeal. The appellants appealed to the House of Lords.
Held – (1) In the first appeal, the agreements entered into by the appellant with the four occupants whereby each occupant had exclusive possession of one bedroom and shared the remainder of the accommodation did not have the effect of creating a collective joint tenancy among the occupants of the flat for the time being by virtue of their having between them exclusive possession of the flat, since the agreements were independent of one another, commenced on different dates, covered different periods and provided for different payments for that occupation. Accordingly, the agreements constituted licences and the appeal would be allowed (see p 1060 j, p 1061 c, p 1064 h j, p 1066 c d, p 1070 d to g, p 1074 f to j and p 1076 g to j, post); Street v Mountford [1985] 2 All ER 289 distinguished.
(2) In the second appeal, the agreements were interdependent on one another and were therefore to be read together as constituting one single transaction. Since it was the intention of the two appellants to occupy the flat as man and wife and since that intention was known to the respondent, the true nature of the arrangement was to create a joint tenancy and the purported retention by the respondent of the right to share the occupation of the small flat with the appellants or to introduce an indefinite number of third parties to do so was clearly a pretence to deprive them of the protection of the Rent Acts. It followed that the agreements created a joint tenancy and not a licence, and the appeal would therefore be allowed (see p 1061 d e, p 1066 e, p 1067 c f, p 1068 d, p 1070 a to c g, p 1072 a, p 1073 d, p 1074 f to j, p 1077 c and p 1078 f g, post); Street v Mountford [1985] 2 All ER 289 applied.
Decisions of the Court of Appeal in AG Securities v Vaughan [1988] 2 All ER 173 and Antoniades v Villiers [1988] 2 All ER 309 reversed.
Notes
For general principles for determining whether an agreement creates a lease or a licence, see 27 Halsbury’s Laws (4th edn) para 6, and for cases on the subject, see 31(1) Digest (Reissue) 202–203, 1692–1698.
Cases referred to in opinions
Aldrington Garages Ltd v Fielder (1978) 37 P & CR 461, CA.
Cole v Harris [1945] 2 All ER 146, [1945] KB 474.
Crancour Ltd v Merola, Crancour Ltd v Da Silvaesa (1986) 52 P & CR 204, CA.
Curl v Angelo [1948] 2 All ER 189, CA.
Hadjiloucas v Crean [1987] 3 All ER 1008, [1988] 3 WLR 1006, CA.
Page 1060 of [1988] 3 All ER 1058
Neale v Del Soto [1945] 1 All ER 191, [1945] KB 144, CA.
Somma v Hazlehurst [1978] 2 All ER 1011, [1978] 1 WLR 1014, CA.
Street v Mountford [1985] 2 All ER 289, [1985] AC 809, [1985] 2 WLR 877, HL.
Sturolson & Co v Weniz (1984) 17 HLR 140, CA.
Appeals
AG Securities v Vaughan and ors
The plaintiffs, AG Securities (an unlimited company), appealed with the leave of the Court of Appeal against the decision of that court (Fox and Mustill LJJ, Sir George Waller dissenting) ([1988] 2 All ER 173, [1988] 2 WLR 689) on 21 December 1987 allowing an appeal by the second, third and fourth defendants, Roderick Lyons, Simon Russell and Christopher Cook (the respondents), against the order of his Honour Judge Aron Owen made in the Clerkenwell County Court dated 16 February 1987 that interests created by agreement by the first defendant, Nigel Vaughan, and the three respondents who occupied a flat known as 25 Linden Mansions, Hornsey Lane, London N6 in the area of the fifth defendant, Haringey London Borough Council, were licences and not tenancies. The Court of Appeal held that the first defendant and the three respondents, at the commencement of the proceedings, occupied the flat as joint tenants protected by the Rent Act 1977. The first defendant had left the flat before the appeal to the Court of Appeal was heard and took no part in the appeals. The fifth defendant took no part in the proceedings. The facts are set out in the opinion of Lord Templeman.
Antoniades v Villiers and anor
The defendants, William Robert Villiers and Sharon Ann Bridger, appealed with the leave of the Appeal Committee of the House of Lords given on 30 June 1988 against the decision of the Court of Appeal (Bingham and Mann LJJ) ([1988] 2 All ER 309, [1988] 3 WLR 139) on 17 March 1988 and order dated 21 March as amended allowing an appeal by the plaintiff, Agis Antoniades (the respondent), against the judgment and order of his Honour Judge Macnair made on 2 July 1987 (and amended on 27 July) whereby he dismissed the respondent’s claim for possession of premises known as Top flat, 6 Whiteley Road, Upper Norwood, London SE19, owned by the respondent and occupied by the appellants, and held that the appellants both occupied the flat jointly as protected tenants under the Rent Acts. The Court of Appeal held that the agreement under which the appellants occupied the flat were licences and not tenancies and accordingly that they were not entitled to the statutory protection. The facts are set out in the opinion of Lord Templeman.
The two appeals were heard together.
Michael Rich QC and John Furber for the appellants in the first appeal.
Stephen Sedley QC and David Watkinson for the respondents in the first appeal.
John Stuart Colyer QC and James Harris for the appellants in the second appeal.
The respondent in the second appeal appeared in person.
Their Lordships took time for consideration.
10 November 1988. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, I gratefully adopt the full account given in the speech of my noble and learned friend Lord Templeman of the facts on which these two appeals depend.
AG Securities v Vaughan and ors
The four respondents acquired their contractual rights to occupy the flat in question
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and undertook their relevant obligations by separate agreements with the appellants made at different times and on different terms. These rights and obligations having initially been several, I do not understand by what legal alchemy they could ever become joint. Each occupant had a contractual right, enforceable against the appellants, to prevent the number of persons permitted to occupy the flat at any one time exceeding four. But this did not give them exclusive possession of the kind which is distinctive of a leasehold interest. Having no estate in land, they could not sue in trespass. Their remedy against intruders would have been to persuade the appellants to sue as plaintiffs or to join the appellants as defendants by way of enforcement of their contractual rights.
The arrangement seems to have been a sensible and realistic one to provide accommodation for a shifting population of individuals who were genuinely prepared to share the flat with others introduced from time to time who would, at least initially, be strangers to them. There was no artificiality in the contracts concluded to give effect to this arrangement. On the contrary, it seems to me, with respect to the majority of the Court of Appeal, to require the highest degree of artificiality to force these contracts into the mould of a joint tenancy.
Antoniades v Villiers and anor
Here the artificiality was in the pretence that two contemporaneous and identical agreements entered into by a man and a woman who were going to live together in a one-bedroom flat and share a double bed created rights and obligations which were several rather than joint. As to the nature of those rights and obligations, the provisions of the joint agreement purporting to retain the right in the respondent to share the occupation of the flat with the young couple himself or to introduce an indefinite number of third parties to do so could be seen, in all the relevant circumstances, to be repugnant to the true purpose of the agreement. No one could have supposed that those provisions were ever intended to be acted on. They were introduced into the agreement for no other purpose than as an attempt to disguise the true character of the agreement which it was hoped would deceive the court and prevent the appellants enjoying the protection of the Rent Acts. As your Lordships all agree, the attempt fails.
I would allow both appeals.
LORD TEMPLEMAN. My Lords, in each of the two appeals now under consideration, the question is whether the owner of residential accommodation granted a tenancy or granted licences.
In the first appeal, the appellant company, AG Securities, owned a block of flats, Linden Mansions, Hornsey Lane, London. Flat 25 consists of six living rooms in addition to a kitchen and bathroom. The company furnished four living rooms as bedrooms, a fifth as a lounge and a sixth as a sitting room. In 1974 furnished lettings became subject to the Rent Acts. If the company granted exclusive possession of the flat to one single occupier or to two or more occupiers jointly in consideration of periodical payments, the grant would create a tenancy of the flat. If the company granted exclusive possession of one bedroom to four different occupiers with joint use of the lounge, sitting room, kitchen and bathroom, each of the four grants would create a tenancy of one bedroom. Exclusive possession means either exclusive occupation or receipt of rents and profits.
The company entered into separate agreements with four different applicants. Each agreement was in the same form, and was expressed to be made between the company as ‘the Owner’ and the applicant as ‘Licensee’. The agreement contained, inter alia, the following relevant clauses:
‘1. THE Owner grants to the Licensee the right to use in common with others who have or may from time to time be granted the like right the flat known as 25 Linden Mansions Hornsey Lane N.6 but without the right to exclusive possession of any part of the said flat TOGETHER with the fixtures furniture furnishings and effects now in the said Flat for six months from the day of 19 and thereafter
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until determined by either party giving to the other one month’s notice in writing to take effect at any time.
2. THE LICENSEE agrees with the Owner as follows:—
(1) To pay the sum of £ per month for the right to share in the use of the said Flat such sum to be payable by equal monthly instalments on the first day of each month …
(2) Not to damage or cause any damage to the walls or floors of the said Flat or to the fixtures furniture furnishings and effects therein.
(3) To share the use of the said Flat peaceably with and not to impede the use of the said Flat by such other persons not exceeding 3 in number at any one time to whom the Owner has granted or shall from time to time grant Licence to use the said Flat in common with the Licensee and not to impede the use by such other persons of the gas electricity and telephone services supplied to the Flat PROVIDED that each shares the cost of such services.
(4) If at any time there shall be less than 3 persons authorised by the Owner to use the said Flat in common with the Licensee upon reasonable notice given by the Owner to meet with any prospective licensee nominated by the Owner at the Flat to provide an opportunity to such prospective licensee to agree terms for sharing the costs of services in accordance with Clause 2(3).
(5) Not to assign this Agreement nor permit any other person except as licensed by the Owner to sleep or reside in or share occupation of the said Flat or any part of it at any time … ’
The flat was kept fully occupied; whenever one agreement was termined the company invited applications to fill the vacancy. The company’s agent produced a draft of the agreement to an applicant. The monthly sum payable by the applicant was not necessarily the same as the monthly sum payable by any of the continuing occupiers of the flat because inflation and other factors caused the value of an agreement to fluctuate. The company and its agent gave no directions or explanations about the manner in which the applicant and other persons not exceeding three in number would use the flat in common. The applicant was sent off to the flat to agree terms with the three continuing occupiers. There he would be offered a vacant bedroom and the use of the lounge, sitting room, kitchen and bathroom with the other occupiers, each of whom had his own bedroom. It was the practice that, whenever a bedroom fell vacant on termination of an agreement, each of the three continuing occupiers, in order of seniority, decided whether to change his bedroom. The applicant for the vacancy was then offered the bedroom which the other three least coveted. The applicant, if content, signed his agreement and moved into his bedroom. If he were unable to share the use of the common parts of the flat peaceably he could terminate his agreement, or the other three occupiers could terminate their agreements or prevail on the company to terminate the agreement of the unpopular occupier.
The respondent Mr Vaughan signed an agreement in 1982 to pay £86·66 per month. The respondent Mr Lyons signed an agreement dated 2 March 1984 to pay £99 per month. The respondent Mr Russell signed an agreement dated 1 August 1984 to pay £125 per month, and the respondent Mr Cook signed an agreement dated 28 January 1985 to pay £104 per month. From 28 January 1985 onwards, each of the four respondents occupied one bedroom and shared the use of the lounge, sitting room, kitchen and bathroom.
The respondents claim that, under and by virtue of the four agreements signed by them respectively, they became tenants of the flat. The company contends that each respondent is a licensee.
In the second appeal, the appellant, Mr Antoniades, is the owner of the house, 6 Whiteley Road, Upper Norwood. The attic was converted into furnished residential accommodation comprising a bedroom, a bed-sitting room, kitchen and bathroom. The
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furniture in the sitting room consisted of a bed-settee, a table-bed, a sideboard and a chair.
The appellants, Mr Villiers and Miss Bridger, spent three months looking for a flat where they could live together. In February 1985 they were shown the attic flat. The bedroom lacked a bed; the appellants expressed a preference for a double bed which Mr Antoniades agreed to provide. Mr Antoniades and Mr Villiers entered into an agreement dated 9 February 1985. The agreement was described as a licence, Mr Antoniades was described as ‘the licensor’ and Mr Villiers was described as ‘the licensee’. The agreement recited that ‘the licensor is not willing to grant the licensee exclusive possession of any part of the rooms hereinafter referred to’ and that ‘the licensee is anxious to secure the use of the rooms notwithstanding that such use be in common with the licensor and such other licensees or invitees as the licensor may permit from time to time to use the said rooms’. The material provisions of the agreement were as follows:
‘By this licence the licensor licences the licensee to use (but not exclusively) all those rooms (hereinafter referred to as “the rooms”) on the Top flat (one bedroom one bedsitting room, kitchen & bathroom) of the building … 6, Whiteley Road SE19 … together with the use of the furniture fixtures and effects now in the rooms (more particularly set out in the schedule of contents annexed hereto) from 14/2/1985 for the sum of £87 per calendar month on the following terms and conditions:
1) The licensee agrees to pay the said sum of £87 (on the 14th of each month) monthly in advance …
3) The licensee shall use his best endeavours amicably and peaceably to share the use of the rooms with the licensor and with such other licensees or invitees whom the licensor shall from time to time permit to use the rooms and shall not interfere with or otherwise obstruct such shared occupation in any way whatsoever …
10) The licensee shall not do or suffer to be done in the rooms any act or thing which may be a nuisance cause of damage or annoyance to the licensor and the other occupiers or users of the rooms …
12) The licensee … will not use the rooms in any illegal or immoral way …
16) The licensor shall be entitled at any time to use the rooms together with the licensee and permit other persons to use all of the rooms together with the licensee …
17) This licence is personal to the licensee and shall not permit the use of the rooms by any person whatsoever and only the licensor will have the right to use or permit the use of the rooms as described in clause 16. The licensee under no circumstances will have the right to allow any other people of his choice to use the rooms in any way …
22) The licensee (occupier) declares that he is over 18 years old and understood this licence …
23) The real intention of the parties in all surrounding circumstances is to create this licence which is not coming under the Rent Acts and is binding as written.
24) This licence represents the entire agreement of the parties and no oral or other agreements were made and no different explanations or representations were made and only agreements in writing will be legally binding.
25) The licensee read and understood this licence and received copy and the licensee understands that all rooms and all parts of the dwelling will be shared and no exclusive possession of any part of the whole will be allowed to the licensees by the licensor under any circumstances.’
There then followed the schedule of furniture and then a new clause as follows:
‘26) Subject to clause 21 this licence may be terminated by one months notice in writing given by either party at any time and the licensor reserves the right of eviction without court order.’
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That agreement was signed by Mr Villiers in five places and each of his signatures was witnessed.
Either then or thereafter, Mr Villiers signed an addendum to the agreement whereby Mr Villiers:
‘… agrees that the licence signed on 9/2/1985 does not come under the Rent Acts and the flat is for single people sharing and if Mr Villiers marries any occupier of the flat then Mr Villiers will give notice and vacate the flat at 6 Whiteley Rd London SE19. The owner, Mr Antoniades, did not promise any other accommodation in any way. No persons will have exclusive possession of the above flat as agreed.’
Mr Antoniades entered into a separate agreement and a separate addendum with Miss Bridger. The agreement and the addendum were in the same form, bore the same date, were executed on the same day and were signed and witnessed in the same way as the agreement and addendum entered into by Mr Villiers.
Thereupon Mr Villiers and Miss Bridger entered into occupation of the rooms comprised in the agreement. Mr Antoniades has never attempted to use any of the rooms or authorised any other person to use the rooms.
The appellants, Mr Villiers and Miss Bridger, claim that they became tenants of the whole of the attic flat. Mr Antoniades contends that each appellant is a licensee.
My Lords, ever since 1915 the Rent Acts have protected some tenants of residential accommodation with security of tenture and maximum rents. The scope and effect of the Rent Acts have been altered from time to time and the current legislative protection is contained in the Rent Act 1977. Section 1 of the 1977 Act, reproducing earlier enactments, provides:
‘Subject to this Part of this Act, a tenancy under which a dwelling-house (which may be a house or part of a house) is let as a separate dwelling is a protected tenancy for the purposes of this Act.’
Parties to an agreement cannot contract out of the Rent Acts; if they were able to do so the Acts would be a dead letter because in a state of housing shortage a person seeking residential accommodation may agree to anything to obtain shelter. The Rent Acts protect a tenant but they do not protect a licensee. Since parties to an agreement cannot contract out of the Rent Acts, a document which expresses the intention, genuine or bogus, of both parties or of one party to create a licence will nevertheless create a tenancy if the rights and obligations enjoyed and imposed satisfy the legal requirements of a tenancy. A person seeking residential accommodation may concur in any expression of intention in order to obtain shelter. Since parties to an agreement cannot contract out of the Rent Acts, a document expressed in the language of a licence must nevertheless be examined and construed by the court in order to decide whether the rights and obligations enjoyed and imposed create a licence or a tenancy. A person seeking residential accommodation may sign a document couched in any language in order to obtain shelter. Since parties to an agreement cannot contract out of the Rent Acts, the grant of a tenancy to two persons jointly cannot be concealed, accidentally or by design, by the creation of two documents in the form of licences. Two persons seeking residential accommodation may sign any number of documents in order to obtain joint shelter. In considering one or more documents for the purpose of deciding whether a tenancy has been created, the court must consider the surrounding circumstances, including any relationship between the prospective occupiers, the course of negotiations and the nature and extent of the accommodation and the intended and actual mode of occupation of the accommodation. If the owner of a one-bedroomed flat granted a licence to a husband to occupy the flat provided he shared the flat with his wife and nobody else and granted a similar licence to the wife provided she shared the flat with the husband and nobody else, the court would be bound to consider the effect of both documents together. If the licence to the husband required him to pay a licence fee of £50 per month and the
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licence to the wife required her to pay a further licence fee of £50 per month, the two documents read together in the light of the property to be occupied and the obvious intended mode of occupation would confer exclusive occupation on the husband and wife jointly and a tenancy at the rent of £100.
Landlords dislike the Rent Acts and wish to enjoy the benefits of letting property without the burden of the restrictions imposed by the Acts. Landlords believe that the Rent Acts unfairly interfere with freedom of contract and exacerbate the housing shortage. Tenants on the other hand believe that the Acts are a necessary protection against the exploitation of people who do not own the freehold or long leases of their homes. The court lacks the knowledge and the power to form any judgment on these arguments, which fall to be considered and determined by Parliament. The duty of the court is to enforce the Acts and in so doing to observe one principle which is inherent in the Acts and has been long recognised, the principle that parties cannot contract out of the Acts.
The enjoyment of exclusive occupation for a term in consideration of periodical payments creates a tenancy, save in exceptional circumstances not relevant to these appeals: see Street v Mountford [1985] 2 All ER 289 at 300, [1985] AC 809 at 826–827. The grant of one room with exclusive occupation in consideration of a periodic payment creates a tenancy, although if the room is not a dwelling the tenant is not protected by the Rent Acts: see Curl v Angelo [1948] 2 All ER 189. The grant of one room with exclusive occupation as a dwelling creates a tenancy, but, if a tenant shares some other essential living premises such as a kitchen with his landlord or other persons, the room is not let as a separate dwelling within the meaning of s 1 of the Rent Act 1977: see Neale v Del Soto [1945] 1 All ER 191, [1945] KB 144 and Cole v Harris [1945] 2 All ER 146, [1945] KB 474. Section 21 of the 1977 Act confers some rights on a tenant who shares essential living premises with his landlord, and s 22 confers protection on a tenant who shares some essential living premises with persons other than the landlord.
If, under an agreement, the owner of residential accommodation provides services or attendance and retains possession for that purpose the occupier is a lodger and the agreement creates a licence. Under an agreement for the exclusive occupation of a room or rooms consisting of a dwelling for periodic payments then, save in the exceptional circumstances mentioned in Street v Mountford, a single occupier, if he is not a lodger, must be a tenant. The agreement may provide, expressly or by implication, power for the owner to enter the dwelling to inspect or repair but if the occupier is entitled to the use and enjoyment of the dwelling and is not a lodger he is in exclusive occupation and the agreement creates a tenancy.
Where residential accommodation is occupied by two or more persons the occupiers may be licensees or tenants of the whole or each occupier may be a separate tenant of part. In the present appeals the only question raised is whether the occupiers are licensees or tenants of the whole.
In the first appeal under consideration the company entered into four separate agreements with four separate persons between 1982 and 1985. The agreements were in the same form save that the periodical sum payable under one agreement did not correspond to the sum payable pursuant to any other agreement. The company was not bound to make agreements in the same form or to require any payment. The agreement signed by Mr Vaughan in 1982 did not and could not entitle or compel Mr Vaughan to become a joint tenant of the whole of the flat with Mr Cook in 1985 on the terms of Mr Vaughan’s agreement or on the terms of Mr Cook’s agreement or on the terms of any other agreement either alone with Mr Cook or together with any other persons. In 1985 Mr Vaughan did not agree to become a joint tenant of the flat with Mr Cook or anybody else. In 1985, in the events which had happened, the company possessed the right reserved to the company by cl 2(3) of Mr Vaughan’s agreement to authorise Mr Cook to share the use of the flat in common with Mr Vaughan. In 1985 Mr Vaughan orally agreed with Mr Cook that, if the company authorised Mr Cook to use the flat in common
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with Mr Vaughan, then Mr Vaughan would allow Mr Cook to occupy a specified bedroom in the flat and share the occupation of the other parts of the flat excluding the other three bedrooms. Mr Vaughan’s agreement with the company did not prevent him from entering into this oral agreement with Mr Cook. Under the standard form agreement the company did not retain power to allocate the four bedrooms but delegated this power to the occupiers for the time being. If the occupiers had failed to allocate the bedrooms the company would have been obliged to terminate one or more of the agreements. The respondents claim that they are joint tenants of the flat. No single respondent claims to be a tenant of a bedroom.
The Court of Appeal (Fox and Mustill LJJ, Sir George Waller dissenting) ([1988] 2 All ER 173, [1988] 2 WLR 689) concluded that the four respondents were jointly entitled to exclusive occupation of the flat. I am unable to agree. If a landlord who owns a three-bedroom flat enters into three separate independent tenancies with three independent tenants each of whom is entitled to one bedroom and to share the common parts, then the three tenants, if they agree, can exclude anyone else from the flat. But they do not enjoy exclusive occupation of the flat jointly under the terms of their tenancies. In the present case, if the four respondents had been jointly entitled to exclusive occupation of the flat then, on the death of one of the respondents, the remaining three would be entitled to joint and exclusive occupation. But, in fact, on the death of one respondent the remaining three would not be entitled to joint and exclusive occupation of the flat. They could not exclude a fourth person nominated by the company. I would allow the appeal.
In the first appeal the four agreements were independent of one another. In the second appeal the two agreements were interdependent. Both would have been signed or neither. The two agreements must therefore be read together. Mr Villiers and Miss Bridger applied to rent the flat jointly and sought and enjoyed joint and exclusive occupation of the whole of the flat. They shared the rights and the obligations imposed by the terms of their occupation. They acquired joint and exclusive occupation of the flat in consideration of periodical payments and they therefore acquired a tenancy jointly. Mr Antoniades required each of them, Mr Villiers and Miss Bridger, to agree to pay one-half of each aggregate periodical payment, but this circumstance cannot convert a tenancy into a licence. A tenancy remains a tenancy even though the landlord may choose to require each of two joint tenants to agree expressly to pay one-half of the rent. The tenancy conferred on Mr Villiers and Miss Bridger the right to occupy the whole flat as their dwelling. Clause 16 reserved to Mr Antoniades the power at any time to go into occupation of the flat jointly with Mr Villiers and Miss Bridger. The exercise of that power would at common law put an end to the exclusive occupation of the flat by Mr Villiers and Miss Bridger, terminate the tenancy of Mr Villiers and Miss Bridger and convert Mr Villiers and Miss Bridges into licensees. But the powers reserved to Mr Antoniades by cl 16 cannot be lawfully exercised because they are inconsistent with the provisions of the Rent Acts.
When Mr Antoniades entered into the agreements dated 9 February 1985 with Mr Villiers and Miss Bridger and when Mr Antoniades allowed Mr Villiers and Miss Bridger to occupy the flat, it is clear from the negotiations which had taken place, from the surrounding circumstances and from subsequent events, that Mr Antoniades did not intend in February 1985, immediately or contemporaneously, to share occupation or to authorise any other person to deprive Mr Villiers and Miss Bridger of exclusive occupation of the flat. Clause 16, if genuine, was a reservation by a landlord of a power at some time during the currency of the tenancy to share occupation with the tenant. The exclusive occupation of the tenant coupled with the payment of rent created a tenancy which at common law could be terminated and converted into a licence as soon as the landlord exercised his power to share occupation. But under the Rent Acts, if a contractual tenancy is terminated, the Acts protect the occupiers from eviction.
If a landlord creates a tenancy under which a flat is let as a separate dwelling the
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tenancy is a protected tenancy under s 1 of the Rent Act 1977. After the termination of a protected tenancy the protected tenant becomes a statutory tenant under s 2 of the Act. By s 3(1):
‘So long as he retains possession, a statutory tenant shall observe and be entitled to the benefit of all the terms and conditions of the original contract of tenancy, so far as they are consistent with the provisions of this Act.’
By s 98 a court shall not make an order for possession of a dwelling house which is subject to a protected tenancy or a statutory tenancy unless the court considers that it is reasonable to make such an order and is satisfied either that alternative accommodation is available or that certain other conditions are satisfied. The landlord cannot dispense with an order of the court and enter into possession in exercise of his common law powers.
Where a landlord creates a tenancy of a flat and reserves the right to go into exclusive occupation at any time of the whole or part of the flat with or without notice, that reservation is inconsistent with the provisions of the Rent Acts and cannot be enforced without an order of the court under s 98. Where a landlord creates a tenancy of a flat and reserves the right to go into occupation of the whole or part of the flat with or without notice, jointly with the existing tenants, that reservation also is inconsistent with the provisions of the Acts. Were it otherwise every tenancy agreement would be labelled a licence and would contract out of the Rent Acts by reserving power to the landlord to share possession with the tenant at any time after the commencement of the term.
Clause 16 is a reservation to Mr Antoniades of the right to go into occupation or to nominate others to enjoy occupation of the whole of the flat jointly with Mr Villiers and Miss Bridger. Until that power is exercised Mr Villiers and Miss Bridger are jointly in exclusive occupation of the whole of the flat making periodical payments and they are therefore tenants. The Rent Act prevents the exercise of a power which would destroy the tenancy of Mr Villiers and Miss Bridger and would deprive them of the exclusive occupation of the flat which they are now enjoying. Clause 16 is inconsistent with the provisions of the Rent Acts.
There is a separate and alternative reason why cl 16 must be ignored. Clause 16 was not a genuine reservation to Mr Antoniades of a power to share the flat and a power to authorise other persons to share the flat. Mr Antoniades did not genuinely intend to exercise the powers save possibly to bring pressure to bear to obtain possession. Clause 16 was only intended to deprive Mr Villiers and Miss Bridger of the protection of the Rent Acts. Mr Villiers and Miss Bridger had no choice in the matter.
In the notes of evidence of his Honour Judge Macnair, Mr Villiers is reported as saying:
‘He [Mr Antoniades] kept going on about it being a licence and not in the Rent Act. I didn’t know either but was pleased to have a place after 3 or 4 months of chasing.’
The notes of Miss Bridger’s evidence include this passage:
‘I didn’t understand what was meant by exclusive possession or licence. Signed because so glad to move in. Had been looking for 3 months.’
In Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825 I said:
‘Although the Rent Acts must not be allowed to alter or influence the construction of an agreement, the court should, in my opinion, be astute to detect and frustrate sham devices and artificial transactions whose only object is to disguise the grant of a tenancy and to evade the Rent Acts.’
It would have been more accurate and less liable to give rise to misunderstandings if I had substituted the word ‘pretence’ for the references to ‘sham devices’ and ‘artificial transactions’. Street v Mountford was not a case which involved a pretence concerning
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exclusive possession. The agreement did not mention exclusive possession and the owner conceded that the occupier enjoyed exclusive possession. In Somma v Hazelhurst [1978] 2 All ER 1011, [1978] 1 WLR 1014 and other cases considered in Street v Mountford the owner wished to let residential accommodation but to avoid the Rent Acts. The occupiers wished to take a letting of residential accommodation. The owner stipulated for the execution of agreements which pretended that exclusive possession was not to be enjoyed by the occupiers. The occupiers were obliged to acquiesce with this pretence in order to obtain the accommodation. In my opinion the occupiers either did not understand the language of the agreements or assumed, justifiably, that in practice the owner would not violate their privacy. The owners real intention was to rely on the language of the agreement to escape the Rent Acts. The owner allowed the occupiers to enjoy jointly exclusive occupation and accepted rent. A tenancy was created. Street v Mountford reasserted three principles. First, parties to an agreement cannot contract out of the Rent Acts. Second, in the absence of special circumstances, not here relevant, the enjoyment of exclusive occupation for a term in consideration of periodic payments creates a tenancy. Third, where the language of licence contradicts the reality of lease, the facts must prevail. The facts must prevail over the language in order that the parties may not contract out of the Rent Acts. In the present case cl 16 was a pretence.
The fact that cl 16 was a pretence appears from its terms and from the negotiations. Clause 16 in terms conferred on Mr Antoniades and other persons the right to share the bedroom occupied by Mr Villiers and Miss Bridger. Clause 16 conferred power on Mr Antoniades to convert the sitting room occupied by Mr Villiers and Miss Bridger into a bedroom which could be jointly occupied by Mr Villiers, Miss Bridger, Mr Antoniades and any person or persons nominated by Mr Antoniades. The facilities in the flat were not suitable for sharing between strangers. The flat, situated in an attic with a sloping roof, was too small for sharing between strangers. If cl 16 had been genuine there would have been some discussion between Mr Antoniades, Mr Villiers and Miss Bridger as to how cl 16 might be operated in practice and in whose favour it was likely to be operated. The addendum imposed on Mr Villiers and Miss Bridger sought to add plausibility to the pretence of sharing by forfeiting the right of Mr Villiers and Miss Bridger to continue to occupy the flat if their double-bedded romance blossomed into wedding bells. Finally and significantly, Mr Antoniades never made any attempt to obtain increased income from the flat by exercising the powers which cl 16 purported to reserve to him. Clause 16 was only designed to disguise the grant of a tenancy and to contract out of the Rent Acts. In this case in the Court of Appeal Bingham LJ said ([1988] 2 All ER 309 at 317, [1988] 3 WLR 139 at 148):
‘The written agreements cannot possibly be construed as giving the occupants (jointly or severally) exclusive possession of the flat or any part of it. They stipulate with reiterated emphasis that the occupants shall not have exclusive possession.’
My Lords, in Street v Mountford [1985] 2 All ER 289, [1985] AC 809 this House stipulated with reiterated emphasis that an express statement of intention is not decisive and that the court must pay attention to the facts and surrounding circumstances and to what people do as well as to what people say.
In Somma v Hazlehurst [1978] 2 All ER 1011, [1978] 1 WLR 1014 a young unmarried couple applied to take a double bed-sitting room in order that they might live together. Each signed an agreement to pay £38·80 per month to share the use of the room with the owner and with not more than one other person at any one time. The couple moved into the bed-sitting room and enjoyed exclusive occupation. In terms the owner reserved the right to share living and sleeping quarters with the two applicants. If the couple parted and the youth moved out, the owner could require the damsel to share her living and sleeping quarters with the owner and with a stranger or with one of them or move out herself. The couple enjoyed exclusive occupation until the owner decided to live with them or until one of their agreements was terminated. The right reserved to the
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owner to require the applicants or one of the applicants to share with the owner or some other third party was contrary to the provisions of the Rent Acts and in addition was, in the circumstances, a pretence intended only to get round the Rent Acts.
In Aldrington Garages Ltd v Fielder (1978) 37 P & CR 461 Mr Fielder and Miss Maxwell applied to take a self-contained flat in order that they might live together. Each signed an agreement to pay £54·17 per month to share the use of the flat with one other person. The couple moved into the flat and enjoyed exclusive occupation. In terms, if the couple parted and Mr Fielder moved out, the owner could require Miss Maxwell to share her living and sleeping quarters with a stranger or move out herself. Mr Fielder and Miss Maxwell enjoyed exclusive occupation unless and until one of their agreements was terminated. The right reserved to the owner to require Miss Maxwell to share with a third party if Mr Fielder’s agreement was terminated and to require Mr Fielder to share with a third party if Miss Maxwell’s agreement was terminated was contrary to the provisions of the Rent Acts and in addition was, in the circumstances, a pretence intended only to get round the Rent Acts.
In Sturolson & Co v Weniz (1984) 17 HLR 140 the defendant and a friend applied to take a self-contained flat for the occupation of the defendant, his wife and the friend. The defendant and his friend signed agreements to pay £100 per month to share the flat with such other persons as might be nominated or approved by the owner from time to time. The defendant, his wife and the friend, moved into the flat and enjoyed exclusive occupation. In terms the defendant and the friend paid between them £200 per month for a flat which could be invaded by one or more strangers at any time. The owner’s agent gave the game away by saying that the owner was happy so long as he received £200 per month from the flat. The defendant and the friend enjoyed exclusive occupation. The right reserved to the owner to require them to share with others was contrary to the provisions of the Rent Acts and was in any event a pretence intended only to get round the Rent Acts.
In Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825 this House disapproved of the decisions of the Court of Appeal in Somma v Hazlehurst [1978] 2 All ER 1011, [1978] 1 WLR 1014, Aldrington Garages Ltd v Fielder (1978) 37 P & CR 461 and Sturolson & Co v Weniz (1984) 17 HLR 190, which held that the occupiers were only licensees and not tenants.
In Crancour Ltd v Merola (1986) 52 P & CR 204 at 214, in which leave was given to defend proceedings under RSC Ord 113, Ralph Gibson LJ referring to the disapproval by this House in Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825 of the decision of the Court of Appeal in Somma v Hazlehurst, said:
‘As I understand the reference to the “sham nature of the obligation,” namely that of sharing the room in common with other persons nominated by the landlord, the House of Lords is there saying, firstly, that the agreement in that case constituted the grant of exclusive possession; secondly, that the written obligation to share the room was not effective to alter the true nature of the grant; and, thirdly, that, on the facts of the case, it should have been clear to the Court of Appeal that that landlord cannot have intended the term as to sharing occupation to be a true statement of the nature of the possession intended to be enjoyed by the “licensees.”’
I agree with this analysis.
In Hadjiloucas v Crean [1987] 3 All ER 1008, [1988] 1 WLR 1006 two single ladies applied to take a two-roomed flat with kitchen and bathroom. Each signed an agreement to pay £260 per month to share the use of the flat with one other person. The two ladies moved into the flat and enjoyed exclusive occupation. In terms, if the agreement of one lady was terminated, the owner could require the other to share the flat with a stranger. The county court judge decided that the agreements only created licences. The Court of Appeal ordered a retrial in order that all the facts might be investigated. Since, however, the two ladies applied for and enjoyed exclusive occupation unless and until one of their
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agreements was terminated, the ladies acquired a tenancy protected by the Rent Acts. The reservation to the owner of the right at common law to require one of the ladies to share the flat with a stranger was a pretence.
My Lords, in each of the cases which were disapproved by this House in Street v Mountford, and in the second appeal now under consideration, there was, in my opinion, the grant of a joint tenancy for the following reasons. (1) The applicants for the flat applied to rent the flat jointly and to enjoy exclusive occupation. (2) The landlord allowed the applicants jointly to enjoy exclusive occupation and accepted rent. A tenancy was created. (3) The power reserved to the landlord to deprive the applicants of exclusive occupation was inconsistent with the provisions of the Rent Acts. (4) Moreover, in all the circumstances the power which the landlord insisted on to deprive the applicants of exclusive occupation was a pretence only intended to deprive the applicants of the protection of the Rent Acts.
The Court of Appeal (Bingham and Mann LJJ) ([1988] 2 All ER 309, [1988] 3 WLR 139) decided in the second appeal under consideration that Mr Villiers and Miss Bridger were licensees. I would restore the order of his Honour Judge Macnair, who declared that Mr Villiers and Miss Bridger were tenants protected by the Rent Acts.
LORD ACKNER. My Lords, each of these appeals raises essentially the same question: what was the substance and reality of the transaction entered into by the parties?
In the first appeal, each of the respondents commenced his occupation of the flat on different dates, each of their agreements covered different periods and each agreement provided for different payments for that occupation. In such circumstances there could not have been a grant of a joint tenancy to all four respondents. At no stage in the litigation was it suggested that the particular facts justified the conclusion that each respondent had, by virtue of his agreement, exclusive possession and therefore a tenancy of the room which he in fact occupied, together with the right to share the rest of the accommodation in the flat with the other occupants, thereby achieving the protection provided by s 22 of the Rent Act 1977.
Thus, by the simple process of elimination, it is apparent that the substance and reality of the transaction was that each respondent achieved by virtue of his agreement no more than a licence to share the flat and he must therefore give up possession following the lawful termination of that licence.
In the second appeal it is clear, when reality is brought to bear, that the agreements relied on by the respondent created a tenancy of the flat, although he sought vigorously to disguise them as mere licences to occupy the flat.
Accordingly, for the reasons given by my noble and learned friends Lord Templeman and Lord Oliver, I would allow both these appeals.
LORD OLIVER OF AYLMERTON. My Lords, since lettings of residential property of an appropriate rateable value attract the consequences of controlled rent and security of tenure provided by the Rent Acts, it is not, perhaps, altogether surprising that those who derive their income from residential property are constantly seeking to attain the not always reconcilable objectives, on the one hand, of keeping their property gainfully occupied and, on the other, of framing their contractual arrangements with the occupants in such a way as to avoid, if they can, the application of the Acts. Since it is only a letting which attracts the operation of the Acts, such endeavours normally take the form of entering into contractual arrangements designed, on their face, to ensure that no estate is created in the occupant for the time being and that his occupation of the land derives merely from a personal and revocable permission granted by way of licence. The critical question, however, in every case is not simply how the arrangement is presented to the outside world in the relevant documentation, but what is the true nature of the arrangement. The decision of this House in Street v Mountford [1985] 2 All ER 289, [1985] AC 809 established quite clearly that if the true legal effect of the arrangement
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entered into is that the occupier of residential property has exclusive possession of the property for an ascertainable period in return for periodical money payments a tenancy is created, whatever the label the parties may have chosen to attach to it. Where, as in that case, the circumstances show that the occupant is the only occupier realistically contemplated and the premises are inherently suitable only for single occupation, there is, generally, very little difficulty. Such an occupier normally has exclusive possession, as indeed she did in Street v Mountford, where such possession was conceded, unless the owner retains control and unrestricted access for the purpose of providing attendance and services. As Lord Templeman observed in that case, the occupier in those circumstances is either a lodger or a tenant. Where, however, the premises are such as, by their nature, to lend themselves to multiple occupation and they are in fact occupied in common by a number of persons under different individual agreements with the owner, more difficult problems arise. These two appeals, at different ends of the scale, are illustrations of such problems.
The relevant facts have been fully set out in the speech of my noble and learned friend Lord Templeman, which I have had the advantage of reading in draft, and I reiterate them only to the extent necessary to emphasise the points which appear to me to be of critical importance.
Antoniades v Villiers and anor
The appellants in this appeal are a young couple who at all material times were living together as man and wife. In about November 1984 they learnt from a letting agency that a flat was available in a house at 6 Whiteley Road, London SE19, owned by the respondent, Mr Antoniades. They inspected the flat together and were told that the rent would be £174 per month. They were given the choice of having the bedroom furnished with a double bed or two single beds and they chose a double bed. So, right from the inception, there was never any question but that the appellants were seeking to establish a joint home and they have, at all material times, been the sole occupants of the flat.
There is equally no question but that the premises are not suitable for occupation by more than one couple, save on a very temporary basis. The small living room contains a sofa capable of being converted into a double bed and also a bed-table capable of being opened out to form a narrow single bed. The appellants did in fact have a friend to stay with them for a time in what the trial judge found to be cramped conditions, but the size of the accommodation and the facilities available clearly do not make the flat suitable for multiple occupation. When it came to drawing up the contractual arrangements under which the appellants were to be let into possession, each was asked to and did sign a separate licence agreement in the terms set out in the speech of my noble and learned friend under which each assumed an individual, but not a joint, responsibility for payment of one-half of the sum of £174 previously quoted as the rent.
There is an air of total unreality about these documents read as separate and individual licences in the light of the circumstance that the appellants were together seeking a flat as a quasi-matrimonial home. A separate licensee does not realistically assume responsibility for all repairs and all outgoings. Nor in the circumstances can any realistic significance be given to cll 16 and 17 of the document. It cannot realistically have been contemplated that the respondent would either himself use or occupy any part of the flat or put some other person in to share accommodation specifically adapted for the occupation by a couple living together. These clauses cannot be considered as seriously intended to have any practical operation or to serve any purpose apart from the purely technical one of seeking to avoid the ordinary legal consequences attendant on letting the appellants into possession at a monthly rent. The unreality is enhanced by the reservation of the right of eviction without court order, which cannot seriously have been thought to be effective, and by the accompanying agreement not to get married, which can only have been designed to prevent a situation arising in which it would be quite impossible to argue that the ‘licensees’ were enjoying separate rights of occupation.
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The conclusion seems to me irresistible that these two so-called licences, executed contemporaneously and entered into in the circumstances already outlined, have to be read together as constituting in reality one single transaction under which the appellants became joint occupiers. That of course does not conclude the case because the question still remains: what is the effect?
The document is clearly based on the form of document which was upheld by the Court of Appeal as an effective licence in Somma v Hazlehurst [1978] 2 All ER 1011, [1978] 1 WLR 1014. That case, which rested on what was said to be the impossibility of the two licensees having between them exclusive possession, was overruled in Street v Mountford [1985] 2 All ER 289, [1985] AC 809. It was, however, a case which related to a single room and it is suggested that a similar agreement relating to premises containing space which could, albeit uncomfortably, accommodate another person is not necessarily governed by the same principle. On the other hand, in this case the trial judge found that apart from the few visits by the respondent (who, on all but one occasion, sought admission by knocking on the door) no one shared with the appellants and that they had exclusive possession. He held that the licences were ‘artificial transactions designed to evade the Rent Acts’, that a tenancy was created and that the appellants occupied as joint tenants.
His decision was reversed by the Court of Appeal on, broadly, the grounds that he had erred in treating the subsequent conduct of the parties as admissible as an aid to construction of the agreements and that, in so far as the holding above referred to constituted a finding that the licences were a sham, that was unsupported by the evidence inasmuch as the appellants’ intention that they should enjoy exclusive possession was not shared by the respondent (see [1988] 2 All ER 309, [1988] 3 WLR 139). The licences could not, therefore, be said to mask the real intention of the parties and fell to be construed by reference to what they said in terms.
If the documents fall to be taken seriously at their face value and to be construed according to their terms, I see, for my part, no escape from the conclusion at which the Court of Appeal arrived. If it is once accepted that the respondent enjoyed the right, whether he exercised it or not, to share the accommodation with the appellants, either himself or by introducing one or more other persons to use the flat with them, it is, as it seems to me, incontestable that the appellants cannot claim to have had exclusive possession. The appellants’ case therefore rests, as counsel for the appellants frankly admits, on upholding the judge’s approach that the true transaction contemplated was that the appellants should jointly enjoy exclusive possession and that the licences were mere sham or window-dressing to indicate legal incidents which were never seriously intended in fact, but which would be inconsistent with the application to that transaction of the Rent Acts. Now to begin with, I do not, for my part, read the notes of the judge’s judgment as showing that he construed the agreement in the light of what the parties subsequently did. I agree entirely with the Court of Appeal that if he did that he was in error. But, though subsequent conduct is irrelevant as an aid to construction, it is certainly admissible as evidence on the question of whether the documents were or were not genuine documents giving effect to the parties’ true intentions. Broadly what is said by counsel for the appellants is that nobody acquainted with the circumstances in which the parties had come together and with the physical layout and size of the premises could seriously have imagined that the clauses in the licence which, on the face of them, contemplate the respondent and an apparently limitless number of other persons moving in to share the whole of the available accommodation, including the bedroom, with what, to all intents and purposes, was a married couple committed to paying £174 a month in advance, were anything other than a smoke-screen; and the fact the respondent, who might be assumed to want to make the maximum profit out of the premises, never sought to introduce anyone else is at least some indication that that is exactly what it was. Adopting the definition of a sham formulated by Purchas LJ in Hadjiloucas v Crean [1987] 3 All ER 1008 at 1014, [1988] 1 WLR 1006 at 1013, counsel for the appellants submits
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that the licences clearly incorporate clauses by which neither party intended to be bound and which were obviously a smoke-screen to cover the real intentions of both contracting parties. In the Court of Appeal Bingham LJ tested the matter by asking two questions, viz ([1987] 3 All ER 1008 at 317, [1988] 3 WLR 139 at 149): (1) on what grounds, if one party had left the premises, could the remaining party have been made liable for anything more than the £87 which he or she had agreed to pay? and (2) on what ground could they have resisted a demand by the respondent to introduce a further person into the premises? For my part, however, I do not see how this helps. The assumed negative answers prove nothing, for they rest on the assumption that the licences are not sham documents, which is the very question in issue.
If the real transaction was, as the judge found, one under which the appellants became joint tenants with exclusive possession, on the footing that the two agreements are to be construed together, then it would follow that they were together jointly and severally responsible for the whole rent. It would equally follow that they could effectively exclude the respondent and his nominees.
Although the facts are not precisely on all fours with Somma v Hazlehurst [1978] 2 All ER 1011, [1978] 1 WLR 1014, they are strikingly similar and the judge was, in my judgment, entitled to conclude that the appellants had exclusive possession of the premises. I read his finding that ‘the licences are artificial transactions designed to evade the Rent Acts’ as a finding that they were sham documents designed to conceal the true nature of the transaction. There was, in my judgment, material on which he could properly reach this conclusion and I, too, would allow the appeal.
AG Securities v Vaughan and ors
The facts in this appeal are startlingly different from those in the Antoniades case. To begin with the appeal concerns a substantial flat in a mansion block consisting of four bedrooms, a sitting room and usual offices. The trial judge found, as a fact, that the premises could without difficulty provide residential accommodation for four persons. There is no question but that the agreements with which the appeal is concerned reflect the true bargain between the parties. It is the purpose and intention of both parties to each agreement that it should confer an individual right on the licensee named that he should be liable only for the payment which he had undertaken and that his agreement should be capable of termination without reference to the agreements with other persons occupying the flat. The judge found that the agreements were not shams and that each of the four occupants had arrived independently of one another and not as a group. His finding was that there was never a group of persons coming to the flat altogether. That has been challenged because, it is said, the evidence established that initially in 1977 and 1978 there was one occupant who was joined by three others who, although they came independently and not as a trio, moved in at about the same. Central heating was then installed, so that the weekly payments fell to be increased and new agreements were signed by the four occupants contemporaneously. Speaking for myself, I cannot see how this can make any difference to the terms on which the individuals were in occupation. If they were in as licensees in the first instance, the mere replacement of their agreements by new agreements in similar form cannot convert them into tenants, and the case has, in my judgment, to be approached on the footing that agreements with the occupiers were entered into separately and individually. The only questions are those of the effect of each agreement vis-à-vis the individual licensee and whether the agreements collectively had the effect of creating a joint tenancy among the occupants of the premises for the time being by virtue of their having between them exclusive possession of the premises.
Taking first, by way of example, the position of the first occupier to be let into the premises on the terms of one of these agreements, it is, in my judgment, quite unarguable, once any question of sham is out of the way, that he has an estate in the premises which entitles him to exclusive possession. His right, which is, by definition, a
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right to share use and occupation with such other persons not exceeding three in number as the licensor shall introduce from time to time, is clearly inconsistent with any exclusive possession in him alone even though he may be the only person in physical occupation at a particular time. He has no legal title which will permit him to exclude other persons to whom the licensor may choose to grant the privilege of entry. That must equally apply to the additional licensees who join him. None of them has individually nor have they collectively the right or power lawfully to exclude a further nominee of the licensor within the prescribed maximum.
I pause to note that it has never been contended that any individual occupier has a tenancy of a particular room in the flat with a right to use the remainder of the flat in common with the tenants of other rooms. I can envisage that as a possibility in cases of arrangements of this kind if the facts support the marking out with the landlord’s concurrence of a particular room as the exclusive domain of a particular individual. But to support that there would, I think, have to be proved the grant of an identifiable part of the flat and that simply does not fit with the system described in the evidence of the instant case.
The real question, and it is this on which the respondents rely, is what is the position when the flat is occupied concurrently by all four licensees? What is said then is that, since the licensor has now exhausted, for the time being, his right of nomination, the four occupants collectively have exclusive possession of the premises because they can collectively exclude the licensor himself. Because, it is argued, (1) they have thus exclusive possession and (2) there is an ascertainable term during which all have the right to use and occupy and (3) they are occupying in consideration of the payment of periodic sums of money, Street v Mountford [1985] 2 All ER 289, [1985] AC 809 shows that they are collectively tenants of the premises. They are not lodgers. Therefore they must be tenants. And, because each is not individually a tenant, they must together be joint tenants.
My Lords, there appear to me to be a number of fallacies here. In the first place, the assertion of an exclusive possession rests, as it seems to me, on assuming what it is sought to prove. If, of course, each licence agreement creates a tenancy, each tenant will be sharing with other persons whose rights to be there rest on their own estates which, once they have been granted, they enjoy in their own right independently of the landlord. Collectively they have the right to exclude everyone other than those who have concurrent estates. But if the licence agreement is what it purports to be, that is to say merely an agreement for permissive enjoyment as the invitee of the landlord, then each shares the use of the premises with other invitees of the same landlord. The landlord is not excluded for he continues to enjoy the premises through his invitees, even though he may for the time being have precluded himself by contract with each from withdrawing the invitation. Second, the fact that under each agreement an individual has the privilege of user and occupation for a term which overlaps the term of user and occupation of other persons in the premises does not create a single indivisible term of occupation for all four consisting of an amalgam of the individual overlapping periods. Third, there is no single sum of money payable in respect of use and occupation. Each person is individually liable for the amount which he has agreed, which may differ in practice from the amounts paid by all or some of the others.
The respondents are compelled to support their claims by a strange and unnatural theory that, as each occupant terminates his agreement, there is an implied surrender by the other three and an implied grant of a new joint tenancy to them together with the new incumbent when he enters under his individual agreement. With great respect to the majority in the Court of Appeal, this appears to me to be entirely unreal. For my part, I agree with the dissenting judgment of Sir George Waller in finding no unity of interest, no unity of title, certainly no unity of time and, as I think, no unity of possession. I find it impossible to say that the agreements entered into with the respondents created either individually or collectively a single tenancy either of the entire flat or of any part of it. I agree that the appeal should be allowed.
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LORD JAUNCEY OF TULLICHETTLE. My Lords, these two appeals which arise out of very different circumstances raise the question of whether arrangements permitting a plurality of persons to occupy furnished accommodation for a financial consideration constitute leases to which the Rent Acts would apply or licences to which they would not. The facts have been fully set out in the speech of my noble and learned friend Lord Templeman and it is therefore unnecessary for me to rehearse them in any detail.
AG Securities v Vaughan and ors
At the date of the commencement of the proceedings on 27 June 1985 each of the four respondents were in occupation of the flat by virtue of separate agreements dated as to one in 1982, two in 1984 and one in 1985. Each agreement stipulated a different monthly payment and a different starting date. In other respects the agreements were in identical terms. It is accepted that these agreements were perfectly genuine and were not intended in any way to cloak the intentions of the parties. The Court of Appeal (Fox and Mustill LJJ, Sir George Waller dissenting) ([1988] 2 All ER 173, [1988] 2 WLR 689) concluded that there was a joint tenancy created by a single implied agreement for the grant of exclusive possession to the respondents when the fourth respondent’s agreement was signed. The Court of Appeal further concluded that in the event of one of the four occupants leaving the flat and being replaced by another who had entered into a similar agreement a new joint tenancy would arise by implied surrender and regrant.
During the course of argument a good deal was said about the recent decision in this House of Street v Mountford [1985] 2 All ER 289, [1985] AC 809. In that case it was, to quote the words of Lord Templeman ([1985] 2 All ER 289 at 297, [1985] AC 809 at 823), ‘clear that exclusive possession was granted and so much is [sic] conceded’. In the present case exclusive possession is the primary issue since without it there can be no joint tenancy. Street v Mountford establishes the legal consequences which may, in given circumstances, flow from an arrangement whereby the occupier of residential property has exclusive possession thereof, but it does not directly assist in determining whether or not he has such exclusive possession.
My Lords, the flat had four bedrooms and each agreement contemplated that up to four persons could share the flat at any one time. It would look very much as if the parties intended that each occupier would have his or her own bedroom and would share communal facilities with the others, and this is what happened in practice. However, this case is not concerned with whether each occupier had exclusive possession and hence a tenancy of a bedroom but with whether the four respondents together had exclusive possession and hence the joint tenancy of the flat as a whole.
When the first occupant alone is in the flat he may have de facto possession thereof but that possession is certainly not exclusive since he is bound in terms of cl 2(3) to share the flat with up to three other persons licensed by the owner. It is not without significance that there is no obligation on the owner to grant licences to other persons in terms identical to those contained in the first agreement. Thus the owner could allow a friend or relation to occupy the flat without payment or he could permit one of the occupants to keep a dog or a cat notwithstanding the prohibitions in cl 2(7) in the first agreement. Similarly, there is no exclusive possession in anyone when the second and third occupants move in. The conclusion that when the fourth occupant moves in a single agreement is implied to create a joint tenancy is somewhat startling when it is remembered that the individual occupants are not said to be connected in any way or to be in occupation as a result of any preconceived arrangement inter se. When the consequences of this conclusion are examined in detail I am, with all respect to the Court of Appeal, driven to the view that it is unsound.
Normal attributes of a lease to joint tenants include a demise for a specific period with exclusive possession at a single rent for payment of which each joint tenant is liable to the lessor in full subject to relief from his co-tenants. No one tenant can terminate the lease during its currency but, where the stipulated period has expired and the joint tenants hold over, due notice by one will terminate the lease, since the continuance of
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the springing interest requires the consent of all parties to the lease. There is, to say the least, a substantial interlocking of interests of the joint tenants. In the present case, as I have already remarked, each respondent arrived independently in the flat and there is nothing in any agreement to suggest that the right of one respondent to share the flat could be determined by anyone other than the owner or himself. Indeed, I have no doubt that each of the four respondents would have been horrified if he or she had thought that his or her right to remain in the flat after the expiry of the initial six-month period could be determined by the independent action of a fellow-occupant.
My Lords, if the arrival of a fourth occupant converted three persons occupying under licence agreements into joint tenants under a single implied agreement one must ask what is the rent payable and the duration of the lease. Each of the four respondents was paying a different monthly sum under their respective agreements and when the fourth respondent arrived the first, second and third respondents were occupying on a monthly basis, their initial six-month period having expired, whereas he was entitled to occupy for an initial period of six months. It has not been suggested that it would be possible to have a joint tenancy with different terms for each tenant. In these circumstances what would be the term for the implied joint tenancy resulting from the arrival of the fourth respondent? Would it be six months, thereby conferring on the first, second and third respondents rights which they did not possess under their own agreements or would it be simply one month thereby depriving the fourth respondent of rights which he demonstrably had under his own agreement?
I pose this question merely to demonstrate the problems created by the theory of a single implied agreement consequent on the arrival of a fourth occupant. The matter however does not end there because it follows that if there is no joint tenancy until the arrival of the fourth respondent there ceases to be a joint tenancy as soon as one occupant leaves unless there is a simultaneous insertion of a substitute in his place. If there is a gap in time between the departure of one occupant and the arrival of another the remaining respondents revert to the status of licensees. Thus the nature of the rights of three out of four of the occupants of this flat would depend not on the terms of their agreement with the owner but on whether or not at any one time there happened to be a fourth occupant in the flat.
The concept of surrender and regrant in leases and as it operated prior to 1707 in relation to resignations in favorem of Scots peerages involved the grantee surrendering his existing rights in exchange for new or altered rights. The implied surrender and regrant in this case would arise not because of any act on the part of the surrendering grantee but solely because of the chance advent of a stranger. I am not persuaded that this is a situation in which it would be appropriate to make such an implication.
I should be surprised indeed if a joint lease could be created by four separate documents of different dates in favour of four independent persons each paying a different rent and also for different periods of six months. Such an arrangement would, as Sir George Waller pointed out be notably deficient in the four unities of interest, title, time and possession (see [1988] 2 All ER 173 at 184, [1988] 2 WLR 689 at 703). My Lords, I have no doubt whatever that the appellants and the respondents intended that each respondent should have, under his or her agreement, certain rights of occupation in the flat and that such rights should be entirely independent of those of every other respondent. I have also no doubt that the parties have achieved this result and that the appellants are well founded in maintaining that there were four licence agreements relative to shared occupation of the flat which did not in aggregate confer exclusive possession thereof on the four respondents. It follows that there was no joint tenancy thereof.
I would therefore allow the appeal.
Antoniades v Villiers and anor
In this appeal the appellants entered into occupation together on the same day with the intention, which was known to the respondent, of living together as man and wife.
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The appellants were only interested in occupying the flat together. The respondent made clear to them that he was not prepared to grant a lease which would be subject to the Rent Acts but would only grant individual licences. The appellants then signed separate agreements in identical terms in which they each undertook, inter alia, to pay one-half of the financial consideration required by the respondent. Two issues arise in this appeal, namely (1) whether the two agreements fall to be read together and constitute a single agreement between the respondent on the one hand and the two appellants on the other and (2) if so, what effect is to be given to the joint agreement having regard to its substance and reality.
My Lords, I do not doubt that the two agreements must be read together. The initial approach to the respondent was made by the first appellant, who indicated that he wanted the flat for himself and the second appellant. The two appellants visited the flat together with their references and at the request of the first appellant the respondent provided a double bed. There is no suggestion that the appellants asked to sign separate agreements and they only did so because of the anxiety of the respondent to avoid granting a lease. As I have already remarked, the agreements were in identical terms and it would in all the circumstances be quite unrealistic to treat them other than as a single agreement in favour of the two appellants.
What effect is then to be given to the agreements? If they are construed solely by reference to their terms and without regard to surrounding circumstances the conclusion must be that there was no intention to confer exclusive possession of the flat on the two appellants. The narrative in the preamble so states and cl 16 is unambiguous in its terms. However, it would not be right to look at the agreements without regard to the circumstances which existed at the time when they were entered into. Furthermore, the appellants maintain that so far as they purport not to confer exclusive possession on them they are a sham. Accordingly, although the subsequent actings of the parties may not be prayed in aid for the purposes of construing the agreements they may be looked at for the purposes of determining whether or not parts of the agreements are a sham in the sense that they were intended merely as ‘dressing up’ and not as provisions to which any effect would be given.
The agreements were clearly drawn up with the decision of the Court of Appeal in Somma v Hazlehurst [1978] 2 All ER 1011, [1978] 1 WLR 1014 in mind. The agreements in that case were very similar to those in this appeal but they related to a bed-sitting room containing two beds rather than to a flat. The Court of Appeal held that the young couple were only licensees of the bed-sitting room but the decision was disapproved by this House in Street v Mountford [1985] 2 All ER 289 at 299, [1985] AC 809 at 825 wherein Lord Templeman concluded that the obligation on the couple ‘to share the room in common with such other persons as the landlord might from time to time nominate’ was a sham and that they were entitled jointly to exclusive possession of the room and were thus joint tenants.
The attic flat with which this appeal is concerned consists of a bedroom containing a double bed and other furniture, a sitting room containing, inter alia, a settee-bed, a table-bed and a chair, a kitchen, a bathroom and a hall. It was thus possible for someone else to sleep in the flat, and, indeed, for some five or six weeks a friend of the appellants’ stayed there after permission had been obtained from the respondent. When the agreements are looked at in detail the operation of certain clauses produces bizarre results. Clause 2 imposes on the licensee responsibilities for payment of all gas and electricity consumed in the flat as well as in the entrance hall, staircase and vestibule of the building. Joint responsibility by each of the two licensees for power consumed in the flat would be an entirely reasonable arrangement so long as they alone were using the power but would become curious, to say the least, if others nominated by the licensor were sharing the flat and consuming power. The responsibility for power consumed by others in the hall, staircase and vestibule is of the latter character. Obligations in cll 4, 5, 6 and 7 anent the condition of the flat and the contents are again reasonable only so long as the two licensees
Page 1078 of [1988] 3 All ER 1058
are occupying the flat alone. Is it conceivable that the appellants assumed these obligations in the knowledge that the extent of their liability to the licensor might be measured not by their own actions but by the actions of others nominated to share the flat over whom they had no control? To answer this question it is necessary to consider cl 16, which is critical to the appeal.
If the clause is read literally the licensor could permit any number of persons to share the flat with the two appellants, even to the extent of sharing the joys of the double bed. The respondent, Mr Antoniades, in his powerful address to your Lordships, argued that the sole purpose of the clause was to enable him to use the flat if some disaster befell his own house and he had no roof over his head. Had the clause so specifically stated, different considerations might have applied. Unfortunately the clause is quite unlimited in its terms and purports to entitle the licensor to pack the flat with as many people as could find some sleeping space therein. The judge found as a fact that when the appellants’ friend slept in the bed-settee the conditions in the flat were cramped. This can also be inferred from the plan which was made available to your Lordships and from which it appears that it would be quite unrealistic for anyone to sleep in the flat elsewhere than in the double bed in the bedroom and in either the table-bed or bed-settee in the small sitting room. In the latter event there would be little remaining room in the sitting room when the bed was up. This situation certainly does not suggest that the parties ever contemplated that other persons would be nominated to share the flat. When subsequent events are looked at the matter becomes even clearer. Although the respondent granted permission to the appellants to have the friend to stay for some weeks he made no charge therefor and during the 17 months which elapsed between the appellants’ entry to the flat and service on them of notice to quit the respondent made no attempt to occupy the flat himself or through anyone nominated by him. In all these circumstances I am driven to the conclusion that the parties never intended that cl 16 should operate and that it was mere dressing up in an endeavour to clothe the agreement with a legal character which it would not otherwise have possessed. It follows that it should be treated pro non scripto.
If cl 16 is ignored and regard is had to the circumstances in which the appellants came to occupy the flat in the first place and to the size of the flat, cll 2, 4, 5, 6 and 7 all indicate an intention that the two licensees should have exclusive possession of the flat and this indication is confirmed by the remainder of the agreement notwithstanding the protestations of lack of exclusivity of possession in the narrative in the preamble. In my view the substance and reality of these agreements was to confer on the appellants exclusive possession of the flat for a term in consideration of periodical payments. Street v Mountford [1985] 2 All ER 289, [1985] AC 809 establishes that in such a situation a tenancy is created. I would therefore allow the appeal.
Appeals allowed
Solicitors: Landy Laufer (for the appellants in the first appeal); Bindman & Partners (for the respondents in the first appeal); A L Hughes & Co (for the appellants in the second appeal).
Mary Rose Plummer Barrister.
Janaway v Salford Health Authority
[1988] 3 All ER 1079
Categories: PROFESSIONS; Medical
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD GRIFFITHS, LORD GOFF OF CHIEVELEY AND LORD LOWRY
Hearing Date(s): 10, 11, 12 OCTOBER, 1 DECEMBER 1988
Abortion – Participation in treatment – Conscientious objection – Letter of referral for abortion – Refusal of doctor’s secretary to type letter of referral – Whether secretary being required to ‘participate in any treatment’ for abortion – Whether secretary under duty to type letter of referral – Whether secretary entitled to object to typing letter of referral – Abortion Act 1967, s 4(1).
The applicant was employed by a local health authority as a doctor’s receptionist and secretary. She refused to type a letter of referral for an abortion on conscientious grounds and was dismissed by the authority. The applicant sought judicial review by way of an order of certiorari to quash the authority’s decision and a declaration that, because of her conscientious objection to typing correspondence of the kind in question, she was not under any duty to carry out such work. She contended that she was entitled to refuse to type such correspondence by virtue of s 4(1)a of the Abortion Act 1967, which provided that a person was under no duty to ‘participate in any treatment authorised by [the 1967] Act’ to which he had a conscientious objection. The judge dismissed her application and on appeal the Court of Appeal affirmed his decision. The applicant appealed to the House of Lords.
Held – On its ordinary and natural meaning the word ‘participate’ in s 4(1) of the 1967 Act referred to actually taking part in treatment administered in a hospital or other approved place for the purpose of terminating a pregnancy and did not cover any arrangements preliminary to, and intended to bring about medical or surgical measures aimed at, terminating a pregnancy, such as typing letters of referral. Accordingly, the applicant was not justified in objecting on conscientious grounds to typing letters of referral for an abortion and her appeal would therefore be dismissed (see p 1082 b to e and p 1083 g to j, post).
Notes
For medical termination of pregnancy, see 30 Halsbury’s Laws (4th edn) para 44.
For the Abortion Act 1967, s 4, see 12 Halsbury’s Statutes (4th edn) 418.
Cases referred to in opinions
R v Bourne [1938] 3 All ER 615, [1939] 1 KB 687, CCC.
Royal College of Nursing of the UK v Dept of Health and Social Security [1981] 1 All ER 545, [1981] AC 800, [1981] 2 WLR 279, HL.
Appeal
The applicant, Barbara Janaway, appealed with leave of the Court of Appeal against the decision of that court (Slade, Balcombe and Stocker LJJ) ([1988] 2 WLR 442) on 18 December 1987 dismissing her appeal against the judgment and order of Nolan J dated 12 February 1987 whereby he dismissed her applications (1) for judicial review by way of an order of certiorari to quash the decision of the respondent, Salford Health Authority, of 6 February 1985 ratifying the decision of an appeal tribunal of the authority of 17 January 1985 that she had been properly dismissed from her employment with the authority for misconduct and (2) for a declaration that (a) in all the circumstances of the
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case, the typing of correspondence concerned with the termination of pregnancies constituted participation in treatment authorised by the Abortion Act 1967, (b) by reason of her conscientious objection to typing such correspondence she was not under any duty whether by contract or by any statutory or other legal requirement to carry out the work and (c) her refusal to carry out the work was justified within the meaning of the discipline rules of the authority. The facts are set out in the opinion of Lord Keith.
Gerard Wright QC and Patrick Field for the applicant.
J J Rowe QC and Geoffrey Tattersall for the authority.
Their Lordships took time for consideration.
1 December 1988. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, the appellant, Mrs Janaway (the applicant), took up employment with the respondent health authority on 25 June 1984. She was engaged as a secretary/receptionist at Irlam Health Centre, working for a Dr Barooah. On 11 September 1984 she was asked by Dr Barooah to type a letter which had to do with referring a pregnant patient for an appointment with a consultant with a view to the latter forming an opinion as to whether the pregnancy should be terminated under the Abortion Act 1967. The applicant, a Roman Catholic holding the belief that abortion is morally wrong, refused to type the letter, which was eventually written by hand by another doctor at the health centre. On 31 October 1984 the applicant was interviewed by a personnel officer from the authority and told him that she felt entitled to refuse to type the letter, and any others concerned with termination of pregnancy, by virtue of the conscientious objection provision contained in s 4(1) of the 1967 Act, to which I shall refer later. On 7 November 1984 the personnel officer wrote to the applicant stating that her refusal to type correspondence of the kind in question amounted to a breach of the authority’s disciplinary rules as being ‘unjustified refusal of a lawful and reasonable instruction’ and asking for a firm assurance that she would in future carry out any such instructions. The applicant sent in reply a letter dated 12 November 1984 which concluded:
‘… except insofar as I stand by the protection afforded by S 4(i) of the Abortion Act [1967] I confirm that I will continue, as I have done in the past, to carry out my contractual duties as detailed in my job description.’
On 27 November 1984 the applicant had a meeting, at which she reaffirmed her position, with the personnel officer and the community services administrator. On 30 November the latter wrote to her saying that legal advice had been obtained to the effect that s 4(1) of the 1967 Act did not apply to her refusal, and that her employment had been terminated from 27 November on grounds of misconduct. The applicant appealed against her dismissal to the authority’s appeal tribunal, but her appeal was dismissed, and the authority formally ratified the decision on 6 February 1985.
On 17 June the applicant applied, with leave, for judicial review in the shape of an order of certiorari to quash the authority’s decision of 6 February 1985 and a declaration that, by reason of her conscientious objection to typing correspondence of the kind in question, she was not under any duty to carry out such work.
The application was dismissed by Nolan J on 12 February 1985, and his decision was affirmed by the Court of Appeal (Slade, Balcombe and Stocker LJJ) ([1988] 2 WLR 442) on 18 December 1987. The applicant now appeals, with leave granted by the Court of Appeal, to your Lordships’ House.
The relevant provisions of the 1967 Act are these:
‘1.—(1) Subject to the provisions of this section, a person shall not be guilty of an
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offence under the law relating to abortion when a pregnancy is terminated by a registered medical practitioner if two registered medical practitioners are of the opinion, formed in good faith—(a) that the continuance of the pregnancy would involve risk to the life of the pregnant woman, or of injury to the physical or mental health of the pregnant woman or any existing children of her family, greater than if the pregnancy were terminated or; (b) that there is a substantial risk that if the child were born it would suffer from such physical or mental abnormalities as to be seriously handicapped …
(3) Except as provided by subsection (4) of this section, any treatment for the termination of pregnancy must be carried out in a hospital vested in the Secretary of State for the purposes of his functions under the National Health Service Act 1977 or the National Health Service (Scotland) Act 1978 or in a place approved for the purposes of this section by the Secretary of State.
(4) Subsection (3) of this section, and so much of subsection (1) as relates to the opinion of two registered medical practitioners, shall not apply to the termination of a pregnancy by a registered medical practitioner in a case where he is of the opinion, formed in good faith, that the termination is immediately necessary to save the life or to prevent grave permanent injury to the physical or mental health of the pregnant woman …
4.—(1) Subject to subsection (2) of this section, no person shall be under any duty, whether by contract or by any statutory or other legal requirement, to participate in any treatment authorised by this Act to which he has a conscientious objection: Provided that in any legal proceedings the burden of proof of conscientious objection shall rest on the person claiming to rely on it.
(2) Nothing in subsection (1) of this section shall affect any duty to participate in treatment which is necessary to save the life or to prevent grave permanent injury to the physical or mental health of a pregnant woman …
5.—(1) Nothing in this Act shall affect the provisions of the Infant Life (Preservation) Act 1929 (protecting the life of the viable foetus).
(2) For the purposes of the law relating to abortion, anything done with intent to procure the miscarriage of a woman is unlawfully done unless authorised by section 1 of this Act.
6. In this Act, the following expressions have meanings hereby assigned to them:—“the law relating to abortion” means sections 58 and 59 of the Offences against the Person Act 1861, and any rule of law relating to the procurement of abortion.’
The applicant claims the protection of s 4(1). The issue in the case turns on the true construction of the words in that subsection ‘participate in any treatment authorised by this Act’. For the applicant it is maintained that the words cover taking part in any arrangements preliminary to and intended to bring about medical or surgical measures aimed at terminating a pregnancy, including the typing of letters referring a patient to a consultant. The health authority argues that the meaning of the words is limited to taking part in the actual procedures undertaken at the hospital or other approved place with a view to the termination of a pregnancy.
The argument for the applicant proceeds on the lines that the acts attracting the protection afforded by s 4(1) are intended to be coextensive with those which are authorised by s 1(1) and which in the absence of that provision would be criminal. The criminal law about accessories treats one who aids and abets, counsels or procures a criminal act as liable to the same extent as a principal actor. In the absence of s 1(1) the applicant by typing a letter of referral would be counselling or procuring an abortion, or at least helping to do so, and subject to a possible defence on the principle of R v Bourne [1938] 3 All ER 615, [1939] 1 KB 687 would be criminally liable. Therefore any requirement to type such a letter is relieved, in the face of a conscientious objection, by s 4(1).
Page 1082 of [1988] 3 All ER 1079
The majority of the Court of Appeal (Slade and Stocker LJJ) accepted the main thrust of the applicant’s argument, to the effect that ss 1(1) and 4(1) are coextensive, but decided against her on the ground that her intention in typing a letter of referral would not be to assist in procuring an abortion but merely to carry out the obligations of her employment. In their view the typing of such a letter by the applicant would not be a criminal offence in the absence of s 1(1).
Nolan J, however, and Balcombe LJ in the Court of Appeal rejected the applicant’s main argument. They accepted the argument for the health authority that on a proper construction the word ‘participate’ in s 4(1) did not import the whole concept of principal and accessory residing in the criminal law, but in its ordinary and natural meaning referred to actually taking part in treatment administered in a hospital or other approved place in accordance with s 1(3), for the purpose of terminating a pregnancy.
In my opinion Nolan J and Balcombe LJ were right to reach the conclusion they did. I agree entirely with their view about the natural meaning of the word ‘participate’ in this context. Although the word is commonly used to describe the activities of accessories in the criminal law field, it is not a term of art there. It is in any event not being used in a criminal context in s 4(1). Ex hypothesi treatment for termination of a pregnancy under s 1 is not criminal. I do not consider that Parliament can reasonably have intended by its use to import all the technicalities of the criminal law about principal and accessory, which can on occasion raise very nice questions about whether someone is guilty as an accessory. Such niceties would be very difficult of solution for an ordinary health authority. If Parliament had intended the result contended for by the applicant, it could have procured it very clearly and easily by referring to participation ‘in anything authorised by this Act’ instead of ‘in any treatment [so] authorised’. It is to be observed that s 4 appears to represent something of a compromise in relation to conscientious objection. One who believes all abortion to be morally wrong would conscientiously object even to such treatment as is mentioned in sub-s (2), yet the subsection would not allow the objection to receive effect.
The applicant’s argument placed some reliance on a passage in the speech of Lord Roskill in Royal College of Nursing of the UK v Dept of Health and Social Security [1981] 1 All ER 545 at 577, [1981] AC 800 at 837–838:
‘My Lords, I read and reread the 1967 Act to see if I can discern in its provisions any consistent pattern in the use of the phrase “a pregnancy is terminated” or “termination of a pregnancy” on the one hand and “treatment for the termination of a pregnancy” on the other hand. One finds the former phrase in s 1(1) and (1)(a), the latter in s 1(3), the former in ss 1(4) and s 2(1)(b) and the latter in s 3(1)(a) and (c). Most important to my mind is s 4, which is the conscientious objection section. This section in two places refers to “participate in treatment” in the context of conscientious objection. If one construes s 4 in conjunction with s 1(1), as surely one should do in order to determine to what it is that conscientious objection is permitted, it seems to me that s 4 strongly supports the wider construction of s 1(1). It was suggested that acceptance of the department’s submission involved rewriting that subsection so as to add words which are not to be found in the language of the subsection. My Lords, with great respect to that submission, I do not agree. If one construes the words “when a pregnancy is terminated by a registered medical practitioner” in s 1(1) as embracing the case where the “treatment for the termination of a pregnancy is carried out under the control of a doctor in accordance with ordinary current medical practice” I think one is reading “termination of pregnancy” and “treatment for termination of pregnancy” as virtually synonymous and as I think Parliament must have intended they should be read. Such a construction avoids a number of anomalies as, for example, where there is no pregnancy or where the extra-amniotic process fails to achieve its objective within the normal limits of time set for its operation.’
Page 1083 of [1988] 3 All ER 1079
That case was concerned with a particular process of treatment for the termination of pregnancy carried out in hospital, important parts of which were performed not by a registered medical practitioner but by a nurse acting under his instructions. The issue was whether the actions of the nurse were unlawful, and it was held that they were not, on the ground that what was authorised by the Act was the whole medical process resulting in termination of pregnancy and that the process was carried out by a registered medical practitioner when that was done under his supervision and in accordance with his instructions, notwithstanding that certain parts of the process were carried out by others. The House was not concerned with the meaning of the word ‘participate’ in s 4(1) in relation to anything other than the actual medical process carried out in the hospital, and then only indirectly. So Lord Roskill’s words cannot be read as having any bearing on the decision of the present case.
A certain amount of argument was addressed to the Abortion Regulations 1968, SI 1968/390, which, inter alia, set out the form of certificate, known as ‘the green form’, to be signed by two registered medical practitioners in pursuance of s 1(1)(a) of the 1967 Act, and to the position in relation to s 4(1) of practitioners who might be required to sign such a certificate. The regulations do not appear to contemplate that the signing of the certificate would form part of treatment for the termination of pregnancy, since reg 3(2) provides:
‘Any certificate of an opinion referred to in section 1(1) of the Act shall be given before the commencement of the treatment for the termination of the pregnancy to which it relates.’
It does not appear whether or not there are any circumstances under which a doctor might be under any legal duty to sign a green form, so as to place in difficulties one who had a conscientious objection to doing so. The fact that during the 20 years that the 1967 Act has been in force no problem seems to have surfaced in this connection may indicate that in practice none exists. So I do not think it appropriate to express any opinion on the matter.
In view of the conclusion I have reached on the main plank of the applicant’s argument, it is unnecessary to deal with the limited ground on which the majority of the Court of Appeal decided against her. It should not, however, be taken that I would necessarily have agreed with them had the issue been a live one.
My Lords, for these reasons I would dismiss the appeal.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given by my noble and learned friend Lord Keith, I would dismiss the appeal.
LORD GRIFFITHS. My Lords, I have had the advantage of reading the speech by Lord Keith and, for the reasons he gives, I would dismiss this appeal.
LORD GOFF OF CHIEVELEY. My Lords, for the reasons given by my noble and learned friend Lord Keith, I would dismiss the appeal.
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Keith. I entirely agree with it and, for the reasons which he gives, I, too, would dismiss the appeal.
I would only add that, if I had once reached the stage of accepting to the same extent as the majority in the Court of Appeal the applicant’s argument (which was based on a
Page 1084 of [1988] 3 All ER 1079
fictitious assumption of criminality on the part of the referring doctor), I would then, in the light of the authorities, have had to think very carefully before rejecting the appeal.
Appeal dismissed.
Solicitors: Gamlens agents for Clifford Poole & Co, Manchester (for the applicant); Hempsons agents for Eric G Jones, Manchester (for the health authority).
Mary Rose Plummer Barrister.
Practice Direction
(judgments and orders: county court: enforcement in High Court)
[1988] 3 All ER 1084
PRACTICE DIRECTIONS
QUEEN’S BENCH DIVISION
14 November 1988.
County court – Judgment or order – Enforcement – Enforcement in High Court – Practice – County Courts Act 1984, s 106 – RSC App A, Forms 53, 54, 56, 57, 58 – CCR Ord 22, r 8(1).
The following Queen’s Bench Masters’ Practice Direction supersedes the directions of 1 August 1984 ([1984] 3 All ER 155, [1984] 1 WLR 1126) and 15 November 1984 ([1984] 3 All ER 1002, [1985] 1 WLR 110).
20A Enforcement in the High Court of county court judgments
The practice for the enforcement in the High Court of county court judgments or orders for sums in excess of £2,000 (or such other sum as may be specified pursuant to s 106(3) of the County Courts Act 1984) shall be as follows.
1. Attendance shall first be made at the alphabetical section of the Action Department (Judgments) appropriate to the plaintiff’s name. The applicant shall present to the judgment counter clerk a certificate of judgment of the county court sealed with the seal of that court, setting out details of the judgment or order to be enforced, together with a copy of the same. There is no fee payable on registration.
2. The judgment counter clerk will check that the certificate has been signed by the registrar (a rubber stamp is not sufficient) and dated and that the certificate complies with CCR Ord 22, r 8(1), namely that on its face it states that it is granted ‘for the purpose of enforcing the judgment [or order] in the High Court’.
3. Provided that paras 1 and 2 have been complied with, the counter clerk will: (a) allocate a reference number, letter (according to plaintiff’s name) and year and indorse that on the top right-hand corner of the certificate and copy; (b) date seal the certificate and the copy, return the original to the applicant and retain the copy for the court records; (c) enter the matter in a special register.
4. The certificate shall be treated for enforcement purposes as a High Court judgment and interest at the appropriate rate shall run from the date of the certificate.
5. The title of all subsequent documents shall be as follows:
IN THE HIGH COURT OF JUSTICE High Court No
QUEENS’S BENCH DIVISION County Court Plaint No
(Transferred from the County Court by
certificate dated the day of )
Between
AB Plaintiff
and
CD Defendant
6. Execution by writ of fieri facias (a) To the notes to Forms 53, 54, 56, 57 and 58 in RSC App A shall be added:
‘In an action transferred from the county court to the High Court for enforcement pursuant to s 106 of the County Courts Act 1984 interest at the appropriate rate will run from the date of the certificate of judgment.’
(b) When a writ of fieri facias is issued, the certificate of judgment retained by the applicant shall be date sealed by the counter clerk on the bottom left-hand corner and indorsed with the designation of the sheriff to whom the process is directed. Any application for a stay of execution shall be made by summons in the High Court returnable before a Queen’s Bench master.
7. District registries The above practice shall be followed in the district registries with such variations as circumstances may require.
L S Warren, Senior Master and Queen’s Remembrancer
Practice Direction
(Chancery 6/88)
(chambers: Chancery Division: variation of masters’ appointments)
[1988] 3 All ER 1085
PRACTICE DIRECTIONS
CHANCERY DIVISION
1 December 1988.
Practice – Chambers proceedings – Masters’ appointments – Adjournment – Vacation of appointment other than where application settled.
Because of the waste of time caused by the last minute vacation of masters’ appointments it has been decided that the adjournment of appointments listed for a time exceeding one hour will not normally be permitted, even by consent, unless an application to adjourn is made to the master concerned on a day not less than five clear working days prior to the appointment to be vacated.
The application should be made at 2.15 pm, the court file having been bespoken, and unless made on notice to all other parties their consents should be produced. A very strong case would have to be made out for any opposed application to succeed.
This direction only applies to adjournments, not to cases where appointments are vacated because the application has been settled.
By direction of the Vice-Chancellor.
R D Munrow Chief Master.
Practice Note
(jury: stand by: jury checks)
[1988] 3 All ER 1086
Categories: PRACTICE DIRECTIONS
Court:
Lord(s): Jury – Juror –Right to stand by jurors –Crown’s right to stand by jurors –Exercise of right –Guidelines on exercise of right following abolition of defendants’ right of peremptory challenge –Criminal Justice Act 1988, s 118.
Hearing Date(s): Jury –Juror –Jury vetting – Attorney General’s guidelines.
The Attorney General has issued the following guidelines on the exercise by the Crown in England and Wales of its right to stand by. The guidelines are to have effect from 5 January 1989 to coincide with the implementation of s 118 of the Criminal Justice Act 1988, which abolishes the right of peremptory challenge. The Attorney General has also reissued his guidelines on jury checks. These incorporate amendments made in 1986, together with a new amendment to para 9 whereby the Attorney General’s personal authority is required before the right to stand by can be exercised on the basis of information obtained as a result of an authorised check.
ATTORNEY GENERAL’S GUIDELINES ON THE EXERCISE BY THE CROWN OF ITS RIGHT OF STAND BY
1. Although the law has long recognised the right of the Crown to exclude a member of a jury panel from sitting as a juror by the exercise in open court of the right to request a stand by or, if necessary, by challenge for cause, it has been customary for those instructed to prosecute on behalf of the Crown to assert that right only sparingly and in exceptional circumstances. It is generally accepted that the prosecution should not use its right in order to influence the overall composition of a jury or with a view to tactical advantage.
2. The approach outlined above is founded on the principles that (a) the members of a jury should be selected at random from the panel subject to any rule of law as to right of challenge by the defence, and (b) the Juries Act 1974 together with the Juries (Disqualification) Act 1984 identified those classes of persons who alone are disqualified from or ineligible for service on a jury. No other class of person may be treated as disqualified or ineligible.
3. The enactment by Parliament of s 118 of the Criminal Justice Act 1988 abolishing the right of defendants to remove jurors by means of peremptory challenge makes it appropriate that the Crown should assert its right to stand by only on the basis of clearly defined and restrictive criteria. Derogation from the principle that members of a jury should be selected at random should be permitted oOnly where it is essential.
4. Primary responsibility for ensuring that an individual does not serve on a jury if he is not competent to discharge properly the duties of a juror rests with the appropriate court officer and, ultimately, the trial judge. Current legislation provides, in ss 9 and 10 of the Juries Act 1974, fairly wide discretions to excuse or discharge jurors either at the person’s own request, where he offers ‘good reason why he should be excused’, or where the judge determines that ‘on account of physical disability or insufficient understanding of English there is doubt as to his capacity to act effectively as a juror’.
5. The circumstances in which it would be proper for the Crown to exercise its right to stand by a member of a jury panel are: (a) where a jury check authorised in accordance with the Attorney General’s Guidelines on Jury Checks (see p 1087, post) reveals information justifying exercise of the right to stand by in accordance with para 9 of the guidelines and the Attorney General personally authorises the exercise of the right to stand by; or (b) where a person is about to be sworn as a juror who is manifestly unsuitable and the defence agree that, accordingly, the exercise by the prosecution of the right to stand by would be appropriate. An example of the sort of exceptional circumstances which might justify stand by is where it becomes apparent that, despite the provisions
Page 1087 of [1988] 3 All ER 1086
mentioned in para 4 above, a juror selected for service to try a complex case is in fact illiterate.
ATTORNEY GENERAL’S GUIDELINES ON JURY CHECKS
1. The principles which are generally to be observed are (a) that members of a jury should be selected at random from the panel, (b) the Juries Act 1974 together with the Juries (Disqualification) Act 1984 identified those classes of persons who alone are either disqualified from or ineligible for service on a jury; no other class of person may be treated as disqualified or ineligible, and (c) the correct way for the Crown to seek to exclude a member of the panel from sitting as a juror is by the exercise in open court of the right to request a stand by or, if necessary, to challenge for cause.
2. Parliament has provided safeguards against jurors who may be corrupt or biased. In addition to the provision for majority verdicts, there is the sanction of a criminal offence for a disqualified person to serve on a jury. The omission of a disqualified person from the panel is a matter for court officials but any search of criminal records for the purpose of ascertaining whether or not a jury panel includes any disqualified person is a matter for the police as the only authority able to carry out such a search and as part of their usual function of preventing the commission of offences. The recommendations of the Association of Chief Police Officers respecting checks on criminal records for disqualified persons are annexed to these guidelines.
3. There are, however, certain exceptional types of case of public importance for which the provisions as to majority verdicts and the disqualification of jurors may not be sufficient to ensure the proper administration of justice. In such cases it is in the interests of both justice and the public that there should be further safeguards against the possibility of bias and in such cases checks which go beyond the investigation of criminal records may be necessary.
4. These classes of case may be defined broadly as (a) cases in which national security is involved and part of the evidence is likely to be heard in camera, and (b) terrorist cases.
5. The particular aspects of these cases which may make it desirable to seek extra precautions are (a) in security cases a danger that a juror, either voluntarily or under pressure, may make an improper use of evidence which, because of its sensitivity, has been given in camera, (b) in both security and terrorist cases the danger that a juror’s political beliefs are so biased as to go beyond normally reflecting the broad spectrum of views and interests in the community to reflect the extreme views of sectarian interest or pressure group to a degree which might interfere with his fair assessment of the facts of the case or lead him to exert improper pressure on his fellow jurors.
6. In order to ascertain whether in exceptional circumstances of the above nature either of these factors might seriously influence a potential juror’s impartial performance of his duties or his respecting the secrecy of evidence given in camera, it may be necessary to conduct a limited investigation of the panel. In general, such further investigation beyond one of criminal records made for disqualifications may only be made with the records of police Special Branches. However, in cases falling under para (a) above (security cases), the investigation may, additionally, involve the security services. No checks other than on these sources and no general inquiries are to be made save to the limited extent that they may be needed to confirm the identity of a juror about whom the initial check has raised serious doubts.
7. No further investigation, as described in para 6 above, should be made save with the personal authority of the Attorney General on the application of the Director of Public Prosecutions and such checks are hereafter referred to as ‘authorised checks’. When a chief officer of police has reason to believe that it is likely that an authorised check may be desirable and proper in accordance with these guidelines he should refer the matter to the Director of Public Prosecutions with a view to his having the conduct of the prosecution from an early Stage. The Director will make any appropriate application to the Attorney General.
Page 1088 of [1988] 3 All ER 1086
8. The result of any authorised check will be sent to the Director of Public Prosecutions. The Director will then decide, having regard to the matters set out in para 5 above, what information ought to be brought to the attention of prosecuting counsel.
9. No right of stand by should be exercised by counsel for the Crown on the basis of information obtained as a result of an authorised check save with the personal authority of the Attorney General and unless the information is such as, having regard to the facts of the case and the offences charged, to afford strong reason for believing that a particular juror might be a security risk, be susceptible to improper approaches or be influenced in arriving at a verdict for the reasons given above.
10. Where a potential juror is asked to stand by for the Crown, there is no duty to disclose to the defence the information on which it was founded; but counsel may use his discretion to disclose it if its nature and source permit it.
11. When information revealed in the course of an authorised check is not such as to cause counsel for the Crown to ask for a juror to stand by but does give reason to believe that he may be biased against the accused, the defence should be given. at least, an indication of why that potential juror may be inimical to their interestes; but because of its nature and source it may not be possible to give the defence more than a general indication.
12. A record is to be kept by the Director of Public Prosecutions of the use made by counsel of the information passed to him and of the jurors stood by or challenged by the parties to the proceedings. A copy of this record is to be forwarded to the Attorney General for the sole purpose of enabling him to monitor the operation of these guidelines.
13. No use of the information obtained as a result of an authorised check is to be made except as may be necessary in direct relation to or arising out of the trial for which the check was authorised.
ANNEX TO THE ATTORNEY GENERAL’S GUIDELINES ON JURY CHECKS
RECOMMENDATIONS OF THE ASSOCIATION OF CHIEF POLICE OFFICERS
1. The Association of Chief Police Officers recommends that in the light of observations made in R v Manson [1980] 3 All ER 777, [1981] QB 881 the police should undertake a check of the names of potential jurors against records of previous convictions in any case when the Director of Public Prosecutions or a chief constable considers that in all the circumstances it would be in the interests of justice so to do, namely (i) in any case in which there is reason to believe that attempts are being made to circumvent the statutory provisions excluding disqualified persons from service on a jury, including any case when there is reason to believe that a particular juror may be disqualified, (ii) in any case in which it is believed that in a previous related abortive trial an attempt was made to interfere with a juror or jurors, and (iii) in any other case in which in the opinion of the Director of Public Prosecutions or the chief constable it is particularly important to ensure that no disqualified person serves on the jury.
2. The association also recommends that no further checks should be made unless authorised by the Attorney General under his guidelines and no inquiries carried out save to the limited extent that they may be needed to confirm the identity of a juror about whom the initial check has raised serious doubts.
3. The association further recommends that chief constables should agree to undertake checks of jurors on behalf of the defence only if requested to do so by the Director of Public Prosecutions acting on behalf of the Attorney General. Accordingly if the police are approached directly with such a request they will refer it to the Director.
4. When, as a result of any checks of criminal records, information is obtained which suggests that, although not disqualified under the terms of the Juries Act 1974, a person may be unsuitable to sit as a member of a particular jury the police or the Director may pass the relevant information to prosecuting counsel, who will decide what use to make of it.
1989
• Volume 1 • Volume 2 • Volume 3 •
Volume 1
Inglewood Investment Co Ltd v Forestry Commission
[1989] 1 All ER 1
Categories: ENVIRONMENTAL
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): DILLON, BUTLER-SLOSS AND STAUGHTON LJJ
Hearing Date(s): 18 OCTOBER 1988
Game – Shooting and sporting rights – Reservation of shooting and sporting rights – Appointment of land in 1921 reserving to appointors ‘hunting shooting fishing coursing and sporting rights’ over and on land in respect of ‘all game woodcocks snipe and other wild fowl hares rabbits and fish’ – Whether ‘game’ including deer – Whether taking of deer reserved to appointors.
By an indenture made in 1921 certain lands in Staffordshire comprising some 1,200 acres were appointed by the plaintiffs’ predecessors in title to the Forestry Commissioners for a term of 999 years subject to a reservation whereby the appointors reserved to themselves the exclusive right of ‘hunting shooting fishing coursing and sporting over and on’ the appointed land in respect of ‘all game woodcocks snipe and other wild fowl hares rabbits and fish’. When deer on the land started to cause damage to the trees the commissioners shot them to protect the trees. The plaintiffs sought a declaration that the commissioners were not entitled to hunt or shoot any deer on the land, contending that deer were ‘game’ and had been reserved under the indenture to the original appointors and their successors. The judge held that the reservation of game did not include deer and that the commissioners were entitled to shoot them. The plaintiffs appealed.
Held – There was no established meaning of ‘game’ which included deer and therefore ‘game’ was to be construed in the context of the indenture. Having regard to the context of the reservation, since ‘game’ has been used in collocation with ‘woodcocks snipe and other wild fowl hares rabbits and fish’, which might not be clearly covered by the word ‘game’, ‘game’ could not be construed as including deer. Furthermore, the reservation of the right to hunt etc was merely the corollary of the reservation of game etc to the appointors and did not expand or grant additional rights in respect of animals or birds other than those reserved under the indenture to the appointors. The appeal would therefore be dismissed (see p 3 h, p 4 b e h and p 5 b c, post).
Decision of Harman J [1988] 1 All ER 783 affirmed.
Notes
For the meaning of ‘game’ and the reservation of game rights, see 2 Halsbury’s laws (4th edn) paras 211, 245–247, and for cases on the subject, see 25 Digest (Reissue) 392, 394–399, 3536–3542, 3556–3588.
Cases referred to in judgment
Jeffryes v Evans (1865) 19 CBNS 246, 144 ER 781.
Cases also cited
Blades v Higgs (1865) 11 HL Cas 621, 11 ER 1474.
Page 2 of [1989] 1 All ER 1
Appeal
The plaintiffs, Inglewood Investment Co Ltd, appealed against the judgment of Harman J ([1988] 1 All ER 783, [1988] 1 WLR 959) given on 17 November 1987 dismissing the plaintiffs’ action against the defendants, the Forestry Commission, for, inter alia, a declaration that on the true construction of an indenture made on 17 August 1921 between (1) the Rt Hon Edward George Percy Third Baron Hatherton and the Hon Edward Charles Rowley Littleton and (2) the Forestry Commissioners, the commission was not entitled to any deer and was not entitled to hunt or shoot or sport after or take any deer on or from land situate in the parishes of Cannock, Huntington, Teddesley Hay, Bednall and Brereton, Staffordshire. The facts are set out in the judgment of Dillon LJ.
Nigel Davis for the plaintiffs.
John Mummery for the commission was not called on.
18 October 1988. The following judgments were delivered.
DILLON LJ. The plaintiffs in this action, Inglewood Investment Co Ltd, appeal against a decision of Harman J given on 17 November 1987 whereby their action was dismissed with costs. Harman J’s decision has been reported (see [1988] 1 All ER 783, [1988] 1 WLR 959), but I take the view that the decision is concerned only with the construction and effect of a particular document and does not raise questions of general importance at all.
That document is an indenture of 17 August 1921 made between the third Baron Hatherton and his eldest son of Hatherton Hall in the county of Stafford of the one part and the respondents to this appeal, the Forestry Commissioners (the commission), of the other part. The document is in form an appointment, but its effect is the grant of a lease to the commission for a term of 999 years of certain lands in Staffordshire, particularly in the area of Cannock Chase, which are more particularly described in a schedule and by reference to a plan. They comprise some 1,200 acres. What is in issue in the present appeal, as before the judge, is the true construction and effect of a reservation to the grantors, the former owners, of sporting rights which is contained in para 2 of the second schedule to the indenture. The plaintiffs are the successors in title to Lord Hatherton and his son, the original grantors.
The question of the true construction and effect of this reservation of sporting rights depends on the wording used and I should read the clause as a whole. It is as follows:
‘SUBJECT to the provisions of the Ground Game Act 1880 the Ground Game Amendment Act 1906 and the Forestry Act 1919 all game woodcocks snipe and other wild fowl hares rabbits and fish with the exclusive right (but subject as aforesaid) for the Appointors and all persons authorised by them at all times of preserving the same (except rabbits) and of hunting shooting fishing coursing and sporting over and on the appointed hereditaments and premises Provided always that as regards rabbits the Commission shall have an equal right with the Appointors to kill the same and the Appointors shall not keep or permit to be kept any rabbit warren in or in the immediate vicinity of the appointed lands.’
There is an obligation imposed on the appointors by the lease to pay the rates on the sporting rights excepted and reserved. That does not, however, give any indication of the scope of the exception and reservation of sporting rights. What is in question is whether the exception and reservation reserves to the grantors, the appointors, all fallow deer on the land and the exclusive right to shoot deer.
It appears that at the time of the grant there were deer on the land and for some years before the date of the grant it was apparently the practice of Lord Hatherton to require his keepers to shoot two deer with shotguns each Saturday morning during the winter months from October to March to provide Lord Hatherton and farm tenants and staff with meat. That is the evidence of a Mr Samuel Price, who knew the land at the time and whose father had been head keeper to the then Lord Hatherton from 1915 onwards.
Page 3 of [1989] 1 All ER 1
It is not suggested that the shooting of the deer, as I have described it, was carried out for sport in the sense that gentlemen may form shooting syndicates to shoot various birds or animals, or landowners and their friends may go out sporting over the land. It was an operation under the instructions of Lord Hatherton for providing meat for the family and staff on a regular basis during the winters.
It appears that that practice continued to some extent after the date of the grant, but I cannot think, nor has this been contended for the plaintiffs, that such continuation can provide guidance to control of construction of the wording used in the reservation in the indenture.
Subsequently, the deer have multiplied on the land and, as they were found by the commission to be causing damage to trees, the commission started shooting the deer to protect the trees. What is in question is whether they were entitled to do so. If there has been effectively reserved to the original grantors the deer and the right to shoot the deer, then the commission were not entitled to shoot deer but, if the exception and reservation does not extend to deer or to the right to shoot deer, then the commission, as the lessees in occupation of the land, were entitled to shoot deer. That is what the judge held was the effect of the reservation, that is to say the commission succeeded and therefore the plaintiffs now appeal.
It is not in doubt that the Ground Game Act 1880 and the Ground Game Amendment Act 1906 gave the commission as occupier the right to kill hares and rabbits on the land. Furthermore, the Forestry Act 1919, subject to which the reservation took effect, gave the commission the right to kill on any land hares and rabbits and vermin, including squirrels; but none of those Acts mentioned deer and it is not suggested that deer are vermin, even if to the commission they may be a cause of trouble.
The case is put by counsel for the plaintiffs on two grounds. First, he says that, in the context of this particular document, the word ‘game’ in the collocation of nouns ‘all game woodcocks snipe and other wild fowl hares rabbits and fish’ includes deer. It includes, he says, all animals ferae naturae which are fit for the food of man and are usually sported after. Second, he says that in the collocation of what the judge called participles and what have been mentioned in argument as gerunds the words used ‘hunting shooting fishing coursing and sporting over and on the appointed hereditaments and premises’, and, in particular, ‘shooting’, are not limited to shooting game, woodcock, snipe etc, but extend to shooting anything which is usually sported after. Reference in that connection is made to the decision in Jeffryes v Evans (1865) 19 CBNS 246 at 265–266 144 ER 781 at 789, where Willes J regarded the words used in that case, ‘the exclusive right of shooting, fishing, and sporting [a] farm’, as to be understood generally as including shooting etc anything that is usually hunted, shot for and sported after, and regarded the expression ‘game’ as not limited to what had in Acts of Parliament been from time to time called game, but extending to such things as were usually sported after ‘excluding small birds and vermin which are beneath the notice of a sportsman’.
We have, however, to construe the words in the context of this particular document. As to the general background, it is quite clear that there is no established meaning to the word ‘game’ as including deer. There are various Acts of Parliament in which the word ‘game’ has been used in contexts which do not include deer. For instance, in s 13 of the Night Poaching Act 1828 it was provided that for the purposes of that Act the word ‘game’ should be deemed to include ‘hares, pheasants, partridges, grouse, heath or moor game, black game and bustards’. The Act itself related to the unlawful taking or destruction of any game or rabbits by night. The original definition of ‘game’ in the Game Act 1831, s 2 was the same: ‘hares, pheasants, partridges, grouse, heath or moor game, black game, and bustards’; and where in various Acts of Parliament it was intended to refer to deer in contexts where game were also referred to, as in s 4 and, for that matter, also s 2 of the Game Licences Act 1860, deer were expressly mentioned. The same can be said of the Agricultural Holdings Act 1908, s 10. It would not be wholly inappropriate to list deer among the animals and birds which are intended to be covered
Page 4 of [1989] 1 All ER 1
by the particular clause including game, but is is not something which is the natural primary meaning of the word; the word ‘game’ is without comprehensive basic definition.
Looking at it in the context of the present case, what is immediately apparent is that the word ‘game’ has been used in collocation with woodcocks, snipe and other wild fowl, hares, rabbits and fish. Had deer been in the mind of the draftsman of the clause I have no doubt that it would have been mentioned. It is conspicuous by its absence. I find it, therefore, impossible to construe the word ‘game’ as including deer in this context where the draftsman has set out to list various other birds and animals to which the clause is to apply and which it might not be clear were definitely covered by the word ‘game’, that is to say woodcock, snipe and other wildfowl, hares, rabbits and fish. The clause has obviously been professionally drawn but it has not been identified as coming from any particular established precedent book. It is a clause which may have served its purpose reasonably well for many years but it has not been able to pass without criticism on all sides when it became necessary to apply it in circumstances which, as it seems to me, were outside the contemplation of the draftsman.
The other limb of the argument of counsel for the plaintiffs is that the reference to shooting covers shooting anything usually sported after which has not been specifically included in the catalogue of game, woodcock, snipe and other wild fowl, hares, rabbits and fish. It is not suggested that the shooting of vermin is expressly reserved; it must be shooting in a context of sporting rights. Again, if the words ‘hunting, shooting, fishing, coursing and sporting over’ stood alone without the earlier reference to a variety of targets, the words might well include the shooting of anything usually sported after. But, in my judgment, in the context of this clause the reference by way of reservation to ‘hunting shooting fishing coursing and sporting over and on the appointed hereditaments and premises’ is merely the corollary of the first part of the clause which reserved the game etc to the grantors and is only concerned with the hunting, shooting, fishing, coursing and sporting over and on the appointed hereditaments and premises in respect of the game, woodcock, snipe and other wild fowl, hares, rabbits and fish mentioned in the clause.
I do not regard it as of any materiality to the case that fish are expressly mentioned whereas there do not appear, so far as the evidence goes, to have been fish to be sported after on or in the area granted at the time of the indenture. Equally, I do not find it of much significance to consider whether or not it is appropriate to attach the word ‘hunting’ to deer. It is capable of being attached to hares which can be destroyed by hunting or shooting as well as by coursing. Again, I do not attach great importance in the context of this case to the words ‘sporting over and on the appointed hereditaments’ because no particular form of sporting other than shooting is in question. It is not suggested that the words ‘sporting over’ import any form of sport which does not involve the quest for animals by way of sport; field sports is the phrase that has been used. This was, on this latter point, the view taken by Harman J where he said ([1988] 1 All ER 783 at 786, [1988] 1 WLR 959 at 962):
‘… I consider that the reservation of rights to hunt etc are exclusively to hunt etc after those things which are expressly included in the list of nouns earlier. It does not to my mind expend or grant additional rights beyond those granted in respect of the animals and birds listed above.’
I agree.
Counsel for the plaintiffs says, ‘Oh well, the owners who in 1921 would have wanted to reserve sporting rights would have wanted to reserve sporting rights in respect of anything that could be sported after; and likewise they would not have wished their tenants to disturb the game on the land by shooting other animals or birds save that the owners would have been constrained to accept the rights of the occupiers under the Ground Game Act 1880 and the Ground Game Amendment Act 1906 to destroy rabbits
Page 5 of [1989] 1 All ER 1
and hares and the right of the commission to destroy vermin as well’. That is, no doubt, a consideration which can, to some extent, be taken into account, but it comes back at the end of the argument to a question of the construction of this particular clause and, as I have indicated, I am unable to construe the word ‘game’ in this context as against the general usage of the word up to 1921 as including deer; and I am unable to construe the participles ‘hunting shooting fishing coursing and sporting over and on the appointed hereditaments and premises’ as extending to other animals or birds than those which have been earlier by the clause reserved to the grantors. The latter part of the clause is merely the counterpart of the earlier part and not an extension.
Accordingly, I agree with the result reached by the judge. I would uphold his order and dismiss this appeal.
BUTLER-SLOSS LJ. I agree.
STAUGHTON LJ. I also agree.
Appeal dismissed.
Solicitors: Pickering & Butters, Stafford (for the plaintiffs); Treasury Solicitor.
Mary Rose Plummer Barrister.
Gumbley v Cunningham
[1989] 1 All ER 5
Categories: CRIMINAL; Road Traffic
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD TEMPLEMAN, LORD GRIFFITHS, LORD ACKNER AND LORD LOWRY
Hearing Date(s): 10 NOVEMBER, 8 DECEMBER 1988
Road traffic – Driving while unfit to drive through drink or drugs – Evidence – Back-calculation – Specimen to determine driver’s blood-alcohol level taken some hours after driving – Specimen showing blood-alcohol level below prescribed limit – Whether evidence of calculation of amount of alcohol eliminated between driving and providing specimen admissible – Road Traffic Act 1972, s 6(1).
Where a person is charged under s 6(1)a of the Road Traffic Act 1972 with driving, attempting to drive or being in charge of a motor vehicle after consuming so much alcohol that the proportion of it in his breath, blood or urine exceeds the prescribed limit and the specimen provided by the person after a lapse of time shows an alcohol level below the prescribed limit, the prosecution may adduce evidence to show, by means of ‘back-calculation’, ie by calculation of the amount of alcohol eliminated in the period between driving and providing the specimen, that the proportion of alcohol in the person’s breath or blood was above the prescribed limit when he was driving. However, the prosecution should not seek to rely on evidence of back-calculation unless it is both easily understood and clearly establishes the presence of excess alcohol at the time when the defendant was driving.
Decision of the Divisional Court of the Queen’s Bench Division [1987] 3 All ER 733 affirmed.
Page 6 of [1989] 1 All ER 5
Notes
For driving a vehicle with excess alcohol, see 40 Halsbury’s Laws (4th edn) para 496, and for cases on the subject, see 39(1) Digest (Reissue) 507–509, 3740–3748.
For the Road Traffic Act 1972, s 6 (as substituted by the Transport Act 1981, s 25(3), Sch 8), see 51 Halsbury’s Statutes (3rd edn) 1427, 1434.
Cases referred to in opinion
Rowlands v Hamilton [1971] 1 All ER 1089, [1971] 1 WLR 647, HL.
Appeal
Stephen Gary Gumbley appealed with leave of the Appeal Committee of the House of Lords given on 5 May 1988 against the decision of the Divisional Court of the Queen’s Bench Division (Watkins LJ and Mann J) ([1987] 3 All ER 733, [1988] QB 170) on 28 July 1987 dismissing the appellant’s appeal by way of case stated by the Crown Court at Birmingham (his Honour Judge Ross QC and two justices) in respect of its adjudication on 18 November 1986 whereby it dismissed his appeal from the decision of justices sitting at Birmingham on 25 June 1986 convicting him of driving a motor vehicle on a road with excess alcohol concentration in his blood, contrary to s 6(1) of the Road Traffic Act 1972, on an information laid by the respondent, Thomas Joseph Cunningham. The Divisional Court had refused the appellant leave to appeal to the House of Lords but had certified, under s 1(2) of the Administration of Justice Act 1960, that a point of law of general public importance was involved in the decision. The facts are set out in the opinion of Lord Ackner.
John Morris QC and Dominic Roberts for the appellant.
Martin Wilson QC and Roger D H Smith for the respondent.
Their Lordships took time for consideration.
8 December 1988. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Ackner. I agree with it and, for the reasons he gives, I would dismiss the appeal.
LORD TEMPLEMAN. My Lords, for the reasons to be given by my noble and learned friend Lord Ackner, I would dismiss this appeal and answer the certified question in the affirmative.
LORD GRIFFITHS. My Lords, for the reasons given by my noble and learned friend Lord Ackner, I would dismiss the appeal.
LORD ACKNER. My Lords,
The facts
At about 8.30 pm on 7 May 1985 the appellant, Stephen Gary Gumbley, and his brother Gordon arrived at a public house in the Northfield area of Birmingham called The Dingle. At about 10.45 pm the appellant left with his brother and began to drive his car to Erdington, which is on the other side of the city. He drove erratically for about six miles and at about 11.15 pm he collided at high speed with the wall of an underpass in the city centre, thereby killing his brother.
The police arrived at about 11.35 p m. They found no evidence of braking. They required the appellant to provide a specimen of his breath; he refused and was arrested and taken to the police station arriving at about 11.45 p m. At the police station he
Page 7 of [1989] 1 All ER 5
complained that he felt ill. Between 11.50 pm and 12.20 pm he vomited and was thereafter taken to a nearby general hospital. At 3.35 am at the general hospital, and with the consent of the doctor in charge, the appellant provided a specimen of blood for analysis. This analysis revealed a concentration of not less than 59 mg of alcohol per 100 ml of blood.
Although this analysis showed a concentration below the prescribed limit of 80 mg, the specimen had been obtained over four hours after the accident. The respondent, the prosecution, accordingly sought to establish that the appellant’s blood-alcohol concentration must have been in excess of the prescribed limit at the time of the collision. Accordingly, medical evidence was called, it was unchallenged, and it established: (i) that the appellant, who at the material time was 34 years old and of average height and muscular build weighing some 11 stone, was in good physical condition; (ii) that such a person would eliminate alcohol from his bloodstream at between 10 and 25 mg per 100 ml per hour; that the most likely elimination rate was in the region of 15 mg per 100 ml per hour and that the concentration of alcohol in his body four hours and twenty minutes before the specimen was collected would have been in the region of 120 to 130 mg per 100 ml; (iii) that even in the most unheard of event of an elimination rate of six mg per 100 ml per hour, the appellant’s blood-alcohol concentration would have been in excess of the prescribed limit at the time of the collision.
The issue
It was not nor could it have been disputed that this evidence was relevant to establishing that the appellant, immediately before the accident, was driving his car after consuming so much alcohol that the proportion of it in his blood exceeded the prescribed limit. The appellant’s contention was that the evidence although admissible was excluded by statute. This submission was rejected by the justices sitting on 25 June 1986 at Birmingham, by the Crown Court sitting at Birmingham on 18 November 1986, and by the Divisional Court on 28 July 1987, when the appellant’s appeal was heard by way of case stated (see [1987] 3 All ER 733, [1988] QB 170).
The following question was certified by the Divisional Court as a point of general importance:
‘Whether on a true construction of Section 6(1) and Section 10(2) of the Road Traffic Act 1972, as amended, the prosecutor is entitled to adduce evidence other than by way of the specimen of breath or blood provided by the accused in order to prove the proportion of alcohol in the accused’s breath or blood at the material time.’
Your Lordships gave leave to appeal to your Lordships’ House.
The relevant legislation
Section 1(1) of the Road Safety Act 1967 provided:
‘If a person drives or attempts to drive a motor vehicle on a road or other public place, having consumed alcohol in such a quantity that the proportion thereof in his blood, as ascertained fom a laboratory test for which he subsequently provides a specimen under section 3 of this Act, exceeds the prescribed limit at the time he provides the specimen, he shall be liable … ’
In Rowlands v Hamilton [1971] 1 All ER 1089, [1971] 1 WLR 647 your Lordships’ House had to consider what was known as the ‘hip-flask defence’, which arose when the defendant claimed that, although the analysis of his blood-
Page 8 of [1989] 1 All ER 5
alcohol concentration established that it exceeded the prescribed limit, he had however drunk alcohol since ceasing to drive, and accordingly the analysis could not be relied on. To meet such a defence the prosecution sought to call evidence to establish that, after making the appropriate adjustment to eliminate the post-driving alcohol, the defendant’s blood-alcohol concentration still exceeded the prescribed limit. However, it was the presence of the words ‘as ascertained from a laboratory test’ which I have emphasised when setting out the terms of s 1(1) of the 1967 Act which prevented the prosecution from leading such evidence.
In his speech Lord Guest said ([1971] 1 All ER 1089 at 1091, [1971] 1 WLR 647 at 653–654):
‘For the appellant to succeed it is, therefore, necessary for him to show that the adjustment made to eliminate the post-driving alcohol content could legitimately be made under the section. It is at this point that the words in s 1(1) “as ascertained from a laboratory test” become important. Detailed provisions are made in s 3 regarding laboratory tests and “the prescribed limit” referred to in s 1(1) is given as the arithmetical proportion of 80 milligrammes of alcohol per 100 millilitres of blood. These provisions make it clear, to my mind, that the Act intended an automatic calculation to be made by means of a chemical analysis as to whether an offence had been committed. It is against the background of the disputes in the courts under the previous Road Traffic Acts as to the effect of alcohol on an individual’s capacity to drive that Parliament has in the 1967 Act provided for automatic proof of guilt by the analysis. For Dr Dolan to make the adjustment of the proportions it would be necessary to go outside the “laboratory test” provided in s 1(1) and make calculations based on certain assumptions as to the individual concerned and the time factor. It would ultimately depend on the expert opinion of the doctor or chemist. I am convinced that Parliament never intended such calculations to be made and that these calculations would not be justified by the terms of the section. I am not satisfied that the section is ambiguous, but if it were I should unhesitatingly take the construction most favourable to the subject.’
In Rowlands’s case your Lordships pointed out that it was for Parliament and not for the courts to close the loophole in the 1967 Act through which the hip-flask driver was able to escape.
Section 1(1) of the 1967 Act was substantially re-enacted in s 6(1) of the 1972 Act. It was not until some ten years after Rowlands’s case that specific statutory provision was made to close this loophole. By virtue of the provisions of Sch 8 to the Transport Act 1981, s 6(1) of the 1972 Act now provides:
‘If a person—(a) drives or attempts to drive a motor vehicle on a road or other public place; or (b) is in charge of a motor vehicle on a road or other public place after consuming so much alcohol that the proportion of it in his breath, blood or urine exceeds the prescribed limit he shall be guilty of an offence.’
Further by the same schedule to the 1981 Act a new s 10 of the 1972 Act is substituted for the old s 10, the material terms of which are as follows:
‘(1) The following provisions apply with respect to proceedings for an offence under section 5 or section 6 of this Act.
(2) Evidence of the proportion of alcohol or any drug in a specimen of breath, blood or urine provided by the accused shall, in all cases, be taken into account, and it shall be assumed that the proportion of alcohol in the accused’s breath, blood or urine at the time of the alleged offence was not less than in the specimen but if the proceedings are for an offence under section 6 of this Act, or for an offence under section 5 of this Act in a case where the accused is alleged to have been unfit through drink, the assumption shall not be made if the accused proves—(a) that he consumed alcohol after he had ceased to drive, attempt to drive or be in charge of a motor vehicle on a road or other public place and before he provided the specimen and
Page 9 of [1989] 1 All ER 5
(b) that had he not done so the proportion of alcohol in his breath, blood or urine would not have exceeded the prescribed limit and, if the proceedings are for an offence under section 5 of this Act, would not have been such as to impair his ability to drive properly … ’
Counsel for the appellant has submitted that all that Parliament was seeking to achieve by these new provisions was to close the loophole disclosed in Rowlands’s case and that they can have no wider effect. It is his contention that evidence which is clearly relevant must nevertheless be excluded from the court’s consideration, because by statute it has been rendered inadmissible. He, however, frankly concedes, as concede he must, that he can point to no express statutory provision to that effect, nor has he submitted that your Lordships should imply words into either s 6(1) or s 10(2) which make such provision. His submission in essence is that Parliament would have expressly provided for the admissibility of ‘back-tracking evidence’ as this is now conveniently called, if it had intended that such evidence, although undoubtedly relevant, should be considered by the courts. However, Parliament’s intention has to be ascertained by properly construing the terms of the relevant legislation. Although I am prepared to accept that it may well have been the primary intention of Parliament when enacting these provisions to deal with the problem highlighted in Rowlands’s case, it would in my judgment be quite wrong to interpret the new statutory provisions as continuing to exclude evidence which is relevant to establishing the blood-alcohol concentration at a time when the defendant was driving.
I therefore agree with the conclusion reached by the Divisional Court that those who drive whilst above the prescribed limits cannot necessarily escape punishment because of the lapse of time. Because back-calculations involve a number of factors, eg the individual’s personal physiology, the amount, if any, which he has eaten and the nature of the alcohol which he has drunk, I would indorse the advice given by the Divisional Court that the prosecution should not seek to rely on evidence of back-calculations save where the evidence is both easily understood and clearly establishes the presence of excess alcohol at the time when the accused was driving. The Divisional Court was clearly right to emphasise that justices must be very careful, especially where there is conflicting evidence, not to convict unless on the scientific and other evidence, which they find it safe to rely on, they are sure that an excess of alcohol was in the defendant’s body when he was actually driving as charged.
I would accordingly dismiss this appeal.
LORD LOWRY. My Lords, I entirely agree with the speech of my noble and learned friend Lord Ackner, whose speech I have had the opportunity of reading in draft. I would therefore dismiss this appeal.
Appeal dismissed.
Solicitors: Cremin Small & Co (for the appellant); Crown Prosecution Service.
Mary Rose Plummer Barrister.
Barclays Bank plc v Bemister and another
Pryke and others v Gibbs Hartley Cooper Ltd
[1989] 1 All ER 10
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): SIR JOHN DONALDSON MR, GLIDEWELL LJ AND SIR DENYS BUCKLEY
Hearing Date(s): 11 DECEMBER 1987
Practice – Transfer of proceedings between divisions of High Court – Transfer sought to obtain speedier trial – Procedure – What claimant for transfer must show – How transfer should be effected.
A party to an action should not apply for a transfer of the action from one division of the High Court to another merely in order to obtain a speedier trial unless the action has been begun in a division which, in accordance with the Rules of the Supreme Court or generally accepted practice, is inappropriate. If any party considers he has a claim for special expedition of his action he should apply for an expedited hearing in the existing division, which he will then have to justify. If the judge considers that a transfer is the appropriate course, he may of his own motion, after making inquiries of the head of the other division, direct a transfer to that division with the consent of his own head of division and that of the division to which the case is to be transferred (see p 13 b to d h, post).
Notes
For transfer of proceedings between and within divisions of the High Court, see 37 Halsbury’s Laws (4th edn) para 64, and for cases on the subject, see 37(2) Digest (Reissue) 223–229, 1459–1497.
Cases referred to in judgment
Zakhem International Construction Ltd v Nippon Kokkan KK (1987) 137 NLJ 641.
Interlocutory appeals
Barclays Bank plc v Bemister and anor
The plaintiff, Barclays Bank plc, appealed with leave of the Court of Appeal against so much of the order of Mr Raymond Kidwell QC sitting as a deputy judge of the High Court in the Queen’s Bench Division dated 13 March 1987 as refused the plaintiff‘s application to transfer to the Chancery Division an action brought by the plaintiff against the defendants, Walter John Bemister and Edna May Bemister, on a guarantee given by them to the plaintiff in 1974. The facts are set out in the judgment of Sir John Donaldson MR.
Pryke and ors v Gibbs Hartley Cooper Ltd
The plaintiffs, John William Pryke and others, who were Lloyds underwriters, appealed with leave of the Court of Appeal against the order of Staughton J in the Queen’s Bench Division (Commercial Court) dated 24 July 1987 whereby he refused the plaintiffs’ application that the trial of the preliminary issues in an action brought by the plaintiffs against the defendants, Gibbs Hartley Cooper Ltd, who were Lloyds brokers, claiming damages for breach of contract or negligence be expedited or, alternatively, that the action be transferred to the Chancery Division. The facts are set out in the judgment of Sir John Lord Donaldson MR.
The appeals were heard successively.
Page 11 of [1989] 1 All ER 10
Richard Salter for the bank in the first appeal.
Michael Supperstone for Mr and Mrs Bemister.
Roger Toulson QC and Mark Cannon for the plaintiffs in the second appeal.
Jeremy Cooke for the brokers.
11 December 1987. The following judgments were delivered.
SIR JOHN DONALDSON MR. In both these matters we are concerned with refusals to transfer actions from the Queen’s Bench Division to the Chancery Division.
In the first action, Barclays Bank plc have sued Mr and Mrs Bemister on a guarantee given by them to the bank in 1974 in relation to the indebtedness of United Grange (Services) Ltd, a company owned and operated by their son. The defence is a familiar one of undue influence, lack of independent advice and negligence. The claim is for £76,278·41 with additional interest from 25 March 1985. Mr Bemister is aged 82 and his wife is 70.
The case came before Mr Raymond Kidwell QC sitting as a deputy judge of the High Court on 13 March 1987 on an appeal by the bank from an order of Master Turner setting aside a judgment obtained in default of defence. The appeal was dismissed and that decision is now accepted. The bank then applied for an order that the action be transferred to the Chancery Division, where, it was said, the action could have been heard within not more than six months after setting down, whereas if it remained in the Queen’s Bench Division it appeared unlikely that a hearing date could be obtained in less than 18 months after setting down. That of course produced a differential in speed of hearing of 12 months. The figures have been updated, and the differential is now probably nine months.
That application was refused by the judge, who also refused leave to appeal to this court. However, we have given leave. [His Lordship summarised the arguments advanced by the bank for a transfer and the judge’s reasons for refusing a transfer, and continued:]
In the second action Mr Pryke and other Lloyds underwriters sued Lloyds brokers for a sum in the region of $US 1,275,000. The issues are complicated, but for present purposes they can, I think, be summarised as follows. The plaintiff underwriters gave binding authority (a binder) to Atlas Underwriting Ltd, a company incorporated in Virginia, to write defined risks on behalf of underwriters. The brokers were responsible for administering the binder. Atlas, it is alleged, wrote risks which were outside the scope of the binder, but underwriters have been compelled to settle claims in respect of those risks. They seek to recover these sums from the brokers as damages for breach of contract or negligence.
The action was begun in June 1986 and discovery was ordered on 19 December of that year. On 27 March 1987 Hirst J ordered the trial of a preliminary issue relating to liability and causation, and counsel agreed that the probable length of that hearing would be six weeks. In June 1987 the parties were told that the earliest available date in the Commercial Court was 30 March 1990. In July 1987 the plaintiffs applied for an order that the trial of the preliminary issue be expedited or, alternatively, that the action be transferred to the Chancery Division. [His Lordship summarised the submissions of the parties on whether the action should be transferred, referred to the judge’s reasons for dismissing the application and also to Zakhem International Construction Ltd v Nippon Kokkan KK (1987) 137 NLJ 641 at 642, and continued:]
In very broad terms delay in hearing actions is determined by (a) the number of actions, (b) their weight and (c) the availability of judges and ancillary resources such as courtrooms. Given the divisional structure of the High Court, which creates more or less watertight compartments, it is inevitable that the interplay of these factors will lead to actions in one division coming on for hearing more quickly than in others. At the present time, other things being equal, actions are heard more quickly in the Chancery Division than in the Queen’s Bench Division and more quickly in the general list of the
Page 12 of [1989] 1 All ER 10
Queen’s Bench Division than in the Commercial Court. This was not always the case. Only a few years ago the longest delays were in the Chancery Division and by far the least in the Commercial Court.
The Commercial Court is, of course, a special problem. Its raison d’être is to supply a speedy and expert service in support of national and international trade. Until recently, and over a period of nearly 90 years, it has been supremely successful, but it is now foundering under the pressure of business generated by its own success. If nothing is done, market forces in the form of consumer dissatisfaction may well restore the balance, but that would be a policy of despair and contrary to the national commercial interest.
On appointment High Court judges are assigned to one or other of the three divisions: the Queen’s Bench, Chancery and Family. Similarly, some types of actions are assigned to specific divisions, although, family matters apart, the majority of actions could be set down in either the Queen’s Bench or the Chancery Divisions. In practice there is a generally accepted notion of what is appropriate to the Queeen’s Bench and what to the Chancery Divisions, although there remains a relatively small category which may well be started in either division; landlord and tenant disputes are perhaps a typical example.
The purpose underlying the creation of divisions and the allocation of work between the divisions was to ensure that disputes are resolved by High Court judges of the relevant expertise. In fact, with the possible exception of very specialised actions, such as patent disputes, all High Court work should be capable of being undertaken by all High Court judges, but the hearing takes longer if the judge is unfamiliar with the territory. In other words, the system of divisions was designed to achieve judicial horses for judicial courses.
However, in recent years it has become apparent that the frontiers of the divisions are much too rigid. Leading members of the Bar, from whom the judges are appointed, no longer practice only in one division of the High Court. On appointment to the Bench they therefore have experience relevant to more than one division and it is inefficient that, as judges, they should be confined to sitting in one division. No doubt other examples could be given, but for present purposes it is only necessary to draw attention to the overlap in experience of the ‘commercial’ judges of the Queen’s Bench Division and the judges of the Chancery Division in relation to commercial disputes which do not arise in the context of shipping. The existence of divisions in the High Court, once created as an aid to efficiency, is now an obstacle.
In this situation consideration will no doubt be given to the abolition of the divisions, thereby creating a unified High Court or to their redefinition. Consideration will also no doubt be given to centrally co-ordinated listing throughout the divisions. This would enable the court, not only to allocate judicial horses to judicial courses, but also to take account of any disparity in the weight being carried by some of those judicial horses.
However, that is not the present position. Where there is a choice of divisions or, in the case of the Commercial Court, a subdivision, it is for the plaintiff to exercise that choice. In doing so, he or his legal advisers will or should have some regard to how his claim can be most speedily and satisfactorily determined. But mistakes can be made. Those mistakes may take the form of beginning an action in a division other than that to which that type of action is assigned, or to which, in terms of its subject matter, it is appropriate. This can and would be remedied by ordering a transfer. However, they can also take the form of backing the wrong horse. The judges concerned may be running well at the time the action is begun, but, due to an excess weight of actions, may seem to be flagging long before the date for hearing is reached. Again the mistake can be remedied by transfer, but in this instance the court is faced with rather greater problems.
It is an understandable fact of life that plaintiffs will want to see their claims dealt with as soon as possible and that defendants will usually wish to postpone the day of judgment. This is illustrated in the present action where it is the plaintiff underwriters and the bank who seek expedition, whilst the brokers and Mr and Mrs Bemister advance cogent arguments for the status quo.
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The decisive factor is not of course the inconsistent wishes of the parties, but the objective need for speed if justice is not to be denied. This objective need is not an absolute. It is relative to the needs of other actions in the same and other divisions or subdivisions of the High Court, matters which will be unknown to individual litigants.
The practical approach in my judgment is therefore somewhat different from that adopted by the parties in the instant case. If an action has been begun in a division (or subdivision in the case of the Commercial Court, for example) to which, in accordance with the rules, or generally accepted practice, it is inapproriate, either party can and should apply for a transfer to the appropriate division. Subject to that qualification, no party should apply for a transfer to another division. If any party considers that he has a claim for special expedition (and I do not mean by that merely a certificate for a speedy trial, but a claim for special expedition), he should apply for an expedited hearing. It will then be for the judge concerned to consider the need alleged and whether an appropriate degree of expedition can be achieved without transfer. If in his judgment it cannot, he should himself make inquiries of the head of another division with a view to ascertaining whether that division can afford the parties of speedier hearing without unduly prejudicing the legitimate needs and expectations of parties to actions which are already the concern of that division. If the result of those inquiries is that a transfer is the appropriate course, it would be for the judge of his own motion to direct a transfer with the consent of his own head of division and that of the division to which the case would be transferred.
This approach would not in any way impede regular consultation between heads of divisions to see whether the disparity in lead times was such that in the general interests of the administration of justice some transfers should be made. By ‘lead times’ I mean the time between setting down, or applying for a date for trial, and hearing. Such consultation is highly desirable and can no doubt be instituted. If the conclusion was that transfers were desirable, it is to be expected that criteria for selecting actions for transfer would be agreed between head of divisions, and it would then be for the judge in charge of the transferor list to identify the particularly actions to be transferred. An alternative and simpler approach, which is sometimes adopted, is for a judge from one division to sit as an additional judge of another division. But, however the matter is dealt with, it is a problem of general judicial management and not something with which the parties to a particular action are in a position to concern themselves.
In the instant cases, Staughton J expressly and Mr Raymond Kidwell QC impliedly held that no exceptional case for expedition had been made out. This is essentially a discretionary decision with which this court should be slow to interfere. The more general problem of ensuring that actions with like claims to expedition are heard as quickly in one division as in another and the particular problem of the Commercial Court, which should, by definition, be a court of expedition, are matters for consideration by the three heads of the trial divisions and the Lord Chancellor and not for this court.
Accordingly, I would dismiss both appeals.
GLIDEWELL LJ. I agree.
SIR DENYS BUCKLEY. I also agree.
Appeals dismissed.
Solicitors: Durrant Piesse (for the bank in the first appeal); Glenn Evans & Co, Twyford (for Mr and Mrs Bemister); Fishburn Boxer (for the plaintiffs in the second appeal); Hewitt Woollacott & Chown (for the brokers).
Mary Rose Plummer Barrister.
Re Atkins
[1989] 1 All ER 14
Categories: ECCLESIASTICAL
Court: CHICHESTER CONSISTORY COURT
Lord(s): CHANCELLOR HIS HONOUR JUDGE QUENTIN EDWARDS QC
Hearing Date(s): 29 JULY, 9 NOVEMBER 1987
Ecclesiastical law – Faculty – Jurisdiction – Faculty for exhumation and reinterment of human remains – Principles to be applied in exercising jurisdiction – Burden on petitioner.
Ecclesiastical law – Burial of the dead – Corpse or ashes – Whether any distinction in canon law between corpse and ashes of cremated body.
In exercising its jurisdiction to grant a faculty authorising the exhumation of human remains from consecrated ground, the consistory court should bear in mind that the canonical intention, as represented in the rites and ceremonies of the Church of England, of those who committed the body or ashes of the deceased to the ground was committal into the safe custody of the Church, although in the nature of things that does not mean that the Church will ensure that the remains will be forever undisturbed. Furthermore, although the court’s jurisdiction to grant or refuse such a faculty is quite unfettered, it is to be exercised reasonably, according to the circumstances of each case, taking into account changes in human affairs and ways of thought but always mindful that consecrated ground and human remains committed to it should, in principle, remain undisturbed. There is therefore a burden on a petitioner seeking leave to disinter remains to show that the presumed intention of those who committed the body or ashes to a last resting place is to be disregarded or overborne. Moreover the length of time since the interment is a matter to be considered, and a prompt application is stronger than one made where remains have been undisturbed for many months or years. In every case the arguments for the grant of a faculty must be weighed against the foregoing general principles and the desirability of maintaining a churchyard or a place set aside for the interment of cremated remains undisturbed, as a place of peace, for prayer and for the recollection of the departed.
The Church of England makes no distinction in canon law between a corpse and the ashes of a cremated body; both should be treated with the same reverence and decency and accorded the same dignity in interment. Although the physical difference cannot be ignored where any question of exhumation arises, the consistory court should make no distinction between a body and ashes and should be careful not to give undue weight to the fact that the disinterment and removal of ashes buried in a casket is simpler and less expensive than the disinterment of a body and is unlikely to give rise to any risk to health. Nor should the court ever regard ashes as less worthy of its protection or their disturbance as a lighter matter than the disturbance of a corpse and it should resist any trend towards regarding the remains of loved relatives and spouses as portable, to be taken from place to place so that the grave or place of interment of ashes may be the more easily visited.
Notes
For faculties for the exhumation of human remains from consecrated ground, see 10 Halsbury’s Laws (4th edn) para 1198 and 14 ibid paras 1315, 1323.
For ecclesiastical law as to the burial of the dead, see 14 ibid paras 1041–1043.
Cases referred to in judgment
Dixon, Re [1892] P 386, Con Ct.
Foster v Dodd (1867) LR 3 QB 67, Ex Ch.
Matheson (decd), Re [1958] 1 All ER 202, [1958] 1 WLR 246, Con Ct.
Pope, Re (1851) 15 Jur 614, Con Ct.
Page 15 of [1989] 1 All ER 14
St Botolph without Aldgate (vicar and one of the churchwardens) v Parishioners [1892] P 161, Con Ct.
St Helen’s, Bishopsgate, with St Mary Outwich (rector and churchwardens) v Parishioners (M’Dougal intervening) [1892] P 259, Con Ct.
St Mary-at-Hill with St Andrew Hubbard (rector and churchwardens) v Parishioners [1892] P 394, Con Ct.
St Michael Bassishaw (rector and churchwardens) v Parishioners (Braikenridge intervening) [1893] P 233, Con Ct.
Talbot, Re [1901] P 1, Con Ct.
Petition for faculty
By a petition dated 25 April 1987 Mrs Gladys May Atkins sought a faculty authorising and empowering the proposed removal of the cremated remains of her late husband, Ernest Hart Atkins, which had been interred in a casket in Church Norton Churchyard in the parish of Selsey on 14 January 1976 and their reinterment in a grave in Twickenham cemetery in the London Borough of Richmond upon Thames, where the remains of Mrs Atkins’s father and sister were interred and where it was intended that Mrs Atkins’s remains would eventually be interred and where permanent arrangements were in existence for the maintenance of such grave. The consent of the Rector of Selsey, the Rev Victor Reginald Cassam, to the proposed removal from Church Norton Churchyard and the consent of the Richmond upon Thames London Borough Council, the burial authority responsible for Twickenham cemetery, to the proposed reinterment had both been obtained. The petition was unopposed. The facts are set out in the judgment.
Mr Paul Bodkin, solicitor, for Mrs Atkins.
Cur adv vult
9 November 1987. The following judgment was delivered.
THE CHANCELLOR. In this case the petitioner, Mrs Gladys May Atkins, prays for a faculty authorising her to remove the cremated remains of her late husband, Ernest Hart Atkins, from consecrated ground in this diocese to the consecrated part of Twickenham cemetery in the London Borough of Richmond upon Thames. The petition is unopposed.
There has, in my experience, and, I understand, in the experiences of other chancellors, been an increase in the number of petitions of this nature in recent years. By petitions of this nature I mean petitions for the disinterment of bodies and of cremated remains and their reinterment in other places, whether near to, or far from, the first place of sepulture. I have in this diocese and in the diocese of Blackburn, of which I am also chancellor, refused to grant the faculties sought under some of the petitions of this nature which have been presented to me. I have learnt that these refusals have caused distress, not only because of the frustration of sincerely held hopes, but also because, in some instances, the petitioners have been led to believe, wittingly or unwittingly, that the grant is no more than a formality, that the faculty is, if all is in order, a licence to which a petitioner is entitled as a matter of right. For this reason and as the petition of Mrs Gladys Atkins appeared to me, on first examination, to be a petition which I should not grant, on grounds which appear below, I directed that it should be heard in open court. I also intimated to the petitioner and her solicitors that I should, in any event, reserve judgment as I wished to consider fully, and then state, the principles which, in my judgment, should guide the consistory court in the exercise of its discretion in petitions of this description.
It is well established that the consistory court has jurisdiction to grant a faculty authorising the exhumation of human remains from consecrated ground. Indeed, it is unlawful to remove any body or the remains of any body which has or have been interred
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in a place of burial without the authority of a faculty, in the case of consecrated ground, or, in other cases, a licence from the Home Secretary: see s 25 of the Burial Act 1857. Certain statutory exceptions have been made to this rule, eg where there has been acquisition of a burial ground under planning legislation or where a pastoral order has been made, but even in those cases there are prescribed requirements to ensure that all is decently done. Where it is proposed to reinter the remains in consecrated ground no more authority than the faculty is required where the proposal is to reinter the remains elsewhere or otherwise dispose of them a licence from the Home Secretary is also required.
There are two reasons why a faculty is required at all. The first is that there may be no disturbance or alteration of consecrated ground or building on it at the whim or desire of any individual but only by lawful authority or well-established right. The parish priest who buries a parishioner has the right at common law to open the soil of the churchyard for that purpose; no one has a corresponding right of disinterment, though a coroner, where there has been a violent death, may order exhumation if the body has been interred before he view it (see 2 Hawk PC c 9, s 23). The second reason given in former times was that, since the buried carcase belonged to no one and was, therefore, under the protection of the public, the ecclesiastical law would, if it lay in consecrated ground, interpose for its protection, just as it had the protection of the temporal law of burial elsewhere: per Byles J in Foster v Dodd (1867) LR 3 QB 67 at 77. While legislation in the last century and this and changes in the disciplinary jurisdiction of consistory courts have taken away much of the force of this reason, nevertheless, as mentioned above it remains, residually, in the statutory necessity for a faculty where the exhumation is to be from consecrated ground.
The proposition that the consistory court has jurisdiction to grant a faculty involves necessarily the proposition that in English canon law burial is not absolutely final. Two questions then arise. First, what, if any, distinction should at the present time be made between a corpse and the ashes of a corpse remaining after cremation? Second, what should a consistory court hold to have been the canonical intention of those burying, with due rite and ceremony, the body or ashes?
The first question is answered, in my judgment, by the Revised Canons Ecclesiastical, Canon B38 (Of the burial of the dead). Paragraph 2 of the Canon deals with the obligations of parochial clergy with regard to burial and, in enjoining a minister to bury, in accordance with the rites of the Church of England, ‘the corpse or ashes’ of a person brought to him, no distinction is made between the two. Cremation is, by para 3, stated to be lawful in connection with Christian burial and para 4(b) states that, save for good and sufficient reason, the ashes of a cremated body should be interred or deposited, by a minister, in consecrated ground. I hold that, at the present time, the Church makes no distinction in canon law between a corpse and the ashes of a cremated body; both should be treated with the same reverence and decency and accorded the same dignity in interment. The physical difference between the two cannot be ignored where any question of exhumation arises but I consider that the court should never regard ashes as less worthy of its protection or that their disturbance is a lighter matter than the disturbance of a corpse.
The answer to the second question must be found in the rites and ceremonies of the Church of England, for what is said and done, in accordance with the authorised forms of worship, must be taken to represent the intention of the Church and its members. The relevant passages from the Book of Common Prayer and the Alternative Service Book are as follows. Book of Common Prayer (The Order for the Burial of the Dead):
‘… FORASMUCH as it hath pleased Almighty God of his great mercy to take unto himself the soul of our dear brother here departed: we therefore commit his body to the ground; earth to earth, ashes to ashes, dust to dust; in sure and certain hope of the Resurrection to eternal life, through our Lord Jesus Christ … ’
Alternative Service Book (Funeral Services: The Committal):
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‘ We have entrusted our brother N to God’s merciful keeping, and we now commit his body to the ground (or to be cremated): *[earth to earth, ashes to ashes, dust to dust:] in sure and certain hope of the resurrection to eternal life through our Lord Jesus Christ, who died, was buried, and rose again for us.
* The words in square brackets may be omitted.’
In the section entitled ‘A Form which may be used at the Interment of the Ashes’ the word ‘ashes’ is substituted for the word ‘body’.
‘We … commit his body to the ground’: these are the critical words and I cannot do better than quote from Wheatly on the Book of Common Prayer (1858 edn) p 586:
‘The phrase of commit his body to the ground implies that we deliver it into safe custody and into such hands as will safely restore it again. We do not cast it away as a lost and perished carcass but carefully lay it in the ground, as having in it a seed of eternity and in sure and certain hope of the resurrection to eternal life … ’
The court should, then, approach the exercise of its discretion in the knowledge that the canonical intention of those who committed the body or ashes of the deceased to the ground was committal into the safe custody of the Church. In the nature of things this cannot, and has never been held to, mean that the Church will ensure that the remains will be for ever undisturbed. The changes and chances of this mortal world may make some disturbance necessary or expedient.
I have examined the reported cases on the exercise of this discretion over the last century and a half in order to discover, if I can, whether any, and if so what, general principles may be deduced which should govern its exercise by me. The authorities, in so far as I have been able to find them, begin with Re Pope (1851) 15 Jur 614. Dr Lushington, as Chancellor of the Diocese of London, granted a faculty for the exhumation of the body of an adult female which had been buried for some three weeks for the purpose of identifying the deceased. In the course of a brief judgment he said: ‘Faculties for the removal of bodies are of very frequent occurrence, and are decreed to gratify the wishes of relations.' This suggests a greater readiness in Dr Lushington to grant faculties of this description than is to be found in the reported decisions of Dr Tristram QC, a later but equally distinguished ecclesiastical judge. In the volumes for 1892, 1893 and 1901 of the Law Reports, Probate Division, there are six reports of decisions of his, as Chancellor of the Diocese of London, concerning exhumation of bodies. Four of these cases arose out of the unhealthy and overcrowded state of certain crypts and churchyards in the City of London and of the desire to widen roads, construct sewers and otherwise to develop land in the City. These are, citing the names of the churches concerned only, St Botolph without Aldgate [1892] P 161, St Helen’s, Bishopsgate [1892] P 259, St Mary-at-Hill [1892] P 394 and St Michael Bassishaw [1893] P 233. The following passage may be cited from St Botolph without Aldgate [1892] P 161 at 167, as showing Dr Tristram’s approach to the exercise of his discretion in cases where public convenience is concerned:
‘In churchyards there are certain alterations, which by practice and in accordance with precedent, the Ecclesiastical Courts have from early times been accustomed to authorize by faculty, such as the enlarging of a church, the erection or enlargement of a vestry, the making of footways in or through a churchyard for public convenience, the making of a carriage drive up to the church door, and the construction of necessary drains. To enable such alterations to be made, it is frequently necessary to remove the remains of persons buried in vaults or graves situated in the ground required for the alterations. And upon the Court being satisfied, that such an alteration is desirable, and that it cannot be made without the removal of a vault and the remains in it, or without the removal of remains in a common grave, it invariably orders the removal of the vault and remains in it, or of the remains in a common grave to another part of the churchyard, after citing and giving notice to the families interested in the vault or common grave of the proposed removal. And the practice of the Court is to give effect to their wishes, as far as is
Page 18 of [1989] 1 All ER 14
practicable, in the selection of the site for the new vault or grave, and to afford them an opportunity of superintending the removal.’
In relation to the question whether part of a churchyard might be used for the purpose of widening a public thoroughfare Dr Tristram said (at 169):
‘The principle upon which the Court holds, that it has jurisdiction to grant such faculties, is, that there is a discretionary power vested in it as to making orders relating to churchyards and that it is the duty of the Court to exercise this discretion reasonably, and, as Sir John Nicholls [sic] (Sir John Nicholl (1759–1838) was Dean of the Arches from 1809 to 1834. The quotation appears to be an adaptation of a passage in Sir John’s judgment in Butt v Jones (1829) 2 Hag Ecc 417 at 424, 162 ER 909 at 911.) observes, “to vary the exercise of it according to the change of times and circumstances;” … ’
He went on to say that the change of circumstances in the City, viz the great increase of traffic, warranted the grant of such faculties ‘for the convenience of those who attend church, as well as for that of the general public’ (at 170).
In Re Dixon [1892] P 386 the petitioner, the widow of Lieut-Col John Dixon, sought a petition authorising the exhumation of her husband’s body, buried some 18 years previously in a mausoleum in the consecrated part of a cemetery, in order that the body might be cremated and the ashes returned to the mausoleum. Dr Tristram refused to grant this strange request on the grounds that cremation should precede and not follow burial. In dealing with the argument that a court would ordinarily grant a faculty for the removal of remains from one part to another of a churchyard, or from one churchyard to another churchyard, in deference to the wishes of members of the family, unless the deceased had left contrary directions in his will he said (at 391):
‘Where the deceased has left no testamentary or clear directions as to the place of his burial, the practice of the Court is to grant a faculty to proper parties, on reasonable grounds shewn and subject to proper precautions, to remove the remains to another grave or vault in the same or in another churchyard but where the deceased has himself expressed a wish to be buried in that or in any other churchyard, the invariable practice of the Court is by a faculty to give effect to such wish.’
He summed up the exercise of the discretion thus (at 393–394):
‘… one result of being buried in consecrated ground is, that the site is under the exclusive control of the Ecclesiastical Courts, and no body there buried can be moved from its place of interment without the sanction of a faculty to be granted upon the application of the executors or members of the family, for reasons approved of by the Court, or upon the application of other parties upon the ground of necessity or of proved public convenience, and then only for reinterment in other consecrated ground.’
In Re Talbot [1901] P 1 Dr Tristram granted a faculty for the exhumation of a body, buried in consecrated ground, in order that it might be reinterred in ground which was, in law, unconsecrated, though was, in fact, below a Roman Catholic church. In the course of his judgment he amended his dictum, just quoted, that there was a limitation on the exercise of the discretion. He said that the former practice to refuse a faculty where it was proposed to reinter the remains in unconsecrated ground, viz to a place under the protection of no court, need no longer be followed now that Parliament had made it unlawful to remove any body or the remains of any body interred in any place of burial, and he cited s 25 of the Burial Act 1857, which is still in force. Dr Tristram added that the court might, in the exercise of its discretion, have regard to all the circumstances of the case.
In this century there are other reported cases concerning the use of part of a churchyard,
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and the consequent disinterment of bodies buried in that part and their reinterment in another part, for the purposes of highway improvement, but they require no special mention here since, it appears to me, in each case the general principles propounded by Dr Tristram and referred to in the passages quoted above were followed.
In Re Matheson (decd) [1958] 1 All ER 202, [1958] 1 WLR 246 Chancellor Steel, sitting in the Liverpool Consistory Court, considered a petition for a faculty for a disinterment for reasons almost identical with those in Re Dixon [1892] P 386. Chancellor Steel held that Dr Tristram did not reach his decision in that case on the ground that he was precluded from granting the petition as a matter of law but did so in the exercise of his discretion. Chancellor Steel granted the faculty sought and said ([1958] 1 All ER 202 at 204, [1958] 1 WLR 246 at 248):
‘From the earliest times it has been the natural desire of most men that after death their bodies should be decently and reverently interred and should remain undisturbed. Burial in consecrated ground secured this natural desire, because no body so buried could lawfully be disturbed except in accordance with a faculty obtained from the church court. As all sorts of circumstances which cannot be foreseen may arise which make it desirable or imperative that a body should be disinterred, I feel that the court should be slow to place any fetter on its discretionary power or to hold that such fetter already exists. In my view there is no such fetter, each case must be considered on its merits and the chancellor must decide, as a matter of judicial discretion, whether a particular application should be granted or refused.’
I propose, in the light of these authorities, to state the principles which, in my judgment, should guide me, as chancellor, in the exercise of my discretion in granting or refusing faculties of this description. The discretion has undoubtedly been expressed to be quite unfettered. It is to be exercised reasonably, according to the circumstances of each case, taking into account changes in human affairs and ways of thought but always mindful that consecrated ground and human remains committed to it should, in principle, remain undisturbed.
The court then should begin with the presumption that, since the body or ashes have been interred in consecrated ground and are therefore in the court’s protection or, in Wheatly’s words, ‘safe custody’, there should be no disturbance of that ground except for good reason. There is a burden on the petitioner to show that the presumed intention of those who committed the body or ashes to a last resting place is to be disregarded or overborne. The finality of Christian burial must be respected even though it may not be absolutely maintained in all cases. The court should make no distinction in this between a body and ashes and should be careful not to give undue weight to the undoubted fact that where ashes have been buried in a casket their disinterment and removal is simpler and less expensive than the disinterment of a body and is unlikely to give rise to any risk to health.
The court must take account of changes in the incidence of cremation in the last two generations. More than two-thirds of those dying in England are now cremated. There are also grounds for believing that society has become more mobile. The court should resist a possible trend towards regarding the remains of loved relatives and spouses as portable, to be taken from place to place so that the grave or place of interment of ashes may be the more easily visited.
Notwithstanding these general principles cases occur in which the discretion to grant a faculty should be exercised. It is impossible, and I should be wrong in attempting, to give, or even foreshadow, a list of classes into which such cases may fall. Some instances may, nevertheless, be mentioned. Errors occur and bodies and ashes are placed in the wrong grave. Interment of both bodies and ashes are sometimes, for understandable reasons, conducted before all relevant considerations are weighed. A family mausoleum or group of graves may be overlooked; the wishes of the deceased may not be known at the time of burial or fully taken into account. In all such cases the length of time which has elapsed since the interment is a matter to be considered; a prompt application must
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be stronger than one which seeks leave to disinter remains which have been undisturbed for many months or years.
The wish of the personal representatives or next of kin of the deceased to remove the body or ashes from one part of a churchyard to another or from one churchyard to another for reasons which appear to the court to be well founded and sufficient is, on the authorities, a ground for the grant of a faculty. So is public necessity or even convenience, as for example the extension of a church, provision of heating facilities for church or parish room, the widening of a hazardous road. In a proper case even the laying out afresh of the churchyard to enable it to be better maintained may be a ground. In every case the arguments for the grant of a faculty must be weighed against the general principles already mentioned and the desirability of maintaining a churchyard, or a place set aside for the interment of cremated remains, undisturbed, as a place of peace, for prayer and for the recollection of the departed. Deep offence may be given to those who cherish the memory of a loved one buried in a churchyard, or tend a grave there, if disinterments are lightly or frequently allowed.
Having expressed the general principles by which I hold the court should be guided I turn to the evidence adduced and arguments addressed to me in support of the petition of the present petitioner Gladys May Atkins. The evidence shows that Ernest Hart Atkins, her late husband, died aged 66, in the parish of Selsey in this diocese on 29 November 1975, after an illness of two or three months. His body was cremated and the ashes remaining were placed in a box or casket made, so I was informed, of oak. The casket containing the ashes was, on 14 January 1976, interred in a part of Church Norton churchyard which was then set aside for the burial of cremated remains. Church Norton churchyard is the churchyard of the old church of the parish (the new parish church having been built about 120 years ago) but is still open for burials. The place where the late Ernest Atkins’s ashes were interred was marked with a stone plaque about 12 inches by 8 inches suitably inscribed. Other similar memorial stones, recording the interment of ashes, are nearby.
Mrs Atkins says that her decision to bury her husband’s ashes in Church Norton churchyard was taken in haste, under the stress of bereavement and without due reflection. She wishes now, and has wished for many years, that she had decided to bury the ashes in the consecrated part of Twickenham cemetery where other members of her family are buried and where she hopes her own mortal remains will lie. Mr Ernest Atkins never said where he wished his body, or ashes, to be buried.
Mrs Atkins said that although she regretted the decision nevertheless she abided by it. She was able to visit the grave by walking through the fields from her house in Selsey although the journey took one and a half hours each way. She is now 77 and is unable to undertake the journey on foot the journey by omnibus is inconvenient and she finds it difficult to make her former weekly visit.
Church Norton churchyard is very large and the parochial church council of the parish has found, as have many others in recent times, increasing difficulty in maintaining it in good order. Mrs Atkins said that she used to keep the grass down round her husband’s grave but she was finding it almost impossible, because of her advancing years, to continue to do so and she complained, though without attaching blame, that that part of the churchyard where her husband’s ashes rested was becoming very neglected. Her evidence as to the state of the churchyard was confirmed by the rector of Selsey, the Rev V R Cassam. He explained that the ashes of Mr Atkins were buried in a plot of land set aside for the interment of cremated remains and that since 1985, when a new plot, authorised by faculty, had been brought into use, no interment had taken place in the former plot. In the new plot the places of interment were not identified and interments were recorded otherwise. He was confident that the new plot would be much easier to keep in order. He agreed that the old plot was rather neglected, that the arrangement there of small plaques recording the interment of ashes made maintenance difficult and that it was likely that within a generation a petition would be presented for a faculty to authorise, after due notice to all concerned, the clearing of memorials from, and the returfing of, the old plot.
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Some further facts which appeared to me relevant should be mentioned. Mrs Atkins lived in the house which, before she owned it, had belonged to, and been the home of, her grandparents and parents and she lived there for the whole of her life until, at the age of 65, she moved, with her husband, to Selsey. On her marriage, in about 1935, her husband had come to live with her in that house. There were no children of the marriage. Mrs Atkins said her husband had no family of his own and became a devoted son-in-law and cared for her mother, who was afflicted by a stroke, in her declining years. Mrs Atkins’s paternal grandparents, her parents, her sister and a cousin were all buried in two graves in the same plot in the consecrated part of Twickenham cemetery before she moved with her husband to Selsey. Mrs Atkins intends to return to live in Twickenham, where she has friends and relatives, and wishes, as I have already said, that, on her death, her cremated remains may be interred in one of those graves. I am satisfied, from documentary evidence, that there is space in those graves for that interment and for the interment of her husband’s ashes.
Having heard the evidence and Mr Bodkin’s submissions and those of the Archdeacon of Chichester, to whom I am obliged for their help, I have come to the conclusion that I should grant this petition. When I read the papers in chambers I considered that the lapse of time since the interment of the ashes in 1976 was so great that, for that reason alone, the petition should be refused. I have been persuaded that, while that is an important fact, it has to be viewed against the rest of the evidence, including Mrs Atkins’s continued residence in Selsey from 1976. The petition is supported by the incumbent and the parochial church council. As the ashes are contained in a stout casket they may be removed and transported without difficulty. There is what amounts to a family grave, or graves, in Twickenham and I accept that Mrs Atkins would, if she had thought the matter over fully at the time of her husband’s death, have buried his ashes there and not at Selsey. The late Mr Atkins was, for 40 years, a resident of Twickenham. The strongest feature of the case, however, is the likely future of the plot in which Mr Atkins’s ashes presently lie. There are serious difficulties in maintaining it as it is; it is no longer in use for the interment of cremated remains; the parochial church council will be able to present a strong case should it file a petition for clearing and returfing it. Should such a petition be presented then Mrs Atkins would, on the authorities (see, for example, St Helen’s,Bishopsgate [1892] P 259 at 260), have an equally strong case for objecting to the grant unless the petition contained provisions authorising her to remove her husband’s ashes and memorial stone to another part of the churchyard or to another consecrated burial ground.
Accordingly I direct that a faculty should pass the seal, authorising the removal of the cremated remains of the late Ernest Hart Atkins from Church Norton churchyard and their reinterment in grave no 165, plot E, class A in Twickenham cemetery and the removal of the memorial stone relating to the said remains and its re-erection on or beside the said grave. The consent of the London Borough of Richmond upon Thames, to whom Twickenham cemetery belongs, has been obtained to the removal of the ashes its consent to the re-erection of the stone in the cemetery must also be obtained before the stone is placed in the cemetery. If the London Borough of Richmond upon Thames so requires the approval of the borough’s medical officer must be obtained before the ashes are removed.
The costs of the petition are to be paid by the petitioner. As I sat for one half-day and the time of the court was also occupied by the hearing of another petition and I have made an order that the petitioner in that case should pay the fee incurred through the sitting of the court for one half-day no fee is to be payable by Mrs Atkins in respect of the sitting of the court.
Petition granted.
Solicitors: Chamberlain Martin & Spurgeon, Selsey (for Mrs Atkins).
N P metcalfe Esq Barrister.
R v Bellman
[1989] 1 All ER 22
Categories: CRIMINAL; Criminal Procedure
Court: HOUSE OF LORDS
Lord(s): LORD MACKAY OF CLASHFERN LC, LORD FRASER OF TULLYBELTON, LORD BRIDGE OF HARWICH, LORD GRIFFITHS AND LORD JAUNCEY OF TULLICHETTLE
Hearing Date(s): 2, 3 NOVEMBER, 8 DECEMBER 1988
Indictment – Joinder of charges – Charges founded on same facts – Mutually contradictory counts – Defendant charged with obtaining property by deception or conspiracy to import controlled drugs illegally – Counts mutually contradictory and mutually destructive – Whether judge entitled to leave both counts to jury – Whether prosecution required to elect on which count it intends to proceed.
Where an indictment contains mutually exclusive counts which are factually contradictory and which will entail an acquittal on one charge if there is a conviction on the other it is nevertheless permissible for the trial judge to leave both counts to the jury if the evidence establishes a prima facie case on both counts, without requiring the prosecution to elect during the course of the trial on which count they wish to proceed (see p 23 b to d, p 26 f and p 29 e to h, post).
Notes
For joinder of offences in an indictment, see 11 Halsbury’s Laws (4th edn) para 213, and for cases on the subject, see 14(1) Digest (Reissue) 294–304, 2245–2326.
Cases referred to in opinion
Connolly v DPP [1962] 2 All ER 401, [1964] AC 1254, [1964] 2 WLR 1145, HL.
Ludlow v Metropolitan Police Comr [1970] 1 All ER 567, [1971] AC 29, [1970] 2 WLR 521, HL.
R v Ailes (1918) 13 Cr App R 173, CCA.
R v Barnes (1985) 83 Cr App R 38, CA.
R v Barrell (1979) 69 Cr App R 250, CA.
R v Harris (1822) 5 B & Ald 926, 106 ER 1430.
R v Kray [1969] 3 All ER 941, [1970] 1 QB 125, [1969] 3 WLR 831, CA.
R v Lane (1985) 82 Cr App R 5, CA.
R v Shelton (1986) 83 Cr App R 379, CA.
R v Smith (1926) 19 Cr App R 151, CCA.
R v Taylor (1924) 18 Cr App R 25, CCA.
R v Tyreman (1925) 19 Cr App R 4, CCA.
Tsang Ping-nam v R [1981] 1 WLR 1462, PC.
Appeal
The Crown appealed with leave of the Appeal Committee of the House of Lords given on 10 December 1987 against the decision of the Court of Appeal, Criminal Division (Neill LJ, Bush and Ian Kennedy JJ) (86 Cr App R 40) on 22 May 1987 allowing the appeal of the respondent, André Patrick Bellman, against his convictions on 13 October 1986 at the Central Criminal Court before his Honour Judge Machin QC and a jury on three counts of dishonestly obtaining money by deception contrary to s 15(1) of the Theft Act 1968. On 4 June 1987 the Court of Appeal (Neill LJ, Potts and Ian Kennedy JJ) refused the Crown leave to appeal to the House of Lords but certified, under s 33(2) of the Criminal Appeal Act 1968, that a point of law of general public importance (set out at p 23 e f, post) was involved in the decision. The facts are set out in the opinion of Lord Griffiths.
Page 23 of [1989] 1 All ER 22
Stephen Mitchell QC and David Fisher for the Crown.
Nicholas Purnell QC and Lesley Orme for Bellman.
Their Lordships took time for consideration.
8 December 1988. The following opinions were delivered.
LORD MACKAY OF CLASHFERN LC. My Lords, I have had the privilege of reading in draft the speech of my noble and learned friend Lord Griffiths. I entirely agree with his reasoning and that this appeal should be disposed of as he suggests.
LORD FRASER OF TULLYBELTON. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Griffiths. I agree with it and, for the reasons given by him, I would allow the appeal and answer the certified question in the way he has proposed.
LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Griffiths. I agree with it and, for the reasons he gives, I would allow the appeal.
LORD GRIFFITHS. My Lords, this is an appeal by the Crown from the decision of the Court of Appeal, Criminal Division ((1987) 86 Cr App R 40) quashing the conviction of the respondent, Bellman, on three counts of obtaining property by deception contrary to s 15(1) of the Theft Act 1968. At the request of the Crown, the Court of Appeal certified the following point of law of general public importance:
‘Is it proper when an indictment contains mutually exclusive counts for both counts to be left to the jury for them to decide which, if either, count has been proven, or should the prosecution be obliged to elect during the course of the trial upon which count they wish to proceed?’
The expression ‘mutually exclusive’ is used in the question to mean counts which are factually contradictory so that a conviction on one count necessarily involves an acquittal on the other count.
Bellman was originally charged with two co-accused, MacAlesher and Ford, on an indictment containing 22 counts. MacAlesher and Ford pleaded guilty to a number of the counts and the court ordered that the remaining counts against them should not be proceeded with without the leave of the Court of Appeal, Criminal Division. The indictment was redrawn and Bellman faced trial on an indictment containing ten counts.
The broad outline of the prosecution case against Bellman was that he and MacAlesher were two conmen who, between May 1982 and June 1983, had either attempted to obtain or succeeded in obtaining large sums of money from individuals by various false pretences. In the case of the attempt and in three of the instances of obtaining money by deception, the false pretence had been that the money would be used to buy drugs in the United States which would be smuggled into this country and sold at a vast profit. As an alternative to the counts alleging that the false pretence related to drugs, the prosecution said that if Bellman and MacAlesher had not been deceiving these individuals and had in fact been intending to buy drugs in the United States, then they were guilty of a conspiracy to evade the prohibition on the importation of controlled drugs. The prosecution therefore included in the indictment three counts of conspiracy to contravene s 170(2) of the Customs and Excise Management Act 1979, contrary to s 1(1) of the Criminal Law Act 1977. The prosecution put forward these counts of conspiracy as alternatives to the counts in which the false deception related to the purchase and importation of drugs.
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The judge, in his summing up, pointed out to the jury that the conspiracy counts were alternatives to the counts alleging obtaining by deception and instructed the jury, first to consider the conspiracy counts, and only if they acquitted on the conspiracy counts would it be necessary for them to consider the counts of deception.
One of the counts of obtaining by deception, count 5, had no alternative conspiracy count and the jury were instructed to consider this separately.
The jury acquitted on the three conspiracy counts but convicted Bellman on four counts of obtaining money by deception, namely counts 5, 6, 7 and 8. The judge sentenced Bellman to serve a term of 2 1/2 years’ imprisonment on each of the counts, the sentences to run concurrently.
Bellman appealed against his conviction. The Court of Appeal allowed his appeal against conviction on counts 6, 7 and 8, but dismissed his appeal against conviction on count 5. Count 5 alleged that Bellman had dishonestly obtained £12,000 from one Childs by falsely pretending that he was concluding a real estate transaction in the United States, that the money would be used to conclude the transaction and that Mr Childs would double his money. Mr Childs in fact lost all his money. There was no alternative conspiracy count in respect of count 5, nor was there any evidence pointing to a connection between this count and any drug dealing. There was ample evidence to support the count, and the Court of Appeal accordingly dismissed the appeal against the conviction in respect of count 5 and it need not be further considered.
Counts 6, 7 and 8 all concerned money obtained from a man by the name of Cannon in June 1983. The false deception alleged in counts 6 and 7, by which Bellman obtained sums of £10,000 and £5,000 from Cannon, was that the money would be used to purchase luxury cars in the United States which would then be illegally imported into this country and sold at a great profit. The false deception alleged in count 8, by which £3,000 was obtained from Cannon, was that the money would be used to facilitate the importation of controlled drugs from the United States to this country and that Cannon’s investment of £15,000 would be lost unless he invested this further sum of £3,000 but that if he did so the return on his investment, which had in fact been used for the purchase of drugs, would be very great. The judge treated these three counts together as alternative to count 10 which was one of the conspiracy counts. Counts 6 and 7 were not strictly alternatives to the conspiracy count but there can be no doubt that count 8 was a true alternative. Because of the way in which they had been treated by the judge the Court of Appeal decided that they must treat them similarly.
The prosecution case in respect of these four counts depended primarily on the evidence of Cannon and a man by the name of Short. Short himself had been named as the loser in counts 3 and 4 which alleged that money had been obtained from him by the false deception that it was to be used to buy drugs in the United States. Short and Cannon, who were both treated as accomplices, gave evidence to the following effect. Short said that he believed that he was putting up money to buy drugs and that he had introduced Cannon to MacAlesher and Bellman in order to provide further funds for this purpose. He said, however, that the story told to Cannon to induce him to part with the first two sums was that the money was to be used to buy cars in the United States which would then be smuggled into this country without paying any import duty and thereby sold at a great profit. After the money had been obtained from Cannon for this purpose, Short had gone to the United States with Bellman and MacAlesher. They flew to Tampa in Florida. On the following day, Short said, MacAlesher and Bellman went to a bank and emerged with a bag which they said contained the money and then told him that they were going off to buy the drugs. When they returned they told him they had bought the drugs and that they were in the bag. He said the bag was always kept padlocked and in the custody of MacAlesher and Bellman. Short said that in his presence Bellman had then telephoned Cannon in England and told him that his money had been used to purchase drugs which had proved more expensive than they thought and they needed another £3,000 or Cannon would lose his money, and it was as a result of that
Page 25 of [1989] 1 All ER 22
telephone conversation that Cannon telexed out the further £3,000 that formed the basis of count 8. Later, he said, it was decided that this bag would be put in the car for safe keeping because the hotel cleaners may have become suspicious about it. Short said he put the bag in the boot of the car and locked it. Later, he said, when he went to fetch the car, he looked in the locked boot and discovered that the bag was no longer there. It is clear from the judge’s summing up that Short gave somewhat confused evidence about when the bag was put in the boot and when it was last seen before he discovered that it was missing.
Cannon in evidence described how he was invited by Short to meet Bellman and MacAlesher to discuss the purchase of cars in the United States and bringing them in without paying customs duty and thereby making a large profit on resale in this country. He described how he raised the money and handed it over. He then described being telephoned by Bellman from the United States and being told that it was not cars that were purchased but drugs and that £3,000 more was needed. If the £3,000 was not forthcoming, he was told, he would have lost his investment of £15,000. As a result of that conversation he said he raised a further £3,000 and telexed it to the United States.
Cannon said that shortly thereafter he met Bellman and MacAlesher, after they had returned from the United States, and they repeated the story about the stolen drugs saying that they had lost much more than he had.
Bellman did not make a statement to the police and he did not give evidence.
This is but a bare outline of the evidence extracted from the summing up of the judge after a trial that lasted many days but it is sufficient to show that the jury would have to decide whether what had taken place in America and what had been told to Cannon about the drugs was all an elaborate charade to deceive Cannon and possibly also Short, or whether, in fact, this had been an attempt to purchase drugs which had come to grief when the drugs were stolen.
It was conceded in argument before your Lordships that if the prosecution had elected to present this case solely as a conspiracy to import drugs, there was, by the end of the prosecution evidence, a prima facie case to be considered by the jury on that charge. It was of course also conceded that there was a prima facie case to be considered on the charges of deception on which the jury convicted. But it was submitted that because these two charges were mutually contradictory neither should have been left to the jury.
The Court of Appeal, in giving its reasons for allowing the appeal on counts 6, 7, and 8, said (86 Cr App R 40 at 46):
‘Having considered with care the course of the trial, the submissions made to the trial judge and the summing-up it seems to us to be clear that the prosecution were putting before the jury counts which were not merely mutually exclusive but were mutually destructive; they were seeking to satisfy the jury by means of the deception counts that the representations as to the importation of drugs were false while at the same time seeking to satisfy them by means of the conspiracy counts that there were in fact conspiracies to import drugs and that accordingly the representations were true. We see the force of the argument by counsel for the Crown that the issue for the jury concerned the state of mind of the appellant rather than the overt acts of the other persons involved, but it is plain that on the conspiracy counts the jury were being asked to draw inferences of fact which were diametrically opposed to the inferences they were asked to draw on the deception counts. We therefore consider that on the facts of this case the prosecution should have been required to make an election at the close of their case and to decide whether to proceed on the deception counts or on the conspiracy counts in so far as they were alternatives … Accordingly, the convictions on counts 6, 7 and 8 must be quashed.’
As to count 5, the Court of Appeal, in dismissing the appeal on that count, said:
‘The false representations alleged in count 5 were quite separate from those in the
Page 26 of [1989] 1 All ER 22
other counts and the person who was deprived of money was different. Moreover it was not alleged by the prosecution that any mention of drugs was made on this occasion. The appeal against conviction in relation to count 5 is therefore dismissed.’
Bellman has already served his sentence on count 5 and as all his sentences were concurrent he will not have to serve any further term of imprisonment if this appeal is allowed.
Counsel for Bellman did not seek to support the Court of Appeal’s decision on the ground that the prosecution should have been put to their election at the end of the prosecution case. If the prosecution have put before a jury evidence which, if believed, is capable of supporting a conviction, it is for the jury and not the judge to evaluate the evidence and decide the question of guilt; still less is it the function of the prosecution to elect which interpretation to place on the evidence, for that is to usurp the function of the jury. The outcome of this case turned primarily on the jury’s assessment of Short and Cannon and whether they believed that the visit to the United States, which was supported by other evidence, was all part of an elaborate charade or whether, in truth, an attempt had been made to obtain drugs. The evidence was capable of supporting either view of the facts and it was the jury’s task to determine where the truth lay.
Counsel for Bellman argued this appeal on the more fundamental proposition that under our adversarial procedure of trial in which the burden of establishing the guilt of the accused is placed on the prosecution, it can never be right for mutually contradictory counts to be contained in one indictment. He submitted that to do so would be contrary to the prosecution’s duty of proving the case, unfair to the accused and an embarrassment for the jury.
My Lords, I am sure that it will only be comparatively rarely that the prosecution will wish to charge counts which are factually mutually contradictory in the sense that proof of one charge destroys the other. The very fact that offences are being charged in the alternative obviously weakens the prosecution case and enables the defence to invite the jury to say that as the prosecution cannot make their mind up which crime the accused committed they, the jury, cannot be sure of his guilt. But equally, I have no doubt that in certain circumstances justice requires that an accused should face mutually contradictory counts. To take a simple example. Suppose the police were keeping watch in Soho because they had evidence that a drug pedlar was regularly selling heroin on the streets. The police see the drug pedlar handing over a packet of white powder to an addict and receiving a large sum in bank notes. They arrest the pedlar but the addict disposes of the packet down a grating in the road so that its contents are lost and cannot be analysed. The addict is prepared to give evidence that he believed he was buying heroin and had bought heroin before from the same drug pedlar, and there is other evidence to support the belief that the packet contained heroin. The drug pedlar, however, says that the packet did not contain heroin but only a mixture of chalk and some other harmless substance, but admits that he received a £1,000 for it because he told the addict it was heroin. In such circumstances I can see no injustice in requiring the accused to face the alternative counts of supplying a controlled drug, and obtaining £1,000 by deception. Whichever be the true explanation, he has committed a crime and the prosecution, lacking the positive evidence of an analysis of the drug because it was dropped down the grating, might not be wholly confident that the jury would draw the inference that the drug was heroin on this occasion and might fear that the jury would accept the accused’s explanation. Of course, there is the possibility that the prosecution might fail to establish either charge because the jury would be directed first to consider the count of supplying a controlled drug, and only if they acquitted on that count, to proceed to consider if they were sure that the accused’s explanation that he sold a harmless substance as heroin was true, in which case they would convict on the second count; but if they were left in doubt then they would have no alternative but to acquit on the second count also. However, it seems to me unlikely that, looking at the evidence as a whole, a jury would not feel able to be sure which was the true explanation of the transaction.
Page 27 of [1989] 1 All ER 22
There are, of course, rare situations in which it is clear that the accused has committed a crime but the state of the evidence is such that it is impossible to say which crime he has committed. In such circumstances no prima facie case can be established to support either crime and neither crime can be left to the jury. The classic example arises where a man has given contradictory evidence on oath on two occasions. It is obvious that one statement must be false but in the absence of any evidence to indicate which statement was false it cannot be proved on which occasion the perjury was committed: see R v Harris (1822) 5 B & Ald 926, 106 ER 1430.
A modern example of this dilemma arose in Tsang Ping-nam v R [1981] 1 WLR 1462. A police officer had made contradictory statements in the course of an investigation into corruption in the police force and at the trial of his police colleagues on charges of corruption. His statement implicated his colleagues but his evidence at the trial exonerated them. The police officer was charged with and convicted of an attempt to pervert the course of justice. The following passage from the judgment of the Judicial Committee delivered by Lord Roskill gives the reasons for allowing the appeal (at 1465):
‘It will be observed that no particulars of this count were ever asked for … Had particulars been sought and ordered, the Crown’s dilemma must at once have emerged. The Crown conceded that perjury could not be proved against the defendant for there was no affirmative evidence that the defendant had lied in court let alone any corroboration of any such affirmative evidence. The Crown also conceded that it could not be affirmatively proved that the defendant had given false information to the investigating officers to whom the several statements had been given. But the Crown averred that it was clear that either the defendant had committed perjury or had given false information to the investigating officers and that, whichever was the case, he was guilty of an attempt to pervert the course of public justice by his conduct … Had the particulars been asked for, the Crown must have given alternative and mutually inconsistent particulars which could not have been allowed to stand as particulars under the same count. If that pleading difficulty had been surmounted by adding in the case of each of the three officers an additional count, their Lordships are of the clear opinion that, at the close of the case for the prosecution, a submission of no case to answer on both of each pair of counts must have succeeded on the ground that the Crown had wholly failed to prove the relevant facts averred in either count.’
The reference to the Crown wholly failing to prove the relevant facts must, of course, be read as a failure by the Crown to establish a prima facie case on either count, for it is the duty of the prosecution to establish a prima facie case of guilt, and it is the function of the jury to say whether the evidence which supports the prima facie case is sufficient to prove guilt.
An accused is always entitled to have the counts in the indictment considered separately by the judge at the end of the prosecution’s evidence and, if there is insufficient evidence to provide a prima facie case on any count, to have that count withdrawn from the jury. This was the evidential difficulty that faced the prosecution in Tsang Ping-nam v R, but it does not deal with the problem in a case such as the present where the evidence is sufficient to support a prima facie case on either of the two alternative hypotheses and it is for the jury to say on their assessment of the witnesses and the inferences that they are prepared to draw from the evidence as a whole whether they are sure that either hypothesis is correct.
It, of course, goes without saying that if the evidence shows that one of two accused must have committed a crime but it is impossible to go further and say which of them committed it, both must be acquitted: see R v Lane (1985) 82 Cr App R 5.
As I have said, the submission of counsel for Bellman was that contradictory counts can never be properly joined in the same indictment. He concedes that no support for
Page 28 of [1989] 1 All ER 22
his argument can be gained from a consideration of the Indictments Act 1915 and the Indictment Rules 1971, SI 1971/1253, made thereunder. The counts of conspiracy and false deception in the present case would clearly be based on the same facts within the meaning of r 9 of the 1971 rules, which provides:
‘Charges for any offences may be joined in the same indictment if those charges are founded on the same facts, or form or are a part of a series of offences of the same or a similar character.’
Nor was he able to cite any authority in which joinder had been refused on the ground that the facts of the two counts were mutually self-destructive.
The Crown, on the other hand, were able to point to the long-established practice of charging counts of larceny and receiving as alternatives and to the present practice since the passing of the Theft Act 1968 of charging robbery or theft and handling as alternatives in separate counts and the express approval of this practice by the Court of Appeal in R v Shelton (1986) 83 Cr App R 379.
Perhaps the most striking example of the joinder of mutually contradictory counts in recent times is R v Barnes (1985) 83 Cr App R 38. Barnes had given evidence at the trial of his brother on a charge of wounding with intent that it was he, Barnes, who had attacked and wounded the victim and not his brother. The brother was acquitted. Barnes was then tried on an indictment that charged him with committing perjury at his brother’s trial and, alternatively, with wounding with intent. Barnes was convicted of perjury and appealed on the ground that the two counts should not have been joined in the same indictment as they were not ‘founded on the same facts’ within the meaning of r 9. The Court of Appeal dismissed the appeal by the application of the proviso to s 2(1) of the Criminal Appeal Act 1968 on the ground that there had been no miscarriage of justice and found it unnecessary to decide whether the two counts had been properly joined.
My Lords, I entertain no doubt that the two counts were properly joined in the indictment. In Ludlow v Metropolitan Police Comr [1970] 1 All ER 567 at 574, [1971] AC 29 at 40 Lord Pearson, in a speech with which the rest of their Lordships agreed, when dealing with r 3 contained in Sch 1 of the Indictments Act 1915 (which had identical wording to the present r 9 of the Indictment Rules 1971) approved the following passage in the judgment of the Court of Appeal in R v Kray [1969] 3 All ER 941 at 944, [1970] 1 QB 125 at 131:
‘It is not desirable, in the view of this court, that r 3 should be given an unduly restricted meaning, since any risk of injustice can be avoided by the exercise of the judge’s discretion to sever the indictment. All that is necessary to satisfy the rule is that the offences should exhibit such similar features as to establish a prima facie case that can properly and conveniently be tried together.’
Lord Pearson added:
‘That last sentence is not a construction of the rule, but I think it is helpful practical advice for those applying the rule. The view that r 3 should not be given an unduly restricted meaning derives support from authority: R v Ailes (1918) 13 Cr App R 173. When it is available, it should be used: R v Taylor (1924) 18 Cr App R 25; R v Tyreman (1925) 19 Cr App R 4; R v Smith (1926) 19 Cr App R 151; Connelly and v Director of Public Prosecutions [1964] 2 All ER 401 at 406, 416–417, 440, 451, [1964] AC 1254 at 1296, 1312–1313, 1351, 1367.’
In R v Barrell (1979) 69 Cr App R 250 at 252–253 Shaw LJ said:
‘This contention rests on too narrow a construction of the language of the statute and the relevant rule. The phrase “founded on the same facts” does not mean that for charges to be properly joined in the same indictment, the facts in relation to the
Page 29 of [1989] 1 All ER 22
respective charges must be identical in substance or virtually contemporaneous. The test is whether the charges have a common factual origin. If the charge described by counsel as a subsidiary charge is one that could not have been alleged but for the facts which give rise to what he calls the primary charge, then it is true to say that for the purposes of rule 9 that those charges are founded, that is to say have their origin, in the same facts and can legitimately be joined in the same indictment.’
The case against Barnes of wounding with intent was founded on the evidence he gave at his brother’s trial and which the prosecution maintained as their primary case was in fact perjured evidence. The factual origin of both offences was the attack on the victim. If the prosecution had been forced to proceed against Barnes in separate trials and Barnes had been acquitted of perjury in the first trial, it would have enabled Barnes on the second trial for wounding with intent to give evidence that what he had said in the witness box at his brother’s trial was, in fact, untrue and perjury, in the knowledge that he would be protected from any further prosecution for perjury by a plea of autrefois acquit. This manifest manipulation and abuse of the judicial process is only to be avoided by joinder of both counts in one indictment so that the whole of the facts can be adjudicated on by one jury.
It is also to be observed that in Tsang Ping-nam v R Lord Roskill did not apparently consider that it would have been fundamentally wrong to include separate but contradictory counts in the indictment. He used the example of charging the offences in separate counts to illustrate the evidential difficulties of the prosecution on the particular facts of that case. If the Judicial Committee had considered that the joinder of such counts was fundamentally wrong the judgment would surely have been differently expressed.
My Lords, for these reasons I find no support in law for the submission that mutually contradictory counts can never be joined in one indictment. I can find no overriding reason why justice requires there should be such a rule nor was it suggested that Bellman suffered injustice in the present case. As I have endeavoured to point out, there will be rare occasions when I think justice positively requires there should be such joinder.
I would therefore allow this appeal and restore the convictions on counts 6, 7 and 8, but as I have already pointed out this will not affect Bellman as he has already served his sentence.
I would answer the certified question by saying that there is no rule of law that prevents the inclusion in one indictment of mutually exclusive counts and that if, at the end of the prosecution case, the evidence establishes a prima facie case on both counts, the matter should be left to the jury to determine the question of guilt, and the prosecution should not be put to their election on which count to proceed.
LORD JAUNCEY OF TULLICHETTLE. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Griffiths. I agree with it, and would allow this appeal.
Appeal allowed.
Solicitors: Crown Prosecution Service; Offenbach & Co (for Bellman).
Mary Rose Plummer Barrister.
R v East Sussex Coroner, ex parte Healy and another
[1989] 1 All ER 30
Categories: ADMINISTRATION OF JUSTICE; Judiciary
Court: QUEEN’S BENCH DIVISION
Lord(s): WOOLF LJ AND HUTCHISON J
Hearing Date(s): 6 MAY 1988
Coroner – Jurisdiction – Inquest – Death occurring ’in or near’ area of jurisdiction – Death occurring eight or nine miles off coast – Whether death occurring ’in or near’ area of coroner’s jurisdiction – Coroners Amendment Act 1926, s 18.
The deceased disappeared while diving from a vessel some eight or nine miles off the Sussex coast. His body was never recovered. The coroner for the county nearest the scene of the accident refused to hold an inquest and expressed the view that he had no jurisdiction to do so because the death had not occurred ’in or near’ the area of his jurisdiction for the purposes of s 18a of the Coroners Amendment Act 1926. The deceased’s parents applied for judicial review of the coroner’s refusal to hold an inquest.
Held – Although the question of whether a coroner had jurisdiction under s 18 of the 1926 Act to hold an inquest if there was no body was primarily a matter for his belief and assessment as to whether the death had occurred ’in or near’ the area of his jurisdiction, a distance of eight or nine miles off the coast could not be described as ’in or near’ the area of his jurisdiction. The coroner had accordingly been right to decline to hold an inquest into the deceased’s death. The application would therefore be refused (see p 35 d to h j and p 36 f g, post).
Notes
For death occurring in or near’ the area of a coroner’s jurisdiction, see 9 Halsbury’s Laws (4th edn) para 1056.
For the Coroners Amendment Act 1926, s 18, see 11 Halsbury’s Statutes (4th edn) 378.
Cases referred to in judgment
Tyne River Keelmen v Davison (1864) 16 CBNS 612, 143 ER 1267.
Cases also cited
R v Shrewsbury Coroner’s Court, ex p British Parachute Association (1987) Times, 21 September, DC.
R v West Yorkshire Coroner, ex p Smith [1982] 3 All ER 1098, [1983] QB 335, CA.
Application for judicial review
Marian Healy and Peter Healy, the parents of Trevor Healy deceased, applied, with the leave of McCullough J given on 16 February 1988, for judicial review by way of (i) certiorari to quash the refusal by Dr Donald Gooding, HM Coroner for the western district of East Sussex, to hold an inquest into the death of the deceased and (ii) mandamus requiring the coroner to hold an inquest. The facts are set out in the judgment of Woolf LJ.
Jeremy Carey for the applicants.
Giles Kavanagh for the coroner.
David Pannick for the Secretary of State for the Home Department.
6 May 1988. The following judgments were delivered.
WOOLF LJ. This is an application for judicial review. It is an application made by Mr and Mrs Peter Healy and it arises out of the tragic death of their 17-year-old son on 9 August 1986. The reason for the application is that there has not been any coroner’s
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inquest into the death of their son, Trevor, and the applicants, not unnaturally in the circumstances, feel that there should be an inquest, not so much for their own personal satisfaction, though that is no doubt a factor which they have in mind as well, but because they feel that an inquest could result in steps being taken to avoid further tragic fatalities of this sort.
The circumstances of Trevor’s death do not have to be gone into in detail for the purposes of this application. It is sufficient if I recite the barest outline of the facts. On 9 August 1986 Trevor, together with other people, went out on a diving expedition. They went to the scene of two wrecks very approximately eight or nine miles offshore and Trevor descended into the sea in that position with another diver, who was much more experienced than Trevor, and that was the last that was seen of Trevor. His body has never been recovered. Precisely what went wrong has never been discovered, albeit, as I will indicate hereafter, there was an inquiry under the Merchant Shipping Acts 1970 and 1979 into his death.
The jurisdiction which it is alleged that the coroner has in these circumstances is an unusual one. It is unusual because the jurisdiction of the coroner is normally founded on the presence of the body of the deceased within his area of jurisdiction. In this case the respondent coroner, Dr Donald Gooding, is the coroner of the western district of East Sussex but as the coroner makes clear in his evidence in fact his jurisdiction extends to the whole of East Sussex, and he is normally required to inquire into deaths where they occur in circumstances warranting an inquest when the body is within his area of jurisdiction.
However, because there are occasions where a body is destroyed or never recovered, a special jurisdiction was introduced, as I understand the position, for the first time by the Coroners (Amendment) Act 1926, s 18. That section provides:
‘Where a coroner has reason to believe that a death has occurred in or near the area within which he has jurisdiction in such circumstances that an inquest ought to be held, and that owing to the destruction of the body by fire or otherwise or to the fact that the body is lying in a place from which it cannot be recovered, an inquest cannot be held except by virtue of the provisions of this section, he may report the facts to the Secretary of State, and the Secretary of State may, if he considers it desirable so to do, direct an inquest to be held touching the death, and an inquest shall be held accordingly by the coroner making the report or such other coroner as the Secretary of State may direct, and the law relating to coroners and coroners’ inquests shall apply with such modifications as may be necessary in consequence of the inquest being one into the death of a person whose body does not lie within the coroner’s jurisdiction.’
It will be noted immediately from the terms of s 18 that the basis of jurisdiction in cases where there is no body available is the coroner having ’reason to believe that a death has occurred in or near the area within which he has jurisdiction’. It is also to be noted that the death need not in fact have occurred in or near the area within the coroner’s jurisdiction as long as the coroner has reason to believe that the death did in fact occur in or near the area within his jurisdiction.
When the circumstances of Trevor’s death were drawn to the coroner’s attention he naturally was concerned to do what he could to assist the parents of Trevor, the present applicants. He took the view initially that he had no jurisdiction and wrote indicating that was so. He also communicated with the Home Office and the Home Office advised him that there was no jurisdiction in these circumstances, the Home Office taking the view, based on their practice, that a distance of seven or eight miles offshore was not near the coroner’s area of jurisdiction, that is to say the county of East Sussex.
The matter did not rest there because a member of Parliament raised the matter with the Home Office and in consequence a letter was written from the Home Office by Mr Douglas Hogg, the Parliamentary Under-Secretary of State, and another letter was written
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on 4 February 1987 on behalf of the Prime Minister. In those letters it was set out that ’in or near his jurisdiction’, that is the coroner’s jurisdiction, in s 18 of the Act is to be construed to be a matter of yards, not miles and accordingly a death seven or eight miles out to sea could not fall within the terms of the section. It is right to say that in coming to his conclusion that there was not jurisdiction, Dr Gooding, the coroner, acted on the advice of the Home Office which he had received which was to the effect that seven or eight miles was beyond the parameters of nearness. He did, however, draw the attention of those who were advising the applicants to the provisions of the Merchant Shipping Acts 1970 and 1979. Although the applicants could not themselves institute an inquiry under the provisions of those Acts, to which I must now turn, they did in fact make representations indicating their support for an inquiry to take place (under those Acts). The provisions of the 1970 Act as amended which are relevant are contained in s 61, which provides:
‘(1) Subject to subsection (4) of this section, where—(a) any person dies in a ship registered in the United Kingdom; or in a boat or life-raft from such a ship; or(b) the master of or a seaman employed in such a ship dies in a country outsidethe United Kingdom; an inquiry into the cause of the death shall be held by a superintendent or proper officer at the next port where the ship calls after the death …
(1B) Subject to subsection (4) of this section, where it appears to the Secretary of State that a person may—(a) have died in a ship registered in the United Kingdom or in a boat or life-raft from such a ship; or (b) have been lost from such a ship, boat or life-raft and have died in consequence of having been so lost, the Secretary of State may arrange for an inquiry to be held by a superintendent or proper officer into whether the person died as aforesaid and, if the superintendent or other officer finds that he did, into the cause of death … ’
Pursuant to those provisions the Secretary of State arranged that there should be an inquiry held by a superintendent into the death of Trevor, the view being taken that he had been lost from a ship, boat or life-raft, the definition of ship being extremely wide and covering certainly the vessel from which Trevor descended on his dive.
An inquiry was held in accordance with the provisions of s 61 on 18 June 1987 by a marine superintendent at the Department of Transport. At the outset of that inquiry, he made it clear that the purpose of the inquiry was, firstly, to establish the fact that death had occurred, and secondly, so far as possible, to establish the physical cause of that death. His jurisdiction to inquire was limited. However, witnesses were called before him who could give relevant evidence. The way the evidence was given was for the statement which the witnesses had previously made to be read out; then the witness was asked if he agreed with the statement; and then there was an opportunity for counsel for the applicants who has appeared before this court, and for whose argument we are indebted, and who appeared before the superintendent, to ask questions. It is right to say that although counsel for the applicants conducted his examination with great circumspection and precision, there were times where the chairman felt it necessary to confine the examination that was being conducted by counsel. Having heard the evidence, the superintendent found that Trevor was lost whilst sports diving from the vessel concerned and that he believed him to be asphyxiated or drowned. He added:
‘Part of the attraction of many sports is that there is an element of risk involved; be it mountaineering or potholing, hang-gliding or sports diving. The pitting of one’s skills and experience against the forces of nature is all part of the challenge … ’
He indicated that the circumstances here were tragic and that it was important in that situation for ’everybody involved in organising such events to minimise the risks involved as far as is humanly possible.' He went on to say:
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‘The greatest care should be taken when planning these activities and thought should be given in that planning, as to whether it is really practical to mix deep dives for the experienced with shallow dives for the novices. Perhaps serious consideration too, should be given to the possibility that a pair of experienced divers should forego taking part in the programme, but remain kitted up whilst diving is in progress, in order to be ready to mount an immediate search and rescue or recovery operation should an emergency arise. Let us all learn something from Trevor’s tragic death. May it be that lesson will teach us that the sea is not an element to be trifled with; it must be respected. The professional seaman recognises this, although even he may be caught unawares. How much more, therefore, that the casual recreational users who, such as the sports diver or sea fishing enthusiast, consider that the sea is just a means to an end, should recognise it also.’
He then closed the inquiry.
Although evidence was given by those most closely involved in this tragic accident, the applicants felt that the inquiry was not satisfactory. In his submissions before this court, counsel for the applicants was careful to point out that he did not make any personal criticism of the way the inquiry was conducted. He was submitting that the shortcomings were because of the extent of the jurisdiction of the inquiry and he submits that notwithstanding that inquiry a coroner’s inquest would serve a useful purpose because the extent of the jurisdiction of the coroner is wider than that of the superintendent. It is right to say that there is substance in counsel’s submission. The jurisdiction of a coroner is wider. However, it also must be recognised that the coroner’s jurisdiction is restricted. The nature of the restriction is indicated by the terms of the Coroners Rules 1984, SI 1984/552, and in particular r 36(1) and (2), which provides:
‘(1) The proceedings and evidence at an inquest shall be directed solely [I emphasise the word ‘solely’] to ascertaining the following matters, namely—(a) who the deceased was; (b) how, when and where the deceased came by his death; (c) the particulars for the time being required by the Registration Acts to be registered concerning the death.
(2) Neither the coroner nor the jury shall express any opinion on any other matters.’
Rule 36 indicates the limits of the jurisdiction of the coroner but it does indicate also that one of the matters that the coroner is entitled to investigate is how the deceased came by his death. ’How the deceased came by his death’ are wider terms than those contained in the Merchant Shipping Act 1970, to which I have made reference, but the ability of the coroner to express any opinion is extremely limited because of the terms of para (2), and it is to be noted that the importance of that rule is underlined by r 41, which provides:
‘Where the coroner sits with a jury, he shall sum up the evidence to the jury and direct them as to the law before they consider their verdict and shall draw their attention to Rules 36(2) and 42.’
Rule 42 provides:
‘No verdict shall be framed in such a way as to appear to determine any question of—(a) criminal liability on the part of a named person, or (b) civil liability.’
However, counsel for the applicants drew attention to a limited power of the coroner which is contained in r 43. The rule provides:
‘A coroner who believes that action should be taken to prevent the recurrence of fatalities similar to that in respect of which the inquest is being held may announce at the inquest that he is reporting the matter in writing to the person or authority who may have power to take such action and he may report the matter accordingly.’
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So there is that power in the coroner to report. The applicants feel here that if there was an inquest this might be a case where the coroner would wish to avail himself of that power.
The first matter that this court has to decide, is bearing in mind that the clear indications here are that Trevor met his death eight or nine miles offshore, is whether there is jurisdiction. For the purposes of the argument, counsel for the applicants accepts, as is contended on behalf of the respondents, that the normal limit to the coroner’s jurisdiction is the point of low tide but he submits that eight or nine miles from that point is well within the provisions of s 18 of the 1926 Act. He refers, with regard to the term ’near’, to a decision of the court decided as long ago as 1864, when methods of transport were not as advanced as they are today, in which consideration was given to the meaning of the term ’near’ in a different context, namely Tyne River Keelmen v Davison (1864) 16 CBNS 612, 143 ER 1267. In that case consideration was given as to when payments were due in respect of the export of coal. The provision of the Act in question referred to the right to make a levy in respect of the export of coal near the River Tyne. Erle CJ said 16 CBNS 612 at 621, 143 ER 1267 at 1271):
‘… I think a colliery which is ten miles off is “near the river Tyne,” within the meaning of the act.’
Williams J was of the same view and added (16 CBNS 612 at 621–622, 143 ER 1267 at 1271):
‘… every colliery or coal-mine whence coals are exported by the river Tyne is “near,” within the meaning of this statute. A colliery which is ten miles off may well be considered near, within the words used. The word must necessarily be construed in different senses according to the subject-matter.’
Willes J was of the same view. Byles J said (16 CBNS 612 at 622, 143 ER 1267 at 1271):
‘… the word “near” is not a restraining, but an expanding word,— to be extended so far as to give effect to the intention of the legislature. Railways have brought places in one sense near to each other which were not so before the discovery of that rapid mode of transit. It is enough to say that I agree with the rest of the court in thinking that this colliery is near the river Tyne within the meaning of the act.’
It is clear from that case that there are circumstances where ten miles can be regarded as near, never mind eight or nine miles. However, it is important to bear in mind in coming to the conclusion as to what is the meaning of ’near’ in this Act, the intent and purpose of the legislation with which we are dealing and, as was recognised in the decision to which I have just made reference, the context in which the word ’near’ is used can be of particular significance.
The first point that has to be made with regard to s 18 is that it is primarily concerned with situations where there could be a conflict of jurisdiction between adjoining jurisdictions of two coroners where there is a situation where it cannot be said whether the death had occurred within the boundaries of one coroner or without those boundaries. That is made clear by the discretion which the Secretary of State has, not only to order that an inquest should be held by the coroner making the report but by such other coroner as the Secretary of State may direct. The section, however, and this is not disputed, also applies to cases where there is no conflict of jurisdiction between two coroners. It can apply in situations where someone dies off the shore of the district of a coroner whose ordinary jurisdiction extends to that shore. In my view there is no reason to construe the section in a way which prevents the coroner investigating a death where there is no body and the death has some real connection with his jurisdiction. Here I adopt a submission helpfully made by counsel for the coroner who referred to the jurisdiction as being normally land-based and submitted that the sort of event in the present circumstances which falls within the section is one which has some nexus with
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the land over which the coroner has jurisdiction. He gave as an example the situation where somebody goes out swimming from the shore and is never seen again. Another example he gave was somebody who goes out in a rowing boat from the shore. He also drew attention to s 61(4) of the Merchant Shipping Act 1970 which makes it clear that where there is a coroner’s inquest there should not then be an inquiry under the 1970 Act.
However, it does not follow that there is an implication that there should not be an inquest when there has been an inquiry under that Act. First of all, of course we are dealing here with a jurisdiction under the 1926 Act whereas the Merchant Shipping Act which I have just been considering is a 1970 Act, albeit a 1970 Act which replaced earlier legislation. Secondly, it could be equally argued that the absence of any similar provision in s 18 of the 1926 Act which is equivalent to s 61(4) points the other way. It is, however, fair to say that if there is some other suitable form of inquiry which can take place this is relevant as it is less likely that Parliament intended there to be an overlap between the two jurisdictions. Here, counsel for the coroner submits that this was clearly a marine accident whereas the section is referring to a land-based jurisdiction.
I regard as being most important in deciding on the proper approach to s 18 the fact that it refers to situations where the coroner has reason to believe that a death has occurred in or near the area within which he has jurisdiction. Having regard to those words, it seems to me that in the first instance the question of whether or not a coroner has jurisdiction is to be judged by the coroner’s belief and his assessment as to whether or not the death occurred in or near the area within which he has jurisdiction. The word ’near’, being an ordinary word of the English language indicating a short distance or at close proximity, is to be applied by the coroner in a commonsense manner and as long as the coroner approaches the matter in a way which is not wholly unreasonable it seems to me that it is not for the courts to define precisely what is meant by the word ’near’. It is a matter to be judged initially by the coroner. It seems to me also that there can be differing circumstances which can cause a different effect to be given to the word ’near’ by a coroner. It will not always have exactly the same application in yards, feet, inches or longer distances than that.
The role of the court, it seems to me, is confined to laying down what are the parameters of what is capable of being regarded as within his jurisdiction by a coroner. The court does that on the basis of particular cases that come before the court. So far as this case is concerned, I consider it is right that I should indicate that I would not accept the Home Office approach as to ’a matter of yards’. That seems to me to be far too constrained. If the coroner had applied that limited approach indicated by the Home Office he would be wrong. If yards is too short an approach to indicate the limits of the jurisdiction under s 18, what is the maximum extent of that jurisdiction? In particular, having regard to this case, is eight or nine miles beyond that maximum? Notwithstanding the authority relied on by counsel for the applicants and to which I have already made reference relied, I have come unhesitatingly to the conclusion that eight or nine miles is beyond the jurisdiction of the coroner under s 18 and the coroner accordingly had no jurisdiction, whatever he may have believed to be the position, in this particular case. In saying that, I am bearing in mind in particular that this was a death at sea, on the high seas. At the time, and I do not regard this as being critical, the jurisdiction, so far as sovereignty was concerned, of this country’s territorial boundaries was three miles from the shore. It has now been extended to twelve miles. The fact that it was at the time of Trevor’s death three miles makes clear in my view that it was not intended by Parliament by using the word ’near’ in relation to a death in these circumstances that the coroner should be given jurisdiction.
Approaching the matter in the way I have indicated, and limiting the court’s role to that which I have indicated, I have come to the conclusion that while the Home Office’s approach can be criticised, equally it is not possible to regard the coroner’s jurisdiction as extending to eight or nine miles. That is enough to determine this case.
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I feel it is right that I should say a few words about the question of discretion. I do so while stressing that I fully understand and accept the basis of this application by the parents. I equally do not in any way criticise the parents for adopting the course they did. They thought it was right not to rush to the courts, which is understandable, but to see what happened at the Merchant Shipping Act inquiry and only when they knew the result of that inquiry did they ultimately decide they should come to this court. Once they decided to come to this court, they moved as expeditiously as was possible as is indicated by the fact that the application for leave was made on 25 January 1988 and leave was obtained on 16 February 1988, but this is a long time after the tragic death of Trevor. The position is that this jurisdiction of the court is normally to be exercised promptly though the court has power to extend time. In considering whether to extend the time for making an application, as the court would have to do in this case, what the court has to consider even if it was possible otherwise to grant leave, is whether an inquest now would serve any purpose. It is also necessary to have in mind the fact that if there were now to be an inquest it would bear hard on those who were closely involved in the death of Trevor and who have already had to go through the harrowing experience of giving evidence in one inquiry. Bearing in mind the period of time which has elapsed and above all the statement of the coroner in his affidavit, which is before this court, that a further inquiry into the death of Trevor might well serve no useful purpose and that in effect the inquiry that has already taken place, albeit more limited, has established the cause of death, the conclusion I would come to as a matter of discretion is that it would not be right for this court to intervene. Therefore, notwithstanding that the court appreciates the feelings of the parents, the court would have come to the conclusion that enough is enough and that so far as proceedings of this nature and inquest are concerned there should be an end. I emphasise the fact that even if the court’s conclusion had been different, it would have been up to the coroner whether or not to make an application to the Secretary of State, and having regard to the sentiments which he expressed and the arguments which were advanced on his behalf, clearly he would not have made such an application. If he had made such an application it appears extremely unlikely that the Secretary of State would ever have contemplated ordering or directing an inquest in this case.
Accordingly, in these circumstances I would refuse this application.
HUTCHISON J. I agree with the judgment Woolf LJ has given and I agree that the application should be refused for the reasons which he has mentioned. I would add only two observations on my own part. Nobody who has heard the facts of this tragic accident could feel other than the greatest sympathy for Mr and Mrs Healy, not only in the loss that they sustained as a result of it but in the motives that understandably have made them feel that they must seek to pursue this application in order that every possible investigation may take place into the circumstances of the death. However, like Woolf LJ, I am quite satisfied, first, that there is no power in this court to direct the coroner to take any further steps because he himself would have had no jurisdiction; and second, that as a matter of discretion, even had that not been so, it would not have been right to compel an inquest at this stage. I would add in that connection that though I perfectly appreciate the distinction that there is under the statutes between the nature of the inquiry under the Merchant Shipping Act 1970 and the nature of a coroner’s inquiry, it did seem to me, when I read last night the full note of the inquiry under the Merchant Shipping Act 1970, that there had been a very full inquiry on that occasion. In particular, it occurred to me that whatever were the theoretical limits which might have inhibited counsel for the applicants from pursuing those matters which he wished on behalf of the parents to investigate, in practice he was not much, if at all, curtailed in the questions he was allowed to ask and he contrived, and I think those instructing him can be grateful for what he achieved, to investigate matters very fully; and I am sure the superintendent conducting that inquiry was indebted to him for that achievement. That is all I wish to say about the facts of this matter.
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I would just add one observation on the question of territorial limits. The matter was raised really in the first instance when counsel for the Secretary of State was addressing us. He indicated that he relied on the point no further than this, to submit that it would be extremely improbable that Parliament was intending to provide that the coroner could assume jurisdiction outside the sovereign limits as laid down at the time. The point was not explored any further in argument. I would wish to reserve the question which was not investigated, namely whether quite apart from s 18 and the matters which we have had argued before us there would have been any jurisdiction in the coroner to embark upon an inquiry where there was within his jurisdiction no body and where it was clear that the death had occurred outside the limits of territorial jurisdiction. I express no opinion one way or the other on that. I simply say what I have said in order to make it clear that the matter has not been argued and we have not decided it.
Application dismissed.
Solicitors: Linnells, Newport Pagnell (for the applicants); Sharpe Pritchard (for the coroner); Treasury Solicitor.
Sophie Craven Barrister.
Esso Petroleum Co Ltd v Hall Russell & Co Ltd (Shetland Islands Council, third party)
The Esso Bernicia and conjoined appeal
[1989] 1 All ER 37
Categories: SHIPPING
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD TEMPLEMAN, LORD GOFF OF CHIEVELEY AND LORD JAUNCEY OF TULLICHETTLE
Hearing Date(s): 27, 28, 29, 30 JUNE, 4, 5, 6 JULY, 6 OCTOBER 1988
Shipping – Negligence in collision cases – Subrogation – Collision with jetty – Berthing of oil tanker at oil terminal – Tanker colliding with jetty and escaping oil polluting foreshore – Shipowners making payments to occupiers of foreshore in respect of pollution damage under voluntary agreement between major oil companies – Shipowners also making payments under arbitration award to operators of oil terminal for work done to clear up pollution – Whether shipowners entitled to sue tortfeasor in own name – Whether shipowners entitled to recover sums paid from tortfeasor as economic loss directly resulting from damage to their tanker.
Harbour – Pilotage district – Compulsory pilot – Loss or damage caused by and to vessel when under compulsory pilotage – Collision of oil tanker with jetty while being berthed at oil terminal – Collision damaging tanker and jetty and allowing oil to escape causing foreshore to be polluted – Collision allegedly due to pilot’s negligence – Whether harbour authority vicariously liable for pilot’s negligence – Pilotage Act 1913, s 15(1).
While an oil tanker owned by the shipowners was being berthed at a jetty at an oil terminal in the Shetland Islands one of the three tugs in attendance caught fire and the tow line from the tug to the tanker was cast off. The tanker, being no longer under the full control of the remaining tugs, crashed into the jetty causing damage to her hull and to the jetty and also causing bunker oil to escape in large quantities which polluted the foreshore. The fire on the tug was caused by a coupling blowing out of a hydraulic pipe
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and the escaping hydraulic oil coming into contact with an engine exhaust. At the time of the accident a compulsory pilot employed by the harbour authority was aboard the tanker. The shipowners, who were were parties to the Tanker Owners Voluntary Agreement Concerning Liability for Oil Pollution (TOVALOP), made payments under that agreement to crofters on the Islands in respect of harm caused to sheep by the pollution of the foreshore. Following arbitration the shipowners also made payments under TOVALOP to the operators of the terminal to compensate them for work done to clear up the pollution. The shipowners brought an action against the builders of the tug, averring that the accident to the tanker was caused by the negligence of the tug’s builders in designing and building the tug and they claimed (i) damages in respect of the damage caused to the tanker and consequential loss and (ii) by subrogation, reimbursement of payments made by them under TOVALOP to the crofters and the terminal operators. The tugbuilders averred that the accident was caused, inter alia, by the fault of the compulsory pilot, for whose acts or omissions the harbour authority were vicariously responsible and the harbour authority were brought in as one of the third parties. The shipowners also sought a declarator that if they were compelled to pay for the damage to the jetty they were entitled to be reimbursed by the tugbuilders and the third parties. On the trial of preliminary pleas the First Division of the Inner House of the Court of Session, on appeal from the Lord Ordinary, rejected the tugbuilders’ submission that the damage to the tanker, the jetty and the foreshore were not a reasonable and probable consequence of their alleged negligence and excluded their averments relating to the vicarious responsibility of the harbour authority for the acts or omissions of the pilot. The First Division also excluded averments by the shipowners in support of their claims to recover the sums paid by them to the crofters and the terminal operators under TOVALOP and for payment by the tugbuilders and the third parties of sums relating to the value of the bunker oil lost, the costs of repairs to the tanker and consequential loss. The shipowners appealed and the tugbuilders appealed and cross-appealed to the House of Lords.
Held – (1) It was clearly arguable that the damage suffered by the tanker and resultant damage to others caused by oil spillage were reasonable and probable consequences of the tugbuilders’ alleged negligence and therefore the shipowners’ averments of negligence were of sufficient relevance to go to inquiry. Accordingly, the tugbuilders’ cross-appeal would be dismissed (see p 41 f to h, p 44 e to h and p 47 j to p 48 c, post).
(2) The general rule that if an indemnifier was subrogated to the rights of someone whom he had indemnified he could only pursue those rights in the name of that person and not in his own name applied even where the indemnifier also had a claim for damage to property arising out of the same act which gave rise to the indemnification. It followed that the shipowners were not entitled to sue the tugbuilders in their own name for the amounts paid to the crofters and the terminal operators (see p 41 f to h, p 43 e, p 44 b to d, p 51 h to p 52 a and p 53 d to f, post); Simpson & Co v Thomson (1877) 3 App Cas 279 and Castellain v Preston [1881–5] All ER Rep 493 applied; Cattle v Stockton Waterworks Co [1874–80] All ER Rep 220 considered.
(3) Furthermore, the shipowners’ obligation under TOVALOP to indemnify persons affected by oil spillage was entirely gratuitous and therefore the payments made to the crofters and the terminal operators by the shipowners were made under a voluntary obligation and were not recoverable from the tugbuilders as economic loss directly resulting from the damage to their tanker, notwithstanding that the event which gave rise to the payments was the physical damage to their tanker (see p 41 f to h, p 44 j to p 45 a and p 54 f to p 55 a, post).
(4) The shipowners’ statutory liability to the harbour authority (under s 74 a of the
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Harbours, Docks and Piers Clauses Act 1847) for the damage to the jetty was prima facie a valid head of damage in their action against the tugbuilders rather than being merely a claim for relief which could be postponed until after liability for payment of the repairs to the jetty had been determined. Accordingly, since all claims arising out of a single act of negligence had to be pursued in the same action and since the shipowners could be substantially prejudiced if they were disabled from pursuing their claim, the claim was rightly included in the action and the shipowners’ appeal against the decision of the First Division striking it out would be allowed (see p 41 f to h, p 45 j, p 56 c to e h j and p 57 c, post); Dunlop v M’Gowans 1980 SC (HL) 73, dicta of the Lord President (Inglis) in Stevenson v Pontifex & Wood (1887) 15 R 125 at 129, of the Lord President (Emslie) in British Rlys Board v Ross and Cromarty CC 1974 SC 27 at 37 and of the Lord President (Cooper) in Central SMT Co Ltd v Lanarkshire CC 1949 SC 450 at 458 applied.
(5) The tugbuilders’ appeal against the exclusion of their averments that the harbour authority were vicariously liable for the acts or omissions of the compulsory pilot would be dismissed because, as a general rule, a pilot was an independent professional man who navigated the ship as a principal and not as a servant of his general employer. Furthermore, s 15(1)b of the Pilotage Act 1913 made a pilot the servant of the shipowner for all purposes connected with navigation and therefore the employer of a qualified licensed pilot was not responsible to the owner of a ship damaged by the pilot’s negligence while under pilotage. On the facts, the general rule applied and therefore the shipbuilders’ averments that the harbour authority were vicariously responsible for the pilot’s acts or omissions had been rightly excluded (see p 41 f to h, p 45 j, p 60 f and p 64 d e, post); Workington Harbour and Dock Board v Towerfield (owners) [1950] 2 All ER 414 and Clark (or Thom) v J & P Hutchison Ltd 1925 SC 386 applied; Fowles v Eastern and Australian Steamship Co Ltd [1916] 2 AC 556 and Oceanic Crest Shipping Co v Pilbara Harbour Services Pty Ltd (1986) 160 CLR 626 adopted; Holman v Irvine Harbour Trustees (1877) 4 R 406 and dictum of Denning LJ in Cassidy v Ministry of Health (Fahrni, third party) [1951] 1 All ER 574 at 586–587 considered.
For remoteness of damage and causation in tort, see 12 Halsbury’s Laws (4th edn) paras 1138–1141, and for cases on the subject, see 17 Digest (Reissue) 135–150, 312–412.
For the doctrine of subrogation, see 16 Halsbury’s Laws (4th edn) para 1438, and for cases on the subject, see 20 Digest (Reissue) 890–891, 6652–6653.
For a shipowner’s liability where a ship is under pilotage and for a shipowner’s liability for damage done to a harbour, see 43 Halsbury’s Laws (4th edn) para 868 and 36 ibid para 543.
For vicarious liability of a harbour authority for acts of its employees, see 36 ibid para 535, and for cases on the subject, see 43 Digest (Reissue) 734–736, 12375–12388.
For the Harbours, Docks, and Piers Clauses Act 1847, s 74, see 34 Halsbury’s Statutes (4th edn) 42.
As from 9 August 1983 s 15(1) of the Pilotage Act 1913 was replaced by s 35 of the Pilotage Act 1983, which in turn was replaced as from 1 October 1988 by s 16 of the Pilotage Act 1987. For s 16 of the 1987 Act, see 39 Halsbury’s Statutes (4th edn) 1123.
Cases referred to in opinions
Arabert, The, A R Appelqvist A/B v Tyne-Tees Steam Shipping Co Ltd [1961] 2 All ER 385, [1963] P 102, [1961] 3 WLR 215.
‘Beechgrove’ Steamship Co Ltd v Akt ‘Fjord’ of Kristiana [1916] 1 AC 364, HL.
Page 40 of [1989] 1 All ER 37
British Rlys Board v Ross and Cromarty CC 1974 SC 27, Ct of Sess.
Candlewood Navigation Corp Ltd v Mitsui OSK Lines Ltd, The Mineral Transporter, The Ibaraki Maru [1985] 2 All ER 935, [1986] AC 1, [1985] 3 WLR 381, PC.
Cassidy v Ministry of Health (Fahrni, third party) [1951] 1 All ER 574, [1951] 2 KB 343, CA.
Castellain v Preston (1883) 11 QBD 380, [1881–5] All ER Rep 493, CA.
Cattle v Stockton Waterworks Co (1875) LR 10 QB 453, [1874–80] All ER Rep 220.
Central SMT Co Ltd v Lanarkshire CC 1949 SC 450, Ct of Sess.
Cia Colombiana de Seguros v Pacific Steam Navigation Co [1964] 1 All ER 216, [1965] 1 QB 101, [1964] 2 WLR 484.
Clark (or Thom) v J & P Hutchison Ltd 1925 SC 386, Ct of Sess.
Dunlop v M’Gowans 1980 SC (HL) 73.
Edwards (John) & Co v Motor Union Insurance Co Ltd [1922] 2 KB 249.
Fowles v Eastern and Australian Steamship Co Ltd [1916] 2 AC 556, PC.
Gold v Essex CC [1942] 2 All ER 237, [1942] 2 KB 293, CA.
Holman v Irvine Harbour Trustees (1877) 4 R 406, Ct of Sess.
King v Victoria Insurance Co Ltd [1896] AC 250, PC.
Leigh & Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] 2 All ER 145, [1986] AC 785, [1986] 2 WLR 902, HL.
Lister v Romford Ice and Cold Storage Co Ltd [1957] 1 All ER 125, [1957] AC 555, [1957] 2 WLR 158, HL.
London Assurance Co v Sainsbury (1783) 3 Doug KB 245, 99 ER 636.
Lumley v Gye (1853) 2 E & B 216, [1843–60] All ER Rep 208, 118 ER 749.
Malcolm (or Macdonald) v Glasgow Western Hospitals Board of Management 1954 SC 453, Ct of Sess.
Maria, The (1839) 1 Wm Rob 95, 166 ER 508.
Nacap Ltd v Moffat Plant Ltd 1987 SLT 221, Ct of Sess.
Neptune the Second, The (1814) 1 Dods 46, 165 ER 1380.
Oceanic Crest Shipping Co v Pilbara Harbour Services Pty Ltd (1986) 160 CLR 626, Aust HC.
Ogilvie v Edinburgh Magistrates (1821) 1 S 24, Ct of Sess.
Orakpo v Manson Investments Ltd [1977] 3 All ER 1, [1978] AC 95, [1977] 3 WLR 229, HL.
Parker v North British Rly Co (1898) 25 R 1059, Ct of Sess.
Payne (David) & Co Ltd, Re [1904] 2 Ch 608, CA.
Rylands v Fletcher (1868) LR 3 HL 330, [1861–73] All ER Rep 1; affg (1866) LR 1 Exch 265, [1861–73] All ER Rep 1, Ex Ch.
Simpson & Co v Thomson (1877) 3 App Cas 279, HL.
Stevenson v Pontifex & Wood (1887) 15 R 125, Ct of Sess.
Thom v J & P Hutchison Ltd 1925 SC 386, Ct of Sess.
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Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1961] 2 All ER 487, [1962] 2 QB 330.
Conjoined interlocutory appeals and cross-appeal
The defenders, Hall Russell & Co Ltd (Hall Russell), appealed with leave of the First Division of the Inner House of the Court of Session against two interlocutors of the First Division (the Lord President (Lord Emslie), Lord Grieve and Lord Brand) (1988 SLT 33) dated 10 July allowing in part reclaiming motions from the decision of the Lord Ordinary (Wylie) contained in three interlocutors dated 11 and 20 December 1985 pronounced in an action by the pursuers, Esso Petroleum Co Ltd (Esso), the owners of the oil tanker Esso Bernicia which collided with the no 2 jetty at Sullom Voe, Shetlands on 30 December 1978 while being berthed, against Hall Russell and four third parties, (1) Donkin & Co Ltd, an engineering company specialising in, inter alia, hydraulic towing winches, and its liquidator, Gordon Christopher Horsefield, (2) Shetland Towage Ltd, a tug operator, (3) Royal Bank Leasing Ltd, the owner of the tugs operated by the latter and (4) the Shetland Islands Council (SIC), the employers of the pilot on board the oil tanker, in
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respect of loss resulting to Esso from the collision. The issue raised by the appeal was whether SIC were vicariously liable for the pilot’s negligence in navigating the tanker. In the second appeal, Esso appealed against three interlocutors of the First Division of the Court of Session (the Lord President (Lord Emslie), Lord Grieve and Lord Brand) (1988 SLT 33) dated 10 July 1987 and preceding interlocutors of the Lord Ordinary (Wylie) dated 11 and 20 December 1985 and 14 March 1986 pronounced in an action by Esso against Hall Russell and the above-named third parties which excluded from probation certain averments of loss made in support of Esso’s claim to be entitled to recover payments made by them pursuant to the Tanker Owners Voluntary Agreement Concerning Liability for Oil Pollution (TOVALOP) from Hall Russell and the third parties. The questions raised in the appeal were whether Esso were entitled to reimbursement in respect of various payments made by them under TOVALOP and whether the averments made in support of their conclusion for declarator that they were entitled to be reimbursed by Hall Russell and the third parties should any party recover from Esso the cost of repairing the jetty were premature and irrelevant. The First Division and the Lord Ordinary held that they were not so entitled. Hall Russell cross-appealed against those parts of the interlocutor which allowed Esso a proof of their averments of negligence against them. The issue raised by the cross-appeal was whether Hall Russell was liable for the damage sustained to the tanker. The appeals were conjoined. The facts are set out in the opinion of Lord Jauncey.
Alastair Cameron QC (Vice-Dean of Faculty), Bruce Kerr QC and Marion Caldwell (both of the Scottish Bar) for Esso.
Michael Bruce QC (of the Scottish Bar), Robert Webb QC and Patrick Hodge (of the Scottish Bar) for Hall Russell.
Alan Rodger QC and J Gordon Reid (both of the Scottish Bar) for SIC.
Joseph O’Neill for the second and third named third parties.
Their Lordships took time for consideration
6 October 1988. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, I have had the opportunity of considering in draft the speech prepared by my noble and learned friend Lord Jauncey. I agree with it and for the reasons he gives would allow Esso’s appeal only to the extent which he proposes and dismiss Hall Russell’s appeal and cross-appeal.
LORD BRANDON OF OAKBROOK. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Jauncey. I agree with it and for the reasons which he gives I would allow Esso’s appeal so far as it related to the declaratory conclusion but no further and dismiss Hall Russell’s appeal and cross-appeal.
LORD TEMPLEMAN. My Lords, for the reasons given by my noble and learned friends Lord Jauncey and Lord Goff I would allow Esso’s appeal so far as it is related to the declaratory conclusion but no further and dismiss Hall Russell’s appeal and cross-appeal.
LORD GOFF OF CHIEVELEY. My Lords, the course which the proceedings have taken, and the relevant facts, are set out in the speech of my noble and learned friend Lord Jauncey; his account I gratefully accept.
The first issue in these appeals is whether the averments of Esso Petroleum Co Ltd (Esso) in support of the second conclusion are irrelevant to the loss claimed. The Lord Ordinary held that they were irrelevant, and excluded them from probation. Before the First Division it was common ground between the parties that, on the Lord Ordinary’s
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approach, he should also have excluded from probation the averments in support of Esso’s third conclusion. Both conclusions were designed to lay the ground for the recovery by Esso from Hall Russell & Co Ltd (Hall Russell) of sums paid out by Esso in satisfaction of claims in respect of oil pollution damage (or the removal of the threat of such damage) which Esso claimed they were bound to pay under the Tanker Owners Voluntary Agreement Concerning Liability for Oil Pollution (TOVALOP). The First Division affirmed the judgment of the Lord Ordinary which excluded the averments in support of the second conclusion, and they further excluded from probation the averments in support of the third conclusion. Against that decision, Esso now appeal to your Lordships’ House.
These conclusions relate to two substantial sums paid by Esso in respect of oil pollution damage (or expenditure incurred in preventing or removing oil pollution damage). The first sum, amounting so far to £480,935·06 (there being a further sum of £46,343 still in dispute) was paid largely through the Shetland Islands Council, either in direct reimbursement of costs incurred by the council, or to the council as representing other bodies or persons in the islands, in particular crofters. The second sum, amounting in all to £3,466,160·55 (including interest) plus expenses in the sum of £160,000, was paid by Esso to BP Petroleum Development Ltd (BP) pursuant to an arbitration award dated 15 October 1985. All these sums have been paid under TOVALOP.
Before the First Division, Esso advanced their claim against Hall Russell in respect of these sums on three grounds: (1) that by virtue of express provisions of TOVALOP Esso were subrogated to the rights of the parties indemnified by them against Hall Russell; (2) that in any event Esso were entitled to a right of recourse, whether or not called subrogation, against Hall Russell; and (3) that the sums paid by Esso fell to be considered as losses incurred by Esso caused by the alleged negligence of Hall Russell. All these submissions were rejected by the First Division. The last two of these submissions have been renewed before your Lordships; the first is no longer pursued.
In order to consider these submissions, it is necessary first to consider the legal effect of TOVALOP. I need only refer to the salient features of that agreement, which was before your Lordships in its amended form dated 1 June 1978.
First, the parties to the agreement are expressed to be tanker owners and bareboat charterers. Consistently with that statement, it is provided that the parties ‘in consideration of their mutual promises, have agreed with one another and do hereby agree as follows’; there then follow 11 clauses, under the last of which it is provided that the agreement shall be governed by the laws of England. From this, it is plain that the agreement is essentially an agreement as between the tanker owners and bareboat charterers (described as participating owners) who are parties to it. Under cl IV:
‘(A) Subject to the terms and conditions of this Agreement, the Participating Owner of a Tanker involved in an incident agrees to assume liability for Pollution Damage caused by Oil which has escaped or which has been discharged from the Tanker, and the cost of Threat Removal Measures taken as a result of the incident.’
The expressions ‘Pollution Damage’, ‘Oil’ and ‘Threat Removal Measures’ are all defined in cl 1, which is concerned with definitions. Certain exceptions to the agreed liability under cl IV(A) are set out in cl IV(B). It is further provided, in cl VIII(D):
‘Persons making claims hereunder may, in the event of a dispute with a Participating Owner concerning same, commence arbitration proceedings … within two years of the date of the incident, and these proceedings shall be the exclusive means for enforcing a Participating Owner’s liability hereunder. Each Participating Owner by becoming a Party to this Agreement, and so long as he remains bound hereby, shall be deemed irrevocably to have offered to any such Person to submit all such disputes to arbitration … ’
It was pursuant to such arbitration proceedings that BP obtained the award against Esso to which I have already referred. Clause VIII further provides, in para (E):
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‘Unless otherwise agreed in writing, any payment to a Person by or on behalf of a Participating Owner shall be in full settlement of all said Person’s claims against the Participating Owner, the Tanker involved, its charterer, their officers, agents, employees and underwriters, which arise out of the incident.’
By cl III(B) it is provided:
‘A party may withdraw from this Agreement … by giving at least six months prior written notice of withdrawal to the Federation … ’
No provision is made in the agreement that a participating owner, on making a payment to a claimant, shall be entitled to require, as a condition of making such payment, an assignation of the claimant’s rights of action against any third party who may be liable to the claimant in respect of any relevant loss or damage suffered by him, or indeed authority from such a claimant to proceed against any such third party in the name of the claimant.
There can, in my opinion, be no doubt that TOVALOP constitutes an agreement binding inter se on those participating owners who are, at the relevant time, parties to it. Counsel for Esso submitted that the agreement created rights enforceable by third parties expressed to be entitled to claim under it, both under English law (the governing law of the agreement) and under Scots law. Like the Lord President, I do not find it necessary to decide this point; for, in my opinion, Esso’s submissions under this head must in any event fail, substantially for the reasons given by the Lord President.
I take the example of the crofters’ claims, since these were the claims concentrated on in argument, although BP’s claim, the subject of the arbitration award, is in fact very much more substantial. The primary submission of counsel for Esso was that Esso were entitled to be subrogated to the crofters’ claims in tort against Hall Russell, and further that Esso were entitled to pursue such claims against Hall Russell in their own name. In my opinion, this submission is not well founded.
In considering this submission, I proceed on the basis (which appears to have been common ground throughout the case) that there is for present purposes no material distinction between Scots law and English law. Now, let it be assumed that the effect of Esso’s payment to the crofters was to indemnify the crofters in respect of loss or damage suffered by them by reason of the wrongdoing of Hall Russell. If such a payment was made under a contract of indemnity between Esso and the crofters, there can be no doubt that Esso would on payment be subrogated to the crofters’ claims against Hall Russell. This would enable Esso to proceed against Hall Russell in the names of the crofters; but it would not enable Esso to proceed, without more, to enforce the crofters’ claims by an action in their own name against Hall Russell.
The reason for this is plain. It is that Esso’s payment to the crofters does not have the effect of discharging Hall Russell’s liability to them. That being so, I do not see how Esso can have a direct claim against Hall Russell in respect of their payment. I put on one side Esso’s claim against Hall Russell in negligence; that I will consider in a moment. There can of course be no direct claim by Esso against Hall Russell in restitution, if only because Esso have not by their payment discharged the liability of Hall Russell, and so have not enriched Hall Russell; if anybody has been enriched, it is the crofters, to the extent that they have been indemnified by Esso and yet continue to have vested in them rights of action against Hall Russell in respect of the loss or damage which was the subject matter of Esso’s payment to them. All that is left is the fact that the crofters’ rights of action against Hall Russell continued to exist (until the expiry of the relevant limitation period), and that it might have been inequitable to deny Esso the opportunity to take advantage of them, which is the classic basis of the doctrine of subrogation in the case of contracts of indemnity (see Castellain v Preston (1883) 11 QBD 380, [1881–5] All ER Rep 493). In normal cases, as for example under contracts of insurance, the insurer will on payment request the assured to sign a letter of subrogation, authorising the insurer to proceed in the name of the assured against any wrongdoer who has caused the relevant damage to the assured. If the assured refuses to give such authority, in theory the insurer can bring
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proceedings to compel him to do so. But nowadays the insurer can short-circuit this cumbrous process by bringing an action against both the assured and the third party, in which (1) he claims an order that the assured shall authorise him to proceed against the third party in the name of the assured and (2) he seeks to proceed (so authorised) against the third party. But it must not be thought that, because this convenient method of proceeding now exists, the insurer can without more proceed in his own name against the third party. He has no right to do so, so long as the right of action he is seeking to enforce is the right of action of the assured. Only if that right of action is assigned to him by the assured can he proceed directly against the third party in his own name (see eg Cia Colombiana de Seguros v Pacific Steam Navigation Co [1964] 1 All ER 216, [1965] 1 QB 101). I have no doubt that the like principles apply in the present case. It follows that Esso could only proceed directly in their own name against Hall Russell in respect of the crofters’ claims against Hall Russell if, on paying the crofters, they received from them a valid and effective assignation of their claims. I cannot think that, in practice, Esso would have met with difficulty if they had, at the time of payment to the crofters, asked each of them for a receipt which operated either as an assignation or as an authority to proceed against the third party in the name of the crofters concerned; if any such practical difficulty should exist, it could surely be overcome in future by an appropriate amendment to TOVALOP.
For these reasons, which are substantially the same as those expressed by the Lord President in his judgment, I would reject Esso’s claim based on subrogation. I would only add that, in agreement with my noble and learned friend Lord Jauncey, I do not consider that Cattle v Stockton Waterworks Co (1875) LR 10 QB 453, [1874–80] All ER Rep 220 has any relevance to this aspect of Esso’s appeal.
There remains however Esso’s claim in negligence. Their claim under this head can be summarised as follows. By reason of Hall Russell’s negligence, physical damage has been caused to Esso’s property, ie to the tanker. It follows that, on ordinary principles, Esso are entitled to recover not only damages in respect of such physical damage, but also damages in respect of any financial loss suffered by Esso by reason of such physical damage. It is into the latter category that Esso seek to place the sums paid or payable by them under TOVALOP.
Hall Russell’s first answer to this claim was that the only damage which could arguably be held to have been caused in law by their alleged negligence was the damage to the tanker herself. Any further damage must be excluded as being too remote from their alleged negligence to be held to be caused by it. However, like the Lord President, I find it impossible to accept any such argument. Let it be supposed that, Hall Russell having negligently caused damage to the tanker, the tanker in consequence immediately ran into some physical object, the property of a third party, and damaged it. It is inconceivable that, as a matter of simple causation, Hall Russell’s responsibility should be held to stop at damage to the tanker. The principle of causation cannot be so rigidly confined. There is, in such a case, no supervening cause independent of Hall Russell’s wrong to which the damage to the physical object can be attributed; and I cannot see how, in such circumstances, the negligence of Hall Russell should be held to have ceased to constitute a sufficiently potent cause for such damage to be legally attributed to it.
Even so, there is a formidable difficulty in the way of Esso’s claim to recover from Hall Russell, in negligence, their payments to BP and the crofters under TOVALOP. It is that TOVALOP appears on its face, and indeed in its name, to be no more than an agreement voluntarily entered into between a large number of tanker owners and bareboat charterers, whereby each participating owner has agreed with the others that, in the event of oil escaping from his tanker and causing oil pollution damage to a third party or expense being incurred by a third party in removing the threat of oil pollution damage, the participating owner in question will compensate the third party under the terms of TOVALOP, irrespective of any negligence on his part. In such circumstances, as it seems to me, Esso cannot claim the sums paid by them under TOVALOP as financial loss attributable to the physical damage to the ship caused by Hall Russell’s alleged negligence.
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The damage to the ship did no more than trigger off the event which led to the pollution in respect of which Esso became bound under the terms of TOVALOP to make the payments which are the subject matter of their claim. In truth, Esso’s claim to damages falls under two separate heads: (1) damages in respect of the physical damage to the tanker, and any financial loss (eg loss of use) flowing from such physical damage; and (2) damages in respect of the sums paid out by Esso under TOVALOP. But, as the Lord President pointed out in his judgment, damages of the type claimed under the second head are irrecoverable in negligence, as has been established for over 100 years, ever since the decision of your Lordships’ House in Simpson & Co v Thomson (1877) 3 App Cas 279.
Like the Lord President, I can see no injustice in this conclusion. It was suggested by counsel for Esso, in the course of argument, that, in so far as Simpson & Co v Thomson provided no more than an example of the general principle that damages are not recoverable in negligence in respect of pure economic loss, your Lordships should not hesitate to make an exception to that principle in relation to cases such as the present, because to allow recovery in such cases would not open the floodgates to other claims. But so to do would effectively contradict Simpson & Co v Thomson itself; and I can see no injustice in denying a direct claim in negligence to a claimant such as Esso in a case such as the present, where, quite apart from any question of subrogation, the necessary arrangements can be made to ensure that, on payment, an assignation is taken of the payee’s (here the crofters’) claims against third parties.
Esso’s final response to this apparently insuperable difficulty was to seek leave from your Lordships’ House to amend their averments by adding the following passage:
‘At the time of said incident on 30 December 1978 it was a practical necessity for the owner of a tanker in order to trade internationally to be a participating owner in TOVALOP. It was in particular a necessity for the owner of a tanker in order to use the facilities at Sullom Voe to be a participating owner in TOVALOP.’
The purpose of the proposed amendment was apparently to attempt to equate the position of Esso in the present case to that of a shipowner who has been compelled by law (for example, under the provisions of the Merchant Shipping (Oil Pollution) Act 1971) to indemnify a third party against the consequences of oil pollution arising from an escape of oil from the ship. However, quite apart from any other difficulties in the way of the allegation raised by the proposed amendment (and a number of these were adumbrated by counsel in his able argument on behalf of Hall Russell), it seems to me that it must in any event be irrelevant for the following very simple reason. The proposed amendment does not allege that it was by reason of the practical necessity so averred that Esso entered into TOVALOP, nor even that it was by reason of such practical necessity that Esso had not taken advantage of their rights under cl III(B) to withdraw from TOVALOP. I must confess that I am not in the least surprised. As appears from a copy of TOVALOP before your Lordships, Esso were (with the other major oil companies) a founder-member of TOVALOP. It is obvious that Esso cannot have become a member of TOVALOP by reason of the practical necessity averred in the proposed amendment. Plainly they must have done so voluntarily, no doubt for very good commercial reasons. Likewise it is inconceivable that Esso should have been deterred from withdrawing from TOVALOP by reason of such practical necessity. But, this being so, the mere existence of the practical necessity, as averred in the proposed amendment, is of no materiality; and the amendment would provide, therefore, no answer to the point that Esso are seeking to claim from Hall Russell, as a separate head of damage, sums paid by them under a voluntary agreement whereby they undertook to indemnify persons in the position of BP and the crofters. For this reason alone I, for my part, would refuse Esso’s application for leave to amend. It follows that I would dismiss Esso’s appeal on this issue.
For the reasons given by my noble and learned friend Lord Jauncey, I would allow Esso’s appeal on the issue of the prematurity of the declaratory conclusion, and I would dismiss Hall Russell’s appeal, as against the Shetland Islands Council, on the issue of compulsory pilotage.
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LORD JAUNCEY OF TULLICHETTLE. My Lords, these appeals arise out of an unusual incident at the oil terminalin Sullom Voe in the Mainland of Shetland on 30 December 1978 when a tanker Esso Bernicia (the Bernicia) came in contact with a number of mooring dolphins whereby a large quantity of bunker oil escaped from her. The case comes before your Lordships at the stage of debate as to the relevancy of certain pleadings, no proof having yet taken place.
The salient facts which are a matter of admission between the three parties to these appeals are as follows. (1) Late on the above date the Bernicia was being berthed at no 2 jetty with three tugs in attendance. One of these tugs, the Stanechakker, had a towing line secured to the stern of the Bernicia. At about 2333 hrs the coupling blew out of a hydraulic pipe above the starboard engine exhaust of the tug, the escaped hydraulic oil caught fire and the towing line was cast off. The Bernicia was then no longer under the full control of the remaining two tugs and she came in contact with a number of dolphins whereby she and the dolphins sustained damage and bunker oil escaped in large quantities. (2) At the time of the incident there was on board a pilot, Captain Hemingway, Sullom Voe being a compulsory pilotage area. (3) The Stanechakker was designed and built by Hall Russell & Co Ltd (Hall Russell) for the purpose of berthing tankers at the Sullom Voe oil terminal.
On 23 November 1981 Esso Petroleum Co Ltd (Esso), the owners of the Bernicia, raised an action against Hall Russell and two other defenders who, for reasons which are not relevant to these appeals, are no longer in the process. As a result of the averments by Hall Russell four different third parties were brought into the process. Only the fourth third parties, Shetland Islands Council (SIC), took an active part in these appeals and I therefore say nothing more about the other three. It will be convenient to refer to the parties to these appeals as Esso, Hall Russell and SIC. The pleadings have been amended on various occasions both before and after the hearing in the First Division but in the form in which they reach this House Esso conclude:
(1) for payment to them by the defenders and third parties of the sums (a) £170,086·39, (b) £527,278·06, (c) £3,727,589·02, together with interest. The first of these sums relates to the value of the bunker oil lost and to the cost of repair of the Bernicia and the loss to Esso consequential thereon. The second of these sums relates to sums paid to crofters in respect of damage to sheep due to pollution of the foreshore. These sums were paid under and in terms of an agreement dated 7 January 1969 between the major oil companies of the western world known as the Tanker Owners Voluntary Agreement Concerning Liability for Oil Pollution (TOVALOP), to which I shall have occasion to refer in more detail later. The third of these sums relates to (i) sums paid by Esso to BP Petroleum Development Ltd (BP) as the operators of the Sullom Voe oil terminal in respect of operations carried out by BP to deal with the pollution caused by the Bernicia bunker oil (those sums were paid in terms of an award by an arbitrator in contested proceedings brought by BP against Esso under and in terms of TOVALOP) and (ii) expenses incurred by Esso in those arbitration proceedings.
‘(2) For (1) declarator that in the event of any body or person recovering from the pursuers by or in consequence of any process in any Court of Law the costs of repairing and reinstating the No. 2 Jetty at Sullom Voe Harbour in the Shetlands incurred in consequence of damage inflicted on said Jetty when the pursuers’ tanker “ESSO BERNICIA” came in contact therewith on or about 30th December, 1978 then the pursuers will in that event be entitled to be paid et separatim reimbursed by the defenders and the first, second, third and fourth named third parties jointly and severally or severally to the extent of the whole amount of any such repair and reinstatement costs recovered from them as a result of any such Court proceedings together with any expenses paid or incurred by the pursuers in consequence of any such proceedings or such other sum or sums as to the Court may seem proper and (2) decree in the event of decree of declarator being pronounced in the foregoing terms ordaining payment to the pursuers by the defenders and the first, second,
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third and fourth-named third parties jointly and severally or severally of (first) the sum of TWO HUNDRED AND SEVENTY THOUSAND FOUR HUNDRED AND TWENTY THREE POUNDS AND TWO PENCE (£270,423·02) Sterling or such other sum or sums as shall have been recovered from the pursuers or incurred as expenses by them in consequence of any such Court proceedings or such other sum or sums as to the Court may seem proper with interest thereon at the rate of Fifteen per centum per annum from the date of any payment made by the pursuers in respect of any such recovery until payment, and (second) the sum of ONE THOUSAND ONE HUNDRED AND THREE POUNDS AND SIXTY FIVE PENCE (£1,103·65) Sterling with interest at the rate of Fifteen per centum per annum from 30th June, 1979 until payment.’
Esso aver that the accident to the Bernicia was due to the negligence of Hall Russell in designing and building the tug. Hall Russell aver that the accident was caused by the fault of a number of persons including that of the pilot for whose actings SIC were responsible. The pleadings of all three parties contain preliminary pleas which were debated before the Lord Ordinary and First Division of the Inner House of the Court of Session over a total period of 16 days (see 1988 SLT 33). Many issues were raised but I think that it is sufficient at this stage to summarise the result of the First Division’s decision. The court held: (1) agreeing with the Lord Ordinary, that there was no substance in a submission by Hall Russell that on the averments the damage suffered by the tanker and the resultant damage to others due to oil spillage was not a reasonable and probable consequence of their alleged negligence; (2) agreeing with the Lord Ordinary, that the averments of Esso in support of their claim to recover the sums paid by them to the crofters and to BP under and in terms of TOVALOP were irrelevant; (3) differing from the Lord Ordinary, that Esso’s averments in support of the declaratory conclusion were irrelevant; (4) agreeing with the Lord Ordinary, that Hall Russell’s averments anent the vicarious responsibility of SIC for the acts and omissions of the pilot were irrelevant.
The practical effect of this decision was that Esso’s claim was restricted to the £170,086·39 first concluded for in conclusion (1) and SIC ceased to be parties to the action. Esso appealed to this House against that part of the interlocutor of the First Division which excluded from probation their averments (i) in support of the sums in conclusion (1) which were paid under and in terms of TOVALOP, and (ii) in support of the declaratory conclusion. Hall Russell cross-appealed against those parts of the interlocutor which allowed Esso a proof of their averments of negligence against them, and appealed against the exclusion from probation of their averments anent the vicarious responsibility of SIC for the acts of the pilot.
Five separate issues were raised in these appeals: (1) whether the doctrine of subrogation entitled Esso to recover in their own name sums paid out by them in terms of TOVALOP; (2) whether Esso were entitled to recover such sums directly as a head of damage suffered by them; (3) whether the declarator sought in conclusion (2) was premature and in any event couched in terms too wide; (4) whether Esso had relevantly averred a causative connection between the alleged negligence of Hall Russell and damage to the Bernicia; and (5) whether Hall Russell had relevantly averred that SIC were vicariously responsible for the acts and omissions of the pilot.
I have set out the foregoing issues in the order in which they were raised in this House. By agreement of parties Esso argued their appeal before that of Hall Russell but logically Hall Russell’s attack on Esso’s averments of negligence should be considered first since success in that attack would involve dismissal of the whole action and would elide consideration of all other issues.
(4) Relevance of Esso’s averments of negligence
Hall Russell’s argument that damage to the Bernicia and damage due to the spillage of bunker oil were not reasonable and probable consequences of their alleged negligence was decisively rejected by both the Lord Ordinary and the First Division. In this House it was argued that the single true and effective cause of the casualty was the disablement
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of the tug and that it was unrealistic to look back and see what caused that disablement. Put another way, the damage complained of was not a direct result of the alleged negligence. To this argument your Lordships did not require Esso to reply.
My Lords, when it is remembered that it is matter of admission that the Stanechakker was designed and built for the purpose of berthing tankers in Sullom Voe, I do not see how it could possibly be said that in no circumstances could Hall Russell have reasonably foreseen the consequences of the tug catching fire during the course of a berthing manoeuvre. Equally, to ignore the reason for the Stanechakker becoming disabled is to put one’s head in the sand. A reparation action will only be dismissed as irrelevant if it is clear that proof by the pursuer of all his averments would establish no liability in law on the part of the defender. Such is not the case here. The Lord President has dealt with Hall Russell’s argument in some detail and I do not think that I could improve on or usefully add to what he has said. Esso’s averments of negligence on the part of Hall Russell are of sufficient relevance to go to inquiry.
(1) TOVALOP: subrogation
Esso incorporate the TOVALOP agreement into their pleadings and it is therefore appropriate to set out some of the provisions thereof in detail.
The foreword includes the following paragraph relevant to the background of TOVALOP:
‘TOVALOP originated from the determination of certain tanker owners to take constructive action to mitigate and to provide compensation for damage by oil pollution from tankers. TOVALOP came into effect on October 6, 1969 at which time owners of 50 per cent. of the world’s tanker tonnage (excluding government-owned tonnage and the tonnage of tankers under 3,000 grt), as measured by gross registered tonnage, became parties. By October 6, 1971 the owners of over 80 per cent. of the world’s tanker tonnage had become parties and at the present time the parties to TOVALOP are owners of almost 99 per cent. of the world’s tanker tonnage.’
It is stated in the preamble that the parties to the agreement are tanker owners and bareboat charterers. Clause I contains the following, inter alia, definitions:
‘(f) “Participating Owner” means the Owner of a Tanker who is a Party.
(o) The “Federation” means the International Tanker Owners Pollution Federation, a Company limited by guarantee and formed pursuant to the laws of England for the purpose of administering the Agreement.’
Clause II(B)(3) provides that each party shall ‘dispose of all valid claims against him arising under this Agreement as promptly as is practicable’. Clause III provides for a party withdrawing from the agreement on giving certain specified periods of notice. Clause IV, which is headed ‘Liability’, provides, inter alia:
‘(A) Subject to the terms and conditions of this Agreement, the Participating Owner of a Tanker involved in an Incident agrees to assume liability for Pollution Damage caused by Oil which has escaped or which has been discharged from the Tanker, and the cost of Threat Removal Measures taken as a result of the Incident.’
Clause VII(A) limits the liability of a participating owner in respect of an incident. Clause VIII provides, inter alia:
‘(D) Persons making claims hereunder may, in the event of a dispute with a Participating Owner concerning same, commence arbitration proceedings, in accordance with Paragraph (I) hereof, within two years of the date of the incident, and these proceedings shall be the exclusive means for enforcing a Participating Owner’s liability thereunder. Each Participating Owner by becoming a Party to this Agreement, and so long as he remains bound hereby, shall be deemed irrevocably
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to have offered to any such Person to submit all such disputes to arbitration as provided in said Paragraph (I).
(E) Unless otherwise agreed in writing, any payment to a Person by or on behalf of a Participating Owner shall be in full settlement of all said Person’s claims against the Participating Owner, the Tanker involved, its charterer, their officers, agents, employees and underwriters, which arise out of the incident …
(J) No payment made hereunder shall be deemed (i) an admission of, or evidence of liability on the part of the Participating Owner in any other proceeding or to any other claimant, or (ii) submission to any jurisdiction on the part of the Participating Owner for any purpose whatsoever, other than as provided in Clause VIII.
(K) Nothing in this Agreement shall prejudice the right of recourse of a Participating Owner against third persons or vessels.’
Clause XI provides that the agreement shall be governed by the laws of England. Then exhibit ‘A’ which is appended to the agreement is in, inter alia, the following terms:
‘To: THE INTERNATIONAL TANKER OWNERS POLLUTION FEDERATION LIMITED The undersigned hereby: (A) Applies to become a Party to the Tanker Owners Voluntary Agreement Concerning Liability for Oil Pollution dated as of the Seventh day of January, 1969, as amended from time to time, and agrees, if this application is accepted, to assume and perform all of the obligations of a Party thereto … ’
The agreement contains no provision whereby a participating owner can require from a claimant to whom he has made payment an assignation of the claimant’s rights of action against third parties responsible in law for the relevant damage.
Esso appear as one of the seven original signatories to the agreement.
Esso’s general submission was that, having indemnified the crofters and BP in terms of TOVALOP, they were subrogated to their rights against Hall Russell and were entitled to sue that company in their own name. Six propositions were advanced in support of that submission. (1) In cases of subrogation such as the present, there is a transfer to the indemnifier of all the rights which the person indemnified has or had against the third party to the extent that it is necessary to reimburse the indemnifier in the sum paid by him. (2) It therefore follows that the right of the indemnified person to sue the third party is also transferred. (3) The reason why a further equitable provision is normally required to enable the indemnifier to sue in his own name is the long-established rule enunciated in Cattle v Stockton Waterworks Co (1875) LR 10 QB 453, [1874–80] All ER Rep 220 that a person claiming in delict for loss resulting from damage to property must have had a proprietary or possessory interest in the property damaged at the relevant times. (4) If, contrary to proposition (2), there is only an equitable assignation by the indemnified person to the indemnifier, the latter can deal with the problem in England since the Supreme Court of Judicature Act 1873 by joining those with the legal right to sue as co-defendants in the action and in Scotland by convening them as parties if the defender tables a plea of ‘all parties not called’. (5) Esso have undoubted title to sue Hall Russell in respect of the damage to and loss of oil from the Bernicia, from which it follows that the reasons which prevent most indemnifiers suing in their own name are not here present. (6) The principle enunciated in Cattle v Stockton Waterworks Co has, on occasion, given way to pragmatic considerations and it is appropriate that it should do so in this case.
Although these propositions were all advanced under the broad umbrella of subrogation they involve two separate questions of law, namely (1) the nature and enforceability of the rights to which an indemnifier is subrogated and (2) the right, if any, to sue for economic loss occasioned by damage to the property of another. These questions are quite distinct because in the first case the subrogated pursuer is enforcing the rights of another which have been transferred to him, whereas in the second case the pursuer is seeking to enforce a right of his own to recover loss which he has suffered.
In his classic definition of subrogation in Castellain v Preston (1883) 11 QBD 380 at
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388–389, [1881–5] All ER Rep 493 at 496 Brett LJ, having stated that the fundamental principle of insurance was that the contract of insurance contained in a marine or fire policy was a contract of indemnity whereby the assured should be fully indemnified but never more than fully indemnified (see 11 QBD 380 at 386, [1881–5] All ER Rep 493 at 495), said:
‘Now it seems to me that in order to carry out the fundamental rule of insurance law, this doctrine of subrogation must be carried to the extent which I am now about to endeavour to express, namely, that as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished. That seems to me to put this doctrine of subrogation in the largest possible form, and if in that form, large as it is, it is short of fulfilling that which is the fundamental condition, I must have omitted to state something which ought to have been stated. But it will be observed that I use the words “of every right of the assured.” I think that the rule does require that limit.’
A few years earlier in Simpson & Co v Thomson (1877) 3 App Cas 279 at 284 Lord Cairns LC referred to the well-known principle of law that the indemnifier—
‘will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself or reimbursed himself for the loss.’
Although these two cases related to insurance the doctrine of subrogation is not restricted to the law of insurance (see per Diplock J in Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1961] 2 All ER 487 at 490, [1962] 2 QB 330 at 339, Lord Diplock in Orakpo v Manson Investments Ltd [1977] 3 All ER 1 at 7, [1978] AC 95 at 104). It undoubtedly extends to other contracts of indemnity and to cautionary obligations such as guarantees given to a creditor on behalf of a debtor, although in the former case the indemnifier is subrogated to the rights and remedies of the assured or other person indemnified whereas in the latter he is subrogated to the rights of the creditor. What is, however, absolutely clear from the authorities is that the rights and remedies to which the indemnifier is subrogated are those which were vested in the person to whom payment has been made, no more and no less, and that rights and liabilities of third parties unconnected with the contract are not affected.
How then is the indemnifier to enforce the rights to which he is subrogated? In Simpson & Co v Thomson 3 App Cas 279 at 284 Lord Cairns LC, after the passage to which I have already referred, continued:
‘It is on this principle that the underwriters of a ship that has been lost are entitled to the ship in specie if they can find and recover it; and it is on the same principle that they can assert any right which the owner of the ship might have asserted against a wrongdoer for damage for the act which has caused the loss. But this right of action for damages they must assert, not in their own name, but in the name of the person insured, and if the person insured be the person who has caused the damage I am unable to see how the right can be asserted at all.’
Lord Penzance said (at 290):
‘But the ground upon which I will ask your Lordships to reject this contention of the Respondents’ counsel is this—that upon the cases cited no precedent or authority
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has been found or produced to the House for an action against the wrongdoer except in the name, and therefore, in point of law, on the part of one who had either some property in, or possession of, the chattel injured. On the other hand, the existence of authorities in which the suit has been brought in the name of the owner, though for the benefit of persons having a collateral interest, is somewhat strong to shew that such persons had no right of action in themselves. For it is to be presumed that a person having such a right would pursue it directly, and not indirectly through the name of another.’
Lord Blackburn similarly stated the position (at 293):
‘In England, the action must be in the name of the shipowner, not of the underwriters. I think this material, as shewing that it is the personal right of action of the shipowner, the benefit of which is transferred to the underwriters.’
In King v Victoria Insurance Co Ltd [1896] AC 250 at 256 Lord Hobhouse in delivering the advice of the Board stated:
‘It is true that subrogation by act of law would not give the insurer a right to sue in a court of law in his own name. But that difficulty is got over by force of the express assignment of the bank’s claim, and of the Judicature Act … ’
In John Edwards & Co v Motor Union Insurance Co Ltd [1922] 2 KB 249 at 253–254 McCardie J, in a detailed consideration of the doctrine of subrogation, said:
‘If once the claim be paid then as a matter of equity the rights to recover against third persons pass from the assured to the insurer although the legal right to compensation remains in the assured and although actions at law must be brought in the name of the assured and not of the insurer: see London Assurance Co. v. Sainsbury ((1783) 3 Doug KB 245 at 253–254, 99 ER 636 at 640); King v. Victoria Insurance Co. As pointed out in MacGillivray [Insurance (1st edn, 1912) p 740], it follows from this equity that if the assured upon tender of a proper indemnity as to costs refuses the use of his name the insurer can by proceedings in equity compel him to give the use of his name. This has long been settled law.’
In Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1961] 2 All ER 487 at 490, [1962] 2 QB 330 at 339 Diplock J observed in relation to the doctrine of subrogation:
‘Although often referred to as an “equity” it is not an exclusively equitable doctrine. It was applied by the common law courts in insurance cases long before the fusion of law and equity, although the powers of the common law courts might in some cases require to be supplemented by those of a court of equity in order to give full effect to the doctrine; for example, by compelling an assured to allow his name to be used by the insurer for the purpose of enforcing the assured’s remedies against third parties in respect of the subject-matter of the loss.’
My Lords, the foregoing authorities leave me in no doubt as to the existence of a general rule in both English and Scots law that where an indemnifier is subrogated to the rights of someone whom he has indemnified he can only pursue those rights in name of that person. It follows that I reject Esso’s second proposition.
Esso sought to get round the general rule by arguing that since they had suffered physical damage as a result of Hall Russell’s negligence they were entitled to pursue the subrogated rights in their own name. In short the general rule does not apply where both the indemnifier and the person indemnified suffer physical damage as a result of the relevant act of negligence. My Lords, it is at this stage important to remember the distinction between the two questions of law to which I have already referred. Esso maintain that it is the rule in Cattle v Stockton Waterworks Co (1875) LR 10 QB 453, [1874–80] All ER Rep 220 which necessitates the further equitable provision normally
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required to enable the indemnifier to sue in his own name and that this rule will not apply where a pursuer has suffered physical damage as well as economic loss due to damage to the property of another.
In Cattle v Stockton Waterworks Co the plaintiff was a contractor working on the land of Knight which was damaged by the negligence of the defendants. Blackburn J put the question thus (LR 10 QB 453 at 457, [1874–80] All ER Rep 220 at 223):
‘can Cattle sue in his own name for the loss which he has in fact sustained, in consequence of the damage, which the defendants have done to the property of Knight, causing him, Cattle, to lose money under his contract? We think he cannot.’
He then went on to justify his conclusion by reference to the floodgates argument in the following terms (LR 10 QB 453 at 457–458, [1874–80] All ER Rep 220 at 223):
‘In the present case the objection is technical and against the merits, and we should be glad to avoid giving it effect. But if we did so, we should establish an authority for saying that, in such a case as that of Rylands v. Fletcher ((1866) LR 1 Exch 265, [1861–73] All ER Rep 1, Exch; affd (1868) LR 3 HL 330, [1861–73] All ER Rep 1) the defendant would be liable, not only to an action by the owner of the drowned mine, and by such of his workmen as had their tools or clothes destroyed, but also an action by every workman and person employed in the mine, who in consequence of its stoppage made less wages than he would otherwise have done. And many similar cases to which this would apply might be suggested. It may be said that it is just that all such persons should have compensation for such a loss, and that, if the law does not give them redress, it is imperfect. Perhaps it may be so. But, as was pointed out by Coleridge, J., in Lumley v. Gye ((1853) 2 E & B 216 at 252, [1843–60] All ER Rep 208 at 221), Courts of justice should not allow themselves, in the pursuit of perfectly complete remedies for all wrongful acts, to transgress the bounds, which our law, in a wise consciousness as I conceive of its limited powers, has imposed on itself, of redressing only the proximate and direct consequences of “wrongful acts.” In this we quite agree. No authority in favour of the plaintiff’s right to sue was cited, and, as far as our knowledge goes, there was none that could have been cited.’
Blackburn J concluded (LR 10 QB 453 at 458, [1874–80] All ER Rep 220 at 224):
‘In the present case there is no pretence for saying that the defendants were malicious or had any intention to injure anyone. They were, at most, guilty of a neglect of duty, which occasioned injury to the property of Knight, but which did not injure any property of the plaintiff. The plaintiff’s claim is to recover the damage which he has sustained by his contract with Knight becoming less profitable, or, it may be, a losing contract, in consequence of this injury to Knight’s property. We think this does not give him any right of action.’
That was a case in which the plaintiff was seeking to recover the loss directly sustained by him as a result of damage to Knight’s property rendering his contract less profitable. He was not seeking to recover in his own name the loss which Knight had sustained, which loss would no doubt have been very different in character. Cattle’s case has been cited with approval in many subsequent cases both in England and in Scotland. Suffice it to mention three. In Candlewood Navigation Corp Ltd v Mitsui OSK Lines Ltd, The Mineral Transporter, The Ibaraki Maru [1985] 2 All ER 935, [1986] AC 1 it was held that a time charterer was not entitled to recover damages for pecuniary loss resulting from damage caused to the chartered vessel by a third party. In delivering the advice of the Board Lord Fraser said ([1985] 2 All ER 935 at 939–940, [1986] AC 1 at 17):
‘These two cases of Cattle and Simpson have stood for over a hundred years and have frequently been cited with approval in later cases, both in the United Kingdom
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and elsewhere. They show, in their Lordships’ opinion, that the justification for denying a right of action to a person who has suffered economic damage through injury to the property of another is that for reasons of practical policy it is considered to be inexpedient to admit his claim.’
In Leigh & Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] 2 All ER 145 at 149, [1986] AC 785 at 809 Lord Brandon said:
‘My Lords, there is a long line of authority for a principle of law that, in order to enable a person to claim in negligence for loss caused to him by reason of loss of or damage to property, he must have had either the legal ownership of or a possessory title to the property concerned at the time when the loss or damage occurred, and it is not enough for him to have only had contractual rights in relation to such property which have been adversely affected by the loss of or damage to it. The line of authority to which I have referred includes the following cases: Cattle v Stockton Waterworks Co … Simpson & Co v Thomson … ’
Finally, in Nacap Ltd v Moffat Plant Ltd 1987 SLT 221 the Lord Justice Clerk (Ross) in delivering the opinion of the First Division cited with approval and applied the dicta of Lord Fraser and Lord Brandon to which I have just referred.
My Lords, I very much doubt whether the rule in Cattle’s case has any relevance to a claim to pursue subrogated rights. Although there may be cases in which the measure of a subrogated claim may be the same as a claim for economic loss arising from damage to a third party’s property, the legal character of each claim is essentially different. So far as subrogation is concerned, the only question is whether the general rule laid down in Simpson & Co v Thomson and the subsequent cases admits of an exception when the indemnifier has also a claim for damage to property arising out of the same act which gave rise to the indemnification. No authority was cited in which such an exception had been admitted and in principle it is not easy to see what basis could exist. The reason for the rule is to prevent a wrongdoer or debtor being subjected to double claims. A successful action by an indemnifier in his own name against a wrongdoer or debtor would not relieve the latter of his liability to the person indemnified. Such liability would only be extinguished by an action brought in the name of the person indemnified or in the name of the indemnifier suing as assignee of the rights of the person indemnified. The fact that the indemnifier also has a claim for damage to his property does not in any way affect the liability of the wrongdoer to the person indemnified.
It was urged on your Lordships that to recognise such an exception would not be to open the floodgates since there could be relatively few cases where the indemnifier would be in a position in which he, as well as the person indemnified, were both likely to suffer damage to their respective property. My Lords, given the reason for the rule and the fact that it has stood for over 100 years, much more than the above consideration would be needed to convince me that there exists an exception thereto such as Esso contend for. The damage to the tanker allows Esso to sue Hall Russell for such loss as they have sustained as a result thereof but it in no way affects their inability to pursue in their own name the crofters’ subrogated rights.
Esso also maintain that they could have convened the crofters as defenders, that any claims which the crofters might have had against Hall Russell were now time-barred and that accordingly no prejudice would result to Hall Russell if they were allowed to pursue in their own name the rights to which they were subrogated. My Lords, the fact that Esso might have brought the crofters into the action or might indeed have obtained from them assignations of their claims against Hall Russell is nothing to the point. They have not chosen to do so and they cannot complain if the case is decided on what was done rather than on what might have been done. All in all I reject Esso’s argument on subrogation and in so doing express my agreement with the reasoning of the Lord President and with that of my noble and learned friend Lord Goff.
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(2) TOVALOP: a direct head of damage
Esso maintained that they had suffered physical damage to their tanker as a result of the negligence of Hall Russell from which it followed that they could recover not only the cost of repairing such damage but also the financial loss which they had incurred as a result of the damage, which loss included the sums paid by them under TOVALOP. The Lord President rejected this contention on two grounds, namely (1) that Hall Russell and the pilot were not said to have known of the existence of TOVALOP and (2) that in any event it was well established by authority that an indemnifier could not sue for reparation by reason of his contractual liability to the person indemnified for damage to his property. Following on the hearing in the First Division Esso amended their pleadings to make averments imputing to Hall Russell knowledge of the existence of TOVALOP and of the likely liability of Esso thereunder in respect of damage from oil pollution. Esso also sought to amend further during the hearing by making the following additional averments:
‘At the time of said incident on 30th December 1978 it was a practical necessity for the owner of a tanker in order to trade internationally to be a participating owner in TOVALOP. It was in particular a necessity for the owner of a tanker in order to use the facilities at Sullom Voe to be a participating owner in TOVALOP.’
I propose to deal first with the second and general ground on which the Lord President rejected Esso’s contentions. The authorities to which the Lord President referred were Simpson & Co v Thomson, Candlewood Navigation Corp Ltd v Mitsui OSK Lines Ltd, Leigh & Sillavan Ltd v Aliakman Shipping Co Ltd and Nacap Ltd v Moffat Plant Ltd. Esso sought to distinguish these authorities for the purposes of this case as they had sought to get round the general rule as to the name in which an indemnifier must sue, namely by relying on the damage suffered by the Bernicia.
If the circumstances of the casualty had been such that Esso had been liable to pay compensation to the crofters under s 1(1) of the Merchant Shipping (Oil Pollution) Act 1971 in respect of an escape of oil I do not doubt that the sums payable would have been a proper head of damage in Esso’s claim against the wrongdoers. In such an event Esso’s liability would have been unavoidably imposed on them by statute. A claim of a similar nature was admitted to be good in The Arabert, A R Appelqvist A/B v Tyne-Tees Steam Shipping Co Ltd [1961] 2 All ER 385, [1963] P 102, to which I shall refer in more detail later. Equally, Esso could have claimed for loss of hire occasioned by a period of necessary repair consequent on damage to the tanker. The present case is, however, in a different position. Esso chose to enter into and remain a party to TOVALOP for what were no doubt sound policy and commercial reasons but under no compulsitor of law so to do. They agreed voluntarily to indemnify persons affected by oil spillage. They were under no general duty in law to the crofters and as far as they were concerned the payments which they received were entirely gratuitous. Indeed, having received payments from Esso the crofters could have sued Hall Russell, arguing that what they had received was no more than gratuities from a disaster fund. TOVALOP is and remains a gratuitous contract of indemnity notwithstanding that the event which gave rise to the payments thereunder was damage to the Bernicia. Esso cannot pray in aid the latter event to convert their claim to repayment of sums paid under that indemnity into a claim for economic loss resulting directly from the damage. The matter can be tested in this way. Assume in the first place that the spillage of bunker oil was entirely due to the negligence of Hall Russell and that Esso had not entered into TOVALOP. In that event Esso would have been liable to the crofters neither in delict nor by virtue of statute and would have made no payments to them. Assume in the second place the same facts but that Esso had entered into TOVALOP and had made payments thereunder to the crofters. What has caused these payments to be made? In my view they were made because Esso has chosen, by entering into and remaining a party to TOVALOP, to assume a voluntary obligation to the crofters and not because of any alleged negligence on the part of Hall Russell. It
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follows that Esso are not entitled to claim the sums second and third concluded for in conclusion (1) as direct heads of damage.
In view of the conclusion which I have reached in relation to the Lord President’s second ground for rejecting Esso’s contention it is not necessary to consider further the effect of the amendments which were made before the hearing in this House and those which were proffered at the bar. Suffice it to say that neither of these amendments go so far as to suggest that there was any legal requirement on Esso to be a party to TOVALOP at the relevant time. I would only add in relation to this branch of the case that the conclusion which I have reached does not mean that Esso never had a remedy in respect of the sums paid by them under TOVALOP. They could either have obtained from the crofters and BP assignations of their claims against Hall Russell and sued that company in their own name or they could have obtained from those persons permission to sue in their names.
(3) Prematurity of declarator
The First Division upheld Hall Russell’s contentions that the declaratory conclusion was premature inasmuch as the claim, being one for relief, could competently be brought without the impediment of prescription after Esso’s liability for payment of the repairs to the jetty had been determined.
Esso’s averments disclose a somewhat curious situation. As the pleadings stood before the First Division Esso averred (1) that by Court of Session summons signetted on 20 December 1983 SIC raised an action against Esso for payment of £270,423, being the cost of repair to no 2 jetty with which the Bernicia came in contact, and (2) that by Court of Session summons signetted on 19 December 1983 BP and Shell UK Ltd raised an action against Esso claiming payment of the same sum. Those pleadings made no reference to the basis of either action. However, prior to the hearing of these appeals Esso amended their pleadings to aver (1) that the basis of SIC’s action was a claim under s 74 of the Harbours, Docks and Piers Clauses Act 1847 and s 4 of the Zetland County Council Act 1974 (c viii) and, alternatively, a claim in respect of negligence of the master and crew of the Bernicia, and (2) that the basis of the claim by BP and Shell was that they were bound by agreement to provide SIC with funds to repair the jetty and that having paid the sum of £270,423 they sought relief from Esso who were primarily liable under s 74 of the 1847 Act. Thus, Esso’s pleadings on the matter are now in a form materially different from that in which they were before the First Division.
Prima facie Esso’s liability to SIC under s 74 of the 1847 Act is undeniable. It is equally certain that Esso cannot be rendered liable twice over for the same damage to the jetty. It does therefore seem most unfortunate that time should have been spent both in the First Division and in this House arguing on the basis that both actions will proceed. I cannot help feeling that some consultation between Esso and the pursuers in the two actions could have resolved the position and obviated the need for Esso to seek protection in the form in which they have done in the declaratory conclusion. However, that being said, it is necessary to look at that conclusion and pleadings as they now stand.
The primary question is whether Esso’s liability to SIC under s 74 of the 1847 Act is a good head of damage in this action against Hall Russell. If it is, then it must be included in this action, since it is trite law that all claims arising out of a single act of negligence must be pursued in the same action. In Stevenson v Pontifex & Wood (1887) 15 R 125 at 129 the Lord President (Inglis) enunciated the rule of practice as follows:
‘… I am of opinion that a single act amounting either to delict or a breach of contract cannot be made the ground of two or more actions, for the purpose of recovering damages arising within different periods but caused by the same act. On the contrary, I hold the true rule of practice based on sound principle to be, that though the delict or breach of contract be of such nature that it will necessarily be followed by injurious consequences in the future, and though it may for this reason
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be impossible to ascertain with precise accuracy at the date of the action or of the verdict the amount of loss which will result, yet the whole damage must be recovered in one action, because there is but one cause of action. The most familiar illustration of this rule is to be found in actions for injury to the person, in which the practice is invariable.’
The foregoing rule has been consistently followed. It was restated in this House in Dunlop v M’Gowans 1980 SC (HL) 73, where it was held that an obligation to make reparation for loss, injury and damage was a single and indivisible obligation and that only one action could be prosecuted for enforcing it. Furthermore, even if as a head of damage the matter could otherwise competently be raised in future proceedings, time-bar would operate to defeat the claim.
In British Rlys Board v Ross and Cromarty CC 1974 SC 27 the county council, who were constructing a new road alongside the railway to Kyle of Lochalsh, were obliged by private Act to pay on demand to the railways board compensation for any loss which they might sustain by reason of damage to railway property. In considering the conduct of the county council in defending an action by the board claiming compensation under the private Act in the context of a proposed action by the county council against their consultant engineers, the Lord President (Emslie) said (at 37):
‘… and although the action proposed by these defenders is of a kind sometimes quite improperly described as one of “relief,” it is nothing more than an action of damages in which the liability of the third parties will in character and origin be wholly different from that under which the defenders have been required to satisfy the claim of the pursuers in this action.’
Although the Lord President’s observations were not essential to his decision in that case I have no doubt that they correctly stated the law and are equally applicable to any claim by Esso to recover from Hall Russell such sums as they have been or will be obliged to pay to third parties in terms of s 74 of the 1847 Act. Although counsel were unable to find any case in which sums paid by a pursuer under an absolute statutory liability had been held to be a good head of damage, I understand that in Admiralty practice in England it is accepted that sums paid under statute by an innocent ship in respect of damage to jetties or raising of wrecks are recoverable as a head of damage from a wrongdoing ship. In The Arabert, A R Appelqvist A/B v Tyne-Tees Steam Shipping Co Ltd [1961] 2 All ER 385, [1963] P 102 Lord Merriman P held that the owners of a wrongdoing vessel were entitled to include the expense of raising the wreck of the innocent vessel in their claim for limitation against the owners of the latter vessel. It was admitted in that case that the expenses incurred by the port authority in raising the vessel, for which her owners were by statute liable, were recoverable as damages against the owners of the wrongdoing vessel. With very experienced Admiralty counsel appearing before a judge so well versed in Admiralty matters it seems most unlikely that such a claim could have passed unchallenged and without judicial comment if it had not accorded with what was understood to be the true position in law.
However, although I consider that Esso’s statutory liability is a good head of damage, it is not necessary at this stage to reach a concluded view on the matter. It is sufficient to entitle Esso to a declaratory conclusion that they ‘have a plain interest to protect themselves against a possibility of prejudice which is by no means fanciful or unreal’ (Central SMT Co Ltd v Lanarkshire CC 1949 SC 450 at 458 per the Lord President (Cooper)). For the reasons which I have already stated there could be substantial prejudice to Esso if they were disabled from pursuing their claim to what is at least prima facie a good head of damage.
The next question is whether the terms of the declarator sought are too wide. They are undoubtedly framed to cover all eventualities and I see no prospect of a Lord Ordinary pronouncing an order precisely as sought. However, I do not consider that this is fatal
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for Esso. A pursuer may in petitory action conclude for what is patently a grossly extravagant sum. The result is not that the conclusion is struck out at the stage of considering relevancy but rather that at the end of the day a Lord Ordinary will grant decree, if at all, for a much reduced sum. In this case if the Lord Ordinary after proof determines liability in favour of Esso he will, in relation to the declaratory conclusion, have two alternatives, namely (1) if Esso’s position vis-à-vis SIC on the one hand and BP and Shell on the other is then clarified, to pronounce a declarator which conforms to the established fact or (2) if the position is not clarified, to make no order in hoc statu in relation to the declarator and to continue consideration of the matter until clarification has taken place.
I do not consider that any prejudice would result by allowing the declaratory conclusion to stand whereas substantial prejudice could result to Esso if it were struck out. For the foregoing reasons, I would allow Esso’s appeal in relation to this conclusion. I would only add that in differing from the First Division on this matter I have been much influenced by the averments anent s 74 of the 1847 Act which were added in this House. I doubt whether your Lordships would have taken a different view from the First Division in relation to the averments which were before that court.
(5) Vicarious responsibility for acts of pilot
Section 6 of the Zetland County Council Act 1974 provided that the county council should exercise jurisdiction as harbour authority within a defined area which included the whole of Sullom Voe. On the coming into operation of the Local Government (Scotland) Act 1973, SIC replaced the county council as the local authority and assumed all the functions of harbour authority under s 154. By the Sullom Voe, Shetland, Pilotage Order 1976, SI 1976/1541, which was made under s 7(1) of the Pilotage Act 1913, there was created a pilotage district which included the whole of Sullom Voe and for which SIC were the pilotage authority. In terms of the order pilotage became compulsory within the district from 1 February 1978.
Hall Russell aver that the pilot was ‘an employee of [SIC] … acting in the course of his employment with them’. SIC answer this averment as follows: ‘Admitted that he was employed as a Marine Officer with [them].' Hall Russell aver negligence on the part of the pilot in a number of respects which it is unnecessary to detail. For the purposes of the present issue the relevant averments are to the effect that SIC employed the pilot in their capacity as port authority and that they are responsible ‘for his actings and omissions in the course of his employment with them’. In their case, Hall Russell intimated that they were prepared, if necessary, to make the following amendment in amplification of the foregoing averments:
‘The fourth third party had been contacted by the vessel with a request for pilotage. The harbour master had instructed the said pilot that he was at liberty to delay the entry of “Esso Bernicia” to Sullom Voe if he had doubts concerning the manoeuvre but that he must inform the harbour-master if he so decided. The pursuers duly paid the pilotage dues to the fourth third party. It was in the interests of the fourth third party, both as harbour authority and as pilotage authority, that vessels entering and berthing at Sullom Voe be safely navigated by the said pilot. Further, it was within the powers of the fourth third party to stipulate in advance the number and disposition of tugs which should be used for bringing vessels to berth in varying weather conditions. In these circumstances it is believed and averred that the fourth third party accepted responsibility for ensuring the safe pilotage of “Esso Bernicia” into Sullom Voe and are vicariously liable for the actings of the said pilot in the course of his employment with them.’
SIC are the fourth third party.
Before turning to consider the arguments presented by Hall Russell it may be convenient to consider the relationship which has existed historically between shipowner
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and pilot. At common law a shipowner was liable for the negligence of a pilot voluntarily engaged just as he was for the negligence of the master. Such a pilot was treated as the servant of the owner. However, a shipowner was not responsible for the negligence of a compulsory pilot, who was not deemed to be his servant or agent. Express provision to this effect was contained in s 633 of the Merchant Shipping Act 1894. The position of a compulsory pilot was equiparated to that of a voluntary pilot at common law by s 15(1) of the 1913 Act, which is in the following terms:
‘Notwithstanding anything in any public or local Act, the owner or master of a vessel navigating under circumstances in which pilotage is compulsory shall be answerable for any loss or damage caused by the vessel or by any fault of the navigation of the vessel in the same manner as he would if pilotage were not compulsory.’
Section 15 came into operation on 1 January 1918.
Hall Russell advanced two reasons for their contention that they had relevantly averred vicarious responsibility on the part of SIC for the negligence of the pilot. In the first place it was said that although earlier authorities had appeared to impose liability on a shipowner for the negligence of a voluntary pilot on the basis of a master and servant relationship this rationale was no longer correct. The true position was that the shipowner owed a non-delegable duty to third parties to have his ship navigated carefully and that he could not discharge that duty by delegating it to an independent contractor in the shape of a pilot. When s 15(1) was looked at against that background there was nothing in it which altered the common law position obtaining between the shipowner and pilot, which remained that of employer and independent contractor. It followed that quoad the shipowner the pilot remained the servant of SIC. In the second place it was said that SIC were the principals in carrying out the business of pilotage and that the pilot was merely carrying out those functions on their behalf, from which it followed that SIC, as the independent contractor, were responsible for acts of negligent pilotage. Similar arguments were presented to the First Division and rejected by the Lord President in his carefully reasoned judgment.
A long line of authority establishes that a shipowner is liable to third parties for the negligent navigation of a voluntary pilot and, since 1 January 1918, he has been similarly liable for negligent acts of compulsory pilots. The basis of this liability is that the pilot is treated as the servant of the owner. Dr Lushington so stated in The Maria (1839) 1 Wm Rob 95 at 103, 166 ER 508 at 511–512. In ‘Beechgrove’ Steamship Co Ltd v Akt ‘Fjord’ of Kristiania [1916] 1 AC 364 it was held that a pilot navigating outwith a compulsory pilotage district was de jure the servant of the onwers and a defence that they were not responsible for his actions was repelled. In Thom v J & P Hutchison Ltd 1925 SC 386 it was held that s 15 of the 1913 Act operated to make a pilot a servant of the owners for the purposes of the doctrine of collaborateur in an action at the instance of the widow of a deceased member of the crew. The pursuer sought to traverse the defence of collaborateur by arguing that the pilot was an agent to whom the business of navigation was deputed and not a servant. The Lord President (Clyde), after remarking that it was impossible to conceive of the pilot in relation to his duties as other than a constituent member for the time being of the crew, said (at 392):
‘These considerations point to service, not to agency, as the foundation on which the relations between a licensed pilot, voluntarily employed, and the owners rest. There is nothing inconsistent with this in the fact that a licensed pilot who is taken on board in a compulsory area is held not to be the servant of the owners. In that case there is no room for contract of any kind.’
The Lord President later observed:
‘… though I rather think it is true that there is no case in which the true nature of the legal relation of a pilot (voluntarily engaged) to the owners has been
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canvassed—it has never been doubted throughout a long series of cases that it is that of service.’
Lord Cullen said (at 393):
‘Now, it is well settled that an owner is liable for loss or damage caused by fault in navigation on the part of a pilot voluntarily employed by him. And the ratio of this liability has always been stated to be that such a pilot is the servant of the owner. He is employed to take up pro tempore the captain’s function of navigator in circumstances where special local knowledge is required. It is true that he is not a kind of servant of whom it can be said that he is bound to obey his employer’s orders, not only as to work to be done, but also as to how he shall do it. But the same thing applies to the captain.’
In Workington Harbour and Dock Board v Towerfield (owners) [1950] 2 All ER 414, [1951] AC 112 a ship went aground due partly to the negligence of a harbour authority and partly to that of a compulsory pilot. It was held that s 15 of the 1913 Act had the effect of rendering the owner responsible so that he was both liable for the loss and damage caused to others and debarred from recovering any damage which he had suffered. The events in question took place before the coming into operation of the Law Reform (Contributory Negligence) Act 1945. Lord Porter, in construing the words ‘answerable for any loss or damage caused … by any fault of the navigation of the vessel’, said ([1950] 2 All ER 414 at 425, [1951] AC 112 at 133–134):
”’Answerable”, as I think, simply means “responsible,” and a shipowner who through a compulsory pilot is responsible for faulty navigation is responsible for damage to his own ship as well as for injury to the property of another. It follows that [he] neither pays for the damage which has been done to the other nor can recover his own damage from the other who is implicated.’
Lord Normand expressly approved the decision and the reasoning of the Lord President and Lord Cullen in Thom v J & P Hutchison Ltd 1925 SC 386 that s 15 created the relation of a master and servant between the shipowner and the pilot (see [1950] 2 All ER 414 at 433, [1951] AC 112 at 145). In the recent case of Oceanic Crest Shipping Co v Pilbara Harbour Services Pty Ltd (1986) 160 CLR 626 the majority of the High Court of Australia considered that a shipowner was responsible for the negligence of a pilot on the basis that the latter became the servant of the former (see per Gibbs CJ, Wilson and Dawson JJ (at 640, 644, 683)).
In the face of these powerful authorities it might be thought that there was little scope for arguing that a compulsory pilot could be treated as anything other than a servant of the owner for all purposes. Counsel for Hall Russell, however, was not to be deterred. Although the rejection by the Lord President (Clyde) of agency as the basis of the owner-pilot relationship was approved by Lord Normand in the Towerfield case, counsel did not shrink from arguing that the Lord President was wrong. The basis of his submission that the pilot remained an independent contractor quoad the owner was the following observation by Denning LJ in Cassidy v Ministry of Health (Fahrni, third party) [1951] 1 All ER 574 at 586–587, [1951] 2 KB 343 at 363:
‘I take it to be clear law, as well as good sense, that, where a person is himself under a duty to use care, he cannot get rid of his responsibility by delegating the performance of it to someone else, no matter whether the delegation be to a servant under a contract of service or to an independent contractor under a contract for services … All those cases give good illustrations of the principle, but I would add two others. One is the case of a shipowner who is under a duty to navigate his ship with reasonable care. He cannot escape that duty by delegating the handling of the ship to someone else, no matter whether it be a ship’s captain under a contract of service or to a pilot under a contract for services; and that is so even though the pilot
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is in control and the captain acts throughout under his directions: see The Neptune the Second ((1814) 1 Dods 467, 165 ER 1380).
Relying on these observations, counsel maintained that while the owner was responsible throughout to third parties for the acts and omissions of the pilot, he was not the master of the pilot for the purposes of any damage which the pilot caused to him. Therefore he could sue both the pilot (Lister v Romford Ice and Cold Storage Co Ltd [1957] 1 All ER 125, [1957] AC 555) and, if he was employed by an authority, his employer. Thus, so far as the pilot is concerned it matters not whether he falls to be treated as the servant of the owner or an independent contractor for the purposes of a negligent act. In either event the owner can recover from him subject always to any statutory limitation of liability. The critical question is whether the owner can recover from a general employer of the pilot. My Lords, I do not consider that the observations of Denning LJ warrant the proposition which counsel sought to derive therefrom. Cassidy v Ministry of Health was a case of negligent medical treatment in which Denning LJ made passing reference to a pilot ‘under a contract for services’. There is no doubt that a pilot was in many cases an independent contractor to the extent that he made his services available to a shipowner and received not a salary but pilotage dues payable in respect of his services under such deductions as the pilotage authority had determined by byelaw made under s 17 of the 1913 Act. However, the fact that he was an independent contractor did not alter the common law rule that when he had been engaged voluntarily by a shipowner he was, so far as any acts or omissions on his part were concerned, the servant of the shipowner. The rule operated whether he was in the general employment of a pilotage authority or whether he was an independent contractor. Denning LJ neither referred nor had occasion to refer to the foregoing rule or to the line of authority which I have mentioned above. In these circumstances his observations cannot be taken as in any way qualifying the general statement of Lord Porter in Workington Harbour and Dock Board v Towerfield (owners) [1950] 2 All ER 414 at 425, [1951] AC 112 at 133–134 that in terms of s 15 of the 1913 Act an owner is responsible for damage to his own ship due to faulty navigation of a compulsory pilot.
My Lords, nothing that has been said on behalf of Hall Russell persuades me that the rationale of the line of authority to which I have referred was wrong or that there is any exception to the general application of s 15 of the 1913 Act to damage suffered by a ship under pilotage. Subject only to what I have to say in the context of Hall Russell’s second submission, the pilot is to be considered for all purposes as the servant of the owner. I would only add that if Hall Russell’s argument were correct there would follow the curious result that the doctrine of respondeat superior would apply to two different masters in respect of two different claims of damage arising out of a single act of negligence. It is a well-recognised principle, exemplified in cases involving crane-drivers, that a servant in the general employment of A may, for a particular purpose, be treated as in the pro hac vice employment of B. However, there is no principle which permits a servant to be in the de jure employment of two separate masters at one and the same time. As the Lord President (Lord Emslie) said in this case (1988 SLT 33 at 48): ‘… no man can serve two masters.' For all these reasons I reject Hall Russell’s first argument as unsound.
Hall Russell’s second argument involved the proposition that SIC had held themselves out as undertaking pilotage services as principals and that the pilot was merely carrying out those services on their behalf. It was said that the position of SIC was indistinguishable from that of hospital authorities, inasmuch as both assumed obligations to others which they performed through professional staff in their employment. The critical question is whether SIC had assumed the obligation of piloting ships in Sullom Voe, in which event they would bear responsibility for any negligence in navigation by a pilot in their employ, or whether they had merely assumed the obligation to provide the services of a qualified pilot, in which event he would be the principal in the pilotage and SIC would not be liable for his negligence.
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In Gold v Essex CC [1942] 2 All ER 237, [1942] 2 KB 293 a local authority was held liable to a patient injured by the negligence of a competent radiographer who was a whole-time employee of the hospital. Lord Greene MR said ([1942] 2 All ER 237 at 242, [1942] 2 KB 237 at 301):
‘Apart from any express term governing the relationship of the parties, the extent of the obligation which one person assumes towards another is to be inferred from the circumstances of the case … but in each case the first task is to discover the extent of the obligation assumed by the person whom it is sought to make liable. Once this is discovered, it follows of necessity that the person accused of a breach of the obligation cannot escape liability because he has employed another person, whether a servant or agent, to discharge it on his behalf; and this is equally true whether or not the obligation involves the use of skill.’
And he observed ([1942] 2 All ER 237 at 243, [1942] 2 KB 237 at 304):
‘It is clear, therefore, that the powers of the respondents include the power of treating patients, and that they are entitled and indeed bound in a proper case to recover the just expense of doing so. If they exercise that power, the obligation which they undertake is an obligation to treat, and they are liable if the persons employed by them to perform the obligation on their behalf act without due care. I am unable to see how a body invested with such a power and to all appearance exercising it, can be said to be assuming no greater obligation than to provide a skilled person and proper appliances.’
In Cassidy v Ministry of Health [1951] 1 All ER 574 at 585, [1951] 2 QB 343 at 360 Denning LJ observed that whenever hospital authorities ‘accept a patient for treatment, they must use reasonable care and skill to cure him of his ailment’. He later said: ‘Once they undertake the task, they come under a duty to use care in the doing of it … ' Finally, in Macdonald v Glasgow Western Hospitals Board of Management 1954 SC 453 at 485 Lord Carmont said:
‘If A bargained with B to do a piece of work, did it matter, if the work was inadequate, whether the agent employed to do the work was a servant or a contractor? Surely not! If there was a failure adequately to fulfil the undertaking, it was no excuse to blame either the one or the other where A was sued for breach. If then a hospital board proposes or holds out an offer to the public to nurse, it seems no answer to one who has not been adequately nursed to refer to the failings of the agent selected to carry out the work for A.’
These cases are undoubted authority for the proposition that if A assumes an obligation towards B he cannot avoid responsibility for a failure of performance due to lack of care on the part of persons whom he has employed to perform on his behalf. They do not, however, assist in determining whether in any particular case A has assumed an obligation to B. That, as Lord Greene MR said in Gold’s case, is a matter to be inferred from the circumstances of the case.
Hall Russell could point to no statutory provision which either obliged or empowered SIC to undertake the pilotage of ships in Sullom Voe. Section 16 of the 1913 Act empowers pilotage authorities to license pilots for their district, and s 19 provides that the grant of a pilot’s licence does not impose any liability on the authority for any loss occasioned by the pilot’s fault. The Act contains no provision empowering a pilotage authority to employ pilots or undertake pilotage. The Zetland County Council Act 1974 contains no reference to pilotage and the 1976 order empowers SIC by art 10 to acquire and own work vessels for the purposes of the order but contains provision relating neither to their employment of pilots nor to performance of pilotage duties. However, Hall Russell argued that the averment that the pilot was acting in the course of his employment with them must be taken as meaning that he, as pilot, was carrying out on behalf of SIC
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the obligation of pilotage towards shipowners which they had assumed. I do not consider that this is a legitimate inference from these bare averments, even as expanded by the proffered amendments in the case, but it is not necessary to decide this point on the pleadings alone, since authority is uniformly against it.
Hall Russell sought to derive support from Holman v Irvine Harbour Trustees (1877) 4 R 406, in which the defenders were held liable to the owners of a ship damaged by the negligence of an unlicensed pilot in their employment. Lord Ormidale said (at 416):
‘A duly qualified or licensed pilot is a public officer who obtains his certificate only after a careful examination of his qualifications by parties competent to judge of them. On being licensed he occupies an independent position, very much as a notary-public or messenger-at-arms does. The public constitute his master, and he is the servant of the public, like these and other public functionaries; and the usual consequences and responsibilities arising from the ordinary relation of master and servant do not arise. It was for this reason—a reason which has no application to the circumstances of the present case—that the harbour and pilotage authorities were assoilzied from liability in the case of Ogilvie and Others v. The Magistrates of Edinburgh ((1821) 1 S 24) relied on so much by the Lord Ordinary.’
Lord Gifford summarised the matter as follows (at 417):
‘The short ground upon which I rest my opinion may be stated almost in a single sentence. I think, upon the evidence, and looking to the whole circumstances of the case, including the terms of the various statutes under which the harbour trustees acted, that Jeremiah M’Gill, on the occasion in question, was not acting as an independent pilot employed by the shipmaster or captain of the “Gertrude,” and merely licensed or authorised by the defenders, but was acting solely and simply as the servant of the defenders, employed by them alone, and paid by them alone, and acting within the limits of the defenders’ harbour in discharging a duty which the defenders themselves had undertaken to perform.’
The Lord Justice Clerk (Moncreiff) said (at 422):
‘No doubt, if the harbour commissioners had sent out a licensed pilot they would have done all that could have been required of them, for it is certain that a pilotage authority, having duly licensed a pilot, is not responsible for any fault he may commit.’
The basis of that decision was that an unlicensed pilot working about the harbour remained the servant of the harbour authority in contradistinction to a licensed pilot who occupied an independent position. Thus, far from assisting Hall Russell, the case is against them as there is no challenge to the licensing or general competence of Captain Hemingway. In Parker v North British Rly Co (1898) 25 R 1059 at 1067 the Lord Justice Clerk (Macdonald), in the context of a harbour authority’s liability to the owner of a damaged ship, observed, obiter:
‘But I cannot hold that if any vessel was picked up by one of these pilots the company were responsible for him as their servant, because they had an arrangement with him that, in respect of their providing him with a boat and a fixed weekly payment, he agreed to hand them the fees he drew from ships which he boarded and piloted in.’
Lord Moncreiff expressed tentative views to the same effect.
In Fowles v Eastern and Australian Steamship Co Ltd [1916] 2 AC 556 it was held that a shipowner’s claim to recover damages caused by the negligence of a compulsory pilot was not maintainable against the government of Queensland, who owed no duty to manage or control ships but merely a duty to license and appoint duly qualified pilots,
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which latter duty was not alleged to have been breached. In delivering the advice of the Board, Earl Loreburn said (at 560–561):
‘In examining the statutes, it is well to bear in mind the condition of things in regard to pilots before Parliament interposed. Originally the business was simply a matter of private enterprise; seamen of local experience made their own bargains with masters of ships. The acting Chief Justice (Barton J. traces the sequel in his judgment. A licence was required, in the interests of public safety; then pilotage fees were turned by statute into pilotage rates, no doubt for public reasons, but still the rates were paid to the men for their private emolument. Then the Treasury took the rates and empowered the Government to fix the remuneration of pilots. “The statutes also provided for constitution of a Marine Board acting in the execution of its powers and functions under the control of the Crown. The same statutes regulated the pilots in their duties after the manner of public servants and provided for a pilotage service, and, indeed, as was admitted, the Government supplied the port pilots with the instruments of their calling in the shape of boats maintained and crews paid, at Government cost, while the admissions and the regulations show that, on the other hand, the coast pilots were allowed to receive fees for themselves, and had to find their own boats and crews. The port pilots were made regular officers of the Government service, paid from the public funds, though the department called the Marine Board managed the pilot service under the immediate control of the Government. The port pilots were classified under the public service laws, according to salary, as professional servants of the Government.” To this it may be added that pilotage in prescribed ports was made compulsory.’
After posing the question of whether or not the government were bound to navigate the ship and employed the pilot to do for them the work which they were bound to do, Earl Loreburn continued (at 562–563):
‘In their Lordships’ opinion these Acts of Parliament did not alter the original status of a pilot, which is, in effect, that he must be regarded as an independent professional man in discharging his skilled duties. If it had been intended to alter this old and familiar status, it is to be supposed that the Legislature would have done it more explicitly. What it has done is more consistent with a different and limited purpose, namely, to secure a proper selection, a proper supply, a proper supervision, and a proper remuneration of men to whose skill life and property is committed, whether the shipowner likes it or not. For this purpose they become servants of the Government. For the purpose of navigating ships they remain what they were, and the duty which the State or Government owes to a shipowner, exercised, it is true, by various authorities, is to provide a qualified man in the terms of the statutes, but not to take the conduct or management of the ship. It is not said that they have failed in this duty of providing a qualified man.’
The statutory provisions in this case certainly do no more to alter the original status of a pilot or to impose a duty of navigation on SIC than did the provisions to which Earl Loreburn referred. However, counsel argued that Fowles’s case was distinguishable from the present case inasmuch as it was here to be inferred from facts averred that SIC had accepted responsibility for ensuring the safe pilotage of the Bernicia.
Fowles’s case was applied by the majority of the High Court of Australia in Oceanic Crest Shipping Co v Pilbara Harbour Services Pty Ltd (1986) 160 CLR 626, who held that a port authority was not vicariously liable for the negligence of a pilot because such liability was impliedly excluded by statute and also because the pilot was a public officer executing an independent duty which the law cast on him. The relevant statutory provision was s 410B(2) of the Navigation Act 1912 (Aust), which was, for practical purposes, in terms identical to s 15(1) of the 1913 Act. Gibbs CJ pointed out that Fowles’s case had since been
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understood in the High Court of Australia as depending on the circumstance that the pilot was executing an independent duty which the law cast on him (at 637). After considering a number of authorities involving tortfeasors who were acting in the performance of a duty imposed by law he rejected an argument that the principles on which Fowles’s case depended no longer accorded with modern principles of vicarious responsibility. He further concluded that the provisions of s 410B(2) of the 1912 Act excluded any liability of the general employer of a pilot thus providing what would have been an additional reason for the conclusion in Fowles’s (at 641), case had the provision then been in force. Wilson and Dawson JJ both reached a similar conclusion as to the effect of s 410B(2). In their dissenting judgments, Brennan and Dean JJ both considered that the reasoning in Fowles’s case should not be applied to a trading corporation empowered to employ licensed pilots for reward. Brennan J expressed the further view that s 410B(2) did not affect the relationship between the master of the ship and the pilot in connection with the conduct of the ship by the pilot and that the owner of the ship and the general employer of the compulsory pilot were both liable to a plaintiff whose damage was caused by the negligence of the pilot in the conduct of the ship. I would respectfully agree with the reasoning and conclusions of the majority of the judges of the High Court and I decline Hall Russell’s invitation to adopt the reasoning of Brennan J in relation to s 410B(2).
My Lords, it may be stated as a general rule that the employer of a qualified licensed pilot is not vicariously responsible to the owner of a ship damaged by his negligence while under pilotage. All the authorities support such a rule and none appear to controvert it. The basis of the rule is twofold, namely (1) the pilot is an independent professional man who navigates the ship as a principal and not as a servant of his general employer and (2) s 15(1) makes him the servant of the shipowner for all purposes connected with navigation.
In stating this rule I am not going so far as to say that an employer of a licensed pilot could never be responsible for his negligent navigation. It is theoretically possible that such an employer could himself assume the obligation of safe pilotage, although at the moment I have very great difficulty in envisaging a situation in which such an event could occur. However, it is unnecessary to speculate further since there is nothing in the present case to take it out of the general rule. It follows that I would reject Hall Russell’s second argument on this branch of the case.
On the whole matter I would allow Esso’s appeal so far as it relates to the declaratory conclusion and quoad ultra dismiss their appeal and the appeal and cross-appeal of Hall Russell.
Interlocutors of Inner House of 10 July 1987 varied and, as varied, affirmed. First appeal and cross-appeal in second appeal dismissed.
Solicitors: Thomas Cooper & Stibbard, agents for Boyd Jameson & Young WS, Edinburgh (for Esso); S J Berwin & Co, agents for Morton Fraser & Milligan WS, Edinburgh (for Hall Russell); Elborne Mitchell, agents for Dundas & Wilson CS, Edinburgh (for SIC); Ingledew Brown Bennison & Garrett, agents for Maclay Murray & Spens, Edinburgh (for the second and third named third parties).
Mary Rose Plummer Barrister.
Greenwich London Borough Council v Powell and another
[1989] 1 All ER 65
Categories: LOCAL GOVERNMENT
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD TEMPLEMAN, LORD GRIFFITHS, LORD ACKNER AND LORD LOWRY
Hearing Date(s): 7, 8 NOVEMBER, 8 DECEMBER 1988
Local authority – Caravan sites – Provision of caravan sites – Duty of local authority – Duty to provide accommodation for gipsies – Gipsies occupying caravans on site seasonally as main or only residence – Whether sites ‘protected sites’ – Whether occupants entitled to security of tenure – Caravan Sites Act 1968, s 6 – Mobile Homes Act 1983, s 5(1).
A caravan site provided by a local authority in the discharge of its duty under s 6a of the Caravan Sites Act 1968 to accommodate those whom it bona fide believes to be gipsies because they are nomadic for part of the year is not a ‘protected site’ within s 5(1)b of the Mobile Homes Act 1983 thereby entitling the occupants to security of tenure under that Act, notwithstanding that they may occupy the caravans as their main or only residence and may establish a permanent residence on the site by returning from year to year. Moreover, even if the occupants give up their erstwhile nomadic way of life entirely such a site will still not become a protected site unless the local authority adopts a policy of offering vacancies on the site to static residents who have fixed full-time employment (see p 69 j to p 70 a d e and p 71 b c f to h, post).
Notes
For the powers of local authorities with respect to the provisions of caravan sites, see 29 Halsbury’s Laws (4th edn) para 118.
For the Caravan Sites Act 1968, s 6, see 32 Halsbury’s Statutes (4th edn) 503.
For the Mobile Homes Act 1983, s 5, see ibid 517.
Cases referred to in opinions
Mills v Cooper [1967] 2 All ER 100, [1967] 2 QB 459, [1967] 2 WLR 1343, DC.
West Glamorgan CC v Rafferty, R v Secretary of State for Wales, ex p Gilhaney [1987] 1 All ER 1005, [1987] 1 WLR 457, CA.
Appeal
Greenwich London Borough Council appealed with leave of the Appeal Committee of the House of Lords given on 9 June 1988 against the decision of the Court of Appeal (Purchas LJ and Heilbron J) on 23 February 1988 allowing an appeal by the defendants, George Powell and Harriett Powell, against the order of his Honour Judge James sitting in the Woolwich County Court on 3 November 1988 whereby, on the application of the council under CCR Ord 24, he ordered that the Powells give up possession of pad J1 at the Thistlebrook Caravan Site, Harrow Manorway, London SE2, owned by the council. The facts are set out in the opinion of Lord Bridge.
John R Macdonald QC and C P L Braham for the council.
Nigel Pascoe QC and David Wade for the Powells.
8 December 1988. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, the appellants are the local authority for the London borough of Greenwich. I shall refer to them as ‘the council’. The respondents are Mr and Mrs Powell. I shall refer to them as ‘the Powells’. The council own a caravan
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site known as the Thistlebrook Caravan Site at Abbey Wood, London SE2. The Powells occupy part of the site known as pad J1, on which they are permitted to station two caravans pursuant to the terms of an agreement with the council. In October 1986 the council gave the Powells four weeks’ notice to quit and in November 1986 they instituted proceedings for possession. The Powells pleaded in defence that the Thistlebrook site was a ‘protected site’ as defined by s 5(1) of the Mobile Homes Act 1983. An agreement under which a person is entitled to station a caravan on a protected site and to occupy it as his only or main residence may only be terminated as provided by Sch 1 to the 1983 Act. The Powells’ agreement has never been so terminated and there is no dispute that they occupy the caravans as their only or main residence. Hence the only issue in the case is whether the Thistlebrook site is a ‘protected site’ as defined by s 5(1). On 3 November 1987 his Honour Judge James at the Woolwich County Court held that it was not and made an order for possession. On 23 February 1988 the Court of Appeal (Purchas LJ and Heilbron J) held that it was and allowed the Powells’ appeal. The council now appeal by leave of your Lordships’ House.
The issue raised is one of great importance for local authorities. It can only be understood in the context of the historical development of the legislation governing caravan sites.
In the 1950s the mushrooming of residential caravan sites to alleviate the acute shortage of conventional housing presented many problems to local planning authorities which their powers under the Town and Country Planning Acts were inadequate to resolve. The first direct statutory control over caravan sites as such was imposed by the Caravan Sites and Control of Development Act 1960. This established a system of licensing of caravan sites by local authorities which gave effective control over both the establishment of new sites and the conditions under which sites were required to be operated. Section 24 of the Act gave power to local authorities themselves to provide both residential and holiday sites within their areas and to acquire land compulsorily for the purpose. Sites provided by local authorities, since they were themselves the licensing authorities, were not required to be licensed: see para 11 of Sch 1.
Part I of the Caravan Sites Act 1968 introduced for the first time a very limited form of statutory security of tenure for the occupier of a residential caravan on a ‘protected site’ as defined by s 1(2), either as licensee of a pitch on which to station his own caravan or as occupier of a caravan belonging to the site owner. In each case his contractual right could only be determined by four weeks’ notice and he could only be evicted by court order. The court was given power to suspend enforcement of an eviction order ‘for such period not exceeding 12 months from the date of the order as the court thinks reasonable’ and from time to time to extend the period of suspension for not more than 12 months at a time: see s 4. This limited protection I shall refer to as ‘the 1968 security of tenure’. A ‘protected site’ is defined by s 1(2), which provides:
‘For the purposes of this Part of this Act a protected site is any land in respect of which a site licence is required under Part I of the Caravan Sites and Control of Development Act 1960 or would be so required if paragraph 11 of Schedule 1 to that Act (exemption of land occupied by local authorities) were omitted, not being land in respect of which the relevant planning permission or site licence—(a) is expressed to be granted for holiday use only; or (b) is otherwise so expressed or subject to such conditions that there are times of the year when no caravan may be stationed on the land for human habitation.’
The effect of this definition is that the 1968 security of tenure is available to all occupiers of residential caravans on local authority sites as well as on privately owned sites.
Part II of the 1968 Act, which came into force on 1 April 1970, attempted to resolve the problem of providing orderly caravan sites to accommodate the gipsy community and of controlling unauthorised gipsy encampments. By the definition in s 16—
‘“gipsies” means persons of nomadic habit of life, whatever their race or origin,
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but does not include members of an organised group of travelling showmen, or of persons engaged in travelling circuses, travelling together as such.’
Section 6 imposes a duty on local authorities—
‘to exercise their powers under section 24 of the Caravan Sites and Control of Development Act 1960 (provision of caravan sites) so far as may be necessary to provide adequate accommodation for gipsies residing in or resorting to their area.’
Sections 10 to 12 impose a system of control of the unauthorised stationing of gipsies’ caravans in the area of any local authority which is dependent on the designation of that area by the minister under s 12 as an area to which s 10 applies. The condition to justify designation under s 12 is that it must appear to the minister—
‘either that adequate provision is made in the area for the accommodation of gipsies residing in or resorting to the area, or that in all the circumstances it is not necessary or expedient to make any such provision.’
(See s 12(3).)
Within a designated area it is an offence under s 10 for a gipsy to station a caravan on land within the boundaries of a highway, on other unoccupied land or on occupied land without the consent of the occupier. Section 11 provides machinery for the expeditious removal by order of a magistrates’ court of unauthorised gipsy caravans stationed in a designated area.
The policy underlying Pt II of the 1968 Act is, if I may say so, admirably described by Ralph Gibson LJ in West Glamorgan CC v Rafferty [1987] 1 All ER 1005 at 1010, [1987] 1 WLR 457 at 463:
‘First, adequate accommodation is to be provided for gipsies in the area of the local authority in the interest of the gipsies themselves, giving them sites to which they can lawfully go and which will be supplied with facilities and supervised so that the sites will be maintained in decent order. Given some security of accommodation their children are more likely to get effective instruction in school. Any gipsies not complying with the regulations of the site may be ejected. Such sites will be better both for the travelling people who use them and for those who live near the sites. The second purpose of the legislation is plain from ss 10 and 12 of the 1968 Act.’
Ralph Gibson LJ then summarised the effect of ss 10 to 12 and continued ([1987] 1 All ER 1005 at 1010–1011, [1987] 1 WLR 457 at 463):
‘The rest of the community is thus to an extent protected from visitation by gipsies trespassing on land, and camping on unregulated sites so as to cause nuisance, and sometimes damage, to those areas in which they trespass and the people living there.’
The Mobile Homes Act 1975 gave greatly enhanced security of tenure to a person stationing his own caravan on a licensed caravan site for occupation as his only or main residence. The detailed provisions are elaborate and have now been superseded. It is sufficient, therefore, to say that, in substance, they gave the occupier statutory security of tenure for five years, renewable for a further three years. This I will call ‘the 1975 security of tenure’. The 1975 Act, however, by its own definition of ‘protected site’, which I need not set out, deliberately excluded from the benefit of the 1975 security of tenure occupiers of caravans on all local authority sites.
The Mobile Homes Act 1983 replaced the main provisions of the 1975 Act and still further enhanced the security of tenure enjoyed by a person stationing his own caravan on an authorised site for occupation as his only or main residence. Subject to exceptions which are immaterial for present purposes, this security (the 1983 security of tenure) in substance continues indefinitely and is transmissible by sale or gift of the caravan. The
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occupier cannot be evicted except by court order which may only be made on the grounds, put shortly, (1) that the occupier is in breach of agreement and that it is reasonable for the agreement to be terminated, (2) that the occupier is not occupying the caravan as his only or main residence, (3) that the condition of the caravan is detrimental to the amenity of the site (see Sch 1, Pt I, paras 4, 5 and 6). For present purposes, the all-important change effected by the 1983 Act, as compared with the 1975 Act, is to extend the 1983 security of tenure to caravans stationed on all local authority sites except gipsy sites. This change is effected by the definition in s 5(1) of the 1983 Act, which reads:
‘“protected site” does not include any land occupied by a local authority as a caravan site providing accommodation for gipsies … but, subject to that, has the same meaning as in Part I of the Caravan Sites Act 1968.’
The question on which this case turns is whether the Thistlebrook site is occupied by the council ‘as a caravan site providing accommodation for gipsies’. It is common ground that the question must be answered by reference to the site as a whole, not by reference to individual pads or pitches.
The facts may not have been investigated at the trial as fully as they might have been if the issues canvassed in the Court of Appeal and before your Lordships had been fully anticipated. But the essential primary facts are not, I think, in dispute. The Thistlebrook site was acquired by the council by compulsory purchase in 1967 under s 24 of the 1960 Act. Before acquisition the site was occupied by a number of caravan dwellers who may or may not have been persons of nomadic habit of life. The trial judge gave an interesting account of the historical background leading to the compulsory purchase, but treated it, as I think rightly, as irrelevant to the issues. In the Court of Appeal there was produced for the first time the report of the inspector who held an inquiry into objections to the council’s compulsory purchase order and this report was admitted without objection as additional evidence. The Court of Appeal seem to have attached some importance to it, but there are two reasons why I find it difficult to draw any relevant inferences from the case made for the council in support of the compulsory purchase order as reported by the inspector. First, the acquisition was effected long before the council had any statutory duty to provide accommodation for gipsies. Second, the evidence is silent as to what happened to the site between 1967 and 1972. The most the inspector’s report proved of possible relevance was that a few of the caravan dwellers now resident on the site had been there before 1967 and objected to the compulsory purchase order.
The evidence of the principal witness for the council, which the judge accepted, was that the site was opened in three stages between October 1972 and December 1973 as a site to provide accommodation for gipsies in discharge of the council’s duty under s 6 of the 1968 Act. The Powells were among the first to come on the site after it was opened. The site had 54 pads, of which some, like that occupied by the Powells, accommodated more than one caravan. In May 1974 the Secretary of State for the Environment made the Gipsy Encampments (Designation of the London Borough of Greenwich) Order 1974, SI 1974/920. The order recites that it appears to the Secretary of State that adequate provision is made in the London borough of Greenwich for the accommodation of gipsies residing in or resorting to that area and designates it as an area to which s 10 of the 1968 Act applies. The order must necessarily be read as referring to the Thistlebrook site as this was the only caravan site provided for by the council, and hence the only site in the borough purporting to provide accommodation for gipsies.
The Powells both gave evidence which the judge accepted. Mr Powell said that he was a gipsy by race and proud of it. Their evidence was that they did seasonal work fruit-picking away from the Thistlebrook site which had usually been for four to five months a year. In 1987 they had been absent for three months. They had one residential caravan (presumably left permanently at Thistlebrook) and one mobile caravan (presumably used on their travels). Their pattern of life was typical of many others resident on the
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Thistlebrook site. They and all the other occupants of the site had their permanent residence there and many others, like the Powells, had been there for many years.
The council’s principal witness produced in evidence a helpful schedule, again accepted by the judge, showing absences from the site in 1986 and 1987. A substantial number of occupants of pads on the site had been absent from the site for periods up to five months in each year and for longer than could reasonably be accounted for as holiday absences. The clear inference from this evidence taken together with the Powells’ evidence was that these occupiers were seasonal workers like the Powells who went on their travels in their caravans for substantial periods of the year moving from place to place to find work. It is not without significance that the site rules which were incorporated in occupiers’ agreements with the council allowed occupiers to be absent from the site for up to 20 weeks in any one year (or for longer if agreed in writing with the council) and to retain their right to return by paying for the weeks of absence half the fixed weekly payments provided for in their agreements. This appears to have been designed to make provision for persons following just such a pattern of life as the Powells.
The judge held that the character of the site was determined by the purpose of the council to occupy it as a site providing accommodation for gipsies and that this was affirmed by the order made by the Secretary of State for the Environment in 1974 under s 12 of the 1968 Act designating the London borough of Greenwich as an area to which s 10 applies. He had no material to indicate any subsequent change in the council’s purpose. On this view he did not find it necessary to decide whether those presently occupying the site were persons of nomadic habit of life. On the evidence, in particular the schedule of absences in 1986 and 1987, he indicated that ‘it would if applicable have been my conclusion that none of those now occupying Thistlebrook are at the present time of nomadic habit of life’. The Court of Appeal held that the status of the site was determined by the character of those presently occupying the site and that none were persons of nomadic habit of life. Hence the site was a ‘protected site’ as defined by s 5(1) of the 1983 Act and the Powells’ agreement giving them the right to occupy had never been determined.
In Mills v Cooper [1967] 2 All ER 100, [1967] 2 QB 459 the Divisional Court had to consider the meaning of the word ‘gipsy’ in s 127 of the Highways Act 1959 without the aid of any statutory definition. The section provides:
‘If, without lawful authority or excuse … (c) … a gipsy pitches a booth, stall or stand, or encamps, on a highway, he shall be guilty of an offence … ’
Lord Parker CJ said ([1967] 2 All ER 100 at 103, [1967] 2 QB 459 at 467):
‘I think that, in this context, “gipsy” means no more than a person leading a nomadic life with no, or no fixed, employment and with no fixed abode.’
Diplock LJ indicated his view that ‘gipsy’ in the section bore—
‘its popular meaning, which I would define as a person without fixed abode who leads a nomadic life, dwelling in tents or other shelters, or in caravans or other vehicles.’
(See [1967] 2 All ER 100 at 104, [1967] 2 QB 459 at 468.)
Both Lord Parker CJ and Diplock LJ rejected the argument that ‘gipsy’ in the context referred only to a person of Romany race.
It is difficult to think that the draftsman of the 1968 Act did not have these passages in mind when he provided the definition of ‘gipsies’ in s 16. He could have defined them as ‘persons of nomadic habit of life and of no fixed abode’, but he did not. Moreover, the duty imposed by s 6(1) is to provide accommodation ‘for gipsies residing in or resorting to their area’. I am inclined to conclude from these indications alone that a person may be within the definition if he leads a nomadic life only seasonally and notwithstanding that he
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regularly returns for part of the year to the same place where he may be said to have a fixed abode or permanent residence.
But we are only concerned with the definition of ‘gipsies’ in s 16 of the 1968 Act, so to speak, at one remove. What we have directly to construe is the definition of ‘protected site’ in the 1983 Act. It was for this reason that I thought it necessary to trace the legislative history in some detail. This made it clear that from 1968 to 1983 the only security of tenure enjoyed by a caravan resident on any local authority site was the 1968 security of tenure. Meanwhile, from 1970 to 1983 local authorities up and down the country, and in particular London boroughs, were doing their best to discharge their duty under s 6 of the 1968 Act to provide sites for gipsies in accordance with policy guidance issued to them by the Department of the Environment. Likewise, local authority areas were being designated under s 12 of the 1968 Act, in order to make available the important powers of control over unauthorised gipsy caravans under ss 10 and 11, in accordance with the view then taken as to what could amount to ‘adequate provision … for the accommodation of gipsies residing in or resorting to’ the local authority area.
It was only when the 1983 Act came into force that it became important to distinguish between local authority sites ‘providing accommodation for gipsies’ and other local authority sites, because it was then for the first time that the crucial distinction between the security of tenure enjoyed by caravan residents on the two classes of site was introduced. The Bill which became the 1983 Act was a government Bill and it would be quite unrealistic not to recognise that the distinction between the two classes of site made in the statute must have been made with full knowledge of the policy which had been followed since 1970 with regard to the performance by local authorities of their duty under s 6 of the 1968 Act. That policy, whilst technically inadmissible as an aid to the construction of the definition of ‘gipsies’ in s 16 of the 1968 Act, is, in my opinion, fully cognisable as a powerful pointer to the intention of the legislature in excluding local authority sites ‘providing accommodation for gipsies’ from the definition of ‘protected site’ in the 1983 Act.
The available indications of the relevant policy are twofold. First, your Lordships have had the advantage of seeing Department of Environment circular 28/77 issued to local authorities in England on 25 March 1977. The appendix to that circular is headed ‘Gipsy Caravan Sites. Notes for the Guidance of Local Authorities in the Implementation of Part II of the Caravan Sites Act 1968’. Paragraph 5 of the notes observes perspicaciously:
‘The criterion “nomadic habit of life” leads to a certain ambiguity, especially in relation to gipsies who settle for lengthy periods on authorised sites.’
But later passages in the notes firmly grasp the nettle of this ambiguity and encourage local authorities to provide sites to accommodate gipsies in four categories as follows: (1) emergency stopping places (paras 55 and 56); (2) transit or short-stay sites (para 57); (3) residential sites (paras58–60); (4) permanent sites for long-term residential use (paras 61–65). The last of these categories can only have had in contemplation sites such as that at Thistlebrook to which gipsies return year after year as their permanent residence but from which they set forth at certain seasons to pursue their traditional nomadic way of life.
Second, there is ample evidence that the policy advocated in the circular with regard to permanent sites for long-term residential use had been recognised by the Secretary of State as an appropriate criterion before 1977 for application under s 12 of the 1968 Act in deciding whether adequate provision had been made in a local authority area for the accommodation of gipsies to justify designation of the area. The undisputed evidence of the council’s principal witness at the trial, which the judge accepted, was that 17 other London boroughs besides Greenwich had been designated under s 12 on the basis that they had made adequate provision for the accommodation of gipsies on sites which were operated on similar lines to the Thistlebrook site, ie by providing permanent
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accommodation for gipsies as a home base from which they pursued their nomadic habit of life only seasonally. At least eight of these designation orders were made by statutory instruments dated between 1973 and 1975.
These considerations confirm me in the opinion that, even if there is an ambiguity in the definition of ‘gipsies’ in s 16 of the 1968 Act, the intention of the legislature in the 1983 Act was clearly to exclude from the definition of ‘protected site’ sites such as that at Thistlebrook provided by local authorities in discharge of their duty under s 6 of the 1968 Act to accommodate those whom they bona fide believe to be gipsies because they are nomadic for part of the year, notwithstanding that they may establish a permanent residence on the site by returning from year to year. Such a site will not become a ‘protected site’ even if some of the erstwhile nomads, as well they may, give up their nomadic way of life entirely. It would be different, of course, if the local authority adopted a policy of offering vacancies on the site to static residents with fixed full-time employment, but this is hardly ever likely to happen.
Any other construction of ‘protected site’ in s 5(1) of the 1983 Act would, it seems to me, cause great difficulties both for local authorities and for most of the gipsy community and would undo much of the good work which has been done in this difficult field. Those already established on sites like Thistlebrook would, of course, enjoy full 1983 security of tenure. But local authorities in the position of the council would need to start de novo to discharge their duty under s 6 of the 1968 Act. Many existing designations under s 12 would have to be revoked or would perhaps be automatically invalidated. Your Lordships were told that, on the strength of the Court of Appeal’s decision, some proceedings had already been instituted seeking judicial review of existing orders made under s 12. For the future, local authorities establishing new sites providing accommodation for gipsies would have to be vigilant to prevent their residence acquiring any degree of permanency. This, I think, they could in practice only do by applying a short rule-of-thumb limit of stay, which would be quite contrary to the interests of the gipsy community.
I would accordingly allow the appeal, set aside the order of the Court of Appeal and restore the order of the Woolwich County Court.
LORD TEMPLEMAN. My Lords, for the reasons given by my noble and learned friend Lord Bridge, I would allow this appeal.
LORD GRIFFITHS. My Lords, I agree that this appeal should be allowed for the reasons given in the speech of my noble and learned friend Lord Bridge.
LORD ACKNER. My Lords, I have had the advantage of reading the speech of my noble and learned friend Lord Bridge, and I would allow this appeal.
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Bridge. I respectfully agree with it and for the reasons given by him I would allow the appeal.
Appeal allowed.
Solicitors: Colin Roberts (for the council); Thos Boyd Whyte, Bexleyheath (for the Powells).
Mary Rose Plummer Barrister.
R v Inner South London Coroner, ex parte Kendall
[1989] 1 All ER 72
Categories: ADMINISTRATION OF JUSTICE; Judiciary
Court: QUEEN’S BENCH DIVISION
Lord(s): PARKER LJ AND SIMON BROWN J
Hearing Date(s): 19, 20, 27 MAY 1988
Coroner – Inquest – Verdict – Solvent abuse – Death occurring as result of casual glue sniffing – Whether death by drug abuse appropriate verdict.
Where death is caused by casual glue sniffing the appropriate verdict is death by solvent abuse or a similar verdict, rather than death by drug abuse (see p 76 g to p 77 d and p 78 b c, post).
Notes
For the coroner’s verdict, see 9 Halsbury’s Laws (4th edn) paras 1120, 1122, and for cases on the subject, see 13 Digest (Reissue) 180–182, 1544–1563.
Cases referred to in judgment
Bradford v Wilson [1984] RTR 116, DC.
R v Inner West London Coroner, ex p De Luca [1988] 3 All ER 414, [1988] 3 WLR 286, DC.
R v Portsmouth Coroner, ex p Anderson [1988] 2 All ER 604, [1987] 1 WLR 1640, DC.
Cases also cited
Rapier (decd), Re [1986] 3 All ER 726, [1988] QB 26, DC.
R v West London Coroner, ex p Gray [1987] 2 All ER 129, [1988] QB 467, DC.
Application for judicial review
Maria Kendall, the mother of Graham Kendall deceased, applied, with the leave of Henry J given on 22 January 1988, for, inter alia, judicial review by way of (i) an order of certiorari to quash the verdict of acute abuse of drugs recorded by HM Coroner for Inner South London sitting at Southwark Coroner’s Court on 11 February 1987 at an inquest into the death of the deceased and (ii) an order of mandamus requiring a fresh inquest to be held by another coroner. The facts are set out in the judgment of Simon Brown J.
Edward Fitzgerald for the applicant;.
Terence Coghlan for the coroner.
Cur adv vult
27 May 1988. The following judgments were delivered.
SIMON BROWN J (giving the first judgment at the invitation of Parker LJ). On Friday, 8 August 1986 Lee Kendall, a boy just turned 14, died tragically in a Bermondsey park after inhaling the solvent trichloroethane, better known as Tipp-Ex thinning fluid. It was a much publicised case. The shopkeeper who supplied the boy was prosecuted and sent to prison for three months, a sentence which was then increased to four months when he imprudently appealed to the Crown Court.
On 11 February 1987 an inquest was held. It was conducted by the then coroner for Southwark sitting alone without a jury. At the end of the hearing, having found the cause of death to be trichloroethane over-dosage, the coroner recorded his verdict thus: ‘Acute abuse of a drug.' This verdict has greatly distressed Lee’s family. They are deeply upset by the stigma which understandably they believe to attach to it. Lee’s mother now seeks to quash this offending part of the inquisition and to ensure that no further verdict
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shall make any reference whatever to drugs. The proceedings consist of both an application under s 6 of the Coroners Act 1887 brought with the Attorney General’s fiat and an application for judicial review pursuant to leave. For the purposes of this judgment we are proceeding solely under this latter jurisdiction. Under the statute, indeed, as matters presently stand, the Divisional Court, as opposed to a single judge, is not empowered to make an order. More fundamentally than that, however, this court has wider powers at common law as to the relief which can be granted. In particular, we are entitled to grant relief short of an order for a fresh inquest, something that could not be done under the statute.
The essential grounds of challenge are these. First, even if the coroner was entitled to arrive at the disputed verdict, he was certainly not bound to do so and thus he misdirected himself in law and improperly fettered his discretion in regarding himself as having no alternative here but to enter this particular verdict. Second, and yet more fundamentally, it is argued that trichloroethane is not a drug, so that this particular verdict was simply not open to the coroner. At an earlier stage of these proceedings other grounds were advanced. In particular it was contended that the coroner failed to make full inquiry or to call evidence sufficient to satisfy himself beyond reasonable doubt that Lee inhaled this volatile substance voluntarily and intentionally, the necessary precondition of any verdict of abuse, whether of a drug or a solvent. Very sensibly, however, counsel for the applicant on instructions did not pursue these additional grounds before the court. They must inevitably have failed: the evidence supporting the coroner’s conclusions on the basic circumstances of this tragic death is overwhelming and irrefutable. It accordingly becomes unnecessary to relate the underlying facts in any great detail. Shortly they are as follows. On 22 July 1986, just over a fortnight before he died, Lee’s parents found him inhaling Tipp-Ex thinners in his sister’s bedroom at home. They sought to impress on him the dangers of solvent abuse, glue sniffing as it is colloquially known, and they confined him to the house as a punishment. Plainly, however, this could not continue indefinitely, and after Lee’s birthday on 3 August he again became free to join his friends. The evidence clearly established that he was one of a group of boys who used to meet together in a den formed by a clump of bushes in a public park hear where they lived. On Thursday, 7 August, the day before he died, it is clear that Lee was again affected by this solvent. Although the statement of one of the group, a boy of 12, suggested that Lee was on that occasion forced to swallow it, the other four vehemently denied any such thing. Whatever may have been the true position as to this, it is really now of no significance either way. Certain it is that, at about midday on the Friday, Lee returned to the park entirely of his own volition and again voluntarily inhaled this lethal solvent. All the medical evidence points irresistibly to this conclusion. At 1.15 pm Lee was found by a member of the public lying next to an empty Tipp-Ex bottle. Efforts were made to resuscitate him both there in the park and again when he was taken by ambulance to Guy’s Hospital. Sadly they failed. Lee had paid with his life for a euphoric high lasting but a few seconds. The mechanics of death were described by the pathologist at the inquest as follows:
‘Normally the thinners are taken by sniffing. They can be taken by ingestion, but by far the commonest way is to sniff or inhale the drug. It is rapidly absorbed through the nasal lining, it entered the brain extremely rapidly, and one normally finds that where acute deaths occur they occur because of an effect on the heart, or an effect on the heart combined with an effect on the brain, and that this effect is rapid.’
As I have said, the coroner’s basic conclusions on the facts were inevitable and, indeed, so much is not now in issue. But immediately having reached those conclusions and after stating that he would record that Lee had died from trichloroethane over-dosage the coroner continued thus: ‘… and his death was, I have to put I am afraid, due to acute dependence on drugs.’
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That unfortunate slip of the tongue, as the coroner deposes and clearly it was in referring to drug dependence rather than abuse, precipitated the family’s outraged intervention in the inquest proceedings. They protested that Lee had not been a drug addict. The coroner thereupon corrected his verdict to one of ‘acute abuse of drug’. The family remained dissatisfied. Their protests to the coroner continued. I need not recite the exchange in its entirety. Suffice to relate two of the coroner’s closing observations: ‘I am afraid if it was only done on one occasion and he died from it then it would have had to have been that verdict,’ and, finally, ‘I am afraid the verdict is laid down by law.’
During this final period of the inquest there were in fact a total of five passages in the coroner’s remarks which in my judgment establish conclusively that he regarded himself as bound to enter the verdict which finally he announced. In such view, however, he was plainly wrong. It is necessary at this stage to refer to the legislation. First the governing statute, the Coroners Act 1887, as amended. By s 4(3) it is provided:
‘After hearing the evidence the jury [here the coroner alone] shall give their verdict, and certify it by an inquisition in writing, setting forth, so far as such particulars have been proved to them, who the deceased was, and how, when, and where the deceased came by his death.’
Section 4(4) requires there also to be found certain particulars required for the Registration Acts. By s 18(2) of the 1887 Act an inquisition is enabled to be made in such form as is from time to time prescribed ‘or to the like effect, and the statements therein may be made in concise and ordinary language’.
I come next to the Coroners Rules 1984, SI 1984/552, those currently in force. Rule 36, under the heading ‘Matters to be ascertained at inquest’, provides as follows:
‘(1) The proceedings and evidence at an inquest shall be directed solely to ascertaining the following matters, namely—(a) who the deceased was; (b) how, when and where the deceased came by his death; (c) the particulars for the time being required by the Registration Acts to be registered concerning the death.
(2) Neither the coroner nor the jury shall express any opinion on any other matters.’
Rule 42 reads:
‘No verdict shall be framed in such a way as to appear to determine any question of—(a) criminal liability on the part of a named person, or (b) civil liability.’
More relevant still is r 60, which provides:
‘The forms set out in Schedule 4, with such modifications as circumstances may require, may be used for the purposes for which they are expressed to be applicable.’
Form 22 in Schedule 4 is entitled ‘Inquisition’. So far as relevant it provides for findings on the following matters:
‘1. Name of the deceased (if known):
2. Injury or disease causing death:
3. Time, place and circumstances at or in which injury was sustained:
4. Conclusion of the jury/coroner as to the death:
5. [Registration Acts particulars].’
The scheduled form then contains certain notes. Note 2 reads:
‘In the case of a death from natural causes or from industrial disease, want of attention at birth, or dependence on, or non-dependent abuse of, drugs insert the immediate cause of death … ’
Note 4 reads:
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‘(a) Where the cause of death is one to which Note 2 applies, it is suggested that one of the following forms be adopted … [The deceased] died from dependence on drugs/non-dependent abuse of drugs … ’ (My emphasis.)
It may be observed that the suggested verdict ‘non-dependent abuse of drugs’ made its first appearance in those 1984 rules. The equivalent notes to the predecessor rules in 1953 (the Coroners Rules 1953, SI 1953/205, Sch 3, Form 18, note 5(a)) suggested instead possible verdicts of ‘chronic alcoholism/addiction to drugs’. As to those verdicts, moreover, contemporary commentaries in Jervis on Coroners (9th edn, 1957) and Home Office circular 68/1955, App 4, para 3, emphasised that they referred only to the deaths of confirmed alcoholics or drug addicts; deaths due to poisoning resulting from an excess of alcohol or drugs were recommended to be treated as accidental.
In short, as counsel for the coroner rightly recognises, even assuming that this particular verdict is appropriate, there was certainly no compulsion whatever on the coroner to enter it. Rule 60 merely introduces a particular form which ‘with such modifications as circumstances may require, may be used’, and note 2 to the form merely ‘suggests’ a particular form of words.
It inevitably follows that the applicant succeeds on her first ground: this verdict must be quashed so that a proper discretion may be exercised. But such a limited order would still leave it open to the coroner to return the same verdict as before. It is therefore necessary to turn to the applicant’s more fundamental contention, that not only was a verdict of drug abuse not forced on the coroner but rather it was not even open to him. Put shortly, counsel for the applicant argues that, even if in any circumstances trichloroethane can reasonably be characterised as a drug, it certainly cannot be so described for the purposes of a coroner’s verdict.
There is before the court a great deal of evidence on this issue. It includes opposing views from highly qualified experts. In support of the coroner’s approach Professor Griffith Edwards, the professor of addictive behaviour at the University of London, whose many qualifications well justify his description as an expert of the very greatest eminence, argues:
‘It is fully in accord with medical and scientific usage to describe Lee’s death as being due to acute abuse of a drug and such a statement also conveys an intelligible and correct meaning to the general public.’
I should mention that one of the grounds for Professor Edwards’s opinion is the particular definition given to the term ‘drug’ by the World Health Organisation. Expressing the rival view, Dr Toseland, professor of clinical chemistry at Guy’s Hospital, prefers the definition of the word ‘drug’ in the Concise Oxford Dictionary as ‘medicinal substance, used alone or as ingredient’. Because trichloroethane has never been used for therapeutic purposes and there is no general acceptance of the description of it as a drug, he asserts that it is not one. He further deposes to having dealt with ‘literally hundreds of solvent abuse deaths and knows that they are generally described as accidental deaths’, a contention which appears to be borne out by some of the statistical material before us as to the type of verdicts returned in these cases, although this evidence is difficult to interpret given that the verdict now at issue was not introduced even as a suggestion until 1984. It is in my judgment wholly unnecessary, indeed unprofitable, to attempt any detailed analysis of all this evidence. It seems to me perfectly plain that in some contexts solvents can properly be described as drugs, in others not; as counsel for the coroner conceded, it is impossible to provide a definition for universal application. One context where such a definition is appropriate is in relation to motoring offences, where there exists a plain social purpose for arriving at this construction. In Bradford v Wilson [1984] RTR 116, an appeal by case stated from a defendant’s conviction for being in charge of a motor vehicle when unfit to drive through drugs, having inhaled solvent from a tin of Evo-Stik, Robert Goff LJ said:
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‘Accordingly, adopting a commonsense approach, I would say, without attempting to give a definition, that, as a general rule, a substance which is taken into the human body by whatever means—for example by inhalation, or by injections, or by mouth—which does not fall within the description “drink” (because that is specifically mentioned in the subsection) and which is not taken as a food, but which does affect the control of the human body, may be regarded as a drug for the purposes of this section. A particular example of such a substance is one which has a narcotic effect on the human body. That provides, I hope, some guidance as to what can properly be regarded as a drug for these purposes.’
The most crucial words in that passage are the last three: ‘for these purposes.' It may further be noted that the only reason why drink fell to be excluded from that approach was ‘because that is specifically mentioned in the subsection’. In my judgment, therefore, this authority provides not the least assistance to us in our task of determining whether or not trichloroethane is properly capable of being described as a drug for the purposes of a coroner’s verdict on drug abuse. Looking at the matter in the particular context in which it now arises for our decision, I have not the least doubt that it cannot. As it seems to me, two central considerations should be in mind when determining the proper approach to the various forms of verdict suggested in the notes to the scheduled form of inquisition.
The first such consideration is the application within the coroner’s jurisdiction of a clearly established policy of avoiding so far as possible any necessary stigma to the memory of the deceased. It is a reflection of this policy that a verdict of suicide will only be entered if established beyond all reasonable doubt, if in truth there is no other possible conclusion to be drawn from the circumstances of the death. It was doubtless this same policy which occasioned the removal from the Coroners Rules 1984 of the suggested verdict of ‘chronic alcoholism’, such a verdict being needlessly offensive and wounding to the memory of the deceased. Rules 36(2) and 42 are further indications of such a policy existing in this part of our law. The other crucial consideration is the actual purpose of these various suggested forms of verdict. The primary, if not indeed the sole, purpose of entering a verdict of the kind here in question must surely be to alert the public to certain specific dangers. It is this desirable social end which, on occasion, outweighs the first consideration and justifies departure from the policy of not stigmatising the deceased.
Viewed in the light of those considerations, it seems to me plain that the verdict with which we are here concerned was both unnecessarily wounding to the deceased’s family and positively misleading in so far as it was designed to warn the public against the dangers of solvent abuse. It is flawed by the twin vices of being both offensive and yet uninformative. Its offensiveness is obvious: the very word ‘drugs’ evokes clear overtones of addiction and criminality. As to its being uninformative, I do not accept for a moment that the general public would recognise within the expression ‘acute abuse of drug’ this sort of casual glue-sniffing. Still less do I accept Professor Edwards’s conclusion:
‘It is in the public interest that inhalation of volatile solvents such as trichloroethane should be recognised as a form of drug abuse which can have an acutely or immediately fatal outcome.’
Rather I believe the inclusion within that sentence of the word ‘drug’ to be not merely optional but unjustifiable. It is moreover difficult to reconcile with Professor Edwards’s earlier comment under the heading ‘Terminology’ when he says the correct term for this activity is ‘volatile substance abuse’, the term ‘solvent abuse’ being roughly synonymous, and the phrase ‘glue sniffing’ being often loosely employed. It really cannot be in the public interest to publish a verdict which, so far from alerting people to the highly dangerous nature of this particular activity, is instead likely to mislead them. A press report of death by drug abuse must inevitably convey to the general public the sordid
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image of heroin or cocaine addiction rather than this boy’s casual stupidity. In short, such a verdict in the instant case seems to me to produce the worst of all possible worlds and I have not the least doubt that it should not stand.
Counsel for the coroner invited the court to give clear guidance whether solvents are or are not drugs for the purposes of coroners’ verdicts. He told us that in the past some coroners have treated them as such, others have not. It is to be hoped that this judgment will provide that guidance and ensure that henceforth solvent abuse deaths are not so designated. What verdict then should be entered on such a death? In my judgment the lawful options are these.
(1) Accident, or just possibly misadventure. Although commentators have hitherto suggested that these verdicts carry distinctive meanings, in which event misadventure might be thought the more appropriate of the two in the circumstances of the present case, Mann J in the recent case of R v Portsmouth Coroner, ex p Anderson [1988] 2 All ER 604 at 609, [1987] 1 WLR 1640 at 1646 suggests that the term misadventure ‘should now be given its quietus’. I wish to say nothing to encourage its resurrection.
(2) Any of the following expressions: ‘Abuse of volatile substances’, ‘solvent abuse’, ‘sniffing Tipp-Ex thinners’, ‘inhalation of Tipp-Ex thinners’.
(3) Any of the above terms could properly be used in combination. Thus it would be perfectly lawful to enter a verdict of ‘accidental death resulting from the inhalation of Tipp-Ex thinners’, or ‘solvent abuse: inhalation of Tipp-Ex thinners’.
After all, the statutory obligation is merely to record ‘in concise and ordinary language’ the coroner’s verdict on ‘how … the deceased came by his death’, and this in the context of a form of inquisition in which, before entering his ‘Conclusion as to … the death’, the coroner has already recorded both ‘Trichloroethane overdosage’ as the ‘Injury or disease causing death’ and also ‘that the deceased sniffed Tippex thinners’ as part of the entry under the heading ‘Time, place and circumstances at or in which injury was sustained’.
One might indeed be forgiven for wondering whether anything further than that was strictly required by way of verdict. Certainly no criticism could have been made of an inquisition recording ‘inhalation of trichloroethane’ as the ‘Injury … causing death’ and ‘solvent overdosage’ as the coroner’s conclusion: it seems to me that the two together really constitute the coroner’s conclusion as to ‘how … the deceased came by his death’ and thus the verdict properly so called. And, indeed, it may be noted that in the standard form headed ‘Coroner’s Certificate after Inquest’, attached to the form of inquisition itself, there twice appears a space for insertion of the ‘Cause of death’, one of these moreover under the general heading ‘Part IV. Accident or Misadventure … ’, and the coroner completed both thus: ‘Trichloroethane overdosage—acute abuse of drugs.’
With those thoughts in mind it therefore seems to me for consideration whether the present draft form of inquisition and notes thereto are entirely sensible and satisfactory. We, of course, do not know precisely what use the responsible authorities make of these inquisitions, or indeed of the annexed coroner’s certificates. But, in so far as these records are intended as information for research, I for my part would have thought that they could with advantage be redesigned. It should then be possible to secure both greater uniformity of approach by coroners up and down the country, and also information better adapted to statistical analysis. If, for example, as I assume to be the case, it is useful for the Home Office to monitor the incidence of death by solvent abuse, perhaps indeed by reference to particular substances with a view to taking controlling measures, then clearly this form, whilst helpful in parts, is for the reasons already stated misleading in its conclusion.
To return to this application. As I have said, this verdict cannot stand. Must we therefore quash the inquisition in its entirety? Such a course would involve a fresh hearing, further public expense and renewed distress to Lee’s family. We conclude not. And this despite our being told that coroner has retired, so that any further step must now be taken by his successor. As stated, there can be no doubt as to the correctness of the other conclusions recorded on this inquisition: the actual cause of death is not in
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doubt. All therefore that remains is for a decision to be taken on an appropriate label to describe in general terms the character of this death. Thus the verdict alone should be quashed. In my judgment such a course is clearly open to the court. Not only was this identical relief granted in the recent case of R v Inner West London Coroner, ex p De Luca [1988] 3 All ER 414, [1988] 3 WLR 286, but it is consistent also with this court’s increasing flexibility of response and remedy in the ever-developing field of judicial review.
In the result I would quash the verdict of death by the abuse of a drug and remit the inquisition to the new coroner for Inner South London to enter such verdict as he considers proper in the light of this judgment.
PARKER LJ. I agree.
Application granted. Verdict quashed. Case remitted for new verdict to be entered.
Solicitors: Simons Muirhead & Burton (for the applicant); Hempsons (for the coroner).
Sophie Craven Barrister.
Leverton v Clwyd County Council
[1989] 1 All ER 78
Categories: EMPLOYMENT; Discrimination
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD TEMPLEMAN, LORD GRIFFITHS, LORD ACKNER AND LORD GOFF OF CHIEVELEY
Hearing Date(s): 23, 24 NOVEMBER, 15 DECEMBER 1988
Employment – Equality of treatment of men and women – Same employment – Woman employed as nursery nurse by local authority under same collective agreement as male comparators – Comparators working in different establishments from woman – Woman enjoying longer holidays and working less hours than male comparators – Whether woman employed ‘in the same employment’ as comparators – Equal Pay Act 1970, s 1(6).
Employment – Equality of treatment of men and women – Variation between woman’s and man’s contracts due to material difference other than sex – Material factor – Hours of work and holidays – Woman enjoying longer holidays and working less hours than male comparators – Whether difference in hours of work and holidays a material factor – Whether variation in woman’s contract and contracts of male comparators genuinely due to material factor other than the difference of sex – Equal Pay Act 1970, s 1(3).
The appellant, a woman, was employed by the respondent local authority as a qualified nursery nurse at a salary of £5,058 a year. Her hours of work were 32 hours a week and she was required to work only during school terms. She claimed to be doing work of equal value to the work of male employees employed by the authority in other establishments under the same collective agreement for local authority administrative, professional, technical and clerical staff by which the appellant’s salary was determined and claimed that she was entitled to equal pay by virtue of s 1(2)(c) a of the Equal Pay Act 1970. The male comparators were paid between £6,081 and £8,532 a year but worked longer hours and had less holidays. However, there was no substantial difference between the appellant’s salary and the salary of the comparators when the rates of pay and hours worked were translated into a notional hourly rate. The industrial tribunal dismissed her
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claim on the grounds that the appellant was not employed ‘in the same employment’ as the male comparators for the purposes of s 1(6) b of the 1970 Act and that the variation between her pay and theirs was genuinely due to a material factor other than the difference of sex, namely the difference in working hours and length of holidays, and therefore under s 1(3) c of the 1970 Act the equality of pay provisions did not apply. The appellant appealed to the Employment Appeal Tribunal, which affirmed the decision on the ground that the appellant and the male comparators were not in the same employment although it rejected the industrial tribunal’s finding that the variation between the contracts of the appellant and the comparators was due to a material factor other than the difference of sex. On appeal, the Court of Appeal affirmed the conclusion of both tribunals that the appellant and the male comparators were not employed in the same employment but rejected the conclusion of the Employment Appeal Tribunal that the respondents had not established the material factor defence. The appellant appealed to the House of Lords.
Held – (1) In deciding whether a woman and a man employed by the same employer at different establishments were ‘in the same employment’ for the purposes of s 1(6) of the 1970 Act the appropriate comparison was a comparison between the terms and conditions of employment at both the establishment where the woman was employed and the establishment where the male comparator was employed and applicable either generally (ie to all the employees at the relevant establishments) or to a particular class or classes of employees to which both the man and woman belonged. Accordingly, where the terms and conditions of employment observed at two or more establishments were governed by the same collective agreement they were common terms and conditions as defined by s 1(6). It followed that the appellant was employed ‘in the same employment’ as the comparators (see p 82 b c e to p 83 a and p 89 f to h, post).
(2) However, since there was no significant difference between the notional hourly rates of pay of the appellant and the male comparators, the clear inference was that the substantial difference in working hours and holidays between the appellant and the comparators was a ‘material factor’ within s 1(3) of the 1970 Act which genuinely accounted for the difference in their annual salaries, and that difference had nothing to do with the difference in sex. It followed that the appellant was not entitled to equality of pay with the comparators and the appeal would therefore be dismissed (see p 86 g to j and p 89 a b f to h, post); Jenkins v Kingsgate (Clothing Productions) Ltd [1981] 1 WLR 1485 and Rainey v Greater Glasgow Health Board [1987] 1 All ER 65 applied.
Notes
For equal treatment of men and women regarding terms and conditions of employment, see 16 Halsbury’s Laws (4th edn) para 767 and 52 ibid paras 21.11–21.12, and for cases on the subject, see 20 Digest (Reissue) 579–595, 4466–4523.
For the Equal Pay Act 1970, s 1, see 16 Halsbury’s Statutes (4th edn) 188.
Cases referred to in opinion
Bilka-Kaufhaus GmbH v Weber von Hartz Case 170/84 [1987] ICR 110, CJEC.
Bromley v H & J Quick Ltd [1988] ICR 623, CA.
Edwards (Inspector of Taxes) v Bairstow [1955] 3 All ER 48, [1956] AC 14, [1955] 3 WLR 410, HL.
Hayward v Cammell Laird Shipbuilders Ltd [1988] 2 All ER 257, [1988] AC 894, [1988] 2 WLR 1134, HL.
Jenkins v Kingsgate (Clothing Productions) Ltd [1981] 1 WLR 1485, EAT.
Page 80 of [1989] 1 All ER 78
Macarthys Ltd v Smith Case 129/79 [1981] 1 All ER 111, [1981] QB 180, [1980] 3 WLR 929, CJEC and CA.
National Coal Board v Sherwin [1978] ICR 700, EAT.
Rainey v Greater Glasgow Health Board [1987] 1 All ER 65, [1987] AC 224, [1986] 3 WLR 1017, HL.
Appeal
Marion Leverton, who was employed as a nursery nurse by the respondents, Clwyd County Council, appealed with leave of the Court of Appeal against the decision of that court (May, Balcombe and Stocker LJJ) ([1988] IRLR 239) on 17 March 1988 dismissing her appeal against the decision of the Employment Appeal Tribunal (French J, Mr J A Powell and Mr G H Wright) ([1987] 1 WLR 65) on 11 June 1986 whereby it dismissed her appeal against the decision of the industrial tribunal (chairman Mr J A O Shand) sitting at Shrewsbury dated 12 July 1985 dismissing her application under s 1(2)(c) of the Equal Pay Act 1970 as amended for equality of pay with male comparators who were not nursery nurses but who like her were classified by the respondents as being in the administrative, professional, technical or clerical services. The facts are set out in the opinion of Lord Bridge.
Anthony Lester QC and David Pannick for the appellant.
G W Wingate-Saul QC and Alistair Webster for the respondents.
Their Lordships took time for consideration. 15 December. The following opinions were delivered.
15 December 1988. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, the appellant is employed as a qualified nursery nurse by the respondents at the Golftyn Infants’ School, Connah’s Quay, Clwyd. On 4 September 1984 she applied to an industrial tribunal claiming under s 1(2)(c) of the Equal Pay Act 1970, as inserted by the Equal Pay (Amendment) Regulations 1983, SI 1983/1794, that she was employed on work of equal value to that of male employees of the respondents. The initial application was clearly defective in that it failed to name the comparators. However, after obtaining on discovery particulars of the terms and conditions of employment of some 200 men employed, as she is, in the administrative, professional, technical and clerical (APT & C) services of the respondents, she nominated 11 male comparators by reference to whom the application proceeded. At the time of the hearing by the industrial tribunal in June 1985 the appellant was in receipt of an annual salary of £5,058. The annual salaries of the comparators ranged from £6,081 to £8,532.
By virtue of the equality clause deemed to be included in her contract of employment under s 1(1) of the 1970 Act, the appellant, if she could establish that she was employed on work of equal value to that of ‘a man in the same employment’, would prima facie be entitled under s 1(2)(c) to have the terms of her contract treated as modified as provided by the section to bring them into line with the terms of his contract. The far-reaching scope of that modification appears from your Lordships’ decision in Hayward v Cammell Laird Shipbuilders Ltd [1988] 2 All ER 257, [1988] AC 894.
The respondents resisted the appellant’s claim, inter alia, on the grounds (1) that none of the comparators was ‘a man in the same employment’ with the appellant, and (2) that the variation between the appellant’s contract and the contracts of the comparators was ‘genuinely due to a material factor which is not the difference of sex’. These two grounds relied on by the respondents, each, if well founded, sufficient to defeat the appellant’s claim, give rise to the two issues for decision in the present appeal. They depend on sub-ss (6) and (3) respectively of s 1, which provides, so far as material, as follows:
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‘… (3) An equality clause shall not operate in relation to a variation between the woman’s contract and the man’s contract if the employer proves that the variation is genuinely due to a material factor which is not the difference of sex and that factor—(a) in the case of an equality clause falling within subsection (2)(a) or (b) above, must be a material difference between the woman’s case and the man’s and (b) in the case of an equality clause falling within subsection (2)(c) above, may be such a material difference.
(6) … for purposes of this section … men shall be treated as in the same employment with a woman if they are men employed by her employer or any associated employer at the same establishment or at establishments in Great Britain which include that one and at which common terms and conditions of employment are observed either generally or for employees of the relevant classes.’
It will be necessary to examine some aspects of the facts in detail later, but it is convenient at this point to summarise the facts which are of central importance. None of the comparators works at the same establishment as the appellant. The appellant and all the comparators, however, are employed on terms and conditions derived from the same collective agreement known as the ‘purple book’, being a scheme agreed by the National Joint Council for Local Authorities’ APT & C Services. Under the terms of that agreement the appellant’s salary is on scale 1 the salaries of the comparators are at different points on scales 3 and 4. The appellant’s basic working week including paid lunch breaks is 321/2 hours. Her holidays are coterminous with the school holidays. The comparators’ basic working week is 37 hours (in one case 39 hours). Their annual holiday entitlement is 20 days plus 8 statutory and 3 local holidays with increments after five years’ service. The effect of these differences is that each of the comparators works many more hours in the year to earn his annual salary than the appellant works to earn hers. As one measure of the extent of this difference the respondents put forward for comparison at the hearing a pro rata calculation of notional hourly income yielding figures of £4.42 for the appellant and £4.40 for the comparator who works 37 hours a week and earns the maximum salary under scale 4. Although rejecting this method of comparison as inappropriate, the industrial tribunal appear to have accepted the accuracy of the arithmetical calculation.
The majority of the industrial tribunal held both that the appellant was not ‘in the same employment’ with the comparators as that phrase is defined by s 1(6) and that the respondents had established what it will be convenient to call ‘the material factor defence’ under s 1(3) in that the variation between the appellant’s contract and the comparators’ contracts was genuinely due to a material factor which was not the difference in sex, viz the difference in working hours and length of holidays being a material difference between her case and theirs. They accordingly dismissed the application. The minority member dissented on both grounds. The Employment Appeal Tribunal affirmed the decision of the industrial tribunal on the ground that the appellant and the comparators were not in the same employment (see [1987] 1 WLR 65). They held, however, that the industrial tribunal had erred in law in upholding the material factor defence on the ground that there was no evidence capable of supporting a finding that the variation between the appellant’s contract and the comparators’ contract was ‘genuinely due’ to a material factor which was not the difference of sex. The Court of Appeal (May, Balcombe and Stocker LJJ) ([1988] IRLR 239) affirmed by a majority (May LJ dissenting) the conclusion of both tribunals that the appellant and the comparators were not in the same employment and held by a majority (Balcome LJ dissenting) that there was evidence to support the finding by the majority of the industrial tribunal that the respondents had established the material factor defence and that there was accordingly no ground on which the Employment Appeal Tribunal could reverse this finding as erroneous in law. The appellant now appeals to your Lordships’ House by leave of the Court of Appeal.
On the question of whether the appellant was in the same employment as the comparators working at different establishments, the view which prevailed with the
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majority of the industrial tribunal, the Employment Appeal Tribunal and the majority of the Court of Appeal was that the comparison called for by s 1(6) was between the terms and conditions of employment of the appellant on the one hand and of the comparators on the other and that it was only if this comparison showed their terms and conditions of employment to be ‘broadly similar’ that the test applied by the phrase ‘common terms and conditions of employment’ in s 1(6) was satisfied. The majority of the industrial tribunal, affirmed by the Employment Appeal Tribunal and the majority of the Court of Appeal, held that the difference in this case in working hours and holidays was a radical difference in the ‘core terms’ of the respective contracts of employment which prevented the comparison from satisfying the statutory test. The contrary view embraced by the dissenting member of the industrial tribunal and by May LJ in the Court of Appeal was that the comparison called for was much broader, viz a comparison between the terms and conditions of employment observed at two or more establishments, embracing both the establishment at which the woman is employed and the establishment at which the men are employed, and applicable either generally, ie to all the employees at the relevant establishments, or to a particular class or classes of employees to which both the woman and the men belong. Basing himself implicitly on this view, the dissenting member of the industrial tribunal expressed his conclusion in the matter tersely. Having referred to the purple book, he said:
‘… 3 Within that agreement there are nine sections and numerous clauses. They do not apply, with few exceptions, to any particular grade. It is clearly a general agreement and not specific to any particular group or class of employee. 4 It is, in my opinion, beyond doubt that the [appellant] and the comparators are employed on common terms and conditions, ie the APT & C Agreement, and clearly it is within the provisions of section 1(6) … ’
My Lords, this is an important difference in principle which depends on the true construction of s 1(6). I have no hesitation in preferring the minority to the majority view expressed in the courts below. It seems to me, first, that the language of the subsection is clear and unambiguous. It poses the question whether the terms and conditions of employment ‘observed’ at two or more establishments (at which the relevant woman and the relevant men are employed) are ‘common’, being terms and conditions of employment observed ‘either generally or for employees of the relevant classes’. The concept of common terms and conditions of employment observed generally at different establishments necessarily contemplates terms and conditions applicable to a wide range of employees whose individual terms will vary greatly inter se. On the construction of the subsection adopted by the majority below the phrase ‘observed either generally or for employees of the relevant classes’ is given no content. Terms and conditions of employment governed by the same collective agreement seem to me to represent the paradigm, though not necessarily the only example, of the common terms and conditions of employment contemplated by the subsection.
But if, contrary to my view, there is any such ambiguity in the language of s 1(6) as to permit the question whether a woman and men employed by the same employer in different establishments are in the same employment to depend on a direct comparison establishing a ‘broad similarity’ between the woman’s terms and conditions of employment and those of her claimed comparators, I should reject a construction of the subsection in this sense on the ground that it frustrates rather than serves the manifest purpose of the legislation. That purpose is to enable a woman to eliminate discriminatory differences between the terms of her contract and those of any male fellow employee doing like work, work rates as equivalent or work of equal value, whether he works in the same establishment as her or in another establishment where terms and conditions of employment common to both establishments are observed. With all respect to the majority view which prevailed below, it cannot, in my opinion, possibly have been the intention of Parliament to require a woman claiming equality with a man in another
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establishment to prove an undefined substratum of similarity between the particular terms of her contract and his as the basis of her entitlement to eliminate any discriminatory differences between those terms.
On the construction of s 1(6) which I would adopt there is a sensible and rational explanation for the limitation of equality claims as between men and women employed at different establishments to establishments at which common terms and conditions of employment are observed. There may be perfectly good geographical or historical reasons why a single employer should operate essentially different employment regimes at different establishments. In such cases the limitation imposed by s 1(6) will operate to defeat claims under s 1 as between men and women at the different establishments. I take two examples by way of illustration. A single employer has two establishments, one in London and one in Newcastle. The rates of pay earned by persons of both sexes for the same work are substantially higher in London than in Newcastle. Looking at either the London establishment or the Newcastle establishment in isolation there is no sex discrimination. If the women in Newcastle could invoke s 1 of the 1970 Act to achieve equality with the men in London this would eliminate a differential in earnings which is due not to sex but to geography. Section 1(6) prevents them from doing so. An employer operates factory A where he has a long-standing collective agreement with the ABC union. The same employer takes over a company operating factory X and becomes an ‘associated employer’ of the persons working there. The previous owner of factory X had a long-standing collective agreement with XYZ union which the new employer continues to operate. The two collective agreements have produced quite different structures governing pay and other terms and conditions of employment at the two factories. Here again s 1(6) will operate to prevent women in factory A claiming equality with men in factory X and vice versa. These examples are not, of course, intended to be exhaustive. So long as industrial tribunals direct themselves correctly in law to make the appropriate broad comparison, it will always be a question of fact for them, in any particular case, to decide whether, as between two different establishments, ‘common terms and conditions of employment are observed either generally or for employees of the relevant classes’. Here the majority of the industrial tribunal misdirected themselves in law and their conclusion on this point cannot be supported.
Before turning to the issue which arises directly for decision in relation to the material factor defence, it is appropriate to refer to certain wider considerations to which your Lordships’ attention was drawn in the course of the argument. When considering an equal pay claim made by a woman under s 1(2)(c) of the 1970 Act with respect to any man who is in the same employment with her, subject to any material factor defence, which the industrial tribunal has a discretion to entertain at the preliminary stage, the industrial tribunal is obliged to refer the claim to an expert under s 2A(1) unless ‘(a) it is satisfied that there are no reasonable grounds for determining that the work is of equal value … ' In this case the industrial tribunal was not so satisfied. Accordingly, the next step, if the material factor defence did not succeed at this stage, would be to refer the claim to an expert who would be required to carry out a job evaluation to determine, as between the applicant and each comparator, whether their work was of equal value. ‘Job evaluation’, a phrase derived from the language of s 1(5), is a term of art describing the highly sophisticated technique adopted by the English legislation to give effect to community law by measuring what, apart from ‘like work’ as defined by s 1(4), is to qualify as ‘equal work’ under art 119 of the EEC Treaty or ‘work to which equal value is attributed’ under art 1 of EC Council Directive 75/117. A general job evaluation study is a study undertaken of the jobs of all the employees, or of any group of employees, in an undertaking or group of undertakings which, as described in s 1(5), evaluates their jobs ‘in terms of the demand made on a worker under various headings (for instance effort, skill, decision)’. Such a study may operate in two ways. If a woman’s and a man’s jobs are rated as equal by the study, she may claim the benefits of an equality clause in relation to him under s 1(2)(b). If a woman’s and a man’s jobs are rated as unequal by the study, the
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employer may rely on the study to defeat the woman’s equal value claim under s 1(2)(c) in limine under s 2A(1) provided there are no reasonable grounds for determining that the study itself discriminated on grounds of sex. Just how complex and sophisticated the process of job evaluation is required to be to satisfy the statutory criteria embodied in ss 1(5) and 2A(3) for eliminating sex discrimination will be appreciated by anyone who reads the judgments of the Court of Appeal in Bromley v H & J Quick Ltd [1988] ICR 623. Where, as here, there has been no relevant general job evaluation study, the expert, if the matter were referred to him, would have to apply the same technique of evaluation, as required by the language of s 1(2)(c) ‘work which … is, in terms of the demands made on her (for instance under such headings as effort, skill and decision), of equal value … ’, in carrying out what would be, in effect, an ad hoc job evaluation study as between the appellant and her comparators.
In the course of their very thorough examination of every aspect of this case, the industrial tribunal considered whether the differences in hours of work and holidays between the appellant and the comparators might be a matter for assessment by the expert when considering the ‘demands’ made on them by their respective jobs. They concluded as follows:
‘We are unanimously agreed that such an assessment would not fall within his expertise and experience of job evaluation studies and that the tribunal must address itself to this fundamental difference.’
Your Lordships were assured by counsel appearing in the appeal, whose collective experience in this somewhat esoteric field of law must be unrivalled, that in job evaluation studies the demands made by different jobs have in practice always been assessed under whatever headings are adopted on a qualitative, not a quantitative, basis. That this is the correct basis, if English law is to conform to Community law, seems to be amply borne out by the judgment of the Court of Justice of the European Communities in Macarthys Ltd v Smith Case 129/79 [1981] 1 All ER 111 at 118–119, [1981] QB 180 at 198 see also National Coal Board v Sherwin [1978] ICR 700. I have no doubt that demand in terms of hours worked is not only beyond the expertise of the job evaluator but is, on the true construction of s 1(2)(c) and (5), a factor which is outside the scope of job evaluation.
It was suggested by counsel for the appellant, instructed not only by the appellant’s union but also by the Equal Opportunities Commission, that in relation to the material factor defence the present appeal raised some great issue of principle which called for a general pronouncement by your Lordships’ House in order to clarify the law as to the nature and scope of the burden which an employer must discharge when seeking to justify a pay practice which has the effect, whether directly or indirectly, of differentiating between men and women. Since the decision of the industrial tribunal in the instant case there have been two judgments of first importance relevant to the consideration of a material factor defence: the judgment of the European Court in Bilka-Kaufhaus GmbH v Weber von Hartz Case 170/84 [1987] ICR 110 and the judgment of this House in Rainey v Greater Glasgow Health Board [1987] 1 All ER 65, [1987] AC 224. Although the industrial tribunal did not have the advantage of the guidance afforded by those cases, they did consider and apply the principles which had been expressed in the judgment of Browne-Wilkinson J in Jenkins v Kingsgate (Clothing Productions) Ltd [1981] 1 WLR 1485 at 1492, to which the House in Rainey’s case gave its full approval. In the circumstances it does not appear to me that any new problem of law arises here for resolution. The speech of my noble and learned friend Lord Keith in Rainey’s case expressing the unanimous opinion of the House, expounds the applicable principles, if I may say so, with admirable lucidity and it seems to me quite unnecessary for your Lordships in the instant case to traverse the same ground. The question which arises here is not what principles are applicable, but whether the applicable principles were correctly applied or, more accurately, whether there is any indication that the majority of the industrial tribunal
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erred in principle or, to apply the well-known test in Edwards (Inspector of Taxes) v Bairstow [1955] 3 All ER 48 at 57, [1956] AC 14 at 36 per Lord Radcliffe, whether their determination contradicted the ‘true and only reasonable conclusion’ to which the evidence before them led.
I must now turn to examine in more detail the facts on which the material factor defence depends. I have already referred to the notional calculation put forward by the respondents to compare the appellant’s salary with that of the comparators on an hourly rate basis. It is not wholly clear whether the respondents were advancing this in support of a defence that the terms of the appellant’s contract were not less favourable than those of any of the comparators. If so, the industrial tribunal rightly rejected it as misconceived, anticipating the decision of your Lordships’ House in Hayward v Cammell Laird Shipbuilders Ltd [1988] 2 All ER 257, [1988] AC 894. But the decision records that, if the method of approach involved in this comparison were proper, the industrial tribunal would regard the respondents’ point as ‘well made’. It adds later that the comparison is viewed by the majority as ‘casting interesting light on the broader merits of the case’. The majority must have had this comparison in mind, as they were entitled to, when considering the material factor defence.
Between the date of the appellant’s application to the industrial tribunal and the hearing a difference between the staff side and the employers’ side of the National Joint Council on rates of pay for the APT & C services of local authorities had been referred to arbitration by the Central Arbitration Committee (the CAC) under s 3 of the Employment Protection Act 1975. The arbitration resulted in an award which enhanced the pay of all grades concerned, but also enhanced the pay of nursery nurses and nursing assistants relative to other grades. The report of the CAC promulgating the award shows that the relative remuneration of nursery nurses and nursing assistants, taking account of the difference in hours worked and holidays, was fully examined in the course of the arbitration and the CAC report and award were naturally much relied on by the respondents before the industrial tribunal. It is common ground, however, that an arbitration under s 3 of the 1975 Act is not directly concerned with questions of sexual discrimination.
At the time of the hearing before the industrial tribunal a general job evaluation study had been undertaken but not completed in relation to all the respondents’ employees in the APT & C services except nursery nurses and nursing assistants. These latter had been excluded from the job evaluation study by agreement between the respondents and the unions concerned on behalf of the nurses.
When the appellant appealed to the Employment Appeal Tribunal her case was taken up by the Equal Opportunities Commission. One of the grounds of appeal relied on was:
‘… the Industrial Tribunal failed to decide whether or not the pay difference was due to, that is caused by, the different working hours and holidays for the Appellant and the male comparables.’
Since it was to be argued that there was no evidence to establish the necessary causal link, the Equal Opportunities Commission wrote to the Employment Appeal Tribunal seeking the chairman’s notes of evidence and the request was passed on to the industrial tribunal. A reply was written on behalf of the chairman dated 5 December 1988 enclosing certain notes of evidence. The covering letter reads, so far as material:
‘Further to your letter dated 26 November 1985, the Chairman directs me to say that his Notes of Submissions and Evidence cover 105 sides. He has refreshed his memory by going through the Notes. The question of causality raised at paragraph 3(ii)(d) of the Notice of Appeal was not raised at the Tribunal and not dealt with specifically in evidence. Any causal link can only be inferred from the evidence. The Chairman has extracted those passages that seem to him relevant … ’
Although I have expressed my disagreement with the conclusion reached by the
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majority of the industrial tribunal on the issue which arose under s 1(6), I must express my admiration for the care, lucidity and thoroughness with which the majority examined every issue in the case and explained the reasoning which led to their conclusions. In particular, they considered the implications of the differences in hours of work and holidays between the appellant and the comparators in great detail. They concluded that, though the appellant might in certain circumstances be required to work outside school hours, such work was of ‘very limited significance’. Likewise hours worked outside the school term were ‘extremely limited’.
In examining the effect of the CAC arbitration report and award, the majority directed themselves in the following terms:
‘It is clear from the judgment of Mr Justice Browne-Wilkinson (as he then was) in Jenkins v Kingsgate (Clothing Production) Ltd ([1981] 1 WLR 1485 at 1495), that some parallel exists between the concept of material factor or material difference and the concept of justifiability of indirect sexual discrimination under the Sex Discrimination Act. It is for the respondents to show that the factor upon which they rely was reasonably necessary to achieve some objective other than an objective related to the sex of the worker.’
They concluded, in effect, that they could not safely rely on the CAC report and award per se and in advance of an expert job evaluation as necessarily having eliminated any element of unintentional sex discrimination between the almost exclusively female nursery nurses and the male comparators employed in other APT & C services. It was suggested that there was some inconsistency between this conclusion and the conclusion that the difference in hours of work and holidays established the material factor defence. I see no such inconsistency. On the contrary the way in which the majority of the industrial tribunal dealt with the argument for the respondents based on the CAC report and award leaves me in no doubt that they had the appropriate criteria of reasonable necessity and objective justifiability clearly in mind when they addressed the question whether, in their own judgment, the difference in hours of work and holidays as between the appellant and any comparator in receipt of the maximum salary on scale 4 established a material factor defence. In reciting the respondents’ argument they clearly directed themselves to the question whether ‘the variation in pay is genuinely due to these different terms’, sc the difference in hours of work and holidays, ‘which constitute a material factor which is not the difference of sex’. They set out their conclusion in the following terms:
‘The majority of the tribunal is satisfied at this stage on the evidence that we have heard that the differing contractual terms on hours and holidays are a genuine material factor which make it reasonably necessary for the respondent to impose pay differentials between the applicant and the relevant comparators. We at this stage would dismiss the application upon the additional basis that the respondents have fully established that material factor defence.’
Looking no further, I should conclude that this was a finding of fact which was amply justified by the evidence as a whole, but perhaps particularly by the comparison between the rates of pay and hours worked. Where a woman’s and a man’s regular annual working hours, unaffected by any significant additional hours of work, can be translated into a notional hourly rate which yields no significant difference, it is surely a legitimate, if not a necessary, inference that the difference in their annual salaries is both due to and justified by the difference in the hours they work in the course of a year and has nothing to do with the difference in sex.
I cannot help thinking that the rejection of the material factor defence by the Employment Appeal Tribunal and by Balcombe LJ in his dissent on this point was due to the circumstance that they concentrated attention on the letter written on behalf of the chairman of the industrial tribunal six months after the hearing rather than on the
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decision itself. It was this, I believe, which led them into error. I doubt if it was legitimate to attach any significance to the chairman’s letter at all. But it certainly did not afford a ground for impugning the decision if the decision itself was otherwise unassailable. Equally, the enclosure with the letter of three pages of evidence which the chairman presumably considered of immediate relevance could not justify confining attention to that evidence alone, to the exclusion of all the other material summarised and examined in the course of the decision, as the basis of any inference which the majority had drawn.
For these reasons I would dismiss the appeal.
I cannot leave this case without adding a word about the procedure involved in equal value claims under s 1(2)(c) of the 1970 Act. If such a claim is referred to an expert under s 2A, the expert’s job evaluation and the subsequent procedural steps which follow the presentation of his report under the special rules of procedure governing equal value claims in Sch 2 to the Industrial Tribunals (Rules of Procedure) Regulations 1985, SI 1985/16, will involve a lengthy, elaborate and, I apprehend, expensive process. The larger the number of comparators whose jobs have to be evaluated, the more elaborate and expensive the process is likely to be. Here, as already mentioned, the appellant spread her net very widely by claiming equality with 11 comparators. But, by the time the case reached the House, your Lordships were told that, if her appeal succeeded, she would only seek a reference to an expert in relation to four of the original comparators. This only goes to show what a lot of time and money would have been wasted if the matter had proceeded on a reference to an expert with respect to all the 11 comparators. I do not in any way criticise the industrial tribunal in this case for deciding under s 2A(1)(a) that they could not be satisfied that there were no reasonable grounds for determining her work to be of equal value with any one of the comparators. But I think that industrial tribunals should, so far as possible, be alert to prevent abuse of the equal value claims procedure by applicants who cast their net over too wide a spread of comparators. To take an extreme case, an applicant who claimed equality with A who earns zX and also with B who earns £2X could hardly complain if an industrial tribunal concluded that her claim of equality with A itself demonstrated that there were no reasonable grounds for her claim of equality with B. That said, however, it is right to point out that an employer’s most effective safeguard against oppressive equal value claims is to initiate his own comprehensive job evaluation study under s 1(5), which, if properly carried out, will afford him complete protection.
LORD TEMPLEMAN. My Lords, art 119 of the EEC Treaty requires and EC Council Directive 75/117 (the Equal Pay Directive) reiterates that member states shall secure the elimination of all discrimination on grounds of sex in conformity with the principle of equal pay for the same work or for work of equal value. The United Kingdom complied with its Community obligations by the Equal Pay Act 1970 which was enacted, as its title indicates, ‘to prevent discrimination, as regards terms and conditions of employment, between men and women’.
By s 1(2)(c) of the 1970 Act (as inserted by the Equal Pay (Amendment) Regulations 1983, SI 1983/1794):
‘where a woman is employed on work which … is, in terms of the demands made on her (for instance under such headings as effort, skill and decision), of equal value to that of a man in the same employment … (i) if … any term of the woman’s contract is … less favourable to the woman than a term of a similar kind in the contract under which that man is employed, that term of the woman’s contract shall be treated as so modified as not to be less favourable … ’
In the present case the appellant, Mrs Leverton, claims under the 1970 Act salary equality with men named by her and employed, like her, by the respondents, Clwyd County Council. The appellant alleges that the men are paid more than her although her work is equal in value to the work of the men. The respondents resist the appellant’s
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claim on the grounds, inter alia, that even if the work of appellant is equal in value to the work of the men, the difference in salary is not due to sex discrimination but is due to the fact that the appellant enjoys a shorter working week and longer holidays than the men.
The appellant is employed as a nursery nurse at an infants school. Nursery nurses and the men with whom she claims salary equality are employed by the respondents in the administrative, professional, technical and clerical services of the council. The salary scales for men and women employed in such services are determined in default of agreement by the Central Arbitration Committee (the CAC) appointed under s 10 of the Employment Protection Act 1975 to resolve trade disputes by arbitration. The CAC last made a relevant award in 1985 when special improvements were made to the salaries of nursery nurses. The respondents employ 400 nursery nurses, of whom all but one are women; they are paid salaries in accordance with scale 1 as determined and adjusted by the CAC in 1985. Other staff employed by the respondents include 205 paid on scale 3; of these 148 are women. Other staff include 79 paid on scale 4; of these 42 are women. The difference between scale 1 and scale 3 salaries is roughly £1,000 per annum; the difference between scale 1 and scale 4 is roughly £1,500.
After initiating these present proceedings by making a general complaint that nursery nurses were unfairly paid, the appellant obtained discovery concerning over 200 employees of the council on scale 3 and scale 4. The appellant then complained of 11 employees. The industrial tribunal found that of these 11, nos 6, 7 and 9 were the most obviously appropriate comparators. Number 6 is a library assistant employed in the library department of the council on scale 3. Number 7 is a driver/assistant employed in the library department on scale 3. Number 9 is a caretaker/supervisor employed in the administrative and legal department on scale 4. The appellant works 321/2 hours a week against 37 hours worked by the men with whom she claims salary equality, apart from one employee who works for 39 hours. The appellant enjoys 70 days holiday the men are entitled to 20 days holiday plus increments after five years service. It has not been decided whether the work performed by the appellant is in fact equal in value to the work of one or more of the scale 3 and scale 4 men with whom she seeks salary equality. But even if work of equal value were established, the appellant is not entitled to equality of salary unless the difference in salary is attributable to sex discrimination, conscious or unconscious. Article 119 of the EEC Treaty and the Equal Pay Directive and the 1970 Act are directed to the elimination of sex discrimination and not to the elimination of wage differences. Accordingly, s 1(3) of the 1970 Act (as amended) provides:
‘An equality clause shall not operate in relation to a variation between the woman’s contract and the man’s contract if the employer proves that the variation is genuinely due to a material factor which is not the difference of sex … ’
The industrial tribunal found by a majority that the difference between the salary paid to the appellant and the salaries paid to the men she chose for comparison was not due to a difference of sex but to the difference between the hours worked and holidays enjoyed by the appellant, on the one hand, and her chosen comparators on the other hand. The industrial tribunal decided that the difference in hours and holidays was a ‘material factor’ within the meaning of s 1(3) of the 1970 Act and that the difference in salaries was ‘genuinely due’ to that material factor. On behalf of the appellant it was said that there was no evidence that the difference in hours of work and holidays was a ‘material factor’. But the difference between the hours and holidays of the appellant, on the one hand, and of the comparators on the other hand, is sufficiently striking to constitute prima facie evidence of a material factor without calling any witness to say so. It was then said that there was no evidence that the difference between salaries corresponded exactly to the difference between hours and holidays. Exact correspondence is impossible to evaluate and unnecessary; s 1(3) only requires that the difference in salaries be ‘genuinely due’ to the difference in hours and holidays which constitutes the relevant ‘material factor’. The
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division of annual salary by hours worked attributed £4·42 for every hour worked by the appellant and £4·40 for every hour worked by the highest paid comparator. The industrial tribunal rightly rejected the argument that this hourly calculation proved that the appellant was paid as much as or more than the comparators. Nevertheless, the calculation supported the respondents’ contention that the difference in hours and holidays was a material factor which genuinely accounted for the difference in annual salary. The appellant did not produce any evidence to the contrary and did not produce any evidence which might have raised the suspicion that the difference in salary was due to sex discrimination. In the course of this appeal it was said on behalf of the appellant that for historical or other reasons the work of the CAC might be tainted, consciously or unconsciously, by sex discrimination in favour of men and against women. The CAC considered a submission that nursery nurses were underpaid and were informed on behalf of local authorities that nursery nurses only worked a 321/2 hour week. The CAC made its award in 1985 in the light of these and other submissions and must have been fully cognisant of and desirous of giving effect to the principle of equal pay which formed part of Community law when the United Kingdom joined the Community in 1972 and which is embodied in the 1970 Act (as amended). The industrial tribunal by a majority decided, on the evidence adduced, that the difference in hours and holidays was a material factor which genuinely accounted for the difference in salary. The soundness of that decision is illuminated by a consideration of the results which might have followed a finding in favour of the appellant. If she were entitled to an increase of £1,500 in her annual salary, all scales 1, 3 and 4 employees could claim to be paid the same salary and all scales 1, 3 and 4 employees could claim a 321/2-hour working week and the enjoyment of 70 days of holiday. Nursery nurses are not indispensable, and such a result could have fatal consequences to the profession of nursery nurses and serious consequences for local authorities and all employees of local authorities. The elimination of sex discrimination may produce results which are painful to employers and surprising to some employees. But the industrial tribunal was not bound to assume sex discrimination against the evidence or to tear up the CAC award in order to account for the difference between the salary paid to nursing nurses and the salary paid to scale 3 and scale 4 employees, male and female. The evidence entitled the industrial tribunal to conclude that the difference in salaries was genuinely due to the material factor that there was a substantial difference in hours worked and holidays enjoyed.
For these reasons and for reasons given by my noble and learned friend Lord Bridge, with whose speech I am in complete agreement, I would dismiss the appeal.
LORD GRIFFITHS. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Bridge. I agree with it and for the reasons he gives I would dismiss this appeal.
LORD ACKNER. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Bridge. I agree with it and for the reasons he gives I too would dismiss this appeal.
LORD GOFF OF CHIEVELEY. My Lords, for the reasons given by my noble and learned friend Lord Bridge, I would dismiss this appeal.
Appeal dismissed.
Solicitors: Pattinson & Brewer, agents for Nicola Jones, Manchester (for the appellant); Sharpe Pritchard agents for E R Ll Davies, Mold (for the respondents).
Mary Rose Plummer Barrister.
R v Manchester City Magistrates’ Court, ex parte Davies
[1989] 1 All ER 90
Categories: ADMINISTRATION OF JUSTICE; Courts
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): O’CONNOR, NEILL LJJ AND SIR ROGER ORMROD
Hearing Date(s): 22 JUNE, 29 JULY 1988
Magistrates – Civil liability – Limitation of damages – Magistrates acting without jurisdiction – Wrongful imprisonment – Magistrates committing applicant to prison for non-payment of rates – Non-payment not caused by applicant’s wilful refusal or culpable neglect – Applicant granted certiorari quashing committal order – Applicant seeking damages against magistrates for unlawful imprisonment – Whether magistrates liable in damages – Whether damages limited to one penny – General Rate Act 1967, ss 96(1), 102, 103(1) – Justices of the Peace Act 1979, ss 45, 52.
The applicant received a rate demand for over £15,000 from the local authority in respect of his shop premises. When the applicant failed to pay, a distress warrant was issued on the council’s application. The applicant paid off some £6,000 of the outstanding rates but the council applied for a warrant of committal in respect of the balance. His accountant advised him to close his business or go bankrupt but he decided not to follow that advice. At the hearing of the committal proceedings the magistrates decided that the applicant’s failure to take his accountant’s advice constituted ‘culpable neglect’ within s 103(1)a of the General Rate Act 1967 and committed him to prison, where he remained for almost eight weeks before being released on bail. He then sought judicial review of the committal warrant and damages. The judge found that the applicant’s failure to pay the rates had not been caused by culpable neglect and he quashed the warrant but adjourned the claim for damages. When the claim came on for hearing the judge held that the applicant was entitled to damages to be assessed. The magistrates appealed, contending (i) that they had not acted outside or in excess of their jurisdiction when committing the applicant to prison, and therefore under s 45 b of the Justices of the Peace Act 1979 were not liable at all in damages, and (ii) if they had, they were entitled to the protection of s 52 c of the 1979 Act, which limited damages to one penny if, inter alia, the plaintiff ‘had undergone no greater punishment than that assigned by law’ for non-payment of the sum he was ordered to pay.
Held – The appeal would be dismissed for the following reasons—
(1) (Sir Roger Ormrod dissenting) Since by s 102 d of the 1967 Act it was a statutory condition precedent to the issue of a committal warrant for non-payment of rates that the magistrates should conduct a proper inquiry, as required by s 103 of the 1967 Act, whether the defaulting ratepayer’s failure to pay the rates had been caused by his wilful refusal or culpable neglect and since, on the facts, there was no connection between the applicant’s decision not to follow his accountant’s advice and his failure to pay the rates, the magistrates had failed to conduct such an inquiry and had acted outside or in excess of their jurisdiction when committing the applicant to prison. Accordingly, the magistrates were liable in damages under s 45 of the 1979 Act for acting outside or in excess of their jurisdiction when committing the applicant to prison (see p 93 g to j, p 94 d, p 95 a to c, p 98 g to p 99 a and p 101 a, post); McC v Mullan [1984] 3 All ER 908 considered.
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(2) Since the ordinary procedure provided by s 96(1)e of the 1967 Act for non-payment of rates was the seizure and sale of the defaulting ratepayer’s goods and chattels under a distress warrant and since there was no provision for imprisonment for mere non-payment of rates, the applicant had undergone a ‘greater punishment than that assigned by law’ for non-payment of his rates and accordingly the damages to which he was entitled were not limited to one penny under s 52 of the 1979 Act but were at large (see p 95 b c, p 100 h to p 101 a, p 105 g to j and p 106 a, post); R v Waltham Forest Justices, ex p Solanke [1986] 2 All ER 981 considered.
Decision of Simon Brown J [1988] 1 All ER 930 affirmed.
Notes
For the civil liability of magistrates, see 1 Halsbury’s Laws (4th edn) paras 206–215 and 29 ibid paras 278–279, and for cases on the subject, see 1(1) Digest (Reissue) 183–195, 1091–1163.
For the General Rate Act 1967, ss 96, 102, 103, see 36 Halsbury’s Statutes (4th edn) 731, 736, 737.
For the Justice of the Peace Act 1979, ss 45, 52, see 27 ibid 131, 135.
Cases referred to in judgments
Anisminic Ltd v Foreign Compensation Commission [1969] 1 All ER 208, [1969] 2 AC 147, [1969] 2 WLR 163, HL.
Houlden v Smith (1850) 14 QB 841, 117 ER 323.
Liverpool Corp v Hope [1938] 1 All ER 492, [1938] 1 KB 751, CA.
McC v Mullan [1984] 3 All ER 908, [1985] AC 528, [1984] 3 WLR 1227, HL.
Marshalsea Case (1612) 10 Co Rep 68b, 77 ER 1027.
O’Connor v Isaacs [1956] 2 All ER 417, [1956] 2 QB 288, [1956] 3 WLR 172, CA.
Polley v Fordham (No 2) (1904) 91 LT 525, [1904–7] All ER Rep 651, DC.
R v Waltham Forest Justices, ex p Solanke [1986] 2 All ER 981, [1986] QB 983, [1986] 3 WLR 315, CA; affg [1985] 3 All ER 727, [1986] QB 479, [1985] 3 WLR 788.
R (ex p Vestry of St Mary, Islington) v Price (1880) 5 QBD 300, DC.
Willis v Maclachlan (1876) 1 Ex D 376, CA.
Case also cited
R v Birmingham Justices, ex p Turner (1971) 219 EG 585, DC.
Appeal
The Manchester City Justices appealed against the decision of Simon Brown J ([1988] 1 All ER 930, [1988] 1 WLR 667) on 16 November 1987 whereby, on the hearing of the issue of damages only and limited to certain agreed questions on a restored notice of motion by the applicant, Barry Davies, for judicial review of an order of the justices on 16 July 1986 committing the applicant to prison for 90 days in respect of the non-payment of rates of £9,303·83, the judge held that the justices were liable to the applicant for damages to be assessed for unlawful imprisonment of the applicant. The facts are set out in the judgment of O’Connor LJ.
Mark Turner for the justices;.
M P Sylvester for the applicant.
Cur adv vult
29 July 1988. The following judgments were delivered.
O’CONNOR LJ. On 16 July 1986 the applicant was committed to prison for 90 days for non-payment of rates by the Manchester City Magistrates. On 2 September 1986 he
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was given leave to move for judicial review of that order and on 5 September he was released on bail. On 22 September 1987 Webster J quashed the decision of the magistrates and adjourned the issue whether the applicant was entitled to recover damages against them. On 16 November 1987 Simon Brown J gave judgment holding that the magistrates had exceeded their jurisdiction and that the applicant was entitled to damages to be assessed (see [1988] 1 All ER 930, [1988] 1 WLR 667). The respondents appeal against that decision.
The appeal raises two important issues of law affecting the liability of justices sued for damages for false imprisonment. Justices are afforded protection by statute under Pt V of the Justices of the Peace Act 1979. The provisions with which we are concerned were formerly contained in the Justices Protection Act 1848. Sections 44 and 45 have to be read together. Section 44 protects a justice for an act done by him in the execution of his duty with respect to any matter within his jurisdiction unless it is proved that the act was done maliciously and without reasonable and probable cause. That protection is withdrawn for acts done outside or in excess of jurisdiction by s 45, but if the act complained of is done under any conviction or order no action lies unless the conviction or order has been quashed. I must set out the relevant part of sub-s (1):
‘This section applies—(a) to any act done by a justice of the peace in a matter in respect of which by law he does not have jurisdiction or in which he has exceeded his jurisdiction, and (b) to any act done under any conviction or order made or warrant issued by a justice of the peace in any such matter … ’
The first issue is whether the justices acted outside or in excess of their jurisdiction in committing the applicant to prison.
If that issue is decided in favour of the applicant the second issue arises under s 52, which provides:
‘(1) The provisions of this section shall have effect where, in any action brought against a justice of the peace for anything done by him in the execution of his office as such a justice, the plaintiff is (apart from this section) entitled to recover damages in respect of a conviction or order, and proves the levying or payment of a penalty or sum of money under the conviction or order as part of the damages which he seeks to recover, or proves that he was imprisoned under the conviction or order and seeks to recover damages for the imprisonment, but it is also proved—(a) that the plaintiff was actually guilty of the offence of which he was so convicted, or that he was liable by law to pay the sum he was so ordered to pay, and (b) where he was imprisoned, that he had undergone no greater punishment than that assigned by law for the offence of which he was so convicted or for non-payment of the sum he was so ordered to pay.
(2) In the circumstances specified in subsection (1) above, the plaintiff shall not be entitled to recover the amount of the penalty or sum levied or paid as mentioned in that subsection or (as the case may be) to recover any sum beyond the sum of one penny as damages for the imprisonment, and shall not be entitled to any costs.’
The question is whether the justices are protected by sub-s (1)(b). I will consider these issues in turn but, before I do so, I must consider the provisions of the General Rate Act 1967 which brought the applicant before the justices.
The statute provides a comprehensive code for the recovery of unpaid rates. No action lies at the suit of a rating authority outside the provisions of the statute: see Liverpool Corp v Hope [1938] 1 All ER 492, [1938] 1 KB 751. The prime provision is s 96, which provides:
‘(1) Subject to section 62 of this Act and to subsection (2) of this section, if any person fails to pay any sum legally assessed on and due from him in respect of a rate for seven days after it has been legally demanded of him, the payment of that sum may, subject to and in accordance with the provisions of this Part of this Act, be
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enforced by distress and sale of his goods and chattels under warrant issued by a magistrates’ court; and, if there is insufficient distress, he may be liable to imprisonment under the provisions of this Part of this Act in that behalf … ’
It will be seen that there is no power to imprison until after a properly issued distress warrant has been executed and a nil or insufficient return has been made. Sections 97 and 99 make detailed provision for the issue and execution of the distress warrant. Section 102 of the General Rate Act 1967 provides:
‘Imprisonment in default of sufficiency of distress.—(1) If the person charged with the execution of a warrant of distress for levying a sum to which some other person has been rated makes a return to the magistrates’ court that he could find no goods or chattels (or no sufficient goods or chattels) on which to levy the sums directed to be levied under the warrant on that other person’s goods and chattels, a magistrates’ court may, if it thinks fit, and subject to the provisions of section 103 of this Act, (a) issue a warrant of commitment against that other person; or (b) fix a term of imprisonment and postpone the issue of the warrant until such time and on such conditions (if any) as the court thinks just … ’
Section 103(1) is also relevant:
‘Inquiry as to means before issue of warrant of commitment.—(1) Section 102 of this Act shall have effect subject to and in accordance with the following provisions:—(a) on the application for the issue of a warrant for the commitment of any person, the magistrates’ court shall make inquiry in his presence as to whether his failure to pay the sum to which he was rated and in respect of which the warrant of distress was issued was due either to his wilful refusal or to his culpable neglect; (b) if the magistrates’ court is of opinion that the failure of the said person to pay the sum was not due either to his wilful refusal or to his culpable neglect, it shall not issue the warrant or fix a term of imprisonment … ’
In the present case a distress warrant had been properly issued and a nil return made in 1985. For the proceedings in July 1986 proper notice had been given and the applicant was before the court. It follows that the justices were entitled to embark on the s 103 inquiry as to means and were acting within their jurisdiction when they did so.
As Webster J has made clear in his judgment, that inquiry disclosed that there was no question of the applicant having wilfully refused to pay the rates. In the course of the hearing the applicant told the justices that in January 1986 his accountant had advised him to close down his business and to go bankrupt but that he had decided to see whether he could weather the storm. The justices came to the conclusion that he had been guilty of culpable neglect in failing to take his accountant’s advice, but again as Webster J pointed out that had nothing whatsoever to do with his failure to pay the rates. There was no causal connection between rejecting the advice of his accountant and the non-payment of the rates; for this reason Webster J quashed the decision. It follows that the only opinion open to the court was that failure to pay was not due either to wilful refusal or culpable neglect and in the result there was no power to imprison.
The very fact that the justices came to the conclusion that they did is strong evidence that they never carried out the inquiry required by s 103. An examination of the evidence filed on behalf of the justices demonstrates to my mind that they never did carry out the inquiry required by s 103. The affidavits of the three justices and that of their clerk show exactly what happened. I can summarise the proceedings as follows. (i) The rating officer opened the case, told the court that £9,303·83 was owing, a portion of the 1985–86 rate. He gave the court the applicant’s rating history and although the justices cannot remember the details they must have been told that in the previous 12 months the applicant had paid off £6,000. The rating officer then gave them details of the applicant’s income and expenditure as given to him or his colleagues outside the courtroom and told the court that the applicant had made no offer as to how he could
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pay off the sum due. The applicant was asked if he agreed with what the rating officer had said and he said that he did. (ii) The applicant was asked what he wanted to say and he told the court what his domestic situation was, what his commitments were, how he had raised a loan on his house, sold his car and was waiting for the autumn when he expected a substantial revival of his business. In the course of what he said he told the court that his accountant had advised him in January 1986 and more than once since then that he should close down his business. (iii) The justices spent a considerable amount of time asking the applicant questions regarding his ability to pay, that is his ability as at that time. The court was told that he had received a further rates demand for the current year in the sum of £12,000, the applicant saying that he could pay nothing off the arrears for the next two or three months. (iv) The chairman sums up the matter in para 13 of his affidavit, which reads:
‘My colleagues and I retired to consider and deliberate on the matter. We were of the opinion that the applicant had unreasonably failed to accept the professional advice given to him and as a result had unnecessarily worsened the financial position.’
This summary of the proceedings shows that what the court was doing was inquiring into the applicant’s present means in order to ascertain what if anything he could reasonably be asked to pay off the arrears. I have some sympathy with the justices: they had 208 cases of rates defaults of one kind or another in their list with nine defaulters actually in court. Quite properly it is necessary to try and find out what the present financial position of a defaulter is and it seems to me that they overlooked the requirements of s 103 altogether.
I return to the issue under s 45 of the 1949 Act. This section was considered by the House of Lords in McC v Mullan [1984] 3 All ER 908, [1985] AC 528. That was a case from Northern Ireland but the relevant statutory provisions are the same. The justices had sentenced a juvenile offender to a custodial sentence in breach of art 15(1) of the Treatment of Offenders (Northern Ireland) Order 1976, SI 1976/226, which provides:
‘A magistrates’ court on summary conviction or a court of assize or county court on conviction on indictment shall not pass a sentence of imprisonment, Borstal training or detention in a young offenders centre on a person who is not legally represented in that court and has not been previously sentenced to that punishment by a court in any part of the United Kingdom, unless either—(a) he applied for legal aid and the application was refused on the ground that it did not appear his means were such that he required assistance; or (b) having been informed of his right to apply for legal aid and had the opportunity to do so, he refused or failed to apply.’
The defendant was unrepresented and had not been informed of his right to apply for legal aid. Lord Bridge reviewed the authorities, English and Irish, in great depth and concluded ([1984] 3 All ER 908 at 924, [1985] AC 528 at 552):
‘Parliament plainly attached importance to ensuring that none of these custodial sentences should be imposed for the first time on a defendant not legally represented unless the defendant’s lack of representation was of his own choice. The philosophy underlying the provision must be that no one should be liable to a first sentence of imprisonment, borstal training or detention, unless he has had the opportunity of having his case in mitigation presented to the court in the best possible light. For an inarticulate defendant, as so many are, such presentation may be crucial to his liberty. It is impossible to say in this or any other case that, if the requirements of art 15(1) had been satisfied, it would have made no difference to the result. For these reasons I am of opinion that the fulfilment of this statutory condition precedent to the imposition of such a sentence as the appellants here passed on the respondent is no less essential to support the justices’ jurisdiction to pass such a sentence than, for
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example, in the case of a sentence of immediate imprisonment, a prior conviction of an offence for which a sentence of imprisonment can lawfully be passed.’
Parliament plainly attached importance to ensuring that no one should be imprisoned for non-payment of rates unless it was established that his failure to pay was due to wilful refusal or culpable neglect. The inquiry required by s 103 is a statutory condition precedent to the imposition of a sentence of imprisonment and its fulfilment is essential to support the justices’ jurisdiction to impose it. In my judgment the first issue must be resolved in favour of the applicant.
It remains to consider the issue under s 52 of the Justices of the Peace Act 1979. Without deciding it I am prepared to accept that the judge was right in holding that the rate demand was sufficient to satisfy the requirement of para (a) but I am in no doubt that para (b) is not satisfied. The only punishment assigned by law for non-payment of rates is the seizure and sale of goods and chattels under a distress warrant. It follows that the justices are not protected by s 52.
For these reasons I would dismiss this appeal.
NEILL LJ. In November 1984 the applicant entered into an underlease of shop premises at the Arndale Centre in Manchester. The underlease was for 20 years from 29 September 1984 at a rent of £14,250 per annum. According to the evidence of the applicant in later proceedings he understood at that time that the rates would be £2,700 per annum.
In December 1984, however, the applicant received a rate demand in the sum of £15,284·33. Believing that there was some mistake he immediately applied to the rating authority (the Manchester City Council) to have the rates reassessed. On 14 August 1985 a distress warrant was issued but there was insufficient distress on the premises to satisfy the arrears. Between August 1985 and July 1986 the applicant managed to pay about £6,000 towards the rates demanded, but an unpaid balance of about £9,300 remained. No reduction had been made in the original demand for £15,284·33.
In July 1986 the rating authority applied to the justices for a committal order. On 16 July the matter came before the three justices who are the appellants in the present proceedings. The applicant appeared at the hearing. He was unrepresented. At the conclusion of the hearing the justices made an order that the applicant be committed to prison for 90 days. He remained in prison until he was released on unconditional bail on 5 September 1986. Meanwhile on 2 September he was granted leave to challenge the warrant of commitment by way of proceedings for judicial review.
On 22 September 1987 the motion seeking an order to quash the committal order and a writ of habeas corpus came before Webster J. In addition the motion included a claim for damages which had been added by leave of the court on 28 January 1987. Webster J had before him an affidavit sworn by the applicant and also affidavits sworn by each of the three justices and by the clerk of the court who had attended on 16 July 1986. On this occasion the applicant was represented by counsel. The justices were not represented. After hearing the submissions of counsel Webster J quashed the committal order and granted a writ of habeas corpus. At the same time he adjourned the claim for damages.
On 16 November 1987 the adjourned motion came before Simon Brown J. At that hearing both the applicant and the justices were represented. It was agreed between counsel that there were two questions for the decision of the court: (i) are the justices liable in damages for the applicant’s unlawful imprisonment? (ii) if so, are such damages limited to one penny by s 52 of the Justices of the Peace Act 1979?
After hearing argument Simon Brown J answered both questions in favour of the applicant, holding that the justices were liable in damages and that the damages were at large (see [1988] 1 All ER 930, [1988] 1 WLR 667). He ordered that the damages should be assessed by a master of the Queen’s Bench Division pursuant to RSC Ord 37, r 1. The justices now appeal to this court.
The questions which were raised before Simon Brown J and which are now before this
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court are of some general importance. In order to answer them it is necessary to consider both the relevant legislation and the affidavit evidence. It is also necessary to have regard to the principles established in the decided cases and in particular to take account of the guidance to be found in the speech of Lord Bridge in McC v Mullan [1984] 3 All ER 908, [1985] AC 528.
I turn to the first question.
Are the justices liable in damages?
The applicant claims damages against the justices for unlawful imprisonment. In order to succeed it will be necessary for him to satisfy the court that in making the order for commitment the justices acted without jurisdiction or in excess of jurisdiction. The applicant asserts that they did so act. The justices on the other hand, though they concede that the order for commitment should not have been made, contend that it was an order which was made within their jurisdiction.
It will be convenient to refer first to s 45 of the Justices of the Peace Act 1979, which, so far as material, provides:
‘(1) This section applies—(a) to any act done by a justice of the peace in a matter in respect of which by law he does not have jurisdiction or in which he has exceeded his jurisdiction, and (b) to any act done under any conviction or order made or warrant issued by a justice of the peace in any such matter; and in the following provisions of this section “the justice”, in relation to any act falling within paragraph (a) above, means the justice of the peace by whom it is done, and, in relation to a conviction, order or warrant falling within paragraph (b) above, means the justice of the peace by whom the conviction or order is made or the warrant is issued.
(2) Any person injured by an act to which this section applies may maintain an action against the justice without making any allegation in his statement or particulars of claim that the act complained of was done maliciously and without reasonable and probable cause.
(3) In respect of any act done under such conviction or order as is mentioned in subsection (1)(b) above no action shall be brought against the justice until the conviction or order has been quashed, either on appeal or upon application to the High Court … ’
It is therefore necessary to consider the meaning of the word ‘jurisdiction’ in s 45(1).
In McC v Mullan [1984] 3 All ER 908 at 912, [1985] AC 528 at 536 Lord Bridge drew attention to the problem posed by the use of the word ‘jurisdiction’:
‘There are many words in common usage in the law which have no precise or constant meaning. But few, I think, have been used with so many different shades of meaning in different contexts or have so freely acquired new meanings with the development of the law as the word “jurisdiction“.’
It is to be noted that in Anisminic Ltd v Foreign Compensation Commission [1969] 1 All ER 208 at 213, [1969] 2 AC 147 at 171 Lord Reid expressed the opinion that it is better not to use the term ‘except in the narrow and original sense of the tribunal being entitled to enter on the enquiry in question’. It is plain, however, that in s 45(1) ‘jurisdiction’ has a wider meaning than this original meaning.
In his judgment in the present case Simon Brown J concluded that it was established by the decision of the House of Lords in McC v Mullan that there were three categories of case in which justices would be regarded as either not having jurisdiction or having exceeded their jurisdiction. I do not find it necessary to decide in the present case whether these three categories are all-embracing, but I am content for the purposes of the present case gratefully to adopt the judge’s analysis.
In the first category are cases where the justices do not have ‘jurisdiction of the cause’ to use the phrase of Coke CJ in Marshalsea Case (1612) 10 Co Rep 68b at 76a, 77 ER 1027 at
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1038. A simple example of a case in this category is provided by Houlden v Smith (1850) 14 QB 841, 117 ER 323, where the plaintiff recovered damages because he had been imprisoned by the order of a county court judge whose jurisdiction was limited to a geographical area which did not include the town where the plaintiff lived and carried on his business.
In the second category are cases where the justices have properly entered on a summary trial of a matter within their jurisdiction but where ‘something quite exceptional’ has occurred in the course of the proceedings so as to oust their jurisdiction. Lord Bridge gave as an example of such an exceptional event a case where a justice absented himself for part of the hearing and then relied on another justice to tell him what had happened during his absence (see [1984] 3 All ER 908 at 920, [1985] AC 528 at 546–547). Lord Bridge expressed the opinion that in such a case, because of the gross and obvious irregularity of the procedure, the justices would have acted without jurisdiction or in excess of jurisdiction.
As will appear when I come to consider the relevant legislation and the facts, the third category of cases is the one which has particular relevance in the present appeal. In this third category are cases where, though the justices have ‘jurisdiction of the cause’ and may have conducted the trial impeccably, they may nevertheless be liable in damages on the ground of acting in excess of jurisdiction if their conviction of the defendant or other determination does not provide a proper foundation in law for the sentence or order made against him.
In McC v Mullan the respondent to the appeal had earlier been convicted of a criminal offence by a juvenile court and had been ordered to attend an attendance centre. He failed to attend regularly and was then tried and convicted by the appellant magistrates of the offence of failing to attend the attendance centre. For that offence the respondent was ordered to be detained at a training school. It was common ground that the magistrates’ court which sentenced the respondent to detention was properly constituted and convened and that the proceedings were properly instituted. It was also common ground that the respondent was properly tried and convicted. The magistrates were nevertheless held to have acted without jurisdiction or in excess of jurisdiction because the respondent was not represented at the hearing and had not been informed of his right to apply for legal aid. It was therefore held that a statutory condition precedent (as provided in art 15(1) of the Treatment of Offenders (Northern Ireland) Order 1976, SI 1976/226) had not been observed, that the detention order was unlawful and that the magistrates were liable to damages though they had a right to an indemnity.
I come now to the relevant provisions of the legislation relating to the imprisonment of a ratepayer for non-payment of rates.
Section 102 of the General Rate Act 1967 (so far as material) provides:
‘(1) If the person charged with the execution of a warrant of distress for levying a sum to which some other person has been rated makes a return to the magistrates’ court that he could find no goods or chattels (or no sufficient goods or chattels) on which to levy the sums directed to be levied under the warrant on that other person’s goods and chattels, a magistrates’ court may, if it thinks fit, and subject to the provisions of section 103 of this Act, (a) issue a warrant of commitment against that other person …
(5) The order in the warrant of commitment shall be that the said person be imprisoned for a time therein specified but not exceeding three months, unless the sums mentioned in the warrant shall be sooner paid … ’
I come next to s 103(1) of the 1967 Act. This subsection provides:
‘Section 102 of this Act shall have effect subject to and in accordance with the following provisions—(a) on the application for the issue of a warrant for the commitment of any person, the magistrates’ court shall make inquiry in his presence as to whether his failure to pay the sum to which he was rated and in respect of
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which the warrant of distress was issued was due either to his wilful refusal or to his culpable neglect; (b) if the magistrates’ court is of opinion that the failure of the said person to pay the said sum was not due either to his wilful refusal or to his culpable neglect, it shall not issue the warrant … ’
It seems to me to be quite clear that the making of an inquiry under s 103(1)(a) is a statutory condition precedent to the issue of a warrant of commitment. In other words, if the justices failed to hold any inquiry at all as required by the section they would have no jurisdiction to issue a warrant. Nor would they have any jurisdiction if they were ‘of opinion that the failure … to pay the … sum was not due either to his wilful refusal or to his culpable neglect’.
If the justices reached such a conclusion they would be deprived of jurisdiction to issue a warrant. It is also clear, though the point does not arise in the present case, that the justices would have no jurisdiction to issue a warrant of commitment which provided for a period of imprisonment in excess of three months.
In the present case the position is less clear cut because some inquiry about the applicant’s finances was made. It therefore becomes necessary to consider the nature of the inquiry which the justices did carry out on 16 July 1986 and to assess the legal consequences of the defects in that inquiry.
In his judgment on 22 September 1987 Webster J set out the relevant passages in the affidavits of the three justices and in the affidavit of the clerk of the court. The judge summarised the matter in these terms:
‘They appear to have paid no regard to the necessity of it being established, before they have a power to commit anyone to prison, that the failure to pay the rates demanded was due to that culpable neglect and none of the evidence is evidence of a conclusion, which was a necessary precondition of a committal order, that the applicant’s failure to pay the rates due was due to his culpable neglect in failing to take his accountant’s advice. Indeed, without a much more extensive inquiry as to his financial position than actually occurred, it would have been impossible to have made such a finding and any such finding would have been unsustainable in law. For instance, if the applicant had taken the accountant’s advice, as one of the justices expresses it, and had gone bankrupt, it is improbable in the extreme that the rates would have been paid in full and quite possible, I imagine, that less would have been recovered from the bankruptcy than was in fact paid and, for these reasons alone, the committal order must be quashed.’
I understand this passage in the judgment of Webster J to amount to a finding by the judge that the inquiry which was carried out by the justices on 16 July 1986 was directed to finding an answer to the wrong question and that accordingly it did not constitute a sufficient inquiry as required by s 103(1)(a) of the 1967 Act.
It seems to me to follow that a statutory condition precedent to the exercise by the justices of their power to issue a warrant under s 102 was not satisfied. It may be that there will be cases under other statutes where a statutory inquiry is provided for and where the inquiry which is in fact carried out does not comply with the requirements in every particular but where the defects are of little importance or can be treated as purely procedural.
In the present case, however, it seems to me that a clear and crucial distinction can be drawn between the inquiry required by the statute and the inquiry which was in fact carried out. The justices never examined the question whether failure to pay was due to culpable neglect.
I do not find it possible to take the view that this was merely a procedural irregularity. The discretion to issue a warrant which is given by s 102 is limited and circumscribed by the provisions of s 103. The statutory inquiry has to be held before the discretion can be exercised. In my judgment the statutory inquiry was not held in the present case.
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For these reasons I would answer the first question in the same way as the judge. I consider that the justices are liable in damages.
I turn to the second question.
Are the damages limited to one penny?
Section 52 of the Justices of the Peace Act 1979 (so far as material) provides:
‘(1) The provisions of this section shall have effect where, in any action brought against a justice of the peace for anything done by him in the execution of his office as such a justice, the plaintiff is (apart from this section) entitled to recover damages in respect of a conviction or order, and … proves that he was imprisoned under the conviction or order and seeks to recover damages for the imprisonment, but it is also proved—(a) that the plaintiff was actually guilty of the offence of which he was so convicted, or that he was liable by law to pay the sum he was so ordered to pay, and (b) where he was imprisoned, that he had undergone no greater punishment than that assigned by law for the offence of which he was so convicted or for non-payment of the sum he was so ordered to pay.
(2) In the circumstances specified in subsection (1) above, the plaintiff shall not be entitled … to recover any sum beyond the sum of one penny as damages for the imprisonment, and shall not be entitled to any costs.’
In this court certain concessions were made on behalf of the applicant. In the first place it was conceded that the issue of the unlawful warrant of commitment was an act done by the the justices in the execution of their office: see R v Waltham Forest Justices, ex p Solanke [1986] 2 All ER 981 at 983, [1986] QB 983 at 987 per Sir John Donaldson MR.
It was also conceded that for the purpose of the present proceedings a proper rate had been levied against the applicant and that he had failed to pay the full amount of that rate. It is apparent from s 102(3) of the 1967 Act that where a warrant of commitment is made it is to be made not only for non-payment of the sum alleged to be due for rates but also for certain specified costs and charges.
The argument on behalf of the applicant was therefore concentrated on s 52(1)(b).
It was submitted that he had suffered a greater punishment than that ‘assigned by law … for the non-payment of the sum he was so ordered to pay’, because the law does not provide for the imposition of any term of imprisonment for mere non-payment of rates but only where the non-payment is due to wilful refusal or culpable neglect.
On behalf of the justices reliance was placed on the decision of Woolf J in Ex p Solanke [1985] 3 All ER 727, [1986] QB 479. In that case the plaintiff was ordered by the High Court to make weekly periodical payments to his former wife for four of his children. She applied to have the order registered in a magistrates’ court but due to an oversight it was not so registered. When the plaintiff defaulted in payment the wife brought the matter before the justices who, finding that they were not satisfied that the default was not due to the plaintiff’s wilful refusal or culpable neglect, issued a warrant of commitment. The warrant was later quashed on the basis that the justices had no jurisdiction because the High Court order had not been registered.
The plaintiff claimed damages against the justices who relied on the provisions of s 52. Woolf J considered the ambit of s 52(1)(b) ([1985] 3 All ER 727 at 732–733, [1986] QB 479 at 489):
‘Then counsel for the applicant submits that this is a case where it would not be possible to rely on s 52 of the 1979 Act because the applicant has undergone a greater punishment than assigned by law for the offence of which he was convicted. The six weeks is the maximum period of imprisonment which justices can now impose under s 93 of the Magistrates’ Courts Act 1980 (which at the relevant time was s 74 of the Magistrates’ Courts Act 1952). However, before such a sentence can be imposed the magistrates’ court has to comply with s 93(6), which provides: “A
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magistrates’ court shall not impose imprisonment in respect of a default to which a complaint under this section relates unless the court has inquired in the presence of the defendant whether the default was due to the defendant’s wilful refusal or culpable neglect, and shall not impose imprisonment as aforesaid if it is of the opinion that the default was not so due … ” On the facts as I find them, and as I have indicated already, I regard this as a case where the justices had complied with the terms of s 93(6) of the 1980 Act. However, on my interpretation of s 52 of the 1979 Act that is an unnecessary finding for the purposes of my conclusion with relation to this submission of counsel for the applicant because as I read s 52(1)(b), in order to avail themselves of the limitation of damages [defence], the justices have only to be in a position to show that they have not imprisoned the applicant for a period longer than that assigned by law for the offence. The period assigned by law was six weeks. They imposed six weeks. It is true that before they could impose that sentence there were certain steps that had to be taken, and it could well be, having regard to the House of Lords decision in McC v Mullan, that if the justices did not take those steps, as I find they did in this case, they would be acting without jurisdiction. None the less, as I read s 52(1)(b), the section would still be available to the justices in those circumstances, it being the intention of the provision that it should apply even though the justices have been in error in other respects and those errors go to jurisdiction. The reason for this is that if that were not the situation s 52 could never apply when the justices imprison and in doing so go outside their jurisdiction, because whenever they do that they cannot have any power to impose the punishment which they did.’
Mr Solanke then appealed to the Court of Appeal, where the argument took rather a different turn. In that court the effect of s 52(1)(b) was considered quite shortly by Sir John Donaldson MR. In his judgment he said ([1986] 2 All ER 981 at 984, [1986] QB 983 at 987–988):
‘That leaves para (b). It has not been argued in front of us, but I think it was argued before Woolf J, that Mr Solanke had undergone a greater punishment than that assigned by law for the non-payment of the sum he was ordered to pay. I think that that argument got a little mixed up with the whole question of whether the High Court order was valid; but, as the judge pointed out, if Mr Solanke was liable to pay the sum which arose under the High Court order and the order had been registered, then six weeks was the maximum period of imprisonment. So there is nothing in that point either.’
In my judgment this court is not bound by the decision in Ex p Solanke as to the effect of the analogous provision in s 93(6) of the Magistrates’ Courts Act 1980, because the argument on this point was not developed in the Court of Appeal. I therefore feel free to consider the matter afresh and, in so far as it is necessary to do so, to differ from the approach of Woolf J in Ex p Solanke.
The ordinary procedure provided for the non-payment of rates is by way of distress and the sale of the ratepayer’s goods and chattels under a warrant. It is to be noted, however, that s 96(1) of the 1967 Act provides in terms that ‘if there is insufficient distress’ the ratepayer may be liable to imprisonment under the provisions of Pt VI of the Act. Imprisonment is therefore a penalty contemplated by the Act.
Nevertheless it seems to me to be clear that the combined effect of ss 102 and 103 is that imprisonment can only be imposed where the non-payment is due to wilful refusal or culpable neglect. In the absence of a finding that the non-payment was blameworthy in the way specified in s 103 imprisonment cannot be imposed as a punishment for non-payment.
In the present case the non-payment was not due to wilful refusal or culpable neglect and imprisonment for any period could not be imposed.
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In my judgment therefore the applicant has undergone a greater punishment than that assigned by law for the non-payment of the sum he was ordered to pay.
I would dismiss the appeal.
SIR ROGER ORMROD. This is an appeal by the three justices concerned against an order made by Simon Brown J on 16 November 1987 on a claim for damages in proceedings for judicial review, pursuant to RSC Ord 53, r 7 (see [1988] 1 All ER 930, [1988] 1 WLR 667). The judges decided two preliminary points in favour of the applicant, namely that the justices were liable in damages to him and that they were not entitled to claim the benefit of the limitation provisions of s 52 of the Justices of the Peace Act 1979. The matter was referred to a master for assessment of damages. On appeal the justices contend that they are entitled to the benefit of s 44 of the 1979 Act or, alternatively, of s 52.
The facts are surprising but apparently not in dispute. The appellant is a skilled glass blower who had been carrying on his craft in Blackpool for some years, seemingly successfully. In November 1984, however, he took a lease of a shop or unit in Halle Mall, Arndale Centre, in Manchester at a rent of £14,250 a year. Arndale Centre is said to be a very expensive area. A month later he received a rate demand for some £15,000. He at once applied for a reduction but quickly got into arrears.
In August 1985 the rating authority applied to the magistrates’ court for and obtained a distress warrant. There was insufficient distress on the premises to satisfy the outstanding arrears of rates. However, the applicant managed to pay off some £6,000. There are still substantial arrears, approximately £9,300 outstanding.
On 16 July 1986 the rating authority took the next step, that is of applying to the court for a warrant of commitment under s 102 of the General Rate Act 1967. This application came before Mr Alan Frost, Dr Elizabeth Marcuson and Mr Kenneth McKeon. The applicant appeared in person. At the conclusion these justices granted a warrant of commitment against the applicant for 90 days’ imprisonment. It is this committal which is the basis of the applicant’s claim for damages.
At the hearing evidence was given, partly through the rating officer who had made inquiries and partly by the applicant himself, as to his financial position. From this it appeared that the applicant had not made any offer to pay the amount owing. He was married with three children and had an overdraft at the bank of £22,000. His earnings had decreased but he expected them to increase greatly towards Christmas time. He also said that he had been advised by his accountant to stop trading and go bankrupt, as the only way of escape from his impossible financial predicament, but he had not taken this advice.
He was in prison from 16 July to 5 September 1986, when he was let out on bail, having started proceedings for judicial review with a view to getting an order quashing the warrant of commitment. On 22 September 1987 Webster J quashed the warrant on the ground that the justices had not complied with the requirements of ss 102 and 103 of the General Rate Act 1967, which provide:
‘102.—(1) If the person charged with the execution of a warrant of distress for levying a sum to which some other person has been rated makes a return to the magistrates’ court that he could find no goods or chattels (or no sufficient goods or chattels) on which to levy the sums directed to be levied under the warrant on that other persons’ goods and chattels, a magistrates court may, if it thinks fit, and subject to the provisions of section 103 of this Act, (a) issue a warrant of commitment against that other person …
(5) The order in the warrant of commitment shall be that the said person be imprisoned for a time therein specified but not exceeding three months, unless the sums mentioned in the warrant shall be sooner paid …
103.—(1) Section 102 of this Act shall have effect subject to and in accordance
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with the following provisions:—(a) on the application for the issue of a warrant for the commitment of any person, the magistrates’ court shall make inquiry in his presence as to whether his failure to pay the sum to which he was rated and in respect of which the warrant of distress was issued was due either to his wilful refusal or to his culpable neglect; (b) if the magistrates’ court is of opinion that the failure of the said person to pay the said sum was not due either to his wilful refusal or to his culpable neglect, it shall not issue the warrant … ’
In the light of those provisions the decision of the justices to issue a warrant was clearly insupportable, and so it was quashed. The applicant’s claim for damages was adjourned to give the justices an opportunity to be heard.
All three of them have filed affidavits and there is also before us an affidavit by the clerk, Mr Jeffrey Wills. From this evidence it is quite clear that the justices carried out an inquiry as to means carefully and in detail and spent a considerable time considering the matter in their retiring room. It is equally plain that they misdirected themselves completely as to the terms and meaning of s 103(1). They ‘made inquiry in his presence’ but failed to realise that the question they had to decide was whether the applicant’s failure to pay his rates was ‘due either to his wilful refusal or to his culpable neglect’. They seem to have treated the question as disjunctive, ie was there a failure to pay and was the defendant guilty of culpable neglect? They considered his failure to take the advice of his accountant amounted to ‘culpable neglect’.
Clearly the justices had no answer to the application to quash the warrant of commitment but whether at the same time they are exposed to an action for damages for trespass is another and difficult question.
The answer depends on the true construction of ss 44 and 45 of the Justices of the Peace Act 1979. Section 44 provides:
‘Acts done within jurisdiction. If apart from this section any action lies against a justice of the peace for an act done by him in the execution of his duty as such a justice, with respect to any matter within his jurisdiction as such a justice, the action shall be as for a tort, in the nature of an action on the case; and—(a) in the statement of particulars of claim it shall be expressly alleged that the act in question was done maliciously and without reasonable and probable cause, and (b) if that allegation is not proved at the trial of the action, judgment shall be given for the defendant, if it is in the High Court, or, if it is in the county court, the plaintiff shall be non-suited or judgment shall be given for the defendant.’
Section 45 provides:
‘(1) This section applies—(a) to any act done by a justice of the peace in a matter in respect of which by law he does not have jurisdiction or in which he has exceeded his jurisdiction, and (b) to any act done under any conviction or order made or warrant issued by a justice of the peace in any such matter; and in the following provisions of this section “the justice”, in relation to any act falling within paragraph (a) above, means the justice of the peace by whom it is done, and, in relation to a conviction, order or warrant falling within paragraph (b) above, means the justice of the peace by whom the conviction or order is made or the warrant issued.
(2) Any person injured by an act to which this section applies may maintain an action against the justice without making any allegation in his statement or particulars of claim that the act complained of was done maliciously and without reasonable and probable cause.
(3) In respect of any act done under any such conviction or order as is mentioned in subsection (1)(b) above no action shall be brought against the justice until the conviction or order has been quashed, either on appeal or upon application to the High Court … ’
The crucial question is the meaning to be given to the word ‘jurisdiction’ in this context. It is a notoriously difficult word to construe and is often used by lawyers as a
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synonym for ‘power’. In the course of his speech in McC v Mullan [1984] 3 All ER 908 at 912, [1985] AC 528 at 536 Lord Bridge said:
‘There are many words in common usage in the law which have no precise or constant meaning. But few, I think, have been used with so many different shades of meaning in different contexts or have so freely acquired new meanings with the development of the law as the word “jurisdiction“.’
Our task is not made any easier by the fact that the crucial expressions in the 1979 Act are taken verbatim from the corresponding sections of the Justices Protection Act 1848, the title of which is significant. It was the culmination of a number of Acts designed to protect justices from civil litigation arising out of their functions as justices which, as Blackstone observed, was a serious detriment to recruitment.
Some assistance as to the meaning of the word ‘jurisdiction’ in the 1848 Act can be obtained from examining the cases reported since it was passed. (There are remarkably few of them, which suggests that the protection was effective). They are conveniently summarised by Lord Bridge in McC v Mullan.
In Houlden v Smith (1850) 14 QB 841, 117 ER 323 the want of jurisdiction was geographical. As judge of the Spilsby County Court, the defendant had no jurisdiction over the plaintiff, who lived and carried on business in Cambridge and so was not amenable to the jurisdiction of the Spilsby County Court.
In Willis v Maclachlan (1876) 1 Ex D 376 the revising barrister had no jurisdiction to order the removal of the plaintiff from his court except for interrupting his business. All the plaintiff had done was to have wrongfully withheld documents in a previous case.
In Polley v Fordham (No 2) (1904) 91 LT 525, [1904–7] All ER Rep 651 the summons on which the plaintiff was fined and later sent to prison for non-payment was bad on its face and, therefore, a nullity. It related to failure to have a child vaccinated but the Vaccination Acts 1867 to 1898 required this to be done before the child was six months old and the summons to be issued within 12 months of the failure. But on the face of the summons the child’s age was then over 18 months. There was, therefore, no jurisdiction at all.
In O’Connor v Isaacs [1956] 2 All ER 417, [1956] 2 QB 288 the plaintiff was committed to prison for non-payment of maintenance to his wife, purportedly under the Summary Jurisdiction (Married Women) Act 1895, but the order recited that the justices had found that persistent cruelty was not proved but that the parties had consented to an order. There was, therefore, no jurisdiction to make any order for maintenance since proof of a matrimonial offence was a prerequisite. Consequently, this order was bad on its face and a nullity and the subsequent committal order was made without jurisdiction.
A similar want of jurisdiction was found in R v Waltham Forest Justices, ex p Solanke [1985] 3 All ER 727, [1986] QB 479; affd [1986] 2 All ER 981, [1986] QB 983, CA. In that case proceedings were taken by the wife in the magistrates’ court for enforcement of arrears of maintenance which resulted in Mr Solanke’s committal to prison for six weeks. It was then discovered that the arrears were due under an order of the High Court which had not been registered in the magistrates’ court, which therefore had no jurisdiction.
In all these cases (with the possible exception of the revising barrister) the act complained of was done by judge or magistrate ‘in a matter in respect of which by law he does not have jurisdiction’.
In the present case the justices had jurisdiction ‘in the matter’, that is the proceedings to recover arrears of rates, and had power to issue a warrant of committal if the conditions of s 103(1) of the 1967 Act were satisfied. The distress warrant had been properly issued and a return of no or no sufficient goods and chattels had been made. The mistake which the justices made, and which made the committal unlawful, was to apply the wrong test.
So, if the case law had stopped there, I would have had no doubt that, given the then accepted meaning of the word ‘jurisdiction’, the justices in the present case where entitled to the benefit of s 44 of the 1979 Act. In other words, their act was an error of law in a matter within their jurisdiction, not an error going to jurisdiction.
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But the law has not stood still. It can fairly be said that the word has acquired a new meaning with the development of the law by the House of Lords in McC v Mullan. This was an appeal from the Court of Appeal in Northern Ireland and it was held that a magistrate in Belfast who made a training order (ie an order that the juvenile defendant be sent to a training school) without first informing the defendant of his right to apply for legal aid had acted without jurisdiction or in excess of jurisdiction and was consequently deprived of the protection of s 15 of the Magistrates’ Courts (Northern Ireland) Act 1964, and so liable to be sued for damages.
Article 15(1) of the Treatment of Offenders (Northern Ireland) Order 1976, SI 1976/226, provides:
‘A magistrates’ court on summary conviction … shall not pass a sentence of imprisonment, Borstal training or detention in a young offenders centre on a person who is not legally represented … unless … (b) having been informed of his right to apply for legal aid and had the opportunity to do so, he refused or failed to apply.’
Section 15 of the 1964 Act provides:
‘No action shall succeed against any person by reason of any matter arising in the execution or purported execution of his office of resident magistrate or justice of the peace, unless the court before which the action is brought is satisfied that he acted without jurisdiction or in excess of jurisdiction.’
The language is different from that used in ss 44 and 45 of the 1979 English Act in which the word ‘jurisdiction’ appears to be used in relation to ‘the matter’, whereas in the Northern Ireland Act it appears to refer to ‘acted’, though it seems unlikely that any different meaning was intended. Section 15 has its own problem: when and how is an act done in purported execution of a justice’s duty within his jurisdiction?
I do not think that there can be any doubt but that the decision in this case has substantially eroded the protection which since 1848 it has been thought the justices enjoyed. The difficult question in this appeal is to determine how far the erosion has gone. If Simon Brown J’s judgment stands, it will further reduce the justices’ protection and it will become increasingly difficult to distinguish between errors of law which are amenable to correction on appeal or judicial review only, and errors of law which destroy the protection of s 44.
If one may respectfully say so, it is evident from Lord Bridge’s speech that he was conscious that he was moving into unchartered waters. In McC v Mullan [1984] 3 All ER 908 at 913, [1985] AC 528 at 536–537 he spoke of the very wide spectrum of meaning which the word jurisdiction covers and said:
‘Your Lordships’ task is to try to discern somewhere within this wide spectrum a sensible line to be drawn by which to determine whether or not justices are acting “without jurisdiction or in excess of jurisdiction” … ’
He concluded that that case fell clearly on the side of liability, the ratio decidendi being, I think, that the magistrate had ignored an express statutory prohibition, ie against making detention orders against unrepresented offenders unless and until they had had an opportunity of obtaining legal aid.
Moreover, it is important to note that Lord Bridge expressly disagreed with the ‘equiperation’ by Lord Lowry LCJ in the Court of Appeal of an excess of jurisdiction which will afford a sufficient ground to quash an order by certiorari with an excess of jurisdiction sufficient to deprive the justices of their statutory protection (see [1984] 3 All ER 908 at 917, [1985] AC 528 at 543). Again he said ([1984] 3 All ER 908 at 920, [1985] AC 528 at 546):
‘But once justices have duly entered on the summary trial of a matter within their jurisdiction, only something quite exceptional occurring in the course of their proceeding to a determination can oust their jurisdiction so as to deprive them of
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protection from civil liability in a subsequent trespass … It is clear, in my opinion, that no error of law committed in reaching a finding of guilt would suffice, even if it arose from a misconstruction of the particular legislative provision to be applied, so that it could be said that the justices had asked themselves the wrong question.’
Our task, and in the absence of guidelines it is a difficult one, is to determine the position which this case occupies on the spectrum. There is no express statutory prohibition in s 103 of the 1967 Act as in McC v Mullan; instead, there is a rather odd inversion in s 103(1)(b) which provides that if the magistrates’ court is of opinion that the failure to pay was not due to wilful refusal or culpable neglect ‘it shall not issue the warrant’. In all other respects the situation in this case, for reasons set out above, seems to correspond closely to the class of case described by Lord Bridge (see [1984] 3 All ER 908 at 920, [1985] AC 528 at 546). On the other hand, in other parts of his speech Lord Bridge referred to a ‘statutory condition precedent’ which had not been complied with by the magistrates. If this is the test, the justices in this case plainly had not complied with the statutory condition precedent in s 103(1)(a) because, although they made a financial inquiry in the defendant’s presence, as a result of misconstruing or misunderstanding the section they directed it to the wrong question.
However, in my judgment, the statutory condition precedent test is not a sufficiently sensitive criterion to discriminate between the class of case which is amenable to certiorari only and the class which is caught by s 45 of the 1979 Act and exposes justices to civil liability. If applied, it will lead I think inevitably to Lord Lowry LCJ’s ‘equiperation’.
One approach which may be helpful is to consider what would have been the situation in this case had the justices not given evidence, or stated in some other way their reasons for issuing the warrant of commitment. Their decision would have been open to challenge on judicial review on the ground either that there was no evidence on which they could have found that the requirements of s 103(1)(a) were satisfied or that no reasonable bench of magistrates, properly directing themselves, could have come to the conclusion that the failure to pay the rates was ‘due either to his wilful refusal or to his culpable neglect’. It could be said that in one sense the justices had acted ‘without jurisdiction or in excess of jurisdiction’ but, in my judgment this is not the sense in which ‘jurisdiction’ was used in either the 1848 Act or the 1979 Act. If I am wrong, s 44 of the 1979 Act affords much less protection than has hitherto been supposed. I would therefore allow the appeal on this part of the case.
I now turn to the alternative ground of appeal, namely that Simon Brown J was wrong in holding that the justices could not invoke the provisions of s 52 of the 1979 Act to limit the damages to one penny. I have come to the conclusion that the judge was right on this part of the case although my reasons are different.
The section is dealing with a plaintiff who is entitled to recover damages against a justice of the peace ‘in respect of a conviction or order’. There is no conviction in this case but there was an order, namely to issue the warrant of commitment. But is this an order within the meaning of the section? I do not think so. Paragraphs (a) and (b) which follow on refer to ‘the sum he was so ordered to pay’. ‘So ordered’ must refer back to ‘conviction or order’. ‘Order’ must, therefore, mean an order to pay a sum of money, eg a fine or maintenance on an instalment order. In this case there was no order to pay, merely a debt due to the rating authority. So there can be no question of the plaintiff’s liability to pay the sum ‘so ordered to be paid’ or of his having undergone no greater punishment than that assigned by law for non-payment because no punishment is assigned by law.
So I do not think the present case can be brought within the terms of this section at all, however ingenious a construction is suggested. (With respect to the judge, to adopt Cockburn CJ’s view in R (ex p Vestry of St Mary, Islington) v Price (1880) 5 QBD 300 at 301 that ‘The rate itself is the order’ is to open the door to an ever-deepening morass of construction difficulties.) The judge thought, understandably, that this point was covered by the decision of this court in Ex p Solanke, but in fact the point was not argued since it was assumed that there was an order within the meaning of the section, ie the High
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Court order to pay maintenance. But whether such an order is within the section was not considered and need not be decided in this case.
Accordingly, in my judgment, the justices are not entitled to the benefit of s 52, and I would dismiss this part of the appeal.
Appeal dismissed. Leave to appeal to House of Lords refused.
12 December. The Appeal Committee of the House of Lords (Lord Brandon of Oakbrook, Lord Ackner and Lord Oliver of Aylmerton) refused a petition for leave to appeal.
Solicitors: Philip K Dodd, Manchester (for the justices); Linder Myers, Manchester (for the applicant).
Raina Levy Barrister.
Kelly v Shulman
[1989] 1 All ER 106
Categories: TRANSPORT; Road
Court: QUEEN’S BENCH DIVISION
Lord(s): WOOLF LJ AND HUTCHISON J
Hearing Date(s): 28 APRIL, 6 MAY 1988
Road traffic – Goods vehicle – Limitation of driver’s time on duty – Breaks and rest periods – Weekly rest period – Day – Whether ‘day’ meaning any 24-hour period commencing at midnight – Whether driver guilty of breaking weekly rest period requirement if he works six consecutive driving periods in less than six days – Transport Act 1968, s 96(11A) – EC Council Regulation 3820/85, arts 6(1), 8(3).
For the purposes of calculating the mandatory rest periods for drivers of commercial vehicles under art 6(1) a of EC Council Regulation 3820/85, the term ‘day’ means successive periods of 24 hours commencing with the resumption of driving after the last weekly rest period and not any 24-hour period commencing at midnight. Accordingly, where a driver works six consecutive driving periods in less than six days he will not necessarily be guilty under s 96(11A) b of the Transport Act 1968 of a breach of the weekly rest period requirement under art 8(3) c of Regulation 3820/85, since art 6(1) states that the weekly rest period may be postponed until the end of the sixth day and the driver may be permitted to continue driving during the period of postponement provided that in so doing he does not exceed the maximum number of hours permitted by the regulations in six consecutive daily driving periods (see p 110 e to p 111 a j to p 112 a h to p 113 a, post).
Notes
For drivers’ hours on goods vehicles and rest periods, see 40 Halsbury’s Laws (4th edn) paras 827–828 and 52 ibid paras 18·140–18·142, and for cases on the subject, see 39(1) Digest (Reissue) 568, 4069 and 21 ibid 273, 1765.
For the Transport Act 1968, s 96(11A) (as inserted by the European Communities Act 1972, s 4(1), Sch 4, para 9(2)(a), see 42 Halsbury’s Statutes (3rd edn) 1907.
Case stated
Patrick Joseph Kelly appealed by way of case stated by the justices for West Yorkshire
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acting in and for the petty sessional division of Bradford in respect of their adjudication as a magistrates’ court sitting at Bradford on 28 September 1987 whereby they convicted the appellant of four charges brought by the respondent, Jeremy I Shulman, on behalf of the licensing authority for the north eastern traffic area, that on 10, 11, 12 and 13 January 1987 on four separate journeys he drove a goods vehicle the use of which was subject to the applicable Community rules as prescribed by s 96 of the Transport Act 1968, so that he did not have 45 consecutive hours off after six daily driving periods, contrary to s 96(11A) of the 1968 Act as amended. The question for the court was whether, on the evidence before it, a reasonable bench of magistrates could come to the conclusion that the appellant could be found guilty of the offences. The facts are set out in the judgment of the court.
Paul F Worsley for the appellant;.
Andrew Woolman for the respondent.
Cur adv vult
6 May 1988. The following judgment was delivered.
HUTCHISON J. This is an appeal by Patrick Joseph Kelly by way of case stated by the Bradford justices in respect of his conviction before them on 27 September 1987 of four offences involving allegations of driving without observing the statutory requirements as to rest periods. We were informed that the problems to which this case gives rise have not previously been considered by the courts, and that the present is regarded as a test case. Both sides expressed the hope that our judgment would provide assistance to haulage contractors and magistrates, for both of whom, as Woolf LJ observed during the argument, one feels considerable sympathy.
The charges
The first of the four informations charged the appellant, who is employed as a goods vehicle driver, with driving a lorry on 10 January 1987 the use of which was subject to the applicable Community rules as prescribed by s 96 of the Transport Act 1968 so that he did not have 45 consecutive hours off after six daily driving periods, contrary to s 96(11A) of the Transport Act 1968. The other three informations alleged identical offences on 11, 12 and 13 January 1987.
The material facts
The appellant (who, though he is a driver, also undertakes other work for his employers) began the particular sequence of work and rest periods with which this case is concerned on Sunday, 4 January 1987 at 1515 hrs. From then until 1300 hrs on Saturday, 10 January he both worked and enjoyed rest periods, but all of the rest periods were of less than 24 hours duration. His work consisted both of driving and of other types of work, and it is implicit in the findings of fact in the case that he undertook a period of driving on each of the days 4 to 9 January inclusive. His driving hours were recorded on the tachograph and in the course of the hearing we were told that before the magistrates it had been common ground between the parties that none of the individual periods of driving prior to 10 January had infringed the regulations. We were also told something which was not contained in the case, but which was not disputed by the respondent, namely that in the period between 1515 hrs on 4 January and 1300 hrs on 10 January the appellant had driven for a total of 32 hours. From 1300 hrs on 10 January until 1315 hrs on 11 January the appellant enjoyed a rest period. He was then at Greenore. His and the vehicle’s base is Bradford. At 1315 hrs on 11 January he resumed working and thereafter continued to work and drive enjoying rest periods of less than 24 hours, over the next few days.
The statutory provision
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Section 96(11A) of the Transport Act 1968, as inserted by s 4 of and para 9(2) of Sch 4 to the European Communities Act 1972 and amended by the Community Drivers’ Hours and Recording Equipment Regulations 1986, SI 1986/1457, reg 2, provides:
‘Where, in the case of a driver of a motor vehicle, there is in Great Britain a contravention of any requirement of [the applicable Community rules] as to periods of driving, or … periods on or off duty, then the offender … shall be liable … to a fine … ’
The relevant provision of the Community rules is EC Council Regulation 3820/85. It is necessary to quote extensively from this regulation. What it does, in the area with which this case is concerned, is to lay down rules as to driving hours and rest periods, in particular in arts 6, 7 and 8:
‘Driving periods
Article 6
1. The driving period between any two daily rest periods or between a daily rest period and a weekly rest period, hereinafter called “daily driving period”, shall not exceed nine hours. It may be extended twice in any one week to 10 hours.
A driver must, after no more than six daily driving periods, take a weekly rest period as defined in Article 8(3).
The weekly rest period may be postponed until the end of the sixth day if the total driving time over the six days does not exceed the maximum corresponding to six daily driving periods …
2. The total period of driving in any one fortnight shall not exceed 90 hours …
Breaks and rest periods
Article 7
1. After four-and-a-half hours’ driving, the driver shall observe a break of at least 45 minutes, unless he begins a rest period. [There follow some qualifications and exceptions, not at present material.]
4. During these breaks, the driver may not carry out any other work …
5. The breaks observed under this Article may not be regarded as daily rest periods.
Article 8
1. In each period of 24 hours, the driver shall have a daily rest period of at least 11 consecutive hours, which may be reduced to a minimum of nine consecutive hours not more than three times in any one week, on condition that an equivalent period of rest be granted as compensation before the end of the following week.
On days when the rest is not reduced in accordance with the first subparagraphs, it may be taken in two or three separate periods during the 24-hour period …
3. The course of each week, one of the rest periods referred to in paragraphs 1 and 2 shall be extended, by way of weekly rest, to a total of 45 consecutive hours. This rest period may be reduced to a minimum of 36 consecutive hours if taken at the place where the vehicle is normally based or where the driver is based, or to a minimum of 24 consecutive hours if taken elsewhere. Each reduction shall be compensated by an equivalent rest taken en bloc before the end of the third week following the week in question.
4. A weekly rest period which begins in one week and continues into the following week may be attached to either of these weeks … ’
We mention at this stage that it seems to us that the key to understanding the interaction between art 6 and art 8 is to appreciate that, whereas restrictions on daily driving are expressed in terms of the maximum length of driving periods between daily rests (the ‘daily driving period’), the requirements as to daily rests are expressed in terms of minimum daily rest periods in 24 hours the (‘daily rest period’). This explains why it was
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common ground between the parties to this appeal that it was perfectly possible lawfully to fit six daily driving periods into fewer than six days.
Article 1 contains some definitions, and those that are material are:
‘3. “driver” means any person who drives the vehicle even for a short period, or who is carried in the vehicle in order to be available for driving if necessary;
4. “week” means the period between 00.00 hours on Monday and 24.00 hours on Sunday;
5. “rest” means any uninterrupted period of at least one hour during which the driver may freely dispose of his time.’
There is no definition of ‘day’.
The basis of the convictions
The magistrates concluded that ‘day’ in the regulations meant not (as the prosecutor contended before them and as both parties submitted to us) the period of 24 hours beginning with the moment when driving was resumed following the conclusion of a weekly rest period, but any period of 24 hours commencing at midnight. It follows, if their view be correct, that the first day of the period under consideration ended not at 1515 hrs on Monday, 5 January but at 2400 hrs on Sunday, and the sixth day not at 1515 hrs on Saturday, 10 January but at 2400 hrs on Friday, 9 January. They found that the appellant’s sixth daily driving period ended on 10 January at 0050 hrs at Greenore, and that he thereupon became obliged to take a minimum rest period of 24 hours. Accordingly, they held that by resuming work and driving at 0845 hrs on 10 January he broke his rest period and was therefore guilty on the first information. As to the second, third and fourth informations, they were of the view that by failing to complete his 24-hour rest period on 10 January he became obliged, before driving on 11, 12 and 13 January, to take a 45-hour break; and that, not having done so, he was guilty on these informations also.
The question posed for this court is, in effect, whether as a matter of law they were right to convict on any one or more of the charges. It was conceded by counsel for the respondent that the convictions on the second, third and fourth informations could not stand, for reasons which we shall explain at the end of this judgment. The discussion of the regulations which follows is in the context of the first information only.
The appellant’s argument
Counsel for the appellant advanced the following propositions.
(1) ‘Day’ means successive periods of 24 hours beginning at whatever time the driver resumes driving after a weekly rest period, what counsel for the appellant described as a rolling period of 24 hours. In each 24 hours a driver must have a rest period of at least 11 consecutive hours which may, if appropriate compensatory rest is taken, be reduced to nine consecutive hours three times in any one week (art 8(1)).
(2) As to driving periods, the basic rule under art 6(1) is that after no more than six daily driving periods (however short each of those periods may be) a driver is to have a weekly rest of 45, 36 or 24 hours, the duration depending on where he is when he ends the sixth period. This basic rule is, however, subject to an important (and in this case crucial) qualification, set out in the next paragraph.
(3) Even where six daily driving periods have been undertaken without an intervening weekly rest, the driver may continue to drive until (at the latest) the end of the sixth day from the time when after his last weekly rest he resumed driving, provided that the total number of hours driven between weekly rests does not exceed the maximum that the driver would have been lawfully entitled to drive in six weekly periods, ie ordinarily 56 hours. (In fact, as we shall show, the theoretical maximum is 58 hours, but that is a refinement.) This, it is argued, is the correct interpretation of art 6(1).
(4) Quite independently of the last mentioned limitation, there is an obligation on every driver to take a weekly rest of 45 consecutive hours (which may in appropriate
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circumstances be reduced to 36 or 24 hours subject to compensation) once in every period of seven days beginning at 0000 hrs on Monday. This is the effect of art 8(3) standing alone; it will be remembered that, by virtue of the provisions of art 6(1), the operation of art 8(3) may in certain circumstances be made more restrictive.
Counsel, applying his interpretation of the regulations to the facts of this case, pointed out that, while it was perfectly true that the appellant had by 0050 hrs on Saturday, 10 January undertaken six daily driving periods since 1515 hrs on Sunday, 4 January, he was at that moment only 9 hours and 35 minutes into the sixth day, that day having begun at 1515 hrs on Friday, 9 January. His next working period, in the case of which he admittedly undertook a seventh driving period, ended at 1300 hrs on Saturday, 10 January, ie 2 hours and 15 minutes before the end of the sixth day, brought his total driving hours in that six day period to 32 hours, was followed by a 24-hour rest period, and therefore did not infringe the regulations.
The respondent’s argument
Counsel for the respondent conceded the correctness of the ‘rolling day’ argument, and therefore accepted that the sixth day ended at 1515 hrs on Saturday, 10 January. His submissions in support of the conviction involved construing art 6(1) as permitting (in the circumstances defined) postponement of the rest period, but not allowing driving, merely other kinds of work, during the extension resulting from the postponement. Article 6(1) says that a driver must take a weekly rest after no more than six daily driving periods; and while the qualification in the next paragraph permits postponement of the rest period, it does not say that further driving is permitted, and therefore it is not. Counsel conceded that the words ‘total driving time over the six days does not exceed the maximum’ presented a problem, because on his construction it was difficult to give them any sensible meaning. It does, we think, no injustice to counsel’s helpful argument if we say that, as it seemed to us, the more these matters were explored in argument, the readier he was to recognise the difficulties posed by these words.
Conclusions
1. We consider that the magistrates were wrong and that the view advanced by both counsel, namely that a day is any period of 24 hours beginning with the resumption of driving after the last weekly rest period, is correct. The magistrates justified their conclusion, that it was a 24-hour period beginning at midnight, by reference to the definition of a week (cited above), but we find no support for their view in that definition. As it seems to us, the fact that the regulations are dealing with an activity which proceeds by day and night, and lay down certain driving and rest periods, militates in favour of the rolling day construction, which should be adopted unless there is in the regulations some clear indication to the contrary. It is true that the use in art 8(1) of the words ‘In each period of 24 hours’ might at first sight be thought to suggest that ‘day’ in art 6 bears some different meaning. However, in the very next paragraph of art 8(1) appear the words ‘On days when the rest is not reduced in accordance with the first subparagraph, it may be taken in two or three separate periods during the 24-hour period … ' This, in our opinion, supports the rolling day construction; and we find nothing in the regulations to compel us to adopt what, for reasons we have briefly mentioned, appears to us to be an inappropriate and practically inconvenient alternative.
2. We consider that the appellant’s construction of art 6(1) is correct for the following reasons.
(a) We begin with the reflection that, as one sees in a number of the regulations, the draftsman’s approach is to impose a limitation and then by subsequent qualifications relax it in defined circumstances. We see no reason for thinking that the relaxation in art 6 is not intended to relate to driving rather than merely to postponement of the rest period. There is nothing in the article which amounts to a prohibition of driving during the period of postponement.
(b) The decisive consideration, however, is to be found in the words ‘if the total driving time over the six days does not exceed the maximum corresponding to six daily
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driving periods’. The qualification to the basic restriction is contemplating a situation when six daily driving periods have taken place in less than six days, and is defining the circumstances in which the weekly rest period, prima facie due as soon as the sixth driving period ends, may be postponed to the end of the sixth day. At the moment when the sixth daily driving period ends the total number of hours that the driver has driven in the six periods will necessarily be known. The respondent’s construction involves that, if at that moment the total hours driven in the six periods amounts to 56 hours or less, then the rest period may be postponed, but if it exceeds 56 hours (which could only occur if the driver had breached other provisions of the regulations, an assumption hardly to be attributed to the draftsmen) it may not. (It will be observed that, for simplicity’s sake, we are for the moment assuming that 56 is the theoretical maximum; we have yet to explain why it is in fact 58.) What possible logic is there in such a provision?
Moreover, this approach reads the words ‘driving time over the six days’ as though they were ‘driving time over the six driving periods’. That the qualification is framed in terms which involve (i) that at the end of the sixth driving period the aggregate hours driven will not exceed 56, and (ii) that postponement of the rest period to a time beyond the end of the sixth period depends on the aggregate driving hours in that extended period not exceeding 56, necessarily involves that it is contemplated that the driver may drive in the period between the conclusion of the sixth driving period and the end of the sixth day.
(c) In this connection we have considered an argument that was not canvassed in the course of the hearing of the appeal. In rereading art 6(1) while preparing this judgment it occurred to us that there is, strictly speaking, no warrant for the assumption (implicit in the appellant’s argument and in all we have said so far assumed to be correct) that the right to a postponement of the weekly rest period to the end of the sixth day is dependent on the driver’s having driven for less than the legally permitted maximum in the course of the six daily driving periods. It could be argued that, in the absence of express provision to this effect, the right to postponement is always available, save where the driver has in the six daily periods already exceeded (thereby breaking the law) the aggregate hours permitted. In the case of a driver who has already equalled his maximum, the condition of the right to postpone is that he should not drive at all during the period of postponement; in the case of any other driver, that he should during the postponement drive only as many hours as will bring him up to the aggregate maximum permitted in six driving periods.
We have, however, felt impelled to reject this argument on the basis that, if it be correct, it is impossible to understand why art 6(1) was drafted as it was. It is surely not to be contemplated that a regulation would be drafted on the premise that the only circumstance in which one of its primary provisions will be operative is where those affected by the regulation have broken its provisions. We pose this question because, if the argument rehearsed in the previous paragraph be correct, only those who are already in breach at the end of the sixth driving period will be precluded from taking advantage of postponement.
The conclusion we have reached is that, looking at art 6(1) as a whole, it must be a matter of implication that the right to postpone arises only where, at the end of the sixth daily driving period, the permitted aggregate has not yet been equalled (or exceeded). In saying this we are conscious that it can be said that there seems little logic in distinctions which have the arbitrary result that postponement is available where 55 3/4 hours, but not where 56 hours, have been driven. But that seems to us to be a consideration less compelling than the difficulty that, in the absence of such an implication as we suggest, the basic rule is, in the case of law-abiding drivers, never operative.
(d) Putting the matter simply, and for that purpose still taking 56 as the theoretical maximum, what art 6 is laying down is this. A driver who, with only daily rest periods between them, has driven six consecutive daily periods amounting in the aggregate to 56 hours’ driving (or more) must immediately on the conclusion of the sixth period begin a weekly rest period. But in any case where the aggregate hours in the six daily driving periods amount to less than 56 hours he may postpone the commencement of
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his weekly rest period to the end of the sixth day, and may in the interval between the conclusion of the sixth period and the end of the sixth day undertake further driving periods provided the hours driven in those periods do not bring the total hours driven since the beginning of the six day period to more than 56. For completeness, it is appropriate to emphasise here that all drivers, even those who have driven fewer than six driving periods since the conclusion of their last weekly rest, are in any event obliged to have a weekly rest in the course of each week. This is the effect of art 8(3) construed independently of art 6 rather than in conjunction with it. However, a weekly rest period begun in one week and ended in another may be attached to either (art 8(4)).
3. The reason the theoretical ‘maximum corresponding to six daily driving periods’ (art 6(1)) is 58 rather than 56 is this. A week in the regulations means the period from the beginning of Monday to the end of Sunday. Article 6(1) allows the daily driving period of nine hours to be extended to ten hours ‘twice in any one week’. If, therefore, one envisages a driver who, following his weekly rest, begins a period of driving towards the end of a week in which he has not previously driven any period of more than nine hours, who, between then and the end of Sunday, drives two periods of ten hours, who on Monday and Tuesday drives two further periods of ten hours, and who concludes with two further periods of nine hours, all six periods taking place in less than six days, he will lawfully have driven 58 hours in the six driving periods. A driver who starts on Monday morning will be confined to 56 hours.
The second, third and fourth informations
The magistrates’ reasons for convicting (that since the 24-hour break after the daily driving period came, on the view they took of the case, a day too late, the only break that could be accepted before driving on the 11, 12 and 13 January was one of 45 hours) was not supported by the respondent. Nor did the respondent feel able to support the contention underlying this approach, namely that since the 24-hour rest (while appropriate in length for a weekly rest break at Greenore) came a day late, any subsequent driving was illegal. The simple fact is that if, as the magistrates held, the appellant was obliged to start a weekly rest after concluding work at 0050 hrs on 10 January, then by driving on that day he was in breach of the requirements of the regulations as to rest periods. However, when a day or so later he took a weekly rest appropriate in length to the place where he was, that was an effective rest period for the purpose of the regulations. We see no warrant for saying that the entitlement to have a weekly rest shorter than 45 hours is conditional on its being taken not only at the appropriate place but also at the appropriate time; and it cannot be right that a driver who in breach of the regulations starts his weekly rest late is precluded from ever driving thereafter.
It follows that, even had the conviction on the first information been sustainable, the appeals in relation to the other three would have succeeded. As it is, the fact that the appeal on the first information succeeds eliminates even the argument for upholding the other three.
Summary of conclusions
1. The term ‘day’ in art 6(1) means successive periods of 24 hours beginning with the driver’s resumption of driving after his last weekly rest period. 2. Every driver must have a weekly rest period, as defined by art 8, once in every week, ie in the period between midnight on Sunday and midnight on the following Sunday. 3. In certain circumstances the weekly rest period falls to be taken earlier. Thus: (a) any driver who in the course of six consecutive driving periods since his last weekly rest has driven in the aggregate not less than the maximum number of hours permitted by the regulations in six such periods must begin a weekly rest immediately on the conclusion of the sixth period; but (b) any such driver who in those six driving periods has driven for an aggregate of less than the maximum number of hours permitted by the regulations may (i) postpone the commencement of his weekly rest period until the end of the sixth day and (ii) drive during the period of postponement provided he does not by so doing increase the aggregate of the hours driven since his last weekly rest to a figure exceeding
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the maximum number of hours permitted by the regulations in six consecutive daily driving periods.
The question posed by the magistrates was, in effect, whether it was open to them on the basis of the facts found to convict the appellant on any of the four informations. We would answer that question by saying that, for the reasons we have given, it was not. Accordingly, the convictions and sentences must be quashed.
We should add, in the form of a postscript to this judgment, that it appears to us that in one respect the appellant was in breach of the regulations. It will be remembered that he began a daily rest period at 0050 hrs on Saturday, 10 January and resumed work again at 0845 hrs the same day. This rest period was therefore of only 8 hours and 50 minutes duration. It should have lasted for a minimum of nine hours. However, the offence alleged in the first information was of failing at this stage to take a weekly rest, and the wording of the information was not apt to cover this comparatively venial lapse.
Appeal allowed.
Solicitors: Ford & Warren, Leeds (for the appellant); Shulmans, Leeds (for the respondent).
N P Metcalfe Esq Barrister.
Nurse v Morganite Crucible Ltd
[1989] 1 All ER 113
Categories: HEALTH; Health & Safety At Work
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD TEMPLEMAN, LORD GRIFFITHS, LORD ACKNER AND LORD LOWRY
Hearing Date(s): 9, 10 NOVEMBER, 15 DECEMBER 1988
Factory – Process – Demolition of disused equipment – Escape of asbestos dust in course of demolition – Duty to provide approved respiratory protective equipment where asbestos dust from factory ‘process’ liable to escape – Duty to store asbestos waste in suitable sealed containers – Duty to keep internal surfaces clear of asbestos waste and dust – Demolition of driers over period of nine days – Whether demolition of driers amounting to ‘process’ – Whether occupier of factory required to provide approved respiratory protective equipment during demolition, store waste in sealed containers and keep internal surfaces clear of asbestos waste and dust – Factories Act 1961, ss 76, 155(2) – Asbestos Regulations 1969, regs 3, 5, 8(1), 9, 15.
The defendants were the occupiers of a factory which manufactured crucibles. Asbestos was not used in the crucible manufacturing process. In 1984, over a period of about nine days, the defendants demolished a number of large brick driers within the factory. The roof panels of two of the driers contained asbestos and in the course of breaking up and removing the panels absestos dust escaped. The defendants were charged with failing to provide its employees with approved respiratory protective equipment where asbestos dust from ‘a process’ was liable to escape, failing to store asbestos waste from a process in suitable sealed containers and failing to keep internal surfaces clear of asbestos dust and waste from a process, contrary to s 155(2) a of the Factories Act 1961 and regs 8(1), b 15 c
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and 9 d of the Asbestos Regulations 1969 made under s 76 e of the 1961 Act. Regulation 3 f applied the regulations to premises and places in which a process involving asbestos was carried on and reg 5 g required every employer or occupier of a factory where such a process was carried on to comply with the requirements of the regulations. The defendants were convicted. They appealed, contending that for the purposes of the 1961 Act and the 1969 regulations a ‘process’ meant a manufacturing process or other regular activity carried on at a factory and that the demolition of the driers did not constitute such a process. The Crown Court dismissed the defendants’ appeal and the defendants appealed to the Divisional Court, which allowed the appeal. The prosecutor appealed to the House of Lords.
Held – In the context of s 76 of the 1961 Act and 1969 regulations the word ‘process’ was used in the broad sense of meaning any operation or series of operations and included an activity of more than a minimal duration which had some degree of continuity or repetition of a series of acts. Since the demolition of the driers was carried out by the defendants over a period of days, it was a process involving materials containing asbestos within the meaning of the regulations. The defendants were therefore rightly convicted of the offences and the prosecutor’s appeal would be allowed (see p 115 d e, p 117 e to g j, p 118 d and p 119 a to f; to p 120 a d to f, post).
R v AI Industrial Products plc [1987] 2 All ER 368 overruled.
Notes
For protection of employees from dust or fumes, see 20 Halsbury’s Laws (4th edn) para 640, and for cases on the subject, see 26 Digest (Reissue) 383–386, 2696–2705.
For the meaning of ‘process’, see 20 Halsbury’s Laws (4th edn) para 411, and for a case on the subject, see 26 Digest (Reissue) 386, 2710.
For the Factories Act 1961, ss 76, 155, see 19 Halsbury’s Statutes (4th edn) 479, 535.
For the Asbestos Regulations 1969, regs 3, 5, 8, 9, 15, see 8 Halsbury’s Statutory Instruments (4th reissue) 282–284, 286.
Section 76 of the 1961 Act was repealed with savings as to regulations made thereunder by the Factories Act 1961 etc (Repeals and Modifications) Regulations 1974, SI 1974/1941. Power to make health and safety regulations is now conferred by s 15 of the Health and Safety at Work etc Act 1974.
As from 1 March 1988 the 1969 regulations were revoked and replaced avoiding the use of the word ‘process’ by the Control of Asbestos at Work Regulations 1987, SI 1987/2115.
Cases referred to in opinions
R v AI Industrial Products plc [1987] 2 All ER 368, CA.
Vibroplant Ltd v Holland (Inspector of Taxes) [1981] 1 All ER 526 affd [1982] 1 All ER 792, CA.
Appeal
The prosecutor, Michael Godfrey Nurse, one of Her Majesty’s inspectors of factories, appealed with the leave of the Divisional Court of the Queen’s Bench Division against
Page 115 of [1989] 1 All ER 113
the decision of that court (Woolf LJ and Hutchison J) on 29 April 1988 allowing an appeal by the defendants, Morganite Crucible Ltd, by way of a case stated by the Crown Court at Hereford (his Honour Judge Roy Ward QC and two justices) in respect of its decision on 14 February 1985 dismissing the defendants’ appeal against their conviction by the justices for the petty sessional division of Worcester (county) sitting as a magistrates’ court at Worcester on 22 November 1984 on three informations preferred by the prosecutor alleging offences contrary to s 155(2) of the Factories Act 1961 and regs 8(1), 9 and 15 of the Asbestos Regulations 1969, SI 1969/690. The Divisional Court had certified under s 12(1) of the Administration of Justice Act 1969 that its decision involved a point of law of general public importance (set out at p 119 h, post). The facts are set out in the opinion of Lord Griffiths.
John F M Maxwell and Carmel Wall for the prosecutor.
John Saunders and Alison Lockwood for the defendants.
Their Lordships took time for consideration.
15 December 1988. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Griffiths. I agree with it and, for the reasons he gives, I would allow the appeal.
LORD TEMPLEMAN. My Lords, for the reasons to be given by my noble and learned friend Lord Griffiths, I would allow this appeal.
LORD GRIFFITHS. My Lords, this is an appeal by the prosecutor from the decision of the Divisional Court who, on a case stated by the Crown Court at Hereford, allowed the appeal of the respondent defendants against their conviction on three summonses alleging breaches of the Asbestos Regulations 1969, SI 1969/690. It is clear from the judgment of the Divisional Court that it only allowed the appeal of the defendants because it rightly held itself bound by the decision of the Court of Appeal, Criminal Division in R v AI Industrial Products plc [1987] 2 All ER 368. It is I think manifest from the wording of the judgment of Woolf LJ in the Divisional Court that but for the decision in R v AI Industrial Products plc it would have dismissed the appeal. This appeal then is in effect an appeal from the decision of the Court of Appeal in that case.
The case stated by the Crown Court is a model of its kind and it states all relevant matters so succinctly that I reproduce it almost in its entirety:
‘1. The [prosecutor] is one of H.M. Inspectors of Factories appointed by the Health and Safety Executive.
2. On 6th August 1984 the [prosecutor] preferred three informations against the [defendants] alleging offences contrary to Section 155(2) of the Factories Act 1961 namely: (i) that the [defendants] being occupiers of a certain factory within the meaning of the Factories Act 1961 to which the Asbestos Regulations 1969 applied did contravene Regulation 8(1) of the said Regulations in that they failed to provide for the use of persons employed approved respiratory protective equipment in that part of the factory into which asbestos dust from a process namely the breaking up and removal of Marinite panels from the roofs of the two larger driers in the Cut Block 380 Department was liable to escape. (ii) that the [defendants] being occupiers of a Factory within the meaning of the Factories Act to which the Asbestos Regulations 1969 applied did contravene Regulation 15 of the said Regulations in that asbestos waste from a process to which these Regulations applied namely broken Marinite panels forming part of a pile close to the Concaste building in the
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said factory was not stored in suitable closed receptacles which would prevent the escape of asbestos dust. (iii) that the [defendants] being occupiers of a Factory within the meaning of the Factories Act 1961 to which the Asbestos Regulations 1969 applied did contravene Regulation 9 of the said Regulations in that all floors, ledges and other internal surfaces of the Cut Block 380 Department being parts of a building in which a process to which these Regulations applied namely the breaking up and removal of the Marinite panels forming the roofs of the two larger driers was carried on were not, so far as was reasonably practicable kept in a clean state and free from asbestos waste and dust.
3. On 22nd November 1984 the [defendants] were convicted of the said offences by Justices for the Petty Sessional Division of Worcester County.
4. An appeal against these said convictions was made by the [defendants] which appeal we heard on 14th February 1985. We were given written statements of all prosecution witnesses and photographs and a “Schedule of Main Facts and Expert Evidence“. We heard oral evidence from Mr Duggan a director of the [defendants] and called on their behalf. All the facts were agreed and we found the following.
FACTS
(1) The [defendants] occupied premises at Woodbury Lane, Norton, Worcester which were a factory within the meaning of the Factories Act 1961. (2) At these premises the [defendants] manufactured crucibles. (3) Asbestos was not used in the course of the manufacture of the crucibles. (4) On dates between 25th April and 2nd May 1984 the [defendants] demolished a number of brick driers within 380 Cut Block Department of the Factory. (5) Two large driers were 40 feet by 12 feet and 8 feet high. The walls were of brick construction. The roof was constructed of 1 inch Marinite panels (containing asbestos) bolted to steel frames. Approximately 10 to 12·5 tons of rubble was removed during demolition before the intervention of the Factory Inspector and much remained on site thereafter as shown in the photographs. The driers were themselves buildings. (6) Driers had never been demolished at the factory before. (7) In the course of the demolition the [defendants] failed to comply with the requirements of the Asbestos Regulations 1969 as set out in the informations.
5. It was contended by the [defendants] that the Asbestos Regulations 1969 did not apply because the demolition of the driers was not a process carried on in their factory.
6. The [defendants] further contended that “process” meant a manufacturer’s process or other regular activity carried on at the factory and did not include the demolition of a drier.
7. The [prosecutor] contended that “process” should be widely interpreted and included demolition of the driers …
11 … we accepted the contention of the [prosecutor] that the word “process” in the Regulations meant any activity or operation of some duration. Accordingly, we found that the Asbestos Regulations 1969 did apply to the [defendants’] premises. This being the only issue raised on the appeal, accordingly we dismissed the appeal.
QUESTION
The question for the opinion of the High Court is whether we were correct in ruling that the Asbestos Regulations 1969 at the material time applied to the demolition of the driers in this factory.’
The defendants’ appeal was dismissed by the Crown Court on 14 February 1985. There matters rested until the decision in R v AI Industrial Products plc [1987] 2 All ER 368 was given by the Court of Appeal a year later. On the strength of that decision the defendants were given leave to appeal out of time and the case was accordingly stated by the Crown Court at Hereford.
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I turn straight away to R v AI Industrial Products plc. The facts in that case were virtually indistinguishable from the present. They were that between Friday, 22 February 1985 and Monday, 25 February 1985 the occupier of a factory demolished a kiln within his factory which resulted in releasing considerable quantities of asbestos dust into the atmosphere. The defence was that the demolition of the kiln was not a ‘process’ to which the 1969 regulations applied. In the Crown Court Mr Recorder Stuart Shields QC ruled that the demolition of the kiln was a process within the meaning of the regulations and the appellants accordingly changed their plea to guilty and were fined. They appealed to the Court of Appeal with the leave of the recorder on the ground that his ruling was in error and that the demolition of the kiln was not a process in a factory within the regulations as it was unconnected with the manufacturing processes undertaken in the factory and was an isolated incident. The Court of Appeal accepted this argument and said ([1987] 2 All ER 368 at 370–371):
‘… the word “process” must be construed according to the meaning to be given it under [the Factories Act 1961] … In our judgment, the word “process” as used in this section [s 175] and elsewhere in the 1961 Act connotes some continuous activity regularly carried on within a factory, and does not include a single operation such as the demolition and removal of a disused piece of machinery or a kiln.’
Later, it said:
‘… it is wrong to extend the meaning of “process” in the 1961 Act beyond some manufacturing process or continuous and regular activity carried on as a normal part of the operation of a factory.’
In arriving at its conclusion the Court of Appeal focused primarily on the meaning to be attached to the word “process” where it appears in the definition of a factory in s 175(1) of the Factories Act 1961. I think, with all respect, that this led it into error. ‘Process’ is a word of very wide general meaning and must take colour from its context. When used in the context of defining a factory it is natural to think of the word ‘process’ in the context of the operations carried on within the factory. The 1969 regulations, however, are not confined to operations carried on within a factory and, in particular, they apply to building operations to which the Court of Appeal’s attention does not appear to have been drawn in R v AI Industrial Products plc. If the Court of Appeal decision is correct it will gravely limit the protection of the regulations. It is difficult to see how they could be applied to normal building operations and it is also difficult to see how they would apply to what is one of the primary risks from asbestos dust, namely the use of asbestos lagging material either for pipes or for furnace repairs.
The regulations were made pursuant to powers contained in ss 62, 76 and 180(6) and (7) of the 1961 Act. Section 76(1) provided:
‘Where the Minister is satisfied that any manufacture, machinery, plant, equipment, appliance, process or description of manual labour is of such a nature as to cause risk of bodily injury to the persons employed or any class of those persons, he may, subject to the provisions of this Act, make such special regulations as appear to him to be reasonably practicable and to meet the necessity of the case.’
It is immediately to be observed that the word ‘process’ in the enabling section is used in apposition to manufacture and would appear to be used in a wide sense.
I turn now to the regulations themselves:
‘Application of Regulations
3.
(1) These Regulations shall apply to the following premises and places in which any process to which these Regulations apply is carried on, that is to say, factories and all premises and places to which the provisions of Part IV of the principal Act with respect to special regulations for safety and health are applied by
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the following provisions of that Act, namely, section 123 (which relates to electrical stations), section 124 (which relates to institutions), so much of section 125 as relates to warehouses other than warehouses within any dock or forming part of any wharf or quay, section 126 (which relates to ships) and section 127 (which relates to building operations and works of engineering construction).
(2) These Regulations apply to every process involving absestos or any article composed wholly or partly of asbestos, except a process in connection with which asbestos dust cannot be given off … ’
By reg 3(1) the regulations are to apply to any such process carried on in a factory or a deemed factory and it also applies the regulations to building operations and works of engineering construction. Counsel for the defendants in a most able argument sought to persuade your Lordships that ‘process’ should be given a different meaning when used in reference to a process carried on in a factory or deemed factory, in which case, he submits, it should bear the restricted meaning given to it by the Court of Appeal, and in the case of building operations or works of engineering construction, in which case a wider meaning should be given to the word so that it covers all activities involving the use of asbestos in building operations and works of engineering construction. This construction of the regulations would involve not only construing the word ‘process’ as having two different meanings when used in reg 3(1) but also giving two different meanings to it in reg 3(2). Regulation 3(2) is framed in simple language and I can find no indication that the word ‘process’ is to have other than the single broad meaning of ‘any activity’. I am satisfied that the same word ‘process’ is used in the same sense in reg 3(1) as it is in reg 3(2) and that it is not permissible to attach two different meanings to it.
Regulation 5 is of importance and is in the following terms:
‘Obligations under Regulations
5.–(1) Except in the case of any place where building operations or works of engineering construction are carried on it shall be the duty—(a) of every employer (whether or not an occupier) who is undertaking in a factory any process to which these Regulations apply to comply with the requirements of these Regulations in relation to any person employed by him, any plant or material under his control, and any part of the factory in which he is carrying on the process or into which asbestos dust in connection with that process is liable to escape; (b) of every occupier of any factory (whether or not such an employer as aforesaid) where any such process is being carried on to comply with the requirements of Regulations 8, 18 and 19 in relation to any person employed in the factory (other than any person employed by an employer who is undertaking in the factory any process to which these Regulations apply) and with the requirements of Part III of these Regulations; and (c) of every person who is undertaking in a factory any process to which these Regulations apply and who employs no other person in the carrying on of that process to comply for the protection of employed persons working there, with the requirements of these Regulations (other than Regulations 8, 14 and 18 to 20) with which he would have to comply if he were the employer of a person doing there the work which he does himself.
(2) In the case of places where building operations or works of engineering construction are carried on it shall be the duty of every contractor and of every employer who is undertaking any process to which these Regulations apply to comply with the requirements of these Regulations in relation to any person employed by him and any person employed there who is liable to be exposed to asbestos dust in connection with any process carried on by the contractor or employer (as the case may be), and in relation to any plant or material under his control and any part of the site where he is carrying on the process or where asbestos dust in connection with that process is liable to escape … ’
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There are, I think, two powerful indications from the wording of this regulation that ‘process’ cannot have the restricted meaning attached to it by the Court of Appeal. In the first place, if a process is construed as a ‘manufacturing process or continuous and regular activity carried on as a normal part of the operation of a factory’ (see [1987] 2 All ER 368 at 371), it is difficult to see how the regulations can apply either to a building operation or to a work of engineering construction.
Second, reg 5(1)(b) is clearly drafted to cover the situation in which the factory occupier calls in an independent contractor to carry out a process to which the regulations apply, in which case the occupier has to comply with certain parts of the regulations to protect any person employed in the factory, except the employees of the independent contractor who are protected by reg 5(1)(a) which puts the duty of compliance with the regulations on their employer, the independent contractor. Now an occupier of a factory is not going to call in an independent contractor to carry out the ‘manufacturing process’ in the factory or to perform some ‘continuous and regular activity carried on as a normal part of the operation’ of the factory, for those are the very operations carried on by the occupier of the factory, for which he has no need of the services of an independent contractor. The occupier of the factory is going to call in the independent contractor to carry out some specialist work of maintenance or repair such as lagging or furnace repairs, and it is clearly this situation that is covered by reg 5(1)(b) and, to my mind, indicates quite clearly that ‘process’ must be given a broad meaning so that if the work involves risk from asbestos dust it is covered by the regulations. If the word is given the narrow meaning it is difficult to see in what circumstances reg 5(1)(b) would ever be likely to apply.
The foregoing considerations which depend on the words of the 1961 Act and the 1969 regulations themselves satisfy me that the word ‘process’ is not used in the limited sense in which it was construed by the Court of Appeal, but in the broader sense of including any activity of a more than minimal duration involving the use of asbestos. Some common sense has to be introduced into the definition of ‘process’. Obviously the single act of knocking a nail into an asbestos panel cannot be considered a process. There has to be some degree of continuity and repetition of a series of acts in order to constitute a process. On the facts of R v AI Industrial Products plc [1987] 2 All ER 368 and of the present case the activity went on over a period of days involving materials containing asbestos and in both cases was a ‘process’ within the meaning of the regulations.
We were referred to a number of authorities in which the meaning of the word ‘process’ was considered in other contexts and particularly in the context of the extended definition of a factory within the meaning of s 175 of the 1961 Act. I do not wish to cast any doubt on the correctness of these decisions but I do not derive any assistance from them because the word ‘process’ is used in an entirely different context. Still less do I derive any assistance from Vibroplant Ltd v Holland (Inspector of Taxes) [1981] 1 All ER 526, in which the word ‘process’ was considered in its context in the Capital Allowances Act 1968.
The Divisional Court in giving leave to appeal to your Lordships’ House certified the following point of law of general public importance:
‘Whether for the purposes of the Factories Act 1961 and Regulations thereunder “process” carried on in a factory means a manufacturing process or other continuous and regular activity carried on as a normal part of the operation of the factory.’
My Lords, I am not prepared to answer the question in this form because the word ‘process’ is scattered throughout many sections of the 1961 Act, and it appears in many regulations made thereunder. Your Lordships have not had the opportunity to consider the meaning to be attached to ‘process’ wherever it appears and it is possible that it has different meanings in different contexts. I would confine my opinion to the meaning of the word ‘process’ where it is used in the 1969 regulations and I would answer the
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certified question by saying that where the word ‘process’ is used in the regulations it means any operation or series of operations being an activity of more than a minimal duration.
I would add this rider. The Crown Court found that the driers being demolished by the defendants were a building. But the defendants were not charged with the offences in their capacity as persons carrying out an operation to which the Building Regulations applied. Counsel for the defendants conceded that on the construction for which he argued the defendants would have had no defence if they had been charged as persons carrying out building operations. However, as matters stood under the decision in R v AI Industrial Products plc, the Court of Appeal had applied a narrow construction to the meaning of ‘process’ in the 1969 regulations which would have provided a defence even if the defendants had been charged as carrying out a building operation. The prosecution was brought against the defendants in their capacity as occupiers demolishing a plant within their factory. This was the basis on which the case was dealt with in the courts below, and the reason why it was identical to R v AI Industrial Products plc. It is on this basis that the case was argued and dealt with before your Lordships, although naturally in argument counsel for the prosecutor drew attention to the impact of the Court of Appeal’s construction on building operations and works of engineering construction.
I would therefore allow this appeal and restore the convictions of the defendants. It was a condition on which leave was given to appeal to your Lordships’ House that the prosecutor would indemnify the defendants in respect of their reasonable costs in the House of Lords; I would therefore order that the prosecutor pay to the defendants their costs in your Lordships’ House.
LORD ACKNER. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Griffiths. I agree with it, and I too would allow this appeal. I also agree with the order that the prosecutor pay to the defendants their costs in your Lordships’ House.
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Griffiths. I agree with it and accordingly I, too, would allow this appeal and restore the defendants’ convictions. I also agree with the order as to costs which my noble and learned friend proposes.
Appeal allowed. Convictions retored.
Solicitors: Treasury Solicitor; Pinsent & Co, Birmingham (for the defendants).
Mary Rose Plummer Barrister.
R v Johnson
[1989] 1 All ER 121
Categories: CRIMINAL; Criminal Evidence
Court: COURT OF APPEAL, CRIMINAL DIVISION
Lord(s): WATKINS LJ, MCNEILL AND MCCOWAN JJ
Hearing Date(s): 22, 29 JULY 1988
Criminal evidence – Prosecution evidence – Disclosure of sources of information – Confidentiality of sources – Police observation posts in private premises – Protection of occupiers of premises used as police observation posts – Guidance on requirements for excluding evidence which would reveal address and identity of occupiers of private premises used as police observation posts.
The appellant was seen to be selling drugs by police officers watching from private premises which were used by the police as observation posts in a known drug-dealing locality. The appellant was charged with possessing and supplying controlled drugs. At his trial the only evidence that the appellant had been supplying drugs was that given by the police officers stationed in the observation posts and the appellant’s counsel applied to be permitted to cross-examine the police officers on the exact location of the observation posts so that he could test the police evidence by reference to their distance from the alleged transactions, their angle of vision and possible obstructions in their line of sight. The Crown contended that the police officers should not be required to reveal the exact location of the observation posts because it would put at risk occupiers who had permitted their premises to be used by the police as observation posts. The judge ruled that the exact location of the observation posts need not be revealed. The appellant was convicted. He appealed, contending that his defence had been so hampered by the judge’s ruling that there had been a miscarriage of justice.
Held – A trial judge could exclude evidence which would reveal the address and identity of occupiers of private premises which were used by the police as observation posts provided that there was a proper evidential basis for the exclusion of such evidence and that he was satisfied that the defendant would nevertheless receive a fair trial and that the desirability of protecting from reprisals those who assisted the police outweighed the principle that there should be full disclosure of all the material facts. In order that the judge should be in a position to make such an evaluation a senior police officer should be able to testify, from visits made by him both before the observation commenced and immediately prior to the trial, as to the attitude of the occupiers towards the possible disclosure of their addresses and identities. Since on the facts the appellant had not received an unfair trial, because the judge had given the jury directions which safeguarded his position in the light of the judge’s ruling to exclude evidence of the exact location of the police observation posts, the jury’s verdict was not unsafe or unsatisfactory and the appeal would therefore be dismissed (see p 127 e to h and p 128 b to g, post).
Notes
For the exclusion of evidence of sources of police information, see 11 Halsbury’s Laws (4th edn) para 464.
Cases referred to in judgment
D v National Society for the Prevention of Cruelty to Children [1977] 1 All ER 589, [1978] AC 171, [1977] 2 WLR 201, HL.
Marks v Beyfus (1890) 25 QBD 494, CA.
R v Brown (1988) 87 Cr App R 52, CA.
R v Hennessey (1978) 68 Cr App R 419, CA.
R v Rankine [1986] 2 All ER 566, [1986] QB 861, [1986] 2 WLR 1075, CA.
R v Turnbull [1976] 3 All ER 549, [1977] QB 224, [1976] 3 WLR 445, CA.
Page 122 of [1989] 1 All ER 121
Cases also cited
Ellis v Home Office [1953] 2 All ER 149, [1953] 2 QB 135, CA.
Hehir v Comr of Police of the Metropolis [1982] 2 All ER 335, [1982] 1 WLR 715, CA.
Rogers v Secretary of State for the Home Dept [1972] 2 All ER 1057, [1973] AC 388, HL.
Webb v Catchlove (1886) 3 TLR 159, DC.
Appeal
Kenneth Johnson appealed against his conviction on 19 May 1988 before his Honour Judge Pownall QC and a jury in the Crown Court of Knightsbridge on three counts of possessing a class B controlled drug, three counts of supplying a class A controlled drug, and one count of possessing a class A controlled drug, for which he was sentenced to two years’ imprisonment, to run concurrently, on the charges of supplying and 12 months’ imprisonment, to run concurrently, on the possession charge, both sentences suspended for two years. The facts are set out in the judgment of the court.
Patrick M J O’Connor (assigned by the Registrar of Criminal Appeals) for the appellant.
Jeremy Benson for the Crown.
Cur adv vult
29 July 1988. The following judgment was delivered.
WATKINS LJ. On 19 May 1988 in the Crown Court at Knightsbridge before his Honour Judge Pownall QC, after a second retrial, the appellant was convicted of a number of offences by a majority verdict (ten to two). On the following day he was sentenced for supplying a controlled class B drug to another (three counts), and for supplying a controlled class A drug to another (three counts), to concurrent terms of two years’ imprisonment, suspended for two years, and for possessing a class A drug to a concurrent term of 12 months’ imprisonment, suspended for two years. A supervision order for two years was also made.
The appellant appeals against conviction on the certificate of the trial judge, which is in the following terms:
‘I ruled that on the evidence before me, the police officers should not reveal the location of their observation points or answer questions, the answers to which would or might reveal those observation points. I further ruled that there was not likely to be a miscarriage of justice.’
The judge added this footnote: ‘There are 18 other such cases awaiting trial at this court.' He conducted all the trials about to be referred to.
The Crown alleged that in June 1987 the appellant was selling cannabis and cocaine on the street in the vicinity of All Saints Road, Ladbroke Grove. He had been observed by police officers during the course of an operation known as ‘Trident’. They were stationed at several points in buildings in the locality. There was no evidence but theirs that the appellant was a supplier of these dangerous drugs.
The first of three trials of the appellant was aborted. The jury in the second trial, having failed to agree, were discharged.
The evidence of the police officers emanated from observations kept on 20, 26 and 27 June 1987. Altogether six separate sales of drugs to persons, who included a teenager and a woman, were observed. Packets were handed over by the appellant to those persons in exchange for money. In most instances the packets were taken from the purchasers on arrest by the police afterwards. Those packets contained either cannabis resin or cocaine hydrochloride in relatively small amounts.
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The appellant was arrested on 30 June at his home in Westbourne Park Grove. Police found equipment there consistent with the use of cocaine. There were several folds of paper, but only one contained a small amount of cocaine. The appellant denied that he had at any time been involved in selling drugs in or near All Saints Road. He did not give evidence but his mother was called to do so. She told the jury that the appellant was always short of money and from time to time she gave him some. She stopped doing that when she learnt that he spent it on drugs which he was taking and which were doing him no good.
Counsel suggested on his behalf that what the police had seen were not sales but purchases of drugs by the appellant. It was also suggested, rather more faintly, that the police officers had fabricated their logs of observations. And it was submitted that, by not having to reveal the nature of their locations when keeping observations, those officers were able successfully to cover up inconsistencies in their evidence. It was alleged that there was no love lost between the appellant and the Notting Hill police because the appellant was known to have assaulted one of the officers stationed there when that officer was endeavouring to arrest the appellant for a suspected driving offence.
During the course of the trial the Crown argued that the police officers should not be compelled to reveal the location of the places from which they had kept observation. If evidence of that kind had to be given it would, it was said, do considerable harm to the discovery of crime and the apprehension of criminals in an area where policing problems are acute. So, it was contended, it was in the interests of the public that police officers should keep observation from buildings neither the address nor the identity of occupiers of which should be revealed. The evidence which the Crown should be compelled to give should go no further than revealing that all the observation points were within a given maximum distance.
Counsel for the appellant argued strongly against these propositions. He maintained that to uphold them would gravely embarrass him in endeavouring to test in cross-examination the evidence of the police officers as to what it was from here and there they actually could see, having regard to the layout of the street and the various objects in it, including trees.
The judge was referred to authority. He had listened to similar arguments in the trial (the second trial) in which the jury had failed to agree. He heard evidence then (in the absence of the jury) from police officers about how difficult it was to obtain assistance from the public for the purpose of keeping observation. There was a need, it was claimed, to protect people who assisted the police for that purpose.
The judge ruled in that trial as follows:
‘First of all, I am indebted to both counsel for the very careful argument each has addressed to me. [Counsel for the Crown] wants to adduce evidence of observation by a number of police officers without their disclosing the precise spot from which the observations were made. This is a case involving, allegedly, the possession and supplying of drugs and is one of a number of such cases to be heard at this court which are the result of police observations called “Operation Trident” in April, May and June of last year in the All Saints Road, a road which is not altogether unknown to this court. Superintendent Hart has explained how it is not easy, indeed it is extremely difficult, to get assistance for the police in those circumstances, and he has explained, too, that there is every possibility that these premises that were used on these occasions will be used in the future. Sergeant Jacklyn has explained, and explained in detail, the need for protection. There is, of course, a long-recognised rule of law that investigating police officers cannot be required to disclose the sources of their information. That rule has been held recently to apply equally to protect the identity of a person or persons who have allowed his or their premises to be used as observation points. The precise location of these premises is therefore protected by that rule. The rule is subject to a duty on me to admit such evidence if
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that is necessary in order to prevent a miscarriage of justice, and [counsel for the defendant] submits that there will be such a miscarriage of justice if I do not allow him to put certain questions, the answers to which will, in the end, identify to those with the meanest of intelligence precisely the various observation points, and therefore the identity of the occupiers during this period. He says that his defence is that, at worst, the observing police officers have fabricated their evidence or, at best, have mistakenly identified this defendant. It is vital that observations of this sort should take place. They plainly cannot take place without the full co-operation of members of the public, and it is very likely in most cases that co-operation would be lost if those members of the public thought they ran the risk of their co-operation being made known by being disclosed in court. It is equally plain that it is in the public interest that such people should not be discouraged from giving their co-operation. As Lawton LJ said in R v Hennessey (1979) 68 Cr App R 419 at 426: ”… but cases may occur when for good reason the need to protect the liberty of the subject should prevail over the need to protect informers. It will be for the accused to show that there is good reason.” Putting it another way, as [counsel for the defendant] does put it to me, “If you rule in favour of the Crown the testing by me of their evidence will be so limited that justice for this defendant will be at risk.” I have had the opportunity of considering this question very carefully, and have had the advantage, as I have said, of hearing careful argument on both sides. I have come to the firm conclusion that it would be quite wrong to order, and therefore I will not order, that the police officers disclose the precise observation points, though some approximate details may be given. Nor will I order at which level the officers were, not will I order them to give details of the angles of their views, or exact distances; and I stress the word “exact” and I stress the word “precise“. As a result of that ruling there are, of course, bound to be some limitations on the various cross-examinations of witnesses by [counsel for the defendant] but in my view they are not so limiting that there is a risk of a miscarriage of justice.’
That ruling he maintained after further argument in the present trial (the third), having heard one of the police officers, namely Sergeant Jacklyn, give evidence to the effect that he had caused recent inquiries to be made of the occupiers of the premises used for observation. All of them were the occupiers at the material times and none of them was, he said, happy for their names and addresses to be disclosed because they feared for their safety.
In summing up to the jury the judge dealt with this matter at some length. What he said needs to be fully stated. He said:
‘You may think that those verdicts will, to a very large extent, depend on what you make of those police witnesses who have told you what they saw as part of this larger Operation Trident, as it was called, in the All Saints Road. You have not only heard and seen all of them give evidence, how they gave it and how [it was] sought to have that evidence tested, so far as it could be, by way of cross-examination. Normally of course many, if not all, of the questions that [counsel for the defendant] sought to ask, and did very properly ask, would have been answered. In this case, and it is not unique by any means, you have heard all of these police officers decline to answer a number of the questions, a number of important questions, that [counsel] asked of them and so it is important perhaps that I give you a brief outline why that came about and, indeed, [counsel] is anxious that you should know and it is right that you should. This case started originally in front of another jury. Before long it became quite clear, I think during Pc Mayhew’s evidence, that there ought to be some guidelines given to him and to others of the observing officers who were going to give evidence, there ought to be some guidelines which they had not as yet been given, as to how far they could go in giving their evidence, and so I brought that trial to an end I think, if my memory serves me right, during Pc Mayhew’s
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evidence; the precise moment does not matter. After that a meeting was held with senior officers at which none of the observing officers were present and that meeting was called to decide how far all the various witnesses could go when giving their evidence. The problem was this: should police officers be ordered to give, if asked, details of where their observation point was, how high it was, at what level it was, what angle their view was from, which side of the road it was, or give exact distances from any point to their observation point, or say whether they were looking through net curtains or not, when to do so would, or might, identify the precise location of their observation point, especially when the answer of any particular police officer was to be added to answers given by other police officers in this case? You would no doubt readily understand that it is obviously important that police officers should not have to disclose the source, for instance, of their information, because surveillance and observation are a vital part of criminal intelligence and as a result it has been a long-standing rule that they should not be required to give the source of their information, and that rule has been extended to protect the identity of a person, or persons, who have allowed their premises to be used for such surveillance or observation and that came about, which must go without saying you may think, because people would not be half so keen to give their permission and co-operation for their premises to be used if they thought for a moment that their names and addresses would be disclosed in public for all to hear, and [counsel for the defendant] naturally accepts that as being a very real and proper fear, and, indeed, Mrs Johnson may not be crystal clear you may think [but] she said that, if she has an informer in the area and lets her premises be used by the police as an observation point, the whole area would be against her and maybe if she was walking down the road home to Shepherd’s Bush she would get a gun or a knife in her back and she simply would not be able to do it, namely allow her premises to be so used, and so it is accepted that this is a very proper position for the police to take and an equally proper, clear and firm rule in the public interest and it is subject only to this: that the evidence should be allowed to be given, and indeed ordered to be given, if there is no likelihood of a miscarriage of justice taking place. That was gone into in some detail in the first retrial, by that I mean proceedings subsequent to the one I have just told you about, where I broke it off at the end of Pc Mayhew’s evidence. I took the view that there was not likely to be a miscarriage of justice despite the fact that there would naturally be no answers given to some, even many, of the questions that [counsel] would quite properly seek to ask. One recognises, anybody would, that that puts something of an extra burden on you to consider particularly carefully all the evidence so as to ensure that a miscarriage of justice does not take place. It was decided at that meeting that the furthest the police officers could safely go was to say that observation points 1, 3 and 4 were within 100 yards south of the junction of the All Saints Road and St Luke’s Mews and that observation point 2 was between 100 and 150 yards down St Luke’s Mews and the east side. The trial took place and was completed, but at the end of it it stalled, the jury were unable to agree. That is something you have not heard put till now, but [counsel] wished you to hear it and so I have told you and so of course there had to be a retrial and this is it and you are trying it. The defence here you may think is twofold and in the alternative. Firstly, these deals that the police officers have told you about may well have taken place; did the officers make a dreadful mistake in their identification of this defendant as being the person conducting those deals with customers? and secondly, in the alternative, that the deals may well have taken place but the officers have quite deliberately burnished it, as [counsel] put it, fabricated their evidence that it was this defendant conducting them, and have done that thoroughly dishonestly. You of course will decide whether you are sure that these officers are right on the one hand, in which case your verdict would no doubt be one of guilty, or, on the other hand whether it may be put that they have fabricated their evidence, or are
Page 126 of [1989] 1 All ER 121
dreadfully mistaken in their identification, either of this defendant, or as to nature of the transactions. If that may be sensibly put, then your verdict no doubt would be one of not guilty.’
The judge also directed the jury, impeccably in our view, on the issue of identification, with the well-known case of R v Turnbull [1976] 3 All ER 549, [1977] QB 224 in mind.
The grounds of appeal are, first, that the judge was wrong to rule that neither the observation points nor angles of views and so forth should be disclosed and he wrongly concluded that this would not result in a miscarriage of justice. Second, the observation evidence was unreliable and vulnerable to challenge and was unsupported by observation from a different point or points. There was no supporting evidence whatsoever. Third, the judge was wrong to prohibit cross-examination as to any existing restrictions on a clear view of the appellant’s alleged transactions. And, fourth, there were inconsistencies in the evidence which made some, if not much, of it unreliable.
Counsel for the appellant began his submissions to us in support of these grounds by contending that the judge’s ruling was wrong in law, that there was insufficient material given to him to raise a public interest immunity and accordingly the principle of a miscarriage of justice applies. The very severe restrictions place on him, counsel said, were unjustified in law. If such restrictions were necessary, that illustrates how inevitable a miscarriage of justice became. It is simply not enough for counsel for the Crown, he argued, merely to assert that restrictions were necesssary, there must be specific evidence going to the need for the imposition of them. The Crown sought an unusual indulgence and the judge in allowing it took an extraordinary course.
We were referred by him and by counsel for the Crown to a number of authorities, some of which deal with what is known as the exclusionary rule. That the application of this is warily regarded by the courts there is no doubt. The following observations of Lord Edmund-Davies in D v National Society of the Prevention of Cruelty to Children [1977] 1 All ER 589 at 615, [1978] AC 171 at 242 testify to that:
‘My Lords, it is a truism that, while irrelevant facts are inadmissible in legal proceedings in this country, not all inadmissible facts are irrelevant. To be received in evidence, facts must be both relevant and admissible, and under our law relevant facts may nevertheless be inadmissible. It is a serious step to exclude evidence relevant to an issue, for it is in the public interest that the search for truth should, in general, be unfettered. Accordingly, any hindrance to its seeker needs to be justified by a convincing demonstration that an even higher public interest requires that only part of the truth should be told.’
The rationale of that rule was explained by Lord Diplock in that very case. He said ([1977] 1 All ER 589 at 595, [1978] AC 171 at 218):
‘The rationale of the rule as it applies to police informers is plain. If their identity were liable to be disclosed in a court of law, these sources of information would dry up and the police would be hindered in their duty of preventing and detecting crime. So the public interest in preserving the anonymity of police informers had to be weighed against the public interest that information which might assist a judicial tribunal to ascertain facts relevant to an issue on which it is required to adjudicate should be withheld from that tribunal. By the uniform practice of the judges which by the time of Marks v Beyfus (1890) 25 QBD 494 had already hardened into a rule of law, the balance has fallen on the side of non-disclosure except where on the trial of a defendant for a criminal offence, disclosure of the identity of the informer could help to show that the defendant was innocent of the offence. In that case, and in that case only, the balance falls on the side of disclosure.’
In R v Rankine [1986] 2 All ER 566, [1986] QB 861 this court held that that rule was capable of being extended to this effect: its extension always having covered the sources
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of information, it was also apt to cover points from which there was observation or surveillance of the commission of offences.
In R v Brown (1988) 87 Cr App R 52, a decision of this court, the authorities to which I have referred were referred to in the context of a review of the exclusionary rule. In the course of giving the judgment of the court Hodgson J said (at 59–60):
‘We have been referred to no authority where a Court has held that the making public of police methods or techniques was a public policy ground which would justify a judge in refusing to admit relevant evidence. Even if there is, or there becomes, such a rule in the future, it would not, and could not, apply, we think, to this particular case. We do not rule out the possibility that with the advent of no doubt sophisticated methods of criminal investigation, there may be cases where the public interest immunity may be successfully invoked in criminal proceedings to justify the exclusion of evidence as to police techniques and methods. But if and when such an argument is to be raised, it must, in the judgment of this Court, be done properly. The Crown Prosecution Service must at least ensure that counsel is properly instructed to make the application and to identify with precision the evidence sought to be excluded and the reasons for its exclusion. It would seem clear that if such a contention is put forward the judge must be given as much information as possible and the application will have to be supported, not by the instructions of the junior officer in charge of the case, but by the independent evidence of senior officers.’
These citations suffice to show that it has been regarded as part of the exclusionary rule that, provided there is a proper evidential basis for it, a trial judge may on application exclude evidence which, if given, would reveal not only where the police have kept observation from but also, if they have kept that observation at premises, especially dwellings, the identity of the occupiers.
The paramount consideration here is of course whether the appellant had an unfair trial which led to a verdict which is either unsafe or unsatisfactory. Although the conduct of the defence was to some extent affected by the restraints placed on it by the judge’s rulings, which were in our view properly made, we are not persuaded that this led to any injustice. The jury were well aware of these restraints and most carefully directed about the very special care they had to give to any disadvantage they may have brought to the defence. It was a summing up which was as a whole, we think, favourable to the defence and which contained safeguarding directions which could have left the jury in no doubt as to the nature of their task.
The judge was not, of course, acquainted with the guidance we are about to give and did not receive evidence which conformed to it before making the rulings complained of. But he heard some evidence going part of the way to meet that guidance and he had knowledge from previous trials conducted by him of the difficulties police encounter in obtaining help from the public in the area where the appellant’s offence was found to be committed. He was, we think, in a sound enough position to balance the competing interests between the principle of full disclosure of material facts on the one hand and the need, in the interests of justice, to in some degree conduct a trial without conforming with it. It is risking condescension to say of him that he knew well the legal principles involved. Moreover, we cannot agree that his rulings went too far to meet the needs of the protection sought. We cannot accept that there was unfairness in this trial, or that the verdict was either unsafe or unsatisfactory.
While the judge, who is, as has already been indicated, so very experienced in handling criminal trials, took infinite care to satisfy himself that there was in his opinion a satisfactory evidential basis in the circumstances of this case for ruling that there be non-disclosure by the police of information which could lead to identification of places used for the purpose of observing the suspected commission of criminal offences, we accept that, for the benefit of the police, counsel and judges who will have to face in the future
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a similar problem to that which confronted this judge, some guidance from this court on basic evidential requirements would be found helpful. The submissions as to that, from counsel for the appellant in particular, we have found valuable in considering what that guidance should be.
Clearly a trial judge must be placed by the Crown, when it seeks to exclude evidence of the identification of places of observation and occupiers of premises, in the best possible position to enable him properly in the interests of justice, which includes of course providing a defendant with a fair trial, to determine whether he will afford to the police the protection sought. At the heart of this problem is the desirability, as far as that can properly be given, of reassuring people who are asked to help the police that their identities will never be disclosed lest they become the victims of reprisals by wrongdoers for performing a public service.
The minimum evidential requirements seem to us to be the following. (a) The police officer in charge of the observations to be conducted, and no one of lower rank than a sergeant should usually be acceptable for this purpose, must be able to testify that beforehand he visited all observation places to be used and ascertained the attitude of occupiers of premises, not only to the use to be made of them but also to the possible disclosure thereafter of the use made and facts which could lead to the identification of the premises thereafter and of the occupiers. He may, of course, in addition inform the court of difficulties, if any, usually encountered in the particular locality of obtaining assistance from the public. (b) A police officer of no lower rank than a chief inspector must be able to testify that immediately prior to the trial he visited the places used for observation, the results of which it is proposed to give in evidence, and ascertained whether the occupiers are the same as when the observations took place and, whether they are or are not, what the attitude of those occupiers is to the possible disclosure of the use previously made of the premises and of facts which could lead at the trial to identification of premises and occupiers.
Such evidence will of course be given in the absence of the jury when the application to exclude the material evidence is made. The judge should explain to the jury, as this judge did, when summing up or at some appropriate time before that, the effect of his ruling to exclude, if he so rules.
There are trials waiting to be held, where we have to suppose the requirements of (a) cannot be satisfied or wholly satisfied, because the guidance of this judgment was not available at the material time or times. In that event we think a judge may, according to the quality of the evidence before him under (b), and possibly in part satisfaction of (a), be able properly and safely to exclude evidence of facts sought to be protected.
For the reasons we have given, this appeal is dismissed.
Appeal dismissed.
Solicitors: Crown Prosecution Service.
N P Metcalfe Esq Barrister.
Somasundaram v M Julius Melchior & Co (a firm)
[1989] 1 All ER 129
Categories: TORTS; Negligence: PROFESSIONS; Lawyers
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): MAY, STOCKER AND STUART-SMITH LJJ
Hearing Date(s): 4, 5, 6 MAY, 12 JULY 1988
Counsel – Negligence – Immunity – Conduct of criminal or civil proceedings – Impugning decision of court of competent jurisdiction – Whether action against barrister or solicitor in respect of conduct of criminal or civil proceedings an abuse of process if it involves attack on decision of court of competent jurisdiction.
Counsel – Negligence – Immunity – Conduct of criminal or civil proceedings – Advice as to plea in criminal proceedings – Barrister’s immunity.
Solicitor – Negligence – Immunity – Immunity when acting as an advocate – Advice as to plea in criminal proceedings – Extent of immunity.
Following an incident in which he stabbed his wife during an argument, the plaintiff was charged with unlawful and malicious wounding. He instructed his solicitors that he intended to plead not guilty but later changed his story. The solicitors arranged a conference with counsel, who advised the plaintiff that on the basis of his revised story he had no defence and that he ought to plead guilty, which he did. He was sentenced to two years’ imprisonment, which was reduced on appeal to 18 months. The plaintiff brought an action for damages for negligence against his solicitors alleging, inter alia, that he had been overpersuaded by them to change his story by suggestions that a guilty plea would improve his position in matrimonial proceedings between him and his wife. The master ordered the plaintiff’s action to be struck out on the ground that it disclosed no reasonable cause of action and was frivolous and vexatious and an abuse of process. On appeal the master’s decision was upheld by the judge. The plaintiff appealed to the Court of Appeal.
Held – An action for negligence against a barrister or solicitor in respect of the conduct of either criminal or civil proceedings would be struck out if it involved an attack on the decision of a court of competent jurisdiction. Accordingly, the plaintiff’s action against his solicitors was an abuse of process since it necessarily involved an attack on the conviction in the Crown Court which was upheld by the Court of Appeal. The appeal would therefore be dismissed (see p 133 c d, p 136 b to d and p 137 b, post); Hunter v Chief Constable of West Midlands [1981] 3 All ER 727 applied; dicta of Lord Reid and Lord Morris in Rondel v Worsley [1967] 3 All ER 993 at 1000, 1012–1013 and Saif Ali v Sydney Mitchell & Co (a firm) [1978] 3 All ER 1033 considered.
Per curiam. Immunity from suit in respect of advice given to a client as to his plea in criminal proceedings is so intimately connected with the conduct of the cause in court that it is covered by the immunity applying to the conduct of litigation and such immunity extends not only to barristers but also to solicitors when acting as advocates, but it does not apply to solicitors when a barrister has also been engaged to advise, although in practice a solicitor’s advice on plea which results in a decision of the court or which is subsequently confirmed by counsel could not give rise to liability on the part of the solicitor (see p 136 e f and p 137 a b, post).
Notes
For immunity from suit in the conduct of litigation, see 3 Halsbury’s Laws (4th edn) para 1194, and for cases on the subject, see 3 Digest (Reissue) 786–787, 4875–4879.
Page 130 of [1989] 1 All ER 129
For a solicitor’s liability to a client for negligence, see 44 Halsbury’s Laws (4th edn) paras 135–137, and for cases on the subject, see 44 Digest (Reissue) 132–135, 1306–1361.
Cases referred to in judgment
Hunter v Chief Constable of West Midlands [1981] 3 All ER 727, [1982] AC 529, [1981] 3 WLR 906, HL; affg sub nom McIlkenny v Chief Constable of West Midlands Police Force [1980] 2 All ER 227, [1980] QB 283, [1980] 2 WLR 689, CA.
Ladd v Marshall [1954] 3 All ER 745, [1954] 1 WLR 1489, CA.
Rees v Sinclair [1974] 1 NZLR 180, NZ CA.
Reichel v Magrath (1889) 14 App Cas 665, HL.
Rondel v Worsley [1967] 3 All ER 993, [1969] 1 AC 191, [1967] 3 WLR 1666, HL; affg [1966] 3 All ER 657, [1967] 1 QB 443, [1966] 3 WLR 950, CA.
Saif Ali v Sydney Mitchell & Co (a firm) [1978] 3 All ER 1033, [1980] AC 198, [1978] 3 WLR 849, HL.
Stephenson v Garnett [1898] 1 QB 677, CA.
Cases also cited
Evans v London Hospital Medical College [1981] 1 All ER 715, [1981] 1 WLR 184.
Hill v Chief Constable of West Yorkshire [1987] 1 All ER 1173, [1988] QB 60, CA; affd [1988] 2 All ER 238, [1988] 2 WLR 1049, HL.
Jones v Dept of Employment [1988] 1 All ER 725, [1988] 2 WLR 493, CA.
Meah v McCreamer [1985] 1 All ER 367.
R v Foster [1984] 2 All ER 679, [1985] QB 115, CA.
R v Lee [1984] 1 All ER 1080, [1984] 1 WLR 578, CA.
R v Smith (Martin) [1974] 1 All ER 651, [1975] QB 531, CA.
S (an infant) v Manchester City Recorder [1969] 3 All ER 1230, [1971] AC 481, HL.
Scudder v Prothero & Prothero (1966) 110 SJ 248.
Stupple (J W) v Royal Insurance Co Ltd [1970] 3 All ER 230, [1971] 1 QB 50, CA.
Appeal
The plaintiff, Harischandra Christian Thanjan Somasundaram, appealed against the decision of Sir Douglas Frank QC, sitting as a deputy judge of the High Court on 12 November 1986, dismissing his appeal against the decision of Master Hodgson on 21 March 1986 to strike out his writ and statement of claim in his action against the respondents, M Julius Melchior & Co, a firm of solicitors, claiming damages for negligence while acting as his solicitors, on the ground that the claim disclosed no reasonable cause of action and was frivolous and vexatious and an abuse of process. The facts are set out in the judgment of the court.
The appellant appeared in person.
Rupert Jackson QC and Iain Hughes for the respondents.
George Pulman as amicus curiae.
Cur adv vult
12 July 1988. The following judgment was delivered.
MAY LJ. This judgment which has been prepared principally by Stuart-Smith LJ is the judgment of the court.
In April 1982 the appellant was arrested and charged following an incident in which he stabbed his wife during an argument. At his subsequent trial on 5 November 1982 he was indicted on alternative counts of causing grievous bodily harm with intent and unlawful and malicious wounding. He pleaded guilty to the latter count and was sentenced to two years’ imprisonment. On 24 October 1983 his application for leave to
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appeal against conviction was dismissed but his sentence was reduced to one of 18 months’ imprisonment. Throughout these matters the respondents, who are a firm of solicitors, were instructed by and acted for the appellant.
On 4 May 1984 the appellant, acting in person, issued a writ against the respondents for damages for their alleged negligence in acting for him in the matters to which we have referred between April 1982 and February 1984.
On 21 March 1986, on the respondents’ application to Master Hodgson, the latter struck out the appellant’s statement of claim on the ground that it disclosed no reasonable cause of action and that it was frivolous and vexatious and an abuse of the process of the court. The appellant appealed against the master’s order and his appeal came before Sir Douglas Frank QC, sitting as a deputy judge of the High Court in the Queen’s Bench Division, on 12 November 1986. The deputy judge dismissed that appeal. The appellant now appeals to this court asking that the order of the judge should be reversed and that he should be at liberty to continue with this litigation.
As the appellant before us was in person and the points raised by this appeal were potentially important, the court asked for the appointment of an amicus curiae. Mr Pulman of counsel was instructed so to act and we are grateful for the arguments which he presented and for the assistance which he gave to us in the course of the appeal, particularly as he did not consider himself able to support all the arguments addressed to us by counsel for the respondents.
Apart from two other substantial grounds relied on by the respondents both before us and before the judge below, to which we refer later in this judgment, counsel submitted in the first place that the appellant’s claim in this action was clearly frivolous and vexatious on its facts. The original version of the events which he gave to his solicitors, the respondents, was that he had no recollection of picking up the knife with which his wife was stabbed; the incident must either have been an accident or at least the injury caused by him acting in self-defence. On this basis the appellant originally instructed his solicitors that he intended to plead not guilty and to defend the allegations against him on this basis. He subsequently told his solicitors that he wished to change his story; having spoken further to his wife and to his minister he remembered getting the knife himself and hitting his wife on the head with it. In these circumstances the respondents arranged a conference with counsel attended by the appellant. At this, despite considerable questioning by counsel, the appellant stuck to his revised story. Counsel consequently advised him that he had no defence and the appellant decided that he would plead guilty, which in the event he did.
It seems at least possible from the material we have that the appellant changed his story to his solicitors in this way in the hope of achieving some reconciliation with his wife. There were at the time serious matrimonial difficulties and part of the appellant’s case before us, as we were able to understand it, was that as the respondents were acting as his solicitors in the matrimonial proceedings between him and his wife, they were able to exert pressure on him by pointing out, and indeed threatening, what might be the result in the matrimonial proceedings, particularly in so far as the children were concerned, if he, the appellant, did not take their advice. It was in these circumstances, the appellant suggested, that he had been overpersuaded to change his story and plead guilty. It is sufficient to say that there is absolutely no evidence to support such a contention and indeed all the relevant material in our papers is clearly to the contrary.
The appellant has also suggested that his solicitors and counsel failed to put forward various matters of mitigation on his behalf. There is nothing in the papers to suggest that this is so; indeed it is apparent that the respondents did obtain a psychiatric report on the appellant to see if this would be of assistance, but it clearly was not.
In these circumstances we have no doubt that this appellant has no reasonable chance of success in this action on the facts alone and that consequently his claim is truly frivolous and vexatious and should be struck out.
This would be sufficient to dispose of the appeal, but as two other important arguments
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were raised by counsel for the respondents, and dealt with by counsel as amicus curiae, we think that we too should deal with them in this judgment.
The first of these was that this action is an abuse of the process of the court in that the plaintiff is seeking to attack in civil proceedings the final decision of a criminal court of competent jurisdiction. In Hunter v Chief Constable of West Midlands [1981] 3 All ER 727 at 733–734, [1982] AC 529 at 541–542 Lord Diplock, with whose speech the other Law Lords agreed, said:
‘The abuse of process which the instant case exemplifies is the initiation of proceedings in a court of justice for the purpose of mounting a collateral attack on a final decision against the intending plaintiff which has been made by another court of competent jurisdiction in previous proceedings in which the intending plaintiff had a full opportunity of contesting the decision in the court by which it was made. The proper method of attacking the decision by Bridge J in the murder trial that Hunter was not assaulted by the police before his oral confession was obtained would have been to make the contention that the judge’s ruling that the confession was admissible had been erroneous a ground of his appeal against his conviction to the Criminal Division of the Court of Appeal. This Hunter did not do. Had he or any of his fellow murderers done so, application could have been made on that appeal to tender to the court as “fresh evidence” all material on which Hunter would now seek to rely in his civil action against the police for damages for assault, if it were allowed to continue. But since, quite apart from the tenuous character of such evidence, it is not now seriously disputed that it was available to the defendants at the time of the murder trial itself and could have been adduced then had those who were acting for him or any of the other Birmingham bombers at the trial thought that to do so would help their case, any application for its admission on the appeal to the Court of Appeal, Criminal Division, would have been doomed to failure … My Lords, collateral attack on a final decision of a court of competent jurisdiction may take a variety of forms. It is not surprising that no reported case is to be found in which the facts present a precise parallel with those of the instant case. But the principle applicable is, in my view, simply and clearly stated in those passages from the judgment of A L Smith LJ in Stephenson v Garnett [1898] 1 QB 677 and the speech of Lord Halsbury LC in Reichel v Magrath (1889) 14 App Cas 665 which are cited by Goff LJ in his judgment in the instant case. I need only repeat an extract from the passage which he cited from the judgment of A L Smith LJ in Stephenson v Garnett [1898] 1 QB 677 at 680–681: ”… the Court ought to be slow to strike out a statement of claim or defence, and to dismiss an action as frivolous and vexatious, yet it ought to do so when, as here, it has been shewn that the identical question sought to be raised has been already decided by a competent court.” The passage from Lord Halsbury LC’s speech in Reichel v Magrath 14 App Cas 665 at 668 deserves repetition here in full: ”… I think it would be a scandal to the administration of justice if, the same question having been disposed of by one case, the litigant were to be permitted by changing the form of the proceedings to set up the same case again.”’
On the face of it that statement of the law appears to be directly in point. But counsel as amicus curiae submits that it is inconsistent with the law as laid down in the House of Lords in Saif Ali v Sydney Mitchell & Co (a firm) [1978] 3 All ER 1033, [1980] AC 198. In that case it was held that the barrister’s immunity from suit for negligence was not total but only extended so far as was absolutely necessary in the interests of the administration of justice. It was not confined to what was done in court but extended to pre-trial work–
‘where the particular work is so intimately connected with the conduct of the cause in Court that it can fairly be said to be a preliminary decision affecting the way that cause is to be conducted when it comes to a hearing.’
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The quotation is from the judgment of McCarthy P in Rees v Sinclair [1974] 1 NZLR 180 at 187 and was approved by the majority of their Lordships’ House.
In some cases where the barrister gives advice that is not immune from suit under this principle there may be a judgment of a competent court against the plaintiff who wishes to sue the negligent barrister. Counsel as amicus curiae submits that the House of Lords cannot have intended in Hunter’s case to say that such claims were an abuse of the process of the court. He therefore invites this court to deal with the matter solely on the basis of immunity, so that the reconciliation of these difficulties can be left for resolution to the House of Lords. But in our judgment the two decisions are not unreconcilable. In Saif Ali’s case the alleged negligence was failure to sue the correct defendant before the claim was statute-barred. The claims against the allegedly negligent drivers were never considered on their merits. The situation is akin to that which all too commonly occurs where through negligence a writ is not issued in time or proceedings are struck out for want of prosecution. In such cases there is no question of there being a direct or indirect attack on the decision of a court of competent jurisdiction.
It is perfectly possible to reconcile the two decisions on the basis that even if a barrister is not immune from suit, where there has in fact been a decision on the merits by a court of competent jurisdiction public policy requires that that decision should not be impugned either directly or indirectly.
Moreover we find it impossible to accept that Lord Diplock overlooked the implications of the decision in Saif Ali. Not only was the case cited in argument in Hunter’s case but a passage from the speech of Lord Diplock was cited by Goff LJ in the Court of Appeal (see McIlkenny v Chief Constable of West Midlands Police Force [1980] 2 All ER 227 at 250, [1980] QB 283 at 337) on the abuse of the powers of the court. Goff LJ’s judgment was approved in the House of Lords (see [1981] 3 All ER 727 at 736, [1982] AC 529 at 545 per Lord Diplock). The passage cited by Goff LJ was as follows ([1978] 3 All ER 1033 at 1045, [1980] AC 198 at 222–223):
‘Under the English system of administration of justice, the appropriate method of correcting a wrong decision of a court of justice reached after a contested hearing is by appeal against a judgment to a superior court. This is not based solely on technical doctrines of res judicata but on principles of public policy, which also discourage collateral attack on the correctness of a subsisting judgment of a court of trial on a contested issue by retrial of the same issue, either directly or indirectly in a court of co-ordinate jurisdiction … My Lords, it seems to me that to require a court of co-ordinate jurisdiction to try the question whether another court reached a wrong decision and, if so, to enquire into the causes of its doing so is calculated to bring the administration of justice into disrepute.’
Counsel as amicus curiae submitted that it would be an anomaly amounting to an absurdity if a barrister or solicitor could be sued for work in respect of which he is not immune under the principle of Saif Ali, where no decision of a court on the merits was involved, but could not where there was such a decision and the claim involved reopening that decision. But this is no more than saying that the rule involves hardship on the plaintiff in the latter case who cannot sue in respect of the negligence. All decisions that a suit, which would otherwise lie, cannot be brought on the grounds of public policy, involve hardship.
It may be objected that abuse of the process on the basis of a collateral attack on the judgment of another court would have been the short answer to the claim in Rondel v Worsley [1967] 3 All ER 993, [1969] 1 AC 191, whereas in fact it was merely one of the bases on which the barrister’s immunity was founded. Lord Reid put it shortly ([1967] 3 All ER 993 at 1000, [1969] 1 AC 191 at 230):
‘So after the plaintiff’s appeal against conviction had been dismissed by the Court of Criminal Appeal, the whole case would in effect have to be retried in a civil court where the standard of proof is different. That is something one would not contemplate with equanimity unless there is a real need for it.’
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But Lord Morris dealt with it at length ([1967] 3 All ER 993 at 1012–1013, [1969] 1 AC 191 at 248–251):
‘Is it, as a matter of public policy, expedient that actions which involve a searching review almost amounting to a re-trial in different actions of previous actions or cases already concluded should not be allowed? Is the administration of justice (which is so much the concern of the community) better promoted if such actions are not countenanced? If it is recognised that there could be some cases where negligence (as opposed to errors of judgment) could be established, is it nevertheless on a balance of desirabilities wise to disallow the bringing of such cases? In my view, the answer to these questions is that it is in the public interest that such actions should not be brought. In this, as in other aspects of the present case, I find myself in general accord with the judgment of SALMON, L.J. ([1966] 3 All ER 657 at 673, [1967] 1 QB 443 at 514). It will be useful to consider some of the circumstances that would arise if such actions were permitted. If someone has been tried on a criminal charge and has been convicted, it would not be of any purpose for him to assert that his counsel had been unskilful, unless he could prove that he would have been acquitted had his counsel conducted the case with due care and skill. He would have to prove that on a balance of probability. He would, however, only have been convicted if the jury had been sure that his guilt had been established. If he asserts that, had his counsel asked some more questions than he did ask, the jury in the criminal case or the magistrates would have acquitted him, would he be entitled in his negligence action to call as witnesses the members of the jury or the members of the bench of magistrates who had convicted him? I have no doubt that it would be against public policy to permit any such course. If there were a conviction by a majority verdict of ten to two, could one of the ten be called to say that had there been further questions put to some witness he would have agreed with the two jurors? Again, that, in my view, would be procedure that ought not to be permitted. If there were a jury in the civil action for negligence they would have to decide whether, on the assumption that the additional questions had been put, there probably would have been an acquittal. Presumably they would have to review all the evidence that had been given in the criminal case. They would either need to have a transcript of it or they would have to hear the witnesses who had previously given evidence. After a period of time the witnesses might not be available. The transcript might not be obtainable. If obtainable it might relate to a trial that had taken not days but weeks to try. Assuming, however, that all the necessary evidence was available and assuming that memories were not dimmed by the passing of time, the civil jury would in effect be required to be engaged in a re-trial of the criminal case. That would be highly undesirable. And supposing that after a criminal trial a person was convicted and then appealed unsuccessfully against his conviction and later brought a civil action against his counsel alleging negligence: if he succeeded, would any procedure have to be devised to consider whether or not it would be desirable to set aside the conviction. The conviction (as in the present case) might have taken place years before. Any sentence of imprisonment imposed might have been served (as in the present case) long before. If in the civil action the suggestion was made that, had there been further evidence called or further questions put in the criminal case, there might have been a disagreement rather than a conviction, this only serves to demonstrate how difficult it would be for a court to decide on a balance of probabilities what the jury in the criminal case would have done had there been different material before them. A trial on a trial would raise speculation on speculation. It may be said that these considerations merely point to the difficulties that would lie in the way of success by a convicted person who brought an action. (The difficulties would be greater in the case of a private prosecutor who, being disappointed by the acquittal of someone who had been prosecuted, brought an action for negligence against prosecuting counsel. Apart from the difficulties of
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proving damage, it would surely be highly undesirable that an issue whether someone was guilty of an offence should be tried in proceedings to which he was not a party.) In my view, the considerations to which I have referred are of deeper and more fundamental significance. The procedure regulating criminal trials and the machinery for appeals in criminal cases is part of the structure of the law. Much of it is statutory. In practice the judges who preside at criminal trials do what they can to ensure that the case of an accused person, whether he is represented or whether he is not, is fairly and adequately presented. If there is an appeal there are rules which regulate the approach of the appeal court, and which apply to such matters as whether evidence will be heard on appeal or whether a new trial will be ordered. In practice it is unlikely that, owing to some want of care, counsel would refrain from calling at the trial a witness who was thought to be dependable and whose testimony would certainly secure an acquittal. It is to be remembered also that an accused person is at liberty to give evidence on his own behalf. A system which is devised so as to provide adequate and reasonable safeguards against the conviction of innocent persons and to provide for appeals must nevertheless aim at some measure of finality. If the system is found not to be adequate then it can be altered and modified: it can be kept continually under review. I cannot think, however, that it would be in the public interest to permit a sort of unseemly excrescence on the legal system whereby someone who has been convicted and has, without success, exhausted all the procedures for appeal open to him should seek to establish his innocence (and to get damages) by asserting that he would not have been convicted at all but for the fact that his advocate failed to exercise due care and skill. Many of these considerations have parallel validity in regard to complaints of lack of care and skill in a civil action. It is true that courts must not avoid reaching decisions merely because there are difficulties involved in reaching them. It may not be impossible in certain circumstances for one civil court to decide that an earlier case in a civil court (one, for example, tried by a judge alone) would have had a different result had some different course been pursued, though in most cases there would be likely to be various difficulties in the way of reaching such a conclusion. It would, in my view, be undesirable in the interests of the fair and efficient administration of justice to tolerate a system under which, as a sort of by-product after the trial of an action and after any appeal or appeals, there were litigation on litigation with the possibility of a recurring chain-like course of litigation.’
In Rondel v Worsley the case seems to have turned on the barrister’s immunity, but it seems to us that these principles of public policy enunciated by Lord Morris stand in their own right and might be applied to a case where no immunity existed.
Counsel as amicus curiae suggested that it might be impossible to argue that a different rule applied to civil and criminal cases, though his submission was that there should be no difference. It may be said that there is a greater public interest in preventing collateral attacks on decisions of criminal courts, than there is in civil cases, since the former involve the public at large, whereas the latter involve only the parties. But this is not so in applications for judicial review and many civil actions have repercussions on those who are not directly parties. There is a greater public interest that a person should not be wrongly convicted of a criminal offence, than that there should be a wrong decision in a civil case. This is reflected in the differing standard of proof and the greater scope for the admission of fresh evidence in a criminal case than in a civil case. Under s 23(1) of the Criminal Appeal Act 1968 the court has a wide discretion to admit further evidence if they ‘think it necessary or expedient in the interests of justice’. In a civil court, the Court of Appeal will only grant leave to adduce further evidence if it is shown that the evidence could not have been obtained with reasonable diligence for use at the trial, that it would probably have an important influence on the result of the case and is credible: Ladd v Marshall [1954] 3 All ER 745, [1954] 1 WLR 1489. These requirements broadly
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correspond to the provisions of s 23(2) of the 1968 Act, which if satisfied require the court to admit the evidence. Thus in a criminal case it may well be easier for an appellant to persuade the Court of Appeal, Criminal Division to quash a conviction on the ground that the verdict is unsafe and unsatisfactory, or to grant a retrial because through the negligence of the appellant’s solicitor important evidence was not available at the trial, than it would be for an appellant in a civil appeal, who would not normally be able to surmount the hurdle in Ladd v Marshall of showing that the evidence could not have been obtained with the exercise of reasonable diligence. This would involve hardship and injustice on the civil litigant if he could not sue his solicitor. Both Hunter’s case [1981] 3 All ER 727, [1982] AC 529 and the present involve an attack on the decision of a criminal court and therefore any opinion in relation to the decision of a civil court is not strictly necessary. But we cannot read Lord Diplock’s speech in Hunter as confined to criminal cases, especially as the authorities to which he refers are both civil cases. We agree with counsel that it is difficult in principle to draw any distinction between the decision of a criminal court and a civil court.
For these reasons it is in our judgment an abuse of the process of the court for the appellant to bring this action which necessarily involves an attack on the conviction and sentence imposed by the Crown Court and upheld in the Court of Appeal, Criminal Division, subject to the reduction in sentence.
The remaining ground on which counsel for the respondents submits that the action should be struck out is on the ground that the respondents are immune from suit in respect of the allegations in the statement of claim and the action is therefore bound to fail. This submission was supported by counsel as amicus curiae. Both counsel submit, rightly in our judgment, that advice as to a plea is something which is so intimately connected with the conduct of the cause in court that it can fairly be said to be a preliminary decision affecting the way that the cause is to be conducted when it comes to a hearing, within the test proposed by McCarthy P in Rees v Sinclair [1974] 1 NZLR 180 and approved by the House of Lords in Saif Ali’s case [1978] 3 All ER 1033, [1980] AC 198. Indeed it is difficult to think of any decision more closely so connected. Counsel submitted that such immunity must therefore extend to solicitors and he relied on passages in the speeches of their Lordships in Rondel v Worsley [1967] 3 All ER 993, [1969] 1 AC 191 to this effect. But to our minds it is clear that in extending the immunity to solicitors, their Lordships limited it to the occasions when they were acting as advocates, as of course they frequently do in the magistrates’ courts and county courts and occasionally in those Crown Courts where they have rights of audience. Lord Reid said ([1967] 3 All ER 993 at 1001, [1969] 1 AC 191 at 232):
‘There are differences between the position of barristers and solicitors; not all the arguments which I have adduced apply to solicitors. But the case for immunity of counsel appears to me to be so strong that I would find it difficult to regard those differences as sufficient to justify a different rule for solicitors. I have already shown that solicitors have the same absolute privilege as counsel when conducting a case. So my present view is that the public interest does require that a solicitor should not be liable to be sued for negligence in carrying out work in litigation which would have been carried out by counsel if counsel had been engaged in the case.’
(See also [1967] 3 All ER 993 at 1024, 1035, [1969] 1 AC 191 at 267, 284 per Lord Pearce and Lord Upjohn.)
Counsel as amicus curiae submitted that in a case where there was both solicitor and barrister, it would be anomalous if the immunity in relation to advising on plea extended to the barrister, but not to the solicitor. That may be so; but we would not be willing to extend the immunity that protects barristers and solicitors qua advocates any further than is necessary in the interests of justice and public policy. Thus we are not persuaded in this case that the action should be struck out on the grounds of immunity from suit, in so far as this is a separate heading from the first ground.
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In practice of course it makes no difference, because in a criminal case advice on plea is likely to result in a decision of the court, which would first have to be upset by the proper appeal process before any action for damages could be sustained. Moreover where, as here, the advice as to plea was later confirmed by counsel, any action against the solicitor would almost certainly be bound to fail either on the ground that the solicitor has also been advised by counsel and was not negligent or, as a matter of causation, counsel’s intervention broke any link between the solicitor’s advice and the eventual plea.
For these reasons we think that the judge was right in the conclusion he reached and this appeal is dismissed.
Appeal dismissed. Leave to appeal to House of Lords refused.
Solicitors: Reynolds Porter Chamberlain (for the respondents); Treasury Solicitor.
Carolyn Toulmin Barrister.
Public Disclosure Commission v Isaacs
[1989] 1 All ER 137
Categories: COMMONWEALTH; Commonwealth Countries: ADMINISTRATIVE LAW
Court: PRIVY COUNCIL
Lord(s): LORD BRIDGE OF HARWICH, LORD BRANDON OF OAKBROOK, LORD BRIGHTMAN, LORD GRIFFITHS AND LORD ACKNER
Hearing Date(s): 16 MAY, 20 JUNE 1988
Natural justice – Hearing – Duty to hear parties etc – Bahamas Public Disclosure Commission – Complaint as to incomplete declarations of financial affairs – Whether complainant entitled to be given opportunity to rebut finding of commission – Public Disclosure Act 1976(Bahamas).
The complainant, the Leader of the Opposition in the Bahamas, made a complaint to the Bahamas Public Disclosure Commission that the Prime Minister of the Bahamas had made incomplete declarations as to his financial affairs for the years 1977 to 1982, contrary to the Public Disclosure Act 1976. The commission investigated the complaint and held that it had not been substantiated. The complainant sought an order of certiorari to quash the commission’s decision but his application was dismissed. On appeal the Bahamas Court of Appeal granted the application on the ground that the complainant had not been given an opportunity of rebutting the commission’s finding before it announced its decision. The commission appealed to the Privy Council. The complainant contended that once the commission formed the opinion under the Act that a complaint should be investigated it was obliged to give the complainant the opportunity not only to lay before it whatever factual material he relied on, but also to controvert, refute or rebut any case made to the commission by the declarant in answer to the complaint.
Held – Since the commission’s procedure under the 1976 Act was inquisitorial rather than adversarial the commission was not required by the rules of natural justice to give a complainant the opportunity of rebutting a finding that the complaint made against the declarant had not been made out before the commission reached its decision. It followed that the commission was entitled to find that the complaint had not been substantiated. The appeal would accordingly be allowed (see p 141 e f and p 141 h to p 142 a h, post).
Dictum of Lord Denning MR in Selvarajan v Race Relations Board [1976] 1 All ER 12 at 19 considered.
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Notes
For the right to a hearing, see 1 Halsbury’s Laws (4th edn) para 76, and for cases on the subject, see 1(1) Digest (Reissue) 200–201, 1172–1176.
Case referred to in opinion
Selvarajan v Race Relations Board [1976] 1 All ER 12, [1975] 1 WLR 1686, CA.
Appeal
The Public Disclosure Commission appealed with leave of the Court of Appeal of the Bahamas against the judgment of the Court of Appeal (Luckhoo P, Henry and Smith JJA) given on 27 February 1986 allowing an appeal by the respondent, Kendal G L Isaacs QC, from the judgment of Georges CJ dated 5 July 1985 in the Supreme Court whereby he dismissed the respondent’s application for an order of certiorari to quash the decision of the commission made on 20 December 1984 and published in the Official Gazette dated 18 January 1984 that the complaint made by the respondent on 2 October 1984 that the Prime Minister of the Bahamas, the Rt Hon Sir Lynden Pindling KCMG, had failed to declare various payments made to him in declarations under the Public Disclosure Act 1976 was unsubstantiated, and for an order of mandamus directed to the commission to rehear the complaint. The facts are set out in the judgment of the Board.
Mark Littman QC and Michael Hamilton (of the Bahamas Bar) for the commission.
Robin Potts QC and David Mabb for the respondent.
20 June 1988. The following opinions was delivered.
LORD BRIDGE. The Public Disclosure Act 1976 requires senators and the members of Parliament in the Commonwealth of the Bahamas to make disclosure to the Public Disclosure Commission (the Commission) of their financial affairs. In October 1984 the respondent to the present appeal, Mr Kendal Isaacs QC, the Leader of the Opposition, made a formal complaint to the commission that for each of the years 1977 to 1982 the declarations made under the Act by the Prime Minister, Sir Lynden Pindling, relating to his financial affairs had been incomplete. The commission investigated the complaint and on 20 December 1984 reached the conclusion that it was not substantiated. A notice to that effect was in due course published in the Official Gazette.
In April 1985 the respondent instituted proceedings for judicial review, applying for orders of certiorari to quash the commission’s decision and mandamus to require it to hear his complaint according to law. The application was dismissed by Georges CJ on 5 July 1985. This decision was unanimously reversed by the Court of Appeal (Luckhoo P, Henry and Smith JJA) on 27 February 1986, who granted the orders of certiorari and mandamus sought. The commission now appeals to Her Majesty in Council pursuant to leave granted by the Court of Appeal on 21 October 1986.
It appears from the affidavit of the respondent sworn in support of his application that in November 1983 the Governor General of the Commonwealth of the Bahamas appointed a commission of inquiry to inquire into drug trafficking between the Bahamas and the United States of America and other ancillary matters. It is important to emphasise that their Lordships know nothing of the proceedings of that commission of inquiry and are in no way concerned with its subject matter. The only relevance of the commission of inquiry is that the factual basis of the complaint made to the commission by the respondent was a statement by one Inspector Richter relating to the financial affairs of Sir Lynden Pindling which was exhibited to the respondent’s affidavit as representing the evidence given by Inspector Richter to the commission of inquiry. Again it must be noted that the issues which arise for determination in this appeal do not require their Lordships to examine the factual material contained in Inspector Richter’s statement, still less to pass any judgment on it. The fact that the present proceedings arise from a
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dispute between the Prime Minister and the Leader of the Opposition in the Commonwealth of the Bahamas of a somewhat dramatic character is of no relevance to the appeal and their Lordships are certainly not required, nor are they in any position, to pronounce on the merits of that dispute. The only issues their Lordships have to decide are whether the procedure followed by the commission in investigating the respondent’s complaint contravened in any way the provisions of the Act or can otherwise be impugned as failing to conform to procedural standards applicable in accordance with established principles of public law.
It is common ground that the object of the Act is the maintenance of probity in public life. Sections 4 and 5 require every senator and member of Parliament to make an annual declaration to the commission in a prescribed form disclosing the assets, income and liabilities of himself and his family. The critical sections on which the issues in the appeal primarily depend are ss 6, 7 and 8 which provide as follows:
‘6.–(1) The Commission shall examine every declaration furnished to it and may request from a Senator or Member of Parliament any information or explanation relevant to a declaration made by him, which in its opinion, would assist it in its examination.
(2) Where upon an examination under subsection (1) the Commission is satisfied that a declaration has been fully made, it shall publish a summary of that declaration in the Gazette in the form prescribed by Form B in the Second Schedule.
(3) Where the Commission publishes a summary of a declaration under section (2) any person may make a written complaint to the Commission in relation to that summary.
7.–(1) Where—(a) upon an examination under section 6(1) the Commission is not satisfied that a declaration has been fully made and is of the opinion that further investigation is necessary; or (b) after a summary of a declaration has been published in the Gazette under section 6(2) and any person makes a written complaint to the Commission in relation to that summary and the Commission, after consideration of the complaint, is of the opinion that the complaint should be investigated, the Commission may—(i) in writing request the Senator or Member of Parliament concerned or the complainant to furnish such further information or documents as it may require, within such time as it may specify; (ii) in writing require the Senator or Member of Parliament concerned to attend on the Commission at such time as may be specified by the Commission; (iii) make such independent inquiries and investigation relating to the declaration or complaint as it thinks necessary; (iv) summon witnesses, require the production of documents and do all such things as it considers necessary or expedient for the purpose of carrying out its functions; and (v) in respect of paragraph (b), in addition, summon the complainant, hear the complainant, (who may be represented by a counsel and attorney), and any witnesses of the complainant in support of the complaint.
(2) Where a Senator or Member of Parliament is required to attend on the Commission pursuant to subsection (1), he shall have the right to be accompanied, and represented by a counsel and attorney for the purpose of such enquiry, and may require the Commission to summon such witnesses as he thinks necessary.
8.–(1) Where—(a) any person fails to furnish the Commission with a declaration which he is required to furnish in accordance with this Act; or (b) the Commission examines a declaration and any related information or documents, or conducts an enquiry into any such declaration or into a complaint made in respect of any summary of a declaration and is not satisfied with any aspect thereof, the Commission shall report the matter (setting out such details and particulars as the Commission in its discretion thinks fit) to the Prime Minister and the Leader of the Opposition.
(2) The Prime Minister or the Leader of the Opposition, when a report is made pursuant to subsection (1), may—(a) publish by way of communication to the
Page 140 of [1989] 1 All ER 137
House of Assembly any information furnished to him by the Commission; (b) cause to be published to the Senate any information furnished to him by the Commission; (c) authorise the furnishing of any information furnished to him by the Commission to the Attorney-General or the Commissioner of Police.
(3) Where the Commission after conducting an enquiry in accordance with section 7(1) into any complaint made under section 6(3) is satisfied that the complaint is groundless or has not been substantiated it shall publish a statement in the Gazette to that effect, and in addition, where the complaint is groundless, the Commission shall report the matter to the Attorney General.’
Section 10 imposes a duty on the commission and its staff to treat all documents and information relating to a declaration as secret and confidential and prohibits their disclosure otherwise than as authorised by or for the purposes of the Act. Section 13 makes it a criminal offence, inter alia, to make ‘any frivolous, vexatious or groundless complaint to the Commission in relation to a summary of a declaration’.
As already indicated, the respondent, in making his complaint to the commission, relied on the factual material contained in the statement of Inspector Richter as showing that the Prime Minister had failed to make proper disclosure in his statutory declarations under s 4 of the Act for the years 1977 to 1982. He did not then suggest, nor has it at any time been suggested in the course of the proceedings, that he had any additional relevant factual material which he was in a position to put before the commission in support of his complaint.
The procedure of the commission in investigating the complaint is described by the chairman of the commission in an affidavit as follows:
‘4. On 27 November, 1984 the Commission of which I was a member and the Chairman commenced consideration of the complaint pursuant to our duty under section 7 of the Public Disclosure Act, 1976.
5. On considering the complaint we enquired into the matters complained of and on November 29th, 1984 we called upon Sir Lynden Pindling for clarification and explanation as to particular aspects of his declaration to the Commission for the years 1977 to 1983 inclusive.
6. On December 13th, 1984 the Commission received explanations and answers from Sir Lynden Pindling, and the Commission continued its consideration of and enquiry into the complaint.
7. On December 20th, 1984 the Commission concluded its consideration and enquiry. The decision of the Commission was that the complaint had not been substantiated.’
The deponent to this affidavit was not cross-examined.
No issue was raised in argument before the board turning on the construction of any of the detailed provisions of the statute and, in particular, it was common ground that the several powers conferred on the commission by s 7(1)(i) to (v) of the Act are discretionary. The essence of the attack on the procedure of the commission mounted on behalf of the respondent was in the submission that, either as a matter of construction arising from a consideration of the underlying purpose of the Act or as a matter of procedural fairness to a complainant, once the commission formed the opinion under s 7(1)(b) that a complaint should be investigated, it was obliged to give the complainant the opportunity not only to lay before it whatever factual material he relied on, but also to controvert, refute or rebut any case made to the commission by the declarant in answer to the complaint.
At the outset, their Lordships express their agreement with Georges CJ that if the commission was provisionally minded to find a complaint frivolous, vexatious or groundless and, in so reporting to the Attorney General under s 8(3), to expose the complainant to the risk of prosecution for an offence under s 13, it would have to indicate
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to the complainant the reasons for their provisional view and give him a fair opportunity, at an oral hearing if he so wished, to demonstrate that its provisional view was unfounded and that he had at least good grounds for making the complaint. But such a question would ordinarily arise before the commission ever called on the declarant to meet or answer the complaint and in any event does not arise in this case.
It is important, in their Lordships’ judgment, to appreciate the implications of the case made for the respondent. Counsel for the respondent, in presenting the argument, appeared reluctant to go further than saying that the commission, having received from a declarant his answer to a complaint, must reveal to the complainant the gist of that answer. Their Lordships find it difficult to understand how this would significantly advance the matter or how merely being told the gist of the declarant’s answer would assist a complainant in making good his complaint. In their Lordships’ judgment there can really be no half-way house in this matter. Once the complainant has laid before the commission all the material on which he relies in support of the complaint, the ensuing procedure must take one of two courses. One alternative is that the commission should conduct its investigation of the complaint wholly in private as a purely inquisitorial body making whatever further inquiry it thinks necessary into the material furnished by the complainant, calling for any answers and explanations it requires from the declarant and reaching its own conclusions. The other alternative is that the procedure on investigation of a complaint should take on a fully adversarial character treating the complainant and the declarant as parties to a lis, each having an equal opportunity to challenge and comment on the cases made by the other, with the commission simply adjudicating between them.
Their Lordships think that there are clear indications in the statute that it was the inquisitorial, not the adversarial, procedure which the legislature contemplated. First, it is to be noted that a full investigation into the declaration made by a senator or member of Parliament may be undertaken by the commission either of its own motion under s 7(1)(a) before it publishes any summary or after publication of the summary on receipt of a complaint under s 7(1)(b). The discretionary powers available to it in either case, save those expressly referring to the complainant, are the same. It is difficult to see why the procedure should be fundamentally different in the one case than in the other. If evidence casting doubt on the sufficiency of a declaration comes to the attention of the commission before it publishes any summary, it may investigate it fully itself and reach the conclusion that the declaration is nevertheless satisfactory. If then, after publication of the commission’s summary, exactly the same evidence is submitted to them in support of a complaint, it may properly form the opinion under s 7(1)(b) that, the matter having already been investigated, no further investigation is necessary. This was rightly conceded by counsel for the respondent in argument. It underlines the difficulty of construing the statute as requiring fundamentally different procedures to be followed by the commission in investigating the selfsame material according to whether it reaches it before it publishes any summary or after publication by way of complaint.
But a second and perhaps even more formidable obstacle to a construction which would require the commission to afford to every complainant the rights of a party litigant is that this would necessarily undermine the provisions protecting the secrecy and confidentiality of information which senators and members of Parliament may have to disclose to the commission in relation to their private affairs. The publication of the summary for which s 6(2) and Sch 2 to the Act make provision is already a substantial and no doubt necessary invasion of privacy. But the legislature have provided by s 10 that the possibly intimate and more far reaching information relating to the private affairs of a declarant and his family which he may have to disclose to the commission in the course of an investigation under s 7 shall be protected from public scrutiny. An adversarial procedure would destroy that protection by making such information available to a complainant who could not then be prevented from disseminating it further.
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Accordingly, so far from supporting the respondent’s contention, a construction of the Act in the light of its underlying purpose appears to their Lordships to weigh heavily against it.
The respondent succeeded in the Court of Appeal on the alternative ground that the so-called audi alteram partem rule applied. The principle underlying the rule is clearly expressed in the judgment of Lord Denning MR in Selvarajan v Race Relations Board [1976] 1 All ER 12 at 19, [1975] 1 WLR 1686 at 1693–1694, where he said:
‘In recent years we have had to consider the procedure of many bodies who are required to make an investigation and form an opinion … In all these cases it has been held that the investigating body is under a duty to act fairly; but that which fairness requires depends on the nature of the investigation and the consequences which it may have on persons affected by it. The fundamental rule is that, if a person may be subjected to pains or penalties, or be exposed to prosecution or proceedings, or deprived of remedies or redress, or in some such way adversely afflicted by the investigation and report, then he should be told the case made against him and be afforded a fair opportunity of answering it.’
With respect to the Court of Appeal, their Lordships do not think that this principle has any application to a complainant under the Act, save in the case already considered and not here applicable where the commission is minded to report to the Attorney General under s 8(3) that the complaint was groundless. In any other case the complainant is not liable to be subjected to any pains or penalties or exposed to prosecution. He is not seeking to enforce any private right, so there is no question of depriving him of any remedies or redress to which he may be entitled. He is acting as a public spirited citizen in giving information to the commission to assist it in the performance of its public duty. Any personal or political interest he may have in the outcome is irrelevant. He cannot be ‘told the case made against him and afforded a fair opportunity of answering it’ because no case is made against him; it is he who makes a case against the declarant. It was submitted for the respondent that he was adversely affected by the publication in the gazette of the commission’s conclusion that his complaint was not substantiated. Their Lordships cannot accept that this is a matter of sufficient weight to prevail against the countervailing considerations to which attention has already been directed. The language used in the statute distinguishing between complaints which are frivolous, vexatious or groundless on the one hand and complaints which are not substantiated on the other may be open to misunderstanding by uninformed members of the public. But on the true construction of the statute a finding that a complaint has not been substantiated connotes no more than that, when investigated and considered in the light of all available evidence, the complaint was not made out. Such a finding casts no adverse reflection on the complainant. Any person making a complaint under s 7(1)(b) must be presumed to know that, although made in good faith and on sufficient grounds, his complaint may fail because it can be successfully rebutted and that this will lead to a published statement by the commission that it was not substantiated.
For these reasons their Lordships will humbly advise Her Majesty that the appeal should be allowed, the order of the Court of Appeal set aside and the order of Georges CJ restored. The respondent must pay the commission’s costs in the Court of Appeal and before the Board.
Appeal allowed.
Solicitors: Charles Russell Williams & James (for the commission); Simmons & Simmons (for the respondent).
Mary Rose Plummer Barrister.
R v North Yorkshire County Council, ex parte M
[1989] 1 All ER 143
Categories: FAMILY; Children
Court: QUEEN’S BENCH DIVISION, (CROWN OFFICE LIST)
Lord(s): EWBANK J
Hearing Date(s): 1, 2 SEPTEMBER 1988
Children and young persons – Care proceedings in juvenile court – Guardian ad litem – Local authority’s duty to disclose changes in child’s circumstances to guardian ad litem – Local authority deciding to place child for adoption without informing guardian ad litem – Whether local authority under duty to disclose changes in child’s circumstances to guardian ad litem – Whether local authority’s decision should be quashed – Magistrates’ Courts (Children and Young Persons) Rules 1970, r 14A(6)).
Care of a little girl aged seven who had been indecently assaulted by her father was granted to the local authority by the juvenile court pursuant to s 1 of the Children and Young Persons Act 1969. The local authority took the view that the child should never be returned to the care of the parents and decided that it was in the best interests of the child for her to be adopted, initially with the parents having access. The parents applied for the care order to be discharged and the juvenile court appointed a guardian ad litem to act for the child in those proceedings. Before the application to discharge the order was heard the local authority, without informing the guardian ad litem, decided to implement a proposal to place the child for adoption without access to the parents. The parents applied for judicial review of the local authority’s decision on the ground that it pre-empted the juvenile court’s decision on the parents’ application to discharge the care order.
Held – The prejudice caused to the parents by the local authority’s decision and the influence it would have on the juvenile court’s decision was not sufficiently serious to merit setting aside the local authority’s decision. However, arising out of the guardian ad litem’s duty under r 14A(6) a of the Magistrates’ Courts (Children and Young Persons) Rules 1970 to safeguard the interests of the child and to investigate the circumstances of the case, there was implied on the local authority a corresponding and reciprocal duty to disclose to the guardian ad litem any proposed major changes in the child’s circumstances and to consider the guardian ad litem’s views before implementing those changes, and since the local authority had failed to inform the guardian ad litem of their decision that failure had flawed the local authority’s decision. The application for judicial review would therefore be granted (see p 146 d to f h j, post).
Dictum of Sir Stephen Brown P in R v Birmingham Juvenile Court, ex p G and ors (minors) [1988] 3 All ER 726 at 732 applied.
Notes
For the procedure in care proceedings, see 24 Halsbury’s Laws (4th edn) paras 764–765, and for cases on the subject, see 28(2) Digest (Reissue) 944–945, 2447–2451.
For the Children and Young Persons Act 1969, s 1, see 6 Halsbury’s Statutes (4th edn) 229.
For the Magistrates’ Courts (Children and Young Persons) Rules, r 14A, see 4 Halsbury’s Statutory Instruments (Grey Volume) 238.
Page 144 of [1989] 1 All ER 143
Cases referred to in judgment
R v Birmingham Juvenile Court, ex p G and ors (minors) [1988] 3 All ER 726, [1988] 1 WLR 950.
R v Newham London Borough, ex p McL [1988] 1 FLR 416.
Cases also cited
Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223, CA.
Application for judicial review
The parents of a child, BM, applied, with the leave of Hollings J given on 16 August 1988, for judicial review by way of an order of certiorari to quash the decision of the North Yorkshire County Council to place BM with long-term foster parents with a view to adoption, on the grounds that the manner in which the decision had been made had been unfair and/or irrational. Hollings J also granted an injunction restraining the local authority from implementing their decision pending the hearing of the applicants’ application to discharge a care order granted on 31 March 1987. The facts are set out in the judgment.
Brian Jubb for the applicants.
Allan Levy for the guardian ad litem.
Caroline Budden for the local authority.
2 September 1988. The following judgment was delivered.
EWBANK J. This is an application for judicial review of a decision made by a local authority to place a child, BM (whom I shall call ‘B’), for adoption during the course of juvenile court proceedings relating to that child. Leave was sought to issue the application for judicial review. That came before Hollings J on 16 August 1988. He granted leave. He granted an injunction restraining the local authority from implementing their decision for the time being, and he recommended the local authority to consider taking wardship proceedings. This recommendation follows the suggestion made by Latey J in R v Newham London Borough, ex p McL [1988] 1 FLR 416. The local authority have declined to start wardship proceedings, and so the juvenile court proceedings will continue.
B was born on 15 February 1981. She is now seven and a half. Her father is now 47 and her mother is 50. They were married in 1978. The father had a conviction in 1970 for indecency with children. In November of 1985 he was again charged with an indecent assault on two little girls. B was put on the ‘at risk’ register of the local authority. The father was convicted of the offence on 12 December 1985 and put on probation with a condition for psychiatric treatment.
Concern was felt about B over the ensuing months. The father was eventually charged with an offence against her. A place of safety order was made in relation to the child on 5 December 1986, and on 8 December 1986 B was moved to a foster placement. On 27 January 1987 the father was convicted of an offence of indecency with B. Care proceedings were started. Various interim care orders were made in favour of the local authority. The case came for hearing on 31 March 1987. A care order was made in favour of the local authority. The local authority’s plan at that time was that B should remain in long-term care with foster parents, with access to the parents. It was the local authority’s view that, in the circumstances, there could be no reunion of B with the parents.
On 4 December 1987 the local authority decided that adoption would be appropriate for B. They had already come to the conclusion that it would never be safe to return her to the care of her parents. They proposed to look for a family who would accept B having access to her parents.
The parents were informed of the local authority’s decision on 7 January 1988. It was implicit in the decision that circumstances might arise when access would have to stop.
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It was in those circumstances that the parents, on 18 January 1988, applied for the discharge of the care order. That is an application which is made under s 21 of the Children and Young Persons Act 1969. The ground on which a care order can be discharged is if the juvenile court is satisfied that it is appropriate to do so. Having regard to the father’s history as a child sexual molester, the proposal that the care order should be discharged must have sounded somewhat unpromising, but the father and mother are entitled in law to make the application.
In the spring of 1988, the local authority became concerned about the foster placement. On 6 May 1988 B was moved to a second foster home. On 24 July 1988 she was moved to a third foster home. This was a short-term foster placement.
When the application for discharge of the care order was made, the juvenile court ordered that a guardian ad litem should act for B. The order was made under s 32A of the Children and Young Persons Act 1969. The duties of the guardian ad litem are set out in s 32B. This provides that a guardian ad litem shall be under a duty to safeguard the interests of the child in the manner prescribed by rules of court. The rules of court are the Magistrates’ Courts (Children and Young Persons) Rules 1970, SI 1970/1792, as amended. The relevant rule is r 14A(6)(a) and (b), which provides:
‘The guardian … shall—(a) so far as it is reasonably practicable, investigate all circumstances relevant to the proceedings and for that purpose shall interview such persons, inspect such records and obtain such professional assistance as the guardian ad litem thinks appropriate; (b) regard as the first and paramount consideration the need to safeguard and promote the infant’s best interests until he achieves adulthood, and shall take into account the wishes and feelings of the infant … ’
Mrs Wakefield was the guardian duly appointed.
On 20 May 1988 the question of B came to be considered by the adoption panel of the local authority. The local authority had not found it possible to find a permanent family on the basis of access to the parents. The panel decided to recommend that access to the parents should be phased out with a view to termination, and that B should be placed for adoption. It is submitted on behalf of the parents that that decision is amenable to judicial review. In fact there was no decision to implement that recommendation until later. I am of the view that the decision itself is unobjectionable.
The local authority knew that the guardian ad litem took a different view. They decided to take the opinion of Dr Wollkind who is the consultant child psychiatrist at the Maudsley Hospital. His report was prepared some time in July 1988. He agreed, in effect, with the decision of the local authority.
B’s case came before the adoption panel again on 5 August 1988. On this occasion the panel decided to implement the original decision and to start the process of introductions preceding the placement. The decision was indorsed and made final by the director of social services on 8 August.
Meanwhile, the application to discharge the care order had been trundling along in the juvenile court with various adjournments asked for by the guardian ad litem, agreed to by the other parties and ordered by the court. The final hearing is due on 21 September 1988. So, the decision to implement the proposal that B should be placed for adoption was taken only six weeks away from the hearing which was due. The parents say that this decision was unreasonable and improperly made. They say that the local authority, in coming to that decision, did not take into account the effect of that decision on the forthcoming juvenile court hearing. The parents say that if the local authority had taken account of the forthcoming hearing, they would have seen that instead of presenting the juvenile court with a child being with short-term foster parents, they will be presenting the court with a child being in a placement which was intended to be permanent even though it could be cut short. The parents say that their case before the juvenile court would be seriously prejudiced. They say that the local authority intended to leave the juvenile court with no realistic alternative but to dismiss their application. They also say
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that it is wrong that the local authority should try to tip the scales of justice even further in their favour, and it is as if the local authority could not trust the court to come to the right decision without a little extra help.
The local authority say that the forthcoming hearing was taken into account, and that the decision was made despite the forthcoming hearing because, in the opinion of the local authority, that decision was in the best interests of the child. The local authority point to their duty under s 18 of the Child Care Act 1980, where the local authority are given the duty in reaching any decision relating to a child in their care to give ‘first consideration to the need to safeguard and promote the welfare of the child throughout his childhood’.
On behalf of the parents, it is said that the local authority only had to wait six weeks for the hearing, but the local authority point out that B had already been moved on several occasions and in the interests of B it was time that a potentially secure placement should be found for her. Moreover, they say that the idea that the hearing on 21 September is going to be the end of the line is unrealistic. There has certainly been a hint to the local authority, so I am told, that an appeal will be mounted by the parents if the application fails. So, the local authority say that it is by no means clear when the position will be such that they can be sure that proceedings are at an end.
The move of B to this new placement will, of course, influence the juvenile court because the circumstances will be different from the circumstances that exist at the moment. However, I have come to the conclusion that the local authority are right in thinking that prejudice to the parents is not so serious as to merit their decision being set aside, and that the local authority’s decision to act in accordance with the best interests of the child cannot be faulted.
The matter, however, does not rest there because, on behalf of the parents and on behalf of the guardian ad litem, a further criticism is made of the decision-making process of the local authority. I have already read out the rules governing the duties of a guardian ad litem. The guardian has to investigate all the circumstances and interview such persons as she thinks appropriate. This implies, in my judgment, a corresponding and reciprocal duty on the part of the local authority to disclose to the guardian ad litem any major changes in the circumstances of the child which are proposed. In R v Birmingham Juvenile Court, ex p G and ors (minors) [1988] 3 All ER 726, [1988] 1 WLR 950 Sir Stephen Brown P had to deal with the responsibilities of local authorities and guardians ad litem. The circumstances were very different. The local authority in that case had withdrawn an application against the wishes of a guardian ad litem. Sir Stephen Brown P said ([1988] 3 All ER 726 at 732, [1988] 1 WLR 950 at 957):
‘The local authority has a grave responsibility in the matter of children. It should never have applied to withdraw the proceedings without full consultation with the guardian ad litem who represented the children.’
In my view, the remarks of Sir Stephen Brown P in that case constitute an example of a more general duty. In my judgment, there is a reciprocal duty on the part of the local authority not only to disclose proposals for change in relation to the child, but also to listen to the views of the guardian ad litem. I am not in any way suggesting that the guardian ad litem makes the decisions or in any way is a party to the decisions, but the guardian ad litem is appointed, in accordance with the statute, to safeguard the interests of the child. While a case is in train, the local authority ought not to take any major decisions without informing the guardian ad litem before the decision is made of the proposal and listening to her views. That the local authority have failed to do in this case. They failed to do it on 20 May when the initial decision was made. They failed to do it on 5 August when the decision to implement the proposal was made. In my view, the failure to do this flaws the decision-making of the local authority.
I accordingly come to the conclusion that for that reason the decision must be quashed. An order for certiorari will lie. The application for judicial review succeeds. The
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injunction will continue until such time as the local authority have informed the guardian, so far as it is necessary for any further information to be given, and heard the guardian’s views and taken them into account.
Certiorari granted. Injunction continued.
Solicitors: Wilford McBain agents for Jenkinson & Nott, York (for the applicants); Stamp Jackson & Procter, Selby (for the guardian ad litem); Gillings Walker & Keen, York (for the local authority).
Bebe Chua Barrister.
Birmingham City Council v Anvil Fairs (a firm) and others
[1989] 1 All ER 147
Categories: SALE OF GOODS
Court: CHANCERY DIVISION
Lord(s): SIR NICOLAS BROWNE-WILKINSON V-C
Hearing Date(s): 5, 6 OCTOBER 1988
Markets and fairs – Disturbance – Levying of rival market – Rival market within common law distance – Measurement of common law distance – Whether distance to be measured from place where lawful market held or from boundary of area over which monopoly granted.
The owner of market rights, whether arising under a franchise or under statute, is entitled to protection from disturbance occasioned by the levying of a rival market within the common law distance of 62/3 miles measured from the place where one of the owner’s markets is actually being conducted and not from the boundary of the area within which the owner is authorised to hold markets (see p 149 e f h j and p 150 h, post).
Halton BC v Cawley [1985] 1 All ER 278 and Manchester City Council v Walsh (1985) 84 LGR 1 applied.
Dicta of Earl Selborne LC in Great Eastern Rly Co v Goldsmid (1884) 9 App Cas 927 at 936 and of Griffiths LJ in Manchester City Council v Walsh (1985) 84 LGR 1 at 10 not followed.
Notes
For levying of a rival market within the common law distance, see 29 Halsbury’s Laws (4th edn) para 653, and for cases on the subject, see 33 Digest (Reissue) 227–232, 1890–1936.
Cases referred to in judgment
Birmingham Corp v Perry Barr Stadium Ltd [1972] 1 All ER 725.
Great Eastern Rly Co v Goldsmid (1884) 9 App Cas 927, HL.
Halton BC v Cawley [1985] 1 All ER 278, [1985] 1 WLR 15.
Islington Market Bill, Re (1835) 3 Cl & Fin 513, [1835–42] All ER Rep 323, 6 ER 1530, HL.
Manchester City Council v Walsh (1985) 84 LGR 1, CA.
Stoke-on-Trent City Council v W & J Wass Ltd [1988] 3 All ER 394, CA; rvsg (4 March 1987, unreported), Ch D.
Case also cited
Yard v Ford (1670) 2 Saund 172, 85 ER 922.
Preliminary issue
By a writ and statement of claim dated 1 December 1986 the plaintiffs, Birmingham City Council, sought an injunction restraining the defendants, Anvil Fairs (a firm),
Page 148 of [1989] 1 All ER 147
T Morris Jones, Roger John Smith and Terence O’Connor, from holding a rival market. On 11 February 1988 Master Barratt ordered the trial of a preliminary issue, namely whether the levying of a market by the defendants at the Black Boy Inn, Heronfield, Knowle, Solihull which was within 62/3 miles of the Birmingham City boundary constituted or would constitute an actionable disturbance of the plaintiffs’ market rights within the City of Birmingham notwithstanding that the premises were situate more than 62/3 miles from the markets held at Northfield and Cotteridge or any of the other markets held or licensed by the plaintiff within the City of Birmingham. The facts are set out in the judgment.
Nicholas Patten QC for the plaintiffs.
The defendants did not appear.
6 October 1988. The following judgment was delivered.
SIR NICOLAS BROWNE-WILKINSON V-C. This is a preliminary issue directed to be tried in an action brought by the Birmingham City Council as owner of statutory rights of market against four defendants, who, they allege, have interfered with the plaintiffs’ rights by holding a rival market.
A right of market, whether arising under a franchise or under statute, confers on the owner a monopoly right, that is to say the exclusive right to hold markets within a limited area. In the case of a franchise market, rival markets cannot be held within a distance of 62/3 miles. It appears that the same distance applies in the case of statutory markets. The question I have to determine is whether that distance of 62/3 miles has to be measured from the place at which the plaintiffs’ market or markets are held or from the boundary of the area within which the plaintiffs are authorised to hold markets.
The plaintiffs enjoy an exclusive statutory right to hold markets within the City of Birmingham under s 89 of the Birmingham Corporation (Consolidation) Act 1883 (46 & 47 Vict c lxx). The area of the City of Birmingham is defined by statute. The plaintiffs themselves conduct certain markets within the city boundaries and have licensed many others to conduct markets at various points within the city. By the statement of claim it is alleged that the defendants have conducted rival markets on land at the Black Boy Inn, Heronfield, Solihull. The Black Boy Inn is more than 62/3 miles from the nearest market conducted within the City of Birmingham under the statutory powers. On the other hand, the Black Boy Inn is less than 62/3 miles from the boundary of the City of Birmingham, ie from the boundary of the area within which the plaintiffs have power to establish markets.
It is in those circumstances that a preliminary issue was directed to be tried in these terms:
‘Whether upon the facts and matters set out in the Statement of Claim herein the levying of a market by the Defendants at the Black Boy Inn Heronfield Knowle Solihull which is within 62/3 of the Birmingham City boundary has constituted or would upon proof of special damage constitute an actionable disturbance of the plaintiff‘s market rights within the City of Birmingham notwithstanding that the said premises are situate more than 62/3 miles from the markets held at Northfield and Cotteridge or any of the other markets held or licensed by the plaintiff within the City of Birmingham … ’
Only the third defendant has served a defence; none of the defendants has appeared before me to argue their case. In the circumstances, counsel for the plaintiffs has had the difficult task of presenting not only his clients’ case, but also any points which might assist the defendants. Needless to say, he has performed this function with his usual skill, balance and learning. I am very grateful to him.
Section 89 of the 1883 Act provides as follows, so far as relevant:
‘The market undertaking of the Corporation as it exists at the commencement of this Act including all property rights powers and privileges of the Corporation in
Page 149 of [1989] 1 All ER 147
relation to markets and fairs shall continue vested in and may be held exercised and enjoyed by the Corporation subject to the provisions of this Act and the Corporation shall have the following powers (namely) … (III.) They may continue the markets and fairs held at the commencement of this Act and may from time to time alter the days on which and the places at which the same respectively are or may be held and may establish and hold new markets and cattle fairs but not within the Parish of Edgbaston … ’
There is no doubt that under this section the plaintiffs have the right to establish markets anywhere within the city boundaries. Moreover, it is clear that once a market has been established the plaintiffs have the right to prevent persons from holding rival markets within the protected area. Pennycuick V-C so held in Birmingham Corp v Perry Barr Stadium Ltd [1972] 1 All ER 725, a case in which the defendants had levied a rival market within the City of Birmingham itself.
I will also assume, but without deciding, that the protected area of the statutory market enjoyed by the plaintiffs is the same as in the case of a franchise market, ie that the radius of 62/3 miles applies (see Manchester City Council v Walsh (1985) 84 LGR 1). I will further assume, again without deciding, that even if this radius of 62/3 miles extends outside the boundaries of the city, a rival market conducted outside the city limits but within 62/3 miles of any market can be restrained (see Halton BC v Cawley [1985] 1 All ER 278, [1985] 1 WLR 15).
The question remains: from what point should the distance of 62/3 miles be measured, from the place where one of the plaintiffs’ markets is actually established and conducted, or from the boundary of the area within which the plaintiffs are entitled to establish markets?
There is no decision directly on the point, although there are some obiter dicta to which I must later refer. As a matter of principle it seems to me that the distance falls to be measured from the place at which a market is actually being conducted. Both at common law and under statute the right to establish and conduct a market authorises the market to be established in a defined place or within a defined area, in the present case the City of Birmingham. In addition to the area within which the market may be established, the market owner is given further protection over a wider area, that is to say over an area having a radius of 62/3 miles. The purpose of this wider protection is to protect the market owner from competition for customers who would normally use his market. The source of the 62/3 miles distance appears to be in the writings of Bracton. Bracton treated 62/3 miles as being one-third of the Roman ‘dieta’, a day’s journey (Bract (1640 edn) bk IV ch 46 fo 235a—b). A man going to market should have one third of a day to get to market, one third to attend the market and another third to return home (see Pease ‘Some Early Cases on Disturbance of Market’ (1916) 32 LQR 199 at 203). If the rival market was within 62/3 miles, it would attract customers who might otherwise come to the authorised market. If the authorised market was given a wider protection than 62/3 miles, users of markets would have to spend too long getting to the nearest market. Hence the limit of 62/3 miles.
The whole basis of that rule, unbelievably archaic as it is, is therefore linked to the distance from an actual market, the customers of that market and their ability to get to it. I can see no basis in principle why protection should be afforded to persons who could establish a market in a particular place but have not done so. Unless and until the market is established, they are not losing customers, nor is there any actionable disturbance of the market owner’s rights by holding a rival market (see Nicholls LJ in Stoke-on-Trent City Council v W & J Wass Ltd [1988] 3 All ER 394 at 404). Moreover, if and when the plaintiffs do elect to establish a market within the city boundaries which is within 62/3 miles of the Black Boy Inn, on the assumptions that I have made they will be entitled to restrain the holding of any further markets at the Black Boy Inn (see Peter Gibson J in the Stoke-on-Trent City Council case at first instance (4 March 1987, unreported)).
It has been said many times recently that the statutory monopoly of a market owner is
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anomalous. In my judgment, it should not be extended save if the law compels that conclusion.
What then of the authorities? The latest edition of Pease and Chitty’s Law of Markets and Fairs (3rd edn, 1984) suggests that the 62/3 miles is to be measured from the boundary of the area within which the plaintiffs’ market can be established. The only authority cited for this proposition is very dubious. In Great Eastern Rly Co v Goldsmid (1884) 9 App Cas 927 at 936 Earl Selborne LC said:
‘… market rights according to the general presumption of law would be entitled to a certain amount of protection, primâ facie extending to a distance of nearly seven miles from the places in which they might be exercised … ’
That dictum plainly indicates that it is the distance from the area in which a market is authorised rather than the position in which the market is held. But in that case nothing turned on the point from which the distance should be measured, and I can attach little importance to the formulation that he there uses.
More to the point is the recent Court of Appeal decision in Manchester City Council v Walsh (1985) 84 LGR 1. In that case the defendants were conducting a rival market within the City of Manchester and within 62/3 miles of many markets conducted by the plaintiff corporation. The defendants submitted that the owner of a statutory market did not enjoy any rights of protection other than those conferred by the statute; that is to say, submitted that the 62/3 rule did not apply. In giving the judgment of the Court of Appeal Griffiths LJ said (at 10):
‘In our judgment, this weight of authority must prevail over the view of Pickford L.J. and establish that a statutory market, whether established under a private or public Act, enjoys as a part of the market rights protection from disturbance by a rival market set up within six and two-thirds miles of the boundaries, unless the wording of the relevant statute modifies that right.’
It is clear from that quotation that the Court of Appeal was saying that the distance extended from the boundaries of the area within which the market can be established.
But again, in that case, nothing turned on the point as to the point from which the 62/3 miles fell to be measured, since the rival market was within the city limits and within 62/3 miles of the plaintiffs’ markets. Nor can I recollect any argument being directed to the point in that case.
On the other side, one of the answers given by the judges to the House of Lords in Re Islington Market Bill (1835) 3 Cl & Fin 513 at 515, [1835–42] All ER Rep 323 at 324 expresses the distance to be measured from the site of the old market. Again, nothing turned on the point from which the measurement was to be made in answering the questions put by the House of Lords in the first instance. Subsequent questions did raise the point much more directly, but unfortunately the judges did not choose to answer the further questions.
Accordingly, there is no authority which persuades me that my own view is wrong. I therefore give the answer ‘No’ to the question raised in the preliminary issue, and hold that the distance of 62/3 miles has to be measured, not from the boundaries of the City of Birmingham, but from a market actually being conducted under the statutory powers within those boundaries.
Order accordingly.
Solicitors: Sharpe Pritchard agents for G W T Pitt, Birmingham (for the plaintiffs).
Celia Fox Barrister.
R v Chief Metropolitan Stipendiary Magistrate, ex parte Secretary of State for the Home Department
[1989] 1 All ER 151
Categories: INTERNATIONAL; International Criminal Law
Court: QUEEN’S BENCH DIVISION
Lord(s): STUART-SMITH LJ AND FARQUHARSON J
Hearing Date(s): 16, 17, 18, 27 MAY 1988
Extradition – Committal – Extradition crime – Offence arising out of tax evasion – Whether ordinary offence arising out of tax evasion an extradition crime – Extradition Act 1870, s 10.
N was convicted in Norway of 11 offences of theft, attempted theft, deception, false accounting and forgery for which he was sentenced to a single sentence of five years imprisonment. He escaped from prison and fled to England where he was arrested. The Norwegian government applied for his extradition and the magistrate made an order under s 10a of the Extradition Act 1870 that he be held in custody to await extradition on six of the charges but not on the other five because they were concerned with tax evasion. The Secretary of State applied for judicial review of the magistrate’s decision refusing to commit N on the tax related charges.
Held – Although the courts would not enforce a claim by a foreign state to recover a tax, that did not prevent the courts from extraditing a person for an ordinary offence arising out of tax evasion if that offence was an extradition crime under the 1870 Act. Since the five offences were extradition crimes albeit they arose out of tax evasion the case would be remitted to the magistrate for him to consider whether N should be extradited on those crimes (see p 155 e, p 159 d, p 160 j and p 163 c d f to h).
R v Governor of Pentonville Prison, ex p Khubchandani (1980) 71 Cr App R 241 not followed.
Notes
For extradition crimes, see 18 Halsbury’s Laws (4th edn) paras 213–215, and for cases on the subject, see 24 Digest (Reissue) 1125–1129, 11946–11979.
For the Extradition Act 1870, s 10, see 17 Halsbury’s Statutes (4th edn) 488.
Cases referred to in judgment
Becke v Smith (1836) 2 M & W 191, 150 ER 724.
Brokaw v Seatrain UK Ltd [1971] 2 All ER 98, [1971] 2 QB 476, [1971] 2 WLR 791, CA.
Buchanan (Peter) Ltd v McVey (1951) [1955] AC 516n, Eire HC and SC.
Cia Naviera Vascongada v Cristina [1938] 1 All ER 719, [1938] AC 485, HL.
Denmark (Government) v Nielsen [1984] 2 All ER 81, [1984] AC 606, [1984] 2 WLR 737, HL.
Hellenes (King) v Brostrom (1923) 16 Ll L Rep 167.
Huddersfield Police Authority v Watson [1947] 2 All ER 193, [1947] KB 842, DC.
Huntington v Attrill [1893] AC 150, PC.
India (Government) Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292, [1955] AC 491, [1955] 2 WLR 303, HL.
R v Governor of Pentonville Prison, ex p Khubchandani (1980) 71 Cr App R 241, DC.
R v Greater Manchester Coroner, ex p Tal [1984] 3 All ER 240, [1985] QB 67, [1984] 3 WLR 643, DC.
R v Harden [1962] 1 All ER 296, [1963] 1 QB 8, [1962] 2 WLR 553, CCA.
Page 152 of [1989] 1 All ER 151
Rees v Secretary of State for the Home Dept [1986] 2 All ER 321, [1986] AC 937, [1986] 2 WLR 1024, HL.
Request for International Judicial Assistance, Re (1979) 102 DLR (3d) 18, Alta QB.
Rossano v Manufacturers Life Insurance Co Ltd [1962] 2 All ER 214, [1963] 2 QB 352, [1962] 3 WLR 157.
Schemmer v Property Resources Ltd [1974] 3 All ER 451, [1975] Ch 273, [1974] 3 WLR 406.
Sydney Municipal Council v Bull [1909] 1 KB 7, [1908–10] All ER Rep 616.
Thompson v Goold & Co [1910] AC 409, HL.
Tzu-Tsai Cheng v Governor of Pentonville Prison [1973] 2 All ER 204, [1973] AC 931, [1973] 2 WLR 746, HL.
Visser, Re, Queen of Holland v Drukker [1928] Ch 877, [1928] All ER Rep 305.
Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1986] 1 All ER 129, [1986] AC 368, [1986] 2 WLR 24, CA.
Cases also cited
Athanassiadis v Government of Greece [1969] 3 All ER 293, [1971] AC 282, HL.
Atkinson v US Government [1969] 3 All ER 1317, [1971] AC 197, HL.
Chung Chi Cheung v R [1938] 4 All ER 786, [1939] AC 160, PC.
Cohen (a bankrupt), Re, ex p the bankrupt v IRC [1950] 2 All ER 36, CA.
Cotton v R [1914] AC 176, PC.
Garland v British Rail Engineering Ltd [1982] 2 All ER 402, [1983] 2 AC 751, HL.
Greece (Royal Government) v Brixton Prison Governor [1969] 3 All ER 1337, [1971] AC 250, HL.
Indian and General Investment Trust Ltd v Borax Consolidated Ltd [1920] 1 KB 539, [1918–19] All ER Rep 346.
R v Governor of Brixton Prison [1911] 2 KB 82, DC.
R v Governor of Pentonville Prison, ex p Budlong [1980] 1 All ER 701, [1980] 1 WLR 1110, DC.
R v Wilson (1877) 3 QBD 42, DC.
Regazzoni v K C Sethia (1944) Ltd [1956] 2 All ER 487, [1956] 2 QB 490, CA; affd [1957] 3 All ER 286, [1958] AC 301, HL.
Thakrar v Secretary of State for the Home Dept [1974] 2 All ER 261, [1974] QB 684, CA.
US Government v McCaffery [1984] 2 All ER 570, [1984] 1 WLR 867, HL.
Application for judicial review
The Secretary of State for the Home Department applied, with the leave of McNeill J given on 22 March 1988, for judicial review by way of an order of certiorari to quash the refusal of the Chief Metropolitan Magistrate on 27 January 1988 to commit Tore Kjell Nuland to prison under s 10 of the Extradition Act 1870 to await extradition to Norway on six offences for which he had been sentenced in Norway to imprisonment. The facts are set out in the judgment of the court.
David Pannick for the Secretary of State.
Clive Nicholls QC and Robert Rhodes as amicus curiae.
Mr Nuland did not appear.
Cur adv vult
27 May 1988. The following judgment was delivered.
STUART-SMITH LJ. This is an application for judicial review of a decision of the Chief Metropolitan Magistrate made on 27 January 1988. On that date he committed Tore Kjell Nuland to custody pursuant to s 10 of the Extradition Act 1870 (the Act) to await directions of the Secretary of State on six charges of theft, attempted theft and inducing a creditor by deception to wait for payment. But he refused to commit him on
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five further charges involving false accounting, forgery and theft. It is in respect of that refusal that the Secretary of State seeks judicial review.
On 9 August 1985 Nuland was convicted in the Sandnes District Court in Norway of 11 offences under the Norwegian criminal code. He was sentenced to five years’ imprisonment, subject to remission for the time spent in custody. On appeal to the Supreme Court his sentence was confirmed on 18 June 1987. For reasons which do not appear Nuland came to this country. In September 1987 a request was duly made by the Royal Norwegian Embassy to the Foreign and Commonwealth Office for his extradition pursuant to the extradition treaty between Norway and the United Kingdom (Stockholm, 26 June 1873; 63 BFSP 175, C 900). The request was transmitted to the Home Office; and on 13 November 1987 the Secretary of State for the Home Department signed an order addressed to the Chief Metropolitan Stipendiary Magistrate or other metropolitan stipendiary magistrate sitting at Bow Street, requiring him to issue a warrant for Nuland’s apprehension. In due course, he was arrested and brought before the court.
As we have indicated, he was committed to custody under s 10 of the 1870 Act to await the order of the Secretary of State on six of the charges on which he was convicted, but not on the remaining five. The magistrate explained in a letter to the Secretary of State dated 28 June 1988 why he declined to commit Nuland on these five charges. The reason is that he considered that the charges were in various ways connected with tax evasion, and he considered himself bound by the decision of this court in R v Governor of Pentonville Prison, ex p Khubchandani (1980) 71 Cr App R 241 to decline on that ground to commit him.
This creates a problem for the Norwegian authorities because the sentence is a global one, passed in respect of all 11 offences and not concurrently on each offence or consecutively amounting in total to five years.
It is accepted by counsel for the Secretary of State that the magistrate was bound by the decision in Khubchandani to act as he did, and there is no criticism of him in any way. But the submission is that that case was wrongly decided on this point and that we should not follow it. Although we pay great regard to the decision and we should follow it as a matter of judicial comity unless we are convinced that it is wrong, we are not bound by it.
In R v Greater Manchester Coroner, ex p Tal [1984] 3 All ER 240 at 248, [1985] QB 67 at 81 Robert Goff LJ said:
‘If a judge of the High Court sits exercising the supervisory jurisdiction of the High Court then it is, in our judgment, plain that the relevant principle of stare decisis is the principle applicable in the case of a judge of first instance exercising the jurisdiction of the High Court, viz that he will follow a decision of another judge of first instance, unless he is convinced that that judgment is wrong, as a matter of judicial comity; but he is not bound to follow the decision of a judge of equal jurisdiction (see Huddersfield Police Authority v Watson [1947] 2 All ER 193 at 196, [1947] KB 842 at 848 per Lord Goddard CJ), for either the judge exercising such supervisory jurisdiction is (as we think) sitting as a judge of first instance, or his position is so closely analogous that the principle of stare decisis applicable in the case of a judge of first instance is applicable to him. In our judgment, the same principle is applicable when the supervisory jurisdiction of the High Court is exercised not by a single judge but by a Divisional Court, where two or three judges are exercising precisely the same jurisdiction as the single judge. We have no doubt that it will be only in rare cases that a Divisional Court will think it fit to depart from a decision of another Divisional Court exercising this jurisdiction. Furthermore, we find it difficult to imagine that a single judge exercising this jurisdiction would ever depart from a decision of a Divisional Court. If any question of such a departure should arise before a single judge, a direction can be made under RSC Ord 53, r 5(2) that the relevant application should be made before a Divisional Court. These are, therefore, the principles which we propose to apply in the present case.’
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The relevant part of the judgment in Khubchandani’s case is in the final ground on which the court granted the writ of habeas corpus. Kilner Brown J, giving a judgment with which Shaw LJ agreed, said (71 Cr App Rep 241 at 248):
‘Finally [counsel for the applicant] submitted that whatever view might ultimately be taken about the application of and the correctness of the decision in HARDEN’S case ([1962] 1 All ER 286, [1963] 1 QB 68), there still remained an insuperable barrier in the way of extradition. The alleged offences were in substance and in reality breaches of the Ghanaian laws relating to exchange control and embargo upon the removal of currency outside the jurisdiction. Claims on behalf of a foreign State to recover taxes due under its fiscal laws are unenforceable in English courts and there is no valid distinction between foreign States and States which are members of the British Commonwealth–see GOVERNMENT OF INDIA, MINISTRY OF FINANCE v. TAYLOR ([1955) 1 All ER 292, [1955] AC 491). Nor does it make any difference that the breaches were founded upon fraud or dishonest deception. For this latter proposition persuasive support is to be found in the case of SCHEMMER v. PROPERTY RESOURCES LTD. ([1974] 3 All ER 451, [1975] Ch 273), to the effect that even if the breaches of a foreign country’s fiscal laws were perpetrated through fraud, the English courts will not act to enforce the public law of that other country. In answer to the contention of the respondents that there could and should be spelt out from the words of item 18 in Schedule 1 to the Fugitive Offenders Act 1967 an inference that breaches of fiscal laws would be covered if fraud or dishonesty were resorted to it was argued that this would be doing that which Lord Simon of Glaisdale roundly condemned in CHENG v. GOVERNOR OF PENTONVILLE PRISON ([1973] 2 All ER 204, [1973] AC 931). In cases where extradition is sought, words in the relevant act must be strictly construed and no gloss be put upon them. In my opinion this argument on behalf of the applicant also succeeds. I would allow this application.’
Counsel for the Secretary of State submits that the reasoning and decision is inconsistent with the reasoning of the House of Lords in Government of Denmark v Nielsen [1984] 2 All ER 81, [1984] AC 606. This case, he submits, makes it clear that what the magistrate has to do in a conviction case, such as this, is to consider whether the conduct and state of mind proved in the foreign court amounts, as a matter of English law, to one of the offences listed in the schedules to the Extradition Acts and contained in the relevant treaties. If it does, then unless the offence falls within the statutory exception where the offence is political (see s 3 of the Act) he must commit the offender under s 10.
It is necessary to refer to some of the provisions of the 1870 Act. Section 2 provides:
‘Where an arrangement has been made with any foreign state with respect to the surrender to such state of any fugitive criminals, Her Majesty may, by Order in Council, direct that this Act shall apply in the case of such foreign state. [There is then provision for limitation or restriction of the order. It continues:] Every such order shall recite or embody the terms of the arrangement, and shall not remain in force for any longer period than the arrangement.’
Orders must be laid before Parliament and published in the London Gazette.
Section 3 provides for restrictions on the surrender of fugitive criminals. The precise wording of this section is important, and must be set out in full:
‘The following restrictions shall be observed with respect to the surrender of fugitive criminals: (1) A fugitive criminal shall not be surrendered if the offence in respect of which his surrender is demanded is one of a political character, or if he proves to the satisfaction of the police magistrate or the court before whom he is brought on habeas corpus, or to the Secretary of State, that the requisition for his surrender has in fact been made with a view to try or punish him for an offence of a
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political character: (2) A fugitive criminal shall not be surrendered to a foreign state unless provision is made by the law of that state, or by arrangement, that the fugitive criminal shall not, until he has been restored or had an opportunity of returning to Her Majesty’s dominions, be detained or tried in that foreign state for any offence committed prior to his surrender other than the extradition crime proved by the facts on which the surrender is grounded: (3) A fugitive criminal who has been accused of some offence within English jurisdiction not being the offence for which his surrender is asked, or is undergoing sentence under any conviction in the United Kingdom, shall not be surrendered until after he has been discharged, whether by acquittal or on expiration of his sentence or otherwise: (4) A fugitive criminal shall not be surrendered until the expiration of fifteen days from the date of his being committed to prison to await his surrender.’
Section 5 provides:
‘When an order applying this Act in the case of any foreign state has been published in the London Gazette, this Act (after the date specified in the order, or if no date is specified, after the date of the publication,) shall, so long as the order remains in force, but subject to the limitations, restrictions, conditions, exceptions, and qualifications, if any, contained in the order, apply in the case of such foreign state … ’
Section 6 is concerned with the liability for apprehension and surrender of a fugitive criminal, who is defined as a person accused or convicted of an extradition crime committed within the jurisdiction of a foreign state and who is in or suspected of being in the United Kingdom.
An ‘extradition crime’ means a crime which if committed in England or within English jurisdiction would be one of the crimes described in Sch 1 to the 1870 Act (see s 26). Further offences have been added by the schedule to the Extradition Act 1873. There is no dispute that the offences covered in charges 6 to 11 are offences covered by the expression ‘extradition crime’, unless the exception in Khubchandani’s case applies.
Section 7 deals with the requisition by the foreign state to the Secretary of State and the order by him to the police magistrate to issue a warrant for the arrest of the fugitive criminal, unless the offence is of a political character. Section 8 deals with the issue of warrants and provisional warrants for apprehension.
Section 9 provides:
‘When a fugitive criminal is brought before the police magistrate, the police magistrate shall hear the case in the same manner, and have the same jurisdiction and powers, as near as may be, as if the prisoner were brought before him charged with an indictable offence committed in England. The police magistrate shall receive any evidence which may be tendered to show that the crime of which the prisoner is accused or alleged to have been convicted is an offence of a political character or is not an extradition crime.’
Section 10 deals with committal. So far as it relates to convicted fugitives it provides:
‘… In the case of a fugitive criminal alleged to have been convicted of an extradition crime, if such evidence is produced as (subject to the provisions of this Act) would, according to the law of England, prove that the prisoner was convicted of such crime, the police magistrate shall commit him to prison, but otherwise shall order him to be discharged. If he commits such criminal to prison, he shall commit him … there to await the warrant of a Secretary of State for his surrender, and shall forthwith send to a Secretary of State a certificate of the committal, and such report upon the case as he may think fit.’
Section 11 deals with surrender of the fugitive and provides:
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‘If the police magistrate commits a fugitive criminal to prison, he shall inform such criminal that he will not be surrendered until after the expiration of fifteen days, and that he has a right to apply for a writ of Habeas corpus. Upon the expiration of the said fifteen days, or, if a writ of Habeas corpus is issued, after the decision of the court upon the return to the writ, as the case may be, or after such further period as may be allowed in either case by a Secretary of State, it shall be lawful for a Secretary of State, by warrant under his hand and seal, to order the fugitive criminal (if not delivered on the decision of the court) to be surrendered to such person as may in his opinion be duly authorised to receive the fugitive criminal by the foreign state from which the requisition for the surrender proceeded, and such fugitive criminal shall be surrendered accordingly … ’
This then is the structure of the Act.
It is now necessary for us to set out at some length passages from the speech of Lord Diplock in Government of Denmark v Nielsen [1984] 2 All ER 81 at 84, 91, [1984] AC 606 at 615, 624–625, with which the other Law Lords agreed:
‘The introductory words to both the 1870 list and the later list provide that the list of crimes is to be construed according to the law existing in England at the date of the alleged crime. So in order to determine whether conduct constitutes an ‘extradition crime’ within the meaning of the Extradition Acts 1870 to 1935, and thus a potential ground for extradition if that conduct had taken place in a foreign state, one can start by inquiring whether the conduct if it had taken place in England would have fallen within one of the 19 generic descriptions of crimes in the 1870 list. If it would have so fallen the inquiry need proceed no further where, as in the case of the principal treaty with Denmark, the extradition treaty with the foreign state demanding the surrender of a person as a fugitive criminal incorporates the whole of the 1870 list in the descriptions of crimes for which surrender may be required and makes no modification to those descriptions … The jurisdiction of the magistrate is derived exclusively from the statute. It arises when a person who is accused of conduct in a foreign state which if he had committed it in England would be one described in the 1870 list (as added to and amended by later Extradition Acts) has been apprehended and brought before the magistrate under a warrant issued pursuant to an order made by the Secretary of State under s 7 or confirmed by him under the last paragraph of s 8. At the hearing, ss 9 and 10 require that the magistrate must first be satisfied that a foreign warrant (within the definition in s 26 that I have already cited) has been issued for the accused person’s arrest and is duly authenticated in a manner for which s 15 provides. Except where there is a claim that the arrest was for a political offence or the case is an exceptional accusation case, the magistrate is not concerned with what provision of foreign criminal law (if any) is stated in the warrant to be the offence which the person was suspected of having committed and in respect of which his arrest was ordered in the foreign state. The magistrate must then hear such evidence, including evidence made admissible by ss 14 and 15, as may be produced on behalf of the requisitioning foreign government, and by the accused if he wishes to do so; and at the conclusion of the evidence the magistrate must decide whether such evidence would, according to the law of England, justify the committal for trial of the accused for an offence that is described in the 1870 list (as added to or amended by subsequent Extradition Acts) provided that such offence is also included in the extraditable crimes listed in the English language version of the extradition treaty. In making this decision it is English law alone that is relevant. The requirement that he shall make it does not give him any jurisdiction to inquire into or receive evidence of the substantive criminal law of the foreign state in which the conduct was in fact committed.’ (Lord Diplock’s emphasis.)
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Counsel for the Secretary of State submits that if the magistrate’s jurisdiction derives exclusively from the statute, he must look only to that and any treaty provisions, which are in effect incorporated under s 5 of the Act, for any limitation and restriction on that jurisdiction. The issue before the court is therefore one of construction of the 1870 Act. On the construction of the statute there is no room to incorporate the limitations.
It is common ground that the House of Lords in Nielsen’s case did not have in mind the particular problem that confronts us; had they done so their decision would of course be binding on us and no problem would arise. But counsel for the Secretary of State submits that the decision on this point in R v Governor of Pentonville Prison, ex p Khubchandani (1980) 71 Cr App R 241 is quite inconsistent with the reasoning of the House of Lords.
We have had the advantage of submissions on this matter by counsel appearing as amicus. He has submitted that Lord Diplock’s statement of the law in the last passage to which we have referred is too narrow, in that it does not take into account limitations imposed by the specific treaties in question. For example, as was quite common in earlier treaties, there was provision that nationals of this country could not be extradited. This is a fetter or restriction on the magistrate’s jurisdiction. We agree, but it seems to us that Lord Diplock makes this plain (see [1984] 2 All ER 81 at 85, [1984] AC 606 at 616). Such limitations therefore are nothing to the point.
Secondly, counsel appearing as amicus submitted that there were issues such as abuse of the process of the court and pleas of autrefois convict or acquit which it is accepted that the magistrate has jurisdiction to consider, though they do not fall expressly within the limitations found in s 3 of the Act. As to abuse of process, in Rees v Secretary of State for the Home Department [1986] 2 All ER 321, [1986] AC 937 the House of Lords left open the question whether the magistrates did have jurisdiction to prevent abuse of the process in respect of proceedings under the Act; and it is equally unnecessary in this court to decide that question, because it is clear, as it seems to us, and counsel appearing as amicus accepted, that such a matter could properly be considered under the provisions of s 9 of the Act. So too with questions of autrefois convict and acquit. Sometimes these matters are specifically dealt with in the treaty in question, but if they are not, and if the magistrate has jurisdiction to consider them, as to which we express no opinion, he could do so under that section, without going outside the ambit of the Act.
But that is not so with the restriction in relation to revenue offences; and this, as counsel appearing as amicus concedes, is the only limitation that is relevant, that is not expressly dealt with in the Act or treaty or may not fall within the powers of the magistrate conferred by s 9 of the Act.
His main submission is as follows: (1) as a matter of construction it requires clear and express language in a statute to derogate from the common law or to take away common law rights; (2) it is a rule of international custom and practice that states will not directly or indirectly enforce revenue or penal laws of another state; (3) the rule of international custom and practice has become part of the common law; (4) the 1870 Act does not specifically take away this limitation.
In support of the first proposition counsel appearing as amicus relied on the dissenting speech of Lord Simon in Tzu-Tsai Cheng v Governor of Pentonville Prison [1973] 2 All ER 204 at 216–218, [1973] AC 931 at 954–955. Lord Wilberforce agreed with Lord Simon, and it matters not for these statements of principle that they were in the minority. Lord Simon said:
‘Presumption against changes in the common law
“Few principles of statutory interpretation are applied as frequently as the presumption against alterations in the common law. It is presumed that the legislature does not intend to make any change in the existing law beyond that which is expressly stated in, or follows by necessary implication from, the language
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of the statute in question. It is thought to be in the highest degree improbable that Parliament would depart from the general system of law without expressing its intention with irresistible clearness.” (Maxwell (Interpretation of Statutes (12th edn, 1969) p 116)). International lawyers were not unanimous whether comity required a state to extradite offenders against the criminal law of a foreign state, Grotius and Pufendorf being ranged on opposite sides of the argument; but the overwhelming modern view is that any international obligation to extradite is imperfect, needing treaty to perfect it (Wheaton (International Law (6th edn, 1929) vol 1, p 212)). There can be no question, though, what answer the English common law returned: no English authority had the right to extradite (Clarke on Extradition (4th edn, 1903), pp 6–7), citing Coke (3 Co Inst (1644) ch 84, p 180); Wheaton (pp 213–214) citing Lord Denman (see Forsyth Cases and Opinions on Constitutional Law (1869) p 369) speaking in your Lordships’ House). This was indeed the inevitable result of the following fundamental principles of English common law: (1) no one can be deprived of his liberty except for an offence against English law; (2) this liberty is vindicated by the writ of habeas corpus, statute in this respect merely embodying the common law; (3) criminal law being (other than exceptionally) territorial, an offence against a foreign criminal code is no offence against English law; (4) therefore anyone taken into custody for the purpose of delivery to a foreign state in respect of an offence against the criminal code of that foreign state could secure his release by habeas corpus proceedings. A fugitive offender against the criminal law of a foreign state being thus protected by the common law from arrest for the purpose of extradition, the Extradition Act 1870 and the orders in council implementing it were necessarily in derogation from the common law. It follows that the positive powers under the Act should be given a restrictive construction and the exceptions from those positive powers a liberal construction. Even if it were otherwise permissible to read s 3(1) as allowing the implication that “offence … of a political character” refers only to an offence which is of a political character as regards the state seeking extradition, the presumption against changes in the common law would preclude such an implication and demand the construction proposed by the appellant. The construction proposed by the respondent cannot possibly be said to be a “necessary” implication from the language of the statute, nor can it possibly be said that Parliament has expressed “with irresistible clearness” the intention that the political character of the offence should be limited to the politics of the state seeking extradition. Since the common law, as so often, favours the freedom of the individual, the rules enjoining strict construction of a penal statute or of a provision in derogation of liberty (Maxwell (p 238)) merely reinforce the presumption against change in the common law.
Presumption in favour of conformity with international law
”… every statute is interpreted, so far as its language permits, so as not to be inconsistent with … the established rules of international law, and the court will avoid a construction which would give rise to such inconsistency unless compelled to adopt it by plain and unambiguous language.” (Maxwell (p 183).) I have already cited Oppenheim (International Law (8th edn, 1955) vol 1, ch 3(x), p 704) and Wheaton (vol 1, p 217) as showing the general consensus that political crimes are not the subjects of extradition, though both indicate the difficulties of definition.’
But these cannons of construction only apply subject to the primary rule that Lord Simon had already quoted, and is to be held as an aid to construction in the event of ambiguity. He said ([1973] 2 All ER 204 at 212–213, [1973] AC 931 at 950):
‘What Maxwell (Interpretation of Statutes (12th edn, 1969) p 28) calls “The first and most elementary rule of construction” is that (except in technical legislation) it is to
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be assumed the words and phrases are used in their ordinary and natural meaning. Moreover (at p 33): “It is a corollary to the general rule of literal construction that nothing is to be added to … a statute unless there are adequate grounds to justify the inference that the legislature intended something which it omitted to express.” “It is a strong thing to read into an Act of Parliament words which are not there and in the absence of clear necessity it is a wrong thing to do.” (Lord Mersey in Thompson v Goold & Co [1910] AC 409 at 420.) If Parliament had intended to say “offence … of a political character against (or in respect of) the foreign state demanding such surrender”, nothing would have been easier than to have inserted such words. Since they are not there, it is not for the courts to supply them. This primary rule of construction is so fundamental that it is sometimes called “the golden rule“. It was so stated by Parke B in Becke v Smith (1836) 2 M & W 191 at 195, 150 ER 724 at 726: “It is a very useful rule, in the construction of a statute, to adhere to the ordinary meaning of the words used … unless that is at variance with the intention of the legislature, to be collected from the statute itself, or tends to any manifest absurdity or repugnance, in which case the language may be varied or modified, so as to avoid such inconvenience, but no further.”’ (Lord Simon’s emphasis.)
To our minds the language of the 1870 Act is clear, that provided the conduct amounts to an extradition crime, then subject to the specific limitations in the Act, the magistrate must commit.
Section 3 of the Act deals with two situations which existed under international custom and practice and were adopted as part of the common law, namely the non-extradition of those whose offence was of a political character (s 3(1)) and specialty, that is to say that there will be no extradition unless there is provision in the law of the requesting state that the offender will not be tried for offences other than those in respect of which he has been extradited (s 3(2)).
We find it very difficult to accept the argument that these provisions were otiose, and could have been left to the common law to ensure that extradition would not occur in such cases. Moreover, where Parliament has dealt with two of the alleged three common law restrictions expressly in the Act, it is difficult to suppose that the third, relating to revenue offences, was to be left intact and unaffected.
If the construction of counsel appearing as amicus is correct it involves reading into the 1870 Act a similar provision to that found in the Extradition Act 1965 of the Republic of Ireland. Section 13 of the Irish Act provides: ‘Extradition shall not be granted for revenue offences’. Since revenue offences as such are not extraditable crimes within the 1870 Act, but only specific offences such as forgery or false accounting that may be committed in a revenue context, revenue offences would have to be defined more widely, as is done in the Irish Act. Section 3(1) of the Irish Act provides:
‘… “Revenue offence” in relation to any country or place outside the State, means an offence in connection with taxes, duties or exchange control but does not include an offence involving the use or threat of force or perjury or the forging of a document issued under statutory authority or an offence alleged to have been committed by an officer of the revenue of that country or place in his capacity as such officer.’
The limitations in the latter part of this definition are of course necessary, otherwise murder of a revenue officer might amount to a revenue offence.
In our judgment, the language of the 1870 Act is clear and admits of no ambiguity; it would be extremely surprising if Parliament expressly incorporated into the statute two common law limitations but omitted a third, which was nevertheless intended to co-exist unabated. This approach to the construction of the Act appears to us to accord with the guidance laid down in Government of Denmark v Nielsen [1984] 2 All ER 81, [1984] AC
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606. And as counsel for the Secretary of State pointed out, the question of construction of the 1870 Act never seems to have been considered by the Divisional Court in R v Governor of Pentonville Prison, ex p Khubchandani (1980) 71 Cr App R 241.
As to the second proposition put forward by counsel appearing as amicus, we have found considerable difficulty in determining the extent of the supposed rule of international custom and practice. In Khubchandani’s case the court relied on the decision of Government of India, Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292 at 295, [1955] AC 491 at 503–504, where Viscount Simonds said:
‘My Lords, I will admit that I was greatly surprised to hear it suggested that the courts of this country would, and should, entertain a suit by a foreign state to recover a tax. For at any time since I have had any acquaintance with the law I should have said, as ROWLATT, J., said in King of the Hellenes v. Brostrom ((1923) 16 Ll L Rep 167): “It is perfectly elementary that a foreign government cannot come here–nor will the courts of other countries allow our government to go there–and sue a person found in that jurisdiction for taxes levied and which he is declared to be liable to by the country to which he belongs.” That was in 1923. In 1928, TOMLIN, J., in Re Visser [Queen of Holland v Drukker [1928] Ch 877 at 884, [1928] All ER Rep 305 at 307], after referring to Sydney Municipal Council v. Bull ([1909] 1 KB 7, [1908–10] All ER Rep 616), in which the same proposition had been unequivocally stated by GRANTHAM, J., and saying that he was bound to follow it, added: “My own opinion is that there is a well recognised rule, which has been enforced for at least two hundred years or thereabouts, under which these courts will not collect the taxes of foreign states for the benefit of the sovereigns of those foreign states; and this is one of those actions which these courts will not entertain.” My Lords, it is not seemly to weigh the pronouncements of living judges, but it is, I think, permissible to say that the opinions of few, if any, judges of the past, command greater respect than those of LORD TOMLIN and SIR SYDNEY ROWLATT, and what appeared to one of them to be a “well recognised rule” and to the other “elementary” law cannot easily be displaced.’
But the limited extent of this proposition was stated by Lord Mackay, with whose speech Lord Scarman, Lord Bridge and Lord Brandon agreed. In Williams & Humbert v W & H Trade Marks (Jersey) Ltd [1986] 1 All ER 129 at 143, [1986] AC 368 at 440–441 he said:
‘Having regard to the questions before this House in Government of India v Taylor I consider that it cannot be said that any approval was given by the House to the decision in the Buchanan case [Peter Buchanan Ltd v McVey (1951) [1955] AC 516] except to the extent that it held that there is a rule of law which precludes a state from suing in another state for taxes due under the law of the first state. No countenance was given in Government of India v Taylor, in Rossano’s case [1962] 2 All ER 214, [1963] 2 QB 352 or in Brokaw v Seatrain UK Ltd [1971] 2 All ER 98, [1971] 2 QB 476 to the suggestion that an action in this country could be properly described as the indirect enforcement of a penal or revenue law in another country when no claim under that law remained unsatisfied. The existence of such unsatisfied claim to the satisfaction of which the proceeds of the action will be applied appears to me to be an essential feature of the principle enunciated in the Buchanan case for refusing to allow the action to succeed.’
It is one thing to say that the courts of this country will not entertain a suit by a foreign state to recover a tax; it is another to say that criminal offences which stand independently of revenue offences, albeit in a revenue connection, are within the rule. This distinction is made clear, as it seems to us, in the Backing of Warrants (Republic of Ireland) Act 1965. Section 2(2) provides:
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‘… nor shall such an order be made if it is shown to the satisfaction of the court—(a) that the offence specified in the warrant is an offence of a political character … or an offence under an enactment relating to taxes, duties or exchange control … ’
Two points may be made. First, that Parliament is specifically referring to revenue offences, which it does not do in the 1870 Act, save that revenue offences in the sense here defined of offences under enactments relating to taxes are not offences to be found in Sch 1 as amended. The second is that the limitation is restricted to offences under enactments relating to taxes, and does not extend to the wide definition of revenue offences in the Irish Extradition Act of 1965.
A similar distinction was drawn in the judgment of Miller J in Re Request for International Judicial Assistance (1979) 102 DLR (3d) 18 at 38:
‘In my opinion, that line of cases does not assist [the defendants] in this application. While it is perhaps true that the ultimate consequences of guilty findings in the tax evasion charges against the defendants will be a civil liability to pay additional income tax, it is my view that the pith and substance of the charges are criminal in nature and the assistance of our Court is sought primarily to enable a full hearing to be held on the criminal charges rather than to help the United States collect alleged arrears of income tax. I do not think it is particularly relevant that most of the charges arise out of alleged offences under the Internal Revenue Code in the United States. The fact is that they are charges which are criminal in nature and which can attract severe monetary and incarceration penalties. In any event, clearly the conspiracy charges against Sedlmayr and Andrews do not fall within any impediment regarding tax collections in a foreign jurisdiction. I do not feel that any compliance with the request in this case runs contrary to the rule against assisting a foreign jurisdiction to collect taxes owing.’
The high water mark of the submission of counsel appearing as amicus is to be found in the European Convention on Extradition 1957 (ETS 24). The United Kingdom took part in the preparation of this convention, but so far has neither signed nor ratified it. Article 5 provides:
‘Fiscal offences–Extradition shall be granted, in accordance with the provisions of this Convention, for offences in connection with taxes, duties, customs and exchange only if the Contracting Parties have so decided in respect of any such offence or category of offences.’
Here, too, there is to our minds doubt whether this provision relates to offences under enactments relating to taxes, as in the Backing of Warrants (Republic of Warrants) Act 1965 or the wider meaning given in the Irish Extradition Act 1965. But assuming that it is the latter, counsel for the respondent submits that it amounts to good evidence of the international rule of custom and practice.
We were at one time impressed by this argument. But quite apart from the difficulty that the convention has not been ratified or signed by the United Kingdom, though it has by Norway, and the ambiguity to which we have referred, it is not an absolute rule like that in relation to political offences, but may be modified in the treaties between states. And in any event, the article has now been altered by art 2 of the Second Additional Protocol to the European Convention on Extradition 1978 (ETS 98) as follows:
‘Fiscal offences. 1. For offences in connection with taxes, duties, customs and exchange extradition shall take place between the Contracting Parties in accordance with the provisions of the Convention if the offence, under the law of the requested Party, corresponds to an offence of the same nature.
2. Extradition may not be refused on the ground that the law of the requested Party does not impose the same kind of tax or duty or does not contain a tax, duty, customs or exchange regulation of the same kind as the law of the requesting Party.’
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In Khubchandani’s case the Divisional Court relied on Schemmer v Property Resources Ltd [1974] 3 All ER 451, [1975] Ch 273 for the proposition that foreign fiscal laws are unenforceable in the English courts even when the breaches concerned were founded on fraud or dishonest deception. But Schemmer’s case was in an entirely different context and was not concerned with extradition. It is true that the relevant rule, r 5, made by the United States Securities and Exchange Commission under § 10(b) of the Securities Exchange Act 1934 (15 USC § 78j(b)), did involve fraud. Rule 5 provides:
‘It shall be unlawful for any person directly or indirectly by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, (1) to employ any device, scheme, or artifice to defraud, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, or in the light of the circumstances under which they were made, not misleading, or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.’
But the matter is dealt with in the judgment of Goulding J ([1974] 3 All ER 451 at 458–459, [1975] Ch 273 at 288):
‘I am naturally led on to a different and alternative ground for denying Mr Schemmer’s alleged cause of action. The 1934 Act is, in my judgment, a penal law of the United States of America and, as such, unenforceable in our courts. I have read enough of it to show that it was passed for public ends and that its purpose is to prevent and punish specified acts and omissions which it declares to be unlawful. It was, of course, enacted not merely in the interest of the nation as an abstract or political entity, but to protect a class of the public. In that it resembles the greater part of the criminal law of any country. Like many other penal laws, the 1934 Act also provides in some cases a private remedy available to the victims of the offences which it forbids, and it may possibly be that a private plaintiff who recovers a judgment in a federal court under the 1934 Act can enforce it by action here. As Lord Watson said in Huntingdon v Attrill [1893] AC 150 at 161: ”… a delict may give rise to a purely civil remedy, as well as to criminal punishment. Although a right of action is given to the party aggrieved, it does not follow that the law of nations must regard his action as a suit in favour of the State.” Here, however, I have nothing of that sort. Mr Schemmer comes before this court, in effect, as a public officer charged to reduce the London funds into possession in order to prevent the commission or continuation of offences against federal law. In my judgment, and in the absence of specific legislation founded on treaties, preventive criminal justice is no more a proper subject of international enforcement than retributive criminal justice. The point would be obvious if the plaintiff here were the plaintiff in the District Court, namely, the commission (in effect the financial police of the American Union) and its character is not altered by the substitution of Mr Schemmer, the receiver appointed on the commission’s application.’
This is an application of the rule that our courts will not enforce foreign penal statutes in the absence of treaty or specific legislation; but the Extradition Acts and the extradition treaties are precisely the means by which in-roads into that principle are made. With all respect, therefore, we fail to see how this case supports the proposition for which it is cited in Khubchandani’s case.
In Dicey and Morris The Conflict of Laws (11th edn, 1987) pp 100–101 the rule is stated as follows:
‘English courts have no jurisdiction to entertain an action: (1) for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign State. [It is said in the comment (at 101)] There is a well-established and almost
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universal principle that the courts of one country will not enforce the penal and revenue laws of another country. Although the theoretical basis for the Rule is a matter of some controversy, the best explanation, it is submitted, is that suggested by Lord Keith of Avonholm in Government of India v Taylor, that enforcement of such claims is an extension of the sovereign power which imposed the taxes, and “an assertion of sovereign authority by one state within the territory of another, as distinct from a patrimonial claim by a foreign sovereign, is (treaty and convention apart) contrary to all concepts of independent sovereignties“.’
This plainly relates to civil proceedings, since criminal jurisdiction in this country depends on the crime being committed within the jurisdiction. It is treaty and convention, as given effect to in the Extradition Acts, that enable foreign penal laws to be enforced to the extent that they are extradition crimes, and offences under enactments relating to tax are not extradition crimes.
It does not appear to us therefore, that there is any clear statements, other than in Khubchandani’s case and possibly in the original version of art 5 of the European Convention, putting the rule as widely as counsel appearing as amicus contends, namely, that it extends to any offence in connection with revenue matters even though the offence itself falls clearly within the definition of extradition crime.
Even if there were such a rule of international custom and practice, it has to be incorporated into our municipal law before it becomes part of the common law. In Cia Naviera Vascongada v Cristina [1938] 1 All ER 719 at 725, [1938] AC 485 at 497 Lord Macmillan said:
‘It is a recognised prerequisite of the adoption in our municipal law of a doctrine of public international law that it shall have attained the position of general acceptance by civilised nations as a rule of international conduct, evidenced by international treaties and conventions, authoritative text-books, practice and judicial decisions. It is manifestly of the highest importance that the courts of this country, before they give the force of law within this realm to any doctrine of international law, should be satisfied that it has the hall-marks of general assent and reciprocity.’
It seems to us, in the light of the 1870 Act, that it is impossible to say that the rule in its wide interpretation has been incorporated into our municipal law. In the narrow construction found in the Backing of Warrants Act 1965, of course, it has, since offences under enactments relating to tax are not extraditable offences.
For all these reasons, we are convinced that the decision in Khubchandani on this point was wrong, and in our view it is not without significance that neither the point as to construction of the statute nor the question whether the supposed rule of international custom and practice was adopted into the common law appear to have been considered by the court in that case.
In the result, the application will be granted and the case referred back to the Chief Metropolitan Magistrate with a direction to commit on the remaining five charges, if he is satisfied, as it appears that he is, that the conduct complained of in these charges amounts to extradition crimes.
Application granted. Case referred back to Chief Metropolitan Magistrate.
Solicitors: Treasury Solicitor.
Dilys Tausz Barrister.
Seven Seas Properties Ltd v Al-Essa and another
[1989] 1 All ER 164
Categories: LAND; Sale of Land: CIVIL PROCEDURE
Court: CHANCERY DIVISION
Lord(s): HOFFMANN J
Hearing Date(s): 24, 25, 27 MAY 1988
Specific performance – Sale of land – Mareva injunction – Specific performance order combined with Mareva injunction – Whether jurisdiction to make combined order.
Sale of land – Damages for breach of contract – Vendor’s inability to show good title – Limitation on damages if vendor’s inability to show good title not attributable to his default – Sale and sub-sale – Vendor failing to complete in sale to purchaser – Purchaser unable to complete sub-sale to sub-purchaser – Sub-purchaser rescinding contract on day notice to complete sale expired – Sub-purchaser bringing action against purchaser for breach of contract of sub-sale – Purchaser given no chance to use best endeavours to obtain good title – Whether sub-purchaser’s damages limited to its expenses.
The plaintiff agreed to purchase a leasehold property from the defendants for £1·5m and on the same day contracted to sell the property to a sub-purchaser for £1,635,000. Both contracts provided for completion on the same day. The defendants failed to complete on time and the sub-purchaser rescinded its contract on the day notice to complete expired. The sub-purchaser later brought an action against the plaintiff claiming over £600,000 damages for breach of contract. The plaintiff brought an action against the defendants seeking specific performance and applied for an inquiry as to damages and an order that £650,000, representing the sub-purchaser’s claim and the plaintiff’s costs in defending that claim, be retained in an account in the joint names of the parties’ solicitors and not paid out to the defendants when the specific performance order was enforced. The master made the order sought. The defendants appealed against that part of the order preventing the £650,000 from being paid out to them, contending that the court had no jurisdiction to include such a provision in an order for specific performance and that in any event the amount to be retained was excessive.
Held – (1) Since in an appropriate case the court could, when making an order for specific performance, make a separate Mareva injunction restraining the vendor from dealing with the purchase money, it was convenient to combine the two orders into one. The master had therefore had jurisdiction to include the retention order in the specific performance order (see p 166 e to g, post).
(2) Since the sub-purchaser’s claim would be limited to its conveyancing expenses, under the rule limiting a purchaser’s damages to his expenses if the vendor failed to make good title, and because the plaintiff had been given no chance by the sub-purchaser to use its best endeavours to obtain a good title, the amount representing the sub-purchaser’s claim would be excluded from the amount retained. Instead, the amount retained would be limited to the plaintiff’s loss of profit on the sub-sale and other matters in respect of which the plaintiff had a good arguable claim (see p 167 b to d and p 168 h j, post); Bain v Fothergill [1874–80] All ER Rep 83 applied.
Notes
For proceedings for summary judgment in actions for specific performance, see 44 Halsbury’s Laws (4th edn) para 526, and for cases on the subject, see Digest (Reissue) 173–174, 1543–1546.
For Mareva injunctions, see 37 Halsbury’s Laws (4th edn) para 362, and for cases on the subject, see 37(2) Digest (Reissue) 474–476, 2947–2962.
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Cases referred to in judgment
Bain v Fothergill (1874) LR 7 HL 158, [1874–80] All ER Rep 83.
Day v Singleton [1899] 2 Ch 320, CA.
Engell v Fitch (1869) LR 4 QB 659, Ex Ch.
Flureau v Thornhill (1776) 2 Wm Bl 1078, [1775–1802] All ER Rep 91, 96 ER 635.
Hadley v Baxendale (1854) 9 Exch 341, [1843–60] All ER Rep 461, 156 ER 145.
Sharneyford Supplies Ltd v Edge (Barrington Black Austin & Co (a firm), third party) [1987] 1 All ER 588, [1987] Ch 305, [1987] 2 WLR 363, CA.
Cases also cited
Seligman Bros v Brown Shipley & Co (1916) 32 TLR 549.
Appeal
The defendants, Fatima Al-Essa and Sheika Sabaha Al Sabah, appealed against that part of an order made by Master Cholmondeley Clarke on 17 February 1988 when making an order for specific performance of a contract dated 26 June 1987 for the sale of a leasehold property at 27–29 Sloane Gardens, London SW1, to the plaintiff, Seven Seas Properties Ltd, whereby the master ordered that the sum of £650,000 be retained in an account in the joint names of the parties’ solicitors and not paid out to the defendants when the specific performance order was enforced. The appeal was heard and judgment was given in chambers. The case is reported by permission of Hoffmann J. The facts are set out in the judgment.
David H J G Powell for the defendants;.
Benjamin Levy for the plaintiff.
Cur adv vult
27 May 1988. The following judgment was delivered.
HOFFMANN J. This is an appeal against part of an order for specific performance made by Master Cholmondeley Clarke under RSC Ord 86. On 26 June 1987 the defendants, who are two ladies resident in Kuwait, agreed in writing to sell the leasehold property known as 27–29 Sloane Gardens, London SW1 to the plaintiff for £1,500,000. A deposit of £150,000 was paid. The property consists of two houses which have been converted into a number of self-contained flats. On the same date the plaintiff entered into a contract to sub-sell the property to a Panamanian corporation called Grangeville Marketing Co Inc (Grangeville) for £1,635,000. Both contracts provided for completion on 7 September.
The first defendant’s husband, who acted on behalf of the vendors in negotiating the sale, says that he knew nothing of the sub-sale until the plaintiff’s solicitors submitted a draft of a transfer to Grangeville on 25 August. He says on information from the defendants that they knew no more. The defendants’ solicitor has also sworn an affidavit in which he says that he knew of the sub-sale after 2 September. I observe that in their letter on 26 June confirming that contracts had been exchanged by agreement on the telephone, the plaintiff’s solicitors asked for an additional authority to inspect the register in favour of another firm of solicitors who were in fact acting for the sub-purchasers. This might have provided an earlier clue, but there is nothing to contradict the evidence that neither the defendants nor their agents knew anything of the sub-sale at the time when contracts were exchanged.
There were some delays on obtaining a consent to assignment of the lease from the Cadogan Estate as landlords and the parties twice agreed to postpone completion. It was eventually set for 21 October. On that date the defendants failed to complete. Notices to complete were served by both the plaintiff and Grangeville on 22 October and expired on 13 November. On that date Grangeville rescinded its contract but the plaintiff did
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not. On 2 December it issued a writ claiming specific performance and damages, including ‘… damages caused by delay leading to the breach by the Plaintiff of its contract of sub-sale’.
A summons for summary judgment under RSC Ord 86 was supported by an affidavit sworn by the plaintiff’s solicitor. He said that Grangeville had put forward a very substantial claim for breach of contract, totalling more than £600,000 and that the plaintiff was therefore likely to be involved in ‘a major contested action’ in which the legal costs were likely to be not less than £50,000. The defendants were resident outside the jurisdiction and there was ‘a substantial risk that any award of damages against them [would] not be met unless it [was] secured by payment into a joint account or into Court … ' The plaintiff therefore asked for an inquiry into damages and a provision in the specific performance order that £650,000 of the purchase price should not be released to the defendants but be retained in the joint names of the parties’ solicitors pending the outcome of the inquiry. The master made an order in those terms.
In this appeal counsel for the defendants does not challenge the order for specific performance, which was carried into effect by completion on 21 April 1988, or the order for an inquiry as to damages. But he challenges the provision for retention of the £650,000 in joint names. First, he submits that the court has no jurisdiction to include such a provision in an order for specific performance. The essence of specific performance is mutuality and the party seeking the order must be ready, willing and able to perform his obligations under the contract. In the case of a purchaser, he must be willing to pay the full purchase price to the vendor. Payment into joint names is not payment to the vendor.
Counsel for the plaintiff did not in principle challenge this analysis of a specific performance order in its pure form, though he did refer to the power to make an order with abatement of the price as an example of the court’s power to adapt its orders to meet the justice of the case. Instead, he said that this was not a pure specific performance order but a convenient marriage of the specific performance and Mareva jurisdiction. Counsel for the defendants did not dispute that in an appropriate case, a court which had made an order for specific performance in the pure form for which he was contending could also, by a separate Mareva injunction, restrain the vendor from dealing with all or some part of the purchase money. If that is right, I think that it would be excessively formalistic to require this result to be achieved by two orders rather than one. It is true that in theory the provision for retention in joint names gives the plaintiff better protection against other creditors of the defendants than it would have under a Mareva order, but counsel for the defendants took no point on this difference. He wanted the defendants to have unrestricted access to the whole of the purchase price. There was no challenge to the allegation that they are resident out of the jurisdiction and no evidence that they have any other assets within. Accordingly, it seems to me that provided the other grounds for a Mareva order were satisfied, the master was right to make the order he did.
Counsel for the defendants’ alternative submission was that even as an exercise of the Mareva injunction, the provision for retention of so large a sum of £650,000 could not possibly be justified. The sole basis on which the claim was put in the supporting affidavit was that the plaintiff was faced with a £600,000 claim for damages from the sub-purchaser. But such a claim against the plaintiff was excluded by the rule in Bain v Fothergill (1874) LR 7 HL 158, [1874–80] All ER Rep 83, and even if sustainable against the plaintiff, would be too remote a head of damage to claim against the defendants.
There seems to me much force in the Bain v Fothergill point. There has been much criticism of the rule (see the 1987 report of the Law Commission on Transfer of Land: The Rule in Bain v Fothergill (Law Com no 166) and Sharneyford Supplies Ltd v Edge (Barrington Black Austin & Co (a firm), third party) [1987] 1 All ER 588, [1987] Ch 305) but it remains the law and not the basis on which vendors contract to sell land which they do not own. (The Law Commission recommended that the rule should be abolished only in relation to contracts made after the commencement of the proposed statute).
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In Flureau v Thornhill (1776) 2 Wm Bl 1078, [1775–1802] All ER Rep 91 at 91–92 De Grey CJ stated the rule in the following terms:
‘Upon a contract for a purchase, if the title proves bad, and the vendor is (without fraud) incapable of making a good one, I do not think that the purchaser can be entitled to any damages for the fancied goodness of the bargain, which he supposes he has lost.’
The rule is subject to various qualifications and counsel for the plaintiff drew attention to the line of authority based on Day v Singleton [1899] 2 Ch 320 which requires a vendor to have used his best endeavours to obtain a good title before being able to rely on the rule. In this case, however, there was no question of the plaintiff having failed to use its best endeavours. It was given no chance to do so because Grangeville rescinded the contract on the very day that its notice to complete expired. Nor would the plaintiff, which stood to make a profit of £135,000, have had any motive for failing to do its utmost to obtain a title. The result is that in my judgment this was a straightforward case of a sub-seller who, despite his good faith and best endeavours, was unable to obtain a title to convey before the sub-purchaser elected to rescind the contract. It falls squarely within the rule in Bain v Fothergill. The evidence before the master therefore did not justify a retention of more than the damages recoverable under that rule. These are traditionally said to be confined to wasted conveyancing expenses and costs. The sub-purchaser appears also to have paid a facility fee to the bank from which it intended to borrow and to have employed architects and surveyors in connection with proposed works on the premises and the application for the landlord’s consent. Whether a purchaser can recover these costs under the rule appears to be a matter of controversy (see Law Com, no 166 para 2.19).
After the master made his order, the purchase was, as I have mentioned, completed on 21 April. The order had provided for the defendants to execute a transfer in favour of the plaintiff, but on 6 April the plaintiff wrote to the defendants’ solicitors saying that it now proposed to sell to Grangeville for £1,375,000 and asked for a transfer direct to Grangeville. The defendants did not do so and the completion took place by two separate transfers from the defendants to the plaintiff and from the plaintiff to Grangeville. There was no formal contract between the plaintiff and Grangeville for the sale at £1,375,000, but there was an exchange of correspondence which included a term that the sale and completion was not to ‘effect [sic] or prejudice [Granville’s] rights and remedies arising directly or indirectly from [the previous contract] … ’
In view of the completion of the sale to Grangeville, counsel for the plaintiff submitted a different method of calculating his claim for damages. First, the plaintiff claims £135,000 as loss of profit on the original sub-sale to Grangeville. Second, it claims £125,000 as loss incurred on the eventual sub-sale to Grangeville. Then there is a claim for £20,000 in respect of the costs of Grangeville’s action arising out of the first contract, £30,000 for interest on Grangeville’s original deposit which had to be repaid, £15,000 for additional stamp duty payable on the two-stage completion on 21 April and £40,000 for some missing fixtures and fittings to which I shall return later.
Counsel for the defendants submits that for Mareva purposes there is no good arguable case for the recovery of any of these heads of claim. All except the last two arise out of the sub-sale to Grangeville and are therefore, he says, not recoverable under the rule in Hadley v Baxendale (1854) 9 Exch 341, [1843–60] All ER Rep 461. I shall consider this point first and return later to the last two items.
This is not a case of total failure to complete or ‘loss of the bargain’ but a case of delayed completion. Was it within the contemplation of the parties at the time of the contract that such delay might result in the loss by the purchaser of a profit on a sub-sale? The cases suggest that one cannot answer this question by reference to a general rule. In Engell v Fitch (1869) LR 4 QB 659 at 668 Kelly CB declined to say that ‘in all cases parties to the sale of real estate must be taken to have contemplated a resale’, but does not suggest that
Page 168 of [1989] 1 All ER 164
such contemplation cannot be held to have existed in an appropriate case. Counsel for the plaintiff submits that in the case of the sale of an investment property such as this, it would be contemplated as ‘not unlikely’ that the purchaser was buying for immediate resale. I think that this must be a matter for evidence and that there must be a good arguable case that damage arising from such a resale is not too remote.
There is a separate point about the claim for the loss incurred by the abatement of the price on the eventual sale to Grangeville. At that stage, the plaintiff would, notwithstanding the order for specific performance, have been entitled to rescind the contract with the defendants. If it had done so, then apart from the loss of profit on the original sub-sale and any liability within the rule in Bain v Fothergill, it would have suffered no loss. Instead, it chose to complete the purchase subject to an immediate sub-sale at a loss of £125,000. This loss would appear to be entirely a consequence of the plaintiff’s own choice. Why should it be laid at the door of the defendants?
Counsel for the plaintiff said that the plaintiff agreed to sell at a loss in order to mitigate Grangeville’s claim for damages under the first contract. If this was so, it was never communicated to either of the other parties and Grangeville, as I have noted, extracted an agreement that the completion was to be without prejudice to its claims under the first contract. In any case, given the position under Bain v Fothergill, I doubt whether it was a reasonable thing to do. I find the circumstances of the second sale to Grangeville extremely puzzling and the plaintiff’s case for recovering the loss thereby arising is in my judgment a weak one. On the other hand, the plaintiff may, if it overcomes the hurdle or remoteness, be able to recover the damages which it would have had to pay, or may still have to pay, to Grangeville on account of the first contract. I think that a generous estimate for this claim would be £50,000.
On the claim for stamp duty, I think that counsel for the defendants is right in his objection. The judgment under RSC Ord 86 defined the obligations of the parties. No doubt the plaintiff could have applied to have it varied but while it stood the defendants could not in my view be obliged to execute a transfer in different terms from those prescribed by the order.
That brings me finally to the claim for the missing fixtures and fittings. It is alleged that shortly before completion the defendants caused to be removed from the premises fixtures such as washing machines, cookers, sink units and fitted cupboards. The cost of replacing these items is said to be £40,000. The contract says nothing about the fixtures and fittings and the answers to preliminary inquires are ambiguous but tend, I think, to suggest that everything which could be so described was included. It appears to me that the plaintiff has at least an arguable case that the items were included in the sale. Counsel for the defendants submitted that £40,000 was grossly excessive but I have very little material on which to judge this question. As I am dealing only with a retention pending a full hearing on the claim I must approach the question with a very broad brush indeed.
Adding up the items for which the plaintiff appears to have a good arguable case, they appear to me to be as following:
Loss of profit £135,000
Loss of interest £30,000
Fixtures and fittings £40,000
Grangeville action £50,000
Plaintiff’s costs £20,000
Total £275,000
I shall therefore vary the master’s order by reducing the sum ordered to be retained in joint names to £275,000.
Appeal allowed in part.
Solicitors: Jepson Goff (for the defendants); Allan Jay & Co (for the plaintiff).
Evelyn M C Budd Barrister.
Practice Direction
(ward of court: disclosure of wardship papers to prospective adopters)
[1989] 1 All ER 169
PRACTICE DIRECTIONS
FAMILY DIVISION
5 December 1988.
Adoption – Practice – Prospective adoption – Ward placed with long-term foster parents with view to adoption – Disclosure of wardship papers to prospective adopters – Leave to disclose wardship file to be made to judge in main wardship proceedings.
Ward of court – Practice – Application in wardship proceedings – Ex parte application – Applications for routine leave or directions where court has authorised placement of ward with view to adoption – Notice to other parties not normally necessary – Consultation with Official Solicitor when acting as guardian ad litem.
1. Advance authority for disclosure of wardship papers to prospective adopters
Prospective adopters with whom a ward of court has been placed, with the court’s authority, as long-term foster parents with a view to adoption require the further authority of the court before they can be granted access to the documents in the wardship proceedings. Requests for such authority have commonly been made, until now, at a separate and subsequent appointment before the registrar or district registrar.
In the opinion of the judges of the Family Division it will in most cases be a more suitable and convenient course for the relevant authority to be sought from the judge at the main wardship hearing, on application by the local authority for an advance authorisation permitting disclosure of the wardship file (subject to conditions safeguarding confidentiality) to the prospective adopters and their legal advisers.
Leave to disclose the wardship file should therefore normally be sought from the judge at the main wardship hearing, subject to such terms and conditions (including the exception from disclosures of any particular document or category of documents) as the judge may think fit. It will be desirable for the judge’s order to indicate the stage at which disclosure is to be allowed to take place and normally this will either be before the placement is made or when leave to commence adoption proceedings is about to be sought.
2. Procedure for obtaining any necessary leave or directions from the court following authorisation of a placement
Although it continues to be the general rule in wardship that ex parte applications are permitted only in cases of urgent necessity (Re H (a minor) [1985] 3 All ER 1, [1985] 1 WLR 1164, CA), applications for routine leave or directions (eg for medical attention or holidays outside the jurisdiction), in cases where the court has already made an order authorising the placement of the minor with a view to adoption, by the person or authority having the care of the minor may be made ex parte and without notice to any other party (but subject to consultation with the Official Solicitor in cases where he is acting as guardian ad litem).
Issued with the concurrence of the Lord Chancellor.
C F Turner, Senior Registrar
5 December 1988.
Re St Thomas à Becket, Framfield
[1989] 1 All ER 170
Categories: ECCLESIASTICAL
Court: CHICHESTER CONSISTORY COURT
Lord(s): CHANCELLOR HIS HONOUR JUDGE QUENTIN EDWARDS QC
Hearing Date(s): 29 JULY, 17 SEPTEMBER 1987
Ecclesiastical law – Parochial church council – Member – Liability – Personal liability – Liability for works executed to church without due authority – Extent of liability.
Ecclesiastical law – Church – Repairs and maintenance – Authority for execution of works to consecrated buildings – Duty of architect – Duty to be satisfied of existence of faculty, interim order of consistory court or archdeacon’s certificate – Duty in cases of urgent works.
Since a parochial church council is a body corporate, no individual member of such a council is personally liable for any debt or other liability of the council which has been lawfully incurred, but if works to a church are executed without due authority, and so unlawfully, by the direction of a churchwarden or other member of the council that protection is lost. Accordingly if a churchwarden, acting alone or with others, directs works to a church without the authority of an archdeacon’s certificate or a faculty he may expose himself to grave financial liability and loss, and may be ordered personally to pay the costs incurred in obtaining a confirmatory faculty and further, if the archdeacon himself seeks and is granted a faculty authorising the undoing or alteration of the works, may be ordered to pay all the archdeacon’s costs and expenses, viz both his legal costs and the costs of the remedial works (see p 173 e to h, post).
Architects who accept retainers for the execution of works to consecrated buildings over which a consistory court has jurisdiction have a duty to satisfy themselves before the works are begun that there is due ecclesiastical authority for the execution of those works, ie the authority of a faculty, an interim order of the consistory court or an archdeacon’s certificate or, in cases of extreme urgency, the authority of necessity, to which is coupled an obligation to seek directions concerning the urgent works from the chancellor, the registrar or the archdeacon as soon as practicable (see p 174 a to c, post).
Notes
For parochial church councils as bodies corporate, see 14 Halsbury’s Laws (4th edn) paras 569, 1256.
For faculties relating to church buildings, see ibid para 1312, and for cases on the subject, see 19 Digest (Reissue) 445–452, 3529–3563.
For an archdeacon’s certificate authorising repairs or maintenance to a church, see 14 Halsbury’s Laws (4th edn) paras 1098, 1331.
Cases referred to in judgment
Atkins, Re [1989] 1 All ER 14, Con Ct.
Hawkes v Jones and Ruscoe (1888) Trist 222, Con Ct.
Petition for confirmatory faculty
By an application dated 6 April 1987 under r 3(1) of the Faculty Jurisdiction Rules 1967, SI 1967/1002, for an archdeacon’s certificate, which on 12 April 1987 was directed by the Archdeacon of Lewes and Hastings, the Ven Max Leon Godden, pursuant to s 12(4) of the Faculty Jurisdiction Measure 1964 to be treated as an application for a faculty, the vicar of the parish of Framfield in the Diocese of Chichester, the Rev Jeremy Cross, and two of the churchwardens, Peter Berry and Betty Gillies, sought authority for the carrying out of certain works of internal repair and decoration to the parish church of St Thomas à Becket. Because of doubts as to the materials and colours to be used in the proposed
Page 171 of [1989] 1 All ER 170
works the chancellor directed that there should be citation stating precisely what was proposed, and when it was learnt that the works in question had already been executed the chancellor countermanded the direction for citation and directed that the petitioners should apply for a confirmatory faculty. The application was unopposed. The facts are set out in the judgment.
The petitioners did not appear.
Cur adv vult
17 September 1987. The following judgment was delivered.
THE CHANCELLOR. The church of St Thomas à Becket is the parish church of Framfield in this diocese. The church dates from the early sixteenth century, most of it having been constructed after a fire in 1509, though the western tower was rebuilt in 1892. In recent times the parishioners have undertaken several works of repair and improvement to the building others have been proposed and are under consideration.
The present case arises out of repairs to the internal wall plaster in all parts of the church and redecoration of the plaster surfaces, once repaired, and the plaster ceilings within the church. On the instructions of the first petitioner, the Rev Jeremy Cross, the parish priest, and the parochial church council Wells-Thorpe & Suppel Ltd, architects and project managers, prepared, in February 1987, a specification of the necessary works. By a unanimous resolution, passed on 16 February 1987, the parochial church council resolved to apply for an archdeacon’s certificate for authority to execute these works. Estimates from three builders for the works described in the specification were obtained and the estimate of Press & Banks Ltd, which was for approximately £5,500 exclusive of value added tax, was accepted. In fact the parochial church council itself did not apply for an archdeacon’s certificate the application was made, in the form prescribed by the Faculty Jurisdiction Rules 1967, SI 1967/1002, by the above-named petitioners, viz the incumbent and the two churchwardens, on 6 April 1987.
This application was by no means the first application for an archdeacon’s certificate in recent times made by the parochial church council or by the incumbent and churchwardens. Applications were made in 1985 and 1986 and in more than one instance the Archdeacon of Lewes directed, pursuant to his power to do so under s 12(4) of the Faculty Jurisdiction Measure 1964, that the application should be treated as an application for a faculty. For reasons not germane to this case there was a meeting between the archdeacon and the incumbent and parochial church council at the beginning of this year in which the archdeacon emphasised the importance of observing the law and procedure relating to the faculty jurisdiction. Finally, it is material to mention at this stage that last year the parochial church council complained to the diocesan authorities of delay by the diocesan advisory committee in dealing with an application relating to the stonework of the church. The complaint was referred to me and I examined the relevant papers and correspondence and reported, through the registrar, that I was satisfied that the diocesan advisory committee had not been guilty of delay or unreasonable conduct.
In the instant case the application of 6 April 1987 was referred to the archdeacon and, as is required by the Measure, to the diocesan advisory committee. The archdeacon, on 12 April 1987, directed that application should be made to the court for a faculty authorising the proposed works. The diocesan advisory committee considered the proposals at its meeting on 7 May and reported to the registrar on 11 May.
In giving its advice the diocesan advisory committee was not able to recommend, without qualification, the execution of the works. The architects specified that the decoration to the plaster wall and ceiling surfaces should be with a water-based masonry paint, approved by the architects. The application of 6 April stated that the proposal was
Page 172 of [1989] 1 All ER 170
to use ‘Crown Covermatt Emulsion’, ‘because an emulsion was used on some of the walls, about 20 years ago, and consequently those areas will not take lime wash’. The diocesan advisory committee, in its advice to me, pointed out the apparent discrepancy between the specification and application and said that the committee considered ‘this church to be worthy of a limewash application following rubbing down of the old emulsion and would advise that this be investigated and carried out if possible’.
Following the archdeacon’s direction the papers, and the diocesan advisory committee’s observations, were referred to me and I gave certain directions which, with the diocesan advisory committee’s advice, were given to the petitioners by the registrar by letter dated 11 June. As there was some doubt as to the material and colour proposed to be applied to the walls and ceilings I directed that there should be citation and that the citation should state precisely what was proposed. The registrar also, in accordance with my directions, asked the petitioners to ‘bear in mind the strong recommendation of the [diocesan advisory committee] concerning lime wash’ and to provide a report from the church’s architect on this issue.
I interpolate here that I have, as chancellor of this and of another diocese, learnt of the firmly held view of many architects experienced in ecclesiastical work of the merit of using lime wash in old churches. The reason is, as I understand it, that the moisture which inevitably occurs in old rubble, stone and cob walls can pass through lime wash, whereas it cannot pass through emulsion or oil paint. This barrier to natural evaporation may cause condensation which is likely to have deleterious consequences on main timbers and other parts of the structure.
The petitioners replied to the registrar’s letter of 11 June on 23 June by a letter stating that the redecoration of the church had been completed using emulsion. Their letter made it clear that all three were aware there was neither the authority of an archdeacon’s certificate nor of a faculty for the execution of the work and that the work was done under the direction and supervision of Wells-Thorpe & Suppel Ltd. The letter adds that ‘the architect, Mr Matthews of Wells-Thorpe and Suppel … was unaware that we were proceeding without an Archdeacon’s Certificate’. Briefly stated the reasons the petitioners gave for proceeding with the works were that they had already considered and rejected the use of lime wash on the ground of expense, that savings were to be made by the immediate execution of the works, that the congregation had been meeting in the village hall ‘since January’ and that there had been past delays in the making of decisions.
As the works in question had already been executed I countermanded the direction that there should be citation and, instead, directed that the application for a confirmatory faculty (as it had become) should be heard at a sitting of this consistory court which had already been fixed for 29 July 1987. The petitioners and the architects were given notice of the hearing and warned that I was likely to be critical of them and that if they wished to answer any criticism which might be made they should attend the hearing. The petitioners did not attend, nor did the architects, though Mr Matthews sent a letter stating that he was ‘not aware that a Faculty or Archdeacon’s Certificate had not been issued for the work’.
The case was called on; I perused the correspondence and relevant papers and said that I would deliver judgment in writing in due course, which I now do.
In my judgment none of the reasons given by the petitioners, whether taken singly or in combination, justify their action in executing a major work to an ancient church without due authority. The application for authority was made only two months before the work was put in hand. No inquiry was made of the registry as to its progress. No inquiry was made of the diocesan advisory committee as to its views by the petitioners or their architects. Because the work was put in hand without notice the diocesan advisory committee could not make any useful inspection of the church or undertake any other investigation. The consequence is that a chance has been lost to undo that which was ill done a generation ago. It may be that for good economic or other reasons
Page 173 of [1989] 1 All ER 170
the chance could not practicably have been taken. The petitioners’ actions have deprived the court and its advisers from making a decision on the matter.
Having said this I recognise, in the light of a report by the architects made after the works were completed, that, on full inquiry and investigation, the diocesan advisory committee may well have withdrawn its suggestion to me that lime wash should be used. I shall, for this reason, grant a faculty confirming the works described in the application of 6 April. In the light of the recent history of this parish and the terms of the petitioners’ letter of 23 June 1987 I am not, however, prepared to pass this matter over and I therefore make the order as to costs and the observations to the Rev Mr Cross, the churchwardens and the architects which follow.
The order as to costs is that the petitioners pay the costs of the application, which is to be treated as a petition for a major faculty. They must pay the costs appropriate to a half-day hearing in court. (No costs of the hearing in court were ordered to be paid by the other petitioner whose case was heard on that day, Mrs G M Atkins, for reasons which are given in my judgment in that case: see Re Atkins [1989] 1 All ER 14 at 21). The petitioners must also pay the registrar’s correspondence fee, which fee will, in due course, be submitted to me for my approval.
As appears from what I have already stated the Rev Mr Cross, with the churchwardens, directed the execution of major works to the ancient and fine church in his care without due authority and in the knowledge that he had no authority. In my judgment this was a serious breach of his obligation of canonical obedience. He should appreciate that if he should ever again execute works to the church of St Thomas à Becket which require the authority of an archdeacon’s certificate or a faculty, but without having that authority, he may, in the light of my above findings, have to face proceedings under the Ecclesiastical Jurisdiction Measure 1963.
The churchwardens, and their successors in that office, are not, as lay men and women, liable to such proceedings. They, however, should appreciate the pecuniary risks which they will run should they ever again execute such works without authority. A parochial church council is a body corporate (see s 3 of the Parochial Church Councils (Powers) Measure 1956), and therefore no individual member of a council is personally liable for any debt or other liability of the body corporate which has been lawfully incurred. If, however, works to a church are executed without due authority, and so unlawfully, by the direction of a churchwarden or other member of the council that protection is lost. If, therefore, a churchwarden, acting alone or with others, directs works to a church without the authority of an archdeacon’s certificate or a faculty he may expose himself to grave financial liability and loss. He may be ordered, personally, to pay the costs incurred in obtaining a confirmatory faculty. The archdeacon may himself seek a faculty authorising the undoing or alteration of the works and if such a faculty be granted to the archdeacon the churchwarden may be ordered to pay all the archdeacon’s costs and expenses, viz both his legal costs and the costs of the remedial works. Finally I should repeat the warning given by Chancellor Dr Tristram QC in the Hereford Consistory Court in 1888 that if a settlement or other damage were to result from alterations done to the fabric without a faculty the churchwarden would be personally liable to make good the damage: see Hawkes v Jones and Ruscoe Trist 222 at 226.
The individual who acted throughout for the petitioners and the parochial church council on behalf of their architects, Wells-Thorpe & Suppel Ltd., was, as I have stated, Mr J G Matthews. He is an employee of that company and, though no doubt appropriately qualified for the work for which he is employed, is not an architect. He says, and the petitioners support him in this, that he was not aware that there was neither an archdeacon’s certificate nor a faculty authorising the works which he, in the name and on behalf of his employers, specified and supervised in their execution. It is well established that it is part of the professional duty of an architect to comply with the requirements of all relevant public and local statutes, and all subsidiary legislation, such
Page 174 of [1989] 1 All ER 170
as bye-laws and the building regulations, affecting works on which he is engaged. An architect is, for example, under a professional obligation to ensure that any necessary planning consents and consents under the building regulations have been obtained before directing the execution of any works. In my judgment architects who undertake ecclesiastical commissions, and particularly those on a diocesan panel maintained under the Inspection of Churches Measure 1955, are under a like obligation with regard to the faculty jurisdiction. In plain words architects who accept retainers for the execution of works to consecrated buildings over which a consistory court has jurisdiction have a duty to satisfy themselves that there is due ecclesiastical authority for the execution of those works before the works are begun. By due ecclesiastical authority I mean the authority of a faculty or interim order of the consistory court, or of an archdeacon’s certificate, or, in cases of extreme urgency, the authority of necessity, to which is coupled an obligation to seek directions concerning the urgent works from the chancellor, the registrar or the archdeacon as soon as practicable.
The company, Wells-Thorpe & Suppel Ltd, regularly undertakes ecclesiastical work in the diocese. Mr J A Wells-Thorpe, a director, and Mr Z A Suppel, a consultant, are on the diocesan panel of architects. In my judgment the company, acting through Mr Matthews, should not have supervised the execution of the works specified in the application of 6 April 1987 without first satisfying itself that there was a faculty or archdeacon’s certificate authorising their execution.
The court, in the exercise of its faculty jurisdiction, relies a good deal on the professional integrity and care of architects. It is the practice of this court (and, I understand, of most other consistory courts) when granting faculties for works affecting the fabric of churches to require that the works should be carried out under the supervision of an architect. The court has power to make a faculty subject to such a condition: see s 10(a) of the Faculty Jurisdiction Measure 1964. To my mind this practice is of great value to the Church’s courts. They have neither sheriffs nor tipstaffs; the enforcement and monitoring of their orders rests, in the main, on informed consent and exhortation. The court knows that it may rely on architects, of standing in the diocese, on whom the duty of supervision has by such a condition been placed, to ensure that works are not executed without authority and that there is no deviation from the terms of the faculty authorising the works.
In the light of these considerations I have had to decide whether to state, in this judgment, that I am not prepared henceforward to make it a condition of any faculty which may hereafter issue that Wells-Thorpe & Suppel Ltd should supervise any works authorised by that faculty. If I did so state and a case arose in which that company had been retained to design and carry through works to a church I should have to make it a condition that the works might not be executed unless they were carried out under the supervision of another architect.
I shall not take that step because I realise the hardship it might cause but I give due warning that such a step is in my power. As it is the direction I give is that in any case henceforward in which Wells-Thorpe & Suppel Ltd are the architects retained and in which, following the ordinary practice of the court, I would grant a faculty, subject to the condition that the carrying out of the works is to be supervised by that company, I shall require a personal undertaking to the court from an architect who is a director of, or employed by, the company that the works will be executed in accordance with the terms of the faculty and that no work will be executed without the court’s authority.
Faculty granted. Costs to be paid by petitioners in terms appearing in judgment.
N P Metcalfe Esq Barrister.
R v Licensing Authority, ex parte Smith Kline & French Laboratories Ltd (Generics (UK) Ltd and another intervening)
[1989] 1 All ER 175
Categories: HEALTH; Medicine
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): DILLON, BALCOMBE AND STAUGHTON LJJ
Hearing Date(s): 12, 13, 16, 17, 18, 19 MAY, 29 JUNE 1988
Medicine – Product licence – Generic product – Essential similarity – Demonstrating essential similarity – Use of originator’s confidential information – Originator supplying details of research and testing in development of drug when applying to licensing authority for product licence – Generic companies subsequently applying for product licence for similar generic product – Whether licensing authority entitled to use information supplied by originator when considering subsequent applications for product licences – Whether information supplied by originator forming part of licensing authority’s general store of scientific knowledge – EEC Council Directive 65/65, art 4(8)(a)(iii) – EC Council Directive 87/21.
The applicant pharmaceutical company applied in 1972 for a product licence in respect of a drug developed by it for controlling the secretion of gastric acid and treating peptic ulcers. The applicant supplied the licensing authority with details of its research and testing in the development of the drug and was duly granted a licence. Under EC Council Directive 87/21 other pharmaceutical companies were entitled to apply to the licensing authority for a product licence for a similar generic product after the lapse of ten years from the grant of a licence to the applicant. In 1987 two firms (the generic companies) applied for product licences to market generic forms of the applicant’s drug. Under art 4(8)(a)(iii) of EEC Council Directive 65/65(as replaced by Directive 87/21) an applicant for a product licence in a member state was not required to supply results of tests on his drug if he could ‘demonstrate’ that his product was essentially similar to a product which had been authorised within the Community for ten years and was marketed in the member state. The generic companies claimed that the essential similarity could be demonstrated by reference to the research and testing details supplied by the applicant in support of its application for a product licence. The applicant opposed the use by the licensing authority of the information supplied by it to determine the essential similarity of the generic companies’ drugs, on the ground that the applicant’s information was confidential, and was granted an injunction restraining the authority from so using the information. The licensing authority appealed to the Court of Appeal.
Held – Applying a purposive construction to Directives 65/65 and 87/21(which declared that the purpose of the rules regulating the production and distribution of proprietary medicinal products was the protection of public health, the harmonisation of trade within the Community by the removal of disparities in licensing procedures and the prevention of unnecessary repetitive tests on humans or animals) the essential similarity of a generic product did not have to be demonstrated by a generic company from the results of its own tests when applying for a product licence. Instead, although the licensing authority was not entitled to make the originator’s confidential information gratuitously available to its rivals, it was entitled to use that information as part of its general store of scientific knowledge when considering subsequent applications for product licences. Accordingly, the applicant was not entitled to an injunction restraining the licensing authority from using confidential information supplied by it when considering the generic companies’ applications for product licences. The appeal would therefore be allowed (see p 181 d e g h, p 182 a b, p 183 f, p 185 g h, p 186 a b e f, p 187 g, p 188 j, p 190 d e and p 191 j to p 192 a, post).
Page 176 of [1989] 1 All ER 175
Notes
For factors relevant to the determination of product licence applications, see 30 Halsbury’s Laws (4th edn) para 654.
For EEC policy on importation and marketing of medicinal products, see 51 ibid, paras 6·73, 8·74.
Cases referred to in judgments
Allen & Hanburys Ltd’s (Salbutamol) Patent, Re [1987] RPC 327, CA.
Burroughs-Delplanque Decision 72/25 OJ 1972 L13, p 50, [1972] CMLR D67, EC Commission.
Castrol Australia Pty Ltd v Emtech Associates Pty Ltd (1980) 33 ALR 31, NSW SC.
de Peijper, Re Case 104/75 [1976] ECR 613.
Frans-Nederlandse Maatschappij voor Biologische Producten BV, Re criminal proceedings against Case 272/80 [1981] ECR 3277.
Kabelmetal-Luchaire Decision 75/494 OJ 1975 L222, p 34, [1975] CMLR D40, EC Commission.
Procureur du Roi v Debauve Case 52/79 [1980] ECR 833.
Cases also cited
A-G v Newspaper Publishing plc [1987] 3 All ER 276, [1988] Ch 333, Ch D and CA.
Albert (Prince) v Strange (1849) 1 Mac & G 25, 41 ER 1171, LC.
Allied Mills Industries Pty Ltd v Trade Practices Commission (1981) 34 ALR 105, Aust Fed Ct.
Burmah Oil Co v Bank of England (A-G intervening) [1979] 3 All ER 700, [1980] AC 1090, HL; affg [1979] 2 All ER 461, [1979] 1 WLR 473, CA.
Bushell v Secretary of State for the Environment [1980] 2 All ER 608, [1981] AC 75, HL.
BV Industrie Diensten Groep v J A Beele Handelmaatschappij BV Case 6/81 [1982] ECR 707.
Church of Scientology of California v Kaufman [1973] RPC 627.
Coca-Cola Co’s Applications, Re [1986] 2 All ER 274, [1986] 1 WLR 695, HL.
Coco v A N Clark (Engineers) Ltd [1969] RPC 41.
Comrs of Crown Lands v Page [1960] 2 All ER 726, [1960] 2 QB 274, CA.
Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 74 ALR 428, Aust Fed Ct.
Crofton Investment Trust v Greater London Rent Assessment Committee [1967] 2 All ER 1103, [1967] 2 QB 955, DC.
Hauer v Land Rheinland-Pfalz Case 44/79 [1979] ECR 3727.
I G Farbenindustrie AG Agreement, Re [1943] 2 All ER 525, [1944] Ch 41, CA.
Johnson (B) & Co (Builders) Ltd v Minister of Health [1947] 2 All ER 395, CA.
Keurkoop BV Rotterdam v Nancy Kean Gifts BV Case 141/81 [1982] ECR 2853.
Löwenbrau Munchen v Grünhalle Lager International Ltd [1974] RPC 492.
Marshall (Thomas) (Exports) Ltd v Guinle [1978] 3 All ER 193, [1979] Ch 227.
Norwich Pharmacal Co v Customs and Excise Comrs [1973] 2 All ER 943, [1974] AC 133, HL.
Padfield v Minister of Agriculture Fisheries and Food [1968] 1 All ER 694, [1968] AC 997, HL.
Pioneer Aggregates (UK) Ltd v Secretary of State for the Environment [1984] 2 All ER 358, [1985] AC 132, HL.
R v Deputy Industrial Injuries Comr, ex p Moore [1965] 1 All ER 81, [1965] 1 QB 456, CA.
R v Goldstein [1983] 1 All ER 434, [1983] 1 WLR 151, HL; affg [1982] 3 All ER 53, [1982] 1 WLR 804, CA.
R v Monopolies and Mergers Commission, ex p Elders IXL Ltd [1987] 1 All ER 451, [1987] 1 WLR 1221.
R v Secretary of State for Social Services, ex p Wellcome Foundation Ltd [1987] 2 All ER 1025, [1987] 1 WLR 1166, CA.
Ruckdeschel (Albert) & Co and Hansa-Lagerhaus Ströh & Co v Hauptzollamt Hamburg-St Annen, Diamalt AG v Hauptzollamt Itzehoe Joined Cases 117/76 and 16/77 [1977] ECR 1753.
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Appeal
The licensing authority under the Medicines Act 1968 appealed from the decision of Henry J on 21 December 1987 whereby on an application for judicial review by the applicant, Smith Kline & French Laboratories Ltd (SKF), he declared that the licensing authority, when considering an application under the abridged procedure set out in item 8(a)(iii) of the second paragraph of art 4 of EEC Council Directive 65/65, as replaced by EC Council Directive 87/21, for product licences by third parties in respect of generic versions of the pharmaceutical product cimetidine originated by the applicant, was not permitted to use, refer to or have recourse to any confidential information supplied by the applicant except with the applicant’s express consent. At the hearing of the appeal leave was given to Generics (UK) Ltd and Harris Pharmaceuticals Ltd to intervene. The facts are set out in the judgment of Dillon LJ.
Andrew Collins QC and Helen Rogers for the licensing authority.
Jonathan Sumption QC and Thomas Sharpe for the first intervener.
Henry Carr for the second intervener.
Jeremy F Lever QC and Derrick Turriff for SKF.
Cur adv vult
29 June 1988. The following judgments were delivered.
DILLON LJ. The licensing authority under the Medicines Act 1968, in fact, the Minister of Health, appeals against a decision of Henry J of 21 December 1987 whereby, on an application for judicial review by Smith Kline & French Laboratories Ltd (SKF) the judge made a declaration that in considering an application for a product licence in respect of a medicinal product containing cimetidine made pursuant to the abridged procedure provided for by point 8(a)(iii) of the second paragraph of art 4 of EEC Council Directive 65/65 as amended the licensing authority may not for the purpose of such application use, refer to or have recourse to any confidential information supplied to it by SKF in connection with any application by SKF for a product licence in respect of such a product except with the express consent of SKF.
Cimetidine is, as the judge said, a drug which has proved useful and popular because of its capacity for controlling gastric acid secretion and healing peptic ulceration. It is marketed by SKF in Britain under the brand name Tagamet. It is also covered by UK patents belonging to SKF. These patents were originally granted in 1972 for a period of 16 years, which was due to expire on 9 March 1988. By the Patents Act 1977, however, which was enacted to give effect to the Convention on the Grant of European Patents (Munich, 5 October 1973; TS 20(1978); Cmnd 7090), which in turn had been concerned to harmonise national patent laws throughout the EEC, the duration of the patents was extended from 16 to 20 years on the basis that during the extra four years the patents would be treated as endorsed ‘licences of right’.
There have consequently been several applications for licences of right under SKF’s cimetidine patents. The terms of such licences fall to be settled by the comptroller, subject to appeal. But before he can market his product, which would be a generic form of cimetidine, in Britain, an applicant will need, in addition to the licence under the Patents Act 1977, a product licence under the Medicines Act 1968 as amended. It is with the applications, by present or prospective licensees of right under the Patents Act, for product licences under the 1968 Act that the declaration made by Henry J is concerned; in fact the same issues will arise after the full 20 years of extended patent protection have expired and the patented products and processes are in the public domain, if others than SKF then desire to market cimetidine products.
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The issue involved can of course equally apply to generic versions of valuable drugs other than cimetidine.
In the court below, two of the applicants for licences of right, Generics (UK) Ltd and Harris Pharmaceuticals Ltd, were heard as interveners in opposition to SKF’s application for judicial review. This was allowed under RSC Ord 53, r 9 on the basis that they desired to be heard in opposition and appeared to the court to be proper persons to be heard. On this appeal, this court has allowed the two interveners to be heard in this court in support of the licensing authority’s appeal.
The product licence is necessary in respect of any medicinal product, whether patented or not, because it is provided by s 7(2) and (3) of the 1968 Act that:
‘(2) Except in accordance with a licence granted for the purposes of this section (in this Act referred to as a “product licence”) no person shall, in the course of a business carried on by him, and in circumstances to which this subsection applies,—(a) sell, supply or export any medicinal product, or (b) procure the sale, supply or exportation of any medicinal product, or (c) procure the manufacture or assembly of any medicinal product for sale, supply or exportation.
(3) No person shall import any medicinal product except in accordance with a product licence.’
Each formulation of the product, eg each strength of tablet or liquid or other form of dosage, requires a separate product licence, and each licensee, whether voluntary or as of right, of the originator of the product also requires a separate product licence for each formulation.
The 1968 Act contains provisions requiring any application for a product licence to be in the prescribed form and to be supported by the prescribed information, but it is unnecessary to refer to these provisions since for many years the procedure and requirements for obtaining a product licence for a medicinal product have been governed by European Community law embodied in a succession of directives of the EEC Council. This is a field in which the Community has, for obvious reasons, been concerned to harmonise the practice in all member states. The 1968 Act has been amended to require regard to be had to Community obligations and the EEC Council directives have direct effect as part of English law.
There are, however, certain provisions of the 1968 Act which I should summarise now, before I turn to the EEC law, as I shall have occasion to refer to them later. In particular, s 21(1) provides that, if the appropriate committee established under the 1968 Act or the Medicines Commission have reason to think on grounds of safety, quality or efficacy of the medicinal product in question that they may be unable to advise the licensing authority to grant a licence for the product in accordance with the application, the applicant is to be notified and is to be afforded an opportunity of appearing before and being heard by them, or of making representations in writing with respect to those grounds. Furthermore by sub-s (3) of the same section if the appropriate committee or the commission advise the licensing authority that the licence ought on any such grounds to be refused, or ought if granted to contain special provisions, the applicant is to be given a notice stating that advice and the reasons for it.
Section 28 empowers the licensing authority to suspend, revoke or vary the provisions of a licence on a variety of grounds, including that the medicinal products as sold fail to a material extent to correspond to the characteristics by reference to which the licence was granted, that the products can no longer be regarded as safe or efficacious for the purposes indicated in the licence and that the specification and standards to which the products are manufactured can no longer be regarded as satisfactory.
Section 118(1) makes it an offence for any person to disclose, save in the performance of his duty, any information obtained by or furnished to him in pursuance of the 1968 Act.
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Section 133(2) provides that except in so far as the 1968 Act otherwise expressly provides the provisions of the Act are not to be construed as derogating from any right of action or other remedy (whether civil or criminal) in proceedings instituted otherwise than under the Act.
So far as EEC law is concerned, the main directive in relation to the licensing of medicinal products in the member states is EEC Council Directive 65/65. This was adopted in January 1965, but it has been several times amended. The latest amendment was effected by EC Council Directive 87/21 and it is Directive 87/21 that is at the heart of the present appeal, since it laid down in its present form the abridged procedure referred to in the declaration made by the judge.
Counsel for SKF rightly points out that Directive 87/21 merely amended Directive 65/65 and the amendments have to be construed in their context in Directive 65/65 read as a whole. For present purposes however, it is, in my judgment, sufficient to say that Directive 65/65 prescribes by art 3 that no proprietary medicinal product may be placed on the market in a member state unless an authorisation has been issued by the competent authority of that state, and the directive then sets out in numbered points 1 to 11 of the second paragraph of art 4 the general information which an applicant for a product licence in respect of a medicinal product has to supply to the relevant licensing authority to get such an authorisation. What is required by way of information to satisfy art 4, and particularly point 8, is then spelt out in much greater detail in the Annex, which is mandatory and binding on all member states, to a later directive, EC Council Directive 75/318. The information so required includes a great deal of scientific information, which will embody the results of the extensive research and testing which will, in the case of a new medicinal product, have been carried out by the originator before there could be any question of that product being licensed for marketing.
It is not in doubt that any research-orientated pharmaceutical company such as SKF incurs a great deal of expense on research and testing for any new medicinal product which is successful and proves valuable, and incurs also incidentally a great deal of expense on research and testing in following up other possible lines of inquiry which in the event are found to lead nowhere. It is also not in doubt that in order to obtain its product licences for its various formulations of cimetidine, and particularly the earliest formulations, SKF had to supply the licensing authority, either under Directive 65/65 or under previous regulations, with a great deal of scientific information, on the results of its research and tests, which it rightly regards as highly confidential and which it would be most reluctant to make available for the benefit of any competitor.
It is SKF’s contention that this confidential information, supplied by SKF to the licensing authority in support of SKF’s own applications for product licences for SKF’s cimetidine formulations, cannot be used at all by the licensing authority, without SKF’s consent, when the licensing authority considers other companies’ applications, and particularly the applications of those who hold or seek licences of right under the SKF patents, for product licences in respect of cimetidine. Such applications have been made under the abridged procedure now in force, which is set out in Directive 87/21, the relevant provisions of which are as follows:
‘Whereas point 8 of the second paragraph of Article 4 of Council Directive 65/65/EEC, as last amended by Directive 83/570/EEC, provides that various types of proof of the safety and efficacy of a proprietary medicinal product may be put forward in an application for marketing authorization depending upon the objective situation of the proprietary medicinal product in question; Whereas experience has shown that it is advisable to stipulate more precisely the cases in which the results of pharmacological and toxicological tests or clinical trials do not have to be provided with a view to obtaining authorization for a proprietary medicinal product which is essentially similar to an authorized product, while ensuring that innovative firms are not placed at a disadvantage; Whereas additional details were provided in respect
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of the application of the abovementioned provision by Council Directive 75/318/EEC of 20 May 1975 on the approximation of the laws of the Member States relating to analytical, pharmaco-toxicological and clinical standards and protocols in respect of the testing of proprietary medicinal products, as last amended by Directive 87/19/EEC; Whereas, however, there are reasons of public policy for not conducting repetitive tests on humans or animals without over-riding cause … [The Council of the European Communities] HAS ADOPTED THIS DIRECTIVE:
Article 1
Directive 65/65/EEC is hereby amended as follows: 1. Point 8 of the second paragraph of Article 4 shall be replaced by the following text:
”8. Results of:—physico-chemical, biological or microbiological tests,—pharmacological and toxicological tests,—clinical trials. However, and without prejudice to the law relating to the protection of industrial and commercial property: (a) the applicant shall not be required to provide the results of pharmacological and toxicological tests or the results of clinical trials if he can demonstrate: (i) either that the proprietary medicinal product is essentially similar to a product authorized in the country concerned by the application and that the person responsible for the marketing of the original proprietary medicinal product has consented to the pharmacological, toxicological or clinical references contained in the file on the original proprietary medicinal product being used for the purposes of examining the application in question; (ii) or by detailed references to published scientific literature presented in accordance with the second paragraph of Article 1 of Directive 75/318/EEC that the constituent or constituents of the proprietary medicinal product have a well established medicinal use, with recognized efficacy and an acceptable level of safety; (iii) or that the proprietary medicinal product is essentially similar to a product which has been authorized within the Community, in accordance with Community provisions in force, for not less than [in the present case ten] years and is marketed in the Member State for which the application is made … ” … ’
The products in question have been on the market for over ten years, and the applicants, lacking any consent from SKF, have relied on para (a)(iii).
Henry J upheld the contention of SKF that the licensing authority could not use SKF’s confidential information at all, and he consequently made the declaration which I have set out at the outset of this judgment. His primary ground for his decision was that he construed the word ‘demonstrate’ in Directive 87/21 as imposing an obligation that an application under the abridged procedure under that directive must, save in so far as the consent of SKF as the originator is available, depend solely and exclusively on material supplied by the applicant. He also, however, considered that as a matter of English law the licensing authority owed an obligation of confidence to SKF, in respect of the technical information supplied by SKF to the licensing authority in support of SKF’s own past applications to the licensing authority for product licences, and that it would be a breach of that duty of confidence if the licensing authority were to make use of that confidential information when considering any other companies’ applications for product licences in respect of cimetidine.
The general attitude of the licensing authority is that it accepts that it does owe a duty of confidence to SKF in respect of SKF’s confidential information, in the sense that it is not entitled to make that information gratuitously available to SKF’s rivals. But it claims to be entitled to use the information for the purpose of discharging its statutory and EEC functions, particularly in relation to cimetidine, and as part of its general store of scientific knowledge in considering applications for product licences. The sort of phrase that has been used in the evidence is that the licensing authority does not seek to use the information to supplement or reinforce or help out an application for a product licence which appears to be defective, but to assess and compare the application and to check on
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the validity of claims that an applicant’s product and a product of SKF are indeed ‘essentially similar’ within the meaning of Directive 87/21. There is, however, considerable practical difficulty in discerning any workable hard-and-fast line between these concepts, not least because those charged with the examination and assessment of product licences on behalf of the licensing authority will be scientists and not lawyers. There have been several occasions in the recent past on which statements of its current practice made on behalf of the licensing authority, including a statement by Lady Trumpington in answer to a question by Lord Hacking in the House of Lords, have had to be corrected because, through failures of communication between those doing the work and those trying to explain it, the statements turned out to be inaccurate. Furthermore the duties of the licensing authority under sub-ss (1) and (2) of s 21 of the 1968 Act, summarised above, may well result in an applicant having to be notified of grounds of objection, or reasons for advice against the grant of a product licence, which are founded on SKF confidential information, if the licensing authority is entitled to have regard to that information in considering an application for a product licence; the difficulty might perhaps then arise that the authority could not fairly discharge its duties under those subsections without disclosing enough to give the applicant some inkling of the confidential information involved. In these circumstances, it seems to me that the court has got to adopt a practical approach to the problems set by this case, and to eschew sophisticated distinctions as to what is or is not permissible for the licensing authority.
These problems depend, in my judgment, essentially on questions of Community law, and not of domestic law. The Community directives apply to member states whose systems of law are not founded on the common law, as well as to this country. Those directives must be construed by an appropriately purposive approach, and not by the somewhat rigidly linguistic approach sometimes considered appropriate by English courts for the construction of documents. The first step is, however, to define the position of the directives in the scheme of Community law and to discern their purpose.
The relevant articles of the EEC Treaty on which the directives are founded are arts 30 and 36. Article 30 is concerned with the elimination of quantitative restrictions on the import and export of goods and of all other measures having the equivalent effect; by contrast art 36 provides that art 30 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified, inter alia, on grounds of the protection of health and life or the protection of industrial and commercial property.
Against this background, the purposes of the directives are indicated in the recitals in the directives. In particular Directive 65/65 declares that the primary purpose of any rules concerning the production and distribution of proprietary medicinal products must be to safeguard public health, and that this objective must be obtained by means which will not hinder the development of the pharmaceutical industry or trade in medicinal products within the Community. It then declares that trade in proprietary medicinal products within the Community is hindered by disparities between national provisions and that such hindrances must accordingly be removed.
Directive 75/318 then provides by its recitals that standards and protocols for the performance of tests and trials on proprietary medicinal products are an effective means of control of these products and hence of protecting public health and can facilitate the movement of these products by laying down uniform rules applicable to tests and trials, the compilation of dossiers and the examination of applications, and that the adoption of the same standards and protocols by all the member states will enable the competent authorities to arrive at their decision on the basis of uniform tests and by reference to uniform criteria and will therefore help to avoid differences in evaluation. The recitals further indicate that the particulars and documents which must accompany an application for authorisation to place a proprietary medicinal product on the market must ‘demonstrate’ that potential risks are outweighed by the therapeutic efficacy of the product; but I do not regard this fairly ordinary use of the word ‘demonstrate’ as casting any special burden of proof on the applicant, or as restricting what a licensing authority
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may consider in deciding whether it has been ‘demonstrated’ in a particular case that potential risks are outweighed by therapeutic efficacy.
I come then to the recitals in Directive 87/21 which are set out above. Certain points are obvious, viz: (i) it is considered undesirable, for reasons of public policy, to conduct repetitive tests on humans or animals without overriding cause. Pharmacological and toxicological tests involve, often, tests on animals, and clinical trials involve tests on humans. The undesirability of repeating such tests unnecessarily must therefore be the reason for the distinction drawn by the directive between physico-chemical, biological or microbiological tests on the one hand and pharmacological and toxicological tests and clinical trials on the other hand. That distinction does not, however, necessarily define what is required to determine whether one proprietary medicinal product is essentially similar to another. Essential similarity does not depend only on physico-chemical, biological and microbiological tests and does not merely involve equivalence in physico-chemical, biological or microbiological factors: it also involves bio-equivalance, viz equivalence of the two products in the way they are absorbed by the human body, and this would often, possibly ordinarily, involve clinical trials on humans. Additionally, essential similarity would involve similarity of impurity profile, which could well involve toxicological tests on animals, to test the significance of the amounts of particular impurities. (ii) The directive is concerned that innovative firms are not to be placed at a disadvantage. This is more fully explained in para 15 of the explanatory memorandum from the EC Commission to the Council. It is the reason why under the directive no application for a product licence can be made on the grounds of essential similarity to another product, without consent of the originator of that other product within ten years of first authorisation of that other product in the Community. The originator of the other product is thus given lead time, but, with consent of the originator, essential similarity can warrant the grant of a product licence for a generic product within the ten years.
A further point which emerges from para 14 of the explanatory memorandum from the Commission is that the previous requirement of a ‘bibliography’ had led to problems over the completeness or appropriateness of references to published literature. No one has suggested, however, that this point casts any relevant light on the aspects of the construction of the new point 8 in the second paragraph of art 4 in Directive 87/21 with which this case is concerned.
Certain further relevant points in community law can be seen in decisions of the Court of Justice of the European Communities.
Re de Peijper Case 104/75 [1976] ECR 613 was concerned with parallel imports. An importer desired to market in Holland by its generic name a product manufactured in the UK under a product licence there which was identical (because from the same source) with the product marketed by the originator in Holland under a Dutch product licence. The Dutch authorities insisted that the importer’s product could under the Dutch regulations only be marketed in Holland if various documents and consents were provided by the originator which the originator was not prepared to provide for a competitor. The court held that in the circumstances the enforcement of these regulations was incompatible with the EEC Treaty. The court had to consider the interplay of arts 30 and 36 of the Treaty, and it held that national rules or practices which restrict imports of pharmaceutical products or are capable of doing so are only compatible with the Treaty to the extent to which they are necessary for the effective protection of the health and life of humans, and that national rules or practices do not fall within the exception specified in art 36 if the health and life of humans can be as effectively protected by measures which do not restrict intra-Community trade so much (see [1976] ECR 613 at 636 (paras 16–17)). The court stated that health and the life of humans rank first among the property or interests protected by art 36, and it considered that parallel imports should not be placed at a disadvantage, since the effective protection of health and the life of humans demanded that medicinal preparations should be sold at reasonable prices (at
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635(para 15), 637(para 25)). The court considered, as I read its decision, that the public health authorities of the member state where the product was to be imported should use the materials they already had on file from the originator’s applications, in order to check the import (at 636–637(para 21, 23)). The court also envisaged that simple co-operation between the authorities of the member states would enable them to obtain on a reciprocal basis the documents necessary for checking certain largely standardised and widely distributed products (at 637(para 27)).
It was not suggested in Re de Peijper that the information on the files of the public health authorities of the member states, and in particular of the member state where the product was to be imported, was confidential to the originator and could not be looked at without the originator’s consent and that that information was itself protected by art 36 of the Treaty as being industrial or commercial property. Had the suggestion been made, however, it is plain, in my judgment, that the court would have rejected it, in view of the overriding importance of the protection of the health and life of humans and the consequent requirement that medicinal preparations should be sold at reasonable prices. The necessity from the point of view of public health and the free movement of medicinal products for the competent authorities in the member states to have at their disposal all useful information on authorised proprietary products, based in particular on summaries adopted in the other member states of the characteristics of the products, was recorded in EC Directive 83/570. It is obviously implicit that the authorities will be free to use the information at their disposal, though in fact the information in the particular summaries envisaged may not be in any sense confidential.
There is then Re criminal proceedings against Frans-Nederlandse Maatschappij voor Biologische Producten BV Case 272/80 [1981] ECR 3277, where the European Court laid down in very clear terms that the licensing authorities of a member state are not entitled unnecessarily to require technical or chemical analyses or laboratory tests in respect of a fungicide where those analyses and tests have already been carried out in another member state and their results are available to those authorities or may at their request be placed at their disposal. It must be a fortiori if the analyses and tests have already been carried out in the same member state.
Against that background of Community law, I am unable to attach the same weight as Henry J did to the word ‘demonstrate’ in Directive 87/21. In my judgment, the word is used in the same ordinary sense as in the recital in Directive 75/318 to which I have already referred, or as the word ‘proves’ is used in art 5 of Directive 65/65, without restricting the licensing authority to looking only at material produced by the applicant. Such a passive role for a licensing authority is not incidentally consistent with the general view that the court has taken of the role a licensing authority should play: see Re de Peijper Case 104/75 [1976] ECR 613 at 637(para 24) (‘instead of waiting passively for the desired evidence to be produced to them’) and the Frans-Nederlandse case [1981] ECR 3277 at 3291(para 14) (‘the authorities of the Member States are nevertheless required to assist’) (although these cases were of course decided before Directive 87/21 was adopted and not in relation to that directive.)
In addition, in my judgment, if there is any right under English law (as opposed to Community law) for SKF to restrain the licensing authority from making any use of SKF’s confidential information without SKF’s consent when considering someone else’s application for a product licence, that right under domestic law is, in my judgment, overridden by the requirements of Community law. Counsel for SKF referred, in support of his arguments on English law, to s 133(2), summarised above, of the 1968 Act, but he accepted that that section could not override the requirements of Community law.
On this part of the case the judge placed importance on the state of the evidence in the court below, and he commented (i) that there was no assertion that there would be any public health risk resulting from the licensing authority not having recourse to SKF’s confidential information for the limited purposes for which it claimed to desire recourse to it, (ii) that the licensing authority’s evidence did not identify any difficulties or dangers
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that would follow if the authority was not to enjoy the recourse to that information which the authority claimed without the consent of SKF, and (iii) that the licensing authority’s chief scientific witness, Dr Jones, had nowhere said that such recourse to the information was ‘essential’ for the proper consideration of an application.
As to (i), it is of course unlikely that there would be a public health risk, because SKF will continue to supply Tagamet and the licensing authority will not grant an applicant a product licence unless the authority is satisfied that there is no public health risk. What is more likely to happen, whether with cimetidine or with other drugs, is that some applicants, whose applications ought to succeed, will have their applications refused, because the authority will not be prepared to take the chance of approving without checking against the SKF (or other originator’s) information, or some applicants will be required to carry out additional tests, and in particular pharmacological and toxicological tests and clinical trials, duplicating unnecessarily the tests carried out by SKF (or other originator). Thus there would be restrictions on the movement of goods in contravention of art 30.
Moreover the judge’s choice of the word ‘essential’ in the passage I have referred to in (iii) above puts any burden on the licensing authority far too high, in my judgment; in essence, the judge has, in my respectful view, got the balance the wrong way round, probably because he has overlooked the importance of art 30.
It is next necessary to consider the passage in point 8 as replaced by Directive 87/21, ‘However, and without prejudice to the law relating to the protection of industrial and commercial property: (a) The applicant shall not be required to provide’ etc. It appears that the phrase ‘industrial and commercial property’, which also appears in art 36 of the Treaty as already mentioned, has not been comprehensively defined by the Community. It is therefore necessary to look to the national law to see what right exists under the national law, and then to consider whether a right of that nature falls within the Community law concept of ‘industrial and commercial property’. That has been done, for instance, with copyright. For present purposes, I would be prepared to assume, without deciding, that the English law concept of confidential information is, if the information relates to technical or scientific matters, within the concept of ‘industrial and commercial property’ in Community law. Even so, however, the passage ‘However, and without prejudice’ etc does not, in my judgment, bear on the present case, because in its context in Directive 87/21, and in the context of the amendment effected by that directive to Directive 65/65, the passage is only concerned with the position of the applicant, and with what the applicant may or may not do, and not with the position of the licensing authority. To put it very briefly, if one looks at art 4 of Directive 65/65 as amended, the words do not bear on the licensing authority at all. They are not an injunction to the licensing authority not, when exercising its functions under Directive 65/65, to interfere with industrial or commercial property.
On grounds of Community law, therefore, I would, for the reasons which I have endeavoured to explain, allow this appeal.
An alternative approach is to consider the position solely under English law, the national law. In the circumstances of this case, has SKF a right, founded on breach of confidence and the law relating to confidential information, to object to the licensing authority using SKF’s confidential information without SKF’s consent when considering any other applicant’s application for a product licence in respect of cimetidine? Essentially SKF has to win on both limbs of the case, both on English law and on Community law, and to show (a) that it has a right under English law and (b) that that right is not overridden by Community law.
There is no doubt that SKF supplied confidential information to the licensing authority. There is no doubt also that in an appropriate context unauthorised use of confidential information by the recipient can be restrained as much as unauthorised disclosure to a third party. It does not, however, follow that use of information will necessarily be restrained just because disclosure of it would be restrained; the two are not necessarily
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the same and whether and how far use is authorised must depend on the context. The crucial question is therefore whether the use to which the authority proposes to put the information would be an unauthorised use, to the detriment of SKF as the party who communicated the information. The court must therefore consider, on an objective view of the facts, what use SKF must be taken to have authorised the authority to make of the information. Since the authority is a public authority exercising important functions in the public interest, it does not follow that the answer to the question will be the same as it might have been in a wholly commercial context, eg if one commercial body had supplied confidential information to another commercial body in the course of negotiations for a purely commercial joint venture.
The judge appears to have taken the view that the confidential information supplied by SKF to the licensing authority could only be used by the authority for the limited purpose for which SKF originally supplied it, viz the purpose of considering and granting (or presumably if the facts had warranted it refusing) SKF’s application for a product licence for its own medicinal product. Counsel for SKF concedes, however, that the implied authority must go further than that, and must extend to enabling the authority to use the information for the purpose of policing any licence granted to SKF, ie suspending, revoking or varying the provisions of the licence under s 28 of the 1968 Act. The concession is inevitable on the wording of s 28 and in particular on the wording of grounds in paras (c), (g) and (h) (summarised earlier in this judgment) of sub-s (3). But it indicates that the matters in relation to which the information can be used extend to matters where the use of it is in the public interest, albeit against the private, or purely personal, interest of SKF.
Counsel for SKF seemed also to concede that the confidential information might be used by the licensing authority, without SKF’s consent, to avoid a potential danger to health. Thus, in appropriate circumstances, if not in general, it might be used to defeat a competitor’s application for a product licence. Whether or not this is conceded by counsel, I have no doubt that it is right: in the context of a licensing scheme set up in the public interest for the protection of health and life, it must be clear that all information supplied to the licensing authority by any applicants must be available to the authority as a general fund of knowledge to avoid dangers to health and life. One can imagine the public outcry if it were not so. Counsel founds this on the proposition that use of the information to avoid a danger to health or to defeat an application which ought not to succeed could not be to the detriment of SKF, and so could not found an action in breach of confidence as damage, or apprehended damage, is an essential ingredient of the cause of action. For my part, however, I would put it on a much wider basis. The protection of public health is the fundamental purpose of the licensing system under the 1968 Act. It is a purpose of great public importance, and I find it inconceivable that anyone could have supposed that the licensing authority was not free to have regard to any information in its possession, if that information might be relevant to avoiding a danger to health.
I assume that SKF and other research pharmaceutical companies act in good faith and after careful investigation when they make application for product licences for medicinal products. None the less, a question of revocation of a licence, not necessarily SKF’s licence, may arise in the light of subsequent experience and there may then be a suspicion that the product may have side effects which had not been appreciated when the licence was granted. Any such question of revocation of a licence is likely to be difficult, and to be grave in its implications whichever way it is decided. I cannot believe that where any question of public health is concerned the licensing authority is only to be entitled to use SKF’s confidential information in so far as SKF specifically consents or the use turns out not to be detrimental to SKF.
Because of the importance of the protection of public health, the licensing procedure under the 1968 Act has since then become linked to Community law. The harmonising of the national laws of the member states into a uniform procedure is in itself an important purpose where matters of public health are concerned. Again, I do not see that
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that can be read as subject to a qualification that no detriment to the interests of SKF is involved.
In my judgment SKF when it supplied confidential information to the licensing authority was bound by the overriding public purposes of the 1968 Act in its context in Community law, viz the purposes of the protection of public health and of harmonising practice throughout the Community and removing obstacles to trade between member states of the Community. The licensing authority is, in my judgment, as a matter of English law, entitled to use that information, without further consent from SKF, at its discretion in performing any of its functions as licensing authority under the 1968 Act and Community law. Accordingly on English law also, I would allow this appeal.
I should mention in passing that counsel for the licensing authority and the interveners sought to support their arguments on English law by reference to s 118(1) of the 1968 Act. I have been unable, however, to derive assistance from that section since it seems to me that the argument is circular: to say that a person cannot disclose information obtained under the 1968 Act save in the performance of his duty does not per se show what his duty is, and casts no light at all on whether or not his duty permits him to use particular information in considering someone else’s application for a product licence.
Finally, there has been reference in the course of the argument to the possibility that this court might direct a reference to the European Court. No party has, however, invited this court to direct a reference and in my judgment it is better that this court should express its views on the issues involved, in the hope of clarifying those issues, and should leave it to others to direct a reference if a reference be considered necessary.
As indicated, I would allow this appeal.
BALCOMBE LJ. I have had the advantage of reading in draft the judgments of Dillon and Staughton LJJ, and I agree with them that this appeal should be allowed. Although we are differing from the judge below, I propose to deal with the matter quite shortly.
I propose to consider EEC law first since, even if SKF would otherwise have a right under English law, it is common ground that that right will be overridden by Community law, if applicable. The question of Community law in turn depends primarily on the meaning and effect of EC Council Directive 87/21. I agree with Dillon LJ that the directive should be construed by an appropriately purposive approach and I therefore turn first to the report (explanatory memorandum) from the Commission to the Council which explained the necessity for the replacement of point 8 of the second paragraph of art 4 of EEC Council Directive 65/65 which was effected by Directive 87/21. I set out below the relevant extracts from paras 14 and 15 of this report:
‘14. When certain applications for marketing authorization submitted to the Committee for Proprietary Medicinal Products were being examined, it became clear that not all the Member States interpreted Article 4(8) of Directive 65/65/EEC in the same way. Paragraph 8 provides that the person responsible for placing the product on the market shall submit in support of his application not only the results of analytical tests but also those of:—pharmacological and toxicological tests (on laboratory animals and sometimes in vitro tests)—clinical trials (in humans, whether patients or healthy volunteers). By way of exception, another company may submit an application for marketing authorization in respect of a proprietary product which is similar to a medicine already authorized, by submitting a summary dossier consisting of bibliographical information. However the manufacturing dossier and the results of the analytical tests (physico-chemical, biological and micro-biological) must be submitted in every case. It has nevertheless been found that the published literature is, in fact, often incomplete or inappropriate. Confronted by this problem, certain national authorities have tended not to be too demanding as regards the bibliographical evidence submitted by the second applicant. This practice seriously penalizes the innovatory firm which has [had] to meet the high
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cost of clinical trials and animal experiments, while its product can be copied at lower cost and sometimes within a very short period. Protection of a medicinal innovation by means of a patent is not in fact always possible or effective, as for example in the case of a natural substance or of a substance which is already known but on which additional research has been carried out with a view to a new therapeutic use.
15. The proposed amendment of Article 4(8) of Directive 65/65/EEC is intended to reestablish the normal principle for exemption, i.e. that according to which the innovating firm consents to the second applicant referring to the tests described in the dossier of the original medicine. The second applicant is also the beneficiary of the exemption as it now stands in Article 4(8), i.e. the right to use published literature. This possibility is, in practice, very limited, since, in accordance with the second paragraph of Article 1 of Directive 75/318/EEC, this bibliographical evidence must be submitted in order to correspond “in like manner” to the criteria of safety and efficacy in the Annex to that Directive. Where the innovatory producer does not give its consent or if the bibliographical evidence cannot be adduced, it appeared advisable to insert a clause not permitting the second applicant to submit an application in simplified form in respect of a copy of a medicine until ten years have elapsed following the authorization of the original medicinal product in the country concerned by the application. This ten-year period will enable the partial recovery of the research investment, which might not be protected otherwise, for example by a patent … ’
When this report is read in full, in conjunction with the two principal recitals to Directive 87/21, viz:
‘Whereas experience has shown that it is advisable to stipulate more precisely the cases in which the results of pharmacological and toxicological tests or clinical trials do not have to be provided with a view to obtaining authorization for a proprietary medicinal product which is essentially similar to an authorized product, while ensuring that innovative firms are not placed at a disadvantage … Whereas, however, there are reasons of public policy for not conducting repetitive tests on humans or animals without over-riding cause’
it seems to me that the purpose of the directive is clear. It is to achieve a balance between the interests of the public, and in particular their interest to prevent unnecessary tests on humans and animals, and the interests of the innovative firm in its confidential data (OCD) so far as that relates to the results of pharmacological and toxicological tests and clinical trials. The pattern of the directive then becomes obvious. During the protected period, in the present case ten years, the applicant for a generic product licence under the abridged procedure must produce its own pharmacological, toxicological and clinical data, unless (a) the originator consents to the use of its OCD for the purpose of examining the application, (para (a)(i) of point 8 of the second paragraph of art 4); or (b) the necessary material is contained in published scientific literature (para (a)(ii) of point 8).
However, after the expiry of the ten-year period, which will have given the innovator the necessary degree of protection for his research investment (and it is to be recalled that in many cases, as in the present, the innovator will retain the benefit of patent protection so that he will receive a royalty even if a licence of right is granted to the generic applicant, which will take into account his research expenditure: see Re Allen & Hanburys Ltd’s (Salbutamol) Patent [1987] RPC 327), the balance swings towards the public interest, and the licensing authority will be entitled to use the OCD without the originator’s consent, thus preventing further unnecessary tests on animals and humans.
If one approaches Directive 87/21 in this manner, then it becomes clear that the approach of SKF, which commended itself to the judge, effectively destroys the object of the directive. Counsel for SKF submitted that a literal construction of the directive
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requires a two-stage approach. (i) The general applicant must first demonstrate the essential similarity of his product to that of the originator’s product. It was common ground that essential similarity is not confined to the physical and chemical properties of the two products. It extends to such matters as bio-equivalence and purity profile, which, as counsel conceded, might well need to be established by the tests on humans and animals which it is the avowed policy of the directive to minimise. (ii) It is only when the generic applicant has demonstrated the essential similarity of the two products that the licensing authority is entitled to use the OCD.
The fallacy in this literal approach is readily apparent. If the generic applicant must first demonstrate the essential similarity of the two products without reliance on the OCD, this must apply as much to the procedure under para (a)(i) of point 8 of the second paragraph of art 4, where the innovator has consented to the use of the OCD for the purpose of examining the application, as it does to the procedure under para (a)(iii), where there has been no consent but the ten-year period has elapsed. But it makes a nonsense of the directive if, notwithstanding that the innovator has consented to the use of his OCD, the licensing authority cannot use it because the applicant must first demonstrate the essential similarity of his product, which he may not be able to do without either using the OCD or conducting further animal and human tests, which it is the avowed object of the directive to avoid.
There remains the question of the effect of the proviso in the introductory words to para (a) of point 8: ‘… without prejudice to the law relating to the protection of industrial and commercial property.' Like Dillon and Staughton LJJ, I am prepared to assume that confidential information can be industrial or commercial property under Community law, although I have considerable doubts whether that assumption is justified: see Re Burroughs-Delplanque Decision 72/75 [1972] CMLR D67 at D70 and Kabelmetal-Luchaire Decision 75/494 OJ 1975 L222, p 34 at p 38. But, even on that assumption, in my judgment the proviso does no more than make it plain that the grant of a product licence to the generic applicant does not override any rights (eg patent rights) to which the originator of the product may be entitled.
On the view which I have taken of Community law, it becomes unnecessary to consider the English law relating to confidential information. However, on this point, the question comes down to this: what was the purpose for which SKF provided the OCD to the licensing authority? Counsel for SKF would limit that purpose to that of SKF, the specific purpose of obtaining a product licence. That submission found favour with the judge. But, as Dillon LJ has pointed out and as counsel was constrained to concede, the purpose must go further than that: it must at least enable the authority to use OCD for the purpose of the exercise of its powers to suspend, revoke or vary the original product licence under s 28 of the Medicines Act 1968. Like Dillon and Staughton LJJ, I can see no reason why the purpose should be other than the purpose of the licensing authority to enable it to perform its statutory functions under the 1968 Act and under Community law. That is sufficient to distinguish this case from Castrol Australia Pty Ltd v Emtech Associates Pty Ltd (1980) 33 ALR 31 and I say no more about this and certain other Australian cases to which we were referred, save to say that I do not find them of any help in answering the question which I have posed above.
Having regard to the way in which this case has developed, and was argued both before us and below, and since no party has invited us to direct a reference to the Court of Justice of the European Communities at this time, I too would not be minded to direct a reference at the present stage.
For these reasons, and for those given at greater length by Dillon and Staughton LJJ, I too would allow this appeal.
STAUGHTON LJ.
1 The meaning of the Council directives
The first and principal ground on which Henry J allowed this application for judicial
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review was based on the language of EEC Council Directive 65/65, as amended by EC Council Directive 87/21. This now provides that an applicant need not supply results of certain tests ‘if he can demonstrate’ that his product is essentially similar to a produce which has been authorised within the Community for ten years and is marketed in this country. This suggests that he, the applicant, must produce proof of essential similarity.
The argument is strengthened when that provision in Directive 87/21 is inserted in its proper place, which is art 4 of Directive 65/65. That article provides:
‘The application shall be accompanied by the following particulars and documents … ’
There is then a list of information and documents to be supplied. Article 5 provides that the application shall be refused—
‘if the particulars and documents submitted in support of the application do not comply with Article 4.’
Consequently it is said that, if the applicant fails to supply proof of essential similarity from his own resources, he is not excused from conducting the tests in question. Either he must provide test results or else his application will fail.
That argument has force, and the judge accepted it. However, there are powerful arguments to the contrary. Firstly, if the words ‘he can demonstrate’ exclude any reliance on material already in the possession of the licensing authority, then an applicant cannot establish essential similarity by referring the authority either to (i) a drug master file which it holds, or (ii) the originator’s confidential data (OCD) when the owner of the information consents to or even supports the application. That is not a fanciful possibility: it could arise when the applicant is a licensee, whom the owner does not wish to have direct access to his information. Counsel for SKF accepts that in such a case information in the possession of the authority can be used to establish essential similarity by reference.
Secondly, counsel accepts (subject, I think, to his separate argument on confidentiality) that the authority can and should have regard to information already in its possession for the purpose of considering the safety, efficacy and quality of the new applicant’s product. It seems to me very proper that the authority should do so. Of course it may still be the law that essential similarity must first be established by independent evidence before that stage is reached. But I should not be inclined to believe that the Council directives intended such a complicated process, unless they plainly say so.
Thirdly, although the evidence is by no means clear, it emerges that with some products it simply will not be possible to demonstrate essential similarity without reference to the OCD, the very word ‘similarity’ implies comparison, and ‘essential’ that there is no difference which is of material importance. The judge considered that reference to the data was ‘a matter of convenience rather than a necessity’. I cannot regard that conclusion as justified by the evidence. Indeed before this court it was conceded that with some products reference to the data was a necessity if essential similarity was to be established.
The answer of counsel for SKF to this point was, in effect: too bad, the new applicant must then conduct his own tests, or else abandon his application. But one of the objects of Council Directive 87/21 was the avoidance of unnecessary tests. That is shown by the recital:
‘Whereas, however, there are reasons of public policy for not conducting repetitive tests on humans or animals without over-riding cause.’
It scarcely promotes that objective to hold that unnecessary tests must be conducted, if the new applicant is to obtain a licence, in a case where essential similarity could be demonstrated by reference to the OCD but not otherwise.
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Fourthly, there is provision in ss 20 and 21 of the 1968 Act for a form of appeal against the refusal of a licence, and for the giving of reasons when a licence is refused. Similar provisions apply to the suspension, revocation or variation of a licence under s 28. I would suppose that the authority can and should have regard to the OCD in exercising any of those powers, although no doubt care is taken to avoid unnecessary disclosure of it to the new applicant or licence-holder when reasons are given.
We were referred to art 9 of Council Directive 65/65, and to s 133(1)(c) of the 1968 Act. Those, broadly speaking, are saving provisions for civil and criminal liability arising apart from the legislation in question. In my judgment they have no bearing on the point. I agree with counsel for SKF that the directives are at pains to achieve a balance between the reward due to innovators for their enterprise and labour on the one hand and freedom of trade on the other. But innovators have the benefit of patent rights, where their invention can be patented, and those are wholly unaffected by the directives. It must be of much less importance to them whether, after their product has been licensed for ten years, their confidential data can be used without their consent in establishing the essential similarity of a new applicant’s product. I can see no presumption that the reward to innovators should include the right to prevent their data being used for that purpose.
In the result I conclude that too much emphasis is placed on the words ‘he can demonstrate’, and particularly the word ‘he’, if it is held that the new applicant must establish essential similarity wholly by his own efforts, and may not refer the authority for this purpose to the OCD which is already in its possession. It might perhaps have been better to say ‘if it can be demonstrated that’ or ‘if it is proved that’.
But we are not to adopt a narrow, semantic approach to the interpretation of Community legislation. In my judgment that is the true meaning of the directive: the new applicant is not confined to evidence which comes from his own possession and his own researches.
2 The proviso
This occurs in the revised point 8 of the second paragraph of art 4, and reads:
‘… without prejudice to the law relating to the protection of industrial and commercial property … ’
In Procureur du Roi v Debauve Case 52/79 [1980] ECR 833 at 878 Mr Advocate General Warner said that ‘industrial and commercial property’ was not a term of art in English law. However, it is the meaning of the phrase in Community law which has to be considered; and there it appears in art 36 of the EEC Treaty itself.
It is not clear to me whether the right to protection of confidential information is or is not industrial or commercial property in Community law. But I can assume for the purposes of this judgment that it is. What the proviso then says, so far as that particular topic is concerned, is at most that the amendment to Council Directive 65/65 shall not alter or affect any rights or liabilities concerned with the protection of confidential information. If that is the right view, I would not dissent from the opinion of Dillon LJ that it is with the rights of the new applicant that the proviso is concerned. But if that is wrong one then has to inquire whether any such right of SKF is altered or affected by the terms of the amendment. For the reasons given in section 3 of this judgment, I am of opinion that none is altered or affected.
I have said that this is the most which the proviso achieves. But I am inclined to doubt whether, on a true view, it achieves even that. My doubt arises because I have difficulty in seeing how the terms of the amendment ever could alter or affect rights or liabilities relating to the protection of industrial and commercial property. Perhaps then the proviso is unnecessary, introduced from an abundance of caution. Alternatively, counsel for the first intervener, Generics (UK) Ltd, may be right in an argument which I can fairly describe as arcane. This was that the amendment, when it mentioned in para 8(a)(i)
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of point 8 the person responsible for the marketing of the original proprietary medical product, might be said to be touching for the first time in this field on the law relating to the protection of industrial and commercial property; it might also be said to be a measure for the harmonisation of national laws within the Community; and if it answered that description, it could be held to replace the saving for such protection in art 36 of the Treaty. That, according to counsel, was the result which it was desired to avoid.
3 Confidential information
The second ground on which Henry J allowed the application for judicial review was that it would be a breach of the authority’s duty of confidence if it were to use the OCD in considering whether a new applicant’s product was essentially similar.
It is not said that SKF has any contractual right to confidence against the authority, or that such use of the data would be tortious. The case is that equity would grant an injunction to restrain it. That being the law, in judicial review proceedings the court can hold that such use of the data would be improper.
There has been no contest as to that analysis of the legal problem as it arises in this case. Nor has it been disputed that the OCD is, by its nature, confidential. It is agreed that equity would restrain disclosure of the data to others, save for certain limited purposes. That view is fortified by s 118(1) of the 1968 Act:
‘If any person discloses to any other person … (b) any information obtained by or furnished to him in pursuance of this Act, he shall, unless the disclosure was made in the performance of his duty, be guilty of an offence.’
There are instances of disclosure which would plainly be permissible, such as to the committees or the commission established by the Act, if indeed that could be regarded as disclosure to another person.
Although the statute deals only with disclosure, it is agreed on all sides that it would also be wrongful in certain circumstances to use the OCD. Equally it is argued that use for some purposes is both the right and the duty of the authority. Thus the authority must use the data in considering the original application by those who provided the data; but it would plainly be wrong for the authority or one of its employees to use the data so as to manufacture its or his own medicinal products. The problem is to find the line that divides those extremes.
Counsel for SKF argues, and this argument found favour with the judge, that one must ascertain the purpose for which the information was provided to the authority. This, he says, was specifically in order that SKF should obtain a licence for its own product; consequently the authority may only use the information in connection with that application.
In my judgment that argument plainly goes too far. It would preclude the authority from using the data in considering, for example, the safety of a new applicant’s product. Counsel’s answer to that is (i) that the data could be used to show that the new product was unsafe, which would not be to the originator’s detriment, or (ii) that use in connection with safety could be justified by higher public interest. For my part, I do not accept that use to demonstrate the safety of the new product, as opposed to lack of safety, would be wrongful. One of the objects of the system is, as I have said, to avoid unnecessary and repetitive tests. Nor do I think that safety, which lies at the heart of the system, should only be considered in the context of the exception of higher public interest.
I prefer the view put forward by counsel for Generics that use, like disclosure, is authorised if it occurs in the course of the authority’s duties. In reality that is no different from saying that use is permitted if it is within the purpose for which the information was entrusted to the authority. No doubt the purpose of SKF was to obtain a licence for its own product. But I do not see why the purpose of SKF alone should be relevant, and the purpose of the authority disregarded. As between two private parties it may be
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possible to discern a common purpose for entrusting information. But the purpose is less likely to be common to both when one is a body with statutory functions. The purpose of the authority in acquiring the information was to use it for all or any of its duties as might be appropriate. I would hold that the authority is not in breach of confidence if it uses the originator’s data in any such manner. That makes it unnecessary to consider whether any countervailing public interest would excuse a breach of confidence in this case.
4 Reference to the Court of Justice of the European Communities
No party invited us to refer this case to the European Court. But counsel for SKF drew our attention to the discretion we have to refer it of our own motion. He also submitted that, if the case reaches the House of Lords, there might then be an obligation to refer it under art 177 of the EEC Treaty.
The issue as to the meaning of the Council directives is, of course, a question of Community law. But if SKF fails on that issue, it may still succeed on the ground of breach of confidence. Indeed the full width of the declaration granted by Henry J could only be justified, if at all, on that ground. That is, initially at any rate, an issue of the national law of England and Wales. In theory, if this were a case of breach of confidence by our national law, that could be sanctioned by Community law. But I am not wholly convinced that it would be. For the reasons given by Dillon LJ I do not consider that we should refer the case to the European Court at this stage.
Appeal allowed. Leave to appeal to House of Lords refused.10 October. The Appeal Committee of the House of Lords (Lord Bridge of Harwich, Lord Ackner and Lord Oliver of Aylmerton) gave SKF leave to appeal.
Solicitors: Treasury Solicitor; S J Berwin & Co (for the first intervener); Roiter Zucker (for the second intervener); Simmons & Simmons (for SKF).
Carolyn Toulmin Barrister.
Barclays Bank of Swaziland Ltd v Hahn
[1989] 1 All ER 193
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): FOX, PARKER AND CROOM-JOHNSON LJJ
Hearing Date(s): 2, 3 AUGUST 1988
Practice – Service – Service by post – Writ for service on defendant within jurisdiction – Whether defendant required to be physically present within jurisdiction at time when service is effected by post – RSC Ord 10, r 1(2).
It is not a condition of valid service under RSC Ord 10, r 1(2)a, which provides for ‘A writ for service on a defendant within the jurisdiction’ to be served by post instead of being served personally, that the defendant be physically present within the jurisdiction at the time when service is so effected, since ‘within the jurisdiction’ refers to the writ and service of it rather than to the defendant (see p 195 e f h j, p 196 f g and p 197 b h j, post).
Notes
For service of process by post, see 37 Halsbury’s Laws (4th edn) paras 151–152, and for cases on the subject, see 37(2) Digest (Reissue) 263, 1711–1714.
Interlocutory appeal
The plaintiff, Barclays Bank of Swaziland Ltd, a company incorporated under the laws of Swaziland, appealed against the order made by Sir Neil Lawson sitting as a judge of the High Court in the Queen’s Bench Division in chambers on 28 January 1988 whereby he dismissed the plaintiff’s appeal from the order made by Deputy Master Ashton on 7 October 1987 declaring that a writ issued on 16 December 1986 by the plaintiff against the defendant, John Aneck Hahn, had not been duly served on the defendant and that therefore the court had no jurisdiction to hear the plaintiff’s claim. The facts are set out in the judgment of Fox LJ.
Conrad Dehn QC and Michael Brindle for the plaintiff.
Winston Roddick QC and Michael Soole for the defendant.
3 August 1988. The following judgments were delivered.
FOX LJ. This is an appeal by the plaintiff from an order of Sir Neil Lawson sitting as a judge of the High Court in the Queen’s Bench Division, whereby he dismissed the appeal of the plaintiff from a decision of Deputy Master Ashton, declaring that the plaintiff’s writ in the action had not been duly served on the defendant, Mr Hahn.
The plaintiff, which is a Swaziland bank, claims that the defendant owes it some £12m under a guarantee executed in Swaziland in 1982.
The defendant, who is retired, lives with his wife in various places. For some part of the year they visit their family in South Africa. For another part of the year, amounting, according to the defendant’s wife’s evidence, to more than four weeks but seldom more than twelve weeks in aggregate, at a flat rented by the wife at a house called Shardeloes, near Amersham in Buckinghamshire. The flat is known as apartment 7. The defendant’s evidence is that his wife has a right to occupy the flat for not more than six months in a year. For the remainder of the year they travel, mostly on the continent of Europe. The defendant’s evidence is that generally on average they spend no more than three months a year in England, though in some years he stays for considerably longer than that.
The plaintiff originally sought to sue the defendant in South Africa in 1986, but those proceedings were abandoned because the defendant could not be served. On 6 November 1986, in the course of the proceedings in South Africa, the defendant’s son swore an affidavit that the defendant was permanently resident in England.
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The next thing that happened was that on 6 December 1986 the plaintiff instituted the present proceedings in England. On 26 January 1987 leave was obtained to serve the defendant out of the jurisdiction, namely in South Africa. Leave to serve out of the jurisdiction was made on the basis of an affidavit, on behalf of the plaintiff, that the defendant was domiciled in England. No application was made to set that order aside. However, the order did not avail the plaintiff since it did not prove possible to serve the defendant in South Africa.
On 14 April 1987 the plaintiff sought to effect service in England. At this point I refer to RSC Ord 10, under r 1 of which service was sought to be effected. Rule 1 is as follows:
‘(1) A writ must be served personally on each defendant by the plaintiff or his agent.
(2) A writ for service on a defendant within the jurisdiction may, instead of being served personally on him, be served—(a) by sending a copy of the writ by ordinary first-class post to the defendant as his usual or last known address, or (b) if there is a letter box for that address, by inserting through the letter box a copy of the writ enclosed in a sealed envelope addressed to the defendant. In sub-paragraph (a) “first-class post” means first-class post which has been pre-paid or in respect of which prepayment is not required.
(3) Where a writ is served in accordance with paragraph (2)—(a) the date of service shall, unless the contrary is shown, be deemed to be the seventh day (ignoring Order 3, rule 2(5)) after the date on which the copy was sent to or, as the case may be, instead through the letter box for the address in question; (b) any affidavit proving due service of the writ must contain a statement to the effect that—(i) in the opinion of the deponent (or, if the deponent is the plaintiff’s solicitor or an employee of that solicitor, in the opinion of the plaintiff) the copy of the writ, if sent to, or, as the case may be inserted through the letter box for, the address in question, will have come to the knowledge of the defendant within 7 days thereafter; and (ii) in the case of service by post, the copy of the writ has not been returned to the plaintiff through the post undelivered to the addressee.
(4) Where a defendant’s solicitor indorses on the writ a statement that he accepts service of the writ on behalf of that defendant, the writ shall be deemed to have been duly served on that defendant and to have been so served on the date on which the indorsement was made.
(5) Subject to Order 12, rule 7, where a writ is not duly served on a defendant but he acknowledges service of it, the writ shall be deemed, unless the contrary is shown, to have been duly served on him and to have been so served on the date on which he acknowledges services.
(6) Every copy of a writ for service on a defendant shall be sealed with the seal of the office of the Supreme Court out of which the writ was issued and shall be accompanied by a form of acknowledgment of service in Form No 14 in Appendix A in which the title of the action and its number have been entered.
(7) This rule shall have effect subject to the provisions of any Act and these rules and in particular to any enactment which provides for the manner in which documents may be served on bodies corporate.’
On 14 April 1987, at about 1530 hrs, believing that the defendant was at apartment 7 at Shardeloes, Amersham, or would be there on that day, the plaintiff’s agent inserted a copy of the writ in a sealed envelope (addressed to the defendant) through the letter box of apartment 7. On the same day the defendant and his wife had left Geneva on a British Airways flight to Heathrow. The flight took off from Geneva at about 1540 hrs British time. It landed at Heathrow at 1727 hrs and it crossed the French coast en route for London at about 1705 hrs.
At Heathrow the defendant was met by the caretaker of apartment 7, who told him that a brown envelope addressed to him had been put through the letter box at apartment
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7 that day by a man who had asked whether the defendant was present. The defendant then instructed the caretaker to drive him to a hotel in Beaconsfield. That was done. Mrs Hahn, the defendant’s wife, was however driven to apartment 7 and was shown the envelope, which contained a copy writ. She did not open it. She then drove to the hotel in Beaconsfield and joined the defendant.
The defendant stayed in England for the rest of that day (14 April) and he and his wife stayed that night at an hotel at Heathrow. On the next day the defendant returned by air to Geneva. Mrs Hahn stayed a further night at Heathrow and then drove to Geneva, arriving there on 17 April.
The defendant’s contention is that since he was not within the jurisdiction when the copy writ was put through the letter box at apartment 7 at about 1530 hrs on 14 April (he did not arrive in England until some time after 1700 hrs) the writ was not duly served on him. It is the defendant’s case that the methods of service permitted by Ord 10, r 1(2) are only available if the defendant is within the jurisdiction when the service is effected under that order. The judge accepted that. The plaintiff appeals.
Order 10, r 1(2) opens with the words: ‘A writ for service on a defendant within the jurisdiction may, instead of being served personally on him, be served … ' There then follow paras (a) and (b) specifying (a) posting by first-class post to the defendant at his usual or last-known address, or (b) if there is a letter box for that address, by inserting through the letter box a copy of the writ enclosed in a sealed envelope addressed to the defendant.
The defendant contends that, in terms, Ord 10, r 1(2) only applies to service on a defendant who is within the jurisdiction. That, it is said, is the consequence of the words ‘A writ for service on a defendant within the jurisdiction’. The words ‘within the jurisdiction’, it is said, relate to the defendant.
I am unable to accept that. It seems to me that the words ‘A writ for service on a defendant within the jurisdiction’ are descriptive of the writ and its service and not of the defendant. In my opinion they are directed at the distinction between a writ for service within the jurisdiction and one for service out of the jurisdiction. Thus, for example, RSC Ord 6, r 6(2) provides:
‘… a writ for service within the jurisdiction may be issued as a concurrent writ with one which is to be served out of the jurisdiction and a writ which is to be served out of the jurisdiction may be issued as a concurrent writ with one for service within the jurisdiction’.
I agree that the rules provide for one form of writ only, but the distinction between the two kinds of writ which I have mentioned is, it seems to me, clear. A writ for service out of the jurisdiction must (subject to other provisions in the rules) be served personally; a writ for service within the jurisdiction may be served personally, or by one of the methods specified in Ord 10. Thus Ord 10, r 1(1) provides in general terms that a writ must be served personally on each defendant. Rule 1(2) relaxes that requirement in the case of a writ to be served within the jurisdiction. A writ for service within the jurisdiction will give the defendant’s address as one which is within the jurisdiction. The result, in my opinion, is that the language of Ord 10 does not require the presence of the defendant within the jurisdiction when the envelope containing a copy writ is put through the letter box or is posted.
Should such a provision be implied? I do not think so. I do not disregard the importance which, historically, has been attached to the physical presence of a defendant within the jurisdiction. But Ord 10 in its present form has introduced great changes in methods of service. Certainly it much diminishes the importance of personal service. But at the same time, however, it gives protection to defendants. It is important to observe that we are not dealing with a situation in which service is effectively permissible on persons having no real connection with this country. In that respect I am not troubled
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by the example of service through the letter box at the last-known address of a person who has not entered this country for, say, 20 years. Thus, under para (3)(b) of Ord 10, r 1:
‘any affidavit proving due service of the writ must contain a statement to the effect that—(i) in the opinion of the deponent (or, if the deponent is the plaintiff’s solicitor or an employee of that solicitor, in the opinion of the plaintiff) the copy of the writ, if sent to, or as the case may be inserted through the letter box for, the address in question, will have come to the knowledge of the defendant within 7 days thereafter; and (ii) in the case of service by post, the copy of the writ has not been returned to the plaintiff through the post undelivered to the addressee.’
These provisions, it seems to me, protect the person who has ceased to have any real connection with the address at which the service is made. The opinion that is required to be sworn to on behalf of the plaintiff involving, as it does, the likelihood that the writ will come to the knowledge of the defendant within seven days, assumes a substantial degree of contact with this country on the part of the defendant served. Further, if the draftsman had contemplated presence within the jurisdiction as being essential to effective service, it is difficult to see why he did not stipulate for it to be sworn to in the affidavit to which I have just referred.
It seems to me that within the framework of Ord 10 it would be little more than a formality to insist on the physical presence of the defendant within the jurisdiction in order to achieve effective service under Ord 10, r 1(2). The important matter, for practical purposes, is not the presence of the defendant within the jurisdiction, but that service of the process should come to the attention of the defendant speedily. Order 10, r 1(3) assumes that for the making of effective service a significant degree of association with this country will exist because it requires evidence that the writ will come to the knowledge of the defendant within seven days. On the other hand there is a significant disadvantage in requiring the presence of the defendant in the jurisdiction in that if the defendant happens to have left the jurisdiction even for only 24 hours or less the service will fail. Moreover the service of process should be as simple and as certain as possible. It is not desirable that it should depend, for example, on calculations as to the time that an aircraft enters English air space.
In my opinion there is nothing in Ord 10 which requires the assumption that the presence of the defendant within the jurisdiction is necessary for effective service under Ord 10, r 1(2). The order is self-contained and neither expresses nor imports such a requirement. I should add that the matter appears to me to be purely one of construction. Nobody suggests there is any question of ultra vires. In my judgment the writ was validly served and I would allow the appeal accordingly.
PARKER LJ. I agree. I add only a few words as we are differing from the judge.
It is in my opinion significant that the possibilities of service are service at the usual, or at the last-known, address. The rule thus expressly contemplates that the plaintiff desiring to serve a writ may well not know where the defendant is. Furthermore, if one had a defendant living in the northern part of Cumbria, who was regularly in the habit of crossing the border for his lunch, it appears to me to make a complete nonsense of the whole matter if he is able to say service was bad because at the time the letter was put through the letter box or at the time it was posted he happened to be in the southern part of Scotland for no more than an hour. That is one example. There are many others. People go in droves from southern ports to Calais for day trips in order to replenish supplies of alcoholic liquor. Is it to be said that it was really the intention of the draftsman that although he had lived, and continued to live permanently in this country for years and years, he could say that he had not been served because the vessel on which he had gone to Calais was just outside the territorial limits at the time of posting or at the time the letter came through the letter box. It appears to me that to attribute that sort of intention to the draftsman simply because of the presence of the words ‘of a defendant’
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in the rule is to impute to him a mischievousness which, for my part, I am not prepared to accept. If the draftsman had so intended, he would as it seems to me have made it a requirement that the affidavit of service, without which no default judgment can be obtained, should include a statement that the deponent verily believed the defendant to be in the jurisdiction at the time of posting or putting through the letter box as the case may be.
In my view also, the wording of this rule is plain and the service was good.
CROOM-JOHNSON LJ. I agree. RSC Order 10, although it is headed ‘Service of Originating Process: General Provisions’, deals in fact throughout with service which takes place within the jurisdiction. This is emphasised by the other provisions of the order, in particular by r 3(2), which says that service made in accordance with the special provisions contained in the contract shall not be effective if the writ is served out of the jurisdiction, unless such service is permitted by RSC Ord 11. Order 11, by distinction, deals entirely with service out of the jurisdiction.
I agree that this is a matter of construction. The words which require interpretation in Ord 10, r 1(2) are: ‘A writ for service on a defendant within the jurisdiction may, instead of being served personally on him, be served … ’ by posting or inserting through the letter box. That short phrase contains three nouns, writ, service and defendant, although the noun ‘service’ is used adjectivally. The plaintiff says that this describes the type of writ. The defendant, on the other hand, says that ‘within the jurisdiction’ describes the whereabouts of the defendant when he is to be served. If the words describe where the service is to take place, that is consistent with the general wording of Ord 10 and assists the plaintiff’s construction as being a description of the writ.
It has been suggested to us that the only way of interpreting this provision is in effect by rewriting it, but in my view it is possible to construe the sentence without resorting to rewriting the sentence, or making any deletion such as omitting the reference to the defendant altogether, or leaving out the words ‘on him’. It is therefore helpful in construing the words, by seeing what was the object of putting in Ord 10, r 1(2) the provisions relating to service by post or service through the letter box. This was done to make service more easy, compared with the previous restriction on service, which required it to be done personally.
In the course of the argument both parties to this appeal adopted the attitude that the addition in Ord 10, r 1(2) was not made with the object of enlarging the jurisdiction of the court. It was only concerned with adding a means of asserting what jurisdiction it already had, which is another way of getting before the court the defendant over whom the court has jurisdiction in any event. The purpose of the addition was simplicity.
I do not think that in making these provisions, the rule is concerned with building in complications such as having to ensure that the proposed defendant was personally present inside the jurisdiction of the court at the moment when the writ was sent, by being put in a postal box, or whether that was so at the moment when the postman delivered it at his address. The defendant might be anywhere out of the jurisdiction, even temporarily. Nor was the rule designed to make the plaintiff find out where he was when the alternative method was used by the process server of putting it through the letter box, which is, after all, only another way of achieving the same result.
In my view the correct interpretation of the phrase is that put on it by the plaintiff, that the words ‘within the jurisdiction’ describe the writ and its service within the jurisdiction and not the physical whereabouts of the defendant, which would lead to all kinds of problems.
Counsel for the defendant has called our attention to various passages and texts which he says support his interpretation. An example is the note in The Supreme Court Practice 1988, vol 1, para 10/1/2(sub-para (3)), which I need not read but which only repeats the wording of the rule. I do not regard that note, or any of the other passages to which he
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referred, as doing any more than simply repeating with prudence the actual words used in Ord 10, r 1(2) which themselves have required interpretation.
I too would allow this appeal.
Appeal allowed. Leave to appeal to the House of Lords refused.16 January 1989. The Appeal Committee of the House of Lords gave leave to appeal.
Solicitors: Lovell White Durrant (for the plaintiff); Kingsford Dorman & Routh Stacey agents for Hart Brown & Co, Guildford (for the defendant).
Wendy Shockett Barrister.
The Powstaniec Wielkopolski
[1989] 1 All ER 198
Categories: SHIPPING
Court: QUEEN’S BENCH DIVISION (ADMIRALTY COURT)
Lord(s): SHEEN J
Hearing Date(s): 28 JUNE, 12 JULY 1988
Admiralty – Jurisdiction – Action in rem – Claim in nature of salvage – Tidal waters – Salvage services rendered to ship and cargo within tidal reach of estuary or navigable river – Whether services provided within ‘harbour’ – Whether person rendering services entitled to claim salvage – Merchant Shipping Act 1894, ss 546, 742.
The entitlement to remuneration for salvage services under s 546a of the Merchant Shipping Act 1894 extends to services rendered in any tidal water within the limits of the United Kingdom, which, by virtue of the definition of ‘tidal water’ in s 742 b of that Act, is ‘any part of the sea and any part of a river within the ebb and flow of the tide … not being a harbour’, where ‘harbour’ has its ordinary and natural meaning of a pier or jetty at which ships can ship or unship goods or passengers, and not the wider meaning assigned to the definition of ‘harbour’ in s 742 as including estuaries and navigable rivers in which ships can obtain shelter. Accordingly, salvage is payable for services rendered in a tidal reach of an estuary or navigable river provided the vessel is not berthed at a pier or jetty (see p 202 e g to p 203 a, post)
Notes
For the Admiralty jurisdiction of the High Court in respect of salvage claims, see 1 Halsbury’s Laws (4th edn) paras 323–335, and for cases on the subject, see 1(1) Digest (Reissue) 279–281, 1648–1668.
For the Merchant Shipping Act 1894, ss 546, 742, see 39 Halsbury’s Statutes (4th edn) 553, 606.
As from 4 July 1988 s 456 of the 1894 Act was amended by the Merchant Shipping Act 1988, s 48, Sch 5, para 3, which added thereto a sub-s (2) defining ‘tidal water’ in that section as meaning ‘(a) any waters within the ebb and flow of the tide at ordinary spring tides; or (b) the waters of any dock which is directly, or (by means of one or more other docks) indirectly, connected with any such waters’.
Cases referred to in judgment
Beatsa, The (1937) 58 Ll LR 85.
Conifer, The (1924) 19 Ll LR 116.
Gamecock Steam Towing Co v ‘Sif’ Cargo and Freight (1921) 6 Ll LR 116.
Goring, The [1988] 1 All ER 641, [1988] AC 831, [1988] 2 WLR 460, HL.
Page 199 of [1989] 1 All ER 198
Hudson Light, The [1970] 1 Lloyd’s Rep 166.
Mitchell v Simpson (1890) 25 QBD 183, CA.
Tees, The, The Pentucket (1862) Lush 505, 167 ER 230.
Zeta, The (1875) LR 4 A & E 460.
Cases also cited
Atsuta Maru, The (1926) 26 Ll LR 151.
Gorsefield, The (1937) 60 Ll LR 6.
Gregerso, The [1971] 1 All ER 961, [1973] QB 274.
Mount Cynthos, The (1937) 58 Ll LR 18.
Mud Hopper No 4, The (1879) 4 Asp MLC 103.
Trask v Maddox, The Carrier Dove (1863) 2 Moo PCCNS 243, 15 ER 893, PC.
Preliminary issue
The plaintiffs, the owners, masters, officers and crews of the motor tugs Sun London, Hibernia and Ionia, brought an Admiralty action in rem against the first and second defendants, the owners of the ship Powstaniec Wielkopolski and the cargo shipped thereon (the shipowners and cargo owners), claiming remuneration for salvage services rendered to the Powstaniec Wielkopolski in Gravesend Reach on 23 April 1985. The shipowners denied that the services rendered were salvage services. The following points of law were ordered to be tried as a preliminary issue: (i) whether the plaintiffs’ right to claim salvage was governed by the provisions of s 546 of the Merchant Shipping Act 1894 which, as construed in accordance with s 742 of the Act, excluded services performed in harbours; and (ii) whether the plaintiffs’ services were performed in a harbour, namely the Port of London, and therefore the plaintiffs were not entitled to claim salvage in respect of them. The facts are set out in the judgment.
Nigel Teare for the plaintiffs.
Belinda Bucknall QC for the shipowners and cargo owners.
Cur adv vult
12 July 1988. The following judgment was delivered.
SHEEN J. In this action the plaintiffs claim salvage remuneration for services rendered to the property of the first and second defendants, the shipowners and cargo owners, in Gravesend Reach of the river Thames on 23 April 1985. By their defence the shipowners denied that such services as were rendered by the plaintiffs were salvaged services. On 20 June 1988 the shipowners applied for and obtained leave to amend their defence by the addition of the two following paragraphs:
‘3a. Further or alternatively the Plaintiffs’ right to claim salvage is governed by the provisions of Section 546 of the Merchant Shipping Act 1894 which, as construed in accordance with Section 742 of the said Act excludes services performed in harbours.
3b. The Plaintiffs’ services were performed within a harbour, namely the Port of London. In the premises the Plaintiffs are not entitled to claim salvage in respect of them.’
When leave to introduce this amendment was given the court ordered the point of law raised by those paragraphs to be tried as a preliminary issue. This judgment relates solely to that issue.
The following facts were agreed. The Powstaniec Wielkopolski is a bulk carrier of 20,593 tons gross. At the material time she was laden with a cargo of 30,560 metric tons of wheat. The value of the ship, her bunkers, stores and cargo was nearly £7m. The claim for salvage is brought by the owners, masters and crews of three tugs, the Sun London, Ionia and Hibernia. On 23 April 1985 the ship was in Gravesend Reach, within the limits of the Port of London as defined by the Port of London Act 1968(c xxxii),
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lying moored fore and aft at buoys on the southern side of the river off Imperial Paper Mills while waiting for a berth at the Tilbury Grain Terminal. The bunkering barge Varsseveld was moored alongside the ship. At about 1800 hours the wind was north-easterly about force 6 and the tide was ebbing. Low water was predicted for 2207 hours (BST). The ship’s bow moorings began to part. At a later stage the stern moorings also parted. Thereafter the ship drifted to the north side of the river. The tugs, which were lying further down Gravesend Reach, heard a report on VHF channel 12 from the Varsseveld that the ship was breaking adrift. They set off up river. There was no call for assistance from the ship.
There is a dispute between the parties as to whether the ship was in danger when the tugs arrived and as to what action (if any) was taken by the tugs on their arrival. Without prejudice to the contention of the defendants that the true facts do not give rise to a claim for salvage, I must assume, for the purposes of the issue before the court, that services in the nature of salvage services were rendered by the plaintiffs on this occasion.
Section 546 of the Merchant Shipping Act 1894 provides:
‘Where any vessel is wrecked, stranded, or in distress at any place on or near the coasts of the United Kingdom or any tidal water within the limits of the United Kingdom, and services are rendered by any person in assisting that vessel or saving the cargo or apparel of that vessel or any part thereof, and where services are rendered by any person other than a receiver in saving any wreck, there shall be payable to the salvor by the owner of the vessel, cargo, apparel, or wreck, a reasonable amount of salvage to be determined in case of dispute in the manner herein-after mentioned.’
Section 742 of the 1894 Act provides:
‘In this Act, unless the context otherwise requires the following expressions have the meanings hereby assigned to them; (that is to say,) … “HARBOUR” includes harbours properly so called, whether natural or artificial, estuaries, navigable rivers, piers, jetties, and other works in or at which ships can obtain shelter, or ship and unship goods or passengers; “TIDAL WATER” means any part of the sea and any part of a river within the ebb and flow of the tide at ordinary spring tides, and not being a harbour … ’
In relation to those definitions Lord Brandon said in The Goring [1988] 1 All ER 641 at 645, [1988] AC 831 at 849–850:
‘The definitions of the expressions “harbour” and “tidal water” in s 742 create a problem when applied to ascertain the meaning of the expression “tidal water” in s 546. The result of applying the very wide definition of “harbour” to the definition of “tidal water” and then applying the definition of “tidal water” so produced to interpret [s 546], is to exclude from the meaning of “tidal water” in that section numerous localities which might be expected to be included in it. It is fortunately not necessary to solve this problem in this appeal. The significance of s 546 is the same as that of s 458 of the [Merchant Shipping Act 1854]. It prescribes the places in which services must be rendered in order to qualify as salvage services in the United Kingdom … ’
On this preliminary issue the problem has to be solved.
Section 458 of the Merchant Shipping Act 1854 was the equivalent of s 546 of the 1894 Act. It did not give rise to the present problem because there was no definition of the words ‘tidal water’. Section 476 of the 1854 Act provided that:
‘… the High Court of Admiralty shall have jurisdiction to decide upon all claims whatsoever relating to salvage, whether the services in respect of which salvage is claimed were performed upon the High Seas, or within the Body of a County … ’
My attention was drawn to examples of the exercise of this jurisdiction in relation to salvage services rendered ‘within the Body of a County’. The first was a decision of Dr
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Lushington in The Tees, The Pentucket (1862) Lush 505, 167 ER 230 in which case the steamship Tees was in danger in a dock near London Bridge when a serious fire broke out in warehouses surrounding the dock and the fire spread to the upper sails of the Tees and another vessel in the dock. The Tees was towed to a place of safety in the river Thames, for which services an award of salvage was made. As a second example of a claim for salvage for services rendered to a barge adrift in the river Thames, my attention was drawn to The Zeta (1875) LR 4 A & E 460.
The question raised by the amended defence is whether by the enactment of the 1894 Act Parliament changed the substantive law of salvage by enacting indirectly that after that Act came into force salvage would not be payable for services rendered in certain tidal waters within the limits of the United Kingdom in which before the passing of the 1894 Act similar services would have attracted a salvage reward.
If the submissions made by counsel for the defendants are valid that unexpected and unseen result would follow. It is unexpected for two reasons. First, because the 1894 Act is a consolidation statute. As such it ‘does not profess to amend or alter the provisions of the Acts consolidated. Prima facie, therefore, the same effect ought to be given to its provisions as was given to those of the Acts for which it was substituted’ (per Fry LJ in Mitchell v Simpson (1890) 25 QBD 183 at 190). Second, because it would be a construction of the 1894 Act which is contrary to the public interest. When construing an Act of Parliament it is to be presumed that Parliament intended to legislate in the public interest. My view as to what is in the public interest is based on two factors, namely (1) that one of the reasons for awarding salvage is to encourage mariners to go voluntarily to the assistance of ships in distress, and it is in the public interest that they should be so encouraged, and (2) the speed with which Parliament has taken steps to remove any possibility of argument as to the meaning of s 546 of the 1894 Act by the provisions of para 3 of Sch 5 to the Merchant Shipping Act 1988 suggests that the construction for which the defendants contend is not in the public interest. It is also surprising that the construction of the 1894 Act for which counsel contends was unseen by many eminent counsel and judges for 94 years. There have been innumerable successful claims for salvage in respect of services rendered in harbours as defined by s 742 of the 1894 Act and many cases in which an award of salvage has been made for services rendered in the river Thames within the Port of London. Some of those claims arose out of services rendered in Gravesend Reach: see Gamecock Steam Towing Co v ‘Sif’ Cargo and Frieght (1921) 6 Ll LR 116, The Conifer (1924) 19 Ll LR 116, The Beatsa (1937) 58 Ll LR 85 and The Hudson Light [1970] 1 Lloyd’s Rep 166.
In The Goring [1988] 1 All ER 641, [1988] AC 831 Lord Brandon reviewed the statutory provisions enacted between 1840 and 1982 which dealt with the substantive law of salvage and the jurisdiction of the Admiralty Court over claims for salvage. It is unnecessary for me to repeat that review. However, counsel for the plaintiffs submitted that it is unnecessary to bear in mind the historical statutory background when applying one’s mind to the relevant meanings assigned to certain expressions by s 742 of the 1894 Act. Section 742 introduces those meanings with the words ‘unless the context otherwise requires’. He submitted that s 546 of the 1894 Act plainly requires that the words ‘tidal water’ should not be given the extended meaning which would result from the definition of harbour being incorporated into it. Counsel relied on the following points. First, prior to the 1894 Act there was a cause of action for salvage on tidal waters within the limits of the United Kingdom whether or not the place of the services was a harbour (see the speech of Lord Brandon in The Goring [1988] 1 All ER 641 at 643, [1988] AC 831 at 846–847). Second, there is no reason to infer from the 1894 Act that Parliament intended to narrow the substantive law of salvage. Lord Brandon pointed out that the 1840 Act did not affect the substantive law of salvage (see [1988] 1 All ER 641 at 643, [1988] AC 831 at 847). Then Lord Brandon said ([1988] 1 All ER 641 at 644–645, [1988] AC 831 at 848):
‘Section 458 [of the 1854 Act] is important because in it the legislature for the first time prescribed the places in which it was necessary for services to a ship, her
Page 202 of [1989] 1 All ER 198
cargo, or her apparel to have been rendered in order to qualify as salvage services within the United Kingdom. It was necessary that they should have been rendered on the shore of any sea or tidal water in the United Kingdom. If the legislature had intended that services rendered in non-tidal inland waters of the United Kingdom should also qualify as salvage services, it would surely have expressly so provided. It did not do so, however, and the inference which I draw is that the legislature did not have that intention.’
Counsel for the plaintiffs submitted that, if express terms are required for the purpose of extending the substantive law of salvage, then a fortiori, if the legislature intended to change the law of salvage by excluding from the places in which services to ships in distress qualified as salvage services a large number of places which had only 54 years earlier been brought within the jurisdiction of the High Court of Admiralty, it would have done so expressly. Furthermore, it would not have made such an important change in the law in a consolidating statute.
I turn now to consider the relevant provisions of the 1894 Act. The relevant words of s 546 are:
‘Where any vessel is … in distress in any place on … any tidal water within the limits of the United Kingdom, and services are rendered by any person in assisting that vessel … there shall be payable to the salvor … a reasonable amount of salvage … ’
The definition of ‘tidal water’ in s 742, quoted earlier, ends with the word ‘harbour’. Therefore the first question to be answered is whether it is possible in that context to give the word ‘harbour’ the meaning assigned to it by s 742. Bearing in mind that the definition of ‘harbour’ immediately precedes the definition of ‘tidal water’ it would be surprising if the context required some other meaning.
But if the definition of ‘harbour’ is incorporated into the definition of ‘tidal water’ it reads as follows:
”’TIDAL WATER” means any part of the sea and any part of a river within the ebb and flow of the tide at ordinary spring tides, and not being a harbour properly so called, whether natural or artificial, estuaries, navigable rivers, piers, jetties, and other works in or at which ships can obtain shelter, or ship and unship goods or passengers.’
That definition of tidal water incorporating the definition of ‘harbour’ only has to be set out to expose its absurdity. The only rivers on which ships can proceed are ‘navigable rivers’. It seems to me that it would, therefore, be absurd to enact that salvage is payable to the salvor of a ship in distress in any part of a river within the ebb and flow of the tide within the limits of the United Kingdom so long as those waters are not an estuary or a navigable river. Where else could a ship be found on tidal water within the United Kingdom? For this reason the context does require that the word ‘harbour’ in the definition of ‘tidal water’ should not be given the meaning assigned to it in s 742.
The word ‘harbour’, where it appears in the definition of ‘tidal water’, must be given its ordinary and natural meaning. The ship Powstaniec Wielkopolski was in a reach of the river Thames. She was not in a harbour, if that word is given its ordinary and natural meaning. Gravesend Reach may on occasions provide some shelter for ships in weather conditions which would cause distress in the open sea, but no mariner would ordinarily or naturally describe Gravesend Reach as a ‘harbour’.
I agree with the submission of counsel for the plaintiffs that it is a misuse of language to say that the whole of that part of the river Thames which forms the Port of London is a harbour; it is more accurate to say that there are many harbours along the river Thames and within the Port of London.
For these reasons I hold that the place where the services of the plaintiffs were rendered
Page 203 of [1989] 1 All ER 198
is tidal and is not a harbour. That is sufficient to dispose of the defence raised by paras 3a and 3b of the amended defence.
Counsel for the plaintiffs invited me to hold that the special meaning assigned to ‘tidal water’ by s 742 should not be applied when construing s 546 of the 1894 Act. Counsel was correct when he pointed out that Lloyd’s Law Reports have reported many cases involving salvage services in harbours. For 94 years the special meaning assigned to ‘tidal water’ has either been overlooked or the court has taken the view that the context of s 546 does require the words ‘tidal waters’ to have their ordinary meaning. It is unnecessary for me to decide this point, and the provisions of the Merchant Shipping Act 1988 may make it unnecessary for the point to be decided hereafter.
Order accordingly.
Solicitors: Thomas Cooper & Stibbard (for the plaintiffs); Elborne Mitchell (for the shipowners); Waltons & Morse and Clyde & Co, Guildford (for the cargo owners).
N P Metcalfe Esq Barrister.
C E Heath plc v Ceram Holding Co and others
[1989] 1 All ER 203
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): KERR AND NEILL LJJ
Hearing Date(s): 1, 5 JULY 1988
Practice – Summary judgment – Counterclaim against co-defendant – Whether defendant entitled to summary judgment against co-defendant – RSC Ord 16, rr 4(3), 8(1)(2)(3).
A defendant who has counterclaimed against both the plaintiff and a co-defendant is not entitled to obtain summary judgment against the co-defendant under RSC Ord 16, r 4(3) a by using the procedure set out in Ord 16, r 8(3) b because, having made his claim against the co-defendant by means of a counterclaim, he is precluded by Ord 16, r 8(2) from serving the ‘notice containing a statement of the nature and grounds of his claim’ referred to in r 8(1), as required by r 8(3) when it refers to service of ‘such a notice’. Furthermore, there is no residual or inherent jurisdiction by which the court can give summary judgment against the co-defendant (see p 210 e f and p 212 a to d, post).
Notes
For claims between co-defendants, see 37 Halsbury’s Laws (4th edn) paras 257, 261–262, and for cases on the subject, see 37(2) Digest (Reissue) 413–414, 2533–2541.
Cases referred to in judgments
Gloucestershire Banking Co Ltd v Phillipps (Creagh, third party) (1884) 12 QBD 533, DC.
Cases also cited
Felix v Shiva [1982] 3 All ER 263, [1983] QB 82, CA.
Moore v Assignment Courier Ltd [1977] 2 All ER 842, [1977] 1 WLR 638, CA.
Official Custodian for Charities v Parway Estates Developments Ltd [1984] 3 All ER 679, [1985] Ch 151, CA.
Tiverton Estates Ltd v Wearwell Ltd [1974] 1 All ER 209, [1975] Ch 146, CA.
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Interlocutory appeal
The second defendants, Knoxville Investments Ltd, in an action brought by the plaintiffs, C E Heath plc, against the first defendants, Ceram Holding Co, an unlimited company incorporated in Gibraltar, to which the second defendants were joined as a party, counterclaimed against both the plaintiffs and the first defendants. An accommodation was reached between the second defendants and the plaintiffs, although the counterclaim against the plaintiffs remained in being. The second defendants issued a summons applying for summary judgment on the counterclaim as against the first defendants under either RSC Ord 16, rr 4, 8(3) and 11, or under s 49(2) of the Supreme Court Act 1981 or under the court’s inherent jurisdiction. The first defendants applied to strike out the summons on the ground that there was no procedural basis for it. On 26 May 1988 Hirst J dismissed the first defendants’ application to strike out the second defendants’ summons and held that where a defendant counterclaimed against both the plaintiff and his co-defendant he could obtain summary judgment against his co-defendant. The first defendants appealed from Hirst J’s order. The plaintiffs were not a party to the appeal. The facts are set out in the judgment of Neill LJ.
Gavin Lightman QC and Michael Briggs for the first defendants.
J M Chadwick QC and John Mummery for the second defendants.
Cur adv vult
5 July 1988. The following judgments were delivered.
NEILL LJ (giving the first judgment at the invitation of Kerr LJ). This is an appeal from an order of Hirst J dated 26 May 1988 whereby he dismissed the application by the first defendants to strike out the summons by the second defendants for summary judgment against the first defendants. It is now clear from the amended respondents’ notice and from the amended summons that the second defendants seek summary judgment, first, under RSC Ord 16, rr 4, 8(3) and 11, second, under the Supreme Court Act 1981 and, third, under the inherent jurisdiction of the court.
The question which arises for decision in this case is whether one of two defendants who makes a counterclaim against the plaintiff and the other defendant can obtain summary judgment against that other defendant. At this stage the merits of the action, and, indeed, of the summons for summary judgment, do not require investigation.
I can outline the facts very shortly. The specially indorsed writ was issued on 2 January 1986. The plaintiffs claimed against the first defendants, an unlimited company incorporated in Gibraltar, to be entitled to a sum in excess of £6·2m provided by the first defendants by way of security. On 5 February 1987 the first defendants served points of defence alleging that the sum in fact represented the deferred purchase price for the sale in 1982 by the plaintiffs of their then subsidiary the second defendants, at that time known as Motolease, and that the sum was irrecoverable because the sale agreement was illegal as being a fraud on the creditors of the second defendants, including the Revenue, and also involved a breach of s 42 of the Companies Act 1981.
On 24 July 1987 the second defendants applied to be joined as a party. In support of their application they exhibited a draft defence and counterclaim. On 18 September 1987 the second defendants were joined; the counterclaim was against both the plaintiffs and the first defendants. I understand that it was served in October 1987. The relief sought against the plaintiffs and the first defendants was as follows:
‘(1) A declaration that the Plaintiff and the First Defendant are jointly and severally liable as constructive trustees to account for and pay to the Second Defendant the sum of money now standing in the joint account in their names at Mercantile Credit Company Limited in London and that the said sum is held upon trust by them for the Second Defendant.
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(2) A declaration that the sum standing in the said joint account in the joint names of the Plaintiff and the First Defendant at Mercantile Credit Company Limited in London is an asset of the Second Defendant.
(3) An order under s. 172 of the Law of Property Act 1925 setting aside the transfer or transfers of money out of the account of the Second Defendant with Handels Kredit, Zurich on the ground that such transfer or transfers of money were made with intent to defraud the creditors of the Second Defendant.
(4) An account of all moneys directly or indirectly received by or on behalf of the Plaintiff and the First Defendant in respect of the sale by the Second Defendant of its leasing contracts and payment to the Second Defendant of all sums found due from them to the Second Defendant on the taking of such account’
and further and other relief including necessary consequential accounts and directions.
On 30 October 1987 the second defendants issued a summons for judgment. This summons has now been amended with the leave of this court and without objection. The application is now for the following directions under RSC Ord 16, rr 4, 8(3) and 11 and/or the Supreme Court Act 1981 and/or the inherent jurisdiction of the court—
‘1. That final judgment be entered in favour of the Second Defendants against the First Defendants in the terms of the declarations and other relief sought in the Points of Counterclaim served herein. 2. That such other judgment or order be made as the nature of the case requires. 3. That the costs of the Second Defendants’ claim against the First Defendants including the costs of this application be taxed and paid by the First Defendants.’
It seems that some accommodation has now been reached between the second defendants and the plaintiffs, but the action by the plaintiffs and the counterclaim against the plaintiffs remain in being.
On 2 December 1987 the first defendants issued the summons which is the subject of the present appeal.
The argument for the first defendants can be stated in three propositions. (1) The power to grant summary judgment without a full trial is a power conferred by statute and by the rules. (2) The court has no residual or inherent power to grant summary judgments. (3) The rules do not confer any power to grant summary judgment against a co-defendant where there is a counterclaim, or could be a counterclaim.
The first defendants recognise that there is an apparent lacuna in the rules and that the situation is anomalous. But they submit that this is a matter for the rules committee and that the court should not be tempted to place a strained interpretation on the plain words of Ord 16, r 8.
In support of this argument we were referred to Ord 14, r 5(1) and to Ord 16, r 8, and in particular to Ord 16, r 8(2). I should start by reading these provisions in their present form. Ord 14, r 5 provides as follows:
‘(1) Where a defendant to an action in the Queen’s Bench Division (including the Admiralty Court) or Chancery Division, begun by writ, has served a counterclaim on the plaintiff, then, subject to paragraph (3) the defendant may, on the ground that the plaintiff has no defence to a claim made in the counterclaim, or to a particular part of such a claim, apply to the Court for judgment against the plaintiff on that claim or part … ’
The next two paragraphs of the rules deal with consequential provisions. Paragraph (3) provides that the rule shall not apply to a counterclaim which includes any such claim as is referred to in r 1(2); those are the well-known exclusions of claims such as claims for libel, false imprisonment and where there is an allegation based on fraud.
In order to examine the argument presented on behalf of the first defendants it is necessary to make some reference to the history and development of the rules of court
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governing four separate forms of procedure: first, summary judgment under Ord 14; second, counterclaims; third, third party proceedings and summary judgments against third parties; and finally, proceedings between co-defendants and summary judgment against a co-defendant. Before turning to these specific forms of procedure, however, it will be convenient to remind oneself of the framework within which the individual rules of court are set.
For the purposes of the present appeal it is unnecessary to consider the forms of procedure in existence before the Supreme Court of Judicature Act 1873. Thus, it was common ground at the hearing before us that before 1873: (a) that, save as provided by the Summary Procedure on Bills of Exchange Act 1855, there was no power to grant summary judgment on the lines now covered by Ord 14; (b) that a defendant who wished to make a counterclaim against a plaintiff had to bring a separate action against the plaintiff and could not introduce a counterclaim into the plaintiff’s action; (c) that a defendant who wished to obtain an indemnity or other relief against a third party had to bring a separate action against that third party.
In 1873 the Supreme Court of Judicature was created by the Supreme Court of Judicature Act of that year. At the same time it was provided by s 24 of the 1873 Act that law and equity should be concurrently administered. We were referred in particular to s 24(3) and (7); I should read those provisions. I read the opening words of s 24:
‘In every civil cause or matter commenced in the High Court of Justice law and equity shall be administered by the High Court of Justice and the Court of Appeal respectively according to the Rules following … ’
Then, in sub-s (3):
‘The said Courts respectively, and every Judge thereof, shall also have power to grant to any defendant in respect of any equitable estate or right, or other matter of equity, and also in respect of any legal estate, right, or title claimed or asserted by him, all such relief against any plaintiff or petitioner as such defendant shall have properly claimed by his pleading, and as the said Courts respectively, or any Judge thereof, might have granted in any suit instituted for that purpose by the same defendant against the same plaintiff or petitioner; and also all such relief relating to or connected with the original subject of the cause or matter, and in like manner claimed against any other person, whether already a party to the same cause or matter or not, who shall have been duly served with notice in writing of such claim pursuant to any Rule of Court or any Order of the Court, as might properly have been granted against such person if he had been made a defendant to a cause duly instituted by the same defendant for the like purpose; and every person served with any such notice shall thenceforth be deemed a party to such cause or matter, with the same rights in respect of his defence against such claim, as if he had been duly sued in the ordinary way by such defendant.’
Then, in sub-s (7):
‘The High Court of Justice and the Court of Appeal respectively, in the exercise of the jurisdiction vested in them by this Act in every cause or matter pending before them respectively, shall have power to grant, and shall grant, either absolutely or on such reasonable terms and conditions as to them shall seem just, all such remedies whatsoever as any of the parties thereto may appear to be entitled to in respect of any and every legal or equitable claim properly brought forward by them respectively in such cause or matter; so that, as far as possible, all matters so in controversy between the said parties respectively may be completely and finally determined, and all multiplicity of legal proceedings concerning any of such matters avoided.’
In the schedule to the 1873 Act were set out some rules of procedure, but I do not
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consider that it is necesary to refer to them specifically because they were soon superseded by the detailed rules of court set out in Sch 1 to the Supreme Court of Judicature Act 1875. These rules were in turn superseded by the Rules of the Supreme Court 1883, which came into force on 24 October 1883. The 1883 rules, though much added to and amended, remained in force for about 80 years until they were partially revised and superseded in 1962 and then wholly revised and superseded by the Rules of the Supreme Court 1965, which came into operation on 1 October 1966. The 1965 rules (as amended) are the rules currently in force.
With this general introduction I turn to the first of the specific forms of procedure to which I referred earlier.
Summary judgment under Ord 14
Schedule 1 to the Supreme Court of Judicature Act 1875 contained rules of court set out in numbered orders. Order XIV was in these terms:
‘Where the defendant appears on a writ of summons specially indorsed, under Order III, Rule 6, the plaintiff may, on affidavit verifying the cause of action, and swearing that in his belief there is no defence to the action, call on the defendant to show cause, before the Court or a Judge why the plaintiff should not be at liberty to sign final judgment for the amount so indorsed, together with interest, if any, and costs; and the Court or Judge may, unless the defendant, by affidavit or otherwise, satisfy the Court or Judge that he has a good defence to the action on the merits, or disclose such facts as the Court or Judge may think sufficient to entitle him to be permitted to defend the action, make an order empowering the plaintiff to sign judgment accordingly.’
As time passed the scope of Ord 14 increased because further types of claim were added to those which could be specially indorsed in accordance with Ord 3, r 6. Later the reference to Ord 3, r 6 was abolished and today the scope of Ord 14 is very wide. At no time before the 1962 revision, however, was it possible for a defendant to obtain judgment under Ord 14 against a plaintiff.
In the 1962 revision, however, a new Ord 14, r 5 was introduced. In its amended form its provisions are in the terms to which I have already made specific reference.
I need say no more about summary judgment under Ord 14, because it is not suggested that the second defendants can make use of Ord 14 in the present case against the first defendants.
Counterclaims
Order XIX, r 3 of the rules of court set out in Sch 1 to the Supreme Court of Judicature Act 1875 gave a defendant the right to make a counterclaim against the plaintiff in the plaintiff’s action. The 1883 rules contained a similar provision. The present equivalent rule is Ord 15, r 2(1).
Order XXII, r 5 of the 1875 rules provided for a counterclaim against the plaintiff and any other person or persons. This rule later became Ord 21, r 11 and is now, in a somewhat different form, Ord 15, r 3(1). This paragraph is the paragraph which the second defendants used to make their counterclaim in this case. It is in the following terms:
‘Where a defendant to an action who makes a counterclaim against the plaintiff alleges that any other person (whether or not a party to the action) is liable to him along with the plaintiff in respect of the subject-matter of the counterclaim, or claims against such other person any relief related to or connected with the original subject-matter of the action, then, subject to rule 5(2) he may join that other person as a party against whom the counterclaim is made.’
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It is not suggested, however, that any right to obtain summary judgment is to be found in Ord 15, r 3.
Third party proceedings and summary judgment against third parties
It may be remembered that s 24(3) of the 1873 Act contained what were in effect three separate provisions; I should refer again to the second limb of the subsection, reading also the opening words:
‘The said Courts respectively, and every Judge thereof, shall also have power to grant to any defendant [and then I turn to what I have described as the second limb] … all such relief relating to or connected with the original subject of the cause or matter, and in like manner claimed against any other person, whether already a party to the same cause or matter or not, who shall have been duly served with notice in writing of such claim pursuant to any Rule of Court or any Order of the Court, as might properly have been granted against such person if he had been made a defendant to a cause duly instituted by the same defendant for the like purpose … ’
It will be seen that this part of the subsection was expressed in wide terms. Moreover, Ord XVI, r 18 of the 1875 rules referred to a claim by a defendant ‘to be entitled to contribution, indemnity, or other remedy or relief over against any person not a party to the action’. But the words ‘other remedy or relief’ were omitted from the 1883 rules and third party proceedings were confined by the 1883 rules to claims by a defendant ‘to contribution or indemnity’. That is set out in Ord 16, r 48, as appears in The Annual Practice 1924 p 281. It is to be noted, however, that Ord 16, r 52 of the 1883 rules gave the court power to order summary judgment if the court was not satisfied that there was a question to be tried as to the liability of the third party. In Gloucestershire Banking Co Ltd v Phillipps (Creagh, third party) (1884) 12 QBD 533 the Divisional Court rejected an argument that Ord 16, r 52 was ultra vires, and held that it was consistent with s 24(3) of the 1873 Act and s 24 of the 1875 Act.
Section 39 of the Supreme Court Judicature (Consolidation) Act 1925 re-enacted, in somewhat different language, the earlier provisions relating to counterclaims and third parties. That section provided as follows:
‘The court or judge shall have power to grant to any defendant in respect of any equitable estate or right or other matter or equity, and also in respect of any legal estate, right or title claimed or asserted by him—(a) all such relief against any plaintiff or petitioner as the defendant has properly claimed by his pleading, and as the court or judge might have granted in any suit instituted for that purpose by that defendant against the same plaintiff or petitioner; and (b) all such relief relating to or connected with the original subject of the cause of matter, claimed in like manner against any other person, whether already a party to the cause or matter or not, who has been duly served with notice in writing of the claim pursuant to rules of court or any order of the court, as might properly have been granted against that person if he had been made a defendant to a cause duly instituted by the same defendant for the like purpose.’
Following the 1925 Act the scope of thiòä party procedure was extended in, I think, 1929 by the introduction of a new Ord 16A. It is sufficient to refer to Ord 16A, r 1 as set out in The Annual Practice 1952 p 290. That was in these terms:
‘(1) Where in any action a defendant claims as against any other person not already a party to the action (in this Order called the third party) (a) that he is entitled to contribution or indemnity, or (b) that he is entitled to any relief or remedy relating to or connected with the original subject-matter of the action and substantially the same as some relief or remedy claimed by the plaintiff, or (c) that any question or issue relating to or connected with the said subject-matter is substantially the same
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as some question or issue arising between the plaintiff and the defendant and should properly be determined not only as between the plaintiff and the defendant but as between the plaintiff and defendant and the third party or between any or either of them, the Court or Judge may give leave to the defendant to issue and serve a “third party notice“.’
It is to be noted, therefore, that sub-paras (b) and (c) of Ord 16A, r 1(1) were new and an extension of what the law had been previously.
However, the right to seek summary judgment on the summons for directions remained and Ord 16A, r 7(1) provided as follows:
‘If the third party enters an appearance the defendant giving notice may, after serving notice of the intended application upon the plaintiff, the third party and any other defendant, apply to the Court or Judge for directions, and the Court or Judge may—(a) where the liability of the third party to the defendant giving the notice is established on the hearing of the application, order such judgment as the nature of the case may require to be entered against the third party in favour of the defendant giving the notice … ’
The modern counterpart of Ord 16A, r 7 is of course, Ord 16, r 4, which provides for third party directions. It is sufficient to refer to Ord 16, r 4(3)(a), which is in these terms:
‘On an application for directions under this rule the Court may—(a) If the liability of the third party to the defendant who issued the third party notice is established on the hearing, order such judgment as the nature of the case may require to be entered against the third party in favour of the defendant … ’
Proceedings between co-defendants and summary judgment against a co-defendant
Order XVI, r 18 of the 1875 rules referred to claims against any person not a party to the action. Order XVI, r 17 was expressed more generally; it was in these terms:
‘Where a defendant is or claims to be entitled to contribution or indemnity, or any remedy or relief over against any other person, or where from any other cause it appears to the Court or a Judge that the question in the action should be determined not only as between plaintiff and defendant, but as between the plaintiff, defendant, and any other person, or between any or either of them, the Court or a Judge may on notice being given to such later-mentioned person, make such order as may be proper for having the question so determined.’
The 1883 rules, however, limited claims between co-defendants, as it limited claims between a defendant and a third party, to claims to an indemnity or contribution. Order 16, r 55 of the 1883 rules, as set out in The Annual Practice 1924 p 296, was in these terms:
‘Where a defendant claims to be entitled to contribution or indemnity against any other defendant to the action, a notice may be issued and the same procedure shall be adopted, for the determination of such questions between the defendants, as would be issued and taken against such other defendant, if such last-mentioned defendant were a third party: but nothing herein contained shall prejudice the rights of the plaintiff against any defendant in the action.’
The effect of Ord 16, r 55 was that a co-defendant who had given the appropriate notice could apply for directions and could take advantage of the summary procedure available under Ord 16, r 52. When the scope of third party proceedings was increased in 1929 the rights of one defendant against another were also increased. It is sufficient to refer to Ord 16A, r 12 in The Annual Practice 1952 p 306, in which it is set out as follows:
‘(1) Where a defendant claims against another defendant (a) that he is entitled to contribution or indemnity, or (b) that he is entitled to any relief or remedy relating
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to or connected with the original subject-matter of the action and substantially the same as some relief or remedy claimed by the plaintiff, or (c) that any question or issue relating to or connected with the said subject-matter is substantially the same as some question or issue arising between the plaintiff and the defendant making the claim and should properly be determined not only as between the plaintiff and the defendant making the claim but as between the plaintiff and that defendant and another defendant or between any or either of them, the defendant making the claim may without any leave issue and serve on such other defendant a notice making such claim or specifying such question or issue.
(2) No appearance to such notice shall be necessary and the same procedure shall be adopted for the determination of such claim, question or issue between the defendants as would be appropriate under this Order if he were a third party … ’
It is clear by reason of para (2) that a defendant, having served a notice, could take advantage of the summary procedure available under Ord 16A, r 7. The modern equivalent of Ord 16A, r 12 is Ord 16, r 8.
It is necessary now to pause and take stock. It seems clear (1) that the procedure under Ord 14 has never applied to a claim by a defendant against a third party or to a claim by one defendant against another. It has only applied to a counterclaim by a defendant against a plaintiff since the 1962 revision. (2) That a different form of summary procedure has been available since 1883 for claims by a defendant against a third party or a co-defendant. Until 1929 the claims by a defendant, and thus the summary procedure, were restricted to claims for a contribution or indemnity. Since 1929 the scope of third party proceedings and of claims by one defendant against another has been extended on the lines I have already indicated. (3) That, notwithstanding the wide language used in s 24(3) of the 1873 Act, the actual scope of third party proceedings and proceedings between defendants has been determined at all times by the rules of court. Similarly, the scope of Ord 14 proceedings has been a matter which has been determined by the rules. There would therefore appear to be little, if any, room for an argument that the court has some wider powers in these fields than that conferred by the rules, or that it has some residual or inherent jurisdiction to grant relief where it is just to do so, or that the wide language of the statute confers some additional powers to act outside and beyond the rules. Nevertheless, it is relevant to bear in mind that the old powers, whatever they are, are preserved by s 49(2) of the Supreme Court Act 1981, which is in these terms:
‘Every such court shall give the same effect as hitherto—(a) to all equitable estates, titles, rights, reliefs, defences and counterclaims, and to all equitable duties and liabilities; and (b) subject thereto, to all legal claims and demands and all estates, titles, rights, duties, obligations and liabilities existing by the common law or by any custom or created by any statute, and, subject to the provisions of this or any other Act, shall so exercise its jurisdiction in every cause or matter before it as to secure that, as far as possible, all matters in dispute between the parties are completely and finally determined, and all multiplicity of legal proceedings with respect to any of those matters is avoided.’
(4) That the general direction of any additions and amendments to the rules in the last 100 years has been towards achieving the fundamental objectives of the 1873 and 1875 Judicature Acts. These are conveniently stated in The Supreme Court Practice 1988 vol 2, para 5187, p 1396 as follows:
‘(a) to bring about the concurrent jurisdiction of law and equity in all civil causes and matters in all civil courts on the basis that in any matter where there is a conflict or variance between the rules of equity and the rules of the common law, the rules of equity shall prevail; and at the same time (b) to secure that the Court will be empowered to determine finally all matters in dispute between the parties and to avoid all multiplicity of proceedings.’
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It is against this background that I return to Ord 16, r 8, which I must now read:
‘(1) Where in any action a defendant who has given notice of intention to defend—(a) claims against a person who is already a party to the action any contribution or indemnity; or (b) claims against such a person any relief or remedy relating to or connected with the original subject-matter of the action and substantially the same as some relief or remedy claimed by the plaintiff; or (c) requires that any question or issue relating to or connected with the original subject-matter of the action should be determined not only as between the plaintiff and himself but also as between either or both of them and some other person who is already a party to the action; then, subject to paragraph (2) the defendant may, without leave, issue and serve on that person a notice containing a statement of the nature and grounds of his claim or, as the case may be, of the question or issue required to be determined.
(2) Where a defendant makes such a claim as is mentioned in paragraph (1) and that claim could be made by him by counterclaim in the action, paragraph (1) shall not apply in relation to the claim.
(3) No acknowledgment of service of such a notice shall be necessary if the person on whom it is served has acknowledged service of the writ or originating summons in the action or is a plaintiff therein, and the same procedure shall be adopted for the determination between the defendant by whom, and the person on whom, such a notice is served of the claim, question or issue stated in the notice as would be appropriate under this Order if the person served with the notice were a third party and (where he has given notice of intention to defend the action or is a plaintiff) had given notice of intention to defend the claim, question or issue … ’
It is first to be noticed that Ord 16, r 8(1) corresponds with Ord 16, r 1(1), just as Ord 16A, r 12 corresponded with Ord 16A, r 1.
It is next to be noticed that in Ord 16, r 8(2) reference is made to ‘such a claim as is mentioned in para (1)’, and that the word ‘claim’ does not appear in sub-para (c) of Ord 16, r 8(1). It may therefore be arguable that Ord 16, r 8(2) apples only to claims under sub-paras (a) and (b) of Ord 16, r 8(1). I feel bound to reject this argument, however, because it seems to me to be implicit in sub-para (c) that if the defendant requires ‘a question or issue’ to be determined he may also want some consequential relief which would amount to a claim. I can see no satisfactory basis for distinguishing between the three sub-paragraphs of r 8(1). Furthermore, in the present case the second defendant is clearly making a claim.
Prima facie, therefore, r 8(2) applies to the claim by the second defendants against the first defendants. The claim not only ‘could have been made’ by counterclaim, but was in fact so made by the second defendants.
There is no doubt that if the claim by the second defendants had been against the first defendants alone, they could have taken advantage of the procedure available under Ord 16, r 4. This right to seek summary judgment against a co-defendant has been available for over 100 years. Moreover, it was accepted on behalf of the first defendants that, in the absence of Ord 16, r 8(2), the second defendants could, if they had wished, sought summary judgment against the plaintiffs under Ord 14, r 5(1) and against the first defendants under Ord 16, rr 8 and 4.
It has to be recognised, however, that the rights to claim summary judgment against a plaintiff on the one hand and against a co-defendant on the other hand depend on the availability of a different code or set of rules. These codes or sets of rules are contained in delegated legislation, though it is legitimate to construe them in the light of the objectives which the primary legislation is seeking to achieve.
I come now to Ord 16, r 8(3); I read again the relevant words:
‘… the same procedure shall be adopted for the determination between the defendant by whom, and the person on whom, such a notice is served of the claim,
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question or issue stated in the notice as would be appropriate under this Order if the person served with the notice were a third party … ’
Hirst J felt able to construe the crucial words ‘such a notice’ as meaning merely a notice containing ‘a statement of the nature and grounds of his claim or, as the case may be, of the question or issue required to be determined’, and the counterclaim in the action amounted to such a notice. I cannot agree with this construction.
The central question is whether the procedure set out in Ord 16, r 4 can be used for the determination of the claim by the second defendants against the first defendants. This procedure can only be used if a notice falling within the description ‘such a notice’ in Ord 16, r 8(3) has been served. ‘Such a notice’ in r 8(3) must mean, in my view, a notice served in accordance with r 8(1). But by the express words of r 8(2), para (1) of r 8 does not apply, and therefore a notice under it cannot be served, where the claim by the defendant ‘could be made’ by counterclaim. Rule 8(2) would seem to apply a fortiori where a claim has been made by counterclaim.
I see no escape from the express words of Ord 16, r 8(2). The route to summary judgment by rr 8(3) and 4(3) of Ord 16 is closed. No other route is open.
Accordingly, and not without regret, I feel bound to say that the appeal should be allowed. In my opinion the anomaly merits the attention of the Supreme Court Procedure Committee.
KERR LJ. I agree entirely with the judgment which Neill LJ has delivered. I share his regret and I hope, with him, that this anomaly may be considered and remedied. I agree that the appeal must be allowed.
Appeal allowed. Second defendants’ summons struck out.
Solicitors: John Wood & Co (for the first defendants); Booth & Blackwell (for the second defendants).
Wendy Shockett Barrister.
National Bank of Greece SA v Pinios Shipping Co No 1 and another
The Maira
[1989] 1 All ER 213
Categories: BANKING & FINANCE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): O’CONNOR, LLOYD AND NICHOLLS LJJ
Hearing Date(s): 19, 20, 21, 25 JANUARY, 2 MARCH 1988
Bank – Duty of care – Duty of care implied by law – Mortgage of vessel – Mortgagor defaulting under mortgage – Bank entering into agreement relating to management of vessel – Management of vessel entrusted exclusively to management agent subject to bank’s directions – Total loss of vessel – Management agent appointed by bank failing to carry out obligation to keep vessel fully insured – Whether bank under duty to ensure that management agent kept vessel fully insured.
Interest – Compound interest – Mortgage – Mortgage securing bank’s guarantee of payment of instalments of purchase price of vessel – No express provision in mortgage entitling bank to charge compound interest – Bank issuing written demand for repayment under mortgage – Whether relationship of banker and customer terminated following demand for repayment – Whether bank entitled to charge compound interest following demand for repayment.
The owners of a vessel built in Japan deferred payment of part of its purchase price by securing the relevant amount by a first preferred mortgage in favour of the builders and by 14 promissory notes payable at six-monthly intervals. The plaintiff bank guaranteed the first six promissory notes under a letter of guarantee, having secured the shipowners’ liability by a second preferred mortgage and a personal guarantee given by T. When the shipowners failed to honour the first promissory note the bank paid the amount due and debited the shipowners. Instead of declaring the shipowners in default under the second mortgage, the bank entered into a tripartite agreement with the shipowners and a management agent, G, under which the exclusive management of the vessel, including responsibility for its insurance, was transferred to G, subject to the bank’s directions. The vessel was subsequently lost and at the time of her loss the insurance proceeds were insufficient even to discharge the shipowners’ indebtedness under the second mortgage. The insurance was payable under a policy which had been renewed by G for less than 130% of the outstanding indebtedness, contrary to the terms of the management agreement and the two mortgages. The shipowners claimed damages against G for under-insurance in breach of its duty under the management agreement. The claim was successful, but G failed or refused to pay and the bank made a written demand to the shipowners and T for repayment of the second mortgage and when the shipowners and T failed to pay the bank issued a writ against the shipowners and T claiming the amount owing under the mortgage plus interest. The judge awarded the bank the amount owing under the mortgage and compound interest to the date of judgment. The shipowners and T appealed, contending (i) that the bank was under a duty of care to see that G did not under-insure the vessel, such a duty arising either under an implied term of the contract or in tort, and (ii) that the judge had erred in awarding compound interest to the date of the judgment since the second mortgage contained no provision entitling the bank to charge compound interest and, if by implication or bankers’ practice it did, that entitlement ended when the bank made its demand for repayment and consequently terminated the relationship of banker and customer.
Held – (1) The court would impose neither a contractual duty of care nor a duty in tort on the bank to ensure that the management agent, G, carried out its obligation to keep the vessel fully insured, since it was not possible to establish either a generalised duty of care applying to all contracts of a defined type into which the management contract
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could be fitted or a duty arising from the particular facts of the case, given that the management contract was a one-off agreement carefully drawn for a specific purpose in special circumstances which did not fit into any defined type or category of contract and that the bank was entitled to leave all decisions about the management and operation of the vessel, including the renewal of insurance, to G. Accordingly, the appeal on the duty of care issue would be dismissed (see p 219 e to g, p 221 h j, p 222 f g, p 223 j, p 230 f g, p 231 h to p 232 c and p 234 j, post); dictum of Lord Cross in Liverpool City Council v Irwin [1976] 2 All ER 39 at 46–47 and Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2 All ER 947 applied.
(2) Once a bank had unequivocally demanded immediate payment of outstanding sums due on account with the intention of being paid in full, thereby closing the account, the relationship of banker and customer was replaced by one of creditor and debtor, and compound interest ceased to be payable in the absence of an express or implied agreement on the part of the customer to pay, or a binding custom entitling the bank to charge, compound interest. Since there was no such agreement between the parties and the bank had not sought to establish any such custom, the bank was only entitled to recover simple interest from the date of the demand for repayment to the date of judgment. Accordingly, the appeal on the compound interest issue would be allowed (see p 225 a b, p 229 h to p 230 c f g, p 234 b to d j and p 235 f, post); Ex p Bevan (1803) 9 Ves 223, Lord Clancarty v Latouche (1810) 1 Ball & B 420, Fergusson v Fyffe [1835–42] All ER Rep 48, dictum of Romilly MR in Crosskill v Bower (1863) 32 Beav 86 at 93 and Deutsche Bank und Disconto-Gesellschaft v Banque des Marchands de Moscou (1931) 4 Legal Decisions Affecting Bankers 293 applied.
Per O’Connor LJ. It cannot be said that, where a bank enters a contract of guarantee as surety, the contract of itself creates between the bank and the principal the banker/customer relationship which would be needed to enable the bank to recover from the principal, in the event of a default, compound interest where no express provision in that behalf has been made (see p 235 e, post).
Notes
For contractual terms implied by law, see 9 Halsbury’s Laws (4th edn) para 354, and for cases on the subject, see 12 Digest (Reissue) 746–754, 5371–5410.
For a bank’s right to charge interest, see 3 Halsbury’s Laws (4th edn) para 160, and for cases on the subject, see 3 Digest (Reissue) 686–687, 4210–4219.
Cases referred to in judgments
American Express International Banking Corp v Hurley [1985] 3 All ER 564.
Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728, [1977] 2 WLR 1024, HL.
Bevan, Ex p (1803) 9 Ves 223, 32 ER 588, LC.
Brown v Boorman (1844) 11 Cl & Fin 1, 8 ER 1003, HL; affg (1842) 3 QB 511, 114 ER 603, Ex Ch.
Clancarty (Lord) v Latouche (1810) 1 Ball & B 420, LC.
Crosskill v Bower (1863) 32 Beav 86, 55 ER 34.
Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 2 All ER 633, [1971] Ch 949, [1971] 2 WLR 1207, CA.
Deutsche Bank und Disconto-Gesellschaft v Banque des Marchands de Moscou (1931) 4 Legal Decisions Affecting Bankers 293, CA.
Eaton v Bell (1821) 5 B & Ald 34, 106 ER 1106.
Economic Life Assurance Society v Usborne [1902] AC 147, HL.
Esso Petroleum v Mardon [1976] 2 All ER 5, [1976] QB 801, [1976] 2 WLR 583, CA.
Fergusson v Fyffe (1841) 8 Cl & Fin 121, [1835–42] All ER Rep 48, 8 ER 49, HL.
Glafki Shipping Co SA v Pinios Shipping Co No 1, The Maira (No 2) [1986] 2 Lloyd’s Rep 12, HL; affg [1985] 1 Lloyd’s Rep 300, CA; rvsg [1984] 1 Lloyd’s Rep 660.
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Greenwood v Martins Bank Ltd [1933] AC 51, [1932] All ER Rep 318, HL.
Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294, [1970] AC 1004, [1970] 2 WLR 1140, HL.
Lister v Romford Ice and Cold Storage Co Ltd [1957] 1 All ER 125, [1957] AC 555, [1957] 2 WLR 158, HL.
Liverpool City Council v Irwin [1976] 2 All ER 39, [1977] AC 239, [1976] 2 WLR 562, HL; affg in part [1975] 3 All ER 658, [1976] QB 319, [1975] 3 WLR 663, CA.
London Joint Stock Bank Ltd v Macmillan [1918] AC 777, [1918–19] All ER Rep 30, HL.
Paton v IRC [1938] 1 All ER 786, [1938] AC 341, HL.
Smith v Littlewoods Organisation Ltd (Chief Constable, Fife Constabulary, third party) [1987] 1 All ER 710, [1987] AC 241, [1987] 2 WLR 480, HL.
Standard Chartered Bank Ltd v Walker [1982] 3 All ER 938, [1982] 1 WLR 1410, CA.
Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2 All ER 947, [1986] AC 80, [1985] 3 WLR 317, PC.
Williamson v Williamson (1869) LR 7 Eq 542.
Yourell v Hibernian Bank Ltd [1918] AC 372, HL.
Cases also cited
Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1987] 2 All ER 923, [1987] 2 WLR 1300.
Corinthian Securities Ltd v Cato [1969] 3 All ER 1168, [1970] 1 QB 377, CA.
Great Western Rly v London and County Banking Co Ltd [1901] AC 414, [1900–3] All ER Rep 1004, HL.
IRC v Holder [1931] 2 KB 81, CA; affd [1932] AC 624, [1932] All ER Rep 265, HL.
IRC v Lawrence Graham & Co [1937] 2 All ER 1, [1937] 2 KB 179, CA.
IRC v Oswald [1945] 1 All ER 641, [1945] AC 360, HL.
Mosse v Salt (1863) 32 Beav 269, 55 ER 106.
Panchand Freres SA v Ets General Grain Co [1970] 1 Lloyd’s Rep 53, CA.
Peabody Donation Fund (Governors) v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529, [1985] AC 210, HL.
Rufford v Bishop (1829) 5 Russ 346, 38 ER 1058.
Shell International Petroleum Co Ltd v Transnor (Bermuda) Ltd [1987] 1 Lloyd’s Rep 363, CA.
Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175, PC.
Appeal
The first defendant, Pinios Shipping Co No 1(Pinios) of Monrovia in the Republic of Liberia, owner and mortgagor of the vessel Maira, and the second defendant, George Dionysios Tsitsilianis, the guarantor of the Pinios’s liabilities, appealed against the decision of Leggatt J made on 29 January 1987 giving judgment for the plaintiff, National Bank of Greece SA (the bank), a foreign corporation registered in England under the Companies Act 1948, s 412 and carrying on business in London, in its claim for repayment under a second preferred mortgage taken by the bank in support of its guarantee of payment of the first six instalments of the purchase price of the vessel, in the sum of $US2,118,213·03 which included a sum for compound interest to the date of judgment, and ruling that the bank owed the defendants no duty of care to ensure that Glafki Shipping Co SA carried out its obligation under a tripartite agreement relating to the management and operation of the vessel to keep it fully insured. The facts are set out in the judgment of Lloyd LJ.
Adrian Hamilton QC and Geraldine Andrews for the defendants;.
Murray Pickering QC and David Owen for the bank.
Cur adv vult
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2 March 1988. The following judgments were delivered.
LLOYD LJ (giving the first judgment at the invitation of O’Connor LJ). This is another chapter in the protracted litigation arising out of the total loss of the Maira nearly ten years ago on 10 April 1978. At the time of her loss the vessel was insured for $US10m. The proceeds of insurance, when paid, were insufficient to enable the vessel’s owner, Pinios Shipping Co No 1 (Pinios), to repay the National Bank of Greece SA (the bank) under an agreement dated 8 February 1977. On 13 November 1978 the bank wrote to Pinios demanding payment of the amount then due under the agreement. By a letter before action dated 28 January 1980 the bank calculated the amount due at 29 January 1980 as $US894,224 including interest. A statement of account was enclosed with the letter. On 8 July 1980 the bank issued a writ. The writ was amended by leave on 30 June 1983. By its points of claim indorsed on the amended writ, the bank claimed $US598,107·70 plus interest to 30 June 1983 amounting to $US734,979·46. Although the interest is not described as such, it was in fact compound interest, calculated with quarterly rests. On 29 January 1987 Leggatt J gave judgment in favour of the bank. The amount for which he gave judgment, including compound interest to the date of his judgment, amounts to $US2,118,213·03. There is now an appeal to this court. One of the two questions in the appeal is whether the judge was right to award compound interest to the date of judgment.
The second question in the case arises as follows. The Maira was built in Japan, under a shipbuilding contract dated 28 July 1975. The price was payable in yen. 30% of the price was payable on or before delivery. 70% of the price was deferred. It was secured by a first preferred mortgage, in favour of the builders, and by 14 promissory notes signed by Pinios payable at six-monthly intervals. The first six promissory notes were guaranteed by the bank under a letter of guarantee. The bank was secured by a second preferred mortgage, and by a personal guarantee given by Mr Tsitsilianis, the second defendant in the action.
The ship was delivered on 19 February 1977. The first promissory note fell due on 9 August 1977. It was dishonoured. The bank thereupon paid the amount of the promissory note under its letter of guarantee, and debited Pinios.
The bank, on payment under the letter of guarantee, could have declared Pinios in default under art II(18)(B) of the second preferred mortgage. But instead of exercising its rights under that clause, the bank entered into a tripartite agreement dated 6 September 1977 with Pinios and a company called Glafki Shipping Co SA (Glafki). By virtue of that agreement Glafki was appointed sole and exclusive agent to manage and conduct the activities of the vessel. Under cl 2 of the agreement Glafki was obliged to manage the vessel in the best interests of Pinios and the bank. Under cl 3 Glafki was obliged to exercise due diligence to protect and safeguard the interests of Pinios and the bank in various specific respects. The effect of the management agreement was to transfer the entire management of the vessel to Glafki, subject to the directions of the bank under cl 13.
Under art I(15) of the second preferred mortgage, it was Pinios’s obligation to insure the vessel for not less than 130% of the total amount secured by the mortgage. There was a similar, though not identical, provision in the first preferred mortgage. Under cl 3(g) of the management agreement, it became Glafki’s duty to place all insurances ‘in accordance with the respective Insurances Clauses of this Mortgage’. When the vessel was delivered on 9 February 1977 she was insured by Pinios for $US10m. This was then sufficient to comply with Pinios’s obligations under both mortgages. But as time went on, and the dollar depreciated against the yen, the margin narrowed. The insurance was renewed on the instructions of Glafki on 9 February 1988 and again on 1 April 1988. The April renewal worked out at less than 130% of the total amount due under both mortgages, with the consequence that Pinios was unable to repay the bank. Accordingly, Pinios brought a claim against Glafki for damages for breach of duty under the management agreement. The claim was referred to arbitration. On 9 February 1982 the
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arbitrator issued his award in favour of Pinios. His award was reversed by Hobhouse J: see Glafki Shipping Co SA v Pinios Shipping Co No 1, The Maira (No 2) [1984] 1 Lloyd’s Rep 660. But Pinios was successful in the Court of Appeal ([1985] 1 Lloyd’s Rep 300) and in the House of Lords ([1986] 2 Lloyd’s Rep 12). Unfortunately its success has proved fruitless. Glafki has failed or refused to pay. So Pinios now seeks to recover by counterclaim from the bank what it has failed to recover from Glafki.
The case is put in a number of different ways. But in essence Pinios says that the bank was under a duty of care to see to it that Glafki did not under-insure the vessel. It says that that duty arose either as an implied term of the contract or in tort. The judge has decided, on orthodox lines, that the bank was under no such duty. The second question in the appeal is whether he was right.
We were told that the first question is one of considerable general importance to bankers. But it is logical, and convenient, to consider the second question first, as did the judge.
At the end of his speech in Smith v Littlewoods Organisation Ltd (Chief Constable, Fife Constabulary, third party) [1987] 1 All ER 710 at 736, [1987] AC 241 at 280 Lord Goff epitomised the judicial function as an educated reflex to facts. I have to confess that in the present case my immediate reflex was that the bank must succeed. I could see no ground for implying a contractual duty of care in favour of Pinios. At the conclusion of the argument, my reflex, though much better educated, remains the same. The judge dealt with the question shortly as follows:
‘Since in this matter the parties have expressly provided for the insurance of the ship, it is not necessary to imply any further duty of supervision. Had the officious bystander inquired whether the bank was under a duty to see to it in the interests of Pinios that Glafki insured the ship for the full sum required under the mortgages, it is by no means obvious that all the parties would have acknowledged that they were. No doubt it was commercially prudent for the bank to ensure that the insurance was sufficient to cover its own interest, but it does not follow that it was bound to go further and determine whether Pinios’s interest too was properly protected. It would in the circumstances be unreasonable to impose on the bank a duty to reinforce the obligation which Glafki assumed under the agency agreement.’
From this it would appear that the argument in the court below was that the implication of a term in favour of Pinios was necessary in order to give the contract business efficacy. Both parties, it must have been argued, would readily have agreed to such a term had they been asked.
The notice of appeal and the defendants’ skeleton argument reflect this approach. Thus in para 8(2) of the skeleton argument it is said:
‘The existence of Glafki’s obligations did not in itself make it unreasonable or unnecessary for there to be an independent duty on the Bank to take steps to prevent Glafki from under-insuring the vessel and thereby causing damage to Pinios.’
The basis for the implication is set out in para 8(6):
‘The learned Judge gave insufficient weight to the fact that the Bank, by insisting on a Management Agreement which deprived Pinios of all rights to safeguard its own interests and which required the managers, Glafki, to regard the Bank’s interests as paramount, had arrogated to themselves the exclusive power to intervene with the managers in the protection of the respective interests of the Bank and Pinios in the insurance monies.’
The conclusion is set out in para 8(8):
‘The implication of the term that the Bank did owe such a duty to Pinios is necessary to give effect to the intentions of the parties and the duty is both fair and reasonable.’
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The argument was put concisely and forcefully by counsel for the defendants at the outset of his submissions as follows: ‘There was nobody to look after Pinios’s interests, once the management agreement had been entered into. The bank owed a duty of care to those that it had deprived of the opportunity of protecting themselves.' But in the course of developing his submissions, counsel shied away from the ‘officious bystander’ test. In this he was wise. For, so far from it being obvious that the bank would have agreed to the suggested implied term, it seems to me quite obvious that it would not. Why should it?
Counsel for the defendants made much of the fact that the management agreement was forced on Pinios. He relied on the observation of Lord Brandon in Glafki Shipping Co SA v Pinios Shipping Co No 1, The Maira (No 2) [1986] 2 Lloyd’s Rep 12 at 14 that the bank had ‘insisted’ on Pinios entering into the management agreement, an observation which Leggatt J has adopted as a finding of fact. It is true that the bank had every reason not to exercise its power of sale under art II(18) of the second preferred mortgage, since the market value of the vessel was already far less than the amount due under the combined mortgages. But Pinios also had much to gain from entering into the management agreement. For so long as it remained the owner of the vessel, even if only in name, there was always the possibility that the market would improve and its fortunes recover. Why, in those circumstances, should the bank have agreed to exercise care on Pinios’s behalf? If the bystander had asked, ‘What happens if Glafki fails or refuses to insure for the full 130%?’, the bank’s answer would have been simple and straightforward. If Glafki were to refuse to insure for the full sum, Pinios could arrange its own insurance for the balance. It would make no difference to its pocket whether Glafki insured for 100% and Pinios for 30% or Glafki for the full 130%. If, on the other hand, Pinios were only to learn of the under-insurance too late, as in the present case, Pinios could recover its loss as damages from Glafki. It would hardly have entered into the parties’ consideration that Glafki might refuse to honour an award. In those circumstances the judge was, if anything, understating the position when he said that it was by no means obvious that the bank would have agreed to act as ‘guarantor’ for Glafki, more especially as Glafki was Pinios’s own nominee to act as manager. To my mind it is obvious that it would not. So counsel for the defendants was, as I say, wise to abandon the officious bystander. No term can be implied on that ground.
But that is by no means the end of the story. Counsel for the defendants submits that this is a case where the law imposes a duty of care, irrespective of what the parties must have intended or agreed. To adopt the terminology of Treitel Law of Contract (7th edn, 1987) p 158, counsel relies on a term implied by law as distinct from a term implied in fact. He puts the case in two ways. It is important to keep them separate. In the first place he submits that the relationship between the parties is such that the law imposes on the bank a generalised duty of care towards Pinios. Secondly, he submits that the law imposes a duty of care arising out of the particular facts, namely that the bank actively intervened in the process of arranging the insurance. I will take each of these two ways of putting the case in turn.
That there is a distinction between a term implied in a contract because it is what the parties must have agreed and a term implied by law is now well established even if, as Lord Wilberforce preferred to put it in Liverpool City Council v Irwin [1976] 2 All ER 39 at 43, [1977] AC 239 at 254, the distinction only represents two ends of a ‘continuous spectrum’. When Liverpool City Council v Irwin was before the Court of Appeal, Lord Denning MR, in a dissenting judgment, said that it was time to get rid of the old clichés about ‘necessary to give business efficacy’ and the ‘officious bystander’ (see [1975] 3 All ER 658 at 664, [1976] QB 319 at 329). The law, he said, implies a term whenever it is reasonable to do so, and that is an end of it. He gave, as examples, terms implied in a contract for the sale of goods and many others. Nobody asks in such cases whether the term is one which the parties must have intended or agreed. When the case reached the
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House of Lords the decision of the Court of Appeal was reversed. But there was no support for the broad principle stated by Lord Denning MR in the Court of Appeal. Lord Wilberforce described Lord Denning MR’s principle as going a long way beyond sound authority. The point is put very clearly by Lord Cross ([1976] 2 All ER 39 at 46–47, [1977] AC 239 at 257–258):
‘When it implies a term in a contract the court is sometimes laying down a general rule that in all contracts of a certain type—sale of goods, master and servant, landlord and tenant, and so on—some provision is to be implied unless the parties have expressly excluded it. In deciding whether or not to lay down such a prima facie rule the court will naturally ask itself whether in the general run of such cases the term in question would be one which it would be reasonable to insert. Sometimes, however, there is no question of laying down any prima facie rule applicable to all cases of a defined type but what the court is being in effect asked to do is to rectify a particular—often a very detailed—contract by inserting in it a term which the parties have not expressed. Here it is not enough for the court to say that the suggested term is a reasonable one the presence of which would make the contract a better or fairer one; it must be able to say that the insertion of the term is necessary to give—as it is put—“business efficacy” to the contract and that if its absence had been pointed out at the time both parties—assuming them to have been reasonable men—would have agreed without hesitation to its insertion. The distinction between the two types of case was pointed out by Viscount Simonds and Lord Tucker in their speeches in Lister v Romford Ice and Cold Storage Co Ltd [1957] 1 All ER 125 at 134, 143, [1957] AC 555 at 579, 594, but I think that Lord Denning MR in proceeding—albeit with some trepidation—to “kill off” Mackinnon LJ’s “officious bystander” must have overlooked it.’
So there is no doubt that there are, in the words of Lord Cross, contracts of a defined type in which the law will imply a term unless the parties have expressly excluded it. Can the present case be brought within any defined type? If we were concerned in the present case with the ordinary relationship of banker and customer, the law would imply certain obligations on the part of the bank, and a limited duty of care on the part of the customer (see Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2 All ER 947, [1986] AC 80). But we are not here concerned with the ordinary relationship of banker and customer. We are concerned with a carefully drawn ‘one-off’ contract between three parties, made for a particular purpose in special circumstances, and apparently making full provision for that purpose. I cannot imagine a contract which it would be more difficult to fit into a ‘defined type’.
But there is a further difficulty. Even if one could conjure up and define a type of contract into which the present contract could be fitted, there would remain the question whether the term on which counsel for the defendants seeks to rely should be implied. In the passage I have quoted from Lord Cross’s speech in Liverpool City Council v Irwin, he appears to have accepted that where the court is laying down a general rule for all contracts of a certain type (sale of goods, master and servant, landlord and tenant and so on), the court asks whether the term is one which it would be reasonable to insert in the general run of such cases. But Lord Wilberforce took a rather different line. In his view only such obligations should be read into the contract ‘as the nature of the contract itself implicitly requires, no more, no less; a test in other words, of necessity’ (see [1976] 2 All ER 39 at 44, [1977] AC 239 at 254). It was Lord Wilberforce’s test that the Privy Council adopted in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd. If, in that case, the Privy Council found it unnecessary to imply into an ordinary contract between banker and customer a duty wider than the duties recognised in London Joint Stock Bank Ltd v Macmillan [1918] AC 777, [1918–19] All ER Rep 30 and Greenwood v Martins Bank Ltd [1933] AC 51, [1932] All ER Rep 318, I can see no necessity for implying any duty of
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care on the part of the bank in the present case. For if we were to imply a duty of care on the part of the bank to see that Glafki did not under-insure the vessel, should we not also have to imply a duty of care to see that Glafki fulfilled its other specific duties under cl 3 of the management agreement? Should we not have to imply a duty to see that Glafki purchased all necessary stores and bunkers at the best price? Should we not have to imply a duty in relation to the supervision of repairs? Clearly not. Such an implication would not only be unnecessary, but wholly unreasonable. So I see no necessity to imply a duty of care in relation to the procuring of insurance, assuming, contrary to my view, that this is the type of case in which the court would imply a term irrespective of the parties’ presumed intentions.
Counsel for the defendants returned over and over again in the course of his argument to the close relationship which existed between the bank and Pinios. But the closeness of the relationship does not in itself justify the implication of a contractual term.
So I turn to the second way in which the case is put. It is said that the bank owed Pinios a duty of care because it actively intervened in the procuring of the insurance. Here counsel is on firmer legal ground. But he is in difficulty on the facts.
The authorities on which counsel relies for this part of his argument are Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 2 All ER 633, [1971] Ch 949, Standard Chartered Bank Ltd v Walker [1982] 3 All ER 938, [1982] 1 WLR 1410 and American Express International Banking Corp v Hurley [1985] 3 All ER 564. In the Cuckmere Brick Co case it was held that a mortgagee, in exercising his power of sale, owes a duty of care to the mortgagor to obtain the best or ‘proper’ price. In the Standard Chartered Bank case it was held, in interlocutory proceedings, that a receiver, realising assets under a debenture, owes a duty of care to the borrower to obtain the best price that circumstances permit. In the American Express case it was submitted that the decision in the Standard Chartered Bank case established no more than that the point was arguable. Mann J refused to accept that submission. After quoting extensive passages from the Cuckmere Brick Co case and the Standard Chartered Bank case, he summarised the law as follows ([1985] 3 All ER 564 at 571):
‘(i) The mortgagee when selling mortgaged property is under a duty to a guarantor of the mortgagor’s debt to take reasonable care in all the circumstances of the case to obtain the true market value of that property. (ii) A receiver is under a like duty. (iii) The mortgagee is not responsible for what a receiver does whilst he is the mortgagor’s agent unless the mortgagee directs or interferes with the receiver’s activities. (iv) The mortgagee is responsible for what a receiver does whilst he is the mortgagee’s agent and acting as such.’
Counsel for the bank does not dispute these propositions. He accepts that if, in the words of Mann J, the bank had directed or interfered with Glafki’s activities in relation to the insurance the bank would have owed Pinios a duty of care. Similar language to that used by Mann J is to be found in the Standard Chartered Bank case [1982] 3 All ER 938 at 942, [1982] 1 WLR 1410 at 1416, where Lord Denning MR said:
‘The debenture holder, the bank, is not responsible for what the receiver does except in so far as it gives him directions or interferes with his conduct of the realisation. If it does so, then it too is under a duty to use reasonable care towards the company and the guarantor.’
So the question is whether the bank directed or interfered with Glafki’s activities when arranging the insurance. That the bank was entitled to direct or interfere is clear enough. Clause 13 of the management agreement provides:
‘Directions and Approvals—In acting under this Agreement the Agent must insofar as this proves possible or realisable accept and rely upon directions instructions consent or approvals made or given on behalf of with the consent of the Bank after
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having received written notice from the Bank by any Officer of the Bank or by any other person designated in writing by the Bank to give such directions approvals or consent … ’
But whether the bank in fact directed or interfered is less clear. Neither side is appealing on fact, so we are bound by the findings of the judge in the court below. Owing to the way in which the case was argued before him, his findings are rather less precise on this point than they might be. He says:
‘Although for its own protection it would no doubt have been prudent for the bank to check whether the amount of the insurance continued to cover [Pinios’s] debt, they [the officers of the bank] did not regard their responsibility as going further than that. All decisions about the management and operation of the ship were left to Glafki, including the renewal of the insurance.’
The reference to ‘renewal of the insurance’ presumably includes the renewal in April 1978.
Later on in his judgment the judge refers to the evidence of Mr Theodoropoulos, the manager of the London branch of the bank. On 16 July 1980 Mr Theodoropoulos signed a statement which was intended for use by Glafki in the arbitration proceedings between Glafki and Pinios. In para 4 he said:
‘I was fully aware and approved of the continuation of the insurance of the Maira at a total of £10 million in February and April 1978.’
In a subsequent statement, prepared for the present proceedings, Mr Theodoropoulos said that he never discussed the amount of the insurance cover with anybody. He had asked for para 4 of his earlier statement to be deleted, as it was not true. But this had not been done.
Mr Theodoropoulos gave evidence at the trial. The judge disbelieved him. But the only finding that the judge makes is in terms of para 4 of the earlier statement, namely that ‘when the insurance was renewed Mr Theodoropoulos on behalf of the bank knew and approved of what was done’.
This finding places us in some difficulty, since it was common ground before us that Mr Theodoropoulos left the London branch of the bank very shortly after the renewal of the insurance in February, to take up a new position as general manager of an associated insurance company in Athens. It seems unlikely that he would have been asked to approve the April insurance in that capacity. That would have been a task for his successor in London. Moreover it was never pleaded by Pinios that Pinios would rely on para 4 of Mr Theodoropoulos’s earlier statement in relation to the April renewal. It was relied on in relation to the February renewal only. Counsel for the defendants tells us that that was a simple oversight on the part of the pleader.
So the position on the facts is not altogether satisfactory. But since neither side is appealing on the facts, we need only concern ourselves with the findings made by the judge. What is meant when it is said that Mr Theodoropoulos, on behalf of the bank, ‘knew and approved’ of what was done? Does it mean that the bank actively intervened? Does it mean that the bank ‘directed and interfered’ with Glafki’s activities, so as to give rise to a duty of care, which, if that is the meaning, counsel for the bank concedes? Or does it mean simply that the bank did not object?
In my view it means the latter. I form that view for two reasons. First, it is more consistent with the judge’s earlier finding that ‘all decisions about the management and operation of the ship were left to Glafki, including the renewal of the insurance’. Second it is more consistent with the contemporary correspondence. Both parties were content that we should look at the correspondence, presumably as some sort of aid to construing the judge’s findings.
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Starting with the February renewal, the previous cover was due to expire on 8 February 1978. The first the bank heard of the matter was a telex dated 9 February from Messrs Frank B Hall, the New York brokers, confirming that they had already placed 10% of the insurance in New York. When the bank inquired about the remaining 90%, it was informed that this had already been placed by Messrs Colburn French & Kneen in London. So the correspondence does not support any suggestion of prior intervention by the bank. As for the April renewal, the first reference in the correspondence is a letter from the bank dated 12 April to the two brokers asking whether the insurance had been renewed. This was not only long after the renewal date, it was also after the vessel had become a total loss. No doubt the bank was relieved to hear that the insurances had indeed been renewed. Again the correspondence does not suggest that there had been any active intervention before the April renewal.
The only support which counsel for the defendants could derive from the correspondence is a letter from the brokers to the bank dated 10 February 1978 confirming that the insurances had been effected, and undertaking, inter alia—
‘to advise you immediately of any material changes which are proposed to be made in the terms of the insurances and following an application received from you not later than 1st March, 1978 … ’
But at best this letter points only to advance knowledge on the part of the bank of the proposed terms of renewal, coupled with an opportunity to intervene. There is a world of difference between an opportunity to intervene and active intervention. As Lord Goff pointed out in Smith v Littlewoods Organisation Ltd [1987] 1 All ER 710 at 729, [1987] AC 241 at 271, the law is always slow to impose liability for what he called a pure omission. In that case he was concerned with tort, but the same must apply when the court is considering whether to imply a term in a contract.
There is one further small pointer as to what the judge had in mind when he used the phrase ‘knew and approved of what was done’. When stating his conclusion, in the passage which I have already cited, the judge said that it was not necessary to imply any further duty of supervision. If the judge had already found as a fact that there had been active intervention by the bank, then ‘supervision’ is surely not the word he would have used to describe the alleged duty.
So I would hold that, in finding that the bank ‘knew and approved’, the judge meant no more than that the bank did not disapprove, or, in other words, that the bank acquiesced. The words fall short of a finding of active intervention, which is the finding which counsel for the defendants needs if he is to succeed on this part of his argument. In the absence of that finding, I would hold that Pinios has failed to establish a duty of care arising on the particular facts of the case, just as it has failed to establish a generalised duty applying to all contracts of this ‘type’.
For completeness I should add one last point. Counsel for the defendants did not seek to argue that the bank is vicariously liable for the shortcomings of Glafki. In the American Express case [1985] 3 All ER 564 Mann J held that the receiver became the bank’s agent after the company had gone into liquidation. He therefore held the bank liable for the receiver’s negligence on ordinary agency principles. Such an argument would not have been open here.
Turning from contract to tort, counsel for the defendants argues strenuously that even if he fails in contract he is entitled to succeed in tort. He relies on Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294, [1970] AC 1004, and the much discussed and increasingly precarious dictum of Lord Wilberforce in Anns v Merton London Borough [1977] 2 All ER 492 at 498, [1978] AC 728 at 751. But those were cases where there was no contract between the parties. So it was tort, or nothing. Here there is a contract, and a most elaborate contract at that.
Now I accept that in a large class of cases it always was, and maybe still is, possible for the plaintiff to sue either in contract or in tort. The obvious example would be actions
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against innkeepers and the like, and those exercising a common calling. In Brown v Boorman (1842) 3 QB 511 at 525–526, 114 ER 603 at 608–609 Tindall CJ, delivering the judgment of the Court of Exchequer Chamber, said:
‘That there is a large class of cases in which the foundation of the action springs out of privity of contract between the parties, but in which, nevertheless, the remedy for the breach, or non-performance, is indifferently either assumpsit or case upon tort, is not disputed. Such are actions against attorneys, surgeons and other professional men, for want of competent skill or proper care in the service they undertake to render … The principle in all these cases would seem to be that the contract creates a duty, and the neglect to perform that duty, or the nonfeasance is a ground of action upon a tort.’
In the House of Lords Lord Campbell said (1844) 11 Cl & Fin 1 at 44, 8 ER 1003 at 1018–1019:
‘… wherever there is a contract, and something to be done in the course of the employment which is the subject of that contract, if there is a breach of a duty in the course of that employment, the plaintiff may either recover in tort or in contract.’
See also Esso Petroleum Co Ltd [1976] 2 All ER 5 at 15, [1976] QB 801 at 819 per Lord Denning MR.
But so far as I know it has never been the law that a plaintiff who has the choice of suing in contract or tort can fail in contract yet nevertheless succeed in tort; and, if it ever was the law, it has ceased to be the law since Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2 All ER 947, [1986] AC 80. In that case the bank advanced very much the same argument as has been advanced by counsel for the defendants. But the argument was rejected. Lord Scarman said ([1985] 2 All ER 947 at 957, [1986] 1 AC 80 at 107):
‘Their Lordships do not believe that there is anything to the advantage of the law’s development in searching for a liability in tort where the parties are in a contractual relationship. This is particularly so in a commercial relationship. Though it is possible as a matter of legal semantics to conduct an analysis of the rights and duties inherent in some contractual relationships including that of banker and customer either as a matter of contract law when the question will be what, if any, terms are to be implied or as a matter of tort law when the task will be to identify a duty arising from the proximity and character of the relationship between the parties, their Lordships believe it to be correct in principle and necessary for the avoidance of confusion in the law to adhere to the contractual analysis: on principle because it is a relationship in which the parties have, subject to a few exceptions, the right to determine their obligations to each other, and for the avoidance of confusion because different consequences do follow according to whether liability arises from contract or tort, eg in the limitation of action … Their Lordships do not, therefore, embark on an investigation whether in the relationship of banker and customer it is possible to identify tort as well as contract as a source of the obligations owed by the one to the other. Their Lordships do not, however, accept that the parties’ mutual obligations in tort can be any greater than those to be found expressly or by necessary implication in their contract.’
Nothing in the subsequent cases at first instance on which counsel for the defendants relied throws any doubt on the appropriateness of Lord Scarman’s observations to the present case. I would hold without hesitation that if, in a case such as the present, the plaintiff fails in contract he must necessarily fail in tort.
The position would be different if the contract and the tort lay in different fields. Thus, if, to take a simple example, I give my employee a lift home and injure him by my careless driving, then obviously he will not be prevented from recovering from me in
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tort because of the existence between us of a contract of employment. But that is not this case.
I return now to consider the bank’s claim for compound interest. I start by setting out the relevant provisions of the loan agreement between Pinios and the bank dated 8 February 1977. The agreement provides that, in consideration of the bank agreeing to issue a letter of credit in favour of the builders, Pinios would execute a second preferred mortgage as security for the payment on demand of all sums which the bank might be called on to pay under the letter of guarantee. Clause (8) provides:
‘(A) We shall pay interest on the amount payable and paid by you under your said Letter of Guarantee at the rate (hereinafter called “the agreed interest rate”) of two per cent (2%) per annum above the rate at which three (3) or six (6) months deposits of amounts in United States Dollars equivalent to the amount of each Promissory Note payable under the said Letter of Guarantee are offered to you by first class Banks in the London Interbank Eurodollar Market with a minimum rate of interest of eight per cent (8%) per annum.
(B) If you shall at any time determine that by reason of changes affecting the London Inter Bank Euro Dollar Market adequate and fair means do not exist for ascertaining the agreed interest rate you may give notice of such fact to us and we shall discuss with you an alternative basis for securing the amount paid under the said Letter of Guarantee on the basis that the return to you shall be the same as that provided for in this agreement. If no agreement is reached upon an alternative basis for securing the amount paid under the said Letter of Guarantee before the next succeeding interest payment date after such notice shall have been given, then the amount paid by you under the said Letter of Guarantee shall become repayable and if not repaid shall bear interest at the amount provided in sub-clause (C) below for interest in default.
(C) If any interest shall be due and unpaid four working days after the relevant interest payment date the amount of interest shall be recalculated from the interest payment date until the date of payment at the rate of two per cent (2%) per annum above the agreed interest rate.
(D) Each determination under this clause shall be conclusive.’
The second preferred mortgage provides for the vessel to stand as security—
‘for the payment by [Pinios] on demand of the total amount of its said liability … and also the payment of interest thereon at the rate of Two per cent (2%) above the current London Euro Dollar Market rate in respect of three (3) or six (6) months deposits whichever be the higher rate for the time being with a minimum of Eight per cent (8%) … ’
A little later the mortgage provides:
‘In case of default in paying any amount due hereunder within four (4) days of the same having been demanded [Pinios] will pay interest after the expiration of the aforesaid period of four (4) days at the rate of Two per cent (2%) per annum above the rate hereinbefore provided until repayment to the Mortgagee in full.’
It will be noticed that, although the mortgage is annexed to the agreement, there are some differences in the language of the two interest provisions. Thus in the mortgage it is provided that the rate of interest should be the higher of the three or six months’ deposit rate, plus 2%, whereas in the agreement the words ‘whichever be the higher’ are omitted. Another difference is that the default rate of interest in the mortgage applies when an amount due has not been paid within four days of the same having been demanded; whereas by cl (8)(C) of the agreement the default rate is payable if any interest remains unpaid four working days after ‘the relevant interest payment date’. There is a further reference to ‘interest payment date’ in cl (8)(B).
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Leggatt J regarded the compound interest question as simple. Having set out the terms of the mortgage which I have just quoted, he continued:
‘The effect of this was to entitle the bank to charge compound interest on the outstanding debt. The relationship governed by the mortgage never came to an end; but, even if it were not so and the right to charge compound interest is to be founded on implied agreement, the conclusion would be the same.’
I find this hard to follow. The judge seems to have thought that there was an express provision in the mortgage entitling the bank to charge compound interest. But I can find no such provision. There is a provision for an increase in the rate of interest in the event of default. But there is no reference anywhere to compound interest; nor is there any provision for periodic rests. Counsel for the bank submitted that the reference to the three- or six-month deposit rate whichever be the higher imports periodic rests. But why should it? It fixes the rate of interest, not the frequency with which interest is capitalised.
Counsel for the bank relies also on the reference to ‘interest payment date’ in cl (8)(B) and (C). But again it is impossible to spell out from these references any right to capitalise the interest. So I would reject the submission that there is any express agreement to pay compound interest.
Then, was there an implied agreement to pay compound interest? Counsel for the defendants concedes that the bank was entitled to charge compound interest with quarterly rests during the currency of the banker/customer relationship. But once the account was closed the banker/customer relationship ceased. According to counsel that occurred on 13 November 1978 when the bank demanded payment. Thereafter the bank was in the same position as any other creditor, and became entitled to simple interest only.
Counsel for the bank on the other hand says that the account was never closed, and the banker/customer relationship never ceased. It continued until judgment. On that view the bank was entitled, he says, to continue to charge compound interest, and the judge was right to give judgment on that basis.
That being the issue between the parties, it is unnecessary to consider whether counsel for the defendants was right to concede that the bank was entitled to charge compound interest up to 13 November 1978. It could be said, as O’Connor LJ has pointed out, that the relationship between the parties was not the ordinary relationship of banker and customer, and that in any event the express right to charge a higher rate of interest in the event of default, and the provision for recalculating the interest ‘until the date of payment’, is fundamentally inconsistent with any implied right to charge compound interest. Be that as it may, I am content to assume that the bank was entitled to charge compound interest up to 13 November 1978. On what basis was it so entitled? Why should the law imply a right to charge compound interest in favour of the bank, when the parties have abstained from expressing any such right for themselves?
As with so much else in our law, the explanation is historical. A convenient point to start is the beginning of the nineteenth century when the Usury Acts were still in force. An Act of Henry VIII had fixed the maximum rate of interest which could lawfully be charged on money lent at 10% pa (37 Hen 8 c 9(1545)). The rate of interest was gradually reduced in successive reigns because, as is stated in the preamble to a 1713 Act (12 Anne Stat 2 c16(1713)), ‘the Reducing of Interest to ten, and from thence to eight, and thence to six in the Hundred, hath, from Time to Time, by Experience been found very beneficial to the Advancement of Trade … ' By the beginning of the nineteenth century the maximum lawful rate of interest stood at 5% pa. Any contract reserving a higher rate of interest was ‘utterly void’. If therefore a contract between banker and customer provided for compound interest at 5% pa with half-yearly rests, the contract was void; for the true rate of interest would be more than 5%. But bankers found a way round this difficulty. At the end of six months the parties were presumed to settle their account, without any previous agreement. Instead of the customer paying the amount of interest
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then due, it was added to the principal. The banker forbore to sue for principal and interest, since he was content to charge interest on the new principal over the next six months.
This practice was upheld as lawful by Lord Eldon LC in Ex p Bevan (1803) 9 Ves 223 at 224, 32 ER 588:
‘So this is legal between merchants; where there is no agreement to lend to either; but they stipulate for mutual transactions; each making advances; and that, if at the end of six months the balance is with A., he will lend to B.; and vice versa.’
The principle was restated by the House of Lords in Fergusson v Fyffe (1841) 8 Cl & Fin 121 at 140, [1835–42] All ER Rep 48 at 50 as follows:
‘Generally a contract or promise for compound interest is not available in England, as was decided in Ex parte Bevan except perhaps as to mercantile accounts current for mutual transactions … ’
Counsel for the bank argued that once the Usury Acts had been repealed, as they were by the Usury Laws Repeal Act 1854, Fergusson v Fyffe ceased to have any relevance: cessante ratione legis, cessat lex ipsa. But, with respect, that argument was hopeless. It is only necessary to refer to the decision of a strong Court of Appeal in Deutsche Bank und Disconto-Gesellschaft v Banque des Marchands de Moscou (1931) 4 Legal Decisions Affecting Bankers 293. Scrutton LJ clearly regarded Fergusson v Fyffe as being good law when he said (at 295):
‘The House of Lords in Fergusson v. Fyffe treated compound interest as not payable, except perhaps on mercantile accounts current for mutual transactions.’
Greer LJ said (at 295–296):
‘I regard the law as stated in Ex parte Bevan, and Fergusson v. Fyffe as laying down two propositions, first, that there can be no title to compound interest without a contract expressed or implied between the debtor and creditor; and, secondly, that it is never implied except as to mercantile accounts current for mutual transactions.’
The corollary of the rule in Fergusson v Fyffe is that once the account has ceased to be ‘a mercantile account current for mutual transactions’ (in other words, once the account has been closed and the relationship of banker and customer brought to an end) the bank is entitled to simple interest only. This is clear from Fergusson v Fyffe itself, where, as it happens, the balance of account was in favour of the customer. It was held that the bank was liable for compound interest up to the date of the customer’s death but not thereafter. Lord Cottenham LC said (8 Cl & Fin 121 at 139, [1835–42] All ER Rep 48 at 50):
‘From that time there was no party with whom any account current could be carried on, there not having been any representative of [the customer] for many years afterwards.’
The point was put very clearly, long after the Usury Acts had been repealed, by James V-C in Williamson v Williamson (1869) LR 7 Eq 542 at 546. That was another case of banker and customer. It was held that the bank was entitled to charge compound interest up to the date of the customer’s death, but not thereafter:
‘With regard to the interest accruing after the testator’s death, I should take some time before assenting to the proposition that the account did not bear simple interest, but I have not to decide this point. I am bound, however, by the authority of the House of Lords to hold that compound interest is incidental to the continuance of the relation of banker and customer. From the testator’s death therefore, only simple interest at 5 per cent. will be allowed on the account.’
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But the death of the customer is not the only event which will bring the relationship of banker and customer to an end. In Crosskill v Bower (1863) 32 Beav 86, 55 ER 34 the customer, who was heavily overdrawn, executed two deeds whereby he assigned his entire estate to trustees for the benefit of his creditors. Thereafter he ceased to carry on business. He neither paid into nor drew on his bank account, and ‘the account was virtually closed’. Romilly MR said (32 Beav 86 at 93, 55 ER 34 at 37):
‘But this stoppage of interest is not confined to the case of death; a customer may say to his banker “I close my account with you, and I shall have no further dealings with you from this day,” thereupon the balance of the account, whichever way it may be, would have to be ascertained at that period, and then all interest would cease. It depends on the pleasure of the bankers, either to enforce payment of the balance due to them or to abstain from doing so, or to obtain such security for it as they may be able. If the last course were adopted, a new contract would be entered into, which would regulate the matter of interest.’
In the Deutsche Bank case (1931) 4 Legal Decisions Affecting Bankers 293, to which I have already referred, the plaintiff bank advanced over £100,000 to the defendant bank before the 1914–18 war. In 1930 the plaintiffs issued a writ for the recovery of the sum lent together with compound interest. Rowlatt J held that the relation of banker and customer continued despite the war. After referring to Fergusson v Fyffe, he said (at 294–295):
‘I cannot see why the mere allowing an account to become dormant, as opposed to an active account, affects it as from the moment of the last transaction. The account does not become dormant to-morrow, because you have had a transaction to-day … It seems to me I must find something analogous to the death of the party to effect a termination of the relationship or contract, of whatever you like, which governs this matter … What am I to lay my finger on for saying when they stopped the currency of this system of half-yearly rests? I do not find anything that stopped it, and therefore I must hold it has gone on … ’
But Rowlatt J’s decision on compound interest was reversed in the Court of Appeal. Scrutton LJ, after referring to Fergusson v Fyffe in the sentence I have already quoted, continued (at 295):
‘In my opinion, after December 31st, 1914, this was not such an account; Germany was at war with Russia, and there were no mutual dealings between the Deutsche Bank and the Moscow Merchants Bank, only debits of interest and credits for securities sold by the English Government. I should be of the opinion, if it were necessary to decide the question, that compound interest should stop after the account of December 31st, 1914; or that, at any rate, it should stop after the order for winding up in 1918 … ’
Greer LJ said (at 296):
‘It seems to me that upon the facts stated in the case there was a contract implied from the transactions between the parties that compound interest would be allowed on one side or the other on the current account so long as it was a current account; but that when War broke out, and it became impossible for the Russian Bank to keep the account going by payments into it to set off against withdrawals, it ceased to be a current account, and the fact that the amount due on the loan account and interest was transferred to current account is not sufficient to show that by not objecting to the interest then due being added to the principal, the defendants agreed that when placed in the current account it should carry further compound interest. In my opinion, though it appeared in the bank’s books as a current account, there was nothing proved in the case sufficient to found a decision that the Russian
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Bank agreed that once it was placed in the current account it should carry compound interest, whether that account continued to be in reality a current account or not.’
Romer LJ said (at 297):
‘In these circumstances it seems plain that the defendants must be taken to have agreed to be charged with compound interest. It is, however, established by several authorities that this implied agreement must be taken to be limited in its operation to the time during which the relation of banker and customer existed between the parties. The plaintiffs cannot justify the charge of compound interest after the mercantile account current for mutual transactions had been closed and the relations between the parties had become merely that of creditor and debtor (see Fergusson v. Fyffe; Crosskill v. Bowe; Williamson v. Williamson ((1869) LR 7 Eq 542).’
The law is well summarised in Paget on Banking (9th edn, 1982) p 116 as follows:
‘The indorsement of a statement of claim must show how the claim is based. Where the customer has acquiesced in the charging of interest, that would justify the claim. Such acquiescence will justify the charging compound interest or interest with periodical rests, so long as the relation of banker and customer exists, and the relationship is not changed into that of mortgagee and mortgagor.’
Counsel for the bank relied on certain tax cases which are cited on the following page of Paget, and on the decision of the House of Lords in an Irish case, Yourell v Hibernian Bank Ltd [1918] AC 372. That decision appeared, at first sight, to lend some assistance to his argument. The case is complicated on the facts. But the key to understanding the case is that the account remained, in the words of Lord Atkinson, a ‘living mercantile account’ right down to and, indeed, beyond the issue of the writ in 1913 (at 389); see also the observations of Lord Finlay LC (at 380). The bank was in truth seeking to ‘rewrite’ the account, as counsel for the defendants submitted, in order to maximise its security. This it was not entitled to do.
With that brief resume of the law, I turn to the point for decision. Counsel for the defendants conceded, as I have said, that the bank is entitled to compound interest down to 13 November 1978, when the bank demanded repayment. The point for decision is whether, once the bank had demanded repayment, the relation of banker and customer ceased. Did the relationship change into that of mortgagee and mortgagor, as counsel for the defendants submits, in which case the bank would be entitled to simple interest only? Or did it remain a relationship of banker and customer?
The judge dealt with the matter as follows:
‘The relationship governed by the mortgage never came to an end; but, even if it were not so and the right to charge compound interest is to be founded on implied agreement, the conclusion would be the same. The account on which the bank is suing is indisputably a mercantile account. There is no evidence that the account was closed nor that it had ceased to be current for mutual transactions. The fact that Pinios has not used the account does not mean that it is not current. Both Pinios and the account have continued in being, as has the bank. Nothing has occurred to render the operation of the account impossible. The relationship between the parties is unchanged. Neither the mortgage nor any ancillary agreement relating to the account was ever superseded or supplanted by any subsequent agreement between the parties. The bank’s right to charge compound interest has therefore remained unimpaired.’
The difficulty with this passage is that it treats the relationship created by the mortgage as the crucial relationship for determining whether the bank is entitled to compound interest. This with respect was erroneous. It goes without saying that the mortgage, as a security, has not been determined or affected in any way. But the mortgage is not ‘an
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account current for mutual transactions’ as that phrase has been understood since Fergusson v Fyffe. The only account which could perhaps be regarded as an ‘account current for mutual transactions’ is the bank account. The question is whether the bank account remained open, or, in other words, whether the relationship of banker and customer continued after the demand for repayment. That question is not answered by asking whether the mortgage continued as the bank’s security. It obviously did. So, with great respect, the judge’s findings in the passage I have quoted seem to be based on the wrong premise.
But that is only the start of our difficulties. For the judge only allowed the compound interest point to be taken at all on the footing that it could be argued as a point of law. His reason was that the point was only taken by Pinios at a late stage before him, and had not been pleaded. That may be so. But it is the bank who ought to have pleaded the basis of its claim for compound interest in the first place. That it never did. So I do not think that the failure to take the point until a late stage can be blamed entirely on Pinios.
But, wherever the blame may lie, the fact remains that we are required to determine whether the relationship of banker and customer continued, as a question of law, with very few facts to go on. Almost all we have is the account submitted with the letter before action, and the final account submitted shortly before the trial.
These show that interest was charged, with value date 15 September 1977, on the amount of the first promissory note paid by the bank under its letter of guarantee on 16 August 1977. Thereafter interest was charged at quarterly intervals, with value dates of 15 December 1977, 15 March, 15 June and 15 September 1978. We do not know how often Pinios received bank statements during the currency of the account. But, in the light of the quarterly interest charges to which I have referred, counsel for the defendants was sensible to concede that Pinios had ‘acquiesced’ in the charging of compound interest.
If so, then an agreement to pay compound interest can be implied. As Lord Manners LC said in the Irish case of Lord Clancarty v Latouche (1810) 1 Ball & B 420 at 429–430:
‘From the Acquiescence of Mr. Conolly I ought to presume an Agreement at the End of every Year, that the interest then due, should become Principal and carry Interest, which according to Ex parte Bevan ((1803) 9 Ves 223, 32 ER 558), this Court will admit of, and that was a Case of Half yearly Rests.’
But did the acquiescence continue beyond 13 November 1978 when the bank demanded repayment? There is nothing in the letter itself which indicates that the bank would go on charging compound interest, assuming that that would be sufficient to establish a continuing entitlement; and we were told that once the bank demanded repayment it ceased to send bank statements. True there is no evidence to that effect. But it would have been odd if the bank had continued to send statements once it had called in the loan, and even odder once it had commenced proceedings. Pinios only learnt for certain that the bank had continued to charge compound interest when it received the bank’s final account shortly before the trial commenced in 1987. So far as we know there were no statements in the intervening eight years. In those circumstances it could not be right to infer that Pinios knew it was being charged compound interest, and without knowledge there could be no continuing acquiescence.
Then can the bank rely on prior acquiescence to justify a claim for compound interest continuing after 13 November 1978? I do not think so. It is difficult to see how the relationship of banker and customer could be said to have continued after the bank had commenced proceedings. But I would go further. In my judgment the correct inference and, indeed, the only possible inference is that the relationship ceased when the bank demanded repayment. The account was then closed. A line was drawn. Instead of banker and customer, the relationship became that of creditor and debtor, without the superadded rights and obligations imported by the banker/customer relationship. It is true that certain payments are shown as having been made into the account after the bank had demanded repayment. I need not go into details. They are equally consistent
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with payments having been made in reduction of the mortgage debt. They do not show a continuing relationship of banker and customer in any true sense.
For the reasons I have given, I would hold that the bank is entitled to simple interest only after 13 November 1978. I would summarise those reasons as follows: (i) there is no right to compound interest save by agreement, express or implied, or custom binding on the parties; (ii) there was no express agreement to pay compound interest in the present case; (iii) an agreement to pay compound interest may be implied by virtue of acquiescence (see Lord Clancarty v Latouche (1810) 1 Ball & B 420 at 429–430); but (iv) such an agreement is not normally implied except as to ‘mercantile accounts current for mutual transactions’ (see the Deutsche Bank case (1931) 4 Legal Decisions Affecting Bankers 293 at 295–286 per Greer LJ; (v) it is open to question whether the agreement between the bank and Pinios dated 8 February 1977 was an account current for mutual transactions; but, even if it was, it ceased to be such an account when the bank closed the account and demanded repayment on 13 November 1978; and (vi) the bank never pleaded or proved a custom entitling it to continue to charge compound interest after the account had been closed, or, a fortiori, after it had issued proceedings for the recovery of debt.
We were told by counsel for the bank that a decision to the above effect would cause dismay and consternation among bankers. If so, the remedy lies in their own hands. They should make express provision for compound interest in their contracts. Since the repeal of the Usury Acts there has been nothing to stop them. Why they have not done so I do not know. But it may be that the explanation is to be found in the mordant observations of Lord Atkin in Paton v IRC [1938] 1 All ER 786 at 788, [1938] AC 341 at 347:
‘It is obvious that the system adopted by banks, which seems to have been common practice in the time of LORD ELDON, L.C., is for the purpose of giving them compound interest without perhaps flaunting that fact before their customers.’
As for the rate of simple interest, counsel for the defendants argued that interest is recoverable under s 35A of the Supreme Court Act 1981. But I see no reason why the bank should not receive simple interest at the rate stipulated in the agreement dated 8 February 1977, which provides, as does the mortgage, for interest to continue until payment.
So I would allow the appeal on the compound interest point, but dismiss it on all other points.
NICHOLLS LJ. I agree that an order should be made in the terms proposed by Lloyd LJ. I add some observations of my own because we are differing from Leggatt J on one point of general importance, and out of deference to the arguments of counsel.
The bank’s duty
Neither the National Bank of Greece SA (the bank) nor Pinios Shipping Co No 1 (Pinios) sought to challenge any of the judge’s conclusions of fact. So I consider first what were the judge’s relevant conclusions of fact. This is necessary, because counsel put different interpretations on the judge’s finding that ‘when the insurance was renewed Mr Theodoropoulos on behalf of the bank knew and approved of what was done’.
We were referred to some of the evidential material which was before the judge, so as to enable us the better to appreciate the setting against which the judge reached his conclusions. In my view, read in its context in the judgment, the phrase ‘knew and approved’ does not mean that before renewing the insurance in April 1978 Glafki Shipping Co SA (Glafki) was given instructions by the bank on the amount of the insurance which the bank required or wished to be effected, nor does it mean even that at the time the bank’s approval of the amount was communicated to Glafki. In the crucial sentence the judge made a finding as to Mr Theodoropoulos’s state of mind: he
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knew what was being done by Glafki regarding the insurance and, for his part, he approved of what was being done. We have been shown nothing which would justify giving to the word ‘approved’ in the judge’s finding any wider meaning than that.
Of course, the pattern of dealings between two parties may be such that the failure of one to object to a course proposed by the other is fairly to be understood by the other as assent. But there is no finding of fact to this effect by the judge in the present case.
The second factual point to be noted is this. The judge said that both Mr Demetracopoulos, the bank’s loan officer, and Mr Theodoropoulos, the manager of the bank’s main London branch, would have known ‘if they had thought about it’ that the 1978 insurance was likely to have been a breach of the obligation to keep the ship insured for not less than 130% of the amount secured by the mortgage (which must be a reference to both mortgages). The judge also found that they (the officers of the bank) did not regard their responsibility as going further ‘than that’, namely checking, for the bank’s own protection, that the amount of the insurance continued to cover the bank’s debt. The judge’s findings, thus, do not go so far as to find that, at the time when the bank through Mr Theodoropoulos approved of the April 1978 insurance, he or any other officer in the bank appreciated that, or even considered whether, the amount of the cover fell short of the 130% figure.
The third point to be noted is the judge’s finding that ‘all decisions about the management and operation of the ship were left to Glafki, including the renewal of the insurance’.
Those being the facts as found, it follows that this is not a case where the bank intervened in the carrying out by Glafki of its duties in the way it considered fit. The bank did not instruct Glafki on the amount of insurance cover to be effected. Had it done so, I think that (depending on the particular facts) there might well have been a liability on the bank in respect of the under-insurance. Glafki’s obligations under cll 1 and 2 of the management agreement required it to insure for the 130% figure. Take, therefore, by way of hypothetical example, a case where without reference to Pinios and without the knowledge of Pinios the bank intervenes and exercises its powers under the management agreement by directing Glafki to insure for a much lower sum than 130%, or not to insure at all, even though such an instruction is not in accordance with the way in which any reasonably prudent shipowner would operate, and even though (depending on the amount of the insurance) that might be an event of default under the first mortgage and under the bank’s own mortgage. I would have no doubt that such an instruction would be a breach of the duty of care which in my view this agreement implicitly requires shall be exercised by the bank in giving instructions to Glafki regarding insurance. I confine my observation to insurance, because the field over which the bank might give directions is so wide that generalisation in respect of all directions would be unwise and, in my view, unjustified. I am not persuaded that either there is a duty of care in respect of all directions given by the bank or there is a duty of care in respect of none. There may be matters where there would be a conflict between the interest of the bank and the owners, and in respect of which the bank would not owe a duty of care to the owners when giving instructions to Glafki. However, it is not necessary to explore these points further, because this is not a case in which the bank actively intervened at all.
What the bank did was that, knowing of the amount of the 1978 insurance, it failed to object. Its officers were content to leave unaltered the amount of the insurance Glafki had effected or was effecting, because that amount was thought sufficient to cover the bank’s indebtedness. Thus to succeed in this appeal Pinios has to go much further than establishing an obligation on the bank to use reasonable care in the exercise of its powers under the management agreement. To succeed, Pinios must show that under this agreement there was imposed on the bank an obligation positively to take action to check that Glafki was not committing a breach of its duty under the management agreement regarding insurance.
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I do not think that there was any such obligation on the bank. In the absence, at any rate, of actual knowledge or suspicion by the bank of misconduct on the part of Glafki, I consider that the bank was entitled to do what it did, viz leave to Glafki, the appointed agent, all decisions about the management and operation of the ship, including renewal of the insurance. By the agreement the bank was expressly given wide powers to override Glafki, and conversely Pinios was expressly excluded from interfering with the ship. But I do not think that these two elements in the parties’ relationship lead to the conclusion that the management agreement of its nature implicitly required the imposition on the bank of an obligation to the effect I have mentioned. I take the test of ‘implicitly required’ from the speech of Lord Wilberforce in Liverpool City Council v Irwin [1976] 2 All ER 39 at 44, [1977] AC 239 at 254. The bank is a bank, not a shipowner or operator. The management of the vessel had been put in the hands of a mutually agreed agent. The agent was required to report monthly to the bank and Pinios. The agent, Glafki, and not the bank, was the party required to insure. If (as here) the agent was in breach of one of its duties, Pinios would have a remedy against it. I see no good reason for impliedly importing into this relationship an obligation on the bank, even in respect of insurance, to check that Glafki was duly performing its obligations.
We heard much learned argument in support of a submission that Pinios has a cause of action in tort, as distinct from a cause of action based on the breach of an implied term of the management agreement. In my view this argument is misconceived. If the nature of the management agreement between the parties is not such as implicitly to require that the bank should be under an obligation to the effect I have mentioned, I do not see how it can be right none the less for the law of tort to impose such a requirement. Pinios entered into a written agreement with the bank and, echoing the words of Lord Scarman in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2 All ER 947 at 957, [1986] AC 80 at 107, Pinios cannot rely on the law of tort to provide it with a greater protection against the bank than that for which, expressly or impliedly, it has contracted with the bank.
Compound interest
The bank sought to establish an entitlement to compound interest in two ways. First, it relied on the terms of the documents. As to that, neither the loan agreement nor the mortgage contains an express provision authorising the bank to charge compound interest. Nor is such a provision implicit in the documents. Clause (8)(A) of the loan agreement and the corresponding provision in the mortgage are concerned only to fix a rate of interest, ‘the agreed interest rate’, as it is described in the agreement. Clause (8)(C), with its reference to ‘interest payment date’, does contemplate that the interest will be due and payable from time to time whilst the principal is still outstanding. But this does not assist the bank because, if anything, this provision is inconsistent with the charging of compound interest. The provision does not envisage that unpaid interest will be capitalised and itself bear interest along with the principal. What it seems to envisage (the drafting is not wholly clear) is that the effect of non-payment of interest will be that the interest will remain payable but, from the date when it ought to have been paid until the date when it is actually paid, interest on the principal sum will be payable at a higher rate.
Second, the bank relied on the practice or custom of bankers. Counsel for the defendants did not challenge the bank’s entitlement to charge compound interest on this footing until payment was demanded in November 1978, but he disputed its right to do so thereafter.
I confess that when the argument was first advanced I found it surprising. Interest on a debt, of course, ceases to accrue after the principal sum has been repaid. And there is the familiar principle that on judgment being given an agreement to pay interest which is merely incidental to the agreement to pay the principal sum will merge in the judgment to pay the principal sum (see the Earl of Halsbury LC in Economic Life Assurance
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Society v Usborne [1902] AC 147 at 149). But, if the arrangement between two parties is such that, impliedly, compound interest is agreed to be payable on a loan of money, it seemed to me at first sight very odd if compound interest should cease to be payable as soon as the creditor asks for his money back, even though it may be months or years before he gets the money. Unassisted by authority I would not have expected to find that the law today was that, if a bank is, by implication, entitled to charge compound interest on an overdraft, its entitlement continues only so long as it is prepared to leave the money outstanding and that its entitlement ceases when it demands immediate repayment. So that, so far as interest is concerned, the customer’s position improves when the bank makes such a demand; thenceforth, unlike previously, interest which is due but not paid does not itself bear interest.
I turn to the authorities. These establish clearly that the practice relied on by the bank in this case is one of long standing. To facilitate the use of compound interest by banks despite the usury laws, which were not finally repealed until the Usury Laws Repeal Act 1854, the courts resorted to the fiction that a fresh agreement for the payment of interest was made on the occasion of each rest in a customer’s account. An agreement, express or implied, to pay compound interest made when a customer opened an account with a bank would have been unlawful. But, if on each occasion when a bank charged or credited interest to an account the parties were to enter into a new agreement that the balance then struck would bear interest, that agreement would be lawful because it would provide only for the payment of simple interest on an agreed sum. Thus, on this analysis, over a period of years there would be a series of separate agreements between banker and customer, made at intervals of one year or six months or whenever, depending on the manner in which the bank kept its accounts. That notion, of each debiting or crediting of interest being the subject of a separate, fresh agreement, was fundamental to the lawfulness of this practice. There was a succession of agreements, implied from the customer’s acquiescence in the practice of the bank regarding the debiting and crediting of interest.
Thus Lord Eldon LC in Ex p Bevan (1803) 9 Ves 223 at 224, 32 ER 588 said:
‘… it is clear, you cannot a priori agree to let a man have money for twelve months, settling the balance at the end of six months; and that the interest shall carry interest for the subsequent six months: that is, you cannot contract for more than 5 per cent.; agreeing to forbear for six months. But, if you agree to settled accounts at the end of six months, that not being part of the prior contract, and then stipulate, that you will forbear for six months upon those terms, that is legal.’
In Paton v IRC [1938] 1 All ER 786 at 795, [1938] AC 341 at 357 Lord Macmillan commented on that principle and its survival despite the repeal of the usury laws:
‘On this principle it was held in Eaton v. Bell ((1821) 5 B & Ald 34, 106 ER 1106) that the bankers who, with the knowledge of, and without objection by, their customers, debited them with interest with half-yearly rests in accordance with their general practice did not offend against the usury laws. This method of dealing with loan accounts, which became common form among bankers, survived the abolition of the usury laws and is well-established as the ordinary usage prevailing between bankers and customers who borrow from them and do not pay the interest as it accrues.’
Although this rationale of the arrangements between banker and customer, with a succession of separate agreements, was (as it seems to me) essentially fictitious, the courts did not apply the artificiality beyond the point at which, on the facts in a particular case, it was possible to spell out from the parties’ relationship the necessary fresh agreement for the payment of interest on an agreed balance. Thus compound interest ceased to be payable, by virtue of this practice, on the death of a customer (Fergusson v Fyffe (1841) 8 Cl & Fin 121, [1835–42] All ER Rep 48) or of the banker (Crosskill v Bower (1863) 32 Beav
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86 at 93, 55 ER 34 at 37), on the bankruptcy of either (Crosskill v Bower); on the winding up of the banker (Deutsche Bank und Disconto-Gesellschaft v Banque des Marchands de Moscou (1931) 4 Legal Decisions Affecting Bankers 293) and on the customer’s announcement to a banker that he is closing his account and having no further dealings with him (per Romilly MR in Crosskill v Bower (1863) 32 Beav 86 at 93, 55 ER 34 at 37).
This being the underlying principle it follows, in my view, that once a banker or customer has unequivocally demanded immediate payment of what is due to him from the other, with the intention of being paid in full and ending their relationship, compound interest normally will cease to be payable. The usual formal letter, written by a bank before proceedings are started, would be typical of such a demand. Compound interest will cease to be payable in that event because there will no longer be the factual basis on which to found the implication of a fresh agreement to pay interest on an agreed balance. Such a demand, as much as the other events I have mentioned, will end the relationship in which alone the making of a fresh agreement to pay interest on an agreed balance is to be implied. This relationship, that of banker and customer, is to be contrasted with the position after an account has been closed ‘and the relations between the parties … become merely that of creditor and debtor’ (see the Deutsche Bank case (1931) 4 Legal Decisions Affecting Bankers 293 at 297 per Romer LJ).
In the present case the bank’s letter to Pinios of 13 November 1978, sent by registered post, was such a demand. The letter read as follows:
‘Dear Sirs,
“MAIRA”
Your Account No. 322392/2
We refer to your account showing the amount of US$.784,959·11 due to us, being the balance of the amount paid by us to the Dai Ichi Kangyo Bank Ltd., Tokyo in accordance with the terms of our Letter of Guarantee No: 926335 dated 9th February, 1977. We now write to demand payment of the amount due to us. A Statement of Account will follow in due course.
Yours faithfully … ’
It may be thought anachronistic that the law in this field is still shaped by a fiction adopted to circumvent laws that were repealed in the middle of the last century. But the banks are not without a remedy. Express intimation to all their customers of the manner in which interest will be charged on overdrafts and loans, and that this will continue until payment, would not seem to be impractical or particularly expensive nowadays.
Before us some argument was directed at how expressions such as ‘mercantile accounts current for mutual transactions’ (Fergusson v Fyffe (1841) 8 Cl & Fin 121 at 140, [1835–42] All ER Rep 48 at 50) and ‘a living mercantile account’ (per Lord Atkinson in Yourell v Hibernian Bank Ltd [1918] AC 372 at 389) are to be understood today and whether they exclude deposit accounts or loan accounts from the ambit of the bankers’ practice. However, those questions, and the further question of what was the true nature of the bank’s account with Pinios, do not call for determination on this appeal, because (as I have said) counsel for the defendants expressly did not challenge the bank’s right to charge compound interest until payment was demanded in November 1978.
For these reasons, I agree that the bank was not entitled to charge compound interest after making that demand.
O’CONNOR LJ. I agree with the order proposed by Lloyd LJ for the reasons given by him.
On the issue of compound interest I add a few words of my own. Lloyd LJ has traced the history of the way in which capitalisation of interest was permitted at periodical rests in order to achieve a payment of compound interest which would otherwise have been illegal by virtue of the usury laws. In my judgment cl (8) of the loan agreement is in clear terms: it provides for payment of interest at an agreed rate. By its terms it envisages
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that interest is to be charged periodically: see the reference to an ‘interest payment date’. In sub-cl (C) express provision is made for what is to happen if interest is not paid on a ‘relevant interest payment date’. For convenience I set out that paragraph:
‘If any interest shall be due and unpaid four working days after the relevant interest payment date the amount of interest shall be recalculated from the interest payment date until the date of payment at the rate of two per cent (2%) per annum above the agreed interest rate.’
For my part I see no ambiguity in this provision. If interest due on a payment date remains unpaid for four days then as from that payment date the rate of interest is to be increased by 2%. That is a clear simple interest provision.
By reason of the authorities considered by Lloyd and Nicholls LJJ in their judgments Pinios Shipping Co No 1 has accepted throughout that it was liable to pay compound interest after the first default. I must not be taken as agreeing that the cases required that concession to be made. The bank account in this case does not seem to me to qualify as a ‘mercantile account current for mutual transactions’ (see Ex p Bevan (1803) 9 Ves 223, 32 ER 588). I am very doubtful that the requisite banker/customer relationship was created by either the guarantee agreement or the second mortgage. I see no reason why a bank should be in any different category to any other surety. The account was not opened until the bank made the first payment under the guarantee on 16 August 1977. From that time down to the demand letter of 13 November 1978 the account records interest at quarterly rests from 15 September 1977, the payment of the second bill under the guarantee and the receipt of insurance moneys in 1978 after the loss of the ship. There is one payment to the management agent, Glafki Shipping Co SA, $US12,116·82 in September 1977 when the agency agreement was made.
However, in view of the concession, we heard no argument on the matter and I express my doubt so that bankers do not take this decision as authority for saying that a contract of guarantee of itself creates the banker/customer relationship needed to enable them to recover compound interest where no express provision in that behalf has been made.
For the reasons given by Lloyd LJ I agree that the bank is entitled to recover simple interest at the contracted rate from 13 November 1978.
Appeal allowed in part.
Solicitors: Elborne Mitchell (for the defendants); Thomas Cooper & Stibbard (for the bank).
Dilys Tausz Barrister.
Braithwaite v Thomas Cook Travellers Cheques Ltd
[1989] 1 All ER 235
Categories: BANKING & FINANCE
Court: QUEEN’S BENCH DIVISION
Lord(s): SCHIEMANN J
Hearing Date(s): 4, 5, 6, 13 JULY 1988
Bank – Cheque – Traveller’s cheque – Loss or theft – Reimbursement – Conditions of purchase – Purchaser required to safeguard cheques properly against loss or theft – Test of proper safeguarding of cheques.
The plaintiff wished to transfer £50,000-worth of traveller’s cheques from Jersey to London. He got up at 4 am, flew to Jersey, collected the traveller’s cheques, put them in a brown envelope, which he placed in a transparent plastic bag, and flew back to London
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the same day. The conditions of purchase of the cheques stated that the issuer would replace or refund the face value of any traveller’s cheques lost or stolen provided the purchaser had ‘properly safeguarded each cheque against loss or theft’. When the plaintiff arrived in London he spent the evening drinking with friends and then took the Underground home. In the course of the Underground journey he fell asleep and when he got off the Underground he realised that he no longer had the plastic bag. He made a claim to the issuer of the cheques for reimbursement of their value on the ground that they had been lost or stolen but the issuer refused to pay. The plaintiff brought an action to recover the value.
Held – Where an agreement for the purchase of traveller’s cheques contained an express condition that the purchaser should properly safeguard the cheques against loss or theft, the whole of the purchaser’s behaviour had to be considered when determining whether he had in fact properly safeguarded them. Taking into account the facts that the plaintiff had carried the cheques in a transparent bag instead of concealing them about his person and that he had fallen asleep because he was tired and had been drinking, the plaintiff could not be said to have properly safeguarded the cheques and therefore he was not entitled to reimbursement of their face value. The action would accordingly be dismissed (see p 240 j to p 241 e, post).
Notes
For traveller’s cheques, see 3 Halsbury’s Laws (4th edn) para 122.
Cases referred to in judgment
British and Foreign Marine Insurance Co Ltd v Gaunt [1921] 2 AC 41, [1921] All ER Rep 447, HL.
Fellus v National Westminster Bank plc (1983) 133 NLJ 766.
Action
The plaintiff, Charles James Braithwaite, brought an action against the defendants, Thomas Cook Travellers Cheques Ltd, claiming reimbursement of lost traveller’s cheques worth £50,000 which he had purchased from the defendants. The facts are set out in the judgment.
Frederic Reynold QC and Charles Howard for Mr Braithwaite.
Murray Pickering QC and David Etherington for the defendants.
Cur adv vult
13 July 1988. The following judgment was delivered.
SCHIEMANN J. This case is concerned with traveller’s cheques and the circumstances in which someone who has purchased them and subsequently parts with possession of them, without having received value therefor, can reclaim the purchase price from the issuer. The matter arises in this way. Mr Braithwaite purchased £50,000-worth of traveller’s cheques from Thomas Cook Travellers Cheques Ltd in Jersey on 12 February 1987. Within 24 hours he claimed that they had all been lost or stolen on the London Underground and asked Thomas Cook for reimbursement of the purchase price. They refused to pay because they were suspicious of him and put him to proof of his claim. Hence his appearance as a plaintiff in this court.
Two witnesses gave evidence on behalf of Mr Braithwaite: James Halliday, who was a customer of the Midland Bank plc (a chartered accountant and a director of various property companies) and the plaintiff himself, who was employed by the Midland Bank in their securities department.
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Mr Halliday told me that at the end of January and in early February 1987, after having met Mr Braithwaite on a few occasions socially, he asked him if he was interested in investing £50,000 in a property development scheme to be carried out by Fenwick Securities Ltd, a company over which Mr Halliday had control. Mr Braithwaite agreed to do so. Mr Halliday told him that Fenwick Securities intended to purchase some property in Sutton and convert it into flats. The vendor wished to complete quickly. In consequence Fenwick Securities needed the money by mid February. Mr Braithwaite told him there would be no problem. On 13 February Mr Halliday rang Mr Braithwaite asking for the money. Mr Braithwaite told him that he had lost it. A cheque for £30,000 was provided on or about 18 February. Contracts were exchanged on 20 February. I accept Mr Halliday’s evidence.
Mr Braithwaite verified the foregoing. He had an account with Barclays Finance Co in Jersey where £50,000 was available. He did not wish to arrange for a bank transfer of that £50,000 to his account in England because he feared this would be brought to the attention of the tax authorities which he feared might expose him to demands for tax on the interest which he had earned on his Jersey account. In consequence the practical choices available to him were transferring the money physically from Jersey to London either in cash or by way of traveller’s cheques. He chose the latter course. The reasoning behind the, on the face of it, strange course of not using a bank transfer was not revealed to the defendants’ inspector investigating this claim or to the court in RSC Ord 14 proceedings because, said Mr Braithwaite, he did not wish to put his head into a noose.
I accept his evidence on this point. It reflects little credit on him and it leads me to view his remaining evidence with suspicion. There are a number of other factors which also cause me to view his evidence with suspicion. However, although as I say I have approached his evidence with considerable scepticism, I am persuaded, having seen him in the witness box, where he made a very good impression, and having considered all the circumstances, that his evidence is honest and, with two exceptions (which relate respectively to the layout of the Underground and to the availability of traveller’s cheques in very large denominations) reliable.
What then is his evidence? It is essentially this. He purchased 400 traveller’s cheques, being 100 of a £200 denomination and 300 of a £100 denomination. The paperwork relating to these took longer than he had anticipated and thus, since he had a plane to catch and since the issuers were anxious to get on with other work, he was permitted to leave the bank where he had purchased them without having signed more than 50 of them. He realised that this made them peculiarly attractive to the dishonest. He signed another 50 at Jersey Airport; a few on the plane; a few more at a cafe at Heathrow the vast majority on the Underground between Heathrow and King’s Cross, and the remaining ones at a café near King’s Cross. I am satisfied that all the cheques were signed by 6 pm, and that, in all probability, others (during the course of this signing process) had observed that he had an unusual number of cheques about him. He carried them in a brown envelope which, in turn, was in a plastic bag supplied at Jersey Airport and containing 200 cigarettes which were visible through the bag. He did not put them in the pockets of his clothing preferring to fill these with cigarettes and other material.
Having arrived at King’s Cross he then spent the evening socialising with his friends which, in his case, took the form of drinking several pints of beer. All this against a background of having risen at 4 am, having eaten only a few snacks, and having also taken alcohol at lunch and on the plane. He himself summed up the situation in an interview as follows: ‘I was not sober but I don’t consider I was drunk’.
At one of the public houses he told Mr Halliday’s brother that he had Mr Halliday’s money there. It is possible that he was overheard. At closing time he left the last public house with the bag. I find, on the balance of probability, that the bag then still contained the envelope and the cheques.
He then caught the Underground train at Baker Street, put the bag on his lap but fell asleep promptly. Sometime later he was nudged by a fellow passenger. He woke up. He
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realised that he had overshot his destination, namely King’s Cross. He leapt out of the train. He caught another one back to King’s Cross. He changed trains to Oakwood, on the Piccadilly Line, and reached there shortly after midnight. He stepped off the train and as it moved away he realised that he no longer had the bag although he still had the newspaper which originally had concealed it. He looked around for London Transport staff but could find none. He walked home, a five minute journey. He then took his car to Cockfosters at the end of the Piccadilly Line, found the stationmaster and explained his predicament. Thereafter he did all that could be done to recover the situation. No one suggests that he could have done more at that stage.
The purchase of the traveller’s cheques was made subject to the following purchase conditions:
‘These travellers cheques are sold to you on the following conditions
Refund The issuer will replace or refund the face value of any travellers cheques which are lost or stolen from you, provided that [1] you have signed each (at the bottom) in permanent ink immediately upon receipt and you have not countersigned the cheques (at the top) [2] you notify the issuer within 24 hours of the loss or theft of any cheques, and the local police if requested, reporting the circumstances of such loss or theft in reasonable detail [3] when making your refund claim, you present the purchaser’s copy of the Sales Advice and provide serial numbers of the missing cheques and the place and date of their purchase [4] you complete and sign the appropriate refund document and provide acceptable proof of your identity [5] you will cooperate in the investigation and any prosecution resulting from such loss or theft [6] you have not parted with the cheques voluntarily or in connection with a game of chance, a wager or an illegal transaction, nor given them to any party as collateral, and you have properly safeguarded each cheque against loss or theft [7] the cheques have not been seized or confiscated by governmental action
Stop Payment The issuer shall not be obliged to stop payment of travellers cheques for any reason whatsoever.’
No point is taken by the defendants on non-fulfilment of conditions 1 to 5. Counsel for the defendants submitted that (1) Mr Braithwaite must prove that the traveller’s cheques were lost or stolen, (2) Mr Braithwaite must prove that he has properly safeguarded each cheque against loss or theft, (3) ‘loss’ in this context does not cover a certainty, or a loss which the plaintiff brings about by his own act and (4) Mr Braithwaite has not discharged the burden of proof.
Counsel on behalf of Mr Braithwaite accepts submissions (1) and (2). He does not accept submission (3) and submits that his client had discharged the burden of proof.
The basis of the third submission, dealing with the meaning of ‘loss’, was an analogy with the learning on all risks policies, as exemplified in the following passage from the speech of Lord Sumner in British and Foreign Marine Insurance Co Ltd v Gaunt [1921] 2 AC 41 at 57, [1921] All ER Rep 447 at 455:
‘There are … limits to “all risks“. They are risks and risks insured against. Accordingly the expression does not cover inherent vice or mere wear and tear … It covers a risk, not a certainty … Nor is it a loss which the assured brings about by his own act, for then he has not merely exposed the goods to the chance of injury, he has injured them himself.’
If one accepts, as I do, Mr Braithwaite’s account, then it seems to me that it follows that the traveller’s cheques were lost or stolen, as those words would be understood by a purchaser of a traveller’s cheque. Of course, if the loser’s conduct is such that he, in effect, ensures that he will lose the traveller’s cheques, then he will not have proved that he has ‘properly safeguarded each cheque against loss or theft’. Conversely, if he proves that he has properly safeguarded each cheque against loss or theft, then, even if the third
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submission be right in law, its application to the facts of this case would not prevent Mr Braithwaite from recovering, in that he would not have brought about the loss by his own act. Thus, in the context of this case, a decision in favour of counsel for the defendants on his third submission would put him in no stronger position than the one in which he finds himself by reason of the acceptance of his second submission. I, therefore, say no more about the third submission.
I come, therefore, to what I regard as the crucial question in this case: has Mr Braithwaite shown that he has properly safeguarded each cheque? Let me first clear away some brushwood.
1. Although each side made submissions about the extent of what they referred to as the purchaser’s duty, we are not, strictly speaking, concerned with a duty at all. We are concerned with a condition precedent which must be fulfilled by a purchaser if he wishes to recover.
2. The primary obligation of an issuer of traveller’s cheques is to pay the presenter of the cheque. In so far as the purchaser retains the cheque or recovers it prior to encashment and wishes to encash it, he can present it.
3. Apart from contract, the purchaser is not entitled to any refund of the face value of the traveller’s cheques which he has lost or which have been stolen from him.
4. Although on a literal reading of condition 6 any failure to safeguard would disentitle the purchaser from claiming a refund, where there is no causal link between that failure and the ultimate loss, counsel for the defendants was, rightly in my judgment, not inclined to argue that in those circumstances there would be such a disentitlement. For example, let us suppose that, having purchased the cheques in England on day one, the purchaser, in order to demonstrate his wealth to the world at large, deliberately left them behind on his restaurant table when he left the table. That would clearly be a failure to safeguard. However, he comes back and they are still there. A few days later, in Peru, he is in a hotel and there is a fire in the middle of the night. He is rescued by firemen from his hotel bedroom and has no time to collect his belongings. The fire is put out, he returns to his room and finds the cheques gone. If, in those circumstances, it were held that he had not failed to safeguard the cheques in Peru but he had so failed in England, in my judgment he would nevertheless, be entitled to recover.
5. Although it could be argued that any loss inevitably involves a failure to safeguard, such a construction would be at odds with the primary undertaking by the issuer to refund the face value of the cheques which are lost, and counsel for the defendants did not argue in favour of such a construction. Mere momentary inadvertence cannot disentitle the purchaser from a refund. It was so decided by Stuart-Smith J in Fellus v National Westminster Bank plc (1983) 133 NLJ 766. In that case the relevant clause read, and I quote: ‘A refund will be made upon completion of our form of application, providing the cheques were signed but not countersigned and there has been no undue negligence.’
6. Although in his case Stuart-Smith J opined that it was for the bank to establish the matters set out in the proviso if they wished to avoid payment, in the present case it is conceded on behalf of Mr Braithwaite that the burden of providing that he had properly safeguarded the cheques is on him. In my judgment that concession is rightly made. One must bear in mind that in these cases all the relevant facts are within the knowledge of the purchaser. If he refused to answer any questions, the bank would find it practically impossible to prove lack of due care on his part.
7. Further, in my judgment, once the purchaser has failed to establish that he has properly safeguarded the cheques, if he wishes none the less to recover on the basis that there is no causal link between his lack of care and the ultimate loss, as in my example of the fire in Peru, the burden of satisfying the court that there was no such causal link is on the purchaser.
Counsel for the defendants argues that Mr Braithwaite has failed properly to safeguard the cheques against loss or theft. He relies on two groups of factors: (1) by signing the cheques in the presence of strangers, Mr Braithwaite made it clear to numerous persons
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that he was in possession of a considerable amount of traveller’s cheques and was keeping them in a plastic bag and (2) Mr Braithwaite, by his course of conduct in staying awake for 20 hours, drinking too much, travelling on the Underground, which is known to attract dishonest people, keeping the cheques in a plastic bag and falling asleep, disabled himself from properly safeguarding the cheques and did not properly safeguard them.
Counsel for Mr Braithwaite submits, as to the first of these points, that the probability is that the cheques were not, in fact, taken by anyone who had seen Mr Braithwaite signing them earlier in the day. Had he been robbed earlier on in the day the position might have been different, but it seems improbable that he was shadowed until he fell asleep. After some hesitation, I have come to the view that this submission is well founded. Mr Braithwaite may have been shadowed but, on the balance of probability, I find that he was not. In consequence there is no causal nexus shown between the carelessness and the loss or theft, and the position is similar to carelessness in England followed by theft in Peru.
So far as the second submission is concerned, counsel for Mr Braithwaite helpfully, at my suggestion, reduced his submission to writing under two heads, and I quote from the document:
‘1. “Meaning of “properly safeguard”. The expression only contemplates and encompasses steps taken and/or arrangements made in regard to the custody of the cheques, viz conscious and deliberate acts: (a) Because this would be a logical ejusdem generis construction, having regard to the other contingencies specified in clause 6. (b) Because to construe the expression as covering forms of inadvertence—eg momentary inattention, absent-mindedness, forgetfulness, whether arising from fatigue, drink or otherwise—would be to construe it in a manner inconsistent with the vendor’s primary obligation to refund the face value of cheques which the purchaser has lost. The promise to refund would be virtually illusory since—apart from the exceptional case of eg a fire or serious accident—loss invariably involves some element of fault on the part of the loser. Furthermore, such a construction would be inconsistent with one of the objective aims of the transaction, viz, a convenient form of insurance against one’s own fallibility, having regard to the normal incidents and hazards of travel, or of being on holiday. The expression is not to be construed as imposing an obligation on the purchaser to exercise reasonable care at all material times—this is not a contract of bailment. The words “negligent” or “negligence” do not appear.
(2) The only circumstances which are relevant are those immediately surrounding the loss. The Plaintiff’s conduct at an earlier moment of time is not material unless it is causative of the ultimate loss. The steps taken in regard to the safeguarding of the cheques on the homeward tube journey were perfectly reasonable. They were concealed from view, being in a brown envelope and inside a carrier bag. The Plaintiff was unencumbered by other luggage, and it was clear that he envisaged that throughout his journey he would be either holding the bag in his hand or it would be resting on his lap. In the context of what is or is not a reasonable arrangement, there is a crucial distinction between carrying £50,000 in cash and carrying such a sum in travellers’ cheques. The loss occurred as a result of the Plaintiff‘s fatigue, probably aggravated by drink, momentary absent-mindedness and inattention. These are typical lapses not encompassed by the expression “properly safeguard“.’
And that is the end of counsel’s submission. What makes this submission attractive is the way it identifies various aspects of Mr Braithwaite’s behaviour and then goes on to look at each of those aspects in turn and in isolation. However, in my judgment, this is not permissible. Mr Braithwaite’s conduct that evening involved the following: (1) carrying £50,000 in traveller’s cheques around London in a plastic bag, with a carton of cigarettes, visible to the outside world. This was an attractive target for the dishonest;
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more attractive than if he had concealed the cheques about his person; (2) failing to go home when he had made no arrangements to meet the intended recipient; (3) instead he socialised, notwithstanding that he had got up at 4 am and had been on two aeroplane flights and must have been feeling increasingly tired. His socialising took the form of drinking more and more alcohol, notwithstanding that he was tired and had not eaten properly all day; (4) finishing the evening, when he was dog tired and not sober, by making a long journey on the Underground at night rather than taking a taxi home; (5) falling asleep on the Underground within minutes of taking his seat; and (6) failing even to notice that he had dropped or had had stolen from him the bag containing the cheques and cigarettes.
It may well be that some of these factors can be present without the plaintiff failing properly to safeguard. But in the present case they were all present and, in my judgment, all contributed to the ultimate loss and, between them, were causative of it. The reason he fell asleep and did not notice the loss was because he was dead tired and not sober. Falling asleep, and the subsequent loss or theft, could and should have been foreseen as the not unlikely conclusion to that evening following that day. In my judgment, if an ordinary member of the travelling public was asked: ‘Has Mr Braithwaite properly safeguarded these traveller’s cheques?’, he would answer: ‘Of course he has not.’
Let me quote from an interview which Mr Braithwaite had with the defendants’ investigating officer. Mr Braithwaite said this: ‘I fell asleep on the train. I mean, obviously. I had been up at 4 o’clock in the morning. I have also had a couple of drinks.' Then, in another passage, Mr Braithwaite said: ‘I had a look at a leaflet. It says you have to properly safeguard them.' The investigating officer said: ‘Right, and have you?' ‘No’, Mr Braithwaite replied.
I give the same answer. In my judgment, the defendants have proved that he failed properly to safeguard the cheques. As I indicated earlier in this judgment, the burden of proof in fact is on him and not on the defendants. It is clear that he has not discharged it. In those circumstances, he has no claim in contract against them.
The defendants have indicated that they have recovered some of the cheques before any money was paid out against them. They are, of course, willing to refund Mr Braithwaite the face value of those, which amounts to £2,000.
There is another group of cheques where, although they were presented and paid, the payer has not so far recovered from the defendants, who appear to have successfully argued that the payer was negligent in making the payment. They amount to £7,400, and I understand that the defendants are prepared to reimburse Mr Braithwaite with their face value unconditionally.
There is a third category, amounting to £6,000, where the traveller’s cheques are still outstanding, and no attempt has been made to encash them. In relation to this category the defendants are prepared to reimburse Mr Braithwaite, subject to a condition that he agrees to indemnify them should they be successfully sued by the payer.
Finally, there is a group of cheques in respect of which the defendants have paid out £34,000 to outside institutions who have paid the persons who presented them. On the pleadings as they stand Mr Braithwaite has, in the light of my findings, no claim in respect of any of them.
Judgment for Mr Braithwaite for £16,000 with interest on certain undertakings by Mr Braithwaite to indemnify the defendants.
Solicitors: Philip Ross & Co (for Mr Braithwaite); Beachcroft Stanleys (for the defendants).
K Mydeen Esq Barrister.
Elawadi v Bank of Credit and Commerce International SA
[1989] 1 All ER 242
Categories: BANKING & FINANCE
Court: QUEEN’S BENCH DIVISION
Lord(s): HUTCHISON J
Hearing Date(s): 18 JULY, 5 SEPTEMBER 1988
Bank – Cheque – Traveller’s cheque – Loss or theft – Reimbursement – Conditions of purchase – Purchase agreement providing that any claim for refund of lost or stolen cheques subject to approval by bank – Cheques stolen due to purchaser’s own negligence – Whether contract containing express or implied obligation to refund – Whether obligation subject to discretion or implied term not to refund where loss resulting from purchaser’s negligence.
The plaintiff purchased £50,000-worth of traveller’s cheques in £100 denominations from the defendant bank. The agreement covering the purchase contained a clause which stated that ‘Any claim for a refund of a lost or stolen cheque shall be subject to approval by the Issuer and to presentation to the Issuer of the Purchaser’s copy of this Agreement’. The plaintiff signed the cheques before taking them away, having been informed by the bank that if the cheques were taken away unsigned he would not be covered in the event of their loss. A few days later the cheques were stolen from the plaintiff‘s car, largely as a result of his own negligence, and £40,700-worth were subsequently encashed. The bank refused to refund to the plaintiff the full value of the stolen cheques, agreeing only to refund the sum of £9,300 in respect of those cheques which had not been encashed. The plaintiff brought an action against the bank claiming, inter alia, a refund of £40,700 on the ground that the bank’s statement that it would not refund on unsigned cheques together with the provision in the purchase agreement regarding claims for refunds constituted an express term of the contract obliging the bank to refund lost or stolen cheques. The bank contended that it was under no such obligation since that provision conferred an unfettered discretion on the bank whether to make a refund. Alternatively, the bank contended that, even if there was an obligation to make a refund, it was an implied term of the purchase agreement that the plaintiff would take reasonable care of the cheques and that a refund would not be made where the plaintiff had been negligent or reckless.
Held – Where a contract for the sale and purchase of traveller’s cheques contained an express term obliging the issuing bank to refund the value of lost or stolen cheques, that obligation was subject to a discretion not to pay where the purchaser had broken one of his contractual obligations, but it was not (in the absence of any express provision) subject to an implied term precluding recovery by the purchaser where the loss resulted from his own negligence or recklessness. Where the contract contained no express term obliging the bank to refund the value of lost or stolen cheques, there would, of necessity, be an implied obligation to refund but subject to a discretionary right to resist a refund. On the true construction of the contract entered into by the parties, it contained an express obligation on the part of the bank to refund lost or stolen cheques regardless of the plaintiff‘s own negligence or recklessness in safeguarding the cheques. The bank would therefore be ordered to pay the £40,700 claimed (see p 248 g h, p 249 c, p 250 c d, p 255 g and p 256 b to d g, post).
Dictum of Schiemann J in Braithwaite v Thomas Cook Travellers Cheques Ltd [1989] 1 All ER 235 at 239 doubted.
Notes
For traveller’s cheques, see 3 Halsbury’s Laws (4th edn) para 122.
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Cases referred to in judgment
Braithwaite v Thomas Cook Travellers Cheques Ltd [1989] 1 All ER 235.
Fellus v National Westminster Bank plc (1983) 133 NLJ 766.
Greenwood v Martins Bank Ltd [1933] AC 51, [1932] All ER Rep 318, HL.
Lister v Romford Ice and Cold Storage Co Ltd [1957] 1 All ER 125, [1957] AC 555, [1957] 2 WLR 158, HL.
Liverpool City Council v Irwin [1976] 2 All ER 39, [1977] AC 239, [1976] 2 WLR 562, HL affg in part [1975] 3 All ER 658, [1976] QB 319, [1975] 3 WLR 3 WLR 663, CA.
London Joint Stock Bank Ltd v Macmillan [1918] AC 777, [1918–19] All ER Rep 30, HL.
National Bank of Greece SA v Pinios Shipping Co No 1, The Maira [1989] 1 All ER 213, CA.
Sullivan v Knauth (1917) 220 NY 216, NY Ct of Apps affg (1914) 146 NYS 583, NY SC.
Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2 All ER 947, [1986] AC 80, [1985] 3 WLR 317, PC.
Action
The plaintiff, Moshen Elawadi, by a writ issued on 18 December 1985 and an amended statement of claim re-served on 15 June 1988, brought an action against the defendants, Bank of Credit and Commerce International SA (sued as Bank of Credit and Commerce International SA Ltd), who were licensed deposit takers, a declaration that the plaintiff was entitled to reimbursement in the sum of £40,700 as the outstanding balance of £50,000 in Visa traveller’s cheques which he had purchased from the bank in August 1985 and which had been stolen on or about 17 August 1985 and subsequently encashed, (ii) payment to the plaintiff of £40,700, alternatively damages, and (iii) interest pursuant to s 35A of the Supreme Court Act 1981. The facts are set out in the judgment.
Peter Cresswell QC and Stephen Hockman for the plaintiff.
Nicholas Stadlen for the bank.
Cur adv vult
5 September 1988. The following judgment was delivered.
HUTCHISON J. This case is to do with an alleged theft of traveller’s cheques. It gives rise to numerous difficult and interesting issues of fact and law which I shall have to consider in some detail, but of which I give a foretaste by saying that they include the following questions. (1) Were the cheques stolen at all? (2) If they were, is there some express or implied contractual right in the plaintiff to have them replaced or to be reimbursed by the issuing bank? (3) If there is, is that right itself subject to an implied term that the plaintiff’s right to recover is dependent on his having exercised care in the custody of the cheques and, if so, what degree of care? (4) Is the bank liable in conversion for those cheques which ultimately found their way into its possession, but which it has not restored to the plaintiff and, if so, what is the measure of damage?
The history of the pleadings is a tortuous one, and even their final state does not reflect all that was at one stage proposed. In the course of the hearing I rejected an application by the plaintiff to plead reliance on the Unfair Contract Terms Act 1977; and the bank flirted with the idea of pleading fraud (a flirtation which at one stage turned into a proposal when it sought leave to amend to raise it) but was refused leave because of the total lack of particularity in its draft amendment. In the circumstances I think I should begin with a careful review of the pleadings in their final form.
By his amended statement of claim the plaintiff, Mr Moshen Elawadi, asserts that in August 1985 he purchased from the defendants, Bank of Credit and Commerce International SA (the bank), who are licensed deposit takers, £50,000-worth of Visa traveller’s cheques in £100 denominations that it was an express or alternatively an
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implied term of the purchase agreement that should the cheques be stolen from or lost by him the bank would refund to him their full value; that on about 17 August they were stolen and that the bank, despite requests to do so, has refused to refund their value, apart from £9,300, being the value of those stolen cheques which were not encashed. By amendment made during the trial the plaintiff claims, in the alternative, that following presentation of cheques to the value of £40,700 to the bank for payment it converted them, as a result of which he has suffered damage equal to their face value. There is also a conventional alternative claim for money had and received. So the plaintiff is claiming reimbursement of £40,700 in contract, and in the alternative the same sum as damages for conversion and/or as money had and received.
The defence, amended twice during the hearing, is to the following effect.
1. The purchase of the cheques is admitted to have taken place on 2 August, and is alleged to have been subject to the purchase agreement form which the plaintiff signed that day. The point is made that the issuer was not the bank but the Bank of Credit and Commerce International (Overseas) Ltd (BCCI Overseas); but in a letter from the bank’s solicitors it is made clear that no point is taken as to parties. Provisions of the purchase agreement (to which I shall have to refer in detail) are pleaded, the purport of which (so it is alleged) was that the bank was under no liability to refund the value of lost or stolen cheques. Particular reliance is placed on these words in the purchase agreement: ‘Any claim for a refund of a lost or stolen cheque shall be subject to approval by the Issuer and to presentation to the Issuer of the Purchaser’s copy of this Agreement.’
2. Alternatively it is said that if by the purchase agreement or otherwise the bank undertook to refund lost or stolen cheques, then it was an implied term of the purchase agreement that the plaintiff should take reasonable care of the cheques to ensure that they were not lost or stolen and further that he owed the bank such a duty, independently of contract. There follow allegations, to which I shall need to refer, detailing the circumstances of the theft, said to constitute a breach by the plaintiff of this implied term and/or duty.
3. The theft had originally been the subject of a ‘not admitted’ plea. The only part of the proposed amendment to plead fraud that I allowed was the substitution for those words of a denial. I did this because it became clear, in the course of the argument about the proposed amendment, that the bank’s predicament was that, while it was highly suspicious about the veracity (because of its supposed improbability) of the plaintiff‘s account of the loss of the cheques, it had no positive case of fraud which it could put forward and it seemed to me that in the circumstances the modest amendment I did allow was appropriate.
4. The second of the amendments raised a plea that if there was an implied term obliging the bank to refund the value of lost or stolen cheques, it was part of that implied term that the bank was not obliged to make a refund in circumstances where it had reasonable grounds for believing that the plaintiff had been, or alternatively he had in fact been, dishonest and/or reckless and/or grossly negligent and/or negligent. The pleading goes on to allege (i) that the plaintiff had been reckless etc (relying on the case originally pleaded, to which I have already made passing reference) and (ii) that the bank had reasonable grounds for believing that the plaintiff‘s account was untrue or that he had been reckless etc.
5. In answer to the claim in conversion or for money had and received, the bank pleads that the plaintiff is, by reason of his negligence, estopped from asserting the claim in conversion and, in support of that plea, relies on the implied term and/or duty to take care of the cheques, the breach of that term and/or duty which resulted in the theft and subsequent forging of the counter-signature, and go on to allege that, in the result, ‘they were obliged to make payment to the cashing agents with whom the traveller’s cheques had been encashed’. I have cited these words particularly because, as I shall show, counsel for the plaintiff argued that on undisputed evidence it was established that such payments as the bank made were made without legal obligation.
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6. The bank pleads alternative answers to the claim in conversion, on the following lines: (a) it denies that any loss suffered by the plaintiff was caused by conversion of the cheques; (b) it says that any loss suffered by the plaintiff was caused by his carelessness, negligence, breach of contract or breach of duty; and (c) it relies on the provision in the purchase agreement which, it says, gives it a discretion to refuse a refund of stolen cheques, and the absence in that agreement of any express obligation to make a refund, and says that those are inconsistent with the alleged claim in conversion, and that therefore it was an implied term of the agreement between the parties that the bank would not be liable in conversion in circumstances where it was entitled to withhold its approval to the making of a refund.
By his amended reply the plaintiff asserts that the purchase agreement was partly oral, and relies on a conversation alleged to have occurred with the manager when, in response to an inquiry, the manager told him that if he took the cheques away before signing them, the bank would not be liable in the event of loss. He contends that the provision in the purchase agreement as to approval is of no legal effect, or at most is confined to the question whether he had countersigned the cheques.
The rejoinder, though maybe not strictly necessary, serves the useful purpose of making clear the bank’s stance as to the effect of the refund provision in the purchase agreement. What it contends is (i) that it gives the bank an absolute discretion to make or refuse a refund and, alternatively, (ii) that, if there is any fetter, it amounts to no more than a requirement that it should act honestly in making its decision or alternatively that it should exercise the discretion bona fide and/or reasonably. It asserts that on the facts it did so exercise it.
I propose next to consider the evidence in relation to the purchase of the cheques, and to make some findings of fact that will be material to the crucial questions as to express or implied terms in the contract. It will be appreciated that, while the circumstances of the alleged loss of the cheques were the subject of controversy, there was much less room for dispute as to the facts to do with their purchase.
The plaintiff, who is an Egyptian, was a customer of the bank of considerable standing. He maintained his own and his company’s accounts there and his brother also banked there. He is a man of some means, and on occasions his account had substantial credit balances. An indication of the bank’s regard for him is that overdraft facilities of the order of £250,000 and £100,000 were permitted on the company’s and his own accounts. He was an important customer and the relationship was valued by the bank. He normally dealt with Mr Musafer Chowdry, the deputy manager, but he also knew the recently appointed manager, Mr Baakza.
On 2 August 1985, the plaintiff told me, he went to the bank, saw Mr Chowdry and indicated that he wished to purchase traveller’s cheques to the value of £50,000, the cost to be debited to his brother’s account, in respect of which he had a mandate. His evidence was that he told Mr Chowdry that he wanted the cheques because he was intending to purchase a factory in Egypt. Mr Chowdry recalled that the plaintiff had first telephoned to arrange the purchase, and said that he was going to Cairo and needed the cheques for some business commitment. Mr Chowdry said that he asked why a transfer of funds would not do, and the plaintiff said that it would not because the cheques gave him a better exchange rate. I shall return to this aspect of the matter, which is of relevance to the question of his credit and the issue of the loss of the cheques, but of no materiality to the contract.
The cheques, each for £100, were produced, and each was signed by the plaintiff before he left the bank. That much is common ground. The plaintiff said that when Mr Chowdry asked him to sign them he, because he was in a hurry, asked if he could take them away and sign them elsewhere, and that Mr Chowdry said that he could, but if he did the bank would not pay if they were lost. The plaintiff did not profess to remember the precise words, but was clear that the purport of what was said was that if he chose to take the cheques away unsigned he was not covered in the event of their loss. He
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therefore sat down, in a back room made available to him, and signed all 500 cheques.
Mr Chowdry’s evidence was to the following effect. He said that he could not recall any specific conversation on 2 August, though he did remember that all 500 cheques were signed at the bank. However, Mr Chowdry did say that if he had been asked about taking the cheques away unsigned he would have said words to this effect: ‘As I’ve told you before, if you do that you’re not entitled to claim for loss.' That this should be Mr Chowdry’s position is hardly surprising, for the bank has a standard form of waiver of liability for cheques issued in blank (one such form was signed by the plaintiff in connection with a further purchase of cheques in January 1986), which provides that:
‘neither the issuer nor selling agent shall be liable to … the purchaser with respect to any claims arising out of this transaction including the loss or theft of Travellers’ Cheques until [the cheques have been signed by the purchaser].’
Bearing in mind that Mr Chowdry did not deny (merely did not recall) this conversation and that the plaintiff‘s account is in my view inherently probable, I accept that a conversation such as he describes did take place.
The plaintiff also, of course, signed the purchase agreement, the relevant provisions of which are as follows:
‘The Issuer and the Purchaser agree as follows: 1. Using the same signature used for signing this Purchase Agreement, the Purchaser shall sign each cheque in permanent ink at the time of purchase and countersign each cheque in the presence of the person cashing the cheque. 2. The purchaser shall report immediately the loss or theft of any cheque to the local police and to the Visa Refund Referral service at the telephone and telex numbers indicated. 3. Any claim for a refund of a lost or stolen cheque shall be subject to approval by the Issuer and to presentation to the Issuer of the Purchaser’s copy of this Agreement.’
On the plaintiff‘s copy of the agreement there also appeared: ‘Safeguard cheques as cash.’
The relevant part of the cheques themselves, which of course contain the usual spaces for signature and countersignature, is the statement: ‘Issuer pay this cheque to or order in the above amount in accordance with terms on reverse.' The terms referred to are:
‘When countersigned by the purchaser whose signature appears on the face in the presence of the person cashing, the issuer will pay in the United Kingdom one hundred pounds Sterling. Elsewhere negotiable at current rates of exchange. Valid in all countries of the world unless otherwise endorsed.’
These are the material matters which go to the issue of what was the contract between the bank and the plaintiff. However, I shall postpone stating my conclusions as to the contractual effect of what I have found took place until I have dealt with the loss of the cheques and the legal arguments.
[His Lordship considered the evidence and found that the plaintiff had put the cheques in his office safe and had then decided to take them to Amsterdam to give to a client to take them to Cairo. On the evening of Friday, 16 August the plaintiff had put the cheques in a plastic bag which he put in his car. He had then made a number of business calls, during which he left the plastic bag unattended in the car. When he returned home that evening he had parked the car in an open parking space adjoining his home and had left the plastic bag in it overnight. The following morning he drove to his shop and parked his car. Some time later during the day he remembered the cheques but when he looked for them in his car they were missing. He had then contacted the police. His Lordship continued:] It is convenient at this stage that I should express my conclusions whether the plaintiff was negligent in his dealings with the cheques. The onus in that regard is, of course, on the bank, though questions on onus are unimportant in the circumstances of this case. I have no hesitation at all in saying that in my view the plaintiff was guilty
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of the most serious negligence. He is and was at the time an experienced businessman accustomed to dealing with large sums of money. On any view, £50,000 is a large sum. He plainly appreciated that traveller’s cheques require to be carefully and safely kept; presumably that is why he put them straight into his safe on 2 August. When he took them from the safe preparatory to departing for Amsterdam, he should at all times have been alive to the fact that he was carrying a very valuable, readily stealable and highly negotiable commodity. He put them in his car in a plastic bag, in full view of any casual passer-by. I am satisfied that on the occasion when they were stolen he must, on the balance of probabilities, have left the car unlocked, an act of gross carelessness in the circumstances. A measure of his carelessness is the fact that he did not even have this valuable packet of traveller’s cheques sufficiently in mind to remember its presence in the car until after six o’clock on the Saturday evening. It seems to me that it is an inescapable conclusion that, in his dealing with these cheques, he was guilty of the most serious negligence and that it was that singular want of care that led to their being stolen.
In the light of these findings, I must now consider the remaining and crucial issues in the case. These, it seems to me, can broadly be summarised as follows. (1) Was the bank under any contractual obligation to refund the value of lost or stolen cheques? (2) If it was, was that obligation absolute or was it in some way qualified by (a) a discretion of some sort to refuse a refund or (b) an implied right to resist payment where the customer had been guilty of negligence, alternatively, gross negligence leading to the loss or (c) an implied right to resist payment where the bank believed that the customer had been dishonest and/or negligent and/or grossly negligent, whether or not that belief was justified? (3) Did the bank convert the cheques on which it paid out? If so, did that conversion give rise to any damage suffered by the plaintiff? If so, has the bank made good its plea of estoppel and/or can it resist the claim in conversion on the basis that the plaintiff was careless etc and/or is there an implied term in the contract exempting the bank from liability in conversion in those cases where it is not liable in contract?
Traveller’s cheques are and have now for many years been widely used in the United Kingdom. It is, therefore, surprising that there are hardly any decisions of English courts dealing with the crucial question of the rights and liabilities of the purchaser and the issuer of such instruments. Two cases were cited to me, in both of which the contracts contained express terms in relation to the right to a refund and the obligation to use care. In the first, a decision of Stuart-Smith J in Fellus v National Westminster Bank plc (1983) 133 NLJ 766, the question was whether there had been ‘undue negligence’ by the plaintiffs. In the course of giving judgment (in which he found that there had not) Stuart-Smith J said (and I read from the transcript of his decision):
‘There is a considerable advantage over cash so far as the public are concerned because of the refund provisions. This is a matter which is advertised by issuing banks in general, including the defendant bank.’
That observation, in so far as it was intended to be of general application rather than to be confined to the facts of the case he was considering, where there was an express obligation to refund, was, of course, obiter. However, it summarises succinctly that quality which makes traveller’s cheques attractive, viz the security they give which cash does not, and I would suppose that members of the public who buy them assume without question that they are getting such an advantage. In this case it is suggested that any such assumption is misplaced.
The other English decision of which I am aware is that of Schiemann J in Braithwaite v Thomas Cook Travellers Cheques Ltd [1989] 1 All ER 235. In that case too there was a specific obligation to refund, subject to a specific qualification in relation to negligence. However, in the course of his judgment Schiemann J made an observation which showed that he considered it to be clear law that it was not one of the ordinary incidents of a contract for the sale and purchase of traveller’s cheques that the purchaser should be
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entitled to a refund of the face value in the event of loss. He said ([1989] 1 All ER 235 at 239):
‘Apart from contract, the purchaser is not entitled to any refund of the face value of the traveller’s cheques which he has lost or which have been stolen from him.’
That observation, while of course also obiter, provides support for the contention of counsel for the bank to the like effect and certainly shows that, despite what I have ventured to suggest would be the understanding of ordinary purchasers of traveller’s cheques, the contention that there is no liability to refund in the absence of particular contractual provisions is not a startling or outrageous one.
There are, of course, cases in other jurisdictions (particularly America, where traveller’s cheques have been in use for very much longer) which do afford some guidance on the law applying to them. The matter is also treated in a number of textbooks, particularly fully and helpfully in Cowen Law of Negotiable Instruments in South Africa (5th edn, 1985) vol 1, pp 295–313. However, it will only be necessary for me to embark on a general review of the law in relation to traveller’s cheques if I conclude that the present is a case in which there is no express term obliging the bank to make a refund and I have only said as much as I have about the law relating to traveller’s cheques to show why it was that counsel for the plaintiff invited me to begin by considering the question of whether he had made good his plea that there was an express term in the present case.
Neither counsel sought, in the course of the argument, to analyse precisely when the contract was concluded and certainly counsel for the bank did not argue that, if there was a conversation such as I have found that there was between the plaintiff and Mr Chowdry, that could not have contractual effect because it followed rather than preceded the conclusion of the contract. If it is necessary to express to a view about it, I should have thought that in the ordinary case the contract is concluded when the purchaser pays for the cheques and takes possession of them or, in the case of a customer of the issuing bank, takes possession of the cheques and signs the form authorising the debiting of his account. In the present case there is no evidence as to precisely in what order things occurred, but as I have indicated I can properly regard the conversation as being a contractual exchange. I reach that conclusion the more readily since, having regard to its content, it was clearly intended by Mr Chowdry that should the plaintiff, notwithstanding the warning he had been given, take the cheques away unsigned, his rights would be affected.
The express term contended for is that the bank will refund lost or stolen cheques. The material said to give rise to such a term is (1) the statement by Mr Chowdry that, if the cheques were taken away unsigned, the plaintiff would not be entitled to claim for their loss and (2) the words of para 3 of the purchase agreement, ‘Any claim for a refund of a lost or stolen cheque shall be subject to approval by the Issuer … ' Counsel for the plaintiff argues that either the conversation or the terms of para 3 or the two together constitute an express term obliging the bank to make a refund of lost or stolen cheques. It seems to me that these submissions are justified for reasons which I shall briefly explain.
It is convenient to begin with the argument of counsel for the bank as to the meaning and significance of para 3. He concedes, as he must, that it is an express term of the contract. However, he contends that all it does is to confer on the issuer an absolutely unfettered discretion whether to pay or not and he argues that neither in this paragraph nor anywhere else in the contract is there any obligation to pay.
The difficulty about that argument, and it is one which counsel never succeeded in resolving to my satisfaction, is that it makes no sense to talk of a discretion that is entirely divorced from any kind of obligation or duty in regard to which the discretion is exercisable. For me to stipulate that I have an absolutely unfettered discretion whether to make good the loss of a £5 note which is blown into the Thames from the hand of the old lady queuing for a bus in front of me is a true but pointless assertion. Accordingly,
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either this paragraph is mere surplusage (an unnecessary and therefore, in the context, a meaningless stipulation in the contract) or it contains within it an obligation on which the reserved discretion is to operate. I lean against holding that it is mere surplusage: it is part of what is plainly a carefully drawn, though briefly expressed, contract and obviously regarded by the bank as having significance. I would only hold that it has none if I could not find in it words capable of supporting an express obligation to refund.
The paragraph begins with the words: ‘Any claim for a refund of a lost or stolen cheque … ' The word ‘claim’, it seems to me, is most naturally to be construed as referring to a right. In my judgment a legitimate construction of these words is that they import an obligation (subject of course to what follows) to refund lost or stolen cheques. The issuer is recognising expressly an entitlement in the purchaser to have lost or stolen cheques refunded, and making a reservation cutting down the extent of that entitlement. I find further support for this construction in paras 1 and 2. If there is no obligation to make a refund the issuer has, strictly, no interest in the safeguarding of the cheques or the reporting of their loss. It may be said, with reason, that he has a commercial interest and also an interest in trying to minimise crime. However, the fact remains that looking at the three paragraphs together reinforces the argument for an express obligation to refund.
The next question is: what is the nature of the discretion? The words are: ‘Any claim for a refund of a lost or stolen cheque shall be subject to approval by the Issuer and to presentation to the Issuer of the Purchaser’s copy of this Agreement.' Plainly it cannot be a wholly unfettered discretion, because then there would be no obligation. Counsel for the plaintiff argues that the words ‘subject to approval by the Issuer’ are of no legal effect, or, if that be wrong, that they are confined to the question whether there has been a breach by the purchaser of the terms imposed in paras 1 and 2 and perhaps to the question whether there has or has not been a loss or theft. Alternatively, he submits that the bank cannot withhold approval on grounds not covered by the terms of the contract. Finally, he reserved, but did not press, an argument to the effect that the issuer was not in fact the bank, but BCCI Overseas. I shall say nothing about that since my understanding of the concession made by the bank and accepted by the plaintiff‘s advisers is that, whereas strictly the defendants should have been BCCI Overseas, no point is taken as to parties, which means that the action is proceeding as if BCCI Overseas had been sued.
Counsel for the bank advanced a number of alternative propositions. He suggested that perhaps all that was required was that the bank should act honestly, or that the bank had a right to withhold approval of a claim if it would be reasonable for a reasonable issuer to do so. It would be reasonable, he submitted, if the purchaser had acted negligently and certainly if he had been guilty of gross negligence or recklessness leading to the loss or theft. Further, he argued that approval could be withheld if the bank believed on reasonable grounds that the purchaser had given an untrue account of the loss or had been negligent etc.
I can dispose of some of these submissions quite shortly. The concept of the right to reject being dependent on the bank’s acting honestly is altogether too vague. On the other hand, I can see no justification for the plaintiff’s contention that the words do not confer any discretion at all nor for his submission that the discretion is confined to the question of whether there has been a breach of paras 1 and 2 or whether there has or has not been a theft. As to the first, from one point of view, any claim to a refund must always be subject to the issuer’s approval, because the issuer has to pay. By stipulating for the right to approve, the issuer is reserving some sort of discretion and to hold otherwise involves that the words are surplusage. However, while plainly the right to withhold approval exists where there has been no loss or theft, I see no basis for saying that the only other factor entitling the issuer to refuse a refund is whether paras 1 and 2 have been complied with.
There are difficulties about any of the suggested resolutions of the question as to the nature of the discretion to withhold approval. They stem, in part, from the fact that the
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contractual provisions are so sparse. However, the solution which I consider to be preferred is that which ties the discretion firmly to the provisions of the contract, namely the formulation of counsel for the plaintiff that the issuer cannot withhold approval on grounds not covered by the contract. If the contract includes an implied obligation of care on the purchaser’s part (which I have still to decide) this solution may be closer to one of the suggested alternatives of counsel for the bank than at first sight appears.
The other basis for the contention of counsel for the plaintiff that there was an express term that lost or stolen cheques would be refunded was the conversation with Mr Chowdry. I have found that he said words to the effect that if the plaintiff took the cheques away unsigned, he would not be entitled to claim for loss and that this is to be regarded as of contractual significance. For reasons similar to those I have given for holding that para 3 of the purchase agreement imports an express obligation to refund lost or stolen cheques, I consider that these words also have that effect. However, the obligation is subject to the para 3 discretion.
I should add that, in so far as my conclusion that para 3 and the conversation with Mr Chowdry individually support the contention that there is an express entitlement to a refund is open to challenge, I would support my finding of an express term by reference to those two features collectively.
If I am wrong in finding an express obligation to refund lost or stolen cheques, is such an obligation to be implied? This is a question which, for a variety of reasons, it is not easy to resolve.
I was referred to the passages dealing with implied terms in the standard textbooks: Treitel Law of Contract (7th edn, 1987) pp 158–162 and Chitty on Contracts (25th edn, 1983) vol 1, paras 841–848. I was also referred to, and found very helpful, passages from the judgment of Lloyd LJ in National Bank of Greece SA v Pinios Shipping Co No 1, The Maira [1989] 1 All ER 213. The issue with which the part of the judgment I am about to cite was concerned was whether a term should be implied in a tripartite contract between a bank (the mortgagee of a ship which, in due course, was lost), Pinios (the owners of the ship who had defaulted in making an instalment payment of the price, which had therefore been paid by the bank pursuant to its guarantee of payment of Pinios’s promissory note for that instalment) and Glafki (the agents appointed by the bank to manage and control the ship). The term contended for by Pinios was an implied term obliging the bank to see that Glafki (who under the agreement were contractually obliged to insure the vessel for 130% of the amount secured by the mortgage, but had not fully complied with that obligation at the date of the loss of the vessel) did not under-insure the vessel in effect, to supervise the carrying out by Glafki of their obligation in relation to insurance. I cite at some length from the judgment of Lloyd LJ ([1989] 1 All ER 213 at 218–220):
‘… in the course of developing his submissions, counsel [for the defendants, Pinios and its guarantor] shied away from the “officious bystander” test. In this he was wise. For, so far from it being obvious that the bank would have agreed to the suggested implied term, it seems to me quite obvious that it would not. Why should it? … But that is by no means the end of the story. Counsel for the defendants submits that this is a case where the law imposes a duty of care, irrespective of what the parties must have intended or agreed. To adopt the terminology of Treitel Law of Contract (7th edn, 1987) p 158, counsel relies on a term implied by law as distinct from a term implied in fact … That there is a distinction between a term implied in a contract because it is what the parties must have agreed and a term implied by law is now well established, even if, as Lord Wilberforce preferred to put it in Liverpool City Council v Irwin [1976] 2 All ER 39 at 43, [1977] AC 239 at 254, the distinction only represents two ends of a “continuous spectrum“. When Liverpool City Council v Irwin was before the Court of Appeal, Lord Denning MR, in a dissenting judgment, said that it was time to get rid of the old clichés about “necessary to give business efficacy” and the “officious bystander” (see [1975] 3 All
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ER 658 at 664, [1976] QB 319 at 329). The law, he said, implies a term whenever it is reasonable to do so, and that is an end of it. He gave, as examples, terms implied in a contract for the sale of goods and many others. Nobody asks in such cases whether the term is one which the parties must have intended or agreed. When the case reached the House of Lords the decision of the Court of Appeal was reversed. But there was no support for the broad principle stated by Lord Denning MR in the Court of Appeal. Lord Wilberforce described Lord Denning MR’s principle as going a long way beyond sound authority. The point is put very clearly by Lord Cross ([1976] 2 All ER 39 at 46–47, [1977] AC 239 at 257–258): “When it implies a term in a contract the court is sometimes laying down a general rule that in all contracts of a certain type—sale of goods, master and servant, landlord and tenant, and so on—some provision is to be implied unless the parties have expressly excluded it. In deciding whether or not to lay down such a prima facie rule the court will naturally ask itself whether in the general run of such cases the term in question would be one which it would be reasonable to insert. Sometimes, however, there is no question of laying down any prima facie rule applicable to all cases of a defined type but what the court is being in effect asked to do is to rectify a particular—often a very detailed—contract by inserting in it a term which the parties have not expressed. Here it is not enough for the court to say that the suggested term is a reasonable one the presence of which would make the contract a better or fairer one; it must be able to say that the insertion of the term is necessary to give—as it is put—’business efficacy’ to the contract and that if its absence had been pointed out at the time both parties—assuming them to have been reasonable men—would have agreed without hesitation to its insertion. The distinction between the two types of case was pointed out by Viscount Simonds and Lord Tucker in their speeches in Lister v Romford Ice and Cold Storage Co Ltd [1957] 1 All ER 125 at 134, 143, [1957] AC 555 at 579, 594, but I think that Lord Denning MR in proceeding—albeit with some trepidation—to ‘kill off ‘ Mackinnon LJ’s ‘officious bystander’ must have overlooked it.” So there is no doubt that there are, in the words of Lord Cross, contracts of a defined type in which the law will imply a term unless the parties have expressly excluded it. Can the present case be brought within any defined type? If we were concerned in the present case with the ordinary relationship of banker and customer, the law would imply certain obligations on the part of the bank, and a limited duty of care on the part of the customer (see Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2 All ER 947, [1986] AC 80). But we are not here concerned with the ordinary relationship of banker and customer. We are concerned with a carefully drawn “one-off” contract between three parties, made for a particular purpose in special circumstances, and apparently making full provision for that purpose. I cannot imagine a contract which it would be more difficult to fit into a “defined type“. But there is a further difficulty. Even if one could conjure up and define a type of contract into which the present contract could be fitted, there would remain the question whether the term on which counsel for the defendants seeks to rely should be implied. In the passage I have quoted from Lord Cross’s speech in Liverpool City Council v Irwin, he appears to have accepted that where the court is laying down a general rule for all contracts of a certain type (sale of goods, master and servant, landlord and tenant and so on), the court asks whether the term is one which it would be reasonable to insert in the general run of such cases. But Lord Wilberforce took a rather different line. In his view only such obligations should be read into the contract “as the nature of the contract itself implicitly requires, no more, no less; a test in other words of necessity” (see [1976] 2 All ER 39 at 44, [1977] AC 239 at 254). It was Lord Wilberforce’s test that the Privy Council adopted in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd. If, in that case, the Privy Council found it unnecessary to imply into an ordinary contract between banker and customer a duty wider than the duties recognised in London Joint Stock
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Bank Ltd v Macmillan [1918] AC 777, [1918–19] All ER Rep 30 and Greenwood v Martins Bank Ltd [1933] AC 51, [1932] All ER Rep 318, I can see no necessity for implying any duty of care on the part of the bank in the present case. For if we were to imply a duty of care on the part of the bank to see that Glafki did not under-insure the vessel, should we not also have to imply a duty of care to see that Glafki fulfilled its other specific duties under cl 3 of the management agreement? Should we not have to imply a duty to see that Glafki purchased all necessary stores and bunkers at the best price? Should we not have to imply a duty in relation to the supervision of repairs? Clearly not. Such an implication would not only be unnecessary, but wholly unreasonable. So I see no necessity to imply a duty of care in relation to the procuring of insurance, assuming, contrary to my view, that this is the type of case in which the court would imply a term irrespective of the parties’ presumed intentions. Counsel for the defendants returned over and over again in the course of his argument to the close relationship which existed between the bank and Pinios. But the closeness of the relationship does not in itself justify the implication of a contractual term.’ (Lloyd LJ’s emphasis)
In the course of the hearing I more than once suggested that the term that issuers and purchasers might reasonably wish to include in their contract was a term along the following lines: that the issuer should be liable to replace or refund the value of lost or stolen cheques provided that the purchaser had not breached his obligation in relation to counter-signature and had not been reckless or grossly negligent in caring for the cheques, so bringing about their loss or theft. For this suggestion there was, in the evidence, a considerable body of support. Mr Strange, who is employed by the bank as manager of its security and investigation department, made it clear that (assuming that the purchaser had not breached the countersigning obligations) he regarded the bank as being under an obligation to refund the value of lost or stolen cheques save where the loss or theft had been occasioned by the gross negligence of the purchaser. Mr Baakza said that there was an obvious obligation on the bank to refund in all cases where there was no negligence and in the context I have no doubt that he meant by negligence something more than ordinary carelessness, something akin to recklessness or gross negligence. The general purport of the evidence of Mr Chowdry and Mr Krishnan (the man in charge of the bank’s traveller’s cheque operations worldwide and an adviser to Visa) was to the same effect. In the case of Mr Krishnan, he may have been speaking essentially of practice rather than obligation, but he did say that there were only six or seven occasions in all his experience when a claim had been rejected and that the present case was exceptional.
Despite this evidence, counsel for the parties rejected any such implication. The primary contention of counsel for the bank was that there is no obligation to refund at all, but that, if there is an obligation, there goes hand in hand with it an obligation on the purchaser to take care and/or to refrain from gross negligence, and breach of that precludes recovery. Counsel for the plaintiff was at the other end of the spectrum: there is an absolute obligation to refund, however negligent the customer had been.
If I approach the matter, as I must, not on the basis of what the parties might reasonably have agreed, but of what the law entitles me to regard as implied in their contract, I must reject the argument of counsel for the plaintiff in so far as it is based on the officious bystander test. If I pose the question, would both parties readily have agreed, had they been asked, that the bank was obliged to replace lost or stolen travellers’ cheques, however reckless or negligent the plaintiff had been in their custody? the answer must be that the bank would certainly not have agreed (see the evidence of the witnesses I have mentioned).
Counsel for the plaintiff, arguing for a favourable answer, sought to rely on those witnesses’ evidence, but overlooked the qualification that they attached to their ready assent to the bank’s liability and he did not seek to pose the question in terms which reflected the qualifications attached by the bank’s witnesses. Perhaps that was because he recognised that an implied term so qualified would not avail him, or perhaps it was
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because he anticipated that it was difficult for him to do so consistently with his strongly maintained position that there was no basis for confidently asserting that the plaintiff would have assented to a term imposing an obligation to refund, but conditional on his taking a degree of care.
However, so far as I recall and my note records, the plaintiff was not asked what would have been his response to a suggestion that the bank’s obligation to refund was subject to an exception excusing it from doing so where he had been grossly negligent or reckless in the custody of the cheques and that conduct on his part had brought about the theft. Can I be satisfied that the plaintiff would, as a reasonable man, have agreed to a term so qualified had it been suggested to him? I would be glad if I could be persuaded to give an affirmative answer to this question because it seems at first sight so obviously sensible to accept that a purchaser should take at least some care of his traveller’s cheques. However, further reflection has convinced me that I cannot be confident that the plaintiff would have given such an answer. He probably would readily have assented to the proposition that he must, as a matter of common sense, take proper care of the cheques; but, if it had been suggested that failure to do so, at least if amounting to reckless want of care, precluded him from recovering, I think that he would, as a reasonable man, have hesitated, wanting to reflect on what would be the consequences to the bank of such conduct on his part. Such reflection would have led him to the conclusion that, since if (as he would expect to do) he promptly notified the loss of the cheques in accordance with the express obligation placed on him by the contract the bank would know, by the time any cheques were presented to it for payment, that they were not ‘countersigned by the purchaser whose signature appears on the face in the presence of the person cashing’ and that, therefore, the condition on which the bank undertook to pay would to its knowledge not have been complied with, the bank would not be out of pocket. This in turn might well have led him to reject the suggested qualification to the bank’s liability. He, of course, would not have known of the arrangements that existed between the bank and Visa to accept such traveller’s cheques in certain circumstances to which I shall make reference later.
I conclude, therefore, that approaching the matter on the basis of the officious bystander test, while it can confidently be predicted that each of the parties would have regarded it as going without saying that some term was to be implied, it can by no means be confidently predicted that they would have had in mind the same term.
Turning, then, to the alternative approach to implied terms, is this a case in which irrespective of the intention of the parties, the law imposes an obligation to refund, and, if so, is it unqualified or subject to some such qualification as that for which counsel for the bank contends? As I understand the decisions of the House of Lords and the Privy Council in Liverpool City Council v Irwin [1976] 2 All ER 39, [1977] AC 239 and Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2 All ER 947, [1986] 1 AC 80, cited by Lloyd LJ in the passage I have quoted from his judgment in National Bank of Greece SA v Pinios Shipping Co No 1, The Maira [1989] 1 All ER 213 at 218–220, the first requirement is that the contract in question should be a contract of a defined type. That poses no difficulty because the issue and purchase of traveller’s cheques is self-evidently such a contract. The second requirement is that the implication of the term should be necessary: in the words of Lord Wilberforce, ‘such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more, no less a test in other words of necessity’ (see Liverpool City Council v Irwin [1976] 2 All ER 39 at 44, [1977] AC 239 at 254). It must be remembered of course that this type of implied term can be excluded by express stipulation: see Lord Cross’s speech in Liverpool City Council v Irwin [1976] 2 All ER 39 at 48, [1977] AC 239 at 259. It can also be so modified.
Here, it seems to me, counsel for the plaintiff is on much firmer ground. As I have already pointed out, Stuart-Smith J in Fellus v National Westminster Bank plc said:
‘There is a considerable advantage over cash as far as the public are concerned
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because of the refund provisions. This is a matter which is advertised by issuing banks in general … ’
I have so far refrained from mentioning, but in this context it is relevant, that the bank in this case was shown to have included in some of its advertising material (not seen by the plaintiff) the words, ‘If lost, worldwide refund service is provided at 60,000 locations including banks’ branches and major hotels’.
In Cowen Law of Negotiable Instruments in South Africa (5th edn, 1985) vol 1, p 295 I find this statement:
‘They [traveller’s cheques] offer the great advantage, compared with carrying foreign currency, that if they are lost or stolen before the traveller has countersigned them, he may claim a refund from the issuer, or replacements, with comparative ease.’
Later in the same work is this passage (at 309):
‘The main problem [in the relations between issuer and traveller] concerns the traveller’s legal rights against the issuer in the event of the instruments being lost or stolen. In dealing with this problem it must again be emphasised that the point of departure is the particular contract entered into between the issuer and the traveller. The American Express “purchase agreement” makes express provision for prompt refunds or the issue of substitutes in the event of loss, provided that the traveller had not signed the instruments before loss. However, in the case of some other issuers (e.g. Visa travellers’ cheques), claims for a refund are made “subject to approval by the issuer”, though it is understood in practice the Amexco procedure is followed. Under the Amexco “purchase agreement” if the loss or theft occurs at a time when the instruments have not yet been countersigned by the traveller, then the traveller is entitled as of right to obtain a refund of the face value of the instruments, or to have them replaced.’
In Chitty on Contracts (25th edn, 1983) vol 2, para 2557 is the following statement:
‘If the loss of the instruments occurs while they do not bear a countersignature, the traveller is entitled to obtain their face value from the issuing banker, provided he agrees to sign an indemnity. Such an indemnity would protect the banker if it turned out that, despite the traveller’s statement, the cheques had been countersigned before they were lost. In such cases the banker would have to honour them when presented by a holder in due course, and the indemnity would enable him to recover the amount so paid from the traveller. The indemnity does not, however, enable the banker to recover from the traveller an amount paid to a holder who was not entitled to payment.’
For this last statement, the authors cite Sullivan v Knauth (1914) 146 NYS 583 affd (1917) 220 NY 216. The basis of the decision was that the relationship was one equivalent to banker and customer, and that the bank, having paid, albeit in good faith, on a forged counter-signature, the purchaser was entitled to reimbursement. In his judgment at first instance Clarke J said (146 NYS 583 at 585–586):
‘In my opinion a relation cognate to that of depositor and banker should be considered to have been established between the plaintiff and these defendants. If that is not the effect of the transaction, the traveler obtains little advantage from these so-called travelers’ checks and might as well carry bills or gold. The basis of his purchase is protection by reason of the double signature. Safety is the thing impressed upon him.’
In Chorley Law of Banking (6th edn, 1974) p 261 are statements distinctly pointing the other way:
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‘A traveller who has lost cheques, or even had them stolen from him, is not unlikely to claim to have them replaced, and it is believed that issuing banks normally adopt a generous policy in such cases, but their legal obligation to do so seems doubtful.’
A footnote extends the argument:
‘In law it is difficult to see any valid ground on which such a traveller could base a claim. He has bought the instrument, and if he loses it, how can he claim to be indemnified? Such a right could, of course, arise out of the contract between the parties, and it would seem possible that the advertisements of the American Express Company amount to such an offer which the traveller accepts by the purchase of the cheques. But the position is not the same with the British banks, and although it is believed that the policy pursued by them is a generous one, it is not considered that any usage to replace lost cheques could be proved.’
Again, in Sheldon and Fidler Practice and Law of Banking (11th edn, 1982) p 263 appears the following statement:
‘If travellers’ cheques are lost, the loss may technically be the traveller’s, but most major banks now undertake to replace lost or stolen cheques provided the local police have been informed.’
Assisted by these authorities and statements of opinion, I must address the question: is it a necessary incident of contracts for the purchase and sale of traveller’s cheques that the issuing bank should be under an obligation to refund the value of lost or stolen cheques? The following features of the transaction seem to be of particular importance.
1. The object of the transaction is security, otherwise, as Clarke J observed, the traveller might as well carry cash (and save himself the commission ordinarily charged on such cheques).
2. The issuing bank has had the traveller’s money, and has contracted with the traveller to pay the cheque when countersigned with the travellers’ signature.
3. I believe I am justified in inferring that the issuing bank invariably requires prompt notification of loss, so that ordinarily, if the traveller has complied (and, if he has not, the bank anyway has grounds for resisting a refund) the bank will know before any cheque is presented that the countersignature is a forgery.
It seems to me that, in these circumstances, it is necessary to imply an obligation of some sort on the part of issuing banks to refund the value of lost or stolen cheques.
I can see no reason for qualifying that obligation by confining it to cases where the loss has occurred without negligence or without gross negligence or recklessness. Such deficiencies on the part of the traveller do not determine whether he or the issuer is out of pocket. An argument may exist for a qualification of a different sort, but for reasons which I shall explain I need not, in this case, reach a final conclusion about that. What I have in mind is that, as I learnt in this case, there do exist between issuers and Visa (and no doubt other organisations who furnish cheques) agreements as to the circumstances in which issuers may refuse to honour cheques known to be forged. In the present case, there is a provision that final payment may not be refused on a cheque reported lost or stolen, unless the signature and counter-signature do not compare favourably, or the original signature has been obviously altered or the cheque has been altered in a manner which should have been obvious to the acceptor.
Such agreements are dictated by good commercial considerations: forgeries are widespread and often skilful; the intermediate party, who cashes the cheque, does not know the signature of the traveller and a too ready refusal to pay wholly innocent and careful intermediaries could soon lead to a refusal by them to accept that brand of cheque and a consequent decline in its use.
It may well be, therefore, that the obligation, which I do consider necessity requires to
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be implied in contracts between issuers and purchasers, ought to be subject to some qualification to take account of commercial realities. It can be argued, on the other hand, that if, without modifying the contractual provisions as to payment that are made between the issuer and purchaser, issuers choose to bind themselves to such extraneous contracts they must suffer the loss.
The reason I need not decide in the present case whether any such qualification is necessary is that the evidence establishes that none of the forged signatures compared favourably, but the bank nevertheless, for what it conceived to be good commercial reasons, paid most of them. Accordingly, any such qualification would not avail them.
It is appropriate at this stage to summarise the conclusions I have reached in relation to express and implied terms. (1) I consider that the contract contained an express term obliging the bank to refund the value of lost or stolen cheques. (2) That term was subject to a discretion not to pay where the purchaser had broken one of his contractual obligations. (3) There was no implied term precluding recovery by the purchaser where the loss of the cheques had resulted from his want of care or recklessness. It follows that neither the fact of want of care or recklessness nor the bank’s belief in their existence offered the bank grounds for refusing, in its discretion, to make refunds. (4) If I am wrong in holding that there was an express term entitling the purchaser to a refund, I hold that there was an implied term. That term is subject to the same qualifications afforded by the discretionary right to resist a refund.
There remains the alternative claim in conversion and/or for money had and received. In the light of the conclusions I have reached, I do not propose to rehearse the arguments or state my conclusions in any detail. It does, however, seem to me distinctly arguable that the bank, by honouring cheques which it had agreed with the plaintiff not to pay unless they were countersigned by him and in the knowledge that they were not countersigned by him (and I would added for good measure, without any contractual obligation as between itself and the intermediate parties), did convert the cheques. They belonged to the plaintiff, and had he repossessed himself of them, he would, by adding his counter-signature, have been able to require the bank to pay their face value. As it is, the bank has precluded him from doing so.
The plea of estoppel fails, if only because plainly the bank was not ‘obliged to make payments to cashing agents’. The plea that the plaintiff‘s loss was not caused by the conversion fails for the same reason. The suggested defences based on the claim in conversion being inconsistent with the bank’s discretion and/or contrary to an implied term, likewise fail both in principle (I cannot see how they could be justified even apart from my conclusions on the extent of the discretion and the issue of implied terms) and because, on the view I take, there would be nothing inconsistent between the claim for conversion and the provisions of the contract.
There will accordingly be judgment for the plaintiff for the sum claimed, with appropriate interest, as to which, no doubt, counsel can agree.
Judgment for the plaintiff.
Solicitors: L B Marks & Co (for the plaintiff); Stephenson Harwood (for the bank).
K Mydeen Esq Barrister.
Gibson or Scoullar or Archibald v Archibald
[1989] 1 All ER 257
Categories: FAMILY; Ancillary Finance & Property
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD TEMPLEMAN, LORD OLIVER OF AYLMERTON AND LORD GOFF OF CHIEVELEY
Hearing Date(s): 5 DECEMBER 1988, 19 JANUARY 1989
Divorce – Financial provision – Lump sum order – Deferment of payment – Deferment of payment of capital sum for lengthy period – Husband’s conduct causing breakdown of marriage – Husband’s only asset was matrimonial home – Husband living in matrimonial home with three children of marriage – Whether appropriate to award substantial capital sum to wife while postponing payment for six years until youngest child attaining 16 years – Divorce (Scotland ) Act 1976, s 5.
The husband and wife were married in 1973 and had three children. In 1983 the wife was granted a decree of divorce in the Court of Session in Scotland on the ground that the marriage had irretrievably broken down as the result of the husband’s conduct. The husband was awarded custody of the three children. In ancillary proceedings the wife sought payment by the husband of a capital sum of £25,000 under s 5 a of the Divorce (Scotland) Act 1976. At the date of proof before the Lord Ordinary the husband and the wife were aged 58 and 49 respectively. The husband’s only asset was the matrimonial home, valued at £42,000, in which he resided with the children. The husband had bought the house before his marriage to the wife when he was married to another woman. The wife did not seek immediate payment of the capital sum but payment in six years’ time (by which time the youngest child would have attained the age of 16) so that disturbance to the children would be avoided. The Lord Ordinary considered that it would be inappropriate to defer payment for such a long period and he awarded the wife a capital sum of £500, which the husband would be able to realise without selling the house. The Second Division of the Inner House of the Court of Session, even though it considered a payment of £500 to be inequitable, affirmed that decision on the ground that there were too many imponderables, namely uncertain and speculative future events, in deferring payment for more than six years. The wife appealed to the House of Lords.
Held – Since at the time of making an order under s 5 of the 1976 Act it was not open to a spouse to return to the court later to seek revision of the order if there was a change of circumstances, it was appropriate for the court when considering the equitable order to make to take account of future changes of circumstances which were foreseeable as being likely to occur, rather than those which were merely speculative. Since it was foreseeable that the three children would, in the ordinary course of events, become self-supporting or marry and leave home the court was not debarred, in arriving at an equitable result, from awarding a substantial capital sum and deferring payment for a lengthy period. The appropriate course in the circumstances was to award the wife a capital sum of £15,000 and postpone enforcement of the order until the sixteenth birthday of the
Page 258 of [1989] 1 All ER 257
youngest child in December 1991. Accordingly, the appeal would be allowed (see p 259 g to p 260 h, post).
Notes
For power to order lump sum payments, see 13 Halsbury’s Laws (4th edn) para 1105, and for cases on the subject, see 27(3) Digest (2nd reissue) 243–256, 10634–10698.
As from 1 September 1986 the Family Law (Scotland) Act 1985 made fresh provision regarding financial or other consequences of decrees of divorce in place of, inter alia, s 5 of the Divorce (Scotland) Act 1976. By s 12(2) of the 1985 Act the court may stipulate that an order for financial provision may come into effect at a specified future time. Section 12(2) of the Family Law (Scotland) Act 1985 corresponds to s 24A(4) of the Matrimonial Causes Act 1973. For s 24A(4) of the 1973 Act, see 27 Halsbury’s Statutes (4th edn) 729.
Cases referred to in opinion
Crooks v Crooks 1986 SLT 500, Ct of Sess.
Gray v Gray 1968 SC 185, Ct of Sess.
Appeal
Mrs Iris Gibson or Scoullar or Archibald (the wife) appealed against an interlocutor of the Second Division of the Inner House of the Court of Session, Scotland (the Lord Justice Clerk (Ross), Lord Dunpark and Lord McDonald) dated 24 February 1988 refusing a reclaiming motion for the wife for review of an interlocutor of the Lord Ordinary (Lord Kincraig) dated 21 November 1985 whereby he ordered the respondent, Leonard Cecil Charles Archibald (the husband), to pay the wife a capital sum of £500 with extract superseded for six months following the grant of a decree of divorce to the wife. The facts are set out in the opinion of Lord Keith.
Donald Macauley QC and Clive Shenton (both of the Scottish Bar) for the wife.
W M Campbell QC and R A Dunlop (both of the Scottish Bar) for the husband.
Their Lordships took time for consideration.
19 January 1989. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, this appeal arises out of an action of divorce, at the instance of the appellant (the wife) against the respondent (the husband). The parties were married at Glasgow on 13 April 1973, and there are three children of the marriage, two daughters and a son, born respectively on 13 January 1971, 27 November 1973 and 15 December 1975. The marriage finally broke down in August 1983 and on 15 August the wife started proceedings for divorce on the grounds of irretrievable breakdown of the marriage occasioned by the husband’s behaviour. The Lord Ordinary (Lord Kincraig) granted a decree of divorce on that ground on 21 November 1985. Custody of the three children was awarded to the husband.
The wife claimed against the husband payment of a capital sum of £25,000. In the conclusions of the summons she also claimed a periodical allowance for herself, but at the proof she in effect abandoned that claim in respect that at the time the husband was unemployed and subsisting on social security payments. By a separate interlocutor of 21 November 1985 the Lord Ordinary awarded the wife a capital sum of £500. The wife reclaimed, but on 24 February 1988 the Second Division affirmed that interlocutor, the opinion of the court being delivered by Lord Dunpark. The wife now appeals to your Lordships’ House.
At the date of the proof before the Lord Ordinary the husband and the wife were aged respectively 58 years and 49 years. The husband’s only capital asset was the former
Page 259 of [1989] 1 All ER 257
matrimonial home, valued at £42,000, in which he resided with the three children. He had bought it in 1960 for £3,000 with the aid of a mortgage, since paid off. At the time he was married to another woman. In the course of her evidence at the proof, the wife stated that in order that disturbance to the children might be avoided she did not seek immediate payment of a capital sum. Funds to meet it could only be raised by selling the house. She did, however, wish to be paid a capital sum after the youngest child had attained the age of 16 or 17 years.
In these circumstances the Lord Ordinary, in his words—
‘gave to the parties an opportunity of coming to an agreement with regard to the disposal of the house in the event of my finding [the wife] entitled to payment of a substantial capital sum, since I did not consider it appropriate to grant decree now for any substantial sum and supersede extract for six years.’
In the event, the parties did not reach any agreement. Thereupon the Lord Ordinary decided not to award the wife a substantial capital sum, because to do so would in his view be contrary to the interests of the children in respect that the husband would have to sell the house and move with them to other accommodation. He expressed himself as satisfied, however, that the husband would be able to realise a sum of £500 without selling the house, and he accordingly awarded the wife a capital sum of that amount, with extract superseded for six months.
In the course of delivering the opinion of the Second Division Lord Dunpark said:
‘It is certainly not equitable that the husband whose conduct was solely responsible for the breakdown of the marriage should be left with a house worth £42,000, while the wife’s contribution to the organisation of the home and the care of the children for a period of 12 years is only marked by a capital award of £500 … We do not consider that the Lord Ordinary can be faulted in deciding that it was inappropriate to supersede extract for what would have been more than six years … There are too many imponderables in superseding extract for a period of six years, and the Lord Ordinary was entitled to conclude that superseding extract for so long a period was not appropriate.’
The principle to be applied in considering whether the decision of a Lord Ordinary on a financial claim arising on divorce is open to successful challenge was thus stated by Lord Guthrie in Gray v Gray 1968 SC 185 at 193:
‘The Inner House would be entitled to interfere with the amount of his award if he had misdirected himself in law, or had failed to take into account a relevant and material factor, or had reached a result which was manifestly inequitable.’
Under the legislation relating to financial provision for spouses and children on divorce which was in force at the time of the proof in this case, namely s 5 of the Divorce (Scotland) Act 1976, a decision about payment of a capital sum had to be made finally on decree of divorce being granted. It was not open to a spouse to return to the court later and seek revision of the decision in the light of a change of circumstances. In that situation it was, in my opinion, entirely appropriate in making the decision to take into account future changes of circumstances which were foreseeable. In the present case it was foreseeable that in the ordinary course of events the three children of the marriage would eventually become self-supporting or marry and would leave home. It is true that this result, although likely to happen in the ordinary course of events, might be frustrated by circumstances not foreseeable. But in considering what is the equitable order to make, it is those changes of circumstances which are likely, not those which are merely speculative, which are proper to be taken into account, or at least which are deserving of being given greater weight. It is not correct to be distracted from arriving at a just and equitable result on the ground of ‘imponderables’, which simply means uncertain and speculative future events.
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It appears that both the Lord Ordinary and the Second Division took the view that in general it would never be appropriate to award a substantial capital sum and postpone extract of the decree for so long as six years. In my opinion that view involves placing an unwarranted fetter on the discretion of the court in the exercise of its function of arriving at an equitable result, and amounts to a misdirection in law. Lord Dunpark described the outcome as regards payment of a capital sum to the wife in this case as ‘certainly not equitable’ which would appear to mean much the same as ‘manifestly inequitable’, the words used by Lord Guthrie in Gray v Gray. He went on to suggest that the provisions of s 5 of the 1976 Act necessarily led to inequity in a considerable number of cases, a situation which had been alleviated by the wider provisions contained in s 8 of the Family Law (Scotland) Act 1985. The latter provisions have indeed introduced an enhanced and welcome degree of flexibility to the powers of the court to do justice in property matters arising on divorce. In so far, however, as it was open to the court to use its available powers to enable the provisions of the 1976 Act to operate as equitably as possible, it was surely its duty to do so. In certain cases the award of a substantial sum with supersession of extract for a lengthy period may have been capable of achieving that result. Crooks v Crooks 1986 SLT 500 was such a case and the present, in my opinion, is another.
My Lords, I would allow the appeal on the ground that both the Lord Ordinary and the Second Division misdirected themselves in law by placing an unwarranted fetter on their discretion so as to disable themselves from arriving at an equitable result, and so arrived at a manifestly inequitable one. It is for consideration whether the appropriate course in the circumstances is to remit the case back to the Court of Session to assess the substantial capital sum which should properly be awarded to the wife, subject to extract being superseded, or whether your Lordships should undertake that exercise. I am of opinion that considering that over three years have passed since the decision of the Lord Ordinary and in the interest of saving further expense the right course is for this House to assess the capital sum payable to the wife by the husband at £15,000, extract of the decree therefor being superseded until 15 December 1991, the sixteenth birthday of the youngest child.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given by my noble and learned friend Lord Keith, I would allow the appeal and make the order which he proposes.
LORD TEMPLEMAN. My Lords, for the reasons given by my noble and learned friend Lord Keith, I would allow the appeal and make the order which he proposes.
LORD OLIVER OF AYLMERTON. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Keith. I agree that this appeal should be allowed for the reasons which he has given. I also agree with the order which he has proposed.
LORD GOFF OF CHIEVELEY. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Keith and, for the reasons he gives, I would allow the appeal and make the order which he proposes.
Appeal allowed.
Solicitors: Baileys Shaw & Gillett, agents for John G Gray & Co, Edinburgh agents for Robertson & Ross, Paisley (for the wife); Gasters, agents for Pairman Miller & Murray WS, Edinburgh, agents for Armstrong & Co, Glasgow (for the husband).
Mary Rose Plummer Barrister.
Gomba Holdings UK Ltd and others v Minories Finance Ltd and others
[1989] 1 All ER 261
Categories: COMPANY; Insolvency
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): FOX, STOCKER AND BUTLER-SLOSS LJJ
Hearing Date(s): 12, 13, 29 JULY 1988
Company – Receiver – Appointment by debenture holder – Document created by receiver during receivership – Termination of receivership – Mortgagor companies seeking delivery up of documents relating to companies’ affairs created for or on behalf of receivers – Mortgagor companies asserting ownership of documents – Whether fact that documents were created for or on behalf of receivers sufficient to confer ownership of the documents on the companies.
Two partners in a firm of accountants were appointed by the debenture holder to be receivers and managers of a group of companies which included the plaintiff companies. Following the discharge of the receiverships the plaintiff companies obtained an order requiring the receivers to deliver up all documents relating to the plaintiff companies’ affairs. In pursuance of that order the receivers delivered up a number of files of documents belonging to the plaintiff companies but refused to deliver up various categories of documents comprising, inter alia, documents created by the receivers to advise and inform the debenture holder on the conduct of the receiverships and the draft accounts and working papers which had been prepared as part of the final audit of the plaintiff companies’ books. The receivers claimed that such documents, although they related to the plaintiff companies’ affairs, did not belong to the plaintiff companies. The plaintiff companies’ subsequent motion for the delivery up of the remaining documents was based on a claim to ownership, namely that during the receivership the receivers were the agents of the plaintiff companies and that, as between principal and agent, all documents concerning the principal’s affairs which had been prepared or received by the agent belonged to the principal. The judge dismissed the motion and the plaintiff companies appealed.
Held – The ownership of documents in the tripartite situation of a receivership of a company depended on whether the documents were brought into being in discharge of the receiver’s duties to the mortgagor or the debenture holder or neither. The receiver had a duty to advise and inform the debenture holder regarding the conduct of the receivership and, consequently, documents created for that purpose, such as those in dispute, could not be the property of the company even though they could be said to relate to the company’s affairs. The fact that the documents were created for or on behalf of the receiver who was, technically, the agent of the company was not sufficient to confer ownership of the documents on the company. Accordingly, the judge’s decision rejecting the plaintiffs companies’ claim to ownership of the documents in dispute was correct and the appeal would therefore be dismissed (see p 263 b to d e to p 264 b e j, p 265 b c e to g and p 266 b c e, post).
Chantrey Martin & Co v Martin [1953] 2 All ER 691 applied.
Notes
For an order against a receiver to give discovery of documents belonging to a company, see 7(2) Halsbury’s Laws (4th edn reissue) para 1166, and for a case on the subject, see 10 Digest (Reissue) 887, 5143.
Cases referred to in judgments
Chantrey Martin & Co v Martin [1953] 2 All ER 691, [1953] 2 QB 286, [1953] 3 WLR 459, CA.
Page 262 of [1989] 1 All ER 261
Magadi Soda Co Ltd, Re (1925) 41 TLR 297.
North and South Trust Co v Berkeley [1971] 1 All ER 980, [1971] 1 WLR 470.
Cases also cited
Gomba Holdings UK Ltd v Homan [1986] 3 All ER 94, [1986] 1 WLR 1301.
Leicestershire CC v Michael Faraday & Partners Ltd [1941] 2 All ER 483, [1941] 2 KB 205, CA.
Appeal
The plaintiffs, Gomba Holdings UK Ltd and seven other companies belonging to the Gomba group of companies, appealed against the decision of Hoffmann J ([1988] BCLC 60) made on 9 October 1987 dismissing the plaintiffs’ motion for delivery up of various categories of documents relating to the plaintiffs’ affairs which had been created by or on behalf of the second and third defendants, Andrew Mark Homan and Colin Graham Bird, who were accountants and partners in the firm of Messrs Price Waterhouse and had been appointed to be receivers and managers of the Gomba group by its debenture holder, the first defendants, Minories Finance Ltd, on the ground that the documents did not belong to the plaintiffs. The facts are set out in the judgment of Fox LJ.
T L G Cullen QC and Anthony Trace for the plaintiffs;.
Robin Potts QC and Richard Adkins for the defendants.
Cur adv vult
29 July 1988. The following judgments were delivered.
FOX LJ. This is an appeal by the plaintiffs from a decision of Hoffmann J on a motion for the delivery up by the defendants of certain documents (see [1988] BCLC 60).
In 1985 the second and third defendants, Mr Homan and Mr Bird, who were accountants and partners in the firm of Messrs Price Waterhouse, were appointed by the first defendants, Minories Finance Ltd (MFL), as debenture holder to be receivers and managers of certain companies known as the Gomba group (the companies) and which included the plaintiffs. The receiverships were discharged about the end of 1986 or early 1987.
By an order of 13 April 1987 the receivers were ordered by Hoffmann J to deliver up to the plaintiffs or their solicitors within two months—
‘all other documents of title books records accounts and other documentation of whatsoever description belonging to the plaintiffs and all other companies within the group of companies of which the plaintiffs form part in the possession of [the receivers] … ’
In pursuance of that order the receivers delivered up some 268 files of documents belonging to the companies. At the same time, Price Waterhouse on behalf of the receivers, by a letter of 12 June 1987 to the plaintiffs’ solicitors, set forth various categories of documents relating to the affairs of the companies which came into existence or were received by or on behalf of the receivers during the receivership but which the receivers declined to deliver up on the grounds that such documents were not the property of the companies. By the present motion, the plaintiffs asserted their ownership of these documents or some of them. Hoffmann J dismissed the motion and the plaintiffs now appeal.
The plaintiffs’ case is put forward on the basis of title: they claim ownership of the documents. Thus we are not concerned with any issue as to relevance (this is not a claim for discovery). And we are not concerned with the ownership of information.
Page 263 of [1989] 1 All ER 261
The basis of the claim to ownership is that the receivers were, during the receivership, the agents of the companies and were paid by the companies. It is said that, as between principal and agent, all documents concerning the principal’s affairs which have been prepared or received by the agent belong to the principal and have to be delivered up on the termination of the agency.
In general terms that is a correct statement of principle but it cannot be applied mechanically to the somewhat complex position of a receivership. The agency of a receiver is not an ordinary agency. It is primarily a device to protect the mortgagee or debenture holder. Thus, the receiver acts as agent for the mortgagor in that he has power to affect the mortgagor’s position by acts which, though done for the benefit of the debenture holder, are treated as if they were the acts of the mortgagor. The relationship set up by the debenture, and the appointment of the receiver, however, is not simply between the mortgagor and the receiver. It is tripartite and involves the mortgagor, the receiver and the debenture holder. The receiver is appointed by the debenture holder, on the happening of specified events, and becomes the mortgagor’s agent whether the mortgagor likes it or not. And, as a matter of contract between the mortgagor and the debenture holder, the mortgagor will have to pay the receiver’s fees. Further, the mortgagor cannot dismiss the receiver since that power is reserved to the debenture holder as another of the contractual terms of the loan. It is to be noted also that the mortgagor cannot instruct the receiver how to act in the conduct of the receivership.
All this is far removed from the ordinary principal and agent situation so far as the mortgagor and the receiver are concerned. Whilst the receiver is the agent of the mortgagor he is the appointee of the debenture holder and, in practical terms, has a close association with him. Moreover, he owes fiduciary duties to the debenture holder who has a right, as against the receiver, to be put in possession of all the information concerning the receivership available to the receiver: see Re Magadi Soda Co Ltd (1925) 41 TLR 297.
The result is that the receiver, in the course of the receivership, performs duties on behalf of the debenture holder as well as the mortgagor. And these duties may relate closely to the affairs of the entity which is the subject of the receivership. It is, therefore, not satisfactory to approach the problem of the ownership of documents which come into existence in the course of the receivership on the basis that ownership depends on whether the documents relate to the affairs of (in this case) the companies.
I agree with Hoffmann J that the ownership of the documents in the tripartite situation of a receivership depends on whether the documents were brought into being in discharge of the receiver’s duties to the mortgagor or to the debenture holder or neither. The fact that a document relates to the mortgagor’s affairs cannot be determinative. All sorts of documents may relate to the mortgagor’s affairs but to which the mortgagor cannot possibly have any proprietary claim.
It is said that the judge’s approach is unworkable because the receivers owed a duty both to MFL and the
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companies. No doubt they did owe duties to both, but they were quite separate duties. The existence of the two duties does not entitle the court to ignore the fact that the ownership of documents created pursuant to one cannot determine the ownership of documents created pursuant to the other. It is also said that the receivers have a duty to maintain the records of the companies. But that does not help one to decide what are the records of the companies, ie whether a document belongs to the companies or someone else.
The receivers in the present case plainly had a duty to manage the affairs of the companies. All documents which were created or received in pursuance of that duty must be the property of the companies. That would include, for example, the ordinary correspondence sent and received by the companies in the conduct of their affairs.
On the other hand (and this is the second group), the receivers had to advise and inform the debenture holders regarding the conduct of the receivership. Documents created for that purpose, while they can certainly be said to relate to the affairs of the companies, cannot be the property of the companies. They were not brought into being for the purpose of the companies’ business or affairs and the fact that they were created by or on behalf of persons who are, technically, the agents of the companies cannot be sufficient to create ownership in the companies.
Thirdly, there are documents prepared by, or on behalf of, the receivers not in pursuance of any duty to prepare them but simply to enable the receivers to prepare such documents or perform such duties as they were required to prepare or perform for the purposes of their professional duties to the debenture holders or the companies. Such papers are, I think, the property of the receivers. Thus, in Chantrey Martin & Co v Martin [1953] 2 All ER 691, [1953] 2 QB 286 it was held by the Court of Appeal that working accounts and the papers which are brought into existence by chartered accountants in the preparation of a final audit of a client’s books are the property of the accountants.
Against that background I come to the documents which have been in dispute and which are set out in Price Waterhouse’s letter of 12 June 1987. They are as follows:
‘List A
(i) advice to [MFL] by Price Waterhouse prior to the appointment of the receivers.’
As I understand it, there is no longer any issue as to these. In any event I see no basis for any claim by the companies to ownership of documents created for the purpose of enabling professional advisers of MFL to give such advice.
‘(ii) formal reports to MFL by the Receivers, notes of any meetings whose purpose was to report on the current situation with regard to the receivership and letters written by the Receivers to MFL updating them on the current situation with regard to the receivership.’
All these are to a greater or lesser extent concerned with the affairs of the companies. But that, as I have indicated, does not advance the companies’ claims to ownership.
The test cannot be whether a document relates to the companies’ affairs (as the judge said, this is not a claim for discovery) but must depend on the capacity in which the receivers were acting when they brought the documents into existence. Thus, in North and South Trust Co v Berkeley [1971] 1 All ER 980, [1971] 1 WLR 470 a Lloyds broker also acted as agent for the underwriters in instructing an assessor to deal with a claim by the assured. It was held that he was not obliged to disclose the report to his principal. Donaldson J said ([1971] 1 All ER 980 at 993, [1971] 1 WLR 470 at 486):
‘However, I think that the fallacy underlying the plaintiffs’ claim may be even simpler and more basic. Lamberts [the broker] in acting for the defendant, were undertaking duties which inhibited the proper performance of their duties towards the plaintiffs, but insofar as they acted for the defendant they were not acting in the discharge of any duty towards the plaintiffs. Lamberts wore the plaintiffs’ hat and the underwriter’s hat side by side, and in consequence, as was only to be expected, neither hat fitted properly. The plaintiffs had a legitimate complaint on this account and can claim damages if and to the extent that the partial dislodgment of their hat has caused them loss or damage. But what the plaintiffs ask in these proceedings is to be allowed to see what Lamberts were keeping under the underwriter’s hat, and for that there is no warrant.’
Thus, the information in the report directly concerned the affairs of the assured but it did not belong to him because the brokers had, albeit wrongly, received it in the capacity of agents for the underwriters. There is no question of breach of duty in the present case. The only issue is were the documents brought into being in discharge of a duty to the debenture holders or to the companies?
It seems to me that all the documents in this category were prepared in discharge of the receivers’ duties to the debenture holders and are not the property of the companies. I do
Page 265 of [1989] 1 All ER 261
not disregard the fact that the receivers are remunerated by the companies. But I do not think that is any indication of ownership in a case where professional advisers owed duties to two separate persons and are paid by one of those persons in pursuance of a contract entered into with the other of them.
‘(iii) memoranda to the file written by MFL personnel and copied to the receivers.’
The judge, in my view rightly, concluded that those were documents created by MFL for its own purposes (ie as MFL records) and that the receivers were merely sent copies as advisers to MFL. The receivers were not sent them as agents for the companies. The documents are the property of MFL.
‘(iv) any documents relating to advice given by [Price Waterhouse] to MFL in connection with assets of the Plaintiffs charged to MFL.’
These are documents produced by professional advisers to MFL for MFL’s own purposes, ie advice regarding MFL’s security. They do not belong to the companies.
‘(v) documentation belonging to us [the receivers] in our personal capacities, including legal advice … press releases and other partnership documents belonging to Price Waterhouse.’
As I understand it, production of these documents is not now being sought.
‘(vi) documentation relating to our advice to MFL in connection with the several attempts by the plaintiffs to redeem the security.’
Documents prepared for the purpose of giving advice to MFL relating to their own property (ie the security) cannot, in my view, be the property of the companies. They were prepared solely by reference to a relationship between the receivers and MFL in which the receivers were acting as agents for, or personal advisers to, MFL.
‘(vii) copy court documentation (ie pleadings, affidavits etc) relating to the various actions in the High Court by the Plaintiffs against the receivers and MFL, including records of information received relating directly to the challenge to our appointment and of conversations with our solicitors in connection therewith.’
These documents were prepared not by the receivers as receivers but simply as agents for MFL. The companies, accordingly, have no property in them.
‘(viii) notes with an exclusively internal circulation prepared by the receivers or their staff relating to the receivership, and other working papers and drafts.’
On the evidence filed in these proceedings it is clear that the reference to internal circulation is intended to indicate documents prepared for the receivers for their own purposes to enable them to discharge their professional obligations to MFL and the companies. On that basis, they must belong to the receivers.
‘(ix) hybrid documents, to the extent that they arise primarily in connection with one or more of the excluded categories listed under (i) to (viii) above. In respect of hybrid documents primarily of a disclosable nature photocopies are supplied with other sections blanked out.’
There is no longer an issue as to these.
The List A documents are in the possession of the receivers. There is also List B, of documents which is in the possession of Messrs Freshfields, the receivers’ solicitors. The List B documents are, strictly, not within the scope of the order of 13 April 1987 since they are not documents in the possession of the receivers. But putting that aside, the position is as follows. The dispute has related to items (iii), (iv), (v), (vii) and (viii) in Price Waterhouse’s letter of 12 June 1987. I deal with these in turn.
Page 266 of [1989] 1 All ER 261
‘(iii) letters and documents from third parties which were also copied to the receivers.’
These have now been given up.
‘(iv) working papers and working drafts: notes with an exclusively internal circulation.’
These are not the property of the companies. They are working papers within the principle of the Chantrey Martin case [1953] 2 All ER 691, [1953] 2 QB 286 and belong to Freshfields.
‘(v) attendances.’
These are attendance notes made by Freshfields for their own assistance in advising the receivers and are really working papers. They therefore belong to Freshfields, and their content is irrelevant.
‘(vii) documents relating to advice given in connection with points (i) to (x) of List A above.’
‘(viii) hybrid documents, to the extent that they arise primarily in connection with matters other than the role as solicitors to the receivers. In respect of hybrid documents which arise primarily from this role, photocopies are supplied with other sections blanked out.’
There is no longer an issue as to these.
The result, in my view, is that the decision of Hoffmann J was correct and this appeal fails.
STOCKER LJ. I agree.
BUTLER-SLOSS LJ. I also agree.
Appeal dismissed. Leave to appeal to the House of Lords refused.
Solicitors: Holman Fenwick & Willan (for the plaintiffs); Freshfields (for the defendants).
Frances Rustin Barrister.
R v Tandy
[1989] 1 All ER 267
Categories: CRIMINAL; Criminal Law
Court: COURT OF APPEAL, CRIMINAL DIVISION
Lord(s): WATKINS LJ, ROSE AND ROCH JJ
Hearing Date(s): 2 NOVEMBER, 21 DECEMBER 1987
Criminal law – Murder – Diminished responsibility – Abnormality of mind induced by disease – Abnormality of mind induced by alcohol – Alcoholic’s first drink of day not involuntary – Judge’s direction to jury ruling out defence of diminished responsibility – Whether direction wrongly removing from jury issue of whether alcoholic’s craving for drink had in itself produced abnormality of mind – Whether judge misdirecting jury – Homicide Act 1957, s 2(1).
The appellant was an alcoholic who strangled her 11-year-old daughter after drinking almost a whole bottle of vodka rather than her customary drink of vermouth or barley wine. She was subsequently charged with the daughter’s murder and at her trial sought to establish the defence of diminished responsibility under s 2(1)a of the Homicide Act 1957. The judged directed the jury that the issue they had to decide was whether, at the moment of strangling her daughter, the appellant was suffering from an abnormality of mind in the form of grossly impaired judgment and emotional responses as a direct result of her condition of alcoholism, over which she had no immediate control, or whether, as the Crown contended, the appellant’s abnormal state of mind at that time was due merely to the fact that she was drunk on vodka, having chosen to drink vodka as her first drink of the day in preference to her customary drink, in which case it could not be said that her resultant abnormality of mind was involuntarily induced by alcoholism. The appellant was convicted. She appealed on the ground, inter alia, that the judge’s direction had wrongly removed from the jury any consideration of the issue whether she had proved that she had such a craving for drink as in itself to produce an abnormality of mind within s 2(1).
Held – For a craving for drink, in itself, to produce an ‘abnormality of mind’ induced by the disease of alcoholism, within s 2(1) of the 1957 Act, the alcoholism had to have reached such a level that the accused’s brain was damaged so that there was gross impairment of his judgment and emotional responses or the craving had to be such as to render the accused’s use of drink involuntary because he was no longer able to resist the impulse to drink. On the other hand, if the accused had simply not resisted an impulse to drink he could not rely on the defence of diminished responsibility. The judge’s direction to the jury was therefore correct in stating that if the appellant’s taking of her first drink of the day was not involuntary then the whole of her drinking on that day was not involuntary, since it clearly explained how great the craving for drink had to be before it could in itself produce an abnormality of mind. Accordingly, since there had been no material misdirection the appeal would be dismissed (see p 272 d to j and p 273 a to d, post).
Notes
For the defence of diminished responsibility to a charge of murder, see 11 Halsbury’s Laws (4th edn) paras 1165–1166, and for cases on the subject, see 15 Digest (Reissue) 1128–1131, 9490–9506.
For the Homicide Act 1957, s 2, see 12 Halsbury’s Statutes (4th edn) 311.
Cases referred to in judgment
R v Byrne [1960] 3 All ER 1, [1960] 2 QB 396, [1960] 3 WLR 440, CCA.
R v Fenton (1975) 61 Cr App R 261, CA.
R v Gittens [1984] 3 All ER 252, [1984] QB 698, [1984] 3 WLR 327, CA.
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Appeal
Linda Mary Tandy appealed with the leave of the single judge against her conviction for murder on 29 January 1987 in the Crown Court at Leeds before Kennedy J and a jury on the ground, inter alia, that the judge’s direction to the jury had wrongly removed from the jury consideration of the defence of diminished responsibility, within s 2(1) of the Homicide Act 1957. The facts are set out in the judgment of the court.
James Stewart QC and Thomas Bayliss, (assigned by the Registrar of Criminal Appeals) for the appellant.
Robert Smith QC and Andrea Addleman for the Crown.
Cur adv vult
21 December 1987. The following judgments were delivered.
WATKINS LJ. The appellant was convicted of the murder of her 11-year-old daughter, Amanda, in the Crown Court at Leeds on 29 January 1987 in a trial before Kennedy J and sentenced to life imprisonment.
The appellant, to whom the single judge gave leave to appeal against conviction, did not at the trial dispute that she had caused Amanda’s death on Wednesday, 5 March 1986 in a bedroom at the home of the appellant and her second husband, Martin Tandy. Amanda and her brother were the children of the first marriage. Death was caused by strangulation with a scarf; the act of strangulation took place at approximately 8 pm. Death followed at 9.30 the following morning after Amanda had been admitted to hospital. She did not at any time recover consciousness.
The evidence at the trial indicated that the relationship between the appellant and her daughter was a good one: that they were like sisters.
On 5 March the appellant telephoned the police at 5.45 pm, because Amanda, according to her, had not returned home at the expected time. She searched for her, she said, but could not find her. That call was tape recorded by the police, to whom the appellant sounded as though she had been drinking.
At 6.45 pm a woman police constable went to the appellant’s home. By this time Amanda had returned, had gone to her bedroom and was refusing to leave it. The constable saw Amanda there. She maintained that the appellant had known where she was. The constable reported that the appellant looked and smelt as though she had been drinking; she was dirty, unkempt, nervous and shaking.
After the constable had left the house at about 7.50 pm, the appellant went to speak to Amanda in her bedroom. Martin Tandy was still in the house at that time. Whilst the appellant was speaking to Amanda he left. Amanda told her mother that she wanted to go and live with her grandmother. When asked why, she said that she had been sexually interfered with but she would not name the person responsible. The appellant asked Amanda whether it was her stepfather who had been interfering with her. The appellant’s evidence as to that was:
‘I said to the child on the bed, is it that bastard just gone out? And then after a long while there was a scream and that was it. I thought that she meant that Martin had been at her. I just saw her there in the bed blue and lifeless. That was when I went to the neighbours. I accept that I must have been responsible, but I have no recollection of having killed her. I don’t know where the scarf came from or anything. I don’t remember what I said to the police or Mrs Hemmingway. I remember the ambulance going and I remember going to the police station and being arrested.’
In fact, having strangled her daughter, the appellant went to a neighbour and asked
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her to go to the appellant’s house, because she, the appellant, thought Amanda was dead. Later the appellant claimed that Amanda had tried to kill herself.
A post-mortem performed on the Thursday afternoon showed that Amanda’s death had been caused by the application of a ligature for tens of seconds. It also revealed that she had been sexually abused over a period of weeks or months in that there was dilation of the anus consistent only with a number of acts of intercourse per anum; in the pathologist’s view, more than 12 such acts. In addition Amanda’s pubic hairs had been shaved.
Evidence at the trial established that it was not the appellant who had interfered with Amanda. The appellant claimed (there was no evidence to contradict this) that until the Wednesday evening she had had no idea that her daughter was being sexually abused.
At the trial the appellant’s intention at the time of the killing was put in issue. No complaint has been raised in regard to the trial judge’s directions to the jury on the requisite intent for murder and no ground of appeal arises out of this issue.
The second issue raised at the trial was the defence of diminished responsibility under s 2(1) of the Homicide Act 1957.
It was raised in this way. The appellant was at all material times an alcoholic. According to her first husband she had been in that condition by 1980. Her own evidence was that she had been drinking heavily for a number of years, her drinking being due to loneliness and two unhappy marriages. She told the doctors who examined her, and the jury, that she normally drank either barley wine or Cinzano, but that on Monday, 3 March, she had purchased a bottle of vodka. She had not opened this until the morning of the Wednesday, but having opened and started the bottle of vodka, she had consumed 90% of it during the course of that day. She had had her last drink at about 6.30 pm. She had not previously drunk vodka. Vodka contains more alcohol than Cinzano which the appellant said she had drunk on Monday, 3 March. She could not recall whether or not she had had a drink on the Tuesday.
Forensic evidence showed that her blood-alcohol level at midnight on Wednesday, 5 March, when a sample of blood was taken from her by Dr Stoker, was 240 mg of alcohol per 100 ml of blood. The opinion of Dr Wood, a consultant forensic psychiatrist called by the defence, was that at the time of the act of strangulation the level of alcohol in the appellant’s blood would have been not less than 330 mg of alcohol per 100 ml of blood and could have been anything up to 400 mg of alcohol per 100 ml of blood.
Dr Lawson, who gave evidence for the Crown, said that in his view the appellant’s blood at the time of the strangulation would have contained approximately 300 mg of alcohol per 100 ml of blood. The medical evidence indicated that this level of alcohol would be a lethal intake of intoxicants for a normal person, but that alcoholics, because of their persistent abuse of alcohol, become able to tolerate such levels of alcohol in their bloodstreams and to dissipate alcohol from their bloodstreams more quickly than non-alcoholics are able to. Indeed in this case the evidence of Dr Stoker, who examined the appellant when at midnight he obtained the sample of blood from her, was that her movements were co-ordinated, her speech was all right and the appellant displayed no clinical evidence of intoxication. Dr Stoker had observed her walking up two flights of stairs.
There were three principal areas of conflict between the medical witnesses called at the trial on behalf of the appellant and the medical witness called by the Crown. The first was whether alcoholism is or is not a disease. Dr Wood and Dr Milne (a consultant psychiatrist) both expressed the view that alcohol dependence syndrome, or alcoholism in the severity manifested in the appellant’s case, constituted a disease. Dr Lawson, who accepted that the appellant was an alcoholic, expressed the opinion that alcoholism, even chronic alcoholism, is not a disease.
In summing up the judge told the jury with regard to that:
‘… it is totally unnecessary for you to involve yourselves in that medical
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controversy about labelling. You have to apply the words of the Act of Parliament in a commonsense way and those words are reflected in the wording on that sheet before you. [Here the judge was referring to a document headed ‘Questions for the jury’ which he had prepared and provided to the jury.] If you find that a woman is suffering from an abnormality of mind in the form of grossly impaired judgment and emotional responses and if you find that she is so suffering as a direct result of a condition over which she had, and I emphasise the words, no immediate control, then you can say that the second element in this defence is proved because her abnormality of mind is induced by disease or injury.’
The judge was there telling the jury that the issue they had to decide was not whether alcoholism is or is not a disease, but whether the appellant was suffering from an abnormality of mind, in the form of grossly impaired judgment and emotional responses, as a direct result of her alcoholism, or whether, as the Crown on the evidence of Dr Lawson contended, her abnormal state of mind at the moment of the act of strangulation was due to the fact that she was drunk on vodka.
The second area of conflict between the doctors was whether the appellant’s drinking on the Wednesday was voluntary or involuntary. Dr Wood said of this that he thought it would have been very difficult for her to resist the temptation of drink on that day. She was under some pressure to continue drinking to stave off the shakiness and other symptoms of withdrawal affecting her. He also said he would argue that drinking to that extent (that is to say most of the bottle of vodka) was an inherent part of the disease. He considered that compulsion was certainly partly causative of her drinking as she did on that day in that the choice to do so was not a free choice. Compulsion stemmed from her being an alcoholic and her experience that to deny herself drink would lead her to being severely uncomfortable, if not ill. When asked if the appellant, in his view, at that time had control over her drinking habits, he replied, ‘No, none whatsoever.' Dr Milne said that he believed the appellant drank involuntarily, because she was an alcoholic. Dr Lawson agreed that a person who is an alcoholic has a craving for alcohol and a compulsion to drink. His view was that the appellant had control over whether she had the first drink of the day, but once she had had the first drink she was no longer in control.
The third area of conflict in the medical evidence was on the question whether, if the appellant had not taken drink that day, she would have strangled her daughter.
Dr Lawson put his view in one short answer: ‘I could not see her killing the child if she were sober.' Dr Milne, when asked whether he went as far as to say that if the appellant had not consumed any drink that day she would have still committed this offence, answered, ‘No.' Dr Wood agreed that an alcoholic may do something which he or she would not otherwise do but for the intake of alcohol. When asked whether, if the appellant had not consumed any drink that day, she would have still done what she did to her daughter, he said: ‘I do not know. I think had she not consumed drink on that day she would have been quite seriously ill in another fashion by 8 o’clock that evening.' He amplified that answer by saying that the appellant’s problem on 5 March was serious alcoholism and until she was withdrawn from alcohol, whether or not she was intoxicated, she would have suffered from seriously disturbed judgment and emotional control. He thought that her judgment and emotional control would have continued to be severely disturbed on the Wednesday, even had she not drunk the vodka which she did drink that day.
The ground of appeal is that there was a material misdirection of the jury in regard to the defence of diminished responsibility. The relevant passages in the summing up are where the judge said:
‘The choice [of the appellant whether to drink or not to drink on Wednesday, 5 March 1986] may not have been easy but … if it were there at all it is fatal to this defence, because the law simply will not allow a drug user, whether the drug be
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alcohol or any other, to shelter behind the toxic effects of the drug which he or she need not have used.’
And where he stated earlier:
‘If she had taken no drink on 5 March 1986, or if you were satisfied that Dr Wood is right in saying that her judgment and emotional response would have been grossly impaired even if no drink had been taken, then the answer would be easy, but clearly she did take drink on 5 March and if she did that as a matter of choice, she cannot say in law or in common sense that the abnormality of mind which resulted was induced by disease.’
Counsel for the appellant submits that these are misdirections, because: (1) the medical evidence had been unanimous that there might be compulsion to drink at least after the first drink of the day; that it was the cumulative effect of the consumption of 90% of the bottle of vodka which caused her to be in the state of intoxication she was in at the time of the killing. By his directions the judge removed the question of compulsion after the taking of the first drink from the jury’s consideration; (2) the directions removed from the jury’s consideration Dr Wood’s evidence that the alcoholism alone produced an abnormal state of mind which substantially impaired her mental responsibility for her acts; (3) the directions removed from the jury the issue which this court in R v Fenton (1975) 61 Cr App R 261 at 263 recognised could arise when an accused person proves such a craving for drink as to produce in itself an abnormality of mind. Lord Widgery CJ’s actual words were:
‘… cases may arise hereafter where the accused proves such a craving for drink or drugs as to produce in itself an abnormality of mind; but that is not proved in this case. The appellant did not give evidence and we do not see how self-induced intoxication can of itself produce an abnormality of mind due to inherent causes.’
The jury, he went on to say, had been rightly told to ignore the effect of alcohol.
Section 2(1) of the Homicide Act 1957 provides:
‘Where a person kills … another, he shall not be convicted of murder if he was suffering from such abnormality of mind (whether arising from a condition of arrested or retarded development of mind or any inherent causes or induced by disease or injury) as substantially impaired his mental responsibility for his acts and omissions in doing … the killing.’
R v Byrne [1960] 3 All ER 1 at 4, [1960] 2 QB 396 at 403 established that the phrase ‘abnormality of mind’ was wide enough to cover the mind’s activities in all its aspects, including the ability to exercise will power to control physical acts in accordance with rational judgment. But ‘abnormality of mind’ means a state of mind so different from that of ordinary human beings that a reasonable man would term it abnormal.
The defence of diminished responsibility was derived from the law of Scotland, in which one of the colloquial names for the defence was ‘partial insanity’. Normal human beings frequently drink to excess and when drunk do not suffer from abnormality of mind, within the meaning of that phrase in s 2(1) of the 1957 Act.
Whether an accused person was at the time of the act which results in the victim’s death suffering from any abnormality of mind is a question for the jury; and, as this court stated in R v Byrne, although medical evidence is important on this question, the jury are not bound to accept medical evidence if there is other material before them from which in their judgment a different conclusion may be drawn.
The Court of Appeal in R v Gittens [1984] 3 All ER 252, [1984] QB 698 said that it was a misdirection to invite the jury to decide whether it was inherent causes on the one hand or drink or pills on the other hand which were the main factor in causing the
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appellant in that case to act as he did. The correct direction in that case was to tell the jury that they had to decide whether the abnormality arising from the inherent causes substantially impaired the appellant’s responsibility for his actions. Lord Lane CJ said ([1984] 3 All ER 252 at 256, [1984] QB 698 at 703):
‘Where alcohol or drugs are factors to be considered … the best approach is that … approved by this court in R v Fenton (1975) 61 Cr App R 261. The jury should be directed to disregard what, in their view, the effect of the alcohol or drugs on the defendant was, since abnormality of mind induced by alcohol or drugs is not, generally speaking, due to inherent causes … Then the jury should consider whether the combined effect of the other matters which do fall within the section amounted to such abnormality of mind as substantially impaired the defendant’s mental responsibility … ’
In his summing up and in the document headed ‘Questions for the jury’, the judge set out the three matters which the defence had to establish on the balance of probability for the defence of diminished responsibility to succeed. No criticism of that part of the summing up or that part of the ‘Questions for the jury’ has been made nor could it have been.
So in this case it was for the appellant to show (1) that she was suffering from an abnormality of mind at the time of the act of strangulation, (2) that that abnormality of mind was induced by disease, namely the disease of alcoholism, and (3) that the abnormality of mind induced by the disease of alcoholism was such as substantially impaired her mental responsibility for her act of strangling her daughter.
The principles involved in seeking answers to these questions are, in our view, as follows. The appellant would not establish the second element of the defence unless the evidence showed that the abnormality of mind at the time of the killing was due to the fact that she was a chronic alcoholic. If the alcoholism had reached the level at which her brain had been injured by the repeated insult from intoxicants so that there was gross impairment of her judgment and emotional responses, then the defence of diminished responsibility was available to her, provided that she satisfied the jury that the third element of the defence existed. Further, if the appellant were able to establish that the alcoholism had reached the level where although the brain had not been damaged to the extent just stated, the appellant’s drinking had become involuntary, that is to say she was no longer able to resist the impulse to drink, then the defence of diminished responsibility would be available to her, subject to her establishing the first and third elements, because, if her drinking was involuntary, then her abnormality of mind at the time of the act of strangulation was induced by her condition of alcoholism.
On the other hand, if the appellant had simply not resisted an impulse to drink and it was the drink taken on the Wednesday which brought about the impairment of judgment and emotional response, then the defence of diminished responsibility was not available to the defendant.
In our judgment the direction which the judge gave the jury accurately reflected these principles. There was evidence on which the jury, directed as they were, could reach their verdict. The appellant had chosen to drink vodka on the Wednesday rather than her customary drink of Cinzano. Her evidence was that she might not have had a drink at all on the Tuesday. She certainly did not tell the jury that she must have taken drink on the Tuesday or Wednesday because she could not help herself. She had been able to stop drinking at 6.30 pm on the Wednesday evening although her supply of vodka was not exhausted. Thus her own evidence indicated that she was able to exercise some control even after she had taken the first drink, contrary to the view of the doctors. There was the evidence of Dr Lawson that the appellant would have had the ability on that Wednesday to abstain from taking the first drink of the day.
Counsel for the Crown pointed out in his submissions that the abnormality of mind
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described by Dr Wood and Dr Milne was of grossly impaired judgment and emotional responses and it did not include an irresistible craving for alcohol.
The three matters on which the appellant relies in the perfected grounds of appeal for saying that there was a misdirection can be dealt with shortly. As to the first, in our judgment the judge was correct in telling the jury that, if the taking of the first drink was not involuntary, then the whole of the drinking on the Wednesday was not involuntary. Further, as we have pointed out, the appellant’s own evidence indicated that she still had control over her drinking on that Wednesday after she had taken the first drink.
As to the second, the jury were told correctly that the abnormality of mind with which they were concerned was the abnormality of mind at the time of the act of strangulation and as a matter of fact by that time on that Wednesday the appellant had drunk 90% of a bottle of vodka.
On the third point, we conclude that for a craving for drinks or drugs in itself to produce an abnormality of mind within the meaning of s 2(1) of the 1957 Act the craving must be such as to render the accused’s use of drink or drugs involuntary. Therefore in our judgment the judge correctly defined how great the craving for drink had to be before it could in itself produce an abnormality of mind. In any event, it was not the evidence of the doctors called on behalf of the appellant that her abnormality of mind included, let alone consisted solely, of a craving for alcohol.
For those reasons we find that there was no material misdirection of the jury and we dismiss this appeal.
Appeal dismissed.
Solicitors: Crown Prosecution Service, Leeds.
N P Metcalfe Esq Barrister.
Van Oppen v Clerk to the Bedford Charity Trustees
[1989] 1 All ER 273
Categories: TORTS; Negligence
Court: QUEEN’S BENCH DIVISION
Lord(s): BOREHAM J
Hearing Date(s): 14, 15, 16, 17, 18, 21, 22, 23, 24, 25, 28, 29, 30 MARCH, 12, 13, 14, 15, 18, 19, 20, 21, 22, 25, 26, 27, 28 APRIL, 22 JULY 1988
Negligence – School – Duty of care – Sport – Injury to pupil – Pupil injured during rugby match at school – Whether school under duty to insure pupils against injuries received while playing sport – Whether school under duty to advise parents to take out personal accident insurance.
The plaintiff was seriously injured in 1980 when he tackled another pupil in a game of rugby at school. In the previous year the school had received a report from the school medical officers’ association recommending that schools take out accident insurance for pupils playing rugby, but at the time of the plaintiff’s accident the school had not decided on what sort of insurance was required and how it was to be obtained. The plaintiff brought an action against the school’s trustees alleging that the school had been negligent in failing (i) to take reasonable care for the plaintiff’s safety on the rubgy field, in that the school had failed to coach or instruct the plaintiff in proper tackling techniques, (ii) to insure the plaintiff against accidental injury and (iii) to advise the plaintiff’s father of the risk of serious injury in rugby, of the need for personal accident insurance for the plaintiff and of the fact that the school had not arranged such insurance. The plaintiff claimed damages for pain, suffering and loss of amenity, loss of earnings and the cost of future assistance.
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Held – The plaintiff’s claim would be dismissed for the following reasons—
(1) On the facts, the school was not negligent in its coaching or teaching of rugby and it was not liable for the plaintiff’s injuries, since they were the result of an accident rather than negligence on anyone’s part.
(2) There was no general duty arising simply from the relationship between a school and its pupils requiring the school to insure its pupils against accidental injury or to protect the pupils’ economic welfare by insuring them, because such a duty would be in excess of the school’s obligations to educate and care for the pupils and would be wider than the duty imposed on a school in its position in loco parentis. Similarly, a school was under no duty to advise a parent of the dangers of rugby football or of the need for personal accident insurance, just as a parent was under no duty to insure if he was advised to do so. Furthermore, the plaintiff’s school had never assumed legal responsibility for advising on the need for insurance or for insuring its pupils, since it did not hold itself out as having the expertise to advise parents on insurance or to deal with insurance itself, and there was no evidence that the plaintiff’s father had relied on the school for such advice (see p 291 c to f, p 292 b to d, p 293 c to p 294 a and p 295 h to p 296 f, post).
Notes
For the duty of care owed by a schoolteacher to the pupils in his charge, see 15 Halsbury’s Laws (4th edn) paras 122, 124, and for cases on the subject, see 19 Digest (Reissue) 526–534, 4010–4052.
Cases referred to in judgment
Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728, [1977] 2 WLR 1024, HL.
Donoghue (or M’Alister) v Stevenson [1932] AC 562, [1932] All ER Rep 1, HL.
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465, [1963] 3 WLR 101, HL.
Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294, [1970] AC 1004, [1970] 2 WLR 1140, HL.
Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201, [1983] 1 AC 520, [1982] 3 WLR 477, HL.
Moorgate Mercantile Co Ltd v Twitchings [1976] 2 All ER 641, [1977] AC 890, [1976] 3 WLR 66, HL.
Mutual Life and Citizens’ Assurance Co Ltd v Evatt [1971] 1 All ER 150, [1971] AC 793, [1971] 2 WLR 23, PC.
Peabody Donation Fund (Governors) v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529, [1985] AC 210, [1984] 3 WLR 953, HL.
Ross v Caunters (a firm) [1979] 3 All ER 580, [1980] Ch 297, [1979] 3 WLR 605.
Seale v Perry [1982] VR 193, Vic Full Ct.
Weller & Co v Foot and Mouth Disease Research Institute [1965] 3 All ER 560, [1966] 1 QB 569, [1965] 3 WLR 1082.
Wilkinson v Coverdale (1793) 1 Esp 75, [1775–1802] All ER Rep 339, 170 ER 284, NP.
Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175, [1987] 3 WLR 776, PC.
Action
By writ and statement of claim served on 13 June 1984 the plaintiff, Simon Richard Van Oppen, claimed against the defendant, the clerk to the trustees of the Bedford Charity, sued in a representative capacity on behalf of the Harpur Trust which was responsible for the administration of Bedford School, damages for a spinal injury sustained by the plaintiff when playing rugby at the school while a pupil there. The plaintiff alleged, inter alia, that the school was negligent in (i) failing to instruct the plaintiff in proper tackling techniques, (ii) failing to ensure that the plaintiff was insured against accidental injury
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and (iii) failing to advise the plaintiff’s father (a) of the need for accident insurance or (b) that the school had not arranged such insurance. The facts are set out in the judgment.
Christopher Wilson-Smith QC and David Westcott for the plaintiff.
Charles Aldous QC and Christopher Symons for the defendant.
Cur adv vult
22 July 1988. The following judgment was delivered.
BOREHAM J. The plaintiff, Simon Van Oppen, claims damages for severe personal injury sustained on the rugby football field at Bedford School on 4 November 1980. He was then aged 16 1/2 years and had been a pupil at the school for nearly three years. The defendant represents the trustees of the Bedford Charity, who were and are responsible for administering and running the school, and to whom I shall refer hereafter as ‘the defendants’.
What happened, in short, was this. The plaintiff was playing in a senior league game at centre three-quarter for Bromham House against Crescent House. Within the last three minutes of the game an opposing three-quarter, William Grant, had the ball and was running for the Bromham try line. The plaintiff launched himself at Grant (whether from an acute angle from the front or an obtuse angle from the side is in dispute) in a flying tackle. Unfortunately his forehead and nose came into contact with Grant’s left hip or thigh, with the result that he sustained injury to the cervical spine, causing an incomplete tetraplega.
Because his injuries and subsequent progress are well documented and because the general and special damages have been agreed subject to liability, it is unnecessary to give more than an outline of the plaintiff’s injuries, his progress and his present condition. At first he was totally paralysed in all four limbs, though there was some appreciation of sensation in his legs. On arrival at hospital he was found to have a severe tetraparesis, though there was some sensation particularly on the right side. X-ray examination disclosed a severe compression fracture of the fifth cervical vertebra. There followed a gradual recovery in the left foot and left leg and then in the right leg and right arm. By Christmas of 1980 there was power and sensation in the bladder, which was emptying automatically. There was moderate power in the muscles of the left arm and the muscles of the left hand were improving; there was near normal power in the left leg.
On 15 January 1981 he was transferred to the National Spinal Injuries Centre at Stoke Mandeville. He continued to improve and was discharged home at the end of May. His progress thereafter is well documented and need not be repeated here.
By the time he appeared at the trial the left hand and arm showed very little weakness, but he had very little function in the right hand and only some power in the right arm. There was generalised weakness of both lower limbs, the right being weaker than the left, with some spasticity. The right foot had virtually no power and was flail. He walked without a stick, but dragged his right leg. He is unable to walk very far and, because of the condition of his right leg, is liable to lose his balance and fall. He experiences severe and uncomfortable spasms, mainly in the right leg, but occasionally spreading to the left. There is pain in the left leg of a burning nature and a different kind of pain in the right foot. This pain is sufficient to keep him awake at night. His bladder function is to a degree impaired, but provided he is strict about his liquid intake during the evening he is not incontinent during the night.
He has, of course, been deprived of his sporting activities on which he was so keen, though he is still able to enjoy sailing, provided he has a crew. Prior to the accident it had been the plaintiff’s hope to join the Royal Navy and to enter Dartmouth. That of course has had to be abandoned. He is now in the second year of a three-year degree course in estate management, his aim being to become a chartered surveyor.
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He has lodgings at Roehampton and a maisonette in Devon. He manages to look after himself, even doing his own cooking. But he finds that the domestic chores take rather longer than they would have done. He also finds it difficult to get about on rough ground doing professional surveys and in scrambling about in roof spaces. He has learnt to write with his left hand. His writing is slower, but, as he said in an answer to a question from me, it is as legible now as it was when he wrote with his right hand. The plaintiff showed not the slightest inclination to exaggerate his disabilities on the contrary, I was left with a clear impression of a young man who was determined to make the best of his physical abilities and to get the best out of life. There is no reason to think that he will not have a successful and satisfying career as a chartered surveyor.
He now alleges that those injuries were caused by the negligence of the school.
In the statement of claim a number of particulars of negligence are alleged, many of which are no longer relied on. The plaintiff’s case before the court can be summarised as follows. The school, which was, or ought to have been, aware of the risk of serious injury to players of rugby football and of the serious risk of injury from unorthodox tackling, particularly from the front, was negligent in: (i) failing to take reasonable care for the plaintiff’s safety on the rugby field by failing to coach or instruct the plaintiff in proper tackling techniques and in particular in the technique of the head-on tackle. The consequence, it is alleged, was that the plaintiff adopted a dangerous technique in tackling William Grant and so was seriously injured; (ii) failing to advise the plaintiff’s father (a) of the inherent risk of serious injury in the game of rugby, (b) of the consequent need for personal accident insurance for the plaintiff, (c) that the school had not arranged such insurance (iii) failing to ensure that the plaintiff was insured against accidental injury at the time of his accident on 4 November 1980.
It is alleged that by reason of such negligence, the plaintiff has suffered damage. The heads of damage, and the sums recoverable under each head if liability is established, have been agreed by counsel as follows. General damages: (a) for pain and suffering and loss of amenity, £38,000; (b) future losses including loss of earnings and handicap on the labour market and cost of future assistance, £58,295. Special damages: £2,330. That is a total of £98,625. In addition it has been agreed that, had the school in November 1980 had the personal accident insurance policy which they had in June 1981, the plaintiff would have been entitled to receive on account of his disability the sum of £55,000.
So far as the court and counsel are aware, the claims under (ii) and (iii) above are entirely nove; their validity turns on interesting questions of law as well as on disputed issues of fact. They provide for a head of compensation which is quite separate from and additional to the claim under (i).
I deal now with the circumstances and cause of the plaintiff’s injury. [His Lordship then described the circumstances in which the plaintiff was injured and continued:]
I am satisfied that the plaintiff made a flying tackle from a wide angle from Grant’s left, that he aimed to get his head behind Grant’s left buttock or thigh and that in so doing he was applying or attempting to apply the correct technique. In the event, the tackle was mistimed, most probably because, once the plaintiff was committed, Grant checked in his stride and so the plaintiff’s head crashed into, instead of passing behind, Grant’s left hip.
It was almost an exact replica of the tackle which produced such disastrous results for an English international, Mr Danny Hearne. It is said that at first the plaintiff blamed no one but himself. I venture to doubt whether it can properly be said that anyone at all was to blame. The plaintiff made a bold bid at speed to stop Grant. His technique was correct. The tackle went wrong because Grant was sufficiently skilful and agile to check his stride at the crucial moment when the plaintiff was already launched. It was no more and no less than a tragic accident.
Strictly, therefore, it may be thought unnecessary for me to consider the defendants’ duty to the plaintiff as a player of rugby football at Bedford School or whether the defendants were in breach of that duty. However, a great deal of time has been occupied
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in adducing evidence and in presenting submissions on these two issues. It seems to me therefore only fair to the parties that I should make my findings on them known.
It is accepted on all sides that Bedford School, being in loco parentis, owed a general duty to the plaintiff and to all pupils to exercise reasonable care for his and their safety both in the classroom and on the games field. It is also accepted that rugby football is a game in which injury may be sustained. It is further accepted that injury is more likely if the correct techniques are not followed by the players, particularly in tackling. It follows therefore that it was the school’s duty by teaching or by coaching or by correction to take reasonable care to ensure that the plaintiff in playing the game of rugby football applied correct techniques when tackling.
Then comes the question: were the defendants in breach of that duty? [His Lordship then described the organisation and supervision of rugby football at the school and continued:]
I am satisfied that the defendants, through the staff ‘taking’ rugby, were well aware of the inherent risks in playing rugby football and of the need for the application of correct techniques and the correction of potentially dangerous errors and lapses. I am also satisfied that the standard of supervision was high, that the refereeing was vigilant and strict and that, as one of the plaintiff’s contemporaries put it, there was at the school an emphasis on discipline, which meant playing the game correctly. There is therefore no substance in the allegations of negligence so far as they relate to the playing of rugby football at Bedford School.
With that I turn to the question of personal accident insurance. In the course of the hearing much time has, understandably, been devoted to oral evidence relevant to this question and to the perusal of reports, articles and other documents dealing with the incidence of injuries to the cervical spine of rugby players and the need for personal accident insurance. To review all those documents would lead to a tedious and unhelpful extension of this judgment. They are available should they be required in the future. In the main, therefore, reference to and identification of particular documents will suffice. There are, as will appear, one or two notable exceptions.
During the later 1970s there was a growing general awareness of the incidence of spinal cord injuries to rugby players. [His Lordship described the efforts of various doctors to draw attention to injuries occurring to schoolboys while playing rugby football. His Lordship continued:]
At the end of a special meeting of the Medical Officers of Schools Association (MOSA) held on 22 March 1979 certain conclusions were reached and a number of recommendations were made. These conclusions and recommendations were set out in a document (the MOSA document), signed by those present, which was prepared for publication in May. So far as it is directly relevant to the issues now under discussion it read as follows:
‘At a General Meeting of the Association called on 22nd March 1979 the undersigned spoke on the increase in rugby injuries to the cervical spine in schoolboys. Our most urgent recommendation is that schools must take out accident insurance for all their rugby players before the beginning of the 1979–80 season, so that schoolboys who become permanently disabled should receive a substantial sum to help supply their life-long needs. It is not generally realised that English schoolboys are seldom insured against sports injuries, whereas all rugby clubs affiliated to the RFU are obliged to carry insurance, and permanent disablement from spinal injuries due to negligence or road accidents usually attracts compensation of over £100,000.’ (MOSA’s emphasis.)
There followed recommendations as to the instruction, supervision and playing of rugby in schools. These had been culled from a discussion document circulated on a date unknown by the headmaster of a school in Northern Ireland. It is not necessary for me to refer to them in detail here.
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The recommendation of personal accident insurance had been made by Dr Silver, a consultant physician at the Spinal Injury Centre at Stoke Mandeville, and was adopted by the meeting without opposition. There was in his mind a conflict between his love of the game and his concern for the youngsters he had treated for spinal injuries. As appears from the document itself, he was concerned that, whereas the Rugby Football Union (RFU) insisted that all adults playing for affiliated clubs be insured, there was no such provision for schoolboys. I should add, however, that such insurance provided cover for permanent disablement in a sum far below that recommended by MOSA. He, Dr Silver, had tried to obtain personal accident insurance for his own rugby-playing sons. It had proved difficult and, in any event, he was reluctant, as he put it, to make them the odd men out.
The MOSA document was sent to all rugby-playing schools and to other interested parties. It made a very considerable impact. [His Lordship then described the reaction of the school’s headmaster, Mr Jones, and bursar, Major Mantell, to the MOSA document. His Lordship continued:]
The position therefore at the end of 1979 was this.
1. The MOSA document had caused a great furore, particularly its insurance recommendation.
2. There were some, such as the RFU and the Public Schools Bursars’ Association (PSBA), who were advising caution in accepting the MOSA recommendations. The RFU seem to have left the matter of insurance to the schools’ governing bodies.
3. There were differences of opinion within the school on the subject of insurance: (a) Mr Thorpe, the master in charge of rugby, was strongly in favour of cover for rugby alone. He seems to have had the support of the rugby staff; (b) the bursar, supported by others, was strongly of the view (i) that insurance was a matter for the parents, of whom he was one, (ii) that if the school were to assume responsibility then it should be compulsory for all pupils and should cover all activities.
4. The headmaster had great sympathy for the views of Mr Thorpe; he wished to put the minds of his staff at rest. He thought they might lose some of their enthusiasm because of the risk of their being accused of negligence. On the other hand (a) he agreed with the bursar as to the responsibility for insurance and as to the comprehensiveness of the cover, (b) he hoped for guidance from the Headmasters’ Conference (HMC) and from other responsible bodies who were considering the matter, (c) he knew of no other schools who had warned parents of the risks inherent in some of the school’s activities or had urged parents to take out personal accident insurance. He had made no personal inquiries, but the bursar had and the headmaster knew this to be true of Felstead, where his own son was a rugby-playing pupil. Moreover, there had been no serious injury at Bedford, where rugby was well supervised both under Mr Murray Fletcher, the former master in charge of rugby, and Mr Thorpe. In the course of cross-examination Mr Jones agreed that by the end of 1979 there was a consensus of opinion that personal accident insurance was desirable. There was, however, a debate as to the scope of the cover, as to whether or not it should be compulsory and as to who should pay. He also agreed, in retrospect, that it would have been better if in his letter to the parents he had disclosed these views, though he doubted whether that would have made any difference.
In 1980 things moved more slowly than the headmaster had hoped. It was put to him in cross-examination that from the end of 1979 he did nothing. In other words, he had taken the bursar’s words literally and had suspended further action. For the only time in a very long cross-examination that allegation appeared to hurt. He accepted that he did not canvass the parents but that would, he thought, have been unwise until he had obtained the support of the governing body. For the moment he knew that there were differences of opinion there. The school was not, he said, deliberately marking time; it was just that there was a disappointing lack of information from bodies he had hoped would advise. For instance, the RFU’s definitive statement had been expected at the end of 1979 and had not been forthcoming. There was still resentment in some quarters that MOSA should, without prior consultation with any other interested parties, have advised
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so categorically on the need for insurance. That was not Mr Jones’s attitude, but it was known to exist. He agreed with the Times Educational Supplement of 25 January 1980 that there was confusion about insurance. He agreed that, had he been disposed to do so, he could have arranged an optional scheme without reference to his governors. For the reasons already give, he was not disposed to promote or to support such a scheme.
I consider the criticism of stagnation to be unjustified. The school had taken their own inquiries as far as they could and with commendable dispatch. There were problems, still under serious debate, to be resolved. Finally, there was the outcome of the deliberations of interested and influential bodies to be considered when available, in particular the views of the HMC, the PSBA and the RFU. Mr Jones had been persuaded that the school had ample cover if negligence were established and that the legal responsibility for effecting personal accident insurance rested on the parents rather than the school. He had advised the parents of the school’s insurance cover and of the lack of cover for personal accident. He had confidence in the rugby staff, who had responded to the rugby recommendations of MOSA. He agreed there always remained a risk of injury but he rejected the suggestion that every time a boy took the field he risked breaking his neck. In these circumstances he considered that matters were not so urgent that he could not await the views of those other responsible advisory bodies. I accept his evidence.
By March 1980 the PSBA had negotiated a policy which was adopted and recommended by the Independent Schools Joint Council (ISJC). This appears to have been referred to wrongly on occasions as the ISIS scheme. In his letter to schools publicising the scheme the secretary of the ISJC wrote as follows:
‘I am writing to announce to schools the details of a Personal Accident Insurance Scheme for pupils which is recommended by ISJC and which can be offered to the parents on an optional basis. The need for such a scheme has been tragically emphasised by certain serious injuries which have occurred. These have involved permanent disability, not occasioned by negligence and therefore ineligible for compensation. A Personal Accident Insurance Scheme would produce a guaranteed scale of benefits for specific disabilities, irrespective of any legal liability. To make this available to parents at the low cost which can be achieved through common participation would be a valuable extension of the service which an independent school provides.’
The letter then set out in broad terms the benefits which could be achieved and the premium rate. It was also pointed out that it was intended that, were it to be promoted immediately, the scheme should be in operation from the beginning of Michaelmas term 1980. In April 1980 Mr Wood, the chairman of the school’s games committee, expressed the view to Mr Thorpe that ‘all-in’ cover arranged for the school but paid for by the parents within the fees was worth further consideration. There is no doubt that the staff were anxious to have cover and to remove the responsibility for insurance from the parents. In early June the school received the ISJC proposals. They were studied by the headmaster and by Major Mantell. The latter compared them with those which had been offered by the school’s own brokers at the end of the previous year. He came to the conclusion that, so far as the extent of cover and the premiums were concerned,the two schemes were comparable. The essential and, to him, worrying difference between the two was that the ISJC scheme was voluntary whereas their own brokers’ scheme had been compulsory. The disadvantage of a voluntary scheme was, in his view, that it would impose on the school an unacceptable administrative burden. In a letter to the headmaster dated 9 June he concluded:
‘My thoughts on this have not changed since the matter first came up last year and I still believe that our two alternatives are: a) We advise parents that we have no cover (except Public Liability) and they must make their own arrangements if they think it necessary. b) We go in for a scheme which offers the least administrative load and this will be one where all boys have to be included, we pay a single long
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term per capita premium, and this premium is included in the Tuition Fee. You will realise from this that my view is to opt for (b) but only if we think this sort of cover is essential.’
Major Mantell still held the view that insurance was the responsibility of the parents.
In cross-examination the headmaster accepted that there was no reason why he could not then have gone to the governors and said, in effect: ‘I want this ISJC scheme at the school.' He also agreed, as he put it, in retrospect, that he could have circulated the scheme to parents at the end of the summer term and left the decision to them. Had he done so and had they expressed a wish to join the ISJC scheme, it being a voluntary scheme, there would have been no need to obtain the governors’ approval. Alternatively, he could have written to the parents saying: ‘We are going to arrange cover but it will take some time. Meanwhile I suggest you insure.' That again was something which he accepted in retrospect. At the time he did not think that it was something that he should do.
He had by now reached the conclusion that a scheme of personal accident insurance was desirable for the boys as well as to placate the staff. It was now necessary to seek the best value for both school and pupils. He still thought that any scheme embarked on by the school should be compulsory and should embrace all activities, not just rugby. He was anxious to avoid the situation where, if two boys were injured, one was covered and one was not. To him that was unacceptable.
He had no doubt that it was his responsibility to get as much advice as he could. He clearly felt somewhat uncomfortable about insurance policies: he thought that they were not always as advantageous in all respects as they sounded. In this he spoke with recent experience of problems concerning insurance after a serious fire at the school. He was still awaiting the views of the RFU. He agreed that that might be regarded by some people as an abdication of his own responsibility. He regarded the brokers’ advice as important and that was being sought.
There was a further problem. He still saw advantage in the school taking insurance cover, but there were some who took the view that the parents would then appear to be abdicating their responsibility. Mr Abrahams, for instance, one of the governors, held the view that it was the parents’ responsibility. If a comprehensive scheme with premiums added to the school fees were adopted, it would be necessary to win over the governing body. This was one of the reasons for his seeking as much backing from responsible, interested bodies as he could obtain. In particular the governors would expect him to await the RFU definitive statement. In any event, the fees for a whole year were set in the spring of each year and became effective at the commencement of the summer term. Thus, any addition to fees could only be made effective in the summer of 1981. In theory it was possible for him to approach the governors as an emergency but that was something which he said would have caused surprise, to say the least. In any event, as I have indicated, they would expect him to await the advice of the RFU. I accept his evidence.
Meanwhile, as appears from the minutes of their meetings, the HMC were in touch with the RFU and since early February had been expecting the RFU to circulate details of a scheme to cover all schoolchildren in all extracurricular activities. They maintained a correspondence and dialogue with Mr Kendall Carpenter the headmaster of Wellington School, senior vice-president of the RFU and an ex-rugby captain of England, still hoping for an insurance scheme. In mid-June 1980 the London branch of the HMC took the view that the ISJC scheme should be recommended to parents.
In July 1980 there was published the long-awaited definitive statement of the RFU. This was received by the headmaster probably towards the beginning of the Christmas term. He was surprised and disappointed to find that it made no mention of insurance. He had by now made up his mind on what he wanted to do, and support from the RFU would have been helpful.
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Having received the RFU definitive statement, though deriving little benefit from it, Mr Jones was in a position to make a final decision. He had decided that the school should take out personal accident insurance, though it was still open to debate whether the responsibility was that of the parents or of the school, and despite the fact that at the meeting of HMC on 27 September 1980 there was still a debate as to the need for insurance.
In cross-examination he agreed that the school was in a better position to decide if insurance was necessary for rugby and for all activities. The school would not wish to see one boy covered and another not. They were in a better position to see that this did not happen because they could probably compel the reluctant parent. Moreover, the school had a better chance of appreciating the risks and had more ready access to expert advice. However, he considered it premature to inform the parents of this decision until the governors had made theirs. If it were to be decided ultimately that it was the parents’ responsibility, he was not sure that it was his responsibility to give the parents information as to the risks involved in various activities or the need for or desirability of personal accident insurance, though he conceded that it might have been helpful for them to have such information. He certainly did not consider it necessary to circulate the MOSA document.
Towards the end of September there came news of another tragic accident to a schoolboy on the rugby field. A pupil at Sedburgh had been badly injured and permanently paralysed. The news came from a doctor who had a son in the upper sixth at Bedford in a telephone message to the bursar’s secretary. The injured boy was his partner’s son. He disclosed that Sedburgh had insurance for that type of accident and he considered that it would be a good idea if Bedford School arranged similar cover. Other parents made inquiries of the bursar about the school having personal accident cover and one criticised the school for not having it.
News of this unfortunate incident increased the headmaster’s concern and, coupled with the continuing lobbying of Mr Thorpe, persuaded the bursar to think again. In a letter to the headmaster on 29 September he had this to say:
‘I have not heard of the Sedburgh accident but it seems sadly apparent that accidents such as this are becoming more frequent and that we should think again. Maybe you were able to assess views on this at the HMC last week? If we do change our minds and opt for a Personal Accident Insurance Scheme then may I plead that it is one which causes the least administrative load on the School. This means, as I argued in my letter of 9th June 1980, the Scheme offered through our Brokers whereby all boys (and Staff although we may have to draw the line carefully for this category) are IN the scheme with no option to contract out and the charge, about £4.50 per head, is another charge to the Tuition Fee. I do not know whether any answer was ever received to your letter to the Clerk of 12th June, but would you like me to seek the up to date views of our Brokers?’
Major Mantell in evidence said that he still thought that insurance was the parents’ responsibility, but he had subordinated his views to those of the majority in the school. In cross-examination he denied that in September 1980 the parents were entitled to assume that the school had arranged insurance. On the other hand, he agreed that if the school had decided to suspend action on insurance, the parents should have been informed. The school had not then decided not to take out insurance: they were still considering the various possibilities.
The headmaster’s response to the bursar’s letter was positive. For reasons which he gave tersely in a note on the letter, he thought that the school should, as he put it, opt in. He added, ‘Let us therefore proceed’; this despite the division of opinion on the topic of insurance which had been apparent in the HMC. He, like the bursar, wanted the views of the trust’s brokers on the respective merits of their scheme and the ISJC scheme. And so the bursar and the trust’s officers made further inquiries of the brokers. It was
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suggested in cross-examination that the bursar in writing to the brokers and stating that attitudes had changed over the past year was unfair. This the headmaster refuted; I agree with him. The views of the bursar and the headmaster had changed over the past year. They had both initially taken the view that the provision of personal accident insurance was not the school’s legal liability: it was the responsibility of the parent. The bursar adhered to that view but he had subordinated his opinion to that of the majority in the school. The headmaster’s view now was that, whatever the legal position, the school should now take a lead.
It was now necessary for the headmaster and the bursar to decide which policy to recommend to the governing body. In this they would be assisted by the advice of the school’s brokers. Once the appropriate policy was identified it would then be necessary for the bursar to prepare the figures for inclusion in the estimates for 1981–82. These figures would be prepared towards Christmas 1980.
In November 1980 there came the accident to the plaintiff. This strengthened the view of the headmaster that personal accident insurance should be effected. In December 1980 he sent his end-of-term letter to the parents. He again referred to personal accident insurance in terms very similar to those employed in 1979, but he added that Mr Raynor, the representative of the parents of day boys on the school’s governing body, had been asked to co-ordinate their views. He thought that he could not be more definite about the provision of insurance cover, because the governors had yet to agree. He hoped that they would agree but he expected a debate on the subject of responsibility. He wanted Mr Raynor to attend the committee meetings to give the parents’ views in the hope that, with their support, his recommendation would be accepted. He thought that the parents were aware of the need for or desirability of personal accident insurance. He did not consider it necessary therefore to warn them that risks were involved in some school activities or to alert them to the need for insurance. In cross-examination he agreed, in retrospect, that it would have been better to have done so. The plaintiff’s accident was in the forefront of his mind. At the end of 1980 MOSA recorded that by the end of the year many schools had joined one or other of the schemes for personal accident insurance, but even more had not done so. This was confirmed by the insurance broker called on behalf of the plaintiff.
On 22 January 1981 the headmaster persuaded the school committee of governors to recommend to the trust that they consider effecting personal accident insurance for the pupils at Bedford School, though Mr Abrahams reiterated his views that it was the parents’ responsibility to effect such insurance. It was still his view that the school’s duty was to insure well against negligence and that they had done. Having regard to the decision of the committee, it now remained for Mr Jones and its chairman to put the committee’s recommendation before the trust’s committees. With this in mind the headmasters of Bedford School and Bedford Modern School combined to produce a memorandum setting out their case. They were agreed on what should be done.
It was a document which evoked unqualified approval during the course of the hearing and was given close attention in the course of these proceedings. It represented a powerful plea supported by cogent arguments. As Mr Jones said, it was strongly worded because he and his colleague felt strongly. It reflected views more strongly held in 1980 than in 1979. No doubt those views had been strengthened by the news from Sedburgh and the injury to the plaintiff. The memorandum ended with a summary and recommendations in these terms:
‘Summary
1. There is a growing general concern over injuries and their consequences. 2. There is a constant debate over responsibilities between parents and School. 3. Authoritative bodies are suggesting Schools should offer some form of insurance to provide cover in cases other than negligence. 4. The cover offered represents an excellent buy for the parents.
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Recommendations
The Harpur Trust, through the Schools, should offer Personal Accident Insurance for all pupils, and extend this to cover selected staff, and the cost of this should be absorbed within the Tuition Fee. It is also proposed that the Bursar be authorised to continue negotiations with the Trust’s brokers and recommend the most suitable policy. In this connection a copy of the outline details of a scheme already in discussion with Bowring Scholfield (Eastern) Ltd is attached. It must be emphasised that the proposed scheme only gives benefit in the case of death, dismemberment or permanent disablement as discussed. It does not cover disfigurement or temporary disablement or hospital or medical expenses.’
Meanwhile Mr Raynor, armed with the recommendations of the school committee, had sought the views of parents. There was now apparently a strong tide of feeling among the parents, including Mr Raynor, that a comprehensive accident insurance policy should be arranged. This was a very different reaction from that which he had experienced in 1979. He communicated this information by letter dated 28 February to the headmaster. The latter now felt that he was in a strong position for his meeting with the relevant committees and finally the governing body of the trust. This view was bolstered to a degree by the receipt on 20 February of the school’s brokers’ proposals. They were in line with their previous proposals. Their scheme was preferable to that of the ISJC.
The education committee considered these matters on 5 March. There was still a strong body of opinion that prudent parents would make their own insurance arrangements rather than rely on the schools. However, it was felt by the committee that each school should decide whether to invite parents to take part in an appropriate insurance scheme. It was resolved:
‘(a) That the Trust should not make any general arrangement to provide personal accident insurance automatically for all pupils at the 4 schools. (b) That each School should determine whether to arrange this insurance on the basis of parent voluntary participation.’
This resolution was substantially indorsed on 12 March by the finance and policy committee. It was later indorsed by the governing body of the trust.
It appears that the two boys’ schools administered by the trust had been strongly in favour of a compulsory comprehensive insurance cover the two girls’ schools did not share that view. Mr Jones was very unhappy. A voluntary scheme was not what he wanted, for the reasons that he had made clear on many occasions. He was determined to seek reconsideration by the committees and the governing body of the trust.
First, however, he made known to the parents in a letter of 19 March the governors’ decision that the responsibility for taking personal accident insurance should be continued to be left to the parents’ own judgment. He pointed out, however, that, because of the inquiries made of the schools’ brokers, the school could probably assist by introducing parents to a group scheme. With each letter was enclosed a pro forma by means of which each parent could indicate to the school whether or not he or she was interested in joining a scheme of personal accident insurance limited to permanent disability.
He was cross-examined at very considerable length as to the respective merits of this letter and a draft which was prepared by Mr Squires, the headmaster of Bedford Modern. Mr Jones acknowledged that his colleague’s draft was a very good one, and so it was. However, there is no evidence that it was sent, nor is there any evidence as to Mr Squires’s attitude towards the relative merits of optional and compulsory insurance. To judge from his draft letter alone, it might appear that he was telling parents to look to their own insurances and consider whether they ought not to take personal accident cover for their sons. This, however, might not be the correct conclusion.
The same might be said of Mr Jones, to judge from his letter alone, whereas I accept that he was concerned about a voluntary scheme: he wanted a compulsory scheme and he wanted the governors of the trust to change their minds. As he put it, he would have
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been very unhappy to face another rugby term without insurance or even with insurance limited to rugby alone.
At about the same time Mr Abrahams produced a memorandum for the heads of all four schools to consider, as the governors wished, he said, for clarification of the personal accident insurance issue. That memorandum pointed out that the issues arose because the heads and some staff felt that parents were not covering their children at present against personal accident either through ignorance or indolence. The memorandum went on to point out the options that were available for consideration. It seems unnecessary for me to repeat those here.
Meanwhile, the bursar commenced inquiries of the trust’s brokers of the terms on which the brokers would be able to offer cover to parents if they indicated a willingness to participate in a voluntary scheme. Inquiries were also directed in similar terms to the brokers of the ISJC scheme.
On 6 May the school’s games committee strongly recommended that the school should introduce a personal accident insurance policy to cover all members of the school (boys and staff). This was clearly intended to add weight to the renewed plea to the governors. The headmaster’s letter of 19 March did not receive an encouraging response. This was particularly disappointing to the headmaster and the bursar, especially after what they had been told by Mr Raynor of the parents’ interest in such a scheme. 1,146 questionnaires had been sent out only 528 were returned. Of these, only 370 were interested at all in a personal accident scheme. In a memorandum to the Bedford School committee for its meeting scheduled for 14 May, the headmaster set out those results and recommended that the school should take part in a personal accident scheme, preferably through the trust’s brokers if they would agree to administer it, but, if suitable terms could not be agreed, then the school should participate in the ISJC scheme. At the meeting on 14 May Mr Abrahams, while disagreeing with the headmaster’s view, conceded that, despite his personal convictions, it might be more generally acceptable for the school to take part in that sort of scheme. It was therefore resolved that:
‘(a) In the best interest of the School all pupils should be compulsorily covered by a Personal Accident Insurance Scheme and the cost included in the Tuition Fee. (b) The Finance and Policy Committee be asked to reconsider the need for a Personal Accident Insurance (Permanent Disability) Scheme for pupils only. (c) The Trust’s Brokers be asked by the Clerk to arrange urgent temporary cover for all pupils for a period of three months. (d) In the event that any obligatory scheme is not accepted by the Governors the Bursar may continue to negotiate a voluntary Scheme through the Trust’s brokers.’
Mr Abrahams had been persuaded. It now remained to persuade the relevant committees and governing body of the trust.
On 21 May the bursar wrote to the clerk to the trust asking him to arrange urgent temporary cover for all pupils for three months. This request was passed on in urgent terms by the clerk to the trust finance officer. It was becoming clear that some at least of the senior governors were revising their views and that the appropriate committees would probably be persuaded to do the same. Temporary cover was in fact arranged through the trust’s brokers to be effective from 16 June. On 23 June the finance and policy committee discussed this question of insurance again and were reminded of the advantages of a compulsory scheme, namely that the heavy responsibilities of the staff when dealing with insured and uninsured pupils would thus be removed. The committee recommended (a) that the trust enter forthwith into the scheme offered through the trust’s own brokers covering all pupils at the four schools, (b) that supplementary estimates be granted to cover the expenditure for the two girls’ schools, since the budget provision had only been made for the two boys’ schools.
In his end-of-term letter to parents the headmaster was able to advise them in the following terms:
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‘Since I took soundings of parents about pupils’ Personal Accident Insurance, the Governors have been re-examining this matter. A recommendation is now going forward for consideration by the full Governing body, at their meeting on 9th July, that the Trust should enter into an Insurance Scheme for this purpose, on lines matching the arrangements which very many other independent Schools have now made. The Scheme would cover pupils for all activities, world wide and throughout the year in terms and holidays until a pupil left School, and would provide substantial financial compensation in respect of specific and total disabilities arising from accidental injuries. If the Trust decides to participate in the Scheme, it would extend to all the pupils at the four Schools and the premiums would be covered within tuition fees. Subject to the Governors’ decision, full details of the Insurance Scheme will be sent to parents early next term, or I shall advise parents again concerning independent arrangements which they could make.’
On 9 July the trust’s governing body resolved that the trust enter forthwith a scheme offered through the trust’s brokers, covering all pupils at the four schools. Mr Jones had succeeded in obtaining what he had set out to do. Two years later the RFU was still complaining that all schools were still not covered; the Department of Education and the local authorities were still not arranging insurance cover for pupils in their schools. The RFU had concluded, somewhat despairingly, that if insurance were left to parents nothing would ever be done.
Before leaving this aspect of the matter, I should say that I found Mr Jones a careful and reliable witness who was anxious to do what was in the interests of the boys and who was receptive of ideas to promote those interests. He was equally concerned for his staff. Comment has been made of an expression which he used several times in the course of a long cross-examination, ‘on reflection’. It is said that this meant ‘after further consideration’. I regard that as fair comment: that was what he meant, but that was not all. It was said when he was agreeing with suggestions as to what he might have done or said in 1979 and 1980. It was much to his credit that he accepted these suggestions, but he did so with hindsight, with the grim experience of the plaintiff’s accident and the daunting experience of this trial and the allegations of negligence made against him. In 1979 he was undergoing a novel experience; in 1988 the novelty has gone. In between, I have no doubt, he had given the matter of personal accident insurance and his part in introducing it to Bedford School a great deal of thought.
Major Mantell, the bursar, has been criticised as obdurate and intent on seeing his own views prevail. I think this is a harsh criticism. He is a man of strong views; he adhered to his view of parental responsibility until he was persuaded to give way to the majority view. Whether he was right or wrong remains to be seen, but, whatever the answer, I am satisfied that his views were born of reason and not of prejudice and that they were shared by others in authority.
Finally, in my judgment, neither the headmaster nor the bursar should be criticised for seeking as much information and as many opinions from well-informed sources as were available. They would have been open to criticism had they communed together and acted in a vacuum.
It is in these circumstances that the plaintiff alleges that the defendants were in breach of their duty to him. By his statement of claim he alleges that the defendants were negligent in: (1) failing to ensure that the plaintiff was insured against accidental injury at the time of his accident on 4 November 1980. One might have been forgiven for thinking that the allegation was that the defendants were in breach of a general duty arising from the relationship of school and pupil. If that was the case, it is now (as will appear) somewhat refined; (2) failing to advise the plaintiff’s father (a) of the inherent risk of serious injury in the game of rugby, (b) of the need of personal accident insurance and (c) that the school had not arranged such insurance. It is alleged that, had the school thus advised his father, the latter would have arranged insurance cover for him.
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In his final submissions counsel for the plaintiff made it clear that he did not contend for a general duty to insure arising from the relationship of school and pupil. There was no general duty, he said, to protect the plaintiff from economic loss. He accepts that the economic welfare of the child is the responsibility, or probably no more than the prerogative, of the parent and, if the parent makes a judgment or decision, it would be difficult to hold him liable. The school’s duty, he submits, was to take such care as, in all the circumstances, a reasonably prudent parent would have taken for the plaintiff’s welfare: a duty to protect from physical harm and to have regard to the plaintiff’s economic welfare. This latter duty includes a duty to inform the parent of matters of which the school was aware and the parent was not, and which were material to the parents’ judgment as to what ought to be done for the boy’s economic welfare.
Finally he submits that, if in fact the school assumed responsibility for a particular area of a child’s economic welfare, then they had a duty to act with reasonable care and were liable for the loss which they ought to have foreseen would be consequent on their careless acts or omissions. This duty arose from the relationship of school and pupil and from the assumption by the school of a particular responsibility; it is wide enough to cover economic loss. The plaintiff’s case is that the school did undertake the following: (1) the responsibility of deciding on the need for personal accident insurance and of advising parents of that need; (2) the responsibility of insuring. Thus they were under a duty to effect personal accident insurance within a reasonable time. In this respect the school’s duty, he submits, was wider than that of the parent.
Counsel for the defendants submits that, in the light of current authority, the plaintiff cannot succeed unless he establishes either (1) a general duty on all parents and on all those in loco parentis to take reasonable care to protect boys from economic loss or (2) a duty to advise the parent of (a) the risk of serious injury in rugby football and/or (b) the need for personal accident insurance or (3) a duty arising in the particular circumstances of this case to insure against personal accident. He contends that the plaintiff cannot establish any of these duties. Finally he submits that the plaintiff has not suffered damage which is recognised by the law.
Counsel for the plaintiff submits that, if the defendants are correct (namely that there was no duty at all) and that the defendants having investigated the need for personal accident insurance and found that there was one, it means that the school could put away their files and forget all about them. This, it is submitted, would not only be morally reprehensible, it would defy common sense and, by inference, would contravene what is fair and reasonable in the relationship between school and pupil and the duty of the former to the latter.
In the course of these submissions, which extended over many days, counsel have helpfully referred me to many authorities. I take this opportunity to express my gratitude to them for their industry, their submissions and their efforts to point me in the right direction, albeit that the directions that they suggested were diametrically opposed. It is with no disrespect to them or to the high authorities whose judgments and opinions have been cited to me, that I refrain from a detailed review of all those authorities.
It is accepted that this case breaks new ground: it cannot be brought precisely within the categories so far identified and recognised by authority. The plaintiff relies on the well-known dictum of Lord Macmillan in Donoghue v Stevenson [1932] AC 562 at 619, [1932] All ER Rep 1 at 30 that the categories of negligence are never closed. His submission is that this case establishes a category which is within, or is based on, principles already well established. The defendants’ case is that the plaintiff’s submissions fly in the face of true principle. They are both agreed therefore that the claim must be judged according to principle. It is because I have come to the conclusion that the basic principles at least are clear that I consider an elaborate review of the authorities to be unnecessary. Reference to one or two, of course, will be necessary. The following basic propositions are accepted by both sides.
1. The defendants, being in loco parentis, clearly owed the plaintiff a duty to take
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reasonable care of his person and of his property and to prevent damage from foreseeable injury both in school and on the playing fields. So far as sport was concerned, that duty may be further particularised as a duty (a) not to require the boys to participate in any activity which a reasonable parent would consider carried an unacceptable risk of injury. Rugby football is not within this category nor is it alleged to be, (b) to take reasonable care to ensure that the game was properly organised and supervised so as to be reasonably safe for the participants, (c) to take reasonable care to ensure that the boys were taught and applied the basic skills and proper techniques so that they could play the game with reasonable safety. It is said that the standard of care expected of the defendants is that of a reasonably careful and prudent parent, while taking into account the fact that the conditions of school life are different from the conditions of home life, and that a larger number of pupils are in the care of a particular teacher than are likely to be in the care of any one parent. I also think that account should be taken of the fact that there will be occasions when the school will have greater relevant knowledge than a parent, and vice versa. For instance, the chemistry master will, or at least should, have a better understanding of the properties of the various substances he calls on his charges to handle than many prudent and careful parents will have. This special knowledge does not enlarge the chemistry master’s duty; it does bring into account an important, in some cases an essential, consideration in deciding whether or not he has discharged that duty. At the same time the parent is more likely to be aware of any idiosyncratic reaction of his child. I doubt therefore whether it is always helpful to define the standard of care further than to say it is the degree of care which is reasonable in all the circumstances, including, among other things, any special knowledge which the school actually had or ought reasonably to have had. This, however, is not to say that special knowledge enlarges the ambit of the duty.
2. For breach of that duty the defendants may be liable not only for damages for personal injury or damage to property, but also for economic loss directly flowing from such injury or damage.
3. There are circumstances in which a defendant may be liable for economic loss which is not consequent on personal injury or damage to property (hereafter referred to as pure economic loss): see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465. It is conceded that the plaintiff’s claim in respect of personal accident insurance is for pure economic loss.
4. So far the circumstances in which pure economic loss has been recovered have been limited. The following are examples: (a) where the defendant has undertaken a voluntary act and the plaintiff has, as the defendant knows, relied on his doing it with care and he does it carelessly: see Wilkinson v Coverdale (1793) 1 Esp 75, [1775–1802] All ER Rep 339; (b) where the defendant has gratuitously performed a service by giving advice, knowing that the plaintiff will rely on it and will suffer financial loss if it is negligently given: see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 1 All ER 575, [1964] AC 465. It has been said that this category is limited to those who engage in a calling or profession requiring special knowledge or skill or who hold themselves out as having special knowledge or skill. Counsel for the defendants relies on that proposition: see Mutual Life and Citizens’ Assurance Co Ltd v Evatt [1971] 1 All ER 150, [1971] AC 793. That was a decision of the Privy Council. Thus, while it is of high persuasive authority, it is not strictly binding on this court. Moreover, there was a powerful dissenting opinion of Lord Reid and Lord Morris, who were parties to the unanimous decision in the Hedley Byrne case, which would extend this category to advice given on business occasions or in the course of business activities, whether or not the party giving the advice was engaged in a calling or profession requiring special knowledge or skill or held himself out as having special knowledge or skill. In the light of these opinions the limitation by the majority in Evatt’s case may still be open to argument. Moreover, in the Hedley Byrne case [1963] 2 All ER 575 at 612, [1964] AC 465 at 531 Lord Devlin referred to such a limitation in these terms:
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‘Since the essence of the matter in the present case and in others of the same type is the acceptance of responsibility, I should like to guard against the imposition of restrictive terms notwithstanding that the essential condition is fulfilled. If a defendant says to a plaintiff:—“Let me do this for you, do not waste your money in employing a professional, I will do it for nothing and you can rely on me”, I do not think that he could escape liability simply because he belonged to no profession or calling, had no qualifications or special skill and did not hold himself out as having any. The relevance of these factors is to show the unlikelihood of a defendant in such circumstances assuming a legal responsibility and as such they may often be decisive. But they are not theoretically conclusive, and so cannot be the subject of definition. It would be unfortunate if they were.’
(c) there may be cases where the plaintiff’s reliance on the defendant’s acts, omissions or utterances is not a necessary link in the chain of causation of loss, some cases even where the plaintiff has been unaware of the defendant’s intervention, where economic loss may be recovered: see Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728. As Lord Salmon said in that case, in some cases reliance by the plaintiff may be important (see [1977] 2 All ER 492 at 513, [1978] AC 728 at 769). In this case it is not even relevant (see also Ross v Caunters (a firm) [1979] 3 All ER 580, [1980] Ch 297); (d) where the defendant has carried out carelessly a contractual duty which he owed to a third person and has thus caused foreseeable economic loss to the plaintiff; (e) where the defendant has actually carried out a public duty and by performing it carelessly has caused the plaintiff foreseeable damage.
These examples cover a wide range of factual situations. Only in Wilkinson v Coverdale and in Hedley Byrne & Co Ltd v Heller & Partners Ltd were the circumstances at all analogous to the present. In each of these examples the plaintiff succeeded only because the court found a sufficiently proximate relationship between the parties and a duty of care sufficiently wide in its ambit to cover pure economic loss. I respectfully adopt what Widgery J had to say in Weller & Co v Foot and Mouth Disease Research Institute [1965] 3 All ER 560 at 570, [1966] 1 QB 569 at 587:
‘The decision in Hedley Byrne & Co., Ltd. v. Heller & Partners, Ltd. does not depart in any way from the fundamental that there can be no claim for negligence in the absence of a duty of care owed to the plaintiff. It recognises that a duty of care may arise in the giving of advice even though no contract or fiduciary relationship exists between the giver of the advice and the person who may act on it, and having recognised the existence of the duty it goes on to recognise that indirect or economic loss will suffice to support the plaintiff’s claim. What the case does not decide is that an ability to foresee indirect or economic loss to another as a result of one’s conduct automatically imposes a duty to take care to avoid that loss. In my judgment there is nothing in Hedley Byrne & Co., Ltd. v. Heller & Partners, Ltd. to affect the common law principle that a duty of care which arises from a risk of direct injury to person or property is owed only to those whose person or property may foreseeably be injured by a failure to take care. If the plaintiff can show that the duty was owed to him, he can recover both direct and consequential loss which is reasonably foreseeable, and for myself I see no reason for saying that proof of direct loss is an essential part of his claim. He must, however, show that he was within the scope of the defendant’s duty to take care.’
For a time it was thought that a wider, more general principle imposing a duty of care in a wider range of cases had been laid down by Lord Wilberforce in Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728. In an oft-quoted dictum he said ([1977] 2 All ER 492 at 498–499, [1978] AC 728 at 751–752):
‘Through the trilogy of cases in this House, Donoghue v Stevenson [1932] AC 562, [1932] All ER Rep 1, Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER
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575, [1964] AC 465 and Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294, [1970] AC 1004 the position has now been reached that in order to establish that a duty of care arises in a particular situation, it is not necessary to bring the facts of that situation within those of previous situations in which a duty of care has been held to exist. Rather the question has to be approached in two stages. First one has to ask whether, as between the alleged wrongdoer and the person who has suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter, in which case a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may give rise (see the Dorset Yacht case [1970] 2 All ER 294 at 297–298, [1970] AC 1004 at 1027, per Lord Reid). Examples of this are Hedley Byrne & Co Ltd v Heller & Partners Ltd where the class of potential plaintiffs was reduced to those shown to have relied on the correctness of statements made, and Weller & Co v Foot and Mouth Disease Research Institute [1965] 3 All ER 560, [1966] 1 QB 569.’
It appears that this passage was applied literally in a number of subsequent decisions, including Ross v Caunters (a firm) [1979] 3 All ER 580, [1980] Ch 297 and Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201, [1983] 1 AC 520. Both these decisions have been regarded as turning on their own special facts, and Ross v Caunters has been criticised in the Supreme Court of Victoria in Seale v Perry [1982] VR 193. I am relieved of the task of deciding whether or not they should be followed because they were decided on facts which are so different from the present as to be of no assistance and because, save for the literal application of Lord Wilberforce’s dictum, they lay down no new principle. Of course, as Lord Wilberforce emphasised, there must be a relationship of sufficient proximity between the parties before a duty of care can possibly arise. But mere proximity is not enough, as Lord Wilberforce was at pains to point out. By his second question he imposed limitations dictated by policy.
This whole approach has been considered by their Lordships in two recent decisions. In the first, Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529, [1985] AC 210, the facts are so far removed from the present as not to be material. Lord Keith, having considered Lord Wilberforce’s approach in Anns’s case, said ([1984] 3 All ER 529 at 534, [1985] AC 210 at 240–241):
‘The true question in each case is whether the particular defendant owed to the particular plaintiff a duty of care having the scope which is contended for and whether he was in breach of that duty with consequent loss to the plaintiff. A relationship of proximity … must exist before any duty of care can arise, but the scope of the duty must depend on all the circumstances of the case … So in determining whether or not a duty of care of particular scope was incumbent on a defendant it is material to take into consideration whether it is just and reasonable that it should be so.’
Lord Keith returned to the same question again in Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705 at 710, [1988] AC 175 at 191–192, where he said:
‘Their Lordships venture to think that the two-stage test formulated by Lord Wilberforce for determining the existence of a duty of care in negligence has been elevated to a degree of importance greater than it merits, and greater perhaps than its author intended. Further, the expression of the first stage of the test carries with it a risk of misinterpretation … The truth is that the trilogy of cases referred to by Lord Wilberforce each demonstrate particular sets of circumstances, differing in character, which were adjudged to have the effect of bringing into being a relationship apt to give rise to a duty of care. Foreseeability of harm is a necessary
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ingredient of such a relationship, but it is not the only one. Otherwise there would be liability in negligence on the part of one who sees another about to walk over a cliff with his head in the air, and forbears to shout a warning.’
I am relieved to be guided by these principles. I share the feelings of Murphy J in the Victorian case of Seale v Perry [1982] VR 193 at 225, that courts of last resort are more accustomed and better situated to engage in policy decisions than this court is.
It seems to me that the crucial question in this case is that which was posed by Lord Devlin in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575 at 608, [1964] AC 465 at 525:
‘Is the relationship between the parties in this case such that it can be brought within a category giving rise to a special duty? As always in English law the first step in such an inquiry is to see how far the authorities have gone, for new categories in the law do not spring into existence overnight.’
I have attempted so far to take that first step. The question which now has to be answered is whether, in the various circumstances postulated on behalf of the plaintiff, the scope of the duty owed by the school to the plaintiff was wide enough to take account of (or, as the plaintiff submits, to have regard to) his economic welfare. In answering that question it is material to take into consideration all the circumstances, in particular the relationship between the parties and what was reasonably to be expected of that relationship and whether it is just and reasonable that it should be so. I shall assume for the moment that failure to insure has caused what the law recognises as economic loss to the plaintiff.
Although it is conceded by counsel for the plaintiff that there is no general duty arising simply from the relationship of school and pupil to ensure that the plaintiff was insured against accidental injury, it will, I think, be helpful to examine why this should be so. Counsel for the defendants submits a number of reasons. First, there is no such duty on parents. A parent has the prerogative of deciding whether or not to insure his offspring, and, whatever decision he makes, none shall complain. A parent is under no duty to insure; he cannot be compelled to do so, nor can he be sued if he carelessly fails. His duty extends to maintaining his child, not to insuring him. If there is no such duty on the parent, it is submitted, there can be no duty on those in loco parentis. Even the duty to maintain does not extend to the school. Thus, even if the parent were under a duty to insure, it would not follow that the school, being in loco parentis, is under a similar duty. It is, he submits, fallacious to contend that the school’s duty is to act in all respects as a careful parent should act towards the child. That is the standard of care to be applied where there is a duty; it does not define the duty itself.
The school’s duty is more limited than that of the parent. It relates to matters over which the school has control and to no other matters. What is a matter of choice or discretion for the parent is outside the ambit of the duty of the school. A duty is not established merely because a prudent headmaster or a prudent parent might think that in certain circumstances it was desirable to have personal accident insurance. Schools are under a duty to protect their pupils from harm. This involves taking reasonable care to ensure, inter alia, that the school’s activities are reasonably safe and well organised. The taking out of personal accident insurance could not justify relaxation of that duty and in particular would not justify allowing the boys to participate in any activity which, because of inherent dangers, should not be undertaken. No one has seriously suggested that rugby football is such an activity.
It is submitted that, if this duty were to be imposed, then we are getting very close to no fault liability. That has never been part of our law. Even the statutory duty imposed in respect of road traffic accidents and the duty imposed by the Employers’ Liability (Compulsory Insurance) Act 1969 is to take out cover for death or injury caused by negligence. If such a duty as the plaintiff contends for is imposed, it really opens the gates to a flood of claims. Moreover, it would apply to many other relationships where
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inherent risks have to be faced, for instance the builder and his employees, the window cleaner and his employees, the car driver and many others.
This, therefore, is a novel claim, it is submitted. That is not conclusive against its validity but it gives cause for pause and serious reflection. Further cause for pause, he submits, lies in the reluctance shown by the courts to extend the duty of care to protect against economic loss.
I approach the matter in this way. It is fundamental to the relationship between school and pupil that the school undertakes to educate him in as wide a sense as it reasonably can. This involves the school having the pupils in its care and it involves the pupils in various activities in the classroom, in the chapel, in the gymnasium, on the sports field and so on. There are risks of injury inherent in many human activities, even of serious injury in some. Because of this, the school, having the pupils in its care, is under a duty to exercise reasonable care for their health and safety. Provided due care is exercised in this sphere, it seems to me that the school’s duty is fulfilled. The law expects no more, nor, I venture to think, do reasonably prudent parents. In particular, there is no general duty to insure, not even against negligence. No doubt it is prudent for a school to insure against negligence but that is in its own interests; it is under no duty to the pupils to do so.
It could hardly be said, therefore, that a school is under a duty to insure against personal accident. Such a duty would, in my judgment, be in excess of the obligations it has undertaken to educate and care for the pupils. The duties imposed on the school must bear a fair and reasonable relationship to the activities carried on at the school. The school’s activities are not designed, nor are they intended (save in an indirect manner), to promote or protect the pupil’s economic welfare. A duty to insure is not a necessary adjunct to its primary undertaking to educate a duty to take reasonable care of person and property while the pupils are in its charge clearly is.
The same duty rests on the parent, who, in addition, is bound to maintain his child. But even the parent has no duty to insure. It has often been said that the standard of care required to discharge the school’s duty is that of the reasonably careful parent. While this does not, of course, define the scope of the duty, it does seem somewhat remarkable if the school is to be judged by a standard which the parent is bound neither to adopt nor even to consider. It would be neither fair nor reasonable to place a wider duty on the school, which stands in loco parentis, than is imposed on the parent. Moreover, it is necessary to consider in what respects the plaintiff had a right to have care taken. It was put by Lord Macmillan in Donoghue v Stevenson [1932] AC 562 at 619, [1932] All ER Rep 1 at 30 in this way:
‘The grounds of action may be as various and manifold as human errancy; and the conception of legal responsibility may develop in adaptation to altering social conditions and standards. The criterion of judgment must adjust and adapt itself to the changing circumstances of life. The categories of negligence are never closed [I interpose to say that that is usually the only sentence quoted] … Where there is room for diversity of view, it is in determining what circumstances will establish such a relationship between the parties as to give rise, on the one side, to a duty to take care, and on the other side to a right to have care taken.’
Here the plaintiff clearly had a right to have his person and his property protected from careless acts or omissions of those for whom the defendants were vicariously liable. He had no right to protection from purely accidental injury or from the consequences of such injury.
It is true that on climbing holidays Mr Pleuger, the referee of the game in which this plaintiff was injured and a master at the school, insisted that all boys who participated were insured. That was no doubt a prudent precaution taken primarily, not to protect the boys from economic loss, but to protect their parents from heavy claims for medical and rescue expenses. The personal accident element, which might be said to be for the
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benefit of the boy, was trivial when considered in relation to serious injury. In any event, this merely begs the question whether Mr Pleuger was under a duty to do what he did. In my view, he was not.
Finally, it seems pertinent to consider what would be the results of the imposition of a duty to insure. What level of cover would be necessary to discharge the school’s duty of reasonable care in these circumstances? Would cover up to, say, £10,000 suffice for permanent disability? That would be a derisory sum by way of compensation in such circumstances. Would it be necessary to obtain cover for all the school’s activities or would it suffice to cover only those where those in authority in the school considered the greater inherent risks obtained? Should it cover only permanent disability of a substantial kind? Or should it cover all injuries?
All these matters convince me that the relationship of proximity which existed between the school and its pupils did not of itself give rise to a duty to insure or to protect the plaintiff’s economic welfare. That was beyond what either party to that relationship contemplated. Viewed more objectively, it was beyond what is reasonable and fair. The school’s duty has been identified on many occasions. In my judgment, there is no warrant either in principle or in authority for extending it to the provision of personal accident insurance. It follows therefore that the concession of counsel for the plaintiff was very well founded.
It was in these circumstances that he refined the duty which he alleges was owed by the school to the plaintiff to a duty to take reasonable care for the plaintiff’s welfare in general. In this context ‘welfare’ includes a duty to protect his person and property from physical harm and to have regard to his economic welfare. Consistent with that duty the plaintiff was entitled as against the school to have his parent informed of material matters which might induce the latter, as a prudent parent, to insure against personal accident. In the end the discretion would be that of the parent and, however he exercised it, no one, not even the plaintiff, could complain. But, it is submitted, the plaintiff was entitled to have his parent apprised of the warning given by the MOSA document in May 1979. By then the school had been made aware of the dangers inherent in the game of rugby football, even when it was properly supervised and played correctly. It was, therefore, it is submitted, the school’s duty to keep the plaintiff’s father abreast of this information in case he might wish to take personal accident insurance cover for his son.
Counsel for the defendants submits that there was no such duty. If there was no duty to insure, then there could be no duty to advise either directly or indirectly on the subject of insurance. There was no area, save that relating to health or physical welfare, or perhaps to purely educational matters, where the defendants were under a duty to advise. Moreover, in his submission, such a duty could only arise if: (a) the defendants were in fact qualified to give such advice or held themselves out as so qualified. There was no evidence that they did hold themselves out in this way; (b) the parents actually relied on the advice so given. There is no evidence, he submits, that parents did rely on the defendants for advice.
I think the answer to the plaintiff’s submission lies in the main in the reasons already given for not finding the more general duty of care. It is not open to doctors, however, eminent, to enlarge the school’s duty. The duty has to be one recognised and enforced by the law. It is, of course, conceivable that information provided by doctors might sound such a warning that, consistent with the school’s duty to protect the plaintiff from harm, they ought not to have allowed him to play rugby football. It is not suggested that this situation arose here. It may very well be, indeed I hold, that the school should take such additional information into account in ensuring, so far as it reasonably can, by proper supervision and coaching and by vigilant and strict refereeing, that the consequences referred to in the MOSA document did not occur. To this extent the information would impose additional burdens on the school, not by widening the scope of the duty but by making more onerous the discharge of that duty.
But that is not the question. The question is: did that additional information, coupled
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with the relationship of school and pupil, enlarge the scope of the duty resting on the school to take account of the plaintiff’s economic welfare and, as a consequence, to advise on the dangers of rugby football? I accept that a duty to advise may arise. For instance, if the chemistry master were to allow a pupil to conduct experiments at home and for that purpose provided him with a dangerous substance, it would clearly be his duty to warn the parent of the danger and to advise on safety precautions. That would be consistent with the school’s well-established general duty to protect its pupils from harm. The duty to advise would, in those circumstances, not extend the duty of care.
It is not suggested in this case that the advice was necessary for such a purpose. There is no suggestion that the advice would have enabled the plaintiff’s father to protect his son from harm. Here, it is contended, it was part of a wider duty to protect by insurance from the economic consequences of accidental injury. Thus it inevitably throws up the basic question: was there such a wider duty? If there was not, there was no obligation to advise. In my view there was no wider duty for the following reasons.
(a) If the parent who is given such information is under no duty to act on it, it is difficult to see how the school can be under any duty to the pupil. A duty to the parent might be more acceptable and fair because serious injury leading to incapacity might very well increase the parent’s burden of maintaining his child. It is not suggested, however, that such a duty arose. It seems to me that if a duty were to arise it must stem from the relationship between the parties and the attendant circumstances and not merely from the fact that information was available to one and not to the other.
(b) The MOSA recommendation regarding personal accident insurance was restricted to rugby football. But, if there was a duty in respect of rugby football, what of other activities on the sports field such as cricket or in the gymnasium such as gymnastics or in the squash court? It may be that it is in playing rugby football that the cervical spine is most at risk (though it may be that gymnastics will run it close), but what of the cricket ball hit high in the air and lost in the sun and striking the fielder on the head? The effect could be devastating. What of the squash ball in the eye? What of the gymnast who slips and lands on his head through nobody’s fault? These are mere instances of the sort of accidents which have occurred. Indeed, what of the science master who must realise that in the best regulated circumstances accidents may occur in the laboratory? Is he under a duty to warn parents so that they might consider exercising a discretion to insure their sons? In my judgment, the answer is a clear No. His duty is to take care to protect his pupils from harm. Provided he exercises due care in that regard his duty is fulfilled. The law expects no more of him.
(c) If, as I consider to be the case, the plaintiff had no right to protection from purely accidental injury or its consequences, how can it be said that he had a right to have his father informed of matters which might induce the father to exercise a discretion to insure against personal accident? It is accepted that he could not compel his father to insure, or sue him if he failed.
(d) In the circumstances of this case there could only be a duty of the kind contended for if the plaintiff’s father relied on the school to give him advice. If it were otherwise there would be no causal link between the breach and the damage. Indeed, that is the plaintiff’s case. Mr Van Oppen senior has said that, had he been apprised of the dangers of rugby and of the need of insurance, he would have sought insurance cover. In other words, he would have heeded the advice if it had been forthcoming. There is no reason to doubt his evidence. But that is a different matter. In fact he did not rely, nor is there any evidence that any parent relied, on the school to advise him on the question of insurance. That question did not cross his or their minds.
(e) The most I think that could be said is that it would have been prudent and careful so to advise the parents. But as Lord Edmund-Davies said in Moorgate Mercantile Co Ltd v Twitchings [1976] 2 All ER 641 at 659, [1977] AC 890 at 919: ‘In most situations it is better to be careful than careless, but it is quite another thing to elevate all carelessness into a tort’. Liability only arises when there is a legal duty not to be careless. In my
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judgment, for the reasons I have attempted to give, there was no such duty as is contended for in the circumstances which have been postulated. I should add that, in giving the reasons as I have, it is not to be assumed that I regard the school as having been careless or lacking in prudence. That is not so.
Next it is contended that the school actually had assumed the following responsibilities:
(a) For assessing, and advising the plaintiff’s father of, the need for personal accident insurance from December 1979. It failed to give such advice and so was in breach of its duty.
(b) Later for effecting personal accident insurance to cover the plaintiff. That being so, it had imposed on it, in accordance with the decisions in Hedley Byrne & Co Ltd v Heller & Parters Ltd [1963] 2 All ER 575, [1964] AC 465 and Wilkinson v Coverdale (1793) 1 Esp 75, [1775–1802] All ER Rep 339, a duty to exercise reasonable care and in particular a duty to act with reasonable dispatch, namely to effect insurance cover within a reasonable time. The foreseeable result of any breach of duty was that the plaintiff, if injured, would or might suffer economic loss.
Counsel for the plaintiff submits that the headmaster’s letter of December 1979 bears the following interpretations: (a) if insurance is necessary, we will effect it; (b) if we do not effect it, it is not necessary; (c) if we do not tell you we have effected cover, it is either unnecessary or you may assume that we have done it. The school, he says, foresaw the risk of serious injury which was ever present and, having reached the conclusion, as it did, that personal accident insurance was necessary, it ought not to have relied on its own cumbersome internal procedures but should have acted with reasonable dispatch.
It is submitted that the responsibility for effecting personal accident insurance had been assumed by the school by June 1980 or, at the latest, September 1980. Whatever genuine doubts there might have been as to the extent of the cover, emergency cover for rugby alone should by then have been taken. The fact that the school at that time opted for a compulsory comprehensive policy covering all pupils in all activities is the clearest evidence that it accepted responsibility for this particular economic loss. Had cover been effected, the plaintiff would have received a substantial sum by way of compensation. It was not done and so he has been deprived.
Counsel for the defendants submits that in order to found such duties it would be necessary for the plaintiff to prove that the school did in fact undertake these respective obligations. This it never did. The headmaster’s letters of Christmas 1979 and 1980, the only relevant communications to parents, did not purport to advise; they were merely informative and they were factual and accurate; no more.
If there was such a duty, then the question must arise: at what level of cover would the school be absolved from liability for negligence? Let it be supposed, it is said, that the school took out cover for £1,000 for permanent disability. Would the school then be held negligent if the injuries were so catastrophic that £1,000 was derisory by way of compensation?
In addition it is submitted it would be necessary for the plaintiff to prove that the parents relied on the defendants to insure or to advise on insurance. There is no evidence, it is said, that any parent, not even the plaintiff’s father, did rely on the school to provide either of these services.
I accept the defendants’ submissions that the school did not in fact undertake to advise the parents nor, prior to early 1981, did it undertake to effect insurance. In particular I accept that the plaintiff’s interpretation of the headmaster’s letter of December 1979 is too strained. It was not intended to be, nor do I think it would have been read by any parent as being, any more than a factual account of the situation so far as personal accident insurance was concerned. The fact is that the school never intended to advise the parents of the need for taking personal accident insurance, nor did it undertake to do so. As for effecting insurance, while the headmaster concluded at quite an early stage that accident insurance would be desirable, there was a continuing debate, both within the school and among the representative bodies to whom he properly looked for advice,
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on a number of issues: who was responsible for providing insurance cover; should the cover be restricted to rugby or should it embrace all activities; should it be compulsory or optional; which policy was the most suitable? There were many people to be looked to for advice and others to persuade. This was a novel experience and new ground for Mr Jones and his staff. They were not insurance advisers or brokers. They moved with understandable and proper caution and it might be said that day by day they had more important duties to perform. Even by September 1980 there was still uncertainty in some areas, particularly as to who was legally responsible and which policy was the best buy. The school had not undertaken to insure. There is no doubt that news from Sedburh and the plaintiff’s accident helped to resolve many of the doubts. But, for whatever reason, it was not until early in 1981 that the school decided to go ahead with insurance. Not until then could it be said that it undertook to insure.
In any event, it seems to me that the plaintiff’s argument is fatally flawed in two respects. First, a person who undertakes to perform a voluntary act is or may be liable if he performs it improperly but not if he neglects to perform it at all: see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575 at 588–589, 609, [1964] AC 465 at 494–495, 526–527 per Lord Morris and Lord Devlin. A voluntary undertaking to advise or to act of itself gives rise to no duty of care; it gives rise to no legal obligation at all. In support of this part of his submission, counsel for the plaintiff relies on Wilkinson v Coverdale (1793) 1 Esp 75, [1775–1802] All ER Rep 339. That was a case where the defendant undertook to effect a policy of insurance on the plaintiff’s house and where the plaintiff relied on him to do so. The defendant carried out that undertaking so carelessly that the insurance was wholly ineffective. In those circumstances, the defendant was held to owe a duty of care to the plaintiff. He was in breach of that duty and was therefore liable.
Here the plaintiff’s case is not that the school was careless in giving advice or in effecting insurance. In reality his case is that the school failed to advise on the need for insurance and failed to insure within a reasonable time, namely by the time the plaintiff was injured. It is accepted that when, later, the school did insure, it acted reasonably in the terms of the policy effected, the premiums agreed and in terms of the activities and the pupils covered. So far as the plaintiff is concerned, his case is that it failed to insure at all. It follows therefore that, even if the school had voluntarily undertaken to advise or to insure, it would have been under no legal duty to do either, nor could there have been any duty of care cast on it.
Secondly, and in any event, the question is not simply whether the defendants undertook to advise on the need for or to effect insurance. The question is whether by such undertaking they should be held by the court to have assumed a legal responsibility to the plaintiff, whether they must be taken, in the circumstances, to have assumed a duty to exercise reasonable care, a duty which was of sufficient scope to include protection against economic loss. The answer to that question must depend on a consideration of all the relevant circumstances, including, of course, the relationship between the parties.
There are a number of matters which are material. First, particularly so far as advice was concerned, whether or not the plaintiff relied on the school to give advice or to be careful in advising. As I have already said, the plaintiff’s father said that, had the school given him advice on the need for insurance, he would have heeded it. I do not doubt that. But that is not to say that he or any other parent relied on the school for advice. Indeed there is no evidence that any parent did rely on the school either to advise or to insure.
Next it is material to consider whether or not the school held itself out as having the expertise to advise on or deal with insurance. As Lord Devlin said in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575 at 612, [1964] AC 465 at 531, this may not be invariably conclusive, but it is clearly an important consideration in deciding whether or not the defendants accepted a legal responsibility. Here it is not even suggested that the school held itself out in this way. Certainly there is no evidence to
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support such a suggestion. Moreover, unlike Wilkinson v Coverdale (1773) 1 Esp 75, [1775–1802] All ER Rep 339, there was here no representation, either express or implied, to the plaintiff or to his father that the school accepted responsibility either to advise or to act. Nor, unlike the plaintiff in the Hedley Byrne case, had the plaintiff or his father sought the advice of the school or sought the school’s assistance in effecting insurance. This is not surprising when one considers that the school had no expertise in insurance matters and thus would not be expected by the parents either to advise or to act.
The very nature of the relationship between the parties militated against any expectation that the school would assume an obligation to advise on the need for or to effect insurance or indeed any other business. I have no doubt that, if, in September 1980, either party (that is either the school or the plaintiff’s father) had been asked whether or not the defendants had undertaken any legal responsibility for advising or insuring, the answer would have been an emphatic No.
In short, nothing had occurred, in my judgment, to alter the normal relationship of school and pupil. The school never assumed any legal responsibility. It sought to provide an additional service for its pupils. There was therefore, in my judgment, nothing to enlarge the duty normally owed by the school to the plaintiff. A duty to advise or to insure could only have arisen if there had been a more fundamental duty to act positively to protect the plaintiff’s economic interest. I have already given my reasons for concluding that there was no such duty.
Finally, to revert to Lord Keith’s observations in Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529 at 534, [1985] AC 210 at 240–241 and Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705 at 710, [1988] AC 175 at 191–192, it seems to me unfair and unreasonable that a school should stand in peril of a finding of negligence at the suit of a pupil for failing to do, either expeditiously or at all, something which the parent could avoid doing or could do carelessly with complete impunity. Moreover, it would be remarkable, to say the least, if the plaintiff, who had no right to expect anyone to insure him, should acquire such a right simply because a caring school considered it desirable that its pupils should have the advantage of personal accident insurance and should have taken steps to effect it.
Before leaving this aspect of the case, I ought to deal shortly with the submission made by counsel for the defendants that, in any event, the plaintiff has suffered no damage which is recognised by the law. He contends that the plaintiff has been deprived of nothing to which he was entitled or of which he was possessed or of any benefit of which he was assured or had reason to expect. Nor had he ventured anything in reliance on the defendants’ skill and judgment. This argument might be more appropriate to demonstrate that the plaintiff had no recognisable interest which he was entitled to have protected. Thus there was no duty on the school. Had there been a duty to insure and had the defendants failed in that duty, then, in my judgment, the result must have been a loss to the plaintiff which would have been recoverable in the courts (see, for instance, Wilkinson’s case (1773) 1 Esp 75, [1775–1802] All ER Rep 339).
For the reasons that I have attempted to give I am driven to conclude that the plaintiff’s claim must fail.
Action dismissed.
Solicitors: Clarke Willmott & Clarke (for the plaintiff); Herbert Smith (for the defendant).
K Mydeen Barrister.
Re T and others (minors) (wardship: jurisdiction)
[1989] 1 All ER 297
Categories: FAMILY; Children
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): SIR STEPHEN BROWN P AND PURCHAS LJ
Hearing Date(s): 5 SEPTEMBER, 27 OCTOBER 1988
Child – Care – Local authority – Wardship proceedings – Interim care orders made in respect of four children of same family – Care orders made in two juvenile courts for different children on the application of two different local authorities – Same guardian ad litem appointed for children – Guardian ad litem applying to High Court to make children wards of court to enable one court to exercise jurisdiction over whole family – Whether guardian ad litem having locus standi to issue wardship summons – Children and Young Persons Act 1969, s 32B(1) – Magistrates’ Courts (Children and Young Persons) Rules 1970, r 14A(1)(6).
A mother had three children by her first marriage, namely G, a boy aged 16, S, a girl aged 15, and L, a girl aged 13. She also had one child, R, a boy aged 9, by her second marriage. Following allegations by S that her stepfather had sexually abused her, a place of safety order was obtained in respect of her and she was placed in the interim care of the local authority. The mother, the stepfather and the three other children moved to the area of another local authority and following further allegations by S of sexual abuse within the family the three remaining children were placed in the interim care of that local authority. In proceedings in the juvenile court for each area the same guardian ad litem was appointed to act for all four children. Because of the difficulties of dealing with two separate sets of proceedings in two different juvenile courts the guardian ad litem issued an originating summons for the children to be made wards of court so that one court could exercise jurisdiction over the whole family. Both local authorities applied to the High court to discharge the wardship in respect of the children but their applications were refused. The local authority having the interim care of G, S and L appealed, contending, inter alia, that the guardian ad litem had no locus standi to issue the wardship proceedings in the High Court because under s 32B(1)a of the Children and Young Persons Act 1969 and r 14A(1)b and (6)c of the Magistrates’ Courts (Children and Young Persons) Rules 1970 the guardian was appointed solely ‘for the purpose of the proceedings’ in the juvenile court to safeguard the interests of the relevant infant before the court and had no role outside or beyond those proceedings and therefore had no authority to embark on wardship proceedings.
Held – The appointment of a guardian ad litem pursuant to s 32B(1) of the 1969 Act did not give the guardian any additional status or authority beyond or outside the proceedings before the juvenile court. Accordingly, the guardian ad litem had no locus standi to issue an originating summons initiating wardship proceedings in the High Court and the summons was therefore procedurally defective. Moreover, even if the summons had been procedurally valid, the wardship would not have been confirmed because the two sets of care proceedings under the 1969 Act had been properly commenced in the
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appropriate juvenile courts and neither local authority envisaged any problem in seeking to protect each of the children concerned. It followed therefore that the appeal would be allowed (see pp 302 j to p 303 b, p 304 b c, p 305 j and p 306 a b post).
Notes
For the appointment and duties of a guardian ad litem, see 24 Halsbury’s Laws (4th edn) paras 738, 765, 796.
For the wardship jurisdiction, see ibid paras 576–583, and for cases on the subject, see 28(2) Digest (Reissue) 911–916, 2220–2247.
For the Children and Young Persons Act 1969, s 32B, see 6 Halsbury’s Statutes (4th edn) 277.
For the Magistrates’ Courts (Children and Young Persons) Rules 1970, r 14A, see 4 Halsbury’s Statutory Instruments (Grey Volume) 238.
Cases referred to in judgments
A v Berkshire CC (1988) Times, 10 June affd (1988) Times, 24 October, CA.
A v Liverpool City Council [1981] 2 All ER 385, [1982] AC 363, [1981] 2 WLR 948, HL.
D (a minor) (wardship: sterilisation), Re [1976] 1 All ER 326, [1976] Fam 185, [1976] 2 WLR 279.
H (a minor) (wardship: jurisdiction), Re [1978] 2 All ER 903, [1978] Fam 65, [1978] 2 WLR 608, CA.
P (infants), Re [1967] 2 All ER 229, [1967] 1 WLR 818.
W v Hertfordshire CC [1985] 2 All ER 301, [1985] AC 791, [1985] 2 WLR 892, HL.
Cases also cited
A, B, C and D (minors), Re (20 April 1988, unreported), Fam Div.
E (minors) (wardship: jurisdiction), Re [1984] 1 All ER 21, [1983] 1 WLR 541, CA.
J (a minor) (wardship: jurisdiction), Re [1984] 1 All ER 29, [1984] 1 WLR 81, CA.
Surrey CC v S [1973] 3 All ER 1074, [1974] QB 124, [1973] 3 WLR 579, CA.
Interlocutory appeal
On 7 April 1988 the plaintiff child S, by her guardian ad litem Mrs Jane Elizabeth Booth, who was also the guardian ad litem of the minors G, L and R, issued an originating summons to make the four minors wards of court. The respondents to the summons were (1) the Bradford Metropolitan City Council (Bradford council), which had interim care of S, (2) the mother of the children, (3) Mr T, the father of S, G and L, (4) Kirklees Metropolitan Borough Council (Kirklees council), which had interim care of G, L and R, and (5) Mr M, the father of R and stepfather of the other children. G was subsequently joined as a separate respondent. On 20 April 1988 Kirklees council issued a summons to discharge the wardship in respect of G, L and R and on 16 May 1988 Bradford council made a similar application in respect of S. On 16 June 1988 Booth J ([1988] 3 WLR 713), in a judgment delivered in open court after a hearing in chambers, refused the applications. Kirklees council appealed. Bradford council did not appeal. The facts are set out in the judgment of Sir Stephen Brown P.
Hugh Bennett QC and Eleanor Hamilton for Kirklees council.
R M Harrison QC and Rebecca Thornton for S.
Anita M Ryan QC and Stephen Glover for G.
James Goss for the mother.
Cur adv vult
27 October 1988. The following judgments were delivered.
SIR STEPHEN BROWN P. On 16 June Booth J decided as a preliminary issue that
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the High Court should exercise its wardship jurisdiction in respect of four children of one family who individually are the subjects of two sets of care proceedings brought by two different local authorities in two different juvenile courts. After hearing argument she ordered that the wardship should be confirmed (see [1988] 3 WLR 713). Kirklees Metropolitan Borough Council (Kirklees council) as the local authority concerned with three of the children now appeals against that order. The other local authority concerned, Bradford Metropolitan City Council (Bradford council), whilst not abandoning the position which it adopted before the judge, nevertheless does not wish to pursue an appeal in this court.
The facts which gave rise to the hearing before the judge are succinctly set out in her judgment. The four children are G, a boy of 16, S, a girl of 15, L, a girl of 13, and R, a boy of 9 years of age. G, S and L are the children of the mother by her first husband, Mr T. The fourth child, R, is the child of the mother by her second husband, Mr M. In May 1987 the mother with Mr M and all her four children were living in Bradford. The girl S made an allegation that she had been raped. She did not at that stage identify the alleged perpetrator. However, in November 1987 she alleged that her stepfather Mr M, the mother’s second husband, had sexually abused her. As a result of her disclosures a place of safety order was obtained by Bradford Social Services Department, and on 8 December 1987 the Bradford Juvenile Court made an interim care order placing S in the care of Bradford council. At the end of November 1987 the mother with Mr M and her three other children moved from Bradford to Huddersfield. They thereupon came within the area of Kirklees council. As a result of the order made in Bradford in relation to S Kirklees social services department was informed of the situation. They got in touch with the family but at that stage decided to take no action. By this stage Mr M, the stepfather of S, had been charged with an offence of indecent assault on S and was no longer living in the family home. At the hearing of this appeal this court has been told that Mr M has been convicted of indecent assault and has been sentenced to a term of imprisonment. Meanwhile, S resided in a children’s home in Bradford pursuant to the interim care order of the Bradford Juvenile Court. She then made an allegation that Mr M had also sexually abused her elder brother, G, and she made yet a further allegation that the maternal grandfather had sexually abused L. As a result of these further allegations Kirklees social services department obtained a place of safety order in respect of L and she was taken from the mother’s home in Huddersfield and interviewed. She did not herself make any allegations when seen, and was permitted to return home. In March 1988 S made further allegations of sexual activity within the family which prompted Kirklees council to obtain place of safety orders in respect of the three children, G, L and R, who then resided in their area.
Police interviews, it is said, disclose that R has apparently admitted having had sexual intercourse with the two girls when he was aged seven but G had always contended that the allegations concerning him are a complete fabrication. On 3 March 1988 the Bradford Juvenile Court made a further interim care order in respect of S in favour of Bradford council. After making a short visit to her mother’s home in Huddersfield S returned to reside in the children’s home in Bradford. On 31 March 1988 the Huddersfield Juvenile Court, on the application of Kirklees council, made interim care orders in respect of the three children G, L and R. L and R are presently residing in two different children’s homes. G is currently at an assessment centre.
In the proceedings in each juvenile court a Mrs Jane Elizabeth Booth was appointed to act as guardian ad litem to all the children. In two affidavits which she has sworn she has made known her concern as to the difficulty which she feels she faces in dealing with two separate sets of proceedings in two different courts. It is apparent that there is a sharp conflict of interest in particular between the child S and the child G. Indeed, G has since been ordered to be separately represented. In consequence of this he was separately represented at the hearing of this appeal. On 7 April 1988, as a result of the difficulties which she felt she encountered, Mrs Booth, acting on her own initiative, took the step of issuing an originating summons in wardship. Her stated purpose was to enable one court
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to exercise jurisdiction over the whole family. The originating summons is entitled ‘In the matter of S——G——L——& R——[I give the initials in order to preserve their anonymity] … Between S——[plaintiff] (by her Guardian Ad Litem JANE BOOTH) and CITY OF BRADFORD METROPOLITAN COUNCIL’ and the mother, the father of S, Kirklees council and Mr M, the mother’s second husband, are all named as defendants. The form of the summons then reads:
‘By this summons, which is issued on the application of the plaintiff [S] (by her Guardian Ad Litem Jane Booth) … the plaintiff claims against the defendant 1. That the children [and all are named] be made Wards of this Honourable Court during their minority 2. That the Court do make orders regarding care and control and access regarding these children.’
On 16 May 1988 Bradford council issued a summons seeking the discharge of the wardship in respect of S, and Kirklees council also applied to discharge the wardship in respect of G, L and R. At the hearing before the judge they relied on the principles established in A v Liverpool City Council [1981] 2 All ER 385, [1982] AC 363 and in W v Hertfordshire CC [1985] 2 All ER 301, [1985] AC 791, each submitting that both local authorities concerned had acted in accordance with the statutory code relating to children in trouble or need and that in the light of those decisions it was neither necessary nor appropriate for there to be a review of the councils’ actions by the High Court. The cases could and should be dealt with in accordance with the statutory code. For the guardian ad litem it was submitted that the court could and should exercise its wide jurisdiction to entertain the originating summons and to decide the issues relating to all the children. It was argued that the Children and Young Persons Act 1969 did not provide any means whereby one court could entertain care proceedings relating to children of the same family if they happened individually to reside in different areas. It was claimed that this constituted a lacuna in the statutory powers of juvenile courts which the High Court could and should fill by the exercise of its wardship jurisdiction.
The two authorities submitted that as ‘guardian ad litem’ appointed under the 1969 Act Mrs Booth had no remit or authority to embark on wardship proceedings. They pointed out that the summons was issued in the name of the child S as plaintiff ‘by her guardian ad litem’. The child was then in fact in the statutory care of Bradford council. The district registrar in due course ordered that she should be referred to as ‘next friend’. Nevertheless, the judge decided that in the circumstances of this case the court did have power to exercise its wardship jurisdiction and that the circumstances of the case required that it should do so. The judge said ([1988] 3 WLR 713 at 722–723):
‘Neither juvenile court has jurisdiction to transfer the case before it to the other court and neither court has jurisdiction to transfer a case to the High Court. Therefore the only means by which the guardian ad litem could achieve a hearing before one tribunal was to invoke the wardship proceedings.’
The judge then ordered that the wardship should be confirmed.
Counsel for Kirklees council, in a careful argument, submitted that the judge was in error in deciding that there was a lacuna in the powers of the juvenile courts under the provisions of the 1969 Act. He reviewed the structure of the Act, pointing out that s 2(2) required a local authority to bring care proceedings in respect of a child residing in its area if it should appear to it that there were grounds for bringing care proceedings. He acknowledged that by virtue of s 2(11) the juvenile court in which care proceedings were to be initiated must be the court for the area in which the child resided. He accepted that the Act contained no provision for the transfer of care proceedings from one juvenile court to another juvenile court. However, he said that a juvenile court is obliged to act in the best interests of the child. He challenged the assertion that it would not be possible or practicable to do justice to each of the children if the proceedings were to continue in separate courts. Mere apparent inconvenience, he submitted, was not a ground for
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removing the proceedings from the jurisdiction of the juvenile courts to the High Court. Mrs Booth, as guardian ad litem, was under a duty to seek the views of the juvenile court in the event of encountering difficulty. In this case it might well be that she would find it difficult to continue to act as guardian to G whilst acting as guardian to the other children, in particular to S, having regard to the conflict between S and G. If, as seemed highly probable, the Bradford Juvenile Court were to find the ground for making a care order made out in the case of S, then it could and probably would make a care order in her case. In the area of Kirklees the Huddersfield Juvenile Court would by virtue of the provisions of s 1(2)(b) of the Act be able to take into consideration the finding of the Bradford Juvenile Court in respect of S when considering the cases of the other three children. Should it be considered necessary for S to give evidence in relation to the allegations which she had made concerning the other children then there would appear to be no procedural impediment to prevent her being called to give evidence in Huddersfield. However, it might prove unnecessary or undesirable for her to be called. Accordingly, he submitted that there was no justification for the High Court to be called on to exercise its wardship jurisdiction in relation to these children. The proceedings under the Children and Young Persons Act 1969 had been properly set in train and the relevant courts were fully competent to decide the relevant issues in respect of each of the children.
Counsel for Kirklees council further submitted that Mrs Booth as guardian ad litem in the juvenile court proceedings had no locus standi to enable her to institute wardship proceedings in the High Court in these cases. Her appointment as guardian ad litem had been made under the provisions of s 32B(1) of the 1969 Act for the purpose ‘of these proceedings’. The proceedings are those in the juvenile court. Rule 14A(1) of the Magistrates’ Courts (Children and Young Persons) Rules 1970, SI 1970/1792, provided that the court should appoint a guardian ad litem ‘for the purpose of the proceedings’. Rule 14A(6) sets out the duties of the guardian ad litem ‘with a view to safeguarding the interests of the relevant infant before the court’. He therefore contended that as guardian ad litem she had no role outside or beyond the proceedings in the juvenile court. He acknowledged that the availability of wardship is very wide and that it would appear that any person, including a local authority and indeed the child himself acting by his ‘next friend’, may apply for the child to be made a ward of court. In this instance, however, the application was not in reality that of the child S herself, although it was so expressed. It was in fact the application of the guardian ad litem as the summons itself indicated. The registrar’s direction that she should be referred to as ‘next friend’ was not valid. It could not alter the nature or status of the proceedings. He argued that there was therefore a fundamental procedural defect in these wardship proceedings. He said that Mrs Booth was apparently seeking an opportunity to transfer the proceedings from the jurisdiction of the juvenile courts when there was no authority for her to do so. Counsel for Kirklees council compared her role with that of the Official Solicitor. He pointed out that it is settled law that the Official Solicitor cannot initiate and then pursue wardship proceedings by purporting to act on the infant’s behalf as his ‘next friend’. He cited Re D (a minor) (Wardship: sterilisation) [1976] 1 All ER 326 at 335–336, [1976] Fam 185 at 196–198. He also referred to A v Berkshire CC (1988) Times, 10 June. He placed a transcript of the judgment before this court. It is a case which I decided at first instance on the application of Berkshire County Council to discharge a wardship summons relating to a boy who was the subject of care proceedings in a juvenile court. The substantive facts were different from the facts of this case. In that case the guardian ad litem had become dissatisfied with proposals to be put before a juvenile court by the county council at the substantive hearing of care proceedings in relation to the minor. As a result she took the step of issuing a summons in wardship. It was said that she wished to be able to obtain a further medical report from a doctor of her own choice and then to put forward alternative detailed proposals for the care of the minor, although by her summons she sought a care order under the Family Law Reform Act 1969 in favour of the same county
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council. The court held that her action was in direct conflict with the principles expressed by the House of Lords in A v Liverpool City Council [1981] 2 All ER 385, [1982] AC 363 and W v Hertfordshire CC [1985] 2 All ER 301, [1985] AC 791 and, furthermore, that she had no locus standi in the High Court as a guardian ad litem appointed by the juvenile court.
Counsel for S submitted that there was a lacuna in the juvenile court code. He claimed that the effect of s 2(11) of the 1969 Act was that no single juvenile court was able to consider the cases of all children from one family if the children happened to reside in different petty sessional areas at the material time. He claimed that there was nothing in the decisions in A v Liverpool City Council or W v Hertfordshire CC to prevent the High Court from assuming wardship jurisdiction in order to bring all such cases before the same tribunal. He submitted that the judge had properly exercised her discretion to confirm the wardships in order to supplement the powers of the juvenile courts. He further submitted that a guardian ad litem appointed by a juvenile court under s 32B of the 1969 Act was entitled in that capacity to initiate wardship proceedings if she considered that the welfare of the minor required her to do so. He argued that her authority arose either from the statute itself or, alternatively, at common law by reason of the fact that she was a person having an interest in the welfare of the minor.
The judge took the view that the likely conflict between S and G would make it difficult not only for the guardian ad litem but also for each juvenile court to make orders which were in the interests of each child, bearing in mind that they were the children of one family. The judge said ([1988] 3 WLR 713 at 719):
‘I am of the view that the guardian ad litem is justified in her fears that in the particular circumstances of this case neither juvenile court has the necessary statutory power to safeguard and protect the welfare of these children having regard to the fact that they are of one family and that their respective interests cannot properly be considered in isolation one from another. Since it is not open to either court to transfer its jurisdiction to the other so that the interests of all the children may be considered by one tribunal the question is whether it is open to this court to exercise its wardship jurisdiction despite the fact that the two local authorities concerned wish to proceed in accordance with the statutory code.’
The judge cited Re P (infants) [1967] 2 All ER 229, [1967] 1 WLR 818, where Stamp J held that despite the fact that a custody order had already been made in a magistrates’ court the High Court could nevertheless exercise its wardship jurisdiction where relief was genuinely sought which the magistrates were not empowered to give. The judge also cited Re H (a minor) (wardship: jurisdiction) [1978] 2 All ER 903, [1978] Fam 65. However, that case received criticism from the House of Lords in A v Liverpool City Council. It is also to be noted that Re P (infants) was decided before the 1969 Act. The judge further took the view that in W v Hertfordshire CC [1985] 2 All ER 301, [1985] AC 791 the House of Lords did not express any view which might appear to derogate from the principle that the High Court may exercise its wardship jurisdiction wherever it is necessary to do so in order to supplement the inadequate statutory powers of the magistrates. The judge said ([1988] 3 WLR 713 at 722):
‘I am therefore satisfied that in this case the High Court can and should exercise its wardship jurisdiction to supplement the powers of the justices and to ensure that one tribunal may consider the future welfare of all the children of this family and make such orders as are found to be in their best interests.’
Whilst it might be thought to be more convenient for the cases of all these children to be decided by one tribunal I am unable to take the view that these sets of proceedings are exceptional. In each case the local authority concerned acted properly in the discharge of its duties under the 1969 Act. The proceedings were commenced in the appropriate courts and appropriate interim care orders were made. Neither authority considered that
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it was inhibited in any way in seeking to protect each of the children concerned. In neither case has the juvenile court indicated that it experienced any difficulty in considering and dealing with the cases before it. The judge said in her judgment that under the Magistrates’ Courts (Children and Young Persons) Rules 1970 the guardian ad litem has an obligation to seek the views of the court in any case where difficulties arise in relation to the performance of her duties. In this case she did not do so. However, the judge said ([1988] 3 WLR 713 at 722): ‘… it seems to me that in the circumstances of this case to do so would have been of no avail.’
The position is, however, that neither of the local authorities concerned has suggested that it envisages any problem in pursuing the proceedings which it has initiated under the statute. Indeed, the contrary is the case. Neither juvenile court has expressed concern at the lack of any powers that it may possess.
From the facts recited in the judgment of the judge it would appear that there is a clear division between the case of S and the cases of the other children involved. The guardian ad litem as guardian for all the children may face a conflict of interest personally. This court has been led to believe that in the case of G there is in any event to be a separate guardian. It would appear that the difficulty in this case therefore arises from the position of the guardian herself, having regard to her dual appointment. It does not appear to me that that of itself affects the powers of the courts or their ability to make appropriate decisions in the individual cases. Perhaps if she had brought her problem to the notice of the courts concerned her position might have been regularised by giving up the appointment to one or other of these positions. This wardship summons was issued before either court had approached any determination of the matter before it, although each had made interim orders. The guardian’s action was clearly designed to remove these matters from the jurisdiction of these juvenile courts. I believe that this action is in conflict with the ratio of the judgments of the House of Lords in A v Liverpool City Council and W v Hertfordshire CC. In his speech in the Hertfordshire case [1985] 2 All ER 301 at 303, [1985] AC 791 at 796 Lord Scarman referred to the speech of Lord Wilberforce in the Liverpool case. He said:
‘In the Liverpool case [1981] 2 All ER 385 at 388, [1982] AC 363 at 372, Lord Wilberforce put the point succinctly: “Parliament has by statute entrusted to the local authority the power and duty to make decisions as to the welfare of children without any reservation of a reviewing power to the court.” He indicated where the line had to be drawn between the wardship jurisdiction of the High Court and the statutory responsibilities of the local authority ([1981] 2 All ER 385 at 388–389, [1982] AC 363 at 373): “This is not to say that the inherent jurisdiction of the High Court is taken away. Any child, whether under care or not, can be made a ward of court by the procedure of s 9(2) of the Law Reform (Miscellaneous Provisions) Act 1949. In cases (and the present is an example) where the court perceives that the action sought of it is within the sphere of discretion of the local authority, it will make no order and the wardship will lapse. But in some instances, there may be an area of concern to which the powers of the local authority, limited as they are by statute, do not extend. Sometimes the local authority itself may invite the supplementary assistance of the court. Then the wardship may be continued with a view to action by the court. The court’s general inherent power is always available to fill gaps or to supplement the powers of the local authority: what it will not do (except by way of judicial review where appropriate) is to supervise the exercise of discretion within the field committed by statute to the local authority.” ’
In this case neither local authority has indicated that it feels any difficulty in dealing under the statutory procedure with the case of the child or children within its area. Nevertheless, the guardian, doubtless in good faith, has without reference to either of the courts which appointed her taken it on herself to issue wardship proceedings.
When she made the order confirming the wardship the judge directed that the Official
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Solicitor should be invited to act as guardian ad litem for all these children. This court has been informed that the Official Solicitor has declined that invitation. Now that the child G is separately represented it does not appear to me that there is likely to be any insuperable difficulty in dealing with this matter through the normal statutory procedure.
Despite the wide ambit of s 9(2) of the Law Reform (Miscellaneous Provisions) Act 1949 I do not consider that the originating summons was regularly or properly issued in this case. The position of the guardian ad litem is a statutory role pursuant to the provisions of s 32B(1) of the Children and Young Persons Act 1969. The appointment pursuant to that section does not in my judgment give any additional status or authority to the guardian beyond or outside the proceedings before the juvenile court. I do not, therefore, consider that Mrs Booth had any locus standi to issue this wardship summons.
In the result I have come to the conclusion, first, that the wardship summons was procedurally defective but, second, even if it was procedurally valid so as to initiate wardship proceedings it should not have been confirmed. In the circumstances I would have to say that in doing so the judge erred in exercising her discretion.
PURCHAS LJ. I agree.
In view of the fact that we are differing from a judge of great experience in these matters I will add a few words of my own. The full history and circumstances have already been set out in the judgment just delivered and need not be repeated. The family involved consisted of children ranging from the age of 16 down to the age of 9. The allegations which were to be investigated by the two juvenile courts concerned are both serious and complex. Moreover, they involve nearly all, if not all, of the children and the mother, stepfather and the maternal grandfather. There is a serious conflict of testimony to be anticipated between S and G, both of whom are of an age to appreciate the impact and significance of allegations of this kind and, in the case of G, on the unestablished assumption that the allegations are true, the desirability of making a false denial. Similarly, S on the other hand is of an age where it is not unknown for young girls to fabricate allegations of a sensational nature. There is considerable force in the suggestion that one court ought to resolve these conflicts of testimony where they are relevant to the determination of the future of the members of the family. However, this is not necessarily the same thing as one court having to resolve the future of the whole family. The possibility, if it is necessary, of S being called in the proceedings in the Bradford Juvenile Court have already been considered by Sir Stephen Brown P. I agree that whilst it is clear that Mrs Booth, the guardian ad litem, must find herself in a position of conflicting interest as between G and S, this of itself is not a cause for removing the matter from the jurisdiction of the juvenile courts. As the guardian ad litem in one court, namely the wardship court, she would still suffer a conflict of interest between G and S. The central point is whether there is any case to be made based on the proper disposition of the various members of this family being only capable of achievement in one court in wardship proceedings.
S’s future, which would appear likely to be one of remaining in the care of the Bradford City Council, can clearly be determined by the Bradford Juvenile Court. Her future does not depend on any conflict of testimony which could be relevant. On the other hand, the future of G, L and R must depend to a material extent on the veracity of the testimony of S. This problem can clearly be resolved in accordance with their function within the statutory code by the Huddersfield Juvenile Court. The so-called ‘lacuna’ passage in the speech of Lord Wilberforce in A v Liverpool City Council [1981] 2 All ER 385 at 388–389, [1982] AC 363 at 373 has been a haven of resort in many cases sought by persons wishing to invoke the wardship jurisdiction. In W v Hertfordshire CC [1985] 2 All ER 301 at 304, [1985] AC 791 at 797 Lord Scarman, after referring to the passages from the speech of Lord Wilberforce in the Liverpool case, said:
‘The High Court cannot exercise its powers, however wide they may be, so as to intervene on the merits in an area of concern entrusted by Parliament to another
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public authority. It matters not that the chosen public authority is one which acts administratively whereas the court, if seised of the same matter, would act judicially. If Parliament in an area of concern defined by statute (the area in this case being the care of children in need or trouble) prefers power to be exercised administratively instead of judicially, so be it. The courts must be careful in that area to avoid assuming a supervisory role or reviewing power over the merits of decisions taken administratively by the selected public authority.’
This passage can be adapted to the problem in the present case. By the statutory code Parliament has decreed that the welfare of any particular child resident within the area of the local authority concerned shall be dealt with administratively by that authority subject only to the powers to grant or withhold care orders etc vested in the first instance in the juvenile court for the area concerned. The fact that the statutory code is framed in such a way that the care of the individual child is the object of attention and supervision rather than the family as a whole is not a matter in which the wardship court should intervene. Intervention in this area is no different from the intervention which was held to be wrongful in A v Liverpool City Council and W v Hertfordshire CC.
Finally, in the course of his argument counsel for Kirklees council referred to A v Berkshire CC (1988) Times, 10 June, in which the judgment at first instance was delivered by Sir Stephen Brown P. Since the argument in the present case was heard that case has been before the Court of Appeal when the appeal was dismissed ((1988) Times, 24 October). It is sufficient for the purposes of this judgment to record that on appeal the Court of Appeal considered submissions relating to the locus standi of the guardian ad litem in that case. The judgments confirmed that the guardian ad litem appointed under s 32B and r 14A of the Magistrates’ Courts (Children and Young Persons) Rules 1970, SI 1970/1792, was appointed ‘for the purposes of the proceedings in the juvenile court’. With the determination of those proceedings the guardian ad litem becomes functus officio. Reference was made to r 14A(6), which provides:
‘The guardian ad litem appointed under this rule or section 32B(1) of the [Children and Young Persons Act 1969], with a view to safeguarding the interests of the relevant infant before the court shall—(a) so far as it is reasonably practicable, investigate all circumstances relevant to the proceedings and for that purpose shall interview such persons, inspect such records and obtain such professional assistance as the guardian ad litem thinks appropriate … ’
As has been set out in the judgment just delivered, in that case the guardian ad litem, holding professional views as to the proper treatment of the child which conflicted with reports in the hand of the local authority, sought an adjournment in order to obtain a psychiatric report from an independent specialist. In the context of an indication from the local authority that they would oppose the adjournment or even if such a report were obtained would not alter their views, the guardian ad litem issued an originating summons in wardship. In the event the local authority at a late stage did not oppose the adjournment and after the hearing before Sir Stephen Brown P a report from the specialist concerned was obtained. The decision to dismiss the wardship summons and deward the child was in those circumstances upheld and the judgments confirmed that the powers given to the guardian ad litem were confined within the ambit of the 1969 Act and the 1970 rules, particularly r 14A. The guardian’s appointment as guardian ad litem is and can only be for the purposes of the proceedings in the juvenile court and she cannot enjoy a similar status until a subsequent appointment has been made in her favour by the High Court in the wardship proceedings. For different reasons, as already indicated, this would be unlikely although not impossible. On the other hand, as an ordinary member of the public especially concerned with the welfare of the child involved, anyone may apply to make that child a ward of court or act as next friend. The fact that the applicant had previously been appointed as guardian ad litem in the juvenile proceedings would not be a cause for restricting the rights available to any individual in
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appropriate circumstances to apply to the wardship court. This, however, is the limit of her locus standi before the court. As has already been said, the real purpose of the application in wardship in this case is to usurp the execution by the two local authorities and the respective juvenile courts of their functions under the statutory code.
For these reasons and for the reasons already given by Sir Stephen Brown P I agree that this appeal must be allowed and that the order he proposes should be made.
Appeal allowed. Leave to appeal to the House of Lords refused.
Solicitors: Sharpe Pritchard agents for M R G Vause, Huddersfield (for Kirklees council); Williscroft & Co, Bradford (for S); Parker Bird, Huddersfield (for G); Ramsdens, Huddersfield (for the mother).
Mary Rose Plummer Barrister.
Commission for Racial Equality v Dutton
[1989] 1 All ER 306
Categories: CONSTITUTIONAL; Civil Rights; Liberties
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): STOCKER, NICHOLLS AND TAYLOR LJJ
Hearing Date(s): 18, 19, 20 MAY, 27 JULY 1988
Race relations – Discrimination – Discrimination against racial group – Gipsies – Racial group defined by reference to colour, race, nationality or ethnic or national origins – Ethnic origins – Travellers – Publican refusing to admit ‘travellers’ to public house – Whether unlawful discrimination against gipsies – Whether gipsies a racial group – Race Relations Act 1976, ss 1(1)(a)(b), 3(1), 29.
The defendant, who was the licensee of a public house, refused to serve a person who was living in an illegally parked caravan nearby and an unpleasant incident ensued. The licensee, as he had done at his previous licensed premises, then put up a sign saying ‘Sorry, no travellers’. Following a complaint the Commission for Racial Equality sought a (i) declaration that the sign contravened s 29a of the Race Relations Act 1976 on the grounds that it was an advertisement indicating that the defendant intended to discriminate against gipsies and (ii) an injunction restraining the defendant from displaying the sign. The judge, sitting with assessors in the county court, dismissed the action. The commission appealed, contending that the defendant had either directly discriminated against gipsies on racial grounds for the purposes of s 1(1)(a)b of the 1976 Act because ‘traveller’ was synonymous with gipsies or had indirectly discriminated against gipsies for the purposes of s 1(1)(b) because he had applied to a gipsy who wished to have a drink at his public house a condition, viz that he was not a traveller, which he applied to persons not of the same ‘racial group’ when the proportion of gipsies who could comply with it was considerably smaller than the proportion of other racial groups who could comply with it.
Held – (1) The term ‘traveller’ was not synonymous with gipsies but referred to all persons leading a nomadic way of life. Accordingly, the defendant’s sign prohibiting the entry of ‘travellers’ to his public house could not reasonably be understood as indicating an intention by the defendant to discriminate against gipsies as a racial group and therefore there had been no direct discrimination under s 1(1)(a) of the 1976 Act (see p 309 d, p 311 c to f, p 315 h and p 318 c d, post).
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(2) For the purposes of race relations and the 1976 Act gipsies were capable of being a separate ‘racial group’ as defined by s 3(1)c of that Act because, despite their long presence in England and the fact that they were no longer derived from common racial stock, they had not merged wholly with the population but remained an identifiable group defined by reference to their ‘ethnic … origins’. Since the proportion of gipsies who could comply with the defendant’s ‘no travellers’ condition was considerably smaller than the proportion of non-gipsies who could comply with it, because a much higher proportion of gipsies were travellers, and since the condition operated to the detriment of nomadic gipsies, the defendant’s ‘no travellers’ condition amounted to indirect discrimination against gipsies under s 1(1)(b) of the 1976 Act unless the defendant could show that it was justified. Since the judge had not decided that issue the appeal would be allowed and the case remitted to the county court to determine the justification issue (see p 313 e f j to p 314 a g h, p 315 d to g, p 317 j to p 318 c and p 320 g h, post); Mandla v Dowell Lee [1983] 1 All ER 1062 applied.
Notes
For unlawful discrimination on grounds of ethnic or national origins, see 4 Halsbury’s Laws (4th edn) para 1035, and for cases on the subject, see 2 Digest (Reissue) 316–317, 1783–1786.
For the Race Relations Act 1976, ss 1, 3, 29, see 6 Halsbury’s Statutes (4th edn) 767, 769, 788.
Cases referred to in judgments
Clarke v Eley (IMI) Kynoch Ltd [1983] ICR 165, EAT.
King-Ansell v Police [1979] 2 NZLR 531, NZ CA.
Mandla v Dowell Lee [1983] 1 All ER 1062, [1983] 2 AC 548, [1983] 2 WLR 620, HL.
Mills v Cooper [1967] 2 All ER 100, [1967] 2 QB 459, [1967] 2 WLR 1343, DC.
Cases also cited
Brutus v Cozens [1972] 2 All ER 1297, [1973] AC 854, HL.
Commission for Racial Equality v Associated Newspapers Group Ltd [1978] 1 WLR 905, CA.
Ealing London Borough v Race Relations Board [1972] 1 All ER 105, [1972] AC 342, HL.
Greenwich London BC v Powell (1988) 20 HLR 411, CA; rvsd [1989] 1 All ER 65, HL.
Patel v Mehtab (1980) 5 HLR 80, DC.
West Glamorgan CC v Rafferty [1987] 1 All ER 1005, [1987] 1 WLR 457, CA.
Appeal
The Commission for Racial Equality appealed from the decision of his Honour Judge Harris QC, sitting with assessors at the Westminster County Court at the trial of the action on 29 June 1987, whereby he dismissed the commission’s claim for a declaration that the defendant, Patrick Dutton, the licensee of the Cat and Mutton public house, London Fields, Hackney, by displaying a sign stating ‘Sorry, no travellers’ outside his public house had contravened s 29 of the Race Relations Act 1976 and an injunction restraining the defendant from displaying the sign or any sign bearing the same words or words to similar effect. The facts are set out in the judgment of Nicholls LJ.
Stephen Sedley QC and Keith Hornby for the commission;.
John E A Samuels QC and Roger McCarthy for Mr Dutton.
Cur adv vult
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27 July 1988. The following judgments were delivered.
NICHOLLS LJ (giving the first judgment at the invitation of Stocker LJ). This case concerns gipsies, and whether they are a racial group within the Race Relations Act 1976. Mr Patrick Dutton has been the licensee of the Cat and Mutton public house, at Broadway Market, London Fields, London E8 for four years. Previously he was the licensee for a year at the Earl of Beaconsfield in Southwark, and before that he was at the Lord Cecil in Clapton from 1978. At both those houses Mr Dutton had unpleasant experiences with people who came from caravans which were parked illegally on nearby sites. They caused damage. They threatened Mr Dutton and terrorised his wife. They behaved generally in such a way as to upset Mr Dutton’s regular customers. So much so that, after such incidents, he put up a sign in the windows of the Earl of Beaconsfield and, subsequently, the Lord Cecil, which read ‘No travellers’. By that he meant, as he said in evidence, a person who travels around in a caravan and parks on illegal sites and gives him ‘hassle’. He wanted only to stop such people coming into his public house. Had the incidents continued he would have lost all his customers. After he put up the signs he had no more problems with such people.
One weekend, after Mr Dutton had been at the Cat and Mutton for about 18 months, some 15 or so caravans parked opposite the public house on London Fields, illegally, about 150 yards away. On Sunday morning some of these ‘travellers’ came into the Cat and Mutton. Mr Dutton refused to serve one of them on the ground he was from the site. There was an incident. Mr Dutton then put up handwritten signs in the windows of the Cat and Mutton: ‘Sorry, no travellers.' Since then Mr Dutton has had no more trouble with travellers.
In June 1985 a local resident, who does not use the Cat and Mutton, brought these signs to the attention of the Commission for Racial Equality. The commission took the view that the signs discriminated against gipsies. After correspondence this action was brought by the commission, in the exercise of its functions under s 63 of the 1976 Act. The commission seeks a declaration that by displaying the signs Mr Dutton has contravened s 29 of the 1976 Act and an injunction restraining him from continuing to display the signs. The action was heard by his Honour Judge Harris QC at the Westminster County Court. He sat with two assessors appointed from the list maintained by the Secretary of State under s 67(4) of persons who appear to him to have special knowledge and experience of problems connected with relations between persons of different racial groups. On 29 June 1987 the judge dismissed the action. The commission has appealed from that decision.
The statute
Section 29(1) of the 1976 Act provides:
‘It is unlawful to publish or to cause to be published an advertisement which indicates, or might reasonably be understood as indicating, an intention by a person to do an act of discrimination, whether the doing of that act by him would be lawful or, by virtue of Part II or III, unlawful.’
Discrimination for the purposes relevant in the present case is defined in s 1(1). Two types of conduct are within the definition. Paragraph (a) defines what is generally known as ‘direct’ discrimination, although not so called in the Act, as follows:
‘(1) A person discriminates against another in any circumstances relevant for the purposes of any provision of this Act if—(a) on racial grounds he treats that other less favourably than he treats or would treat other persons … ’
Section 3(1) defines ‘racial grounds’ as meaning ‘any of the following grounds, namely colour, race, nationality or ethnic or national origins’.
Mr Dutton’s notices are advertisements within the definition in s 78(1). Further, they
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indicate an intention by him to treat travellers less favourably than he treats other persons, in circumstances relevant for the purposes of the 1976 Act. By the notices he is informing would-be customers that he will not serve any who are travellers. They cannot use the Cat and Mutton. That is discrimination in the provision of goods, facilities or services (see s 20). Thus arises the question on this part of the case: is that discrimination ‘on racial grounds’? On this, the first issue to be considered is the meaning of the expression ‘travellers’ in the context in which the signs are being displayed.
The commission’s case was that in these notices ‘travellers’ is synonymous with gipsies. Before the judge there was material supporting the contention that, in recent years, the two expressions are sometimes used interchangeably. For example Chambers 20th Century Dictionary (1983) includes under the word ‘travel’ the sub-heading ‘traveller’: ‘travelling folk, people the name by which itinerant people often call themselves, in preference to the derogatory names gipsies or tinkers.' Again, the Supplement to the Oxford English Dictionary (1986) added a further meaning to the word ‘traveller’: ‘Also, a gypsy.' There was also evidence to the same effect from two expert witnesses, Dr Donald Kenrick and Dr Thomas Acton.
The meaning of ‘gipsy’
Notwithstanding this material the judge rejected the view that the words are synonymous. I agree with him. But before proceeding further it is necessary for me to comment on the word ‘gipsy’. One of the difficulties in the present case, in my view, is that the word ‘gipsy’ has itself more than one meaning. The classic dictionary meaning can be found as the primary meaning given in the Oxford English Dictionary (1933):
‘A member of a wandering race (by themselves called Romany), of Hindu origin, which first appeared in England about the beginning of the 16th c. and was then believed to have come from Egypt.’
Hence the word ‘gipsy’, also spelt as ‘gypsy’. It is a corruption of the word ‘Egyptian’. We find this usage in Shakespeare, where Othello says to Desdemona (Othello III. iv. 56–59):
‘That handkerchief
Did an Egyptian to my mother give;
She was a charmer, and could almost read
The thoughts of people … ’
Alongside this meaning, the word ‘gipsy’ also has a more colloquial, looser meaning. This is expressed in the Longman Dictionary of Contemporary English (1984), where two meanings are attributed to ‘gipsy’. The first meaning is along the lines I have already quoted. The second is: ‘a person who habitually wanders or who has the habits of someone who does not stay for long in one place’; in short, a nomad.
I can anticipate here by noting that if the word ‘gipsy’ is used in this second, colloquial sense it is not definitive of a racial group within the 1976 Act. To discriminate against such a group would not be on racial grounds, namely on the ground of ethnic origins. As the judge observed, there are many people who travel around the country in caravans, vans, converted buses, trailers, lorries and motor vehicles, leading a peripatetic or nomadic way of life. They include didicois, mumpers, peace people, new age travellers, hippies, tinkers, hawkers, self-styled ‘anarchists’, and others, as well as Romany gipsies. They may all be loosely referred to as ‘gipsies’, but as a group they do not have the characteristics requisite of a racial group within the Act.
I give two further illustrations of this point. First, an extract from a report of the Greater London Conciliation Committee, set out in the Report of the Race Relations Board for 1967–68 (HC Paper (1967–68) no 262) App III, which refers neatly to a difficulty arising in this field from the two meanings I have mentioned:
‘There are the pubs which discriminate against Gipsies. In tackling this problem the Committee has been hampered by two ambiguities. There is, first, some doubt
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as to the status of Gipsies under the Act. The Committee feels that there is little or no justification for this doubt, but equally believes that it persists and that it does so largely because of the second ambiguity. This second ambiguity arises out of common parlance, for it seems that the word “Gipsy” is used to designate wanderers generally as opposed to ethnic Gipsies. The Committee is, therefore, trying to prevent discrimination against Gipsies in the one (proper) sense while being aware that it may not interfere with discrimination against Gipsies in the other (vulgar) sense, and it is in a weak position in any argument with a publican about which way he uses the word.’
Second, the decision of the Queen’s Bench Divisional Court in Mills v Cooper [1967] 2 All ER 100, [1967] 2 QB 459. The court was there concerned with the meaning of the word ‘gipsy’ in s 127 of the Highways Act 1959. So far as material the section provides:
‘If, without lawful authority or excuse … (c) a hawker or other itinerant trader or a gipsy pitches a booth, stall or stand, or encamps, on a highway, he shall be guilty of an offence … ’
In Mills v Cooper [1967] 2 All ER 100 at 103, [1967] 2 QB 459 at 466 it was argued that the word ‘gipsy’ should be ‘given its dictionary meaning, as being a member of the Romany race … ' Lord Parker CJ said ([1967] 2 All ER 100 at 103, [1967] 2 QB 459 at 467):
‘That a man is of the Romany race is, as it seems to me, something which is really too vague of ascertainment, and impossible to prove; moreover, it is, I think, difficult to think that Parliament intended to subject a man to a penalty in the context of causing litter and obstruction on the highway merely by reason of his race. I think that, in this context, “gipsy” means no more than a person leading a nomadic life with no, or no fixed, employment and with no fixed abode. In saying that, I am hoping that those words will not be considered as the words of a statute, but merely as conveying the general colloquial idea of a gipsy.’
Likewise Diplock LJ said ([1967] 2 All ER 100 at 104, [1967] 2 QB 459 at 467–468):
‘I agree that the word “gipsy” as used in s. 127(c) of the Highways Act, 1959, cannot bear its dictionary meaning of a member of a wandering race (by themselves called Romany) of Hindu origin. If it did, it would mean that Parliament in 1959 had amended the corresponding section of the Highway Act, 1935, which referred to “gipsy or other person” so as to discriminate against persons by reason of their racial origin alone.’
In the context provided by this difficulty, and the impossibility of ever being able to prove pure Romany origin, Diplock LJ preferred what he described as the popular meaning of the word ‘gipsy’ ([1967] 2 All ER 100 at 104, [1967] 2 QB 459 at 468):
‘… a person without fixed abode who leads a nomadic life, dwelling in tents or other shelters, or in caravans or other vehicles.’
The substance of that definition was then adopted by Parliament in the Caravan Sites Act 1968. Section 6 of that Act imposed on local authorities a duty to exercise their powers, under the Caravan Sites and Control of Development Act 1960, to provide caravan sites’ so far as may be necessary to provide adequate accommodation for gipsies residing in or resorting to their area’. Section 16 provides:
‘… “gipsies” means persons of nomadic habit of life, whatever their race or origin, but does not include members of an organised group of travelling showmen, or of persons engaged in travelling circuses, travelling together as such … ’
I shall return at a later stage to the relevance of those statutory provisions. For the moment it is sufficient to note that there is ambiguity in the word ‘gipsy’, and when
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considering reports and other material about gipsies it is essential therefore to identify what is the meaning with which the author is using the word ‘gipsy’. In this judgment, save where I indicate otherwise, I shall henceforth use the word ‘gipsy’ in the narrower sense of the first of the two meanings mentioned above.
‘No travellers’
I can now state my reasons for agreeing with the judge’s conclusion on the ‘direct’ discrimination issue. Like most English words, the meaning of the word ‘traveller’ depends on the context in which it is being used. It has one meaning when seen on a railway station. For some time now the refreshment service provided at railway stations and on trains has been styled ‘Travellers Fare’. The word has a different meaning when in its context it is directed at travelling salesmen. In my view, in the windows of the Cat and Mutton ‘No travellers’ will be understood by those to whom it is directed, namely potential customers, as meaning persons who are currently leading a nomadic way of life, living in tents or caravans or other vehicles. Thus the notices embrace gipsies who are living in that way. But the class of persons excluded from the Cat and Mutton is not confined to gipsies. The prohibited class includes all those of a nomadic way of life mentioned above. As the judge said, they all come under the umbrella expression ‘travellers’, as this accurately describes their way of life.
It is estimated that nowadays between one-half and two-thirds of gipsies in this country have wholly or largely abandoned a nomadic way of life in favour of living in houses. I do not think that the notices could reasonably be understood as applying to them, that is, to gipsies who are currently living in houses. Gipsies may prefer to be described as ‘travellers’ as they believe this is a less derogatory expression. But, in the context of a notice displayed in the windows of a public house near a common on which nomads encamp from time to time, I do not think ‘no travellers’ can reasonably be understood as other than ‘no nomads’. It would not embrace house-dwellers, of any race or origin.
For this reason I cannot accept that Mr Dutton’s notices indicate, or might reasonably be understood as indicating, an intention by him to do an act of discrimination within s 1(1)(a). Excluded from the Cat and Mutton are all ‘travellers’, whether or not they are gipsies. All ‘travellers’, all nomads, are treated equally, whatever their race. They are not being discriminated against on racial grounds.
Indirect discrimination: a racial group
That suffices to dispose of the claim based on s 1(1)(a) of the 1976 Act, but that is not the end of the action. I must now turn to consider s 1(1)(b), which is in the following terms:
‘(1) A person discriminates against another in any circumstances relevant for the purposes of any provision of this Act if … (b) he applies to that other a requirement or condition which he applies or would apply equally to persons not of the same racial group as that other but—(i) which is such that the proportion of persons of the same racial group as that other who can comply with it is considerably smaller than the proportion of persons not of that racial group who can comply with it; and (ii) which he cannot show to be justifiable irrespective of the colour, race, nationality or ethnic or national origins of the person to whom it is applied; and (iii) which is to the detriment of that other because he cannot comply with it.’
On this the first question which arises is whether gipsies are a racial group. If they are not, para (b) cannot apply to Mr Dutton’s notices. Mr Dutton cannot apply to a gipsy who wishes to have a drink at the Cat and Mutton a condition (in this case, of not being a traveller) which he applies equally to persons ‘not of the same racial group’ unless gipsies are a racial group within the Act. Indeed, if gipsies are not a racial group, a notice saying ‘No gipsies’ would be lawful.
The definition of ‘racial group’ in s 3(1) includes a group of persons defined by
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reference to ‘ethnic … origins’. This definition was considered by the House of Lords in Mandla v Dowell Lee [1983] 1 All ER 1062, [1983] 2 AC 548. There the context was whether Sikhs constituted a group defined by reference to ethnic origins. Lord Fraser observed that the word ‘ethnic’ in the Act should be construed relatively widely, in a broad cultural/historic sense. He approved the following passage from the judgment of Richardson J sitting in the New Zealand Court of Appeal in King-Ansell v Police [1979] 2 NZLR 531 at 543:
‘… a group is identifiable in terms of its ethnic origins if it is a segment of the population distinguished from others by a sufficient combination of shared customs, beliefs, traditions and characteristics derived from a common or presumed common past, even if not drawn from what in biological terms is a common racial stock. It is that combination which gives them an historically determined social identity in their own eyes and in the eyes of those outside the group. They have a distinct social identity based not simply on group cohesion and solidarity but also on their belief as to their historical antecedents.’
Lord Fraser summarised his opinion on the construction of the Act in his own words ([1983] 1 All ER 1062 at 1066–1067, [1983] 2 AC 548 at 562–563):
‘For a group to constitute an ethnic group in the sense of the 1976 Act, it must, in my opinion, regard itself, and be regarded by others, as a distinct community by virtue of certain characteristics. Some of these characteristics are essential; others are not essential but one or more of them will commonly be found and will help to distinguish the group from the surrounding community. The conditions which appear to me to be essential are these: (1) a long shared history, of which the group is conscious as distinguishing it from other groups, and the memory of which it keeps alive; (2) a cultural tradition of its own, including family and social customs and manners, often but not necessarily associated with religious observance. In addition to those two essential characteristics the following characteristics are, in my opinion, relevant: (3) either a common geographical origin, or descent from a small number of common ancestors; (4) a common language, not necessarily peculiar to the group; (5) a common literature peculiar to the group; (6) a common religion different from that of neighbouring groups or from the general community surrounding it; (7) being a minority or being an oppressed or a dominant group within a larger community, for example a conquered people (say, the inhabitants of England shortly after the Norman conquest) and their conquerors might both be ethnic groups. A group defined by reference to enough of these characteristics would be capable of including converts, for example, persons who marry into the group, and of excluding apostates. Provided a person who joins the group feels himself or herself to be a member of it, and is accepted by other members, then he is, for the purpose of the 1976 Act, a member. That appears to be consistent with the words at the end of sub-s (1) of s 3: ‘references to a person’s racial group refer to any racial group into which he falls.' In my opinion, it is possible for a person to fall into a particular racial group either by birth or by adherence, and it makes no difference, so far as the 1976 Act is concerned, by which route he finds his way into the group.’
In the present case the judge expressed his conclusion on the conditions enunciated by Lord Fraser in this way:
‘It may well be, as I have said, that there is a small number of travelling people who can claim either by looks or characteristics to be true gipsies but these people have been absorbed into a larger group. Some have abandoned the nomadic way of life and some are indistinguishable from any ordinary member of the public. The larger group of travellers or gipsies forming a part of a larger group cannot in my judgment, on the evidence before the court, satisfy those two essential conditions
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and can satisfy barely any of the other five conditions. Although there may be a Romany language, some may be able to trace their ancestry back to people who came to England many hundreds of years ago, the language does not seem to be in general use. There is no common religion, they have no literature. Although it was urged on the court that there should be some relevance in the fact that they have what was described as oral literature passing on myths and other old stories I do not think that was what Lord Fraser was referring to.’
He decided that gipsies were not a group defined by reference to ethnic origins.
I come here to a further difficulty about the present case. The evidence on this part of the case consisted principally of evidence called by the commission: the two experts I have mentioned, and a Mr Peter Mercer, who is a gipsy. No expert evidence was led by Mr Dutton. But although there was no contrary evidence called by Mr Dutton, the judge was not impressed by either of the commission’s expert witnesses. He approached their evidence with much caution and doubt. Counsel for the commission criticised the judge’s comments in this regard, but on this the judge’s advantage, of having seen and heard the witnesses is obviously of paramount importance. We are not in a position to conclude that the judge erred in his assessment of the reliability of these witnesses.
Nevertheless, taking the judge’s assessment of the witnesses fully into account, and with all respect to the judge, I am unable to agree with his conclusion on what have been called the Mandla conditions when applied, not to the larger amorphous group of ‘travellers’ or ‘gipsies’ (colloquially so-called), but to ‘gipsies’ in the primary, narrower sense of that word. On the evidence it is clear that such gipsies are a minority, with a long shared history and a common geographical origin. They are a people who originated in northern India. They migrated thence to Europe through Persia in medieval times. They have certain, albeit limited, customs of their own regarding cooking and the manner of washing. They have a distinctive traditional style of dressing, with heavy jewellery worn by the women, although this dress is not worn all the time. They also furnish their caravans in a distinctive manner. They have a language or dialect, known as ‘pogadi chib’, spoken by English gipsies (Romany chals) and Welsh gipsies (Kale) which consists of up to one-fifth of Romany words in place of English words. They do not have a common religion, nor a peculiar, common literature of their own, but they have a repertoire of folk-tales and music passed on from one generation to the next. No doubt, after all the centuries which have passed since the first gipsies left the Punjab, gipsies are no longer derived from what, in biological terms, is a common racial stock, but that of itself does not prevent them from being a racial group as widely defined in the 1976 Act.
I come now to the part of the case which has caused me most difficulty. Gipsies prefer to be called ‘travellers’ as they think that term is less derogatory. This might suggest a wish to lose their separate distinctive identity so far as the general public is concerned. Half or more of them now live in houses, like most other people. Have gipsies now lost their separate, group identity so that they are no longer a community recognisable by ethnic groups within the meaning of the Act? The judge held that they had. This is a finding of fact.
Nevertheless, with respect to the judge, I do not think that there was before him any evidence justifying his conclusion that gipsies have been absorbed into a larger group, if by that he meant that substantially all gipsies have been so absorbed. The fact that some have been so absorbed and are indistinguishable from any ordinary member of the public, is not sufficient in itself to establish loss of what Richardson J in the King-Ansell case [1979] 2 NZLR 531 at 543 referred to as ‘an historically determined social identity in [the group’s] own eyes and in the eyes of those outside the group’. There was some evidence to the contrary from Mr Mercer, on whose testimony the judge expressed no adverse comment. He gave evidence that ‘we know who are members of our community’ and that ‘we know we are different’. In my view the evidence was sufficient to establish that, despite their long presence in England, gipsies have not merged wholly in the population, as have the Saxons and the Danes, and altogether lost their separate identity.
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They, or many of them, have retained a separateness, a self-awareness, of still being gipsies.
I feel less constrained than otherwise I would to depart from the judge’s conclusions on this point because of the importance attached by him to the meaning borne by the word ‘gipsy’ in the Highways Act 1959 and the Caravan Sites Act 1968. He said:
‘Although the Highways Act 1959 and the Caravan Sites Act 1968 are statutory examples of the use of the word “gipsy” the meaning given to the word in those Acts does have great weight in my mind. If you find a word defined in a definition section of one Act of Parliament and defined by the Divisional Court on another use of the same word in another statute it would be difficult to say: well when you are looking at the Race Relations Act 1976 you must have a wholly and totally different meaning attached to it. I consider, agreeing as I do with the Divisional Court in Mills v Cooper [1967] 2 All ER 100, [1967] 2 QB 459, that it would be impossible to discover if any person or any body of persons were members of the Romany race or true gipsies. It is not difficult to discover whether they are leading a nomadic life, whether they are travelling from place to place with no fixed abode and no fixed employment. But having ascertained these matters one might justifiably come to the conclusion that they being travellers were not clearly gipsies. As I say I do not think one can be a gipsy or a non-gipsy in one statute and not in another.’
In my view those two statutes do not materially assist in the present case, and the judge misdirected himself on this point. The present case is quite different from Mills v Cooper. In the present case the issue is not which of two or more meanings of the word ‘gipsy’ is to be preferred in the context of a particular statute or document. The question is whether there is an identifiable group of persons, traditionally called ‘gipsies’, who are defined by reference to ethnic origins. That is essentially a question of fact, to be determined on the evidence, applying the approach set out in Mandla’s case [1983] 1 All ER 1062, [1983] 2 AC 548. On that question the definition of ‘gipsy’ used in the Caravan Sites Act 1968, and the meaning of the word ‘gipsy’ in the Highways Act 1959 as interpreted in Mills v Cooper, are of little assistance, if any. Furthermore, the difficulty, mentioned in Mills v Cooper [1967] 2 All ER 100 at 103–104, [1967] 2 QB 459 at 467–468, of determining today whether a person is of ‘the Romany race’ or is of ‘pure Romany descent’ or ‘Romany origin’, seems to have led the judge into thinking that that difficulty constituted an obstacle to the commission’s success in the present case. But that is not so. The material provision in the 1976 Act is concerned with ethnic origins, and ‘ethnic’ is not used in that Act in a strictly biological or racial sense. That was decided in Mandla’s case.
In my view, accepting the judge’s doubts about the evidence of Dr Kenrick and Dr Acton, the evidence was still sufficient to establish that gipsies are an identifiable group of persons defined by reference to ethnic origins within the meaning of the 1976 Act.
Indirect discrimination: adverse impact
Having concluded that gipsies are a racial group, each of sub-paras (i) to (iii) in s 1(1)(b) of the 1976 Act must be satisfied before the conduct complained of amounts to discrimination within the meaning of the Act. I shall consider the three sub-paragraphs one by one, starting with sub-para (i).
Clearly the proportion of gipsies who will satisfy the ‘no travellers’ condition is considerably smaller than the proportion of non-gipsies. Of the estimated gipsy population in the United Kingdom of some 80,000, between one-half and two-thirds, now live in houses. But this still means that a far higher proportion of gipsies are leading a nomadic way of life than the rest of the population in general or, more narrowly, than the rest of the population who might wish to resort to the Cat and Mutton.
Counsel for Mr Dutton submitted that the word ‘can’ in the expression ‘can comply’ in sub-para (i) means ‘can comply without giving up the distinctive customs and cultural
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rules of gipsies’. He submitted that gipsies can cease to be nomadic, and become house-dwellers, and comply with the ‘no travellers’ condition, without giving up their customs and cultures and that, therefore, sub-para (i) is not satisfied in this case. I do not accept this. Lord Fraser’s words in Mandla’s case [1983] 1 All ER 1062 at 1069, [1983] 2 AC 548 at 565 which counsel embraced in this submission, were used in the context of a ‘no turban’ condition being applied in relation to a Sikh. Lord Fraser was rejecting the submission that ‘can’ meant ‘can physically’. But that does not assist the solution of the present case. Indeed, gipsies can and do cease to be nomadic, but that will be of little use to a particular nomadic gipsy when he chances on the Cat and Mutton and wishes to go in for a drink. At that stage he is, in practice, unable to comply. In the present case the problem is a different one: at what moment of time does ability to comply fall to be judged? Is it when the condition is invoked (in this case, when the gipsy is outside the public house wishing to enter) or is it at some earlier date (which would give the gipsy sufficient opportunity to acquire housing accommodation for himself before turning up at the Cat and Mutton)?
A similar question was considered by the Employment Appeal Tribunal in Clarke v Eley (IMI) Kynoch Ltd [1983] ICR 165 with regard to s 1(1) of the Sex Discrimination Act 1975, the wording of which does not differ materially from s 1(1)(b) of the 1976 Act. Browne-Wilkinson J delivered the judgment of the tribunal to the effect that the relevant point of time at which the ability or inability to comply has to be shown is the date at which the requirement or condition has to be fulfilled. I find his reasoning compelling, and I agree with his conclusion (see [1983] ICR 165 at 171–172).
In my view, therefore, sub-para (i) is satisfied in the present case.
Indirect discrimination: detriment
Sub-paragraph (iii) requires the applied condition to be to the relevant person’s detriment because he cannot comply with it. Rightly, it was not disputed that sub-para (iii) is satisfied in the present case, by the hypothetical nomad gipsy being excluded from the Cat and Mutton (I say hypothetical, because there was no evidence that there were any gipsies among the travellers on the nearby sites).
Indirect discrimination: justification
I have left sub-para (ii) to the end for this reason. On the admitted or proved facts it is possible for this court to decide whether sub-paras (i) and (iii) are satisfied, even though the judge himself did not decide these points. Sub-paragraph (ii) is different. On the facts before us it would not be satisfactory for this court to attempt to decide this point, which the judge expressly left open.
In these circumstances for my part I would remit the action to the county court for the judge to determine whether s 1(1)(b)(ii) is satisfied in the present case and, if it is, for him to make such order as he considers appropriate. I would allow this appeal accordingly.
TAYLOR LJ. I agree. The commisson’s case under s 1(1)(a) of the Race Relations Act 1976 must fail for the reasons given by Nicholls LJ. The word ‘traveller’ is not synonymous with the word ‘gypsy’.
The case under s 1(1)(b) turns essentially on whether gipsies are a racial group within the meaning of the 1976 Act. It is only on that issue that I wish to add some observations.
The judge considered four different approaches to the issue. First he said he would consider the evidence of the two expert witnesses called on behalf of the commission and its gipsy witness, Mr Mercer. In fact, he made no reference to Mr Mercer in dealing with this first approach. Clearly, the two experts made an unfavourable impression on the judge who described their views as wholly obsessive, biased and totally preconceived. In particular, he found Dr Acton to be a very bad witness in that he could not be contained within the ordinary question and answer routine. The judge summarised his conclusions on this approach (ie via the commission’s witnesses) by saying merely that he approached
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the experts ‘with much caution and doubt’ and did not consider ‘that their evidence overrides or displaces the views’ he later set out. But, however difficult or partisan the experts may have been, it was surely an excessive reaction to reject their evidence altogether. The historical account they gave of gipsies, their origins and customs was not contradicted by any other evidence. Furthermore, Mr Mercer gave firsthand evidence confirming much of what they said and the judge made no finding adverse to his qualities as a witness.
The second approach was headed by the judge ‘Statutes and statements in government reports on the legal interpretation of the word “Gipsy”’.
It is clear that the word gipsy bears at least two broad meanings. Historically it referred to:
‘A member of a wandering race (by themselves called Romany), of Hindu origin, which first appeared in England about the beginning of the 16th c. and was then believed to have come from Egypt.’
(See Oxford English Dictionary (1933).)
More recently it has come to mean ‘a nomad’. The latter meaning has been adopted in certain statutes. Thus, as the trial judge noted, the word ‘gipsy’ in s 127 of the Highway Act 1959 was held to have the colloquial meaning of ‘a person leading a nomadic life with no, or no fixed, employment and with no fixed abode’ (see Mills v Cooper [1967] 2 All ER 100 at 103, [1967] 2 QB 459 at 467). Again, s 16 of the Caravan Sites Act 1968 defines gipsies as meaning:
‘persons of nomadic life, whatever their race or origin, but does not include members of an organised group of travelling showmen, or of persons engaged in travelling circuses, travelling together as such.’
Those statutes, however, have nothing whatsoever to do with race relations or discrimination. They are concerned with highways and the provision and regulation of caravan sites. The statutory adoption of the second broad meaning of gipsy in those contexts cannot be taken to consign a racial group called gipsies to oblivion if it still exists in fact. I therefore agree that the trial judge misdirected himself in relying on the statutory meaning of ‘gipsy’ in contexts quite different from that of the present case. In his judgment he said:
‘Although the Highways Act 1959 and the Caravan Sites Act 1968 are statutory examples of the use of the word “gipsy” the meaning given to the word in those Acts does have great weight in my mind. If you find a word defined in a definition section of one Act of Parliament and defined by the Divisional Court on another use of the same word in another statute it would be difficult to say: well when you are looking at the Race Relations Act 1976 you must have a wholly and totally different meaning attached to it … As I say I do not think one can be a gipsy or a non-gipsy in one statute and not in another.’
That approach assumes ‘gipsy’ must have the same meaning in all contexts and fails to identify the two different meanings mentioned above. In fact, the word ‘gipsy’ does not occur in s 1 of the 1976 Act. The phrase which has to be construed is a ‘racial group’ as defined in s 3(1) and as interpreted in Mandla v Dowell Lee [1983] 1 All ER 1062, [1983] 2 AC 548.
Confusion of the two meanings of gipsy continued when the judge came to refer to certain reports which had been put before him. He quoted from a report of the Greater London Conciliation Committee (the passage referred to in Nicholls LJ’s judgment). He went on to cite Accommodation for Gypsies, A report on the Working of the Caravan Sites Act 1968 by Sir John Cripps for the Department of the Environment and the Welsh Office. However, they were not dealing with the same subject matter. The first report was concerned with the type of problem presented by the present case. The second was
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clearly made in the context of provision of caravan sites and defined the word ‘gipsy’ in that context as, in effect, a person of ‘nomadic habit of life’ (see para 1.5).
The third approach was to examine dictionary definitions. Here, the judge expressed the view that one could pick and choose the meaning one wished to find. He cited six definitions ranging from ‘A member of a dark-haired race which may be of Indian origin … ’ through the broader meaning of ‘A person who habitually wanders … ’ to the merely abusive ‘Cunning rogue’. Having set out those definitions the judge said:
‘Accordingly in my judgment the [commission] cannot really derive any assistance from dictionary definitions. People obtaining the meaning from the dictionary could not think that a gipsy was a member of a racial group or had basic ethnic origins.’
Here, I do not follow the judge’s reasoning. The fact that dictionaries give more than one meaning for the word ‘gipsy’ does not prevent the work from having, at any rate in some contexts, the meaning given in four out of six of the definitions.
Finally the judge considered the approach laid down in Mandla v Dowell Lee [1983] 1 All ER 1062 at 1066, [1983] 2 AC 548 at 561–562. It is important first to emphasise that ethnic origin is not now limited to or to be equated with strict racial or biological origins. Lord Fraser said:
‘My Lords, I recognise that “ethnic” conveys a flavour of race but it cannot, in my opinion, have been used in the 1976 Act in a strict racial or biological sense. For one thing it would be absurd to suppose that Parliament can have intended that membership of a particular racial group should depend on scientific proof that a person possessed the relevant distinctive biological characteristics (assuming that such characteristics exist). The practical difficulties of such proof would be prohibitive, and it is clear that Parliament must have used the word in some more popular sense … In my opinion, the word “ethnic” still retains a racial flavour but it is used nowadays in an extended sense to include other characteristics which may be commonly thought of as being associated with common racial origin.’
Lord Fraser then set out what he described as the two essential conditions followed by five other relevant characteristics (see [1983] 1 All ER 1062 at 1067, [1983] 2 AC 548 at 562). The passage has already been cited in full by Nicholls LJ. The judge’s application of the Mandla tests is as follows:
‘It may well be, as I have said, that there is a small number of travelling people who can claim either by looks or characteristics to be true gipsies but these people have been absorbed into a large group. Some have abandoned the nomadic way of life and some are indistinguishable from any ordinary member of the public. The larger group of travellers or gipsies forming a part of a larger group cannot in my judgment on the evidence before the court satisfy those two essential conditions and can satisfy barely any of the other five conditions.’
With respect to him, the fact that some gipsies, even a substantial proportion, have abandoned the nomadic way of life or have become assimilated in the general public is not decisive of the issue. There are no doubt other religious, racial or ethnic groups whose numbers diminish due to inter-marriage, lack of adherence to the group or lapsed observance. But if there remains a discernible minority which does adhere it may still be a racial group within Lord Fraser’s criteria.
On the evidence, and perhaps that of Mr Mercer in particular, there is still a discernible group of gipsies with ‘a long shared history, of which the group is conscious as distinguishing it from other groups, and the memory of which it keeps alive’ (see [1983] 1 All ER 1062 at 1067, [1983] 2 AC 548 at 562 per Lord Fraser). There may well be individuals on the borderline between membership and assimilation whom it might be difficult to classify, but that does not deny the existence of the group. Likewise, the fact
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that some of those within the group prefer to call themselves travellers rather than gipsies is not indicative of whether a discrete racial group has ceased to exist.
As to Lord Fraser’s second essential characteristic, I agree that the evidence summarised by Nicholls LJ does show gipsies have a cultural tradition of their own including family and social customs and manners.
Accordingly, I conclude that the four approaches rightly identified by the judge, ought to have led him to a different conclusion from the one he reached.
I too would remit the action to the county court for the judge to determine whether s 1(1)(b)(ii) is satisfied and to make the appropriate order. I would allow this appeal.
STOCKER LJ. I have had the benefit of reading in draft the judgments of Nicholls and Taylor LJJ. I agree with their conclusions that the matter should be remitted for determination under s 1(1)(b)(ii) of the Race Relations Act 1976, though for my part I have entertained considerable doubt on one aspect of this matter in the light of some of the findings of fact made by the judge.
I agree that in order to succeed under s 1(1)(a), direct discrimination, the commission had to prove that the words ‘traveller’ and ‘gipsy’ were synonymous. For the reasons given by Nicholls LJ, they plainly are not and the claim under this subsection must fail.
So far as indirect discrimination is concerned the judge dealt with the question whether or not gipsies were of ‘ethnic origin’ and thus a racial group in general terms in his consideration of direct discrimination and applied his findings that they were not to indirect discrimination and dismissed the claim under s 1(1)(b) in a single paragraph. There is no reason why he should not have adopted this approach but it seems to me that it may have concealed the problem that ‘gipsy’ is used in two different senses. On the one hand it is used to embrace the category which may be described as ‘true gipsies’, ie one who is, or believes he is, of Romany descent, or by long established adherence is a member of that class. On the other, it embraces all those of nomadic habit and disposition.
I agree that the judge’s reasoning whereby he concluded that gipsies, in the strict sense, are not an ethnic group was in many respects flawed. I say nothing of his rejection of the evidence of the expert witnesses (he saw and heard them and was entitled to regard their evidence with doubt and caution) though their evidence on the historical migration, settlement and customs of gipsies was not the subject of any evidence to the contrary. I also agree with Nicholls and Taylor LJJ that dictionary definitions can support a conclusion either way on the essential question of the ethnic origins of gipsies where the word is capable of the two distinct meanings referred to, but this fact does not itself resolve the problem raised on this appeal. I further agree that contrary to the judge’s finding no assistance is to be derived from the meaning of the word ‘gipsy’ for the purpose of s 127 of the Highways Act 1959 or the Caravan Sites Act 1968, since both statutes would be unworkable in practice if ‘gipsy’ for the purposes of those Acts were to be defined in the strict sense. The definition accorded to the word for the purpose of the 1959 Act in Mills v Cooper [1967] 2 All ER 100, [1967] 2 QB 459 and the definition in the Caravan Sites Act 1968 do not assist at all when the issue under the 1976 Act is whether or not the word ‘gipsy’ for the purpose of that Act imports the conception of ‘ethnic origin’. I refer hereunder to the dicta of Lord Parker CJ in that case in a different context. Before considering the fourth basis of the judge’s reasoning, his application of the decision of the House of Lords in Mandla v Dowell Lee [1983] 1 All ER 1062, [1983] 2 AC 548, I think it convenient to refer to four passages in his judgment which are findings of fact made by the judge. He said:
‘There is, in my judgment, no easily identifiable group of gipsies as there were Sikhs. The evidence is that persons who had hitherto regarded themselves as true gipsies or Romanies no longer wish to be known as gipsies because they think that is perjorative and they wish to adhere to a larger amorphous group known apparently as travellers … Gipsies may as I have said be a part of a group of travelling people, they may well be accurately called ‘travellers’ but they themselves do not in my
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judgment form any clearly identifiable group … It may well be, as I have said, that there is a small number of travelling people who can claim either by looks or characteristics to be true gipsies but these people have been absorbed into a larger group. Some have abandoned the nomadic way of life and some are indistinguishable from any ordinary member of the public. The larger group of travellers or gipsies forming a part of a larger group cannot in my judgment on the evidence before the court satisfy those two essential conditions and can satisfy barely any of the other five conditions … I am wholly satisfied that the group, whether you call them gipsies or travellers, are not a group forming a racial group referred to by reference to their ethnic origins as provided by s 3(1) of the 1976 Act.’
If the reference in the earlier passage to the larger group is a reference to the wide meaning of the word ‘gipsy’ and the small number to the word in its strict sense then this conclusion may beg the question rather than answering it. Finally the judge adopted as a finding of fact in the instant case the dicta of Lord Parker CJ in Mills v Cooper [1976] 2 All ER 100 at 103, [1967] 2 QB 459 at 467:
‘That a man is of the Romany race is, as it seems to me, something which is really too vague of ascertainment, and impossible to prove … ’
My hesitation arises from the conclusion to be drawn from these findings, if justified on the facts, in the context of Mandla’s case read in its full context. It seems to me clear from the speeches of Lord Fraser and Lord Templeman that the fact alone that a group may comply with all or most of the relevant criteria does not itself establish that such a group is of ethnic origin. Examples of such groups which might comply with the criteria but which would not be of ethnic origin was cited by the respondent in Mandla’s case [1983] 2 AC 548 at 555. Indeed, such groups might themselves be of multi-racial composition where no question of racial discrimination on the grounds of ethnic origin could possibly arise though many of the criteria could apply to them. No doubt there are many other examples. Lord Fraser said ([1983] 1 All ER 1062 at 1066–1067, [1983] 2 AC 548 at 561–562):
‘… I recognise that “ethnic” conveys a flavour of race but it cannot, in my opinion, have been used in the 1976 Act in a strict racial or biological sense … the word “ethnic” still retains a racial flavour but it is used nowadays in an extended sense to include other characteristics which may be commonly thought of as being associated with common racial origin. For a group to constitute an ethnic group in the sense of the 1976 Act, it must, in my opinion, regard itself, and be regarded by others, as a distinct community by virtue of certain characteristics.’
It is in this context that he sets out the criteria which in his opinion were essential or helpful to ‘distinguish the group from the surrounding community’. Lord Templeman said ([1983] 1 All ER 1062 at 1072, [1983] 2 AC 548 at 569):
‘In my opinion, for the purposes of the 1976 Act a group of persons defined by reference to ethnic origins must possess some of the characteristics of a race, namely group descent, a group of geographical origin and a group history. The evidence shows that the Sikhs satisfy these tests. They are more than a religious sect, they are almost a race and almost a nation.’
It is in the context of these comments that the House considered the question whether or not the Sikh community complied with the relevant criteria. It seems to me relevant to observe that the main issue before the House was not so much whether the Sikh community did or did not comply with the criteria but what was the correct test to apply in deciding the question of ethnic origin. The question whether or not the Sikh community complied with the criteria seems to me to have been one which was almost self-evident once the appropriate criteria were established and for my part I doubt very much whether an ordinary member of the public would have had any doubts about this.
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Most people would regard Sikhs as a ‘race’ even if they falsely believed that their race was ‘biologically derived’. Many, if not all, of the general public would know that there had been two Sikh wars and would know that for generations regiments of Sikhs formed a part of the Indian Army and were often a symbol, through their presence on guard at British embassies and establishments, of British Imperial power based on the Indian army and the British army in India. They would know that they fought in two World Wars as distinctive units. They would know of their distinctive dress and probably some of their customs regarding hair and the wearing of turbans. They would know that the Sikhs had a distinct religion or would at least have heard of the Golden Temple at Amritsar. The question whether or not Sikhs were of ethnic origin within the criteria was, in my view, a simple and obvious one and would have been regarded as such by the general public once the appropriate criteria for the phrase ‘ethnic origin’ were established. A Sikh would certainly have so regarded himself and his fellow Sikhs. The same does not necessarily apply to gipsies and if the judge’s findings of fact were justified by the evidence I would, for my part, be inclined to agree that even if individual gipsies fall within many of the Mandla criteria they were not an ethnic group because on the judge’s finding such a group was not in any true sense identifiable as a group even by the gipsies themselves or by others, and no sufficient racial flavour existed. If the judge’s findings were justified by the evidence, the fact that the conclusion was reached by a process of flawed reasoning would not necessarily be fatal to the decision.
Was the finding justified on the evidence? Accepting that the judge was entitled, having heard them, to form an unfavourable view of the experts and to regard their evidence with caution, it is not easy to understand how he can have wholly rejected their historical discourse nor their evidence with regard to the customs and traditions and traditional way of life peculiar to gipsies since no evidence to controvert this was tendered. The evidence of Mr Mercer, who described himself as ‘a gipsy by birth’ and whose people ‘were gipsies back in 1888’, was to the effect that he would identify ‘our own people’. However, the evidence of the continued separate identity of gipsies as people ‘who regarded themselves and who were regarded by others as a distinct community’ (see Mandla v Dowell Lee [1983] 1 All ER 1062 at 1066, [1983] 2 AC 548 at 562 per Lord Fraser) was scant and it is for this reason I have hesitated whether or not it could be said that the ethnic identity of gipsies in the strict sense was established. The validity of the judge’s finding above recited ‘that there is a small number of travelling people who can claim either by looks or characteristics to be true gipsies but these people have been absorbed into a larger group’ must depend on whether or not there is sufficient evidence that such absorption has occurred. There was, at least, some evidence that it has not and for these reasons I do not feel I can properly dissent from the conclusions of Nicholls and Taylor LJJ. I reach this conclusion with some regret. I doubt whether if the claim for breach of the Act is finally established, benefit rather than detriment will result to either side.
For the reasons I have given I agree with the conclusion of Nicholls and Taylor LJJ and would allow this appeal. I agree with the directions proposed.
Appeal allowed. Case remitted to county court for further consideration.
Solicitors: Bindman & Partners (for the Commission); Edward Fail Bradshaw & Waterson (for Mr Dutton).
Frances Rustin Barrister.
Attorney General’s Reference (No 1 of 1988)
[1989] 1 All ER 321
Categories: CRIMINAL; Corporate Crime
Court: COURT OF APPEAL, CRIMINAL DIVISION
Lord(s): LORD LANE CJ, HUTCHISON AND TUCKER JJ
Hearing Date(s): 26 SEPTEMBER, 18 OCTOBER 1988
Company – Insider dealing – Prohibition on stock exchange deals by insiders etc – Person who obtains insider information – Obtain – Whether ‘obtains’ restricted to acquiring by purpose and effort – Whether person who receives unsolicited inside information prohibited from dealing in company’s securities – Company Securities (Insider Dealing) Act 1985, s 1(3)(4)(a).
The respondent was interested in purchasing a publicly-quoted company and had discussions with the company’s merchant bankers. Shortly afterwards, the company’s chairman agreed to the company being taken over by another company. The merchant bankers informed the respondent of the proposed take-over and told him that a public announcement would be made shortly but that until then the information was price sensitive and highly confidential. Ten minutes later the respondent purchased 6,000 shares in the company. The next day the take-over of the company was announced and five weeks later the respondent sold the shares at a substantial profit. He was charged with two offences of dealing in the securities of a company as a prohibited person, contrary to s 1(3) and (4)(a)a of the Company Securities (Insider Dealing) Act 1985. The respondent contended that he had not ‘obtained’ the information since it had been given to him unsolicited and had not been acquired by purpose and effort on his part. The trial judge upheld that contention and directed the respondent’s acquittal. The Attorney General referred the question of the meaning of ‘obtained’ in s 1(3) of the 1985 Act to the Court of Appeal for its opinion.
Held – A recipient of inside information about a company who dealt in the company’s securities committed an offence under s 1(3) and (4) of the 1985 Act whether he procured that information from the primary insider by purpose and effort or came by it without any positive action on his part.
Notes
For insider dealing, see 7(1) Halsbury’s Laws (4th edn reissue) paras 1060–1068.
For the Company Securities (Insider Dealing) Act 1985, s 1, see 8 Halsbury’s Statutes (4th edn) 829.
Cases referred to in judgment
Black-Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG [1975] 1 All ER 810, [1975] AC 591, [1975] 2 WLR 513, HL.
DPP v Ottewell [1968] 3 All ER 153, [1970] AC 642, [1968] 3 WLR 621, HL.
R v Fisher [1963] 1 All ER 744, [1964] AC 210, [1963] 2 WLR 1137, CCA rvsd in part sub nom Fisher v Raven [1963] 2 All ER 389, [1964] AC 210, [1963] 2 WLR 1137, HL.
R v Hayat (1976) 63 Cr App R 181, CA.
Cases also cited
Brighton Parish Guardians v Strand Union Guardians [1891] 2 QB 156, CA.
London and Country Commercial Property Investments Ltd v A-G [1953] 1 All ER 436, [1953] 1 WLR 312.
New Plymouth BC v Taranaki Electric-Power Board [1933] AC 680, PC.
R v Dones [1987] Crim LR 682, CCC.
Page 322 of [1989] 1 All ER 321
R v Munks [1963] 3 All ER 757, [1964] 1 QB 304, CCA.
Spillers Ltd v Cardiff (Borough) Assessment Committee [1931] 2 KB 21, [1931] All ER Rep 524, DC.
Tait v Bonnice [1975] VR 102, Vic SC.
Woods (decd), Re, Woods v Woods [1941] St RQ 129, Qld Full Ct.
Reference
The Attorney General referred to the Court of Appeal, Criminal Division, pursuant to s 36 of the Criminal Justice Act 1972, the following points of law for its consideration: (a) whether or not the word ‘obtained’ in s 1(3) of the Company Securities (Insider Dealing) Act 1985 had the restricted meaning of ‘acquired by purpose and effort’ or whether it had a wider meaning, and (b) whether or not any individual who had, from another, information within the scope of the prohibitions contained in ss 1(4) and (6) and 2 of the 1985 Act, might be an individual who had ‘obtained’ within the terms of ss 1(3) and (6) and 2 of that Act. The facts are set out in the opinion of the court.
The Attorney General (Rt Hon Sir Patrick Mayhew QC) and Timothy Nash with him, in his own behalf.
Richard Ferguson QC and Antony White for the respondent.
Cur adv vult
18 October 1988. The following judgment was delivered.
LORD LANE CJ. On 11 April 1988 the respondent appeared in the Crown Court at Southwark and pleaded not guilty to two offences of dealing in the securities of a company as a prohibited person, contrary to s 1(3) and (4)(a) of the Company Securities (Insider Dealing) Act 1985.
The material facts were as follows. In the autumn of 1985 the respondent held himself out as a possible purchaser of company A. He was put in touch with Miss M, an employee of the company’s merchant bankers. He asked her to provide him with financial information about the company. In the event the type of information envisaged did not reach the respondent until after the date of the offences alleged.
On the morning of 5 December 1985 the chairman of the company agreed with representatives of company B for their take-over of company A. The merchant bank took no part in the negotiation of this agreement.
Miss M, on hearing of the agreed take-over and with the chairman’s blessing, informed the respondent of the agreement and that an announcement would be made shortly. She told the respondent that the information she was imparting to him was sensitive and highly confidential and that as a result of what she was saying to him he would be an ‘insider’. Ten minutes later the respondent telephoned to his stockbroker and placed an order for 10,000 shares in company A. In the event he actually purchased two blocks of shares, 5,000 shares at one price and 1,000 shares at another price.
The next day a public announcement of the take-over was made. The share price rose quickly and five weeks later he sold his two blocks of shares at a handsome profit.
The prosecution conceded that the respondent had taken no step directly or indirectly to secure, procure or acquire the information given to him by Miss M. Whether that concession was wisely made it is not our task to inquire.
The two counts in the indictment reflected the purchase by the respondent of the two blocks of shares and charged him in the following terms:
‘For that he on or about the 5th December 1985, having information which he knowingly obtained from [Miss M] who was connected with the company and whom he knew or had reasonable cause to believe held the information by virtue of
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being so connected, and Knowing or having reasonable cause to believe that because of the said [Miss M’s] connection and position it would be reasonable to expect her not to disclose that information except for the proper performance of the functions attaching to that position, and Knowing that the information was unpublished price sensitive information in relation to the securities of [the company] purchased 5,000 (1,000) ordinary shares in [the company] on a recognised stock exchange, namely the Stock Exchange.’
The wording of that indictment followed the wording of the material sections in the 1985 Act, which provide as follows. Section 1:
‘… (3) The next subsection applies where—(a) an individual has information which he knowingly obtained (directly or indirectly) from another individual who—(i) is connected with a particular company, or was at any time in the 6 months preceding the obtaining of the information so connected, and (ii) the former individual knows or has reasonable cause to believe held the information by virtue of being so connected, and (b) the former individual knows or has reasonable cause to believe that, because of the latter’s connection and position, it would be reasonable to expect him not to disclose the information except for the proper performance of the functions attaching to that position.
(4) Subject to section 3, the former individual in that case—(a) shall not himself deal on a recognised stock exchange in securities of that company if he knows that the information is unpublished price sensitive information in relation to those securities … ’
Section 3(1)(a) exempts a person acting otherwise than with a view to making a profit or the avoidance of a loss. Section 3(1)(b) exempts an individual entering into a transaction in good faith as a liquidator, receiver or trustee in bankruptcy. Section 3(1)(c) exempts an individual acting in the course of a business of a jobber if the information was obtained by him in that capacity. Section 174 of the Financial Services Act 1986 provides a further exception in relation to market makers.
Counsel for the respondent at the close of the prosecution case submitted, inter alia, that there was no evidence that the respondent ‘obtained’ information from the connected individual (i e Miss M), that he merely received it, that the prohibition contained in s 1(4) of the 1985 Act did not therefore operate against the respondent since the proper construction of the word ‘obtained’ in s 1(3) of the Act connoted active conduct on the part of the respondent.
The trial judge upheld the respondent’s submissions and in the light of the concession made by the prosecution had no option but to direct the respondent’s acquittal, which he did.
The Attorney General now refers the following points of law to this court for our consideration:
‘(a) Whether or not the word “obtained” in section 1(3) of the Company Securities (Insider Dealing) Act 1985 has the restricted meaning of “acquired by purpose and effort” or whether it has a wider meaning.
(b) Whether or not any individual who has, from another, information within the scope of the Act and is otherwise within the scope of the prohibitions contained in sections 1(4), 1(6) and 2 of the Act, may be an individual who has “obtained” within the terms of sections 1(3), 1(6) and 2 of the Act.’
The first task in these circumstances is to discover the ordinary meaning of the word ‘obtained’. As Lord Diplock observed in Black-Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG [1975] 1 All ER 810 at 836, [1975] AC 591 at 638: ‘… the court must give effect to what the words of the statute would be reasonably understood to mean by those whose conduct it regulates.’
Page 324 of [1989] 1 All ER 321
There are, it is clear from the lexicographers and one’s own experience, two such meanings. The definition in the Shorter Oxford English Dictionary is: ‘To procure or gain, as the result of purpose and effort; hence, generally, to acquire, get.' Black’s Law Dictionary (5th edn, 1979) is not dissimilar: ‘to get hold of by effort; to get possession of; to procure; to acquire, in any way.' Thus the word is capable of supporting the contention of either party: that of the Attorney General, who argues that it means to ‘acquire in any way’, and that of the respondent that it means to ‘procure as the result of purpose or effort’.
The Attorney General, to support his submission that it is the latter, broader, meaning which the draftsman was intending to adopt, draws our attention to the scheme of the 1985 Act. This shows that potential offenders are divided into classes. The first target of s 1 is the primary insider. Broadly speaking, subject to the defences in s 3, any individual who is or at any time in the preceding six months has been knowingly connected with a company may not deal on a recognised stock exchange in securities of that company if he is in possession of inside information as defined in the section. It is not necessary for the prosecution to establish that the inside information was actually used by the person in reaching his decision to deal.
The other class is the secondary insider. It was to this class that the respondent was alleged to have belonged. As already indicated, to succeed against such a defendant the prosecution must prove that he had information which he knowingly obtained directly or indirectly from another individual who was connected with a particular company, or who was so connected at any time during the preceding six months, who the defendant knew or had reasonable cause to believe, held the information by virtue of being so connected that the information was, in short, confidential and that it was price sensitive. As with the primary insider, the offence is committed when he deals in the securities of that company.
Thus, in the case of each type of insider, the offence is not one of using information but of dealing in the securities while being in possession of the relevant information.
The Attorney General submits that, looking at the Act as a whole, as one is entitled to do in construing the relevant word, one should conclude that the vice aimed at is the exploitation of an unfairly privileged advantage gained from a particular source. If so, why, he asked rhetorically, should the unsoliciting ‘tippee’ (to adopt the inelegant but convenient expression used by the editors of Gore-Brown on Companies (44th edn, 1986)) be any less culpable than the person who has deliberately sought out the information? The vice lies in the way the information is used, not in the method of its receipt.
Moreover, picking up the words of Lord Diplock already cited and making the not unreasonable assumption that the editors of Gore-Brown on Companies are comparable to those whose conduct the Act regulates, it is clear from para 12.21 of that publication that they assume that the broader interpretation of the word ‘obtain’ is intended. Indeed, one notes from his admirably clear ruling on the submission of no case that the initial reaction of the judge was the same as that of those editors, when he said: ‘Let me admit at once that my initial reaction to this [sc the respondent’s] submission was that it could not be right indeed that it might even be described as jejune.’
We had our attention drawn to the history of the 1985 Act. Its effect was to consolidate earlier enactments, including the provisions of the Companies Act 1980, and was itself the subject of amendments by the provisions of the Financial Services Act 1986 which by s 174 thereof adds a further exception as already explained.
Preceding the 1980 Act was a White Paper on The Conduct of Company Directors (Cmnd 7037), which dealt, inter alia, with the subject of insider dealing. That type of conduct was not then subject to any legal sanctions, although it was causing serious concern not only in business circles.
We are invited to look at the contents of that paper in order to see the mischief which it was desired by Parliament to remedy. As Lord Diplock pointed out in the Black-Clawson case [1975] 1 All ER 810 at 836, [1975] AC 591 at 638, such papers—
Page 325 of [1989] 1 All ER 321
‘may be used to resolve the ambiguity in favour of a meaning which will result in correcting those deficiencies in preference to some alternative meaning that will leave the deficiencies uncorrected. The justification of this use of such reports … is that knowledge of their contents may be taken to be shared by those whose conduct the statute regulates and would influence their understanding of the meaning of ambiguous enacting words.’
Paragraph 22 of the paper contains the following passage:
‘Insider dealing is understood broadly to cover situations where a person buys or sells securities when he, but not the other party to the transaction, is in possession of confidential information which affects the value to be placed on those securities. Furthermore the confidential information in question will generally be in his possession because of some connection which he has with the company whose securities are to be dealt in (e g he may be a director, employee or professional adviser of that company) or because someone in such a position has provided him, directly or indirectly, with the information. Public confidence in directors and others closely associated with companies requires that such people should not use inside information to further their own interests. Furthermore, if they were to do so, they would frequently be in breach of their obligations to the companies, and could be held to be taking an unfair advantage of the people with whom they were dealing.’
Our attention was drawn particularly to the expressions ‘the … information … will generally be in his possession’ and ‘someone in such a position has provided him … with the information’, as indicative of the broad rather than the narrow approach to the problem which we have to decide. What is in our view much more significant is the obvious and understandable concern which the paper shows about the damage to public confidence which insider dealing is likely to cause and the clear intention to prevent so far as possible what amounts to cheating when those with inside knowledge use that knowledge to make a profit in their dealing with others.
That is the reason for the proposals in para 25 of the paper:
‘… that it shall be a criminal offence for an insider to deal on the market … in certain circumstances where he has inside information … The prosecution will need to show that the insider knew or had reasonable grounds to believe that the information was not generally known and was price sensitive and that he dealt nevertheless. Also, it will be possible for a person to offer as a defence that his purpose in dealing was not to make a profit or avoid a loss by the use of his inside information.’
Now, so far as gaining an unfair advantage of or, put bluntly, cheating the other party to a transaction is concerned, it makes no difference to the person cheated whether the information on which the ‘tippee’ is basing the cheating was sought out by him or came his way by unsolicited gift. Against the background of public and government concern it would indeed have been surprising if Parliament had intended that persons such as, for example, the respondent in the instant case should be free to make a profit from their insider information simply because of the way in which they came by the information. It would do nothing to increase the confidence of the public in the probity of the business world if behaviour such as that of the respondent were to be free from sanction. The wording of para 25 is consistent with that approach. In other words, if one construes the key word ‘obtained’ in the light of the purpose behind the Act, the conclusion must, in our judgment, be that it means no more than ‘received’.
Counsel for the respondent, however, submits that this broad construction of the word provides inadequate protection for the involuntary recipient of information. We disagree. The involuntary recipient does not, in our view, require protection. There is no crime in
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receiving information. He can protect himself from prosecution by the simple expedient of not dealing in the relevant securities.
Perhaps more cogent is the submission that since the word ‘obtain’ has already been the subject of interpretation by this court, and since that interpretation adopts the narrower meaning, that is the meaning which the word must have been intended to bear in the 1985 Act.
In R v Fisher [1963] 1 All ER 744, [1964] AC 210 the appellant had been convicted of obtaining credit by fraud other than false pretences contrary to s 13(1) of the Debtors Act 1869 and of obtaining credit when an undischarged bankrupt contrary to s 155(a) of the Bankruptcy Act 1914. The case was largely concerned with the meaning of ‘credit’, but Winn J had this to say ([1963] 1 All ER 744 at 747, [1964] AC 210 at 215):
‘“Obtaining” a thing means that one person A has secured from another B, normally by some active process, what A did not already possess, e.g., by purchase, exchange, force or deceit. For present purposes, it suffices to note that the word is not synonymous with accepting or receiving; for this reason, none of the various criminal offences of obtaining by fraud would be established by mere proof of a payment of money or transfer of goods to a fraudulent person in the absence of further proof that such payment or transfer was induced by, and so obtained by a fraudulent pretence or other fraud.’
It is to be noted that the judgment is careful to confine the definition to the purposes of case under consideration.
R v Hayat (1976) 63 Cr App R 181 was another case under s 155(a) of the Bankruptcy Act 1914. James LJ, delivering the judgment of the court, said (at 186):
‘We are of the view that in order to establish the offence of obtaining credit within the meaning of section 155(a) of the Bankruptcy Act 1914, not only must the Crown prove that it is “credit” which is obtained, but they must also prove the “obtaining” of the credit and in order to do that some conduct, either by words or otherwise, must be proved to have taken place on the part of the accused person which amounts to an obtaining.’
In that case the credit which the appellant was alleged to have obtained consisted of an overdraft at his bank. The reason for his overdrawing was that, unknown to him, a cheque drawn in his favour had been stopped by the drawer. Thus the credit he had unwittingly received in the shape of the overdraft was due to nothing which he himself had done. In such a case, brought under the provisions of the Bankruptcy Act 1914, the actus reus is the obtaining, and the mischief aimed at by the Act is that the bankrupt, without disclosing his status, procures credit for himself. It is perhaps not surprising that in those circumstances the court concluded that Parliament intended to adopt the narrow meaning of ‘obtain’. As already explained, the situation here is quite different. The crucial element is the dealing. The obtaining on its own is of no import. We do not consider that in those circumstances it is either necessary or proper to adopt the meaning ascribed to the word in the judgment of James LJ in the 1985 Act.
Finally, it is submitted on behalf of the respondent that this being a penal enactment any ambiguity should be resolved in favour of the defence.
This principle of construction is of limited application. As stated in 44 Halsbury’s Laws (4th edn) para 910, it—
‘means no more than that if, after the ordinary rules of construction have first been applied, as they must be, there remains any doubt or ambiguity, the person against whom the penalty is sought to be enforced is entitled to the benefit of the doubt.’
As Lord Reid stated in DPP v Ottewell [1968] 3 All ER 153 at 157, [1970] AC 642 at 649:
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‘I would never seek to diminish in any way the importance of that principle within its proper sphere but it only applies where after full enquiry and consideration one is left in real doubt. It is not enough that the provision is ambiguous in the sense that it is capable of having two meanings. The imprecision of the English language (and, so far as I am aware, of any other language) is such that it is extremely difficult to draft any provision which is not ambiguous in that sense. This section is clearly ambiguous in that sense the Court of Appeal (Criminal Division) attach one meaning to it, and your lordships are attaching a different meaning to it. But if, after full consideration, your lordships are satisfied, as I am, that the latter is the meaning which Parliament must have intended the words to convey, then this principle does not prevent us from giving effect to our conclusion.’
We have not found the decision easy, but taking all these matters into account, we have reached the conclusion that Parliament intended to penalise the recipient of inside information who deals in the relevant securities, whether he procures the information from the primary insider by purpose and effort or comes by it without any positive action on his part.
This conclusion will have the advantage of avoiding the fine distinctions which would otherwise have to be drawn between what is and what is not a sufficient purpose or effort to satisfy the narrow meaning of ‘obtain’. These would have been distinctions so fine as to be almost imperceptible, and would have done nothing to enhance the reputation of the business world for honesty or of the criminal law for clarity.
The answers to the two questions posed are therefore as follows: (a) the word ‘obtained’ in s 1(3) of the Company Securities (Insider Dealing) Act 1985 has a wider meaning than ‘acquired by purpose and effort’; (b) any individual who has, from another, information within the scope of the 1985 Act and is otherwise within the scope of the prohibition contained in ss 1(4) and (6) and 2 of that Act may be an individual who has ‘obtained’ within the terms of those sections.
Reference answered accordingly. In pursuance of an application by the respondent in that behalf the court referred the point to the House of Lords under s 36(3) of the Criminal Justice Act 1972.
Solicitors: Solicitor to the Department of Trade and Industry; Offenbach & Co (for the respondent).
Sophie Craven Barrister.
R v HM Treasury and others ex parte Daily Mail and General Trust plc
[1989] 1 All ER 328
(CASE 81/87)
Categories: EUROPEAN COMMUNITY; Right of Establishment
Court: COURT OF JUSTICE OF THE EUROPEAN COMMUNITIES
Lord(s): JUDGES LORD MACKENZIE STUART (PRESIDENT), BOSCO, DUE, RODRIGUEZ IGLESIAS (PRESIDENTS OF CHAMBERS), KOOPMANS, EVERLING, BAHLMANN, GALMOT, JOLIET, O’HIGGINS AND SCHOCKWEILER ADVOCATE GENERAL M DARMON
Hearing Date(s): 22 MARCH, 7 JUNE, 27 SEPTEMBER 1988
European Economic Community – Freedom of establishment – Beneficiaries – Companies and firms – Movement within Community – Transfer of activities or of central management and control – National provision requiring consent to transfer – United Kingdom tax legislation requiring Treasury consent for body corporate resident in United Kingdom to cease to be so resident or to transfer its trade or business to person not so resident – Whether Treaty provisions guaranteeing freedom of establishment applying to companies or firms – Whether Treaty provisions conferring right on company incorporated in one member state to transfer central management and administration to another member state while retaining status as company incorporated in first member state – Whether United Kingdom legislation restricting freedom of establishment – Income and Corporation Taxes Act 1970, s 482(1) – EEC Treaty, arts 52, 58 – EC Council Directive 73/148.
Income tax – Corporation tax – Migration etc of companies – Treasury consent – Consent for body corporate resident in the United Kingdom to cease to be so resident or to transfer trade or business to person not so resident – Whether requirement of Treasury consent restricting freedom of establishment guaranteed to nationals of member states of European Economic Community – Income and Corporation Taxes Act 1970, s 482(1) – EEC Treaty, arts 52, 58 – EC Council Directive 73/148.
The applicant, which was an investment holding company, applied to the Treasury for consent under s 482(1)a of the Income and Corporation Taxes Act 1970 to transfer its central management and control to the Netherlands. It was common ground that the principal reason for the proposed transfer was to enable the applicant, after establishing its residence in the Netherlands for tax purposes, to sell a significant part of its non-permanent assets and to use the proceeds of that sale to buy its own shares, without having to pay the capital gains tax and advance corporation tax to which it would be liable under United Kingdom tax laws. After establishing its central management and control in the Netherlands the applicant would be subject to Netherlands corporation tax, but the transactions envisaged would be taxed only on the basis of any capital gains which accrued after the transfer of its residence. Following negotiations with the Treasury, which proposed that it should sell at least part of the assets before transferring its residence out of the United Kingdom, the applicant brought proceedings in the High Court seeking a declaration that it was entitled under art 52b of the EEC Treaty to transfer its residence to the Netherlands without Treasury consent or that it was entitled under art 52 to the unconditional consent of the Treasury. The High Court referred to the
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Court of Justice of the European Communities for a preliminary ruling the questions (1) whether arts 52 and 58c of the EEC Treaty gave a company, incorporated under the legislation of a member state and having its registered office there, the right to transfer its central management and control to another member state, and, if so, whether the member state of origin could make that right subject to the consent of national authorities, and (2) whether EC Council Directive 73/148 on the abolition on restrictions on movement and residence within the Community for nationals of member states with regard to establishment and the provision of services conferred that right on a company.
Held – (1) Freedom of establishment constituted one of the fundamental principles of the Community, and the provisions of the EEC Treaty guaranteeing that freedom secured the right of establishment in another member state not merely for nationals but also for companies or firms formed in accordance with the law of a member state and having their registered office, central administration or principal place of business within the Community. Even though those provisions of the Treaty were directed mainly to ensuring that foreign nationals and companies were treated in the host member state in the same way as nationals of that state, they also prohibited the member state of origin from hindering the establishment in another member state of one of its nationals or of a company incorporated under its legislation and having its registered office, central administration or principal place of business within the Community (see p 348 d to f, post).
(2) Section 482(1) of the 1970 Act imposed no restriction on the setting up of agencies, branches or subsidiaries nor on the taking part in the incorporation of a company in another member state. Furthermore, s 482(1) did not stand in the way of a partial or total transfer of the activities of a company incorporated in the United Kingdom to a company newly incorporated in another member state, if necessary after winding up and, consequently, the settlement of the tax position of the United Kingdom company; it only required Treasury consent where such a company sought to transfer its central management and control out of the United Kingdom while maintaining its legal personality and status as a United Kingdom company (see p 348 h j, post).
(3) Companies, unlike natural persons, were creatures of law and, in the present state of Community law, were creatures of national law, and none of the directives on the co-ordination of company law adopted under art 54(3)(g) of the EEC Treaty dealt with the differences in national law in issue. In those circumstances arts 52 and 58 of the Treaty could not be interpreted as conferring on companies incorporated under the law of a member state a right to transfer their central management and control and their central administration to another member state while retaining their status as companies incorporated under the legislation of the first member state (see p 348 j to p 349 a e to g and p 350 d, post).
(4) Since the title and provisions of EC Council Directive 73/148 referred solely to the movement and residence of natural persons, it was clear that those provisions could not, by their nature, be applied by analogy to legal persons. It followed therefore that the directive conferred no right on a company to transfer its central management and control to another member state (see p 349 j to p 350 a e, post).
Notes
For the right of establishment and freedom to provide services under EEC law, see 52
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Halsbury’s Laws (4th edn) paras 16.01–16.05, 16.12–16.15, and for cases on the subject, see 21 Digest (Reissue) 267–271, 1743–1758.
For Treasury consent to the removal abroad of the residence of a company, see 23 Halsbury’s Laws (4th edn) paras 1488–1491.
In relation to companies’ accounting periods ending after 5 April 1988 s 482(1) to (4) of the Income and Corporation Taxes Act 1970 were replaced by s 765 of the Income and Corporation Taxes Act 1988. For s 765 of the 1988 Act, see 44 Halsbury’s Statutes (4th edn) 895.
For the EEC Treaty, arts 52, 58, see 50 ibid 285, 287.
Cases also cited
Association des Centres distributeurs Edouard Leclerc v Sarl ‘Au ble vert’ Case 229/83 [1985] ECR 1.
EC Commission v French Republic Case 270/83 [1986] ECR 273.
EC Commission v French Republic Case 96/85 [1986] ECR 1475.
EC Commission v Hellenic Republic Case 192/84 [1985] ECR 3967.
EC Commission v Italian Republic Case 95/81 [1982] ECR 2187.
Fabriek voor Hoogwaardige Voedingsprodukten Kelderman BV, Re criminal proceedings against Case 130/80 [1981] ECR 527.
Insurance Services, Re, EC Commission v Germany Case 205/84 [1987] 2 CMLR 69, CJEC.
Knoors v Secretary of State for Economic Affairs Case 115/78 [1979] ECR 399.
Levin v Staatssecretaris van Justitie Case 53/81 [1982] ECR 1035.
NV International Fruit Co v EC Commission Joined Cases 41 to 44/70 [1971] ECR 411.
R v Pieck Case 157/79 [1980] ECR 2171.
Rewe-Zentral AG v Bundesmonopolverwaltung fü Branntwein Case 120/78 [1979] ECR 649.
Royer, Re Case 48/75 [1976] ECR 497.
Steinhauser v City of Biarritz Case 197/84 [1985] ECR 1819.
van Bennekom, Re criminal proceedings against Case 227/82 [1983] ECR 3883.
van Binsbergen v Bestuur van de Bedrijfsvereniging voor de Metaalnijverheid Case 33/74 [1974] ECR 1299.
Walrave and Koch v Association Union Cycliste Internationale Case 36/74 [1974] ECR 1405.
Reference
By order dated 6 February 1987 the High Court of Justice, Queen’s Bench Division referred to the Court of Justice of the European Communities for a preliminary ruling under art 177 of the EEC Treaty four questions (set out at p 347 c to f, post) on the interpretation of arts 52 and 58 of the Treaty and the provisions of EC Council Directive 73/148 of 21 May 1973 on the abolition of restrictions on movement and residence within the Community for nationals of member states with regard to establishment and the provision of services. The questions arose in the course of an action brought by Daily Mail and General Trust plc against HM Treasury for a declaration that it was entitled under art 52 of the Treaty to transfer its residence to the Netherlands without the consent provided for under s 482(1) of the Income and Corporation Taxes Act 1970 or, alternatively, that it was entitled under art 52 of the Treaty to the unconditional consent of the Treasury. The Commission of the European Communities, Daily Mail and General Trust plc and the government of the United Kingdom submitted written observations to the court. The language of the case was English. The facts are set out in the report for the hearing presented by the Judge Rapporteur.
27 September 1988. The following judgments were delivered.
THE JUDGE RAPPORTEUR (O DUE) presented the following report for the hearing.
I—FACTS AND PROCEDURE
1. The Income and Corporation Taxes Act 1970 makes companies resident in the United Kingdom subject to corporation tax. That tax consists mainly of: income tax levied, in principle, on all income wherever accruing; a tax on capital gains made on the disposal of investments; advance corporation tax on all payments of dividends or other
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distributions made by a company; the amount may be deducted by the company (solely) from income tax and corresponds to a tax credit in favour of the beneficiary.
Under the above Act companies which are resident outside the United Kingdom, even those incorporated under its legislation and having their registered office there, are as a rule liable to tax only on income arising in the United Kingdom.
For the purposes of corporation tax, s 482(7) defines residence in the United Kingdom as follows:
‘A body corporate shall be deemed … to be resident or not to be resident in the United Kingdom according as the central management and control of its trade or business is or is not exercised in the United Kingdom … ’
The same section also regulates the transfer of a company’s residence out of the United Kingdom.
Section 482(1) provides:
‘Subject to the provisions of this section, all transactions of the following classes shall be unlawful unless carried out with the consent of the Treasury, that is to say—(a) for a body corporate resident in the United Kingdom to cease to be so resident …
According to s 482(4), the consent referred to in sub-s (1)—
‘(a) may be given either specially (that is to say, so as to apply to specified transactions … ) or generally (that is to say, so as not only to apply as aforesaid); and (b) may, if given generally, be revoked by the Treasury; and (c) may in any case be absolute or conditional … ’
Section 482(5) provides that any infringement of the provisions of s 482(1) is a criminal offence; under sub-s (6) that offence is punishable by imprisonment for not more than two years or a fine not exceeding £10,000 or both or, in the case of a company, a fine three times the tax to which the company was liable in the 36 months immediately preceding the commission of the offence or £10,000, whichever is the greater.
2. Daily Mail and General Trust plc, the applicant in the main proceedings, is a limited company incorporated under English law whose registered office is in London. In the sense in which the term is used here, the company is also resident in London.
The company is an investment company. It has a substantial holding in the share capital of two companies, Associated Newspaper Holdings plc and Bristol United Press Ltd, assets which the company regards as permanent and whose value at the end of 1986 was estimated at approximately £275m. It also holds a portfolio of investments quoted on the London Stock Exchange, which are regarded as assets of a non-permanent nature and whose value at the end of 1986 was estimated at approximately £73m.
3. On 1 March 1984 the applicant in the main proceedings submitted to the tax authorities an application for consent under s 482(1) of the above-mentioned Act with a view to transferring its residence to the Netherlands.
In order to make that transfer, the company states in its application that it proposes to take the following steps. All board meetings will be held in the Netherlands and the applicant’s articles of association will be amended to require this. Two persons resident in the Netherlands will be appointed directors of the company in place of two existing directors resident in the United Kingdom, with the result that of the eight directors only two will have their residence in the United Kingdom. An office will be rented on a permanent basis in the Netherlands and as much as possible of the applicant’s bookkeeping and administration will be transferred there. The applicant will open a bank account with a bank resident in the Netherlands and register with the Netherlands Chamber of Commerce.
According to the application, if the transfer of residence were permitted the result for tax purposes would be that the company would be liable to Netherlands corporation tax, as a company resident in the Netherlands, but would no longer be liable to capital gains
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tax and advance corporation tax in the United Kingdom. The company would remain liable, substantially to the same extent as previously, to income tax in the United Kingdom.
The application also states that the purpose of the transfer of residence is to correct a significant discount in the price of the company’s shares compared to the real value of its assets, in the light of capital gains on the shares constituting those assets. That discount, of about 31·3% (on 30 April 1986), reflects the substantial liability to capital gains tax to which disposal of those shares would give rise, since the value of the permanent assets at the end of 1986 was more than £256m greater than their book cost and the value of the non-permanent assets at the end of 1986 was £60m greater than their acquisition cost. After a transfer of residence, those capital gains would no longer be taxable in the United Kingdom and the company would be liable in the Netherlands to tax only on the capital gains accruing after the change of residence.
It may also be seen from the application that the company considers that the tax charge to which its non-permanent assets would be subject in the event of disposal interferes with its ability to dispose freely of those assets, and it intends, after transferring its residence to the Netherlands, to sell a substantial part of that portfolio and to use the money thereby raised to repurchase some of its own shares, thus further reducing the discount at which the remaining shares stand in relation to the real value of the company’s assets.
The application also states that after transferring its residence to the Netherlands the company intends, so as to avoid prejudicing the tax position of its shareholders who are resident in the United Kingdom and would otherwise lose the benefit of the tax credit, to set up a subsidiary resident in the United Kingdom and transfer to it the shares constituting its permanent assets; shareholders in the parent company would then be issued dividend-bearing shares in the subsidiary, thus permitting them to receive a large part of their dividends from a United Kingdom source.
Finally, the application states that the two directors who constitute the applicant’s investment committee are resident outside the United Kingdom (in Paris and in Jersey) and it would be easier for them to meet if the company’s main office were in the Netherlands rather than in London.
4. In a letter of 13 March 1984 the tax authorities asked the applicant company to provide an estimate of the tax that would be payable on the transactions which it proposed to carry out if the company remained resident in the United Kingdom. The company provided that information in a letter of 19 April 1984. It shows that, with the figures updated to 31 December 1986, the loss of tax revenue as a result of a transfer of residence, leaving aside income tax revenue, estimated by the tax authorities at £500,000 per year, may be calculated as follows:
Tax on capital gains in respect of non-permanent assets:
Total value £73,094,493
Acquisition £12,380,000
Total capital gains £60,714,493
Tax at 30% £18,214,348
Tax on the proposed sale of shares to the amount of £53,094,493 £13,230,567
Advance corporation tax (levied on thepurchase of the company’s shares with the money obtained from the sale):
Amount available £53,094,493
–£13,230,567
£39,863,926
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Tax at a rate of 29/71 (of which only a very small part may be deducted from income tax) £11,560,538
total £24,791,105
In a letter of 9 July 1984 the tax authorities asked the company, inter alia, for its comments on the suggestion that prior to its intended migration it should liquidate a significant proportion of its portfolio. The applicant’s solicitors replied in a letter dated 19 November 1984 that the possibility of the company’s agreeing to such a sale would depend on the amounts involved.
After further negotiations and exchanges of letters, the company informed the tax authorities in a letter of 1 April 1986 that it had decided, even in advance of transferring the residence of the company to the Netherlands, to establish a branch there through which it could, inter alia, provide services to third parties. In the same letter the company stated that it was entitled under art 52 of the EEC Treaty to transfer its residence to the Netherlands without securing the consent of the Treasury and it asked the latter to confirm that proposition or give unconditional consent before 31 May 1986.
5. On 24 June 1986 the applicant in the main proceedings brought an action before the Queen’s Bench Division of the High Court of Justice essentially for a declaration that it is entitled under art 52 of the EEC Treaty to transfer its residence to the Netherlands without the consent provided for under s 482(1) of the Income and Corporation Taxes Act 1970 or, in the alternative, that it is entitled under art 52 of the EEC Treaty to the unconditional consent of the Treasury.
By order of 6 February 1987 the national court decided to stay proceedings until the Court of Justice had given a preliminary ruling on the following questions:
‘1. Do Articles 52 and 58 of the EEC Treaty preclude a Member State from prohibiting a body corporate with its central management and control in that Member State from transferring without prior consent or approval that central management and control to another Member State in one or both of the following circumstances, namely where: (i) payment of tax upon profits or gains which have already arisen may be avoided; (ii) were the company to transfer its central management and control, tax that might have become chargeable had the company retained its central management and control in that Member State would be avoided?
2. Does Council Directive 73/148/EEC give a right to a corporate body with its central management and control in a Member State to transfer without prior consent or approval its central management and control to another Member State in the conditions set out in Question 1? If so, are the relevant provisions directly applicable in this case?
3. If such prior consent or approval may be required, is a Member State entitled to refuse consent on the grounds set out in Question 1?
4. What difference does it make, if any, that under the relevant law of the Member State no consent is required in the case of a change of residence to another Member State of an individual or firm?’
6. The order of the High Court of Justice, Queen’s Bench Division was lodged at the court registry on 19 March 1987.
7. Pursuant to art 20 of the Protocol on the Statute of the Court of Justice, written observations were submitted on 12 June 1987 by the Commission of the European Communities, represented by its legal adviser, D R Gilmour, on 20 July 1987 by Daily Mail and General Trust plc, the applicant in the main proceedings, represented by David Vaughan QC and Derrick Wyatt, Barrister, and on 21 July 1987 by the United Kingdom, represented by S J Hay, Treasury Solicitor, acting as agent.
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8. On hearing the report of the Judge Rapporteur and the views of the Advocate General, the court decided to open the oral procedure without any preparatory inquiry.
II—OBSERVATIONS SUBMITTED TO THE COURT
1. Observations of the applicant in the main proceedings
The applicant in the main proceedings claims first of all that arts 52 and 58 of the EEC Treaty grant to natural and legal persons a right of exit from their own member states, as well as a right of entry to other member states for the purposes of establishment.
Under art 52 nationals of one member state wishing to establish themselves in another member state are entitled to challenge not only restrictions on entry and establishment imposed by the other member state but also restrictions on emigration imposed by the member state of which they are nationals. That restrictions on emigration are caught by art 52 is confirmed by EC Council Directive 73/148 of 21 May 1973 on the abolition of restrictions on movement and residence within the Community for nationals of member states with regard to establishment and the provision of services. According to art 1, the directive is concerned, inter alia, with nationals of a member state who wish to establish themselves in another member state, and under art 2(1) and (4) member states must grant such persons the right to leave their territory and may not demand from them any exit visa or equivalent requirement. In its judgment in Re Royer Case 48/75 [1976] ECR 497 the court decided that the directive gives rise to no new rights in favour of persons protected by Community law, but simply lays down the scope and detailed rules for the exercise of rights conferred directly by the Treaty. To deny a right of exit would render nugatory the right of establishment in another member state.
Article 52 itself thus bestows a right of exit from a member state, and it follows that the same right is enjoyed by legal persons since, under the first paragraph of art 58, such persons are to be treated in the same way as natural persons for the purposes, in particular, of the implementation of art 52.
It cannot be argued that that right is not enjoyed by legal persons since they do not need to transfer their residence in order to exercise their right of establishment but may do so by setting up branches and agencies. In its judgment in EC Commission v French Republic Case 270/83 [1986] ECR 273 the court decided that art 52 expressly leaves traders free to choose the appropriate legal form in which to pursue their activities in another member state and that freedom of choice may not be limited by national provisions discriminating against branches and agencies in relation to subsidiaries of foreign companies. As art 52 leaves companies the freedom to choose between the different modes of secondary establishment, it would follow that they are equally free to make the initial choice as between primary establishment on the one hand and secondary establishment on the other.
The applicant in the main proceedings claims, second, that the transfer of a company’s central management and control to another member state amounts to establishment in that state.
Article 52 of the Treaty grants a right of primary establishment (first paragraph, first sentence) and a right of secondary establishment (first paragraph, second sentence). In regard to companies, guidance as to the content of the right of primary establishment may be found in the General Programme for the abolition of restrictions of freedom of establishment (OJ 1962, p 36 (S Edn (2nd Series) IX, p 7)), on which the court has relied on several occasions. According to Title I of the programme (Beneficiaries), companies and firms formed under the law of a member state and having the seat prescribed by their statutes, their centre of administration or their main establishment situated within the Community are equivalent to ‘nationals of Member States’. Furthermore, companies so defined are equivalent to ‘nationals of Member States established in a Member State’ provided that, where only the seat prescribed by their statutes is situated within the
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Community, their activity shows a real and continuous link with the economy of a member state. The court has held with regard to companies that it is their prescribed seat or registered office that serves as the connecting factor with the legal system of a particular state, corresponding to nationality in the case of natural persons (cf EC Commission v French Republic Case 270/83 cited above); it follows that a company must be regarded as established in a member state if its central administration is situated in a member state, its main establishment is situated in a member state or, in the absence of either of the above links, the activity of the company shows a real and continuous link with the economy of that member state. The decisive factor is therefore the real and continuous link with the economy of a member state, and the presence of the central administration or the main establishment is presumed to constitute such a link.
A transfer of the central management and control of a company such as that contemplated by the applicant in the main proceedings would amount to a transfer of its central administration within the meaning of the General Programme. The central administration is located where the company organs take the decisions that are essential for the company’s operation.
Such a transfer of central management and control a fortiori constitutes establishment when that transfer is accompanied, as in this case, by the opening of an investment management office with a view to the provision of financial services to third parties. It clearly amounts to an effective and genuine economic activity (see, in regard to the free movement of workers, the judgment in Levin v Staatssecretaris van Justitie Case 53/81 [1982] ECR 1035). Article 52 of the Treaty must be given a broad interpretation in that regard, as the court stressed in its judgment in Steinhauser v City of Biarritz Case 197/84 [1985] ECR 1819 at 1825 (para 10).
The applicant in the main proceedings claims, in the third place, that the motives of a company seeking to change the place in which its central management and control is located do not affect its rights under art 52 of the Treaty.
It emphasises that the primary concern of an investment company must be to manage its assets in the most commercial way and that it is natural for it to take account of the incidence of taxation and to seek to make its activities subject to the least onerous tax system.
In the area of freedom of movement for workers, the court has accepted that the intentions of the person seeking to benefit from the rights conferred by the Treaty are of no account in the eyes of Community law. In Levin’s case cited above, which was concerned with a part-time worker, the court decided that the advantages which Community law confers may be relied on only by persons who actually pursue or seriously wish to pursue activities as employed persons but that the enjoyment of this freedom may not be made to depend on the aims pursued by the worker, as long as he pursues or wishes to pursue an effective and genuine activity as an employed person. The court decided that, once that condition is satisfied, the motives which may have prompted the worker to seek employment in another member state are of no account and must not be taken into consideration.
The situation is identical in this case, in which the applicant company wishes to establish itself in another member state with every prospect of permanence and to pursue effective and genuine economic activity both in and from that member state, and for that reason the motives of those controlling the company are of no account.
However, that does not imply that recourse may be had to the provisions of Community law in a temporary and perfunctory manner solely in order to avoid the application of national law. In its judgment in Association des Centres distributeurs Edouard Leclerc v Sarl ‘Au ble vert’ Case 229/83 [1985] ECR 1 the court held that reimports of books exported for the sole purpose of reimportation so as to avoid national rules on price-fixing for books did not fall within the scope of art 30 of the Treaty. The situation is very different in this case, in which the transfer of central management and control
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produces real effects in the economy of the member state in which establishment is to take place. It should be noted that in this case the national authorities do not contest the fact that the applicant company wishes to establish a real and effective presence in the Netherlands.
Fourth, the applicant in the main proceedings claims that a national rule such as s 482 of the Income and Corporation Taxes Act 1970 which subjects all transfers of corporate residence to other member states to the consent of the national authorities and to compliance with national conditions is incompatible with arts 52 and 58 of the Treaty.
A provision of national law may not make the exercise of a right conferred by Community law subject to such a procedure or to compliance with such conditions.
In the area of free movement of goods, the court has established the principle that the enjoyment of such a right may not be made dependent on a discretionary power or a concession granted by the national authorities and that a requirement to obtain import or export licences constitutes an unlawful hindrance to trade even where such licences are granted as of right (see the judgments in Re criminal proceedings against Fabriek voor Hoogwaardige Voedingsprodukten Kelderman BV Case 130/80 [1981] ECR 527 and NV International Fruit Co v EC Commission Joined Cases 41 to 44/70 [1971] ECR 411).
That principle is equally applicable with regard to the free movement of persons. In its judgment in R v Pieck Case 157/79 [1980] ECR 2171 the court decided that the right of workers under Community law to enter the territory of a member state may not be made subject to clearance by the authorities of that member state. The same principle should also apply to the right to leave a member state, a right also conferred by Community law, and with regard to legal persons, which Community law treats in the same way as natural persons for these purposes.
In the fifth place, the applicant in the main proceedings claims that a national rule such as that at issue is inconsistent with arts 52 and 58 of the Treaty where transfers of corporate residence may, at the discretion of the national authorities, be treated as taxable events.
The applicant emphasises that under United Kingdom tax law emigration is not an event giving rise to liability to capital gains tax.
A provision which permits the national authorities, at their discretion, to treat emigration as a taxable event, as seems to have been the case here, constitutes an obstacle to freedom of establishment because it creates an ambiguous and uncertain situation calculated to deter the potential emigrant (see, in regard to free movement of goods, the judgment in EC Commission v Hellenic Republic Case 192/84 [1985] ECR 3967).
In the sixth place, the applicant in the main proceedings claims that a national rule such as that at issue is incompatible with arts 52 and 58 of the Treaty since it places restrictions on the right of exit of corporate bodies where no such restrictions are placed on the right of exit of individuals.
Article 58 of the Treaty treats companies in the same way as natural persons for the purposes of the provisions concerning freedom of establishment. Consequently, a member state may not impede the right of establishment by drawing unjustifiable distinctions between the activities of individuals on the one hand and the ‘companies and firms’ referred to in art 58 of the Treaty on the other. Member states must permit the establishment of companies on the same basis as they permit the establishment of natural persons. The same principle applies to the right to leave a member state in order to become established in another.
In the seventh place, the applicant in the main proceedings claims that the fact that a transfer of residence by a corporate body may lead to a loss of future tax revenue to a member state cannot justify derogation from the principle of freedom of establishment.
According to art 56(1) of the Treaty, the provisions of Community law on freedom of establishment may not prejudice the applicability of national provisions providing for special treatment for foreign nationals on grounds of public policy, public security or public health. That article, which must be construed strictly, is not applicable to this
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case, which is concerned with a measure restrictive of emigration invoked by a member state against one of its own nationals, not against a foreign national. In any event, the derogations referred to in that article cannot be construed as extending to the protection of the economic or fiscal interests of the member state (see, in regard to similar concepts in art 36 of the Treaty, the judgment in EC Commission v Italian Republic Case 95/81 [1982] ECR 2187).
However, the applicant in the main proceedings accepts that art 52 may in principle be subject to such exceptions as are recognised by the Court of Justice, but such exceptions must be narrowly defined, applied without discrimination and be proportionate. As the court has held, the protection of the fiscal interests of a member state cannot justify derogation from the requirements of art 52 of the Treaty. In its judgment in EC Commission v French Republic Case 270/83 [1986] ECR 273 cited above the court stated expressly that the risk of tax evasion cannot justify any derogation from the fundamental principle of freedom of establishment laid down in art 52 of the Treaty. In this case there is no question of tax evasion or any improper motive. Almost every emigration of a natural or legal person involves a loss of revenue to a member state and to justify restrictions on emigration on that ground alone would seriously undermine the scope of art 52 of the Treaty.
If there were any exception to art 52 on fiscal grounds, it could only justify measures to secure the payment of a tax liability already accrued or to prevent fraudulent or improper practices. Such an exception could not in any circumstances justify measures to secure the payment of tax for which there was not yet any liability and to which liability would probably not arise if emigration did not take place.
Finally, in its eighth submission the applicant in the main proceedings claims that even if derogation from the right of emigration under art 52 may be justified in specific cases, a general restriction such as the one contained in the national rule at issue is disproportionate.
As the court has consistently held, exceptions to the free movement of persons must be construed strictly. National measures derogating from art 52 must not go beyond what is necessary to achieve the ends justifying the derogation (see the judgment in EC Commission v French Republic Case 96/85 [1986] ECR 1475). Furthermore, the burden of proof in establishing exceptions to fundamental Treaty provisions lies on the party relying on the exception (see Re criminal proceedings against van Bennekom Case 227/82 [1983] ECR 3883).
It is thus not open to a member state to impose restrictions on all companies seeking to emigrate and to impose on them the burden of demonstrating that an exception to the free movement provisions is not applicable in their case. At most, the member states may require generally that those contemplating emigration notify the national authorities of their identity and their intentions. National legislation making the transfer of residence of companies a criminal offence in the absence of the consent of the national authorities is in any event excessive and disproportionate.
In conclusion, the applicant in the main proceedings suggests that the questions asked by the national court should be answered as follows:
‘1. Where under the law of a member state unrealised profits or gains have accrued, but no tax liability in respect thereof has arisen, and where the transfer of central management and control of a corporate body from the member state to another member state does not amount to a taxable event, arts 52 and 58 of the EEC Treaty preclude the former member state from prohibiting a body corporate with its central management and control in that state from transferring, without prior consent or approval, its central management and control to another member state, notwithstanding the fact that no tax on unrealised gains will be payable to the first member state as a result of such transfer. Furthermore, where the tax liabilities of bodies corporate accrue from time to time under the law of a member state by
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virtue of the presence in that state of the central management and control of such bodies corporate, arts 52 to 58 of the EEC Treaty preclude that member state from prohibiting a body corporate from transferring its central management and control to another member state in order to ensure continued liability to tax under the law of the former member state.
2. Article 2(1) and (4) of EC Council Directive 73/148, in conjunction with arts 52 to 58 of the EEC Treaty, gives a right to a corporate body with its central management and control in a member state to transfer without prior consent or approval its central management and control to another member state in the circumstances referred to in the first question referred by the Divisional Court.
3. Since no consent or approval is required, a member state is not entitled to refuse consent in the circumstances set out in the first question referred by the Divisional Court.
4. Since arts 52 to 58 of the EEC Treaty give expression to the principle that natural and legal persons must be free to choose the appropriate legal form in which to pursue their activities in other member states, it is incompatible with arts 52 to 58 to subject a transfer of corporate residence to another member state to prior consent or approval, where no such prior consent or approval is required in the case of a change of residence to another member state of an individual or a firm.’
2. Observations of the United Kingdom
The United Kingdom observes first of all that the transfer of ‘residence’ at issue in the main proceedings, which concerns an investment company, is not intended to entail and will not be accompanied by any alteration in the nature of the principal business activity of the company, in the location of its registered office or in the proportion of the company’s business that is transacted on the Stock Exchange in the United Kingdom. The transfer is not intended to integrate the company into the Netherlands economy but is solely intended to permit it to avoid United Kingdom corporation tax.
The United Kingdom argues principally that a change of a company’s residence does not, by itself, amount to ‘establishment’ under art 52 of the EEC Treaty. If Community law protected such changes of residence, in the absence of harmonisation of national corporate tax systems capital movements and the internal structure of the Community market could be seriously distorted.
In the alternative, if that submission is not accepted, the United Kingdom considers that any right granted to companies by art 52 of the Treaty to transfer their residence may not be relied on when the sole or main purpose of asserting that right is to avoid the operation of national fiscal laws.
With regard to its principal submission, the United Kingdom contends that art 52 of the Treaty does not create any general right for a company to change its residence, that such a right is not expressly conferred by other Community legislation and that it may not be inferred from the freedoms granted by arts 52 to 58 of the Treaty.
Article 52 is concerned with establishment in the sense of location in a member state in order to conduct economic activity there. Like the free movement of workers and the freedom to provide and obtain services, also covered by Title III of Pt II of the Treaty, it is not a simple freedom of movement but rather a freedom of movement created in order to promote the economic integration of the Community. In its judgment in Walrave and Koch v Association Union Cycliste Internationale Case 36/74 [1974] ECR 1405 the court decided that freedom of movement for workers does not affect the composition of sports teams, in particular national teams, since that has nothing to do with economic activities. That decision was confirmed in Levin v Staatssecretaris van Justitie Case 53/81 [1982] ECR 1035, concerning the right of residence of a part-time worker, in which the court stated that the employment must be effective and genuine.
However, fixing the residence of a company in a member state does not by itself necessarily involve an effective and genuine economic activity in the host state. The
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‘residence’ of a company corresponds, according to the definition contained in s 482(7) of the Income and Corporation Taxes Act 1970, to the place in which the ‘central management and control’ of the company is located. That is the place where the ultimate directing authority of the company is exercised. In order to change residence, all that United Kingdom law requires is that the place in which overall decisions about the conduct of the activities of the company (in this case the place in which the board adopts its decisions) should be changed. It is not necessary that the actual activities of the company should be changed, and in this case the transfer of the applicant company’s residence to the Netherlands would in no way alter the economic activities at present carried on by the company.
Nor is such a right on the part of a company to change its residence expressly provided for by other provisions of Community law. A right to change one’s residence is expressly provided for in EC Council Directive 73/148 on the abolition of restrictions on movement and residence within the Community for nationals of member states with regard to establishment and the provision of services, on which the applicant company relies. However, the express terms of the directive apply only to individuals. Article 2 thus makes the exercise of the right to leave the territory of a member state subject to the holding of an identity card or passport, which is manifestly inappropriate in the case of a corporate body.
The only relevance of that directive is in considering whether the recognition in the directive of a right to leave a member state merely determines the scope of a right conferred directly by the Treaty and the manner in which it may be exercised (see the judgment in Re Royer Case 48/75 [1976] ECR 497). The question is whether the right to transfer residence or to leave the territory of a member state is a right inherent in art 52 of the Treaty and extends to all persons covered by that article, both individuals and companies, on the ground that it is essential to the exercise of the right of establishment.
The United Kingdom considers that that right is inherent in the right of establishment granted to individuals by the Treaty. It would be difficult, if not impossible, for individuals to exercise genuine and effective economic activity in a particular member state without residing there. However, a company can extend its international locus by the establishment of agencies, branches or subsidiaries without being obliged to transfer its residence. It thus cannot be assumed in the case of a company that a right of establishment necessarily entails a right of residence. The irrelevance of the location of a company’s residence to the exercise of the freedoms conferred by art 52 of the Treaty is demonstrated by the facts of the present case. A transfer of residence would make no difference to the applicant’s ability to carry out effective and genuine economic activity in the Netherlands. Indeed, it is its intention to carry out such activity whether or not it is able to transfer its residence there. Moreover, it does not intend to cease to be established in the United Kingdom.
The conclusion that the right to transfer residence is not inherent in the exercise of the rights conferred on legal persons by art 52 of the Treaty is not contrary to the judgment of the court in EC Commission v French Republic Case 270/83 [1986] ECR 273. The court decided in that case that the freedom for companies to choose the appropriate legal form in which to pursue their activities in another member state, expressly conferred on them by art 52 of the Treaty, must not be limited by discriminatory tax provisions. The judgment was concerned with discrimination on grounds of nationality between branches and agencies on the one hand and subsidiaries on the other, contrary to the express provisions of art 52, and not the question whether a rule not expressly laid down in art 52 was necessarily to be inferred from freedoms expressly conferred by that article.
With regard to its alternative submission, the United Kingdom contends that, if art 2 of the Treaty gives a company a right to change its residence, that right must be subject to an exception in the case where the sole or main object of the change of residence is the avoidance of the tax laws of the state where the company previously resided.
In its case law the court has recognised a principle preventing individuals from
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using Community freedoms in order to avoid the application of legitimate national rules. In regard to freedom to provide services, the court decided in van Binsbergen v Bestuur van de Bedrijfsvereniging voor de Metaalnijverheid Case 33/74 [1974] ECR 1299 that specific requirements imposed on the person providing a service cannot be considered incompatible with the Treaty where they have as their purpose the general good and are binding on any person established in the member state in question, where the person providing the service would escape from the ambit of those rules by being established in another member state. In regard to freedom of establishment, the court decided in Knoors v Secretary of State for Economic Affairs Case 115/78 [1979] ECR 399 that it is not possible to disregard the legitimate interest which a member state may have in preventing certain of its nationals, by means of facilities created under the Treaty, from attempting wrongly to evade the application of their national legislation as regards training for a trade.
The above principle is not the same as that enunciated in Rewe-Zentral AG v Bundesmonopolverwaltung fü Branntwein Case 120/78 [1979] ECR 649, which recognised the possibility of limited derogations from general Community rules in order to promote a restricted number of public policy interests. Whether the principle being discussed here applies or not depends on the conduct and purpose of the subject who seeks to assert in his own favour the prima facie directly effective rights granted by Community law. The principle provides that a subject cannot rely on such rights where his sole or main purpose in asserting those rights is to avoid the application to him of legitimate national rules.
That principle should be applied in the present case. The freedom to alter one’s residence cannot be relied on where the sole or main purpose of that change of residence is to avoid the application of national fiscal rules.
That submission is fully in accordance with Community policy on the prevention of tax avoidance, which must be distinguished from tax evasion, the latter usually involving elements of dishonesty. In the absence of harmonisation of the tax systems relating to companies, the Community institutions have recognised that there is a direct Community interest in preventing tax evasion and avoidance. As is stated in the preamble to EC Council Directive 77/799 of 19 December 1977 concerning mutual assistance by the competent authorities of the member states in the field of direct taxation, practices of tax evasion and tax avoidance extending across the frontiers of member states lead to budget losses and violations of the principle of fair taxation and are liable to bring about distortions of capital movements and of conditions of competition, thus affecting the operation of the common market.
This case therefore concerns the protection not merely of a national interest but also of a Community interest.
According to the United Kingdom, the above-mentioned principle justifies a national provision such as that at issue in the main proceedings since it enables the authorities to control a change of company residence in any case where the sole or main objective of that change is the avoidance of liability for United Kingdom taxation.
Finally, the United Kingdom observes that there are sound practical reasons for a difference of treatment between individuals and companies inasmuch as only the latter are subject to the obligation to obtain the approval of the authorities for a transfer of residence. Article 58 treats companies in the same way as individuals for the purposes of the provisions of the Treaty on freedom of establishment but does not require the member states to apply in every case the same rules of domestic law to companies as to individuals.
The United Kingdom therefore submits that the questions posed by the national court should be answered as follows:
‘1. Articles 52 to 58 of the EEC Treaty do not preclude the member state from prohibiting the transfer of central management and control in either of the stated circumstances.
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2. EC Council Directive 73/148 gives no rights to corporate bodies. The second part of the question accordingly does not arise.
3. The prior consent or approval referred to may be required, and the member state is entitled to refuse consent on either of the grounds set out in question 1.
4. The provisions of the domestic law of the member state referred to make no difference to the above replies.’
3. Observations of the Commission
The Commission points out first of all that the questions referred by the national court concerning the right of exit by a legal person from its home state raise for the first time the question of the right of exit from a member state in order to take advantage of the provisions of the EEC Treaty.
The Commission goes on to observe that although under art 58 of the Treaty a company established in conformity with the law of one member state is treated in the same way as a natural person, who has the right under art 52 to establish himself in another member state, there is a significant difference in the legal framework affecting natural and legal persons. A natural person can decide of his own volition to remove himself from one state and establish himself in another. A legal person cannot necessarily act in the same way or, at least, with the same degree of freedom. Legal persons depend for their existence on their law of incorporation and the extent to which, inter alia, they can change their residence, moving from one state to another, depends on the law of the state of incorporation and on that of the host state. In some countries a change in the location of the central management and control of the company is possible and implies a change in residence. In others, if the central management and control emigrates, it is equivalent to winding up the company. In these respects the law is not harmonised. However, all Community legal systems appear to have one point in common: any company can be wound up in one state and reincorporated in another. Short of that solution, how far a company can migrate remains a matter of national law. In this case the question to be resolved is whether, where national company law bestows the right to alter residence, a company may rely on art 52 of the Treaty in a situation where the national authorities seek to impede emigration.
Under United Kingdom company law there is a distinction between the registered office and the location of the central management and control. While nationality of a company is dependent on the location of the registered office, its residence is dependent on the location of central management and control. The latter can emigrate without any consequences for the nationality of the company. Dutch law allows a company to establish itself in the Netherlands by locating its central management and control there without however acquiring Netherlands nationality. In this respect, United Kingdom and Dutch law are compatible.
There is no doubt, as far as individuals are concerned, that Community law recognises a right of exit from the member state of origin. That point has been expressly dealt with by art 2 of EC Council Directive 73/148 of 21 May 1973 on the abolition of restrictions on movement and residence within the Community for nationals of member states with regard to establishment and the provision of services. The Commission considers that that directive cannot apply to legal persons since the terms in which it is drafted are such as to make it clear that it applies only to natural persons. However, in the view of the Commission, whether one is dealing with natural or legal persons, the rights conferred under art 52ff of the Treaty would be rendered meaningless if the state of nationality could actually prevent emigration. Any legal person may be wound up and reincorporated in another member state, and a legal person has the right to change its residence, where that possibility is provided for under national company law. The Commission therefore considers that where national company law draws a distinction between nationality and residence, and provides for the retention of nationality by companies which decide to
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establish residence abroad, art 52 of the Treaty confers on a company the right to exercise that choice without being dependent on an authorisation from national fiscal authorities. However, there would appear to be no objection to a requirement that notice be given.
With regard to whether tax considerations can modify that solution, the Commission considers that the member state of origin may not impose conditions on emigration in order to secure potential revenue. In its judgment in EC Commission v French Republic Case 270/83 [1986] ECR 273 the court decided that art 52 of the Treaty does not permit any derogation from the fundamental principle of freedom of establishment on the ground that there is a risk of tax evasion.
This case is concerned not with tax evasion but only with a maximisation of lawful fiscal possibilities. The real problem in this case arises under United Kingdom law and from the absence of appropriate provisions in the Netherland—United Kingdom double tax convention.
The Commission concludes by proposing that the Court of Justice should give the following answers to the questions submitted by the national court:
‘1. Articles 52 and 58 of the EEC Treaty preclude a member state from prohibiting a body corporate with its central management and control in that member state from transferring without prior consent or approval that central management and control to another member state in one or both of the following circumstances, namely where: (i) payment of tax on profits or gains which have already arisen may be avoided; (ii) were the company to transfer its central management and control tax that might have become chargeable had the company retained its central management and control in that member state would be avoided.
2. EC Council Directive 73/148 confers no rights on bodies corporate.
3. In the light of the answer given to question 1, this question is not applicable.
4. The answer to question 1 is not affected by the legal situation attaching to an individual or firm.’
David Vaughan QC and Derrick Wyatt for Daily Mail and General Trust plc; Richard Buxton QC, Alan Moses and Nicholas Green for the United Kingdom; D R Gilmour for the EC Commission.
7 June 1988.
THE ADVOCATE GENERAL (M DARMON) delivered the following opiniond. Mr President, Members of the Court,
1. The issue in the main proceedings lies at the point where company law meets tax law. In the United Kingdom the connecting factors governing the application to a legal person of those branches of law are not necessarily the same. The concept of incorporation, as it is understood in English law, makes it possible to dissociate a company’s domicile, expressed through its registered office, and its nationality, on the one hand, from its residence, which largely determines the tax rules applicable to it, on the other. The proceedings pending before the national court arise from the possibility of such a separation.
2. In that regard, the legislation of the member states is very diverse, and that situation is aggravated by differences in the content of the relevant concepts. In order to overcome the resulting difficulties recourse must be had to harmonisation at Community level or agreements concluded by the member states. In any event, the function of the Court of Justice is to interpret Community law as it now stands. Thus the context of the case in which the Queen’s Bench Division of the High Court has referred questions to the court for a preliminary ruling, as it appears from the file, calls for certain general observations in order to attempt to reply to the questions. Those questions raise delicate problems concerning the interpretation of the Community provisions in regard to the right of
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establishment which have not until now been considered by the court. What is involved in this case is the claim by a company to exercise the right of establishment and, in particular, the conditions to which the member state of origin in which its registered office is situated may make subject the transfer of its central management and control to another member state.
3. Does such a transfer come within the scope of the right of establishment guaranteed by the EEC Treaty? Establishment ‘means integration into a national economy’ (see Schapira, Le Tallec and Blaise Droit Europeen des Affaires (1984) p 534). Thus, it is not contested that establishment within the meaning of the Treaty involves two factors: physical location and the exercise of an economic activity, both, if not on a permanent basis, at least on a durable one (see, for example, Renauld Droit Europeen des Societes (1969) p 2.08, Colomes Le Droit de l’Etablissement et des Investissements dans la CEE (1977) p 78 and Burrows Free Movement in European Community Law (1987) p 187).
4. Let me point out that the right of establishment, as laid down in arts 52 to 58 of the Treaty, applies to ‘Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community’ (see art 58, first paragraph). The right of establishment can manifest itself in two different ways (see, for example, Temple Lang ‘The right of establishment of companies and free movement of capital in the European Economic Community’, in Lafave and Hey (eds) International Trade, Investment and Organization (1967) esp pp 302–303). On the one hand, subsidiaries, branches or agencies may be set up. That is known as secondary establishment. The court, in Re Insurance Services, EC Commission v Germany Case 205/84 [1987] 2 CMLR 69 at 100 (para 21), stated that an undertaking is established in a member state as soon as it has a permanent presence there even if that presence consists merely of—
‘an office managed by the undertaking’s own staff or by a person who is independent but authorised to act on a permanent basis for the undertaking, as would be the case with an agency.’
Establishment may also take the form of the setting up of a new company or the transfer of the central management and control of the company, often regarded as its real head office. That is called ‘primary establishment’. It has been said in that regard that ‘central management and control is not a legal concept but an economic one’ (see Schwartz Le droit d’etablissement des societes commerciales dans le traite instituant la Communaute economique europeene (1963) p 61) and that it ‘is located where the company organs take the decisions that are essential for the company’s operations’ (see Everling The right of establishment in the Common Market (1964) p 75).
5. The concept of establishment itself is essentially an economic one (see Renauld Droit Europeen des Societes pp 2.19, 2.35). It always implies a genuine economic link (see Harding ‘Freedom of establishment and the rights of companies’ [1963] CLP 162 at 163). The transfer of the central management and control of a company, understood by reference to ‘criteria which are more economic than legal’ (see Renauld p 2·43), is covered by the right of establishment in so far as it is necessary to determine in concrete terms ‘the economic centre of gravity of the undertaking’ (see Renauld p 2.44). Thus ‘the concept of central management and control … corresponds … not merely to the physical location of the principal administration services but also, and perhaps principally, to the place from which the company is actually run’ (see Renauld p 2.31). The real head office is normally the place where the company’s central management and administration is located, since that is ‘the place in which the decisions concerning the company’s independent activity are made and from which that activity is set in motion; in other words, it is the centre from which that activity is exercised … ’ (see Goldman and Lyon-Caen Droit commercial europeen (4th edn, 1983) p 357).
6. The parties to the main proceedings take entirely opposite views on the question whether the transfer of the management of a company constitutes ‘establishment’ within
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the meaning of the EEC Treaty. According to Daily Mail and General Trust, such a transfer comes within the scope of the right of establishment. Arguing on the basis of art 52 to 58 of the Treaty and the General Programme for the abolition of restrictions on freedom of establishment (see OJ 1962, p 36 (S Edn (2nd Series) IX, p 7)), the applicant in the main proceedings considers that the location in a member state of the central management and control of a company is sufficient to permit the existence of a ‘real and continuous link’ (expression borrowed from the General Programme, Title I) with the economy of that state to be presumed, and thus constitutes ‘establishment’ within the meaning of the Treaty. Conversely, the United Kingdom takes the view that a change of residence by a company does not constitute establishment. It does not necessarily imply a change in the company’s economic activities, especially since a company wishing to conduct economic activity in another member state can do so through secondary establishments. Finally, the Commission is of the opinion that it is for national law to determine whether a company may transfer its residence without being wound up. It considers that art 52 applies where national legislation permits a company to transfer its residence without losing its nationality.
7. In my view, the problem should be expressed in different terms. The concept of central management is difficult to pin down. Even where it designates the place at which the board of directors meets, it is not sufficient to provide a satisfactory connecting factor. As has been noted—
‘owing to the progress made by means of communication, it is no longer necessary to arrange formal board meetings. The telephone, telex and telecopier enable each director to state his point of view and to take part in the decision-making without being physically present in a given place. The board meetings each director will attend via television will soon form part of company’s everyday life. The board of directors can meet in a place chosen arbitrarily, which bears no real relation with the decision centre of the company.’
(See Rivier ‘General Report: The Fiscal Residence of Companies’ LXXIIa Studies on International Fiscal Law 75.)
The place in which the board of directors meets cannot, therefore, constitute the sole criterion making it possible to designate with certainty in each case the place in which the central management is located. That designation cannot be arrived at by means of a formal legal assessment which does not take account of a number of factual elements the respective scope of which may vary according to the type of company involved.
8. In order to determine whether the transfer of the central management and control of a company constitutes establishment within the meaning of the Treaty it is therefore necessary to take into consideration a range of factors. The place at which the management of the company meets is undoubtedly one of the foremost of those factors, as is the place, normally the same, at which general policy decisions are made. However, in certain circumstances those factors may be neither exclusive nor even decisive. It might be necessary to take account of the residence of the principal managers, the place at which general meetings are held, the place at which administrative and accounting documents are kept and the place at which the company’s principal financial activities are carried on, in particular, the place at which it operates a bank account. That list cannot be regarded as exhaustive. Moreover, those factors may have to be given different weight according to whether, for example, the company is engaged in production or investment. In the latter case, it may be perfectly legitimate to take account of the market on which the company’s commercial or stock exchange transactions are mainly carried out and the scale of those transactions.
9. In the light of the judgment in Association des Centres distributeurs Edouard Leclerc v Sarl ‘Au ble vert’ Case 229/83 [1985] ECR 1 it is clear that Community law offers no assistance where ‘objective factors’ show that a particular activity was carried out ‘in order to circumvent’ national legislation: see Leclerc’s case (at 35 (para 27)). The fact that the
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essential activities of a company take place on the territory of a member state other than that to which it intends to transfer its central management may not be ignored. Such circumstances may, in certain cases, constitute an indication that what is involved is not genuine establishment, in particular when the effect of the transfer of the central management is to cause the company to cease to be subject to legislation which would otherwise apply to it. I believe that that conclusion can be drawn from the judgments of the court in van Binsbergen v Bestuur van de Bedrijfsvereniging voor de Metaalnijverheid Case 33/74 [1974] ECR 1299 and Knoors v Secretary of State for Economic Affairs Case 115/78 [1979] ECR 399. As a general rule it appears that the national court may assess whether, in a specific case and having regard to the circumstances, there is a suggestion of abuse of a right or circumvention of the law and whether it should decide not to apply Community law.
10. However, when the proper conclusion to be drawn from the circumstances is that the transfer of the central management genuinely constitutes establishment within the meaning of the Treaty, the question then arises whether the right to make such a transfer may be made subject to the authorisation of the national authorities and whether those authorities may object to the transfer for fiscal reasons.
11. Generally, in most of the member states, the transfer of the central management of a company, in the sense of its real head office, may take place only through the winding up of the company and its reconstruction in the host member state. That solution, the ‘legal death’ of the company, involves the settlement of its tax position, determined on the day of the winding up, both in regard to the existing debt and in regard to matters in respect of which the event normally giving rise to tax liability has not yet occurred. Capital gains are thus taxed even though no disposition of assets has taken place. In regard to the member states referred to above, the transfer of the central management of a company without loss of legal personality or nationality may take place under agreements between member states of the kind provided for in art 220 of the Treaty.
12. No prior authorisation may be required for the exercise of a fundamental freedom laid down in the Treaty. Similarly, a member state cannot prevent a company from exercising its right of establishment on the ground that such exercise entails a loss of revenue in respect of taxes which would have been due on the basis of the company’s future activities if it had remained subject to the tax laws of that state.
13. However, I consider that, as Community law now stands, member states are not prevented from requiring a company to settle its fiscal position on any transfer of its central management, even where winding up is not required. It is generally accepted that the winding up required by national legislation as a condition for the emigration of a company is not contrary to Community law (see Renauld p 2.47). It would be paradoxical if a member state not requiring winding up were to find itself placed by Community law in a less favourable fiscal position precisely because its legislation on companies is more consistent with Community objectives in regard to establishment. A company set up under the legislation of a member state in which ‘fiscal allegiance’ (this expression comes from Rivier p 15) is determined in the light of the location of the central administration will maintain its registered office in that country and continue to have that country’s nationality even after transferring its residence, or, more precisely, the seat of its management, to another member state. However, for the reasons indicated above, that does not seem to me, in the present state of Community law, to preclude national authorities from attaching to such a transfer fiscal consequences similar to those of winding up.
14. The guidelines which I propose should enable the court to reply to the first and third questions referred to it by the Queen’s Bench Division of the High Court. They make a reply to the fourth question unnecessary. The remaining question does not require any long discussion. Although the first paragraph of art 58 provides that companies or firms are, for the purposes of the provisions of the Treaty on freedom of
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establishment, to be treated in the same way as natural persons who are nationals of member states, they clearly cannot be placed entirely on the same footing; along with the United Kingdom and the Commission, therefore, I consider that EC Council Directive 72/148 does not apply to legal persons.
15. Consequently, I propose that the court should rule that: (1) the transfer to another member state of the central management of a company may constitute a form of exercise of the right of establishment, subject to the assessment by the national court of any elements of fact showing whether or not such a transfer reflects a genuine integration of the said company into the economic life of the host member state; (2) under Community law a member state may not require a company wishing to establish itself in another member state, by transferring its central management there, to obtain prior authorisation for such transfer; (3) however, Community law does not prohibit a member state from requiring a company established on its territory, on establishing itself in another member state by transferring its central management there, to settle its tax position in regard to the part of its assets affected by the transfer, the value of which is to be determined at the date of transfer; (4) EC Council Directive 73/148 is applicable only to natural persons.
THE COURT OF JUSTICE delivered the following judgment.
1. By an order of 6 February 1987, which was received at the court on 19 March 1987, the High Court of Justice, Queen’s Bench Division, referred to the court for a preliminary ruling under art 177 of the EEC Treaty four questions on the interpretation of arts 52 and 58 of the Treaty and EC Council Directive 73/148 of 21 May 1973 on the abolition of restrictions on movement and residence within the Community for nationals of member states with regard to establishment and the provision of services.
2. Those questions arose in proceedings between Daily Mail and General Trust plc, the applicant in the main proceedings (hereinafter referred to as ‘the applicant’), and HM Treasury for a declaration, inter alia, that the applicant is not required to obtain consent under United Kingdom tax legislation in order to cease to be resident in the United Kingdom for the purpose of establishing its residence in the Netherlands.
3. It is apparent from the documents before the court that under United Kingdom company legislation a company such as the applicant, incorporated under that legislation and having its registered office in the United Kingdom, may establish its central management and control outside the United Kingdom without losing legal personality or ceasing to be a company incorporated in the United Kingdom.
4. According to the relevant United Kingdom tax legislation, only companies which are resident for tax purposes in the United Kingdom are as a rule liable to United Kingdom corporation tax. A company is resident for tax purposes in the place in which its central management and control is located.
5. Section 482(1)(a) of the Income and Corporation Taxes Act 1970 prohibits companies resident for tax purposes in the United Kingdom from ceasing to be so resident without the consent of the Treasury.
6. In 1984 the applicant, which is an investment holding company, applied for consent under the above-mentioned national provision in order to transfer its central management and control to the Netherlands, whose legislation does not prevent foreign companies from establishing their central management there; the company proposed, in particular, to hold board meetings and to rent offices for its management in the Netherlands. Without waiting for that consent, it subsequently decided to open an investment management office in the Netherlands with a view to providing services to third parties.
7. It is common ground that the principal reason for the proposed transfer of central management and control was to enable the applicant, after establishing its residence for tax purposes in the Netherlands, to sell a significant part of its non-permanent assets and to use the proceeds of that sale to buy its own shares, without having to pay the tax to which such transactions would make it liable under United Kingdom tax law, in regard
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in particular to the substantial capital gains on the assets which the applicant proposed to sell. After establishing its central management and control in the Netherlands the applicant would be subject to Netherlands corporation tax, but the transactions envisaged would be taxed only on the basis of any capital gains which accrued after the transfer of its residence for tax purposes.
8. After a long period of negotiations with the Treasury, which proposed that it should sell at least part of the assets before transferring its residence for tax purposes out of the United Kingdom, the applicant initiated proceedings before the High Court of Justice, Queen’s Bench Division, in 1986. Before that court, it claimed that arts 52 and 58 of the EEC Treaty gave it the right to transfer its central management and control to another member state without prior consent or the right to obtain such consent unconditionally.
9. In order to resolve that dispute, the national court stayed the proceedings and referred the following questions to the Court of Justice:
‘1. Do Articles 52 and 58 of the EEC Treaty preclude a Member State from prohibiting a body corporate with its central management and control in that Member State from transferring without prior consent or approval that central management and control to another Member State in one or both of the following circumstances, namely where: (i) payment of tax upon profits or gains which have already arisen may be avoided; (ii) were the company to transfer its central management and control, tax that might have become chargeable had the company retained its central management and control in that Member State would be avoided?
2. Does Council Directive 73/148/EEC give a right to a corporate body with its central management and control in a Member State to transfer without prior consent or approval its central management and control to another Member State in the conditions set out in Question 1? If so, are the relevant provisions directly applicable in this case?
3. If such prior consent or approval may be required, is a Member State entitled to refuse consent on the grounds set out in Question 1?
4. What difference does it make, if any, that under the relevant law of the Member State no consent is required in the case of a change of residence to another Member State of an individual or firm?’
10. Reference is made to the report for the hearing for a fuller account of the facts and the background to the main proceedings, the provisions of national legislation at issue and the observations submitted to the court, which are mentioned or discussed hereinafter only in so far as is necessary for the reasoning of the court.
First question
11. The first question seeks in essence to determine whether arts 52 and 58 of the Treaty give a company incorporated under the legislation of a member state and having its registered office there the right to transfer its central management and control to another member state. If that is so, the national court goes on to ask whether the member state of origin can make that right subject to the consent of national authorities, the grant of which is linked to the company’s tax position.
12. With regard to the first part of the question, the applicant claims essentially that art 58 of the Treaty expressly confers on the companies to which it applies the same right of primary establishment in another member state as is conferred on natural persons by art 52. The transfer of the central management and control of a company to another member state amounts to the establishment of the company in that member state because the company is locating its centre of decision-making there, which constitutes genuine and effective economic activity.
13. The United Kingdom argues essentially that the provisions of the Treaty do not give companies a general right to move their central management and control from one
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member state to another. The fact that the central management and control of a company is located in a member state does not itself necessarily imply any genuine and effective economic activity on the territory of that member state and cannot therefore be regarded as establishment within the meaning of art 52 of the Treaty.
14. The Commission emphasises, first of all, that in the present state of Community law, the conditions under which a company may transfer its central management and control from one member state to another are still governed by the national law of the state in which it is incorporated and of the state to which it wishes to move. In that regard the Commission refers to the differences between the national systems of company law. Some of them permit the transfer of the central management and control of a company and, among those, certain attach no legal consequences to such a transfer, even in regard to taxation. Under other systems the transfer of the management or the centre of decision-making of a company out of the member state in which it is incorporated results in the loss of legal personality. However, all the systems permit the winding up of a company in one member state and its reincorporation in another. The Commission considers that, where the transfer of central management and control is possible under national legislation, the right to transfer it to another member state is a right protected by art 52 of the Treaty.
15. Faced with those diverging opinions, the court must first point out, as it has done on numerous occasions, that freedom of establishment constitutes one of the fundamental principles of the Community and that the provisions of the Treaty guaranteeing that freedom have been directly applicable since the end of the transitional period. Those provisions secure the right of establishment in another member state not merely for Community nationals but also for the companies referred to in art 58.
16. Even though those provisions are directed mainly to ensuring that foreign nationals and companies are treated in the host member state in the same way as nationals of that state, they also prohibit the member state of origin from hindering the establishment in another member state of one of its nationals or of a company incorporated under its legislation which comes within the definition contained in art 58. As the Commission rightly observed, the rights guaranteed by art 52 ff would be rendered meaningless if the member state of origin could prohibit undertakings from leaving in order to establish themselves in another member state. In regard to natural persons, the right to leave their territory for that purpose is expressly provided for EC Council Directive 73/148, which is the subject of the second question referred to the court.
17. In the case of a company, the right of establishment is generally exercised by the setting up of agencies, branches or subsidiaries, as is expressly provided for in the second sentence of the first paragraph of art 52. Indeed, that is the form of establishment in which the applicant engaged in this case by opening an investment management office in the Netherlands. A company may also exercise its right of establishment by taking part in the incorporation of a company in another member state, and in that regard art 221 of the Treaty ensures that it will receive the same treatment as nationals of that member state as regards participation in the capital of the new company.
18. The provision of United Kingdom law at issue in the main proceedings imposes no restriction on transactions such as those described above. Nor does it stand in the way of a partial or total transfer of the activities of a company incorporated in the United Kingdom to a company newly incorporated in another member state, if necessary after winding up and, consequently, the settlement of the tax position of the United Kingdom company. It requires Treasury consent only where such a company seeks to transfer its central management and control out of the United Kingdom while maintaining its legal personality and its status as a United Kingdom company.
19. In that regard it should be borne in mind that, unlike natural persons, companies are creatures of the law and, in the present state of Community law, creatures of national
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law. They exist only by virtue of the varying national legislation which determines their incorporation and functioning.
20. As the Commission has emphasised, the legislation of the member states varies widely in regard to both the factor providing a connection to the national territory required for the incorporation of a company and the question whether a company incorporated under the legislation of a member state may subsequently modify that connecting factor. Certain states require that not merely the registered office but also the real head office, that is to say the central administration of the company, should be situated on their territory, and the removal of the central administration from that territory thus presupposes the winding up of the company with all the consequences that winding up entails in company law and tax law. The legislation of other states permits companies to transfer their central administration to a foreign country but certain of them, such as the United Kingdom, make that right subject to certain restrictions, and the legal consequences of a transfer, particularly in regard to taxation, vary from one member state to another.
21. The Treaty has taken account of that variety in national legislation. In defining, in art 58, the companies which enjoy the right of establishment, the Treaty places on the same footing, as connecting factors, the registered office, central administration and principal place of business of a company. Moreover, art 220 of the Treaty provides for the conclusion, so far as is necessary, of agreements between the member states with a view to securing, inter alia, the retention of legal personality in the event of transfer of the registered office of companies from one country to another. No convention in this area has yet come into force.
22. It should be added that none of the directives on the co-ordination of company law adopted under art 54(3)(g) of the Treaty deal with the differences at issue here.
23. It must therefore be held that the Treaty regards the differences in national legislation concerning the required connecting factor and the question whether, and if so how, the registered office or real head office of a company incorporated under national law may be transferred from one member state to another as problems which are not resolved by the rules concerning the right of establishment but must be dealt with by future legislation or conventions.
24. Under those circumstances, arts 52 and 58 of the Treaty cannot be interpreted as conferring on companies incorporated under the law of a member state a right to transfer their central management and control and their central administration to another member state while retaining their status as companies incorporated under the legislation of the first member state.
25. The answer to the first part of the first question must therefore be that in the present state of Community law arts 52 and 58 of the Treaty, properly construed, confer no right on a company incorporated under the legislation of a member state and having its registered office there to transfer its central management and control to another member state.
26. Having regard to that answer, there is no need to reply to the second part of the first question.
Second question
27. In its second question, the national court asks whether the provisions of EC Council Directive 73/148 of 21 May 1973 on the abolition of restrictions on movement and residence within the Community for nationals of member states with regard to establishment and the provision of services give a company a right to transfer its central management and control to another member state.
28. It need merely be pointed out in that regard that the title and provisions of that directive refer solely to the movement and residence of natural persons and that the provisions of the directive cannot, by their nature, be applied by analogy to legal persons.
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29. The answer to the second question must therefore be that EC Council Directive 73/148, properly construed, confers no right on a company to transfer its central management and control to another member state.
Third and fourth questions
30. Having regard to the answers given to the first two questions referred by the national court, there is no need to reply to the third and fourth questions.
Costs
31. The costs incurred by the United Kingdom and the Commission of the European Communities, which have submitted observations to the court, are not recoverable. Since these proceedings are, in so far as the parties to the main proceedings are concerned, in the nature of a step in the action pending before the national court, the decision on costs is a matter for that court.
On those grounds, the court, in answer to the questions referred to it by the High Court of Justice, Queen’s Bench Division, by order of 6 February 1987, hereby rules: (1) in the present state of Community law, arts 52 and 58 of the EEC Treaty, properly construed, confer no right on a company incorporated under the legislation of a member state and having its registered office there to transfer its central management and control to another member state; (2) EC Council Directive 73/148 of 21 May 1973 on the abolition of restrictions on movement and residence within the Community for nationals of member states with regard to establishment and the provision of services, properly construed, confers no right on a company to transfer its central management and control to another member state.
Solicitors: Freshfields (for Daily Mail and General Trust plc); Susan Hay, Treasury Solicitor’s Department (for the United Kingdom); D R Gilmour, Legal Adviser, EC Commission (for the Commission).
Rengan Krishnan Esq Barrister.
Barrett v Lounova (1982) Ltd
[1989] 1 All ER 351
Categories: TORTS; Negligence
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): KERR LJ AND SWINTON THOMAS J
Hearing Date(s): 20, 22 JUNE 1988
Landlord and tenant – Repair – Landlord’s covenant – Implication of repairing covenant – Implication necessary to give business efficacy to tenancy agreement – Express covenant by tenant to repair inside of premises – Agreement silent on obligation to repair outside – Whether covenant by landlord to repair outside correlative to tenant’s obligation to repair inside should be implied.
Negligence – Defective premises – Landlord’s duty of care by virtue of obligation to repair – Enforcement of duty – Injunction requiring landlord to repair premises – Defective Premises Act 1972, s 4(1).
The tenancy agreement of a terrace house contained a covenant by the tenant to keep the inside of the premises in good repair. The agreement did not contain any covenant by either the landlord or the tenant to keep the outside of the premises in repair. Over the years the outside of the house fell into a bad state of disrepair, and the tenant alleged that as a result of that disrepair there was extensive water penetration causing damage to the interior of the house. The tenant brought an action against the landlord claiming damages and specific performance of the agreed repairs, on the grounds (i) that there was an implied covenant by the landlord to keep the outside of the house in repair or alternatively, (ii) that the landlord was in breach of the duty of care owed to her under s 4(1)a of the Defective Premises Act 1972. The judge held that a covenant by the landlord to repair the outside of the premises was to be implied into the agreement and, accordingly, he awarded the tenant agreed damages for breach of that covenant and specific performance by the landlord of an agreed schedule of dilapidations. The landlord appealed.
Held – An obligation on a landlord to repair the outside of premises could be implied into a tenancy agreement where it was necessary to do so to give business efficacy to the agreement. Accordingly, where a tenancy agreement contained an express covenant by the tenant to keep the inside of the premises in repair but was silent as to any obligation to repair the outside, and the tenant’s covenant was intended to be enforceable throughout the tenancy and could not be properly performed unless the outside was kept in repair, an obligation by the landlord to repair the outside, correlative to the tenant’s obligation to repair the inside, could be implied in order to give business efficacy to the agreement. In all the circumstances, such a term would be implied. The appeal would therefore be dismissed (see p 356 j to p 357 e g and p 358 g h, post).
Dicta of Ormerod and Willmer LJJ in Sleafer v Lambeth Metropolitan BC [1959] 3 All ER 378 at 386, 388 and of Slade LJ in Duke of Westminster v Guild [1984] 3 All ER 144 at 149 applied.
Hart v Windsor [1843–60] All ER Rep 681 considered.
Dictum of Bankes LJ in Cockburn v Smith [1924] All ER Rep 59 at 62 disapproved.
Per Kerr LJ. There is no reason why an injunction should not issue to enforce a landlord’s duty under s 4(1) of the 1972 Act where there is appropriate evidence to support such an injunction (see p 358 d h, post).
Notes
For a landlord’s liability to repair apart from express covenant, see 27 Halsbury’s Laws
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(4th edn) para 264, and for cases on the subject, see 31(2) Digest (Reissue) 596–599, 4863–4876.
For the Defective Premises Act 1972, s 4, see 31 Halsbury’s Statutes (4th edn) 199.
Cases referred to in judgments
Cockburn v Smith [1924] 2 KB 119, [1924] All ER Rep 59, CA.
De Falco v Crawley BC [1980] 1 All ER 913, [1980] QB 460, [1980] 2 WLR 664, CA.
Hart v Windsor (1844) 12 M & W 68, [1843–60] All ER Rep 681, 152 ER 1114.
Liverpool City Council v Irwin [1976] 2 All ER 39, [1977] AC 239, [1976] 2 WLR 562, HL.
Sleafer v Lambeth Metropolitan BC [1959] 3 All ER 378, [1960] 1 QB 43, [1959] 3 WLR 485, CA.
Smith v Bradford Metropolitan Council (1982) 44 P & CR 171, CA.
Warren v Keen [1953] 2 All ER 1118, [1954] 1 QB 15, [1959] 3 WLR 702, CA.
Westminster (Duke) v Guild [1984] 3 All ER 144, [1985] QB 688, [1984] 3 WLR 630, CA.
Wilchick v Marks and Silverstone (Silverstone, third party) [1934] 2 KB 56, [1934] All ER Rep 73.
Appeal
The defendant, Lounova (1982) Ltd (the landlord), appealed against the decision of Mr Recorder Desmond Keane QC on 10 December 1987 in the Shoreditch County Court whereby, in an action brought by the plaintiff, Elsie Mary Barrett (the tenant), claiming by recommended particulars of claim dated 10 December 1987 damages limited to £2,000, interest thereon and an order of specific performance compelling the landlord to execute such works as were necessary to remedy specified defects or damages in lieu thereof limited to the cast of executing and supervising the works, he held that there was to be implied in the tenancy agreement between the landlord and the tenant, a term that the landlord was bound to keep the outside of the tenant’s premises at 70 Lansdowne Drive, London E8 in reasonable repair and gave judgment for the tenant for the agreed sum of £1,250 damages, inclusive of interest, and ordered the landlord to carry out the repairs itemised in an agreed schedule of repairs within six months from 10 December 1987. The facts are set out in the judgment of Kerr LJ.
Robert Pryor QC and Simon Monty for the landlord;.
Derek Wood QC and Martin Seaward for the tenant.
22 June 1988. The following judgments were delivered.
KERR LJ. This is an appeal from a decision of Mr Recorder Desmond Keane QC in the Shoreditch County Court given on 10 December 1987. The case concerns an end of terrace house in the East End of London in the borough of Hackney, 70 Lansdowne Drive, London E8, which has been occupied under the Rent Acts since 1941. The outside of the premises is in a bad state of repair and dilapidated; probably no work has been done to it for decades.
The issue is whether the landlord is bound to repair the outside. The tenancy contained a covenant that the tenant should keep the inside in good repair and it gives the landlord access for any reasonable purpose. But there is no express obligation on anyone to keep the outside in repair. The recorder held that a term was to be implied, correlative to the tenant’s obligation, to the effect that the landlord would keep the outside in a reasonable state of repair. There is also, in the alternative, an issue under s 4 of the Defective Premises Act 1972, but the main issue on this appeal has been whether a term can be implied as the recorder has held.
I turn to the tenancy agreement. This was made on 5 April 1941 between a Mr Frank Hayllar of Brighton, described as a solicitor, as ‘the landlord’, and a Mr Albert Edward Arbon of Dalston, described as a bread baker, as ‘the tenant’. It demised the house together with the landlord’s fixtures in and about the premises—
‘From the twelfth day of April [1941] for the term of One year certain and
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thereafter on a monthly tenancy At the yearly rent of Seventy eight pounds such rent to be payable weekly in advance on Monday in each week the first payment of One pound ten shillings to be made on the signing hereof.’
There followed the covenant to pay the rent; I need not read that. But I must read the following one:
‘THE Tenant hereby agrees … To do all inside repairs (if any) now required and to keep and at the expiration of the tenancy to leave the inside of the said premises and fixtures in good repair order and condition but fair wear and tear to be allowed at the end of the tenancy.’
Next the tenant agreed:
‘TO permit the Landlord and his agents to enter at all reasonable times upon the said premises and for all reasonable purposes.’
Then I can go on to the tenant’s agreement:
‘NOT without … consent … to make any alterations in or addition to the said premises [and] NOT to carry on any trade or business upon the said premises or use the same otherwise than as a private dwellinghouse.’
The only relevant agreement on the part of the landlord was that the tenant should be entitled to quiet possession in the usual way and that the landlord would pay all rates and taxes payable in respect of the premises so long as the tenant performed his part of the agreement and paid all moneys due from him punctually.
The whole agreement must of course be construed by reference to the circumstances as they existed at the conclusion of the contract. The recorder referred to some allowances in the early rent books in evidence, which had evidently been made by the landlord for minor external work done by the tenant, as being consistent with his conclusion that the landlord was under an obligation to repair, though rightly not as any aid to the construction of the agreement. I put that matter out of my mind.
The plaintiff (the tenant) occupies the house as the result of two transmissions under the Rent Acts. After the death of the original tenant the tenancy was transmitted to his widow and I understand that the plaintiff is her daughter. So far as the landlord company is concerned, it is not known when it acquired this freehold. To complete the history, more for historical than for any other purposes, the rent has now gone up to £15 per week.
Complaints from the tenant about the state of disrepair of this property began in May 1985, and proceeded with a solicitors’ letter in August 1985. There was then a surveyors’ report with further chasers which were sent more or less throughout 1986. Ultimately there was some response from the landlord and an inspection was carried out on its behalf. But recently the landlord changed its mind and claimed that on the true construction of the agreement there was no obligation to repair.
The particulars of claim were issued on 20 March 1987. Under the heading ‘PARTICULARS OF DEFECTS’ they include the following:
‘The structure and exterior, including the drains and gutters, of the premises is in such poor condition as to cause extensive water penetration and damage to the internal plaster and timbers.’
Then there is reference to a survey report which sets out the defects in detail.
There was also (by the amended particulars of claim) a claim in the alternative under the Defective Premises Act 1972, to which I shall come later.
The defence was simply a denial of liability on all counts.
In the course of the hearing it was agreed that the tenant was entitled to damages in the sum of £1,250 subject to liability. These were to cover special as well as general
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damages, damages for inconvenience, damage caused to the contents by damp and so forth.
A fairly comprehensive schedule of dilapidations was also agreed, on the basis of what a repairing covenant by the landlord, if one were to be implied, would require to be done to the premises. The cost was estimated at about £10,000.
As I have mentioned, the recorder took the view that such a covenant should be implied. He accordingly gave judgment for the sum of £1,250 and ordered specific performance of the terms of the schedule agreed between the surveyors, to be carried out within six months from 10 December 1987, the date of his order. He granted a stay of 21 days for the purposes of an appeal, but only subject to the payment of £5,000 into court within seven days.
Apart from giving notice of appeal, the landlord did nothing at all in relation to that order and it was rightly conceded on its behalf that the company was clearly in contempt of court.
When the time for the hearing of this appeal approached, a few days after the expiry of the six-month period on 10 June, it appears that a builder was sent to the premises, but without any prior notice, and not surprisingly he was not admitted by the tenant in those circumstances. Moreover, the sum of £5,000 was not brought into court. Accordingly, we declined to proceed with the appeal unless and until £5,000 was brought into court. That was done last Monday, the day on which we heard this appeal, and the sum was duly paid into the Shoreditch County Court.
Against that background I turn to the issue whether or not there is to be implied a term to the effect that the landlord was bound to keep the outside in reasonable repair, as the recorder decided. In that regard it is common ground that he directed himself correctly when he said:
‘Clearly on the authorities the law does not permit the court to imply terms merely on the basis that implication would seem to be reasonable or fair. In essence, what is required before such implication is made is either a situation where the parties to the agreement, if asked about the suggested implied term, would have said words such as, “Oh yes, of course we both agree. Is there any need to mention it?” or where it is not merely desirable but necessary to imply such a term to give business efficacy or in other words necessary to make the contract workable, which amounts to the same thing.’
Those two ways of putting the test whether or not a term should be implied, sometimes referred to as ‘the officious bystander test’ and the ‘business efficacy test’, are of course correct. But whether or not, on applying those tests, the implication falls to be made is not easy, and the authorities are of no direct assistance.
The landlord relied strongly on a well-known passage in Woodfall on Landlord and Tenant (28th edn, 1978) para 1—1465, in the following terms:
‘In general, there is no implied covenant by the lessor of an unfurnished house or flat, or of land, that it is or shall be reasonably fit for habitation, occupation or cultivation, or for any other purpose for which it is let. No covenant is implied that the lessor will do any repairs whatever … ’
The first authority cited was the old case of Hart v Windsor (1844) 12 M & W 68, [1843–60] All ER Rep 681. There there was a full tenant’s repairing covenant of a house, but he declined to pay the rent because the house was bug-infested to such an extent that he said it was unfit for human habitation. That plea was rejected. Parke B, giving the judgment of the court, said (12 M & W 68 at 87–88, [1843–60] All ER Rep 681 at 685):
‘We are all of opinion … that there is no contract, still less a condition, implied by law on the demise of real property only, that it is fit for the purpose for which it is let. The principles of the common law do not warrant such a position; and though, in the case of a dwelling-house taken for habitation, there is no apparent
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injustice in inferring a contract of this nature, the same rule must apply to land taken for other purposes—for building upon, or for cultivation; and there would be no limit to the inconvenience which would ensue. It is much better to leave the parties in every case to protect their interests themselves, by proper stipulations, and if they really mean a lease to be void by reason of any unfitness in the subject for the purpose intended, they should express that meaning.’
Secondly, there is an even stronger passage in a dictum of Bankes J in Cockburn v Smith [1924] 2 KB 119, [1924] All ER Rep 59, a decision of this court. The owner of a block of flats had let one of the top flats but had kept the roof of the building and the guttering in his own possession and control. The guttering became defective, water escaped and wetted the tenant’s outside wall and so caused damage to the inside. Not surprisingly, it was held that since the landlord had retained control of the guttering he was under a duty to take reasonable care to remedy any defects in it of which he had notice and which were a source of damage. Those facts, of course, do not apply here, but in an obiter dictum Bankes LJ said ([1924] 2 KB 119 at 128, [1924] All ER Rep 59 at 62):
‘I want to make it plain at the outset that this is not a letting of the whole house where, without an express covenant or a statutory obligation to repair, the landlords would clearly be under no liability to repair any part of the demised premises whether the required repairs were structural or internal and whether they had or had not notice of the want of repair.’
That statement was not only obiter, but if it purported to lay down any general rule that no repairing covenant could arise by implication then, with all respect, it clearly went too far, as shown by later cases.
Finally in this context the landlord relied on the decision of Goddard J in Wilchick v Marks and Silverstone (Silverstone, third party) [1934] 2 KB 56, [1934] All ER Rep 73. But implication derived from the true construction of the terms of the letting was not raised in argument in that case. It was also not dealt with by the judge since no relevant implication could have been derived from the terms of that particular instrument.
I turn now to the more recent cases. They show that there is no rule of law against the implication of any repairing covenant against landlords and that the ordinary principles of construction concerning implied terms apply to leases in that context as they apply generally in the law of contract. That is illustrated, but in a very different context, by the decision of the House of Lords in Liverpool City Council v Irwin [1976] 2 All ER 39, [1977] AC 239. I need not refer to that case, but I should mention two other cases, both decisions of this court, which show that implication of a landlord’s repairing covenant is a permissible approach if the terms of the agreement and circumstances justify it.
The first is Sleafer v Lambeth Metropolitan BC [1959] 3 All ER 378, [1960] 1 QB 43. That was an extraordinary case, in which the tenant found that he was unable to open his front door due to a minor defect which caused it to jam. So he pulled hard on the only external handle, the letterbox knocker. That came off, and he fell backwards against an iron balustrade and suffered injury to his back. He sued the landlord for allowing the door to get into that state. Perhaps not surprisingly, it was held that in relation to a minor defect of that kind no question of any obligation on the landlord could arise. It is also to be noted that the lease provided, by cl 2, that the tenant was to reside in the dwelling, that is to say, in the same way as here, that it was not to be used for any business purposes, and by cl 9 the tenant was not to do, or to allow to be done, any decorateve or other work without the landlord’s consent in writing. In rejecting the tenant’s claim against the landlord, Morris LJ, who gave the first judgment, quoted the passages in Hart v Windsor and Cockburn v Smith which I have already set out (see [1959] 3 All ER 378 at 383, [1960] 1 QB 43 at 55). But I do not think that he said anything about the possibility of implying a term dealing with repairs. However, that was dealt with by Ormerod LJ in a passage which I must read ([1959] 3 All ER 378 at 386, [1960] 1 QB 43 at 60):
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‘When this matter was argued before the learned judge, it was contended by counsel for the landlords that in no circumstances could a condition be implied that the landlords should be under an obligation to repair. The learned judge dealt with that in this way: “Although I cannot follow counsel for the tenant in saying that the mere fact that the landlords have reserved the right to do repairs means that an obligation is imposed on them, I cannot agree with counsel for the landlords when he says that the absence of some express term in the tenancy, whether oral or in writing, means that a contractual duty on the landlords to do the repairs can never arise—in other words, that such term can never be implied. I am not sure that that is right; I am not prepared to say that circumstances may not arise in which a court could find itself impelled to imply such terms in a tenancy agreement.” Without having to decide that question, as at present advised, I should certainly agree with the learned judge. A tenancy agreement, like any other agreement, must be read as a whole, and it may very well be that in construing the agreement it is possible to imply an obligation on the landlords to do repairs, but the question for the learned judge and for this court to decide was whether such an obligation could be implied in this particular agreement.’
That is equally the issue which arises on the present appeal.
Wilmer LJ said ([1959] 3 All ER 378 at 388, [1960] 1 QB 43 at 63):
‘There is much to be said for the view that cl. 2 of the agreement, which requires the tenant to reside in the dwelling-house, does by implication require the landlords to do such repairs as may make it possible for the tenant to carry out that obligation. At least it seems to me that that is a possible view.’
Then he said that, even if that view be right, in his judgment the obligation would not extend to cover the type of repairs which fell to be considered in that case, which was no more than easing the bottom of the jammed door. He said in that regard ([1959] 3 All ER 378 at 388, [1960] 1 QB 43 at 63):
‘Wherever the line is drawn, even assuming that counsel for the tenant is right in saying that some obligation on the part of the landlords to execute repairs must be implied, I should have thought that that line must be drawn well short of including responsibility for such a trivial repair as the unsticking of this door.’
Finally, there is a recent decision of this court in Duke of Westminster v Guild [1984] 3 All ER 144, [1985] QB 688, in which the judgment was delivered by Slade LJ. He referred to two decisions in which an obligation on landlords had been implied to do certain work, in the first case the cleaning of the common parts of the premises and in the second painting the premises (see [1984] 3 All ER 144 at 149, [1985] QB 688, 696–697). These obligations were implied from terms imposed on the tenants to pay for the cost of a cleaner in the first case and for the cost of the necessary paint in the second. The position in those cases was of course far stronger than here. Before quoting the general proposition from Woodfall on Landlord and Tenant (28th edn, 1978) para 1—1465, which I have already set out, Slade LJ said ([1984] 3 All ER 144 at 149, [1985] QB 688 at 697):
‘We do not question the correctness of these two decisions on their particular facts, or doubt that in some instances it will be proper for the court to imply an obligation against a landlord, on whom an obligation is not in terms imposed by the relevant lease, to match a correlative obligation thereby expressly imposed on the other party. Nevertheless we think that only rather limited assistance is to be derived from these earlier cases where obligations have been implied.’
Then he referred to the proposition in Woodfall which I have read.
So it follows that a repairing obligation on the landlord can clearly arise as a matter of implication. But that leaves the question already mentioned, which I find difficult and
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on the borderline, whether the terms and circumstances of this particular lease enable such an implication to be made. As to that, although I have not found this an easy case, I agree with the conclusion of the recorder. In my view the clue lies in what Slade LJ referred to as a ‘correlative obligation’, in this case one which is correlative to the express covenant by the tenant to keep the inside and fixtures in good repair, order and condition.
The considerations which lead me to that conclusion are the following. It is obvious, as shown by this case itself, that sooner or later the covenant imposed on the tenant in respect of the inside can no longer be complied with unless the outside has been kept in repair. Moreover, it is also clear that the covenant imposed on the tenant was intended to be enforceable throughout the tenancy. For instance, it could not possibly be contended that it would cease to be enforceable if the outside fell into disrepair. In my view it is therefore necessary, as a matter of business efficacy to make this agreement workable, that an obligation to keep the outside in repair must be imposed on someone. For myself, I would reject the persuasive submission of counsel for the landlord that both parties may have thought that in practice the landlord (or possibly the tenant) would do the necessary repairs, so that no problem would arise. In my view that is not a businesslike construction of a tenancy agreement. Accordingly, on the basis that an obligation to keep the outside in a proper state of repair must be imposed on someone, three answers are possible.
First, that the tenant is obliged to keep the outside in repair as well as the inside, at any rate to such extent as may be necessary to enable him to perform his covenant. I would reject that as being unbusinesslike and unrealistic. In the case of a tenancy of this nature, which was to become a monthly tenancy after one year, the rent being paid weekly, it is clearly unrealistic to conclude that this could have been the common intention. In that context it is to be noted that in Warren v Keen [1953] 2 All ER 1118, [1954] 1 QB 15 this court held that a weekly tenant was under no implied obligation to do any repairs to the structure of the premises due to wear and tear or lapse of time or otherwise and that it was doubtful whether he was even obliged to ensure that the premises remained wind and watertight. Any construction which casts on the tenant the obligation to keep the outside in proper repair must in my view be rejected for these reasons, and also because there is an express tenant’s covenant relating to the inside, so that it would be wrong, as a matter of elementary construction, to imply a covenant relating to the outside as well.
The second solution would be the implication of a joint obligation on both parties to keep the outside in good repair. I reject that as being obviously unworkable and I do not think that counsel for the landlord really suggested the contrary.
That leaves one with the third solution, an implied obligation on the landlord. In my view this is the only solution which makes business sense. The recorder reached the same conclusion by following much the same route, and I agree with him. Accordingly I would dismiss this appeal.
However, for the sake of completeness I should also refer briefly to the alternative claim under s 4 of the Defective Premises Act 1972, with which the recorder also dealt. Section 4 is in the following terms:
‘(1) Where premises are let under a tenancy which puts on the landlord an obligation to the tenant for the maintenance or repair of the premises, the landlord owes to all persons who might reasonably be expected to be affected by defects in the state of the premises a duty to take such care as is reasonable in all the circumstances to see that they are reasonably safe from personal injury or from damage to their property caused by a relevant defect …
(4) Where premises are let under a tenancy which expressly or impliedly gives the landlord the right to enter the premises to carry out any description of maintenance or repair of the premises, then, as from the time when he first is, or by notice or otherwise can put himself, in a position to exercise the right and so long as he is or can put himself in that position, he shall be treated for the purposes of
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subsections (1) to (3) above (but for no other purpose) as if he were under an obligation to the tenant for that description of maintenance or repair of the premises … ’
The recorder held that the effect of sub-s (4) read together with sub-s (1) of s 4 and, in the present case, with the express right of entry for any reasonable purpose granted to the landlord was that the landlord owed a duty of care under s 4(1) and was in breach of it, and that this enured to the benefit of the tenant as well as third parties.
Originally the landlord had appealed against that conclusion. But that was rightly dropped, having regard in particular to the decision of this court in Smith v Bradford Metropolitan Council (1982) 44 P & CR 171, where it was held that the reference to ‘any person’ in s 4(1) could include the tenant himself.
The sum of £1,250 by way of damages, which I have already mentioned, had been agreed also to cover any liability, as is now conceded, owed to the tenant under the 1972 Act. But the schedule of dilapidations had not been agreed with reference to the limited scope of the statutory duty. In those circumstances it was conceded below by counsel for the tenant (not Mr Derek Wood QC who appeared on this appeal) that no injunction could issue under the Act compelling the landlord to carry out any repairs. On the present state of the evidence that is clearly right. But on proper evidence and proper considerations whether or not an injunction should issue there is no reason, of principle or jurisdiction, why an injunction to enforce obligations under s 4(1) of the 1972 Act should not issue in appropriate circumstances. In that context there was a brief reference to the decision of this court in De Falco v Crawley BC [1980] 1 All ER 913, [1980] QB 460.
If this appeal had been allowed instead of being dismissed, we would accordingly have remitted the matter to the Shoreditch County Court to deal with the alternative claim under the 1972 Act for the purpose, not of recovering damages, which are already covered by the agreement which was made, but to enable the tenant to apply for an injunction under the 1972 Act if so advised. However, since we are agreed that this appeal fails, that aspect falls away.
It follows that in my view the tenant is entitled to the agreed damages and to an injunction, once again in mandatory terms, to compel the landlord to carry out the work in the agreed schedule of dilapidations. In relation to that we shall have to hear counsel as to a timetable which, having regard to the lamentable history, should be stringent.
For those reasons I would dismiss this appeal.
SWINTON THOMAS J. I confess that my mind has waivered in the course of the extremely persuasive submissions that have been presented to us on this appeal. Like the judge below I do not find the central point that arises in the appeal easy, but in the end I have been wholly persuaded that in order to give business efficacy to this tenancy agreement it is necessary to imply the term set out by Kerr LJ in his judgment.
I am also persuaded that if the parties had been asked, in April 1941, whether such a term should be included in this particular tenancy agreement, which provides that the tenant shall be responsible for internal repairs, they would immediately and without hesitation have agreed that it should be so included.
Accordingly, and for the reasons that have been given by Kerr LJ, I too would dismiss this appeal.
Appeal dismissed. Injunction to continue for work to be completed within four months from 22 June 1988. £5,000 to remain in court until order complied with. Leave to appeal to House of Lords refused.
Solicitors: Bernstein & Co (for the landlord); Geo J Dowse & Co (for the tenant).
Wendy Shockett Barrister.
Lui Mei-lin v R
[1989] 1 All ER 359
Categories: CRIMINAL; Criminal Evidence
Court: PRIVY COUNCIL
Lord(s): LORD KEITH OF KINKEL, LORD ROSKILL, LORD TEMPLEMAN, LORD ACKNER AND LORD JAUNCEY OF TULLICHETTLE
Hearing Date(s): 25 JULY, 24 OCTOBER 1988
Criminal evidence – Co-accused – Cross-examination – Previous inconsistent statement – Co-accused’s inconsistent statement excluded – Whether defendant having right to cross-examine co-accused on excluded statement.
A witness may be cross-examined as to any previous inconsistent statement made by him in writing or which is reduced to writing subject, where the inconsistent statement is said to be in writing, to his attention first being called to those parts of the written statement which are to be used to contradict him. Where a co-accused wishes to cross-examine another co-accused on a previously excluded statement, he has an unfettered right to do so and the only limit on that right is relevancy (see p 362 c to e and p 363 c d, post).
Dicta of Devlin J in R v Miller [1952] 2 All ER 667 at 668–669, of Lord Donovan in Murdoch v Taylor [1965] 1 All ER 406 at 416 and R v Rowson [1985] 2 All ER 539 adopted.
Dictum of Humphreys J in R v Treacy [1944] 2 All ER 229 at 236 explained.
Yu Tit-hoi v R [1983] HKLR 7 overruled.
Notes
For evidence by a defendant as to the character of a co-defendant, see 11 Halsbury’s Laws (4th edn) para 371, and for a case on the subject, see 14(2) Digest (Reissue) 502, 4113.
Cases referred to in judgment
Murdoch v Taylor [1965] 1 All ER 406, [1965] AC 574, [1965] 2 WLR 425, HL.
R v Miller [1952] 2 All ER 667, Assizes.
R v Rice [1963] 1 All ER 832, [1963] 1 QB 857, [1963] 2 WLR 585, CCA.
R v Rowson [1985] 2 All ER 539, [1986] QB 174, [1985] 3 WLR 99, CA.
R v Treacy [1944] 2 All ER 229, CCA.
Yu Tit-hoi v R [1983] HKLR 7, Hong Kong CA.
Appeal
Lui Mei-lin appealed with the special leave of the Judicial Committee of the Privy Council granted by an Order in Council dated 18 December 1987 against the decision of the Court of Appeal of Hong Kong (Yang ACJ, Kempster and Power JJA) on 25 June 1987 dismissing her application for leave to appeal against her conviction on 23 January 1987 in the High Court of Hong Kong before Deputy Judge Ryan and a jury on two counts of forgery. The facts are set out in the judgment of the Board.
At the conclusion of the argument the Board announced that the appeal should be allowed and the conviction quashed for reasons to be given later.
Desmond Keane QC and Paul Storey for the appellant.
The Director of Public Prosecutions of Hong Kong (J K Findlay QC) and Ross Dalgleish (of the Hong Kong Bar) for the Crown.
24 October 1988. The following judgment was delivered.
LORD ROSKILL. At the conclusion of the hearing of this appeal on 25 July 1988 their Lordships stated that they would humbly advise Her Majesty that the appellant’s appeal
Page 360 of [1989] 1 All ER 359
should be allowed and her conviction on 23 January 1987 in the High Court of Hong Kong on two counts of forgery quashed and that their Lordships’ reasons for that advice would be given in due course. Their Lordships now give those reasons.
The appellant was one of three defendants jointly charged on two counts (the first and second counts in the indictment), one of having forged dies with intent to defraud, the other of having forged valuable securities. The first defendant was named Liu Kan-por. The appellant was the third defendant. Yick Hak-kan was the second defendant. Yick Wai-ming was the fourth defendant. The third and fourth counts in the indictment were against the second defendant alone, while a fifth count was against the first defendant alone. The first defendant, the appellant and the fourth defendant were all convicted on counts one and two. The second defendant was acquitted on counts three and four. The first defendant was also convicted on the fifth count. Substantial prison sentences were imposed on all three defendants so convicted. Subsequent appeals to the Court of Appeal by the first and fourth defendants against their convictions on counts one and two succeeded on the ground of misdirection by the trial judge. Retrials were ordered. The appellant’s appeal against her convictions was dismissed.
The issue involved in the appellant’s appeal to the Court of Appeal and now to this Board is entirely different from the issues involved in the appeals by the other defendants. On 11 June 1986 the first defendant was interviewed by and made a statement to the police. That statement, which their Lordships have read, beyond doubt incriminated the appellant. The prosecution sought to adduce that statement in evidence against its maker, the first defendant. The admissibility of the statement was challenged. At the outset of the trial a voir dire was held to determine whether or not the statement had been made voluntarily. The trial judge held that the statement was made as a result of inducements by a police officer. He accordingly excluded the statement on the ground that it was not made voluntarily. The first defendant in due course gave evidence in his own defence. He admitted that he had taken part in the arrangements for printing stamps, but had done so innocently, having been misled by the appellant. He was cross-examined on behalf of the second and fourth defendants. There is no doubt that his oral evidence differed in a number of material respects (the details do not now matter), from what he had said in the excluded statement. The appellant’s counsel naturally cross-examined the first defendant on the basis that the oral evidence was false. He sought the leave of the trial judge further to cross-examine the first defendant on the excluded statement as being an inconsistent statement previously made by the first defendant. Counsel for the Crown opposed the application, relying on a previous decision of the Court of Appeal in Yu Tit-hoi v R [1983] HKLR 7. The trial judge was of course bound by that decision and refused the application for leave to cross-examine the first defendant on his statement. A further application on behalf of the appellant for a separate trial was also refused.
When the appellant appealed to the Court of Appeal that court also held that the appeal must fail because it too was bound by the decision in Yu Tit-hoi v R and indeed by later decisions following that decision. Power JA in a separate judgment, while accepting that the court was so bound, expressed the view that it was ‘unfortunate that [the court was] not free to consider the [appellant’s] arguments … ' On 18 December 1987 special leave to appeal to the Board was given.
Since the Hong Kong decisions to which their Lordships have just referred were given, the same issue arose for decision in England in R v Rowson [1985] 2 All ER 539, [1986] QB 174. In that case the trial judge had ruled that a statement made by one co-accused was inadmissible in that the relevant rule of the Judges’ Rules (see Practice Note [1964] 1 All ER 237, [1964] 1 WLR 152) had been broken. Counsel for other co-accused in due course sought to cross-examine the maker of that statement on its content when he gave evidence. The trial judge allowed the facts alleged in the statement to be put to the maker of the statement but declined to allow the jury to be told that the facts emanated from the statement which he had already excluded. All the accused were convicted but the two co-accused appealed on the ground that their counsel had an unfettered right to
Page 361 of [1989] 1 All ER 359
cross-examine on the statement and had been prevented from exercising that right. The Court of Appeal, Criminal Division in a judgment delivered by Robert Goff LJ, held that the submission was well founded though the court applied the proviso and dismissed the appeals (see [1985] 2 All ER 539 at 542, [1986] QB 1974 at 180). The attention of the court was not, it seems, drawn to the relevant Hong Kong decisions. It is therefore clear that there has been a divergence of view between the Court of Appeal in Hong Kong on the one hand and in England on the other which their Lordships must now resolve.
The decision in Yu Tit-hoi v R was founded on the decisions of the Court of Criminal Appeal in R v Treacy [1944] 2 All ER 229 and R v Rice [1963] 1 All ER 832, [1963] 1 QB 857. In the former case the Crown had not sought to put in evidence, as part of the prosecution case, a statement made by a defendant charged with murder (there was no co-accused in that case) but when the defendant gave evidence in his own defence he was allowed to be cross-examined on that statement. This, as the Court of Criminal Appeal held, was plainly wrong and the conviction for murder was quashed. Much reliance was placed by the Court of Appeal in Yu Tit-hoi v R on the statement in the judgment of the Court of Criminal Appeal delivered by Humphreys J that a statement made by a person under arrest was either admissible or not admissible. The judge went on ([1944] 2 All ER 229 at 236):
‘If it is admissible, the proper course for the prosecution is to prove it, give it in evidence, let the statement if it is in writing be made an exhibit, so that everybody knows what it is and everybody can inquire into it and do what they think right about it. If it is not admissible, nothing more ought to be heard of it, and it is quite a mistake to think that a document can be made admissible in evidence which is otherwise inadmissible simply because it is put to a person in cross-examination.’
In R v Rice the same principle was applied to the use by the prosecution of a statement made by one co-accused against another co-accused. But their Lordships emphasise that neither case was concerned, as the present case is concerned and as Yu Tit-hoi v R and R v Rowson were concerned, with the attempted use by a co-accused of an excluded statement made by another co-accused.
Counsel for the appellant placed great reliance on the decision of the House of Lords in Murdoch v Taylor [1965] 1 All ER 406, [1965] AC 574. The question there arose under s 1(f)(iii) of the Criminal Evidence Act 1898. The House decided that, once a co-accused had ‘given evidence against’ another co-accused, the latter was under the statute entitled without restriction to cross-examine the former as to character and to put his previous convictions to him. Lord Donovan emphasised the difference between the position of the prosecution and the position of a co-accused in this respect ([1965] 1 All ER 406 at 416, [1965] AC 574 at 593):
‘… but when it is the co-accused who seeks to exercise the right conferred by proviso (f)(iii) different considerations come into play. He seeks to defend himself to say to the jury that the man who is giving evidence against him is unworthy of belief and to support that assertion by proof of bad character. The right to do this cannot, in my opinion, be fettered in any way.’
A similar view had earlier been expressed by Devlin J in an interlocutory ruling given in R v Miller [1952] 2 All ER 667 at 668–669. Their Lordships think it right to quote the relevant passage in full:
‘The fundamental principle, equally applicable to any question that is asked by the defence as to any question that is asked by the prosecution, is that it is not normally relevant to inquire into a man’s previous character, and, particularly, to ask questions which tend to show that he has previously committed some criminal offence. It is not relevant because the fact that he has committed an offence on one occasion does not in any way show that he is likely to commit an offence on any
Page 362 of [1989] 1 All ER 359
subsequent occasion. Accordingly, such questions are, in general, inadmissible, not primarily for the reasons that they are prejudicial, but because they are irrelevant. There is, however, this difference in the application of the principle. In the case of the prosecution, a question of this sort may be relevant and at the same time be prejudicial, and, if the court is of the opinion that the prejudicial effect outweighs its relevance, then it has the power, and, indeed, the duty, to exclude the question. Therefore, counsel for the prosecution rarely asks such a question. No such limitation applies to a question asked by counsel for the defence. His duty is to adduce any evidence which is relevant to his own case and assists his client, whether or not it prejudices anyone else.’
Counsel for the Crown invited their Lordships to distinguish Murdoch v Taylor on the ground that the rights there in question arose under a statute and that what was there allowed to be put in cross-examination were the previous convictions of the co-accused. Their Lordships agree that this is so but find no sufficient ground of distinction in that fact. Ever since s 5 of the Criminal Procedure Act 1865 (Mr Denman’s Act) was enacted (this section is exactly reproduced in s 14 of the Evidence Ordinance (Cap 8) of Hong Kong) it has been permissible in every criminal and indeed in every civil trial to cross-examine a witness as to any previous inconsistent statement made by him in writing or reduced into writing subject, where the inconsistent statement is said to be in writing, to his attention first being called to those parts of any writing which were to be used in order to contradict him. The only limit on the right of a co-accused to cross-examine another co-accused in these circumstances is, in their Lordships’ opinion, relevancy. If one co-accused has given evidence incriminating another it must be relevant for the latter to show, if he can, that the former has on some other occasion given inconsistent evidence and thus is unworthy of belief.
Counsel for the Crown also argued before their Lordships that R v Rowson was wrongly decided and should not be followed. With respect their Lordships disagree. That decision is entirely in line with the principles which their Lordships have endeavoured to enunciate and is clearly consistent with the decisions in R v Miller and Murdoch v Taylor. Their Lordships respectfully agree with the distinction which the Court of Appeal, Criminal Division drew in R v Rowson between R v Treacy and R v Rice on the one hand and the case then before that court where it was, as already stated, counsel for one co-accused who sought to cross-examine another co-accused on his excluded statement. When Humphreys J said in R v Treacy that ‘nothing more ought to be heard of it’ he clearly meant that nothing more ought to be heard of the excluded statement, as between the prosecution and the defendant. The judge plainly did not have in mind the possibility of a co-accused subsequently seeking to make use of the excluded statement, for in that case there was no co-accused. It follows that their Lordships have also reached the conclusion, with great respect to the Court of Appeal, that Yu Tit-hoi v R and the later Hong Kong cases following it were wrongly decided and should not be followed. As already pointed out, their Lordships have noted that in the present case Power JA clearly had reservations as to the correctness of those decisions.
Counsel for the Crown pressed on their Lordships the submission that to allow a co-accused complete freedom to cross-examine on an excluded statement could give rise to difficult questions how far, if at all, a trial judge should explain to a jury why it was that they were suddenly hearing of this statement and perhaps even seeing it for the first time at a comparatively late stage of the trial. This question was touched on by the Court of Appeal, Criminal Division in R v Rowson [1985] 2 All ER 539 at 543, [1986] QB 174 at 182. Their Lordships doubt if it is possible to state general principles which should be uniformly applied in every case where the question arises. But, in agreement with the judgment of Robert Goff LJ in the passage just referred to, they are clearly of the view that the trial judge should warn the jury that they must not use the statement in any way as evidence in support of the prosecution’s case and that its only relevance is to test the
Page 363 of [1989] 1 All ER 359
credibility of the evidence which the maker of the statement has given against his co-accused. Their Lordships consider that as a general rule the trial judge should briefly tell the jury why the statement had previously been excluded and cannot therefore be relied on by the prosecution to prove its case, as for example that it was or may well have been procured by inducement. It should be remembered that in cross-examination as to credit the cross-examiner is bound by the answers which he receives and that it is not legitimate to reopen all the circumstances in which the excluded statement was taken. In many cases, as in the present, the trial judge may well think it right to remind the jury that the maker of the statement may well have a motive for incriminating a co-accused and that his or her evidence should be approached with extreme caution.
It was also suggested on behalf of the Crown that, if cross-examination on the excluded statement were to be permitted, the trial judge might have to carry out what was described as a balancing exercise, balancing the interests of the maker of the statement against the interests of the co-accused on whose behalf it was sought to cross-examine, before deciding whether or not to permit the proposed cross-examination. Their Lordships disagree. In their view the right to cross-examine is, as Lord Donovan stated in Murdoch v Taylor [1965] 1 All ER 406 at 416, [1965] AC 574 at 593, unfettered, the only limit being relevancy. If the statement contains irrelevant matter the trial judge would no doubt insist that that irrelevant matter should not be referred to and, if necessary, excised from any copies of the statement which the jury might be allowed to see.
Their Lordships were told that the practice in Hong Kong is to hold the voir dire at the beginning of the trial, as was done in the present case. If at the conclusion of the voir dire the trial judge decides to exclude the statement, their Lordships see no reason why he should not at that time ask counsel for any co-accused whether they will thereafter seek to make any use of the excluded statement. In the present case, after leave to cross-examine on the statement in the appeal had been refused, there was an application for a separate trial of the appellant which the trial judge also rejected. For the reasons given by Devlin J in R v Miller [1952] 2 All ER 667 at 669, cases of this type, where it is right to grant separate trials, are indeed rare but, if that possibility is to be envisaged at all, that will normally be the right moment to consider that issue and not at a much later stage when, for the first time, the statement is referred to and perhaps produced before the jury.
Counsel for the prosecution informed their Lordships that, in the event of their Lordships humbly advising Her Majesty that the appellant’s appeal should be allowed and her conviction quashed, as their Lordships have now done, the prosecution would neither seek the application of the proviso nor an order for the appellant to be retried. Unlike her co-accused, whose convictions were quashed but who were ordered to be retried (their Lordships were told that the first defendant was convicted but the fourth defendant acquitted on the retrial), the appellant in common with the fourth defendant stands acquitted.
Appeal allowed. Conviction quashed.
Solicitors: Philip Conway Thomas & Co (for the appellant); Macfarlanes (for the Crown).
Mary Rose Plummer Barrister.
EC Commission v United Kingdom
[1989] 1 All ER 364
(CASE 416/85)
Categories: EUROPEAN COMMUNITY; Customs Union
Court: COURT OF JUSTICE OF THE EUROPEAN COMMUNITIES
Lord(s): JUDGES LORD MACKENXIE STUART (PRESIDENT), BOSCO, DUE, MOITINHO DE ALMEIDA, RODRIGUES IFLESIAS (PRESIDENTS OF CHAMBERS), KOOPMANS, EVERLING, BAHLMANN, GALMOT, KAKOURIS, JOLIET, O’HIGGINS AND SCHOCKWEILER AND ADVOCATE GENERAL M DARMON
Hearing Date(s): 15 SEPTEMBER 1987, 2 DECEMBER 1987, 21 JUNE 1988
European Economic Community – Value added tax – Exemptions – Public interest exemptions – Measures taken for clearly defined social reasons and for benefit of final consumer – Clearly defined social reasons – Benefit of final consumer – Final consumer – Identification of social reasons – Whether identification of social reasons a matter of political choice for member states – Whether identification of social reasons subject to supervision at Community level – Whether ‘final consumer’ restricted to persons not using goods or services in course of economic activity – Whether United Kingdom in breach of obligations in respect of exemptions from value added tax – Value Added Tax Act 1983, Sch 5 – EC Council Directive 67/228, art 17 – EC Council Directive 77/388, art 28(2).
European Economic Community – Treaty provisions – Obligations under treaty – Failure to fulfil obligation – Matters to be considered by court – Whether court entitled to consider objectives pursued by Commission in bringing action against member state for failing to fulfil treaty obligations – EEC Treaty, art 169.
The Commission of the European Communities sought a declaration that by continuing in Sch 5a to the Value Added Tax Act 1983 the exemption from value added tax of items yielding or used to produce food for human consumption, fuel and similar public utility supplies to industry, news services supplied for business use, the construction of industrial and commercial buildings and community and civil engineering works and the sale of protective boots and helmets to employers, the United Kingdom had contravened art 28(2)b of EC Council Directive 77/388 (the Sixth Directive). The Commission submitted that although art 28(2), in conjunction with the last indent of art 17c of EC Council Directive 67/228 (the Second Directive), permitted the retention by member states of reduced rates and exemptions ‘with refund of the tax paid at the preceding stage’ in force on 31 December 1975, the exemptions granted by the United Kingdom did not meet the requirement of art 17 of the Second Directive that an exemption should only be granted ‘for clearly defined social reasons and for the benefit of the final consumer’, where the final consumer was to be construed as the person who acquired goods or services, the benefit of which was to be direct, without having any right to deduct value added tax. The United Kingdom contended, inter alia, that the final consumer was the person at the end of a production or distribution chain and that it was sufficient if he acquired an indirect benefit from the supply, ie where reduced production costs resulting from the application of exemptions to items used in the production process of an item which was itself exempt were then passed on to the consumer in the form of lower prices.
Held – (1) The identification of social reasons was in principle a matter of political choice for the member states and could be the subject matter of supervision at the Community level only in so far as it led to measures which because of their effects and true objectives were outside its scope (see p 381 c, post).
Page 365 of [1989] 1 All ER 364
(2) Under the general scheme of value added tax the final consumer was the person who acquired goods or services for personal use, rather than for economic activity, and thus bore the tax. However, the provision of goods or services at a stage higher in the production or distribution chain which was nevertheless sufficiently close to the consumer to be advantageous to him could also be for the benefit of the final consumer (see p 381 f g, post).
(3) It followed that—
(a) since animal feeding stuffs, seeds and live animals used as, or yielding or producing, food for human consumption contributed to the production of substances intended for human consumption, those supplies were sufficiently close to the final consumer to be of advantage to him, and, since the negative effects of any taxation of those products on food prices could not be neglected, the alleged failure of the United Kingdom to fulfil its obligations had not been established in respect of those supplies (see p 311 j to p 312 a and p 384 a to c, post);
(b) since the provision of sewerage services, water, fuel and power to industry, the provision of news services to undertakings such as banks and insurance companies, the construction of industrial and commercial buildings and community and civil engineering works and the sale of protective clothing to employers could not be considered to be for the benefit of the final consumer, the United Kingdom had failed to fulfil its obligations under art 28 of the Sixth Directive in continuing to exempt those goods and services from value added tax (see p 382 b to h j, p 383 a f to h and p 384 a to c, post);
(c) since the measures adopted by the United Kingdom in order to implement its social policy of facilitating home ownership for the whole population fell within the purview of ‘social reasons’ for the purposes of art 17 of the Second Directive, in exempting housing constructed by local authorities and the private sector from value added tax the United Kingdom had not failed to fulfil its obligations in respect of those measures (see p 383 e and p 384 a to c, post).
Per curiam. In the context of the balance of powers between the institutions laid down in the EEC Treaty, it is not for the court to consider what objectives are pursued by the Commission in an action brought under art 169d of the Treaty, but simply to decide whether the member state in question had failed to fulfil its obligation as alleged (see p 380g post).
Notes
For public interest exemptions in relation to value added tax, see 52 Halsbury’s Laws (4th edn) para 20.27.
For the Value Added Tax Act 1983, Sch 5, see 48 Halsbury’s Statutes (4th edn) 666.
For the EEC Treaty, art 169, see 50 ibid 323.
Cases cited
EC Commission v Italian Republic Case 7/68 [1968] ECR 423.
EC Commission v Germany Case 107/84 [1985] ECR 2655.
European Parliament v EC Council Case 13/83 [1985] ECR 1513.
R v Henn, R v Darby Case 34/79 [1980] 2 All ER 166, [1981] AC 850, [1980] 2 WLR 597, [1979] ECR 3795, CJEC.
Staatssecretaris van Financiën v Hong Kong Trade Development Council Case 89/81 [1982] ECR 1277.
Page 366 of [1989] 1 All ER 364
Verbond van Nederlandse Ondernemingen v Inspecteur der Invoerrechten en Accijnzen Case [1977] ECR 113.
Application
The Commission of the European Communities brought an action under art 169 of the EEC Treaty for a declaration from the Court of Justice of the European Communities that by exempting from value added tax certain categories of goods and services, namely food (animal feeding stuffs, seeds and live animals of a kind generally used as, or yielding or producing, food for human consumption), sewerage services and water supplied to industry, new services supplied for business use, fuel and power supplied to industry, the construction of industrial/commercial buildings and community/civil engineering works and the sale of protective boots and helmets to employers pursuant to Groups 1, 2, 6, 7, 8 and 17 of Sch 5 to the Value Added Tax Act 1983, contrary to the provisions of art 28(2) of EC Council Directive 77/388 of 17 May 1977 on the harmonisation of the laws of the member states relating to turnover taxes, the United Kingdom had failed to fulfil its obligations under the EEC Treaty. The language of the case was English. The facts are set out in the report for the hearing presented by the Judge Rapporteur.
21 June 1988. The following judgments were delivered.
THE JUDGE RAPPORTEUR (GIACINTO BOSCO) presented the following report for the hearing.
I—SUMMARY OF THE FACTS
Article 28(2) of EC Council Directive 77/388 of 17 May 1977 (on the harmonisation of the laws of the member states relating to turnover taxes: common system of value added tax: uniform basis of assessment) (the Sixth Directive) provides as follows:
‘Reduced rates and exemptions with refund of the tax paid at the preceding stage which are in force on 31 December 1975, and which satisfy the conditions stated in the last indent of Article 17 of the Second Council Directive of 11 April 1967, may be maintained until a date which shall be fixed by the Council, acting unanimously on a proposal from the Commission, but which shall not be later than that on which the charging of tax on imports and the remission of tax on exports in trade between the Member States are abolished. Member States shall adopt the measures necessary to ensure that taxable persons declare the data required to determine own resources relating to these operations. On the basis of a report from the Commission, the Council shall review the above-mentioned reduced rates and exemptions every five years and, acting unanimously on a proposal from the Commission, shall where appropriate adopt the measures required to ensure the progressive abolition thereof.’
The last indent of art 17 of EC Council Directive 67/228 of 11 April 1967 (on the harmonisation of legislation of member states concerning turnover taxes) (the Second Directive), to which art 28 of the Sixth Directive refers, provides:
‘… Member States may … provide for reduced rates or even exemptions with refund, if appropriate, of the tax paid at the preceding stage, where the total incidence of such measures does not exceed that of the reliefs applied under the present system. Such measures may only be taken for clearly defined social reasons and for the benefit of the final consumer, and may not remain in force after the abolition of the imposition of tax on importation and the remission of tax on exportation in trade between Member States.’
Article 28 of the Sixth Directive therefore provides for exemption from value added tax (VAT) with refund of the tax paid at the preceding stage. Under that system VAT is paid at all stages of the distribution chain except the retail stage. At that stage the consumer is not required to pay VAT and the retailer receives a refund of the input tax paid.
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The United Kingdom used the possibilities of exemption provided for in art 28 to retain a system known as ‘zero-rating’, now governed by Sch 5 to the Value Added Tax Act 1983 (which re-enacted almost in its entirety Sch 4 to the Finance Act 1972). The system of zero-rating applies to the supplies specified in a list comprising 17 groups of goods and services and, according to the Commission, covers some 35% of private consumption in the United Kingdom, whereas (again according to the Commission) in other member states such as Italy, Belgium and Denmark similar systems of relief only apply to a relatively small part of the VAT base (see Report from the Commission to the Council annexed to the reply; extracts reproduced in its reply).
Consequently, VAT coverage in the United Kingdom is limited to 44% of private consumption as compared with 90% in most other member states (see extracts from the White Paper from the Commission to the Council ‘Completing the Internal Market’ (June 1985) on the completion of the internal market reproduced by the Commission in its reply).
Zero-rating differs from the system of exemption with refund inasmuch as no VAT is charged on zero-rated goods and services at the various stages of the marketing chain. Consequently, at the retail stage there is no VAT to refund.
Despite that difference, the Commission accepts that, as far as the fiscal result is concerned, the system of zero-rating as applied by the United Kingdom is equivalent to the system of exemption with refund of the VAT paid at the preceding stage provided for by art 28(2) of the Sixth Directive.
The Commission also accepts that the system of zero-rating does not affect the Community’s own resources and that it was already in force on 31 December 1975, the material date for the purposes of the Sixth Directive.
However, the Commission contests the application ratione materiae of the zero-rates in the United Kingdom. In its letter of 19 October 1981 to the United Kingdom government, the Commission maintained that certain of the zero-rates provided for by the Value Added Tax Act 1983 were not in conformity with the requirements laid down by art 28(2) of the Sixth Directive. Consequently, it requested the United Kingdom, pursuant to art 169 of the EEC Treaty, to submit its observations on the matter.
In its reply of 25 February 1982 the United Kingdom government defended the zero-rates in question and proposed that discussions on the matter be opened. Following those discussions the Commission withdrew its objections to the zero-rating of some of the categories of goods and services mentioned in its letter of 19 October 1981. However, it adhered to the observations which it had made concerning the following groups of goods and services which are set out in Sch 5 to the 1983 Act:
‘GROUP I—FOOD
…
General items
Item No
…
2. Animal feeding stuffs.
3. Seeds or other means of propagation of plants comprised in item 1 or 2.
4. Live animals of a kind generally used as, or yielding or producing, food for human consumption …
GROUP 2—SEWERAGE SERVICES AND WATER
Item No
1. Services of—(a) reception, disposal or treatment of foul water or sewage in bulk; and (b) emptying of cesspools, septic tanks or similar receptacles.
2. Water other than—(a) distilled water, deionised water and water of similar purity, and (b) water comprised in any of the excepted items set out in Group 1.
[In so far as supplies to industry are concerned]
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GROUP 6—NEWS SERVICES
Item No
1. The supply to newspapers or to the public of information of a kind published in newspapers …
GROUP 7—FUEL AND POWER
Item No
1. Supplies of coal, coke and other solid substances, being supplies held out for sale solely as fuel.
2. Coal gas, water gas, producer gases and similar gases.
3. Petroleum gases, and other gaseous hydrocarbons, whether in gaseous or liquid state.
4. Fuel oil, gas oil and kerosene.
5. Electricity, heat and air-conditioning …
[All items in so far as not supplied to the final consumer.]
GROUP 8—CONSTRUCTION OF BUILDINGS, ETC
Item No
1. The granting by a person constructing a building of a major interest in, or in any part of, the building or its site.
2. The supply—(a) in the course of the construction … or demolition of … any building or any civil engineering work, of any services other than the services of an architect, surveyor or any person acting as consultant or in a supervisory capacity.
3. The supply, by a person supplying services within item 2 and in connection with those services, of—(a) materials or of builder’s hardware, sanitary ware or other articles of a kind ordinarily installed by builders as fixtures; or (b) in respect of such goods, services described in paragraph 1(1) of Schedule 2 to this Act …
[All items in so far as the zero-rate is not restricted to buildings by and for the final consumer within a social policy.]
…
GROUP 17—CLOTHING AND FOOTWEAR
Item No
…
2. Protective boots and helmets for industrial use [in so far as sold to employers] … ’
Consequently, on 4 September 1984 the Commission sent to the United Kingdom government a reasoned opinion as provided for by art 169. By a letter of 6 November 1984 the United Kingdom government asked the Commission for further clarification on certain points. However, the discussions which followed produced no result. Consequently, the Commission lodged the present application, which was registered at the court on 10 December 1985.
II—WRITTEN PROCEDURE AND CONCLUSIONS OF THE PARTIES
The written procedure followed its normal course. On hearing the report of the Judge Rapporteur and the views of the Advocate General, the court decided to open the oral procedure without any preparatory inquiry.
The Commission claims that the court should declare that, by maintaining in force the application of the zero-rate of value added tax on the items set out above, the United Kingdom of Great Britain and Northern Ireland has contravened the provisions of the Sixth Directive and has therefore failed to fulfil the obligations incumbent on it under the Treaty establishing the European Economic Community; and that the United Kingdom is liable in costs.
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The United Kingdom contends that the application should be dismissed; and that the Commission should be ordered to pay the United Kingdom’s costs.
III—SUBMISSIONS AND ARGUMENTS OF THE PARTIES
A General observations
The Commission maintains, first, that the method used by the United Kingdom in applying zero-rates goes far beyond anything contemplated in the Sixth Directive. It accepts that the system of zero-rating does not affect the Community’s own resources and that, at national level, it produces the same fiscal results as a system of exemption with refund as envisaged by art 28(2) of the Sixth Directive; however, the Commission considers that when used on such a large scale this form of tax relief is liable to undermine the process of the progressive harmonisation of VAT. The use of zero-rates should therefore be limited to the transactions which meet the criteria laid down in art 28(2) of the Sixth Directive and the last indent of art 17 of the Second Directive.
By permitting the member states to retain certain exemptions, those provisions constitute a major exception to the general principle that all supplies of goods and services are to be taxed and must therefore, in the Commission’s view, be interpreted strictly.
The Commission then considers the conditions laid down in the last indent of art 17 of the Second Directive. That article provides that exemptions may be granted only (a) ‘for clearly defined social reasons’ and (b) ‘for the benefit of the final consumer’.
As regards ‘social reasons’, the Commission accepts that the member states have a margin of discretion in determining the social reasons which justify tax relief. In its reply the Commission concedes that it may not challenge measures taken by a member state in pursuance of a social policy unless it can be shown that the social policy is not sufficiently clearly defined or that the measures in question are either not justified or disproportionate.
Further, the Commission accepts that an exemption which is justified for social reasons may not be called in question because it may incidentally benefit a category of consumer which does not require the social benefit. However, in its view the fact that, in the case of a product or service which may be put to a variety of uses, certain uses may be zero-rated does not mean that the other uses which do not fulfil the conditions laid down by the directives may also be zero-rated.
As regards the requirement that the exemption must be granted for the benefit of the final consumer, the Commission first of all defines the term ‘final consumer’ and distinguishes it from the term ‘taxable person’ in art 4 of the Sixth Directive. The final consumer is the person who acquires the goods or services without having any right of deduction (see Staatssecretaris van Financiën v Hong Kong Trade Development Council Case 89/81 [1982] ECR 1277). Taxable persons, on the other hand, are always entitled to deduct their input tax from the output tax for which they are liable.
According to the Commission, in referring to the final consumer art 17 of the Second Directive means persons who are at the final stage in the distribution chain and have no right to deduct VAT.
Moreover, it is inherent in the exemption with refund mechanism provided for by the Sixth Directive that the benefit only goes to the final consumer. It was therefore designed to be of direct and immediate benefit to persons at the final stage of a production or distribution chain. Consequently, exemptions which are only of indirect benefit to the final consumer are not in conformity with art 28.
The Commission accepts that the system of zero-rating applied in the United Kingdom is equivalent to the system of exemption with refund provided for by the Sixth Directive. However, it points out that, unlike exemptions, zero-rates apply not only at the final stage but at all stages of the commercial chain.
Consequently, it is necessary to determine how far up the commercial chain zero-rating can go and still fulfil the requirements laid down in art 28. In general terms, the
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Commission considers that zero-rates may be applied to transactions which would qualify for deduction of VAT under a system of exemptions with refunds. In other words, only products which are bona fide inputs for a product which is itself zero-rated may be zero-rated. As an illustration of this the Commission states that it would not accept that farmers’ boots could be zero-rated simply because food is zero-rated.
The United Kingdom contests the Commission’s restrictive interpretation of art 28(2) of the Sixth Directive and the last indent of art 17 of the Second Directive.
As a general point the United Kingdom observes that in the Sixth Directive the Council placed great stress on the vital need to provide for a transitional period to allow national laws to be gradually adapted. At the time when the Sixth Directive was adopted it was clearly envisaged that measures allowing the retention of reduced rates and exemptions would continue in force for many years.
The United Kingdom emphasises that art 28 lays down a procedure for the progressive abolition of reduced rates and exemptions (on the basis of reports submitted by the Commission to the Council ‘every five years’) and that as yet the Commission has made no specific proposals in that regard. It claims therefore that the Commission’s motive is to bypass the procedural requirements of the Sixth Directive in the hope of achieving a result which it has not yet even proposed to the Council. In order to do so the Commission is stretching the interpretation of the Community rules in question.
According to the United Kingdom, art 17 does not constitute an exception but forms part of a general rule, in relation to which the need for ‘transitional’ provisions was seen to be ‘vital’.
The United Kingdom maintains that in Verbond van Nederlandse Ondernemingen v Inspecteur der Invoerrechten en Accijnzen Case 51/76 [1977] ECR 113 and EC Commission v Germany Case 107/84, [1985] ECR 2655 the court did not accept that art 17 constituted an exception or that it should be interpreted strictly.
As regards more particularly the requirements for tax relief laid down by art 17, the United Kingdom maintains, first of all, that the member states enjoy a margin of discretion in determining their own social policies and hence in determining what measures are justified by social reasons. Such a measure cannot be challenged unless the social reason is not sufficiently clearly defined or unless the measure is unjustified or disproportionate.
However, where there is a social reason for the introduction of tax reliefs that reason cannot be negated by the existence of some other reason, whether primary or secondary or subsidiary.
As regards the requirement that the exemption should benefit the ‘final consumer’, the United Kingdom defines that term as meaning the person at the end of a particular distribution chain rather than a person who has no right to deduct VAT.
The United Kingdom further observes that art 17 does not require that it should ‘only’ or ‘solely’ be the final consumer who benefits. On the contrary, it is sufficient for the purposes of that provision if the final consumer gains an indirect benefit, for example by way of lower prices.
The restrictive interpretation proposed by the Commission is in conformity neither with the letter nor with the spirit of the articles in question and would be liable to render ineffective rules which were considered to be ‘vital’ within the context of the Sixth Directive.
As regards the question of inputs, the United Kingdom observes that the Commission seems to have misunderstood the operation of zero-rates in the United Kingdom. The United Kingdom does not, as a matter of course, zero-rate all inputs which go towards the production of a zero-rated supply.
B Specific observations
Group 1—Food
The Commission considers that the contested items in this group are too remote to
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form part of the direct production and distribution chain of food (which is zero-rated) and hence do not fulfil the requirement of benefiting the final consumer. The Commission also questions whether the use of zero-rating in this manner for social purposes is proportionate to the end sought.
The United Kingdom, on the other hand, observes that the zero-rating of the items in question plays an essential role in preventing the increase in food prices which would occur as a result of the input VAT paid being passed on to the final consumer. Moreover, it does not accept the ‘remoteness’ test advanced by the Commission and argues, for example, that an animal awaiting slaughter (which the Commission does not accept as correctly zero-rated) is equally proximate or remote from the ‘final consumer’ as a potato awaiting harvesting (which the Commission accepts to be correctly zero-rated).
Group 2—Sewerage services and water
As regards the disposal of sewage, it should be noted that in the United Kingdom this service is normally paid for by a rate based on property values. Services are provided on a commercial basis and hence fall within the scope of VAT only where premises are too remote to be connected to the main drainage systems and sewage enters into cesspools, septic tanks and the like.
The Commission challenges the zero-rating of such services in so far as they are supplied to industry. There is no social justification for such relief.
The United Kingdom observes that it would be inequitable to tax such services while rate-funded services did not bear tax. It adds that it is most unlikely that there are many industrial concerns which rely on cesspits.
The Commission replies that, in view of this limited use, there should be no difficulty in repealing the offending provisions.
As regards supplies of water, the Commission does not accept that either of the criteria laid down by art 17 are met. Supplies of water to industry are zero-rated, yet the United Kingdom has not specified the social reasons for this.
According to the United Kingdom, it is principally the individual who benefits from supplies of potable water, even where it is supplied to industry. Moreover, the Commission accepts, in relation to Luxembourg, a member state which exempts water from VAT, that water as a basic necessity warrants special tax treatment (see the answer to written question 1243/85, OJ 1986 C87, p 6).
With respect to that specific point, the Commission replies that the exemption of water in Luxembourg is based on another paragraph of art 28, namely para 3(b).
Group 6—News services
The Commission accepts that the requirements of art 28 are fulfilled in the case of services supplied directly to the public and of supplies to undertakings which themselves have zero-rated outputs. On the other hand, the Commission contests the zero-rating of the supply of news services to producers of positively rated services.
According to the United Kingdom, the function of news services is broadly equivalent to that of newspapers, which are zero-rated. Services supplied to undertakings whose supplies are positively rated may be regarded as an ‘incidental benefit’, since the main beneficiaries of such services are newspapers; that incidental benefit cannot negate the social reasons which justify generally the zero-rating of this type of supply.
Group 7—Fuel and power
The Commission contests the zero-rating of fuel and power which is not supplied to the final consumer. It observes that as a result of the zero-rating of such supplies the largest consumers of fuel and power, namely industrial users, do not pay VAT. Such relief is not in conformity with art 28 because such inputs are too remote to form part of the production chain of products which are correctly zero-rated.
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The Commission adds that administrative difficulties alone cannot justify the total exclusion of inputs of fuel and power to the whole of industry from the scope of VAT.
According to the United Kingdom, the administrative difficulties involved in limiting the application of zero-rates to final consumers alone would probably be insurmountable.
Moreover, in sectors which at present are partly exempt, in particular schools and hospitals, the imposition of VAT at the full rate would have undesirable social effects.
Group 8—Construction of buildings etc
The Commission emphasises that it does not seek to enter into a discussion concerning the validity of the United Kingdom’s social policy in the area of housing. However, the Commission considers that, with the exception of local authority housing, the indiscriminate zero-rating of the housing sector is disproportionate to the objectives pursued.
According to the United Kingdom, there can be no simple distinction for VAT purposes between private and public sector housing. All housing fulfils a social need, particularly since it is now the private sector which provides an increasing proportion of housing for the needier section of the community.
Moreover, the Commission wholly disregards the social reasons for building schools and hospitals or other civil engineering works and the resultant benefit to the consumer.
Group 17—Protective boots and helmets
In the Commission’s view, protective clothing sold to employers does not constitute an input forming part of the production chain of zero-rated products. Consequently, such clothing cannot qualify for relief under art 28(2).
According to the United Kingdom, this relief is intended to promote industrial safety, since the imposition of a positive rate of VAT would have the effect of discouraging employers from providing protective clothing for their employees. Moreover, such clothing must be considered separately and not as an input in the production process. The employer is the final consumer of the goods concerned.
D R Gilmour for the EC Commission.
David Vaughan QC for the United Kingdom.
2 December 1987.
THE ADVOCATE GENERAL (M DARMON). delivered the followinge opinion. Mr President, Members of the Court,
1. This action against the United Kingdom for failure to fulfil its obligations concerns the criteria for the application of art 28(2) of EC Council Directive 77/388 of 17 May 1977 (on the harmonisation of the laws of the member states relating to turnover taxes: common system of value added tax: uniform basis of assessment) (the Sixth Directive). The essence of the claim is that the United Kingdom applies to a number of goods and services a ‘zero rate’ which is not justified for ‘clearly defined social reasons and for the benefit of the final consumer’, as required by the last indent of art 17 of EC Council Directive 67/228 of 11 April 1967 (on the structure and procedures for application of the common system of value added tax) (the Second Directive), to which art 28(2) of the Sixth Directive refers.
2. That provision was adopted as part of a process initiated in 1967, when the first two directives on the harmonisation of legislation concerning turnover taxes were adopted (ie EC Council Directive 67/227 of 11 April 1967 (the First Directive) and the Second Directive); it should be noted that in the United Kingdom these taxes have never been as important as they were in the original member states of the Community, nor have they taken the same form, that of a cumulative multi-stage tax (see J C Scholsem, ‘La TVA impot european’ in Melanges Fernand Dehousse vol II, p 305). Although ‘the rates and
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exemptions [were] not harmonised at the same time’ (see the eighth recital in the preamble to the First Directive), the result was the establishment of a ‘general tax on consumption’ (art 2 of the First Directive). The Sixth Directive (the Third, Fourth and Fifth Directives merely delayed the introduction of the common VAT system), adopted ten years later, had as its aim an essential objective, the creation of ‘own resources’ for the Communities, which were to include ‘those accruing from value added tax and obtained by applying a common rate of tax on a basis of assessment determined in a uniform manner according to Community rules’ (see the second recital in the preamble to the directive).
3. ‘So that the Communities’ own resources may be collected in a uniform manner in all the Member States’ (see the eleventh recital in the preamble to the Sixth Directive), arts 13 to 16 of the directive lay down a list of exemptions common to all the member states. However, on a transitional basis art 28 of the Sixth Directive allows them to retain, under certain conditions, inter alia, the reduced rates and exemptions which were in force on 31 December 1975 and satisfy the criteria set out in the last indent of art 17 of the Second Directive. That possibility was left open on the ground that it was ‘vital to provide for a transitional period to allow national laws in specified fields to be gradually adapted’ (see the nineteenth (last) recital in the preamble to the directive).
4. Although it was adopted on the basis of art 28(2), the system of zero-rating at issue differs from the exemption mechanism provided for in that article. That is to say, art 28 provides for exemption ‘with refund of the tax paid at the preceding stage’ which takes effect at the retail stage. At earlier stages every taxable person as defined in art 4 of the Sixth Directive must apply the tax. Only a retailer who sells an exempted product to a ‘final consumer’ does not pass on the VAT which he has paid but obtains a refund from the tax authorities. The zero-rating system takes a different approach. A list of goods and services designated by the national legislature is subject to purely notional taxation, under which no VAT is actually charged either on delivery or at earlier stages in the marketing chain. Naturally, there is nothing to refund to the retailer. According to the Commission, some 35% of the private consumption of households is zero-rated in the United Kingdom and 33% in Ireland; Ireland disputes that percentage and states that the real figure is 25%. The zero-rating technique exists in three other states, but they operate it only on a very small scale, largely in favour of the press.
5. Let me state right away that the system itself is not challenged by the Commission, which considers it to be equivalent to the system of exemption and refund. However, the Commission disputes the application of zero-rating to certain categories of goods and services in the list contained in the Value Added Tax Act 1983 (disputed zero rates: Group 1: food (animal feeding stuffs, seeds and live animals of a kind generally used as, or yielding or producing, food for human consumption); Group 2: sewerage services and water (supplies to industry); Group 6: news services (supplies to industry); Group 7: fuel and power (supplies to industry); Group 8: construction of buildings, etc other than by or for the final consumer within a social policy; Group 17: clothing and footwear (protective boots and helmets sold to employers)). It considers that those provisions do not comply with the criteria laid down in art 17. While it admits that zero-rating has no effect on own resources, it states that ‘in the context of the completion of the internal market, of the abolition of fiscal frontiers and of the drive towards a standardisation of the rate of VAT’ its aim is to ‘limit the use of zero-rates to those transactions which meet the criteria laid down in art 28(2) of the Sixth Directive and this as part of its overall fiscal policy of working towards the total phasing out of all zero-rates or exemptions with refunds’.
6. According to the Commission, in determining how far up the commercial chain zero-rating may be applied if it is to benefit the final consumer, only stages corresponding to ‘bona fide inputs’ in the production or distribution of a final product which may be exempted in accordance with the criteria laid down in art 28(2) may be taken into account. The Commission further argues that only the person who acquires the goods or services without having any right of deduction may be regarded as the final consumer.
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7. The United Kingdom disagrees with that definition, and submits that the final consumer is the person at the end of a production or distribution chain. Moreover, it is not necessary that it should ‘only’ be the final consumer who benefits, or that he should benefit directly. It is sufficient if he gains an indirect benefit from the transaction, in particular by way of a lower end price. The United Kingdom points out that it enjoys considerable discretion in determining its own social policies and hence in deciding on the national measures to be taken for ‘clearly-defined social reasons’. The Commission does not deny that such a prerogative exists, but it submits that the court, exercising its supervisory power, should hold that in this case those measures are unjustified or disproportionate in relation to the social reasons relied on, and that the meaning of that concept for Community purposes must be defined by the court.
8. The United Kingdom complains more generally, however, that what the Commission is really doing is using an action against it for alleged failure to fulfil its obligations in an endeavour to evade the provisions of art 28, according to which it is for the Council, acting unanimously, to decide to abolish the exemptions permitted by that article. That analysis, it says, is illustrated by the terms used by the Commission, from which it appears that the application of zero-rates constitutes one of the ‘stumbling blocks’ on the path towards a uniform rate of VAT. The United Kingdom considers that its assessment of the Commission’s real motive is supported by the fact that the Commission accepts that the zero-rating in question has no bearing on own resources because of the mechanism established by the last sentence of the first sub-paragraph of art 28(2), which requires that ‘taxable persons declare the data required to determine own resources’ relating to exempted operations. The United Kingdom also argues that when it instituted these proceedings the Commission had not yet submitted to the Council a proposal for progressive abolition as provided for in that article. It may be noted in that regard that such a proposal was submitted while these proceedings were in progress (see OJ 1987 C250, p 2).
9. Let me say right away that these objections concerning the Commission’s possible motives for bringing the action do not seem relevant to the role of the court. It scarcely needs pointing out that the decision whether or not to bring an action against a member state for failure to fulfil its obligations is in any event in the entire discretion of the Commission, as the custodian of the Treaties, and that it is for the Commission ‘to judge at what time it shall bring an action before the Court’ (see EC Commission v Italian Republic Case 7/68 [1968] ECR 423). Moreover, the role of the court in proceedings of this kind is to determine whether or not a member state has failed to fulfil its obligations towards the Community as defined by the law in force. It should be recalled in that regard that in European Parliament v EC Council Case 13/83 [1985] ECR 1513 at 1588 (para 17), where the Council contended that the Parliament was using the action for failure to act as a means of furthering political objectives, the court held:
‘… it is not possible to restrict the exercise of that right [to bring an action for failure to act] by one of them [the Community institutions] without adversely affecting its status as an institution under the Treaty … ’
Rejecting the objection of inadmissibility raised in that respect by the Council, the court followed the opinion of the Advocate General (C O Lenz), who had stated (at 1518 (para 1)):
‘It is not for this Court to decide whether the action has political objectives. An action is being prosecuted before the Court according to the rules of procedure on a question of law, namely the scope of the duties of a Community institution. The action will be decided according to the relevant provisions, namely those of the Treaty establishing the European Economic Community of 25 March 1957. It is prosecuted in the interests of the Community and its legal system which will be given a binding ruling on the scope of the rights and obligations of the parties.’
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Such statements of principle, emphasising the objective nature of actions brought before the court, make possible a correct assessment of the weight of the arguments submitted in that respect by the United Kingdom. Although the Commission did refer in rather general terms to the interests which it considered to be at issue in this case, the fact remains that its action is directed unambiguously at a failure to comply with art 28 of the Sixth Directive in conjunction with art 17 of the Second Directive. It is obviously on the basis of those provisions alone that the court can determine whether or not the United Kingdom has failed to fulfil its obligations, since although the Sixth Directive states expressly that it is for the Council to abolish the exemptions established under art 28, their retention until such abolition depends on their conformity with that provision. The next step must therefore be to examine that issue.
I—MEASURES TAKEN FOR CLEARLY DEFINED SOCIAL REASONS AND FOR THE BENEFIT OF THE FINAL CONSUMER
10. Let me emphasise right away that ‘clearly defined social reasons’ and ‘benefit of the final consumer’ are not alternative conditions. One of them concerns the objective of the measures in question, the other its beneficiaries. They are therefore cumulative. Moreover, a provision creating an exception to the rules on the uniform basis of assessment for VAT cannot be construed liberally.
A ‘Clearly defined social reasons’
11. The parties are agreed that the determination of their own social policy is a matter for the discretion of the member states. The Commission considers, however, that it is for the court to lay down a definition for Community purposes of the phrase ‘clearly defined social reasons’ and that the court should hold that in this case the measures adopted are not sufficiently well-defined or are unjustified or disproportionate in relation to the reasons relied on.
12. The application of zero-rating may result in a reduction of the tax burden on the least well-off segments of society. It is equally conceivable, however, that the member states should also use fiscal instruments in order better to satisfy the needs of the great majority of the population. With regard to the concept at issue, moreover, I do not think that it is the role of the court to review the expediency of choices made by the member states. With reference to the ‘public morality’ exception to the rules on the free movement of goods, the court has held in R v Henn, R v Darby Case 34/79 [1980] 2 All ER 166 at 191, [1981] AC 850 at 898:
‘In principle, it is for each member state to determine in accordance with its own scale of values and in the form selected by it the requirements of public morality in its territory.’
I propose that the court take the same approach in this case. That is to say, if it is accepted that the member states can restrict that fundamental freedom in the manner described, it must be possible to accord them, without thereby endangering to any greater extent the consistency of the Community legal system, a similar latitude with regard to provisional exceptions to rules establishing a uniform basis of assessment for VAT.
13. However, compliance with the directive in question requires that the court should be able to intervene in the event that the exercise by the member states of their powers in the matter, where it has no relation to the field at issue, might frustrate the Community provision itself. I therefore suggest that the court should declare measures contrary to Community law only where their objective is clearly unrelated to the satisfaction of the fundamental needs, be they individual or collective, of the population of the member state.
B The final consumer
14. In my view the final consumer must be defined as the person who acquires goods
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or services for his personal use, as opposed to an economic activity, which art 4 of the Sixth Directive uses as the criterion for determining who is a taxable person. The distinction between a taxable person and a final consumer lies in the fact that a taxable person carries out transactions for consideration, while a final consumer is one who acquires goods or services for his own use. That distinction has fundamental consequences for tax purposes; in principle a taxable person deducts VAT, whereas a final consumer must bear that tax ‘unless there is a further transaction in which a price is paid’ (see Staatssecretaris van Financiën v Hong Kong Trade Development Council Case 89/81 [1982] ECR 1277 at 1286 (para 9)). That consequence cannot be ignored in the case of a zero-rate. In such a case the final consumer is the person who would have to bear a positive tax and would not be able to deduct it. That definition is not, I think, based on a narrow approach; it corresponds strictly to a fiscal interpretation, the only one which, in the context of provisions on VAT, is appropriate to the categories relevant to such taxation. It is, moreover, that which appears in art 3 of the proposal for a sixteenth VAT directive (OJ 1984 C 226, p 2):
‘For the purposes of this directive: (a) “final consumer” means: 1. any person who, with regard to the importation of goods referred to in Article 2, is not deemed to be a taxable person within the meaning of Article 4 of Council Directive 77/388/EEC, 2. a taxable person who was not entitled to deduct value added tax when purchasing goods.’
C ‘For the benefit’ of the final consumer: the concept of a benefit
15. It remains for me to consider the concept of a ‘benefit’ as used in art 17 of the Second Directive, where it speaks of exemptions ‘for the benefit of the final consumer’. In the case of a ‘normal’ exemption, such a benefit results from the non-application of VAT at the retail stage. In essence, the benefit is entirely identical under the zero-rating system; the consumer pays no VAT. The application of zero-rating at earlier stages of distribution results in no additional fiscal benefit for the consumer since he does not pay the tax in any event. However, as the Commission says, zero-rating may be accepted higher in the commercial chain in so far as it is applied to the product itself which is zero-rated on purchase by the final consumer.
16. Can we go further and take into account the indirect benefit which, according to the United Kingdom, results from the application of zero-rating to inputs used to produce goods which are themselves zero-rated? It should be emphasised that from the fiscal point of view such a benefit does not exist once a zero-rate is applied on purchase by the final consumer. That is to say the extension of a zero-rating higher up the commercial chain has no effect on the fiscal burden on the consumer, who in any event benefits from a zero-rate. The only benefit for him, therefore, lies in a possible reduction in the cost of the product resulting from a reduction in cash outlays and overheads in the absence of positive rates of tax on the inputs concerned. I think, however, that these consequences, which are revealed by an economic analysis, should be regarded with prudence in so far as they vary according to the time limits for deductions, the size and structure of the producers or dealers in question, credit arrangements between them etc. The complexity of such effects requires, in my opinion, a degree of caution in that respect in considering the notion of a ‘benefit’ for the final consumer for the purposes of art 17. However, in so far as the very existence of a reduction in production costs is likely to result in a benefit, albeit variable, for the final consumer, I propose that the court should not reject, as a matter of principle, the zero-rating of inputs which are directly and exclusively used in a product which itself is properly zero-rated.
17. Now that the conditions laid down in the provision at issue have been defined, we may determine whether or not the contested measures comply with them.
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II—THE CONTESTED ZERO RATES
A Group 1 of the list set out in Sch 5 to the Value Added Tax Act 1983: food
18. At issue is the application of zero-rates to animal feeding stuffs, seeds or other means of propagation of plants, and live animals used as, or yielding or producing, food for human consumption. These are all inputs used in the production of food for human consumption, and there is no dispute as to the application of zero-rates to food. The United Kingdom argues that the application to them of zero-rates is of direct benefit to final consumers who themselves use those inputs to produce food. It refers more generally to the reduced burden on farmers’ cash-flow and its possible effects on food prices.
19. Although this last consideration must be approached with caution, as I have already stated, the negative effects of any taxation of those products on food prices, increases in which are particularly ‘sensitive’ at the level of the final consumer, cannot be ignored. It should be observed that all the supplies referred to contribute directly and exclusively to the production of food for the final consumer. Moreover, persons using such supplies to produce their own food and farmers keeping part of their production for the use of their family receive a direct benefit from the application of the zero-rates at issue. I therefore propose that the court hold that the United Kingdom has not failed to fulfil its obligations in this respect.
B Group 2: sewerage services and water
20. Sewerage services (reception, disposal or treatment of sewage and emptying of cesspools, septic tanks etc) are normally financed by a rate which is not subject to VAT. Consequently, taxable commercial services are provided only in respect of cesspools or septic tanks which are made necessary by the absence of any main drainage system. The United Kingdom justifies the application of zero-rates to such services essentially for reasons of equity between town-dwellers and isolated farmers, who are generally the beneficiaries of the measure in question. There are also, it maintains, domestic considerations justifying exemption. The Commission, in any event, disputes only the supply of such services to industry. Since the United Kingdom states that it is highly unlikely that industrial concerns would make use of such services, I agree with the Commission that the repeal of the disputed provision (since industrial concerns cannot be regarded as final consumers) should not present any difficulty.
21. With regard to the supply of water, only supplies to industry are in dispute; while the United Kingdom admits that the industrial sector is the largest consumer, it argues that in certain cases water is used principally for the benefit of the individual in the preparation of food and drink. In its view there is, moreover, no practical reason for attempting to identify the status of the final consumer, since water is connected in the public mind with food and should be treated in the same way by analogy.
22. That argument cannot be upheld. Industrial uses of water are important enough to preclude, so it seems to me, the application of zero-rates, in the light of the fact that the users are taxable persons. All I would allow, following the Commission’s view, is the application of a zero-rate for the industrial production of finished food products. The United Kingdom did point out that there is an exemption for supplies of water in another member state. The Commission observed that that exemption was based on art 28(3)(b) of the Sixth Directive, under which member states may, during the transitional period, continue to exempt the activities set out in Annex F, inter alia ‘the supply of water by public authorities’ (item 12 of the annex). The United Kingdom, which based its contentions expressly on art 28(2), has not argued that it could rely on art 28(3) (which to my mind is strictly alternative to art 28(2)) or even asserted that it met the conditions laid down in the latter. I therefore think that the United Kingdom has failed to fulfil its obligations in this respect.
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C Group 6: news services
23. Since the Commission has accepted that zero-rates may be applied in respect of the supply of information directly to the public or to undertakings which use that information in the production of products such as newspapers, it seems that it is only the application of zero-rates to the supply of information, essentially by electronic means, for other business uses that remains at issue. Such beneficiaries of zero-rating (banks, insurance companies etc) cannot be regarded as final consumers.
D Group 7: fuel and power
24. The Commission contests the exemption of supplies other than to final consumers. The United Kingdom argues, first of all, that in the case of mixed users it is difficult to distinguish between business uses and private uses. Such an objection is unconvincing, and it is for the member states to find appropriate technical solutions to what does not appear to be an insurmountable difficulty. Second, it argues that the taxation of such supplies in the education and health sectors would have undesirable social effects. Having regard to the very large energy consumption of the industrial sector it is clear that zero-rates do not benefit the final consumer in this area. The Commission’s claim must therefore, in my opinion, be upheld in this respect.
E Group 8: construction of buildings
25. This is certainly the most important group of exemptions from the economic point of view since it covers the housing sector, industrial and commercial buildings, and the community and civil engineering sector. The Commission considers that the failure to distinguish according to the type of housing concerned is disproportionate having regard to the objectives pursued. The United Kingdom argues that it is very difficult to distinguish, as the Commission suggests, between housing constructed by local authorities, which unquestionably qualify for exemption, and other housing, especially since it is now the private sector which, because of the steps taken to encourage home ownership, provides an increasing proportion of housing for the most disadvantaged segments of the community.
26. If it was for the court to consider whether or not the decision to apply a zero rate in respect of the construction of all private housing was well-founded, it could undoubtedly hold that measures of such an indiscriminate nature reflect a very wide view of the social reasons relied on. As I have already said, however, the exercise of such a supervisory role would impinge on the powers of the member states. In any event, the approach adopted by the United Kingdom, that is to say, facilitating home ownership for the whole population, clearly does not go beyond the discretion which it undoubtedly retains in this field.
27. In the industrial and commercial sector zero-rating is used by the United Kingdom as a means of encouraging renewal of infrastructure and construction, especially from the point of view of employment. I do not share the Commission’s reserves with regard to the social reasons put forward. The improvement of industrial infrastructure, the development of residential areas and, above all, the quantitative and qualitative effects of such development for employment are clearly important social reasons. However, I must propose that the court hold that the United Kingdom has failed to fulfil its obligations in so far as the zero-rates at issue, although undoubtedly benefiting workers, users and citizens, cannot be regarded as benefiting the final consumer as defined in the directive. To treat the entire population as the final consumer does not seem to me to be compatible with a provision which clearly concerns a person who acquires goods or services for his own use. Moreover, such a wide interpretation of the term ‘final consumer’ would amount to the de facto removal of the condition laid down in that respect by the relevant provision, and allow any exemption based on social reasons.
28. With regard to community works and civil engineering, I am inclined, for reasons similar to those I have just set out, to adopt the same approach. Here again, despite the
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social aspect of the reasons put forward, it is hard to see any distinction between the final consumer and the population as a whole.
F Group 17: protective boots and helmets
29. The zero-rating of purchases of such supplies by employers is said to be justified by the fear that taxation would discourage them from providing such equipment for their staff. I need simply point out that the beneficiary cannot be regarded as a final consumer according to the definition I have adopted. It may be added that it appears from the United Kingdom’s pleadings themselves that many employers should be able to recover the tax on such supplies.
I therefore propose that the court (1) hold that by applying zero-rates of VAT to supplies to industry of water and sewerage services, to information services other than those intended directly for the public or for the production of zero-rated products such as newspapers, to the construction of buildings for industrial and commercial use and in the community and civil engineering sector, to supplies of fuel and power and of protective boots and helmets in so far as they are not supplied to the final consumer, the United Kingdom has failed to fulfil its obligations under the EEC Treaty and under art 28(2) of the Sixth Directive of 17 May 1977, (2) dismiss the remainder of the application and (3) order the United Kingdom to pay the costs.
THE COURT OF JUSTICE delivered the following judgment.
1. By an application lodged at the court registry on 13 December 1985 the Commission of the European Communities brought an action pursuant to art 169 of the EEC Treaty for a declaration that by continuing to apply a zero-rate of value added tax to certain groups of goods and services the United Kingdom of Great Britain and Northern Ireland has contravened the provisions of EC Council Directive 77/388 of 17 May 1977 (on the harmonisation of the laws of the member states relating to turnover taxes: common system of value added tax: uniform basis of assessment) (the Sixth Directive) and has therefore failed to fulfil its obligations under the EEC Treaty.
2. Article 28 of the Sixth Directive lays down transitional provisions for the progressive adaptation of national legislation in certain respects. Article 28(2) provides as follows:
‘Reduced rates and exemptions with refund of the tax paid at the preceding stage which are in force on 31 December 1975, and which satisfy the conditions stated in the last indent of Article 17 of the second Council Directive of 11 April 1967, may be maintained until a date which shall be fixed by the Council, acting unanimously on a proposal from the Commission, but which shall not be later than that on which the charging of tax on imports and the remission of tax on exports in trade between the Member States are abolished. Member States shall adopt the measures necessary to ensure that taxable persons declare the data required to determine own resources relating to these operations. On the basis of a report from the Commission, the Council shall review the above-mentioned reduced rates and exemptions every five years and, acting unanimously on a proposal from the Commission, shall where appropriate, adopt the measures required to ensure the progressive abolition thereof.’
3. The last indent of art 17 of EC Council Directive 67/228 of 11 April 1967 (on the harmonisation of legislation of member states concerning turnover taxes: structure and procedures for application of the common system of value added tax) (the Second Directive), to which art 28 of the Sixth Directive refers, provides that member states may—
‘provide for reduced rates or even exemptions with refund, if appropriate, of the tax paid at the preceding stage, where the total incidence of such measures does not exceed that of the reliefs applied under the present system. Such measures may only be taken for clearly defined social reasons and for the benefit of the final consumer,
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and may not remain in force after the abolition of the imposition of tax on importation and the remission of tax on exportation in trade between Member States.’
4. On the basis of art 28(2) of the Sixth Directive, the United Kingdom has continued to apply a system called ‘zero-rating’. Originally Sch 4 to the Finance Act 1972 contained a list of 17 groups of goods or services which were zero-rated. That list was incorporated almost in its entirety into Sch 5 to the Value Added Tax Act 1983.
5. The Commission considered that certain of the Zero-rates provided for by the United Kingdom legislation did not comply with the criteria contained in the last indent of art 17 of the Second Directive; by a letter of 19 October 1981 it therefore called on the United Kingdom to submit its observations in accordance with the first paragraph of art 169 of the EEC Treaty.
6. The United Kingdom did not agree that it had failed to fulfil its obligations under the Treaty, and on 4 September 1984 the Commission therefore delivered a reasoned opinion. Since the United Kingdom did not comply with that opinion, the Commission brought these proceedings.
7. Reference is made to the report for the hearing for a fuller account of the facts of the case, the course of the procedure and the submissions and arguments of the parties, which are mentioned or discussed hereinafter only in so far as is necessary for the reasoning of the court.
The jurisdiction of the court
8. The United Kingdom contends that there is a political motive behind the Commission’s application to the court and that such a motive is not a proper basis for an action pursuant to art 169 of the EEC Treaty. The Commission’s action is intended in fact to attain by means of judicial proceedings an objective which can be achieved only by a decision of the Community legislature. It is clear from the Commission’s reply that its intention in bringing these proceedings is to bypass the procedural requirements of art 28 of the Sixth Directive, under which it is for the Council, acting unanimously, to decide to abolish the exemptions permitted by that article. The United Kingdom therefore submits that it is not the task of the court ‘to substitute itself for the political procedures envisaged by art 28 of the Sixth Directive and to substitute an immediate obligation on a member state for the progressive compliance envisaged by art 28’.
9. That argument cannot be upheld. In the context of the balance of powers between the institutions laid down in the Treaty, it is not for the court to consider what objectives are pursued in an action brought under art 169 of the Treaty. Its role is to decide whether or not the member state in question has failed to fulfil its obligation as alleged. As the court held in EC Commission v Italian Republic Case 7/68 [1968] ECR 423, an action against a member state for failure to fulfil its obligations, the bringing of which is a matter for the Commission in its entire discretion, is objective in nature.
Substance
10. It should be pointed out first of all that the Commission does not dispute the legality of the zero-rating system in general; it considers that system to be essentially equivalent to the exemptions provided for by art 28 of the Sixth Directive, as it expressly stated in its proposal for a Sixth Directive submitted to the Council on 29 June 1973. It submits, however, that the requirements laid down in the last indent of art 17 of the Second Directive, which provides that exemptions may be made only ‘for clearly defined social reasons and for the benefit of the final consumer’, are not met with regard to certain groups of goods and services included in Sch 5 to the 1983 Act.
11. It must therefore be determined whether the zero-rating of the goods and services at issue complies with the conditions laid down in those provisions.
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The concept of ‘clearly defined social reasons’
12. With regard to the first condition, that is to say that exemption may be granted only for clearly defined social reasons, the parties are agreed that the determination of their own social policy is a matter for the discretion of the member states. They accept, however, that that discretion may be subject to supervision at the Community level.
13. In particular, the United Kingdom accepts that the Commission may challenge a measure where the social reason cannot be said to be sufficiently ‘clearly defined’, where the social reason advanced cannot justify the measure or if the measure lacks all proportionality. The Commission states that by ‘social reasons’ it understands measures which are introduced primarily for general social purposes and not principally for industrial, sectorial or fiscal reasons; it accepts, however, that it may not challenge measures taken in pursuance of a member state’s social policy unless it can be shown that the social policy is not sufficiently clearly defined or that the measures in question either are not justified by or are disproportionate to the social reasons advanced.
14. The identification of social reasons is in principle a matter of political choice for the member states and can be the subject matter of supervision at the Community level only in so far as, by distorting that concept, it leads to measures which because of their effects and their true objectives lie outside its scope.
The phrase ‘for the benefit of the final consumer’
15. The Commission regards as ‘final consumers’ those persons who stand at the final stage in the manufacturing and commercial chain and have no right to deduct VAT, that is to say non-taxable persons.
16. The United Kingdom considers that there is nothing in the general scheme of VAT to indicate that the term ‘final consumer’ should be treated as synonymous with the term ‘non-taxable person’. On the contrary, the final consumer must be taken to be the natural or legal person at the end of a particular production or distribution chain for a particular product or service, even where that product or service is used in the production of other products or the provision of other services, regardless of whether or not the person is a taxable person.
17. Under the general scheme of VAT the final consumer is the person who acquires goods or services for personal use, as opposed to an economic activity, and thus bears the tax. It follows that having regard to the social purpose of art 17 the term ‘final consumer’ can be applied only to a person who does not use exempted goods or services in the course of an economic activity. The provision of goods or services at a stage higher in the production or distribution chain which is nevertheless sufficiently close to the consumer to be of advantage to him must also be considered to be for the benefit of the final consumer as so defined.
The zero rates at issue
A Group 1: food (animal feeding stuffs, seeds or other means of propagation of plants comprised in food for human consumption or animal feeding stuffs, live animals of a kind generally used as, or yielding or producing, food for human consumption)
18. The Commission’s allegation is essentially that the zero-rating of these products does not comply with the second condition laid down in the last indent of art 17 of the Second Directive. It submits that transactions in these products are too remote from the final zero-rated food product to fulfil the criterion of benefit to the final consumer.
19. The United Kingdom argues that the application of a positive rate of VAT to these products would entail an increase in food prices and thus jeopardise the achievement of the social objectives which it is pursuing. It also disputes the Commission’s argument concerning remoteness from the final product.
20. All the supplies at issue contribute to the production of substances intended for human consumption and are sufficiently close to the final consumer to be of advantage
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to him. Moreover, the negative effects of any taxation of those products on food prices, increases in which are particularly sensitive for the final consumer, who himself enjoys zero-rating, cannot be neglected.
21. It follows that with regard to the products of this group at issue the alleged failure of the United Kingdom to fulfil its obligations has not been established.
B Group 2: sewerage services and water
22. The Commission’s submission in this respect concerns services provided to industry regarding the emptying of cesspools and septic tanks made necessary by the absence of a mains drainage system, on the one hand, and the supply of water to industry, on the other.
23. In neither of these cases can the provision of services to industry be regarded as fulfilling the second criterion laid down in art 17 of the Second Directive, since industrial users cannot be regarded as final consumers.
24. With regard in particular to the supply of water to industry, the United Kingdom pointed out that such supplies are exempted in another member state. In the course of the proceedings the Commission explained that that exemption is based on art 28(3)(b) of the Sixth Directive, according to which the member states may, during the transitional period, continue to exempt the activities set out in Annex F, in this instance ‘the supply of water by public authorities’. The United Kingdom has not sought to rely on that provision.
25. The failure of the United Kingdom to fulfil its obligations in respect of these products and services is therefore established.
C. Group 6: news services provided to certain undertakings
26. The Commission’s submissions concern the supply of news services to undertakings which themselves provide services which are not zero-rated, such as banks or insurance companies.
27. The United Kingdom argues that the services in question can be included as an ‘incidental benefit’ and that the intrinsic characteristics of news services remain the same whether they are supplied to a bank or to a newspaper, the latter being zero-rated.
28. Leaving aside the fact that an incidental benefit such as that relied on by the United Kingdom has no place in the concept of a benefit to the final consumer for the purposes of art 28 of the Sixth Directive, it is clear that since the undertakings to which the news services in question are provided, such as banks and insurance companies, cannot be regarded as final consumers, the second criterion laid down in art 17 of the Second Directive is not fulfilled.
29. The failure of the United Kingdom to fulfil its obligations in respect of these services is therefore established.
D Group 7: fuel and power (coal, coke, coal gas, water gas, petroleum gases, fuel oil, gas oil, electricity etc)
30. The Commission challenges the zero-rating of supplies of fuel and power other than to final consumers.
31. In its defence the United Kingdom relies essentially on the negative effects from the social point of view of any taxation of supplies of fuel and power, in particular to schools and hospitals.
32. Whilst the court does not call in question the social reasons underlying that policy, it must point out that the services in question cannot be considered to have been provided for the benefit of final consumers, since final consumers as defined above derive only very indirect advantages from zero-rating. They therefore do not fulfil the second criterion of art 17 of the Second Directive.
33. With regard to the United Kingdom’s alternative argument to the effect that the difficulties in administering the tax if only supplies to final consumers were zero-rated
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would probably be insurmountable, it must be observed that where a member state wishes to make use of the derogations in question it must take all the practical measures necessary for the correct application of those provisions. If it considers that such measures cannot be implemented, it must refrain from applying zero-rates.
34. The alleged failure of the United Kingdom to fulfil its obligations is therefore established.
E Group 8: construction of buildings (including in particular the initial sale of new buildings, the services provided by a contractor constructing a new building for a client who owns the site, the construction of commercial and industrial buildings, civil engineering works, the construction of roads, railways and airports)
35. The Commission challenges the zero-rating of all the items in Group 8 with the exception of housing constructed by local authorities. With regard to the housing sector, the Commission argues that the indiscriminate application of a zero-rate to the whole sector, regardless of the nature of the dwellings concerned, is contrary to the first criterion laid down in the last indent of art 17 of the Second Directive inasmuch as it is disproportionate in relation to the objectives of the United Kingdom’s social policy in housing matters. With regard to commercial and industrial buildings and to community and civil engineering works the Commission considers that any benefit to the final consumer is too remote to meet the second criterion laid down in the last indent of art 17.
36. With regard to buildings intended for housing, the Commission’s arguments cannot be upheld. The measures adopted by the United Kingdom in order to implement its social policy in housing matters, that is to say facilitating home ownership for the whole population, fall within the purview of ‘social reasons’ for the purposes of the last indent of art 17.
37. By applying a zero rate to the activities comprised in Group 8 with regard to housing constructed both by local authorities and by the private sector, the United Kingdom has not, therefore, contravened the last indent of art 17.
38. However, activities included in Group 8 in relation to the construction of industrial and commercial buildings and to community and civil engineering works cannot be considered to be for the benefit of the final consumer.
39. It follows that the United Kingdom has failed to fulfil its obligations, as alleged by the Commission, in so far as it applies a zero-rate to services in relation to the construction of industrial and commercial buildings and to community and civil engineering works.
F Group 17: protective boots and helmets
40. The Commission submits that the supply of these products to employers for the use of their employees cannot benefit from zero-rating because they cannot be regarded as inputs in the chain of production of products which are zero-rated.
41. The United Kingdom argues that protective boots and helmets must be considered in their own right, not as part of a production process. The employer must, it says, be regarded as the final consumer of these goods.
42. In the light of the considerations set out above, it must be held that the persons to whom these goods are supplied cannot be regarded as final consumers.
43. The alleged failure of the United Kingdom to fulfil its obligations in this respect is therefore established.
44. It follows from all the foregoing that by continuing to apply a zero-rate of value added tax to the groups of goods and services specified above, the United Kingdom has contravened the provisions of EC Council Directive 77/388 and has therefore failed to fulfil its obligations under the EEC Treaty.
Costs
45. Under art 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered
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to pay the costs. Since the United Kingdom has failed in most of its submissions, it must be ordered to pay the costs.
On those grounds, the court hereby (1) declares that, by continuing to apply a zero-rate of value added tax to supplies to industry of water and sewerage services (emptying of cesspools and septic tanks) included in Group 2 of Sch 5 to the Value Added Tax Act 1983, in so far as they are not supplied to final consumers; to news services included in Group 6, in so far as they are not provided to final consumers; to supplies of fuel and power included in Group 7 and to protective boots and helmets included in Group 17, in so far as they are not supplied to final consumers; to the provision of goods and services included in Group 8 in relation to the construction of industrial and commercial buildings and to community and civil engineering works, in so far as they are not provided to final consumers, the United Kingdom of Great Britain and Northern Ireland has contravened the provisions of EC Council Directive 77/388 of 17 May 1977 and has therefore failed to fulfil its obligations under the EEC Treaty; (2) for the rest, dismisses the application; (3) orders the United Kingdom to pay the costs.
Agents: D R Gilmour, Legal Adviser, EC Commission (for the Commission); Susan Hay, Treasury Solicitor’s Department (for the United Kingdom).
Mary Rose Plummer Barrister.
Singh v Atombrook Ltd
[1989] 1 All ER 385
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): KERR LJ AND SIR JOHN MEGAW
Hearing Date(s): 17 JUNE 1988
Writ – Amendment – Amendment to correct party’s name – Amendment after judgment – Whether court having jurisdiction to allow amendment of writ after final judgment in proceedings – RSC Ord 2, r 1(2), Ord 20, r 5.Writ – Service on company – Service at company’s registered office – Failure to serve writ on company at its registered office – Whether failure nullifying proceedings – Whether failure a mere irregularity capable of remedy – Companies Act 1985, s 725(1) – RSC Ord 2, r 1.
The court can in principle allow a plaintiff to amend his writ even after final judgment in the proceedings has been entered (eg for the purpose of substituting the defendant’s correct name for the incorrect name in which he was sued), since the court has wide general powers under RSC Ord 2, r 1(2)a to allow amendments and there is no rule which precludes the court from exercising its power under Ord 20, r 5b to allow amendments to the writ or pleadings at any stage of the proceedings after final judgment has been entered (see p 390 c d and p 393 g, post); Whittam v W J Daniel & Co Ltd [1961] 3 All ER 796 applied; Davies v Elsby Bros Ltd [1960] 3 All ER 672 distinguished; Midland Bank Trust Co Ltd v Green (No 2) [1979] 1 All ER 726 considered.
Having regard to the wide terms of Ord 2, r 1 and its purpose of abolishing the distinction between non-compliance with procedural rules which renders proceedings a nullity and non-compliance which merely renders proceedings irregular, failure to comply with s 725(1)c of the Companies Act 1985, which provides that a writ may be served on a company by leaving it at, or sending it by post to, the company’s registered office, does not, even on the basis that the provision is mandatory, constitute such an irregularity in the proceedings as to render them a nullity and entitle the defendant to have them set aside ex debito justitiae instead, non-compliance with s 725(1) is a mere irregularity within Ord 2, r 1(1) and as such does not nullify the proceedings (see p 391 h j, p 392 b, p 393 g and p 394 g h, post); Vignes v Stephen Smith & Co Ltd (1909) 53 SJ 716 distinguished.
Notes
For non-compliance with rules of court, see 37 Halsbury’s Laws (4th edn) paras 36–39, and for cases on the subject, see 37(2) Digest (Reissue) 205–217, 1355–1412.
For amendment of a writ, see 36 Halsbury’s Laws (4th edn) paras 68–71 and 37 ibid para 271, and for cases on the subject, see 37(1) Digest (Reissue) 255–272, 1696–1781.
For the Companies Act 1985, s 725, see 8 Halsbury’s Statutes (4th edn) 664.
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Cases referred to in judgments
Davies v Elsby Bros Ltd [1960] 3 All ER 672, [1961] 1 WLR 170, CA.
Harkness v Bell’s Asbestos and Engineering Ltd [1966] 3 All ER 843, [1967] 2 QB 729, [1967] 2 WLR 29, CA.
Midland Bank Trust Co Ltd v Green (No 2) [1979] 1 All ER 726, [1979] 1 WLR 460.
Pritchard (decd), Re [1963] 1 All ER 873, [1963] Ch 502, [1963] 2 WLR 685, CA.
Sharpley and Manby’s Arbitration, Re [1942] 1 All ER 66, [1942] 1 KB 217, CA.
Stylo Shoes Ltd v Prices Tailors Ltd [1959] 3 All ER 901, [1960] Ch 396, [1960] 2 WLR 8.
Tennant v London CC (1957) 121 JP 428, CA.
Vignes v Stephen Smith & Co Ltd (1909) 53 SJ 716.
White v Weston [1968] 2 All ER 842, [1968] 2 QB 647, [1968] 2 WLR 1459, CA.
Whittam v W J Daniel & Co Ltd [1961] 3 All ER 796, [1962] 1 QB 271, [1961] 3 WLR 1123, CA.
Interlocutory appeal
By a writ issued on 4 June 1987 the plaintiff, Mrs Santosh Kumari Singh, suing as administratrix of the estate of her deceased husband Mr Ranjit Singh, claimed against ‘Sterling Travel (a firm)’ as defendant the return of money paid by Mr Singh to Sterling Travel Ltd for three airline tickets which, following Mr Singh’s death, the plaintiff returned to Sterling Travel, which agreed to arrange for a refund of the price of the tickets. In default of any appearance by Sterling Travel the plaintiff obtained a default judgment on 21 July 1987. On 25 November 1987 the defendant, Atombrook Ltd (trading as Sterling Travel), applied to have the default judgment set aside for irregularity, because of the misnomer of the defendant in the writ on the grounds that the defendant should have been named as ‘Atombrook Ltd trading as Sterling Travel’, and the failure to serve the writ on Atombrook Ltd at its registered office. On 22 December 1987 Mr District Registrar Bailey-Cox set aside the default judgment on condition that the defendant pay into court the full sum claimed by the plaintiff. On appeal by the defendant, Hutchison J, sitting in the High Court at Winchester on 29 January 1988, affirmed the registrar’s order, and also directed that the writ be amended to name the defendant as Atombrook Ltd trading as Sterling Travel. The defendant appealed, seeking to have the orders of the district registrar and Hutchison J set aside and the default judgment of 21 July 1987 set aside unconditionally. The facts are set out in the judgment of Kerr LJ.
Thomas Weitzman for the defendant.
David Bartlett for the plaintiff.
17 June 1988. The following judgments were delivered.
KERR LJ. This is an appeal by the defendant from an order made by Hutchison J sitting at Winchester on 29 January 1988, whereby he affirmed an order of Mr District Registrar Bailey-Cox made in the Southampton District Registry on 22 December 1987. Both orders set aside at the request of the defendant a judgment which had been obtained by the plaintiff against the defendant in an incorrect name, but in each case on terms that the defendant bring into court the full sum claimed, about £1,300, on the ground that the indicated defence was shadowy. The appeal is on the ground that this was an irregular judgment, irregular to the point of being a nullity, with the result that notwithstanding the far-reaching changes introduced by the new RSC Ord 2, the defendant was entitled to have it set aside as of right, or ex debito justitiae, to use the phrase used in a number of the authorities, and accordingly without the imposition of the condition that it brings the amount claimed into court. The defendant also submits that both the district registrar and the judge were wrong in allowing the writ to be amended so as to substitute the defendant’s correct name for the name in which it had been sued.
The claim arises in sad circumstances. The plaintiff is the widow and administratrix of the estate of her late husband, Mr Ranjit Singh. On or about 6 June 1984 Mr Singh, in
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the company of the plaintiff and another member of the family, went to the premises of travel agents trading under the name ‘Sterling Travel’, or at least displaying that name, in Rupert Street, London W1. They bought three airline tickets for a flight to the United States for Mrs Singh and her two children on 25 July 1984. Sadly, on 27 June 1984 Mr Singh died and his wife and the two children were therefore unable to travel to the United States. The daughter took the tickets back to Sterling Travel on or about 10 July 1984 and, as she said, was assured that the agents would obtain a refund of the price of the tickets for the plaintiff. She never obtained such a refund, although the tickets were never returned to her or not for a long time.
After the tickets had been taken back to Sterling Travel, without any further response from them, repeated inquiries were made and letters were written by the plaintiff and her solicitors, who have done everything possible to try to obtain some satisfaction for her. In the early stages there were some telephone calls in response to these letters to Sterling Travel in Rupert Street. So they were being received. Various temporising assurances were given; but no satisfaction was obtained. As it transpires, Sterling Travel, or whoever was trading in the name of Sterling Travel, then moved away from Rupert Street, and by the time these proceedings had been started they were no longer trading there. The writ was issued on 4 June 1987 addressed to ‘Sterling Travel (a firm)’ at the Rupert Street address. It was posted to Rupert Street on 5 June 1987. Nothing was heard from the defendant and some six weeks later, on 21 July 1987, judgment was entered in default.
Steps were than taken to try to execute the judgment. But on 24 August 1987 a company called United Air Travel Services Ltd sent a telex to the plaintiff’s solicitors saying that they had just received the writ. They said that there was no firm called Sterling Travel; there was a company called Atombrook Ltd who were, as they said, an associated company of United Air Travel Services Ltd, and Atombrook Ltd was the proprietor of Sterling Travel. One can see from the notepaper of this company that although it is prominently headed ‘Sterling Travel’ there is a very small note at the bottom saying ‘Proprietors, Atombrook Limited’, whose registered address is stated to be in Goswell Road, London E1. Although in certain circumstances it is possible for a limited company to have an interest in a firm in a way which would appropriately describe them as proprietors of the firm, it is not suggested that this is the present situation. It is accepted that the correct name of the defendant whom the plaintiff intended to sue, and who obviously realised that they were the parties whom the plaintiff intended to sue, should have been ‘Atombrook Limited, T/a Sterling Travel’. One can see immediately that this line of defence by the defendant, unlike the name Sterling Travel in which they chose to trade, no doubt because they thought it sounded and would sell better, is utterly without merit.
The response to the telex from United Air Travel was that the plaintiff’s solicitors wrote on 26 August 1987 inviting an application to have the judgment set aside. There were then abortive execution proceedings because the sheriff could not find anybody still trading in the name of Sterling Travel in Rupert Street. Ultimately, on 25 November 1987 the defendant applied to have the judgment set aside on the ground that it had been ‘irregularly obtained’. Accordingly there had been a delay of several months from the time when United Air Travel Services Ltd knew about the writ and from the time when the defendant, through United Air Travel Services Ltd, had been advised to have the judgment set aside if it wished to do so. In the view of the judge, which is not open to criticism, that was an unreasonably long time in the circumstances.
I should add that the evidence filed on behalf of the defendant is significantly silent on the question as to when anybody concerned with the defendant first became aware of the writ and the judgment. That may well have been substantially before the telex of 24 August. That telex may only have been sent because those associated with Atombrook Ltd, and previously with Sterling Travel, or whatever may have been the position, were becoming uncomfortable because of the attempts to enforce this judgment.
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There then followed the orders which I have already mentioned. Both the registrar and the judge took the view that the defendant should have the opportunity of raising a defence which it claimed to have, but only on terms of bringing the money into court. The effective issue today is whether the defendant is bound to bring that amount into court if it wishes to resist the plaintiff’s claim, now amended by describing the defendant in its full correct name.
To see the issues which arise I must refer to a number of provisions of the Rules of the Supreme Court. Order 2, r 1(1) and (2) is as follows:
‘(1) Where, in beginning or purporting to begin any proceedings or at any stage in the course of or in connection with any proceedings, there has, by reason of any thing done or left undone, been a failure to comply with the requirements of these rules, whether in respect of time, place, manner, form or content or in any other respect, the failure shall be treated as an irregularity and shall not nullify the proceedings, any step taken in the proceedings, or any document, judgment or order therein.
(2) Subject to paragraph (3) the Court may, on the ground that there has been such a failure as is mentioned in paragraph (1) and on such terms as to costs or otherwise as it thinks just, set aside either wholly or in part the proceedings in which the failure occurred, any step taken in those proceedings or any document, judgment or order therein or exercise its powers under these rules to allow such amendments (if any) to be made and to make such order (if any) dealing with the proceedings generally as it thinks fit.’
The first two paragraphs of the notes to that rule in The Supreme Court Practice 1988 vol 1, para 2/1/1 are in the following terms:
‘Effect of rule—The predecessor of this rule (O.59 of R.S.C. 1875; O.70, r. 1, of R.S.C. 1883) sought to provide that non-compliance with any of the rules should not of itself render any proceedings void unless the Court should so direct, but that they might be set aside wholly or in part as irregular or amended on such terms as the Court might think fit. Nevertheless the decisions under the rule preserved a distinction between a non-compliance such as rendered the proceedings a nullity (in which case the Court had no discretion but to treat them as a nullity and set them aside) and a non-compliance which merely rendered the proceedings irregular (in which case they remained valid and the Court had a discretion what order to make in the circumstances). It was held, indeed, that the Order did not apply to the former class of case but only the latter.
As a result of the decision of the Court of Appeal in Re Pritchard decd. ([1963] 1 All ER 873, [1963] Ch 502) the present rule was by R.S.C. 1964 substituted for rr. 1 and 2 of the previous O.2 and under it the above distinction between nullity and mere irregularity disappears (see Harkness v. Bell’s Asbestos & Engineering Ltd ([1966] 3 All ER 843 at 845, [1967] 2 QB 729 at 735)) at any rate in regard to “a failure to comply with the requirements of these rules”, though it may still be that there are other failures to comply with statutory requirements or other improprieties so serious as to render the proceedings in which they occur, and any order made therein, a nullity … ’
I must then quote Ord 2, r 2:
‘(1) An application to set aside for irregularity any proceedings, any step taken in any proceedings or any document, judgment or order therein shall not be allowed unless it is made within a reasonable time and before the party applying has taken any fresh step after becoming aware of the irregularity.
(2) An application under this rule may be made by summons or motion and the grounds of objection must be stated in the summons or notice of motion.’
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It will be noted that under Ord 2, r 2(1) the grant of an application to set aside for irregularity is only permissible if it is made ‘within a reasonable time’. As already mentioned, the judge rightly took the view that the summons to set this judgment aside had not been issued within a reasonable time. Accordingly, as he held, the defendant was not entitled to have the judgment set aside under Ord 2 as a matter of right. He accepted, and I shall have to deal with this in a moment, that the judgment had been obtained irregularly in two respects. First, there was no firm called Sterling Travel; the only relevant entity was ‘Atombrook Limited, trading as Sterling Travel’. Second, the writ and subsequent proceedings had not been served at the registered address of Atombrook Ltd in Goswell Road but at an address in Rupert Street. However, he held that while the defendant could accordingly not rely on Ord 2, r 2, the was willing in the circumstances to set aside the judgment under Ord 13, r 9, which provides that the court may set aside any judgment on such terms as it thinks just, which would include the default judgment in the present case. In the same way as the district registrar, the judge considered that it was just in this case that the defendant should bring the full amount claimed into court. At the same time, and in my view it does not matter precisely in which order he did so, he exercised his discretion to give leave to amend the writ by substituting for ‘Sterling Travel’, ‘Atombrook Limited, T/a Serling Travel’. In doing that, he may have been purporting to exercise his powers under Ord 20, r 5(3) by correcting the name of a party in the circumstances there set out. Or perhaps (but it does not matter for present purposes) he was proceeding under Ord 2, r 1(2), which includes a general power of amendment.
In connection with Ord 20, r 5(3), it is at least to be said in favour of the defendant that it has conceded throughout that the plaintiff acted under a mistake which was entirely genuine, that they (I am referring throughout to the individuals who were in fact concerned as ‘the defendant’) had no doubt that these proceedings were directed to them and that they were never misled by the fact that the defendant was named ‘Sterling Travel’ and not ‘Atombrook Limited, T/a Sterling Travel’. Indeed, the mistake was not only genuine but entirely understandable, since this entity, Atombrook Ltd, was clearly purporting to trade as Sterling Travel, giving the impression in every way that there was a firm of travel agents called Sterling Travel. It was that which induced this mistake. In these circumstances it would be a case of regret, if not for shame, if the change in the rule under Ord 2, r 1, which had been designed to achieve the purposes set out in the note to it which I have read, was unable to deal with this situation. It would be a blemish on the law if the judge did not have power to do what he did.
Counsel for the defendant submits, nevertheless, that that is the position. He has taken two points, of which the second falls into two parts.
The point which I take first is that since this was a final judgment, albeit a default judgment, there was no power to amend the writ once judgment had been entered. Therefore, he said, as I followed his submission, that even if the judge was correct in setting the judgment aside as he did, nevertheless there was no power to amend the writ thereafter. Accordingly the writ falls away, the judgment having been set aside; and if the plaintiff wishes to start again the ordinary rules would apply, enabling the defendant to defend unconditionally.
Counsel for the defendant bases that on a summary of three authorities referred to in a note to Ord 20, r 5 (which I have mentioned) in The Supreme Court Practice 1988 vol 1, para 20/5–8/14 which is somewhat cautiously worded. Having referred in the first paragraph to interlocutory judgments and decrees in Admiralty actions leaving damages to be assessed, the second paragraph states: ‘But after final decree or judgment the Judge of first instance cannot, or at all events will not, amend the pleadings or add new parties … ' Then there is a reference to three cases, of which the latest, was in 1907. Counsel for the defendant offered to refer us to them but he described them as ‘gnomic’ and was conscious, at any rate to some extent, of the passage of time and of the importance that counsel must be selective in their submissions. We have therefore not seen those cases;
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but counsel for the defendant did not suggest that they were any more definite than the note.
However, he was right to refer us to a decision of Oliver J in Midland Bank Trust Co Ltd v Green (No 2) [1979] 1 All ER 726 at 733, [1979] 1 WLR 460 at 468, where there are remarks on the power to amend after judgment. I do not propose to read what Oliver J there said. It is perhaps not entirely clear whether he took the view that the general jurisdiction of the court to give leave to amend pleadings ‘even after judgment’, the phrase which he used, was intended to cover the position where the judgment is final but execution and enforcement proceedings are still pending, as in the present case. I think his language is capable of being construed in that way, that pending enforcement there is still power to amend the proceedings even after final judgment. But he was admittedly dealing with a different situation. However, no case having been cited which precludes the court from amending the pleadings under Ord 20, r 5 after final judgment, and having regard to the cautious way in which the note in The Supreme Court Practice is expressed, I would hold that there is no reason in principle, particularly given the width of the new Ord 2, r 1, which precludes the court in appropriate cases from amending the pleadings and proceedings even after final judgment. There being no clear authority to the contrary, and having regard to Ord 2, r 1(1) and (2), I reject the first submission of counsel for the defendant as being contrary to that provision.
I then come to the two matters which counsel for the defendant put in the forefront. He said that the defendant was entitled to have this judgment set aside ex debito justitiae on the ground that it was a total nullity and not merely one which had been obtained irregularly, even though his own summons had applied to have it set aside on the ground that it had been obtained irregularly. This is a somewhat complex argument, since counsel for the defendant cannot challenge the judge’s conclusion under Ord 2, r 2(1), to that extent clearly unappealable, that the application to set aside was not made within a reasonable time. But counsel for the defendant submits, as I understand it, that that does not matter, because the judgment was not merely one which has been obtained irregularly, but a nullity. In that context he relied on the remarks of Diplock LJ in Harkness v Bell’s Asbestos and Engineering Ltd [1966] 3 All ER 843 at 846, [1967] 2 QB 729 at 736.
Counsel for the defendant claims that it was a nullity on two grounds. First, and this is the order which he adopted, the writ was served on the defendant at an address other than its registered address. In that regard he relied on s 725(1) of the Companies Act 1985, which provides:
‘A document may be served on a company by leaving it at, or sending it by post to, the company’s registered office.’
That provision is echoed in Ord 10, r 1(2) and (7) and Ord 65, r 3(2), but I do not think it is necessary to refer to those rules, which do not go further than s 725. Counsel for the defendant submits that a writ served on a body corporate elsewhere than at its registered address is simply a nullity and that although the word in the section is ‘may’ it is to be read as ‘must’. For that purpose he relies on a decision of Eve J in Vignes v Stephen Smith & Co Ltd (1909) 53 SJ 716, in which a writ had been served on a company elsewhere than at its registered office and Eve J held that that writ could not stand. He said in relation to the predecessor of s 725:
‘Now counsel for the plaintiff points out that the words in the section and in the rule are “may be served” and not “must be served,” and he says that the court may look at the surrounding circumstances and say whether the fact that the writ has been issued has been brought home to the company, and whether the company have not done all that is necessary for that purpose, and he cited cases where the writ was not set aside, though the rule had not been strictly adhered to. Those cases were mostly cases of foreign companies, and are not really germane to the present case. Here the question is whether it is competent to serve a company with a writ except
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in the prescribed form. I am precluded by the decisions cited by the defendants’ counsel from holding that the writ has been properly served. The rule and the section clearly indicate that the only way in which a writ can be served on a company is by leaving it at or sending it by post to the registered office. There will therefore be an order setting aside the writ.’
There are a number of things to be said about that decision, apart from the fact that it does not appear to have been referred to in any subsequent case, at any rate not one which has been cited to us. First, the judge was not concerned with any application for amendment of the address for service, or of the process, or of anything which would have been in the previous Ord 70 or the predecessor of what is now Ord 2, r 1. That simply did not arise. The only question was whether the writ could stand or whether it should be set aside.
Second, the strictness of that interpretation of the word ‘may’ in legislation which deals with service by various means is not borne out by two subsequent decisions. The first was a decision of this court in Re Sharpley and Manby’s Abitration [1942] 1 All ER 66, [1942] KB 217, in which the relevant statutory provision stated that one of the ways of serving process might be by registered post. But it was held that sending it by ordinary post was a sufficient compliance with the word ‘may’ in that provision. It is true that the result of that case can also be justified by reference to another provision which rendered it sufficient if the process had been brought to the attention of the defendants.
That was pointed out in the second of these cases by Wynn-Parry J in Stylo Shoes Ltd v Prices Tailors Ltd [1959] 3 All ER 901 at 905, [1960] Ch 396 at 405. He dealt with Re Sharpley and Manby’s Arbitration and pointed out that the decision could be explained on the basis that another part of that provision was satisfied, and that it was not necessarily based on the interpretation of the word ‘may’. But he went on:
‘But there is another point which to my mind was fatal to the tenants in this case. On the reasoning of the members of the Court of Appeal in Tennant v. London County Council ((1957) 121 JP 428) I feel constrained to construe s. 23(1) as being permissive so far as the mode of service is concerned. It is perfectly true, as was pointed out by counsel for the tenants, that the requirement that the notice etc. is to be in writing is imperative—“Any notice, request, demand or other instrument under this Act shall be in writing”; but then when the subsection goes on to deal with service the permissive verb “may” is used, and that is in clear contradistinction to the imperative “shall“. I can see no canon of construction which would entitle me to qualify the nature of the verb “may” by anything that has gone before in the subsection.’
It is true, of course, that that was an entirely different provision from s 725 of the 1985 Act and it may well be that the decision of Eve J is still good law so far as what is now s 725 is concerned, viewed in isolation.
But even if that is so, and I must say that I have some doubts as to why ‘may’ must be construed as ‘must’ in that provision, it appears to me quite clear that even if there were an irregularity under the statute to that extent, and therefore also under the rules which contain provisions to the same effect, it would nevertheless be insufficient to render the proceedings a nullity so as to entitle the defendant to have them set aside ex debito justitiae. Any other view would produce an extraordinary result in the face of Ord 2, r 1 and the note to it which I have read. Accordingly I would reject that submission.
I should add that, among other cases, we were referred to the decision of this court in White v Weston [1968] 2 All ER 842, [1968] 2 QB 647. Russell and Sachs LJJ held that a judgment should be set aside unconditionally ex debito justitiae without referring to the new rule because it was a plain case of the defendant being totally unaware of the proceedings from the beginning to the end of the history. Both Russell and Sachs LJJ thought that one did not get much assistance from considering whether a judgment is to be described as having been obtained irregularly or whether it was a nullity. In a passage
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with which Sachs LJ agreed (see [1968] 2 All ER 842 at 848, [1968] 2 QB 647 at 662), Russell LJ said ([1968] 2 All ER 842 at 846, [1968] 2 QB 647 at 659):
‘I do not myself attach importance to the question whether it is proper to label a judgment obtained in circumstances such as this as “irregular” or “a nullity“. The defect is in my judgment so fundamental as to entitle the defendant as of right, ex debito justitiae, to have the judgment avoided and set aside.’
In my view there can be no question of the present case involving any defect of a fundamental nature, let alone one as fundamental as in White v Weston.
I come to the second point raised by counsel for the defendant, which at first sight appears to be more fundamental. He says that this was a writ issued against a non-existent person, since there was no firm called Sterling Travel. That is conceded. But it leaves open the question whether this is a proceeding issued against someone who can properly be described as non-existent, or merely against a defendant who has been misnamed or misdescribed. If it is the latter, then Ord 2, r 1 clearly applies, and Ord 20, r 5(3) probably as well. There are two helpful decisions of this court in that connection. The first was Davies v Elsby Bros Ltd [1960] 3 All ER 672, [1961] 1 WLR 170. A writ had been issued against ‘Elsby Brothers (a firm)’ and then amended by striking out ‘(a firm)’ and adding the word ‘Ltd.' after the limitation period had expired. It concerned an accident sustained by the plaintiff, who had been an employee both of the firm, Elsby Bros, and of the limited company which it subsequently became. The writ did not state on what date the accident occurred, so that it was impossible to ascertain from the writ whether the plaintiff had intended to sue one legal entity, the firm, or another legal entity, the company. In the view of the court that was fatal to the power to amend the writ. Devlin LJ dealt with the matter by saying that whether a writ was addressed to a non-existent party or whether it was a case of misnomer or misdescription must be decided on the basis of what a reasonable reader in the position of the defendant would conclude on receiving the writ. He said ([1960] 3 All ER 672 at 676, [1961] 1 WLR 170 at 176):
‘The test must be: How would a reasonable person receiving the document take it? If, in all the circumstances of the case and looking at the document as a whole, he would say to himself: “Of course it must mean me, but they have got my name wrong”, then there is a case of mere misnomer. If, on the other hand, he would say: “I cannot tell from the document itself whether they mean me or not and I shall have to make inquiries”, then it seems to me that one is getting beyond the realm of misnomer. One of the factors which must operate on the mind of the recipient of a document, and which operates in this case, is whether there is or is not another entity to whom the description on the writ might refer.’
Then he dealt with the facts of that case as an example. As one can see, given the absence of the date of the accident sued on, it would be impossible for any objective reader to know, or to be sure, from the writ whether the plaintiff intended to sue the firm or the company; he would have to make inquiries as to when the alleged accident took place and so forth.
Of course, in the present case there was never the slightest doubt in the mind of the defendant that the plaintiff intended to sue it and that it was the person with whom this case was concerned. From start to finish it knew that perfectly well, and in my judgment it was taking steps throughout to avoid the pursuit of this claim against it. Undaunted, however, counsel for the defendant said that this still left it open for an objective person to have construed the writ in a different way. He was suggesting, though I find it impossible to follow the argument in full or to accept it, that an objective person, although knowing all the facts which the defendant knew, might still have thought that this plaintiff intended to sue a firm called Sterling Travel which might be an existing entity, or something of that kind. That is fanciful and I reject it. The matter is put beyond doubt by a further decision of this court in Whittam v W J Daniel & Co Ltd [1961] 3 All ER 796, [1962] 1 QB 271. In that case a limited company was sued within the
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limitation period but without adding the word ‘Limited’, and therefore appeared to have been sued in the name of a firm. The court allowed the word ‘Limited’ to be added after the limitation period had expired, and distinguished Davies v Elsby Bros Ltd [1960] 3 All ER 672, [1961] 1 WLR 170. Donovan LJ quoted the test of Devlin LJ to which I have referred and said ([1961] 3 All ER 796 at 799, [1962] 1 QB 271 at 277):
‘Applying that test, there could have been no doubt in the mind of the defendants when they got the writ that it was they whom the plaintiff intended to sue and that she had simply got the name wrong.’
Danckwerts LJ said that the case was plainly distinguishable from Davies v Elsby Bros Ltd because:
‘… in the present case, there is no other entity to which the description in the writ could be taken to refer.’
(See [1961] 3 All ER 796 at 802, [1962] 1 QB 271at 282.)
He went on:
‘On the other hand, counsel for the defendants’ argument is that it is a description which describes nothing and, therefore, is an action against nobody, and, therefore, it would be improper and against the rules to put in the defendants in place of a person which did not exist. I cannot accept that argument. It seems to me that this is a case in which the description could only refer to the defendants and would not be taken by any reasonable person to refer to anybody but the defendants.’
That authority applies precisely to the present case. Although at first sight a more fundamental point, one can therefore see why counsel for the defendant put it second to the point which he took on service. In my view it is simply untenable in the face of the authorities. This is a case which falls plainly within the scope of the new Ord 2, r 1. The judgment had been obtained irregularly in the two respects to which I have referred. But it could still be amended, although it was a final judgment, both under Ord 2, r 1(2) and Ord 20, r 5. The defendant was not entitled to have it set aside as of right. It was only entitled to have it set aside, as it was, under Ord 13, r 9. Proceeding under that provision the judge was entirely right to impose the condition that the defendant should bring the amount claimed into court, and he was also entitled to amend the name of the defendant in the writ as he did.
I would dismiss this appeal.
SIR JOHN MEGAW. I agree that the appeal should be dismissed for the reasons that have been given by Kerr LJ.
I would add a few paragraphs. First, I would like to express my sympathy with counsel for the defendant for the fact that he had an extremely difficult row to hoe because, to carry on the metaphor, the ground which he had to plough was far from fertile. But I would pay tribute to the thoroughness of the research and the diligence with which he has put forward the points which, I should also say, were expressed with admirable fullness and clarity in his skeleton argument.
The only issues on which I desire to add anything to what Kerr LJ has said (it may be nothing more than repetition) is in relation to what appears to me to be the only issue in this case which can really be said to involve an important question of principle. That is dealt with by counsel for the defendant in his skeleton argument under the heading ‘Scope and operation of the Rules of the Supreme Court O.2’.
He sets out the relevant part of RSC Ord 2, r 1(1), including the provision that any ‘failure to comply with [the Rules of the Supreme Court] … shall be treated as an irregularity and shall not nullify the proceedings, any step taken in the proceedings, or any document, judgment or order therein’. Counsel for the defendant goes on to submit that there are certain failures, nevertheless, which fall outside the scope of that part of the order and which will render proceedings, or any subsequent steps in the proceedings,
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nullities. In other words, he submits that, as the position was on the authorities before the amendment was made bringing in the present Ord 2 in 1964, there is a distinction between things that go wrong procedurally which constitute invalidity so as to make the whole of the proceedings invalid as a matter of course on the one hand and irregularities in procedure on the other.
I do not propose to go into the submission that, in spite of the way in which Ord 2, r 1 is now framed, there still remain failures, which presumably mean failures in compliance with some part of the Rules of the Supreme Court, which will render proceedings nullities. The two ‘failures’ which appear to me to be of possible significance, as set out in the skeleton argument of counsel for the defendant, are, first, the bringing of proceedings against a non-existent party and, second, the failure to comply with a statutory requirement. He also sets out a third, with which I do not think it is necessary to deal.
If indeed there were in this case nullities in the sense of rendering the proceedings invalid, whether by virtue of proceedings having been brought against a non-existent party, or by virtue of failure to comply with a statutory requirement, then, while the judge would properly have set aside the judgment at the instance of the defendant, he would not have been entitled to make such setting aside conditional. But the judge did not regard the irregularities as being other than irregularities coming within Ord 2, r 1.
So far as there is a suggestion that invalidity is caused by the bringing of proceedings against a non-existent party, the simple answer on the facts of this case is that the proceedings here are not properly to be treated as against a non-existent party. There was merely a misnomer. Once you get from persons representing the defendant what appears in the telex which United Air Travel Services Ltd sent on 24 August 1987, it becomes quite impossible to believe that the defendant itself regarded these proceedings as being against a non-existent party. It is to be assumed, as the defendant would wish us to assume, that that telex was sent on behalf of, and with the authority of, the proper defendant, Atombrook Ltd.
It is perhaps theoretically possible in some circumstances that, though the defendant itself did not regard the proceedings as being against a non-existent party, some person with the same knowledge as the defendant might have so regarded them, that is to say such a person might have taken a different view from that which the defendant itself took. But in the circumstances of this case that is not a probable, nor, I think, a conceivable, hypothesis.
With regard to the second of the alleged nullities or invalidities, the failure to comply with the statutory requirement, as Kerr LJ has pointed out, the statutory requirement which is asserted here is s 725 of the Companies Act 1985. Subsection (1) says that a document may be served on a company by leaving it at, or sending it by post to, the company’s registered office. This document, for reasons which are apparent and which really cannot be put as being in any serious way the fault of the plaintiff, was not addressed to Atombrook Ltd’s registered office, but in my view that does not, in the circumstances, by itself result in invalidity: it is merely an irregularity. How serious an irregularity a failure to state a company’s address accurately may be will of course depend on the circumstances. It may well be that it would in some cases be an irregularity that would justify the court, without more, in setting aside unconditionally any judgment that had been entered. But it would be absurd to suggest that any failure to send the writ to the correct address, as for example some minor error in the address which caused no conceivable prejudice to the defendant, could result in the whole of the proceedings being invalid; and in this case I see no basis whatever for suggesting that there was a failure to comply with the statutory requirement such as to invalidate the proceedings.
The judge thought it right to set aside the judgment on the basis that there was at least a possibility that the defendant had not had the opportunity to appear in court and put its case before judgment was entered, because it may not have had notice of the writ and of the proceedings by that time. If that is a possibility, then it could be an injustice that it should not have the judgment set aside and the opportunity to be heard and to put its
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defence. But in the present case, having regard to all the relevant circumstances, I see no basis for saying that the judge, in setting aside the judgment, was wrong in making that order conditional on the payment into court, having regard to the basis on which he reached that decision, namely that the defence, as put forward in the documents that were before him (and here of course I am not speaking about what may be the defence in the ultimate trial but the defence as it appeared in the documents before the judge) was indeed shadowy.
I agree that the appeal should be dismissed.
Appeal dismissed. Payment into court to be within 14 days of judgment in Court of Appeal. Defence to be served within 14 days of same date.
Solicitors: Brutton & Co, Fareham (for the defendant); Lamport Bassitt, Southampton (for the plaintiff).
Wendy Shockett Barrister.
Re C and another (minors) (wardship: adoption)
[1989] 1 All ER 395
Categories: FAMILY; Children
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): PURCHAS LJ AND SIR DENYS BUCKLEY
Hearing Date(s): 4 OCTOBER 1988
Adoption – Removal of child outside Great Britain – Removal by relative – Relative – Great-uncle – Whether great-uncle a ‘relative’ – Whether great-uncle permitted to remove child outside Great Britain for adoption – Adoption Act 1976, ss 56(1), 72(1).Adoption – Ward of court – Guardianship order – Removal of child outside Great Britain – Removal by guardian – Wards’ great-uncle and great-aunt wishing to adopt wards and remove them to Australia – Whether court having inherent jurisdiction to make guardianship order in respect of wards of court – Whether court should exercise jurisdiction to make guardianship order which derogates from wardship jurisdiction.
Following the breakdown of their parents’ marriage the two young children of the marriage were made wards of court and committed to the care of the local authority, which was given leave to place them with foster parents with a view to adoption. The childrens’ paternal great-uncle and great-aunt, who were domiciled in Australia, wished to adopt the children and were regarded as suitable adopters by the local authority, which applied to the court for leave to remove the children from the jurisdiction and place them with the great-uncle and great-aunt in Australia as prospective adopters. Under s 56(1)a of the Adoption Act 1976 the removal of children for adoption outside Great Britain by any person who was not ‘a parent or guardian or relative of the child’ was prohibited. The local authority accordingly made an interim application for a declaration that the great-uncle was a ‘relative’ for the purposes of s 56(1) or alternatively an order making the great-uncle and great-aunt ‘guardians’ of the children. The judge held that for the purposes of the 1976 Act a great-uncle was not a ‘relative’ and he refused to make a declaration to that effect but with a view to leaving open the possibility of adoption by the great-uncle and great-aunt as ‘guardians’ he appointed them guardians of the children pending the hearing of the application for leave to remove the children from the
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jurisdiction. The mother, who was opposed to the adoption by the great-uncle and great-aunt, appealed against the order and the local authority cross-appealed against the judge’s ruling that a great-uncle was not a ‘relative’.
Held – (1) Having regard to the clear and precise definition of ‘relative’ in s 72(1)b of the 1976 Act, which included ‘uncle’ but not ‘great-uncle’, a great-uncle was not a ‘relative’ for the purposes of s 56(1) of that Act. The local authority’s cross-appeal would therefore be dismissed (see p 399 d e and p 401 h, post).
(2) It was doubtful whether the court had inherent jurisdiction to make a guardianship order when there was an existing wardship, but, even if there was, it was a wrong exercise of that jurisdiction to make a guardianship order which derogated from the wardship jurisdiction being exercised by the court itself and the local authority’s statutory powers arising out of the children being in their care. The mother’s appeal against the interim guardianship order would therefore be allowed (see p 400 f and p 401 h, post); Re M (a minor) (adoption: removal from jurisdiction) [1973] 1 All ER 852 distinguished.
Notes
For restrictions on the removal of children for adoption abroad and for who is a relative for the purposes of adoption, see 24 Halsbury’s Laws (4th edn) paras 640, 653.
For the Adoption Act 1976, ss 56, 72, see 6 Halsbury’s Statutes (4th edn) 488, 501.
Cases referred to in judgments
M (a minor) (adoption: removal from jurisdiction), Re [1973] 1 All ER 852, [1973] Fam 66, [1973] 2 WLR 515.
M’Cullochs (minors), Re (1844) 6 I Eq R 393, LC.
McGrath (infants), Re [1893] 1 Ch 143, CA.
Interlocutory appeal
The mother of two infant children, who were wards of court, appealed against the order of his Honour Judge Aglionby, sitting as a judge of the High Court in wardship on 8 September 1988, making the wards’ paternal great-uncle and great-aunt guardians of the wards within the jurisdiction pending the hearing of an application by Kent County Council, to whom the care of the wards had been committed, for leave to remove the wards from the jurisdiction. The local authority cross-appealed against a ruling by the judge that a great-uncle was not a ‘relative’ for the purpose of the application to remove the wards from the jurisdiction. The facts are set out in the judgment of Purchas LJ.
Jean Adele Williams for the mother;.
Caroline Budden for the council.
4 October 1988. The following judgments were delivered.
PURCHAS LJ. The appellant in this case is the mother. She appeals from an order of his Honour Judge Aglionby, sitting as a judge of the High Court in wardship, made on 8 September 1988. The first respondents to the appeal are the Kent County Council (to whom I shall refer as ‘the council’). There is before the court not only the notice of appeal but a respondent’s notice by which the council challenge part of the judge’s order.
The wards involved are Sara, who was born on 16 November 1985, and Julie, who was born on 1 January 1987. They were made wards of court on the council’s originating summons as plaintiff, dated 28 February 1987. The defendants to that summons were the mother, the father and the maternal grandparents. Apart from the mother, the other defendants have taken no part in this appeal.
The history can be shortly stated. The parents are still very young. They had a stormy marriage with a number of breakdowns, but it finally broke down in August 1988. It is,
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however, quite apparent that serious difficulties affecting the children had arisen before that causing the council to issue the summons, to which I have referred, in February 1986. There is an elder daughter who at all material times has been living with the maternal grandparents, and the court is not concerned with her.
Sara and Julie have been in the care of the council, who placed them with foster parents, granting access to the family, ie the mother, the father and the maternal grandparents.
On 15 January the summons came before Wood J. He made the following interim orders. There were two orders, one in respect of each of the wards, which are in the same terms. It was ordered that each of the children should remain a ward of court during her minority or until further order, that they should be committed to the care of the council under s 7(2) of the Family Law Reform Act 1969, that the council should have leave to place each of the wards with long-term foster parents with a view to adoption and that there should be one more period of access by the first, second, third and fourth defendants, ie the mother, the father and the maternal grandparents, within the following four weeks and thereafter there should be no more access to any member of the family. Leave was given to persons named as the prospective adopters, ie the persons referred to in the earlier part of the order, unidentified, to issue adoption proceedings in the county court. Apart from costs, the final provision in each order was that the matter should be brought back to court if adoption proceedings had not been issued within nine months.
The whole purpose and tenor of those orders is quite clear. There was to be a final separation between the family and the two wards and the council should proceed in proper order to achieve the adoption of these two young girls.
The history of the matter did not turn out as envisaged. As a result of a summons, to which I must come in a moment, the main wardship issues will once again be before the court on 10 October, that is next Monday.
After the orders had been made by Wood J, the council set about looking for suitable adopters. Whilst they were doing this, they were contacted by a paternal great-uncle of the wards, Mr H and his wife, who gave to the council every appearance of being suitable adopters. They are domiciled in Queensland, Australia, and have had no contact with the wards although each of them originated in this country.
The mother, who had accepted the orders of Wood J in the sense that she made no appeal against them, which meant that her contact with the two children would be determined, now objects to an adoption in Australia on two grounds. The first is that the children will be brought up as Australians and the second is that she objects to the influence, however remote, of her husband’s family in their upbringing. Those are matters with which this court is not concerned and are clearly matters which, if appropriate, will be considered on the restored hearing of the summons.
Becoming aware of the interest of the paternal great-uncle and his wife (to whom I shall for convenience refer as ‘the prospective adopters’), the council issued summonses in respect of both wards. On 11 August they issued summonses in equivalent terms to this effect:
‘… to show cause why an order should not be made that the Plaintiff do have leave to remove the above-named minor from the jurisdiction and place the said minor with [the prospective adopters] both of [an address in Queensland] to the intent that the said [prospective adopters] should adopt the said minor in Australia.’
So that was a straightforward summons in the wardship proceedings in each case.
Five days later, however, the council issued two more summonses. These sought in each case the following:
‘(1) [A declaration] that for the purposes of the Adoption Act 1976 “relative” includes a great uncle. (2) Alternatively that [the proposed adopters] be appointed guardians to the above named Minor. (3) That the Plaintiff [ie the council] do have
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leave to place the [minor] with the [prospective adopters] [and these words are important] within the jurisdiction as foster parents pending the hearing of the Plaintiff’s summons herein dated 11 August 1988.’
There is also an application for leave to apply for passports and visas for Australia.
That summons on its face only sought interim relief pending the hearing of the main summons. Although the perspective may have been distorted by the passage of time, the return date for the second summons was 8 September whereas, of course, the return date for the earlier summons is next month. So the period for this order to run was about a month.
The summonses, we have been told, very properly were issued because the council were anxious not to offend against the provisions of the Adoption Act 1976 relating to adoption by persons not domiciled in this country, and it is convenient at this stage to refer shortly to the relevant provisions of that Act. Section 55 of the 1976 Act deals with the adoption of children abroad, and reads as follows:
‘(1) Where on an application made in relation to a child by a person who is not domiciled in England and Wales or Scotland an authorised court is satisfied that he intends to adopt the child under the law of or within the country in which the applicant is domiciled, the court may, subject to the following provisions of this section, make an order vesting in him the parental rights and duties relating to the child.
(2) The provisions of Part II relating to adoption orders [except for the various sections there enumerated which are not relevant] shall apply in relation to orders under this section as they apply in relation to adoption orders subject to the modification that in section 13(1) for ”19” and ”13” there are substituted ”32” and ”26” respectively.’
Those two periods of time, which are both extended, relate to periods of time over which the child should have resided with the prospective adopter.
I need not refer to sub-ss (3) and (4) of s 55. I pass to s 56, which deals with the restriction on removal of children for adoption outside Great Britain. Subsection (1) provides:
‘Except under the authority of an order under section 55 … it shall not be lawful for any person to take or send a child who is a British subject or a citizen of the Republic of Ireland out of Great Britain to any place outside the British Islands with a view to the adoption of the child by any person not being a parent or guardian or relative of the child … ’
Then the section provides that any person who does so is guilty of an offence.
‘Relative’ is one category of person who is not caught by s 56(1). The definition of ‘relative’ is to be found in s 72(1), and reads as follows:
”’relative” in relation to a child means a grandparent, brother, sister, uncle or aunt, whether of the full blood or half-blood or by affinity and includes, where the child is illegitimate, the father of the child and any person who would be a relative within the meaning of this definition if the child were the legitimate child of his mother and father.’
Whilst referring to statutory provisions I want to mention only one other: that is s 17(1) of the Guardianship of Minors Act 1971, which provides:
‘Nothing in this Act shall restrict or affect the jurisdiction of the High Court to appoint or remove guardians or otherwise in respect of minors.’
The matter came before Judge Aglionby, who declined to declare that ‘relative’ included a great-uncle but appointed the prospective adopters as guardians of the two
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wards. The mother appeals, asserting that it was wrong of the judge to have appointed the prospective adopters as guardians. Counsel for the mother, in her submissions in support of the appeal, has submitted that, where there is a full provision to deal with the question of adoption by persons not domiciled within the country and the dealings with the wards of court are already under the wardship jurisdiction of the court, it was a wrong exercise of jurisdiction to appoint guardians whether that be under the inherent jurisdiction of the court to appoint guardians or otherwise.
Counsel for the council supports the course taken by the judge, but by her respondent’s notice asserts that he was wrong to decline to make a declaration that ‘relative’ includes ‘great-uncle’. Counsel submits further that he was right to act within the inherent jurisdiction of the court to appoint the prospective adopters as guardians even if she is wrong in her assertion that the definition of ‘relative’ extends to ‘great-uncle’.
The judge, in an admirable judgment, has recognised the problems and has accurately and carefully set out the factual background, to which it is not necessary for me to refer in any greater detail.
The appeal raises two very short points. I take them in the order in which they appear in the judge’s judgment. One is whether he was right to decline to make the declaration sought, and I turn to the passage in his judgment:
‘I declare that for the purposes of the Adoption Act 1976 relative does not include great-uncle. The definition in s 72 is clear and precise and it would not be right to judicially interpret uncle to include great-uncle. Although grandparent is included, if Parliament had wished to include great-uncle it could have done so and the [council] must have realised this was the likely outcome because the second part of their application is that the [prospective adopters] be appointed guardians.’
I express my gratitude to both counsel for the helpful submissions they have made both on this and the second point. I find it impossible to fault the approach made by the judge on this first aspect of the case. If one needed any further assurance, it would come from the realisation that this definition applies throughout the whole of the 1976 Act where it refers to children. That includes s 13(1), where these particular periods of qualification are laid down:
‘Where—(a) the applicant, or one of the applicants, is a parent, step-parent or relative of the child, or (b) the child was placed with the applicants by an adoption agency or in pursuance of an order of the High Court, an adoption order shall not be made unless the child is at least 19 weeks old and at all times during the preceding 13 weeks had his home with the applicants or one of them.’
It is those two periods of ‘19 weeks old’ and ‘13 weeks’ which are enlarged to ‘32’ and ‘26’ respectively in s 55(2). In s 13 the category of persons involved under sub-s (1)(a) is ‘a parent, step-parent or relative of the child’.
‘Parent’ and ‘step-parent’ are quite precise, and ‘relative’, in my judgment, ought to be construed in the same sense. Therefore, if a wider definition of ‘uncle’ than ‘uncle’ without qualification was adopted, it would strike at the efficacy of the provision under s 13(1) just as it would strike at the protection in respect of s 56 as regards persons who act in relation to adoption outside the jurisdiction, which in my judgment it would be wrong to distort.
For those reasons and the reasons given by the judge, I have come to the conclusion that his judgment on this aspect of the case was correct, and I would not disturb it.
Turning now to the second point, the judge recognised the purposes of s 55 in these terms:
‘This provides a restriction and requires where the applicant is seeking an order that the child is of certain age and has lived with the applicant for a period of time which these children have not.’
Page 400 of [1989] 1 All ER 395
Then the judge referred to a case in the Family Division, Re M (a minor) (adoption: removal from jurisdiction) [1973] 1 All ER 852, [1973] Fam 66, which concerned a purported adoption by two Danish people resident and domiciled in Denmark of a child in the care of the local authority and placed with foster parents in this country. The judge referred to part of the judgment of Brandon J in which the judge indicated that, if the applicants had been made guardians, they would have escaped the prohibitions in the sections to which I have referred (see [1973] 1 All ER 852 at 856, [1973] Fam 66 at 71).
The judge was referred to a passage in Lowe and White Wards of Court (2nd edn, 1986) p 246 for the proposition that he was entitled to make guardianship orders notwithstanding the existence of the wardship proceedings and, indeed, was making them within those same wardship proceedings. The authors refer to Re McGrath (infants) [1893] 1 Ch 143 as indicating that there was residing in the court an inherent power to appoint guardians notwithstanding the provisions of the Guardianship of Minors Act 1971, because s 17(1) of that Act specifically provides for the preservation of the inherent jurisdiction.
Re McGrath (infants) was dealing with the dismissal and reappointment of another guardian in very special circumstances. In that case mention is made of the ‘jurisdiction of the Court of Chancery [regarding children] who had no property’ (see [1893] 1 Ch 143 at 147). It was a different issue that was being considered from that which is being considered in the present case. It related to the doubt at one time, now well settled to be unfounded, whether the old Court of Chancery had, and the present Family Division has, an inherent jurisdiction to interfere with and deal with the guardianship of children even though there are no issues as to property, which was the basis of the old wardship jurisdiction.
That, in my judgment, does not take the matter very much further; nor, indeed, does the other case to which we were referred by counsel for the respondent, which was again a case of some venerability, Re M’Cullochs (minors) (1844) 6 I Eq R 393. In that case, during argument, counsel for the petitioner withdrew the part of the prayer which was seeking the substitution of one testamentary guardian by another or others and merely sought an order making the minors wards of court. Sugden LC held that it was not inconsistent with the testamentary guardianship to make the children also wards of court. As counsel for the mother submitted, that is the obverse side of the coin. Here the position is quite different. There is an existing jurisdiction being exercised in accordance with the statutory powers now granted to the court by Parliament.
I agree with the submission of counsel for the mother that, whether or not there may be a residue of inherent jurisdiction which could in special circumstances be brought into play where there is a statutory lacuna, there is no statutory lacuna here and the welfare of these wards can be fully provided for under the existing wardship proceedings.
Now to return to the judgment of Judge Aglionby. Having considered the submission made by counsel on the same basis, the judge acknowledged the difficulty, having recognised that it was unusual, to say the least, to appoint as guardians persons who had never actually seen the children. He held that that was not, however, an absolute bar. I do not find it necessary to decide that as a point of law, because it does not really arise in this case. But I look to the reasons which motivated the judge to exercise such a jurisdiction as he might have had in the terms that he quite properly relates. I emphasise that, when I describe the motivation of the judgment as a device, I am in no way being opprobrious about it. It was a perfectly proper approach if it was a correct one in law. The judge said:
‘Introducing the [prospective adopters] to the children would not constitute the making or taking part in transferring the actual custody of any person for that purpose.’
That is dealing with the anxiety of the council not to offend against s 56. The judge continued:
Page 401 of [1989] 1 All ER 395
‘Of course the [council] do, however, wish to go further than merely introducing the [prospective adopters] to the children and in my judgment bearing in mind what is best for the children I ought to make the order if I can properly do so. At the main hearing it will allow the court to consider the main proposals for the future of the children. Whether the court approves is a different matter however. In making such an option available I do not take the view that appointing the [prospective adopters] as guardians breaks any statutory provisions. Brandon J would not have mentioned the possibility if it involved a clear breach of the statute. In my view although the [council] had the power given to them by Wood J to place with foster parents with a view to adoption it may well be that if the [council] placed the children with the [prospective adopters] then they could fall foul of the provision of s 56(1). In my opinion it is not an improper exercise for the court’s discretion and it may be helpful to the children that the option should be assessed. It is always open to the court to remove the [prospective adopters] as guardians and this can be considered by the court at the main hearing.’
I understand the judge’s reasoning and approach, but with great regret I have come to the conclusion that it was a wrong approach. I have come to this conclusion for a number of reasons. Going back for a moment to the summonses, the summons of 16 August 1988 requests that the council have leave to place the minor with the prospective adopters within the jurisdiction as foster parents pending the hearing of the council’s summons herein. That provision of the summons would have provided the council with the power within the jurisdiction to take all the steps necessary pending the hearing next week to make an introduction, albeit with a view to adoption if those steps proved fruitful.
I do not, with respect, share the anxieties expressed, which were apparently accepted by the judge, that, if that order had merely been acceded to by the judge, the whole process in the interests of these children would not have taken place during the four weeks with which we are concerned, and that the whole matter could remain in wardship to be dealt with on the next hearing. I have come to the conclusion, whether there is jurisdiction or not (and I have very grave doubts whether there is any inherent jurisdiction to make a guardianship order in the presence of an existing wardship), that, with respect to the judge, it was a wrong exercise of that jurisdiction to make the guardianship orders which are a derogation of the wardship jurisdiction being exercised by the court itself and, although not exactly the same but similar, the powers which had been given to the council under the care order made in the wardship proceedings.
Sympathising, as I do, with the judge, I have come to the conclusion that the part of his order which relates to the prospective adopters as guardians to either of these two minors was an order which he should not have made. I would therefore allow the appeal to the extent that that part of each of the two orders should be deleted, and dismiss the cross-appeal.
SIR DENYS BUCKLEY. I agree, and I do not think that I can usefully add anything to what Purchas LJ has already said.
Appeal allowed. Cross-appeal dismissed.
Solicitors: E A Morling & Sons, Maidstone (for the mother); W G Hopkin, Maidstone (for the council).
Bebe Chua Barrister.
Forsikringsaktieselskapet Vesta v Butcher and others (No 1)
[1989] 1 All ER 402
Categories: INSURANCE
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD TEMPLEMAN, LORD GRIFFITHS, LORD ACKNER AND LORD LOWRY
Hearing Date(s): 14, 15, 16, 17 NOVEMBER 1988, 26 JANUARY 1989
Insurance – Reinsurance – Risk insured – Breach of condition – Livestock insurance for Norwegian fish farm – Original insurance policy governed by Norwegian law – Reinsurance policy made in England covering 90% of liability – Both policies containing condition that 24-hour watch be kept on fish farm – Breach of 24-hour watch condition not rendering original policy null and void under Norwegian law if breach irrelevant to loss – Breach of condition rendering reinsurance policy null and void under English law irrespective of whether breach relevant to loss – Fish stock destroyed by storm – Insured in breach of 24-hour watch condition but breach irrelevant to loss – Norwegian insurers paying loss – Whether reinsurer liable to make good loss under resinsurance policy.
The plaintiffs, a Norwegian insurance company, insured the owners of a Norwegian fish farm against loss of fish and reinsured 90% of the risk with London underwriters. The insurance and the reinsurance policies each incorporated an identical condition that a 24-hour watch be kept on the farm and further provided that ‘failure to comply’ with any of the conditions would render the policy null and void. Following the loss of fish stocks in a storm the plaintiffs settled the owners’ claim and sought indemnity under the reinsurance policy from the defendant underwriters. A 24-hour watch would not have prevented the loss but the underwriters repudiated liability on the ground, inter alia, that there had been a breach of the 24-hour watch condition. The plaintiffs brought an action against the underwriters to recover the 90% indemnity. Under Norwegian law, which governed the insurance policy, the breach of the 24-hour watch condition did not render the policy null and void, despite the express words of the policy, because the breach was not relevant to nor causative of the loss. However, under English law, which governed the reinsurance policy, the breach of the 24-hour watch condition, whether relevant to the loss or not, rendered the reinsurance policy null and void. The judge held that, although the reinsurance policy itself was governed by English law, relevant clauses such as the 24-hour watch condition were to be construed according to Norwegian law because the reinsurance policy had been made back-to-back with the original policy, which was governed by Norwegian law, and, since under Norwegian law breach of the 24-hour watch condition did not provide a valid defence to the plaintiffs’ claim, the plaintiffs were entitled to judgment against the underwriters. The underwriters appealed to the Court of Appeal, which dismissed their appeal. The underwriters appealed to the House of Lords.
Held – Since on the true construction of the reinsurance policy the underwriters had agreed to indemnify the plaintiffs against the risks covered by the original insurance policy, the risks covered by the reinsurance policy were to be interpreted by reference to Norwegian law. The underwriters were therefore liable to indemnify the Norwegian insurers for 90% of the loss which was, under Norwegian law, a risk covered by the reinsurance policy, since once the word ‘failure’, in the phrase ‘failure to comply’, was incorporated from the original insurance policy into the reinsurance policy it meant ‘relevant’ or ‘causative’ failure in the English contract of reinsurance. It followed that since breach of the 24-hour watch condition was irrelevant to the loss it did not render the reinsurance policy null and void. The appeal would therefore be dismissed (see p 403 j, p 404 j to p 405 a c to f j, p 406 g, p 409 e f h, p 419 h to p 420 b and p 422 a b, post).
Page 403 of [1989] 1 All ER 402
Per Lord Bridge and Lord Griffiths. It is desirable that the Lloyd’s standard form of reinsurance be redrafted in grammatical, intelligible and unambiguous language (see p 404 a and p 409 f, post).
Decision of the Court of Appeal [1988] 2 All ER 43 affirmed.
Notes
For contracts of reinsurance, see 25 Halsbury’s Laws (4th edn) paras 209–215.
Cases referred to in opinions
Amin Rasheed Shipping Corp v Kuwait Insurance Co, The Al Wahab [1983] 2 All ER 884, [1984] AC 50, [1983] 3 WLR 241, HL.
Charrington & Co Ltd v Wooder [1914] AC 71, HL.
Gwyn v Neath Canal Navigation Co (1868) LR 3 Exch 209.
Hamlyn & Co v Talisker Distillery [1894] AC 202, [1891–4] All ER Rep 849, HL.
Helbert Wagg & Co Ltd, Re [1956] 1 All ER 129, [1956] Ch 323, [1956] 2 WLR 183.
Home Insurance Co of New York v Victoria-Montreal Fire Insurance Co [1907] AC 59, PC.
Insurance Co of South Africa v Scor (UK) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312, CA.
Njegos, The [1936] P 30, [1935] All ER Rep 863.
Pine Top Insurance Co Ltd v Unione Italiana Anglo Saxon Reinsurance Co Ltd [1987] 1 Lloyd’s Rep 476.
Prenn v Simmonds [1971] 3 All ER 237, [1971] 1 WLR 1381, HL.
Reardon Smith Line Ltd v Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co [1976] 3 All ER 570, [1976] 1 WLR 989, HL.
Royal Exchange Assurance Corp v Sjorforsakrings Aktiebolaget Vega [1901] 2 KB 567.
Schuler (L) AG v Wickman Machine Tool Sales Ltd [1973] 2 All ER 39, [1974] AC 235, [1973] 2 WLR 683, HL.
Wear (River) Comrs v Adamson (1877) 2 App Cas 743, [1974–80] All ER Rep 1, HL.
Appeal
The first defendant, James Neil Eric Butcher, a nominated Lloyd’s underwriter acting on behalf of himself and other underwriters (the underwriters), appealed with leave of the Appeal Committee of the House of Lords given on 3 March 1988 against that part of the judgment and order of the Court of Appeal (O’Connor, Neill LJJ and Sir Roger Ormrod) ([1988] 2 All ER 43, [1988] 3 WLR 565) given 30 October 1987 dismissing the underwriters’ appeal against the judgment of Hobhouse J ([1986] 2 All ER 488) given on 20 December 1985 whereby it was adjudged, inter alia, that the underwriters should pay the first respondent plaintiffs, Forsikringsaktieselskapet Vesta (Vesta), Nkr 1,223,243·64, being Nkr 611,638·59 as damages for breach of a reinsurance contract under which the underwriters had contracted to indemnify the plaintiffs for 90% of the risk covered in Vesta’s insurance policy with Fjordlaks Tafjord SA and Nkr 611,605·05 agreed interest thereon. The second and third defendants, Bain Dawes Ltd and its subsidiary Aquacultural Insurance Service Ltd (the brokers), sought affirmation of the order of the Court of Appeal. The facts are set out in the opinion of Lord Lowry.
Timothy Walker QC and Andrew Smith for the underwriters.
Andrew Longmore QC and Adam Fenton for Vesta.
Michael Ogden QC and Christopher Purchas for the brokers.
Their Lordships took time for consideration. 26 January. The following opinions were delivered.
26 January 1989. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Templeman and Lord Lowry. For the reasons they give I would dismiss the appeal.
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I wish also to record my concurrence in the views expressed by my noble and learned friend Lord Griffiths regarding the relationship normally to be found between contracts of insurance and contracts of reinsurance. I entirely agree with him as to the desirability of the Lloyd’s standard form of reinsurance being redrafted in grammatical, intelligible and unambiguous language. The only people who can expect to profit from the obscurities of the present Form J1 are the lawyers.
LORD TEMPLEMAN. My Lords, the business of the respondent Norwegian company, Vesta, comprises or includes the issue of insurance policies against the risk of loss from storm damage and other catastrophe being suffered by Norwegian fish farmers. The business of the appellant underwriters includes the issue of reinsurance policies against the risk of loss being suffered by insurers of fish farmers in many parts of the world. Vesta insured a Norwegian fish farmer. Vesta effected reinsurance with the underwriters for 90% of the liability of Vesta to the fish farmer. The fish farmer suffered loss as a result of storm damage and Vesta paid the loss. In these proceedings Vesta seek to recover 90% of the loss from the underwriters. The trial judge (Hobhouse J) ([1986] 2 All ER 488) and the Court of Appeal (O’Connor, Neill LJJ and Sir Roger Ormrod) ([1988] 2 All ER 43, [1988] 3 WLR 565) found in favour of Vesta. The underwriters appeal.
When both the insurance policy by Vesta in favour of the fish farmer and the reinsurance policy by the underwriters in favour of Vesta were under negotiation the brokers required both policies to incorporate the following terms:
‘SPECIAL CONDITIONS AND WARRANTIES
It is warranted that a 24-hour watch be kept over the site.
CLAIMS CONTROL CLAUSE
In the event of loss hereunder, no payment, offer or compromise shall be made without the consent of underwriters who shall have sole control of all negotiations. Failure to comply with any of the warranties outlined hereunder will render this policy null and void. All warranties to be completed at the assured’s expense.’
A 24-hour watch was not kept on the fish farm so that there was a breach of warranty in each policy. Under Norwegian law, which governed the insurance policy issued by Vesta to the fish farmer, the breach of warranty did not render the policy null and void, despite the express words of the policy, because the breach was irrelevant to the loss. A 24-hour watch could not have prevented the loss of fish caused by the storm. Under English law, which governed the reinsurance policy issued by the underwriters to Vesta, the breach of warranty, whether relevant to the loss or not, rendered the reinsurance policy null and void. Therefore, say the underwriters, they are not liable to pay Vesta under the reinsurance policy although Vesta were liable to pay the fish farmer under the insurance policy.
The question is whether the reinsurance policy, on its true construction, insured 90% of the liability of Vesta under the insurance policy or 90% of the liability which would have been incurred by Vesta if the insurance policy had been governed by English law.
By the reinsurance policy, in terms both inelegant and ungrammatical—
‘the Underwriters hereby agree to reinsure against loss to the extent and in the manner hereinafter provided. Being a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Company [Vesta] and that the Company retains during the currency of this Policy at least the amount stated in the Schedule as the retention on the identical subject matter and risk and in identically the same proportion on each separate part thereof but, in the event of the retention being less than that stated in the Schedule, the Underwriters’ lines to be proportionately reduced.’
The reinsurance policy thus emphasised that the two policies were on identical terms, that the risks of the underwriters and Vesta were identical and that a claim settled under
Page 405 of [1989] 1 All ER 402
the insurance policy would be a claim payable under the reinsurance policy. By the operative parts of the reinsurance policy—
‘the Underwriters … hereby bind ourselves … to pay or make-good to the Company all such loss as herein provided, such payment to be made after such loss is proved … ’
The schedule defined the reinsured as Vesta and the original assured as the fish farmer. Retention was 10%. The sum reinsured was 90% of Nkr 750,000, the amount insured by Vesta. The period of reinsurance was expressed to commence and expire at the hour expressed in the original policy. ‘The perils and interest reinsured hereunder’ were expressed to be ‘LIVESTOCK REINSURANCE Rainbow Trout and Salmon only, the property of [the fish farmer] only as more fully set forth in the original policy’.
By the reinsurance policy, the underwriters promised that, if Vesta became liable for a loss under the insurance policy, then the underwriters would make good 90% of the loss. Vesta became liable for a loss under the insurance policy and the underwriters must perform and observe their promise in the reinsurance policy. The provision incorporated in the reinsurance policy that on a breach of warranty the reinsurance policy shall become null and void is identical with the provision in the insurance policy that on a breach of warranty the insurance policy shall become null and void. In my opinion, in the absence of any express declaration to the contrary in the reinsurance policy, a warranty must produce the same effect in each policy. The effect of a warranty in the reinsurance policy is governed by the effect of the warranty in the insurance policy because the reinsurance policy is a contract by the underwriters to indemnify Vesta against liability under the insurance policy. The reinsurance policy could have provided expressly that the warranties were to have different effects in the two policies. The reinsurance policy could have limited the liability of the underwriters by providing that a breach of warranty by Vesta would absolve the underwriters even if an identical breach of warranty by the fish farmer did not absolve Vesta. Any such limitation would, however, have been inconsistent with the concept of reinsurance, unacceptable as a basis for the business relationships between brokers, insurers and reinsurers and contrary to the language of the reinsurance policy which insists on the identity of terms, subject matter and risk involved in both the reinsurance policy and the insurance policy.
Counsel, in the course of a painstaking and forceful address on behalf of the underwriters, submitted that the ‘follow settlements’ clause, which provided for the reinsurance ‘to follow the settlements’ of Vesta, was emasculated by the incorporated ‘claims control clause’ which provided that no payment, offer or compromise should be made without the consent of underwriters who should have sole control of all negotiations. For this purpose, he cited the judgment of Robert Goff LJ in Insurance Co of South Africa v Scor (UK) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312 at 331. In deciding this appeal I decline to follow counsel down the trail of insurance jargon in a reinsurance policy and incorporated documents littered with language which is ungrammatical and contradictory.
The ‘follow-settlements clause’ shows that a compromise of Norwegian proceedings brought by the fish farmer against Vesta was intended to bind the English underwriters. The ‘claims control clause’ shows that the underwriters were entitled to negotiate a settlement of Norwegian proceedings brought by the fish farmer against Vesta. Neither the settlements clause nor the claims control clause indicates that if Vesta, or underwriters on behalf of Vesta, unsuccessfully defend proceedings brought by the fish farmer in Norway on the grounds that the fish farmer has committed a breach of warranty, nevertheless the underwriters may successfully defend proceedings brought by Vesta in England on the grounds that an identical breach of warranty was committed by Vesta.
In my opinion the reinsurance policy in the present case, on its true construction, insures 90% of the liability of Vesta under the insurance policy and I would dismiss the appeal of the underwriters.
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LORD GRIFFITHS. My Lords, it is commonplace for an insurer to wish to lay off in the reinsurance market part of the risk he has accepted on a policy of insurance. This litigation arises out of that everyday situation in the insurance market. I find it disturbing that the underlying document, Form J1, used in the Lloyd’s market to effect reinsurance should be framed in terms which are inelegant and ungrammatical, to quote Lord Templeman, and, in my view, obscure. I also regret that so little thought was apparently given to the difference between a primary insurance contract and a reinsurance contract at the time the reinsurance was placed with Lloyd’s.
The essential facts are simple. Lloyd’s brokers produced a policy of insurance to cover fish farms. The brokers interested Vesta, a Norwegian insurance company, in accepting insurance of fish farms on the terms of this policy on the understanding that the brokers would be able to obtain reinsurance of 90% of Vesta’s risk under the policy in the Lloyd’s reinsurance market in London. Vesta insured a Norwegian fish farm on the terms of the policy and the brokers effected reinsurance with Lloyd’s. In fact the reinsurance was placed before the insurance; the details are fully set out in the speech of Lord Lowry and I will not repeat them. In my view no importance attaches to the fact that the reinsurance antedated the insurance.
The policy of insurance contained a warranty that a 24-hour watch would be kept over the fish stocks and a further clause in the following terms:
‘Failure to comply with any of the warranties outlined hereunder will render this policy null and void. All warranties to be completed at the assured’s expense.’
The fish stocks were destroyed in a storm. A 24-hour watch was not kept over the stock but even if it had been kept it could not have prevented the storm damage. Under Norwegian law a breach of warranty cannot be relied on by an insurer to avoid liability unless there is a causal link between the breach and the damage. There was no causal link in this case and Vesta were therefore liable under the policy.
Vesta therefore turned to their reinsurers to recover 90% of the claim that they had had to meet under the policy. The reinsurers refused to pay. They said that the terms of the reinsurance contract were the same as the terms of the original insurance contract and therefore contained the 24-hour watch warranty and the clause rendering the policy null and void in breach of the warranty. It is one of the less attractive features of English insurance law that breach of a warranty in an insurance policy can be relied on to defeat a claim under the policy even if there is no causal connection between the breach and the loss. The reinsurance policy is undoubtedly governed by English law and the reinsurers claim that they are entitled to rely on the breach of the 24-hour watch clause to refuse to pay under the reinsurance policy.
This litigation has been conducted on the basis that the same terms were terms of both the insurance policy and the reinsurance policy. In so far as I must accept this assumption, I agree that this appeal fails for the reasons given in the speeches of Lord Templeman and Lord Lowry. However, at the trial the brokers sought to challenge this assumption and to argue that the 24-hour watch clause, the stock control clause and other clauses in the original insurance policy were not terms of the reinsurance policy. They would have required to obtain leave to amend their pleading to raise this issue and the judge, Hobhouse J, after hearing argument, gave the following reasons for refusing leave to amend ([1986] 2 All ER 488 at 496–497):
‘Because of the way in which they sought to raise this argument the brokers had to ask for leave to amend their pleadings to do so. If this leave had been given certain other consequential amendments raising further issues would have had to have been allowed for other parties. Therefore, I permitted the brokers to develop their argument (which was purely one of law and based on English law) to establish whether the argument had any substance in it. It did not and was plainly demurrable and I therefore refused the brokers leave to amend. The brokers’ argument was
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unsustainable for a number of reasons but three will suffice. First it overlooked that policy Form J1 was to be used; this meant that any term of the original insurance was also to be a term of the reinsurance. Second, it is not sound to argue that because a provision relates to an act to be done by another the contracting party is not promising that that other will do that act. For example, a warranty of seaworthiness may be given in a charterparty by a disponent owner or, under the Marine Insurance Act 1906, by a cargo owner insured under a policy of marine insurance. In any such case the contracting party is dependent on another to perform the obligation and, if he is wise, has a back-to-back contract with another to give him a like remedy for non-performance. Third, even on the reinsurance slip itself the document annexed is not one which refers to the original insurance but to the 90% reinsurance. It follows that each of the stock control and 24-hour watch clauses as well as the claims control clause are terms of the reinsurance contract between plaintiffs and the reinsurers.’
Whilst I fully appreciate the reluctance of the judge to allow an amendment at such a late stage which altered the basis on which the case had been pleaded and prepared for trial, I myself regret that it has not been possible to examine the issues in this case in the light of such an amendment.
I am not myself persuaded that on its true construction Form J1 does make the terms of the original policy of insurance terms of the policy of reinsurance, but if it does have that effect it is, I think, a highly unsatisfactory way of conducting reinsurance business and likely to lead to many unnecessary disputes.
An insurer who has accepted a risk by issuing a policy of insurance goes to reinsurers to lay off part of that risk. Before the reinsurer accepts part of the insurer’s risk, he will wish to assess the risk for himself. The reinsurer can only assess the risk if he is shown the terms on which the insurer has accepted the risk, in other words if the reinsurer is shown the policy that has been or is to be issued by the insurer. When the reinsurer has assessed the risk covered by the policy he can then decide whether or not he will reinsure the risk. In the ordinary course of business reinsurance is referred to as ‘back-to-back’ with the insurance, which means that the reinsurer agrees that if the insurer is liable under the policy the reinsurer will accept liability to pay whatever percentage of the claim he has agreed to reinsure. A reinsurer could, of course, make a special contract with an insurer and agree only to reinsure some of the risks covered by the policy of insurance, leaving the insurer to bear the full cost of the other risks. Such a contract would, I believe, be wholly exceptional, a departure from the normal understanding of the back-to-back nature of reinsurance and would require to be spelt out in clear terms. I doubt if there is any market for such a reinsurance.
With these general considerations in mind I turn to consider the slip, and Form J1. The contract of reinsurance is contained in the slip which incorporates Form J1:
‘type Livestock Reinsurance.
form J.1
assured R/I Forsikringsaktieselskapet Vesta a/c Fjordlaks, Tafjord A.S. [Then it states the period covered.]
interest Rainbow Trout and Salmon only, the property of Fjordlaks Tafjord A/S only as more fully set forth in the original policy. [Then it gives the sum insured as 90% of the relevant Kroner figure. It also gives the situation of the cages in Tafjord.]
conditions Being a reinsurance of Forsikringsaktieselskapet Vesta who retain 10% of Full R.I. Clause. premium [The Kroner deposit premium is stated.]
brkge 25%.
infn Original policy of Forsikringsaktieselspaket Vesta as attached hereto.’
Form J1 is the standard form of reinsurance policy used in the Lloyd’s market. The material parts read:
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‘LLOYD’S REINSURANCE POLICY
Whereas the Reinsured named in the Schedule herein (hereinafter called “the Company”) has paid the premium specified in the Schedule to the Underwriting Members of Lloyd’s who have hereunto subscribed their names (hereinafter called “the underwriters”). Now We the Underwriters hereby agree to reinsure against loss to the extent and in the manner hereinafter provided. Being a Reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Company and that the Company retains during the currency of this Policy at least the amount stated in the Schedule as the retention on the identical subject matter and risk and in identically the same proportion on each separate part thereof but, in the event of the retention being less than that stated in the Schedule, the Underwriters’ lines to be proportionately reduced. If the Company shall make any claim knowing the same to be false or fraudulent, as regards amount or otherwise, this Policy shall become void and all claim hereunder shall be forfeited.’
For my part, I would be reluctant to read these contractual documents as making the terms of the contract of insurance terms of the contract of reinsurance. Although the wording is archaic and difficult to comprehend I understand the phrase ‘warranted same gross rate terms and conditions’ as a warranty given by the company, ie the insurer, that he has placed the risk on the same terms that he has disclosed to the reinsurers. This view is I think strongly supported by the fact that the policy is attached to the slip against the heading ‘INFN’ which is clearly an abbreviation of the word ‘Information’ and shows that at the time the slip is completed the policy terms are available to the reinsurer to show the nature of the risk that he is accepting. The warranty in the reinsurance is that the policy has been or will be written in those terms.
A contract of insurance will almost inevitably contain terms that are wholly inappropriate in a contract of reinsurance. The two contracts are dealing with entirely different subject matter. The original policy is concerned to define the risk that the insurer is prepared to accept. The contract of reinsurance is concerned with the degree of that risk as defined in the policy that the reinsurer is prepared to accept.
I accept that this view of the documents faces the difficulty that the brokers altered the schedule of the policy attached to the slip to show the name of the assured as Vesta and not the fish farmer and referred to the 90% reinsurance, and that the policy of insurance contained a claims control clause which is only relevant to a reinsurance policy. But I would prefer to regard this as indicative of thoughtless confusion rather than an intention to introduce into a contract of reinsurance terms which were wholly inappropriate. To take but one example, the stock control clause provides:
‘In the event of a claim under this policy, Underwriters reserve the right to replace the stock lost, for which the claim is made, with similar stock of a like species.’
Is it seriously to be supposed that it was the intention of the parties that London underwriters were to have the option of discharging their liability to Vesta by delivering a load of live fish to them?
The fact is that all the terms of the policy attached ‘for information’ to the slip (apart from the reference to the reinsurance in the schedule and the claims control clause) are sensible terms in a policy of insurance on a fish farm but many of them are wholly inappropriate in a policy of reinsurance, and I find it difficult to conceive that sensible and skilled reinsurers, brokers or insurers should have intended them to apply to the contract of reinsurance.
In Home Insurance Co of New York v Victoria-Montreal Fire Insurance Co [1907] AC 59 the Privy Council were faced with a problem in many ways similar to that presented by the present case. Reinsurers denied liability to meet a reinsurance claim arising out of a fire policy on the ground that a condition in the original fire policy had been incorporated into the reinsurance policy and resulted in the reinsurance claim being time barred. The reinsurance contract had been created by attaching to the printed form of the original
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fire policy a reinsurance slip and amending the original fire policy by insertion of the word ‘re’ before the word ‘insure’ thus substituting the expression ‘does reinsure’ for ‘does insure’ (which is an echo of the way in which the brokers amended the schedule to the policy attached to the slip in this case). Reinsurers argued that all the terms of the original policy were thus terms of the reinsurance and that they were entitled to repudiate because a breach of the time clause in the original policy. That clause provided that no claim could be brought unless commenced within 12 months of the fire. The insurance claim had taken time to investigate and settle and therefore the claim against the reinsurers was not made until more than 12 months after the fire. In rejecting this defence Lord Macnaghten said (at 64–65):
‘It is difficult to suppose that the contract of re-insurance was engrafted on an ordinary printed form of policy for any purpose beyond the purpose of indicating the origin of the direct liability on which the indirect liability, the subject of the re-insurance, would depend, and setting forth the conditions attached to it. In the result their Lordships have come to the conclusion that according to the true construction of this instrument, so awkwardly patched and so carelessly put together, the condition in question is not to be regarded as applying to the contract of re-insurance. To hold otherwise would, in their opinion, be to adhere to the letter without paying due attention to the spirit and intention of the contract.’
The opinion expressed in the first sentence of this passage accords closely with my own approach to the case. I appreciate that I have not heard full argument but, if I am right, it provides a simple answer to the problem posed by this case. Vesta did place the insurance on the terms they disclosed to the reinsurers and thus fulfilled the warranty in Form J1. The policy took effect in Norway on Norwegian fish stocks and therefore the risks covered by the policy fell to be judged by Norwegian law. Reinsurers had agreed to indemnify against the risks covered by the policy and therefore are liable to indemnify Vesta for 90% of the claim which was, under Norwegian law, a risk covered by the policy.
I have ventured to set out these views because I am satisfied that the Lloyd’s market, perhaps the largest reinsurance market in the world, would be well advised to give urgent consideration to the desirability of redrafting their standard form of reinsurance policy.
At present, whatever it is intended to mean, it is obscure. If it means what I have suggested it should be redrafted to make that clear. If, on the other hand, it is really intended to mean that the terms of the original policy of insurance are to be terms of the reinsurance contract then, again, the policy should be redrafted to spell this out. If that is done, however, Lloyd’s must face the difficulties that will inevitably follow when trying to construe and apply terms in reinsurance contracts which serve no useful purpose and are appropriate only to the original policy of insurance.
LORD ACKNER. My Lords, I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Templeman and Lord Lowry. For the reasons they give I would dismiss the appeal.
LORD LOWRY. My Lords, the appellant, who is the nominated representative of a group of Lloyd’s underwriters, seeks in this appeal to reverse the judgment of the Court of Appeal (O’Connor, Neill LJJ and Sir Roger Ormrod) ([1988] 2 All ER 43, [1988] 3 WLR 565), which, affirming the decision of Hobhouse J ([1986] 2 All ER 488), held that the underwriters, as reinsurers, were liable to indemnify the plaintiff and first respondent, Forsikringsaktieselskapet Vesta (Vesta), a leading Norwegian insurance company, as to 90% (the reinsured proportion of the risk borne by Vesta) of a sum of Nkr 2·75m properly paid by Vesta to Fjordlaks Tafjord A/S, the owner of a Norwegian fish farm (the insured) in settlement of its claim under an insurance policy in respect of loss and damage caused to the fish farm by a storm. The contracts of insurance and reinsurance each expressly
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incorporated identical wording, known as ‘Aquacultural Wording No V’, which contained a warranty that a 24-hour watch would be kept over the site, and also the following statement:
‘Failure to comply with any of the warranties outlined hereunder will render this policy null and void. All warranties to be completed at the assured’s expense.’
A 24-hour watch was not kept but the failure to keep watch was not a cause of the loss and, accordingly, by virtue of s 51 of the Norwegian Insurance Contracts Act 1930 (out of which the parties may not contract), Vesta was fully liable to the insured despite the breach. On the other hand, if considered exclusively under English insurance law, the breach of a warranty renders the insurance policy null and void, even if, as in the present case, the breach has not caused any part of the loss sustained by the insured. The question for decision, as between Vesta and the underwriters, is whether the 24-hour watch warranty should, as the courts below have held, be given, in spite of the principles in English law, the same meaning and effect in the contract of reinsurance as it had in the Norwegian contract of insurance. If Yes, the appeal fails and the underwriters are liable on their contract with Vesta; if No, the appeal succeeds, the underwriters escape liability and further questions fall to be decided between Vesta and Aquacultural Insurance Services Ltd (the brokers), who were co-defendants in the action and are also respondents in this appeal.
The facts of the case are fully set out in the judgment of the trial judge (see [1986] 2 All ER 488 at 490). For present purposes I am content to say that in 1977 the insured set up at Tafjord in Norway a fish farm consisting of about 14 large net cages moored in the water and containing trout and some small salmon, which are fed and allowed to grow with a view to slaughter and sale. On 17 September 1978 a violent storm broke the moorings and broke open about ten of the cages so that most of the fish escaped. Some were recaptured but a serious loss occurred and the insured claimed under its contract with Vesta, which was by necessary implication governed by Norwegian law. It is now agreed that Vesta was fully liable on thecontract and that the sum of NKr 2·75m, for which it settled the claim on 27 October 1978, was a fair figure. Vesta had covered the insured for 12 months from 26 October 1977 against loss of living fish from any cause and were through the brokers reinsured for 90% of the loss. The underwriters, however, repudiated liability and declined to consent to any settlement of the insured’s claim. Then Vesta sued the underwriters on the reinsurance contract and, in the alternative, claimed damages from the brokers for negligence and breach of contract, while in a separate action the underwriters (in the event of their being found liable to Vesta) have claimed damages against the brokers.
Before this particular insurance or reinsurance had been effected or contemplated the brokers, as part of a scheme for insuring fish farms which they were promoting worldwide, had prepared a set of clauses considered suitable for this kind of insurance and known as the Aquacultural no V wording. As their name implies, the brokers, a subsidiary of Bain Dawes Ltd, the second defendants, had been set up to cater for this type of business, which might accrue not only in Norway but in other countries, such as Canada, France and the United States. They issued brochures in different languages, claiming to provide ‘a comprehensive world-wide facility for fish farmers, their insurance brokers and agents … and solely concerned with solving the insurance problems of aquaculture’ and they prepared insurance schemes of which the no V wording was one. As Hobhouse J put it (at 492):
‘Bain Dawes and London underwriters wished to promote and share in this business either by way of direct insurance or by way of reinsuring local insurance companies carrying on business in the relevant foreign countries.’
In March 1977 the brokers’ manager visited Vesta in Norway, partly at Vesta’s expense,
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and discussed the possibility of selling insurance to Norwegian fish farmers. Vesta then began to get orders for fish farm insurance which it passed on to the brokers for reinsurance. The brokers provided the documentation which, as they and Vesta recognised, had to be translated into Norwegian and, while it was difficult to be certain, the judge considered it more likely that it was the brokers’ translations which were used.
In London the brokers had obtained from the underwriters in June 1977 a slip (C/792) in the form of 12 months’ open cover worldwide on all risks to aquatic creatures, terms of cover to be agreed with leading underwriters in each case. The special conditions, which gave the brokers a profit commission and authority to bind the underwriters, granted permission to issue cover notes showing the terms, conditions and wordings for each risk, to cancel policies and to bind risks up to £100,000 or equivalent subject to confirmation within seven days. Translations, where required, of wordings, terms and conditions were to be carried out by translators specified by the Lloyd’s Policy Signing Office and policies and cover notes would be issued accordingly. The slip was in the form of a binder given by all underwriters to the brokers to give limited temporary cover and by the following underwriters to the leading underwriters to write risks on their behalf, and all underwriters authorised the brokers to issue cover notes on their behalf and to cancel the cover. The slip was accordingly referred to as ‘the binder slip’.
The terms of the insurance and reinsurance and the circumstances in which they came about are important and I cannot describe what follows more succinctly than did the trial judge ([1986] 2 All ER 488 at 493–494):
‘When on 26 October 1977 the plaintiffs telexed the brokers asking for cover in respect of Fjordlaks, Mr Secretan made use of the authority given by the binder slip to hold the plaintiffs covered for seven days, obtaining the confirmation of the leading underwriters for a further thirty days on 2 November. This was subject to the completion of a proposal form within thirty days and a marine survey. However, by the beginning of December the plaintiffs had still not forwarded either of these documents, so the brokers sent them a reminder and repeated the process of themselves first giving and then obtaining from the leading underwriters a further held covered note. In fact the proposal form arrived shortly afterwards and no one seems to have insisted on the marine survey. The specific slip under which the plaintiffs were reinsured was prepared by Bain Dawes and was, on 30 December 1977, initialled by the three leading underwriters on behalf of all the underwriters who had underwritten the open cover together with an indorsement which increased the sum insured to Nkr 8 m. It is now agreed that this slip and indorsement is the actual contract under which the plaintiffs were reinsured and that no further problem of rectification arises. The slip provides:
“type Livestock Reinsurance.
form J.1
assured R/I Forsikringsaktieselskapet Vesta a/c Fjordlaks, Tafjord A.S. [Then it states the period covered.]
interest Rainbow Trout and Salmon only, the property of Fjordlaks Tafjord A/S only as more fully set forth in the original policy. [Then it gives the sum insured as 90% of the relevant Kroner figure. It also gives the situation of the cages in Tafjord.]
conditions Being a reinsurance of Forsikringsaktieselskapet Vesta who retain 10% of Full R.I. Clause. premium [The Kroner deposit premium is stated.]
brkge 25%.
infn Original policy of Forsikringsaktieselskapet Vesta as attached hereto.”
Form J1 is a standard form of Lloyd’s reinsurance policy which contains the words (printed in red) “being a reinsurance of and warranted same gross rate and terms
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and conditions as and to follow the settlements of the [reassured] “. It is thus an express term of this form that the reinsurance shall be on the same terms and conditions as the original insurance. It also includes an express follow-settlements provision. The document attached to the slip was not in fact the original insurance policy but was a document headed “The Aquacultural Insurance Service Ltd. Aquacultural wording No. V. General purpose wording. Monthly reporting of values. Schedule“. There then follow various particulars of the contract which start with “ASSURED: R/L Forsikringsaktieselskapet Vesta a/c Fjordlaks Tafjord A/S” and the sum assured is again given as 90% of the full Norwegian kroner sum. Then there follow some six pages of unnumbered clauses which make up the Aquacultural no v wording. It is only necessary to make limited quotations from the wording. The scheme is that of an insurance on wide terms with a few warranties and exclusions in favour of the insurer, and among other provisions, an indemnity clause which provides for agreed values (in Norwegian kroner) of fish lost depending on the average weight of the individual fish concerned, a differential franchise clause and premium adjustment clause. The clauses on which the defendants particularly rely are as follows:
“STOCK CONTROL CLAUSE The assured will maintain regular written stock control records which records will, at all times, be available to Underwriters or their representatives for their inspection …
SPECIAL CONDITIONS AND WARRANTIES It is warranted that a 24 hour watch be kept over the site.
CLAIMS CONTROL CLAUSE In the event of loss hereunder, no payment off or compromise shall be made without the consent of Underwriters who shall have sole control of all negotiations. Failure to comply with any of the warranties outlined hereunder will render this policy null and void. All warranties to be completed at the assured’s expense.”
Having obtained the signatures of the leading underwriters on the slip, the brokers on 4 January 1978 sent to the plaintiff a letter enclosing a cover note. This letter said:
“Fjordlaks Tafjord A/S
Please find enclosed the bills, Cover Note and a copy of the Policy Wording No. V in respect of the above client. You will note from the Wording that the sum insured is shown in NKr. 750,000. The increase of the sum insured to NKr. 8,000,000 from 8th December 1977 will be dealt with by endorsement and the relevant document will be forwarded to you together with the policy document when it is received from the Lloyd’s Policy Signing Office. You will further note that the increased sum insured has been noted on the Cover Note. We would ask that the assured reads his policy wording carefully in order that there are no misunderstandings. We trust that the enclosed documents are in order.”
The enclosed cover note had a first sheet which was similar to the schedule attached to the slip but it also included the heading “COVER NOTE THE AQUACULTURAL INSURANCE SERVICE LIMITED. Subscribed by Lloyd’s and Company Underwriters under Cover Number C792/7” and the words:
“This is to certify that insurance has been arranged with Lloyd’s and Company Underwriters in accordance with the terms, conditions and limitations provided by The Aquacultural Insurance Service Limited Wording Number V under Cover Number C792/7 subject to the attached special conditions and loss reporting clause, as more fully set forth in the policy document to be issued on receipt of the stipulated premium … ”
and then below the signature of Mr Hewitt of the brokers the words “Specially
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empowered by Underwriters to issue this temporary Cover Note.” The attached no v wording was the same, save for some minor and irrelevant differences, as that attached to the slip.’
Having received the cover note, Vesta issued its policy to the insured, with a request to read through the terms and stressing their importance. Mr Pedersen, the ‘alter ago’ of the insured, on reading the 24-hour watch clause, appreciated that he could not comply with it and so informed the local branch of Vesta by telephone. Mr Kolbeinsen of Vesta then passed this information to the brokers, but nothing more happened. By doing nothing Vesta can be taken, as the judge held, to have waived this condition, but the position of the underwriters was not affected by what happened and, for the purpose of the question now before your Lordships, this complication can be disregarded.
The reinsurance policy was issued on 7 February 1978. It was on the J1 form mentioned in the slip, specified the 10% retention and referred in a number of places to the original policy or policies. In the relevant box in the schedule it stated: ‘The peril and interest reinsured hereunder LIVESTOCK REINSURANCE Rainbow Trout and Salmon only, the property of Fjordlaks Tafjord A/S only as more fully set forth in the original policy.’
The underwriters raised three defences against Vesta’s claim: (1) that a 24-hour watch had not been kept; (2) that stock control records had not been kept or produced; (3) that the underwriters had not consented to Vesta’s settlement with the insured. The judge rejected the second and third defences for reasons which I need not recall, since the arguments which he dismissed were not revived.
Turning to the 24-hour watch clause, he noted the effect under English law of failure to comply and, in the course of what Sir Roger Ormrod rightly described as a meticulously careful judgment, stated his conclusion on this part of the case. Vesta had contended that the reinsurance contract was governed by Norwegian law. Its alternative submission, ‘pursued with only lukewarm enthusiasm’ but supported by the brokers, was that the no V wording incorporated in both contracts was so governed. The underwriters had contended that the contract was governed by English law and that English law alone was relevant. The judge said ([1986] 2 All ER 488 at 504–505):
‘I consider that there is a solution to the problem of the choice of law in the present case which does give a satisfactory answer. It is the almost invariable rule that there is only a single proper law of a contract which governs all aspects of the contract. This is conceptually sound as the primary function of the proper law is to give effect to the parties’ intention not merely to agree but also to make a legal contract, ie to create a legal relationship. This presupposes a legal system since a legal contract cannot be made without a reference to a legal system which is to give it its legal effect. As Lord Diplock said in Amin Rasheed Shipping Corp v Kuwait Insurance Co, The Al Wahab [1983] 2 All ER 884 at 891, [1984] AC 50 at 65: ” … contracts are incapable of existing in a legal vacuum. They are mere pieces of paper and void of all legal effect unless they were made by reference to some system of private law … ” In the present case one would prima facie assume that this underlying legal system was English law. But by the same logic the choice of law is a matter for the actual or imputed choice of the parties and it has been recognised for a long time that parties may choose that different parts of the contract should be governed by different laws. This is stated in the current edition of Dicey and Morris Conflicts of Laws (10th edn, 1980) p 749. In Hamlyn & Co v Talisker Distillery [1894] AC 202 at 207, [1891–4] All ER Rep 849 at 852 Lord Herschell LC said: “Where a contract is entered into between parties residing in different places, where different systems of law prevail, it is a question, as it appears to me, in each case, with reference to what law the parties contracted, and according to what law it was their intention that their rights under the whole or any part of the contract should be determined.” In Re Helbert Wagg & Co Ltd [1956] 1 All ER 129 at 135, [1956] Ch
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323 at 340 Upjohn J, considering a contract which in certain of of its areas of operation clearly contemplated that a foreign law would apply, said: “Those considerations are not conclusive of the question for the parties may well contemplate that different parts of their contract shall be governed by different law.” In the present case there is an express provision for the terms and conditions of the reinsurance contract and those of the original insurance to be the same and the reinsurance is manifestly to be back-to-back with the original insurance. From this one should infer a contractual intent that the legal effect of the clauses which define and limit the scope of the cover should be the same in the reinsurance and in the original insurance. When one takes into account that the parties clearly must contemplate that the original insurance is governed by Norwegian law I infer as a matter of English law that the parties intended the construction and effect of the clauses of the Aquacultural wording shall be governed by Norwegian law. Whether one chooses to categorise this conclusion as an application of the English substantive law of construction of an English law contract or as the application of the English choice of law rules does not matter. They are in the present context essentially the same thing. The parties have on the true ascertainment of their contractual intention chosen that that part of the contract shall be governed by Norwegian, not English, law. It will be appreciated that it is a corollary of this particular conclusion that it is the law of Norway applicable to domestic contracts of original insurance which the parties intend shall govern, not the Norwegian law which may or may not apply to reinsurance contracts. The reinsurance contract itself is and remains an English law contract but it is one which is made with reference to, and on the terms of, the Norwegian law contract of original insurance. This view of the English law parallels that of Mr Rafen on the first point I discussed under the heading of Norwegian law and which I accepted. It follows from this that the dispute about the Norwegian law applicable to reinsurance contracts is really irrelevant and the plaintiffs could succeed even if that dispute had been decided against them. I therefore hold as a matter of English law that the proper law of the reinsurance contract is English law subject to the construction and effect of the clauses of the Aquacultural wording being determined in accordance with Norwegian law in the same manner as they are as part of the contract of original insurance. If I had not decided that this hybrid and admittedly somewhat unorthodox conclusion was open to me, I would have been compelled to the conclusion that the whole contract should be governed by Norwegian law, because any other conclusion would be contrary to the manifest intention of the parties to provide the plaintiffs with reinsurance cover in respect of a contract of original insurance on the same terms which is governed by Norwegian law.’
The judge rounded off this part of his judgment thus (at 505–506):
‘I accordingly hold that the plaintiffs are entitled to judgment against the reinsurers. I would add that this conclusion is fully in accordance with the business nature of the transaction. London underwriters and brokers are seeking to market insurance contracts in foreign countries. As a matter of business they do not do this directly but make use of a local insurance company to obtain the business. The business reality is that the contract that is marketed is a local contract fronted by the local insurance company. The 90% reinsurance framework, like the profit commission and 25% brokerage payable to the brokers, is in reality only a mechanism to achieve this end. It is commercially unrealistic for reinsurers to rely on an English law consequence which forms no part of the scheme of insurance which is being provided and which, if they had stopped to think, they would have realised made the insurance package wholly unsaleable to the overseas insurers and assureds from whom they are seeking to acquire premium income. In subsequent years the package was expressly varied to take this into account.’
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The reasoning of the Court of Appeal is well summarised by the learned reporter in her headnote ([1988] 2 All ER 43 at 44):
‘(1) Although the reinsurance contract was in the main governed by English law the 24-hour watch clause was to be construed in the same way as in the underlying insurance contract because (a) that condition was to be performed locally and by the insured, (b) the insurance and the reinsurance were in essence back-to-back, (c) the follow-settlements clause, however much it was affected by the claims control clause, could not be ignored, (d) if the underwriters had exercised their right under the claims control clause to negotiate with the insured they would have had to have done so on the basis that the insurance policy was governed by Norwegian law and (e) the only construction that made commercial sense was that the 24-hour watch clause in the reinsurance contract was to be given the same effect as it had in the underlying insurance contract. Since the breach of the 24-hour watch condition did not provide a valid defence in Norwegian law to the owners’ claim under the underlying insurance contract, the reinsurers could not rely on that breach as a defence to the plaintiffs’ claim under the reinsurance policy … ’
O’Connor LJ devoted his judgment to Vesta’s claim against brokers. As to the case against the underwriters, he agreed with Neill LJ for the reasons given by him. Neill LJ, having pointed out that the brokers were formed for the specific task of providing specialised insurance cover for fish farms throughout the world and that they considered with Vesta the possibilities of selling insurance cover to groups of Norwegian fish farmers (see [1988] 2 All ER 43 at 56, [1988] 3 WLR 565 at 583), expressed his view on this part of the case as follows ([1988] 2 All ER 43 at 58, [1988] 3 WLR 565 at 585):
‘What effect then should be given to the watch clause? I have found this to be a difficult question to answer and the arguments put forward so attractively on behalf of the underwriters very formidable. There are, it would appear, three possible solutions. (a) The reinsurance contract, like the insurance contract, is governed by Norwegian law. (b) The reinsurance contract in its entirety is governed by English law. (c) Though the reinsurance contract is in the main governed by English law, the watch clause is to be construed in the same way as in the underlying insurance contract. The first solution, though it was pressed by Vesta before the judge and was kept alive as an alternative in this court, appears to me to be quite unrealistic. The reinsurance was placed in London on the London market and the documents which were used strongly support the argument that the contract was prima facie governed by English law. It follows therefore that the second solution has much to commend it. In the end, however, I find myself compelled, as was the judge, to reject it. The relevant term was one to be performed locally and by the insured. The contract of insurance itself was in a form devised by the brokers and was part of an operation in which the underwriters themselves were clearly keenly interested. Both the history of the negotiations and the form of the documents shows that in essence the insurance and the reinsurance were back-to-back. The follow-settlements clause, however much emasculated by the claims control clause, cannot be ignored. Furthermore, the rights given to the underwriters by the claims control clause included the right to negotiate with the insured with reference to an insurance policy, which was indubitably governed by Norwegian law. In my judgment the word “hybrid” may itself be a source of confusion. I would prefer to say that as a matter of construction of the reinsurance contract and by seeking to ascertain the presumed intention of the parties the watch clause has to be given the same effect as it is given in the underlying insurance contract. In the context of the present case this solution is to my mind the only one that makes commercial sense.
Sir Roger Ormrod began his judgment with a trenchant introduction ([1988] 2 All ER 43 at 59, [1988] 3 WLR 565 at 586):
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‘The main issue in this appeal, stated bluntly but fairly, is whether underwriters under a contract of reinsurance with the plaintiffs (Vesta), a Norwegian insurance company, can avoid liability to reimburse them for losses sustained by them under a policy with their insured (Fjordlaks) on the ground of breach of a warranty which is wholly irrelevant to the cause or size of the loss, when they themselves, whose policy with the insured contained a warranty in identical terms, are precluded by Norwegian law from relying on it.’
He also attributed some of the difficulties in the case to the way in which the business was conducted in London by the brokers, Bain Dawes Ltd, whom he described as the prime movers through their subsidiaries ([1988] 2 All ER 43 at 59, [1988] 3 WLR 565 at 586–587):
‘They designed the form of words (form V) to be used in contracts for the insurance of fish farms. They negotiated with underwriters and obtained their approval to this form of words and arranged that the business would be done in the form of reinsurance at a time when they had no actual clients and no “original” insurance contracts to be reinsured. In this case the terms of the reinsurance contracts were copied into the original insurance contracts. Finally, it was the brokers’ expressed intention to market this form of insurance “worldwide” for fish farms wherever situated.’
Noting the general principle stated in The Njegos [1936] P 90, [1935] All ER Rep 863 that interrelated contracts should prima facie be governed by the same law, Sir Roger did not consider that principle, ‘which is after all one of common sense’, powerful enough to take the whole of the reinsurance contract into Norwegian law, but he saw a strong argument for saying that it was not governed entirely by English law. He said ([1988] 2 All ER 43 at 60, [1988] 3 WLR 565 at 587):
‘Whereas the risk insured by the original policy … was financial loss arising from damage to or loss of the fish, the risk insured by the reinsurance policy was loss to the reinsured arising out of their liability under the original policy. Liability under the original policy and the quantum of the loss are governed by Norwegian law. Therefore, liability under the reinsurance policy is governed de facto by Norwegian law.’
He continued ([1988] 2 All ER 43 at 60–61, [1988] 3 WLR 565 at 588):
‘Finally, and perhaps most cogent, is the fact that it was the intention of all parties that the terms of the reinsurance contract governing liability should be the same as the terms governing liability under the original contract. The reinsurance policy expressly says so; the brokers insisted on the form V wording being incorporated in both the reinsurance and the original policies; and Vesta clearly expected to be covered up to 90% of anything they would be called on to pay under their policy with Fjordlaks. In fact, all concerned were agreed that the two policies were to be back-to-back. Faced with this problem Hobhouse J held—“as a matter of English law that the proper law of the reinsurance contract is English law subject to the construction and effect of the clauses of the Aquacultural wording being determined in accordance with Norwegian law in the same manner as they are as part of the contract of original insurance.” (See [1986] 2 All ER 488 at 505.) Had he not gone on to refer to his conclusion as “hybrid and admittedly somewhat unorthodox”, the matter might have been left as a question of construction of an English contract on English principles. Notwithstanding counsel’s powerful argument for the reinsurers, I think that Hobhouse J’s conclusion was correct. There is no other way in which the intention of the parties that liability of Vesta should be matched by liability of the reinsurers on a back-to-back basis can be achieved.’
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Sir Roger concluded his judgment on this part of the case with a passage which views the problem differently and which I wish to cite and comment on, partly because it was criticised by the appellant as being inconsistent with what had gone before ([1988] 2 All ER 43 at 61, [1988] 3 WLR 565 at 588–589):
‘Turning to the warranty, both the reinsurance contract and the original insurance contract contain a warranty that a 24-hour watch shall be kept over the site. Both contracts also contain a claims control clause to which there appears to be attached a provision, which has no connection with it, providing that failure to comply with any of the warranties will “render this policy null and void“. The claims control clause itself was, of course, wholly inapposite and ineffectual in the original insurance contract. Although there is no evidence that the 24-hour watch warranty was included in the reinsurance contract by a similar mistake and it is accepted that it formed part of it, it is obviously much more appropriate to the original contract. By s 51 of the Norwegian Insurance Contracts Act 1930 breach of a safety regulation (anglice warranty) gives no defence to an insurer unless the breach caused the loss. In English law causation is still irrelevant. This introduced a major difference between the two contracts and, if the English version prevails, effectively destroys the basis of the reinsurance policy. So there is a direct conflict between the terms of the Lloyd’s reinsurance policy which contains a warranty that its terms are the same as those in the original contract, and the warranty provision. It is also plainly inconsistent with the intention of the parties when they entered into the reinsurance contract. In my judgment the only way to resolve this problem is to imply into the reinsurance contract a term to the effect that breach of warranty will only avoid, or permit reinsurers to repudiate, the policy if breach of the same warranty would permit the reinsured to avoid the original policy with their clients. Some such term is necessary to give business efficacy to the reinsurance contract and to give effect to the real intention of the parties.’
The words to which exception is taken are ‘the only way to resolve this problem’, having regard to what Sir Roger had said when agreeing with Hobhouse J, namely: ‘There is no other way in which the intention of the parties … can be achieved.' I do not, with due respect to the argument of counsel for the underwriters (which at every other point was extremely clear, well marshalled and persuasive), detect here an inconsistency because I have understood ‘this problem’ to be the one mentioned in the immediately preceding paragraph of the judgment. Sir Roger had found a clear intention that the terms of the two contracts should be the same and that Vesta should be insured against its own liability to the fish farmer. At the same time he had found a term in the reinsurance contract which, if read literally according to English insurance law, would have a different effect from that of the same term in the insurance contract, thereby nullifying that intention and depriving Vesta of what it had contracted for; hence the problem. This passage in the judgment clearly illustrates the legal problem that, given the joint intention found to exist by all the judges, a way must, if possible, be found of giving effect to it. I readily concede counsel’s point that one ought not to imply a term in a contract which contradicts an express term of the same contract. Moreover, neither the proposed nor any other implied term had been pleaded by Vesta or relied on in argument.
Reinsurance is prima facie a contract of indemnity, as the many examples in the Vesta’s printed case effectively illustrate, under which the reinsurer indemnifies the original insurer against the whole or against a specific amount or proportion (in this case 90%) of the risk which the latter has himself insured. This, my Lords, is the situation one expects to find on turning to look at the reinsurance contract. The judge has mentioned the slip and indorsement under which Vesta was reinsured. The slip incorporated Lloyd’s Form J1, a standard form of reinsurance policy, which was incorporated by reference in
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the slip and became the reinsurance policy here. It was ‘a reinsurance of and warranted same gross rate, terms and conditions as and to follow the settlements of the Company’ (Vesta) under which the underwriters ‘hereby bind ourselves … to pay or make good to the Company all such loss as herein provided’. The no V wording was also incorporated in the contracts of insurance and reinsurance. I am of the opinion, like all the judges in the courts below, that the intention of the underwriters and Vesta to enter into a legally binding contract of indemnity (up to 90% of the risk) is absolutely clear. Because, however, the underwriters have contended that the contracts are not, in insurance jargon, ‘back-to-back’, I shall consider, as the courts below have done, the surrounding circumstances which I have already referred to. The propriety of doing this in order to ascertain and give effect to the intention of the parties is amply illustrated by authority. A basic rule is stated by Kelly CB in Gwyn v Neath Canal Navigation Co (1868) LR 3 Exch 209 at 215, where he said:
‘The result of all the authorities is, that when a court of law can clearly collect from the language within the four corners of a deed, or instrument in writing, the real intention of the parties, they are bound to give effect to it by supplying anything necessarily to be inferred from the terms used, and by rejecting as superfluous whatever is repugnant to the intention so discerned.’
I would also refer to Prenn v Simmonds [1971] 3 All ER 237 at 239–240, [1971] 1 WLR 1381 at 1383, where Lord Wilberforce observed:
‘The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. There is no need to appeal here to any modern, anti-literal, tendencies, for Lord Blackburn’s well-known judgment in River Wear Comrs v Adamson (1877) 2 App Cas 743 at 763, [1874–8] All ER Rep 1 at 11 provides ample warrant for a liberal approach. We must, as he said, enquire beyond the language and see what the circumstances were with reference to which the words were used and the object, appearing from those circumstances, which the person using them had in view.’
In Reardon Smith Line Ltd v Hansen-Tangen [1976] 3 All ER 570 at 574, [1976] 1 WLR 989 at 995–996 again Lord Wilberforce stated:
‘In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.’
His speech also made reference to an apt quotation from the speech of Lord Dunedin in Charrington & Co Ltd v Wooder [1914] AC 71 at 82:
‘… in order to construe a contract the Court is always entitled to be so far instructed by evidence as to be able to place itself in thought in the same position as the parties to the contract were placed, in fact, when they made it—or, as it is sometimes phrased, to be informed as to the surrounding circumstances.’
(See [1976] 3 All ER 570 at 575, [1976] 1 WLR 989 at 997.) Finally, the observation of Lord Reid in L Schuler AG v Wickman Machine Tool Sales Ltd [1973] 2 All ER 39 at 45, [1974] AC 235 at 251 may be thought particularly apposite in this case:
‘The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.’
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I consider that all the surrounding circumstances to which I have already referred provide strong confirmation that the intention of the parties was to provide an indemnity for Vesta. Assuredly, they furnish no support for the opposite view.
The main thrust of the argument of counsel for the underwriters was as follows: (1) the proper law of the reinsurance contract is English law; (2) that contract contained a warranty by Vesta that a 24-hour watch would be kept, accompanied by the words, ‘Failure to comply with any of the warranties outlined hereunder will render the policy null and void’; (3) there was failure to comply; (4) that failure, even though not a cause of damage, rendered the policy null and void according to English law; (5) therefore the underwriters are not liable.
Put like that, nothing could be simpler and no logical conclusion more inevitable. But, the real intention of the parties having, as I, like every judge who has considered the case, believe, been found within the four corners of the contract, effect should if legally possible, be given to it.
As your Lordships will recall, so clear was Hobhouse J about the intention of the parties and the need to give effect to it that he would, if compelled, have held Norwegian law to be the proper law of the reinsurance contract. He did not, however, adopt that unlikely solution, described by Neill LJ as ‘quite unrealistic’, but said ([1986] 2 All ER 488 at 505):
‘… I infer as a matter of English law that the parties intended the construction and effect of the clauses of the Aquacultural wording shall be governed by Norwegian law. Whether one chooses to categorise this conclusion as an application of the English substantive law of construction of an English law contract or as the application of the English choice of law rules does not matter. They are in the present context essentially the same thing. The parties have on the true ascertainment of their contractual intention chosen that that part of the contract shall be governed by Norwegian, not English, law.’
The judge described his conclusion as ‘hybrid and somewhat unorthodox’. As to this, Neill LJ, having rejected the underwriters’ argument that the contract was in its entirety governed by English law, said ([1988] 2 All ER 43 at 58, [1988] 3 WLR 565 at 585):
‘In my judgment the word “hybrid” may itself be a source of confusion. I would prefer to say that as a matter of construction of the reinsurance contract and by seeking to ascertain the presumed intention of the parties the watch clause has to be given the same effect as it is given in the underlying insurance contract. In the context of the present case this solution is to my mind the only one that makes commercial sense.’
On this point Sir Roger Ormrod said ([1988] 2 All ER 43 at 60, [1988] 3 WLR 565 at 588):
‘Had he not gone on to refer to his conclusion as “hybrid and admittedly somewhat unorthodox”, the matter might have been left as a question of construction of an English contract on English principles. Notwithstanding counsel’s powerful argument for the reinsurers, I think that Hobhouse J’s conclusion was correct.’
My Lords, I respectfully consider the problem to be one of construing the words in the reinsurance contract and not one involving an imputed choice of law. The words ‘It is warranted that a 24-hour watch be kept over the site’ are clear in any language and mean what they say. The important words (italicised) are in the next sentence:
‘Failure to comply with any of the warranties outlined hereunder will render this policy null and void.’
The original insurance contract was governed by Norwegian law. Consequently the word ‘failure’ in the phrase ‘failure to comply’, once the no V wording was incorporated in the
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Norwegian contract, meant ‘relevant failure’, that is ‘causative failure’ because that contract was governed by Norwegian law. ‘Failure to comply’ had, despite the general rule of English law, the same meaning and effect in what I shall without compromise call the English contract of reinsurance. The parties to that contract are deemed to have used the same dictionary, in this case a Norwegian legal dictionary, to ascertain the meaning of the terms and conditions in wording no V, including the conditions relating to the 24-hour watch and the words ‘failure to comply’. There is, in my view, no need to treat the reinsurance contract as partly governed by Norwegian law, except in the special sense that one must resort to Norwegian law in order to interpret and understand the meaning and effect of the no V wording in both contracts. That is a different concept from ‘the proper law of the contract’ (or of part of the contract) which is discussed in the authorities on that subject.
I do not, having regard to my conclusion, consider that it would be helpful to me to discuss those authorities. The ascertainment of the parties’ intention (including imputed intention) with regard to the choice of law is, however, often related (and must be subservient) to their contractual intention as deduced from the instrument and the surrounding circumstances, because an imputed choice of law for the whole or part of a contract will sometimes be determined by the court by reference to what it finds the parties were trying to achieve. As Bigham J said in Royal Exchange Assurance Corp v Sjorforsakrings Aktiebolaget Vega [1901] 2 KB 576 at 574:
‘Now, no doubt, as a rule, the law to be applied in construing and enforcing a contract is the law of the country where the contract is made; but this is only because, in the absence of other circumstances, our Courts assume that such was the intention of the parties. If it should appear clearly from other circumstances that the parties intended that the rights should be ascertained and determined by some other law, our Courts will give effect to such intention.’
There is another possible approach which I would briefly examine. The no V wording was included in both contracts in toto, with the strange result, among others, that not only Vesta but the underwriters appear to claim the benefit of the following provision:
‘In the event of a claim under this policy, Underwriters [the term must be generic] reserve the right to replace the stock lost, for which the claim is made, with similar stock of a like species.’
Sir Roger Ormrod has already pointed out that the claims control clause was ‘wholly inapposite and ineffectual in the original contract’. It is tempting to say that different parts of the no V wording ought to be rejected in each contract as superfluous or, alternatively, that in the reinsurance contract Vesta is simply telling the underwriters the terms on which it has signed its original insurance. The 24-hour watch clause, like the stock control clause, could very well with a different method of drafting have been confined to the insurance contract, leaving the reinsurance contract to function as a straightforward indemnity incorporating further settlements and claims control clauses. But both the underwriters and Vesta have throughout regarded the entire no V wording as part of both contracts and have presented their arguments on this basis. Accordingly, I have not felt able to adopt this solution, which was briefly canvassed during the argument before your Lordships. Indeed, in view of the way in which the contracts were formed, it is doubtful whether Vesta could ever have adopted this approach.
Since the hearing, and after reaching my own conclusion, I have read an instructive article by Mr Robert Merkin, ‘Reinsurance, Brokers and the Conflict of Laws’ [1988] Lloyd’s MCLQ 5, in which the author criticised the drafting of the contracts as having failed to distinguish between insurance and reinsurance and cited two cases, Home Insurance Co of New York v Victoria-Montreal Fire Insurance Co [1907] AC 59 and Pine Top Insurance Co Ltd v Unione Italiana Anglo Saxon Reinsurance Co Ltd [1987] 1 Lloyd’s Rep 476, as authority for the proposition that the courts will not permit the incorporation of
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inappropriate terms from an insurance agreement into a reinsurance agreement. The way in which the reinsurance contract was formed in those cases is interesting, but it is now impossible to say how far Vesta could have succeeded with the argument which prevailed there or whether its advisers would have risked the attempt when the case which they actually made depended on showing that the terms of the two contracts were the same.
My Lords, the parties devoted considerable time at every stage of these proceedings to arguing about the effect of the follow-settlements clause and the claims control clause. I have not found in those clauses any real help for either side, but ought to mention them, starting with the observations of the judge where he said ([1986] 2 All ER 488 at 497):
‘Where a reinsurance contract contains a provision requiring the reinsurers to follow the settlements of the reassured, a consent and control of the negotiations clause is a qualification of that provision. Thus reinsurers are not under an obligation to follow settlements if made without their consent. If the consent has not been obtained then the reassured must prove his loss, that is to say, prove his legal liability under the policy of original insurance to the original assured. If he fails to do so, he fails to prove his right [to] an indemnity under the reinsurance contract; if he succeeds, he has proved his loss and may, subject to other defences, recover under the reinsurance contract. As Robert Goff LJ said in Insurance Co of Africa v Scor (UK) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312 at 331: “In my judgment the undertaking by the insurers not to make a settlement without the approval of reinsurers must have been intended to circumscribe the power of insurers to make settlements binding upon reinsurers, so that reinsurers would only be bound to follow a settlement when it had received their approval. In other words, the follow settlements clause must be construed in its context in the policy, containing as it does a claims co-operation clause in this form, as only requiring reinsurers to follow settlements which are authorised by the policy, i.e., those which have received their approval, though presumably reinsurers can, if they wish, waive that requirement. This effectively emasculates the follow settlements clause; but it is nevertheless, in my judgment, what the parties to a policy in this form have agreed.” See also per Fox LJ (at 334). Therefore under English law the presence of the consent clause has only limited effect. This conclusion is not affected by its juxtaposition with the breach of warranty provision which clearly deals with a different subject matter altogether.’
The insurer, if he settles a claim without the reinsurer’s consent, must prove his liability by showing (1) that he was liable and (2) that the amount paid was correct. (I am not for present purposes concerned with compromise settlements.) The reinsurer must then pay up, unless he has a good defence, as the underwriters have contended they have in this case. Let me give an example. If the failure of the insured here to keep a 24-hour watch has been a cause of the loss, Vesta, having waived the obligation, would still have been liable to the insured for the proper amount of the claim, but the underwriters, not having waived it, would have had a good defence against Vesta.
It is idle for the underwriters to attack Vesta’s case by pointing to the absurdity of saying that the follow settlements clause is governed by English law and the claims control clause, which qualifies it, by Norwegian law. In saying that I am not merely relying on the ‘construction of contract’ solution but am pointing out the fallacy of regarding the words ‘Failure to comply with any of the warranties’ etc as part of the claims control cause. As the judge said in the passage quoted above: ‘… the breach of warranty provision … clearly deals with a different subject matter altogether.’
I wish finally to mention another fallacious argument of the underwriters, who said that if, contrary to their contention, the no V wording in the reinsurance contract is governed by Norwegian law then it should be remembered that the need for the breach to be causative expressly does not apply to reinsurance contracts under Norwegian law.
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The answer to this point is that, according to the view taken in the courts below, with which I respectfully agree, we are not here concerned with Norwegian reinsurance law and that the meaning and effect of the failure to comply provision are the same in both contracts.
For these reasons, my Lords, I would affirm the judgment of the Court of Appeal on the question at issue and would dismiss the underwriters’ appeal.
Appeal dismissed.
Solicitors: Clyde & Co (for the underwriters); Richards Butler (for Vesta); Hewitt Woollacott & Chown (for the brokers).
Mary Rose Plummer Barrister.
Dino Services Ltd v Prudential Assurance Co Ltd
[1989] 1 All ER 422
Categories: INSURANCE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): KERR, MANN LJJ AND SIR DENYS BUCKLEY
Hearing Date(s): 31 OCTOBER, 1 NOVEMBER 1988
Insurance – Property insurance – Perils insured against – Theft – Loss or damage from theft involving ‘forcible and violent’ means of entry to premises – ‘Violent’ means of entry – Thieves stealing keys to premises and entering premises by normal use of keys to unlock doors – No physical damage caused to locks or doors – Whether entry by ‘violent’ means.
A business insurance policy taken out by the plaintiff with the defendant insurers to cover the plaintiff’s business premises provided the plaintiff with cover against loss or damage to property on the premises resulting from, inter alia, theft involving entry to the premises ‘by forcible and violent means’. Goods were stolen from the premises by thieves who had stolen the keys to the premises from the plaintiff’s car and then entered the premises at night by simply using the keys in the normal way to unlock various doors, without causing any physical damage to the locks or to the doors. The defendants refused to indemnify the plaintiff under the policy on the ground that the thieves’ entry had not been ‘by forcible and violent means’ within the terms of the policy. The plaintiff brought an action seeking a declaration that he was entitled to be indemnified under the policy. The judge upheld his claim, on the ground that there had been entry to the premises by both forcible and violent means within the policy. The defendants appealed. On the basis that the opening of the doors with the stolen keys constituted ‘forcible’ entry within the policy, the only issue was whether the entry had also been by ‘violent’ means. The plaintiff contended that entry to premises was by ‘violent’ means where the entry was unlawful or illegal because the word ‘violent’ characterised the unlawfulness of the act of theft.
Held – In the context of a policy of insurance against theft from premises by ‘forcible and violent’ means of entry, the word ‘violent’ was to be construed according to its ordinary meaning and meant entry by the use of any force which was accentuated or accompanied by a physical act which could properly be described as violent in nature and character. In the context of such a policy the word ‘violent’ accordingly referred to the physical character of the means of entry and not merely to its unlawful character. It followed that the thieves, by gaining entry to the premises simply by using the proper keys to unlock the doors of the premises, had not entered the premises by ‘violent’ means.
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Accordingly, the plaintiff’s loss was not covered by the policy. The appeal would therefore be allowed (see p 426 d to j, p 427 a b and p 432 d f to h, post).
Re George and Goldsmiths and General Burglary Insurance Association Ltd [1899] 1 QB 595 and dictum of Atkin LJ in Re Calf and Sun Insurance Office [1920] 2 KB 366 at 383 applied.
Dictum of Bankes LJ in Re Calf and Sun Insurance Office [1920] 2 KB 366 at 378 considered.
Notes
For the requirement in insurance against burglary that the entry is forcible and violent, see 25 Halsbury’s Laws (4th edn) para 672, and for cases on the subject, see 29 Digest (Reissue) 557–558, 4991–4992.
Cases referred to in judgments
Calf and Sun Insurance Office, Re [1920] 2 KB 366, CA.
George and Goldsmiths and General Burglary Insurance Association Ltd, Re [1899] 1 QB 595, CA;rvsg [1898] 2 QB 136, DC.
Swales v Cox [1981] 1 All ER 1115, [1981] QB 849, [1981] 2 WLR 814, DC.
Appeal
By a writ issued on 11 November 1985 the plaintiff, Dino Services Ltd, amended in place of William Joseph Nash (trading as Dino Services Ltd), claimed as against the defendant, Prudential Assurance Ltd, sued in error as Prudential Assurance Services Ltd, a declaration that the plaintiff was entitled to be indemnified under a combined business policy effected by Mr Nash with the defendant, in respect of loss sustained by the plaintiff in a theft from the plaintiff’s premises. By a judgment given on 10 November 1987 Peter Pain J held that the theft involved entry to and exit from the premises ‘by forcible and violent means’ within the cover provided by the policy and declared that the plaintiff was entitled to indemnity under the policy in respect of recoverable loss and damage sustained in the theft. The defendant appealed. The facts are set out in the judgment of Kerr LJ.
James Wadsworth QC and Michael Pooles for the defendant.
John B Deby QC and Q Tudor-Evans for the plaintiff.
1 November 1988. The following judgments were delivered.
KERR LJ. This is an appeal by the defendant insurers from a judgment delivered by Peter Pain J on 10 November 1987. The judge had to decide a number of points under a combined business policy dated 11 November 1984 held by the plaintiff. The issues under the policy arose following a successful theft of valuable property from the plaintiff’s premises on the night of 4–5 October 1985.
The plaintiff company is effectively a one-man company of which Mr William Joseph Nash is the moving spirit. It carries on business at unit 7, Endsleigh Industrial Estate, Endsleigh Road, Norwood Green, Heston, Middlesex. Its business is in connection with Ferrari motorcars, particularly the older type of Ferraris, being the maintenance, rebuilding and repair of such cars which can have a very considerable value.
Briefly, before I turn to the detailed facts, what happened is that on a Friday evening Mr Nash locked up the premises. That involved using quite a number of keys. He then drove away in his car, which I think was also a Ferrari, and which is equipped with every kind of alarm and locking device to prevent theft. He parked the car outside a nearby public house where he often went at the end of the working week. He left the keys to his premises in the glove compartment and later on made his way home, leaving the car parked where it was. In the morning the car was gone and when he then went to his premises he discovered that during the night they had been entered unlawfully by means of his own keys taken from the car. So, for the purposes of the interpretation of the policy, they were stolen keys which were used to open the various locks of the premises
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to carry out the theft. The physical operation of opening the doors was normal, but of course the entry was unlawful and criminal.
We are solely concerned with that part of the cover which is headed ‘Theft Section’, of which I read the first clause although it is only para (a) which is relevant to the present facts. The cover provides as follows:
‘In the event of 1 any of the Property Insured described in the Appendix to this Section contained within the Premises being lost or damaged as the result of theft or attempted theft involving a) entry to or exit from the Premises by forcible and violent means or b) actual or threatened assault or violence or use of force at the premises against the Insured or any director partner or employee of the Insured or any other person lawfully on the Premises … during the Period of Insurance the Company will indemnify the Insured by at their option repairing replacing or paying the amount of the loss or damage.’
The judge was also concerned with another provision of the policy, on which a great deal of time was spent both in evidence and argument. That was the Reasonable Precautions Conditions, whereby the insured was to take all reasonable precautions to safeguard the property, to secure the premises and so forth. That issue no longer arises before us. I must say, although of course we have heard no argument on it, that I am somewhat surprised to find that the judge took the view in passing that Mr Nash was not to be equated with the insured for the purposes of that provision. But nothing turns on it at this stage. The main point on that part of the case was that the judge held that in all the circumstances, and after a careful review of the facts, that condition had been satisfied even if Mr Nash was included in the persons to whom it applied. That has not been challenged on this appeal. We are solely concerned with the meaning of the words ‘by forcible and violent means’ in cl 1(a).
I come now to the description of the premises, which I can take from the judgment. I add the identification of the various doors referred to, which are numbered on an agreed plan. The judge said:
‘I have the benefit of a plan and a number of photographs. The premises are a comparatively small unit in an industrial estate, rectangular in shape; the major part being a workshop which has a sliding door [7] coming to the front and then, beside that, an entrance door [2], which opens and leads into a small vestibule. A door to the right [3] leads into the office; a door to the left [5] leads into the wc, and a door straight ahead leads into the workshop [6]. There is in addition, a door at the back of the workshop which leads into an alley [9]. Those doors are numbered on the plan which I have, and I shall be referring to them in the course of my judgment, by the numbers which appear on the plan.’
Before turning to the judge’s findings, it is of some interest to see how the matter was pleaded in the face of the phrase ‘entry by forcible and violent means’. I need only refer to the further and better particulars which were given in reply to an allegation that force and violence had been applied to effect entry. The answer was:
‘The office lobby to workshop door [6] was secured by means of four locks. At the top and the bottom were two Chubb security locks … ’
and then it refers to further locks and then to marks which were found on the wooden door frame immediately below the five-lever Chubb lock. It is said that portions of wood were missing from the door frame—
‘possibly caused by the use of a screwdriver or similar object [therefore] the Plaintiff will contend that force and violence was used on that door [6].’
As regards door 5 it was said that similar marks were found in a similar position on that door and that the wood was dented and that the paint had been damaged and removed and that there were signs of forcing that door.
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Finally, in relation to door 9, it was said, and this was accepted by the judge, that the upper hinge of the rear door had been partially levered out by means of a tool or tools, and that that constituted forcible and violent entry or exit through that door. The judge did not accept any of these allegations, save to the extent of the physical damage to door 9, and his findings are now accepted by both parties to this appeal.
In his judgment, in dealing with what in his view had happened, he said:
‘One has to proceed by inference as to what the thieves must have done, but I think by the conclusion of the evidence both parties were agreed that the thieves must have found the keys in the car in the car park, have also noticed (if they did not already know) some documents which he had in the car which showed where the business was, then driven there, let themselves in at door 2 (the front door) and then gone in quickly through door 3 and switched the alarm off within the 45-second period. It is common ground, as agreed evidence, that the alarm had not been activated on that evening. Then they went through door 6, they went to door 9 (the door at the back) and I think it right to infer that that door was opened by them. The reason I infer that is that there was evidence, both from Mr Nash and from Mr Dann, who had more acquaintance, perhaps, with door 9, because his used to be the job to do the dirty work, washing down various parts near that door, and he frequently had it open in order that fumes could escape and he could get fresh air. And they both told me that before this theft the door opened quite easily, but after the theft the door did not open easily, it required two men (because it is a heavy door) to lift it up into position in order to shut it, and this was because, in the way that doors so often have, the top hinge had come away from the framework (not completely come away but was loose) and the effect of that of course is that the door drops.’
Then he dealt with the steps which were taken to put that right, and he went on:
‘But, on the basis of that, I think it right to draw the inference that the thieves went to the back of the workshop and opened the door, as indeed any competent thief would because he would want to see where it led, in case he was surprised in the middle of his depredations, and, having opened the door (and opened it for some reason somewhat roughly), it may well be the hinge was already a little bit loose and they loosened it considerably more, which led to this difficulty in shutting the door. It is I think quite clear that they did not use that door in order to evacuate what they were stealing, because it was so much easier to load up from the front, where they could operate by bringing the material out through the sliding door. I ought also to mention that it is suggested that door 6 had been damaged in the course of the theft, but the only evidence as to that was that Mr Nash noticed, after the locksmith had been, that it was sticking slightly. It seems to me that is very slender evidence on which to base anything (doors often will start sticking a bit) and there is certainly no physical evidence of any damage of any substance having been done to that door or the frame. Accordingly, I hold that the thieves went straight in through door 6 and that in this burglary no damage was done to door 6. The thieves then having got in, opened the sliding door (door 7) and then proceeded to evacuate a considerable number of tools and parts.’
Mr Nash referred to a press of some 3 cwt, which would have had to be carried some 60 ft from the back of the workshop in order to load it on some conveyance which must have been parked outside the sliding doors in the front of the premises. Those findings are now accepted, and against that background I turn to consider the relevant terms of the cover.
In that regard certain matters were agreed. Counsel for the defendant agreed that, on the authorities, the opening of various doors by means of the stolen keys satisfied the word ‘forcible’. The defendant accepts that force in this context means the application of energy to an obstacle with a view to its removal, as Donaldson LJ said in a quite
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different context in Swales v Cox [1981] 1 All ER 1115 at 1119, [1981] QB 849 at 854. However, I think the reason why the defendant, understandably, accepts that an application of minimal force is sufficient to satisfy the word ‘forcible’ derives from the later of two decisions of this court given as long ago as 1899 and 1920 (see Re George and Goldsmiths and General Burglary Insurance Association Ltd [1899] 1 QB 595 and Re Calf and Sun Insurance Office [1920] 2 KB 366), to which I shall come in a moment.
In itself, this technical interpretation of the word ‘forcible’ appears surprising. Until I saw the 1920 decision it certainly surprised me. It seems to imply that if I use my own house key to let myself into my house, I effect an entry by forcible means. From the first of those two cases it is clear that Lord Russell CJ would not have accepted that as having been the meaning of the word ‘forcible’ in a similar context. But it is equally clear, at any rate as from 1920, that by reason of the later decision, and in particular of what Atkin LJ said in that case, the ordinary action of turning the knob of a door, or turning a key so as to open a lock, has been taken to satisfy the term ‘forcible’ in this context. So the issue in the present case turns on the effect of the additional word ‘violent’.
As to that, counsel for the plaintiff concedes that that word must be given some meaning additional to the word ‘forcible’. That again is a concession which he obviously had to make.
The word ‘violent’ is an ordinary English word, which here appears in a common commercial document. It seems to me that there is no reason why its meaning should be in any way different from what any ordinary person would understand. At first sight I therefore conclude that there should be no need to resort either to a dictionary, or to authorities, to interpret this work; nor to the rule that, this being an insurers’ document, it must be construed against them. On that basis I would take the ordinary meaning of the word ‘violent’ in this context to be that it is intended to convey that the use of some force to effect entry, which may be minimal, such as the turning of a key in a lock or the turning of a door handle, if accentuated or accompanied by some physical act which can properly be described as violent in its nature or character. An obvious picture that springs to mind is the breaking down of a door or the forcing open of a window, which would be acts of violence directed to the fabric of the premises to effect entry. Or there might be violence to a person, such as knocking down someone who seeks to prevent entry, irrespective of whatever may be contained within para (b) of that part of the cover.
Accordingly, on that basis I would not consider for one moment that the ordinary meaning of the phrase ‘entry to premises by forcible and violent means’ can be applied to the action of moving the lever of a lock into its open position by means of its proper key and then turning a knob or pushing the door open to go inside. That would be ‘forcible’ in the sense which I have explained, as is conceded on the authorities. But there would be nothing violent about it at all. That would be my impression.
However, counsel for the plaintiff, who has said everything that could possibly be said, does not accept that approach. He obviously cannot. He stresses the fact that the keys were stolen, and he says that ‘violent’ is a term which characterises the unlawfulness of the act, relying in particular on one short passage in one of the cases to which I shall come. So what he says in effect is that ‘forcible and violent’ is to be equated with ‘forcible and unlawful’ in relation to the means of entry.
Unless constrained by authority, which I would be astonished to find, I cannot accept that submission for one moment. I say that for two reasons. First, ‘violent’ as an ordinary word obviously has a different meaning from ‘unlawful’ or any similar word such as ‘illegal’. Violence is often unlawful, but not always or necessarily so. For instance, if I break down my own door because I have lost my key, I do something violent but nothing unlawful. On the other hand, a forcible entry which is unlawful is not necessarily one which is effected by violent means. There may be unlawfulness in which violence plays a part (that is what is covered by this provision) or there may be unlawfulness without anything which can be described as violence, and in my view that would not be covered.
The second reason why I would not accept the submission of counsel for the plaintiff,
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even if one dictionary meaning of ‘violent’ is ‘unlawful’ as referred to in the judgment to which I come later, is that ‘unlawful’ cannot have been the intended meaning here, because the phrase ‘by forcible and violent means’ occurs in a context which assumes a state of unlawfulness, since we are concerned with ‘theft or attempted theft’ involving entry by the means referred to. Accordingly, I have no doubt that the valiant attempt of counsel for the plaintiff to equate ‘violent’ with ‘unlawfulness’ must be rejected, unless astonishingly there were to be any authority binding on this court which compels its acceptance.
Two decisions of this court have been cited in this connection, on which Peter Pain J said that a good deal of time had been spent, but in my view neither has this effect. Indeed, it seems to me that they support the natural construction of the word ‘violent’ which I have sought to indicate. The first is Re George and Goldsmiths and General Burglary Insurance Association Ltd [1899] 1 QB 595. I read part of the headnote, which refers to a policy on stock in trade. It was insured against loss or damage by burglary or housebreaking ‘as hereinafter defined’, and the definition was: ‘by theft following upon actual forcible and violent entry upon the premises … ' The insured property was in a shop in the Strand, the front door of which was shut but not locked or bolted, so that access could be obtained by merely turning the handle of the door. The headnote goes on:
‘In the early morning before business hours, during the temporary absence of a servant of the assured, some person opened the front door, entered the shop, and, breaking open a locked-up compartment or show-case within, which formed a portion of the shop, stole therefrom part of the insured property … ’
This court reversed the judgment of the Divisional Court ([1898] 2 QB 136) and held that the loss was not covered by the policy.
In that connection two matters should be mentioned before referring to the judgments. First, the word ‘actual’ has disappeared from the words of the cover in this policy, but it clearly survived at least as long as 1920 as appears from the next case. However, counsel for the plaintiff has not suggested, again, if I may so so, rightly, that that affects the present position. It may be that ‘actual forcible and violent means’ was thought to be an unhappy phrase because ‘actual’ suggested something which is the opposite of constructive, and it is difficult to see what can be meant by ‘constructive violence’ in this context. Second, the reason why the judgment of the Divisional Court was reversed in that case was because that court had concentrated on the technical meaning of ‘burglary’ and ‘housebreaking’ and had not, in the view of this court, paid sufficient attention to the definition which followed and which is so similar to the words in the present case.
I should mention one part of the argument on behalf of the respondent plaintiff. This is reported as follows ([1899] 1 QB 595 at 598–599):
‘If the word “violent” means anything more than “forcible”, it merely means unlawful as being against the will of the owner of the premises. All that it imports is that the entry must be by unlawful force. Here the entry by turning the handle of the door involved a certain amount of force, and it was unlawful and it amounted to housebreaking … ’
Although not precisely the same as the argument which has been addressed to us on behalf of the plaintiff in the present case, there is a distinct echo of it there.
The leading judgment was given by Lord Russell CJ. He said that he wished to say that the case involved no question of principle or of general interest (see [1899] 1 QB 595 at 600). However, as so often happens, judges underestimate the importance of what they are saying, since we have been asked to look at this case again and again as it were through a microscope.
He said (at 602):
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‘Taking the language of the policy, namely, that the assured is to be protected against loss “by theft following upon actual forcible and violent entry upon the premises”, apart from technical considerations, could any one, as a matter of good sense, and, applying its ordinary meaning to ordinary language, suppose that an entry which is effected by turning the handle of the door and walking into the shop is an “actual forcible and violent entry” within the meaning of the policy? It appears to me that such a suggestion is repugnant to good sense.’
He added (at 603) that what was intended to be covered was an entry effected by real violence in contrast to an entry effected by stealth without violence and he then dealt with the word ‘actual’ in a passage which I need not read. But if one goes on, one can see that he would not have accepted the meaning of the word ‘forcible’ which is now conceded in this case. He said (at 603–604):
‘Suppose that the door is closed, and in order to obtain entrance it is necessary to turn the door-handle, that being the natural method by which every one is intended to go in and out of the shop; it is suggested that that is sufficient to constitute a forcible entry within the policy, and the Court cannot enter upon the question, if there be any force, whether a greater or less degree of force was used. But let us go a little further, and suppose that the door is ajar and is pushed open for the purpose of effecting an entry. It was argued that that would be sufficient force to constitute an actual forcible and violent entry within this policy. But let us go a little further still, and suppose that the door is ajar, but so far open that a little boy or a lean person could enter without opening it further, but a stout person could not do so. Would it be a forcible entry within the policy, if such a person pushed it fully open and entered, but not so, if a small thief entered without pushing it open? It seems to me that such considerations shew that the line of reasoning on behalf of the respondent is not sound. As I have said, I conceive that the policy was directed to securing the assured against the consequences of an entry effected by real “violence,” as the word is commonly understood, in contradistinction to an entry effected by stealth without violence as I think the entry in this case was effected.’
Pausing there, one can see that that does not accord with the concession in this case. The stout person in the example given by Lord Russell CJ who had to push the door a little to get in would, it appears, have entered forcibly, whereas the lean person or the little boy would not. Therefore it is rightly said by counsel for the plaintiff that between 1899, the date of that decision, and after the second case in 1920, it seems clear that the word ‘forcible’ acquired a new meaning in the insurance context.
Lord Russell CJ then dealt with that part of the argument which I have read and said, referring to counsel for the respondent (at 604):
‘His argument was this. He adopted the argument of his leader to the effect that the word “actual” was the really important word in the policy. He then proceeded to argue that it would be no unfair construction of the words “forcible and violent” to construe them as meaning “unlawful,” and therefore, if there was an unlawful entry, that was sufficient to satisfy the words of the policy. It seems to me that that view cannot be accepted, because it would follow from it that any man who in broad daylight entered a shop, the door being wide open, with the felonious purpose of committing a theft therein, if he got an opportunity of doing so, would have effected an unlawful entry within the meaning of that argument; and therefore that the words of the policy would cover the case of a man who enters a shop without any impediment in his way at all, and, having done so, contrives to distract the attention of the shopman or get him on some pretext to go to another portion of the premises, and then proceeds to commit a theft. I think no one could say as a matter of good sense that such a case came within a policy which in express terms is confined to cases of “theft following on an actual forcible violent entry on the premises“.’
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A L Smith LJ agreed. He said (at 606):
‘The first question is, Did this theft follow upon “actual forcible and violent entry upon the premises” ? The answer to this certainly appears to me off-hand to be that it did not; for I ask, where is the force and where is the violence? ’
Then, there is a passage in his judgment, which, speaking for myself, I find of the greatest assistance in explaining the meaning, or the general sense, of the word ‘violent’ in this context. He said (at 608):
‘It is said that the word “violent” has no meaning other than that of the word “forcible” to which it is conjoined in the clause in question, and should therefore be discarded. [Pausing there, that is not what counsel for the plaintiff has argued here. A L Smith LJ went on:] I do not think so. In my opinion the word “violent” was used to accentuate and give point to the kind of force which was covered by the policy, and to prevent, if possible, it being argued, as argued it has been, that, as the mere act of turning the handle of a door is the exercise of some force, therefore such an act was covered by the policy. It is true the entry must be actual, but also with force and violence. These last works cannot be omitted.’
I do not think I need read anything from the judgment of Collins LJ in that case; he also agreed that the words of the cover had not been satisfied.
I come now to the second case, in which the words were again very similar. That arose out of an arbitration in Re Calf and Sun Insurance Office [1920] 2 KB 366. It concerned a burglary and housebreaking policy on business premises which covered property in the premises if it be—
‘stolen by theft following upon an actual forcible and violent entry of the said premises by the person or persons committing such theft.’
This was a tailor’s shop in the West End of London. The premises consisted of a shop on the ground floor, a fitting room on the first floor and a trimming room in the basement. It was admitted that all three of these were within the word ‘shop’ in the cover. There were then residential premises above these premises. As appears from the headnote, what happened was that:
‘During the currency of the policy a person in the day-time entered the house in the normal way without any force or violence, and concealed himself in a coal cellar in the basement. At night, after the shop and trimming room had been locked up, he left the coal cellar and entered the trimming room from the passage, having by means of an instrument slid back the catch of the lock and so opened the door. He took a quantity of goods from the room and went up the stairs with the goods to the shop, which he entered by violently breaking open the door leading into the shop, and having taken more goods from the shop he left the house, with all the goods he had taken, by the front door.’
The arbitrator had concluded that entry had been made without any force or violence, but that if, contrary to that view, there had been some entry which satisfied the words of the cover, then the entry into the trimming room was not actual, forcible and violent entry (that was where the catch of the lock had been slid back by some instrument). On the other hand, the entry into the shop was obviously violent, since the shop door had been violently broken down. That was the view of Mr MacKinnon KC who stated a case for the opinion of the court. On these findings this court did not agree with him and decided that the insured was entitled to recover. The main issue was whether a forcible and violent entry on an inner door, a part of the premises, satisfied the cover, which referred to ‘forcible and violent entry of the premises’. If the violent breaking down of the shop door was sufficient, then that decided the case, because it was conceded that the policy would then cover the goods which had previously been removed from the trimming room. The reason, of course, was that the theft would have taken place, as a
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matter of common sense, when all the goods were removed which had been taken from anywhere on the premises.
The first judgment was given by Bankes LJ. For present purposes the relevant part concerns the entry into the trimming room, although it was not strictly necessary for the decision. Describing this entry, Bankes LJ said that by means of an instrument the intruder, who had secreted himself in a cellar—
‘forced back—I use those words deliberately—the latch of the Yale lock sufficiently to enable him to open the door, and so gained access to that room.’
(See [1920] 2 KB 366 at 376.)
He then dealt with the forcible and violent entry to the shop premises, and concluded that that was sufficient to decide the case. He went on to say that there had been considerable argument about the nature of the entry to the trimming room, and referred to George’s case [1899] 1 QB 595. He said ([1920] 2 KB 366 at 378):
‘The facts in that case were wholly different from those in the present case. No force was used in obtaining access to the premises covered by the policy. The thief simply turned the handle of the front door and walked in.’
Pausing there, one can see that Bankes LJ is apparently still taking the same view as that of Lord Russell CJ in 1899, that turning a door handle is not ‘forcible’. He went on:
‘In the present case the thief did something very different. Instead of finding a door through which persons were to pass by turning the handle, he found a locked door through which only an authorized person who had the key was intended to pass. To open the door he used sufficient force to force back the catch of the lock. All I need say about the words “forcible and violent entry” is that in my opinion they have reference to the character of the act by which an entry is obtained rather than the actual amount of force used in making the entry.’
That is the passage on which the judge principally relied and on which counsel for the plaintiff placed reliance on this appeal.
However, in referring to the character of the act, Bankes LJ was clearly referring to the forcing, having used that word deliberately in the passage already read, of a lock as opposed to opening it in the normal way with its key. In my view he was not referring to the unlawful nature of the act at all, but to its physical nature, the forcing of the lock.
Atkin LJ said a number of things which have no doubt considerably influenced the interpretation of the word ‘forcible’ since then (see [1920] 2 KB 366 at 382–383). He dealt with the shop and then came to the trimming room (at 383):
‘As, however, the point has been argued and the arbitrator has expressed an opinion upon it, I desire to say that in my opinion there was an actual forcible and violent entry of that room. In ordinary language the lock was forced, and forced in such a sense that it could properly be said that the room was forcibly and violently entered.’
Then he referred to the old law dealing with indictments of persons who unlawfully enter on property, where the words ‘by force and arms’ in the Latin text occur; I need not read that. He then went on as follows:
‘I think that the view taken by the learned judges in George’s Case was this: that by the words “actual forcible and violent entry” it was intended to mean an entry effected by the exercise of force in a manner that was not customary in order to overcome the resistance of the usual fastenings and protections in the premises.’
In my view, that is a very important sentence. He went on:
‘If a person turns a key he uses force but not violence. If he uses a skeleton key, he uses force but not violence. If on the other hand instead of using a key he uses a
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pick-lock, or some other instrument, or a piece of wire, by which as a lever he forces back the lock, it appears to me that he uses force and violence, and in the present case both force and violence were used.’
Younger LJ agreed, and I need not read from his judgment.
I then come to the relevant passage in the judge’s judgment in the present case. It begins:
‘Now “violent” is defined in the Oxford English Dictionary in this way. Of things: “Having some quality or qualities in such a degree as to produce a very marked or powerful effect, especially in the way of injury or discomfort. Intense, vehement, very strong or severe.” Of persons: “Acting with or using physical force or violence, especially in order to injure, control or intimidate others. Committing harm or destruction in this way. Acting illegally. Taking illegal possession.” And, of actions: “Characterised by the doing of harm or injury accompanied by the exercise of violence. Characterised by the exertion of great physical force or strength, done or performed with intense or unusual force and with some degree of rapidity. Not gentle or moderate.” That is not the whole definition, but I think those are the parts which are helpful for the purpose of this case. So one arrives at the position that “violent” may, in certain circumstances, mean no more than “very forcible“. But commonly, it means “forcible” in some context where the force is being used in a way that is injurious or illegal. That it has in this context the latter meaning, is borne out partly by the fact that the word “forcible” is used as well as “violent”, and one starts on the basis there would be no point in using “violent” if it simply meant the same thing, and, second, by the context in which it is used. It is used in the Theft Section in cl 1(a) of the cover, which couples theft involving “entry to or exit from the Premises by forcible and violent means” with theft involving “actual or threatened assault or violence … ” ’
And he than quotes the words of cl 1(b) of the cover.
He then reviewed at length the judgments in the two cases to which I have referred, and states his conclusion in the following passage:
‘In construing this clause, I have to bear in mind of course the contra proferentem principle. This was the defendant’s document and in so far as there are ambiguities, those are to be resolved in favour of the plaintiff. Now the use of the key by the thieves was unlawful and the purpose of the use was to injure the plaintiff’s rights in his property by depriving him of it, and I am quite happy to follow the phrase of Bankes LJ (in Re Calf and Sun Insurance Office [1920] 2 KB 366 at 378), that the words to be construed have reference to the character of the act by which the entry is obtained. It seems, applying the definition in the Oxford English Dictionary, that the theft did involve entry to and exit from the premises by forcible and violent means.’
With great respect, I cannot accept that reasoning. We have not been referred to the dictionary, where one illustration of ‘violent’ is evidently equated with illegality or unlawfulness in relation to persons. Presumably it would have been of no assistance to us. Whatever that illustration may be, that cannot be the meaning of the word here. I have also already indicated that in my view the judge misinterpreted the passage from the judgment of Bankes LJ on which he relied.
Counsel for the plaintiff also referred to another part of the cover, dealing with keys, as an aid to the construction of cl 1(a) of the theft section. It is in the ‘Extensions’ to the theft section, cl 5, headed ‘Keys’, in the following terms:
‘The company will in addition to the Limits of Liability pay to the Insured an amount not exceeding £500 incurred as a result of the necessary replacement of locks at the Premises following the loss of keys pertaining to the Premises … by theft involving entry or exit by forcible and violent means from the Premises or the home of any director partner … ’
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What counsel for the plaintiff submits, as I understand it, and I think I do understand it, is that given the words ‘in addition to the Limits of Liability”, this provision is based on the assumption, or at any rate points to the assumption, that the keys and the changed locks which it covers in the two circumstances referred to, namely ‘forcible and violent’ entry to the premises or ‘forcible and violent’ entry to a relevant person’s home, are covered in addition to the limits of liability comprised in the main part of the theft cover. So, says counsel for the plaintiff, in cases covered by cl 5 the keys and the changed locks are covered, but it is envisaged that that cover will be additional to the main cover. Therefore, he says, you there have an illustration of a situation where, if for instance the keys were taken from one of the persons described by entry into his home by forcible and violent means, then they become stolen keys with whose assistance the business premises which are covered by the policy are then simply entered in the normal way and the main cover then applies. That is an ingenious argument. But in my view one cannot construe insurance policies in this overanalytical way, because they so often contain words which on a strict analysis may be unnecessary but cannot properly be used to distort the ordinary meaning of the main part of the cover. What cl 5 was intended to do was merely to make it clear in what circumstances up to £500-worth of loss due to stolen keys and changed locks will be covered. It cannot be used as a means of affecting the ordinary sense of the words used in the main cover in cl 1(a).
The point is similar to another one made by counsel for the plaintiff. He asks rhetorically: if ‘violent’ has its ordinary meaning, as I think it has, then why use the word ‘forcible’ at all, since ‘violent’ would include the concept of ‘forcible’ ? I can see that would be so. The reason why the word ‘forcible’ is there is no doubt because it has an old history and one knows that insurance policies, like other standard business documents, very often do not have their wording changed even when it might be logical to do so. I regret that I cannot attach any weight to either of these submissions.
Counsel for the plaintiff finally says, in my view entirely reasonably, that this is a business document which to the ordinary person would convey that cl 1(a) is intended to cover against burglary, and cl 1(b) against robbery, and that Mr Nash would be amazed to find that on the facts of this case he was uninsured. I agree and have every sympathy with Mr Nash. Since it is now accepted that he took reasonable precautions and this is an exceptional and novel point, and an important one for insurers generally, I would personally hope that this might be regarded as a deserving case for an ex gratia payment. But, having to construe the policy as I must, I have no doubt that it cannot be construed in the way in which the judge construed it, and accordingly I would allow this appeal.
MANN LJ. I agree. Although we are differing from the judge below, there is nothing I can usefully add, except to say that it seems to me that this phrase, which has been in currency now for nearly 100 years ought to be the subject of scrutiny.
SIR DENYS BUCKLEY. I also agree. I do not think I can usefully add anything to the very full judgment which Kerr LJ has delivered.
Appeal allowed.
Solicitors: R J Hunter (for the defendant); Howard Kennedy (for the plaintiff).
Wendy Shockett Barrister.
Babanaft International Co SA v Bassatne and another
[1989] 1 All ER 433
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): KERR, NEILL AND NICHOLLS LJJ
Hearing Date(s): 12, 13, 18 MAY, 29 JUNE 1988
Practice – Pre-trial or post-judgment relief – Mareva injunction – Worldwide Mareva injunction – Post-judgment injunction – Extra-territorial effect of injunction – Protection of third parties – Foreign defendant having foreign assets – Defendant likely to attempt to frustrate execution of judgment against him – Whether court having jurisdiction to grant Mareva injunction over defendant’s foreign assets before or after judgment – Whether worldwide injunction should be qualified by express proviso protecting third parties.
The plaintiffs obtained judgment for over $15m against the defendants, who were two brothers who were Lebanese nationals, one of whom lived mainly in Switzerland while the other lived mainly in Greece. They owned property in the United Kingdom and carried on shipping and oil-trading transactions worldwide. They had a peripatetic lifestyle and carried out their business transactions in a secretive manner through a network of family companies. When the defendants failed to satisfy the judgment the judge made an order for the examination of the defendants under RSC Ord 48 to determine what assets were available to meet the judgment debt. The judge also ordered the defendants to file an affidavit disclosing their assets wherever situated and, because he considered that they would be likely to take any step open to them to frustrate the execution of the judgment, he granted an injunction restraining the defendants from dealing with their assets outside the jurisdiction without giving the plaintiffs notice of their intention to do so. The defendants appealed against the injunction.
Held – Although the court had jurisdiction to grant a Mareva injunction over a defendant’s foreign assets after judgment, had been given the court would not make an unqualified Mareva injunction covering assets abroad because it would involve an exorbitant and extra-territorial assertion of jurisdiction of an in rem nature over third parties outside the jurisdiction. Instead, such an injunction, if made, should be qualified by an express proviso making it clear that the injunction was directed to the defendant himself and did not affect the rights of third parties or seek to control their activities. Accordingly, the unconditional injunction made by the judge would be replaced by an injunction directed specifically to the defendants and to that extent the appeal would be allowed (see p 438 g h, p 440 h j, p 441 a to c, p 446 e to h p 447 d e, p 449 c, p 450 b to g j, p 452 d e and p 453 d e, post).
Dictum of Hoffmann J in Bayer AG v Winter (No 3) [1986] FSR 357 at 362 approved.
Ashtiani v Kashi [1986] 2 All ER 970 considered.
Per Kerr LJ. (1) The principles applying to the grant of a worldwide post-judgment Mareva injunction also apply to a pre-trial worldwide injunction (although the cases in which it is appropriate to grant such an injunction will be rare) (see p 441 e and p 447 j, post).
(2) A Mareva injunction covering assets abroad should provide that it does not affect the rights of third parties except to the extent that the order is enforced by the courts of states in which the defendant’s assets are located (see p 441 c e f j to p 442 a and p 447 f g, post).
Notes
For Mareva injunctions, see 37 Halsbury’s Laws (4th edn) 362, and for cases on the subject, see 37(2) Digest (Reissue) 474–476, 2947–2962.
Page 434 of [1989] 1 All ER 433
Cases referred to in judgments
A-G v Newspaper Publishing plc [1987] 3 All ER 276, [1988] Ch 333, [1987] 3 WLR 942, Ch D and CA.
Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888, [1986] 3 WLR 647, CA.
Ballabil Holdings Pty Ltd v Hospital Products Ltd (1985) 1 NSWLR 155, NSW CA.
Bayer AG v Winter [1986] 1 All ER 733, [1986] 1 WLR 497, CA.
Bayer AG v Winter (No 3) sub nom Bayer AG v Winter (No 2) [1986] FSR 357.
Clunies-Ross, Re, ex p Totterdell (1987) 72 ALR 241, Aust Fed Ct.
Coombs & Barei Constructions Pty Ltd v Dynasty Pty Ltd (1986) 42 SASR 413, S Aust SC.
Crown Petroleum Corp v Ibrahim (27 April 1988, unreported), QBD.
de Cavel v de Cavel Case 143/78 [1979] ECR 1055.
Denilauler v Snc Couchet Frères Case 125/79 [1980] ECR 1553.
Faith Panton Property Plan Ltd v Hodgetts [1981] 2 All ER 877, [1981] 1 WLR 927, CA.
Home Office v Harman [1982] 1 All ER 532, [1983] 1 AC 280, [1982] 2 WLR 338, HL.
Interpool Ltd v Galani [1987] 2 All ER 981, [1988] QB 738, [1987] 3 WLR 1042, CA.
Iraqi Ministry of Defence v Arcepey Shipping Co SA (Gillespie Bros & Co Ltd intervening), The Angel Bell [1980] 1 All ER 480, [1981] QB 65, [1980] 2 WLR 488.
Maclaine Watson & Co Ltd v International Tin Council (No 2) [1988] 3 All ER 257, [1988] 3 WLR 1190, CA.
Mareva Cia Naviera SA v International Bulkcarriers SA, The Mareva (1975) [1980] 1 All ER 213, CA.
Penn v Lord Baltimore (1750) 1 Ves Sen 444, [1558–1774] All ER Rep 99, 27 ER 1132.
Portarlington (Lord) v Soulby (1834) 3 My & K 104, [1824–34] All ER Rep 610, 40 ER 40.
Reilly v Fryer (1987) 138 NLJ 134, CA.
Seaward v Paterson [1897] 1 Ch 545, [1895–9] All ER Rep 1127, CA.
Siskina (cargo owners) v Distos Cia Naviera SA, The Siskina [1977] 3 All ER 803, [1979] AC 210, [1977] 3 WLR 818, HL.
South Carolina Insurance Co v Assurantie Maatschappij ‘De Zeven Provincien’ NV [1986] 3 All ER 487, [1987] AC 24, [1986] 3 WLR 398, HL.
Toller v Carteret (1705) 2 Vern 494, 23 ER 916.
Yandil Holdings Pty Ltd v Insurance Co of North America (1986) 7 NSWLR 571, NSW SC.
Z Ltd v A [1982] 1 All ER 556, [1982] QB 558, [1982] 2 WLR 288, CA.
Appeals
The defendants, Bahaedine Bassatne and Walid Mohamed Bassatne, appealed against the decisions of Vinelott J whereby (i) on 19 April 1988 he granted, on the application of the plaintiffs, Babanaft International Co SA, a Mareva injunction precluding the defendants from dealing with any of their assets worldwide without giving five days’ notice to the plaintiffs’ solicitors and (ii) on 20 April 1988 he refused the defendants’ application to restrain the plaintiffs from giving notice of the injunction to persons who might hold the defendants’ assets. The facts are set out in the judgment of Kerr LJ.
Gavin Lightman QC, Barbara Dohmann QC and Hugo Page for the defendants;.
Anthony Clarke QC, Simon Mortimore and Charles Haddon-Cave for the plaintiffs.
At the conclusion of the argument the court announced that the appeals would be allowed, the injunction discharged and an injunction limited to the defendants personally substituted for reasons to be given later.
29 June 1988. The following judgments were delivered.
KERR LJ. On 29 March 1988, after a trial which had lasted several weeks, Vinelott J gave judgment for the plaintiff company (Babanaft) against both defendants in a total sum which exceeded $15m inclusive of interest. On the following day, on an ex parte
Page 435 of [1989] 1 All ER 433
application on notice, he made an order for the disclosure by the defendants of their assets worldwide pursuant to RSC Ord 48 and for the oral examination of the defendants in relation to their assets. He also granted a Mareva injunction covering any assets of the defendants in this country, but refused to extend this to assets outside the jurisdiction. He said that he concluded, with some regret, that he was precluded from doing so by the reasoning of the decision of this court in Reilly v Fryer (1987) 138 NLJ 134 in which Mustill LJ had delivered the main judgment. The plaintiffs appealed against this refusal on the same day, the last day of the term, and sought a ‘holding order’ freezing the defendants’ assets worldwide pending a full hearing of their appeal after the Easter vacation. A division of this court consisting of Slade, Mustill and Russell LJJ declined to make any order to this effect and adjourned the plaintiffs’ appeal. However, in the course of the discussion, in particular as the result of comments from Mustill LJ, it became apparent to the plaintiffs’ advisers that neither the decision nor the reasoning in Reilly v Fryer would have precluded Vinelott J from granting the worldwide Mareva injunction which they sought. They therefore renewed their application to him on 15 April 1988 to extend the injunction to assets outside the jurisdiction. That application was heard inter partes. On seeing the notes of what had been said in the Court of Appeal on 30 March, Vinelott J agreed that Reilly v Fryer did not stand in the way of the order which he had wanted to make, and it is now common ground that he was correct in this view. We have accordingly not been referred to Reilly v Fryer and I say no more about it. Having heard the application, the judge then granted a Mareva injunction on 19 April 1988 precluding the defendants from dealing with any of their assets worldwide without giving five days’ notice to the plaintiffs’ solicitors in every case. On the following day he gave a further brief judgment in which he refused the defendants’ application to restrain the plaintiffs from giving notice of the injunction to persons such as banks or other institutions who might hold assets of the defendants. In pursuance of that judgment the plaintiffs’ solicitors notified some 47 entities in various countries of the terms of the injunction, including some 24 banks and two international credit card companies.
The defendants appealed against both of these judgments. We heard the appeals on 12 and 13 May. On 18 May we allowed the appeals, discharged the order of 19 April and substituted an order limited to the defendants personally, as explained below, which expressly excluded any effect on any third party. We also ordered that all persons who had been informed of the previous order should be notified that they should now disregard it, since it had been discharged and replaced by an order which merely affected the defendants personally. We announced that we would put our reasons in writing and give them as soon as convenient. We adopted this course because of the urgency of the situation and of pressures of time which would not have enabled us to give full judgments before the spring vacation and during the absence of two members of the court for some weeks, also bearing in mind that the case obviously raises issues of general importance.
Before giving my reasons for allowing the appeals to that extent I must summarise the history. It is most unusual, and judgments of the order of $15m against individual defendants are of course also not common. Although we all concluded that the orders made by Vinelott J could not stand, one can readily see why he considered that drastic measures were necessary.
The defendants are brothers, and I will refer to them as ‘BB’ and ‘WB’. Babanaft is a Panamanian company which was incorporated in 1976 but insolvent and in members’ voluntary liquidation since May 1985. Its incorporators, shareholders, directors and officers were BB as the president and WB as secretary and treasurer respectively, together with a Mr Aladin Hassan Bahri as vice-president, who is believed to have died in August 1979 when travelling in a private jet which crashed in the desert on a flight to Jeddah. These three persons had until then operated highly successfully in shipping and oil transactions through a number of companies, and from about 1978 they decided to combine their operations into a joint venture which was channelled through Babanaft. But, after the death of Mr Bahri, the moving spirit in the shipping business, and also due
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to trade recessions in oil, the business of the company deteriorated, and it was evidently stripped of its assets, which had been very substantial. There was a lengthy and highly complex history of BB and WB’s dealings with the company’s assets and of proceedings concerning the estate of Mr Bahri, which were closely examined in the lengthy judgment of Vinelott J in the action. But for present purposes it is only necessary to refer to the matters which gave rise to the judgment against the defendants. In 1979 Babanaft had entered into a long-term time charter for a new building, subsequently named the ‘Eastern Venture’, with Beeston Shipping Ltd, a Liberian company. The vessel was delivered in December 1980, but in March 1982 Babanaft ceased to pay hire. In May 1982 Beeston treated the charterparty as repudiated and brought proceedings in the Commercial Court. These resulted in a judgment for some $700,000 against Babanaft for unpaid hire, and a reference to arbitration to assess the full damages to which Beeston was entitled. This led to a default award against Babanaft for about $12m and an additional sum of £41,000, and judgment in terms of the award was entered in March 1987.
A Mr C T E Hayward had meanwhile been appointed as receiver of Babanaft in January 1985. He brought the present action in the name of Babanaft against BB and WB in the Commercial Court, and the action was subsequently transferred to the Chancery Division. The substance of the plaintiff’s allegation was that, although BB, WB and Mr Bahri had nominally merely been shareholders and directors of Babanaft, in truth they had carried on a joint venture as partners which used Babanaft as a vehicle and as a screen to protect them from personal liability, with the result that they were jointly and severally liable to indemnify Babanaft in respect of, inter alia, the judgment debt owed to Beeston. This is the allegation which Vinelott J found to be established and which resulted in the judgment for over $15m against the defendants. We understand that the defendants intend to appeal.
It is now necessary to say something about them. They are unusually peripatetic in their lifestyle and elusive in the way they do business and hold assets. Both are Lebanese nationals, but it is not clear whether they are still domiciled in the Lebanon. BB is mainly resident in Switzerland and WB mainly in Greece. However, three substantial residential properties are also available to BB in this country (which are comprised in the domestic Mareva injunction) and the brothers are also joint owners of a number of properties in the Lebanon. Both are described as oil traders in a very substantial way, and BB says that he has an income from transactions and commissions of the order of $400,000 to $500,000 a year. All ‘their’ assets appear to be held in the names of a large network of companies incorporated in many countries in which they or members of their families hold bearer shares. The properties available to BB in this country appear to be owned in this way. He appears to spend considerable time here and was served with these proceedings when he was here in hospital after an attack with a knife, following which he says that both brothers received anonymous threats to their lives and demands for money. WB has no apparent connection with this country but submitted to the jurisdiction after the proceedings had been served on his brother. Thereafter both defendants have complied with the orders made for the disclosure of their assets pursuant to RSC Ord 48, but the true nature and location of their assets remains unclear, and they are due to be cross-examined on their affidavits in the near future. In his judgment of 29 March 1988, when he granted the domestic Mareva injunction but at that stage refused to extend it abroad, Vinelott J said:
‘I should at the outset say that in the course of the hearing, extending over a long period in which both defendants gave evidence and in the course of which I had to go through a very large volume of documentary evidence, I reached the conclusion that the defendants would be likely to take any step open to them to frustrate the execution of the judgment.’
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In the judgment of 19 April now under appeal, whereby he extended the Mareva injunction worldwide, he said about the defendants:
‘They are businessmen who carry on their business activities in the field of, among other things, oil trading worldwide. WB has a settled home in Athens. BB has for some years had a house available to him in England. Indeed he has had the use of a house in the country and one in London, although both are owned by Panamanian companies, and some at least of his business affairs are conducted from offices in London. He also has an address in Switzerland and offices elsewhere. BB and WB carry on their business activities through a large number of companies almost all incorporated in jurisdictions, Panama, Liberia, and the Dutch Antilles, in which it is difficult for outsiders to obtain information about their ownership, control and assets. The shares of these companies are for the most part bearer shares, and no annual returns or accounts are required to be filed in any registry in which they can be inspected by the public. Babanaft is, therefore, likely to face considerable difficulties in ascertaining the extent of the assets available to meet the judgment it has obtained and in enforcing that judgment. Moreover, during the course of the hearing, I reached the conclusion that BB and WB would be likely to take any step open to them to frustrate or delay execution of the judgment.’
The judge then considered the decisions of this court in Faith Panton Property Plan Ltd v Hodgetts [1981] 2 All ER 877, [1981] 1 WLR 927, Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888 and Reilly v Fryer and concluded that he was—
‘free to decide whether on the facts of this case an injunction should be granted to restrain BB and WB from disposing of their assets without as well as within the jurisdiction.’
In considering this, he gave particular weight to the second reason given by Dillon LJ in Ashtiani v Kashi [1986] 2 All ER 970 at 977, [1987] QB 888 at 901, namely the difficulty for English courts to control or police enforcement proceedings in other countries, and the problems liable to arise from notification of such orders to third parties in other countries. He then said:
‘These are important practical considerations which must be borne in mind in deciding whether to grant an injunction affecting foreign assets. Their weight must be evaluated in the context of the particular facts and of the width of the order sought. In the instant case the injunction is sought in aid of the examination under Ord 48, that is, to ensure that BB and WB do not frustrate the purpose of the examination by disposing of assets disclosed in the course of or before the examination until after Babanaft has had an opportunity of considering whether it can take effective steps to execute the judgment in the jurisdiction where those assets are situate. That purpose, it seems to me, will be fully answered by the grant of an injunction restraining BB and WB from dealing with their assets outside the jurisdiction without giving Babanaft reasonable notice of their intention to do so. Once the existence of an asset with which BB and WB propose to deal has been disclosed, it will be open to Babanaft to take any steps available in the jurisdiction where the asset is situate to execute the judgment or to prevent BB and WB from disposing of it or, if appropriate, to make a further application to this court for, for instance, the appointment of a receiver. An injunction in those limited terms would not, it seems to me, create the difficulties developed by counsel for the defendants.’
The order which he subsequently made was subject to an undertaking on behalf of Babanaft to pay the reasonable costs and expenses of third parties served with notice of the order and to indemnify them against liability arising from compliance with it. It was pointed out on behalf of the defendants on this appeal that this was unsatisfactory, since
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Babanaft was insolvent and there was no undertaking to pay damages. These matters were disposed of without opposition from the plaintiffs by a full undertaking in damages given on behalf of Beeston’s P & I club who had supported the litigation, the London Steamship Owners Association, and no more need be said about that aspect. The operative part of the order which is relevant for present purposes restrained the defendants until further order, whether by themselves, their servants or agents or otherwise howsoever from—
‘(i) disposing of or transferring charging or diminishing or causing or procuring or permitting the disposal transfer charging or diminution or in any way howsoever dealing with any of their respective assets money or goods without the jurisdiction whether such assets be in their own names or jointly with any other persons or in the names of nominees or trustees for them save in so far as the value of such assets money or goods within the jurisdiction exceeds the sum of $16,000,000 (Sixteen million United States Dollars), and (ii) Without prejudice to the generality of the foregoing and save as aforesaid from disposing of transferring charging or diminishing or removing from their present locations or otherwise dealing with any bearer shares held by them or either of them or jointly with any other person or by agents or nominees for them in the capital of any company wherever such shares are situate and such company incorporated without first giving at least 5 clear English working days’ notice in writing or by telex to the Receiver’s solicitors Messrs Holman Fenwick & Willan at their offices in London at Marlow House Lloyds Avenue London EC3N 3AL marked “For the urgent attention of Mr N Robinson and Mr T Jones” of their intention to do so identifying with particularity the precise value nature and whereabouts of such assets including but not limited to the number(s) of any bank account(s) where relevant.’
This order was qualified by a proviso in the following terms:
‘Nothing in this injunction shall prevent any bank or third party (not being a third party connected or associated in any way with the Defendants or either of them or any relative of the Defendants or either of them or any company or firm united or associated in any way with the Defendants or either of them or any relative of the Defendants or either of them) from exercising any right of set off it may have in respect of facilities given to the Defendants or the said companies before the date of this injunction including any interest which has accrued or may hereafter accrue in respect of such facilities.’
We understand that this is nowadays a standard type of proviso to Mareva injunctions, and it is of course inserted for the benefit of third parties who may be affected by the freezing order. My reason for quoting it is that it illustrates that, although Mareva injunctions are orders made in personam against defendants, they also have an in rem effect on third parties. It shows that, save to the extent of the proviso, the order is binding on third parties who have notice of the injunction. Although the passage in the judgment of Lord Denning MR in Z Ltd v A [1982] 1 All ER 556 at 562, [1982] QB 558 at 573 headed ‘Operation in rem’ may well go too far in a number of respects, there cannot be any doubt that Mareva injunctions have a direct effect on third parties who are notified of them and who hold assets comprised in the order.
This needs no elaboration and is demonstrated by the events which followed. I have already mentioned that, pursuant to leave granted by Vinelott J in general terms, some 47 entities in various countries were notified of the terms of the order by the plaintiff’s solicitors. This was done by telexes which quoted the order in full and then concluded as follows:
‘We are giving you notice of this injunction because we believe that you may hold assets beneficially owned by either or both of the defendants. You will note
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from paragraph 1 of the injunction that the defendants are bound to give at least 5 clear English working days notice to us before dealing with any of their assets. We strongly advise you to check with us at the following address or telex number that the requisite notice has been given before you allow the defendants to deal with any of their assets held by you.’
We were also briefly referred to a number of the responses. Many of the replies were to the effect that the addressees held no assets of the defendants’. Others queried the meaning and effect of the order or its validity. In one case a foreign bank rejected it in strong terms, perhaps unnecessarily drawing the senders’ attention to the fact that ‘the decisions have been rendered by a British court’. In other cases further correspondence was necessary in an attempt to clarify the effect of the orders. In some cases the clarifications contained phrases such as ‘We are sure that you, as their lawyers in France, will also be keen to ensure that your clients are not in breach of court orders’. And in the case of one international bank with a branch in England a telex to its Athens branch included the following:
‘It is of course conceivable that officers of the bank within the English jurisdiction could be responsible for any breaches of the injunction by the bank in foreign jurisdictions, and it is possible that those breaches may be punishable by proceedings for contempt.’
This correspondence speaks for itself. The judge clearly had some misgivings about the implications of his order. In his short judgment of 20 April he said in this connection:
‘These are inevitably, I think, rather tentative steps in a new situation. I do not think, so far as authority goes, that an injunction has been sought worldwide even after judgment in this wide form. I formulated provisions for notification and the five day moratorium with a view to mitigating, if possible, injury to third parties rather than to the defendants, who are, after all, indebted to the plaintiffs for a very substantial sum and are not in my view entitled to protection unless and until they can show that they have assets available on which they can give security. But I do not think that there would be any grave hardship to third parties if the full terms of the injunction are communicated to persons who are given notice of it and if reasonable restraint is exercised by the plaintiffs’ solicitors in deciding the range of persons to be notified. The third parties will be free to deal with the assets of the defendants provided that they first satisfy themselves by communicating with Holman Fenwick that the requisite notice has been given and expired.’
I then turn to the law.
The jurisdiction of the court to grant injunctions is now to be found in s 37 of the Supreme Court Act 1981:
‘Powers of High Court with respect to injunctions and receivers.—(1) The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so.
(2) Any such order may be made either unconditionally or on such terms and conditions as the court thinks just.
(3) The power of the High Court under subsection (1) to grant an interlocutory injunction restraining a party to any proceedings from removing from the jurisdiction of the High Court, or otherwise dealing with, assets located within that jurisdiction shall be exercisable in cases where that party is, as well as in cases where he is not, domiciled, resident or present within that jurisdiction … ’
Subsection (3) is clearly directed specifically to Mareva injunctions covering assets located within the jurisdiction. In Ashtiani v Kashi [1986] 2 All ER 970 at 976, 979, [1987]
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QB 888 at 900, 904 both Dillon and Neill LJ attached some importance to this provision in support of their conclusion that Mareva injunctions should be limited to assets located within the jurisdiction, and Nicholls LJ agreed with both judgments. But it is clear from a reading of these judgments as a whole that the decisions were not founded on the construction of s 37 but on wider considerations of policy. The purpose of sub-s (3) was not to restrict the territorial ambit of Mareva injunctions but to ensure that there should be no discrimination against persons not domiciled, resident or present within the jurisdiction. Subsection (3) does not restrict the scope, geographical or otherwise, of sub-s (1). And it is perhaps worth noting that the appointment of a receiver pursuant to sub-s (1) may extend to assets outside the jurisdiction, whether movable or immovable (see 8 Halsbury’s Laws (4th edn) para 648 (Conflict of Laws) and 39 ibid para 855 (Receivers).
And, in regard to the proper scope of the exercise of the court’s discretion, the practice is clearly still in a state of development which has moved on since then. Thus, the Australian courts have not followed the policy indicated in Ashtiani v Kashi by granting Mareva injunctions before judgment covering assets located in other Australian jurisdictions: see Ballabil Holdings Pty Ltd v Hospital Products Ltd (1985) 1 NSWLR 155 and Coombs & Barei Constructions Pty Ltd v Dynasty Pty Ltd (1986) 42 SASR 413; and the General Division of the Federal Court of Australia has granted an interim injunction against a bankrupt living in Western Australia from dealing with real property in the Cocos (Keeling) Islands Territory pending the hearing of a substantive application: see Re Clunies-Ross, ex p Totterdell (1987) 72 ALR 241. Moreover, for the reasons mentioned hereafter it is in my view also necessary to consider the policy of the Ashtiani v Kashi decision in the context of international reciprocity as evidenced by the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (Brussels, 27 September 1968; EC 46 (1978); Cmnd 7395), or, to give it its popular title, the European Judgments Convention, set out in Sch 1 to the Civil Jurisdiction and Judgments Act 1982.
The fact that the practice in this field is still in a state of development is also shown by recent decisions concerning orders for the disclosure of assets outside the jurisdiction. In Ashtiani v Kashi, albeit on the particular facts, this court took a restrictive view of an order for the disclosure of assets situated abroad because, it was said, such a disclosure might enable the plaintiffs to use the disclosed information to obtain an attachment of the defendant’s assets in other jurisdictions. That was a pre-judgment case, and the court was not referred to any of the relevant international jurisprudence discussed below. However, two more recent decisions of this court have held that the position is in any event different in principle once a judgment has been obtained. The first was Interpool Ltd v Galani [1987] 2 All ER 981, [1988] QB 738, which decided that orders for the disclosure of assets after judgment pursuant to Ord 48 could properly extend to assets outside the jurisdiction. And in Maclaine Watson & Co Ltd v International Tin Council (No 2) [1988] 3 All ER 257, [1988] 3 WLR 1190 this court held that the defendants should make a full disclosure of their assets, both within and outside the jurisdiction, where the plaintiffs had obtained judgment but were unable to rely on Ord 48. The order for extra-territorial disclosure was made pursuant to s 37(1) of the Supreme Court Act 1981.
I therefore proceed on the basis that in appropriate cases, though these may well be rare, there is nothing to preclude our courts from granting Mareva-type injunctions against defendants which extend to their assets outside the jurisdiction.
On that assumption three questions fall to be answered which did not arise or were not raised in Ashtiani v Kashi but which now need to be considered in principle. To take them in the order in which they were raised in the present case, they are as follows. (1) Should we adopt a different policy in relation to applications made after judgment, in line with the authorities on post-judgment orders for the disclosure of assets, by granting unqualified Mareva injunctions over foreign assets after judgment in appropriate cases?
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That was the conclusion of Vinelott J and the main issue argued on this appeal, distinguishing Ashtiani v Kashi on that ground. (2) If the answer to (1) is in the negative, because this would involve an exorbitant assertion of extra-territorial jurisdiction over third parties, should we restrict such orders expressly so as to bind only the defendant personally by adding a proviso to make it clear that third parties shall not be affected by the order? This was a fall-back position suggested on behalf of the defendants as a compromise between upholding the unqualified Mareva injunction, which they submitted was clearly wrong in law, and declining to make any order affecting the defendants’ foreign assets, which they recognised to be more or less unacceptable on the facts of this case. As explained below, on the basis of the oral arguments addressed to us, this was the solution which we ultimately adopted in the order which we announced after the hearing. (3) Alternatively to (2), should the terms of the order in such cases take the form of a normal Mareva injunction, but with the qualification that the order shall not affect third parties unless and to the extent that it is enforced by the courts of the state in which the assets are located? This appears to me to be the correct international approach, stemming from the jurisprudence dealing with art 24 of convention entitled ‘Provisional, including protective, measures’, to which I come shortly. That aspect was only raised by the court itself towards the end of the oral argument. After the conclusion of the hearing counsel then referred us in writing to some of the relevant material, including the three Australian cases to which I have referred, and they also submitted brief comments on one of the relevant decisions of the Court of Justice of the European Communities mentioned below.
Three matters should be noted about solutions (2) and (3). First, both are in principle equally relevant before and after judgment. Second, neither militates against the reasoning of the judgments of this court in Ashtiani v Kashi. Third, it may be that in some foreign jurisdictions there would be no real difference between these solutions in their practical effect. Thus, some foreign courts might enforce orders in terms of solution (2) in ways which would affect third parties holding assets of the defendant, and to that extent the proviso to such orders might in practice prove to be nugatory. This is an additional reason, together with those set out hereafter, for the conclusion that in my view solution (3) is the correct approach in principle in those cases where a Mareva-type injunction extending to foreign assets is considered to be appropriate.
However, before coming to these aspects, I must briefly refer to the reasons which led Vinelott J to adopt solution (1).
The judge founded himself squarely on the consideration that in the present case the order was sought after judgment and therefore in aid of execution. In that connection he dealt at length with the judgments in this court in Faith Panton Property Plan Ltd v Hodgetts [1981] 2 All ER 877, [1981] 1 WLR 927, which had been an appeal from himself. This court had there granted a Mareva injunction after judgment to protect an order for costs in favour of the plaintiffs pending taxation, and the judgments emphasised the difference in approach to orders of this kind when the plaintiff has already obtained a judgment. That is of course understandable. The court is then no longer so concerned to protect the defendant, and there are good reasons for assisting judgment creditors, as shown by Interpool Ltd v Galani and Maclaine Watson & Co Ltd International Tin Council (No 2). But the Faith Panton case had no foreign element of any kind and is no authority for present purposes. In the context of orders which operate extra-territorially, wholly different considerations arise, as discussed below. These show that unqualified Mareva-type injunctions applying to foreign assets can never be justified, neither after nor before judgment. None of the counsel could recollect any order of any foreign court, however ‘long-arm’ the nature of the jurisdiction claimed, which had gone as far as the order made in this case.
In my view, the key to the proper exercise of any extra-territorial jurisdiction must lie in the question whether there is international reciprocity for the recognition and enforcement of the type of order which is under consideration, in this case a Mareva
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injunction or a variant of it purporting to operate on the defendants’ assets abroad. In that context one must have regard to the practice and jurisprudence concerning art 24 of the convention. This was concluded in 1968 between the original six members of the European Economic Coummunity (the EEC) and extended to the United Kingdom, among others, by the Convention on Accession of 9 October 1978 of the Kingdom of Denmark, of Ireland and of the United Kingdom of Great Britain and Northern Ireland to the Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters and to the Protocol on its Interpretation by the Court of Justice (Cmnd 7395, OJ L304/78 p 1), without any alteration to art 24. The convention requires the recognition and enforcement of all judgments or orders which fall within its scope, whether final or interlocutory, subject to limited exceptions which have no application in the present case: see arts 1, 25, 26 to 28 and 31 of the convention and the comments of Mr P Jenard on Title III of the convention (OJ 1979 C59, p 42ff). The convention therefore applies prima facie to any order made on the plaintiffs’ application in this case, ie both to the order made by Vinelott J and to the qualified order which we substituted on this appeal.
But this is not the main reason for the importance of the convention in the present context. The main reason lies in the fact that it contains the most extensive code evidencing international reciprocity in the recognition and enforcement of judgments and orders issued in foreign jurisdictions, and that it includes art 24 dealing with provisional and protective measures. The forerunner of the European Judgments Convention had been a network of bilateral conventions, and among the original six member states nearly all of these had included a provision corresponding to art 24: see the comment on this article by Mr P Jenard (at 42). So the European Judgments Convention is now the widest embodiment of international consensus in this field, founded on decades of bilateral conventions. A parallel convention in similar terms to the Judgments Convention, including art 24 without alteration, between the EEC and the European Free Trade Association (EFTA) states (Austria, Finland, Iceland, Norway, Sweden and Switzerland) will be discussed at a diplomatic conference later this year. It will probably result in the adoption of art 24 throughout virtually the whole of Western Europe, and with it the decisions of the European Court concerning it. A discussion of the relevant jurisprudence as it stood some years ago will be found in the valuable article by Mr Lawrence Collins, the editor of Dicey and Morris Conflict of Laws, ‘Provisional Measures, the Conflict of Laws and the Brussels Convention’ [1981] Yearbook of European Law 249.
With apologies for this lengthy introduction, I then come to the text of art 24 which is in the following terms:
‘Application may be made to the courts of a Contracting State for such provisional, including protective, measures as may be available under the law of that State, even if, under this Convention, the courts of another Contracting State have jurisdiction as to the substance of the matter.’
Without legislation this provision could not have been used by our courts to grant, for instance, Mareva injunctions over assets situated in this country in aid of substantive proceedings pending in other EEC jurisdictions. To do so would have been contrary to the decision of the House of Lords in Siskina (cargo owners) v Distos Cia, The Siskina [1977] 3 All ER 803, [1979] AC 210. This had held that, unless our courts were properly seised of the substance of an action, there was no jurisdiction to grant a Mareva injunction over assets in this country in aid of proceedings abroad. The reversal of The Siskina and adherence to art 24 was achieved by s 25 of the 1982 Act. It is unnecessary to set this out for present purposes. However, its effect was to focus attention on only one aspect of art 24: the power of a court in EEC state A, which is not seised of the substantive action, to make some provisional or protective order in aid of a substantive action pending in state B. I will refer to this as the primary effect of art 24. However, that leaves out of
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account a secondary and entirely distinct effect of art 24, to take a corresponding example: the recognition and enforcement by the courts of state A, pursuant to the requirements of the convention, of provisional or protective orders made by a court in state B pursuant to art 24 in aid of a substantive action pending before it, which orders purport to have effect in state A. It is this latter aspect which is material in the present context.
Two important decisions of the European Court on art 24 indicate that extra-territorial orders akin to Mareva injunctions, made by the courts in one EEC state and purporting to operate on assets located in another EEC state, will be recognised and enforced by the courts of the latter state if they fall within the scope of the European Judgments Convention and satisfy certain requirements designed to protect the defendant against whom the orders were made. They are de Cavel v de Cavel Case 143/78 [1979] ECR 1055 and Denilauler v Snc Couchet Frères Case 125/79 [1980] ECR 1553. Both cases concerned a pre-judgment saisie conservatoire issued by a French court over assets of the defendants located in Germany. In the first case divorce proceedings were pending before a court in France. On the application of the husband the court froze the furniture, effects and other objects situated in the couple’s flat in Frankfurt and in a safe hired in the wife’s name in a bank in Frankfurt, and the wife’s account at that bank. The husband sought enforcement of this order by proceedings in Germany pursuant to art 24 of the European Judgments Convention. The German Federal Court of Justice referred his entitlement to enforcement to the European Court. The issue was whether art 24 applied to orders made in divorce proceedings which involved the status of the parties and proprietary legal relations resulting from the matrimonial relationship. Since these are not matters falling within art 1 of the convention, the European Court held that the French order was not entitled to recognition and enforcement in Germany under art 24. In Denilauler v Snc Couchet Frères a French court was seised of a commercial action and in the course of it made an order authorising the freezing of the defendants’ assets in a bank in Frankfurt as security. The plaintiffs sought to enforce that order under art 24, but the German court referred the case to Luxembourg on the ground that the German defendants had had no notice of the order before it had been made. On that ground the European Court held that the order was not entitled to recognition and enforcement by the German courts under art 24. But there was no suggestion in the opinion of either Advocate General in either case (who was Mr Advocate General J-P Warner in de Cavel v de Cavel), or in the judgments of the court, that there was any basis for criticising the orders of the French courts on the ground that, subject to their recognition and enforcement by the German courts, they purported to operate extra-territorially. This is not at all surprising when it is remembered that the object of the European Judgments Convention was to create something analogous to a single law district for the whole of the EEC.
I have expressed the outcome of these cases in Luxembourg in broad terms which may well to some extent oversimplify the detailed grounds of the decisions. But that does not matter for present purposes. What these cases show, if one transposes them by reference to our courts, can be summarised as follows. A pre-judgment Mareva injunction granted by an English court in aid of English proceedings, freezing specific assets of a defendant located in the territory of any EEC state, is entitled to recognition and enforcement by the courts of that state if (i) the English proceedings fall within the scope of art 1 of the Judgments Convention (civil and commercial matters) and do not fall within any of the exceptions, in particular those in arts 27 and 28, and (ii) the order was made inter partes, or at any rate after the defendant had had an opportunity to resist the plaintiff’s application for the order. Depending on the local law and practice, it may be that the same would apply to orders covering the defendant’s assets generally, without specifying their nature or location.
There are three important implications of these decisions.
(A) Viewed purely from the point of view of international comity, and indeed reciprocity, there appears to be no reason why our courts should refrain from granting inter partes pre-judgment Mareva injunctions in cases falling within the European
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Judgments Convention in relation to assets situated in the territories of other EEC states; and the same may soon apply to the territories of all or most of the EFTA states.
(B) However, there can be no question of such orders operating directly on the foreign assets by way of attachment, or on third parties, such as banks, holding the assets. The effectiveness of such orders for these purposes can only derive from their recognition and enforcement by the local courts, as should be made clear in the terms of the orders to avoid any misunderstanding suggesting an unwarranted assumption of extra-territorial jurisdiction. However, if the orders fulfil the requirements of (i) and (ii) above, then the local courts will be bound to recognise and enforce them.
(C) Apart from any EEC or EFTA connection, there is in any event no jurisdictional (as opposed to discretionary) ground which would preclude an English court from granting a pre-judgment Mareva injunction over assets situated anywhere outside the jurisdiction, which are owned or controlled by a defendant who is subject to the jurisdiction of our courts, provided that the order makes it clear that it is not to have any direct effect on the assets or on any third parties outside the jurisdiction save to the extent that the order may be enforced by the local courts. Whether an order which is qualified in this way would be enforced by the courts of states where the defendant’s assets are situated would of course depend on the local law, as would the question whether such orders would be recognised and enforced if they refer to the assets of the defendant generally or only if specified assets are mentioned in the order. As the European Court said in Denilauler v Snc Couchet Frères [1980] ECR 1553 at 1570 (para 16):
‘The courts of the place … where the assets subject to the measures sought are located, are those best able to assess the circumstances which may lead to the grant or refusal of the measures sought or to the laying down of procedures and conditions which the plaintiff must observe in order to guarantee the provisional and protective character of the measures ordered … ’
That comment applies equally to what I have referred to as the primary as well as to the secondary effect of art 24.
Before turning to post-judgment orders I would add two further comments on the decision of this court in Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888, bearing in mind that none of this jurisprudence was brought to the court’s attention in that case.
First Dillon LJ expressed the view that ([1986] 2 All ER 970 at 978, [1987] QB 888 at 903)—
‘If in a future case disclosure of foreign assets is in a proper case ordered on special grounds, it does seem to me that prima facie at any rate the plaintiffs should be required to give an undertaking not to use any information disclosed without the consent of the defendant or the leave of the court.’
With all due respect, I do not think that as a general rule this comment can be correct, and it was regarded as ‘somewhat surprising’ by Rogers J hearing the Commercial List of the Common Law Division of the Supreme Court of New South Wales: see Yandil Holdings Pty Ltd v Insurance Co of North America (1986) 7 NSWLR 571 at 577. Its application would deny the intended effect, both primary and secondary, of art 24. No doubt, as emphasised by Nicholls LJ at the end of his judgment in the present case, any orders affecting foreign assets should always be considered with great care, since they may have unforeseen and unintended consequences for defendants. But it should also be said, with equal emphasis, that some situations, which are nowadays by no means uncommon, cry out, as a matter of justice to plaintiffs, for disclosure orders and Mareva-type injunctions covering foreign assets of defendants even before judgment. Indeed, that is precisely the philosophy which underlies art 24 and which has been applied by the development of the common law in Australia.
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Second in Ashtiani v Kashi [1986] 2 All ER 970 at 975, [1987] QB 888 at 898 there is a lengthy citation of a passage from the judgment of Hoffmann J in Bayer AG v Winter (No 3) [1986] FSR 357 at 362, which was also cited by Rogers J in the Yandil Holdings case 7 NSWLR 571 at 575. I do not propose to repeat it in full, but the passage concluded as follows:
‘There are territorial limits to the effectiveness of this court’s own orders. If however there is evidence that a foreign court would be willing to make orders similar in effect to a Mareva injunction upon assets within its jurisdiction, it seems to me that, other things being equal, this court should not restrict a plaintiff’s ability to obtain such a relief. It would be a pointless insularity for an English court to put obstacles in the way of a plaintiff who wished, with the aid of foreign courts, to enforce an English judgment against a defendant’s assets wherever they might be.’
Dillon LJ rejected the view expressed in this passage in favour of a contrary view which had been expressed by Sir Neil Lawson at first instance (see [1986] 2 All ER 970 at 978, [1987] QB 888 at 902). However, since none of the foregoing considerations had been brought to the attention of the court in Ashtiani v Kashi, I feel entitled to suggest that, viewed internationally, Hoffmann J was quite right in his approach, at any rate within the scope of the decisions of the European Court on what I have referred to as the secondary effect of art 24. Indeed, I would respectfully go further by suggesting that this approach, based as it is on international reciprocity, is in principle altogether correct.
I then turn to post-judgment Mareva injunctions purporting to freeze foreign assets. Perhaps surprisingly from an English point of view, it appears at first sight to be more difficult to justify such orders than pre-judgment Mareva injunctions. The reason is that it can be suggested that they would not be regarded as provisional or protective measures within art 24. It seems that the jurisprudence of our continental partners may not recognise provisional orders having the character of attachments or saisies conservatoires after judgment. Thus, as was pointed out by Collins in ‘Provisional Measures, the Conflict of Laws and Brussels Convention’ [1981] Yearbook of European Law 249 at 263, referred to above:
‘… the Hague Convention of February 1971 on recognition of judgments excludes, in terms, judgments ordering provisional measures … ’
One can see the same approach in art 16(5) of the European Judgments Convention, on which Miss Dohmann QC for the defendants relied in her argument. This provides that, regardless of domicile, ‘in proceedings concerned with the enforcement of judgments, the courts of the Contracting State in which the judgment has been or is to be enforced’ shall have ‘exclusive jurisdiction’. In Interpool Ltd v Galani [1987] 2 All ER 981, [1988] QB 738 this court ordered the defendant to make a full disclosure after judgment of his assets abroad, clearly in order to enable the plaintiff to use the disclosure for the purpose of enforcement proceedings in the jurisdictions where the disclosed assets were situated. The court also held that an order for disclosure by the defendant of his assets worldwide pursuant to Ord 48 did not infringe art 16(5) of the European Judgments Convention (see [1987] 2 All ER 981 at 984–985, [1988] QB 738 at 742–743). In my view, the correctness of that decision is not open to doubt. However, there remains the question whether an English court would be precluded by art 16(5) from granting a Mareva injunction over assets situated elsewhere within the EEC. The commentary on this article by Mr P Jenard, which is an admissible aid to the construction of the European Judgments Convention scheduled to the 1982 Act by virtue of s 3(3) of the Act, is in the following terms (OJ 1979 C59, p 36):
‘What meaning is to be given to the expression “proceedings concerned with the enforcement of judgments”? It means those proceedings which can arise from “recourse to force, constraint or distraint on movable or immovable property in
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order to ensure the effective implementation of judgments of authentic instruments“. Problems arising out of such proceedings come within the exclusive jurisdiction of the courts for the place of enforcement.’
Mr P Jenard adds: ‘Provisions of this kind appear in the internal law of many Member States, and cites the position in France, whereby:
‘French courts have exclusive jurisdiction over measures for enforcement which is to take place in France (preventive measures, distress levied on tenant’s chattels, writs of attachment and applications for enforcement of a foreign judgment); over distraint levied on immovable or movable property, and over proceedings concerned with the validity of measures for enforcement.’
Despite the apparent width of these comments I do not think that a ‘holding order’ in the form of a post-judgment Mareva injunction, covering assets of a defendant in the territory of an EEC state pending proceedings for the enforcement of the judgment in accordance with the applicable provisions of the European Judgments Convention and the national law of that state, would constitute any infringement of art 16(5). It seems illogical, at any rate from an English point of view, that a post-judgment provisional protective order should fall outside the scope of art 24. The better view would be that after judgment ‘the substance of the matter’ referred to in art 24 consists of the ‘proceedings concerned with the enforcement of judgments’ referred to in art 16(5). The latter are of course within the exclusive jurisdiction of the state where the assets are. But I can see no reason why art 24 should not be available in the interim, pending enforcement of the judgment there, to entitle our courts, if the judgment has been given here, to grant a Mareva injunction over the foreign assets pending execution abroad.
I appreciate that in this discussion I have strayed a long way from the course which the present appeal in fact took on the basis of the limited issues which were debated. Unfortunately, the important international perspective was only touched on superficially at the end of the hearing and briefly in the subsequent written submissions. But, if one goes back to the suggested alternative solutions numbered (1), (2) and (3) to the problems posed by extra-territorial Mareva-type injunctions which I have set out earlier, I think that I have said enough to indicate my reasons for concluding that solution (1) is clearly unacceptable, and that this appeal therefore had to be allowed to that extent in any event. Unqualified Mareva injunctions covering assets abroad can never be justified, either before or after judgment, because they involve an exorbitant assertion of jurisdiction of an in rem nature over third parties outside the jurisdiction of our courts. They cannot be controlled or policed by our courts, and they are not subjected to the control of the local courts, as the European Court advised in Denilauler v Snc Couchet Frères [1980] ECR 1553 at 1570 (para 16) they should be. In consequence, as can be seen from the correspondence between the plaintiffs’ solicitors and the 47 or so third parties to whom the injunctions were notified in the present case, any purported assertion of such jurisdiction is unworkable and merely gives rise to problems and disputes.
Solution (3), which I believe to be the correct solution in principle, was never canvassed, for the reasons which I have stated. It obviously binds the defendant personally, in common with solution (2), but would go further and would therefore be more useful. So that leaves our adoption of solution (2) in the present case. For the reasons set out in the judgment of Nicholls LJ there is clearly no objection to making a personal order binding on the defendant alone. That was the effect of the order made by Hobhouse J in Crown Petroleum Corp v Ibrahim (27 April 1988, unreported), to which Nicholls LJ has referred. The order which we made in the present case went further, and its terms covered immovable as well as movable property of the defendants. Its crucial difference from the order made by Vinelott J was that it was qualified by the following proviso:
‘Provided always that no person other than the defendants themselves shall in any wise be affected by the terms of this order … or concerned to enquire whether any
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instruction given by or on behalf of either defendant or by anyone else, or any other act or omission of either defendant or anyone else, whether acting on behalf of either defendant or otherwise, is or may be a breach of this order … by either defendant.’
In addition, to complete the history, we added a paragraph entitling each of the defendants to draw living and other expenses which they claimed to be necessary and for which no allowance had been made below. Since both defendants undertook that these would come exclusively out of income to be generated by their business activities and that they would not dispose of any capital assets, we agreed to the lavish amounts for which they asked, £15,000 per month for BB and $17,000 for WB. In that connection we bore in mind that the whole position will be reviewed in whatever way may appear to be necessary in the light of the defendants’ full evidence which they are required to give pursuant to Ord 48. They undertook to supplement their present inadequate affidavits by supplying full details of the nature, value and location of their assets, and they will then be cross-examined on them.
Finally, it is perhaps hardly necessary to add an emphatic note of caution in relation to those parts of this judgment which, as I have indicated, were not canvassed in the arguments of counsel, either before Vinelott J or on this appeal. In these circumstances, it is obviously particularly likely that there may be errors in what I have said. But, in view of its great general importance, I feel that it is right to air this topic more fully, albeit obiter, than was necessary for the purposes of this particular appeal. Viewed in that way I can summarise my present views as follows. (A) An unqualified Mareva-type injunction purporting to freeze assets situated outside the jurisdiction of our courts is always inadmissible, both after and before judgment. (B) A Mareva-type injunction (perhaps it should be called ‘a personal Mareva’ for identification) qualified by an express proviso excluding any effect on third parties, which was the order which we made on the present appeal, is clearly unobjectionable in principle. But it is not a satisfactory formulation, because it disregards the realities which a Mareva injunction seeks to achieve. Hobhouse J recognised this in Crown Petroleum Corp v Ibrahim when he said that the order ‘will be solely binding on the conscience of the defendant … ’ (C) Subject to the note of caution which I have sounded, if the arguments addressed to us had fully deployed the considerations discussed in this judgment, then it would in my view have been equally permissible, and the better course, to have allowed this appeal by making an order in terms of my solution (3), viz an order in the form of a normal Mareva injunction against both defendants with a qualification that the order should not affect third parties unless and to the extent that it is enforced by the courts of the states in which any of the defendants’ assets are located. This would be the logical and internationally appropriate course, and it would have taken the plaintiffs further than the order which we made, without, so far as I can see, any basis for objection by the defendants; nor in principle, for the reasons discussed. (D) Viewed purely jurisdictionally, the comments in (B) and (C) above apply equally to orders made after, as well as before, judgment. However, as a matter of discretion, such orders will in practice no doubt be made much more readily after judgment. (E) The orders for the disclosure of the defendants’ assets abroad pursuant to RSC Ord 48 were not in issue on this appeal, and their jurisdictional justification was not open to question in view of the decisions of this court in Interpool Ltd v Galani [1987] 2 All ER 981, [1988] QB 738 and Maclaine Watson & Co Ltd v International Tin Council (No 2) [1988] 3 All ER 257, [1988] 3 WLR 1190. However, in my view there is equally no jurisdictional objection to such orders before judgment. The cautionary comments in the judgments in Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888 should no doubt be borne in mind in this context. But in extreme situations, which justify a pre-judgment Mareva injunction covering a defendant’s assets outside the jurisdiction, orders for the disclosure of the nature and location of such assets must be equally justifiable. Prima facie, both types of orders should be considered in parallel.
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NEILL LJ. We are concerned in this appeal with a branch of the law which is in a stage of development and where the court will be asked to exercise its discretion to grant injunctive relief in many differing sets of circumstances. It seems to me therefore that any guidelines which are laid down by this court should be expressed in general terms.
The power of the High Court to grant injunctions is now a statutory power. It is conferred by s 37(1) of the Supreme Court Act 1981, which is in similar terms to s 45(1) of the Supreme Court of Judicature (Consolidation) Act 1925 and s 25(8) of the Supreme Court of Judicature Act 1873. Section 37(1) of the 1981 Act provides:
‘The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and covenient to do so.’
It will be seen that the power to grant injunctions is expressed in very wide terms. It contains no territorial limitation. Furthermore, there is abundant authority for the proposition that, where a defendant is personally subject to the jurisdiction of the court, an injunction may be granted in appropriate circumstances to control his activities abroad. Thus, for example, a party to an action may be restrained from commencing or continuing an action in a foreign court. Nevertheless, as Lord Brandon explained in South Carolina Insurance Co v Assurantie Maatschappij ‘De Zeven Provincien’ NV [1986] 3 All ER 487 at 495, [1987] AC 24 at 40, the wide power conferred by s 37(1) and its predecessors has been circumscribed by judicial authority dating back for many years.
The decision of this court in Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888 is authority for the proposition that, where a Mareva injunction is granted before judgment, the injunction should be limited to assets within the jurisdiction of the court. Dillon LJ gave four reasons to explain this general rule ([1986] 2 All ER 970 at 977, [1987] QB 888 at 901–902):
‘In my judgment there are valid reasons why the Mareva injunction should be limited to the assets of the defendant within the jurisdiction of the court. Firstly, it could very well be oppressive to the defendant that, as a result of an order of an English court, his assets everywhere should be frozen or he should be subjected to applications for seizure orders in many other jurisdictions. Secondly, it is difficult for the English court to control or police enforcement proceedings in other jurisdictions. It is not very desirable that the English court should attempt to control such foreign proceedings, and the difficulties are underlined where, as here, the plaintiffs are not resident within the jurisdiction of the English court. Thirdly, as Lord Roskill pointed out in his speech in Home Office v Harman [1982] 1 All ER 532 at 552, [1983] 1 AC 280 at 323, our judicial process in requiring discovery involves invasion of an otherwise absolute right to privacy. The particular form of discovery he was concerned with there was the discovery in the course of an action and the production of relevant documents with a view to the fair trial of the action, but his comment that the order involves an invasion of privacy applies with the fullest force to an order on an individual or a company to disclose all his or its assets throughout the world. Fourthly, it has been many times laid down that the object of a Mareva injunction is not to give the plaintiff security for the amount of his claim in advance of judgment in the action; but, if there is an order for disclosure of foreign assets, that may lead to the plaintiff obtaining security in some foreign jurisdiction. For instance, in the present case an order has been obtained in Belgium. We have evidence that under Belgian law the court will not make any order attaching assets unless those assets are specifically identified. It would be necessary, for instance, in order to attach a bank account to have particulars of that account and the branch where it is kept. The defendant has been compelled by Hirst J’s order to disclose and
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identify his bank account in Belgium. The plaintiffs have thereby been enabled to obtain an order in Belgium. That order is described as a saisie-arrête conservatoire. Prima facie its effect is not necessarily the same as a Mareva injunction, but the same as a saisie-arrête conservatoire under Belgian law, whatever that may be. Whether or not it does have that effect in Belgium, such an ancillary seizure attachment of a debt may have the effect of giving the plaintiff much greater security than the Mareva injunction gives him over English assets.’
I was a party to the decision in Ashtiani v Kashi and I remain of the opinion that it accurately reflected the way in which the jurisdiction to grant Mareva injunctions had been exercised and developed in England in the period between the original decision in Mareva Cia Naviera SA v International Bulkcarriers SA, The Mareva (1975) [1980] 1 All ER 213 in June 1975 and June 1986.
I am satisfied, however, that the court has jurisdiction to grant a Mareva injunction over foreign assets, and that in this developing branch of the law the decision in Ashtiani v Kashi may require further consideration in a future case.
In the present case we are concerned with an injunction which has been granted following a judgment. I therefore propose to restrict my comments on pre-trial injunctions to the following matters to which our attention was drawn either in the course of or following the conclusion of the argument.
It is first to be noted that the Court of Justice of the European Communities has recognised the right of a court of one state to grant ‘provisional, including protective, measures’ within the meaning of art 24 of the European Judgments Convention of 1968 affecting assets situated in another state: see Denilauler v Snc Couchet Frères Case 125/79 [1980] ECR 1553.
It is also to be observed that several courts in Australia have granted interlocutory injunctions of a Mareva type in relation to assets which were outside the jurisdiction of the relevant court: see, for example, Coombs & Barei Constructions Pty Ltd v Dynasty Pty Ltd (1986) 42 SASR 413, Re Clunies-Ross, ex p Totterdell (1987) 72 ALR 241 and Yandil Holdings Pty Ltd v Insurance Co of North America (1986) 7 NSWLR 571.
At the same time it is to be remembered that art 24 of the 1968 convention is not the source of any power to grant protective measures. It is the relevant national law which supplies the remedy. Furthermore, it is important to bear in mind the need for caution where a court is minded to grant an injunction which may take effect outside the territory of its own jurisdiction. In Denilauler v Couchet Frères [1980] ECR 1553 at 1570 (paras 15, 16) the European Court underlined the need for care:
‘Whilst it is true that procedures of the type in question authorizing provisional and protective measures may be found in the legal system of all the Contracting States and may be regarded, where certain conditions are fulfilled, as not infringing the rights of the defence, it should however be emphasized that the granting of this type of measure requires particular care on the part of the court and detailed knowledge of the actual circumstances in which the measure is to take effect. Depending on each case and commercial practices in particular the court must be able to place a time-limit on its order or, as regards the nature of the assets or goods subject to the measures contemplated, require bank guarantees or nominate a sequestrator and generally makes its authorization subject to all conditions guaranteeing the provisional or protective character of the measure ordered. The courts of the place or, in any event, of the Contracting State, where the assets subject to the measures sought are located, are those best able to assess the circumstances which may lead to the grant or refusal of the measures sought or to the laying down of procedures and conditions which the plaintiff must observe in order to guarantee the provisional and protective character of the measures ordered.’
I turn now to the present case.
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It is clear that, after a judgment has been obtained, an order for the disclosure of assets can be made pursuant to RSC Ord 48: see Interpool Ltd v Galani [1987] 2 All ER 981, [1988] QB 738. Leave to appeal against that decision was refused by the Appeal Committee of the House of Lords (see [1987] 3 All ER facing p 1, [1988] 1 WLR 134). It is further clear that an order for extra-territorial disclosure can be made pursuant to s 37(1) of the 1981 Act in a case where judgment has been obtained but where the applicants for disclosure cannot rely on Ord 48: see Maclaine Watson & Co Ltd v International Tin Council (No 2) [1988] 3 All ER 257, [1988] 3 WLR 1190.
In my judgment, the arguments against granting a Mareva-type injunction extending to assets outside the jurisdiction are much weaker in a case where judgment has been obtained than in a case where an interlocutory order is sought before trial. Indeed, I am satisfied that there will be many cases, of which the present case is one, where justice requires that, once judgment has been obtained, the successful plaintiffs should be able to obtain the protection of an injunction extending to all the assets of the defendants whether within or outside the jurisdiction of the court. It is always to be remembered, however, that a Mareva injunction is not a form of attachment but is a form of relief in personam which prohibits certain acts in relation to the assets in question: see Iraqi Ministry of Defence v Arcepey Shipping Co SA, The Angel Bell [1980] 1 All ER 480 at 486, [1981] QB 65 at 72. In other words, the injunction has its legal operation not on the property itself but on the person who is subject to the jurisdiction of the court.
I have had the advantage of reading in draft the judgments of Kerr and Nicholls LJJ. Kerr LJ has explained the difficulties which arose in this case when notice of the judge’s order was given to the 47 banks and other institutions who held or might have held assets of the defendants. I am satisfied that it is wrong in principle to make an order which, though intended merely to restrain and control the actions of a person who is subject to the jurisdiction of the court, may be understood to have some coercive effect over persons who are resident abroad and who are in no sense subject to the court’s jurisdiction. It was with these considerations in mind that I took the view that the following proviso should be added to the injunction:
‘Provided always that no person other than the defendants themselves shall in any way be affected by the terms of this order numbered (1) or concerned to enquire whether any instruction given by or on behalf of either defendant or by anyone else, or any other act or omission of either defendant or anyone else, whether acting on behalf of either defendant or otherwise, is or may be a breach of this order numbered (1) by either defendant.’
The purpose of this proviso was to make it clear that the injunction was and was intended to be directed to the defendants themselves and did not affect the rights of third parties or control their activities.
The present order is intended to hold the ring for the time being and to prevent the defendants from making dispositions in breach of the order. I envisage that in due course further orders may be required. The plaintiffs may require directions as to what steps they can take to obtain additional relief abroad in respect of specific assets. I also envisage that in future orders of this type a less widely drafted proviso may be appropriate so as to limit the protection of third parties to acts by them outside the jurisdiction.
Like Nicholls LJ, however, I consider it to be important that the court should not abandon control of what use is made of the discovery which plaintiffs are able to obtain by means of orders of the kind made in this case.
For the reasons which I have endeavoured to outline I am satisfied that the unconditional order which was made by the judge cannot be supported, though I can well understand the reasons which led him to make this order. In my view, it will take time before the courts will be able to work out, on a case-by-case basis, the most satisfactory way of controlling injunctions and discovery orders which relate to assets outside the jurisdiction. It will be necessary to take full account of the European
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Judgments Convention, and also of the policy which underlines that convention. Thus it may be appropriate to seek to follow the policy of the convention even though in the particular case the convention itself has no direct application. At the same time, however, it will be necessary to remember that, where an English order relates to foreign assets, the enforcement of the order may be under the control of a court which is unfamiliar with a form of relief which takes effect in personam rather than in rem. A proviso in the terms of that included in our order, or in similar terms, would, I think, go a long way towards explaining to the foreign court the limited and personal nature of the order made by the English court. Nevertheless, in my view, an English court should remain alert to the possibility that a foreign court might treat the injunction as though it were a form of attachment in rem.
NICHOLLS LJ.
In personam
Equity acts in personam and an injunction is an equitable remedy. At first sight, therefore, there would seem to be no reason why, faced with defendants who are amenable to the court’s jurisdiction and who, as the judge found, would be likely to take any step open to them to frustrate or delay execution of the judgment, the court should not exercise its wide jurisdiction under s 37(1) of the Supreme Court Act 1981 by granting against them a ‘holding’ injunction in respect of their overseas assets, to give the plaintiff time to apply to the relevant foreign court for appropriate orders of attachment or the like. The jurisdiction to make such an order would, of course, need to be exercised with caution, and the terms of any injunction would need to be framed with care to ensure that the injunction did not operate oppressively. In particular, as is usual in Mareva orders, the normal conduct of a defendant’s business should not be impeded, and provision should be made for his living expenses and payment of legal fees. Further, the ‘holding’ nature of the injunction might well be reflected in a provision to the effect that the injunction would cease to apply to any specific asset or assets once the defendant has given, with due particularity, a specified number of days’ notice to the plaintiff regarding that asset or those assets. But, in principle, the observations of Lord Brougham LC in Lord Portarlington v Soulby (1834) My & K 104 at 108, [1824–34] All ER Rep 610 at 612, concerning an application for an injunction to restrain a defendant from taking proceedings in Ireland on a bill of exchange, would be apt to the making of an order such as I have described:
‘In truth, nothing can be more unfounded than the doubts of the jurisdiction. That is grounded, like all other jurisdiction of the Court, not upon any pretension to the exercise of judicial and administrative rights abroad, but on the circumstance of the person of the party on whom this order is made being within the power of the Court. If the Court can command him to bring home goods from abroad, or to assign chattel interests, or to convey real property locally situate abroad if, for instance, as in Penn v. Lord Baltimore ((1750) 1 Ves Sen 444, [1558–1774] All ER Rep 99), it can decree the performance of an agreement touching the boundary of a province in North America; or, as in the case of Toller v. Carteret ((1705) 2 Vern 494, 23 ER 916), can foreclose a mortgage in the isle of Sark, one of the channel islands; in precisely the like manner it can restrain the party being within the limits of its jurisdiction from doing anything abroad, whether the thing forbidden be a conveyance or other act in pais, or the instituting or prosecution of an action in a foreign Court.’
I can see nothing in the decision of this court in Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888 inconsistent with this approach. That was a ‘disclosure’ case, concerned with the position of a defendant before any judgment had been obtained against him. There the court was troubled about the unsatisfactory, even oppressive, consequences
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that might befall a defendant if he were compelled by an English court to disclose the whereabouts of his overseas assets in advance of judgment. But after judgment has been obtained the parties’ positions are different in an important respect. Under English law, unlike the position before judgment, after judgment a plaintiff is able to attach assets of the defendant against whom he has obtained judgment. Thus it is now established that, after judgment has been obtained, there is no objection in principle to the judgment debtor being required to give disclosure of his assets worldwide under RSC Ord 48, r 1(1) (Interpool Ltd v Galani [1987] 2 All ER 981, [1988] QB 738) or, in a case outside Ord 48, under s 37 (Maclaine Watson & Co Ltd v International Tin Council (No 2) [1988] 3 All ER 257, [1988] 3 WLR 1190). The object of ordering such disclosure is to render the judgment effective, by enabling the judgment creditor to discover whether, in the absence of sufficient assets within the jurisdiction, there are assets elsewhere which may be attached by him if he seeks to enforce his judgment overseas. But, in a given case, that purpose, for which such worldwide disclosure is ordered, may itself be at real risk of being defeated if an unscrupulous judgment debtor, after he has (truly) disclosed the whereabouts of overseas assets, remains at liberty to move them from one country to another before the judgment creditor has had an opportunity, however diligent he and his advisers may be, to apply to the local court for an attachment of the assets. Many assets, ranging from money in a bank through bearer shares to valuable postage stamps, can be moved speedily and easily from country to country. That being so, such a case, in principle, would be an eminently proper occasion for the court to exercise its ample jurisdiction under s 37 by making a temporary ‘holding’ injunction against the judgment debtor, requiring him not to move or deal with his assets without giving to the judgment creditor the few days’ notice which is the minimum reasonably required to enable the judgment creditor to invoke any assistance which the local court may afford to him in respect of his judgment debt. Such an injunction would be supplementary to the worldwide disclosure order.
Third parties
But there is a troublesome point here concerning third parties. An injunction, as an order of the court, can affect the conduct of persons other than the defendant in the proceedings against whom the order is made. This was a matter considered in the recent Spycatcher litigation (A-G v Newspaper Publishing plc [1987] 3 All ER 276, [1988] Ch 333). For the purposes of the present appeal it is sufficient to note that it is well established that a person who knowingly assists in the breach of a court order is himself in contempt of court: see, for example, Seaward v Paterson [1897] 1 Ch 545, [1895–9] All ER Rep 1127 and, in the context of a Mareva injunction, Z Ltd v A [1982] 1 All ER 556, [1982] QB 558. This principle is one of the strengths of a Mareva order, but it is the application of this principle to an injunction in respect of overseas assets such as I have described above that causes difficulty.
Take the present case. After the judge made the order under appeal on 19 April 1988, the plaintiffs’ solicitors gave notice of the order to numerous overseas banks and other organisations. In some of their telexes the plaintiffs’ solicitors strongly advised the recipients that, before allowing the defendants to deal with any of the defendants’ assets held by them, they should check with the plaintiffs’ solicitors directly to see that the defendants had given the requisite notice. There is no question of the solicitors having acted improperly in taking these steps. These matters were ventilated before the judge, and on 20 April 1988 he declined to place any restraint on dissemination of notice of the injunction by the plaintiffs’ solicitors. In so doing the judge recognised that, inevitably, he was having to feel his way in a new situation, no similar worldwide injunction having been ordered previously even after judgment. But a consequence of the plaintiffs taking these steps was that, so far as the English court was concerned, if a French or Swiss bank, or other person to whom notice was given, thereafter parted with money or some other asset of either defendant without proper advance warning having been given to the
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plaintiffs’ solicitors, the bank or other person would or might be in contempt of the English court. Indeed, it was precisely for this purpose that the notice of the injunction was being given to third parties. By thus affording the plaintiffs a possible sanction against third parties the plaintiffs’ position was intended to be fortified.
This is not an acceptable situation. It would be wrong for an English court, by making an order in respect of overseas assets against a defendant amenable to its jurisdiction, to impose or attempt to impose obligations on persons not before the court in respect of acts to be done by them abroad regarding property outside the jurisdiction. That, self-evidently, would be for the English court to claim an altogether exorbitant, extra-territorial jurisdiction.
In Crown Petroleum Corp v Ibrahim (27 April 1988, unreported) Hobhouse J sought to avoid this difficulty by accepting from the plaintiff an undertaking not to serve notice of a post-judgment restraint order in respect of assets outside the jurisdiction on any person other than the defendant (and, in that case, another person who was a party to the action) and his legal representatives. This, in practice, would go a long way towards resolving the difficulty, but in my view it does not go far enough. This form of order is still unsatisfactory in respect of a third party who may learn of the existence of the order without being formally notified by the plaintiff’s solicitors.
To meet this difficulty I can see no alternative but to grasp the nettle firmly, and write into the order, which applies only to property outside the jurisdiction, an express provision to the effect that nothing in the relevant part of the order is to affect any person other than the defendants personally. This will remove any extra-territorial vice which otherwise the order might have, or be thought to have. The order will be binding only on the conscience of the defendants.
I have considered anxiously whether an order in such a form would be wrong in principle. It is certainly unattractive to make an order which, contrary to the normal position, third parties are bidden to ignore. But in this case the alternative is not to make any temporary ‘holding’ order at all. Given that choice, I think that justice and convenience require an order binding only on the defendants rather than no order at all. The touching concern shown by the defendants on this appeal for the integrity of banks and others overseas should not be allowed to obscure the judge’s finding that these defendants would be likely to do whatever they can to frustrate execution of the judgment.
This is a novel form of order, and in this developing field still further refinements may be shown to be necessary. For instance, it may be that the proviso protecting third parties should, in a given case, be confined to acts done by them outside the jurisdiction. This was not a point explored in the present case, and so I say no more about it. But, as to the novelty, I echo the words of Fox LJ in Bayer AG v Winter [1986] 1 All ER 733 at 737, [1986] 1 WLR 497 at 502:
‘Bearing in mind we are exercising a jurisdiction which is statutory, and which is expressed in terms of considerable width, it seems to me that the court should not shrink, if it is of opinion that an injunction is necessary for the proper protection of a party to the action, from granting relief, notwithstanding it may, in its terms, be of a novel character.’
To the above I add four comments. First, if an order is made in the terms just mentioned, I do not see why land need be excluded. Second, the defendants will be restrained from doing the prohibited acts by any means whatsoever, whether by their servants or agents or otherwise. In that respect the order will have the usual, wide ambit. But the order should be confined in its effect to the defendants personally, thus excluding everyone else, even the defendants’ servants or agents. The defendants’ servants or agents, as much as banks and other third parties, may be acting outside the jurisdiction, so that the problem of extra-territorial effect may be as much relevant to them as it is to banks and others. Third, I do not think that it would be right to attempt to distinguish between
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third parties who are resident or domiciled or present within the jurisdiction and those who are not. This could give rise, for instance, to a distinction between an overseas bank which has a branch in London and one which does not. More importantly, however, attempting to draw any such distinction is wrong in principle. If it is to be free from extra-territorial vice, the order must not attempt to regulate the conduct abroad of persons who are not duly-joined parties to the English action in respect of property outside the jurisdiction. The actual residence or domicile of such persons, or their presence within the jurisdiction, is essentially irrelevant. For instance, Banque Nationale de Paris should not be affected by this order in respect of any money it may hold for the defendants abroad. This should be so whether or not it has a branch in London. Likewise with Lloyds Bank. It is resident here, but it should not be affected by the order in respect of any money it holds for the defendants abroad.
Fourth, for the plaintiff it was submitted that banks and others not amenable to the jurisdiction of the English court who disregard an order freezing a defendant’s assets overseas would not be in contempt of the English court. No authority was cited on this point, nor were the underlying principles analysed further. The point does not call for decision on this appeal, and it is preferable therefore not to express a view, necessarily obiter, on such an important point. For, even if giving notice to a third party abroad does not have the effect, so far as an English court is concerned, that the third party may be in contempt of court if he knowingly assists in a breach of the order of which he has been given notice, I consider that it is still not desirable to make an unqualified order freezing assets abroad. If, under English law, notice to a third party abroad has no effect on him, at any rate as to acts outside the jurisdiction, Vinelott J’s order would seem, strictly, to be free of extra-territorial vice so far as such a party is concerned. Nevertheless, it would still be potentially misleading for a plaintiff to give notice of an English court order to an overseas third party without explaining that the third party was not affected by the order, and, even if such an explanation were given with the notice, there would remain a real risk of confusion. Moreover, there would remain a difficulty about overseas banks and others with branches in this country. The sensible course must be to include in the order itself a limiting provision as mentioned above, and thereby (a) ensure that the order does not purport to have an (unintended) extra-territorial operation and (b) remove the risk of third parties being confused about the effect of the order so far as they are concerned.
The European Judgments Convention
The defendants placed some reliance on the exclusive jursdiction provision in art 16(5) of the convention. I was not persuaded by these submissions. The order, binding the defendants only, albeit in respect of assets in other countries, is not an order made in proceedings in which the judgment is sought to be enforced in those countries. It is a provisional or protective measure within art 24, with a strictly limited objective and scope. The enforcement of the judgment in other countries, by attachment or like process, in respect of assets which are situated there is not affected by the order. The order does not attach those assets. It does not create, or purport to create, a charge on those assets, nor does it give the plaintiff any proprietary interest in them. The English court is not attempting in any way to interfere with or control the enforcement process in respect of those assets.
Addendum
Since writing the above I have had the advantage of reading a draft of Kerr LJ’s judgment. He has raised a point on the making of Mareva orders with extra-territorial effect, both before and after judgment, in cases where such orders of an English court would be recognised and enforced by the court of the state in which the assets are located. I prefer to reserve my view on this interesting suggestion, which was not canvassed or explored in argument.
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However, having considered Kerr LJ’s observations on Ashtiani v Kashi, one point which strikes me forcefully is this. I say nothing concerning the circumstances in which it will be proper for the court to make an order for the disclosure of information regarding assets situated abroad, either before judgment or after judgment. That is not a matter which arose, or was argued, on this appeal. But in all cases where such an order is sought or made the court will need to be alive to the importance of exercising control over the use of information disclosed compulsorily about assets situated overseas. It is obvious that such information can be used by a plaintiff in a manner that, in some circumstances, would be unjust to the defendant who has been compelled to disclose it. Dillon LJ gave some examples of this, in a pre-judgment case, in Ashtiani v Kashi [1986] 2 All ER 970 at 977–978, [1987] QB 888 at 901–902. I add the further example that, apparently, in some countries the mere presence of assets within the country is regarded as giving to the court of that country jurisdiction over the owner of the assets. As noted by Mr Lawrence Collins in his valuable article ‘Provisional Measures, the Conflict of Laws and the Brussels Convention’, [1981] Yearbook of European Law 249, in some such instances any judgment obtained is limited to the value of the locally-sited assets. In other instances the jurisdiction assumed from the presence of assets is unlimited in its extent. Thus an order for the disclosure of information, whether made before or after judgment, can easily have results not foreseen or intended by an English court. Hence the need for the court to control strictly the use made of the information overseas. In some cases it may be possible and proper, in advance of the disclosure of the information, for the court to spell out with sufficient precision in the disclosure order one or more uses which the plaintiff may make of the information in a particular country or countries. In other cases, where in advance of disclosure little is known of what assets a defendant has overseas, the court will need to have the information about the assets and be told of the overseas proceedings envisaged, before the court can decide what use it will permit to be made of that information in foreign proceedings, either in countries which are parties to the 1968 convention or elsewhere. Hence the need for the undertaking mentioned by Dillon LJ in Ashtiani v Kashi [1986] 2 All ER 970 at 978, [1987] QB 888 at 903.
A second point follows from this. Once information has been disclosed it cannot be recalled. The disclosure of information is an irreversible step. The only means available to the English court to control the use made abroad of information disclosed concerning foreign assets is such control as the English court may have in the circumstances over the plaintiff to whom it has compelled the defendant to make disclosure. Thus, before making a disclosure order in respect of foreign assets, the court normally will need to be satisfied that, by reason of the plaintiff’s continuing connection with this country or otherwise, the court has over the plaintiff a degree of control sufficient to ensure compliance with any orders it may make regarding the use of the information.
Appeal allowed in part. Order of 19 April 1988 discharged and order substituted limited to defendants personally.
Solicitors: Theodore Goddard (for the defendants); Holman Fenwick & Willan (for the plaintiffs).
Dilys Tausz Barrister.
Republic of Haiti and others v Duvalier and others
[1989] 1 All ER 456
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): FOX, STOCKER AND STAUGHTON LJJ
Hearing Date(s): 4, 5, 6, 7, 22 JULY 1988
Practice – Pre-trial or post-judgment relief – Mareva injunction – Worldwide Mareva injunction – Pre-trial injunction – Extra-territorial effect of injunction – Protection of third parties – Foreign defendant having foreign assets – Proceedings brought by Republic of Haiti in French court to recover money embezzled by former president – Defendant likely to attempt to frustrate execution of judgment against him – Whether court having jurisdiction to grant Mareva injunction over defendant’s foreign assets before judgment – Whether worldwide injunction should be qualified by express proviso protecting third parties – Civil Jurisdiction and Judgments Act 1982, s 25, Sch 1, art 24 – RSC Ord 11, r 1(2).
The Republic of Haiti commenced proceedings in France in July 1986 to recover from a former president of the republic and from his family and associates some $120m alleged to have been embezzled while the president was in power in Haiti. In June 1988 the republic issued a writ in England against the defendants, namely the former president, members of his family, his associates and a bank, and on the same day obtained ex parte a Mareva injunction (i) restraining the defendants from dealing with assets, wherever they might be, which represented the proceeds which were the subject of the French action, (ii) freezing their assets within the jurisdiction except to the extent that they exceeded $120m, (iii) ordering the defendants’ solicitors to disclose the nature, location and value of the defendants’ assets known to them and (iv) ordering the solicitors not to disclose the making of the order. The defendants, once they were served with the order, applied to have it set aside but the judge refused to do so. The defendants appealed to the Court of Appeal, where the questions arose, inter alia, (i) whether a writ claiming interim relief in aid of foreign proceedings pursuant to s 25a of the Civil Jurisdiction and Judgments Act 1982 could be served out of the jurisdiction pursuant to RSC Ord 11, r 1(2)b without leave, since under r 1(2) service of a writ out of the jurisdiction without leave was permissible only if the court had jurisdiction to hear and determine the ‘claim’ made by the writ and there were no proceedings between the parties concerning the same cause of action pending in the United Kingdom or in a state (including France) which was a party to the Convention on Jurisdiction and the Enforcement of Civil and Commercial Judgments 1968 (which had the force of law in the United Kingdom by virtue of s 2(1) of the 1982 Act), (ii) whether the court had jurisdiction to restrain a non-resident defendant from dealing with assets situated outside the jurisdiction (iii) if so, whether the court should exercise its discretion to grant such an injunction, and (iv) the nature of the protection to be accorded to third parties. The defendants contended, regarding the issue of the writ, that an application for interim relief was not a ‘claim’ and that the English proceedings concerned the same cause of action as the French proceedings and, regarding the issue of the Mareva injunction, that the court ought not to grant an injunction when it had no jurisdiction on the merits, the defendants were resident and the assets were situated outside the jurisdiction and the proper court to make the order was the French court.
Held – The appeal would be dismissed for the following reasons—
(1) RSC Ord 11, r 1(2) was to be construed as giving effect to the United Kingdom’s obligation under art 24c of the 1968 convention (set out in Sch 1 to the 1982 Act) to make
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available in aid of the courts of other contracting states such provisional and protective measures as English domestic law would afford if an English court were seised of the substantive action. Accordingly, service of the republic’s writ out of the jurisdiction without leave was permissible under Ord 11, r 1(2), since either a claim for interim relief was itself a cause of action or there could be proceedings and a claim without a cause of action. In either case the cause of action in the English proceedings was not the same as the cause of action in the French proceedings (see p 462 f to j p 463 h, p 464 c and p 469 b, post).
(2) The court had jurisdiction to grant a Mareva injunction pending trial over assets worldwide even where the relief was sought in aid of a foreign monetary claim and not a proprietary claim. However, such an injunction ought to be subject to a proviso protecting third parties except to the extent that the order was enforced by the courts of states in which the defendant’s assets were situated, but such a proviso should only apply to assets and acts done outside England and Wales and not to individuals resident in England and Wales. Having regard to the plain and admitted intention of the defendants to move their assets out of the reach of courts of law and the vast amount of money involved, an injunction ought to be granted but subject to a suitable proviso to protect third parties (see p 466 b, p 467 a to c and p 468 d e j to p 469 b, post); Babanaft International Co SA v Bassatne [1989] 1 All ER 433 considered.
Notes
For Mareva injunctions, see 37 Halsbury’s Laws (4th edn) para 362, and for cases on the subject, see 37(2) Digest (Reissue) 474–476, 2947–2962.
For the Civil Jurisdiction and Judgments Act 1982, ss 2, 25, Sch 1, art 24, see 11 Halsbury’s Statutes (4th edn) 906, 911, 939.
Cases referred to in judgments
Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888, [1986] 3 WLR 647, CA.
Babanaft International Co SA v Bassatne [1989] 1 All ER 433, CA.
Bankers Trust Co v Shapira [1980] 3 All ER 353, [1980] 1 WLR 1274, CA.
Denilauler v Snc Couchet Frères Case 125/79 [1980] ECR 1553.
Garland v British Rail Engineering Ltd [1982] 2 All ER 402, [1983] 2 AC 751, [1982] 2 WLR 918, HL.
Joh Verhulst & Zn BV v PVBA Thovadec Plastics (1978) Eur Ct Dig (D series) 1–21—B2, ’s-Hertogenbosch District Ct.
Liddell’s Settlement Trusts, Re [1936] 1 All ER 239, [1936] Ch 365, CA.
MacKinnon v Donaldson Lufkin & Jenrette Securities Corp [1986] 1 All ER 653, [1986] Ch 482, [1986] 2 WLR 453.
Siskina (cargo owners) v Distos Cia Naviera SA, The Siskina [1977] 3 All ER 803, [1979] AC 210, [1977] 3 WLR 818, HL.
Cases also cited
Bankers Trust International Ltd v Todd Shipyards Corp, The Halcyon Isle [1980] 3 All ER 197, [1981] AC 221, PC.
Company, Re a [1985] BCLC 333, CA.
Cook Industries Inc v Galliher [1978] 3 All ER 945, [1979] Ch 439.
Fothergill v Monarch Airlines Ltd [1980] 2 All ER 696, [1981] AC 251, HL.
Hollandia, The [1982] 3 All ER 1141, [1983] 1 AC 565, HL.
Interlocutory appeal
The defendants, Jean-Claude Duvalier, his wife, Michele Bennett Duvalier, and Simone Ovide, the widow of François Duvalier, who were the defendants together with others in proceedings brought in France and England by the plaintiffs, the Republic of Haiti and five of its agencies, La Minoterie d’Haiti, L’Office de l’Assurance des Vehicles contre Tiers,
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La Loterie de L’Etat Haitien, La Commission de Controle des Jeux de Hasard, La Banque Nationale de Crédit, appealed against the order of Leggatt J made on 22 June 1988 whereby he dismissed the defendants’ application to set aside the English proceedings under RSC Ord 12, r 8 and discharge the order made by Knox J on 3 June 1988 restraining the defendants from dealing with the assets which were the subject of the French action and from removing from the jurisdiction or dealing with their assets within the jurisdiction except to the extent that they exceeded $120m in value and ordered the defendants, acting by their solicitors, Messrs Turner & Matlin, to disclose to the plaintiffs’ solicitors the nature, location and value of the defendants’ assets. The facts are set out in the judgment of Staughton LJ.
Steven Gee for the defendants.
Nicholas Strauss QC and Michael Jones for the plaintiffs.
Cur adv vult
22 July 1988. The following judgments were delivered.
STAUGHTON LJ (giving the first judgment at the invitation of Fox LJ). Jean-Claude Duvalier, the first defendant in these proceedings, was the President of the Republic of Haiti from 1971 until 7 February 1986. The second defendant is his wife, Michele Bennett Duvalier, and the sixth defendant his mother. She is the widow of François Duvalier, who was the president from 1957 until his death in 1971. Those three members of the family are the appellants in this court. All are now resident in France.
The Republic of Haiti started proceedings in the Tribunal de Grande Instance at Grasse in July 1986 five of its agencies were later added as co-plaintiffs. Those proceedings were against various members of the Duvalier family, including Jean-Claude Duvalier, his wife and mother, and their associates. It is said that they were responsible for embezzling sums totalling $120m from the Republic during the presidency of Jean-Claude Duvalier, that is between 1971 and 1986. Indeed it is suggested that this is only the tip of the iceberg and that very much larger sums were involved.
The defendants in the French action altogether deny liability. They observe that it has been a tradition in Haiti for over 180 years for a new government to take legal proceedings against those who were in charge under the previous regime. (One is reminded of the Roman historian who noticed that it was the practice of the later emperors to bring to justice the murderers of the previous emperor but one.) But this appeal is scarcely concerned with the merits of the substantive claims made in France. It is acknowledged that the plaintiffs’ evidence demonstrates a prima facie case, or even a good arguable case. Counsel for the plaintiffs goes further: he submits that there is a very strong case, to which the defendants have offered no substantive or detailed answer, either in the French proceedings or in the courts of this country.
Unless it is essential to do so, I do not feel that I should make any comment at this stage on the strength of the plaintiff’s case. It is enough that on the affidavit evidence there is a case to answer, or a good arguable case, such as would justify the use of interim protective measures in an English domestic case, and would also justify service out of the jurisdiction if that is permitted by the Rules of the Supreme Court.
What is more striking, and less usual, is the evidence that the members of the Duvalier family have been attempting to conceal their assets, or place them beyond the reach of courts of law. It is unnecessary to set out this evidence in detail, since the conclusion from it is admitted. In the affidavit of Professor Vaisse, a French lawyer acting for the Duvalier family, there is this passage:
‘9. The plaintiffs have drawn attention to the fact that assets in the control of the defendants have, when threatened with legal attachment proceedings, been removed
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from the jurisdictions concerned. It is my understanding that this has occurred. This does not reflect any doubts that the defendants have about the merits of their position. They are simply aware that there is a worldwide campaign being conducted against them by the Haitian Government supported by the United States Government to persecute them by seizing their assets wherever they can be found. This campaign is assisted by the International Press which provokes prejudice against them wherever they go and they have merely sought to frustrate this campaign which I submit is a normal reaction in the circumstances … ’
If those be the true facts, one would suppose that the Duvalier family would welcome an early trial of the case against them by a just court in a country which has, by international law, jurisdiction to try it.
It is, however, necessary to enlarge on that admission by referring to some features of the evidence which are striking. First, the plaintiffs’ evidence exhibits extracts from a book Les Banques Suisses et l’Argent written by a French lawyer, Maître J-P Carteron. This is said to treat the concealment of funds within the Swiss banking system. It points to the advantage of using a fiduciary as the legal owner of the assets to be concealed, rather than the beneficial owner himself, and the added advantage of choosing a lawyer as the fiduciary: ‘Le secret de sa profession [translated ‘his professional secrecy’] protegera totalement l’identité du client.’
There is evidence that Maître Carteron, between 1984 and 6 February 1986 (which was when the Duvalier family left Haiti), received approximately $500,000 in Switzerland from Haitian government funds. There is also evidence of 13 telexes or telephone calls from the Ministry of Finance or the National Palace in Haiti to Maître Carteron’s number in Geneva, the last telephone call being on 6 February 1986.
Furthermore there is evidence that the Duvalier family made use of the idea, whether or not derived from Maître Carteron’s book, of employing a professional lawyer as intermediary. Some documents have been disclosed pursuant to an order of Knox J (to which I shall refer later) by Messrs Turner & Co, an English firm of solicitors in which Paul Turner and John Stephen Matlin are partners. Among other things, Turner & Co were asked to identify bank accounts—
‘from which or to which any moneys which belong to any of the 1st to 10th defendants (whether directly or indirectly) or which are reasonably apparent or believed by Turner & Co. to be moneys in which one or more of the 1st to 10th defendants is or are beneficially interested or otherwise held by a nominee or trustee, have been transferred.’
The answer listed 17 accounts, at eleven different banks, in seven different countries. Eleven of the accounts were in the name of Turner & Co or the partners of the firm.
A second striking feature emerges from documents which the plaintiffs have obtained by proceedings in Jersey. These tend to show that Mr Matlin arranged for the deposit with the Hongkong and Shanghai Banking Corp (CI) Ltd, via their correspondent in Toronto and for the credit of ‘Messrs. Turner & Co No 2 Clients’ Account’ of Canadian treasury bills worth in excess of Can $40m. Turner & Co, in answer to the order for disclosure of the first to tenth defendants’ assets, wrote:
‘Canadian Government Treasury Bills have been held by us on occasion. They have all been encashed.’
I should also refer to the evidence which tends to show, as Professor Vaisse admits, that assets threatened with attachment have been removed from the jurisdictions concerned. I can summarise that evidence by saying that it leads to one of three possible conclusions: (1) the Duvalier family or their advisers have somehow obtained advance notice of the plaintiffs’ efforts at attachment, or (2) assets are moved so regularly and so frequently that it is no coincidence if some have been moved just before attachment took effect, or (3) it is coincidence.
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It should be emphasised as to all this evidence that no wrongdoing on the part of Turner & Co or its partners is alleged on behalf of the plaintiffs. Furthermore Mr Matlin has said in an affidavit that he has never heard of Maître Carteron, or read his book; nor was he even aware of it until it was referred to in the plaintiffs’ evidence. He says that he is not aware of any elaborate and co-ordinated scheme to conceal funds.
The English proceedings
On 3 June 1988 the Republic of Haiti and the five other plaintiffs in the French action made an ex parte application to Knox J, sitting as a vacation judge of the Commercial Court. In the writ issued that day they were named as plaintiffs, and the first to tenth defendants were members of the Duvalier family or their associates. None of those defendants had an address within the jurisdiction. The eleventh defendants were Barclays Bank plc of Lombard Street, London EC3.
The order made by Knox J can be summarised as follows, so far as is material: (1) the plaintiffs undertook to notify the defendants of the terms of the order by 4 pm on 6 June, and to notify Mr Matlin forthwith, (2) the first to tenth defendants were restrained from dealing with assets which represented the proceeds of the payments which are complained of in the French action, (3) the first to tenth defendants were restrained from removing from the jurisdiction or dealing with their assets within the jurisdiction save in so far as they exceed $120m in value, (4) the first to tenth defendants were ordered, acting by Messrs Turner & Matlin, to disclose to the plaintiffs’ solicitors by 10 am on 6 June information known to Mr Turner or Mr Matlin as to the nature, location and value of those defendants’ assets, (5) the defendants were ordered, in particular by Messrs Turner & Matlin, not to disclose the making of the order for the time being and (6) there was leave to serve out of the jurisdiction and substituted service.
Notice that not only was the order made in the absence of the defendants and without their knowledge; it was also not to be communicated to them until after their solicitors had complied with that part of it relating to disclosure of information. In those respects it was in line with current English practice. While there may not be much point in making an order that a defendant himself disclose documents or provide information ex parte, since he will have to know of the order before he complies with it, the situation is different where information or documents are sought from some third party (see Bankers Trust Co v Shapira [1980] 3 All ER 353, [1980] 1 WLR 1274) or even the solicitors as in this case, or when there is to be a compulsory search by an Anton Piller order. That is why particular caution is needed in making such orders.
On 6 June 1988 the solicitors applied to Knox J to vary or discharge his order. He declined to do so. The time limits for compliance with the order and notification of it to the defendants were extended. On 7 June the solicitors appealed to this court. Their appeal was heard in camera, and did not feature in the cause list. It would seem from the judgment of Lord Donaldson MR that the principal points argued were: (i) whether the relief sought was within s 25 of the Civil Jurisdiction and Judgments Act 1982, (ii) whether an English court should make an order for the disclosure of information about assets abroad, except in connection with a tracing claim, (iii) whether the plaintiffs’ affidavits were sufficient in point of form and (iv) whether the solicitors could rely on legal professional privilege.
The Court of Appeal rejected the solicitors’ arguments on all four grounds. I need say nothing about their reasons on grounds (i) and (iii), since those arguments were not repeated before us; nor need I consider ground (iv), since a further claim for legal professional privilege is, by agreement, to be remitted to a Commercial judge. (Counsel for the plaintiffs accepts that the affidavit on its face appears to assert a valid claim for privilege in respect of a limited class of information.) As to ground (ii), Lord Donaldson MR said in terms that he was not happy to accept the suggested limitation on the disclosure of information about assets abroad, viz that it should only be ordered in
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connection with a tracing claim. But he found on the evidence before the court that the French action was in the nature of a tracing claim.
The appeal was allowed only to the extent that the time limits were again varied. In all other respects it was dismissed.
On 7 and 8 June 1988 Phillips J made three orders permitting the plaintiffs to use certain information provided by Turner & Co for the purpose of legal proceedings in some other jurisdictions. This was necessary because the plaintiffs had given an undertaking to Knox J, although not recorded in his order, that they would not use the information disclosed pursuant to his order without the leave of the court. Counsel instructed by Turner & Co on behalf of the defendants appeared before Phillips J; it does not seem that the defendants themselves were aware by then that the order of Knox J had been made. That again would be in line with English practice and common sense, since the intention was to obtain Mareva orders abroad, or information as to the new location of assets by order of foreign courts.
Thereafter the defendants were informed of the English proceedings. They were served with a summons on behalf of the plaintiffs seeking disclosure of further information and documents relating to the assets of the first to tenth defendants. That was met by a summons on behalf of the first and second defendants to set aside the proceedings under RSC Ord 12, r 8, in effect for want of jurisdiction. Those applications came before Leggatt J, inter partes but in chambers. On 22 June 1988 he made the order from which this appeal is brought.
By that order Leggatt J, so far as is material for present purposes, (1) dismissed the application to set aside the English proceedings under Ord 12, r 8, (2) upheld the order of Knox J which restrained the first to tenth defendants from dealing with assets, wherever they might be, which represented the proceeds of the payments complained of in the French action, (3) upheld the order of Knox J which restrained the first to tenth defendants from removing from the jurisdiction or dealing with their assets within the jurisdiction, up to a limit of $120m and (4) ordered that the first to tenth defendants acting by Messrs Turner & Matlin do within 24 hours permit inspection of documents, and disclose information, relating to their assets wherever they may be.
The issues
These are as follows. (a) Can the writ be served without leave on the first to tenth defendants out of the jurisdiction pursuant to RSC Ord 11, r 1(2)? (b) If not, can leave be granted for service out of the jurisdiction pursuant to RSC Ord 11, r 1(1)(b)? (c) Should there be a restraint on dealing with assets which are out of the jurisdiction? (d) Discretion. (e) The Babanaft proviso (see Babanaft International Co SA v Bassatne [1989] 1 All ER 433). (f) Privilege. I shall consider those issues in turn.
(A) Service without leave
The crucial feature of this case is that the plaintiffs do not seek any substantive relief in England. They seek only information as to where the assets of the Duvalier family are, and a temporary restraint on dealing with those assets. It is said that these remedies are sought in aid of the French action; and so in a sense they are. But whether further proceedings will be confined to France, and to the tribunal at Grasse, is at the very least doubtful. To the extent that the information already disclosed, and to be disclosed under the order of Leggatt J, reveals assets in other jurisdictions, there may well be other proceedings of an interim nature, and possibly also seeking substantive relief.
Until the Civil Jurisdiction and Judgments Act 1982 came into force, an English court would not have entertained a claim of this limited nature. The plaintiffs would not have had a cause of action: see Siskina (cargo owners) v Distos Cia Naviera SA, The Siskina [1977] 3 All ER 803 at 824, [1979] AC 210 at 256, where Lord Diplock said:
‘A right to obtain an interlocutory injunction is not a cause of action. It cannot
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stand on its own … the High Court has no power to grant an interlocutory injunction except in protection or assertion of some legal or equitable right which it has jurisdiction to enforce by final judgment … ’
That conclusion is now superseded by s 25(1) of the Civil Jurisdiction and Judgments Act 1982:
‘The High Court in England and Wales or Northern Ireland shall have power to grant interim relief where—(a) proceedings have been or are to be commenced in a Contracting State other than the United Kingdom … ’
Counsel for the defendants does not dispute that there can now be English proceedings in which only interim relief is sought, if the requirements of that subsection are met. But he contends that there is no means of effecting service of such proceedings out of the jurisdiction, should that be necessary. If right, this is a curious result, since s 25(2) expressly confers a discretion to refuse that relief if—
‘the fact that the court has no jurisdiction apart from this section in relation to the subject-matter of the proceedings in question makes it inexpedient for the court to grant it.’
Power to effect service out of the jurisdiction must be found in the Rules of the Supreme Court: see Ord 6, r 7. The primary contention of counsel for the plaintiffs, which the judge accepted, is that it is to be found in Ord 11, r 1(2):
‘Service of a writ out of the jurisdiction is permissible without the leave of the Court provided that each claim made by the writ is either:—(a) a claim which by virtue of the Civil Jurisdiction and Judgments Act 1982 the Court has power to hear and determine, made in proceedings to which the following conditions apply—(i) no proceedings between the parties concerning the same cause of action are pending in the courts of any other part of the United Kingdom or of any other Convention territory, and (ii) either—the defendant is domiciled in any part of the United Kingdom or in any other Convention territory … ’
Counsel for the defendants submits first that a ‘claim’ must mean a cause of action, and that an application for interim relief only is therefore not a claim which the court can ‘hear and determine’, by reason of The Siskina. I do not accept that argument. Since the enactment of s 25, either a claim for interim relief is itself a cause of action or there can be proceedings and a claim without a cause of action. Which solution one chooses is merely a matter of semantics; there is no need to make such a sterile choice, and I do not do so.
Second, counsel for the defendants submits that the condition in Ord 11, r 1(2)(a)(i) is not satisfied because the English proceedings concern the same cause of action as the French proceedings. Curiously, the Supreme Court Rule Committee used the word ‘concerning’ in that condition, in contrast to the word ‘involving’ in RSC Ord 6, r 7(1)(b) and in art 21 of the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (Brussels, 27 September 1968; EC 46(1978); Cmnd 7395). But I cannot see anything in the distinction.
The answer to counsel’s second argument, so far as English domestic law is concerned, emerges from what I have already said in connection with his first point. Either a claim for interim relief does not involve or concern any cause of action, or it is based on a new and distinct cause of action created by s 25. Whichever be right, the condition in Ord 11, r 1(2)(a)(i) is satisfied because any cause of action with which the English proceedings are concerned or involved is not the same as that with which the French action is concerned or involved.
Taking a wider view, I must refer to arts 21 and 24 of the convention. Article 21 is in Title II, section 8, headed ‘Lis Pendens—Related Actions’. It reads:
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‘Where proceedings involving the same cause of action and between the same parties are brought in the courts of different Contracting States, any court other than the court first seised shall of its own motion decline jurisdiction in favour of that court … ’
Article 24 is in section 9, headed ‘Provisional, including protective, measures’:
‘Application may be made to the courts of a Contracting State for such provisional, including protective, measures as may be available under the law of that State, even if, under this Convention, the courts of another Contracting State have jurisdiction as to the substance of the matter.’
It is plain as can be that RSC Ord 11, r 1(2)(a)(i) was intended to reflect art 21 of the convention, so that two contracting states should not simultaneously try a dispute between the same parties involving the same cause of action. It is equally plain that art 24 deals with provisional and protective measures as a different topic, not impinging on art 21: see the decision of the Dutch court in Joh Verhulst & Zn BV v PVBA Thovadec Plastics (1978) Eur Ct Dig (D series) 1–21—B2. Yet if the argument of counsel for the defendants is correct, RSC Ord 11, r 1(2)(a)(i) would prevent the United Kingdom giving full effect to art 24 in England and Wales if a substantive action has already been commenced in another contracting state between the same parties.
Lord Diplock said in The Siskina [1977] 3 All ER 803 at 827, [1979] AC 210 at 260:
‘… as art 24 of the convention indicates, this is a field of law in which it has not been considered necessary … to embark on a policy of harmonisation.’
This is because art 24 expressly refers to ‘measures … available under the law of that State’, and does not attempt to lay down what those measures must be. However, it seems to me that the convention requires each contracting state to make available, in aid of the courts of another contracting state, such provisional and protective measures as its own domestic law would afford if its courts were trying the substantive action. That would be harmonisation of jurisdiction, although not of remedies.
If that be the right construction of the convention, I refer to the words of Lord Diplock in Garland v British Rail Engineering Ltd [1982] 2 All ER 402 at 415, [1983] 2 AC 751 at 771:
‘… it is a principle of construction of United Kingdom statutes, now too well established to call for citation of authority, that the words of a statute passed after the treaty has been signed and dealing with the subject matter of the international obligation of the United Kingdom, are to be construed, if they are reasonably capable of bearing such a meaning, as intended to carry out the obligation and not to be inconsistent with it.’
Applying the same principle to the Rules of the Supreme Court, I would construe Ord 11, r 1(2) as giving effect to the obligation of the United Kingdom in England and Wales to make available in aid of the courts of other contracting states such provisional and protective measures as our domestic law would afford if our courts were seised of the substantive action.
Accordingly, I agree with the judge that this was a case where service out of the jurisdiction without leave was authorised by Ord 11, r 1(2). It is agreed that the action, begun by writ, ought properly to have been begun by originating summons: see Ord 5, r 3. However, it is also agreed that nothing turns on that point in the present case. Order 11, r 9(1) provides that Ord 11, r 1 shall apply to the service out of the jurisdiction of an originating summons; consequently there may be service without leave where Ord 11, r 1(2) would allow a writ to be served without leave. Rule 9(5) provides that r 4(1)(b), which requires an affidavit that in the deponent’s belief there is a good cause of action, ‘shall, so far as applicable, apply in relation to an application for the grant of leave under
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this Rule … ' If, which I have refrained from deciding, that would otherwise be an obstacle to a claim for interim relief only, it does not apply where no grant of leave is necessary.
(B) Service out of the jurisdiction with leave
This issue raises an alternative argument on behalf of the plaintiffs. It is said that leave to serve out of the jurisdiction was properly given under Ord 11, r 1(1)(b) (‘an injunction is sought ordering the defendant to do or refrain from doing anything within the jurisdiction’). If the plaintiffs had succeeded only on this ground, there would have been some necessary limitation on the orders sought; the injunctions which relate to dealing with assets should at the least have been confined to acts done within the jurisdiction. That might have been a severe impediment to the efficacy of the relief granted. Before Leggatt J counsel for the plaintiffs conceded that the case was within r 1(1)(b). That concession was withdrawn in this court.
In the event we do not need to decide the point. Rule 1(1) contains a provision that the writ ‘is not a writ to which paragraph (2) of this rule applies’. But I have held that para (2) does apply, and that the writ can be served without leave.
Leggatt J, before whom the point was conceded, would if necessary have held that there was power to grant leave under r 1(1)(b). That involves the conclusion that s 25 of the 1982 Act has had a greater impact on The Siskina than I have so far accepted. In that case Lord Diplock rejected the submission that r 1(1)(i), the predecessor of r 1(1)(b), comprehended a claim for an injunction that was interlocutory only (see [1977] 3 All ER 803 at 824, [1979] AC 210 at 256). For my part I would not express any view on the question whether s 25 has superseded that aspect of the decision of the House of Lords. It does not arise in this case.
(C) Restraint on dealing with assets which are out of the jurisdiction
In the light of recent authority, counsel for the defendants conceded that the court has power to restrain a defendant who is not resident here from dealing with his assets which are out of the jurisdiction. He desires only to keep the point open in case this dispute goes further. Nevertheless, I consider that, as the issue goes to the jurisdiction of this court and is of considerable general importance, we ought to examine it. In doing so it is necessary to travel over some ground which is also relevant to discretion.
It may be that the powers of the court are wider, and certainly discretion is more readily exercised, if a plaintiff’s claim is what is called a tracing claim. For my part, I think that the true distinction lies between a proprietary claim on the one hand, and a claim which seeks only a money judgment on the other. A proprietary claim is one by which the plaintiff seeks the return of chattels or land which are his property, or claims that a specified debt is owed by a third party to him and not to the defendant.
Thus far there is no difficulty. A plaintiff who seeks to enforce a claim of that kind will more readily be afforded interim remedies in order to preserve the asset which he is seeking to recover, than one who merely seeks a judgment for debt or damages. But if the asset has been converted into some other form of property, the question of tracing arises. If the defendant stole the plaintiff’s peas, sold them and bought beans with the proceeds, the plaintiff claims that the beans are his property. Or if the defendant misappropriated the plaintiff’s credit balance with bank X, and established a credit with bank Y from the proceeds, the plaintiff claims that the debt due from bank Y is his property. In that last case, if the proceedings are brought by the plaintiff against the defendant only, the relief claimed can be no more than a declaration, and an injunction against interference with the plaintiff’s property. Ultimately the right must be enforced against the debtor, in my example bank Y.
With that introduction I turn to consider whether the claim which the plaintiffs seek to enforce in France is a proprietary claim. New evidence has emerged since this dispute was last before the Court of Appeal, when the proceedings were ex parte so far as the
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defendants were concerned. In form the claim in the French action is for damages in tort. But process is available there to attach specific assets held by the defendants, which would result in the plaintiffs having priority over other creditors. The plaintiffs have in fact made use of that process in respect of two assets, a flat in Paris and a chateau in France. They have not yet sought any proprietary remedy in respect of other assets of the Duvalier family in the French proceedings, because they do not know what or where those assets are. The very object of the English proceedings is to find out. When they are discovered, I do not doubt that the plaintiffs will seek to assert any proprietary remedy that may be available, whether in France or some other jurisdiction.
In that state of affairs I would not go so far as to say that the action in France, in aid of which these proceedings are said to be brought, is itself a proprietary or tracing claim. It does not presently assert ownership of any of the assets expected to be revealed by orders in the English proceedings. But I am confident that ownership will be asserted when and where the assets are found. This is then something of a hybrid situation; and one should perhaps consider it on the basis that interim relief is sought in aid of a monetary claim only, without any claim to ownership of the Duvaliers’ assets.
The law on this topic has developed in recent years; and in particular a distinction has emerged between pre-judgment and post-judgment restraint. Our courts are more willing to restrain a defendant from dealing with his assets after, than before, judgment has been given against him. (In passing, I would say that an injunction granted after judgment should normally, in my view, be of limited duration; the plaintiff should be encouraged to proceed with proper methods of execution; perpetual injunctions restraining a defendant from dealing with his assets until the crack of doom are undesirable.) This, of course, is a pre-judgment case.
The decision of this court in Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888 was concerned with a Mareva injunction, pre-judgment, over assets within the jurisdiction, coupled with an order for disclosure of assets worldwide. The injunction was discharged. Both Dillon and Neill LJJ considered that a Mareva injunction should be limited to assets within the jurisdiction, if there is no proprietary or tracing claim. But I think that they regarded this limitation as arising from settled practice, rather than from any restriction on the powers of the court. There are indications in both judgments to that effect. Nicholls LJ agreed with both judgments.
The problem was extensively reviewed by this court in Babanaft International Co SA v Bassatne [1989] 1 All ER 433. That was a post-judgment case, and what was said as to injunctions before judgment was obiter. The court upheld a worldwide injunction on dealing with assets, subject to a proviso which I shall consider later.
There were some features in the Babanaft case that are similar to those in the present case. The judgment was against two individuals, whom Kerr LJ described as ‘unusually peripatetic in their lifestyle and elusive in the way they do business and hold assets’, for $15m (at 436). He said (at 436):
‘All “their” assets appear to be held in the names of a large network of companies incorporated in many countries in which they or members of their families hold bearer shares.’
The judge below had found that they would be likely to take any step open to them to frustrate the execution of the judgment.
I do not attempt to summarise the reasoning of Kerr LJ. He concluded (at 440):
‘I therefore proceed on the basis that in appropriate cases, though these may well be rare, there is nothing to preclude our courts from granting Mareva-type injunctions against defendants which extend to their assets outside the jurisdiction.’
Neill LJ said (at 449):
‘I was a party to the decision in Ashtiani v Kashi and I remain of the opinion that it
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accurately reflected the way in which the jurisdiction to grant Mareva injunctions had been exercised and developed in England … I am satisfied, however, that the court has jurisdiction to grant a Mareva injunction over foreign assets, and that in this developing branch of the law the decision in Ashtiani v Kashi may require further consideration in a future case.’ (Neill LJ’s emphasis.)
Nicholls LJ declined to express any opinion on the pre-judgment position.
For my part, if the point had not been conceded before us, I would have agreed with the view expressed by Kerr LJ, for the reasons given in his judgment, that there is jurisdiction to grant a Mareva injunction, pending trial, over assets worldwide; and that cases where it will be appropriate to grant such an injunction will be rare, if not very rare indeed.
(D) Discretion
This arises in two ways. First, the judge had to consider whether it was just and convenient to grant an injunction, in terms of s 37(1) of the Supreme Court Act 1981. Second, he ought to have refused interim relief under s 25(2) of the Civil Jurisdiction and Judgments Act 1982 if the fact that the court had no jurisdiction apart from that section made it ‘inexpedient’ to grant relief.
Counsel for the defendants advanced different arguments on discretion in relation to the order restraining dealings with assets abroad on the one hand, and the order for disclosure of information on the other. As to the first of those orders, he observes that the English courts have no jurisdiction on the merits, none of the first to tenth defendants are resident here, there is no judgment against them, the assets concerned are mainly if not wholly outside the jurisdiction, and the proper court to make such orders is either the French court at Grasse or the court(s) having jurisdiction where the assets are located.
I can see considerable force in that last point. It is supported by the judgment of the Court of Justice of the European Communities in Denilauler v Snc Couchet Frères Case 125/79 [1980] ECR 1553 at 1570 (para 16) where it was said:
‘The courts of the place or, in any event, of the Contracting State, where the assets subject to the measures sought are located, are those best able to assess the circumstances which may lead to the grant or refusal of the measures sought … ’
But the plaintiffs, when they launched the English proceedings, did not know where the assets were located. One of their objects was to find out. The proceedings were started here because it was here that the information is available. There is a case to be made for any injunction over assets abroad to be of limited duration. This would preserve the plaintiffs’ position until there had been a reasonable opportunity, after discovering where the assets were, to apply for some interim relief in the jurisdiction(s) where the assets are. But although the question of a time limit was raised by the court in the course of the argument, no application was made that one should be imposed.
Counsel for the defendants also argued that it was wrong in principle to order persons not resident in this country as to what they should or should not do out of the jurisdiction, and relied on the judgment of Hoffmann J in MacKinnon v Donaldson Lufkin & Jenrette Securities Corp [1986] 1 All ER 653, [1986] Ch 482. That case was actually concerned with an order against a bank which was not a party to the action. There have been many cases where parties out of the jurisdiction have been subjected to an injunction as to their conduct abroad, for example as to commencing or continuing proceedings there, or bringing children back to this country: see Re Liddell’s Settlement Trusts [1936] 1 All ER 239 at 248, [1936] Ch 365 at 374, where Romer LJ said:
‘The moment that a person is properly served under the provisions of R.S.C. Ord. XI, that person, so far as the jurisdiction of a court is concerned, is in precisely the same position as a person who is in this country.’
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Counsel argues that even though substantive relief may be granted in such cases, interim relief should not be. I can see no ground for drawing that distinction.
It is beyond question that the injunction granted by Knox J and upheld by Leggatt J was a most unusual measure, such as should very rarely be granted. But this case is most unusual. It is not the nature or strength of the plaintiffs’ cause of action which puts them in that category. What to my mind is determinative is the plain and admitted intention of the defendants to move their assets out of the reach of courts of law, coupled with the resources they have obtained and the skill they have hitherto shown in doing that, and the vast amount of money involved. This case demands international co-operation between all nations. As the judge said, if ever there was a case for the exercise of the court’s powers, this must be it. Or to quote Kerr LJ in Babanaft International Co SA v Bassatne [1989] 1 All ER 433 at 444: ‘… some situations … cry out, as a matter of justice to plaintiffs, for disclosure orders and Mareva-type injunctions covering foreign assets of defendants even before judgment’; and I think that this is such a case. If the Duvalier family have a defence to the substantive claim, and feel that they are being persecuted, then their remedy as I have said is to co-operate in securing an early trial of the dispute. It is not to secrete their assets where even the most just decision in the world cannot reach them.
As to discretion in connection with the information order, the objection of counsel for the defendants is as to the use which the plaintiffs may make of the information obtained. It gave an undertaking to Knox J, as I have said, not to use the information without leave of the court; and it has three times applied for and obtained that leave. But it is said that the court would have no sanction which could be imposed if the plaintiffs were to break that undertaking in the future. This was not taken into account by the judge; but he can scarcely be blamed for that, as the point was not raised before him.
Kerr LJ in the Babanaft case did not agree that, as a general rule, such an undertaking should be required. But Neill and Nicholls LJJ differed from Kerr LJ on that point; and Nicholls LJ said that normally the court will need to be satisfied that it has a sufficient degree of control over the plaintiff to secure compliance with the undertaking (see [1989] 1 All ER 433 at 455).
It is difficult to see how, as a matter of law, the court could ensure that it had that degree of control over the Republic of Haiti, short of requiring a bank guarantee in a very large sum which could be called on in the event that the undertaking was broken. But I doubt if the court should make such a demand on a foreign sovereign state, or assume that it would be at all likely to break an undertaking given to the court. The republic has complied scrupulously with its undertaking in the past. And if it were to come about that the undertaking were broken in the future, I would expect that foreign courts, particularly those in the European Community, would take that into account in exercising any discretion they may have in proceedings between the republic and the Duvalier family. I do not consider that, in this case, the discretion to order disclosure of information ought to have been exercised against the republic because it is not in law subject to the control of the English courts.
(E) The Babanaft proviso
This is, as Nicholls LJ said in the Babanaft case [1989] 1 All ER 433 at 452, a troublesome point. The proviso in fact imposed by the Court of Appeal on the injunction restraining dealing in assets was as follows:
‘Provided always that no person other than the defendants themselves shall in any wise be affected by the terms of this order … or concerned to enquire whether any instruction given by or on behalf of either defendant or by anyone else, or any other act or omission of either defendant, or anyone else, whether acting on behalf of either defendant or otherwise, is or may be a breach of this order … by either defendant.’
It is plain from the judgments that the proviso was intended to apply (and may in fact
Page 468 of [1989] 1 All ER 456
have applied, for we do not have a full copy of the order) to dealing in assets abroad, not those within England and Wales.
Kerr LJ would have preferred to add ‘unless … [the order] is enforced by the courts of the states in which any of the defendants’ assets are located’ (at 447). It is not clear to me precisely what benefit that addition will confer on the republic; until the order is so enforced it will not operate on third parties, and after the order is so enforced the addition may well not be needed. But it may encourage the courts of other countries to enforce the English order; and if it has that effect it is in my opinion desirable. I would add that I doubt if Kerr LJ was concerned about the formal drafting of his order. It ought to apply to each asset severally, if a court of the state in which that asset is located has enforced the English order.
Neill LJ acknowledged that in other cases ‘a less widely-drafted proviso may be appropriate so as to limit the protection of third parties to acts by them outside the jurisdiction’ (see at 450). Nicholls LJ expressed a similar view. But he did not think it right to attempt to distinguish between third parties who are resident or domiciled or present within the jurisdiction and those who are not (at 453–454).
We first have the question whether any proviso should be added to the order of Leggatt J. In my opinion there should be some proviso, firstly because counsel for the plaintiffs acknowledges that there should be, and secondly because we ought not to differ, even on a matter of discretion, from a recent and considered decision of another division of this court.
Secondly, I would include the addition proposed by Kerr LJ, with some alteration in the drafting.
Thirdly, I consider that the proviso should only apply to assets outside England and Wales, and to acts done outside England and Wales.
Fourthly, I regret that I differ from Nicholls LJ in the circumstances of this case, and consider that the proviso should not apply to individuals (i e natural persons) who are resident in England and Wales. If it so happens that there is a bank account in the Channel Islands or the Isle of Man, which can be operated on the signature of an English resident, whether a solicitor with Turner & Co or another firm, or anybody else, I would find it offensive that he should be free to cross the channel and sign away the money. I have some qualms about limiting this category to natural persons as opposed to corporations. But this should avoid one problem that troubled Nicholls LJ, which was whether the court should distinguish between an overseas bank which has a London branch and one that has not. And a corporation can only act by a natural person, unless its computer is programmed to take action without instructions from anybody.
I realise that these conclusions will involve formidable problems in drafting. The orders already made are long enough in all conscience; and as I have frequently observed in the past, Mareva injunctions are served on and have to be understood by persons who are not lawyers (in this case not even English-speaking), who must obey instantly on pain of imprisonment. It is to be hoped that counsel can prepare a draft order which is precise but intelligible. For example, as an aid to comprehension it might be preferable to replace ‘out of the jurisdiction’ with ‘outside England and Wales’. One solution may be to prepare a separate order dealing with foreign assets, so that there is no need for it to contain a mass of material relating to disclosure and English assets.
(F) Privilege
It is agreed, as I have said, that the claim for privilege against disclosure of certain classes of documents and information should be remitted to a Commercial judge. The order should identify these classes, so that it will operate forthwith in all other respects.
Conclusion
I would vary the order of Leggatt J (i) by inserting the undertaking as to the use of information that was given to Knox J, (ii) by inserting a proviso in the order for disclosure
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of assets outside England and Wales, of the kind which I have described, and (iii) by excepting disclosure of the material for which privilege is claimed. The order of Leggatt J should remain in full force and effect until the variations have either been agreed and approved by this court, or else settled by this court.
In all other respects I would dismiss this appeal.
STOCKER LJ. I agree and wish to add nothing further.
FOX LJ. I also agree.
Appeal dismissed subject to variation of order. Leave to appeal to the House of Lords refused.
Solicitors: Watson Farley & Williams (for the defendants); Slaughter & May (for the plaintiffs).
Sophie Craven Barrister.
Derby & Co Ltd and others v Weldon and others (No 1)
[1989] 1 All ER 469
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): MAY, PARKER AND NICHOLLS LJJ
Hearing Date(s): 19, 22, 25, 26, 27, 28, 29 JULY 1988
Practice – Pre-trial or post-judgment relief – Mareva injunction – Worldwide Mareva injunction – Pre-trial injunction – Extra-territorial effect of injunction – Protection of third parties – Foreign defendant having foreign assets – Proceedings brought by United States banking group against former directors of subsidiary alleging breach of contract, conspiracy and fraudulent breach of fiduciary duty over loans made to Far Eastern commodity dealer which collapsed owing over £35m to banking group – Defendants likely to attempt to frustrate execution of judgment against them – Whether court having jurisdiction to grant Mareva injunction over defendants’ foreign assets before judgment – Whether worldwide injunction should be subject to undertakings by plaintiffs not to enforce order overseas or use in foreign proceedings information about overseas assets disclosed by defendants without leave of English court.
The plaintiffs were foreign companies which were all part of a United States banking group. The first and second defendants were the directors of a London company, CML, a commodity dealer which specialised in trading internationally in cocoa. CML was owned by the third and fourth defendants. In 1981 the plaintiff group purchased CML, which continued to be managed by the first and second defendants. While under their management CML offered very extensive credit to a Far Eastern commodity dealer which in 1984 became insolvent owing over £35m to CML. The plaintiff group recovered less than £11/2m in the insolvency and brought an action against the defendants alleging breach of contract, conspiracy and fraudulent breach of fiduciary duty. The plaintiffs applied for, inter alia, a Mareva injunction restricting the first and second defendants from dealing with their assets worldwide but the judge, although finding that there were grounds for supposing that the first and second defendants had acted dishonestly and that there was a real risk that any judgment in favour of the plaintiffs would remain unsatisfied because the first and second defendants had the ability to lock away assets in inaccessible overseas companies, held that he only had jurisdiction to grant a Mareva injunction over assets within the jurisdiction. He granted an injunction limited accordingly. The plaintiffs appealed, seeking the grant of a worldwide Mareva injunction.
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Held – Whether the court should grant a worldwide Mareva injunction pending trial depended on the particular facts in each case but, having regard to the drastic and oppressive nature of the remedy, such an injunction should only be granted in exceptional cases and should (i) protect the defendant from oppression by exposure to a multiplicity of proceedings, (ii) protect the defendant against the misuse of information obtained by an order for disclosure made in aid of the Mareva injunction and (iii) protect the position of third parties. On the facts, the court would grant a worldwide Mareva injunction pending trial and make an ancillary order for disclosure by the defendants of their overseas assets because the first and second defendants’ English assets were wholly insufficient to afford protection to the plaintiffs and there were substantial foreign assets, but there was a high degree of risk that the first and second defendants would dispose of them in the face of an adverse judgment. However, the grant of the injunction would be conditional on the plaintiffs giving undertakings that they would neither apply to a foreign court to enforce the order to seek nor use in foreign proceedings any information disclosed by the defendants about their overseas assets without first obtaining leave from the English court. The appeal would accordingly be allowed (see p 473 c d f to h, p 474 a b d f g j to p 475 b, p 476 d g h, p 477 d f g j, p 478 c g h and p 480 e, post).
Babanaft International Co SA v Bassatne [1989] 1 All ER 433 and Republic of Haiti v Duvalier [1989] 1 All ER 456 considered.
Per curiam. On an application for a Mareva injunction there are only three issues, namely (i) whether the plaintiff has a good arguable case, (ii) whether the plaintiff can satisfy the court that there are assets within or, where an extra-territorial injunction is sought, outside the jurisdiction and (iii) whether there is a real risk that those assets will be dissipated or secreted so as to render any judgment which the plaintiff may obtain nugatory, and those issues should be decided on comparatively brief evidence. In particular, the court ought not to be asked either to resolve disputed questions of fact, whether relating to the merits of the underlying claim or the Mareva jurisdiction, or to hear detailed argument on difficult points of law (see p 474 f g, p 475 c d, p 476 c d and p 480 e f, post); dictum of Lord Templeman in Spiliada Maritime Corp v Cansulex Ltd, The Spiliada [1986] 3 All ER 843 at 847 applied.
Notes
For Mareva injunctions, see 37 Halsbury’s Laws (4th edn) para 362, and for cases on the subject, see 37(2) Digest (Reissue) 474–476, 2947–2962.
Cases referred to in judgments
A v C [1980] 2 All ER 347, [1981] QB 956, [1981] 2 WLR 629.
American Cyanamid Co v Ethicon Ltd [1975] 1 All ER 504, [1975] AC 396, [1975] 2 WLR 316, HL.
Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888, [1986] 3 WLR 647, CA.
Babanaft International Co SA v Bassatne [1989] 1 All ER 433, CA.
Ballabil Holdings Pty Ltd v Hospital Products Ltd (1985) 1 NSWLR 155, NSW CA;affg [1984] 2 NSWLR 662, NSW SC.
Bankers Trust Co v Shapira [1980] 3 All ER 353, [1980] 1 WLR 1274, CA.
Clunies-Ross, Re, ex p Totterdell (1987) 72 ALR 241, Aust Fed Ct.
Coombs & Barei Constructions Pty Ltd v Dynasty Pty Ltd (1986) 42 SASR 413, S Aust SC.
Guinness plc v Saunders [1988] 2 All ER 940, [1988] 1 WLR 863, CA affg [1988] BCLC 43.
Hait (Republic) v Duvalier [1989] 1 All ER 456, CA.
Home Office v Harman [1982] 1 All ER 532, [1983] 1 AC 280, [1982] 2 WLR 338, HL.
Interpool Ltd v Galani [1987] 2 All ER 981, [1988] QB 738, [1987] 3 WLR 1042, CA.
Lister & Co v Stubbs (1890) 45 Ch D 1, [1886–90] All ER Rep 797, CA.
Maclaine Watson & Co Ltd v International Tin Council (No 2) [1988] 3 All ER 257, [1988] 3 WLR 1190, CA.
Page 471 of [1989] 1 All ER 469
Spiliada Maritime Corp v Cansulex Ltd, The Spiliada [1986] 3 All ER 843, [1987] AC 460, [1986] 3 WLR 972, HL.
Wakefield v Duke of Buccleuch (1865) 12 LT 628; subsequent proceedings (1866) LR 4 Eq 613; on appeal (1870) LR 4 HL 377.
Cases also cited
A-G’s Reference (No 1 of 1985) [1986] 2 All ER 219, [1986] QB 491, CA.
Allied Arab Bank Ltd v Hajjar [1987] 3 All ER 739, [1988] QB 787.
Avant Petroleum Inc v Gatoil Overseas Inc [1986] 2 Lloyd’s Rep 236, CA.
British Syphon Co Ltd v Homewood [1956] 2 All ER 897, [1956] 1 WLR 1190.
Cook v Deeks [1916] 1 AC 554, [1916–17] All ER Rep 285, PC.
Cook Industries Inc v Galliher [1978] 3 All ER 945, [1979] Ch 439.
Denilauler v Snc Couchet Frères Case 125/79 [1980] ECR 1553.
House of Spring Gardens Ltd v Waite [1985] FSR 173, CA.
London and Counties Securities Ltd v Caplan (26 May 1978, unreported), Ch D.
Marshall (Thomas) (Exports) Ltd v Guinle [1978] 3 All ER 193, [1979] Ch 227.
Mediterranean Raffineria Siciliana Petroli SpA v Mabanaft GmbH [1978] CA Transcript 816.
Metropolitan Bank v Heiron (1880) 5 Ex D 319, CA.
National Bank of Greece v Constantinos Dimitriou (1987) Times, 16 November, CA.
Porzelack KG v Porzelack (UK) Ltd [1987] 1 All ER 1074, [1987] 1 WLR 420.
Shell-Mex and BP Ltd v Clayton (Valuation Officer) [1956] 3 All ER 185, [1956] 1 WLR 1198, HL.
Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 3 All ER 75, [1986] 1 WLR 1072, PC.
Sterling Engineering Co Ltd v Patchett [1955] 1 All ER 369, [1955] AC 534, HL.
Thompson’s Settlement, Re, Thompson v Thompson [1985] 2 All ER 720, [1986] Ch 99.
Yandil Holdings Pty Ltd v Insurance Co of North America (1986) 7 NSWLR 571, NSW SC.
Interlocutory appeal
The plaintiffs, Derby and Co Ltd, Cocoa Merchants Ltd (CML), Phibro-Salomon Finance AG, Phibro-Salomon Ltd, Philipp Bros Inc, Philipp Bros Ltd and Salomon Inc of the United States of America (the holding company of the other plaintiff companies), by a writ issued on 25 June 1987 brought an action against the defendants, Anthony Henry David Weldon, Ian Jay, Milco Corp, a Panamanian company, and CML Holding SA of Luxembourg (CMI), claiming damages for breach of contract, misrepresentation, negligence, deceit, conspiracy to defraud and fraudulent breach of fiduciary duty arising out of the trading activities of CML between February 1981 and June 1984 while under the management of the first and second defendants as executive directors of CML after it had been purchased by Salomons from the liquidator of a subsidiary of Milco, which was itself a subsidiary of CMI. In particular, the plaintiffs alleged that between June 1981 and February 1984 the first and second defendants caused CML to suffer losses of £35m on unauthorised advances and credit made available to the Allied Group of companies of Hong Kong when the first and second defendants were owed large sums in their personal capacity by the persons who controlled Allied. The plaintiffs further alleged that when Allied collapsed in 1984 the plaintiffs were owed £35,580,424 of which they were only able to recover £1,485,148 in the insolvency. On 4 December 1987 the plaintiffs applied ex parte to Sir Nicolas Browne-Wilkinson V-C and were granted Mareva injunctions against the first and second defendants restraining them from removing their assets out of the United Kingdom or those countries which were parties to the Convention on Jurisdiction and the Enforcement of Civil and Commercial Judgments 1968 or from dealing in any way with those assets except to the extent that they exceeded £25m and requiring the first and second defendants to file an affidavit disclosing the full value of their assets. By a notice of motion dated 8 December the plaintiffs sought an order freezing the first and second defendants’ assets up to £25m wheresoever in the world
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situated and disclosure of particulars of bank accounts, nominees etc. The motions were heard by Mervyn Davies J who on 27 June 1988 made a Mareva injunction restricted to the first and second defendants’ assets in the United Kingdom and further ordered, by para 6 of his order, that the first and second defendants file an affidavit disclosing what had become of all moneys paid by CML in respect of commodity and foreign exchange transactions with certain specified companies with particulars of accounts into which the moneys had been paid and the identity of the account holder or assets acquired with or representing those moneys. The plaintiffs appealed against the judge’s refusal to grant a worldwide Mareva injunction. The first and second defendants cross-appealed against para 6 of the judge’s order. The facts are set out in the judgments.
Michael Lyndon-Stanford QC, Charles Purle and J Stephen Smith for the plaintiffs.
Philip Heslop QC, John Brisby and Robert Miles for the first and second defendants.
29 July 1988. The following judgments were delivered.
MAY LJ. We have before us an appeal and cross-appeals in respect of orders made in Mareva proceedings before Mervyn Davies J on 27 June 1988. The facts of the case are complicated: they were fully set out in the judge’s judgment whose exposition of them I gratefully adopt. In brief, at material times the first two defendants were directors of the second plaintiffs. The latter were members of what I may call the Salomon Group of which the principal holding company was the seventh plaintiff. At such times the first and second defendants were also directors of or had substantial interests in the fourth defendant.
The plaintiffs’ various claims against the respondents rely on allegations of breach of contract, conspiracy, tort and fraudulent breach of fiduciary duty. They arose initially out of the insolvency of a group of companies known as the Allied Group in February 1984 owing the second plaintiffs £35,580,424. That sum, less £1,485,148 recovered from Allied in Hong Kong, namely a net £34,095,276 is among other relief now claimed from the respondents.
In general terms the plaintiffs’ complaints are that for their own ends, the defendants, and particularly the first and second defendants (a) were content to allow improper credit to Allied, (b) on their own account, through the medium of companies in which they (the defendants) had influence or interest, engaged in transactions that were incompatible with their fiduciary duties to the plaintiffs. As to (b) the plaintiffs’ case is that for their own interests and contrary to their obligations to the plaintiffs they and companies which they controlled carried out foreign exchange dealings and business transactions in cocoa (physical) and cocoa futures to a substantial extent.
In the course of his judgment, having considered the material put before him, the judge made the following comments:
‘… it seems to me that in the light of matters such as I have tried to summarise above, the refusal of a Mareva injunction “would involve a real risk that a judgment in favour of the plaintiffs would remain unsatisfied.” I say that because there are grounds for supposing that the [defendants] may have acted dishonestly, coupled with the fact that they have the ability to lock away assets in inaccessible overseas companies … there is no doubt in my mind that this is a very plain case for an ordinary Mareva order in that the two basic ingredients for the making of an order are present in a high degree. Although a different picture may emerge when oral evidence is given, the plaintiffs’ case is highly arguable. As well there is, I think, a high risk that any assets the [defendants] have, whether here or overseas, will, if the plaintiffs obtain judgment, be unavailable for execution … The [defendants] are well used to moving funds worldwide.’
Notwithstanding these findings the judge was only prepared to make a Mareva order in respect of assets within the jurisdiction, refusing any wider order on the basis of the decision of this court in Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888. However,
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as has been said in a number of decisions in Mareva proceedings, the jurisdiction is a developing one. In Babanaft International Co SA v Bassatne [1989] 1 All ER 433 this court was prepared to make a post-judgment worldwide Mareva order subject to a proviso preserving the personal effect of such an order on and to the particular defendants against whom it was directed. The court in Babanaft indicated that in its view a pre-judgment worldwide Mareva was legitimate, but of course that comment was then obiter. However, in Republic of Haiti v Duvalier [1989] 1 All ER 456 decided during the hearing of the instant appeal, another division of this court made a pre-judgment worldwide Mareva, again subject to the personal proviso to which I have already referred. The court recognised that such an injunction was a most unusual measure, such as should very rarely be granted. Nevertheless the court quoted the dictum of Kerr LJ in Babanaft [1989] 1 All ER 433 at 444: ‘… some situations … cry out, as a matter of justice to plaintiffs, for disclosure orders and Mareva-type injunctions covering foreign assets of defendants even before judgment.' Even though we are hearing this appeal almost simultaneously with the delivery of the judgment in the Duvalier case, for my part I think that this case also is one which cries out for a worldwide Mareva injunction even though it is being sought before judgment. The amount involved and the findings of the judge about the first two defendants, which I have already quoted in my judgment, make this clear.
In his submissions in the instant appeal, counsel for the defendants submitted that, other things apart, a worldwide Mareva should only be made where there was evidence either that the defendant had in fact secreted or alternatively had attempted to secrete assets of his outside the jurisdiction so as to render nugatory any judgment to which the plaintiff might ultimately be entitled. Counsel based this submission not only on Duvalier’s case to which I have already referred, but also on Ballabil Holdings Pty Ltd v Hospital Products Ltd [1984] 2 NSWLR 662;affd (1985) 1 NSWLR 155, Coombs & Barei Constructions Pty Ltd v Dynasty Pty Ltd (1986) 42 SASR 413 and Re Clunies-Ross, ex p Totterdell (1987) 72 ALR 241. As counsel originally submitted, all these authorities show that as wide an order as that sought in the instant case should only be made where there is evidence of previous malpractice or nefarious intent. Counsel originally contended that one could deduce this as a principle of law from the authorities; in his reply, however, he accepted that the highest he could put it was that the cases demonstrated that at least evidence of this nature, or of equivalent persuasive effect, was needed before the court was entitled to make so draconian an order as that sought in this case.
I entirely accept that it will only be in an exceptional case that the court will make such an order. Nevertheless, each case must depend on its own facts. In the light of the cases decided since the judge gave judgment herein, to which I have referred, I respectfully think that he misdirected himself with relation to his approach to the facts which he found and which I have outlined. For the reasons given by Nicholls LJ in his judgment, which I have had the benefit of reading in draft, I do not think that at this stage any valid challenge can be sustained against those findings of fact made by the judge on the vast amount of material before him.
Nevertheless, as the court in this type of case is exercising the widest jurisdiction, which may, unless precautions are taken, prove more oppressive to those against whom the orders are made than beneficial to those whom they are intended to protect, I think that these orders should normally be restricted even more than merely by the proviso to which I have referred and suggested originally in Babanaft.
As the judge in the instant case pointed out, first, such a wide order can be severely oppressive if the defendants, while preparing for a very complicated trial in England, at the same time find themselves engaged in courts overseas in further applications of a Mareva nature, bearing in mind that plaintiffs with substantial resources may not be slow to engage the respondents in as many courts throughout the world as possible. Further, the judge, in referring to objections which had been voiced by Dillon LJ in Ashtiana v Kashi [1986] 2 All ER 970, [1987] QB 888 also pointed out that if a worldwide disclosure order is made simultaneously with a Mareva injunction, this may enable a
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plaintiff to obtain security in some foreign jurisdiction. It is in addition, as Lord Roskill has pointed out, a substantial invasion of privacy (see Home Office v Harman [1982] 1 All ER 532 at 552, [1983] 1 AC 280 at 323). To obviate these very real difficulties, counsel on behalf of the plaintiffs undertook in the course of the argument in the instant case to leave any decision whether action should be taken by his clients in any foreign jurisdiction in respect of any of the assets of the two defendants to the English court. In my judgment such a term or undertaking should generally be part of any worldwide pre-judgment Mareva obtained in circumstances not dissimilar from those in this or the Duvalier case [1989] 1 All ER 456. It is worth making the point that if a worldwide Mareva is not obtained and the plaintiffs do from time to time discover the whereabouts of assets of the defendants, they may well be minded to take those steps in foreign jurisdictions which in totality might well be oppressive, whereas if a worldwide Mareva does contain a term giving the English court the general control over the litigation this would clearly obviate this potential difficulty.
I should add that the third particular reason which the judge gave for refusing a worldwide order was: ‘No dishonesty is yet proved and may never be proved. I must assume that the respondents are honest. Furthermore, they are not in breach of any court order.' These comments do not lie easily alongside the earlier comments made by the judge in his judgment which I have already quoted, to support which there was certainly evidence before him.
In these circumstances my opinion is that it falls to us to decide whether the relief sought should be granted on the judge’s findings of fact and in the light of the law as I understand this court has now stated it to be. For my part I have no doubt that with the appropriate safeguards to which I have referred, this is a case in which a worldwide Mareva injunction ought to be granted, with the concomitant disclosure.
As to the limited proprietary relief claimed by the plaintiffs, I have, as I have indicated, had the opportunity of reading the judgment of Nicholls LJ in draft. I respectfully agree with it and with the conclusion to which he comes.
I have also had the opportunity of reading the judgment of Parker LJ in draft and for my part would respectfully endorse the views he expresses therein.
Subject to the caveats I have expressed, therefore, I would allow the appeal and dismiss the cross-appeal.
PARKER LJ. I agree that this appeal should be allowed and I also agree with the judgments of May and Nicholls LJJ which I have had the opportunity to read in draft. I desire however to add some observations of my own on two matters.
(1) It was submitted for the defendants (i) that if a worldwide Mareva could be granted on no more than a good arguable case and a risk of dissipation of assets it would follow that such an order could be made in the vast majority of commercial cases in which material existed for the grant of an internal Mareva and (ii) that this would conflict with statements in Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888, Babanaft International Co SA v Bassatne [1989] 1 All ER 433 and Republic of Haiti v Duvalier [1989] 1 All ER 456 that an extra-territorial Mareva, albeit effective only in personam would only rarely be granted and would require exceptional circumstances.
I do not accept the first of the above submissions. The mere fact that the plaintiff shows a good arguable case and a real risk of disposal or hiding of English assets, the requisites for an internal Mareva, clearly cannot by itself be sufficient to justify an extra-territorial Mareva either worldwide or at all. Such a Mareva would clearly be unjustified if, for example, there were sufficient English assets to cover the appropriate sum, or if the court were not satisfied that there were foreign assets or that there was a real risk of disposal of the same, or if it would in all the circumstances be oppressive to make the order.
Here, however, it is accepted that there are foreign assets. The judge has found, correctly in my view, that there is a high risk of disposal of such assets. The English assets
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are wholly insufficient to afford protection. The defendants are clearly sophisticated operators who have amply demonstrated their ability to render assets untraceable and a determination not to reveal them.
In those circumstances it appears to me that there is every justification for a worldwide Mareva, so long as, by undertaking or proviso or a combination of both, (a) oppression of the defendants by way of exposure to a multiplicity of proceedings is avoided, (b) the defendants are protected against the misuse of information gained from the ordinary order for disclosure in aid of the Mareva, (c) the position of third parties is protected.
Whether, ultimately, the order in personam will be converted into an order attaching some or all of the assets disclosed will of course depend on (i) the court here giving the plaintiffs leave to proceed in a jurisdiction in which assets have been found and (ii) the decision of the court in such jurisdiction whether to make an order.
(2) That the hearing of an application for interlocutory relief should take 26 days is, in my view, entirely unwarranted, as is also the fact that the documents for an appeal from the judge should comprise several thousand pages of affidavits and exhibits.
There are in essence only three issues: (i) has the plaintiff a good arguable case, (ii) has the plaintiff satisfied the court that there are assets within and, where an extra-territorial order is sought, without the jurisdiction, (iii) is there a real risk of dissipation or secretion of assets so as to render any judgment which the plaintiff may obtain nugatory? Such matters should be decided on comparatively brief evidence. In American Cyanamid Co v Ethicon Ltd [1975] 1 All ER 504 at 510, [1975] AC 396 at 407–408 Lord Diplock, dealing in that case with an application for an interlocutory injunction, said:
‘It is no part of the court’s function at this stage of the litigation to try to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend nor to decide difficult questions of law which call for detailed argument and mature considerations. These are matters to be dealt with at the trial. One of the reasons for the introduction of the practice of requiring an undertaking as to damages on the grant of an interlocutory injunction was that “it aided the court in doing that which was its great object, viz abstaining from expressing any opinion on the merits of the case until the hearing” (Wakefield v Duke of Buccleuch (1865) 12 LT 628 at 629.’
In my view the difference between an application for an ordinary injunction and Mareva lies only in this: that in the former case the plaintiff need only establish that there is a serious question to be tried, whereas in the latter the test is said to be whether the plaintiff shows a good arguable case. This difference, which is incapable of definition, does not however affect the applicability of Lord Diplock’s observations to Mareva cases.
In the present case this seems to have been forgotten. It was not until the 18th day of the hearing before the judge that the defendants accepted that there was a good arguable case which, unless the many conflicts on the affidavit evidence are resolved in the defendants’ favour, there plainly is. Moreover, the defendants sought to go into and obtain the court’s view on questions of law, which the argument before us and the judgment of the judge show clearly to be questions calling for detailed argument and mature consideration. This is quite wrong.
More recently, in relation to an application under RSC Ord 12, r 8 to set aside service of a writ outside the jurisdiction, Lord Templeman in Spiliada Maritime Corp v Cansulex Ltd, The Spiliada [1986] 3 All ER 843 at 847, [1987] AC 460 at 465 said that such cases should be measured in hours not days, that appeals should be rare and that this court should be slow to interfere. These observations in my view also apply to cases such as the present.
Counsel for the defendants has however sought to go yet again into large parts of the evidence in order to persuade us that the judge’s finding that there is a high risk of dissipation of assets both here and overseas should be reversed in respect of overseas assets. In essence he sought to persuade us to attempt to resolve conflicts of fact going to the
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merits of the claim but which were also important on the question of risk of dissipation. This is no part of this court’s function any more than it is the function of the court at first instance. He also sought to show that the plaintiffs in the present case have no proprietary claim. His submissions in this behalf depended on the resolution both of disputed, detailed and complex fact and of difficult questions of law requiring mature consideration. The function of this court is again misappreciated.
It is to be hoped that in future the observations of Lord Diplock and Lord Templeman will be borne in mind in applications for a Mareva injunction, that they will take hours not days and that appeals will be rare. I do not mean by the foregoing to indicate that argument as to the principles applying to the grant of a Mareva injunction should not be fully argued. With a developing jurisdiction it is inevitable and desirable that they should be. What, however, should not be allowed is (1) any attempt to persuade a court to resolve disputed questions of fact whether relating to the merits of the underlying claim in respect of which a Mareva is sought or relating to the elements of the Mareva jurisdiction such as that of dissipation or (2) detailed argument on difficult points of law on which the claim of either party may ultimately depend. If such attempts are made they can and should be discouraged by appropriate orders as to costs.
NICHOLLS LJ. I agree that this appeal should be allowed.
It is now established that under s 37 of the Supreme Court Act 1981 the English court has jurisdiction to make a Mareva ‘restraint’ order in respect of assets outside England and Wales, both before judgment (Republic of Haiti v Duvalier [1989] 1 All ER 456 and after judgment (Babanaft International Co SA v Bassatne [1989] 1 All ER 433). Likewise, the English court has jurisdiction to make a ‘disclosure’ order in respect of assets outside England and Wales, both before judgment (Republic of Haiti v Duvalier) and after judgment (Interpool Ltd v Galani [1987] 2 All ER 981, [1988] QB 738 and Maclaine Watson & Co Ltd v International Tin Council (No 2) [1988] 3 All ER 257, [1988] 3 WLR 1190).
The jurisdiction is established, but what is still being worked out, in this fast developing area of law, is the manner in which, in practice, the court should exercise its discretionary power under this wide jurisdiction. One important matter in this regard concerns the limitations and safeguards normally appropriate to be built into restraint and disclosure orders regarding overseas assets. As to restraint orders, some of the points canvassed, but left open, in the judgments of this court in the Babanaft case were subsequently considered in the very recent decision, also of this court, in Republic of Haiti v Duvalier. In particular, in the Duvalier case the court engrafted onto what was there described as the ‘Babanaft proviso’, whereby the order was expressed not to affect third parties, the qualification ‘unless and to the extent that it is enforced by the courts of the states in which … the … assets are located’. This was the limitation suggested by Kerr LJ in the Babanaft case [1989] 1 All ER 433 at 447. In the present case the plaintiffs proposed that this point should be dealt with by the plaintiffs giving to the English court an undertaking in terms which will preclude them from making any application to a foreign court to enforce the order without first obtaining leave from the English court. This seems to me to be a convenient course. If this undertaking is accepted, and an order is made, it would then be for the judge of the English court to whom any application for such leave might be made to consider, among other matters, whether the enforcement of the order in the country (or countries) for which leave is sought will, under the law of that country, result in the order having a substantially similar effect there to a Mareva, restraint order in this country, as distinct from the order having there a more far-reaching effect (such as the assets in the country being attached as a form of security for the plaintiffs’ claims, which is not the object of a Mareva, restraint order). On any application for such leave, which normally would be inter partes, the judge can be expected to have before him what we do not have, namely evidence of the law and practice in the country or countries in which the order is sought to be enforced. The undertaking, I add, is being offered by all the plaintiffs, which include among their
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number English companies whose substance has not been questioned. So the undertaking is a worthwhile one.
As to extra-territoriality and the protection of third parties, the restraint order as sought by the plaintiffs also embodies the restriction on the Babanaft proviso adopted in the Duvalier case, to the effect that individuals who are resident in this country are to be affected by the restraint order regarding overseas assets, even in respect of acts done by them outside England and Wales. As Staughton LJ recognised in Duvalier, the distinction thus drawn between natural and other persons resident in this country is not satisfactory. However, no argument was addressed to us on this point by counsel. This is not a suitable case therefore to seek to take this particular point further.
As to the disclosure order in respect of overseas assets, in the present case this order is intended to be ancillary to the worldwide restraint order. Disclosure is sought in order to render that restraint order effective, or more effective. Here also the undertaking being offered by the plaintiffs is in terms which will preclude them from making any use of information so disclosed in proceedings abroad against the first and second defendants (to whom I shall refer simply as ‘the defendants’) without the leave of the (English) court. Here again, therefore, reasonable protection for the defendants is being built into the order to ensure that the information compulsorily disclosed is not misused and that it does not lead to the defendants being harassed or oppressed by having to face litigation, brought by financially more powerful parties, in overseas courts throughout the world.
I have referred to the safeguards being embodied in the order before considering whether a worldwide restraint order, and an ancillary worldwide disclosure order, should be made at all, because the extent and adequacy of the safeguards available are of particular relevance in the present case having regard to the criticisms advanced by the plaintiffs of the factors which weighed with the judge when he exercised his discretion. After a full exploration of voluminous, complex affidavit evidence for more than five weeks, made with the assistance of submissions by leading counsel on both sides, the judge’s conclusions on the facts included the following. First, that there was a very real risk that assets, here or abroad, presently owned by the defendants would, by the use of foreign companies, nominee directors, bearer shares and the like, remain hidden or now be spirited away, so as to render any future judgment useless. Second, that that risk would be reduced, if not eliminated, by a restraint order affecting overseas assets. Third, in the circumstances of this case an order affecting only assets in England and Wales might for practical purposes be virtually useless. Fourth, that the defendants had not sought to help themselves by disclosing any details of their assets beyond saying that they have some assets in England and that they have no assets elsewhere in the EEC countries.
Despite this the judge declined to make a restraint order, with an ancillary disclosure order, in respect of overseas assets (the defendants did not resist the making of such orders in respect of assets in England and Wales). He declined, because of the importance he attached to three considerations. He felt that these three considerations were of such strength as to outweigh all the others. Two of those considerations concerned the oppressiveness of the use which the plaintiffs might make of information regarding the defendants’ overseas assets: the defendants could be made to engage in courts overseas in applications of a Mareva nature, and the information could lead to the plaintiffs obtaining security in some foreign jurisdiction. If making the disclosure order would be likely to have those consequences in this case, I would agree with the judge on the weightiness of these factors. As the judge rightly recognised, these were the considerations which prompted this court to discharge an overseas disclosure order in Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888. But in the present case the undertaking offered by the plaintiffs puts the matter into an altogether different light, by giving the defendants reasonable protection. So I think that the judge, who did not have the benefit of the subsequent decisions in Babanaft and Duvalier, fell into error in not taking the undertaking proffered by the plaintiffs into account as providing an answer to his justifiable concern on these two points.
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The third point to which the judge attached overriding weight was that in previous cases where orders have been made regarding overseas assets there was a background of proven misconduct by a defendant, but in the present case no dishonesty has yet been proved. The judge said that he must assume that the two individual defendants are honest. Of course, the outcome of the trial may be that the defendants are wholly innocent of all the charges, and are not liable under any of the claims made against them. But, if by what he said the judge meant that a restraint order in respect of overseas assets should not be made in the absence of proof of dishonesty on the part of the defendants even though the action is only at a very early interlocutory stage, then I would feel bound to part company from him. However, I do not think that it is necessary to consider further whether this indeed is what the judge meant. Having regard to the misdirection already mentioned, the judge’s exercise of his discretion cannot stand.
In these circumstances it is for this court to exercise its own discretion. As to that I am in no doubt that a restraint order in respect of overseas assets ought to be made pending the trial or further order, with an ancillary disclosure order. Counsel for the defendants challenged the judge’s conclusions about the very real risk of assets remaining hidden or being spirited away so as to render any judgment useless. Counsel drew our attention to certain passages in the evidence. These were lengthy but they still fell far short of the totality of evidence considered by the judge. Having considered those passages, and the submissions of counsel for the defendants, I am not persuaded that the judge can be faulted in his conclusion on these points.
Counsel for the defendants further submitted that, even if these conclusions regarding the risk of assets being secreted or removed were to stand, no order should be made. He placed much emphasis on judicial observations that pre-judgment restraint orders regarding overseas assets will be granted only ‘in extreme situations’ (per Kerr LJ in Babanaft [1989] 1 All ER 433 at 447) and that cases where it will be appropriate to grant such injunctions ‘will be rare, if not very rare indeed’ (per Staughton LJ in Republic of Haiti v Duvalier [1989] 1 All ER 456 at 466). He submitted that before an overseas restraint order is made more must be required than a good arguable case and a real risk that the overseas assets will be dissipated or secreted. He contended that if those were the only pre-requisites to a worldwide restraint order, the facts which would justify a restraint order regarding assets in England and Wales would frequently, if not normally, also justify a restraint order regarding assets overseas. If that were so, a restraint order regarding overseas assets would become commonplace, because if a defendant is likely to dissipate or spirit away or secrete his UK assets, he is likely to behave similarly regarding his overseas assets.
In my view each case must depend on its own facts. An order restraining a defendant from dealing with any of his assets overseas, and requiring him to disclose details of all his assets wherever located, is a draconian order. The risk of prejudice to which, in the absence of such an order, the plaintiff will be subject is that of the dissipation or secretion of assets abroad. This risk must, on the facts, be appropriately grave before it will be just and convenient for such a draconian order to be made. It goes without saying that before such an order is made the court will scrutinise the facts with particular care. In the instant case there are present the special factors to which May and Parker LJJ have referred. I do not think that it is correct that, if an order is made in the present case regarding overseas assets, such an order will become, or should become, the norm in cases where a restraint order is made regarding assets within the jurisdiction.
For completeness I should add that in the present case nothing turns on the position regarding assets which are located abroad in countries which are parties to the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (Brussels, 27 September 1968; EC 46(1978); Cmnd 7395) as distinct from assets which are located elsewhere abroad. The defendants assert that they have no assets in convention countries. Quite rightly, time was not spent on what, in that circumstance, would have been arid argument. Counsel for the defendants accepted that his clients’ position
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regarding convention countries should stand or fall with the fate of this appeal so far as it is related to other countries throughout the world: if a worldwide order should be made, that should embrace convention countries as well as non-convention countries. Conversely, if a worldwide order should not be made, there should be no special order regarding convention countries.
I turn to the defendants’ cross-appeal in respect of para 6 in the judge’s order. In my view it is clear that an order along these lines cannot be justified unless the plaintiffs have a seriously arguable claim to have a proprietary interest in the sums of money paid by or on behalf of Cocoa Merchants Ltd (CML) to Cocoa Merchants (Far East) Ltd (CMFE) in respect of profits from the foreign exchange transactions being attacked by the plaintiffs. The judge’s order, indeed, goes wider than foreign exchange transactions entered into with CMFE, but before us counsel for the plaintiffs was content to confine the plaintiffs’ claim to CMFE transactions. Counsel for the defendants presented a formidable argument to the effect that neither on the pleadings nor on the evidence is such a claim made out as a serious issue. I agree with him that the statement of claim leaves much to be desired on this point. But in a case of this complexity I do not think that the present state of the statement of claim, already once amended and likely, I suspect, to be amended more than once hereafter, should be decisive on an interlocutory application of the nature with which this appeal is concerned. I attach more importance to the state of the evidence. There will be ample opportunity for the statement of claim to be tidied up well before the trial so as to accord with the case being advanced against the defendants as deposed to in the affidavit evidence.
So I turn to the evidence. As to that, the defendants’ liability to account, like all the other claims against the defendants, is strenuously resisted by the defendants. But counsel for the respondents, rightly in my view, accepted for the purposes of this appeal that on the evidence, much disputed though it is, the plaintiffs have an arguable case that the defendants are required in equity to account for the profits in question. Counsel’s case on this point on this appeal was that this claim is not proprietary in nature. The plaintiffs’ claim, he submitted, is one of obligation leading (if established at the trial) to a money judgment. The claim, however much the plaintiffs contend otherwise, is not an ownership claim under which specific property from the moment it reached CMFE was impressed with a trust in favour of CML. For this distinction counsel relied on such well-known cases as Lister & Co v Stubbs (1890) 45 Ch D 1, [1886–90] All ER Rep 797.
The plaintiffs sought to distinguish these cases on the basis that here the money being claimed as an unauthorised profit emanated from CML. Contrast Lister & Co v Stubbs, where the money received as a bribe came to the defendant from a third party. Reliance was placed on the very recent decision of this court in Guinness plc v Saunders [1988] 2 All ER 940, [1988] 1 WLR 863. That case concerned a sum of £5·2m paid by Guinness to a company on behalf of Mr Ward under a contract made in breach of Mr Ward’s fiduciary duty as a director of Guinness. The Court of Appeal upheld Sir Nicolas Browne-Wilkinson V-C’s decision ([1988] BCLC 43), which included a declaration that Guinness was entitled to an equitable charge over any bank account or other property to the extent to which the balance in the account, or the property, derived from the sum of £5·2m or any part of that sum.
In turn counsel for the defendants sought to deflect that line of attack. He submitted that the crucial question is whether the money paid over by the plaintiff to the defendant, and received by him as an unauthorised profit, was the property of the plaintiff before the alleged wrongful act. If it was not, then there is no proprietary claim. On the facts in the instant case, he submitted that the money paid by CML to CMFE which the plaintiffs are asserting was impressed with a trust in favour of CML was not money which belonged to CML prior to the acts of which complaint is being made. He relied on his clients’ evidence that all the foreign exchange transactions by CML with CMFE were backed by corresponding transactions between CML and a bank. So that the source of the money which passed to CMFE as its profits was not CML but was the banks under the
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corresponding backing transactions. The money only came to CML, and passed through CML, as part and parcel of the transactions now being impugned.
In my view these rival contentions raise a seriously arguable point, of some general importance, which it is undesirable for the court to pursue and decide on this interlocutory application. The underlying facts are far from clear. There is a dispute on the evidence on the way in which the impugned foreign exchange transactions were conducted. This is not a satisfactory basis for the court to decide a point of law which, as presented to us, may turn on fine questions of fact, presently obscure, concerning what sums of money actually passed from whom and to whom and when and in respect of what.
If the plaintiffs have a seriously arguable case that they had a proprietary interest, under a constructive trust, in certain sums of money paid to CMFE, then in my view the court has jurisdiction, under the principles set out in A v C [1980] 2 All ER 347, [1981] QB 956 and Bankers Trust Co v Shapira [1980] 3 All ER 353, [1980] 1 WLR 1274, to require the defendants to provide information about what has happened to those sums. In the exercise of his discretion Mervyn Davies J considered that an order to that effect should be made in this case. I can see no ground entitling or requiring this court to interfere with that exercise of his discretion.
Counsel for the defendants challenged the form of the order in several respects. I agree that the order, so far as it related to the disclosure of copies of documents this should be limited to documents in the possession, custody or power of the defendants. But I am unable to accept counsel’s other criticisms of the width of the order. In particular, for the disclosure obligation to cease once the money (running into millions of pounds) paid to CMFE has been mixed with the general assets of that company would fail to recognise that, if there is a trust claim here, the plaintiffs may be entitled to a charge on a mixed fund held by CMFE or on property derived therefrom.
With that one minor variation, and subject to confining the order to foreign exchange transactions entered into with CMFE, I would dismiss the defendants’ cross-appeal. There will, of course, be an undertaking by the plaintiffs not to make any use of the information provided by the defendants without leave of the court.
In his judgment, which I have had the advantage of reading in draft, Parker LJ has commented on the nature of Mareva proceedings. Of course, whether or not a restraint or disclosure order should be made will often be a matter of great importance to one or both of the parties in an action. But this is equally true of applications for other forms of interlocutory injunctive relief. I wish to associate myself, therefore, with Parker LJ’s observations on this point. It is devoutly to be hoped that never again will there be an application for Mareva relief which will occupy the court for over five weeks.
Appeal allowed. Cross-appeal dismissed.
Solicitors: Lovell White Durrant (for the plaintiffs); Hopkins & Wood (for the first and second defendants).
Carolyn Toulmin Barrister.
Chloride Industrial Batteries Ltd and another v F & W Freight Ltd
[1989] 1 All ER 481
Categories: TRANSPORT; Road: INTERNATIONAL; Treaties
Court: QUEEN’S BENCH DIVISION
Lord(s): SHEEN J
Hearing Date(s): 6, 13 OCTOBER 1988
Carriers – Contract – Carriage of goods – International carriage of goods by road – International carriage – Carriage between different countries – Carriage of goods by road from north of England to Jersey – Whether Jersey a different country – Whether carriage from England to Jersey international carriage – Carriage of Goods by Road Act 1965, s 9, Sch, art 1, para 1.
The provisions of the Convention on the Contract for the International Carriage of Goods by Road 1956, which has the force of law in the United Kingdom by virtue of the Carriage of Goods by Road Act 1965, do not apply to a contract for the carriage of goods by road from the north of England to Jersey, since ‘country’ in para 1a of art 1 of the convention (which is set out in the schedule to the 1965 Act) refers to a sovereign state which is competent to enter into an international convention on its own behalf and Jersey is not a ‘different country’ from the United Kingdom for the purposes of para 1 because under s 9b of the 1965 Act the convention can only become applicable to Jersey by an Order in Council directing that the Act shall extend to Jersey (see p 484 a b d e, post).
Notes
For the international carriage of goods by road, see 5 Halsbury’s Laws (4th edn) paras 417–418.
For the Carriage of Goods by Road Act 1965, s 9, Sch 1, art 1, see 28 Halsbury’s Statutes (3rd edn) 440, 442.
Case referred to in judgment
Stag Line Ltd v Foscolo Mango & Co Ltd [1932] AC 328, [1931] All ER Rep 666, HL.
Preliminary issue
The plaintiffs, Chloride Industrial Batteries Ltd and the States of Jersey Telecommunications Board, by a writ issued on 5 November 1986 in the District Registry of Liverpool, claimed against the defendant, F & W Frieght Ltd, damages for breach of contract or negligence and/or breach of duty in respect of the total loss of a consignment of batteries which the defendant had agreed to carry under contract, at the request of the first plaintiff in November 1985, from the first plaintiff’s premises in Manchester to the second plaintiff’s premises in Jersey. On 19 April 1988 Master Warren, by the consent of the parties, ordered that the question whether the provisions of the Convention on the Contract for the International Carriage of Goods by Road 1956, as enacted into English law by the Carriage of Goods by Road Act 1965, applied to goods carried by road from Manchester of Jersey be tried as a preliminary issue. The facts are set out in the judgment.
Nigel Meeson for the plaintiffs;.
George Leggatt for the defendant.
Cur adv vult
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13 October. The following judgment was delivered.
13 October 1988. The following judgment was delivered.
SHEEN J. The court has before it a preliminary issue to be tried by order of Master Warren made on 19 April 1988 by consent of the parties. The question of be tried is whether the Convention on the Contract for the International Carriage of Goods by Road (Geneva; 19 May 1956) as enacted into English law by the Carriage of Goods by Road Act 1965 applies to the carriage forming the subject matter in this action, being from Manchester in England to Jersey.
The plaintiffs’ claim arises out of a contract made in November 1985, whereby the defendant agreed to carry a consignment of batteries by road from the first plaintiff in Manchester to the second plaintiff in Jersey.
Section 1 of the Carriage of Goods by Road Act 1965 provides:
‘Subject to the following provisions of this Act, the provisions of the Convention on the Contract for the International Carriage of Goods by Road … as set out in the Schedule to this Act, shall have the force of law in the United Kingdom so far as they relate to the rights and liabilities of persons concerned in the carriage of goods by road under a contract to which the Convention applies.’
As appears in its preamble, the convention was signed on 19 May 1956 by nine European states which recognised the desirability of standardising the conditions governing the contract for the international carriage of goods by road. Article 1, para 1 of the convention provides:
‘This Convention shall apply to every contract for the carriage of goods by road in vehicles for reward, when the place of taking over of the goods and the place designated for delivery, as specified in the contract, are situated in two different countries, of which at least one is a Contracting country, irrespective of the place of residence and the nationality of the parties.’
It follows that the convention applies to the contract of carriage on which this action is founded if, but only if, the first plaintiff’s premises in Manchester and the second plaintiff’s premises in Jersey are in different countries within the meaning to be attributed to the word ‘country’ in art 1 of the convention.
The defendant put in evidence an affidavit of Caroline Dorey, who is a member of the Bar of England and Wales and an Advocate of the Royal Court of the Island of Jersey, in which she dealt with the constitutional position of the Island of Jersey and its relationship with the United Kingdom in this way:
‘The Channel Islands were part of the Duchy of Normandy before the Norman conquest but remained in allegiance to the King of England when continental Normandy was lost in 1204. When later the ducal title was surrendered the King of England continued to rule the Islands as though he were Duke of Normandy, observing their laws customs and liberties; those were later confirmed by charters of successive sovereigns which secured for them their own judiciaries and freedom from process of English Courts and other important privileges of which the Islands are justly proud and which have always been respected. Although expressed in somewhat different terms in different ages, this has remained the essence of the relationship between the Islands and the Crown to the present day. After the separation of the Islands from Normandy and Norman administration the local institutions were gradually moulded over time very largely on local initiative to meet changing circumstances until their present constitutional position evolved. This evolution, however, did not at any time involve amalgamation with, or subjection to, the government of the United Kingdom and even today the Islands’ link with the United Kingdom and the remainder of the Commonwealth is through the Sovereign as latter-day successor of the Dukes of Normandy. The constitutional
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position of the Channel Islands is thus unique. They enjoy wide powers of self-government. However, this must not blind the observer to the exact constitutional position. The main feature of the constitutional relationship between the United Kingdom and the Island of Jersey is that the Crown has ultimate responsibility for the good government of the Island. The Crown acts through the Privy Council. It is the practice at the beginning of each reign to appoint Committees to the Committee of the Privy Council to entertain petitions from the Channel Islands. It is, in fact, the Home Secretary who is the member of the Council primarily concerned with the affairs of the Island and is the channel of communication between Jersey and the Crown and the United Kingdom government. The most important point to note in relation to the present case is that Jersey is not a Sovereign State and that the United Kingdom Government is responsible for the Island’s international and external relations. The status of the Island is that of a dependent territory. This has always been the case notwithstanding the Island’s claim to various privileges and liberties previously granted to it. Those relate to fiscal and domestic matters and no more.’
On behalf of the plaintiffs counsel submitted first that Jersey is not part of the United Kingdom, which is the country in which Manchester is situated. Furthermore, counsel relied on the fact that in the past Parliament has treated Jersey as a country. Counsel drew my attention to s 1(4) of the Evidence (Foreign, Dominion and Colonial Documents) Act 1933, which provides:
‘In this section the expression “country” means a Dominion, the Isle of Man, any of the Channel Islands, a British colony or protectorate, a foreign country, a colony or protectorate of a foreign country, or any mandated territory … ’
In answer to this point counsel for the defendant submitted that, although there are occasions on which it is permissible to look at an earlier statute which is in pari materia in order to resolve an ambiguity in the statute under consideration, the 1933 Act is of no assistance to the court when it is interpreting the convention. Counsel reinforced this submission by drawing my attention to the words of Lord Macmillan in Stag Line Ltd v Foscolo Mango & Co Ltd [1932] AC 328 at 350, [1931] All ER Rep 666 at 667:
‘It is important to remember that the [Carriage of Goods by Sea Act 1924] was the outcome of an International Conference and that the rules in the Schedule have an international currency. As these rules must come under the consideration of foreign Courts it is desirable in the interests of uniformity that their interpretation should not be rigidly controlled by domestic precedents of antecedent date, but rather that the language of the rules should be construed on broad principles of general acceptation.’
The task of the court is to interpret the word ‘country’ in its context in art 1 of the convention. That word occurs twice in para 1 of art 1. It must be given the same meaning on both occasions.
On the second occasion on which the word is used, it is in the phrase ‘a Contracting country’. Counsel for the defendants submitted that its use in that context shows that it can only mean a state, as that term is used internationally, which has the power to enter into a convention. Its most important characteristic is its capacity to make treaties or enter into negotiations which another country or state. Counsel drew my attention to O’Connell International Law (2nd edn, 1970) vol 1, p 284, in which the author deals with the attributes of statehood and says:
‘The fully sovereign State is one which is not subordinate in its capacity for international action to any other legal entity … it is an organised community and this implies a population occupying a defined territory which it asserts to be exclusive to it, and which it administers through governmental agencies competent
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to deal with foreign States in the way accepted as normal by the international community.’
Counsel submitted that Jersey does not have these attributes. Jersey is not competent to enter into an international contract or convention on its own behalf. This is apparent from s 9 of the 1965 Act, which provides that Her Majesty may by Order in Council direct that this Act shall extend to, amongst other territories, any of the Channel Islands.
It is equally clear from para 3 of art 31 of the convention that in the convention the words ‘country’ and ‘state’ are synonymous. In the French text the word ‘pays’ is used on both occasions.
Counsel for the plaintiffs developed an argument that as a matter of logic Jersey must be a different country from the United Kingdom for the purposes of the convention, because the convention applies in the United Kingdom and does not apply in Jersey. It would follow that if there was a contract for the carriage of goods by road from the United Kingdom to Turkey, which is not a party to the convention, the convention would apply, because the convention applies in the United Kingdom, but if the contract was from Jersey to Turkey, the convention would not apply because the convention does not apply in Jersey. Counsel submitted that it follows from this that the United Kingdom and Jersey are treated as different countries for the purposes of the convention.
In answer to this, counsel for the defendant pointed out that the law of Jersey is different from the law of England and that the convention is not part of the law of Jersey. But it does not follow that Jersey is a different ‘country’ within the meaning of art 1, para 1. Indeed, if one asks the question, ‘How would the convention become applicable to Jersey?’ the answer is by an Order in Council directing that the 1965 Act shall extend to Jersey. This demonstrates that Jersey is part of one contracting country.
I have been left in no doubt that for the purposes of the convention Jersey is not a different country from the United Kingdom and that the contract of carriage is not in respect of international carriage. Accordingly the answer to the question posed for the court is No.
Order accordingly.
Solicitors: Hill Dickinson & Co, Liverpool (for the plaintiffs); Clyde & Co (for the defendant).
K Mydeen Esq Barrister.
Re Calmex Ltd
Calmex Ltd and another v C Lila Ltd and others
[1989] 1 All ER 485
Categories: COMPANY; Insolvency
Court: CHANCERY DIVISION (COMPANIES COURT)
Lord(s): HOFFMANN J
Hearing Date(s): 11 AUGUST 1988
Company – Compulsory winding up – Winding up order – Rescission – Application for rescission – Court’s jurisdiction to rescind order – Company wound up by mistake – Removal of winding-up order from register – Whether order should be removed from register – Insolvency Act 1986, s 130(1) – Insolvency Rules 1986, rr 4.3, 7.47(1)(4).
A company which has been wound up by mistake instead of an unconnected company with a similar name is entitled to rescission of the winding-up order under r 7.47(1) and (4) of the Insolvency Rules 1986, which gives the court jurisdiction to rescind the order within seven days of it being made, which time limit can be extended under r 4.3 of those rules where appropriate. The company is also entitled to have the order removed from the register since on the true construction of s 130(1) of the Insolvency Act 1986 the registrar cannot retain in his records a winding-up order which the court has declared to be a nullity (see p 487 a c and p 488 a e g to j, post).
Notes
For rescission of a winding-up order, see 7(2) Halsbury’s Laws (4th edn reissue) para 2027.
For the Insolvency Act 1986, s 130, see 4 Halsbury’s Statutes (4th edn) (1987 reissue) 811.
For the Insolvency Rules 1986, rr 4.3, 7.47, see 3 Halsbury’s Statutory Instruments (Grey Volume) 285, 441.
Cases referred to in judgment
Craig v Kanseen [1943] 1 All ER 108, [1943] KB 256, CA.
Intermain Properties Ltd, Re [1986] BCLC 265.
R v Registrar of Companies, ex p Central Bank of India [1986] 1 All ER 105, [1986] QB 1114, [1986] 2 WLR 177, CA.
Application
By notice of application dated 26 July 1988 the applicants, Calmex Ltd (the company) and Anthony Hanley, a director of the company, applied for, inter alia, orders that (i) the compulsory winding-up order made in respect of the company by Mr Registrar Bradburn on 2 December 1987 be rescinded and (ii) all copies of and references to the winding-up order appearing in the company’s file at Companies House be removed from the file and destroyed. The respondents to the application were C Lila Ltd, on whose petition the company had been wound up, the Official Receiver and the Registrar of Companies. The petitioner and the Official Receiver took no part in the proceedings. The facts are set out in the judgment.
Page 486 of [1989] 1 All ER 485
William Trower for the applicants.
Kevin Garnett for the Registrar of Companies.
11 August 1988. The following judgments were delivered.
HOFFMANN J. Calmex Ltd has been trading since 1985 as a haulage contractor in Lancashire. On 2 December 1987 it was wound up by mistake. The petitioner had not intended to have it wound up and the company knew nothing about the proceedings. The petitioner’s solicitor has explained in an affidavit that it was the result of a series of errors. His client was owed money by an entirely unconnected company called Calmex Fashions Ltd. But the petition as presented and advertised named Calmex Ltd. The affidavit of service said that the petition had been served at the registered office of Calmex Ltd by being left pinned to a panel at the bottom of the staircase, but the registered office was in fact at a different address. Not surprisingly, no one appeared for the company on the hearing before Mr Registrar Bradburn and he made the usual compulsory order.
Unusually, the order appears to have been drawn up before the mistake was discovered. On 11 January 1988 an application was made by the petitioner’s solicitors for a stay of the winding up, purportedly in the name of Mr Anthony Hanley, a director and contributory of the company. The order was made by Mervyn Davies J on 1 February 1988. Mr Hanley says that he knew no more about this application than he had about the original order. It was made on the authority of his accountant, who presumably learnt of the winding-up order via the true registered office and later told Mr Hanley that he had assumed that the stay would put right the mistake and decided not to bother him with the matter.
The first that Mr Hanley knew of the winding up was at the end of March, when he was arranging finance to buy a new tractor unit for the company’s business. The finance house told him that his bank reference and accounts were satisfactory but its credit reference agency had told them that the company was in liquidation. It refused to proceed with the transaction. In April there was a similar incident. A sub-contractor failed to perform a haulage contract and said afterwards that the credit reference agency had told him that Calmex Ltd had been blacklisted. As a result, the company lost the main contract. Last month, the suppliers of a photocopier came to repossess the machine because the finance house had turned down the company’s application because of an adverse report from a credit reference agency. This time the company’s solicitors managed to persuade the finance house that the winding-up order had been made in error.
Counsel for the company now moves for an order that the winding-up order be rescinded and that the relevant documents be removed from the company’s records at Companies House. The respondents are the petitioning creditor and Official Receiver, who have no interest in the matter and do not appear, and the Registrar of Companies who is indifferent to whether or not the order is rescinded but says that the court has no jurisdiction to order the removal of documents from the file and, even if it has, should not do so.
The first question is whether the winding-up order can be rescinded. Until the Insolvency Rules 1986, SI 1986/1925, came into force, a winding-up order could not be rescinded after it had been drawn up. The only remedy was to apply for a stay: see Re Intermain Properties Ltd [1986] BCLC 265. But r 7.47(1) of the 1986 rules says:
‘Every court having jurisdiction under the Act to wind up companies may review, rescind or vary any order made by it in the exercise of that jurisdiction.’
That power is expressed in completely general terms and in my judgment gives me jurisdiction to rescind the order notwithstanding that it has already been drawn up and, indeed, that proceedings have been stayed. Rule 7.47(4) says:
‘Any application for the rescission of a winding-up order shall be made within 7 days after the date on which the order was made.’
This time limit will usually be sufficient to ensure that a rescission order is in fact
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made before the order has been drawn up. But r 4.3 gives the court power to extend the time limit in an appropriate case. I think that in the exceptional circumstances of this case it would be right to do so.
As for the grounds for exercising the jurisdiction, they are plain enough. As Lord Greene MR said in Craig v Kanseen [1943] 1 All ER 108 at 113, [1943] KB 256 at 262:
‘… an order which can properly be described as a nullity is something which the person affected by it is entitled ex debito justitiae to have set aside … Apart from proper ex parte proceedings, the idea that an order can validly be made against a man who has had no notification of any intention to apply for it is one which has never been adopted in England. To say that an order of that kind is to be treated as a mere irregularity, and not something which is affected by fundamental vice … cannot be sustained.’
The company is therefore entitled to have the order rescinded. I declare it to have been a nullity and it follows that the order staying proceedings had nothing on which it could fasten and was also a nullity.
The next question is whether anything can be done about the register. This is a serious matter for the company because credit reference agencies can in good faith give reports which cause great damage but are based on mistaken information or inferences. For example, inquiries by the company’s solicitors from a number of credit reference agencies showed that five of them had on their files copies of the winding-up order but no copy of the stay order. Furthermore, the hire-purchase company concerned in the photocopier transaction said that its usual policy was to refuse credit to a company against which a winding-up order had been made even if the proceedings had been subsequently stayed. This is not in the ordinary case an unreasonable attitude, because the usual reason for an order staying the winding up is that at the thirteenth hour a director or contributory has paid off the debts due to the petitioning and supporting creditors and the costs of the Official Receiver. The fact that a winding-up order was made is therefore still a black mark against the company. It can however be very unfair in an exceptional case like the present where the stay was ordered because the winding-up order should never have been made. But credit reference agencies operate by using general criteria which can be programmed into a computer and they cannot be expected to inquire into the individual circumstances of each case.
It is impossible to eliminate mistakes in searching official records or injustices caused by applying generalisations to exceptional cases. But I think that one should try so far as possible to minimise the risks. The question here is whether anything further can be done which is consistent with the registrar’s statutory duties and whether the court has power to order the registrar to do it.
The effect of s 130(1) of the Insolvency Act 1986 and r 4.21(3) of the 1986 rules is that ‘On the making of a winding-up order’ the Official Receiver is under a statutory duty to forward a copy to the registrar, who ‘shall enter it in his records relating to the company’. Section 709(1) of the Companies Act 1985 entitles anyone to inspect a copy of ‘any document kept by the registrar’ and by s 711(1) the registrar must give notice in the Gazette of his receipt of various classes of documents, including any winding-up order. There are no provisions for the removal of any documents from the registrar’s keeping except by way of the removal to the Public Record Office of the records of dissolved companies and the destruction of accounts and annual returns more than ten years old, subject to the retention of copies.
Is the registrar under a duty to retain in his records a copy of a winding-up order which the court has rescinded on the grounds that the company was never served and the entire proceedings were a mistake? In Craig v Kanseen [1943] 1 All ER 108 at 113, [1943] KB 256 at 262 Lord Greene MR described an order made in such circumstances as a ‘nullity’. As I said in Re Intermain Properties Ltd [1986] BCLC 265 at 266 the word ‘nullity’ can be rather slippery and Lord Greene MR’s reference to the order being ‘set aside’ make it difficult to know whether he regarded the order as incapable of having any legal consequences whatever. But I need not explore the meaning of nullity at this level of
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generality: the relevant question here is whether the order is a nullity for the purposes of s 130(1) of the 1986 Act. In my judgment it is. The present question could not have arisen before the 1986 rules because the order could not have been rescinded after it had been drawn up and registered. But, now that it can be, I think that justice requires s 130(1) to be construed to give effect to the nullity principle stated by Lord Greene MR.
The registrar’s view, as put to the court by counsel, is that the removal of the order would be a falsification of history. The indelible fact is that the order was made. But I do not think that the purpose of the register is simply to chronicle events. Anyone who wants information about the minor fiasco which occurred in Mr Registrar Bradburn’s court on 2 December 1987 will be able to find it in the records of the court. The companies register is to record information which may be useful to persons dealing with the company. I can see no purpose in recording the fact that the company was a victim of mistaken identity as a consequence of which the court purported to make an order which had no legal consequences and was afterwards declared to have been a nullity. On the other hand, as we have seen, the existence of the record is a potential source of serious injustice to the company.
Counsel for the registrar expressed concern about the confusion which might be caused if a search of the register failed to disclose a document which had been present when a previous search had been made. He told me that in cases in which, by administrative error, a document had been wrongly placed in the file, the registrar’s practice was to remove it but to leave a note giving a brief description of the document and saying that it had been inserted by mistake and subsequently removed. In such cases the microfiche of the file which was made available to searchers would have to be reconstructed. This procedure seems to me entirely sensible and I see no reason why it cannot be followed in this case. The winding-up and stay orders can be removed and replaced by a note saying ‘Winding-up order made in error and subsequent stay of that order removed from the file’ or words to that effect.
The registrar was also worried that the precedent set by this application might lead to many others which would add to the burdens of his office. I do not think that it would. Although cases of mistaken identity in the Companies Court are not rare, they are almost always discovered as soon as the Official Receiver notifies the company of the order and an application for rescission is made before the order has been drawn up. Cases like the present are likely to be infrequent and I think that any administrative burdens placed on the registrar are outweighed by the prejudice which might otherwise be caused to the companies.
Finally, counsel for the registrar submitted that the court had no jurisdiction to tell the registrar to remove documents from the register. I would be surprised if a company had no remedy against the registrar if he chose to include in the file a document which was prejudicial to the company and which he had no statutory duty to keep. And I have held that, on the true construction of s 130(1) of the 1986 Act, the registrar has no duty to retain entered in his records a winding-up order which the court has declared to be a nullity. I suspect that the remedy would be by way of judicial review, but counsel for the registrar said that the registrar did not wish to take any point on the procedure by which the matter has been brought before the court, but contended that even by way of judicial review there was no jurisdiction. In my judgment the court does in principle have jurisdiction according to ordinary public law principles to control the way in which the registrar carries out his statutory duties, subject to any specific exclusions of that jurisdiction or the evidence on which it could be founded, as in R v Registrar of Companies, ex p Central Bank of India [1986] 1 All ER 105, [1986] QB 1114. I will therefore make an order that the winding-up and stay orders be removed from the registrar’s files, subject, if the registrar thinks it desirable, to their replacement by a note in terms on which I shall invite the views of counsel.
Order accordingly.
Solicitors: Joynson-Hicks (for the applicants); Treasury Solicitor.
Hazel Hartman Barrister.
The Rosa S
[1989] 1 All ER 489
Categories: SHIPPING
Court: QUEEN’S BENCH DIVISION (ADMIRALTY COURT)
Lord(s): HOBHOUSE J
Hearing Date(s): 7, 8, 21 JULY 1988
Shipping – Carriage by sea – Damages for breach of contract – Loss of or damage to goods – Limitation of liability – Liability determined by reference to gold value – Shipowners admitting liability in respect of damage to goods – Provisions of bill of lading limiting liability to £100 – Cargo owners claiming damages of £100 expressed as a gold value figure – Whether shipowners’ liability limited to ‘£100’ or ‘£100 sterling gold value’ – Hague Rules, art IV, r 5, art IX.
The defendant shipowners shipped a complete aluminium continuous casting and rolling plant, consisting of a consignment of 222 cases, on board their vessel for carriage from Italy to Mombasa, Kenya. The bill of lading issued by the defendants was subject to the provisions of the Hague Rules. On discharge one of the cases and its contents was found to be damaged. The loss suffered by the plaintiffs exceeded £K100,000. The defendants admitted liability, but submitted that art IV, r 5a of the Hague Rules limited their liability to ‘£100 per package or unit, or the equivalent of that sum in other currency’ and claimed that their liability was accordingly limited to £100 actual value. The plaintiff cargo owners submitted that r 5 was to be read in conjunction with art IXb, which provided that ‘The monetary units mentioned in [the Hague Rules] are to be taken to be gold value’ so that ‘£100’ was to be read as ‘£100 sterling gold value’. The plaintiffs claimed that the gold value of £stg100 was the value of 732·238 g of fine gold in accordance with the Coinage Act 1971 and that since the sterling value of 732·238 g of fine gold at the date of delivery of the cargo, which was the relevant date for assessment of the defendants’ liability, was £6,630·50, that amount, converted into Kenyan pounds, was the correct limit of the defendants’ liability.
Held – On its true construction art IV, r 5 of the Hague Rules was to be read in conjunction with art IX, which clearly provided that the gold value of sterling was to be used as a measure of value of the monetary units mentioned in the rules. Accordingly, ‘£100’ in r 5 was to be understood as ‘£100 sterling gold value’, and the correct limit of the defendants’ liability in respect of the damaged cargo was therefore the sterling value of 732·238 g of fine gold at the date of delivery of the cargo, ie £6,630·50. It followed that the plaintiffs were entitled to recover £K6,491·25, being the equivalent sum in Kenyan currency (see p 494 c, p 496 d, p 497 b h and p 499 d e, post).
Feist v Société Intercommunale Belge d’Electricité [1933] All ER Rep 228 applied.
Dictum of Morris LJ in Treseder-Griffin v Co-op Insurance Society Ltd [1956] 2 All ER 33 at 41 distinguished.
Notes
For limitation of the liability of a carrier of goods by sea, see 43 Halsbury’s Laws (4th edn) para 786.
For the Hague Visby Rules (which revised the Hague Rules), see ibid paras 759–793.
For the Coinage Act 1971, see 10 Halsbury’s Statutes (4th edn) 181.
Cases referred to in judgment
Adamastos Shipping Co Ltd v Anglo-Saxon Petroleum Co Ltd [1958] 1 All ER 725, [1959] AC 133, [1958] 2 WLR 688, HL.
Page 490 of [1989] 1 All ER 489
Adelaide Electric Supply Co Ltd v Prudential Assurance Co Ltd [1934] AC 122, [1933] All ER Rep 82, HL.
Agemar Srl v Siat [1979] Dir maritt 215, Corte d’appello di Trieste.
Air Cameroun v Cie Maritime des Chargeurs Révnis [1967] Jurisprudence Français 675, Cour d’appel de Rouen.
Brown Boveri (Australia) Pty Ltd v Baltic Shipping Co (31 July 1986, unreported), NSW SC.
Despina R, The [1979] 1 All ER 421, [1979] AC 685, [1978] 3 WLR 804, HL.
Dobell & Co v Steamship Rossmore Co Ltd [1895] 2 QB 408, [1895–9] All ER Rep 885, CA.
Doroty, The [1979] ETL 550, Can Fed Ct.
Feist v Société Intercommunalé Belge d’Electricite [1934] AC 161, [1933] All ER Rep 228, HL.
Fiat Co v American Export Lines Inc [1965] AMC 384, Corte d’appello di Firenze.
Holyman (William) & Sons Pty Ltd v Foy & Gibson Pty Ltd (1945) 73 CLR 622, Aust HC.
Hussain v Great Eastern Shipping Co [1960] ILR Ker 1028, Kerala CA.
Miliangos v George Frank (Textiles) Ltd [1975] 3 All ER 801, [1976] AC 443, [1975] 3 WLR 758, HL.
New Brunswick Rly Co v British and French Trust Corp [1938] 4 All ER 747, [1939] AC 1, HL.
Norway and Asia Lines v Adamjee Jute Mills Ltd [1981] Bangladesh LD 152, Bangladesh CA.
Pyrene Co Ltd v Scindia Steam Navigation Co Ltd [1954] 2 All ER 158, [1954] 2 QB 402, [1954] 2 WLR 1005.
SpA Carniti v SpA Comesmar [1979] Dirmaritt 90, Tribunale di Genova.
Treseder-Griffin v Co-op Insurance Society Ltd [1956] 2 All ER 33, [1956] 2 QB 127, [1956] 2 WLR 866, CA.
Vishva Pratibha, The [1980] 2 MLJ 265, Singapore HC.
Cases also cited
Auckland Corp v Alliance Assurance Co Ltd [1937] 1 All ER 645, [1937] AC 587, PC.
Campos v Kentucky and Indiana Terminal Railroad Co [1962] 2 Lloyd’s Rep 459.
De Bueger v J Ballantyne & Co Ltd [1938] 1 All ER 701, [1938] AC 452, PC.
Maurice v Goldsbrough Mort & Co Ltd [1939] 3 All ER 63, [1939] AC 452, PC.
Ottoman Bank of Nicosia v Chakarian [1937] 4 All ER 570, [1938] AC 260, PC.
Pendle & Rivett Ltd v Ellerman Lines Ltd (1927) 29 Ll L Rep 133.
Syndic in Bankruptcy of Nasrallah Khoury v Khayat [1943] 2 All ER 406, [1943] AC 507, PC.
Thomas (T W) & Co Ltd v Portsea Streamship Co Ltd [1912] AC 1, HL.
Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] 2 All ER 271, [1972] AC 741, HL.
Action
The plaintiffs, Kaluworks Ltd, the owners of a cargo shipped on board the vessel Rosa S, by a writ issued on 21 November 1985, brought an Admiralty action in rem against the defendants, the owners of the Rosa S, claiming damages for breach of contract and/or duty in and about the loading, handling, custody, care and discharge of their cargo and the carriage thereof from Leghorn, Italy to Mombasa, Kenya on board the Rosa S in 1984. The carriage of the cargo was pursuant to the terms and conditions of a bill of lading which was itself subject to the provisions of the Hague Rules. The issue which arose was how the defendants’ liability in respect of the damaged cargo was to be determined under the Hague Rules. The facts are set out in the judgment.
Julian Malins for the plaintiffs;.
A E Diamond QC for the defendants.
Cur adv vult
Page 491 of [1989] 1 All ER 489
21 July. The following judgment was delivered.
21 July 1988. The following judgment was delivered.
HOBHOUSE J. On 9 April 1984 at Leghorn in Italy there was loaded by New Hunter Engineering SpA of Turin on board the defendants’ vessel Rosa S a consignment of 222 cases consisting of one complete aluminium continuous casting and rolling plant together with related ancillaries for carriage to Mombasa in Kenya. The carriage was covered by a bill of lading in the English language issued on behalf of the defendants. The goods were consigned to a firm called Kaluworks Ltd of Mombasa who are the relevant plaintiffs in this action. When the consignment came to be discharged at Mombasa it was found that one of the cases, together with its contents, was badly damaged. The net loss suffered by the plaintiffs in respect of that damage was £K107,758·53. It is agreed by the parties that the carriage of the goods on board the Rosa S was subject to the provisions of the International Convention for the Unification of certain Rules of Law relating to Bills of Lading (the Hague Rules) (Brussels, 25 August 1924; TS 17(1931); Cmd 3806). The defendants further admit that the damage was caused by their breach of their contractual duties as carriers under the bill of lading. The dispute between the parties is what is the limit of the defendants’ liability to the plaintiffs in respect of such breach and damage. No value of the goods was declared by the shippers or inserted in the bill of lading.
Clause 2 of the bill of lading provided that:
‘Any dispute arising out of this bill of lading shall be governed by English law and … the High Court of Justice in London shall have exclusive jurisdiction … ’
Clause 1 of the bill of lading was a paramount clause, which read:
‘It is mutually agreed that this bill of lading shall have effect subject to the provisions of the International convention relating to bills of lading dated Brussels 25th August 1924 hereafter called the Hague Rules except where legislation giving effect to the Hague Rules as amended by the protocol signed at Brussels on 23rd February 1968 (hereafter called the Hague Visby Rules) is compulsorily applicable, in which case this bill of lading shall have effect subject to such legislation. Neither the Hague Rules nor the Hague Visby Rules shall apply where the goods carried hereunder are live animals. Nothing in this bill of lading shall be deemed to be a surrender by the carrier of any of his rights or immunities or an increase of any of his responsibilities under the said rules or enactments and/or their protocols. If anything herein contained is inconsistent with the said legislation or Hague Rules or Hague Visby Rules it shall, to the extent and on the occasion of such inconsistency and no further, be null and void.’
At the material time Italy had not become a contracting party to the Hague-Visby Rules, hence the parties’ agreement that this bill of lading was subject to the provisions of the 1924 convention, the Hague Rules.
Clause 28 of the bill of lading provided, inter alia:
‘Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with goods in an amount exceeding pound sterling 100 per package or unit … ’
The defendants before me somewhat faintly sought to rely on this clause as showing a contractual intention that, whatever might be the true effect of the Hague Rules, they were entitled to a limit of £stg100 and no more. This contention of course could not survive the concluding words of the clause paramount (‘if anything herein contained is inconsistent with the … Hague Rules … it shall … be null and void’) and art III, r 8 of the Hague Rules, which provides that any clause in a contract of carriage purporting to relieve the carrier from liability or lessening his liability otherwise than as provided in the rules is to be null and void and of no effect. Accordingly, the question of what is the
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limit of the defendant’s liability under this bill of lading must be ascertained by reference to the provisions of the Hague Rules and those alone.
The only authoritative text of the Hague Rules is the French text. The bureau of the conference did however authorise an English translation. During the argument before me the parties have been content to proceed on the basis of the English translation subject to two points to which I will refer. In this translation art IV, r 5 reads:
‘Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with goods in an amount exceeding £100 per package or unit, or the equivalent of that sum in other currency, unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading … ’
Article IX provides:
‘The monetary units mentioned in this Convention are to be taken to be gold value. Those contracting states in which the pound sterling is not a monetary unit reserve to themselves the right of translating the sums indicated in this convention in terms of pound sterling into terms of their own monetary system in round figures. The national laws may reserve to the debtor the right of discharging his debt in national currency according to the rate of exchange prevailing on the day of the arrival of the ship at the port of discharge of the goods concerned.’
In art IV, r 5 the French text reads ‘100 Livres sterling’; therefore a better translation would be ‘£100 sterling’. In the third sentence of art IX the French phrase is ‘réserver au débiteur la faculté de se libérer’ which perhaps has been too narrowly translated by using the words ‘debtor’ and ‘debt’ as opposed to for example ‘the party liable’ and ‘his liability’. No submission was advanced before me by either party which depended on this refinement of the precise meaning of the French text of art IX.
The plaintiffs submit that art IV, r 5 must be read with the first sentence of art IX so that instead of saying ‘£100 sterling’ it says ‘£100 sterling gold value’. They say that the gold content of £stg100 was in 1924 defined as a matter of English law by the Coinage Act 1870, and was at the date of this bill of lading, and is at today’s date, defined by the Coinage Act 1971, as being 798·805 g of gold of a millesimal fineness 916·66, which is the same as 732·238 g of fine gold. They say that the gold value is therefore the value of that quantity of gold. Taking the relevant date for the assessment of the defendants’ liability as being the date of the delivery of the goods, which the parties have agreed can be treated as 1 June 1984, this gives a value of the gold expressed in sterling as being £6,630·50. They therefore say that that is the value which expresses the relevant limit applicable to their claim. Their claim is for a sum in Kenyan pounds. That sum of sterling converted into Kenyan pounds at the same date gives a limit of liability expressed in Kenyan pounds of £6,491·25. That is what the plaintiffs say is the correct limit of the defendants’ liability in respect of the plaintiffs’ claim in the present action.
The defendants on the other hand say that the correct limit is £stg100 in today’s money or its nominal equivalent expressed in Kenyan currency. They say that all considerations of gold value should be excluded. They say that art IV should be construed on its own without recourse to art IX, that art IX is in any event too unclear and unspecific to qualify the words of art IV. As a matter of English law a gold clause to be effective must have a greater clarity and degree of definition than art IX contains. They sought to rely on historical arguments to support the conclusion that the Hague Rules treated sterling currency as a nominal money of account and not any gold value of sterling. They finally argued that if any gold value was to be taken into account it was simply the quantity of gold that £stg100 would at the date of the accrual of the cause of action have bought and that its purpose was simply to provide stability in terms of sterling between the date of the accrual of the cause of action and any date when judgment might thereafter be given.
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Some preliminary observations need to be made. The court in the present case is concerned to construe a contract, the contract contained in this bill of lading. The parties to this bill of lading have choosen to refer to the provisions of an international convention. International conventions are agreements between states, not between private individuals, nor as a matter of English law do they of themselves have any legal effect in English law unless made law by some statute.
Under the Carriage of Goods by Sea Act 1924, the substance of what were subsequently to become the Hague Rules were not made part of English law as such, but were compulsorily incorporated into bills of lading issued in this country. That Act was based on the draft Hague Rules; art IX of the final Hague Rules was not part of the draft rules yet the United Kingdom legislature chose to include in the draft rules as scheduled to the 1924 Act a sentence which corresponded to the first sentence of art IX of the Hague Rules as it was finally agreed to. The 1924 Act has been repealed by the Carriage of Goods by Sea Act 1971 and was not in force at the date of this bill of lading. I am not concerned in this case with any problem that there might have been of construing the 1924 Act. The way in which the gold value provision has been included in the schedule to the 1924 Act has been described in the leading text books on carriage of goods by sea, Scrutton on Charterparties (18th edn, 1974) p 449 and Carver on Carriage by Sea (12th edn, 1971) vol 1, para 307, as giving rise to ‘difficult’ or ‘very difficult’ questions. The editors of Scrutton resolved those questions in an way that is consistent with the submissions of the plaintiffs before me; the editor of Carver expressed a view which was more favourable to the defendants’ approach but which the defendants were not able fully to adopt. Dr F A Mann in The Legal Aspect of Money (4th edn, 1982) p 154 has commented: ‘It cannot be readily appreciated why the City of London found the Act of 1924 so mysterious.' Dr Mann clearly believes that the view expressed by Scrutton and the approach adopted by the plaintiffs before me are correct. I recognise that there may have been difficulties under the 1924 Act in precisely understanding the intentions of the draftsman. There could be an argument that the Act was stating what was the monetary limit for the purposes of English law and the reference to gold value was only appropriate and necessary where the limit had to be assessed in some other currency. In this connection it is relevant to note that, in their Hague Rules legislation, many other countries have chosen to exercise the liberty to express the limit in their own currencies in a fixed amount; for example in the United States Carriage of Goods by Sea Act 1936 it is $US500. But these considerations of domestic legislation do not arise in the present case. What the parties have chosen to refer to in their contract is not any domestic legislation but instead the provisions of an international convention.
A second preliminary observation is that where a bill of lading is to have effect subject to the provisions of another document the parties must be taken to have intended to give effect to those provisions as contractual provisions between themselves and not as provisions having some separate or different validity and effect: see Dobell & Co v Steamship Rossmore Co Ltd [1895] 2 QB 408, [1895–9] All ER Rep 885 and Adamastos Shipping Co Ltd v Anglo-Saxon Petroleum Co Ltd [1958] 1 All ER 725, [1959] AC 133. The provisions which have no relevance to the contract between the parties to the bill of lading are not incorporated; the construction of the provisions must be a construction which is to be given to them as contractual provisions. Therefore I question the extent to which the defendants were right to advance before me arguments derived from the monetary history of the United Kingdom in the 1920s. However I do accept that one must take into account that the bill of lading expressly identifies the provisions as having originally formed part of and as deriving from the Hague Rules which were made in 1924 and which have as their purpose, both express and implicit, the furtherance of international uniformity in the rules governing bill of lading contracts. One must not expect, nor must one treat the parties to this bill of lading as if they expected, that the provisions of the rules were in all respects drafted as contractual provisions or provisions of domestic legislation. This is particularly the case with regard to art IX itself. Two of the sentences
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of art IX can solely have relevance in relation to the freedom of action of contracting states and the domestic legislation that they may pass. They will not themselves have direct effect in relation to this bill of lading contract. But those two sentences, like the preamble to the rules, are part of the rules and are properly to be taken into account in construing the provisions to which the parties to this bill of lading have said that their contract is to be subject. If, for example, the parties had wished to incorporate as a matter of contract the United States Carriage of Goods by Sea Act 1936 they could have done so, in which case no question of gold values would have arisen. What they have chosen to do is to incorporate the provisions of the Hague Rules which do make reference to gold values.
Turning now to the Hague Rules themselves, it seems to me clear beyond argument that the first sentence of art IX is intended to qualify the reference to ‘£100 sterling’ in art IV, r 5. No other purpose for the inclusion in the rules of the relevant sentence of art IX has been suggested. There is no reason to suppose that those words were not intended to have any effect. They were clearly intended to have the effect of expressing the sterling figure as a gold value figure. This, in respect of the 1924 Act, was regarded as too obvious for argument by Devlin J in Pyrene Co Ltd v Scindia Steam Navigation Co Ltd [1954] 2 All ER 158 at 160, [1954] 2 QB 402 at 413, where he said: ‘The limit stated in that rule is £100, but this is subject to art IX which prescribes that the figure is to be taken to be the gold value.’
Whether one looks at the matter as at the date of the Hague Rules or as at the date of this bill of lading contract the provision that the limit in art IV, r 5 is to be treated as a gold value presents no problem. As previously stated the Coinage Acts of the United Kingdom define the gold content of the pound sterling. As Morris LJ put it in Treseder-Griffin v Co-op Insurance Society Ltd [1956] 2 All ER 33 at 40, [1956] 2 QB 127 at 151: ‘I take the word “sterling” as referring to English currency. I consider that “gold sterling” denotes gold coins.' The 1971 Act identifies various denominations of coin including gold coins (see also the Currency Act 1983). It specifies their weight and fineness. It is therefore still possible, as a matter of English law, to answer the question what is the gold content of £1 gold sterling. (It is also notable that the 1971 and 1983 Acts similarly preserve the concept of gold coins as currency; s 2(1) expressly provides that gold coins can be legal tender.) The provisions of the 1971 Act create no relevant conflict with those of the 1870 Act; under both it is possible to identify the monetary unit that is being referred to. Therefore there is no uncertainty about, or inability to ascertain, what is the gold value which the parties were by their contract agreeing should be the limit of the carriers’ liability.
In an attempt to undermine this conclusion the defendants referred me to what was said by Morris LJ in the Treseder-Griffin case [1956] 2 All ER 33 at 41, [1956] 2 QB 127 at 152. That case involved a lease dated 30 December 1938 of two shops in Queen Street, Cardiff, for a period of 99 years from 1933. The lease provided for the payment ‘yearly during the said term either in gold sterling or Bank of England notes to the equivalent value in gold sterling the rent of £1,900 … by equal quarterly payments’. This was construed by the majority of the Court of Appeal as being a gold payment clause, not a gold value clause and, in so far as it stipulated for payment in gold, as being illegal or ineffective. The judgments of the majority were strongly influenced by what they regarded as the public policy regarding such a provision. Morris LJ said:
‘The lease is for a term which ends on June 24, 2029. It is clearly impossible to forecast whether within that period gold coins will be minted and re-introduced for ordinary and general use. The Coinage Act, 1870, prescribed the standard of both gold and silver coins. No one can foresee whether, if before the year 2029 gold coins come back into use, they will be coins of the weight and fineness specified in the Act of 1870. It is I think of significance that the lease refers merely to “gold sterling“. There is no provision that the gold sterling is to be of specified weight and fineness.
Page 495 of [1989] 1 All ER 489
There is no wording comparable with that in Feist v. Société Intercommunale Belge d’Electricité ([1934] AC 161, [1933] All ER Rep 228); the obligation imposed by the bonds there in question was to pay “the sum of £100 in sterling in gold coin of the United Kingdom of or equal to the standard weight and fineness existing on Sept. 1, 1928.”’
I do not find that this passage assists me in the present case. Morris LJ was concerned with a situation where the defined obligation was going to have to continue until the year 2029 and was affected by what he regarded as a hiatus in the relevant legislation. On any view those problems do not affect the construction of this bill of lading contract. At the time the contract was made the gold content of the pound sterling was defined and ascertainable. It was in fact the same content as had existed in 1924. There is no element of uncertainty. There is no problem of having to look forward to some data far into the future. Further, there is no question of any illegality in the present case nor is there any question of the infringement of any principle of public policy. In respect of this contract the parties were at liberty to fix the limit of liability of the carrier in any way they chose and by reference to any money account or any unit of value.
The purpose of any gold clause must be to escape from the principle of nominalism. As stated in the Feist case [1934] AC 161, [1933] All ER Rep 228, which must be regarded as the leading authority on this point, the gold clause if it is to be effective for this purpose must be a gold value clause, not merely a gold payment clause. The decision of their Lordships’ House was given by Lord Russell, with whose speech all other members of the House agreed. He said ([1934] AC 161 at 172, [1933] All ER Rep 228 at 233):
‘In my opinion the purpose can be discerned from clause 4, in which the reference to gold coin of the United Kingdom is clearly not a reference to the mode of payment but to the measure of the Company’s obligation. So too, condition 6, which again is a clause not directed to mode of payment, but to describing and measuring liability, shows that the words are used as such a measure. In just the same way I think that in clauses 1 and 2 of the the bond the parties are referring to gold coin of the United Kingdom of a specific standard of weight and fineness not as being the mode in which the Company’s indebtedness is to be discharged, but as being the means by which the amount of that indebtedness is to measured and ascertained.’
There can be no doubt into which category the provisions of the Hague Rules come. The function of art IV, r 5 is to provide the measure of the limit of liability of the carrier. The first sentence of art 9 expressly refers to gold value.
The defendants also sought to rely on New Brunswick Rly Co v British and French Trust Corp [1938] 4 All ER 747, [1939] AC 1. In that case the House of Lords followed and applied the Feist case. Lord Maugham LC said ([1938] 4 All ER 747 at 754, [1939] AC 1 at 18): ‘… I do not think that a construction on the lines of the Feist decision ought to be adopted unless the so-called gold clause obligation is expressed in clear language … ' And Lord Wright said ([1938] 4 All ER 747 at 764, [1939] AC 1 at 35): ‘If it had been intended to apply the gold obligation to the interest, that should have been done by precise words, as was done in Feist’s case … ' There the House of Lords was concerned with the question whether the gold value provision should apply both to the liability in respect of principal and the liability in respect of interest. They held that as regards the former the intention of the document was clear but as regards the latter it was not.
In the present case I consider that the intention of the parties is clear and sufficiently precise. I am concerned with the construction of a commercial contract between a goods owner and a carrier and there is no reason why the ordinary rules of construction should not be applied to such a document; indeed, in so far as there is any rule of certainty applicable to such documents, it is that the carrier, if he wishes to exclude or limit his liability, must do so by clear terms. The argument of the defendants in the present case stands that principle on its head.
Page 496 of [1989] 1 All ER 489
The defendants next sought to rely on a historical argument. They attempted to suggest that in 1924, whilst the international community might have been concerned about the stability of other currencies, there was no concern about the stability of the pound sterling or any reason to suppose that they might be interested in referring to a gold value for the pound sterling. I was taken by counsel for the defendants through a series of English statutes starting with the Bank of England Act 1833 and ending with the Coinage Act 1971; I was referred to various summaries of the historical development of the relationship between the pound sterling and the value of gold given in speeches of Lord Wright particularly that in Adelaide Electric Supply Co Ltd v Prudential Assurance Co Ltd [1934] AC 122 at 153–155, [1933] All ER Rep 82 at 94, and the useful and authoritive exposition in Mann The Legal Aspect of Money (4th edn, 1982) ch 2. As already indicated I doubt whether such material has any relevance to the construction of the contract with which I am concerned, but in any event it merely served to reinforce the plaintiffs’ submissions and undermine those of the defendants. In the 1920s a number of currencies were under very strong inflationary pressures. The question of the gold standard and of the gold backing of currencies was in the forefront of every economist’s mind. The degree to which the English paper currency was to be convertible into gold and the extent to which the United Kingdom should adhere to the gold standard or to a bullion standard were the subject of successive changes of policy until the United Kingdom finally abandoned the gold standard in 1931. The material placed before me by counsel for the defendants showed every reason why the draftsmen of the Hague Rules should be concerned to include in it not merely a reference to the pound sterling but also a reference to the gold value of that currency.
The radical arguments of the defendants accordingly fail. They also advanced certain alternative arguments which were partly designed to answer the obvious question why the first sentence of art IX was included if it was not intended to have the effect for which the plaintiffs contend. Thus the defendants argued that the first sentence of art IX could be given adequate effect to by construing it as a reference to the amount of gold that could be bought with £stg100 at the date of the contract or at the date of the delivery of the goods. I suppose that a clause could be drafted which would have this effect but that is not the effect of the natural meaning of the words in the first sentence of art IX. What is referred to in the Hague Rules is the gold value of £stg100. It is monetary gold that is referred to, the expression being ‘monetary units’. The relevant monetary unit is the £1 gold coin or sovereign which has a defined gold content and it is the value of that quantity and fineness of gold that is the measure of value. Next it was argued that the reference to gold value only becomes material when it is necessary to convert from pounds sterling into some other currency. This argument has the support of the editor of Carver and is also supported by the other sentences of art IX. The second sentence enables contracting states which do not wish to pass domestic legislation referring to the pound sterling to use a figure in art IV, r 5 expressed in their own currency. If they choose to do this it is clear that it is their obligation to take the sum in their own currency which corresponds to the gold value of sterling not some other nominal value. (It was of course contemplated that such legislation might come to be passed some considerable time after 1924). Similarly the last sentence contemplates that the domestic legislation may give the carrier the right to discharge his liability in the local currency ascertained at the rate of exchange prevailing on the day of the arrival of the ship at the port of discharge. But again the Hague Rules clearly contemplate that it is to be the gold value of sterling that is to be used as the measure of value against which the right to discharge the liability in the local currency must be assessed.
These arguments therefore do not detract from the primary proposition of the plaintiffs that the gold value referred to is the gold value of sterling. Indeed, it can be commented that it would appear that this was the belief of the draftsman of the 1924 Act since the 1924 Act was of course domestic United Kingdom legislation. Since the
Page 497 of [1989] 1 All ER 489
pound sterling was (and is) the monetary unit used in the United Kingdom and the gold sovereign was (and still is) legal tender in the United Kingdom, if the defendants be right there was no need or justification to include any reference to gold value in the 1924 Act. But as already remarked, a reference to gold value was specially inserted in the 1924 Act even though it had not appeared in the draft Hague Rules. This can only have been to underline as a matter of English law that what was being referred to in art IV, r 5 was the gold value of the pound sterling, not its nominal or paper value.
Even if the defendants were correct to say that the reference to gold value in the first sentence of art IX was solely to be referred to when there was a necessity for converting to some other currency than sterling that argument would not assist them in the present case. In the present case, as they are entitled to, the plaintiffs claim damages expressed in Kenyan pounds. That is the currency in which they have suffered their damage. They are entitled if they so choose to a judgment expressed in Kenyan pounds: see Despina R 9] 1 All ER 421, [1979] AC 685. Therefore, if the defendants are to avail themselves of their right to limit their liability under art IV, r 5, they must convert that limit into Kenyan pounds so as to establish that the limit is less than the amount for which the plaintiffs are asking judgment. An expression of the value of that limit in terms of Kenyan pounds is required; there has to be a translation from the gold value of sterling into the nominal value of Kenyan pounds. Therefore even on this argument the defendants cannot escape from the consequences of the first sentence of art IX.
The defendants further developed their argument by submitting that the purpose of the first sentence of art IX was to guard against the devaluation of sterling currency between the date when the goods owner’s cause of action accrued, normally the date of delivery of the goods, and the date when he was able to obtain either a judgment or an arbitration award in his favour. Thus, counsel submitted that what was contemplated was that on, say, the date of discharge one would assess what quantity of gold could be bought with £stg 100 (nominal) and that one would then use that quantity of gold as the basis for assessing the limit of the carrier’s liability which was applicable at the date of judgment or award. Thus if the judgment or award was to be given in, say, Kenyan pounds one would ask what number of Kenyan pounds was necessary at that later date to purchase that quantity of gold. This argument cannot be supported. Firstly, it depends on the erroneous approach of treating the gold value provision as requiring consideration of how much gold a sterling pound would buy as opposed to what was the gold value of the pound sterling. Secondly, it patently does not fit in with the scheme of the Hague Rules. The purpose of the gold clause provision in art IX of the Hague Rules is clearly to provide a single and constant measure of value by reference to gold, not a fluctuating value. What would result on the defendants’ submission is that that value would be constantly fluctuating up to the time of discharge. Further, it is unrealistic to suppose that the parties to the Rules, or indeed the parties to this bill of lading, had in mind and were making provision for the essentially procedural problems which existed under English law prior to the decision in Miliangos v George Frank (Textiles) Ltd [1975] 3 All ER 801, [1976] AC 443 and The Despina R.
The defendants’ arguments therefore fail. The gold value provision in art IX of the Hague Rules is of sufficient clarity; it is effective. The defendants’ submission how the provision should be applied likewise fails.
In evaluating the submissions of the parties I have not so far referred to the opinion or decision of any overseas court. In fact since 1964 there have been a series of decisions in which the gold value provision in the Hague Rules has been considered. With one exception, these have all to a greater or lesser extent supported the plaintiffs’ submissions before me. I must express my debt to those acting for the plaintiffs in collecting together these various decisions. They are as follows: (1) Fiat Co v American Export Lines Inc [1965] AMC 384, Corte d’appello di Firenze; (2) Air Cameroun v Cie Maritime des Chargeurs Réunis [1967] Jurisprudence Français 675, Cour d’appel de Rouen; (3) SpA Carniti v SpA Comesmar
Page 498 of [1989] 1 All ER 489
[1979] Dir maritt 90, Tribunale di Genova; (4) Agemar Srl v Siat [1979] Dir Maritt 215, Corte d’appello di Trieste; (5) The Doroty [1979] ETL 550, Can Fed Ct; (6) Hussain v Great Eastern Shipping Co [1960] ILR Ker 1028, Kerala CA; (7) Norway and Asia Lines v Adamjee Jute Mills Ltd [1981] Bangladesh LD 152, Bangladesh CA; (8) The Vishva Pratibha [1980] 2 MLJ 265, Singapore HC (Sinnathuray J); (9) Brown Boveri (Australia) Pty Ltd v Baltic Shipping Co (31 July 1986, unreported), NSW SC (Yeldham J). The only decision at all favourable to the defendants is that in Singapore in 1980. This was fully considered by Yeldham J in the Brown Boveri case in New South Wales in 1986 in the course of a judgment which upheld contentions similar to those advanced before me by the plaintiffs.
The Fiat case merely provides an illustration of the common assumption that art IX had the effect of introducing a gold value, that is to say the value of £100 gold stg. The parties had agreed that that was the position and the court simply had to give effect to that agreement. In the Court of Appeal at Rouen a similar decision was arrived at by the court rejecting an argument to the contrary. The two Italian decisions in 1978 also appear to have been given in proceedings where the point was in dispute. The provision that the gold value of sterling should be taken as the measure of the limit of the carrier’s liability was given effect to though of course in a context where it was necessary to convert that limit into the currency units of the court. The decision in Trieste particularly stresses that the carrier’s argument for taking a paper value would have virtually nullified the clause and would have contradicted its manifest intent which was to refer to a system of gold parity. The point was again in dispute in the Canadian case and was again decided in favour of the good’s owners. The judge clearly treated the provision of art IX as too clear to admit any worthwhile debate. The cases from the Indian subcontinent were again decided against the carriers in the face of argument to the contrary. Each court considered that it had to have regard to the value in rupees of the gold content of 100 gold sovereigns. The judges in Bangladesh specifically followed and applied the decision in Feist v Société Intercommunale Belge d’Electricité [1934] AC 161, [1933] All ER Rep 228.
The judge in the Singapore case was of a contrary view. He was concerned to construe the Singapore Carriage of Goods by Sea Act, which was in all material respects in the same terms as the 1924 Act. He therefore had the potential difficulties of construction to which I have previously referred in relation to the 1924 Act and he furthermore had the difficulty that he had no evidence before him of the value of a sovereign. He commented ([1980] 2 MLJ 265 at 267):
‘Counsel for the plaintiffs assumed that the £100 in Article IV rule 5 means ”£100 gold“. It stems from the fact that the only reference to a monetary unit in the rules is in Article IV rule 5, and therefore the reference to gold value in Article IX must be ”£100” in gold value. I am not satisfied that such an assumption is valid.’
He discussed the differing views in Scrutton and Carver. He preferred the view that art IX was only relevant when it was necessary to convert £100 into the equivalent of that sum in another currency, which he considered that he did not need to do. He concluded (at 268):
‘I have also, I think, sufficiently demonstrated that neither “gold” nor “sovereign” is “currency“. Therefore, either of them does not arise for consideration in the construction of Article IV rule 5. As regards Article IX, for the reasons I have given, it is otiose. Leaving aside the mystery of how it got into the municipal law in the form it is, I agree with Carver that it should not have been incorporated into it. I also agree with Carver that it should have been repealed. I hold that ”£100” in Article IV rule 5 does not mean ”£100 gold“.’
Before Yeldham J in the Supreme Court of New South Wales, Admiralty Division, the relevant question appears to have been fully argued and the previous decision referred to. The case concerned goods which were damaged in the course of their carriage by sea
Page 499 of [1989] 1 All ER 489
from Genoa in Italy to Sydney. The Hague Rules as in the 1924 convention had been incorporated into the bill of lading as a matter of contract. The judge was therefore concerned with a question that was for practical purposes the same as that with which I am concerned except that the currency in which the plaintiff had suffered his loss was the currency of the forum. The carrier argued that the limit of his liability was $A200 per package or unit, being the nominal value in Australian dollars of a £stg100 paper. The judge considered the effect of the Hague Rules and the principles governing contractual incorporation of such rules into a bill of lading. He was able to adopt dicta in a previous decision of the High Court of Australia similar in effect to the dictum of Devlin J in Pyrene Co Ltd v Scindia Steam Navigation Co Ltd [1954] 2 All ER 158 at 160, [1954] 2 QB 402 at 413 (see William Holyman & Sons Pty Ltd v Foy & Gibson Pty Ltd (1945) 73 CLR 622). He adopted the definition of the gold content of the pound sterling in the Coinage Act 1870 and followed and applied the Fiest case. He preferred the Indian and Bangladeshi decisions to that in Singapore. He recognised that the goods owner was entitled to ask for his judgment in Australian currency and that on any view a translation of the limit into Australian currency was necessary. He, rightly in my view, criticised the ‘confusion between the means of discharging the liability of the carrier on the one hand and the measure of such liability on the other’.
In my judgment these decision of other courts strongly support the conclusion which I have reached. They rebut the argument that art IX lacks sufficient clarity to be effective. They show that, with one unpersuasive exception, there has been a consistent international practice of recognising and giving effect to art IX; and it does not need to be stressed that, in connection with international conventions such as the Hague Rules, the court should seek to give such conventions and the contracts into which they are incorporated an interpretation which is consistent with the international practice and not overinfluenced by domestic prejudices.
The sum by way of damages that the plaintiffs are entitled to recover from the defendants in this action is, accordingly, £K6,491·25.
Order accordingly.
Solicitors: Clyde & Co (for the plaintiffs); Lloyd & Co (for the defendants).
N P Metcalfe Esq Barrister.
R v Worcester City Juvenile Court, ex parte F
[1989] 1 All ER 500
Categories: FAMILY; Children
Court: QUEEN’S BENCH DIVISION (CROWN OFFICE LIST)
Lord(s): SIR STEPHEN BROWN P
Hearing Date(s): 10 OCTOBER 1988
Children and young persons – Care proceedings in juvenile court – Care order – Application to discharge care order – Refusal of application – Whether juvenile court required to give reasons for refusal of application.
If asked to do so, a juvenile court is required to give its reasons if it decides to refuse an application to discharge a care order made in respect of a child (see p 501 e, post).
Notes
For applications to discharge care orders, see 24 Halsbury’s Laws (4th edn) para 755.
Application for judicial review
F, the mother of two children taken into care by the Worcester City Council, applied with the leave of Mann LJ given on 1 December 1987 for judicial review by way of an order of mandamus requiring the justices for the petty sessional division of the City of Worcester to state a case following their decision as a juvenile court on 15 May 1987 to refuse an application by the applicant to discharge care orders made in respect of the children. The facts are set out in the judgment.
David Hershman for the applicant.
The justices and the local authority were not represented.
10 October 1988. The following judgment was delivered.
SIR STEPHEN BROWN P. This is an application by F for an order of mandamus directed to the justices of the peace for the petty sessional division of the City of Worcester requesting them to state a case for the opinion of this court, following their refusal as a juvenile court to discharge care orders made on 15 May 1987 in respect of two children of the applicant. The justices, by their clerk, have declined to state a case. They say, by their clerk, that no question of law or of mixed law and fact arises in the circumstances.
The brief history of the matter is that the two children in question were made the subject of care orders in November 1985 by the Worcester City Juvenile Court, as a result of injuries received by the younger child. The applicant is their mother. In her affidavit before this court, she states that the injury in question was caused by a man who was cohabiting with her at the time but that that relationship had now terminated. She therefore applied to the Worcester City Juvenile Court to discharge the care orders, contending that she was able to put forward proposals for her own parents to be the principal carers of the children in question.
It appears that her application to discharge the care orders was opposed by the county council, the local authority in whose favour the care orders had been made, and it was also opposed by the children’s guardian ad litem. At the conclusion of what appears to have been a full hearing the magistrates announced that they did not propose to discharge the care orders. They did not give any reason for their decision. The mother is aggrieved by their decision and is anxious to discover on what basis they came to their conclusion.
At the time when the magistrates heard this matter there was no right of appeal on the part of a parent to the Crown Court. The guardian ad litem in this case did have a right of appeal but did not seek to exercise it, perhaps not surprisingly since the guardian had apparently opposed the application to discharge the care orders. The local authority did not take any step in the matter, presumably also because they had succeeded before the magistrates.
Page 501 of [1989] 1 All ER 500
Counsel for the applicant obtained leave to move for judicial review from Mann LJ, who granted leave—
‘upon an undertaking by counsel on behalf of the applicant to reconsider the matter when the respondent’s evidence is filed, and if he takes the view that further proceedings would be fruitless, then he will withdraw the application.’
The justices have declined to divulge any reason or, indeed, to indicate the basis on which they came to their conclusion.
The applicant has amended the questions which it is desired to pose for the consideration of this court. The questions now suggested are: whether the evidence justified the following findings of fact that (1) it would not be appropriate for the care orders to be discharged, (2) the children would not receive the care and control they required after discharge, whether through the making of a supervision order or otherwise. The phraseology is taken from the words of the statute. It is the first question which is principally relied on.
The justices, through their clerk, expressed the view that they did not consider that the questions so posed raised any question of law or mixed law and fact. It would seem that what the applicant is seeking to do is to overcome, by this route, the absence of any right of appeal against the refusal to discharge the care order since the legislation in force at the time did not provide for any right of appeal.
Nevertheless it is, in my judgment, invidious that an applicant, such as this mother, should be kept in the dark and not know, even in the briefest terms, what evidence weighed with the justices in coming to their conclusion, having regard to the fact that it appears that a substantial body of evidence was adduced before them. There was clearly a conflict, having regard to the stance taken by the parties before the magistrates.
I have come to the conclusion that the magistrates should be required to state a case. Accordingly, mandamus will go requiring them to state a case.
I should add at this stage that when the case is stated the matter will come for consideration on its merits. I would not, in the absence of any detailed information about the actual nature of the case which the justices heard, be minded to give any indication which might be optimistic for the applicant. In other words, the fact that this application is allowed today does not in any sense bear on the final outcome of the matter. I think it wise to make those cautionary remarks. No doubt they were in Mann LJ’s mind at the time when he gave what I would describe as conditional leave.
Order of mandamus granted.
Solicitors: Curtler & Hallmark, Worcester (for the applicant).
Bebe Chua Barrister.
Customs and Excise Commissioners v Fine Art Developments plc
[1989] 1 All ER 502
Categories: TAXATION; VAT & Customs & Excise
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD TEMPLEMAN, LORD ACKNER AND LORD LOWRY
Hearing Date(s): 12, 13 DECEMBER 1988, 2 FEBRUARY 1989
Value added tax – Overpayment of tax – Deduction of overpayment – Deduction of overpayment from subsequent payment of tax – Overpayment occurring because of taxpayer’s compliance with directions issued by commissioners subsequently ruled to be invalid – Taxpayer deducting overpayment from subsequent payment of tax – Whether taxpayer entitled to deduct overpayment – Value Added Tax Act 1983, s 14 – Value Added Tax (General) Regulations 1985, reg 58(1), Sch , Form 4.
The taxpayer company manufactured greeting cards which it sold at a wholesale price to retail customers for resale. The taxpayer company, in accordance with a direction issued by the Commissioners of Customs and Excise, paid value added tax on the retail value of the goods supplied to customers who were not registered for value added tax. The Court of Justice of the European Communities subsequently ruled, in unconnected proceedings, that the commissioners had no power to issue such a direction and the taxpayer company sought repayment of some £1·39m overpaid tax. When the commissioners refused to make any repayment the taxpayer company deducted that amount from a subsequent payment of value added tax. The commissioners brought an action against the taxpayer company claiming the £1·39m and the judge gave them leave to enter summary judgment for that amount. The taxpayer company appealed, contending that, although the Value Added Tax Act 1983 did not expressly permit an overpayment of tax to be deducted, reg 58(1)a of the Value Added Tax (General) Regulations 1985 and the form of return for value added tax set out in Form 4b in the schedule to those regulations envisaged overpayments of tax in previous periods being deducted from the amount of tax otherwise payable in the accounting period in which the overpayment was discovered. The Court of Appeal dismissed the taxpayer company’s appeal and it appealed to the House of Lords.
Held – A taxpayer was entitled to deduct overpaid value added tax when computing his liability for a subsequent instalment of value added tax since, although s 14c of the 1983 Act contemplated that, in the ordinary case, liability to value added tax would fall to be established simply by deducting input from output tax in the current accounting period, that section had to be read with the 1985 regulations and, in particular, with the prescribed form for value added tax returns set out in Form 4 and the value added tax guide issued by the commissioners (both of which had the force of law), which, on their true construction, gave a legal right and imposed an obligation to make deductions from current liability to value added tax in respect of past overdeclarations made in error, irrespective of whether the error was one of law or of fact. It followed that the taxpayer company had been entitled to deduct the overpayment in computing its liability for a subsequent period. The appeal would therefore be allowed (see p 507 e to g and p 508 e to h, post).
Betterware Products Ltd v Customs and Excise Comrs (No 2) [1988] STC 6 approved.
Decision of the Court of Appeal [1988] 2 All ER 70 reversed.
Page 503 of [1989] 1 All ER 502
Notes
For the deduction of input tax from output tax in general, see 12 Halsbury’s Laws (4th edn) paras 935–938.
For the Value Added Tax Act 1983, s 14, see 48 Halsbury’s Statutes (4th edn) 614.
Cases referred to in opinions
Betterware Products Ltd v Customs and Excise Comrs (No 2) [1988] STC 6.
Direct Cosmetics Ltd v Customs and Excise Comrs Case 5/84 [1985] STC 479, [1985] ECR 617, CJEC.
Appeal
Fine Art Developments plc (the taxpayer) appealed with leave of the Court of Appeal against the decision of the Court of Appeal (Glidewell and Taylor LJJ) ([1988] 2 All ER 70, [1988] QB 895) on 28 January 1988 dismissing the taxpayer’s appeal from the decision of Sir Neil Lawson sitting as a judge of the High Court in chambers on 9 July 1987 whereby the judge allowed on terms an appeal by the Crown against an order of Deputy Master Rose dated 5 March 1987 dismissing the Crown’s application for judgment under RSC Ord 14, r 2 in respect of alleged overpayments of value added tax which were deducted by the taxpayers from a subsequent payment of value added tax. The facts are set out in the opinion of Lord Keith.
Andrew Park QC and Robin Mathew for the taxpayer;.
John Laws and Robert Jay for the Crown.
Their Lordships took time for consideration.2 February. The following opinions were delivered.
2 February 1989. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, this appeal is concerned with the question whether, under the relevant statutory provisions relating to value added tax a taxpayer who by mistake has in a particular accounting period paid a greater amount of tax than was properly due is entitled to deduct the amount of the excess in computing his liability for a later period.
The appellant taxpayer carries on the business of manufacturing and distributing greetings cards, and has at all material times been registered for purposes of value added tax. The statute which now governs that tax is the Value Added Tax Act 1983, a consolidating measure. Some of the events material to the present case took place before the consolidation, but, as the terms of the enactments in force at the earlier time have not been altered by the 1983 Act, it will be convenient to refer throughout to that Act. The supply of cards by the taxpayer to its customers in the United Kingdom was a taxable supply, so it was liable to charge its customers with value added tax and to account for the tax so charged (output tax) to the Commissioners of Customs and Excise. However, under s 14(2) of the 1983 Act it was entitled to take credit for the tax on the supply to it of goods or services (input tax). Some of the customers of the taxpayer were not registered for value added tax, so that they were not liable for output tax nor in a position to take credit for any input tax. The prices charged to these customers by the taxpayer for wholesale supplies of cards were lower than the prices charged by the customers on sale by retail. On 13 August 1981 the commissioners served on the taxpayer pursuant to what is now para 3 of Sch 4 to the 1983 Act a notice of direction requiring it to calculate output tax on the open market value of the cards on sale by retail, which was of course more than the prices actually charged by the taxpayer company to the customers in question. The taxpayer duly complied. However, another taxpayer subject to a similar direction successfully challenged its validity under Community law in proceedings before the Court of Justice of the European Communities: see Direct Cosmetics Ltd v
Page 504 of [1989] 1 All ER 502
Customs and Excise Comrs Case 5/84 [1985] STC 479, [1985] ECR 617. The invalidity flowed from the failure of the United Kingdom government to notify the Commission of the European Communities of the amendment, by s 14(1) of the Finance Act 1981, of para 3 of Sch 3 to the Finance Act 1972. It is unnecessary to go into further detail. In the result, all notices of direction issued after the amendment took effect, on 27 July 1981, became null and void, including that issued to the taxpayer on 13 August 1981. So on 5 March 1985 the commissioners informed the taxpayer company that the notice was withdrawn with effect from 14 February 1985 (the day after the decision of the European Court), and that as from that date it should account for value added tax on the basis of the prices actually charged by the taxpayer to its customers.
The taxpayer had accounted for value added tax in accordance with the notice of direction from 13 August 1981 until 30 June 1983. Thereafter it had ceased to do so because of doubts about the validity of the notice. The excess of what had been paid by way of tax over what had been properly payable was £1,399,022. By letter dated 13 June 1985 the commissioners intimated to the taxpayer that they were prepared to consider claims for repayment of value added tax paid under invalid notices but would not do so in respect of payments made before 9 November 1983 unless the taxpayer in question had queried the validity of the relevant notice at an earlier date. The significance of 9 November 1983 was that it was the date on which the London value added tax tribunal had referred the Direct Cosmetics case to the European Court. On 22 July 1985 the taxpayer requested the commissioners to refund to it the sum of £1,399,022, but this was refused. Accordingly, the taxpayer in its value added tax return for the quarter ended 31 December 1985 deducted that sum from the net amount of value added tax then otherwise due. By letter dated 3 March 1986 the commissioners contended that the overpayment was irrecoverable as having been made under a mistake of law, and requested payment of the £1,399,022 within seven days, failing which they would take proceedings for recovery.
On 20 October 1986 the commissioners issued a writ in the High Court claiming payment by the taxpayer of the sum of £1,399,657·67 (later reduced by amendment to £1,399,022) as a debt due to the Crown. Later they applied for summary judgment under RSC Ord 14, r 1, but the application was dismissed by Deputy Master Rose on 5 March 1987. The commissioners appealed, and on 9 July 1987 Sir Neil Lawson, sitting as a judge of the High Court, allowed the appeal and gave the commissioners leave to enter judgment for the sum claimed with interest to be assessed if not agreed. Execution of the judgment was stayed on condition that the taxpayer issued by a specified date a writ against the commissioners claiming restitution of the disputed sum. Sir Neil gave no reasons for his decision. The taxpayer appealed to the Court of Appeal but on 28 January 1988 that court (Glidewell and Taylor LJJ) ([1988] 2 All ER 70, [1988] QB 895) dismissed the appeal, while giving leave to appeal to your Lordships’ House, which the taxpayer now does.
The taxpayer is not entitled to deduct past overpayments of value added tax from that currently due unless there is some provision of primary or subordinate legislation which authorises it to do so. It maintains that such authorisation is to be found in certain provisions of the Value Added Tax (General) Regulations 1985, SI 1985/886, made by the commissioners under various powers conferred on them by the 1983 Act. The powers particularly relevant are those to be found in paras 2(1) and (4) of Sch 7 to the Act. Paragraph 2(1), so far as material, provides:
‘Regulations under this paragraph may require the keeping of accounts and the making of returns in such form and manner as may be specified in the regulations … ’
Paragraph 2(4), omitting irrelevant words, reads:
‘Regulations under this paragraph may make provision … (c) for the correction of errors.’
Page 505 of [1989] 1 All ER 502
Regulation 58(1) of the 1985 regulations provides:
‘Save as the Commissioners may otherwise allow, every person who is registered or was or is required to be registered shall, in respect of every period of a quarter or in the case of a person who is registered every period of 3 months ending on the dates notified either in the certificate of registration issued to him or otherwise, furnish the Controller, not later than the last day of the month next following the end of the period to which it relates, with a return on the form numbered 4 in the Schedule to these Regulations showing the amount of tax payable by or to him and containing full information in respect of the other matters specified in the form and a declaration that the return is true and complete … ’
There follow certain provisos not relevant for present purposes.
The Form 4 referred to in the regulation, as at the time of the relevant return by the taxpayer, set out the following table:
£ p
FOR
OFFICIAL
USE VAT DUE in this period on OUTPUTS (sales, etc), certain postal imports and services received from abroad
1
Underdeclarations of VAT made on previous returns (but not those notified in writing by Customs and Excise)
2
TOTAL VAT DUE (box 1 + box 2) 3
VAT DEDUCTiBLE in this period on INPUTS (purchases, etc)
4
Overdeclarations of VAT made on previous reutrns (but not those notified in writing by Customs and Excise)
5
TOTAL VAT DEDUCTIBLE (box 4 + box 5) 6
NET VAT PAYABLE OR REPAYABLE
(Difference between boxes 3 and 6)
7
The form also contained the following section:
‘Please tick only ONE of these boxes:
box 3 greater
than box 6 payment by
credit transfer payment
enclosed
box 6 greater
than box 3 repayment
due
Regulation 64 provides:
‘Correction of errors
64. If a person makes an error in accounting for tax or in any return furnished under these Regulations he shall correct it in such manner and within such time as the Commissioners may require.’
The commissioners have issued and revised from time to time a VAT Guide. The guide as revised on 1 January 1984 stated in para 2 that section VIII of it contained requirements made by the commissioners by virtue of their powers under Sch 7 of the 1983 Act and had legal force. Section VIII contained a para 63 dealing with adjustment of errors. Sub-paragraph (b) of para 63 provided:
‘Other errors. Any others affecting tax due from you or repayable to you, which are discovered after you have sent in your return for the tax period in which they
Page 506 of [1989] 1 All ER 502
occurred, should be recorded separately as underdeclarations or overdeclarations of tax in previous periods. You should carry the totals to your VAT account for adjustment in your next return.’
The VAT account was thus described in para 64:
‘For each tax period, you must keep a summary of the totals of your output tax and input tax. This is called your VAT account. You should keep it in a special book or ledger opening. You will find an example of a simple VAT account in Keeping records and accounts but any form of account containing the same information will be acceptable to Customs and Excise. If you are in doubt, ask your local VAT office for advice.
You make up your VAT account by adding up the VAT in your records at convenient intervals—for example, one a month, and putting the totals in your VAT account with separate headings for:
• VAT DEDUCTIBLE • VAT PAYABLE
Under VAT PAYABLE itemise separately:
• output tax on goods or services supplied
by you; Taken from records referred to in paragraph 58(a)(i)
• tax due but not paid on imported
goods, goods removed from bonded
warehouse and on services listed in
Appendix G reveiced from abroad;
Taken from records referred to in paragraph 58(a)(v).
• any underdeclarations of VAT from
previous periods, but not those notified in writing by Customs and Excise.
See paragraph 63(b)
Under VAT DEDUCTIBLE itemise separately:
• tax you have been charged on goods and services you have received Taken from records referred to in paragraph 61(a)(i)
• tax due on imported goods and on goods removed from bonded warehouse, whether paid or postponed and on services listed in Appendix G received from abroad;
Taken from records referred to in paragraph 61(a)(ii).
• any overdeclarations of tax from previous periods, but not those notified in writing by Customs and Excise;
See paragraph 63(b)
• any relief allowed from VAT on bad debts Seeparagraph 55
‘Add up separately the VAT PAYABLE and VAT DEDUCTIBLE, take the smaller amount from the larger and record the difference.
If the VAT payable is more than the VAT deductible, the difference is the amount that you must pay to Customs and Excise.
If the VAT deductible is more than the VAT payable, the difference is the amount that you should claim from Customs and Excise’
The argument for the taxpayer is that the terms of Form 4 and the requirements of paras 63(b) and 64 of the VAT Guide, which have the force of law, incorporate arrangements for the correction of errors which the commissioners are authorised to make by para 2(4)(c) of Sch 7 to the 1983 Act. Regulation 64 of the 1985 regulations obliges the taxpayer to correct errors, including those arising from previous overdeclarations, in accordance with those arrangements. That is what the taxpayer did in its return for the quarter ended 31 December 1985.
Page 507 of [1989] 1 All ER 502
The argument for the commissioners is primarily founded on s 14 of the 1983 Act, which has the cross-heading ‘Credit for input tax against output tax’, the relevant subsections being:
‘(1) A taxable person shall, in respect of supplies made by him, account for and pay tax by reference to such periods (in this Act referred to as “prescribed accounting periods”), at such time and in such manner as may be determined by or under regulations.
(2) Subject to the provisions of this section, he is entitled at the end of each such period to credit for so much of his input tax as is allowable under section 15 below, and then to deduct that amount from any output tax that is due from him …
(5) If either no input tax is due at the end of the period, or the amount of the credit exceeds that of the tax, then, subject to subsections (6) and (7) below, the amount of the credit or, as the case may be, the amount of the excess shall be paid to the taxable person by the Commissioners … ’
The contention is that the effect of these provisions is that, for the purposes of accounting for value added tax, the taxpayer is entitled to credit in any accounting period only for input tax, and that any regulations made by the commissioners allowing credit for anything else, in particular for past overdeclarations, would be inconsistent with those provisions and thus ultra vires. The purpose of boxes 2 and 5 in Form 4, to be filled in in accordance with regs 58 and 64, is said to be merely the administrative convenience of imparting information to the commissioners, who are at liberty to allow the deductions if they think fit, and, if they do not do so, to disallow the deductions and leave the taxpayer to any remedies he may have at law.
In my opinion, the terms of s 14 are not inconsistent with an intention on the part of Parliament that the commissioners should have power to bring about that past errors resulting, in whatever way, in overdeclarations or underdeclarations of tax should be corrected in subsequent returns. No doubt in the ordinary case liability will fall to be established simply by deducting input tax from output tax, or vice versa, in the current accounting period, and that is what s 14 contemplates. But para 2(4)(c) of Sch 7 gives the commissioners specific power to make regulations for the correction of errors, and such regulations, when made, take their place in the Act alongside the provisions of s 14. The prescribed Form 4 and the requirements of paras 63(b) and 64 of the VAT Guide can only be construed as giving a legal right, and indeed as imposing an obligation, to make deductions from current liability to value added tax in respect of past overdeclarations made in error. No differentiation is made between overdeclarations made through error of law and those made through error of fact. If the commissioners do not accept that a deduction has been properly made, they can raise an assessment on the taxpayer under para 4(1) of Sch 7, and the assessment will be subject to appeal to the value added tax tribunal under s 40(1)(m) of the Act.
In Betterware Products Ltd v Customs and Excise Comrs (No 2) [1988] STC 6 Simon Brown J had occasion to deal with a case on facts indistinguishable from those of this case. He accepted the argument of the taxpayer and rejected that of the commissioners, both being similar to those advanced before your Lordship’s House. After summarising the argument for the commissioners, he said (at 12):
‘Persuasively as these submissions were advanced, I find myself quite unable to accept them. The problems attendant upon them appear to me formidable. In the first place, it is a necessary corollary of the commissioners’ argument that they have in fact made no provision at all for the correction of errors, but only for their notification. The difference is crucial. At the heart of their case lies the proposition that it is entirely a matter for their discretion whether, once notified of errors, they give effect to them by relieving the taxpayer of any part of his current liability. If they choose, they may instead leave it to the taxpayer to sue them in the courts, reserving their rights to invoke defences clearly beyond the contemplation of
Page 508 of [1989] 1 All ER 502
Parliament when envisaging the correction of errors. That, indeed, is precisely the course the commissioners are following in this very case. Secondly, I find it quite impossible to construe and apply the statutory form of return other than as providing for the correction of errors in the full sense for which the company contends. It is in my judgment perfectly plain that the form requires previous errors to be declared so as to affect “the amount of tax payable by or to” the taxpayer as envisaged by reg 58(1). Putting it in the language of para 63(b) of the General Guide, any underdeclarations or overdeclarations are, by the very structure of the form “carried to your VAT account for adjustment in your next tax return“. Both the form and the guide represent, in my judgment, the commissioners’ requirements of the manner and time in which past errors should be corrected as contemplated by reg 64.’
Glidewell LJ giving his judgment in the present case, with which Taylor LJ agreed, quoted that passage and continued ([1988] 2 All ER 70 at 76, [1988] QB 895 at 906):
‘That judgment is obviously most persuasive in the present taxpayer company’s favour. The arguments that the form of return appears to envisage an overpayment in a previous period being deducted in the accounting period in which it comes to light, and that if necessary the issue can be decided by the commissioners’ raising an assessment which can be the subject of an appeal to the value added tax tribunal, are strong. Nevertheless, with considerable reluctance, I have concluded that the submissions of counsel for the Crown are correct. In my view, the wording of ss 1, 2(1) and 14 of the 1983 Act compel us to hold that the tax for which a taxable person must account in any accounting period is calculated by deducting input tax from output tax. No other deduction is envisaged or permitted by the Act.’
My Lords, in my opinion the reasoning contained in the judgment of Simon Brown J in the Betterware case was entirely correct, and there is nothing in either ss 1 and 2(1) or s 14 of the 1983 Act which compels a contrary conclusion to that which he reached. I would accordingly allow this appeal. The result of that would technically be simply that the summary judgment in favour of the commissioners is set aside. Counsel for the Crown agreed, however, that if the appeal is allowed their action against the taxpayer should appropriately be dismissed, and I would make an order accordingly. The commissioners must pay the taxpayer’s costs here and of the proceedings in the courts below.
LORD TEMPLEMAN. My Lords, for the reasons given by my noble and learned friend Lord Keith, I would allow this appeal.
LORD ACKNER. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Keith. I agree with it and, for the reasons which he gives, I, too, would allow the appeal, dismiss the action and make the order as to costs which my noble and learned friend proposes.
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Keith. I agree with it and, for the reasons which he gives, I, too, would allow the appeal, dismiss the action and made the order as to costs which my noble and learned friend proposes.
Appeal allowed.
Solicitors: Berrymans agents for Shakespeare Duggan Lea & Co, Birmingham (for the taxpayer); Solicitor for the Customs and Excise.
Mary Rose Plummer Barrister.
R v Panel on Take-overs and Mergers, ex parte Guinness plc
[1989] 1 All ER 509
Categories: ADMINISTRATIVE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): LORD DONALDSON OF LYMINGTON MR, LLOYD AND WOOLF LJJ
Hearing Date(s): 13, 14, 18, 19, 20, 28 JULY 1988
Judicial review – Availability of remedy – Take-over Panel – Panel refusing to adjourn hearing held to determine whether company’s take-over affected by operation of concert party in breach of Take-over Code – Company applying for judicial review of panel’s decision to refuse adjournment – Company not exercising right of appeal to panel’s appeal committee – Whether panel’s refusal to grant adjournment causing injustice – Whether panel’s decision subject to judicial review.
In the course of a contested take-over by two public companies, A and G, for a third public company, D, the purchase of a block of 3% of D’s shares by a Swiss company, P, was investigated by the Panel on Take-overs and Mergers at the request of A. The panel decided not to take the matter any further when it received an assurance from G’s finance director that G and P were not acting in concert. G’s bid for D was successful but following the take-over the Department of Trade and Industry (the DTI) decided to investigate G’s affairs and the panel decided to reopen its investigation into whether P had acted in concert with G during the take-over of D, contrary to the City Code on Take-overs and Mergers. The panel subsequently advised G that it would proceed to investigate the concert party issue without waiting for the outcome of the DTI inquiry, particularly since a copy of a letter purportedly from P to a director of G had come to light, the contents of which, if correct, showed that P had acted in concert with G. The panel also advised G that the two-stage investigation, which would not be disciplinary in nature, would (i) decide whether there had been a concert party and (ii) if so, consider the consequences. G objected, seeking an adjournment of the hearing until the DTI inspectors’ report had been published and any resulting criminal or civil proceedings concluded. The panel nevertheless continued its inquiries and also received confirmation from the DTI of P’s letter to G. At a preliminary hearing of the panel held to determine whether there should be an adjournment G again sought an adjournment on the grounds (i) that the panel’s speedy and informal procedures, though appropriate in the context of a current bid, were ill-adapted to an inquiry after a take-over, which was to be equated with disciplinary proceedings, and (ii) that essential witnesses from Switzerland regarding P’s letter to G should be called for examination. The panel refused the adjournment and further refused to vacate the date for the hearing of the concert party issue, because of its concern for the former shareholders in D to whom G would be liable for any breach of the code, and because of the fact that the panel had received no information from G which cast doubt on the strong evidence in favour of a concert party. Immediately before the hearing of the concert party issue the panel executive delivered to G the final version of its submissions to the panel, which contained a new and significant addition, namely a letter from the solicitors of P’s Swiss bank amounting to an admission that P’s purchase of shares in D had been a concert party operation. At that hearing G again sought an adjournment to enable it to respond to the executive’s final submissions but that was refused by the panel. Without exercising its right of appeal to the panel’s appeal committee, G then applied for judicial review of the panel’s decisions refusing adjournments. The Divisional Court dismissed the application and G appealed to the Court of Appeal.
Held – The test of whether particular acts or decisions of a body, such as the Panel on Take-overs and Mergers, whose constitution, functions and powers were sui generis should be subject to judicial review was whether, considering the matter in the round,
Page 510 of [1989] 1 All ER 509
something had gone wrong with that body’s procedure such as to cause real injustice and require the intervention of the court. However, a decision whether to adjourn a hearing was essentially a matter for the exercise of judicial discretion by the court or tribunal seised of the matter and, furthermore, where a right of appeal from the decision-making body existed but was not exercised, the court would only grant relief by way of judicial review in exceptional circumstances. Accordingly, although the panel’s decision to refuse to adjourn the hearing of the concert party issue even for a short period was open to criticism, the panel’s conduct of the investigation as a whole had been fair and had not caused injustice to G. It followed that the court would not intervene and that G’s appeal would therefore be dismissed (see p 512 j to p 513 c, p 526 g, p 527 c h j, p 528 a to e, p 529 f g, p 530 e f, p 534 a to c, p 537 g to j, p 538 j to p 539 a, p 541 g j and p 544 c d g, post).
Notes
For the City Take-over Code and the Panel on Take-overs and Mergers, see 7 Halsbury’s Laws (4th edn) paras 790–794.
Cases referred to in judgments
Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223, CA.
Chief Constable of the North Wales Police v Evans [1982] 3 All ER 141, [1982] 1 WLR 1155, HL.
Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935, [1985] AC 374, [1984] 3 WLR 1174, HL.
General Medical Council v Spackman [1943] 2 All ER 337, [1943] AC 627, HL.
Guinness plc v Saunders [1988] BCLC 43 affd [1988] BCLC 607, CA.
John v Rees [1969] 2 All ER 274, [1970] Ch 345, [1969] 2 WLR 1294.
R v Chief Constable of the Merseyside Police, ex p Calveley [1986] 1 All ER 257, [1986] QB 424, [1986] 2 WLR 144, CA.
R v Hillingdon London Borough, ex p Royco Homes Ltd [1974] 2 All ER 643, [1974] QB 720, [1974] 2 WLR 805, DC.
R v Liverpool City Justices, ex p Lunt [1988] CA Transcript 675.
R v Monopolies and Mergers Commission, ex p Argyll Group plc [1986] 2 All ER 257, [1986] 1 WLR 763, CA.
R v Panel on Take-overs and Mergers, ex p Datafin plc [1987] 1 All ER 564, [1987] QB 815, [1987] 2 WLR 699, CA.
R v Secretary of State for the Environment, ex p Brent London BC [1983] 3 All ER 321, [1982] QB 593, [1982] 2 WLR 693, DC.
R v Thames Magistrates’ Courts, ex p Polemis [1974] 2 All ER 1219, [1974] 1 WLR 1371, DC.
Secretary of State for Education and Science v Thameside Metropolitan Borough [1976] 3 All ER 665, [1977] AC 1014, [1976] 3 WLR 641, CA and HL.
Cases also cited
Findlay v Secretary of State for the Home Dept [1984] 3 All ER 801, [1985] AC 318, HL.
R v Board of Visitors of Hull Prison, ex p St Germain (No 2) [1979] 3 All ER 545, [1979] 1 WLR 1401, DC.
R v Crown Court at Aylesbury, ex p Farrer (1988) Times, 9 March, CA.
R v Leyland Justices, ex p Hawthorn [1979] 1 All ER 209, [1979] QB 283, DC.
R v Monopolies and Mergers Commission, ex p Elders IXL Ltd [1987] 1 All ER 451, [1987] 1 WLR 1221.
R v Monopolies and Mergers Commission, ex p Matthew Brown plc [1987] 1 All ER 463, [1987] 1 WLR 1235.
Sanko Steamship Co Ltd v Shipping Corp of India and Selwyn and Clark, The Jhansi Ki Rani [1980] 2 Lloyd’s Rep 569.
Wiseman v Borneman [1969] 3 All ER 275, [1971] AC 297, HL.
Page 511 of [1989] 1 All ER 509
Appeal
Guinness plc appealed against the decision of the Divisional Court of the Queen’s Bench Division (Watkins, Russell LJJ and Tudor Evans J) on 29 March 1988 dismissing their application for judicial review of two decisions of the Panel on Take-overs and Mergers made on 25 August and 2 September 1987 refusing to adjourn a hearing of the panel relating to the issue whether Guinness had acted in concert with a Swiss company, Pipetec AG, during their take-over bid for Distillers Co plc, contrary to r 11 of the City Code on Take-overs and Mergers. The facts are set out in the judgment of Lord Donaldson MR.
David Oliver QC, Richard Field QC and Patrick Elias for Guinness.
Roger Buckley QC and Paul Walker for the panel.
Cur adv vult
28 July 1988. The following judgments were delivered.
LORD DONALDSON OF LYMINGTON MR. On 25 August 1987, and again on 2 September, the Panel on Take-overs and Mergers considered and rejected an application by Guinness plc that it postpone a hearing concerned with one aspect of the April 1986 take-over bid by Guinness for Distillers Co plc. Guinness obtained leave to apply for judicial review of these decisions, but on 29 March 1988 that application was refused by a Divisional Court of the Queen’s Bench Division consisting of Watkins, Russell LJJ and Tudor Evans J. Guinness now appeal to this court.
The take-over panel
The panel is a truly remarkable body, whose nature was considered by this court in R v Panel on Take-overs and Mergers, ex p Datafin plc [1984] 1 All ER 564, [1987] QB 815. Part legislator, part court of interpretation, part consultant, part referee, part disciplinary tribunal, its self-imposed task is to regulate and police the conduct of take-overs and mergers in the financial markets of the United Kingdom.
Lacking a statutory base, it has to determine and declare its own terms of reference and the rules applicable in the markets, thus acting as a legislator. It has to give guidance in situations in which those involved in take-overs and mergers may be in doubt how they should act. These doubts may arise because the situation is one which is novel and not covered by the rules. The panel then acts as the conscience of the markets. This is the consultancy role. Or they may arise out of difficulty in applying the rules literally, in which case the panel interprets them in its capacity as a court of interpretation. I use the word ‘interpret’ rather than ‘construe’ advisedly because, as noted in Ex p Datafin plc [1987] 1 All ER 564 at 579, [1987] QB 815 at 841, the panel as legislator tends to lay down general principles on the lines of EEC legislation rather than to promulgate specific prohibitions, although such prohibitions do exist. Where it detects breaches of the rules during the course of a take-over, it acts as a whistle-blowing referee, ordering the party concerned to stop and, where it considers it appropriate, requiring that party to take action designed to nullify any advantage which it has obtained and to redress any disadvantage to other parties. Finally, when the dust has settled, it can take disciplinary action against those who are found to have broken the rules.
In Ex p Datafin plc [1987] 1 All ER 564 at 579, [1987] QB 815 at 842 I said:
‘… I wish to make it clear beyond a peradventure that in the light of the special nature of the panel, its functions, the market in which it is operating, the time scales which are inherent in that market and the need to safeguard the position of third parties, who may be numbered in thousands, all of whom are entitled to continue to trade on an assumption of the validity of the panel’s rules and decisions, unless and until they are quashed by the court, I should expect the relationship between
Page 512 of [1989] 1 All ER 509
the panel and the court to be historic rather than contemporaneous. I should expect the court to allow contemporary decisions to take their course, considering the complaint and intervening, if at all, later and in retrospect by declaratory orders which would enable the panel not to repeat any error and would relieve individuals of the disciplinary consequences of any erroneous finding of breach of the rules.’
This passage has, I think been misunderstood, at least by academic writers. When the take-over is in progress the time scales involved are so short and the need of the markets and those dealing in them to be able to rely on the rulings of the panel so great that contemporary intervention by the court will usually either be impossible or contrary to the public interest. Furthermore, it is important that this should be known, as otherwise attempts would undoubtedly be made to undermine the authority of the panel by tactical applications for judicial review. On the other hand, once the immediate problem has been dealt with by the panel, no similar objections would apply to a retrospective review of its actions designed to avoid the repetition of error, if error there has been. And when it comes to disciplinary action by the panel, which necessarily will be taken in retrospect and with all due deliberation, the court will find itself in its traditional position of protecting the individual from any abuse of power.
Until the present problem arose, I imagine that all concerned visualised a complete dichotomy between the contemporaneous refereeing function and the retrospective disciplinary function. However in the instant case the panel, having failed for lack of evidence to blow the whistle whilst the take-over was in progress, thought it right over a year later to resume its refereeing function on the basis of an ‘action replay’. I am far from saying that it was wrong to do so. Indeed Guinness does not complain of this course being adopted, although it strongly objects to the timing. But it is a novel situation and both the panel and the court are necessarily breaking new ground.
The jurisdiction of the court
The court’s jurisdiction and limitations on its exercise are established in Ex p Datafin plc. However the present appeal calls for a further review and, in particular, consideration of whether the separate grounds for granting relief (illegality, irrationality, procedural impropriety and, possibly, proportionality) are appropriate in all situations. Illegality would certainly apply if the panel acted in breach of the general law, but it is more difficult to apply in the context of an alleged misinterpretation of its own rules by a body which under the scheme is both legislator and interpreter. Irrationality, at least in the sense of failing to take account of relevant factors or taking account of irrelevant factors, is a difficult concept in the context of a body which is itself charged with the duty of making a judgment on what is and what is not relevant, although clearly a theoretical scenario could be constructed in which the panel acted on the basis of considerations which on any view must have been irrelevant or ignored something which on any view must have been relevant. And similar problems arise with procedural impropriety in the narrow sense of failing to follow accepted procedures, given the nature of the panel and of its functions and the lack of any statutory or other guidance as to its procedures which are intended to be of its own devising. Similarly, in the broad sense of breach of the rules of natural justice, what is or is not fair may depend on underlying value judgments by the panel as to the time scale which is appropriate for decision, the consequences of delay and matters of that kind. Approaching the problem on the basis of separate grounds for relief may at once bring several interlocking and mutually inconsistent considerations into play. Were the underlying judgments tainted by illegality or irrationality? If not, accepting those judgments, was the action unfair? If the underlying judgments were so tainted, was the action unfair on the basis of judgments which might reasonably have been made? The permutations, if not endless, are considerable and confusing.
It may be that the true view is that, in the context of a body whose constitution, functions and powers are sui generis, the court should review the panel’s acts and omissions more in the round than might otherwise be the case and, whilst basing its
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decision on familiar concepts, should eschew any formal categorisation. It was Lord Diplock who in Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935, [1985] AC 374 formulated the currently accepted categorisations in an attempt to rid the courts of shackles bred of the technicalities surrounding the old prerogative writs. But he added that further development on a case-by-case basis might add further grounds (see [1984] 3 All ER 935 at 950, [1985] AC 374 at 410). In the context of the present appeal he might have considered an innominate ground formed of an amalgam of his own grounds with perhaps added elements, reflecting the unique nature of the panel, its powers and duties and the environment in which it operates, for he would surely have joined in deploring any use of his own categorisation as a fetter on the continuous development of the new ‘public law court’. In relation to such an innominate ground the ultimate question would, as always, be whether something had gone wrong of a nature and degree which required the intervention of the court and, if so, what form that intervention should take.
The background
The starting point is December 1985, when Argyll Group plc announced an offer for the shares of Distillers and January 1986 when Guinness put forward a rival offer. The take-over rules set out in the City Code on Take-overs and Mergers applied and one such rule, r 11, provided:
‘11.1 WHEN A CASH OFFER IS REQUIRED … Except with the consent of the Panel in cases falling under (a), where:—(a) the shares of any class under offer in the offeree company purchased for cash by the offeror and any person acting in concert with it during the offer period and within 12 months prior to its commencement carry 15% or more of the voting rights currently exercisable at a class meeting of that class; or (b) in the view of the Panel there are circumstances which render such a course necessary in order to give effect to General Principle 1, then the offer for that class shall be in cash or accompanied by a cash alternative at not less than the highest price paid by the offeror or any person acting in concert with it for shares of that class during the offer period and within 12 months prior to its commencement.
11.2 DISPENSATION FROM HIGHEST PRICE … If the offeror considers that the highest price (for the purposes of Rule 11.1) should not apply in a particular case, the offeror should consult the Panel, which has discretion to agree an adjusted price.’
The definition section of the rules provides that—
‘Persons acting in concert comprise persons who, pursuant to an agreement or understanding (whether formal or informal), actively co-operate, through the acquisition by any of them of shares in a company, to obtain or consolidate control … of that company.’
General principle 1 reads: ‘All shareholders of the same class of an offeree company must be treated similarly by an offeror.’
Guinness and those acting in concert with them, ‘the Guinness concert party’, at that time held marginally less than 15% of the shares in Distillers and it followed that, under the rules and subject to any dispensation by the panel under r 11.2, they could acquire no more Distillers shares in the market without at the same time making an offer to buy all Distillers shares of the same class at a price not less than that paid by them for any Distillers shares during the offer period or within 12 months prior to its commencement. In terms of hard cash, this meant that whereas the cash offer contained in the bid was 630p per share, if the 15% limit was exceeded, Guinness would have to raise their offer to 731p per share, that being the highest price at which the Guinness concert party had acquired Distillers shares in the relevant period. This must have been an unwelcome prospect when even Argyll, as the rival bidder, was at that stage only offering 660p per share.
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On 17 April 1986 Mercury Warburg Investment Management Ltd, which owned 3% of Distillers shares, decided that the time had come to sell and that it wished to do so by cash settlement that day. This block constituted 10·6m shares. Professional opinion was that so large a block would be difficult to place quickly, but, rather surprisingly, a buyer was found in the shape of Pipetec AG, a Swiss company, the agreed price being 705p per share. The stockbrokers acting for Pipetec were Cazenove & Co, who also acted for Guinness. The voting rights attached to such a large block of shares could obviously have a significant influence on whether Guinness or the rival Argyll bid succeeded. When the deal came to the knowledge of Samuel Montagu & Co Ltd, advisers to Argyll, they invited the panel to investigate the matter with a view to finding out whether Pipetec was acting in concert with Guinness with the consequences to which I have already referred.
At this stage I should perhaps explain how the panel works and, for this purpose, I do not think that I can do better than refer to the first affidavit of Mr John Walker-Haworth, the then director general:
‘4. The Panel executive
4.1 The Panel executive staff comprise both permanent officials and a number of individuals seconded from City firms and institutions. The Director General is usually a senior merchant banker experienced in corporate finance; in my own case I am a director of S.G. Warburg & Co. Limited and have been involved in corporate finance for many years. The other seconded staff include accountants, stockbrokers, solicitors, civil servants, clearing bankers and personnel from the Bank of England.
4.2 The role of the Panel executive is dealt with in paragraph 1(c) of the introduction to the Code which states: “The Panel works on a day to day basis through its executive, headed by the Director General. The Director General, or one of his Deputies, is available to give rulings on points of interpretation of the Code or for consultation before or during take-over or merger transactions. Companies and their advisers are encouraged to make full use of this service. Consultations are confidential.” In connection with any take-over, particularly where it is contested by the board of the offeree company or where there are competing offerors (as in the case of the take-over of Distillers), the Panel executive is usually in daily contact with the principals’ advisers, operating through telephone conversations, submissions of written information where necessary and through meetings as required, often at a few minutes’ notice.
4.3 The Panel executive is involved daily in giving many rulings on the interpretation of the Code to parties involved in take-overs. In 1986 there were some 40 or 50 take-overs proceeding at any one time including perhaps 10–20 contested take-overs. Most issues do not involve breaches of the Code, but rather clarifying the application of the Code in advance of action taken so that a breach does not occur. In the vast majority of cases the Panel executive’s rulings are simply accepted.
4.4 Thus on a day-to-day basis, as is stated in paragraph 1(c) in the introduction to the Code set out above, the work of the Panel in giving rulings and advice is carried out by the Panel executive. However, where a party is dissatisfied with the decision of the Panel executive it may appeal to the Panel. Alternatively the Panel executive may refer a particularly difficult or important matter to the Panel without giving a ruling itself. These matters are dealt with in paragraph 5 of the introduction to the Code.
4.5 In the course of its work—whether in the context of giving rulings or advice at the request of a party or in the context of its own investigations—the Panel executive may consider that there has or may have been a breach of the Code. This will have consequences for two different aspects of the Panel’s work.
4.5.1. The Code itself contemplates that if certain events occur requisite action should be taken in order to ensure that the principles of fair dealing are upheld.
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This will, for example, include the principle of equality of treatment for offeree company shareholders. In such circumstances the Panel executive may where appropriate give a ruling in line with the principles of the Code as to the action necessary to ensure that no unfair advantage is received by the person in breach and that any disadvantage, such as to offeree company shareholders, is rectified. A ruling of this kind is described as a ruling as to the “Code consequences” arising from the events which have taken place. As I indicated above, the Panel executive may, instead of giving a ruling itself, refer the matter to the Panel for a ruling.
4.5.2. A breach of the Code does not necessarily result in any disciplinary action. Where a breach of the Code is thought to warrant disciplinary action, the Panel executive invites the person concerned to appear before the Panel for a hearing. The procedure at that hearing and the action which may be taken by the Panel are dealt with in paragraphs 6 and 7 of the introduction to the Code.
5. The procedures of the Panel executive
The object of the Panel procedures is to produce the right answer in Code terms in the circumstances. Though the procedures adopted by the Panel executive and the Panel are flexible so as to accommodate, wherever possible, the timetable set in relation to a take-over offer, the need to reach a correct answer is not sacrificed under the Code for the sake of speed.
5.2 When an issue requires the Panel executive to give a ruling on the interpretation of the Code or on a question of fact, such as whether or not persons are acting in concert, it seeks to establish the position as soon as practicable. Its procedures in an investigation of concert parties would be:—
5.2.1 to contact the relevant identifiable parties and to describe the substance of the issues;
5.2.2 to interview them (where possible) and examine any written information that may be available, in order to establish the relationship between the persons who might be acting in concert;
5.2.3 to look at the surrounding facts to discover whether actions are consistent with acting in concert;
5.2.4 to relay to the interested parties relevant evidence and give the principals the opportunity to respond to the evidence (including written evidence if available, although this is unusual because persons who might be seeking to conceal that they are acting in concert are unlikely to have any written understanding);
5.2.5 to assess the evidence and interpret Code consequences arising;
5.2.6 if the Panel executive considers that it is necessary for the Panel to decide the question of acting in concert, or if the Panel executive decides the question and any party disagrees, a meeting of the Panel will be called, at such notice as is reasonably necessary: during a take-over that might mean one or two days notice;
5.2.7 the parties will be notified of the time and venue for the hearing and asked to produce written submissions of the information available to them and their views on the case. The Panel executive will do the same. In advance of the hearing, copies of all such submissions will be distributed to the parties. These submissions would also be distributed to the Panel in advance. In some cases new evidence may appear at a Panel hearing which was not previously available to the Panel executive; such evidence is normally dealt with ad hoc at the hearing;
5.2.8 in cases where the Panel executive does not find evidence either to conclude that persons are acting in concert or to justify referring the question to the Panel, it will not proceed to a decision or such referral (although the matter may be referred to the Panel on appeal).
5.3 The aims of the Panel are to ensure the right application of the Code in the circumstances of the case; its procedures are directed at achieving this aim. They have been operated in relation to over 5,000 take-overs over some twenty years, and been accepted by practitioners, investors, and companies subject to the Code as reasonable to produce a fair conclusion in the light of the principles of the Code.
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6. Hearings of the Panel
6.1 The composition of the panel for any hearing depends on availability of individuals and conflicts of interest (e.g. a representative of the Issuing Houses Association who is a director of the adviser to a party would be ineligible): an attempt is made to ensure that as many Panel members are present as possible; in cases of unavailability or conflict an alternative is appointed if possible.
6.2 Any hearing opens with the Chairman briefly describing the nature of Panel hearings: their confidentiality and informality, the ability of all parties to make such statements and representations and call such witnesses as they wish, to question other persons present, to question written submissions and otherwise make such oral submissions as they see fit. The Panel executive will express its views and the reasons for them and can question and be questioned by the parties. All parties present express their own views and submit such information as they wish and are free to question each other. Panel members in turn will ask questions and make such comments as they think appropriate.
6.3 As stated in the introduction to the Code, there are no rules of evidence. A tape recording will normally be taken only for the administrative assistance of the Panel in its deliberations and even for this purpose has very rarely to be consulted but no permanent record is maintained and transcripts are not normally made.
6.4 Once all submissions have been made, the parties and the Panel executive withdraw whilst the Panel makes its decision. All parties then reconvene to hear the decision of the Panel; the full reasons may be written thereafter, and, depending on the nature of the issues and the decision, may be published in the form of a public statement, sight of which is given to the parties before publication.
6.5 The consequences of a Panel decision, for example a finding that persons are or were acting in concert, may be evident from the application of the Code’s rules themselves. Where this is not the case, the Panel seeks to find an equitable solution in accordance with the principles of the Code.’
The complaint or invitation to investigate by Samuel Montagu was received by the panel executive on 17 April 1986. In accordance with r 31.6 of the code, the last day for either the Guinness or the Argyll offers to be successful or to lapse was 18 April 1986. It was therefore a matter of the utmost urgency to determine whether or not the purchase of the 10·6m shares by Pipetec was a concert party operation. What happened next I can take from a background paper prepared by the executive and submitted to the panel for the purposes of the hearing on 2 September 1987:
‘5.3(Note: paragraph 5.3 is verbatim from the executive’s notes except for depersonalising the individual at the executive and entitling names.) (a) The executive (Mr Hinton through this paragraph) spoke to Mr Mayhew of Cazenoves explaining the Argyll concern. Mr Mayhew said that the order had been received from Banque Leu in Switzerland. Cazenoves dealt from time to time with Banque Leu but felt that they were acting as agents rather than principal in this deal. According to Mr Mayhew, the block of shares which had come onto the market that morning, had been offered to one of the advisers to Distillers and had subsequently been brought to his attention by advisers to Guinness. He had been able to find a purchaser for these shares who was prepared to pay cash for immediate delivery. Mr Mayhew gave the executive the name of his contact at Banque Leu. Accordingly, the executive spoke to Mr Baumann in Lausanne. Mr Baumann said that he had been contacted by his client Pipetec AG who had informed him that they were prepared to pay £7 cash for a line of Distillers shares. The reason that Banque Leu had been brought into the deal was because Mr Mayhew wanted a bank confirmation that Pipetec had the resources available. Mr Baumann described Pipetec as an investment company. After speaking to his principal, he was able to give to the executive the name of Dr Frey, managing director of Pipetec. (b) On 18 April the executive spoke to Dr Frey who said that Pipetec had absolutely no connection with
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either of the offeror companies or with the offeree company. He felt that the Distillers shares were a good investment which would enable him to get into Guinness, “a company with considerable prospects“. The executive decided that there was little more that the executive could obtain in the way of information but, in the circumstances, it was decided that the executive should ask Guinness and Morgan Grenfell for written confirmation that there were no arrangements for any side deal between Guinness and Pipetec. The executive contacted Mr Seelig of Morgan Grenfell to this effect and he was quite happy for Guinness to provide such confirmation.
5.4 That written confirmation was given in a letter of 17 April 1986 which the executive received on 18 April …
5.5 It was clear that, as the Guinness share price was some 330p (making the Guinness basic securities exchange offer somewhat above 705p per Distillers share), it was possible that an investment decision could be made in the way indicated to the executive.
5.6 On 18 April [Mercury Warburg Investment Management Ltd] (the seller of the 10·6mn shares) made a disclosure of the sale to The Stock Exchange and to the Panel. In the event, the price was 705p per share, not £7.’
The letter of confirmation from Guinness signed by Mr Olivier Roux was in the following terms:
GUINNESS PLC
39 PORTMAN SQUARE london w1H 9HB telephone
TELEX 23368 FAX 01 486 4968
Confidential
17 April 1986
Dear Sir,
Distillers
You have asked us to write to you with respect to the reported purchase today of approximately 10 million shares in Distillers through Cazenove & Co. We have spoken to Cazenoves and can confirm that the purchaser is not a subsidiary or associated company of Guinness, that such shares were not bought for our account and that we have made no financial arrangements with the purchaser with respect to such shares (including any arrangement linked to the sale of Distillers’ listed investments).
Yours faithfully,
Olivier Roux
For and on behalf of
Guinness PLC
The Director General
Panel on Take-overs and Mergers
PO Box No. 226
The Stock Exchange Building
London EC2P 2JX.’
The panel executive having concluded that, on the evidence available to it, it should take no action, Guinness were free to declare their unconditional and did so on 18 April 1986.
Nothing further which is material happened until on 1 December 1986 inspectors were appointed under ss 432 and 442 of the Companies Act 1985, with wide terms of reference calling for an investigation of the affairs of Guinness. This was followed on 7 January 1987 by Bank Leu AG writing to the non-executive directors of Guinness:
‘During the closing stages of the Guinness bid, Guinness entered into letter
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agreements with subsidiaries of the Bank whereby these subsidiaries agreed to purchase Guinness shares up to the value of £50,000,000 and confirmed the purchase of Distillers shares to the value of £75,612,149·38. Guinness, for its part, agreed to repurchase these shares within 60 days. These letters set out the Bank’s fees and remuneration for effecting the purchase as well as Guinness’s obligation to repurchase. In the events which followed, and at the request of Guinness, this 60 day period was extended. Subsequently, on the 2nd June, one of the subsidiaries purchased a further 23,630,000 ordinary shares of Guinness on the same basis and, as part of the arrangements to extend the 60 day period, the Guinness subsidiary G. & C. Moore deposited £50,000,000 with Bank Leu (Luxembourg) as security for Guinness’s obligations. The documents setting up the above arrangements were signed variously by Olivier Roux and Tom Ward. We had always assumed that the transactions were properly carried out and that any necessary formalities would have been complied with. The Distiller shares purchased were accepted to the offer in consideration of Guinness shares. Certain sales of the Group’s total holding of Guinness shares occurred in the second half of June 1986, leaving a balance of 41,080,599 shares now held by the Bank Leu Group. It was at one time proposed that these shares should form part of an international placing operation.’
There followed a boardroom upheaval as a result of which Sir Norman Macfarlane was appointed chairman of Guinness and their accountants were asked to go to Switzerland and talk to Bank Leu. During that visit they were given a copy of a letter dated 18 April 1986 purporting to be signed by Dr F Burger on behalf of Pipetec and by Mr Thomas Ward, a United States attorney and director of Guinness, on behalf of Guinness. The letter was in the following terms:
‘Dear Mr. Ward,
We are pleased to confirm our yesterday’s telephone conversation with Mr. W. Frey as follows: We, Pipetec AG, Luzern/Switzerland, have upon respective instructions received from yourself bought Distillers Shares on the London Stock Exchange in an aggregate value of 75’612’149.38 pound sterling. Guinness Plc, London, on the other hand undertakes to a) To pay to us an up front arrangement fee of 47’250.—pound sterling b) Repurchase from us the shares bought as per above (or the respective securities issued by Guinness Plc upon conversion, as the case may be) within 60 days at a price determined by adding (I) the original purchase price, (II) commissions, fees and other costs charged in London in connections with such purchase, (III) the taxes levied in Switzerland for securities transactions of 0,33% flat (i.e. 0,165% each for purchase and sale of the shares), (IV) our commission of 0,1% flat calculated on the purchase price and (V) our refinancing cost for the period from the purchase of the shares to their sale on the basis of our actual funding cost plus a margin of 1/8%p.a. We ask you to kindly confirm your agreement with the above by returning to us the enclosed duplicate of this letter duly signed on behalf of Guinness Plc.
Yours faithfully,
PIPETEC AG
[Signed]
Dr. F. Burger.’
If this letter, which was referred to in argument and which I will refer to as ‘the Pipetec letter’ was either genuine or accurate, it followed that the purchase by Pipetec of 10·6m Distillers shares had indeed been a concert party operation and on 16 January 1987 Sir Norman Macfarlane wrote to all stockholders telling them of the boardroom changes and of what the new board had been able to find out about a number of transactions entered into by Guinness under their previous board. This letter included the following passage:
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‘In the last two weeks, a number of serious disclosures have been made to the Board and I feel it is important that I inform you forthwith of their main substance. It has been alleged that, during and after the bid for Distillers, substantial funds of the Company were applied in a widespread series of transactions involving both the purchase of its own shares and the giving of financial assistance with a view to their purchase. In particular, it has been established that substantial purchases of both Guinness and Distillers shares were made by wholly-owned subsidiaries of Bank Leu AG on the strength of Guinness’s agreement, signed on its behalf by Mr. Ward or Mr. Roux, to repurchase the shares at cost plus carrying charges—an agreement which, at least as regards its own shares, Guinness could not lawfully have fulfilled. It is also alleged that these purchases may have been financed by lines of credit granted by Bank Leu AG. In connection with these purchases, and in apparent breach of Companies’ Act requirements, a Guinness subsidiary made a deposit of £50 million with a Luxembourg subsidiary of Bank Leu AG. The present position is that the £50 million deposit remains and a total of approximately 41 million Guinness shares are held by the Bank Leu group.’
This was followed by a statement from the panel in the following terms:
‘GUINNESS PLC
The Panel naturally views the events relating to Guinness that have unfolded over recent weeks with the greatest concern. From the public statements made by the company it appears that there may have been breaches of the law during the take-over of Distillers by Guinness. It seems likely to the Panel from the information which has so far emerged that there was also material, and it could well be in some cases deliberate, breaches of the Take-over Code. These concern disclosures of dealings which should have been made, but were not. Furthermore, if any of the persons who received a secret undertaking of support or benefit from Guinness or its agents, and so were working in concert with Guinness, purchased shares in Distillers at above the level of the cash offer by Guinness for Distillers that would have had significant Code consequences for the Guinness offer. Normally, following its own investigation in any Code case in order to determine what had happened, and, if breaches of the Code had occurred, who was at fault and what should be done, the Panel would promptly set out its findings and decisions in detail in a public statement. In the present situation, however, because Inspectors have been appointed, and legal consequences may flow from their work, the Panel must await the outcome of the Inspectors’ enquiries, before publishing any findings or judgments of its own.’
There matters rested until 1 May 1987, when Sir Norman Macfarlane again wrote to shareholders in Guinness. The letter included the following paragraph:
‘You may recall that Bank Leu, through two of its subsidiary companies, made purchases of Guinness and Distillers shares, on the basis of purported agreements for Guinness to repurchase these shares within a given period. Guinness subsequently deposited £50 million with a Bank Leu subsidiary, which the Bank regarded as security. Guinness maintains that the supposed agreements with the Bank Leu subsidiaries are null and void, and has sought the return of the deposit. Bank Leu disputes this interpretation, but both parties are currently discussing how best to resolve their differences.’
It will be noted that there was no direct challenge to the fact of the agreements, only to their validity, that validity being a matter which might be thought to be irrelevant to the existence of a concert party operation.
On 13 May 1987 the Financial Services (Disclosure of Information) (Designated Authorities No 2) Order 1987, SI 1987/859, constituted the panel a designated authority
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for the purposes of s 180 of the Financial Services Act 1986 and s 449 of the Companies Act 1985 in relation to all its functions. The practical effect of this was that the Secretary of State for Trade and Industry was thereby permitted, but not required, to disclose information to the panel which he had acquired from his inspectors and, if he decided to make such disclosures, could, in the exercise of his discretion, impose conditions on the use which the panel could make of such information.
The panel executives’ investigation
On 17 June 1987 Lazard Bros & Co Ltd, advisers to Guinness, were invited to a meeting with the executive at which Lazards were informed that the panel proposed to investigate the Pipetec purchase. It was explained that the decision no longer to await the Department of Trade and Industry (the DTI) inspectors’ report resulted from additional information coming into the hands of the panel and specific mention was made of comments during legal proceedings before Sir Nicolas Browne-Wilkinson V-C in Guinness plc v Saunders [1988] BCLC 43. The representative of the panel executive made it clear that, whilst it had come to no conclusion on the question of whether the Pipetec purchase was a concert party operation, it had information which led it to conclude that this was a real possibility and it would appreciate information from Guinness about the precise details of that purchase. It was also made clear that the panel executive contemplated an investigation in two phases, the first involving a judgment on whether or not there was a concert party and, if there was, a second phase when the panel would consider the consequences. Those consequences might involve Distillers shareholders who had accepted the Guinness cash offer, or who might have done so if it had been of the same amount as that at which Pipetec purchased, being given a further sum to make up the difference.
Lazards raised three objections on behalf of Guinness, namely: (i) such had been the exodus of senior personnel from Guinness that there were real problems in Guinness discovering what had happened; (ii) what did happen was the subject of litigation which inhibited the scope of Guinness’s response to a panel investigation; (iii) no reserve had been made in the Guinness accounts for any such liability as that contemplated by the panel executive.
On 23 July 1987 Messrs Herbert Smith, solicitors for Guinness, informed the panel that in the light of legal advice it would be unlikely that Guinness would be ready to co-operate with the panel until (i) the report of the DTI inspectors had been published, (ii) all criminal proceedings arising out of the take-over had been completed and (iii) all civil claims against Guinness, threatened or pending, had been fully settled or determined.
The letter then elaborated on Guinness’s objections to a panel investigation at that stage. It was a closely reasoned document of five pages which I do not feel justified in reproducing in full. However, it is relevant that it made clear that: (a) Guinness objected to an investigation of the Pipetec transaction in isolation from any other aspect of the take-over, unless it was clear that there would be no other such investigations; (b) Guinness feared that any information given to the panel and any conclusions of the panel might be used by others to their detriment in civil proceedings or, if Guinness themselves became involved in criminal proceedings, in those proceedings; (c) Guinness concluded that it was not only their actions, but those of other concert party members, which would be relevant to the consequences of any finding of a concert party operation and they wanted to be assured that the investigation would be wide enough to give effect to such a view; (d) Guinness doubted whether the panel could secure effective co-operation from all concerned at the present stage, bearing in mind their conflicting interests and the panel’s lack of power to compel discovery and the attendance of witnesses and further doubted whether, in the absence of such voluntary co-operation, the truth could be expected to emerge in particular Guinness sought an assurance that the panel executive was satisfied that Bank Leu would co-operate fully.
On 31 July 1987 the panel executive told Herbert Smith informally that it would be continuing with the investigation, unless prevented by court order, that it would be
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making inquiries of merchant bankers and brokers during the next week and that, if a hearing was needed, it would be held on 2 September 1987. This was formally confirmed by a letter dated 5 August 1987 which explained that a hearing date was being fixed at that time in order to cover the possibility that a meeting of the full panel might be necessary and that, in the absence of such advance notice, relevant people might be unavailable. The letter also contained these passages:
‘We consider that it is incumbent on the Panel executive, in the present circumstances, to look further into whether the relevant purchase was made by a person acting in concert with Guinness. If that were so, the Code consequences which may flow from that fact may be of importance. In determining to establish this point now, we have had particular regard to the interests of Distillers shareholders at the relevant time. Although we are focussing on one specific Code aspect of the take-over of Distillers, it may be that further investigations on other matters, and perhaps meetings of the Panel, will be necessary in the future. We will obviously review when those should occur in the light of circumstances as they unfold. In this particular investigation, and any other investigation, the outcome could include a public statement by the Panel, incorporating such comments as the Panel considers appropriate. The extent to which any proceedings take on a disciplinary aspect must depend on the facts and the Panel’s approach to them. We would envisage following our normal procedures with regard to inviting those parties whom we consider appropriate to provide us with such relevant information as they may have; as with all Panel matters, this process should be completed as quickly as possible. With regard to the extent to which parties are willing to provide information and attend any Panel hearing, that is for them to inform us. Persons who attend any Panel hearing will of course be given the usual opportunity to state their views and ask questions on matters relevant to the issues before the Panel which may concern them.’
On 7 August the DTI wrote confirming a telephone conversation of 3 August in which it had revealed the existence of the Pipetec letter and added that it was understood that nothing in the evidence given to the inspectors up to that time contradicted that letter. The DTI asked for undertakings that the Pipetec letter would not be published or disclosed other than to Guinness, Pipetec and Bank Leu without the consent of the Secretary of State. These undertakings were given and the Pipetec letter was passed to the panel executive.
On 10 August the panel executive told Herbert Smith on behalf of Guinness that it had a copy of the Pipetec letter. As it happened, Guinness had had this since January 1987, but this fact had previously been unknown to the panel executive. Next day the panel executive wrote again to Herbert Smith saying that it had not yet completed its inquiries, but hoped to do so shortly. It expressed the view that there was a prima facie case for holding that there had been a concert party operation and confirmed its intention, which had previously been only tentative, to convene a meeting of the full panel for 2 September. The letter invited Guinness to submit in advance a written paper for circulation to the panel, asked for any further information to be provided as soon as possible and offered to discuss the matter generally.
Between 11 and 13 August 1987 there were a series of oral and written exchanges between the panel executive, Guinness, Herbert Smith and Lazards, in which Guinness disputed the authority and accuracy of the Pipetec letter and pressed that there should be no hearing on the grounds previously advanced and on the grounds of the commercial disruption which Guinness might experience. The panel executive felt unable to agree to a postponement of the hearing on 2 September, but proposed that there should be a preliminary meeting of the panel on 25 August which could consider and rule on the issue of adjournment. The panel executive said that it would itself prepare a paper for the panel setting out its reasons for believing that there had been a concert party
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transaction and invited Guinness to prepare and submit a paper setting out why the matter should not be investigated at this stage. The executive added that if, on commercial grounds, Guinness were minded to seek a two- or three-month adjournment, it must be clearly understood that they could not later come back and ask for a further adjournment.
Thereafter there were exchanges between the panel executive and Guinness’s solicitors, but the next event of moment was the delivery by the panel executive of its submissions for the 25 August hearing on the issue of adjournment and draft submissions for the hearing on 2 September on the substantial issue.
The hearing on 25 August 1987
Mr Edward Walker-Arnott of Herbert Smith appeared for Guinness. We had been furnished with a shorthand note of the proceedings and it is clear that he put the case for an adjournment forcefully and persuasively. For present purposes perhaps his most significant submissions were the following. (i) The panel’s speedy and informal procedures were appropriate and acceptable in the context of a current take-over bid, but, as was accepted by the panel, inappropriate to disciplinary proceedings where less speed and a much more sustained attempt to get at the full facts was appropriate and indeed essential. The present investigation, whilst perhaps not disciplinary in character, did involve very substantial issues for Guinness, was being conducted after the bid had been concluded and, in terms of what procedure was appropriate, was to be equated with disciplinary proceedings. (ii) To do justice, it was essential that Mr Tom Ward (lately a director of Guinness), Mr Baumann, Dr Frey and Mr Burger (all executives of Bank Leu), Mr Mayhew of Cazenove (Guinness’s stockbrokers) and Mr Hinton (the member of the panel executive who took part in its investigations in April 1986) should be called to give evidence and be cross-examined. In Guinness’s view neither Mr Ward nor any of the Bank Leu witnesses would be willing to attend at that time. In answer to an inquiry from the chairman (Mr Robert Alexander QC), Mr Walker-Arnott said that Guinness did not know when would be the right time to hold an inquiry, but it was not then.
The contemporary note of the chairman’s ruling on behalf of the panel refusing to vacate the 2 September hearing date reads as follows:
‘Judgment
When all the parties had re-assembled RA [the chairman] thanked the parties especially EWA [Mr Walker-Arnott]. He said the clear issue is whether or not the hearing fixed for 2nd September should go ahead. There are a number of points relevant to this which he wishes to make clear:—1. The case brought before the Panel is not as a disciplinary matter but whether the facts which have been brought to light have Code consequences. 2. If there were a breach of the Code this is one which took place some 15 months ago. If the facts had been known at the time this matter would probably have been dealt with in April 1986. 3. Any delay would be one which would run at least until the DTI Report and that must be some time ahead. The delay would require a cogent case. RA said that he recognised two points:—(a) That EWA had pointed out that there are potential serious consequences to Guinness. EWA emphasised that the Panel would have to be careful before making a finding against Guinness. It is wholly accepted by the Panel that the current management of Guinness is doing all it can. Having said that the Panel has to bear in mind that the concern is for former Distillers shareholders. If there was a breach of the Code then Guinness is responsible. (b) EWA’s chief submission was that justice could not be done now. If the Panel had accepted that it would have adjourned the hearing of 2nd September. The Panel Executive have laid information, including: (1) the Pipetec letter; (2) the money that went to Cazenoves overnight; (3) the two shareholders letters; and (4) that the DTI have received no information that contradicts. The Panel therefore do not accept that the case is based almost exclusively on the Pipetec letter. The Panel have received no positive information from Guinness to throw doubt on the Pipetec letter. EWA has said that without co-operation
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from Ward and others it will not be easy to evaluate the transaction. However, the Panel has received no evidence as to why Guinness throws doubt on the facts. In the circumstances the Panel does not think that it would be fair to adjourn the 2nd September hearing. RA emphasised:—(1) That if during the course of the hearing on 2nd September it appears that injustice would be done to Guinness the Panel will reconsider, but the Panel hopes that it will receive the co-operation of Guinness and that they will alert the Panel to any injustice. (2) Under the Code there is an opportunity of appeal to the Appeal committee. RA said he thought it right to indicate here and now that if the Panel decides against Guinness at the 2nd September hearing it would give leave to Guinness to appeal and include the opportunity of arguing that the state of facts was such that that hearing could not justly have been heard. RA said that he had not dealt at length with the jeopardy point as this could be severe and would depend in particular on whether Guinness owed a duty to Argyll. In his view this does not constitute a reason for no hearing to take place. Finally at the end of his submission EWA said that if the hearing went against Guinness there could be a public row. He asked the Panel to decline to exercise short term muscularity, but instead to exercise long term wisdom. RA said that he hopes that in considering the Distillers shareholders’ position the Panel is showing long term wisdom. RA said that he hopes that Guinness will participate in the 2nd September hearing. An alternative would be for Guinness to seek to take Court proceedings. The Panel cannot be deflected by suggestions that this may lead to a dispute even where the company involved is one of the most reputable in the country. RA made it clear that he was refusing leave to appeal as of now. Note: The hearing commenced shortly after 3.00 p.m. and ended around 6.00 p.m.)’
Events between the two hearings
At about 3.00 pm on 28 August 1987, which was the Friday before the August bank holiday weekend, the panel executive gave Lazards (on behalf of Guinness) the final version of its submissions for the hearing on Wednesday, 2 September. On Tuesday, 1 September Herbert Smith wrote a letter again seeking an adjournment, this time on the additional ground of the late delivery of the panel executive’s final submissions. It is noteworthy that the letter contained the sentence: ‘This effectively left one working day (today) for consideration of the paper and, if Guinness should decide to participate in tomorrow’s hearing, for the formulation of a written submission’ (my emphasis). The letter also submitted that, even if the issue of concert party or no concert party was decided on 2 September, the panel should not at once proceed to consider consequences since, in Guinness’s view, this question of consequences in the present context raised novel issues of great complication and difficulty.
The panel executive rejected this submission and complained that it had continually invited Guinness to play a full part in the investigation, but they had failed to do so.
It is a fact that the final submission of the panel executive differed from the draft in two respects. The first, to which counsel for Guinness drew attention, but was unable to suggest reasons why it was really significant, was an expansion of section 3, ‘Further information and the Executive’s views’, from 21/2 pages to just over 9 pages. The second, which was undoubtedly crucial, was the disclosure of a letter from Messrs Allen & Overy, solicitors to Bank Leu, dated 27 August 1987 in which they too protested at the refusal to adjourn the hearing on 2 September 1987. The letter continued:
‘In all the circumstances our clients have decided to confine themselves to a short statement of what they believe to be the salient facts, so far as they are concerned, relating to the Distillers share purchase. This statement runs as follows:—“The question of Bank Leu buying Distillers shares was first raised on the morning of 17th April 1986 when Tom Ward, a Guinness director, telephoned Dr. Werner Frey (a senior vice president of the Bank and deputy head of its trading division) at the Bank’s offices in Zurich. Mr. Ward explained that approximately £75m worth of
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Distillers shares was being offered for sale and asked whether the Bank would be in a position to make an immediate purchase of these shares for cash settlement that same day. After Dr. Frey had first consulted with members of the Bank’s board of management and reverted to Mr. Ward, he spoke (at the suggestion of Mr. Ward) to David Mayhew of Cazenove, Guinness’s brokers, and confirmed the purchase of a total of 10,598,826 shares for the account of Pipetec AG, an investment company which was a sub-subsidiary of the Bank. The price was £7·0544 per share (exclusive of commission and stamp duty). The Bank’s efforts to secure the necessary funds at short notice were successful and Cazenove duly received payment of the inclusive purchase price of £76,612,149·38 during the afternoon of 17th April. (The Bank has no knowledge whatever of any funds being advanced, temporarily or otherwise, by Guinness in connection with the transaction). Following the purchase, on 17/18th April, both Mr. Kurt Baumann (in charge of the foreign stock exchange department within the Bank’s trading division and responsible to Dr. Frey for processing the transaction) and Dr. Frey himself received telephone calls from Mr. Hinton of the Take-over Panel. Mr. Hinton was primarily concerned to know whether Pipetec had any connection with either Guinness, Distillers or Argyll. There being no shareholding relationship between Pipetec and any of those companies, Mr. Baumann and Dr. Frey confirmed in separate conversations that Pipetec had no such connection. The arrangements agreed between Mr. Ward and Dr. Frey for the purchase of the Distillers shares were subsequently confirmed in a letter from Pipetec to Mr. Ward dated 18th April 1986, of which the Panel apparently has a copy, supplied (it is understood) by the DTI. This letter sets out the arrangements for an up-front fee and the repurchase of the shares (or the Guinness shares representing them) within a 60 day period. The fee was not in fact paid nor were the shares repurchased. The Distillers shares were purchased by Pipetec in non-assented form and registered in the name of Cazenove Nominees. They were subsequently accepted to the Guinness offer for a mix of Guinness ordinary and convertible preference shares. The £50m was not deposited by Guinness with the Bank until some weeks after the Distillers share purchase: no such security was in contemplation at the time of the purchase. To the best of the Bank’s knowledge, no other Distillers shares were bought for the account of the Bank or any of its subsidiaries in connection with the Guinness bid, either before or after 17th April 1986.” The Bank intends to rest on this statement for the purpose of the hearing on 2nd September. Accordingly it is not proposed that any of the Bank’s officers should attend the hearing, indeed Dr. Frey will in any case be away on military service at the time. Representatives of this firm will however be entrusted with a watching brief on the Bank’s behalf. Finally, quite apart from our clients’ objections to the principle of the Panel’s enquiry at this particular juncture, may we say that we regard it as quite unjustifiable that our clients should be subjected to such a stringent timetable: we were given less than one month’s notice to prepare for the hearing, the whole of which falls within the August holiday period when inevitably key people are unavailable for significant periods of time. As you will appreciate more than 16 months has already elapsed since the transaction took place—why now the sudden urgency?’
The hearing on Wednesday, 2 September 1988
At this hearing Guinness again asked for an adjournment. Mr Walker-Arnott’s main point was that the panel’s submission was substantially different from the draft which they had previously had and that they had been faced with dealing with it over the bank holiday weekend. Furthermore, it was only on the previous day that the Guinness directors had decided to attempt to put all the material which they had before the panel. He said:
‘In this matter there has been pace and frenetic activity. This may be all right in a
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bid situation. Even accepting the principle of fairness to the Distillers shareholders does not justify this speed. Four days’ notice of an articulated case of principles given the sums of money involved and the damage to Guinness is utterly unfair and unreasonable.’
Mr Walker-Arnott then asked for an adjournment of some weeks.
The panel refused this adjournment and proceeded to the first phase of the hearing, dealing with the issue of whether or not there had been a concert party. In the course of that hearing Mr Walker-Arnott clarified a previous offer, made in the context of the application for an adjournment, to pay interest to Distillers shareholders on any ‘top-up’ award. He said:
‘The present directors do not think that they can possibly assure the panel here and now and bind future directors to whatever the finding of the panel may be and whenever it may be made. The Guinness directors can say that if they accept the panel finding and its consequences, they would accept a panel requirement for a compensatory interest uplift.’
This formulation reflects some reservations on the part of Guinness whether making payments in accordance with the direction or request by the panel would be intra vires the company. The panel held that there had been a concert party operation.
When the panel moved on to phase 2, ‘consequences’, it became apparent that the problem was more complicated than it had at first appeared and, at the chairman’s suggestion, this aspect was adjourned to enable talks to take place between the panel executive, Guinness and others.
The panel’s reasons
At a later date the panel gave written reasons for its decisions not to adjourn and for its finding of a concert party. These are clearly of the greatest importance and I do not think that I can fairly summarise them. [His Lordship appended to his judgment the panel’s reasons for its decisions, but they are not reproduced in this report.]
The panel appeal committee
The panel has established an appeal committee consisting of a chairman (at present Lord Roskill) and members of the panel who did not attend the panel hearing and are not disqualified from sitting by interest or involvement in the dispute. The introduction to the code provides at section A6:
‘There is a right of appeal to the Appeal Committee in a case where the Panel finds a breach of the Code and proposes to take disciplinary action; and also in a case where it is alleged that the Panel has acted outside its jurisdiction. An appeal may also lie, with leave of the Panel, against decisions which, although not strictly of a disciplinary nature, inflict in the view of the Panel serious hardship on an individual or company. No appeal, however, lies against a finding of fact or against a decision of the Panel on the interpretation of the Code. A right of appeal to the Appeal Committee will also lie in respect of any refusal by the Panel to recognise, or any decision of the Panel to cease to recognise, a market-maker or fund manager as an exempt market-maker or exempt fund manager as the case may be. The Appeal Committee does not normally hear new evidence. If the Appeal Committee considers there may be material new evidence which could not have been presented to the Panel, then it will normally remit the matter to the Panel for further consideration. If an appeal is upheld, the appellant is consulted on the form of statement (if any) which is to be published. If an appeal is dismissed, the findings of the Panel are published and any steps decided upon by way of penalty implemented. In either case the Appeal Committee may make any further comment it thinks fit.’
The panel took the view that it would be right to give Guinness leave to appeal to the
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appeal committee on all points, but to make this leave only operative after a decision has been reached on ‘consequences’. There were two reasons given for this approach. First, it was at that time thought that consequences could be resolved by agreement or otherwise within a relatively short time. Second, it was thought that the appeal committee should be enabled to view the matter ‘in the round’. Guinness were dissatisfied with this decision, wishing to have the right, whether or not they would exercise it and whether or not they would in any event apply for judicial review, to take the issues of adjournment and concert party to the appeal committee before embarking on any consideration of consequences.
Conclusion
I approach this appeal by reminding myself that the judicial review jurisdiction of the High Court, and of this court on appeal, is a supervisory or ‘longstop’ jurisdiction. It also has a large discretionary content, which contributes to its value. Thus, to take extremes, in R v Liverpool City Justices, ex p Lunt [1988] CA Transcript 675 this court gave leave to apply for judicial review of an order of magistrates sentencing the applicant to 42 days’ imprisonment for non-payment of rates, notwithstanding that he had served the sentence in August and September 1985 and that the normal time limit for such an application is three months. Suffice it to say that the circumstances were wholly exceptional. At the opposite end of the spectrum, and coincidentally in the context of the take-over battle for Distillers, this court found that the chairman of the Monopolies Commission had acted wholly without jurisdiction, but refused to quash his order (see R v Monopolies and Mergers Commission, ex p Argyll Group plc [1986] 2 All ER 257, [1986] 1 WLR 763). I also remind myself that, consistently with this ‘longstop’ character, it is not the practice of the court to entertain an application for judicial review unless and until all avenues of appeal have been exhausted, at least in so far as the alleged cause for complaint could thereby be remedied. The rationale for this self-imposed fetter on the exercise of the court’s jurisdiction is twofold. First, the point usually arises in the context of statutory schemes and if Parliament directly or indirectly has provided for an appeals procedure it is not for the court to usurp the functions of the appellate body. Second, the public interest normally dictates that, if the judicial review jurisdiction is to be exercised, it should be exercised very speedily and, given the constraints imposed by limited judicial resources, this necessarily involves limiting the number of cases in which leave to apply should be given.
I also remind myself, as a general proposition, that a decision whether or not to adjourn a hearing is par excellence a matter for the exercise of judicial discretion by the court or tribunal seised of the matter and that it is well settled that, on an appeal from such a decision, an appellate court will not intervene only on the ground that it thinks that it would have reached a different decision. It must be satisfied that the first instance decision was wrong in principle or, which is usually the same thing, that it resulted from a self-misdirection. Where, therefore, a right of appeal exists but is not exercised, something more is required if relief is to be granted on judicial review. Quite how much or what more defies definition, if only because intervention by the court in such circumstances is wholly exceptional, but an example is provided by R v Chief Constable of the Merseyside Police, ex p Calveley [1986] 1 All ER 257, [1986] QB 424 and, in particular, the judgment of May LJ. If the right of appeal has been exercised, a different situation arises, because the court will then be reviewing the decision of the appellate body and asking itself whether that body has fulfilled its proper function.
The application for judicial review which is the subject matter of this appeal is limited to the panel’s refusals to order an adjournment when requested to do so on 25 August 1987 and on 2 September 1987. Essentially the application on 25 August was for what might be described as a long adjournment, ie until after all proceedings, both civil and criminal, had been concluded and the report of the DTI inspectors had been published. This is not to say that the panel did not have to consider whether some shorter
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adjournment, until, for example, the DTI inspectors had completed taking evidence, would have been appropriate. The panel also had to consider whether an adjournment of whatever duration would enable it to be more sure that it had got at the truth of the matter. Although this application was expressly or impliedly repeated on the occasion of the 2 September hearing, the application on that occasion was essentially for a short adjournment to enable Guinness to respond to the final submission of the panel executive, which they had received only on Friday, 28 August 1987. Somewhat different considerations apply to the two applications, although there is an overlap, and I will consider them separately.
The long adjournment
As I have already indicated, I think that, at least in the circumstances of this appeal, it is more appropriate to consider whether something has gone wrong of a nature and degree which require the intervention of the court, rather than to approach the matter on the basis of separate heads of Wednesbury unreasonableness and unfairness or breach of the rules of natural justice (see Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223). In passing I would, however, accept that whether the rules of natural justice have been transgressed is not to be determined by a Wednesbury test: could any reasonable tribunal be so unfair? On the other hand, fairness must depend in part on the tribunal’s view of the general situation and a Wednesbury approach to that view may well be justified. If the tribunal’s view should be accepted, then fairness or unfairness falls to be judged on the basis of that view rather than the court’s view of the general situation.
Counsel for Guinness has taken a number of points in support of his submission that the court should intervene. His first is that the panel approached the matter very much as though it were an investigation taking place within the constraints of time imposed when a bid is current, whereas the bid had been concluded 15 months earlier and there were a number of unique features. In particular he drew attention to (a) the unenviable and unavoidable state of ignorance of the present Guinness board as to what actually happened, (b) the fact that DTI inspectors had been appointed and the panel had become a designated body to which the Secretary of State could convey information derived from evidence given to the inspectors and (c) the fact that criminal and civil proceedings might well inhibit candour on the part of those in a position to know the facts.
Counsel also criticised the distinction which, in his submission, the panel made between investigations into a bid and disciplinary proceedings, treating these proceedings as being in the former category, whereas he said that they were either sui generis or should be equated with the latter category. He went on to criticise the weight which, in his submission, the panel gave to the fact that, if, in April 1986, it had been disclosed to the panel that Guinness had attempted to assist in the purchase of the Pipetec shares by providing £76m to Cazenove on an overnight basis, there would have been a contemporaneous further investigation, the outcome of which could not be predicted. Finally he submitted that former Distillers shareholders would be amply protected if they were told to keep evidence of their transactions and any ‘top-up’ award included interest at commercial rates.
There is force in these criticisms in the sense that they have to be taken very seriously. However, the conduct of the panel has to be judged in the light of the position as it saw it, provided always that its assessment was a reasonable one.
In my judgment it was not unreasonable for the panel to regard the investigation as having some of the character of one which was contemporaneous with the bid, for at least two reasons. First, it was concerned with precisely the same issue as had in fact arisen during the bid: concert party or no concert party? Second, assuming that there had been a concert party, and of course no problem arises on any other hypothesis, the primary reason why it was not dealt with by the panel during the currency of the bid was the fact that Mr Olivier Roux on behalf of Guinness had falsely confirmed in the
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letter dated 17 April 1986 that Guinness had made no financial arrangements with Pipetec.
Furthermore, in my judgment it was not unreasonable for the panel to regard these proceedings as being essentially different from disciplinary proceedings. They were inquisitorial in nature as well as procedure, being directed at finding out what happened, rather than convicting anyone of an offence. It was, as it were, an inquiry in rem, rather than an adversarial proceeding, whether or not conducted inquisitorially, in personam. True it is that the panel’s findings might give rise to financial consequences, favourable to former Distillers shareholders and unfavourable to others, notably Guinness, but not necessarily limited to Guinness. However, financial consequences are inherent in all the work of the panel and their existence does not, of itself, point to any particular activity of the panel having a disciplinary character.
That said, the panel had to, and I am clear did, take account of the fact that, the bid being an accomplished fact, it was not working to an imminent and defined deadline, but could investigate the facts more fully than would otherwise have been possible.
Given the fact that Guinness could put forward no grounds for believing that the panel would be better informed in any respect directly relevant to the issue of whether the purchase of the shares by Pipetec was a concert party operation before or even when all proceedings had been concluded and the DTI inspectors’ report published, months and possibly years into the future, and the panel’s assessment of the detriment to former Distillers shareholders which would flow from such a delay, I am quite unable to criticise the panel for its decision. No doubt there is always a possibility that any trial or inquiry will one day be shown by further evidence to have reached a wrong conclusion, but even in the context of the trial of capital offences, this was never an argument for long adjournments. Rather it was an argument for not having any such offences and therefore trials relating to them, but Guinness does not suggest that the panel should not one day decide whether there was a concert party operation in April 1986.
This does not dispose of the question of whether the panel should not have granted a shorter adjournment of, say, three months. Parties who open their mouths far too wide may still be entitled to a cut off the joint, even if they are clearly not entitled to the joint itself. Looking at the matter as it stood on 25 August 1987 I find this not an easy problem to resolve. Evidentially the position was that there were very powerful indications that Pipetec had been involved in a concert party operation. Unless the panel itself were to embark on some further and different methods of investigation, there was no realistic basis for believing that an adjournment for even six months would provide it with other or better evidence. No one was likely to volunteer information who had not already done so and, whilst the DTI investigation was proceeding, nothing had emerged to contradict the accuracy (I leave on one side the authenticity) of the Pipetec letter and, I would add, that remained the position when the appeal was heard in this court nearly 12 months later.
And this brings me to what caused me the greatest anxiety in this appeal. Should the panel not have sought to achieve the personal attendance of relevant witnesses from Bank Leu as requested by Guinness? The difficulties in the way of securing the attendance of Mr Ward were obvious and virtually insurmountable, but personal evidence from Mr Baumann, Dr Frey and Mr Burger might well have either put the matter beyond all doubt or, perhaps, created real doubt.
Now it is quite true that the panel has no power to compel the attendance of witnesses, still less witnesses from overseas. But this may be a somewhat narrow view. The panel has no de jure power to do anything, but it wields immense de facto power and influence by means of the support of others who have the power to render untenable the position in the market of those who do not choose to co-operate with the panel. Counsel for the panel, said that the panel did not agree that it could have used indirect pressure to secure the attendance of these gentlemen. I have to accept that the panel is in the best position to know, but I find the answer surprising. I bear in mind that, possibly apocryphal, story
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of the office boy who was invited to meet the chairman for a friendly discussion on the former’s conduct. The dialogue ended with the chairman saying, ‘Well Jones, it was only a suggestion, but I am sure that you will remember who made it.' The Bank Leu witnesses were very far from being office boys, but I should have thought that they might, for rather different reasons, have been susceptible to strongly worded suggestions.
My anxieties on this score, looking at the situation as it was on 25 August 1987, do not exist looking at the situation as it had revealed itself by 2 September. The panel by then had the Allen & Overy letter containing the Bank Leu statement. This was a carefully considered, indeed counsel for Guinness described it as ‘negotiated’, statement authorised at the highest level and made with legal advice. It amounted to a complete admission that the Pipetec purchase was indeed a concert party operation. True it is that it was short on any detail as to why this occurred or what Bank Leu or those who took the decision thought that they would get out of it, but it was unequivocal in relation to all matters with which the panel was concerned.
Any court or tribunal faced with such an admission will bear in mind the fact that, however rarely, false admissions are sometimes made when the consequences of telling the truth and the whole truth may be even more undesirable than those flowing from the false admission. In this situation I pressed counsel for Guinness to advance any reason, however fanciful, why Bank Leu should have made this admission if it was not true. The bank’s conduct was, it appeared, under investigation by the Swiss banking authorities who would get to know of it and were in a position to test its accuracy. In addition the bank had given evidence to the DTI inspectors and that evidence must have been consistent with their admission, since the panel had been told that the inspectors had no evidence to contradict the contents of the Pipetec letter. All that counsel could suggest was that the statement might be an attempt to explain away a hypothetical failure by the bank to maintain liquidity ratios. This suggestion was in fact touched on before the panel and appears not to have made any impression on the members, although it was supremely something which it, rather than the court, was in a position to evaluate.
In other such cases, if they ever occur and if the evidence is not so overwhelming, I have no doubt that the panel should, and I hope would, give serious consideration to whether, de facto, it may not be in a position to summon witnesses if there is time to do so.
In short, whilst I have reservations about the wisdom of the decision of 25 August in refusing even a relatively short adjournment during which the panel might have made more vigorous attempts to secure the attendance of the Bank Leu witnesses, I have no doubt that the situation had changed by 2 September 1987.
The short adjournment
By this I refer to the application on 2 September 1987 based on the later arrival of the Bank Leu statement and the need for Guinness indeed to indulge in frenetic activity if they were to prepare an adequate submission over the bank holiday weekend. At this point it is necessary to give separate consideration to actual and apparent injustice to Guinness. Of actual injustice there is no trace. The essential evidence supporting a finding of a concert party along the lines set out in the Pipetec letter, which incidentally had been in the possession of Guinness for nine months, and the corroborative evidence, apart from the Allen & Overy letter, had been in the possession of Guinness for ample time to enable them to formulate submissions, as indeed they had been continually urged to do. The Allen & Overy letter was the last nail in the coffin, and a substantial one, but it could not in any way affect what Guinness had to say and no one is suggesting that it did. The reality is that their embarrassment stemmed from the eleventh hour decision by the board of Guinness to co-operate in the panel’s investigation. Even this need not have created embarrassment, because contingency plans could have been laid.
As to the apparent injustice, counsel for Guinness relied on the attitude of the courts as exemplified by R v Thames Magistrates’ Court, ex p Polemis [1974] 2 All ER 1219, [1974]
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1 WLR 1371, where the court quashed a conviction on the grounds that the defendant had no reasonable opportunity of preparing and presenting his defence, even if, with hindsight, it could be established that he had no defence to present. There is force in this submission, but I think that it confuses the position of Guinness with that of a defendant. Guinness were only witnesses at an inquiry, albeit with a substantial interest in the outcome. In this they were not alone. The same could be said of others. But in any event ‘apparent’ injustice is concerned with the appearance of proceedings if the full facts are known, not with injustice as it might appear to someone who knows only some of the facts. If a disinterested observer had been told that, apart from the Allen & Overy letter, Guinness had had ample time to prepare, but had chosen not to do so, and that it was open to them to suggest any reason why the Allen & Overy letter was not conclusive of the issue but they had been unable to do so, I do not think that he would have concluded that there had been any injustice. Bank Leu were not surprise witnesses in the sense that they arrived out of the blue. Guinness’s accountants had been talking to officials of the bank in the previous January and could have talked to them at any time thereafter. The element of surprise was only that the bank should have made the statement at all and done so at the eleventh hour.
That said, it is the experience of the courts that it is sometimes wiser to appear naive and to grant unmeritorious applications for short adjournments, even when the full facts reveal no injustice actual or apparent, provided always that it can be done without creating insuperable difficulties to reaching an early decision. Such difficulties may well have existed had a short adjournment been granted on 2 September and it had been necessary to convene a further meeting of the panel. Suffice it to say that, whilst the panel could never have been criticised if it had granted a short adjournment, I do not find it possible to say that its decision not to do so was wrong.
This is sufficient to dispose of this appeal and to explain why I would dismiss it, but I should also make brief mention of the failure on the part of Guinness to use the panel’s appeal machinery. The panel appeal committee had in many respects wider powers to review the panel’s decision and it is not apparent why the requirement that a decision should first be reached on consequences should be an insuperable obstacle from the point of view of Guinness. However, bearing in mind the novelty of the panel, its powers and constitution and the unprecedented situation which had arisen, I do not regard this failure as an absolute bar to the granting of relief. Nevertheless, I wish to make it clear that, if such a case should recur, any applicant for relief on judicial review may well find that such a failure is of itself treated as a bar.
I would dismiss the appeal.
LLOYD LJ. This is only the second case in which a decision of the Panel on Take-overs and Mergers has been challenged in the courts. In the first, R v Panel on Take-overs and Mergers, ex p Datafin plc [1987] 1 All ER 564 at 579, [1987] QB 815 at 842, Sir John Donaldson MR said:
‘The only circumstances in which I would anticipate the use of the remedies of certiorari and mandamus would be in the event, which I hope is unthinkable, of the panel acting in breach of the rules of natural justice, in other words, unfairly.’
Counsel for Guinness plc submits that the unthinkable has occurred in this case. His central submission is that his clients have not had a fair opportunity of presenting their case. If that were so, then whatever the nature of the proceedings before the panel, whether they are properly characterised as adversarial, inquisitorial or somewhere in between, we should not hesitate to intervene.
Counsel made it clear at the very outset of his submissions that he is not attacking the substance of the panel’s decision. He conceded that there was evidence on which the panel could conclude that Pipetec AG was a concert party, and that the panel’s decision might well turn out to have been correct. Counsel’s attack is not on the substance of the
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panel’s decision, but on its decision to go ahead with the hearing on 2 September 1987. I refer to ‘decision’ in the singular because, although there are two decisions under attack, that of 25 August and that of 2 September, in the end it is the panel’s conduct in the round which is called in question.
So I emphasise again that we are not here concerned with the substantive decision on the issue whether there was a concert party. It is the ‘decision-making process’, in Lord Brightman’s often repeated phrase, that we have to consider: see Chief Constable of the North Wales Police v Evans [1982] 3 All ER 141 at 154, [1982] 1 WLR 1155 at 1173. The point is of a special importance in the present case for two reasons.
In the first place the question whether we are entitled to intervene at all is not to be answered, as counsel for the panel argued, by reference to Wednesbury unreasonableness (see Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223). It is not a question whether, in the language of Lord Diplock, quoted by Watkins LJ in the Divisional Court, the decision to hold the hearing on 2 September was ‘so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it’ (see Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935 at 951, [1985] AC 374 at 410). Rather, the question has to be decided in accordance with the principles of fair procedure which have been developed over the years, and of which the courts are the author and sole judge. These principles, which apply as well to administrative as judicial tribunals, are known compendiously (if misleadingly) as the rules of natural justice.
Counsel for the panel argued that the correct test is Wednesbury unreasonableness, because there could, he said, be no criticism of the way in which the panel reached its decision on 25 August. It is the substance of that decision, viz the decision not to adjourn the hearing fixed for 2 September, which is in issue. I cannot accept that argument. It confuses substance and procedure. If a tribunal adopts a procedure which is unfair, then the court may, in the exercise of its discretion, seldom withheld, quash the resulting decision by applying the rules of natural justice. The test cannot be different just because the tribunal decides to adopt a procedure which is unfair. Of course the court will give great weight to the tribunal’s own view of what is fair, and will not lightly decide that a tribunal has adopted a procedure which is unfair, especially so distinguished and experienced a tribunal as the panel. But in the last resort the court is the arbiter of what is fair. I would therefore agree with counsel for Guinness that the decision to hold the hearing on 2 September is not to be tested by whether it was one which no reasonable tribunal could have reached.
The second reason why it is important to emphasise that we are not here concerned with the substance of the panel’s decision is that it touches on another point, very faintly argued by counsel for the panel, that the application for judicial review is premature. Guinness should first, he says, have exhausted their remedies by way of appeal to the appeal committee.
There is no doubt as to the general rule. It applies not only where Parliament has provided an avenue of appeal, as in R v Chief Constable of the Merseyside Police, ex p Calveley [1986] 1 All ER 257, [1986] QB 424, though the rule was not applied on the special facts of that case. It applies also where the appeal procedure is contractual, and indeed where it is neither statutory nor contractual. The justification for the rule is convenience, by which I mean not just the convenience of the court, but the public interest in abating litigation.
But, as Ex p Calveley itself shows, there are exceptions to the general rule. The present case is exceptional, partly because the panel has refused leave to appeal until after there has been a further hearing as to the consequences of its decision, and partly because when the appeal takes place (if it does) it will not be in the nature of a complete rehearing. When the substance of a decision is attacked by judicial review, on the ground of Wednesbury unreasonableness or any other ground, the court will be very reluctant
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indeed to intervene, if there is an immediate appeal open on the merits. However, the court will be less reluctant to intervene where the attack is based on procedural irregularity, and the substantive appeal has to be postponed for some reason or is limited in scope. So I would respectfully agree with the Divisional Court that it was fully open to Guinness to apply for judicial review in the present case.
There is one other matter which I should mention at the outset, since it featured prominently in the argument of counsel for the panel. Over and over again he stressed that the task which faced the panel, both on 25 August and 2 September, was a balancing task. By this he meant, I think, that the panel had to balance the need to give Guinness a fair hearing against the urgent need to compensate former Distillers shareholders, or perhaps, more accurately, the urgent need to ensure that they receive fair treatment in accordance with general principle 1 of the City Code on Take-overs and Mergers.
I would only comment at this stage that no amount of urgency in compensating former shareholders would justify depriving Guinness of a fair opportunity of presenting their case. It was said that the concept of fairness is flexible; and so in a sense it is. I would accept that what is required of a tribunal, if it is to be fair, must depend on the nature of the task in hand and the circumstances prevailing at the time in question. But it is certainly not flexible in the sense that, once what is fair has been ascertained, the tribunal can be allowed to fall short of that standard by so much as an iota.
Secondly, if, by his emphasis on the panel’s balancing task, counsel was hinting that the decision as to what was fair in the present case was really one for the panel rather than the court, then I would disagree. One can understand the view that the panel, with its great experience of City affairs, is well equipped to decide what is fair by City standards. The court does not seek to match the panel’s experience in that regard. But it does have long experience of other tribunals of all sorts, high and low. It would be failing in its duty if it did not enforce those principles of fair procedure which it has developed over many years. As the court pointed out in Ex p Datafin case [1987] 1 All ER 564, [1987] QB 815, the unique character of the panel should not, and does not, exclude it from the court’s purview in this or any other respect.
The central submission counsel for Guinness, as I have said, is that Guinness did not have a fair opportunity of presenting their case. He supports that submission on two grounds. The first and main ground, known as the general adjournment point, was that the panel should not have proceeded with the hearing until after the Department of Trade and Industry (the DTI) inspectors had completed their taking of evidence. The request for a general adjournment was considered and rejected by the panel on 25 August. The second and subsidiary ground, known as the limited adjournment point, was that the panel should have adjourned for a matter of weeks or even days in order to enable Guinness to give proper consideration to the panel executive’s case, the final version of which only came into Guinness’s hands at 3.00 pm on Friday, 28 August. Since Monday, 31 August was a bank holiday and since the Guinness director dealing with the matter, Mr S C Dowling, only returned from holiday on the Monday night, Guinness had only one working day to consider the final version of the executive’s case and decide what to do. The request for a limited adjournment, together with a renewal of the request for a general adjournment, was considered and rejected by the panel on 2 September.
Although the main weight of counsel’s argument rested on the general adjournment point, it is convenient to consider the limited adjournment point first. The facts have been set out in the judgment of Lord Donaldson MR. I will not repeat them. Although Guinness had been in possession of the first version of the executive’s case for some days, they did not know that Bank Leu’s witnesses would not be available for cross-examination, and they did not see Bank Leu’s written statement contained in Messrs Allen & Overy’s letter of 27 August until they were sent the final version on 28 August. Moreover, the executive’s views, as set out in section 3, had expanded from two and a half pages to just over nine pages. Guinness asked for a short adjournment to consider the position, and prepare a further answer if necessary, without prejudice to their request for a longer
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adjournment. Counsel for Guinness submitted that the panel’s refusal of a short adjournment was, in the circumstances, quite simply incomprehensible.
Counsel for the panel, on the other hand, relied first and foremost on the fact that Guinness had been in possession of the Pipetec letter, which was the crucial piece of evidence against them (if so it can be called) since January. He submitted that Bank Leu’s written statement added nothing of substance to the Pipetec letter other than to make clear where Bank Leu stood. It showed in effect that the executive had been deceived by Bank Leu when it was making its inquiries in April 1986. Secondly, counsel submitted that, even if the panel had granted a short adjournment for a matter of weeks or days, there was not anything much Guinness could usefully have done. They never said why wanted a short adjournment. The panel was presented with nothing but a naked request.
I would unhesitatingly reject counsel’s second argument. In R v Thames Magistrates’ Court, ex p Polemis [1974] 2 All ER 1219, [1974] 1 WLR 1371 the master of a Greek vessel was served with a summons alleging a breach of the Prevention of Oil Pollution Act 1971. The summons was returnable at 2.00 pm that same day. The solicitors appearing for the master applied for an adjournment. But an adjournment was refused, no doubt because the vessel was due to sail at 9.00 pmthat night. The hearing took place at 4.00 pm. The master was convicted. The Divisional Court quashed the conviction on the ground that the master had not had a reasonable opportunity of preparing his case. There had been a breach of natural justice. One of the arguments put forward in support of the conviction was that an adjournment would have served no purpose. There was no useful evidence which the master could have obtained. The result would have been the same. Lord Widgery CJ said ([1974] 2 All ER 1219 at 1223, [1974] 1 WLR 1371 at 1375)
‘I reject that submission. It is again absolutely basic to our system that justice must not only be done but must manifestly be seen to be done. If justice was so clearly not seen to be done, as on the afternoon in question here, it seems to me that it is no answer to the applicant to say, “Well, even if the case had been properly conducted, the result would have been the same“. That is mixing up doing justice with seeing that justice is done, so I reject that argument.’
It was said that the principles on which Ex p Polemis was decided do not apply, or do not apply with the same force, to the sort of investigation being carried out by the panel. I do not agree. I do not find it helpful to draw any distinction, for present purposes, between the panel’s disciplinary function and its investigatory function, or to characterise the proceedings as adversarial or inquisitorial. The bare facts of the matter are that the inquiry was being held some 16 months after completion of the take-over. The result of the inquiry may yet be that Guinness will have to compensate former Distillers shareholders with a sum which may be as much as £200m. These facts speak for themselves. Whatever the nature of the inquiry, and however unlikely it be that Guinness could have made good use of a short adjournment, by obtaining evidence or otherwise, the law requires, as it required of the magistrates in Ex p Polemis, that Guinness should be given a chance.
So I would reject counsel’s second argument on the short adjournment point. There is, I think, much more to be said for his first argument that Guinness had already had time enough, since they had been in possession of the Pipetec letter since January (without disclosing the existence of that letter to the panel), and had known the substance of the case against them since June.
What then would I have done if I had myself been in the position of the panel on 2 September and had to make up my own mind as to the limited adjournment point? I am fairly certain that I would have granted a short adjournment. For I can see hardly any reason for not granting a short adjournment, unless it be the convenience of the panel, by which I have in mind the difficulty of reconvening at short notice. Obviously this should not have weighed heavily against an adjournment, any more than did the imminent
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departure of the vessel in Ex p Polemis. One need not quote the well-known dictum of Lord Atkin in General Medical Council v Spackman [1943] 2 All ER 337 at 341, [1943] AC 627 at 638 that ‘convenience and justice are often not on speaking terms’.
But the question is not what I would have done if I had been a member of the panel, but whether the panel’s refusal of a short adjournment was fair. After much hesitation I have come to the conclusion that it was. Wise it was not, but fair it was, having regard to what Guinness already knew of the case against them. So, if the limited adjournment point had stood alone, I should have decided it in favour of the panel. However, even if I had been against the panel on the limited adjournment point, I should not have been in favour of quashing the panel’s decision without considering the wider context. As I said earlier, it is the panel’s conduct of the inquiry as a whole which is called in question. The limited adjournment point and the general adjournment point are interrelated, so much so that they cannot, or at any rate should not, be considered in isolation. It is to the general adjournment point, therefore, that I now turn.
The essence of the argument of counsel for Guinness, as I have already foreshadowed, is that the panel ought to have waited until after the DTI inspectors had completed taking evidence. This had been the panel’s original intention, as appears clearly from the press release dated 30 January 1987:
‘Normally, following its own investigation in any Code case in order to determine what had happened, and, if breaches of the Code had occurred, who was at fault and what should be done, the Panel would promptly set out its findings and decisions in detail in a public statement. In the present situation, however, because Inspectors have been appointed, and legal consequences may flow from their work, the Panel must await the outcome of the Inspectors’ enquiries before publishing any findings or judgments of its own.’
Nothing, according to counsel, had happened, or nothing that we know of had happened, to make the panel change its mind save that it came into possession of the Pipetec letter from the DTI. It was said on behalf of the panel that by May 1987 there was no immediate prospect of the DTI inspectors publishing their findings. But I should be surprised if the panel had thought there was any such immediate prospect in January 1987.
We do not know the reason for the panel’s original view that it should wait until the DTI inspectors had reported, or, save as appears from its reasons, why it continues to think that disciplinary proceedings should be postponed. Guinness’s reasons for seeking an adjournment, as expounded by counsel can be summarised as follows.
(i) By August 1987 the Guinness directors who were most closely concerned at the time of the bid were no longer in office. The new board was gravely handicapped. They had no real alternative but to look to others to find out what had happened, not only on the Guinness side of the disputed transaction, but still more on the Bank Leu side.
(ii) Whatever powers of persuasion the panel may have, it has no power to compel the attendance of witnesses. The DTI inspectors have such powers and have already examined under oath a number of Bank Leu witnesses. Other witnesses are still to be seen, including Mr Ward, one of Guinness’s directors, though this must remain highly unlikely. At the conclusion of their investigation the DTI inspectors would be able to review the case as a whole, not just one isolated aspect. It must therefore make sense to wait at least until the inspectors have completed taking evidence, in case any further evidence might throw light on the concert party issue, and even perhaps contradict the panel’s conclusion.
(iii) The crucial piece of ‘evidence’ against Guinness at the hearing on 25 August was the Pipetec letter. The panel must have had at least some doubt about the genuineness of that letter, in view of what the executive had been told by two Bank Leu executives, Dr Frey and Mr Baumann, in April 1986. The original of the letter has never been produced. Yet the panel decided to go ahead with the hearing on 2 September, although it knew
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that Dr Frey would not be available to give evidence on that day and had no reason to suppose that Mr Baumann, Dr Fürer or Dr Burger, who signed the letter on behalf of Bank Leu, would be available. By 2 September it had Allen & Overy’s letter of 27 August, including Bank Leu’s written statement. The statement confirms the arrangement agreed between Dr Frey and Mr Ward as set out in the Pipetec letter. But it leaves many relevant questions unanswered.
(iv) The consequences of deciding against Guinness at a hearing on 2 September on the strength of the Pipetec letter, the Bank Leu statement and such other evidence as the panel may have had would be very serious indeed. By contrast, the consequences of adjourning the hearing would be that former Distillers shareholders would have to wait a little longer to receive the cash they would have received if the bid had gone through and they had exercised the cash option. Guinness had undertaken to pay interest at a full commercial rate to all those who might ultimately be held entitled to compensation. More than 16 months had already elapsed. ‘Why now,’ in the words of Allen & Overy, ‘the sudden urgency?’
The above arguments were all available to Guinness at the hearings on 25 August and 2 September. But since 2 September the attendance notes and correspondence passing between the executive and Mrs S E Brown of the DTI and also between the executive and those representing other potential witnesses, including in particular Allen & Overy representing Bank Leu, have been made available to Guinness on discovery. These documents have enabled counsel for Guinness to advance a further argument as follows. He submits that the steps taken by the executive in the course of its investigation and its attempts to obtain the attendance of crucial witnesses were wholly inadequate. By way of example, the executive seems to have accepted without question Mrs Brown’s assurance in a letter of 7 August that the Pipetec letter ‘would give the Panel the evidence it needs to make progress with its enquiries’ and that ‘none of the other evidence given to the Inspectors contradicts it’. We now know that there are transcripts of the evidence given to the DTI inspectors by the Bank Leu witnesses. Even if there was some difficulty in making these transcripts available to Guinness (a difficulty which, for my part, I do not fully understand), the transcripts should surely, says counsel, have been scrutinised by the executive, if not by the panel, in case they opened up some further line of inquiry.
Another example taken by counsel for Guinness comes from the executive’s first meeting with Allen & Overy on 11 August. Mr Hewat of Allen & Overy explained that Bank Leu were co-operating fully with the DTI and were also helping the Swiss Federal Banking Commission. He was not sure how Bank Leu would regard yet another inquiry. There then appears the following passage from the attendance note:
‘Hewat asked how to proceed on the matter as he saw it there were three alternatives. Allen & Overy could write a reply on behalf of their client, or Allen & Overy and Bank Leu’s in-house lawyer could come for a meeting, or the relevant parties could come for a meeting in our offices. PRF [Peter R Frazer, the deputy director general of the panel] said we would be happy with any of those three approaches. On the timing of our request, ADP [A D Paul, secretary of the panel] said that we had investigated the purchase at the time and been given misleading information, we have been waiting for the DTI’s interim report which is taking longer than expected, and we now felt that we had sufficient information to put the question of a breach of the Code to the Panel. Hewat said that he would explain this timing then on the basis of those facts.’ (My emphasis.)
Surely, says counsel, it was the executive’s duty to press harder for the attendance of the relevant witnesses. It seems as if it was happy to rely on the contents of the Pipetec letter, backed by Mrs Brown’s hearsay evidence, without obtaining, or even apparently seeking, the oral evidence of those directly concerned. Counsel submits with force that, in the context of a major inquiry, with very serious consequences for Guinness and no obvious pressure of time, such a lax approach was not good enough. When one adds the
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further special feature that Guinness were handicapped in making their own inquiries, the result, says counsel, was patently unfair.
Counsel for Guinness had one final argument which I should mention. Rule 11.2 of the code makes clear that, in the event of a concert party being proved, the panel has a discretion whether or not to require Guinness to compensate former Distillers shareholders to the full extent. A consideration on which Guinness might wish to rely in mitigation (so to speak) would be that Mr Ward was engaged on a frolic of his own without the knowledge or consent of any of the Guinness directors. We were told that Mr Ward has indicated, in the course of very delicate negotiations with the current board of Guinness, that he sees no reason why Guinness should be liable to pay a penny piece. I attach no weight to that consideration. But I do attach weight to counsel’s argument that if Guinness are to be in a position to mitigate they must be given the material with which to do so. It is said on behalf of the panel that, if Guinness feel themselves in a difficulty at the hearing as to consequences, they could always apply for an adjournment at that stage. To that counsel for Guinness replies that, if the hearing as to consequences is going to have to be adjourned, what possible benefit could there be to the former Distillers shareholders in knowing in advance that they have, as it were, succeeded on liability? Counsel for the panel ripostes that they are entitled to know where they are, and sooner rather than later. But the same would be true of any plaintiff in any litigation.
I have mentioned in passing a number of counsel’s incidental arguments in support of the panel’s decision to go ahead on 2 September. But I have left it to the end to summarise his main submissions as follows.
(i) Guinness never asked the panel to adjourn until after the DTI inspectors had completed taking evidence. They asked for an adjournment until the publication of their report at the earliest. That might be years away.
(ii) The strength of the evidence available to the panel is a material factor in deciding whether to postpone the hearing. Here the evidence in support of a concert party was overwhelming.
(iii) The panel has a public duty to perform in determining whether there was a concert party and, if so, in ensuring that the former Distillers shareholders receive fair treatment in accordance with general principle 1 of the code. The concert party issue is an isolated issue which does not impinge on other issues being investigated by the DTI inspectors. It is in the public interest that the concert party issue should be determined as soon as possible. The offer of interest is never adequate compensation.
(iv) The panel is an important City watchdog. It depends for its success on public confidence. To decide that the panel had acted unfairly would undermine public confidence in the panel and jeopardise its authority among City institutions.
In addition, counsel for the panel relied on the matters set out by the panel itself in paras 19 and 20 of its reasons, which largely overlap his own submissions.
As to the first of counsel’s arguments, I accept that Guinness were asking for a longer adjournment than they now regard as a minimum. But they made it clear why they were asking for an adjournment. They wanted the evidence of the relevant witnesses to be available to the panel, and preferably the witnesses themselves available for cross-examination. It must have been obvious to the panel that for this purpose they would not necessarily have to wait until after publication of the DTI inspectors’ report.
As for the second of the arguments, counsel for Guinness relied on the salutary warning of Megarry J in John v Rees [1969] 2 All ER 274 at 309, [1970] Ch 345 at 402, echoed by Ackner LJ in R v Secretary of State for the Environment, ex p Brent London BC [1983] 3 All ER 321 at 357, [1982] QB 593 at 646:
‘As everybody who has anything to do with the law well knows, the path of the law is strewn with examples of open and shut cases which, somehow, were not; of unanswerable charges which, in the event, were completely answered; of inexplicable conduct which was fully explained; of fixed and unalterable determinations that, by discussion, suffered a change.’
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Nevertheless there remains much force in the second argument of counsel for the panel, as in his third.
As for the reasons given by the panel itself, counsel for Guinness identified six reasons in all. (i) The panel was not concerned with the taking of disciplinary action, but with ensuring fair treatment for former Distillers shareholders. (ii) If there was a concert party, this should have been disclosed by Guinness in April 1986. (iii) If Guinness had disclosed the provision of £76m as temporary cover in April 1986, it would have led to immediate further investigation by the executive. (iv) Former Distillers shareholders would be prejudiced by any further delay. (v) The concert party issue was a separate issue which could conveniently be considered by the panel in isolation. (vi) Guinness had not attempted to offer any explanation of the Pipetec letter.
Counsel subjected these reasons to detailed criticism. He argued that there is no logical distinction between disciplinary proceedings and other proceedings. They both have, or may have, serious consequences. Nor can one justify hurrying the investigation in September 1987 just because the panel would have had to act in a hurry in April 1986. Guinness are not to be punished for having failed to disclose the concert party in 1986 by depriving them of a proper opportunity of presenting their case 18 months later. Two blacks do not make a white. As for the argument that the concert party issue is an isolated issue, it would have been a strong reason for postponing the inquiry if it had not been an isolated issue. But the converse does not follow. The fact, if it be the fact, that the concert party issue is an isolated issue affords no positive reasons for treating it in advance of all other issues. According to counsel, only one of the reasons given by the panel for refusing an adjournment can withstand scrutiny, and that is the fourth; but any prejudice to the shareholders is, he says, far outweighed by the prejudice to Guinness.
Those were the arguments advanced before us. Like Watkins LJ in the Divisional Court, I have found my mind going one way and the other. At one stage of the hearing I was all but persuaded that to press ahead on 2 September was unfair to Guinness. Just as on the limited adjournment point I could see no good reason for not granting a short adjournment, so on the general adjournment point I could see no good reason for not waiting until the DTI inspectors had completed the taking of evidence. It could do little harm to the shareholders for the panel to explore the origins of the Pipetec letter in greater depth, whereas the converse could do great and perhaps irreparable harm to Guinness. We are constantly reminded that justice delayed is justice denied. This might, I thought, be a case where justice was denied by being rushed.
But in the end I have come to the conclusion that we ought not to intervene. Despite the very forceful arguments of counsel for Guinness, he has failed in the end to satisfy me that there has been any real injustice, or even any real risk of injustice, in this case. My reasons are, first, that Guinness have been in possession of the crucial piece of evidence against them, namely the Pipetec letter, since January 1987; and have known the broad lines of the case they would have to meet since June 1987. Second, the combination of the Pipetec letter and the Bank Leu statement adds up to a very strong case indeed. I bear in mind Megarry J’s warning in John v Rees [1969] 2 All ER 274 at 309, [1970] Ch 345 at 402. I accept that there may just possibly be some explanation for the Pipetec letter other than the apparent one. But the chances of such an explanation emerging if the panel were to wait until the DTI inspectors have completed taking evidence must be extremely remote. Third, there is the public interest in the panel getting on with, and being seen to get on with, its self-appointed task. I have applied the penetrating oil of natural justice to the facts before us. I conclude that the procedure adopted by the panel in the instant case was not unfair. Accordingly I would dismiss the appeal.
WOOLF LJ. I would also dismiss this appeal. I have, however, reservations as to the appropriateness of the actions of the Panel on Take-overs and Mergers and in these circumstances I feel I should set out my own reasons for coming to the same conclusion as the other members of the court.
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It is not necessary for me to repeat the facts, which are fully set out in the judgment of Lord Donaldson MR. I should however make it clear that I regard the unique qualities of the panel as being important in deciding what is the correct outcome of this appeal. I have in mind two particular features of the panel. The first is that its authority is not derived from any statutory power. Instead it derives its authority from the institutions in the City of London who give it their support and nominate its members. The second is that the scope of its activities are self-determined. Except in so far as the panel itself decides to limit its jurisdiction and to set out its functions, as it has in the City Code on Take-overs and Mergers, the constraints on its powers are those dictated not by legal but by practical considerations. The closest analogy to the panel is to be found in bodies set up by the Crown under its prerogative powers, such as the Criminal Injuries Compensation Board. Indeed, if it was appropriate to talk of the City of London having prerogative powers, then it could be said that the panel has been set up under just such powers.
These qualities of the panel create constraints as to the circumstances and as to the manner in which the courts can intervene which do not exist in the case of statutory bodies. For example, in this case with some justification, it is suggested that the panel, having deciding to adopt an inquisitorial role in conducting its investigations as to whether or not Guinness plc had contravened the code, could have pressed home those investigations more vigorously than it did. However, subject to what I have to say hereafter, the panel is under no duty to carry out its investigations in any particular way and it must be for the panel to decide to what extent it is appropriate for it having regard to its resources to engage in extensive investigations. Again in the case of a statutory body it is possible to identify considerations which it is under a statutory obligation to take into account or to ignore. Failure to comply with this statutory obligation can invalidate a decision. However, there is no equivalent obligation in the case of the panel.
The panel’s ability to carry on its activities without being subject to legal constraint or the intervention of the courts can however be limited by the nature of an activity which it undertakes. If in the private law sphere an individual, as a volunteer, undertakes to provide services which require professional standards of care, by undertaking those activities the individual becomes under an obligation, enforceable in law, to exercise the appropriate standard of care. So in the public law field, if the panel, without being under any enforceable duty to do so, engages on an activity which can have consequences to a third party, then the panel by so doing can impose on itself legally enforceable obligations of a similar nature to those to which it would be subject if it were carrying out that activity pursuant to a statutory duty. However, this does not mean the obligations are identical to those which would exist if it were under a statutory duty. In the normal case a body such as the panel will retain a very wide discretion how it performs the task it sets itself and the court will regard its role as being one of last resort reserved for plain and obvious cases.
In this case the function on which the panel embarked was to determine whether in the circumstances Guinness had contravened the terms of its own code. Having set itself this adjudicative objective, the panel placed itself under an obligation not to carry out this function in a manner which was inconsistent with that objective. If it reached a result which was unjust, this would be in breach of this obligation. In the words of its then own chief executive, the director general, Mr John Walker-Haworth, the object of the panel’s procedures is to produce the right answer in code terms in the circumstances. If it goes about this role in a manner which manifestly creates a real and not theoretical risk of injustice, then it would be abusing its power and, because it is performing a public function, on an application for judicial review the courts could intervene on behalf of the public to protect those liable to be adversely affected by the exercise of the power.
On the application for judicial review it is appropriate for the court to focus on the activities of the panel as a whole and ask with regard to those activities, in the words of Lord Donaldson MR, ‘whether something has gone wrong’ in nature and degree which
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requires the intervention of the courts. Nowadays it is more common to test decisions of the sort reached by the panel in this case by a standard of what is called ‘fairness’. I venture to suggest that in the present circumstances in answering the question which Lord Donaldson MR has posed it is more appropriate to use the term which has fallen from favour of ‘natural justice’. In particular in considering whether something has gone wrong the court is concerned whether what has happened has resulted in real injustice. If it has, then the court has to intervene, since the panel is not entitled to confer on itself the power to inflict injustice on those who operate in the market which it supervises.
On the facts of this appeal we are principally concerned with three decisions of the panel. They are: (1) the decision of 25 August 1987 to refuse an adjournment (the long-term adjournment decision); (2) the decision of 2 September 1987 not to adjourn (the short-term adjournment decision); and (3) the decision of the panel on 2 September 1987 to reach its decision that Guinness had acted in breach of the code on the material then before the panel and not to require further investigations to be carried out before it came to its determination (the inadequate investigation issue).
It is convenient to consider separately Guinness’s case on each of these decisions. However, the outcome of Guinness’s appeal does not necessarily depend on the result of that separate consideration, since, although intervention by the court may not be justified on an examination of any single decision, the intervention could be justified by the collective findings on the three decisions. Furthermore, the facts relating to one decision affect the other decisions. Thus the alleged inadequacy of the investigations carried out by the panel’s executive, if established, strengthens Guinness’s case for the grant of a short- or long-term adjournment. It is because they form the background against which the adjournment decisions are to be judged that I propose to consider first of all the adequacy of the investigations carried out on behalf of the panel by its executive. In doing so, I do not propose to make any separate examination of the extent to which the panel was aware of the limited nature of investigations carried out by its executive, since on the general approach indicated above it seems to me that whether the default was that of the executive or the panel would not affect the outcome of this appeal.
The inadequate investigation issue
It is not disputed that when the panel decided to inquire into whether Guinness had contravened r 11.1 of the code it was required to conduct that investigation properly. This involved the panel taking reasonable steps to inform itself of the material facts. Like the Secretary of State for Education and Science in Secretary of State for Education and Science v Thameside Metropolitan Borough [1976] 3 All ER 665 at 696, [1977] AC 1014 at 1065 in Lord Diplock’s words the panel had to ‘take reasonable steps to acquaint [itself] with the relevant information to enable [it] to answer [the question] correctly’. As long as the party affected by its decision was given a reasonable opportunity to put forward any facts it wished, normally it will be very much a matter for the judgment of the panel and its executive as to what steps it should take. However, in this case the panel should have had in mind the fact that Guinness were labouring under a considerable disadvantage in making any representations. The persons who were directors of Guinness at the material time were now in dispute with Guinness. In particular Mr Ward, who was abroad, would certainly not at that time co-operate with Guinness. In addition, Bank Leu AG was in dispute with Guinness, so that information was not likely to be forthcoming to Guinness from the bank or its officers who were involved in the critical transaction of 17 April 1986, namely Dr Burger, Mr Frey and Mr Baumann, all of whom Guinness would have liked the opportunity to cross-examine. Furthermore, when on 13 May 1987 the panel became a designated body under the Financial Services (Disclosure of Information) (Designated Authorities No 2) Order 1987, SI 1987/859, the panel was entitled to seek information from a most important source which was not available to Guinness.
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In these circumstances it was desirable that the panel should conduct a full investigation within the limits of its resources. In carrying out that investigation, unlike the situation on a normal investigation, the panel was not under any pressing constraints as to time. Because of the delay which had already occurred, any reasonable period of extra time which the panel needed to complete its inquiries would not materially affect the Distillers shareholders, whose interests the panel was most anxious to protect.
Having carefully considered the documents which are now available but which were not available to Guinness until discovery in these proceedings, it is my impression that, whether or not there was any legal obligation to do so, it would have been preferable for the panel to carry out fuller inquiries than it did. Its failure to do so is probably explained by a natural tendency to conduct this investigation in the same way as investigations are normally conducted in the heat of a take-over battle, the fact that the date for the hearing had been provisionally arranged for 2 September and the fact that the executive regarded itself as already in possession of evidence which indicated a virtually irrefutable case against Guinness.
Having expressed my impression as to the adequacy of the investigation, I turn to consider the three sources of possible information which Guinness complain were inadequately investigated.
(1) Mr Ward Although the panel was content to accept a statement made by Mr Ward’s solicitors that he would not attend a meeting on 2 September and did not inquire whether Mr Ward would be prepared to make himself available on a later date, I have no doubt that it was reasonable for the executive not to have pursued investigations further in relation to Mr Ward. It was most unlikely that he would be prepared to co-operate and the panel was not in a position to compel him to do so.
(2) The Bank Leu witnesses The bank has co-operated with the Department of Trade and Industry inspectors. The bank has a branch in this country and, bearing in mind that it is being investigated by the Swiss authorities with regard to its role, the bank is likely to be anxious to appear to be co-operating with the panel. At the same time its undisputed role in relation to the critical purchase of shares meant that the bank and its officers were going to be very cautious about being forthcoming as to precisely what happened. In this respect the timescale which the panel’s executive had set for its investigations put the bank in the ideal position to confine what it was prepared to say to no more than was necessary so as not to be labelled as being unco-operative. As in the case of Mr Ward, the first approach was made on 4 August 1987. On 6 August there was a prompt response by Mr Hewat of Messrs Allen & Overy, the bank’s solicitors, during which he indicated that ‘the client was … not available for a meeting’. It is not clear from this statement whether or not Mr Hewat was saying that it was because his clients were abroad that they were not available or that he was indicating they would not attend the meeting. He himself, however, attended a meeting on 11 August with the executive when he indicated that his clients had co-operated fully to date with the Department of Trade and Industry (the DTI) and with the Swiss Federal Banking Commission, but that he was not sure ‘what his client’s stance would be on our enquiry. Similarly in response to our request for help, he could not answer for his client’s reaction’. He went on to point out that a ‘key individual (Mr Frey) was training with the Swiss Army at the moment’. Mr Hewat also indicated three alternative courses which were open to his client, one of which was to provide a reply by the letter from Allen & Overy, the second of which was for there to be a meeting with the panel by the bank’s in-house lawyer and Allen & Overy, and the third of which was a meeting at the panel’s offices with the ‘relevant parties’. Complaint is made by counsel for Guinness about the response of the executive, which was that they ‘would be happy with any of those three approaches’. However, it is right to note that later at the meeting Mr Hewat was told that it was expected ‘that the meeting would follow the usual procedures and that relevant parties would be invited to submit papers in advance of the meeting and to attend the hearing on the 2 September’.
What then happened was that the executive were informed that the bank would ‘put
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in’ a written statement, and, no objection having been raised to that course, Allen & Overy delivered on 27 August 1987 a letter which contains the statement from the bank as to the Pipetec transaction and a protest that the bank had been subject to such a stringent timetable.
As counsel for Guinness fairly submits, this letter of 27 August bears the hallmark of being carefully ‘negotiated’. It does not answer a number of questions which Guinness would like explaining, in particular why no fee was in fact paid to the bank, why the shares were not required to be repurchased and why there was delay in seeking to enforce the obligations contained in the letter of 18 April 1986.
If there had been more time prior to the hearing on 2 September, it would have at least been open to the executive to have raised further inquiries with the bank through its solicitors by letter. It would also have been possible to clarify the position with regard to the bank’s officers being prepared to attend a hearing at a later date. However, the executive was content to rest on the contents of the letter of 27 August 1987. The nearest the executive went to objecting to the bank’s limited contribution was to suggest at one stage that the bank’s solicitors might not be entitled to attend the hearing if the bank’s contribution was confined to a response by letter.
The Department of Trade and Industry inspectors
The DTI made available to the panel the critical letter of 18 April 1986. Through Mrs Brown it also confirmed that it had no information which was inconsistent with the contents of that letter. Counsel for Guinness submits that in not seeking further information the executive showed to a remarkable degree ‘a lack of curiosity’ which could not be supplemented by anyone else’s activity: ‘The executive were in a unique position to extract information and failed to do so.’
While I accept counsel’s approach, I recognise that it is extremely unlikely that any other information would have been made available to the executive which would have had any direct bearing on the actual issue which was decided by the panel on 2 September. Obviously Guinness would like to have seen any statements of witnesses which threw light on the context in which the Pipetec letter came into existence or the details of the transactions as a result of which the critical shareholding was purchased. However, because of the DTI’s concern with the criminal proceedings, it is unlikely that anything material would have resulted from further approaches to the department and the panel was aware that the DTI inspectors did not have information which conflicted with the contents of the Pipetec letter.
Considering the executive’s information-gathering process as a whole, I do not regard its failure to press home its inquiries more forcefully as a justification for the court intervening in these proceedings. As counsel for the panel pointed out, with regard to the securing of the attendance of witnesses, at the hearing on 25 August 1987, Guinness themselves accepted that, even if the witnesses agreed to come before the panel, they would not agree to be cross-examined by Guinness, and that ‘their consistent posture had been to hide behind lawyers’. This was a realistic assessment of the position and in practice I have little doubt that without cross-examination nothing further would have been revealed which was even of interest to Guinness, never mind directly relevant to the sole issue which the panel had set itself to determine.
In the course of argument the question arose as to the extent to which the panel should have taken advantage of its ability to bring pressure to bear on anyone operating in the City of London to co-operate. That it has such power I have little doubt. However, it must be for the panel and the panel alone to decide whether, and if so how, it should use such a power.
My conclusion under this head is therefore that, while the panel by the executive could have been more energetic, this did not affect the outcome and the court would not be justified in intervening on this ground.
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The short adjournment decision
I regret that the panel did not feel able to accede to the submission that the hearing should be adjourned for a few weeks. Such an adjournment could not possibly have caused prejudice to anyone, but it would clearly have caused inconvenience to the panel and difficulty in finding another date when the panel could reassemble. However, it should have been recognised that this administrative inconvenience was at least contributed to by the failure of the executive to realise the problems which would be caused to those involved in preparing for a hearing by the holiday period during the preceding month. Although counsel for the panel eloquently sought to establish the limited nature of the new material contained in the final submissions of the executive as compared with its earlier submissions, the fact remains that the letter of 27 August from Allen & Overy setting out the bank’s position did materially strengthen the case against Guinness, albeit this did not involve any change of stance on the part of the bank.
However, while making this criticism of the panel’s decision, I wholly agree with the view expressed by Watkins LJ in the Divisional Court that this amounted to no more than inconsideration on the part of the panel. Events since 2 September have clearly shown, as the panel was entitled to assume would be the position, that a limited period adjournment would not have enabled additional material to have been obtained by Guinness: it would merely have provided an opportunity to Guinness to reflect on the manner in which they would present their case, and could not in any way have affected the final outcome.
The long adjournment
The argument on this aspect of the case has been advanced marginally differently at different stages. The original position of Guinness was that the adjournment should be until the DTI inspectors’ report was available. This in practice could mean until after the criminal proceedings were concluded. The alternative way in which the argument was advanced was that the adjournment should be until the inspectors had completed their investigations and presumably had made available to the panel the results of those investigations so far as they affected the issue before the panel. Both arguments, if accepted, would involve a substantial delay. In considering whether the panel was required to delay its investigations to this extent, it is important to first of all identify the precise issue which the panel in fact determined on 2 September. I draw attention to this because I recognise that the position could be different with regard to a decision as to what should be the consequences of a determination by the panel that there had been a breach of the code.
The underlying reason why Guinness were anxious that the panel should adjourn, at least until the DTI inspectors had heard evidence from all the witnesses, was because Guinness knew that the only prospect of avoiding an adverse decision, the relevant witnesses not being available for cross-examination, was if evidence was obtained from the inspectors which indicated that the letter of 18 April was manufactured by the bank, or Pipetec, with the connivance of Mr Ward and did not reflect a genuine transaction between the bank and/or Pipetec and Guinness. Guinness had reason to be suspicious of the alleged agreement reflected in the letter and the DTI inspectors, through their powers, might be the means by which they could obtain confirmation of their suspicions. Their concern about the panel’s refusal to allow the adjournment is underlined by the criticisms to which I have already referred which they are now in a position to make with regard to the investigations carried out by the executive. Guinness also submit that the attitude adopted by the panel is inconsistent because it had agreed to adjourn disciplinary proceedings for the required period and there is no real distinction between proceedings for breach of the code and disciplinary proceedings, bearing in mind that the consequences of the adverse finding by the panel is that Guinness could be required to make compensatory payments of many millions of pounds.
The panel, on the other hand, submits that, notwithstanding the offer of Guinness to
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pay interest, the delay would prejudice the shareholders in Distillers. I do not dismiss this suggestion of prejudice, but, bearing in mind the offer of interest, I do not myself regard the degree of prejudice as a matter of very great substance. I do, however, accept that lengthy delay in determining an issue as important as whether or not Guinness had contravened the code is undesirable. The panel was clearly not in a position to act until it had been provided with a copy of the 18 April 1986 letter. However, once it was in receipt of that letter, I can well understand why the panel regarded it as its duty to proceed if this was practical. The significance of a decision whether or not Guinness were in breach of the code was not confined to the former Distillers shareholders. It was also important to Guinness’s shareholders and the reputation and standing of the panel in the City. I accept, therefore, that the panel was not required as a matter of law to adjourn for what could be a very substantial period of time unless there was some real advantage to be achieved by doing so or a real risk that justice could not be done without doing so.
The test which the panel posed for itself in deciding whether to adjourn the hearing was to ask itself whether ‘there was any substantial risk of injustice to Guinness’ in not doing so. If, as I assume is the case, by using the word ‘substantial’, the panel meant no more than that there was a real as opposed to a fanciful risk of injustice, then this is a perfectly appropriate test to apply. Furthermore, I cannot fault the conclusion of the panel that there was no such risk. This is emphasised by the panel pointing out in the reasons given for its decision that, if in the course of the hearing on 2 September it should appear that there was any such risk, the panel would reconsider the position.
Although counsel for Guinness was able to canvass a possible motive for the letter of 18 April 1986 being manufactured, it is impossible to escape from the conclusion that the case for concluding that there was a breach of the code was overwhelming. While I regard it as legitimate to contemplate that, in consequence of the DTI inspectors’ greater powers, more information could be revealed about the circumstances in which the agreement, which is reflected in the letter of 18 April 1986, was made, I do not accept that there was any realistic likelihood of anything being disclosed which would have avoided a finding of a breach of the code. If previously there had been any doubt on this subject, it was removed by Bank Leu’s statement contained in the letter of Allen & Overy dated 27 August 1987. While, as Guinness submitted, that letter involved simply a repetition by Bank Leu of an assertion previously made, the fact that the bank was prepared to repeat its admission of involvement to the panel in the terms contained in the statement in that letter is highly significant.
I would, however, again emphasise that the views that I have expressed are confined to the determination of the question of whether there was a breach of the code. It now appears that the determination of the consequences of that finding of breach may be complex and involve wider considerations than was thought previously, and the panel may well have to give anxious consideration whether it would be right to proceed to determine this issue before the DTI inspectors’ investigations are completed.
However, I do not fault the decision of the panel on the present issue. Before leaving the issue I should make reference to R v Thames Magistrates’ Court, ex p Polemis [1974] 2 All ER 1219, [1974] 1 WLR 1371, which relied on by counsel for Guinness. In his judgment in that case Lord Widgery CJ emphasised the importance that not only should justice be done, but it should also appear to be done (see [1974] 2 All ER 1219 at 1223, [1974] 1 WLR 1371 at 1375). Both justice and the appearance of justice are important in considering whether or not an adjournment can be properly refused. While the approach adopted by Lord Widgery CJ in that case is important and one of general application, it must be remembered that it related to the trial of a defendant on a criminal charge and not to an inquiry of the type on which the panel was engaged. This principle is particularly important where, as sometimes happens in a case involving bias, the applicant cannot discharge the onus of proving actual bias but can establish the appearance of bias. I do not consider that Lord Widgery CJ’s remarks should be treated as indicating that if on a proper examination of the facts of a decision of this sort it appears that no
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injustice has in fact been done then on an application for judicial review, for technical reasons, notwithstanding that the relief is discretionary, the decision of the panel would have invariably to be quashed because of some appearance of injustice when a person aware of all the relevant facts would accept there was no actual injustice. To invariably quash a decision of the panel in such circumstances would be inconsistent with the use of the proviso in a criminal appeal and could result in injustice to the panel without remedying any legitimate complaint of Guinness. It could also be in conflict with the principle that the requirements of natural justice are not technical but requirements relating to the substance and not the form of the proceedings.
It remains for me to consider whether, looking at the cumulative effect of the argument so ably advanced by counsel for Guinness, I consider this is a case in which the court is required to intervene, adopting the approach which I identified at the beginning of this judgment. The conclusion which I have come to, while in agreement with Lloyd LJ that many of the criticisms counsel makes of the panel’s conduct are well founded, is that the intervention would not be justified because no injustice has been caused and what was wrong was not of the nature or gravity which required the intervention of the court. The decisions were after all in the field of activities which the panel’s combined experience and expertise make it peculiarly well qualified to determine and in this field as a matter of substance and discretion the court should only interfere to avoid injustice. Although I have come to this conclusion, I acknowledge, as I did earlier, that the appeal none the less has caused me concern. I trust with hindsight the panel will understand the reasons for this concern and that this will enable the panel to avoid situations arising in the future where a body, the subject of its decision, can feel a genuine sense of grievance because of the way in which an inquiry has been conducted. In making this last comment I do, however, stress that I do not intend to deter the panel from acting with all due expedition where this is required. Here the situation was different from normal and this case gave the panel scope to be more accommodating in the interests of Guinness than would usually be possible. In these circumstances to rush the investigation so as to obtain an early hearing while not unlawful was insensitive.
Having come to this conclusion, it is not necessary for me to deal with the argument that Guinness should in any event be deprived of relief because of their failure to resort to the appeal procedures which were available. I do however conclude by pointing out that while normally it is preferable for an appeal procedure to be exhausted prior to application for judicial review, particularly where there is an appeal procedure prescribed by statute, there are always cases where this approach has no application, as was indicated as long ago as 1974 in R v Hillingdon London Borough, ex p Royco Homes Ltd [1974] 2 All ER 643, [1974] QB 720.
For the reasons given in the judgment of Lord Donaldson MR as well as in this judgment I would dismiss this appeal.
Appeal dismissed. Leave to appeal to the House of Lords refused.
7 November. The Appeal Committee of the House of Lords (Lord Keith of Kinkel, Lord Templeman and Lord Goff of Chievely) refused leave to appeal).
Solicitors: Herbert Smith (for Guinness); Lovell White Durrant (for the panel).
Frances Rustin Barrister.
Bank of Boston Connecticut v European Grain and Shipping Ltd;
The Dominique
[1989] 1 All ER 545
Categories: SHIPPING
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD OLIVER OF AYLMERTON, LORD GOFF OF CHIEVELEY AND LORD JAUNCEY OF TULLICHETTLE
Hearing Date(s): 8, 9, 10, 14, 15, 16 NOVEMBER 1988, 9 FEBRUARY 1989
Shipping – Freight – Claim for freight – Set-off – Shipowner’s failure to complete contract – Failure to complete voyage – Damages for shipowner’s repudiation – Voyage charterparty providing for payment of lump sum freight within five days of signing bills of lading – Freight assigned to bank – Vessel arrested and impounded during voyage because of owner’s insolvency – Bank claiming payment of freight – Whether owner’s right to freight accruing before termination of charterparty – Whether charterers entitled to set off claim for damages for owner’s wrongful repudiation against claim for freight – Whether charterers entitled to maintain set-off against bank claiming as assignees – Law of Property Act 1925, s 136(1).
The owners chartered a vessel to the charterers on the Gencon form for a voyage from India to European ports at a lump sum freight. The vessel’s earnings, including all freight, were assigned absolutely to a bank. Clause 16 of the charterparty provided that freight was to be pre-paid within five days of signing and surrender of final bills of lading and that full freight would be deemed to be earned on the signing of the bills. Bills of lading were signed before the vessel sailed for Europe via Colombo. When the vessel arrived at Colombo it was arrested by creditors, and, because of the owners’ insolvency, it remained impounded. The charterers, as they were entitled to do, elected to treat the owners’ conduct as a repudiation of the charterparty and arranged for the cargo to be discharged and shipped on in another vessel to the European ports of destination, thereby incurring costs which exceeded the amount of the advance freight payable under the charterparty. A claim by the bank for the advance freight and the charterers’ cross-claim for damages for the owners’ repudiation of the charterparty were referred to arbitration. The arbitrators held that the charterers’ claim for damages for wrongful repudiation could be set off against the bank’s claim for freight and dismissed the bank’s claim because the charterers’ claim exceeded the amount of the freight. On appeal, the judge set aside the award, on the grounds that the owners were entitled to recover the freight regardless of their repudiation and that the charterers’ cross-claim did not provide a defence to, or set-off against, the claim for freight. The charterers appealed to the Court of Appeal, which allowed their appeal and restored the arbitrators’ award, on the grounds that the owners, and the bank as assignees, could not recover the freight in full without regard to the damage caused by the owners’ own wrongful repudiation of the charterparty. The bank appealed to the House of Lords, contending that the charterers would not have been entitled to set off their claim for damages as a defence to a claim by the owners for freight and were not entitled to such a set-off as against the bank claiming as assignees. The charterers contended that the charterparty had been terminated by the repudiation before the owners’ right to advance freight accrued and that even if they could not set off their claim for damages as a defence to a claim by the owners for freight they were entitled to such a set-off as against the bank claiming as assignees, since under s 136(1)a of the Law of Property Act 1925 the assignment of freight, although conferring the legal right to the freight on the bank, was ‘subject to equities having priority over the right of assignee’ and the charterers’ claim for damages constituted such an equity.
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Held – (1) On the true construction of cl 16 of the charterparty the owners’ right to freight accrued on completion of the signing of all the bills of lading, which took place before the termination of the charterparty, and the postponement of payment until after the termination of the charterparty did not render the owners’ prior acquisition of the right to the freight conditional, since the postponement of payment was an incident attaching to the right acquired and was not a condition of its acquisition. It followed that the owners’ right to the freight had been unconditionally acquired before termination of the charterparty and was not divested or discharged by the termination (see p 547 f g, p 549 d to g, p 550 a to c and p 559 d e, post); dictum of Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476–477 applied.
(2) The principle that there was no right to set off a claim for damages for breach of a charterparty against a claim for freight applied to both a repudiatory and a non-repudiatory breach of the charterparty. Accordingly, as between the owners and the charterers, a defence by way of equitable set-off in respect of the damage suffered by the charterers as a result of the owners’ repudiatory breach of the charterparty would not have been available to the charterers in a claim by the owners for freight. Furthermore, the charterers were not entitled to rely on their counterclaim as a defence between them and the bank because the fact that such counterclaim constituted an equity to which the assignment of the freight was made subject under s 136(1) of the 1925 Act did not avail the charterers, since the obligations giving rise to the counterclaim arose out of the same contract under which the freight was payable. It followed that the bank could recover the freight in full without regard to the damage caused by the owners’ wrongful repudiation of the charterparty. The bank’s appeal would therefore be allowed (see p 547 f g, p 556 a to c, p 557 j to p 558 a and p 559 b to e, post); Newfoundland Government v Newfoundland Rly Co (1888) 13 App Cas 199 and Aries Tanker Corp v Total Transport Ltd [1977] 1 All ER 398 considered.
Decision of the Court of Appeal sub nom Colonial Bank v European Grain and Shipping Ltd, The Dominique [1988] 3 All ER 233 reversed.
Notes
For the effect of an assignment of freight, see 43 Halsbury’s Laws (4th edn) paras 720–721, and for cases on the subject, see 43 Digest (Reissue) 456–457, 9997–10013.
For the Law of Property Act 1925, s 136, see 37 Halsbury’s Statutes (4th edn) 257.
Cases referred to in opinions
Allison v Bristol Marine Insurance Co Ltd (1876) 1 App Cas 209, [1874–80] All ER Rep 781, HL.
Aries Tanker Corp v Total Transport Ltd, The Aries [1977] 1 All ER 398, [1977] 1 WLR 185, HL; affg [1976] 2 Lloyd’s Rep 256, CA.
A/S Gunnstein & Co K/S v Jensen Krebs and Nielson, The Alfa Nord [1977] 2 Lloyd’s Rep 434, CA.
Beasley v D’Arcy (1800) 2 Sch & Lef 403.
Best v Hill (1872) LR 8 CP 10.
Cleobulos Shipping Co Ltd v Intertanker Ltd, The Cleon [1983] 1 Lloyd’s Rep 586, CA.
Elena Shipping Ltd v Aidenfield Ltd, The Elena [1986] 1 Lloyd’s Rep 425.
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] 2 All ER 122, [1943] AC 32, HL.
Hanak v Green [1958] 2 All ER 141, [1958] 2 QB 9, [1958] 2 WLR 755, CA.
Henriksens Rederi A/S v PH Z Rolimpex, The Brede [1973] 3 All ER 589, [1974] QB 233, [1973] 3 WLR 556, CA.
Johnson v Agnew [1979] 1 All ER 883, [1980] AC 367, [1979] 2 WLR 487, HL.
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, Aust HC.
Mondel v Steel (1841) 8 M & W 8588, [1835–42] All ER Rep 511, 151 ER 1288.
Newfoundland Government v Newfoundland Rly Co (1888) 13 App Cas 199, PC.
Page 547 of [1989] 1 All ER 545
Piggott v Williams (1821) 6 Madd 95, 56 ER 1027.
Rawson v Samuel (1839) 1 Cr & Ph 161, 41 ER 451.
Smith v Parkes (1852) 16 Beav 115, 51 ER 720.
Stumore v Campbell & Co [1892] 1 QB 314, [1891–4] All ER Rep 785, CA.
Turnbull v Great Eastern and Peninsular Navigation Co (1885) Cab & El 595.
Vagres Cia Maritime SA v Nissho-Iwai American Corp, The Karin Vatis [1988] 2 Lloyd’s Rep 330, CA.
Appeal
The Bank of Boston Connecticut (formerly Colonial Bank) of Connecticut, USA (the bank) appealed with the leave of the Appeal Committee of the House of Lords given on 13 June 1988 against the order of the Court of Appeal (Fox, Croom-Johnson and Mustill LJJ) ([1988] 3 All ER 233, [1988] 3 WLR 60) dated 21 December 1987, as amended on 14 January and 11 April 1988, allowing an appeal by European Grain and Shipping Ltd (the charterers) from the order of Hobhouse J ([1987] 1 Lloyd’s Rep 239) dated 24 October 1986 made on the hearing of an appeal by the bank against an arbitration award dated 12 February 1986 made by the arbitrators Clifford Clark, Alex Kazantzis and Andrew Longmore QC, whereby the judge held, inter alia, (i) that under cl 16 of a charterparty on the Gencon form dated 16 June 1982, by which Vilamoura Maritime Inc, the owners of the vessel Dominique, let her to the charterers at a lump sum freight of $US 223,676 for a voyage from India to European ports, the charterers were liable to pay the bank, as assignee of the earnings of the vessel, the full amount of freight due notwithstanding the owners’ wrongful repudiation of the charter and (ii) that the charterers were not entitled to set off a cross-claim for damages for wrongful repudiation of the charter against the bank’s claim to freight. The facts are set out in the opinion of Lord Brandon.
Bernard Eder and Steven Berry for the bank.
Martin Moore-Bick QC and Timothy Young for the charterers.
Their Lordships took time for consideration.
9 February 1989. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Brandon. I agree with it, and for the reasons he gives would allow the appeal.
LORD BRANDON OF OAKBROOK. My Lords, the subject matter of this appeal is a claim by the appellants (the bank) as assignees of the owners of the mv Dominique (the owners) to recover from the respondents (the charterers) advance freight which the bank alleges became payable by the charterers under a voyage charterparty relating to that vessel made between the owners and the charterers in June 1982. The charterers dispute that any such freight became payable, but it is agreed between the parties that, if it did, the amount of it was $US 233,676.
The bank’s claim was referred to arbitration by three arbitrators in London, who by a reasoned award made on 12 February 1986 decided in favour of the charterers and dismissed the claim. The bank appealed with leave to Hobhouse J in the Commercial Court ([1987] 1 Lloyd’s Rep 239), who by an order dated 24 October 1986 allowed the appeal and awarded to the bank the full amount of their claim. The charterers appealed to the Court of Appeal (Fox, Croom-Johnson and Mustill LJJ) ([1988] 3 All ER 233, [1988] 3 WLR 60), which by an order dated 21 December 1987, as amended on 14 January and 11 April 1988, allowed the appeal, set aside the order of Hobhouse J and restored the arbitrators’ award. The bank now brings a further appeal from the decision of the Court of Appeal with the leave of your Lordships’ House.
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The facts found by the arbitrators are as follows. By an assignment under seal dated 14 April 1982 the owners assigned absolutely to the bank all the earnings of the Dominique including all freight. By a charterparty dated 16 June 1982 the owners chartered the Dominique to the charterers to proceed to Kakinada, in India, and there load a cargo of agricultural products in bulk for carriage to European ports. Under that charterparty the Dominique loaded at Kakinada between 28 June and 13 July 1982 various parcels of cargo, in respect of which bills of lading were signed between those dates and on 14 July 1982. On that date the Dominique left Kakinada bound for Colombo for bunkers. At about the same time the bank received notice that the vessel’s club entry would be cancelled with effect from 28 June 1982, and they accordingly gave to the charterers written notice of the assignment referred to earlier. On 19 July 1982 the Dominique arrived at Colombo and was arrested by previous suppliers of bunkers to her. The Dominique remained under arrest and it became apparent to both the charterers and the bank that the owners had no funds of their own with which to procure her release and that the club would not assist them. By a telex from the charterers to the owners dated 22 July the charterers justifiably elected to treat the owners’ conduct as a repudiation of the charterparty. By 26 July all the bills of lading previously signed had been surrendered, which I take to mean delivered, to the shippers. On 12 August the charterers obtained the leave of the court in Colombo to discharge the cargo from the Dominique. During September the cargo, following such discharge, was transhipped to another vessel. That vessel then on-carried the cargo to European ports where it was discharged during November. The Dominique was later sold by order of the court in Colombo.
The cost to the charterers of discharging and transhipping the cargo at Colombo, and having it on-carried to European ports and discharged there, exceeded the amount of the advance freight claimed from them by the bank.
The charterparty was on the Gencon form with typed alterations, a series of additional typed clauses and an addendum, and was governed by English law. The essential provision relating to the payment of advance freight was cl 16 of the additional typed clauses, which was in these terms:
‘Freight shall be prepaid within 5 days of signing and surrender of final Bills of Lading, full freight deemed to be earned on signing Bills of Lading, discountless and non-returnable, vessel and/or cargo lost or not lost and to be paid to [a named bank in Piraeus].’
The charterers disputed their liability to pay the advance freight claimed by the bank on two grounds. The first ground was that the charterers, by accepting the owners’ repudiation of the charterparty, had lawfully brought the charterparty to an end before the owners’ right to be paid freight under cl 16 had accrued. The second ground was that, if, contrary to the first ground, the owners’ right to be paid freight under cl 16 had accrued before the charterparty was brought to an end, the charterers were entitled to set off against the bank’s claim to freight the damage suffered by them as a result of the owners’ repudiation.
Hobhouse J considered, rightly in my view, that the grounds for disputing liability relied on by the charterers raised four questions for decision. Using my own words I would formulate those four questions as follows. (1) Had the owners’ right to advance freight accrued before the charterparty was terminated by the charterers’ acceptance of the owners’ repudiation of it? (2) If such right had so accrued, did it survive such termination? (3) If so, would the charterers, had the owners not assigned their right to freight to the bank, have been entitled to set off against such right the damage suffered by the charterers as a result of the owners’ repudiation of the charterparty? (4) If not, are the charterers nevertheless entitled to such set-off as against the bank claiming as assignees?
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Question (1): accrual of owners’ right to advance freight
The answer to this question depends on two matters. The first matter is the sequence of the relevant events as found by the arbitrators. The second matter is the true construction of cl 16 of the charterparty.
So far as the first matter is concerned the arbitrators found the sequence of the relevant events to have been as follows: (i) on 14 July 1982 the signing of the bills of lading was completed; (ii) on 22 July the charterparty was terminated by the charterers’ acceptance of the owners’ repudiation of it; and (iii) by 26 July all the bills of lading had been surrendered to the shippers. The expression ‘by 26 July’, used by the arbitrators in relation to event (iii) above, is in a sense equivocal, in that, on a literal interpretation, it might refer to any date not later than 26 July, including a date earlier than 22 July. The inference which I would draw, however, is that, while the arbitrators were unable to fix the date with certainty, they were satisfied that it was later than 22 July. In any case, in so far as it would be to the advantage of the bank to have had a finding that the surrender of the bills of lading was completed before the termination of the charterparty on 22 July, they failed to obtain such finding.
So far as the second matter is concerned, it was recognised by both courts below that cl 16 of the charterparty is confusingly drawn and because of that difficult to interpret. The main difficulty arises from the apparent conflict between the first phrase of the clause, which reads ‘Freight shall be prepaid within 5 days of signing and surrender of final Bills of Lading’, and the second phrase, which reads ‘full freight deemed to be earned on signing Bills of Lading’. For the bank it was contended that the effect of the two phrases taken together was that the owners’ right to the freight accrued on completion of the signing of all the bills of lading, but payment was postponed until five days after the bills of lading, having been signed, were delivered to the shippers. On this basis the owners’ right to freight accrued on 14 July 1982, well before the termination of the charterparty on 22 July. For the charterers it was contended that their obligation to pay the freight and the corresponding right of the owners to be paid the freight were both governed, and governed only, by the first phrase. On that basis the owners’ right to be paid the freight accrued after 22 July 1982.
While the matter is far from easy, I consider that the contention for the bank is to be preferred to that for the charterers. The reason why I take that view is that the contention for the charterers gives no effect to the second phrase of cl 16 ‘full freight deemed to be earned on signing Bills of Lading’, whereas the contention for the bank does. This conclusion accords with the decision of the Court of Appeal on a different but comparable clause in a charterparty in Vagres Cia Maritima SA v Nissho-Iwai American Corp, The Karin Vatis [1988] 2 Lloyd’s Rep 330.
I would therefore answer question (1) by saying that the owners’ right to freight accrued before the termination of the charterparty.
Question (2): effect of charterparty being terminated
The principles of law applicable when a contract is terminated by the acceptance by one party to it of a repudiation by the other party to it are not in doubt. They were clearly and simply stated by Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476–477, where he said:
‘When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected.’
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That statement of the relevant principles was expressly approved and adopted by Lord Wilberforce in Johnson v Agnew [1979] 1 All ER 883 at 892, [1980] AC 367 at 396. Applying those principles to the facts of the present case it is necessary to consider whether the owners’ right to the freight had been ‘unconditionally acquired’ by them before the termination of the charterparty. The circumstance that, by reason of the first phrase of cl 16, the charterers’ obligation to pay the freight was postponed until after the termination of the charterparty does not, in my view, mean that the owners’ prior acquisition of the right to the freight was conditional only. The postponement of payment was an incident attaching to the right acquired, but it was not a condition of its acquisition. It follows that, in accordance with the principles of law referred to above, the owners’ right to the freight, having been unconditionally acquired before the termination of the charterparty, was not divested or discharged by such termination.
I would therefore answer question (2) by saying that the owners’ right to the freight survived the termination of the charterparty.
Question (3): set-off as between charterers and owners
Under a contract for the carriage of goods by sea, such as the voyage charterparty in the present case, freight is the monetary consideration payable by the cargo owner to the shipowner for the carriage of the goods. The time when the freight is payable depends on the terms of the contract. It may be payable on delivery of the goods at the port of discharge, in which case it is called ‘freight’ without any qualifying epithet; or it may be payable at an early stage of the voyage, such as on completion of the signing of bills of lading, in which case it is called ‘advance freight’; or part of it may be payable at an early stage of the voyage and the balance on delivery.
It is a long-established rule of English law, dating at least from the early part of the nineteenth century, that a cargo owner is not entitled to set up, as a defence to a claim for freight, damage suffered by him by reason of some breach of contract by the shipowner in relation to the carriage, causing for instance partial loss of or damage to the goods, but must enforce any right which he has in respect of such breach by a cross-claim. The effect of the rule before the coming into force of the Supreme Court of Judicature Acts 1873 and 1875 was that a cargo owner sued by a shipowner for freight could only recover his damage by bringing a separate cross-action against the shipowner; the effect of the rule since the coming into force of those Acts has been that the cargo owner, instead of having to bring a separate cross-action, has been able (though not bound) to raise his cross-claim by way of counterclaim in the shipowner’s action. The rule applies equally to freight payable on delivery of the goods and to advance freight payable at some earlier stage of the voyage.
The rule of law referred to differs from that prevailing in many other countries and has been subjected to a considerable amount of criticism in various quarters from time to time. The continued existence of the rule was, however, affirmed by the Court of Appeal in Henriksens Rederi A/S v P H Z Rolimpex, The Brede [1973] 3 All ER 589, [1974] QB 233, in which the earlier authorities were fully examined. That decision of the Court of Appeal was unanimously approved by your Lordships’ House in Aries Tanker Corp v Total Transport Ltd, The Aries [1977] 1 All ER 398, [1977] 1 WLR 185. It follows that the rule concerned (which I shall from now on call ‘the rule against deduction’), whatever its merits or demerits may be, is not open to challenge.
In all the cases in which the rule against deduction has been applied, up to and including The Aries, the breaches of contract by shipowners sought to be relied on as defences to claims for freight have been non-repudiatory breaches resulting in partial loss of or damage to cargo or delay in its delivery. So in A/S Gunnstein & Co K/S v Jensen Krebs and Nielsen, The Alfa Nord [1977] 2 Lloyd’s Rep 434 at 436, a case in which charterers claimed the right to deduct damage caused by delay from freight due to shipowners, we find Roskill LJ applying the rule against deduction and saying:
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‘We have to apply the well-established principle that there is no right of set-off for claims for damages for breach of charter, whether for loss of or damage to goods or for alleged failure to prosecute a voyage with reasonable dispatch or otherwise, against a claim for freight.’
The words ‘or otherwise’ used by Roskill LJ in this passage might, if taken out of context, cover a claim for damage caused by an accepted repudiation. In my view, however, Roskill LJ did not have a claim of that kind in mind, but was referring to other breaches of contract of a non-repudiatory character.
Since 1977 the rule against deduction has been applied to cases of non-repudiatory breaches of kinds different to those referred to above. In Cleobulos Shipping Co Ltd v Intertanker Ltd, The Cleon [1983] 1 Lloyd’s Rep 586 the rule was applied by the Court of Appeal to a case in which the breach of contract relied on was inadequacy in the ship’s cargo pumps, making it necessary for her to leave one port of discharge and proceed to another. In Elena Shipping Ltd v Aidenfield Ltd, The Elena [1986] 1 Lloyd’s Rep 425 the rule was applied by Steyn J to a case in which the breach of contract relied on was the unfitness of some cargo spaces because of lack of facilities for ventilation.
It does not appear that, in any of the nineteenth century cases in which the rule against deduction was applied, equitable principles were invoked in order to defeat such rule. In The Brede [1973] 3 All ER 589, [1974] QB 233 a defence by way of equitable set-off, based on short delivery of and damage to cargo, was put forward and rejected by the Court of Appeal. In The Aries [1977] 1 All ER 398, [1977] 1 WLR 185 the same defence, based on short delivery, was again put forward and rejected by your Lordships’ House. As is apparent, however, the breaches of contract relied on in both these cases were again of a non-repudiatory character. The present case, therefore, raises for the first time the question whether, although a claim in respect of a non-repudiatory breach of a voyage charterparty cannot operate as a defence by way of set-off to a claim for freight, a claim in respect of repudiation of such contract, accepted as such, is capable of doing so.
In the present case it was contended for the bank that, as between the owners and the charterers, the owners were entitled to rely on the rule against deduction as precluding the charterers from setting up, as a defence to any claim by the owners for advance freight, the damage suffered by them as a result of the owners’ repudiation of the charterparty. For the charterers, on the other hand, it was contended that, while they could not, having regard to the decision in The Aries, set up their damage as a defence at common law by way of abatement or otherwise, they were entitled to set it up as a defence by way of equitable set-off. They accepted that an ordinary cross-claim in respect of loss of or damage to cargo amounting to no more than a breach of warranty, such as was relied on in The Aries, could not give rise to a defence by way of equitable set-off; but they contended that, where there was a much more serious breach of contract by the owners in the form of a repudiation of the charterparty accepted by them, a defence by way of equitable set-off was available to them.
Before examining this contention for the charterers it is necessary to explain briefly the nature, origins and basis of a defence by way of equitable set-off. Until the coming into force of the Supreme Court of Judicature Acts 1873 and 1875 courts of equity had the power to prohibit by injunction the enforcement of a common law claim where there was a cross-claim which they regarded as being of an appropriate character. Section 24 of the Supreme Court of Judicature Act 1873 took away that power and provided instead that such a cross-claim could be raised as a defence to the claim. Those provisions of the 1873 Act have since been replaced successively, without any difference in effect, first by ss 36 to 41 of the Supreme Court of Judicature (Consolidation) Act 1925 and more recently by s 49 of the Supreme Court Act 1981. It therefore becomes necessary, in order to decide whether a party can rely on a particular cross-claim as giving him a defence by way of equitable set-off to a common law claim today, to see whether such cross-claim is of such a character that it would before the coming into force of the
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Supreme Court of Judicature Acts 1873 and 1875 have led a court of equity to prohibit by injunction the enforcement of such common law claim.
The authority most relied on as providing the relevant test is Rawson v Samuel (1839) 1 Cr & Ph 161 at 179, 41 ER 451 at 458, in which Lord Cottenham LC said that a cross-claim, in order to give rise to a defence by way of equitable set-off, must be such as ‘impeached the title to the legal demand’. He then gave examples of cross-claims of that character. One case referred to was Beasley v D’Arcy (1800) 2 Sch & Lef 403. There a tenant was entitled to redeem his lease on payment to his landlord of rent due. The landlord had previously caused damage to the land let and the tenant was held to be entitled to deduct from the rent due the amount of the damage so done. Another case referred to was Piggott v Williams (1821) 6 Madd 95, 56 ER 1027. There a solicitor brought a claim against a client for the costs of work done. The client cross-claimed on the ground that the incurrence of the costs had been caused by the solicitor’s negligence. It was held that the client was entitled to rely on such cross-claim as a defence.
The concept of a cross-claim being such as to ‘impeach the title to the legal demand’ is not a familiar one today. A different version of the relevant test is to be found in the decision of the Judicial Committee of the Privy Council in Newfoundland Government v Newfoundland Rly Co (1888) 13 App Cas 199. In that case there was a contract between the Newfoundland Railway Co and the government of Newfoundland under which the company agreed to build a railway line some 340 miles in length in five years and, having done so, to maintain it and operate it continuously. In return the government agreed, inter alia, to pay the company an annual subsidy for 35 years, such subsidy to be paid in proportionate parts as and when each five-mile section of the line was completed and operated. The company built part of the line and, on completion of each five-mile section, was paid by the government a proportionate amount of the annual subsidy attributable to it. Subsequently, the company abandoned the building of the remaining part of the line, on which the government refused to make any further payments of subsidy. The company, together with certain assignees of its rights under the contract, brought a petition of right against the government claiming, inter alia, that the government was bound to continue payment of subsidy in respect of the five-mile sections of the line which had been completed for the full period of 35 years. It was held that the government was bound by the terms of the contract to continue the payments of subsidy as claimed, but that it was entitled, as against both the company and the assignees, to set off against that liability the damage suffered by it by reason of the failure of the company to complete the whole of the line. In this connection Lord Hobhouse, who delivered the judgment of the Board, said (at 212–213):
‘There is no universal rule that claims arising out of the same contract may be set against one another in all circumstances. But their Lordships have no hesitation in saying that in this contract the claims for subsidy and for non-construction ought to be set against one another.’
Lord Hobhouse then referred to Smith v Parkes (1852) 16 Beav 115 at 119, 51 ER 720 at 722, and continued (at 213):
‘That was a case of equitable set-off, and was decided in 1852, when unliquidated damages could not by law be the subject of set-off. That law was not found to be conducive to justice, and has been altered. Unliquidated damages may now be set off as between the original parties, and also against an assignee if flowing out of and inseparably connected with the dealings and transactions which also give rise to the subject of the assignment.’
It is to be inferred that the change of law there referred to by Lord Hobhouse had been brought about by legislation in what was then the colony of Newfoundland, which adopted the principles enacted in England by s 24 of the Supreme Court of Judicature Act 1873 to which I drew attention earlier. Newfoundland Government v Newfoundland Rly
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Co was clearly a case of a defence by way of equitable set-off based on a cross-claim. It was treated as such by Sellers LJ in Hanak v Green [1958] 2 All ER 141 at 154, [1958] 2 QB 9 at 31, and by Hobhouse J in his judgment in the present case (see [1987] 1 Lloyd’s Rep 239 at 255). It is to be observed, however, that the criterion which Lord Hobhouse applied in deciding whether the government’s cross-claim for unliquidated damages could be set off against the company’s claim was not that the cross-claim ‘impeached the title to the legal demand’, as in Rawson v Samuel (1841) 1 Cr & Ph 161, 41 ER 451, but rather that it was a cross-claim ‘flowing out of and inseparably connected with the dealings and transactions which also give rise’ to the claim (see 13 App Cas 199 at 213).
I turn now to examine, against the background of the origin and nature of a defence by way of equitable set-off which I have described, the manner in which your Lordships’ House dealt with such a defence in The Aries [1977] 1 All ER 398, [1977] 1 WLR 185. That case arose out of a voyage charterparty under which the entire freight was payable on delivery. Delivery having been made, the charterers did not pay to the shipowners the full amount of freight due but deducted a substantial sum from that amount on the ground of short delivery of the cargo. The owners brought an action against the charterers in the Queen’s Bench Division in which they claimed payment of the balance of freight so deducted. The charterers resisted the claim on the ground that they were entitled to set off against it the amount of the damage which they had suffered by reason of the short delivery. They also counterclaimed for the amount of that loss. The owners having applied for summary judgment under RSC Ord 14, Donaldson J refused leave to defend and gave judgment in favour of the owners for the full amount of their claim. The charterers, having appealed unsuccessfully to the Court of Appeal (see [1976] 2 Lloyd’s Rep 256), brought a further appeal to your Lordships’ House which was, as I indicated earlier, unanimously dismissed.
The primary ground on which the House dismissed the appeal was that the charterparty expressly incorporated art III, r 6 of the Hague Rules, which provides that any claim for loss of or damage to cargo shall be discharged unless suit is brought within one year from the date of delivery or the date on which the goods should have been delivered, that the charterers had failed to bring suit within that period of time and that their cross-claim in respect of short delivery had therefore become prescribed, so that it could not be relied on by way of either defence or counterclaim.
While this was the primary ground on which the appeal was dismissed, the House also rejected arguments put forward for the charterers that their cross-claim in respect of short delivery afforded them a defence to the owners’ claim for the balance of the freight either by way of abatement at common law or by way of equitable set-off.
Lord Wilberforce emphasised four main points (see [1977] 1 All ER 398 at 403–404, [1977] 1 WLR 185 at 189–191): first, that it was a long-established rule of English law that a claim in respect of cargo could not be asserted by way of deduction from freight; second, that the status of the rule, as a rule of law, was not affected by the fact that the reason for it could not readily be ascertained; third, that the principle of abatement at common law was confined to contracts for the sale of goods and contracts for work and labour: it did not extend to contracts for the carriage of goods by sea and it would not be right for the courts so to extend it; fourth, that the parties had contracted on the basis of the rule, and it was not for the courts to alter that basis even if they were convinced that a different rule would have greater merit. Having dealt with these matters Lord Wilberforce turned to the question of equitable set-off, saying ([1977] 1 All ER 398 at 404–405, [1977] 1 WLR 185 at 191):
‘My Lords, a yet further argument was developed, that the charterers’ claim for short delivery might operate by way of equitable set-off—this, on the assumption as I understood it, that the right of deduction at law was not upheld. This contention was given more prominence in this House than perhaps it received in the Court of Appeal’s judgments in The Brede [1973] 3 All ER 589, [1974] QB 233 though in fact
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it seems to have been given adequate consideration in that case. It does not appear to me to advance the charterers’ case. One thing is certainly clear about the doctrine of equitable set-off—complicated though it may have become from its involvement with procedural matters—namely that for it to apply, there must be some equity, some ground for equitable intervention, other than the mere existence of a cross-claim: see Rawson v Samuel (1841) Cr & Ph 161 at 178, 41 ER 451 at 458, per Lord Cottenham LC, Best v Hill (1872) LR 8 CP 10 at 15, and the modern case of Hanak v Green [1958] 2 All ER 141 at 147, [1958] 2 QB 9 at 19, per Morris LJ. But in this case counsel could not suggest, and I cannot detect, any such equity sufficient to operate the mechanism, so as, in effect, to override a clear rule of the common law on the basis of which the parties contracted. It is significant that in no case since the Supreme Court of Judicature Act 1873 or at a time before that Act when equitable jurisdiction was available to a court dealing with the claim, was any such equitable set-off or equitable defence upheld or, until The Brede, suggested.’
Lord Simon also dealt with the question of equitable set-off, where he said ([1977] 1 All ER 398 at 406–407, [1977] 1 WLR 185 at 193):
‘The argument from equity fails, in my respectful opinion, for a number of reasons. First, the mere existence of cross-claims per se did not give rise to equitable intervention: it was not enough that they arose from the same contract; the equity of the bill had to impeach the title to the legal demand: per Lord Cottenham LC in Rawson v Samuel (1841) Cr & Ph 161 at 178–179, 41 ER 451 at 458. The title to a claim for freight is not impeached by short delivery of cargo—unless, of course, the latter amounts to repudiation of the contract of carriage. Secondly, there is no record of equity having in fact intervened at any time before the Common Law Procedure Act 1854 … Thirdly, there is no record of the alleged equitable defence having been essayed at any time since the Supreme Court of Judicature Act 1873. Equity did not bark at all at a claim for freight during this century-long night; to adopt Holmes, this would be a curious incident … Fourthly, the cases of assignment like Newfoundland Government v Newfoundland Railway Co (1888) 13 App Cas 199, on which the charterers so greatly relied, are clearly distinguishable. You cannot equitably take the benefit of an assignment without also assuming its burdens both; flow out of and are inseparably connected with the same transaction … Fifthly, at the time of Mondel v Steel (1841) 8 M & W 858, [1835–42] All ER Rep 511 the Court of Exchequer itself still had an equitable jurisdiction; but it seems to have occurred to no one that any rule of equitable set-off affected the situation.’
There are certain observations which I would make with regard to the passages from the speeches of Lord Wilberforce and Lord Simon quoted above. First, the cross-claim of the charterers which they held could not operate as a defence by way of legal set-off to a claim for freight was, as I indicated earlier, a cross-claim based on a non-repudiatory breach of contract, namely short delivery of cargo. Lord Wilberforce did not deal with the question whether a cross-claim based on repudiation of a charterparty could or could not operate as such a defence. He did not do so because the case before him did not raise that question. Lord Simon did refer to repudiation when he said: ‘The title to a claim for freight is not impeached by short delivery of cargo—unless, of course, the latter amounts to repudiation of the contract … ' It is not entirely clear to what kind of repudiation Lord Simon was there referring. Since, however, he was dealing with a case in which freight was only payable on delivery, it seems likely that he was referring to repudiation in the form of total failure to deliver, a failure which would of itself prevent freight becoming payable at all. In any case it is clear that he was not referring to a case like the present one, in which, after the owners’ right to advance freight had accrued, they then repudiated the charterparty.
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Second, both Lord Wilberforce and Lord Simon considered that the characteristic of a cross-claim necessary to enable it to operate as a defence by way of equitable set-off was the characteristic prescribed by Lord Cottenham LC in Rawson v Samuel (1841) Cr & Ph 161 at 179, 41 ER 451 at 458, namely that the cross-claim impeached the title to the legal demand. Lord Wilberforce added that it must create an equity sufficient to override a clear rule on the basis of which the parties contracted (see [1977] 1 All ER 398 at 404–405, [1977] 1 WLR 185 at 191).
Third, Lord Simon distinguished cases of assignment, such as Newfoundland Government v Newfoundland Rly Co (1888) 13 App Cas 199 on the basis that one cannot take the benefit of an assignment without assuming the burdens, because both flow out of and are inseparably connected with the same transaction. With great respect to Lord Simon, I believe him to have been in error on this point. The decision in the Newfoundland case was that the government’s cross-claim for damage caused by the company’s failure to complete the railway line could operate as a defence by way of equitable set-off against both the company and the assigness, no distinction in this respect being drawn between the two. It is essential to bear in mind, however, that the company’s claim in that case was a claim for subsidy under the particular terms of what was in essence a building contract, so that the special character which the law attaches to a claim for freight under a contract for the carriage of goods by sea was in no way relevant.
My Lords, in The Aries [1977] 1 All ER 398 at 405, 410, [1977] 1 WLR 185 at 191, 197 Viscount Dilhorne and Lord Edmund-Davies agreed with Lord Wilberforce on all points. Lord Salmon delivered a separate speech, agreeing substantially with Lord Wilberforce, except on the question of the prescriptive effect of art III, r 6 of the Hague Rules, with regard to which he reserved his opinion.
The speeches of Lord Wilberforce and Lord Simon in The Aries make it clear that, when an owner’s breach of charterparty is of a non-repudiatory character, such as partial loss of or damage to cargo, it does not give rise to an equity in favour of the charterers sufficient to override the established rule against deduction. The question for decision in the present case is whether, where an owner’s breach of charterparty is of a repudiatory character, it does give rise to such an equity.
Various arguments can be advanced to support an affirmative answer to that question. First, it can be said that a repudiatory breach or breach of a voyage charterparty by an owner, occurring after the right to the payment to him of advance freight has accrued, satisfies the test for a defence by way of equitable set-off laid down in Rawson v Samuel of giving rise to an equity sufficient to ‘impeach the legal title’ to the claim for such advance freight. I find it difficult, however, to see how, when a charterparty expressly provides, in effect, that the legal title to advance freight is to be deemed to be complete on the signing of bills of lading, a subsequent breach of the charterparty, even one of a repudiatory character, can properly be regarded as impeaching that title.
Second and alternatively, it can be said that a claim based on a repudiatory breach of a voyage charterparty by an owner, occurring after the right to the payment to him of advance freight has accrued, satisfies the test for an equitable set-off laid down in Newfoundland Government v Newfoundland Rly Co of being a breach flowing out of and being inseparably connected with the transaction, namely the charterparty which gave rise to the claim for such advance freight. The same might be said, however, of claims with regard to non-repudiatory breaches, such as partial loss of or damage to cargo, in respect of which The Aries is conclusive authority that they do not give rise to a defence by way of equitable set-off.
Third, it can be said that the rule against deduction is in any case anomalous, that it has hitherto been applied only to cases of non-repudiatory breach and that the courts ought not to extend its application to cases of repudiatory breach. In my view, however, there is little force in this argument, because a case like the present one seems never to have arisen before, and it is unlikely, except very rarely, that it will arise again.
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Once the three arguments discussed above are rejected, as I think on the grounds which I have given that they should be, it is possible to state a number of good reasons for holding that a repudiatory breach of a voyage charterparty is no more capable of giving rise to a defence by way of equitable set-off than is a non-repudiatory breach. I shall set out those reasons shortly first and then develop them. The first reason is that a repudiatory breach of a charterparty by an owner does not necessarily cause more damage to a charterer than a non-repudiatory breach; it may cause less. There is, therefore, no justification based on quantum of damage for applying the rule against deduction to the latter breach but not to the former. The second reason is that the application of the rule against deduction only works to the ultimate disadvantage of a charterer when the owner’s financial situation makes it impossible for a counterclaim to be enforced against him. That risk, however, exists whether the breach is repudiatory or non-repudiatory. The third reason lies in the manner in which the legislation has treated the premature termination of a voyage charterparty by frustration.
With regard to the first reason it is easy to visualise a case where partial loss of or damage to a valuable cargo would cause greater loss to a charterer than a premature termination of the voyage as a result of accepted repudiation, especially if the latter occurred at a late stage of the voyage rather than an early one. Yet, if the contentions for the charterers are right, the rule against deduction would apply to the former greater loss but not to the latter lesser loss. It is difficult to see any justification for this.
With regard to the second reason, provided that an owner’s financial situation is such that a counterclaim for damages can be enforced against him, the charterer will not in the end suffer from the application of the rule against deduction. A good illustration of this is to be found in Turnbull v Great Eastern and Peninsular Navigation Co (1885) Cab & El 595. In that case a steamer was chartered to carry a cargo of coal from Birkenhead to Bombay. The charterparty provided that four-fifths of the freight was to be paid in cash in one month from the ship’s sailing from her last port in Great Britain, steamer lost or not lost. The perils excluded by the charterparty did not include negligence of the master. The ship sailed with her cargo on 12 July 1884 and was lost through the negligence of the master on 19 July, the loss being known in England on 21 July. On 26 July the charterers paid four-fifths of the freight to the owners. In an action subsequently brought by the charterers against the owners for damages for breach of the charterparty resulting in the loss of the cargo, it was held, first, that the expression ‘steamer lost or not lost’ did not apply to a loss caused by the master’s negligence and, second, that the charterers were entitled to include in the damages recoverable by them the four-fifths of the freight which they had paid in advance. The risk of a charterer’s counterclaim being defeated by insolvency of the owner can arise when such counterclaim is based on a non-repudiatory breach as well as when it is based on a repudiatory breach, so that, since the rule against deduction applies in the former case, there is no good reason, so far as that risk is concerned, why it should not also do so in the latter case.
The third reason requires rather more elaboration. At common law frustration of a contract did not cause it to be rescinded ab initio, but terminated it forthwith on the occurrence of the frustrating event. The effect of such termination was to release both parties from further performance of the contract, while leaving intact any payments already made and any rights already acquired under it. Put shortly, the principle followed by the common law was that, on a contract being frustrated, losses and gains lay where they fell and no adjustment of the parties’ rights could be made. So, in the case of a voyage charterparty stipulating for the payment of freight in advance, if the charterparty became frustrated after the date for such payment had passed, the result was this: if the charterer had already paid the advance freight, he had no right to recover it, while, if he had not already paid it, he remained obliged to do so. If authority for these propositions is needed, it is to be found in the advice of Brett J to the House of Lords in Allison v Bristol Marine Insurance Co Ltd (1876) 1 App Cas 209 at 226. One modification to the common
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law of frustration as it had previously been understood to be was made by the decision of your Lordships’ House in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] 2 All ER 122, [1943] AC 32. That modification was that, when, as a result of a contract being frustrated, there was a total failure of consideration for a payment already made, the payment could be recovered by the payer as money had and received to his use. This modification, however, was of a very limited effect, since it left untouched payments in respect of which the consideration had failed partly but not wholly.
The law relating to the frustration of contracts as I have described it was radically altered, soon after the decision in the Fibrosa case referred to above, by the passing of the Law Reform (Frustrated Contracts) Act 1943. That Act, except in the case of a few specified kinds of contract, got rid of the common law principle that, on a contract being frustrated, losses and gains lay where they fell, and substituted for it an elaborate code by which the rights of the parties could be readjusted in an equitable manner. It is not necessary to go into the details of this code of readjustment; it is sufficient to say that it included, where appropriate, repayment in whole or in part of payments already made by one party to the other, and the release of a party in whole or in part from obligations to make payments already accrued due: see s 1(2) including the proviso to it.
The significance of the 1943 Act for present purposes, however, lies in the fact that, as I indicated earlier, certain specified contracts are excluded from its application. These contracts include ‘any charterparty, except a time charterparty or a charterparty by way of demise’ and ‘any contract (other than a charterparty) for the carriage of goods by sea’: see s 2(5)(a). The legislature must have had a reason for this exclusion and the only reason which it seems to me that it could have had is an unwillingness to create a situation in which, following the frustration of contracts of this kind, advance freight already due could, if paid, be recovered back in whole or in part, or, if not paid, cease to be payable in whole or in part. In other words the legislature was preserving, in the context of the premature termination of such contracts by frustration, the indefeasibility of an accrued right to advance freight. The attitude of the legislature in this respect seems to me to make it difficult to say that, when a voyage charterparty or other contract for the carriage of goods by sea is prematurely terminated by the owner’s repudiation of it, the indefeasibility of an accrued right to advance freight should not be similarly preserved by applying the rule against deduction to the situation so created.
It was argued for the charterers that, where a court had before it in the same action an owner’s claim for freight under a charterparty and a charterer’s counterclaim for damages for breach of that charterparty, it could by procedural means bring about a set-off of the counterclaim against the claim, even though, under the substantive law governing the rights of the parties, no such set-off was available. The court, it was said, could try and determine both the owner’s claim for freight and the charterer’s counterclaim for damages, and then, supposing both to have succeeded in whole or in part, exercise its power under RSC Ord 15, r 2(4), which provides: ‘Where a defendant establishes a counterclaim against the claim of a plaintiff and there is a balance in favour of one of the parties, the Court may give judgment for the balance … ' It was further argued that, if the court could act in this way, arbitrators could do the same thing. The practical result would be a set-off, by procedural means, between the owner’s claim for freight and the charterer’s counterclaim for damages.
In my opinion, for the court to act in the manner suggested would constitute a wrong exercise of its discretion, because it would involve using rules of procedure to bring about a result contrary to the rights of the parties under the substantive law. That would be inconsistent with the principle that the Judicature Acts, while making important changes in procedure, did not alter and were not intended to alter the rights of parties: see Stumore v Campbell & Co [1892] 1 QB 314 at 316, 318, [1891–4] All ER Rep 785 at 787 per Lord Esher MR and Lopes LJ.
For the reasons which I have given I would answer question (3) by saying that, if the
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owners had not assigned their right to freight to the bank, the charterers would not have been entitled to set off against such right the damage suffered by them as a result of the owners’ repudiation of the charterparty.
Question (4): set-off as between charterers and bank
The bank’s claim for freight against the charterers was brought by them as legal assignees of the owners. It follows that the bank’s rights against the charterers are governed by s 136(1) of the Law of Property Act 1925, which provides:
‘Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice—(a) the legal right to such debt or thing in action; (b) all legal and other remedies for the same; and (c) the power to give a good discharge for the same without the concurrence of the assignor … ’
It was contended for the charterers that, even if, as I have held in answering question (3), they were not entitled to set up their counterclaim in respect of the damages suffered by them as a result of the owners’ repudiation of the charterparty as a defence by way of equitable set-off as between them and the owners, they were nevertheless entitled to rely on such counterclaim as a defence as between them and the bank, on the ground that it constituted an equity to which the assignment of the right to freight was made subject under s 136(1) above.
In support of this contention for the charterers reliance was placed on certain passages in the judgment of the Privy Council delivered by Lord Hobhouse in Newfoundland Government v Newfoundland Rly Co (1888) 13 App Cas 199 and on passages from various textbooks which appear to be largely founded on that case. I discussed the Newfoundland Rly case in some detail in connection with question (3), and I also referred to what I respectfully suggested was a misunderstanding about its effect in the speech of Lord Simon in The Aries [1977] 1 All ER 398 at 406–407, [1977] 1 WLR 185 at 193. The charterers relied particularly for present purposes on a passage in the speech of Lord Hobhouse immediately preceding the passage which I quoted earlier. In the passage so relied on by the charterers Lord Hobhouse, referring to the company’s claim for subsidy on the one hand and the government’s counterclaim for damages for the failure to complete the railway on the other, said (13 App Cas 199 at 212):
‘The two claims under consideration have their origin in the same portion of the same contract, where the obligations which give rise to them are intertwined in the closest manner. The claim of the Governement does not arise from any fresh transaction freely entered into by it after notice of the assignment by the company. It was utterly powerless to prevent the company from inflicting injury on it by breaking the contract. It would be a lamentable thing if it were found to be the law that a party to a contract may assign a portion of it, perhaps a beneficial portion, so that the assignee shall take the benefit, wholly discharged of any counterclaim by the other party in respect of the rest of the contract, which may be burdensome.’
Hobhouse J in his judgment in the present case made a very full and careful analysis of the Newfoundland Rly case (see [1987] 1 Lloyd’s Rep 239 at 254–257). I respectfully agree with that analysis, and in particular with two matters contained in it. The first matter is that the case was one of equitable set-off, in the sense that it was held that the government’s counterclaim in respect of the company’s breach of contract in failing to complete the railway, because it flowed out of and was inseparably connected with the contract between the parties, operated as a defence by way of equitable set-off to the
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company’s claim for subsidy. The second matter is that Lord Hobhouse drew no distinction in this respect between the rights of the government against the company on the one hand and its rights against the company’s assignees on the other. On the contrary he made it clear that the government’s counterclaim operated as a defence by way of equitable set-off both against the company and against the assignees.
Having regard to these matters I do not consider that the Newfoundland Rly case affords any support for the contention of the charterers presently under discussion. On the contrary, it seems to be inconsistent with it.
I would, therefore, answer question (4) by saying that the charterers are no more entitled to rely on their counterclaim for damages as a defence by way of equitable set-off against the bank than they would have been entitled to rely on it, but for the assignment, against the owners.
Having regard to the answers which I have given to the four questions discussed above, I would allow the appeal, set aside the order of the Court of Appeal dated 21 December 1987 as later amended and restore the order of Hobhouse J dated 24 October 1986.
LORD OLIVER OF AYLMERTON. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Brandon. I agree that the appeal should be allowed for the reasons which he has given.
LORD GOFF OF CHIEVELEY. My Lords, for the reasons given by my noble and learned friend Lord Brandon, I would allow this appeal.
LORD JAUNCEY OF TULLICHETTLE. My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Brandon. I agree with it, and for the reasons he gives would allow the appeal.
Appeal allowed.
Solicitors: Holman Fenwick & Willan (for the bank); Wilde Sapte (for the charterers).
Mary Rose Plummer Barrister.
Byng v London Life Association Ltd and another
[1989] 1 All ER 560
Categories: COMPANY; other Company
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): SIR NICOLAS BROWNE-WILKINSON V-C, MUSTILL AND WOOLF LJJ
Hearing Date(s): 5, 6, 7, 21 DECEMBER 1988
Company – Meeting – Adjournment – Powers of chairman – Location notified for meeting proving too small to accommodate all members wishing to attend – Chairman of meeting adjourning meeting to another location in afternoon of same day – Whether chairman having power to adjourn meeting without its consent – Whether power to adjourn validly exercised – Test to be applied.
Notice was duly given of an extraordinary general meeting of a company to be held at a specified location at 12 noon on 19 October 1988. There was an assembly of members of the company at that time and place, but the location proved to be too small to accommodate all those members wishing to be present. D, the president of the company and chairman of the meeting, purported to adjourn the meeting and direct that it be resumed in the afternoon of the same day at another location. The reconvened meeting passed the sole resolution of which notice had been given. The plaintiff, a shareholder of the company, brought an action claiming that D had not validly adjourned the meeting in the morning and that accordingly all business conducted at the reconvened meeting in the afternoon had been invalidly conducted. The judge dismissed the plaintiff’s claim. The plaintiff appealed to the Court of Appeal.
Held – (1) There was no rule of law that a meeting from which members were wrongly excluded was a nullity notwithstanding the fact that it was incapable of conducting any business. On the true construction of the company’s articles of association an inquorate meeting of the company incapable of conducting any business was nevertheless a ‘meeting’ of the company which was capable of being adjourned. It followed that on the facts (Mustill LJ dissenting) there had been a meeting of the company on 19 October at the first location presided over by D as chairman (see p 565 h to p 566 a, p 567 c d, p 571 j, p 572 a d e and p 575 h, post).
(2) Where there was a meeting at which the views of the majority could not be validly ascertained, the chairman had a residual common law power to adjourn the meeting without its consent in order to give all persons entitled a reasonable opportunity of voting and speaking at the meeting (see p 567 e, p 568 c to e h j, p 569 c, p 573 c to e and p 575 h, post); Jackson v Hamlyn [1953] 1 All ER 887 applied.
(3) The test to be applied in deciding whether the chairman’s decision to adjourn was lawful was the same as that applicable on judicial review in accordance with accepted principles relating to unreasonableness. However, since the chairman’s power was only exercisable for the purpose of giving the members a reasonable opportunity to debate and vote on the resolution, there had to be very special circumstances to justify a decision to adjourn a meeting to a time and place where, to the chairman’s knowledge, a number of members who had attended the original meeting would not only be unable to attend but also be unable to lodge a proxy vote. Accordingly, although D had acted in good faith, his decision to adjourn to another location on the same date was not valid, on the grounds either that he failed to take into account relevant factors or that the decision was unreasonable. The appeal would therefore be allowed (see p 569 g to j, p 570 g j to p 571 c e to g, p 573 f to p 574 a and p 575 g h, post); Second Consolidated Trust Ltd v Ceylon Amalgamated Tea and Rubber Estates Ltd [1943] 2 All ER 567 and Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680 applied.
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Notes
For powers of a chairman to adjourn a meeting, see 7(1) Halsbury’s Laws (4th edn reissue) para 696, and for cases on the subject, see 9 Digest (Reissue) 627, 640, 3734, 3841.
Cases referred to in judgments
A-G v Edison Telephone Co of London Ltd (1880) 6 QBD 244.
Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223, CA.
Fletcher v New Zealand Glue Co Ltd (1911) 31 NZLR 129, NZ SC.
Harben v Phillips (1883) 23 Ch D 14, Ch D and CA.
Jackson v Hamlyn [1953] 1 All ER 887, [1953] Ch 577, [1953] 2 WLR 709.
John v Rees [1969] 2 All ER 274, [1970] Ch 345, [1969] 2 WLR 1294.
London Flats Ltd, Re [1969] 2 All ER 744, [1969] 1 WLR 711.
McLaren v Fisken (1881) 28 Gr 352, Ont Ch Ct.
National Dwellings Society v Sykes [1894] 3 Ch 159.
Portuguese Consolidated Copper Mines Ltd, Re (1889) 42 Ch D 160, Ch D and CA.
R v D’Oyly (1840) 12 Ad & El 139, 113 ER 763.
Salisbury Gold Mining Co Ltd v Hathorn [1897] AC 268, PC.
Second Consolidated Trust Ltd v Ceylon Amalgamated Tea and Rubber Estates Ltd [1943] 2 All ER 567.
Cases also cited
Associated Color Laboratories Ltd, Re (1970) 12 DLR (3d) 338, BC SC.
Cambrian Peat Fuel and Charcoal Co Ltd, Re, De La Mott’s and Turner’s Case (1875) 31 LT 773.
D’Arcy v Tamar Kit Hill and Callington Rly Co (1867) LR 2 Ex 158.
Musselwhite v C H Musselwhite & Son Ltd [1962] 1 All ER 201, [1962] Ch 964.
Newman (George) & Co, Re [1895] 1 Ch 674, CA.
Sharp v Dawes (1876) 2 QBD 26, CA.
Shaw v Tati Concessions Ltd [1913] 1 Ch 292, [1911–13] All ER Rep 694.
Appeal
The plaintiff, Julian Michael Edmund Byng, appealed against the order of Vinelott J made on 14 November 1988 whereby he dismissed the plaintiff’s claim that the second defendant, Oliver Dawson, the chairman of the extraordinary general meeting of the first defendant, London Life Association Ltd, convened to be held at Cinema 1, Barbican Centre, Barbican, London EC2 on Wednesday, 19 October 1988 at 12 noon, was not entitled to adjourn the meeting to the Cafe Royal, Regent Street, London W1 at 2.30 pm on the same day and that all business conducted at the purported adjourned meeting was invalid. The facts are set out in the judgment of Sir Nicolas Browne-Wilkinson V-C.
Robin Potts QC and Nigel Davis for the plaintiff.
David Oliver QC and Robert Hildyard for the defendants.
At the conclusion of the argument the court announced that the appeal would be allowed for reasons to be given later.
21 December 1988. The following judgments were delivered.
SIR NICOLAS BROWNE-WILKINSON V-C. Notice of an extraordinary general meeting of the first defendant, London Life Association Ltd (London Life), to be held at Cinema 1, The Barbican, London EC2 at 12 noon on Wednesday, 19 October 1988 was duly given. There was an assembly of members of London Life at that time and place, but Cinema 1 proved too small to accommodate all those members wishing to be present.
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The second defendant, Mr Dawson, purported to adjourn that meeting and direct that it be resumed in the afternoon of the same day at the Café Royal. The meeting at the Café Royal passed the sole resolution of which notice had been given. The plaintiff, a member of London Life, brought this action claiming that the second defendant had not validly adjourned the ‘meeting’ in the morning and that accordingly all business conducted at the purported adjourned meeting in the afternoon was invalidly conducted. The action was heard with great speed, and on 14 November 1988 Vinelott J dismissed the action. The plaintiff appealed to this court and the appeal was heard by us on 5, 6 and 7 December 1988. At the end of the hearing we gave our decision to allow the appeal, stating that our reasons would be given later. These are those reasons.
London Life is a mutual life assurance company. It has no share capital but is limited by guarantee. The members are some, but not all, of its policyholders. Early in 1988 London Life started negotiations with another mutual life assurance company, Australian Mutual Provident Society (AMP), for the merger of their long-term businesses. The existence of these negotiations was disclosed at the annual general meeting of London Life in May 1988.
Thereafter negotiations continued and agreement in principle was reached between the two companies which is conditional on completion taking place by 31 March 1989. The agreement required the London Life long-term fund to become a separate fund administered by AMP. The view was taken that the scheme could not go ahead until the memorandum of association of London Life had been amended to include a general power to transfer the business of London Life. The sole business of the meeting convened for 19 October 1988 was to pass the necessary special resolution so to amend the memorandum of association. The scheme also has to be sanctioned by the court under s 49 of the Insurance Companies Act 1982.
The proposed merger gave rise to some opposition and some adverse press comment. It became apparent to the board that the meeting was likely to be far better attended than the ordinary run of general meetings of London Life at which normally only approximately 80 people attend. In the circumstances the board determined to hold the meeting at Cinema 1 at the Barbican Centre which could seat 280 people but could, if necessary, accommodate some 300.
Notice of the proposed extraordinary general meeting was given on 27 September 1988. Very shortly thereafter the board became anxious whether Cinema 1 would in fact prove adequate. As a result arrangements were made with the Barbican Centre to book two overflow rooms together with additional accommodation in the foyer to accommodate those who could not fit into the cinema. The intention was that there would be an audio-visual link between the overflow rooms, the foyer and the cinema. The two overflow rooms could, at a maximum, hold 100 persons each.
As the date of the meeting approached the board continued to feel anxious lest Cinema 1 and the provisions for overflow at the Barbican Centre should themselves prove inadequate for the number who attended. They accordingly booked another room at the Café Royal (with a seating capacity of 800) between 1.30 and 5 pm on 19 October. The judge found that those concerned with the organisation throughout thought that the cinema together with the overflow provision at the Barbican Centre would accommodate all those wishing to attend: the room at the Café Royal was booked merely as a precaution, it not being thought that it would be necessary to have the meeting there.
The details of what occurred on 19 October are set out in the judge’s judgment. For my purposes I can summarise the events as follows. Those arriving for the meeting had to register in order to be issued with voting cards. Such registration took place in the foyer. Some of those arriving to attend the meeting were diverted to the overflow rooms which were on the ninth floor but they were not told that there would be no facilities for registration there. The cinema became overcrowded and members unable to gain access to the cinema were diverted to both the overflow rooms and the foyer.
Under art 17 the president of London Life is made the chairman of any general
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meeting. Mr Dawson is the president. At about 12 noon he and the directors took their places at a table at the end of the cinema facing the body of the room. They were accompanied by their legal advisers. Since registration was not complete, Mr Dawson announced that the start of the meeting would be delayed by 20 minutes. He later delayed the start a further ten minutes until 12.30 pm. It emerged that many people had gone to the overflow rooms without registering and they were unwilling to go down to the foyer to register.
A small party went up to the overflow rooms to discover what the situation was. They found that the audio-visual link was deficient; although the board could be seen and the chairman could be heard, members speaking from the body of the cinema could not be heard. There was no direct audio-visual link from the overflow rooms to the cinema. This was contrary to expectations. To meet the position, a person with headphones and a portable microphone had been stationed in each of the overflow rooms, in the foyer and in the cinema. These persons could communicate with each other and thereby a message from someone in an overflow room or in the foyer could be passed to the person equipped with headphones and a microphone in the cinema. He could then write down the message and take it to the chairman.
The arrangements for the meeting were plainly unsatisfactory and before 12.30 pm suggestions had been made from the floor of the cinema that the meeting should be adjourned. However, Mr Dawson decided to open the meeting at 12.30 pm. Registration was not then complete. As soon as the meeting opened a member rose to object that it was not fair to start the meeting while there were people outside trying to get in. Others proposed that the meeting should be adjourned which was taken to mean dissolved or abandoned. One member insisted that there should be a vote on this resolution, although there was some opposition to an adjournment in the body of the cinema. Mr Dawson having pointed out that a vote would take a considerable time, the member who had proposed an adjournment withdrew it. Mr Dawson then started to deliver his prepared speech.
While this was going on, a number of messages had been received from the overflow rooms and passed in note form to Mr Dawson. One in particular records that the plaintiff had proposed an adjournment sine die. Mr Dawson said that he did not recollect reading this note.
The time was now about 12.45 pm or 12.50 pm. One of the doors of the cinema was forced open letting in a ‘muted roar’ from the foyer. At that stage Mr Dawson said that he proposed the adjournment of the meeting himself and proposed that it should adjourn to alternative accommodation at the Café Royal where the meeting would resume at 2.30 pm. A policyholder objected that he had appointments for the afternoon and received support from the body of those in the cinema. The chairman repeated that he proposed the adjournment to the Café Royal but said that he would like it to be done with the majority consent of the members. Another policyholder suggested that such an adjournment of the meeting would be invalid (which again received support) and pointed out that the meeting could not continue if part of the membership was excluded. Another policyholder said words to the effect that such an adjournment would exclude those who could not attend at 2.30 pmand that such an adjournment would prejudice those who had appeared at the right time and in the right place. This again received support from the floor. Another policyholder then proposed a vote of no confidence in the board. The chairman then adjourned the meeting to the Café Royal at 2.30 pm.
At the meeting in the Café Royal in the afternoon Mr Dawson gave his prepared speech and there was an orderly debate. As the room had only been booked until 5 pm Mr Dawson ruled that a vote would have to be taken on the resolution before 4.30 pm. When the resolution was put, it was carried by a small majority and therefore failed as a special resolution. However, Mr Dawson demanded a poll and the meeting was closed. The result of the poll was announced the following day and the resolution was passed.
The judge found that there were approximately 800 people at the meeting in the
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morning of whom 468 were registered to vote. At the meeting at the Café Royal in the afternoon there were approximately 600 people present of whom 335 were registered to vote.
I must now mention the articles of London Life which are directly in question. Article 12 requires that 21 days’ notice of an extraordinary general meeting convened to pass a special resolution must be given ‘specifying the place, the day and the hour of the meeting … ' Article 17 provides that the president is to preside as chairman at any general meeting. Article 18 provides:
‘The Chairman may, with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting) adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting from which the adjournment took place. When a meeting is adjourned for thirty days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. Save as aforesaid, it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting.’
Article 25 provides: ‘The Chairman of the meeting shall regulate the proceedings thereat … ’
It is common ground between the parties that, in the circumstances obtaining at the Barbican Centre on the morning of 19 October, no business could have been validly conducted at that meeting. Those who wished to be present in the cinema had been excluded from it and the audio-visual arrangements made for the overflow rooms and the foyer had broken down. The issue between the parties is whether Mr Dawson, as president of London Life, could and did validly adjourn anything which was a ‘meeting’ of London Life to the Café Royal. If there was no valid adjournment, the business purported to be done at the alleged adjourned meeting would have been wholly invalid.
The arguments put forward by counsel on behalf of the plaintiff both to the judge and to us were broadly the same. He made three submissions, each supported by a number of different arguments. First, he submitted that the assembly at the Barbican Centre was not a meeting of London Life at all. If this submission is correct, Mr Dawson could not claim to be chairman under art 17, since there was no meeting of London Life to which that article could apply. Therefore Mr Dawson could not adjourn the meeting. Moreover, if the assembly at the cinema was not a meeting of London Life, the meeting at the Café Royal in the afternoon could not be an adjourned meeting of London Life. Counsel’s second submission for the plaintiff was that, even if there was a meeting of London Life of which Mr Dawson was the chairman, he had no power to adjourn it without the consent of the meeting since art 18 so provides. Counsel’s third main submission was that, even if there was a meeting of London Life which Mr Dawson could, in certain circumstances, adjourn without the consent of the meeting, he did not validly exercise such power. I will consider these submissions in turn.
Was there a meeting?
The first difficulty is to identify what, if anything, was the meeting. Was it the assembly of the members in the cinema alone (from which all those in the overflow rooms and foyer were excluded) or was it the conglomerate assembly of those in the cinema plus those in the overflow rooms and foyer?
Counsel’s first submission for the plaintiff under this head was made with a view to showing that the conglomerate assembly in the cinema, the overflow rooms and the foyer could not constitute a meeting. He submitted that for there to be a meeting at all everyone must be in the same place, face to face. If this submission were correct, even if the audio-visual links had worked perfectly, there would still have been no meeting at the Barbican on 19 October since all the members attending would not have been face to face but scattered between different rooms. In support of this submission counsel relied
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on the definition of the word ‘meet’ in the Shorter Oxford English Dictionary, viz ‘To come face to face with or into the company of [another person]’. He also relies on the fact that the requirement in the Companies Act 1985, s 378 that an extraordinary resolution has to be passed at a general meeting has a long statutory history dating back to times long before the invention of audio-visual links. This, he submits, shows that a meeting for the purpose of the Act requires that everyone shall be physically present in the same room or space.
I do not accept this submission. The rationale behind the requirement for meetings in the 1985 Act is that the members shall be able to attend in person so as to debate and vote on matters affecting the company. Until recently this could only be achieved by everyone being physically present in the same room face to face. Given modern technological advances, the same result can now be achieved without all the members coming face to face; without being physically in the same room they can be electronically in each other’s presence so as to hear and be heard and to see and be seen. The fact that such a meeting could not have been foreseen at the time the first statutory requirements for meetings were laid down, does not require us to hold that such a meeting is not within the meaning of the word ‘meeting’ in the 1985 Act. Thus, communication by telephone has been held to be a ‘telegraph’ within the meaning of the Telegraph Acts 1863 and 1869, notwithstanding that the telephone had not been invented or contemplated when those Acts were passed: see A-G v Edison Telephone Co of London Ltd (1880) 6 QBD 244.
I have no doubt therefore that, in cases where the original venue proves inadequate to accommodate all those wishing to attend, valid general meetings of a company can be properly held using overflow rooms provided, first, that all due steps are taken to direct to the overflow rooms those unable to get into the main meeting and, second, that there are adequate audio-visual links to enable those in all the rooms to see and hear what is going on in the other rooms. Were the law otherwise, with the present tendency towards companies with very large numbers of shareholders and corresponding uncertainty as to how many shareholders will attend meetings, the organisation of such meetings might prove to be impossible.
In the event, counsel for the defendants did not contend that the conglomerate assembly was a meeting of the company. He submitted that the assembly in the cinema was the meeting. I accept this submission. If there was a meeting at all it was the assembly in the cinema, that being the venue specified in the notice convening the meeting. Such meeting was incapable of proceeding to business, since all those members unable to get into the cinema were excluded. For the reasons I have given, if proper overflow facilities had in fact been provided, those in the overflow rooms and the foyer would not have been excluded from that meeting but would, electronically, have been present at it. But since the audio-visual links did not work, those in the overflow rooms and foyer were excluded and the meeting in the cinema was incapable of transacting any business.
Does the fact that the assembly in the cinema was incapable of conducting any business necessarily mean that it was not a ‘meeting’ at all? Counsel for the plaintiff submitted that it was an invalid meeting, a nullity. He said that, as in the case of a meeting of which proper notice has not been given or at which there is no quorum, where members are excluded from a meeting it is invalid and cannot be adjourned.
In my judgment the phrase ‘invalid meeting’, although useful as a shorthand description of a meeting at which no business can be validly transacted, is capable of giving rise to confusion. The fact that a meeting cannot pass a valid resolution in certain circumstances does not necessarily mean that there has been no meeting at all. Thus in many cases (including the present) the articles of a company provide that, in the event of there being no quorum present at a meeting, the meeting shall be adjourned for a fixed period. In such a case it is clear that the inquorate meeting was a meeting notwithstanding the fact that it could conduct no business.
In my judgment there is no absolute rule of law that a meeting from which members
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are wrongly excluded is a nullity. The meeting, as such, can conduct no business, but it is nevertheless a meeting. I can see no good reason why the law should shut its eyes to the reality that, in response to a notice convening them, certain members of the company have assembled together at what, in ordinary usage, would be called a meeting. What that meeting can validly do is quite another matter.
In the present case the sole question is whether Mr Dawson was, within art 17, the chairman of a general meeting of London Life. The answer to that question must depend on the meaning of the word ‘meeting’ in the articles of London Life. Article 15 provides:
‘No business shall be transacted at any General Meeting unless a quorum is present when the meeting proceeds to business … ’
Article 16 then provides:
‘If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened on the requisition of Members, shall be dissolved. In any other case it shall stand adjourned to the same day in the next week, at the same time and place … ’
These two articles therefore proceed on the basis that an inquorate meeting incapable of conducting any business is still a ‘meeting’ of London Life, capable of being adjourned. Similarly, under regs 40 and 41 of Table A in the Companies (Tables A to F) Regulations 1985, SI 1985/805, an inquorate meeting is treated as a meeting capable of adjournment. Therefore, the draftsman of the London Life articles and Parliament both plainly envisaged that the word ‘meeting’ covered an assembly which could conduct no business.
Counsel for the plaintiff relied on certain authorities to show that as a rule of law a meeting from which those entitled to be present were excluded is a nullity. In Harben v Phillips (1883) 23 Ch D 14 four directors were wrongly excluded from a board meeting. The three directors present at the board meeting purported to adjourn it. The adjourned board meeting purported to take certain decisions. Chitty J said that the first meeting was ‘an unlawful meeting, that it was not properly constituted, and that everything that was done at it is invalid’ (at 26). In consequence he held that the adjourned board meeting could not validly transact the business it purported to transact. In the Court of Appeal Cotton LJ expressed very grave doubt whether the first board meeting could be considered a proper meeting (at 34). The only question in that case was whether the first board meeting had been validly adjourned. The purported adjournment was the act of the meeting itself (ie of the three directors present). Therefore in that case it was being contended that the meeting itself (as opposed to the chairman of the meeting) could conduct business, notwithstanding the exclusion of some members entitled to be there and to vote on the resolution. That, to my mind, is a wholly different case. In the present case the meeting at the cinema did not purport to transact business; the claim is that its ex officio chairman had power to adjourn it.
In Re Portuguese Consolidated Copper Mines Ltd (1889) 42 Ch D 160 there was a board meeting of which inadequate notice was given. Only two directors attended. They resolved that two directors should be a quorum, purported to allot certain shares and adjourned the meeting. The adjourned meeting purported to ratify the allotment. The Court of Appeal held that, there having been no proper notice of the first meeting, it was ‘no valid meeting, and being an invalid meeting could not adjourn itself … ’: per Lord Esher MR (at 167). The position, therefore, was the same as in Harben v Phillips, viz a meeting which had excluded (through lack of notice) persons entitled to attend. It therefore could not transact business and could not resolve to adjourn itself. Certainly the language used by Lord Esher MR goes wider than that, but it must be read in the light of the question he was there considering.
The Canadian case of McLaren v Fisken (1881) 28 Gr 352 is the same. An inquorate meeting of a board purported to do business by adjourning itself, there being no article permitting them so to do. It was held that the purported adjournment was a nullity and
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therefore no business could be validly transacted at the adjourned meeting. There again the question was not whether a meeting had been held but whether such meeting could validly adjourn itself.
On the other side there is one authority which lends some support to the view that there can be a general meeting even when that meeting is incapable of conducting business. In Fletcher v New Zealand Glue Co Ltd (1911) 31 NZLR 129 the company was bound to submit a return of the persons who were its members on the fourteenth day after its annual general meeting. The company duly convened an annual general meeting which proved to be inquorate. Under its articles, an inquorate meeting was automatically adjourned sine die. The company made a return of the members 14 days after the date of the inquorate meeting. It was held that the return was proper since there was a valid general meeting but valid only for the purposes of adjournment. Although the circumstances there under consideration were very different, the case is some authority for the proposition that there can be a meeting of a company even though such a meeting is incapable of conducting any business.
I can therefore see no reason why, as common sense suggests, the assembly at the cinema should not in law constitute a ‘meeting’ within the meaning of that word in the 1985 Act and the articles of London Life. It follows that I agree with Vinelott J that under art 17 Mr Dawson was the chairman of the meeting and had all the powers of the chairman.
Did the chairman have power to adjourn?
Counsel for the plaintiff submits that since art 18 expressly provides that the chairman can only adjourn the meeting with its consent, Mr Dawson could have no power in any circumstances to adjourn without such consent. Vinelott J rejected this submission, to my mind rightly.
I will first consider the powers of a chairman at common law, there being no document expressly regulating powers of adjournment. A chairman has no general right to adjourn a meeting at his own will and pleasure, there being no circumstance preventing the effective continuation of the proceedings: see National Dwellings Society v Sykes [1894] 3 Ch 159 at 162. However, it is clearly established that a chairman has such power where unruly conduct prevents the continuation of business: see John v Rees [1969] 2 All ER 274 at 290–293, [1970] Ch 345 at 379–383. In my judgment it is also established that when in an orderly meeting a poll is demanded on a motion to adjourn and such poll cannot be taken forthwith, the chairman has power to suspend the meeting with a view to its continuance at a later date after the result of the poll is known: Jackson v Hamlyn [1953] 1 All ER 887, [1953] Ch 577. In that case Upjohn J expressly held that the chairman was not ‘adjourning’ the meeting within the meaning of the article there in question (see [1953] 1 All ER 887 at 889, [1953] Ch 577 at 588). Even so, he held that the chairman had power to stand over the proceedings to another time, since some such power had to exist in order to give effect to the provisions as to polls in the articles. Therefore, although it may not have been an adjournment within the meaning of the articles there under consideration, he held that there was a residual power in the chairman to take such steps as would, in the ordinary usage of the word, amount to an adjournment.
In my judgment the position at common law is correctly set out in John v Rees and in the two following passages. The first is from R v D’Oyly (1840) 12 Ad & El 139 at 159, 113 ER 763 at 771:
‘Setting aside the inconvenience that might arise if a majority of the parishioners could determine the point of adjournment, we think that the person who presides at the meeting is the proper individual to decide this. It is on him that it devolves, both to preserve order in the meeting, and to regulate the proceedings so as to give all persons entitled a reasonable opportunity of voting. He is to do the acts necessary for those purposes on his own responsibility, and subject to being called upon to answer for his conduct if he has done anything improperly.’ (My emphasis).
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The second passage is from Rogers A Practical Arrangement of Ecclesiastical Law (1840) p 874 quoted in John v Rees [1969] 2 All ER 274 at 292, [1970] Ch 345 at 381. The passage says that a particular decision—
‘by no means interferes with the right which every chairman has to make a bona fide adjournment, whilst a poll or other business is proceeding, if circumstances of violent interruption make it unsafe, or seriously difficult for the voters to tender their votes; nor of adjourning the place of polling, if the ordinary place used for that purpose be insufficient, or greatly inconvenient. In most of such cases, the question will turn upon the intention and effect of the adjournment, if the intention and effect were to interrupt and procrastinate the business, such an adjournment would be illegal if, on the contrary, the intention and effect were to forward or facilitate it, and no injurious effect were produced, such an adjournment would, it is conceived, be generally supported.’ (My emphasis).
In my judgment, were it not for art 18, Mr Dawson would at common law have had power to adjourn the meeting at the cinema since the inadequacy of the space available rendered it impossible for all those entitled to attend to take part in the debate and to vote. A motion for adjournment could not be put to the meeting as many who would be entitled to vote on the motion were excluded. Therefore, at common law it would have been the chairman’s duty to regulate the proceedings so as to give all persons entitled a reasonable opportunity of debating and voting. This would have required him either to abandon the meeting or to adjourn it to a time and a place where the members could have a reasonable opportunity to debate or vote. I see no reason to hold that in all circumstances the meeting must be abandoned; in my judgment the chairman can, in a suitable case, merely adjourn such meeting.
What then is the effect of art 18 which expressly confers on the chairman power to adjourn but only with the consent of a quorate meeting? Counsel for the plaintiff submits that the chairman’s power to adjourn having been expressly laid down and expressly circumscribed, there is no room for the chairman to have any implied power at common law. He relies on the decision of the Privy Council in Salisbury Gold Mining Co Ltd v Hathorn [1897] AC 268. In that case the articles provided that the chairman could adjourn with the consent of the members; the articles did not provide (as does art 18 in the present case) that the chairman was bound to adjourn if so directed by the meeting. It was held that the chairman was not bound to put a motion for adjournment to the meeting but was entitled to insist in the meeting proceeding to business. Lord Herschell treated the express provision making it the chairman’s decision whether or not to adjourn as ousting the general rule that a meeting can always adjourn itself. So, by analogy, counsel for the plaintiff argues that the express provision in art 18 requiring the chairman to obtain the consent of the meeting as a precondition to the exercise of his power to adjourn precludes the existence of any power in the chairman to adjourn without such consent.
Like the judge, I reject this submission. In my judgment art 18 regulates the chairman’s powers of adjournment to the extent that its machinery is effective to cover the contingencies which occur. Therefore if the circumstances are such that it is possible to discover whether or not the meeting agrees to an adjournment, art 18 lays down a comprehensive code. But if the circumstances are such that the wishes of the meeting cannot be validly ascertained, why should art 18 be read as impairing the fundamental common law duty of the chairman to regulate proceedings so as to enable those entitled to be present and to vote to be heard and to vote? In my judgment Jackson v Hamlyn [1953] 1 All ER 887, [1953] Ch 577 is an authority in support of that view since in that case there was an article in much the same terms as art 18 in the present case.
As the judge pointed out, the contrary result would produce manifest absurdities. Say that there was a disturbance in a meeting which precluded the taking of any vote on a
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motion to adjourn. Would this mean that the meeting had to be abandoned even though a short adjournment would have enabled peace to be restored and the meeting resumed? Again, say that in the present case the adjoining Barbican theatre had been available on 19 October so that a short adjournment to the theatre would have enabled an effective meeting of all members wishing to attend to be held that morning. Can it really be the law that because a valid resolution for such an adjournment could not be passed in the cinema (many members entitled to vote being excluded from the cinema) no such adjournment could take place?
I do not find that any principle of construction requires me to hold that an express provision regulating adjournment when the views of the meeting can be ascertained necessarily precludes the existence of implied powers when consent of the meeting cannot be obtained. The Salisbury Gold case lays down no such proposition. Accordingly, I reach the conclusion that in any circumstances where there is a meeting at which the view of the majority cannot be validly ascertained, the chairman has a residual common law power to adjourn ‘so as to give all persons entitled a reasonable opportunity of voting’ and, I would add, speaking at the meeting.
Was the power validly exercised?
Vinelott J held that Mr Dawson validly exercised the power to adjourn by adjourning the meeting to the Café Royal in the afternoon. This is the only point (though a decisive one) on which I differ from the judge. As I understand his judgment, he took the view that provided Mr Dawson acted in good faith (which it is accepted that he did) his decision could not be impugned and in particular that it was irrelevant that the effect of the adjournment to the Café Royal was that some 200 of those present in the morning did not attend the meeting at the Café Royal in the afternoon and that 133 people (being over 25% of the total) who had registered at the Barbican did not register at the Café Royal. I am unable to agree with this view.
The starting point is to consider the nature of the residual power to adjourn which in my judgment remains vested in the chairman. It was a residual power exercisable only when the machinery provided by the articles had broken down. This residual common law power is itself tightly circumscribed by reference to the objects for which it exists. I quote again from the passages which I have emphasised above in the quotations from R v D’Oyly and Mr Rogers’s book. The power is to regulate proceedings ‘so as to give all persons entitled a reasonable opportunity of voting’. The chairman must ‘do the acts necessary for those purposes’. The power to adjourn is only validly exercised if ‘no injurious effect were produced’. I would add that at a company meeting a member is entitled not only to vote but also to hear and be heard in the debate. Therefore it is the very purpose of the power to facilitate the presence of those entitled to debate and vote on a resolution at a meeting where such debate and voting is possible. To my mind, this is inconsistent with the view that the exercise of the power can only be impugned on the grounds of lack of good faith. In my judgment the chairman’s decision must also be taken reasonably with a view to facilitating the purpose for which the power exists. Accordingly, the impact of the proposed adjournment on those seeking to attend the original meeting and the other members must be a central factor in considering the validity of the chairman’s decision to adjourn.
The quotation from Rogers might suggest that if the chairman’s decision proves in the event to have an adverse effect on the members, that will render the decision invalid. In my judgment that is not the correct test. The chairman’s decision will not be declared invalid unless on the facts which he knew or ought to have known he failed to take into account all the relevant factors, took into account irrelevant factors or reached a conclusion which no reasonable chairman, properly directing himself as to his duties, could have reached, ie the test is the same as that applicable on judicial review in accordance with the principles of Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223. This was the approach adopted by Uthwatt J in Second
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Consolidated Trust Ltd v Ceylon Amalgamated Tea and Rubber Estates Ltd [1943] 2 All ER 567, where he held a chairman’s decision invalid on the grounds that he had failed to take into account a relevant factor.
I turn then to consider the position confronting Mr Dawson at the Barbican cinema on the morning of 19 October. The principal factors were as follows: (1) the business before the meeting was to amend the memorandum of association but the meeting was also treated as being in the nature of a referendum to establish the attitude of the members to the proposed merger of a large part of the business of London Life with AMP, a matter of fundamental importance to the company and its members; (2) the last date by which the merger had to be approved was 31 March 1989 (I note that this fact is not mentioned in the judgment of Vinelott J and may well not have been brought to his attention); (3) the merger would be much easier to put into operation if completed on 31 January 1989 being the end of the accounting years of both London Life and AMP. To that end a date (5 December 1988) had been fixed for a hearing in court under the Insurance Companies Act 1982; (4) the meeting at the cinema was incapable of either debating or voting on the resolution to amend the memorandum of association; (5) there was a substantial ‘ginger group’ opposing the merger, at least until alternative courses had been considered; many of them were present at the Barbican; (6) there were repeated attempts from the floor and the overflow rooms to obtain an adjournment of the meeting sine die; (7) when the possibility of adjournment to the Café Royal in the afternoon was first suggested, there were objections from the floor that some members present in the cinema would not be able to attend such adjourned meeting; (8) there were present at the meeting a number of members who had come from a distance and might not be able to attend a further meeting on another date (9) if the meeting were adjourned to the Café Royal on the same day, those present at the Barbican but unable to be present at the Café Royal in the afternoon would not only be unable to speak but also unable to vote. Under art 30, proxies have to be deposited 48 hours before any adjourned meeting; and (10) the chairman was advised by leading counsel that he could properly adjourn to the Café Royal in the afternoon.
Mr Dawson gave evidence of the factors which most persuaded him to adjourn to the Café Royal. These include all the factors mentioned above, except those which in my view were of central importance, viz (2), (6), (7) and (9). It would not be fair or sensible to find that, because he did not specifically mention that he took into account the desire of certain members for an adjournment sine die and their inability to be at the Café Royal in the afternoon, he did not have that well in mind; he was being bombarded with this information at the time he took his decision. But I can see nothing to suggest that he took into account the fact that there was no absolute necessity to obtain approval of the merger until 31 March 1989, a date more than five months away. Nor is there anything to suggest that he appreciated that those who could not be at the Café Royal would not only be unable to speak but would be unable to vote even by proxy.
It was suggested in argument that those whose other arrangements precluded them from attending the afternoon meeting at the Café Royal would probably not have been able to stay long enough to vote even if the Barbican meeting had proceeded in the ordinary way, since this would have lasted for a long time. This is a point which carried weight with the judge. But, to my mind, it has only a limited impact. First, it is a hypothesis, not a fact. Second, and more important, the purpose of members attending meetings is to enable them not only to vote but also to take part in the debate. Those present in the morning could in any event have been present and spoken in the debate if it had continued at the Barbican, even if they could not have waited until the vote was taken. By the adjournment to the Café Royal they were precluded from even taking part in the debate.
In these circumstances, in my judgment, Mr Dawson’s decision to adjourn to the Café Royal in the same afternoon was not valid on the ground either that he failed to take into account relevant factors or that the decision was Wednesbury unreasonable. The legal
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advice tendered was in my judgment erroneous, probably because it failed to take account of the very limited ambit of the chairman’s residual power to adjourn. Since such power is only exercisable for the purpose of giving the members a proper opportunity to debate and vote on the resolution, there must in my judgment be very special circumstances to justify a decision to adjourn the meeting to a time and place where, to the knowledge of the chairman, it could not be attended by a number of the members who had taken the trouble to attend the original meeting and could not even lodge a proxy vote. To overlook this factor is to leave out of account a matter of central importance. True it is that those who were available for the afternoon meeting would have been inconvenienced by an adjournment to another date or the convening of a wholly new meeting since they would either have to have attended at the fresh meeting or to have lodged proxies. But in my judgment this could not outweigh the central point that the form of the adjournment was such as undoubtedly to preclude certain members from taking any part in the meeting either by way of debate or by way of vote.
If the time factor had been such that the merger proposal could not have been carried through at all unless there was an immediate decision on the resolution before the meeting (ie if the merger had to be approved within a period which rendered impossible the convening of a further meeting on 21 days’ notice or the adjournment of the original meeting for a sufficient period to allow proxies to be lodged) the matter might have been different. But in fact there was no compelling time factor in this case. True it is that expenditure would have to be incurred in calling a further meeting. But if, instead of adjourning to the detriment of certain members, the meeting at the Barbican had either been abandoned or adjourned sine die, 21 days’ notice could have been given of a fresh meeting to be held, say, a month later, well before even the date fixed for the hearing in court. If such fresh meeting had been called, all the members would have had an opportunity to be present either in person or by proxy. There is no sign that Mr Dawson ever appreciated this factor or took it into account in reaching his decision.
Accordingly, although Mr Dawson acted in complete good faith, his decision to adjourn to the Café Royal on the same date was not one which, in my judgment, he could reasonably have reached if he had properly apprehended the restricted nature and purpose of his powers. Therefore in my judgment his decision was invalid.
I would therefore allow the appeal and declare first that the meeting at Cinema 1 on the morning of 19 October was not validly adjourned and also that proceedings purportedly conducted at the meeting at the Café Royal in the afternoon are invalid and of no effect.
MUSTILL LJ. I agree that this appeal should be allowed, but since we differ from the conclusion of the judge and since my reasons for doing so are not in every respect the same as those expressed by Sir Nicolas Browne-Wilkinson V-C and Woolf LJ, I will add some observations of my own.
My starting point is the proposition that a gathering of people may occupy an intermediate status between a meeting which can validly effect the business which it was convened to transact and a mere assembly which can do nothing at all. The intermediate status involves that the gathering may have a chairman and that the chairman has powers to dissolve the meeting and, subject to the points mentioned below, to adjourn it on his own initiative, and to prorogue it; and yet the gathering cannot transact any real business, including even a decision, qua meeting, to adjourn. I use the word ‘prorogue’, defined in the Oxford English Dictionary as ‘To discontinue the meetings of (a legislative or other assembly) … without dissolving it’, because it seems to come closest to the idea of simultaneously bringing the meeting to an end and keeping it in existence. The concept of such an impotent body having any true legal existence seems odd, but it does appear to be implicit in arts 13, 16 and 19 of London Life’s articles of association, and also in Re London Flats Ltd [1969] 2 All ER 744 at 752, [1969] 1 WLR 711 at 719 and Fletcher v New Zealand Glue Co Ltd (1911) 31 NZLR 129.
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I also accept that it is possible to have a meeting, not all of whose members are present in the same room. It is unnecessary to consider the extreme case where none of the participants are face to face, but are linked by simultaneous audio-visual transmissions. This would require consideration of whether it is possible to convene a meeting which does not take place in any single location, and which consists only of the exchange of electronic impulses. No such problem arises here. If the arrangements had gone according to plan, and if the participants had first occupied Cinema 1 until it was full, and had then all found a place in the adjacent rooms by the time the business had commenced, and if they all had been able to see, hear and communicate with the other participants I would have seen no intellectual and practical objection to regarding this as a ‘meeting’. Moreover, it would have been a meeting held at the place of which notice had been given, namely Cinema 1, since this was where the centre of gravity of the meeting was to be found.
In the event, however, this is not what happened at all. Those who found places in the overflow rooms could not see or hear properly. The opportunity for an exchange of views and arguments between one overflow room and another, and between each room and those on the platform in Cinema 1 was virtually non-existent. Many of those in the overflow rooms were unable to carry out the registration formalities, and did not know whether and how to do so. Still others were milling around in the foyer and had not yet achieved a place in any room. It is said for the company that this amounted to a meeting, albeit not one which was capable of transacting any business, let alone the business which it was summoned to transact. For this purpose, it was said, and rightly said, that one must leave out of account the shouts, hubbub and general disturbance. A disorderly meeting is none the less a meeting. I agree, but one must still inquire, where in this chaotic scene was to be found the meeting of the members of London Life, of which Mr Dawson is said to have acted as chairman?
As I understand it, the main thrust of the company’s case is that there was a meeting in Cinema 1; an ineffectual meeting, with many people shut out who should have been there, but a meeting none the less. I can certainly understand the theory of this proposition, in that the presence of all these members outside the cinema, who were entitled to be inside it, is not conclusive against the existence of a meeting with just sufficient substance in it to have a chairman. But, on the facts, is this what happened? Reading through the partial transcript, partial because it only begins at 11.30 am, it seems to me plain that Mr Dawson never conceived his meeting to consist only of those who had managed to gain entry to Cinema 1 but, on the contrary, was trying to marshal the scattered fragments of the intended meeting which but for the breakdown of the communications which he was attempting to re-establish would have taken place in three places simultaneously. I think it equally plain that on no view could these fragments be regarded as a meeting of any kind, even one with the very limited capacity previously described.
We were pressed in argument to give ‘meeting’ its ordinary meaning, and to avoid a decision based on technicalities. As to the ordinary meaning, I believe that there may be several. I doubt whether the characteristics of a meeting as understood by the law correspond with those of an informal meeting in everyday life; but in any event (and the matter is really one of impression) I would not myself have thought that the events at the Barbican Centre on the morning of 19 October 1988 are what the man in the street would have called a meeting. He would be more likely to describe it as a meeting which London Life had tried to hold, but which had never got off the ground. As to technicalities, I believe that an insistence on regular form is not the invention of lawyers determined to find objections to what is really unobjectionable, but a recognition founded on the practical experience over very many years of those who have been concerned with meetings that if the forms are not observed there is an ever-present risk of confusion, resentment and dispute, as the present case has clearly shown.
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On this ground alone, therefore, I would have been prepared to hold that the attempts made at the Barbican did not amount to any meeting which would have been capable of prorogation to the opinion at the Café Royal on the initiative of Mr Dawson. But since Sir Nicolas Browne-Wilkinson V-C and Woolf LJ in company with the judge are of a different opinion, I will go on to deal briefly with the remaining issues. The first is whether, in the absence of express contrary provisions in the articles or rules governing the conduct of the meeting, the chairman has power to prorogue where circumstances make it impossible for the conduct of business to continue. It is true that the earlier cases were concerned with polls which could not be completed within the time-span of the meeting, and it might be said that the conducting of a poll after the participants had dispersed never to reassemble is not in any real sense the continuance of the meeting, rather than the completion of unfinished business on behalf of the concluded meeting. Nevertheless, the power was addressed in much wider terms in John v Rees [1969] 2 All ER 274, [1970] Ch 345 and Jackson v Hamlyn [1953] 1 All ER 887, [1953] Ch 577, and I see no reason to differ from what is there stated.
Nor do I regard the presence of art 18 as a ground for concluding that a power to prorogue cannot in the present case be implied. The purpose of art 18 is to enable the meeting to validate, by a motion properly proposed and carried, a decision to adjourn. The powers under the article are capable of employment only if the meeting is in a condition to conduct its business in an orderly manner. This is just the situation in which the implied power to prorogue comes into existence, and I cannot see how the presence of art 18, which ex hypothesi is inoperable, can have any effect on the implication which would otherwise have been made.
It must, however, be borne in mind that prorogation is an emergency measure, to be employed only if the business of the meeting can be saved by no other method and only if saving the business does not cause incommensurate hardship on those who have attended to speak and vote, by comparison with the damage which would be done if the chairman adopted the alternative course of dissolving it and summoning another. That there was an emergency at the Barbican is, of course, undeniable. But did the chairman address himself appropriately to the choice which he had to make? If he had done so, we would not be entitled to intervene simply because in the light of hindsight it appeared that he had made the wrong choice. It would be necessary for the plaintiff to establish the degree of unreasonableness contemplated by the tests laid down in authorities too well known to require repetition and, speaking for myself, I would be slow to make such a finding, given the very difficult circumstances in which the chairman had to act. I do, however, agree with Sir Nicolas Browne-Wilkinson V-C that the chairman omitted from consideration certain important factors which bore on the exercise of this exceptional power, and thereby established the decision to prorogue on an insecure foundation. There is no need to set out my reasons for this conclusion, since they correspond exactly with those set out in the judgment of Sir Nicolas Browne-Wilkinson V-C. Accordingly, I would on this ground also hold that the plaintiff was entitled to the relief which he claimed.
I would allow the appeal.
WOOLF LJ. I agree that in accordance with the judgment of Sir Nicolas Browne-Wilkinson V-C this appeal should be allowed. There is nothing that I can usefully add to his judgment on the first of the three issues which he identifies. I would, however, add a few comments on the second and third issues which I regard as being closely interrelated.
In deciding whether Mr Dawson’s decision to adjourn the meeting was lawful, the approach of the court is no different from that which it regularly adopts when reviewing the exercise of discretion by a public body under a statutory power. This is the position even though when acting as chairman of the meeting Mr Dawson is not performing a public function and he derives his powers either expressly or by implication from the
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articles of the company. While the source of his power is different from that of a person performing a public function, the well-established principles which determine whether there has been a proper exercise of discretion by a public body apply to the exercise by Mr Dawson of his powers. In particular he must have regard to the nature of the power which he is exercising and use the power for the purpose for which it was given.
The general source of Mr Dawson’s powers is to be found in art 25, which provides: ‘The Chairman of the meeting shall regulate the proceedings thereat … ' This power is conferred on the chairman so as to enable the chairman to assist the meeting in achieving the purpose for which the meeting was taking place. It is a general power which has to be considered in the light of the specific provisions of the other relevant articles which will, in so far as they are inconsistent with the general power, restrict it. In particular, the chairman’s power to regulate the meeting is subject to the express provisions of art 18 which make it clear that Mr Dawson as chairman has only an express power to adjourn a meeting (1) if he is acting with the consent of a meeting at which a quorum is present, and (2) subject to giving notice of the adjournment when the meeting is being adjourned for more than 30 days.
Because of the conditions which existed on 19 October 1988 it was clearly impossible to obtain the consent of the meeting which was then taking place at Cinema 1 in the Barbican and it was only because of this inability to ascertain the wishes of the meeting in accordance with art 18 that Mr Dawson had an exceptional and residual discretion to adjourn without the consent of the meeting which would normally be required. If it had been possible to obtain the views of the meeting then Mr Dawson could only have adjourned the meeting if he complied with art 18.
The exceptional and residual nature of the power which Mr Dawson was exercising placed constraints on the manner in which it was proper to exercise the power. The power was not one which should be exercised as freely as it could be if it was exercised under art 18.
In adjourning the meeting to the Café Royal Mr Dawson was adjourning to a different location and to a different time from that of the meeting for which notice had been given. He was therefore taking a step without the specific authority of a meeting which could interfere with the rights of those who were entitled to receive notice of the time and place of the meeting and he was doing so when he should have been aware and was almost certainly in fact aware that there was a strong body of opinion which strongly objected to his taking this course.
In deciding whether or not to adjourn to the Café Royal Mr Dawson was therefore required, in my view, to give very great weight to the alternative course which was open to him of abandoning the meeting so that it could be reconvened after proper notice had been given on a subsequent date. This alternative course might have caused inconvenience to some or indeed many of those who attended in the afternoon at the Café Royal but, unlike the decision to adjourn, there could be no question of it interfering with the rights of those entitled to attend the meeting to express their views either in person or by proxy. The course of adjourning to the Café Royal could therefore, in my view, only be justified if there was some ground such as an urgent need for decision because of which Mr Dawson could properly come to the conclusion that it was not possible to adopt the alternative of reconvening a fresh meeting.
I would emphasise that this was not a case of merely adjourning the meeting for a short period so as to enable the meeting to reconvene at an adjoining location. While no doubt those who were minded and able to do so could, without undue difficulty, travel from the Barbican to the Café Royal in Regent Street for the meeting in the afternoon, the fact is that the change of time and location would inevitably be inconvenient to a number of those attending as is borne out by the substantially smaller number who attended the adjourned meeting when compared with the number who were present in the morning.
In his evidence Mr Dawson explains the factors which he took into account in deciding
Page 575 of [1989] 1 All ER 560
to adjourn to the Café Royal. One of those factors is the advice which he received from leading counsel that—
‘if it was [MrDawson’s] view … that no sensible meeting could take place and that there was no practical means of conducting a show of hands or poll [Mr Dawson] was not only entitled to but should immediately adjourn of [his] own motion.’
While I make no criticism of leading counsel for giving this advice in the confused situation which existed that morning, with respect, the advice was not correct because it made no mention of the fact that there was an alternative course which Mr Dawson was required to consider which was whether it would be preferable to terminate the meeting and have it reconvened on a later date and instead it suggested Mr Dawson was obliged to adjourn to the Café Royal in accordance with the arrangements which had already been made.
The whole approach of Mr Dawson’s evidence, consistent with the advice which he received, was that because of the conditions which existed that morning he had an unfettered right to adjourn. As I have sought to show, he had no such unfettered right; his discretion to adjourn was a limited and restricted discretion which ordinarily would only be appropriately exercised by bringing the meeting to an end and by arranging at a later date for a new meeting to be reconvened. It is true that Mr Dawson indicates that of the many factors which he relied on when coming to his decision one was the fact that he regarded it—
‘as of very great importance that the issues should be properly debated and resolved that day, given the carefully structured timetable.’
However, as Sir Nicolas Browne-Wilkinson V-C has pointed out, there was not that degree of urgency as the language which Mr Dawson uses suggests; and, while he was perfectly entitled to take into account as a factor the desirability of keeping to the planned timetable, this certainly was not an overwhelming consideration in the context of the exceptional and residual special power which he was purporting to exercise.
If Mr Dawson had recognised the limits on his discretion which I have sought to point out, then I would like to think that he would not have adopted the course that he did. However, he did not appreciate the limited nature of the power that he was exercising and he did not take into account the considerations which favoured his taking the alternative course. It is, therefore, my view that on the material before this court Mr Dawson, in exercising his discretion, did not take into account considerations which he was required to take into account. It is for that reason that his decision was not a proper one, with the result that the adjourned meeting was invalid. I would not myself categorise Mr Dawson’s conduct as Wednesbury unreasonable (see Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223). A decision had to be taken in a difficult situation relying on an ill-defined residual power and when the consequences of that decision would not be as apparent as they are afterwards in a court of law.
For those reasons, and in agreement with the other reasons of Sir Nicolas Browne-Wilkinson V-C, I would allow the appeal.
Appeal allowed. Leave to appeal to the House of Lords refused.
Solicitors: Farrer & Co (for the plaintiff); Herbert Smith (for the defendants).
Celia Fox Barrister.
Fairfield-Mabey Ltd v Shell UK Ltd (Metallurgical Testing Services (Scotland) Ltd, third party)
[1989] 1 All ER 576
Categories: CIVIL PROCEDURE
Court: QUEEN’S BENCH DIVISION (OFFICIAL REFEREES’ BUSINESS)
Lord(s): HIS HONOUR JUDGE BOWSHER QC
Hearing Date(s): 23 NOVEMBER 1988
Evidence – Exchange of witnesses’ statements – Statements of oral evidence – Examination on statements which have been exchanged – Whether exchange of statements thereby putting them in evidence – Whether witness may be cross-examined by reference to statement of another witness who has not been called – Whether cross-examining counsel may put to opposing witness a statement taken on behalf of his own client – Whether putting part only of such statement entitling opposing counsel to re-examine his own witness on whole statement – RSC Ord 38, r 2A.
Witness statements which have been exchanged under RSC Ord 38, r 2A are not put in evidence by the fact of exchange but remain confidential until the witness makes the statement public by verifying it on oath in the witness box or the party who served the statement waives the privilege. It follows, therefore, that in opening counsel should not refer to such a statement, nor should a witness called by an opposing party be cross-examined by reference to a statement of another witness who might or might not be called by that opposing party or someone other than the party on whose behalf the cross-examination is being conducted. Cross-examining counsel may, however, put to an opposing witness a statement taken on behalf of the cross-examiner’s own client, but by so doing he waives his client’s privilege in the statement. Furthermore, if he puts to an opposing witness only a small part of his own client’s statement, he will thereby entitle counsel who called the witness to re-examine that witness on the whole of the statement. The risk of promoting lengthy re-examination may, however, be avoided either by cross-examining counsel agreeing with opposing counsel that part only of a statement may be put to a witness without the whole being opened up for re-examination or by cross-examining counsel preparing written questions to be handed to the witness either in the witness box or several days previously (see p 577 f g j and p 578 b c, post).
Notes
For exchange of witnesses’ statements, see Supplement to 37 Halsbury’s Laws (4th edn) para 457A.
Ruling
By an originating summons dated 22 January 1985 and a statement of claim served on 29 July 1985 the plaintiff, Fairfield-Mabey Ltd, sought declarations as against the defendant, Shell UK Ltd (trading as Shell UK Exploration and Production), (i) that the CTOD tests carried out on certain specimens on 18 June 1984 were valid, that the specimen in each case passed the test and that the test results should have been approved and (ii) that the plaintiff was entitled to a variation order in respect of the defendant’s oral amendments to specification ES.108 instructed between 8 June and 10 July 1984 and to the costs of the variation. By a counterclaim dated 29 August 1985 the defendant counterclaimed against the plaintiff damages for breach of contract, and by a third party notice dated 14 March 1986 issued pursuant to the order of his Honour Judge David Smout QC dated 24 February 1986 the plaintiff claimed against the third party, Metallurgical Testing Services (Scotland) Ltd, (i) an indemnity against the defendant’s claim on the grounds that if the plaintiff was in breach of its contract with the defendant it was because the third party was in breach of an oral contract made on 12 June 1984 whereunder the third party undertook for reward to test certain of the plaintiff’s welding
Page 577 of [1989] 1 All ER 576
procedures and (ii) that the question whether the CTOD tests were valid and whether the specimens passed the tests and should have been approved by the defendant should be determined not only as between the plaintiff and the defendant but also as between either or both of them and the third party. During the course of the trial a ruling was sought as to the manner in which exchanged statements of witnesses of fact might be used during the trial.
Desmond Wright QC and Nicholas Baatz for the plaintiff.
Colin Reese QC and David Streatfield-James for the defendant.
Michael Lewer QC and Jeremy Nicholson for the third party.
23 November 1988. The following ruling was delivered.
HIS HONOUR JUDGE BOWSHER QC. During the course of the trial of this action I have been asked to give a ruling as to the manner in which exchanged statements of witnesses of fact may be used during the trial so as to save time without causing any injustice and without breach of any rule of law.
In 1981 official referees began making orders for the cross-service of statements of witnesses of fact in cases where the parties gave their consent (in practice the majority of cases before the official referees). The success of that practice led to its official approval in 1986 by RSC Ord 38, r 2A as regards the official referees and certain other parts of the High Court. The practice has since been further extended. It is common for such statements to be ordered to stand as the evidence-in-chief of the witness and for no oral evidence-in-chief to be given except in relation to new matters which have arisen in the course of the trial. The extent of oral examination-in-chief is a matter to be determined by the trial judge in the circumstances of the particular case. There is however some division of opinion amongst practitioners as to the use which may be made of statements served under this practice in those parts of the trial falling outside evidence-in-chief.
Statements which have been so exchanged are clearly not put in evidence by the fact of exchange. I take the view that such statements are served on a confidential basis and that they remain confidential until either the witness makes the statement public by verifying it on oath in the witness box or the party who served the statement waives the privilege. The confidence in the statement is the confidence of the party on whose behalf the statement was taken. That is not to say that there is any property in a witness. It may be that more than one party will take a statement from one particular witness but each statement will be confidential to the party taking it.
It follows that it would be quite wrong for counsel in opening to refer to any witness statement. It would also be wrong to cross-examine a witness called by an opposing party by reference to a statement of another witness who might (or might not) be called in the future by that opposing party or by some other party other than the party on whose behalf the cross-examination is being conducted. For example, counsel for the plaintiff can put to the defendant any evidence which has already been given whether orally or in writing, but it would be wrong to seek to put to the defendant the statement of a proposed witness for the defendant or a third party who had not yet given evidence. The decision might be taken not to call that further witness and meanwhile his evidence remains confidential.
Counsel however may do what he could have done before the adoption of the new procedure of cross-service of statements. Cross-examining counsel may put to an opposing witness a statement taken on behalf of the cross-examiner’s own client. By so doing the cross-examiner waives his client’s confidence in the statement. As a matter of courtesy, counsel should give notice to other counsel in the case of his intention to take this course so that they may take any appropriate objection. When this course is adopted, the judge should direct himself that the unsworn statement being put to the witness is not evidence and that the only evidence will be the answers of the witness in relation to it. If the witness under cross-examination agrees with the whole of the statement, it may be that it will be unnecessary to call the maker of the statement to give evidence.
Page 578 of [1989] 1 All ER 576
A difficulty may arise when counsel wishes to put to a witness a small part only of his client’s statement. Faced with the task of putting to an opposing witness an account of a long conversation, counsel might wish to put to an opposing witness one page only of a very lengthy statement. I take the view that by so doing he would entitle counsel calling the witness to re-examine that witness on the whole of the statement. I regret that conclusion, since I believe that it is in the interests of all parties that cross-examination should be shortened by the questioning being done in documentary form during those parts of the cross-examination devoted to ‘putting’ matters or coldly eliciting information.
Clearly the promotion of lengthy re-examination will not shorten trials. The difficulty may be avoided in one or both of two ways: first, cross-examining counsel may agree with opposing counsel that a part only of a statement may be put to a witness without the whole being opened up for re-examination; or second, cross-examining counsel may prepare written questions to be handed to the witness either in the witness box or some days previously. Such questions might be of the following nature: ‘Do you agree the facts set out in the attached schedule?’, ‘Do you agree that a conversation took place between you and X in the terms set out below?’, ‘Please mark on the attached plans all the welds which were required to be subjected to CTOD testing.’
I encourage both of these procedures, while recognising that they impose further burdens on counsel. To shorten time taken at trial, much work has to be done before trial.
Ruling accordingly.
Solicitors: Davies Arnold & Cooper (for the plaintiff); D H Roose (for the defendant) Berrymans (for the third party).
K Mydeen Esq Barrister.
Smith Kline & French Laboratories Ltd v Licensing Authority (Generics (UK) Ltd and another intervening)
[1989] 1 All ER 578
Categories: HEALTH; Medicine
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD TEMPLEMAN, LORD ACKNER, LORD OLIVER OF AYLMERTON AND LORD LOWRY
Hearing Date(s): 11, 12, 16, 17 JANUARY, 9 FEBRUARY 1989
Medicine – Product licence – Generic product – Essential similarity – Demonstrating essential similarity – Use of originator’s confidential information – Originator supplying details of research and testing in development of drug when applying to licensing authority for product licence – Generic companies subsequently applying for product licence for similar generic product – Whether licensing authority entitled to use information supplied by originator when considering subsequent applications for product licences – EEC Council Directive 65/65, art 4(8)(a)(iii ) – EC Council Directive 87/21.
The appellant pharmaceutical company applied in 1972 for a product licence to manufacture and sell under a particular brand name a proprietary drug developed by them for the treatment of duodenal and gastric ulcers and other gastro-intestinal tract disorders. As required by art 4 of EEC Council Directive 65/65 the appellants supplied the licensing authority under the Medicines Act 1968 with details of their research and testing in the development of the drug in order to show that the drug was safe and effective and could be produced to a consistently high quality. They were duly granted a licence in November 1976. Under EC Council Directive 87/21 other pharmaceutical companies were entitled to apply to the licensing authority for a product licence for a similar generic product after the elapse of ten years from the grant of a licence to the
Page 579 of [1989] 1 All ER 578
appellants. In 1987 two firms (the generic companies) applied for product licences to market generic forms of the appellants’ drug. Under art 4(8)(a)(iii)a of the 1965 directive (as replaced by the 1987 directive) an applicant for a product licence in a member state was not required to supply results of tests on his drug if he could ‘demonstrate’ that his product was essentially similar to a product which had been authorised within the Community for ten years and was marketed in a member state. The generic companies claimed that the essential similarity could be demonstrated by reference to the research and testing details supplied by the appellants in support of their application for a product licence. The appellants opposed the use by the licensing authority of the information supplied to it by them to determine the essential similarity of the generic companies’ drugs, on the ground that the appellants’ information was confidential, and they were granted an injunction restraining the authority from so using the information. The licensing authority appealed to the Court of Appeal, which allowed its appeal on the ground that, although the licensing authority was not entitled to make an originator’s confidential information gratuitously available to its rivals, it was entitled to use that information as part of its general store of scientific knowledge when considering subsequent applications for product licences. The appellants appealed to the House of Lords.
Held – The licensing authority had a duty to safeguard public health and ensure fairness to all applicants for product licences and it could not discharge that duty without having recourse to all the information available to it, whether confidential or not, which assisted it in considering whether to grant any application for a product licence or which assisted it in performing its other functions under the 1968 Act. Accordingly, the licensing authority had a right and duty to make use of all the information supplied by the appellants when considering the generic companies’ applications for product licences. It followed that the appeal would be dismissed (see pp 580 e, p 586 h j p 587 c to e and p 590 e to h, post).
Per curiam. Not only may the licensing authority use but it may also disclose information supplied to it by an applicant for a product licence if the disclosure is made in the performance of its duty under the 1968 Act (see p 580 e, p 588 d and p 590 g h, post).
Decision of the Court of Appeal sub nom R v Licensing Authority, ex p Smith Kline & French Laboratories Ltd (Generics (UK) Ltd intervening) [1989] 1 All ER 175 affirmed.
Notes
For the determination of applications for product licences, see 30 Halsbury’s Laws (4th edn) para 654.
For EEC policy on importation and marketing of medicinal products, see 51 ibid, para 6.73, 8.74.
Cases referred to in opinions
Allen & Hanburys Ltd v Generics (UK) Ltd Case 434/85 [1988] 2 All ER 454, CJEC; on reference from sub nom Beecham Group plc v Gist-Brocades NV [1986] 1 WLR 51, HL.
British Leyland Motor Corp Ltd v Armstrong Patents Co Ltd [1986] 1 All ER 850, [1986] AC 577, [1986] 2 WLR 400, HL.
Butler v Board of Trade [1970] 3 All ER 593, [1971] Ch 680, [1970] 3 WLR 822.
Castrol Australia Pty Ltd v Emtech Associates Pty Ltd (1980) 33 ALR 31, NSW SC.
Coca-Cola Co’s Applications, Re [1986] 2 All ER 274, [1986] 1 WLR 695, HL.
Interlego AG v Tyco Industries Inc [1988] 3 All ER 949, [1988] 3 WLR 678, PC.
Keene, Re [1922] 2 Ch 475, [1922] All ER Rep 258.
Metropolitan Asylum District Managers v Hill (1881) 6 App Cas 193, [1881–5] All ER Rep 536, HL.
Page 580 of [1989] 1 All ER 578
Appeal
Smith Kline & French Laboratories Ltd appealed with the leave of the Appeal Committee of the House of Lords given on 10 October 1988 against the decision of the Court of Appeal (Dillon, Balcombe and Staughton LJJ) ([1989] 1 All ER 175, [1988] 3 WLR 898) on 29 June 1988 allowing the appeal of the licensing authority under the Medicines Act 1968 against the judgment of Henry J ([1988] 2 CMLR 883) hearing the Crown Office list on 21 December 1987 and order dated 23 February 1988 whereby, on an application by the appellants for judicial review, he declared that the licensing authority, when considering an application under the abridged procedure set out in point 8(a)(iii) of the second paragraph of art 4 of EEC Council Directive 65/65, as replaced by EC Council Directive 87/21, for product licences by third parties in respect of generic versions of the pharmaceutical product cimetidine originated by the appellants, was not permitted to use, refer or have recourse to any confidential information supplied by the appellants except with the appellants’ express consent. At the hearing before the Court of Appeal, Generics (UK) Ltd and Harris Pharmaceuticals Ltd were given leave to intervene. The facts are set out in the opinion of Lord Templeman.
Jeremy F Lever QC, Derrick Turriff and Vivien Rose for the appellants.
Andrew Collins QC and Helen Rogers for the licensing authority.
Jonathan Sumption QC and Thomas Sharpe for the first intervener.
Henry Carr for the second intervener.
Their Lordships took time for consideration.
9 February 1989. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Templeman. I agree with it and, for the reasons he gives, I would dismiss the appeal.
LORD TEMPLEMAN. My Lords, on 9 March 1972 the appellants, Smith Kline & French Laboratories Ltd, filed a complete specification for the grant, subsequently made, of an United Kingdom patent for the compound known as cimetidine, a medicinal product. That patent and allied patents conferred on the appellants an effective monopoly of the production, sale and importation of cimetidine for the period of 16 years expiring on 9 March 1988. Cimetidine is a most valuable drug which heals duodenal and gastric ulcers and treats and cures several other gastro-intestinal tract disorders. Cimetidine was first marketed by the appellants in the United Kingdom in November 1976 under the trade mark and brand name of Tagamet. The four-year delay between the filing of the patent specification and the first marketing of Tagamet was largely due to the research and development, detailed and expensive, which were required to prove, pursuant to the Medicines Act 1968, that cimetidine was safe and effective and that Tagamet, a brand of cimetidine, would be produced of a consistently high quality.
By s 7(2) of the 1968 Act, no person shall, in the course of a business, sell, manufacture or import any medicinal product except in accordance with a product licence granted by the appropriate licensing authority, in this case the Minister of Health. By s 18(1) of the Act:
‘Any application for the grant of a licence … shall be made to the licensing authority and shall be made in such form and manner, and shall contain, or be accompanied by, such information, documents, samples and other material, as may be prescribed.’
By s 19(1), in dealing with an application for a product licence, the licensing authority shall in particular take into consideration—
Page 581 of [1989] 1 All ER 578
‘(a) the safety of medicinal products of each description to which the application relates; (b) the efficacy of medicinal products of each such description for the purposes for which the products are proposed to be administered; and (c) the quality of medicinal products of each such description, according to the specification and the method or proposed method of manufacture of the products, and the provisions proposed for securing that the products as sold or supplied will be of that quality.’
By s 20(1) of the 1968 Act, as amended by reg 4(3) of the Medicines (Medicines Act 1968 Amendment) Regulations 1977, SI 1977/1050, on any application to the licensing authority for a licence, the licensing authority—
‘(a) may grant a licence containing such provisions as they consider appropriate, or (b) if, having regard to the provisions of this Act and any Community obligation, they consider it necessary or expedient to do so, may refuse to grant a licence.’
By sub-s (3):
‘The licensing authority shall not refuse to grant such a licence on any grounds relating to the safety, quality or efficacy of medicinal products of any description, except after consultation with the appropriate committee or, if for the time being there is no such committee, with the Commission.’
The commission mentioned in s 20(3) is the Medicines Commission established by the minister pursuant to s 2 of the 1968 Act and comprising experts in the fields of medicine and pharmacy. The appropriate committee mentioned in s 20(3) is a committee established by the minister under s 4 of the Act to deal with any particular kind of medicinal product and charged under s 4(3) with—
‘(a) giving advice with respect to safety, quality or efficacy, or with respect to all or any two of those matters; (b) promoting the collection and investigation of information relating to adverse reactions, for the purpose of enabling such advice to be given.’
On 1 January 1973 the United Kingdom became a member of the European Communities and, pursuant to the European Communities Act 1972, became subject to Community law. Article 100 of the EEC Treaty provides that the Council of the Community shall—
‘issue directives for the approximation of such provisions laid down by law, regulation or administrative action in Member States as directly affect the establishment or functioning of the common market … ’
On 26 January 1965 the Council promulgated EEC Council Directive 65/65 on the approximation of provisions laid down by law, regulation or administrative action relating to proprietary and medicinal products (the 1965 directive). The provisions of the 1965 directive, as amended and amplified from time to time by subsequent directives, became binding on the United Kingdom and must be performed and observed by the licensing authority. The 1965 directive recited, inter alia:
‘… the primary purpose of any rules concerning the production and distribution of proprietary medicinal products must be to safeguard public health; … however, this objective must be attained by means which will not hinder the development of the pharmaceutical industry or trade in medicinal products within the Community; … trade in proprietary medicinal products within the Community is hindered by disparities between certain national provisions, in particular between provisions relating to medicinal products … and … such disparities directly affect the establishment and functioning of the common market: … such hindrances must accordingly be removed; and … this entails approximation of the relevant provisions … ’
Page 582 of [1989] 1 All ER 578
Article 3 of the directive directed:
‘No proprietary medicinal product may be placed on the market in a Member State unless an authorisation has been issued by the competent authority of that Member State.’
In the United Kingdom the authorisation issued by the competent authority consists of a product licence granted by the licensing authority pursuant to its powers under the Medicines Act 1968.
Article 4 of the 1965 directive required an application for a product licence to be accompanied by certain specified particulars and documents which were detailed under 11 numbered points, including the following:
‘1. Name or corporate name and permanent address of the person responsible for placing the proprietary product on the market and, where applicable, of the manufacturer.
2. Name of the proprietary product …
3. Qualitative and quantitative particulars of all the constituents of the proprietary product in usual terminology …
4. Brief description of the method of preparation.
5. Therapeutic indications, contra-indications and side-effects.
6. Posology, pharmaceutical form, method and route of administration and expected shelf life if less than three years.
7. Control methods employed by the manufacturer (analysis and assay of the constituents and of the finished product, special tests, e.g. sterility tests, tests for the presence of pyrogenic substances, the presence of heavy metals, stability tests, biological and toxicity tests).
8. Results of:—physico-chemical, biological or microbiological tests;—pharmacological and toxicological tests;—clinical trials. However: (a) a List of published references relating to the pharmacological tests, toxicological tests and clinical trials may be substituted for the relevant test results in the case of: (i) a proprietary product with an established use, which has been adequately tested on human beings so that its effects, including side-effects, are already known and are included in the published references; (ii) a new proprietary product, in which the combination of active constituents is identical with that of a known proprietary product with an established use; (iii) a new proprietary product consisting solely of known constituents that have been used in combination in comparable proportions in adequately tested medicinal products with an established use … ’
Thus, in the case of an application for a new proprietary product ‘identical’ with that of a known proprietary product with an established use, or in the case of a new proprietary product consisting of known constituents that had been used in ‘comparable proportions’ in medicinal products with an established use which had already been adequately tested, the applicant was not compelled to carry out time consuming and expensive tests and trials provided there was evidence in published references that tests on and trials of the ‘identical’ or ‘comparable’ product had been carried out with satisfactory results. It was for the licensing authority to determine whether two products were or were not ‘identical’ or ‘comparable’ for the purposes of point 8 applying any criteria laid down by the Council.
By EC Council Directive 75/318, dated 20 May 1975, the Council laid down uniform rules applicable to tests and trials, the compilation of dossiers and the examination of applications for product licences in every member state and specified the data to be provided under point 8 of art 4 of the 1965 directive. The declared objects of the directive were to protect public health and to prevent obstruction to the free movement of medicinal products within the Community by different standards and evaluations in different member states. By EC Council Directive 75/319, also dated 20 May 1975,
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further rules were laid down in order to reduce or eliminate disparities between the practices of different member states and in order to facilitate the movement of proprietary medicinal products.
The appellants applied to the licensing authority for a product licence to manufacture and sell cimetidine under the brand name Tagamet. The appellants provided all the particulars and documents specified in art 4 of the 1965 directive and in compliance with the 1975 directives. There being no ‘identical’ or ‘comparable’ product, the appellants provided the results of tests and trials carried out by the appellants and complying with point 8 of art 4. A product licence was granted in November 1976. The particulars and documents provided by the appellants to the licensing authority disclosed information acquired by the appellants in the course of their research into and development of cimetidine and information concerning the manufacturing processes of Tagamet. This information had been acquired by the appellants with much ingenuity, care, time and expense, and was, for the most part, unavailable to the public. The information was invaluable to the appellants and would be valuable to any competitor seeking to exploit cimetidine after the expiry of the appellants’ patents. In these circumstances, the confidential information supplied by the appellants to the licensing authority, that is to say information which was not available to the public, could only be used by the licensing authority for the purposes of carrying out their functions under the 1968 Act. Under English law, the courts applying equitable principles would consider that it was unconscionable for the licensing authority to make use of the confidential information, supplied by the appellants, otherwise than for the purpose of carrying out the functions of the licensing authority under the 1968 Act.
By the Patents Act 1977 the term of a patent was increased from 16 to 20 years. A patent granted after 1 June 1967, and before the passing of the 1977 Act, for a term of 16 years, obtained the benefit of an extension from 16 to 20 years but at the end of the sixteenth year the 1977 Act provided that such a patent should be subject to licence of right provisions whereby any person might exploit the patent on terms to be settled by the comptroller in default of agreement between the proprietor of the patent and the licensee. The appellants’ patents relating to cimetidine became subject to the exercise of licences of right powers between 10 March 1988 and 9 March 1992.
After the 1965 directive had been amplified and amended in 1975 and further experience had been gathered, the European Commission reported to the Council and recommended further amendments to point 8 of art 4 of the 1965 directive: report (explanatory memorandum). Under the 1965 directive as originally promulgated, the first applicant for a product licence relating to a medicinal product was bound to produce all the particulars and documents required by art 4 of the 1965 directive. In the present case the appellants were bound to prove that cimetidine was safe and effective and that Tagamet would be cimetidine of consistently high quality. A second applicant for a product licence, for the same or a similar medicinal product, where the first applicant was not protected by a patent or where the first applicant’s patent had expired, was also bound to produce all the particulars and documents required by art 4. Where, however, the second application related to a product which was ‘identical’ or ‘comparable’ and fulfilled the requirements of point 8(a) of the 1965 directive, the second applicant was not bound to carry out and repeat all the tests and trials specified in point 8 of art 4 of the 1965 directive, but could rely on published literature. The Commission reported, at para 14, that where a licensing authority was satisfied that the products of the two applicants were ‘identical’ or ‘comparable’ but the published literature was incomplete or inappropriate, then—
‘certain national authorities have tended not to be too demanding as regards the bibliographical evidence submitted by the second applicant. This practice seriously penalizes the innovatory firm which has [had] to meet the high cost of clinical trials and animal experiments, while its product can be copied at lower cost and sometimes
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within a very short period. Protection of a medicinal innovation by means of a patent is not in fact always possible or effective, as for example in the case of a natural substance or of a substance which is already known but on which additional research has been carried out with a view to a new therapeutic use.’
It appears, therefore, that some member states were more willing than others on a second application to dispense with tests and trials by accepting published literature which other member states found to be inadequate. To achieve uniformity, the Commission proposed that the 1965 directive should be amended so that if the second applicant was, in effect, copying the product of the first applicant, he would not be obliged to carry out the tests and trials required by point 8 of art 4 of the 1965 directive, provided that ten years had elapsed since the grant of a product licence to the first applicant. The second applicant could rely on the tests and trials carried out by the first applicant, provided that the first applicant had been able to market his product for ten years. The Commission stated in para 15: ‘This ten-year period will enable the partial recovery of the research investment, which might not be protected otherwise, for example by a patent.' In the present case, the appellants were protected by a patent and were able to recover their costs of research and investment during a period of 12 years between 1976, when the appellants obtained a product licence from the licensing authority to market cimetidine under the brand name of Tagamet, and 1988, when, for the first time, a second applicant became entitled under a patent licence of right to apply for a product licence to market cimetidine under some other brand name. The tests and trials carried out by the appellants, pursuant to art 4, point 8 of the 1965 directive together with the other particulars and documents furnished by the appellants, were sufficient to satisfy the licensing authority in 1976 that cimetidine was safe, effective and could be produced with a consistent high quality. Provided nothing had happened since 1976 to cast doubts on the results of these tests and trials, the Commission’s proposals meant that a second applicant in 1988 would not have to prove by further tests and trials that cimetidine was safe and effective and could be produced of good quality. The second applicant must, however, satisfy all the other requirements of the 1965 directive in order to prove that his brand of cimetidine was as safe and effective as Tagamet and of comparable quality.
The Council by EC Council Directive 87/21, dated 22 December 1986, implemented some of the recommendations of the Commission’s report. The directive recited:
‘… experience has shown that it is advisable to stipulate more precisely the cases in which the results of pharmacological and toxicological tests or clinical trials do not have to be provided with a view to obtaining authorization for a proprietary medicinal produce which is essentially similar to an authorized product, while ensuring that innovative firms are not placed at a disadvantage … ’
The directive amended the 1965 directive by replacing point 8 so that it now reads as follows:
‘Results of:—physico-chemical, biological or microbiological tests,—pharmacological and toxicological tests,—clinical trials. However, and without prejudice to the law relating to the protection of industrial and commercial property: (a) The applicant shall not be required to provide the results of pharmacological and toxicological tests or the results of clinical trials if he can demonstrate: (i) either that the proprietary medicinal product is essentially similar to a product authorized in the country concerned by the application and that the person responsible for the marketing of the original proprietary medicinal product has consented to the pharmacological, toxicological or clinical references contained in the file on the original proprietary medicinal product being used for the purpose of examining the application in question; (ii) or by detailed references to published scientific literature presented in accordance with the second paragraph of Article 1 of Directive 75/318/EEC that the constituent or constituents of the proprietary medicinal product have
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a well established medicinal use, with recognized efficacy and an acceptable level of safety; (iii) or that the proprietary medicinal product is essentially similar to a product which has been authorized within the Community, in accordance with Community provisions in force, for not less than six years and is marketed in the Member State for which the application is made; this period shall be extended to 10 years in the case of high-technology medicinal products within the meaning of Part A in the Annex to Directive 87/22/EEC or of a medicinal product within the meaning of Part B in the Annex to that Directive for which the procedure laid down in Article 2 thereof has been followed; furthermore, a Member State may also extend this period to 10 years by a single Decision covering all the products marketed on its territory where it considers this necessary in the interest of public health. Member States are at liberty not to apply the abovementioned six-year period beyond the date of expiry of a patent protecting the original product. However, where the proprietary medicinal product is intended for a different therapeutic use from that of the other proprietary medicinal products marketed or is to be administered by different routes or in different doses, the results of appropriate pharmacological and toxicological tests and/or of appropriate clinical trials must be provided … ’
In a written parliamentary answer, dated 30 June 1987, the government of the United Kingdom announced that the ten-year period allowed by point 8(a)(iii) of art 4 of the directive would be extended to all medicinal products marketed in its territory (see 118 HC Official Report (6th series) written answers col 82). Thus, by the amended point 8 of art 4 of the 1965 directive, as applied in the United Kingdom, a second applicant for a product licence in respect of a product which is ‘essentially similar’ to a product licensed less than ten years before the second application can only dispense with the tests and trials specified by point 8 if the first applicant consents to the pharmacological, toxicological and clinical references contained in the file on the first applicant’s medicinal product being used for the purpose of examining the second application. This is the effect of the amended point 8(a)(i). But where the two products are ‘essentially similar’ and the first applicant has been in possession of a product licence for ten years or more, the second applicant need not carry out and supply the results of pharmacological and toxicological tests and clinical trials. This is the effect of the amended point 8(a)(iii).
Point 8(a) of art 4 of the 1965 directive, as amended, is expressed to be ‘without prejudice to the law relating to the protection of industrial and commercial property’. These words cannot create a restriction where none existed. The quoted words suffice in the present case to preserve the English law of confidentiality which prevents the licensing authority from using the appellants’ confidential information for purposes other than the performance by the licensing authority of its functions under the 1968 Act.
On 16 January 1987 the first intervener, Generics (UK) Ltd (Generics), applied to the Comptroller General of Patents, Designs and Trade Marks to settle the terms of a licence of right for Generics as from 9 March 1988 to make, import and sell cimetidine compound and its products defined as pharmaceutical formulations containing cimetidine as the sole active ingredient. The terms were settled by the comptroller on 15 March 1988 and included payment to the appellants of a royalty of £178 per kilo of the compound manufactured or imported. On 10 June 1987 Generics applied to the licensing authority for a product licence in respect of cimetidine. That application was not supported by the results of tests and trials pursuant to point 8 of art 4 of the 1965 directive, as amended, such tests and trials being unnecessary in view of point 8(a)(iii). ‘Essential similarity’ between Tagamet and Generics’ brand will appear because both products will contain cimetidine as the sole active ingredient and a comparison between the information supplied by the appellants and the information supplied by Generics will demonstrate whether the two brands are similarly safe, effective and of good quality.
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The second intervener, Harris Pharmaceuticals Ltd (Harris), in March 1987, applied to the comptroller to settle the terms of a licence of right for cimetidine and they were settled on 8 April 1988 on terms identical with those decided in the case of Generics. There have been other applications for licences of right in respect of cimetidine. In July 1987 Harris applied to the licensing authority for a product licence in respect of cimetidine. That application also was not supported by the results of tests and trials pursuant to art 4, point 8 of the 1965 directive, as amended, in view of point 8(a)(iii).
On 2 October 1987 the appellants instituted judicial review proceedings against the licensing authority claiming a number of declarations prohibiting the licensing authority from making use of any of the information contained in the appellants’ 1976 application for a product licence without the consent of the appellants.
As a result of these proceedings the applications of Generics and Harris for product licences for their brands of cimetidine have not yet been granted or refused by the licensing authority.
On 23 February 1988 Henry J made a declaration that—
‘in considering an application for a product licence in respect of a medicinal product containing cimetidine made pursuant to the abridged procedure provided for by Article 4(8)(a)(iii) of Council Directive 65/65/EEC as amended the [licensing authority] may not for the purpose of such application use refer or have recourse to any confidential information supplied to it by the [appellants] in connection with any application by the [appellants] for a product licence in respect of such a product except with the express consent of the [appellants].’
Counsel for the appellants did not, on this appeal, seek to support this declaration in so far as it precluded the licensing authority from using information relevant to the protection of the public from unsafe medicinal products. Nevertheless, counsel submitted that the appellants’ file of information in the possession of the licensing authority should be sealed up and that no person concerned with the grant of a product licence relating to cimetidine to the appellants should deal with any application by Generics, Harris or anyone else for a product licence in case that person should recollect or be unconsciously influenced by anything which he had learned from the appellants’ application.
On 29 June 1988 the Court of Appeal (Dillon, Balcombe and Staughton LJJ) ([1989] 1 All ER 175, [1988] 3 WLR 896) set aside the order made by Henry J. The appellants now appeal to this House.
In my opinion the first and only question which requires to be answered on this appeal is whether English law prohibits the licensing authority from having recourse to the confidential information provided by the appellants in the course of their application for a product licence relating to cimetidine for the purpose of considering whether to grant or reject an application by Generics or Harris or anyone else for a product licence in respect of cimetidine.
The licensing authority are advised by experts in the field of medicinal products. The information available to the licensing authority consists of the knowledge obtained by these experts based on long experience, the information available in published literature and, over the years, the vast amount of information provided by large numbers of applicants for product licences, such information being partly confidential and partly available to the public. The principal task of the licensing authority is to protect the public. But in performing its functions, the licensing authority must treat all applicants fairly and equally. The standard which it requires from the first applicant for a product licence for cimetidine must be required of the second and subsequent applicants. If the licensing authority sanctions the first application, notwithstanding the presence of certain impurities, the same deviations from purity must be allowed to second and subsequent applicants. If the information disclosed by a first applicant when compared with the information disclosed by the second applicant leads the licensing authority to conclude that the second application ought to be allowed, then the licensing authority must act
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accordingly. Conversely, if the information supplied by the second applicant casts doubt on some aspect of the product of the first applicant, then the licensing authority must consider whether to exercise the power conferred on the licensing authority by the 1968 Act to revoke the first applicant’s product licence. It is for the licensing authority, comparing the information received from the first applicant and the information received from the second applicant, and taking into account all other information available to the licensing authority, from whatever source, and whether confidential or not confidential, to decide in the case of any particular application whether it shall be declined or granted. There may be, there will be, in the case of a popular medicinal product many applications by many different applicants. It is essential for the licensing authority to compare the applications of the first and subsequent applicants in order to satisfy themselves that both products are similar, safe, effective and reliable. The licensing authority cannot discharge its duty to safeguard the health of the nation and its duty to act fairly and equally between applicants without having recourse to all the information available to the licensing authority, confidential or otherwise. Indeed, it would not be practicable and it would be highly dangerous for the licensing authority to attempt to segregate in the case of each applicant the information which was confidential to that applicant and to forget or ignore that information when carrying out any function imposed on the licensing authority by the 1968 Act in the interests of the public.
My Lords, I am satisfied that it is the right and duty of the licensing authority to make use of all the information supplied by any applicant for a product licence which assists the licensing authority in considering whether to grant or reject any other application, or which assists the licensing authority in performing any of its other functions under the 1968 Act. The use of such information should not harm the appellants and, even were it to do so, this is the price which the appellants must pay for co-operating in the regime designed by Parliament for the protection of the public and for the protection of the appellants and all manufacturers of medicinal products from the dangers inherent in the introduction and reproduction of modern drugs.
The appellants asserted that they had no intention of obstructing the licensing authority in its onerous task of protecting the public but their proceedings and the order made by Henry J would have that effect. The appellants relied on three English authorities and one Australian authority. In Metropolitan Asylum District Managers v Hill (1881) 6 App Cas 193, [1881–5] All ER Rep 536 this House determined that an Act of Parliament which authorised an asylum did not authorise the asylum to commit a nuisance. Lord Blackburn said (6 App Case 193 at 208, [1881–5] All ER Rep 536 at 543):
‘It is clear that the burthen lies on those who seek to establish that the Legislature intended to take away the private rights of individuals, to shew that by express words, or by necessary implication, such an intention appears.’
In the present case the 1968 Act does not take away any private rights. If the appellants choose to apply for a product licence under the Act, they choose to provide information to the licensing authority for the purposes of the Act. It is not unconscionable for the licensing authority to make use of that information in the public interest for the purposes of the Act, although it would be unconscionable for the licensing authority to disclose that information to third parties for other purposes. In Re Keene [1922] 2 Ch 475, [1922] All ER Rep 258, a debtor was obliged to disclose to his trustee in bankruptcy secret formulas for the making of certain proprietary articles. In Butler v Board of Trade [1970] 3 All ER 593, [1971] Ch 680 the Board of Trade were not allowed in criminal proceedings to put in evidence the copy of a letter written by a solicitor to his client, the plaintiff, which was a privileged letter. I am unable to derive any assistance from these authorities in the present circumstances; the appellants have voluntarily provided information to the licensing authority for the purposes of the Act. In Castrol Australia Pty Ltd v Emtech Associates Pty Ltd (1980) 33 ALR 31, in the Supreme Court of New South Wales, Rath J, perhaps surprisingly, held in interlocutory proceedings that a report furnished by Castrol
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to the Trade Practices Commission in order to persuade the commission that Castrol’s advertisements were justified in claiming that tests on Castrol oil showed an improvement in fuel consumption could not be used by the commission in prosecuting Castrol for publishing misleading advertisements. In that case, however, the commission had expressly undertaken to Castrol to treat the report as confidential. The judge recognised that ‘in some cases public interest in disclosure will prevail over public interests in the preservation of confidence’ (at 52). But he concluded that ‘the public interest does not require that the Commission, at this stage, should be excused from breaking the confidence that on the present evidence was reposed in it’. In the present case, the licensing authority gave no undertaking to the appellants and do not propose to break any confidences but only to make use of information supplied under the Act for the purposes of carrying out their duties under the Act.
Section 118(1) of the 1968 Act provides:
‘If any person discloses to any other persons … (b) any information obtained by or furnished to him in pursuance of this Act, he shall, unless the disclosure was made in performance of his duty, be guilty of an offence.’
That subsection reinforces the view which I have formed that information obtained under the Act may be used by the licensing authority and that even disclosure is lawful if the disclosure is made in the performance by the licensing authority of its duty under the Act.
Accordingly, there is no principle of confidentiality in English law which prevents the licensing authority from making use of the information supplied by the appellants for any of the purposes for which the licensing authority was established. Article 30 of the EEC Treaty prohibited quantitative restrictions on imports and all measures having equivalent effect between member states, but by art 36, the provisions of art 30 do not preclude prohibitions or restrictions on imports justified on grounds, inter alia, of the protection of industrial and commercial property. Article 36 did not impose on member states any Community obligation of confidentiality. The directives to which we were referred did not impose on member states any Community obligation of confidentiality. Article 4, point 8 of the 1965 directive, as amended by the 1987 directive is expressed to operate ‘without prejudice to the law relating to the protection of industrial and commercial property’. The only relevant law in the present case is English law and for the reasons which I have indicated, English law does not protect the appellants against the use by the licensing authority of confidential information supplied by the appellants to the licensing authority for the purposes of the 1968 Act. The appellants suggested that it was necessary or might be useful to refer to the Court of Justice of the European Communities for a ruling under art 177 of the EEC Treaty on questions concerning the ambit of the expression ‘without prejudice to the law relating to the protection of industrial and commercial property’. In my opinion no question of Community law arises in connection with confidentiality or otherwise. The 1965 directive, as amended, authorises the licensing authority to grant a product licence to Generics and Harris without requiring Generics and Harris to produce the results of pharmacological and toxicological tests and clinical trials, provided that Generics and Harris furnish all the particulars and documents required by the 1965 directive with the exception of the results of such tests and trials and provided that the licensing authority, after comparing the applications of Generics and Harris with the earlier applications of the appellants and after considering all other information in their possession, is satisfied that the Generics and Harris products of cimetidine are essentially similar to Tagamet and are safe, efficient and reliable. Point 8(a) of art 4 of the 1965 directive, as amended and as applied to the United Kingdom, would have required a second applicant for a product licence of cimetidine to produce the results of the relevant tests and trials if the second application had been made before November 1986 unless the appellants consented to the use of their files which contained results of the relevant tests and trials. Point 8(a) does not require a
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second applicant to produce the results of the relevant tests and trials after November 1986. Generics and Harris may, without the consent of the appellants, rely on the fact that the appellants produced satisfactory results relating to cimetidine when the appellants obtained a produce licence for Tagamet.
The argument most pressed by the appellants was that Generics and Harris cannot comply with point 8 of art 4 of the 1965 directive, as amended, unless they ‘demonstrate’ that the cimetidine, for which they seek produce licences, is ‘essentially similar’ to Tagamet by carrying out the very tests and trials which are expressly rendered unnecessary by point 8(a)(iii). The applications of Generics and Harris must be in respect of a formulation which contains cimetidine as the sole active ingredient. In support of those applications Generics and Harris must supply all the information which they are bound to supply under points 1 to 7 of art 4 of the 1965 directive, as amended, and any other information required by the directive or by regulations made under the 1968 Act. It will be the duty of the licensing authority to compare the applications made by Generics and Harris for product licences for their brands of cimetidine with the application made by the appellants in 1976 for their Tagamet brand of cimetidine in order to determine whether the licensing authority is satisfied that the Generics and Harris brands are, in the opinion of the licensing authority, ‘essentially similar’ to Tagamet. The declared objects of Generics and Harris are to copy Tagamet and to equal or improve on Tagamet. The licensing authority will decide whether Generics and Harris succeed or fail without obliging Generics or Harris to demonstrate in 1988 (as the appellants were perforce constrained to demonstrate in 1976), by the tests and trials required by point 8 of art 4 of the 1965 directive, that cimetidine is capable of being manufactured in a form which is safe, effective and of high quality.
The appellants object, understandably, to Tagamet being copied by Generics, Harris or anyone else. The appellants’ submissions are, in essence, based on the proposition that if a product is worth copying, the law should protect the product against being copied. My Lords, that is not the law. In British Leyland Motor Corp Ltd v Armstrong Patents Co Ltd [1986] 1 All ER 850, [1986] AC 577 this House declined to allow the law of copyright to be exploited and rejected the argument that a motor car manufacturer was entitled to a perpetual monopoly in spare parts and could prevent the copying of spare parts which were no longer protected by a patent. In Re Coca-Cola Co’s Applications [1986] 2 All ER 274, [1986] 1 WLR 695 this House declined to allow trade mark law to be exploited and rejected the argument that the manufacturer of a beverage sold under a trade name had established a perpetual monopoly in and could prevent the copying of the shape of a bottle which was no longer protected by the Registered Designs Act 1949. In Interlego AG v Tyco Industries Inc [1988] 3 All ER 949, [1988] 3 WLR 678 the Privy Council declined to allow the law of copyright in Hong Kong to be exploited and rejected the argument that a manufacturer of a toy was entitled to a perpetual monopoly in the toy and could prevent the copying of the shape of the toy which was no longer protected by the 1949 Act. In Beecham Group plc v Gist-Brocades NV [1986] 1 WLR 51 and in Allen & Hanburys Ltd v Generics (UK) Ltd Case 434/85 [1988] 2 All ER 454 proprietors of patented drugs sought to obstruct and delay the settlement of terms of licences of right by the comptroller and met with some success until the European Court ruled that the comptroller had no power to prohibit imports from Community countries.
In the present case the appellants seek to enlist the law of confidentiality and to extend their patent monopoly beyond the term granted. The appellants seek to harass and obstruct the licensing authority in the determination of the applications by Generics and Harris and others of their applications for product licences in respect of cimetidine. The campaign began with parliamentary questions and debate which sought to inhibit the licensing authority from making use of information derived from product licence applications. At the same time, lawyers’ letters interrogated the licensing authority with regard to its practice, refused to agree terms of licences of right, threatened Harris with actions for breach of patent and threatened the licensing authority with judicial review
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proceedings. The advisers of the Minister of Health, in his parliamentary role and in his role as licensing authority, were anxious to appease their critics and made statements some of which were inept and confusing and which wrongly accepted that the powers of the licensing authority were much more restricted than I hold them to be. The soothing attitude on the part of the licensing authority did not prevent the appellants from issuing judicial review proceedings, and obtaining interlocutory injunctions and undertakings. The practical effect has been that the applications of Generics and Harris and others for product licences have not yet been determined and one year of the licence of right term will shortly expire.
My Lords, the patent term of 14 years authorised by the Statute of Monopolies (1623) was increased in 1919 to 16 years and in 1977 to 20 years. The effective term of the patent monopoly afforded to the appellants in respect of cimetidine from 1976 when Tagamet was first sold until 1988 was 12 years and in addition the appellants are entitled to royalties under the licence of right provisions for a further four years. The appellants have been able, for 12 years, to establish their trade mark of Tagamet and to establish the reputation of their product with the medical profession and the public. The appellants still possess, and always will possess, advantages over other producers of cimetidine and will only suffer the hardship of competition from which they have hitherto been protected by their patent. The obstructions which the appellants now seek to place in the path of the licensing authority in the consideration by the licensing authority of other applications for product licences would apply not only during the period of licences of right but also after all patent protection has expired. The appellants are seeking to prolong their monopoly beyond the statutory term. Of course, the appellants and their supporters are entitled to amount campaigns in Parliament, in the press and elsewhere and they are entitled to institute such legal proceedings as they may be advised. But in my opinion the licensing authority should not be deterred from exercising its right and powers so as to ensure public safety and to ensure fairness to all applicants whether or not they resort to campaigns and litigation. The courts should be reluctant to criticise the practices of the licensing authority or to grant injunctions or orders or declarations against the licensing authority which is endeavouring reasonably and conscientiously to discharge the onerous duties imposed by Parliament and is acting in good faith. I would dismiss this appeal.
LORD ACKNER. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Templeman. I agree with it and, for the reasons given by my noble and learned friend, I, too, would dismiss this appeal.
LORD OLIVER OF AYLMERTON. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Templeman, and would dismiss the appeal for the reasons which he has given.
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Templeman. I entirely agree with it and, for the reasons given by my noble and learned friend, I, too, would dismiss this appeal.
Appeal dismissed.
Solicitors: Simmons & Simmons (for the appellants); Treasury Solicitor; S J Berwin & Co (for the first intervener); Roiter Zucker (for the second intervener).
Mary Rose Plummer Barrister.
Re Berger (deceased)
[1989] 1 All ER 591
Categories: SUCCESSION; Administration of Estates
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): MUSTILL, MANN LJJ AND SIR DENYS BUCKLEY
Hearing Date(s): 28, 29 MARCH, 21 JULY 1988
Probate – Document – Admission to probate – Testator’s intention regarding admission to probate – Relevance of testator’s intention – Zavah in Hebrew language – Testator executing zavah in Hebrew alongside English will – Zavah intended to be binding in Jewish law and enforceable in rabbinical court – Testator expressing no intention whether it was to be enforceable in English court – English will invalid – Whether zavah should be admitted to probate as testator’s last will.
Probate – Document – Admission to probate – Will in foreign language – Whether authenticated translation or text in foreign language document admissible to probate.
Probate – Document – Admission to probate – Will in foreign language – Evidence of foreign law to ascertain testator’s intention – Whether permissible for court to refer questions on meaning or effect of foreign law to foreign court.
The deceased was an orthodox Jew domiciled in England. From 1964 onwards he made dispositions of his estate to his family by executing two parallel series of documents. The first consisted of a succession of English wills drawn up by the deceased’s legal adviser containing dispositions of his movable property which the deceased clearly intended should be given effect to, and be provable, in the English courts. The second series consisted of documents handwritten by the deceased in Hebrew and known as zavah. They contained religious exhortations to his family in terms which were alien to an English will but also contained dispositions of his movable property. The zavah were intended by the deceased to be binding in Jewish law and to be enforceable in the rabbinical court, but he did not indicate whether they were intended also to be enforceable in the English courts or what was to happen if his current English will failed. In 1975 the deceased executed a valid English will which revoked all former wills. On 6 August 1977 the deceased executed the last of his zavah, the document being executed in accordance with the Wills Act 1837. On 9 August the deceased purported to execute another English will but that will was invalid because it was improperly attested and did not comply with the 1837 Act. The deceased died on 20 September. The 1977 zavah contained testamentary dispositions of the deceased’s movable property to his family, as well as religious exhortations addressed to them, and also contained provisions relating to matters over which the deceased had no testamentary powers of control. It concluded by stating that it was ‘binding’ on the deceased’s family, that it was ‘additional’ to what was written in the 1977 English will and that if any clarification of that will was needed the ‘present [Hebrew] will … is the definitive one’. On the deceased’s death his executors claimed that, because the 1977 English will had failed, the 1977 zavah (with the terms of the 1977 English will incorporated into it) should be admitted to probate as the deceased’s last will and testament. The defendants, who were the beneficiaries under the 1975 will, sought pronouncement in favour of that will, on the ground that the 1977 zavah was not a testamentary document in English law governing the disposition of the deceased’s estate. The judge pronounced in favour of the 1977 zavah with the terms of the 1977 will incorporated into it. The defendants appealed.
Held – (1) For an instrument to be a provable will which would be admitted to probate in the English court, it was not necessary that the testator should have positively intended that the instrument should be provable in the English court. Provided the testator had not positively indicated the contrary, namely that the instrument should not be admitted
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to probate in the English court, all that was necessary for the instrument to be admitted to probate was that it should contain directions for the disposal of the testator’s property after his decease which were revocable during his lifetime. The fact that the testator had not contemplated the possibility of the instrument being enforced in the English court did not necessarily mean that it should not be so enforced (see p 599 f to j, p 600 d e h and p 602 a b, post).
(2) Since the 1977 zavah had been executed in accordance with the 1837 Act, since it contained dispositions of the deceased’s movable property which were to take effect on his death and which, having regard to the history of the series of zavah, were to be revocable and capable of modification during his lifetime and since the deceased had never positively indicated that he did not wish his zavah to be enforced in the English court but (per Sir Denys Buckley) on the contrary, by referring to the 1977 English will in the 1977 zavah, had expressed the intention that the 1977 zavah should take effect in English law, it followed that the 1977 zavah, with the terms of the 1977 will incorporated into it, should be admitted to probate as the deceased’s last will on the basis that those documents were intended by the deceased to be taken together as being his last will. The appeal would therefore be dismissed (see p 600 e to j, p 601 d f to h, p 602 e j and p 603 c d f to p 604 a, post).
Per curiam. (1) Where a will is in a foreign language the court must be furnished with an authenticated translation, and it is the translation, not the text in the foreign language, which will be admitted to probate (see p 600 g h and p 602 b c, post).
(2) Where the will of a testator domiciled in England is in a foreign language and uses terms inappropriate to English law but appropriate to a foreign system of law, the English court when administering the distribution of the testator’s movable property in accordance with English law can have recourse to evidence of the foreign system of law for the purpose of ascertaining the testator’s intention, but it cannot refer any questions on the meaning or effect of the foreign law to the foreign court, even if the testator expressly provided that any such question must be decided by the foreign court, because for the English court to do so would conflict with the rule of English law that the devolution and distribution of the movable property of a testator domiciled in England shall be governed by the lex domicilii (see p 600 g h and p 602 j to p 603 c, post).
Notes
For the essential characteristics of a will, for evidence of testamentary character and for testamentary form and testamentary intention, see 50 Halsbury’s Laws (4th edn) paras 202, 206, 249–250.
For the Wills Act 1837, see 50 Halsbury’s Statutes (4th edn) 150.
Cases referred to in judgments
Douglas-Menzies v Umphelby [1908] AC 224, PC.
Ferguson-Davie v Ferguson-Davie (1890) 15 PD 109.
Godman v Godman [1920] P 261, CA.
Guardhouse v Blackburn (1866) LR 1 P & D 109, [1861–73] All ER Rep 680.
Lemage v Goodban (1865) LR 1 P & D 57.
Lister v Smith (1863) 3 Sw & Tr 282, 164 ER 1282.
Meynell, Re, Meynell v Meynell [1949] WN 273.
Milnes v Foden (1890) 15 PD 105.
Raven, Re, Spencer v National Association for the Prevention of Consumption and other forms of Tuberculosis [1915] 1 Ch 673, [1914–15] All ER Rep 353.
Whyte v Pollok (1882) 7 App Cas 400, HL.
Wynn’s Will Trusts, Re, Public Trustee v Newborough (Baron) [1952] 1 All ER 341, [1952] Ch 271.
Appeal
By a writ issued on 2 October 1984 the plaintiffs, Sarah Englander and Doris Feldman, claimed, as two of the executors of the will of Gerson Berger deceased, for pronouncement
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and admission to probate as the deceased’s last will and testament of a manuscript Hebrew will dated 6 August 1977, incorporating therein an invalid English will made by the deceased on 9 August 1977. The defendants, Sighismund Berger, Mendel Berger and Brucha Berger, two of the deceased’s sons and his wife, and Gerson Berger Association Ltd, by their defence denied that the 1977 Hebrew will was the deceased’s last will and testament. The first, second and fourth defendants, by a counterclaim, claimed for pronouncement and admission to probate of an English will made by the deceased in 1975 as being his last valid will and testament. On 3 April 1987 Warner J pronounced for the 1977 Hebrew will with the 1977 English will incorporated into it. The fourth defendant appealed. The facts are set out in the judgment of Mustill LJ.
Michael Nield for the fourth defendant.
David Ritchie for the plaintiffs.
Cur adv vult
21 July 1988. The following judgments were delivered.
MUSTILL LJ. This case concerns the testamentary effect of an instrument executed by Mr Gerson Berger on 6 August 1977. This document was handwritten in the Hebrew tongue, and there is no doubt that Mr Berger, who was a devout orthodox Jew, intended it to be a zavah. This term has for convenience been rendered as a ‘Hebrew will’, but I think it preferable to employ the technical expression, so as to avoid begging the question whether the document was a will at all. At first instance Warner J has pronounced for the zavah, holding also that it should take effect with the incorporation of a roughly contemporaneous document in the English language, which was undoubtedly intended to take effect as a will, but which failed for want of proper execution. An appeal is now brought against this decision by certain beneficiaries under an English will made on 15 July 1975, the contention being that the zavah was not apt for admission to probate, either with or without the incorporation of the invalid English will of 1977, and that accordingly the 1975 will stands as the last valid testamentary disposition of Mr Berger.
This appeal is concerned with two groups of documents. The first consists of a series of documents in the English language, plainly intended to take effect as wills to which effect would be given through the English law of probate. So far as is shown by the evidence now before us, there were seven such documents, executed in 1957, 1958, 1963, 1964, 1972, 1975 and 1977. Current at the same time was a series of documents in the shape of a zavah. The first was dated 1965. The second was executed on 18 December 1972, the same date as the fifth English will. The third was dated 11 February 1976, between the sixth and seventh English wills. As will later appear, it was intended by Mr Berger and his solicitors that the fourth zavah should be executed at about the same time as the seventh English will, as had been the case with the pair of documents dated 18 December 1972. In fact the zavah was signed on 6 August 1977, three days before the seventh and last English will, and about six weeks before Mr Berger died.
The present dispute arises from the fact, that although as planned the deceased appended his signature to the last English will within a few days of the last zavah, that will was not properly executed, and therefore has no direct testamentary effect. The question for decision is whether in consequence the estate should be distributed in accordance with the last of the valid English wills, namely the will of 15 July 1975, or whether the zavah of 6 August 1977 should be admitted to probate, as representing the last of the deceased’s valid testamentary dispositions. Warner J has held in favour of the latter alternative, and against this decision the beneficiaries under the 1975 will now appeal.
In order to form an impression of how the deceased envisaged that the two series of documents were to take effect concurrently it is convenient to look as briefly as possible at the dispositions which they contained. We may begin with the English will of 25 July 1964. As did all the English wills, this began with a revocation clause. It proceeded to
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appoint executors and trustees, and then dealt specifically with the shares in Raymond Sun Ltd, which were to go in unequal portions to two of the testator’s sons. The residue of the estate was devised to the trustees, in trust for the testator’s daughter Doris, with liberty to apply capital to the benefit of the deceased’s wife. The remainder of the will consisted of various provisions in common form relating to the powers and rights of the trustees. By a codicil dated 27 July 1964 the testator gave his personal effects to his children, after the death of his wife.
Nine months later Mr Berger executed the first zavah. This document, which was of some length, began with words translated as follows: ‘This is concerning the division of the estate after 120 years’, the last three words being a circumlocution for the death of Mr Berger. The first clause stated that Raymond Sun Ltd ‘is not included in the Trust’, and was to pass to the same sons in the same proportions as in the English will. The remainder of the will consisted of: (1) directions as to the disposal of companies ‘in the Trust’; (2) a direction that various relatives should take stipulated sums from those companies, with a wide discretion as to the time at which this should be done; (3) a stipulation that certain named ‘companies from the Trust’ which he had given to his daughter should belong to her ‘although they, too, are in the Trust’; (4) a command that all the heirs should give Mr Berger’s wife an income of £100 per week free of tax, as a director’s fee or in some other way; (5) a declaration that the shares in certain companies which Mr Berger had given to his son-in-law during his lifetime were his property, ‘Even the 25 per cent I have therein are his’; (6) a request ‘In the matter of charity: from the value of the Trust companies … and from the charitable company G.B. Association Ltd.' a certain income should be given to a brother-in-law, and that marriage settlements should be made for his sons and daughter; (7) the expression of a wish that from moneys ‘from my Charity’ and ‘from the Charity funds that shall remain after me’ various dispositions should be made; (8) expressions of affection, and exhortations to good conduct, directed to various relatives.
Next, on 18 December 1972 there were executed, in unknown order, an English will and a zavah. The English will contained specific legacies of £50,000 and £15,000 to the Gerson Berger Association Ltd and to his wife respectively. As to the residue, the trustees were to pay the income to the wife for life, and on her death were to hold the trust fund for the children in equal shares.
The contemporaneous zavah began with the words (in translation) ‘Here are some changes in my Will’. It is clear that the words translated as ‘my will’ were a reference to the zavah of 25 May 1965. Paragraph 1 stated that, since Raymond Sun Ltd now belonged to the charitable company Gerson Berger Association Ltd (the fourth defendant), para 1 of the former zavah was now irrelevant, as were certain of the directions that relatives should have sums from companies in the trust, as distributions had already been made. For the rest, the provisions of the former zavah were either stated to be unchanged, or were varied in minor respects.
Next, there was the English will of 15 July 1975. This simply contained an absolute gift of £100,000 to Gerson Berger Association Ltd, with the residue to the testator’s wife.
On 11 February 1976 he made a further zavah. In brief, this was to the following effect. 1. Certain paragraphs of the two previous zavah were cancelled, as were some of the specific directions for payments to named persons. 2. The provision for the wife was increased to £200 per week free of tax. 3. Various new gifts were added. It may be noted that nothing was said in this zavah about the sources from which those responsible for administering it were to find the additional expenditure which it entailed.
Now we arrive at the pair of documents which the deceased executed during August 1977. The circumstances were found by the judge to have been as follows:
‘Mr Rabin [the solicitor of Mr Berger] took instructions for the English will at two meetings which he had with the deceased at 8 Gilda Crescent at the end of July 1977. During the course of those meetings, the deceased told Mr Rabin that he was
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going to write to his children a “zavah” (a Jewish will) and he instructed Mr Rabin to refer to it in the English will. Mr Rabin told me, and it is, I think, common ground, that if a zavah is to be morally binding only, it need not be witnessed, but that if it is to be binding in Jewish law it must have two witnesses. Mr Rabin assumed that the deceased’s zavah would be of the former kind. Otherwise he would have asked the deceased for details of what he was going to put in it and taken steps to ensure that the two wills were consistent. Mr Rabin sent the engrossment of the English will to the deceased by hand at 8 Gilda Crescent in the afternoon of 5 August 1977, with a covering letter. He had not previously submitted to the deceased a draft of it. 5 August 1977 was a Friday. The Jewish sabbath began at sunset on that day and ended at sunset on the following day. A man of the deceased’s religious convictions would not have taken any step to execute a will during that period. After sunset on Saturday 6 August 1977 the deceased executed the Hebrew will. He did so at 8 Gilda Crescent. Why he did not execute the English will at the same time is unknown. Possibly he had not had time to read it. Undoubtedly he was not well at the time. On the following Sunday or Monday he went to stay with one of his granddaughters at Margate. Mr Pinter described him as convalescing there. It was there that on Tuesday 9th he and Mr Pinter put their signatures to the English will.’
As to the invalid English will this purported to revoke ‘all former Wills and Codicils’, so that the prior gift of £100,000 to the charitable association and the absolute gift of the residue fell away, and in substitution (a) the wife was to have an income of £10,000 free of tax, (b) the wife was to have a home for life of a value equivalent to that of the existing matrimonial home and (c) the residue was to go to the testator’s four children in equal shares.
Paragraph 13 of the will read as follows:
‘I wish my children to know that I have immediately prior to the making of this my Will written to them a letter expressing my wishes and requirements of them in the future. I request my children to comply with my wishes and desires with all the authority which I as a father am entitled to require from them as religious Jews.’
We should mention that when the English will of 1977 came to be drawn the deceased’s solicitor was unaware that English wills had previously been made in 1972 and 1975. Whether the deceased had forgotten them, we do not know.
Finally, as to the last zavah, which the judge has directed shall be admitted to probate. So that the flavour of this document may be understood it is best to set it out at length, omitting only the signatures and other formal parts (the translator’s notes are in square brackets):
‘With the help of God
To my dear sons. Shalom Zvi, may his light shine, Aharon Menachem Mendl, may his light shine, Eli’ and Sarah Englander, Chaim Moshe and Devorah Feldman, may they live [long]. I hereby reiterate my decision, that the division I have made some time ago, i.e., the part of my property that I apportioned to each of you, is still in force (and there, my eldest son Shalom Zvi, may his light shine, received a larger portion). But regarding the part I have not divided, which is in my own name or in that of a Company or a Charity Company, or in another manner, both Companies the shares of which belong to me alone or in which I am partner with fifty per cent of the shares, or less, and the like, [these] shall be divided equally among my four sons, may they live [long], and all the other appointments I have made, either in writing or orally, are null and void, and once again, I repeat and command—invoking the commandment “honour thy father”—my son Shalom Zvi, may he live [long], to take all the steps in order to fulfil my wishes expressed in this will. I also command all the previous appointees which are not my sons, to sign all manner
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of resignations and all manner of documents that you ask of them either together or each one of you separately, and you must make any excuse in the world to fulfil my wish and should anybody whosoever hold on to my property in contravention of my instructions in the present will, then these are strictly forbidden to him in this [world] as well as the next one. With regard to the Charities, I hereby command you to distribute to all the Charities as I used to do myself, out of the income from my portion and the balance of the income shall be for distribution among my four sons, may they live [long]. You are not obligated to sell capital in order to distribute to charity and the distribution to charity shall be exclusively from future income. As I have written, my property shall be divided equally among the four of you and, if you wish, you may separate and you have no obligation to be in partnership.
[Signatures and Attestations]
I reiterate and command my son Shalom Zvi, may his light shine, to appoint my son Aharon Menachem Mendl and my two sons-in-law or daughters governors, directors or trustees of G.B. Association Ltd and any company or Charity company [in which] which I have a share., or a trust I set up and, as I have written above, dismiss all the other appointees who are not my sons. My ardent wish is that all my four sons, may they live [long] will have equal say in each company, or Charity company or trust or association and that every resolution shall be passed unanimously and, if that prove impossible, by majority opinion. I reiterate and stress that all the benefits due to me in any way whatsoever, either from companies or association or the like, be equally divided among my four sons, may they live [long], and their families. I command you to strictly honour your mother, that is, my dear spouse, may she live [long] and, from my share, give her “free of tax”, the sum of two hundred pounds Sterling per week, according to today’s rate and, should she need more, give her more, according to need. Additionally, she has a right to a flat for herself either at 1–2 Warwick Court or another flat, befitting her status, without the expense of rent. Each of my sons, may they live [long], should know that what I have written in this will is binding on you and additional to what was written in the English language will, and should any clarification be needed, the present will (in the Holy Tongue) [Hebrew] is the definitive one.
[Signature and Attestation]’.
I have described the terms of the various documents in some detail, because they represent almost the sum total of the evidence from which the court must form an opinion on the crucial issue of Mr Berger’s intentions when executing the zavah. To my mind, this is most unfortunate. Much guidance could have been furnished by information on the following topics.
1. The nature and effect of a zavah under Jewish religious law. It was agreed that a document of this kind bearing the signatures of two witnesses is enforceable through the religious courts, but we know nothing about the mechanisms for such enforcement, or of the sanctions available to the tribunal. Nor again were we informed whether the enforcement would apply to all the provisions of the document, or only to those which were expressed as dispositive, leaving the expressions of the writer’s wishes to the good conscience of the persons who were desired to carry them out. Equally, we do not know what, if any, steps the religious tribunal would have taken regarding those instances, of which there are several in the successive Hebrew documents, where Mr Gerber was expressing instructions or desires for the disposition of property which no longer belonged to him. Information on these and other relevant aspects of Jewish law is no doubt readily to hand, but in the absence of expert evidence or agreement we cannot properly make any assumptions about them.
2. It was explained to us in the course of argument that Mr Berger had made dispositions of a substantial part of his wealth in the course of his lifetime. It is possible to glean from a letter written by Mr Rabin to Mr Berger while in the course of taking
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instructions for the failed English will that Mr Berger had created and endowed certain charitable companies of which the shares were held in the family, that among these endowments were some or all of the shares in various of Mr Berger’s trading companies and that Mr Berger had made gifts to his family of holdings in his companies. More than this we do not know. This is a pity, for it is material to any attempt to reconstruct from the Hebrew documents themselves what Mr Berger intended when he executed them to consider whether the dispositions which they contain related to property which it was already beyond his power under English law to bequeath.
3. We were informed that, in the course of the extensive and bitter family dispute which has followed the death of Mr Berger, an issue or issues concerning the zavah was referred to a rabbinical court in New York, but counsel were unable to state the subject matter of the reference, or anything about its outcome.
One thing does seem to me quite clear, namely that Mr Berger cannot have caused the documents to be produced with the conscious intention that the current zavah should be admitted to probate together with the current English will. On their own, the revocation clauses in the English wills would be enough to show this. If each zavah was conceived by the testator to be a will, he must have intended that the 1972 English will would revoke the 1965 zavah, which is impossible, since this was treated as subsisting by the 1972 zavah, which purported to amend it. Similarly, if the 1972 English will was executed after the 1972 zavah (which was the order of events contemplated in 1977) it would have revoked both the 1965 and the 1972 zavah, which was plainly not intended. Again, the 1975 English will would have revoked the 1965 and 1972 zavah, yet the latter part of the 1976 zavah clearly contemplates that the 1972 zavah was subsisting, and Mr Berger cannot have intended that the 1975 English will would operate to create a gap in the succession of zavah.
Moreover, the contrary proposition entails that the Hebrew documents of 1965, 1972 (possibly, depending on the order of execution) and 1976 were intended to operate as codicils to the current English wills. This is unconvincing, first because the 1976 zavah is expressed to amend the earlier Hebrew documents, not the 1975 English will, which it does not mention, and second because Mr Berger was a successful and experienced businessman, who knew what to do when he wished to make a will which would be enforced by the English court, namely he sought the advice of an English professional adviser, gave him instructions on what he wanted and signed the resulting document. That Mr Berger should have intended, by creating documents of his own composition, written in the Hebrew tongue, and quite alien in tone and content to the instruments which his lawyer had prepared for him, to bring about a variation in the effect which the English court would be obliged to give to his current English wills seems quite impossible to conceive.
To my mind there is nothing in cl 13 of the failed English will, nor in the last clause of the 1977 zavah, to demand any opposite conclusion. The former is if anything the other way, for it speaks only of ‘a letter’, and ‘wishes’ and ‘requirements’. It is conceivable that there was some misunderstanding between Mr Rabin and Mr Berger, and that Mr Rabin believed that Mr Berger had in mind an unattested zavah, binding in honour only. But is it possible that if Mr Berger had intended to execute, contemporaneously with the document which he was instructing Mr Rabin to prepare, a home-made document designed to rank with Mr Rabin’s document as a testamentary disposition to be enforced by the English court he would not at least have mentioned it? Or that if he had mentioned it, Mr Rabin would not have insisted on a sight of it, and redrawn cl 13 accordingly? Nor again, is it possible that Mr Berger would have executed a will containing cl 13 if it contradicted his intentions? Granted, he was a sick man at the time, but the zavah plainly contained instructions which were close to his heart, and if cl 13 entirely misrepresented their effect, he could hardly have failed to protest.
As for the last paragraph of the 1977 zavah, I find it hard indeed to understand this as an intimation to the English courts of probate and construction that the zavah was to be
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regarded as a definitive exposition of the contemporaneous English will. It seems to me more consistent with the notion, to which I shall return, that the zavah was to operate in the shadow of the English will.
Accordingly, if the right question is whether Mr Berger intended that the series of zavah in general, and the last one in particular, should operate in tandem with the current effective English language wills, as documents which were to be read in conjunction with them as dispositions to which the English court would give effect, I would without hesitation answer in the negative. I am not convinced however, although the point achieved no prominence in argument, that this is indeed the right question. We are not concerned here with any attempt to enforce the current valid English will and the 1977 zavah at the same time. For the current English will was the 1975 will, and neither party has contended that this should be admitted to probate along with the zavah. This is not surprising, not only because the zavah is plainly referring to the 1977 will, and not to some other document which would have been obsolete but for the error in execution, but also because there is reason to believe that Mr Berger had forgotten, and Mr Rabin had never known, that he had made a will in 1975.
Thus, if one is to seek out the intention of Mr Berger, the right question is this: what did he intend to be the status of the zavah as a document to be admitted to probate, on the unforeseen contingency that the English will was ineffectual? To this question there is no rational answer, for in reality Mr Berger had no intention at all, since the possibility that the English will might fail obviously never crossed his mind: and if it had done, he would have looked into the matter, and the course of events would have been different. But, whatever intention should be imputed to him, I see no reason to suppose that he intended a document designed to be enforced by the rabbinical tribunal, and written in the appropriate terms, to be enforced by a court to which its terminology and social underpinnings were entirely alien, and still less that he would have wished a linguistic and intellectual hybrid between a valid zavah and an invalid English will to be enforced by an English court, and this is what the plaintiffs’ argument entails.
So far, the discussion has concerned the intentions of Mr Berger as to the enforcement of the zavah in the English probate registry; and the answers, as suggested, seem to be all in the negative. But it is also right to ask whether we can infer anything about what Mr Berger positively did intend. Here we are much impeded by the lack of information to which I have already referred. Nevertheless, I think it legitimate to infer that the zavah were intended to operate in the shadow of the English wills, in two respects. First, the rights created by the English wills were alone to be those recognised by the mechanisms of English law; but the persons who were beneficiaries of these rights were to hold them subject to a further group of rights and duties as to the manner in which they were to be enjoyed, the enforcement of which was to be the business of the rabbinical tribunal. In this respect, there might be seen a likeness to the way in which rights enforceable through the courts of equity shadowed those conferred by the common law, before the two systems were merged. Second, the zavah was designed to impose on various persons obligations in regard to the disposition of assets which they did not derive from any English will, but from the prior bounty of the deceased. So far as these obligations were enforceable at all, the only medium of enforcement was the rabbinical tribunal.
So the position in short seems to me as follows. Mr Berger intended that the wishes expressed in the English wills should be obeyed, and enforced by the English court. He also intended that the wishes expressed in the zavah should be obeyed, and enforced if necessary by the rabbinical tribunal. He had no intention about what would happen if the English will failed.
If this is a fair reconstruction of what the testator desired, how does the matter stand in law? Not surprisingly, there is no case in point. Litigation on facts such as the present must surely be unique. It may not be unusual (for aught we know) that the same person executes parallel series of English will and zavah, but it seems highly improbable that the zavah (designed to be enforced by the rabbinical court) would ever be presented for
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probate in the English court in preference to the English will (designed for enforcement in that court) otherwise than in the exceptional circumstances of the present case. Furthermore, modern authority in this field is in short supply. Although there were several cases (to which we have not been referred) before the Wills Act 1837 introduced the requirements as to signature and attestation, there have been few since then. This is not surprising. If a document which resembles a will bears the signature and attestation required by the Act, the presumption that it was intended to be enforced by those judicial mechanisms to which compliance with the Act is a condition precedent will be hard to rebut: see per Barnard J in Re Meynell, Meynell v Meynell [1949] WN 273. If on the other hand the document is not signed and attested as required, it will not be admitted to probate unless it falls into certain confined categories, such as soldiers’ wills. Accordingly, the problems raised by the kind of informal and ambiguous documents which were formerly the subject of dispute as to their testamentary effect will now only infrequently arise.
Furthermore, I believe that care should be taken not to draw too readily on general statements in the few reported cases, given the great dissimilarity of their subject matter to the present. In particular, all the cases were concerned with an issue whether the instrument was intended to be a will or something else, such as an immediate gift inter vivos, or as a document which had no legal effect at all, such as a draft or an expression of intent. None had occasion to address the problem of the document which was meant to be a testamentary disposition, but not one which would be enforced by the mechanisms of probate.
Subject to these reservations, the following propositions may be derived from the authorities, among which I include Lister v Smith (1863) 3 Sw & Tr 282, 164 ER 1282, Guardhouse v Blackburn (1866) LR 1 PD 109, [1861–73] All ER Rep 680, Milnes v Foden (1890) 15 PD 105, Whyte v Pollok (1882) 7 App Cas 400, Ferguson-Davie v Ferguson-Davie (1890) 15 PD 109, Re Raven, Spencer v National Association for the Prevention of Consumption and other forms of Tuberculosis [1915] 1 Ch 673, [1914–15] All ER Rep 353, Godman v Godman [1920] P 261, Re Wynn’s Will Trusts, Public Trustee v Newborough (Baron) [1952] 1 All ER 341, [1952] Ch 271, Jarman on Wills (8th edn, 1951) vol 1, pp 6, 26, 32, 37 and 50 Halsbury’s Laws (4th edn) paras 201–203, 250, 376.
(1) An instrument cannot be a ‘provable will’ (by which expression I mean the type of instrument which will be admitted to probate in the English courts) unless it contains a revocable ambulatory disposition of the maker’s property which is to take effect on death.
(2) An instrument cannot be a ‘provable will’ unless the maker had an ‘animus testandi’.
(3) This expression does not mean that a document cannot be a ‘provable will’ unless the maker has addressed his mind to the question whether the instrument will be capable of admission to probate in the English court, and wishes that it shall be so. Rather, it conveys only that the maker must intend that his document shall effect the kind of disposition referred to under item 1 above.
(4) Thus, it is possible to make a ‘provable will’, whatever its form or appearance or mode of expression and irrespective of the language in which it is written, so long as it combines the requirements above mentioned, the necessary intention and execution as required by the 1837 Act (if the circumstances are such as to require execution).
(5) If the document has the necessary dispositive effect, and is duly executed, the necessary animus will be presumed. This presumption is however rebuttable, either by other terms of the document itself, such as the statement that the document is intended for guidance only, or by strong extrinsic evidence.
These propositions, if correct, will serve to illuminate the source of the present problem, for they distinguish between the (necessary) intention to make a revocable disposition which is to operate on death and the (unnecessary) intention to make a ‘provable will’. At first they seem to disclose a contradiction. Imagine a document headed with the words, ‘This is not a will and is not intended to be admitted to probate’. To hold
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that it could nevertheless be proved would seem to be not only absurd, and an unjustifiable thwarting of the testator’s intentions, but would also contravene the rule that internal evidence can negative animus; and yet the conclusion would seem to be justified by the distinction between animus testandi and the desire to make a ‘provable will’. In my judgment there is no true contradiction here, for the heading would show that the maker did not intend the document to be enforced by the probate court, and in the absence of any other mode of enforcement he would thereby have demonstrated that he did not wish his dispositions to be enforced at all, and thus took away one of the essential characteristics of a will.
The present case raises a different problem, which the authorities do not appear to touch at all. What if the zavah had been headed with the words: ‘I solemnly declare that I wish this document, in case of dispute, to be construed and enforced by the rabbinical tribunal, and that it shall not be admitted to probate or otherwise pronounced on by the English court.' Could the court properly grant probate of such a document? Granted that there was animus testandi in the shape of an intention to make a disposition on death, still there was no intention that it should make a disposition enforceable by the only mechanisms to which such animus testandi was relevant. To my mind the court should not grant probate in such a case: a testator who has made a will but has demonstrated that he did not wish it to be a ‘provable will’ has not made a ‘provable will’.
This proposition, even if right, is not the end of the case, for Mr Berger did not write anything in his will similar to the hypothetical heading which I have discussed. Nor does the fact he never contemplated the possibility of the zavah being enforced in the English court necessarily mean that he desired, that if all else failed, it should not be so enforced. In the event, it is impossible to conceive that he intended anything at all about the unforeseen combination of circumstances which has actually come to pass. One must therefore fall back on two undeniable facts, namely (i) he made a document containing directions for the disposal of his property the language of which was dispositive and (ii) it was executed in a form sufficient to render it enforceable by the English court. This being so, I am driven to the conclusion that the document does amount to a will, and should be admitted to probate. This is not a result which I view with much enthusiasm. I believe that Mr Berger would have been startled to learn that the zavah was to be administered by the English court, rather than the tribunal to whose religious and cultural norms it so plainly appealed. Moreover, the court of administration to which we now remit all further consideration of this document is likely to have an unenviable task in deciding what if any effect should be given to it. On the other hand, it is reassuring that at least a part of the arrangements made by Mr Berger in the 1977 documents should survive, rather than yielding place to an outdated will whose very existence he seems to have forgotten.
At all events, I conclude in respectful agreement with the reasons to be stated by Sir Denys Buckley that the appeal should be dismissed.
MANN LJ. I have had the advantage of reading in draft the judgments of Mustill LJ and Sir Denys Buckley. I agree with them. I share the regret of Mustill LJ that the court was not better informed. However, I entertain no doubt but that the zavah of 6 August 1977 should be admitted to probate. Having been so admitted, its effect will have subsequently to be determined. I would hope that the determination could be achieved without recourse to further litigation. I also would dismiss this appeal.
SIR DENYS BUCKLEY. By English law the devolution and distribution of the movable property of anyone who dies domiciled in England is governed by the lex domicilii of that person, that is to say by English law: Jarman on Wills (8th edn, 1951) vol 1, p 4. The present action has proceeded on the assumption that Mr Gerson Berger (the deceased) died domiciled in England. The pleadings are silent about this, and we
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have been referred to no evidence on this aspect of the matter. It appears to be common ground. The correct forum for decision of any question relating to the devolution of the deceased’s movable property is accordingly an English court.
Jarman p 25 further stated that ‘in a general and comprehensive sense, a will consists of the aggregate of all the papers through which it is dispersed’. Sir J P Wilde said in Lemage v Goodban (1865) LR 1 P & D 57 at 62 that a will is the aggregate of a man’s testamentary intentions so far as they are manifested in writing duly executed according to the Wills Act 1837. So, to discover what the deceased’s testamentary intentions were when he died, we must identify whatever duly executed testamentary documents were made by him and were in operation at his death.
The relevant facts have already been fully stated and I need not repeat them.
Jarman p 26 describes a document qualified to be recognised as a will or testamentary instrument in this way:
‘A will is an instrument by which a person makes a disposition of his property to take effect after his decease, and which is in its own nature ambulatory and revocable during his life.’
It must be manifest that the instrument is not to operate until the testator dies and is to be revocable meanwhile.
It is, to my mind, perfectly clear that the deceased intended to make certain dispositions of his property by the 1977 zavah. After referring in the second paragraph to certain ‘apportionments’ which he had made among his sons ‘some time ago’ he proceeds:
‘But regarding the part I have not divided, which is in my own name or in that of a Company or of a Charity Company, or in another manner … [these] shall be divided equally among my four sons … ’
I need not pause to investigate the ‘apportionments … made some time ago’. The following passage relating to ‘the part I have not divided’ clearly, in my judgment, discloses an intention to make a disposition of property which he had not theretofore disposed of. This is supported by the later passage: ‘As I have written, my property shall be divided equally among the four of you … ’
This, in my judgment, clearly discloses some dispositive intention, to take effect at the death of the deceased. Moreover, I think that clearly the document was intended to have an ambulatory effect and (particularly having regard to the history of the series of zavahs) to be revocable and capable of modification by the deceased.
Consequently, in my judgment, the 1977 zavah has, in at least some respects, the characteristics of a testamentary instrument. No special ground for excluding the document from probate, such as lack of testamentary capacity, fraud or undue influence is alleged. Consequently, in my judgment, the 1977 zavah should be admitted to probate as part of the deceased’s will, unless it can be established either that it was not executed in accordance with the 1837 Act or that it was written without any intention that it should have any operation and effect as a testamentary disposition, that is without animus testandi.
The 1977 zavah consists of two sheets, each of which the deceased signed, and each signature was attested by two witnesses. The trial judge found as a fact that the 1977 zavah was duly executed in accordance with the Act. There is no appeal against that finding. He also found as a fact that the deceased had no positive intention that the zavah should not take effect in English law. The appellant contends that that finding was against the weight of the evidence and inconsistent with another finding of the judge that the deceased saw his English and Hebrew wills as being in separate and parallel streams, one to be enforced in the English courts and one in the rabbinical courts. The appellant contends that the judge ought to have held that the deceased did not intend that the 1977 zavah should have any effect in English law. I emphasise the last three words
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because I shall later consider whether a testamentary document can be excluded by the testator from consideration by a court of the forum in which the devolution of his property primarily falls to be regulated.
English law does not require a document which is intended to have testamentary effect to assume any particular form or to be couched in language technically appropriate to its testamentary character. It is, says Jarman p 32, sufficient that the instrument, however irregular in form or artificial in expression, discloses the intention of the maker respecting the posthumous destination of his property. It may be made in any language. If it is made in a foreign language, the court must be furnished with an authenticated translation made by a qualified translator. It is that translation, not the text in the foreign language, which is admitted to probate. It is from the document so admitted to probate together with any other relevant testamentary instruments that an English court will ascertain the testator’s testamentary intentions and determine their effect and validity.
The 1977 zavah as translated contains the following passage:
‘Each of my sons … should know that what I have written in this will is binding on you and additional to what was written in the English language will, and should any clarification be needed, the present will (in the Holy Tongue) [Hebrew] is the definitive one.’
This seems to me to be irreconcilable with any suggestion that that zavah was not intended to have any testamentary force. On the contrary, the deceased’s signature on it was attested by two witnesses which, according to the evidence, would render its provisions judicially enforceable in a rabbinical court.
I would therefore reject any argument to the effect that the 1977 zavah was intended only to have exhortatory or advisory effect but no legal effect under any system of law.
The function in English law of a probate court is to ascertain and determine what testamentary paper or papers is or are to be regarded as constituting the last will of the testator and who is entitled to be constituted his legal personal representative. However many testamentary documents a testator may leave—
‘it is the aggregate or the net result that constitutes his will, or, in other words, the expression of his testamentary wishes … In this sense it is inaccurate to speak of a man leaving two wills; he does leave, and can leave, but one will.’
(See Douglas-Menzies v Umphelby [1908] AC 224 at 233.)
Having regard to the existing distribution of business between the various divisions of the High Court, under which contentious probate business is now allocated to the Chancery Division, it is important to distinguish between the jurisdiction of a judge of that division trying a probate action from the jurisdiction of a judge of that division trying an administration action. The probate jurisdiction extends to the function referred to in the preceding paragraph. A judge exercising that jurisdiction can, of course, receive all evidence and entertain all submissions relevant to the performance of that function. He has, however, no duty to construe any of the instruments sought to be proved except so far as to do so may be necessary for the performance of that function. The probate court has no role to play in the administration of the testator’s estate in accordance with whatever valid testamentary disposition the testator may have made, nor in determining how far his intended dispositions are valid. Once the identity of the deceased’s testamentary papers has been determined and they have been admitted to probate, all questions of construction arising in the administration of the estate concern only the court of administration.
I have already indicated why I, for my part, consider that the 1977 zavah contains at least some testamentary dispositions which were not intended to be merely precatory.
If a testator, who at all relevant times has been domiciled in England and whose movable property accordingly falls to be distributed in accordance with English law has
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made a will which, or some part of which, is in a foreign language and perhaps uses technical terms inappropriate to English law but appropriate to a foreign system of law, an English court administering his estate must ascertain what the testator intended by ordinary processes of construction, including expert evidence of the meaning and effect of those technical terms in the relevant foreign law and possibly of how a court within that system of foreign law would give effect to that document. The English court in the light of all the admissible evidence will determine what the testator intended and will give effect to that intention so far as it is valid and effectual by English law. In so doing the English court is applying English law and has recourse to evidence of foreign law merely for the purpose of ascertaining the testator’s intention. The English court would not refer any question arising on the meaning or effect of the foreign document for decision by a court in the foreign jurisdiction. This would, I think, be the case even if the testator were to provide expressly that any such question must be decided by a court of the foreign jurisdiction. To hold otherwise must, I think, conflict with the English law that the devolution and distribution of the movable property of such a testator shall be governed by the lex domicilii.
Moreover, Warner J in his judgment drew attention to the fact that there is in the present case no evidence, let alone clear evidence, that the deceased positively intended that his Hebrew wills should not have effect in English law. On the contrary, as it seems to me, the reference in the 1977 zavah to the 1977 English will, which I have already mentioned, is to a precisely opposite effect.
I do not myself consider that any reliable conclusion can be drawn from the circumstances that the deceased does not seem to have appreciated that the revocation clauses in his various English wills, or indeed the terms of subsequent zavahs, may have affected the continuance in force of earlier zavahs or parts of them. A failure on his part to realise this would in my view have little or no bearing on the question whether the deceased’s intentions, when writing the 1977 zavah, were of a testamentary character. I think that the deceased may well have believed that the zavahs, written in Hebrew and invoking certain religious rules or concepts, would have a more solemn and compelling effect on his children than his English wills. In this respect it is not, I think, inappropriate to speak of the wills and the zavahs constituting parallel streams or to describe one series as operating in the shadow of the other. But to use terms of that kind does not, to my mind, help to solve the problem which confronts us.
The 1977 zavah and the 1977 English will (had it been duly executed) should, in my opinion, have been regarded as mutually incorporated in one testamentary exercise, that is to say as together constituting the deceased’s last will. If that had been the case, the presence in the English will of a revocation clause would not, in my judgment, have occasioned, as has been suggested, a revocation of the 1977 zavah.
For reasons which I hope I have sufficiently explained, I am of the opinion that the 1977 zavah, which unquestionably contains some provisions which seem to relate to matters over which the deceased had no testamentary powers of control, nevertheless equally unquestionably contains provisions which have all the indicia of being testamentary dispositions of property over which he had power to dispose by will. Consequently, in my judgment, the judge was right in holding that the 1977 zavah should be admitted to probate. The operation and effect of such provisions of the 1977 zavah as are capable of having testamentary effect and what that effect should be are matters for the court charged with the duty of controlling the administration of the deceased’s estate.
The judge’s order pronounced in favour of the force and validity of the 1977 zavah incorporating therein the defectively executed English will dated 9 August 1977. In my opinion he was justified on the facts in treating the English will as incorporated in the zavah by virtue of the reference to the English will contained in the zavah. It is clear on the facts and from the language used in the zavah that the English will was a document
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which was in existence when the zavah was signed and so was capable of incorporation in the zavah.
For these reasons I for my part would dismiss this appeal.
Appeal dismissed.
Solicitors: Grangewoods (for the fourth defendant); Pickering Kenyon (for the plaintiffs).
Wendy Shockett Barrister.
Attorney General v Associated Newspapers Group plc and others
[1989] 1 All ER 604
Categories: ADMINISTRATION OF JUSTICE; Contempt of Court
Court: QUEEN’S BENCH DIVISION
Lord(s): MANN LJ AND HENRY J
Hearing Date(s): 7, 8, 26 JULY, 20 OCTOBER 1988
Contempt of court – Publications concerning legal proceedings – Court – Inferior court – Mental health review tribunal – Plaintiffs bringing proceedings for contempt – Whether mental health review tribunal a ‘court’ – Contempt of Court Act 1981, s 19.
The respondents, who were the editors and publishers of two newspapers published articles about a mental health patient who had been sent to a secure hospital after pleading guilty to the manslaughter of a young girl. The articles appeared shortly before a mental health review tribunal was due to hear an application for the patient’s release and stated that the Home Office would be opposing his release. The articles contained interviews which were critical of the hospital director for supporting the patient’s release. The tribunal hearing was subsequently adjourned part heard because of the publicity that had been aroused. The Attorney General applied for an order that the two papers were guilty of contempt of court because the articles had tended ‘to interfere with the course of justice in particular legal proceedings’, within s 1a of the Contempt of Court Act 1981. The issue arose whether the proceedings of a mental health review tribunal were proceedings before a ‘court’ within s 19b of the 1981 Act, which defined a court as including ‘any tribunal or body exercising the judicial power of the State’.
Held – A mental health review tribunal was not a ‘court’ for the purposes of the 1981 Act and therefore an article published in a newspaper prior to or during the hearing by such a tribunal of an application by a restricted patient for release from a secure hospital was not contempt of court under s 1 of that Act. In any event, on the facts any risk of prejudice to the tribunal’s proceedings but had been remote. It followed that the Attorney General’s application would be dismissed (see p 611 d and p 612 f g, post).
A-G v BBC [1980] 3 All ER 161 considered.
Notes
For what constitutes a court, see 10 Halsbury’s Laws (4th edn) paras 701–702, and for cases on the subject, see 16 Digest (Reissue) 136–138, 1373–1392.
For the Contempt of Court Act 1981, ss 1, 19, see 11 Halsbury’s Statutes (4th edn) 181, 196.
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Cases referred to in judgments
A-G v BBC [1980] 3 All ER 161, [1981] AC 303, [1980] 3 WLR 109, HL; rvsg [1979] 3 All ER 45, [1981] AC 303, [1979] 3 WLR 312, CA.
A-G v English [1982] 2 All ER 903, [1983] 1 AC 116, [1982] 3 WLR 278, HL.
A-G v Leveller Magazine Ltd [1979] 1 All ER 745, [1979] AC 440, [1979] 2 WLR 247, HL.
De Wilde v Belgium (No 1) (1971) 1 EHRR 373, E Ct HR.
F (a minor) (publication of information), Re [1977] 1 All ER 114, [1977] Fam 58, [1976] 3 WLR 813, CA.
R v Horsham Justices, ex p Farquharson [1982] 2 All ER 269, [1982] QB 762, [1982] 2 WLR 430, CA.
R v Oxford Regional Mental Health Review Tribunal, ex p Secretary of State for the Home Dept [1986] 3 All ER 239, [1986] 1 WLR 1180, CA; affd [1987] 3 All ER 8, [1988] AC 120, [1987] 3 WLR 522, HL.
R v St Mary Abbotts, Kensington Assessment Committee [1891] 1 QB 378.
Royal Aquarium and Summer and Winter Garden Society Ltd v Parkinson [1892] 1 QB 431, [1891–4] All ER Rep 429, CA.
Sunday Times v UK (1979) 2 EHRR 245, E Ct HR.
X v UK (1981) 4 EHRR 188, E Ct HR.
Cases also cited
A-G v News Group Newspapers Ltd [1986] 2 All ER 833, [1987] QB 1, CA.
Application
The Attorney General applied with leave of the Divisional Court (Watkins LJ and Macpherson J) on 22 January 1987 for orders of committal in respect of contempts of court allegedly committed by (i) the first respondents, the editor of the Daily Mail newspaper, Sir David English, and the owners, Associated Newspapers Group plc, in respect of an article published in the Daily Mail newspaper on 2 November 1985 under the heading ‘Storm over bid to free sex killer’ and (ii) the second respondents, the editor of the Liverpool Echo newspaper, Christopher John Oakley, and the owners, Trinity International plc, in respect of an article published in the Liverpool Echo on 2 November 1985 under the heading ‘Storm over sex killer’. The facts are set out in the judgment of Mann LJ.
John Mummery for the Attorney General.
John Mathew QC, Geoffrey Shaw and Manuel Barca for the first respondents.
Brian Leveson QC and John Corless for the second respondents.
Cur adv vult
16 July. Mann LJ announced that the applications would be dismissed for reasons to be given later.
20 October 1988. The following judgments were delivered.
MANN LJ. Her Majesty’s Attorney General by these proceedings makes application in respect of two newspapers alleging that they have been guilty of contempt of court. The proceedings are brought under the ‘strict liability’ rule in the Contempt of Court Act 1981. It is accepted that the respondents and their editors acted in good faith and that there was no intent to prejudice.
The respondents are as follows: Sir David English, who is the editor of the Daily Mail; Associated Newspapers Group plc, which is the proprietor and publisher of the Daily Mail; Christopher John Oakley, who is the editor of the Liverpool Echo; and Trinity International plc, which is the proprietor and publisher of the Liverpool Echo.
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In order to understand the way in which these proceedings have come to pass it is necessary to recite a chronology. On 7 December 1972 Peter Pickering pleaded guilty to the manslaughter of a young girl. He was sent to a secure hospital by means of an order under s 60 of the Mental Heath Act 1959 and he was the subject of a restriction order without limit of time made under s 65 of that Act. Those orders subsequently have effect as if made under ss 37 and 41 of the Mental Health Act 1983. In December 1984 Pickering applied for his discharge. On 23 August 1985 a hearing date before a mental health review tribunal was fixed. On 2 November 1985 there appeared the articles of which complaint is now made. The hearing occurred on 11 November but on the second day was adjourned part heard because of the publicity which the proceedings had attracted. The proceedings were recommenced on 24 March 1986 and concluded on 26 March. The result was that Pickering was not discharged. On 27 January 1987 the motions now before the court were initiated.
The articles of which complaint is made were both published on 2 November 1985. They were respectively in the following terms. First, the Daily Mail:
‘Ministers are battling to prevent a child killer being freed from a security hospital, because they believe he is still dangerous. They are horrified at the willingness of the hospital’s chief, Dr Malcolm MacCulloch, to back rapist Peter Pickering in his bid for release later this month. Pickering, 48, was convicted in 1972 of the brutal killing of a 14-year-old schoolgirl. He was sent to Broadmoor but was transferred four years ago to Park Lane Hospital, Liverpool, “the Broadmoor of the North” where Dr MacCulloch is medical director. Now Pickering will plead for his freedom before a mental health review tribunal on November 11 and 12.
Confession
Dr MacCulloch, whose opinion is likely to be a key factor at the hearing, is pushing for his release. But Home Office Ministers and MPs are determined to resist the move. Some Tory MPs are also expected to call for the removal of Dr MacCulloch, who became nationally known in 1981 during the trial of the Yorkshire Ripper, Peter Sutcliffe. He decided Sutcliffe was mad within an hour of meeting him and diagnosed the mass murderer as a paranoid schizophrenic without reading evidence of what he had done or his voluntary confession to police. He argued that Sutcliffe was unfit to plead. Ministers are now alarmed that Dr MacCulloch appears to be more ready than Broadmoor’s director, Dr John Hamilton, to believe that patients, particularly sexual psychopaths, have made sufficient progress either to be released from top security confinement or to be released into the community at large. One Minister has been heard to say: “Pickering’s release would terrify me.” During his trial, Pickering was said to have committed “sub-human acts” on his victim, schoolgirl Shirley Ann Boldy. He grabbed her near her home in Barnsley, South Yorkshire, raped her and held her prisoner in his car before finally stabbing her. Five months earlier, he had come out of prison after a nine-year sentence for indecency and assaulting a woman. He had spent a total of 15 years behind bars for attacks on teenage girls. Ministers say there are too many warnings in the case files about the potential risk to the public of releasing a man with his history. The Home Office believes that had Pickering remained at Broadmoor—with its longer experience of treating such cases—there would have been no question of him yet being released into the community. Only six months ago another Park Lane inmate, a convicted child killer, won a conditional discharge. He had been detained there and in Broadmoor (from where he once escaped in 1981) as a restricted patient. He is now accused of assault and unlawful wounding in two attacks on young women, according to Home Office Under Secretary David Mellor who told MPs last week that he and then Home Secretary Leon Brittan took a very serious view of the case and had opposed the man’s release in April. Dr MacCulloch last night admitted he was “extremely anxious” about Pickering’s release tribunal, following the arrest of
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the other man. “But if I am going to perform as a straightforward doctor, I am bound to give my professional opinion,” he said. “I am not expected to get it right. I am expected to act competently.” He refused to say if he would back Pickering’s bid. At one time, the Home Secretary made the decision on any release. But Britain was forced to change its law following a ruling by the European Court of Human Rights, which said that some patients detained indefinitely were being denied their rights. Patients can now apply for a discharge every 12 months to a tribunal. The parents of Pickering’s victim, Norman and Edna Boldy, have lived with the constant nightmare that he would be released. Mr Boldy, 58, who is a homeless families officer with Barnsley Council, said: “I find it horrific that this man could ever be let out.” He and his wife, also 58, live quietly in Wood Walk, Wombwell, where they cannot bear to have pictures of their dead daughter in the room. The mother of the girl killed by the patient who was freed in April demanded to talk to Dr MacCulloch after learning of the man’s release. By her side at the meeting in a police station, close to the spot where her daughter’s body was found, was the patient’s ex-wife. Together they quizzed Dr MacCulloch and warned him—despite his assurances—that the man was still dangerous and would strike again. The mother said yesterday: “Dr MacCulloch told us, ‘I think we have got through to him—he will never ever do it again.’” Just six weeks later the man was arrested and charged with assault and wounding. The mother said: “Dr MacCulloch was sure that the man was totally cured and we did not understand him. He said he had made a good friend of the man and had gained his confidence. I told Dr MacCulloch: ‘You are mistaken. You are wrong’.” Clutching a colour photograph of her dead daughter, the woman described how the killer’s ex-wife was terrified when he arrived at her home to speak to their teenage son after being released. “I feel disgusted this man was let out. After what happened to my daughter they promised me he would never be freed.” ’
Second, the Liverpool Echo:
‘The Home Office pledged today to fight moves by Park Lane top security hospital to free a child killer. Ministers are furious at chiefs at the Maghull psychiatric hospital for trying to release rapist Paul Pickering, who was convicted in 1972 for the horrific killing of a 14-years-old girl. And some MPs may call for the sacking of Park Lane director Dr. Malcolm MacCulloch. One minister is reported to have told officials he would be “terrified” by Pickering’s release. The Home Secretary no longer has the power to detain prisoners like Pickering. The issue will be decided by a mental health review tribunal on November 11–12, which will hear evidence from hospital chiefs and a barrister briefed by the Home Office. A Home Office spokesman said today: “We will continue to oppose the question of his release vigorously because we do not feel that he is fit for release into the community. We are concerned about the safety of the public.” The row comes only four days after MPs were told that another killer who won his release from Park Lane in March—against Home Office advice—had now been charged following two attacks on young women. Pickering (48), was said at his trial to have committed “sub-human acts” on schoolgirl Shirley Ann Boldy from South Yorkshire, who was raped and held prisoner in his car before being stabbed. He had been released from prison five months earlier after a nine-year sentence for indecency and assaulting a woman, and had spent a total of 15 years in jail. Barnsley East Labour MP Terry Patchett, whose constituents include the dead girl’s parents, said local people still remembered the terrible crime and would be horrified at his proposed release.’
The relevant provisions of the 1981 Act are as follows:
‘1. The strict liability rule. In this Act “the strict liability rule” means the rule of law whereby conduct may be treated as a contempt of court as tending to interfere with the course of justice in particular legal proceedings regardless of intent to do so.
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2. Limitation of scope of strict liability.—(1) The strict liability rule applies only in relation to publications, and for this purpose “publication” includes any speech, writing, broadcast or other communication in whatever form, which is addressed to the public at large or any section of the public.
(2) The strict liability rule applies only to a publication which creates a substantial risk that the course of justice in the proceedings in question will be seriously impeded or prejudiced.
(3) The strict liability rule applies to a publication only if the proceedings in question are active within the meaning of this section at the time of the publication.
(4) Schedule 1 applies for determining the times at which proceedings are to be treated as active within the meaning of this section.
3. Defence of innocent publication or distribution.—(1) A person is not guilty of contempt of court under the strict liability rule as the publisher of any matter to which that rule applies if at the time of publication (having taken all reasonable care) he does not know and has no reason to suspect that relevant proceedings are active.
(2) A person is not guilty of contempt of court under the strict liability rule as the distributor of a publication containing any such matter if at the time of distribution (having taken all reasonable care) he does not know that it contains such matter and has no reason to suspect that it is likely to do so.
(3) The burden of proof of any fact tending to establish a defence afforded by this section to any person lies upon that person …
5. Discussion of public affairs. A publication made as or as part of a discussion in good faith of public affairs or other matters of general public interest is not to be treated as a contempt of court under the strict liability rule if the risk of impediment or prejudice to particular legal proceedings is merely incidental to the discussion.
6. Savings. Nothing in the foregoing provisions of this Act … (b) implies that any publication is punishable as contempt of court under that rule which would not be so punishable apart from those provisions …
19. Interpretation. In this Act … “court” includes any tribunal or body exercising the judicial power of the State, and “legal proceedings” shall be construed accordingly … ’
It may be observed that the draftsman of s 19 borrowed language used by Lord Fraser and Lord Scarman in A-G v BBC [1980] 3 All ER 161 at 177, 181, [1981] AC 303 at 353, 359.
It was common ground that the publication of the two newspaper articles were publications within s 2(1) of the Act. It was also common ground that proceedings were active at the time of publication (see s 2(3) of the Act). Once the common ground is left two questions were agitated before the court. First, is a mental health review tribunal a court for the purposes of the Act? If Yes, was there a substantial risk of prejudice? Third, in the Liverpool case there was discussed, but mutedly, the question of a defence under s 5.
In resolving the first question it is necessary to look at the history of mental health review tribunals. They were established under the Mental Health Act 1959. They had power to discharge certain categories of patient but they had no power to discharge a patient who was subject to a s 60 order and a restriction order under s 65 of the Act. In regard to such a patient they had an advisory function and a power of recommendation (see ss 65(3)(b) and 66(2)). It was conceded by the Attorney General if concession was necessary, that in discharging their advisory and recommendatory functions they were exercising an administrative function. The decision in regard to the discharge of a s 60 patient who was subject to a s 65 restriction order was for the Secretary of State. His act was essentially an executive act (see R v Oxford Regional Mental Health Review Tribunal, ex p Secretary of State for the Home Dept [1986] 3 All ER 239 at 244, [1986] 1 WLR 1180 at 1185). The legislative structure in so far as it related to patients subject to a restriction
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order was criticised in X v UK (1981) 4 EHRR 188 at 207 as being contrary to art 5(4) of the Convention for the Protection of Human Rights and Fundamental Freedoms (Rome, 4 November 1950; TS 71(1953); Cmd 8969). Article 5(4) provides:
‘Everyone who is deprived of his liberty by arrest or detention shall be entitled to take proceedings by which the lawfulness of his detention shall be decided speedily by a court and his release ordered if his detention is not lawful.’
In their judgment the court said:
‘53. It is not within the province of the Court to enquire into what would be the best or most appropriate system of judicial review in this sphere, for the Contracting States are free to choose different methods of performing their obligations. Thus, in Article 5(4) the word “court” is not necessarily to be understood as signifying a court of law of the classic kind, integrated within the standard judicial machinery of the country. This term, as employed in several Articles of the Convention (including Art. 5(4)), serves to denote—“bodies which exhibit not only common fundamental features, of which the most important is independence of the executive and of the parties to the case, but also the guarantees (‘appropriate to the kind of deprivation of liberty in question’) of [a] judicial procedure”, the forms of which may vary from one domain to another.’
(The words quoted in the above extract come from De Wilde v Belgium (No 1) (1971) 1 EHRR 373 at 408, 407 (paras 78, 76).)
It appears to me that the court was requiring some tribunal independent of the executive. It does not seem to me that it was requiring a court in the strict sense of the term whatever that strict sense may be. There is however in my mind no doubt that the decision of the European Court of Human Rights led to legislative changes which are now embodied in the 1983 Act. Under that Act a restricted patient has a right of access to a mental health review tribunal every 12 months. The tribunal has power to direct absolute or conditional discharges (see ss 70 and 73). The giving of the direction as to the discharge of any form is however subject to the tribunal being satisfied of the existence of certain criteria. I need not recite them for nothing turns on them.
There is no previous authority on whether a mental health review tribunal is a court for the purposes of proceedings for contempt. The textbook writers are not in agreement. Thus Arlidge and Ealy Law of Contempt (1982) p 293 suggests that it would be difficult to classify the activities of a mental health tribunal as an administrative activity; however, Borrie and Lowe Law of Contempt (2nd edn, 1983) p 336 submits that a mental health review tribunal does not satisfy the term ‘court of law’. I approach the question on the basis of caution. Such caution seems to me to be justified by reference to passages in the speeches in A-G v BBC. Lord Salmon said ([1980] 3 All ER 161 at 168–169, [1981] AC 303 at 342):
‘I agree, for the reasons given by counsel for the Attorney General, which I need not repeat, that a local valuation court has some of the attributes of the long-established “inferior courts“. There is today a plethora of such tribunals which may well resemble the old “inferior courts“. In my view, it does not by any means follow that the modern inferior courts need the umbrella of contempt of court or that they come under it. Indeed, in my opinion, public policy requires that most of the principles relating to contempt of court which have for ages necessarily applied to the long-established inferior courts such as county courts, magistrates’ courts, courts-martial, coroners’ courts and consistory courts shall not apply to valuation courts and the host of other modern tribunals which may be regarded as inferior courts; otherwise the scope of contempt of court would be unnecessarily extended and accordingly freedom of speech and freedom of the press would be unnecessarily contracted.’
Page 610 of [1989] 1 All ER 604
Lord Edmund-Davies said ([1980] 3 All ER 161 at 172, [1981] AC 303 at 346):
‘Equal clarity and certainty should prevail in relation to the question of jurisdiction to commit for contempt. It is unacceptable to leave it to the Attorney General ultimately to decide when and where contempt proceedings will lie for, as Sir Stanley Rees pertinently observed in the Court of Appeal ([1979] 3 All ER 45 at 57, [1981] AC 303 at 318): ” … it is … vital to ensure that freedom of expression in the press and in broadcasting should not be unwarrantably fettered. It is equally important that the press and the broadcasting authorities should be able to know in advance what tribunals are inferior courts within the ambit of RSC Ord 52, r 1.”’ (Lord Edmund-Davies’s emphasis.)
Lord Fraser said ([1980] 3 All ER 161 at 177, [1981] AC 303 at 353):
‘Uncertainty is a serious objection because of the large number of tribunals set up by modern legislation, many of which might be on the borderline. It is undesirable that anyone intending to publish information in the newspapers or on radio or television relating to proceedings pending before a tribunal should have to examine in detail the functions and constitution of the tribunal in order to ascertain whether it is protected by the law against contempt.’
Lord Scarman said ([1980] 3 All ER 161 at 183, [1981] AC 303 at 362):
‘Neither the meagre authorities available in the books nor the historical origins of contempt of court require the House to extend the doctrine to administrative courts and tribunals. Legal policy in today’s world would be better served, in my judgment, if we refused so to extend it. If Parliament wishes to extend the doctrine to a specific institution which it establishes, it must say so explicitly in its enactment, as it has done on occasion, eg the Tribunals of Inquiry (Evidence) Act 1921. I would not think it desirable to extend the doctrine, which is unknown, and not apparently needed, in most civilised legal systems, beyond its historical scope, namely the proceedings of courts of judicature. If we are to make the extension, we have to ask ourselves, if the United Kingdom is to comply with its international obligations, whether the extension is necessary in our democratic society. Is there “a pressing social need” for the extension? For that, according to the European Court of Human Rights see Sunday Times v United Kingdom (1979) 2 EHRR 245 at 275. It has not been demonstrated to me that there is.’
It is axiomatic that a mental health review tribunal must act judicially in the discharge of its functions otherwise it will be exposed to an application for judicial review. That exposure is not however in any way indicative of whether the tribunal is a ‘court’. Viscount Dilhorne said in A-G v BBC ([1980] 3 All ER 161 at 167, [1981] AC 303 at 339–340):
‘I do not think that the Divisional Court’s jurisdiction extends to all courts created by the state, for I think that a distinction has to be drawn between courts which discharge judicial functions and those which discharge administrative ones, between courts of law which form part of the judicial system of the country on the one hand and courts which are constituted to resolve problems which arise in the course of administration of the government of this country. In my opinion a local valuation court comes within the latter category. It discharges functions formerly performed by assessment committees. It has to resolve disputes as to the valuation of hereditaments. While its decisions will affect an occupier’s liability for rates, it does not determine his liability. It is just part of the process of rating. It has to act judicially but that does not make it a court of law. The fact that it has to act judicially means, as Fry LJ said in Royal Aquarium and Summer and Winter Garden Society Ltd v Parkinson [1892] 1 QB 431 at 447, [1891–4] All ER Rep 429 at 434, that its
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proceedings must be “conducted with the fairness and impartiality which characterise proceedings in Courts of justice, and are proper to the functions of a judge” and not, though established by law, that it is a court of law and part of the judicial system of the country. In R v St Mary Abbotts, Kensington Assessment Committee [1891] 1 QB 378 Lord Esher MR said that an assessment committee was not a court or tribunal exercising judicial functions in the legal acceptation of the term. A local valuation court, as I have said, discharges the same functions as an assessment committee did and they have not changed their character. I hold that such a court’s functions are administrative, not judicial. No case was cited to us of the law of contempt being applied to tribunals or courts discharging, albeit judicially, administrative functions and I for my part am not prepared to extend the law by applying it to such tribunals or courts.’
Something of this passage is applicable here. In regard to restricted patients the mental health review tribunals are inheritors of an executive function and on a 12 monthly basis review a patient’s position against specified criteria. Counsel for the Attorney General said that the tribunals deal with the liberty of the subject. However, the tribunals cannot deprive a person of liberty and a refusal to discharge is not final. The case is reviewable within a 12 month. Those seem to me to be powerful counter-indications against the suggestion that the tribunals are dealing with the liberty of the subject.
Bearing in mind the caution which the House of Lords has admonished the Divisional Court to observe (ie, in A-G v BBC), I have come to the conclusion that a mental health tribunal is not a ‘court’ for the purposes of the 1981 Act. For that self-sufficient reason these applications fail.
I must mention that there was much discussion about s 6(b) of the Act. Of the forerunner of that provision, s 12(4) of the Administration of Justice Act 1960, Scarman LJ in Re F (a minor) (publication of information) [1977] 1 All ER 114 at 131, [1977] Fam 58 at 99 said:
‘… I think it likely that the subsection was enacted to ensure that no one would in future be found guilty of contempt who would not also under the pre-existing law have been found guilty. Certainly such a construction is consistent with the law’s basic concern to protect freedom of speech and individual liberty … ’
That observation was indorsed by Lord Edmund-Davies in A-G v Leveller Magazine Ltd [1979] 1 All ER 745 at 761, [1979] AC 440 at 465 and by Lord Denning MR in R v Horsham Justices, ex p Farquharson [1982] 2 All ER 269 at 285, [1982] QB 762 at 791. Those observations are of course binding on me but I do not think they would have bitten in the present case had I taken a different view as to ‘court’. It would not have been the ‘foregoing provisions’ which would have caused difficulty but it would have been the provisions of the 1983 Act conferring the new power on the mental health review tribunals.
Should I be wrong on the question of ‘court’ I must deal with the issue of ‘substantial risk’ under s 2(2). There was no dispute on the law. The court has to assess the risk created at the time when publication occurred and the risk which is only remote is alone to be excluded (see A-G v English [1982] 2 All ER 903 at 918–919, [1983] 1 AC 116 at 141).
No complaint was made by counsel appearing on behalf of Pickering before the tribunal about either the Daily Mail or the Liverpool Echo articles. The Liverpool Echo article was not mentioned throughout the hearing before the tribunal. The Daily Mail article was referred to once when Dr MacCulloch said: ‘Reports in the Daily Mail compare me unfavourably with the medical director of Broadmoor Hospital, Dr John Hamilton and also similar other echoes have appeared in other papers.' True it was that the chairman of the tribunal, her Honour Judge Ebsworth, said:
‘This case has been severely hampered by ill-informed media comment before and during its hearing. The coverage persisted after the tribunal had drawn attention
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to the private nature of the proceedings. The content and persistence of the coverage was calculated to put unreasonable pressure on the parties and the witnesses. It obviously and unfairly affected the RMO [regional medical officer] and placed unnecessary strain on the patient.’
I do not know to what publication these remarks were addressed. It is however pertinent to observe that there was discussion at the hearing about an article in the Guardian which appeared on the second day of the hearing under the heading ‘DHSS launches inquiry on release of psychopaths’.
To what is it that the Attorney General wishes to draw the court’s attention? In the case of the Daily Mail it is the following:
‘Dr MacCulloch, whose opinion is likely to be a key factor at the hearing, is pushing for his [the patient’s] release. But Home Office Ministers and MPs are determined to resist the move. Some Tory MPs are also expected to call for the removal of Dr MacCulloch, who become nationally known in 1981 during the trial of the Yorkshire Ripper … ’
In the case of the Liverpool Echo it is this passage:
‘Ministers are furious at chiefs at the Maghull psychiatric hospital for trying to release rapist Paul Pickering … And some MPs may call for the sacking of Park Lane director Dr. Malcolm MacCulloch.’
I would not for one moment wish to encourage assaults on expert witnesses but Dr MacCulloch is well used to controversy and cannot have been innocent of the attitude of the Home Office and of members of Parliament. I think it unnecessary to rehearse in detail the controversial activities of Dr MacCulloch but I should say that on 4 July 1985 Mr Mellor on behalf of the Secretary of State for the Home Department said in Parliament that the Secretary of State ‘continues to take the firm view that Mr Pickering is not fit for release into the community’.
In my judgment, no suggestion of impact on the tribunal having been made, the risk of prejudice by any effect on Dr MacCulloch is remote.
There remains s 5 in regard to the Liverpool Echo. The onus is on the Attorney General to show that the defence does not apply (see A-G v English [1982] 2 All ER 903 at 918, [1983] 1 AC 116 at 141). I think in the present case the Attorney General has discharged the burden on him. The discussion in the Liverpool Echo seems to me to be limited to the instant case and not to be a discussion of a matter of general public interest.
For the reasons which I have given I would dismiss these applications.
HENRY J. I agree.
Applications dismissed.
28 October. The court refused leave to appeal to the House of Lords but certified, under s 1(2) of the Administration of Justice Act 1960, that the following point of law of general public importance was involved in the decision: Whether a mental health review tribunal is a ‘tribunal … exercising the judicial power of the State’ and is therefore a court for the purposes of the Contempt of Court Act 1981.’
Solicitors: Crown Prosecution Service; Swepstone Walsh & Son (for the first respondents); Lace Mawer, Liverpool (for the second respondents).
Dilys Tausz Barrister.
Richco International Ltd v International Industrial Food Co SAL
The Fayrouz III
[1989] 1 All ER 613
Categories: ADMINISTRATION OF JUSTICE; Arbitration
Court: QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
Lord(s): HIRST J
Hearing Date(s): 22, 23 JUNE, 4 JULY 1988
Arbitration – Practice – Securing amount in dispute – Failure to comply with order to bring amount in dispute into court – Jurisdiction of High Court to stay arbitration proceedings for failure to comply with order – Whether court should stay further proceedings of arbitration – Arbitration Act 1950, s 12(6)(f) – RSC Ord 29, r 2.
The plaintiff sellers sold 25,000 tonnes of wheat for Denmark or Germany, destination Syrian ports, for $US2,342,896 on a GAFTA 64 contract which included normal GAFTA arbitration terms. Shortly after loading, the buyers rejected the cargo on the grounds of sub-standard quality and notified the sellers that the cargo would be kept at the sellers’ disposal when the vessel arrived in Syria. The sellers denied the default but when they presented the sale documents to the buyers’ bank they were rejected. The buyers notified the sellers that the sub-buyers, a Syrian state purchasing agency, had also rejected the cargo on the grounds of quality. The buyers sought to have the dispute referred to arbitration but before the arbitration commenced the buyers, without the sellers’ knowledge, received payment from the sub-buyers for the wheat, less a discount for the lower quality, and the wheat was off-loaded at a Syrian port while the sellers continued to assert title to it. On an application by the sellers the judge ordered the buyers to pay into court the sum of $US1,820,000. The buyers did not comply with the order and the sellers applied for an order that in default of paying the sum into court the sellers be debarred from contesting the arbitration.
Held – The court had power under s 12(6)(f)a of the Arbitration Act 1950 to secure the amount in dispute in an arbitration and under RSC Ord 29, r 2b could exercise that power by ordering a party to pay the amount in dispute into court on terms, and if that party failed to comply with such an order the court could order a permanent stay of his claims in the arbitration thereby debarring him from pursuing or defending his claims. Since on the facts the sellers had a virtually irrefutable case that the buyers had sold goods which remained the property of the sellers and had retained the proceeds and since the buyers had failed to pay the net proceeds into court as ordered, the court would order that the buyers be debarred from defending the sellers’ claims in the arbitration unless they complied with the order for payment into court within four weeks (see p 618 f g, p 619 c to e h j and p 620 d e, post).
Dorval Tankers Pty Ltd v Two Arrows Maritime and Port Services Ltd, The Argenpuma [1984] 2 Lloyd’s Rep 563 applied.
Notes
For the court’s powers to secure amounts in dispute in a reference to arbitration, see 2 Halsbury’s Laws (4th edn) para 595.
For the Arbitration Act 1950, s 12, see 2 Halsbury’s Statutes (4th edn) 547.
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Cases referred to in judgment
Bremer Vulkan Schiffbau Und Maschinenfabrik v South India Shipping Corp [1981] 1 All ER 289, [1981] AC 909, [1981] 2 WLR 141, HL.
Dorval Tankers Pty Ltd v Two Arrows Maritime and Port Services Ltd, The Argenpuma [1984] 2 Lloyd’s Rep 563, CA.
Golden Trader, The, Danemar Scheepvaart Maatschappij BV v Golden Trader (owners) [1974] 2 All ER 686, [1975] QB 348, [1974] 3 WLR 16.
Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal, The Hannah Blumenthal [1983] 1 All ER 34, [1983] 1 AC 854, [1982] 3 WLR 1149, HL.
Application
The plaintiffs, Richco International Ltd, a corporation with limited liability under the law of Bermuda (the sellers), applied for an order that the defendants, International Industrial Food Co SAL, a corporation established under the law of the Republic of Lebanon (the buyers), be debarred from defending the sellers’ claim in an arbitration between the parties in which the sellers were the respondents and the buyers were the claimants, on the grounds that the buyers had failed to comply with an order made by Hirst J on 25 May 1988 requiring them to pay into court within 14 days $US 1,820,000, being the fund in dispute in the arbitration, in default of which all of the buyers’ claims in the arbitration were to be stayed. The application was heard in chambers but judgment was given by Hirst J in open court. The facts are set out in the judgment.
L J West-Knights for the sellers.
Nigel Meeson for the buyers.
Cur adv vult
4 July 1988. The following judgment was delivered.
HIRST J.
Introduction
This case raises the question, on which there seems to be no decided authority, as to the powers of the court to make an effective order to secure by payment into court a specific fund of money where the right to that fund is in dispute in a pending arbitration. I am giving this judgment in open court in response to a strong request by counsel for the plaintiffs, Richco International Ltd (the sellers), who are the claimants for present purposes in the arbitration.
This was not opposed by counsel for the defendants, International Industrial Food Co SAL (the buyers), though he invited me to avoid naming the parties: such anonymity is inconvenient, and in my view unnecessary in the present case.
Factual outline
By a contract on GAFTA 64 terms, including normal GAFTA arbitration, the sellers sold to the buyers 25,000 tonnes of wheat fob Denmark or Germany, payment against documents, destination Syrian ports, for a total price of $US2,342,896. A vessel called the Fayrouz III was nominated, and loaded the cargo partly at Emden and partly at Nordenham, completing the latter loading on 29 March 1988. There was then a dispute as to the certification of quality and on 31 March the buyers rejected the cargo and confirmed such rejection by telex a week later stating they were holding the cargo at the sellers’ disposal, and that the vessel was proceeding to Tartous in Syria where the goods would be kept at the sellers’ disposal. The sellers’ denied the default, and notified the vessel that the cargo was still their property. Meantime the buyers notified the sellers that their sub-buyers, a Syrian state purchasing body called l’Organisme Générale pour la
Page 615 of [1989] 1 All ER 613
Commercialisation et l’Industrialisation des Céreéales (OGCIC), had also rejected the goods. The vessel by this time was anchored off Crete. On 12 April the sellers presented the documents to the buyers’ bank, Union des Banques Arabes et Françaises (UBAF) at Neuilly in France. These were rejected on the ground of a number of alleged documentary defects. Avoiding all unnecessary detail, the essence of the buyers and sub-buyers’ complaint concerning the goods was that the ‘falling number’ was too low, showing too high a proportion of germinated grains, and the essence of the complaint about the documents was that the attached certificates failed in numerous respects to comply with the contractual requirements.
On 21 April the buyers and the sellers met in Paris and tried to thrash out their difficulties. In the course of that meeting the buyers proposed a compromise which the sellers rejected, insisting on strict compliance with the contractual terms of which they denied any breach. On 25 April the buyers claimed arbitration and nominated a GAFTA arbitrator. Telex correspondence meantime continued in which each side maintained their position, until on 28 April the sellers’ Dutch lawyers offered a compromise on the same lines as that put forward by the buyers in Paris a week earlier, while explicitly maintaining their claim that they were still the owners of the cargo. This offer was not accepted by the buyers, who in a series of telexes promised to revert with a detailed offer from their side which was never forthcoming. (I mention these details because in the buyers’ evidence it is suggested that the sellers’ compromise offer on 28 April amounted to a belated acceptance of the buyers’ oral offer at the meeting in Paris a week earlier; but, on the proper construction of this telex correspondence as a whole, such an interpretation is completely unarguable, and indeed was not supported in argument by counsel for the buyers.)
At about this juncture an extraordinary sequence of events ensued. On 25 April the buyers presented documents to OGCIC’s bank in Syria, the Banque Centrale de Syrie, and the following day UBAF notified the Syrian bank that in accordance with their instructions they were debiting their current account with the sub-purchase price, and had paid the buyers against presentation of the relevant documents. The exact date of payment is unclear, but on the buyers’ own evidence it was not later than 2 May. All this was completely unbeknown to the sellers, who were meantime maintaining their claim to the title in the goods and attempting to forestall any discharge from the vessel. The amount of this payment from the sub-buyers to the buyers was $US3,024,783 which, on the buyers’ own evidence, allowed for a discount on the sub-purchase contract price of $20 per tonne to make allowance for the alleged quality defects which had been the subject of complaint. The sub-contract purchase price was on a cif basis, and on the buyers’ evidence the insurance and freight element amounted to a little short of $1m so that, in round figures, the strict sub-purchase price amounted to about $2m.
On 6 May Leggatt J granted the sellers an ex parte order restraining the buyers from instructing the vessel to enter Tartous. However, on the following day the vessel was placed under restraint by the Syrian authorities. This came to the knowledge of the sellers (who still did not know about the payment by the sub-buyers to the buyers of the sub-purchase price) and on 10 May the sellers sought confirmation from the buyers that the cargo still belonged to the sellers. On 16 May a court in Syria ordered the vessel to discharge, and on the following day discharge began in Tartous under the supervision of armed Syrian officers. Discharge was finally completed on 24 May.
On 25 May the matter came before me on an inter partes summons, and I made an order containing, inter alia, the following requirement:
‘That the [buyers] do bring into Court within 14 days of the date hereof the sum of US $1,820,000 being a fund in dispute between the parties in default of which all of the [buyers’] claims in the arbitration between the parties do be stayed.’
The jurisdiction on which that order was based is the same as that relied on by the sellers at the present hearing as described below. I refused leave to appeal and no attempt was
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made by the buyers to make any necessary application to the Court of Appeal within the prescribed time limits. However the order has not been complied with.
The sellers’ claim in the arbitration
The essence of the sellers’ claim in the arbitration, in which of course they are for present purposes the effective claimants though technically respondents, is that the goods have at all times remained their property, both the goods and the documents having been rejected by the buyers, and that such rejection remains effective to this day, there having been no subsequent agreement by way of compromise or otherwise which could result in a transfer of the property in the goods from the sellers to the buyers. It is the sellers’ contention that these goods are now represented by the purchase price paid by the Syrian sub-buyers to the buyers. Their principal claim in the arbitration is that the buyers sold to the sub-buyers as (in effect) self-appointed agents of the sellers and therefore owe the sellers the fiduciary duty to account for and pay over to the sellers the proceeds of the sale, less freight and insurance, and that such proceeds constitute a specific fund. The claim is also framed on a number of alternative bases, including a claim for the purchase price, but those other formulations are immaterial for present purposes.
Counsel for the buyers expressly concedes that for present purposes this purchase price received by the buyers from the sub-buyers does constitute a specific fund, and I do not therefore need to evaluate a piece of affidavit evidence from the buyers’ commercial manager in Syria, Mr Daniel Fernandez-Diaz, that the money received has been spent to reimburse the bank, though I should have in any event found great difficulty in giving that evidence any weight since, notwithstanding his pivotal position on behalf of the buyers, it is given on no better basis than secondhand information.
Other contractual disputes
There are a number of other contracts for the sale of wheat between the sellers and the buyers which have also given rise to disputes, with assertions and counter-assertions of numerous breaches by each side against the other which I need not recite. All these are GAFTA contracts, and in each case separately the buyers have instituted a GAFTA arbitration. There is also pending litigation between the sellers and the buyers’ French bankers in the Commercial Court in Nanterre in France concerning a claim under a performance bond.
In their evidence the buyers seek to rely on their various claims under these other contracts as validly constituting potential set-offs in the present arbitration. Let me say at once that I regard this as a completely untenable proposition. Each of these GAFTA arbitrations is contractually separate from each other, as indeed are the contracts themselves, and no claim in one of them can in my judgment possibly constitute a valid set-off against an opposite claim in another. I shall therefore entirely disregard in the present context all the pending claims in the other arbitrations under the other contracts.
The sellers’ claim in the present summons
The sellers now seek an extension of the order which I made on 25 May, to provide that, in default of payment into court of the sum of $US 1,820,000 by some appropriate future date, the buyers should be debarred from defending the sellers’ claim in the arbitration. It is convenient to note at this juncture that the buyers explicitly accept that the sellers’ fiduciary claim to the specific fund falls within the terms of the GAFTA arbitration clause, which is very widely drawn.
The legal framework
Section 12(6) of the Arbitration Act 1950 provides:
‘The High Court shall have, for the purpose of and in relation to a reference, the same power of making orders in respect of—(a) security for costs … (f) securing
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the amount in dispute in the reference; (g) the detention, preservation or inspection of any property or thing which is the subject of the reference or as to which any question may arise therein, and authorising for any of the purposes aforesaid any persons to enter upon or into any land or building in the possession of any party to the reference, or authorising any samples to be taken or any observation to be made or experiment to be tried which may be necessary or expedient for the purpose of obtaining full information or evidence … as it has for the purpose of and in relation to an action or matter in the High Court … ’
The immediately relevant paragraph is of course para (f) (with which para (g) is closely linked), but I have also quoted para (a) because it gives rise to a very close parallel on which there is decided authority. The court’s general powers in relation to the detention, preservation or inspection of property and for the securing of a specific fund, are contained in RSC Ord 29, r 2, which provides so far as relevant as follows, paras (3) and (4) being those directly in point:
‘Detention, preservation, etc., of subject-matter of cause or matter.—(1) On the application of any party to a cause or matter the Court may make an order for the detention, custody or preservation of any property which is the subject-matter of the cause or matter, or as to which any question may arise therein, or for the inspection of any such property in the possession of a party to the cause or matter.
(2) For the purpose of enabling any order under paragraph (1) to be carried out the Court may by the order authorise any person to enter upon any land or building in the possession of any party to the cause or matter.
(3) Where the right of any party to a specific fund is in dispute in a cause or matter, the Court may, on the application of a party to the cause or matter, order the fund to be paid into court or otherwise secured.
(4) An order under this rule may be made on such terms, if any, as the Court thinks just … ’
The power to order security for costs which is contained in Ord 23 contains in r 2 an identical provision mutatis mutandis to that contained in Ord 29, r 2(4). In Dorval Tankers Pty Ltd v Two Arrows Maritime and Port Services Ltd, The Argenpuma [1984] 2 Lloyd’s Rep 563 the Court of Appeal held that under s 12(6)(a) of the 1950 Act the court had statutory jurisdiction to order a permanent stay of a claim in an arbitration where the claimant had failed to comply with an order of the court to furnish security for costs, expressly distinguishing Bremer Vulkan Schiffbau Und Maschinenfabrik v South India Shipping Corp [1981] 1 All ER 289, [1981] AC 909, in which the House of Lords held that the court has no inherent jurisdiction to grant a stay of an arbitration for want of prosecution. The two leading judgments were given by Eveleigh and Kerr LJJ, with whom Fox LJ agreed. Eveleigh LJ stated ([1984] 2 Lloyd’s Rep 563 at 566):
‘It is said that the Court has no power to put an end to an arbitration. Reference was made to Bremer Vulkan Schiffbau und Maschinenfabrik Corporation Ltd. v. South India Shipping Corporation Ltd. ([1981] 1 All ER 289 at 296–297, [1981] A.C. 909 at 979–980). That case decided that the Court had no inherent jurisdiction to do so, but the jurisdiction that is invoked in this case is that which flows from s. 12(6) of the Arbitration Act, 1950. It has the effect of incorporating the Rules of Court, O. 23 into the Arbitration Act. Order 23, r. 2 provides: “Where an order is made requiring any party to give security for costs, the security shall be given in such manner, at such time, and on such terms (if any), as the Court may direct.” Consequently, the Court has statutory jurisdiction in this matter to do what it considers just.’
Kerr LJ stated (at 567–568):
‘The second issue is whether Mr. Justice Leggatt had jurisdiction to order a
Page 618 of [1989] 1 All ER 613
permanent stay of the arbitration. In my view, he did. Bremer Vulkan Schiffbau und Maschinenfabrik Corporation Ltd. v. South India Shipping Corporation Ltd. decided that the Court has no power to dismiss an arbitration for want of prosecution … The present case differs radically from the position in Bremer Vulkan and The “Hannah Blumenthal” [Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 All ER 34, [1983] 1 AC 854], since it turns on express powers of the Courts concerning arbitrations which are conferred by statute and under the Rules of Court. Part I of the Arbitration Act, 1950, confers a number of powers upon various parts of our Court system to make orders in relation to arbitrations. The present case is concerned with s. 12(6)(a) which confers power upon the High Court to make orders for the security for the costs of arbitrations in the same way as in relation to actions in the High Court. Section 28 of the Act provides: “Any order made under this Part of this Act may be made on such terms as to costs or otherwise as the authority making the order thinks just.” In relation to orders for security for costs R.S.C., O. 23, r. 2 provides for a similar discretion to impose terms. A stay of the proceedings in relation to which an order for security is made, pending the provision of the security, is commonplace, if not invariable in the absence of consent, because further unsecured costs may be incurred in the interim. The power to impose a stay of the arbitration in this case, which was exercised ex parte on Feb. 5, 1982 and inter partes on Apr. 2, 1982, is therefore not open to doubt. Having ordered a stay of the arbitration, it is equally within the power of the Court to decide whether the stay should be lifted or maintained if—as happened here—the security is not provided within the prescribed time … Given the foregoing, I think that Mr. Justice Leggatt also had jurisdiction to order that the stay be permanent. In relation to proceedings in the Courts this can be achieved by an order striking out or dismissing the action for want of prosecution: see the note in the Annual Practice 23/1–3/23.’
The Argenpuma demonstrates that Ord 23 is the counterpart of s 12(6)(a) of the 1950 Act; similarly Ord 29, r 2 is the counterpart of s 12(6)(f) and (g) of the Act: see The Golden Trader, Danemar Scheepvaart Maatschappij BV v Golden Trader (owners) [1974] 2 All ER 686 at 695, [1978] QB 348 at 359 per Brandon J.
Submissions and conclusions in law
The kernel of the submissions of counsel for the sellers is that the powers under paras (a) and (f) of s 12(6) of the 1950 Act are strictly comparable, and that, just as, on the authority of The Argenpuma, the court has statutory jurisdiction in appropriate circumstances to put a permanent stop on a plaintiffs‘s claim in an arbitration where he is in default of an order for security for costs (on the basis of its wide power to impose terms under Ord 23, r 2), so the court is statutorily entitled to debar a defendant from defending pursuant to its wide powers under Ord 29 if he is in default of complying with an order to secure a specific fund, or, where the situation arises, if he is in breach of an order for the custody or preservation of the property. He draws attention to the wide range of circumstances in which the court has power to order either the dismissal of claims or the debarring of defences where orders are not complied with, either under the express terms of rules of court themselves, or under the inherent jurisdiction of the court; default in pleading or failure to give discovery under Ord 29 or Ord 24, r 16 respectively are examples of the former, and delay or default in drawing up an order or abuse of process are instances of the latter (see the full catalogue helpfully set out in The Supreme Court Practice 1988 vol 2, paras 4624–4626).
Counsel for the buyers submits that there is no such jurisdiction, no specific authority having been produced in support of such an order under s 12(6)(f) of the 1950 Act. Alternatively, he submits that it would be wholly unjust to impose such draconian terms on default under an order to secure a specific fund, since that might debar the defendant from establishing a valid defence, thus giving the plaintiff an unjust judgment. He
Page 619 of [1989] 1 All ER 613
submits that the only cases where the defendant should be so debarred are those expressly contained in the rules in relation to such matters as discovery and inspection, or default in filing a defence, which are due to the defendant’s own fault in the actual conduct of the proceedings, where he has only himself to blame. The proper course, counsel submits, would be for the plaintiff to invoke the powers of the court under Ord 45, r 1(2), which provides:
‘Subject to the provisions of these rules, a judgment or order for the payment of money into court may be enforced by one or more of the following means, that is to say—(a) the appointment of a receiver; (b) in a case in which rule 5 applies, an order of committal; (c) in such a case, writ of sequestration.’
In my judgment, the submissions of counsel for the sellers are sound in principle. The analogy of The Argenpuma [1984] 2 Lloyd’s Rep 563 seems to me so close as to provide all but binding authority in favour of his basic proposition, and certainly to give me a sound foundation on which to uphold his basic argument. Counsel for the buyers’ suggested rationale for the cases where parties are debarred from suing or defending claims seems to me inconsistent with the security for costs cases; in such cases there is no default by the plaintiff in the actual conduct of the case, and he may indeed (and no doubt often does) have a good sound claim, but because of his default in complying with an order for security the court undoubtedly has powers to debar him from pursuing that claim, be that claim just or unjust. This is the only sanction the court has for compliance with its order and it is a sanction which the court in proper cases can and will impose.
A defendant who fails to comply with an order under s 12(6)(f) or Ord 29 for the securing of a specific fund (or under para (g) for the custody or preservation of property) is in no worse position than the plaintiff in the above-mentioned comparable circumstances, when his defence, just or unjust, is debarred. In each case the sanction is undoubtedly a severe one, and it goes without saying that the court will only impose it in the exercise of its discretion if the circumstances fully warrant so stringent an order.
Order 45, r 1(2) provides other specific sanctions which the court may impose, not an exhaustive catalogue of permissible remedies in the case of non-payment of a sum of money into court. In the case of an English defendant an order appointing a receiver might no doubt often be appropriate, and, in bad cases, an order for committal or a writ of sequestration. But any such orders would be completely futile in the present case, where the defendant buyers are a Lebanese company. Counsel for the buyers drew my attention to a passage in Kerr on Receivers (16th edn, 1983) p 83 which shows that the court may appoint a receiver over foreign property, but in the same paragraph the author goes on to state, citing authority, that ‘the court will not make such an order if it would be useless’ this in my judgment is manifestly the situation here.
The exercise of my discretion
The relevant facts are as follows. (i) The sellers have a virtually cast-iron case that the property in the goods always remained in their hands, so that the sub-sale by the buyers was a sub-sale of goods belonging not to the buyers but to the sellers. (ii) These goods are now represented in the buyers’ hands by the specific fund amounting to approximately $2m, ie the purchase price of just over $3m with a full allowance of $1m for freight and insurance expenses. (iii) The buyers have received this money for the sellers’ goods as sub-sellers without paying so much as a cent to the sellers under the sale contract between the sellers and the buyers.
On these facts alone, it seems to me that, if ever there was a strong case in favour of an order for security under s 12(6)(f) and for tough sanctions in support of such an order, this is that case.
I reach this conclusion without regard to other factors which might also be prayed in aid, not least the somewhat surreptitious conduct of the buyers in receiving payment
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from their sub-buyers without disclosing any inkling of this fact to the sellers but rather, on the contrary, continuing the desultory and eventually fruitless discussions in which they promised but never provided alternative proposals for solving the problem.
None the less, to avoid any vestige of a warrantable sense of injustice in the minds of the buyers, I wish to be careful to exclude from the amount ordered to be secured any sum in respect of which the buyers might conceivably have a viable defence on the merits. The only heading in the present case for any such defence is the alleged quality defects, which, as is demonstrated by the buyers’ own evidence, and as is common ground between counsel, have already been fully taken into account in the computation of the price paid by the sub-buyers. There is therefore no need to make allowance under this head a second time over. It follows that the amount sought of $1,820,000 falls well short of the sum of $2m approximately to which the sellers are virtually certain to be entitled after making full allowance to the buyers for all possible defences on the merits.
The buyers are already several weeks in default of my previous order and it seems very unlikely that they will comply with it, especially since their affidavit contains no mention of the order, let alone any explanation for their non-compliance. There is indeed no incentive for them to comply, since, having received the full price from their sub-buyers, there is no need for them to pursue any claim in the present arbitration, and therefore no hardship to them in their own claim being stayed.
It follows that in my judgment an order to secure the amount sought of $1,820,000 remains fully justified, and that the additional sanction of debarring a defence in default of compliance with such an order is also fully justified in all the circumstances. I shall therefore in the exercise of my discretion make an order in these terms. However, to make sure the buyers have ample opportunity to reconsider their position in the light of this judgment, I shall give them until 4 pm on Friday, 29 July 1988 to make the payment into court, in default of which they will be debarred from defending the sellers’ claims in the arbitration.
Order accordingly.
Solicitors: Richards Butler (for the sellers); Sinclair Roche & Temperley (for the buyers).
K Mydeen Barrister.
Jobson v Johnson
[1989] 1 All ER 621
Categories: CONTRACT
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): KERR, DILLON AND NICHOLLS LJJ
Hearing Date(s): 20, 21, 22, 25 APRIL, 25 MAY 1988
Contract – Penalty – Forfeiture clause – Penalty for non-performance of contractual obligation – Penalty requiring transfer of property – Sale of shares by instalments – Clause in sale agreement requiring purchaser to transfer shares back to vendor for fixed sum if he defaulted in payment of instalments – Fixed sum for transfer back not reflecting true value of shares – Purchaser defaulting in payment of instalments – Whether retransfer clause a penalty – Whether clause should be struck out – Whether clause enforceable subject to equitable relief – Nature of relief available to vendor.
The defendant entered into an agreement with the vendors for the purchase of 62,566 shares in a football club for a total purchase price of £351,688 payable by an initial payment of £40,000 and six instalments of £51,948 payable half-yearly. The agreement contained a clause that if the defendant defaulted on the payment of the second or any subsequent instalment he was required to transfer the shares back to the vendors for the sum of £40,000. That sum was not a genuine pre-estimate of the vendors’ loss in the event of the defendant’s default and did not reflect the true value of the shares. The defendant paid £140,000 towards the purchase price and the shares were transferred to him. He then defaulted on payment of the instalments. The plaintiff, who was the assignee of the vendors, sought specific performance of the agreement for the retransfer of the shares. The defendant claimed that the retransfer agreement was a penalty and therefore unenforceable and counterclaimed for relief against forfeiture if the agreement was enforceable. At the trial the counterclaim was struck out because the defendant had not complied with an undertaking to disclose certain documents. The judge held that the retransfer agreement was a penalty but nevertheless enforceable unless the defendant was granted relief against forfeiture, which, because of the striking out of the defendant’s counterclaim, was not possible. The judge accordingly ordered specific performance of the agreement for the retransfer of the shares for the sum of £40,000. The defendant appealed, contending that the agreement for the retransfer of the shares was unenforceable because it was a penalty.
Held – The appeal would be allowed for the following reasons—
(1) There was no distinction between a penalty for non-payment of money due under a contract and a penalty for the non-performance of some other obligation under the contract and, furthermore, there was no distinction between a penalty which required the payment of money and a penalty which required the transfer of property. In each case the consequences of a contractual term being identified as a penalty clause were the same, namely the clause remained a term of the contract and would not be struck out merely because it was a penalty but enforcement of the clause would be subject to equitable relief without the need for a specific claim in that behalf on the part of the defendant; accordingly, if the clause was sued on by the plaintiff it would not be enforced by the court beyond the amount of the plaintiff‘s actual loss (see p 627 e, p 628 d to f, p 630 a, p 631 c d, p 632 e f, p 633 a b h j, p 634 j, p 638 e to h and p 639 c, post); Beckham v Drake (1849) 2 HL Cas 579, Craig v M’Beath (1863) 1 M 1020, dictum of Lord Hatherley LC in Thompson v Hudson (1869) LR 4 HL 1 at 15, Re Dagenham (Thames) Dock Co, ex p Hulse (1873) LR 8 Ch App 1022, Public Works Comr v Hills [1904–7] All ER Rep 919, Wall v Rederiaktiebolaget Luggude [1915] 3 KB 66 and Bridge v Campbell Discount Co Ltd [1962] 1 All ER 385 applied.
(2) On its true construction the retransfer agreement was intended to provide the plaintiff with security for unpaid instalments and it gave the plaintiff the remedy of
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repossession as an alternative to suing for recovery of any unpaid instalments. In those circumstances (Kerr LJ dissenting) the court would make available to the plaintiff two alternative forms of relief, namely (a) an order for the sale of the shares by the court and payment to the plaintiff of the unpaid instalments and interest out of the proceeds of the sale or (b) an inquiry as to the value of the shares and if the value of the shares did not exceed the amount of the unpaid instalments and interest by £40,000 an order for specific performance of the agreement for the retransfer of the shares, with the choice of relief being left to the plaintiff. If the plaintiff declined to accept either form of relief the order for specific performance would be discharged since otherwise the court would be enforcing a penalty and the plaintiff would be left to his remedy of suing to recover the amount of the unpaid instalments in a fresh action (see p 630 e to j and p 635 b f j to p 636 a d g to p 637 d j, post) Peachy v Duke of Somerset (1721) 1 Stra 447, Re Dagenham (Thames) Dock Co, ex p Hulse (1873) LR 8 Ch App 1022 and dictum of Lord Wilberforce in Shiloh Spinners Ltd v Harding [1973] 1 All ER 90 at 100 applied.
Notes
For equitable relief against penalties and forfeiture, see 16 Halsbury’s Laws (4th edn) paras 1444–1450, and for cases on the subject, see 20 Digest (Reissue) 892–899, 6656–6703.
Cases referred to in judgments
Alder v Moore [1961] 1 All ER 1, [1961] 2 QB 57, [1961] 2 WLR 426, CA.
Astley v Weldon (1801) 2 Bos & P 346, [1775–1802] All ER Rep 606, 126 ER 1318.
Beckham v Drake (1849) 2 HL Cas 579, 9 ER 1213.
Bridge v Campbell Discount Co Ltd [1962] 1 All ER 385, [1962] AC 600, [1962] 2 WLR 439, HL.
Clydebank Engineering and Shipbuilding Co Ltd v Yzquierdo y Castaneda [1905] AC 6, [1904–7] All ER Rep 251, HL.
Cooden Engineering Co Ltd v Stanford [1952] 2 All ER 915, [1953] 1 QB 86, CA.
Craig v M’Beath (1863) 1 M 1020, Ct of Sess.
Dagenham (Thames) Dock Co, Re, ex p Hulse (1873) LR 8 Ch App 1022, LJJ.
Dixon, Re, Heynes v Dixon [1900] 2 Ch 561, CA.
Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, [1914–15] All ER Rep 333, HL.
Gerrard v Clowes [1892] 2 QB 11.
Kemble v Farren (1829) 6 Bing 141, [1824–34] All ER Rep 641, 130 ER 1234.
Kreglinger (G & C) v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25, [1911–13] All ER Rep 970, HL.
Peachy v Duke of Somerset (1721) 1 Stra 447, 93 ER 626, LC.
Photo Production Ltd v Securicor Transport Ltd [1980] 1 All ER 556, [1980] AC 827, [1980] 2 WLR 283, HL.
Public Works Comr v Hills [1906] AC 368, [1904–7] All ER Rep 919, PC.
Reynolds v Pitt (1812) 19 Ves 134, 34 ER 468, LC.
Roles v Rosewell (1794) 5 Term Rep 538, 101 ER 302.
Shiloh Spinners Ltd v Harding [1973] 1 All ER 90, [1973] AC 691, [1973] 2 WLR 28, HL.
Sloman v Walter (1783) 1 Bro CC 418, 28 ER 1213, LC.
Stockloser v Johnson [1954] 1 All ER 630, [1954] 1 QB 476, [1954] 2 WLR 439, CA.
Thompson v Hudson (1869) LR 4 HL 1.
Wall v Rederiaktiebolaget Luggude [1915] 3 KB 66.
Wallingford v Mutual Society (1880) 5 App Cas 685, HL.
Wallis v Smith (1882) 21 Ch D 243, CA.
Wyllie v Wilkes (1780) 2 Doug KB 519, 99 ER 331.
Page 623 of [1989] 1 All ER 621
Cases also cited
Anglo-Auto Finance Co Ltd v James [1963] 3 All ER 566, [1963] 1 WLR 1042, CA.
Barton Thompson & Co Ltd v Stapling Machines Co [1966] 2 All ER 222, [1966] Ch 499.
Preston v Dania (1872) LR 8 Exch 19.
United Dominion Trust (Commercial) Ltd v Ennis [1967] 2 All ER 345, [1968] 1 QB 54, CA.
Appeal
By a writ issued on 5 August 1985 the plaintiff, Victor Thomas Jobson, sought, inter alia, specific performance of an agreement contained in or evidenced by a letter dated 12 August 1983 whereby, under cl 6(b) of the letter, the defendant, Anton Leslie Johnson, agreed to retransfer to the plaintiff 62,666, or alternatively 62,566 ordinary shares in Southend United Football Club Ltd for the sum of £40,000 in the event of the defendant defaulting on payment of instalments of the purchase price of £351,688 for the shares under a sale agreement made between the plaintiff‘s assignors and the defendant. By his defence the defendant pleaded that cl 6(b) of the letter was a penalty clause and as such was unenforceable, and counterclaimed for relief from forfeiture of the shares if, which he denied, cl 6(b) was a valid and enforceable provision. By an order made on 5 February 1987 Harman J, having struck out the defendant’s counterclaim because of the defendant’s default in complying with an undertaking given to the court, ordered that the agreement contained in cl 6(b) of the letter be specifically performed by the defendant. The defendant appealed. The facts are set out in the judgment of Dillon LJ.
Leslie Joseph QC and Victor Levene for the defendant.
James Munby QC and Guy Newey for the plaintiff.
Cur adv vult
25 May 1988. The following judgments were delivered.
DILLON LJ (giving the first judgment at the invitation of Kerr LJ). The defendant, Mr Johnson, appeals against an order of Harman J of 5 February 1987 whereby the judge ordered, in favour of the plaintiff Mr Jobson, as assignee of two brothers named Rubin (the Rubins), specific performance of an agreement in writing of 12 August 1983 whereby the defendant agreed, in the events which have happened, to sell 62,566 ordinary shares of 25p each in Southend United Football Club Ltd (the club) to the Rubins for a sum of £40,000. The appeal raises a narrow point of considerable difficulty, which only arises because of the unusual course these proceedings have taken.
Briefly the origin of this matter is that in August 1983 the Rubins were, by inheritance from their father, entitled to 62,666 ordinary shares in the club, which constituted 44·914% of the issued share capital of the club. By two documents, both dated 12 August 1983, which have to be read together to get the full terms of the contract, the Rubins contracted to sell the 62,666 shares to the defendant.
The first of these two documents was a sale agreement made between the Rubins and a Mr Machutchon who was a nominee for the defendant. It provided for the sale by the Rubins to Mr Machutchon of the 62,666 shares for a price of £40,000 in cash, and for completion to take place immediately after the signing of the agreement. The sale agreement contained many other provisions but none is relevant to this appeal.
The second of the two documents was a side-letter of the same date. It was written by the defendant to the Rubins and was countersigned by them and was expressed to be agreed in consideration of the Rubins entering into the sale agreement with Mr Machutchon.
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Clause 2 of the side-letter provided for the Rubins, without extra consideration, to procure the transfer to Mr Machutchon of extra shares in the club to bring the total sold to over 50% of the share capital, but that did not happen and an option given to the defendant by cl 5 of the side-letter to require the Rubins to reacquire the shares for £40,000 if the extra shares were not acquired was never exercised. These provisions can therefore be ignored. What is important about the side-letter is however (1) that by cl 3 and the last three lines of cl 2 the defendant agreed to pay the Rubins, in addition to the £40,000 under the sale agreement, a sum of £311,688 by six equal half-yearly instalments of £51,948 commencing on 12 February 1984; the £311,688 represented £260,000 plus interest at 12·5% per annum on a reducing balance, and (2) that by cl 6 there were alternative provisions for the retransfer to the Rubins of 44·9% of the issued share capital of the club in the event of default by the defendant, as follows:
‘(a) In the event of any default by me in payment of the first instalment of the sum referred to in paragraph 3 of this letter for a period of 7 days from the due date of payment I shall transfer (or procure the transfer) of ordinary shares of 25p each in the Company amounting to not less than 44·9% of the issued share capital of the Company as at the due payment date to you jointly subject to the payment to me (or as I may direct) of £15,666.50. (b) In the event of any such default by me in respect of any subsequent instalment of the sum I shall transfer (or procure the transfer) of ordinary shares of 25p in the Company amounting to not less than 44·9% of the issued share capital of the Company at the due payment date to you jointly subject to the payment to me (or as I may direct) of £40,000.’
It is the retransfer under cl 6(b) that the plaintiff, as assignee of the Rubins, now claims to enforce. Because the number of shares comprised in the sale agreement represented, as indicated above, slightly more than 44·9% of the issued share capital of the club, the action has been about, and the judge’s order relates to, the slightly smaller number of 62,566 shares. But nothing turns on precise numbers.
The defendant paid the £40,000 provided for by the sale agreement and the 62,666 shares were transferred to him or to his nominee. He defaulted, however, in paying the first instalment, due on 12 February 1984, under cl 3 of the side-letter. A variation agreement was accordingly entered into on 1 June 1984 between the Rubins and the defendant. This substituted a sum of £300,000 for the £311,688 specified in cl 3 of the side-letter and provided for that sum to be paid by instalments (a) as to £50,000 on the signing of the variation agreement, (b) as to a further £50,000 on 31 August 1984 and (c) as to the balance of £200,000 by 12 quarterly instalments of £15,000 each commencing on 31 March 1985 and a final instalment of £20,000 on 31 March 1988.
There were certain provisions included in the variation agreement for the protection of the Rubins, in that the defendant agreed that the freehold or leasehold properties of the club should not be sold without their consent; he agreed not to charge or encumber the shares and agreed to deposit the share certificate relating to the shares with his then solicitors with irrevocable instructions not to part with it. The defendant also agreed that until a certain level of payments has been reached (which has not yet happened) the Rubins should have the right to appoint one director to the board of the club.
The defendant paid the Rubins the first £100,000 under the variation agreement, in addition to the £40,000 already mentioned, but he has failed to make any payment at all in respect of the balance of £200,000. The rights of the Rubins against the defendant were assigned to the plaintiff for value in July 1985, and he now claims against the defendant to enforce the repurchase of 62,566 shares under cl 6(b) of the side-letter.
At the trial a great deal of time was devoted to claims by the defendant that the sale agreement and the side-letter were tainted with fraud and illegality, and so could not be enforced. The judge held that there was no sufficient evidence to support these claims, which he accordingly rejected, and as to that there is no appeal. Apart from that, however, the defendant pleaded in his defence that the provisions contained in cl 6 of the
Page 625 of [1989] 1 All ER 621
side-letter constituted penalties and were accordingly unenforceable. He then counterclaimed that if, which he denied, cl 6 was valid and enforceable, he ought to be granted relief, which was described as ‘relief from the forfeiture of his said shares … ’
In a reserved judgment delivered on 23 January 1987 after the trial of the action Harman J held that cl 6(b) of the side-letter was indeed a penalty clause, but he held that the effect of that was not that the clause was unenforceable or to be ‘blue-pencilled out’, but that, all other things being equal, the defendant might in the discretion of the court be granted relief under his counterclaim. He then at the defendant’s request adjourned the hearing of the counterclaim to 9 February. It appeared, however, after Harman J had given judgment on 23 January 1987, that the defendant was then in default in complying with certain undertakings given to the court in November 1986 to disclose documents relating to the defendant’s own recent financial circumstances. Harman J accordingly extended the defendant’s time for compliance with those undertakings to the close of business on 30 January 1987, but as by that time the defendant still had not complied with the undertakings, Harman J on 5 February struck out the counterclaim for relief. There is no appeal against the striking out.
The defendant challenges by this appeal the judge’s ruling that, although a penalty clause, cl 6(b) of the side-letter creates an enforceable obligation from which the only escape for the party bound would be by relief, akin to relief against forfeiture, granted to that party by the court in its discretion. The defendant submits that the true view is that cl 6(b), being a penalty clause, is unenforceable. Thus the defendant relies on his defence that the penalty clause is unenforceable, and says that he does not need to rely on his counterclaim for relief, which has been struck out. The position on the record is that if the defendant fails on this submission the appeal must fail because the striking out of the counterclaim is not challenged.
The plaintiff‘s submission is that the law as to penalty clauses is that a penalty clause creates a binding obligation which the courts will enforce unless the courts see fit to grant equitable relief. This view of the law Harman J accepted in his judgment of 23 January 1987, contrary, as he said, to his initial reaction when the proposition was first advanced. The plaintiff submits that if this view of the law is correct, it must follow that, as the counterclaim for relief was struck out, the court cannot give the defendant relief from the penalty clause, and must order specific performance of the defendant’s obligation under cl 6(b), as the judge did by his order of 5 February 1987.
In this court the plaintiff does not challenge the judge’s ruling that cl 6(b) is a penalty clause. That ruling was, in my judgment, plainly right for a combination of two reasons: (1) the repurchase of the shares under cl 6(b) was to be at the fixed price of £40,000 if there was default in payment of any instalment, without regard to how much the defendant had already paid; it would make no difference if the default was in the payment of the second, the last, or an intermediate instalment, and (2) there was also cl 6(a) of the side-letter providing for repurchase at an even lower price than £40,000 in the event of default in the payment of the first instalment under the side-letter, ie default when the defendant had only paid the £40,000 under the sale agreement. The plain reading of cl 6 is therefore that the defendant was to be punished for any default by being bound to retransfer substantially all the shares to the Rubins at a fixed price which was bound to be less, and could be very much less, than the defendant had paid. The retransfer price under either part of cl 6 could not have been based on a genuine pre-estimate either of the Rubins’s loss or of the value of the shares.
The penal effect of cl 6(b) would of course be all the greater if, having enforced a retransfer of the shares for £40,000 under that paragraph, the plaintiff as assignee of the Rubins would remain entitled to sue the defendant to recover additionally all the unpaid instalments under the side-letter as varied by the variation agreement. For my part, however, I would hold as a matter of construction of the side-letter that retransfer of the shares under cl 6(b) was to be in lieu of all other remedies and would preclude the plaintiff recovering any unpaid instalments, whether those unpaid at the date when the
Page 626 of [1989] 1 All ER 621
retransfer was called for or those which would only have become payable subsequently.
We have therefore to consider what the basis is of the court’s approach to penalty clauses, and we have had the benefit of very interesting historical argument on each side.
The effect of the court’s approach has been to establish what Lord Diplock in Photo Production Ltd v Securicor Transport Ltd [1980] 1 All ER 556 at 567, [1980] AC 827 at 850 referred to as ‘the equitable rule against penalties’. He said that an agreement—
‘must not offend against the equitable rule against penalties, that is to say, it must not impose on the breaker of a primary obligation a general secondary obligation to pay to the other party a sum of money that is manifestly intended to be in excess of the amount which would fully compensate the other party for the loss sustained by him in consequence of the breach of the primary obligation.’
There is no doubt that the rule originated in equity, and is of long standing in equity. Thus, Lord Mansfield CJ tells us in Wyllie v Wilkes (1780) 2 Doug KB 519 at 523, 99 ER 331 at 333 that Sir Thomas More, when Lord Chancellor, summoned the judges to a conference concerning the granting of relief at law, after the forfeiture of bonds, on payment of principal, interest and costs, ‘and when they said they could not relieve against the penalty, he swore by the body of God, he would grant an injunction’.
The refusal of the court to sanction legal proceedings for penalties was thus, as Lord Radcliffe stated in Bridge v Campbell Discount Co Ltd [1962] 1 All ER 385 at 395, [1962] AC 600 at 622:
‘a rule of the court’s own, produced and maintained for purposes of public policy (except where imposed by positive statutory enactment, as in [the Administration of Justice Act 1696 and the Administration of Justice Act 1705]).’
In Clydebank Engineering and Shipbuilding Co Ltd v Yzquierdo y Castaneda [1905] AC 6 at 10, [1904–7] All ER Rep 251 at 253 Lord Halsbury LC held that the law as to penalties is now the same in England as in Scotland. He referred to the different form of the administration of the law in England as giving rise to the Administration of Justice Act 1696, and held also, more importantly in my judgment for present purposes, that what gave the jurisdiction to the courts in both countries to interfere at all in an agreement between the parties was that an agreement to pay a penalty was regarded as ‘unconscionable and extravagant, and one which no Court ought to allow to be enforced’. This is of course not saying that the courts claim a general power not to enforce any agreement which the courts regard as unconscionable and extravagant as Lord Radcliffe also stated in Bridge v Campbell Discount Co Ltd [1962] 1 All ER 385 at 397, [1962] AC 600 at 626, the courts of equity never undertook to serve as a general adjuster of men’s bargains. But rules evolved as to the types of cases in which relief would be given, and one of those rules, now too entrenched to be challenged, is the equitable rule against penalties, based on the view, as stated by Lord Halsbury, that an agreement to pay a penalty was, for the reasons given, one that no court ought to allow to be enforced.
An explanation of the rule against penalties that leads to the same result is given by the Lord Justice Clerk (Inglis) in the Scots case of Craig v M’Beath (1863) 1 M 1020 at 1022, where he put as the basis of the rule that parties cannot lawfully enter into an agreement that the one party shall be punished at the suit of the other. Consequently, the court was bound to modify the penalty to the actual loss ‘if duly required by the defender to do so’.
One consequence of the attitude of the courts to penalty clauses is that the question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided on the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract, not as at the time of the breach: see Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 86–87 per Lord Dunedin. This was interpreted, in my view correctly, by Somervell LJ in Cooden Engineering Co Ltd v Stanford [1952] 2 All ER 915 at 919, [1953] 1 QB 86 at 94 as meaning
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that the question whether a sum was a penalty or a pre-estimate of damages, if it arose, had to be considered as at the date of the contract and having regard to its terms, and not on the particular breach or breaches on which the claim was based. The approach makes it less likely, in my view, that the enforcement of the penalty should depend on the particular breach or breaches on which the claim was based, and on whether or not relief in equity should be granted against those breaches.
It is also to be noted that a clause which was identified by the court of equity as a penalty clause as a matter of construction of the contract was not enforced, even though the desired result could legitimately have been achieved if the clause had been drawn differently. Thus in Astley v Weldon (1801) 2 Bos & P 346 at 353, [1775–1802] All ER Rep 606 at 610 Heath J stated:
‘It is a well known rule in equity, that if a mortgage covenant be to pay 5l. per cent. and if the interest be paid on certain days then to be reduced to 4l. per cent. the Court of Chancery will not relieve if the early day be suffered to pass without payment; but if the covenant be to pay 4l. per cent. and if the party do not pay at a certain time it shall be raised to 5l. there the Court of Chancery will relieve.’
This concept was echoed by Lord Hatherley many years later in Wallingford v Mutual Society (1880) 5 App Cas 685 at 702. It is clear to me that equity relieved by not enforcing the penal increased interest which only became payable on default, not by examining the financial circumstances of the mortgagor at the time of breach and considering whether his breach was wilful or culpable or whether he ought to be let off paying the increased interest if he actually paid the arrears at the lower rate within a specified and reasonable time.
All the cases to which I have referred were cases where the penalty was a sum of money. Now that the jurisdictional differences between the courts of common law and equity no longer exist, any court, English or Scottish, when faced with a claim for a sum of money payable on default which it identifies as a penalty, must refuse to enforce the penal part of the sum and must give judgment for the claimant merely for the actual damages suffered by the claimant, with, as appropriate, interest and costs. Where the penalty is a sum of money, the relief, once the penalty has been identified, does not involve a consideration of the circumstances of the defendant, or of the factors which might be appropriate to a grant of relief against forfeiture in such a case as Shiloh Spinners Ltd v Harding [1973] 1 All ER 90, [1973] AC 691, where there was no question of penalty. Giving judgment for the actual damage without further inquiry into the circumstances was the course taken in Cooden Engineering Co Ltd v Stanford [1952] 2 All ER 915, [1953] 1 QB 86 and Bridge v Campbell Discount Co Ltd [1962] 1 All ER 385, [1962] AC 600 and in my judgment it was the correct course.
Counsel for the plaintiff submits otherwise, in reliance in particular on s 8 of the 1696 Act. That rather lengthy section, which I do not propose to set out, applied to actions in any of the King’s courts of record on any bond or any penal sum for non-performance of any covenant or agreement in any indenture deed or writing contained. The procedure under the section was that the plaintiff might sign judgment for the full amount of the penalty claimed, but he could not enforce the judgment by execution or otherwise without assigning or alleging the breaches of the agreement on which he relied and proving his damage from those breaches, and he could only enforce the judgment to the extent of the damage so proved. Parke B stated in Beckham v Drake (1849) 2 HL Cas 579 at 629, 9 ER 1213 at 1231 that the the statute in effect made the bond a security only for the damages really sustained.
It was held in Roles v Rosewell (1794) 5 Term Rep 538, 101 ER 302 that the procedure under s 8 was mandatory even if the defendant did not appear to plead the Act, and consequently the plaintiff could not levy a default judgment for the full amount of a penalty without going to a jury to prove his actual loss. The result under the Act was explained by Tindal CJ in Kemble v Farren (1829) 6 Bing 141 at 148, [1824–34] All ER
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Rep 641 at 642 as follows:
‘But that a very large sum should become immediately payable, in consequence of the nonpayment of a very small sum, and that the former should not be considered as a penalty, appears to be a contradiction in terms; the case being precisely that in which courts of equity have always relieved, and against which courts of law have, in modern times, endeavoured to relieve, by directing juries to assess the real damages sustained by the breach of the agreement.’
The judgments of Lord Eldon CJ and Chambre J in Astley v Weldon (1801) 2 Bos & P 346, [1775–1802] All ER Rep 606 are in my view, to the same effect.
I find nothing therefore in the 1696 Act or the procedure under it to change my view, as indicated above, where the penalty is a sum of money.
The procedure in Scotland, as explained in Craig v M’Beath (1863) 1 M 1020, seems to have been somewhat different from the procedure in England under the 1696 Act, and there seems to have been some difference of opinion among the Scottish judges in that case as to where the onus of proving the extent of actual damage lay. Lord Benholme, however, stated (at 1024):
‘Where it is truly penal—where the parties have not had in view a mere statement of liquidated damages—the penalty is to be modified and reduced to the amount of the damage actually sustained.’
Does it make any difference, then, that the penalty in the present case is not a sum of money? In principle, a transaction must be just as objectionable and unconscionable in the eyes of equity if it requires a transfer of property by way of penalty on a default in paying money as if it requires a payment of an extra, or excessive, sum of money. There is no distinction in principle between a clause which provides that if a person makes default in paying a sum of £100 on a certain day he shall pay a penalty of £1,000, and a clause which provides that if a person makes default in paying a sum of £100 on a certain day he shall by way of penalty transfer to the obligee 1000 shares in a certain company for no consideration. Again, there should be no distinction in principle between a clause which requires the defaulter, on making default in paying money, to transfer shares for no consideration, and a clause which in like circumstances requires the defaulter to sell shares to the creditor at an undervalue. In each case the clause ought to be unenforceable in equity in so far as it is a penalty clause.
Instances in the books of cases where the penalty has been other than a penalty in money for non-payment of money are infrequent. Perhaps the closest on the facts is Re Dagenham (Thames) Dock Co, ex p Hulse (1873) LR 8 Ch App 1022. In that case the company, incorporated by Act of Parliament, had contracted to purchase some land for the purpose of making a dock in exercise of its statutory powers. The price was payable by two instalments and on payment of the first instalment the company was let into possession and began construction on the land. The contract included a clause that if the company defaulted in paying the second instalment, the vendors could re-enter on the land and repossess it as in their former estate, with the benefit of the company’s expenditure on it, and eject the company without repaying any part of the price which had been previously paid. There were successive agreements extending the time for payment of the second instalment and interest, and in the latest agreement the power of re-entry on default was again repeated, and the report records that the repossession was to be of ‘the lands and all works thereon’ (at 1023). The right of repossession was to be exercisable whether or not any conveyance of the land had been made to the company. In the event it seems that no conveyance had been made. The company failed to pay the money, became insolvent and was put into compulsory liquidation. The vendors started an action of ejectment, and, under a consent order in the winding up, they were given liberty to sign judgment on an undertaking not to issue execution until further order, and to abide by any order the court might make as to the property. The vendors then
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applied to the court for an order that they might be at liberty to issue execution and for possession of the property free from all claims by the company.
That application came before Lord Romilly MR at first instance. It seems (from the analysis of the record by Romer LJ in his judgment in Stockloser v Johnson [1954] 1 All ER 630 at 641, [1954] 1 QB 476 at 497) that there was before Lord Romilly MR an affidavit in which it had been stated that the liquidator of the company had represented that, if further time were allowed, the company would be able to come to some satisfactory arrangement. But it would seem that there was no immediate offer by the liquidator to pay the unpaid balance and interest, let alone a tender of it. Lord Romilly MR offered the vendors an order for sale of the property and payment out of the proceeds as in the ordinary case of a vendor’s lien, but on the vendors declining that offer he refused to make any order on the application. The vendors appealed. James and Mellish LJJ did not find it necessary to call on counsel for the liquidator, and agreed with Lord Romilly MR that the repossession clause was plainly a penalty. The way it was put, however, by James LJ, at the end of his judgment was that it was a penalty ‘from which the company are entitled to be relieved on payment of the residue of the purchase-money with interest’ (see LR 8 Ch App 1022 at 1025).
It is to be observed that, on the facts of that case, time to pay was what the liquidator needed, since he had to pay the balance of principal and interest to the vendors in full if he was to get a clear title to the lands so that he could realise them towards satisfaction of the creditors. It is to be inferred that after the order of the Court of Appeal some satisfactory arrangement was indeed come to between the parties, presumably by payment by the liquidator. The court therefore never had to face up, as it might have had to if the liquidator had again defaulted, to actually enforcing the penalty clause in full, despite its penal nature. The case is an instance of the court refusing to enforce a penalty clause, in that Lord Romilly MR refused to make the possession order, but in a context in which equitable relief on payment of the residue of the purchase money with interest was still available.
In the context of the present case, relief by way of an extension of time for the defendant to pay the unpaid purchase money and interest is just the relief which would have been considered on the defendant’s counterclaim if the counterclaim had not been struck out. Moreover, it is the sort of relief to which the documents which, in breach of his undertaking, the defendant failed to disclose might have been marginally relevant, in that they might have indicated what period he would realistically have required to raise the necessary amount of money. Therefore in my judgment it is not open to this court to grant that form of relief on this appeal. It does not necessarily follow, however, in my judgment, that this court is therefore bound to enforce the penal clause, cl 6(b) of the side-letter, in all its rigour and without regard to its penal consequences.
There is one other penalty case to which I should refer: Public Works Comr v Hills [1906] AC 368, [1904–7] All ER Rep 919. In that case there had been an agreement between the government of the Cape of Good Hope and a contractor for the contractor to build a railway between two places by a certain date. The agreement contained a clause that if the contractor failed to complete the railway in time (save for specified causes) certain securities provided by the contractor for the due performance of the contractor’s obligations should be forfeit to the government; these included a security deposit paid by the contractor to the government in relation to that particular contract and also retention moneys held by the government for the contractor under two other contracts in respect of other lengths of railway which the contractor had completed. The contractor defaulted under the contract in suit, the government declared the securities forfeit, and the contractor’s assignee sued for the return of the security moneys on the ground that the forfeiture clause was a penalty clause. The Privy Council upheld a decision in the court below that the forfeiture clause was a penalty clause and that the contractor was entitled to repayment of the security moneys, but the Privy Council, in an opinion delivered by Lord Dunedin, allowed the government an inquiry as to the actual damage
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suffered by it as the result of the failure of the contractor to complete the railway on time and the amount of such damage was to be deducted from the moneys payable. The case is thus a further illustration that a clause identified by the courts as a penalty clause cannot be enforced so as to enable a party to recover or retain more than his actual loss.
What then should the court do in the present case? It is not, in my judgment, open to the court to decree specific performance of the sale of the shares to the plaintiff, but at a higher price than the £40,000, so as to recoup to the defendant what he has actually paid for the shares, since that would involve the court making a new contract between the parties.
One possibility that might have been considered is that the court, while refusing specific performance, should, as in the money penalty cases such as Cooden Engineering Co Ltd v Stanford [1952] 2 All ER 915, [1953] 1 QB 86 and Bridge v Campbell Discount Co Ltd [1962] 1 All ER 385, [1962] AC 600, enter immediate judgement for the plaintiff against the defendant for the amount of the plaintiff‘s loss, viz all the unpaid instalments under the variation agreement with interest from default in respect of each instalment until judgment. That however is disclaimed by counsel for the plaintiff and has not been sought at any earlier stage. Moreover, if cl 6(b) of the side-letter is wholly unenforceable, the plaintiff could sue the defendant for the unpaid instalments and interest in a fresh action and would be entitled to summary judgment under RSC Ord 14.
There remain two other alternatives. Counsel for the plaintiff concedes that in the circumstances of this case the plaintiff is not entitled to any unpaid vendor’s lien under the general law on the shares which have been transferred to the defendant under the sale agreement. If I am right, however, that the remedy of repurchase of the shares under cl 6(b) of the side-letter is an alternative, and not in addition to, the recovery of the unpaid instalments, the repurchase is in substance a security for the payment of the unpaid instalments and interest.
Accordingly, the court could, I apprehend, follow the course taken by Lord Romilly MR in Re Dagenham (Thames) Dock Co (1873) LR 8 Ch App 1022 and offer the plaintiff an order for sale of the 62,566 shares by the court, and payment of the unpaid instalments and interest out of the proceeds as in the ordinary case of a vendor’s lien.
Alternatively, by analogy to the power which the court has had for a very long time to direct an inquiry as to damages in a penalty case so as to ensure that there is no enforcement beyond the plaintiff’s actual loss, the court could, in my judgment, direct inquiries to ascertain (i) the present value of the 62,566 shares, (ii) the present aggregate of the unpaid instalments under the variation agreement with interest as above and (iii) the present amount charged on the shares under the charging order obtained by Chartered Standard Bank (C I) Ltd. The order for specific performance would then stand if the present value of the shares as certified under (i) did not exceed by more than £40,000 (the sale price under cl 6(b) of the side-letter) the aggregate of the unpaid instalments and interest under (ii) and the amount, if any, by which the present amount charged under the charging order as certified under (iii) exceeds the £40,000 (and so cannot be paid off out of the purchase price under cl 6(b)). If, however, that condition is not satisfied, the order for specific performance would have to be discharged, since its enforcement would be the enforcement of a penalty.
These two alternatives should, in my judgment, be offered to the plaintiff, but they cannot be forced on him. If neither is acceptable to him the appeal must, in my judgment, be allowed and the order for specific performance must be discharged since otherwise the court would be lending its machinery to the enforcement of the penal effects of a clause which has been clearly identified as a penalty clause. But in that event, as mentioned above the plaintiff will be free to bring a fresh action for payment.
NICHOLLS LJ. This case, as it has proceeded on appeal in this court, is a very unusual one. Partly this is because the term in the contract, cl 6(b), of which the plaintiff is seeking specific performance, is itself a somewhat unusual provision. More especially is
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this case unusual because of two other matters. First, in the court below the judge struck out the defendant’s counterclaim for relief, not after an investigation of its merits, but because of the defendant’s failure to comply with an undertaking given by him to the court regarding discovery of documents considered material on the issues raised by his counterclaim for relief. Secondly, there has been no appeal from the striking out order. This has made it necessary to grapple with problems concerning the effect of an admittedly ‘penal’ provision in a case where there is no extant application for relief from ‘forfeiture’.
Equitable relief
In considering this appeal it is right to have in mind that the legal principles applicable today regarding penalty clauses in contracts and those applicable regarding relief from forfeiture stem from a common origin. A penalty clause in a contract, as that expression is normally used today, is a provision which, on breach of the contract, requires the party in default to make a payment to the innocent party of a sum of money which, however it may be labelled, is not a genuine pre-estimate of the damage likely to be sustained by the innocent party, but is a payment stipulated in terrorem of the party in default. For centuries equity has given relief against such provisions by not permitting the innocent party to recover under the penal provision more than his actual loss. In Wyllie v Wilkes (1780) 2 Doug KB 519 at 522–523, 99 ER 331 at 333 Lord Mansfield observed that in the reign of Henry VIII Sir Thomas More had attempted unsuccessfully to persuade the judges to give relief in respect of money bonds:
‘For he summoned them to a conference concerning the granting relief at law, after the forfeiture of bonds, upon payment of principal, interest, and costs; and when they said they could not relieve against the penalty, he swore by the body of God, he would grant an injunction.’
Likewise with forfeiture. Take the simple case of a provision for forfeiture of a lease on non-payment of rent. That provision was regarded by equity as a security for the rent. So that, where conscience so required, equity relieved against the forfeiture on payment of the rent with interest. Again with mortgages: if an estate was conveyed with a condition enabling the ‘feoffor’, to use the ancient terminology, to re-enter on payment by him of a given sum on a given date, and in substance the transaction was intended to be by way of security for payment of that sum, equity relieved against the condition by permitting the feoffor to redeem his estate on payment of principal, interest and costs within a reasonable time. Viscount Haldane LC observed in Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25 at 35, [1911–13] All ER Rep 970 at 973 that the intervention of equity with regard to mortgages was ‘merely a special application of a more general power to relieve against penalties and to mould them into mere securities’. In Thompson v Hudson (1869) LR 4 HL 1 at 15 Lord Hatherley LC summarised the underlying principle as follows:
‘I take the law to be perfectly clear … namely, that where there is a debt actually due, and in respect of that debt a security is given, be it by way of mortgage or be it by way of stipulation that in case of its not being paid at the time appointed a larger sum shall become payable, and be paid, in either of those cases Equity regards the security that has been given as a mere pledge for the debt, and it will not allow either a forfeiture of the property pledged, or any augmentation of the debt as a penal provision, on the ground that Equity regards the contemplated forfeiture which might take place at Law with reference to the estate as in the nature of a penal provision, against which Equity will relieve when the object in view, namely, the securing of the debt, is attained, and regarding also the stipulation for the payment of a larger sum of money, if the sum be not paid at the time it is due, as a penalty and a forfeiture against which Equity will relieve.’
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Penalty clauses
The particular procedure by which the Court of Chancery prevented a party seeking payment under a penalty clause in a contract, including a bond, from recovering more than his actual loss seems to have differed a little according to whether the penalty was intended to secure only a payment of money on a specified date or was intended to secure the performance of an obligation other than a payment of money. The details are not material for the purpose of this appeal. It suffices to say that an example of the latter type of case is to be found in Sloman v Walter (1783) 1 Bro CC 418, 28 ER 1213. The party seeking payment of the penalty was prevented by injunction from recovering, by execution or otherwise, more from his judgment obtained at law on a bond than the amount of his loss as established by an issue of quantum damnificatus directed by the Court of Chancery. In the former case, of a bond securing only a money payment, the Court of Chancery proceeded on the principle that failure to pay the principal on a certain day could be compensated sufficiently by payment of principal, interest and costs on a subsequent day. Thus it was unnecessary to direct an issue of quantum damnificatus. If necessary, the court referred the calculation to a master (see Rigby LJ in Re Dixon, Heynes v Dixon [1900] 2 Ch 561 at 576). Subsequently the common law courts became obliged to give effect to these equitable principles, under the Administration of Justice Act 1696 and the Administration of Justice Act 1705, ss 12 and 13. After the Supreme Court of Judicature Act 1873 came into force these two statutes ceased to be necessary, and eventually they were repealed.
Thus today, when law and equity are administered concurrently in the same courts, and the rules of equity prevail whenever there is any conflict or variance between the rules of equity and the rules of the common law with reference to the same matter (s 49 of the Supreme Court Act 1981), a penalty clause in a contract is, in practice, a dead letter. An obligation to make a money payment stipulated in terrorem will not be enforced beyond the sum which represents the actual loss of the party seeking payment, namely, principal, interest and, if appropriate, costs, in those cases where (to use modern terminology) the primary obligation is to pay money, or where the primary obligation is to perform some other obligation, beyond the sum recoverable as damages for breach of that obligation. (For convenience I shall hereafter refer to that sum as ‘the actual loss of the innocent party’.) Hence normally there is no advantage in suing on the penalty clause. In Wall v Rederiaktiebolaget Luggude [1915] 3 KB 66 at 73 Bailhache J concluded his examination of the history of this matter in the context of a penalty clause in a charterparty with these words:
‘This being the state of the law as I understand it, one easily sees why in charterparty cases no one sues on the penalty clause now. You cannot under it recover more than the proved damages, and if the proved damages exceed the penal sum you are restricted to the lower amount. As the penalty clause may be disregarded it always is disregarded and has become a dead letter, or from another point of view a “brutum fulmen” … ’.
This accords with authoritative dicta in Bridge v Campbell Discount Co Ltd [1962] 1 All ER 385, [1962] AC 600. In particular, Lord Morton observed that the result of the conclusion that the clause there in point was a penalty was that Bridge, the hirer, was ‘entitled to relief in accordance with the principles laid down by LORD THURLOW LC, in Sloman v. Walter ((1783) 1 Bro CC 418, 28 ER 1213)’ (see [1962] 1 All ER 385 at 391, [1962] AC 600 at 616). Likewise Lord Radcliffe said ([1962] 1 All ER 385 at 397, [1962] AC 600 at 625):
‘In my opinion, a clause of this kind, when founded on in consequence of a contractual breach, comes within the range of the court’s jurisdiction to relieve against penalties, and the respondents should be confined to the right of claiming from the appellant any damage that they can show themselves to have actually suffered from his falling down on the contract.’
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Lord Denning’s remarks on this are to the same effect (see [1962] 1 All ER 385 at 401, [1962] AC 600 at 632).
Although in practice a penalty clause in a contract as described above is effectively a dead letter, it is important in the present case to note that, contrary to the submissions of counsel for the defendant, the strict legal position is not that such a clause is simply struck out of the contract, as though with a blue pencil, so that the contract takes effect as if it had never been included therein. Strictly, the legal position is that the clause remains in the contract and can be sued on, but it will not be enforced by the court beyond the sum which represents, in the events which have happened, the actual loss of the party seeking payment. There are many cases which make this clear. I have already referred to the decision of Bailhache J in Wall’s case [1915] 3 KB 66. I mention only two other decisions. In Beckham v Drake (1849) 2 HL Cas 579, 9 ER 1213 a contract of employment provided for the payment of a penal sum of £500 in the event of default by the other party. As one of the judges advising the House of Lords, Maule J, said (2 HL Cas 579 at 622, 9 ER 1213 at 1228–1229):
‘The clause by which, in the event that has happened, the master agreed to pay the servant 500l., is certainly in its terms an agreement to pay money, and though the construction which the law requires to be put upon it prevents the whole sum from being payable when it would be more than a reasonable compensation for a failure of performance, it is not thereby rendered wholly inoperative, but it retains the effect of binding the failing party to pay such part of the sum as may be reasonable in respect of the failure.’
Lord Campbell said (2 HL Cas 579 at 645, 9 ER 1213 at 1237):
‘The [Administration of Justice Act 1696], although it prevents the party recovering, as he might have done at Common Law, the whole of the penalty, does not at all prevent that part of the penalty which is recovered being considered in the nature of a debt; and so much is it a debt that an action of debt might be maintained for it. Instead of an action of assumpsit upon damages, an action of debt might have been maintained, and there would have been judgment for the amount of the debt.’
Consistently with this, in Gerrard v Clowes [1892] 2 QB 11 it was decided that a claim for £500, the amount stated in a bond securing payment of £250, was not a claim for damages but was a claim properly brought under RSC Ord 14 on the bond, judgment being given for £250 as part of the claim to which there was no defence.
There is a further point to be mentioned here. As noted above, equity adopted the attitude in relation to penalty clauses that non-payment of money is adequately compensated by late payment with interest. This seems to have been established by the time of Lord Eldon LC, although he was critical of the principle in Reynolds v Pitt (1812) 19 Ves Jun 134 at 140, 34 ER 468 at 470. Jessel MR was equally critical in Wallis v Smith (1882) 21 Ch D 243 at 257, but he too accepted that the old decisions were binding. Accordingly, once a court becomes aware that the amount claimed by the plaintiff is a penalty arising on default of payment of a specific sum of money the legal consequence which follows, as day follows night, is that the amount claimed will be scaled down by the court to a sum equal to the unpaid principal, with interest and costs. That consequence, albeit having its historical origin in equity, is not dependent on the court exercising a discretion to grant or withhold relief having regard to all the circumstances. It is a consequence which for many years has followed automatically, regardless of the circumstances of the default.
In this respect, as the law has developed, a distinction has arisen between the enforcement of penalty clauses in contracts and the enforcement of forfeiture clauses. A penalty clause will not be enforced beyond the sum which equals the actual loss of the innocent party. A forfeiture clause, of which a right of re-entry under a lease on non-
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payment of rent is the classic example, may also be penal in its effect. Such a clause frequently subjects the defaulting party, in the event of non-payment of rent or breach of some other obligation, to a sanction which damnifies the defaulting party, and benefits the other party, to an extent far greater than the actual loss of the innocent party. For instance, the lease may be exceedingly valuable and the amount of unpaid rent may be small. But in such a case the court will lend its aid in the enforcement of the forfeiture, by making an order for possession, subject to any relief which in its discretion the court may grant to the party in default. Normally the granting of such relief is made conditional on the payment of the rent with interest and costs. If that condition is not complied with, and subject to any further application by the tenant or other person in default for yet more time, the forfeiture provision will be enforced. Thus the innocent party is in a better position when seeking to enforce a forfeiture clause than when seeking to enforce a penalty clause in a contract.
This is not the occasion to attempt to rationalise the distinction. One possible explanation is that the distinction is rooted in the different forms which the relief takes. In the case of a penalty clause in a contract equity relieves by cutting down the extent to which the contractual obligation is enforceable: the ‘scaling-down’ exercise, as I have described it. In the case of forfeiture clauses equitable relief takes the form of relieving wholly against the contractual forfeiture provision, subject to compliance with conditions imposed by the court. Be that as it may, I see no reason why the court’s ability to grant discretionary relief against forfeiture should deprive a defendant of the relief automatically granted in respect of a penalty clause if, exceptionally, a contractual provision has characteristics which enable a defendant to pray in aid both heads of relief.
Property and not money
I return to penalty clauses. The scaling-down exercise which is carried out automatically by equity is straight forward when the penalty clause provides for payment of a sum of money. More difficult, and more unusual, is the case where the penal obligation triggered by the breach is an obligation to transfer property to the party not in default, as under cl 6(b). Even in such a case there is no difficulty where the value of the property at the time when the court is making its order does not exceed the actual loss of the innocent party. In that event there can be no more objection to the court specifically enforcing the obligation to transfer the property than there would be to the court making an order for the payment of a sum of money stipulated in a (pecuniary) penalty clause where, in the event, that sum does not exceed the actual loss of the innocent party. The difficulty arises where the value of the property agreed to be transferred exceeds the actual loss of the innocent party. A precisely comparable scaling-down exercise would not provide an acceptable solution, at any rate where the property consists of a single piece of land, or a block of shares in a company such as Southend United Football Club Ltd, whose shares are not traded in one of the securities markets. It could not be right to order specific performance of cl 6(b) in part only, namely in respect of the reduced number of shares whose value does not exceed the actual loss of the plaintiff. That, indeed, would be to make a new bargain for the parties.
In the present case we do not know what is the current value of the shares comprised in cl 6(b), even in approximate terms. I shall return later to the question of what, in that circumstance, can and should be done. For the moment it is sufficient to note that, apart from the difference between shares and money, cl 6(b) possesses all the essential characteristics of a penalty clause. In principle, and subject to the complication arising from the difficulty of ‘scaling-down’ an obligation to transfer shares, there can be no difference between an obligation to pay a stipulated sum of money arising on a default and an obligation to transfer specified property arising on a default. The essential vice is the same in each case. In principle, so far as this can be achieved, the parties’ respective positions should be no better, or worse, than they would be if cl 6(b) had stipulated for payment of money rather than a transfer of shares.
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A forfeiture clause
Clause 6(b), however, is something of a hybrid. It possesses the essential characteristics of a penalty clause in a contract. It also possesses features which resemble those of a forfeiture provision. Clause 6(b) provided that if the purchaser failed to pay all the agreed instalments, he would retransfer to the vendors a slice (44·9%) of the issued share capital of the company equal to the slice the vendors had sold to him. In substance cl 6(b) is equivalent to a right to re-take the property being sold in default of payment of the full price. Clause 6(b) was inserted as an attempt to give the vendors some ‘security’ over the property being sold if the purchaser failed to pay in full. This was sought to be buttressed by cl 7 of the side-letter. Although worded infelicitously, the object of cl 7 was to impose on the purchaser an obligation to keep a 44·9% stake in the company until the whole of the purchase price had been paid. The protection afforded to the vendors by cl 6(b) was strengthened further by the variation agreement. The purchaser was required to deposit his certificate for his 62,666 shares with his solicitors with irrevocable instructions not to part with possession of it without the consent of the vendors. The purchaser agreed not to charge the shares. Until further instalments to a stated amount had been paid, which has not yet occurred, the vendors were to be entitled to appoint a director to the board of the company. Until all the further instalments had been paid the purchaser agreed that the company would not dispose of any land without the consent of the vendors.
The terms of the agreement between the parties were unusual in that, despite the presence of cl 6(b) and the elaborate terms just mentioned, after completion the vendors (and this is common ground between the parties) had no lien or charge over the shares sold. Clause 6(b) operated only as an unsecured personal obligation. Furthermore, under cl 6(b) the shares to be retransferred to the vendors need not be precisely the same shares as those sold by the vendors, nor did the 62,666 shares sold to the defendant comprise exactly 44·9% of the then issued share capital of the company (62,666 shares represented just over 44·9%). Again, if the issued share capital were to be increased (or reduced) before cl 6(b) was invoked, the defendant would be required to transfer a correspondingly larger (or smaller) number of shares under that sub-clause than he had bought. But I do not regard these features as undermining the conclusion that the purpose of cl 6(b) was to provide a form of security for payment in that the purchaser was obliged to restore to the vendors their former stake in the company if default occurred in payment, that stake not to be diminished by any further issues of shares made meanwhile.
So construed, cl 6(b) falls squarely within the words I have emphasised in the following extract from the speech of Lord Wilberforce in Shiloh Spinners Ltd v Harding [1973] 1 All ER 90 at 100, [1973] AC 691 at 722:
‘There cannot be any doubt that from the earliest times courts of equity have asserted the right to relieve against the forfeiture of property. The jurisdiction has not been confined to any particular type of case. The commonest instances concerned mortgages, giving rise to the equity of redemption, and leases, which commonly contained re-entry clauses; but other instances are found in relation to copyholds, or where the forfeiture was in the nature of a penalty. Although the principle is well established, there has undoubtedly been some fluctuation of authority as to the self-limitation to be imposed or accepted on this power. There has not been much difficulty as regards two heads of jurisdiction. First, where it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest, if appropriate, and also costs (Peachy v Duke of Somerset (1721) 1 Stra 447, 93 ER 626 and cases there cited).’
In the present case cl 6(b) is a term intended to provide the unpaid vendors with some ‘security’ against non-payment by giving them an alternative remedy (repossession of their former slice in the company) in the event of default in payment of all the instalments. That is a situation in which, par excellence, equity in its discretion, and
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having regard to all the circumstances, may grant relief. Such relief would normally be on terms that the primary obligation for which this alternative remedy is ‘security’ is performed within a reasonable time, albeit later than stipulated in the agreement.
In the present case legal and beneficial title to the 62,666 shares had passed to the purchaser before cl 6(b) was invoked. Thus, it was submitted, this case is different from one where the forfeiting party seeks merely to repossess property title to which, or a reversion in which, he has retained throughout. For example, where a landlord seeks to re-enter following forfeiture of a lease for non-payment of rent, or a vendor seeks to eject a purchaser whom he has permitted to enter on the property being sold pending completion. I am unable to accept that this difference represents a crucial distinction in this case. I note that relief from forfeiture was held to be available in the Shiloh Spinners case [1973] 1 All ER 90, [1973] AC 691 even though the forfeiting party there had retained no legal or equitable interest, other than the right to re-enter, in the property in question. As the owner of adjoining land he had retained a live, practical interest in seeing that the fencing and support obligations were performed, but the fact that the forfeiting party had this interest cannot by itself turn the case into one in which the defaulting party could have recourse to the equitable principles of relief from forfeiture if otherwise he could not have done so.
I think, therefore, that cl 6(b) is a clause in respect of which Harman J had jurisdiction to grant relief. The most obvious form which the relief might have taken was to relieve the defendant from complying with cl 6(b) if he paid the balance of the price with interest and costs, as occurred in Re Dagenham (Thames) Dock Co, ex p Hulse (1873) LR 8 Ch App 1022 at 1025. The contrary conclusion, that the court had no jurisdiction to give relief, would mean that if the defendant’s claim for relief had not been struck out at the trial, and if the defendant had been able and willing to pay the outstanding instalments with interest and costs at once in full, the court could still not have given him any relief in respect of cl 6(b), however deserving his case. That is not an acceptable conclusion.
Procedurally it is established practice for a claim by a defendant for relief from forfeiture to be the subject of a counterclaim. Whether that is an issue which can be raised only in a counterclaim as distinct from in a defence is not a matter which calls for consideration in this case, because in the present case the claim for relief from forfeiture was made, in the normal way, in a counterclaim and it was this counterclaim that was struck out by the judge. Thus the defendant’s claim for relief from forfeiture was the issue which the judge barred the defendant from pursuing. Against that order of the judge there has been no appeal.
The consequence of no claim for relief
However, I am unable to accept that in the absence of a claim for discretionary relief from forfeiture it follows that the court must or should now specifically enforce cl 6(b) in its entirety, whatever the value of the shares. As I have said, I see no reason why there should not be an order for specific performance of cl 6(b) if the shares do not exceed in value the actual loss of the plaintiff. What that loss comprises, in arithmetical terms, is set out with regard to the facts in the present case in the judgment of Dillon LJ. If, on the other hand, the shares are now worth more than the amount of the plaintiff‘s loss, the court has available to it a means of ensuring that the purpose for which cl 6(b) was included in the main agreement is duly fulfilled without either party otherwise being prejudiced. Clause 6(b) was intended to provide the vendors with a form of ‘security’ if the purchaser defaulted in paying the full price. If the shares are now worth more than the actual loss of the plaintiff, ex hypothesi a sale of the shares will realise a sum which is sufficient to put the plaintiff in the financial position he would have occupied if the defendant had not defaulted. If the shares are now sold and the plaintiff is duly paid the amount of his actual loss, with the surplus proceeds being paid to the defendant, the plaintiff will have obtained from cl 6(b) everything for which it was provided as ‘security’.
In my view that is the course which the court can and should take. It is the equivalent
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in the different circumstances of this case to the automatic scaling-down of a (pecuniary) penalty clause. Clause 6(b) is being enforced, in favour of the plaintiff and against the defendant, but in a form modified to preclude it from operating penally. As I have said, it would not be right to order the transfer to the defendant of a reduced number of shares. Nor would it be right to order the transfer of all the shares, to the prejudice of the defendant, or to refuse to grant any specific relief with regard to the shares, to the prejudice of the plaintiff, when by ordering (if the plaintiff so requests) that the shares be sold, the court can enforce cl 6(b) to an extent, or in a manner, that would give the plaintiff everything for which cl 6(b) was intended to be ‘security’ and yet still prevent the clause operating punitively against the defendant. If the court orders a sale it will be granting a limited form of specific relief in respect of the defendant’s obligations under cl 6(b). In an early leading case, Peachy v Duke of Somerset (1721) 1 Stra 447 at 453, 93 ER 626 at 630, Lord Macclesfield LC observed: ‘The true ground of relief against penalties is from the original intent of the case, where the penalty is designed only to secure money, and the Court gives him all that he expected or desired … ' That will be achieved in this case by ordering specific relief which stops short of an order for specific performance. A similar course seems to have been adopted by Lord Romilly MR at first instance in the Dagenham case. He offered to the applicant seeking leave to execute an order for possession ‘an order for sale and payment, as in the ordinary case of vendor’s lien’ (see LR 8 Ch App 1022 at 1024).
Counsel for the plaintiff submitted that the plaintiff ought not to be worse off than he would be if the defendant had made an application for relief which had succeeded on terms that the defendant paid all the outstanding instalments with interest and costs within a stated period. In such event, if the defendant had not complied with the conditions on which relief was given, the court would have made an order for specific performance of cl 6(b). In this way the plaintiff would have obtained either the money due to him or the shares. As to that, I will say only that the course proposed above will result in the plaintiff obtaining either the shares (if they are worth less than the actual amount of the plaintiff‘s loss) or the money (if the shares are worth more). Both parties should be free to bid and buy the shares if there is a sale, so that if the plaintiff is anxious to acquire a stake in the company he will have the opportunity to do so.
Other defences
For completeness I should add that counsel for the defendant further submitted that in any event specific performance of cl 6(b) ought not to be ordered, because damages would afford an adequate remedy. I am unable to accept this. It was not suggested that there is an active market in shares in the company in which a 44·9% stake in that company could readily be bought. Counsel for the plaintiff also relied on evidence by the original vendors that when the sale agreement was made in 1983 they did not want the shares, and he submitted that the plaintiff as their assignee could be in no better position than they would be if they were pursuing the claim themselves. I can see nothing in this. The Rubins sold the shares, so it is not surprising to find that they did not want them. They wanted payment, and cl 6(b) was drafted to protect their position and ensure payment. But that of itself does not afford any sort of reason for the court declining to order specific performance of cl 6(b). It may also be that if the plaintiff obtains the shares he will seek to sell them. But, again, this is not a sound answer to a claim for specific performance.
Conclusion
For these reasons I would make an order in the terms outlined by Dillon LJ. I agree also with what he says on the irrecoverability of the unpaid instalments if the plaintiff chooses to take an order for the enforcement of cl 6(b) in the manner discussed above. I be disposed to hear counsel on the precise calculation of the plaintiff‘s actual loss, in particular with regard to interest and costs.
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I regret to find myself differing from Kerr LJ in that I am unable to agree with the alternative course proposed by him. That course would restore the parties, so far as is now possible, to their pre-contract positions. That approach does not accord with the established equitable principle relating to penalty clauses, whereunder equity confines the sum recoverable under a penalty clause to the loss actually suffered by the innocent party by reason of the breach of contract.
KERR LJ. I respectfully differ on one aspect of this puzzling case from the conclusions reached in the judgments of Dillon and Nicholls LJJ, which I have had the great advantage of reading. This concerns the choice of remedies to which the plaintiff should now be entitled.
It is common ground that cl 6(b) is penal in its nature. The reason is of course not that the value of the shares might rise substantially above the agreed price before the end of the period during which the instalments fall to be paid, although in my view, as explained below, this may be relevant to the appropriate order which should now be considered in the unusual circumstances of this case. The reason why cl 6(b) is penal in its nature, as explained by Dillon LJ, is that it subjects the defendant to the same liability irrespective of the gravity and consequences of the breach relied on by the plaintiff in seeking to enforce the clause: see Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87, [1914–15] All ER Rep 739 at 742 per Lord Dunedin. This is a question which falls to be decided on the true construction of the clause independently of subsequent events (see [1915] AC 79 at 86–87, [1914–15] All ER Rep 739 at 741–742).
However, it does not follow that a penalty clause is illegal in the same way as, for instance, provisions imposing unlawful restraints of trade. These are simply struck down, or ‘blue-pencilled’, because they are prohibited on the ground of public policy, unless it is possible to sever the good from the bad. Penalty clauses falling within the principles considered in the Dunlop Tyre case are not in the same category. In my view, the combined effect of law and equity on penalty clauses is simply that they will not be enforced in favour of a plaintiff without first giving to the defendant a proper opportunity to obtain relief against their penal consequences.
This is of particular importance in relation to the relevant provision in the present case. I respectfully agree with the analysis of Nicholls LJ in the section of his judgment headed ‘A forfeiture clause’ that this is the true nature of cl 6(b). Although this classification presents some obvious problems, due to the fact that no property in the shares was retained by the vendor and that the identical shares did not have to be retransferred by the purchaser, taking cl 6(b) in the context of the other provisions to which Nicholls LJ refers it is in my view much closer to what is commonly referred to as a ‘forfeiture’ than a ‘penalty’ clause. It follows a fortiori that cl 6(b) is not necessarily unenforceable, but merely that the defendant must be given a proper opportunity of seeking appropriate relief before there can be any question of enforcing the provisions.
This analysis is also supported by the course which this action would have taken but for the fact that the defendant’s counterclaim for relief came to be struck out due to his own fault, and I did not understand anyone to suggest the contrary. The normal course of events would have been that the defendant would have been granted relief from the obligation to retransfer the shares, but on terms that he must pay the then outstanding instalments in full, together with interest and the plaintiff‘s costs: see eg per Lord Wilberforce in Shiloh Spinners Ltd v Harding [1973] 1 All ER 90 at 100, [1973] AC 691 at 722. However, if it should then have turned out that the defendant was unwilling or unable to abide by these terms, after he had been given every reasonable opportunity to do so, then an order for the retransfer of the shares on the terms of cl 6(b) would have been made. This is an everyday situation in the context of provisions for forfeiture in leases, and it is also the basis on which the law of mortgages and the equity of redemption have developed. It seems to work well in practice and to cause little injustice. Thus, if in
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the present case the value of the shares in January 1987 had been greatly in excess of the outstanding instalments when Harman J was dealing with the matter, then Mr Johnson, the defendant, would no doubt have been willing and able to raise the amount of the outstanding instalments together with interest and costs, if necessary by borrowing on the security of the shares, in order to obtain relief in the normal way.
However, the defendant chose not to pursue this course. He evidently preferred to let his counterclaim be struck out. Perhaps he was unwilling to comply with an order which would have forced him to reveal his financial circumstances; or it may be that the then value of the shares made a claim for relief unattractive; or perhaps he had both considerations in mind. In the result, the stage of considering and formulating the terms on which relief should be granted was never reached.
In these unusual circumstances, but only with considerable doubt, I respectfully agree with the judgments of Dillon and Nicholls LJJ that it was at any rate premature to grant immediate specific performance of a forfeiture clause which, for the reasons already stated, was also penal in its nature.
But more than a year has passed since then. Although both parties were somewhat cagey about explaining the present position, it is clear that circumstances have changed. On behalf of the defendant, counsel intimated to us, as I understood him, that the shares were now worth far more than the total outstanding purchase price and that the defendant would have no difficulty in raising the necessary sum to be granted relief on usual terms to obtain their release from escrow. On behalf of the plaintiff, counsel did not contradict these veiled references to the present value of the shares, but he reminded us repeatedly that we had no evidence of their value and must not speculate about it. He also pointed out that counsel for the defendant was careful not to suggest that there was any way whereby the defendant’s struck-out counterclaim for relief could now somehow be revived.
If one accepts that the order for specific performance made by Harman J cannot stand, as I do albeit with doubt, what is the appropriate course which this court should now take? Two things appear clear. First, the rights of the plaintiff cannot be prejudiced by the defendant’s failure to pursue the offer of relief which the court was bound to, and did, grant to him. If this process had run its normal course, then the plaintiff would have obtained an order for payment by the defendant of all the outstanding instalments, together with interest and costs, within a reasonable time, or alternatively for the retransfer of the shares pursuant to cl 6(b) in default of compliance.
Secondly, it is plain that whereas in January 1987 the issue may have been largely about money, at any rate so far as the defendant was concerned, it is now solely about the right to the shares. Both sides are clearly most anxious to obtain them and interested in little else. That is why counsel for the defendant took pains to let us know, although perhaps he should not have done so, that the defendant was now willing, able and extremely keen to comply with any order as to payment if he is permitted to retain the shares. It is equally the reason why counsel on behalf of the plaintiff not only formally declined the court’s offer of a monetary judgment, but also made no response to counsel for the defendant’s offer of more or less readily available cash in full.
Quite apart from the fact that the counterclaim for relief has been struck out, I agree that it is now far too late for the defendant to seek relief in the normal way. I say that, because in my view the plea in the defence that cl 6(b) is a penal provision obliges the court to offer relief to the defendant, without the need for any formal counterclaim. It follows inevitably, once it is clear that the plaintiff is seeking to enforce a penalty clause. I also agree that, given that the order of Harman J cannot stand, it is necessary for this court to reach an appropriate conclusion in equity. To this end the judgments of Dillon and Nicholls LJJ have offered the choice of two remedies to the plaintiff. The first is an order for the sale of the shares by the court and payment of the unpaid instalments and interest out of the proceeds, no doubt together with costs in the ordinary way, and obviously leaving it open to the plaintiff to sue thereafter for any balance of the price
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which may still be outstanding. The second is an inquiry as to the value of the shares, and an order to the effect of cl 6(b) in the event that their present value is less than the total net sum presently due from the defendant; but not otherwise.
In my view neither of these alternatives offers sufficient justice to the plaintiff in the exceptional circumstances of this case. The first alternative differs little from simply granting relief to the defendant in the usual way, save that this would be accompanied by what would in effect be an auction of the shares, in which both parties as well as outsiders could compete. The second alternative is almost certainly unrealistic and not a worthwhile offer in practice, since it is to be suspected that the present value of the shares greatly exceeds all monetary sums to which the plaintiff is now entitled.
In these circumstances it seems to me that, in equity, the plaintiff is entitled to a further alternative. This would be an order giving effect to cl 6(b), but on terms that the plaintiff repays to the defendant, perhaps with interest, the £160,000 which he has received under the agreement. In my view a further option to this effect would do justice to the plaintiff without contravening any principle of equity. It would give effect to the unenforceability of cl 6(b) because of its penal nature, but without simply ‘blue-pencilling’ it, which would be wrong. Secondly, it would provide some compensation to the plaintiff for having lost the opportunity of obtaining an order in terms of cl 6(b) because the normal process of an application for relief from forfeiture was frustrated by the defendant’s decision to allow his counterclaim to be struck out. Above all, it would result in equitable restitution to both parties, without either enforcing or ‘blue-pencilling’ cl 6(b). There is nothing penal about a provision that, in the event of a failure by the defendant to pay any instalment of the price, the plaintiff is to be entitled to rescind the contract and to recover the goods against a refund of all sums received by him: cf Alder v Moore [1961] 1 All ER 1, [1961] 2 QB 57. Clause 6(b) is penal, because its operation takes no account of the sums already received, and to that extent it is unenforceable. But it is enforceable to the extent that it is not a penalty, by requiring full restitution by the plaintiff as a condition of its enforcement. That would not be a case of ‘mending men’s bargains’, but the enforcement of a penal forfeiture clause by the removal of its penal element, and in a situation where relief from forfeiture can no longer be claimed by the defendant.
Subject to offering this further alternative to the plaintiff I therefore agree that the order of Harman J should be set aside and that the defendant’s appeal should be allowed to this extent.
Appeal allowed to extent indicated in judgments of Dillon and Nicholls LJJ.
Solicitors: Maurice Hackenbroch & Co (for the defendant); Jefferies, Westcliff-on-Sea (for the plaintiff).
Wendy Shockett Barrister.
Atlas Express Ltd v Kafco (Importers and Distributors) Ltd
[1989] 1 All ER 641
Categories: CONTRACT
Court: QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
Lord(s): TUCKER J
Hearing Date(s): 12, 13 DECEMBER 1988, 10 JANUARY 1989
Contract – Duress – Economic duress – Commercial pressure – Contract to carry goods at agreed consideration – Carriers subsequently seeking to increase charges – Carriers refusing to carry goods unless distributors agreeing to pay increased charges – Distributors agreeing to pay increased charges in order to meet commitments to customers – Whether agreement to pay increased charges valid.
The plaintiffs, a national road carrier, entered into a contract with the defendants, a small company which imported and distributed basketware to the retail trade, to deliver cartons of basketware to branches of a national retail chain for the defendants. Before the contract was entered into the plaintiffs’ depot manager had inspected the cartons, which were of different sizes, and estimated that each load would contain a minimum of 400 and possibly as many as 600 cartons and on that basis he agreed a rate of carriage of £1·10 per carton. In fact the first load contained only 200 cartons and the plaintiffs’ depot manager told the defendants that the plaintiffs would not carry any more cartons unless the defendants agreed to pay a minimum of £440 per load. The defendants were heavily dependent on the retail chain’s contract and were unable at the time to find an alternative carrier. The defendants accordingly agreed to the new terms but later refused to pay the new rate. The plaintiffs brought an action to recover the amount owing under the new rate.
Held – Where a party to a contract was forced by the other party to renegotiate the terms of the contract to his disadvantage and had no alternative but to accept the new terms offered, his apparent consent to the new terms was vitiated by economic duress. Applying that principle, the pressure applied by the plaintiffs to the defendants to renegotiate the terms of the contract amounted to economic duress which vitiated the contract. In any event, there was no consideration for the new agreement. Accordingly, the plaintiffs could not sue to recover the amount owing under the new rate and the claim would be dismissed (see p 644 g p 645 b, p 646 h and p 647 a, post).
Dictum of Lord Scarman in Pao On v Lau Yiu [1979] 3 All ER 65 at 78–79 applied.
Notes
For a contract entered into under duress, see 9 Halsbury’s Laws (4th edn) paras 290, 297, and for cases on the subject, see 12 Digest (Reissue) 118–124, 640–679.
Cases referred to in judgment
Astley v Reynolds (1731) 2 Stra 915, 93 ER 939.
B & S Contracts and Design Ltd v Victor Green Publications Ltd [1984] ICR 419, CA.
Barton v Armstrong [1975] 2 All ER 465, [1976] AC 104, [1975] 2 WLR 1050, PC.
D & C Builders Ltd v Rees [1965] 3 All ER 837, [1966] 2 QB 617, [1966] 2 WLR 288, CA.
Maskell v Horner [1915] 3 KB 106, [1914–15] All ER Rep 595, CA.
North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd, The Atlantic Baron [1978] 3 All ER 1170, [1979] QB 705, [1978] 3 WLR 419.
Occidental Worldwide Investment Corp v Skibs A/S Avanti, The Siboen and the Sibotre [1976] 1 Lloyd’s Rep 293.
Pao On v Lau Yiu [1979] 3 All ER 65, [1980] AC 614, [1979] 3 WLR 435, PC.
Skeate v Beale (1841) 11 Ad & El 983, 113 ER 688.
Page 642 of [1989] 1 All ER 641
Universe Tankships Inc of Monrovia v International Transport Workers’ Federation [1982] 2 All ER 67, [1983] 1 AC 366, [1982] 2 WLR 803, HL.
Action
The plaintiffs, Atlas Express Ltd, brought an action against the defendants, Kafco (Importers and Distributors) Ltd, claiming £10,970·37 and interest being the amount outstanding under a number of invoices submitted to the defendants for road haulage services provided to the defendants. The facts are set out in the judgment.
David Fisher for the plaintiffs.
I H Foster for the defendants.
Cur adv vult
10 January 1989. The following judgment was delivered.
TUCKER J. By their statement of claim the plaintiffs, Atlas Express Ltd, claim against the defendants, Kafco (Importers and Distributors) Ltd, £17,031·83 plus interest, as outstanding payments due to them under a number of invoices submitted to the defendants. It is admitted that some of this has since been paid, and the sum now claimed is £10,970·37.
The plaintiffs are well-known carriers of goods by road in the United Kingdom. They offer a parcels delivery service. The defendant company derives its name from the first letters of the surnames of its three original directors, Messrs King, Armiger and Fox. The company imports basketware from abroad and supplies it to retailers in the United Kingdom.
On 24 June 1986 the plaintiffs entered into a general trading agreement with the defendants whereby the plaintiffs agreed to deliver cartons of the defendants’ basketware at a rate per carton depending on the number of cartons in the load. By October 1986 the defendants had entered into an agreement to supply their basketware to Woolworth shops in the United Kingdom. The defendants wished the plaintiffs to make the deliveries for them, and the plaintiffs agreed to do so. The terms of this agreement were contained in a trading agreement signed by Mr Armiger on the defendants’ behalf on 20 October 1986. The rate agreed was expressed as being £1·10 per carton. There was a minimum charge of £7·50 per consignment but this referred to the delivery to each branch. The agreement was silent as to the size of the cartons or as to the number of cartons necessary to constitute a load. The rate was expressed to be effective from 10 October 1986 to a review on 31 May 1987. The case proceeded on the basis that this was a concluded agreement. Neither the plaintiffs’ nor the defendants’ counsel submitted that it was not capable of giving effect to the parties’ intentions, and this issue was not raised in the pleadings.
The rate agreement was that orally agreed between Mr Armiger and Mr Hope, the manager of the plaintiffs’ depot in Wellingborough. They met at the defendants’ warehouse at Tinker’s Drove, Wisbech, on 10 October 1986. Mr Hope had gone there to see a sample of the goods his company were being asked to deliver. He was shown a range of cartons of the sort the defendants used. He cannot say what size the largest carton was which he then saw, because he did not take any measurements. The trailers which the plaintiffs used were 40 feet long. Mr Hope says he calculated the rate per carton on the basis that the plaintiffs would be transporting a minimum of 400 cartons, and possibly as many as 600, on each trailer, thus producing a minimum return of £440 per load. In order to achieve this quantity per load, it would be necessary that no carton should exceed a measurement of 2ft 6ins in any dimension. Mr Hope said that to the best of his memory, he and Mr Armiger discussed the basis on which the rate was calculated,
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though later he agreed that he was not sure they had had a conversation about a load of 400. Mr Armiger was firmer in his evidence. He said that the sizes of the cartons were never discussed and nothing was said about the number of cartons which would be carried, and that he could not have agreed a figure of 400 because he never knew what revenue the plaintiffs expected, and he did not know how many cartons could be loaded onto a trailer.
I prefer Mr Armiger’s evidence on this point. I think his recollection of the conversation is clearer than Mr Hope’s, and I believe him. His account is confirmed to some extent by the telex which he sent to Mr Hope on 13 October, referring simply to the rate per carton and not to size or number. Further, when Mr Hope drew up the trading agreement, he made no mention of these matters. As I have already indicated, there was no reference to this in the written agreement which Mr Armiger signed on 20 October. But when Mr Hope wrote to Mr Armiger on 17 November about raising a minimum charge, he referred to the initial quote of £1·10 per carton but he did not suggest that the basis on which this figure had been agreed had ever been discussed at the initial meeting.
In any event, the plaintiffs’ counsel said that he did not rely on any knowledge by Mr Armiger of the basis on which the calculation was made. This was not part of his pleaded case, and he did not submit that this was a term of the contract between the parties, or that it was a representation made by or on behalf of the defendants.
Much more important is the question of the sample or mix of cartons which Mr Hope saw at the defendants’ warehouse at Tinker’s Drove, Wisbech. It is agreed that he did not see any of the goods destined for Woolworth, because they were stored at another warehouse called Wisbech Roadways. But I accept the evidence of Mr Armiger, supported to a great extent by that of Mr King, that the cartons which Mr Hope did see included three kinds of the same size as those in which the Woolworth goods were contained, and that the fourth kind of carton used to pack Woolworth’s goods was of a smaller size than the three kinds which Mr Hope saw. I find that the plaintiffs had already carried those three sizes of cartons for the defendants under their general agreement. I also find that the largest carton to be carried for Woolworth was a bale measuring 6 feet long by 18 inches diameter, and that bales of that kind and size were present at Mr Hope’s inspection. I find that Mr Hope saw a fair and representative mix of the kind of cartons which his company was being asked to deliver, and that he was given every opportunity of inspecting what was there, so as to enable him to calculate the rate to be quoted. It may be that Mr Hope mistakenly believed that he could load more cartons on to a trailer than was physically possible but, in fixing the rate of £1·10 per carton, he was not in any way misled by the defendants and he should not have been deceived by the sample and mix of cartons which he saw.
In pursuance of the written agreement, the plaintiffs proceeded to make the first delivery. When Mr Hope saw the load from the defendants, he said he was surprised to see how large the cartons were and how many large cartons were included in the load. He said they were far larger than the parties had contemplated, and because of this there were fewer of them, only 200 instead of the 400 he had anticipated. He said he had no prior knowledge that cartons of that size would be included. I find that he is wrong about this. I accept Mr Armiger’s evidence that the load was representative of the type of cartons which Mr Hope had seen at the warehouse, and that the cartons were no larger than those inspected by him.
However, Mr Hope was convinced that it would not be financially viable to carry such a load at the rate agreed. He contacted Mr Armiger about it, in an attempt to renegotiate the rate. I find that the two of them met to discuss it, and that Mr Hope made it plain to Mr Armiger that the plaintiffs would not carry any more goods under the Woolworth agreement unless the defendants agreed to pay at least a minimum rate of £440 per trailer load. I find that if the defendants had refused, the plaintiffs would not have made any further deliveries. However, I find that no agreement to renegotiate the terms of the contract was reached at this stage.
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The defendants were a small company and their three directors were personally committed to its success. They had secured a large order from Woolworth and had obtained a large quantity of goods in order to fulfil it. It was essential to the defendants’ success and to their commercial survival that they should be in a position to make deliveries. I find that this was obvious to Mr Hope, and was known by him. It was now early November, a time of year when demands on road hauliers and deliverers are heaviest.
It would have been difficult, if not impossible, for the defendants to find alternative carriers in time to meet their delivery dates.
I find that the meeting between Mr Hope and Mr Armiger took place on Friday, 14 November. I derive this date from a letter written by Mr Hope on 17 November, which would have been the following Monday. The letter is in these terms:
‘Further to our conversation on Friday 14 November, I would confirm the necessity for Atlas Express Limited to raise a minimum charge of £440 per trailer for distribution to Woolworth Stores. Our initial quote of £1·10 per carton was based purely and simply on our achieving a minimum of 400 cartons per trailer, indeed we were anticipating a far higher figure in some instances. It is unfortunate that this has added considerably to your distribution costs. However, we as a company could not accommodate your operation whilst achieving such a possibly low revenue per movement. I have, therefore, enclosed an updated trading agreement for covering this new aspect of the operation which I will require signing and handing back to my driver by return.’
The following day, 18 November, one of the plaintiffs’ drivers arrived at the defendants’ premises with an empty trailer. He brought with him a document entitled ‘Amended/Transferred Account Details’. Mr Hope had written in the new rates, which now specified a minimum charge of £400 per trailer. Mr Armiger did not want to agree to this, and he had not done so at the meeting. He queried it with the driver, who said that he had instructions that if the defendants did not sign the agreement he was to take the trailer away unloaded. Mr Armiger had done his best at the meeting to persuade Mr Hope to reduce his demands, but the only concession he had achieved was that the minimum charge would not apply to deliveries within the five counties nearest to the plaintiffs’ depot at Wellingborough. Mr Armiger tried to contact Mr Hope on 18 November, but he was unable to do so. Mr Hope was unavailable. I infer that this was deliberate. It prevented the defendants from protesting to him. In these circumstances, Mr Armiger justifiably felt himself to be in a situation of ‘take it or leave it’. He could not afford to lose the plaintiffs’ services, with all the consequences that would ensue, so he signed the agreement. Before doing so, he wrote in the concession which he had obtained.
I find that when Mr Armiger signed that agreement he did so unwillingly and under compulsion. He believed on reasonable grounds that it would be very difficult, if not impossible, to negotiate with another contractor. He did not regard the fact that he had signed the new agreement as binding the defendants to its terms. He had no bargaining power. He did not regard it as a genuine armslength renegotiation in which he had a free and equal say and, in my judgment, that view was fully justified.
In the words of the co-director, Mr Fox, he felt that he was ‘over a barrel’. He tried in vain to contact Mr Hope but, as he said to Mr Armiger, they really had no option but to sign. I accept the evidence of the Woolworth manager, Mr Graham, that if the defendants had told them that they could not supply the goods Woolworth would have sued them for loss of profit and would have ceased trading with them. I find that this was well known to the defendants’ directors.
After Mr Armiger signed the agreement, the plaintiffs’ driver agreed to load a delivery. Thereafter the plaintiffs carried the defendants’ goods and delivered them to Woolworth until 29 December 1986. The plaintiffs knew that the defendants would not be paid by Woolworth until deliveries were completed, and the plaintiffs agreed that they would
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not expect payment from the defendants until the defendants had been paid by Woolworth. Mr Hope recognised that this would not be before 30 January 1987.
On 2 February 1987 the defendants sent to the plaintiffs a cheque for £10,000, expressed as being a payment on account. I do not regard that as an acceptance of the new terms. The defendants made their position quite clear through their solicitors, who wrote to the plaintiffs on 2 March 1987, saying that the revised contract was signed under duress. This was three months before the plaintiffs commenced proceedings.
The issue which I have to determine is whether the defendants are bound by the agreement signed on their behalf on 18 November 1986. The defendants contend that they are not bound, for two reasons: first, because the agreement was signed under duress; second, because there was no consideration for it.
The first question raises an interesting point of law, ie whether economic duress is a concept known to English law.
Economic duress must be distinguished from commercial pressure, which on any view is not sufficient to vitiate consent. The borderline between the two may in some cases be indistinct. But the authors of Chitty on Contracts (25th edn, 1983) and of Goff and Jones on the Law of Restitution (3rd edn, 1986) appear to recognise that in appropriate cases economic duress may afford a defence, and in my judgment it does. It is clear to me that in a number of English cases judges have acknowledged the existence of this concept.
Thus, in D & C Builders Ltd v Rees [1965] 3 All ER 837 at 841, [1966] 2 QB 617 at 625 Lord Denning MR said: ‘No person can insist on a settlement procured by intimidation.' And in Occidental Worldwide Investment Corp v Skibs A/S Avanti, The Siboen and the Sibotre [1976] 1 Lloyd’s Rep 293 at 336 Kerr J appeared to accept that economic duress could operate in appropriate circumstances. A similar conclusion was reached by Mocatta J in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd, The Atlantic Baron [1978] 3 All ER 1170 at 1182, [1979] QB 705 at 719.
In particular, there are passages in the judgment of Lord Scarman in Pao On v Lau Yiu [1979] 3 All ER 65 at 78–79, [1980] AC 614 at 635–636, which clearly indicate recognition of the concept, where Lord Scarman said:
‘Duress, whatever form it takes, is a coercion of the will so as to vitiate consent. Their Lordships agree with the observation of Kerr J in The Siboen and The Sibotre [1976] 1 Lloyd’s Rep 293 at 336 that in a contractual situation commercial pressure is not enough. There must be present some factor “which could in law be regarded as a coercion of his will so as to vitiate his consent“. This conception is in line with what was said in this Board’s decision in Barton v Armstrong [1975] 2 All ER 465 at 476–477, [1976] AC 104 at 121 by Lord Wilberforce and Lord Simon of Glaisdale, observations with which the majority judgment appears to be in agreement. In determining whether there was a coercion of will such that there was no true consent, it is material to enquire whether the person alleged to have been coerced did or did not protest whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy; whether he was independently advised; and whether after entering the contract he took steps to avoid it. All these matters are, as was recognised in Maskell v Horner [1915] 3 KB 106, [1914–15] All ER Rep 595, relevant in determining whether he acted voluntarily or not. In the present case there is unanimity amongst the judges below that there was no coercion of Lau’s will. In the Court of Appeal the trial judge’s finding (already quoted) that Lau considered the matter thoroughly, chose to avoid litigation, and formed the opinion that the risk in giving the guarantee was more apparent than real was upheld. In short, there was commercial pressure, but no coercion. Even if this Board was disposed, which it is not, to take a different view, it would not substitute its opinion for that of the judges below on this question of fact. It is, therefore, unnecessary for the Board to embark on an enquiry into the question whether English law recognises a category of duress known as “economic duress“. But, since the question has been fully argued
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in this appeal, their Lordships will indicate very briefly the view which they have formed. At common law money paid under economic compulsion could be recovered in an action for money had and received: see Astley v Reynolds (1731) 2 Stra 915, 93 ER 939. The compulsion had to be such that the party was deprived of “his freedom of exercising his will” (see 2 Stra 915 at 916 93 ER 939). It is doubtful, however, whether at common law any duress other than duress to the person sufficed to render a contract voidable; see Blackstone’s Commentaries (12th edn, 1793) vol 1, pp 130–131 and Skeate v Beale (1841) 11 Ad & El 983, 113 ER 688. American law (Williston on Contracts (3rd edn, 1970) ch 47) now recognises that a contract may be avoided on the ground of economic duress. The commercial pressure alleged to constitute such duress must, however, be such that the victim must have entered the contract against his will, must have had no alternative course open to him, and must have been confronted with coercive acts by the party exerting the pressure: see Williston on Contracts ch 47, s 1603. American judges pay great attention to such evidential matters as the effectiveness of the alternative remedy available, the fact or absence of protest, the availability of independent advice, the benefit received, and the speed with which the victim has sought to avoid the contract. Recently two English judges have recognised that commercial pressure may constitute duress the presence of which can render a contract voidable [Lord Scarman then referred to the judgments of Kerr and Mocatta JJ to which I have referred and continued:] Both stressed that the pressure must be such that the victim’s consent to the contract was not a voluntary act on his part. In their Lordship’s view, there is nothing contrary to principle in recognising economic duress as a factor which may render a contract voidable, provided always that the basis of such recognition is that it must amount to a coercion of will, which vitiates consent. It must be shown that the payment made or the contract entered into was not a voluntary act.’
A further case, which was not cited to me was B & S Contracts and Design Ltd v Victor Green Publications Ltd [1984] ICR 419 at 423, where Eveleigh LJ referred to the speech of Lord Diplock in another uncited case, Universe Tankships Inc of Monrovia v International Transport Workers’ Federation [1982] 2 All ER 67 at 75–76, [1983] AC 366 at 384:
‘The rationale is that his apparent consent was induced by pressure exercised on him by that other party which the law does not regard as legitimate, with the consequence that the consent is treated in law as revocable unless approbated either expressly or by implication after the illegitimate pressure has ceased to operate on his mind.’
In commenting on this Eveleigh LJ said of the word ‘legitimate’ ([1984] ICR 419 at 423):
‘For the purpose of this case it is sufficient to say that if the claimant has been influenced against his will to pay money under the threat of unlawful damage to his economic interest he will be entitled to claim that money back … ’
Reverting to the case before me, I find that the defendants’ apparent consent to the agreement was induced by pressure which was illegitimate and I find that it was not approbated. In my judgment that pressure can properly be described as economic duress, which is a concept recognised by English law, and which in the circumstances of the present case vitiates the defendants’ apparent consent to the agreement.
In any event, I find that there was no consideration for the new agreement. The plaintiffs were already obliged to deliver the defendants’ goods at the rates agreed under the terms of the original agreement. There was no consideration for the increased minimum charge of £440 per trailer.
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Accordingly, I find that the plaintiffs’ claim fails, and there will be judgment for the defendants with costs.
Action dismissed.
Solicitors: Shoosmiths & Harrison, Northampton (for the plaintiffs); Barlows, Chertsey (for the defendants).
K Mydeen Esq Barrister.
R v Secretary of State for Trade and Industry and others, ex parte R
[1989] 1 All ER 647
Categories: BANKING & FINANCE
Court: QUEEN’S BENCH DIVISION
Lord(s): MUSTILL LJ AND MCCOWAN J
Hearing Date(s): 17, 18, 28 NOVEMBER 1988
Company – Investigation by Department of Trade and Industry – Affairs of company – Investment business – Investigation of past business transactions – Whether powers of investigation retrospective – Whether business transactions carried out prior to enactment of statutory powers of investigation constituting ‘investment business’ – Financial Services Act 1986, s 105.
The Secretary of State for Trade and Industry’s power under s 105a of the Financial Services Act 1986 to investigate the affairs of an ‘investment business’ does not entitle him to investigate business transactions which took place before the date on which the material provisions of that Act setting out his investigative powers and characterising the different types of investment business activity that could be investigated came into effect, ie 18 December 1986, since the investigative scheme created by the Act is not retrospective and transactions which took place prior to that date are not ‘investment business’ within the meaning of the Act (see p 650 g h and p 651 f to j, post).
Notes
For investigation of any investment business, see Supplement to 32 Halsbury’s Laws (4th edn) para 347.
For the Financial Services Act 1986, s 105, see 30 Halsbury’s Statutes (4th edn) 360.
As from 19 May 1987 the Secretary of State’s powers to investigate investment businesses were transferred to the Securities and Investments Board Ltd by the Financial Services Act 1986(Delegation) Order 1987, SI 1987/942, subject to a reservation that they were exercisable by the Secretary of State concurrently with the board.
Case cited
Lauri v Renad [1892] 3 Ch 402, CA.
Preliminary issue
A company director applied with leave of Kennedy J given on 12 October 1988 for judicial review of an order of the Secretary of State for Trade and Industry dated 19 May 1988 authorising two inspectors, David Alexander Caruth and John Pitkeathly Percy, to investigate the applicant’s affairs pursuant to s 105 of the Financial Services Act 1986, seeking, inter alia, a declaration that ‘investment business’ within the meaning of the 1986 Act did not include business carried on before 18 December 1986, the date when
Page 648 of [1989] 1 All ER 647
the material provisions of the 1986 Act came into effect. It was agreed that the point of law raised thereby should be tried as a separate issue. The court held that since the degree of confidentiality appropriate to the proceedings had not been determined by the date of the hearing the applicant should not be identified. The facts are set out in the judgment of Mustill LJ.
Anthony Arlidge QC, Peter Rook and David Chivers for the applicant.
A W H Charles for the Secretary of State.
Cur adv vult
28 November 1988. The following judgments were delivered.
MUSTILL LJ. The Secretary of State for Trade and Industry, claiming to act in pursuance of powers vested in him by s 105(4) of the Financial Services Act 1986, has called for the disclosure of documents said to be relevant to the affair of a businessman. The latter challenges this demand by judicial review, raising a number of questions, some of law, others of mixed law and fact. Only the first of these is before the court today. Since it turns exclusively on the interpretation of s 105, and since the degree of confidentiality which should attach to proceedings of this particular kind has been put in question but not yet determined, it is convenient for the time being to identify the businessman only as ‘the applicant’.
Although the demand for production is made pursuant to s 105(4), the dispute hinges on sub-s (1). Section 105(1) and (4) read as follows:
‘(1) The powers of the Secretary of State under this section shall be exercisable in any case in which it appears to him that there is good reason to do so for the purpose of investigating the affairs, or any aspect of the affairs, of any person so far as relevant to any investment business which he is or was carrying on or appears to the Secretary of State to be or to have been carrying on …
(4) The Secretary of State may require the person under investigation or any other person to produce at a specified time and place any specified documents which appear to the Secretary of State to relate to any matter relevant to the investigation; and—(a) if any such documents are produced, the Secretary of State may take copies or extracts from them or require the person producing them or any connected person to provide an explanation of any of them; (b) if any such documents are not produced, the Secretary of State may require the person who was required to produce them to state, to the best of his knowledge and belief, where they are.’
The terminology used in s 105, which is also to be found in many other provisions of the 1986 Act, is established by s 1. So far as material this is in the following terms:
‘(1) In this Act, unless the context otherwise requires, “investment” means any asset, right or interest falling within any paragraph in Part I of Schedule 1 to this Act.
(2) In this Act “investment business” means the business of engaging in one or more of the activities which fall within the paragraphs in Part II of that Schedule and are not excluded by Part III of that Schedule.’
If one now looks at Sch 1 to the 1986 Act, it is seen to have three relevant parts. The first contains a list of choses in action which are to rank as ‘investments’ for the purpose of the Act. As one would expect, these included rights under contracts for options, futures and differences, and long term insurance contracts.
Part II of Sch 1 describes the activities which constitute investment business, subject to the exceptions in Pt III. These activities comprise dealing in investments, namely buying, selling, subscribing for or underwriting investments, arranging deals in investments for others, managing investments for others and giving investment advice. Part III of Sch 1
Page 649 of [1989] 1 All ER 647
contains an elaborate statement of activities which are not to constitute investment business, even if they fall within the wide scope of Pt II. For present purposes it is sufficient to note that some of the exclusions are defined by reference to characteristics of the party with whom the person on whose activities the 1986 Act is focusing does business. For convenience I will call these the ‘counter-party’ and the ‘primary party’ respectively, although this is not the terminology of the Act. Other exceptions relate to permissions given or certificates issued by the Secretary of State.
The dispute about s 105 arises in this way. Earlier this year, the Secretary of State appointed two inspectors to exercise the powers conferred on him by s 105. The inspectors thereupon wrote to the applicant, identifying 14 categories of documents, and calling on him to produce all documents within these categories emanating from him or addressed to him or to certain companies which related to the period from 1 January 1984 to date. Although willing to disclose voluntarily certain of the documents comprised in this demand, the applicant objected to its validity on the ground that (i) he did not at any material time carry on ‘investment business’, within the meaning of the 1986 Act, (ii) no activities carried on before 18 December 1986, the date on which certain provisions of the Act, including ss 1, 2 and 105 and Sch 1, came into effect, were capable of amounting to investment business (see Sch 1 to the Financial Services Act 1986(Commencement No 3) Order 1986, SI 1986/2246) and (iii) the demands were not for ‘specified’ documents, since they were expressed only in terms of general categories. Since the inspectors did not accept these objections, the applicant pursued them through the medium of an application for judicial review. It has been agreed that the point raised by the second objection shall be determined by the court ahead of the others, in the shape of the following question: whether activities carried out before 18 December 1986 can or cannot be investment business within the meaning of the Financial Services Act 1986.
Before addressing this question it is necessary to emphasise one important point, namely that the powers of the inspectors are said to be confined, not by reference to the dates on the documents whose production is demanded, but to the time when the party was carrying on the investment business to which the documents called for are said to be relevant. Thus, it is not in dispute that if on the facts and the law the applicant actually was, or if it appears to the Secretary of State that he was, carrying on investment business after the appointed day, the inspectors have power to call for documents which appear relevant to the investigation of affairs relating to that business, irrespective of whether they came into existence before or after the appointed day.
Returning to the question now before the court, the rival contentions are really very simple. For the applicant the matter is put in two ways which I believe must be carefully distinguished. The first is that ‘investment business’ is a concept which, whatever it might mean in ordinary speech, did not exist with this very special connotation until the 1986 Act created it so that it was impossible for anyone to be carrying on investment business before the appointed day. Second, it is said that even if investment business was capable of existing before that day Parliament cannot have intended that the powers under s 105 should be exercised in relation to pre-Act business, and that s 105 should be read in a limited sense. In particular, it was contended that the words ‘he … was carrying on’ must be read as subject to the implied qualification ‘after the appointed day’.
To the first limb of this argument the Secretary of State replies that investment business is not a new species of activity, but simply a new label for an old species of activity. There is nothing novel or esoteric about the various types of transactions identified in Pt II of Sch 1, or about carrying them out in relation to the choses in action listed in Pt I. They were all going on before the 1986 Act, just as much as afterwards, even though nobody could at that stage tell that they would later be swept into a legislative scheme which gave them a special name. The language of s 105(1) can very well be read as comprising all investment business, even if not currently identified as such when it was effected; and the fact that s 105 is capable of dealing with the past is shown by the words ‘which he is or was … ’ and ‘appears … to be or to have been … ’
To this argument on the language of s 105(1), the applicant has a response which also
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depends on the way in which the statute is expressed. As I have said, the definition of investment business involves a qualification expressed partly in terms of the ‘Excluded Activities’ set out in Pt III of Sch 1. These embrace certain types of transactions where the counter-party falls into the category of ‘authorised persons, exempted persons, or persons holding a permission under paragraph 23 below’ (see para 17(2)(a)).
Authorised persons are defined in Ch III of the 1986 Act as including members of recognised self-regulatory organisations and persons authorised by recognised professional bodies (see ss 7(1) and 15(1)). Recognition as such an organisation or body has to be applied for, and is granted by the Secretary of State under mechanisms established by the 1986 Act. Other authorised persons include those who hold an authorisation granted by the Secretary of State (s 25). Clearly there could be no authorised persons before the statutory procedures of Ch III had been brought into force.
Again, there are the ‘exempted persons’ whose presence as counter-parties prevents the principal party’s transactions from ranking as investment business. This category includes ‘recognised’ investment exchanges, clearing houses and money market institutions for the time being included in a list maintained by the Bank of England (see ss 36, 38 and 43). As in the case of authorised persons, the category of exempted persons could not be exhaustively identified before the 1986 Act came into force.
The position is plainly the same with the remaining category of counter-parties referred to in para 17(2)(a), namely persons holding a permission from the Secretary of State under para 23 of Sch 1.
One may now return to the Secretary of State’s theory of retrospective labelling. In order to decide whether any pre-Act transaction had those characteristics which would have enabled it to rank as investment business if that concept had then existed as part of English law, it would have been necessary to know two facts: first, whether the transactions concerned investments of a type, and involved dealings of a type, described in Pt I of Sch 1; second, whether the dealing was an excluded activity. Of these, the first fact was objectively ascertainable, its existence being independent of the coming into force of the 1986 Act, and of anything done under the Act. But in many cases the second fact could not be ascertained, for where the primary party dealt as principal it would be necessary to know whether the counter-party fell into one of the three categories referred to in para 17(2)(a), and, as we have seen, these categories could not exist before the mechanisms created by the 1986 Act were available and were utilized.
So far as I can see, the only way to save the idea of retrospective labelling is to hold either that the impossibility of identifying an excepted transaction meant that all pre-Act dealings as principals were automatically excluded from investment business (in which case the category would become larger on the appointed day), or were automatically included (in which case it would shrink). Neither reading conforms with what the 1986 Act says, or with common sense. To my mind, s 105 just will not work if it is read as applying to pre-Act transactions.
Whilst this objection seems unanswerable, I do not find it very satisfying, and would prefer to look at s 105 in a broader context, to see whether a compelling argument to the contrary can be found. We may therefore examine the main provisions of the 1986 Act, not for the purpose of comparing and contrasting their language with that of s 105 (a process which only infrequently yields useful results, and which in my judgment does not yield any here) but in order to see whether the legislature can have intended to confer powers to investigate transactions which were over and done with before the Act came into force.
Following up this line, we see that the 1986 Act begins, in ch II, with a prohibition on the carrying on of investment business, except by authorised or exempted persons. Sanctions are imposed in the shape of penal offences(s 4), unenforceability of bargains (s 5), and injunctions at the suit of the Secretary of State (s 6). Chapters III and IV establish the regimes for the appointment and regulation of the various types of authorised and exempted persons. Disciplinary measures are created in the shape of powers to revoke
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authorisations or exemptions, and to issue compliance orders (see ss 12, 20, 28 and 33). It may be noted that a person authorised by virtue of establishment in a member state is guilty of an offence if he begins to carry on investment business in the United Kingdom without giving seven days notice to the Secretary of State. Chapter V begins by creating an offence where a misleading statement is made with a view to inducing another to enter into an investment agreement (ie an agreement relating to business which falls within Pt II of Sch 1 unless exempted by Pts III and IV). It goes on to render unenforceable all investment agreements resulting from unsolicited calls (s 56). These provisions relate to all persons, but the remainder of the chapter is largely concerned with authorised persons. Chapters VI and VII confer a wide range of powers relating to the control of authorised persons, including the restriction of the right to enter into various types of transactions, the maintenance of assets to secure potential liabilities and the granting of winding-up orders and administration orders. Chapter IX is concerned with the Financial Services Tribunal, which is to hear references concerning the various disciplinary powers created by the Act. Of the remaining chapters it is necessary to mention only ch XIII, which permits the Secretary of State to transfer various of his functions to designated agencies, including Security and Investments Board Ltd.
Looking through the 1986 Act in this way, two things seem to me quite clear. First, the Act creates an elaborate new structure which is to come into effect for the future, as a replacement for the much less ambitious scheme of the Prevention of Fraud (Investments) Act 1958. This factor is not conclusive in itself, since it would be possible for one isolated section in the new Act to look backwards, even if the Act as a whole looked forward, but it does suggest that one should look with care to see what reason the legislature might have had for giving s 105 this singular effect. Second, and more important, there seems to be nothing else in the Act which might furnish such a reason. The powers of investigation must be there for a purpose. One possible reason for making them work retrospectively (to use a convenient if not strictly accurate adverb) might have been to give the Secretary of State means to discover whether an applicant for authorisation is a fit person to be granted this status. But this is already catered for by s 26(2)(b)(ii) and (3), and in any event there seems no reason why the necessary information should be restricted, as it would be in s 105, to the applicant’s conduct of investment business. I can see no other reason why the Secretary of State should have taken the powers created by s 105 except to enable him to police the proper working of the scheme created by the Act and to administer the various sanctions conferred by the Act for infractions of that scheme. These sections, like the scheme itself, are all concerned with events happening after the appointed day. Plainly, the Secretary of State might in appropriate cases need to examine what had happened in the past in order to decide what course he should take in the future, and this accounts for the words ‘was’ and ‘to have been’. I also accept, as the parties accept, that a power to look at the past to explain the present must be implicit in s 105. I do not, however, see any reason why Parliament should have given the Secretary of State powers to investigate putative investment business before the Act, to underpin the supervision of a scheme and the application of sanctions to enforce it, when the scheme only began to come into existence on the first of the appointed days.
Accordingly, although I recognise that the grammar of s 105 would, if the section were read out of context, support the Secretary of State’s contention, I would, for the two reasons which I have endeavoured to state, answer the question posed to us in the negative.
McCOWAN J. I agree.
Order accordingly.
Solicitors: Slaters (for the applicant); Solicitor to the Department of Trade and Industry.
Dilys Tausz Barrister.
R v Martin
[1989] 1 All ER 652
Categories: CRIMINAL; Criminal Law
Court: COURT OF APPEAL, CRIMINAL DIVISION
Lord(s): LORD LANE CJ, SIMON BROWN AND ROCH JJ
Hearing Date(s): 29 NOVEMBER 1988
Criminal law – Necessity as a defence – Whether necessity a defence recognised in law – What amounts to necessity for purpose of defence – Appropriate direction to jury.
The defence of necessity in extreme circumstances is recognised by English law. The defence arises most commonly as duress, ie pressure put on the accused’s will by another’s wrongful threats or violence, but it can also arise from other objective dangers threatening the accused or others amounting to duress of circumstances. The defence is available only if, from an objective standpoint, the accused can be said to have acted reasonably and proportionately in order to avoid a threat of death or serious injury. Assuming the defence to be open to the accused on his account of the facts, the defence should be left to the jury with a direction to determine two questions, namely (i) whether the accused was, or might he have been, impelled to act as he did because, as a result of what he reasonably believed to be the situation, he had good cause to fear that otherwise death or serious physical injury would result, and (ii) if so, whether a sober person of reasonable firmness, sharing the characteristics of the accused, would have responded to that situation by acting as the accused had acted, and to acquit if both questions are answered affirmatively since the defence of necessity will then have been established (see p 653 g to p 654 a, post).
R v Conway [1988] 3 All ER 1025 applied.
Notes
For necessity as a defence to a criminal charge, see 11 Halsbury’s Laws (4th edn) para 26, and for cases on the subject, see 14(1) Digest (Reissue) 57–59, 266–280.
Cases referred to in judgment
R v Conway [1988] 3 All ER 1025, [1988] 3 WLR 1238, CA.
R v Willer (1986) 83 Cr App R 225, CA.
Case also cited
R v Howe [1987] 1 All ER 771, [1987] AC 417, HL.
Appeal against conviction
Colin Martin appealed against his conviction in the Crown Court at Snaresbrook before his Honour Judge Finney on 2 February on a charge of driving while disqualified, contrary to s 99(b) of the Road Traffic Act 1972, to which he pleaded guilty following a ruling by the judge that he could not plead a defence of necessity to the charge and for which he was sentenced to four months’ imprisonment suspended for two years. The grounds of his appeal were that the judge’s ruling was erroneous and had deprived him of a valid defence. The facts are set out in the judgment of the court.
Nigel Joseph Ley (assigned by the Registrar of Criminal Appeals) for the appellant.
Samuel Parrish for the Crown.
29 November 1988. The following judgments were delivered.
SIMON BROWN J delivered the following judgment of the court. On 2 February 1988 this appellant pleaded guilty in the Crown Court at Snaresbrook to driving whilst disqualified. He was sentenced by his Honour Judge Finney to four months’ imprisonment suspended for two years. In addition, for breach of a sentence of four months’ imprisonment suspended for two years, imposed at Waltham Forest Magistrates’ Court
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on 20 June 1986 for driving whilst unfit through drink or drugs, the operational period of the suspension was extended for a further two years.
The appellant now appeals against his conviction as of right on a pure point of law. The point is whether the defence of necessity is available to a charge of driving whilst disqualified when that driving occurs in circumstances such as the appellant was contending arose in his case. To those circumstances I shall come in a moment. In a private-room hearing before the appellant was arraigned, the judge held not. He concluded that, once it was established that the defendant was driving and that he was disqualified at the time, the offence was established. It was, in short, in those circumstances an absolute offence.
In consequence of that ruling the appellant pleaded guilty and merely prayed in aid as mitigation the circumstances on which he relied to establish the necessity of breaking the law. But for the ruling he would have contested the case.
The appeal is brought under s 2(1)(b) of the Criminal Appeal Act 1968, namely on the basis that the judgment of the court of trial should be set aside on the ground of a wrong decision on a question of law.
The circumstances which the appellant desired to advance by way of defence of necessity were essentially these. His wife has suicidal tendencies. On a number of occasions before the day in question she had attempted to take her own life. On the day in question her son, the appellant’s stepson, had overslept. He had done so to the extent that he was bound to be late for work and at risk of losing his job unless, so it was asserted, the appellant drove him to work. The appellant’s wife was distraught. She was shouting, screaming, banging her head against a wall. More particularly, it is said she was threatening suicide unless the appellant drove the boy to work.
The defence had a statement from a doctor which expressed the opinion that ‘in view of her mental condition it is likely that Mrs Martin would have attempted suicide if her husband did not drive her son to work’.
The appellant’s case on the facts was that he genuinely, and he would suggest reasonably, believed that his wife would carry out that threat unless he did as she demanded. Despite his disqualification he therefore drove the boy. He was in fact apprehended by the police within about a quarter of a mile of the house.
Sceptically though one may regard that defence on the facts (and there were, we would observe, striking difficulties about the detailed evidence when it came finally to be given before the judge in mitigation), the sole question before this court is whether those facts, had the jury accepted they were or might be true, amounted in law to a defence. If they did, then the appellant was entitled to a trial of the issue before the jury. The jury would of course have had to be directed properly on the precise scope and nature of the defence, but the decision on the facts would have been for them. As it was, such a defence was pre-empted by the ruling. Should it have been?
In our judgment the answer is plainly not. The authorities are now clear. Their effect is perhaps most conveniently to be found in the judgment of this court in R v Conway [1988] 3 All ER 1025, [1988] 3 WLR 1238. The decision reviews earlier relevant authorities.
The principles may be summarised thus: first, English law does, in extreme circumstances, recognise a defence of necessity. Most commonly this defence arises as duress, that is pressure on the accused’s will from the wrongful threats or violence of another. Equally however it can arise from other objective dangers threatening the accused or others. Arising thus it is conveniently called ‘duress of circumstances’.
Second, the defence is available only if, from an objective standpoint, the accused can be said to be acting reasonably and proportionately in order to avoid a threat of death or serious injury.
Third, assuming the defence to be open to the accused on his account of the facts, the issue should be left to the jury, who should be directed to determine these two questions: first, was the accused, or may he have been, impelled to act as he did because as a result
Page 654 of [1989] 1 All ER 652
of what he reasonably believed to be the situation he had good cause to fear that otherwise death or serious physical injury would result; second, if so, would a sober person of reasonable firmness, sharing the characteristics of the accused, have responded to that situation by acting as the accused acted? If the answer to both those questions was Yes, then the jury would acquit the defence of necessity would have been established.
That the defence is available in cases of reckless driving is established by R v Conway itself and indeed by an earlier decision of the court in R v Willer (1986) 83 Cr App R 225. R v Conway is authority also for the proposition that the scope of the defence is no wider for reckless driving than for other serious offences. As was pointed out in the judgment, ‘reckless driving can kill’ (see [1988] 3 All ER 1025 at 1029, [1988] 3 WLR 1238 at 1244).
We see no material distinction between offences of reckless driving and driving whilst disqualified so far as the application and scope of this defence is concerned. Equally we can see no distinction in principle between various threats of death; it matters not whether the risk of death is by murder or by suicide or indeed by accident. One can illustrate the latter by considering a disqualified driver being driven by his wife, she suffering a heart attack in remote countryside and he needing instantly to get her to hospital.
It follows from this that the judge quite clearly did come to a wrong decision on the question of law, and the appellant should have been permitted to raise this defence for what it was worth before the jury.
It is in our judgment a great pity that that course was not taken. It is difficult to believe that any jury would have swallowed the improbable story which this appellant desired to advance. There was, it emerged when evidence was given in mitigation, in the house at the time a brother of the boy who was late for work, who was licensed to drive, and available to do so; the suggestion was that he would not take his brother because of ‘a lot of aggravation in the house between them’. It is a further striking fact that when apprehended by the police this appellant was wholly silent as to why on this occasion he had felt constrained to drive. But those considerations, in our judgment, were essentially for the jury, and we have concluded, although not without hesitation, that it would be inappropriate here to apply the proviso to s 2(1) of the 1968 Act.
In the result this appeal must be allowed and the conviction quashed.
Appeal allowed. Conviction quashed.
Solicitors: Crown Prosecution Service, Snaresbrook.
N P Metcalfe Barrister.
R v Secretary of State for Foreign and Commonwealth Affairs, ex parte Everett
[1989] 1 All ER 655
Categories: CONSTITUTIONAL; Crown: ADMINISTRATIVE LAW
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): O’CONNOR, NICHOLLS AND TAYLOR LJJ
Hearing Date(s): 20 OCTOBER 1988
Crown – Prerogative – Passport – Refusal to issue passport to person for whom warrant of arrest issued – Secretary of State refusing to issue passport overseas to applicant for whom warrant of arrest outstanding in United Kingdom – Applicant informed of reason without being given details of warrant or opportunity to challenge accuracy of details or present exceptional circumstances which might justify issue of passport – Whether decision to issue or refuse passport involving exercise of prerogative power – Whether court having jurisdiction to review decision – Whether Secretary of State’s decision fair.
The applicant, a British passport holder living in Spain, applied to the British Embassy in Madrid for a new passport to be issued on the expiry of his old one. The Foreign and Commonwealth Office refused to issue a new passport because there was a warrant for the applicant’s arrest current in the United Kingdom and it was the Secretary of State’s policy not to issue a passport to persons who were wanted by the police on suspicion of a serious crime. No details of the warrant were given. The applicant applied for judicial review by way of an order of certiorari to quash the refusal on the ground, inter alia, that no particulars of the warrant had been made available to him. Two warrants had been issued for the applicant’s arrest, one for obtaining a false passport by deception and the other for robbery, and by the date of the hearing the applicant had been given details of the date, place of issue and subject matter of the warrants, neither of which he had sought to challenge. The judge granted the applicant the relief sought, holding that before refusing to issue a passport because of an outstanding warrant of arrest the Secretary of State was required to consider whether his policy should not be applied in the particular case. The Secretary of State appealed, contending that the High Court had no jurisdiction to review a decision to refuse to issue a passport since such a decision involved the exercise of prerogative power.
Held – Although a decision by the Secretary of State to refuse to issue a passport involved the exercise of prerogative power the High Court had jurisdiction to review such a decision and to inquire whether a passport had been wrongly refused. Accordingly, although the Secretary of State’s policy of not issuing passports abroad to persons against whom there were warrants of arrest outstanding in the United Kingdom was a valid policy, nevertheless when a passport was refused on that ground the Secretary of State was required to give the reason for the refusal, to provide the applicant with the particulars of the warrant and to inform him that if there were exceptional reasons (eg compassionate grounds) why the policy should not be applied they would be taken into account. However, since the applicant had not suffered any injustice because he had known by the date of the hearing everything which he should have been told by the Secretary of State, and since there were no exceptional reasons in his case, there were no grounds for granting relief. The appeal would therefore be allowed (see p 658 b c, p 659 a to p 660 h, post).
Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935 applied.
Notes
For the refusal to grant a passport, see 18 Halsbury’s Laws (4th edn) para 1412.
Page 656 of [1989] 1 All ER 655
Cases referred to in judgments
Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935, [1985] AC 374, [1984] 3 WLR 1174, HL.
R v Port of London Authority, ex p Kynoch Ltd [1919] 1 KB 176, CA.
Appeal
The Secretary of State for Foreign and Commonwealth Affairs appealed against the decision of Mann J made on 2 December 1987 whereby on an application of Ronald James Everett for judicial review he ordered, inter alia, that the decision of the British Embassy in Madrid made on 12 May 1986 and confirmed by the Foreign and Commonwealth Office by letter dated 24 July 1986 refusing to grant the applicant a new passport be quashed. The facts are set out in the judgment of O’Connor LJ.
Roger Ter Haar for the Secretary of State.
Laureen Fleischmann for the applicant.
20 October 1988. The following judgments were delivered.
O’CONNOR LJ. On 2 December 1987 Mann J quashed a decision of the Secretary of State for Foreign and Commonwealth Affairs given in a letter of 24 July 1986 refusing a passport to the applicant. The Secretary of State appeals against that decision.
The facts giving rise to this case can be simply stated. The applicant has been living in Marbella in the south of Spain since June 1984. He was the holder of a British passport which was due to expire on 20 May 1986. In April of that year he filled in the necessary form to apply for a new passport with the supporting documents. That can be issued by a consul in Malaga via the consular department of the British Embassy in Madrid. The matter went to Madrid, but no passport was forthcoming. On 12 May the applicant sent a lawyer to the British Embassy to find out why he had not received a new passport and according to the affidavit of the notary he was told that a passport was not going to be issued but that a travel document, which was effectively a one-way ticket to England, could be issued. The report of this interview does not record whether the Spanish lawyer asked why his client was not getting a passport, nor does it record being told why he was not given one. In the result solicitors in London on behalf of the applicant wrote to the Passport Office. It turns out that, when passports are issued abroad, it is handled by the Foreign Office, as one might expect, from the embassy or consulate as the case may be. Thus it was that a reply came back on 24 July why no passport had been issued. That letter reads:
‘I refer to your letter of 2 June addressed to the Passport Office. This has been sent to us for reply as the Foreign and Commonwealth Office are responsible for the issue of passports overseas. We have noted your comments and the substance of the notarised declaration made by Mr Luis Bertelli Galvex. However, British passports are issued overseas at the discretion of the Secretary of State for Foreign and Commonwealth Affairs and it is a fundamental principle that they should not be issued to persons for whose arrest a warrant has been issued in the United Kingdom. Such a warrant has been issued in respect of [the applicant] and it would clearly not be in the interests of justice if, in these circumstances, a passport were to be issued to him. We therefore consider that the British Embassy in Madrid were justified in refusing to issue a standard passport to [the applicant], who has however been offered an emergency passport to enable him to travel to the United Kingdom only. I regret that we are not in a position to give you details of the warrant for arrest and can only advise that you contact the UK police authorities if you wish to have these.’
As a result of that letter these proceedings were launched in October 1986. The relief sought by way of judicial review was certiorari to quash both the oral decision on 12 May in Madrid and that contained in the letter on 24 July, together with an order for
Page 657 of [1989] 1 All ER 655
mandamus requiring the passport application to be considered in a proper and lawful manner.
The grounds which were given for the relief were that no particulars of the warrant had been made available to the applicant that he was afforded no opportunity for a hearing before the decision was made in Spain and that therefore the decision was made in a manner which failed to comply with natural justice. So, too, was the attack on the letter of 24 July. In addition there was an allegation that the refusal at least had the effect of circumventing the extradition rules for Spain, as far as this man is concerned.
An affidavit was sworn by Mr Le Breton, for the Secretary of State, in July 1987, which was before the judge. By that time leave had been given by Russell J. He had ordered that inquiries should be made as to the nature of the warrant. The applicant had information, which we see from correspondence exhibited to an affidavit, including a letter of 20 February which is not exhibited but referred to, which carried the information from Scotland Yard that a warrant had been issued in the Thames Magistrates’ Court in January 1985 for the arrest of this man on a charge of obtaining property by deception, namely a false passport. There was a further warrant, which had nothing to do with this refusal because it did not come until December 1986, issued out of the Bow Street Magistrates’ Court on a charge of robbery. The affidavit sworn by Mr Le Breton explained what had happened. He said:
‘2. In April 1986 the Applicant … applied through the British Consulate at Malaga, Spain for a new passport to replace a passport which was to expire on the 20th May 1986. That application was passed to the Consular Section, British Embassy, Madrid for processing. It came to the attention of the officers in the Consular Section that the Applicant was named on a list which the Director of Public Prosecutions had supplied (through the Embassy) to the Spanish Authorities of persons whom the British police wished to question in connection with a robbery.
3. The Consular Section therefore raised inquiries with my Department and it was established that there was an outstanding Warrant for the arrest of the Applicant issued in January 1985 on charges of obtaining property by deception. Those charges concern the Applicant having obtained a passport in the false name of Ronald Page in 1983.
4. On the basis of long standing practice, which has been brought to Parliament’s attention on various occasions the issue of a passport is refused to persons for whose arrest a Warrant has been issued in the United Kingdom or persons who are wanted by the United Kingdom police on suspicion of a serious crime. My Department therefore informed the Consular Section in Madrid that a replacement standard passport should not be issued to the Applicant but that he might be offered an emergency passport for a single journey to the United Kingdom.’
He then refers to the correspondence.
When the matter came before the judge three matters were taken before him. First, the Secretary of State objected that judicial review did not lie against the refusal of a passport. That forms the first ground of appeal, because the judge rejected the submission. Once again it can be simply stated. Until the decision of the House of Lords in Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935, [1985] AC 374 it was generally assumed that the law was that decisions of the administration taken under the prerogative were not amenable to judicial review, and so one finds a whole series of matters which were not amenable to review. In that case it will be remembered that the order that employees of GCHQ were not to be union members was taken under an Order in Council issued under the prerogative by the Minister for the Civil Service. The first question which had to be decided was whether judicial review of the decision lay at all.
Three of their Lordships, Lord Diplock, Lord Scarman and Lord Roskill, unequivocally held that judicial review of decisions taken under the prerogative did lie. Lord Scarman in his speech stated that it was not the origin of the administrative power, but was the
Page 658 of [1989] 1 All ER 655
actual factual application which had to be considered (see [1984] 3 All ER 935 at 946–948, [1985] AC 374 at 404–407). It is quite clear since that decision that there are areas of the exercise of the prerogative which the courts can and will review. There are other areas, some of which were identified in that case, which they will not. Obvious examples are the making of treaties, which the court would not entertain by way of judicial review: so, too, policy decisions on foreign affairs and other matters which are to be found in Lord Roskill’s speech. I need not refer to them in this judgment.
The judge held that the issue of a passport fell into an entirely different category. That seems common sense. It is a familiar document to all citizens who travel in the world and it would seem obvious to me that the exercise of the prerogative, because there is no doubt that passports are issued under the royal prerogative in the discretion of the Secretary of State, is an area where common sense tells one that, if for some reason a passport is wrongly refused for a bad reason, the court should be able to inquire into it. I would reject the submission made on behalf of the Secretary of State that the judge was wrong to review the case.
I then pass to consider the next ground of appeal, but before I do that I state what the judge decided. He said in his judgment:
‘That of course does not conclude the matter. Assuming, as I have held, that the discretion is reviewable, is it here to be flawed? It is apparent that the Secretary of State has a general policy, that is to say that the discretion will not be exercised in favour of a person, at least one who is outside the United Kingdom, who is the subject of a warrant of arrest. The Secretary of State is entitled to have such a general policy, but it must not preclude the exercise of the discretion vested in him. If it does, then, as Bankes LJ said, it amounts to a refusal to exercise any discretion (see R v Port of London Authority, ex p Kynoch Ltd [1919] 1 KB 176 at 184–185). What concerns me in this case is that there was not any inquiry of the applicant as to whether or not the policy should here be applied. Indeed, the state of knowledge at the time of refusal was as scant as that contained in the letter of 24 July 1986 and has not subsequently been increased, save by knowledge of the warrant of arrest for robbery issued after any event with which I am concerned.’
I pause there. It seems to me that the judge has fallen into error. By the time the matter came before him there was an advance on the matters contained in the letter of 24 July because by that time it was known when and where and for what the warrant had been issued. The details I have already read in the affidavit of Mr Le Breton. The judge continued:
‘I do wish to make it clear that the Secretary of State is entitled to have a policy and that he is entitled to have regard to the fact that warrants of arrest are issued as part of the judicial process. But I do not regard it as satisfactory that he should not inquire as to whether there is any reason why this policy should not be applied in the instant case. What I propose to do is to issue certiorari to quash. The matter will have to be reconsidered. Whether that reconsideration achieves any practically useful consequence, so far as the applicant is concerned, is not for me to say.’
He then went on to deal with the ‘veiled extradition’ issue, to which I will return in a moment.
It will be seen that the judge was stating that the policy of not issuing passports to persons against whom there was a warrant of arrest outstanding was an intelligible and valid policy, and no appeal is made against that because it is obvious good sense. But the judge came to the conclusion that the fair application of the policy required that if a passport was refused because a warrant was outstanding against the applicant, inquiry had to be made of the applicant before refusing a passport, as to whether he had anything to say.
In my judgment the judge fell into error in concluding that that was required for the
Page 659 of [1989] 1 All ER 655
fair exercise of his discretion. It seems to me that the Secretary of State, in the fair exercise of his discretion, was entitled to refuse the passport but to give his reason for so doing, and the fair giving of the reason, if the reason be that there is a warrant for the applicant’s arrest outstanding, was to tell him when the warrant was issued and what offence was charged. Once he has done that he has all but discharged his duty, but he should, when notifying the applicant that that was the reason for refusing the passport, tell him that if there were any exceptional grounds which might call for the issue of a passport he would consider them. We have been told very properly by counsel for the Secretary of State that it is possible that exceptions may arise on compassionate grounds, eg if such a person were desperately ill in hospital in a foreign country it might be that a passport would be issued or an exception made. Had that been done, no one could challenge the proper exercise of the discretion.
In the present case it has been submitted that the letter of 24 July gives all the information, coupled with the visit of a lawyer on behalf of the applicant in Madrid, and one could assume that the lawyer must have asked why the passport was refused.
Unfortunately I do not think one can assume if he did ask such a question that he necessarily got the answer which would be required and it seems to me that the decision letter of 24 July was not sufficient to give the information which ought to have been given.
That is not an end of the matter, because judicial review is a discretionary remedy and one must look at the position at the time when the application came before the judge. At that stage the applicant knew everything. He was fully armed with lawyers in this country, solicitors and counsel, and there is not a word from him of any sort. There is no suggestion that there are any exceptional circumstances in this case. There is no suggestion from him that there is anything wrong with the warrant, or that he was not wanted on a warrant for an offence of obtaining a false passport or obtaining a passport in the name of Ronald Page by deception: he knew everything which he ought to have been told. He certainly knew when he made representations in the launching of the proceedings.
In those circumstances I cannot see that there are any grounds for thinking that, had the decision letter contained the information which he got later and contained the offer to consider any representations as to exceptional circumstances, any different result would have come about. Where the court finds itself in that position, namely that the applicant has suffered no injustice and that to grant the remedy would produce a barren result there are no grounds for granting relief.
Finally, I would like to say a few words about extradition. Counsel for the applicant applied for leave to reopen part of the second ground of the application, namely the suggestion that what was happening here was an attempted ‘veiled extradition’ of this applicant. In my judgment there is no evidence whatever which could bring that charge home against the Secretary of State and as it would be quite pointless to raise the matter here, I would refuse leave to cross-appeal in this case.
In those circumstances I would allow this appeal and refuse the order for judicial review.
NICHOLLS LJ. I agree and I add a few words only on one aspect of this case.
The Secretary of State has for some years adopted and followed a policy of refusing to issue a passport to certain classes of persons. One of these classes comprises persons for whose arrest a warrant has been issued in the United Kingdom. That the Secretary of State was entitled to adopt and follow this policy has not been challenged in this case. In my view the fair implementation of that policy requires that, when a passport application is refused on the ground I have mentioned, in general the applicant should be told of when and where the warrant in question was issued and in respect of what offence or offences. If he is not given that information the applicant could not, for example, begin to show that the warrant which has been issued could not in fact relate to him. Of course, each case must depend on its own particular circumstances and there may be cases where
Page 660 of [1989] 1 All ER 655
even those details need not formally be communicated, eg where the applicant already has the substance of the necessary information. Furthermore, in so far as exceptions may be made to the policy in particular cases on some special grounds, such as compassionate grounds, fair implementation of the policy requires that the notification of refusal of a passport should not be in terms which would lead a reasonable applicant to believe that no exceptions were ever made and that his application has inevitably reached the end of the road. Here also each case must depend on its own facts, but it seems to me that in general the fair implementation of the policy also requires that the applicant should be told, when the renewal of the passport is refused, something to the effect that if he wishes to submit that there are compassionate or other special reasons why, despite the policy, a new passport should be issued to him, then he may communicate with the passport issuing authority accordingly, when anything he puts forward will be considered.
Nevertheless I agree, for the reasons given by O’Connor LJ, that the failure by the Secretary of State to follow that approach in this case has not resulted in any prejudice to the applicant. I, too, would allow the appeal.
TAYLOR LJ. I agree and add only a few words on the first ground of appeal of counsel for the Secretary of State concerning the jurisdiction of this court.
I am in no doubt that the court has power to review the withdrawal or refusal to grant or renew a passport. The House of Lords in Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935, [1985] AC 374 made it clear that the powers of the court cannot be ousted merely by invoking the word ‘prerogative’. The majority of their Lordships indicated that whether judicial review of the exercise of prerogative power is open depends on the subject matter and in particular on whether it is justiciable. At the top of the scale of executive functions under the prerogative are matters of high policy, of which examples were given by their Lordships: making treaties, making law, dissolving Parliament, mobilising the armed forces. Clearly those matters, and no doubt a number of others, are not justiciable. But the grant or refusal of a passport is in a quite different category. It is a matter of administrative decision, affecting the rights of individuals and their freedom of travel. It raises issues which are just as justiciable as, for example, the issues arising in immigration cases. Counsel for the Secretary of State sought to put the grant of passports under the umbrella of foreign affairs and thereby elevate it to that level of high policy which would preclude the intervention of the courts. He says that the grant of a passport involves a request in the name of the Queen to a foreign power to afford the holder free passage and protection. It also extends the protection and assistance of the Crown to the holder whilst he is abroad.
However, those considerations do not, to my mind, render issues arising on the refusal of a passport non-justiciable. The ready issue of a passport is a normal expectation of every citizen, unless there is good reason for making him an exception. The issues arising are no more likely to have foreign policy repercussions than those arising, to take the same analogy as before, in immigration cases. Accordingly, I consider that the judge was right to entertain the application. However, for the reasons given by O’Connor and Nicholls LJJ I agree that his decision on the facts of this case cannot be supported.
Appeal allowed.
Solicitors: Treasury Solicitor; Hughmans (for the applicant).
Carolyn Toulmin Barrister.
Re State of Norway’s Application (No 1)
[1989] 1 All ER 661
Categories: CONFLICT OF LAWS: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): KERR, GLIDEWELL AND RALPH GIBSON LJJ
Hearing Date(s): 3, 4, 5, 6, 9, 10, 11 DECEMBER 1985, 12 FEBRUARY 1986
Evidence – Foreign tribunal – Examination of witnesses in relation to matters pending before foreign tribunal – Evidence for purpose of civil proceedings – Proceedings in civil or commercial matter – Evidence requested by foreign tax tribunal – Whether foreign proceedings civil or commercial matter – Whether proceedings assisting foreign tax-gathering – Evidence (Proceedings in Other Jurisdictions) Act 1975, ss 1, 9(1).
Evidence – Foreign tribunal – Examination of witnesses in relation to matters pending before foreign tribunal – Confidentiality – Confidential information between bank and customer – Whether private interest of confidentiality between banker and customer outweighing duty of disclosure to foreign court – Whether court should compel witnesses to violate duty of confidence.
Evidence – Foreign tribunal – Examination of witnesses in relation to matters pending before foreign tribunal – Evidence for purpose of civil proceedings – Letter of request in nature of ‘fishing’ operation – Whether terms of request too wide.
J, a wealthy Norwegian shipowner, died in 1982. The county tax committee for that part of Norway in which he had resided decided to raise a retrospective tax assessment against his estate for the years 1972–82 on the ground that he had avoided tax during those years by failing to declare a large part of his assets. The estate commenced proceedings in the court of first instance in Norway to have the assessment declared null and void and appealed to the national tax committee to have it set aside. The Norwegian court, on the application of the State of Norway supported by the estate, issued letters of request addressed to the High Court in England requesting it to summon two named merchant bankers (the witnesses) to attend before an examiner in London to give oral evidence relevant to the issues in the proceedings before the Norwegian court. The bank had acted as bankers for a charitable trust alleged to have been set up and controlled by J and which allegedly held shares for J as beneficial owner. After receiving the letter of request the master made an order under s 2a of the Evidence (Proceedings in Other Jurisdictions) Act 1975 granting the application for the oral examination of the witnesses. The witnesses applied to have the order for oral examination set aside. The judge upheld the master’s decision subject to certain directions limiting the scope of the questions which could be put to the witnesses. The witnesses appealed to the Court of Appeal, contending, inter alia, (i) that the English court had no jurisdiction to give effect to the letter of request since the legal process pending before the Norwegian court did not constitute ‘civil proceedings’ within 1b of the 1975 Act, which were defined by s 9(1)c of that Act as proceedings in a ‘civil or commercial matter’, (ii) that the letter of request amounted to a request for assistance in the enforcement of a foreign tax law, contrary to public policy, (iii) that the terms of the letter of request were too wide and did not constitute a proper request for evidence and (iv) that, since the giving of testimony by the witnesses would be a breach of their duty of confidentiality as bankers, the judge should have exercised his discretion by refusing the application. The State of Norway and the estate cross-appealed for the removal of the directions limiting the scope of the questions which could be asked.
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Held – (1) Where a request was made by a foreign court for the oral examination of witnesses whose evidence was required for use in foreign proceedings, the English court, in determining whether the foreign proceedings were ‘civil proceedings’ within the meaning of ss 1 and 9(1) of the 1975 Act so as to confer jurisdiction on the court, had to be satisfied that the proceedings concerned a civil or commercial matter under the law of the requesting court, and in determining that issue the English court was not bound by the requesting court’s classification if it conflicted with any fundamental principle recognised by English law regarding the classification of proceedings. Accordingly, even if the English court concluded that the requirements of the classification had been met under the law of the requesting court, it could in its discretion refuse to make an order pursuant to a letter of request if proceedings characterised as proceedings in a civil matter by the requesting court were nevertheless regarded as criminal or penal proceedings by English law. Applying that test on the limited evidence of Norwegian law before the court, although (per Kerr LJ) it was not clear whether the proceedings instituted in the Norwegian court were public or private law proceedings, it was clear that they would be characterised as a civil proceeding under English law and therefore that they fell within the ambit of s 1 of the 1975 Act (see p 676 b c j to p 677 b, p 678 g h, p 679 j, p 680 e g j, p 681 b, p 689 h j, p 690 b d and p 692 b c, post).
(2) Although the courts would regard a request by a foreign state to obtain evidence against a taxpayer of that state as part of the foreign state’s tax-gathering process and as a matter of public policy would not accede to a letter of request issued for such a purpose, having regard (per Kerr and Ralph Gibson LJJ) to the fact that the taxpayer, ie the estate, supported the request and had initiated it the court would not decline the request on the ground that it would assist foreign tax gathering (see p 682 d to g, p 683 d e, p 690 d and p 692 c, post); dictum of Lord Somervell in Government of India Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292 at 301–302 considered.
(3) (Ralph Gibson LJ dissenting) In order to determine whether the witnesses should be ordered to break their duty of confidentiality by answering the questions raised by the letter of request, the court had to consider whether the interest in protecting the confidence reposed in the witnesses was outweighed by the public interest in assisting a foreign court. In the circumstances the balance was against compelling the witnesses to violate their duty of confidence. Furthermore, the terms of the letter of request were so wide that the questions intended to be asked would inevitably include a number which would elicit information which might lead to a line of inquiry which would disclose evidence rather than evidence in the proceedings themselves. Since such questions would be ‘fishing’, they would be unacceptable. It followed that the court would not order the witnesses to give evidence on the request as framed. Furthermore, the court was in no position to bring the request into conformity with what would be permissible. The witnesses’ appeal would accordingly be allowed and the cross-appeal dismissed (see p 684 g j, p 685 d, p 686 f g, p 688 b to d, p 689 d and p 691 f h j, post); Rio Tinto Zinc Corp v Westinghouse Electric Corp [1978] 1 All ER 434 considered.
Notes
For evidence for proceedings in other jurisdictions, see 17 Halsbury’s Laws (4th edn) paras 326–329, and for cases on the subject, see 22 Digest (Reissue) 665–668, 7111–7123.
For the Evidence (Proceedings in Other Jurisdictions) Act 1975, ss 1, 2, 9, see 17 Halsbury’s Statutes (4th edn) 191, 192, 197.
Cases referred to in judgments
A-G of New Zealand v Ortiz [1983] 2 All ER 93, [1984] AC 1, [1983] 2 WLR 809, HL; affg [1982] 3 All ER 432, [1984] AC 1, [1982] 3 WLR 570, CA.
Ayres v Evans (1981) 39 ALR 129, Aust HC.
Bankers Trust Co v Shapira [1980] 3 All ER 353, [1980] 1 WLR 1274, CA.
Bonalumi v Secretary of State for the Home Dept [1985] 1 All ER 797, [1985] QB 675, [1985] 2 WLR 722, CA.
Page 663 of [1989] 1 All ER 661
British Steel Corp v Granada Television Ltd [1981] 1 All ER 417, [1981] AC 1096, [1980] 3 WLR 774, Ch D, CA and HL.
Buchanan (James) & Co Ltd v Babco Forwarding and Shipping (UK) Ltd [1977] 3 All ER 1048, [1978] AC 141, [1977] 3 WLR 907, HL.
Buchanan (Peter) Ltd and Macharg v McVey (1951) [1955] AC 516n, Eire HC and SC.
Burchard v Macfarlane, ex p Tindell [1891] 2 QB 241, [1891–94] All ER Rep 137, CA.
Comr of Taxes Federation of Rhodesia v McFarland 1965(1) SA 470, WLD.
Desilla v Fells & Co (1879) 40 LT 423, DC.
FDC Co Ltd v Chase Manhattan Bank (29 October 1984, unreported), Hong Kong CA.
Fothergill v Monarch Airlines Ltd [1980] 2 All ER 696, [1981] AC 251, [1980] 3 WLR 209, HL.
Hillegom Municipality v Hillenius Case 110/84 [1985] ECR 3947.
India (Government) Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292, [1955] AC 491, [1955] 2 WLR 303, HL.
Morgan v Morgan [1977] 2 All ER 515, [1977] Fam 122, [1977] 2 WLR 712.
Netherlands v Rüffer Case 814/79 [1980] ECR 3807.
O’Reilly v Mackman [1982] 3 All ER 1124, [1983] 2 AC 237, [1982] 3 WLR 1096, HL; affg [1982] 3 All ER 680, [1983] 2 AC 237, [1982] 3 WLR 1098, QBD and CA.
R v Grossman (1981) 73 Cr App R 302, CA.
Radio Corp of America v Rauland Corp [1956] 1 All ER 549, [1956] 1 QB 618, [1956] 2 WLR 612, DC.
Rio Tinto Zinc Corp v Westinghouse Electric Corp, RTZ Services Ltd v Westinghouse Electric Corp [1978] 1 All ER 434, [1978] AC 547, [1978] 2 WLR 81, HL; rvsg sub nom Re Westinghouse Electric Corp Uranium Contract Litigation MDL Docket No 235 [1977] 3 All ER 703, [1978] AC 547, [1977] 3 WLR 492, CA.
Salomon v Customs and Excise Comrs [1966] 3 All ER 871, [1967] 2 QB 116, [1966] 3 WLR 1223, CA.
Salvatore v Etat Belge, Ministere des Finances JT, 8 April 1976, p 444, Belgian Cour de Cassation.
Senior v Holdsworth [1975] 2 All ER 1009, [1976] QB 23, [1975] 2 WLR 987, CA.
Seyfang v G D Searle & Co [1973] 1 All ER 290, [1973] QB 148, [1973] 2 WLR 17.
Stag Line Ltd v Foscolo Mango & Co Ltd [1932] AC 328, [1931] All ER Rep 666, HL.
Tournier v National Provincial and Union Bank of England Ltd [1924] 1 KB 461, [1923] All ER Rep 550, CA.
Town Investments Ltd v Dept of the Environment [1977] 1 All ER 813, [1978] AC 359, [1977] 2 WLR 450, HL.
US v Harden (1963) 41 DLR (2d) 721, Can SC.
Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1986] 1 All ER 129, [1988] AC 368, [1986] 2 WLR 24, HL.
X AG v A bank [1983] 2 All ER 464.
Cases also cited
Asbestos Insurance Coverage Cases, Re [1985] 1 All ER 716, [1985] 1 WLR 331, HL.
Brokaw v Seatrain UK Ltd [1971] 2 All ER 98, [1971] 2 QB 476, CA.
D v National Society for the Prevention of Cruelty to Children [1977] 1 All ER 589, [1978] AC 171, HL.
Gourdain v Nadler Case 133/78 [1979] ECR 733.
Gross Re, ex p Treasury Solicitor [1968] 3 All ER 804, [1969] 1 WLR 12.
Huntington v Attrill [1893] AC 150, PC.
Maliban Biscuit Manufactories Ltd v Subramaniam [1971] AC 988, PC.
S v E [1967] 1 All ER 593, [1967] 1 QB 367.
Settebello Ltd v Banco Totta and Acores [1985] 2 All ER 1025, [1985] 1 WLR 1050, CA.
Stamps Comrs, Straits Settlements v Oei Tjong Swan [1933] AC 378, PC.
Tennekoon v Duraisamy [1958] 2 All ER 479, [1958] AC 334, PC.
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Vervaeke v Smith (Messina and A-G intervening) [1982] 2 All ER 144, [1983] 1 AC 145, HL.
Appeal
Lord Kindersley and Mr A J Hardman (the witnesses) appealed, pursuant to leave given by McNeill J, against the decision of the judge on 24 July 1985 whereby he dismissed their application to discharge the order of Master Prebble made on 14 January 1985 for oral examination of the witnesses pursuant to s 2 of the Evidence (Proceedings in Other Jurisdictions) Act 1975, in compliance with a request from the Sandefjord City Court on an application by the State of Norway, supported by the estate of Anders Jahre deceased, and directed that the examination proceed subject to certain directions limiting the scope of the questions which they could by required to answer. The evidence sought by the state and the estate related to information relevant to proceedings brought by the estate of the deceased shipowner against the state concerning a disputed retrospective assessment for tax on the estate for the years 1972–82. The state and the estate cross-appealed seeking the removal of the directions. The facts are set out in the judgment of Kerr LJ.
Michael Crystal QC and John Higham for the witnesses.
Anthony Boswood for the state.
Nicolas Bratza for the estate.
Cur adv vult
12 February 1986. The following judgments were delivered.
KERR LJ. This is an appeal from a judgment of McNeill J delivered on 24 July 1985 in open court after a hearing in chambers on appeal from part of an order made by Master Prebble on 14 January 1985. The case raises novel and complex issues of considerable importance, both in this country and internationally, and the hearings below and here occupied some five and seven days respectively. It arises out of a request by the State of Norway, supported by the estate of a deceased Norwegian shipowner Mr Anders Jahre (the estate), for the examination as witnesses pursuant to the Evidence (Proceedings in Other Jurisdictions) Act 1975 of Lord Kindersley, a director of Lazard Bros & Co Ltd (Lazards), and of Mr A J Hardman, a former administration manager (banking division) of Lazards, in aid of proceedings in Norway concerning a disputed retrospective assessment to tax on the estate for the years 1972–82 amounting to just under 338 m Norwegian kroner. The basis for the assessment is that Mr Jahre is alleged to have avoided tax by transferring, and in effect concealing, funds or other assets about which the proposed witnesses from Lazards (the witnesses) are believed to be able to give evidence.
The original request was that the witnesses should be ordered to give oral evidence and to produce certain documents or classes of documents. Lazards and the witnesses take strong objection to this request on a variety of grounds, including the fact that it would involve a breach of their duty of confidentiality as bankers.
On an ex parte application under RSC Ord 70, r 2 Master Prebble granted the application for the oral examination of the witnesses without qualification, but he declined to make any order for the production of documents on the ground that the request appeared too wide and that there was no reason to think that the documentation was in the custody, possession or power of the witnesses. There was no appeal against the latter part of Master Prebble’s order, but the witnesses appealed to McNeill J on the part which ordered their oral examination. He heard the matter inter partes supported by a considerable amount of further evidence. Originally only the State of Norway, represented by the Solicitor General, Mr Bjoern Haug, was the party on whose behalf the request was made, but, on the application of the estate, Stuart-Smith J ordered on 25 June 1985 that the estate be joined as a party, on terms, inter alia, that it filed no evidence, since the matter was shortly to come on for hearing. Effectively, therefore, the contest is
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between the State of Norway and the estate, as the applicants on whose behalf the request is made, and the witnesses, as the respondents who oppose it.
McNeill J dismissed the witnesses’ appeal against the order for their oral examination, but subject to certain directions limiting the scope of the questions which they could be required to answer, as set out later on in this judgment. The witnesses now appeal to this court against his decision and ask that the order for their oral examination be set aside, and the state and the estate cross-appeal for the removal of the judge’s directions limiting the scope of the examination.
The Evidence (Proceedings in Other Jurisdictions) Act 1975
It is common ground that the 1975 Act was passed mainly in order to give effect to the accession by the United Kingdom, under the auspices of the Hague Conference on Private International Law, to the Hague Convention on the Taking of Evidence abroad in Civil or Commercial Matters (The Hague, 18 March 1970; TS 20 (1977); Cmnd 6727). This is nowhere mentioned in the Act but, if authority be required, a number of statements that this was one of the purposes of the 1975 Act are to be found in the decision of the House of Lords in the Westinghouse case, Rio Tinto Zinc Corp v Westinghouse Electric Corp, RTZ Services Ltd v Westinghouse Electric Corp [1978] 1 All ER 434 at 441, 449, 461, 468, 477, [1978] AC 547 at 608, 618, 632, 641, 653 per Lord Wilberforce, Viscount Dilhorne, Lord Diplock, Lord Fraser and Lord Keith.
It is convenient to begin by setting out the relevant provisions of the 1975 Act, and for convenience I have emphasised a number of words and phrases which are of particular importance for present purposes. The ‘long title’ is in the following terms:
‘An Act to make new provision for enabling the High Court, the Court of Session and the High Court of Justice in Northern Ireland to assist in obtaining evidence required for the purposes of proceedings in other jurisdictions; to extend the powers of those courts to issue process effective throughout the United Kingdom for securing the attendance of witnesses; and for purposes connected with those matters.’
The relevant parts of ss 1, 2 and 3 are as follows:
‘1. Where an application is made to the High Court, the Court of Session or the High Court of Justice in Northern Ireland for an order for evidence to be obtained in the part of the United Kingdom in which it exercises jurisdiction, and the court is satisfied—(a) that the application is made in pursuance of a request issued by or on behalf of a court or tribunal (“the requesting court”) exercising jurisdiction in any other part of the United Kingdom or in a country or territory outside the United Kingdom; and (b) that the evidence to which the application relates is to be obtained for the purposes of civil proceedings which either have been instituted before the requesting court or whose institution before that court is contemplated, the High Court, Court of Session or High Court of Justice in Northern Ireland, as the case may be, shall have the powers conferred on it by the following provisions of this Act.
2. —(1) Subject to the provisions of this section, the High Court, the Court of Session and the High Court of Justice in Northern Ireland shall each have power, on any such application as is mentioned in section 1 above, by order to make such provision for obtaining evidence in the part of the United Kingdom in which it exercises jurisdiction as may appear to the court to be appropriate for the purpose of giving effect to the request in pursuance of which the application is made; and any such order may require a person specified therein to take such steps as the court may consider appropriate for that purpose.
(2) Without prejudice to the generality of subsection (1) above but subject to the provisions of this section, an order under this section may, in particular, make provision—(a) for the examination of witnesses, either orally or in writing; (b) for the production of documents …
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(3) An order under this section shall not require any particular steps to be taken unless they are steps which can be required to be taken by way of obtaining evidence for the purposes of civil proceedings in the court making the order (whether or not proceedings of the same description as those to which the application for the order relates); but this subsection shall not preclude the making of an order requiring a person to give testimony (either orally or in writing) otherwise than on oath where this is asked for by the requesting court.
(4) An order under this section shall not require a person—(a) to state what documents relevant to the proceedings to which the application for the order relates are or have been in his possession, custody or power; or (b) to produce any documents other than particular documents specified in the order as being documents appearing to the court making the order to be, or to be likely to be, in his possession, custody or power …
3.—(1) A person shall not be compelled by virtue of an order under section 2 above to give any evidence which he could not be compelled to give—(a) in civil proceedings in the part of the United Kingdom in which the court that made the order exercises jurisdiction; or (b) subject to subsection (2) below, in civil proceedings in the country or territory in which the requesting court exercised jurisdiction …
(4) In this section references to giving evidence include references to answering any question and to producing any document … ’
I need not refer to s 4. Section 5 contains similar provisions for criminal proceedings with certain qualifications; in particular, it only applies to requests made by courts or tribunals outside the United Kingdom and only in relation to criminal proceedings which have already been instituted. Section 6 contains a power to apply the provisions of ss 1 to 3 to certain kinds of ‘international proceedings’ by Order in Council, but it has no relevance here.
Finally, one comes to the important part of the interpretation provision, s 9, on which much of the argument has turned:
‘(1) In this Act—”civil proceedings”, in relation to the requesting court, means proceedings in any civil or commercial matter … ’
It should also be mentioned that the enactments repealed by Sch 2 to the 1975 Act include the Foreign Tribunals Evidence Act 1856, the Evidence by Commission Act 1859 and the Evidence by Commission Act 1885, to which I will refer later on.
The background facts and allegations
Mr Anders Jahre was a wealthy Norwegian shipowner who died in 1982. He had no relevant connection of any kind with this country. On 14 September 1983 the Vestfold County Tax Committee in Norway, in whose area he had resided, decided by four votes to three to raise a supplementary retrospective assessment against his estate in the sum of Nkr337,999,317 for the years 1972–82 on the ground that he had failed to declare, and in effect concealed, a large part of his assets. These are alleged to include the assets of a Panamanian company, Continental Trust Co Inc (CTC), which evidently held large bank accounts, including one in a bank in Stockholm, but it is not alleged that any of the assets are or have ever been in the United Kingdom. The shares of CTC form part of the assets of a charitable foundation (the trust) formed in 1976 in an unknown location. It is alleged that Mr Jahre was the settlor or in control of the trust, directly or indirectly, and accordingly the beneficial owner of the assets of CTC. Mr Jahre was the president or treasurer of CTC from 1970 to 1978, but it is denied that he was a member of the board of directors.
Lord Kindersley is a director of Lazards, a well-known merchant bank in London, and acted as adviser to the trust since its foundation, and Lazards appear to have acted as bankers to the trust at all material times. Mr Hardman, a senior employee of Lazards,
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was appointed the assistant secretary of CTC and treasurer in 1978. He retired from the bank in 1977 and from CTC in 1984, when CTC appears to have been dissolved.
Lord Kindersley denies that Mr Jahre or his estate control or have derived any beneficial interest from the trust, but has declined to give any information about its activities or beneficiaries, because this would involve breaches of his duty of confidentiality as its banker and financial adviser. In 1984 he had a meeting with Dr Brunsvig, a Norwegian lawyer acting for the estate, but in correspondence with him, and thereafter between the solicitors, he declined to discuss these matters with Mr Haug, the Solicitor General of Norway. I should quote from three letters which Lord Kindersley wrote to Dr Brunsvig. On 31 October 1980 he wrote:
‘Dr. Roberto Aleman, Vice-President and Secretary of Continental Trust Co., a Panama corporation, has presented to me a copy of his letter to the Bank of Norway dated 23rd May 1978 [which is not in evidence] and he asked me to confirm to you the following:—(1) I have been an adviser to the Foundation referred to in that letter since its foundation. (2) It is a properly constituted and existing legal entity. (3) The following excerpt from the Trust Deed describes the purpose of the Foundation. “Such income or any part thereof shall be paid to any one or more religious, charitable or educational institution or institutions or any organisations or institutions operating for the public good (and the Trustees shall be the sole and absolute judges of whether any organisation or institution so qualifies as a beneficiary hereunder) the intention being to enable the Trustees to endeavour to act for the good or for the benefit of mankind in general or any section of mankind in particular anywhere in the world or throughout the world. In the case of any question as to the propriety of any distribution or selection by the Trustees the written approval of the advisers to the Trustees, if such exists, shall be an absolute and final determination which shall not be open to question.” (4) As stated in Dr. Aleman’s letter the advisers to the Foundation are—Lord Kindersley, Thorleif Monsen, John Worsley. (5) The Foundation is the sole owner of the shares of Continental Trust Co. which are registered in the name of the Foundation. I hope this letter will be of some help to you in the discussions which I understand are proceeding with the authorities in your country.’
On 25 April 1984, after the death of Mr Jahre, he wrote:
‘I refer to our various telephone conversations over the last weeks during which you asked me whether I would be prepared to receive a visit from you accompanied by the Solicitor-General in my capacity as an adviser to the charitable foundation which holds the shares of Continental Trust Company. The same principles of confidentiality apply here as in the banker to client relationship and I pointed out that I had given you all the information I could in my 1980 letter to you. In particular I was not, and am still not, at liberty to disclose who was the settlor of the foundation since it is obviously undesirable for the donor of substantial funds to have his identity known. In spite of your perfectly sincere promise of confidentiality he is understandably fearful of the publicity which might ensue in today’s world where the media seem to have the upper hand. Not only would the flood of requests for help become intolerable, but security risks have become a serious hazard. In my letter I did however describe the settlor to a sufficient extent to make clear that it could not be Mr Anders Jahre. You asked me on the telephone whether I could state categorically that neither Anders Jahre nor his family had benefited in any way from the charitable foundation. I have been an adviser of the foundation since it was formed in 1976 and I can assure you that no donations have been recommended or made which could in any way have benefited Mr. Jahre or his surviving family. I must respect the wishes of the settlor by continuing to refuse to take part in a discussion of the affairs of the foundation. I hope this letter will be of some help to you.’
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Finally, on 24 May 1984, after referring to a meeting between him and Mr Hardman with Dr Brunsvig, Lord Kindersley wrote:
‘Since our meeting I have been in touch with the settlor who is unwilling to take part in any meetings of this sort for reasons with which you are all too familiar.’
In this context there is also an affidavit from Mr Ian Fraser, then joint chairman and a director of Lazards, sworn in opposition to the present application. He confirmed the truth of the following extract from an affidavit sworn by a partner in Messrs Linklaters & Paines on behalf of the witnesses:
‘12. It is important that it should be appreciated that the execution of the letter rogatory herein will necessarily involve the involuntary disclosure of confidential information which has come into the posession of Lord Kindersley and Mr. Hardman purely in their capacities as officers of Lazards and of which both they and Lazards as merchant bankers are under a duty owed to Lazards’ principals, who are not party to the Norwegian legal process, not to disclose. Indeed Lazards’ principals have specifically indicated to Lazards that information of the nature sought by the letter rogatory should not be disclosed by or on behalf of Lazards.’
He went on to say that the matters deposed to in the following two paragraphs of his own affidavit are matters of concern to Lazards:
‘13. The dispute between the Estate and the Norwegian Government appears to have been very widely reported in the Scandinavian press and there has for instance been extensive reporting of the evidence given by other witnesses pursuant to the Courts of Sweden. Furthermore, the contents of letters written by Lord Kindersley to Mr. Brunsvig … also appear to have been reported and indeed extracts therefrom quoted verbatim in the Norwegian press …
14. In the circumstances it is clear not only that the execution of the letter rogatory herein will certainly lead to the dissemination of confidential information presently in the posession of Lazards and their officers to the Revenue Authorities of a foreign (albeit in this case friendly) State, but that, on the basis of previous experience in this case, it is likely to lead to the dissemination of such confidential information to the world at large.’
Mr Fraser concluded his affidavit as follows:
‘Confidentiality lies at the heart of merchant banking business in the City of London and the forced disclosure of confidential information, particularly in a case of such notoriety as the present and in particular in a case involving foreign Revenue Authorities, is likely to cause damage not only to the reputation and standing of Lazards, but also to merchant banking and the ability of merchant bankers to conduct business generally in the City of London. I would accordingly submit that it would be contrary to the public interest to order the disclosure of such confidential information on as broad a basis and in such circumstances as the present save where the necessity for such disclosure has been congently and compellingly demonstrated. The present case is not in my submission such as to warrant any such disclosure.’
The Norwegian proceedings
The tax assessment made by the Vestfold County Tax Committe is now enforceable but there are two ways in which an assessment can be discharged. The taxpayer can bring an action before the appropriate Norwegian court to have it declared null and void and he can also appeal to a body referred to as the National Tax Committee (the NTC), which forms part of the Tax Directorate of Norway. There was no evidence that the NTC is a ‘court or tribunal’ for the purposes of the 1975 Act, and indeed it appears clear from a letter of 4 November 1985 from the assistant director general of the Tax Directorate to
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Dr Brunsvig that the NTC acts in an administrative capacity similar to the Inland Revenue Commissioners in this country.
On 3 November 1983 the estate brought an action in the Sandefjord City Court, where Mr Jahre had been resident, to have the assessment set aside, and in view of the importance of the case the Solicitor General took over the defence of these proceedings. The estate did not originally appeal to the NTC, but subsequently decided to do so, and the NTC agreed to consider the appeal although it was out of time. In effect, therefore, the proceedings in the Sandefjord court and the appeal to the NTC are now both pending. If the NTC should decide to set aside the assessment, then that would of course be an end of the matter. It was at one time thought that the NTC would deal with the appeal in the autumn of last year, and therefore before the outcome of the Sandefjord proceedings will be known. However, the position is now that the NTC will not deal with the matter until some time in the future, so that it is uncertain whether the outcome of the court proceedings or the decision of the NTC will come first. But it is clearly to be inferred from the evidence before us that, if the present order stands, then the testimony of the witnesses will be made available not only to the Sandefjord court, but also to the NTC if the appeal before it is then still pending. In effect, to use the phrase of Lord Wilberforce in Westinghouse [1978] 1 All ER 434 at 444, [1978] AC 547 at 611, if the examination takes places the testimony of the witnesses will then be ‘in the public domain’.
As regards the nature of the Sandefjord proceedings, there is an affidavit from the Solicitor General which states the following:
‘4. The Norwegian legal system has 4 civil Courts: a Forliksraad (Conciliation Court); a Byrett or a Herredsrett (parallel courts of first instance); the Lagmannsrett (Court of Appeal); and the Hoeyesterett (the final Court of Appeal). Where the Government is a defendant, the plaintiff need not have recourse to the first level, the Conciliation Court. The City Court of Sandefjord is a Byrett.
5. Whilst there are specific tribunals for certain matters (for example, labour disputes), there is no separate system of Courts dealing with civil actions involving the Government. Any civil proceedings brought by or against the Government are brought within the civil system outlined in the preceding paragraph. The Action is, and has to be brought as, a normal civil action, following exactly the same procedure as any other, governed by the Civil Procedure Act of 13th August 1915 No. 6 and the Law Courts Act of 13th August 1915 No. 5. Such an Action will be heard by a normally constituted civil Court, and the same rights of appeal will exist as in any other matter.’
The letter of request also referred to the action as a ‘civil case’. It is therefore clear that the Sandefjord proceedings are civil proceedings for the purpose of the courts system and the administration of justice in Norway, but there is no evidence whether the subject matter of the proceedings would, under the law of Norway, be regarded as a ‘civil or commercial matter’ as referred to in s 9(1) of the 1975 Act and discussed below.
The request for letters rogatory
On 22 June 1984 Dr Brunsvig issued a ‘writ of process’ in the Sandefjord court stating that ‘it is of importance to have the persons examined who have direct knowledge of CTC matters’. He asked for the examination of a Mr Bonde, referred to as a director of CTC, with whom we are not concerned, and of Lord Kindersley, but he made no request in relation to Mr Hardman. The request for the examination of Lord Kindersley was made expressly pursuant to the 1970 convention on the ground that both Norway and the United Kingdom were signatories to it. Dr Brunsvig referred to the ‘declarations’ which Lord Kindersley had already made in the letters from which I have quoted and concluded as follows: ‘It is requested that he be confronted with the declarations and asked to give an explanation of the contents.’
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On 5 November 1984 the Solicitor General made a similar request to the Sandefjord court for the examination of Lord Kindersley as well as of Mr Hardman. It is this request with which the present proceedings are directly concerned. The original and the translation of the request were exhibited to an affidavit sworn by a partner in Messrs Freshfields, and formed the basis of the ex parte application before Master Prebble. In connection with this affidavit I should mention one matter in order to get it out of the way. One of the points taken before McNeill J was that the affidavit had failed to make a full disclosure of the material facts, because it made no reference to the possibility that the testimony of the witnesses would also be made available to the NTC. On the hearing of this appeal counsel appearing for the witnesses rightly abandoned this point as such and in my view there was never anything in it. The omission was no doubt regarded as irrelevant and certaintly inadvertent, and it is no longer suggested that it has any bearing on the fate of this appeal. But the fact that the testimony may well be made available to the NTC in addition to the Sandefjord court remains a matter for consideration, and I refer to it again later on in this judgment.
The letter of request, as I will call it, had attached to it so-called ‘pleadings’ dealing with the evidence (used in a purely neutral sense) which was sought from the witnesses. This was set out in Pts (paragraphs) II and III with the following request:
‘The witnesses must be confronted with the questions given in paragraph II and ordered to procure and submit original documents, or copies of them, as stated in paragraph III.’
Part II is in the following terms:
‘II
The defendant will seek information and evidence from both witnesses respecting the following matters or questions in connection with these:
1. Present and previous owner or owners, direct or indirect, of funds and shares in Continental Trust Company Inc. (“C.T.C.”).
2. Information about the trust or foundation (hereinafter “the trust”) which is stated to be the owner of all or the majority of the shares in C.T.C., who was settlor, the name of the trust, foundation, structure, object, balance sheet, names of trustees, beneficiaries and who has authority to elect (or remove) trustees and alter the trust deed.
3. Information about C.T.C.’s operations and about Anders Jahre’s dealings, direct or indirect, in these operations, also as agent or adviser, and about the administration of C.T.C.’s funds and changes in these both before and after 1976 when Lazard Brothers & Co Ltd were entrusted with the administration of C.T.C.’s funds in accordance with a resolution by C.T.C.’s board.
4. Information about the trust’s funds, including size and investments, and the administration of and alterations in these.
5. Further information with regard to which persons, companies or institutions that have exercised control both “de jure” as well as “de facto” of C.T.C.’s funds and shares and the trust’s funds and in what way and on what basis such control has been exercised.
6. Relations between Lazard Brothers & Co Ltd and the witnesses on the one hand and C.T.C., the trust and Andres Jahre, now his estate, or his companies or representatives on the other hand.
7. If C.T.C. kept accounts, where were these kept, who has kept or keeps these accounts and who has been and is principal in charge of the accounting.
8. Anders Jahre’s relations, direct or indirect, both with C.T.C and the trust and his association or relations with any part of the evidence given in connection with questions stated under II.
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The testimonies of the witnesses respecting the above will be of significance as Lord Kindersley is stated to be adviser for the trust and Mr A.J. Hardman is stated to have been Treasurer and Assistant Secretary in C.T.C.’
Although the request for documents is no longer pursued, it was contended that it remained material to demonstrate the width of the letter of request as a whole, and that it was also relevant to the scope of the oral evidence which it would be sought to elicit from the witnesses. Part III is in the following terms:
‘III
The defendant requests that the original documents, or copies of them, mentioned below be submitted:
1. The trust deed, as well as documents respecting possible amendments of the deed, and every document of significance in connection with the foundation of the trust and later statutory meeting.
2. Minutes from the trust’s meetings.
3. All accounts relating to the trust and its funds.
4. All documents in connection with or giving proof of the administration of or changes in the trust’s funds.
5. All documents in connection with or giving proof of C.T.C.’s operations or administration of, or changes in C.T.C.’s funds.
6. All correspondence exchanged between the witnesses on their own behalf or on behalf of the companies or institutions these are connected with on the one hand and Anders Jahre, his companies, or any representative on the other hand.’
The order of McNeill J
McNeill J did not accept any of the submissions on behalf of the witnesses on the issues with which I deal below, save the one headed ‘Fishing’, as it was referred to in the argument before us. In that regard he said:
‘Turning back to the pleadings to which I referred at the outset of this judgment, it is of course clear that in many respects they are seeking the disclosure and contents of documents under the guise of oral testimony, which is impermissible and falls under the same impermissibility as that which affected Pt III of the request which the learned master refused. Indeed, many of the requests not dealing with documents seem to me to have a breadth which is not permissible under this procedure. Accordingly, I have come to the conclusion that I should not strike down the letters rogatory but should make directions to bring them within what is permissible under the statute and the rule and as a matter of discretion.’
The directions which he gave ‘as to the conduct of the examination’, which are sought to be expunged by the cross-appeal, were as follows:
‘1. No question shall be asked of either witness calculated to elicit the existence or contents of any document; 2. No question shall be asked of Lord Kindersley save as to matters within his direct knowledge as adviser to the charitable foundation and he shall be entitled to decline to answer any question on the ground that the answer is not within his direct knowledge as such adviser; 3. No question shall be asked of Mr. Hardman save as to matters within his knowledge as an officer of C.T.C. and he shall be entitled to decline to answer any question on the ground that the answer is not within his knowledge as such officer.’
The issues
These can in the main be summarised under the following headings, without much elaboration at this stage.
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A. Civil proceedings: civil or commercial matter
The issue is whether the Sandefjord proceedings fall within the ambit of the 1975 Act.
B. Tax gathering
This phrase is taken from the speech of Lord Somervell in Government of India Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292 at 301, [1955] AC 491 at 514. The contention is that compliance with the letter of request would be contrary to public policy and the settled principle that our courts will not lend their assistance to the enforcement, directly or indirectly, of foreign tax liabilities. This issue arises both independently and in the context of issue A.
C. Sovereignty
The contention is that, since the Sandefjord proceedings are concerned with the estate’s assessment to tax in Norway, compliance by an English court with the letter of request is precluded by s 4 of the Protection of Trading Interests Act 1980 on the ground that the request, or compliance with it, infringes the jurisdiction of the United Kingdom or is prejudicial to its sovereignty.
D. Dual purpose
The issue concerns the intention to make the testimony of the witnesses available to the NTC, in addition to the Sandefjord court, if the estate’s appeal to the NTC will not have been determined by the NTC when the testimony is available.
E. Fishing
The contention is that the terms of the letter of request are far too wide to constitute a proper or acceptable request for evidence under the 1975 Act, irrespective of the limitations contained in the directions given by the judge.
F. Confidentiality
The heading speaks for itself: it is submitted that in all the circumstances the witnesses should not be ordered to break their duty of confidentiality by answering the questions raised by the letter of request. Issues E and F overlap to some extent and fall to be examined in combination.
G. Discretion
Apart from issues as to jurisdiction, issues relating to the proper exercise of the court’s discretion inevitably pervade the entire case, and it is convenient at this stage to summarise the issues in that regard.
It was submitted on behalf of the witnesses that, whereas issues A and C go to the jurisdiction of our courts to comply with the letter of request, issues B, D and E go both to jurisdiction and to the court’s discretion, whereas issue F clearly goes solely to discretion. In this connection a number of matters were common ground. First, even assuming that the necessary jurisdiction exists, it is ultimately a matter for the discretion of the court, to be exercised judicially whether or not the request should be granted. Second, the court also has a discretionary power to restrict the scope of the request by placing some limitation on it. This is supported by a short passage in the speech of Lord Keith in Westinghouse [1978] 1 All ER 434 at 478, [1978] AC 547 at 654 and is also inherent in s 2(1) of the 1975 Act, which provides that the court—
‘shall … have power … to make such provision for obtaining evidence … as may appear to the court to be appropriate for the purpose of giving effect to the request … ’
But the extent to which the court’s discretion should be exercised to use a ‘blue pencil’ in order to strike out parts of a request which is too wide remains in doubt, although it was referred to in many passages in the judgments and speeches in the Westinghouse case in relation to a request for the production of documents, as mentioned later on. Finally, it
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was common ground that the witnesses were entitled to apply to the court to decline to comply with the letter of request, or, on appeal, to discharge the order made ex parte against them, on the grounds that the request was, inter alia, ‘fishing, speculative or oppressive’ (see Senior v Holdsworth [1975] 2 All ER 1009 at 1016, [1976] QB 23 at 35 per Lord Denning MR and other cases cited in The Supreme Court Practice 1985 vol 1, para 38/14–19/11) and that this was also a matter for the discretion of the court.
However, there was inevitably considerable disagreement about the proper exercise of the court’s discretion in all the circumstances. Counsel representing the state and the estate respectively relied on two important factors in this connection: first, the principle of international comity, the desirability that the English courts should strive to comply with a request of a foreign court made pursuant to the 1970 convention, to which both Norway and the United Kingdom are parties. (In fact it appears that a bilateral convention concluded in London on 30 January 1931 between the United Kingdom and Norway ‘regarding legal proceedings in Civil and Commercial Matters’ (TS 35 (1931); Cmd 3931) is also still in force; its contents and effects are similar to the 1970 convention, but it was not relied on as such and requires no further mention). Second, and inevitably, they placed in the forefront of their arguments the unprecedented feature of this case that the examination of the witnesses was desired both by the state and the estate, the taxpayer. Counsel for the witnesses recognised the weight which was properly to be given to these two factors. But they submitted that they were overcome by the cumulative effect of the matters raised in relation to issues B, D, E and F. As regards the fact that the estate supported the letter of request, they pointed out that Dr Brunsvig’s request to the Sandefjord court only related to Lord Kindersley and that it was far narrower than Pt II of the ‘pleadings’ annexed to the letter of request by the state. They also pointed out that counsel for the estate in effect agreed that the only questions which he would wish to put at the examination would be designed to obtain confirmation of the statements made by Lord Kindersley in his letters, as to which he had already waived confidentiality and which had already been published in the Norwegian press.
Apart from these competing general considerations on the balancing exercise which the court has to carry out, there was also disagreement about the course which the proposed examination of the witnesses would and should properly take. This is governed by RSC Ords 39 and 70(‘Evidence by deposition: examiners of the court’ and ‘Obtaining evidence for foreign courts, etc.’). The Supreme Court Practice 1985 vol 1, para 70/1–6/22, referring to the judgment of Cockburn CJ in Desilla v Fells & Co (1879) 40 LT 423 at 423–424, shows that there is considerable latitude about the evidence which may be admitted:
‘The evidence can only be taken “in the English mode,” but that does not mean that it is to be limited to what is admissible in English courts. The foreign Court should be afforded the fullest help it is possible to give. If its rules of evidence are known, effect should be given to them; if not, any questions should be admitted which may be expected to throw light on the matters in issue … ’
However, subject to any claim for privilege under s 3(1)(b) of the 1975 Act (see Ord 70, r 6) and any special directions contained in the order, the note points out that examination must be conducted in the manner provided by the relevant provisions of Ord 39. Order 39, r 8 provides for the examination, cross-examination and re-examination of the witnesses ‘in like manner as at the trial of a cause or matter’. Rule 10 provides, inter alia, that, if a witness objects to answer any questions put to him, the ground for the objection must be set out in the deposition and that the validity of such ground must then be decided by the court and not by the examiner.
There was considerable disagreement between counsel as to how the application of these provisions would and should work out in practice in this case. Prima facie one would expect that the witnesses would be called on behalf of the estate and cross-
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examined on behalf of the state. But, when we inquired about this, all counsel were agreed that the witnesses would and should be called on behalf of the state. This is understandable, since the relevant part of the letter of request is in the following terms:
‘It appears from paragraph II of the pleadings of 24 October 1984 from the Attorney-General [sic] in Norway which questions will be put to the witnesses. In this connection reference is also made to pleadings of 22 June 1984 from plaintiff’s counsel [Mr. Brunsvig] in so far as concerns the witness Lord Kindersley [ie ‘that he be confronted with the declarations [his letters, as quoted above] and asked to give an explanation of the contents’].’
The problems which may result are obvious. Would the state be bound by the answers given, or could it cross-examine its own witnesses? Objections to many of the questions covered by Pt II of the ‘pleadings’ are obviously to be expected. Counsel for the state said that this should not deter the court from upholding the order. He pointed out that, although the judge said that he would have declined to allow the witnesses to be represented by counsel, he was informed that the state subsequently agreed to this, so that counsel would be present. However, it is to be noted that the judge expressed reservations about this and said that ‘such a course may present very serious practical difficulties for the examiner’. With respect, it seems to me that this remark in itself recognises the much more fundamental difficulties which are certain to arise in this case. Counsel for the state did not accept this. He said that the examination would be conducted in a friendly and fairly informal manner, and, although counsel for the witnesses, and the witnesses themselves, could be expected to object to many questions on the grounds of ‘fishing’ and confidentiality, these objections would be recorded and, if necessary, ruled on by the court subsequently. On the other side, counsel for the witnesses submitted that this approach was far too simplistic. It would clearly involve further, possibly prolonged, court proceedings. In these, if the present order stands, it would, inter alia, be submitted on behalf of the state that by upholding the width of the questions covered by Pt II of the ‘pleadings’ this court had already impliedly ruled on the permissible scope of the questions which had to be answered. Further, to the extent that this submission did not prevail, it would be necessary for the court to consider the questions and objections in detail. He therefore submitted that if we should conclude that the scope of Pt II of the ‘pleadings’ was too wide to be acceptable, and could not properly be cut down by ‘blue pencil’ amendments or appropriate directions, then the judge’s order should be reversed and the state and the estate should be invited to reconsider the position in the light of our judgments.
On this part of the argument I should say at once that I agree with the approach and submissions of counsel for the witnesses as I have summarised them above.
The final matter to be mentioned, on the various issues which were argued in the context of the discretion of this court, is that in the circumstances of this case it was not strongly urged on behalf of the state or the estate that this court was effectively bound by the way in which the judge had exercised his discretion, having decided that he had jurisdiction to comply with the letter of request. The importance of giving great weight to the views which he expressed in this connection requires no emphasis, and I need not refer to any of the well-known authorities in which it has been laid down that this court can only interfere if it concludes that the judge has clearly fallen into error in some relevant respect. But in the present case this conclusion was not seriously challenged in relation to the ‘directions’ given by the judge in order to cut down the scope of Pt II of the ‘pleadings’ to an acceptable extent. Thus, while contending in general that the judge’s exercise of his discretion should not be overturned, since he had considered and weighed each of the issues, in support of their cross-appeal counsel for the state and the estate were themselves highly critical of the judge’s directions on the ground that these were inappropriate and should be deleted, whereas counsel for the witnesses, while seeking to
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uphold them if all else failed, had no real answer to these criticisms. I will deal with these aspects under issue E, ‘fishing’. It was also pointed out on behalf of the witnesses that the judge may have been under the impression that the submissions under issue F directed to confidentiality involved a claim for privilege, which would clearly have been unsustainable. In all these circumstances the thrust of the arguments deployed before us concerning the court’s discretion was primarily directed to the correct solution of the overall balancing exercise which fell to be performed below and afresh on appeal to this court, and this is how I regard the position for the purposes of this judgment.
International comity
Before dealing with issues A to F seriatim, it is right to place this topic in the forefront. Its importance has been stressed in many cases involving international aspects and consequences, and the decision of the House of Lords in Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1986] 1 All ER 129, [1986] AC 368, given shortly after the conclusion of this appeal, provides the most recent illustration. The relevance of this topic in the present context is that the court should strive to give effect to the request of the foreign court unless it is driven to the clear conclusion that it cannot properly do so. In this connection it is unnecessary to say more than to quote a passage from the judgment of McNeill J:
‘The general approach of the court should be to assist the requesting court and to give effect to letters rogatory so far as is proper and practicable and to the extent permissible under English law: see per Cooke J in Seyfang v G D Searle & Co [1973] 1 All ER 290 at 293, [1973] QB 148 at 151: “Judicial and international comity requires that any request of a foreign court for evidence to be taken under the Act [ie the Foreign Tribunals Evidence Act 1856, and the same, I interpolate, applies to the 1975 Act] should be treated with sympathy and respect and complied with so far as the principles of English law permit.” See also per Lord Denning MR in Re Westinghouse Electric Corp Uranium Contract Litigation MDL Docket No 235 [1977] 3 All ER 703 at 708, [1978] AC 547 at 560: “It is our duty and our pleasure to do all we can to assist that court”, and in the same case in the House of Lords, Lord Wilberforce said sub nom Rio Tinto Zinc Corp v Westinghouse Electric Corp [1978] 1 All ER 434 at 444, [1978] AC 547 at 611: “This is that, on the whole, I am of opinion that following the spirit of the 1975 Act which is to enable judicial assistance to be given to foreign courts, the letters rogatory ought to be given effect to so far as possible … ” ’
It should be noted, however, that all counsel were agreed that there appears to be no precedent for such assistance to have been given internationally in any ‘tax gathering’ context, as referred to in issue B (I say ‘internationally’ to distinguish co-operation by different courts within one federal system, as also distinguished in Government of India, Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292, [1955] AC 491).
I turn to issues A to F.
Issue A: civil proceedings: civil or commercial matter
I have emphasised the various references in the 1975 Act to ‘civil proceedings’. This expression is used both in relation to the courts in the United Kingdom mentioned in s 1 when requests for orders for the obtaining of evidence are addressed to them (to which I will refer as ‘the court addressed’ or generally ‘the English courts’) and in relation to ‘the requesting court’: see s 1(b). Thus, in ss 2(3) and 3(1)(a) ‘civil proceedings’ has the meaning which is to be given to this expression by the court addressed in the United Kingdom. But in the context of the present issue one is primarily concerned with s 1(b): the court addressed in the United Kingdom must be satisfied—
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‘that the evidence to which the application relates is to be obtained for the purposes of civil proceedings which either have been instituted before the requesting court or whose institution before that court is contemplated.’
In that context ‘civil proceedings’ is defined in s 9(1), because it is there defined ‘in relation to the requesting court’. It follows that ‘civil proceedings’ in s 1(b) means ‘proceedings in any civil or commercial matter’.
Two further consequences follow. First, the issue whether the proceedings in the requesting court are proceedings ‘in any civil or commercial matter’ goes to the jurisdiction of the court addressed in the United Kingdom, in this case the High Court and this court on appeal from the High Court. Second, the court addressed must somehow reach a conclusion whether or not the proceedings in the requesting court are to be categorised as ‘proceedings in any civil or commercial matter’. A great deal of the argument before us revolved on the question how this is to be done. Since this phrase is used in numerous international conventions, both bilateral and multilateral, such as the 1970 convention itself, the problem is clearly of considerable international significance.
Unfortunately, the 1970 convention provides no assistance (in common with all other conventions in which this phrase is used) as to its meaning or scope, or how these are to be determined. These questions have only been determined by the Court of Justice of the European Communities in the decisions referred to below, on the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (Brussels, 27 September 1968), followed by a 1971 protocol (Luxembourg, 3 June 1971) and the Accession Convention of 1978 (Luxembourg, 9 September 1978) (EC 46 (1978); Cmnd 7395). This added Denmark, the Republic of Ireland and the United Kingdom to what is compendiously known as the European Judgments Convention. Effect has been given to this in the United Kingdom by the Civil Jurisdiction and Judgments Act 1982, in Sch 1 to which the text of the 1968 convention, as amended, is set out. But the relevant parts are not yet in force, and even if the 1982 Act provided any direct assistance, which it does not, it could not be used as a means of interpreting the 1975 Act.
How then is an English court to approach and resolve the problem of categorisation posed by s 9(1) of the 1975 Act? McNeill J said ‘it was accepted that reference to the convention could properly be of assistance in construing the statute’. This was not disputed on this appeal, and, since it was pointed out in Westinghouse that one of the purposes of the 1975 Act was to implement the convention, this must be the starting point. Where English legislation has been enacted to give effect to a convention, reference to it may, and should where necessary, be made to it to see whether it assists in the interpretation of the legislation, not only where the convention is annexed (see esp Lord Diplock in Fothergill v Monarch Airlines Ltd [1980] 2 All ER 696 at 705–707, [1981] AC 251 at 280–283), but even where it is not (see Salomon v Customs and Excise Comrs [1966] 3 All ER 871 at 874–876, [1967] 2 QB 130 at 141–145 per Lord Denning MR and Diplock LJ). In statutes giving effect to conventions, an interpretation ‘on broad principles of general acceptation’ is desirable (see Stag Line Ltd v Foscolo Mango & Co Ltd [1932] AC 328 at 350, [1931] All ER Rep 666 at 677 per Lord Macmillan). However, sometimes this may not be possible (see James Buchanan & Co Ltd v Babco Forwarding and Shipping (UK) Ltd [1977] 3 All ER 1048 esp at 1052–1053, [1978] AC 141 esp at 152–153 per Lord Wilberforce).
But, having reached the 1970 convention, this provides no assistance whatever. Where then does an English court go next in order to determine whether proceedings in a foreign court, on which a request for assistance under s 2 of the 1975 Act is based, are proceedings ‘in a civil or commercial matter’?
Four possible categorisations present themselves: (1) a generally accepted international interpretation; (2) classification under the law of the requesting court; (3) classification under the law of the court addressed; (4) a combination of (2) and (3), ie the court
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addressed would satisfy itself that the proceedings concern a civil or commercial matter under the law of the requesting court, but would only accept this categorisation for the purposes of assuming jurisdiction if it is not in conflict with any fundamental principle recognised under the laws of the court addressed.
On the evidence and submissions presented on this appeal I have ultimately reached the reluctant conclusion that (4) provides the best answer, because (1) has not been established on the material before us. But it is impossible to express the reasons shortly, since many countervailing factors require to be taken into account. I list the main ones below to which reference was made.
(i) ‘Civil or commercial matter’ is a translation of the French phrase ‘matiere civile ou commerciale’. Like all Hague conventions since 1961, the 1970 convention was concluded in English and French, and art 42 provides that both texts are equally authentic. This phrase has been used in many previous conventions, but none of them contain any definition or other clear guidance as to the meaning or scope of these words. The travaux préparatoires for the 1970 convention (which would be admissible under the decision of the House of Lords in Fothergill v Monarch Airlines Ltd) throw no light on it. Counsel for the state told us that the French phrase was first used in a Hague convention in 1896, but we do not know whether its travaux préparatoires would be of any assistance. (Throughout the hearing of this appeal I felt that, if ever there was a case where the assistance of an experienced comparative lawyer would have been welcome, this is so here.)
(ii) ‘Matière civile ou commerciale’ clearly stems from French law and appears to be a concept current in many or all civil law systems and probably others as well. ‘Matière’ indicates the nature of the litigation, the subject matter of the dispute: see Dalloz Lexique de Termes Juridiques (5th edn, 1981). The duality of ‘civil’ and ‘commercial’ points away from a classification under the common law, since we include commercial cases in ordinary civil cases. But in French law there is a distinction between ‘civil’ and ‘commercial’ which is ‘rooted in history’ (see René David English Law and French Law (1980) pp 36 ff), although not in all other civil law countries. The duality of the phrase in Hague conventions and elsewhere was clearly intended to make it clear that no distinction was to be drawn between ‘civil’ and ‘commercial’ for international purposes. In the present context the issue turns on ‘civil’.
(iii) Other passages in David, and many untranslated extracts from French treatises which were supplied to us during the hearing, show that civil law countries draw a fundamental distinction between private and public law (droit civil and droit administratif) which is only beginning to emerge in this country. It seems certain that this distinction must have been crucially present to the mind of anyone seeking to circumscribe and distinguish ‘matières civiles et commerciales’ from other, ie ‘public law’, proceedings. Relations between states and their public authorities on the one hand and private citizens or corporations on the other fall within the sphere of public law. Civil and commercial matters do not, because they are concerned with private disputes. Droit fiscal (or matière fiscale: see the extract quoted below from the speech of Lord Somervell in Government of India Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292 at 301, [1955] AC 491 at 514) is a recognised part of public law and evidently a special topic which is even separate from the generality of droit administratif. It appears incontestable that no civil law country would ever treat a disputed tax claim as part of ‘matière civile ou commerciale’. Droit fiscal is not comprised in ‘droits et obligations de caractère civil’: see the decision of the Belgian Cour de Cassation in Salvatore v Etat Belge, Ministère des Finances JT, 8 April 1976, p 444.
(iv) International assistance in revenue matters is generally given by double tax conventions, which normally provide for ‘exchange of information’ (see eg the Double Taxation Relief (Taxes on Income) (Norway) Order 1970, SI 1970/154, giving effect to the Convention (London, 22 January 1969; Cmnd 3954), art 30. As already mentioned,
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there appears to be no reported instance of an ordinary international convention, whether multi- or bilateral, for evidential judicial assistance being used for this purpose.
(v) For the purposes of the European Judgments Convention it is settled law that the expression ‘matière civile ou commerciale’ does not include disputes ‘between a public authority and a person governed by private law … if the public authority is acting in the exercise of its public authority powers’: see Netherlands v Rüffer Case 814/79 [1980] ECR 3807 at 3819 (para 8), following the earlier decisions of the Court of Justice of the European Communities there mentioned. For the purposes of that convention, even in its original form (cf para (vi)(c) below), any dispute concerning liability for taxes could clearly not be a ‘civil or commercial matter’.
(vi) But: (a) the subject matter of the European Judgments Convention is the recognition and enforcement of foreign judgments, not merely judicial assistance for the provision of evidence in foreign courts; (b) the European Court is empowered by the EEC Treaty to interpret the European Judgments Convention authoritatively. It does so in a sense which is ‘communautaire’ within the members of the EEC. There is nothing analogous for the 1970 convention or any other Hague convention, which are open to accession by any country: see eg art 39 of the 1970 convention. The preamble refers to the desirability ‘to improve mutual judicial co-operation in civil or commercial matters’, which may point away from a multilateral or generally international interpretation; (c) the 1978 Accession Convention and our 1982 Act expressly exclude ‘in particular … revenue, customs or administrative matters’ from ‘civil or commercial matters’: see art 1 of the convention as incorporated by Sch 1 to the 1982 Act. This was done to resolve any doubt about the scope of ‘civil or commercial matters’ in relation to member states which draw no clear distinction between public and private law. But (unfortunately, in my view) it was not done in the 1970 convention or the 1975 Act. In relation to this express exclusion in the 1978 Accession Convention, in Netherlands v Rüffer [1980] ECR 3807 at 3831 Mr Advocate General Warner quoted the following passage from the report on the Accession Convention by Professor Dr Peter Schlosser (OJ 1979 C59, p 82), which is an admissible aid to its interpretation by virtue of s 3(1) of the 1982 Act:
‘The distinction between civil and commercial matters on the one hand and matters of public law on the other is well recognized in the legal systems of the original Member States and is, in spite of some important differences, on the whole arrived at on the basis of similar criteria … In the United Kingdom and Ireland the distinction commonly made in the original EEC States between private law and public law is hardly known. This meant that the problems of adjustment could not be solved simply by a reference to these classifications … ’
It may well be significant that Professor Schlosser makes no reference to the third acceding state, Denmark, in this connection, whose legal system and jurisprudence may well be similar to that of Norway. But, apart from the extracts from the affidavit of the Norwegian Solicitor General which I have set out, we have no evidence of Norwegian law. All we know is that the action in Sandefjord is ‘a normal civil action’. We do not know whether the substance of the dispute would be regarded as a ‘civil or commercial matter’ under the law of Norway or whether Norway recognises a clear distinction between public and private law. I suspect that it does, but unfortunately there is no evidence about it.
(vii) In English law the phrase ‘civil or commercial matter’ is first to be found in the Foreign Tribunals Evidence Act 1856, the predecessor of the 1975 Act, which was repealed by it. It appears to have been inspired by the Treaty of Paris, with many protocols governing international relations and co-operation, concluded earlier in 1856; and the treaty, its protocols and the 1856 Act are comprised in the state papers for that year. But despite suggestions from the court and the industry of counsel, including a search for ‘Notes on Clauses’ by the parliamentary draftsman, no further light was shed
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on the reasons for the adoption of these words in an English statute. However, s 2 of the 1856 Act is of interest, since it clearly points away from a purely common law categorisation. This was in the following terms, which find no counterpart in the 1975 Act:
‘Certificate of Ambassador, &c. sufficient Evidence in support of Application. A Certificate under the Hand of the Ambassador, Minister, or other Diplomatic Agent of any Foreign Power, received as such by Her Majesty, or in case there be no such Diplomatic Agent, then of the Consul General or Consul of any such Foreign Power at London, received and admitted as such by Her Majesty, that any Matter in relation to which an Application is made under this Act is a Civil or Commercial Matter pending before a Court or Tribunal in the Country of which he is the Diplomatic Agent or Consul having Jurisdiction in the Matter so pending, and that such Court or Tribunal is desirous of obtaining the Testimony of the Witness or Witnesses to whom the Application relates, shall be Evidence of the Matters so certified; but where no such Certificate is produced other Evidence to that Effect shall be admissible.’
Per contra, the Evidence by Commission Acts 1859 and 1885, which were also repealed by the 1975 Act, do not contain the phrase ‘civil or commercial matter’, presumably because they were designed to operate within Her Majesty’s dominions, with powers of extension to other (also mainly common law) territories over which Britain exercised jurisdiction. The former Act applied to ‘any action, suit or proceedings’ and the latter, with differing effect, to any ‘civil proceeding’ and ‘any criminal proceeding’. This distinction is also adopted in the definition of ‘judgment or order’ in s 11(1) of the Foreign Judgments (Reciprocal Enforcement) Act 1933, and in this context, as in the 1978 Accession Convention and the 1982 Act, judgments on tax liabilities are expressly excluded by s 1(2)(b) of the 1933 Act.
(viii) In the 1975 Act, the 1970 convention is not mentioned at all. The Act clearly applies to requests for evidential assistance issued by or on behalf of a court or tribunal in any foreign country, whether or not it has adhered to the 1970 convention. Since the words ‘civil or commercial matter’ are wholly unqualified, a wide interpretation was presumably intended, although in my view one which was clearly designed to exclude ‘public law’ disputes.
(ix) As Professor Schlosser indicated in his report, the common law does not, or at any rate not yet, recognise any clear distinction between public and private law. But the division is beginning to be recognised: see Town Investments Ltd v Dept of the Environment [1977] 1 All ER 813, [1978] AC 359, A-G of New Zealand v Ortiz [1982] 3 All ER 432 at 456–460, [1984] AC 1 at 20–24 per Lord Denning MR (decided on a different point in the House of Lords (see [1983] 2 All ER 93, [1984] AC 1)) and O’Reilly v Mackman [1982] 3 All ER 680 at 692, [1983] 2 AC 237 at 255 per Lord Denning MR (CA), [1982] 3 All ER 1124 at 1128, [1983] 2 AC 237 at 277 per Lord Diplock (HL). Nevertheless, I feel bound to conclude that the interpretation of the 1975 Act cannot properly be based on it. Thus, the Act applies between the courts of the different parts of the United Kingdom, as it does in relation to all foreign countries. But it appears inconceivable that in 1975 Parliament could have intended that inter-UK requests for evidence in civil proceedings should be based on a categorisation by reference to public and private law. Or, more realistically, the draftsman of the Act may unfortunately have failed to appreciate that while this distinction certainly underlay the 1970 convention in using this well-known phrase, it could not conveniently also be fitted into an inter-UK arrangement, at any rate without further definition or explanation. However, we must take the Act as we find it.
(x) On the evidence before us the action instituted by the estate in the Sandefjord court is clearly a civil proceeding, in the sense that it is an action proceeding in the hierarchy of the ordinary civil courts of Norway. A similar process in this country to
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discharge an assessment to tax (before the General or Special Commissioners with an appeal to the High Court, or an application for judicial review before the Divisional Court) would equally be a civil proceeding. McNeill J said:
‘English law does not recognise any “middle ground” between civil and criminal proceedings: both public and private law matters may be civil matters and dealt with in civil proceedings.’
There is no answer to this, except that the concept of ‘civil proceedings’ may not be synonymous with ‘civil or commercial matter’, let alone ‘matière civile ou commerciale’.
In all the circumstances, however, contrary to my first, and what would have been my preferred, conclusion, I find it impossible, on the material before us, to give to ‘civil or commercial matter’ in s 9(1) of the 1975 Act any interpretation which can be seen as being broadly acceptable internationally as well as within the three law districts of the United Kingdom. The approach of the Court of Justice of the European Communities in Netherlands v Rüffer [1980] ECR 3807 would in my view undoubtedly provide the best answer, but on the material before us it has not been established in the present context. It is also always important to bear in mind the observation of Lord Wilberforce in James Buchanan & Co Ltd v Babco Forwarding and Shipping (UK) Ltd [1977] 3 All ER 1048 at 1053, [1978] AC 141 at 153 dealing with the Convention on the Contract for the International Carriage of Goods by Road (CMR) (Geneva, 19 May 1956; TS 90 (1967); Cmnd 3455):
‘To base our interpretation of this Convention on some assumed, and unproved, interpretation which other courts are to be supposed likely to adopt is speculative as well as masochistic.’
It follows that I feel constrained to reject category (1). I would also reject each of categories (2) and (3), classifying the proceedings exclusively by reference, respectively, to the law of the requesting court or of the court addressed. There seems no warrant for the latter to the exclusion of the former. The starting point must surely be the law of the requesting court. If it acts in accordance with principles of international comity, it should refrain from making any request under the 1970 convention or the 1975 Act unless the proceedings before it are ‘proceedings in a civil or commercial matter’ by its own law. But I do not think that the court addressed can be wholly bound by the classification put forward by any requesting court. By s 1 of the 1975 Act the court addressed must be ‘satisfied’ that the request falls within s 9(1). It is therefore open to it to examine the nature of the proceedings in the requesting court. Accordingly, even if it concludes that the requirements of the classification have been met under the law of the requesting court, I do not think that the court addressed is bound in all cases. If, for instance, proceedings which would clearly be regarded as criminal or penal proceedings by the law of the court addressed are nevertheless characterised as proceedings in a civil matter by the requesting court, then it must be open to the court addressed to decline to accede to the request, if not on jurisdictional grounds, then at least as a matter of discretion. Of the four suggested categories I therefore conclude that (4) is the most acceptable.
Where does that leave the present case? If the substance of a dispute is clearly a matter of public law in the jurisprudence of the requesting court, then I would not accept that it can properly be regarded as ‘matière civile ou commerciale’ for the purposes of the 1970 convention or any legislation based on it. But although I regard the evidence on Norwegian law as insufficiently searching, particularly on the characterisation of the substance of these proceedings by reference to the distinction between public and private law which may well be recognised in Norway as in civil law countries, I do not feel able to conclude on the evidence that the Sandefjord action cannot be regarded as a proceeding in a civil matter by the law of Norway.
Counsel for the state offered to produce a further affidavit on this point, but we declined it at this late stage. However, since the Norwegian court was evidently satisfied that the request was a proper one under its own law, and the evidence of the Solicitor
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General supports it, I would reluctantly give it the benefit of the doubt, which I nevertheless retain. In any event, in view of my conclusions on issues E and F, in this judgment the matter becomes academic. I would only add that if a similar issue should arise in the future, I hope that our courts will be provided with more satisfactory evidence in the light of the considerations to which I have referred.
So far as concerns the second ingredient of category (4), the characterisation of the Sandefjord action by English law, it is clearly a civil proceeding. Accordingly, although only with considerable doubt, I would dismiss the appeal on issue A.
Issue B: tax gathering
Since the absence of jurisdiction under s 9(1) of the 1975 Act has not been established, this issue turns on questions of public policy. One could easily write at similar length about this topic, but in the circumstances of this case I can deal with it more shortly. The witnesses rely on the general principle stated in Dicey and Morris The Conflict of Laws (10th edn, 1980) vol 1, pp 89–90:
‘English courts have no jurisdiction to entertain an action: (1) for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign state … ’
This is certainly a principle of general international acceptation: see Government of India, Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292 at 295, 301, [1955] AC 491 at 505, 514 per Viscount Simonds and Lord Somervell, the decision of the Irish courts in Peter Buchanan Ltd and Macharg v McVey (1951) [1955] AC 516n, the decision of the Supreme Court of Canada in US v Harden (1963) 41 DLR (2d) 721, the South African decision in Comr of Taxes Federation of Rhodesia v McFarland 1965(1) SA 470, the Australian decision in Ayres v Evans (1981) 39 ALR 129 and the jurisprudence of the United States.
The passage from the speech of Lord Somervell, on which the appellants relied in particular, especially the second paragraph, is as follows ([1955] 1 All ER 292 at 301–302, [1955] AC 491 at 514):
‘There is no decision binding on your Lordships’ House and the matter, therefore, falls to be considered in principle. If one state could collect its taxes through the courts of another, it would have arisen through what is described, vaguely perhaps, as comity or the general practice of nations inter se. The appellant was, therefore, in a difficulty from the outset in that, after considerable research, no case of any country could be found in which taxes due to state A had been enforced in the courts of state B. Apart from the comparatively recently English, Scottish and Irish cases, there is no authority. There are, however, many propositions for which no express authority can be found because they have been regarded as self-evident to all concerned. There must have been many potential defendants.
Tax gathering is an administrative act, though, in settling the quantum, as well as in the final act of collection, judicial process may be involved. Our courts will apply foreign law if it is the proper law of a contract, the subject of a suit. Tax gathering is not a matter of contract, but of authority and administration as between the state and those within its jurisdiction. If one considers the initial stages of the process, which may, as the records of your Lordships’ House show, be intricate and prolonged, it would be remarkable comity if state B allowed the time of its courts to be expended in assisting in this regard the tax gatherers of state A. Once a judgment has been obtained and it is a question only of its enforcement, the factor of time and expense will normally have disappeared. The principle remains. The claim is one for a tax.
That fact, I think, itself justifies what has been clearly the practice of states. They have not in the past thought it appropriate to seek to use legal process abroad against
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debtor taxpayers. They assumed, rightly, that the courts would object to being so used. The position in the United States of America has been referred to, and I agree that the position as between member states of a federation wherever the reserve of sovereignty may be, does not help.
The following passage from PILLET’S TRAITÉ DE DROIT INTERNATIONAL PRIVÉ (1924, para 674) confirms the negative result of counsel’s researches in respect of French law. “Les jugements rendus en matière criminelle ne sont pas les sculs qui soient soumis à la loi de la territorialité absolue. Les jugements rendus en matière fiscale ne sont eux non plus susceptibles d’aucune exécution à l’étranger, et l’on n’a même jamais songé à la possibilité de faire exécuter sur le territoire de l’un d’eux une sentence relative aux droits fiscaux de l’état qui aurait été rendue sur le territoire d’un autre.”
The appellant is asking the English courts to do what the courts of no other country have done. In some fields this might commend the argument, but here, for the reason which I stated at the outset, it is fatal.’
The extract from the French textbook which Viscount Simonds described as ‘of high authority’ (see [1955] 1 All ER 292 at 296, [1955] AC 491 at 506) is also of interest since it refers specifically to ‘matiéere fiscale’, as discussed above under issue A in contrast to ‘matiére civile ou commerciale’.
However, it is clearly open to argument whether a request for evidential assistance pursuant to s 2 of the 1975 Act relating to proceedings in a foreign court concerning a foreign resident’s tax liability is properly describable as an action for the enforcement, directly or indirectly, of a revenue law of a foreign state. The recent decision of the House of Lords in Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1986] 1 All ER 129, [1986] AC 368 suggests that the principle stated in Dicey and Morris is to be construed narrowly. It is also important to note that by s 5 of the 1975 Act evidence may be obtained, albeit to a more limited extent, in relation to criminal, ie penal, proceedings in foreign countries. Accordingly, despite the references to the various stages of the process of ‘tax gathering’ which Lord Somervell mentioned, it must be doubtful whether the English courts would be wholly debarred from considering a request such as the present as a matter of public policy. Nevertheless, if this issue had arisen in the present case in a different form, ie if a foreign state had sought to enlist the assistance of the English courts in order to obtain evidence against one of its taxpayers in opposition to the taxpayer, then I would have regarded such a request as part of the foreign ‘tax gathering’ process to which the English courts should not lend their assistance as a matter of public policy, in keeping with principles which are internationally accepted.
Although this issue is again academic on the basis of my conclusions on issues E and F, and partly covered by matters already referred to, it is of sufficient importance to warrant some additional comments. As already mentioned, despite counsel’s researches they were unable to point to any decision anywhere, or to any published material, suggesting that the 1970 convention, or any of the many similar bilateral conventions, had been intended by the participants at the various Hague conventions conferences on private international law to be applicable to requests for evidence in aid of fiscal proceedings within the expression ‘civil or commercial matters’. A request for international evidential assistance by a state against one of its own taxpayers appears to be wholly unprecedented. Many of the factors mentioned above under issue A point in the opposite direction and suggest that this would be contrary to comity and the practice of states. Assistance in fiscal matters is dealt with in special bilateral treaties. Requests for the examination of witnesses and the production of documents in relation to such matters are likely to involve unwilling breaches of confidence on the part of witnesses and the investigation of the private affairs of persons alleged to be liable for tax in other countries. No such order has been made in any of the cases referred to below under issue F. The elicitation of evidence
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in support of an allegation of fiscal liability involves the consideration of foreign revenue laws and therefore their indirect enforcement. The admissibility of such a request on behalf of a foreign state or revenue authority against the wishes of the person concerned would certainly not command ‘general acceptation’ (to quote the expression of Lord Macmillan in Stag Line Ltd v Foscolo Mango & Co Ltd [1932] AC 328 at 350, [1931] All ER Rep 666 at 677, repeated by Lord Wilberforce in the Babco case [1977] 3 All ER 1048 at 1052, [1978] AC 141 at 152) and would probably be rejected out of hand by the courts of most countries. Wide powers to compel the disclosure of information relevant to tax investigations are at the disposal of the Commissioners of Inland Revenue in this country: see the Taxes Management Act 1970, ss 13, 17, 23, 24, 26 and 28 and the Finance Act 1976, ss 23(3) and (4) and 20A and Sch 6. No doubt similar powers exist in most other countries. But they appear never to have been applied internationally indirectly, at the request of a foreign state, as part of the ordinary processes of the civil courts, but only as the result of inter-governmental agreement, particularly in connection with criminal offences going beyond alleged evasion of taxes.
Accordingly, if the request in the present case had been made in opposition to the estate, I feel no doubt that I should have concluded that it should be refused, whether as a matter of public policy or of discretion. However, the factual position and the submissions on this appeal would then have been entirely different. As it is, the estate supports the request and indeed initiated it originally, albeit on a far narrower basis. This is the unprecedented feature of this case which may well remain unique for a long time. It seems to me that it removes all the objections mentioned above. If the necessary jurisdiction exists under the 1975 Act, then it cannot be contrary to comity or public policy to accede to an exceptional request which is in effect being made jointly by the state and the taxpayer.
Accordingly, on the special facts of this case, I would dismiss the appeal on issue B as well.
Issue C: sovereignty
Section 4 of the Protection of Trading Interests Act 1980 is in the following terms:
‘A court in the United Kingdom shall not make an order under section 2 of the Evidence (Proceedings in Other Jurisdictions) Act 1975 for giving effect to a request issued by or on behalf of a court or tribunal of an overseas country if it is shown that the request infringes the jurisdiction of the United Kingdom or is otherwise prejudicial to the sovereignty of the United Kingdom; and a certificate signed by or on behalf of the Secretary of State to the effect that it infringes that jurisdiction or is so prejudicial shall be conclusive evidence of that fact.’
The witnesses submitted that the request, or compliance with it, would infringe the jurisdiction of the United Kingdom or be prejudicial to its sovereignty. They pointed out, as McNeill J accepted, that a certificate from the Secretary of State was not an essential prerequisite to this submission. It was based on the fact that the rationalisation of the principle against the enforcement of foreign tax liabilities was considered to be founded on an infringement of sovereignty in some of the authorities referred to under issue B above. It was also submitted that s 4 echoed the views expressed in Rio Tinto Zinc Corp v Westinghouse Electric Corp [1978] 1 All ER 434 at 447, 460, 466–467, 475, [1978] AC 547 at 615–616, 631, 640, 650–651 per Lord Wilberforce, Viscount Dilhorne, Lord Diplock and Lord Fraser. But the circumstances to which these passages related were wholly different, since the evidence was sought for purposes which could have subjected English corporations to criminal liability in the United States. We all considered that this submission was almost unarguable in the context of the present request, and we did not call on counsel for the state or the estate to deal with it. Accordingly, the appeal on this issue must equally fail.
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Issue D: dual purpose
It was submitted, both on jurisdiction and discretion, that compliance with the letter of request should be refused because it is intended that the evidence of the witnesses should be made available to the NTC as well as to the Sandefjord court if the matter is then still pending before the NTC. I have already dealt with the facts in that connection and proceed on the basis that it has not been shown that the NTC is a ‘court or tribunal’ for the purposes of s 1(a) of the 1975 Act. Nevertheless, I would reject this submission in the circumstances of this case which, in this context also, are quite different from those in the Westinghouse case. The primary purpose of the request by the Sandefjord court is clearly to assist its determination of the action before it. This complies with s 1(a) and is in my view sufficient to deal with the submission based on absence of jurisdiction. There remains discretion. Here again the wishes of the estate and the state coincide. Again I cannot find anything to the contrary in the speeches in Westinghouse [1978] 1 All ER 434 esp at 444, 450–451, 460, 462, 475–476, [1978] AC 547 esp at 611, 619–620, 631, 634, 651 per Lord Wilberforce, Viscount Dilhorne, Lord Diplock and Lord Fraser. As I read these passages, once it is shown that the primary purpose of the request is bona fide to use the evidence for civil proceedings before a court or tribunal, and not also for some ulterior purpose involving criminal proceedings, let alone a purpose which would infringe the sovereignty of the United Kingdom, the court has a discretion to comply with the request. On this issue I would again give the greatest weight to the common wish of the estate and the state, also bearing in mind that the possible use of the evidence by the NTC cannot by itself conflict with any objection raised in order to protect the witnesses from breaches of confidentiality, since their evidence will by then clearly be in the public domain in any event.
Issue E: fishing
This issue, together with issue F, in my view raises far greater problems. The Solicitor General stated:
‘Although Freshfields have attempted to explain to me the distinction between a request for evidence which amounts to a “fishing expedition” and one which does not, I confess to having had some difficulty in grasping the concept.’
This is readily understandable: although ‘fishing’ has become a term of art for the purposes of many of our procedural rules dealing with applications for particulars of pleadings, interrogatories and discovery, illustrations of the concept are more easily recognised than defined. It arises in cases where what is sought is not evidence as such, but information which may lead to a line of inquiry which would disclose evidence. It is the search for material in the hope of being able to raise allegations of fact, as opposed to the elicitation of evidence to support allegations of fact which have been raised bona fide with adequate particularisation. In the present context, ‘fishing’ may occur in two ways. First, the ‘evidence’ may be sought for a preliminary purpose, such as the process of pre-trial discovery in the United States. The fact that this is clearly impermissible for the purposes of the 1975 Act is established in the Westinghouse case and was equally so held by this court in relation to the 1856 Act in Radio Corp of America v Rauland Corp [1956] 1 All ER 549, [1956] 1 QB 618. This is irrelevant in the present context, since the ‘evidence’ is required for the trial itself. But ‘fishing’ is in my view also relevant in another sense in the present context, as the judge rightly indicated. It is perhaps best described as a roving inquiry, by means of the examination and cross-examination of witnesses, which is not designed to establish by means of their evidence allegations of fact which have been raised bona fide with adequate particulars, but to obtain information which may lead to obtaining evidence in general support of a party’s case.
In the Radio Corp case the court was concerned with the word ‘testimony’ in the 1856 Act, whose equivalent is now ‘evidence’ in the 1975 Act. In a passage from the leading
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judgment given by Devlin J, which is quoted by Lord Fraser in the Westinghouse case [1978] 1 All ER 434 at 468, [1978] AC 547 at 642, he said, and I have put in square brackets the words which do not apply here ([1956] 1 All ER 549 at 552, [1956] 1 QB 618 at 646):
‘Testimony, if it can be called “testimony”, which is mere answers to questions [on the discovery proceeding] designed to lead to a train of inquiry, is not permissible.’
I will give one example which may be relevant to the present case. The state evidently alleges that Mr Jahre was the settlor and ultimate beneficiary of the trust. Or it may have alleged (we have not considered the material underlying the Sandefjord action) that X was the settlor and beneficiary and that he in fact administered the trust and used its assets for the benefit of Mr Jahre. Under our rules, and presumably equally in Norway, such allegations cannot be based on bare assertions, but would have to be adequately particularised by any facts relied on in support of them. In that event, any questions to witnesses designed to elicit answers showing whether or not either of these allegations were true would be requests for ‘evidence’. But if these questions were unproductive the further question ‘Who, then, was it?’ would in my view be ‘fishing’.
The scope of the present request is so wide that I am left in no doubt that it goes far beyond the elicitation of ‘evidence’ and contains a great deal of impermissible ‘fishing’. I am leaving out of account the request for documents in Pt III of the ‘pleadings’ annexed to the request, although it is clear, as the judge recognised in the passage already cited, that Pt II is designed to cover much the same ground. In an affidavit by the Solicitor General he described the scope of Pt II as follows:
‘The questions which it is sought to put to Lord Kindersley and Mr. Hardman are directed to ascertain the identities of those who owned or controlled CTC and the Foundation at the material times; to whether Anders Jahre had any dealings with either of them; to the extent and nature of assets held by CTC and the Foundation; and to the nature and location of the accounts and other records kept in relation to their activities.’
This really speaks for itself and is a perfectly fair summary of the effect of Pt II. Indeed, I do not think that I need go through it in detail to emphasise the width of the scope of the proposed examination; it also speaks for itself. In particular, it should perhaps be pointed out that it has never been alleged that Mr Jahre was more than the beneficial owner of the assets of CTC itself, whereas the scope of the questions comprises the assets and operations of the trust as a whole, which may of course well go beyond any connection with CTC.
McNeill J was clearly of the same opinion, and I have already quoted what he said. It then remains to consider whether the directions which he gave, or any other limitation of the scope of Pt II, would be appropriate to remedy the position. As I have already mentioned, in support of the cross-appeal counsel for the state and the estate submitted that the judge’s directions ‘to bring them [the letters rogatory] within what is permissible under the statute and the rules and as a matter of discretion’ were inappropriate, and counsel for the witnesses had no real answer to these submissions. Direction 1 appears, with respect, to have been based on a misunderstanding of s 2(4)(a) of the 1975 Act. This was virtually common ground and requires no elaboration. Direction 2 seeks to distinguish between Lord Kindersley’s ‘direct’ and other knowledge as adviser to the trust. But how would this work? Inevitably, one supposes, most of his knowledge must have been derived indirectly from what he was told by the persons from whom he received his instructions or from documents submitted to him. As regards direction 3, how is Mr Hardman to distinguish between knowledge which he acquired as an officer of CTC and knowledge which he obtained as an employee of Lazards, possibly in the
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course of assisting Lord Kindersley? I hope that I am not being discourteous to the judge in these criticisms of his directions. He had no assistance from counsel in regard to them; we were told that they had not been given on the basis of any submissions put forward in the course of the hearing, but that it was simply left to the judge to consider whether any limitations should be imposed on the scope of Pt II. The argument before him was effectively confined to the question whether Pt II in its present form amounted to ‘fishing’ or not, and he clearly concluded that it did.
If the directions are not appropriate, there remains the question whether there should be some other limitation. The only alternative offered on behalf of the state and the estate was the deletion of the words ‘information and’ in the opening paragraph of Pt II and the omission of ‘information’, or its substitution by ‘evidence’, wherever this occurs in the numbered paragraphs which follow. But this would provide no alteration of substance whatever. We were also referred to the passages in the speeches in the Westinghouse case which deal with the possibility of cutting down an excessive request, in that case for documents, by ‘blue pencilling’. This is obviously an easier thing to do in relation to the production of particular documents or classes of documents than in relation to the ambit of oral questions, and even in relation to documents it appears to have been the view of the House of Lords that this court had gone too far in editing the request (see [1978] 1 All ER 434 at 443–444, 452–454, 454–455, 463, 470–471, 476–477, [1978] AC 547 at 610–612, 621–625, 625–626, 635–636, 644–645, 652–654 per Lord Wilberforce, Viscount Dilhorne, Lord Diplock, Lord Fraser and Lord Keith). These passages undoubtedly show that the court should strive to give effect to letters of request, if necessary by amendments which may even be substantial, at any rate in relation to the production of documents. But they are no authority, as I see it, for the proposition that the court should, in effect, redraft a request in different terms. In the present case I would not know how to set about doing this, even if it were permissible, and, apart from the suggestion concerning the word ‘information’ which I have already mentioned, none of the parties felt able to make any submissions in this connection or to accept tentative suggestions offered by the court.
I have accordingly reached the conclusion, ultimately without any hesitation, that this request is far too wide, that the court is in no position to bring it into conformity with what would be permissible and, as already mentioned under issue G, ie discretion, that the state and the estate should be invited to reconsider the position in the light of this judgment if they wish to pursue their request via the Sandefjord court. In this connection I have also taken into account the other matters to which I have referred under issue G, discretion.
Accordingly, I would allow this appeal on these grounds.
Issue F: confidentiality
Taken in conjunction with all the other matters already discussed, I would allow this appeal on this ground as well. I do not think that any of the authorities cited to us are of direct assistance for present purposes. These included Tournier v National Provincial and Union Bank of England Ltd [1924] 1 KB 461, [1923] All ER Rep 550, Bankers Trust Co v Shapira [1980] 3 All ER 353, [1980] 1 WLR 1274, R v Grossman (1981) 73 Cr App R 302, X AG v A bank [1983] 2 All ER 464, an unreported decision of the Court of Appeal of Hong Kong in FDC Co Ltd v Chase Manhattan Bank (29 October 1984, unreported) and Bonalumi v Secretary of State for the Home Dept [1985] 1 All ER 797, [1985] QB 675.
In Tournier v National Provincial and Union Bank of England Ltd [1924] 1 KB 461 at 473, [1924] All ER Rep 550 at 554 Bankes LJ said that a banker’s obligation not to reveal his customer’s business affairs is subject to four exceptions: (a) where disclosure is under compulsion by law; (b) where there is a duty to the public to disclose; (c) where the interests of the bank require disclosure; (d) where the disclosure is made by the express or implied consent of the customer. Atkin LJ said ([1924] 1 KB 461 at 486, [1924] All ER Rep 550 at 561):
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‘But I think it safe to say that the obligation not to disclose information such as I have mentioned is subject to the qualification that the bank have the right to disclose such information when, and to the extent to which it is reasonably necessary for the protection of the bank’s interests, either as against their customer … or for protecting the bank, or persons interested, or the public, against fraud or crime.’
Exception (a) in the judgment of Bankes LJ merely begs the question in the present context whether or not, in the discretion of the court in all the circumstances, the witnesses should be compelled to submit themselves for examination etc pursuant to RSC Ord 39, r 8. So far as concerns exception (d), I do not think that the estate’s joinder in the letter of request gives rise to any express or implied consent by or on behalf of Lazard’s customers. Lord Kindersley is one of the advisers of the trust and of the settlor, to whom he referred in his letters of 25 April and 24 May 1984, after Mr Jahre’s death. Mr Hardman was an officer of CTC. Lazards were or are bankers of the trust and evidently of CTC. It has not been alleged that any of them ever acted for Mr Jahre. Indeed, the estate contends the contrary and is asserting that Mr Jahre had no connection with the trust. The estate’s support for the letter of request can therefore be no relevant consent to the disclosure by the witnesses of the affairs of the trust and CTC, contrary to the duty of confidence which the witnesses owe them. The Solicitor General has recognised throughout, very fairly, that an order complying with the letter of request would compel the witnesses to break the duty of confidence to which they are subject. Finally on this aspect, as regards exception (b), I do not think that any duty of disclosure ‘to the public’ arises in this case, or, in the words of Atkin LJ, the protection of the public ‘against fraud or crime’. The alleged evasion of foreign tax liabilities by a foreigner was obviously not in the mind of the court at all. Nor do I think that one gets much help from the other authorities. All of them recognise the importance of the duty of confidentiality of bankers and the fact that the courts should only intervene to compel disclosure in exceptional circumstances. Bankers Trust Co v Shapira [1980] 3 All ER 353, [1980] 1 WLR 1274 was a case of obviously forged cheques for $1m. In ordering disclosure in support of attempts by the defrauded plaintiffs to trace the proceeds Lord Denning MR said ([1980] 3 All ER 353 at 357–358, [1980] 1 WLR 1274 at 1282):
‘This new jurisdiction must, of course, be carefully exercised. It is a strong thing to order a bank to disclose the state of its customer’s account and the documents and correspondence relating to it. It should only be done when there is a good ground for thinking the money in the bank is the plaintiff’s money, as for instance when the customer has got the money by fraud, or other wrongdoing, and paid it into his account at the bank. The plaintiff, who has been defrauded, has a right in equity to follow the money … So the court, in order to give effect to equity, will be prepared in a proper case to make an order on the bank for their discovery.’
Bonalumi v Secretary of State for the Home Dept was also a case involving a criminal offence. The remaining authorities were all concerned with situations in which the courts in one jurisdiction had exercised, or were asked to exercise (in R v Grossman in relation to a bank in the Isle of Man), what is nowadays commonly referred to as a ‘long-arm’ jurisdiction beyond their own frontiers. The fact that the objections of the banks were upheld in all these cases is therefore not a circumstance which is of any direct assistance to Lazards in the present case, which depends on its own circumstances. As Lord Wilberforce said in British Steel Corp v Granada Television Ltd [1981] 1 All ER 417 at 455, [1981] AC 1096 at 1168:
‘Third, as to information obtained in confidence, and the legal duty, which may arise, to disclose it to a court of justice, the position is clear. Courts have an inherent wish to respect this confidence, whether it arises between doctor and patient, priest and penitent, banker and customer, between persons giving testimonials to employees, or in other relationships. A relationship of confidence between a
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journalist and his source is in no different category; nothing in this case involves or will involve any principle that such confidence is not something to be respected. But in all these cases the court may have to decide, in particular circumstances, that the interest in preserving this confidence is outweighed by other interests to which the law attaches importance. The only question in this appeal is whether the present is such a case.’
The court must carry out a balancing exercise. In the scales on one side must be placed the desirable policy of assisting a foreign court, in this case supported by both parties to the litigation before it. On the other side there is the opposing principle that the court will give great weight to the desirability of upholding the duty of confidence in relationships in which, as here, it is clearly entitled to recognition and respect. Which way the balance then tilts depends on the weight which is properly to be given to all the other circumstances of the case. In my view it is open to this court to carry out this balancing exercise afresh for the reasons already given, in particular because I do not think that the judge’s way of dealing with issue E, ie fishing, can be supported. On this basis I have come to the clear conclusion that the balance is against compelling the witnesses to violate their duty of confidence.
The factors which have cumulatively led me to this conclusion can be summarised as follows, in the order in which they arise under the issues discussed above, without seeking to arrange them in any order of importance.
(i) The subject matter of the letter of request clearly appears to be unprecedented internationally and is almost certainly contrary to the spirit of what the various national delegations who drafted the 1970 convention intended to be covered by a ‘civil or commercial matter’. It lies in the field of ‘tax gathering’ even if it does not constitute an attempt at indirect enforcement of foreign tax liabilities, and it is unlikely that many other countries, if any, would comply with a request for evidential assistance in this field. Indeed, I should be surprised if our revenue authorities would seek to invoke the 1970 or any of the similar bilateral conventions for a similar purpose. The fact that both parties to the litigation exceptionally support the request is irrelevant, since neither is in a position of clients of Lazards whose consent would be relevant (issues A and B).
(ii) The extent to which the witnesses from Lazards would be compelled to disclose banking confidences is very wide indeed. The request is in the nature of a roving investigation which may affect the private financial affairs of unknown persons who were and are entitled to expect that a highly reputable merchant bank in London, whom they entrusted with their affairs, would never be compelled to disclose these by an English court except in circumstances of allegations of fraud or crime on their part, which do not arise. No way has been suggested whereby this consequence can be avoided by means of some more limited investigation, and an attempt to carry it out fairly, under the procedural rules which would be applicable to it, is certain to give rise to further, more specific, problems in the course of the examination of the witnesses and almost certainly to further recourse to the courts (issues D and G).
(iii) There is considerable substance, in all these circumstances, in the matters raised by the affidavit of Mr Ian Fraser on behalf of Lazards and for the protection of banking institutions in the City generally. Confidence in their ability to receive and maintain confidential information, which their clients give to them in confidence, is a crucial part of their stock-in-trade and reputation. This veil of confidentiality should certainly be pierced in cases of bona fide allegations of crime and fraud. But for it to be seen to be pierced in the present context would do great damage, which is not justified by the circumstances.
(iv) Viewed internationally, it should perhaps be noted that since the hearing of this appeal the Court of Justice of the European Communities has recognised a banker’s right to rely on his duty of confidentiality in the face of a request for him to give evidence, albeit in a different context: see Hillegom Municipality v Hillenius Case 110/84 [1985] ECR
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3947. There is no indication that, if the English courts were to order an English bank to break its duty of confidentiality merely in order to assist a foreign government to establish or maintain a claim for tax against one of its own taxpayers, such a precedent would meet with any international reciprocity whatever. On the contrary, international practice and jurisprudence point in the opposite direction. There may of course be great benefit in extending international co-operation to tax evasion, as is already happening in relation to crime in many fields. But this is a matter for treaties. The framework of the Hague conferences on private international law has nothing to do with any such objective, nor any national legislation which is based on it.
Finally, I would add that, if this judgment reflects the ultimate outcome of this appeal, then I hope that any renewal of the present letter of request in some more limited and acceptable form, if this can be devised, should be accompanied by clear evidence as to what is properly to be regarded as a ‘civil or commercial matter’ by the law of Norway, and in particular whether Norwegian law distinguishes between public and private law. I feel, frankly, uneasy about my acceptance, dubitante, of the very limited evidence in this connection on the present application. I would also urge that, at any rate in the international context, particularly in relation to the concept of ‘civil and commercial matters’ in the Hague and similar bilateral conventions, as well as of the 1975 Act, it would be desirable to recognise a clear-cut distinction between private and public law in our jurisprudence, in the same way as in other legal systems.
Accordingly, I would allow this appeal.
GLIDEWELL LJ. Kerr LJ has set out in his judgment the facts relevant to this appeal and I gratefully adopt his summary. He has also defined the issues before this court, and I wish only to comment on some of these, adopting the lettering he has applied.
A. Are the proceedings in the Sandefjord City Court ‘civil proceedings’ within the Evidence (Proceedings in Other Jurisdictions) Act 1975?
I agree with Kerr LJ that the phrase has different meanings in different parts of the 1975 Act. As he says ‘civil proceedings’ in ss 2(3) and 3(1)(a) has the meaning which an English court would give to the expression if there were no statutory definition, ie civil as opposed to criminal proceedings. Since, however, the application is made under s 1 of the 1975 Act, under which the English court has to be satisfied that ‘the evidence to which the application relates is to be obtained for the purpose of civil proceedings … before the requesting court … ’, it is in my view clear that the English court has to decide whether the proceedings are properly regarded as civil proceedings by the requesting court. This question necessarily involves the definition of ‘civil proceedings’ in s 9(1) of the 1975 Act, since this definition applies ‘in relation to the requesting court’. So the question is: are the proceedings in the Sandefjord City Court proceedings in a ‘civil or commercial matter’ under the law of Norway?
I also agree with Kerr LJ that, while primarily concerned to inquire whether the proceedings concern a civil or commercial matter under the law of the requesting court, the English court would only comply with the application if the proceedings were also ‘civil proceedings’ in the English sense. But this point may be largely, if not entirely, theoretical. We have no evidence that there is any jurisdiction in which proceedings in a ‘civil or commercial matter’ would not be regarded as civil proceedings in the English sense.
If proceedings similar to those in the Sandefjord court were taking place in the High Court in England, and that court applied for an order for the examination of witnesses to a court in a jurisdiction whose relevant statute was in terms identical to those of the 1975 Act, the English High Court would of course say that the proceedings were civil proceedings. But, if asked to explain its process of reasoning, it might do so in some such terms as these: ‘We do not usually categorise actions which come before our courts in terms of their subject matter. We do so in order to comply with ss 1 and 9 of your
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statute. We say that these proceedings are civil proceedings under English law; therefore they are proceedings in a “civil matter”; therefore they are civil proceedings within the definition in your statute.’
It seems to me that this circular process of reasoning is, in essence, that adopted by the Solicitor General of Norway in his affidavit of 26 June 1985. I therefore do not share the doubts which have troubled Kerr LJ whether the evidence before us should satisfy us that the Sandefjord proceedings are ‘in a civil … matter’. In my view the evidence makes it clear that they are.
I accept that in a country whose law derives from the ‘civil law’ the courts adopt a classification of matters coming before them, and that such a classification may categorise the subject of an action such as that in the Sandefjord court as a ‘fiscal matter’,not as a ‘civil or commercial matter’. From the passages read to us from David English Law and French Law (1980) it seems clear that this would be the case in France. The argument of counsel for the witnesses is, in effect, that, since some jurisdictions categorise matters in a way which would exclude the subject of this action from the categories ‘civil or commercial’, a different categorisation may not be adopted for any other jurisdiction. Such an approach must disregard the law and the approach to categorisation of disputes in such other jurisdictions.
In my view, the approach counsel commends, despite the learning with which he supports it, is neither logical nor desirable.
I therefore agree with Kerr LJ that the proceedings in the Sandefjord court are civil proceedings within s 1 of the 1975 Act.
On issue B (tax gathering), I agree with the reasons given by Kerr LJ for dismissing the appeal on this ground, save that I would not myself express any firm view as to what the decision should have been if the application had been opposed by the estate.
On issues C (sovereignty) and D (dual purpose), I agree entirely with Kerr LJ and have nothing to add.
This brings me to issues E (fishing) and F (confidentiality). These issues are inter-related. It is convenient to start by considering confidentiality. I take the view that none of the authorities cited to us relating to the duty of confidence owed by a banker to his customer, to which Kerr LJ refers in his judgment, are of assistance to us except the decision of this court in Tournier v National Provincial and Union Bank of England Ltd [1924] 1 KB 461, [1923] All ER Rep 550. The dictum of Bankes LJ does assist by listing the circumstances in which the duty of confidentiality may be held to be qualified, namely:
‘(a) where disclosure is under compulsion by law; (b) where there is a duty to the public to disclose; (c) where the interests of the bank require disclosure; (d) where the disclosure is made by the express or implied consent of the customer.’
(See [1924] 1 KB 461 at 473, [1923] All ER Rep 550 at 554.)
In the present case (c) and (d) do not arise. Qualification (a) merely refers to the question we have to decide: should we uphold the order of McNeill J, which may result in overriding the banker’s duty of confidence? It is test (b) which, in my judgment, we should apply in making our decision, in the sense that it is in the public interest for our courts to assist a foreign court, and in appropriate circumstances the importance of doing so will outweigh the banker’s obligation not to disclose information about his customer’s business affairs, so as to justify the court in requiring the disclosure of such information. In this respect the passage from the speech of Lord Wilberforce in British Steel Corp v Granada Television Ltd [1981] 1 All ER 417 at 458, [1981] AC 1096 at 1168, quoted by Kerr LJ, is in point.
It is not alleged that Lazards, or Lord Kindersley or Mr Hardman personally, acted for Mr Anders Jahre. If, however, there were some evidence that a person (or persons) who was a customer of Lazards, or for whom Lord Kindersley or Mr Hardman acted, was the nominee or agent of Mr Jahre in relation to any transaction at issue in the proceedings before the Sandefjord court, the importance of assisting that court could, in my judgment,
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properly be held to outweigh any duty of confidence owed to such a person. On the other hand, the disclosure of information about the affairs of a person who was not shown to have had such a relationship with, or to have acted for, Mr Jahre would be an unjustified breach of confidence which the English courts should not require. In the latter case, if the proceedings were in an English court, the court would not require the duty of confidence to be overridden and by s 3(1) of the 1975 Act a witness may not be compelled to give evidence which he could not be compelled to give in English proceedings.
I turn to issue E: fishing. I adopt gratefully Kerr LJ’s brief definition of a fishing expedition as one ‘where what is sought is not evidence as such, but information which may lead to a line of inquiry which would disclose evidence’. In Radio Corp of America v Rauland Corp [1956] 1 All ER 549 at 552, [1956] 1 QB 618 at 646 Devlin J, giving the leading judgment, in a passage quoted by Lord Fraser in Rio Tinto Zinc Corp v Westinghouse Electric Corp [1978] 1 All ER 434 at 468–469, [1978] AC 547 at 642, referred to the decision of this court in Burchard v Macfarlane, ex p Tindell [1891] 2 QB 241, [1891–94] All ER Rep 137 and said:
‘In that authority the distinction is made plain between what I have called discovery or indirect material on the one hand, and proof or direct material on the other hand. That is, I think, the true distinction with which one must approach the word “testimony” in this Act. Testimony which is in the nature of proof for the purpose of the trial is permissible. Testimony, if it can be called “testimony,” which is mere answers to questions on the discovery proceeding designed to lead to a train of inquiry, is not permissible.’
Radio Corp of America v Rauland Corp was a decision on the somewhat different wording of s 1 of the Foreign Tribunals Evidence Act 1856, but the principle applies equally to the 1975 Act, as indeed Lord Fraser said in the Westinghouse case [1978] 1 All ER 434 at 468, [1978] AC 547 at 642.
I agree with Kerr LJ that the scope of the ‘matters or questions’ about which the state in the present application is seeking ‘information and evidence’ is so wide that the questions intended to be asked will inevitably include a substantial number which will elicit information which may lead to a line of inquiry rather than evidence in the proceedings themselves. Since such questions would be ‘fishing’, they would be unacceptable, and it follows that the court should not order the witnesses to give evidence on the request as at present framed.
Whether some of the questions would also lead to an unacceptable breach of the duty of confidence I cannot say with certainty, although it is clear that the wider the request the more likely it is that the questions would be objectionable on this ground also.
McNeill J also took the view that the request was too wide but decided that he could by directions confine it within acceptable limits. Kerr LJ has set out these directions in his judgment, and I need not repeat them. With respect to the judge, I also am of the view that the directions he gave would not have the effect he intended of limiting the questioning of Lord Kindersley and Mr Hardman to questions which would elicit only relevant evidence. The question thus is: should this court endeavour to impose directions which would be effective?
Passages in the speeches of all their Lordships in the Westinghouse case make it clear that, where a court can, by excising inappropriate material, produce a request which is acceptable and proper, it should adopt this course and make the order sought.
Nevertheless, I, like Kerr LJ, do not regard the dicta as authority for the proposition that the court should redraft the request. In the present case the request is so wide that, to avoid the prospect that questions under it would be objectionable as ‘fishing’, it would in my view require to be redrafted. Thus I have reluctantly come to the conclusion that on this sole ground the order sought by the state and the estate should not be made. I would therefore allow the appeal.
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I must make it clear, however, that in my view a request in much narrower terms could probably be framed which would not fall foul of the ‘no fishing’ rule, and which would carry little, or a lesser, risk that the answers to the questions could properly be objected to as being in breach of confidence. Whether such a limited request would meet the requirements of either the state or the estate I do not know, but, if it would, the way to an order for the examination of either or both of the witnesses is by no means barred by the decision to allow the present appeal.
RALPH GIBSON LJ. I agree that the witnesses, the appellants in this case, have failed to show that the court lacks jurisdiction to order the witnesses to attend before an examiner for oral examination under the Evidence (Proceedings in Other Jurisdictions) Act 1975, and I, too, would dismiss the appeal on issue A (civil or commercial matter), on issue B (tax gathering), on issue C (sovereignity) and on issue D (dual purpose). I agree with the reasons given by Kerr LJ in his judgment for holding that the appeal cannot succeed on issues B (tax gathering), C (sovereignity) and D (dual purpose). On issue A (civil or commercial matter) I would dismiss the appeal on the grounds set out in the judgment of Glidewell LJ, with which I agree, and as to issue B I also would not wish to express any firm view as to what the decision should have been if the application had been opposed by the state.
I have, however, reached a different conclusion on issue E (fishing), and on issue F (confidentiality). I venture to differ from the views of Kerr and Glidewell LJJ only after hesitation and with reluctance, but I would dismiss the appeal.
Kerr LJ has described the background facts and allegations and has set out in full Pt II of the documents attached to the letter of request in which appears the list of questions (the Pt II list) to put to the witnesses. McNeill J referred to many of the requests as having a ‘breadth which is not permissible under the procedure’. The judge concluded that he could bring them within what is permissible under the statute and the rules by giving directions. I agree with Kerr LJ that the directions given for this purpose by the judge have been shown on examination to be unsatisfactory and I would not sustain them as part of the court’s order. The purpose of the directions was to limit the range of permissible questioning and, in part, to contain that range within our rules of evidence relating to hearsay and to exclude, for example, answers which Lord Kindersley might be able to give based on what he has been told outside his work as adviser to the foundation. If the taking of evidence proceeds as I think that it should, and this is discussed later in this judgment, this difficulty in this particular case can be met without directions of this nature. The admissibility of evidence is a matter for the court in Norway. If their law of evidence should differ from ours, eg, so as to render admissible hearsay evidence generally, that fact would not, in my judgment, widen the scope of the evidence which our courts would consider may be required of a witness under the principles which protect a witness against unreasonably oppressive or intrusive questioning or unjustifiable breach of his obligations of confidence. The parties are agreed that if the witnesses are required to give evidence they will be called on behalf of the state and that the estate would be entitled to cross-examine in the usual way. In considering whether in the court’s discretion an order should be made at the request of a foreign court for witnesses to be examined, this court is, I think, entitled to assume, and should assume, that the rules of evidence and of permitted questioning under Norwegian law are the same as ours unless the contrary is proved by evidence. The witnesses would therefore be entitled to refuse to answer if the questioning should be in breach of our rules.
It is not in doubt that the evidence which is sought from the witnesses is intended for use at the trial. It was contended for the witnesses that, nevertheless, the letter of request was impermissibly wide in its terms because the categories of questions in the Pt II list raised matters going far beyond the issue in the civil proceedings for which the evidence was requested. That issue was identified as:
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‘whether Mr Jahre was the owner of CTC and accordingly the owner of accounts held by CTC at the SE Bank in Stockholm.’
Such a description is, in my judgment, an incomplete guide to the factual issues in the civil proceedings which could more fully be described as whether Mr Jahre is shown to have exercised such control over CTC and its assets that he is to be treated under Norwegian law in all the circumstances as beneficial owner thereof, and whether, if and when the shares in the assets of CTC passed into the control or nominal ownership of the alleged trust or foundation, there was any real change in the beneficial ownership and control.
It is necessary to look at the pleadings. The estate, as plaintiff, in support of the claim that the supplementary assessment to tax of 14 September 1983 should be nullified, set out its ‘principal points’ as follows:
‘The estate of the deceased Anders Jahre has been submitted to supplementary assessment as if Mr Jahre were the owner of the Panamanian limited company CTC … and accordingly also of the company’s accounts with the SE Bank Stockholm. Further the supplementary assessment is based on all deposits which CTC has paid into its account with SEB being regarded as income for Anders Jahre and the balance of all accounts at the end of each year being regarded as his personal assets. Anders Jahre, as well as the individuals who have factual knowledge of CTC in their capacity of “Company Secretary” or member of the Board of Directors or “Adviser” to the foundation which owns the majority of the shares in CTC, have all stated that the shares in CTC during the years 1970 et seq have been owned by others than Anders Jahre … Anders Jahre was never a member of the Board of Directors of CTC. He has been an officer of the company, being President and for a period of time also Treasurer. In that capacity he has been empowered to make arrangements on behalf of the company within the limits of the instructions issued from time to time by CTC’s Board of Directors and general meeting … ’
Lord Kindersley is included within the description ‘Adviser’ and Mr Hardman within the description ‘Company Secretary’ in the passage cited. The years in respect of which the supplementary assessment applied are 1970 to 1982 inclusive.
It thus appears that the estate was unable to make any assertion as to the identity of the persons who did own the shares during the relevant time in order to demonstrate that those persons were not only ostensibly owners of the shares but also holding them free of any interest or control of Mr Jahre.
The defence in the proceedings on behalf of the state sets out relevant principles of law, including the propositions that (i) it is the duty of a taxpayer actively to produce any material he has or may have access to and to contribute towards the clarification of his tax liability and (ii) the tax committee was entitled to disregard the formal structure of the Panamanian company, Pankos/CTC, and to treat the corporate structure as an artificial set-up with no real content or purpose other than to avoid Norwegian taxation if satisfied that Mr Jahre was the direct or indirect owner of the shares with the right of disposal vested in him.
Primary facts asserted in the defence include: (i) a high degree of passivity on the part of the plaintiff, namely, a failure to produce information which could be expected to be provided, and the production of evidence as the case has proceeded which was contradictory; (ii) as to the activities of Pankos/CTC, practically all were conducted from Sandefjord by Mr Jahre or those closest to him. All demonstrable dispositions have practically without exception been for the benefit of Mr Jahre, his wife and properties; (iii)there is negative evidence that Pankos/CTC has not had any funds other than the CTC accounts, including Bergen Bank; (iv) a history of events preceding the relevant period 1970 to 1982 is set out in order to ‘illustrate the case’, including the role of Mr Jahre in the formation of Pankos/CTC in 1939, the acquisition by that company of a ship
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in which Mr Jahre had an interest, the transfer in 1940 of practically all the shares in Pankos to one Dalmann of Gothenberg on terms that Mr Jahre could repurchase the shares at par, the transfer of the repurchase right to Jasmin, a Panamanian company in which Mr Jahre was a shareholder until 1955, and the allegation that for the period 1940 to 1954 Dalmann is shown by the documents to have been a ‘dummy’ for Mr Jahre; (v) Mr Jahre’s formal connections with Pankos/CTC were as president or treasurer in the period 1971 to 1978 and he was ‘in close connection with Pankos/CTC and its dispositions during the supplementary assessment period 1970–1982’; (vi) in 1972 shares owned by Pankos/CTC in the company Crevettes de Cameroun were sold and funds from the sale were transferred to Mr Jahre to an account with a bank in Paris; (vii) no accounts are available covering the activities carried on by Mr Jahre through CTC.
The defence draws attention to the failure by the estate to produce information: for example, to give adequate explanations of Mr Jahre’s relationship with CTC and the funds in the accounts in CTC’s name, or to produce documents to give concrete information which shows who was the owner of the shares in the period 1970 to 1982.
It thus appears that under Norwegian law the taxpayer has a duty to clarify his tax liability, and his failure to do so is a fact to which the tax committee can properly have regard in drawing inferences from the primary facts proved before them. The evidence suggesting or proving that Mr Jahre had directed the affairs and use of the assets of Pankos/CTC over a period of many years as if he were the beneficial owner justifies, according to the defence in the proceedings, the conclusions reached by the tax committee. It is clear that the estate, which is trying to persuade the Norwegian court that the inferences of beneficial ownership in Mr Jahre should not on the facts be drawn, has an interest in getting before the Norwegian court evidence to support the out of court statements of Lord Kindersley and any supporting evidence that Mr Hardman can give. Mr Hardman was appointed assistant secretary of CTC in 1977 and treasurer in 1978, retiring from both offices in January 1984. The estate will wish to demonstrate that the shares in CTC were owned beneficially by persons other than Mr Jahre, that those persons were not the nominees or ‘dummies’ of Mr Jahre, that the shares in CTC, or those not retained by someone else, passed to the charitable foundation as beneficial owner and not as nominee of Mr Jahre and that any apparent control of Mr Jahre at any relevant time over CTC or its assets was consistent with his ostensible position as one working on behalf of CTC as an officer or agent. The out of court statements of Lord Kindersley show that the assets of the foundation included shares in Pankos/CTC. Nothing, I think, asserts positively that the foundation had any other assets of any significance. It would be relevant, so far as I can see, and of assistance to the estate to prove that the foundation did have such further assets derived from sources other than Mr Jahre because it would tend to show that the foundation was exercising real control over its assets independently of Mr Jahre and that, even if any part of its assets had come from or had been passed to it by someone else on the instructions of Mr Jahre, nevertheless Mr Jahre had divested himself of beneficial interest in them and control over them.
The State of Norway, represented in the proceedings by the Ministry of Finance, contends to the court in the pleadings to which I have referred that the tax committee reached a correct or unassailable decision. Mr Haug, the Solicitor General, has stated in his first affidavit before the court that his purpose in seeking the order for the taking of evidence was ‘to ascertain the truth relevant to the matter’. It was suggested on behalf of the witnesses that this statement was an indication that the purpose of the application was impermissibly ‘fishing’ as opposed to an attempt to obtain evidence for the proceedings. I see no force in that suggestion. It is clear to me that evidence available from the witnesses, if found after proper testing and scrutiny to be convincing, as no doubt it would be, might well cause or assist in causing the court to reach a conclusion different from that of the tax committee on all or part of the additional assessment. I am sure that the Solicitor General of Norway does intend, and obviously would intend, to
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submit to the court the evidence sought to be obtained by this application as relevant to the factual issues in the proceedings so that it may assist in ascertaining the truth of the matter. It is an attitude to the litigation which I would have assumed the Solicitor General to hold and his statement merely served to confirm it.
It is necessary now to consider the Pt II list, which has been set out in full by Kerr LJ. I take the list as amended by omission of the words ‘information and’ where they appear in addition to the word ‘evidence’ and by the substitution of the word ‘evidence’ for the word ‘information’ wherever it appears. I am confident that nothing of significance turns on the use of the words which have in translation appeared as ‘information’.
It seems to me that both witnesses probably have knowledge of some or all of the matters covered by each of the headings, that their evidence of the facts known would probably be relevant in the proceedings and that there is nothing to show that such evidence would be inadmissible under Norwegian law. Paragraph 1 of the Pt II list refers to present and previous owners of funds and shares in CTC and the relevance of such evidence is clear in the light of the factual issues set out in the pleadings; in particular the estate will wish to prove that such owners were not Mr Jahre or persons closely connected to him or controlled by him. Evidence about the trust (para 2) is similarly relevant under all headings listed. It might well be that evidence showing that the shares in CTC were received by the trust from a settlor who is not alleged to have been under the control of Mr Jahre would render the rest of the heading irrelevant. The witness may know the name of the settlor but not know of his relations with Mr Jahre or from whom or the terms on which that settlor acquired the shares. The other headings may then be relevant: the name of the trust, to identify it, if it appears, in the documents and transactions separately proved; the foundation, structure, object, names of trustees, beneficiaries and powers of election and removal of trustees etc, to demonstrate that any assets once owned or controlled by Mr Jahre had effectively passed out of his control; and the balance sheets, both to show (if they exist) assets other than those previously in Pankos/CTC and to explain or disprove the existence of payments to or from the benefit of Mr Jahre. The matters covered by the remaining paragraphs also seem to me to be matters on which the witnesses may well be able to give evidence relevant to the factual issues in the proceedings.
The witnesses are entitled to the protection of the law at two stages with reference to the attempt by the applicants to obtain their evidence by order of the court: at the first stage (and, as Kerr LJ has pointed out, this was common ground between the parties), the witness cannot be required to comply with the letter of request if it appears to the court that the request is ‘irrelevant, or fishing, or speculative, or oppressive’: see Senior v Holdsworth [1975] 2 All ER 1009 at 1016, [1976] 1 QB 23 at 35 per Lord Denning MR and cases cited in The Supreme Court Practice 1985 vol 1, para 38/14–19/11. That is the test which the court will apply in deciding whether to set aside a subpoena so as to excuse the witness from being required to give any evidence at all. It has been held that the fact that the witness is clearly able to give relevant evidence and that nothing more is sought from him is not decisive: the subpoena may be set aside if, on balancing the value of the evidence to the applicant against the burden on the witness, and the degree of intrusiveness of the proposed questioning and all other circumstances, it seems to the court that the request is oppressive: see Morgan v Morgan [1977] 2 All ER 515, [1977] Fam 122 at 125 per Watkins J.
The second stage is at the questioning before the examiner if the witness is directed to give evidence. Kerr LJ cited Desilla v Fells (1879) 40 LT 423, which shows that the evidence can only be taken ‘in the English mode’ but is not limited to what is admissible in English courts; and he has referred to the provisions of RSC Ord 39. By r 8(1), subject to any directions contained in the order for examination, the witness is to be examined, cross-examined and re-examined ‘in like manner as at the trial of a cause or matter’. Rule 10 deals with objections to questions: if the witness objects to answer any question, the
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ground for the objection must be set out. The validity of the ground for objection shall be decided by the court and not by the examiner, but the examiner must state his opinion thereon, which must also be recorded. The right of objection in the rules is not limited to any particular grounds.
By s 3(1) of the 1975 Act a person shall not be compelled by virtue of an order under s 2 to give any evidence which he could not be compelled to give either in civil proceedings in this country or in the civil proceedings in Norway. The heading of the section is ‘Privilege of witnesses’. The power of the court to decline to compel a witness to attend to give evidence, or to answer particular questions after the witness has been sworn, is not limited to matters of recognised privilege but includes cases where the request for relevant evidence is shown to be oppressive, or where the claim to refuse to answer is based on an obligation of confidence. It was not argued that, if the appeal were dismissed, the witnesses could not claim to refuse to answer particular questions on the grounds of oppressiveness or confidentiality. In my judgment that concession was right and any objection which a witness could make to particular questions, if the examination were proceeding in a court in this country, may be made on the examination of the witness pursuant to an order under the 1975 Act. The argument for the witnesses was that the nature of the request was so impermissibly wide, and so clearly bound to require evidence to be given unreasonably in breach of the duty of confidence, that the request should be rejected. It was argued further that to entrust control of the questioning to the process of objection and ruling by the court was ‘simplistic’ and would clearly involve further and possibly prolonged court proceedings and that, if the request were upheld, the court would in effect have ruled impliedly on the permissible scope of questions to be answered. In short, the witnesses, having failed on their fundamental opposition to the request on the ground that the court had no jurisdiction to make the order under the 1975 Act, have contended that the order of McNeill J should be set aside in the exercise of this court’s discretion and the state and the estate left to consider what new application they should make in more limited terms.
I will deal first with the width of the request. I agree that the terms of the request are wide, but that follows, I think, from the subject matter of the proceedings and the relevant rules of Norwegian law as set out in the defence. I agree, further, that if the order is upheld in the terms which I have proposed it would be possible for questions to be asked which, having regard to answers already given by the witnesses and to the issues in the case as they could then in detail be shown to be, would be impermissible as going beyond what is relevant and necessary.
If it were necessary, in order for the state and the estate to succeed, to demonstrate that the terms of the letter of request are such that no question could be asked outside what will be shown to be relevant and necessary in the proceedings, then the terms of the request set out in the Pt II list would be too wide. I do not think that the law places such a burden on these applicants. In Re Westinghouse Electric Corp Uranium Contract Litigation MDL Docket No 235 [1977] 3 All ER 703 at 710, [1978] AC 547 at 562 in the Court of Appeal, at the time of the making of the order of 26 May 1977 by which Westinghouse were entitled to proceed to the examination of certain witnesses, Lord Denning MR said:
‘So far as evidence is to be given, by word of mouth, the witnesses can, I think, be required to answer any questions which fairly relate to the matters in dispute in the foreign action. Counsel for the appellants asked us to disallow questions of a roving nature, but I do not think the order can or should be so limited. The only practical test of any question is: is it relevant? does it relate to the matters in question? No one would wish the witnesses to be asked about irrelevant matters or to go into other things with which the dispute is not concerned. But it is said there is a difficulty. The witnesses are not conversant with the issues in the case. They do not know what is relevant, and what is not. Any difficulty on that score is readily overcome. By agreement (and I think even without agreement) these witnesses,
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when they are asked to give evidence, can and should have legal advisers at their elbow. There are very reputable and responsible advisers on each side. If a question is irrelevant the witness will be told and advised not to answer. So the point can and should be resolved by the responsible lawyers on each side without difficulty.’
Roskill and Shaw LJJ agreed with Lord Denning MR’s judgment. In the House of Lords the majority upheld in general the rightness of the order of 26 May 1977 when made (see sub nom Rio Tinto Zinc Corp v Westinghouse Electric Corp [1978] 1 All ER 434 at 444, 463, 471, [1978] AC 547 at 612, 636, 645 per Lord Wilberforce, Lord Diplock and Lord Fraser). Lord Keith said ([1978] 1 All ER 434 at 478, [1978] AC 547 at 654):
‘As regards the oral evidence sought to be obtained under the letters rogatory, I am of opinion that the Court of Appeal acted rightly in sustaining the order for examination of the persons named therein as witnesses. On the material made available I consider that there were reasonable grounds for the view that these persons might be in a position to give evidence relevant to Westinghouse’s defence in the Virginia proceedings. In the face of a statement in letters rogatory that a certain person is a necessary witness for the applicant, I am of opinion that the court of request should not be astute to examine the issues in the action and the circumstances of the case with excessive particularity for the purpose of determining in advance whether the evidence of that person will be relevant and admissible. That is essentially a matter for the requesting court. Should it appear necessary to apply some safeguard against an excessively wide-ranging examination, that can be achieved by making the order for examination subject to a suitably worded limitation.’
Having regard to the words of Lord Denning MR and of Lord Keith in the Westinghouse case, it seems to me that the state and the estate have shown that the witnesses can probably give evidence relevant to the factual issues in the case pending in Norway and that the request is not so wide that the court should reject the application. The parties are agreed that the witnesses may be represented and advised by counsel if they are to be required to give evidence. This court therefore need not decide whether we could, or should, if otherwise minded to uphold the order of the judge, impose a condition to that effect. For my part I see no reason why the court could not do so and it is clearly right in this case that the witnesses should have such advice available to them.
The fact that the witnesses are advised by experienced lawyers and will have their assistance if required to give evidence should not enable applicants in all cases to obtain an order which the law should not allow if the witnesses would be without that protection. Witnesses should not be put to substantial expense to obtain protection which might be provided by a more precise definition of the terms of the request or by the giving of directions by the court. Allowing, I hope, full weight to these factors it is my view that the witnesses should, in the circumstances of this case, be required to give evidence in response to this request. The case is complicated. The extent to which the witnesses will be required to answer on separate parts of the case will depend on earlier answers given. It seems likely to me that the witnesses would wish to be advised and represented by lawyers while giving evidence even if the judge’s order were set aside and the state and the estate were left to apply again on a more restricted letter of request.
As to the submission that it is ‘simplistic’ to rely for proper protection of the witnesses on advice by counsel, refusal to answer and subsequent ruling by the court, I do not so regard it. It is to an extent a cumbersome procedure and it may cause delay, in that the examiner before whom witnesses give evidence has no power to rule. But, as in the Westinghouse case, so here, the parties and the witnesses are advised by responsible and experienced lawyers. If the appeal is dismissed so that the witnesses are required to give evidence the judgments in this court would give some, and I think sufficient, indication as to the extent to which and the principles according to which the court would support
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or override any claim by the witnesses to be allowed to refuse to answer a question, whether on the ground that it is ‘fishing’ and not fairly necessary in the proceedings, or that it is oppressive, or that, and I deal with this issue below, it unreasonably requires the witness to break his obligation of confidence. I would expect the advisers of the parties and of the witnesses to be able to discover without difficulty what evidence the witnesses would be able and willing to give under the headings set out in the Pt II list. The state and the estate could then severally decide what further questions they would ask the witnesses to answer. Evidence given will affect what matter thereafter will be shown to be relevant and necessary. The sanction against seeking more than is relevant and necessary, or evidence on matters which the witnesses will not be required to reveal in breach of confidence, will be an order to pay the costs caused by the further proceedings. That which Kerr LJ has pointed to as deserving the greatest weight on matters of discretion in this case is that the application is pursued at the common wish of the estate and of the state, a special factor capable of removing many of the objections which might otherwise have had great force. If this appeal is dismissed, and when the evidence has been taken to which the witnesses raise no objection in the light of the judgments of this court, it may be that that special factor will no longer be present, or it may be limited to part only of any further contest.
As to the submission that, if this court should uphold the width of the questions covered by the Pt II list, the court would impliedly have ruled on the permissible scope of the questions to be answered, to some extent that is clearly right. To take the example considered by Kerr LJ, I would, for my part, and I am dealing at this point only with the width of the questioning, rule that the witnesses would be required to answer whether to the knowledge of the witnesses Mr Jahre owned or did acts indicating that he owned or controlled the shares in Pankos/CTC, whether those shares were passed to any trust or foundation by or at the direction of Mr Jahre and whether any other named person owned or controlled those shares and the assets of Pankos/CTC and/or the trust and its assets for the benefit of Mr Jahre. It would not be sufficient merely to give a name in order to demonstrate the relevance of the answers sought. It would be necessary also to demonstrate that the person so named is identified in the proceedings as a person so acting on behalf of or under the control of Mr Jahre and that that identification is made by evidence, whether direct or arising by inference, which is available and apparently credible. If either the state or the estate should then wish to ask ‘If not Mr Jahre, or any named person, who then was it?’, the issue whether the court would regard that question as irrelevant or unnecessary or inadmissibly ‘fishing’ would have to be decided in the light of the other evidence already given by the witnesses and all necessary information as to the factual issues in the case to which the answer was said to be ‘necessary’. It would be for the state and the estate to satisfy the court that the answer was one reasonably necessary to be given. The fact that it is not possible at this stage to be sure of the limits to which the state and the estate may be permitted to go in requiring answers is, in my judgment, no reason to deprive them of the sworn evidence of the witnesses on those matters on which, so far as concerns relevance and necessity, it is clear that the witnesses should be required to answer. It may be that in other cases which will come before the court the utility or importance of what is clearly permissible may be so small, and the ability of the witness to protect himself, either on his own or by any adviser or representative that he can obtain, against the risk of unfairness may be so inadequate, that the order should be refused on the ground that the request is too wide or ‘fishing’. I do not regard this as such a case.
As to issue F, confidentiality, Kerr LJ has referred to the principle that the English courts should strive to comply with a request of a foreign court made pursuant to the 1970 convention unless it is driven to the clear conclusion that it cannot properly do so, and to the important feature in this case that the Norwegian court has sought the evidence at the instigation of both parties to the proceedings.
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Kerr LJ has demonstrated that the request falls within the terms of the 1975 Act and is not excluded by any principle of law, such as tax gathering or sovereignty, subject to which Parliament must have intended the court to exercise the jurisdiction created by the Act. The court should, in my judgment, exercise its discretion by applying the principle that a witness, whose evidence is sought by a foreign court, should be directed to answer no more and no less than would be required of him in proceedings in the courts of this country. The witness may be entitled to a special and more extended protection under the law of Norway (see s 3(1)(b) of the 1975 Act), but that has not so far been raised in this case. If the order of the judge is upheld, it might be raised hereafter.
Kerr LJ has set out the principle as stated by Lord Wilberforce in British Steel Corp v Granada Television Ltd [1981] 1 All ER 417 at 455, [1981] AC 1096 at 1168: the court must consider whether the interest in protecting the confidence reposed in the witness is outweighed by other interests to which the law attaches importance. The factors in favour of requiring the witnesses to answer are the importance of assisting the Norwegian court to obtain evidence which it regards as necessary in the interests of justice and, further, the great financial importance of the case to the estate of Mr Jahre.
As to the protection of the confidence reposed in the witnesses, for the reasons I have set out, this court, by upholding the order of the judge, would not be deciding that the witnesses would hereafter be required to answer all and any questions within the headings of the Pt II list; if that were the consequence then I would agree that the application should be dismissed on this ground. On the material before this court it would be right, in my judgment, for Lord Kindersley to be required to answer on oath questions to provide the answers which he has already given in his out of court statements. There is, in them, no secrecy left to be protected: see the terms of his letter of 31 October 1980 as set out in the judgment of Kerr LJ. Mr Hardman could rightly be asked whether he confirms the answers.
How much further is it possible to say at this stage that the state and the estate should be allowed to go? In my judgment, if these proceedings were being conducted in a court in this country on similar issues, the witnesses would be required to answer, notwithstanding the apparent breach of confidence required of them in so answering, at least as far as the questioning could properly go, as I have explained above, within the limits of relevance and necessity, ie that the witnesses may be required to answer whether to their knowledge Mr Jahre owned or did acts indicating that he owned or controlled the shares in Pankos/CTC, whether those shares or any of them were passed to any trust or foundation by or at the direction of Mr Jahre and whether any other named person owned or controlled those shares and the assets of Pankos/CTC and /or the trust and its assets for the benefit of Mr Jahre. And again for these purposes it would not be sufficient merely to give a name to found the obligation to answer: it would be necessary also to demonstrate that the person so named is identified in the proceedings as a person so acting on behalf of or under the control of Mr Jahre and that identification is made by evidence which is available and apparently credible. If the state and the estate should wish to go further they would, as I have said, have to justify their claim.
My reasons for reaching that conclusion are as follows: the protection which the banker claimed is for the obligation of confidence which he owes to his customer. It is important for the banker’s business that he be seen to be unswervingly loyal to that obligation, but the confidence is reposed by the customer and it is his secret which is revealed if the witness is required to answer. The factual issues and allegations in the proceedings indicate to me the probability that any person connected with Pankos/CTC was also connected with and aware generally of the activities of Mr Jahre down to the date of his death. Mr Jahre’s estate seeks the evidence in order to protect the estate from what, if their case is right, is a mistaken imposition of a very heavy tax burden based in part on Jahre’s failure to supply information which would rebut inferences otherwise likely to be drawn. To the extent which I have indicated, it does not seem to me to be
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excessively or unfairly intrusive as against any customer of the bank to require of the witnesses that they answer.
If Pankos/CTC was still in existence a subpoena directed to that company to produce at the trial specific documents in order to prove, for example, that Mr Jahre was or was not the owner of shares in the company or of funds held would not, in my judgment, be set aside on the grounds that the request was unreasonably intrusive or oppressive having regard to the utility of the evidence and to the demonstrated connection of Mr Jahre with the company. Evidence which could be required of a company does not become protected merely by causing the officers of the company to be officers of a bank which has rendered banking services to the company. The position with reference to the foundation, or trust, is different: whereas Mr Jahre’s connection with Pankos/CTC is, as I have said, sufficiently indicated in the papers, his connection with the foundation is less clear. The main fact appears to be that the shares in and the assets of Pankos/CTC became vested in the foundation. If the identity of the foundation were known it would, I think, be difficult to justify requiring Lord Kindersley to answer with reference to the connections of Mr Jahre with the foundation and its assets because the parties could seek such evidence directly from the foundation and the officers of the foundation could either give the evidence or state their reasons for claiming the right to refuse. The trust claims to preserve its anonymity and to direct its adviser to give no evidence at all. The parties can go nowhere else for the evidence. To the extent which I have indicated, it is right, in my view, for the witnesses to be required to answer.
I accept that, as Kerr LJ has said, the support of the applications by the estate cannot be taken as consent to the disclosure by the witnesses of the affairs of the trust and CTC, and I agree that there is nothing to show that disclosure is required in discharge of any ‘duty to the public’.
As to the submission that the request ‘lies in the field of tax gathering’, I am unable to give to that fact any great weight. It is not an attempt to enforce foreign tax liabilities: it is a request within the jurisdiction established by Parliament. The width of the factual issues results partly from the proceedings being concerned with the tax affairs of a man who made much money and controlled, for himself or others, many valuable assets and partly from the terms of the relevant law. The fact that the liability in issue arises under a tax law does not seem to me, when the application is supported by both sides, to be of any particular weight in deciding whether it is fair and reasonable in the interest of those who seek the evidence to risk intruding into the private financial affairs of as yet unknown customers of the bank to the extent which I have indicated.
For the reasons I have given, it is my view that the extent of the questioning, and of any permissible intrusion into the private affairs of the customers of the bank, can be effectively controlled within the limits laid down by the law of this country. I do not accept that any difficulty or expense in any further proceedings which may be anticipated constitute factors of any significant weight in this case in deciding whether to uphold the order of the judge.
If it were to be finally established by the decisions of the courts of this country that there is jurisdiction to make the order, and that the witnesses must answer, within the limits which the law imposes by reference to relevance, necessity, oppressiveness and confidentiality, the parties would, as I have said, probably be able to arrange quickly for the evidence to be given on which there would be no further dispute. The state and the estate, if they wish to go further, would be able to concentrate, in the light of the judgments of the court, on demonstrating the grounds on which the witnesses may properly be required to answer further by reference to more precisely defined questions within the headings covered by the Pt II list and, as I have said, the burden would be on them to justify their application after refusal by the witnesses. I have in mind the matters raised by Mr Ian Fraser in his affidavit with reference to the importance to the banking institutions of their ability to maintain the secrecy of information given to them in confidence by their clients. If the matter is allowed to proceed in the way which I have
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described there would be no piercing of the veil of secrecy to any greater extent than the law of this country permits or requires. I am uncomfortably aware of the risk of circularity in that statement, but it is my view that, by upholding the order of the judge, varied in the manner suggested, this court would be doing no more than permitting the state and the estate to proceed in accordance with the law of this country. I would dismiss the appeal.
Appeal allowed. Witnesses to have one-third of their costs in Court of Appeal and below as against the state. No order as to costs as between the witnesses and estate in Court of Appeal or below. Leave to appeal to the House of Lords refused.
Solicitors: Linklaters & Paines (for the witnesses); Freshfields (for the state); Macfarlanes (for the estate).
Celia Fox Barrister.
Re State of Norway’s Application (No 2)
[1989] 1 All ER 701
Categories: CONFLICT OF LAWS: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): MAY, BALCOMBE AND WOOLF LJJ
Hearing Date(s): 19, 20, 21, 22, 23, 26, 27 OCTOBER, 18 DECEMBER 1987
Evidence – Foreign tribunal – Examination of witnesses in relation to matters pending before foreign tribunal – Evidence for purpose of civil proceedings – Proceedings in a civil or commercial matter – Evidence requested by foreign tax tribunal – Whether foreign proceedings civil or commercial matter – Whether proceedings assisting foreign tax gathering – Evidence (Proceedings in Other Jurisdictions) Act 1975, ss 1, 9(1).
Precedent – Court of Appeal – Binding effect of previous decisions of court – Reason which is not essential and necessary to a decision – Dicta – Whether court bound by reason which is not essential and necessary to a decision – Whether court entitled to disregard dicta of court of co-ordinate jurisdiction.
Estoppel – Issue estoppel – Jurisdiction – Evidence to show that court has no jurisdiction – Issue estoppel preventing evidence from being put before court – Whether party can be prevented by issue estoppel from putting evidence to show that court has no jurisdiction.
Estoppel – Issue estoppel – Appealability – Whether issue estoppel prevented from arising if unsuccessful party unable to appeal.
J, a wealthy Norwegian shipowner, died in 1982. The county tax committee for that part of Norway in which he had resided decided to raise a retrospective tax assessment against his estate for the years 1972–1982 on the ground that he had avoided tax during those years by failing to declare a large part of his assets. The estate commenced proceedings in the court of first instance in Norway to have the assessment declared null and void and appealed to the national tax committee to have it set aside. The Sandefjord City Court, on the application of the State of Norway supported by the estate, issued letters of request addressed to the High Court in England requesting the court, inter alia, to summon two named merchant bankers (the witnesses) to attend before an examiner in London to give oral evidence relevant to the issues in the proceedings before the Norwegian court. The bank had acted as bankers for a charitable trust alleged to have been set up and controlled
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by J and which allegedly held shares for J as beneficial owner. After receiving the letter of request a Queen’s Bench master made an order under s 2a of the Evidence (Proceedings in Other Jurisdictions) Act 1975 granting the application for the oral examination of the witnesses. The witnesses applied to have the order set aside. The judge upheld the master’s decision subject to certain directions limiting the scope of the questions which could be put to the witnesses. The witnesses appealed to the Court of Appeal, contending, inter alia, that the Norwegian proceedings did not constitute ‘civil proceedings’ under s 1b of the 1975 Act, which were defined by s 9(1)c as proceedings in a ‘civil or commercial matter’, so as to confer jurisdiction on the English court and that the terms of the letter of request were so wide as to amount to a fishing expedition. The Court of Appeal allowed the appeal and set aside the order. The court expressed the views that whether proceedings were a ‘civil or commercial matter’ depended on their classification under the law of the requesting court and the law of the court to whom the request was made and that the Norwegian proceedings would be characterised as a civil proceeding under English law and therefore the proceedings fell within the ambit of s 1 of the 1975 Act, but went on to hold that the terms of the letter of request were too wide for the court to order the witnesses to give evidence on the request as framed. Following a further application by the State of Norway, supported by the estate, the Norwegian court issued a second letter of request for the oral examination of the witnesses on 12 specific issues and setting out the specific questions to be put to the witnesses. The letter of request stated that the Norwegian proceedings were a ‘civil action’ under Norwegian law and a ‘civil matter’ under the convention relating to the taking of Evidence Abroad in Civil or Commercial Matters 1970. The master made an order under s 2 of the 1975 Act for the examination of the witnesses according to the terms of the letter of request. On appeal by the witnesses, the judge upheld the order subject to certain limitations on the testimony which the witnesses could be required to give. The witnesses appealed to Court of Appeal. The state contended that the witnesses were prevented by both judicial precedent and issue estoppel from again contending that the Norwegian proceedings were not ‘civil proceedings’ within the meaning of ss 1 and 9(1) of the 1975 Act and that the English court had no jurisdiction. The state also cross-appealed against the limitations placed by the judge on the witnesses’ testimony.
Held – (1) Applying the principle that only matters which were essential and necessary to the decision of a Court of Appeal were binding on subsequent divisions of that court, the court was not bound by the views previously expressed by it on the jurisdiction issue since its decision would have remained the same, having regard to the holding that the letter of request was too wide, even if the jurisdiction issue had not been discussed or if jurisdiction had been assumed to exist. In any event, it was not clear that what was prevoiusly said by the court on the jurisdiction issue was or was intended to be part of the ratio of its decision. Accordingly, although the views previously expressed by the court on the jurisdiction issue carried very great weight the court was entitled to depart from those views if it was satisfied that they were wrong. Similarly, the witnesses were not estopped from arguing that the Norwegian proceedings were not a ‘civil action’ under Norwegian law, contrary to the previous finding of the Court of Appeal, since that finding was not fundamental to its decision (see p 710 j to p 711 a j to p 712 a, p 714 g, p 719 f to p 720 a j to p 721 b, p 723 d e, p 734 g h, p 735 e f and p 736 g h, post); dictum of Lord Denning MR in Penn-Texas Corp v Murat Anstalt (No 2) [1964] 2 All ER at 597 applied; Leeds Industrial Co-op Society v Slack Ltd [1924] All ER Rep 259 considered.
(2) (Woolf LJ dissenting) Having regard to the connection between the 1970 Hague Convention and the 1975 Act and that fact that there was no distinction between civil or
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commercial proceedings under the common law, the term proceedings in a ‘civil or commercial matter’ in s 9 of the 1975 Act was to be construed according to its generally acceptable international interpretation derived from the civil law distinction between private law (which included civil or commercial proceedings) and public law (which included fiscal proceedings). Accordingly, jurisdiction under the 1975 Act in respect of letters of request only arose if the English court was satisfied that the procedings in the requesting court were either civil or commercial proceedings in a civil law sense and since (Woolf LJ concurring) the Norwegian proceedings were clearly fiscal proceedings they were not proceedings in a ‘civil or commercial matter’ for the purposes of s 9, with the result that the court had no jurisdiction to order the examination of the witnesses according to the terms of the letter of request. The witnesses’ appeal would therefore be allowed (see p 716 c h to p 717 a, p 718 f g, p 719 a, p 721 j, p 724 h j, p 726 e g, p 728 f to p 729 b, p 730 f g, p 732 e, p 740 f g and p 744 d to f, post); Re State of Norway’s Application (No 1) [1989] 1 All ER 661 not followed.
Semble. A party cannot be prevented by issue estoppel from putting before the court evidence to show that the court has no jurisdiction to make the order sought (see p 715 c, p 723 f g and p 737 b, post).
Per May LJ. An issue estoppel is not prevented from arising merely because the party against whom the finding was made was unable to appeal against the decision (see p 714 g, post).
Notes
For evidence for proceedings in other jurisdictions, see 17 Halsbury’s Laws (4th edn) paras 326–329, and for cases on the subject, see 22 Digest (Reissue) 665–668, 7111–7123.
For the Evidence (Proceedings in Other Jurisdictions) Act 1975, ss 1, 2, 9, see 17 Halsbury’s Statutes (4th edn) 191, 192, 197.
Cases referred to in judgments
Air France v Saks (1985) 84 L Ed 2d 289, US SC.
Badar Bee v Habib Merican Noordin [1909] AC 615, PC.
Bavaria Fluggesellschaft Schwabe & Co KG and Germainair Bedarfsluftfahrt GmbH & Co KG v Eurocontrol Joined Cases 9 and 10/77) [1977] ECR 1517.
Block v Cie Nationale Air France (1967) 386 F 2d 323, US Ct of Apps, 5th Cir; cert denied (1968) 392 US 905.
Bonalumi v Secretary of State for the Home Dept [1985] 1 All ER 797, [1985] QB 675, [1985] 2 WLR 722, CA.
British Steel Corp v Granada Television Ltd [1981] 1 All ER 417, [1981] AC 1096, [1980] 3 WLR 774.
Buchanan (James) & Co Ltd v Babco Forwarding and Shipping (UK) Ltd [1977] 3 All ER 1048, [1978] AC 141, [1977] 3 WLR 907, HL.
Campbell (Donald) & Co Ltd v Pollak [1927] AC 732, [1927] All ER Rep 1, HL.
Carl-Zeiss-Stiftung v Rayner & Keeler Ltd (No 2) [1966] 2 All ER 536, [1967] 1 AC 853, [1966] 3 WLR 125, HL.
Close v Steel Co of Wales Ltd [1961] 2 All ER 953, [1962] AC 367, [1961] 3 WLR 319, HL; affg [1960] 2 All ER 657, [1960] 2 QB 299, [1960] 3 WLR 401, CA.
Dalmia Dairy Industries Ltd v National Bank of Pakistan [1978] 2 Lloyd’s Rep 223, CA.
Deumeland v Germany (1986) 8 EHRR 448, E Ct HR.
Dreyfus v Peruvian Guano Co (1899) 43 Ch D 316, CA.
Duedu v Yiboe [1961] 1 WLR 1040, PC.
Feldbrugge v Netherlands (1986) 8 EHRR 425, E Ct HR.
Fidelitas Shipping Co Ltd v V/O Exportchleb [1965] 2 All ER 4, [1966] 1 QB 630, [1965] 2 WLR 1059, CA.
Fothergill v Monarch Airlines Ltd [1980] 2 All ER 696, [1981] AC 251, [1980] 3 WLR 209, HL.
Page 704 of [1989] 1 All ER 701
Gourdain v Nadler Case 133/78 [1979] ECR 733.
Gross, Re, ex p Treasury Solicitor [1968] 3 All ER 804, [1969] 1 WLR 12.
Huntington v Attrill [1893] AC 150, PC.
India (Government) Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292, [1955] AC 491, [1955] 2 WLR 303, HL.
Khan v Goleccha International Ltd [1980] 2 All ER 259, [1980] 1 WLR 1482, CA.
Kingston’s (Duchess) Case (1776) 1 East PC 468, [1775–1802] All ER Rep 623, HL.
Leeds Industrial Co-op Society Ltd v Slack [1924] AC 851, [1924] All ER Rep 259, HL; rvsg [1923] Ch 431, CA.
LTU Lufttransportunternehmen GmbH & Co KG v Eurocontrol Case 29/76 [1976] ECR 1541.
Maliban Biscuit Manufactories Ltd v Subramariam [1971] AC 988, [1971] 3 WLR 469, PC.
Netherlands v Ruffer Case 814/79 [1980] ECR 3807.
New Brunswick Rly Co v British and French Trust Corp [1938] 4 All ER 747, [1939] AC 1, HL.
Norway’s (State) Application, Re (No 1) [1989] 1 All ER 661, CA.
Penn-Texas Corp v Murat Anstalt [1963] 1 All ER 258, [1964] 1 QB 40, [1963] 2 WLR 111, CA.
Penn-Texas Corp v Murat Anstalt (No 2) [1964] 2 All ER 594, [1964] 2 QB 647, [1964] 3 WLR 131, CA.
R v Hutchings (1880) 6 QBD 300, CA.
R v Southampton Justices, ex p Green [1975] 2 All ER 1073, [1976] QB 11, [1975] 3 WLR 277, CA.
Rio Tinto Zinc Corp v Westinghouse Electric Corp, RTZ Services Ltd v Westinghouse Electric Corp [1978] 1 All ER 434, [1978] AC 547, [1978] 2 WLR 81, HL; rvsg sub nom Westinghouse Electric Corp Urainium Contract Litigation MDL Docket No 235 [1977] 3 All ER 703, [1978] AC 547, [1977] 3 WLR 492.
Salomon v Customs and Excise Comrs [1966] 3 All ER 871, [1967] 2 QB 116, [1966] 3 WLR 1223, CA.
Shoe Machinery Co v Cutlan [1896] 1 Ch 667.
Stag Line Ltd v Foscolo Mango & Co Ltd [1932] AC 328, [1931] All ER 666, HL.
Stamps Comr Straits Settlements v Oei Tjong Swan [1933] AC 378, PC.
Tennekoon (Comr for Registration of Indian and Pakistan Residents) v Duraisamy [1958] 2 All ER 479, [1958] AC 354, [1958] 2 WLR 994, PC.
Thoday v Thoday [1964] 1 All ER 341, [1964] P 181, [1964] 2 WLR 381, CA.
Yat Tung Investment Co v Dao Heng Bank [1975] AC 581, [1975] 2 WLR 690, PC.
Cases also cited
Allsop and Joy’s Contracts, Re (1889) 61 LT 213.
Asbestos Insurance Coverage Cases, Re [1985] 1 All ER 716, [1986] 1 WLR 331, HL.
Barham v Lord Huntingfield [1913] 2 KB 193, [1911–13] All ER Rep 663, CA.
Bemberg v Revenue Authorities of the Province of Buenos Aires (24 February 1949, unreported), Cours de Cassation de France.
Bunbury v Fuller (1853) 9 Exch 111, 156 ER 47, Ex Ch.
Connelly v DPP [1964] 2 All ER 401, [1964] AC 1254, HL.
Getty (Sarah C) Trust, Re [1985] 2 All ER 809, [1985] QB 956.
Griffiths v Davies [1943] 2 All ER 209, [1943] KB 618, CA.
Hennessy v Wright (No 2) (1890) 24 QBD 445n.
Hoystead v Taxation Comr [1926] AC 155, [1925] All ER Rep 56, PC.
Jacobs v LCC [1950] 1 All ER 737, [1950] AC 361, HL.
Kok Hoong v Leong Cheong Kweng Mines Ltd [1964] 1 All ER 300, [1964] AC 993, PC.
London Corp v Cox (1867) LR 2 HL 238.
Panthalu v Ramnord Research Laboratories Ltd [1965] 2 All ER 921, [1966] 2 QB 173, CA.
R v Comrs for Special Purposes of the Income Tax (1888) 21 QBD 313, [1886–90] All ER Rep 1139, CA.
Page 705 of [1989] 1 All ER 701
R v Hull Prison Board of Visitors, ex p St Germain [1979] 1 All ER 701, [1979] QB 425, CA.
R v Lincolnshire Justices, ex p Brett [1926] 2 KB 192, [1926] All ER Rep 275, CA.
R v Secretary of State for the Environment, ex p Hackney London BC [1984] 1 All ER 956, [1984] 1 WLR 592, CA; affg [1983] 3 All ER 358, [1983] 1 WLR 524.
Sebright v Hanbury [1916] 2 Ch 245.
Securities and Exchange Commission v Stockholders of Santa Fe International Corp [1985] ECC 187.
Spens v IRC [1970] 3 All ER 295, [1970] 1 WLR 1173.
Tournier v National Provincial and Union Bank of England [1924] 1 KB 461, [1923] All ER Rep 550, CA.
Waring (decd), Re, Westminster Bank Ltd v Burton-Butler [1948] 1 All ER 257, [1948] Ch 221.
Appeal and cross appeal
Lord Kindersley and Mr A J Hardman (the witnesses) appealed, pursuant to leave given by Kenneth Jones J, against his decision on 20 October 1986 whereby he dismissed the witnesses’ application to discharge the order of Master Creightmore made in chambers on 2 April 1986 for oral examination of the witnesses pursuant to s 2 of the Evidence (Proceedings in Other Jurisdictions) Act 1975, in compliance with a request from the Sandefjord City Court on an application by the State of Norway, supported by the estate of Anders Jahre deceased, that the witnesses be examined on 12 specified issues, and directed that the examination proceed subject to certain directions limiting the scope of the questions which they could be required to answer. The evidence sought by the applicants related to information relevant to proceedings brought by the estate of the deceased shipowner against the State of Norway concerning a disputed retrospective assessment for tax on the estate for the years 1972–82. The state cross-appealed seeking the removal of the directions. The facts are set out in the judgment of May LJ.
Michael Crystal QC, J A Jolowicz and John Higham for the witnesses.
Anthony Boswood QC and Stephen Moriarty for the state.
Nicolas Bratza for the estate.
Cur adv vult
18 December 1987. The following judgments were delivered.
MAY LJ. This is an appeal against a judgment of Kenneth Jones J of 20 October 1986. He then had before him a summons on behalf of Lord Kindersley and Mr A J Hardman (the witnesses) to set aside an ex parte order of Master Creightmore of 2 April 1986. That summons originally came before Master Prebble who, by consent, adjourned it to the judge in chambers under RSC Ord 32, r 12.
This litigation has had a long history and an application similar to that before the judge was before McNeill J in December 1985 and on appeal before the Court of Appeal in February 1986. The decision of this court on that occasion has been fully reported: see Re State of Norway’s Application (No 1) [1989] 1 All ER 661. In the course of his judgment Kerr LJ set out fully the course which the proceedings had taken until then and all the background facts and allegations (see [1989] 1 All ER 661 at 666–671). As Kenneth Jones J said in his judgment presently under appeal, much of what Kerr LJ said in relation to the litigation is relevant to the instant application and appeal and I gratefully incorporate it in this judgment by reference and without unnecessarily repeating it.
Nevertheless, for I hope the easier understanding of this judgment I will briefly set out the background to the case. Mr Anders Jahre was in the 1970s the president of a Panamanian corporation by the name of Continental Trust Co Inc (CTC). In 1976 Lord Kindersley, a director of Lazard Bros & Co Ltd, was appointed one of the advisers to a
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charitable foundation formed in that year which became the sole owner of the entire issued share capital of CTC. In 1977 Mr Hardman, an employee of Lazards, was appointed assistant secretary of CTC and in 1978 the treasurer of the corporation. In the same year Mr Jahre retired as the corporation’s president. He was a wealthy Norwegian shipowner. He died domiciled in Norway on 26 February 1982. In the course of the administration of his estate, on 14 September 1983 the relevant tax authorities raised a supplementary tax assessment on it retrospectively for the years 1970 to 1982 for the sum of N Kr 337,999,317 on the basis that the deceased had directly or indirectly been the owner of CTC and that there was reason to disregard the latter’s corporate form as a real company.
On 3 November 1983 the estate commenced proceedings in the Sandefjord City Court in Norway for an order nullifying the supplementary tax assessment. By what is apparently a parallel procedure, the estate also appealed to the Norwegian National Tax Committee on 31 January 1984. It was subsequently agreed between the estate and the state that any evidence given by the proposed witnesses pursuant to the letters of request to which I shall refer would be presented both to the city court and also to the National Tax Committee. I interpolate that in January 1984 Mr Hardman retired as the assistant secretary and treasurer of CTC.
On the estate’s application to the Sandefjord City Court, subsequently supported by the state, the office of the stipendiary magistrate in Sandefjord issued a first letter of request to the United Kingdom courts on 5 November 1984 for oral testimony to be given and documents to be produced by the witnesses. The master made the usual ex parte order. The witnesses then issued a summons to discharge it. This came before McNeill J who upheld the master’s order and effectively granted the joint application of the estate and the state subject to certain directions which he then gave. The witnesses then appealed successfully against the judge’s order. This was the decision of the first Court of Appeal to which I have already referred.
There were seven issues in that first appeal which can be listed as follows.
A. Civil proceedings: ‘civil or commercial matter’
The question was whether the Sandefjord proceedings fell within the ambit of the Evidence (Proceedings in Other Jurisdictions) Act 1975.
B. Tax gathering
A phrase taken from the speech of Lord Somervell in Government of India Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292 at 301, [1955] AC 491 at 514. The contention was that compliance with the first letter of request would be contrary to public policy and the settled principles that our courts would not lend their assistance to the enforcement, directly or indirectly, of foreign tax liabilities.
C. Sovereignty
The contention was that since the Sandefjord proceedings were concerned with the estate’s assessment to tax in Norway, compliance by an English court with the letter of request was precluded by s 4 of the Protection of Trading Interests Act 1980 on the ground that the request, or compliance with it, would infringe the jurisdiction of the United Kingdom or be prejudicial to its sovereignty.
D. Dual purpose
This concerned the intention to make the testimony of the witnesses available to the National Tax Committee, in addition to the Sandefjord court.
E. ‘Fishing’
The contention was that the terms of the first letter of request were far too wide to be an acceptable request for evidence under the 1975 Act, irrespective of certain limitations contained in directions given by McNeill J.
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F. Confidentiality
It was submitted that in all the circumstances the witnesses should not be ordered to break their duty of confidentiality to their customers by answering the questions raised by the letter of request.
G. Discretion
It was submitted that whereas issues A and C went to the jurisdiction of our court to comply with the letter of request, issues B, D, and E went to both jurisdiction and to the court’s general discretion, whereas issue F went solely to discretion.
In the event the witnesses failed before the first Court of Appeal on issues A, B, C and D but succeeded on issues E and F. The question whether the decision of what I will continue to call the first Court of Appeal created any precedent or issue estoppel binding on us was the first question argued on the hearing of the instant appeal. To this I shall have to return later.
At this point I set out the relevant provisions of the 1975 Act. The long title is in these terms:
‘An Act to make new provision for enabling the High Court, the Court of Session and the High Court of Justice in Northern Ireland to assist in obtaining evidence required for the purposes of proceedings in other jurisdictions; to extend the powers of those courts to issue process effective throughout the United Kingdom for securing the attendance of witnesses; and for purposes connected with those matters.’
The relevant parts of ss 1, 2, 3 and 9 are as follows:
‘1. Where an application is made to the High Court, the Court of Session or the High Court of Justice in Northern Ireland for an order for evidence to be obtained in the part of the United Kingdom in which it exercises jurisdiction, and the court is satisfied—(a) that the application is made in pursuance of a request issued by or on behalf of a court or tribunal (“the requesting court”) exercising jurisdiction in any other part of the United Kingdom or in a country or territory outside the United Kingdom; and (b) that the evidence to which the application relates is to be obtained for the purposes of civil proceedings which either have been instituted before the requesting court or whose institution before that court is contemplated, the High Court, Court of Session or High Court of Justice in Northern Ireland, as the case may be, shall have the powers conferred on it by the following provisions of this Act.
2.—(1) Subject to the provisions of this section, the High Court, the Court of Session and the High Court of Justice in Northern Ireland shall each have power, on any such application as is mentioned in section 1 above, by order to make such provision for obtaining evidence in the part of the United Kingdom in which it exercises jurisdiction as may appear to the court to be appropriate for the purpose of giving effect to the request in pursuance of which the application is made; and any such order may require a person specified therein to take such steps as the court may consider appropriate for that purpose.
(2) Without prejudice to the generality of subsection (1) above but subject to the provisions of this section, an order under this section may, in particular, make provision—(a) for the examination of witnesses, either orally or in writing; (b) for the production of documents …
(3) An order under this section shall not require any particular steps to be taken unless they are steps which can be required to be taken by way of obtaining evidence for the purposes of civil proceedings in the court making the order (whether or not proceedings of the same description as those to which the application for the order relates); but this subsection shall not preclude the making of an order requiring a person to give testimony (either orally or in writing) otherwise than on oath where this is asked for by the requesting court.
(4) An order under this section shall not require a person—(a) to state
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what documents relevant to the proceedings to which the application for the order relates are or have been in his possession, custody or power; or (b) to produce any documents other than particular documents specified in the order as being documents appearing to the court making the order to be, or to be likely to be, in his possession, custody or power …
3.—(1) A person shall not be compelled by virtue of an order under section 2 above to give any evidence which he could not be compelled to give—(a) in civil proceedings in the part of the United Kingdom in which the court that made the order exercises jurisdiction; or (b) subject to subsection (2) below, in civil proceedings in the country or territory in which the requesting court exercises jurisdiction …
(4) In this section references to giving evidence include references to answering any question and to producing any document …
9.—(1) In this Act—“civil proceedings”, in relation to the requesting court, means proceedings in any civil or commercial matter … ’
Kerr LJ in the first Court of Appeal was critical about the cogency and extent of the evidence then before the court on what I may describe as the ‘international’ aspect and the Norwegian law issue. At the end of his judgment he said ([1989] 1 All ER 661 at 689):
‘Finally, I would add that if this judgment reflects the ultimate outcome of this appeal, then I hope that any renewal of the present letter of request in some more limited and acceptable form, if this can be devised, should be accompanied by clear evidence as to what is properly to be regarded as a “civil or commercial matter” by the law of Norway, and in particular whether Norwegian law distinguishes between public and private law. I feel, frankly, uneasy about my acceptance, dubitante, of the very limited evidence in this connection on the present application. I would also urge that, at any rate in the international context, particularly in relation to the concept of “civil and commercial matters” in the Hague and similar bilateral conventions, as well as of the 1975 Act, it would be desirable to recognise a clear-cut distinction between private and public law in our jurisprudence, in the same way as in other legal systems.’
As Kenneth Jones J said, this passage was naturally construed first by the state and the estate as an invitation to make a fresh application for a letter of request in ‘some more limited and acceptable form’. Second, the witnesses read it as an invitation, if a fresh application were made, to adduce further evidence and material to the court about the law of Norway and to reopen issue A. Both sides acted swiftly. A second joint application was made in Norway by the state and the estate on 7 March 1986 and pursuant to it a second letter of request was issued by the stipendiary magistrate in Sandefjord on 10 March 1986. The topics on which the evidence of the witnesses is now sought are set out in schedule 1 to the letter of request, but I need not detail them fully at this stage of this judgment.
Before the judge below and here it was again first argued on behalf of the witnesses that the underlying proceedings in the Sandefjord court did not fall within the ambit of the 1975 Act. But on behalf of both the state and the estate the preliminary points were taken, first, that as a matter of law the judge was bound by way of legal precedent by the construction placed by the first Court of Appeal on the relevant provisions of that Act and second, that in so far as the issues raised questions of fact rather than of English law, particularly questions of the relevant Norwegian law, the witnesses were estopped from re-opening the issue by the earlier decision of the Court of Appeal.
When this matter was before the first Court of Appeal Kerr LJ reluctantly found it impossible to give any ‘international’ interpretation to the definition of ‘civil proceedings’ in s 9(1) of the 1975 Act. He held that the proper approach to the problem required the court addressed to satisfy itself that the relevant proceedings concerned a civil or commercial matter under the law of the requesting court, but that the court addressed
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would only accept the foreign classification for the purpose of assuming jurisdiction if it were not in conflict with any fundamental principle recognised under its own laws. On the limited material before the court on that occasion Kerr LJ reluctantly concluded that the Sandefjord proceedings could be regarded as a civil matter by the law of Norway and that as they were clearly to be so characterised by English law the first letter of request was within the scope of the 1975 Act and that accordingly the English courts had jurisdiction to give effect to it, subject to the resolution of the other issues involved. With this view both Glidewell and Ralph Gibson LJJ agreed.
In relation to the second letter of request Kenneth Jones J held, firstly, that he was bound by this decision on the proper construction of s 9(1) in English law by the court. But on this point he also held, secondly, that the witnesses were not estopped from re-arguing the question of Norwegian law. Nevertheless, he, thirdly and finally, decided on the material before him, which he thought was still far from clear, that in Norwegian law the proceedings before the Sandefjord court would be categorised as proceedings in a civil matter for the purposes of the 1975 Act.
Before us the witnesses have once more argued for an international construction of s 9(1). In any event, and in the alternative, they have contended that the judge’s finding on Norwegian law was wrong. They necessarily submitted that they were bound neither by precedent nor issue estoppel to prevent them so arguing.
The state and estate have contended the reverse. First, that the witnesses were bound by both precedent and issue estoppel. Second, if they were not, that the proper construction of the 1975 Act did not admit of an international one and further, that the previous decision of the two judges at first instance and of this court on the question of Norwegian law had been correct.
Before Kenneth Jones J counsel for the witnesses did not argue issues B (tax gathering), C (sovereignty), or D (dual purpose), but reserved his position on them for a higher court. He has formally argued these issues before us, although more on paper by way of his full and helpful skeleton argument than orally, but he has recognised the difficulties in his way posed by the earlier decision of this court on these issues. The state and the estate have sought to uphold these earlier decisions and have contended that they apply equally to the second letter of request as to the first. I should add that the decision on these issues in the first Court of Appeal was unanimous.
On issue E (fishing), in relation to the first letter of request Kerr and Glidewell LJJ held in favour of the witnesses. Ralph Gibson LJ took the opposite view. On the second letter of request, Kenneth Jones J held that, with limited deletions which he ordered, the questions sought to be asked would not be ‘fishing’. As might be expected, on the instant appeal the witnesses have contended that the judge was wrong, whilst the state and the estate have argued the reverse. By a cross-notice the state has further contended that the judge was wrong even to order the limited deletions which he did.
On issue F, confidentiality, on the previous occasion in this court Kerr LJ again held in favour of the witnesses and Ralph Gibson LJ in favour of the present state and the estate. Although I respectfully do not think that Glidewell LJ expressed any final conclusion on this issue, on a careful reading of his judgment I think that in general he took the same view as did Kerr LJ. Before Kenneth Jones J the two issues of ‘fishing’ and ‘confidentiality’ appear to have been argued together. The judge held against the witnesses, who now appeal. The state and estate have submitted that the judge was correct.
When this matter was before the first Court of Appeal on the first letter of request, in the light of the majority decision on issues E and F the question of discretion did not directly arise. Ralph Gibson LJ would clearly have exercised his discretion in favour of the witnesses’ proposed examination. On the second letter of request, Kenneth Jones J took the same view as had Ralph Gibson LJ on the first. On this appeal the parties have taken the appropriate opposing stances.
The first issues which have therefore to be considered in this appeal are first, whether the decision of the first Court of Appeal created any precedent in law or issue estoppel
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binding on us and the witnesses. In so far as the latter are concerned, a subsidiary issue has been argued, namely that even if otherwise there would be issue estoppel can this deprive the court of a jurisdiction which it would otherwise possess under the statute? In addition, we have heard argument on each of the seven issues listed by Kerr LJ (see [1989] 1 All ER 661 at 672).
I turn therefore to the issue of precedent. The question is whether the decision of the first Court of Appeal on the previous occasion on the question of law of the proper construction of s 9(1) of the 1975 Act is binding as a legal precedent on us. The general principles are well known; they are stated in 26 Halsbury’s Laws (4th edn) para 573 in this way:
‘The use of precedent is an indispensable foundation upon which to decide what is the law and its application to individual cases; it provides at least some degree of certainty upon which individuals can rely in the conduct of their affairs, as well as a basis for orderly development of legal rules. The enunciation of the reason or principle upon which a question before a court has been decided is alone binding as a precedent.’
In Close v Steel Co of Wales Ltd [1961] 2 All ER 953 at 960, [1962] AC 367 at 388 Lord Denning MR in the course of his speech quoted Sir Frederick Pollock Progress of Continental Law in the Nineteenth Century (Continental Legal History Series) p xliv, on the same point to this effect:
‘Judicial authority belongs not to the exact words used in this or that judgment, nor even to all the reasons given, but only to the principles accepted and applied as necessary grounds of the decision.’
Precedents therefore are to be contrasted with dicta, which are statements which are not necessary to the decision, which go beyond it and lay down a rule that is unnecessary for the purpose in hand. They have no binding authority on another court, although they may have some persuasive efficacy.
On the previous occasion that this matter came before the Court of Appeal Kerr LJ considered the question of the proper construction of s 9(1) of the 1975 Act in detail and I am respectfully most grateful for the help that I have derived from his judgment. He ultimately concluded that he could not adopt any ‘international’ interpretation of the phrase ‘civil or commercial matter’ in the relevant subsection. However, at the end of this part of his judgment he said ([1989] 1 All ER 661 at 681): ‘In any event, in view of my conclusions on issues E and F, in this judgment the matter becomes academic.’
I think that Glidewell LJ in his turn also rejected the international approach to the question of construction, but not in terms which lead me in any way to think that he relied on this for his ultimate decision in the case. As I have already said, in my respectful opinion he expressed no final view on issue F, confidentiality, but expressly agreed with Kerr LJ in his decision on issue E, ‘fishing’. In his judgment Glidewell LJ said ([1989] 1 All ER 661 at 691):
‘Thus I have reluctantly come to the conclusion that on this sole ground the order sought by the state and the estate should not be made.’
I think that this makes clear on what basis Glidewell LJ decided that the appeal should be allowed.
Finally, Ralph Gibson LJ did not specifically refer to the issue of international construction in the course of his judgment. Nevertheless he agreed generally with the views of Kerr LJ on issue A as a whole.
On this analysis I do not think that any views expressed by this court on the previous occasion, that as a matter of law one could not give any international construction to the relevant phrase in the 1975 Act, formed any part of the ratio for their ultimate decision.
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Consequently, that which they did say on this particular point is not in my opinion binding on us.
I should, however, refer to an argument put to us attractively by counsel for the estate founded on the decision of the Court of Appeal in Slack v Leeds Industrial Co-op Society Ltd [1923] Ch 431. The question in that case was whether on a proper construction of s 2 of the Chancery Amendment Act 1858 (Lord Cairns’s Act) a court had any jurisdiction to award damages in substitution for an injunction where the injury to the plaintiff’s rights was only apprehended in the future, but no present actionable interference existed. In the earlier case of Dreyfus v Peruvian Guano Co (1899) 43 Ch D 316 all three members of the Court of Appeal had expressed the view after full argument that there was no such jurisdiction in those circumstances. However, for two members of the court such a conclusion was not necessary for their decision in that earlier case; the third member of the court in any event dissented. In Slack v Leeds Industrial Co-op Society Ltd Lord Sterndale MR and Warrington LJ clearly took a contrary view on the question of construction but, in the light of the earlier dicta, Lord Sterndale MR said (at 452):
‘It is hardly possible to imagine dicta which are not binding decisions of greater weight, and as I have already pointed out, though they have been referred to on several occasions they have never elicited any expression of disapproval … I think … that it is open to us to decide the question contrary to those dicta, and the question is whether we ought to do so. I am of opinion that we ought not, and that if opinions of such weight given after such careful consideration more than thirty years ago, often mentioned and considered during that time and never disapproved, are to be overruled, it should only be done by the final tribunal of appeal and not by a Court of co-ordinate jurisdiction.’
Warrington LJ in his turn said (at 456):
‘In order to get rid of the effect of the opinions deliberately expressed by three judges of this Court it is in my judgment not enough to say “they are mere dicta.” They are not views casually expressed on a point not really adequately considered, but they are arrived at and expressed with the same care and deliberation as if they had been necessary for the decision of the case. Although therefore they are not absolutely binding as would be an actual decision of the Court necessary to its judgment, they are entitled to such weight that we ought to follow them unless we find that they have been overruled or that they are inconsistent with previous decisions.’
Counsel for the estate submitted that following those views so firmly expressed in Slack’s case, we should not lightly depart from and indeed should follow the considered and reasoned view of Kerr LJ who is extremely experienced in this type of case.
However, when Slack’s case reached the House of Lords ([1924] AC 851, [1924] All ER Rep 259) the decision of the Court of Appeal was reversed, and in particular for present purposes Lord Dunedin said ([1924] AC 851 at 863–864; [1924] All ER Rep 259 at 265–266):
‘My Lords, I cannot help remarking that I think the judgments in this appeal are in a peculiar position. On the question of construction of the statute all four judges are—so far as their own opinions are concerned—of one mind that the jurisdiction in question is conferred by the words used … [Lord Sterndale MR and Warrington LJ] took up a position which personally I cannot quite appreciate. They said that Dreyfus did not bind them, but that the dicta in Dreyfus must be followed, and if wrong must be put right by a higher Court, that is, your Lordships’ House. My Lords, if a decision is binding, there is an end of it. But if you have only to do with dicta, though such dicta may well serve to help you to form your own opinion, I cannot see that they ought to overrule it.’
I respectfully agree with Lord Dunedin and in my opinion the principle is as I have
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quoted from 26 Halsbury’s Laws (4th edn) para 573. For this reason I must reject the argument of counsel for the estate. As I have said, I, of course, accord the greatest respect to the earlier judgment of Kerr LJ but I do not think that it or any decision of the previous Court of Appeal is binding on us on this question of construction.
Different from their view on the question of law concerning a possible international construction of the relevant section of the 1975 Act, however, I think that each member of the first Court of Appeal did hold that the proceedings in the Sandefjord court were civil proceedings under Norwegian law. This was, of course, a question of fact. In these circumstances it was contended both before the judge below and before us that the witnesses were in any event estopped from contending that this was not so. It was submitted that it was a clear case for the application of the principle of issue estoppel.
The principle contended for was that stated in Thoday v Thoday [1964] 1 All ER 341 at 352, [1964] P 181 at 198 by Diplock LJ:
‘There are many causes of action which can only be established by proving that two or more different conditions are fulfilled. Such causes of action involve as many separate issues between the parties as there are conditions to be fulfilled by the plaintiff in order to establish his cause of action; and there may be cases where the fulfilment of an identical condition is a requirement common to two or more different causes of action. If in litigation on one such cause of action any of such separate issues whether a particular condition has been fulfilled is determined by a court of competent jurisdiction, either on evidence or on admission by a party to the litigation, neither party can, in subsequent litigation between them on any cause of action which depends on the fulfilment of the identical condition, assert that the condition was fulfilled if the court has in the first litigation determined that it was not, or deny that it was fulfilled if the court in the first litigation determined that it was … The determination by a court of competent jurisdiction of the existence or non-existence of a fact, the existence of which is not of itself a condition the fulfilment of which is necessary to the cause of action which is being litigated before that court, but which is only relevant to proving the fulfilment of such a condition, does not estop at any rate per rem judicatam either party in subsequent litigation from asserting the existence or non-existence of the same fact contrary to the determination of the first court. It may not always be easy to draw the line between facts which give rise to “issue estoppel” and those which do not, but the distinction is important and must be borne in mind.’
It was submitted that it was a condition precedent to the validity of the first letter of request that the Sandefjord proceedings were indeed civil proceedings under Norwegian law; that this point was argued at length on behalf of the witnesses in relation to that first letter of request; that there was no reason at all why the witnesses could not have adduced all the evidence on Norwegian law at that stage which was relevant to the point and which they subsequently sought to introduce in relation to the second letter of request; that after hearing the argument and evidence the issue was fully considered by the Court of Appeal and clearly decided against the witnesses; that whether or not the conclusion as to Norwegian law was part of the ratio of the decision on the previous occasion nevertheless the unanimous finding by the members of the court was fundamental to their decision and was clearly not incidental or collateral.
However, it seems clear to me that Kerr LJ did not think that the parties would be precluded from canvassing this particular issue on a later occasion. His inferential invitation to consider a renewal of the first letter of request, accompanied by substantially clearer and fuller evidence about Norwegian law, the terms of which I have already quoted, makes this clear. He gave direct expression to his unease about his then acceptance of the very limited evidence on this point that there was before the Court of Appeal on the previous application. I cannot think that the question of possible issue of estoppel was not present to his mind. I think it at least well arguable that he expressly
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decided the appeal then before that court on the issues of fishing and confidentiality so that the parties should not thereafter be precluded from having the Norwegian law issue reopened and fully considered on adequate material.
In the court below on the present second occasion the judge was referred to the decision in Penn-Texas Corp v Murat Anstalt (No 2) [1964] 2 All ER 594 esp at 597, [1964] 2 QB 647 esp at 660 per Lord Denning MR:
‘In my opinion, a previous judgment between the same parties is only conclusive on matters which were essential and necessary to the decision. It is not conclusive on other matters which came incidentally into consideration in the course of the reasoning: see Duchess of Kingstont’s Case ((1776) 1 East PC 468, [1775–1802] All ER Rep 623) and R v Hutchings ((1881) 6 QBD 300). One of the tests in seeing whether a matter was necessary to the decision, or only incidental to it, is to ask: could the party have appealed from it? If he could have appealed and did not, he is bound by it, see Badar Bee v Habib Merican Noordin ([1909] AC 615 at 623), per LORD MACNAGHTEN. If he could not have appealed from it (because it did not affect the order made), then it is only an incidental matter, not essential to the decision, and he is not bound.’
The judge then accepted the submission made on behalf of the witnesses and repeated before us that they could not have appealed the decision of the previous Court of Appeal on this Norwegian law point because they had succeeded overall. Consequently there could be no estoppel.
In challenging this contention in the instant appeal, counsel for the state submitted that there was no general or absolute rule of law that an issue estoppel is incapable of arising merely because the party against whom the finding was made was unable to appeal against the decision. There is no reference to such a rule in recent authoritative decisions on the point, such as those of the Privy Council in Yat Tung Investment Co v Dao Heng Bank [1975] AC 581 and the Court of Appeal in Khan v Goleccha International Ltd [1980] 2 All ER 259, [1980] 1 WLR 1482. We were also referred to Spencer-Bower and Turner Res Judicata (2nd edn, 1969) p 144, para 181. In any event, it was contended that there was good authority to the contrary. In Shoe Machinery Co v Cutlan [1896] 1 Ch 667 there had been an earlier action between the same parties in which a patentee had claimed damages for an infringement of his patent and an injunction. In answer the defendant had denied not only the infringement but also the validity of the patent. On that first occasion the court had upheld the validity of the patent, but had granted no injunction or damages on the ground that the evidence of the alleged infringement had not been admissible. In the second action between the same parties in respect of the same patent the defendant again denied its validity. The patentee contended that, as the question of the validity of the patent had been decided on the first occasion, the defendant was estopped from raising that issue again on the second. Romer J decided this question in favour of the patentee. Counsel for the state submitted to us that clearly the judge’s earlier decision that the patent was valid could not have been appealed, and yet he had held that there had been an issue estoppel. In reply counsel for the witnesses submitted that Romer J had so decided because he took the view that there could have been an appeal against his earlier decision, if only against the order for costs. He relied on the following passage from Romer J’s judgment (at 670):
‘It was because the issue of validity had been found in favour of the plaintiffs that the Court ordered the defendants to pay the plaintiffs the costs of that issue; and because the plaintiffs had failed on the issue of infringement that the Court ordered the plaintiffs to pay the defendants’ costs of that issue, and declared that there should be a set-off. Now clearly, in my judgment, that decision of the Court, so far as concerns the question of the validity of the patent, and the order which directed the
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defendants to pay the costs of that issue, could have been appealed from. It was a deliberate finding on the question of validity—a question fairly raised for the decision of the Court as between these two parties and fairly fought out before it; and I cannot see why the decision given by the Court then on that issue is not to bind the parties to it.’
Authority for the proposition that in special circumstances an appeal will lie to the House of Lords on a question issue of costs alone can be found in Donald Campbell & Co Ltd v Pollak [1927] AC 732, [1927] All ER Rep 1.
However, I do not read Romer J’s judgment, in so far as it dealt with the contention that there could be no estoppel because there had been no right of appeal, as being based on the proposition that there would at least have been a right of appeal on his earlier order on costs. I think that he took the view that even though the defendant had succeeded in the action as a whole, he nevertheless could have appealed the determination of the validity of the patent had he wished to do so. He put the matter again in this way (at 671):
‘It appears to me that it sufficiently appears from this judgment that I did not dismiss this action so far as concerns this patent, and I found the issue of validity and determined it in favour of the plaintiffs, and I ordered the defendants to pay the costs of it. I cannot doubt that if the defendants had chosen to appeal from that part of the judgment they were entitled to have had that appeal heard by the Court of Appeal.’
For present purposes it is unnecessary to decide whether the judge’s view was correct. Even if the case were binding on us, I do not think that it is sufficiently clear authority to support the argument which was based upon it.
Shoe Machinery Co v Cutlan was referred to in the opinion of the Privy Council in Duedu v Yiboe [1961] 1 WLR 1040. In that case the Ghana Court of Appeal held that in earlier proceedings between the parties the issue of ownership of a parcel of land had been decided in the respondent’s favour. Consequently in subsequent proceedings seeking a declaration of title to that land the appellant was estopped by the earlier decision. On a full reading of the report I think that the Judicial Committee did so hold notwithstanding the fact that the respondent could not have appealed in the earlier proceedings because he had succeeded in defeating his opponent’s claim for damages for trespass. In my judgment, this decision of the Privy Council, although not strictly binding on us, is good persuasive authority for the proposition that there can be an issue estoppel even though the previous decision could not have been appealed. Nevertheless, this is in no way inconsistent with the proposition that whether or not an earlier decision could have been appealed is in many cases a good test of whether it brought into being an issue estoppel.
In my opinion similar considerations arise on this question of issue estoppel as they do on the question of precedent. I respectfully agree with the statement of the general principle by Diplock LJ in Thoday v Thoday [1964] 1 All ER 341, [1964] P 181. But, as Lord Denning MR pointed out in Fidelitas Shipping Co Ltd v V/O Exportchleb [1965] 2 All ER 4, [1966] 1 QB 630, the principle is to be applied flexibly. In Carl-Zeiss-Stiftung v Rayner & Keeler Ltd (No 2) [1966] 2 All ER 536 at 573, [1967] AC 853 at 947 Lord Upjohn said:
‘All estoppels are not odious but must be applied so as to work justice and not injustice, and I think that the principle of issue estoppel must be applied to the circumstances of the subsequent case with this overriding consideration in mind.’
As I have already said, in my view whether or not the decision on the previous occasion was appealable is only one test which may or may not be of help in a given case. The basic requirement for the operation of the general principle is that the earlier determination relied on as raising an issue estoppel shall have been fundamental to the
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decision first arrived at. The matter is fully dealt with in Spencer-Bower and Turner Res Judicata (2nd edn, 1969) pp 179–182, paras 210–211, of which the opening passage reads:
‘Even when in one way or another it can be demonstrated that the court has expressly determined, in the earlier proceedings, the same issue as is now in dispute, an issue estoppel will not by any means always be the result. Only determinations which are necessary to the decision—which are fundamental to it and without which it cannot stand—will found an issue estoppel. Other determinations, without which it would still be possible for the decision to stand, however definite be the language in which they are expressed, cannot support an issue estoppel between the parties between whom they were pronounced.’ (The editor’s emphasis.)
In these circumstances it is unnecessary for me to express any decided view on the question whether the court can be deprived by the operation of the principle of issue estoppel of a jurisdiction which it would otherwise possess under the statute. Nevertheless, having had the question fully argued before us, my present opinion is that it cannot.
Being therefore bound neither by precedent nor by the principle of issue estoppel to follow without more the conclusions reached on the point by the first Court of Appeal, I turn to consider afresh the first and fundamental question in this case, namely the proper construction of the phrase ‘proceedings in any civil or commercial matter’ in s 9(1) of the 1975 Act and whether the Sandefjord proceedings fall within that construction. Three preliminary comments can be made. First, the answer to this fundamental question will define the jurisdiction of the court addressed in the United Kingdom, in this case the High Court and then this court on appeal from the latter. Second, on a first reading of the phrase in a common law context, the courts are in my view immediately presented with a patent difficulty. Parliament cannot have intended that the words ‘or commercial’ should be ignored; it is a trite comment that a commercial proceeding in an English court is in English law a civil proceeding; thus the phrase ‘civil or commercial’, which ex hypothesi contrasts the two types of proceedings, has no intelligible common law meaning. Although, for the reasons which I have already given, we are not bound by the decision on this point by the first Court of Appeal, the views then expressed of course carry very considerable persuasive effect and, if I may respectfully say so, I have been greatly assisted by them.
I therefore turn to consider the views expressed, first by Kerr LJ ([1989] 1 All ER 661 at 676–678). On the question of how an English court is to approach and resolve the problem of construction posed by s 9(1) of the 1975 Act it has never been disputed that reference to the convention can properly be of assistance. As Kerr LJ said ([1989] 1 All ER 661 at 676):
‘… since it was pointed out in Rio Tinto Zinc Corp v Westinghouse Electric Corp [1978] 1 All ER 434, [1978] AC 547] that one of the purposes of the 1975 Act was to implement the convention, this must be the starting point. Where English legislation has been enacted to give effect to a convention, reference to it may, and should where necessary, be made to it to see whether it assists in the interpretation of the legislation, not only where the convention is annexed (see esp Lord Diplock in Fothergill v Monarch Airlines Ltd [1980] 2 All ER 696 at 705–707, [1981] AC 251 at 280–283), but even where it is not (see Salomon v Customs and Excise Comrs [1966] 3 All ER 871 at 874–876, [1967] 2 QB 130 at 141–145 per Lord Denning MR and Diplock LJ). In statutes giving effect to conventions, an interpretation “on broad principles of general acceptation” is desirable (see Stag Line Ltd v Foscolo Mango & Co Ltd [1932] AC 328 at 350, [1931] All ER Rep 666 at 677 per Lord Macmillan). However, sometimes this may not be possible (see James Buchanan & Co Ltd v Babco Forwarding and Shipping (UK) Ltd [1977] 3 All ER 1048 esp at 1052–1053, [1978] AC 141 esp at 152–153 per Lord Wilberforce).’
But having thus reached the convention, Kerr LJ thought that it itself provided no assistance on the question at all. In asking where an English court then went, he suggested
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that four possible categories presented themselves: (1) a generally accepted international interpretation; (2) classification under the law of the requesting court; (3) classification under the law of the court addressed; (4) a combination of (2) and (3): the court addressed would satisfy itself that the proceedings concern a civil or commercial matter under the law of the requesting court, but would only accept this categorisation for the purposes of assuming jurisdiction if it is not in conflict with any fundamental principle recognised under the laws of the court addressed.
On the material and the submissions presented to the court on that occasion, Kerr LJ reluctantly concluded that (4) provided the best answer. Nevertheless, I think that it is clear that had he felt able so to hold, he would have preferred category (1).
With the help of the substantial additional material and argument which were put before us, I have found myself driven to the conclusion that the generally accepted international interpretation comprised in the first category referred to by Kerr LJ is not only correct but also to be preferred. It is unnecessary to set out or to refer in detail to all the fresh material to which we were referred. I have, however, derived substantial assistance from, and I am especially grateful for, the argument for the witnesses formulated on material assembled by their legal advisers, particularly by Professor J A Jolowicz of the University of Cambridge, and also for the comments of Dr F A Mann in his critical note on the decision of the first Court of Appeal ‘Any Civil or Commercial Matter’ (1986) 102 LQR 505.
I have already drawn attention to the difficulty, if not impossibility, of attributing an intelligible common law meaning to the phrase in s 9(1) of the 1975 Act, ‘civil or commercial’. The combination of ‘civil’ and ‘commercial’ points away from a classification under the common law and since that combination is carried over from the 1970 convention into the 1975 Act, I think it right to assume that Parliament intended to point in the same direction. This would not be the first time in this field where Parliament has chosen to do so (see [1989] 1 All ER 661 at 679, per Kerr LJ). As I have already said, the terms of the 1970 convention are expressed to have the same meaning in each of the two authentic texts and consequently one of those can be looked at to clarify the meaning of the other. The phrase ‘civil or commercial matter’, which is a translation of the French ‘matiere civile ou commerciale’ clearly directs one’s attention to the civil law systems.
Next, the use of the word ‘matiere’ indicates or describes the nature of the litigation, the subject matter of the dispute: see Dalloz Lexique de Termes Juridiques (5th edn, 1981) p 270. On such an approach, different from that based on procedural considerations, the duality and indeed the dichotomy between ‘civil’ and ‘commercial’ points even more strongly away from a classification under the common law. In French law, however, there exists a clear distinction between ‘civil’ and ‘commercial’ which is rooted in history: see David English Law and French Law (1980) p 36ff. Whether the distinction should or can be maintained may be a matter of controversy. The authority just referred to shows that in some countries the view has prevailed that the distinction should be repudiated, for instance in Switzerland, Italy and the Netherlands.
However, it is also apparent that civil law countries draw a clear distinction between private and public law, a distinction which, as Kerr LJ remarked, is only beginning to emerge in this country. I respectfully agree with the view also expressed by Kerr LJ that the draftsman of the 1970 convention, when using the phrase ‘matiere civile ou commerciale’ must have had this distinction in mind. Viewed through the eyes of a civil lawyer, the Sandefjord proceedings would be categorised as being concerned with a ‘matiere fiscale’ within the sphere of public law and as such not comprised within the phrase ‘matiere civile ou commerciale’. Further, as Kerr LJ also said, international assistance in revenue matters is generally given by double tax conventions, which normally provide for the ‘exchange of information’.
Against this background, and remembering the widening legal horizons towards which our courts have increasingly to look, it is not difficult in my view to conclude that jurisdiction under the 1975 Act in respect of letters of request only arises if the English
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court is satisfied that the proceedings in the requesting court are either civil or commercial in the sense in which civilian legal systems would understand these words. In other cases this could be a matter of some difficulty and require much further discussion and argument. For the purposes of the instant case, however, it is accepted that if this is the correct approach, then the proceedings in the Sandefjord court are indeed concerned with ‘matiere fiscale’ in a civil law classification and as such are not proceedings sufficient to found the basic jurisdiction.
I turn briefly to consider the factors which in the view of Kerr LJ militated against the choice of a generally accepted international interpretation as the proper construction of the phrase used in s 9(1) of the 1975 Act. He first pointed out that the subject matter of the European Judgments Convention of 1968 (set out in Sch 1 to the Civil Jurisdiction and Judgments Act 1982) was the recognition and enforcement of foreign judgments; not merely the more limited one of providing judicial assistance for the provision of evidence in foreign courts. Further, the European Court is expressly empowered by the EEC Treaty to interpret the 1968 convention authoritatively. It does so in the sense which is ‘communautaire’ within the members of the European Economic Community. It is not so empowered with regard to the Hague Convention on the Taking of Evidence abroad in Civil or Commercial Matters (The Hague, 18 March 1970, TS 20(1977); Cmnd 6727).
With respect, I am not persuaded that this makes any difference; each convention is concerned with an aspect of international legal procedures. Unless there is good reason not to do so, I prefer to construe the phrase ‘matiere civile ou commerciale’ and thus its English translation, in the same way in each convention. If this is a correct approach, then the decision in Netherlands v Rutter Case 814/79, [1980] ECR 3807 confirms and does not weaken the view I have formed on the 1970 convention and 1975 Act.
Kerr LJ then drew attention to the fact that whereas the 1968 convention and the Civil Jurisdiction and Judgments Act 1982 expressly exclude ‘in particular … revenue, customs or administrative matters’ from ‘civil or commercial matters’, neither the 1970 convention nor the 1975 Act do so. However, he also pointed out that this was done to resolve any doubts about the scope of ‘civil or commercial matters’ in relation to member states which draw no clear distinction between public and private law. This corresponds with the view expressed in other material put before us but which was not before the first Court of Appeal that the phrase or sentence quoted was not an amendment but a clarification of the scope of the 1968 convention (see Kohler ‘The Case Law of the European Court on the Judgments Convention—Part II’ (1982) 7 EL Rev 104ff). I respectfully agree with Kerr LJ that it is unfortunate that no such clarification was attempted of the 1970 convention and the 1975 Act, but the fact that it was not does not lead me to construe the latter differently.
Finally, Kerr LJ pointed out again that the common law does not, at any rate at the present time, recognise any clear distinction between public and private law, although such a distinction is certainly beginning to be recognised. He suggested that it would be wrong to reach any interpretation of the 1975 Act even impliedly on the existence of any such distinction. It seemed to him inconceivable that in 1975 Parliament could have intended that inter-United Kingdom requests for evidence in civil proceedings should be based on a categorisation by reference to public and private law. For my part, however, I am not prepared to accept that the draftsman of the 1975 Act did not appreciate that while the distinction inherent in this well-known phrase certainly underlay its use in the 1970 convention, nevertheless it could not conveniently be fitted into an inter-United Kingdom arrangement, at any rate without further definition or explanation. The draftsmen were skilled and experienced lawyers whom one might expect to have had more than a nodding acquaintance with the concepts of civil law. It is in my view not difficult to accept that in drafting the 1975 Act based on the international 1970 convention they would have had substantial contact and discussion with lawyers in other relevant countries when drawing up the Act and adhering to the convention and would have been aware of what they were doing.
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As to the three other possible categories considered by the first Court of Appeal, it rejected the second and this was not contended for before us. As Balcombe LJ points out in his judgment, which I have had the advantage of reading in draft, if an English court were to be wholly bound by the classification of the requesting court, it might be required to assist in proceedings which were classified by English law as criminal or penal. This would be contrary to the well-established principles of international law reiterated, for instance, in Huntington v Attrill [1893] AC 150 at 156.
The third of the possible categories listed by Kerr LJ might appear to have the greatest attraction for an English court in the instant case, and indeed to any court addressed whatever the circumstances. If the proper construction of the convention and, in so far as the United Kingdom is concerned, that of s 9(1) of the 1975 Act, enabled one to prefer this category, then it would enable the courts of this country to accept jurisdiction in those cases in which our law indicated that it was right and proper to do so. However, one’s immediate attraction to the third category as keeping the question of jurisdiction to be decided by one’s own law is very soon diluted by the difficulty to which I have already referred of resolving the patent dichotomy between ‘civil’ and ‘commercial’.
As to the fourth possible category, I respectfully and gratefully adopt the comments of Balcombe LJ in his judgment on this point, also on the view (which I respectfully agree to have been erroneous) of Dr Mann that categories 2 and 4 must fall together, and on the passage from the judgment of Glidewell LJ in the first Court of Appeal decision (see [1989] 1 All ER 661 at 689–690.
Finally, apart from the purely constructional arguments which I have rehearsed, a substantial attraction for me in the choice of a generally acceptable interpretation of the relevant phrase in the convention and the Act is that it will produce uniformity. That may be based on a civilian law approach rather than on a common law one, but if in a particular instance the one produces certainty and uniformity in a particular context and the other does not, then as a common lawyer I am content. The English courts will now be able to treat letters rogatory under the Act in the same way from whichever country they come if the substance of the proceedings in that other country is the same, however differently they may be viewed under the several legal systems of the requesting countries: cf eg LTU Lufttransportunternermen GmbH & Co KG v Eurocontrol Case 29/76 [1976] ECR 1541 at 1551–1553 and Gourdain v Nadler Case 133/78 [1979] ECR 733.
In my opinion, therefore, the proper construction of the phrase ‘proceedings in any civil or commercial matter’ in s 9(1) of the 1975 Act is that which accords with a generally acceptable international interpretation. It is that which a civilian lawyer would give to it and to the corresponding French phrase of which it is the translation. Reverting for a moment to the judgment of Kerr LJ (see [1989] 1 All ER 661 at 680), the question which arose in James Buchanan & Co Ltd v Babco Forwarding and Shipping (UK) Ltd [1977] 3 All ER 1048, [1978] AC 141, a decision referred to by the Lord Justice, was the proper measure of damages on the facts of that case based on a detailed construction of a small part of one of the articles of the Convention on the Contract for the International Carriage of Goods by Road (Geneva, 19 May 1956; Cmnd 2260). In that case the interpretation argued for, but held by the House of Lords to be incorrect, may well have been assumed and unproved. That is not the situation in the instant case. The interpretation of ‘matiere civile ou commerciale’ is neither assumed nor unproved. In a civil jurisdiction its interpretation is clear and incapable of dispute. Where the 1975 Act clearly adopted a translation of the phrase and having done so produced a result which is unintelligible at common law, to choose the civil law interpretation in the Act which has the international flavour that it does, is not in my view properly to be described as speculative and in any event it forthwith eases the pain and self humiliation which the very difficult search for an alternative interpretation would involve.
Having reached this conclusion on the fundamental question of construction, it is unnecessary for me to express any detailed views on the remaining issues in this appeal. Equally conscious that anything that I did say would be obiter, I gratefully adopt and
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agree with the observations on those issues which are contained in the judgment herein of Balcombe LJ.
In these circumstances and for all these reasons I would allow this appeal and discharge the order of Master Creightmore.
BALCOMBE LJ. The facts in this matter are fully set out in the judgment of May LJ and I need not repeat them. The live issues which we have to decide may be summarised as follows.
(1) Has the question whether the Sandefjord City Court proceedings are ‘civil proceedings’ within the definition of s 9(1) of the Evidence (Proceedings in Other Jurisdictions) Act 1975 been determined as far as we are concerned by the decision of the Court of Appeal on the first letter of request (see Re State of Norway’s Application (No 1) [1989] 1 All ER 661 and hereafter referred to as ‘the first Court of Appeal decision’)? This in turn divides into three sub-issues. (A) Are we bound, as a matter of precedent, by the construction given to the 1975 Act in the first Court of Appeal decision? (B) Even if we are not strictly bound, should we not nevertheless follow the first Court of Appeal in their construction of the 1975 Act? (C) In any event, as between the parties to these proceedings, is the question whether the Sandefjord proceedings are qualifying proceedings under the 1975 Act the subject of an issue estoppel arising from the first Court of Appeal decision, by which the appellant witnesses are bound?
(2) If the first Court of Appeal decision is not determinative of this issue, what is the proper meaning of the phrase ‘proceedings in any civil or commercial matter’ in s 9(1) of the 1975 Act?
(3) If Norwegian law is relevant in determining whether the Sandefjord proceedings are qualifying proceedings under the 1975 Act, are they ‘proceedings in any civil or commercial matter’ according to the law of Norway?
(4) In any event, should the second letter of request be struck down or amended on the grounds of either (i) ‘fishing’ or (ii) confidentiality?
Certain other issues were raised by the notice of appeal and the respondents’ notice, but as these were not argued before us I need not consider them further. So I turn to consider the issues as set out above.
1(A) Precedent: are we bound by the first Court of Appeal’s construction of the 1975 Act?
The enunciation of the reason or principle on which a question before the court has been decided, the ratio decidendi, is alone binding as a precedent. Statements which are not necessary to the decision, which go beyond the occasion and lay down a rule that is unnecessary for the purpose in hand are generally termed ‘dicta’: see 26 Halsbury’s Laws (4th edn) paras 573–574, Penn-Texas Corp v Murat Anstalt (No 2) [1964] 2 All ER 594, [1964] 2 QB 647.
In the first Court of Appeal decision an appeal by the witnesses against an order directing them to attend to give evidence pursuant to the first letter of request was allowed by a majority (Kerr and Glidewell LJJ, Ralph Gibson LJ dissenting). The ratio decidendi of the first Court of Appeal decision was that the first letter of request was too wide, that it was a fishing request (see [1989] 1 All ER 661 at 672, 681, 691 per Kerr and Glidewell LJJ). Kerr LJ would also have allowed the appeal on the ground of confidentiality, that the balancing exercise which the court had to perform came down against the witnesses being compelled to violate their duty of confidence (see [1989] 1 All ER 661 at 686–688. Glidewell LJ would not have allowed the appeal on this ground (see [1989] 1 All ER 661 at 691). All three Lords Justices were of the considered view that the Sandefjord proceedings were ‘civil proceedings’ as defined by s 9(1) of the 1975 Act. However, that view was not necessary for the decision of the majority, since they decided to reject the first letter of request on grounds not connected with that issue of jurisdiction. The majority need have not dealt with the issue at all, or they could have merely assumed that jurisdiction existed; in either event their decision would have remained the same.
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Kerr LJ recognised that his decision on the jurisdiction issue was not part of the ratio decidendi, since he referred to it as ‘academic’, and he clearly did not consider that any future court would be precluded from considering the matter afresh (see [1989] 1 All ER 661 at 681).
Accordingly I am quite clear in my mind that we are not bound, as a matter of precedent, by the construction given to the 1975 Act in the first Court of Appeal decision.
1(B) Should we follow the first Court of Appeal in their construction of the 1975 Act?
Although the judgments of the first Court of Appeal on this question of construction are only technically dicta, nevertheless they are dicta to which great weight must be given since, in the case of Kerr and Glidewell LJJ, they represent their considered views on this issue.
‘Dicta are of different kinds and of varying degrees of weight. Sometimes they may be called almost casual expressions of opinion upon a point which has not been raised in the case, and is not really present to the judge’s mind. Such dicta, though entitled to the respect due to the speaker, may fairly be disregarded by judges before whom the point has been raised and argued in a way to bring it under much fuller consideration. Some dicta however are of a different kind; they are, although not necessary for the decision of the case, deliberate expressions of opinion given after consideration upon a point clearly brought and argued before the Court. It is open no doubt to other judges to give decisions contrary to such dicta, but much greater weight attaches to them than to the former class.’
(See Slack v Leeds Industrial Co-op Society Ltd [1923] 1 Ch 431 at 451 per Lord Sterndale MR.)
In the same case Warrington LJ said (at 456):
‘In order to get rid of the effect of the opinions deliberately expressed by three judges of this Court it is in my judgment not enough to say “they are mere dicta“. They are not views casually expressed on a point not really adequately considered, but they are arrived at and expressed with the same care and deliberation as if they had been necessary for the decision of the case. Although therefore they are not absolutely binding as would be an actual decision of the Court necessary to its judgment, they are entitled to such weight that we ought to follow them unless we find that they have been overruled or that they are inconsistent with previous decisions.’
Basing himself on these and other passages from the judgments of Lord Sterndale MR and Warrington LJ in Slack’s case, counsel for the estate addressed to us a most persuasive argument that, in the absence of any compelling reasons to the contrary, we should follow the considered dicta of the first Court of Appeal, leaving it to the House of Lords to put matters right, if necessary.
The decision of the Court of Appeal in Slack’s case was reversed by the House of Lords on the point of substance, but in the course of his speech Lord Dunedin said ([1924] AC 851, 864):
‘Lord Blanesburgh, then Younger LJ … was, however, out-voted by his two colleagues, who took up a position which personally I cannot quite appreciate. They said that Dreyfus v. Peruvian Guano Co ((1899) 43 Ch D 316) did not bind them, but that the dicta in Dreyfus must be followed, and if wrong must be put right by a higher Court, that is, your Lordships’ House. My Lords, if a decision is binding, there is an end of it. But if you have only to do with dicta, though such dicta may well serve to help you to form your own opinion, I cannot see that they ought to overrule it. It is a different question when a practice follows on dicta. A practice it might not be right to disturb, but then it is the practice and not the dicta that forms the binding authority.’
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This seems to me to be the answer to counsel’s submission. While I would naturally wish to give the utmost respect to the views of Kerr and Glidewell LJJ, unless those views have hardened into a practice which it would be wrong for us to disturb, then we must, so it seems to me, make up our own minds on this issue and if, after giving all due weight to those views, we are satisfied that they were wrong, then we both can and should depart from them.
1(C) Issue estoppel
In my judgment the same considerations which preclude the judgments of the first Court of Appeal from constituting a binding precedent also preclude their constituting an issue estoppel by which the witnesses are bound.
‘Even when in one way or another it can be demonstrated that the court has expressly determined, in the earlier proceeding, the same issue as is now in dispute, an issue estoppel will not by any means always be the result. Only determinations which are necessary to the decision—which are fundamental to it and without which it cannot stand—will found an issue estoppel. Other determinations, without which it would still be possible for the decision to stand, however definite be the language in which they are expressed, cannot support an issue estoppel between the parties between whom they were pronounced.’
(See Spencer-Bower and Turner Res Judicata (2nd edn, 1969) para 210, p 179.)
The editor continues (para 211, pp 181–182):
‘In order to make this essential distinction [between the fundamental and the collateral] one has always to inquire with unrelenting severity—is the determination upon which it is sought to found an estoppel so fundamental to the substantive decision that the latter cannot stand without the former. Nothing less than this will do.’ (The editor’s emphasis.)
And later he says (para 215, p 186):
‘Not every finding of fact in a judge’s judgment, not every issue of fact determined by a judge or jury, is res judicata between the parties in later proceedings. Thus, a decision of fact or law against the party in whose favour the substantial dispute was ultimately decided will not found an estoppel in a later proceeding; and this because it cannot have been necessary to the substantive decision. It is merely collateral, clearing the way perhaps to the point where a substantive decision can be given, but not fundamental or necessary to the decision itself. Moreover, it would be not only illogical but unjust to make it the foundation of a subsequent estoppel; for, the substantive decision being in his favour, no appeal is available on such a collateral decision to the person against whom it was given.’ (The editor’s emphasis.)
These statements from this authoritative work are fully supported by the cases there cited and by the many authorities to which we were referred, and which I do not find it necessary to set out in extenso.
Kenneth Jones J in the court below held that the witnesses were not estopped from arguing that the proceedings in the Sandefjord court were not civil proceedings within the ambit of the 1975 Act, although he expressed his conclusion as resulting from the fact that the witnesses could not have appealed against the first Court of Appeal decision on the jurisdiction issue. I agree with his decision, although I would prefer to base my judgment on the wider proposition that the first Court of Appeal decision on the jurisdiction issue was not fundamental to their substantive decision. I agree with the editor of Spencer-Bower and Turner para 211, p 182 that the question of appealability is but a useful test to decide whether the determination which is alleged to create an issue estoppel is fundamental to the substantive decision.
Counsel for the State of Norway placed much reliance on this question of appealability on the decision of Romer J in Shoe Machinery Co v Cutlan [1896] 1 Ch 667. In that case
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patentees claimed damages for an infringement and an injunction. The defendants denied the infringement and also denied the validity of the patent. The court upheld the validity of the patent, but granted no injunction or damages. The judgment as drawn up was, so far as relevant, in the following terms (at 667–668):
‘And the Court not dealing in any way with any alleged infringement of the letters patent … by the manufacture of machines made subsequent to the date of the issue of the writ in this action, and being of opinion that the alleged infringements of the said letters patent mentioned in the statement of claim and particulars of breaches were not infringements of the said last-mentioned patent, doth not think fit to make any order for an injunction in respect of the said letters patent … and pursuant to s. 31 of the Patents, Designs, and Trade Marks Act, 1883, the judge doth certify that the validity of the said patent came into question.’
It was also ordered that it should be referred to the taxing master to tax the plaintiffs’ costs of the action ‘so far as it relates to the issue of validity’ of the patent and to tax the defendants’ costs of the action so far as they related to the issue of infringement of the patent and a set-off of costs was ordered.
In a second action between the same parties in respect of the same patent, the defendants again denied the validity of the patent. The question then arose whether the defendants were estopped from raising in the second action the question of the validity of the patent. They argued that they were not so estopped, as on the form of the judgment as drawn up (there having been no declaration of the validity of the patent) they could only appeal on two points, costs and the certificate of validity. But the Court of Appeal, in an earlier case, had held that no appeal lay against the grant of a certificate of validity. Romer J held that the question of the validity of the patent was res judicata between the parties. In the course of his judgment he said (at 670–672):
‘It was because the issue of validity had been found in favour of the plaintiffs that the Court ordered the defendants to pay the plaintiffs the costs of that issue; and because the plaintiffs had failed on the issue of infringement that the Court ordered the plaintiffs to pay the defendants’ costs of that issue, and declared that there should be a set-off. Now clearly, in my judgment, that decision of the Court, so far as concerns the question of the validity of the patent, and the order which directed the defendants to pay the costs of that issue, could have been appealed from … I desire to say emphatically that I dealt with the issues separately, and it was because I came to a decision on the issues that I awarded the costs. And further, in my opinion, this sufficiently appears from the words of the judgment itself. It is not necessary, in considering the question of res judicata, that there should be an express finding in terms, if, when you look at the judgment and examine the issues raised before the Court, you see that the point came to be decided as a separate issue for decision, and was decided between the parties. It was not necessary, in my opinion, therefore, that there should be—though I agree that it might have been better if there had been—in the judgment in the case a separate declaration stating the validity of the patent: a declaration which clearly the Court had jurisdiction to put into the judgment if it had thought fit … It appears to me that it sufficiently appears from this judgment that I did not dismiss this action so far as concerns this patent, and I found the issue of validity and determined it in favour of the plaintiffs, and I ordered the defendants to pay the costs of it. I cannot doubt that if the defendants had chosen to appeal from that part of the judgment they were entitled to have had that appeal heard by the Court of Appeal.’
The industry of counsel has only discovered one reported case in which Shoe Machinery Co v Cutlan has been cited, viz the decision of the Privy Council in Duedu v Yiboe [1961] 1 WLR 1040. Shoe Machinery Co v Cutlan was there cited without any word of qualification, but a careful reading of the decision shows that the proposition for which it was cited
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(that an express finding in terms in a judgment is not necessary to found an estoppel) does not deal with the point whether the finding as to the validity of the patent in Shoe Machinery Co v Cutlan was fundamental to the substantive decision in that case and whether it was possible for the defendants to have appealed against a judgment in that particular form.
Shoe Machinery Co v Cutlan was a decision at first instance which is not binding on this court. Although it was decided over ninety years ago, no practice appears to have arisen based on it. Since the point was not argued before us, I say nothing as to the validity of the decision on its particular facts, so far as it relates to the issue of the validity of a patent when that is called in question, but I am not prepared to accept it as creating any general exception to the rule as set out in Spencer-Bower and Turner and cited above.
Counsel for the state also sought to argue that the witnesses could have appealed to the House of Lords against the order for costs made in the first Court of Appeal decision if this order was founded on a wrong view of the law, and in support of this proposition cited Donald Campbell & Co Ltd v Pollak [1927] AC 732. Whether or not they could have appealed against the order for costs seems to me to be immaterial: as I have already said, the question of appealability is no more than a test to decide whether a particular issue was fundamental to the substantive decision. I am satisfied that the first Court of Appeal determination on the jurisdiction issue was not fundamental to their substantive decision, which was to reject the first letter of request on the grounds of ‘fishing’ and (in the case of Kerr LJ) confidentiality. So in my judgment the witnesses are not precluded by issue estoppel from again raising the question whether the Sandefjord proceedings are qualifying proceedings under the 1975 Act.
I have some sympathy with the submission of counsel for the state that this decision can mean that the jurisdiction issue can in theory be relitigated on each occasion that a fresh letter of request is made, provided that all previous letters of request have been rejected on grounds that do not go to the issue of jurisdiction. However, I do not see why the court should not be asked to include in its order, where appropriate (ie if it considers that the issue has been fully argued and that all relevant evidence has been adduced), a declaration as to jurisdiction. Once such a declaration has been included in the order then an estoppel by record will arise; further, it would then be possible for the dissatisfied party (in this case the witnesses) to appeal against the declaration.
In the circumstances I do not find it necessary to reach a decision on the question, which was raised in the course of argument, whether it can ever be possible for jurisdiction to be conferred on the court by estoppel, eg because a party is estopped from denying the existence of a state of affairs necessary to found the court’s jurisdiction in the particular case. However, I very much doubt whether jurisdiction can be conferred by estoppel: see 10 Halsbury’s Laws (4th edn) para 718 and 26 ibid para 1501, note 3.
2. What is the proper meaning of the phrase ‘proceedings in any civil or commercial matter’ in s 9(1) of the 1975 Act?
Section 1 of the 1975 Act provides that, for the High Court to make an order for evidence to be obtained pursuant to a request from an overseas court, the High Court must be satisfied that the evidence is to be obtained ‘for the purposes of civil proceedings’ in the overseas court. Section 9(1) of the 1975 Act provides that ”‘civil proceedings”, in relation to the requesting court, means proceedings in any civil or commercial matter.’
This issue (whether the Sandefjord proceedings fall within the ambit of the 1975 Act) was referred to as issue A in the first Court of Appeal decision. It requires the court to construe the phrase ‘proceedings in any civil or commercial matter’ in the context in which it appears in the 1975 Act. The first Court of Appeal considered that there were four possible categorisations, and no further possibilities were suggested in argument before us. They are: (1) a generally acceptable international interpretation (the first Court of Appeal referred to a generally accepted international interpretation, but it was never suggested, and cannot have been intended, that the construction adopted should depend
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on some sort of international opinion poll); (2) classification under the law of the requesting court; (3) classification under the law of the court addressed; (4) a combination of (2) and (3); the English court addressed would satisfy itself that the proceedings concern a civil or commercial matter under the law of the requesting court, but would only accept this categorisation for the purposes of assuming jurisdiction if it is not in conflict with any fundamental principle recognised under English law.
Kerr LJ was evidently much attracted to the international interpretation. He considered it at great length, but eventually rejected it because—
‘contrary to my first, and what would have been my preferred, conclusion, I find it impossible, on the material before us, to give to “civil or commercial matter” in s 9(1) of the 1975 Act any interpretation which can be seen as being broadly acceptable internationally as well as within the three law districts of the United Kingdom. The approach of the Court of Justice of the European Communities in Netherlands v Ruffer [1980] ECR 3807 would in my view undoubtedly provide the best answer, but on the material before us it has not been established in the present context.’ (My emphasis.)
See [1989] 1 All ER 661 at 680.)
So he eventually came down in favour of category (4).
Glidewell LJ had no such hesitation. He categorised the international approach as ‘neither logical nor desirable’ (see [1989] 1 All ER 661 at 690). He, too, accepted category (4), whilst acknowledging that this could result in a case in one requesting country being a ‘civil or commercial matter’, whereas an identical case in another requesting country would not, so that the English court would in every case have to consider the law of the requesting country, and possibly be bound to entertain a request from one country, whilst having to refuse a request in an identical case from another: see [1989] 1 All ER 661 at 675.
On this issue Ralph Gibson LJ merely expressed his agreement with Glidewell LJ.
At one point in his judgment Kerr LJ said ([1989] 1 All ER 661 at 677):
‘Throughout the hearing of this appeal I felt that if ever there was a case where the assistance of an experienced comparative lawyer would have been welcome, this is so here.’
The witnesses hearkened to this cri de coeur, and their legal team before us was augmented by the presence of Professor Jolowicz, who holds the chair of comparative law at the University of Cambridge, and much new material, some of which is also mentioned later in this judgment, was presented to us. We were also referred to a note ”‘Any Civil or Commercial Matter”’ (1986) 102 LQR 505 by the distinguished jurisprudent Dr F A Mann, expressing strong support for Kerr LJ’s preferred international interpretation.
Before I turn to the four possible categories in detail, I mention certain general matters which in my judgment are appropriate for the court to consider in its approach to this question of construction.
(a) To an English lawyer a civil matter, in the context of proceedings in a court of law, is any matter which is not criminal. Thus to an English lawyer a commercial matter is a civil matter. The dichotomy ‘any civil or commercial matter’ has no meaning to an English lawyer.
(b) It was common ground, both in the first Court of Appeal and before us, that the 1975 Act was passed mainly in order to give effect to the accession by the United Kingdom to the Hague Convention on the Taking of Evidence abroad in Civil or Commercial Matters (The Hague, 18 March 1970, TS 20 (1977); Cmnd 6727). That this was a purpose of the 1975 Act was recognised in the speeches of the House of Lords in Re Westinghouse Electric Corp Uranium Contract Litigation MDL Docket No 235 (Nos 1 and 2) [1978] 1 All ER 434, [1978] AC 547 (the Westinghouse case). It is true that the 1970 convention is not mentioned in the 1975 Act. However—
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‘it is now clear law that where the source of the legislation in question is not the ordinary parliamentary process, but is an international treaty or convention and the statute is designed to give effect to that treaty or convention, it is legitimate to look at that source in order to resolve ambiguities in the legislation which has made those treaty or convention provisions part of the ordinary municipal law of this country.’
(See Fothergill v Monarch Airlines Ltd [1980] 2 All ER 696 at 719, [1981] AC 251 at 299 per Lord Roskill).
(c) The 1970 convention was concluded in the English and French languages, both texts being equally authentic. In the English text the introduction includes the statement ‘Desiring to improve mutual judicial co-operation in civil or commercial matters’, while Ch I, art 1 reads: ‘In civil or commercial matters a judicial authority of a Contracting State may … request the competent authority of another Contracting State … to obtain evidence’. In both these passages, and elsewhere in the 1970 convention (see art 15 and 17) the English phrase ‘in civil or commercial matters’ corresponds to the French phrase ‘en matiere civile ou commerciale.’
(d) In construing an international treaty (the Warsaw Convention relating to international transportation by air (12 October 1929; TS 11(1933); Cmd 4284) the higher courts of the United States have enunciated certain principles of construction. In Block v Cie Nationale Air France (1967) 386 F 2d 323 the US Court of Appeals (Fifth Circuit) held that a multilateral treaty was like a ‘uniform law’ within the United States, and the court had an obligation to keep interpretation as uniform as possible. In that case the court noted that the underlying concepts of the convention were civilian in origin. The majority felt (at 336) that—
‘the determination in an American court of the meaning of an international convention drawn by continental jurists is hardly possible without considering the conception, parturition and growth of the convention.’
In Air France v Saks (1985) 84 L Ed 2d 289 the United States Supreme Court held that it was the responsibility of the court to give the specific words of a treaty a meaning consistent with the shared expectations of the contracting parties. The court said (at 297):
‘We look to the French legal meaning for guidance as to these expectations because the Warsaw Convention was drafted in French by continental jurists.’
I appreciate that these cases are concerned with the interpretation of an international convention itself, but in my judgment we should apply similar principles in construing the 1975 Act, passed to give effect to an international convention, and incorporating phraseology taken from that convention which has no generally accepted meaning to an English lawyer.
(e) International comity. As Kerr LJ said in the first Court of Appeal ([1989] 1 All ER 661 at 675): ‘… the court should strive to give effect to the request of the foreign court unless it is driven to the clear conclusion that it cannot properly do so.' Whilst I accept that this is a factor which must in any event be taken into account, in my judgment it is of more significance when considering factors where the court has a discretion to exercise, than where the court is seeking to construe the enabling Act to see whether or not it has jurisdiction to accede to the request. In any event, it could point in the opposite direction to the next factor.
(f) Consistency of interpretation. In my judgment there is much to be said in favour of a construction which leads to the conclusion that what falls within the ambit of the 1975 Act does not depend upon the meaning given to ‘civil or commercial matter’ by the law of the requesting court. Such a construction would permit the building up of a series of precedents as to what does or does not fall within the ambit of the 1975 Act, without in every case having to consider the law of the requesting court. This would enable the English courts to deal with individual requests with a measure of certainty as to the jurisdiction, and a consequent saving of costs to the parties.
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With these introductory matters in mind, I turn to consider the four possible categories for the interpretation of ‘civil or commercial matter’.
(1) The international interpretation
(i) ‘Matiere civile ou commerciale’ (of which ‘civil or commercial matter’ is a translation) stems from French law. It is a concept current in many or all civil law systems, based on the Roman jus civile. This system has been categorised as belonging to the Romano-Germanic legal family, as distinct from the common law family and other legal systems. A feature of this system is that the law has evolved, primarily for historical reasons, as an essentially private law, as a means of regulating the private relationships between individual citizens: see David and Brierley Major Legal Systems in the World Today (3rd edn, 1985) pp 22–24.
(ii) ‘Matiere’ indicates the nature of the litigation, the subject matter of the dispute: see Dalloz Lexique de Termes Juridiques (5th edn, 1981) p 270.
(iii) In French law, and in other systems of law within the Romano-Germanic legal family, there is a distinction between ‘civil’ and ‘commercial’ law, which is rooted in history: see Rene David English Law and French Law (1980) at pp 36 ff, and International Encyclopaedia of Comparative Law vol 8, ch 2, ‘Civil Law and Commercial Law’ by D Tallon. From this latter work it appears that whilst those legal systems which recognise openly the autonomy of commercial law all belong to the Romano-Germanic legal family, not all systems within that family recognise the autonomy (eg Switzerland), and in others (eg Holland and Italy) there is a movement for the merger of civil and commercial law. However, the Nordic countries (Sweden, Norway, Denmark, Finland and Iceland) have no autonomous system of commercial law. See also International Encyclopaedia of Comparative Law, vol 2, ch 2 ‘The Civil Law System’ by C Szladits at pp 70–73.
(iv) Civil law countries draw a fundamental distinction between private and public law. This fundamental division is considered a basic division, the summa divisio, in all legal systems belonging to the civil law family of laws.
‘Public law is that body of law which governs the affairs of the communities (the states, municipalities, public corporations, etc.) among themselves and the acts of the authorities to which the individual is subject. Private law regulates legal relations in which persons confront each other as individuals, theoretically, at least, on an equal footing.’
(See International Encyclopaedia of Comparative Law vol 2, ch 2, by C Szladits, p 15 and see also pp 20, 48.)
Whether fiscal matters are to be treated as part of administrative law, or as a separate category of their own, it is beyond dispute that they are part of public law. Civil or commercial matters are equally incontestably part of private law. ‘According to the view held in continental European States, administrative matters (including fiscal matters) … fall outside the purview of the term “civil or commercial”’ (see Encyclopaedia of Public International Law vol 9, p 242). Apart from the citations above and those set out by Kerr LJ in [1989] 1 All ER 661 at 677, reference can also be made to Merryman and Clark Comparative Law: Western European and Latin American Legal Systems (1978) pp 819–820.
(v) The European Judgments Convention of 1968 (the Brussels convention), to which the United Kingdom acceded in 1978 and to which effect has been given by the Civil Jurisdiction and Judgments Act 1982, also applies in ‘civil and commercial matters’: see art 1. In Netherlands v Ruffer Case 814/79 [1980] ECR 3807 the Court of Justice of the European Communities held that an action by a Dutch public authority to recover from the owner of a wrecked vessel the costs of removing the wreck from a public waterway was not a ‘civil or commercial matter’ within the ambit of the Brussels convention. The European Court followed its own earlier decisions there cited and held (at 3819 (para 7)):
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‘that the concept “civil and commercial matters” used in Article 1 of the Brussels Convention must be regarded as an independent concept which must be construed with reference first to the objectives and scheme of the Convention and secondly to the general principles which stem from the corpus of the national legal systems.’
And later the court stated (at 3821 (para 14)):
‘As the Court has stated in the authorities cited above the Brussels Convention must be applied in such a way as to ensure, as far as possible, that the rights and obligations which derive from it for the Contracting States and the persons to whom it applies are equal and uniform. By that same case-law such a requirement rules out the possibility of the Convention’s being interpreted solely in the light of the division of jurisdiction between the various types of courts existing in certain States: on the contrary it implies that the area of application of the Convention is essentially determined either by reason of the legal relationships between the parties to the action or of the subject-matter of the action.’
I accept, of course, that this construction of the phrase ‘civil or commercial matters’ by the European Court in the context of a different convention and as between members of the European Economic Community cannot be decisive in the instant case. Nevertheless the approach of the European Court in that case is one which I find persuasive and to follow it would lead to a generally acceptable international interpretation of this widely-used phrase.
Thus far I have followed, with some minor variations, the factors which Kerr LJ in the first Court of Appeal decision considered as leading towards an international interpretation (see [1989] 1 All ER 661 at 676). He then changed direction and listed those factors which persuaded him, reluctantly, to abandon his preferred, international, interpretation (see [1989] 1 All ER 661 at 676–677). I now consider these seriatim.
(vi) (a) The subject matter of the Brussels convention is the recognition and enforcement of judgments; not merely judicial assistance for the provision of evidence in foreign courts. In my judgment this is a distinction without a difference: both matters are part of an international procedure. At the very least one approaches the question of construction of a single phrase, ‘matiere civile ou commerciale’, with an inclination to give it the same meaning in each of the international conventions where it appears. There is no logic in refusing to recognise a judgment based on a foreign tax claim, but to be willing to assist in gathering evidence which may lead to an unenforceable judgment.
(b) The judgment of the Court of Justice of the European Communities is ‘communautaire’ within the EEC. Thus the phrase ‘matiere civile ou commerciale’ has a definitive interpretation for those countries which are members of the EEC. This provides the best available guide for what is likely to receive general international acceptance, what, in the course of argument, was described as ‘the lowest common denominator’ as to the meaning of the phrase.
With all respect to Kerr LJ, I do not accept that the use of the words ‘mutual judicial co-operation’ in the preamble to the 1970 convention points away from a multilateral, or general international, interpretation of the convention. This is a phrase commonly used in international conventions: see eg the 1931 convention between the United Kingdom and Norway regarding legal proceedings which, incidentally, also applies ‘only to civil and commercial matters’. I do not find that the use of the word ‘mutual’ points either towards, or against, an international interpretation.
(c) Article 1 of the Brussels convention, in the form in which it is set out in Sch 1 to the Civil Jurisdiction and Judgments Act 1982, is in the following terms:
‘This Convention shall apply in civil and commercial matters whatever the nature of the court or tribunal. It shall not extend, in particular, to revenue, customs or administrative matters.’
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The second sentence, which was not part of the original text, and was added on the accession of Denmark, Ireland and the United Kingdom to the Brussels convention, was not an amendment but a clarification of the scope of the convention: see Kohler ‘Case Law of the European Court on the Judgments Convention, Part II’ (1982) 7 EL Rev 104. Thus, while agreeing with Kerr LJ that it is unfortunate that there was no similar clarification in the 1970 convention or the 1975 Act, I do not accept that this suggests a different interpretation of the phrase ‘civil or commercial matter’ in the 1970 convention or the 1975 Act: indeed the contrary is the case.
(vii) As Kerr LJ points out (see [1989] 1 All ER 661 at 678–679), s 2 of the Foreign Tribunals Act 1856 points away from a purely common law categorisation of the phrase ‘civil or commercial matter’, although it is fair to say that that section points more towards an interpretation according to the law of the requesting court than to an international interpretation. However, the Evidence by Commission Acts 1859 and 1885, since they do not use the phrase at all, throw no light on the question.
(viii) Since it is common ground that the 1975 Act was passed mainly to give effect to the 1970 convention and that reference could be made to the 1970 convention in construing the 1975 Act the fact that the 1975 Act does not expressly refer to the 1970 convention is irrelevant (see [1989] 1 All ER 661 at 679).
(ix) The fact that the common law does not, yet, recognise any clear distinction between public and private law is, in my judgment, irrelevant, because one cannot approach the construction of the phrase ‘civil or commercial matter’ in the 1975 Act from a common law standpoint. As I have already said, this phrase to a common lawyer has no sensible meaning. To a civilian it has a very clear meaning. I accept that, as the 1975 Act applies between the courts of the different parts of the United Kingdom, as it does in relation to all foreign countries, the internationalist interpretation will result in inter-United Kingdom requests for evidence in civil proceedings being based upon a categorisation by reference to the civil law. But this is the result of Parliament using a phrase having meaning only to a civilian lawyer, and in my judgment this is a small price to pay for the uniformity and consistency of approach which, as I have said in the introductory para (f) above, is an approach to be favoured.
(x) This point falls to be dealt with more conveniently under classifications (2) to (4).
So, in my judgment, the factors which led Kerr LJ to abandon his preferred international interpretation, when carefully analysed, do not lead to that conclusion.
I can now summarise my reasons for favouring the international interpretation.
(i) The phrase ‘civil or commercial matter’ has no intelligible meaning at common law. Unless the words ‘or commercial’ are to be ignored, the use of the phrase points away from a common law interpretation of the word ‘civil’, ie a purely procedural interpretation. This is reinforced by the use of the word ‘matter’ as indicating the subject matter of the litigation.
(ii) In the 1970 convention, to give effect to which the 1975 Act was passed, the words ‘in civil or commercial matters’ correspond to the French phrase ‘en matiere civile ou commerciale’.
(iii) In civil law countries the dichotomy between civil and commercial law is widespread. In those countries the phrase ‘civil matter’ would not include a commercial matter: hence the inclusion of the words ‘or commercial’.
(iv) So the use of the phrase ‘civil or commercial matter’ in the 1975 Act points to a civilian meaning for those words.
For the purposes of this judgment I do not find it necessary or desirable to consider what matters are, according to this interpretation, included within, or excluded from, the scope of the phrase ‘civil or commercial matters’. It is sufficient to say that no civil law country would ever treat a disputed tax claim as being a civil or commercial matter.
For these reasons I favour the generally acceptable international interpretation, ie an interpretation according to the civil law, of the phrase ‘proceedings in any civil or commercial matter’ in s 9(1) of the 1975 Act. However, before coming to a final conclusion on this question, it is necessary to consider the other possible categorisations.
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(2) Classification under the law of the requesting court
This categorisation was rejected by the first Court of Appeal and was not pursued before us. If the English court were to be wholly bound by the classification of the requesting court, it might be required to assist in criminal or penal proceedings (as classified by English law), even though these were classified as ‘proceedings in a civil or commercial matter’ by the requesting court. This would be contrary to well-established principles of English jurisprudence: see Huntington v Attrill [1893] AC 150 at 155, a case which was cited to the first Court of Appeal, although not referred to in the judgments.
(3) Classification under the law of the court addressed, ie English law
Although this categorisation was rejected by the first Court of Appeal and was not pursued before us, it cannot be dismissed out of hand. Although the instinctive reaction of a common lawyer is to give the phrase ‘civil or commercial matter’ a procedural interpretation (see eg Re Gross, ex p Treasury Solicitor [1968] 3 All ER 804 at 806, [1969] 1 WLR 12 at 15 per Chapman J) nevertheless English courts can and do draw distinctions as a matter of substance between criminal and civil matters, regardless of the form of the proceedings. Thus in Bonalumi v Secretary of State for the Home Dept [1985] 1 All ER 797, [1985] QB 675 this court held that an order made on an application in the High Court by the Home Secretary under the Bankers’ Books Evidence Act 1879 to inspect the bank accounts of Mr Bonalumi, so that they could be used as evidence in criminal proceedings in Sweden, was an order made in a criminal cause or matter under s 18(1)(a) of the Supreme Court Act 1981, so as to exclude an appeal to the Court of Appeal, notwithstanding the civil procedural form of the application. Nevertheless, the obvious difficulty in giving an English interpretation to the phrase is the dichotomy between ‘civil’ and ‘commercial’ which, as I have already said more than once, has no intelligible meaning to an English lawyer.
(4) The combination of (2) and (3)
This was the preferred categorisation of the first Court of Appeal: reluctantly on the part of Kerr LJ; without hesitation on the part of Glidewell LJ, with whom Ralph Gibson LJ agreed. In the note to which I have already referred, Dr Mann said that if possibility (2) was inapposite, as he held it was for reasons developed in Huntington v Attrill [1893] AC 150, ‘possibility (4) must necessarily suffer the same fate’ (see (1986) 102 LQR 505 at 507). No one before us sought to support the exclusion of possibility (4) on this basis, for the very good reason, as stated by Kerr LJ ([1989] 1 All ER 661 at 680), that the combination of English law with the law of the requesting court was for just this purpose: to ensure that the English court would not be precluded from rejecting a classification by the law of the requesting court if this offended fundamental principles of English law.
Nevertheless, the same problems will arise under this head as arise under classification (3) above, viz where the law of the requesting court, like English law, does not recognise the dichotomy between ‘civil’ and ‘commercial’. This would be the case when a request comes from any country with a system of law derived from the common law and, on the evidence before us, is equally the case under Norwegian law, which primarily uses ‘civil’ in a procedural sense to distinguish it from ‘criminal’. But when the law of the requesting court, as with English law, does not normally make a distinction between ‘civil’ and ‘commercial’ matters according to subject matter, then a difficulty is bound to arise. That difficulty is well exemplified in the present case by the voluminous evidence of Norwegian law, with Professor Fleischer on behalf of the state of Norway stating categorically that the Sandefjord proceedings are civil proceedings under Norwegian law, whereas Professors Huser, Bernt and Haerem, for the witnesses, were equally firm that the Sandefjord proceedings were not proceedings in a civil or commercial matter according to Norwegian law. This difference was not resolved by the cross-examination (at length) of these eminent jurists, and by the nature of things could not have been, for
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a perusal of their affidavits and the transcripts of their cross-examination makes it clear that they were approaching the question from wholly different standpoints; Professor Fleischer from a procedural standpoint, the others from a substantive one. The dilemma is well expressed in the following passage from the judgment of Glidewell LJ in the first Court of Appeal ([1989] 1 All ER 661 at 689–690):
‘If proceedings similar to those in the Sandefjord court were taking place in the High Court in England, and that court applied for an order for the examination of witnesses to a court in a jurisdiction whose relevant statute was in terms identical to those of the 1975 Act, the English High Court would of course say that the proceedings were civil proceedings. But, if asked to explain its process of reasoning, it might do so in some such terms as these: “We do not usually categorise actions which come before our courts in terms of their subject matter. We do so in order to comply with ss 1 and 9 of your statute. We say that these proceedings are civil proceedings under English law; therefore they are proceedings in a ‘civil matter’; therefore they are civil proceedings within the definition in your statute.” It seems to me that this circular process of reasoning is, in essence, that adopted by the Solicitor General of Norway in his affidavit of 26 June 1985. I therefore do not share the doubts which have troubled Kerr LJ whether the evidence before us should satisfy us that the Sandefjord proceedings are “in a civil … matter“. In my view the evidence makes it clear that they are.’
With all respect to Glidewell LJ I do not agree with the reasoning contained in the following passage: ‘We say that these proceedings are civil proceedings under English law; therefore they are proceedings in a “civil matter“.' I do not accept that, because proceedings may be civil proceedings under English law (classified procedurally), therefore they are proceedings in a ‘civil matter’ (classified substantively), more especially where the context requires that a ‘civil’ matter must be distinguished from a ‘commercial’ matter, although both are, by English procedural tests, ‘civil’ proceedings.
So, although I can understand the reasons which prompted the first Court of Appeal to choose the fourth categorisation, in my judgment it provides a less satisfactory interpretation then the international interpretation, ie category (1).
So I answer the main question 2 above: the proper meaning of the phrase ‘proceedings in any civil or commercial matter’ in s 9(1) of the 1975 Act is that which accords with a generally acceptable international interpretation, which is the meaning which a civilian lawyer would give to the phrase. This necessarily excludes a disputed tax claim, and therefore excludes the Sandefjord proceedings.
In view of my answer to main question 2, issues 3 and 4 do not arise. However, as it seems probable that this case will go further, I venture to express an opinion on these issues recognising, as I do, that my views are necessarily obiter!
3. The Norwegian law issue
On the basis (contrary to my view expressed above) that Norwegian law is relevant in determining whether the Sandefjord proceedings are qualifying proceedings under the 1975 Act, the judge held that these proceedings are ‘proceedings in any civil or commercial matter’ according to the law of Norway. His reasons for reaching this conclusion may be summarised as follows.
(i) This was the conclusion in the first Court of Appeal decision, on the evidence then before that court. At the very least this threw the evidential burden of proving the contrary on to the witnesses.
(ii) The evidence before the first Court of Appeal included the affidavit of the Solicitor General of Norway sworn on the first application. Although there was no affidavit of the Solicitor General before the judge, he said: ‘I regard that as a technicality and I can take full account of paras 4 and 5 of the Solicitor General’s affidavit of 26 June 1985 and treat its contents as being in evidence before me.’ (The effect of those paragraphs was that the Sandefjord proceedings were civil proceedings for the purpose of the courts’ system and the administration of justice in Norway, ie applying a procedural test in the same way that they would be described as ‘civil proceedings’ if they were being carried on in an English court.)
(iii) By issuing the letters of request, the Norwegian court was evidently satisfied that the request was a proper one. (This was a ground on which the first Court of Appeal relied, and which the judge took as his starting point.)
(iv) The evidence of the Norwegian professors before him disclosed a division so deep that it did not enable him to say with confidence that the evidential burden thrown on the witnesses had been discharged. However, if he had to make a choice, he preferred the evidence of Professor Fleischer for the state that the Sandefjord proceedings were proceedings in a civil matter under Norwegian law.
These findings are attacked by the witnesses on a number of grounds.
(a) Before the hearing before Kenneth Jones J, the parties had expressly agreed that the affidavit of the Solicitor General should not be treated as evidence, expert or otherwise, on the second application. Neither counsel invited the judge to rely on this affidavit. This contention is borne out by the correspondence between the parties, and counsel for the state did not seek to argue the contrary before us. In my judgment, therefore, it is clear that, in reaching his decision on this issue, the judge took into account material on which he was not entitled to rely.
(b) The issuance of the letters of request, being in a form submitted by the lawyers for the state of Norway and the estate of Anders Jahre, was no evidence of Norwegian law on the question which the English court had to decide. In my judgment the fact that the Norwegian court saw fit to issue the letters of request in their form as drafted, which, in the case of the second letter of request, asserts that the Sandefjord action ‘is a civil action under the law of Norway, and the proceedings are a “civil matter” under the law of Norway, for the purposes of’ the 1970 convention, is a matter which an English court must take into account on this issue. However, it is not something to which, in the circumstances in which the letters of request were prepared, the English court should attach great weight (see the Westinghouse case [1978] 1 All ER 434 at 442–443, [1978] AC 547 at 609–610 per Lord Wilberforce).
(c) These errors vitiate the judge’s conclusions on the Norwegian law issue. We could, if necessary, order a retrial of the Norwegian law issue before another judge, but since his decision did not turn on the question of credibility of the expert witnesses, this court is in as good a position as he was to decide this issue, albeit technically one of fact. I agree: see Dalmia Dairy Industries Ltd v National Bank of Pakistan [1978] 2 Lloyd’s Rep 223 at 285–286.
(d) On a proper analysis of the evidence of the four professors, Norwegian law would not, as a matter of substance, characterise the Sandefjord proceedings as a civil matter. As I have already said, it is clear that the Norwegian lawyers were faced with the same problem as English lawyers: that the dichotomy between ‘civil’ and ‘commercial’ matters is not one with which Norwegian law is familiar, because Norwegian lawyers, like English lawyers, would normally adopt a procedural approach. However, for the same reasons that have persuaded me against the adoption of category (4) under issue 2 above, it seems to me that the evidence given on behalf of the witnesses is to be preferred to that of Professor Fleischer on behalf of the state of Norway on this issue.
So, had it been material, I would have answered question 3 by saying that the Sandefjord proceedings are not ‘proceedings in any civil or commercial matter’ according to the law of Norway.
4. Fishing/confidentiality
(a) Fishing. I approach this issue with Lord Wilberforce’s statement in the Westinghouse case [1978] 1 All ER 434 at 444, [1978] AC 547 at 612 very much in my mind:
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‘… following the spirit of the 1975 Act which is to enable judicial assistance to be given to foreign courts, the letters rogatory ought to be given effect to so far as possible … ’
Having carefully considered the second letter of request, I am satisfied that, subject to the detailed modifications ordered by Kenneth Jones J to paras 6, 7, 10 and 12 of Sch 1 to the letter, and to one further modification mentioned below, the second letter of request cannot be rejected, as was the first letter of request, as a fishing application. The one further modification to which I refer relates to para 8 of Sch 1. Kenneth Jones J rejected this paragraph in toto. In its original form I am not surprised at that decision, but in the course of the hearing before us the State of Norway put in a modified proposal for para 8. If that paragraph were amended to read:
‘If the settlor of the shares and/or assets was Anders Jahre or his nominee or agent, what was or were: the name of the “Foundation”, its constitution and objects, and the names of the Trustees and beneficiaries, and who had authority to elect or remove Trustees and to alter the trust deed; were the financial aspects of the “Foundation” including its accounts managed from Norway?’
I would have been prepared to restore the paragraph, thus modified, to the second letter of request.
(b) Confidentiality. As the judge said, following Kerr LJ in the first Court of Appeal, the resolution of this issue requires the performance of a balancing exercise by the court. The judge exercised his discretion on this question and I know of no reason why this court should interfere with that exercise.
Conclusion
For the reasons given in my answers to questions 1 and 2 above, I would allow this appeal and discharge the order of Master Creightmore dated 2 April 1986.
WOOLF LJ. I am saved the burden of having to set out the background to the present appeal as this has already been clearly set out in the judgments of May and Balcombe LJJ and the earlier judgments of the other division of the court. The long history of these proceedings does not disclose a happy situation. The Hague Convention on the Taking of Evidence abroad in Civil or Commercial Matters (The Hague, 18 March 1970; TS 20(1977); Cmnd 6727) was implemented to ‘improve mutual judicial co-operation in civil or commercial matters’. The Evidence (Proceedings in other Jurisdictions) Act 1975 was intended to give effect to the United Kingdom’s ratification of the convention and, in the terms of its long title, ‘to assist in obtaining evidence required for the purpose of proceedings in other jurisdictions’. It is indeed unfortunate that notwithstanding these commendable objectives of the Act and the convention these proceedings should have been so drawn out and expensive. However, this history is explained partly by the difficulty, complexity and importance of the issues involved and partly by the fact that on the previous occasion when the proceedings were before the Court of Appeal (the first appeal), as Kerr LJ made clear in his judgment (see [1989] 1 All ER 661 at 681, 689), the parties did not provide all the assistance and evidence needed to come to an exhaustive determination of the issues involved. In this appeal we certainly cannot complain of too little assistance. It is out of deference to that assistance that I set out my own reasoning even though by doing so I risk dulling the clarity which the judgments of May and Balcombe LJJ have introduced to the issues, since I come to the same conclusion as they do by a route which is mine alone.
The jurisdiction issue
The most important issue before this court is undoubtedly the question as to whether the proceedings which have been brought by the estate of Anders Jahre before the City
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Court of Sandefjord are civil proceedings as defined in s 9(1) of the 1975 Act. That is to say, are they proceedings in a ‘civil or commercial matter’? If they are not proceedings in a civil or commercial matter then it is quite clear that the High Court has no jurisdiction to assist the Norwegian court and it is for this reason that it is appropriate to refer to this issue as being the jurisdiction issue.
If there had not been the previous proceedings in relation to the first letter of request, in order to determine the jurisdiction issue the court’s task would be confined to having to determine the proper interpretation of ‘proceedings in any civil or commercial matter’ in the context of the 1975 Act and then to apply that interpretation in order to decide whether the Norwegian proceedings were proceedings in a civil or commercial matter. However, because of the first appeal in relation to the first letter of request, it is also necessary to consider whether this court is bound as a matter of legal precedent to follow the interpretation given on the first appeal and whether issue estoppel operates so as to prevent this court in relation to the second letter of request departing from the determination on the first appeal that the Norwegian proceedings were in fact proceedings in a civil or commercial matter.
It is preferable to deal with these questions of legal precedent and issue estoppel at the outset.
Precedent
It is not surprising that before Kenneth Jones J, it was not argued on behalf of the witnesses that the interpretation of the 1975 Act adopted by the Court of Appeal at the first hearing should not be followed by him. Obviously, whether or not the interpretation of the provisions of the Act by the Court of Appeal were strictly binding on him, Kenneth Jones J would feel most reluctant to adopt a different interpretation. However, before this court counsel for the estate sought to reopen the whole question of interpretation and in doing so had the assistance of a distinguished comparative lawyer, the absence of whom Kerr LJ had regretted in his judgment in the first appeal. In addition counsel has relied on a substantial quantity of what I will call additional international material in support of his argument. With this help, counsel submits an international interpretation ought to be given to the definition of civil proceedings contained in s 9(1) of the 1975 Act.
As I read the judgments of this court on the first appeal, there are at least differences in emphasis between the approach which was adopted to the question of interpretation by Glidewell LJ (with whom Ralph Gibson LJ agreed on this point) and Kerr LJ. Glidewell and Kerr LJJ (Kerr LJ reluctantly) did not apply to the definition contained in the Act a ‘generally accepted international interpretation’ and decided that what was required before the court could give effect to an application for assistance by the foreign court was that the application should relate to proceedings which would be classified both under the law of the requesting court and under the law of this the addressee court as proceedings concerning a civil or commercial matter. However, Kerr LJ left open the question whether or not the view of the court addressed on the question of classification went to jurisdiction or discretion and continued ([1989] 1 All ER 661 at 680–681):
‘Where does that leave the present case? If the substance of a dispute is clearly a matter of public law in the jurisprudence of the requesting court, then I would not accept that it can properly be regarded as “matiere civile ou commerciale” for the purposes of the 1970 convention or any legislation based on it. But although I regard the evidence on Norwegian law as insufficiently searching, particularly on the characterisation of the substance of these proceedings by reference to the distinction between public and private law which may well be recognised in Norway as in civil law countries, I do not feel able to conclude on the evidence that the Sandefjord action cannot be regarded as a proceeding in a civil matter by the law of Norway. Counsel for the state offered to produce a further affidavit on this point, but we
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declined it at this late stage. However, since the Norwegian court was evidently satisfied that the request was a proper one under its own law, and the evidence of the Solicitor General supports it, I would reluctantly give it the benefit of the doubt, which I nevertheless retain. In any event, in view of my conclusions on issues E and F, in this judgment the matter becomes academic. I would only add that if a similar issue should arise in the future, I hope that our courts will be provided with more satisfactory evidence in the light of the considerations to which I have referred.’
Glidewell LJ thought it was most unlikely that the need to comply with the English classification would cause any difficulty since, as he said ([1989] 1 All ER 661 at 684):
‘We have no evidence that there is any jurisdiction which proceedings in a “civil or commercial matter” would not be regarded as civil proceedings in the English sense.’ (My emphasis.)
In addition Glidewell LJ took the view that, where under the law of the requesting state the classification of the proceedings would not normally be on the basis of their subject matter but on their procedural characteristics, eg whether they were criminal or civil proceedings, it was perfectly appropriate to adopt a procedural rather than a substantive classification. However, both Kerr and Glidewell LJJ, on the evidence before them, came to the conclusion that under Norwegian law the proceedings would be classified as a civil or commercial matter which meant that if the first letter of request was in a satisfactory form the state and the estate would have succeeded on the appeal. However, both Kerr and Glidewell LJJ (differing from Ralph Gibson LJ) were of the view that, having regard to the terms of the request which they regarded as ‘fishing’, it would not be appropriate for the court to give effect to the first letter of request and on this ground by a majority the witnesses’ appeal was allowed.
In these circumstances although counsel for the witnesses did not go so far as to submit that the views expressed by this court on the first appeal as to interpretation were obiter, he did submit that they did not form part of the ratio which was binding on this court. In a powerful, succinct and highly persuasive argument counsel for the estate accepted that this court was not strictly bound by the previous decision on the question of interpretation but submitted that as the decision on the first appeal was reached following detailed argument and after careful consideration, this court, as a matter of propriety between two courts of co-ordinate jurisdiction, should not in the absence of the most compelling circumstances depart from the interpretation adopted.
That the previous decision is not strictly binding upon this court is in my view made clear by the decision of this court in Penn-Texas Corp v Murat Anstalt (No 2) [1964] 2 All ER 594, [1964] 2 QB 647, a decision which happened to involve the interpretation of the predecessor of the 1975 Act, namely the Foreign Tribunals Evidence Act 1856. Lord Denning MR having indicated that—
‘a previous judgment between the same parties is only conclusive on matters which were essential and necessary to the decision. It is not conclusive on other matters which came incidentally into consideration in the course of the reasoning … ’
made the following statement which would apply equally to these proceedings:
‘The ruling on the second point in Penn-Texas (No. 1) ([1963] 1 All ER 258, [1964] 1 QB 40) was not necessary to the decision. The result would have been the same, even if the ruling had been the other way. The ruling is not, therefore, absolutely binding, and we are at liberty to depart from it if convinced it is wrong.’
(See [1964] 2 All ER 594 at 597, [1964] 2 QB 647 at 660–661.)
In support of his submission counsel for the estate referred the court to Slack v Leeds Industrial Co-op Society Ltd [1923] 1 Ch 431. In that case, with regard to dicta which did not constitute a decision binding on a subsequent court, Lord Sterndale MR said (at 451):
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‘Dicta are of different kinds and of varying degrees of weight. Sometimes they may be called almost casual expressions of opinion upon a point which has not been raised in the case, and is not really present to the judge’s mind. Such dicta, though entitled to the respect due to the speaker, may fairly be disregarded by judges before whom the point has been raised and argued in a way to bring it under much fuller consideration. Some dicta however are of a different kind; they are, although not necessary for the decision of the case, deliberate expressions of opinion given after consideration upon a point clearly brought and argued before the Court. It is open no doubt to other judges to give decisions contrary to such dicta, but much greater weight attaches to them than to the former class.’
At the end of his judgment Lord Sterndale MR added (at 452):
‘I am of opinion … that if opinions of such weight given after such careful consideration more than thirty years ago, often mentioned and considered during that time and never disapproved, are to be overruled, it should only be done by the final tribunal of appeal and not by a Court of co-ordinate jurisdiction.’
Warrington LJ said very much the same thing (at 456).
Counsel for the estate submitted that in this case, having regard to the care with which the matter was dealt with on the first appeal, the decision of this court in relation to the nature of the Norwegian proceedings is within the top scale of judicial dicta and should only be overruled by the House of Lords and not this court.
Counsel for the estate also in the course of his argument examined the submissions before the other division of this court and the new material relied on by counsel for the witnesses and contended that the witnesses’ case has not materially changed so there was no compelling reason justifying this court departing from the previous decision. While there are obviously differing standards of dicta and the previous court’s conclusion on the jurisdiction issue commands the greatest respect, it is material that Kerr LJ regarded the point as being ‘academic’ and regretted the absence of the additional assistance which this court has had. Furthermore, as Balcombe LJ has pointed out, the House of Lords in Slack’s case took a very different view from the Court of Appeal. In this situation the appropriate approach is that indicated by Lord Denning MR to which reference has already been made. This court should follow the earlier decision unless we are satisfied it is wrong.
Issue estoppel
Although I have dealt with this aspect of the appeal as though the question were one of judicial precedent, in argument it was also approached on the basis of res judicata. However, as the previous court’s conclusions on the jurisdiction issue were unnecessary for their decision there can be no question of res judicata. The position is, however, different with regard to issue estoppel. The previous decision of the Court of Appeal was unanimous (although Kerr LJ was reluctant and retained doubts as to its correctness) that the proceedings before the Sandefjord court would be classified under Norwegian law as proceedings in a civil or commercial matter. This was a decision on an important issue in the proceedings. However, it is to be noted that while it is a determination of fact as to the categorisation of the proceedings under foreign law, that finding of fact depends on the construction which is placed upon the vital phrase ‘civil or commercial matter’ and the difference of emphasis as to this, to which I have already drawn attention, explains why Glidewell LJ found the determination of this issue more straightforward than did Kerr LJ. Kerr LJ lays more stress on the substance of the proceedings in the Norwegian court than Glidewell LJ, who considered the Norwegian court would determine the matter having regard to the nature of the proceedings rather than their subject matter. Accordingly, if the approach adopted by Glidewell LJ is, in the view of this court, not the appropriate method of classification, this could affect the premise on which the argument in favour of issue estoppel is based.
Kenneth Jones J came to the conclusion that there was no issue estoppel because,
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having regard to the Court of Appeal’s conclusions which were in favour of the witnesses, the witnesses were not in a position to appeal on this issue: a test referred to by Lord Denning MR in Penn-Texas v Murat Anstalt (No 2) [1964] 2 All ER 594, [1964] 2 QB 647. While counsel for the state accepted that the availability of a right of appeal was a useful rule of thumb, he correctly submitted that the fundamental question was whether a previous finding was ‘essential and necessary to the decision’, and he also submitted that in fact there was a right of appeal in this case and in any event, if there was not, the absence of a right of appeal did not mean that issue estoppel could not arise.
Having regard to the argument which counsel for the state advanced based on the order for costs which was made by the Court of Appeal on the previous hearing, I would be prepared to accept that technically it would have been possible for the witnesses to have sought leave to appeal in respect of the Court of Appeal’s decision in respect of the first letter of request. However, I regard it as quite unrealistic to expect the witnesses to have tried to exercise any such right of appeal and I am certain that if they had sought to do so, they would never have received leave. In these circumstances, in considering whether issue estoppel operates, the only realistic approach is that adopted by the judge. The decision on the first appeal in respect of the issue as to the method of classification which would be adopted under Norwegian law can be treated as not being the subject of a right of appeal. It is relevant here to refer to the speech of Lord Upjohn in Carl-Zeiss-Stiftung v Rayner & Keeler Ltd (No 2) [1966] 2 All ER 536 at 573, [1967] 1 AC 853 at 947:
‘As my noble and learned friend, Lord Reid, has already pointed out there may be many reasons why a litigant in the earlier litigation has not pressed or may even for good reasons have abandoned a particular issue. It may be most unjust to hold him precluded from raising that issue in subsequent litigation (and see Lord Maugham, L.C.’s observations in the New Brunwick Rly Co v British and French Trust Corp ([1938] 4 All ER 747, [1939] AC 1)). All estoppels are not odious but must be applied so as to work justice and not injustice, and I think that the principle of issue estoppel must be applied to the circumstances of the subsequent case with this overriding consideration in mind.’
Earlier in his speech Lord Upjohn had also pointed out that with regard to res judicata generally, that issue estoppel—
‘goes beyond the mere record; it is part of the law of evidence for, to see whether it applies, the facts and reasons given by the judge, his judgement, the pleadings, the evidence and even the history of the matter may be taken into account … ’
(See [1966] 2 All ER 536 at 572, [1967] 1 AC 853 at 946.)
Adopting this approach to the previous proceedings in this case, I have no doubt that it would be wrong to regard the witnesses as being disentitled from re-opening the question of Norwegian law which inferentially if not expressly Kerr LJ was inviting them to do in any subsequent proceedings. As to Shoe Machinery Co v Cutlan [1896] 1 Ch 667 I respectfully adopt the analysis of the effect of that case set out by Balcombe LJ in his judgment.
However, even if I were minded to take a different view, I would not have felt it right on the issue of classification under Norwegian law to have treated the issue as being the subject of issue estoppel. If the witnesses’ contention as to Norwegian law was right, then subject to the question as to the proper interpretation of s 9 of the 1975 Act, the proper classification of the Norwegian proceedings would determine whether the English court had jurisdiction to act on the letter of request. The jurisdiction of the High Court to act on the Norwegian court’s request is purely statutory and is dependent on the English court being satisfied that the evidence to which the application relates is required for the purposes set out in s 1(b) of the 1975 Act. If there is evidence available to the court which would indicate that the evidence requested was not required for this purpose, then no principle of estoppel can prevent the court investigating the matter. The parties cannot
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confer jurisdiction under the 1975 Act on the court by consent and this being so, I cannot see how the failure of one party in previous proceedings to produce evidence or to advance an argument going to the issue of jurisdiction can prevent the court considering that evidence in subsequent proceedings where the same question of jurisdiction arises. Despite the researches of counsel no previous decision was found which in relation to the High Court clearly established that this was the situation. However, it seems to me that the principle is so clear and so obvious that it can be said with confidence that a party cannot be prevented by any rule of issue estoppel from putting before the court evidence to establish that the court has no jurisdiction to make the order which is being sought.
Counsel for the state correctly warned the court of the dangers of adopting this view because of the risk of the same issue being constantly relitigated. However, this risk is reduced by the fact that the court can always protect itself against abuse of its process by preventing an issue being raised vexatiously independently of estoppel and what I have said as to the question of jurisdiction would not apply where the previous decision constitutes a binding precedent.
Construction of civil or commercial matter
On this issue I acknowledge at the outset that I have derived considerable assistance from the judgment of Kerr LJ on the first appeal. However, although I accept and gratefully adopt a substantial proportion of Kerr LJ’s reasoning, I ultimately differ from his conclusion in a way which is highly significant to the outcome of this appeal.
Before turning to matters of detail which cause me to differ from the conclusions of Kerr LJ, I regard it as necessary to draw attention to certain broad features of the 1975 Act.
1. Although the 1975 Act was undoubtedly passed in order to give effect to the principles of the 1970 convention, the Act applies to letters of request in respect of civil proceedings pending or contemplated from any country irrespective of whether or not the countries subscribe to the 1970 convention.
2. The 1975 Act clearly draws a distinction between civil and criminal proceedings and whatever the context in which the phrase civil proceedings is used in the Act it does not include and is used in contradistinction to criminal proceedings.
3. While the 1970 convention is not expressly referred to in the 1975 Act it is clear (as was accepted by all their Lordships in Rio Tinto Zinc Corp v Westinghouse Electric Corp, RTZ Services Ltd v Westinghouse Electric Corp [1978] 1 All ER 434, [1978] AC 547, and by the parties on this appeal) that part of the purpose of the Act was to give effect to the 1970 convention. Accordingly, it is appropriate to have regard to the 1970 convention for assistance in interpreting the 1975 Act in so far as its language does not make its meaning clear. However, it should not be forgotten in seeking aid from the convention that the Act also applies to the different jurisdictions within the United Kingdom and therefore it would be less likely that Parliament would intend an international interpretation to be adopted if that international interpretation would lead to difficulties in applying the Act within the United Kingdom.
4. Although in the Westinghouse case their Lordships did not consider any assistance could be obtained from the legislation which the 1975 Act replaced (see eg [1978] 1 All ER 434 at 461, [1978] AC 547 at 633 per Lord Diplock on this issue) it is relevant to note that the 1975 Act replaced the Foreign Tribunals (Evidence) Act 1856 and the Evidence by Commission Acts 1859 and 1885 and while the former Act which applied to requests from foreign courts referred expressly to civil or commercial matters the later Acts which dealt with requests within ‘Her Majesty’s dominions’ did not do so.
5. The definition in s 9(1) of civil proceedings as meaning proceedings in any civil or commercial matter indicates that whether the proceedings are civil proceedings in the requesting court is not to be decided by evaluating the procedure adopted but on the
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basis of the subject matter of the proceedings. While Glidewell LJ is no doubt right in saying ‘we do not usually categorise actions which come before our courts in terms of their subject matter’ (see [1989] 1 All ER 661 at 689–690), the English courts can and sometimes have to do so. For example, for the purposes of s 18(1)(a) of the Supreme Court Act 1981 and for the purposes of RSC Ord 53, r 3(4) it is necessary to decide whether proceedings are in a criminal cause or matter and in order to decide whether this is the case it is necessary to examine the substance of the proceedings. Although an application for judicial review procedurally would be classified as civil, it becomes a criminal cause or matter if the application for judicial review is in relation to the decision of a magistrate’s court in a criminal matter such as a motoring offence. On the other hand an application for judicial review in respect of a decision by a magistrate’s court exercising its criminal jurisdiction to forfeit recognisances entered into by sureties in respect of bail granted to an accused charged with a criminal offence is not a criminal cause or matter. As Lord Denning MR said in R v Southampton Justices, ex p Green [1975] 2 All ER 1073 at 1076, [1976] 1 QB 11 at 15:
‘A recognisance is in the nature of a bond. A failure to fulfil it gives rise to a civil debt. It is different from the ordinary kind of civil debt, because the enforcement is different. It is enforceable like a fine … But that method of enforcement does not alter the nature of the debt. It is simply a civil debt on a bond and as such it is not a criminal cause or matter.’
6. Although the definition in s 9(1) relates to civil proceedings in the requesting court, there is nothing in the language used in that section or s 1(b) to indicate that the English court has to adopt the classification which would be adopted by the requesting court if that classification is different from that which would be adopted by the English court. The language is equally consistent with the classification being carried out in accordance with either the classification which would be adopted by the requesting or the English court, though obviously if classifying is being carried out in accordance with the concepts of the assisting court, the concepts may have to be adapted to accommodate any peculiarities of the legal system of the requesting court.
With these preliminary remarks I turn to consider the reasoning of Kerr LJ in order to identify the limited but critical extent to which I differ from his reasoning.
I begin by agreeing that if there was an acceptable international interpretation of civil proceedings as defined by s 9(1) which could be practically applied to requests for assistance within the United Kingdom as well as from abroad then I consider that it would be desirable and appropriate to adopt that interpretation so that this country will deal uniformly with all applications and it is to be hoped that other countries who subscribe to the 1970 convention would do likewise.
In considering whether it is possible to apply an acceptable international interpretation in agreement with Kerr LJ I regard the reference in s 9 to a civil or commercial matter as being derived from matiere civile ou commerciale under French law and that the duality of ‘civil’ and ‘commercial’ points away from a classification under common law and suggests a classification in accord with that which would be adopted by civil law jurisdictions. I also, of course, accept that Kerr LJ is right to say that—
‘civil law countries draw a fundamental distinction between private and public law (droit civil and droit administratif) [and that it is to be expected that] this distinction must have been crucially present to the mind of anyone seeking to circumscribe and distinguish “matieres civile et commerciales” from other, ie “public law”, proceedings. Relations between states and their public authorities on the one hand and private citizens and corporations on the other fall within the sphere of public law. Civil and commercial matters do not, because they are concerned with private disputes.’
(See [1989] 1 All ER 661 at 677.)
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However, as Professor Szladits points out, while—
‘the fundamental division between private law and public law is considered a basic distinction, the summa divisio in all legal systems belonging to the civil law families of law the scope of this division differs considerably within the different legal systems, and consequently the theoretical analysis and reasons, as well as the practical effects, of these divisions also differ.’
(See International Encyclopaedia of Comparative Law vol 2, ch 2, para 25.)
Although the division is by no means as well developed as in civil jurisdictions, in the majority if not all the common law jurisdictions, the distinction between private and public law is now also well recognised. However, the recognition of the distinction does not solve the problem. It cannot be ignored that in almost every jurisdiction, the line of division between public and private law differs and the range of differences is very substantial. Professor Szladits draws attention to these differences and their historical explanation. Because of these differences it is, in my view, impossible to say that there is some internationally acceptable definition of civil or commercial matters which can be identified by construing that phrase as meaning private law matters as opposed to criminal or public law matters. To do so would not provide an interpretation which is uniform. It would merely alter the problem to what is meant by public and private law unless you can also identify the legal system whose division between public law and private law is to be applied.
If one system was to be chosen, then the obvious candidate would be the French system. Their system recognises not only the difference between public law and private law but also the difference between civil and commercial matters. However, the French classification is so different from our own as well as other common law and civil law jurisdictions that I cannot regard it as being internationally acceptable or as one Parliament could have intended to adopt. Adapting and modifying the language of Kerr LJ (see [1989] 1 All ER 661 at 679) it appears inconceivable that in 1975 Parliament could have intended that inter-United Kingdom requests for evidence of civil proceedings should be based upon a categorisation by reference to the French concept of the distinction between public and private law. To adopt the French classification would result in a wholly unwarranted restriction on the operation of the 1975 Act since many actions which in this country would undoubtedly be regarded as civil proceedings and as having no public or administrative law element would under the French system be excluded from the application of the 1975 Act. I find nothing in the Act or the convention to justify such a consequence.
Regrettably it is not possible to approach the interpretation of the 1970 convention or the 1975 Act in the same way as they could be approached if they formed the subject matter of Community Law. If they were part of community law then it would be possible to give to the expression civil and commercial matters the meaning which would be determined by Community Law and this would unquestionably be a great advantage. However, the decisions of the European Court of the European Communities, in particular in Netherlands v Ruffer Case 814/79 [1980] 3 ECR 3807 and in Bavaria Fluggesellschaft Schwabe & Co KG and Germanair Bedarfsluftfahrt GmbH & Co KG v Eurocontrol Joined Cases 9 and 10/77 [1977] ECR 1517, make it clear that you cannot adopt the same approach to Community and non-community legislation. The jurisdiction of the European Court in respect of the former is critical. In the Ruffer case the concept ‘civil or commercial matters’ in the Brussels convention was interpreted in a sense communitaire and that interpretation would be recognised by the English courts in applying the Civil Jurisdiction and Judgments Act 1982 which was passed primarily for the implementation of that convention. However, in the Eurocontrol case the European Court recognised that even with regard to an area to which the Brussels convention applied, a different interpretation from that which was applicable under the Brussels
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convention would be given to a bilateral agreement entered into between two members of the community. As the court said (at 1526):
‘Although this result may lead to the same expression in the Brussels Convention and in a bilateral agreement being interpreted differently, this is due to the different systems in which the concept “civil and commercial matters” is used.’
As Bradley ‘Social Security and the Right to a Fair Hearing: The Strasbourg Perspective’ [1987] PL 3 makes clear, the recent decisions of the European Court of Human Rights in Feldbrugge v Netherlands (1986) 8 EHRR 425 and Deumeland v Germany (1986) 8 EHRR 448 also illustrate how difficult it is to find a uniform recognition of the distinction between public and private law. Those cases concerned complaints that the way in which claims for sickness benefit and an industrial widow’s pension were dealt with by the appropriate domestic tribunals infringed art 6(1) of the convention in that the claimants had not been granted a fair hearing within a reasonable time in the determination of their civil rights and obligations. ‘Previous decisions of the Strasbourg court have assumed that art 6(1) is primarily concerned with the protection of private rather than public law rights’ but the majority decisions in these cases confirmed that civil rights and obligations in art 6(1) of the convention was an autonomous concept and were not influenced either by the fact that under both Dutch and German law (as in English law) the claims would be regarded as falling within the public law sphere, or the minority’s contention, that the result was inconsistent with the history of the drafting of art 6(1).
While I would not dissent from the approach laid down by Sandra O’Connor J in the United States Supreme Court in Air France v Saks (1985) 84 L Ed 2d 289 at 297 that ‘it is our responsibility to give the specific words of the treaty a meaning consistent with the shared expectations of the contracting parties’ the difficulty of doing this on the basis of a distinction between public law and private law is that there are no identifiable shared expectations as to the distinction between the two categories which can be used as a means of deciding what is meant by public as opposed to civil proceedings.
However, the fact that there is no internationally acceptable interpretation of a civil or commercial matter does not mean that it is necessary to give those words the identical meaning which they would have in a domestic context in this country or in the domestic context of the requesting state. While I cannot identify an acceptable international interpretation of the phrase, I do accept that the material which is before the court is overwhelmingly to the effect that whatever else is or is not included in the concept of a civil or commercial matter, matieres fiscales are not within that concept and this can be taken into account in construing the section. Even in common law jurisdictions, so far as enforcement of judgments is concerned it has been recognised that revenue matters come within a different and special category and are subject to rules of public policy which do not apply to other civil proceedings. I here refer to the speech of Lord Somervell in Government of India v Taylor [1955] 1 All ER 292 at 301, [1955] AC 491 at 514 cited by Kerr LJ (see [1989] 1 All ER 661 at 681). Taking into account the well-established approach of the courts to assisting in tax gathering by a foreign state, I would regard the proper interpretation of the words ‘civil or commercial matter’ in the 1975 Act as excluding matieres fiscales. I am encouraged to adopt this view by Dr Mann’s ‘Any Civil or Commercial Matter’ (1986) 102 LQR 505 at 509 on the decision on the first appeal and his statement that ‘it can be asserted with confidence that very few States (if any) will ever regard a tax claim as a civil or commercial matter.’
The fact that I come to this conclusion is probably sufficient for the purposes of determining this appeal. However, in order to justify my rejection of a general international approach to the phrase ‘civil or commercial matter’ I should shortly indicate how I believe it is possible to give effect to the wording of the 1975 Act and to do so without creating the difficulties which are inherent in adopting the approach accepted on the first appeal which were dramatically illustrated by the problems which faced
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Kenneth Jones J when he sought to ascertain what would be the classification which would be adopted by a Norwegian court.
I have already indicated that I cannot find any indication in the Act that it is necessary to look to the requesting state’s classification. As the classification controls the United Kingdom court’s jurisdiction, I would regard it as more likely that it is the United Kingdom court’s classification which was to prevail and I regard the choice of the United Kingdom court as being preferable to the dual classification suggested on the first appeal.
The great advantage of adopting a United Kingdom court’s classification is that it will only be necessary to look to the requesting court for factual information as to the nature of the proceedings before the requesting court. In the normal case a translation of the pleadings in the requesting court and some limited background information will be ample. There would certainly not be any need to obtain the extensive conflicting expert evidence which has been assembled in this case. Given the material to which I have referred it should be a relatively easy task for the English court to make up its mind whether on the proper interpretation of a civil or commercial matter the substantive nature of the proceedings before the requesting court falls within the wording of the statute.
This appears to be the predominant approach according to the editors of the Encyclopaedia of Public International Law vol 9, p 242 in the chapter dealing with legal assistance between states in civil matters:
‘The substantive nature of a case determines whether a case is civil, criminal or administrative. The branch of the judicial administration handling the case and the type of procedure used for the request are irrelevant. It is not clear, however, whether determination is made according to the law of the requesting State or the requested State. A special commission on the operation of the Hague Convention on Evidence Abroad (1970) was divided, but the predominant opinion was that with regard to the Convention the characterisation by the law of the requested state should prevail.’
In the note to which I have already made reference Dr Mann is also of the view that there is a very great deal of support for this approach and in this connection the passage in the speech of Lord Watson in Huntington v Attrill [1893] AC 150 at 155 which is cited by Dr Mann is not without relevance.
However, although the English court has to perform the act of classifying the nature of the foreign proceedings, it does not do so by adopting any parochial classification of a procedural nature. As the Act requires, the English court has to look at the substantive nature of the matter which is before the foreign court to decide whether it constitutes a civil or commercial matter as that phrase is interpreted by the English court.
Against this interpretation counsel for the state relied heavily on the decision of Chapman J in Re Extradition Act 1870 [1968] 3 All ER 804, [1969] 1 WLR 12. That case concerned the application of the Foreign Tribunals Evidence Act 1856. In his judgment Chapman J indicates that ‘civil or commercial matter’ in s 1 of the 1856 Act did cover all kinds of suits, petitions, summonses and applications but the learned judge was primarily concerned with the meaning of any criminal matter of a political character. The judge was not concerned with a situation where a contrast was drawn between civil proceedings in general and proceedings in a civil or commercial matter and I do not regard the case as requiring me to take a different view of the interpretation from that which I have indicated above which I believe to be the correct interpretation.
The other cases on which the state relied were three Privy Council decisions in which public law and fiscal proceedings were regarded as civil proceedings. However in those cases (Stamps Comr Straights Settlements v Oei Tjong Swan [1933] AC 378, Tennekoon (Comr for Registration of Indian and Pakistani Residents) v Duraismy [1958] 2 All ER 479, [1958] AC 354 and Maliban Biscuit Manufactories Ltd v Subramaniam [1971] AC 988) there was no
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question of any special meaning being given to the term civil cause or civil action and the context was quite different. I accordingly find that the cases provide no assistance.
Finally on this issue I should make it clear that it is possible that there may be other areas, apart from the fiscal, where there is sufficient unanimity of approach to exclude what would normally be regarded as a civil or commercial matter under English law from that phrase as used in the 1975 Act having regard to the intent and purpose of that Act. However such other areas did not have to be identified and were not identified for the purposes of the present appeal.
Norwegian law
Having regard to my view of the proper interpretation of the phrase ‘civil or commercial matter’, there can be no doubt that the proceedings before the Norwegian court are fiscal proceedings and therefore not proceedings in relation to which the 1975 Act is available. Having looked at the pleadings, it appears the proceedings are no different (save that they take place before a civil as opposed to an administrative tribunal) from the proceedings which would take place before the general or special commissioners in this country if a taxpayer were to appeal against an assessment. This being so I do not consider that it is possible to treat the proceedings as not being of a fiscal nature because the application to the Norwegian court is by the estate and the estate as well as the state require the evidence which they believe the witnesses can give for use in a court.
If it is wrong to treat a fiscal matter as coming within a special category, then looking at the substance of the proceedings with English eyes, I would regard them as being a civil or commercial matter. They would be similar to an application for judicial review in respect of a tax decision or an appeal in a tax case to the High Court from the decision of the commissioners, both of which proceedings I would regard as being civil matters under the normal English classification. On this approach the Privy Council decisions relied on by the state of Norway would be relevant.
Finally if, contrary to my view, the classification as a matter of substance has to be carried out in accordance with Norwegian law, then I would regard the proceedings as not being a civil or commercial matter. I appreciate that this is contrary to the decision of Kenneth Jones J. However, his decision was based upon the approach indicated by Glidewell LJ on the first appeal. With the assistance of counsel for the witnesses I am satisfied, on a reading of the expert witnesses’ reports and evidence, that if the substance as opposed to the procedure is looked at under Norwegian law the Norwegian proceedings are to be regarded as proceedings in a fiscal matter which would not be treated by the Norwegians as being a civil or commercial matter.
The factual issues
Under this heading I propose to deal with the remaining issues. I will deal with them in the same order as they were dealt with by Kerr LJ on the first appeal. They are: B (tax gathering), C (sovereignty), D (dual purpose), E (Fishing) and F (confidentiality). No separate oral argument was advanced before us on issues B, C and D. We did, however, have the benefit of written submissions. Bearing in mind that having regard to my views as to jurisdiction these issues do not strictly arise, I will deal with them very briefly. I have treated them as being factual issues because to a large extent the outcome on the issues depends upon the facts.
B and C Tax gathering: Sovereignty
I have reservations as to whether our approach to the question of tax gathering should be the same today as it has been in the past. Having regard to the scale of international tax avoidance and the undesirable manifestations which are associated with it, a powerful
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argument could be advanced for saying it is very much in the interests of this country and the majority of the other countries in the world that there should be co-operation in this field. However, it would be wholly inappropriate in this appeal to seek to undermine the well-established policy identified in the speech of Lord Somerville in Government of India v Taylor [1955] 1 All ER 292, [1955] AC 491. It is sufficient if I say that I agree with the decision on the first appeal that this case raises special considerations because the estate are at one with the state in seeking to support the letter of request. The support of the estate could not make what in my view was not a civil or commercial matter into a civil or commercial matter. However, it can and does change the situation with regard to the policy issues from what it would have been otherwise and so the request could not be rejected because it might provide assistance in foreign tax gathering.
I also agree with the decision of the first Court of Appeal on the question of sovereignty. Section 4 of the Protection of Trading Interests Act 1980 has no application to the facts of the present case.
D. Dual purpose
The difficulty that I have with regard to this issue is because of the wording of the 1975 Act. I find it difficult to understand why if the proceedings before the National Tax Committee are not within s 1 why the proceedings before the court should be. However, assuming the distinction can be drawn between the two sets of proceedings either on the basis that the tax committee are not a tribunal or otherwise, then I would regard this as a matter going to discretion and on the basis that the estate supports the letters of request I would not refuse assistance on this ground.
E. Fishing
I have difficulty in applying the concept of fishing to a request that a witness should be required to give oral evidence. It is in English proceedings commonly used on applications for interrogatories and it may be said that there is little distinction between oral cross-examination and written cross-examination and the administering of interrogatories. However, interrogatories are in my view part of the process of discovery and so far as the giving of evidence (albeit prior to the trial) is concerned, different considerations could apply. Questions of privilege are dealt with expressly in s 3. But subject to the question of privilege, what I would expect normally to concern the court when considering whether effect should be given to a request, is whether the request is confined to seeking to obtain evidence which will be relevant to the proceedings in the foreign court. If it is, then normally that will be the end of the matter. Under the 1975 Act the court does not however have a general discretion and if there are special circumstances making it important that the examination is confined the court can take the appropriate action. Here the question of confidentiality can be highly significant. However, subject to confidentiality I can see no possible objection to the latest request, which is clearly designed to obtain evidence for use at the hearing. In this connection I should make it clear that what I have said already, which is of general application, is on the assumption that the evidence of the witness is required for the hearing. If the examination of the witness is sought as part of a pre-trial process, in other words as part of the process of discovery, then different considerations would apply and the principle of fishing could when appropriate be invoked. Here, therefore, I would regard Ralph Gibson LJ as indicating the correct approach rather than the majority on the first appeal who, as I understand their judgments, would extend principles which I would regard as applicable to discovery to evidence required for the hearing itself.
However, whether the approach is that indicated by the majority on the first appeal or by Ralph Gibson LJ or in this judgment (in so far as it differs from that adopted by Ralph Gibson LJ) I am quite satisfied that the letter of request is not flawed on the grounds of fishing. On the contrary, the letter was designed to elicit evidence which was highly
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relevant to the proceedings before the Norwegian court. If this had not been the case, then the court in refusing to give effect to the letter would not ordinarily do so on a jurisdictional basis but as a matter of discretion.
F. Confidentiality
The witnesses undoubtedly owe a duty of confidentiality to their clients which the English court will protect so long as this can be done consistently with the duty this court has to assist the Norwegian courts where it is appropriate to do so. As was pointed out on the first appeal and by Kenneth Jones J this involves a balancing exercise. The importance of the evidence which has been requested in the proceedings has to be taken into account in performing the exercise. The court can and should, where this is necessary in order to do justice, give directions or otherwise restrict the request as authorised by the English court to protect a duty of confidence. If the proceedings were taking place before an English court the English court would seek to preserve confidentiality and the broad approach to the request should be the same.
Kenneth Jones J performed the balancing exercise, he directed himself properly when so doing and I can see no reason whatever for interfering with the conclusion to which he came. Criticisms are made as to the directions which Kenneth Jones J made as to the amendment of the letter of request. However, this being a matter for his discretion, I would not interfere with the decision that he made, save in respect of the modified request which was put before this court but was not available to Kenneth Jones J.
I would therefore allow the appeal. I do so on the short ground that on the proper interpretation of the 1975 Act the fiscal proceedings which are now being conducted before the Sandefjord City Court are not capable of being regarded a ‘civil or commercial matter’ for the purposes of the 1975 Act. I come to this conclusion notwithstanding the fact that it would be my view that if the English court had jurisdiction to assist the Norwegian court it certainly should do so. This would, however, require a further treaty and a statute to implement that treaty which were designed to provide for assistance in relation to proceedings in matieres fiscal.
I agree with the order proposed by May and Balcombe LJJ.
Appeal allowed. Order below discharged as to costs, order substituted that there be no order as to costs below. Witnesses to have costs of the appeal. Time extended for applying for leave to appeal against first Court of Appeal decision; leave to appeal to House of Lords in respect of both decisions by Court of Appeal on all issues granted. Leave to cross-appeal granted.
Solicitors: Linklaters & Paines; Freshfields; Macfarlanes.
Carolyn Toulmin Barrister.
Re State of Norway’s Applications (Nos 1 and 2)
[1989] 1 All ER 745
Categories: CONFLICT OF LAWS: CIVIL PROCEDURE
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD GRIFFITHS, LORD GOFF OF CHIEVELEY AND LORD LOWRY
Hearing Date(s): 17, 18, 19, 20, 24 OCTOBER 1988, 16 FEBRUARY 1989
Evidence – Foreign tribunal – Examination of witnesses in relation to matters pending before foreign tribunal – Evidence for purpose of civil proceedings – Proceedings in civil or commercial matter – Evidence requested by foreign tax tribunal – Whether foreign proceedings civil or commercial matter – Whether proceedings assisting foreign tax gathering – Evidence (Proceedings in Other Jurisdictions) Act 1975, ss 1, 9(1).
J, a wealthy Norwegian shipowner, died in 1982. The county tax committee for that part of Norway in which he had resided decided to raise a retrospective tax assessment against his estate for the years 1972–82 on the ground that he had avoided tax during those years by failing to declare a large part of his assets. The estate commenced proceedings in the court of first instance in Norway to have the assessment declared null and void and appealed to the national tax committee to have it set aside. The Norwegian court, on the application of the State of Norway supported by the estate, issued letters of request addressed to the High Court in England requesting the court, inter alia, to summon two named merchant bankers (the witnesses) to attend before an examiner in London to give oral evidence relevant to the issues in the proceedings before the Norwegian court. The bank had acted as bankers for a charitable trust alleged to have been set up and controlled by J and which allegedly held shares for J as beneficial owner. After receiving the letter of request the master made an order under s 2a of the Evidence (Proceedings in Other Jurisdictions) Act 1975 granting the application for the oral examination of the witnesses. The witnesses applied to have the order set aside. The judge upheld the master’s decision subject to certain directions limiting the scope of the questions which could be put to the witnesses. The witnesses appealed to the Court of Appeal, contending, inter alia, that the Norwegian proceedings did not constitute ‘civil proceedings’ under s 1b of the 1975 Act, which were defined by s 9(1)c of that Act as proceedings in a ‘civil or commercial matter’, so as to confer jurisdiction on the English court, and that the terms of the letter of request were so wide as to amount to a fishing expedition. In allowing the appeal and setting aside the order the Court of Appeal expressed the view that whether proceedings were a ‘civil or commercial matter’ depended on their classification under the law of the requesting court and the law of the court to whom the request was made and that the Norwegian proceedings would be characterised as a civil proceeding under English law. The Court of Appeal therefore found that the proceedings fell within the ambit of s 1 of the 1975 Act but went on to hold that the terms of the letter of request were too wide for
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the court to order the witnesses to give evidence on the request as framed. Following a further application by the State of Norway, supported by the estate, the Norwegian court issued a second letter of request for the oral examination of the witnesses on 12 specific issues and setting out the specific questions to be put to the witnesses. The letter of request stated that the Norwegian proceedings were a ‘civil action’ under Norwegian law and a ‘civil matter’ under the Convention relating to the Taking of Evidence abroad in Civil or Commercial Matters of 1970. The master made an order under s 2 of the 1975 Act for the examination of the witnesses according to the terms of the letter of request. On appeal by the witnesses, the judge upheld the order subject to certain limitations on the testimony which the witnesses could be required to give. The witnesses appealed to Court of Appeal, again contending that the Norwegian proceedings were not ‘civil proceedings’ within ss 1 and 9(1) of the 1975 Act and that the English court had no jurisdiction. The state cross-appealed against the limitations placed by the judge on the witnesses’ testimony. The Court of Appeal held that the witnesses were not prevented by either judicial precedent or issue estoppel from again contending that the Norwegian proceedings were not ‘civil proceedings’ within ss 1 and 9(1) of the 1975 Act, and held that, applying a generally acceptable international interpretation derived from the civil law distinction between private law (which included civil or commercial proceedings) and public law (which included fiscal proceedings), the Norwegian proceedings, which were clearly fiscal proceedings, were not proceedings in a ‘civil or commercial matter’ for the purposes of s 9, with the result that the court had no jurisdiction to order the examination of the witnesses according to the terms of the letter of request. The state and the estate appealed to the House of Lords against both decisions of the Court of Appeal.
Held – On the true construction of s 9 of the 1975 Act the question whether proceedings were a ‘civil or commercial matter’ depended on the classification of those proceedings according to the law of the requesting court and the law of the court to which the request was made (ie English law), since the classification could not be made by reference to any internationally acceptable classification. In answering that question the English court was required to determine according to the law of the requesting court how the proceedings would be classified under the law and practice of that state, having regard to the manner in which classification was ordinarily made in that country, and then to determine according to English law whether the proceedings were civil proceedings on the basis that all proceedings other than criminal proceedings were civil proceedings. Since under Norwegian law the Norwegian proceedings would be classified as proceedings in a civil matter and since under English law proceedings in a fiscal matter were civil proceedings the court had jurisdiction to order the examination of the witnesses according to the terms of the letter of request. Furthermore, that jurisdiction was not affected by the rule that English courts would not entertain an action for the enforcement of a foreign revenue law, since that rule did not go to jurisdiction and in any event the letter of request issued by the Norwegian court did not amount to the attempted enforcement, either directly or indirectly, of Norwegian revenue laws in England but was merely seeking the assistance of the English court to obtain evidence to enable Norwegian revenue laws to be enforced in Norway. The state’s appeal would therefore be allowed (see p 747 g to j, p 757 d g to j, p 758 f h j, p 759 g h, p 760 h j and p 761 g to p 762 b, post).
Decision of the Court of Appeal [1989] 1 All ER 661 affirmed.
Decision of the Court of Appeal [1989] 1 All ER 701 reversed.
Notes
For evidence for proceedings in other jurisdictions, see 17 Halsbury’s Laws (4th edn) paras 326–329, and for cases on the subject, see 22 Digest (Reissue) 665–668, 7111–7123.
For the Evidence (Proceedings in Other Jurisdictions) Act 1975, ss 1, 2, 9, see 17 Halsbury’s Statutes (4th edn) 191, 192, 197.
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Cases referred to in opinions
A-G of New Zealand v Ortiz [1983] 2 All ER 93, [1984] AC 1, [1983] 2 WLR 809, HL affg [1982] 3 All ER 432, [1984] AC 1, [1982] 3 WLR 570, CA.
Bemberg v Revenue Authorities of the Province of Buenos Aires (24 February 1949, unreported), Cours de Cassation de France.
India (Government) Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292, [1955] AC 491, [1955] 2 WLR 303, HL.
Rio Tinto Zinc Corp v Westinghouse Electric Corp, RTZ Services Ltd v Westinghouse Electric Corp [1978] 1 All ER 434, [1978] AC 547, [1978] 2 WLR 81, HL.
Consolidated appeals and cross-appeals
The State of Norway and the estate of Anders Jahre deceased appealed against the decisions of the Court of Appeal on 12 February 1986 (Kerr and Glidewell LJJ, Ralph Gibson LJ dissenting in part) ([1989] 1 All ER 661) and on 18 December 1987 (May and Balcombe LJJ, Woolf LJ dissenting in part) ([1989] 1 All ER 701) allowing appeals by Lord Kindersley and Mr A J Hardman (the witnesses) against the decisions of McNeill J on 24 July 1985 and Kenneth Jones J on 20 October 1986 respectively dismissing the witnesses’ applications to discharge orders made for the oral examination of the witnesses pursuant to s 2 of the Evidence (Proceedings in Other Jurisdictions) Act 1975, in compliance with a request from the Sandefjord City Court on an application by the state supported by the estate. The witnesses cross-appealed against the order of the Court of Appeal as to costs in Re State of Norway’s Application (No 2). The facts are set out in the opinion of Lord Goff.
The appeals and cross-appeal were consolidated by order of the House of Lords dated 28 April 1988.
Anthony Boswood QC and Stephen Moriarty for the State of Norway and the estate.
Michael Crystal QC, J A Jolowicz and David Alexander for the witnesses.
Their Lordships took time for consideration
16 February 1989. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, I have had the opportunity of considering in draft the speech prepared by my noble and learned friend Lord Goff. I agree with it, and for the reasons he gives would allow the appeal in Re State of Norway’s Application (No 2) [1989] 1 All ER 701, and deal with Re State of Norway’s Application (No 1) [1989] 1 All ER 661 as he proposes.
LORD BRANDON OF OAKBROOK. My Lords, I had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Goff. I agree with it and for the reasons which he gives I would allow the appeal in Re State of Norway’s Application (No 2) [1989] 1 All ER 701 and deal with Re State of Norway’s (No 1) [1989] 1 All ER 661 in the manner which he proposes.
LORD GRIFFITHS. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Goff. I agree with it, and for the reasons he gives would allow the appeal in Re State of Norway’s Application (No 2) [1989] 1 All ER 701, and deal with Re State of Norway’s Application (No 1) [1989] 1 All ER 661 as he proposes.
LORD GOFF OF CHIEVELEY. My Lords, this appeal is concerned with letters rogatory issued by a Norwegian court, addressed to the English High Court, requesting the oral examination of two witnesses in this country, Lord Kindersley and Mr A J Hardman. The witnesses have opposed any order that they should submit to such oral
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examination; their grounds of opposition will appear hereafter, but their principal fear is that, if compelled to give evidence, they will be forced to break their duty of confidentiality as bankers. The result has been extensive litigation in this country, including two hearings before the Court of Appeal; it is the second decision of the Court of Appeal which is, primarily, the subject of the present appeal before your Lordships’ House. Before considering the substance of the appeal itself, it is necessary for me to set out, as briefly as I can, the course of the proceedings which have taken place. It will then be possible to identify the issues which arise for decision on this appeal; and so to consider the rival submissions advanced before your Lordships on those issues.
At the heart of the present proceedings lies an assessment to tax raised against the estate of a wealthy Norwegian shipowner, Anders Jahre, who died in 1982. On 14 September 1983 the county tax committee for the area in Norway in which he lived decided to raise a supplementary retrospective tax assessment against his estate in the sum of about 338m Norwegian Kroner for the years 1972–82, on the ground that he had failed to declare a large part of his assets. The undeclared assets are alleged to include the assets of a Panamanian company, Continental Trust Co Inc (CTC). The shares in CTC form part of the assets of a charitable foundation (the trust) founded in 1976; and it is alleged that the deceased was a settlor or in control of the trust, and accordingly the beneficial owner of the assets of CTC. Lord Kindersley is a director of Lazard Bros & Co Ltd who acted as adviser to the trust since its foundation; Lazards appear to have acted as bankers to the trust. Mr Hardman was a senior employee of Lazards who acted as assistant secretary, and subsequently as treasurer, of CTC, until the dissolution of CTC in 1984.
The assessment raised by the county tax committee is enforceable as such, but may be discharged either by an order by the appropriate Norwegian court declaring the assessment null and void, or on an appeal to the National Tax Committee (the NTC). In November 1983 the estate brought an action in the Sandefjord City Court to have the assessment set aside; the Norwegian Solicitor General took over the defence of those proceedings. Subsequently, the estate also appealed to the NTC. It appears that, if the order for letters rogatory is made, the testimony of the witnesses would be made available not only to the Sandefjord court but also to the NTC.
In June 1984 the lawyer acting for the estate addressed a request to the Sandefjord court for the examination of Lord Kindersley; in the request it was submitted that Lord Kindersley might be asked to give evidence in accordance with the Convention on the Taking of Evidence abroad in Civil or Commercial Matters (The Hague, 18 March 1970, TS 20 (1977); Cmnd 6727), to which both Norway and the United Kingdom are parties. Subsequently, in November 1984, the Solicitor General made a further request for the examination of Lord Kindersley and Mr Hardman. A letter of request from the Sandefjord court, addressed to the competent court in Great Britain, requesting assistance in the examination of both witnesses, formed the basis of the first set of proceedings in this country (which I shall refer to as ‘Norway (No 1)’). The letter of request made no reference to any convention; I do not imagine this to be in any way unusual. Attached to the letter of request were certain pleadings setting out the matters in respect of which evidence was sought from the two witnesses. An order for examination of the witnesses was sought in this country by the State of Norway, and on 14 January 1985, on an ex parte application, Master Prebble made the requested order. The witnesses then applied to discharge that order; the estate was then added as a respondent to the witnesses’ summons. On 24 July 1985 McNeill J dismissed the witnesses’ application, but directed that the order should take effect subject to certain qualifications which he placed on the matters in respect of which the testimony of the witnesses was sought. The witnesses appealed to the Court of Appeal against the order requiring them to give evidence and the state and the estate cross-appealed against the limitations imposed by McNeill J. By a majority (Kerr and Glidewell LJJ, Ralph Gibson LJ dissenting) the Court of Appeal allowed the appeal (see [1989] 1 All ER 661), on the ground that the letter of request was in such wide terms that it amounted to an impermissible ‘fishing expedition’, ie that it
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was a roving inquiry designed to elicit information which might lead to the obtaining of evidence. The majority further concluded that the appeal should also be allowed on the basis that the order compelled the witnesses to violate their duty of confidence as bankers.
A number of other issues were canvassed before the Court of Appeal in Norway (No 1). In particular, it considered a submission by the witnesses that the English courts had no jurisdiction to entertain the application, on the ground that the application was not concerned with ‘proceedings in any civil or commercial matter’ and so did not fall within the jurisdiction conferred on the English courts by s 1(b) of the Evidence (Proceedings in Other Jurisdictions) Act 1975. The submission was rejected by the Court of Appeal. I shall have to consider this point in depth at a later stage. At present I need say no more than that the question was considered in detail by Kerr LJ with whom, on this point, both Glidewell and Ralph Gibson LJJ agreed (see [1989] 1 All ER 661). With some reluctance he rejected an argument, advanced on behalf of the witnesses, that the relevant words in the 1975 Act, viz ‘proceedings in any civil or commercial matter’, should be interpreted as bearing a broadly acceptable international meaning, consistent with that used in civil law countries, and as such excluding proceedings in public law matters, and therefore excluding proceedings for the recovery of tax. In particular Kerr LJ (who considered that the relevant proceedings must be proceedings in a civil or commercial matter both by the law of the requesting state (here Norway) and by the law of this country) felt unable to conclude, on the evidence before him, that the action in the Sandefjord court could not be regarded as proceedings in a civil matter by the law of Norway. In the closing paragraph of his judgment he said ([1989] 1 All ER 661 at 689):
‘Finally, I would add that if this judgment reflects the ultimate outcome of this appeal, then I hope that any renewal of the present letter of request in some more limited and acceptable form, if this can be devised, should be accompanied by clear evidence as to what is properly to be regarded as a “civil or commercial matter” by the law of Norway, and in particular whether Norwegian law distinguishes between public and private law. I feel, frankly, uneasy about my acceptance, dubitante, of the very limited evidence in this connection on the present application.’
Doubtless in response to that invitation, the state and the estate obtained from the Sandefjord court a second letter of request, addressed to the English High Court, once again seeking the testimony of Lord Kindersley and Mr Hardman, but limited to 12 specific issues, and setting out the specific questions to be put to the witnesses. The letter of request contained the statement: ‘The action is a civil action under the law of Norway, and the proceedings are a “civil matter” under the law of Norway, for the purposes of [the 1970 convention] … ' It is said that these words were derived from the draft letter of request submitted to the court by the parties. No doubt they were but they were accepted by the court. At all events, the letter of request led to the proceedings in this country in Norway (No 2). The application for the order in this country was made by the State of Norway, though the application was supported by the estate. On an ex parte application Master Creightmore, on 2 April 1986, made the order requested. The witnesses applied to have that order set aside by judgment on 20 October 1986 and order dated 18 November 1986 Kenneth Jones J dismissed the witnesses’ application, subject to certain qualifications which he placed on the testimony which the witnesses were required to give under the master’s order. The witnesses appealed to the Court of Appeal against the judge’s order and the state cross-appealed against that part of his order which imposed limitations on the testimony to be given. The Court of Appeal allowed the witnesses’ appeal (see [1989] 1 All ER 701). May and Balcombe LJJ did so on the ground that the words ‘proceedings in any civil or commercial matter’ in the 1975 Act were to be construed, in accordance with what they held to be a generally acceptable international interpretation, in the civil law sense as excluding public law matters and so excluding fiscal matters, and that therefore the English court had no jurisdiction to entertain the request of the Sandefjord court. Woolf LJ concluded that there was no internationally acceptable meaning to be attached to the words ‘proceedings in any civil or commercial
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matter’ in the 1975 Act he nevertheless held that that expression excluded fiscal matters, and on that basis he also held that the English court had no jurisdiction. The State of Norway and the estate now appeal to your Lordships’ House against that decision.
On the appeal before your Lordships’ House, four issues emerged in the course of argument. First, the State of Norway challenged the decision of the Court of Appeal that the English court had no jurisdiction to entertain its application. The witnesses, while seeking to uphold the decision of the Court of Appeal on that point, submitted, in the alternative, that the State of Norway’s application should in any event be dismissed, either as ‘tax-gathering’ and as such inconsistent with the well-known principle in Government of India Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292, [1955] AC 491 or on the ground that it constituted an illegitimate ‘fishing expedition’ or because it compelled the witnesses to break their duty of confidentiality as bankers. It is the first two of these issues which raise the matters of principle for decision by your Lordships’ House. I shall consider them together, under the heading of jurisdiction. The other two issues I shall consider briefly at the end of this speech.
Jurisdiction
I turn first, therefore, to the central question argued before your Lordships’ House, which is whether the proceedings in the Sandefjord court were civil proceedings within s 1(b) of the 1975 Act, having regard to the definition of ‘civil proceedings’ in s 9(1) of the Act, viz that that expression, in relation to the requesting court, means proceedings in any civil or commercial matter.
In order to consider this question, I must set out those parts of the 1975 Act which are of immediate relevance. First, the long title of the Act reads as follows:
‘An Act to make new provision for enabling the High Court, the Court of Session and the High Court of Justice in Northern Ireland to assist in obtaining evidence required for the purposes of proceedings in other jurisdictions; to extend the powers of those courts to issue process effective throughout the United Kingdom for securing the attendance of witnesses and for purposes connected with those matters.’
Section 1 of the Act provides as follows:
‘Where an application is made to the High Court, the Court of Session or the High Court of Justice in Northern Ireland for an order for evidence to be obtained in the part of the United Kingdom in which it exercises jurisdiction, and the court is satisfied—(a) that the application is made in pursuance of a request issued by or on behalf of a court or tribunal (“the requesting court”) exercising jurisdiction in any other part of the United Kingdom or in a country or territory outside the United Kingdom; and (b) that the evidence to which the application relates is to be obtained for the purposes of civil proceedings which either have been instituted before the requesting court or whose institution before that court is contemplated, the High Court, Court of Session or High Court of Justice in Northern Ireland, as the case may be, shall have the powers conferred on it by the following provisions of this Act.’
The expression ‘civil proceedings’ is defined in s 9(1) of the Act as follows:
‘In this Act—“civil proceedings”, in relation to the requesting court, means proceedings in any civil or commercial matter … ’
It is not in doubt that a major purpose of the 1975 Act was to enable ratification of the 1970 convention. The text of the convention is in the English and French languages, both being authoritative. The convention is entitled ‘Convention on the Taking of Evidence abroad in Civil or Commercial Matters’. The first two paragraphs of art 1 of the convention read as follows:
‘In civil or commercial matters a judicial authority of a Contracting State may, in accordance with the provisions of the law of that State, request the competent
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authority of another Contracting State, by means of a Letter of Request, to obtain evidence, or to perform some other judicial act.
A Letter shall not be used to obtain evidence which is not intended for use in judicial proceedings, commenced or contemplated.’
In the French text, the opening words of art 1 read: ‘En matiagere civile ou commerciale … ’
The submissions of the witnesses on this point are, in summary, as follows. It was submitted that the main purpose of the 1975 Act was to give effect to the 1970 convention. The words ‘civil or commercial matters’ in s 9(1) of the Act reflect the same words in art 1 of the convention, and should be given the same meaning. Furthermore, the distinction drawn between ‘civil’ and ‘commercial’ matters is inconsistent with the English procedural classification, in which civil matters embrace all matters which are not criminal, and in particular include commercial matters. This suggests that the words ‘civil or commercial matters’ in s 9(1) should, like the same words in the English text of art 1 of the convention, be regarded as derived from the words ‘matiagere civile ou commerciale’ in the French text of art 1. In France, as in other civil law countries, civil matters are categorised as a matter of substance and are regarded as limited to private law matters, excluding public law matters and in particular fiscal matters. This approach was commended as ‘internationalist’; and it was suggested that it would achieve uniformity in the construction of art 1 of the convention, and a consistent construction of s 9(1), which is derived from it. In Norway (No 1) this approach was rejected, after full and careful consideration, by Kerr LJ, despite the attraction he felt for it; on this point, both Glidewell and Ralph Gibson LJJ agreed with Kerr LJ. However it found favour with the majority of the Court of Appeal in Norway (No 2), who felt free to depart from the conclusion reached on it by the Court of Appeal in Norway (No 1).
Your Lordships are here concerned with the construction of certain words used in an Act of Parliament (the 1975 Act) which is primarily concerned with conferring jurisdiction on courts in the United Kingdom (in England, the High Court) to obtain evidence pursuant to a request from a court or tribunal outside the jurisdiction of the court (whether elsewhere in the United Kingdom or abroad). The 1975 Act is not the first legislation to be found in the statute book conferring jurisdiction of this kind; and the expression ‘civil or commercial matter’ is to be found in the earliest Act of Parliament concerned with this subject, the Foreign Tribunals Evidence Act 1856. The question has therefore arisen whether it is legitimate to have recourse to the earlier legislation for the purpose of construing the 1975 Act.
In Rio Tinto Zinc Corp v Westinghouse Electric Corp, RTZ Services Ltd v Westinghouse Electric Corp [1978] 1 All ER 434 at 441, [1978] AC 547 at 608 it was said by Lord Wilberforce of the 1975 Act that:
‘The 1975 Act is, as I think, clear in its terms so that reference in aid of interpretation to previous statutes is not required.’
Furthermore Lord Diplock said with reference to previous decision of English courts as to the meaning of different words used in the 1856 Act ([1978] 1 All ER 434 at 461, [1978] AC 547 at 633):
‘For my part, I do not think that any assistance is to be gained from those decisions. The jurisdiction of English courts to order persons within [their] jurisdiction to provide oral or documentary evidence in aid of proceedings in foreign courts has always been exclusively statutory. There is no presumption that Parliament, in repealing one statute and substituting another in different terms, intended to make the minimum changes in the previous law that it is possible to reconcile with the actual wording of the new statute, particularly where, as in the instant case, the new statute is passed to give effect to a new international convention.’
These observations of course carry much weight. Even so, caution has to be exercised. When it is said that the 1975 Act was passed with, in part, the purpose of giving effect to
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the 1970 convention, this is no doubt true; and where words in the Act are derived directly from the convention, it may well be right that reference to previous Acts of Parliament in aid of construction would not be appropriate. This is particularly so where, under the Act, the jurisdiction of the courts in this country is enlarged to accommodate the convention; though I have to say that only minor provisions were required for this purpose. But it is not to be forgotten that the 1975 Act was not only passed to ensure that our domestic law accommodated the 1970 convention and so to enable its ratification by the United Kingdom. It was also passed to embrace within one Act of Parliament the relevant powers of superior courts in the United Kingdom, previously contained in a number of Acts of Parliament; and the 1975 Act confers powers which apply in relation to other jurisdictions within the United Kingdom and, like its predecessors, enables courts in the United Kingdom to assist courts in other jurisdictions throughout the world, whether in convention countries (including not only the 1970 convention but other conventions to which this country is party) or in non-convention countries (of which there are still a large number). In these circumstances, in considering the scope of the jurisdiction conferred by the 1975 Act, it is, in my opinion, both legitimate and appropriate to have regard to the legislative history of the Act.
I turn therefore to the earlier legislation. As I have already indicated, the first Act of Parliament concerned with the obtaining of evidence for the assistance of foreign courts and tribunals is the Foreign Tribunals Evidence Act 1856. The origins of this Act are obscure all that we know is that the Act has no direct treaty base. Section 1 of the Act confers on superior courts in the United Kingdom jurisdiction ‘to order the Examination upon Oath, upon Interrogatories or otherwise, before any Person or Persons named in such order’ of witnesses within the jurisdiction whose testimony ‘any Court or Tribunal of competent Jurisdiction in a Foreign Country, before which any Civil or Commercial Matter is pending, is desirous of obtaining … in relation to such matter … ’ The crucial point is, of course, the power to compel the witnesses to attend any such examination.
Here we find the first mention in an Act of Parliament, at least in this context, of the expression ‘civil or commercial matter’. It is plain that here the word ‘matter’ is used as referring to the relevant proceedings, because in s 1 the ‘matter’ is required (consistently with the long title and s 2 of the Act) to be pending before the foreign court or tribunal. This reinforces the natural inference that, in s 1 of the Act, the expression ‘civil matter’ is being given no restricted meaning and would be understood in this country as referring to civil, as opposed to criminal, proceedings. It is true that this gives no weight to the words ‘or commercial’ so far as the law of this country is concerned; but it is not surprising to find these words added in relation to a jurisdiction which will be invoked by courts or tribunals in foreign countries, many of which differentiate between civil and commercial matters.
Section 2 of the 1856 Act makes provision for a certification procedure, under which a certificate of a diplomatic agent or consul of a foreign country—
‘that any Matter in relation to which an Application is made under this Act is a Civil or Commercial Matter pending before a Court or Tribunal in the Country of which he is the Diplomatic Agent or Consul having Jurisdiction in the Matter so pending, and that such Court or Tribunal is desirous of obtaining the Testimony of the Witness or Witnesses to whom the applicant relates … ’
shall be evidence of the matter so certified. This shows that the general intention of Parliament in the Act was to provide assistance in respect of any pending matters which, in the requesting state, would be described as civil or commercial, though it must also have been intended that the United Kingdom courts (whose jurisdiction was established under s 1) should not exercise that jurisdiction in matters which would, in the relevant jurisdiction in this country, be classified as criminal, even though in the requesting state they are classified as civil or commercial. In any event, there can be no question of the jurisdiction of the United Kingdom courts being dependent on a ‘civil law’ classification of the relevant matter as civil or commercial.
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Three years after the 1856 Act there was passed the Evidence by Commission Act 1859 (subsequently amended by the Evidence by Commission Act 1885), which conferred on courts or tribunals of competent jurisdiction in Her Majesty’s dominions power to obtain evidence in relation to any action, suit or proceeding pending in or before courts or tribunals elsewhere in Her Majesty’s dominions. The words ‘action, suit or proceeding’ are so wide that they must have been intended to embrace all kinds of proceedings, civil or criminal. Eleven years later, the jurisdiction conferred by the 1856 Act in civil or commercial matters was extended by s 24 of the Extradition Act 1870 to apply in relation to ‘any criminal matter pending in a court or tribunal in a foreign state … ' The 1870 Act provided that all provisions of the 1856 Act should be construed as if the term ‘civil matter’ included a criminal matter; it follows that these were to be classified in the same way as ‘civil or commercial’ matters under the 1856 Act. Three years later a fresh provision relating to criminal matters was enacted in s 5 of the Extradition Act 1873, which provided that a Secretary of State may, by order under his hand and seal, require a police magistrate or a justice of the peace to take evidence for the purposes of any criminal matter pending in any court or tribunal in a foreign state.
These provisions remained in force for many years, until the repeal of all (except s 5 of the Extradition Act 1873) by the 1975 Act. They were so repealed because, as is evident from the long title of the 1975 Act, one important purpose of the Act was to make new provision, in one statute, for the jurisdiction of superior courts in the United Kingdom in relation to obtaining evidence for the assistance of courts or tribunals in other jurisdictions, whether elsewhere in the United Kingdom, or in the few surviving British dominions (which include the important commercial centre of Hong Kong), or in other countries (whether or not members of the Commonwealth). The 1873 Act was no doubt excluded because it did not affect the jurisdiction of the High Court, the Court of Session or the High Court of Justice in Northern Ireland.
Such is the legislative history. I turn to the conventions. It appears from the evidence before your Lordships’ House that the first international conventions concerned with obtaining evidence for the assistance of courts or tribunals in foreign jurisdictions consist of a series of 23 bilateral conventions entered into between the United Kingdom and various foreign countries. The first is a convention with France in 1922; the last before the 1970 convention was a convention with Israel in 1966. Apart from the convention with Israel, all the foreign countries concerned can broadly be described as civil law countries they include Norway, with which a convention was entered into in 1931 (London, 7 August 1931; TS 35 (1931); Cmd 3934). Each convention has, of course, texts both in the English language and in the language of the relevant foreign country. In each, the convention is stated (in the English text) to apply in civil or commercial matters.
In the convention with France of 1922 (as in that with Belgium in 1924) it is stated in the French text that the convention applies ‘en matiagere civile ou commerciale’. This expression is also to be found in an earlier multilateral convention in 1896, to which a number of European states (though not the United Kingdom) were parties, concerned with the service of documents (a matter also dealt with in the bilateral conventions and now the subject of the 1965 Hague Convention). Doubtless similar expressions were used, in the various languages, in the other 21 bilateral conventions entered into by the United Kingdom. In all the circumstances, however, I do not regard it as a legitimate inference that the English expression ‘civil or commercial matters’ in these conventions is a translation from the French ‘matiagere civile ou commerciale,’ expecially bearing in mind that the expression ‘any civil or commercial matter’ was also to be found in the United Kingdom statute conferring the then relevant jurisdiction on our courts, which had been on the statute book for nearly 70 years before the 1922 convention with France. Doubtless all states which were parties to these conventions interpreted the expression, as used in their own languages, in their own ways. Even so, as appears from preparatory documents relating to the 1970 convention, no difficulty was experienced in practice in the operation of these conventions. Each provided that any such difficulties as might arise should be settled through the diplomatic channel. Indeed, the jurisdiction of
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national courts, as in this country, is no doubt established by domestic legislation, which may well be (in Norway, as in this country) of wider application, on its face not expressly related to (though no doubt framed to accommodate) any convention to which the country is party.
It is in these circumstances of some interest to have regard to the position relating to Commonwealth countries. In 1859 all the relevant countries were British dominions, and so the courts and tribunals in this country and in the British dominions could, in relation to each other, take advantage of the wide language of the 1859 Act, which referred to ‘any action, suit or proceeding’.
Following the Statute of Westminster 1931 and the movement to independence after the 1939–45 war, the great majority of these countries have acquired independent status. Nevertheless, as is normal, much of the old imperial legislation was continued in force in relation to each country on attaining independence, including the 1856 and 1859 Acts. These Acts (repealed by the United Kingdom Parliament by the 1975 Act) have no doubt also been repealed by many Commonwealth countries. I cannot say whether this has invariably been done or, if it has been done, when it was done. Let me however give two examples. In India the two Acts were repealed, together with many other statutes, by the British Statutes (Application to India) Repeal Act 1960, the relevant law then being found in provisions of the Indian Codes of Civil and Criminal Procedure. Under the Code of Civil Procedure 1908, ss 76 and 78 confer jurisdiction on Indian courts relating to the execution and return of commissions and, in the case of commissions issued at the instance of foreign tribunals, Ord 26, r 19, of the relevant rules of court requires only that ‘the proceeding is of a civil nature’. In New South Wales it appears that the 1856 and 1859 Acts will shortly be repealed by the Evidence (Evidence on Commission) Amendment Act 1988, which has not yet been brought into force; by that Act they will be replaced (see Pt IX of the 1988 Act, concerned with taking of evidence for foreign and Australian courts) by, inter alia, new provisions applicable in relation to ‘proceedings in any civil or commercial matter’ which are very similar to ss 1, 2 and 3 of the 1975 Act. Furthermore it appears that, in relation to the few remaining British colonies, the 1856 and 1859 Acts having been repealed, the provisions of the 1975 Act (with appropriate modifications) have been applied to them by various ordinances, in 1975 or later. It follows that, as between many countries in the common law legal family (and, in due course, so far as New South Wales is concerned, as between that state and other Australian states), the relevant jurisdiction is expressed to be in ‘proceedings in civil or commercial matters’. But for some years at least in relation to many Commonwealth countries (and, it may be, still today in relation to others), the jurisdiction of the United Kingdom courts has been in proceedings ‘in any civil or commercial matter’ under the 1975 Act, whereas the jurisdiction of the courts of other Commonwealth countries, in relation to the United Kingdom or in relation to other countries, has been that conferred by the 1856 and 1859 Acts, or (as in the case of India) has otherwise been broadly defined. It is, in my opinion, important to bear in mind, when ascertaining the jurisdiction conferred on the courts of the United Kingdom by the 1975 Act, its impact on the relationship between the courts of this country and the courts of Commonwealth countries, with whom, as fellow members of the largest legal family in the world, we enjoy the closest of legal ties.
It is against this background that I turn to consider the 1975 Act, and in particular the expression ‘civil proceedings’ in s 1(b) of the Act, as defined in s 9(1), viz “civil proceedings”, in relation to the requesting court, means proceedings in any civil or commercial matter … ’
Now it is true that the words ‘proceedings in any civil or commercial matter’ in s 9(1) differ from the words ‘any civil or commercial matter’ in s 1 of the 1856 Act and it can be argued that, in this slightly different phraseology, it would be tautologous to identify the relevant ‘matter’ with the proceedings themselves, and that it might therefore be proper to apply a substantive rather than a procedural test for the purpose of characterising the relevant proceedings as civil, and to do so with reference to the French words in the
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1970 convention. I cannot however help thinking that this very slight change in wording constitutes a slender basis on which to build so substantial a departure from the previous law. Indeed, it would be remarkable if it were intended to do so, when the relevant wording in the 1970 convention mirrors that in the 23 bilateral conventions which were operated without difficulty under the 1856 Act.
But this verbal point pales into insignificance beside the fact that the argument advanced on behalf of the witnesses would involve a profound departure from the established legal practice of conferring a very broad jurisdiction on the courts in the United Kingdom to enable them to provide assistance for courts in other jurisdictions by obtaining evidence for them. There is no hint in the statute itself that any such departure was intended; indeed the long title of the Act makes no reference at all to the 1970 convention. I wish to dwell for a moment on the consequences if the witnesses’ contention were to be accepted, and the expression ‘proceedings in any civil or commercial matter’ in s 9(1) were to be given a restricted construction, derived from the French text of art 1 of the convention, limited by reference to a civil law meaning to be derived from the words in the French text.
I first refer to the fact that the jurisdiction under the 1975 Act can be invoked to obtain evidence for the assistance of a court or tribunal in another jurisdiction in the United Kingdom. No doubt, within the United Kingdom, it is normal for a court desiring to obtain evidence from another jurisdiction in the United Kingdom now to take advantage (where necessary) of the extended power of subpoena embodied in s 4 of the 1975 Act. But it may not always be possible to obtain evidence in this way, for example where a witness is ill and so unable to comply with a subpoena and the simple fact remains that the jurisdiction under the Act is not restricted to obtaining evidence in aid of foreign jurisdictions. It is surely improbable that Parliament should, in these circumstances, have legislated that the jurisdiction should be restricted to proceedings in a civil or commercial matter in a sense understood in civil law countries.
Next, for over a century since 1859, courts or tribunals in British dominions, most of them now independent members of the Commonwealth, have been able to take advantage of an unrestricted jurisdiction in all actions, suits or proceedings. It would be strange indeed if, in relation to these countries, the jurisdiction should not be limited with reference to the law of civil law countries, not only in relation to the remaining Crown colonies, but also in relation to members of the Commonwealth whose courts continued after independence to enjoy an unrestricted jurisdiction. All (or very nearly all) of these countries are, as I have said, members of the common law legal family, to whom the restricted meaning of ‘civil or commercial matters’, deriving as it does from a different system of law, is unknown.
Furthermore the 1975 Act confers, as I have said, a jurisdiction exercisable (like the old jurisdiction under the 1856 Act) in order to assist courts or tribunals in all countries, whether or not parties to the 1970 convention. It is understandable that that convention should have prompted the passage of the 1975 Act; but it is very difficult to see why Parliament should, for the first time, have here restricted this universal jurisdiction with reference to the French text of the convention, and most unlikely that it should have done so sub silentio, ie without making it express that this was indeed the legislative purpose.
Lastly the Act provides, consistently with the law as it has stood for over 100 years (since s 24 of the 1870 Act), for courts in the United Kingdom to have jurisdiction to assist courts in other countries by obtaining evidence in criminal proceedings. This power has nothing to do with private law at all; and it would be surprising if Parliament was expressly to perpetuate the power in relation to criminal proceedings, which are par excellence proceedings brought by the foreign state itself, and at the same time be held, by reference to s 9(1), to have restricted the meaning of the words ‘civil or commercial matter’ by excluding from them what are recognised (in varying forms) as public law cases by the law of certain states. Indeed, the argument for the witnesses leads to the
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remarkable conclusion that, if penal proceedings in the requesting court are categorised as criminal proceedings, the English court can assist under s 5; but if they are not criminal proceedings, the English court has no jurisdiction to assist.
But the matter does not stop there. Your Lordships’ House has, like the courts below, been provided with a most helpful selection of comparative law material. Study of this material reveals that it is very difficult to attribute any uniform meaning to ‘matière civile ou commerciale’ or ‘civil or commercial matter’, in civil law countries. There appears to be little doubt that, in most if not all civil law countries, an important distinction is drawn between private law and public law, and that public law matters are generally excluded from civil or commercial matters. But the identification of public law matters differs from country to country, sometimes in minor respects, sometimes in major respects. I myself, like Woolf LJ in Norway (No 2) [1989] 1 All ER 701, have derived great assistance from the substantial account, given by Professor Charles Szladits of the Columbia Law School, of the distinction between public law and private law in the civil law system, contained in the International Encyclopaedia of Comparative Law vol 2. That volume, entitled ‘The Legal Systems of the World: Their Comparison and Unification’, is under the chief editorship of Professor Rene David Professor Szladits’ account forms part of ch 2 of the volume, entitled ‘Structure and the Divisions of the Law’. In his introduction, Professor Szladits states (para 25):
‘The fundamental division between private law and public law is considered a basic distinction, the summa divisio, in all legal systems belonging to the Civil Law family of laws. The scope of this division, however, differs considerably within the different legal systems, and consequently the theoretical analysis and the reasons, as well as the practical effects, of these divisions also differ. From the point of view of comparative law, the description of divisions of law and its explanation is a bewildering and difficult task because of their kaleidoscopic nature. Although the same categories can be found—more or less—in all the legal systems of the Civil Law, the disparity of premises on which they have been established points rather to historical accident and practical convenience than to any all-embracing logical or structural basis.’
Later he states (para 31):
‘The dual division of law into public law and private law has been accepted in all the Civil Law systems. This uniformity disappears, however, when we consider the scope of the division, namely, what branches of law are subsumed under the one or the other.’
He then proceeds in this section (and in the following section, concerned with specific traits of public law) to illustrate by detailed reference the divergences of approach in the various civil law systems, considering that it is in the French and German legal systems that the didactic classification of law differs most. It is not necessary for me to go into detail, but I wish to quote from Professor Szladits on this distinction (para 57):
‘The distinction between public law and private law “seems to many Continental European lawyers to be fundamental, necessary and, on the whole, evident. Institutional works, student manuals and treatises contain discussions of the dichotomy, often in confidently dogmatic terms that put to rest incipient doubts.” This is an excellent summary of the situation generally prevailing in the Civil Law systems. Yet this division is far from “necessary” and far from “evident.” The criteria of distinction are established neither in theory nor in the practice of the courts and, in view of the everincreasing interpenetration of public law and private law the dichotomy appears to be in process of dissolution, which may indicate that it is not even so “fundamental” as it has been hitherto thought to be. Yet in spite of these doubts and contradictions, the dichotomy is firmly rooted in the thinking of the civilian lawyer.’
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In these circumstances, it is scarcely surprising to find, in Preliminary Document No 3 of August 1968 relating to what became the 1970 convention (Report of the Special Commission established by M Amram) the statement that:
‘The opening phrase of Article 1 immediately precipitated a spirited debate on the scope of the Convention. There was no disagreement that the Convention should be limited to “civil and commercial matters” but there was debate on the definition of a “civil and commercial matter” … ’
However, having ascertained that previous conventions in which this phrase was used (including the bilateral conventions to which the United Kingdom was party) had worked effectively without any need for specific definition of the phrase, and having regard to the historic policy of the Hague Conference to include neither a definition nor a rule of conflicts to resolve a dispute between the states on such an issue, it was decided that art 1 should follow the historic pattern without any definition of ‘civil or commercial matters’.
In these circumstances, it must in any event be very difficult to identify, by reference to civil law systems, any ‘internationally acceptable definition’ of the expression ‘civil or commercial matters’. Even if it were appropriate to define the expression in the 1975 Act with reference to the text of the 1970 convention, no internationally acceptable definition could be derived from that source. This reinforces my opinion that Parliament did not intend, by any such means, to make the profound change, now adumbrated by the witnesses, in the jurisdiction of the courts of the United Kingdom.
I need only add, on this aspect of the case, that I do not feel able to draw any assistance from the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (Brussels, 27 September 1968; EC 46 (1978); Cmnd 7395), to which the United Kingdom acceded in 1978, and to which effect was given in the United Kingdom by the Civil Jurisdiction and Judgments Act 1982. Quite apart from the fact that the convention excludes certain specific matters, thus delineating the ‘civil and commercial matters’ to which it applies, there is a court (the Court of Justice of the European Communities) which has the power and the duty to impose a uniform meaning on the convention and it is scarcely surprising that, bearing in mind that the original signatories to the convention were all civil law countries, the meaning so imposed should be derived from the civil law.
For these reasons, in agreement with the Court of Appeal in Norway (No 1) [1989] 1 All ER 661, and with Woolf LJ in Norway (No 2) [1989] 1 All ER 701, I have come to the conclusion that the words ‘civil or commercial matters’ in the 1975 Act cannot be construed with reference to any internationally acceptable meaning. There remains therefore the question how they should be construed and to answer that question it is first necessary to consider by reference to which system of law this question should be answered.
In the courts below three alternatives were canvassed: (1) the law of the requesting court; (2) the law of the court addressed (in the present case, the law of this country); and (3) a combination of both laws, ie jurisdiction would only be established if the relevant proceedings were proceedings in a civil or commercial matter under the laws of both countries. In Norway (No 1) the Court of Appeal, having rejected the solution of an internationally acceptable interpretation, preferred the third solution. In Norway (No 2) the point did not arise for May or Balcombe LJJ; Woolf LJ preferred the second solution. On this point I find myself to be in agreement with the Court of Appeal in Norway (No 1). Such a conclusion is consistent with the approach under the 1856 Act. (It is true that the certification procedure under that Act no longer applies but that is scarcely surprising, bearing in mind the improvement in communications.) I can discern, in the 1975 Act, no intention to depart from the former approach, which in any event introduces a desirable element of comity into the procedure.
It was, of course, because the Court of Appeal in Norway (No 1) preferred the third solution that Kerr LJ regretted that he had insufficient assistance on Norwegian law, with
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the consequence that, in Norway (No 2), a substantial body of evidence was made available to the English court from distinguished Norwegian lawyers. The Norwegian lawyers provided very full and helpful written opinions on the point. Professor Huser of the University of Bergen (whose evidence was supported by Professor Haerem and Professor Bernt) supported the thesis advanced by the witnesses that, by Norwegian law, civil and commercial matters did not include public law matters and so excluded fiscal matters. On the other hand Professor Fleischer, of the University of Oslo and the Norwegian Ministry of Foreign Affairs, supported the thesis that, by Norwegian law as by the law of this country, it was appropriate to identify civil matters as consisting of all matters other than criminal matters, and so capable of including fiscal matters. Both Professor Huser and Professor Fleischer gave oral testimony in addition to their written opinions.
Study of the written opinions of Professor Huser and Professor Fleischer reveals that the difference of opinion between them stems, to a very substantial degree, from the fact that they were asking themselves different questions. Professor Huser’s opinion was devoted to an examination of the structure of Norwegian law, and to the division of Norwegian law into private law and public law; his answer was that the ‘subject matter of the Sandefjord case’ should be classified as tax law, which is part of the well-established category of public law, and so not a civil or commercial matter. Professor Fleischer, on the other hand, distinguished between classification of the rules of law, and classification of the cases or matters actually before the courts. He expressed the opinion that, in the general understanding and common usage of Norwegian lawyers:
‘… the term and concept of “civil” refer to “civil” as opposed to “criminal“. The term “civil” is used to describe both the procedure applied by the courts—in conformity with the code on civil procedure as opposed to the code on the procedure in criminal cases—and the matters brought before them.’
It is apparent, therefore, that this difference of opinion could only be resolved by identifying the correct question which should have been posed for their consideration.
I therefore turn back to the 1975 Act and ask myself: what is the correct question which should be addressed to experts in the law of the requesting court? The answer is, in my opinion, a very simple one. It is that it is a matter for the law and practice of the requesting state, having regard to the manner in which classification is ordinarily made in that country.
Let me take, as an example, a request by a court in a Commonwealth country. The court of the requesting state would (like any court in this country) never think that it was required to delve into a distinction founded only on the substance of the relevant proceedings. It would simply say to itself: in our country, unlike some other countries, we do not draw any distinction between civil and commercial matters, and so we can ignore that these are plainly civil proceedings, because they are not criminal proceedings therefore we can apply for assistance from the English court under s 1 of the 1975 Act. I have no doubt that the English court would find such an approach entirely acceptable and, if it is acceptable in relation to a court in a Commonwealth country, I cannot see why any different approach should be adopted in relation to a request for assistance from a Norwegian court.
In the present case Kenneth Jones J concluded, on the evidence before him, that, under Norwegian law, the proceedings in Norway would be classified as proceedings in a civil matter. In my opinion, he was entirely justified in reaching that conclusion on the evidence before him; indeed it seems to me that the evidence of Professor Fleischer, that this was in accordance with the general understanding and common usage of Norwegian law, compelled that conclusion, which was also the conclusion reached by the Sandefjord court itself. In saying this, I intend no disrespect to Professor Huser and his colleagues. On the contrary, they were in my opinion invited to consider a question restricted to the substance of the proceedings, irrespective of the ordinary practice in Norway; and indeed their evidence reveals that the question they were being asked to consider was, in Norwegian terms, somewhat unreal.
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The judge’s conclusion is moreover consistent with the view expressed by Lord Diplock in the Westinghouse case [1978] 1 All ER 434 at 461–462, [1978] AC 547 at 633–634 that in the ordinary way the English court should be prepared to accept the statement of the requesting court that the evidence is required for the purpose of civil proceedings. It is appropriate that the requesting court should have regard to its own ordinary approach to these matters, without indulging in an analysis which is inappropriate in its own system. In this way, the 1975 Act can be made to work sensibly in relation to all countries in the world, common law countries and civil law countries alike, without requiring any of them to act in any way which is foreign to its own way of thinking; and expert evidence will, in the vast majority of cases, be unnecessary. In theory, as under the 1856 Act, an English court would not treat a matter as civil or commercial which would, by English law, fall to be classified as criminal, in which event it would treat the request as falling under s 5 of the Act instead of under s 1. It is however difficult to imagine such a case arising in practice.
I turn next to the question whether, as a matter of English law, the jurisdiction of the High Court under the 1975 Act in respect of civil proceedings is wide enough to embrace proceedings in fiscal matters. Woolf LJ considered that it was not. He said ([1989] 1 All ER 701 at 740):
‘While I cannot identify an acceptable international interpretation of the phrase [‘civil or commercial matter’], I do accept that the material which is before the court is overwhelmingly to the effect that whatever else is or is not included in the concept of a civil or commercial matter, matières fiscales are not within that concept and this can be taken into account in construing the section. Even in common law jurisdictions, so far as enforcement of judgments is concerned it has been recognised that revenue matters come within a different and special category and are subject to rules of public policy which do not apply to other civil proceedings … Taking into account the well-established approach of the courts to assisting in tax gathering by a foreign state, I would regard the proper interpretation of the words ‘civil or commercial matter’ in the 1975 Act as excluding matières fiscales.’
I feel driven to state, with all respect, that in my opinion the approach of Woolf LJ is, on this point, not logical. My difficulty with his reasoning is that he appears to conclude that ‘matières fiscales’ should be excluded as a matter of general international interpretation. He has however rejected the existence of any generally acceptable international interpretation of the expression ‘civil or commercial matter’, and I do not see how he can, on any such basis, exclude fiscal matters. The point has, in my opinion, to be considered with reference to English law.
I have no doubt that, under English law, the words in s 9(1) should be given their ordinary meaning, so that proceedings in any civil matter should include all proceedings other than criminal proceedings, and proceedings in any commercial matter should be treated as falling within proceedings in civil matters. On this simple approach, I do not see why the expression should be read as excluding proceedings in a fiscal matter; so that the High Court can have jurisdiction in respect of such a matter under the 1975 Act.
In his case note on the Court of Appeal’s decision in Norway (No 1) entitled ‘Any Civil or Commercial Matter’ (1986) 102 LQR 505 at 509 Dr F A Mann stated:
‘… it can be asserted with confidence that very few States (if any) will ever regard a tax claim as a civil or commercial matter.’
I myself have little doubt that this is broadly true in the case of most civil law countries, with their classification of law into public law matters (including fiscal matters) and private law matters (with which alone civil and commercial matters are concerned); though this does not appear to be true of the law of Norway, having regard to the evidence of Professor Fleischer and the terms of the relevant parts of the Norwegian Law Courts Act. But, so far as common law countries are concerned, the matter is, on the
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material before your Lordships’ House, completely unresolved. The American Law Institute’s Restatement, Third, Foreign Relations Law, § 471, comment f, § 473, comment c indicates that the practice in the United States is to consider any proceeding which is not criminal as coming within the provisions of the 1970 convention, and that letters of request may be used in administrative proceedings, including proceedings concerning fiscal matters. This view appears to be consistent with the Report of the United States Delegation to the Special Commission on the Operation of the 1970 Hague Convention, dated June 1978, in which it is stated that the United Kingdom delegates concurred with the United States interpretation of the convention and stated that the United Kingdom central authority followed the same practice as the United States. There appears however to be no decision of any court in the United States on the point nor has any relevant decision from any other common law country been drawn to the attention of your Lordships’ House.
It is at this stage necessary to turn to the impact on the jurisdiction conferred on the courts of this country under the 1975 Act of the principle associated with the decision of your Lordships’ House in Government of India Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292, [1955] AC 491. In Dicey and Morris on the Conflict of Laws (11th edn, 1987) p 100, r 3 provides as follows:
‘English courts have no jurisdiction to entertain an action: (1) for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign State; or (2) founded upon an act of State.’
In that rule it is stated that the English courts have no jurisdiction to entertain such an action. However, in Dicey and Morris p 101 itself it is recognised that the theoretical basis of the rule is a matter of some controversy. The editors express the opinion that the best explanation is to be found in the speech of Lord Keith in the Government of India case [1955] 1 All ER 292 at 299, [1955] AC 491 at 511, where he said:
‘One explanation of the rule … may be thought to be that enforcement of a claim for taxes is but an extension of the sovereign power which imposed the taxes, and that an assertion of sovereign authority by one state within the territory of another, as distinct from a patrimonial claim by a foreign sovereign, is (treaty or convention apart) contrary to all concepts of independent sovereignties.’
This opinion is consistent with that expressed by Lord Denning MR in A-G of New Zealand v Ortiz [1982] 3 All ER 432 at 457, [1984] AC 1 at 21, where he said:
‘By international law every sovereign state has no sovereignty beyond its own frontiers. The courts of other countries will not allow it to go beyond the bounds. They will not enforce any of its laws which purport to exercise sovereignty beyond the limits of its authority.’
It is not necessary for the purposes of the present case to decide what is the precise theoretical basis of the rule, though I am respectfully inclined to agree with Lord Keith’s expression of opinion. At all events the rule cannot, in my view, go to the jurisdiction of the English court. What the English court does is simply to decline in such cases to exercise its jurisdiction, and on that basis the relevant proceedings will be either struck out or dismissed.
The question arises whether, given the fundamental nature of the principle embodied in r 3 of Dicey and Morris, as applied in revenue cases, the jurisdiction conferred by s 1 of the 1975 Act should be read as qualified by reference to that principle. I myself can see no basis for concluding that the jurisdiction should be regarded as qualified in this way as a matter of construction of the Act. The words in the Act are unqualified; and the rule in Dicey and Morris does not, as I see it, go to jurisdiction.
There remains however the further question whether, given that the jurisdiction is unqualified, the English courts should decline to exercise that jurisdiction in the case of
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letters of request for assistance in relation to civil proceedings concerned with the enforcement of the revenue laws of the requesting state. It can be argued that they should decline to do so, as a matter of judicial discretion, on the basis that direct or indirect enforcement of foreign revenue laws constitutes an invasion of the sovereignty of this country, and is contrary to a fundamental rule of English law.
It has been suggested that that question can be avoided in the present case because the letters of request have been issued in response to an application by a taxpayer, seeking assistance for the purpose of opposing a claim by a foreign state for tax. In agreement with the Court of Appeal in Norway (No 1), I am for my part prepared to accept that submission. I do not see how such letters of request, or their execution, could amount to the enforcement, direct or indirect, of a foreign revenue law nor do I see how they could constitute an invasion of this country’s sovereignty. Such a conclusion is, in my opinion, acceptable, once it is recognised that the rule does not affect the jurisdiction of the court, but is concerned rather with circumstances in which the court declines to exercise its jurisdiction. In the case of an application by a taxpayer, I do not consider that the rule requires the court to decline to exercise jurisdiction. It is true that in the present case the request was made by both the state and the estate. But in such a case the English court could (if necessary) accede to the application of the estate, while rejecting that of the state.
However, since the state, as well as the estate, is applying for the assistance of the English courts, it is necessary to consider, in relation to the application of the state, the broader question whether the execution of letters of request in relation to foreign civil proceedings in a fiscal matter should, if the request is made on the application not of the taxpayer but of the taxing authority, be refused by an English court on this ground. I must confess to having given the most anxious consideration to this question. First, the rule is deeply embedded not only in the common law but also in the law of civil law countries. An eloquent account of it in French law is to be found in the exposition by Professor Mazeaud of Bemberg v Revenue Authorities of the Province of Buenos Aires (24 February 1949, unreported). Second, there appears to exist no case of fiscal proceedings in relation to which letters of request have been executed in any jurisdiction; and it can be argued (as indeed it is argued by Mazeaud) that, if a change has to be made, it should be made by legislation and not by judicial decision.
Counsel for the witnesses helpfully placed before your Lordships a most useful bundle of documents concerned with double taxation conventions, including the text of the OECD Model Agreement, and also the text of the draft OECD Convention on Mutual Administrative Assistance in Tax Matters. This last document serves the useful purpose of demonstrating the range of matters which such a convention might cover, and the safeguards which might properly be embodied in it. It is right to say, however, that the draft convention provides for matters going far beyond simple requests by foreign courts for assistance in obtaining evidence in relation to pending or contemplated proceedings.
I return to the rule in the Government of India case. It is of importance to observe that that rule is limited to cases of direct or indirect enforcement in this country of the revenue laws of a foreign state. It is plain that the present case is not concerned with the direct enforcement of the revenue laws of the State of Norway. Is it concerned with their indirect enforcement? I do not think so. It is stated in Dicey and Morris p 103 that indirect enforcement occurs (1) where the foreign state (or its nominee) in form seeks a remedy which in substance is designed to give the foreign law extra-territorial effect or (2) where a private party raises a defence based on the foreign law in order to vindicate or assert the right of the foreign state. I have been unable to discover any case of indirect enforcement which goes beyond these two propositions. Even so, since there is no authority directly in point to guide me, I have to consider whether a case such as the present should nevertheless be held to fall foul of the rule. For my part, I cannot see that it should. I cannot see any extra-territorial exercise of sovereign authority in seeking the assistance of the courts of this country in obtaining evidence which will be used for the enforcement of the revenue laws of Norway in Norway itself. Let it be supposed, for
Page 761 of [1989] 1 All ER 745
example, that in A-G of New Zealand v Ortiz [1983] 2 All ER 93, [1984] AC 1 the case was not one of New Zealand seeking to enforce its claim in this country, but of seeking the assistance of the English courts to obtain evidence to enforce its claim in New Zealand. I find it very difficult to imagine that such an application would have been refused. Nor do I consider that refusal of the application of the State of Norway in the present case could easily be reconciled with the power of the courts of this country to exercise their jurisdiction under the 1975 Act in criminal proceedings, for example, criminal proceedings in Norway in a case of tax evasion.
It follows that I am unable to accept the submissions of the witnesses on the first two points argued by them before your Lordships’ House.
‘Fishing’ and confidentiality
I turn then to the two remaining issues, concerned respectively with ‘fishing’ and confidentiality. These two issues I can deal with very shortly.
On the question of ‘fishing’, the only issue before your Lordships’ House is whether the order made by Kenneth Jones J in Norway (No 2), under which the second letter of request (subject to certain deletions made by him in the list of issues set out in schedule 1 to his order) was held not to constitute an impermissible ‘fishing expedition’ but to constitute rather a legitimate request for assistance in the obtaining of evidence, should stand. The Court of Appeal in Norway (No 2) decided (subject to the restoration of para 8 of schedule 1 in an amended form, as set out in the judgment of Balcombe LJ (see [1989] 1 All ER 701)), to uphold the decision of the judge on this point.
Before your Lordships’ House it was submitted on behalf of the witnesses that the second letter of request, taken as a whole, was in substance no more than an exercise in ‘fishing’ and, as such, should have been rejected in toto without attempting, by editing it, to limit it to a request for assistance in obtaining evidence. Having studied the letter of request, and the limited deletions made by the judge, I am unable to accept this submission. In my opinion, the true position is the reverse. The letter of request was in substance a request for what, by English law, would be regarded as assistance in obtaining evidence. The judge however formed the opinion that some of the issues identified in the letter of request went beyond evidence and deleted them. The Court of Appeal saw no reason to differ from the judge’s decision. The witnesses’ appeal on this point is concerned only with a matter of judgment, on which your Lordships’ House would not normally depart from a concurrent decision by the judge of first instance and the Court of Appeal. I can see no reason to do so in the present case.
I wish, however, to add that, since the state does not appeal against the deletions made by the judge, your Lordships’ House does not have to consider any matter of principle on this issue, and in particular does not have to consider the conflict of opinion between Kerr and Glidewell LJJ in Norway (No 1) on the one hand and Ralph Gibson LJ in Norway (No 1) and Woolf LJ in Norway (No 2) on the other hand on the principles to be applied by courts in this country in considering whether or not the matters on which the requesting state seeks assistance do or do not constitute evidence. On this question, I wish to reserve my opinion.
It is accepted on both sides that the question of confidentiality can only be answered by the court undertaking a balancing exercise, weighing on the one hand the public interest in preserving the confidentiality owed by the witnesses as bankers to their customers, and on the other hand the public interest in the English courts assisting the Norwegian court in obtaining evidence in this country. In Norway (No 2) that balancing exercise was performed by the judge. He took into account the considerations urged on behalf of the witnesses, and in particular the matters set out in affidavits sworn on behalf of them, stressing the importance of the duty of confidentiality owed by bankers in this country, notably in the City of London. He then said:
‘The major consideration is, undoubtedly, that referred to by Lord Kindersley in
Page 762 of [1989] 1 All ER 745
his letter to the Norwegian lawyer, acting for the estate, on 15 April 1984 … namely the identity of the settlor. Lord Kindersley seeks that his identity and information which might indirectly reveal his identity should remain a matter of confidence and should not pass into the public domain, as it might do if he were required to give evidence in the Sandefjord proceedings. On the other hand, if it could be shown that the settlor in relation to the matters with which the Sandefjord court is directly concerned, was acting merely as the agent or nominee of Jahre, then the public policy of assisting a foreign court to the proper determination of the matter before it would, in all probability, outweigh the public interest in upholding the confidential relationship between the witnesses and the settlor.’
On that basis, he decided to reject the submission of the witnesses on the ground of confidentiality, but made his order subject to a direction:
‘… that the said witnesses shall not be required to reveal the identity of the Settlor, or to answer any questions under Paragraph 7, 9, 10 or 11, unless the said witnesses or one of them shall have said in evidence that the Settlor was, in relation to the CTC shares and/or the assets of CTC held in the name of the Foundation acting as the nominee or agent for Anders Jahre.’
The Court of Appeal unanimously decided not to interfere with the judge’s exercise of his discretion on this point. In these circumstances, it would require cogent reasons to persuade your Lordships to interfere with the judge’s decision. For my part, I do not consider that your Lordships should, in the present case, take that unusual step.
For these reasons, I would allow the appeal in Norway (No 2), and restore the order of Kenneth Jones J (subject to the restoration of the amended para 8 of schedule 1 to his order, to which I have already referred).
If the remainder of your Lordships should be in agreement with the opinion which I have expressed on the appeal in Norway (No 2), I would suggest that counsel, having considered your Lordships’ conclusion on that appeal, should be given the opportunity briefly to address your Lordships on the appeal on costs in Norway (No 1).
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Goff. I agree with it and, for the reasons which he gives, I, too, would allow the appeal in Re State of Norway’s Application (No 2) [1989] 1 All ER 701 and restore the order of Kenneth Jones J.
So exactly does the reasoning of that speech represent my view on the jurisdiction issues that it would be pointless for me to add any observations of my own. I wish, however, to take the opportunity of expressly concurring in my noble and learned friend’s interpretation and application of the principle with regard to foreign proceedings in fiscal matters which was enunciated by Lord Keith in Government of India Ministry of Finance (Revenue Division) v Taylor [1955] 1 All ER 292, [1955] AC 491.
Appeal in Re State of Norway’s Application (No 1) dismissed. No order as to costs in House of Lords.
Appeal in Re Norway’s Application (No 2) allowed.
Solicitors: Freshfields; Macfarlanes; Linklaters & Paines.
Mary Rose Plummer Barrister.
Practice Direction
(Chancery 1/89)
[1989] 1 All ER 764
PRACTICE DIRECTIONS
CHANCERY DIVISION
23 January 1989.
Practice – Summons for directions – Chancery Division – Exchange of witness statements – Order for exchange normally to be made at hearing of summons for directions – Order to specify day on which exchange to be made – Objections to order – RSC Ord 38 r 2A.
Practice – Summons for directions – Chancery Division – Pleadings – Complete set of pleadings to be lodged on issuing summons for directions.
1. Henceforward on the hearing of the summons for directions the master will normally make an order under RSC Ord 38, r 2A for the exchange of witness statements of all oral evidence which any party intends to lead at the trial. The order will specify the day on which such exchange is to be made. Any party who objects to the making of such order or desires a modified order for such exchange must specifically raise the point for decision on the summons for directions.
2. Henceforward on issuing the summons for directions a complete set of pleadings must be lodged.
By direction of the Vice-Chancellor.
R D Munrow, Chief Master
23 January 1989.
Practice Direction
(mental health: appeal by official solicitor)
[1989] 1 All ER 764
PRACTICE DIRECTIONS
LORD CHANCELLOR
16 January 1989.
Mental health – Patient – Legal proceedings involving patient – Appeal – Official Solicitor – Power to appeal to Court of Appeal in cases involving patients – Supreme Court Act 1981, s 90(3)(b) – Mental Health Act 1983 – RSC Ord 80, r 1.
I, the Right Honourable James Peter Hymers, Baron Mackay of Clashfern, do hereby under s 90(3)(b) of the Supreme Court Act 1981 direct that the Official Solicitor to the Supreme Court shall have power to appeal to the Court of Appeal in any case involving a patient within the meaning of RSC Ord 80, r 1a which has been heard and determined by the High Court or a county court where (a) the Official Solicitor deems it in the patient’s interest that the case should be considered by the Court of Appeal, (b) the case may not otherwise be considered by the Court of Appeal and (c) the Court of Appeal gives leave.
Mackay of Clashfern C, Barrister
16 January 1989.
Practice Direction
(Family Division: disclosure of addresses by government departments)
[1989] 1 All ER 765
PRACTICE DIRECTIONS
FAMILY DIVISION
13 February 1989.
Husband and wife – Maintenance – Address – Disclosure – Address of person against whom order is sought or to be enforced – Disclosure of address by government departments – Disclosure at request of registrar – Particulars to be certified in request – Information to be supplied to registrar by applicant or solicitors prior to request – Maintenance Orders (Facilities for Enforcement)Act 1920 – Maintenance Orders Act 1950 – Army Act 1955, s 153 – Air Force Act 1955, s 153 – Naval Discipline Act 1957, s 101 – Maintenance Orders Act 1958 – Family Law Reform Act 1969, s 6 – Guardianship of Minors Act 1971 – Armed Forces Act 1971, s 62 – Matrimonial Causes Act 1973, ss 23, 24, 24A, 27, 31 – Children Act 1975, s 34 – Matrimonial and Family Proceedings Act 1984, s 17.
Ward of court – Missing ward – Address of ward or of person with whom ward believed to be – Disclosure of address by government departments – Disclosure at request of registrar – Particulars to be certified in request – Information to be supplied to registrar by applicant or solicitors prior to request – Child Abduction and Custody Act 1985 – Family Law Act 1986, Pt I.
The arrangements set out in the Registrar’s Direction of 26 April 1988 ([1988] 2 All ER 573, [1988] 1 WLR 648) whereby the court may request the disclosure of addresses by government departments have been further extended. These arrangements will now cover (a) tracing the address of a person in proceedings against whom another person is seeking to obtain or enforce an order for financial provision either for himself or herself or for the children of the former marriage and (b) tracing the whereabouts of a child, or the person with whom the child is said to be, in proceedings under the Child Abduction and Custody Act 1985 or in which a custody order, as defined in Pt I of the Family Law Act 1986, is being sought or enforced. Requests for such information will be made officially by the registrar. The request, in addition to giving the information mentioned below, should certify: (A) in financial provision applications either (a) that a financial provision order is in existence, but cannot be enforced because the person against whom the order has been made cannot be traced, or (b) that the applicant has filed or issued a notice, petition or originating summons containing an application for financial provision which cannot be served because the respondent cannot be traced. A ‘financial provision order’ means any order made under ss 23, 24 24A and 27 of the Matrimonial Causes Act 1973 or the variations of any order made under s 31 of the 1973 Act, and any periodical payments or lump sum order made under s 6 of the Family Law Reform Act 1969, the Guardianship of Minors Act 1971, s 34 of the Children Act 1975 and any order registered in the High Court under the Maintenance Orders (Facilities for Enforcement) Act 1920, the Maintenance Orders Act 1950 and the Maintenance Orders Act 1958 and any order made under s 17 of the Matrimonial and Family Proceedings Act 1984; (B) in wardship proceedings that the child is the subject of wardship proceedings and cannot be traced and is believed to be with the person whose address is sought; (C) in custody proceedings that that child is the subject of custody proceedings and cannot be traced and is believed to be with the person whose address is sought.
The following notes set out the information required by those departments which are likely to be of the greatest assistance to an applicant.
(1) DEPARTMENT OF SOCIAL SECURITY
The department most likely to be able to assist is the Department of Social Security, whose records are the most comprehensive and complete. The possibility of identifying one person amongst so many will depend on the particulars given. An address will not be supplied by the department unless it is satisfied from the particulars given that the record of the person has been reliably identified.
The applicant or his solicitor should therefore be asked to supply as much as possible
Page 765 of [1989] 1 All ER 765
of the following information about the person sought: (i) national insurance number; (ii) surname; (iii) forenames in full; (iv) date of birth (or, if not known, approximate age); (v) last known address, with date when living there; (vi) any other known address(es) with dates; (vii) if the person sought is a war pensioner, his war pension and service particulars (if known); and, in applications for financial provision, (viii) the exact date of the marriage and the wife’s forenames.
Inquiries should be sent by the registrar to:
Department of Social Security
NICB
Special Section A
Newcastle upon Tyne NE98 1YX
The department will be prepared to search if given full particulars of the person’s name and date of birth, but the chances of accurate identification are increased by the provision of more identifying information. Second requests for records to be searched, provided that a reasonable interval has elapsed, will be met by the Department of Social Security.
Supplementary benefit/income support
Where, in the case of applications for financial provision, the wife is or has been in receipt of supplementary benefit/income support, it would be advisable in the first instance to make inquiries of the manager of the local social security office for the area in which she resides in order to avoid possible duplication of inquiries.
(2) OFFICE OF POPULATION CENSUSES AND SURVEYS NATIONAL HEALTH SERVICE CENTRAL REGISTER
The Office of Population Censuses and Surveys administers the National Health Service Central Register for the Department of Health. The records held in the central register include individuals’ names, with dates of birth and national health service number, against a record of the family practitioner committee area where the patient is currently registered with a national health service doctor. The central register does not hold individual patients’ addresses, but can advise courts of the last family practitioner committee area registration. Courts can then apply for information about addresses to the appropriate family practitioner committee for independent action.
When application is made for the disclosure of family practitioner committee area registrations from these records the applicant or his solicitor should supply as much as possible of the following information about the person sought: (i) national health service number; (ii) surname; (iii) forenames in full; (iv) date of birth (or, if not known, approximate age); (v) last known address; (vi) mother’s maiden name.
Inquiries should be sent by the registrar to:
Office of Population Censuses and Surveys
National Health Service Central Register
Smedley Hydro
Trafalgar Road
Southport
Merseyside PR8 2HH
(3) PASSPORT OFFICE
If all reasonable inquiries including the aforesaid methods have failed to reveal an address, or if there are strong grounds for believing that the person sought may have made a recent application for a passport, inquiries may be made to the Passport Office. The applicant or his solicitor should provide as much of the following information about the person as possible: (i) surname; (ii) forenames in full; (iii) date of birth (or, if not known, approximate age); (iv) place of birth; (v) occupation; (vi) whether known to have travelled abroad, and, if so, the destination and dates; (vii) last known address, with date living there; (viii) any other known address(es), with dates.
The applicant or his solicitor must also undertake in writing that information given in
Page 766 of [1989] 1 All ER 765
response to the inquiry will be used solely for the purpose for which it was requested, ie to assist in tracing the husband in connection with the making or enforcement of a financial provision order or in tracing a child in connection with custody or wardship proceedings, as the case may be.
Inquiries should be sent to:
The Chief Passport Officer
Passport Department
Home Office
Clive House
Petty France
London SW1H 9HD
(4) MINISTRY OF DEFENCE
In cases where the person sought is known to be serving or to have recently served in any branch of HM Forces, the solicitor representing the applicant may obtain the address for service of financial provision or custody and wardship proceedings direct from the appropriate service department. In the case of army servicemen the solicitor can obtain a list of regiments and of the various manning and record offices from the Officer in Charge, Central Manning Support Office, Higher Barracks, Exeter EX4 4ND.
The solicitors’ request should be accompanied by a written undertaking that the address will be used for the purpose of service of process in those proceedings and that so far as is possible the solicitor will disclose the address only to the court and not to the applicant or any other person, except in the normal course of the proceedings.
Alternatively if the solicitor wishes to serve process on the person’s commanding officer under the provisions contained in s 101 of the Naval Discipline Act 1957, s 153 of the Army Act 1955 and s 153 of the Air Force Act 1955 (all of which as amended by s 62 of the Armed Forces Act 1971) he may obtain that officer’s address in the same way.
Where the applicant is acting in person the appropriate service department is prepared to disclose the address of the person sought, or that of his commanding officer, to a registrar on receipt of an assurance that the applicant has given an undertaking that the information will be used solely for the purpose of serving process in the proceedings.
In all cases the request should include details of the person’s full name, service number, rank or rating, and his ship, arm or trade, corps, regiment or unit or as much of this information as is available. The request should also include details of his date of birth, or, if not known, his age, his date of entry into the service and, if no longer serving, the date of discharge, and any other information, such as his last known address. Failure to quote the service number and the rank or rating may result in failure to identify the serviceman or at least in considerable delay.
Inquiries should be addressed as follows:
(a) Officers of Royal Navy and
Women’s Royal Naval Service Ministry of Defence (Navy Secretary)
Old Admiralty Building
Whitehall
London sw1a 2be
Ratings in the Royal Navy,
WRNS ratings
QARNNS ratings The Commodore (Naval Drafting Division) HMS Centurion
Grange Road
Gosport
Hants po13 9xa
Royal Navy medical and dental
officers Ministry of Defence
Medical Director General (Naval)
First Avenue House
High Holborn
London wc1v 6he
Page 767 of [1989] 1 All ER 765
Officers of Queen Alexandra’s
Royal Naval Nursing Service Ministry of Defence
The Matron-in-Chief QARNNS
First Avenue House
High Holborn
London wc1v 6he
Naval chaplains Ministry of Defence
Chaplain of the Fleet
Lacon House
Theobalds Road
London wc1x 8ry
(b) Royal Marine officers The Commandant-General Royal Marines (MS Branch) Old Admiralty Building Whitehall
London sw1a 2be
Royal Marine ranks The Commodore (DRORM)
HMS Centurion
Grange Road
Gosport
Hants po13 9xa
(c) Army officers (including WRAC and QARANC) Ministry of Defence
Army Officers’ Documentation Office Government Buildings (F Block)
Stanmore
Middlesex ha7 4pz
Other ranks, army The manning and record office which is appropriate to the regiment or corps
(d) Royal Air Force and Women’s
Royal Air Force officers
(including PMRAFNS) Ministry of Defence
AR8B (RAF)
Eastern Avenue
Barnwood
Gloucester gl4 7pn
Other ranks, RAF and WRAF Ministry of Defence
RAF Personnel Management Centre
RAF Innsworth
Gloucester gl3 1ez
Page 768 of [1989] 1 All ER 765
General notes
Records held by other departments are less likely to be of use, either because of their limited scope or because individual records cannot readily be identified. If, however, the circumstances suggest that the address may be known to another department, application may be made to it by the registrar, all relevant particulars available being given.
When any department is able to supply the address of the person sought to the registrar, it will be passed on by him to the applicant’s solicitor (or, in proper cases, direct to the applicant if acting in person) or an understanding to use it only for the purpose of the proceedings.
Nothing in this practice direction affects the service in matrimonial causes of petitions which do not contain any application for financial provision etc. The existing arrangements whereby the Department of Social Security will at the request of the solicitor forward a letter by ordinary post to a party’s last known address remain in force in such cases.
The Registrar’s Direction of 26 April 1988 ([1988] 2 All ER 573, [1988] 1 WLR 648) is hereby revoked.
Issued with the concurrence of the Lord Chancellor.
C F Turner, Senior Registrar
13 February 1989.
Equal Opportunities Commission v Birmingham City Council
[1989] 1 All ER 769
Categories: EDUCATION
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD ROSKILL, LORD BRANDON OF OAKBROOK, LORD GRIFFITHS AND LORD GOFF OF CHIEVELEY
Hearing Date(s): 11, 12 JANUARY, 23 FEBRUARY 1989
Education – Local education authority – Sex discrimination – Less favourable treatment – Provision of more places for boys than girls at single sex selective secondary schools – Duty of local authority to provide sufficient secondary schools in its area – Duty of local authority not to do any act which constitutes sex discrimination – Whether local education authority unlawfully discriminating against girls by providing more places for boys than girls at selective schools – Education Act 1944, s 8 – Sex Discrimination Act 1975, ss 23(1), 25.
The respondent council, in its capacity as the local education authority, wished to reorganise all selective secondary education in its area on a non-selective basis but had been unable to achieve that, with the result that there were considerably more places available for boys than for girls at selective schools in its area. The council provided 540 places for boys at five single sex grammar schools and 360 places for girls at three equivalent schools and consequently a girl had substantially less chance of obtaining a grammar school education in the council’s area than a boy. Local education authorities were required by s 8a of the Education Act 1944 to provide sufficient secondary schools having certain specific characteristics in their areas regardless of whether they were selective or non-selective or both. By s 23(1)b of the Sex Discrimination Act 1975, in carrying out those functions they were prohibited from doing any act which constituted sex discrimination and by s 25c of that Act they were required to see that education facilities were provided without sex discrimination. The council was aware of the disparity in places available for boys and girls at selective schools in its area but took no action to implement the options open to it, such as opening a new selective school for girls, closing two boys schools or changing a boys school to a girls school, because it found those options to be unattractive or difficult to apply. The Equal Opportunities Commission brought an action for judicial review against the council seeking (i) a declaration that the council’s arrangements concerning selective education constituted sex discrimination, contrary to s 23(1) of the 1975 Act read with s 8 of the 1944 Act, and (ii) an order of mandamus requiring the council to consider without delay the means by which such discrimination could be removed. The trial judge upheld the commission’s complaint and granted the declaration sought. The council appealed to the Court of Appeal, which affirmed the judges decision. The council appealed to the House of Lords, contending (i) that in order to establish that girls had received less favourable treatment than boys the commission had to show that selective education was better than non-selective education, and the commission had produced no evidence to that effect, (ii) that the commission had to show that there was less favourable treatment on grounds of sex because of an intention or motive on the part of the council to discriminate against girls and (iii) that either (a) its failure to provide selective schools was neither an act nor a deliberate omission within s 23(1) of the 1975 Act, since it was not part of the council’s duty under s 8 of the 1944 Act to provide selective schools as such because it could perform its functions under s 8 by providing selective or non-selective schools or both, or,
Page 770 of [1989] 1 All ER 769
alternatively, (b) a breach under s 23(1) only occurred where a local education authority did an act which not only resulted in sex discrimination but itself involved discrimination or arose out of a discriminatory policy.
Held – The appeal would be dismissed for the following reasons—
(1) For the purpose of establishing that there had been less favourable treatment of girls in the council’s area on grounds of sex it was not necessary for the commission to show that selective education was ‘better’ than non-selective education since it was enough for the commission to show that the council had deprived the girls of a choice which was valued by them or their parents (see p 771 c to e, p 774 c d and p 776 h, post); Gill v El Vino Co Ltd [1983] 1 All ER 398 and R v Secretary of State for Education and Science, ex p Keating (1985) 84 LGR 469 applied.
(2) Although the intention or motive of the council to discriminate might be relevant so far as remedies were concerned if sex discrimination was established it was not a necessary condition for liability. Whatever might have been the council’s motive, it was because of their sex that girls in the council’s area had received less favourable treatment than boys in regard to selective education and so were subject to discrimination under the 1975 Act (see p 771 c to e, p 774 e to g, p 776 h, post); dicta of Lord Denning MR in Ministry of Defence v Jeremiah [1979] 3 All ER 833 at 836, of Browne-Wilkinson J in Jenkins v Kingsgate (Clothing Productions) Ltd [1981] 1 WLR 1485 at 1494 and of Taylor J in R v Secretary of State for Education and Science, ex p Keating (1985) 84 LGR 469 at 475, applied.
(3) A local education authority was in breach of s 23(1) of 1975 Act if its system of selective education was such that fewer places were provided for girls than boys at selective schools, so that girls were required to achieve a higher mark than boys to gain entry to such schools, since a breach of s 23(1) occurred not only where the authority did an act which itself involved sex discrimination but also where it did an act which resulted in sex discrimination. Accordingly, the commission was not required to show that the council was in breach of its duties under s 8 of the 1944 Act but only that in carrying out those duties an act or omission on its part constituted sex discrimination contrary to s 23(1) of the 1975 Act (see p 771 c to e, p 772 b c and p 776 c to e h, post); R v Secretary of State for Education and Science, ex p Keating (1985) 84 LGR 469 applied.
Per curiam. The purpose of s 25 of the 1975 Act is not to outlaw sex discrimination as such but to place on public bodies such as local education authorities a positive role in relation to the elimination of sex discrimination (see p 771 c to e and p 776 a, post).
Notes
For sex discrimination by local education authorities, see 15 Halsbury’s Laws (4th edn) para 183.
For the Education Act 1944, s 8, see 15 Halsbury’s Statutes (4th edn) 113.
For the Sex Discrimination Act 1975, ss 23, 25, see 6 ibid 716, 717.
Cases referred to in opinions
Gill v El Vino Co Ltd [1983] 1 All ER 398, [1983] QB 425, [1983] 2 WLR 155, CA.
Jenkins v Kingsgate (Clothing Productions) Ltd [1981] 1 WLR 1485, EAT.
Ministry of Defence v Jeremiah [1979] 3 All ER 833, [1980] QB 87, [1979] 3 WLR 857, CA.
R v Secretary of State for Education and Science, ex p Keating (1985) 84 LGR 469.
Appeal
Birmingham City Council appealed, with leave of the Court of Appeal, against the decision of that court (Dillon and Neill LJJ, Woolf LJ dissenting) ([1988] 3 WLR 837) on 13 May 1988 dismissing its appeal from the judgment of McCullough J ([1988] IRLR 96) hearing the Crown Office list on 14 October 1987 whereby, on the application of the Equal Opportunities Commission, he granted judicial review by way of a declaration that the arrangements currently made by the council for the provision of selective
Page 771 of [1989] 1 All ER 769
secondary education in its area were unlawful pursuant to s 23 of the Sex Discrimination Act 1975 read with s 8 of the Education Act 1944, but refused to make an order of mandamus requiring the council to consider without delay the means by which such unlawful sex discrimination could be removed. The facts are set out in the opinion of Lord Goff.
Michael Beloff QC and Richard McManus for the council.
Anthony Lester QC and David Pannick for the commission.
Their Lordships took time for consideration
23 February 1989. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Goff. I agree with it and for the reasons he gives would dismiss the appeal.
LORD ROSKILL. My Lords, I have had the advantage of reading in draft the speech to be delivered by my noble and learned friend Lord Goff. For the reasons he gives, with which I am in entire agreement, I would dismiss this appeal.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons to be given by my noble and learned friend Lord Goff I would dismiss the appeal.
LORD GRIFFITHS. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Goff. I entirely agree with it and, for the reasons given, I too would dismiss this appeal.
LORD GOFF OF CHIEVELEY. My Lords, this case is concerned with proceedings for judicial review brought by the Equal Opportunities Commission against the Birmingham City Council. The subject matter of these proceedings is the provision by the council for selective education in single-sex secondary schools. At all material times there have been available considerably more places for boys at the age of 11 than there have been for girls. As appears from the evidence, there are eight selective schools in the city, all of which are single-sex schools. These are as follows:
Boys schools Places
King Edward’s Grammar School for Boys, Aston 90 at age 11
King Edward VI Camp Hill School for Boys 90 „ „ 11
King Edward VI Five Ways School 90 „ „ 11
Handsworth Grammar School 120 „ „ 11
Bishop Vesey’s Grammar School 150 „ „ 12
Girls schools
King Edward VI Camp Hill School for Girls 90 „ „ 11
King Edward’s Grammar School for Girls, Handsworth 120 „ „ 11
Sutton Coldfield County Grammar School for Girls 150 „ „ 12
Of these schools, all except Sutton Coldfield County Grammar School for Girls are voluntary-aided secondary schools. It will be seen from the table that there are equal numbers of places available for boys and girls at the age of 12; but at the age of 11, whereas there are 390 places available for boys, there are only 210 places available for girls. The total number of places offered for secondary transfer at the age of 11 by selective schools represents only about 5% of the total available secondary places for that age. How this came about is set out in an affidavit sworn in the present proceedings by Mr John Crawford, the director of education of the Birmingham City Council. He has demonstrated how the history of proposals for secondary schools reorganisation in
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Birmingham has been a history of changing policies according to the philosophy of the political party in power. I need not rehearse this story. The effect has, however, been that since 1974 when the number of places offered by selective schools represented about 27% of the total number of places available, there has been a substantial reduction in the number of places available in Birmingham. This is the product of a policy to reorganise all selective education in the city on a non-selective basis. But, as a result of successful resistance by voluntary-aided schools and changes in political control (both of the city council and of central government) the voluntary-aided schools I have identified survived as selective schools, with the disparity I have referred to above.
The effect of this disparity is demonstrated in a table, which was placed in evidence, showing the number of places offered by these eight schools to boys and girls respectively over the years 1984 to 1987. The table shows that girls with a test mark near the borderline have a substantially smaller chance of obtaining education at selective schools in Birmingham than do boys with comparable marks. This effect has been known to the council for some years and since December 1985 the council has known that the Equal Opportunities Commission considered that the arrangements made by the council constitute unlawful sex discrimination contrary to s 23 of the Sex Discrimination Act 1975. Following representations by the commission, a report was prepared by the chief education officer and the city solicitor for the education (policy and finance) sub-committee, in which the whole matter was reviewed in detail. In that report, the options open to the council for remedying the situation were listed as follows:
‘(a) to open a new selective school or schools for girls, providing another 180 places per year group [to this option there was later added the alternative of enlarging girls’ selective schools by 180 places per year]; (b) to close one (90 place) boys’ school and to reopen it as a girls’ school; (c) to close two boys’ schools; (d) to reorganise two boys’ schools as mixed schools; (e) to reorganise all of the selective schools as mixed schools; (f) to cease to maintain any selective schools at all.’
The officers recommended that the sex discrimination in admissions to selective schools should be recognised and that steps should be taken to remove the discrimination at the earliest opportunity; in particular, it was recommended that discussions regarding the steps to be taken should be entered into with the King Edward Foundation and the governors of Handsworth Grammar School. However, the sub-committee resolved, on 17 March 1987, that consideration of the matter should be referred to a later meeting to enable the various options to be further investigated. At a subsequent meeting on 30 June 1987 the sub-committee considered the various courses of action open to them, and decided to deny the allegation of sex descrimination but nevertheless to consult the governing bodies of the schools in question on possible solutions to eliminate sex discrimination. There is no evidence on the question whether such consultations have taken place.
The various options proposed to the sub-committee by the responsible officers were obviously intended to be a list of options theoretically open to the council: it was not being suggested that any one of them constituted a practical or desirable course of action in the circumstances. Furthermore, the council’s powers (under s 12 of the Education Act 1980) are subject to several legal restraints. I need not go into detail; it is enough to record that there are important limitations in connection with voluntary schools, and that implementation of proposals by the council is subject always to the overriding attitude of the Secretary of State. In addition, the falling demand for school places in the area creates of itself a major practical constraint. There is no doubt that the council faces great difficulties in the way of solving the problem of disparity between the sexes in selective secondary schools. However, it has to be said that, whatever the difficulties may be, there is no evidence that the council has sought actively to overcome them.
In these circumstances the commission commenced proceedings for judicial review. They sought (1) a declaration that the arrangements currently made by the council for
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the provision of selective secondary education were unlawful pursuant to s 23 of the 1975 Act, read with s 8 of the Education Act 1944 (as amended), and (2) an order of mandamus requiring the council to consider without delay the means by which such unlawful sex discrimination was to be removed. On 14 October 1987 McCullough J upheld the commission’s complaint of sex discrimination. He granted the declaration asked for but declined to make an order of mandamus. The council appealed to the Court of Appeal. On 13 May 1988 the Court of Appeal by a majority (Dillon and Neill LJJ, Woolf LJ dissenting) ([1988] 3 WLR 837) dismissed the appeal. The council now appeals to your Lordships’ House by leave of the Court of Appeal.
In order to consider the issues in the appeal, it is necessary to set out the terms of the most relevant statutory provisions of the 1975 Act. Section 1 defines sex discrimination against women. Subsection (1) provides:
‘A person discriminates against a woman in any circumstances relevant for the purposes of any provision of this Act if—(a) on the ground of her sex he treats her less favourably than he treats or would treat a man, or (b) he applies to her a requirement or condition which applies or would apply equally to a man but—(i) which is such that the proportion of women who can comply with it is considerably smaller than the proportion of men who can comply with it, and (ii) which he cannot show to be justifiable irrespective of the sex of the person to whom it is applied, and (iii) which is to her detriment because she cannot comply with it.’
Sections 22 to 28 are concerned with discrimination in the field of education. Section 22 deals with discrimination by bodies in charge of particular education authorities (including discrimination in relation to educational establishments maintained by a local education authority); s 23 deals with other discrimination by local education authorities; s 24 with certain designated establishments; and s 25 with a general duty in the public sector of education. Sections 26 to 28 provide for exceptions in certain cases. In particular, s 26 provides for an exemption in the case of single-sex establishments, with the effect that none of the relevant schools in the present case is guilty of unlawful discrimination by reason of offering places to children of one sex only. Because of that exception, s 22 is not relevant in the present case. The two sections which are of direct relevance are ss 23 and 25, it being alleged by the commission that the council is guilty of unlawful discrimination under s 23. Section 23(1) (as amended by the Education Act 1980, s 33(1) and the Education Act 1981, Sch 3, para 11) provides as follows:
‘It is unlawful for a local education authority, in carrying out such of its functions under the Education Acts 1944 to 1981 as do not fall under section 22, to do any act which constitutes sex discrimination.’
I should add that by s 82(1) an act includes a deliberate omission.
So far as material s 25 provides:
‘(1) Without prejudice to its obligation to comply with any other provision of this Act, a body to which this subsection applies shall be under a general duty to secure that facilities for education provided by it, and any ancillary benefits or services, are provided without sex discrimination.
(2) The following provisions of the Education Act 1944, namely—(a) section 68 (power of Secretary of State of State to require duties under that Act to be exercised reasonably), and (b) section 99 (powers of Secretary of State where local education authorities etc. are in default), shall apply to the performance by a body to which subsection (1) applies of the duties imposed by sections 22 and 23 and shall also apply to the performance of the general duty imposed by subsection (1), as they apply to the performance by a local education authority of a duty imposed by that Act …
(4) The sanctions in subsections (2) and (3) shall be the only sanctions for breach
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of the general duty in subsection (1), but without prejudice to the enforcement of sections 22 and 23 under section 66 or otherwise (where the breach is also a contravention of either of those sections) …
(6) Subsection (1) applies to—(a) local education authorities in England and Wales … ’
The first argument advanced by the council before your Lordships’ House was that there had not been, in the present case, less favourable treatment of the girls on grounds of sex. Here two points were taken. It was submitted (1) that it could not be established that there was less favourable treatment of the girls by reason of their having been denied the same opportunities as the boys for selective education unless it was shown that selective education was better than non-selective education, and that no evidence to that effect was called before McCullough J, and (2) that, if that burden had been discharged, it still had to be shown that there was less favourable treatment on grounds of sex, and that involved establishing an intention or motive on the part of the council to discriminate against the girls. In my opinion, neither of these submissions is well founded.
As to the first, it is not, in my opinion, necessary for the commission to show that selective education is ‘better’ than non-selective education. It is enough that, by denying the girls the same opportunity as the boys, the council is depriving them of a choice which (as the facts show) is valued by them, or at least by their parents, and which (even though others may take a different view) is a choice obviously valued, on reasonable grounds, by many others. This conclusion has been reached by all the judges involved in the present case; and it is consistent with previous authority (see, in particular, Gill v El Vino Co Ltd [1983] 1 All ER 398, [1983] QB 425 and R v Secretary of State for Education and Science, ex p Keating (1985) 84 LGR 469). I have no doubt that it is right. As to the second point, it is, in my opinion, contrary to the terms of the statute. There is discrimination under the statute if there is less favourable treatment on the ground of sex, in other words if the relevant girl or girls would have received the same treatment as the boys but for their sex. The intention or motive of the defendant to discriminate, though it may be relevant so far as remedies are concerned (see s 66(3) of the 1975 Act), is not a necessary condition to liability; it is perfectly possible to envisage cases where the defendant had no such motive, and yet did in fact discriminate on the grounds of sex. Indeed, as counsel for the commission pointed out in the course of his argument, if the council’s submission were correct it would be a good defence for an employer to show that he discriminated against women not because he intended to do so but (for example) because of customer preference, or to save money, or even to avoid controversy. In the present case, whatever may have been the intention or motive of the council, nevertheless it is because of their sex that the girls in question receive less favourable treatment than the boys, and so are the subject of discrimination under the 1975 Act. This is well established in a long line of authority: see, in particular, Jenkins v Kingsgate (Clothing Productions) Ltd [1981] 1 WLR 1485 at 1494 per Browne-Wilkinson J and R v Secretary of State for Education and Science, ex p Keating (1985) 84 LGR 469 at 475 per Taylor J; see also Ministry of Defence v Jeremiah [1979] 3 All ER 833 at 836, [1980] QB 87 at 98 per Lord Denning MR. I can see no reason to depart from this established view.
I turn then to the most substantial issue in the case. This turns on the true constructon of s 23 of the 1975 Act, and its relationship with s 25.
Counsel for the council fastened on certain words in s 23, which provides that it is unlawful for a local education authority, in carrying out such of its functions under the Education Acts 1944 to 1981 as do not fall under s 22, to do any act which constitutes sex discrimination (I have emphasised the words in quesion). The relevant functions of local education authorities are to be found in s 8 of the 1944 Act (as amended by the Education (Miscellaneous Provisions) Act 1948, s 3, the Education Act 1980, Sch 7 and the Education Act 1981, s 21), which, so far as relevant, provides as follows:
‘(1) It shall be the duty of every local education authority to secure that there will
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be available for their area sufficient schools … (b) for providing secondary education, that is to say, full-time education suitable to the requirements of senior pupils, other than such full-time education as may be provided for senior pupils in pursuance of a scheme made under the provisions of this Act relating to further education and full-time education suitable to the requirements of junior pupils who have attained the age of ten years and six months and whom it is expedient to educate together with senior pupils; and the schools available for an area shall not be deemed to be sufficient unless they are sufficient in number, character, and equipment to afford for all pupils opportunities for education offering such variety of instruction and training as may be desirable in view of their different ages, abilities, and aptitudes, and of the different periods for which they may be expected to remain at school, including practical instruction and training appropriate to their respective needs … ’
The functions identified in s 8 relate to the provision of a sufficient number of schools having certain specific characteristics. That function can be performed by the provision of selective schools or non-selective schools or both; but it is no part of the function of the authority to supply selective schools as such. It followed, submitted counsel for the council, that failure to provide selective schools was neither an act nor a deliberate omission within s 23 of the 1975 Act.
In the alternative, counsel for the council sought to support the conclusion of Woolf LJ in his dissenting judgment in the Court of Appeal. Woolf LJ was much concerned with the practical difficulties facing a local education authority when ensuring that facilities for education are provided without sex discrimination. In this connection he was concerned not only with the problem facing the Birmingham City Council in the present case, but also with less important situations, such as, for example, those relating to size of classes, quality of school buildings, pupil to teacher ratio and, indeed, almost every aspect of the educational system. He saw the solution to such problems in a proper identification of the roles of ss 23 and 25 respectively of the 1975 Act. He observed that, whereas a breach of duty under s 23 led to an action lying in tort against the offending establishment, a breach of duty under s 25 (assuming that it was not also a breach of s 22 or s 23) led to the result that the breach would only be remedied by the Secretary of State exercising his powers under s 68 or s 99 of the 1944 Act, whereby he has power to give appropriate directions to remedy the situation, a much more flexible remedy. Woolf LJ concluded that, having regard to the wording of s 23, a breach under that section only occurred where the local education authority did an act which constituted sex discrimination, ie not only resulted in sex discrimination but itself involved sex discrimination, or where—
‘the act complained of amounts to a decision by a local education authority to implement a policy which is discriminatory or where there is a deliberate failure to take a decision because of a policy of sex discrimination.’
(See [1988] 3 WLR 837 at 849.)
Only in those circumstances would an act or deliberate omission be unlawful under s 23. In his opinion, the present was not such a case.
In order to consider these submissions it is necessary to consider the relationship between ss 22, 23, and 25. As I read them, ss 22 and 23 are concerned with unlawful discrimination: in s 22, by bodies (including local education authorities) in charge of particular educational establishments in relation to those establishments, and, in s 23, by local education authorities in other circumstances. I can see no reason why these two sections should not, in the field of education, embrace all cases of unlawful discrimination as such by local education authorities. Section 25, however, is, as I read it, concerned with something different. It is concerned with a positive duty placed on bodies in the public sector, including local education authorities, to secure that ‘facilities for education
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provided by it, and any ancillary benefits or services, are provided without sex discrimination’. That section is therefore intended, not to outlaw acts of discrimination as such, but to place on such bodies a positive role in relation to the elimination of sex discrimination. The idea appears to have been to see that such bodies are, so to speak, put on their toes to ensure that sex discrimination does not occur in areas within their responsibility. It must not be forgotten that, in the field of education, there must be some reluctance on the part of parents to become entangled in disputes with their children’s schools, or with the authorities responsible for them, on this subject. Quite apart from fear of prejudicing their children’s prospects, the simple fact is that children pass rapidly on to other things, and a complaint of this kind may soon become irrelevant in relation to them.
Bearing the purposes of s 25 in mind, I feel unable to accept either of the submissions of counsel for the council. First of all, I do not think that it can be right to restrict s 23 as he suggests, so as to exclude discrimination in a case such as the present. On this point, I accept the submission of counsel for the commission, that it is not necessary for the commission to show that the council is in breach of its duties under s 8 of the 1944 Act. All that it is necessary for the commission to show is that the council, in carrying out its functions under the section, did an act (or deliberately omitted to do an act) where such act or omission constituted sex discrimination. Were that not so, there would be a serious gap in the legislation. This conclusion is consistent with the decision of Taylor J in R v Secretary of State for Education and Science, ex p Keating (1985) 84 LGR 469, which appears to me to be correctly decided. Nor, with all respect, is it right, in my opinion, to restrict s 23 as Woolf LJ would do, with reference to the word ‘constitutes’ in the phrase ‘to do any act which constitutes sex discrimination’. I myself do not attach such significance to that word. As I read them, the effect of ss 22 and 23 is to render unlawful all cases of particular acts or (deliberate) omissions by local education authorities which are discriminatory in the sense laid down in s 1 (and s 2) of the 1975 Act. Where there is at the same time a failure by an authority to fulfil its general duty under s 25, a person discriminated against by an act or deliberate omission made unlawful by ss 22 or 23 can still bring proceedings against the local education authority.
For these reasons, I find myself in agreement with the conclusion of McCullough J and with the majority of the Court of Appeal. I agree with the general conclusion expressed by Dillon LJ in the following passage ([1988] 3 WLR 837 at 856):
‘In truth the council’s position really is that they are knowingly continuing their acts of maintaining the various boys’ and girls’ selective schools, which inevitably results in discrimination against girls in the light of the great disparity in the numbers of places available, because the only alternatives open to the council, even with the consent of the Secretary of State, are unattractive or difficult to apply.’
The time has come for the Birmingham City Council to accept that it is in breach of s 23 of the 1975 Act, and that something has got to be done about it. Its proper course must surely be to respond to the proposal of the commission that it should begin the necessary process of consultation, with a view to finding the most practical solution available which accords with the obligations imposed on it by Parliament.
I would dismiss the appeal.
Appeal dismissed.
Solicitors: Sharpe Pritchard; Pattinson & Brewer.
Mary Rose Plummer Barrister.
R v Secretary of State for the Home Department, ex parte Al-Mehdawi
[1989] 1 All ER 777
Categories: ADMINISTRATIVE: IMMIGRATION
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): O’CONNOR, NICHOLLS AND TAYLOR LJJ
Hearing Date(s): 25, 26 OCTOBER, 9 NOVEMBER 1988
Natural justice – Hearing – Duty to hear parties etc – Immigration adjudicator – Applicant deprived of hearing through negligence of his own solicitors – Adjudicator not at fault – Whether breach of rules of natural justice – Whether adjudicator’s decision subject to judicial review.
Precedent – Court of Appeal – Binding effect of previous decisions of court – Power of court to depart from previous decision – House of Lords deciding appeal on different ground from that argued below – Whether Court of Appeal’s decision in that case binding on another division of the Court of Appeal.
The respondent was an Iraqi student who overstayed his leave to remain in the United Kingdom. When he was served with a notice of the Secretary of State’s decision to deport him he instructed solicitors to lodge an appeal. When a date of hearing for the appeal was fixed the solicitors wrote to notify him of the date but negligently sent the letter to the wrong address and the respondent never received the letter. The adjudicator subsequently dismissed the appeal on the papers since neither the respondent nor his solicitors appeared before him. The respondent applied to have the adjudicator’s decision quashed. The judge held that he was bound by a previous decision of the Court of Appeal which decided that certiorari ought to be granted where the negligence of an applicant’s solicitors deprived him of an oral hearing. The judge accordingly granted certiorari. The Secretary of State appealed, contending (i) that the Court of Appeal was not bound by its previous decision because when that case had gone to the House of Lords on appeal the House had decided the appeal on a different ground and had held that the issue determined below did not arise for decision and (ii) that judicial review was not available as a guarantee to a litigant against any perceived unfairness regardless of who was at fault since its purpose was to check procedural impropriety in the decision-making process and control errors by the person making the decision.
Held – (1) Where the House of Lords decided that an issue which was argued in the Court of Appeal did not arise for decision on appeal to the House and expressed no view as to the soundness or otherwise of the Court of Appeal’s reasoning on that issue, the Court of Appeal’s decision on that issue was not binding on another division of the Court of Appeal (see p 780 j, p 781 d and p 784 h, post); Balabel v Air-India [1988] 2 All ER 246 applied; R v Diggines, ex p Rahmani [1985] 1 All ER 1073 considered.
(2) Since the respondent had been deprived of a hearing by the adjudicator solely because of his solicitor’s negligence the decision-making process was fundamentally flawed by a breach of the rules of natural justice even though neither the respondent himself nor the adjudicator were at fault. The respondent was therefore entitled to judicial review of the adjudicator’s decision dismissing his appeal. The Secretary of State’s appeal would accordingly be dismissed (see p 784 b c g h, post); dictum of Stephenson LJ in R v Diggines, ex p Rahmani [1985] 1 All ER 1073 at 1082 applied.
Notes
For the principles of natural justice and certiorari for breach of those principles, see 1 Halsbury’s Laws (4th edn) paras 64, 74, 80, 83, 87, and for cases on the subject, see 1(1) Digest (Reissue) 200–201, 1172–1176 and 16 ibid 388–435, 4237–4797.
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For the binding effect of Court of Appeal decisions, see 26 Halsbury’s Laws (4th edn) para 578, and for cases on the subject, see 30 Digest (Reissue) 269–273, 763–793.
Cases referred to in judgments
Balabel v Air-India [1988] 2 All ER 246, [1988] Ch 317, [1988] 2 WLR 1036, CA.
Khan v Secretary of State for the Home Dept, Deen v Secretary of State for the Home Dept [1987] Imm AR 543, CA.
Minter v Priest [1930] AC 558, [1930] All ER Rep 431, HL rvsg [1929] 1 KB 655, CA.
R v Blundeston Prison Board of Visitors, ex p Fox-Taylor [1982] 1 All ER 646, DC.
R v Diggines, ex p Rahmani [1985] 1 All ER 1073, [1985] QB 1109, [1985] 2 WLR 611, CA; affd on other grounds [1986] 1 All ER 921, [1986] AC 475, [1986] 2 WLR 530, HL.
R v Gillyard (1848) 12 QB 527, 116 ER 965.
R v Immigration Appeal Tribunal, ex p Temel [1988] CA Transcript 344.
R v Leicester Recorder, ex p Wood [1947] 1 All ER 928, [1947] KB 726, DC.
R v Leyland Magistrates, ex p Hawthorn [1979] 1 All ER 209, [1979] QB 283, [1979] 2 WLR 28, DC.
R (Burns) v Tyrone County Court Judge [1961] NI 167, NI DC.
Young v Bristol Aeroplane Co Ltd [1944] 2 All ER 293, [1944] KB 718, CA affd [1946] 1 All ER 98, [1946] AC 163, HL.
Cases also cited
Birkett v James [1977] 2 All ER 801, [1978] AC 297, HL.
Council of Civil Service Unions v Minister for the Civil Service [1984] 3 All ER 935, [1985] AC 374, HL.
Davis v Johnson [1978] 1 All ER 1132, [1979] AC 264, HL.
O’Reilly v Mackman [1982] 3 All ER 1124, [1983] 2 AC 237, HL.
R v Crown Court at Knightsbridge, ex p Goonatilleke [1985] 2 All ER 498, [1986] QB 1, DC.
R v Immigration Appeal Tribunal, ex p Enwia, R v Immigration Appeal Tribunal, ex p A S [1983] 2 All ER 1045, [1984] 1 WLR 117, CA.
R v Secretary of State for the Home Dept, ex p Yeboah, R v Secretary of State for the Home Dept, ex p Draz [1987] 3 All ER 999, [1987] 1 WLR 1586, CA.
Appeal
The Secretary of State for the Home Department appealed against the decision of Macpherson J hearing the Crown Office list on 23 November 1987 (i) granting an application by the respondent, Shahib Al-Mehdawi, for judicial review by way of an order of certiorari to quash the determination of an immigration adjudicator dated 5 December 1985 whereby he dismissed an appeal by the respondent against the decision of the Secretary of State issued on 12 March 1985 to deport him pursuant to s 3(5)(a) of the Immigration Act 1971 and (ii) ordering that the matter be remitted to an adjudicator for a further hearing. The facts are set out in the judgment of Taylor LJ.
John Laws and David Pannick for the Secretary of State.
Sir Charles Fletcher-Cooke QC and George Warr for the respondent.
Cur adv vult
9 November 1988. The following judgments were delivered.
TAYLOR LJ (delivering the first judgment at the invitation of O’Connor LJ). This is an appeal by the Secretary of State for the Home Department from a decision of Macpherson J on 23 November 1987. The judge granted an order of certiorari to quash the determination of an adjudicator dismissing an appeal by Shahib Al-Mehdawi (the respondent) against the Secretary of State’s decision to deport him.
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The respondent was born in Iraq on 29 April 1956. In August 1977, aged 21, he arrived in the United Kingdom as a visitor. Between 1977 and 1984 his leave to remain was extended from time to time to enable him as a student to pursue various training courses. He was a conspicuously unsuccessful student and eventually, on 4 May 1984, he was refused a further extension of time. Despite that refusal, the respondent failed to leave. Accordingly, on 12 March 1985 the Secretary of State gave notice of his decision to deport the respondent pursuant to s 3(5)(a) of the Immigration Act 1971. The respondent instructed solicitors, Messrs Bowman Ziadie & Co. They lodged a notice of appeal on 28 March 1985. On the same day they wrote to the respondent at his address in Edinburgh to inform him of the step they had taken.
On 23 September Bowman Ziadie wrote to him again to tell him that the hearing before an adjudicator was fixed for 21 November. However, most unfortunately and negligently, their letter was sent, not to the respondent’s Edinburgh address, but to his former address in Birmingham. The letter did not reach him. It is common ground (a) that he never knew of the hearing before it was so far passed that he not only missed attending, but was too late to appeal, and (b) that Bowman Ziadie took no further steps after their misdirected letter and before the hearing. So, on 21 November neither the respondent nor anyone from Bowman Ziadie appeared before the adjudicator. A representative of the Home Secretary was there and invited the adjudicator to determine the appeal on the available documents. The adjudicator did so and dismissed the appeal. On 5 December he sent a copy of his decision to Bowman Ziadie. They wrote to the respondent telling him that any further appeal had to be lodged by 22 December. But, again, their letter was wrongly addressed to Birmingham, so no appeal was lodged.
On 28 April 1986 the Secretary of State signed a deportation order directing the respondent’s removal to Iraq. On 23 May he was arrested and detained in Perth prison. There followed extended representations and negotiations involving the Home Office and, on the respondent’s behalf, a second firm of solicitors in Scotland and a member of Parliament. Eventually, via the respondent’s third and present firm of solicitors, an application was made for judicial review on 5 February 1987. The case for the respondent (the applicant before Macpherson J) was that, owing to the negligence of his solicitors, he had been deprived of an oral hearing of his appeal to which he was entitled by the rules of natural justice and accordingly the decision should be quashed. He relied on the decision of this court in R v Diggines, ex p Rahmani [1985] 1 All ER 1073, [1985] QB 1109. Before Macpherson J counsel for the Secretary of State accepted that, unless he could show fault on the part of the respondent personally, the judge was bound by this court’s decision in Rahmani’s case and should grant relief. The judge was not prepared to find the respondent had been at fault. Accordingly, he granted certiorari.
On this appeal, counsel’s first submission for the Secretary of State is that this court is not bound by its decision in Rahmani’s case in view of the ultimate ruling when the case went to the House of Lords (see [1986] 1 All ER 921, [1986] AC 475). There it was held that the issue determined by me at first instance and by the Court of Appeal thereafter did not arise on a true view of the relevant facts and law.
Shortly, the facts of Rahmani’s case were as follows. The applicant had been refused leave for herself and her children to remain in the United Kingdom. She appealed to an adjudicator. She was represented by the United Kingdom Immigrants Advisory Service, but by the date of the hearing they were unable to contact her since although they had been given her new address they had failed to record it. By letter to the adjudicator they said they had no instructions and invited him ‘to decide the case in such manner as he may deem proper’. In purported exercise of the power in r 12 of the Immigration Appeals (Procedure) Rules 1972, SI 1972/1684, the adjudicator dismissed the appeal without a hearing. At first instance I held that there had been a breach of the rules of natural justice in that the applicant had been denied a hearing. Although that breach was due to the negligence of her own advisers, she was nevertheless entitled to relief. The Court of Appeal upheld the decision for the same reasons. Neither before me nor the
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Court of Appeal was any criticism made of the adjudicator. However, in the House of Lords, this important issue of principle was held not to have arisen because the true and simple ground for granting the applicant relief was that the adjudicator should not have determined the case under r 12, there being nothing to justify a finding under para (c) of that rule that no person was authorised to represent the applicant at the hearing.
In these circumstances, counsel for the Secretary of State contends that the true ratio of the case was the simple one propounded in the House of Lords. The more general point of principle decided below did not arise for decision in Rahmani’s case. He submits the case must be considered as one continuous piece of litigation. Therefore, although the views expressed on the issue of principle in this court are of high persuasive value, they cannot be regarded as the ratio of the case and thus binding, since they were unnecessary to its decision.
Counsel referred to Young v Bristol Aeroplane Co Ltd [1944] 2 All ER 293, [1944] KB 718, the leading authority on the principle of stare decisis in this court. Lord Greene MR stated the principle thus ([1944] 2 All ER 293 at 300, [1944] KB 718 at 729–730):
‘On a careful examination of the whole matter we have come to the clear conclusion that this court is bound to follow previous decisions of its own as well as those of courts of co-ordinate jurisdiction. The only exceptions to this rule (two of them apparent only) are those already mentioned which for convenience we here summarise: (i) The court is entitled and bound to decide which of two conflicting decisions of its own it will follow. (ii) The court is bound to refuse to follow a decision of its own which, though not expressly overruled, cannot in its opinion stand with a decision of the House of Lords. (iii) The court is not bound to follow a decision of its own if it is satisfied that the decision was given per incuriam.’
Counsel submits that those exceptions are not exhaustive. In particular, it would seem that Lord Greene MR’s principles were related to final decisions of the Court of Appeal. They may well be inapt where the House of Lords, in giving the final decision of a case, expressly indicates that, on the true facts, the issue resolved by the Court of Appeal did not require to be decided. Alternatively, such a case may be akin to Lord Greene MR’s exception (ii). In Rahmani’s case the House of Lords went further than simply to say the issue below did not arise for decision. Lord Scarman, with whose speech all the other law Lords agreed, said ([1986] 1 All ER 921 at 922–923, [1986] AC 475 at 478):
‘However, the parties and the two courts below proceeded on the basis that r 12 did apply. At the outset of the hearing before your Lordships it became obvious that there must be a serious doubt as to the applicability of r 12 to this case. Your Lordships raised the point with counsel for the adjudicator who very fairly said at once that, if your Lordships should be disposed to the view that r 12 does not apply in this case, he would not argue for the contrary view. He had come to argue the question of principle. Counsel for the immigrants was equally eager to argue the question of principle but left the matter in your Lordships’ hands. Thereupon and with the assistance of counsel, your Lordships examined the terms of the rule and the facts of the case and considered that in the circumstances the rule did not apply. Your Lordships have not, therefore, considered, nor have they heard arguments on, the point of principle which was the ground of decision in both courts below. Accordingly, I express no opinion on the point. I must not be understood to have indicated even a provisional view on the soundness or otherwise of the alleged principle. Indeed it would be dangerous, in my view, to discuss the point save in a case where the circumstances and the facts require it to be decided.’
It would be strange indeed if, despite those final words, the decision of this court is to be regarded as binding authority on the point of principle.
Counsel for the respondent referred to R v Immigration Appeal Tribunal, ex p Temel [1988] CA Transcript 344. There, Purchas LJ, referring to Rahmani’s case, said:
Page 781 of [1989] 1 All ER 777
‘The matter, we are told, went to the House of Lords, who granted leave to appeal, which was refused by this court, presumably because of the important issue of principle. It is perhaps disappointing that their Lordships did not in the event deal with this point but disposed of the appeal on a purely procedural technicality. The position, however, is that the ultimate authority at the moment which binds this court is Rahmani’s case and the judgments delivered in it on this particular topic.’
It would not appear that any argument was addressed to the court as to the precise effect of the House of Lords’ decision on the binding force of this court’s ruling. Indeed, the opening words of the passage I have cited (‘The matter, we are told, went to the House of Lords’) suggest that the full report of the House of Lords’ decision may not even have been cited.
Counsel also helpfully referred to an essay contained in Sir Arthur Goodhart’s Essays in Jurisprudence and the Common Law (1931) entitled ‘Determining the Ratio Decidendi of a Case’. He pointed to a number of passages suggesting that the ratio of a court’s decision remained binding even if the facts on which the court based it subsequently turned out to be wrong. But here it is not merely that knowledge subsequent and extraneous to the proceedings shows the facts to be wrong: the House of Lords in the very case, giving its final opinion, has ruled that the issue determined below did not arise for decision.
In these circumstances I consider that, although the reasoning of the Court of Appeal in Rahmani’s case is of powerful persuasive influence, this court is not bound by it. Support for that view is afforded by a passage from the judgment of this court in Balabel v Air-India [1988] 2 All ER 246, [1988] Ch 317 which, whilst I gave it, is strengthened by the agreement of Lord Donaldson MR and Parker LJ. The case is concerned with the extent and scope of legal professional privilege. The relevant passage is ([1988] 2 All ER 246 at 250–251, [1988] Ch 317 at 325–326):
‘In particular [counsel for the appellant] contends that the decision of the Court of Appeal in Minter v Priest [1929] 1 KB 655 is in his favour and is binding on this court. That was a defamation case. The respondents’ solicitor was approached to assist in obtaining a loan for the deposit on a contemplated purchase of a house, the intention being that, if the loan was obtained, the proposed purchasers would employ the respondent to complete the purchase. The respondent was alleged to have defamed the appellant in the course of his interview with the proposed purchasers and the issue was whether one of the latter was entitled to claim privilege from disclosing what happened at the interview. The decision of the Court of Appeal was on the footing that what passed at the interview was between clients and a solicitor acting in his professional capacity and within the ordinary scope of his business as a solicitor. The court upheld the claim to privilege. The House of Lords reversed the decision on the ground that the respondent was not acting as a solicitor at the relevant time because, so far from undertaking the duty of a solicitor on the proposal made to him, the respondent made a counter-proposal involving a malicious scheme from which he was to profit jointly with the proposed purchasers (see [1930] AC 558, [1930] All ER Rep 431). Accordingly, the dicta both in the Court of Appeal and in the House of Lords touching on the extent of legal professional privilege where the relationship of solicitor and client does exist were not essential to the determination of the case, and in my judgment are not binding on this court. Nevertheless, they are of strong persuasive authority.’
Should this case go further on the main issue, as seems likely, it may be thought appropriate for their Lordships to consider stare decisis in the context of cases such as Balabel’s case, the present case and no doubt others in which a decision of their Lordships’ House may neither overrule nor be on all fours with the decision of this court in the same case.
Before turning to the main issue of principle on this appeal, it is convenient to clear
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the ground by dealing with a secondary submission made by counsel for the respondent in the alternative. It is that, as in Rahmani’s case, the adjudicator fell foul of r 12 which carries the same number and substance in the 1984 rules applicable here as in those of 1972 which applied in Rahmani’s case. Rule 12(1)(c) provides:
‘An appellate authority may determine an appeal without a hearing if … (c) the appellate authority is satisfied that the appellant is outside the United Kingdom or that it is impracticable to give him notice of a hearing and, in either case, that no person is authorised to represent him at a hearing.’
In Rahmani’s case the adjudicator (by chance the same adjudicator as here) expressly stated in his determination that it was made under r 12, ie without a hearing. Here, counsel submits that the same situation arose and the same adjudicator dealt with it in the same way, that is to say without a hearing. The case can therefore, he says, be decided in the respondent’s favour on the same ground as founded the final decision in Rahmani’s case.
In my judgment, that argument is untenable on the evidence. The determination of the adjudicator expressly states:
‘3. Although an oral hearing of his appeal against this decision was requested, neither the [respondent] nor his representative appeared at the hearing [counsel for the Home Secretary] asked me therefore to determine the appeal on the basis of the available documents. Before doing so, however, he drew my attention to paragraph 156 of HC 169 [Statement of Changes in Immigration Rules of 9 February 1983 (HC Paper (1982–83) no 169], which sets out the factors to be taken into account by the Secretary of State in considering whether to give effect to a deportation order. [Counsel] contended that all these factors had in fact been taken fully into account in this case, and pointed out that the appellant had overstayed his leave to remain on no less than 4 occasions during the 8 years he had been here. No compassionate circumstances had been advanced in support of the appeal.’
From that, it is clear that there was a hearing, albeit in the absence of the respondent but physically attended by a representative of the Home Secretary. The adjudicator was not acting under r 12, but r 34(2) which permitted him to proceed with the hearing of an appeal in the absence of the respondent if satisfied that the requisite notice of the time and place of the hearing had been given and no explanation of the respondent’s absence had been furnished. The provisions as to notice are set out in rr 34(5)(a), 44(1) and 26(1). It is unnecessary to set them out as it is common ground here that the notice given complied with them. In my judgment, therefore, there is no substance in this subsidiary argument on behalf of the respondent.
This leaves as the main, indeed only, issue the question of principle considered by this court in Rahmani’s case. Counsel for the Secretary of State concedes that if the reasoning of this court in that case is sound, it is determinative of the present appeal. I confess at the outset that I adhere to the views I expressed in Rahmani’s case which were approved by this court. Since all three members of the court gave reasoned judgments after considering the arguments and the authorities, it is tempting simply to adopt them. However, counsel for the Secretary of State in this case did not appear in Rahmani’s case and in deference to his forceful submissions, which were not identical with those advanced there, I set out my reasons for remaining unrepentant.
The respondent’s contention, as upheld by this court in Rahmani’s case, is formulated in the Secretary of State’s skeleton argument in these terms (at para 2):
‘… a decision of a public authority, which is within the power conferred by statute and has been reached without procedural impropriety or irregularity on its part, can, nevertheless, be quashed upon judicial review if the exercise of the power has—without fault on the part of the complainant—resulted in an infringement of natural justice.’
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That formulation is, however, not wholly accurate. The respondent contends that there was procedural irregularity in the hearing before the adjudicator although through no fault of his. The question, therefore, is whether judicial review lies only when the public authority, here the adjudicator, is at fault or also when, without his fault, the procedure is, in the event, seriously defective or irregular. Here, the respondent did not have an opportunity to put his case. Is his right to do so to be forfeited without fault on his part simply because there was also no fault by the adjudicator?
The main submission of counsel for the Secretary of State is that the purpose of judicial review is to impose standards of decision-making and more particularly to control errors and departures from those standards by decision-makers. He submits that the respondent’s case involves judicial review being available as a guarantee to a litigant against any form of unfairness in litigation regardless of who, if indeed anyone, is at fault. This would extend judicial review so far, he says, as to leave principles behind, particularly the principle requiring finality in litigation.
Referring to the authorities, counsel says that the main exceptions to the requirement of fault by the authority whose decision is impugned are cases of fraud or perjury (see R v Gillyard (1848) 12 QB 527, 116 ER 965, R v Leicester Recorder, ex p Wood [1947] 1 All ER 928, [1947] KB 726 and R (Burns) v Tyrone County Court Judge [1961] NI 167). To these, he concedes there must be added two further exceptional cases which he submits are grafted onto the main exception. Those are R v Leyland Magistrates, ex p Hawthorn [1979] 1 All ER 209, [1979] QB 283 and R v Blundeston Prison Board of Visitors, ex p Fox-Taylor [1982] 1 All ER 646. In the former case, the prosecution failed to disclose to the defence the existence of two material witnesses. In the latter, the prison authority likewise failed to bring possible witnesses to the attention of a prisoner in proceedings against him before the board of visitors. Counsel explains these cases as examples of misconduct by a party owing a public duty in the administration of justice. However, in the Leyland Magistrates case [1979] 1 All ER 209 at 210–211, [1979] QB 283 at 286 Lord Widgery CJ explained the grant of certiorari in the following terms:
‘But the problem, and one can put it in a sentence, is that certiorari in respect of breach of the rules of natural justice is primarily a remedy sought on account of an error of the tribunal, and here, of course, we are not concerned with an error of the tribunal, we are concerned with an error of the police prosecutors. Consequently, amongst the arguments to which we have listened an argument has been that this is not a certiorari case at all on any of the accepted grounds. We have given this careful thought over the short adjournment because it is a difficult case in that the consequences of the decision either way have their unattractive features. However, if fraud, collusion, perjury and such like matters not affecting the tribunal themselves justify an application for certiorari to quash the conviction, if all those matters are to have that effect, then we cannot say that the failure of the prosecutor which in this case has prevented the tribunal from giving the defendant a fair trial should not rank in the same category.’
In Rahmani’s case [1985] 1 All ER 1073 at 1087, [1985] QB 1109 at 1129 Purchas LJ, after quoting that passage, said:
‘With respect to Lord Widgery CJ I would venture to comment that the correct approach should have been that the tribunal had failed to try the case according to the rules of natural justice but through no fault of theirs. The fault lay with the prosecution.’
Whichever way it is expressed, the nub of the decision was that since there had been a failure of natural justice in the trial process, certiorari could and should go notwithstanding the absence of fault by the tribunal. Purchas LJ went on to quote with approval the reasoning of Phillips J in Ex p Fox-Taylor [1982] 1 All ER 646 at 649–650 to the like effect.
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Counsel for the Secretary of State submitted that if negligence of his own advisers could entitle an applicant to a grant of certiorari and a rehearing of his case, Pandora’s box would be wide open. He conjured up the possibility of certiorari where the applicant’s lawyer failed to call a witness, failed to seek an adjournment, cross-examined incompetently or otherwise left the applicant aggrieved. It was, he said, neither logical nor workable to draw a distinction between a fundamental breach of natural justice which would justify certiorari and any other unfairness which would not. One must go the whole hog. If certiorari lies here, it must lie wherever litigation ends in unfairness however caused.
I cannot accept this argument ad absurdum. It is true, as counsel says, that natural justice cannot be invoked to rectify every perceived unfairness. But, in the present case there was, owing entirely to the solicitors’ negligence, a breach of a basic rule of natural justice, audi alteram partem. That was a fundamental flaw in the decision-making process. It is clearly distinguishable from situations within a proper process in which the applicant’s case might have been conducted more skilfully or differently. No doubt difficult cases could arise near the borderline between a reviewable defect of process and a grievance without remedy. Where that line should be drawn is perhaps incapable of a universal definition and must depend on the circumstances of each case. The conduct of the applicant himself would clearly be a highly relevant factor. Both in Ex p Temel and in Khan v Secretary of State for the Home Dept [1987] Imm AR 543 the applicants failed because they were each held to have been responsible for the fact that they did not have a hearing. But in Khan’s case (at 555) Bingham LJ said:
‘If a procedural mishap occurs as a result of misunderstanding, confusion, failure of communication, or even perhaps inefficiency, and the result is to deny justice to an applicant, I should be very sorry to hold that the remedy of judicial review was not available.’
In Rahmani’s case [1985] 1 All ER 1073 at 1082, [1985] QB 1109 at 1122 Stephenson LJ said:
‘We do not have to consider, and the judge very properly did not consider, whether it is ever permissible to grant judicial review to an applicant who is not wholly innocent. Where the mistake or misunderstanding which leads to the denial of natural justice is the applicant’s own, it may seldom, if ever, be right for the court to exercise its discretion in his or her favour; for in most, if not all, cases of that kind there could be no unfairness towards the author and only begetter of the procedural defect. But I would hold, if necessary, that the court has the discretionary power to review and quash a decision reached as a result of an applicant’s own fault.’
Whatever may be the position regarding an applicant who is himself at fault, I regard the present case, where no blame attaches to the respondent, as a clear case for relief. I would, accordingly, uphold the decision of Macpherson J and dismiss this appeal.
NICHOLLS LJ. I agree.
O’CONNOR LJ. I agree that this appeal should be dismissed for the reasons given by Taylor LJ.
Appeal dismissed. Leave to appeal to the House of Lords granted.
Solicitors: Treasury Solicitor; Burton Woolf & Turk.
Raina Levy Barrister.
Kleinwort Benson Ltd v Malaysia Mining Corp Bhd
[1989] 1 All ER 785
Categories: CONTRACT
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): FOX, RALPH GIBSON AND NICHOLLS LJJ
Hearing Date(s): 13, 14 DECEMBER 1988, 2 FEBRUARY 1989
Contract – Intention to create legal relationship – Inference of intention from circumstances – Letter of comfort – Plaintiffs making loan to defendants’ subsidiary – Defendants furnishing letters of comfort to plaintiffs as part of loan agreement – Loan expressing defendants’ policy to ensure that subsidiary’s business at all times in a position to meet its liability to plaintiffs – Subsidiary going into liquidation – Plaintiffs suing defendants for subsidiary’s debt – Whether letters of comfort having contractual effect.
The plaintiff bank agreed with the defendants to make a loan facility of up to £10m available to the defendants’ wholly-owned subsidiary, M, which traded in tin on the London Metal Exchange. As part of the facility arrangement the defendants furnished to the plaintiffs two ‘letters of comfort’, each of which stated in para 3 that ‘It is our policy to ensure that the business of [M] is at all times in a position to meet its liabilities to you under the [loan facility] arrangements’. In 1985 the tin market collapsed at a time when M owed the plaintiffs the whole amount of the facility. M went into liquidation and the plaintiffs sought payment of the amount owing from the defendants. When the defendants refused to pay the plaintiffs brought an action against them to recover the amount owing. The judge held that the plaintiffs were entitled to recover. The defendants appealed to the Court of Appeal.
Held – A letter of comfort from a parent company to a lender stating that it was the policy of the parent company to ensure that its subsidiary was ‘at all times in a position to meet its liabilities’ in respect of a loan made by the lender to the subsidiary did not have contractual effect if it was merely a statement of present fact regarding the parent company’s intentions and was not a contractual promise as to the parent company’s future conduct. On the facts, para 3 of the letters of comfort was in terms a statement of present fact and not a promise as to future conduct and in the context in which the letters were written was not intended to be anything other than a representation of fact giving rise to no more than a moral responsibility on the part of the defendants to meet M’s debt. The appeal would therefore be allowed (see p 792 d e, p 795 a to f, p 796 g to j and p 797 d j to p 798 b, post).
Edwards v Skyways Ltd [1964] 1 All ER 494 and Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5 considered.
Decision of Hirst J [1988] 1 All ER 714 reversed.
Notes
For intention to create legal relations, see 9 Halsbury’s Laws (4th edn) paras 300–304, and for cases on the subject, see 12 Digest (Reissue) 21–26, 2–21.
Cases referred to in judgments
Chemco Leasing SpA v Rediffusion Ltd (19 July 1985, unreported), QBD affd [1987] 1 FTLR 201, CA.
Edwards v Skyways Ltd [1964] 1 All ER 494, [1964] 1 WLR 349.
Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5, [1976] QB 801, [1976] 2 WLR 583, CA.
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465, [1963] 3 WLR 101, HL.
Heilbut Symons & Co v Buckleton [1913] AC 30, [1911–13] All ER Rep 83, HL.
Page 786 of [1989] 1 All ER 785
Maclaine Watson & Co Ltd v Dept of Trade and Industry [1988] 3 All ER 257, [1988] 3 WLR 1033, CA.
Prenn v Simmonds [1971] 3 All ER 237, [1971] 1 WLR 1381, HL.
Rose & Frank Co v J R Crompton & Bros Ltd [1923] 2 KB 261, [1924] All ER Rep 245, CA; [rvsd] [1925] AC 445, [1924] All ER Rep 245, HL.
Appeal
The defendants, Malaysia Mining Corp Bhd, a public limited company incorporated under the laws of Malaysia, appealed from the judgment of Hirst J ([1988] 1 All ER 714, [1988] 1 WLR 799) given on 21 December 1987 whereby he awarded the plaintiffs, Kleinwort Benson Ltd, damages arising from breach of a warranty and/or representation contained in an agreement in writing between the plaintiffs and the defendants set out in letters dated 21 August 1984 and 7 May 1985. The facts are set out in the judgment of Ralph Gibson LJ.
S A Stamler QC and Julian Gibson-Watt for the defendants.
Mark Waller QC and Nicholas Padfield for the plaintiffs.
Cur adv vult
2 February 1989. The following judgments were delivered.
RALPH GIBSON LJ (giving the first judgment at the invitation of Fox LJ). This is an appeal by the defendants, Malaysian Mining Corp Bhd, from the decision of Hirst J of 21 December 1987 by which the plaintiffs, Kleinwort Benson Ltd, obtained judgment for damages for breach of contract against the defendants for £12·26m including interest. The defendants ask that the judgment be set aside and that the plaintiffs’ claim be dismissed on the ground that the defendants did not enter into any relevant contractual obligations to the plaintiffs.
The judgment of Hirst J contains an account of the circumstances in which the defendants provided to the plaintiffs the comfort letter on the terms of which the plaintiffs’ claim is founded (see [1988] 1 All ER 714 at 716–718, [1988] 1 WLR 799 at 801–803). The description of the document as a comfort letter is that used by the parties themselves in the negotiations which preceded the provision of it by the defendants.
The plaintiffs are merchant bankers of high reputation and long experience. The defendants are a public limited company incorporated under the laws of Malaysia in which the Republic of Malaysia has at all material times held a controlling interest. In 1983 the defendants caused to be incorporated under the laws of this country a company called MMC Metals Ltd (Metals), as a wholly-owned but indirect subsidiary, to operate as a ring-dealing member of the London Metal Exchange. The paid up capital of Metals was £1·5m. To carry out trading on the London Metal Exchange much larger funds would be required. There were negotiations for the provision of funds by the plaintiffs to Metals. The plaintiffs sought from the defendants assurances as to the responsibility of the defendants for the repayment by Metals of any sums lent by the plaintiffs. A ‘comfort letter’ dated 21 August 1984 was provided by the defendants as part of an acceptance credit/multi-currency cash loan facility granted by the plaintiffs to Metals to a maximum of £5m. That letter contained, among other statements, the assertion by the defendants that:
‘It is our policy to ensure that the business of MMC Metals Limited is at all times in a position to meet its liabilities to you under the above arrangements.’
This case turns on the proper construction, in its context, of that assertion by the defendants. In 1985 the facility was increased by the plaintiffs to a maximum of £10m
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in reliance on a second comfort letter dated 7 May 1985, which was in substantially identical terms.
In October 1985 the tin market collapsed when the International Tin Council (the ITC) announced that it was unable to meet its liabilities which ran to hundreds of millions of pounds. An account of those events and a list of the sovereign states (including the United Kingdom and Malaysia) which were members of the ITC can be found in the judgment of Kerr LJ in Maclaine Watson & Co Ltd v Dept of Trade and Industry [1988] 3 All ER 257 at 268–271, [1988] 3 WLR 1033 at 1047–1050. When the tin market collapsed Metals ceased trading. The plaintiffs demanded repayment of all sums outstanding. Nothing was paid, and Metals went into liquidation. The plaintiffs called on the defendants to ensure that the plaintiffs received payment of the sums due.
The defendants refused to pay and said by telex of 3 December 1985:
‘We have been advised that the statements made in the letter of 7th May [1985] were not intended by either party to impose, and do not impose, any legally binding obligation on us to support Metals. You will appreciate that circumstances are now materially different from those existing at the date of that letter and that although the policy referred to was our policy at that time and in the light of the circumstances then prevailing, no assurance was given that such policy would not be reviewed in the light of changing circumstances. We therefore cannot accept, as you stated in your telex, that we have given any assurances to you that Metals would at all times be kept in a position to meet its liability to you.’
Hirst J described in his judgment the course of the discussions between the defendants and the plaintiffs which led to the provision of the two comfort letters. Before Hirst J and in this court it was accepted by both sides that those events could properly be taken into account as part of the context in which the second comfort letter was sent by the defendants.
I will set out Hirst J’s description of those events substantially in his words, which have been accepted as full and accurate by the parties ([1988] 1 All ER 714 at 717–718, [1988] 1 WLR 799 at 802–803):
‘… in the first instance, by letter dated 16 December 1983, [the plaintiffs] offered to both [the defendants] and Metals jointly a facility totalling £5m, on terms that, throughout the currency of the facility, both [the defendants] and Metals should be jointly and severally liable for all amounts due to [the plaintiffs] on this basis an accepting commission/margin of 3/8% per annum was proposed. On 9 February 1984 there was a meeting in Singapore, attended on [the plaintiffs’] side by Mr Gordon Irwin, who was the sole witness at the trial. At this stage [the plaintiffs] were proposing a guarantee by [the defendants] rather than joint and several liability, but one of [the defendants’] representatives at the meeting stated that it was [the defendants’] policy not to guarantee their subsidiary’s borrowings. At a subsequent meeting in London on 21 June 1984, Mr John Green, who had been newly appointed as the director in charge of Metals’ operations, is recorded in [the plaintiffs’] meeting note as having stated as follows: “The original offer was outlined (£5 mn. u.f.n. ca 3/8% p.a. margin guaranteed by [the defendants]). A facility of this sort appears to fit in with Green’s requirements, with the exception of the guarantee. Green said that [the defendants] were now not so keen on issuing guarantees just to keep finance costs down by 1/8% p.a., and Green himself would be recommending that all MMC Metals’ bank lines should be covered by a letter of comfort, rather than by a guarantee. I said that a letter of comfort would not be a problem, but that we would probably have to charge a higher rate.” This was reported by Mr Irwin in an internal memorandum dated 3 July 1984 as follows: “Contrary to earlier reports,
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[the defendants] have now taken a decision not to issue guarantees to cover the banking facilities granted to MMC Metals. As a result, we have been asked to consider a line which would be covered by a letter of comfort from [the defendants].” Mr Irwin in evidence accepted that by this stage he realised that [the plaintiffs] would not be able to obtain either joint and several liability as originally proposed, or a guarantee from [the defendants]. Originally it was proposed that [the defendants] should draft the comfort letter, but eventually on 11 July [the plaintiffs] furnished to Metals a revised facility letter addressed to them only, providing for 1/2% commission (ie an increase of 1/8%), and accompanied by a draft of a proposed comfort letter, in which the crucial paragraph read as follows: “It is our policy to ensure that the business of MMC Metals Limited is conducted in such a way that MMC Metals Limited is at all times in a position to meet its liabilities to you under the above arrangements.” Ie containing at this stage some extra words in the second line. On 10 August 1984 at a board meeting of [the defendants] the following directors’ written resolution was passed: “THAT MMC Metals Limited be authorised to accept the above facility on terms and conditions contained in the letter from [the plaintiffs] (KBL) dated July 11, 1984, and that the required Letter of Comfort in the form attached be issued to KBL.” Eventually, on 17 September, Metals returned the formal facility letter to [the plaintiffs] accompanied by the first comfort letter, dated 21 August 1984, with the crucial paragraph redrafted by [the defendants]. The full text of the letter is as follows: “We refer to your recent discussion with MMC Metals Limited as a result of which you propose granting MMC Metals Limited: a) banking facilities of up to £5 million; and b) spot and forward foreign exchange facilities with a limitation that total delivery in cash will not on any one day exceed £5 million [1] We hereby confirm that we know and approve of these facilities and are aware of the fact that they have been granted to MMC Metals Limited because we control directly or indirectly MMC Metals Limited. [2] We confirm that we will not reduce our current financial interest in MMC Metals Limited until the above facilities have been repaid or until you have confirmed that you are prepared to continue the facilities with new shareholders. [3] It is our policy to ensure that the business of MMC Metals Limited is at all times in a position to meet its liabilities to you under the above arrangements. Yours faithfully MALAYSIA MINING CORPORATION BERHAD. I have inserted numbers for the three main paragraphs for clarity of reference in this judgment. Paragraph (2) was, as is common ground, contractual.’
Hirst J was referred to four authorities, which in order of date were Rose & Frank Co v J R Crompton & Bros Ltd [1923] 2 KB 261, [1924] All ER Rep 245, Edwards v Skyways Ltd [1964] 1 All ER 494, [1964] 1 WLR 349, Prenn v Simmonds [1971] 3 All ER 237, [1971] 1 WLR 1381 and Chemco Leasing SpA v Rediffusion Ltd (19 July 1985, unreported), QBD; affd [1987] 1 FTLR 201.
From those cases and from a passage in Chitty on Contracts (25th edn, 1983) para 123 Hirst J accepted the following principles as applicable (I have numbered them separately): (i) an agreement, even though it is supported by consideration, is not binding as a contract if it was made without any intention of creating legal relations; (ii) in the case of an ordinary commercial transaction it is not normally necessary to prove that the parties in fact intended to create legal relations, the onus of proving that there was no such intention ‘is on the party who asserts that no legal effect is intended, and the onus is a heavy one’: per Megaw J in Edwards v Skyways Ltd [1964] 1 All ER 494 at 500, [1964] 1 WLR 349 at 355; (iii) to decide whether legal effect was intended, the courts normally apply an objective test; for example, where the sale of a house is not ‘subject to contract’, either party is likely to be bound even though he subjectively believed that he would not be bound until the usual exchange of contracts had taken place; (iv) the court will, in deciding that question, attach weight (a) to the importance of the agreement of the
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parties and (b) to the fact that one of them has acted in reliance on it; (v) in the search for agreed terms of a commercial transaction, business men may adopt language of deliberate equivocation in the hope that all will go well. It may, therefore, be artificial to try to ascertain the common intention of the parties as to the legal effect of such a claim if in fact their common intention was that the claim should have such effect as a judge or arbitrator should decide: see the decision of Staughton J in Chemco Leasing SpA v Rediffusion Ltd cited by Hirst J (see [1988] 1 All ER 714 at 719, [1988] 1 WLR 799 at 805). Nevertheless, the court’s task is to ascertain what common intentions should be ascribed to the parties from the terms of the documents and the surrounding circumstances.
Before stating the steps by which, having regard to those principles, Hirst J made his decision in this case, I must refer to three matters which Hirst J listed as having been relied on by the defendants as demonstrating that the parties did not intend the words in para 3 of the comfort letter to have legal effect as a contractual term. They were (i) that the comfort letter should be construed against the plaintiffs as the party putting forward the paragraph in question, ie contra proferentem, (ii) that the language of the paragraph was not apt to express a legal obligation and was, in that regard, markedly different from those parts of the comfort letter which did express legal obligation, and in particular the preceding para 2, and (iii) that the common appreciation by both sides that the defendants were not willing either to assume joint and several liability, or to enter into a guarantee, supported displacement of the presumption.
The steps by which Hirst J reached his conclusion may, I think, be summarised as follows. (a) The two comfort letters came into existence as part of a commercial banking transaction and the statement in para 3 of the letter of May 1985 was an important feature of them. (b) Accordingly, the presumption laid down by Edwards v Skyways Ltd applied and the burden therefore lay on the defendants to show that the parties did not intend para 3 in the letter to have legal effect as a contractual term. (c) The three matters relied on by the defendants were not sufficient to displace that presumption: (i) as to construction contra proferentem, that principle was not applicable because the wording was not ambiguous, and, if it was, the paragraph was the product of joint drafting and was not for this purpose to be regarded as drafted by the plaintiffs; (ii) as to the language of the paragraph, it was fully apt to express a legal obligation. Hirst J continued ([1988] 1 All ER 714 at 722, [1988] 1 WLR 799 at 809):
‘I see no magic in the opening words “we confirm that we will not … ” in para (2), or their omission from para (3): put another way, I do not think that any greater strength would have been added to para (3) if it had begun “We confirm that it is our policy … ”’
(iii) as to the common appreciation by both sides that the defendants were not willing either to assume joint and several liability or to enter into a guarantee, that argument came ‘perilously close to infringing the principle that the course of negotiations cannot be invoked in order to influence the construction of a written document’. Apart from that consideration the argument was unconvincing because the provisions of para 3 are not to be equated with a guarantee even though, as it happens, the measure of damages for breach of the term contained in the paragraph would be equivalent to the amount recoverable on a guarantee. There was, in the judge’s view, a very substantial difference between, on the one hand, a guarantee and, on the other, a paragraph like the one under consideration in the present case. Further, the underlying premise on which the argument was based was unacceptable, namely the suggestion that once a formal guarantee had been rejected by the defendants, as it was, there was no further scope for the possibility of any contractually binding obligation of the sort enshrined in para 3. (d) A number of considerations strongly reinforced the presumption that the parties intended that the paragraph should have legal effect, namely: (i) the plaintiffs acted in
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reliance on the paragraph in agreeing to advance money to Metals; (ii) it was of paramount importance to the plaintiffs that the defendants should ensure that Metals was at all times in a position to meet its liabilities; and (iii) the statement contained in para 3 was also treated as a matter of importance by the defendants, as was shown by their formal board resolution.
Having thus held that the defendants had not demonstrated that the parties did not intend para 3 to have effect as a contractual term, Hirst J considered the interpretation of the words in para 3. The interpretation was, in his view, crystal clear without embellishment. He said ([1988] 1 All ER 714 at 724, [1988] 1 WLR 799 at 811):
‘It is an undertaking that, now and at all times in future, so long as Metals are under any liability to [the plaintiffs] under the facility arrangements, it is and will be [the defendants’] policy to ensure that Metals is in a position to meet those liabilities.’
Counsel’s submissions in this court for the defendants were as follows. He referred to the use of letters of comfort in banking over recent years, and to the description of that practice in Wood Law and Practice of International Finance (1980) para 13.5 from which Staughton J cited passages in the Chemco case. He contended that the paragraphs of the comfort letter in this case are typical of a comfort letter, both in substance and in sequence, namely: (i) a statement of the awareness of the parent company of the advances made to the subsidiary; (ii) a promise that the parent will not, without the consent of the bank, relinquish or reduce control of the subsidiary before repayment; and (iii) the words of comfort, stating how far the parent is prepared to go in supporting its subsidiary, often beginning ‘it is our intention … ’ or ‘it is our policy … ' Counsel, however, did not contend, as I understood his argument, that the phrase ‘comfort letter’ was shown to have acquired a precise meaning, in particular as to the limits of any legally enforceable liability which might be assumed by a parent company under such a letter, but he submitted that the phrase was generally understood to include a letter giving comfort only in the sense that the parent company assumed no legally enforceable liability to pay the debts of its subsidiary but did, in order to recognise fully its moral responsibility, acknowledge that the debts had been incurred by the subsidiary with the knowledge and approval of the parent, and state the present policy of the parent as to ensuring repayment.
The defendants have throughout acknowledged that the term in para 2 of the present letter was a contractual promise, ie it was intended to have legal effect as such. The statement in para 3, however, was not, it was submitted, a contractual promise and was not intended to have legal effect as such. It was nevertheless, in counsel’s submission, not devoid of legal significance: it was a representation of fact as to the policy of the defendants at the time that the statement was made; and the plaintiffs were entitled to rely on it was a statement of the current policy of the defendants. If it were shown to have been untrue to the knowledge of the defendants at the time when it was made, the plaintiffs would have had a claim in deceit, but there has been no suggestion of that nature.
In addition, the plaintiffs were entitled to rely on the representation as to the current policy of the defendants unless and until they were told that the policy had been changed. If the policy did change, without notice from the defendants so that the representation ceased to be true, and the plaintiffs thereafter relied on it by making further advances to Metals, they would have, it was said, ‘a cause of action in misrepresentation’, but no cause of action in contract. Since the contract into which the plaintiffs entered in reliance on the representation was not made with the defendants, there could be no claim under s 2 of the Misrepresentation Act 1967, but a claim for negligent misrepresentation might be advanced on the principles stated in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465. No such claim, of course, has been advanced in this case.
The main attack on the analysis and reasoning of the judge, which counsel for the
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defendants developed, was directed at the application by Hirst J of the proposition, illustrated by Edwards v Skyways Ltd [1964] 1 All ER 494, [1964] 1 WLR 349, that a promise, made for consideration in a commercial transaction, will be taken to have been intended to have contractual effect in law, unless the contrary is clearly shown. The proposition was not disputed on behalf of the defendants before Hirst J, or this court. It was, however, submitted that the principle is of no assistance in deciding whether, on the evidence and on their true construction, the words in question are words of promise or not.
On that question, it was said, neither Rose & Frank Co v J R Crompton & Bros Ltd [1923] 2 KB 261, [1924] All ER Rep 245 nor Edwards v Skyways Ltd [1964] 1 All ER 494, [1964] 1 WLR 349 laid down any relevant presumption in favour of the plaintiffs which the defendants were called on to displace. The judge, it was said, was led into the belief that, if he took the view that the defendants had failed to displace the presumption laid down in Edwards v Skyways Ltd, it followed that para 3 was to be given effect in law as a contractual promise.
That approach was demonstrated, it was said, by the passage near the beginning of the judgment where Hirst J said ([1988] 1 All ER 714 at 716, [1988] 1 WLR 799 at 801): ‘The main question … is whether … the crucial paragraph … was contractual in status if it is, the subsidiary question arises as to its proper construction.’
It was, counsel for the defendants argued, further demonstrated by the summary treatment of the question of construction itself where, as set out above, the judge found the answer to be crystal clear and the meaning to be an undertaking that, ‘now and at all times in future … it is and will be [the defendants’] policy to ensure that Metals is in a position to meet those liabilities’ (see [1988] 1 All ER 714 at 724, [1988] 1 WLR 799 at 811).
For the rest, the substance of the submissions advanced by counsel for the defendants, in which he adopted the comments of Mr Brian Davenport QC in ‘A Very Comfortable Comfort Letter’ in [1988] Lloyd’s MCLQ 290, was as follows. (i) The words in para 3 are not words of contractual promise. In that respect they differ markedly from the wording of para 2: ‘We confirm that we will not reduce our current financial interest in MMC Metals Ltd.’ (ii) To give to the words the meaning which the judge held them to have requires that no force be given to the words ‘it is our policy … ' Further, or in the alternative, it is necessary to imply, in addition to the statement as to present policy, a promise that the policy will not be changed and such an implication is not possible on the evidence in this case. (iii) Therefore, without recourse to any assistance from the circumstances in which the transaction was conducted, it should be held that by para 3 the defendants did not make the promise which the judge extracted from the words. (iv) If any doubt could be entertained as to the meaning of para 3 that doubt should be dispelled by giving due weight to the facts proved, namely that the plaintiffs had sought to obtain either joint and several liability of the defendants, or a guarantee from the defendants of the liabilities of Metals to the plaintiffs, and the defendants had refused to assume either form of obligation; and the plaintiffs knew that, if the transaction was to proceed, it must be without such security. Further the plaintiffs had, in compensation for not having that security, stipulated for, and obtained from Metals, the right to an increased commission of 1/8%. To put some financial meaning into that point, counsel for the defendants calculated that if the facility had been revolved four times a year on the basis of 90-day bills the increase of 1/8% would be chargeable on £40m, ie £50,000 pa.
The submission in this court for the plaintiffs can be more shortly stated because counsel adopted and relied on the reasoning of the judge. As to the effect and meaning to be given to para 3, his main submissions were that: (i) the statement in para 3 was made in a commercial contractual document and it is to be treated as a contractual promise if it appears on the evidence to have been so intended: see Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5, [1976] QB 801; (ii) it is shown to have been so intended
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because the statement was made for the purpose of inducing the plaintiffs to enter into the acceptance credit transaction with Metals under the credit facility and it was plainly of decisive commercial importance to the transaction; (iii) the statement as to present policy must be taken as including a promise that that policy will remain in force. This proposition can be tested, it was said, by taking an example remote from banking: suppose a shop, by notice, announced that ‘it is our policy to take back all goods purchased and to refund the price, without any questions, on return of the goods in good condition within 14 days of purchase’, if a customer should return goods, having bought them in reliance on the notice, the shop could not (said counsel for the plaintiffs) refuse to refund the price on the ground that the notice only stated the shop’s policy on the day of purchase so that the shop was free to change its policy within the 14-day period. So in this case it is absurd in commercial terms for the defendants to claim to be free to change their announced policy after money has been advanced in reliance on it. To treat the words of para 3 as no more than a representation of fact is to give no force to the words ‘at all times’.
For my part, I am persuaded that the main criticisms of the judgment of Hirst J advanced by counsel for the defendants are well founded and I would, for the reasons which follow, allow this appeal. In my judgment the defendants made a statement as to what their policy was, and did not in para 3 of the comfort letter expressly promise that such policy would be continued in future. It is impossible to make up for the lack of express promise by implying such a promise, and indeed, no such implied promise was pleaded. My conclusion rests on what, in my judgment, is the proper effect and meaning which, on the evidence, is to be given to para 3 of the comfort letters.
Before expressing my reasons for that conclusion, I should refer to the way in which the question of ‘intention of creating legal relations’ was introduced into this case. The plaintiffs’ primary pleaded contention was that by the first letter of 21 August 1984, on its true construction, the defendants warranted that, in consideration of the plaintiffs’ granting the loan facility to Metals, the defendants would ensure that Metals was at all times capable of fulfilling its financial obligations to the plaintiffs under the facility. The alternative and secondary contention was that, if the defendants had not given that warranty, the defendants warranted that it was their business policy to ensure that Metals would always have sufficient means to meet its liabilities to the plaintiffs under the terms and conditions of the facility and that, in all the circumstances, the defendants impliedly warranted that they would give to the plaintiffs reasonable notice of their intention to change that business policy.
Those two contentions were repeated with reference to the letter of May 1985. The judge made no findings on the secondary contention, and no alternative claim has been pursued in this court. It is to be noted that the only reliance on implied obligation was in that alternative claim which has not been pursued, no doubt because there is nothing to show that any failure to give notice of the change in policy caused loss to the plaintiffs.
In answer to the plaintiffs’ claims, the defendants pleaded that—
‘the letters of 21 August 1984 and of May 1985 were, and were agreed and understood by both parties to be “letters of comfort” or “letters of awareness” falling short of any legal … warranty, and that the said statements of policy by the defendants (if given honestly, which they were) were not and were agreed and/or understood by both parties not to be, legally enforceable.’
The defendants added that, if para 3 of the letters constituted any actionable representation, it was only a representation of the defendants’ policy or intention at the date of the letter and the defendants’ only obligation was to notify the plaintiffs within a reasonable time of any change in such policy or intention.
Particulars were requested and provided of the ‘agreement or understanding’ on which the defendants relied. In short, the defendants said that, by reference to the course of the
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negotiations set out by Hirst J in his judgment, the plaintiffs ‘agreed to accept a letter of comfort (rather than any legal liability on the part of the defendants) in consideration of the increased acceptance commission.’
There were thus included in the pleaded case of the defendants two distinct pleas as to the intentions of the parties with reference to para 3 of the comfort letters. The first was that even if, on its true construction, it contained what would have been a contractual promise, as contrasted with a mere representation of fact, nevertheless it should not be enforced as a contractual promise because there had been a separate agreement or understanding that it should not be legally enforceable.
The second plea was that, failing proof of that separate agreement or understanding, the statement in para 3 of the comfort letters was not in its terms a warranty or contractual promise and was not intended to be such. This second plea is, in this case, inseparable, in my judgment, from the question of the proper construction of the words of para 3 in their context although, of course, there might be in some cases a separate issue of construction once it was established that the words, not in express promissory terms, were intended as a warranty. In this case, if the court is persuaded that the statement in para 3 as to what the policy of the defendants is, is to be treated as including a promise as to what that policy would be in future, there was not any real dispute as to what was the extent and meaning of that promise.
In the event, at the trial there was no evidence to support the first plea, ie that there had been an agreement that the words of the comfort letters should not have legal effect. The parties had referred to a ‘comfort letter’, but it was not proved that the parties had agreed on any specific meaning for that phrase as descriptive of the liabilities to be undertaken by the defendants. The point was apparently not pursued. The argument concentrated on whether para 3 was to be treated in law as a contractual promise: Hirst J referred to the main question as being whether para 3 was ‘contractual in status’, and his conclusion was, as I have said, that the presumption laid down in Edwards v Skyways Ltd [1964] 1 All ER 494, [1964] 1 WLR 349 applied and that the defendants had failed to displace the presumption.
Counsel for the plaintiffs before Hirst J had placed strong reliance on Edwards v Skyways Ltd and his submission was recorded by Hirst J as follows ([1988] 1 All ER 714 at 721, [1988] 1 WLR 799 at 807): ‘… there was a heavy onus on [the defendants] to prove that there was no intention to create contractual relations.’
In my judgment counsel for the defendants is right in his submission that the presumption described in Edwards v Skyways Ltd had no application to the issues in this case once the plea of a separate agreement or understanding to the effect that the comfort letters should have no legal effect had disappeared from the case for want of evidence to support it. The introduction of that plea into the case appears to have served only to distract attention from what, if I am right, are the clear merits of the defendants’ case as to the meaning and effect of para 3 of the comfort letters.
To explain why, in my view, the presumption applied by Hirst J had no application to this case it is necessary to examine in some detail the issues in Edwards v Skyways Ltd. In that case Skyways Ltd, the defendants, found it necessary to declare redundant some 15% of the pilots in their employ. The secretary of Skyways Ltd, at a meeting with representatives of the airline pilots union, agreed that—
‘Pilots declared redundant and leaving the company would be given an ex gratia payment equivalent to the company’s contribution to the Pension Fund [and, in addition] … a refund of their own contributions to the fund.’
(See [1964] 1 All ER 494 at 497, [1964] 1 WLR 349 at 351.) Edwards, in reliance on that agreement, left the company and claimed payment under it. The company purported to rescind its decision to make the ex gratia payment on the ground that it had obligations
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to creditors and the promised ex gratia payments were not enforceable in law. The company admitted that a promise had been made to make the payments and that the promise was supported by consideration, but contended (in reliance on Rose & Frank Co v J R Crompton & Bros Ltd [1923] 2 KB 261 at 288, [1924] All ER Rep 245 at 249–250) that the promise or agreement had no legal effect because there was no intention to enter into legal relations in respect of the promised payment. It was argued that the mere use of the phrase ‘ex gratia’, as part of the promise to pay, showed that the parties contemplated that the promise when accepted would have no binding force in law and, further, that there was background knowledge, concerned with the tax consequences of legally enforceable promises to pay, and present to the minds of the representatives of the parties, which gave unambiguous significance to the words ‘ex gratia’ as excluding legal relationships. Megaw J rejected these arguments on the facts and on his construction of the meaning in the context of the words ‘ex gratia’. The company thus failed to show that what was otherwise admittedly a promise, supported by consideration, was to be denied legal effect because of the common intention of the parties that it should not have such effect and, accordingly, the company failed to displace the presumption. Megaw J was not dealing with the sort of question which is raised in this case, namely whether, given that the comfort letter was intended to express the legal relationship between the parties, the language of para 3 does or does not contain a contractual promise (see [1964] 1 All ER 494 at 497–501, [1964] 1 WLR 349 at 354–356).
The central question in this case, in my judgment, is that considered in Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5, [1976] QB 801, on which counsel for the plaintiffs relied in this court but which was not cited to Hirst J. That question is whether the words of para 3, considered in their context, are to be treated as a warranty or contractual promise. Paragraph 3 contains no express words of promise. Paragraph 3 is in its terms a statement of present fact and not a promise as to future conduct. I agree with the submission of counsel for the defendants that, in this regard, the words of para 3 are in sharp contrast with the words of para 2 of the letter: ‘We confirm that we will not’ etc. The force of this point is not limited, as Hirst J stated it, to the absence from para 3 of the words ‘We confirm’. The real contrast is between the words of promise, namely ‘We will not’ in para 2, and the words of statement of fact, ‘It is our policy’ in para 3. Hirst J held that, by the words of para 3, the defendants gave an undertaking that now and at all times in the future, so long as Metals should be under any liability to the plaintiffs under the facility arrangements, it is and will be the defendants’ policy to ensure that Metals is in a position to meet their liabilities. To derive that meaning from the words it is necessary to add the words emphasised, namely ‘and will be’, which do not appear in para 3. In short, the words of promise as to the future conduct of the defendants were held by Hirst J to be part of the necessary meaning of the words used in para 3. The question is whether that view of the words can be upheld.
The absence of express words of warranty as to present facts or the absence of express words of promise as to future conduct does not conclusively exclude a statement from the status of warranty or promise. According to the well-known dictum of Holt CJ, ‘… an affirmation can only be a warranty provided it appears on evidence to have been so intended’: see Ormrod LJ in Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5 at 19 [1976] QB 801 at 824, citing Viscount Haldane LC in Heilbut Symons & Co v Buckleton [1913] AC 30 at 38, [1911–13] All ER Rep 83 at 86. Thus in Esso Petroleum Co Ltd v Mardon the statement that Esso ‘estimated that the throughput of the Eastbank Street site, in its third year of operation, would amount to 200,000 gallons a year’, which had been made as an expert estimate, which was of great commercial importance to a potential tenant of the site, and which induced Mr Mardon to enter into the contract of lease, was held to be a warranty not that such a throughput would be achieved, but that, in effect, the estimate had been made with due care on the basis of information in the possession of Esso
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(see [1976] 2 All ER 5 at 14, 21, 25, [1976] QB 801 at 818, 827, 832 per Lord Denning MR, Ormrod and Shaw LJJ).
Counsel for the plaintiffs in this court placed reliance on the decision in Esso Petroleum Co Ltd v Mardon. It is, in my judgment, on the facts of this case, of no assistance to the plaintiffs. The evidence does not show that the words used in para 3 were intended to be a promise as to the future conduct of the defendants but, in my judgment, it shows the contrary.
The concept of a comfort letter was, as counsel for the defendants acknowledged, not shown to have acquired any particular meaning at the time of the negotiations in this case with reference to the limits of any legal liability to be assumed under its terms by a parent company. A letter, which the parties might have referred to at some stage as a letter of comfort, might, after negotiation, have emerged containing in para 3 in express terms the words used by Hirst J to state the meaning which he gave to para 3. The court would not, merely because the parties had referred to the document as a comfort letter, refuse to give effect to the meaning of the words used. But in this case it is clear, in my judgment, that the concept of a comfort letter, to which the parties had resort when the defendants refused to assume joint and several liability or to give a guarantee, was known by both sides at least to extend to or to include a document under which the defendants would give comfort to the plaintiffs by assuming, not a legal liability to ensure repayment of the liabilities of its subsidiary, but a moral responsibility only. Thus, when the defendants by Mr John Green in June 1984 told the plaintiffs that Mr Green would recommend that credit lines for Metals be covered by a letter of comfort rather than by guarantee, the response of Mr Irwin, before any draft of a comfort letter had been prepared, was ‘… that a letter of comfort would not be a problem, but that [he] would probably have to charge a higher rate’. The comfort letter was drafted in terms which in para 3 do not express any contractual promise and which are consistent with being no more than a representation of fact. If they are treated as no more than a representation of fact, they are in that meaning consistent with the comfort letter containing no more than the assumption of moral responsibility by the defendants in respect of the debts of Metals. There is nothing in the evidence to show that, as a matter of commercial probability or common sense, the parties must have intended para 3 to be a contractual promise, which is not expressly stated, rather than a mere representation of fact which is so stated.
Next, the first draft of the comfort letter was produced by the plaintiffs. Paragraph 1 contained confirmation that the defendants knew of and approved of the granting of the facilities in question by the plaintiffs to Metals, and para 2 contained the express confirmation that the defendants would not reduce their current financial interest in Metals until (in effect) facilities had been paid or the plaintiffs consented. Both are relevant to the present and future moral responsibility of the defendants. If the words of para 3 are to be treated as intended to express a contractual promise by the defendants as to their future policy, which Hirst J held the words to contain, then the recitation of the plaintiffs’ approval and the promise not to reduce their current financial interest in Metals, would be of no significance. If the defendants have promised that at all times in the future it will be the defendants’ policy to ensure that Metals is in a position to meet its liabilities to the plaintiffs under the facility, it would not matter whether they had approved or disapproved, or whether they had disposed of their shares in Metals. Contracts may, of course, contain statements or promises which are caused to be of no separate commercial importance by the width of a later promise in the same document. Where, however, the court is examining a statement which is by its express words no more than a representation of fact, in order to consider whether it is shown to have been intended to be of the nature of a contractual promise or warranty, it seems to me to be a fact suggesting at least the absence of such intention if, as in this case, to read the
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statement as a contractual promise is to reduce to no significance two paragraphs included in the plaintiffs’ draft, both of which have significance if the statement is read as a representation of fact only.
That point can be made more plainly thus: if para 3 in its original or in its final form was intended to contain a binding legal promise by the defendants to ensure the ability of Metals to pay the sums due under the facility, there was no apparent need or purpose for the plaintiffs, as bankers, to waste ink on paras 1 and 2.
As I have said, the absence of express words of promise does not by itself prevent a statement from being treated as a contractual promise. The example given in argument by counsel for the plaintiffs, namely of the shop stating by a notice that it is its policy to accept, within 14 days of purchase, the return in good condition of any goods bought and to refund the price without question, seems to me to be a case in which a court would be likely to hold that the notice imported a promise that the policy would continue over the 14-day period. It would be difficult on those facts to find any sensible commercial explanation for the notice other than a contractual promise not to change the policy over the 14-day period. It would not be satisfactory or convincing to regard the notice as no more than the assumption of a moral responsibility by the shop giving such a notice to its customers. In such a case, and in the absence of any relevant factual context indicating otherwise, it seems to me that the court would probably hold that the statement was shown to have been intended to be a contractual promise.
In this case, however, the opposite seems to me to be clear. The context in which the comfort letter was requested and given is before the court without dispute as to the relevance or admissibility of that context. That concession was, in my view, rightly made. The evidence showing the context in which the comfort letters were produced, as set out in the judgment of Hirst J, was evidence of the factual background known to the parties at or before the date of the contract and of the ‘genesis’ and ‘aim’ of the transaction (see Prenn v Simmonds [1971] 3 All ER 237, [1971] 1 WLR 1381), in short the provision of a comfort letter by the defendants, as the parent company of Metals to which the plaintiffs were intending to provide finance, in circumstances in which the defendants had refused to assume legal liability for the repayment of money lent to Metals by the plaintiffs, whether in the form of joint and several liability or of a guarantee. Those facts are not available to show merely that the defendants did not themselves subjectively intend to assume legal liability and that, therefore, the words eventually included in the comfort letter provided by the defendants should be construed so as to exclude such liability. That, as I understand it, would be misapplying the principles stated in Prenn v Simmonds by which evidence of the factual background is admitted. But the evidence of the refusal by the defendants to assume legal responsibility for the liabilities of Metals to the plaintiffs in the normal form of joint and several liability or of a guarantee, and the consequent resort by the parties to what they described as a comfort letter substantially in the terms submitted by the plaintiffs to the defendants, is, in my judgment, admissible on the question whether, for the purposes of the test applied by this court in Esso Petroleum Co Ltd v Mardon, the defendants’ affirmation in para 3 appears on the evidence to have been intended as a warranty or contractual promise.
With that evidence before the court I find it impossible to hold that the words in para 3 were intended to have any effect between the parties other than in accordance with the express words used. For this purpose it seems to me that the onus of demonstrating that the affirmation appears on evidence to have been intended as a contractual promise must lie on the party asserting that it does, but I do not rest my conclusion on failure by the plaintiffs to discharge any onus. I think it is clear that the words of para 3 cannot be regarded as intended to contain a contractual promise as to the future policy of the defendants. If para 3 had been drafted by the plaintiffs and submittted in the form in which Hirst J formulated its meaning (see [1988] 1 All ER 714 at 724, [1988] 1 WLR 799 at 811), namely as—
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‘an undertaking that, now and at all times in future, so long as Metals are under any liability to [the plaintiffs] under the facility arrangements, it is and will be [the defendants’] policy to ensure that Metals is in a position to meet those liabilities’,
it must have appeared to both parties, in the context proved in evidence, as a radically different term from that which was in fact submitted and accepted. Such an undertaking does not fit, as a matter of commercial probability, with the factual background. I do not suggest that people only act in accordance with apparent commercial probability; the plaintiffs might have submitted such an undertaking which, in the light of the prior refusal to give a guarantee, was likely to be rejected and the defendants, contrary to what seemed likely, might have accepted it, but the plaintiffs in fact submitted the words we see in para 3. The plain meaning of those words, without the addition contained in Hirst J’s formulation of its meaning, does fit the factual background. Most importantly, that factual background explains, notwithstanding the commercial importance to the plaintiffs of security against failure by Metals to pay and the plaintiffs’ reliance on the comfort letter, why the plaintiffs drafted and agreed to proceed on a comfort letter which, on its plain meaning, provided to the plaintiffs no legally enforceable security for the repayment of the liabilities of Metals. I therefore find it impossible to hold that by the words of para 3 the parties must be held to have intended that the plaintiffs be given that security.
I should mention briefly some other points which were argued. As is apparent from what I have said above, the plaintiffs are, in my judgment, to be regarded as the party putting forward the language contained in the comfort letters as a whole. The change in the wording introduced by the defendants made no difference whatever to the meaning. It was not argued that it did. Hirst J held that the principle of construction contra proferentem had no application because there was no ambiguity. I do not agree. The question was whether words, which are not in the form of a contractual promise, are on the evidence to be treated as intended to have been such a promise. Having regard to the defendants’ prior refusal to assume joint and several liability or to give a guarantee, and to the resort by the parties to what was referred to as a comfort letter, it seems to me that the defendants are entitled to rely on the fact that, if the plaintiffs required a promise as to the defendants’ future policy, it was open to them as experienced bankers to draft para 3 in those terms. I do not, however, regard the point as decisive. If the letter in its final form is to be regarded as the result of joint drafting, my conclusion would not be affected.
Submissions were made to Hirst J, and repeated in this court, as to the differences between the liability of the defendants on a formal guarantee, and the ease of enforcement of that liability, on the one hand, and the liability and attendant problems of enforcement under para 3, on the other hand, according to its meaning and effect as determined by the judge.
I did not find these submissions to be of any assistance in the resolving of the main issue in this case, and I do not propose to deal with them in any detail. I agree with Hirst J that the mere fact that the defendants had refused to give a formal guarantee did not mean that there was a further scope for the subsequent agreement by them to a term having the meaning and effect which Hirst J gave to para 3; but contemplation by either party of the alleged differences in certainty or of the availability of summary judgment seems to me to be wholly improbable.
If my view of this case is correct, the plaintiffs have suffered grave financial loss as a result of the collapse of the tin market and the following decision by the defendant company not to honour a moral responsibility which it assumed in order to gain for its subsidiary the finance necessary for the trading operations which the defendants wished that subsidiary to pursue. The defendants have demonstrated, in my judgment, that they made no relevant contractual promise to the plaintiffs which could support the judgment
Page 798 of [1989] 1 All ER 785
in favour of the plaintiffs. The consequences of the decision of the defendants to repudiate their moral responsibility are not matters for this court.
I would allow this appeal.
NICHOLLS LJ. I agree.
FOX LJ. I also agree.
Appeal allowed. Leave to appeal to House of Lords refused.
Solicitors: Freshfields; Herbert Smith.
Frances Rustin Barrister.
Caparo Industries plc v Dickman and others
[1989] 1 All ER 798
Categories: TORTS; Negligence
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): O’CONNOR, BINGHAM AND TAYLOR LJJ
Hearing Date(s): 25, 26, 27, 28, 29 APRIL, 3 MAY, 29 JULY 1988
Negligence – Information or advice – Knowledge third party might rely on information – Auditor – Preparation of company’s accounts – Duty to shareholder – Duty to prospective investor – Plaintiffs owning shares in public company – Plaintiffs making successful take-over bid for company in reliance on audited accounts of company – Accounts showing profit instead of loss – Whether reasonably foreseeable that shareholders and potential investors might rely on auditor’s report when dealing in company’s shares – Whether sufficient proximity between auditor and shareholders or potential investors – Whether just and reasonable to impose duty of care on auditor – Whether auditor owing duty of care to shareholders or potential investors to carry out audit with reasonable care and skill.
The plaintiffs owned shares in a public company, F plc, and were interested in making a take-over bid for it. As shareholders the plaintiffs were entitled to receive the audited accounts of F plc and after receipt of the accounts for the year ended 31 March 1984 they purchased more shares in F plc and later that year made a successful take-over bid. Following the take-over, the plaintiffs brought an action against, inter alios, the auditors of F plc, alleging that they had made their bid in reliance on F plc’s audited accounts and that the auditors had been negligent in auditing the accounts, which instead of showing a reported profit of £1·3m should have shown a loss of £0·46m. On the trial of a preliminary issue, the judge held that the auditors owed no duty of care to the plaintiffs either as shareholders or as potential investors. The plaintiffs appealed to the Court of Appeal.
Held (O’Connor LJ dissenting) – The auditor of a public company owed a duty of care to individual shareholders to carry out his audit of the company using reasonable care and skill and, since it was reasonably foreseeable that shareholders and potential investors in the company might rely on the auditor’s report in considering whether and how to deal in the company’s shares, there was sufficient proximity between the auditor and the shareholders arising out of the close and direct relationship between an auditor and the shareholders and the fact that the auditor voluntarily assumed direct responsibility to individual shareholders, and it was just and reasonable to impose a duty of care on the auditor. However, although such a duty was owed to a shareholder in respect of the purchase of further shares in the company, it was not owed to potential investors in, or
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take-over bidders for, the company, having regard to the lack of proximity between the auditor and potential investor and the fact that it would not be just and reasonable to impose a duty on the auditor to non-shareholding investors. Accordingly, if the plaintiffs could show that the auditors had failed to exercise the ordinary skill and care of a reasonable and competent auditor and that they had relied on the audited accounts of F plc and had suffered damage as a result, they were entitled to succeed in their claim against them. The appeal would therefore be allowed to that extent (see p 806 b to d, p 807 h to p 808 b, p 809 h, p 811 j to p 812 a f to h, p 813 a, p 815 h, p 816 c d, p 819 f g, p 820 a to d f j, p 821 g j to p 822 a d e and p 830 h j, post).
Ministry of Housing and Local Government v Sharp [1970] 1 All ER 1009, dicta of Lord Salmon in Anns v Merton London Borough [1977] 2 All ER 492 at 512–513, of Lord Keith in Govenors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529 at 534 and of Lord Keith Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705 at 710 applied.
Scott Group Ltd v McFarlane [1978] 1 NZLR 553, Twomax Ltd v Dickson M‘Farlane & Robinson 1982 SC 113 and JEB Fasteners Ltd v Marks Bloom & Co (a firm) [1983] 1 All ER 583 considered.
Notes
For auditors’ duties and auditors’ reports, see 7(1) Halsbury’s Laws (4th edn reissue) paras 905, 912–914 and for cases on the subject, see 9 Digest (Reissue) 601–607, 3593–3614.
For negligence in relation to statements by professional men, see 34 Halsbury’s Laws (4th edn) para 53, and for cases on the subject, see 36(1) Digest (Reissue) 49–50, 149–158.
Cases referred to in judgments
Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728, [1977] 2 WLR 1024, HL.
Bolam v Friern Hospital Management Committee [1957] 2 All ER 118, [1957] 1 WLR 582.
Candler v Crane Christmas & Co [1951] 1 All ER 426, [1951] 2 KB 164, CA.
Candlewood Navigation Corp Ltd v Mitsui OSK Lines Ltd, The Mineral Transporter, The Ibaraki Maru [1985] 2 All ER 935, [1986] AC 1, [1985] 3 WLR 381, PC.
Cann v Willson (1888) 39 Ch D 39.
Citizens State Bank v Timm Schmidt & Co (1983) 113 Wis 2d 376, Wis SC.
Courteen Seed Co v Hong Kong and Shanghai Banking Corp (1927) 245 NY 377, NY Ct of Apps.
Credit Alliance Corp v Arthur Andersen & Co (1985) 65 NY 2d 536, NY Ct of Apps.
Donoghue (or M‘Alister) v Stevenson [1932] AC 562, [1932] All ER Rep 1, HL.
Glanzer v Shepard (1922) 233 NY 236, NY Ct of Apps.
Goldberg v Housing Authority of Newark (1962) 38 NJ 578, NJ SC.
Greater Nottingham Co-op Society Ltd v Cementation Piling and Foundations Ltd [1988] 2 All ER 971, [1989] QB 71, [1988] 3 WLR 396, CA.
Haig v Bamford (1976) 72 DLR (3d) 68, Can SC.
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465, [1963] 3 WLR 101, HL.
Hill v Chief Constable of West Yorkshire [1988] 2 All ER 238, [1989] AC 53, [1988] 2 WLR 1049, HL.
Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294, [1970] AC 1004, [1970] 2 WLR 1140, HL.
Ingram Industries Inc v Nowicki (1981) 527 F Supp 683, ED Ky.
JEB Fasteners Ltd v Marks Bloom & Co (a firm) [1981] 3 All ER 289; affd [1983] 1 All ER 583, CA.
Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201, [1983] 1 AC 520, [1982] 3 WLR 477, HL.
Kingston Cotton Mill Co, Re [1896] 1 Ch 6, CA.
Le Lievre v Gould [1893] 1 QB 491, CA.
Page 800 of [1989] 1 All ER 798
London and General Bank, Re (No 2) [1895] 2 Ch 673, [1895–9] All ER Rep 953, CA.
McLoughlin v O’Brian [1982] 2 All ER 298, [1983] 1 AC 410, [1982] 2 WLR 982, HL.
Ministry of Housing and Local Government v Sharp [1970] 1 All ER 1009, [1970] 2 QB 223, [1970] 2 WLR 802, CA.
Muirhead v Industrial Tank Specialities Ltd [1985] 3 All ER 705, [1986] QB 507, [1985] 3 WLR 993, CA.
Mutual Life and Citizens’ Assurance Co Ltd v Evatt [1971] 1 All ER 150, [1971] AC 793, [1971] 2 WLR 23, PC.
Peabody Donation Fund (Governors) v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529, [1985] AC 210, [1984] 3 WLR 953, HL.
Rhode Island Hospital Trust National Bank v Swartz Bresenoff Yavner & Jacobs (1972) 455 F 2d 847, US Ct of Apps, 5th Cir.
Rosenblum (H) Inc v Adler (1983) 93 NJ 324, NJ SC.
Ross v Caunters (a firm) [1979] 3 All ER 580, [1980] Ch 297, [1979] 3 WLR 605.
Rowling v Takaro Properties Ltd [1988] 1 All ER 163, [1988] AC 473, [1988] 2 WLR 418, PC.
Saif Ali v Sydney Mitchell & Co (a firm) [1978] 3 All ER 1033, [1980] AC 198, [1978] 3 WLR 849, HL.
SCM (UK) Ltd v W J Whittall & Son Ltd [1970] 3 All ER 245, [1971] 1 QB 337, [1970] 3 WLR 694, CA.
Scott Group Ltd v McFarlane [1978] 1 NZLR 553, NZ CA; affg [1975] 1 NZLR 582, NZ SC.
Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 All ER 791, [1988] QB 758, [1988] 2 WLR 761, CA.
Spartan Steel and Alloys Ltd v Martin & Co (Contractors) Ltd [1972] 3 All ER 557, [1973] QB 27, [1972] 3 WLR 502, CA.
State Street Trust Co v Ernst (1938) 278 NY 104, NY Ct of Apps.
Sutherland Shire Council v Heyman (1985) 60 ALR 1, Aust HC.
Twomax Ltd v Dickson M‘Farlane & Robinson 1982 SC 113, Outer House; rvsd by consent 1984 SLT 424, Inner House.
Ultramares Corp v Touche (1931) 255 NY 170, NY Ct of Apps.
W (an infant), Re [1971] 2 All ER 49, [1971] AC 682, [1971] 2 WLR 1011, HL.
Weller & Co v Foot and Mouth Disease Research Institute [1965] 3 All ER 560, [1966] 1 QB 569, [1965] 3 WLR 1082.
Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175, [1987] 3 WLR 776, PC.
Cases also cited
Cattle v Stockton Waterworks Co (1875) LR 10 QB 453, [1874–80] All ER Rep 220, DC.
Clarke v Bruce Lance & Co (a firm) [1988] 1 All ER 364, [1988] 1 WLR 881, CA.
Harris v Wyre Forest DC [1988] 1 All ER 691, [1988] QB 835, CA.
Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915] 1 Ch 881, [1914–15] All ER Rep 900.
Leigh & Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] 2 All ER 145, [1986] AC 785, HL.
Newton v Birmingham Small Arms Co Ltd [1906] 2 Ch 378.
Interlocutory appeal
The plaintiffs, Caparo Industries plc (Caparo), by writ dated 24 July 1985 brought an action against the first and second defendants Stephen Graham Dickman and Robert Anthony Dickman, who were the directors of Fidelity plc, and the third defendants, Touche Ross & Co (the auditors), claiming damages against the first and second defendants for fraud and against the auditors for negligence. The statement of claim alleged that in July 1983 the directors of Fidelity plc forecast that the company’s profits for the year
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ended 31 March 1984 would be £2·2m. On 1 March 1984 the company’s share price was 143p. On 22 May the company announced profits for the year ended 31 March 1984 of £1·3m and by 1 June the share price had fallen to 63p. Caparo purchased 100,000 shares in the company at 70p on 8 June and 50,000 shares at 73p on 12 June. On 12 June the audited accounts for the year ended 31 March 1984 were released to shareholders and in reliance on the information contained in the accounts Caparo purchased further shares in the company and by 6 July held 29.9% of the company’s stock. On 4 September Caparo made a take-over bid for the company at 120p per share which was later increased to 125p per share at which price the directors of the company, including the first and second defendants, recommended shareholders to accept the offer. The bid was successful by 25 October. By para 7 of the statement of claim it was alleged that the accounts overstated the profits of the company by including non-existent stock, making under-provision for obsolete stock and making under-provision in respect of after-date sales credits. It was alleged that the true position of the comany was that it had made a loss of at least £465,000 and it was claimed that if Caparo had known the true position it would not have made its take-over bid for the company at the price it did or at all. It was alleged that the first and second defendants had forged stock sheets, had included as sales transactions which were not sales at all and had misrepresented the company’s position to Caparo, and it was further alleged that the auditors had been negligent in failing to discover the forgery and other irregularities perpetrated by the first and second defendants when carrying out the audit of the accounts. Caparo claimed that the auditors knew or ought to have known that the company required financial assistance and ought to have foreseen that the company was vulnerable to a take-over and that persons such as Caparo might well rely on the accounts for the purpose of making a take-over and might well suffer loss if the accounts were inaccurate. By order of Sir Neil Lawson, sitting as a judge of the High Court in the Queen’s Bench Division in chambers the question whether on the facts alleged the auditors owed a duty of care to Caparo as (a) potential investors in the company or (b) shareholders in the company in respect of the audit of the company’s accounts for the year ended 31 March 1984 was tried as a preliminary issue. On the trial of that issue Sir Neil Lawson ([1988] BCLC 387) held that the auditors did not owe a duty of care to Caparo either as potential investors or as shareholders in the company. Caparo appealed.
Christopher Bathurst QC and Michael Brindle for Caparo.
Peter Goldsmith QC and Stephen Moriarty for the auditors.
Cur adv vult
29 July 1988. The following judgments were delivered.
BINGHAM LJ (giving the first judgment at the invitation of O’Connor LJ).
‘It is not easy, or perhaps possible, to find a single proposition encapsulating a comprehensive rule to determine when persons are brought into a relationship which creates a duty of care upon those who make statements towards those who may act upon them and when persons are not brought into such a relationship.’
Thus said the Lord Ordinary (Stewart) in Twomax Ltd v Dickson M‘Farlane & Robinson 1982 SC 113 at 122. Others have spoken to similar effect. In Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575 at 601, [1964] AC 465 at 514 Lord Hodson said:
‘I do not think that it is possible to catalogue the special features which must be found to exist before the duty of care will arise in a given case … ’
and Lord Devlin said ([1963] 2 All ER 575 at 611, [1964] AC 465 at 529–530):
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‘I do not think it possible to formulate with exactitude all the conditions under which the law will in a specific case imply a voluntary undertaking, any more than it is possible to formulate those in which the law will imply a contract.’
In Mutual Life and Citizens’ Assurance Co Ltd v Evatt [1971] 1 All ER 150 at 162, [1971] AC 793 at 810 Lord Reid and Lord Morris said:
‘In our judgment it is not possible to lay down hard and fast rules as to when a duty of care arises in this or in any other class of case where negligence is alleged.’
In Rowling v Takaro Properties Ltd [1988] 1 All ER 163 at 172, [1988] AC 473 at 501 Lord Keith, emphasising the need for careful analysis case by case, said:
‘It is at this stage that it is necessary, before concluding that a duty of care should be imposed, to consider all the relevant circumstances. One of the considerations underlying certain recent decisions of the House of Lords (Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529, [1985] AC 210) and of the Privy Council (Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175) is the fear that a too literal application of the well-known observation of Lord Wilberforce in Anns v Merton London Borough [1977] 2 All ER 492 at 498, [1978] AC 728 at 751–752 may be productive of a failure to have regard to, and to analyse and weigh, all the relevant considerations in considering whether it is appropriate that a duty of care should be imposed. Their Lordships consider that question to be of an intensely pragmatic character, well suited for gradual development but requiring most careful analysis. It is one on which all common law jurisdictions can learn much from each other, because, apart from exceptional cases, no sensible distinction can be drawn in this respect between the various countries and the social conditions existing in them. It is incumbent on the courts in different jurisdictions to be sensitive to each other’s reactions; but what they are all searching for in others, and each of them striving to achieve, is a careful analysis and weighing of the relevant competing considerations.’
The many decided cases on this subject, if providing no simple ready-made solution to the question whether or not a duty of care exists, do indicate the requirements to be satisfied before a duty is found.
The first is foreseeability. It is not, and could not be, in issue between these parties that reasonable foreseeability of harm is a necessary ingedient of a relationship in which a duty of care will arise: see Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705 at 710, [1988] AC 175 at 192. It is also common ground that reasonable foreseeability, although a necessary, is not a sufficient condition of the existence of a duty. This, as Lord Keith observed in Hill v Chief Constable of West Yorkshire [1988] 2 All ER 238 at 241, [1989] AC 53 at 60, has been said almost too frequently to require repetition.
The second requirement is more elusive. It is usually described as proximity, which means not simple physical proximity but extends to—
‘… such close and direct relations that the act complained of directly affects a person whom the person alleged to be bound to take care would know would be directly affected by his careless act.’
(See Donoghue v Stevenson [1932] AC 562 at 581, [1932] All ER Rep 1 at 12 per Lord Atkin.) Sometimes the alternative expression ‘neighbourhood’ is used, as by Lord Reid in the Hedley Byrne case [1963] 2 All ER 575 at 580, [1964] AC 465 at 483 and Lord Wilberforce in Anns v Merton London Borough [1977] 2 All ER 492 at 498, [1978] AC 728 at 751, with more conscious reference to Lord Atkin’s speech in the earlier case. Sometimes, as in the Hedley Byrne case, attention is concentrated on the existence of a special relationship. Sometimes it is regarded as significant that the parties’ relationship is ‘equivalent to contract’ (see the Hedley Byrne case [1963] 2 All ER 575 at 610, [1964] AC
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465 at 529 per Lord Devlin) or falls ‘only just short of a direct contractual relationship’ (see Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201 at 204, [1983] 1 AC 520 at 533 per Lord Fraser) or is ‘as close as it could be short of actual privity of contract’ (see the Junior Books case [1982] 3 All ER 201 at 214, [1983] 1 AC 520 at 546 per Lord Roskill). In some cases, and increasingly, reference is made to the voluntary assumption of responsibility: see Muirhead v Industrial Tank Specialities Ltd [1985] 3 All ER 705 at 715, [1986] QB 507 at 528 per Robert Goff LJ, Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705 at 711, 714, [1988] AC 175 at 192, 196, Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 All ER 791 at 803, 805, [1988] QB 758 at 781, 784 and Greater Nottingham Co-op Society Ltd v Cementation Piling and Foundations Ltd [1988] 2 All ER 971 at 984, 989, 990, [1989] QB 71 at 100, 106, 107. Both the analogy with contract and the assumption of responsibility have been relied on as a test of proximity in foreign courts as well as our own: see Glanzer v Shepard (1922) 233 NY 236, Ultramares Corp v Touche (1931) 255 NY 170 at 182–183, State Street Trust Co v Ernst (1938) 278 NY 104 at 111–112 and Scott Group Ltd v McFarlane [1978] 1 NZLR 553 at 566. It may very well be that in tortious claims based on negligent misstatement these motions are particularly apposite. The content of the requirement of proximity, whatever language is used, is not, I think, capable of precise definition. The approach will vary according to the particular facts of the case, as is reflected in the varied language used. But the focus of the inquiry is on the closeness and directness of the relationship between the parties. In determining this, foreseeability must, I think, play an important part: the more obvious it is that A’s act or omission will cause harm to B, the less likely a court will be to hold that the relationship of A and B is insufficiently proximate to give rise to a duty of care.
The third requirement to be met before a duty of care will be held to be owed by A to B is that the court should find it just and reasonable to impose such a duty: see Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529 at 534, [1985] AC 210 at 241 per Lord Keith. This requirement, I think, covers very much the same ground as Lord Wilberforce’s second stage test in Anns’s case [1977] 2 All ER 492 at 498, [1978] AC 728 at 752 and what in cases such as Spartan Steel and Alloys Ltd v Martin & Co (Contractors) Ltd [1972] 3 All ER 557, [1973] QB 27 and McLoughlin v O’Brian [1982] 2 All ER 298, [1983] 1 AC 410 was called policy. It was considerations of this kind which Lord Fraser had in mind when he said in Candlewood Navigation Corp Ltd v Mitsui OSK Lines Ltd, The Mineral Transporter, The Ibaraki Maru [1985] 2 All ER 935 at 945, [1986] AC 1 at 25:
‘… some limit or control mechanism has to be imposed on the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence.’
The requirement cannot, perhaps, be better put than it was by Weintraub CJ in Goldberg v Housing Authority of Newark (1962) 38 NJ 578 at 583:
‘Whether a duty exists is ultimately a question of fairness. The inquiry involves a weighing of the relationship of the parties, the nature of the risk, and the public interest in the proposed solution.’ (Weintraub CJ’s emphasis.)
If the imposition of a duty on a defendant would be for any reason oppressive, or would expose him, in Cardozo CJ’s famous phrase in Ultramares Corp v Touche 255 NY 170 at 179—
‘to a liability in an indeterminate amount for an indeterminate time to an indeterminate class … ’
that will weigh heavily, probably conclusively, against the imposition of a duty (if it has not already shown a fatal lack of proximity). On the other hand, a duty will be the more readily found if the defendant is voluntarily exercising a professional skill for reward, if the victim of his carelessness has (in the absence of a duty) no means of redress, if the
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duty contended for (as in McLoughlin v O‘Brian) arises naturally from a duty which already exists or if the imposition of a duty is thought to promote some socially desirable objective.
At the heart of this case lies the role of the statutory auditor. That role is, I think, without close analogy. Its peculiar characteristics derive from the nature of the public limited liability company. The members, or shareholders, of the company are its owners. But they are too numerous, and in most cases too unskilled, to undertake the day-to-day management of that which they own. So responsibility for day-to-day management of the company is delegated to directors. The shareholders, despite their overall powers of control, are in most companies for most of the time investors and little more. But it would, of course, be unsatisfactory and open to abuse if the shareholders received no report on the financial stewardship of their investment save from those to whom the stewardship had been entrusted. So provision is made for the company in general meeting to appoint an auditor (Companies Act 1985, s 384) whose duty is to investigate and form an opinion on the adequacy of the company’s accounting records and returns and the correspondence between the company’s accounting records and returns and its accounts (s 237). The auditor has then to report to the company’s members (among other things) whether in his opinion the company’s accounts give a true and fair view of the company’s financial position (s 236). In carrying out his investigation and informing his opinion the auditor necessarily works very closely with the directors and officers of the company. He receives his remuneration from the company. He naturally, and rightly, regards the company as his client. But he is employed by the company to exercise his professional skill and judgment for the purpose of giving the shareholders an independent report on the reliability of the company’s accounts and thus on their investment. Vaughan Williams J said in Re Kingston Cotton Mill Co [1896] 1 Ch 6 at 11:
‘No doubt he is acting antagonistically to the directors in the sense that he is appointed by the shareholders to be a check upon them.’
The auditor’s report must be read before the company in general meeting and must be open to inspection by any member of the company (s 241). It is attached to and forms part of the company’s accounts (ss 238(3) and 239). A copy of the company’s accounts (including the auditor’s report) must be sent to every member (s 240). Any member of the company, even if not entitled to have a copy of the accounts sent to him, is entitled to be furnished with a copy of the company’s last accounts on demand and without charge (s 246).
It is pointed out, quite correctly, that the primary duty in and about the preparation of accounts is that of the directors. It is the duty of the company to keep proper accounting records (s 221). It is the duty of the directors to prepare an annual profit and loss account and balance sheet (s 227) complying with the statutory requirements (s 228). It is the duty of the directors to lay the accounts before the company in general meeting (s 241(1)) and to deliver a copy to the registrar of companies (s 241(3)), who must make them available for inspection by any person (s 709). It is the directors who are criminally liable for breach of the statutory accounting requirements (s 245). The auditor’s role is secondary and accessory. His task is to vet the accounts, not to draw them up in the first place or carry out the detailed accounting work necessary to draw them up.
These provisions show, as I think, a plain parliamentary intention that shareholders in a public company shall receive independent and reliable information on the financial standing of the company (and thus of their investment): see Re London and General Bank (No 2) [1895] 2 Ch 673 at 682, [1895–9] All ER Rep 953 at 956 per Lindley LJ. For what purpose is this required? The company lawyer’s answer would, I think, be: to enable the members to make an informed judgment whether, and if so how, they should exercise the powers of control enjoyed by them as members. The commercial man’s answer would more probably be: to enable each shareholder to make an informed judgment whether he should retain or reduce or increase his holding of shares in the company. I
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see no reason to reject either of these answers. Successive Companies Acts have promulgated a detailed code designed to ensure that the ultimate powers of decision are vested in the members. But it is a truism that possession of adequate information is a necessary condition of effective decision-making. It would not be realistic to expect shareholders to exercise their powers of control on the basis only of such information as the directors chose to give them. But I think these provisions also reflect a wider and more commercial intention. The growth and development of limited liability companies over a relatively very short period have been phenomenal. Their proliferation and expansion have depended on their acceptance by the investing public as an advantageous and (on the whole) reliable medium of investment. The statutory requirements that companies account to their members and that auditors express an independent opinion to shareholders on the truth and accuracy of company accounts are in my view designed (in part at least) to fortify confidence in the holding of shares as a medium of investment by enabling shareholders to make informed investment decisions. There are obvious reasons, both economic and social, why this end should be regarded as desirable.
The requirement that a company make its accounts available for inspection by members of the public who are not shareholders is imposed for reasons which are in part the same and in part different from those just considered. Submission of accounts to the registrar could be required for purposes of official supervision and regulation, but this would not of itself require the accounts to be available for inspection by the public. This additional requirement must in my view be imposed (in part at least) for the protection of those dealing with the company as contracting parties, creditors, lenders and even, perhaps, defendants in litigation. But again I think that wider commercial considerations play a part. It would not be conducive to a flourishing and orderly market in company shares, which is plainly thought to be desirable, if reliable information of a company’s performance were restricted to its shareholders, directors and employees. The publication of accounts must limit, if it cannot eliminate, the scope for rumour-inspired speculation and thus promote an informed and orderly market. It enables prospective investors, like shareholders, to make informed decisions. For such prospective investors the independent opinion of the auditor has the same significance as for existing shareholders.
It is common ground between the parties that an auditor owes a duty to the company which appoints him to exercise reasonable care and skill in conducting the audit and making his audit report. Such a duty is plainly to be implied into the contract between auditor and company. A coincident duty in tort will also arise. If the auditor breaches his duty he will be liable to the company for any reasonably foreseeable loss the company suffers as a result of his breach. Helpful examples were given. Thus, for example, the company may have a good claim if an auditor’s negligence allows a dishonest employee to continue defrauding it or fails to alert the company to the need to take steps to improve performance or eliminate losses. But this duty will not of course avail a shareholder or investor who makes a mistaken investment decision on the strength of a negligent audit report, because that will cause no loss to and therefore support no claim by the company.
The judge held that the auditor owes no duty of care to the shareholders as a body or class. For reasons which will appear when I consider the position of individual shareholders, I doubt the correctness of this conclusion, unless it be that damage to the shareholders as a class is not reasonably foreseeable. In almost any situation in which damage has been suffered by the shareholders as a class, damage will also have been suffered by the company and in the ordinary way the company will then be the appropriate plaintiff. Counsel suggested only one case in which damage would be suffered by the shareholders as a class but not by the company: where a parent company, in reliance on a negligent report by the auditor of its subsidiary, sold its shareholding in the subsidiary at an undervalue. No doubt other examples could be elaborated. But this example depends on the singularity of the shareholders as a class and it seems clear that a duty owed to shareholders as a class, if existing at all, would be of minimal practical significance.
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So I turn to consider the first major question arising on this appeal, which is whether the auditor of a public company owes any, and if so what, duty of care to individual shareholders (as distinct from shareholders as a class). This is a question to be answered by applying to the special facts of this relationship the three requirements which I mentioned at the outset.
The judge held that the foreseeability of economic loss to Caparo Industries plc (Caparo) as a shareholder was present when the auditors’ report was published. This finding has not been challenged. It was therefore common ground that Caparo could satisfy the first and necessary requirement of foreseeability. I have no doubt this conclusion is correct. The auditors of course knew that their report would be communicated to those who were registered as shareholders when the accounts were sent to members under s 240 or when the report was read in general meeting under s 241. They must have known that some shareholders might rely on the report and accounts in making investment decisions. They must have known that an unqualified report, negligently made, might cause individual shareholders to suffer loss by selling if the accounts undervalued the company’s worth or buying if the accounts overvalued the company’s worth. These findings are, I think, inherent in the conclusion that economic loss to Caparo as a shareholder was foreseeable by the auditors as a result of any failure to exercise reasonable care in conducting their audit and reporting to the shareholders.
It was on the second requirement of proximity that major battle between the parties was joined. Caparo’s case was simple. Auditors are appointed for the important and specific purpose of reporting to the shareholders. A private report to the directors will not suffice (see Re London and General Bank Ltd (No 2) [1895] 2 Ch 673, [1895–9] All ER Rep 953). The 1985 Act requires a copy of the report to reach the breakfast table or desk of every shareholder and the report itself to be read before the company in general meeting and to be opened to inspection by any member. Relations between auditor and shareholder are both close and direct. A lack of care will directly affect the very person whose interest the auditor is engaged to protect. Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465 shows that the relationship of A and B may be sufficiently proximate if, independently of contract, A assumes the responsibility of giving B deliberate advice; if A engages B contractually to give advice to C, the relationship of B and C is no less proximate, however that expression is interpreted.
Counsel for the auditors sought to rebut Caparo’s argument on proximity by a sustained and closely reasoned submission. Most of this was specifically directed to the auditors’ relationship with investors who are not shareholders but the principal points applied equally to shareholders. The starting point of the argument was that the law treats negligent words differently from negligent acts. The peculiar character of words has led to insistence on closer proximity between the parties before a duty of care can arise than is required where physical injury or damage is in issue. That this is so emerges, I think, clearly from the Hedley Byrne case itself [1963] 2 All ER 575 at 580, 613 [1964] AC 465 at 482, 534 esp per Lord Reid and Lord Pearce. The trend of authority over the last 25 years shows considerable wariness in upholding claims for economic loss divorced from physical injury or damage, although lack of proximity has not usually proved the plaintiff’s undoing.
The fundamental submission of counsel for the auditors was that voluntary assumption of direct responsibility to the plaintiff (and thus, here, to Caparo as shareholder) in circumstances equivalent to contract is the touchstone of proximity in cases such as this. This requires that the auditor should deliberately accept a particular responsibility to the shareholder in addition to the responsibility already existing to the company. This also requires that the statement should be made for the very purpose of a particular transaction of which the auditor knows, that the shareholder should be the person (or a member of a small and determinate class) for whom the statement is made and that there should be some communication or conduct linking the auditor to the shareholder so as to show his acceptance of special responsibility to the shareholder. Judged by these tests the
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relationship between auditor and shareholder (it was said) lacks the proximity necessary before a duty of care can arise.
I think that at this stage of the inquiry it is important to concentrate on the substance of what one is investigating, which is the degree of closeness between the parties. It is only too easy to be mesmerised by expressions used in other cases which, however apt in those cases, provide no universally applicable yardstick. The language used in other cases guides but does not govern.
Thus ‘voluntary assumption of responsibility’, although a very useful expression, does not provide a single, simple litmus test of proximity. In Ministry of Housing and Local Government v Sharp [1970] 1 All ER 1009 at 1018–1019, [1970] 2 QB 223 at 268–269 Lord Denning MR said:
‘Counsel for the defendants submitted to us, however, that the correct principle did not go to that length. He said that a duty to use due care (where there was no contract) only arose when there was a voluntary assumption of responsibility. I do not agree. He relied particularly on the words of Lord Reid in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575 at 583, [1964] AC 465 at 487, and of Lord Devlin ([1963] 2 All ER 575 at 610–611, [1964] AC 465 at 529). I think they used those words because of the special circumstances of that case (where the bank disclaimed responsibility). But they did not in any way mean to limit the general principle. In my opinion the duty to use due care in a statement arises, not from any voluntary assumption of responsibility, but from the fact that the person making it knows, or ought to know, that others, being his neighbours in this regard, would act on the faith of the statement being accurate. That is enough to bring the duty into being. It is owed, of course, to the person to whom the certificate is issued and who he knows is going to act on it, see the judgment of Cardozo J in Glanzer v Shepard (1922) 233 NY 236. But it is also owed to any person who he knows or ought to know, will be injuriously affected by a mistake, such as the incumbrancer here.’
Salmon LJ said ([1970] 1 All ER 1009 at 1027–1028, [1970] 2 QB 223 at 279):
‘I do not accept that, in all cases, the obligation to take reasonable care necessarily depends on a voluntary assumption of responsibility.’
Cross LJ added ([1970] 1 All ER 1009 at 1038, [1970] 2 QB 223 at 291):
‘It is true that the phrase “voluntary assumption of risk” occurs frequently in the speeches in the Hedley Byrne case, but I agree with the judge that that case did not purport to lay down any metes and bounds within which legal liability in tort for false statements, on which the parties to whom they are made rely, has to be confined. (See in particular per Lord Devlin ([1963] 2 All ER 575 at 611, [1964] AC 465 at 530–531).) I see no sufficient reason why in an appropriate case the liability should not extend to cases in which the defendant is obliged to make the statement which proves to be false.’
If, however, one asks whether the auditors here voluntarily assumed direct responsibility to individual shareholders it seems to me inescapable that they did. They did not have to accept appointment as auditors. Their work was not in reality unrewarded. They undertook it, no doubt, in the ordinary course of professional practice in order to earn a fee and, perhaps, obtain additional work from the company. But they knew that the end-product of their audit was a report to shareholders on which they knew any shareholder might rely. It would, I think, be surprising if in those circumstances the auditors were said not voluntarily to have assumed a responsibility to each shareholder.
There is, of course, no contract between the shareholders (either as a class or individually) and the auditor. But certainly as between the shareholders as a class and the auditor the relationship seems to me to be very close indeed to contract. The auditor’s
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contract is made with the company, but it is a contract made on the company’s behalf by the shareholders; the auditor’s fee is paid out of company funds otherwise available (in part) for distribution to the shareholders; and the object of the contract is to obtain a report to shareholders made independently of the company itself. As between the shareholders individually and the auditor the analogy with contract is less compelling, but in my view it remains close. If a company engaged a doctor to examine and advise its senior employees, I would regard the relationship between the doctor and each individual employee as equivalent to contract for all except strictly legal purposes. The relationship between auditor and individual shareholder is less close, but not in my opinion critically so.
In Candler v Crane Christmas & Co [1951] 1 All ER 426 at 435, [1951] 2 KB 164 at 183 Denning LJ confined the duty which he upheld to—
‘cases where the accountant prepares his accounts and makes his report for the guidance of the very person in the very transaction in question.’
In Glanzer v Shepard (1922) 233 NY 236 a buyer who paid his seller on the faith of an erroneous certificate of weight given by a public weigher succeeded in a claim against the weigher because use of the certificate by the buyer for the purpose of paying the seller was, as the weigher knew, ‘the end and aim of the transaction’. These cases must be read in context. Denning LJ was naturally concerned to make his departure from binding authority as narrow as possible, and did not wish to be thought to give his blessing to the foundation of liability on a careless misstatement made to the world at large. Thus immediately after the words quoted above he continued:
‘That is sufficient for the decision of this case. I can well understand that it would be going too far to make an accountant liable to any person in the land who chooses to rely on the accounts in matters of business, for that would expose him … to … “liability in an indeterminate amount for an indeterminate time to an indeterminate class.”’
When, in Ultramares Corp v Touche (1931) 255 NY 170, Cardozo CJ came to comment on his earlier decision in Glanzer v Shepard he also was at pains to disavow the possibility of liability at large. But he approved an earlier statement by Pound J in Courteen Seed Co v Hong Kong and Shanghai Banking Corp (1927) 245 NY 377 at 381 that—
‘negligent words are not actionable unless they are uttered directly, with knowledge or notice that they will be acted on, to one to whom the speaker is bound by some relation of duty, arising out of public calling, contract or otherwise, to act with care if he acts at all.’
(See 255 NY 170 at 185.)
This formulation would not exclude the finding of a sufficiently proximate relationship in the present case if the words ‘will be acted on’ are replaced, as in English law I think they should be, by ‘may be acted on’.
All these cases are concerned to insist on the need for a clear and close nexus between the author and the victim of the allegedly careless misstatement. In cases of physical injury or damage the nexus rarely causes a problem. It is enough that the plaintiff chances to be (out of the whole world) the person with whom the defendant collided or who purchased the offending ginger beer. Where careless words causing economic loss are complained of, more is required to establish proximity than the fortuity of suffering damage. Thus in recent consideration of Cann v Willson (1888) 39 Ch D 39, Le Lievre v Gould [1893] 1 QB 491 and Candler’s case, and in cases such as those I consider at the end of this judgment, attention has been concentrated on the author’s knowledge of the victim’s intention to rely on the statement complained of in a particular way. But none of the cases involved relations between a shareholder and a statutory auditor. None was a case in which the author was subject to a statutory duty to report to the victum in a
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capacity in which the victim sues. Even in the absence of a statutory duty, and without regard to an accountant’s statutory liability (with or without negligence) for misstatements in a prospectus, Lord Salmon in Anns v Merton London Borough [1977] 2 All ER 492 at 512–513, [1978] AC 728 at 769 plainly regarded the relationship of certifying accountant and subscriber as sufficiently proximate to give rise ot a duty of care and he said:
‘There are a wide variety of instances in which a statement is negligently made by a professional man which he knows will be relied on by many people besides his client, eg a well-known firm of accountants certifies in a prospectus the annual profits of the company issuing it and unfortunately, due to negligence on the part of the accountants, the profits are seriously overstated. Those persons who invested in the company in reliance on the accuracy of the accountants’ certificate would have a claim for damages against the accountants for any money they might have lost as a result of the accountants’ negligence: see the Hedley Byrne case.’
I do not regard the relationship Lord Salmon had in mind as more proximate than the present. A prospectus, of course, solicits investment whereas an auditor’s report appended to a company’s accounts does not. But the recipient of a prospectus (foreseeably) may or may not subscribe. The shareholder receiving a company’s accounts and auditor’s report (foreseeably) may or may not base an investment decision on them. The greatest difference is that the class of potential subscribers is in all probability larger and less determinate than the class of shareholders.
It is true, as counsel for the auditors argued, that in some of the authorities (as for example Haig v Bamford (1976) 72 DLR (3d) 68 at 75, 80) reference is made to the victim’s membership of a ‘limited class’ as a test of proximity. By ‘limited’, it was said, one should understand ‘small and determinate’. I have little doubt that a victim of a careless misstatement falling within Cardozo CJ’s ‘indeterminate class’ would fail to show sufficient proximity, as recognised by Lord Wilberforce in Anns [1977] 2 All ER 492 at 504, [1978] AC 728 at 758 when he referred to the possible objection that an endless, indeterminate class of potential plaintiffs may be called into existence.' Again the emphasis was on the need for a clear and close nexus between the author and the victim of the allegedly careless misstatement. But the class of shareholders to whom an auditor reports is not indeterminate. The composition of the class changes but the members of it can at any instant be precisely identified. It cannot be predicted who within that class will rely on the report, but that does not make indeterminate the class to whose members the duty is owed but only the identity of the potential claimant. The class may of course, in a large public company, be very numerous. That is a relevant consideration when deciding whether it is just and reasonable and whether as a matter of policy a duty should be imposed, but I do not think it can deprive of proximity a relationship otherwise having that quality. Lord Salmon cannot have thought so.
Weighing the competing submissions on proximity in the light of the many authorities cited, I am left in no real doubt but that there is a sufficiently proximate relationship between the statutory auditor and the shareholder to whom he reports to sustain a duty of care which it is otherwise right to impose.
I come, therefore, to the third requirement to be satisfied by Caparo, that it is in all the circumstances just and reasonable to impose a duty of care on a statutory auditor towards individual shareholders. Caparo’s case was again simple. The duty contended for obliges an auditor to do nothing which he is not already obliged to do under his contract with the company. The existing obligation is one from which the auditor cannot be excused (see s 310 of the 1985 Act). The duty contended for would simply extend a right of redress, if the auditor failed to perform his duties with reasonable care and skill, from the company, which would rarely have a claim, to shareholders, who foreseeably would. It is just and in principle desirable that those who fail to perform their professional duties in
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accordance with professional standards should compensate those foreseeably injured by their failure.
The auditors relied on a number of matters as showing that it would not be just or politic to impose the duty contended for. Where a shareholder suffered loss by relying on misleading accounts, the primary responsibility lay with the directors, who might well be fraudulent. But the directors would usually lack the means to satisfy a large claim against them. So the tendency would be to add the auditor as a party in order to gain the benefit of the auditor’s insurance cover, even where no defect in the audit procedure could at the outset be identified. There was, however, already extreme difficulty in obtaining professional indemnity cover. If it could not be obtained, an auditor’s personal fortune would be at risk, perhaps through the error of his partner or employee. If it could be obtained, the cost would be high and this would necessarily be reflected in the cost of audit work to the prejudice of the great mass of shareholders. An undesirably defensive and self-protective attitude would moreover be encouraged. Reliance was placed on Lord Keith’s observations in Rowling v Takaro Properties Ltd [1988] 1 All ER 163 at 173, [1988] AC 473 at 502:
‘The third is the danger of overkill. It is to be hoped that, as a general rule, imposition of liability in negligence will lead to a higher standard of care in the performance of the relevant type of act; but sometimes not only may this not be so, but the imposition of liability may even lead to harmful consequences. In other words, the cure may be worse than the disease. There are reasons for believing that this may be so in cases where liability is imposed on local authorities whose building inspectors have been negligent in relation to the inspection of foundations, as in the Anns case itself, because there is a danger that the building inspectors of some local authorities may react to that decision by simply increasing, unnecessarily, the requisite depth of foundations, thereby imposing a very substantial and unnecessary financial burden on members of the community. A comparable danger may exist in cases such as the present, because, once it became known that liability in negligence may be imposed on the ground that a minister has misconstrued a statute and so acted ultra vires, the cautious civil servant may go to extreme lengths in ensuring that legal advice, or even the opinion of the court, is obtained before decisions are taken, thereby leading to unnecessary delay in a considerable number of cases.’
The duty would, it was said, if imposed, expose auditors to claims indeterminate in number and unquantifiable in amount for periods which could not be calculated. Rather than incur this burden accountants might decline to undertake audit work. It was no answer to say that auditors would usually defeat claims made against them because they would still have the burden and expense of defending themselves, with the inevitable risk of damage to their professional reputation. This was all unnecessary: if shareholders were dissatisfied with the auditor’s performance they could remove him.
This argument amounted to much more than a simple submission that a decision in favour of Caparo would open the floodgates to an uncontrollable inrush of claims against auditors. But certain features of the argument, in particular concerning insurance, are hard to assess in the absence of evidence or inquiry. I think that certain conclusions can none the less be reached. (1) The removal of an auditor gives no adequate redress to a shareholder who has suffered loss through his negligence. It is not in any event a remedy open to a minority shareholder or one who has sold his shareholding in reliance on a negligent audit report. (2) Given the duty which already exists, I do not think recognition of a duty to individual shareholders would lead to any significant change in audit practice. (3) Given the duty which already exists, I do not think recognition of a duty to shareholders would lead competent accountants to decline audit work, at any rate unless there were comparable alternative work available which did not expose them to potential liability. (4) I do not think it realistic to envisage auditors being subjected to hundreds or
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thousands of claims, as a pharmaceutical manufacturer might be. The reality is that the greater the number of claims the smaller each must necessarily be, and the smaller the claim the smaller the chance that the shareholder will embark on an expensive action. The probability is that action will be brought, if at all, by one large shareholder, as here, or by a handful of large shareholders. The quantification of damage would not, I think, be more problematical than in many tortious situations. The odds are that the auditor’s error, if any, will come to light fairly soon; it is unlikely to lie undiscovered for years, as may happen with a negligently designed building or bridge. (5) The shareholder’s claim will in the ordinary way be a very hard claim to establish.
This last point deserves a little elaboration. As in any other claim of professional negligence the claimant must show that the defendant failed to exercise the ordinary skill of an ordinary competent man exercising his particular art: see Bolam v Friern Hospital Management Committee [1957] 2 All ER 118, [1957] 1 WLR 582. Lord Diplock said in Saif Ali v Sydney Mitchell & Co (a firm) [1978] 3 All ER 1033 at 1043, [1980] AC 198 at 220:
‘No matter what profession it may be, the common law does not impose on those who practice it any liability for damage resulting from what in the result turns out to have been errors of judgment, unless the error was such as no reasonably well-informed and competent member of that profession could have made.’
These principles afford special protection to auditors, whose task is not to draw the accounts nor to turn every stone and open every cupboard but to exercise their very considerable skill and judgment in carrying out checks and investigations in accordance with complex but none the less detailed and explicit professional standards. Many entries in the accounts will depend on the directors’ judgment, and here it is for the auditors not to satisfy themselves that the judgment is correct but that it is reasonable. Lord Hailsham LC said in Re W (an infant) [1971] 2 All ER 49 at 56, [1971] AC 682 at 700:
‘Two reasonable parents can perfectly reasonably come to opposite conclusions on the same set of facts without forfeiting their title to be regarded as reasonable … Not every reasonable exercise of judgment is right, and not every mistaken exercise of judgment is unreasonable.’
If, despite these obstacles, the shareholder can show a failure to exercise ordinary skill and care he must still show that he relied on the auditor’s report. Most shareholders will not do so. Woolf J in JEB Fasteners Ltd v Marks Bloom & Co (a firm) [1981] 3 All ER 289 at 297 said:
‘The longer the period which elapses prior to the accounts being relied on, from the date on which the auditor gave his certificate, the more difficult it will be to establish that the auditor ought to have foreseen that his certificate would, in those circumstances, be relied on.’
If that obstacle also is overcome, the shareholder must then prove damage. That he can do only if the negligence complained of has had a significant effect on the share price. It is not every oversight or blunder, even if negligent, which will have that effect. Some error having a real and palpable effect on the value of the company will be called for.
Not many claims by shareholders will, I think, fulfil these stringent requirements. If a shareholder can prove these things, I think it just and reasonable that he should obtain redress. I am not persuaded that any compelling consideration of policy should deny him. It may be that to begin with auditors will be put to the burden and expense of defending some bad claims, but the problems facing plaintiffs will be quickly appreciated and the liability for costs is likely to be an effective deterrent. I simply do not think that a decision in principle in favour of Caparo will lead to an uncontrollable inrush of claims.
I accordingly conclude that the auditor of a public company does owe individual shareholders a duty to exercise reasonable care in carrying out his audit and making his
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audit report. But that does not conclude even this part of the appeal. For the auditors submitted that if, contrary to their primary contention, an auditor owes a shareholder any duty of care the duty is owed to him as shareholder only, not investor; thus a claim might lie for loss sustained by selling or retaining shares in reliance on a negligent audit report but not for loss sustained by buying, because in buying the shareholder would be acting not as such but as an investor. This distinction is not without a logical basis. The shareholder receives the report by virtue of his existing shareholding and as a report on the stewardship of his existing shareholding. But I have to say (with respect to those who think otherwise) that I do not consider this a sensible place at which to draw the line. There is no distinction to be drawn between selling and retaining on the one hand and buying on the other in terms of foreseeability or proximity. Nor does any consideration of what is just and reasonable or of what policy demands lead me to conclude that a duty imposed in the one situation should be denied in the other. In reality the shareholder is an investor in each situation, whether he is selling, retaining or buying, as the auditor well knows. Nor can it sensibly be said that a duty is owed if a shareholder, in reliance on the audit report, buys a small number of additional shares but not if he buys a large number or seeks to buy all the shares he does not already hold. Any such distinction would in my view deserve Lord Devlin’s eloquent denunciation in the Hedley Byrne case [1963] 2 All ER 575 at 602–603, [1964] AC 465 at 517.
If I am right so far, the question whether the auditors owed Caparo a duty of care as an investor, irrespective of their capacity as a shareholder, by virtue of the facts pleaded in para 16 of the statement of claim (assumed for purposes of the issue to be true) does not strictly arise. But the question has been very fully argued. It is one of considerable importance. It is appropriate to express a conclusion.
The judge held that a buyer who was not a shareholder could show the foreseeability of economic damage caused by reliance on a negligent audit report. It was, he said, foreseeable that a negligent misstatement in the auditors’ report, referring to an annexed account, would cause economic loss to investors. This conclusion was not challenged. So, at any rate on the facts pleaded in para 16, a non-shareholder buyer can satisfy the requirement of foreseeability.
When, however, one turns to the second requirement, of proximity, it is in my view apparent that the relationship between the auditors and Caparo on the facts assumed (but on the assumption that Caparo is not a shareholder) is very much less proximate than that of auditor and shareholder. There is here no statutory duty. The auditor is not engaged by the company to report to such a buyer, even though it is known that the report will be available for his inspection. Such a buyer may be, almost literally, anyone in the world. He may inspect the report and accounts in the public company file. More probably he will obtain a copy from his stockbroker or financial adviser. There is no knowing. Only in a loose sense could the auditor be said to have assumed a responsibility towards him. The relationship falls far short of contract. The nexus or link between the parties is tenuous. If the report were a dangerous chattel likely to cause physical injury the requisite proximity might be found, but the relationship does not in my view satisfy the more stringent standards required of negligent misstatement. In truth, Caparo’s case on proximity rests on foreseeability alone and foreseeability alone is not enough.
If, contrary to my view, Caparo can show sufficient proximity I should none the less conclude that it could not on the facts assumed satisfy the third requirement. It is true that the obligation to make the report and accounts available for public inspection, and the general commercial considerations to which I earlier referred, would weigh in favour of a duty not limited to shareholders. It could be said with force to be anomalous that a duty is owed to one who is registered as a shareholder at the date of the general meeting but not to one who becomes a shareholder thereafter and exercises his right to obtain a copy of the accounts under s 246. To extend the duty to non-shareholding investors adds nothing to the substance of what the auditor is in practical terms required to do. It merely increases his potential liability. But this would be a large extension of potential
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liability. Time and experience may show such an extension to be desirable or necessary. It is, however, preferable that analogical developments of this kind should be gradual and cautious. I am not at present persuaded that it would be just and reasonable, or politic, that the law should be extended so as to impose a duty when no more is shown than the facts Caparo has pleaded.
I consider this conclusion to be broadly consistent with the law as developed in other common law jurisdictions, to which (in deference to Lord Keith’s injunction cited at the outset) I should make brief reference.
(1) The most far-reaching statement of principle in this immediate field in any English case is, I think, that of Woolf J in JEB Fasteners Ltd v Marks Bloom & Co (a firm) [1981] 3 All ER 289 at 296. He relied on Lord Wilberforce’s oft-quoted statement in Anns in particular and applied what was in substance a foreseeability test. He described (at 293) the facts before him as in some respects similar to those in Candler v Crane Christmas & Co [1951] 1 All ER 426, [1951] 2 KB 164, but it seems to me that they were in principle scarcely distinguishable. The plaintiffs on 23 June 1975 acquired the share capital of BG Fasteners Ltd. The defendants were BG’s auditors and (by Mr Marks) its accountant and financial adviser. Well before the acquisition Mr Marks knew that financial support was being sought in various forms (at 298). In August 1974 Mr Marks wrote to BG enclosing draft accounts for the period November 1973 to July 1974, indicating that BG would require these for dealing with the plaintiffs. He thought the plaintiffs would want further information and offered to help (at 298). In April 1975 he sent BG a fair copy of the (uncertified) accounts for the year ended 31 October 1974 so that BG could visit the bank with the figures. He also sent a copy to the bank (at 298). After the accounts were certified a proposal was made that the plaintiffs should take over BG. Mr Marks was fully aware of the progress of the negotiations thereafter, on which he advised BG. He also supplied information to the plaintiffs (at 299). On the day following the acquisition he submitted a bill which included a charge (albeit modest) for corresponding with the plaintiffs and advising them on the telephone (at 299). The audited accounts were not, therefore, certified with the plaintiffs’ take-over specifically in view, but the plaintiffs’ interest was known and it was readily to be inferred that after certification the defendants impliedly represented the accuracy of their report and the accounts which they had (I think) themselves prepared. I respectfully doubt whether any extension of Candler or Hedley Byrne principles was called for in order to resolve the duty of care issue in favour of the plaintiffs.
(2) The facts in Twomax Ltd v Dickson M‘Farlane & Robinson 1982 SC 113 were less strong than in JEB Fasteners but still stronger than here. The Lord Ordinary (Stewart) said (at 125):
‘Mr M‘Farlane’s state of knowledge when he audited the 1973 accounts included a number of matters which I consider relevant to an assessment of what he should reasonably have foreseen. He was aware that Kintyre was suffering from a shortage of capital. He was aware during the summer months of 1973 that a director, Mr Anderson, wished to dispose of his shareholding. He was aware that this shareholding was substantial, amounting to 10,000 shares. The defenders had in fact advertised in the newspaper under a box number on behalf of Mr Anderson. He knew for certain that the accounts were being made available to lenders in so far as he knew they were lodged with the company’s bank. He knew that auditors’ certificates, when they were “clean” certificates, were commonly relied on by shareholders, potential investors, and potential lenders. In the whole circumstances I consider that Mr M‘Farlane should have foreseen before he certified the 1973 accounts that these accounts might be relied on by a potential investor for the purpose of deciding whether or not to invest. The situation was such that I would have thought it an inevitable inference that Mr M‘Farlane should have realised by the time he came to grant his audit certificate that there would shortly be some dealings in the issued
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shares of Kintyre and might well be fresh shares issued in order to inject new capital into the company.’
In reaching his decision the Lord Ordinary (Stewart) relied on Lord Wilberforce’s statement in Anns and Woolf J’s statement in JEB Fasteners. Even so, I think it questionable whether he would have reached a decision in favour of the plaintiffs on the bare facts pleaded here.
(3) In Haig v Bamford (1976) 72 DLR (3d) 68 a very similar question was considered by the Supreme Court of Canada. Accountants of a company (who claimed to have carried out an audit but who had not in fact done so) were held to owe a duty of care to an investor in the company who relied on a negligent financial statement. The crucial finding (to which three of the judges in particular attached importance) was (at 70):
‘Instructions were issued to the firm of R. L. Bamford & Co. (the accountants), of whom the respondents (defendants) were partners, to prepare the required financial statement and Scholler began a search for an outside investor. He made it known to the accountants that he was seeking an investor. The trial Judge, MacPherson, J., made a crucial finding, not disturbed by the Court of Appeal for Saskatchewan, that the accountants knew, prior to completion of the financial statement, dated June 18, 1965, at the root of the present litigation, that the statement would be used by Sedco, by the bank with whom the Company was doing business, and by a potential investor in equity capital.’
Without that finding, stronger than the facts assumed here, the plaintiffs’ claim would, I think, have failed for want of proximity.
(4) The case which perhaps gives Caparo most assistance is Scott Group Ltd v McFarlane [1978] 1 NZLR 553. The plaintiffs relied on accounts audited by the defendants to take over John Duthie Holdings Ltd. This company was rich in assets but unimpressive in earnings and thus, as Cooke J put it (at 582), ‘a classic case for a takeover or merger’. But when the defendants carried out their audit and signed their report they had no knowledge of any intention by the plaintiffs or anyone else to make a take-over offer. At first instance Quilliam J held that the auditors owed the plaintiffs no duty of care because on the facts there was no special relationship between them (see [1975] 1 NZLR 582). On appeal Richmond P agreed with him, relying in particular on the restrictive statements on principle in the Hedley Byrne case and Candler’s case. But on this point the other two members of the Court of Appeal disagreed. Woodhouse J held that a relationship of sufficient, indeed ‘close’ (at 575), proximity existed. He attached particular importance (at 575–576) to the publicity requirements in the New Zealand Companies Act 1955 (a point which also caused Richmond P some concern (at 568)). But he limited his decision to the case of a take-over related to the value of shareholders’ funds (at 575). The reasoning of Cooke J followed similar lines. He also regarded the publicity requirements as important (at 581), and he also concerned himself with the position of a party taking over a company, reserving his opinion on the position of an ordinary market purchaser who buys in reliance on the audited accounts. Plainly Caparo is assisted by the conclusions of these two distinguished judges. But there was, overall, an equal division of judicial opinion. The majority view may, in the wake of Anns, have been unduly coloured by the finding of foreseeability. And I do not, with respect, think the distinction between buying a limited number of shares and buying enough to take the company over is convincing: recognition that a company is ripe for take-over would, after all, be good enough reason for a shrewd investor to buy some shares in the company even if he could not take it over himself. So I am not shaken in my view that English law should not, yet, advance to this position. I am, however, reassured by what I take to be an implicit assumption by all three members of the Court of Appeal that a duty of care is owed by auditors to shareholders (see [1978] 1 NZLR 553 at 555, 568, 575, 581).
(5) The United States cases do not present a consistent picture. In Ultramares Corp v
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Touche (1931) 255 NY 170 the accountants knew that the accounts when certified would be used to raise money and for that purpose supplied 32 certified and serially numbered copies (at 173–174). On the faith of one of those copies, given to it on its demand, the plaintiff lent the company money. The audit was found to be negligent. A claim in negligence failed on the ground that the auditors owed the plaintiff no duty of care, there being no sufficiently proximate relationship. A requirement of privity, not of contract but of relationship, was laid down. This rule appears still to be the rule in New York: see Credit Alliance Corp v Arthur Andersen & Co (1985) 65 NY 2d 536. Other states also adhere to it. But a much less restrictive rule has been followed elsewhere: see for example H Rosenblum Inc v Adler (1983) 93 NJ 324 1, in which account was taken of the Hedley Byrne and JEB Fasteners cases, and Citizens State Bank v Timm Schmidt & Co (1983) 113 Wis 2d 376. In Rhode Island Hospital Trust National Bank v Swartz Bresenoff Yavner & Jacobs (1972) 455 F 2d 847 at 851 the United States Court of Appeals, applying Rhode Island law, applied the rule that an accountant should be liable in negligence for careless financial misrepresentations relied on by actually foreseen and limited classes of persons. In Ingram Industries Inc v Nowicki (1981) 527 F Supp 683 a federal judge applying the law of Kentucky relied on the American Law Institute’s Restatement of the Law, Second, Torts 2d (1977) § S552, pp 126–127. This is perhaps as close as one can come to a concensus of opinion in the United States. Section 552 provides:
‘Information Negligently Supplied for the Guidance of Others (1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
(2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered (a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.
(3) The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them.’
It would be unprofitable to discuss at length whether this statement accords or should accord with English law. It would not, I think, support a claim by Caparo otherwise than as a shareholder, but subsection (3) would appear to me to cover its claim as shareholder.
The auditors argue that it would be absurd for the important issue of duty or no duty to turn on the holding of a single share. But that is because, in the ordinary way and leaving non-commercial considerations aside, it is absurd to hold a single share. The mass of investors in public companies hold more than a single share, and once one accepts multiple shareholding as the norm it does not seem to me absurd that the issue of duty or no duty should turn on whether a party misled does or does not belong to the specific class to whom the auditor was engaged to report.
I would allow the appeal against the decision of the judge that the auditors owed no duty of care to Caparo as a shareholder but dismiss it against his decision that they owed Caparo no duty of care as a non-shareholding buyer.
TAYLOR LJ. This case raises an important question of principle. To whom do auditors of a company owe a duty of care in respect of their report made pursuant to s 236 of the Companies Act 1985 and what is the scope of that duty? The judge dealt with this question as a preliminary issue. He held that the only duty was to the company itself.
Caparo’s case is put on alternative footings. Primarily, they contend that auditors owe
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a duty not only to the company but also to individual investors, whether existing shareholders or potential shareholders and whether the investment relates to a few shares or to a take-over of the company. Secondly, even if the duty does not extend to all potential investors, where the company is vulnerable to take-over, it does extend to a potential ‘suitor’ (a word used to define a legal entity seeking to take-over the company). Thirdly, at the very least counsel for Caparo argues that the duty extends to existing shareholders.
The judge held that three factors must be present to establish a duty of care in the field of negligent misstatement: firstly, foreseeability of loss; secondly, proximity of the plaintiff to the defendant; and, thirdly, the court must be satisfied that it is fair, just and reasonable that the defendant should owe a duty to the plaintiff. The judge incorporated the element of public policy in his third factor, whereas the auditors treat it as a separate element. Subject to that, there is no real issue between the parties as to the correctness of the judge’s three-part test.
It is agreed that in the present case the element of foreseeability was present in relation to both shareholders and potential investors. When the auditors issued their report it was foreseeable to them that shareholders and potential investors might rely on it in considering whether and how to deal in the company’s shares. Moreover, it is conceded by counsel for Caparo that proof of such foreseeability although essential is not enough, even if qualified by the fair, just and reasonable test. There must be present the second of the judge’s three factors, which he called proximity. This is now settled law. The much-quoted passage from Lord Wilberforce’s speech in Anns v Merton London Borough [1977] 2 All ER 492 at 498–499, [1978] AC 728 at 751–752 has been held not to have laid down any universal rule to the contrary. Thus, in Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529 at 534, [1985] AC 210 at 240 Lord Keith, after quoting Lord Wilberforce, said:
‘There has been a tendency in some recent cases to treat these passages as being themselves of a definitive character. This is a temptation which should be resisted. The true question in each case is whether the particular defendant owed to the particular plaintiff a duty of care having the scope which is contended for, and whether he was in breach of that duty with consequent loss to the plaintiff. A relationship of proximity in Lord Atkin’s sense must exist before any duty of care can arise, but the scope of the duty must depend on all the circumstances of the case.’
In Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705 at 710, [1988] AC 175 at 192 Lord Keith, giving the advice of the Privy Council, said:
‘Foreseeability of harm is a necessary ingredient of such a relationship, but it is not the only one. Otherwise there would be a liability in negligence on the part of one who sees another about to walk over a cliff with his head in the air, and forbears to shout a warning. Donoghue v Stevenson [1932] AC 562, [1932] All ER Rep 1 established that the manufacturer of a consumable product who carried on business in such a way that the product reached the consumer in the shape in which it left the manufacturer, without any prospect of intermediate examination, owed the consumer a duty to take reasonable care that the product was free from defect likely to cause injury to health. The speech of Lord Atkin stressed not only the requirement of foreseeability of harm but also that of a close and direct relationship of proximity.’
Lord Keith then quoted the famous passage from Lord Atkin’s speech in Donoghue v Stevenson [1932] AC 562 at 580, [1932] All ER Rep 1 at 11 beginning: ‘Who, then, in law is my neighbour? … ' He continued as follows ([1987] 2 All ER 705 at 711, [1988] AC 175 at 192):
‘Lord Atkin clearly had in contemplation that all the circumstances of the case,
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not only the foreseeability of harm, were appropriate to be taken into account in determining whether a duty of care arose.’
The main arguments in the present case have been addressed to the following issues. (1) What amounts to proximity in the context of negligent misstatement? (2) Was the judge right in concluding such proximity did not exist between the auditors and Caparo (a) as shareholders and (b) as investors? (3) Was he right in concluding further that to impose on auditors the duty contended for by Caparo would not be fair, just and reasonable?
1. Proximity
Counsel for the auditors in his admirable argument sought to identify the criteria for establishing proximity. His main submission was that there must be by the defendant a voluntary assumption of responsibility towards the individual plaintiff in circumstances akin to contract. That test was propounded in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465. It was applied in Muirhead v Industrial Tank Specialities Ltd [1985] 3 All ER 705, [1986] QB 507, in Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 All ER 791, [1988] QBD 758 and in Greater Nottingham Co-op Society Ltd v Cementation Piling and Foundations Ltd [1988] 2 All ER 971, [1989] QB 71. However, in each of those cases there could have been no nexus creating proximity between the parties in the absence of a voluntary assumption of responsibility by the defendant to the plaintiff.
In the Hedley Byrne case the plaintiffs and defendants had no reason to know of each other’s existence. The plaintiffs, via their bankers, sought a reference for a company which banked with the defendants. The defendants gave the reference negligently knowing that reliance would or might be placed on it by a customer of the inquiring bank and, had they not issued a disclaimer, it was held they would have been liable. That was because they would voluntarily have assumed responsibility to the plaintiff. In that case, proximity could only be established by such a voluntary assumption. There was nothing else.
The other authorities cited above were not negligent misstatement cases. Each was a case in which there was a chain of contracts but no relevant direct contract between the parties. In each case it was sought unsuccessfully to establish liability for economic loss by reliance on the Hedley Byrne principle. In the Simaan case [1988] 1 All ER 791 at 805, [1988] QB 758 at 784 Dillon LJ said:
‘If, however, foreseeability does not automatically lead to a duty of care, the duty in a Hedley Byrne type of case must depend on the voluntary assumption of responsibility towards a particular party giving rise to a special relationship, as Lord Keith held in Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175 … ’ (My emphasis.)
The latter case was somewhat closer on its facts to the present one. The Commissioner of Deposit-taking Companies was responsible for registering such companies under an ordinance. One company so registered went into liquidation. The plaintiffs lost money which they had deposited with the company and alleged negligence against the commissioner since he should have known the company was suspect and the plaintiffs had relied on the registration as showing the company to be sound. Lord Keith referred to the Hedley Byrne case and Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201, [1983] 1 AC 520 and continued ([1987] 2 All ER 705 at 714, [1988] AC 175 at 196):
‘These decisions turned on the voluntary assumption of responsibility towards a particular party, giving rise to a special relationship. Lord Devlin in the Hedley Byrne case [1963] 2 All ER 575 at 611, [1964] AC 465 at 530 proceeded on the proposition that wherever there is a relationship equivalent to a contract, there is a duty of care.
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In the present case there was clearly no voluntary assumption by the commissioner of any responsibility towards the appellants in relation to the affairs of the company. It was argued, however, that the effect of the ordinance [Deposit-taking Companies Ordinance 1976] was to place such a responsibility on him. Their Lordships consider that the ordinance placed a duty on the commissioner to supervise deposit-taking companies in the general public interest, but no special responsibility towards individual members of the public.’
Because in a Hedley Byrne type of case a voluntary assumption of responsibility is necessary to establish proximity, it does not follow that such an assumption is necessary in every case. There may be some other nexus sufficient to create proximity. In Yuen Kun-yeu’s case Lord Keith considered the argument that the ordinance might suffice. Their Lordships rejected that argument, not because of any necessity for a voluntary assumption of responsibility, but because the ordinance did not create a special responsibility to any individual member of the public. That liability might exist without voluntary assumption of risk where the defendant was under an obligation to make a statement was clearly envisaged by Cross LJ in Ministry of Housing and Local Government v Sharp [1970] 1 All ER 1009 at 1038, 2 QB 223 at 291. He said:
‘It is true that the phrase “voluntary assumption of risk” occurs frequently in the speeches in the Hedley Byrne case, but I agree with the judge that that case did not purport to lay down any metes and bounds within which legal liability in tort for false statements, on which the parties to whom they are made rely, has to be confined. (See in particular per Lord Devlin ([1963] 2 All ER 575 at 611, [1964] AC 465 at 530–531).) I see no sufficient reason why in an appropriate case the liability should not extend to cases in which the defendant is obliged to make the statement which proves to be false.’
In the same case the other members of the court also indicated that voluntary assumption of responsibility is not essential to create a duty. Thus, Lord Denning MR said ([1970] 1 All ER 1009 at 1018, [1970] 2 QB 223 at 268):
‘[Counsel for the defendants] said that a duty to use due care (where there was no contract) only arose when there was a voluntary assumption of responsibility. I do not agree. He relied particularly on the words of Lord Reid in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575 at 583, [1964] AC 465 at 487, and of Lord Devlin ([1963] 2 All ER 575 at 610–611, [1964] AC 465 at 529). I think they used those words because of the special circumstances of that case (where the bank disclaimed responsibility). But they did not in any way mean to limit the general principle. In my opinion the duty to use due care in a statement arises, not from any voluntary assumption of responsibility, but from the fact that the person making it knows, or ought to know, that others, being his neighbours in this regard, would act on the faith of the statement being accurate.’
In using the phrase ‘being his neighbours’ Lord Denning MR was clearly referring to ‘neighbours’ in the sense in which the word was used by Lord Atkin, implying proximity not merely foreseeability. Salmon LJ said ([1970] 1 All ER 1009 at 1027–1028, [1970] 2 QB 223 at 279):
‘I do not accept that, in all cases, the obligation to take reasonable care necessarily depends on a voluntary assumption of responsibility.’
Counsel for the auditors went on to consider other possible touchstones of proximity. He suggested there must be a special relationship between the parties, that the negligent statement must have been made for the very purpose for which reliance was placed on it, that the plaintiff must be a member of a small limited class and that there must be some communing between the plaintiff and the defendant. It is unnecessary to cite the
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cases relied on in support of these several tests. Clearly, in appropriate cases it will be relevant to have regard to all or some of them. I do not accept, however, that any one or group of them can be regarded as definitive of the requisite proximity. As Bingham LJ said in the Simaan case [1988] 1 All ER 791 at 803, [1988] QB 758 at 782:
‘However attractive it may theoretically be to postulate a single principle capable of embracing every kind of case, that is not how the law has developed. It would of course be unsatisfactory if (say) doctors and dentists owed their patients a different duty of care. I do not, however, think it unsatisfactory or surprising if, as I think, a banker’s duty towards the recipient of a credit reference and an industrial glass manufacturer’s duty towards a main contractor, in the absence of any contract between them, differ.’
In my judgment it is not possible to lay down one precise test or set of tests applicable in every situation to show whether the necessary proximity is established. In each case the court must inquire how close and direct a relationship exists between the parties and whether the defendant should have had the plaintiff in contemplation as a person who would or might rely on the relevant statement.
2(a). Caparo as shareholders
Primarily, the duty of auditors is to the company whose accounts they audit. But, under the Companies Act 1985, they are appointed by the shareholders in general meeting (s 384). They have a duty to report to the shareholders whether, inter alia, the company’s accounts give a true and fair view of its financial position (s 236). A report made by auditors to the directors rather than to the shareholders is not a proper compliance with that duty (see Re London and General Bank (No 2) [1895] 2 Ch 673 at 682, 684–685, [1895–9] All ER Rep 953 at 956–958). By s 240 a copy of the company’s accounts together with the auditor’s report must be sent to every shareholder. Further, the auditor’s report must be read at a general meeting of the company’s shareholders (s 241). These provisions show that, although the legal entity which contracts with and pays the auditors and to which the auditors owe a statutory duty is the company, Parliament entrusted the appointment of auditors to the shareholders and required the auditors to render their report to the shareholders rather than the directors, so that those owning the company’s shares should receive an independent account of its financial state.
Auditors have thus in my judgment a close and direct relationship with the shareholders. Once auditors accept appointment they know that their report has to be sent to each shareholder as a named individual who will or may act on it. It is argued that the shareholders of a company are a constantly changing body; but, at the relevant time when the report goes out, their identity is ascertainable and has to be ascertained. In this context some observations of Megarry V-C in Ross v Caunters (a firm) [1979] 3 All ER 580 at 587, [1980] Ch 297 at 308 are relevant and helpful:
‘… the question is whether a solicitor owes a duty of care to a beneficiary under a will that he makes for a client, and, if so, on what basis that duty rests. This is, of course, the central core of the case. In considering this, three features of the case before me seem to stand out. First, there is the close degree of proximity of the plaintiff to the defendants. There is no question of whether the defendants could fairly have been expected to contemplate the plaintiff as a person likely to be affected by any lack of care on their part, or whether they ought to have done so: there is no “ought” about the case. This is not a case where the only nexus between the plaintiff and the defendants is that the plaintiff was the ultimate recipient of a dangerous chattel or negligent misstatement which the defendants had put into circulation. The plaintiff was named and identified in the will that the defendants drafted for the testator. Their contemplation of the plaintiff was actual, nominate and direct. It
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was contemplation by contract, though of course, the contract was with a third party, the testator.’
Auditors’ contemplation of an individual registered shareholder is also ‘actual, nominate and direct’. They know of the shareholder’s actual existence; they know his nominate identity; and they send directly to that shareholder the report on which his reliance is foreseeable. Here too one has ‘contemplation by contract’. True, the contract is with the company and not the shareholders but the auditors’ appointment by them and duty to report to them creates a nexus close to contract. Indeed, the only reason there is no contract with the shareholders derives from the rule giving a limited liability company a legal identity separate from that of its members.
Even if one were to apply the voluntary assumption of responsibility test, it would in my view be satisfied here. In the Hedley Byrne case, the House of Lords clearly indicated that a voluntary assumption might be implied rather than express (see [1963] 2 All ER 575 esp at 611, [1964] AC 465 esp at 529–530 per Lord Devlin). Auditors are not obliged to accept appointment. If they do so voluntarily, then they assume (as the statute requires) the duty to report to each shareholder individually knowing that he may well act in reliance on the report. In those circumstances, I would hold that a voluntary assumption of responsibility arises by implication. For these reason, I conclude that there was the requisite proximity between Caparo as shareholders and the auditors.
2(b). Caparo as investors
The position of a potential investor is very different. He plays no role in the statutory scheme relating to auditors. He has no part in appointing them; he does not receive their report directly from them. He may, of course, be shown the accounts and the report by others. A copy of those documents has to be delivered to the registrar of companies (s 241(3)) and they must be available for inspection by anyone (s 709). But the right to inspect them and the option to buy shares are enjoyed by the world at large. Within the auditors’ contemplation there is no focus on any person or class of person who may decide to invest. All they can foresee is that some unidentified investor or investors may inspect their report and act on it. By the same token other unascertained persons may also do so, eg a bank contemplating the grant to the company of a loan or its suppliers or creditors. In none of these instances is there any close or direct relationship with the auditors. Foreseeability of reliance is conceded but the element of proximity is in my judgment lacking.
Counsel for Caparo argued that where, as pleaded here, a company is vulnerable to take-over the auditors owe a duty to a suitor in respect of their statutory report. He submits that especially in the case of an unwelcome suitor the only information available consists of the published accounts and auditors’ report. Ex hypothesi the company will not itself vouchsafe information. Whereas a duty to investors generally would or could be owed to vast numbers, there can he submits be only one successful suitor in a take-over so that liability would be restricted.
Apart from the difficulty which would arise from the vague and elusive nature of vulnerability as a test, I can see no reason in principle to distinguish between a suitor (welcome or otherwise) and any other investor. Assuming the company was vulnerable to take-over in the present case, it may have been more readily foreseeable that a suitor might rely on the auditors’ report. However, I do not see how the argument for proximity is any stronger. I therefore conclude that investors even if they are suitors are not owed any duty of care by the auditors.
3. Fair, just and reasonable?
The principal concern in this class of case is that casting too wide a duty on a potential defendant may result in a liability which is intolerably onerous. The courts have therefore been reluctant to extend the scope of liability for economic loss arising from negligent
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misstatement. The fear is well summarised in the much-quoted observation of Cardozo CJ in Ultramares Corp v Touche (1931) 255 NY 170 at 179:
‘… liability in an indeterminate amount for an indeterminate time to an indeterminate class.’
Counsel for the auditors submits that those words would obviously and incontrovertibly apply if auditors owed a duty to the world of investors at large. But he maintains they also apply even if the duty extends no further than to shareholders.
I do not, however, think shareholders can be described as an indeterminate class. The class may well be very large in the case of a major public company, but its members are ascertainable. Again, as to time, the period during which reliance could reasonably be placed on the report would in practice be limited. It is right to say that liability could be for a large amount. On the other hand, a plaintiff shareholder would have a number of hurdles to clear before he could recover damages. He would first have to establish that the auditors were negligent. It would by no means follow, for example, that failure to expose deliberate and well concealed fraud on the part of a company’s directors would amount to negligence by the auditors. They are not insurers. They would be judged by reasonable professional standards. Reliance on the report would have to be proved, as would damage. These considerations and the risk of having to bear the costs of an unsuccessful claim would in my view be sufficient to deter all but the stout-hearted and seriously aggrieved from bringing proceedings.
It is contended that auditors would find it difficult and cripplingly expensive to obtain insurance cover. It is even suggested that accountants might decline to be appointed as auditors. No evidence was adduced on this aspect of the case and if I am right about the difficulties and disincentives affecting possible claimants the insurance problem should not be insurmountable. It would always be open to Parliament to intervene should limitation of liability be considered necessary.
Counsel for Caparo emphasises that the auditors already have a duty to the company to prepare their report with proper professional skill and care. No additional work or different standard would be required of them should their duty extend not merely to the company but also to the shareholders. It is, he submits, only fair and reasonable that they should have a remedy if the auditors they appoint report to them negligently and they in consequence act to their detriment. The judge said their remedy was to get rid of the auditors but, as counsel for the auditors accepted, that is no remedy at all. At best the threat of removal might be some sanction against carelessness. But those shareholders who have shed their total holdings would have no power to remove the auditors; neither would a minority. In the unlikely event of a majority of shareholders exercising the power, they would merely be shutting the stable door. They would not recoup their losses.
Balancing the factors urged on both sides, I conclude it is fair, just and reasonable that an individual shareholder should have a remedy against a negligent auditor. I do not consider that the reasons advanced against the existence of the duty are of sufficient cogency to outweigh those in favour.
But what should be the scope of the duty? Here again fairness and public policy are the tests. Counsel for the auditors submits that at highest the duty should only apply to a shareholder in respect of his existing shareholding. It should not extend to his purchase of further shares in reliance on the report. He submits the only distinction between a shareholder and any other investor is that the former already owns some shares. In respect of any further shares bought he is in no different position from that of any other investor and should be so treated.
In my view, once proximity to the shareholder is established, the auditor ought prima facie to be liable for any loss suffered in foreseeable reliance on the report; prima facie, that is, unless such liability be unfair, unjust or unreasonable. There is no logical basis for distinguishing between reliance for the purpose of selling shares and reliance in
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purchasing more. It is, therefore, necessary to analyse the possible situations which could occur.
A negligent report can result in misrepresentation only of two broad kinds: either an overvalue or an undervalue of the company’s shares. A shareholder relying on the report can act only in one of three ways. He may sell; he may retain his holding; or he may buy more shares. If the report undervalues, a shareholder who buys has no complaint. If he retains his shares he has neither lost nor gained by the error. Only if he sells at an undervalue will he have sustained loss. He would then be entitled to claim from the auditors the difference between what he received and the true value. However, since this would involve dealing with his existing shareholding it does not bear on the issue under consideration. Take the converse situation, where the negligent report shows an overvalue. The shareholder who sells will gain and one who simply retains his holding will neither gain nor lose. Only he who buys will suffer damage. This last would therefore be the only instance of liability occurring as a result of extending the duty to all dealings by shareholders and not otherwise. The claim would be for the difference between what the shareholder paid and the true value. I do not consider the liability of the auditors to that extent in that one situation would be unfair, unjust or unreasonable. To exclude it would be illogical and arbitrary. Accordingly, I would hold that the auditors’ duty to individual shareholders was not limited to their existing shareholding.
Bingham LJ has considered in detail JEB Fasteners Ltd v Marks Bloom & Co [1981] 3 All ER 289 and Twomax Ltd v Dickson M‘Farlane & Robinson 1982 SC 113 and has also reviewed the American and Commonwealth authorities. I entirely agree with his analysis and cannot usefully add to it.
I, too, would allow this appeal as to the auditors’ duty to Caparo qua shareholder and dismiss it against the judge’s decision that they owed no duty to Caparo as a non-shareholding investor.
O’CONNOR LJ. In 1984 the plaintiffs (Caparo) made a successful take-over bid for Fidelity plc (Fidelity). At all material times the defendants, Touche Ross & Co (the auditors), were auditors of Fidelity. In July 1985 Caparo commenced this action in which they claim damages for fraud against two directors of Fidelity and damages for negligence against the auditors. Caparo alleged that they made their bid in reliance on the accounts of Fidelity for the year ending 31 March 1984. These were signed by the auditors in May with a clean certificate, sent to shareholders in June, read and approved at the annual general meeting on 4 July. Broadly, Caparo say that so far from giving a true and fair view of the state of affairs of Fidelity the accounts gave a false picture in that the reported profit of £1·3m should have been a loss of £0·46m.
In July 1987 an order was made for the trial of a preliminary issue:
‘… whether on the facts set out in paragraphs 4 and 6 and in sub-paragraphs (1) and (2) of paragraph 16 of the Statement of Claim herein, the Third Defendants, Touche Ross & Co., owed a duty of care to the Plaintiffs Caparo Industries PLC … ’
That issue was tried by Sir Neil Lawson in December 1987. He decided that the auditors owed no duty of care. Caparo appeal to this court.
I set out para 4 of the statement of claim:
‘In June 1984 Caparo began to purchase Fidelity shares in the open market and purchased 100,000 shares at 70 pence each on 8th June 1984. On 12th June 1984, the date on which the Accounts for the period ended 31st March 1984 were issued to shareholders, including Caparo, a further 50,000 shares were purchased at 73 pence each.’
Paragraph 6 sets out the details of the take-over transaction; the material fact averred is that Caparo acted in reliance on the information contained in the accounts.
I set out para 16 in full:
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‘Touche Ross, as auditors of Fidelity carrying out their functions as auditors and certifiers of the Accounts in April and May 1984, owed a duty of care to investors and potential investors, and in particular to Caparo, in respect of the audit and certification of the Accounts. In support of that duty of care Caparo will rely upon the following matters:—(1) Touche Ross knew or ought to have known (a) that in early March 1984 a press release had been issued stating that profits for the financial year would fall significantly short of £2·2m (b) that Fidelity’s share price fell from 143 pence per share on 1st March 1984 to 75 pence per share on 2nd April 1984 (c) that Fidelity required financial assistance. (2) Touche Ross therefore ought to have foreseen that Fidelity was vulnerable to a take-over bid and that persons such as Caparo might well rely on the Accounts for the purpose of deciding whether to take over Fidelity and might well suffer loss if the Accounts were inaccurate.’
Caparo claim to have lost the cost of the take-over, £13m. This may be small in the context of take-over bids ranging up to a billion pounds or more but it is obvious that the decision in this case is of great importance to all accountants who act as auditors.
I must make it clear that the auditors strongly deny that they were negligent in any way and that it is only for the purposes of deciding the point of law that we have to assume that the clean certificate was a negligent misstatement. Once more we have to consider possible liability for economic loss caused by negligent misstatement. The law has developed rapidly since 1963, when the House of Lords opened the door to such liability in Hedley Bryne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465. What emerges from the cases is that, in a case such as this, in deciding whether a duty of care exists it is also necessary to consider its scope: see Rowling v Takaro Properties Ltd [1988] 1 All ER 163 at 172, [1988] AC 473 at 501. In the same case Lord Keith said ([1988] 1 All ER 163 at 172, [1988] AC 473 at 501):
‘It is at this stage that it is necessary, before concluding that a duty of care should be imposed, to consider all the relevant circumstances. One of the considerations underlying certain recent decisions of the House of Lords (Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529, [1985] AC 210) and of the Privy Council (Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175) is the fear that a too literal application of the well-known observation of Lord Wilberforce in Anns v Merton London Borough [1977] 2 All ER 492 at 498, [1978] AC 728 at 751–752 may be productive of a failure to have regard to, and to analyse and weigh, all the relevant considerations in considering whether it is appropriate that a duty of care should be imposed. Their Lordships consider that question to be of an intensely pragmatic character, well suited for gradual development but requiring most careful analysis. It is one on which all common law jurisdictions can learn much from each other, because, apart from exceptional cases, no sensible distinction can be drawn in this respect between the various countries and the social conditions existing in them. It is incumbent on the courts in different jurisdictions to be sensitive to each other’s reactions; but what they are all searching for in others, and each of them striving to achieve, is a careful analysis and weighing of the relevant competing considerations.’
In Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705 at 710, [1988] AC 175 at 191–192 Lord Keith said:
‘Their Lordships venture to think that the two-stage test formulated by Lord Wilberforce for determining the existence of a duty of care in negligence has been elevated to a degree of importance greater than it merits, and greater perhaps than its author intended. Further, the expression of the first stage of the test carries with it a risk of misinterpretation. As Gibbs CJ pointed out in Sutherland Shire Council v Heyman (1985) 60 ALR 1 at 13 there are two possible views of what Lord Wilberforce meant. The first view, favoured in a number of cases mentioned by Gibbs CJ, is that
Page 824 of [1989] 1 All ER 798
he meant to test the sufficiency of proximity simply by the reasonable contemplation of likely harm. The second view, favoured by Gibbs CJ himself, is that Lord Wilberforce meant the expression “proximity or neighbourhood” to be a composite one, importing the whole concept of necessary relationship between plaintiff and defendant described by Lord Atkin in Donoghue v Stevenson [1932] AC 562 at 580, [1932] All ER Rep 1 at 11. In their Lordships’ opinion the second view is the correct one. As Lord Wilberforce himself observed in McLoughlin v O’Brian [1982] 2 All ER 298 at 303, [1983] 1 AC 410 at 420, it is clear that foreseeability does not of itself, and automatically, lead to a duty of care. There are many other statements to the same effect. The truth is that the trilogy of cases referred to by Lord Wilberforce each demonstrate particular sets of circumstances, differing in character, which were adjudged to have the effect of bringing into being a relationship apt to give rise to a duty of care. Foreseeability of harm is a necessary ingredient of such a relationship, but it is not the only one. Otherwise there would be liability in negligence on the part of one who sees another about to walk over a cliff with his head in the air, and forbears to shout a warning.’
In Hill v Chief Constable of West Yorkshire [1988] 2 All ER 238 at 241, [1989] AC 53 at 60. Lord Keith said:
‘It has been said almost too frequently to require repetition that foreseeability of likely harm is not in itself a sufficient test of liability in negligence. Some further ingredient is invariably needed to establish the requisite proximity of relationship between the plaintiff and defendant, and all the circumstances of the case must be carefully considered and analysed in order to ascertain whether such an ingredient is present. The nature of the ingredient will be found to vary in a number of different categories of decided cases.’
The question in this case is: did the auditors owe a duty of care to someone who, relying on the certified accounts, bought shares in the company?
The Companies Act 1985 requires every company to appoint auditors at its annual general meeting to hold office for a year (s 384). The directors are required to lay before the company in general meeting copies of the accounts (s 241). The accounts must contain the auditors’ report (s 239). The requirements for the auditors’ report are found in s 236:
‘(1) A company’s auditors shall make a report to its members on the accounts examined by them, and on every balance sheet and profit and loss account, and on all group accounts, copies of which are to be laid before the company in general meeting during the auditors’ tenure of office.
(2) The auditors’ report shall state—(a) whether in the auditors’ opinion the balance sheet and profit and loss account and (if it is a holding company submitting group accounts) the group accounts have been properly prepared in accordance with this Act; and (b) without prejudice to the foregoing, whether in their opinion a true and fair view is given—(i) in the balance sheet, of the state of the company’s affairs at the end of the financial year, (ii) in the profit and loss account (if not framed as a consolidated account), of the company’s profit or loss for the financial year, and (iii) in the case of group accounts, of the state of affairs and profit or loss of the company and its subsidiaries dealt with by those accounts, so far as concerns members of the company.’
Auditors’ duties and powers are set out in s 237:
‘(1) It is the duty of the company’s auditors, in preparing their report, to carry out such investigations as will enable them to form an opinion as to the following matters—(a) whether proper accounting records have been kept by the company and proper returns adequate for their audit have been received from branches not
Page 825 of [1989] 1 All ER 798
visited by them, (b) whether the company’s balance sheet and (if not consolidated) its profit and loss account are in agreement with the accounting records and returns.
(2) If the auditors are of opinion that proper accounting records have not been kept, or that proper returns adequate for their audit have not been received from branches not visited by them, or if the balance sheet and (if not consolidated) the profit and loss account are not in agreement with the accounting records and returns, the auditors shall state that fact in their report.
(3) Every auditor of a company has a right of access at all times to the company’s books, accounts and vouchers, and is entitled to require from the company’s officers such information and explanations as he thinks necessary for the performance of the auditor’s duties.
(4) If the auditors fail to obtain all the information and explanations which, to the best of their knowledge and belief, are necessary for the purposes of their audit, they shall state that fact in their report.
(5) If the requirements of Parts V and VI of Schedule 5 and Parts I to III of Schedule 6 are not complied with in the accounts, it is the auditors’ duty to include in their report, so far as they are reasonably able to do so, a statement giving the required particulars.
(6) It is the auditors’ duty to consider whether the information given in the directors’ report for the financial year for which the accounts are prepared is consistent with those accounts; and if they are of opinion that it is not, they shall state that fact in their report.’
A copy of the accounts must be sent to every member of the company not less than 21 days before the date of the meeting at which they are to be laid (s 240).
Section 241(2) provides:
‘The auditors’ report shall be read before the company in general meeting, and be open to the inspection of any member of the company.’
The result of these statutory provisions is that auditors are employed by the company and it is an implied term of the contract that they will carry out their duties with the care and skill expected from reasonably competent auditors. If they fail to do their audit with the requisite care and skill they may fail to discover some irregularity in the accounts which they ought to have discovered. If the irregularity is such that the auditors ought not to have certified that a true and fair view of the state of the company’s affairs is given in the accounts it must follow that the accounts either understate or overstate the true state of affairs. The company itself cannot suffer any loss from the over- or understatement of its affairs, but may suffer loss from the failure of the auditors to discover the irregularity.
Counsel for Caparo submitted that auditors know, or at least must be taken to know, that investors considering buying shares in the company may rely on the accuracy of the accounts certified by the auditors, which are readily available to investors. If the investor was considering a take-over bid he would rely on the certified accounts in making his decision. If as a result of negligent audit the auditors had failed to discover that the accounts overstated the true position of the company, they could foresee that an investor might suffer loss because he would be paying more for the shares than they were really worth.
Counsel for Caparo accepted that foreseeability of damage was not sufficient to impose a duty on the auditors but he submitted that the matters pleaded in para 16 of the statement of claim introduced a sufficient degree of proximity. In support of that contention he relied on the judgment of Woolf J in JEB Fasteners Ltd v Marks Bloom & Co (a firm) [1981] 3 All ER 289. That was a take-over case, as appears from the opening paragraphs of the judgment (at 291):
‘… the plaintiffs acquired the entire share capital of that company. They contend
Page 826 of [1989] 1 All ER 798
that they would not have purchased the company if they had known its true financial position, but that they did so relying on its audited accounts for the year ending 31st October 1974, prepared by the defendants, which did not give a true and fair view of the state of the company. The plaintiffs allege that they have suffered substantial loss and damage as a result of the purchase of the company. Before going into the facts in great detail it is desirable if I indicate my views as to the legal issues involved which have been in dispute before me. In order to succeed in this case, the plaintiffs have to establish as a matter of law that the defendants owed them a duty of care so as to give rise to liability if they were negligent in the preparation of the accounts. It is not alleged that at the time the accounts were audited the defendants knew that the accounts would be relied on by the plaintiffs. Indeed, no takeover was then contemplated, and counsel for both the plaintiffs and the defendants agree that there is no direct English authority on the question whether the defendants owe such a duty in those circumstances.’
Woolf J then reviewed the authorities and as his decision on them is crucial to the argument for Caparo in the present case I must look a little more closely at the build up to his conclusion.
He began with the dissenting judgment of Denning LJ in Candler v Crane Christmas & Co [1951] 1 All ER 426 at 434, [1951] 2 KB 164 at 180–181 approved by the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465. In that case the accountants had been asked by the company to prepared accounts expressly for the purpose of being shown to the plaintiff, who was proposing to invest money in the company. Denning LJ asked himself to whom accountants owed a duty and said:
‘They owe the duty, of course, to their employer or client, and also, I think, to any third person to whom they themselves show the accounts, or to whom they know their employer is going to show the accounts so as to induce him to invest money or take some other action on them. I do not think, however, the duty can be extended still further so as to include strangers of whom they have heard nothing and to whom their employer without their knowledge may choose to show their accounts. Once the accountants have handed their accounts to their employer, they are not, as a rule, responsible for what he does with them without their knowledge or consent.’
After further citation Woolf J said ([1981] 3 All ER 289 at 293):
‘In Candler, although the facts are in some respects similar to those in the present case, it was clear that the accountants concerned had knowledge that the accounts were to be supplied to the plaintiffs, and of the specific purpose for which they were required. It is therefore understandable that Denning LJ, having dealt with liability of accountants who had such knowledge and the position of strangers to the accountants to whom their employer without their knowledge chose to show their accounts, did not deal specifically with the position where the accountants had no actual knowledge that the accounts would be shown to a particular person, but should reasonably have foreseen that the accounts could be shown to a third person who would rely on them.’
Woolf J then referred to the well-known passage from the judgment of Cardozo CJ in Ultramares Corp v Touche (1931) 255 NY 170 at 179:
‘If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.’
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Woolf J then said that if the law had stood there he would have felt constrained to hold that there was no general duty based on foreseeability, but the law had not stood there and he cited next the oft-cited passage from the speech of Lord Wilberforce in Anns v Merton London Borough [1977] 2 All ER 492 at 498–499, [1978] AC 728 at 751:
‘Through the trilogy of cases in this House, Donoghue v Stevenson [1932] AC 562, [1932] All ER Rep 1, Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 3 All ER 575, [1964] AC 465 and Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294, [1970] AC 1004, the position has now been reached that in order to establish that a duty of care arises in a particular situation, it is not necessary to bring the facts of that situation within those of previous situations in which a duty of care has been held to exist. Rather the question has to be approached in two stages. First one has to ask whether, as between the alleged wrongdoer and the person who has suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter, in which case a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may give rise (see the Dorset Yacht case [1970] 2 All ER 294 at 297–298, [1970] AC 1004 at 1027, per Lord Reid). Examples of this are Hedley Byrne & Co Ltd v Heller & Partners Ltd where the class of potential plaintiffs was reduced to those shown to have relied on the correctness of statements made, and Weller & Co v Foot and Mouth Disease Research Institute [1965] 3 All ER 560, [1960] 1 QB 569 and (I cite these merely as illustrations, without discussion) cases about “economic loss” where, a duty having been held to exist, the nature of the recoverable damages was limited (see SCM (United Kingdom) Ltd v W J Whittall & Son Ltd [1970] 3 All ER 245, [1971] 1 QB 337, Spartan Steel and Alloys Ltd v Martin & Co (Contractors) Ltd [1972] 3 All ER 557, [1973] QB 27).’
Woolf J also cited a passage from the speech of Lord Salmon ([1977] 2 All ER 492 at 512–513, [1978] AC 728 at 769):
‘There are a wide variety of instances in which a statement is negligently made by a professional man which he knows will be relied on by many people besides his client, eg a well-known firm of accountants certifies in a prospectus the annual profits of the company issuing it and unfortunately, due to negligence on the part of the accountants, the profits are seriously overstated. Those persons who invested in the company in reliance on the accuracy of the accountants’ certificate would have a claim for damages against the accountants for any money they might have lost as a result of the accountants’ negligence: see the Hedley Byrne case.’
Next he examined the New Zealand Court of Appeal’s decision in Scott Group Ltd v McFarlane [1978] 1 NZLR 553. That was another take-over case; the court was divided but Woolf J extracted from the judgments that two members of the court, applying the foreseeability test from Anns, thought that a sufficient degree of proximity existed to impose liability notwithstanding the fact that the auditors had no direct knowledge of the plaintiffs or that a take-over from any quarter was contemplated.
Lastly he relied on certain passages in the judgment of Megarry V-C in Ross v Caunters (a firm) [1979] 3 All ER 580, [1980] Ch 297. This is yet another case where the straight foreseeability test from Anns was used to impose a duty of care on a solicitor to the beneficiary in a client’s will.
After this review of the case law Woolf J said ([1981] 3 All ER 289 at 296–297):
‘Without laying down any principle which is intended to be of general application, on the basis of the authorities which I have cited, the appropriate test for establishing
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whether a duty of care exists appears in this case to be whether the defendants knew or reasonably should have foreseen at the time the accounts were audited that a person might rely on those accounts for the purpose of deciding whether or not to take over the company and therefore could suffer loss if the accounts were inaccurate. Such an approach does place a limitation on those entitled to contend that there has been a breach of duty owed to them. First of all, they must have relied on the accounts and, second, they must have done so in circumstances where the auditors either knew that they would or ought to have known that they might. If the situation is one where it would not be reasonable for the accounts to be relied on, then, in the absence of express knowledge, the auditor would be under no duty. This places a limit on the circumstances in which the audited accounts can be relied on and the period for which they can be relied on. The longer the period which elapses prior to the accounts being relied on, from the date on which the auditor gave his certificate, the more difficult it will be to establish that the auditor ought to have foreseen that his certificate would, in those circumstances, be relied on.’
The JEB Fasteners case was relied on and followed in a case in the Outer House in Twomax Ltd v Dickson M‘Farlane & Robinson 1982 SC 113. In that case the three pursuers had bought shares in a company relying on the audited accounts. The Lord Ordinary (Stewart) found as a fact that Mr M‘Farlane, the auditor, did not know that any of the three pursuers were potential investors when he audited the accounts but, applying the approach suggested by Woolf J, held that the auditors did owe a duty of care. It is instructive to see how the judge did this. He said (at 125):
‘Mr M‘Farlane’s state of knowledge when he audited the 1973 accounts included a number of matters which I consider relevant to the assessment of what he should reasonably have foreseen. He was aware that Kintyre was suffering from a shortage of capital. He was aware during the summer months of 1973 that a director, Mr Anderson, wished to dispose of his shareholding. He was aware that this shareholding was substantial, amounting to 10,000 shares. The defenders had in fact advertised in the newspaper under a box number on behalf of Mr Anderson. He knew for certain that the accounts were being made available to lenders in so far as he knew they were lodged with the company’s bank. He knew that auditors’ certificates, when they were “clean” certificates, were commonly relied on by shareholders, potential investors, and potential lenders. In the whole circumstances I consider that Mr M‘Farlane should have foreseen before he certified the 1973 accounts that these accounts might be relied on by a potential investor for the purpose of deciding whether or not to invest. The situation was such that I would have though it an inevitable inference that Mr M‘Farlane should have realised by the time he came to grant his audit certificate that there would shortly be some dealings in the issued shares of Kintyre and might well be fresh shares issued in order to inject new capital into the company. While he did not know then about Twomax and Mr Gordon he should, in my view, reasonably have foreseen that there would be incorporations or individuals who would be interested potential investors either in the sense of purchasing shares already issued or of taking up any fresh issue. To these, the latest audited accounts of the company would be of very great importance in influencing them whether or not to invest and at what price. I, therefore, consider that in respect of Twomax and Mr Gordon, both being in the class of persons who were potential investors, Mr M‘Farlane owed a prima facie duty of care in the auditing of the 1973 accounts. That answers affirmatively the first question posed by Lord Wilberforce in Anns.’
I think that the judges in these two cases, JEB Fasteners and Twomax, understood the first stage of the test in Anns in the first sense referred to by Lord Keith in Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705 at 710, [1988] AC 175 at 191. They appreciated the conflict with what I may call ‘the Ultramares control’ and sought to resolve it by confining
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foreseeability. Now that the later development of the law has uncoupled proximity from foreseeability it is no longer necessary to attempt what I regard as an artificial constriction of foreseeability. Assume that auditors know, as a result of their professional skill and experience, that the state of the company is such that a take-over bid may be made, I do not think that, if a bid is made, that knowledge alone creates a sufficient proximity between bidder and auditor to impose a duty of care on the auditor. In any given case the fact that the number of potential take-over bidders is less, or far less if you like, than the number of potential share buyers does not produce proximity. In my judgment there has to be something linking the auditor to the person relying on his certificate other than knowledge that some person or persons may rely on the certificate. The linkage which I regard as necessary has sometimes been identified in the cases as ‘assumption of responsibility’ or ‘a special relationship’, but I think that it is the same concept. Obvious examples were given by Denning LJ in Candler’s case where it will be remembered the accounts had been produced for the express purpose of being shown to an identified would-be investor. I do not regard it as necessary or desirable to say more as to what facts may provide the necessary linkage.
In the present case, if one disregards the fact that Caparo were shareholders, I am satisfied that on the facts pleaded the auditors did not owe any duty of care to Caparo.
Caparo were in fact shareholders: see para 4 of the statement of claim. Counsel for Caparo submitted that that fact alone was sufficient to satisfy the requirement of proximity. I must examine that submission.
Although auditors are employed by the company, the statutory provisions focus on the report which they are required to make to the shareholders and I have no doubt that they are under a like duty to exercise care and skill in making their report. Similar provisions in the Companies Act 1879 were considered in this court in Re London and General Bank (No 2) [1895] 2 Ch 673, [1895–9] All ER Rep 953. In that case the auditors made a report to the directors pointing out in detail the unsatisfactory nature of the bank’s main asset, ‘loans to customers and other securities’. They ended saying that in their opinion no dividend should be paid for the year. They were persuaded by the chairman to omit that last sentence from the report before it went to the board. Their certificate, as laid before shareholders, concluded: ‘The value of the assets as shewn on the balance-sheet is dependent upon realisation.' As originally drafted it had gone on to say ‘And on this point we have reported specifically to the board’, but again the chairman prevailed on them to withdraw that sentence. At the general meeting, on the chairman’s proposal, a dividend was declared. It turned out that the dividend could only be paid and was paid out of capital. When the bank was wound up the liquidator claimed the sum paid out as dividend from the auditors. Lindley LJ said ([1895] 2 Ch 673 at 682, [1895–9] All ER Rep 953 at 956–957):
‘It is impossible to read s. 7 of the Companies Act, 1879, without being struck with the importance of the enactment that the auditors are to be appointed by the shareholders, and are to report to them directly, and not to or through the directors. The object of this enactment is obvious. It evidently is to secure to the shareholders independent and reliable information respecting the true financial position of the company at the time of the audit. The articles of this particular company are even more explicit on this point than the statute itself, and remove any possible ambiguity to which the language of the statute taken alone may be open if very narrowly criticised. It is no part of an auditor’s duty to give advice, either to directors or shareholders, as to what they ought to do. An auditor has nothing to do with the prudence or imprudence of making loans with or without security. It is nothing to him whether the business of a company is being conducted prudently or imprudently, profitably or unprofitably. It is nothing to him whether dividends are properly or improperly declared, provided he discharges his own duty to the shareholders. His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that.’
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The court held that the auditors had failed to discharge their duty to the shareholders.
There is a further passage in the judgment of Lindley LJ to which I must refer. He said ([1895] 2 Ch 673 at 688, [1895–9] All ER Rep 953 at 959–960):
‘A point was made that the form of the order was wrong. But there is nothing in this. Mr. Theobald could obviously be sued alone in an action at law for breach of his statutory duty as auditor, and for damages resulting from the breach of duty, and the measure of damages would be the sum which he has been ordered to pay.’
In my judgment the proper analysis of that case is that the shareholders in general meeting took a decision, which but for the breach of duty of the auditors they would not have taken, and that decision caused loss to the company which it could have brought an action to recover. The court was not considering whether any duty was owed by the auditors to the shareholders in their individual capacities. Indeed, in their individual capacities so far from suffering any loss each had gained to the extent of the dividend received.
The statutory duty owed by auditors to shareholders is, I think, a duty owed to them as a body. I appreciate that it is difficult to see how the overstatement of the accounts can cause damage to the shareholders as a body: it will be the underlying reasons for the overstatement which cause damage, for example fraudulent abstraction of assets by directors or servants, but such loss is recoverable by the company. I am anxious to limit the present case to deciding whether the statutory duty operates to protect the individual shareholder as a potential buyer of further shares. If I am wrong in thinking that under the statute no duty is owed to shareholders as individuals, then I think that the duty must be confined to transactions in which the shareholder can only participate because he is a shareholder. The statute imposes a duty to shareholders as a class and the duty should not extend to an individual save as a member of the class in respect of some class activity. Buying shares in a company is not such an activity. Selling shares may be, for only a shareholder can sell shares. (I disregard certain stock exchange short-term gambling practices). We do not have to decide whether in a case where the accounts understate the value of the company a shareholder who sells shares and suffers loss could claim that loss as damages for breach of statutory duty. I say this because, in so far as the statutory duty is relied on as dispensing with other proof of proximity, it can only do so within its confines.
I appreciate that it can be said that it is not sensible to distinguish between a shareholder buying shares and a shareholder selling shares, but I regard it as more sensible than the alternative. Let me give an example. Two friends each have money to invest. One is a shareholder and receives the report with the certified accounts; having read it he hands it to his friend, who also reads it, and both decide individually to buy shares. I find it very difficult to draw any distinction between these two and as I am satisfied that the friend does not establish the required proximity I conclude nor does the shareholder.
I have considered the statutory duty of auditors to shareholders. I see no reason to impose any wider duty at common law.
For these reasons I conclude that the auditors did not owe any duty to Caparo in their capacity as shareholders. Something more was required to create what I regard as the necessary linkage and it is not present in this case.
For these reasons I would dismiss this appeal but, as Bingham and Taylor LJJ take a different view, the order must be that the appeal be allowed.
Appeal allowed. Leave to appeal to House of Lords granted.
Solicitors: Berwin Leighton; Freshfields.
Raina Levy Barrister.
Practice Direction
(Chancery Division: Bristol)
[1989] 1 All ER 831
PRACTICE DIRECTIONS
CHANCERY DIVISION
20 December 1988.
Practice – Chancery Division – Hearings by judges outside London – Bristol – New arrangements – Weekly sittings for motions and other urgent business – Urgent applications at other times – Commencement of proceedings – Authorised jurisdiction.
I am pleased to be able to announce new arrangements for the hearing of cases assigned to the Chancery Division of the High Court. From January 1989 the judge authorised by the Lord Chancellor to hear such cases will sit regularly at the Old Council House, Bristol. He will be available on at least one fixed day each week to hear motions and other urgent business and he will be able to offer fixed and, it is hoped, early dates for trials and other longer hearings.
In addition the judge should be available to hear urgent applications, even out of court hours, whenever necessary.
Proceedings will be issued, as at present, in the High Court Registry, Greyfriars, Bristol. When actions commenced in the county court involve issues of Chancery law or procedure, these will be heard, if convenient, by the Chancery judge.
The jurisdiction authorised by the Lord Chancellor is unrestricted save as regards particular categories of Chancery business, primarily revenue cases. Nevertheless, if a case arises in any of the excluded categories, or which for any other reason should be heard by a judge of the High Court, and a local hearing is desirable, then I have the authority of the Vice-Chancellor to say that, whenever possible, arrangements will be made for a High Court judge to hear the case in Bristol or such other trial centre as may be convenient.
It is hoped that these new arrangements will enable the courts to offer the public in general, and the business and financial communities in particular, a prompt and efficient service for the hearing and resolution of all Chancery disputes.
Nolan J, Presiding Judge, Western Circuit
20 December 1988.
Practice Direction
(Chancery Division: Cardiff)
[1989] 1 All ER 832
PRACTICE DIRECTIONS
CHANCERY DIVISION
20 December 1988.
Practice – Chancery Division – Hearings by judges outside London – Cardiff – New arrangments – Weekly sittings for motions and other urgent business – Urgent applications at other times – Commencement of proceedings – Authorised jurisdiction.
I am pleased to be able to announce new arrangements for the hearing of cases assigned to the Chancery Division of the High Court. From January 1989 the judge authorised by the Lord Chancellor to hear such cases will sit regularly at the Law Courts in Cardiff. He will be available on at least one fixed day each week to hear motions and other urgent business and he will be able to offer fixed and, it is hoped, early dates for trials and other longer hearings.
In addition the judge should be available in South Wales to hear urgent applications, even out of court hours, whenever necessary.
Proceedings will be issued, as at present, in the High Court Registry, Westgate Street, Cardiff. When actions commenced in the county court involve issues of Chancery law or procedure, these will be heard, if convenient, by the Chancery judge.
The jurisdiction authorised by the Lord Chancellor is unrestricted save as regards particualr categories of Chancery business, primarily revenue cases. Nevertheless, if a case arises in any of the excluded categories, or which for any other reason should be heard by a judge of the High Court, and a local hearing is desirable, then I have the authority of the Vice-Chancellor to say that, whenever possible, arrangements will be made for a High Court judge to hear the case in Cardiff or such other trial centre as may be convenient.
It is hoped that these new arrangements will enable the courts to offer the public in general, and the business and financial communities in particular, a prompt and efficient service for the hearing and resolution of all Chancery disputes.
Evans J, Presiding Judge, Wales and Chester Circuit
20 December 1988.
Smith v Stages and another
[1989] 1 All ER 833
Categories: TORTS; Tortious Liability
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD GRIFFITHS, LORD GOFF OF CHIEVELEY AND LORD LOWRY
Hearing Date(s): 26, 27, 31 OCTOBER, 1 NOVEMBER 1988, 23 FEBRUARY 1989
Vicarious liability – Master and servant – Act within course of employment – Journey to temporary job – Employee paid wages while travelling to and from temporary job – Time and mode of travel left to employee’s discretion – Whether employee acting within course of employment when travelling to and from temporary job – Whether employer vicariously liable for employee’s negligence while travelling to and from temporary job in his own car.
The employee was employed by the employers as a peripatetic lagger to install insulation at power stations. In August 1977 he was working on a power station in the Midlands when he was taken off that job and sent with another employee, the first defendant, to carry out an urgent job on a power station in Wales. The two employees were paid eight hours’ pay for the travelling time to Wales and eight hours’ pay for the journey back, as well as the equivalent of the rail fare for the journey, although no stipulation was made as to the mode of travel. The two employees travelled to Wales in the first defendant’s car and stayed a week in Wales while working on the power station there. At the end of the job, after working for 24 hours without a break in order to finish the job, they decided to drive straight back to the Midlands. On the way back the car, driven by the first defendant, left the road and crashed through a brick wall. The employee was seriously injured and he brought an action against the first defendant, who was uninsured, and against the employers alleging that they were vicariously liable for the first defendant’s negligence since he had been acting in the course of his employment while driving the two employees back to the Midlands. The employee subsequently died from unrelated causes and his widow continued the action on behalf of his estate. The judge held that the accident had been caused by the first defendant’s negligence but further held that the employers were not liable because he had not been acting in the course of his employment at the time of the accident. On appeal, the Court of Appeal reversed his decision and held that the employers were vicariously liable for the first defendant’s negligence. The employers appealed to the House of Lords.
Held – An employee who for a short time was required by his employer to work at a different place of work some distance away from his usual place of work was acting in the course of his employment when returning to his ordinary residence after completing the temporary work if he travelled back to his ordinary residence in the employer’s time, which he would be doing if he was paid wages (and not merely a travelling allowance) for the time travelled notwithstanding that the time and mode of travel were left to his discretion. Accordingly, since the employees had been paid while driving back to the Midlands they had been travelling in the employers’ time and the employers were vicariously liable for the first defendant’s negligence. The appeal would therefore be dismissed (see p 834 h j, p 838 a to d h, p 850 d e and p 851 c to g j, post).
St Helens Colliery Co Ltd v Hewitson [1923] All ER Rep 249, Canadian Pacific Rly Co v Lockhart [1942] 2 All ER 464 and dictum of Sir John Donaldson MR in Nancollas v Insurance Officer [1985] 1 All ER 833 at 837 applied.
Vandyke v Fender (Sun Insurance Office Ltd, third party) [1970] 2 All ER 335 approved.
Per curiam. An employee travelling on the highway will be acting in the course of his employment if, and only if, he is at the material time going about his employer’s business. The duty to turn up for work must not be confused with the concept of already being ‘on duty’ while travelling to it (see p 834 h j, p 836 c g to p 837 a and p 851 b c, post).
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Notes
For accidents arising out of or in the course of employment, see 33 Halsbury’s Laws (4th) paras 486–497, and for cases on the subject, see 35 Digest (Reissue) 6863–707, 6723–6840.
Cases referred to in opinions
Alderman v Great Western Rly Co [1937] 2 All ER 408, [1937] AC 454, HL.
Barras v Aberdeen Steam Trawling and Fishing Co Ltd [1933] AC 402, [1933] All ER Rep 52, HL.
Blee v London and North Eastern Rly Co [1937] 4 All ER 270, [1938] AC 126, HL.
Canadian Pacific Rly Co v Lockhart [1942] 2 All ER 464, [1942] AC 591, PC.
Elleanor v Cavendish Woodhouse Ltd [1973] 1 Lloyd’s Rep 313, CA.
Harvey v R G O’Dell Ltd (Galway, third party) [1958] 1 All ER 657, [1958] 2 QB 78, [1958] 2 WLR 473.
Nancollas v Insurance Officer [1985] 1 All ER 833, CA.
Netherton v Coles [1945] 1 All ER 227, CA.
Nottingham v Aldridge (Prudential Assurance Co Ltd, third party) [1971] 2 All ER 751, [1971] 2 QB 739, [1971] 3 WLR 1.
R v Industrial Injury Benefits Tribunal, ex p Fieldhouse (1974) 17 KIR 63, DC.
St Helens Colliery Co Ltd v Hewitson [1924] AC 59, [1923] All ER Rep 249, HL.
Vandyke v Fender (Sun Insurance Office Ltd, third party) [1970] 2 All ER 335, [1970] 2 QB 292, [1970] 2 WLR 929, CA.
Weaver v Tredegar Iron and Coal Co Ltd [1940] 3 All ER 157, [1940] AC 955, HL.
Appeal
The second defendants, Darlington Insulation Co Ltd (the employers), appealed with the leave of the Appeal Committee of the House of Lords given on 12 April 1988 against the decision of the Court of Appeal (Lord Donaldson MR, Glidewell LJ and Sir Denys Buckley) ([1988] ICR 201) on 1 December 1987 allowing the appeal of the plaintiff, Mary Smith, the widow and administratrix of Ronald George Machin, against the decision of his Honour Judge Wilson Mellor QC, sitting as a judge of the High Court in the Queen’s Bench Division at Birmingham, upholding the claim brought by Mr Machin and continued by the plaintiff after his death against the first defendant, George Stages, for damages for personal injury but dismissing Mr Machin’s claim against the employers that they were vicariously liable for the first defendant’s negligence as his employers. The facts are set out in the opinion of Lord Goff.
Piers Ashworth QC and Peter Bowers for the employers.
D H Stembridge for the plaintiff.
The first defendant did not appear.
Their Lordships took time for consideration
23 February 1989. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Lowry. I agree with it, and for the reasons he gives would dismiss the appeal.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given by my noble and learned friends Lord Goff and Lord Lowry I would dismiss the appeal.
LORD GRIFFITHS. My Lords, I agree that this appeal should be dismissed for the reasons given in the speech of my noble and learned friend Lord Lowry.
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LORD GOFF OF CHIEVELEY. My Lords, Mr Machin and the first defendant, Mr Stages, were employed by the second defendants, Darlington Insulation Co Ltd (the employers). The employers specialise in the insulation of pipes, boilers and power stations. Mr Machin and Mr Stages worked for them as laggers at powers stations; they had both worked for the employers in that capacity for many years. In August 1977 they were members of a group of about 20 laggers, employed by the employers, working at Drakelow power station at Burton-on-Trent. At that time, Mr Machin appears to have been living in Burton-on-Trent; it is not clear where Mr Stages was living. There was another job to be done at Pembroke power station. Mr Pye, the employers’ contract manager, visited the power station at Pembroke to assess the job. It was urgent, and had to be completed by 29 August 1977. So it was decided to withdraw Mr Machin and Mr Stages from Drakelow to do the job at Pembroke. They went down to Pembroke on Monday, 22 August, travelling in Mr Stages’s car. They started work there on Tuesday, 23 August; they worked right through the rest of the week and the following weekend, working long hours, and, by working straight through Sunday and Sunday night, finished the job by 8.30 am on Monday, 29 August, which was the August bank holiday. Shortly after finishing work on the Monday morning, they drove back home in Mr Stages’s car. On the way there was a serious accident. Mr Stages’s car left the road; it crashed through a brick wall into a field, and both men were seriously injured. No other vehicle was involved. Mr Stages, the driver, was plainly at fault. Mr Machin survived the accident, but he died about two years later from lung cancer unconnected with the accident.
In December 1978, before his death, Mr Machin commenced proceedings against Mr Stages for damages for his personal injuries arising out of the accident. In the following March the employers were joined as second defendants; this was no doubt because Mr Stages proved to be uninsured. Mr Machin alleged that the employers were vicariously liable for the negligence of Mr Stages. This allegation raised the crucial question in the case, which was whether, at the time of the accident, Mr Stages was acting in the course of his employment with the employers.
After Mr Machin’s death in August 1979, his widow continued the action on behalf of her husband’s estate. In the action, the employers alleged contributory negligence on the part of Mr Machin, in allowing himself to be driven by Mr Stages when he knew that he had not had enough sleep. The action came on for trial in October 1986 before his Honour Judge Wilson Mellor QC, sitting as a judge of the High Court. The judge held that Mr Stages (who took no part in the trial) had been negligent, and dismissed the employers’ allegation of contributory negligence against Mr Machin; but he dismissed the action against the employers on the grounds that Mr Stages was at the relevant time acting neither as agent for the employers nor in the course of his employment with them. In December 1987 the Court of Appeal reversed that decision, holding that Mr Stages had been acting in the course of his employment (see [1988] ICR 201). It is against that decision that the employers now appeal to your Lordships’ House.
The present case can be seen as one of those cases, which have troubled the courts in the past, in which the question has arisen whether an employee, travelling to or from a place of work, is acting in the course of his employment. In order to consider the question in the present case, it is necessary first to examine the facts of the case in a little detail. The full facts are set out in that speech of my noble and learned friend Lord Lowry, on whose account I gratefully rely.
The employers set aside a normal working day (Monday, 22 August) for the two men’s journey to Pembroke; they were paid as for an eight-hour day for the journey. In addition, each received the equivalent of their rail fare as travelling expenses. The employers made no direction as to the means by which the men travelled. The two men were however expected to start work at 8 am on Tuesday, 23 August, and to finish the job by 8.30 am on Monday, 29 August, which, to their great credit, they did. After that,
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they were expected to report for work at Drakelow at 8 am on Wednesday, 31 August. While they were working at Pembroke, they were paid for the actual hours worked by them, the usual premium rate being paid for overtime. An allowance was paid for their lodgings in Pembroke. At the end of the job they were also paid eight hours’ sleeping time, because they had worked for one day and one night consecutively (on Sunday, 28 August). Although the men were expected to sleep on the next day, Monday, there was no way in which the employers could compel them to sleep on that day. Since Monday was the August bank holiday, they were also paid holiday time for that day. Another normal working day (Tuesday, 30 August) was made available for the journey back. The two men were again paid as for an eight-hour day for the journey; they were also given the same allowance for travelling expenses as on the way out. Once again, it is plain that they could travel by any means they liked; their duty was to report for work at Drakelow on the Wednesday morning.
I now turn to the applicable principles of law. The fundamental principle is that an employee is acting in the course of his employment when he is doing what he is employed to do, to which it is sufficient for present purposes to add, or anything which is reasonably incidental to his employment. In Canadian Pacific Rly Co v Lockhart [1942] 2 All ER 464 at 468, [1942] AC 591 at 600 (a case concerned with vicarious liability) Lord Thankerton said: ‘In these cases the first consideration is the ascertainment of what the servant was employed to do.' This statement reflects a statement of principle by Lord Atkinson in an earlier case, St Helens Colliery Co Ltd v Hewitson [1924] AC 59 at 70–71, [1923] All ER Rep 249 at 256 (a workmen’s compensation case), in which he said:
‘I myself have been rash enough to suggest a test—namely, that a workman is acting in the course of his employment when he is engaged “in doing something he was employed to do.” Or what is, in other and I think better words, in effect the same thing—namely, when he is doing something in discharge of a duty to his employer, directly or indirectly, imposed upon him by his contract of service. The true ground upon which the test should be based is a duty to the employer arising out of the contract of employment, but it is to be borne in mind that the word “employment” as here used covers and includes things belonging to or arising out of it.’
As usual, it is comparatively easy to state the principle; but it is more difficult to apply it to the facts of individual cases. Even so, it is important always to keep the principle in mind.
As I have already observed, we are here concerned with a case which may be seen as one of those cases concerned with travelling to or from work. I have used guarded language in so describing it, because (as will appear) I do not consider the present case to fall strictly within that category of case. Even so, it is helpful to use the cases in that category as a starting point. We can begin with the simple proposition that, in ordinary circumstances, when a man is travelling to or from his place of work, he is not acting in the course of his employment. So a bank clerk who commutes to the City of London every day from Sevenoaks is not acting in the course of his employment when he walks across London Bridge from the station to his bank in the City. This is because he is not employed to travel from his home to the bank: he is employed to work at the bank, his place of work, and so his duty is to arrive there in time for his working day. Nice points can arise about the precise time, or place, at which he may be held to have arrived at work; but these do not trouble us in the present case. Likewise, of course, he is not acting in the course of his employment when he is travelling home after his day’s work is over. If, however, a man is obliged by his employer to travel to work by means of transport provided by his employer, he may be held to be acting in the course of his employment when so doing.
These are the normal cases. There are, however, circumstances in which, when a man is travelling to (or from) a place where he is doing a job for his employer, he will be held
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to be acting in the course of his employment. Some of these are listed by Lord Atkin in Blee v London and North Eastern Rly Co [1937] 4 All ER 270 at 273, [1938] AC 126 at 131–132. So, if a man is employed to do jobs for his employer at various places during the day, such as a man who goes from door to door canvassing for business, or who distributes goods to customers, or who services equipment like washing machines or dishwashers, he will ordinarily be held to be acting in the course of his employment when travelling from one destination to another, and may also be held to do so when travelling from his home to his first destination and home again after his last. Again, it has been held that, in certain circumstances, a man who is called out from his home at night to deal with an emergency may be acting in the course of his employment when travelling from his home to his place of work to deal with the emergency: see Blee v London and North Eastern Rly Co. There are many other cases.
But how do we distinguish the cases in this category in which a man is acting in the course of his employment from those in which he is not? The answer is, I fear, that everything depends on the circumstances. As Sir John Donaldson MR said in Nancollas v Insurance Officer [1985] 1 All ER 833 at 836, the authorities—
‘approve an approach which requires the court to have regard to and to weigh in the balance every factor which can be said in any way to point towards or away from a finding that the claimant was in the course of his employment. In the context of the present appeals, there are a number of such factors to which we must have regard, but none is of itself decisive.’
For example, the fact that a man is being paid by his employer in respect of the relevant period of time is often important, but cannot of itself be decisive. A man is usually paid nowadays during his holidays; and it often happens that an employer may allow a man to take the afternoon off, or even a whole day off, without affecting his wages. In such circumstances, he will ordinarily not be acting in the course of his employment despite the fact that he is being paid. Indeed, any rule that payment at the relevant time is decisive would be very difficult to apply in the case of a salaried man. Let me, however, give an example concerned with travelling to work. Suppose that a man is applying for a job, and it turns out that he would have a pretty arduous journey between his home and his new place of work, lasting about an hour each way, which is deterring him from taking the job. His prospective employer may want to employ him, and may entice him by offering him an extra hour’s pay at each end of the day, say ten hours’ pay a day instead of eight. In those circumstances he would not, I think, be acting in the course of his employment when travelling to or from work. This is because he would not be employed to make the journey: the extra pay would simply be given to him in recognition of the fact that his journey to and from work was an arduous one.
That example serves, I think, to point up the two alternative solutions under consideration in the present case. For to me, the question is this. Was Mr Stages employed to travel to and from Pembroke? Or was the pay given to him simply in recognition of the fact that he had lost two days’ work at Drakelow because, in order to work at the power station at Pembroke, he would have to make his own way to Pembroke and back again to the Midlands? If we can solve that problem, we can answer the question whether Mr Stages was acting in the course of his employment when, worn out, he crashed his car on the A40 near Llandeilo.
I propose first to consider the problem not in relation to his journey back from Pembroke when the accident in fact happened, but in relation to his journey out to Pembroke. I shall do so because I find it easier to consider the problem uncomplicated by the fact that Monday, 29 August, was a bank holiday or by the fact that Mr Stages was being paid eight hours’ sleeping time because he had worked through the night of Sunday, 28 August, although, as will appear, I consider both facts to be irrelevant. I should add that Mr Stages’s contract of service was not apparently in evidence before the judge; and so, although that is normally a material document, sometimes a highly
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material document, in these cases, your Lordships’ House has (like the courts below) to reach a conclusion unassisted by the terms of the relevant contract.
I approach the matter as follows. I do not regard this case as an ordinary case of travelling to work. It would be more accurate to describe it as a case where an employee, who has for a short time to work for his employers at a different place of work some distance away from his usual place of work, has to move from his ordinary base to a temporary base (here lodgings in Pembroke) from which he will travel to work at the temporary place of work each day. For the purpose of moving base, a normal working day was set aside for Mr Stages’s journey, for which he was paid as for an eight-hour day. In addition to his day’s pay he was given a travel allowance for his journey, and an allowance for his lodgings at his temporary base in Pembroke. In my opinion, in all the circumstances of the case, Mr Stages was required by the employers to make this journey, so as to make himself available to do his work at the Pembroke power station, and it would be proper to describe him as having been employed to do so. The fact that he was not required by his employer to make the journey by any particular means, nor even required to make it on the particular working day made available to him, does not detract from the proposition that he was employed to make the journey. Had Mr Stages wished, he could have driven down on the afternoon of Sunday, 21 August, and have devoted the Monday to (for example) visiting friends near Pembroke. In such circumstances it could, I suppose, be said that Stages was not travelling ‘in his employers’ time’. But this would not matter; for the fact remains that the Monday, a normal working day, was made available for the journey, with full pay for that day to perform a task which he was required by the employers to perform.
I have it very much in mind that Mr Machin and Mr Stages were described by counsel for the employers as peripatetic laggers working at such sites as were available. This may well be an accurate description of their work. If so, their contracts of service may have provided at least an indication as to how far they would be acting in the course of their employment when changing from one power station to another. Indeed, accepting the description as correct, it is difficult to know how much weight to give to it in the absence of their contracts of service. However, the present case can in any event be differentiated on the basis that it was a departure from the norm in that it was concerned with a move to a temporary base to deal with an emergency, on the terms I have described.
I turn to Mr Stages’s journey back. Another ordinary working day, Tuesday, 30 August, was made available for the journey, with the same pay, to enable him to return to his base in the Midlands to be ready to travel to work on the Wednesday morning. In my opinion, he was employed to make the journey back, just as he was employed to make the journey out to Pembroke. If he had chosen to go to sleep on the Monday morning and afternoon for eight hours or so, and then to drive home on the Monday evening so that he could have Tuesday free (as indeed Mr Pye expected him to do), that would not have detracted from the proposition that his journey was in the course of his employment. For this purpose, it was irrelevant that Monday was a bank holiday. Of course, it was wrong for him to succumb to the temptation of driving home on the Monday morning, just after he had completed so long a spell of work; but once again that cannot alter the fact that his journey was made in the course of his employment.
For these reasons, I would dismiss the appeal.
LORD LOWRY. My Lords, the plaintiff and respondent is the widow and administratrix of Ronald George Machin deceased (the deceased). He and the first defendant, George Stages, were employed as laggers by the second defendants and appellants, Darlington Insulation Co Ltd (the employers), and on 29 August 1977, having finished a lagging job at Pembroke power station, they were returning to the Midlands in Mr Stages’s motor car when, by reason of Mr Stages’s negligent driving, the car left the road and crashed and both men were seriously injured. The deceased died on 30 August
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1979 from lung cancer which was unrelated to the 1977 accident but was caused by asbestosis for which the employers admitted liability.
On 11 December 1978 the deceased had sued Mr Stages for damages for personal injuries, loss and damage sustained, as alleged, by reason of Mr Stages’s negligence and on 26 March 1979 (no doubt because Mr Stages proved to be uninsured and the Motor Insurers’ Bureau was by then out of reach) he had joined the employers as defendants under RSC Ord 20, r 1, alleging that, as the employers of Mr Stages, they were vicariously liable for his negligence. The plaintiff continued this action for the benefit of the deceased’s estate under the Law Reform (Miscellaneous Provisions) Act 1934 and also sued the employers under the Fatal Accidents Act 1976 for damages occasioned by the deceased’s death from lung cancer.
In the first action Mr Stages by his defence denied negligence but did not appear, nor was he represented, at the trial or subsequently. The employers by their defence and at the trial denied that the accident to the deceased was caused by Mr Stages’s negligence and that either the deceased or Mr Stages was in the course of his employment at the time of the accident and alleged that the accident was caused wholly or partly by the negligence of the deceased in travelling with Mr Stages when the latter, to the knowledge of the deceased, had not had sufficient rest.
Both actions were tried in October 1986 at Birmingham by his Honour Judge Wilson Mellor QC sitting as a judge of the High Court. In the first action he found Mr Stages to have been negligent and rejected the allegation of contributory negligence, but gave judgment for the employers against the plaintiff on the ground that Mr Stages was not the agent of the employers or acting in the course of his employment at the time of the accident. The judge then assessed the damages in both actions and stated his reasons on 10 November in a carefully considered judgment.
Your Lordships have no further concern with the Fatal Accidents Act claim, but the plaintiff appealed against the judgment in favour of the employers in the first action. They in turn cross-appealed against the negative finding on contributory negligence. The Court of Appeal (Sir John Donaldson MR, Glidewell LJ and Sir Denys Buckley) by their judgment on 1 December 1987 allowed the plaintiff’s appeal and dismissed the cross-appeal (see [1988] ICR 201). From that judgment, in so far as it allowed the plaintiff’s appeal, the employers have appealed by leave of this House. Thus the question whether Mr Stages was acting in the course of his employment when driving his car at the time of the accident is the sole question for your Lordships to decide. I turn first to the evidence.
At the trial the plaintiff put in form BI 76, a questionnaire relating to an industrial injuries claim by the deceased, which was issued by the Department of Health and Social Security at Burton-on-Trent and answered on 16 September 1977 by Mr William Wilkinson, the office manager of the employers’ Birmingham branch. The form contained the erroneous statement that at the time of the accident the deceased was travelling from one site to another, but nothing now turns on this.
The plaintiff also relied on interrogatories which had been administered to the employers, but the information contained in the answers appears from the employers’ evidence. The address of the deceased was given as 4 Short Street, Stapenhill, Burton-on-Trent in the writ of summons when it was first issued.
As part of their evidence, the employers read a statement which Mr Wilkinson, who had died in 1983, made to their solicitors in Birmingham in May 1981. It showed that the employers had a Birmingham branch, of which the witness had been the office manager for 31 years, and that they applied insulation to a number of power stations ‘throughout the southern area’. In August 1977 they had 20 or 30 men engaged at Drakelow power station, Burton-on-Trent and also had a contract to carry out thermal insulation at Pembroke power station. Mr Pye, the contracts manager, went to Pembroke to price the job and assess the time required. It was urgent and had to be completed by 8.30 am on 29 August. The deceased and Mr Stages, both experienced men, were ‘withdrawn’ from Drakelow power station and sent to Pembroke power station. The
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deceased was with the employers for nearly 23 years and Mr Stages for 12. Before they went to Pembroke they were ‘instructed by Mr Pye’, who told them what had to be done, when the job had to be completed and the number of hours involved.
The remainder of the statement reads as follows:
‘They travelled down to Pembroke on Monday, 22 August 1977 and on that day they were paid eight hours’ travelling time. They were to be paid eight hours’ travelling time each way. They were given the equivalent of rail fare each as travelling expenses. No stipulation was made as to how they travelled. We raised no objection if they travelled by car. In fact we had no way of knowing how they travelled. No stipulation was made when they travelled. They were given eight hours’ travelling on Monday, 22 August 1977 and we expected them to start work at 8 am on Tuesday, 23 August 1977. They worked from Tuesday, 23 August 1977 through to the following Sunday night and Monday morning. They worked 11 hours on Tuesday, Wednesday and Thursday, and 9 hours on Friday. 13 hours on the Saturday and 19 hours on Sunday into Monday morning. On the Sunday they worked from 8.30 am to 6.30 pm and had a one-hour break in that time for meals. They then recommenced at 9 pm and worked until 8.30 am the following morning with a 1 1/2-hour break in that spell. They were the actual working hours they were paid for. The usual premium rate was paid on overtime hours. At Pembroke power station the men clocked in and out but that was for the purpose of security at the power station. It was not for our purposes. The men could clock in and rest if they wished. We would not have known of the clocking in and out hours if it had not been thought necessary to obtain them because of the accident. The men finished their physical work at 8.30 am. That was the time they were paid until. They clocked out at 8.37 am. On top of the hours they worked they were paid eight hours’ sleeping time. That was in accordance with our usual procedures. They were aware of that and had each been paid that on several occasions before. The sleeping time was given because they worked one day and one night consecutively and it enabled them to rest before making their journey home and be paid for it. It was accepted that the men required rest before returning home because they had been deprived of their sleep by virtue of the work done. Although the men were paid to rest there was no way we could enforce that. They could rest for as long or as little as they liked without our knowledge. Monday, 29 August 1977 was a bank holiday. That was the day they were paid sleeping time. On Tuesday, 30 August 1977 they were paid eight hours’ travelling time. They were expected to return to work at Drakelow power station at 8 am on Wednesday, 31 August 1977. The men did not ask us if they could travel back on the Monday and I would not have expected them to. We had no jurisdiction over them after they clocked out because the moneys they were paid after that time were allowances not for the work done. They would have known that if they had asked us if they could travel on the Monday we would have had to say no. It would not only have been unsafe but it was against the regulations. We would in fact have forbidden them to travel by road without first having their proper rest. The position was that we were not paying them to work but were paying them an allowance in accordance with r 3(ii)(e) of the national agreement between the Thermal Insulation Contracting Industry and the General and Municipal Workers Union and the Transport and General Workers’ Union.’
Only r 3 (overtime) of the national agreement was in evidence and only r 3(ii)(e) is germane to this case:
‘Any operative working one day and one night consecutively shall not work for the ensuing day of 8 hours which shall be paid at plain time rates.’
It must perforce be assumed that the national agreement contains nothing about sleeping or travelling time, pay or allowances which sheds light on the question.
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Mr Pye then gave evidence. He had since 1977 moved to Darlington as technical representative. Examining him, counsel for the employers said: ‘As I understand the position the men are paid the rail fare between their home base and wherever they are going to work?' The witness confirmed this and stated that the men received the fare (in each direction) in cash. He also confirmed that the employers had no control over how the men travelled to the site, except where company transport was supplied. He would know how the men travelled, but would not have to give permission. He added: ‘I am not concerned how they travel. I am concerned that they get on the job and get it completed on time.' It did not matter, he said, in which direction the men went or how long they took. I give the next passage verbatim:
‘Q. In order to get to Pembroke are they given any time paid? A. Yes, they are paid travelling time.
Q. Is that based on an eight-hour day? A. For Pembroke it was eight hours travelling. Normally it is the travelling time plus time to find accommodation, and we thought eight hours is an appropriate time.
Q. So they received payment for that? A. Yes.
Q. Did they receive a day off whilst they were being paid that?
Counsel for the plaintiff: Do not lead the witness, please.
A. No, no. They don’t receive a day off. The day they are travelling down there they are receiving time.
Q. So they are paid a day to travel? A. Yes.
Q. Does it matter if they travel during that day or not? A. No, they are given time when they should report to the job, and normally they travel the day previous because they have got to find accommodation as well, you see.’
Asked when the two men were expected to report for work again, Mr Pye said: ‘At 8 am Wednesday at Drakelow.' He had no control from 8.30 am on Monday until then. The employers had to pay ‘eight hours’ sleeping time’ to men who worked a day and a night consecutively, and, in this case, ‘eight hours’ travelling time’ as well. It did not matter to the employers what the men did between finishing the job and reporting for work on the Wednesday. When asked if he would have expected the men to travel straight after finishing work, the witness replied: ‘Not really, no, but I have got to be truthful; it does go on, or it did go on at that time, you know.’
I shall refer to just one passage in the cross-examination of counsel for the plaintiff:
‘Q. You knew they were travelling by motor car? A. Yes.
Q. In Mr Stages’s motor car? A. Yes.
Q. You knew that Mr Machin would be travelling as his passenger? A. Yes.
Q. You or the company was paying them wages during the time they spent travelling from the Midlands to this power station, and again back from the power station to the Midlands, were you not? A. Yes.’
Mr Pye also clarified the point that the men (like other employees) received ten and two-thirds hours’ pay (time and a third) in respect of Monday, 29 August because it was a public holiday, as well as eight hours’ travelling time in each direction and eight hours’ sleeping time.
The last defence witness was Mr Bostock. I refer to his cross-examination on the question of sleeping time:
‘Q. They are not doing physical work (we know that), but they were regarded as being employed by you on that Monday, were they not, and you were paying them? A. They were using the allowance for sleeping time, yes.
Q. It was not an allowance; it was a wage, was it not? A. It was a wage for sleeping time, yes, which was paid to them in respect of the eight hours they would spend sleeping.’
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I have devoted some time to the evidence because in this case, as in most others, the facts constitute the essential basis for the legal inquiry into the question at issue. The picture may be regarded as incomplete, since your Lordships do not know the terms of Mr Stages’s contract of service or the arrangements which the employers may customarily have made with regard to the pay and allowances of their men when travelling from home or from a place of employment to undertake various jobs. It is, of course, possible that nothing of consequence has been omitted, but it all too frequently happens that, only when the legal principles have been analysed in depth, is the significance recognised of facts which are not in evidence and cannot then be ascertained. In such a situation it becomes necessary to assume that everything relevant has been ascertained and to hope that nothing is missing which could have led to a different conclusion.
The trial judge found that the deceased and Mr Stages were employed at Drakelow power station and were sent by Mr Pye to Pembroke power station to do the lagging on a job which he had assessed. They were paid for a standard eight-hour day for the journey and for the time spent finding themselves accommodation in Pembroke. The employers knew that the men travelled in Mr Stages’s car but they neither required nor specifically authorised them to do so. Each man was paid the equivalent of the railway fare and allowed to travel in any way he chose. As a result of working a whole night the men became entitled to a day’s wages for sleeping. They also were entitled to a day for travelling back to the Midlands. The men were not supervised at Pembroke and there was no evidence of any instructions being given to them there. He also referred to r 3(ii)(e) of the national agreement, cited above.
The employers argued that it necessarily followed from this rule that the men could not be working when travelling on Monday, because pursuant to the rules Monday was to be the day paid for as sleeping time. The judge rejected this point but, after summarising the facts, he found ‘no basis for the suggestion that Mr Stages drove his car as agent for the defendants’.
Then, after reviewing a number of decided cases to which, so far as may be necessary, I shall return, the trial judge further concluded—
‘that the claim by the plaintiff in the first action on the footing that the [employers] are vicariously liable for the negligence of Mr Stages must fail.’
The plaintiff appealed against the decision that Mr Stages was not driving during and in the course of his employment on the grounds that (a) the accident occurred during normal working hours at a time when Mr Stages and the deceased were being paid for their services, (b) the employers knew that and had approved of the fact that Mr Stages was using his motor car and taking the deceased with him as a passenger to travel to and from Pembroke power station where they were required to carry out work on behalf of the employers. The plaintiff also averred that the judge misdirected himself in holding that Mr Stages was not driving his motor car ‘incidental to his work as a lagger.’
The Court of Appeal allowed the appeal, and I now come to the judgment of Glidewell LJ, in which the other members of the court concurred. Glidewell LJ, after stating the facts, noted the trial judge’s first main finding (see [1988] ICR 201 at 207):
‘I find no evidence that those rules were ever brought to the attention of the deceased, or, indeed, Stages. They seem designed as much for the protection of an employee as for the protection of the employer … I regard the attempt before me to allocate the Monday as a sleeping day and Tuesday as a travelling day as an ex post facto rationalisation designed to exonerate the [employers] from liability for Stages’ conduct. I conclude that the facts, in summary, were these: the [employers] were aware that the deceased had travelled in Stages’ car to Pembroke and would probably travel back in the same way on the Monday. Having paid each man his travelling allowance his mode of travel was left by the [employers] to his discretion. The travelling day was paid for as a working day and the [employers] were entitled to
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direct how the deceased and Stages should act during that day. The [employers], however, issued no instructions in the manner of travel. Stages drove his car and neither sought nor received any authority from the [employers] to do so. In these circumstances I can find no basis for the suggestion that Stages drove his own car as agent for the [employers].’
Glidewell LJ then said (at 207):
‘I should say that in that passage the judge was finding that what Mr. Wilkinson said—that the [employers] had no control over Stages and Machin during the time between 8.30 on the Monday morning and the time when they were due to arrive at Drakelow—was inaccurate. If indeed at the relevant times, when they should or might have been sleeping and were in fact travelling home, these men were acting in the course of their employment (i.e. both activities took place during the company’s time), I respectfully agree with the judge that the company could have directed the deceased and Stages and told them how to act. They could have ordered them not to travel, certainly by car, on the day on which they were being paid for resting. That is contingent upon both periods, the rest period and the travelling period, being periods when they were acting or expected to act within the scope of their employment.’
He noted without surprise, as I do, that the judge had concluded that Mr Stages was not acting as the employers’ agent the plaintiff‘s real case was that Mr Stages was driving the car in the course of his employment so as to render the employers vicariously liable for his negligence. On that issue the judge had found against the plaintiff (at 207–208):
‘Nevertheless, he was not paid to drive; he was not instructed or obliged to drive; no control was exercised or claimed by the [employers] as to how he should travel; and no allowance was paid. [As to that, Glidewell LJ said: ‘That last remark is a little difficult to understand in the light of the evidence.' The trial judge continued:] Although these men were travelling by car they were equally entitled to travel by train or coach or howsoever they pleased. The allowance in working hours and pay for such hours for travelling does not, in my view, necessarily bring such travel within the ambit of a man’s work. I therefore conclude that the claim by the plaintiff in the first action on the footing that the [employers] are vicariously liable for the negligence of Stages must fail.’
Glidewell LJ then reviewed that conclusion in the light of a number of authorities, which he summarised to good effect. For the moment I shall be content merely to list them. They were Canadian Pacific Rly Co v Lockhart [1942] 2 All ER 464, [1942] AC 591, Harvey v R G O’Dell Ltd (Galway, third party) [1958] 1 All ER 657, [1958] 2 QB 78, Vandyke v Fender (Sun Insurance Office Ltd, third party) [1970] 2 All ER 335, [1970] 2 QB 292 (in which reference was made to St Helens Colliery Co Ltd v Hewitson [1924] AC 59, [1923] All ER Rep 249 and Weaver v Tredegar Iron and Coal Co Ltd [1940] 3 All ER 157, [1940] AC 955) and Nottingham v Aldridge (Prudential Assurance Co Ltd, third party) [1971] 2 All ER 751, [1971] 2 QB 739. All these cases had been mentioned by the trial judge; Glidewell LJ cited two more: Elleanor v Cavendish Woodhouse Ltd [1973] 1 Lloyd’s Rep 313 and Nancollas v Insurance Officer [1985] 1 All ER 833. From these cases he derived four principles which he set out (at 211):
‘First, where an employee is driving solely between his home and his normal place of work or vice versa, it may well be that he is not in the course of his employment unless the test laid down by Lord Denning M.R. in Vandyke v. Fender ([1970] 2 All ER 335, [1970] 2 QB 292) is satisfied, that is to say that it is an obligation to travel in the way in which he is travelling. Secondly, when he is travelling between two places of work—for example, as here, if the employee is travelling between a main base and a distant place at which he is engaged to work
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temporarily, particularly if the second place is premises not occupied by the employers but premises at which he is to work, generally the journey will be within the course of his employment. Thirdly, if he makes such a journey—that is to say in the employers’ time and in order to carry out his employment at a place distant from his main base—but for convenience he actually starts off in the morning from his own home instead of leaving from his home base, so to speak, or returns in the evening to his own home rather than going via his base, it may well be that such a journey too will be within the course of his employment. It is a question of whether, within the contract of his employment, he was required to make that particular journey, even though the beginning or end of it may be his home rather than the base. Finally, if no other transport is available, and for convenience sake he travels in his own car and the employers know that and approve of it and permit him to do so—in other words authorise him to travel by car rather than in some other way—that may well mean that the journey in his own car will be in the course of his employment.’
He then disposed, conclusively in my opinion, of an attempt by the employers’ counsel to distinguish the present case from those in which an employee who had left his base in the morning and come back the same day had been held to have been travelling in the course of his employment. This is an unsound distinction: it should not matter whether a travelling salesman, for example, completes his rounds on one day (or a succession of days on each of which he returns to base) or stays away for a night or several nights in the course of his peripatetic employment. And the mere fact that he is not acting in the course of his employment while sitting in his hotel or lodgings or while going out in the evening does not alter the character of his journey while he is travelling on his employer’s business. Similarly, the plaintiff has no need to show that the deceased and Mr Stages were in the course of their employment while relaxing at Pembroke during the evenings of their stay there. They were in the same position there as the ticket collector in Alderman v Great Western Rly Co [1937] 2 All ER 408, [1937] AC 454.
The employers argued secondly that on the Monday, ‘when, according to the evidence, they were being paid to rest and not to travel,’ the men were not acting in the course of their employment and that, if they chose to travel on that day, it was not within the course of their employment. Glidewell LJ met that submission (convincingly, in my opinion) with the following observations (at 212–213):
‘The difficulty which faces that argument which to my mind is in the end conclusive—I must say that it was an argument which greatly attracted me at first—is the finding of the judge to which I have already referred but to which I return that the travelling day was paid as a working day and the employers were entitled to direct how the deceased and Stages should act during that day. I have already said that this can only be correct if prima facie Stages’ journey, if made at some other time—for instance, if it had been made on the Tuesday—would have been in the course of his employment. That is I think what the judge had in mind. Then the employers would have been entitled to direct that he should not drive on the Monday. But they did not do so. If it is right that they were entitled to direct that Stages should not drive on the Monday and should drive on the Tuesday—or certainly should not travel by car on the Monday because he would be so exhausted—the fact that the employers did not take the opportunity to give such directions means in my view that, whenever Stages embarked on the journey back, which itself was to be made in the employers’ time and was regarded as part of Stages’ and Machin’s job that week and thus was a part of the course of their employment, that journey took place during the course of their employment. It was left to them to decide when to drive to Staffordshire. Whenever they chose to do it, if the employers did not take the opportunity to direct them, the journey was made during the course of their employment. Since the employers had authorised Stages to drive,
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and to drive Machin, not merely was the journey made during the course of their employment but Stages was driving in the course of his employment. Therefore in my view, based upon the conclusion to which the judge came to which I have just referred, the eventual conclusion to which he came was, with respect to him, wrong. I would hold that this journey, on the facts of this particular case, was made during the course of Stages’ employment and thus that the [employers] were vicariously liable for his negligent driving.’
At an earlier point in his judgment Glidewell LJ adverted to a passage in the judgment of Sir John Donaldson MR in Nancollas v Insurance Officer [1985] 1 All ER 833 at 840 in which he said:
‘We cannot overemphasise the importance of looking at the factual picture as a whole and rejecting any approach based on the fallacious concept that any one factor is conclusive. The addition or subtraction of one factor in a given situation may well tip the balance. In another, the addition or subtraction of the same factor may well make no difference. We appreciate that it would assist if we could lay down rules or even guidelines. However, there are no rules, other than that which is contained in the statute: if, looking at the whole factual picture, the claimant suffered the accident whilst in the course of his employment, he is eligible for benefit, assuming all other conditions are satisfied. As to guidelines, it would be possible to point to material factors: was he being paid for what he was doing? Was it the employer’s car? If not, was he paid mileage allowance? Was it of any concern to the employer that he was where he was? Had he a fixed place of work and was he going to it? Had he more than one fixed place of work and was he travelling between them? But any such list would mislead, if, as is almost inevitable, it was once thought to be comprehensive. We could list factors which are irrelevant, but again any examples would have to be so extreme as to be unhelpful, because otherwise we might be dismissing a factor which, in exceptional circumstances which we had not envisaged, might nevertheless have had some weight.’
These observations on the crucial importance of the facts teach a valuable lesson, but I would be reluctant to see them as indicating that there are no principles in the light of which to resolve the question your Lordships have had to consider.
The trial judge’s conclusion was one of mixed fact and law. Was it susceptible of attack and, if so, on what grounds? I agree with Glidewell LJ that the judge was right (or was at least justified) in regarding ‘the attempt … to allocate the Monday as a sleeping day and Tuesday as a travelling day as an ex post facto rationalisation designed to exonerate the [employers]’ (see [1988] ICR 201 at 207). Once he had gone that length in the plaintiff’s favour, with the men having been paid their wages while travelling to Pembroke and back, it could well be thought that the case had been decided in the plaintiff’s favour. But he found against the plaintiff on the course of employment issue. I am, however, satisfied that the Court of Appeal was right and I consider that the judge misdirected himself in point of law by drawing faulty conclusions from cases decided on different facts. In a passage already quoted above the judge said:
‘[1] Nevertheless, he was not paid to drive; [2] he was not instructed or obliged to drive; [3] no control was exercised or claimed by the [employers] as to how he should travel; [4] and no allowance was paid.’
(I have inserted the figures for ease of reference.)
My observations are as follows. (1) This point would be relevant to answer the claim based on agency, but it does not prevent Mr Stages from having been in the course of his employment; the fact that he was driving is incidental. The deceased was a passenger but that fact was consistent with the deceased’s being in the course of his employment; both men were employed to go to Pembroke, do the lagging job and come back. Both their
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travelling, by car or other means, and their work at Pembroke were to be paid for by the employers and done in the employers’ time. (2) It was up to the deceased and Mr Stages how they reached Pembroke and how they returned; a travelling salesman with no special directions or orders as to his mode of transport would have been in the same position. The question of obligation to use a particular means arises only where the employee prima facie is not making a paid journey in his employer’s time on his employer’s business, eg when he is going from his home to his main place of work. (3) In this case the employers had the right of control, although they did not exercise it. (4) This is wrong; quite apart from the travelling allowance, the important thing is that the men were paid their wages to travel there and back.
The next sentence in the judgment adds nothing which has not been covered by what I have said: ‘Although these men were travelling by car, they were equally entitled to travel by train or coach or howsoever they pleased.' The judge went on: ‘The allowance in working hours and pay for such hours for travelling does not, in my view, necessarily bring such travel within the ambit of a man’s work.' Not necessarily, it may be, but the payment of wages makes a prima facie case which is uncontradicted. It is, moreover, important that the employers (who had 20 or 30 men engaged at Drakelow) ‘withdrew’ the deceased and Mr Stages from there and ‘sent them to Pembroke’. They were paid eight hours’ travelling time there and back as well as eight hours’ sleeping time. They were not regarded as having a day off when travelling but were ‘receiving time’. The employers knew that they were travelling in Mr Stages’s car and were paying their wages during the time spent travelling to Pembroke and back. All this is taken directly from the employers’ evidence.
The first case to which the trial judge looked for assistance was Nottingham v Aldridge [1971] 2 All ER 751, [1971] 2 QB 739. The plaintiff and the first defendant were apprentices attending a residential training school as part of their employment with the second defendants. They were returning from a weekend spent at home in a van driven by the first defendant and owned by his father when the plaintiff was injured in an accident caused by the first defendant’s negligence. Eveleigh J held that the employers were not liable for the driver’s negligence because at the relevant time he was not acting as either their servant or their agent. Although he was given both a mileage and a passenger allowance and had a duty to present himself at the detached place of work, the first defendant was under no duty to drive himself or the plaintiff there: the mode and time of travel and the route were at his discretion and the employers had no right of control. Many of these points coincided with the circumstances of the present case, but in Nottingham v Aldridge the occupants of the car were travelling in their own time (that is unpaid time) and not in the employers’ time and were not on duty but merely returning to duty after a weekend off. The driver was receiving allowances but neither he nor his passengers were being paid wages to cover the time of their journey. That case, as well as others, exemplifies the danger of picking out features and treating them as decisive in a different context. With respect, this is what I think the trial judge did when he relied on Nottingham v Aldridge to defeat the plaintiff on the course of employment issue. The judge further relied on a passage from the judgment of Lord Denning MR in Vandyke v Fender [1970] 2 All ER 335 at 340, [1970] 2 QB 292 at 305, which Eveleigh J had cited in Nottingham v Aldridge [1971] 2 All ER 751 at 756, [1971] 2 QB 739 at 747. Referring to the words ‘arising out of and in the course of his employment’, Lord Denning MR said:
‘The selfsame words have been used in the Road Traffic Acts 1930 and 1960. They have also been used in employers’ liability policies. In my opinion they should receive the same interpretation in all three places for they are all so closely connected that they ought, as a matter of common sense, to receive the same interpretation in each. The words were construed and applied in thousands of cases under the Workmen’s Compensation Acts and I think we should follow those cases. The two
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leading cases, most apposite for present purposes, are St Helens Colliery Co Ltd v Hewitson [1924] AC 59, [1923] All ER Rep 249 and Weaver v Tredegar Iron Coal Co Ltd [1940] 3 All ER 157, [1940] AC 955. They show, to my mind quite conclusively, that when a man is going to or coming from work, along a public road, as a passenger in a vehicle provided by his employer, he is not then in the course of his employment—unless he is obliged by the terms of his employment to travel in that vehicle. It is not enough that he should have the right to travel in the vehicle, or be permitted to travel in it. He must have an obligation to travel in it. Else he is not in the course of his employment. That distinction must be maintained, for otherwise there would be no certainty in this branch of the law.’ (Lord Denning MR’s emphasis.)
What was here said about the passenger in relation to the course of his employment was also apposite to the driver, as Eveleigh J pointed out.
My Lords, let me say at once that I entirely agree with all of Lord Denning MR’s general observations on the consistently continuing meaning of the specified words and also with his answer to the particular questions which arose for decision in Vandyke v Fender [1970] 2 All ER 335, [1970] 2 QB 292. Both the plaintiff and Fender (who was driving) were undertaking their customary journey from their homes to their regular place of work. The employers provided a car and a travelling allowance, no doubt as an inducement to the men to accept their employment, but the men were not paid for the time during which they were travelling to work; they were not on duty and not in the course of their employment. Fender was, however, by virtue of his arrangements with the employers held to have been their agent, although not acting as their employee, while driving, with the result that they were liable to the plaintiff but had a right of indemnity against Fender (which in practice meant the insurers nominated by the Motor Insurers’ Bureau). The real contest was between the Motor Insurers’ Bureau and the company insuring the employer’s liability risk, which would arise only if the plaintiff, while a passenger in the car, was in the course of his employment. Accordingly, my Lords, to hold that Vandyke v Fender is of no help to the employers does not weaken its authority in any way.
The judge, rightly observing that ‘Cases where the servant is driving in his own time out of working hours fall on one side of the line’, included among them, as I would, Nottingham v Aldridge and Vandyke v Fender. He then adverted to Canadian Pacific Rly Co v Lockhart [1942] 2 All ER 464, [1942] AC 591 and Harvey v R G O’Dell Ltd [1958] 1 All ER 657, [1958] 2 QB 78, which fell on the other side. In Lockhart’s case the railway company employed a handyman called Stinson whose duties took him away from his base at Toronto to places which could be reached by rail. He was paid for the time needed to reach those places and was sometimes instructed or permitted to go by tram, and given a ticket. Men could use their own cars but there was a strict prohibition against doing this if the cars were not insured. Stinson had already been reprimanded for disregarding this rule. Despite this, he used his car (other means being available) while uninsured and negligently injured the plaintiff on the highway. The Privy Council, affirming the Supreme Court of Canada, which had reversed the trial judge and the Court of Appeal for Ontario, held that the company was liable for the negligence of Stinson because, although not paid to drive, he was acting in the course of his employment. It is noteworthy that the only argument before the Judicial Committee, and the only judicial opinions in the courts below, to the contrary effect were based on Stinson’s disobedience in failing to have his car insured. Lockhart’s case is therefore not only distinguishable from the cases already cited but strongly supportive of the plaintiff here.
A number of interesting motor insurance questions arose in Harvey v R G O’Dell Ltd. For present purposes your Lordships are concerned only with whether a workman driving his own motor cycle combination was acting in the course of his employment when driving a fellow employee on a five-mile return journey from a lunch break during
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which the men had collected tools. McNair J held that both when going out to the job in the morning in the employer’s paid time and when returning from the break the workman was acting in the course of his employment and further stated that he would have so held, even if tools had not been involved. I draw attention to what he said (see [1958] 1 All ER 657 at 665, [1958] 2 QB 78 at 102). The judge here cited that passage, and made no attempt to distinguish the present case on its facts. Harvey v R G O’Dell Ltd primarily exemplifies incidental deviation or interruption. It is also in general terms in favour of the plaintiff in this case and gives no support to the employers.
The judge also referred to Netherton v Coles [1945] 1 All ER 227, where the question was whether a painter who had to work at a hospital was in the course of his employment when travelling from there to his home. The Court of Appeal, reversing the county court judge, decided against the claimant: by the general rule a workman was not in the course of his employment between his home and his workplace; the employer had for the time being appointed the hospital as the workplace and the workman, though paid a travelling allowance equivalent to half-an-hour’s pay per day, received no pay and was regarded as being outside working hours when coming and going. The general observations of Finlay LJ are helpful to the plaintiff in the present case and were cited by the judge without comment.
Glidewell LJ reviewed the judge’s cases (except Netherton v Coles) and mentioned in addition Elleanor v Cavendish Woodhouse Ltd [1973] 1 Lloyd’s Rep 313 and Nancollas v Insurance Officer [1985] 1 All ER 833. In Elleanor’s case the Court of Appeal affirmed Ormrod J’s finding that a salesman, who worked during the day at his employer’s showroom and who canvassed for orders with a fellow employee in the evening (while receiving commission on orders, expenses and free petrol), was acting in the course of his employment while driving the fellow employee to the latter’s home after a canvassing trip. In the course of his judgment Lawton LJ put the matter with both wisdom and brevity ([1973] 1 Lloyd’s Rep 313 at 314–315):
‘At one stage of this case it looked as if the Court would have to consider and review a long line of authorities relating to what is meant by the phrase “in the course of employment“. Mr. Justice Ormrod had had to consider some of the authorities and he described them as “a nightmare“. Perhaps they are, if one tries to distinguish the very many reported cases on their facts. But in my judgment it is unnecessary to review the law in any detail at all, because ever since 1924, the principles applicable in this class of case have been established by the decision of the House of Lords in St. Helens Colliery Co. Ltd. v. Hewitson ([1924] AC 59, [1923] All ER Rep 249). What is required in this case (and it may be a difficult task) is to apply those principles to the facts of this case as established by the evidence.’
Nancollas v Insurance Officer [1985] 1 All ER 833 was concerned with a claim for industrial injury benefit by a disablement resettlement officer who lived at West Worthing, whose main office was at Worthing and whose duties took him to other job centres in his area and to the homes of disabled persons. He adjusted his working hours to the duties he had to perform. One morning he was driving from home to keep an appointment to see a disabled person in Aldershot when he was involved in an accident and injured. The Court of Appeal, reversing the Social Security Commissioners, held that at the time of the accident the claimant was in the course of his employment. There is an important passage in Sir John Donaldson MR’s judgment (at 837):
‘The reasoning which led them to reject the claim is long and detailed but the substance sufficiently appears from what follows in this judgment. The starting point is a proposition of law which the commissioners derived from the judgment of Lord Denning MR in Vandyke v Fender [1970] 2 All ER 335, [1970] 2 QB 292 that “The journey to and from work is not a journey in the course of employment unless the claimant is fulfilling a duty to his employer in undertaking it at the time or in
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the manner in which he is doing so”, coupled with references to the St Helens Colliery and Weaver cases. With the greatest respect to the commissioners, this discloses what may be a misreading and certainly a misapplication of the authorities. In all three cases the employees concerned each had only one regular work place, a mine or a factory, and the courts proceeded on the basis that the journeys were between home and the work place. They then considered whether any and, in the St Helens and Weaver cases, how much of that journey could properly be said to be in the course of the employment. In Mr Nancollas’s case, the issue was different. He had indeed a regular work place in his Worthing office, but on the day in question he was going somewhere else for the purposes of his work. The issue was whether the journey was not only in the course of, but part of, his work: whether at the material time the road was his work place. More specifically, it was whether Mr Nancollas was employed, inter alia, to drive to places in his area at which disabled persons could be interviewed and there interview them or whether he had a number of work places which he had to reach in order to work at them. Mr Nancollas lived in Worthing. He had his main base office in Worthing. He was sufficiently senior to decide for himself when and in what manner to travel to outstations and, if he had set out for Aldershot from his Worthing office instead of from his home, there can be no doubt that the whole of his journey from that office would have been undertaken in the course of his employment. It cannot, in principle, make any difference that, no doubt for sensible reasons such as that there would be no time to undertake any worthwhile work at the Worthing base office, he drove straight to Aldershot from his home. This was not a case of a man who one day worked at a Guildford office, on another at an Aldershot office and on a third at a Worthing office, travelling by car from home to the relevant “work place” each day. He was an itinerant officer who, in the course of his employment, had to roam his area calling at appropriate offices and, no doubt, private homes to attend case conferences and to interview disabled people. In driving to Aldershot, Mr Nancollas was not going to work. That was part of his work.’
The point I would stress before parting with Nancollas’s case is that the decisions of the commissioners which were reversed were founded not on Vandyke v Fender [1970] 2 All ER 335, [1970] 2 QB 292 but on a misreading of that authority. It cannot be supposed that Lord Denning MR, when he laid down the general rule about travel between home and place of work, intended to treat as if they had never existed authorities such as Canadian Pacific Rly Co v Lockhart [1942] 2 All ER 464, [1942] AC 591 and Blee v London and North Eastern Rly Co [1937] 4 All ER 270, [1938] AC 126 (in which a railway worker was by his contract obliged to turn out from his home in emergencies and was to be paid from the time he left home in answer to the summons).
The only other case of this kind which I wish to mention is R v Industrial Injury Benefits Tribunal, ex p Fieldhouse (1974) 17 KIR 63, which culminated in an application for an order of certiorari and in which a peripatetic petrol station manager who had been injured in a traffic accident while travelling on the direct route between two petrol stations, intending to spend the night at his home on the way, failed in his claim for industrial injury benefit. Lord Widgery CJ stated in his judgment that the claimant was travelling in off duty hours; furthermore, it was common ground between the parties that the commissioners had not erred in law. Not surprisingly, the commissioners’ finding that the claimant had not been at the material time in the course of his employment was not disturbed.
Accordingly, in agreement with the Court of Appeal, I conclude that the judge went wrong in the way I have described. I would add that, in my clear opinion, the decisions which are typified at the highest level by St Helens Colliery Co Ltd v Hewitson [1924] AC 59, [1923] All ER Rep 249 are correct and remain of binding authority. Parliament has continuously indorsed the effect of those decisions by its repeated use in various statutes
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of the phrase ‘in the course of his employment’, and the application of the principle so clearly enunciated in Barras v Aberdeen Steam Trawling and Fishing Co Ltd [1933] AC 402, [1933] All ER Rep 52 can rarely have been more obviously justified than in relation to those words. But the facts of each particular case are crucial and new social and economic factors, though not in any way undermining or detracting from the guiding principles to be deduced from the cases relied on by the present employers, have created some new situations to which the older authorities, though binding as to principle, do not always furnish a cut and dried solution.
In their printed case and before your Lordships the employers described the issues as:
‘(a) What are the correct principles to be applied in determining whether an employee travelling to or from work along a public highway is acting in the course of his employment? (b) Whether the test laid down by the Court of Appeal in Vandyke v. Fender ([1970] 2 All ER 335, [1970] 2 QB 292) is the correct test, and whether that case was correctly decided. (c) Whether the payment of an agreed allowance for working exceptional hours and/or for travelling time and/or the payment of travelling expenses affect the general principles and have the result that an employee travelling home is deemed to be travelling in the course of his employment whenever and by whatever means he chooses to make the journey.’
The answer to question (b) is that the test in Vandyke v Fender is the correct test in situations to which it applies and that that case was correctly decided. This conclusion, however, does not lead to the further conclusion that the Court of Appeal went wrong in the case now before your Lordships. The answer to question (c) is No, but that question appears to have been designed to sidestep or to render irrelevant the fact, which was clearly demonstrated by the employers’ evidence, that the men were paid not merely allowances but wages for travelling to Pembroke and back in their employers’ time. My Lords, I am not impressed by the employers’ counter-argument to the effect that the payment (expressly stated by the employers’ witnesses to be a payment of wages) was in reality an allowance in addition to the travelling expenses already allowed, a recompense to the workmen for missing two days’ employment at Drakelow. As to that I would make two points. There appears to be no justification for thus interpreting what the employers’ witnesses described as wages. Secondly, if there had been any further evidence on this important issue to contradict or explain the evidence already given, it would have been within the power of the employers, as well as in their interest, to produce it. A much simpler interpretation, wholly consistent with the authorities, is that the men, so far from being compensated for not working, were being paid their wages for performing a duty, that is for going to Pembroke, carrying out the lagging job and coming back, as directed.
Again, the employers in their printed case described the deceased and Stages as ‘peripatetic laggers working at such sites and on such contracts as were from time to time available’, suggesting that the work at Drakelow was ‘simply a longer and larger contract than that at Pembroke’ and that the fact that they were to return to work at Drakelow rather than at Pembroke ‘[did] not and [could] not affect the nature of their journey home from Pembroke’. This concept seems to me quite inconsistent with arranging to pay the men wages (or even compensation) when instructing them to stop work at Drakelow, go to Pembroke to carry out an urgent job and then resume work at Drakelow. As Mr Wilkinson put it in his statement, the men were ‘withdrawn from Drakelow’ and ‘sent to Pembroke’. There was no reason why their employment should not include going to and returning from Pembroke and being treated as on their employers’ payroll while doing so; as Glidewell LJ put it in the passage from his judgment which I have already cited ([1988] ICR 201 at 212):
‘… whenever Stages embarked on the journey back, which itself was to be made in the employers’ time and was regarded as part of Stages’ and Machin’s job that
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week and thus was a part of the course of their employment, that journey took place during the course of their employment.’
If the employers cannot succeed, they seek in the alternative as much certainty as the common law and your Lordships’ House can give them in a field which can too easily provide wasteful and expensive opportunities for conflict between the insurers, on the one hand, of motorists alleged to have caused damage by negligence and, on the other, of employers who are sought, by reason of someone’s allegedly negligent driving, to be rendered vicariously liable for (and sometimes to) one of their employees.
The paramount rule is that an employee travelling on the highway will be acting in the course of his employment if, and only if, he is at the material time going about his employer’s business. One must not confuse the duty to turn up for one’s work with the concept of already being ‘on duty’ while travelling to it.
It is impossible to provide for every eventuality and foolish, without the benefit of argument, to make the attempt, but some prima facie propositions may be stated with reasonable confidence. (1) An employee travelling from his ordinary residence to his regular place of work, whatever the means of transport and even if it is provided by the employer, is not on duty and is not acting in the course of his employment, but, if he is obliged by his contract of service to use the employer’s transport, he will normally, in the absence of an express condition to the contrary, be regarded as acting in the course of his employment while doing so. (2) Travelling in the employer’s time between workplaces (one of which may be the regular workplace) or in the course of a peripatetic occupation, whether accompanied by goods or tools or simply in order to reach a succession of workplaces (as an inspector of gas meters might do), will be in the course of the employment. (3) Receipt of wages (though not receipt of a travelling allowance) will indicate that the employee is travelling in the employer’s time and for his benefit and is acting in the course of his employment, and in such a case the fact that the employee may have discretion as to the mode and time of travelling will not take the journey out of the course of his employment. (4) An employee travelling in the employer’s time from his ordinary residence to a workplace other than this regular workplace or in the course of a peripatetic occupation or to the scene of an emergency (such as a fire, an accident or a mechanical breakdown of plant) will be acting in the course of his employment. (5) A deviation from or interruption of a journey undertaken in the course of employment (unless the deviation or interruption is merely incidental to the journey) will for the time being (which may include an overnight interruption) take the employee out of the course of his employment. (6) Return journeys are to be treated on the same footing as outward journeys.
All the foregoing propositions are subject to any express arrangements between the employer and the employee or those representing his interests. They are not, I would add, intended to define the position of salaried employees, with regard to whom the touchstone of payment made in the employer’s time is not generally significant.
In framing these propositions I acknowledge my debt to Glidewell LJ’s statement of principles in the Court of Appeal (see [1988] ICR 201 at 211). I would, however, respectfully suggest that some of the conditions laid down in the fourth principle are a little too restrictive.
My Lords, for the reasons I have already given, I would dismiss this appeal and affirm the order of the Court of Appeal.
Appeal dismissed.
Solicitors: Turner Kenneth Brown agents for Jacksons Monk & Rowe; Sharpe Pritchard agents for F A Greenwood & Co, Birmingham.
Mary Rose Plummer Barrister.
Holmes v Bangladesh Biman Corp
[1989] 1 All ER 852
Categories: AVIATION
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD GRIFFITHS, LORD ACKNER, LORD JAUNCEY OF TULLICHETTLE AND LORD LOWRY
Hearing Date(s): 30 NOVEMBER, 5, 6, 7 DECEMBER 1988, 16 FEBRUARY 1989
Carriage by air – Carriage of passengers – Domestic carriage – Foreign domestic carriage – Limitation of carrier’s liability – Death of passenger in air crash in Bangladesh – Claim by widow of passenger against carrier for damages – Carrier admitting liability – Bangladesh not party to international conventions governing contracts of carriage by air – Whether United Kingdom legislation governing non-convention carriage by air applicable – Whether amount of damages determinable by reference to Bangladesh law or United Kingdom rules – Whether United Kingdom rules to be given extra-territorial effect – Carriage by Air Act 1961, s 10 – Carriage by Air Acts (Application of Provisions) Order 1967, art 3, Sch 1.
In 1984 an aircraft operated by the appellants crashed on an internal domestic flight in Bangladesh. The respondent’s husband, who was a passenger, was killed. The respondent brought an action against the appellants in England claiming damages on behalf of herself and her children under the Fatal Accidents Act 1976 and on behalf of her deceased husband’s estate under the Law Reform (Miscellaneous Provisions) Act 1934, s 1. The appellants admitted liability and the only issue between the parties was the amount of damages recoverable. Under Bangladesh law, which governed the contract of carriage, the damages recoverable were limited to £913, whereas if the law to be applied was British law, which governed carriage by air under Sch 1 to the Carriage by Air Acts (Application of Provisions) Order 1967, the damages recoverable would be £83,763. The 1967 order was made under s 10(1)a of the Carriage by Air Act 1961, which conferred power by Order in Council to apply Sch 1 to that Act (which gave the force of law in England to the provisions of the Hague Convention) ‘to carriage by air, not being carriage by air to which the Convention applies, of such description as may be specified in the Order’. Article 3b and Sch 1 to the 1967 order provided rules for ‘all carriage by air, not being carriage to which [the Warsaw and Hague conventions] applies’. The question whether the rules contained in Sch 1 to the 1967 order applied to foreign domestic carriage, ie carriage within the territory of a foreign state, was ordered to be tried as a preliminary issue. The judge and the Court of Appeal held that the rules were so applicable. The appellants appealed to the House of Lords.
Held – The 1967 order could have no wider scope and effect than was duly authorised by the power conferred by s 10 of 1961 Act to legislate by Order in Council and, in conformity with the rule against giving extra-territorial effect to legislation, s 10 was to be construed as authorising legislation limited to carriage wholly within the United Kingdom or non-convention carriage involving a place of departure or destination or an agreed stopping place in a foreign state and a place of departure or destination or an agreed stopping place in the United Kingdom or other British territory. Accordingly, a contract of carriage made and to be performed wholly within the territory of a single foreign state or between two foreign states was excluded from the scope of the 1967 order. It followed that the rules contained in Sch 1 to the 1967 order did not apply to the contract of carriage between the deceased and the appellants and the respondent was therefore not entitled to rely on those rules. The appeal would therefore be allowed (see p 855 j to p 856 a, p 860 f to p 861 d, p 862 g, p 863 b, p 864 f g, p 865 d to j, p 875 e, p 876 a d to g and p 877 c to f, post).
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The Zollverein (1856) Sw 96, Cope v Doherty (1858) 2 De G & J 614, Re Sawers, ex p Blain [1874–80] All ER Rep 708 and Grein v Imperial Airways Ltd [1936] 2 All ER 1258 applied.
Notes
For rules as to liability in non-international air carriage and death or injury to passengers, see 2 Halsbury’s Laws (4th edn) paras 1397, 1402–1405.
For the Law Reform (Miscellaneous Provisions) Act 1934, s 1, see 17 Halsbury’s Statutes (4th edn) 312.
For the Carriage by Air Act 1961, s 10, Sch 1, see 4 ibid 26, 28.
For the Fatal Accidents Act 1976, see 31 ibid 202.
For the Carriage by Air Acts (Application of Provisions) Order 1967, art 3, Sch 1, see 3 Halsbury’s Statutory Instruments (Grey Volume) 23, 24.
As from a day to be appointed Sch 1 to the 1961 Act is to be substituted by s 1 of and Sch 1 to the Carriage by Air and Road Act 1979.
Cases referred to in opinions
AB & Co, Re [1900] 1 QB 541, CA.
Air-India v Wiggins [1980] 2 All ER 593, [1980] 1 WLR 815, HL.
Blain, Ex p, re Sawers (1879) 12 Ch D 522, [1874–80] All ER Rep 708, CA.
Clark (Inspector of Taxes) v Oceanic Contractors Inc [1983] 1 All ER 133, [1983] 2 AC 130, [1983] 2 WLR 94, HL.
Cope v Doherty (1858) 2 De G & J 614, 44 ER 1127, LJJ.
Cox v Army Council [1962] 1 All ER 880, [1963] AC 48, [1962] 2 WLR 126, HL.
Cox v Hakes (1890) 15 App Cas 506, HL.
Goldman v Thai Airways International Ltd [1983] 3 All ER 693, [1983] 1 WLR 1186, CA.
Grein v Imperial Airways Ltd [1936] 2 All ER 1258, [1937] 1 KB 50, CA.
Hawkins v Gathercole (1854) 6 De GM & G 1, 43 ER 1129, LJJ.
Hollandia, The [1982] 3 All ER 1141, [1983] 1 AC 565, [1982] 3 WLR 1111, HL.
Pearson, Re, ex p Pearson [1892] 2 QB 263, [1891–4] All ER Rep 1066, CA.
R v Jameson [1896] 2 QB 425.
Zollverein, The (1856) Sw 96, 166 ER 1038.
Appeal
Bangladesh Biman Corp, a Bangladesh airline, appealed with the leave of the Appeal Committee of the House of Lords given on 7 July 1988 against the decision of the Court of Appeal (Lord Donaldson MR, Dillon and Bingham LJJ) ([1988] 2 Lloyd’s Rep 120) on 26 February 1988 dismissing their appeal against the judgment of Leggatt J ([1987] 2 Lloyd’s Rep 192) given on 29 January 1987 on the hearing of a preliminary issue in the action brought by the respondent, Keiko Holmes, suing as the widow and executrix of the will of Geoffrey Paul Mervyn Holmes, otherwise known as Paul Holmes, deceased, against the appellants claiming damages under the Fatal Accidents Act 1976 on behalf of herself and her children and under the Law Reform (Miscellaneous Provisions) Act 1934 on behalf of the estate of her deceased husband who died in an air accident in Bangladesh while a passenger on an internal domestic flight in an aircraft operated by the appellants. The preliminary issue was whether the relevant carriage by air was one in respect of which Sch 1 to the Carriage by Air Acts (Application of Provisions) Order 1967, SI 1967/480, had effect. Leggatt J and the Court of Appeal held that the 1967 order was applicable. The facts are set out in the opinion of Lord Bridge.
Charles Sparrow QC and Robert Webb QC for the appellants.
Timothy Walker QC and Simon Browne-Wilkinson for the respondent.
Their Lordships took time for consideration
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16 February 1989. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, the respondent is the widow of Geoffrey Paul Mervyn Holmes who was killed in an air crash in August 1984. He was a passenger in an aircraft operated by the appellant airline flying from Chittagong to Dhaka in Bangladesh. The plane crashed as it approached Zia International Airport. This was a purely internal Bangladesh flight.
The widow sues the airline for damages under the Fatal Accidents Act 1976 on behalf of herself and her children and under the Law Reform (Miscellaneous Provisions) Act 1934 on behalf of the estate of her deceased husband. Liability not being in dispute, the only issue between the parties is as to the amount of damages recoverable. Under the terms of the contract between Mr Holmes and the airline and in accordance with the relevant Bangladesh legislation applicable to carriage by air in Bangladesh the damages the widow could recover would be limited to £913. But if the law to be applied is that which governs carriage by air under Sch 1 to the Carriage by Air Acts (Application of Provisions) Order 1967, SI 1967/480, damages would be recoverable up to a limit of £83,763. A preliminary issue in the action was ordered to be tried, namely:
‘Whether or not the carriage by air referred to in the Statement of Claim was carriage by air in respect of which Schedule 1 to the Carriage by Air Acts (Application of Provisions) Order 1967 had effect.’
Before the issue came to be tried the parties had agreed that the damages suffered exceeded the limit imposed by Sch 1 to the 1967 order. Accordingly, the final outcome of the action will now be governed by the determination of the issue. If it is determined in the widow’s favour, she will be entitled to judgment for £83,763; if not, for £913 only. Leggatt J determined the issue in the widow’s favour (see [1987] 2 Lloyd’s Rep 192). His judgment was affirmed by the Court of Appeal (Lord Donaldson MR, Dillon and Bingham LJJ) ([1988] 2 Lloyd’s Rep 120). The airline now appeals by leave of your Lordships’ House.
There are now two international conventions in force, each providing a uniform set of rules governing contracts of international carriage by air to which the convention applies. The first is the Warsaw Convention agreed in 1929. The second is an amended version of the Warsaw Convention agreed at The Hague in 1955, which it will be convenient to refer to as ‘the Hague Convention’. The United Kingdom is a party to both conventions. The Warsaw Convention was enacted into United Kingdom law by the Carriage by Air Act 1932. This came into force in the United Kingdom, the Channel Islands and the Isle of Man on 13 May 1933 and in all other dependent British territories on 3 March 1935. For brevity I shall hereafter refer to the Channel Islands, the Isle of Man and all other dependent British territories collectively as ‘other British territory’. The Hague Convention was enacted into United Kingdom law by the Carriage by Air Act 1961 and was brought into force in the United Kingdom and other British territory on 1 June 1967.
The scope of the Hague Convention appears from art 1, which provides:
‘(1) This Convention applies to all international carriage of persons, baggage or cargo performed by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking.
(2) For the purposes of this Convention, the expression international carriage means any carriage in which, according to the agreement between the parties, the place of departure and the place of destination, whether or not there be a break in the carriage or a transhipment, are situated either within the territories of two High Contracting Parties or within the territory of a single High Contracting Party if there is an agreed stopping place within the territory of another State, even if that State is not a High Contracting Party. Carriage between two points within the
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territory of a single High Contracting Party without an agreed stopping place within the territory of another State is not international carriage for the purposes of this Convention … ’
Article 1(1) of the Hague Convention repeats art 1(1) of the Warsaw Convention and the definition of ‘international carriage’ in art 1(2) repeats with immaterial drafting amendments that contained in art 1(2) of the Warsaw Convention. But a number of countries, notably the United States of America, which are party to the Warsaw Convention have never adopted the Hague Convention. Hence the scope of the ‘international carriage’ to which each convention applies is quite different.
Section 1 of the 1961 Act enacts that the provisions of the Hague Convention—
‘as set out in the First Schedule to this Act shall, so far as they relate to the rights and liabilities of carriers, carriers’ servants and agents, passengers, consignors, consignees and other persons, and subject to the provisions of this Act, have the force of law in the United Kingdom in relation to any carriage by air to which the Convention applies, irrespective of the nationality of the aircraft performing that carriage; and the Carriage by Air Act, 1932 (which gives effect to the Warsaw Convention in its original form), shall cease to have effect.’
Section 10(1) of the Act enacts:
‘Her Majesty may by Order in Council apply the First Schedule to this Act, together with any other provisions of this Act, to carriage by air, not being carriage by air to which the Convention applies, of such descriptions as may be specified in the Order, subject to such exceptions, adaptations and modifications, if any, as may be so specified.’
Section 10(2) provides a corresponding power to legislate by Order in Council for other British territory. Section 10 of the 1961 Act is a re-enactment with immaterial drafting amendments of s 4 of the 1932 Act which had been exercised by the Carriage by Air (Non-international Carriage) (United Kingdom) Order 1952, SI 1952/158, to impose a modified version of the Warsaw Convention providing a set of rules to govern all carriage by air not governed by the Warsaw Convention. When the 1961 Act was brought into force, it was necessary to give continuing force in United Kingdom law to the provisions of the Warsaw Convention in relation to ‘international carriage’ to which it still applied. The enabling power conferred by s 10 was exercised by the Carriage by Air Acts (Application of Provisions) Order 1967 both for this purpose and for the purpose of enacting a modified version of the Hague Convention providing a set of rules governing all carriage by air not falling within the definition of ‘international carriage’ in either of the two conventions. Thus there are now three sets of rules in the law of the United Kingdom and other British territory which govern different categories of carriage by air to which I shall refer for convenience as ‘the Hague rules’ (Sch 1 to the 1961 Act), ‘the Warsaw rules’ (Sch 2 to the 1967 order) and ‘the United Kingdom rules’ (Sch 1 to the 1967 order). The question is whether the United Kingdom rules apply to carriage by air which, according to the agreement between the parties, is to be performed wholly within the territory of a foreign state.
With so much by way of introduction, I have to say at once, with all respect, that, in my opinion, the judge and the Court of Appeal never applied their minds to the right question. They concentrated their attention exclusively on the language, structure and drafting technique of the 1967 order and found that it led them to a conclusion in favour of the widow which both Dillon and Bingham LJJ described as ‘startling’. But the 1967 order can have no wider scope and effect than is duly authorised by the power conferred by s 10 of the 1961 Act to legislate by Order in Council. If that power is unlimited, the scope of its exercise by the order will be a matter to be determined on the true construction of the order. But if on the true construction of s 10 the enabling power is
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itself limited, then it is axiomatic that the order cannot exceed that limit. Accordingly, it seems to me that the essential prior question to be answered, before attempting to construe the order, is whether the words in s 10, ‘carriage by air … of such descriptions as may be specified’, ought to be read as subject to any limitation.
At the heart of the issue lies a principle embodied in a line of authority which I shall have to examine and which certainly establishes a presumption limiting the scope which should be given to general words in a United Kingdom statute in their application to the persons, property, rights and liabilities of the subjects of other sovereign states who do not come within the jurisdiction of the United Kingdom Parliament. This presumption is often described, and has been referred to throughout the argument of this case at all levels, as ‘the presumption against extra-territorial legislation’. This may be a convenient shorthand expression, but if it is understood as accurately and comprehensively expressing the principle involved it is potentially misleading. I cannot help thinking that it has led to some confusion of thought in discussion of the issue arising in this appeal. In one sense all legislation enacted in the United Kingdom to give effect to international conventions, long familiar in the field of maritime law, is extra-territorial in effect. But it would be absurd to suggest that in legislating to embody the terms of such internationally agreed conventions in our municipal law Parliament is in any sense usurping an illegitimate authority over the subjects of foreign states. But it is precisely such illegitimate usurpation which Parliament is presumed not to intend and it is against such usurpation that the so-called presumption against extra-territorial legislation is directed. There can be no difficulty in construing s 10 of the 1961 Act as enabling provision to be made by Order in Council, as it was by the 1967 order, for continuing the Warsaw rules in effect. The question we should ask in considering how far s 10 gave power to legislate in relation to carriage by air not within the scope of either the Warsaw or the Hague conventions is not simply whether such legislation may take effect in relation to extra-territorial carriage by air, but whether it is subject to any limitation arising from the presumption that Parliament is not to be taken, by the use of general words, to legislate in the affairs of foreign nationals who do nothing to bring themselves within its jurisdiction.
An early statement of the relevant principle which underlies the presumption is found in the judgment of Dr Lushington in The Zollverein (1856) Sw 96 at 98, 166 ER 1038 at 1040:
‘In endeavouring to put a construction on a statute, it must be borne in mind how far the power of the British legislature extends, for unless the words are so clear that a contrary construction can in no way be avoided, I must presume that the legislature did not intend to go beyond this power. The laws of Great Britain affect her own subjects everywhere—foreigners only when within her own jurisdiction.’
In Cope v Doherty (1858) 2 De G & J 614, 44 ER 1127 the question at issue was whether the provisions of ss 503 and 504 of the Merchant Shipping Act 1854 limiting the liability of the owner of ‘any sea-going ship’ could be invoked by the American owners of an American ship in litigation in the English courts arising out of a collision between that ship and another American ship on the high seas. Turner LJ said (2 De G & J 614 at 623–624, 44 ER 1127 at 1131):
‘The words of these sections are no doubt wide and extensive. The words “any sea-going ship,” construed with reference to the interpretation clause, would embrace every vessel navigating the sea, which is not propelled by oars, but it is not because general words are used in an Act of Parliament every case which falls within the words is to be governed by the Act. It is the duty of the Courts of justice so to construe the words as to carry into effect the meaning and intention of the legislature. We had occasion very much to consider this point in Hawkins v. Gathercole ((1854) 6 De GM & G 1, 43 ER 1129), in which case we restrained the effect of general words in the Act on which the case depended, and there are many
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cases in the books to the same effect, some of which are referred to in that case, and others not, but are to be found in Viner’s Abridgment, title ”Statutes.” Was it then the intention of the legislature that the general words contained in the sections to which I have referred should extend to the case of a collision between foreign ships owned by foreigners? I think it was not. This is a British Act of Parliament, and it is not, I think, to be presumed that the British Parliament could intend to legislate as to the rights and liabilities of foreigners. In order to warrant such a conclusion, I think that either the words of the Act ought to be express or the context of it to be very clear.’
The fullest discussion of the relevant principle of statutory construction is found in the judgments in Ex p Blain, re Sawers (1879) 12 Ch D 522, [1874–80] All ER Rep 708. The issue in the case was whether a foreigner, domiciled and resident abroad, who had never been to England but was a partner in a firm which traded in England and had defaulted, could be made bankrupt here. The context was thus far removed from the subject matter with which we are now concerned, but the statements of principle in the judgments are comprehensive and illuminating. James LJ said (12 Ch D 522 at 526, [1874–80] All ER Rep 708 at 709–710):
‘It appears to me that the whole question is governed by the broad, general, universal principle that English legislation, unless the contrary is expressly enacted or so plainly implied as to make it the duty of an English court to give effect to an English statute, is applicable only to English subjects or to foreigners who by coming into this country, whether for a long or a short time, have made themselves during that time subject to English jurisdiction. Every foreigner who comes into this country, for however limited a time, is, during his residence here within the allegiance of the sovereign, entitled to the protection of the sovereign and subject to all the laws of the sovereign. But, if a foreigner remains abroad, if he has never come into this country at all, it seems to me impossible to imagine that the English legislature could have ever intended to make such a man subject to particular English legislation.’
Brett LJ said (12 Ch D 522 at 528, [1874–80] All ER Rep 708 at 711):
‘It is said that the case is literally within the words of the statute, and so, no doubt, it is. But does it follow that, because a case is literally within the words of a statute of any country, therefore it is within the jurisdiction of the courts of that country? Certainly not. The governing principle is that all legislation is prima facie territorial, that is to say, that the legislation of any country binds its own subjects and the subjects of other countries who for the time being bring themselves within the allegiance of the legislating power.’
And finally, Cotton LJ said (12 Ch D 522 at 531–532, [1874–80] All ER Rep 708 at 713):
‘All we have to do is to interpret an Act of Parliament which uses a general word, and we have to say how that word is to be limited, when of necessity there must be some limitation. I take it the limitation is this, that all laws of the English Parliament must be territorial—territorial in this sense, that they apply to and bind all subjects of the Crown who come within the fair interpretation of them, and also all aliens who come to this country, and who, during the time they are here, do any act which, on a fair interpretation of the statute as regards them, comes within its provisions.’
In order to determine what, if any, application the principle of statutory construction discussed in these authorities may have in limiting the ambit of the power to legislate by Order in Council conferred originally by s 4 of the 1932 Act, now by s 10 of the 1961 Act, in relation to carriage by air which is not subject to either the Warsaw or the Hague
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conventions, it is first necessary to consider the general character and purposes of the Warsaw and the Hague rules, which are authorised to be applied by Order in Council to non-convention carriage by air with or without exceptions, adaptations and modifications. The rules have these features in common. They impose liability on the carrier without proof of fault in respect of the death of or injury to passengers and damage to or loss of baggage or cargo which the carrier, however, may rebut by proving certain matters in relation to the relevant causative event. They impose limits on the amount recoverable in respect of the relevant death, injury, loss or damage. They nullify contractual provisions tending to relieve the carrier of liability or to lower the applicable limits of liability. They allow, however, recovery against the carrier of an amount in excess of the relevant limit if the claimant can prove certain matters in relation to the relevant causative event. Actions for damages pursuant to the rights given by the rules can only be brought subject to the rules and are to the exclusion of other remedies. Such actions must be brought within a time limit. Perhaps most important of all, each set of rules contains a provision to prevent avoidance of the rules by any contractual term ‘deciding the law to be applied’. Thus, if a carrier undertakes carriage by air to which the rules apply, he cannot contract out of the rules by a choice of law clause.
The philosophy underlying the Warsaw Convention is expounded in what I find a most illuminating judgment of Greene LJ in Grein v Imperial Airways Ltd [1936] 2 All ER 1258 at 1278–1279, [1937] 1 KB 50 at 74–77. He said:
‘The rules laid down are in effect an international code declaring the rights and liabilities of the parties to contracts of international carriage by air; and when by the appropriate machinery they are given the force of law in the territory of a High Contracting Party they govern (so far as regards the courts of that party) the contractual relations of the parties to the contract of carriage of which (to use language appropriate to the legal systems of the United Kingdom) they become statutory terms. The desirability of such an international code for air carriage is apparent. Without it, questions of great difficulty as to the law applicable to a contract of international carriage by air would constantly arise. Our courts are familiar with similar questions arising under contracts of through carriage otherwise than by air; and it is easy to imagine cases where questions of the greatest difficulty might arise as to which law or laws governed the contract and whether different laws might not apply to different stages of the journey … Thus different laws might be held to apply according as a ticket (to take a simple case) was taken in Paris for a flight to London or in London for a flight to Paris, according as the carrier was a French or an English company, according as an accident took place in England or in France. Where the carriage is effected by stages covering several countries and involving aeroplanes belonging to companies incorporated in several countries, the difficulties increase as well as the unlikelihood of finding in the various countries in which actions might be brought any uniformity of legal principles for their decision. It is, I think, apparent from the subject matter with which the convention deals and from its contents that the removal of these difficulties by means of a uniform international code, to be applied by the courts of the various countries adopting the convention, is one, at any rate, of the main objects at which the convention aims; and it is in my judgment essential to approach it with a proper appreciation of this circumstance in mind. The convention is limited to international carriage. There was no necessity for any agreement as to carriage performed within the territory of one state; nor was it thought necessary to deal with the case where an aeroplane performing the contract of carriage began and ended its journey in the territory of the same state without coming to earth, even if during its flight it passed over the territory of another state. In such a case difficulties as to the law applicable would not be likely to arise; in this country at any rate it could scarcely be said, for instance, that a contract to carry a passenger direct from London to Gibraltar without an
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intermediate landing (were such a flight possible) would be affected in any way by French law by reason of the fact that the machine in the course of its flight passed over French territory or made a forced landing therein. It was not considered useful to class as international carriage cases where the carriage begins in the territory of a state adopting the convention and ends in one which does not adopt it or vice versa. The reason, I think, is that the courts of the non-adopting state would not be bound by the convention and there would accordingly be no possibility of uniformity of decision. The fact that in cases such as this the convention does not apply, is in my judgment no argument in favour of the view that the present case is not one of international carriage. On the other hand, where the contract of carriage provides for a descent in foreign territory, the fact that the carriage begins and ends in territory belonging to the same state, would not necessarily prevent questions from arising in the courts of that state as to the law applicable to that part of the flight which took place over the foreign territory in question. Accordingly the convention makes express provision for this case. To take an example, any one who takes a ticket for a flight from Berlin to (say) Konigsberg in East Prussia under terms of carriage providing for an intermediate descent upon Polish territory in the Corridor will know that his contract with the carrier will be held by German courts to be governed by the code and that no question of Polish law will arise; and this would be so whether or not Poland was a party to the convention. The reason for confining the application of the convention where the carriage begins and ends in the territory of the same state to cases where descent in the territory of another state is provided for by the contract of carriage is sufficiently obvious. It is, I think, that where the descent in the territory of another state was involuntary, no question of the applicability of the law of that state to the contract of carriage would be likely to arise.’
It is to be noted that the scope of ‘international carriage’ within the convention definition is in no way dependent on the nationality of the carrier. There are now very few countries which are not party to one or other or both of the conventions. One, frequently referred to in the course of the argument as a source of illustrative examples, is Thailand. When Thai Airways carry a passenger or a cargo pursuant to a single contract from Bangkok to London or from London to Bangkok the carriage is not subject to either convention. But it was decided in Grein v Imperial Airways Ltd and appears never to have been doubted since that carriage of a passenger pursuant to the single contract embodied in a return ticket from a place of departure in a convention country to a destination in a non-convention country and back to the original place of departure is ‘international carriage’ within the convention definition. Thus, if Thai Airways carry a passenger on a return ticket London—Bangkok—London, this is ‘international carriage’ subject to the Hague Convention. This was accepted without argument in Goldman v Thai Airways International Ltd [1983] 3 All ER 693, [1983] 1 WLR 1186.
The United Kingdom rules have the same common features as those to which I have drawn attention in the Warsaw and Hague rules. In authorising the application of such rules, based on or adapted from the Hague rules, to non-convention carriage by air, what categories of such carriage may Parliament have reasonably had in contemplation as the proper subject matter of United Kingdom legislation? Just as the character of ‘international carriage’ in the convention definition is determined by reference to the places of departure and destination and agreed stopping places ‘according to the agreement between the parties’, so may the potential categories of non-convention carriage to which the United Kingdom rules might apply be similarly distinguished. It seems to me that four distinct categories fall for consideration. (1) Carriage in which the places of departure and destination and any agreed stopping places are all within the United Kingdom or other British territory. (2) Non-convention carriage involving a place of departure or destination or an agreed stopping place in a foreign state and a place of departure or destination or an
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agreed stopping place in the United Kingdom or other British territory. (3) Non-convention carriage between places of departure and destination in two foreign states with no agreed stopping place in the United Kingdom or other British territory. (4) Carriage in which the places of departure and destination and any agreed stopping places are all within the territory of a single foreign state, being either a convention or a non-convention country.
Carriage in category (1) is clearly within the proper scope of the United Kingdom legislation and is covered by the United Kingdom rules. The main argument before your Lordships was addressed to the classification of carriage in category (2) and the primary thrust of the submissions made on behalf of the appellant airline was directed to showing that this category of carriage by air was excluded from the proper scope of the legislation authorised by s 10 of the 1961 Act because such legislation would be ‘extra-territorial’ and must therefore be presumed not to be authorised by the general words of the section. In refuting this argument, counsel for the respondent widow cogently pointed out that, like the conventions themselves, the United Kingdom rules had as one of their primary objectives the elimination of conflict of laws problems and that such problems would be just as likely to arise, if not excluded by uniform rules, from non-convention as from convention carriage. This proposition certainly holds good in relation to carriage in category (2). On this basis counsel for the respondent further contended that the presumption against extra-territorial legislation is effectively rebutted in relation to the construction of s 10 which must therefore be construed without limitation as authorising legislation by Order in Council regulating all extra-territorial carriage by air.
It is precisely here that concentration on an imprecisely defined concept of extra-territoriality has, as it seems to me, confused the issue. If I may say so with respect, I believe that much of the argument addressed to your Lordships on both sides was really directed at the wrong target. All carriage by air which is, in the colloquial sense, international, whether or not it falls within the definition of ‘international carriage’ in either of the conventions, is, again in the colloquial sense, extra-territorial. But we are here concerned with legislation governing the rights and liabilities of parties to international contracts of carriage. If contracts for international carriage by air, as in the case of carriage within category (2), provide for carriage from or to a place of departure or destination or via an agreed stopping place in the United Kingdom or other British territory, British legislation imposing certain compulsory terms on such contracts does not seem to me to involve any usurpation of an illegitimate authority over foreign subjects of the kind which Parliament is presumed not to intend. It is right to emphasise again the obvious desirability, in relation to carriage in category (2), as in relation to ‘international carriage’ within the convention definition, of uniform rules applicable by British courts for the avoidance of the kind of conflict of laws problems discussed by Greene LJ in the passage from his judgment in Grein v Imperial Airways Ltd [1936] 2 All ER 1258 at 1278–1279, [1937] 1 KB 50 at 74–77 which I have quoted. For relevant purposes, carriers, passengers, consignors, consignees and others who enter into contracts with such a British connection as is presupposed in relation to carriage by air in category (2) may fairly be regarded, in my opinion, as coming within the jurisdiction of the British legislature in relation to their contractual rights and obligations. In relation to carriage in category (2), I conclude that the so-called presumption against extra-territorial legislation has no relevance and s 10 is to be construed as duly authorising the United Kingdom rules imposed by Sch 1 to the 1967 order in relation to that category of carriage.
But when I turn to consider contracts of carriage by air in categories (3) and (4) it seems to me that a wholly different question arises from that raised by carriage in category (2). Contracts of carriage by air in direct flights between two non-convention countries can be of no legitimate concern to the United Kingdom legislature and if Parliament claimed to regulate the rights and liabilities of the parties to such contracts, it would indeed be asserting a jurisdiction over foreign subjects who have done nothing to bring themselves within that jurisdiction. If this applies to carriage in category (3), it applies a fortiori to
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carriage in category (4), which is strictly the only category of carriage in relation to which your Lordships have to decide whether the United Kingdom rules apply. Carriage in category (3) may give rise to conflict of laws problems, albeit problems with which it is unlikely in the extreme that British courts need ever be concerned. But carriage in category (4) could only exceptionally give rise to any such problems at all. A contract made and to be performed wholly within the territory of a foreign state will normally be subject to the laws of that state and to no other. That the United Kingdom Parliament should exercise a power to regulate the terms of such contracts would seem to me to present an extreme example of the legislature doing precisely that which the relevant authorities tell us it is presumed not to intend. To illustrate the proposition graphically by a concrete example, it is surely inconceivable that Parliament by s 10 of the 1961 Act intended to authorise the imposition by Order in Council of the Hague rules or any modified version of them on contracts of carriage to be performed wholly within the United States of America, notwithstanding that in relation to international carriage the United States of America had chosen to retain the Warsaw rules in preference to the Hague rules.
For these reasons I have reached the conclusion that the words of s 10 ‘carriage by air … of such descriptions as may be specified’ should be construed as limited to carriage in categories (1) and (2), which are appropriate subjects of United Kingdom legislation, but as excluding carriage in categories (3) and (4), which are not.
In reaching this conclusion I have not overlooked the fact that two current legal textbooks which address the point favour the conclusion reached by the judge and Court of Appeal: see Shawcross and Beaumont Air Law (4th edn, 1977) para 401 and Dicey and Morris on The Conflict of Laws (11th edn, 1987) vol 2, p 1272. But in assessing the weight to be attributed to this textbook consensus it is necessary to consider its evolution.
The question at issue could not have arisen before the coming into force of the Carriage by Air (Non-international Carriage) (United Kingdom) Order 1952. The first edition of Shawcross and Beaumont published after 1952 was the third edition in 1966. The view was there expressed that the words of the order itself applying the provisions of Sch 3 to the order to all carriage by air meant no less than they said (see p 362). The fourth edition, published in 1977 after the coming into force of the 1967 order, enlarges on the point in the following passage (pp 388–389):
‘In cases coming before the English courts, almost all such carriage [ie non-convention carriage] (the exceptional cases being those of gratuitous carriage other than by the Crown or by an air transport undertaking) is governed by the First Schedule to the Carriage by Air Acts (Application of Provisions) Order 1967, and so far as the issues are regulated by provisions of that Schedule further choice-of-law questions cannot arise. At first sight, the proposition just advanced may seem surprising. It ill accords with the common law rules of the conflict of laws to find, for example, that an action in the English courts arising out of the injury of a Nigerian passenger travelling on a domestic Nigerian flight operated by a Nigerian carrier and under a contract the proper law of which was Nigerian should be governed by the provisions of an English statutory instrument, without any reference to the law of Nigeria. The proposition is, however, in accordance with article 3 of the 1967 Order, made under section 10 of the Carriage by Air Act 1961: “This Order shall apply to all carriage by air, not being carriage to which the amended Convention applies“. Some of the provisions of the Order, that is the Second Schedule, expressly apply to international carriage, and are not limited to examples of such carriage linked in some way to England. Accordingly the normal presumption, in interpreting a statute, against giving it extra-territorial effect cannot apply.’
The editions of Dicey and Morris published since 1952 are the seventh (1958), eighth (1967), ninth (1973), tenth (1980) and eleventh (1987). The view expressed in each
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edition up to the ninth is sufficiently indicated in the following short passage from that edition (pp 829–830):
‘Not all contracts for through carriage by air are “international” contracts as defined by the Warsaw Convention. If the Convention does not apply and if the parties have failed to determine the proper law either expressly or by implication, an English court will perhaps be inclined to apply the law of the country from which the aircraft took off for the first portion of its flight. This will often be the lex loci contractus. There does not appear to be any English or Scottish authority on the point. Where the law to be applied is that of England, Scotland or Northern Ireland, the substantive provisions of the Conventions (with some modifications) will apply to non-international carriage by virtue of the Carriage by Air Acts (Application of Provisions) Order 1967.’
But by the time of publication of the tenth edition Dr Morris (at p 844) had adopted the view expressed in the fourth edition of Shawcross and Beaumont.
It seems to me, with respect to the learned authors, that, like the judge and the Court of Appeal, they never addressed the basic question whether the enabling power conferred by s 10 of the 1961 Act in relation to non-convention carriage by air should be construed as subject to any limitation, and moreover they proceeded on the fallacious assumption that because Sch 2 to the 1967 order, continuing to give legal effect to the Warsaw rules in United Kingdom law, was ‘extra-territorial’ in effect, Sch 1 must necessarily be given an unlimited extra-territorial operation.
It remains only to notice that an important component, perhaps even the cornerstone, of the argument for the respondent widow was that Sch 1 to the 1967 order could safely be held to apply in British courts to contracts of carriage by air made and to be performed wholly within a foreign state because in the overwhelming majority of such cases, notwithstanding that the plaintiff had succeeded in effecting service on the carrier here, the carrier would be able to obtain a stay of execution on the ground that the courts of the relevant foreign state would provide the only convenient forum for the litigation and would thus escape the application of the United Kingdom rules. But the doctrine of forum non conveniens cannot possibly provide any effective counterweight to the presumption that Parliament does not intend by general words to legislate in relation to the affairs of foreign subjects beyond its jurisdiction in circumstances where that presumption properly applies. If the presumption applies, it must enable a foreigner beyond the jurisdiction, though duly served in a British court, to claim that the legislation has no application to him rather than being forced to rely on the doctrine of forum non conveniens to escape its application.
For these reasons I would allow the appeal. Leave to appeal was given on terms that the appellants would not seek to disturb the orders for costs below and would pay the respondent’s costs of the appeal in any event. I would accordingly propose that the orders of the judge and the Court of Appeal be set aside, save as to costs, that the preliminary issue be answered to the effect that the carriage by air referred to in the statement of claim was not carriage by air in respect of which Sch 1 to the Carriage by Air Acts (Application of Provisions) Order 1967 had effect and that the appellants pay the respondent’s costs in this House.
LORD GRIFFITHS. My Lords, the question in this appeal is whether the Carriage by Air Act 1961 and the Carriage by Air Acts (Application of Provisions) Order 1967, SI 1967/480, were intended by Parliament to apply to an air accident in Bangladesh on an internal domestic flight which was not governed by any international convention. The history of the English legislation and the background, content and primary purpose of the Warsaw Convention and the amended Warsaw Convention known as the Hague Convention are reviewed in the speeches of my noble and learned friends Lord Bridge and Lord Jauncey. I gratefully adopt what they have said and will not repeat it. Although
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the judge and the Court of Appeal recognised that it was a surprising result, they felt compelled by the wording of the Carriage by Air Acts (Application of Provisions) Order 1967 to conclude that it was intended to apply to such a flight. That the language of the order is wide enough to embrace this result is beyond argument. But the language of many statutes and orders read literally is of sufficient width to apply to situations in other countries. It is, however, unnecessary for the draftsman to insert language specifically limiting the effect of statutes to this country because of the well-recognised rule that the statute will be construed to apply only to matters that fall properly to be legislated by our own Parliament and that, in the absence of clear and compelling words, they will not be given extra-territorial effect.
In the field of air law a recent example of the application of this rule is to be found in Air-India v Wiggins [1980] 2 All ER 593, [1980] 1 WLR 815. In that case Air-India carried a cargo of live birds consigned from India to Heathrow Airport. Owing to lack of ventilation most of the birds died on the journey before the aircraft entered British airspace. The defendant airline was charged with contravening art 5(2) of the Transit of Animals (General) Order 1973, SI 1973/1377, made under s 23(b) and (c) of the Diseases of Animals Act 1950 (as adapted to air transport by s 11 of and Sch 2 to the Agriculture (Miscellaneous Provisions) Act 1954), by carrying the birds in a way likely to cause them injury or unnecessary suffering. The statute and the order were drafted in the widest terms. Section 23 of the 1950 Act provided:
‘The Minister may make such orders as he thinks fit … (b) for ensuring for animals carried by sea or by air a proper supply of food and water and proper ventilation during the passage and on landing; (c) for protecting them from unnecessary suffering during the passage and on landing.’
Article 3(3) of the 1973 order provided:
‘In relation to carriage by sea or air, the provisions of this order shall apply to animals carried on any vessel or aircraft to or from a port or airport in Great Britain, whether or not such animals are loaded or unloaded at such port or airport.’
Article 5(2) provided:
‘No person shall carry any animal by sea, air, road or rail, or cause or permit any animal to be so carried, in a way which is likely to cause injury or unnecessary suffering to the said animal.’
The justices convicted the airline holding that, by virtue of art 3(3), proceedings could be brought against foreign nationals for offences committed abroad. The Crown Court and the Divisional Court upheld the decision of the magistrates. This House allowed an appeal by the airline holding that s 23 and the order made thereunder were to be construed as limited by the presumption against extra-territorial effect and that the statute was confined to incidents occurring in British airspace. In his speech Lord Diplock explained the application of the principle in the following passage ([1980] 2 All ER 593 at 596, [1980] 1 WLR 815 at 819):
‘My Lords, in construing Acts of Parliament there is a well-established presumption that, in the absence of clear and specific words to the contrary, an “offence-creating section” of an Act of Parliament (to borrow an expression used by this House in Cox v Army Council ([1962] 1 All ER 880 at 882, [1963] AC 48 at 67) was not intended to make conduct taking place outside the territorial jurisdiction of the Crown an offence triable in an English criminal court. As Viscount Simonds put it ([1962] 1 All ER 880 at 882, [1963] AC 48 at 67): ”… apart from those exceptional cases in which specific provision is made in regard to acts committed abroad, the whole body of the criminal law of England deals with acts committed in England.” Cox v Army Council was concerned with a statute which in the plainest possible words
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made acts committed abroad by serving members of the British army offences triable by court-martial. The presumption against a parliamentary intention to make acts done by foreigners abroad offences triable by English criminal courts is even stronger. As Lord Russell CJ said in R v Jameson [1896] 2 QB 425 at 430: “One other general canon of construction is this—that if any construction otherwise be possible, an Act will not be construed as applying to foreigners in respect to acts done by them outside the dominions of the sovereign power enacting.” Two consequences follow from these principles of statutory construction: the first is that if the minister had power to make an order under the statute, making acts done by foreigners abroad offences triable in English criminal courts, such power must have been conferred on him by words in the statute so clear and specific as to be incapable of any other meaning; the second is that the words of the order must themselves be explicable only as a clear and unambiguous exercise of that power. If either the empowering words of s 23(b) of the Act or the enacting words of art 3(3) of the order would have a sensible content if restricted to acts done within the territorial jurisdiction of the Crown, they must be so construed.’
That was, of course, a case dealing with a criminal offence; the line of authority cited by Lord Bridge shows that the presumption or rule applies equally to statutes that affect civil liability. I can see no reason, in principle, why it should be any more the concern of our Parliament to legislate to create civil rights in foreign countries triable in our courts than it would be to create criminal offences in a foreign country triable in our courts. I can discern no legitimate purpose for this country to seek to impose either its own criminal law or its own civil law on foreigners in their own countries. It is, of course, true that Mr Holmes was a visitor to Bangladesh and not a native of that country; but that can make no difference. If a foreigner comes to this country he must conduct himself in accordance with our laws and, by the same token, if one of our citizens goes to a foreign country, he must conduct himself in accordance with the laws of that country and, if misfortune there befalls him, be it of a civil or criminal nature, it is by the laws of that country that he should be judged. If Mr Holmes had been killed in Bangladesh in a car or railway accident and his widow was permitted, under the principles of forum conveniens to bring a claim for his death in this country, it would be judged by the law of Bangladesh. I can see no reason why our Parliament should wish to legislate to provide for domestic air law in Bangladesh any more than it would wish to legislate on road traffic or railway safety in Bangladesh, and I do not believe that it intended to do so.
The basis of the rule that statutes do not have extra-territorial effect is the presumption that our own Parliament will not seek to intervene in matters that are legitimately the concern of another country. Countries respect one another’s sovereignty and the right of each country to legislate for matters within their own boundaries. If as a result of international co-operation a number of countries agree to adopt the same law, the domestic legislation that gives effect to this international agreement in this country is not extra-territorial within the meaning of the rule. In such circumstances our domestic legislation is not an interference with the sovereignty of the other countries but the recognition of their wish that we should alter our own law to accord with the common will. The Warsaw and Hague conventions dealt with international carriage by air as therein defined. It is significant, however, that they did not deal with domestic carriage by air which did not involve another country. If before the conventions were entered into Parliament had enacted a statute giving power to Her Majesty in Council to make orders ‘in respect of such carriage by air as may be specified in the order’ I do not believe that anyone would have supposed that Parliament intended to authorise the making of orders to govern carriage by air on domestic airlines within, say, the United States of America. It would be no legitimate concern of Parliament to do so and the rule against the extra-territorial effect of our legislation would apply.
After we had entered into the first Warsaw Convention, s 4 of the Carriage by Air Act 1932 provided:
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‘His Majesty may by Order in Council apply the provisions of the First Schedule to this Act and any provision of section one of this Act to such carriage by air, not being international carriage by air as defined in the said First Schedule, as may be specified in the Order, subject however to such exceptions, adaptations and modifications, if any, as may be so specified. Any such order may extend to the United Kingdom, and to all or any of the territories mentioned in the last preceding section.’
In my view the rule applies to this wording with equal force to prevent the power being construed to apply to domestic carriage by air in the United States. It is not legitimate to say that because this country and the United States have agreed to adopt the same rules for certain types of international carriage by air, our Parliament should now be free to legislate for the domestic affairs of the United States. The very fact that the Warsaw Convention did not apply to purely domestic carriage shows that it was the intention of the signatories to retain the right to legislate for carriage by air within their own boundaries, and we should apply a construction to our own legislation that does not violate that right.
The same argument applies to the power contained in s 10 of the Carriage by Air Act 1961 which must bear the same construction as s 4 of the Carriage by Air Act 1932.
The construction adopted by the courts below fails, in my view, to give sufficient weight to the presumption against the intention of Parliament to legislate for matters that are properly the concern of other countries. It was referred to as a ‘tentative assumption that it was not intended to subject transactions taking place abroad to British statutory rules overriding the proper law of the transaction’. In my view, the rule of construction is far more deeply entrenched than a ‘tentative assumption’. The Court of Appeal concentrated its attention on the construction of the Carriage by Air Acts (Application of Provisions) Order 1967, but the crucial question in this case is to decide whether Parliament ever intended to give the power to make orders governing domestic air law in other countries, and this depends on the construction to be given to ‘carriage by air’ in the 1932 and 1961 Acts. I can think of no reason why Parliament should have thought it right to take on itself to legislate for matters which are no concern of ours. The limit of recovery for a fatal accident in Bangladesh is set at £913 by their domestic law. This seems a pitifully inadequate sum by European standards but may have a wholly different significance in the context of that country’s economy. It surely cannot be the concern of this country to substitute for that limit of £913 the sum of £83,763 which would be the result of giving extra-territorial effect to our legislation.
In my view the phrase ‘carriage by air … of such descriptions as may be specified’ in s 10 of the Carriage by Air Act 1961, in conformity with the rule against the extra-territorial effect of our legislation, cannot have been intended to apply to the circumstances of this accident, and I agree that the phrase should receive the limited construction proposed by my noble and learned friend Lord Bridge. Naturally, I feel the greatest sympathy with the widow but, for these reasons and those contained in the speeches of my noble and learned friends Lord Bridge and Lord Jauncey, with which I am in full agreement, I would allow this appeal.
LORD ACKNER. My Lords, I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Bridge, Lord Griffiths and Lord Jauncey. For the reasons they give I would allow the appeal and would make the order which my noble and learned friend Lord Bridge proposes.
LORD JAUNCEY OF TULLICHETTLE. My Lords, in August 1984 the respondent’s husband, a British citizen, was killed when one of the appellant’s aircraft in which he was travelling crashed during the course of an internal scheduled flight between the two Bangladeshi cities of Chittagong and Dhaka. The contract of carriage was made
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in Bangladesh to be wholly performed within that country and it is not in dispute that the proper law applicable thereto was that of Bangladesh. The question raised by this appeal is whether notwithstanding the admitted proper law of contract the respondent, having sued the appellants in England, is entitled to rely on the provisions of the Carriage by Air Acts (Application of Provisions) Order 1967, SI 1967/480, rather than on the law of Bangladesh in relation to the contract of carriage. If Bangladeshi law applies the respondent can recover no more than £913, whereas if United Kingdom law applies she can, under the above order, recover £83,763, which sum is agreed to be less than that which she would otherwise have been able to recover if no limit of liability existed.
In order to understand the issues involved it is necessary to examine in some detail the relevant United Kingdom legislation and the historical background thereto. On 12 October 1929 the United Kingdom government became a signatory at Warsaw to a convention for the unification of certain rules relating to international carriage by air (the Warsaw Convention). On 15 May 1933 there came into force the Carriage by Air Act 1932, of which the long title was in the following terms:
‘An Act to give effect to a Convention for the unification of certain rules relating to international carriage by air, to make provision for applying the rules contained in the said Convention, subject to exceptions, adaptations and modifications, to carriage by air which is not international carriage within the meaning of the Convention, and for purposes connected with the purposes aforesaid.’
Section 1(1) of the 1932 Act was in the following terms:
‘As from such day as His Majesty may by Order in Council certify to be the day on which the Convention comes into force as regards the United Kingdom, the provisions thereof as set out in the First Schedule to this Act shall, so far as they relate to the rights and liabilities of carriers, passengers, consignors, consignees and other persons and subject to the provisions of this section, have the force of law in the United Kingdom in relation to any carriage by air to which the Convention applies, irrespective of the nationality of the aircraft performing that carriage.’
Section 1(4) provided that any liability imposed on a carrier by the Warsaw Convention in respect of the death of a passenger should be in substitution for any liability under statute or at common law. Section 4 of the 1932 Act provided that any provisions of the Warsaw Convention, which were set out in Sch 1 could by Order in Council be applied ‘to such carriage by air, not being international carriage by air as defined in the said First Schedule, as may be specified in the Order … ' The Warsaw Convention applies to ‘international carriage’ which was defined in art 1(2) thereof as meaning:
‘any carriage in which, according to the contract made by the parties, the place of departure and the place of destination, whether or not there be a break in the carriage or a transhipment, are situated either within the territories of two High Contracting Parties or, within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, suzerainty, mandate or authority of another Power, even though that Power is not a party to the Convention … ’
In summary, the Warsaw Convention (1) imposes liability on an air carrier for damage sustained in the event of death or injury of a passenger arising out of an accident on board the aircraft or in the course of embarking or disembarking. This liability can be avoided if the carrier proves that he and his servants or agents have taken all necessary measures to avoid the damage or that it was impossible for him or them so to do, (2) limits the liability of a carrier for each passenger to a fixed sum and makes null and void any provision tending to reduce or exclude the carrier’s liability, (3) removes the carrier’s right to limit his liability if the damage is caused by his wilful misconduct, (4) specifies a
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number of forums in the territory of high contracting parties to the convention, in one of which the plaintiff must elect to sue the carrier, (5) imposes a time limit on the raising of actions and (6) provides that any clause in the contract whereby the parties purport to infringe the rules in the convention whether by deciding the law to be applied or by altering the rules as to jurisdiction shall be null and void.
The object of the convention was stated to be ‘the Unification of Certain Rules relating to International Carriage by Air’, and in relation thereto I cannot do better than quote the words of Greene LJ in Grein v Imperial Airways Ltd [1936] 2 All ER 1258 at 1277–1278, [1937] 1 KB 50 at 74–75:
‘By “unification of certain rules” is clearly meant, “the adoption of certain uniform rules,” that is to say, rules which will be applied by the courts of the High Contracting Parties in all matters where contracts of international carriage by air come into question. The rules laid down are in effect an international code declaring the rights and liabilities of the parties to contracts of international carriage by air; and when by the appropriate machinery they are given the force of law in the territory of a High Contracting Party they govern (so far as regards the courts of that party) the contractual relations of the parties to the contract of carriage of which (to use language appropriate to the legal systems of the United Kingdom) they become statutory terms. The desirability of such an international code for air carriage is apparent. Without it, questions of great difficulty as to the law applicable to a contract of international carriage by air would constantly arise. Our courts are familiar with similar questions arising under contracts of through carriage otherwise than by air; and it is easy to imagine cases where questions of the greatest difficulty might arise as to which law or laws governed the contract and whether different laws might not apply to different stages of the journey.’
The Carriage by Air (Non-international Carriage) (United Kingdom) Order 1952, SI 1952/158, which came into operation on 1 April 1952 and which was made in exercise of the powers contained in s 4 of the 1932 Act applied the Warsaw Convention with certain modifications ‘to all carriage by air, not being international carriage by air as defined in the [convention].' Although there appears to have been no decision in the courts of the United Kingdom on the meaning of these words in the 1952 order, the authors of Shawcross and Beaumont Air Law (3rd edn, 1966) submit at the beginning of ch 21 that it would apply to cases coming before the English courts whether or not the damage occurred outside the United Kingdom and whether or not the proper law of the contract of carriage was the law of a country outside the United Kingdom. The reference to ‘English courts’ must of course be read as a reference to United Kingdom courts. If this submission which was repeated in subsequent editions of the above work were correct it would follow that, so long as the 1952 order was in force, in any action of damages at the instance of a passenger against an air carrier the United Kingdom courts would, with one or two very limited exceptions, be bound to apply either the rules of the Warsaw Convention where appropriate, or those rules as modified by the 1952 order irrespective of the terms of the contract of carriage or the places between which that contract took effect.
In September 1955 a number of states including the United Kingdom signed at The Hague a convention amending the Warsaw Convention, to which for convenience I shall refer as the Hague Convention. On 22 June 1961 there was passed the Carriage by Air Act 1961, whose long title was:
‘An Act to give effect to the Convention concerning international carriage by air known as “the Warsaw Convention as amended at The Hague 1955,” to enable the rules contained in that Convention to be applied, with or without modification, in other cases and, in particular, to non-international carriage by air; and for connected purposes.’
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Section 1(1) of the 1961 Act, which came into force on 1 June 1967, is in the following terms:
‘Subject to this section, the provisions of the Convention known as “the Warsaw Convention as amended at The Hague, 1955” as set out in the First Schedule to this Act shall, so far as they relate to the rights and liabilities of carriers, carriers’ servants and agents, passengers, consignors, consignees and other persons, and subject to the provisions of this Act, have the force of law in the United Kingdom in relation to any carriage by air to which the Convention applies, irrespective of the nationality of the aircraft performing that carriage; and the Carriage by Air Act, 1932 (which gives effect to the Warsaw Convention in its original form), shall cease to have effect.’
Section 9 provides that the 1961 Act with or without modification may be extended by Order in Council to the Isle of Man, any of the Channel Islands and any colony or protectorate, protected state or United Kingdom trust territory. Section 10(1) is in the following terms:
‘Her Majesty may by Order in Council apply the First Schedule to this Act, together with any other provisions of this Act, to carriage by air, not being carriage by air to which the Convention applies, of such descriptions as may be specified in the Order, subject to such exceptions, adaptations and modifications, if any, as may be so specified.’
Schedule 1 to the 1961 Act contains the English and French texts of the Hague Convention of which the following articles have relevance to this appeal. Article 1 is in the following, inter alia, terms:
‘(1) This Convention applies to all international carriage of persons, baggage or cargo performed by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking.
(2) For the purposes of this Convention, the expression international carriage means any carriage in which, according to the agreement between the parties, the place of departure and the place of destination, whether or not there be a break in the carriage or a transhipment, are situated either within the territories of two High Contracting Parties or within the territory of a single High Contracting Party if there is an agreed stopping place within the territory of another State, even if that State is not a High Contracting Party. Carriage between two points within the territory of a single High Contracting Party without an agreed stopping place within the territory of another State is not international carriage for the purposes of this Convention … ’
Article 2(2) excludes the carriage of mail and postal packages from the application of the convention. Article 17 imposes liability on the carrier for physical damage sustained by a passenger. Article 20 sets out what the carrier must prove in order to avoid liability. Article 22(1) specifies the limit of the carrier’s liability for each passenger. Article 23(1) provides:
‘Any provision tending to relieve the carrier of liability or to fix a lower limit than that which is laid down in this Convention shall be null and void, but the nullity of any such provision does not involve the nullity of the whole contract, which shall remain subject to the provisions of this Convention.’
Article 28(1) provides:
‘An action for damages must be brought, at the option of the plaintiff, in the territory of one of the High Contracting Parties, either before the court having jurisdiction where the carrier is ordinarily resident, or has his principal place of
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business, or has an establishment by which the contract has been made or before the court having jurisdiction at the place of destination.’
Article 32 provides, inter alia:
‘Any clause contained in the contract and all special agreements entered into before the damage occurred by which the parties purport to infringe the rules laid down by this Convention, whether by deciding the law to be applied, or by altering the rules as to jurisdiction, shall be null and void … ’
The principal differences between the Warsaw and the Hague conventions are that in the latter (1) the limit of liability of the carrier is doubled and (2) the circumstances are extended in which the carrier is disabled from relying on limitation of liability.
At present 35 states are parties to the Warsaw Convention and over 100 are parties to the Hague Convention. A number of states including the United Kingdom are parties to both conventions whereas the United States is a party only to the Warsaw Convention. With the notable exception of Thailand almost every state in the world of any significance is a party to one or other of the conventions. Since international carriage in each convention is defined by reference to the high contracting parties thereto, it follows that carriage from the territory of a state which is a party only to one convention to the territory of a state which is a party only to the other is not covered by the rules of either convention.
On 1 June 1967 there also came into operation the Carriage by Air Acts (Application of Provisions) Order 1967, SI 1967/480, of which art 3 is in the following terms: ‘This Order shall apply to all carriage by air, not being carriage to which the amended Convention applies.' The 1967 order has two principal purposes, namely (1) to apply the Hague Convention with modification to carriage which is not international carriage as defined in the Warsaw Convention, and (2) to re-enact the Warsaw Convention as part of the law of the United Kingdom consequent on the repeal of the 1932 Act. The first purpose is achieved by art 4 and Sch 1. Article 4 is headed ‘Non-international carriage, and carriage of mail and postal packages’ and is in the following terms:
‘Schedule 1 to this Order shall have effect in respect of carriage to which this Order applies, being either—(a) carriage which is not international carriage as defined in Schedule 2 to this Order, or (b) carriage of mail or postal packages.’
Schedule 1 sets out the exceptions, adaptations and modifications to the Hague Convention which are effected by the order. For the purposes of this appeal two modifications are important, namely (1) an increase in the limit of liability in art 22(1) from 250,000 to 875,000 francs for each passenger and (2) the omission of art 28.
The second purpose is achieved by art 5 and Sch 2 which together give effect in the law of the United Kingdom to the Hague Convention amended to the extent that it has assumed the original Warsaw form.
Further orders applying the 1961 Act and the 1967 order to the Channel Islands, the Isle of Man and to specified overseas territories came into operation on 1 June 1967. For convenience I shall hereafter refer to all territories to which the 1961 Act and the 1967 order apply and have been applied as ‘United Kingdom territory’.
The combined effect of the 1961 Act and the 1967 order is to create three different categories of carriage by air to which the legislation applies, namely (1) international carriage as defined in the Hague Convention, (2) international carriage as defined in the Warsaw Convention and (3) carriage to which art 4 of and Sch 1 to the 1967 order are applicable.
The issue between the parties to this appeal is whether the contract of carriage between the deceased and the appellants was subject to the provisions of art 4 and Sch 1 and hence within the third category. The question was tried as a preliminary issue before Leggatt J, who found in favour of the respondent that these provisions did apply (see [1987] 2
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Lloyd’s Rep 192). The Court of Appeal affirmed his judgment (see [1988] 2 Lloyd’s Rep 120). Bingham LJ considered that Sch 2 to the 1967 order was—
‘of crucial importance in construing the 1967 Order for two reasons. First, it is inescapable that schedule 2 has the force of law in the United Kingdom in cases to which it applies. This the appellant airline rightly acknowledged. Secondly, as again the appellant airline rightly acknowledged, schedule 2 must be understood as having extra-territorial effect. If a claim is brought here against an airline over which the English Court has jurisdiction under art 28, schedule 2 would be applied even though the carriage in question was between the territories of two foreign states (parties to the unamended Convention) not touching the United Kingdom at any point.’
(See [1988] 2 Lloyd’s Rep 120 at 122–123.)
He continued:
‘The question whether a statutory enactment is intended to have extra-territorial effect is, however, one to be decided on the language of the enactment in question having regard to the subject-matter and other relevant circumstances. Here, it is accepted that the amended Convention scheduled to the 1961 Act and the unamended Convention in schedule 2 to the 1967 order have the force of law and have extra-territorial effect. Schedule 1, as I have suggested, plainly has the force of law. The language used in the order and in schedule 1 could not have been more comprehensive. The draftsman could not have failed to appreciate that this language was broad enough to embrace international travel not covered by the amended or unamended Conventions and not touching the United Kingdom, domestic flights abroad and domestic flights at home. If he intended to differentiate, it seems to me inconceivable that he would not have done so, or that he would have relied on a presumption which in the context of this legislation read as a whole would have been quite inappropriate. No presumption against extra-territoriality can in my view survive a straightfoward reading of these provisions.’
Dillon LJ considered that the judgment of Leggatt J produced a startling result but was unable to see any escape from the conclusion that he was right (at 124).
The arguments before your Lordships ranged a good deal wider than they appear to have done in the courts below. The appellants maintained that Sch 1 to the 1967 order applied only to contracts of carriage where the proper law of the carriage was that of a United Kingdom country, and they relied heavily on the presumption that a statute will not be construed as having extra-territorial effect unless it plainly so provides. The respondent on the other hand submitted that the 1961 Act and the 1967 order read together produced a comprehensive code which embraced all actions in the United Kingdom arising out of carriage by air anywhere. Any presumption against extra-territoriality was ousted by the unambiguous terms of the Act and the order. The effect of the respondent’s argument is to treat art 4 of the 1967 order as a residue clause applicable to all carriage by air wheresoever it may take place which does not fall within the scope of either the Hague or the Warsaw convention.
The words ‘such carriage by air, not being … as may be specified’ and ‘carriage by air, not being … as may be specified’ occurring respectively in ss 4 and 10 of the 1932 and 1961 Acts are very general. So also are the words ‘all carriage by air, not being … ’ which occur in arts 1 and 3 respectively of the 1952 and 1967 orders. However, in construing such general words regard must be had to the object of the statute, to the powers of the legislature and to the context in which the words appear. Frequently have the courts refused to give unlimited meaning to general words because of one or more of the above factors. Indeed, as Lord Halsbury LC in Cox v Hakes (1890) 15 App Cas 506 at 517 said:
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‘… it is impossible to contend that the mere fact of a general word being used in a statute precludes all inquiry into the object of the statute or the mischief which it was intended to remedy.’
Lord Halsbury LC’s words are particularly apposite when considering whether or not general words were intended to operate extra-territorially because there is a long line of authority to the effect that English legislation is presumed to be territorial in its effect, that is to say is presumed not to try and regulate matters which are primarily the concern of another state, unless the contrary is expressed or so clearly implied as to be inescapable. This presumption, which has been described as a rule of construction, is critical to the issue raised in this appeal. Before turning to the authorities in which the principle is enunciated I should add that although they are all English it must follow that the presumption as to territoriality would apply equally to the United Kingdom as a whole where the statute applied to the United Kingdom rather than to England alone.
In The Zollverein (1856) Sw 96 at 98, 166 ER 1038 at 1040 Dr Lushington, in considering the applicability of a section of the Merchant Shipping Act 1854 to a foreign ship, said:
‘In endeavouring to put a construction on a statute, it must be borne in mind how far the power of the British legislature extends, for unless the words are so clear that a contrary intention can in no way be avoided, I must presume that the legislature did not intend to go beyond this power. The laws of Great Britain affect her own subjects everywhere—foreigners only when within her own jurisdiction. Attempts have been made, as in trying to enforce customs’ laws, to bind foreigners out of our own jurisdiction, and great inconvenience has resulted therefrom.’
In Cope v Doherty (1858) 2 De G & J 614, 44 ER 1127 the question of the applicability of other sections of the Merchant Shipping Act 1854 to two foreign ships on the high seas was considered. Turner LJ said (2 De G & J 614 at 623–624, 44 ER 1127 at 1131):
‘The words of these sections are no doubt wide and extensive. The words “any sea-going ship,” construed with reference to the interpretation clause, would embrace every vessel navigating the sea, which is not propelled by oars, but it is not because general words are used in an Act of Parliament every case which falls within the words is to be governed by the Act. It is the duty of the Courts of justice so to construe the words as to carry into effect the meaning and intention of the legislature. We had occasion very much to consider this point in Hawkins v. Gathercole ((1854) 6 De GM & G 1, 43 ER 1129), in which case we restrained the effect of general words in the Act on which the case depended, and there are many cases in the books to the same effect, some of which are referred to in that case, and others not, but are to be found in Viner’s Abridgment, title ”Statutes.” Was it then the intention of the legislature that the general words contained in the sections to which I have referred should extend to the case of a collision between foreign ships owned by foreigners? I think it was not. This is a British Act of Parliament, and it is not, I think, to be presumed that the British Parliament could intend to legislate as to the rights and liabilities of foreigners. In order to warrant such a conclusion, I think that either the words of the Act ought to be express or the context of it to be very clear.’
Later, he said (2 De G & J 614 at 625, 44 ER 1127 at 1131):
‘But what seems to me to be more decisive upon the subject, is the context of the Act. If the 504th section reaches the case of a collision between foreign vessels owned by foreigners, the 503rd section must also reach that case, and then we must suppose that the British Parliament meant by this Act to legislate upon the questions what should be inserted in the bills of lading of foreign shippers, and what should be declared by them to the masters of the vessels on board which their goods were shipped.’
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In Ex p Blain, re Sawers (1879) 12 Ch D 522, [1874–80] All ER Rep 708 the Court of Appeal refused to apply the provisions of the Bankruptcy Act 1869 to two foreigners domiciled and permanently resident in Chile. James LJ said (12 Ch D 522 at 526, [1874–80] All ER Rep 708 at 709):
‘It appears to me that the whole question is governed by the broad, general, universal principle that English legislation, unless the contrary is expressly enacted or so plainly implied as to make it the duty of an English Court to give effect to an English statute, is applicable only to English subjects or to foreigners who by coming into this country, whether for a long or a short time, have made themselves during that time subject to English jurisdiction.’
Brett LJ said (12 Ch D 522 at 528, [1874–80] All ER Rep 708 at 711):
‘It is said that the case is literally within the words of the statute, and so, no doubt, it is. But does it follow that, because a case is literally within the words of a statute of any country, therefore it is within the jurisdiction of the Courts of that country? Certainly not. The governing principle is that all legislation is primâ facie territorial, that is to say, that the legislation of any country binds its own subjects and the subjects of other countries who for the time being bring themselves within the allegiance of the legislating power.’
Cotton LJ said (12 Ch D 522 at 531–532, [1874–80] All ER Rep 708 at 713):
‘All we have to do is to interpret an Act of Parliament which uses a general word, and we have to say how that word is to be limited, when of necessity there must be some limitation. I take it the limitation is this, that all laws of the English Parliament must be territorial—territorial in this sense, that they apply to and bind all subjects of the Crown who come within the fair interpretation of them, and also all aliens who come to this country, and who, during the time they are here, do any act which, on a fair interpretation of the statute as regards them, comes within its provisions.’
Cotton LJ’s reference to ‘the English Parliament’, an institution which ceased to exist more than 170 years prior to 1879, must have been intended to be a reference to the Parliament of the United Kingdom.
Ex p Blain was followed in Re AB & Co [1900] 1 QB 541, another bankruptcy case, in which Lindley MR said (at 544–545):
‘What authority or right has the Court to alter in this way the status of foreigners who are not subject to our jurisdiction? If Parliament had conferred this power in express words, then, of course, the Court would be bound to exercise it. But the decisions go to this extent, and rightly, I think, in principle, that, unless Parliament has conferred upon the Court that power in language which is unmistakable, the Court is not to assume that Parliament intended to do that which might so seriously affect foreigners who are not resident here, and might give offence to foreign Governments. Unless Parliament has used such plain terms as shew that they really intended us to do that, we ought not to do it. That is the principle which underlies the decisions in Ex parte Blain and In re Pearson ([1892] 2 QB 263, [1891–4] All ER Rep 1066).’
Finally, in Clark (Inspector of Taxes) v Oceanic Contractors Inc [1983] 1 All ER 133 at 143, [1983] 2 AC 130 at 151 Lord Wilberforce referred to the general principle that ‘English legislation is primarily territorial’ and cited with approval the passage in the judgment of James LJ in Ex p Blain to which I have already referred. He observed with reference to the territorial principle ([1983] 1 All ER 133 at 144, [1983] 2 AC 130 at 152):
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‘That principle, which is really a rule of construction of statutes expressed in general terms and which, as James LJ said, a “broad principle”, requires an inquiry to be made as to the person with respect to whom Parliament is presumed, in the particular case, to be legislating.’
My Lords, it is clear from the foregoing authorities that the presumption proceeds on the basis that Parliament is unlikely to seek to interfere and has no interest to interfere in matters which are properly the concern of the legislature of another state. In all these authorities the relevant legislation was unilateral in the sense that it did not seek to implement an international agreement. Where, however, Parliament incorporates into domestic legislation an international convention which necessarily gives to that domestic legislation extra-territorial effect in the broadest sense an entirely different situation arises. The extra-territorial effect of such legislation is not within the presumption at all since the basis for the presumption no longer exists. Even if the principle does apply to all legislation whether unilateral or not all the necessary conditions for its rebuttal would exist in the case of convention legislation. With these important distinctions in mind I turn to consider in more detail the statutory provisions which are relevant to this appeal.
I take as a starting point the 1932 Act, of which the primary object was to give effect to the Warsaw Convention. The respondent argued that the words ‘irrespective of the nationality of the aircraft’ occurring in s 1(1) of that Act and of the 1961 Act demonstrated that Parliament intended the Acts to have unilateral extra-territorial effect inasmuch as owners of aircraft who were nationals of states which were not high contracting parties to the convention (non-HCP owners) would be subject to the provisions if their aircraft were engaged to any extent in international carriage within the meaning of the convention. There are, in my view, two answers to this argument. In the first place it is reasonable to assume that the existence and terms of the convention were widely known among persons undertaking international carriage by air as therein defined. Such persons could be expected to know what would be the consequences of performing such international carriage. Per contra there would be no reason why a carrier operating on one side of the world should consider or even be aware of the carriage by air laws of a state situated on the other side with which his operations had no connection. To bring a foreign carrier within the ambit of a widely publicised international convention because he chooses to operate within the territory of parties to the convention is far removed from bringing such carrier within the ambit of the municipal law of a state with which his operations may have no connection. In the second place, and in any event, non-HCP owners would only be affected by s 1(1) if a United Kingdom court satisfied one of the four alternatives set out in art 28 of the convention. The first two alternatives are not relevant to extra-territoriality since they presuppose that the carrier is ordinarily resident or has his principal place of business within the jurisdiction of the United Kingdom courts. If the contract were neither made in the United Kingdom nor was the United Kingdom the destination of the carriage, a United Kingdom court would satisfy neither of the second alternatives and s 1(1) would not apply to the non-HCP owner. In my view the words to which I have referred at the beginning of this paragraph do no more than emphasise what is implicit in art 1 of the Warsaw and Hague conventions that it is the contract of carriage and not the nationality of the carrier which brings them into operation.
If s 4 of the 1932 Act reserved power by Order in Council to apply the Warsaw Convention to any carriage by air other than that to which the convention applied, the exercise of such power could have produced surprising results. For example, the United Kingdom legislature could unilaterally have applied the convention in whole or in an adapted form to domestic carriage taking place wholly within the territory of any one or more of the high contracting parties. Thus, international carriage affecting high contracting parties would have been brought within the ambit of United Kingdom legislation because the high contracting parties had so agreed, but purely domestic carriage affecting them would have become subject to the law of the United Kingdom
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because the legislature at its own hand and without reference to them had so decided. This would have been a very remarkable result indeed and one which hardly accorded with the ordinary principles of comity of nations. A further example would have been the unilateral application of the convention by the United Kingdom legislature to international carriage between two states which were not high contracting parties. Thus states which had not signed the convention could have found themselves treated by the United Kingdom legislature as though they had. This would also have been a somewhat startling result. Both these examples would apply equally to the exercise of the power reserved in s 10(1) of the 1961 Act, which is, for practical purposes, in terms identical to those of s 4 of the 1932 Act. However, by virtue of the number of states which are high contracting parties to one or both of the Warsaw and Hague conventions, a more appropriate second example would be the unilateral application of the Hague Convention to contracts of carriage where the place of departure was within the territory of a state which was a party only to the Warsaw Convention and the place of destination was within the territory of a state which was a party only to the Hague Convention or vice versa.
My Lords, I have referred to the two Acts in the first place because I consider that it is essential to construe the 1967 order in the light of the provisions of ss 1 and 10 of the 1961 Act. To look at the order alone without regard to the purpose and provisions of the Act is an illegitimate approach and one likely to lead to a wrong conclusion. The Act rules and the scope of the order are limited by the extent of the powers in the Act. In Grein v Imperial Airways Ltd [1936] 2 All ER 1258 at 1278–1279, [1937] 1 KB 50 at 76 Greene LJ, after referring to difficulties created by the different laws which might be applicable where an accident took place in the country of departure or in the country of destination or where the carriage was effected by stages covering several countries, observed:
‘It is, I think, apparent from the subject matter with which the convention deals and from its contents that the removal of these difficulties by means of a uniform international code, to be applied by the courts of the various countries adopting the convention, is one, at any rate, of the main objects at which the convention aims; and it is in my judgment essential to approach it with a proper appreciation of this circumstance in mind. The convention is limited to international carriage. There was no necessity for any agreement as to carriage performed within the territory of one state; nor was it thought necessary to deal with the case where an aeroplane performing the contract of carriage began and ended its journey in the territory of the same state without coming to earth, even if during its flight it passed over the territory of another state. In such a case difficulties as to the law applicable would not be likely to arise … ’
If international agreement was not needed to regulate conditions of domestic carriage within one state it is difficult to see why the United Kingdom legislature should seek unilaterally to apply United Kingdom law to such contracts of carriage whose proper law is not in doubt and in relation to which no question of conflict of laws could otherwise arise. Indeed, such unilateral application of United Kingdom law, far from resolving difficult questions of conflict of laws would appear to create them in situations where they would not otherwise exist. It may be said that because the 1952 and 1967 orders have applied parts of the relevant conventions to domestic carriage within the United Kingdom and its dependencies where otherwise no conflict of law would arise they could equally apply the conventions to foreign domestic carriage. That is, in my view, nothing to the point since there is a yawning gap between the application by a state of an international convention in modified terms to its own domestic carriage by air, a convenient method of providing a suitable domestic code, and the unilateral application of that convention to foreign domestic carriage where the proper law of the contract is not in doubt.
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Turning to the 1967 order, there can be no doubt that the words in art 3 ‘all carriage by air, not being carriage to which the amended Convention applies’ are capable of comprehending all carriage throughout the world which is not within the Hague Convention. Parliament by s 1 of the 1961 Act having repealed the 1932 Act thereby deprived the Warsaw Convention of the force of law in the United Kingdom. Since that convention still subsisted Parliament clearly had to reclothe it by some other means with the force of law. This was done by the process to which I have already referred. In his judgment Leggatt J said ([1987] 2 Lloyd’s Rep 192 at 196):
‘By virtue of art. 3, schedule 2 applies the unamended Warsaw Convention to international carriage, and schedule 1 applies the amended Warsaw Convention to non-international carriage. Since schedule 2 is undeniably extra-territorial in its effect, so must schedule 1 be extra-territorial also.’
Bingham LJ, in the passage to which I have already referred, considered that Sch 2 to the 1967 order was of crucial importance in construing the order because (i) it had the force of law in the United Kingdom and (ii) Sch 2 must be construed as having extra-territorial effect (see [1988] 2 Lloyd’s Rep 120 at 122).
My Lords, with all respect to the reasoning of Leggatt J and Bingham LJ, I think that they have overlooked the fundamental difference, to which I have already referred, between legislation which has extra-territorial effect unilaterally and in pursuance of an international convention. When the 1961 Act came into force the Warsaw Convention was still operative and it was incumbent on the United Kingdom as a party thereto to continue to give it legal effect. This is precisely what art 5 of and Sch 2 to the 1967 order did. I do not therefore consider that the extra-territorial effect of Sch 2 in pursuance of the Warsaw Convention affords any support for the view that art 4 and Sch 1 have unilateral extra-territorial effect.
It is clear from the long title of the 1961 Act that its primary purpose was to give effect in the law of the United Kingdom to the Hague Convention. An equally important purpose was to enable the Warsaw Convention to be reincorporated in the law of the United Kingdom on the repeal of the 1932 Act. These purposes are effected by s 1 and exercise of the powers conferred in s 10 of the 1961 Act. Do its other purposes include legislation relating to foreign domestic travel wholly unconnected with the United Kingdom in relation to which no question of conflict of law arises? I do not consider that they do and that for a number of reasons.
In the first place, if one looks at the events in relation to which Parliament is presumed to be legislating one might as an example ask what interest Parliament has in legislating for the terms of the carriage by air of two Russians in a Russian owned aircraft from Omsk to Tomsk. The commonsense answer would be none, just as Parliament would have had no interest had the two Russians chosen instead to make the same journey by the Trans-Siberian Railway. In the second place, the fact that Parliament has, by giving effect in the law of the United Kingdom to the Warsaw and Hague conventions, legislated in relation to certain matters which are likely to affect high contracting parties suggests that Parliament would be unlikely to legislate in relation to other similar matters without the agreement of those same high contracting parties who were likely to be affected. In the third place, there is nothing in the 1932 or 1961 Acts which expressly enacts that foreign carriage by air of any description other than convention ‘international carriage’ falls within their ambit. In relation to such latter carriage Parliament had no difficulty in making its intentions clear and unambiguous. Similarly, in s 1(2) and (3) of the Carriage of Goods by Sea Act 1971 Parliament had no difficulty in providing unambiguously that the Hague Visby Rules should have the force of law in the United Kingdom and should apply to carriage where the port of shipment was a port in the United Kingdom. The rules accordingly were held to apply to an incident occurring at a foreign port of transhipment for onward carriage to the agreed port of destination: see The Hollandia [1982] 3 All ER 1141, [1983] 1 AC 565. Furthermore, for the reasons which I have just
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given, far from there being a plain implication in the Acts that foreign carriage by air of any description was intended to be brought within their scope all the circumstances point in the opposite direction. I therefore conclude that the 1961 Act and the 1967 order did not apply to the contract of carriage between the deceased and the appellants. In reaching this conclusion I am fortified by the knowledge that it is more likely to produce a degree of certainty between carriers and their passengers than would the result sought by the respondent. It must be a matter of importance to both carriers and passengers that they should be aware of the extent of their rights and liabilities at the time when the contract of carriage is entered into. If the law applicable to the contract limits the carrier’s liability to a small amount the passenger can, if so advised, readily effect further insurance to cover accident during the carriage. Equally the carrier having limited his liability in accordance with the proper law of the contract can make appropriate insurance arrangements. Both parties know where they stand. If, on the other hand, the respondent’s argument were correct, a foreign domestic carrier would never know at the time when he entered into a contract of carriage what his ultimate liability might be because the passenger in question or his representatives might at some future date be able to invoke the jurisdiction of the United Kingdom courts and resist any attempt by the carrier to plead forum non conveniens. If the Warsaw and Hague conventions were intended to produce the adoption of certain uniform rules whereby parties to contracts of carriage by air knew where they stood the results contended for by the respondent would produce precisely the opposite result.
My Lords, although I am in favour of the appellants’ general submissions, I reject their contention that art 4 of and Sch 1 to the 1967 order applies only to contracts of carriage whose proper law is that of the United Kingdom. While it is sufficient for the disposal of this appeal that these provisions did not extend to the deceased’s contract of carriage I think it right to express a positive rather than a purely negative view as to the scope of the schedule. The flaw in the appellants’ contention is that it gives no content to art 32 of the amended convention which has been retained in Sch 1. If the schedule only applied to contracts whose proper law was that of the United Kingdom the words in art 32 ‘whether by deciding the law to be applied’ would be otiose. Any contractual attempt to remove or reduce a carrier’s liability below the limits provided in the schedule is already struck at by art 23. The above words, in my view, relate to contracts of carriage which provide for the application thereto of a system of law other than that of the United Kingdom. I have already concluded that the 1961 Act and the 1967 order do not apply to foreign domestic carriage. My reasons for reaching that conclusion apply equally to carriage between the territories of two or more states, where that carriage (1) does not fall within the definition of ‘international carriage’ in either of the conventions, and (2) involves neither departure, stopping place nor destination within United Kingdom territory.
There is no doubt that Sch 1 to the 1967 order applies to domestic carriage wholly within or between parts of the United Kingdom territory. The more difficult question is how much further it extends. I was at first minded to conclude that it extended to any contract of carriage which did not fall within the ambit of either of the conventions and which involved entry into United Kingdom air space even for purposes of passage only. On further reflection, however, I do not think that it extends so far. In Grein v Imperial Airways Ltd [1936] 2 All ER 1258 at 1278–1279, [1937] 1 KB 50 at 76 Greene LJ pointed out that no difficulties as to the law applicable would arise where the contract related to non-stop carriage between two points within the territory of one state albeit passage over the territory of another state was involved. Per contra carriage between two such points which involved an agreed stopping place within the territory of another state is covered by both conventions for the obvious reason that difficulties as to the law applicable to the contract could in such circumstances arise. Both the original and amended conventions are concerned solely with carriage which is defined by reference to places of departure
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and destination and agreed stopping places. The airspace through which the aircraft passes is irrelevant to the definition. Thus, carriage from the territory of one high contracting party to that of another is within the convention definition whether in the case of that carriage the aircraft passes over the territory of a third high contracting party or over that of a state which is not a party to the convention. Why then should Parliament seek to apply United Kingdom law to a contract of carriage which involves a purely ephemeral contact with United Kingdom airspace but none with United Kingdom territory? To take an extreme example, a foreign aircraft flying from America to Scandinavia might spend a fraction of a second passing through United Kingdom airspace over Rockall and perhaps one or two seconds passing over the Shetland Islands. It is difficult to see what interest Parliament could have in applying United Kingdom law to the contracts of carriage of the passengers. I am satisfied that Parliament never intended to legislate in relation to contracts of carriage which merely involved passage through United Kingdom airspace for varying degrees of time. Some more positive connection with United Kingdom territory must have been intended. In my view Sch 1 to the 1967 order applies to (1) carriage wholly within or between parts of United Kingdom territory and (2) carriage which, in terms of the contract, has either a place of departure, a place of destination or an agreed stopping place within United Kingdom territory and is not included within the definition of international carriage in either of the conventions. Such carriage would, for example, include (i) carriage by single ticket from London to Bangkok or return ticket Bangkok—London—Bangkok and (ii) carriage from a Warsaw point of origin to a Hague point of destination with an agreed stopping place in the United Kingdom where neither the Warsaw state nor the Hague state were parties to the other convention.
My Lords, for the foregoing reasons I would allow the appeal.
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Bridge, Lord Griffiths and Lord Jauncey. I agree with them and would, in particular, express my respectful and complete acceptance of the reasoning in the course of which they have explained and applied the principle which is commonly referred to as the presumption against extra-territorial legislation.
Accordingly, for the reasons given by my noble and learned friends, I, too, would allow the appeal and would make the order which my noble and learned friend Lord Bridge proposes.
Appeal allowed. Orders of judge and Court of Appeal set aside save as to costs. Appellants to pay respondent’s costs in House of Lords.
Solicitors: Beaumont & Son; Clifford Chance.
Mary Rose Plummer Barrister.
Robbins v Secretary of State for the Environment and another
[1989] 1 All ER 878
Categories: TOWN & COUNTRY PLANNING
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD BRANDON OF OAKBROOK, LORD TEMPLEMAN, LORD ACKNER AND LORD LOWRY
Hearing Date(s): 23, 24 JANUARY, 2 MARCH 1989
Town and country planning – Building of special architectural or historic interest – Repairs notice – Compulsory acquisition of listed building requiring repair – Service of notice specifying works ‘reasonably necessary for proper preservation’ of building – Whether ‘preservation’ including restoration – Whether inclusion in notice of excessive items invalidating notice – Whether ‘preservation’ referring to features existing when building first listed or features existing at date of notice – Town and Country Planning Act 1971, ss 114, 115.
The appellant was the owner of a windmill which had been built in 1868 and included in a list of buildings of special architectural or historic interest in 1951. The appellant had acquired the windmill in 1969 and had converted it into a dwelling house. The appellant allowed the windmill to deteriorate and in 1983 the local council served a repairs notice on him under s 115a of the Town and Country Planning Act 1971 specifying the works which they considered were ‘reasonably necessary for the proper preservation of the building’. The appellant failed to comply with the notice and the council, in their capacity of local planning authority, made a compulsory purchase order under s 114b of the 1971 Act. The appellant objected to the confirmation of the order, claiming that the repairs notice was invalid because it included items which amounted to restoration and were outside the scope of a repairs notice. After a public inquiry the Secretary of State for the Environment confirmed the order. The appellant applied to the High Court to quash the Secretary of State’s decision but his application was dismissed by the judge, whose decision was upheld by the Court of Appeal. The appellant appealed to the House of Lords. The questions arose (i) as to what was the scope of the ‘proper preservation’ of a listed building in the context of ss 114 and 115 of the 1971 Act which the works specified in a repairs notice under s 115 might be directed to achieve and whether ‘preservation’ of a listed building referred to the preservation of the building in the state it was in when it was listed or when the repairs notice was served and (ii) whether the repairs notice was invalid because it specified some works which fell outside the proper scope of such a notice.
Held – (1) On its true construction the word ‘preservation’ in s 115(1)(a) of the 1971 Act was to be given its ordinary meaning and did not extend to restoration work. However, having regard to the policy of the 1971 Act and the public interest in preserving buildings of special architectural or historic interest, the ‘preservation’ of a listed building referred it being kept in the state it was in when first listed and not when the repairs notice was served (see p 883 j, p 884 h, p 885 b, p 886 j, p 887 a, p 889 c and p 890 g h, post).
(2) A repairs notice served on the owner of a listed building under s 115 of the 1971 Act which specified works considered reasonably necessary for the proper preservation of the building was an effective notice for the purpose of the compulsory purchase procedure under s 114 of that Act even if the list of works specified included a number of items which went beyond the scope of s 115. It followed that the Secretary of State had been entitled to confirm the compulsory purchase order. The appeal would therefore be dismissed (see p 886 h j, p 887 a and p 890 f to h, post).
Page 879 of [1989] 1 All ER 878
Notes
For compulsory acquisition of a listed building needing repair, see 34 Halsbury’s Laws (4th edn) paras 677–678.
For the Town and Country Planning Act 1971, ss 114, 115, see 46 Halsbury’s Statutes (4th edn) 394, 396.
Appeal
Tom Robbins appealed with the leave of the Appeal Committee of the House of Lords given on 26 October 1988 against the decision of the Court of Appeal (Slade, Glidewell and Russell LJJ) on 17 May 1988 dismissing his appeal against the decision of Mr Malcolm Pill QC, sitting as a deputy judge of the High Court in the Queen’s Bench Division on 13 November 1987, dismissing his application under s 23 of the Acquisition of Land Act 1981 for an order quashing the decision of the first respondent, the Secretary of State for the Environment, on 16 December 1986 confirming a compulsory purchase order made by the second respondent, Ashford Borough Council, on 15 October 1984 under s 114 of the Town and Country Planning Act 1971 relating to Willesborough Windmill, Mill Lane, Willesborough, Ashford, Kent, which was a listed building owned by the appellant. The facts are set out in the opinion of Lord Bridge.
Michael Barnes QC and Richard Hayward for the appellant.
Jeremy M Sullivan QC and Mark Lowe for the respondents.
Their Lordships took time for consideration
2 March 1989. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, the appellant challenges a compulsory purchase order made by Ashford Borough Council on 15 October 1984 and confirmed by the Secretary of State on 16 December 1986 which authorises the council to acquire compulsorily the Willesborough Windmill. The authorisation was given pursuant to s 114 of the Town and Country Planning Act 1971 on the ground that it appeared to the Secretary of State that ‘reasonable steps are not being taken for properly preserving’ the windmill, which is a listed building. It is a condition precedent to a compulsory acquisition under s 114 that at least two months before initiating the compulsory purchase proceedings the acquiring authority should serve on the owner of the building a notice under s 115 ‘specifying the works which they consider reasonably necessary for the proper preservation of the building’. The notice is referred to in the section as a ‘repairs notice’. The ground of the appellant’s challenge is that the repairs notice which was served on him by the council on 7 October 1983 did not satisfy the condition precedent in that some of the works specified as considered by the council to be reasonably necessary for the proper preservation of the windmill were incapable, on the true construction of s 115, of being so considered and that the inclusion of these excessive items invalidated the notice. The challenge thus raises two distinct questions of statutory construction. First, what, in the context of ss 114 and 115, is the scope of the ‘proper preservation’ of a listed building which the works specified in a repairs notice under s 115 may be directed to achieve? Second, if the notice specifies some works falling within that scope but also others which exceed it, is the statutory condition precedent to compulsory acquisition satisfied or is the notice ineffective for that purpose?
The appellant applied to the High Court pursuant to s 23 of the Acquisition of Land Act 1981 for the quashing of the compulsory purchase order. The application was dismissed by Mr Malcolm Pill QC, sitting as a deputy judge of the High Court in the Queen’s Bench Division. His decision was affirmed by the Court of Appeal (Slade, Glidewell and Russell LJJ). The appellant now appeals by leave of your Lordships’ House.
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For the purpose of deciding the appeal the relevant facts may be quite shortly stated. The windmill was built in 1868. It continued in operation as a windmill until 1938. In September 1951 it was included in a list of buildings of special architectural and historic interest pursuant to s 30(1) of the Town and Country Planning Act 1947. The notes entered in the list descriptive of the building read as follows:
‘Built in 1868 by John Hill of Ashford, Mill-wright. Rect. brick base of 2 s. Above this an octagonal smock mill of white weather-boarding with a platform and railing round above the base. Sash ws. with gl. bars intact. Hooded cap. Fantail and sweeps partly missing. The Windmill is still worked as a mill but not by wind. Unusually good condition.’
In 1969 the windmill was acquired by the appellant and converted to a dwelling house. Over the years the condition of the windmill deteriorated greatly. In particular, by the time the council served the repairs notice in October 1983 the platform and railing round the base of the mill (the catwalk) had mostly decayed or been removed, parts of the fantail had been removed and what remained was in danger of collapse, and very little was left of the sweeps.
The repairs notice served under s 115 specified 20 items of works which the council considered reasonably necessary for the proper preservation of the building. It is now accepted that 14 of those items, those numbered 1 to 12, 14 and 18 in the list, specified either works of an emergency nature (dismantling the dangerous remains of the fantail) or works in the nature of repairs required to prevent further deterioration of the structure or of parts of the windwill which were subsisting at the date of service of the notice. The remaining items, however, went beyond this. They included, inter alia, the complete reconstruction of the catwalk and the fantail and the renewal of the stocks and whips (but not the framework or shutters) of the sweeps. The work specified for the catwalk and the sweeps was to be ‘to the original standard or to a standard approved by the council’. I shall for convenience refer to items 13, 15, 16, 17, 19 and 20 collectively as ‘the restoration items’.
When the compulsory purchase order was made the appellant duly objected to its confirmation and a public inquiry was held in December 1985 by an inspector appointed by the Secretary of State. In a lengthy report, dated 10 January 1986, the inspector records the submissions made to him and sets out his findings of fact. Objection was taken on behalf of the appellant that the inclusion in the repairs notice of the restoration items was unlawful. Since service of the repairs notice the ruinous remains of the fantail had been dismantled, but apart from that it is clear that very little work had been done in response to the notice. The inspector found that—
‘the steps taken can in my opinion only be described as preliminaries for the eventual preservation of the building rather than as substantial works for its proper preservation.’
The inspector concluded—
‘that no reasonable steps are being taken for properly preserving the building and that it is expedient to make provision for its preservation and to authorise compulsory acquisition for that purpose.’
The crucial paragraphs of the Secretary of State’s decision letter, dated 16 December 1986, read, so far as presently material, as follows:
‘5. Careful consideration has been given to the legal points set out by the Inspector at paragraphs 27 to 44 of his report and his opinion at paragraph 45 that they are for the Secretary of State to decide. Representations were made to the effect that:—(i) some of the works included in the repairs notice were appropriate to the restoration of the building rather than to its preservation. The Secretary of State takes the view
Page 881 of [1989] 1 All ER 878
that the question whether works are properly considered to be reasonably necessary for the proper preservation of a building is bound, to a certain extent, to be one of fact and degree. He agrees with the inspector’s view that in certain instances works which might normally be considered more appropriate to restoration can, in other circumstances, be regarded as necessary for the proper preservation of a building. In the Secretary of State’s view, the repairs required to preserve the building contained in the Council’s repairs notice do not include such items as would invalidate the notice although the Secretary of State accepts that had all, or most, or even a substantial amount of the works required by items 1–12, 14 and 18 of the schedule to the notice been carried out, he would have been satisfied that reasonable steps were being taken for properly preserving the building …
6. The Secretary of State, having considered the legal points raised on behalf of the owners of the mill, considers that there is no legal impediment to prevent him from reaching a decision on the compulsory purchase order on the merits of the case.
7. The Inspector’s findings of fact and conclusions have been carefully considered. The Inspector’s conclusion that the building is a particularly important one which warrants every effort being made to preserve it is accepted, as is also his conclusion that no reasonable steps are being taken for properly preserving it …
9. The Secretary of State accepts the Inspector’s findings of fact and his recommendation and he is satisfied that it is expedient to make provision for the preservation of the building and to authorise its compulsory purchase for that purpose. He has accordingly decided to confirm the order without modification.’
Before examining the rival submissions of the parties it is essential to consider the general scheme of the 1971 Act in relation to the preservation of buildings of special architectural or historic interest. Lists of such buildings are compiled or approved by the Secretary of State under s 54(1). Section 54(2) provides:
‘In considering whether to include a building in a list compiled or approved under this section, the Secretary of State may take into account not only the building itself but also … (b) the desirability of preserving, on the ground of its architectural or historic interest, any feature of the building consisting of a man-made object or structure fixed to the building or forming part of the land and comprised within the curtilage of the building.’
As soon as may be after listing the local authority are notified and they in turn notify the owner of the building (see sub-ss (4) and (7)). A copy of the entry in the list is registered as a local land charge (see sub-s (6)). Thus every subsequent owner will acquire with knowledge that the building is listed. Once a building has been listed under s 54, s 55 makes it a criminal offence to demolish the building or to alter or extend it in any manner which would affect its character as a building of special architectural interest, unless permission, referred to in the Act as ‘listed building consent’, has been granted by the local planning authority or the Secretary of State. The owner of a listed building is not consulted and has no right of objection before the building is listed. However, if he applies for listed building consent and it is not granted by the local planning authority, he has, on appeal to the Secretary of State, a full opportunity to canvass the merits of the listing and it is at that stage that the Secretary of State will have to reach a decision for or against the merits of preserving the building. If listed building consent is refused or granted subject to conditions, compensation is, in appropriate circumstances, payable to the owner pursuant to s 171.
The machinery the Act provides to secure the preservation of a listed building may be considered under three headings: first, sanctions for unlawful demolition or alteration; second, provision for preservation work to be undertaken by the local authority or the Secretary of State; third, provision for compulsory acquisition when reasonable steps are not being taken by the owner for properly preserving the building.
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The offence created by s 55(1) is punishable by a fine or imprisonment (see sub-s (5)). In addition, when works have been carried out in contravention of s 55(1), ss 96 to 100 of the Act provide an elaborate procedure initiated by the service of a listed building enforcement notice, analogous to the enforcement notice procedure applicable to ordinary breaches of planning control, to secure the restoration of the listed building. In particular, by s 96(1)(b)(i) (as substituted by the Local Government and Planning (Amendment) Act 1981, s 1 and Sch, para 9), a listed building enforcement notice may require such steps as may be specified to be taken ‘for restoring the building to its former state’. One of the grounds of appeal available against such a notice under s 97(1)(g) (as substituted) is that ‘the requirements of the notice exceed what is necessary for restoring the building to its condition before the works were carried out’. Non-compliance with a valid listed building enforcement notice attracts further criminal penalties under s 98 the ultimate sanction to secure restoration of the listed building is provided by s 99, which allows the local planning authority to take the steps required to be taken by the enforcement notice and to recover the expenses of so doing from the owner.
Subject to certain limitations, s 101 provides that when it appears to the local authority or the Secretary of State that works are urgently necessary for the preservation of a listed building they may execute the works. Since 1 April 1987 the significance of this provision, as an encouragement to the owner of a listed building to keep it in proper repair, has been strengthened by the addition of s 101A, introduced by the Housing and Planning Act 1986 (s 40 and Sch 9, para 7), which enables the expenses of works executed under s 101 to be recovered from the owner. I mention this as a recent enhancement of the statutory machinery for the preservation of listed buildings, but I recognise, of course, that it cannot affect the construction of ss 114 and 115.
Turning now to the machinery for compulsory acquisition, I first set out so much of ss 114 and 115 (as amended) as seems to me material as follows:
‘114.—(1) Where it appears to the Secretary of State, in the case of a building to which this section applies, that reasonable steps are not being taken for properly preserving it, the Secretary of State may authorise the council of the county or county district in which the building is situated … to acquire compulsorily under this section the building and any land comprising or contiguous or adjacent to it which appears to the Secretary of State to be required for preserving the building or its amenities, or for affording access to it, or for its proper control or management …
(3) This section applies to any listed building …
(4) The Secretary of State shall not make or confirm a compulsory purchase order for the acquisition of any building by virtue of this section unless he is satisfied that it is expedient to make provision for the preservation of the building and to authorise its compulsory acquisition for that purpose.
(5) The Acquisition of Land Act 1981 shall apply to the compulsory acquisition of land under this section.
(6) Any person having an interest in a building which it is proposed to acquire compulsorily under this section may, within twenty-eight days after the service of the notice required by section 12 of the Acquisition of Land Act 1981, apply to a magistrates’ court acting for the petty sessions area within which the building is situated for an order staying further proceedings on the compulsory purchase order; and, if the court is satisfied that reasonable steps have been taken for properly preserving the building, the court shall make an order accordingly.
(7) Any person aggrieved by the decision of a magistrates’ court on an application under subsection (6) of this section may appeal against the decision to the Crown Court.
115.—(1) The compulsory purchase of a building under section 114 of this Act shall not be started by a council … unless at least two months previously they have served on the owner of the building, and not withdrawn, a notice under this section
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(in this section referred to as a “repairs notice”)—(a) specifying the works which they consider reasonably necessary for the proper preservation of the building and (b) explaining the effect of sections 114 to 117 of this Act …
(4) For the purposes of this section a compulsory acquisition is started when the council … serve the notice required by section 12 of the Acquisition of Land Act 1981.’
Section 116 provides that the measure of compensation on compulsory acquisition of a listed building, unless compensation has already become payable under s 171 on refusal of listed building consent or grant of such consent subject to conditions, shall be assessed on the assumption that listed building consent for demolition, alteration or extension of the building would be granted. This ensures that the open market value on which compensation is assessed is not to be depreciated by the restriction inherent in the listing. Section 117 provides for a reduced level of compensation in a case where the building has been deliberately allowed to fall into disrepair for the purpose of justifying its demolition. It is not suggested that this is such a case.
Counsel, who has presented the case for the appellant with conspicuous skill and cogency, submits that a line must be drawn between preservation and restoration and that, on the true construction of ss 114 and 115, works cannot be considered necessary for the proper preservation of a listed building which are not directed to the preservation of the building as it subsists at the date when the repairs notice is served. He accepts, of course, that the concept of preservation in these sections cannot be limited to keeping the building in the exact condition in which it is when the notice is served since this would frustrate the whole procedure. But he submits that no more can ever be considered necessary for preservation than such repairs as are required to secure whatever remains of the building from further deterioration. Thus, for example, if part of the roof is missing or a wall has become unstable, it is accepted that works to repair the roof or stabilise the wall would properly be directed to preservation of the building. But, on the other hand, if some distinct part of the building, some decorative feature of the building without structural significance or some free-standing object included in the listing under s 54(2)(b) has been accidentally destroyed, works to repair or replace those items would exceed the ambit of preservation and could not properly be included in a repairs notice. This construction, counsel for the appellant submits, accords with the ordinary meaning of the word ‘preservation’ in contrast with the word ‘restoration’ found in the provisions relating to the enforcement notice procedure in ss 96 and 97. On the basis of this construction the restoration items specified in the repairs notice in this case were beyond the scope of s 115.
Counsel for the respondents submits that the phrase ‘reasonably necessary for the proper preservation of the building’ must be construed as a whole and establishes the criterion to be applied by the acquiring authority when they serve the repairs notice and the Secretary of State when deciding whether to confirm the compulsory purchase order in the circumstances of any particular case, which is partly a matter of fact and degree and partly a matter of discretion. Their decisions in the application of that criterion, he submits, are only susceptible to review by the courts on the ground of irrationality. I readily accept, as did counsel for the appellant in argument, that the use of the words ‘reasonably’ and ‘proper’ in the phrase under consideration call for value judgments, weighing such matters as the cost and the benefit of works required for the preservation of a listed building, and that such judgments are entrusted to the acquiring authority under s 115 and to the Secretary of State under s 114. But I think that the word ‘preservation’ has to be given its ordinary meaning in contrast with ‘restoration’ and that this does impose an objective limitation which must be applied in considering what the works specified in a repairs notice may be directed to achieve.
The more difficult question is whether ‘preservation’ of the listed building in these sections refers to the preservation of the building as it was when listed or of the building
Page 884 of [1989] 1 All ER 878
as it is when the repairs notice is served. I think the language of the sections is capable of either construction. Indeed, both counsel adopted the proposition that the sections refer to preservation of the building as it subsisted at the date of listing as an alternative to their primary submissions, albeit with very different emphasis. Counsel for the appellant’s bottom line, if I may use that colloquialism, is that the preservation envisaged by ss 114 and 115 must at least exclude the restoration of features of a building which ceased to exist before the building was listed. Counsel for the respondents’ bottom line is that it must at least include anything designed to preserve the building as it subsisted when first listed and that this would include, in the case of a building in disrepair at the time of listing, works designed to remedy the disrepair and secure the building against further deterioration.
I accept that the legislature cannot have intended that immediately following the listing of a building it should be liable to compulsory purchase on the ground that steps were not being taken for properly preserving it because the owner was unwilling to restore features of the building which had ceased to exist before listing. I accept, on the other hand, that if what I will call the date of listing construction is to be preferred to the date of notice construction, a building in disrepair when listed may be the subject of a repairs notice under s 114 specifying works necessary to prevent further deterioration. The line between repair and restoration may not be an easy one to draw with precision, but in practice I doubt if any great difficulty will be found in saying whether any particular works fall on one side of the line or the other. The important issue is whether the date of listing or the date of notice construction is correct.
Counsel for the appellant naturally places much emphasis on the specific references to restoration which can be required to be undertaken by or at the expense of the owner under the listed building enforcement notice procedure in ss 96 to 100. He also contends, I think rightly, that the works urgently necessary for the preservation of a listed building, which may be undertaken by the local authority or the Secretary of State under s 101 and the expenses of which since 1 April 1987 may be recovered from the owner under s 101A, can only refer to works urgently necessary to preserve the building as it subsists when the works are undertaken. These indications, he submits, point strongly in favour of the date of notice construction. I am conscious of the force of counsel’s submission but I cannot accept that the considerations on which he relies are decisive. An enforcement under s 96 is both penal and coercive: it compels the owner to restore the building or to bear the cost of restoration. A repairs notice is in no way either penal or coercive: it is a procedural preliminary to compulsory acquisition designed to give the owner the opportunity, if he chooses, to undertake the works reasonably necessary for the proper preservation of the building as an alternative to selling it at its market value to the acquiring authority. Again, it is clear that works can only be urgently necessary for the preservation of a building so as to justify works being undertaken pursuant to s 101 if they are necessary for the preservation of the building as it subsists when the works are carried out. Thus there is no ambiguity in s 101. I do not think it follows that the proper preservation of a listed building, which is the objective of the compulsory acquisition procedure under ss 114 and 115, is limited in the same way.
I believe that the question whether the date of listing or the date of notice construction is correct is to be resolved purposively by considering the underlying policy of the legislation. The public interest in the preservation of buildings of special architectural or historic interest needs no emphasis. Once a building has been listed, that public interest has been declared. If the owner seeks and is denied unconditional listed building consent he will recover any compensation payable under s 171. If a listed building falls into disrepair and that disrepair becomes apparent before the building or part of it collapses, the character of the building can be preserved, if necessary, by emergency works under s 101. But, if part of a building collapses without warning or is destroyed by fire or storm damage, the character of the building as a building of special architectural historic interest can only be preserved if the damage is made good. If the date of notice
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construction is correct, the compulsory purchase machinery is ineffective to serve the public interest in such cases and ss 114 and 115 are of very limited utility. On the other hand, if the date of listing construction is correct, compulsory purchase is available in such cases as the only means, if the owner is unwilling to make good the damage, of preserving the character of the building from which its special architectural and historic interest derives. I have no hesitation in concluding that the date of listing construction is to be preferred. Sections 114 and 115, given this more generous construction, do no more than to enable the building as listed to be acquired and preserved at the public expense. The interest of the owner, if he is unwilling to undertake the necessary works, in retaining his property has to yield to the public interest in the same way and on the same terms as the interest of any other property owner whose property is acquired for some necessary public purpose.
I have felt it appropriate to examine this issue of construction at some length since it was fully argued and is of obvious importance. At the end of the day, however, I do not think the result of the appeal turns on it. I accept the submission of counsel for the appellant that even on the date of listing construction the repairs notice served by the council specified works exceeding what could be considered reasonably necessary for the proper preservation of the windmill. The notes entered in the 1951 list recorded that the fantail and sweeps were then partly missing. The restoration items in the repairs notice specified works for the full restoration of the fantail and partial restoration of the sweeps. The former clearly are, and the latter, in the absence of evidence as to which parts of the sweeps were missing in 1951, must be taken to be, works for the restoration of the building to the condition that it was in before it was listed.
The Secretary of State, however, clearly did not rely on the fact that none of the works specified in relation to the restoration items had been carried out in reaching his conclusion that reasonable steps were not being taken for preserving the windmill. There was ample material on which he could reach that conclusion in reliance on the failure to carry out works specified as reasonably necessary for the preservation of the windmill in relation to the other 14 items listed in the repairs notice. His confirmation of the compulsory purchase order, therefore, was perfectly lawful under s 114 unless, as counsel for the appellant contends, the inclusion in the repairs notice of the restoration items relating to the fantail and the sweeps invalidated the remainder of the notice so that the condition precedent to compulsory purchase under s 115 was not satisfied.
Before turning to that issue I should observe that the statutory code relating to the preservation of listed buildings on which I have based the opinion expressed as to the proper construction of ss 114 and 115 is the 1971 consolidating Act. A large part of that code, including the provisions now found in ss 114 and 115, was first enacted by the Town and Country Planning Act 1968 amending the original code under the Town and Country Planning Act 1947. I leave open for future consideration, if the question should ever arise, whether works specified for the restoration of some feature of a building first listed under s 30 of the 1947 Act which had disappeared before the 1968 Act came into force could properly be regarded as necessary for the preservation of the listed building within the meaning of ss 114 and 115. The point does not arise here and no argument was addressed to it. It is very unlikely, I would think, to arise in the future and I express no opinion on it.
The remaining and crucial question on which the appeal depends is whether a repairs notice which specifies a list of works considered reasonably necessary for the proper preservation of a listed building which includes a number of items within the scope of the section (valid items) and also a number of items beyond the scope of the section (invalid items) effectively satisfies the condition precedent to compulsory purchase imposed by s 115. This is a pure question of the construction of the section and I do not think that any assistance is to be derived from authorities on severance in very different legal contexts. On the face of the language of s 115 a notice listing a number of valid items is a notice ‘specifying the works which they consider reasonably necessary for the
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proper preservation of the building’ notwithstanding that it also includes invalid items. Provided that the list of valid items is sufficiently substantial to support a conclusion by the Secretary of State, in the event that the specified works are not carried out, that reasonable steps are not being taken for properly preserving the building, it is difficult to see why the invalid items should not simply be disregarded. Counsel for the appellant submits, however, that the purpose of a repairs notice is to give the owner of a listed building the opportunity to avoid compulsory purchase by undertaking the works which are reasonably necessary for the proper preservation of the building and that a notice which is excessive puts him in a dilemma: he does not know whether to carry out all the specified works or to omit those works which he considers to be excessive at the risk of having his property acquired if he is held to have been wrong. Such a dilemma may arise whenever the owner of a listed building wishes to challenge any items of works specified in the repairs notice as excessive. The ground of a challenge may be that the disputed items are excessive in fact, ie that valid items exceed what is in fact reasonably necessary for the proper preservation of the building, or it may be that the disputed items are excessive in law, ie that they are invalid items. Counsel for the appellant rightly concedes that a notice containing valid items which are excessive in fact satisfies the condition precedent to compulsory purchase imposed by s 115. It is otherwise, he submits, if invalid items are included because the acquiring authority, in serving the notice, has erred in law.
The dilemma of the owners is the same whether he wishes to challenge certain items in the repairs notice as being excessive in fact or excessive in law. It seems to me that recourse to the magistrates’ court under s 114(6) is tailor-made to provide a solution to the dilemma in either case. This unusual provision empowers the magistrates’ court to override the opinion of the acquiring authority and to pre-empt the decision of the Secretary of State in determining what works are reasonably necessary for the proper preservation of the listed building. The procedure will operate in the following way. The owner who wishes to retain his property in the listed building will put in hand the works specified in the repairs notice which he admits to be necessary for its proper preservation, but not the works specified in the items listed which he wishes to dispute. On receipt of notice under s 12 of the 1981 Act initiating the compulsory purchase proceedings, he will then apply to the magistrates’ court under s 114 for an order staying those proceedings. If the magistrates’ court is satisfied that he has taken reasonable steps for properly preserving the listed building by the works he has already put in hand and that the disputed items are excessive, the owner will be entitled to an order staying further proceedings on the compulsory purchase order. In relation to the disputed items, the proceedings initiated in the magistrates’ court will in due course resolve all issues of both fact and law and can, if necessary, be taken on appeal to the Crown Court or on a point of law to the High Court. If at the conclusion of the proceedings it is held against the owner that some of the disputed items are reasonably necessary for the proper preservation of the listed building, he will then be able to put in hand the works specified in relation to those items, and it is inconceivable that the acquiring authority would proceed with the acquisition. If they were to do so, the owner could make a fresh application to the magistrates’ courts under s 114(6) which would be bound to succeed.
Being satisfied that this procedure is available to protect the owner of a listed building who is willing to carry out such works as are reasonably necessary for its proper preservation from any prejudice by the inclusion in a repairs notice of invalid items, I am equally satisfied that the inclusion of such items does not invalidate the remainder of the notice.
I would accordingly dismiss this appeal.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given in the speeches of my noble and learned friends Lord Bridge and Lord Ackner, I would dismiss the appeal.
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LORD TEMPLEMAN. My Lords, for the reasons given by my noble and learned friend Lord Bridge I would dismiss this appeal.
LORD ACKNER. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Bridge. I gratefully adopt and therefore need not repeat his recital of the facts which led to this appeal.
The central issue in this appeal is the meaning of the phrase ‘works … reasonably necessary for the proper preservation’ of a listed building in s 115(1)(a) of the Town and Country Planning Act 1971.
The purpose of ‘listing’ buildings and how this is achieved
Before considering the rival contentions of the parties, the provisions of the 1971 Act, in so far as they relate to listed buildings, must first be considered. The purpose of ‘listing’ buildings is to ensure the protection and enhancement of the local heritage of buildings. The Secretary of State, pursuant to his statutory obligation under s 54 of the Act, compiles lists of buildings of special architectural or historic interest or approves such lists compiled by the Historic Buildings and Monuments Commission for England or by other persons or bodies of persons as appear to him appropriate as having special knowledge of, or interest in, buildings of architectural or historic interest.
Under s 54(2), in considering whether to include a building in a list compiled or approved under the section, the Secretary of State may take into account not only the building itself, but also any respect in which its exterior contributes to the architectural or historic interest of any group of buildings of which it forms part, and the desirability of preserving on grounds of its architectural or historic interest any feature of the building. Moreover, s 54(9) contains an extended definition of ‘listed building’ to include any object or structure fixed to the building and any object or structure within the curtilage of the building which, although not fixed to the building, forms part of the land and has done so since before 1 July 1948.
The purpose of ‘listing’ buildings, to which I have referred earlier, is achieved in the first place by making it a criminal offence for a person to execute—
‘any works for the demolition of a listed building or for its alteration or extension in any manner which would affect its character as a building of special architectural or historic interest … ’
(See s 55(1).) Quite apart from the penalties that may be incurred in carrying out unauthorised work to a listed building, power is given to the local authority to issue a notice (a building enforcement notice) to restore the building to its former state or to the state in which it would have been if the terms and conditions of any listed building consent which had been granted had been complied with (see s 96). If such a notice is not complied with not only does the owner commit a further offence (see s 98), but provision is made for the local authority to carry out the necessary work and recover the expenses reasonably incurred (see s 99).
Those sections relate to acts of commission. To cater for acts of omission s 101 makes provision where urgent works are necessary to preserve the listed building. In such a case the owner is given notice in writing of the intention to carry out the works, and under s 101A the expense of executing those works are recovered by the authority who carries them out.
Where the works required to preserve the building are not urgently necessary, a notice under s 115 (referred to as a ‘repairs notice’) may be served by a local authority ‘specifying the works which they consider reasonably necessary for the proper preservation of the building’. Such a notice, unlike a notice under the Housing Acts, does not require the execution of any work and places no statutory obligation on the owner to carry out any work. It is a warning shot, a preliminary to compulsory acquisition of that listed building
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if not complied with. The notice has to explain that the local authority consider that reasonable steps are not being taken for the proper preserving of the building and that the works which they specify in the notice are reasonably necessary for its proper preservation. It warns the owner that, if the works are not carried out within two months from service of the notice, they may exercise their powers under s 114 of the Act to begin proceedings for the compulsory purchase of the building. The notice also has to point out that, if (which was not the case in respect of this property) it appears that the building has been deliberately allowed to fall into disrepair for the purpose of justifying its demolition and the development or redevelopment of the site, a compulsory purchase order may include a direction under s 117 for ‘minimum compensation’ the effect of which will be to limit the compensation otherwise payable on compulsory acquisition by requiring it to be assessed on the assumption that neither planning permission nor listed building consent under the Act would be granted for any works except to restore the building to a proper state of repair and to maintain it in such a state. In cases where the building has not been deliberately left derelict, compensation is based on the assumption that listed building consent would be granted for any works for the alteration or extension of the building or for its demolition, other than works in respect of which such consent has been applied for before the date of the order and refused or granted subject to conditions.
If the repairs notice is not complied with and the Secretary of State is satisfied that reasonable steps are not being taken properly to preserve the building, he will authorise the local authority to acquire the building compulsorily under s 114. However, he may not make or confirm a compulsory purchase order under this section unless he is satisfied that it is expedient to make provision for the preservation of the building and to authorise its compulsory acquisition for that purpose.
Thus, it will be seen that, although the owner may disregard the repairs notice, he does so at his peril since thereby he renders the building liable to be compulsorily acquired. Thus, given that works are reasonably necessary for the proper preservation of the building, their execution is achieved either at the owner’s expense (aided by such grants as may be available) or at the public expense after the public has compulsorily acquired the building. Thus, Parliament’s purpose to ensure the protection and enhancement of the local heritage of buildings is fulfilled.
The construction of the words ‘works … reasonably necessary for the proper preservation of the building’
‘Works’ within the meaning of s 115(1)(a) must be works (1) for the preservation of the building and (2) which the local authority consider reasonably necessary for its proper preservation.
There is no dispute that the works specified in the repairs notice prepared by the second respondents satisfied (2) above. The essential issue is whether they were works for the ‘proper preservation of the building’. This raises two questions, namely (i) the correct construction, in its context, of the word ‘preservation’ and (ii) by reference to what date is the condition of the building to be preserved, and, in particular, is the condition in which it is to be preserved to be that which existed as at the date of the repairs notice or the date of its listing?
Counsel, who has argued the case for the appellant with very great skill, has submitted that the works of preservation are confined to works necessary to prevent deterioration or further deterioration of the building from the condition in which it was at the time of the notice. Accordingly, features of the building, which on account of their architectural or historic interest had occasioned the listing of the building but which before the service of the repairs notice had been destroyed or seriously damaged, cannot properly be the subject of the repairs notice. Its preservation in its condition as at the date of the notice is all that can be required. According to this submission, it would matter not whether it
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was the owner’s omissions or an act of nature or a combination of both which had brought about the destruction or damage.
Counsel’s argument can be well illustrated by a particular feature of this windmill. In the brief description in the list dated 24 September 1951 there is a specific reference to ‘a platform and railing round above the base’, that is the rectangular brick base of two storeys. This is the ‘catwalk’ and is clearly shown in the photograph of the mill taken not long before the listing. As at the date of the repairs notice (7 October 1983) the catwalk was in a very poor condition, with very little if any of the handrail intact. It would follow from counsel’s submission that although, no doubt, some work would be necessary to prevent further deterioration of the catwalk there would be no need to replace any of the handrail, clearly a feature at the time the building was listed. Indeed, counsel for the appellant readily accepted that it would follow, if his submissions were valid, that if important features of this or any building were blown or burnt down the day before the notice was served, the repairs notice could not extend to such features.
In my judgment the submissions of counsel for the appellant would clearly produce results contrary to the underlying policy of the Act, which is to preserve the building, ie to keep it and its features as they existed at the date of listing in sound condition.
Did the inclusion in the repairs notice of works which went beyond what was reasonably necessary for the proper preservation of the windmill render the notice invalid?
Counsel for the appellant accepted that if the notice included works which went beyond what was reasonably necessary for the proper preservation of the building, because the notice required an unreasonable amount of preservation work to be carried out, this did not render the notice invalid. For instance, where a roof was in a state of disrepair because there were a dozen or more tiles missing, to require the roof to be completely stripped and retiled would clearly be excessive. However, he submitted that where the requirement was excessive, because works specified were not works of preservation at all but were works involving restoring the building to a condition it did not enjoy at the material date, be it the date of listing or the date of the repairs notice, whichever be the correct date, the notice became an invalid notice, albeit that it contained a substantial amount of work reasonably necessary for the proper preservation of the building. This was so because, so he submitted, the excessive demands in the notice were not due to the incorrect assessment of the amount of preservation work which was needed, but to a wrong construction by the authority of the meaning of the word ‘preservation’.
I am prepared to accept that certain of the works specified in the repairs notice went beyond works reasonably necessary for the preservation of the building in the state in which it was when listed since they were works of restoration to a pre-existing state. In the notes in the list there is a reference to ‘fantail and sweeps partly missing’. In the repairs notice the appellant was required to renew the fantail and the sweeps. Counsel for the appellant submits that that is an indication that the respondents wrongly construed the word ‘preserve’ as including restoration to a pre-existing state. For the purpose of his argument I am prepared to accept that he may well be right, particularly when one has regard to the fact that work which was described as ‘long-term restoration work’ in the report of the engineers and millwrights retained by the council was in part incorporated in the repairs notice.
I am unable, however, to understand why one category of excessive work can be properly excised or severed from the notice, whereas another category attributable to an erroneous interpretation should not be excisable or severable and thus renders the entire notice bad. I of course accept that a notice which requires excessive work, whatever the reason may be for the excess, places the owner of a property in a dilemma. He can either, without further ado, comply with the unjustifiable requirement and thereby avoid any risk of an application compulsorily to acquire his property or he can take the following
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alternative steps. Under s 114(6) he may, within 28 days after the service of the compulsory purchase order, of which the authority seeks confirmation from the Secretary of State, apply to a magistrates’ court for an order staying further proceedings on the compulsory purchase order. If the court is satisfied that reasonable steps have been taken for properly preserving the building, the court shall make an order accordingly. Additionally or alternatively the owner, after service of the compulsory purchase order for which confirmation is sought, may enter an objection to the Secretary of State, who will then hold an inquiry. The compulsory purchase order may then be confirmed if the Secretary of State is satisfied that reasonable steps are not being taken for properly preserving the building. Even then, as stated above, he will not make or confirm a compulsory purchase order unless satisfied that it is expedient to make provision for the preservation of the building and to authorise its compulsory acquisition for that purpose (see s 114(4)). Both counsel for the appellant and counsel for the respondents accepted that before the magistrates or at the inquiry it was not essential for the owner to have actually carried out any work, so long as he could establish that he had taken reasonable steps with a view to carrying out such work. For example, he may have instructed surveyors to advise him as to which of the items in the repairs notice could fairly be said to be reasonably necessary for the proper preservation of the building and, having received their report and found that only certain items fell within that category, instructed them to carry out such work after the proceedings before the magistrates or the inquiry had terminated.
Whichever is the reason for the owner’s quandary, these options are open to him. Moreover, where his contention is that neither the local authority nor the minister is entitled in law to construe ‘works … reasonably necessary for the proper preservation of the building’ in the manner in which they have done, he has the additional right of appeal from the Crown Court to the Divisional Court by way of case stated, and from the decision of the Secretary of State to the High Court under s 23 of the Acquisition of Land Act 1981.
I therefore conclude that, so long as there is not inextricably mingled in the repairs notice works which have not the character of work of preservation, such works can properly be excised from the repairs notice, leaving the notice valid as respects those works which are reasonably necessary for proper preservation of the building.
Since it is common ground that the appellant had not carried out even those 14 out of the 20 items in the repairs list which were undoubtedly reasonably necessary for the proper preservation of the building, the minister was entitled to confirm the compulsory purchase. It is also common ground that he was entitled to conclude that it was expedient to make provision for the preservation of the building and to authorise its compulsory purchase for that purpose. Accordingly, for the above reasons and those given by my noble and learned friend Lord Bridge I would dismiss this appeal with costs.
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Bridge. I agree with it and, for the reasons which he gives, I, too, would dismiss the appeal.
Appeal dismissed.
Solicitors: Edwin Coe agents for Roderick O’Driscoll & Partners, Maidstone; Treasury Solicitor; Sharpe Pritchard agents for A E Drew, Ashford, Kent.
Mary Rose Plummer Barrister.
Practice Note
(Court of Appeal: Skeleton arguments)
[1989] 1 All ER 891
Categories: PRACTICE DIRECTIONS
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): LORD DONALDSON OF LYMINGTON MR, BINGHAM AND MANN LJJ
Hearing Date(s): 1 March 1989
Court of Appeal – Practice – Civil Division – Presentation of appeals – Skeleton argument – Content of skeleton argument – Chronology of events – Reference to law reports – Timetable for exchange and submission of skeleton arguments – Supplementary skeleton arguments – Listing changes – Time estimates – Oral hearing
1 March 1989. The following judgment was delivered.
LORD DONALDSON OF LYMINGTON MR made the following statement at the sitting of the court. The purpose of the Practice Direction which is being handed down this morning is to give advance notice of some important changes which the Civil Division of the Court of Appeal will be introducing with effect from 6 June 1989.
The principal changes relate to skeleton arguments, presentation of oral argument in court and Court of Appeal listing.
Our objective is to reduce the amount of time spent in court whilst at the same time adhering to our long-established tradition of oral argument in open court. Time spent in court is costly both to the nation and to the parties. It is therefore vital that it is used economically and effectively.
The time lag between the date of lodging and the date of hearing of appeals is still far too long, particularly in the case of appeals against final orders made in the High Court. The average time lag in the case of such appeals (other than cases involving children and urgent appeals) is still about 12 months. It is not right that a successful party to a High Court action, for instance a plaintiff who has been injured in a road or factory accident, should have to wait a year before knowing whether the award of damages in his or her favour is going to be upheld. This is particularly so bearing in mind the fact that the case is likely to have taken a considerable time to come to trial. Likewise a defendant who has a decision against him or her which is erroneous should not have to wait a year before having that judgment varied or set aside. Justice delayed is always unsatisfactory and it can amount to justice denied.
It is for those reasons that we have been giving thought to ways of reducing the amount of time spent in court and increasing the court’s ‘productivity’ without detracting from the quality of our appellate system.
A working party was set up under the chairmanship of Purchas LJ. A number of proposals were made as a result of the deliberations of that working party and there were very helpful discussions with the representatives of the solicitors’ and barristers’ professions. The proposals included the establishment of a team of lawyers to assist the Civil Division, along the lines of the system of office lawyers which has obtained in the Criminal Division for some time. The need for such a team has been accepted by the Lord Chancellor and it is in the course of being established.
A very important element in the working party’s strategy, which has been indorsed by all the judges of the court, is that time spent in court will be shortened if the members of the court who are going to hear the appeal are able to do effective prereading. This can only be done if, well in advance of the hearing, the court has details of the points which are going to be argued and the authorities which are going to be cited. For that reason the keystone of the new system is that skeleton arguments will no longer be optional, but will be required for all civil appeals (other than appeals heard with exceptional urgency). So far as timing is concerned, in all cases (other than those assigned to the short warned list, to which a different timetable will apply) skeleton arguments must be lodged not less that four weeks before the date on which the hearing is scheduled to begin.
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Requiring the skeleton arguments to be lodged well before the appeal hearing has three main advantages. First and foremost, the judges can do really effective prereading and thus save a considerable amount of time which would otherwise be spent reading aloud in court. Second, they can consider whether the time estimate is realistic, and, if not, the court can direct that the necessary adjustments to the listing be made well in advance. Third, it brings forward the point of time at which the parties, particularly the appellant’s side, have to make a firm decision whether or not to proceed to a hearing before the Court of Appeal or whether to settle the case. Accelerating this point of decision should help to reduce the number of cases where the appeal is settled a matter of hours, or even minutes, before the hearing is due to commence or where an appeal is pursued simply because a true appreciation of the prospects of success was only reached so late that a settlement could save little or no expense. Settlements of appeals the night before or at the door of the court usually result in a court day being wasted, because it is then too late to call another appeal on from the short warned list. This is a hardship to the parties to appeals waiting to be heard.
There is an important point which I want to make clear at this stage. When the practice of inviting counsel to put in skeleton arguments for the use of the Court of Appeal was first introduced about five years ago, word filtered back to us that some lawyers took the view that this was a first step towards adopting the system which is operated by the appellate courts in the United States of having very full arguments submitted in writing and then limiting oral argument in court to a very short period. That is not the case. I cannot emphasise too strongly that the English Court of Appeal remains firmly wedded to its long-established tradition of oral argument in open court. For that reason, as the Practice Direction makes clear, skeleton arguments should be confined to identifying the points, not arguing them.
The court recognises that calling for skeleton arguments to be lodged four weeks before the hearing date will involve counsel preparing the appeal well in advance of the hearing and then inevitably doing further work by way of recapitulation shortly before the hearing. For that reason and with a view to ensuring that counsel are entitled to appropriate remuneration for any extra work involved, the court is directing the taxing masters to tax the costs of preparing a skeleton argument separately from brief fees, but with due regard to the fact that more work may be involved in preparing the oral argument if the counsel presenting that argument has not been involved in the preparation of the skeleton.
The point was rightly made by the representatives of the two branches of the profession in our discussions about these new proposals that, if counsel are going to have to ‘get the case up’ twice, that would make all concerned even more anxious to have counsel of their first choice to argue the appeal. We recognise that, and we are changing the arrangements relating to appeals which qualify for a fixture with a view to achieving greater certainty in relation to hearing dates. We are also giving directions designed to ensure that counsel’s estimates of the length of hearing, which are a key factor in listing, are monitored and kept up to date.
I should make it clear, however, that it will still be necessary for the Court of Appeal to have a short warned list to which relatively short appeals will continue to be assigned and put ‘on call’ from a specified date.
So that there are no misconceptions about our reasons for having a short warned list, I should perhaps say something about this. We do not maintain a short warned list on the basis of the notion, which may have obtained in earlier times, that the judge is such an important figure that not a moment of his time must be wasted and therefore there must always be cases on call to fill any gaps. In the modern Court of Appeal the short warned list is not based on the dignitas of the judiciary. It is there to ensure that we make full use of the courtrooms and judicial resources at our disposal. However, there is reason to hope that improved listing and increased flexibility consequent on judges devoting more
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of their time to prereading in their rooms may reduce, even if it is unlikely to eliminate, the need for appeals to be included in this list.
We recognise that in the case of appeals which are put into the short warned list a party’s counsel of first choice may not be available on the day for which the appeal is called on and that in such circumstances the brief will have to change hands. This is an inevitable consequence of putting cases into a short warned list, but we have to maintain one for the reasons I have given. We also recognise that, in such a situation, equity requires that each counsel should be properly remunerated for the part which he or she has played in the whole process of preparing and presenting the appeal. We believe that our direction to the taxing masters will achieve that result.
The Practice Direction sets out changes in the way in which oral argument is to be presented in future in cases where skeleton arguments have been lodged in advance and prereading has been done by the judges with the aid of the skeleton. For the benefit of those appearing in the case, and particularly their clients, it is important that the documents and authorities which have been preread should be identified, and the presiding Lord Justice will do so at the commencement of the hearing. The rest of the directions dealing with oral argument are designed to achieve what we consider to be the proper and legitimate objective of ensuring that oral argument is devoted to making the relevant points, not working up to making them.
It is important that members of the legal profession should explain to their clients in advance of the appeal hearing what the Court of Appeal’s practice is in relation to oral argument. Without such an explanation, the clients might jump to the mistaken conclusion that insufficient time has been allowed for their case to be put before the court. If it is explained to them that the appeal bundles and the cases which bear on the branches of the law concerned have been studied by the members of the Court of Appeal, together with skeleton arguments, it will not come as a shock to the parties to find that the court then expects counsel to proceed to deal straight away with the grounds of appeal.
These new arrangements represent the most fundamental change that has been made since October 1982, when the parts of the Supreme Court Act 1981 dealing with the Court of Appeal and the rules made in that connection came into force. When I introduced my Practice Statement in October 1982 explaining that new system, I said that we would need the co-operation of both branches of the profession (see Practice Note [1982] 3 All ER 376 at 377). We have enjoyed that co-operation over the past six years, we have had it in the fullest measure in considering the changes which are now being introduced and I am sure that we shall continue to enjoy it in the future.
We recognise that so substantial a change in the practice of the court is bound to give rise to teething troubles, but are confident that, with assistance from both branches of the profession, they can be quickly overcome. We also recognise that as a result of lessons learnt in what might be described as the ‘running-in period’, it may be desirable to introduce modifications. In this context, as in all others, we shall welcome constructive criticisms from both branches of the profession and from users generally.
CHANGES IN THE PRACTICE AND PROCEDURE OF THE COURT OF APPEAL
1. The changes announced in this Practice Direction will apply to all appeals to the Civil Division of the Court of Appeal which have a hearing date commencing on or after 6 June 1989.
Skeleton arguments
2. With effect from that date skeleton arguments will be compulsory in the case of all appeals to the Civil Division of the Court of Appeal, except in the case of appeals which are heard as a matter of great urgency and any individual case where the court otherwise
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directs. If counsel consider that a skeleton argument is unnecessary, application should be made to the registrar for a special order.
Content of skeleton arguments
3. The purpose of a skeleton argument is to identify not to argue the points. A skeleton argument should therefore be as succinct as possible. In the case of points of law, it should state the point and cite the principal authority or authorities in support, with references to the particular page(s) where the principle concerned is enunciated. In the case of questions of fact, the skeleton argument should state briefly the basis on which it is contended that the Court of Appeal can interfere with the finding of fact concerned, with cross-references to the passages in the transcript or notes of evidence which bear on the point.
In the case of respondents whose arguments will be simply that the judgment of the court below is correct for the reasons given, counsel for the respondent can send in a letter to that effect in lieu of a skeleton argument. Where, however, the respondent is going to rely on any authority or refer to any evidence which is not dealt with in the judgment of the court below, a respondent’s skeleton argument must be lodged. The respondent’s side must always lodge a skeleton argument in any case where there is a respondent’s notice.
Skeleton arguments are not pleadings and, save in exceptional cases (see para 8 below), need not answer the skeleton arguments of the other side.
Chronology of events
4. The appellant’s skeleton argument must be accompanied by a written chronology of events relevant to the appeal. This must be a separate document in order that it can easily be consulted in conjunction with other papers.
Specialist law reports
5. There is no objection to counsel referring to specialist law reports, whether or not the decision is also reported in the Law Reports, if doing so would assist the court. However, it must be appreciated that such reports may not be readily available to the judges and photostat copies should be provided of any such authorities relied on in the skeleton argument. The Law Reports are to be preferred both by reason of their nature and their general availability. Accordingly, where a decision is reported in that series of reports, the need to refer to specialist reports should be explained.
Timetable for exchange and submission of skeleton arguments
6. Appeals with fixed dates In the case of appeals which are given any form of fixture (ie all appeals, other than appeals assigned to the short warned list and appeals which are heard as a matter of urgency) the skeleton arguments must be sent or delivered to the other side and three copies lodged with the Civil Appeals Office not less than four weeks before the date on which the hearing is due to commence.
Short warned list cases In the case of appeals assigned to the short warned list the skeleton arguments must be sent to the other side and three copies lodged with the Civil Appeals Office ten days before the date from which the short warned list appeal is ‘on call’.
Supplementary skeleton arguments
8. Either side may lodge a supplementary skeleton argument if exceptional circumstances give rise to a need for one. This will only occur if (a) one side raised a point which could not have been anticipated on a reading of the notice of appeal or any respondent’s notice and (b) it called for an answer, eg confession and avoidance. Wherever a supplementary skeleton argument is called for, a copy of it must be sent to the other side and three copies lodged with the Civil Appeals Office at the earliest possible moment.
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Listing changes
9. Consequent on the new arrangements for compulsory skeleton arguments, some changes will be made to the Court of Appeal listing arrangements.
10. Fixtures The present system of giving fixtures to appeals estimated to last five days or more and a ‘flexible fixture’ (ie a hearing date within a band) to appeals estimated at four days or less (see generally The Supreme Court Practice 1988 vol 1, para 59/1/10) will be replaced by a single form of fixture.
In the case of all appeals (other than those assigned to the short warned list) which have a hearing due to commence on or after 6 June 1989 (whenever fixed) the present system of ‘banded dates’ will be replaced by a single form of flexible fixture which will apply to all such appeals, namely that the appeal will be booked to commence on a specified date, or on the next following sitting day.
If it does not prove to be possible for the court concerned to take the appeal on the specified date or on the following sitting day, and the listing office are unable to transfer the appeal to another court, the hearing date will have to be rearranged.
The purpose of providing this new system is to assist both counsel and solicitors by providing greater certainty.
11. Short warned list Unless the court otherwise directs, three weeks’ notice will be given of the entry of an appeal into the short warned list. This will allow time for the skeleton argument to be prepared, sent to the other side and lodged within the ten-day time limit prescribed above (see para 7).
The court appreciates that, in the case of appeals assigned to the short warned list, counsel who has prepared the skeleton argument may not always be available on the date on which the appeal is called on, with the result that the brief will have to change hands. In order to ensure that the original counsel who prepared the skeleton argument is appropriately remunerated for that work, and that the brief fee is suitably adjusted to take account of the fact that the skeleton has already been done, a general instruction is being given to taxing masters to tax the cost of preparing skeleton arguments separately from brief fees in all appeals.
Time estimates
12. The system to be adopted in relation to counsel’s certified time estimates of the length of the appeal hearing is that set out in the Practice Statement of 2 October 1987 (see Practice Note [1987] 3 All ER 434, [1987] 1 WLR 1422; see also para 59/1/9A in the current cumulative supplement to The Supreme Court Practice 1988). From 4 April 1989 it will be subject to this additional requirement, namely that a copy of the certified estimate must be placed and kept with counsel’s papers. Each time counsel is asked to give any advice or to deal with anything in connection with the appeal he or she must look at the estimate and check whether it is still correct. It is particularly important that, when preparing the skeleton argument, counsel should check the certified time estimate to ensure that it is as realistic and accurate as possible. Efficient listing, which is in everyone’s interests, is heavily dependent on the accuracy of time estimates.
Oral hearing
13. The following procedure will be adopted in the case of all appeals to the Civil Division, unless the court announces in any individual case that some other course should be adopted.
(a) The judges will already have read the notice of appeal, any respondent’s notice, the judgment under appeal and the skeleton arguments. At the commencement of the hearing the presiding Lord Justice will state what other documents and authorities have also been read.
(b) It will not normally be necessary to open the facts and, unless otherwise directed, counsel for the appellant will be expected to proceed immediately to the ground of appeal which is in the forefront of the appellant’s case. Likewise, the respondent’s counsel
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will be expected to proceed immediately with his or her submissions on the issues in the appeal without any preamble. In an exceptional case, such as where there is technical evidence which will need to be explained by counsel and to this extent some opening is necessary, the presiding Lord Justice will notify counsel in advance of the hearing.
(c) When citing an authority which has been preread, counsel should not read the case at length, but go immediately to the passage in the judgment where the principle relied on in the skeleton argument is to be found.
(d) When dealing with issues of fact, the passages in the transcripts or notes of evidence relied on will have been listed in the skeleton argument (see para 3 above) and accordingly counsel should so far as possible avoid reading from them in extenso.
14. It will be the duty of solicitors and counsel to ensure that their lay clients have had explained to them before the appeal hearing what the procedure will be and how the Court of Appeal now deals with oral argument. It is important that both appellants and respondents should be made aware of the new procedure, particularly the extent to which the court relies on prereading, so that the parties do not infer that, because the appeal hearing has been shorter than has hitherto been customary, their case has not been just as fully considered.
Frances Rustin Barrister.
Practice Direction
(Chancery 2/89)
[1989] 1 All ER 896
PRACTICE DIRECTIONS
CHANCERY DIVISION
13 March 1989.
Practice – Chancery Division – Administrative arrangements – Chancery Chambers – Official referees’ business – Location.
1. The following arrangements have been directed by the Vice-Chancellor and approved by the Lord Chancellor with a view to the better dispatch of business and the convenience of the public.
2. From 4 April 1989 such parts of Chancery Chambers as deal with all aspects of business which is to be heard by the official referees will be relocated in St Dunstan’s House, Fetter Lane, London EC4. This will include the issue of writs and summonses and the payment of fees thereon, the entry of and searching of acknowledgments of service, the drawing up and filing of orders and documents, default judgments and the issue of fieri facias and payment of fees thereon.
3. The Practice Direction of 29 July 1982 ([1982] 3 All ER 124, [1982] 1 WLR 1189) is to be read subject to this direction, which amends the room numbers set out therein in so far as they relate to official referees’ business.
By direction of the Vice-Chancellor and with the concurrence of the Lord Chancellor.
R D Munrow, Chief Master
13 March 1989.
Department of Transport v Chris Smaller (Transport) Ltd
[1989] 1 All ER 897
Categories: CIVIL PROCEDURE
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD ROSKILL, LORD GRIFFITHS, LORD OLIVER OF AYLMERTON AND LORD GOFF OF CHIEVELEY
Hearing Date(s): 23, 24 JANUARY, 2 MARCH 1989
Practice – Dismissal of action for want of prosecution – Inordinate delay without excuse – Delay before and after issue of writ – Writ issued six months before expiration of six-year limitation period – Writ not served until three months after expiration of limitation period – Fair trial of action still possible despite delay – Defendants suffering no prejudice from post-writ delay – Whether plaintiff should be penalised for delay occurring between accrual of cause of action and date of issue of writ within limitation period – Whether post-writ delay sufficient ground for striking out action – Whether prejudice justifying striking out confined to prejudice affecting conduct of trial or extending to prejudice to defendant’s business interests – Whether anxiety accompanying litigation sufficient ground of prejudice justifying striking out action.
In December 1978 a lorry owned by the defendants and driven by their employee crashed into a motorway bridge killing the driver and badly damaging the bridge. Early in 1979 the plaintiff department, who owned the bridge, notified the defendants that they intended making a claim in respect of the damage to the bridge if it had been caused by the negligence of the defendants’ driver. In June 1982 the plaintiffs presented their claim for £334,885, being the cost of the repairs. The defendants’ insurers instructed a consulting engineer to advise on the plaintiffs’ claim but he was unable to arrange a meeting to agree the value of the claim. On 30 May 1984, five and a half years after the accident and six months before the expiry of the six-year limitation period, the plaintiffs issued a writ against the defendants; six months later, on 19 March 1985, the writ was served on the defendants. The statement of claim was delivered on 23 September 1985 and the defendants filed a defence denying liability. Pleadings closed on 20 December 1985. The plaintiffs failed to issue a summons for directions and instead the defendants did so on 24 June 1986. The summons was heard on 8 July 1986, when the plaintiffs were ordered to give further and better particulars, to answer interrogatories and to set the action down for trial, all within 28 days. The plaintiffs provided further and better particulars and answered interrogatories within that period but failed to set the action down for trial. On 28 April 1987 the defendants applied to have the action struck out for want of prosecution. The master struck out the plaintiffs’ claim but the judge reversed his decision on the ground that although the plaintiffs had been guilty of inordinate and inexcusable delay for 13 months in the period following the issue of the writ there was no real risk that there could not be a fair trial of the action and the defendants had failed to show that they would suffer more than minimal prejudice as a result of the post-writ delay. On appeal by the defendants the Court of Appeal affirmed the judge’s decision. The defendants appealed to the House of Lords, contending that inordinate and inexcusable delay in the conduct of the litigation after the expiry of the limitation period ought to be a ground for striking out even though there could be a fair trial and the defendant would suffer no prejudice. The defendants further contended that they had in fact been prejudiced by the delay because their insurance cover was less than the amount claimed by the plaintiffs and the contingent liability for the balance had hindered them in raising finance for their business.
Held – (1) A plaintiff could not be penalised for any delay occurring between the accrual of the cause of action and the issue of the writ if the writ was issued within the limitation period (see p 899 a b, p 900 h, p 903 a to c and p 905 d to h, post).
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(2) Inordinate and inexcusable delay by the plaintiff in prosecuting an action after the limitation period had expired was not a ground for striking out the action for want of prosecution unless the defendant had suffered prejudice from the delay or a fair trial of the issues was impossible. However, where a long delay before the issue of the writ had caused the defendant prejudice he only had to show something more than minimal additional prejudice as the result of post-writ delay to justify the action being struck out. On the facts, the 13-month delay after the issue of the writ had only caused the defendants minimal prejudice because any difficulties arising from the contingent liability hanging over them as the result of the action were attributable to the statutory limitation period of six years and not to the post-writ delay. The appeal would therefore be dismissed (see p 899 a b, p 903 d e j, p 904 b and p 905 h, post); Allen v Sir Alfred McAlpine & Sons Ltd [1968] 1 All ER 543 and Birkett v James [1977] 2 All ER 801 applied.
Per curiam. (1) Prejudice entitling a defendant to strike out an action is not confined to prejudice affecting the actual conduct of the trial but includes, inter alia, prejudice to the defendant’s business interests (see p 899 a b, p 904 j and p 905 a b, post).
(2) The court should be cautious about allowing the mere fact of the anxiety that accompanies any litigation to be regarded as a sufficient ground of prejudice which by itself would justify striking out an action (see p 899 a b and p 905 b h, post) dictum of Griffiths LJ in Eagil Trust Co Ltd v Pigott-Brown [1985] 3 All ER 119 at 124 approved.
Notes
For dismissal of actions for want of prosecution, see 37 Halsbury’s Laws (4th edn) paras 447–450, and for cases on the subject, see 37(3) Digest (Reissue) 67–78, 3293–3341.
Cases referred to in opinions
Allen v Sir Alfred McAlpine & Sons Ltd, Bostic v Bermondsey and Southwark Group Hospital Management Committee, Sternberg v Hammond [1968] 1 All ER 543, [1968] 2 QB 229, [1968] 2 WLR 366, CA.
Birkett v James [1977] 2 All ER 801, [1978] AC 297, [1977] 3 WLR 38, HL.
Biss v Lambeth Southwark and Lewisham Health Authority [1978] 2 All ER 125, [1978] 1 WLR 382, CA.
Bridgnorth DC v Henry Willcock & Co Ltd [1983] CA Transcript 958.
Eagil Trust Co Ltd v Pigott-Brown [1985] 3 All ER 119, CA.
Electricity Supply Nominees Ltd v Longstaff & Shaw Ltd [1986] CA Transcript 1063.
Haynes v Atkins (1983) Times, 12 October, CA.
Note [1966] 3 All ER 77, [1966] 1 WLR 1234, HL.
President of India and Union of India v John Shaw & Sons (Salford) Ltd (1977) Times, 27 October, CA.
Tolley v Morris [1979] 2 All ER 561, [1979] 1 WLR 592, HL.
Westminster City Council v Clifford Culpin & Partners (a firm) (1987) 137 NLJ 736, CA.
Appeal
The defendants, Chris Smaller (Transport) Ltd, appealed with the leave of the Appeal Committee of the House of Lords given on 7 July 1988 against the order of the Court of Appeal (Nicholls and Staughton LJJ) dated 4 March 1988 dismissing their appeal from the order of Sir Neil Lawson sitting as a judge of the High Court in the Queen’s Bench Division in chambers on 26 October 1987 whereby he allowed an appeal by the plaintiffs, the Department of Transport, from the order of Master Lubbock dated 5 May 1987 dismissing the plaintiffs’ action for want of prosecution. The facts are set out in the opinion of Lord Griffiths.
Michael Connell QC, Sean Overend and Michael Pooles for the defendants.
John Laws and Guy Sankey for the plaintiffs.
Their Lordships took time for consideration
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2 March 1989. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, I have had the opportunity of considering in draft the speech prepared by my noble and learned friend Lord Griffiths. I agree with it, and for the reasons he gives would dismiss this appeal.
LORD ROSKILL. My Lords, I have had the advantage of reading in draft the speech about to be delivered by my noble and learned friend Lord Griffiths. I agree with it, and for the reasons he gives I would dismiss this appeal.
LORD GRIFFITHS. My Lords, over ten years ago, on 8 December 1978, a lorry, owned by the defendants and driven by a lorry driver in their employment, crashed into a bridge on the M50 motorway. The lorry driver was killed and the bridge was badly damaged. The Department of Transport, the plaintiffs, who owned the bridge, wrote promptly, on 24 January 1979, to the defendants saying that they would consider making a claim for the cost of repairing the bridge if it appeared that the accident was due to negligence of the defendants or their driver. As no other vehicle had been involved in the accident, the plaintiffs clearly had a strong prima facie case that the accident was caused by the negligence of the defendants or their driver. Thereafter, however, matters proceeded at a snail’s pace.
The contract for the repair of the bridge was made in May 1980 but it was not until 24 June 1982 that the plaintiffs first wrote to present their claim for the sum of £334,885. The defendants’ insurers had instructed a Mr Parkinson Hill, a consulting engineer, to investigate the claim in 1979 but he had been unable to advise on the value of the claim until it was formulated in June 1982. Thereafter, he sought particulars of the claim from the plaintiffs, which were finally delivered to him on 8 March 1983. In July and August 1983 Mr Parkinson Hill wrote trying to arrange a meeting with the plaintiffs to agree the value of the claim, subject to liability. The plaintiffs responded to the second of these letters, asking to see his calculations and ending ‘we will contact you thereafter as requested’. Mr Parkinson Hill sent his calculations but nothing more was heard about the claim until a writ was served on the defendants on 19 March 1985, over 18 months after he had last written to the plaintiffs with his calculations. The writ had been issued on 30 May 1984, five and a half years after the accident and six months before the expiration of the six-year limitation period. It was not served until three months after the limitation period had expired.
It is difficult to see any justification for a government department to be so tardy in attempting to recover money due to public funds, and one would have at least expected that the action, once commenced, would be pursued as swiftly as possible; but that was not to be. The statement of claim was not delivered until 23 September 1985. The defence denied negligence on the part of the lorry driver alleging a sudden loss of consciousness from natural causes. It also alleged design and construction faults in the structure of the bridge and the safety barrier in the road and a failure to mitigate damage. The pleadings closed on 20 December 1985 but the plaintiffs failed to take out the summons for directions, which they should have done by 20 January 1986. Eventually, it was the defendants who took the initiative and issued the summons for directions on 24 June 1986, five months after the date on which it should have been issued by the plaintiffs.
The summons for directions was heard on 8 July 1986. The plaintiffs were ordered to give further and better particulars, to answer interrogatories and to set down the action, all within 28 days. The plaintiffs failed to comply with any of these directions. The defendants took out a summons for a peremptory order for further and better particulars and answers to the interrogatories returnable on 20 October. This appears to have galvanised the plaintiffs into action: the further and better particulars were served on 15 October and the answers to interrogatories on 19 October, therefore on the summons on 20 October the only order made was for the defendants to have their costs. The
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plaintiffs still failed to set down the action for trial and on 28 April 1987 the defendants took out a summons to strike the action out for want of prosecution. This summons was taken out nine months after the date on which the plaintiffs should have set the action down for trial.
The master struck out the plaintiffs’ claim. The judge allowed the plaintiffs’ appeal. He held, applying the principles in Birkett v James [1977] 2 All ER 801, [1978] AC 297, that the plaintiffs had been guilty of inordinate and inexcusable delay for a period of 13 months but that there was no real risk that there could not be a fair trial of the issues and the defendants had failed to show that they would suffer more than minimal prejudice as a result of the post-writ delay.
The Court of Appeal dismissed the defendants’ appeal and your Lordships gave leave to appeal so that they might re-examine the principles that have governed applications to strike out for want of prosecution since the decision of this House in Birkett v James in the light of criticisms as to the effectiveness of those principles expressed in certain judgments in the Court of Appeal.
The principles on which the jurisdiction to strike out for want of prosecution is exercised were settled by the Court of Appeal in Allen v Sir Alfred McAlpine & Sons Ltd [1968] 1 All ER 543, [1968] 2 QB 229, and approved by the decision of this House is Birkett v James. The power should be exercised only where the court is satisfied either (1) that the default has been intentional and contumelious, eg disobedience to a peremptory order of the court or conduct amounting to an abuse of the process of the court, or (2)(a) that there has been inordinate and inexcusable delay on the part of the plaintiff or his lawyers and (b) that such delay will give rise to a substantial risk that it is not possible to have a fair trial of the issues in the action or is such as is likely to cause or to have caused serious prejudice to the defendants, either as between themselves and the plaintiffs, or between each other, or between them and a third party.
These principles left unresolved three further questions on which divergent views had been expressed in the Court of Appeal. They were (1) the relevance of the fact that the limitation period had not expired by the time the application to dismiss for want of prosecution was heard, (2) the relevance of the period which the plaintiff had allowed to lapse before action was brought, when this was done within the limitation period, and (3) whether the judge ought to weigh up the plaintiff‘s prospects of success in any remedy he might have against his solicitor if the action were dismissed, and, if so, how his estimate should affect the exercise of his discretion.
It was to resolve these questions that leave to appeal was given in Birkett v James. The answers given were (1) that only in ‘wholly exceptional circumstances’ should an action be struck out within the relevant limitation period, because the plaintiff would be able to issue a fresh writ which would result in the action being heard at an even later date as a result of the striking out. ‘Wholly exceptional circumstances’ were discussed in the speeches of Lord Diplock and Lord Edmund-Davies but do not fall for further consideration in this appeal. (2) Time that has elapsed between the accrual of the cause of action and the issue of a writ within the limitation period cannot constitute inordinate and inexcusable delay. Although a defendant may well have been prejudiced by this delay and in some cases it may even make it difficult to have a fair trial, these considerations do not justify striking out an action which a plaintiff has commenced within the period of limitation set by Parliament. The plaintiff must have been guilty of inordinate and inexcusable delay in the prosecution of the action after the issue of the writ and the defendant must show prejudice flowing directly from the post-writ delay which must be additional to any prejudice suffered because the plaintiff did not commence his action as soon as he could have done. (3) The fact that the plaintiff may or may not have an alternative remedy against his solicitor is not a relevant consideration in deciding whether or not to dismiss an action for want of prosecution.
It was hoped that the initiative taken by the Court of Appeal in Allen v McAlpine to strike out actions for want of prosecution and the indorsement of those principles by this House in Birkett v James would be a sufficient deterrent to ensure that all plaintiffs’
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solicitors would in future pursue litigation with reasonable dispatch rather than face an action against them by their clients when the action was struck out. Unfortunately, this has not proved to be the case. There are still far too many applications to strike out actions for want of prosecution. In a postscript to his judgment in Westminster City Council v Clifford Culpin & Partners (a firm) (1987) 137 NLJ 736 at 737–738 Kerr LJ expressed the frustration of the court at the present state of affairs. He said:
‘Although more complex than most, and of course unusual to the extent that the plaintiffs were represented by their own legal department during the relevant years, this case is typical of the large numbers of applications to strike out claims for want of prosecution which are constantly before our courts. These are only the tip of the iceberg. For every contested case there are no doubt dozens which are settled or not pursued. Their causes and consequences are pernicious. They are caused by inexcusable dilatoriness or inefficiency on the part of lawyers and sometimes others, such as insurers. This then leads to extensive further delays and wasted costs involved in contesting the resulting striking-out applications. Apart from the delays between 1973 and early 1986 when the summonses to strike out were issued in this case, one should reflect on the time and effort, and the thousands of pounds spent on lawyers’ fees and other costs, which have been expended over the last 18 months without any relevance or benefit for the subject-matter of the proceedings. This period has been taken up with numerous complex fresh pleadings and applications to amend or to appeal and three court hearings until now, involving three firms of solicitors and four barristers on each occasion. The proceedings involved in killing a claim on the one hand, and trying to keep it alive on the other, can take far longer and cost far more than its trial. And such proceedings are necessarily entirely sterile and unproductive in relation to the substantive issues. There are constant complaints about delays in our legal processes and suggestions for reforms, such as the current ‘Civil Justice Review’ by the Lord Chancellor’s Department. But no changes in the organisation or administration of the courts would make any material difference to cases such as the present. By far the major part of all delays stems solely from the way in which litigation is conducted. In this connection our law needs to be changed, both in substance and procedurally. The principles laid down in Birkett v James are unsatisfactory and inadequate. They are far too lenient to deal effectively with excessive delays. Moreover they then breed excessive further delays and costs in their application. The long line of decisions concerned with striking out applications, both reported and unreported, demonstrate that the regime of Birkett v James should be replaced by a system of rules which are much stricter, more effective and simple to apply. And it is highly questionable whether plaintiffs should be allowed the benefit of the full periods of limitation, with virtual impunity, where the facts are known and there is no obstacle to the speedy institution and prosecution of claims. The present system provides insufficient sanctions for those responsible for the dilatory and inefficient conduct of litigation, and it is frequently unfair to litigants.’
Sir John Megaw, who was sitting with him, gave his support to these comments. In Electricity Supply Nominees Ltd v Longstaff & Shaw Ltd [1986] CA Transcript 1063 Mustill LJ expressed similar misgivings. The court was dealing with an action in which the first intimation of claim received by one of the defendants was the service of the writ almost seven years after the cause of action arose. Thereafter, the plaintiff was guilty of inordinate and inexcusable delay for a period of ten months in the conduct of the action before the application to strike out for want of prosecution. The court was driven to the conclusion that, although the defendants had obviously been prejudiced by the seven years’ delay, the additional delay of a period of ten months could not have added any further significant prejudice to their position or to the prospect of a fair trial. The official referee had struck the action out on the ground that there would be further prejudice caused by the ten months’ delay. But after reviewing and rejecting this conclusion Mustill LJ said:
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‘I accordingly feel constrained to hold that these appeals should be allowed. I say “constrained” because I differ with great hesitation from the official referee on a matter lying so particularly within his special field of experience, the more so since the conclusion at which he arrived accords with what I believe to be the instinctive reaction of many (and it was certainly mine) that this stale, old claim should not through the culpable delay of the plaintiffs be allowed to become even older and more stale. But I cannot find that the clear and well-established authorities binding on this court leave any room for such a blunt approach to the present problem.’
His reference to the blunt approach is, I believe, a reference to a suggestion he made at an earlier stage in the judgment where he said:
‘One possible avenue of escape from this renewed dilemma would be to open up the discretion by enabling the court to dismiss an action for culpable delay in those cases where the commencement of proceedings has been long postponed, regardless of any specific extra detriment. This was, I believe, the solution preferred by Lord Denning MR in Biss v Lambeth Southwark and Lewisham Health Authority [1978] 2 All ER 125, [1978] 1 WLR 382, but despite its attraction it must, I believe, be rejected as inconsistent with the clear tenor of the authorities.’
The defendants, relying on these passages, have invited your Lordships to depart from Birkett v James and to hold that inordinate and inexcusable delay occurring after the expiration of the limitation period should be a sufficient ground to strike out an action even if there can still be a fair trial of the issues and even if the defendant has suffered no prejudice as a result of the delay. Counsel for the defendants submits that, as Birkett v James was in fact dealing with a case in which the delay had occurred before the expiration of the limitation period, your Lordships are free to regard as obiter all that was said about inordinate and inexcusable delay arising outside the limitation period. This would in my view be altogether too narrow a view of the effect of the decision, which clearly intended to lay down principles to govern questions of delay and prejudice arising both before and after the expiration of the limitation period. If your Lordships are to depart from the principles in Birkett v James it must be because you are convinced that time has shown that the principles are flawed and that it is now right to adopt a different approach in accordance with the 1966 practice statement (see Note [1966] 3 All ER 77, [1966] 1 WLR 1234).
This case is due to be tried in November 1989, that is 11 years after the accident. This is a totally unnecessary delay, but it is principally due to the fact that the plaintiffs did not commence the action for five and a half years and then did not serve the writ until nine months later. Under the present law of limitation, the plaintiffs were allowed six years in which to commence their action and, under the present rules of practice, were allowed a further 12 months in which to serve the writ. Kerr LJ in the Westminster City Council case (1987) 137 NLJ 736 at 738, in the passage I have cited, said:
‘… it is highly questionable whether plaintiffs should be allowed the benefit of the full periods of limitation, with virtual impunity, where the facts are known and there is no obstacle to the speedy institution and prosecution of claims.’
I see the force of this observation, particularly in a case like the present, when there is no good reason why the action should not have been started much earlier than it was. But limitation periods are set by Parliament and not by the courts. The six-year period of limitation for actions in tort other than for personal injury was considered in the Twenty-first Report of the Law Reform Committee, Final Report on Limitation of Actions (Cmnd 6923 (1977)). No change was recommended and that period is now provided for in an Act as recent as the Limitation Act 1980. It may be thought that six years is too long in the vast majority of cases, but it must be remembered that most people who suffer injury will wish to recover damages and will not wait until the limitation period is almost due to expire before commencing their action, and the limitation period has to
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cover the unusual as well as the usual case. In the unusual case there may be special circumstances that make it impossible or inadvisable to commence proceedings shortly after the cause of action arises. It would, I think, introduce intolerable uncertainty into the litigation process if litigants were at risk of being penalised even if they commenced their actions within the limitation period and thereafter pursued them expeditiously. The effect would be to push people into precipitate litigation for fear that the court might eventually rule that they had not started their action soon enough. The vast majority of claims are settled without resort to litigation and it would place an insupportable burden on our already overloaded system to push these claims unnecessarily into the litigation process. The courts must respect the limitation periods set by Parliament; if they are too long then it is for Parliament to reduce them. I therefore commence my assessment of the present regime by concluding that the plaintiff cannot be penalised for any delay that occurs between the accrual of the cause of action and the issue of the writ provided it is issued within the limitation period. Counsel for the defendants, I think, accepted this conclusion, for he did not seek to persuade your Lordships that, save possibly in case of deliberate breach of a peremptory order, it would be right to strike out an action within the limitation period when the plaintiff would be able to start a fresh action.
However, counsel for the defendants submits that, once the limitation period has expired so that the plaintiff cannot commence a fresh action, inordinate and inexcusable delay in the conduct of the litigation should be a ground for striking out even though there can be a fair trial of the issues and the defendant has suffered no prejudice from the delay. What would be the purpose of striking out in such circumstances? If there can be a fair trial and the defendant has suffered no prejudice, it clearly cannot be to do justice between the parties before the court; as between the plaintiff and defendant such an order is manifestly an injustice to the plaintiff. The only possible purpose of such an order would be as a disciplinary measure which by punishing the plaintiff will have a beneficent effect on the administration of justice by deterring others from similar delays. I have no faith that the exercise of the power in these circumstances would produce any greater impact on delay in litigation than the present principles. There are still many cases that are struck out for want of prosecution, which shows that the deterrent effect of Allen v Sir Alfred McAlpine & Sons Ltd [1968] 1 All ER 543, [1968] 2 QB 229 has not been as successful as was hoped for, and I see no reason to suppose that the deterrent effect of extending the principle to cover this new situation would be likely to be any more successful. At least it can be said that under the present principle such limited success as has been achieved has been with a view to protection of the defendant. To extend the principle purely to punish the plaintiff in the illusory hope of transforming the habits of other plaintiffs’ solicitors would, in my view, be an unjustified way of attacking a very intractable problem. I believe that a far more radical approach is required to tackle the problems of delay in the litigation process than driving an individual plaintiff away from the courts when his culpable delay has caused no injustice to his opponent. I, for my part, recommend a radical overhaul of the whole civil procedural process and the introduction of court controlled case management techniques designed to ensure that once a litigant has entered the litigation process his case proceeds in accordance with a timetable as prescribed by rules of court or as modified by a judge: see Civil Justice Review, Report of the Review Body on Civil Justice (Cm 394 (1988)).
The principles in Allen v Sir Alfred McAlpine & Sons Ltd and Birkett v James are now well understood and I have not been persuaded that a case has been made out to abandon the need to show that the post-writ delay will either make a fair trial impossible or prejudice the defendant. Furthermore, it should not be forgotten that long delay before issue of the writ will have the effect of any post-writ delay being looked at critically by the court and more readily being regarded as inordinate and inexcusable than would be the case if the action had been commenced soon after the accrual of the cause of action. And that if the defendant has suffered prejudice as a result of such delay before issue of the writ he will only have to show something more than minimal additional prejudice as a result of the post-writ delay to justify striking out the action.
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Alternatively, counsel for the defendants submits that at least the burden should be on the plaintiff guilty of inordinate post-writ delay to prove that the defendant will not suffer prejudice as a result of the delay. I regard this as a wholly impractical suggestion. It would put an unrealistic burden on the plaintiff. The plaintiff will not know the defendant’s difficulties in meeting the case, such as the availability of witnesses and documents nor will the plaintiff know of other collateral matters that may have prejudiced the defendant such as the effect of delay on the defendant’s business activities. The defendant, on the other hand, has no difficulty in explaining his position to the court and establishing prejudice if he has in fact suffered it. I must, therefore, reject this second limb of the argument of counsel for the defendants.
Finally, counsel for the defendants submitted that even applying the principles in Birkett v James your Lordships should allow this appeal. Although this action will be tried 11 years after the accident, there is no suggestion that there cannot be a fair trial of the issues. There is no medical evidence to support the suggestion that the lorry driver was overcome by sudden unconsciousness and the faith in such a plea receives little support from the fact that the defendants paid into court £90,000 on 6 December 1985, almost immediately after the commencement of the action. In so far as criticisms are aimed at the design and construction of the bridge and safety barrier, there is no reason to suppose that all the necessary drawings and other documents will not be available to debate these issues even 11 years after the accident. Indeed, counsel for the defendants did not seek to persuade your Lordships that there could not be a fair trial of the action.
The defendants, however, submit that the delay has prejudiced them because it has hindered them in raising finance to expand their business. The plaintiffs’ claim is for £335,000 plus interest. The defendants’ insurance cover is limited to £250,000 plus interest, leaving a potential liability on the defendants of £85,000 plus interest. The defendants maintain that this contingent liability in their accounts prevented them from raising the finance with which they wished to expand their business.
Counsel for the plaintiffs submitted that the prejudice that entitled a defendant to strike out an action should be limited to proof of prejudice in the conduct of the litigation. This seems to me to be but another way of saying that delay has prevented a fair trial of the action; but in both Allen v Sir Alfred McAlpine & Sons Ltd and Birkett v James reference is made to the risk both that there could not be a fair trial of the action and of prejudice to the defendants, which, one would suppose, was intended to mean some prejudice other than the mere inability to have a fair trial. Counsel for the plaintiffs frankly conceded that the weight of authority was against his submission. In Biss v Lambeth Southwark and Lewisham Health Authority [1978] 2 All ER 125, [1978] 1 WLR 382 Lord Denning MR and Geoffrey Lane LJ considered that the anxiety suffered by nurses whose professional competence was in question was a sufficient prejudice in that case to justify striking out the action, and they also instanced the prejudice that might be caused to a small business with a huge claim hanging over it as another example of prejudice that would justify making a striking out order. In Tolley v Morris [1979] 2 All ER 561 at 568, [1979] 1 WLR 592 at 600 Lord Diplock said:
‘Biss’s case was concerned with the nature of the prejudice that must be shown, a matter that it was not necessary to discuss in Birkett v James. I see no reason for disagreeing with the actual decision in Biss’s case … ’
The decisions of the Court of Appeal in President of India and Union of India v John Shaw & Sons (Salford) Ltd (1977) Times, 27 October and Bridgnorth DC v Henry Willcock & Co Ltd [1983] CA Transcript 958 are further examples of the court taking business prejudice into account as a ground for striking out, and Haynes v Atkins (1983) Times, 12 October is an example of delay hanging over a professional man being taken into account as a ground of prejudice. In the face of this powerful line of authority, I cannot accept the submission of counsel for the plaintiffs. These authorities clearly establish that prejudice may be of varying kinds and it is not confined to prejudice affecting the actual conduct
Page 905 of [1989] 1 All ER 897
of the trial. It would be foolish to attempt to define or categorise the type of prejudice justifying striking out an action, but there can be no doubt that if the defendants had been able to establish significant damage to their business interests, flowing directly from the culpable delay of 13 months after the issue of the writ, a judge would have been entitled to regard it as prejudice justifying striking out the action. I would, however, express a note of caution against allowing the mere fact of the anxiety that accompanies any litigation being regarded as of itself a sufficient prejudice to justify striking out an action. Counsel for the defendants did not seek to argue that the anxiety occasioned by the extra 13 months in this case should be regarded as a sufficient ground of prejudice to justify making a striking out order. There are, however, passages in some of the judgments that suggest that the mere sword of Damocles, hanging for an unnecessary period, might be a sufficient reason of itself to strike out. On this aspect I repeat the note of caution I expressed in the Court of Appeal in Eagil Trust Co Ltd v Pigott-Brown [1985] 3 All ER 119 at 124, where I said:
‘Any action is bound to cause anxiety, but it would as a general rule be an exceptional case where that sort of anxiety alone would found a sufficient ground for striking out in the absence of evidence of any particular prejudice. Biss’s case is an example of such an exceptional case, the action hanging over for 11 1/2 years, with professional reputations at stake.’
In the event, the defendants failed to satisfy either the judge or the Court of Appeal that the additional 13 months delay had caused more than minimal prejudice to them. The reasons for this conclusion are cogently set out in the judgment of Nicholls LJ. They may be briefly summarised by saying that such difficulties as the defendants may have had in raising finance in 1986 because of the contingent liability hanging over them were not attributable to delay after the issue of the writ because it would have existed even if the claim had been pursued diligently after the issue of the writ. The truth is that the defendants’ embarrassment flowed from the statutory limitation period of six years and not from the delay subsequent to the writ. The judge and the Court of Appeal concluded that the fact that this contingent liability will not be quantified until 18 months later than the date it would have been quantified if the action had proceeded expeditiously did not cause the defendants’ business more than minimal prejudice. It is well established that your Lordships will only re-examine the exercise of a discretion in exceptional circumstances. Such circumstances do not exist in this case. The judge and the Court of Appeal respectively exercised and reviewed the discretion on the principles established in Birkett v James [1977] 2 All ER 801, [1978] AC 297 and no grounds have been shown for interfering with their conclusions.
For these reasons I would dismiss the appeal.
LORD OLIVER OF AYLMERTON. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Griffiths, with which I entirely agree. I too would dismiss the appeal.
LORD GOFF OF CHIEVELEY. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Griffiths, with which I agree. I too would dismiss the appeal.
Appeal dismissed.
Solicitors: Gregory Rowcliffe & Milners agents for John Stallard & Co, Worcester; Treasury Solicitor.
Mary Rose Plummer Barrister.
R v Inland Revenue Commissioners, ex parte Taylor
[1989] 1 All ER 906
Categories: CIVIL PROCEDURE: PROFESSIONS; Lawyers
Court: QUEEN’S BENCH DIVISION (CROWN OFFICE LIST)
Lord(s): FARQUHARSON J
Hearing Date(s): 25 MAY 1988
COURT OF APPEAL, CIVIL DIVISION
O’CONNOR, NICHOLLS AND TAYLOR LJJ
24, 25, 26 OCTOBER 1988
Discovery – Legal professional privilege – Document prepared with a view to litigation – Written request for legal advice – Investigation of taxpayer’s affairs – Inspector issuing notice for delivery up of documents – Inspector anticipating that notice likely to be challenged in proceedings – Inspector seeking advice from Revenue solicitor before issuing notice – Whether request for advice privileged.
Discovery – Judicial review proceedings – Affidavit filed in connection with judicial review proceedings – Discovery of documents referred to in affidavit – Notice requiring applicant to deliver documents relevant to his liability to tax – Affidavit sworn on behalf of Revenue referring to report from inspector leading to issue of notice – Whether applicant entitled to discovery of documents referred to in affidavit – Taxes Management Act 1970, s 20(2) – RSC Ord 24, rr 10(1), 13(1), 17
The applicant was a solicitor who advised clients on tax matters. During the course of investigation into his own tax affairs by an inspector, the Board of Inland Revenue, acting through R, served on him a notice under s 20(2)a of the Taxes Management Act 1970 requiring him to deliver to the inspector all the documents in his possession or power as specified in a schedule attached to the notice. The applicant applied for leave to bring judicial review proceedings, seeking an order of certiorari to quash the notice or, alternatively, a declaration that the notice was ultra vires, on the grounds, inter alia, that the notice was not in accordance with s 20(2) of the 1970 Act and that it was oppressive in that it required him to give up documents in breach of his duty of confidentiality to his clients. Leave was given in February 1987. In the course of those proceedings R filed an affidavit which stated his authority for issuing the notice and referred to two documents. The first was a request dated 8 May 1986 written by the inspector to the Revenue’s solicitor seeking legal advice because, from past experience of the applicant, he anticipated that if a s 20(2) notice was issued the applicant would be likely to challenge it in legal proceedings. The second document was a report from the inspector dated 8 September 1986 which led to the issue of the s 20(2) notice. The applicant requested the production for inspection of the two documents under RSC Ord 24, r 10(1)b but that request was refused. In interlocutory proceedings the applicant applied to the court for an order for discovery of the two documents. The judge refused the application, holding that there were no grounds on which R’s decision to issue the notice could be challenged, and that therefore disclosure of the documents which helped him arrive at that decision could not properly be ordered. The applicant appealed.
Held – The appeal would be dismissed for the following reasons—
(1) On the facts there was ample evidence that the Revenue had anticipated litigation if a s 20(2) notice was served. It followed therefore that the written request for a legal opinion on 8 May 1986 was protected by legal professional privilege (see p 915 b c, p 917 d and p 918 a b, post).
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(2) Where a party sought the production of documents for inspection under RSC Ord 24, r 13(1)c, prima facie it was for that party to show that it was necessary for disposing fairly of the case. On the facts, the applicant had failed to show that production of the documents was necessary for the fair disposal of the issues raised in the application for judicial review. The court, however, had power under Ord 24, r 17d to reopen the matter and on the substantive hearing the court would have unfettered discretion to decide whether the report of 8 September 1986 should be disclosed (see p 916 a and p 917 a b d to f j to p 918 a, post).
Notes
For production for inspection of documents referred to in pleadings and affidavits or of other relevant documents and for ordering their production for inspection, see 13 Halsbury’s Laws (4th edn) paras 58–59, 62–64, and for cases on the subject, see 18 Digest (Reissue) 77–85, 548–611.
For the Taxes Management Act 1970, s 20, see 42 Halsbury’s Statutes (4th edn) 286.
Cases referred to in judgment
IRC v National Federation of Self-Employed and Small Businesses Ltd [1981] 2 All ER 93, [1982] AC 617, [1981] 2 WLR 722, HL.
O’Reilly v Mackman [1982] 3 All ER 1124, [1983] 2 AC 237, [1982] 3 WLR 1096, HL.
R v IRC, ex p J Rothschild Holdings plc [1986] STC 410; affd [1987] STC 163, CA.
R v Secretary of State for the Home Dept, ex p Harrison [1987] CA Transcript 1246.
Cases also cited
Preston v IRC [1985] 2 All ER 327, [1985] AC 835, HL.
R v Lancashire CC, ex p Huddleston [1986] 2 All ER 941, CA.
R v Secretary of State for the Home Dept, ex p Herbage (No 2) [1987] 1 All ER 324, [1987] QB 1077, CA.
Application
Thomas Patrick Denton Taylor applied by notice of motion dated 24 February 1988 for discovery of two documents dated 8 May 1986 and 8 September 1986 compiled by John Christopher Ward, an inspector of taxes, and referred to by John Herbert Roberts, an under secretary appointed by the Commissioners of Inland Revenue, in an affidavit sworn in connection with an application by the applicant for judicial review, leave to apply for which had been given by Nolan J on 20 February 1987, of a notice issued against the applicant by the commissioners on 23 September 1986 under s 20(2) of the Taxes Management Act 1970. The facts are set out in the judgment.
Michael Ashe for Mr Taylor.
Roy Lemon for the Crown.
25 May 1988. The following judgment was delivered.
FARQUHARSON J. This is an application for discovery arising out of a motion for judicial review which has yet to be heard. On 23 September 1986 the Commissioners of Inland Revenue issued a notice against the applicant, Mr Taylor, under s 20(2) of the Taxes Management Act 1970. It will be helpful if I cite that particular statutory provision straight away:
‘Subject to this section, the Board may by notice in writing require a person to deliver, to a named officer of theirs, such documents as are in the person’s possession or power and as (in the Board’s reasonable opinion) contain, or may contain, information relevant to any tax liability to which he is or may be subject, or to the amount of any such liability.’
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The notice contained a schedule with an extensive list of documents which the commissioners were asking Mr Taylor to produce. Mr Taylor on a number of grounds objected to the form and content of that document, and it is that notice which is the subject, as I have just said, of his application for judicial review.
The grounds on which his application is based spell out his objections. He says the notice was wrong in law and was not in accordance with s 20(2) of the Taxes Management Act 1970, there were no grounds or alternatively insufficient grounds for its issue, the notice was oppressive in relation to the range of documents which he was called on to produce, there were no or insufficient reasons given for the demand, the documents required related to matters that were the subject of an appeal by him in relation to certain assessments, and there was a risk that if he complied with the notice he would have to surrender documents which would breach his duty of confidentiality to his clients, Mr Taylor being a solicitor who advises clients on revenue matters. It was Mr Taylor’s case that the object of this exercise was to get information in relation to the tax affairs not only of himself but of his clients as well.
On 22 December 1986 Mr Taylor initiated this application for leave to apply for judicial review, and supported it by an affidavit.
The case seems to have drifted on through the year 1987, for reasons that have not been satisfactorily explained to me, but in January 1988 at long last the Revenue filed an affidavit from an under secretary in the Inland Revenue, a Mr John Herbert Roberts. He was the person to whom Mr Ward, the inspector, was responsible, Mr Ward being the person who had been delegated to serve the notice.
That affidavit set out the history of the circumstances in which the notice under s 20(2) came to be issued. Mr Roberts deals, during the course of that affidavit, with the reasons why he was of the opinion that the notice was properly issued, and he deals at some considerable length with the grounds on which it was decided that the Board, through Mr Ward, should serve the notice on Mr Taylor. Those grounds are extensive. They go in particular into matters which were the subject of inquiry by the Board relating to the tax affairs of Mr Taylor.
Further, in that affidavit there were references to certain documents of which Mr Ward was the author. One of them was a document dated 8 May 1986, which of course was before the service of the s 20 notice, in which Mr Ward had sought legal advice from the legal department of the Inland Revenue. It was of course in relation to the projected service of this notice that he sought that advice, in anticipation, on his former experience of Mr Taylor, that legal questions would be raised as a result of that notice, the substance and form of which would be likely to be challenged, whether in judicial review proceedings or otherwise.
There was a further document referred to by Mr Roberts in his affidavit, also emanating from Mr Ward. That was a report dated 8 September 1986, in which Mr Ward set out the reasons why he was submitting that a notice should be authorised to be served on Mr Taylor. The latter document, that is to say the report of 8 September 1986, is the subject of extensive quotation by Mr Roberts in his affidavit. Indeed, it was necessary that it should be, as it was setting out the basis of the reasoning why he authorised the service of the notice. It is as a result of the service of that document that Mr Taylor now comes before the court to seek the discovery of documents. The items in respect of which he seeks discovery are, first of all, the order of the Crown going back to 3 May 1979, whereby Mr Roberts was delegated by the Board to issue notices under s 20(2). This is not an application, at any rate in relation to that particular document, on which counsel for Mr Taylor places much reliance. He says that once the authority has been challenged there would be no difficulty in the document being produced for examination.
I have been referred by counsel for the Crown to the provisions of the Inland Revenue Regulation Act 1890, by which the power to grant that kind of authority is vested in the Board by virtue of s 4A, and indeed that as well as other delegations of power are
Page 909 of [1989] 1 All ER 906
presumed as a matter of form to be regularly given by the provisions of s 24 of the same Act. For my part I do not think this is a serious argument, and in the circumstances of those statutory provisions I do not find that an order for discovery should be made in respect of that document.
The second and third documents are of course the two reports to which I have already alluded emanating from Mr Ward: first, that of 8 May 1986; second, that of 8 September 1986. Some reference has been made to the law applicable to the rules of discovery in relation to judicial review proceedings. It is, I think, common ground that the procedure with regard to discovery is different in judicial review matters from that which obtains in ordinary actions which are begun by writ.
I have been referred to some very helpful comments in the authorities as to the basis on which the court should approach an application of this nature. Without wishing to go through them I think it would be most helpful to turn to the judgment of Simon Brown J in R v IRC, ex p J Rothschild Holdings plc [1986] STC 410. There the judge considered the approach which should be made when this question comes before the court and cited a number of authorities, including O’Reilly v Mackman [1982] 3 All ER 1124, [1983] 2 AC 237 and IRC v National Federation of Self-Employed and Small Businesses Ltd [1981] 2 All ER 93, [1982] AC 617, where various speeches were made in the House of Lords on this question. They are summarised by the judge in this way (at 413):
‘In my judgment, this is a case where discovery is required in order that the justice of the case may be advanced and likewise a case where it is, within the meaning of Ord 24, r 8, necessary for disposing fairly of the matter.’
Counsel for Mr Taylor, in his submissions to me, suggested that he comes within that rule, certainly in relation to the two memoranda or reports to which I have referred. He pointed out that as a matter of general practice in ordinary actions where a document is referred to in an affidavit normally the other side is entitled to call for it. The answer which is given by counsel for the Crown is this: he said the distinction which has to be made, as of course is well known, is not whether the decision made by the Board through their agent Mr Roberts is correct, but whether the procedure or the manner in which he came to that decision can be challenged. He said that within the context of this case the affidavit which has been filed on behalf of the Crown, and which has been made by Mr Roberts, sets out that reasoning in detail. Furthermore, it makes reference, in the context of the reports, to the basis on which that reasoning rested. In those circumstances he said that the present application is simply directed to seeing whether, by the production of the documents, there is any material there to be discovered which could question or challenge that reasoning.
It is conceded by counsel for Mr Taylor that the truth of Mr Roberts’s affidavit is not in dispute, although I say at once that counsel for Mr Taylor goes on to contend that that of course is not the end of the matter.
My decision in this case, which is that this application should not succeed, is based on the fact that there is no material before me which can be relied on which tends to show that Mr Roberts’s process of reasoning was defective or unreasonable or open to challenge. If there was some material to which Mr Taylor could point which showed that the affidavit is not to be relied on, however truthful it may be, because of other features which show that the process of reasoning was suspect or open to challenge in the normal way in this type of proceeding, then it would be appropriate to order that the report should be disclosed in full, but if the purpose of the application is to study that report to see if there is any flaw in the manner of Mr Roberts’s decision-making process it seems to me that it goes to the other side of the line, and it is not a case where the court can properly order disclosure. For those reasons, as I have already indicated, I dismiss this application.
Application dismissed. Leave to appeal granted.
Page 910 of [1989] 1 All ER 906
Interlocutory Appeal
Mr Taylor appealed to the Court of Appeal.
Leolin Price QC and Penelope Reed for Mr Taylor.
Timothy Brennan for the Crown.
26 October 1988. The following judgments were delivered.
O’CONNOR LJ. The applicant (Mr Taylor) appeals against the refusal of Farquharson J to order the Commissioners of Inland Revenue to give inspection of documents referred to in an affidavit filed as their evidence in judicial review proceedings brought by the applicant with leave. Counsel for Mr Taylor referred us at once to RSC Ord 24, which is applied to judicial review proceedings by Ord 53, r 8. He reminded us of what Lord Diplock had said on this topic in O’Reilly v Mackman [1982] 3 All ER 1124 at 1131–1132, [1983] 2 AC 237 at 282, where he said:
‘Those disadvantages, which formerly might have resulted in an applicant being unable to obtain justice in an application for certiorari under Ord 53, have all been removed by the new rules introduced in 1977. There is express provision in the new r 8 for interlocutory applications for discovery of documents, the administration of interrogatories and the cross-examination of deponents to affidavits. Discovery of documents (which may often be a time-consuming process) is not automatic as in an action begun by writ, but otherwise Ord 24 applies to it and discovery is obtainable on application whenever, and to the extent that, the justice of the case requires … ’
for my part, I am content to look at Ord 24 in the light of what Lord Diplock said in O’Reilly v Mackman and also to bear in mind what was said in IRC v National Federation of Self-Employed and Small Businesses Ltd [1981] 2 All ER 93, [1982] AC 617, in two short passages. Lord Wilberforce, dealing with discovery, said ([1981] 2 All ER 93 at 100, [1982] AC 617 at 635):
‘Finally, if as I think, the case against the Revenue does not, on the evidence, leave the ground, no court, in my opinion, would consider ordering discovery against the Revenue in the hope of eliciting some impropriety.’
Lord Scarman and Lord Roskill pronounced to the same effect (see [1981] 2 All ER 93 at 114, 121, [1982] AC 617 at 654, 664).
Discovery in our procedure is a two-pronged device. The first part of Ord 24, rr 1 to 8, deals with the discovery of documents in the sense of requiring the party to state what documents relevant to the issues raised in the proceedings are or have been in his possession, and, if they have left his possession, what has happened to them, and, in making a list or affidavit, as the case may be, that is the time for claiming privilege against production to the other side of any of the documents which are disclosed. Rules 9 and 10 (which is the vital one here) relate to inspection of documents. Rule 9 deals with the inspection of documents referred to in the list. Rule 10 provides:
‘(1) Any party to a cause or matter shall be entitled at any time to serve a notice on any other party in whose pleading or affidavits reference is made to any document requiring him to produce that document for the inspection of the party giving the notice and to permit him to take copies thereof.
(2) The party on whom a notice is served under paragraph (1) must, within 4 days after service of the notice, serve on the party giving the notice a notice stating a time within 7 days after the service thereof at which the documents, or such of them as he does not object to produce, may be inspected at a place specified in the notice, and stating which (if any) of the documents he objects to produce and on what grounds.’
So it will be seen that there is special provision for documents referred to in the pleadings
Page 911 of [1989] 1 All ER 906
and in the affidavits, because in the nature of things, if objection to production is to be taken, it has to be taken subsequent to referring to the documents in the pleadings or affidavits.
Rule 11 provides:
(1) If a party … who is served with a notice under rule 10(1)—(a) fails to serve a notice under … rule 10(2), or (b) objects to produce any document for inspection, or (c) offers inspection at a time or place such that, in the opinion of the Court, it is unreasonable to offer inspection then or, as the case may be, there, then, subject to rule 13(1), the Court may, on the application of the party entitled to inspection, make an order for production of the documents in question for inspection at such time and place, and in such manner, as it thinks fit.’
rule 13 provides:
‘(1) No order for the production of any documents for inspection or to the Court shall be made under any of the foregoing rules unless the Court is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs … ’
Those are the provisions with which we are primarily concerned, but for completeness, as it will be relevant later in my judgment, r 17 provides:
‘Any order made under this Order (including an order made on appeal) may, on sufficient cause being shown, be revoked or varied by a subsequent order or direction of the Court made or given at or before the trial of the cause or matter in connection with which the original was made.’
It follows, as I read r 17, that an order made at any time before that can be varied on good grounds at a later stage.
Counsel for Mr Taylor submitted that here was an affidavit filed in these proceedings referring to two documents, that proper request had been made under r 10(1) and that there were no grounds for not ordering inspection of the two documents. To put it quite simply, if in judicial review proceedings in the affidavits a party refers to documents, prima facie he should be ordered to produce them to the other side on request. It is against that background that it is necessary to look in some detail (I fear in more detail than the judge, perfectly properly, found it necessary to do) to see what has happened in this case.
Mr Taylor is a solicitor who specialises in tax avoidance. He has been at loggerheads with the Revenue over his own tax affairs since 1983. The evidence for the Revenue is found in an affidavit sworn on 25 January 1988 by Mr Roberts, an under secretary in the Inland Revenue, and I must refer to some paragraphs in that affidavit. He starts (at para 1):
‘I am the Director of Technical Division 2, and have held this post since 1985. The post entails overall responsibility for for all the specialist investigation units of the Inland Revenue which are directly controlled from Head Office, which include Special Investigations Section.’
He then says that he is the person duly authorised to issue notices under s 20(2) of the Taxes Management Act 1970. He says:
‘3. On 8 September 1986, Mr J C Ward submitted to me a detailed report concerning the tax affairs of Mr Taylor which he (Mr Ward) has had under investigation since 1983, the purpose of which was to recommend the issue to Mr Taylor of a notice under Section 20(2), Taxes Management Act 1970. Mr Ward is one of the Inspectors in the Special Investigations Section within my Division: a large part of their work is concerned with the investigation of substantial cases of suspected tax avoidance (many of them involving pre-planned schemes). As well as
Page 912 of [1989] 1 All ER 906
his investigation into Mr Taylor’s own tax affairs, Mr Ward’s duties since he joined the section in 1982 have also included investigation of a number of tax avoidance schemes entered into by taxpayers, both corporate and individual, on advice given by Mr Taylor.
4. Mr Ward’s report drew my attention to his earlier report, dated 8 May 1986, to the Inland Revenue Solicitor’s Office in which he had asked for legal advice on a number of points, including the form and content of the proposed notice, which (on the basis of his experience of similar cases) he anticipated might be taken by Mr Taylor in the event of the service on him of a notice under Section 20(2), Taxes Management Act 1970. This report, and the advice of the Solicitor’s Office were available to me with Mr Ward’s report to me (dated 8 September 1986), for it was on the same file. In his report dated 8 September 1986 Mr Ward mentioned that in his view any notice issued to Mr Taylor under Section 20(2), Taxes Management Act 1970 was likely to be challenged in legal proceedings (and possibly by application for judicial review).’
I shall return to Mr Roberts’s affidavit later.
Section 20(2) of the Taxes Management Act 1970 provides:
‘Subject to this section, the Board may by notice in writing require a person to deliver, to a named officer of theirs, such documents as are in the person’s possession or power and as (in the Board’s reasonable opinion) contain, or may contain, information relevant to any tax liablility to which he is or may be subject, or to the amount of any such liability.’
It will be seen that it is a blanket provision requiring the taxpayer to make documents available to the Revenue which, in the Board’s reasonable opinion, contain information which may be relevant in his tax liability.
The notice which was served on 23 September 1986 required the delivery up of a large number of classes of documents. For example, in para 2 of the schedule, Mr Taylor was required to produce and deliver up:
‘Books of account including inter alia cash books, ledgers, journals, expense vouchers, invoices, fee notes, work-in-progress valuations and business correspondence and all other records relating to your practice as a Solicitor for the period from 1 May 1979 to 30 April 1984.’
And in para 4:
‘All agreements, contracts, business correspondence, accounting records in respect of any trade, profession or vocation carried on by yourself in partnership either in the United Kingdom or abroad during the period from 6 April 1980 to 5 April 1985, for the period during which such trade, profession or vocation was carried in that period.’
The other four categories, which I need not cite, were also very broadly based.
As Mr Roberts and Mr Ward had anticipated, on the last day of the three months available to Mr Taylor he applied for judicial review on 22 December 1986, and the relief sought was to quash the notice. He listed no less than nine grounds on which relief was sought:
‘1. That the Board of Inland Revenue was wrong in law to issue the aforesaid Notice. 2. That the aforesaid Notice was not in accordance with Section 20(2) of the Taxes Management Act 1970. 3. That there were no or alternatively insufficient grounds for the issue of the aforesaid Notice. 4. That the aforesaid Notice is oppressive in relation to the amount of documents which it requires and/or the time which it gives for those documents to be delivered. 5. That no or insufficient reason has been given for the demand for documents to which the aforsaid notice relates.
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6. That the documents required by the aforesaid Notice relate to the conduct of pending appeals by the Applicant and that if the documents were to be sought an order should have been obtained from The Special Commissioners under Section 51 of the Taxes Management Act. 7. That the aforesaid Notice requires documents which if given up pursuant to its terms would breach the duty of confidentiality which the Applicant has as a Solicitor to his clients. 8. That the aforesaid Notice is wholly or partly designed to get information not about the tax affairs of the Applicant but about the Applicant’s clients. 9. That the aforesaid Notice was issued in bad faith.’
Those were the grounds on which leave was duly given.
In his affidavit in support Mr Taylor said, on the matters which are relevant to this appeal:
‘19. It may be said that I have been unco-operative with the Inland Revenue but in the face of the kind of approach exhibited by the tax inspector in this case I regard it as my right to require The Board of Inland Revenue to act in accordance with the law. I do not regard their actions as being well founded in law. It strikes me as extraordinary that without any allegation of fraud or even any expressed suspicions the Revenue can, without any independent sanction, require not only the immediate background information supporting my audited accounts but also details of my clients and of my practice to such an extent that in effect substantially all my practice papers should be looked at. In these circumstances I find it difficult to accept that either Mr. Ward or the Board have acted in good faith.
20. Many of the details requested will necessarily breach my duty of confidentiality to my clients. I dispute whether the Board of Inland Revenue has the power to do this but even if they have I contend that the exercise of their power was unreasonable as they should not use their powers to breach professional confidences without substantial grounds—none of which have been shown. I have been concerned that this is an indiscriminate fishing expedition which the Inland Revenue [has] embarked on with the hope of gaining information on my clients affairs. My practice is concerned with tax matters and many of my clients are or have been themselves under investigation by the Inland Revenue in relation to schemes for tax mitigation or tax avoidance in which they engaged. In some cases I was partly or wholly responsible for these schemes, in others I have been instructed in relation to litigation arising out of schemes devised and implemented by others. In recent years judicial attitudes to the efficacy of pre-planned or pre-ordained tax saving schemes has altered. I am concerned that, notwithstanding the denials of the Inspector of Taxes in correspondence, the investigation into my affairs is wholly or partly motivated by a desire to ascertain the identity of my clients, their affairs and in particular any schemes for tax mitigation or tax avoidance about which they have been advised but which have not been subjected to tax litigation. Mr. Ward is the Inspector who since he became an Inspector at Special Investigation Section on or about 1st October 1983 is or has been dealing with all except two of the cases in which I am or have been acting professionally. The Special Investigations Section to which Mr. Ward is attached is the Inland Revenue unit concerned with investigating and challenging tax avoidance schemes.’
So there we find that, apart from the earlier paragraphs in the grounds which I have read, Mr Taylor was putting forward two main grounds, namely that the s 20 notice had been served on him with the avowed object of a fishing expedition through his papers in order to get information about his clients who were engaged in tax avoidance or tax mitigation schemes, and that, if that were so, it was bad faith on the part of the Revenue and it vitiated and flawed the decision-making process for the issue of the notice.
It is not therefore surprising that Mr Roberts in his affidavit dealt with these allegations. I turn back to his affidavit:
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‘8. There was, in addition, another aspect of the case which concerned me. This was the fact that Mr Ward was—and had for some time been—engaged in investigating a number of transactions or schemes carried out by some of Mr Taylor’s clients, and that Mr Taylor (in his letter dated 31 July 1986) had suggested that Mr Ward’s wish to see documents relating to some of his clients was an illegitimate and unreasonable exercise of his duties in investigating his (Mr Taylor’s) affairs. Mr Taylor had suggested that Mr Ward’s main purpose, or one of his main purposes, was to obtain information from him for use in connection with his investigations into the affairs of his (Mr Taylor’s) clients which Mr Taylor had described as “a declared fishing investigation into the affairs of persons who are, or who have been, clients of mine“. As regards this aspect of the case, I was well aware that if the Revenue wish to require a person to make available documents in connection with an investigation into another person’s tax affairs the appropriate power is that conferred by Section 20(3) of that Act, and that it is a statutory requirement that in such a “third party” notice the name of the taxpayer under investigation shall be stated in the notice (see the closing words of Section 20(8) of the Act).
9. Accordingly, I directed my mind to the question whether (as Mr Taylor had suggested) Mr Ward was in reality proposing to use a Board’s notice to Mr Taylor under Section 20(2) of the Act as a “fishing investigation” as part of his investigations into transactions carried out by or involving clients of Mr Taylor. I concluded that this was not the case, although at the same time I recognised that in the circumstances—if Mr Taylor complied with the notice—Mr Ward might well obtain information which would also be relevant to those other investigations. It seemed to me that if in the event a part of the information in the documents made available by Mr Taylor under the proposed notice were to be of some use to Mr Ward in his other investigations, this would be no more than an incidental consequence of Mr Taylor making available documents considered to be of relevance to his own tax affairs. I considered therefore that this was not a reason for concluding that the issue of the notice was not in all the circumstances justified, or for excluding from the notice documents which might fall into that category.
10. In reaching the conclusion that the issue of a notice was justified, I took into account the following features of the case to which Mr Ward drew attention in his report dated 8 September 1986, having noted that in Mr Ward’s view there were aspects of Mr Taylor’s returns, accounts and tax computations which required further consideraion (and further information) before they could be agreed … ’
And he set out five major areas of investigation which I need not further refer to. Then he said that he was satisfied that Mr Taylor was not prepared to make a voluntary disclosure of his documents, and he concluded:
‘I was not persuaded that Mr Ward was acting in bad faith, and I noted that Mr Ward had denied the allegation in his letter [to Mr Taylor] dated 6 August 1986 … ’
And he denied that it was a fishing expedition.
It was in that state of affairs, when that affidavit was received, that on 27 January 1988 (two days after the affidavit was sworn) Mr Taylor’s solicitors applied by letter under Ord 24, r 10(1) for production of the two reports from Mr Ward dated 8 May and 8 September 1986. They asked also for the document by which the board had delegated power to Mr Roberts to issue the notice. The judge refused all three requests.
In this court counsel for Mr Taylor has not pursued any request for the authority giving Mr Roberts power to issue the notice. The appeal is confined to the two reports of Mr Ward dated 8 May and 8 September.
In refusing production, the solicitor for the Inland Revenue replied on 29 January 1988 to the letter of 27 January 1988. He said:
Page 915 of [1989] 1 All ER 906
‘The purpose of Mr Ward’s report of 8 May 1986, which was addressed to the Solicitor’s Office, Inland Revenue (and not to Mr Roberts) was to seek legal advice, so that it is subject to legal professional privilege; and I must decline to produce it on that ground.’
I pause there for one moment. Counsel for Mr Taylor submitted that no litigation had been in anticipation at the time when Mr Ward produced his report for consideration by the Solicitor’s Department in May 1986. I have already referred to the paragraph in Mr Roberts’s affidavit, and it seems to me that there was ample evidence that the Revenue anticipated that if a s 20 notice was served on this taxpayer litigation was bound to ensue. In my judgment Mr Ward was fully entitled to take the solicitor’s opinion on any matter which might be arising out of such a notice, and I can see no grounds for ordering the production of the report of 8 May 1986 because, on the face of it, it is plainly protected by legal professional privilege.
The second paragraph of the letter of 29 January 1988 reads as follows:
‘Mr Ward’s report of 8 September 1986 was addressed to Mr Roberts, and its purpose was to ask him to issue the Section 20(2) notice. As I explained in my letter of 21 January, we are advised that there is some doubt as to whether the applicant taxpayer in this type of case is entitled to discovery of such a report; and, as I have already indicated, we consider that it should only be made available to you if the Court so directs.’
When the matter came before Farquharson J, he said (p 909, ante):
‘It is conceded by counsel for Mr Taylor that the truth of Mr Roberts’s affidavit is not in dispute, although I say at once that counsel for Mr Taylor goes on to contend that that of course is not the end of the matter. My decision in this case, which is that this application should not succeed, is based on the fact that there is no material before me which can be relied on which tends to show that Mr Roberts’s process of reasoning was defective or unreasonable or open to challenge. If there was some material to which Mr Taylor could point which showed that the affidavit is not to be relied on, however truthful it may be, because of other features which show that the process of reasoning was suspect or open to challenge in the normal way in this type of proceedings, then it seems to me that it would be appropriate to order that the report should be disclosed in full, but if the purpose of the application is to study that report to see if there is any flaw in the manner of Mr Roberts’s decision-making process it seems to me that it goes to the other side of the line, and it is not a case where the court can properly order disclosure. For those reasons … I dismiss this application.’
It is said that the judge fell into error in so deciding. Counsel for Mr Taylor submitted that on the face of it this report formed part of the decision-making process undertaken by Mr Roberts and would throw a clear light on whether he was acting in abuse of power and issuing the notice with the ulterior motive of getting information about the tax affairs of Mr Taylor’s clients.
At first sight that may seem a powerful argument, but the problem is that before the judge, counsel who then appeared for Mr Taylor said in terms that he was not challenging the truth of Mr Roberts’s affidavit, and in this court counsel for Mr Taylor has adopted exactly the same stance. He says that at this stage he is not challenging it because he cannot. If that be the state of affairs, one asks oneself how stands this case when it goes for trial on the grounds in the notice of motion that the Revenue acted in bad faith and in order to collect material in respect of other taxpayers and not this one? Those grounds have not been abandoned; they still stand; but at this stage, if one asks oneself the question which in my judgment one is bound to ask oneself under Ord 24, r 13, ‘Is it necessary for disposing fairly of this cause that the report of 8 September 1986 should be
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produced?’, on the state of the case as it stands today and as it stood before the judge, in my judgment, the right answer to that is: ‘I don’t know.' It seems to me that prima facie it is for Mr Taylor to show that it is necessary for the fair disposal of the case, and at the present time he has not done so.
In so far as the judge came to the conclusion that he could not go behind Mr Roberts’s affidavit unless there was other material available to show that it might be in error (and I deliberately do not say untruthful), reliance was placed by counsel for the Crown on an unreported decision of this court in R v Secretary of State for the Home Dept, ex p Harrison [1987] CA Transcript 1246. That was a case arising out of the refusal of the Home Office to pay compensation to a man who had been convicted of crime and imprisoned, and who had later had his appeal allowed because the Court of Appeal, Criminal Division, held that the trial judge had fallen into error in directing the jury. The question in the case was whether such an ex-prisoner qualified for compensation. Compensation having been refused, judicial review proceedings were commenced in order to bring into question that decision. In the course of those proceedings, not only was there a request for discovery of documents against the Secretary of State, but also for production of documents referred to in the affidavit sworn by the department in that case. So both matters were before the court. Glidewell LJ, who gave the first judgment, dealt shortly with the cases. He then turned to Ord 24 (it will be remembered that the court was dealing with both those things) and, having gone through the provisions of the order and having dealt with the affidavit in that case, he said:
‘The question of whether or not there should be judicial review at all and, if so, whether, for instance, the Home Secretary owed to Mr Harrison a duty of fairness which would oblige him to disclose to Mr Harrison any material of which he had possession which contained comment adverse to the applicant are both questions which are in issue in these proceedings themselves. If the arguments for the Home Office succeed there will be no question of discovery, because there will be nothing to be disclosed. If there is no duty of fairness there is no need to disclose the documents which were not disclosed to Mr Harrison. If on the other hand the Home Office are wrong in their arguments and if these proceedings succeed, then, says [counsel for the Home Secretary], and says accurately, the Home Secretary’s decision not to make an ex gratia payment will have to be quashed, the application will have to be reconsidered and at that stage, if it is not granted, another attack by way of judicial review could no doubt be mounted. It may be that at that time, if it is ever reached, an application for discovery might be appropriate, but not at this stage in these proceedings. That argument also is one which I find convincing. I therefore do not find it necessary to say much about [counsel for the Home Secretary’s] wider argument as to the nature and ambit of discovery generally in judicial review, but I would comment on one other submission which he made as part of this wider submission. He suggests that to a not immaterial extent what is being sought here is material which it is hoped by the applicant will, at least in part, contradict matter contained in Mr Caffarey’s affidavit. In other words what is being sought is documents which can be used to check the accuracy of what Mr Caffarey asserts in his affidavit. [Counsel for the Home Secretary] submits that an applicant is not entitled to go behind an affidavit in order to seek to ascertain whether it is correct or not unless there is some material available outside that contained in the affidavit to suggest that in some material respect the affidavit is not accurate. If there is such material it may be right to order discovery to follow that up. But without some prima facie case for suggesting that the affidavit is in some respects incorrect it is improper to allow discovery of documents the only purpose of which, as I have said, would be to act as a challenge to the accuracy of the affidavit. With that submission also, which is of general application, I agree.’
When one applies what Glidewell LJ says to the present case, one sees that counsel for
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Mr Taylor both here and below said in terms that they are not impugning the truth of Mr Roberts’s affidavit. He is the decision-maker for the purposes of this case. While that state of affairs lasts, the time for seeking to go behind it by calling for production of Mr Ward’s report of 8 September simply has not arrived. It is for those reasons that, in my judgment, at the present time and before the judge it could not be said that the production of the document is necessary for the fair disposal of the issues raised in these proceedings. Whether that will prevail at the trial I know not. As I have already said, the rules themselves give power to reopen the matter. I do not regard this as being the appropriate time to make any order. It is not a question of refusing to order production except in the sense that, in my judgment, the application simply cannot stand with the attitude adopted on behalf of Mr Taylor up to this time. I do not know whether bad faith is going to be persisted in when it comes to the trial. I would say that in order to try and deal with the other part of the case, namely that the notice is intended to investigate the affairs of other taxpayers, we invited counsel for the Crown to say, if he was able, how widely the Crown intended to argue that the notice applied. He took instructions on the matter and came to the conclusion that the only help that he could give the court is to say that of course documents which had nothing to do with Mr Taylor’s tax affairs would not be within the net which had been cast. It may well be that, when the case comes to trial, the judge in the exercise of his discretion, when he sees exactly how the issues are put before him, will order production of this report, and nothing which I have said must be taken in any way as fettering his discretion so to do.
For those reasons, which are a little different from those given by the judge, I would dismiss this appeal and refuse the order for production of any documents.
NICHOLLS LJ. I agree, and I add only some brief observations of my own.
The decision being impugned in these judicial review proceedings was made by Mr Roberts. He has made an affidavit setting out with a fair degree of particularity what were the matters that he had in mind and took into account when reaching his decision. Mr Taylor has disclaimed any attack on Mr Roberts’s truthfulness. In those circumstances I see no answer to the contention of counsel for the Crown that the issue to be determined at the hearing of the judicial review application is whether the reasons for which Mr Roberts made his decision, set out in an admittedly truthful affidavit, are adequate to support his decision.
Perusal of the contents of Mr Ward’s reports is, therefore, not necessary for disposing fairly of the proceedings. It is not necessary because, having regard to the contents of the affidavit, the reports are not material to the issue before the court.
However, although Mr Taylor has, very fairly, accepted the honesty of Mr Roberts’s affidavit, he still seeks to challenge Mr Roberts’s decision on the ground of bad faith. Quite how these two attitudes can lie together in this case, having regard to the contents of Mr Roberts’s affidavit, is a matter which I find puzzling. As I understand it, Mr Taylor does not accept Mr Ward’s good faith. But where that leaves matters is far from clear. Suffice it to say that nothing which was submitted to this court had persuaded me of the relevance of Mr Ward’s state of mind. Quite rightly, however, on this interlocutory application counsel have not fully developed their arguments on this point. Moreover, the question of what on its proper construction is the scope of the notice and, if relevant, the question of what Mr Roberts understood to be the scope of the notice when he made his decision are matters which remain to be considered.
Whilst, therefore, as matters stand at present I am not satisfied that production of the September report is necessary for fairly disposing of these proceedings, I can envisage circumstances in which, when these matters are considered fully at the substantive hearing and the mass of documentary material not considered by us has been looked into, things may appear different. What is not now apparent, namely that production of the September report is necessary for disposing fairly of the matter, may become apparent in the clearer light that there will then be. I too would not say anything which might be
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thought to tie the hands of the judge or to preclude Mr Taylor from renewing his application for production of the September report if such an eventuality should arise.
I refer only to the September report because I agree that the earlier report made in May 1986 is privileged from production on the ground of legal professional privilege.
I too would dismiss this appeal whilst none the less leaving the door open to the extent I have mentioned.
TAYLOR LJ. I agree with both the judgments that have been delivered.
Appeal dismissed. Leave to appeal to the House of Lords refused.
30 January 1989. The Appeal Committee of the House of Lords (Lord Bridge of Harwich, Lord Templeman and Lord Goff of Chieveley) refused a petition for leave to appeal.
Solicitors: Gregory Rowcliffe & Milners (For Mr Taylor); Solicitor of Inland Revenue.
Heather Whicher Barrister.
Lombard Tricity Finance Ltd v Paton
[1989] 1 All ER 918
Categories: CONSUMER; Consumer Credit
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): SLADE, STOCKER AND STAUGHTON LJJ
Hearing Date(s): 6, 27 OCTOBER 1988
Consumer credit – Agreement – Form and content of agreement – Statement of circumstances in which variation of terms of agreement may occur – Increase in rate of interest – Lender’s discretion to raise rate of interest – Consumer credit agreement providing that lender could increase rate of interest in its absolute discretion – Whether provision lawful – Consumer Credit (Agreements) Regulations 1983, reg 2, Sch 1, para 19.
By an agreement dated 10 October 1985 the defendant borrower entered into a credit agreement with the plaintiff credit company to finance the purchase of a computer on a credit charge account. The agreement was a regulated agreement under the Consumer Credit Act 1974. A box on the face of the agreement stated that the interest payable on the credit balance was ‘Subject to variation by the creditor from time to time on notification as required by law’, while cl 2(a) on the reverse of the agreement referred to variations in the interest charged ‘as may from time to time be notified’. While the account was still running the credit company increased the rate of interest from 2·3% per month to 2·45% and when the defendant fell into arrears the interest rate rose to 2·95%. When the defendant continued to default in his monthly payments the credit company brought proceedings in the county court claiming the amount due. The registrar dismissed the claim and the judge upheld his decision on the ground that the agreement did not comply with reg 2a of and para 19b of Sch 1 to the Consumer Credit (Agreements) Regulations 1983 since it did not indicate ‘the circumstances in which [a] variation [sc in
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the rate of interest] may occur’ and was therefore not properly executed by virtue of s 61(1)c of the 1974 Act. The credit company appealed to the Court of Appeal.
Held – It was lawful for a consumer credit contract to provide that the lender could unilaterally vary the rate of interest in its absolute discretion subject to notice to the borrower as required by law. Such a provision did not conflict with para 19 of Sch 1 to the 1983 regulations, since ‘the circumstances in which any variation … may occur’ did not refer to external factors such as changes in the market rates of interest which might cause a variation, and neither the 1974 Act nor the 1983 regulations made such a provision unlawful. Accordingly, the lender was not obliged to set out the factors which could cause him to exercise his contractual power to increase the rate of interest. Nor was it necessary for such an agreement to state specifically that the lender had an absolute discretion or that it could raise the interest rate for any reason whatsoever. It followed that, since the agreement between the credit company and the defendant did not infringe para 19 of Sch 1 to the 1983 regulations, the appeal would be allowed (see p 923 g to j and p 924 b c g, post).
Notes
For the variation of consumer credit agreements, see 22 Halsbury’s Laws (4th end) para 111.
For the Consumer Credit Act 1974, s 61, see 11 Halsbury’s Statutes (4th edn) 57.
Case referred to in judgment
May & Butcher Ltd v R [1934] 2 KB 17, [1929] All ER Rep 679, HL.
Appeal
The plaintiffs, Lombard Tricity Finance Ltd (Lombard), appealed with the leave of the judge against the decision of his Honour Judge Heald given in the Nottingham County Court on 29 March 1988 whereby he held that the agreement dated 10 October 1985 made between Lombard and the defendant, Martin Shaun Paton, did not comply with the requirements of paras 18 and 19 of Sch 1 to the Consumer Credit (Agreements) Regulations 1983, SI 1983/1553, and was thereby not properly executed within the meaning of s 61(1) of the Consumer Credit Act 1974. The facts are set out in the judgment of the court.
Michael Beloff QC and Stephen Morris for Lombard.
Alexander Hill-Smith for Mr Paton.
Cur adv vult
27 October 1988. The following judgment was delivered.
STAUGHTON LJ. Martin Paton, the defendant in an action in the Nottingham County Court and respondent to this appeal, was in September 1985 minded to buy an Amstrad computer from Currys Ltd. The price, including an extended warranty insurance policy, was £244·98. Mr Paton decided to borrow the money, or rather the greater part of it, from Lombard Tricity Finance Ltd (Lombard), the plaintiffs in the action and appellants in this appeal. Instead of a credit sale agreement, he was offered a credit charge account, which was a species of running-account credit as defined in s 10 of the Consumer Credit Act 1974. But there was no other transaction after the purchase of the computer, for which the initial loan was £218.
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The agreement, dated 10 October 1985, was thus a regulated agreement within s 8 of the 1974 Act. It is suggested that there was a failure to comply with the provisions of the Act in one important respect. In a box on its face there were these provisions:
‘Interest charge (per month) 2·3%
Annual Percentage Rate 31·3%
Interest is payable on credit balance. Subject to variation by the creditor from time to time on notification as required by law. In calculating the APR no account has been taken of any variation of it which may occur under this Agreement.’
That information was evidently intended to comply with reg 2 of the Consumer Credit (Agreements) Regulations 1983, SI 1983/1553. By para (4) of that regulation certain financial and related particulars must be ‘shown … as a whole … and not interspersed with other information … ' We are told that in the trade the part of the agreement which contains those particulars is called ‘the holy ground’, because no other material may trespass on it. For our part we would describe it, with equal inaccuracy, as ‘the child’s guide’, since it is intended to set out succinctly the principal effect of the agreement for those untrained in reading such documents.
Since it is compliance with reg 2 that is in question, it is not to the point to quote any other terms of the document. But for completeness we set out cl 2(a) on the reverse:
‘If the sum payable monthly by me under Clause 1 above is paid by banker’s Direct Debiting Mandate, I shall pay an interest charge of 2·3% per month (equivalent to AN ANNUAL PERCENTAGE RATE OF 31·3%) or such other percentage as may from time to time be notified to me by you on the total amount, if any, outstanding on my Creditcharge Account immediately after the expiration of each month during which such Account is in existence. If such sum is paid in any other way, I shall pay an interest charge of 2·7% per month (equivalent to AN ANNUAL PERCENTAGE RATE OF 37·6%) or such other percentage as may from time to time be notified to me by you on such total amount, if any, outstanding immediately after the expiration of each month during which my Creditcharge Account is in existence. In all cases such interest charge will be debited to my said Account and will run after as well as before any judgment obtained against me.’
Payments of £10 or £20 were duly made by Mr Paton from time to time. These were credited to his account. There was debited in each month an interest charge at 2·3% on the outstanding balance. There was also a charge calculated at 0·3% for credit protection insurance, but nothing turns on that.
Then on 9 March 1986 the interest rate was increased to 2·45%. There is an issue whether due notice of that increase was given. This may well not have been investigated in the county court, for reasons which will appear later. When it was raised before us, counsel for Lombard observed that it could only affect quantum, and only to the extent of £10 (being the difference between the sum that would be due if the original interest rate had continued in force throughout and the sum in fact claimed). He was prepared to waive that amount. So the issue as to notice disappears.
Shortly afterwards Mr Paton defaulted on his obligations; his direct debit payments ceased. The interest rate charged thereupon rose to 2·95%. Four further payments of £10 were made; but then there was again default, and by 9 November 1986 the amount outstanding was £203·62.
Lombard on 22 December 1986 commenced an action in the Nottingham County Court, claiming that amount together with interest and costs. Mr Paton filed a defence saying that he disputed the claim as to £100 for reasons which are not material. The case came before the deputy registrar as an arbitration on 6 October 1987. He dismissed the claim entirely. Lombard appealed to his Honour Judge Heald, who on 29 March 1988 upheld the decision of the deputy registrar, but gave Lombard leave to appeal to this court.
The only issue before the registrar and the judge was whether the credit charge
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agreement complied with the provisions of the 1974 Act and the regulations made under it. Section 60 of the 1974 Act provides:
‘(1) The Secretary of State shall make regulations as to the form and content of documents embodying regulated agreements, and the regulations shall contain such provisions as appear to him appropriate with a view to ensuring that the debtor or hirer is made aware of—(a) the rights and duties conferred or imposed on him by the agreement, (b) the amount and rate of the total charge for credit (in the case of a consumer credit agreement), (c) the protection and remedies available to him under this Act, and (d) any other matters which, in the opinion of the Secretary of State, it is desirable for him to know about in connection with the agreement.
(2) Regulations under subsection (1) may in particular—(a) require specified information to be included in the prescribed manner in documents, and other specified material to be excluded; (b) contain requirements to ensure that specified information is clearly brought to the attention of the debtor or hirer, and that one part of a document is not given insufficient or excessive prominence compared with another … ’
By s 61(1) a regulated agreement is not properly executed if it does not conform with regulations made under s 60. The consequence is set out in s 65(1):
‘An improperly-executed regulated agreement is enforceable against the debtor or hirer on an order of the court only.’
Before turning to the section which deals with enforcement orders, we should mention s 82(1). This provides that regulations may be made as to how notice shall be given of any variation made under a power contained in a regulated agreement. Under that section the Consumer Credit (Notice of Variation of Agreements) Regulations 1977, SI 1977/328, provide:
‘Notice valid for any variation
2. Subject to regulation 3 below, notice of variation of any regulated agreement shall—(a) set out particulars of the variation; and (b) be served on the debtor or hirer not less than seven days before the variation takes effect.
Notice valid for special variations
3. —(1) This regulation applies to a variation of a regulated consumer credit agreement where—(a) the amount of the payments of interest charged under the agreement is determined, both before and after the variation takes effect, by reference to the amount of the balance outstanding, established as at daily intervals; and (b) the variation is a variation of the rate of interest payable under the agreement.
(2) In the case of a variation to which this regulation applies, the requirements of regulation 2(b) above shall be treated as satisfied where—(a) the notice of variation—(i) is published in at least three national daily newspapers, in each case being printed in a type not less than 3 mm in height and occupying a space of not less than 100 sq cm, or (ii) if it is not reasonably practicable so to publish it, is published in the Gazette, and (b) if it is reasonably practicable to do so, the notice of variation is prominently displayed, so that it may easily be read, in a part (if any) open to the public of the premises of the creditor where the agreement to which the variation relates is maintained.’
Section 127 provides, among other things, that on any application for an enforcement order the court may reduce any sum payable by the debtor ‘so as to compensate him for prejudice suffered as a result of the contravention in question’. That is a most important feature of the 1974 Act. Under the old law as to moneylenders it was in general all or nothing, sudden death. Failure by the moneylender to comply with the law meant that he could recover nothing, however large the sum involved and however trivial his default. Now the court has power to make an equitable adjustment. But CCR Ord 49,
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r 4(9)(a) provides that application for an enforcement order must be made by originating application. None has been made by Lombard. So for the present the only question is whether the credit charge agreement complied with the regulations prescribing the form and content of regulated agreements. These are to be found in the Consumer Credit (Agreements) Regulations 1983. The material provisions are Sch 1, paras 18 and 19, as follows:
TYPE OF AGREEMENT
(1) INFORMATION
(2)
18. Agreements under which the rate or amount of any item included in the total charge for credit will or may be varied (other than a variation in consequence of an event which is certain to occur). A statement indicating that in calculating the APR no account has been taken of any variation which may occur under the agreement of the rate or amount of any item entering into that calculation.
19. Agreements falling within paragraph 18. A statement indicating the circumstances in which any variation referred to in paragraph 18 above may occur and, where that information is ascertainable at the time at which the document referred to in section 61(1) of the Act is presented or sent to the debtor for signature, the time at which any such variation may occur.
It is said that there was a failure to comply with para 19, and thus a breach of s 61(1), on the ground that the agreement did not state the circumstances in which a variation in the interest rate might occur. The case for Lombard was that they were entitled to alter the interest rate from time to time at their absolute discretion, and that the only circumstance required was notice by them to the debtor, which was stated in the agreement. The judge rejected that argument. He said:
‘To my mind the words “a statement of circumstances” require a reference to external factors by which the debtor can judge whether the variation is being properly exercised, eg by a reference to base rates, retail price indices or such other guidelines as the creditor may care to choose. I take the view that notice is something essentially different from the change in circumstances which gives rise to the variation. Likewise I take the view that the mere whim or desire of the creditor is not a circumstance. The relevant clause does not comply with para 19 of Sch 1 to the regulations.’
The implications of that decision are considerable. It is of course possible to borrow and lend money at a fixed rate of interest for a fixed period. The government does it habitually, and the discount market does little else. But it is very common indeed for private individuals to agree to a rate of interest which may fluctuate. Borrowers on a mortgage or real property are presently finding to their cost that interest rates have increased.
No doubt it would be possible for lenders to comply with the judge’s requirements, and state the considerations which will induce them to increase or reduce their interest rate; there is nothing which a draftsman cannot achieve if he has clear instructions and enough ink in his pen. But it could well be a cumbersome procedure. It might also tend to defeat the purpose of ‘the child guide’, by cluttering up that part of the agreement with a mass of detail. The alternative solution, for the lender to apply in every case for an enforcement order in the county court because his agreement did not state the circumstances in which the interest rate could be varied, as defined by the judge, would cause grave disruption in the business of the courts.
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On two potential issues there has been no dispute before us. The first is whether the contract does, as a matter of construction, provide that Lombard may vary the interest rate in their absolute discretion, subject only to due notice. The second, whether such a contract, if made, is lawful. Counsel for Mr Paton concedes that the answer is Yes to both questions. But as the case is of some general importance, and as his concessions mean that he is, to some extent at any rate, unable to support the reasoning of Judge Heald in the county court, we think it right to explain why in our view they were rightly made.
In general it is no doubt unusual for a contract to provide that its terms may be varied unilaterally by one party, in his absolute discretion, to the detriment of the other; in general one would require clear words to achieve that result. But in this particular case it is, we think, part of the background, matrix or surrounding circumstances that market rates of interest are known to vary from time to time and that some variation was very likely to occur during the lifetime of this agreement. There is also provision that the borrower may bring it to an end at any time by repaying the amount outstanding. In theory he could thus avoid the effect of an increase in the interest rate, if he found it unattractive. But we recognise that in practice this remedy is unlikely to be available, since he is unlikely to have the money, or to be able to borrow it from some other lender at less than the prevailing market rate.
Counsel for Lombard observed that the provision of credit is a competitive industry, and that the effect of competition is likely to restrain Lombard from a capricious increase in their interest rate. That is no doubt true if they increase rates by the same amount and at the same time for both new and old borrowers, as he tells us they do. Indeed if a provider of credit capriciously treated old borrowers unfavourably, one would hope that the Director General of Fair Trading would consider whether he should still have a licence under the 1974 Act. It was also suggested that the provisions of the Act relating to extortionate credit bargains might provide protection for the borrower. But counsel for Mr Paton suggested that ss 137 and 138 may apply only to the original credit agreement, and not to how it is subsequently operated. It is unnecessary to express any view on that point.
Bearing all those considerations in mind, we consider that on a fair reading of the agreement it does provide, as counsel for Mr Paton accepts, that Lombard may increase the interest rate at their absolute discretion subject only to notice. A power to vary the rate is conferred in plain terms, there is no other express restriction on it and we can see no sufficient basis for any implied restriction.
The second question is whether such an agreement is lawful. At common law it is. One can compare a contract for the sale of goods, of which Viscount Dunedin said in May & Butcher Ltd v R [1934] 2 KB 17 at 21, [1929] All ER Rep 679 at 684: ‘… with regard to price it is a perfectly good contract to say that the price is to be settled by the buyer.' If that be the law where the other party is locked into the contract with no means of escape, we do not see that it can be different in a contract of loan, where the borrower has (in theory at any rate) the opportunity to repay the whole outstanding balance.
Is there anything in the statute or regulations which renders such a contract unlawful? Apart from para 19 of Sch 1 to the 1983 regulations, it has not been suggested that any legislative provision has this effect. Indeed para 9 of the schedule points in the opposite direction, since it refers to:
‘Agreements for fixed-sum credit except agreements … (c) which provide for a variation of, or permit the creditor to vary, (whether or not by reference to any index) the amount or rate of any item included in the total charge for credit after the relevant date … ’
So the question is whether para 19, with its reference to ‘circumstances’, requires as a matter of law that a power to increase the interest rate can be provided by contract only if justified by external factors such as an increase in the general level of rates prevailing in the money market. We are not sure whether Judge Heald thought that it did, but if that was the judge’s view we agree that it cannot be supported. There may well be reasons
Page 924 of [1989] 1 All ER 918
of policy why Parliament might itself have enacted such a law, or given the Secretary of State power to do so. But s 60 of the 1974 Act confers powers to make regulations ‘as to the form and content of documents embodying regulated agreements’, and provides that they shall contain provisions ‘with a view to ensuring that the debtor is made aware of’ certain matters. It is by no means clear that the regulations may affect the substance of such agreements, or render unlawful a term which would otherwise be lawful. This restriction is reflected in reg 2 itself, which provides that documents ‘shall contain the information set out in Column 2 of Schedule 1’. And the schedule is headed ‘Information to be Contained in Documents Embodying Regulated Consumer Credit Agreements … ' Accordingly, if it was the judge’s view that an agreement cannot lawfully confer on the lender a power to increase the interest rate in his absolute discretion, we agree that this view cannot be supported. That conclusion would seem to have the support of Professor Guest and Mr Michael Lloyd in Encyclopaedia of Consumer Credit Law para 3—224 and indeed of counsel for Mr Paton in his capacity of author of Consumer Credit: Law and Practice (1985) p 96.
So we turn at last to the one point that was ultimately in issue in this appeal, which was formally raised only by a respondent’s notice at the conclusion of the argument. This was that the true effect of the contract was not stated with sufficient clarity in the box (or child’s guide) on the front, so as to comply with para 19 of Sch 1. It used the words: ‘Subject to variation by the creditor from time to time on notification as required by law.' It was accepted by both counsel, and we agree, that, where para 19 requires a statement ‘indicating the circumstances in which any variation … may occur’, this refers to a variation which the contract permits, rather than to the circumstances in which a contractual power may in practice happen to be exercised. But counsel for Mr Paton argues that the statement, in order to reflect accurately the power conferred by the contract, should have contained words such as ‘for any reason whatsoever’ or ‘in its absolute discretion’. In other words counsel for Mr Paton argues that, although cl 2(a) of the contract is clear enough to achieve the result which Lombard contend for, very much the same language, when used in the box on the front of the agreement, is not a sufficient statement of ‘the circumstances’ required by para 19. That is not necessarily an implausible result. Lawyer’s language in the body of the contract will not necessarily serve equally well in the child’s guide. What is needed there is language which is succinct and plain, so that the reader will not become weary or impatient and will readily understand what is said.
In our judgment the words on the face of the contract here are sufficient to convey, to the average reader of modest intelligence, that Lombard have the right to vary the interest rate at will if they choose to do so, subject only to proper notification. There is nothing to suggest that their right is otherwise fettered or limited in any way, and we do not think that the reader would assume that there is any limitation. There was no failure to comply with para 19. Accordingly, we would allow the appeal, remit the case to the deputy registrar and direct that there be an award in favour of Lombard for £192·75. (That figure results from the concession of counsel for Lombard that he does not seek the increased rate of interest.) The deputy registrar may be asked to exercise his discretion over interest and costs.
In conclusion we would mention that ‘the child’s guide’ on the face of the agreement made no mention of the fact that the interest rate would be increased, under cl 2(a), if the borrower ceased to pay by direct debit. No reliance was placed on that point before us, and we express no view on it.
Appeal allowed. Judgment for Lombard for £192·75.
Solicitors: Mishcon de Reya agents for I M Harding, Enfield; Cruickshanks, Long Eaton (for Mr Paton).
Celia Fox Barrister.
Bank Mellat v Kazmi and others (Secretary of State for Social Services intervening)
[1989] 1 All ER 925
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): PURCHAS, NOURSE AND STUART-SMITH LJJ
Hearing Date(s): 22 NOVEMBER, 21 DECEMBER 1988
Practice – Pre-trial or post-judgment relief – Mareva injunction – Assets – Supplementary benefit arrears – Benefit arrears owed to defendant whose assets frozen by injunction – Crown having notice of injunction – Probability that defendant would dispose of payment of arrears in breach of injunction – Crown applying to court for directions as to payment – Whether payment should be made directly to defendant or into bank account frozen by injunction – Crown Proceedings Act 1947, s 25(4) – Supplementary Benefits Act 1976, s 16(1).
Social security – Supplementary benefit – Payment – Mareva injunction – Benefit arrears owing to defendant with assets frozen by injunction – Whether order for payment into bank account frozen by injunction an ‘assignment of, or charge on, any supplementary benefit’ – Whether court prevented from making order – Supplementary Benefits Act 1976, s 16(1).
The defendant, while employed by the plaintiff bank, obtained an employee’s mortgage on his house. Following his conviction and imprisonment for fraud committed during his employment, the bank issued a writ against him claiming damages for conversion and obtained a Mareva injunction over the defendant’s assets including sums of money held in certain named bank accounts. After realising the defendant’s assets, including the house, the bank was still owed some £123,000. The defendant was subsequently found to be owed £8,480·15 by the Secretary of State for Social Services in arrears of supplementary benefit for mortgage interest relief on the house. The Secretary of State became aware of the Mareva injunction against the defendant and applied to the court for directions whether payment of the £8,480·15 should be made direct to the defendant, having regard to the provisions of s 25(4)a of the Crown Proceedings Act 1947, which prohibited garnishee proceedings against the Crown, or s 16(1)b of the Supplementary Benefits Act 1976, which made any ‘assignment of, or charge on, any supplementary benefit’ or ‘agreement to assign or charge any such benefit’ void. The judge rejected the bank’s request for an order for payment into one of the bank accounts named in the injunction and ordered that the arrears of supplementary benefit be paid directly to the defendant, even though his evidence demonstrated a probability that he would dispose of the money in breach of the terms of the injunction. The bank appealed, contending that an order for payment into a named bank account would not be contrary to either s 25(4) of the 1947 Act or s 16(1) of the 1976 Act.
Held – Where the court had notice of the probability that a defendant would dispose of money owed to him in breach of the terms of a Mareva injunction, the court ought not to assist the defendant in flouting its previous order and accordingly it could, with the debtor’s assent, order the money to be paid into the defendant’s account at a bank that had notice of the injunction, unless prevented by statute from doing so. In the circumstances, an order requiring the Secretary of State to pay arrears of supplementary benefit into a named account would not be prohibited by s 25(4) of the 1947 Act or s 16(1) of the 1976 Act, since (a) even if the order was a process in the nature of an attachment, the Crown was not being forced to pay the arrears but rather was ready and
Page 926 of [1989] 1 All ER 925
willing to follow the court’s directions for payment and (b) the order would have the same effect as the injunction to which it would be subordinate and, as such, would operate only in personam without creating any assignment, or charge on, the payment of arrears. Accordingly, the bank’s appeal would be allowed and an order would be made directing that the £8,480·15 be paid into a named bank account (see p 929 c to f, p 930 c to g and p 932 a to d g h, post).
Dictum of Buckley LJ in Cretanor Maritime Co Ltd v Irish Marine Management Ltd [1978] 3 All ER 164 at 170 applied.
Walker v Walker [1983] 2 All ER 909 distinguished.
Notes
For orders made in respect of money due from the Crown, see 11 Halsbury’s Laws (4th edn) para 1436.
For the Crown Proceedings Act 1947, s 25, see 13 Halsbury’s Statutes (4th edn) 33.
For the Supplementary Benefits Act 1976, s 16, see 46 Halsbury’s Statutes (3rd edn) 1060.
Cases referred to in judgments
Cretanor Maritime Co Ltd v Irish Marine Management Ltd [1978] 3 All ER 164, [1978] 1 WLR 966, CA.
Law Society v Shanks (1987) 131 SJ 1626, CA.
Walker v Walker [1983] 2 All ER 909, [1983] Fam 68, [1983] 3 WLR 421, CA.
Z Ltd v A [1982] 1 All ER 556, [1982] QB 558, [1982] 2 WLR 288, CA.
Cases also cited
Avant Petroleum Inc v Gatoil Overseas Inc [1986] 2 Lloyd’s Rep 236, CA.
Ranson v Ranson [1988] 1 WLR 183, CA.
Roberts v Roberts [1986] 2 All ER 483, [1986] 1 WLR 437.
Appeal
The plaintiff, Bank Mellat, a bank incorporated under the laws of the Islamic Republic of Iran, appealed with the leave of the judge against the decision of Sir Neil Lawson sitting as a judge of the High Court in the Queen’s Bench Division in chambers on 20 April 1988 whereby on the hearing of an application made to the court for directions by the Secretary of State for Social Services, as intervener, the judge ordered, inter alia, that the Secretary of State pay the sum of £8,480·15, being arrears of supplementary benefit for mortgage relief, directly to the first defendant, Sibtal Hassan Kazmi, whose assets (including sums of money held in named bank accounts) were subject to a Mareva injunction which had been granted by Parker J on 13 July 1981 and continued by Robert Goff J on 28 July 1981 in respect of an action for damages for fraud and conversion brought by the bank against Mr Kazmi, its former employee. The facts are set out in the judgment of Nourse LJ.
Hazel Williamson QC for the bank.
John Mummery for the Secretary of State.
Mr Kazmi appeared in person.
Cur adv vult
21 December 1988. The following judgments were delivered.
NOURSE LJ (giving the first judgment at the invitation of Purchas LJ). The question in this case is whether, with the approval of the debtor, the court can direct moneys owing to a defendant who is restrained from disposing of or dealing with them by a Mareva injunction to be paid into an account of the defendant at a bank which has notice of the
Page 927 of [1989] 1 All ER 925
injunction. So stated, the question is one which is capable of arising in any case where a Mareva injunction is in force. But here there is a further complication in that the moneys are owed by the Crown for arrears of supplementary benefit. It has been argued that the order would offend s 25(4) of the Crown Proceedings Act 1947 and s 16(1) of the Supplementary Benefits Act 1976, as amended by the Social Security Act 1980.
The first defendant, Sibtal Hassan Kazmi, was formerly employed by Bank Pars, which on 9 November 1979 granted him an employee’s mortgage and took from him an all moneys legal charge over 41 Milton Road, London E17. In 1980 Bank Pars merged with Bank of Tehran to form the plaintiff bank, Bank Mellat (the bank). In or about July 1981 Mr Kazmi, who was then an internal auditor with the bank, was arrested on charges of obtaining money belonging to the bank by deception. On 13 July 1981 the writ in this action was issued against Mr Kazmi and other defendants, with a claim for damages for fraud and conversion against Mr Kazmi. On the same day the bank applied ex parte and obtained Mareva relief. On 28 July 1981 Robert Goff J made a consent order continuing that relief in the following terms, so far as material:
‘… the Injunction granted herein on 13th July 1981 restraining the First Defendant … from disposing, pledging, transferring or otherwise dealing with any assets he may have within the jurisdiction of this Court including and in particular the sums of money standing to the credit of the Bank Accounts particularised in the first Schedule hereto or removing or taking any steps to remove the same out of the jurisdiction be continued until further order.’
Although much has happened in the mean time, that injunction is still running against Mr Kazmi. He has never applied for a modification so as to allow the defrayment of living expenses and so forth. It is unnecessary to recount the intervening events except to say, first, that in March 1983 Mr Kazmi was convicted on three counts of obtaining money by deception and received concurrent sentences of three years’ imprisonment on each count, second, that judgment in this action was subsequently entered against him for damages assessed at £96,681·40 plus costs and, third, that extensive realisations were made by the bank both before and after judgment, including the sale of 41 Milton Road for about £60,750 net. The bank claims that as at 22 November 1988 the amount outstanding under the judgment (including interest) was about £61,400 and that a further sum of about £62,320 was owing to it in respect of principal and interest on Mr Kazmi’s loan account.
Between 1981 and 1984 Mr Kazmi claimed supplementary benefit in respect of mortgage interest payable by him under the bank’s legal charge over 41 Milton Road. On 16 November 1987 an adjudication officer determined that he was entitled to receive an aggregate sum of £8,480·15 in respect of those claims. The effect of the determination was to render the Crown, in the person of the Secretary of State for Social Services, a debtor to Mr Kazmi in that amount. It is also believed that a further sum of about £2,000 may become due in respect of the same liability after further calculations have been made.
Early in November 1987 it came to the attention of the Secretary of State that the bank had obtained a Mareva injunction against Mr Kazmi and that that injunction remained in full force and effect. The Department of Health and Social Security’s solicitor accordingly communicated with both the bank and Mr Kazmi, as a result of which it became clear that the Secretary of State was faced with a dilemma. On one side the bank, maintaining that payment to Mr Kazmi direct would or might constitute an aiding and abetting of a breach of the injunction by Mr Kazmi and thus a contempt of court by the Secretary of State, requested that payment should be made into one of the bank accounts particularised in the order of Robert Goff J, none of which is held with the bank itself. On the other side, Mr Kazmi maintained that payment should be made to him direct. He indicated that if that could not be done he would withdraw the claim altogether.
The practical result of all this was that the Secretary of State had no alternative but to seek to intervene in the proceedings, for the purpose of being given directions—
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‘under the injunction herein granted to the Plaintiffs on 28 July 1981 or otherwise as to whom and in what manner the Proposed Intervener might make payment of all sums awarded to the First Defendant by way of arrears of supplementary benefit in respect of mortgage payments.’
That application came before Sir Neil Lawson, sitting as a judge of the High Court in the Queen’s Bench Division, on 20 April 1988, when he ordered that all sums awarded to Mr Kazmi by way of arrears of supplementary benefit in respect of mortgage payments should be paid direct to Mr Kazmi or to his order. He gave the bank leave to appeal and granted a stay of execution on his order pending an appeal. The bank has now appealed to this court.
Both here and below the Secretary of State and the bank have appeared by counsel. Mr Kazmi has appeared in person. The Secretary of State, being in much the same position as an interpleader, has correctly adopted a neutral stance. To him it is a matter of indifference whether the money is paid into the designated bank account or to Mr Kazmi direct. His only interest in the matter is to comply with the directions of the court. But at the invitation of the court and with the approval of Mr Kazmi, counsel for the Secretary of State was good enough to address to us the principal arguments which would have been advanced on Mr Kazmi’s behalf, if he had appeared here by counsel. Having heard those arguments, Mr Kazmi was content to adopt them for himself and, except on one point (see below), did not add anything of his own. Counsel’s assistance in arriving at a sound decision of the matter has proved invaluable.
Although they were argued in the reverse order, I find it both logical and convenient to begin with the general question and then to go on to that which arises by virtue of the special position of the Secretary of State.
In Z Ltd v A [1982] 1 All ER 556 at 563, [1982] QB 558 at 574 Lord Denning MR, after considering the effect of a Mareva injunction on banks and bank accounts, said:
‘But the same applies to any specific asset held by a bank for safe custody on behalf of the defendants, be it jewellery, stamps, or anything else, and to any other person who holds any other asset of the defendant. If the asset is covered by the terms of the Mareva injunction, that other person must not hand it over to the defendant or do anything to enable him to dispose of it. He must hold it pending further order.’
In Law Society v Shanks (1987) 131 SJ 1626 (a transcript of which was before us) Sir John Donaldson MR (with whose judgment Neill LJ and Sir Roualeyn Cumming-Bruce agreed), after reading an earlier passage from Lord Denning MR’s judgment in Z Ltd v A [1982] 1 All ER 556 at 562, [1982] QB 558 at 572 and then the passage quoted above, said:
‘It is generally accepted that a Mareva injunction prevents banks or other people who hold assets to the order of the defendant from assisting the defendant to dispose of those assets to third parties or to dissipate them, but I know of no authority other than this particular passage for the proposition that it prevents anybody handing the asset over to the owner of the asset, in this case the defendant. That does not of itself amount to a dissipation or a disposal of any kind whatsoever. In special circumstances, where it is known that the sole purpose of requiring the asset to be handed over to the defendant is to facilitate a dissipation of that asset, different considerations may arise, but that is not suggested in this case. That would be a very peculiar case indeed.’
He added that the two passages from Lord Denning MR’s judgment did not represent a general statement of the law which is applicable in any ordinary case.
I respectfully agree that mere notice of the existence of a Mareva injunction cannot render it a contempt of court for a third party to make over an asset to the defendant direct. Otherwise it might be impossible, for example, for a debtor with notice to pay over to the defendant even the most trivial sum without seeking the directions of the
Page 929 of [1989] 1 All ER 925
court. A distinction must be drawn between notice of the injunction on the one hand and notice of a probability that the asset will be disposed of or dealt with in breach of it on the other. It is only in the latter case that the third party can be guilty of a contempt of court. No general test can be propounded for the latter class of case, although the facts here suggest that it may not be quite as peculiar as Sir John Donaldson MR thought. In a letter to the Department of Health and Social Security’s solicitor of 10 December 1987, Mr Kazmi gave this reason for withdrawing the claim, if the money could not be paid to him direct: ‘… as the Bank Mellat got £70,000 house back and further you will pay them arrears that will be the injustice. Now you will decide who is the big looser.' Mr Kazmi’s evident resolve to prevent the money getting into the hands of the bank at any cost demonstrated a probability that he would, if he could, dispose of it in breach of the injunction. The Secretary of State’s decision to seek the directions of the court was entirely appropriate.
What then ought the attitude of the court to be when asked to decide to whom and in what manner the money available to satisfy the debt should be paid? This question admits of only one answer. If the debtor has notice of a probability that the money will, if paid to the defendant direct, be disposed of in breach of the injunction, so has the court. And the court has no choice, nor, I will add, any inclination in the matter, except to come to the aid of its previous order. It must take some course which will effectively subject the money to the operation of the Mareva injunction. On a conventional approach, the correct course might be to order it to be paid into court. But in a case where there is already a bank account with one of the major clearing banks whose balance from time to time is frozen by the injunction it is preferable in practice, and unobjectionable in theory, for it to be paid into that account. That will not give the creditor any better right to receive the money than if it had been paid into court. He will still have to take garnishee proceedings against the bank under RSC Ord 49.
Applying these general considerations to the facts of the present case, I am in no doubt that, unless prevented by the fact that the debtor here is the Secretary of State, we ought to accede to the bank’s appeal and order the sums in question to be paid into one of the bank accounts maintained with a major clearing bank which are particularised in the order of Robert Goff J. I now turn to consider whether the material legislation prevents us from taking that course.
Part III of the Crown Proceedings Act 1947 is headed ‘Judgments and Execution’ and consists of ss 24 to 27. Sections 24 and 26 are not material to the present inquiry. Subsections (1) to (3) of s 25 provide, shortly stated, for the issuing and service of certificates of orders made against the Crown and, in the case of an order for the payment of any money by way of damages or otherwise or of any costs, for the payment by the appropriate government department of the amount so certified. The firstpart of sub-s (4) of s 25 is in these terms:
‘Save as aforesaid no execution or attachment or process in the nature thereof shall be issued out of any court for enforcing payment by the Crown of any such money or costs as aforesaid … ’
Thus the effect of s 25(4) is, amongst other things, to prohibit garnishee proceedings against the Crown, being the process by which a debt owing to a judgment debtor by a third party can be attached by the judgment creditor. But then s 27 goes on to provide for a process analogous to garnishee proceedings, by which money payable by the Crown can, except in certain cases, be attached. The substantive provisions are contained in s 27(1). They need not be quoted in full, because it is clear that the bank would prima facie be able to obtain an order under the subsection, were it not for the proviso, which is in these terms:
‘Provided that no such order shall be made in respect of:—(a) any wages or salary payable to any officer of the Crown as such; (b) any money which is subject to the provisions of any enactment prohibiting or restricting assignment or charging or taking in execution.’
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Those are the material provisions of the 1947 Act. Also material is s 16(1) of the Supplementary Benefits Act 1976, as amended by the Social Security Act 1980, which is in these terms:
‘Every assignment of, or charge on, any supplementary benefit, and every agreement to assign or charge any such benefit, shall be void; and, on the bankruptcy of a person entitled to any supplementary benefit, no rights in respect of the benefit shall pass to any trustee or other person acting on behalf of his creditors.’
Counsel for the bank accepts, correctly, that, by virtue of s 16(1), Mr Kazmi’s arrears of supplementary benefit are ‘money which is subject to the provisions of [an] enactment prohibiting or restricting assignment or charging or taking in execution’ within para (b) of the proviso to s 27(1) of the 1947 Act. She accordingly accepts that the bank cannot obtain an order in its own favour under s 27. But she nevertheless submits that an order for payment into a bank account particularised in the order of Robert Goff J would not offend either s 25(4) of the 1947 Act or s 16(1) of the 1976 Act.
Counsel for the Secretary of State has submitted that the order sought by the bank is a process in the nature of attachment within s 25(4). I am not sure whether that submission is correct or not. Certainly it is a process preliminary to attachment, in the sense that without it garnishee proceedings cannot be taken. But it lacks essential features of a garnishee order, in that it neither divests the judgment debtor of his title to the debt nor gives it to the judgment creditor. Moreover, in Cretanor Maritime Co Ltd v Irish Marine Management Ltd [1978] 3 All ER 164 at 170, [1978] 1 WLR 966 at 974 Buckley LJ thought it manifest that a Mareva injunction could not operate as an attachment. And so it might well be said that an order whose effect is to subject money to such an injunction cannot be a process in the nature of attachment. It is, however, unnecessary to resolve this problem, because a simpler answer to counsel’s submission was suggested in argument by Stuart-Smith LJ. Even if the order sought by the bank is a process in the nature of attachment, it is not one, in the circumstances of this case, ‘for enforcing payment by the Crown’. Not only is the Crown not being forced to pay the arrears, it is ready, willing and able to pay them to whomsoever and in whatsoever manner the court shall direct. The order sought by the bank offends neither the letter nor the spirit of s 25(4).
I turn then to s 16(1), which, so far as material, avoids any assignment of, or charge on, any supplementary benefit and any agreement to assign or charge any such benefit. As a matter of principle it cannot be doubted that a Mareva injunction, which, like any other injunction, operates only in personam, does not create any assignment of, or charge on, the assets in respect of which it is granted, or any agreement to assign or charge those assets. If authority be needed for that proposition, reference can again be made to the judgment of Buckley LJ in the Cretanor Maritime case [1978] 3 All ER 164 at 170, [1978] 1 WLR 966 at 974. Accordingly, had it not been for the decision of this court in Walker v Walker [1983] 2 All ER 909, [1983] Fam 68, the submission by counsel for the bank that the order sought by the bank would not offend s 16(1) could have been accepted without more ado.
In Walker v Walker the husband, who was discharged from the army before decree absolute, was entitled to a resettlement grant from the Ministry of Defence. On an application by the wife under s 37 of the Matrimonial Causes Act 1973 the county court registrar ordered the Paymaster General to pay the amount of the grant into court pending trial of the issues relating to ancillary relief for the wife and the children of the family. Objection having been taken by the Ministry of Defence, the proceedings were transferred to the High Court, where Sheldon J discharged the registrar’s order as being in contravention of s 203 of the Army Act 1955. His decision was affirmed by this court.
Section 203 of the 1955 Act is in these terms:
‘(1) Every assignment of or charge on, and every agreement to assign or charge, any pay, military award, grant, pension or allowance, payable to any person in respect of his or any other person’s service in Her Majesty’s military forces shall be void.
Page 931 of [1989] 1 All ER 925
(2) Save as expressly provided by this Act, no order shall be made by any court the effect of which would be to restrain any person from receiving anything which by virtue of this section he is precluded from assigning and to direct payment thereof to another person … ’
It will be observed that sub-s (1) of that section is for all practical purposes to the same effect as s 16(1) of the Supplementary Benefits Act 1976, which does not, however, contain any provision equivalent to sub-s (2) of s 203. Counsel for the Secretary of State told us that similar provisions, in one form or the other, are to be found in other Acts, so that the problem is one which may arise in other contexts also.
It seems that in Walker v Walker Sheldon J, although he did not think that payment into court would be payment ‘to another person’, nevertheless based his decision on s 203(2): see the reference to his views in the judgment of Cumming-Bruce LJ in the Court of Appeal ([1983] 2 All ER 909 at 911, [1983] Fam 68 at 73). However, it is clear from the following passage that Cumming-Bruce LJ based his decision on both subsections of s 203 ([1983] 2 All ER 909 at 913–914, [1983] Fam 68 at 76):
‘Either a cheque payable by the Ministry of Defence to Her Majesty’s Accountant General by way of payment into court of the sum representing the entitlement of the former soldier to his resettlement grant was payable to another person pursuant to the order of the court that the money be paid into court, in which case such order for payment into court would be contrary to the express terms of s 203(2) of the 1955 Act, or alternatively, if that is wrong, the order for payment into court is itself bad, because the only explanation or reason for such an order would be to circumvent the prohibition in s 203(1) which prohibits any charge on the grant in question. I am content to hold that the order for payment into court made by the county court, making the order against Her Majesty’s Paymaster General, was bad, either because the Paymaster General, on paying this cheque to the Accountant General was paying to another person, which is prohibited, or if he was not, then what he was ordered to do was to take the step which, to have any valid or useful effect for the benefit of the petitioner, must involve at some stage a restraint or charge on the grant, which itself is prohibited by sub-ss (1) and (2).’
Griffiths LJ rested his decision on s 203(2), primarily because he thought that an order directing payment into court would be an order directing payment to another person. He continued ([1983] 2 All ER 909 at 914, [1983] Fam 68 at 77):
‘If I were wrong in this view, I would still follow the judge’s line of reasoning. It is manifest that the judge could not, under sub-s (2), make an order that this money should be paid direct to the wife because on any view that would be an order directing payment to another person, which he is not entitled to do. It seems to me that it would be quite wrong to construe the subsection as enabling him to achieve this same end in two steps, namely by first ordering the money to be brought into court and then, by a further order, seeing that it fell into the hands of the wife.’
Griffiths LJ did not therefore rely on s 203(1). Sir Roger Ormrod agreed in terms with both the other judgments and did not add anything of his own on s 203.
On a strict view, by virtue of Sir Roger Ormrod’s agreement with the judgment of Cumming-Bruce LJ, we are thus faced with a decision of this court to the effect that an order for payment into court of an army resettlement grant pending trial of ancillary relief proceedings offends not only sub-s (2), but also sub-s (1), of s 203 of the 1955 Act. Counsel for the Secretary of State has accordingly submitted that the order sought by the bank in this case would likewise offend s 16(1) of the 1976 Act. My reasons for thinking that we ought not to accede to that submission are these. First, the view of Cumming-Bruce LJ was based on his belief that the only explanation or reason for an order for payment into court would be to circumvent the prohibition in s 203(1), and that it was a step which, to have any valid or useful effect for the benefit of the wife, must involve at some stage a restraint or charge on the grant. That no doubt is an entirely realistic view
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of the effect of an order for payment into court made at the suit of a wife in ancillary relief proceedings. But I do not think that the same can be said of the order proposed in the present case. True it is that it will enable the bank to take garnishee proceedings but, unless and until it obtains a garnishee order, the money will still be held to the account of Mr Kazmi and it will still, in theory at any rate, be available to satisfy the claims of all creditors and not just one of them. Secondly, I do not see that we can disregard the proposition, established both in principle and on authority, that a Mareva injunction does not create any assignment of, or charge on, the assets in respect of which it is granted, or any agreement to assign or charge those assets. A subsequent order which ensures that a specific asset will not be disposed of or dealt with in breach of the injunction cannot have any different effect. Thirdly and perhaps most important, if the money were to be paid to Mr Kazmi direct, admittedly there would be no offence to s 16(1). But in that event he would come under an immediate obligation, by virtue of an injunction which is already in force, to preserve it. On the general principles already stated, the court would be bound to come to the aid of its previous order by directing Mr Kazmi to pay the money into the designated bank account. And so the court is only achieving by one order that which it could achieve by two.
For these reasons I conclude that we are not prevented by the decision in Walker v Walker from making the order sought by the bank. I express no opinion as to what the position might have been if the 1976 Act had contained a provision equivalent to s 203(2) of the 1955 Act. That question is better left for decision in a case in which it directly arises.
Counsel for the Secretary of State referred us to s 1(1) of the 1976 Act, which gives an absolute right to benefit where resources are insufficient to meet requirements. There is no obligation on the recipient to apply it for some special purpose, in this case, for example, in discharge of the mortgage interest payments. Counsel also referred us to para 6 of the Supplementary Benefit (Claims and Payments) Regulations 1981, SI 1981/1525, which provides in effect that Mr Kazmi is entitled to be paid his arrears of benefit by means of an instrument of payment, unless the Secretary of State makes other arrangements for payment. I do not think that these provisions have any inhibiting effect on the order sought by the bank. The objection, if there was one, could again be met by ordering the Secretary of State to pay the money to Mr Kazmi direct, with a further order directing Mr Kazmi to pay it into the designated bank account.
Having held that the court has jurisdiction to make the order sought by the bank, I am in no doubt that, as a matter of discretion, the order should be made. Mr Kazmi submitted that the discretion should be exercised by not making the order, but it is obvious that that submission must be rejected. Finally, it must be said that it would be of no avail to Mr Kazmi to seek to withdraw his claim for supplementary benefit, more accurately to forgive the debt which is owed to him by the Crown, because that would in itself constitute the disposal of an asset in breach of the Mareva injunction.
For these reasons I would allow this appeal and make the order sought by the bank.
STUART-SMITH LJ. I agree.
PURCHAS LJ. I also agree.
Appeal allowed. Order in respect of costs in court below to stand no order in respect of costs of appeal.
Solicitors: Stephenson Harwood; Treasury Solicitor.
Dilys Tausz Barrister.
R v Secretary of State for Transport and others, ex parte de Rothschild and another
[1989] 1 All ER 933
Categories: TOWN & COUNTRY PLANNING
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): SLADE, CROOM-JOHNSON AND RALPH GIBSON LJJ
Hearing Date(s): 11, 12 JULY 1988
Compulsory purchase – Compulsory purchase order – Application to quash order – Grounds on which order may be challenged – Acquisition of land for bypass – Alternative routes proposed by objectors – Objectors willing to sell land for alternative routes – Whether Secretary of State entitled to impose route on landowner willing to sell other land which would serve same purpose equally well taking all relevant considerations into account – Test to be applied.
A highway authority made a compulsory purchase order to acquire land owned by the appellants for the construction of a bypass. The appellants objected to the order and an inquiry was held at which they put forward four alternative routes for the bypass on other land which they owned and were prepared to sell to the highway authority. The inspector found that the disadvantages of extra cost and delay positively outweighed the advantages of the appellants’ alternative routes. The Secretary of State confirmed the order, stating in his decision letter that he did not believe that any of the suggested alternatives had sufficient advantages or benefits which would justify its adoption in place of the scheme proposed by the highway authority. The appellants applied for judicial review of the Secretary of State’s decision by way of an order of certiorari quashing it. The judge dismissed the application and the appellants appealed, contending, inter alia, that the onus was on the highway authority to justify the compulsory purchase order and that the Secretary of State had applied a test which was wrong in law, because a compulsory purchase order should only be confirmed if it was decisively in the public interest to do so.
Held – There were no special rules beyond the ordinary rules relating to unreasonableness which fell to be applied by the court when considering a challenge to the confirmation by the Secretary of State of a compulsory purchase order. However, given the draconian nature of such an order, no reasonable Secretary of State would be likely to confirm such an order in the absence of what he perceived to be a sufficient justification for his decision on its merits or to impose such an order on an unwilling landowner if the owner was willing to sell other land which would serve the same purpose equally well taking all relevant considerations, including delay and cost, into account. On a fair reading of the decision letter, however, the Secretary of State was intending to indorse all the inspector’s conclusions including his conclusion that, on the facts, the highway authority had shown unequivocally that the route in the compulsory purchase order was a better route in the public interest than any of the alternative routes proposed by the appellants. Accordingly, there were no grounds for challenging the decision of the Secretary of State as being wrong in law and the appeal would be dismissed (see p 938 j to p 939 a, p 942 a b e to h, p 943 c to f and p 944 c d, post).
Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680 and Ashbridge Investments Ltd v Minister of Housing and Local Government [1965] 3 All ER 371 applied.
Notes
For the right to apply to quash a compulsory purchase order, see 8 Halsbury’s Laws (4th edn) paras 35–37.
Cases referred to in judgments
A-G v De Keyser’s Royal Hotel Ltd [1920] AC 508, [1920] All ER Rep 80, HL.
Page 934 of [1989] 1 All ER 933
Ashbridge Investments Ltd v Minister of Housing and Local Government [1965] 3 All ER 371, [1965] 1 WLR 1320, CA.
Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223, CA.
Brown v Secretary of State for the Environment (1978) 40 P & CR 285.
Chilton v Telford Development Corp [1987] 3 All ER 992, [1987] 1 WLR 872, CA.
Prest v Secretary of State for Wales (1982) 81 LGR 193, CA.
R v Secretary of State for the Environment, ex p Melton BC (1985) 52 P & CR 318.
Appeal
Evelyn de Rothschild and Eranda Herds Ltd appealed against the decision of Mann J hearing the Crown Office list on 12 November 1987 dismissing their application for judicial review by way of an order of certiorari quashing the decision of the Secretary of State for Transport contained in a letter dated 26 November 1986 confirming the Bedfordshire County Council (Leighton Linslade Southern Bypass) Compulsory Purchase (No 2) Order 1985 made by the Bedfordshire County Council as the local highway authority. The facts are set out in the judgment of Slade LJ.
Jeremy M Sullivan QC and Brian Ash for the appellants.
John Laws for the Secretary of State.
Charles George for the council.
12 July 1988. The following judgments were delivered.
SLADE LJ. This is an appeal by Mr Evelyn de Rothschild and Eranda Herds Ltd from a judgment of Mann J given on 12 November 1987 whereby he dismissed an application by the appellants, who were seeking to quash a compulsory purchase order.
The appellants are the owners and occupiers of certain land in Bedfordshire which the Bedfordshire County Council, who are the second respondents to this appeal, have sought to acquire compulsorily for the construction of a southern bypass to the town of Leighton Linslade. For this purpose the council made a compulsory purchase order relating to part of the appellants’ land, namely the Bedfordshire County Council (Leighton Linslade Southern Bypass) Compulsory Purchase (No 2) Order 1985. The order was made by the council in its capacity as highway authority and in exercise of the powers conferred on it by ss 239, 240, 246 and 250 of the Highways Act 1980 and s 2 of the Acquisition of Land Act 1981. The confirming authority in regard to the order was the Secretary of State for Transport, who is the first respondent to this appeal.
While it was not disputed that the order fell within the letter of the council’s statutory powers, the appellants objected to it on its merits. Accordingly, pursuant to s 13(2) of the 1981 Act the Secretary of State, before confirming the order, caused a public local inquiry to be held before an inspector appointed for the purpose. Section 13(2) reads as follows:
‘If any objection duly made as aforesaid is not withdrawn, the confirming authority shall, before confirming the order, either cause a public local inquiry to be held or afford to any person by whom any objection has been duly made as aforesaid and not withdrawn an opportunity of appearing before and being heard by a person appointed by the confirming authority for the purpose, and, after considering the objection and the report of the person who held the inquiry or the person appointed as aforesaid, may confirm the order either with or without modifications.’
The subsection by its terms appears to confer on the Secretary of State a very wide discretion as to whether or not to confirm a compulsory purchase order, and we have heard a good deal of argument on this appeal concerning the proper principles to be applied by him in exercising this function. It is convenient to deal with this aspect of the case at this point.
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It has been common ground that the exercise of this power of the Secretary of State may be challenged, at least on any of the grounds set out by Lord Denning MR in his judgment in Ashbridge Investments Ltd v Minister of Housing and Local Government [1965] 3 All ER 371 at 374, [1965] 1 WLR 1320 at 1326, where he said:
‘The court can only interfere on the ground that the Minister has gone outside the powers of the Act or that any requirement of the Act has not been complied with. Under this paragraph, it seems to me that the court can interfere with the Minister’s decision if he has acted on no evidence; or if he has come to a conclusion to which, on the evidence, he could not reasonably come; or if he has given a wrong interpretation to the words of the statute; or if he has taken into consideration matters which he ought not to have taken into account, or vice versa; or has otherwise gone wrong in law. It is identical with the position when the court has power to interfere with the decision of a lower tribunal which has erred in point of law.’
These, as Mann J said in his judgment in the present case, are the conventional grounds of challenge and, in particular, the grounds which derive from the decision of this court in Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223. I will for brevity refer to these grounds as ‘the Wednesbury/Ashbridge grounds’. However, it has to be recognised that the compulsory purchase of land involves a serious invasion of the private proprietary rights of citizens. As Purchas LJ described them in Chilton v Telford Development Corp [1987] 3 All ER 992 at 997, [1987] 1 WLR 872 at 878, the powers of compulsory purchase of an acquiring authority are of a draconian nature. The power to dispossess a citizen of his land against his will is clearly not one to be exercised lightly and without good and sufficient cause.
On behalf of the appellants counsel have submitted that there are to be derived from the authorities what they call ‘special rules’, beyond the Wednesbury/Ashbridge grounds which are applicable whenever the court is considering a challenge to a compulsory purchase order. They summarise these so-called special rules in five propositions as follows (I am quoting from their skeleton argument):
‘(i) The onus is upon the acquiring authority to justify a compulsory purchase order and upon the Secretary of State to justify his decision to confirm such an order. (ii) A compulsory purchase order should only be confirmed if it is decisively in the public interest to do so, or if there is a “compelling case” in the public interest. (iii) Any reasonable doubt as to the justification for a compulsory purchase order is to be resolved in favour of the owner of the affected land. (iv) If alternative land is available that is equally suitable for the purposes of the acquiring authority but which can be acquired without the use of compulsory purchase powers, the use of such powers cannot be justified. (v) At the very least it is for the acquiring authority to demonstrate that compulsory acquisition is necessary, and not for the landowner to demonstrate the converse.’
By way of support for these five propositions, counsel referred to general principles of our constitutional law, including the Magna Carta and art 1 of the First Protocol to the European Convention for the Protection of Human Rights and Fundamental Freedoms (Paris, 20 March 1952; TS 46(1954); Cmd 9221). More specifically, he relied on three reported cases.
The first was the decision of Forbes J in Brown v Secretary of State for the Environment (1978) 40 P & CR 285. In that case a local authority, with a view to providing a site for gipsies in pursuance of their duty under s 6 of the Caravan Sites Act 1968, made a compulsory purchase order in respect of land owned by the applicants. The applicants objected to the order and an inquiry was held. The inspector found that there were other sites available to the local authority, including one owned by them. He went so far as to say that the applicants’ site was probably the worst. Nevertheless, the Secretary of State
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confirmed the order. In his decision letter he expressly stated that he was solely concerned with the merits or otherwise of the order land and did not think it material to his decision whether or not the local authority would have chosen the applicants’ land if they had considered all the possible locations at the same time. As Forbes J pointed out, the Secretary of State disagreed with the inspector’s conclusion—
‘not because he disagrees with the inspector on a value judgment about the suitability of these sites but because he has directed himself that the suitability of these sites is an immaterial matter for consideration in forming his decision.’
(See 40 P & CR 285 at 291.)
On an application for judicial review, Forbes J considered that the Secretary of State had misdirected himself. He said the letter set out no adequate reasons for the disagreement with the inspector’s conclusions. In a passage relied on by counsel for the appellants he went on to say (at 291):
‘It must also, it seems to me, be a matter of supreme importance, in considering whether or not to confirm a compulsory purchase order, that not only is there another suitable site available but that that very site happens to be in the ownership of the authority that is seeking to exercise compulsory purchase powers. It seems to me that there is a very long and respectable tradition for the view that an authority that seeks to dispossess a citizen of his land must do so by showing that it is necessary, in order to exercise the powers for the purposes of the Act under which the compulsory purchase order is made, that the acquiring authority should have authorisation to acquire the land in question. If, in fact, the acquiring authority is itself in possession of other suitable land—other land that is wholly suitable for that purpose—then it seems to me that no reasonable Secretary of State faced with that fact could come to the conclusion that it was necessary for the authority to acquire other land compulsorily for precisely the same purpose’.
Though in this passage Forbes J used words which could be read as indicating that an onus of proof fell on the authority to show that acquisition was ‘necessary’, I do not read his judgment as indicating that he regarded any special principle other than ordinary Wednesbury/Ashbridge principles as applicable, or that he founded his ratio decidendi on any question of onus of proof. In what seems to me to be the ratio of his judgment he summarised the grounds for quashing the decision as being (at 292):
‘… first, that the Secretary of State has wrongly directed himself that the suitability of alternative sites is a matter that is immaterial to his decision, and, secondly, that he has not anywhere considered, so far as I can see, the fact that this acquiring authority seeking compulsory purchase powers had already in its hand land of its own found by the inspector to be more suitable for the purpose of the Act than the applicants’ land. In those circumstance, it seems to me that the Secretary of State ignored that factor, which was a material consideration … ’
The Brown decision, therefore, in my judgment illustrates a conventional application of Wednesbury/Ashbridge principles, namely on the grounds that the Secretary of State had failed to take into consideration a matter which he ought to have taken into account.
The second of the authorities on which counsel for the appellants relied in support of his contention that special rules apply where the court is considering a challenge to a compulsory purchase order was the decision of this court in Prest v Secretary of State for Wales (1982) 81 LGR 193. In that case a water authority needed to make a new sewage works on land owned by the applicants. A compulsory purchase order was made in respect of a site forming part of that land. At a public inquiry the applicants offered to convey to the authority either of two alternative sites at ‘existing use value’ as agricultural land. The inspector recommended that the order be confirmed and the Secretary of State in due course confirmed it. However, the Secretary of State, in writing his decision letter,
Page 937 of [1989] 1 All ER 933
failed to take into account the cost of acquiring the compulsory purchase order site as against the cost of acquiring the alternative sites offered by the applicants. When the case reached this court, fresh evidence was available showing that it was highly probable that the owners of the land would obtain planning permission for development of the site proposed by the water authority for industrial purposes. This court held that the compulsory purchase order should be set aside. In the course of their judgments, the members of the court made some broad observations which have been strongly relied on by counsel for the appellants in the course of their argument. Lord Denning MR said (81 LGR 193 at 198):
‘To what extent is the Secretary of State entitled to use compulsory powers to acquire the land of a private individual? It is clear that no Minister or public authority can acquire any land compulsorily except that power to do so be given by Parliament: and Parliament only grants it, or should only grant it, when it is necessary in the public interest. In any case, therefore, where the scales are evenly balanced—for or against compulsory acquisition—the decision—by whomsoever it is made—should come down against compulsory acquisition. I regard it as a principle of our constitutional law that no citizen is to be deprived of his land by any public authority against his will, unless it is expressly authorised by Parliament and the public interest decisively so demands: and then only on the condition that proper compensation is paid: see Attorney-General v De Keyser’s Royal Hotel Ltd ([1920] AC 508, [1920] All ER Rep 80). If there is any reasonable doubt on the matter, the balance must be resolved in favour of the citizen.’
Then Lord Denning MR cited with approval the first of the two passages from the judgment of Forbes J in Brown’s case I have already quoted. However, later in his judgment, Lord Denning MR, in referring to the power of the court to intervene in cases of this nature, specifically referred to the passage from his own judgment in the Ashbridge case which I have already quoted. Furthermore, he ultimately expressed the two grounds of his decision in terms which seem to me to echo the conventional Wednesbury/Ashbridge grounds. He said (81 LGR 193 at 202):
‘In view of the fresh evidence it would be quite unreasonable for the acquiring authority to proceed with the compulsory purchase order. Yet on 18 May 1981 they gave notice to treat and have only held their hand pending these proceedings. In the second place, even if the fresh evidence be disregarded, when the Secretary of State wrote the decision letter confirming the compulsory purchase order, he failed to take into account the cost of acquiring the CPO site as against the cost of acquiring the alternative site offered by Sir Brandon. This was a most relevant consideration.’
In other words, as I read it, Lord Denning MR’s judgment was ultimately founded on the grounds of unreasonableness and of failure to take into account a material consideration.
Watkins LJ, in the course of his judgment in the same case, made some general observations, again strongly relied on by counsel for the appellants. He said (at 211):
‘In the sphere of compulsory land acquisition, the onus of showing that a compulsory purchase order has been properly confirmed rests squarely on the acquiring authority and, if he seeks to support his own decision, on the Secretary of State. The taking of a person’s land against his will is a serious invasion of his proprietary rights. The use of statutory authority for the destruction of those rights requires to be most carefully scrutinised. The courts must be vigilant to see to it that that authority is not abused. It must not be used unless it is clear that the Secretary of State has allowed those rights to be violated by a decision based upon the right legal principles, adequate evidence and proper consideration of the factor which sways his mind into confirmation of the order sought.’
Page 938 of [1989] 1 All ER 933
As I read his judgment, however, its ratio is to be found in the immediately succeeding paragraph where he said (at 212):
‘I have come to the conclusion that his decision should not be upheld. A vital consideration was not inquired into, in my view. It was, therefore, left out of account in the exercise of the Secretary of State’s discretion. The hope value of parts of the Miskin lands should not have been disregarded as it was, especially seeing that there was evidence of its possible existence. An inquiry into it would not, it seems to me, have delayed the decision by much time, if any. To fail to make that inquiry was a glaring omission going to a fundamental consideration.’
In other words, the Secretary of State had failed to take into account a material consideration.
Fox LJ’s judgment contains a passage, also relied on by the appellants in this case, which I think is to the same effect. He said (at 216):
‘I can only conclude that, in a case where the Secretary of State decided to confirm the compulsory purchase order primarily on considerations of cost, and where shortly before his decision he was asked to take account of land acquisition costs, he confirmed the order without material as to what the latter costs were. Accordingly, I do not think that he can have given the proper degree of consideration to the overall question of cost. The onus of establishing that a compulsory purchase order has been properly made must be on the acquiring authority. The question of cost was a material issue.’
Having considered the judgments of this court in Prest v Secretary of State for Wales and of Forbes J in Brown v Secretary of State for the Environment, I conclude that both of them were merely examples of challenges to the Secretary of State’s decision on conventional Wednesbury/Ashbridge grounds. Though all the judgments in Prest’s case contained observations regarding onus, I, for my part, read them as doing no more than giving a warning that, in cases where a compulsory purchase order is under challenge, the draconian nature of the order will itself render it more vulnerable to successful challenge on Wednesbury/Ashbridge grounds unless sufficient reasons are adduced affirmatively to justify it on its merits.
In R v Secretary of State for the Environment, ex p Melton BC (1985) 52 P & CR 318 Forbes J summarised what he understood to be the effect of the Prest decision in a passage on which counsel for the appellants also relied. He said (at 326):
‘Throughout that case it is quite plain that the Court of Appeal was deciding that the duty of the Secretary of State to look, if necessary, for other sources of information before coming to his conclusion, arose when he was minded to confirm a compulsory purchase order. The reason for that was, quite simply, that he must satisfy himself that the compulsory purchase order is necessary before he can confirm the order so that a private citizen’s land is compulsorily acquired.’
I have already stated my own understanding of the Prest decision. I think that the word ‘necessary’ itself carried with it an element of ambiguity and uncertainty and I would prefer to avoid it in this context. It does not appear in s 13(2) of the 1981 Act and counsel for the appellants expressly disclaimed any submission that it should be read into the subsection by a process of implication.
In answer to counsel’s submissions as to ‘special rules’, I summarise my conclusions thus. First, I do not accept that any special rules beyond the ordinary Wednesbury/Ashbridge rules fall to be applied when the court is considering a challenge to the Secretary of State’s confirmation of a compulsory purchase order. Second, however, the Secretary of State, as counsel on his behalf accepted and submitted, must be satisfied that the compulsory purchase order is justified on its merits before he can properly confirm it.
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He must not exercise his powers capriciously. Given the obvious importance and value to land owners of their property rights, the abrogation of those rights in the exercise of his discretionary power to confirm a compulsory purchase order would, in the absence of what he perceived to be a sufficient justification on the merits, be a course which surely no reasonable Secretary of State would take.
I think that this approach to the matter reconciles the judgments in Prest v Secretary of State for Wales with the ordinary principles of our law applicable to claims for judicial review. Furthermore, it has the merit of avoiding any reference to onus of proof, which is an expression more appropriate, as counsel for the Secretary of State pointed out, to a lis inter partes. As Lord Denning MR observed in Prest itself, the Secretary of State’s decision certainly is not a lis inter partes. As he said (81 LGR 193 at 200):
‘It is a public inquiry—at which the acquiring authority and the objectors are present and put forward their cases—but there is an unseen party who is vitally interested and is not represented. It is the public at large. It is the duty of the Secretary of State to have regard to the public interest.’
In making his decision, there are a multitude of different factors which the Secretary of State has to take into account. To mention only a few: questions of landscape and other amenity, feasibility, cost and delay. To talk of questions of onus of proof when so many competing factors have to be taken into the balance seems to me not only inappropriate but a somewhat difficult concept.
While, in response to the invitation of all counsel, I have thought it right to state fully my understanding of the principles which fall to be applied by the court in this class of case, I believe that ultimately, on the particular facts of this appeal, the question which we will have to decide will be quite a short one, depending on the construction of one sentence in the inspector’s letter of decision. I will explain why later in this judgment. Meantime, I revert to the facts.
The inquiry was held in April and June 1986 before an inspector. At the inquiry, as the inspector recorded in para 177 of his report, there was no objection in principle to the need for the southern bypass of Leighton Linslade and all the evidence supported the need both to relieve traffic in Leighton Linslade and neighbouring villages and to improve access to the industrial area of the town. The appellants, however, objected to the proposed route for the bypass and the order affecting their own land. They put forward four alternative schemes which they said were better on engineering, agricultural and environmental grounds. All four were on land which they owned and offered to sell to the council at a valuation. By inference they accepted that some of their land would be needed for the making of a new bypass. The question was what land and what scheme were the appropriate ones.
The four schemes are to be found summarised in para 70 of the inspector’s report where he referred to them as options 2B, 3B, 4B and 5B. In para 69 of his report he had referred to a submission made on behalf of the appellants that the onus of proof was on the acquiring authority to show there were compelling reasons for compulsory purchase of land which belonged to them other than that which they had offered to sell. In para 90 the inspector recorded the acceptance by the council that it was their responsibility to show that the order route was superior to other proposals on the balance of factors involved.
The inspector gave a very full and very careful report. Having summarised the parties’ respective submissions, in paras 120 to 175 he set out his findings of fact. Then in the remaining paragraphs he set out his conclusions. In paras 185 to 197 he dealt very fully with the appellants’ four alternative schemes. In para 185 he said that the route across the land owned by the appellants had been considered in considerable depth, since the objectors’ alternative proposals were presented in some detail with the evidence of a number of expert witnesses. He recorded that option 2B was stated to be the preferred option, but in presentation and evidence option 3B was given more prominence. Then,
Page 940 of [1989] 1 All ER 933
after further observations on these alternative schemes, he stated his ultimate conclusions as to options 2B and 4B in para 191, where he stated his firm conclusion that they should be rejected on grounds of extra cost, the unsuitability of a proposed grade separated junction as a permanent junction and doubts about its design suitability and because of landscape disadvantages. Similarly, in para 193 he rejected option 5B on the ground of cost; and in paras 194–195 he rejected option 3B on the grounds both of extra cost and of substantial delay, pointing out that the council’s scheme was one which virtually had universal approval and support. He clearly regarded delay as being a very significant factor. In para 196 he summarised his conclusions in regard to the alternative proposals thus:
‘I am of the opinion that there are no factors, including the offer to sell alternative land at Ascott Farm, which individually or together outweigh the disadvantages of extra cost and exceptional delay which would result from the adoption of the objectors’ alternative route and I believe that the Bedfordshire County Council has shown unequivocally that the Order route is the best in the public interest under the circumstances.’
Counsel for the appellants, as I understood him, submitted, inter alia, that this para 196, when properly read, did not amount to a finding by the inspector that the disadvantages of extra cost and delay positively outweighed the advantages of the appellants’ alternatives. Reading para 196 in conjunction with the earlier paragraphs to which I have referred, I have no hesitation in rejecting this particular submission. I do not think it indicates any misdirection on his part. However, as counsel for the appellants correctly pointed out, it is the Secretary of State’s decision as recorded in his letter and not that of the inspector which is under challenge on this appeal.
The inspector in due course submitted his report to the Secretary of State, recommending that the compulsory purchase order, together with certain other orders of the same nature, should be confirmed. By a letter of 26 November 1986 the Secretary of State gave his decision to confirm the order. In para 14 he summarised the effect of the inspector’s report as follows:
‘Having considered the four alternative options of [the appellants’] the Inspector believes that the Council’s route and the alternatives are comparable in environmental terms and marginally in the objectors’ favour if there were a railway underbridge. Considering the alignment between the A418 and the railway line on its own, the Inspector says the agricultural advantage probably lies with the objectors’ route since it uses pasture rather than arable land, but in engineering terms, there is a little more certainty that the Council’s alignment is more soundly based. The Inspector does not believe there is much to choose between the locations for the bypass junction on the A418 but says that a grade separated junction would take more land, cost extra, does not appear to be justified in traffic terms and the proposed design is open to question. For these reasons he does not believe a grade separated junction should be pursued, and says the junction with the A418 should be a roundabout. The Inspector considers, given that the access to the northern part of Mentmore Road is not required, the only advantage of an underbridge for the railway crossing is from a landscaping point of view and while he accepts the proposed embankment and bridge would be more visible he does not consider that, with the proposed landscaping, they would detract unacceptably from the existing landscape. The Inspector believes the costs and potential delay outweigh the environmental advantages of an underbridge compared with the proposed overbridge and believes it would be preferable to maintain the published vertical alignment of the bypass between the canal and the A4146. On the assumption that the bypass junction with the A418 is a roundabout, and allowing for differences in estimates, the Inspector notes that the railway underbridge and overbridge on the objectors’ alignment
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would cost extra, in terms of money and delay. The Inspector is of the opinion that there are no factors which individually or together outweigh the disadvantages of extra cost and delay which would result from the adoption of the objectors’ alternative route. He believes the County Council has shown unequivocally that the Order route is the best in the public interest under the circumstances.’
Counsel for the appellants accepted that this was a full and fair summary of the reasons given by the inspector for his recommendation in regard to the route of the proposed bypass. It is, I think, quite clear that the Secretary of State had fully understood and digested the effect of what the inspector had found and recommended in this context.
In para 16 the Secretary of State said:
‘The Inspector notes that there was no objection in principle to the need for a bypass and all the evidence supports that need. He says the Council’s scheme has been carefully worked out and in paying due regard to environmental and agricultural circumstances it achieves a reasonable balance between all the factors involved. The Inspector concludes that the objections to the Orders cannot be supported and recommends that the Orders and bridge scheme should be confirmed, with minor amendments to the Side Roads Order.’
There then followed in the Secretary of State’s letter a section headed ‘SECRETARY OF STATE’S DECISION’, of which the first paragraph, para 17, read as follows:
‘The Secretary of State has carefully considered the report and recommendations of the Inspector together with all matters raised by the objectors both at the Public Inquiries and in writing. He notes that the need for the bypass to relieve traffic in Leighton Linslade and neighbouring villages and to improve access to the industrial area of the town is not in dispute, and that there is a large measure of support from the public both for the bypass and for work to start on it as soon as possible. From the evidence the Secretary of State does not believe that any of the suggested alternatives has sufficient advantages or benefits which would justify its adoption in place of the scheme as proposed by the County Council.’
It is the effect of the last sentence of this paragraph, which I will call ‘the crucial sentence’, on which ultimately the whole of this appeal turns.
The only other paragraph of the Secretary of State’s letter to which I need refer is para 20, which began with the words: ‘Accordingly, the Secretary of State agrees with the Inspector’s conclusions and recommendations … ' He went on to express his decision to confirm the three compulsory purchase orders under consideration.
A notice of motion was issued by the appellants on 29 December 1986 challenging the Secretary of State’s decision. In its original form the notice was, or may have been, defective for reasons explained at the end of the judge’s judgment. However, the judge permitted an amendment of it and, by its amended form, the notice of motion sought an order that the relevant orders and scheme made by the council be quashed on the grounds that the decision of the Secretary of State contained in the letter of 26 November confirming the compulsory purchase order was not ‘within the powers of the said Acts’ in that:
‘In concluding in paragraph 17 of his said letter that: “from the evidence the Secretary of State does not believe that any of the suggested alternatives has sufficient advantages or benefits which would justify its adoption in place of the scheme as proposed by the County Council”, the First Respondent applied a test which is wrong in law. The question was not whether the Applicants’ alternative alignment for the proposed road had advantages or benefits when compared with the scheme proposed by the Second Respondent but whether the advantages or benefits of the latter so outweighed those of the former that there was a “compelling” or “decisive”
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case for compulsory acquisition of land in the public interest, any reasonable doubt on the matter being resolved in favour of the Applicants.’
In a variety of attractive guises this is substantially the point which counsel for the appellants have urged on us in support of this appeal. For reasons which I have already explained, I do not think that any special rules fall to be applied by us beyond the Wednesbury/Ashbridge rules when the court is considering a challenge to the confirmation by the Secretary of State of a compulsory purchase order. However, I have also already accepted that, given the draconian nature of such an order, no reasonable Secretary of State would be likely to confirm such an order in the absence of what he perceived to be a sufficient justification of his decision on its merits.
Now, on the facts of the present case, counsel for the appellants have accepted, as was accepted on behalf of the appellants at the inquiry, that a southern bypass to the town of Leighton Linslade is required in the public interest. They have further accepted that, if such a bypass is to be constructed at all, part of it must inevitably pass over some part of the appellants’ land. If, therefore, the Secretary of State had explicitly said that he considered that the route proposed by the council was better than those proposed by the appellants under options 2B, 3B, 4B or 5B, I do not believe that this appeal could have got off the ground, or indeed that it would have been brought. However, in the crucial sentence in para 17 of his decision letter quoted above, the Secretary of State did not say this in terms. He merely said that he did not believe that any of the suggested alternatives had sufficient advantages or benefits which would justify its adoption in place of the schemes proposed by the council.
I would accept that, if the ultimate conclusion of the Secretary of State as expressed in his letter, when properly read as a whole, was merely that, after taking all the circumstances into account, the appellants had not shown that any of their schemes were better than the council’s scheme, his decision would be impeachable on Wednesbury grounds. For it seems to me that no reasonable Secretary of State would confirm a compulsory purchase order, imposing a purchase on an unwilling landowner, if that same landowner was willing to sell to the acquiring authority land which would be seen to serve equally well for the same purpose after all relevant considerations, including, of course, cost and delay, have been taken into account. This is essentially the way in which counsel for the appellants has invited us to read the crucial sentence in the Secretary of State’s letter. This is why earlier in this judgment I have described the issue on this appeal as ultimately depending on a short question of construction.
However, I, for my part, cannot accept counsel’s construction of this sentence. If the crucial sentence in para 17 were wrenched out of its context and read in isolation, I suppose it might be understood as indicating the Secretary of State’s view that the onus was on the appellants to show that their alternative schemes, or any of them, had positive advantages over the routes proposed in the order and that the appellants had failed to discharge this onus. However, in my judgment, the crucial sentence cannot properly be read in isolation and out of its context; and, when read in its context, it does not bear this meaning.
In para 17 of his letter the Secretary of State was clearly echoing and indorsing in abbreviated form the report and recommendations of the inspector which he had already fully and fairly summarised in para 14. In particular there can be no doubt that in the crucial sentence the Secretary of State was echoing and indorsing, at the very least, the inspector’s conclusion that ‘there are no factors which individually or together outweigh the disadvantages of extra cost and delay which would result from the adoption of the objectors’ alternative route’. At the very least, therefore, the Secretary of State was saying that the suggested alternatives were no better than the council’s route. He quite clearly had in mind the factors of delay and expense which had weighed so heavily with the inspector. However, the submission is that the Secretary of State by his letter was not going so far as to indorse or accept the inspector’s conclusion that the council had affirmatively shown that the order route was the best route, simply because, in the crucial
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sentence in para 17, he did not expressly echo the words of para 196 of the inspector’s report stating what the council had ‘unequivocally’ shown.
In my judgment, it could not be right to analyse and pick to pieces each sentence of the Secretary of State’s letter as if it were a subsection in a taxing statute. To accept the appellants’ submission would, in my judgment, involve an altogether too analytical, indeed I would say perverse, construction of the language by which the Secretary of State expressed himself, when his letter is read as a whole. In para 14 he fully and fairly summarised the inspector’s conclusions, including his crucial final conclusion that the council had shown ‘unequivocally’ that the order route was the best in the public interest. In the last sentence of para 16, which led in to para 17, he referred to the inspector’s conclusion that the objections to the order could not be supported. On a fair reading of the letter as a whole, it is in my opinion clear that the Secretary of State was intending to indorse the whole of the inspector’s conclusions. And, indeed, in para 20 he stated without qualification that he agreed with the inspector’s conclusions.
Counsel for the appellants submitted that para 20 of the decision letter was of no assistance to the Secretary of State’s argument, essentially on the grounds that the inspector himself had proceeded under an error of law as regards the burden of proof, similar to that which he had attributed to the Secretary of State. I have already stated in my view that the inspector did not misdirect himself in any respect.
Some reliance was placed on the phrase used by Lord Denning MR in Prest v Secretary of State for Wales (1982) 81 LGR 193 at 198 that no citizen is to be deprived of his land by any public authority against his will unless the public interest ‘decisively so demands’. As I read the inspector’s report and the Secretary of State’s decision, both of them considered that the public interest did decisively so demand. The bypass was needed. Some land of the appellants had to be acquired for the purpose. They both took the view that the council had shown unequivocally that the order route was better in the public interest than any of the alternative routes over other land of the appellants which they had proposed.
For the reasons which I have stated, the alleged error of law on the part of the Secretary of State has not, in my judgment, been substantiated and I agree with the judge that there are no grounds for challenging his decision. I would accordingly dismiss this appeal.
CROOM-JOHNSON LJ. I agree. I have prepared a judgment which I was intending to give, but the matters in it have so comprehensively been covered by Slade LJ in his judgment that there is no purpose in my going over the same ground again.
I would like to add only one very short matter and it is this. In the suggestion that in what is a special rule in compulsory purchase order cases there has to be some form of discharge of an onus of proof, I entirely agree that the form of the inquiry and the form of the decision which has to be taken by the Secretary of State is hardly appropriate for the discharge of a burden of proof in such a form. At the end what the minister has to do is to investigate all the facts, the arguments and so forth and ultimately perform a balancing exercise. At the end he has to balance things against each other which are not at all compatible; they are not like each other and cannot be the subject of direct comparison.
In various cases, though not necessarily in this one, he may have to balance, for example, the effect on traffic flow, the requirement of the road in particular form and in a particular place, the question whether it is arable or pasture land which is being taken in the course of the compulsory purchase order, the effect on amenity and the environment and, of course, very importantly, the question of cost and the question of the time factor which has to be regarded in the carrying out of the work. In the end he comes out with what must be a value judgment that to confirm the order is justified in the public interest, and in my view it is not right to turn this value judgment into a legal formula.
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The law was very succinctly stated by Watkins LJ in Prest v Secretary of State for Wales (1982) 81 LGR 193 at 211:
‘The use of statutory authority for the destruction of those rights requires to be most carefully scrutinised. The courts must be vigilant to see to it that that authority is not abused. It must not be used unless it is clear that the Secretary of State has allowed those rights to be violated by a decision based upon the right legal principles, adequate evidence and proper consideration of the factor which sways his mind into confirmation of the order sought.’
It is true that that passage follows immediately on another passage in which Watkins LJ dealt with the seriousness of taking a man’s land against his will; but that was the context in which the later passage came, and in my view there is no such special rule as has been urged on us by counsel for the appellants in compulsory purchase order cases.
I would like to add I entirely agree also with the construction which has been put on the Secretary of State’s letter by Slade LJ and I would agree that the appeal should be dismissed.
RALPH GIBSON LJ. I agree that this appeal should be dismissed for the reasons given by Slade LJ in his judgment.
Appeal dismissed. Leave to appeal to the House of Lords refused.
Solicitors: Horwood & James, Aylesbury; Treasury Solicitor; R C Wilkinson, Bedford.
Celia Fox Barrister.
Gatewhite Ltd and another v Iberia Lineas Aereas de España SA
[1989] 1 All ER 944
Categories: AVIATION
Court: QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
Lord(s): GATEHOUSE J
Hearing Date(s): 18, 24 MARCH, 3 MAY, 29 JULY 1988
Carriage by air – Carriage of goods – International carriage – Right of action – Goods damaged in transit – Owner of goods not named as consignor or consignee in air waybill – Owner of goods named as party to be notified – Whether right of action dependent on plaintiff being a party to contract of carriage as consignor or consignee – Whether owner of goods entitled to sue for damages – Carriage by Air Act 1961, Sch 1, arts 24(1), 30(3).
The purpose of arts 24(1)a and 30(3)b of Sch 1 to the Carriage by Air Act 1961, which confer on the consignor and consignee named in the air waybill evidencing the contract of carriage a right of action against an international air carrier, is not to deprive the owner of goods damaged in transit of his common law right to sue the carrier but to enable a party to the contract with no proprietary interest in the goods, such as the owner’s customs clearing agent or a forwarding agent, to maintain an action against the carrier. Accordingly, an owner who was neither the consignor nor the consignee of goods which were damaged in transit has a right of action against the carrier, particularly where his name appears on the air waybill as the party to be notified, which should put the carrier
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on notice that the owner is the party with an interest in the goods as opposed to one of the parties to the contract of carriage (see p 950 d to g, post).
Parke Davis & Co v British Overseas Airways Corp (1958) 170 NYS 2d 385 and Tasman Pulp and Paper Co Ltd v Brambles J B O’Loghlen Ltd [1981] 2 NZLR 225 applied.
Manhattan Novelty Corp v Seaboard and Western Airlines Inc (1957) 5 Avi Cas 17229, Holzer Watch Co Inc v Seaboard and Western Airlines Inc (1957) 4 Avi Cas 17854 and Pilgrim Apparel Inc v National Union Fire Insurance Co (1959) 6 Avi Cas 17733 not followed.
Notes
For actions against an international air carrier for loss of or damage to goods, see 2 Halsbury’s Laws (4th edn) paras 1379, 1383.
For the Carriage by Air Act 1961, Sch 1, see 4 Halsbury’s Statutes (4th edn) 28.
As from a day to be appointed arts 24 and 30 of Sch 1 to the 1961 Act are to be replaced by arts 24 and 30 of Sch 1 to the Carriage by Air and Road Act 1979.
Cases referred to in judgment
Bart v British West Indian Airways Ltd [1967] 1 Lloyd’s Rep 239, Guyana CA.
Cordial Manufacturing Co Ltd v Hong Kong—America Air Transport [1976] HKLR 555, Hong Kong HC.
Corocraft Ltd v Pan American Airways Inc [1969] 1 All ER 82, [1969] 1 QB 616, [1968] 3 WLR 1273, CA.
El Al Israel Airlines Ltd v Oram Electrical Industries Ltd (1974) IATA ACLR No 468, Tel Aviv Ct.
Foscolo Mango & Co Ltd v Stag Line [1932] AC 328, [1931] All ER Rep 666, HL.
Holzer Watch Co Inc v Seaboard and Western Airlines Inc (1957) 5 Avi Cas 17854, NY City Ct.
Manhattan Novelty Corp v Seaboard and Western Airlines Inc (1957) 5 Avi Cas 17229, NY SC.
Pan American World Airways Inc v SA Fire and Accident Insurance Co Ltd 1965 (3) SA 150, SA SC (App Div).
Parke Davis & Co v British Overseas Airways Corp (1958) 170 NYS 2d 385, NY City Ct.
Pilgrim Apparel Inc v National Union Fire Insurance Co (1959) 6 Avi Cas 17733, NY City Ct.
Scruttons v Midland Silicones Ltd [1962] 1 All ER 1, [1961] AC 446, [1962] 2 WLR 186, HL.
Tasman Pulp and Paper Co Ltd v Brambles J B O’Loghlen Ltd [1981] 2 NZLR 225, NZ HC.
Action
The first plaintiff, Gatewhite Ltd, issued a writ on 14 December 1987 against the defendant, Iberia Lineas Aereas de España SA, who had contracted to transport by air a consignment of chrysanthemums owned by the plaintiff from Las Palmas, Gran Canaria to London via Madrid on 27 and 28 February 1987, claiming, inter alia, damages of £17,000 for the total loss of the flowers which had perished as a result of an unaccountable delay in transportation, that amount being the sound arrived market value of the flowers in London. The second plaintiff, Cultivos de Primor SA, the grower of the flowers, took no part in the action. The action was heard in chambers but judgment was given by Gatehouse J in open court. The facts are set out in the judgment.
Geoffrey Kinley for the plaintiff.
Simon Browne-Wilkinson for the defendant.
Cur adv vult
29 July 1988. The following judgment was delivered.
GATEHOUSE J. At all material times the first plaintiff, who is an English wholesaler, was the owner of a consignment of chrysanthemums which was carried by the defendant from Las Palmas airport via Madrid to Heathrow.
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The second plaintiff, who has taken no part in this summons, was the grower of the flowers in Grand Canary. It is not in dispute that ownership passed from the second plaintiff to the first plaintiff on delivery of the consignment to the defendant and that in the course of discharging a running account between the two plaintiffs, who have been doing regular business with each other, the second plaintiff has been paid for the goods.
It is also not in dispute that the goods arrived at Heathrow some four or five days late and in a damaged condition; they were in fact valueless and were destroyed. There has been no suggestion that the defendant was not responsible for the damage. The sole issue before me is whether the first plaintiff is entitled to sue.
To someone brought up in the principles of English common law, the argument that the owner of goods damaged by a carrier is not entitled to sue the latter in respect of the damage is, to say the least, somewhat startling. But the defendant says that this being a case of international carriage by air, it is governed by the Carriage by Air Act 1961 and the Warsaw Convention as amended at The Hague 1955 which is contained in Sch 1 to the Act, and that under the convention, only the consignor or the consignee has a right of action against the carrier. The first plaintiff was not the consignor nor was it the consignee in the air waybill issued by the defendant; accordingly it has no claim.
The writ in the action was issued on 14 December 1987 and the points of claim served the following day. This matter came before the court on the plaintiffs’ summons for RSC Ord 14 judgment. It was clear from an early stage that the defendant was raising this substantial defence in law entitling it to unconditional leave to defend but, as both counsel were fully prepared to deal with the issue, it was sensibly agreed that the hearing of the summons should be treated as the trial of the action. I have accordingly heard full argument and, at the request of both counsel, I agreed to deliver judgment in open court. Although the issue has arisen on a number of occasions in other jurisdictions where the convention applies, this is the first occasion it has arisen for decision in our courts.
To deal briefly with the undisputed facts, the goods were delivered to the defendant at Las Palmas airport on 27 February 1987 and an air waybill of that date was issued by it. The shipper was the second plaintiff. The goods were described as chrysanthemums, Canary Island produce, ‘per’ which presumably indicates perishable. The carriage was to be by successive Iberian Airways flights, to Madrid on 27 February and on to London on 28 February. The consignees were named as Perishables Transport Co Ltd, who are the first plaintiff’s customs clearing agents. The first plaintiff’s name appeared as the ‘notify party’. Although the insured value of the goods was stated as 1·5m pesetas (the price at which the shippers had sold to the first plaintiff) no value was inserted in the box entitled ‘Declared value for Carriage’ and the claim was based on the sound arrived market value on the relevant date, namely £17,000. The goods were unaccountably delayed, arriving in two lots on 2 and 3 March and on survey were found to have been damaged or to have deteriorated through heating in the course of transit to such an extent as to be valueless.
Before reviewing the various decisions in other jurisdictions, I turn to the 1961 Act and the convention itself. Section 1(1) of the 1961 Act, on which counsel for the first plaintiff naturally placed much emphasis, provides that—
‘Subject to this section, the provisions of the Convention known as “The Warsaw Convention as amended at The Hague, 1955” … shall, so far as they relate to the rights and liabilities of carriers, carriers’ servants and agents, passengers, consignors, consignees and other persons … ’
have the force of law in the United Kingdom in relation to international air carriage. Counsel points, of course, to the addition of the words ‘and other persons’ after the specific words ‘consignors, consignees’. I need not refer to any of the other sections of the Act and I go at once to the convention set out in Sch 1. It is divided into five chapters, but only Chs II and III require any detailed consideration.
Chapter II is headed ‘Documents of Carriage’ and is divided into three sections: s 1 dealing with the passenger ticket, s 2 with the baggage check, neither of which is relevant, and s 3 with the air waybill.
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The air waybill evidences the contract of carriage entered into between the consignor and the carrier, and arts 5 to 11 provide the procedural requirements as to the making out and the contents of the air waybill. The only parties concerned in the production of the document are the consignor and the carrier (although one of the three original parts is to be marked ‘for the consignee’ and is to accompany the cargo). It may, however, be relevant to note that art 10(2) provides:
‘The consignor shall indemnify the carrier against all damage suffered by him, or by any other person to whom the carrier is liable, by reason of the irregularity, incorrectness or incompleteness of the particulars and statements furnished by the consignor.’
So the convention does not in terms limit the carrier’s liability, as a result of some defect in the information furnished by the consignor, to the consignee alone. Damages suffered by the owner of the goods would therefore appear to fall within the words ‘any other person to whom the carrier is liable’ and thus be included within the indemnity.
Article 12 is of importance because it has been relied on by other courts concerned with the present issue. It gives to the consignor a right of disposal up to the moment when the consignee’s right begins under art 13. Article 12 is concerned solely with the right of disposal; it has nothing to do with any right of action against the carrier for loss of or damage to the goods. The carrier’s liability in this latter respect is dealt with in the next chapter headed ‘Liability of the Carrier’ and, in the case of cargo, arts 18 and 19, subject to the qualifications contained in the remaining articles in Ch III.
Article 13(1) and (2) give rights to the consignee to require delivery of the cargo to him, provided the consignor has not exercised or resumed his right of disposal under art 12.
Article 13(3) seems somewhat anomalous in its context. All the preceding paragraphs of arts 12 and 13 are limited to dealing with the consignor’s right of disposal, and thereafter the consignee’s right to delivery, of the cargo. Yet art 13(3) provides that in the two specified events ‘the consignee is entitled to put into force against the carrier the rights which flow from the contract of carriage’. This wide form of wording appears to refer to all rights, including rights of action for loss of or damage to the cargo. But the latter rights would be quite out of place in Ch II and in my view the framers of the convention intended that art 13(3) should be limited to enforcing the rights given to the consignee by the preceding paragraphs of the article.
If that is right art 14 is likewise limited. I mention the point at this stage because some of the reported decisions holding that only the consignor and consignee are entitled to sue the carrier for damage to cargo are based in part on the provisions of arts 12, 13 and 14. In my respectful view, the authority of those decisions is to that extent weakened.
Article 15(2) provides for variation of the provisions of the three preceding arts by means of express provision in the air waybill. Article 15(3) was added by amendment as a result of the Hague Protocol in 1955. The plaintiff relies strongly on this provision permitting the issue of negotiable air waybills as indicating that the carrier must contemplate that ownership of cargo may change in the course of the contract of carriage and may thus become vested in persons of whose identity he is unaware.
Chapter III is the self-contained part of the convention dealing with the liability of the carrier for (i) death or personal injury suffered by a passenger (art 17), (ii) damages arising out of the destruction or loss of or damage to baggage or cargo (art 18). Article 19 imposes liability on the carrier for damage caused by delay. Articles 20 to 23 provide qualifications and limitations to the carrier’s liability.
Article 24 is important. By para (1) it provides: ‘In the case covered by Articles 18 and 19 any action for damages, however founded, can only be brought subject to the conditions and limits set out in this Convention.' By contrast para (2) provides:
‘In the cases covered by Article 17 the provisions of the preceding paragraph also apply, without prejudice to the questions as to who are the persons who have the right to bring suit and what are their respective rights.’
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The defendant naturally relies on these provisions as a clear indication that whereas, in the case of death or personal injury, the category of possible plaintiffs is not limited, in cases of loss of or damage to cargo the conditions and limits set out in the convention do restrict the possible plaintiffs to (in the defendant’s contention) the parties named as parties to the contract of carriage, ie consignor and consignee alone.
The last article I need refer to is art 30, dealing with carriage performed by successive carriers. Its third paragraph confers rights of action, in the case of cargo, on the consignor and consignee in the various circumstances set out. It does not confer rights of action on any other person. The defendant relies strongly on its limited wording in support of its contention.
In considering the construction of the convention one needs to beware of adopting too parochial an approach. Representatives of many different countries took part in its drafting, not only from common law countries but also from countries whose legal system was based on the civil law and, it may well be, countries with systems of law even less familiar to English lawyers.
Having said that, it is nevertheless remarkable that nowhere does the convention expressly exclude the right of the owner of goods to sue the carrier for damage to or loss of the goods. The limitation of this right to consignor or consignee alone, for which the defendant contends, arises if at all by implication, principally, in my view, from the wording of arts 24 and 30.
I was asked by the plaintiff to look at the traveaux préparatoires which preceded the amendments of the convention agreed in 1955, and I did so despite the defendant’s formal objection to my use of such an aid to construction. I have to say that I derived no assistance from this source. I was also referred to the standard textbooks, Shawcross and Beamount on Air Law (3rd edn, 1966; 4th edn, 1977) and Chitty on Contract (25th edn, 1983), and to an interesting extract from Miller Liability in International Air Transport (1977) ch 14, ‘The Warsaw Plaintiff’.
But principally the parties referred me to the various decisions from other jurisdictions, and to these I now turn. It is right to say that most of these are in favour of the defendants’ argument limiting the right to sue to consignor or consignee alone. There are two decisions the other way, and some powerful dissenting judgments.
Taking them chronologically, the first is a decision of the New York Supreme Court in January 1957, Manhattan Novelty Corp v Seaboard and Western Airlines Inc 5 Avi Cas 17229 at 17230, where, in a case involving loss of cargo, Benvenga J said:
‘The convention gives the right of action to the consignee (articles 12, 13, 14, 15, 30) who may sue in his own name “whether he is acting in his own interest or in the interest of another” (Article 14). These provisions are intended to be exclusive. The plaintiff has no right of action, even though he has a proprietary interest in the goods shipped and even though the consignee may have been the plaintiff’s custom broker.’
This was followed by a judge of the City Court of the City of New York in September 1957 in Holzer Watch Co Inc v Seaboard and Western Airlines Inc 5 Avi Cas 17854. Rivers J said that he could not agree that the result reached on the authority of the Manhattan Novelty case was unreasonable, adding (at 17855):
‘It is reasonable that the carrier be subject to suit only by those whom it knowingly dealt with, that is, by the consignor or consignee named in the air waybill. It is not unreasonable that the identities of consignor and consignee be disclosed in the air waybill and that others be not permitted to sue.’
The reports of both cases available to me are brief in the extreme, and not convincing in so far as the reasoning is based in part on arts 12 to 15 of the convention. Nor do I follow the point that it is reasonable that the carrier should only be liable to parties with whom it ‘knowingly’ dealt. The carrier by sea is not so protected. The cargo is the same cargo, whoever may be the owner. What magic is there in the name on an air waybill?
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In January 1958 in Parke Davis & Co v British Overseas Airways Corp 170 NYS 2d 385 another judge of the City Court of the City of New York, Baer J, distinguished both those cases because, it appears, the named consignee was in each case the plaintiff’s customs broker and the plaintiff’s name did not appear on the air waybill. In the case before him, Baer J pointed out that after the name of the customs broker there appeared the words ‘a/c Parke Davis & Company, Detroit, Michigan’. It was also necessary, said the judge, that the ‘real party in interest’ (ie the plaintiff) should procure its customs broker to arrange the details. The decision turned on the failure to file the claim within the time limit provided by the convention, but it does appear that the judge considered that the owner of the cargo was entitled to sue although it was not the named consignee, apparently on the ground that its name appeared on the air waybill and thus the carrier was on notice that the plaintiff was the real party in interest. Later in the short judgment, however, he appears to have regarded the plaintiff as the consignee.
The last of the US decisions cited to me was Pilgrim Apparel Inc v National Union Fire Insurance Co 6 Avi Cas 17733, another case in the City Court of the City of New York decided in November 1959. The judge followed the previous Manhattan Novelty and Holzer Watch cases in holding that only the consignor or consignee named in the air waybill was entitled to sue the carrier. Again, the reasoning is brief in the extreme and is unsatisfactory as being expressly based on arts 13, 14 and 15.
Turning to other jurisdictions where the issue has arisen, the next authority is a case in the Appellate Division of the Supreme Court of South Africa in 1965, Pan American World Airways Inc v SA Fire and Accident Insurance Co Ltd 1965 (3) SA 150. Four of the judges of appeal concurred in the view that only the consignor or consignee had a right of action under the convention. There is a strong dissenting judgment by Steyn CJ (though in fact obiter as he decided the appeal on another ground). Of the majority, Ogilvie Thompson JA relied on the ‘cumulative effect of the various relevant articles of the Convention’ without being more precise, and added that the majority view seemed to be ‘uniformly supported by the American decisions—see particularly Parke Davis and Co v BOAC and Others (1958) 170 NYS 2d 385) and Pilgrim Apparel Inc v National Union Fire Insurance Co ((1959) 6 Avi Cas 17733) … ’ (see 1965(3) SA 150 at 167). In my view the Parke Davis case supports the opposite conclusion and Pilgrim Apparel is the least satisfactory of the other three American authorities.
Holmes JA (with whom Potgieter AJA simply agreed without adding reasons) does not carry the matter further, except that he disagreed with Steyn CJ’s judgment on this issue. The principal judgment dealing with the issue is clearly that of Rumpff JA (see 1965 (3) SA 150 at 176–179).
In 1967 the Guyana Court of Appeal divided two to one on the point in Bart v British West Indian Airways Ltd [1967] 1 Lloyd’s Rep 239. Stoby C agreed with the dissenting judgment of Steyn CJ in the Pan American case. The contrary view was developed by Luckhoo JA, with whom Bollers CJ agreed without giving separate reasons.
Luckhoo JA expressed himself as ‘deeply conscious of the serious and grievous consequences in restricting the rights of an affected party to have redress for a wrong by raising a prohibition on a doubtful premise’ but nevertheless he came to the conclusion that, despite the strong dissenting judgment of Steyn CJ in the Pan American case, the restrictive construction of the convention was correct (see [1967] 1 Lloyd’s Rep 239 at 286–287). He relied in part on the terms of the articles in Ch II of the convention and the correlative rights and duties of the carrier, consignor and consignee; in part on arts 24 and 30, and in part on the three American decisions, Manhattan Novelty, Holzer Watch and Pilgrim Apparel.
In 1974 the magistrate’s court in Tel Aviv in El Al Israel Airlines Ltd v Oram Electrical Industries Ltd (1974) IATA ACLR No 468, a case involving delay in delivery, appears to have decided that the carrier was under no liability to anyone other than the consignee under art 13(2), following the reasoning in a Dutch case on art 13. But the decision seems to have turned on the particular provision of the local statute adopting the convention and replacing the carrier’s liability under any other law. The report was not available.
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A further decision in favour of the restrictive approach contended for by the defendants is that of Trainor J in the Hong Kong High Court in Cordial Manufacturing Co Ltd v Hong Kong—America Air Transport Ltd [1976] HKLR 555. Most of the judgment, so far as the convention is concerned, revolved around arts 12 to 15 and the judge found support for his view in the three American cases referred to in Bart, and in the majority judgments in Bart itself. The case carries the argument no further.
Finally, in 1981 there comes the most recent decision, that of Prichard J in the New Zealand High Court in Tasman Pulp and Paper Co Ltd v Brambles J B O’Loghlen Ltd [1981] 2 NZLR 225. Not only is this the latest reported decision on the point at issue, I find in it, with respect, the most convincing reasoning. Counsel for the defendant is entitled to say that its persuasive effect is lessened by the fact that the actual case before the court was merely an application by the carrier to strike out the statement of claim against it, that the decision refusing the application was therefore limited in reality to a decision that the owner of the goods had an arguable case under the convention against the carrier, and that this was not, therefore, an authority against him of much weight even as a persuasive authority.
But the fact is that the judge, while acknowledging that he was not coming to a final conclusion, clearly indicated his view that he ‘took his stand’ with Stoby C in Bart’s case and Steyn CJ in the Pan American case (see [1981] 2 NZLR 225 at 235). Apart from a mistaken reference to art 24 of the convention, where the judge must clearly mean art 13(3), I find myself in respectful agreement with his reasoning (see [1981] 2 NZLR 225 at 231). In my view the owner of goods damaged or lost by the carrier is entitled to sue in his own name and there is nothing in the convention which deprives him of that right. As the convention does not expressly deal with the position by excluding the owner’s right of action (though it could so easily have done so) the lex fori, as it seems to me, can fill the gap. While bearing in mind the need to guard against the parochial view of the common lawyer, I see no good reason why the civil lawyer’s approach to the construction of the convention, based on the importance of contract, should be of overriding importance. The fact is that the convention is silent where it could easily have made simple and clear provision excluding the rights of the ‘real party in interest’, had that been the framers’ intention.
It would be a curious and unfortunate situation if the right to sue had to depend on the ability and willingness of the consignee alone to take action against the carrier, when the consignee may be (and no doubt frequently is) merely a customs clearing agent, a forwarding agent or the buyer’s bank. It would seem artificial in the extreme to require a special contract in the air waybill itself under art 15(2) to provide the goods owner with a remedy in such a normal situation.
I have also borne in mind the desirability of uniform construction of international conventions: see Scruttons Ltd v Midland Silicones Ltd [1962] 1 All ER 1 at 9, [1962] AC 446 at 471–472, Foscolo Mango & Co Ltd v Stag Line [1932] AC 328 at 350, [1931] All ER Rep 666 at 677 and Corocraft Ltd v Pan American Airways Inc [1969] 1 All ER 82 at 88, [1969] 1 QB 616 at 655. But it seems to me that there is already a division of opinion on the issue, to be found not only in dissenting judgments but in actual decisions.
If I am wrong in principle, nevertheless the facts of this case seem to me to bring it within the ratio of the Parke Davis case. The first plaintiff was the notify party named in the air waybill and there appears to me to be no real distinction between that and the added words ‘a/c Parke Davis … ’ etc.
The first plaintiff is entitled to judgment for damages to be assessed.
Judgment for first plaintiff for damages to be assessed.
Solicitors: Clyde & Co (for the plaintiff); Lavington Thatcher & Taylor (for the defendant).
K Mydeen Esq Barrister.
Mitsui & Co Ltd and another v Flota Mercante Grancolombiana SA
The Ciudad de Pasto, The Ciudad de Neiva
[1989] 1 All ER 951
Categories: SALE OF GOODS
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): PURCHAS, STAUGHTON LJJ AND SIR GEORGE WALLER
Hearing Date(s): 19, 20 APRIL 1988
Sale of goods – Passing of property – Reservation of right of disposal – Fob contract – Payment by instalments – Bill of lading stating that goods deliverable to sellers’ order – Part payment by buyers – Goods found to be damaged on discharge – Whether property passing to buyers on shipment – Whether buyers having title to sue for damage – Sale of Goods Act 1979, s 19.
The second plaintiffs, a Japanese company, agreed to buy from the sellers in Colombia cartons of prawns which were to be shipped fob by the sellers on board the defendants’ ships to Japan. Under the bills of lading the goods were deliverable to the order of the sellers. Payment of 80% of the purchase price was made before shipment by a letter of credit. On discharge the prawns were found to be damaged and the second plaintiffs brought an action against the shipowners claiming damages. The issue arose whether the plaintiffs had title to sue, having regard to the prima facie presumption under s 19a of the Sale of Goods Act 1979 that where by the bills of lading shipped goods were deliverable to the order of the seller the seller reserved the right of disposal and the property in the goods did not pass to the buyer until the conditions imposed by the seller had been fulfilled. The judge held that that presumption had been displaced and that the second plaintiffs had become owners of the goods on shipment and were therefore entitled to sue in tort for such damage as had occurred while the goods were in the shipowners’ custody. The shipowners appealed, contending that the second plaintiffs had no title to sue since the property in the goods only passed to them when the balance of 20% was paid and there was no evidence that the damage had occurred before that payment was made.
Held – Arising out of the presumption in s 19b of the 1979 Act that where by the bills of lading shipped goods were deliverable to the order of the seller the seller reserved the right of disposal and the property in the goods did not pass to the buyer until the conditions imposed by the seller had been fulfilled, it was to be presumed that where only part of the purchase price had been paid the condition imposed by the seller for the passing of the property in the goods was payment of the balance of the purchase price, since in the ordinary way a seller would not wish to part with the property in his goods if they were shipped overseas until he had been paid in full. On the facts, that presumption had not been displaced since the sellers took the bills of lading to their own order and consequently retained the property in the goods until the balance of the purchase price had been paid. Since the second plaintiffs had been unable to show that they had paid the balance before the goods were damaged they had no title to sue and their claim failed. The appeal would therefore be allowed (see p 955 h, p 957 f g, p 958 b to d and p 960 c to g, post).
Notes
For the passing of property and reservation of rights of disposal under a contract for the sale of goods, see 41 Halsbury’s Laws (4th edn) para 926, and for cases on the subject, see 39(2) Digest (Reissue) 300–303, 2390–2404.
For the Sale of Goods Act 1979, s 19, see 39 Halsbury’s Statutes (4th edn) 124.
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Cases referred to in judgments
Brandt & Co v Liverpool Brazil and River Plate Steam Navigation Co Ltd [1924] 1 KB 575, [1923] All ER Rep 656, CA.
Karberg (Arnhold) & Co v Blythe Green Jourdain & Co [1915] 2 KB 379; affd [1916] 1 KB 495, CA.
Leigh & Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] 2 All ER 145, [1986] AC 785, [1986] 2 WLR 902, HL.
Parchim, The [1918] AC 157, PC.
Smyth (Ross T) & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60, HL.
Sorfareren, The (1915) 85 LJP 121; on appeal (1917) 117 LT 259, PC.
Stein Forbes & Co v County Tailoring Co (1916) 115 LT 215.
Wait v Baker (1848) 2 Exch 1, 154 ER 380.
Cases also cited
Karlshamns Oljefabriker v Eastport Navigation Corp, The Elafi [1982] 1 All ER 208.
London Joint Stock Bank Ltd v British Amsterdam Maritime Agency Ltd (1910) 16 Com Cas 102.
South African Reserve Bank v Samuel & Co Ltd (1931) 40 Ll L Rep 291, CA.
Appeal
The defendants, Flota Mercante Grancolombiana SA (the shipowners), appealed against the decision of Hobhouse J ([1987] 2 Lloyd’s Rep 392) on 6 April 1987 giving judgment for the first plaintiffs, Mitsui & Co Ltd, who were the parent company of the second plaintiffs, Colombia Fisheries Ltd, in their claim for damages against the shipowners in respect of damage caused to a consignment of frozen prawns which had been carried on the shipowners’ ships Ciudad de Pasto and Cuidad de Neiva from Colombia to Japan. The facts are set out in the judgment of Staughton LJ.
R D Jacobs for the shipowners.
M S Howard for the plaintiffs.
20 April 1988. The following judgments were delivered.
STAUGHTON LJ ‘(giving the first judgment at the invitation of Purchas LJ). Colombia Fisheries Ltd, a Japanese company and the second plaintiffs in this action, operate a fleet of trawlers, which are registered in Japan, in the Caribbean Sea. They catch prawns, which are a popular food in Japan, particularly because prawns caught on a Japanese vessel may not have to bear import duty. Colombia Fisheries sell the prawns to a Colombian company, Cia Pesquera Vikingos de Colombia SA (Vikingos), who have a processing and packaging plant in Colombia. This arrangement gives some advantage to Colombia Fisheries because it enables them to obtain a licence to fish off the Colombian coast. After processing and packaging the goods are shipped by Vikingos to Cartagena for carriage to Japan. They are sold back to Colombian Fisheries by Vikingos. In turn, Colombia Fisheries sell the prawns to Mitsui & Co Ltd, another Japanese company, the parent of Colombia Fisheries and the first plaintiffs in this action. But that last sale is expressed to take place ‘upon clearance of custom declaration’, in other words after the goods have reached Japan.
Another company, Mitsui USA, had a part to play in the resale contract between Vikingos and Colombia Fisheries, apparently because Mitsui USA were best placed to open a letter of credit in favour of Vikingos in the terms which the parties had agreed. But nothing turns on the intervention of Mitsui USA.
This appeal is concerned with a parcel of 2,426 cartons of prawns that were shipped by Vikingos on board the vessel Ciudad de Pasto on 29 August 1980 at Cartagena. Part of the prawns had been caught by a Colombia Fisheries vessel but part had not. The Ciudad de Pasto belonged to the defendants, who were shipowners carrying on business in
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Colombia. The goods were transhipped at Buenaventura to the Ciudad de Neiva, also owned by the defendants; and thence they were carried via San Francisco to Yokohama. They were discharged there on 7 October 1980.
On discharge the prawns were found to be damaged: some heavily, some to a medium extent and some lightly. Mitsui & Co Ltd were paid for the damage by their insurers, who bring this action in the names of Colombia Fisheries and Mitsui & Co Ltd as plaintiffs. The trial did not start until March 1987. One reason for that may have been that the parties took three and a half years to complete the pleadings. Another may have been that the parties and their legal advisers expected, as the judge found, that the claim would be settled, like a very high proportion of all cargo actions started in the Commercial Court. Indeed, one issue was whether the claim had in fact been settled. The judge held that it had not. Hobhouse J said in his judgment ([1987] 2 Lloyd’s Rep 392 at 394):
‘The state of the evidence both oral and documentary before me at the trial can only be described as woefully inadequate. Relevant documents had not been preserved. The oral evidence had to rely upon the manifestly unreliable recollection of witnesses about events which had occurred over six years before.’
The principal issue at the trial appears to have been whether the damage to the prawns, apparently caused by lack of refrigeration, occurred while they were in the custody of the shipowners, or before shipment at Cartagena. The judge found that the heavy damage was not proved to have occurred during the voyage, but that one-third of the light damage and of the medium damage was caused by matters for which the shipowners were responsible during the second stage of the voyage. The cost of that came to 3·6m yen, as opposed to the sum of 15·5m yen which the plaintiffs had claimed.
There was another issue, which is the only one that arises on this appeal. It is whether the plaintiffs have title to sue, in contract or in tort. In general, there are four means by which a claim can be made for damage to goods on board a ship. First, the shipper may sue in contract, assuming that he has not divested himself of his rights by indorsement of the bill of lading. Second, a consignee named in the bill of lading or an indorsee of the bill of lading can sue in contract under s 1 of the Bills of Lading Act 1855. Third, an implied contract can arise out of the circumstances in any particular case in which delivery is taken at the port of discharge: see Brandt & Co v Liverpool Brazil and River Plate Steam Navigation Co Ltd [1924] 1 KB 575, [1923] All ER Rep 656. Fourth, the person who was owner of the goods at the time when the damage occurred can sue in tort. (I leave out the case of a charterparty.) The House of Lords has held in Leigh & Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] 2 All ER 145, [1986] AC 785 that a person who is not the owner at the time that the damage occurred can not sue in tort.
The plaintiffs did not seek to proceed by the first of those routes. The goods were shipped by Vikingos and it was not alleged at the trial that they were agents of either of the plaintiffs for that purpose. It is too late for Colombia Fisheries to suggest now, as they do in their outline argument at any rate, that Vikingos may have been agents for Colombia Fisheries to ship the goods.
As to the second route, Colombia Fisheries were not named in the bills of lading as consignees; nor was there any evidence of an indorsement of the bills of lading to them. Nor as to the third route, was there any evidence which might establish an implied contract when delivery was taken at the port of discharge. So the judge held that there was no right to sue in contract. There has been no respondent’s notice contesting that conclusion.
As to tort, Mitsui & Co Ltd, the first plaintiffs, only became the owners of the goods on discharge in Japan. Again, that is not challenged by respondent’s notice. However, the judge did hold that Colombia Fisheries, the second plaintiffs, became owners of the goods on shipment. Hence their claim succeeded in tort to the extent that the damage was found to have occurred while the goods were in the custody of the shipowners. It is that conclusion which alone is in issue in this appeal.
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The remaining facts are very short. Colombia Fisheries agreed to buy the prawns from Vikingos. No copy of the contract is available, but the judge was able to find that it contained the term fob; that conclusion is again not challenged. Payment of 80% of the price was made before shipment by means of a letter of credit which had been opened by, or at the instance of, Mitsui USA. The judge found ([1987] 2 Lloyd’s Rep 392 at 400) that: ‘Mitsui USA were interposed between Colombia Fisheries and Vikingos but again in each case on fob terms.' Whether or not it be strictly accurate, it is for all material purposes sufficient to treat the contract of sale as one between Colombia Fisheries and Vikingos, with Mitsui USA providing the letter of credit on behalf of Colombia Fisheries.
No copy of the letter of credit is available. Apparently it provided that 80% of the price was payable ‘when the goods were made available for consignment but before shipment’. It is entirely a matter of speculation whether any documents had to be presented in order to obtain that payment under the letter of credit, and whether those documents (if any) provided any security to Mitsui USA or the bank which issued the credit. For my part, I find it difficult to see how they could have provided any effective security; but I may be wrong about that.
The remaining 20% of the price no doubt had to be paid somehow. There is no evidence as to how it should have been paid or was paid. I would be inclined to assume that it was payable as a second instalment of the letter of credit, against the presentation of bills of lading. But that again is speculative. What is important is that there is no evidence as to when it was paid, whether before or after the damage to the prawns occurred on the voyage. Neither party has invited the court to consider which is more likely to have occurred first, the damage to the prawns on the voyage or the payment of the remaining 20% of the price.
The goods were shipped by Vikingos, who obtained five bills of lading. In the box marked ‘Shipper/Exporter’ the name of Vikingos was inserted; in that marked ‘Consignee’ the words ‘to order’. So the shipowners undertook to deliver the goods to Vikingos or to the party whom they should designate by an indorsement, general or special, of the bills of lading. There is no evidence that there were any indorsements. In the box marked ‘Notify Party’ there was inserted the name and address of Mitsui & Co Ltd. There is evidence that in fact Colombia Fisheries suffered no loss because they were paid in full by their buyers, Mitsui & Co Ltd. That is not relied on by counsel for the shipowners as a reason why this appeal should be allowed. Indeed, it does not feature in his notice of appeal; but he desires to keep the point open in case this case goes further.
Colombia Fisheries contend that the property in the prawns passed to them on shipment. As a variant of that argument counsel on their behalf said that it passed to them no later than the date of shipment, and so advanced the possibility that this may have happened earlier, for example when the 80% was paid. Without any detailed knowledge of the sale contract or of the letter of credit I can find no evidence that the property passed to Colombia Fisheries before shipment. It is not even proved that the goods agreed to be sold had been ascertained, in terms of the Sale of Goods Act 1979, before shipment. In my judgment, counsel can only argue that the property passed on shipment, the point on which Hobhouse J found in his favour.
Counsel for the shipowners argues that the property passed to Colombia Fisheries only when the remaining 20% of the price was paid. As there is no evidence that this occurred before the damage, he submits that the claim in tort must fail.
The Sale of Goods Act 1979 supplies part of the answer. Section 16 provides:
‘Where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained.’
There is no evidence that the goods in this case were ascertained when the contract of sale was made, or as I think at any time before shipment. But on shipment they were ascertained.
Section 17 provides:
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‘(1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.’
Although the contract in this case was, in all probability, for a sale of unascertained goods, it is agreed that s 17 applied once the goods had been ascertained. The court accordingly has to resolve the problem by the means set out in s 17(2).
However, various presumptions are supplied by ss 18 and 19. Section 18 begins:
‘Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer.’
The relevant rule in this case is r 5:
‘(1) Where there is a contract for the sale of unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods then passes to the buyer; and the assent may be express or implied, and may be given either before or after the appropriation is made.
(2) Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee or custodier (whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is to be taken to have unconditionally appropriated the goods to the contract.’
In this case prima facie Vikingos did not unconditionally appropriate the goods to the contract, but reserved a right of disposal. That appears from s 19, which provides:
‘(1) Where there is a contract for the sale of specific goods or where goods are subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled; and in such a case, notwithstanding the delivery of the goods to the buyer, or to a carrier or other bailee or custodier for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.
(2) Where goods are shipped, and by the bill of lading the goods are deliverable to the order of the seller or his agent, the seller is prima facie to be taken to reserve the right of disposal … ’
Here by the bills of lading the goods were deliverable to the order of the sellers; consequently the prima facie presumption is that they reserved the right of disposal. Unless the presumption is displaced, that has the result that the property did not pass to the buyers until the condition imposed by the sellers was fulfilled. That condition was, presumably, that the balance of the price be paid.
The question then is whether that presumption is displaced. The judge, when dealing with the issue, said ([1987] 2 Lloyd’s Rep 392 at 399–400):
‘The clear inference is that Colombia Fisheries brought the goods on f.o.b. terms. Therefore unless there was a breach of the agreement, or some failure on the part of their sellers to perform their agreement, the title in the goods should have been passed to Colombia Fisheries at the time of shipment … In the present case I do not consider that I should conclude that Vikingos were intending not to perform their obligation to pass the property in the goods on shipment.’
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Counsel for the plaintiffs has not sought to support the proposition that appears to emerge from those passages in the judgment. He acknowledges that it would not be a breach of contract for an fob seller to reserve the right of disposal when the goods are shipped. With that concession I agree, at all events unless there is provision to the contrary in the contract. Benjamin’s Sale of Goods (3rd edn, 1987) para 1861 states:
‘By section 19(2) of the Sale of Goods Act 1979, a seller is prima facie taken to reserve a right of disposal “where goods are shipped, and by the bill of lading the goods are deliverable to the order of the seller or his agent.” This subsection is based on a number of nineteenth century cases, some of which were concerned with f.o.b. contracts, in which the taking of a bill of lading in this form was regarded as evidence of intention on the part of the seller to reserve a right of disposal. The suggestion that section 19(2) does not apply to an f.o.b. contract would therefore seem to be historically unsound. It appears to be based on the view that a seller who reserves a right of disposal acts “contrary to the contract” and not “in performance of his contract to place them [the goods] ‘free on board.’” But if this view is (as has been submitted) incorrect, there is no good reason why section 19(2) should not be capable of applying to an f.o.b. contract. Under such a contract the seller is not bound to pass the property in the goods at any particular time. It is submitted that he can perfectly well ship the goods “in performance of his contract” and so perform his duty to deliver without simultaneously making an unconditional appropriation so as to pass the property. If this were not the case, considerable difficulties would arise in financing f.o.b. sales.’
See also Wait v Baker (1848) 2 Exch 1, 154 ER 380. That was one of the cases on which s 19(2) appears to have been based. The expression ‘fob’ determines how the goods shall be delivered, how much of the expense shall be borne by the sellers and when the risk of loss or damage shall pass to the buyers. It does not necessarily decide when the property is to pass.
Counsel for the plaintiffs argued that the passages which I have quoted formed no part of the judge’s reasons for deciding that the property passed on shipment. In my judgment, they did form a significant part of his reasons. But there are other grounds on which the judge also relied.
The intention of the parties that the property passed on shipment is, according to counsel for the plaintiffs, to be derived from the facts that 80% of the price had been paid and a letter of credit was available which (as I have assumed) secured payment of the remaining 20%. In Ross T Smyth & Co Ltd v T D Bailey Son and Co [1940] 3 All ER 60 at 67 Lord Wright said:
‘It is true that all these rules, both under sect. 18 and under sect. 19, are prima facie rules, and depend on intention, but the intention in this regard by the parties is seldom or never capable of proof. It is to be ascertained, as already stated here, by having regard to the terms of the contract, the conduct of the parties and the circumstances of the case.’
We have been referred to a number of cases in which it has been held that the property did or did not pass on shipment, as a guide to what the intention of the parties is likely to have been in this case.
Counsel for the shipowners relied on the Ross T Smyth case (which was concerned with a cif contract), Wait’s case, Arnhold Karberg & Co v Blythe Green Jourdain & Co [1915] 2 KB 379 at first instance and Stein Forbes & Co v County Tailoring Co (1916) 115 LT 215. While those cases provide powerful support for the presumption in s 19 (which in any case is statutory), in none of them had there been any prepayment of the price. Counsel for Vikingos relied on The Sorfareren (1915) 85 LJP 121. There the buyers had paid half the price in advance, but the sellers had taken a bill of lading to their own order. It was held that the property had passed to the buyers.
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Counsel for the shipowners seeks to distinguish that case on the ground that the sale contract there did not provide that the payment of the balance of the price would be against presentation of the bill of lading. The balance was to be paid (see 85 LJP 121 at 126) after discharge of the goods. That, as it seems to me, would make it less likely that the property would pass on shipment rather than more likely. So I cannot see that that is a valid ground of distinction. But it is to be observed that Evans P did not in that case make any mention of s 19 of the Sale of Goods Act 1893. He found that there had been no reservation of the right of disposal (at 125), but he reached that conclusion without, as I have said, adverting to the presumption that s 19 provides.
There is a comment on that case in Benjamin para 1863, where the editors say:
‘The decision is best explained on the ground that the sellers had shown that they did not intend to reserve a right of disposal; for in making their claim they had described themselves not as owners of the cargo, but as persons “interested in the cargo to the extent of the unpaid balance.”’
I can only treat that case as a decision on its own facts.
Counsel for the plaintiffs also relied on The Parchim [1918] AC 157, where it was held on other grounds that the presumption in s 19 had been rebutted and that the property passed on shipment. One of the factors to which importance was attached by Lord Parker in delivering the advice of the board was that the risk of loss or damage had passed to the buyers and that, in his Lordship’s opinion, was a factor indicating that the property had passed also (at 171). Counsel in this case acknowledges that he cannot wholeheartedly support that reasoning. The case is again commented on in Benjamin para 1864, where the editors say: ‘With respect, it is submitted that this reasoning is no longer acceptable as a general rule.' There is then a considerable discussion on the case. It is again to be noted that many factors were taken into account by the Privy Council in reaching its decision which were special to that case.
For my part, I do not find other decisions, many of them reached 70 years ago or more when commercial conditions may well have been different, of much assistance. Nor do I derive any help from cases which say that a seller would be unlikely to part with property and then be content to rely on a lien; those seem to be matched by other cases where it was held that the sellers had done exactly that, as the judge held that Vikingos did in this case.
It seems to me that in the ordinary way a seller will not wish to part with the property in his goods if they are shipped overseas until he has been paid in full. There is support for that view again in Benjamin para 1484:
‘In overseas sales, there is, therefore, a fairly strong presumption that the seller does not intend to part with property until he has either been paid or been given an adequate assurance of payment. Of course the presumption may be rebutted: for example, by the fact that buyer and seller are associated companies (so that the seller does not need security for payment) or by the fact that the contract expressly provides for credit.’
Of course, the seller may choose to give credit, but I would not readily infer that he intended to do so. I find it difficult to draw any distinction for this purpose between a seller who has received 80% of the price in advance and one who has received, say, 40%, or none.
Nor can I attach much weight to the fact that the balance of the price was (as I assume) payable by letter of credit. Even the most copper-bottomed letter of credit sometimes fails to produce payment for one reason or another; and the seller who has a letter of credit for 100% of the price will nevertheless often retain the property in his goods until he has presented the documents and obtained payment. If only 20% is outstanding his worries will be less, but they may not have disappeared altogether.
One must, of course, pay attention to the position of Colombia Fisheries, since it is the
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common intention of the parties which must be ascertained. They had paid 80% of the price and would be anxious to obtain some security. But it seems to me that they had already been content to assume that risk. They had advanced the 80% as a matter of trust, with no security so far as the evidence goes, or none that I can discern, up to the time of shipment. I can see no very powerful argument that, between the time of shipment and the presentation of the bills of lading under the letter of credit for payment of the remaining 20%, they intended to acquire the property in the goods to safeguard their advance.
Looking at the case as a whole I consider that the presumption in s 19 is not displaced. As counsel for the shipowners observed in the course of his reply this morning, if the parties wanted it to be displaced all they had to do was arrange that Vikingos should insert the name of Colombia Fisheries as consignee in the bills of lading. Vikingos did not do that. They took bills of lading to their own order and, therefore, in accordance with the presumption they retained the property in the goods until the balance of the price was paid. It is not proved that this occurred before the goods were damaged. Consequently the claim fails. Like the judge, I consider this a most unsatisfactory case. But, if plaintiffs or their insurers delay until the evidence which they need is lost, they cannot complain.
I would allow this appeal and enter judgment for the defendants.
PURCHAS LJ. I agree that this appeal should be allowed. As we are differing from a judge with great experience in this field, however, I shall add a few words of my own.
The circumstances have already fully been set out in the judgment of Staughton LJ. The judge was faced with a well-nigh impossible task on the evidence before him, which he justifiably described as woefully inadequate and continued to criticise in the terms which have already been quoted by Staughton LJ.
For the purposes of this appeal the missing documents, which were clearly of crucial importance, included the letter of credit with the so-called ‘red clause’, the contractual documents as between Vikingos and Mitsui and other evidence which would normally be available in an action of this kind. The main evidence which was led to the contractual aspect of the case was restricted to two statements admitted under the Civil Evidence Act 1968 from persons employed respectively by each of the plaintiffs.
After a skilful and meticulous consideration of this wholly inadequate evidence, which might well have been thought by some judges to fall short of discharging the onus of proof placed on any plaintiff in establishing the cause of action of damage to the cargo at all, the judge managed to draw inferences on this aspect of the case which, very properly, have not been attacked on appeal. However, the effect of the inadequacy of the evidence does not end there and, as the judge commented in relation to the evidence as to the cause of damage, where evidence was wholly inadequate the impact of the burden of proof assumed critical importance (see [1987] 2 Lloyd’s Rep 392 at 394). The same can be said when it comes to the consideration of the question where the property in the goods lies and whether that property has passed to the buyer. Parliament has provided a statutory, if prima facie, presumption as to how the intention of the parties as to the passing of property should be resolved.
The relevant sections of the Sale of Goods Act 1979 have already been cited in the judgment of Staughton LJ and it is unnecessary for me to repeat them here. The vital section, however, is sub-s (2) of s 19 and, purely for the sake of reference, I refer to that only:
‘Where goods are shipped, and by the bill of lading the goods are deliverable to the order of the seller or his agent, the seller is prima facie to be taken to reserve the right of disposal.’
The question which faced the judge was whether that prima facie position had been disturbed by the inadequate evidence placed before him.
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In addition, the authority of the speech of Lord Wright in Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60 at 67 already cited by Staughton LJ lends support to this presumption where the seller reserves or retains for himself the right of payment by cash against documents.
The judge approached this problem in this way ([1987] 2 Lloyd’s Rep 392 at 399):
‘The next issue I have to consider is the issue of title to sue. The plaintiffs have alleged that they have the title to sue both in tort and in contract. I will take tort first. This is based upon the allegation that the plaintiffs, or one or other of them, was the owner of the goods at all material times while they were in the care and custody of the defendants. The burden of proof is upon the plaintiffs to establish this title and the evidence which they have placed before the Court is most unsatisfactory. As I have already commented the material documents, or at any rate a large proportion of them, although they will have been at one time in the possession and power of the plaintiffs are no longer available and their case has to depend in substance upon two statements put in under the Civil Evidence Act. Despite the unsatisfactory nature of the plaintiffs’ evidence I am prepared to find on the balance of probabilities that the title in the relevant goods passed to Colombia Fisheries on shipment and remained in them until after the completion of discharge at Yokohama.’
It is at this point of the judge’s judgment, like Staughton LJ, that regretfully I find myself unable to follow him in drawing that inference. I therefore direct by attention to see where the difference has arisen. The judge said (at 399–400):
‘The relevant dispute before me centered upon whether it was right to conclude that title had passed to Colombia Fisheries at the time of shipment at Cartagena or only at some later, unidentified time. The clear inference is that Colombia Fisheries bought the goods on f.o.b. terms. Therefore unless there was a breach of the agreement, or some failure on the part of their sellers to perform their agreement, the title in the goods should have been passed to Colombia Fisheries at the time of shipment.’
The inference which the judge has drawn from the statements before him under the Civil Evidence Act 1968 that the goods were bought on fob terms has not been challenged on appeal. In citing that as one of the leading inferences on which the judge inferred that the property passed on shipment, it is difficult not to conclude that at this point in his judgment Homer must have nodded in overlooking the fact that in an fob contract it is still open to the seller to reserve to himself the right of disposal of the goods the subject matter of the contract. If it were otherwise it is unlikely that the judge would have referred to that particular aspect of the case at that point in his judgment.
I now turn to the judgment again where reference is made to s 19(2) of the 1979 Act (at 400):
‘I was asked by the [shipowners] to infer that Vikingos had not passed the title to Mitsui U.S.A. on shipment because of the terms in which Vikingos took the bills of lading, which were to their own order. Prima facie taking bills of lading in such a form is an indication that the shipper wishes to reserve the right of disposal of the goods and not at that time to pass the property in the goods to any other person. No reliance before me was placed upon any difference between any foreign legal system and English law and the parties among other things referred me to the Sale of Goods Act and the well known passage in Lord Wright’s speech in Ross T. Smyth v. T. Bailey Son & Co. ([1940] 3 All ER 60). However in each case it is a question of evaluating all the evidence of the parties’ conduct including the contracts which they have made in order to see whether they have intended that the general property should not pass on shipment. In the present case I do not consider that I should conclude
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that Vikingos were intending not to perform their obligation to pass the property in the goods on shipment.’
There again, with respect to the judge, he has returned to the error which, in my judgment, he made in the application of the accepted fact that the contract was on fob terms to the problem of deciding when the property in the goods should pass. He continued then to this finding, which was based on that erroneous inference:
‘The correct inference is in my judgment that they were at most merely reserving a special property in order to facilitate the operation of the letter of credit mechanism for payment. Vikingos would have a lien on the bills of lading until they were paid and thereafter the bankers would have a lien. But there is no reason why the general property should not pass down the line to Colombia Fisheries. Further it would be extravagant that the general property should not pass seeing that Vikingos had already been paid 80 per cent. of the value of the goods prior to shipment and were only interested in collecting the balance of 20 per cent.’
In my judgment, there was simply no evidence from which secondary inferences could be drawn which would entitle the departure from the prima facie presumption arising from the form in which the bills of lading were drawn. The only authority to which I wish to refer, since the cases have been fully discussed by Staughton LJ and I wholly agree with his analysis of the authorities, is The Parchim [1918] AC 157. In that case, notwithstanding that the form of the bills of lading pointed to the opposite, their Lordships came to the conclusion that property passed on shipment. The significance of that authority, in my judgment, is not that distinction but the considerable detail into which their Lordship saw fit to go before they were prepared to depart from the prima facie presumption to be found in s 19(2).
So far as counsel for the plaintiffs’ courageous attempt to take the path of avoiding the impact of s 19(2) is concerned, while accepting that the inference apparently drawn by the judge from the fact that the contract was on fob terms was not one that he was entitled to draw, I find myself in agreement with Staughton LJ that I cannot follow counsel’s able and attractive submissions along that path. In particular, I adopt with gratitude the analysis that Staughton LJ has given of the point based on the so-called ‘red clause’, that Vikingos had already been paid 80% of the value of the goods prior to shipment. In my judgment, that is an aspect which has little or no impact on the general evidence necessary if a party is to avoid the prima facie presumption contained in s 19(2).
For those reasons and for the reasons already given by Staughton LJ I agree that this appeal should be allowed.
SIR GEORGE WALLER. I agree with both judgments that have been delivered and do not wish to add anything.
Appeal allowed.
Solicitors: Sinclair Roche & Temperley (for the shipowners); Clyde & Co, Guildford (for the plaintiffs).
Celia Fox Barrister.
Bradley v Eagle Star Insurance Co Ltd
[1989] 1 All ER 961
Categories: INSURANCE
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD TEMPLEMAN, LORD OLIVER OF AYLMERTON AND LORD JAUNCEY OF TULLICHETTLE
Hearing Date(s): 30, 31 JANUARY, 2 MARCH 1989
Insurance – Employers’ liability insurance – Third party’s rights against insurers – Action by third party against insurers – Employee contracting respiratory disease through inhalation of cotton dust in course of employment – Employee alleging disease caused by negligence of employer company – Company insured against liability for personal injuries to employees – Company dissolved twelve years before action brought – Amount or existence of liability of company to employee not established before company dissolved – Whether employee entitled to indemnity from insurers in respect of company’s liability – Third Parties (Rights against Insurers) Act 1930, s 1(1)(b).
Between 1933 and 1970 the appellant was employed in a textile company’s cotton mill for three periods totalling 24 years. In 1970 she was certified as suffering from byssinosis, a respiratory disease caused by the inhalation of cotton dust. The textile company was voluntarily wound up in 1975 and dissolved in 1976. In 1984 the appellant decided to bring an action against the respondent insurers under s 1(1)(b)a of the Third Parties (Rights against Insurers) Act 1930 on the basis that her injuries were caused by the negligence or breach of statutory duty of her former employer, which had insured against those risks with the respondents during the relevant period. In order to obtain the necessary material on which to found the proposed action the appellant applied in 1986 for pre-action discovery of the relevant insurance policies issued by the respondents to the company. The district registrar made an order for disclosure but on appeal the judge set it aside. The appellant appealed to the Court of Appeal, which dismissed her appeal. The appellant appealed to the House of Lords.
Held (Lord Templeman dissenting) – An insured person’s right of indemnity under a policy of insurance against liability to third parties did not arise until the existence and amount of his liability to the third party had first been established either by action, arbitration or agreement. Accordingly, since the appellant’s former employer was a company which had been wound up and dissolved the existence and amount of the employer’s liability to the appellant had never been established while the employer existed and there was now no longer any means whereby that liability could be established; that being so, there was now no longer any right of indemnity of the employer against the respondents in respect of any such liability which could be transferred to and vested in the appellant under s 1(1) of the 1930 Act. Since the appellant’s proposed action against the respondents could not succeed, pre-action discovery in support of that action could not be ordered. The appeal would therefore be dismissed (see p 962 f, p 963 g to p 964 a, p 965 g h, p 966 f g, p 967 g and p 969 a b, post).
Post Office v Norwich Union Fire Insurance Society Ltd [1967] 1 All ER 577 approved.
Notes
For statutory subrogation of rights under an insurance policy, see 25 Halsbury’s Laws (4th edn) para 708, and for cases on the subject, see 29 Digest (Reissue) 586–590, 5167–5184.
For the Third Parties (Rights against Insurers) Act 1930, s 1, see 4 Halsbury’s Statutes (4th edn) 688.
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Cases referred to in opinions
Harrington Motor Co Ltd, Re, ex p Chaplin [1928] Ch 105, CA.
Hood’s Trustees v Southern Union General Insurance Co of Australasia Ltd [1928] Ch 793, CA.
Post Office v Norwich Union Fire Insurance Society Ltd [1967] 1 All ER 577, [1967] 2 QB 363, [1967] 2 WLR 709, CA.
West Wake Price & Co v Ching [1956] 3 All ER 821, [1957] 1 WLR 45.
Appeal
Doris Bradley appealed, with the leave of the Appeal Committee of the House of Lords given on 14 July 1988, against the decision of the Court of Appeal (Purchas, Lloyd and Staughton LJJ) ([1988] 2 Lloyd’s Rep 233) on 25 March 1988 dismissing her appeal against the order of Macpherson J in chambers dated 9 April 1987 allowing the appeal of the respondents, Eagle Star Insurance Co Ltd, against the order of Mr District Registrar Burton in chambers dated 30 January 1987 whereby, pursuant to RSC Ord 24, r 7A, he granted the appellant pre-action discovery of the terms and particulars of all contracts of insurance issued by the respondents to the Federation of Master Cotton Spinners Association Ltd relating to the liability of the appellant’s former employer, Dart Mill Ltd, to its employees for personal injuries sustained by the employees at work during the periods 1933 to 1934, 1940 to 1946 and 1953 to 1970. The facts are set out in the opinion of Lord Brandon.
David Clarke QC and David Allan for the appellant.
Stephen Grime QC and Patrick Field for the respondents.
Their Lordships took time for consideration
2 March 1989. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Brandon. I agree with it, and for the reasons he gives would dismiss this appeal.
LORD BRANDON OF OAKBROOK. My Lords, the appellant, Mrs Doris Bradley, was employed by Dart Mill Ltd in the cardroom of its cotton mill at Bolton from 1933 to 1934, 1940 to 1946 and 1953 to 1970. In August 1970 she was certified by the pneumoconiosis medical panel to be suffering from byssinosis and her disability caused by it was assessed at 30%. Byssinosis is a respiratory disease caused by the inhalation of cotton dust. It is the appellant’s case, first, that in the course of her employment by Dart Mill Ltd the conditions in which she worked necessarily involved her in the inhalation of substantial quantities of cotton dust, second, that the byssinosis from which she suffers was caused by such inhalation, third, that the exposure to such inhalation was caused by the negligence and breach of statutory duty of Dart Mill Ltd and, fourth, that Dart Mill Ltd was, during the periods when she was employed by that company, insured in respect of liability for personal injuries to its employees by the respondents, Eagle Star Insurance Co Ltd.
Dart Mill Ltd was voluntarily wound up in 1975 and dissolved in 1976. Under s 651 of the Companies Act 1985 the company could not be restored to the register more than two years after it was dissolved. In the result the company no longer exists and is incapable by any means of being restored to existence.
In 1984 the appellant’s solicitor decided to bring an action on her behalf against the respondents under s 1(1) of the Third Parties (Rights against Insurers) Act 1930. In order to enable him to have the necessary material on which to found the action, the appellant’s solicitor required to have prior discovery of the relevant insurance policies issued by the respondents to Dart Mill Ltd. Accordingly, on 26 September 1986 he applied on behalf of the appellant, under s 33(2) of the Supreme Court Act 1981 and RSC Ord 24, r 7A, in
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the Oldham District Registry of the High Court, Queen’s Bench Division, for an order that the respondents should disclose to the appellant the terms and particulars of all contracts of insurance issued by the respondents to Dart Mill Ltd in respect of that company’s liability to its employees for personal injuries sustained at work during the periods 1933 to 1934, 1940 to 1946 and 1953 to 1970.
The originating summons came first before Mr District Registrar Burton, who on 30 January 1987 ordered the respondents to make substantially the disclosure applied for on behalf of the appellant. The respondents appealed to Macpherson J, who on 9 April 1987 allowed the appeal and set aside the order of the district registrar. Macpherson J refused the appellant leave to appeal to the Court of Appeal, but such leave was subsequently given by that court. On 25 March 1988 the Court of Appeal (Purchas, Lloyd and Staughton LJJ) ([1988] 2 Lloyd’s Rep 233) unanimously dismissed the appeal.
In order to understand the basis of the substantive claim which the appellant seeks to bring against the respondents, and the grounds on which the Court of Appeal decided her application for pre-action discovery against her, it is necessary to refer to the relevant provisions of the Third Parties (Rights against Insurers) Act 1930. That Act provides:
‘1.—(1) Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then—(a) in the event of the insured becoming bankrupt or making a composition or arrangement with his creditors; or (b) in the case of the insured being a company, in the event of a winding-up order being made, or a resolution for a voluntary winding-up being passed, with respect to the company, or of a receiver or manager of the company’s business or undertaking being duly appointed, or of possession being taken, by or on behalf of the holders of any debentures secured by a floating charge, of any property comprised in or subject to the charge; if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred.
(2) Where an order is made under section one hundred and thirty of the Bankruptcy Act, 1914, for the administration of the estate of a deceased debtor according to the law of bankruptcy, then, if any debt provable in bankruptcy is owing by the deceased in respect of a liability against which he was insured under a contract of insurance as being a liability to a third party, the deceased debtor’s rights against the insurer under the contract in respect of that liability shall, notwithstanding anything in the said Act, be transferred to and vest in the person to whom the debt is owing … ’
The grounds on which the Court of Appeal decided against the appellant on her application for pre-action discovery can be stated as follows. First, under s 1(1) of the 1930 Act the appellant only had transferred to and vested in her such rights against the respondents as Dart Mill Ltd itself would have had under the relevant contracts of insurance. Second, Dart Mill Ltd would only have been entitled, under such contracts of insurance, to be indemnified by the respondents in respect of any liability incurred by it to the appellant if the existence and amount of that liability had first been established either by a judgment of a court, or by an award in an arbitration, or by an agreement between Dart Mill Ltd and the appellant. Third, the existence and amount of any liability incurred by Dart Mill Ltd to the appellant had never been established in any of those three ways while Dart Mill Ltd existed or was capable of being restored to existence, and there was now therefore no longer any means by which the existence and amount of any such liability could be established. Fourth, that being so, there was not, and could not now ever be, any right of indemnity of Dart Mill Ltd against the respondents in respect of any such liability which could be transferred to and vested in the appellant under s 1(1) of the 1930 Act. Fifth, that being so, the appellant’s proposed action against the
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respondents could not succeed, and it would therefore serve no useful purpose to make the order for pre-action discovery sought by her.
The Court of Appeal, rightly in my view, considered itself bound to reach the conclusion which it did by an earlier decision of that court in Post Office v Norwich Union Fire Insurance Society Ltd [1967] 1 All ER 577, [1967] 2 QB 363. It follows that this appeal requires your Lordships to consider whether that earlier case was rightly decided.
The facts in the Post Office case, as they appear mainly from the headnote of the report ([1967] 2 QB 363), were these. In May 1963 a company of contractors called Potters damaged a Post Office cable. The Post Office by letter claimed £839 10s 3d for its repair. The contractors denied liability. Before any proceedings had been begun to determine liability and quantum, the contractors in June 1964 went into compulsory liquidation. The contractors were insured under a public liability policy in the usual terms which provided that the insurers ‘will indemnify the insured against all sums which the insured shall become legally liable to pay … in respect of … damage to property’. On 17 June 1965 the Post Office issued a writ against the contractors’ insurance company claiming that under s 1 of the 1930 Act they were entitled, once the contractors had gone into liquidation, to claim against the insurance company direct the sum of £839 10s 3d. The trial judge gave judgment for the Post Office, against which the insurers appealed to the Court of Appeal (Lord Denning MR, Harman and Salmon LJJ).
That court allowed the appeal and dismissed the Post Office’s claim on two grounds. The first ground, which was unanimous, turned on a particular condition of the contract of insurance, to which it is not necessary to refer futher. The second ground, which was relied on by Lord Denning MR and Salmon LJ but not by Harman LJ, was that the contractors could not have claimed to be indemnified by the insurance company until the existence and amount of their liability to the Post Office had been properly established, and the Post Office could not be in any better position as against the insurance company in this respect than the contractors.
Referring to s 1(1) of the 1930 Act, Lord Denning MR said ([1967] 1 All ER 577 at 579–580, [1967] 2 QB 363 at 373–374):
‘Under that section the injured person steps into the shoes of the wrongdoer. There are transferred to him the wrongdoer’s “rights against the insurers under the contract“. What are those rights? When do they arise? So far as the “liability” of the insured is concerned, there is no doubt that his liability to the injured person arises at the time of the accident, when negligence and damage coincide; but the “rights” of the insured person against the insurers do not arise at that time. The policy in the present case provides that “the [defendants] will indemnify the insured against all sums which the insured shall become legally liable to pay as compensation in respect of loss of or damage to property.” It seems to me that [Potters] acquire only a right to sue for the money when their liability to the injured person has been established so as to give rise to a right of indemnity. Their liability to the injured person must be ascertained and determined to exist, either by judgment of the court or by an award in arbitration or by agreement. Until that is done, the right to an indemnity does not arise. I agree with the statement by DEVLIN, J., in West Wake Price & Co. v. Ching ([1956] 3 All ER 821 at 825, [1957] 1 WLR 45 at 49): “The assured cannot recover anything under the main indemnity clause or make any claim against the underwriters until they have been found liable and so sustained a loss.” Under s. 1 of the Act of 1930 the injured person cannot sue the insurance company except in such circumstances as the insured himself could have sued the insurance company. Potters could only have sued for an indemnity when their liability to the third person was established and the amount of the loss ascertained. In some circumstances an insured might sue earlier for a declaration, e.g., if the insurance company were repudiating the policy for some reason; but where the policy is admittedly good, the insured cannot sue for an indemnity until his own liability to the third person is ascertained.’
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Lord Denning MR continued ([1967] 1 All ER 577 at 580, [1967] 2 QB 363 at 375):
‘In these circumstances I think the right to sue for these moneys does not arise until the liability is established and the amount ascertained. How is this to be done? If there is an unascertained claim for damages in tort, it cannot be proved in the bankruptcy, nor in the liquidation of the company; but the injured person can bring an action against the wrongdoer. In the case of a company, he must get the leave of the court. No doubt leave would automatically be given. The insurance company can fight that action in the name of the wrongdoer. In that way liability can be established and the loss ascertained. Then the injured person can go against the insurance company.’
Salmon LJ agreed with Lord Denning MR. He said ([1967] 1 All ER 577 at 582, [1967] 2 QB 363 at 377–378):
‘The case really resolves itself into this simple question: could Potters on June 17, 1965, have successfully sued their insurers for the sum of £839 10s. 3d. which they were denying they were under any obligation to pay to the Post Office? Stated in that way, I should have thought the question admits of only one answer. Obviously Potters could not have claimed that money from their insurers. It is quite true that if Potters in the end are shown to have been legally liable for the damage resulting from the accident to the cable, their liability in law dates from the moment when the accident occurred and the damage was suffered. Whether or not there is any legal liability, however, and, if so, the amount due from Potters to the Post Office can, in my view, only be finally ascertained either by agreement between Potters and the Post Office or by an action or arbitration between Potters and the Post Office. It is quite unheard of in practice for any assured to sue his insurers in a money claim when the actual loss against which he wishes to be indemnified has not been ascertained. I have never heard of such an action, and there is nothing in law that makes such an action possible. I agree with the statement of DEVLIN, J., in West Wake Price & Co. v. Ching ([1956] 3 All ER 821 at 825, [1957] 1 WLR 45 at 49), to which LORD DENNING, M.R., has already referred. This statement is obiter, but I think it correctly states the legal position, although it does not expressly point out that liability and quantum can be ascertained not only by action but also by arbitration or agreement.’
In my opinion the reasoning of Lord Denning MR and Salmon LJ contained in the passages from their respective judgments in the Post Office case set out above, on the basis of which they concluded that, under a policy of insurance against liability to third parties, the insured person cannot sue for an indemnity from the insurers unless and until the existence and amount of his liability to a third party has been established by action, arbitration or agreement, is unassailably correct. I would, therefore, hold that the Post Office case was rightly decided, and that the principle laid down in it is applicable to the present case.
There is, however, a vital difference between the Post Office case and the present case. In the Post Office case the wrongdoing company, although in compulsory liquidation, was still in existence. It was, therefore, still open to the Post Office, as Lord Denning MR explained, to bring an action, with the leave of the Companies Court, against that company, in order to establish the existence and amount of the liability in issue. By contrast, in the present case, because Dart Mill Ltd no longer exists and can no longer be resurrected, the same solution to the problem is not available, with the result arrived at by the Court of Appeal.
Counsel for the appellant accepted that it was necessary, in order to enable her to recover in an action against the respondents under s 1(1) of the 1930 Act, for her to establish the existence and amount of the liability which Dart Mill Ltd incurred to her in the past. He contended, however, that these matters could be established in the action
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proposed to be brought by the appellant against the respondents. In support of this contention he made two forceful points which deserve careful consideration.
The first point was that, in certain kinds of cases, such as an action against a solicitor for negligence in failing to bring an action within a relevant period of limitation, the court was accustomed, in order to assess the damages recoverable, to put a value on the lost claim, and that process necessarily involved consideration of the existence and amount of the liability of a third party who was not a party to the action. The second point was that, even if Dart Mill Ltd were still in existence or capable of being resurrected, so as to make it possible for the appellant, with the leave of the Companies Court, to bring an action against that company in order to establish the existence and amount of its liability to her, such action would in practice be defended by the respondents in the company’s name, so that in substance, though not in form, the dispute would be between the appellant on one side and the respondents on the other. That being so, it made no difference to the substance of the matter that Dart Mill Ltd itself could no longer be sued.
The first point, though superficially attractive is, in my view, unsound. In the case of an action of the kind suggested, namely an action against a solicitor for negligence in failing to bring proceedings in time, what the court has to do is not to establish that the lost claim would have succeeded and what the amount of damages recovered would have been. All that the court has to do is to make an assessment of the value of the claim as between the plaintiff and the defendant solicitor, which is in no way binding on the person against whom the plaintiff’s action, if it had not been lost due to the solicitor’s negligence, would have been brought. That assessment of value will take account of all contingencies, including where appropriate the contingency of complete or partial failure in the lost action. In these circumstances I do not consider that the kind of case suggested provides any real analogy to the kind of case with which your Lordships are here concerned.
The second point illustrates the fact that the difficulty which the appellant faces is, to a large extent at any rate, a procedural difficulty rather than a substantive one. But this difficulty, however it may be categorised, is a necessary consequence of two matters: first, the nature of the rights given to an insured person under a policy of insurance against liability to third parties; and, second, the terms of s 1(1) of the 1930 Act relating to the transfer of rights, in certain events, from an insured person to a third party.
For the reasons which I have given I am of opinion that neither of the two points relied on by counsel for the appellant, though fully deserving of consideration, is sustainable in law.
The complaint may be made, and has been forcefully made on behalf of the appellant in this appeal, that the decision reached by the Court of Appeal, with which it is apparent that I fully agree, depends really on procedural technicalities and produces a result which is unfair to the appellant and gives an unmerited bonus to the respondents. In answer to that complaint I think that it is right to draw attention to two matters: first, the historical reason for the passing of the 1930 Act; and, second, the inference to be drawn from the terms of s 1(2) of that Act, which I set out earlier above with s 1(1).
The historical reason for the passing of the 1930 Act was to remedy a particular form of injustice which had become apparent from two then recent decisions of the Court of Appeal. The first of these two decisions was Re Harrington Motor Co Ltd, ex p Chaplin [1928] Ch 105. In that case a person injured in a road accident had obtained a judgment for damages against a company, but had been unable to enforce the judgment before the company went into liquidation. The company’s motor insurers paid the amount of the judgment to the liquidator, who then treated the injured person as an unsecured creditor with no special interest in the insurance moneys. It was held by the Court of Appeal that the liquidator had been right to deal with the matter in that way.
The second decision was Hood’s Trustees v Southern Union General Insurance Co of Australasia Ltd [1928] Ch 793. In that case H, being insured by the defendant company against liability to third parties, negligently injured C in a road accident. C subsequently
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brought an action against H for damages but, before he could obtain judgment, H was made bankrupt and the official receiver was appointed trustee in the bankruptcy. The trustee informed the defendant company in reply to a question that he did not propose to take any part in C’s action against H. H later purported, for an agreed sum much below the value of the claim, to release the defendant company from its obligation under the policy to indemnify him in respect of any judgment obtained against him by C. Shortly afterwards C obtained judgment against H for damages for the personal injuries sustained by him. Subsequently H was made bankrupt a second time and another trustee in bankruptcy was appointed. It was held by Tomlin J that the benefit of the indemnity under H’s policy of insurance vested in the trustee in the first bankruptcy, notwithstanding that C’s claim, being one in respect of tort for which judgment was not obtained until after the commencement of the first bankruptcy, was not itself provable in bankruptcy. That decision was subsequently affirmed by the Court of Appeal.
These two decisions showed that, even where an injured person obtained a judgment for damages against a wrongdoer, if the wrongdoer being a company went into liquidation, or being an individual became bankrupt, and the judgment had not by then been enforced by execution, the moneys payable by way of indemnity under any policy of insurance by which the wrongdoer was insured against liability to third parties did not go solely to benefit the injured person but were payable to the liquidator or trustee in bankruptcy of the wrongdoer for distribution pari passu among all the unsecured creditors. This was recognised to be plainly unjust, and the 1930 Act was passed to remedy that injustice. It was not passed to remedy any injustice arising from other matters; in particular, it was not passed to remedy any injustice which might arise as a result of the dissolution of a company making it impossible to establish the existence and amount of the liability of such company to a third party. That kind of situation was not, in my view, contemplated by the legislature at all.
The significance of s 1(2) of the 1930 Act is this. In that subsection the legislature dealt expressly with the situation where a deceased’s estate was ordered to be administered in bankruptcy, and provided that, if any debt provable in bankruptcy was owing to the deceased in respect of a liability against which he was insured as being a liability to a third party, the deceased debtor’s rights against the insurer should be transferred to and vest in the person to whom the debt was owing. While the legislature dealt expressly in this way with the case of a deceased debtor’s estate being administered in bankruptcy, it made no provision of any kind with regard to the case of a company dissolved after being wound up. This action leads to the inference that the legislature, in enacting the 1930 Act, did not have a situation of that kind in contemplation at all.
My Lords, for the reasons which I have given, and despite the natural sympathy which one is bound to feel for the difficulty in which the appellant finds herself, I would dismiss this appeal. I would only add that, even if the appeal had succeeded, the appellant would still have had other serious difficulties to surmount with regard to limitation of actions under the Limitation Act 1980.
LORD TEMPLEMAN. My Lords, the appellant, Mrs Bradley, was employed by Dart Mill Ltd at its cotton mill at times between 1933 and 1970. For present purposes it must be assumed that the Dart Mill company was insured with the respondents, Eagle Star Insurance Co Ltd, against claims by employees, including the appellant, for injuries suffered as a result of the negligence or breach of statutory duty by the Dart Mill company. The appellant asserts that she contracted byssinosis because she was exposed to cotton dust while she was working for the Dart Mill company and that she is entitled to damages for negligence and breach of statutory duty which are risks covered by the Eagle Star insured policy. At some stage, the court must consider whether the appellant is entitled to proceed with her claim because of the delay which has occurred. For present purposes the delay is irrelevant. At some time after 1970, the Dart Mill company passed a resolution for voluntary winding up and, in 1976, the Dart Mill company was dissolved.
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Section 1 of the Third Parties (Rights against Insurers) Act 1930 applies—
‘(1) Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur … ’
In the present case, under a contract of insurance, the insured, the Dart Mill company, was insured by the respondents against liabilities to a third party, the appellant, which the Dart Mill company may have incurred.
Where s 1 of the 1930 Act applies, then—
‘(1) … (b) in the case of the insured being a company, in the event of a winding-up order being made, or a resolution for a voluntary winding-up being passed … if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred.’
In the present case a resolution for the voluntary winding up of the Dart Mill company was passed, and, if liability to the appellant was incurred, the rights of the Dart Mill company against the insurers, the respondents, in respect of the liability to the appellant were transferred to and are now vested in the appellant. The appellant seeks to enforce against the respondents the rights she claims are vested in her in respect of the policy. Of course, any proceedings by the appellant will fail if she cannot prove that the Dart Mill company by its negligence or breach of duty incurred a liability to her and that the Dart Mill company was insured against that liability with the respondents. But the respondents contend that, even if the Dart Mill company became liable to the appellant and even if that liability was covered by an insurance policy effected by the Dart Mill company with the respondents, nevertheless the appellant is not entitled to exercise the rights under insurance policy transferred to her by the 1930 Act.
It is said on behalf of the respondents that the 1930 Act does not avail the appellant because, following the resolution to wind up, the Dart Mill company was dissolved in 1976 and no longer exists. But it seems to me that the existence or non-existence of the Dart Mill company at present is irrelevant. The Dart Mill company did exist and, if it insured with the respondents against liability to the appellant, if the Dart Mill company incurred liability to the appellant its rights under the Eagle Star insurance policy are vested in the appellant. The 1930 Act was intended to protect a person who suffers an insured loss at the hands of a company which goes into liquidation. That protection was afforded by transferring the benefit of the insurance policy from the company to the injured person. In my opinion, Parliament cannot have intended that the protection afforded against a company in liquidation should cease as soon as the company in liquidation reaches its predestined and inevitable determination in the dissolution of the company. It is conceded that within two years (now 12 years) after the date of dissolution, the appellant could have obtained an order of the court reviving the defunct Dart Mill company for the sole purpose of enabling the appellant to recover against the respondents. But there would be no point in restoring the Dart Mill company for that limited purpose. The Dart Mill company would have no interest in a quarrel over an insurance policy between the insurance company, the respondents, and the person, the appellant, in whom the benefit of the insurance policy is claimed to be already vested by virtue of the 1930 Act. To restore the Dart Mill company in these circumstances would do no more than authorise the appellant to make use of a name carved on a tombstone. The use of the name could not restore life to the skeleton.
The dissolution of the Dart Mill company has no significance in the present case save that it enables the respondents to argue that they are not bound to pay in respect of a liability which they accepted and for which they were paid premiums. I would allow this appeal and enable the appellant to proceed with her action against the respondents.
Page 969 of [1989] 1 All ER 961
LORD OLIVER OF AYLMERTON. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Brandon, with which I entirely agree. I too would dismiss the appeal.
LORD JAUNCEY OF TULLICHETTLE. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Brandon. I agree with it and for the reasons given therein I would dismiss the appeal.
I would only add a further word about s 1(2) of the Third Parties (Rights against Insurers) Act 1930. That subsection only applies where a debt provable in bankruptcy is owing by the deceased in respect of insured liability. In terms of s 30(1) of the Bankruptcy Act 1914 a claim for unliquidated damages arising in tort is not provable in bankruptcy. It follows that no rights which the deceased may have had against insurers in respect of such a claim are transferred to the person to whom he had incurred liability. If the appellant’s argument were correct it would follow that the third party to whom an individual had incurred insured liability would be able to proceed direct against his insurers on his becoming bankrupt but would be unable to to proceed if after his death an order were made under s 130 of the 1914 Act. This would be a curious result which has no apparent logic. Far more likely is it that the legislature intended that in both subsections the type of rights capable of being transferred to third parties should be the same.
Appeal dismissed.
Solicitors: Field Fisher & Martineau agents for John Pickering, Oldham (for the appellant); Davies Arnold Cooper agents for T Unsworth, Urmston (for the respondents).
Mary Rose Plummer Barrister.
Bray (Inspector of Taxes) v Best
[1989] 1 All ER 969
Categories: TAXATION; Income Tax, emoluments from office or employment
Court: HOUSE OF LORDS
Lord(s): LORD MACKAY OF CLASHFERN LC, LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD OLIVER OF AYLMERTON AND LORD GOFF OF CHIEVELEY
Hearing Date(s): 28, 29, 30 NOVEMBER 1988, 23 FEBRUARY 1989
Income tax – Emoluments from office or employment – Receipts ‘from’ employment – Receipts after employment has ceased – Distribution of assets of trusts for benefit of employees – Employing company taken over – Employment transferred to parent company – Trusts wound up and assets distributed among all employees after transfer of employment to parent company – Whether receipts attributable to any employment or year of assessment – Income and Corporation Taxes Act 1970, s 181.
Practice – Citation of cases – Reports – Revenue cases – Law Reports series or Reports of Tax Cases – Tax Cases may be used if counsel think it more convenient – References to Law Reports also to be given.
The taxpayer was employed by a company from 1958–59 to 1978–79. In anticipation of the transfer on 1 April 1979 of all the employees of the company to employment by its parent company, the trustees of two trusts for the benefit of the company’s employees exercised their powers to bring into effect provisions leading to the winding up of the trusts and the distribution of the net assets. In 1979–80 the taxpayer was allocated two sums totalling £18,111. He was assessed to income tax under s 181(1), Sch Ea, Case I of
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the Income and Corporation Taxes Act 1970. He appealed against the assessment contending that the allocations were not emoluments from his employment. The Revenue contended that the allocations were emoluments and that it was appropriate to attribute the allocations over the whole period of the taxpayer’s employment or, alternatively, that the whole allocation should be attributed to 1978–79, the taxpayer’s final year of employment with the company. A Special Commissioner determined that the allocations were emoluments from the taxpayer’s employment and were attributable to the year in which they were paid but they could not be attributed to any one or more of the relevant years of assessment during which the taxpayer had been employed by the company and there was accordingly no chargeable period. The judge allowed an appeal by the Crown, holding that the allocations were emoluments and as such had to be paid in respect of some period of service and that that period was either a definable special period or the whole of the period of employment. The judge accordingly ordered that the case be remitted to the commissioner to determine, as a question of fact, over what period the emoluments should be deemed to have been earned and how they should be apportioned over the tax years in that period. On appeal, the Court of Appeal upheld the commissioner’s decision and allowed the taxpayer’s appeal. The Crown appealed to the House of Lords.
Held – Income tax was a tax of an annual nature and for an emolument to be chargeable to income tax under Sch E it had to be not only an emolument from an employment but also an emolument for the year of assessment in respect of which the charge was sought to be raised. The period to which any given payment was to be attributed was a question to be determined as one of fact in each case, depending on all the circumstances, including its source and the intention of the payer so far as it could be gathered either from direct evidence or from the surrounding circumstances. Since the Special Commissioner could find no feature of any significance which would indicate that the payment made to the taxpayer fell to be attributed either to the last year or to all or any of the previous years during which he was employed by the company, it followed that there was no period to which the payment of the sums could be attributed. The appeal would therefore be dismissed (see p 971 e g h, p 974 j to p 975 a and p 978 b c g h, post).
Per Lord Mackay LC. If counsel appearing in the House of Lords think it more convenient to do so, they may refer to the report of a case in Tax Cases, even though the case is also reported in the Law Reports, but if they decide to do so references to the case in the Law Reports should also be given (see p 971 f post).
Decision of the Court of Appeal [1988] 2 All ER 105 affirmed.
Notes
For voluntary payments to a holder of an office or employment, see 23 Halsbury’s Laws (4th edn) para 644, and for cases on the subject, see 28(1) Digest (Reissue) 335–337, 1211–1218.
For citation of reports of decisions as authorities, see 26 Halsbury’s Laws (4th edn) para 587, and for cases on the subject, see 30 Digest (Reissue) 285–289, 931–1005.
In relation to taxation for the year 1988–89 and subsequent years of assessment s 181 of the Income and Corporation Taxes Act 1970 was replaced by ss 19 and 192(1) of the Income and Corporation Taxes Act 1988. For ss 19 and 192 of the 1988 Act, see 44 Halsbury’s Statutes (4th edn) 57, 240.
Cases referred to in opinions
Board of Inland Revenue v Suite [1986] 2 All FR 577, [1986] AC 657, [1986] 2 WLR 1042, PC.
Bridges (Inspector of Taxes) v Hewitt [1957] 2 All ER 281, [1957] 1 WLR 674, CA.
Brown v National Provident Institution [1921] 2 AC 222, HL.
Brumby (Inspector of Taxes) v Milner [1976] 3 All ER 636, [1976] 1 WLR 1096, HL; affg [1975] 3 All ER 1004, [1976] 1 WLR 29, CA; affg [1975] 2 All ER 773, [1975] 1 WLR 958.
Page 971 of [1989] 1 All ER 969
Hamblett v Godfrey (Inspector of Taxes) [1987] 1 All ER 916, [1987] 1 WLR 357, CA.
Heasman v Jordan (Inspector of Taxes) [1954] 3 All ER 101, [1954] Ch 744, [1954] 3 WLR 432.
Hochstrasser (Inspector of Taxes) v Mayes [1959] 3 All ER 817, [1960] AC 376, [1960] 2 WLR 63, HL; affg [1958] 3 All ER 285, [1959] Ch 22, [1958] 3 WLR 215, CA; affg [1958] 1 All ER 369, [1959] Ch 22, [1958] 2 WLR 982.
Hunter (Inspector of Taxes) v Dewhurst (1932) 16 TC 605, [1932] All ER Rep 753, HL.
Laidler v Perry (Inspector of Taxes) [1965] 2 All ER 121, [1966] AC 16, [1965] 2 WLR 1171, HL.
Seymour v Reed [1927] AC 554, [1927] All ER Rep 294, HL.
Appeal
The Crown appealed with the leave of the House of Lords given on 21 March 1988 against the decision of the Court of Appeal (May, Balcombe and WooIf LJJ) ([1988] 2 All ER 105, [1988] 1 WLR 784) on 30 October 1987 allowing an appeal by Peter Maurice Best (the taxpayer) against the decision of Walton J ([1986] STC 96) on 20 January 1986 whereby on a case stated (set out at [1986] STC 97–108) the judge reversed the decision of a Commissioner for the Special Purposes of the Income Tax Acts discharging assessments made on the taxpayer for the years 1958–59 to 1977–79 inclusive and reducing the assessment for the year 1978–79 to the agreed figure of £8,111. The facts are set out in the opinion of Lord Oliver.
J M Chadwick QC and Alan Moses for the Crown.
Andrew Park QC and Richard Bramwell for the taxpayer.
Their Lordships took time for consideration
23 February 1989. The following opinions were delivered.
LORD MACKAY OF CLASHFERN LC. My Lords, I have had the advantage of reading in draft the speech about to be delivered by my noble and learned friend Lord Oliver. I agree with his reasoning and conclusion that this appeal should he dismissed.
In the course of the hearing of this appeal their Lordships found that on occasion the report of a case in Tax Cases may appropriately be referred to even when the case is also reported in the Law Reports. Accordingly, I consider that for the future in this House counsel should be entitled, if they think that the more convenient course, to use the report of such a case in Tax Cases rather than in the Law Reports but if they decide to do so the references to the case in the Law Reports should also be given.
LORD KEITH OF KINKEL. My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Oliver. I agree with it, and for the reasons given by him would dismiss the appeal.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given in the speech of my noble and learned friend Lord Oliver, I would dismiss the appeal.
LORD OLIVER OF AYLMERTON. My Lords, this appeal is concerned with the assessability to income tax under Sch E of distributions made by the trustees of two trust funds established for the benefit of the employees of a trading company which was taken over by a larger organisation, such distributions having been determined on and made after the cessation of the relevant employment. The company, A Gallenkamp & Co Ltd, was an old established family company carrying on the business of manufacturing laboratory equipment. Towards the latter part of the 1950s the directors, partly with a view to making the company less vulnerable to take-over and partly to provide additional incentive for its employees, established a trust fund for the benefit of employees. By a trust deed dated 3 December 1957 and made between the company of the one part and three trustees (the company’s chairman, its solicitor and its accountant) of the other part,
Page 972 of [1989] 1 All ER 969
it was provided that during a lengthy trust period, defined by reference to the life of the survivor of all descendants then living of His late Majesty King George V the trustees should hold the trust fund (being such sums as should from time to time be advanced by the company for the purposes of the deed) on trust to raise thereout and apply such sums as should be necessary for the subscription or purchase of such fully-paid shares in the company as the company should direct. It is unnecessary to recite the trusts of the deed in any detail beyond saying that the beneficiaries were confined to employees who had not themselves sold or transferred shares to the trustees and that provision was made for shares purchased by the trustees to be offered to employees of the company, for the income in each year to be divided at the company’s discretion among such qualified employees as the company should determine and, in so far as not so applied, for it to be invested as an accretion to capital and for the trustees in their discretion at any time to determine the trust. There was also reserved to the company a wide power in its discretion to alter or modify the trusts or provisions of the deed.
In 1961 the trustees purchased from a Mrs Jarrom, the widow of a former managing director, a substantial parcel of shares which were segregated and made the subject of a separate trust which closely followed the pattern of the 1957 deed, save that income was distributable at the trustees’ rather than the company’s discretion and that the employees and directors eligible to benefit were limited to those with ten or more years’ service. The reason for this, it appears, was that Mrs Jarrom had expressed a wish that a separate fund should be established in memory of her late husband, Harry Jarrom, and that it should be for the benefit of long-serving members of the company’s staff.
On 25 August 1977 the company became a wholly-owned subsidiary of Fisons plc and following this the trustees anticipated that there might come a time in the future when the company’s workforce would be absorbed by the parent company and they might either find themselves with no beneficiaries or find themselves unable effectively to restrict the beneficiaries to employees who had given service to the company. They accordingly set about making arrangements to wind up the trusts, arrangements which, in 1979, were accelerated by the knowledge that the parent company planned to transfer all the employees of the company to its own employment on 1 April 1979. By deeds dated 15 March 1979 both the trusts were varied, the material alterations for present purposes being (1) the insertion, for the protection of the trustees on any distribution, of a clause enabling them to rely conclusively on a signed statement of the secretary of company containing particulars of the employees on any particular date and containing information regarding length of service, salary and other data relating to any employee and (2) the substitution, by way of a schedule, of new trusts to take effect on the termination of the trust period. So far as material the provisions in the schedule of the 1957 deed were as follows:
1. In this Schedule … (2) “the Termination Date” means the date of expiration or earlier termination of the Trust Period. (3) “Eligible Employee” means a person who was at the 31st December 1977 and is at the Termination Date an employee of the Company (including a director holding salaried employment or office with the Company) but who has not at any time before the Termination Date sold or transferred any share in the Company to the Trustees for the time being of the Principal Deed … (5) “the Terminal Fund” means the net monies remaining held by the Trustees … after payment of or provision for … liabilities …
2. The Trustees shall within the nine months immediately following the Termination Date pay or provide for all liabilities mentioned in the definition of the Terminal Fund and apply the Terminal Fund by allocating thereout in respect of each Eligible Employee such a sum as the Trustees shall in their absolute and unfettered discretion think fit but so that A. No Eligible Employee shall be entitled to receive as of right any sum allocated to him B. The Trustees shall apply all sums allocated to Eligible Employees in one or more of the following ways and such application shall be made within three months of the allocation in question (the
Page 973 of [1989] 1 All ER 969
choice of application to be in the absolute and unfettered discretion of the Trustees) namely:—(i) by paying the same to the Eligible Employee in each case or where the Eligible Employee is dead, to his personal representative as an accretion to his Estate; (ii) by purchasing from an insurance company … a non-commutable non-assignable annuity policy in his name the annuity whereunder is payable as from his attainment of age 65 (or in the case of a woman, age 60) or, if such age has already been attained at the date of purchase, is payable as an immediate annuity.
3. Every allocation and application shall be made in writing and pursuant to a unanimous resolution of the Trustees.
4. The Trustees before making any payment shall be entitled to deduct or make provision for all taxation payable by the Trustees in respect thereof.
5. Subject to the trusts aforesaid, the Trustees shall hold the Terminal Fund upon trust to divide and pay the same to and amongst all the Eligible Employees in shares proportional to their salaries for the year ended 31st December 1978 … and any payment so falling to be made to an Eligible Employee who has died before it has been made shall be paid to his legal personal representatives.’
The schedule to the amended deed regulating the Harry Jarrom Trust was in similar terms save that eligible employees were limited to those who had been in the service of the company on 31 December 1975.
These alterations having been effected, the trustees, by deeds dated 29 March 1979, directed that the trust period in relation to each fund should thereupon terminate in relation to the whole of the trust property. It thus became necessary, unless the ultimate trust in default was to take effect, for the trustees to allocate the funds among the eligible employees before the end of December 1979. On 1 April 1979 all the company’s employees were transferred to the employment of the parent company and their employment by the company ceased. On the previous day a notice had been posted on the company’s notice board informing employees of the existence of the trusts, announcing their winding up and outlining the procedure which would be followed. For many employees this may well have been the first occasion on which they were aware of the existence of trusts.
The trustees were concerned that the division of the funds should be conducted as fairly as possible and various computer print-outs were obtained showing the effect of applying various formulae which attached different weights to length of service and salary scales. None of these was actually adopted, but they were used to form the basis for ultimate allocation, although, by adopting a lower cut-off point to reduce differentials, there was a substantial departure from the figures yielded by the print-outs. By written resolutions dated 21 December 1979 the trustees of both funds resolved on the allocation of the funds among some 770 employees (633 in the case of the Harry Jarrom Trust fund) in accordance with the decision at which they had ultimately arrived. As a result there became payable to the taxpayer an aggregate sum of £18,111 from the two funds, being as to the major part capital before provision for tax and as to the balance interest after provision for tax at 45%. On 22 February 1980 letters were dispatched to each qualified employee stating the amount allotted and on 18 March 1980 the trustees passed formal resolutions for the application of the funds in accordance with the allocation. A small number of allocations were made in the form of annuity purchases but the majority were applications of cash, including those to the taxpayer, Mr Best, who was a senior employee who had been in the service of the company continuously since 23 April 1957.
On 4 March 1983 the inspector of taxes raised assessments on the taxpayer in respect of each year from the year 1958–59 to the year 1978–79 (inclusive) in sums which represented the inspector’s calculation of an appropriate proportion of the taxpayer’s total allocation from the funds for each year of his service, the assessment for the year 1978–79 being in a sum of £13,728, which was intended as an alternative assessment raised on the footing that the whole allocation was chargeable for that year and to be reduced appropriately if the remaining assessments were confirmed on appeal to the
Page 974 of [1989] 1 All ER 969
commissioners. The taxpayer appealed to the Special Commissioner, who, on 16 February 1984, allowed the appeal and, at the request of the Crown, stated a case for the High Court (set out at [1986] STC 97–108). The underlying basis of the Special Commissioner’s conclusion was that, although the sums allocated to the taxpayer constituted an emolument from his employment which would otherwise be taxable under Case I of Sch E, they escaped the charge to tax because they could not be attributed to any year of assessment other than the year 1979–80 in which the taxpayer’s entitlement arose, and that, since in that year there was no employment of the taxpayer and consequently no source from which the emolument arose, there could be no charge to tax under Case I of Sch E, although it was not disputed and had never been disputed that there was a liability under s 187 of the Income and Corporation Taxes Act 1970 but subject to the exemption provided in s 188 of that Act. On 20 January 1986 Walton J ([1986] STC 96) allowed the Crown’s appeal, holding that emoluments from an employment must be paid in respect of some period of service which must either be a definable period or, failing that, the whole period of the employment. He accordingly remitted the matter to the commissioner to determine, as a question of fact, over what period the sums allocated should be deemed to have been earned and how they should be apportioned. From this decision the taxpayer appealed to the Court of Appeal ([1988] 2 All ER 105, [1988] 1 WLR 784), which unanimously allowed the appeal and upheld the conclusion of the Special Commissioner.
My Lords, the relevant statutory provisions fall within a small compass. Section 181 of the Income and Corporation Taxes Act 1970 provides (so far as material) as follows:
‘(1) The Schedule referred to as Schedule E is as follows:—
SCHEDULE E
1. Tax under this Schedule shall be charged in respect of any office or employment on emoluments therefrom which fall under one, or more than one, of the following Cases—Case I: where the person holding the office or employment is resident and ordinarily resident in the United Kingdom, any emoluments for the chargeable period … and tax shall not be chargeable in respect of emoluments of an office or employment under any other paragraph of this Schedule … ’
Section 183(1) provides that the expression ‘emoluments’ shall ‘include all salaries, fees, wages, perquisites and profits whatsoever’. ‘Chargeable period’ is defined in s 526(5) as an accounting period of a company or a year of assessment’ and ‘year of assessment’ is defined by the same section as meaning ‘with reference to any income tax, the year for which such tax was granted by any Act granting income tax’.
The only other provisions which ought to be mentioned, since they form the foundation of one of the Crown’s submissions, are ss 29 and 50 of the Taxes Management Act 1970. Sections 7 and 8 of that Act contain machinery for the making of returns by persons chargeable to income tax for any year of assessment and s 29(1) provides for an assessment to be made by a tax inspector. If it appears to the inspector that there are chargeable profits which have not been included in a return ‘he may make an assessment to tax to the best of his judgment’ (s 29(1)(b)). Alternatively, if an inspector ‘discovers’ either that profits which ought to have been assessed to tax have not been so assessed or that an assessment to tax is insufficient, he may make an assessment ‘in the amount, or the further amount, which ought in his … opinion to be charged’ (s 29(3)). Section 50 regulates the procedure on an appeal to the commissioners of income tax and sub-s (6) provides that if on such an appeal it appears to the majority of the commissioners present at the hearing ‘by examination of the appellant … or by other lawful evidence, that the appellant is overcharged by any assessment, the assessment shall be reduced accordingly, but otherwise every such assessment shall stand good’.
The provisions of the Income and Corporation Taxes Act 1970 to which I have referred underline the annual nature of income tax. For an emolument to be chargeable to income tax under Sch E, not only must it be an emolument from an employment but it must be an emolument for the year of assessment in respect of which the charge is sought
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to be raised. The argument for the taxpayer is a very simple one. Granted, it is said, that the payment to which the taxpayer became entitled out of the trust funds was a profit which derived from his previous employment with the company and thus an emolument from that employment, the only chargeable period for which it could possibly be said to have been paid is the year of assessment, 1979–80. It is a well-established principle, deriving from the nature of income tax as an annual tax, that a receipt or entitlement arising in a year of assessment is not chargeable to tax unless there exists during that year a source from which it arises (see, for instance, Brown v National Provident Institution [1921] 2 AC 222). The principle is conveniently expressed in Whiteman and Wheatcroft on Income Tax (2nd edn, 1976) p 21 as follows:
‘… most types of income are classified by reference to the source from which they come. From this it was held to follow that if a taxpayer ceased to possess a particular source of income, he could not be taxed on delayed receipts from that source unless they were referable to, and could be assessed in respect of, a period during which he possessed the source.’
There is, it is argued, no ground for attributing the payment in the instant case to any period other than that in which the taxpayer became entitled to and received it, and, since in that period he had ceased to be employed and thus to possess the source from which the entitlement arose, the sum cannot be taxable under Sch E for that period, although it is not contested that the payment was one made in connection with the termination of his employment and so taxable under the provisions of s 187 of the Act.
The argument of the Crown can, I think, be fairly summarised in the following five propositions. (1) The trusts were instituted as a reward for the services of employees of the company and the payments made to the taxpayer and other ex-employees were found as a fact by the Special Commissioner to be a ‘reward for their services’ (see [1986] STC 96 at 107). (2) A reward for services is the same as remuneration and can only be remuneration for a period during which services are being performed under the contract of services. (3) It follows that the emolument must be for a chargeable period during which the employment continued and in the absence of any clear ascription to any particular year or years of the employment it can only be ‘for’ the whole period of the employment. (4) The inspector was accordingly entitled to apportion the payment to the best of his ability in the exercise of the judgment which he is called on to exercise under s 29(1)(b) of the Taxes Management Act 1970 or the opinion which he has to form under s 29(3) of that Act. (5) Having regard to the provisions of s 50(6) of the Act, the assessment must stand unless the taxpayer can point conclusively to some other period of apportionment or some more appropriate period of attribution.
In effect, the submission of the Crown amounts to this: that it is in the very nature of an emolument from an employment that it cannot be otherwise than ‘for’ a chargeable period during which the employment continued and it is this that is at the root of the argument, although counsel for the Crown would, I think, say that he does not have to go this far because he has a finding of fact in his favour which necessarily entails the consequence that the payment to the taxpayer was made for some chargeable period during which the taxpayer’s contract of employment was in being. Although before the Special Commissioner and in the High Court the taxpayer had contested that the sum paid constituted an emolument from his employment, the decision of this House in Brumby (Inspector of Taxes) v Milner [1976] 3 All ER 636, [1976] 1 WLR 1096 effectively precludes further argument on this point and the question has not been pursued either before the Court of Appeal or before your Lordships. Thus the only question which has now to be determined is whether the payments made to the taxpayer comprised or included emoluments for all or any of the chargeable periods 1958–59 to 1978–79 inclusive for which he has been assessed. Nevertheless, although the payment to the taxpayer is accepted to be an emolument from his employment, it is still necessary for the purposes of answering the only remaining question to determine the nature of the emolument, particularly in the light of the Special Commissioner’s
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finding of fact on which the Crown relies. I turn therefore to that finding. In Brumby v Milner [1975] 3 All ER 1004 at 1010, [1976] 1 WLR 29 at 36 in the Court of Appeal, Lord Russell in delivering the judgment of the court said:
‘We do not consider that the provision for terminal payments can be considered as, so to speak, a throwaway provision bearing no colour of reward for services; the very existence of the discretion to allocate is against this inference. It appears to us that the scheme is one scheme based fundamentally on reward for services by employees, and the fact that after the final payment there is no more by way of bonus to look for does not relevantly distinguish that final payment.’
That was a case the facts of which were very similar to those of the instant case save that there was no question but that the employment was continuing when the payment was made.
So far as material for present purposes the commissioner’s finding was expressed in a passage in which, after quoting the excerpt from the Court of Appeal’s judgment just referred to, he continued ([1986] STC 96 at 107):
‘After careful consideration I find that those words summarise also my view of the facts of the present case, so far as the source of the payment is concerned.’
A little later he observed:
‘The company was obviously very prosperous and its support for any application for shares amounted in my view to a reward for services.’
Counsel for the Crown argues that this amounts to a distinct finding of fact that the payments made to the taxpayer were remuneration for the services which he rendered to the company and a finding that, since there were no such services rendered in the year in which the taxpayer’s entitlement arose, they were remuneration for previous years of service and assessable as such.
My Lords, for my part I find myself unpersuaded that it is possible to deduce from the commissioner’s reference to a ‘reward for services’ a finding that the payment either was or was intended to be, as it were, additional remuneration for services rendered to the company in respect of the previous years in which the taxpayer was employed. The expression ‘reward for services’ in this context probably derives from the decision of this House in Hochstrasser (Inspector of Taxes) v Mayes [1959] 3 All ER 817 at 821, [1960] AC 376 at 388, where Viscount Simonds cited with approval the judgment of Upjohn J in the same case where he said ([1958] 1 All ER 369 at 375, [1959] Ch 22 at 33):
‘… payment must be made in reference to the service the employee renders by virtue of his office, and it must be something in the nature of a reward for services past, present or future.’
This was merely restating in slightly different terms a test propounded by Viscount Cave LC in Seymour v Reed [1927] AC 554 at 559, [1927] All ER Rep 294 at 297, where he spoke of an emolument as including ‘all payments made to the holder of an office or employment as such, that is to say, by way of remuneration for his services’. It has, however, to be remembered that in Hochstrasser v Mayes both Upjohn J and Viscount Simonds were speaking in the context of a case in which the only question in issue was whether an indemnity given by an employer formed in effect additional remuneration for the employee’s services in the year in question. Lord Radcliffe in the same case pointed out that all the various expressions which had been used to test whether particular payments arose ‘from’ an employment (such as payments ‘made to an employee as such’ or ‘in his capacity as an employee’ or ‘by way of remuneration for his services’) were no more than glosses on the statutory language which might be illustrative but could not be treated as definitive (see [1959] 3 All ER 817 at 823, [1960] AC 376 at 391). He observed ([1959] 3 All ER 817 at 823, [1960] AC 376 at 391–392):
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‘For my part, I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee.’
In an earlier case, Bridges (Inspector of Taxes) v Hewitt [1957] 2 All ER 281 at 296, [1957] 1 WLR 674 at 691, Morris LJ referred to an emolument as embracing the ‘conception … that some taxable remuneration may accrue to a person by reason of his having or exercising an office or employment of profit’. Again, in Laidler v Perry (Inspector of Taxes) [1965] 2 All ER 121 at 125, [1966] AC 16 at 31 Lord Reid observed that, although the word ‘reward’ had been used in many cases, it was not apt to include all the cases which can fall within the statutory words, and he gave as an example a gift made to an employee in the hope or expectation that it would produce good service in the future. Lord Morris in the same case said that the facts showed that the employee had received the taxable benefit only ‘because he was a staff employee … the reasons for the distribution are to be found in the employer-employee relationship’ (see [1965] 2 All ER 121 at 126–127, [1960] AC 16 at 33–34). Similarly Lord Hodson referred to the employment as being the ‘causa causans’ of the receipt in question (see [1965] 2 All ER 121 at 127, [1960] AC 16 at 34). It is perhaps worth mentioning that in that case, although the extent of the benefits conferred on employees was directly related to the length of their respective periods of employment, there was no question but that they were taxable as emoluments for the year of receipt.
Of course, emoluments include, and indeed normally consist primarily of, sums paid by way of periodic remuneration for services, but it is, I think, clear that that concept is not an essential ingredient of the term. It is worth mentioning that in Brumby v Milner [1975] 2 All ER 773, [1975] 1 WLR 958 Walton J, whose decision was affirmed both in the Court of Appeal and in this House, adopted Lord Radcliffe’s test in Hochstrasser v Mayes and expressly rejected the submission that, in order to qualify as an emolument, the sum had to be paid ‘in respect of services rendered by’ the employee. ‘In return for … being an employee’ meant, he observed, exactly what it said, although, as he went on to point out, the distinction may seem a semantic one. An employee renders services so that, in some circumstances at least, ‘in return for being an employee’ may be expanded into ‘in return for being a person who renders services’ and then contracted again into ‘in return for rendering services’ (see [1975] 2 All ER 773 at 788, [1975] 1 WLR 958 at 969). In this House, the test adopted both by Lord Simon and Lord Kilbrandon was whether the profit arose ‘from the employment or from something else’, quoting Lord Reid in Laidler v Perry. But perhaps the most striking example, which really conclusively negatives the notion of periodic remuneration as an essential ingredient of an emolument, is the recent case of Hamblett v Godfrey (Inspector of Taxes) [1987] 1 All ER 916, [1987] 1 WLR 357, where a sum paid to an employee at the Government Communications Headquarters for relinquishing his right to remain a member of a trade union was held to be a taxable emolument from his employment. In the light of these authorities, I cannot read the phrase ‘reward for services’ as anything more than a conventional expression of the notion that a particular payment arises from the existence of the employer-employee relationship and not, to use Lord Reid’s words in Laidler v Perry [1965] 2 All ER 121 at 124, [1966] AC 16 at 30, from ‘something else’. I cannot attribute to the commissioner in the instant case the distinct finding of fact for which the Crown has contended and indeed the commissioner’s inability to find any ground for attributing the payment to any year of the taxpayer’s service is inconsistent with the suggestion that he regarded himself as having made any such finding. It is, in addition, to be noted that the commissioner adopted Lord Russell’s reasoning ‘so far as the source of the payment is concerned’ (see [1986] STC 96 at 107). He was at that stage considering only the question of whether the payment was an emolument, not the nature of the emolument.
That, however, is not the end of the case, for the question remains whether, finding of fact or no finding of fact, there is necessarily subsumed in the concession that the
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payment constituted an emolument from the employment a conclusion that it must therefore be ‘for’ a chargeable period within the aggregate period during which the employment subsisted, so that the commissioner should, in any event, either have upheld the assessment or reallocated the payment in some other manner. My Lords, I can see no reason in logic or authority why it should be nor does such a concept emerge from the various paraphrases of the statutory language to which I have already referred. In the Court of Appeal it was said that there is a prima facie presumption that an emolument is paid ‘for’ the year of assessment in which the payee becomes entitled to receive it. I would prefer, however, to say simply that the period to which any given payment is to be attributed is a question to be determined as one of fact in each case, depending on all the circumstances, including its source and the intention of the payer so far as it can be gathered either from direct evidence or from the surrounding circumstances. In the course of his judgment in the Court of Appeal, May LJ conducted a careful review of the relevant authorities and it would be a work of supererogation to repeat it here. Suffice it to say that Hunter (Inspector of Taxes) v Dewhurst (1932) 16 TC 605, [1932] All ER Rep 753 is an example of a case where, although the payment was calculated by reference to a specified length of past service, it was clearly shown on the facts to be referable to the year in which the payee became entitled to it, whilst Heasman v Jordan (Inspector of Taxes) [1954] 3 All ER 101, [1954] Ch 744 and Board of Inland Revenue v Suite [1986] 2 All ER 577, [1986] AC 657 are examples of cases in which the facts clearly established the payment in question to be referable to a period other than the year of assessment in which the entitlement arose. I gratefully accept and adopt the conclusion expressed by May LJ in his judgment when he said ([1988] 2 All ER 105 at 112, [1988] 1 WLR 784 at 792):
‘In my respectful opinion, therefore, the judge’s conclusion that an emolument from an employment must of necessity and as a matter of law be attributed to a period or periods of that employment is erroneous. I think that the year or years of assessment to which to attribute such an emolument is a question of fact to be decided in the light of all the circumstances of the particular case. From the very nature of an emolument from an employment it may well be that in most cases this has indeed to be attributed to a year or particular years of the employment. But this does not necessarily follow.’
In the instant case, the commissioner could, on the facts, find no feature of any significance which would indicate that the payment made to the taxpayer fell to be attributed either to the last year in which he was employed or to all or any of the previous years during his employment by the company. The Court of Appeal could find none and, for my part, I can find none. The mere fact that the seniority of the taxpayer as an employee was a matter taken into account in arriving at the amount of the distribution does not appear to me to be any indication that the payment determined on and made in the year of assessment 1979–80 (because that was the only period within which, in accordance with the trusts declared, it had to be resolved on) can properly be treated as made for or in respect of any other period. I would accordingly dismiss the appeal.
LORD GOFF OF CHIEVELEY. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Oliver, and for the reasons he gives I would dismiss the appeal.
Appeal dismissed.
Solicitors: Solicitor of Inland Revenue; Rawlison & Butler, Crawley (for the taxpayer).
Rengan Krishnan Esq Barrister.
Coronation Street Industrial Properties Ltd v Ingall Industries plc
[1989] 1 All ER 979
Categories: LANDLORD & TENANT; Leases
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD TEMPLEMAN, LORD JAUNCEY OF TULLICHETTLE AND LORD LOWRY
Hearing Date(s): 22, 23 FEBRUARY, 16 MARCH 1989
Landlord and tenant – Covenant – Covenant running with land – Covenant by surety to accept new lease if tenant becoming insolvent and disclaiming lease – Whether surety’s covenant running with land – Whether covenant enforceable by landlord against surety if tenant becoming insolvent and disclaiming lease.
By a lease dated 30 August 1972 the tenant was granted the lease of industrial premises for a term of 21 years. Performance of the tenant’s covenants was guaranteed by the surety. The lease further provided that in the event of the tenant going into liquidation and the lease being disclaimed the surety ‘hereby covenants with the Lessor that it will accept from the Lessor a Lease of the Demised Premises’ for the unexpired residue and on the same terms and conditions of the tenant’s lease except for the surety provisions. In 1984 the tenant went into voluntary liquidation and the liquidators disclaimed the lease. The landlord gave notice to the surety calling on it to take a lease of the unexpired term. The surety refused to enter into a new lease and the landlord brought proceedings to enforce the surety’s covenant to accept a new lease. The master granted the landlord specific performance and, on appeal by the surety, his decision was upheld by the judge. A further appeal by the surety to the Court of Appeal was dismissed. The surety appealed to the House of Lords, contending that a covenant to renew a lease only touched and concerned the demised land in the case of a renewal by the tenant and did not cover an option given to the landlord to create a new lease with a different party.
Held – A covenant by the surety of a tenant to accept a lease replacing the lease granted to the tenant if the tenant became insolvent and disclaimed his lease was a covenant which ran with the land and was therefore enforceable by the landlord against the surety. The appeal would therefore be dismissed (see p 980 c d, p 983 b to e h to p 984 a, post).
P & A Swift Investments (a firm) v Combined English Stores Group plc [1988] 2 All ER 885 applied.
Notes
For the passing of the burden of the tenant’s covenants in a lease, see 27 Halsbury’s Laws (4th edn) para 391, and for cases on the subject, see 31(1) Digest (Reissue) 371–379, 2967–3028.
Cases referred to in opinions
Hunter’s Lease, Re, Giles v Hutchings [1942] 1 All ER 27, [1942] Ch 124.
Muller v Trafford [1901] 1 Ch 54.
Swift (P & A) Investments (a firm) v Combined English Stores Group plc [1988] 2 All ER 885, [1988] 3 WLR 313, HL.
Vyvyan v Arthur (1823) 1 B & C 410, [1814–23] All ER Rep 349, 107 ER 152.
Woodall v Clifton [1905] 2 Ch 257, [1904–7] All ER Rep 268, CA.
Appeal
Ingall Industries plc (the surety) appealed with leave of the Court of Appeal against the decision of the Court of Appeal (Croom-Johnson LJ and Sir Denys Buckley) on 30 March 1988 dismissing the surety’s appeal from the decision of Rose J on 16 July 1987 dismissing
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the surety’s appeal from the order of Master Turner dated 8 May 1987 granting the plaintiff, Coronation Street Industrial Properties Ltd (the landlord), specific performance of a covenant to take a lease of premises at Ashmore Lake Road, Willenhall, Walsall. The facts are set out in the opinion of Lord Templeman.
Gavin Lightman QC and Elizabeth Weaver for the surety.
Roger Ellis for the landlord.
Their Lordships took time for consideration
16 March 1989. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, I have had the opportunity of reading in draft the speech to be delivered by my noble and learned friend Lord Templeman. I agree with it, and for the reasons he gives would dismiss this appeal.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given in the speech of my noble and learned friend Lord Templeman, I would dismiss the appeal.
LORD TEMPLEMAN. My Lords, the question raised by this appeal is whether a covenant by a surety to accept a lease replacing a lease disclaimed on behalf of an insolvent tenant is a covenant which touches and concerns the land so that the benefit of the covenant runs with the reversion.
By a lease dated 30 August 1972 made between the original landlords, Griffiths Bentley & Co Ltd, of the first part, the tenant, Griffiths Bentley (Engineers) Ltd, of the second part, and the appellant surety, Ingall Industries plc (then Ingall Industries Ltd), of the third part, premises at Willenhall, Walsall, were demised to the tenant for the term of 21 years from 30 August 1972 at a rent and subject to covenants on the part of the tenant to pay the rent, to repair and decorate and to perform and observe other obligations which touched and concerned the land so as to be enforceable by assignees and successors in title of the original landlords against the tenant and the successors in title of the tenant without express assignment of the benefit of the tenant’s covenants. Clause 5 of the lease was in these terms:
‘THE Surety at the request of the Lessee and in consideration of the demise hereinbefore contained hereby covenants and guarantees with and to the Lessor that the Lessee or the Surety will at all times hereafter duly pay the rents and other sums hereby reserved … and duly perform and observe all the covenants on the part of the Lessee and conditions herein contained and also that the Surety will at all times hereafter pay and make good to the Lessor on demand all losses costs, damages and expenses occasioned to it by the non-payment of the rent and other sums or any part thereof or the breach or non-observance of any of the said covenants and conditions … and in the event of the tenant (being a Company) going into liquidation or (being an individual) becoming bankrupt and this Lease being disclaimed by a Liquidator or a Trustee in Bankruptcy … the Surety hereby covenants with the Lessor that it will accept from the Lessor a Lease of the Demised Premises for a term commencing on the date of such disclaimer and continuing for the residue then unexpired of the term hereby granted such Lease to be at the cost of the Surety and to contain the like Lessee’s and Lessor’s covenants respectively and the like provisoes and conditions in all respects (including the proviso for re-entry but excluding any provisions for a Surety) and to reserve the like rents and other sums as are herein reserved and made payable provided always that the Surety shall not be bound to accept any such Lease unless the Lessor within the period of three months after such disclaimer serves upon the Surety a Notice in writing so to do … ’
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On 4 August 1981 the original landlords conveyed to the respondent landlord, Coronation Street Industrial Properties Ltd, the freehold reversion of the premises demised by the lease subject to and with the benefit of the lease. The benefit of the covenant by the surety contained in the lease was not expressly assigned.
On 18 May 1984 the tenant went into voluntary liquidation. Pursuant to an order of the Companies Court made on 4 February 1986 the liquidators of the tenant on 11 March 1986 disclaimed all the interests of the tenant in the lease. On 5 June 1986 the landlord gave notice to the surety requiring the surety to take a lease of the demised premises in conformity with the covenant on the part of the surety contained in the lease. In these proceedings the landlord sought and obtained an order requiring the surety to take a lease accordingly. The surety appeals on the grounds that the covenant on the part of the surety to take a lease did not touch and concern the land. Therefore the benefit of the surety’s covenant does not run with the reversion and, in the absence of an express assignment of the benefit of the covenant, the landlord cannot enforce the covenant.
In P & A Swift Investments (a firm) v Combined English Stores Group Plc [1988] 2 All ER 885, [1988] 3 WLR 313 this House considered the covenant by a surety in a form set out and indistinguishable from the present covenant by the surety (see [1988] 2 All ER 885 at 888, [1988] 3 WLR 313 at 317). In that case the tenant defaulted in payment of rent, went into voluntary liquidation and disclaimed the lease. An assignee of the reversion sought and was held entitled to be paid rent on the grounds that covenant by the surety to pay the rent touched and concerned the land and the benefit of the covenant ran with the reversion without express assignment of the benefit of the covenant. Lord Oliver reaffirmed ([1988] 2 All ER 885 at 889, [1988] 3 WLR 313 at 318) the validity of the pronouncement by Best J in Vyvyan v Arthur (1823) 1 B & C 410 at 417, [1814–23] All ER Rep 349 at 352 to the following effect:
‘The general principle is, that if the performance of the covenant be beneficial to the reversioner, in respect of the lessor’s demand, and to no other person, his assignee may sue upon it but if it be beneficial to the lessor, without regard to his continuing owner of the estate, it is a mere collateral covenant, upon which the assignee cannot sue.’
Lord Oliver made the following observations ([1988] 2 All ER 885 at 890–891, [1988] 3 WLR 313 at 320):
‘Formulations of definitive tests are always dangerous, but it seems to me that, without claiming to expound an exhaustive guide, the following provides a satisfactory working test for whether, in any given case, a covenant touches and concerns the land. (1) The covenant benefits only the reversioner for the time being, and if separated from the reversion ceases to be of benefit to the covenantee. (2) The covenant affects the nature, quality, mode of user or value of the land of the reversioner. (3) The covenant is not expressed to be personal (that is to say neither being given only to a specific reversioner nor in respect of the obligations only of a specific tenant). (4) The fact that a covenant is to pay a sum of money will not prevent it from touching and concerning the land so long as the three foregoing conditions are satisfied and the covenant is connected with something to be done on, to or in relation to the land.’
The surety’s obligation to take a new lease after a disclaimer gives effect to the surety’s obligation to procure compliance with the terms of the old lease. In these circumstances, it seems to me that the considerations which led this House in the Swift Investments case to hold that the covenant by the surety touched and concerned the land apply in equal measure to the whole covenant including the covenant to take a new lease after disclaimer. Counsel for the surety, however, in the course of an ingenious and painstaking submission, argued that the decision of this House in the Swift Investments case only
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applied to that part of the surety’s covenant which deals with the payment of rent and performance and observance of the tenant’s covenant and did not deal with the second part of the covenant by the surety which obliges the surety to accept a lease after disclaimer.
Counsel submits that the covenant by the surety to take a lease conferred an option on the landlords to create a new lease. A provision in a lease which provides for the creation of a new lease only touches and concerns the land, he submitted, in the case of a covenant to renew the lease and that exception to the general rule is anomalous and should not be extended.
The rule against perpetuities does not apply to a covenant which touches and concerns the land; the courts, anxious to limit the grant of estates in the future to a perpetuity period, will not extend the anomalous rule that a covenant to renew is a covenant which touches and concerns the land demised. In Muller v Trafford [1901] 1 Ch 54 a covenant by a mesne landlord to grant a further term to a subtenant, if the mesne landlord acquired a further term from the head landlord, was held not to be a covenant for renewal and therefore not to run with the land. Farwell J said (at 60–61):
‘It is said that this is a covenant running with the land. If so, then no question of perpetuity would arise. A covenant to renew has been held for at least two centuries to be a covenant running with the land … Now, if, as has been argued, the rule that covenants for renewal run with the land, and are not, therefore, within the rule of perpetuity, is a mere technical rule, resting on authority and not on any rational principle, then I answer technicality with technicality, and say that this is not a covenant for renewal at all; and I should not be prepared to extend what has been stated in the arguments to be an anomaly, without any reason underlying it, to a case which is not strictly a covenant for renewal.’
Similarly, in Woodall v Clifton [1905] 2 Ch 257, [1904–7] All ER Rep 268 an option conferred on a tenant to purchase the fee simple was held not to touch and concern the land demised. Romer LJ said ([1905] 2 Ch 257 at 279, [1904–7] All ER Rep 268 at 271–272):
‘The covenant is aimed at creating, at a future time, the position of vendor and purchaser of the reversion between the owner and the tenant for the time being. It is in reality not a covenant concerning the tenancy or its terms. Properly regarded, it cannot in our opinion, be said to directly affect or concern the land, regarded as the subject-matter of the lease, any more than a covenant with the tenant for the sale of the reversion to a stranger to the lease could be said to do so. It is not a provision for the continuance of the term, like a covenant to renew, which has been held to run with the reversion, though the fact that a covenant to renew should be held to run with the land has by many been considered as an anomaly, which it is too late now to question, though it is difficult to justify.’
In Re Hunter’s Lease, Giles v Hutchings [1942] 1 All ER 27, [1942] Ch 124 a covenant by a landlord to pay a sum to the tenant on the expiration or sooner determination of the lease was held not to touch and concern the interest which was the subject matter of the lease and Uthwatt J said ([1942] 1 All ER 27 at 30, [1942] Ch 124 at 131):
‘To hold that the burden of the covenant which is here in question runs with the reversion would be to extend the operation of the rule, stated by the Court of Appeal to be anomalous that a covenant to renew touches and concerns the thing demised.’
It does not seem to me that the option cases on which counsel for the surety relies were concerned with the position where a new lease is substituted for an old lease which, through no fault of the landlord, ceases to be effective. It is true that the covenant by the surety in the present case involves the creation of a new tenancy and the creation of a new landlord and tenant relationship, but the new tenancy which replaces the old
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tenancy is no more perpetuitous than the old. For the benefit of the creditors of an insolvent tenant company and in order to enable the assets of the insolvent company to be distributed, the Companies Acts enable the liquidator to disclaim a lease with the consent of the court. Such consent must have been given in the present instance in the belief that the landlords would not be prejudicially affected by the disclaimer. The new tenancy is substituted for the old disclaimed tenancy with the substitution of the surety for the tenant because the surety covenanted in the first place to ensure that the tenant’s obligations under the old tenancy would be performed and observed throughout the term granted by the old tenancy. The original landlords insisted on a covenant by a surety in the old lease in order to provide against the very possibility which happened, namely the insolvency of the tenant. In these circumstances I adhere to the views which were expressed in the Swift Investments case [1988] 2 All ER 885 at 887, [1988] 3 WLR 313 at 316:
‘A surety for a tenant is a quasi tenant who volunteers to be a substitute or twelfth man for the tenant’s team and is subject to the same rules and regulations as the player he replaces.’
As a result of the disclaimer the tenant retires mortally wounded and the surety is the substitute. The covenants by the surety in the old lease touch and concern the land demised and the benefit of and the right to enforce that covenant ran with the reversion and became vested in the landlord when the old tenancy was assigned to it.
Accordingly, I would dismiss this appeal.
LORD JAUNCEY OF TULLICHETTLE. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Templeman with which I entirely agree, and I wish to add only a few words of my own. The gravamen of the argument of counsel for the surety was that, with the single anomalous exception of an option to the tenant to renew his lease options in leases did not touch and concern the land and consequently did not run with the land. The provision with which this appeal was concerned was an option in favour of the lessor. I very much doubt whether it is correct so to describe the provision. I would prefer to describe it as a contingent obligation by the surety on the lease being disclaimed on behalf of the lessee to accept a lease of the premises for the unexpired portion of the lease. The contingency is a timeous demand being made by the lessor.
Counsel for the landlord was, in my view, well founded in submitting that the second part of the covenant was analogous to the first part. Indeed I would go further and say that it was both analogous and complementary thereto. The first part protects the lessors’ interest by guaranteeing performance of the lessee’s obligations to the lessors while the lease subsists. The second part protects that interest by covenanting to accept a lease for the residue of the term on the same conditions in the event of the lease being disclaimed on behalf of the lessee. The second covenant satisfies the working test suggested by Lord Oliver in P & A Swift Investments (a firm) v Combined English Stores Group plc [1988] 2 All ER 885 at 890–891, [1988] 3 WLR 313 at 320. If the lessors had not conveyed the reversion to the landlord the surety would have been bound on a disclaimer by the lessee’s liquidator to accept a lease if called on timeously to do so. He would have been similarly bound if the lessors had previously conveyed the reversion and had expressly assigned the benefit of the surety’s covenant. Why then should he be able to avoid the performance of his covenant because events have occurred which affect neither the extent of the obligations of the lessee nor of himself and over which neither of them had any control? So far as the surety is concerned, the only effect of the conveyance of the reversion is that he receives a lease from, pays rent to and otherwise performs his obligations as tenant to someone other than the original lessor. In my view neither justice nor common sense require that he shall be relieved of his obligations in these circumstances.
Page 984 of [1989] 1 All ER 979
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Templeman and Lord Jauncey and, for the reasons given by my noble and learned friends, I, too, would dismiss this appeal.
Appeal dismissed.
Solicitors: George Carter & Co (for the surety); Wigram & Co (for the landlord).
Mary Rose Plummer Barrister.
British Medical Association v Greater Glasgow Health Board
[1989] 1 All ER 984
Categories: CONSTITUTION; Crown: ADMINISTRATIVE LAW
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD TEMPLEMAN, LORD JAUNCEY OF TULLICHETTLE AND LORD LOWRY
Hearing Date(s): 20, 21, 22 FEBRUARY, 16 MARCH 1989
Crown – Proceedings against – Health authority – Scottish health board – Relief against Crown – Interdict proceedings against Scottish health board – Whether action against health board a proceeding against Crown – Whether health board entitled to immunity from suit – Crown Proceedings Act 1947, ss 17(3), 21 – National Health Service (Scotland) Act 1978, s 2.
An action against a health board constituted under s 2a of the National Health Service (Scotland) Act 1978 is not a proceeding against the Crown for the purposes of s 21b of the Crown Proceedings Act 1947, read with s 17(3)c of that Act and s 2(8)d of the 1978 Act, and accordingly such boards are not entitled to immunity from interdict proceedings by virtue of s 21 of the 1947 Act (see p 985 e to g, p 990 h j and p 991 b to d f, post).
Notes
For limitation of proceedings against the Crown, see 8 Halsbury’s Laws (4th edn) para 969 and 11 ibid para 1435.
For the Crown Proceedings Act 1947, ss 17, 21, see 13 Halsbury’s Statutes (4th edn) 28, 30.
The functions of health boards constituted in Scotland under s 2 of the National Health Service (Scotland) Act 1978 are performed in England and Wales by health authorities established under s 8 of the National Health Service Act 1977. For s 8 of the 1977 Act, see 30 Halsbury’s Statutes (4th edn) 815.
Cases referred to in opinions
BBC v Johns (Inspector of Taxes) [1964] 1 All ER 923, [1965] Ch 32, [1964] 2 WLR 1071, CA.
Feather v R (1865) 6 B & S 257, 122 ER 1191.
Page 985 of [1989] 1 All ER 984
Pfizer Corp v Ministry of Health [1963] 3 All ER 779, [1964] Ch 614, [1963] 3 WLR 999, CA affd [1965] 1 All ER 450, [1965] AC 512, [1965] 2 WLR 387, HL.
Raleigh v Goschen [1898] 1 Ch 73.
Town Investments Ltd v Dept of the Environment [1977] 1 All ER 813, [1978] AC 359, [1977] 2 WLR 450, HL.
Wood v Leeds Area Health Authority (Training) [1974] ICR 535, NIRC.
Appeal
The Greater Glasgow Health Board appealed with leave of the Inner House of the Second Division of the Court of Session in Scotland against an interlocutor of that court (the Lord Justice Clerk (Ross), Lord Dunpark and Lord Mayfield) (1988 SCLR 403) dated 10 March 1988 refusing a reclaiming motion by the appellants against an interlocutor of the Lord Ordinary (Prosser) (1988 SCLR 1) dated 26 February 1987 granting the respondents, the British Medical Association, interim interdict against the appellants from interviewing candidates for the position of Director of the Plastic and Oral Surgery Unit, Canniesburn Hospital, Glasgow unless and until the grievance of the consultants in the unit had been determined in accordance with the procedures in the agreement between the appellants and organisations represented on the Whitley Council, including, inter alia, the respondents. The facts are set out in the opinion of Lord Jauncey.
R N M MacLean QC and M G Clarke (both of the Scottish Bar) for the appellants.
M S R Bruce QC and C M Campbell (both of the Scottish Bar) for the respondents.
Their Lordships took time for consideration
16 March 1989. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Jauncey. I agree with it, and would dismiss the appeal for the reasons he gives.
LORD BRANDON OF OAKBROOK. My Lords, for the reasons set out in the speech to be delivered by my noble and learned friend Lord Jauncey, I would dismiss the appeal.
LORD TEMPLEMAN. My Lords, for the reasons to be given by my noble and learned friend Lord Jauncey, I would dismiss the appeal.
LORD JAUNCEY OF TULLICHETTLE. My Lords, this appeal arises out of a dispute between consultants at the West of Scotland Regional Plastic and Oral Surgery Unit at Canniesburn Hospital, Glasgow, and the Greater Glasgow Health Board. The sole issue raised by the appeal is whether a health board constituted under the National Health Service (Scotland) Act 1978 is entitled to immunity from interdict proceedings by virtue of s 21 of the Crown Proceedings Act 1947. It is necessary to say no more about the dispute than that it concerned the appointment of a director of the unit. The Lord Ordinary (Prosser) granted interim interdict against the health board ‘from interviewing candidates for the position of Director of the Plastic and Oral Surgery Unit, Canniesburn Hospital, Glasgow’ (see 1988 SCLR 1). The interdict sought was at the instance of the British Medical Association, who represent the consultants in dispute, and extended also to the appointment of a director, but in view of an undertaking by the health board to make no appointment until certain agreed disputes procedures had been exhausted, interdict against appointment became unnecessary. The health board reclaimed the Lord Ordinary’s interlocutor but the Second Division refused the reclaiming motion (see 1988 SCLR 403).
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The health board has now appealed. However, in the interval which elapsed between the interlocutor of the Second Division of 10 March 1988 and the hearing of the appeal in this House the disputes procedures were exhausted and a director was appointed. It followed that the question of whether interim interdict should stand or be recalled had become academic. Nevertheless counsel for the appellants moved your Lordships to hear the appeal for two reasons, namely (1) that a live issue still existed between the parties in relation to expenses in the courts below and costs in this House and (2) that the question raised by the appeal was one of general importance which would be likely to arise again in disputes between the British Medical Association and its members on the one hand and the health boards on the other. Counsel for the respondents did not oppose this motion. Your Lordships took the view that as there was still a lis between the parties it would be proper to hear the appeal.
In addressing the question of whether a health board is entitled to immunity from interdict proceedings it is necessary in the first place to look at the relevant statutory provisions. Section 36(1) of the National Health Service (Scotland) Act 1978 provides:
‘It shall be the duty of the Secretary of State to provide throughout Scotland, to such extent as he considers necessary to meet all reasonable requirements, accommodation and services of the following descriptions—(a) hospital accommodation, including accommodation at state hospitals; (b) premises other than hospitals at which facilities are available for any of the services provided under this Act; (c) medical, nursing and other services, whether in such accommodation or premises, in the home of the patient or elsewhere.’
Section 2(1) of the 1978 Act (as amended by para 1 of Sch 7 to the Health and Social Services and Social Security Adjudications Act 1983) provides, inter alia:
‘The Secretary of State shall by order constitute in accordance with Part I of Schedule 1 boards for such areas as he may by order determine, for the purpose of exercising such of his functions under this Act as he may so determine … ’
Paragraph 1 of Sch 1 to the 1978 Act provides that a health board shall be a body corporate and shall have a common seal. Subsections (8) and (9) of s 2 are in the following terms:
‘(8) A Health Board shall, notwithstanding that it is exercising functions on behalf of the Secretary of State, be entitled to enforce any rights acquired, and shall be liable in respect of any liabilities incurred (including liability in damages for wrongful or negligent acts or omissions), in the exercise of those functions in all respects as if the Health Board were acting as a principal; and all proceedings for the enforcement of such rights or liabilities shall be brought by or against the Health Board in its own name.
(9) A Health Board shall not be entitled to claim in any proceedings any privilege of the Crown in respect of the recovery or production of documents; but this subsection shall be without prejudice to any right of the Crown to withhold, or procure the withholding from production of, any document on the ground that its disclosure would be contrary to the public interest.’
Although health boards are creatures of the 1978 Act the functions which they perform were previously carried out by regional hospital boards and boards of management under the National Health Service (Scotland) Act 1947. That Act imposed on the Secretary of State duties similar to those imposed on him by s 36(1) of the 1978 Act. Section 13 of the 1947 Act was in the following terms:
‘(1) A Regional Hospital Board shall, notwithstanding that they are exercising functions on behalf of the Secretary of State and a Board of Management shall, notwithstanding that they are exercising functions on behalf of the Regional
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Hospital Board be entitled to enforce any rights acquired, and shall be liable in respect of any liabilities incurred (including liability in damages for wrongful or negligent acts or omissions), in the exercise of those functions, in all respects as if the Regional Hospital Board or Board of Management, as the case may be, were acting as a principal, and all proceedings for the enforcement of such rights or liabilities shall be brought by or against the Regional Hospital Board or Board of Management, as the case may be, in their own name.
(2) A Regional Hospital Board or Board of Management shall not be entitled to claim in any proceedings any privilege of the Crown in respect of the recovery or production of documents, but this subsection shall be without prejudice to any right of the Crown to withhold or procure the withholding from production of any document on the ground that its disclosure would be contrary to the public interest.’
Section 13 of the comparable English Act, the National Health Service Act 1946, was in virtually identical terms. Section 21 of the Crown Proceedings Act 1947, which was later in time than the National Health Service (Scotland) Act 1947 is, so far as relevant, in the following terms:
‘(1) In any civil proceedings by or against the Crown the court shall, subject to the provisions of this Act, have power to make all such orders as it has power to make in proceedings between subjects, and otherwise to give such appropriate relief as the case may require: Provided that:—(a) where in any proceedings against the Crown any such relief is sought as might in proceedings between subjects be granted by way of injunction or specific performance, the court shall not grant an injunction or make an order for specific performance, but may in lieu thereof make an order declaratory of the rights of the parties …
(2) The court shall not in any civil proceedings grant any injunction or make any order against an officer of the Crown if the effect of granting the injunction or making the order would be to give any relief against the Crown which could not have been obtained in proceedings against the Crown.’
Against this statutory background counsel for the appellants propounded two alternative tests for determining whether a body fell to be treated as the Crown for the purposes of s 21. In the first place the Crown extended to Her Majesty’s government in the United Kingdom and those persons and bodies which are appointed or created to carry out exclusively the functions of the executive government. In the second place the Crown included a body, person or corporation whose essential activities were carried out exclusively in the performance of a duty or the exercise of a power which is imposed on or vested in the executive government by statute or prerogative. Such a body might be a government agency. A health board, it was said, satisfied both these tests. In support of this argument counsel referred to a number of authorities as showing that the Crown embraces agencies which carry out the executive functions of government on its behalf. In BBC v Johns (Inspector of Taxes) [1964] 1 All ER 923 at 941, [1965] Ch 32 at 79 Diplock LJ, in considering whether the BBC were entitled to Crown immunity from payment of taxes, said:
‘But to use the expression “the Crown” as personifying the executive government of the country tends to conceal the fact that the executive functions of sovereignty are of necessity performed through the agency of persons other than the Queen herself. Such persons may be natural persons or, as has been increasingly the tendency over the last hundred years, fictitious persons—corporations. The question here is whether the B.B.C. carries on all or any of its activities as agent for the executive government. Are they carried out in the performance of a duty or in the exercise of a power which is imposed on or vested in the executive government of the United Kingdom by statute or by the prerogative? (cf. Pfizer Corpn. v. Ministry of Health ([1963] 3 All ER 779 at 788, [1964] Ch 614 at 645)).’
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In Town Investments Ltd v Dept of the Environment [1977] 1 All ER 813 at 818, [1978] AC 359 at 381 Lord Diplock said:
‘Where, as in the instant case, we are concerned with the legal nature of the exercise of executive powers of government, I believe that some of the more Athanasian-like features of the debate in your Lordships’ House could have been eliminated if instead of speaking of “the Crown” we were to speak of “the government”—a term appropriate to embrace both collectively and individually all of the Ministers of the Crown and Parliamentary Secretaries under whose direction the administrative work of government is carried on by the civil servants employed in the various government departments. It is through them that the executive powers of Her Majesty’s Government in the United Kingdom are exercised, sometimes in the more important administrative matters in Her Majesty’s name, but most often under their own official designation. Executive acts of government that are done by any of them are acts done by “the Crown” in the fictional sense in which that expression is now used in English public law.’
Both these cases were concerned with Crown immunity and necessarily involved consideration of whether for general purposes a particular individual or body was the Crown.
Perhaps more germane to the present appeal is Pfizer Corp v Ministry of Health [1963] 3 All ER 779, [1964] Ch 614, which was concerned with whether the use of drugs by the National Health Service was ‘for the services of the Crown’ for the purposes of s 46(1) of the Patents Act 1949. In the Court of Appeal Willmer LJ, after reference to certain sections of the National Health Service Act 1946, said ([1963] 3 All ER 779 at 786, [1964] Ch 614 at 642):
‘These provisions of the Act of 1946 to which I have referred seem to me to lead inexorably to the conclusion that regional hospital boards, hospital management committees and hospital officers, in exercising their respective functions, are acting on behalf of the minister for the purpose of discharging the duties laid by the statute on him, and are therefore carrying on services of the Crown.’
Diplock LJ said ([1963] 3 All ER 779 at 792–793, [1964] Ch 614 at 652–653):
‘The duty to provide hospital and specialist services is imposed on the Minister. It is in its nature a duty which he can only perform vicariously through agents acting on his behalf. The Act requires him to do so through the immediate agency of the regional hospital boards. The regional hospital boards, being corporations, can themselves only do the physical acts involved in the provision of the services on behalf of the Minister, vicariously through their officers and servants. Any act done by an officer or servant of a regional hospital board for the purpose of providing hospital or specialist services is accordingly done on behalf of the Minister in performance of the statutory duty which is imposed on him. Their acts are acts of a government department. Counsel for [Pfizer Corp] placed considerable reliance on s. 13 of the Act of 1946, as showing that the regional hospital boards exercise their functions as principals and not as agents of the Minister. But the section seems to me to be directed to quite a different matter. The National Health Service Act, 1946, was passed before the Crown Proceedings Act, 1947. At that date the fact that a regional hospital board was acting on behalf of a minister of the Crown would have entitled it to shelter behind the immunity of the crown from suit except by petition of right: (see Feather v. R. ((1865) 6 B & S 257, 122 ER 1191)); Raleigh v. Goschen ([1898] 1 Ch 73). All that s. 13 does is to re-assert that a regional hospital board is acting on behalf of the Minister (i.e., on behalf of the Crown) but to provide that, for the purpose of legal proceedings for the enforcement of rights and liabilities, it shall be treated, notwithstanding that it is an agent of the Crown, as if it were acting
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as principal and shall sue and be sued in its own name. Such a provision would have been unnecessary unless a regional hospital board, in exercising its functions under the Act, was acting on behalf of the Crown. It is not, in my view, necessary to determine whether the officers and servants of a regional hospital board are strictly “servants of the Crown“. It is sufficient for the decision of the present appeal that, in administering or supplying drugs to in-patients or out-patients for the purpose of their treatment at National Health Service hospitals, such officers and servants are acting on behalf of the Minister in fulfilment of his statutory duty to provide medical, nursing and other services required at or for the purposes of hospitals. The use of patented drugs for this purpose is thus, in my view, a use by a government department.’
The Court of Appeal’s decision that supply of patented drugs to hospital patients was for the service of the Crown was upheld by this House, where Pfizer Corp conceded that doctors and nurses in National Health hospitals were to be treated as servants or agents of the Crown (see [1965] 1 All ER 450 at 453, [1965] AC 512 at 533 per Lord Reid). Counsel for the appellants relied strongly on the dictum of Diplock LJ that acts of an officer or servant of a regional hospital board ‘are acts of a government department’ in support of the proposition that health boards were the Crown or, in any event, agents of the Crown in a sense which identified them much more closely with the Crown than would a private agent be identified with his principal (see [1963] 3 All ER 779 at 792, [1964] Ch 614 at 653). He also referred to Wood v Leeds Area Health Authority (Training) [1974] ICR 535 at 538, in which Donaldson P, in the National Industrial Relations Court, having posed the question of whether national health service employees were servants of the Crown, referred to the National Health Service Act 1946 and to the passage from the judgment of Willmer LJ in Pfizer Corp v Ministry of Health [1963] 3 All ER 779 at 786, [1964] Ch 614 at 642 which I have quoted above, and concluded that the plaintiff, who was a national health service employee, was in fact a Crown servant. If, it was argued, a national health service employee engaged and paid by a health authority was a Crown servant it must follow that the authority was itself the Crown or an agent thereof. Accordingly, proceedings against the health authority were proceedings against the Crown. Reliance was also placed on (1) s 138(5) of and Sch 5 to the Employment Protection (Consolidation) Act 1978, which provided that for the purposes of certain parts of that Act health boards should not be regarded as performing functions on behalf of the Crown so that employment by them would not be Crown employment, and (2) s 1(1)(a) of the National Health Service (Amendment) Act 1986, which is in the following terms:
‘For the purposes of food legislation—(a) a health authority shall not be regarded as a servant or agent of the Crown, or as enjoying any status, immunity or privilege of the Crown … ’
These two statutory provisions, it was said, showed that for all purposes other than those therein referred to, health authorities were the Crown.
My Lords, these arguments were attractive, but I consider that they failed to address directly the critical question which is not whether health boards perform functions on behalf of the Crown, a matter which was not disputed by counsel for the respondents, nor whether health boards for the purposes of statutory immunity or other purposes fall to be treated as the Crown or as agents so clearly identified with the Crown that they are for all practical purposes indistinguishable therefrom, but whether the respondents’ petition amounted to ‘proceedings against the Crown’ within the meaning of s 21(1) of the Crown Proceedings Act 1947. The four authorities to which I have referred were not concerned with this point. That Act, as counsel for the respondents pointed out, is not concerned with Crown immunity and who qualifies therefor, but in the words of the long title with ‘the civil liabilities and rights of the Crown’ and ‘civil proceedings by and
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against the Crown’. Indeed, s 40(2)(f) specifically provides that the presumption of Crown immunity from statutory liability is not to be affected. The two primary objects of the Act were (1) to enable a plaintiff in England to proceed against the Crown as of right instead of by petition of right and (2) to subject the Crown in both England and Scotland to actions founded in tort and delict in the same way as other defendants and defenders.
Historically the position of the private litigant vis-à-vis the Crown differed in Scotland and England. While actions founded in tort and delict could be brought against the Crown in neither country, other actions could be brought as of right in Scotland, whereas in England it was necessary to proceed by petition of right. Indeed, interdict was available against the Crown in Scotland although such a remedy was, I understand, inconceivable in England. It could be said that Scots law took a more robust view of the individual’s rights against the Crown than did the law of England. Had the present interdict proceedings been instituted against a regional hospital board after the passing of the National Health Service (Scotland) Act 1947 but before the coming into force of the Crown Proceedings Act 1947, no one could have suggested that they were incompetent. I refer briefly to this historical background because the Crown Proceedings Act 1947 is selective in its application to Scotland, and the historical background must be relevant to this selectivity.
My Lords, s 21(1) of the Crown Proceedings Act 1947 provides that in any proceedings against the Crown the court shall not grant injunction or interdict but shall instead make a declaratory order. Section 21(2) is designed to ensure that sub-s (1) is not circumvented by a litigant obtaining an injunction or interdict against an officer of the Crown which would have the effect of enjoining or interdicting the Crown. Officer in relation to the Crown is defined by s 38(2) as including ‘any servant of His Majesty, and accordingly (but without prejudice to the generality of the foregoing provision) includes a Minister of the Crown’. It was not and in my view could not have been contended that a health board was an officer of the Crown for the purposes of s 21(2). However, the appellants’ argument produces the curious result that whereas the Secretary of State is an officer of the Crown for the purposes of s 21, a health board which carries out functions on his behalf is not an officer of the Crown but the Crown itself. In considering the scope of the proceedings to which s 21 applies, regard must be had to s 17(3) which provides:
‘Civil proceedings against the Crown shall be instituted against the appropriate authorised Government department, or, if none of the authorised Government departments is appropriate or the person instituting the proceedings has any reasonable doubt whether any and if so which of those departments is appropriate, against the Attorney General.’
This section applies only to England, no doubt because provision already existed for suing the Lord Advocate as representing government departments by virtue of the Crown Suits (Scotland) Act 1857. However, although this is a Scottish case, s 17(3) is important as showing the sort of proceedings which Parliament had in mind in s 21, namely proceedings against the appropriate government department or the Attorney General. It is, in my view, inconceivable that Parliament should have intended to fetter the right of the subject to obtain a prohibitory order more strictly in Scotland than in England, particularly when the historical background is remembered. Counsel for the respondents was, in my view, well founded in contending that the underlying approach in s 17(3) and in the 1857 Act was similar. Thus looking at the Crown Proceedings Act 1947 alone, it appears that Parliament intended that relief from prohibitory orders should only be available to the Crown in such proceedings as were instituted in accordance with s 17(3) or with the 1857 Act.
However, this appeal does not turn solely on the provisions of the Crown Proceedings Act 1947 because s 2(8) of the 1978 Act provides that health boards should be liable in respect of any liabilities incurred in the exercise of their functions as if they were
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principals and should be sued in their own name. As I mentioned earlier, a similar provision appeared in the English and the Scottish National Health Service Acts prior to the Crown Proceedings Act, and if Parliament had intended that actions against regional hospital boards and hospital management committees should be treated as civil proceedings against the Crown, it would have been very simple to have so provided in s 17(3) of the Crown Proceedings Act. Section 2(8) of the 1978 Act is prima facie inconsistent with the view that an action against the health board is a proceeding against the Crown for the purposes of s 21 of the Crown Proceedings Act. Counsel for the appellants sought to argue that s 2(9) of the 1978 Act demonstrated that but for its provisions a health board would be entitled to claim Crown privilege in relation to recovery of documents. Even if that is the proper inference to be drawn, of which I am by no means certain, the mere fact that a health board, in exercising the functions imposed on the Secretary of State, could claim Crown privilege in relation to a document, cannot convert it into the Crown for the purposes of proceedings against it. When s 2(8) of the 1978 Act and ss 17(3) and 21 of the Crown Proceedings Act are read together, the inference is inescapable that s 21 was never intended to apply to proceedings against a regional hospital board or its successor, a health board. I am fortified in reaching this conclusion by the fact that the general purpose of the Crown Proceedings Act was to make it easier rather than more difficult for a subject to sue the Crown. To hold that the Act had clothed with immunity from prohibitory proceedings a body which prior to its passing would have enjoyed no such immunity would be to run wholly counter to its spirit. Furthermore, neither principle nor logic would appear to require that a body such as a health board should be granted such a privilege.
All three judges in the Second Division concluded that, although a health board performed certain functions on behalf of the Secretary of State, it was not the Crown and therefore not entitled to protection under the Crown Proceedings Act 1947 (see 1988 SCLR 403). I do not in any way criticise these conclusions, but I do not find it necessary to decide this case on so broad a basis, preferring to rely on a construction of the sections above referred to. I would therefore dismiss the appeal.
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Jauncey.
I agree with it and, for the reasons given by my noble and learned friend I, too, would dismiss this appeal.
Appeal dismissed.
Solicitors: Lawrence Graham agents for James I McCubbin, Edinburgh (for the appellants); S J Berwin & Co agents for Morton Fraser & Milligan WS, Edinburgh (for the respondents).
Mary Rose Plummer Barrister.
R v Lombardi
[1989] 1 All ER 992
Categories: CRIMINAL; Criminal Procedure
Court: COURT OF APPEAL, CRIMINAL DIVISION
Lord(s): LORD LANE CJ, SIMON BROWN AND ROCH JJ
Hearing Date(s): 15, 21 NOVEMBER 1988
Indictment – Addition of new counts – Count founded on facts or evidence before examining justices – Count based on evidence before examining justices but in respect of which defendant not committed – Whether permissible to add or substitute count based on evidence before examining justices but not founded on same facts or forming part of series of same or similar offences as counts in existing indictment – Administration of Justice (Miscellaneous Provisions) Act 1933, s 2(2) proviso – Indictment Rules 1971, r 9.
Additional counts based on evidence which was before the examining justices but in respect of which there has been no committal may only be preferred under the proviso to s 2(2)a of the Administration of Justice (Miscellaneous Provisions) Act 1933 in substitution for or in addition to counts in an indictment in respect of which the defendant has been committed if the new counts can properly be joined in that indictment under r 9b of the Indictment Rules 1971 because they are founded on the same facts or form or are a part of a series of offences of the same or a similar character (see p 995 b to e, post).
Notes
For the joinder of offences on the same indictment, see 11 Halsbury’s Laws (4th edn) para 213, and for cases on the subject, see 14(1) Digest (Reissue) 284–285, 2148–2164.
For defective indictments, see 11 Halsbury’s Laws (4th edn) para 216, and for cases on the subject, see 14(1) Digest (Reissue) 304–305, 2327–2336.
For the Administration of Justice (Miscellaneous Provisions) Act 1933, s 2, see 12 Halsbury’s Statutes (4th edn) 225.
For the Indictment Rules 1971, r 9, see 6 Halsbury’s Statutory Instruments (Grey Volume) 13.
Case referred to in judgment
R v Newland [1988] 2 All ER 891, [1988] QB 402, [1988] 2 WLR 382, CA.
Cases also cited
R v Cairns (1983) 87 Cr App R 287, CA.
R v Roe [1967] 1 All ER 492, [1967] 1 WLR 634, CA.
Appeal against conviction
Raymond Alexander Lombardi appealed with the leave of the single judge against his conviction in the Crown Court at Southwark before Mr T Maher sitting as an assistant recorder on four charges under the Bankruptcy Act 1914 to which he pleaded guilty following the rejection of a submission on his behalf that the indictment containing the counts charging the offences should not be preferred or signed because he had not been committed for trial on those offences. The appellant was sentenced to three months imprisonment to run consecutively with a sentence of 30 months’ imprisonment imposed for counterfeiting offences on which the appellant had been found guilty after trial on another indictment. The facts are set out in the judgment of the court.
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G A Pringle (assigned by the Registrar of Criminal Appeals) for the appellant.
John Blair-Gould for the Crown.
Cur adv vult
21 November 1988. The following judgment was delivered.
LORD LANE CJ. On 9 February 1988 in the Crown Court at Southwark the appellant faced two indictments. The first indictment charged him with four offences under the Forgery and Counterfeiting Act 1981. He was convicted on three of those counts and sentenced to a total of 30 months’ imprisonment. His appeal against that sentence was dismissed on 15 November 1988.
On the second indictment he faced four charges under the Bankruptcy Act 1914. Before arraignment on those charges counsel moved to quash the indictment. The assistant recorder heard argument on both sides and then in a judgment which was admirably succinct and clear he ruled against the application. The appellant then pleaded guilty and was sentenced to a total of three months’ imprisonment to run consecutively to the 30 months in respect of the first indictment.
The history of events, so far as it is material, was as follows. On 6 March 1987 the appellant was committed for trial by the Horseferry Road justices on a number of charges under the 1981 Act. In early June 1987 there appeared two indictments, one in relation to the counterfeiting offences (on which the appellant had been committed for trial) and the other (the second indictment) in relation to bankruptcy offences, in respect of which there was, so it happened, ample evidence before the justices but no charge and no committal.
It was submitted, unsuccessfully, on behalf of the appellant to the assistant recorder at the trial that the second indictment did not comply with the provisions of the Administration of Justice (Miscellaneous Provisions) Act 1933. On this appeal, which comes by leave of the single judge, it is submitted that the ruling of the assistant recorder was wrong, the indictment was bad and the conviction on the bankruptcy charges should accordingly be quashed.
Section 2(2) of the 1933 Act provides as follows:
‘Subject as hereinafter provided no bill of indictment charging any person with an indictable offence shall be preferred unless either—(a) the person charged has been committed for trial for the offence; or (b) the bill is preferred by the direction of the criminal division of the Court of Appeal or by the direction or with the consent of a judge of the High Court … ’
The provisions of para (b) have no application in the present case. The justices did not commit the appellant for trial on these charges. Therefore the provisions of para (a) were not applicable. Accordingly the Crown was thrown back onto the proviso to that section, which read as follows:
‘Provided that—(i) where the person charged has been committed for trial, the bill of indictment against him may include, either in substitution for or in addition to counts charging the offence for which he was committed, any counts founded on facts or evidence disclosed in any examination or deposition taken before a justice in his presence, being counts which may lawfully be joined in the same indictment … ’
There is no dispute that there was the necessary evidence before the justices which disclosed the commission of the bankruptcy offences.
What counsel for the appellant submits in short is that the proviso only allows the prosecution to add or substitute charges to those in the bill of indictment against the defendant, and does not permit the prosecution to prefer another indictment containing
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charges on which he was not committed for trial, even though they may be amply supported by evidence which was before the justices.
Why then, one asks rhetorically, did the prosecution not simply add these bankruptcy counts to the indictment charging the counterfeiting offences? The answer to that is that those counts could not lawfully be included in the same indictment because of the provisions of r 9 of the Indictment Rules 1971, SI 1971/1253, which read as follows:
‘Charges for any offences may be joined in the same indictment if those charges are founded on the same facts, or form or are a part of a series of offences of the same or a similar character.’
The counterfeiting charges and the bankruptcy offences do not fall within that description.
Why then, one asks again, should the prosecution not add the fresh charges to the original indictment and then apply to sever the charges and thus make two indictments?
The answer to that question again is to be found in r 9, which, as already pointed out, prohibits the first step of that exercise. That is emphasised, if emphasis is required, by the decision of another division of this court in R v Newland [1988] 2 All ER 891, [1988] QB 402. In that case it was held that the power to sever an indictment within s 5(3) of the Indictments Act 1915 was applicable only to a valid indictment. Since the indictment in that case charged the appellant with three counts of drug offences and three counts of assault occasioning actual bodily harm, which were not connected with the drug offences, the indictment was invalid and accordingly the power to sever did not exist.
Thus, if the submission of the appellant is correct, one reaches this situation. If the justices had committed for trial on both sets of charges, the prosecution could then legitimately have preferred two separate indictments, one charging the counterfeiting and the other the bankruptcy offences. Since they did not commit on both (although they might have done), the prosecution cannot add the counts because of the terms of r 9, nor can they prefer a second different indictment because s 2 of the 1933 Act only permits addition or substitution to the existing indictment and makes no provision for the preferring of an altogether fresh indictment. The only way, it is suggested, that the prosecution can legitimately proceed on the fresh charges is to obtain a voluntary bill or else to charge the defendant and apply to have him committed for trial by the justices on the fresh charge.
It is tolerably clear that this situation was not present to the minds of those who were responsible for the wording of the proviso to s 2(2) of the 1933 Act. The question is whether the words of the proviso are apt to cover the present situation, namely where the fresh charges are contained in a separate indictment.
Counsel for the Crown puts his case in this way. There is nothing to prevent more than one indictment based on one committal. Therefore the words ‘the bill of indictment’ in the section must mean any bill of indictment, or the bill of indictment which is under consideration at that particular time. The second indictment here contains charges admittedly based on evidence which was before the justices; these charges, he suggests, were ‘in substitution’ for the charges on which the defendant was committed, and they, being all charges under the Bankruptcy Act 1914 of a similar nature to each other, could lawfully be joined in the same indictment. Therefore the second indictment falls within the terms of the proviso.
Section 2(2) is clearly restrictive. Its primary purpose is to prevent indictments being preferred save after committal or alternative judicial leave. The proviso allows some relaxation, which is itself restricted by the final words ‘being counts which may lawfully be joined in the same indictment’.
It would, in our judgment, be contrary to the whole tenor of the section to allow the prosecution to prefer indictments in the way they here suggest without any reference to justices, judge or appellate court. This is particularly so where, under the present day committal proceedings, there may be much evidence on paper, perhaps only marginally
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relevant to the charges on which committal is being sought, but providing evidence of the commission of other criminal offences, and therefore also providing ample scope for further charges and further potential indictments.
It is true that the words ‘bill of indictment’ are apt to include more than one bill of indictment. Thus, as already noted, where the justices have committed on more than one charge, the prosecution are at liberty, in the appropriate case, to prefer a separate indictment in respect of each. However, charges in respect of which there has been no committal, even though based on evidence which was before the justices, can only be the proper subject of indictment where two conditions are satisfied. First, they must be in ‘substitution’ for, or in addition to, the counts in respect of which the defendant was committed. The contentions advanced by the prosecution involve the necessity, so it seems to us, of treating this provision as otiose, or, even worse, of allowing the prosecution to prefer two indictments to create a notional ‘substitution’.
The second condition which has to be satisfied is that the new counts ‘may lawfully be joined in the same indictment’. That must, in our judgment, mean the same indictment as that containing the charges on which the defendant was committed. That is clear from the whole context and also from the use of the word ‘include’. The prosecution contentions require that those words should mean simply that no indictment must contain counts which cannot lawfully be joined, which scarcely needs stating. If Parliament had intended the law to be as the prosecution claim it to be, it would have been easy in plain terms to say so.
In short, in the judgment of this court, the words of s 2(2) and its proviso are not apt to entitle the prosecution to prefer the second indictment. The assistant recorder should have acceded to the motion to quash that indictment. We therefore allow this appeal and quash these convictions.
Appeal allowed. Convictions quashed.
Solicitors: Crown Prosecution Service, Southwark.
N P Metcalfe Esq Barrister.
R v Follett
[1989] 1 All ER 995
Categories: CRIMINAL; Criminal Procedure
Court: COURT OF APPEAL, CRIMINAL DIVISION
Lord(s): LORD LANE CJ, SIMON BROWN AND ROCH JJ
Hearing Date(s): 21 NOVEMBER, 9 DECEMBER 1988
Indictment – Second indictment – Second indictment preferred to cure earlier defective indictment – Earlier indictment charging defendant and others with disparate offences not arising out of same facts – Judge giving leave to prefer three further bills of indictment – Original indictment stayed – Fresh indictment containing two counts against accused – One count same as in original indictment – Second count based on evidence given at committal proceedings – Whether new indictment valid – Indictment Rules 1971, r 9.
The appellant was committed for trial for theft and burglary under a single indictment which charged the appellant and others with disparate offences of theft, burglary, cheque and credit card offences, handling stolen property and drug offences. The indictment contravened r 9a of the Indictment Rules 1971 because the charges were not founded on the same facts and they did not form nor were they part of a series of offences of the same or a similar character. The trial judge gave the prosecution leave to prefer three voluntary
Page 996 of [1989] 1 All ER 995
bills out of time splitting up the offences so that each indictment complied with r 9. Proceedings on the original indictment were stayed. The new indictment contained two counts of theft, the first of which had not appeared in the original indictment but was based on the evidence given at the committal proceedings and could thus properly be included in the new indictment and the second of which was the same as a count in the original indictment. The appellant pleaded guilty to the second count and his trial on the first count proceeded. The appellant was found guilty on the first count. He appealed, contending that the prosecution were not entitled to prefer a fresh series of indictments in order to cure an original indictment which was defective.
Held – Where an indictment was invalid because it was not drawn according to r 9 of the 1971 rules the court was entitled to give leave to the prosecution to prefer out of time fresh indictments which conformed to the 1971 rules, notwithstanding the existence of the original invalid indictment, and then stay proceedings on the original indictment and proceed to trial on the fresh indictments. The appeal would therefore be dismissed (see p 999 d e and p 1001 g h, post).
R v Thompson [1975] 2 All ER 1028 explained.
R v Newland [1988] 2 All ER 891 distinguished.
Notes
For the joinder of offences on the same indictment, see 11 Halsbury’s Laws (4th edn) paras 213, and for cases on the subject, see 14(1) Digest (Reissue) 284–285, 2148–2164.
For defective indictments, see 11 Halsbury’s Laws (4th edn) para 216, and for cases on the subject, see 14(1) Digest (Reissue) 304–305, 2327–2336.
For the Indictment Rules 1971, r 9, see 6 Halsbury’s Statutory Instruments (Grey Volume) 13.
Cases referred to in judgment
Poole v R [1960] 3 All ER 398, [1961] AC 223, [1960] 2 WLR 770, PC.
Practice Note [1976] 2 All ER 326, [1976] 1 WLR 409, CA.
R v Bell (1984) 78 Cr App R 305, CA.
R v Groom [1976] 2 All ER 321, [1977] QB 6, [1976] 2 WLR 618, CA.
R v Newland [1988] 2 All ER 891, [1988] QB 402, [1988] 2 WLR 382, CA.
R v Thompson, R v Clein [1975] 2 All ER 1028, [1975] 1 WLR 1425, CA.
Case also cited
R v Cairns (1983) 87 Cr App R287, CA.
Appeal against conviction
Gary Follett appealed with the leave of the single judge against his conviction in the Crown Court at Stoke-on-Trent before Mr J H B Saunders sitting as an assistant recorder and a jury on a charge of theft for which, together with another charge of theft to which he pleaded guilty, he was sentenced to four months’ imprisonment. The grounds of the appeal were that the conviction arose out of a defective indictment. The facts are set out in the judgment of the court.
A Nadim (assigned by the Registrar of Criminal Appeals) for the appellant.
J Goldring QC for the Crown.
Cur adv vult
9 December 1988. The following judgment was delivered.
LORD LANE CJ. On 29 February 1988 in the Crown Court at Stoke-on-Trent the appellant was arraigned on an indictment dated 29 February 1988 which contained two
Page 997 of [1989] 1 All ER 995
counts. He pleaded guilty to a charge of theft in count 2 and two days later, after a trial, he was convicted of the theft charged against him in count 1, and on that he was sentenced to four months’ imprisonment. No separate penalty was imposed on count 2. He now appeals against conviction on a point of law.
Nothing turns on the facts of the offences, but the chronology of events is important. Five defendants were charged on an indictment, which was dated 1 February 1988. Angela Salmon pleaded guilty to count 4, which was the only count affecting her. One defendant, Shaun Smith, did not appear. The other defendants, including the appellant, all pleaded not guilty to the various counts and the matter was then adjourned for trial. The judge on that occasion expressed doubts about the propriety of the indictment in the form in which it stood, but no action was taken. On 29 February 1988 the case was listed again, this time before Mr J H B Saunders sitting as an assistant recorder. Three defendants were before the court for trial: Barry Chevin, John David Chevin and the appellant. Shaun Smith was present on this occasion and pleaded guilty.
The original indictment dated 1 February 1988 contained nine counts. Counts 1 to 3 charged the Chevins and in one count the appellant as well with thefts and burglary. Counts 4 to 5 were charges of credit card and cheque offences against the Chevins. Counts 6, 7 and 8 charged Smith with drug offences and count 9 charged Smith with handling. It is clear that this indictment was not drawn according to the rules. Indeed, whoever was responsible for drafting it had not paid any attention to r 9 of the Indictment Rules 1971, SI 1971/1253, which provides:
‘Charges for any offences may be joined in the same indictment if those charges are founded on the same facts, or form or are part of a series of offences of the same or a similar character.’
There was no such nexus between the various groups of charges in that indictment.
Counsel for the prosecution on 29 February conceded the breach of r 9 of the 1971 rules, and he in the first instance applied to the assistant recorder to quash the indictment and for leave to prefer further bills out of time. Doubt was felt however by both the assistant recorder and counsel as to the propriety of that course. In the upshot the assistant recorder gave leave to prefer three further bills of indictment splitting up the offences into their proper compartments (as should have been done originally), so that each indictment prima facie complied with r 9. These indictments ((a), (b) and (c)) were accordingly settled and dated 29 February. The assistant recorder then ordered that all proceedings on the original indictment should be stayed as against the appellant and the two Chevins. The original indictment was not quashed nor were any of the counts in the original indictment amended out of that indictment.
Overnight the full report of R v Newland [1988] 2 All ER 891, [1988] QB 402 was obtained. Up to that time the court had only been provided with The Times newspaper report of the judgment in that case. The assistant recorder discovered that he had (so he thought) done what in R v Newland it was held a court should not do.
The assistant recorder was faced with a difficult situation. Due to no fault of his own he had apparently, so to speak, burnt his boats. He had been left with this situation. The original indictment was still in existence, although proceedings on it had been stayed. There were now three fresh indictments founded on the same committal proceedings which he had given leave to prefer out of time covering most of the ground of the original indictment with a trial in prospect on one of the fresh indictments. That indictment contained two counts. Count 1 on which he was tried was based on count 2 in the original indictment. There was a fresh count 2, to which the appellant pleaded guilty. That was an additional count not appearing in the original indictment but based on evidence which was before the justices on committal. It was a charge which could properly be joined in the same indictment as the offence on which the justices had committed him for trial.
In R v Newland [1988] 2 All ER 891, [1988] QB 402, where the indictment had been drawn in breach of r 9 of the 1971 rules, the recorder had simply ordered severance of
Page 998 of [1989] 1 All ER 995
the two disparate sets of counts so that they could be tried separately. It was there held by another division of this court that that course was not permissible. It was contended by the prosecution in that case that severance was permissible by virtue of s 5(3) of the Indictments Act 1915, which provides as follows:
‘Where, before trial, or at any stage of a trial, the court is of opinion that a person accused may be prejudiced or embarrassed in his defence by reason of being charged with more than one offence in the same indictment, or that for any other reason it is desirable to direct that the person should be tried separately for any one or more offences charged in an indictment, the court may order a separate trial of any count or counts of such indictment.’
That argument was rejected. Watkins LJ said ([1988] 2 All ER 891 at 894, [1988] QB 402 at 406):
‘… that subsection can only apply to a valid indictment. It states what the court may do by way of ordering separate trials of counts in a valid indictment in the interests of a fair trial for a defendant or defendants.’
What the court could and should have done was, as Watkins LJ went on to say, to take advantage of the provisions of s 5(1) of the 1915 Act:
‘Where, before trial, or at any stage of a trial, it appears to the court that the indictment is defective, the court shall make such order for the amendment of the indictment as the court thinks necessary to meet the circumstances of the case … ’
Then Watkins LJ continued ([1988] 2 All ER 891 at 894, [1988] QB 402 at 406):
‘It was clearly open therefore to the assistant recorder to amend the indictment. He could have done that simply by ordering that the drugs counts or the assault counts be deleted from the indictment, and that the trial of the indictment take place in its amended form. If he had so ordered, then a perfectly lawful trial would have ensued.’
Thus in the present case there could have been no objection if all the counts save those on which the appellant and his co-defendants stood charged had been deleted from the indictment and the trial of these three men had continued on the surviving counts. This is not what happened, as already described. The original indictment stood unamended. Three fresh indictments, (a), (b) and (c), were with leave preferred, proceedings on the first indictment were stayed and the trial took place on one of the counts in fresh indictment (c). The leave which was granted was (as already explained) leave to prefer the indictment after the time set by the 1971 rules had expired.
The appellant criticises that course on two main grounds. They are these. First, it does what the court in R v Newland [1988] 2 All ER 891 at 894, [1988] QB 402 at 406 (albeit in an obiter dictum) seems to suggest should not be done. This is the passage:
‘What the prosecution could have done, if anything, about the counts which had been amended out of the indictment is altogether a different matter. But that was for the prosecution to concern itself with and not the court. What the prosecution could not have done in the circumstances, nor could the court have ordered that to be done, was to draft a fresh indictment to include the counts amended out of the original indictment. There is no such power known to us. In order to proceed on the counts amended out, it would have been necessary for the prosecution to seek a voluntary bill.’
Second, it is contended that in any event there is no power to prefer a fresh series of indictments in order to cure a defective original indictment.
So far as the first point is concerned, namely the impact of the decision in R v Newland, it seems to us that that case was dealing with a different situation from that which faces
Page 999 of [1989] 1 All ER 995
us. The ratio decidendi there was that it is not permissible to amend an indictment invalid by reason of misjoinder of counts by severing the disparate parts and trying each separately. That was not done here. What could be done was to amend the invalid indictment by deleting one of the disparate parts and to conduct the trial on the basis of what remained. The obiter dictum simply said that, having ‘deleted’ one set of counts, that deleted portion could not properly be the subject of a fresh indictment without the assistance of a voluntary bill. That would seem to flow from the provisions of s 2(2) of the Administration of Justice (Miscellaneous Provisions) Act 1933, which provides in effect that an indictment must be founded on charges on which the justices have committed or else on a voluntary bill. Once the counts have been deleted, the effect of the justices’ committal is, so to speak, spent. No counts were deleted in the instant case. The stay was only ordered after the new bills of indictment had been preferred.
It follows that the problem in the present case comes down to this. Where an indictment is invalid by reason of a misjoinder of counts as here, is the prosecution entitled to prefer two or more fresh indictments drawn in accordance with r 9 and covering the same ground as the original indictment, providing that they thereafter elect which of the indictments they will proceed on?
Counsel for the Crown submits that there is nothing in the 1915 Act or the 1971 rules to render such a course improper.
The first step is to ask whether, under the terms of s 2(2) of the 1933 Act and the proviso thereto, the defendant was committed for trial for the offence, or alternatively whether the count in question was founded on facts or evidence disclosed in any examination or deposition taken before a justice in his presence. The answer to that is Yes. One of the counts was in respect of an offence on which the justices had committed him for trial; the other was founded on evidence which was before the justices.
Next, is there anything to prevent there being in existence at the same time two indictments against the same person for the same offence? Counsel for the Crown submits to us that the answer to that question is to be found in the practice direction issued by Lord Widgery CJ on 9 March 1976 (Practice Note [1976] 2 All ER 326, [1976] 1 WLR 409), which stated as follows:
‘There is no rule of law or practice which prohibits two indictments being in existence at the same time for the same offence against the same person on the same facts. But the court will not allow the prosecution to proceed on both such indictments. They cannot in law be tried together and the court will insist that the prosecution elect the one on which the trial shall proceed.’
It is true that the case on which that practice note was based, namely R v Groom [1976] 2 All ER 321, [1977] QB 6, was not concerned with two indictments based on the same committal, but the words of the practice note, it is submitted, cover the present situation fully.
As against that, counsel for the appellant submits that the decision in R v Thompson, R v Clein [1975] 2 All ER 1028, [1975] 1 WLR 1425 shows that the course adopted by the prosecution and court in the present case is not permissible. In R v Thompson the indictment consisted solely of counts which did not follow the committal charges. The circuit judge quashed the indictment and then gave leave to prefer a fresh indictment based on the committal charges. If the fresh charges had been by way of amendment and the old charges had thereafter been quashed, no harm would have been done. That would have been in accordance with s 5(1) of the 1915 Act. The submission of the appellant in that case was that, once an indictment is preferred on the basis of a valid committal, that committal has served its purpose. It has brought the accused person before that court. If that indictment is quashed, unless there is some other reason independent of those proceedings for keeping him in custody, the accused is entitled to be discharged, the commital having been spent.
There was another wider way of putting the argument. That is that the prosecution
Page 1000 of [1989] 1 All ER 995
are not entitled to prefer more than one indictment based on one committal for trial; that they are not entitled to prefer indictment after indictment if one, then another and then another fails on a motion to quash; that, having elected the form of indictment to be put before the trial court on the authority of the committal, if it is found that the election results in the quashing of that indictment, the only course open to the prosecution is to obtain leave to prefer a new bill from a High Court judge or this court.
James LJ delivering the judgment of the court in that case said ([1975] 2 All ER 1028 at 1032, [1975] 1 WLR 1425 at 1430):
‘As indicated earlier we do not think that the decision of these appeals depends on the view that once the indictment based on the committal is quashed the committal itself is a dead letter, rather than on the principle that the Crown can only once prefer an indictment as a result of one committal … I would prefer to base the decision on the latter principle, that it is only once that an indictment can be preferred on the basis of one committal. If that indictment fails in toto, the remedy for the Crown if it is desired to pursue the prosecution is to obtain leave in accordance with the provisions of the 1933 Act.’
If the wider ratio in R v Thompson is correct, then there is no valid distinction to take the present case outside the principle and the appeal would accordingly succeed. The position is quite different if the true ratio in that case is the narrower principle stated in the report, namely ([1975] 2 All ER 1028 at 1031, [1973] 1 WLR 1425 at 1429):
‘… that the Crown is not entitled to prefer indictment after indictment if one indictment, then another and then another fails on a motion to quash; that, having elected the form of indictment to be put before the trial court on the authority of the committal, if it is found that the election results in the quashing of that indictment the only course open to the Crown is to obtain leave to prefer a new bill and that leave can only be obtained from a High Court judge or the Court of Appeal Criminal Division’.
If that is the correct ratio, it applies only in cases where the first indictment has been quashed. On that basis, once the first indictment has been quashed, the prosecution cannot then produce a second indictment based on the same committal containing the same matters as those which were covered by the first. On the other hand, if the defects in the first indictment are appreciated before that indictment is quashed, then, subject to limitations as to time and to any questions which may arise under the terms of s 2(2) of the 1933 Act, a second indictment based on the same committal can be preferred.
The reasons are these. A single committal can result in a defendant being committed for trial for offences which may not all be legitimately joined in a single indictment because of the provisions of r 9 of the 1971 rules. There can be more than one indictment based on a single committal: see R v Groom [1976] 2 All ER 321, [1977] QB 6 and Practice Note [1976] 2 All ER 326, [1976] 1 WLR 409.
There can be in existence at the same time two indictments against the same person for the same offence or for offences based on the same facts: see Poole v R [1960] 3 All ER 398, [1961] AC 223. This was a Privy Council case. Their Lordships’ reasons for dismissing the appeal were delivered by Lord Tucker, who said ([1960] 3 All ER 398 at 407, [1961] AC 223 at 244):
‘Their Lordships are, therefore, satisfied that a second indictment or information is not inherently bad by reason of the pendency of an earlier one for the same offence against the same person on the same facts. In the present case, whether or not there were at any moment of time two such informations in existence depends on the proper construction of s. 250 and s. 255 of the Criminal Procedure Code [of Kenya]. Section 255 provides that the indictment ”… when so signed shall be as valid and effectual in all respect, as an indictment in England which has been signed by the
Page 1001 of [1989] 1 All ER 995
proper officer of the court in accordance with the Administration of Justice (Miscellaneous Provisions) Act, 1933.”’
The only limitations on indictments based on a single committal are these. First, the indictment or indictments should be preferred in the time laid down by the rules, or such further time in respect of which the trial judge gives leave. Second, the offences in the indictment must be offences in respect of which the accused has been committed for trial or be offences in respect of which he may be charged in addition to or in substtitution for those offences for which he has been committed for trial (see the proviso to s 2(2) of the 1933 Act). Third, the offences charged in a single indictment must be properly joined in that single indictment.
In our judgment the decision in R v Thompson [1975] 2 All ER 1025, [1975] 1 WLR 1425 should be restricted to the narrower principle for these reasons. The wider principle in that case was a point raised by the court itself, and not by the appellant. It was not fully argued (see [1975] 2 All ER 1028 at 1031, [1975] 1 WLR 1425 at 1429, where this passage occurs):
‘Counsel for the Crown has referred us to such authorities he has found in the very limited time available for him to do any research.’
In particular the decision in Poole v R [1965] 3 All ER 398, [1961] AC 223 was not cited to the court.
In R v Bell (1984) 78 Cr App R 305 this court did so confine the decision in R v Thompson. In that case appears the following passage in the judgment of the court (at 310):
‘The Court in THOMPSON AND CLEIN was not dealing with a case where the Crown had preferred two separate indictments—one alleging charge A upon which the appellant had been properly committed for trial and the other alleging charges B, C and D upon which also he had been properly committed, neither of which had been quashed. It does not seem to us that, read against the facts of that case, the judgment of James L.J. in THOMPSON AND CLEIN is any authority for saying that the Crown’s composite indictment in the present case should not have been preferred. The Practice Direction ([1976] 2 All ER 326, [1976] 1 WLR 409) already referred to is not, on this analysis, in conflict with the decision in THOMPSON AND CLEIN. It would indeed be surprising had that been so for a number of reasons, not least the fact that the Direction was given at the conclusion of GROOM ([1976] 2 All ER 321, [1977] QB 6), in which the reserved judgment of the five-judge Court was given by James L.J., as was the judgment in THOMPSON AND CLEIN.’
In our judgment there was nothing to prevent the court in this case taking the course which it did, that is to say giving leave to the prosecution to prefer out of time fresh indictments which conformed with the rules, despite the existence of the original invalid indictment, and then staying proceedings on the invalid indictment and proceeding to trial on the others.
We only pause to add that this situation would not arise if those responsible for drawing the indictment in the first place were to have proper regard to the 1971 rules.
The appeal accordingly is dismissed.
Appeal dismissed.
Solicitors: Crown Prosecution Service, Stafford.
N P Metcalfe Esq Barrister.
Derby & Co Ltd and others v Weldon and others (No 2)
[1989] 1 All ER 1002
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): LORD DONALDSON OF LYMINGTON MR, NEILL AND BUTLER-SLOSS LJJ
Hearing Date(s): 28, 29, 30 NOVEMBER, 1, 16 DECEMBER 1988
Practice – Pre-trial or post-judgment relief – Mareva injunction – Worldwide Mareva injunction – Pre-trial injunction – Extra-territorial effect of injunction – Protection of third parties – Injunction restraining foreign defendants from disposing of assets outside jurisdiction – Defendants having no assets within jurisdiction and likely to dissipate their assets to frustrate judgment or order against them – Whether pre-trial Mareva injunction should be granted against foreign defendant with no assets within jurisdiction – Whether receiver of foreign assets should be appointed – Whether defendants should be ordered to reveal the nature, value and whereabouts of foreign assets – Whether order should be made subject to proviso that third parties indirectly affected by it not bound by it until it is recognised or registered or enforced by foreign court.
The plaintiffs were seven associated companies which were all part of a United States banking group. The first and second defendants were the directors of a London company, CML, a commodity dealer which specialised in trading internationally in cocoa. CML was owned by the third defendant, a Panamanian company, and the fourth defendant, a Luxembourg company, both of which were under the control of the first and second defendants. In 1981 the plaintiff group purchased CML, which continued to be managed by the first and second defendants. While under their management CML offered very extensive credit to a Far Eastern commodity dealer which in 1984 became insolvent owing over £35m to CML. The plaintiff group recovered less than £1 1/2m in the insolvency and brought an action against the defendants alleging breach of contract, conspiracy and fraudulent breach of fiduciary duty. The plaintiffs applied for and were granted a Mareva injunction restricting the first and second defendants from dealing with their assets worldwide until judgment in the action. The plaintiffs later sought similar relief against the third and fourth defendants and also the appointment of a receiver of their assets and an order for disclosure of their assets. The judge granted the plaintiffs a worldwide Mareva injunction against the fourth defendant, appointed a receiver of its assets and made a disclosure order but he refused to grant similar relief against the third defendant because of the difficulty of enforcing such orders in Panama. The fourth defendant appealed, contending that the court had no jurisdiction to grant the Mareva injunction because it was a necessary precondition for granting a Mareva injunction that the defendant had some assets within the jurisdiction of the court and the fourth defendant had no such assets. The plaintiffs cross-appealed against the judge’s refusal to grant a Mareva injunction and other relief against the third defendant. It was conceded for the purposes of the appeal that the first and second defendants might dissipate their assets so that they would not be available to satisfy any judgment which might be given against them in the action and might cause the third and fourth defendants to do the same and that the third and fourth defendants might be found liable to the plaintiffs for sums in excess of £25m.
Held – The appeal would be dismissed and the cross-appeal would be allowed for the following reasons—
(1) The court had jurisdiction in an appropriate case to grant a pre-judgment Mareva injunction over a defendant’s foreign assets, notwithstanding that he had no assets within the jurisdiction, if such an order was necessary to prevent the defendant from taking action to frustrate subsequent orders of the court. However, where there were sufficient assets within the jurisdiction the injunction should be confined to those assets. The court accordingly had jurisdiction to grant a worldwide Mareva injunction against both the
Page 1003 of [1989] 1 All ER 1002
third and fourth defendants (see p 1009 b to f, p 1010 b c, p 1015 d e, p 1018 j, p 1020 c e, p 1022 a and p 1023 c, post); Derby & Co Ltd v Weldon (No 1) [1989] 1 All ER 469 followed.
(2) Although the court would refrain from making an order even where the justice of the case required it if it was doubtful whether the order would be obeyed and there was no real sanction to enforce compliance with the order, in the context of the grant of a Mareva injunction a sufficient sanction existed in the fact that the court could bar the defendant’s right to defend in the event of disobedience of the order. It followed that no distinction should have been made between the third and fourth defendants in relation to the grant of a Mareva injunction (see p 1010 g j, p 1011 c d, p 1015 d e, p 1021 g, p 1022 a and p 1023 c h, post).
(3) Furthermore, when granting a Mareva injunction against a foreign defendant who had no assets within the jurisdiction the court should protect the position of third parties outside the jurisdiction who were indirectly affected by the order by including a proviso that, in so far as the order purported to have extra-territorial effect, no person, whether natural or juridical, should be affected by it or concerned with its terms until it was declared enforceable or recognised or enforced by an appropriate foreign court (see p 1012 f, p 1013 b c, p 1015 a to d, p 1020 g to j, p 1022 a and p 1023 a h, post).
(4) Since a Mareva injunction operated in personam and did not normally offend the principle that English courts would refrain from making orders which infringed the exclusive jurisdiction of foreign courts, the court had jurisdiction to make an order appointing a receiver of foreign assets in support of a Mareva injunction. In the circumstances the court had rightly appointed a receiver of the assets of the fourth defendant and since Luxembourg was a party to the European Judgments Convention and the fourth defendant was a party to the action the order should take effect regardless of whether it was recognised and enforced in Luxembourg. Moreover, the third defendant should not be treated any differently from the fourth defendant, because the fact that Panama was not a party to the convention or to any agreement to which effect could be given under the Foreign Judgments (Reciprocal Enforcement) Act 1933 was not an absolute bar to the appointment of a receiver of its assets since the task of the receiver would be to preserve the third defendant’s assets, assisted by the sanction that if the third defendant did not co-operate it would not be allowed to defend the action. Furthermore, the third defendant should be required to reveal the nature, value and whereabouts of those assets (see pp 1011 g, p 1014 d to j, p 1015 a to d, p 1021 a e, p 1022 a and p 1023 h, post).
Notes
For Mareva injunctions, see 37 Halsbury’s Laws (4th edn) para 362, and for cases on the subject, see 37(2) Digest (Reissue) 474–476, 2947–2962.
For power of court to appoint a receiver, see 37 Halsbury’s Laws (4th edn) para 381, and for cases on the subject, see 37(2) Digest (Reissue) 484–485, 3002–3007.
For the Foreign Judgments (Reciprocal Enforcement) Act 1933, see 22 Halsbury’s Statutes (4th edn) 283.
Cases referred to in judgments
Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888, [1986] 3 WLR 647, CA.
Babanaft International Co SA v Bassatne [1989] 1 All ER 433, [1989] 2 WLR 232, CA.
Beddow v Beddow (1878) 9 Ch D 89.
Bekhor (A J) & Co Ltd v Bilton [1981] 2 All ER 565, [1981] QB 923, [1981] 2 WLR 601, CA.
Blunt v Blunt [1943] 2 All ER 76, [1943] AC 517, HL.
Chartered Bank v Daklouche [1980] 1 All ER 205, [1980] 1 WLR 107, CA.
Derby & Co Ltd v Weldon (No 1) [1989] 1 All ER 469, [1989] 2 WLR 276, CA.
Faith Panton Property Plan Ltd v Hodgetts [1981] 2 All ER 877, [1981] 1 WLR 927, CA.
Haiti (Republic) v Duvalier [1989] 1 All ER 456, [1989] 2 WLR 261, CA.
Hamlin v Hamlin [1985] 2 All ER 1037, [1986] Fam 11, [1985] 3 WLR 629, CA.
Page 1004 of [1989] 1 All ER 1002
Intraco Shipping Corp v Notis Shipping Corp, The Bhoja Trader [1981] 2 Lloyd’s Rep 256, CA.
Jagger v Jagger [1926] P 93, [1926] All ER Rep 613, CA.
Liddell’s Settlement Trusts, Re, Liddell v Liddell [1936] 1 All ER 239, [1936] Ch 365, CA.
Lister & Co v Stubbs (1890) 45 Ch D 1, [1886–90] All ER Rep 797, CA.
Locabail International Finance Ltd v Agroexport [1986] 1 All ER 901, [1986] 1 WLR 657, CA.
Mareva Cia Naviera SA v International Bulkcarriers SA, The Mareva (1975) [1980] 1 All ER 213, CA.
MBPXL Corp v Intercontinental Banking Corp Ltd [1975] CA Transcript 411.
Newton v Newton (1885) 11 PD 11.
Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft mbH & Co KG, The Niedersachsen [1984] 1 All ER 398, [1983] 1 WLR 1412, CA.
Nippon Yusen Kaisha v Karageorgis [1975] 3 All ER 282, [1975] 1 WLR 1093, CA.
Ownbey v Morgan (1921) 256 US 94, US SC.
Prince Abdul Rahman Bin Turki Al Sudairy v Abu-Taha [1980] 3 All ER 409, [1980] 1 WLR 1268, CA.
Rasu Maritima SA v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) and Government of Indonesia (as interveners) [1977] 3 All ER 324, [1978] QB 644, [1977] 3 WLR 518, CA.
Robinson v Pickering (1881) 16 Ch D 660, CA.
South Carolina Insurance Co v Assurantie Maatschappij ‘de Zeven Provincien’ NV [1986] 3 All ER 487, [1987] AC 24, [1986] 3 WLR 398, HL.
Third Chandris Shipping Corp v Unimarine SA, The Pythia, The Angelic Wings, The Genie [1979] 2 All ER 972, [1979] QB 645, [1979] 3 WLR 122, CA.
Ward v James [1965] 1 All ER 563, [1966] 1 QB 273, [1965] 2 WLR 455, CA.
Wickins v Wickins (Goode, party cited) [1918] P 265, CA.
Cases also cited
Allied Arab Bank Ltd v Hajjar [1987] 3 All ER 739, [1988] QB 787.
Altertext Inc v Advanced Data Communications Ltd [1985] 1 All ER 395, [1985] 1 WLR 457.
Ballabil Holdings Pty Ltd v Hospital Products Ltd [1985] 1 NSWLR 155, NSW CA.
Bayer AG v Winter [1986] 1 All ER 733, [1986] 1 WLR 497, CA.
Chellaram v Chellaram [1985] 1 All ER 1043, [1985] Ch 409.
de Cavel v de Cavel Case 143/78 [1979] ECR 1055.
Denilauler v Snc Couchet Frères Case 125/79 [1980] ECR 1553.
Duder v Amsterdamsch Trustees Kantoor [1902] 2 Ch 132.
Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492, [1973] AC 360, HL.
Evans v Clayhope Properties Ltd [1988] 1 All ER 444, [1988] 1 WLR 358, CA.
Hart v Emelkirk Ltd, Howroyd v Emelkirk Ltd [1983] 3 All ER 15, [1983] 1 WLR 1289.
Interpool Ltd v Galani [1987] 2 All ER 981, [1988] QB 738, CA.
Mediterranea Raffineria Siciliana Petroli SpA v Mabanaft GmbH [1978] CA Transcript 816.
‘Morocco Bound’ Syndicate Ltd v Harris [1895] 1 Ch 534.
National Bank of Greece v Constantinos Dimitriou (1987) Times, 16 November, CA.
Schemmer v Property Resources Ltd [1974] 3 All ER 451, [1975] Ch 273.
Siskina (cargo owners) v Distos Cia Naviera SA, The Siskina [1977] 3 All ER 803, [1979] AC 210, HL.
Vocalion (Foreign) Ltd, Re [1932] 2 Ch 196, [1932] All ER Rep 519.
Interlocutory appeal and cross-appeal
The plaintiffs, Derby & Co Ltd, Cocoa Merchants Ltd (CML), Phibro-Salomon Finance AG, Phibro-Salomon Ltd, Philipp Bros Inc, Philipp Bros Ltd and Salomon Inc of the
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United States (the holding company of the other plaintiff companies), by a writ issued on 25 June 1987 brought an action against (1) Anthony Henry David Weldon, (2) Ian Jay, (3) Milco Corp, a Panamanian company, and (4) CML Holding SA of Luxembourg (CMI), claiming damages for breach of contract, misrepresentation, negligence, deceit, conspiracy to defraud and fraudulent breach of fiduciary duty arising out of the trading activities of CML between February 1981 and June 1984 while under the management of the first and second defendants as executive directors of CML after it had been purchased by Salomon Inc from the liquidator of a subsidiary of Milco, which was itself a subsidiary of CMI. In particular, the plaintiffs alleged that between June 1981 and February 1984 the first and second defendants caused CML to suffer losses of £35m on unauthorised advances and credit made available to the Allied Group of companies of Hong Kong when the first and second defendants were owed large sums in their personal capacity by the persons who controlled Allied. The plaintiffs further alleged that when Allied collapsed in 1984 the plaintiffs were owed £35,580,424, of which they were only able to recover £1,485,148 in the insolvency. On 4 December 1987 the plaintiffs applied ex parte to Sir Nicolas Browne-Wilkinson V-C and were granted Mareva injunctions against the first and second defendants restraining them from removing their assets out of the United Kingdom or those countries which were parties to the Convention on Jurisdiction and the Enforcement of Civil and Commercial Judgments 1968 or from dealing in any way with those assets except to the extent that they exceeded £25m and requiring the first and second defendants to file an affidavit disclosing the full value of their assets. By a notice of motion dated 8 December the plaintiffs sought an order freezing the first and second defendants’ assets up to £25m wheresoever in the world situated and disclosure of particulars of bank accounts, nominees etc. On 27 June 1988 Mervyn Davies J granted, inter alia, a Mareva injunction restricted to the first and second defendants’ assets in the United Kingdom but on appeal by the plaintiffs the Court of Appeal ([1989] 1 All ER 469, [1989] 2 WLR 276) granted a worldwide Mareva injunction against the first and second defendants. By notices of motion dated 16 August and 4 November 1988 the plaintiffs sought worldwide Mareva injunctions and receivership and discovery orders against CMI and Milco. On 4 November 1988 Sir Nicolas Browne-Wilkinson V-C ordered, inter alia, (1) that CMI be restrained until after judgment in the action or further order from disposing of or transferring, charging, diminishing or in any way howsoever dealing with any of its assets wheresoever the same might be situated, except in so far as the value of such assets exceeded £25m, and on 7 November 1988 he ordered, inter alia, (2) (as varied by order dated 11 November 1988) (a) that Christopher Morris be appointed until further order receiver without security of all the assets of CMI ‘including without limitation … any interest whether direct or indirect legal or beneficial of [CMI] in any asset’ and (b) that CMI procure, so far as it lay within its power, that its assets be forthwith delivered to the receiver (provided, however, that no steps be taken to enforce that part of the order until after the courts of Luxembourg had declared the order enforceable or otherwise enforced the same) and that none of the assets held by or in the name of or to the order of Domaine Investment Corp of Panama (Domaine), a subsidiary company of CMI, or any direct or indirect subsidiary or associated company of Domaine or CMI or any asset held by trustees or nominees in whole or in part for CMI, Domaine or any other subsidiary or associated company should be disposed of by Domaine or any other person or company until after judgment or further order except with the consent of the receiver or leave of the court, and (3) that CMI by a responsible officer make and serve within seven days an affidavit disclosing the full value of all the assets of CMI of any description. CMI appealed with leave of Sir Nicolas Browne-Wilkinson V-C against those orders. The plaintiffs cross-appealed against the order of Sir Nicolas Browne-Wilkinson V-C made on 4 November 1988 refusing to continue the worldwide Mareva injunction granted ex parte against Milco by Mervyn Davies J on 11 August 1988 and refusing to appoint a receiver of Milco’s assets. The facts are set out in the judgment of Lord Donaldson MR.
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A G Bompas and Rosalind Nicholson for CMI and Milco.
Michael Lyndon-Stanford QC, Charles Purle and J Stephen Smith for the plaintiffs.
Leslie Kosmin for the receiver.
Cur adv vult
16 December 1988. The following judgments were delivered.
LORD DONALDSON OF LYMINGTON MR. The complexity of the issues involved in this action is only matched by the size of the sums in dispute, not less than £25m and probably more. However, the issues in the appeal and cross-appeal which concern protective interlocutory measures, Mareva injunctions, the appointment of receivers and disclosure of the nature, amount and whereabouts of assets, are much more confined. So far as the action as a whole is concerned, it is sufficient to say that the plaintiffs complain that they have been defrauded by the defendants by or in connection with dealings in the cocoa market.
The action first came before this court in July 1988 when the plaintiffs successfully appealed against the refusal of Mervyn Davies J to grant Mareva relief on a worldwide basis against the first two defendants (Mr Weldon and Mr Jay) (see Derby & Co Ltd v Weldon (No 1) [1989] 1 All ER 469, [1989] 2 WLR 276). In so far as this court then decided any matters of law, its decision of course binds us. The present appeal is by the fourth defendant, CML Holding SA of Luxembourg (referred to in argument and hereafter in this judgment as ‘CMI’ in order to distinguish it from the plaintiff, Cocoa Merchants Ltd). CMI appeals against orders by Sir Nicolas Browne-Wilkinson V-C on 4 and 7 November 1988, as amended by a further order on 11 November 1988, granting a worldwide Mareva injunction, appointing a receiver of the assets of CMI and a disclosure order. The plaintiffs cross-appeal against the refusal of Sir Nicolas Browne-Wilkinson V-C to continue a worldwide Mareva injunction granted ex parte against the third defendant, Milco Corp of Panama (Milco), and his refusal to appoint a receiver of its assets and to order disclosure of its assets. The plaintiffs also seek modification of the orders against CMI.
The issues confronting this court have been simplified, but by no means resolved, by four concessions which have very sensibly been made (for the purposes of the appeal only) on behalf of CMI and Milco following the hearings before Sir Nicolas Browne-Wilkinson V-C. They are: (a) that the first defendant (Mr Weldon) and the second defendant (Mr Jay) might be likely to dissipate their own assets so as not to be available to satisfy any judgment against them in this action; (b) that Mr Weldon and Mr Jay are to be assumed to exercise a high degree of control over CMI and Milco; (c) that, in view of (a) and (b) above, CMI and Milco might be likely to dissipate their assets so as not to be available to satisfy any judgment against them or either of them in this action, and (d) that CMI and Milco might at trial be found liable to some one or other of the plaintiffs in respect of the claims (referred to in specified paragraphs of the amended statement of claim) and that the approximate amount of the judgment against CMI or Milco could with interest be as much as £25m. Three issues arise: (1) whether, and if so in what circumstances and on what terms, a pre-judgment Mareva injunction should be granted against a foreign defendant who has no assets within the jurisdiction of the court; (2) whether, and if so in what circumstances and on what terms, a receiver of the assets of such a foreign defendant should be appointed before judgment for purposes similar to those served by a Mareva injunction; (3) whether, and if so in what circumstances and on what terms, such a foreign defendant should be required to disclose the nature, value and whereabouts of his assets.
THE MAREVA JURISDICTION GENERALLY
The fundamental principle underlying this jurisdiction is that, within the limits of its powers, no court should permit a defendant to take action designed to ensure that
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subsequent orders of the court are rendered less effective than would otherwise be the case. On the other hand, it is not its purpose to prevent a defendant carrying on business in the ordinary way or, if an individual, living his life normally pending the determination of the dispute, nor to impede him in any way in defending himself against the claim. Nor is it its purpose to place the plaintiff in the position of a secured creditor. In a word, whilst one of the hazards facing a plaintiff in litigation is that, come the day of judgment it may not be possible for him to obtain satisfaction of that judgment fully or at all, the court should not permit the defendant artificially to create such a situation.
The jurisdictional basis of the Mareva injunction is to be found in s 37(1) to (3) of the Supreme Court Act 1981, which, in sub-s (1), is the lineal successor of s 45 of the Supreme Court of Judicature (Consolidation) Act 1925 and s 25(8) of the Supreme Court of Judicature Act 1873. Those subsections provide as follows:
‘(1) The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so.
(2) Any such order may be made either unconditionally or on such terms and conditions as the court thinks just.
(3) The power of the High Court under subsection (1) to grant an interlocutory injunction restraining a party to any proceedings from removing from the jurisdiction of the High Court, or otherwise dealing with, assets located within that jurisdiction shall be exercisable in cases where that party is, as well as in cases where he is not, domiciled, resident or present within that jurisdiction.’
In Beddow v Beddow (1878) 9 Ch D 89 at 93 Jessel MR said:
‘… I have unlimited power to grant an injunction in any case where it would be right or just to do so: and what is right or just must be decided, not by the caprice of the Judge, but according to sufficient legal reasons or on settled legal principles.’
That remains the position to this day, the only issue being whether in particular circumstances the grant is ‘right or just’. What changes is not the power or the principles but the circumstances, both special and general, in which courts are asked to exercise this jurisdiction. This can and does call for changes in the practice of the courts. We live in a time of rapidly growing commercial and financial sophistication and it behoves the courts to adapt their practices to meet the current wiles of those defendants who are prepared to devote as much energy to making themselves immune to the courts’ orders as to resisting the making of such orders on the merits of their case. Hence it comes about that, as was pointed out by Neill LJ in Babanaft International Co SA v Bassatne [1989] 1 All ER 433 at 448, [1989] 2 WLR 232 at 251–252 and by May LJ in Derby & Co Ltd v Weldon (No 1) [1989] 1 All ER 469 at 472–473, [1989] 2 WLR 276 at 280, this is a developing branch of the law. To that I would add that a failure or refusal to grant an injunction in any particular case is an exercise of discretion which cannot, as such, provide a precedent binding on another court concerned with another case, save in so far as that refusal is based on basic principle applicable in both such cases.
THE RELEVANCE OF AN ABSENCE OF ASSETS WITHIN THE JURISDICTION
When the matter was before Sir Nicolas Browne-Wilkinson V-C there was no evidence showing, or giving rise to any inference, that CMI, which is a Luxembourg company, had any assets within the jurisdiction. That remains the position to this day, although as a result of the compulsory disclosure of information it now appears that a company within the group of companies of which CMI is the holding company may have such assets. In this situation the first submission on behalf of CMI is that a necessary precondition for granting a Mareva injunction is that the defendant has some assets within the jurisdiction. The significance of this submission is that, if correct, it would
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distinguish this appeal from Derby & Co Ltd v Weldon (No 1), where the relevant defendants had assets within the jurisdiction.
Counsel for CMI submitted that this was the ratio of the decision of this court in Intraco Shipping Corp v Notis Shipping Corp, The Bohja Trader [1981] 2 Lloyd’s Rep 256. In that case Staughton J had been asked to restrain the defendants from claiming under a guarantee given by the London branch of a French bank and had refused to do so on the well-established principle that the courts will not grant such an injunction unless fraud is involved. Instead, he looked to the proceeds of the guarantee and enjoined the defendants from removing such proceeds from the jurisdiction. On appeal the plaintiffs unsuccessfully appealed against the refusal to prevent the defendants claiming under the guarantee. The defendants, however, successfully appealed against the Mareva injunction on the grounds that any moneys payable under the guarantee were payable in Greece, a matter which had never been pointed out to Staughton J, and that accordingly these moneys would never be within the jurisdiction and capable of being removed from it. No one suggested that there were any other assets within the jurisdiction or that the injunction should be extended to cover the dissipation of Greek assets. This decision accordingly neither supports nor detracts from CMI’s contention.
When a similar submission was made to Sir Nicolas Browne-Wilkinson V-C he was also referred to the decisions of this court in Third Chandris Shipping Corp v Unimarine SA, The Pythia, The Angelic Wings, The Genie [1979] 2 All ER 972 at 984–985, 988, [1979] QB 645 at 668, 673, A J Bekhor & Co Ltd v Bilton [1981] 2 All ER 565, [1981] QB 923 and Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888. He concluded that it might just be possible to say that in these three cases the statements as to the need for local assets were obiter, but that in the Intraco case it was plainly the ratio decidendi. For the reasons which I have given, I think that in this later respect he was mistaken. This is not of great significance because it now appears that in MBPXL Corp v Intercontinental Banking Corp Ltd [1975] CA Transcript 411 this court (Stephenson and Scarman LJJ) held in terms and as the ratio of the court’s decision that a Mareva injunction is an exceptional remedy—
‘which will only be granted by the court where there is clear evidence that there are assets in this country, not immovable but movable assets, in the possession of the defendant.’
Sir Nicolas Browne-Wilkinson V-C said:
‘It has been said many times that Mareva relief is a developing field. There is no doubt that as a matter of English law this court has jurisdiction to grant relief against any party properly before it in relation to assets wherever situate. However, the circumstances under which such jurisdiction should be exercised must depend on and vary with the circumstances of every case. The rationale of the earlier decisions was plain: the court was seeking to freeze assets against which an eventual judgment in the English court could be enforced. In my judgment the earlier decisions merely show what was a settled practice in the ordinary case; that is to say in a case where there was no question of extending the order beyond local assets. For myself, I believe that the practice of requiring some grounds for believing there are local assets is still applicable in such case. But the three recent Court of Appeal cases were not the normal case [see Babanaft International Co SA v Bassatne [1989] 1 All ER 433, [1989] 2 WLR 232, Republic of Haiti v Duvalier [1989] 1 All ER 456, [1989] 2 WLR 261 and Derby & Co Ltd v Weldon (No 1) [1989] 1 All ER 469, [1989] 2 WLR 276]. In each judgment the Court of Appeal stressed they were very special cases. They involved a claim for Mareva relief over assets not situate here. If the case of Derby & Co Ltd v Weldon (No 1) before the Court of Appeal was a very special case, so is this application, which is intimately linked with exactly the same matter. In my judgment, I am free to exercise the undoubted jurisdiction to make the orders sought in the particular circumstances of this case. But, to my mind, three
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requirements ought to be satisfied before the court takes the extreme step that is asked for in this case. The first requirement is that the special circumstances of the case justify such an exceptional order. Second, that the order is in accordance with the rationale on which Mareva relief has been based in the past. Third, that the order does not conflict with the ordinary principles of international law.’
In substance I agree. The normal form of order should indeed be confined to assets within the jurisdiction, although the practice has changed since the decision in the MBPXL case and such an order could well extend to the disposition of a freehold interest in a house. The reason for that change is that, whereas initially the courts focused on assets being removed from the jurisdiction in an attempt to make the defendant ‘judgment proof’, later experience suggested that there were other ways of achieving this object and at least as much attention was then paid to that part of the common form order which forbade the disposal of assets as to that which prohibited their removal from the jurisdiction. The reason why at present the normal form of order should be so confined is that most defendants operate nationally rather than internationally. But, once the court is concerned with an international operator, the position may well be different.
In my judgment, the key requirement for any Mareva injunction, whether or not it extends to foreign assets, is that it shall accord with the rationale on which Mareva relief has been based in the past. That rationale, legitimate purpose and fundamental principle I have already stated, namely that no court should permit a defendant to take action designed to frustrate subsequent orders of the court. If for the achievement of this purpose it is necessary to make orders concerning foreign assets, such orders should be made, subject, of course, to ordinary principles of international law. When Sir Nicolas Browne-Wilkinson V-C said that special circumstances had to be present to justify such an exceptional order, I do not understand him to have been saying more than that the court should not go further than necessity dictates, that in the first instance it should look to assets within the jurisdiction and that in the majority of cases there will be no justification for looking to foreign assets.
Returning to the submission of counsel for CMI, I can see neither rhyme nor reason in regarding the existence of some asset within the jurisdiction of however little value as a precondition for granting a Mareva injunction in respect of assets outside the jurisdiction. The existence of sufficient assets within the jurisdiction is an excellent reason for confining the jurisdiction to such assets, but, other considerations apart, the fewer the assets within the jurisdiction the greater the necessity for taking protective measures in relation to those outside it.
The reality is, I think, that it is only recently that litigants have sought extra-territorial relief and that the courts have had to consider whether to grant it and on what conditions. During the last year it has been granted in the three cases to which Sir Nicolas Browne-Wilkinson V-C referred, namely the Babanaft case [1989] 1 All ER 433, [1989] 2 WLR 232, Republic of Haiti v Duvalier [1989] 1 All ER 456, [1989] 2 WLR 261 and Derby & Co Ltd v Weldon (No 1) [1989] 1 All ER 469, [1989] 2 WLR 276. Counsel for CMI seeks to distinguish the Babanaft case on the grounds that the injunction was granted in aid of execution of an existing judgment. This I accept as a distinction in that the court will have less hesitation in taking measures in support of a judgment creditor than it would in support of a potential judgment creditor. The decision in Republic of Haiti v Duvalier he seeks to distinguish on the grounds that it was a tracing case and that the funds were under the control of an agent resident within the jurisdiction. This is certainly a distinction in fact, although I am not sure that it is one of principle. In Derby & Co Ltd v Weldon (No 1) he seeks to distinguish on the ground that the defendants had assets within the jurisdiction, but, for the reasons which I have already given, I do not consider this to be a distinction in principle.
There remains one other authority to which I should refer. This is the decision of the House of Lords in South Carolina Insurance Co v Assurantie Maatschappij ‘de Zeven Provincien’ NV [1986] 3 All ER 487, [1987] AC 24. Counsel for CMI relied on it for the general
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proposition that the jurisdiction of the court under s 37(1) of the 1981 Act was ‘circumscribed by judicial authority dating back many years’ (see [1986] 3 All ER 487 at 495, [1987] AC 24 at 40 per Lord Brandon). It followed, so he said, that there was no scope for a new and extended use of the power. I do not accept this submission for at least two reasons. First, Lord Brandon said in terms that the jurisdiction in relation to Mareva injunctions was an exception to the principle that its exercise was circumscribed by judicial authority (see [1986] 3 All ER 487 at 496, [1987] AC 24 at 40). Second, the House was not considering a case which involved Mareva injunctions.
Once the suggested distinction based on the absence of any assets within the jurisdiction is rejected, the short answer to the submission that the court cannot, or alternatively should not, grant a Mareva injunction extending to the overseas assets of CMI is provided by Derby & Co Ltd v Weldon (No 1). That case is binding authority for the proposition that the court can grant such an injunction in the circumstances of this case and persuasive authority for doing so.
Sir Nicolas Browne-Wilkinson V-C then went on to consider other aspects stemming from the fact that CMI and Milco differ from Mr Weldon and Mr Jay in that they are juridical and not natural persons and are incorporated abroad, CMI in Luxembourg and Milco in Panama.
ENFORCEABILITY OF THE INJUNCTIONS
First amongst these considerations was that, as Sir Nicolas Browne-Wilkinson V-C said, ‘nothing brings the law into greater disrepute than the making of orders which cannot be enforced. The maxim “equity does not act in vain” is a very sound one’. It was suggested in argument that, on the authorities, the maxim referred not to enforceability but to the making of orders with which it was impossible to comply, eg to fell a tree which had already been blown down or which lawfully could at once be nullified, eg to grant the plaintiff a tenancy at will. However that may be, Sir Nicolas Browne-Wilkinson V-C was plainly right in his general proposition, although it requires careful examination in the context of particular circumstances.
I find it difficult to believe that, in using the words ‘cannot be enforced’, he meant ‘cannot be specifically enforced’. That that is not the true test is clear, because it is not uncommon for a court to order the disclosure of information which exists only in the mind of an individual. If he is unusually obdurate the order is unenforceable in the sense that the information will not be disclosed. Courts assume, rightly, that those who are subject to its jurisdiction will obey its orders: see Re Liddell’s Settlement Trusts, Liddell v Liddell [1936] 1 All ER 239 at 248, [1936] Ch 365 at 374, which, although said in relation to an order affecting wards of court normally resident in this country against a mother normally so resident, is I think of general application. It is only if there is doubt about whether the order will be obeyed and if, should that occur, no real sanction would exist, that the court should refrain from making an order which the justice of the case requires.
This consideration led Sir Nicolas Browne-Wilkinson V-C to examine the extent to which a Mareva injunction could be enforced against CMI in Luxembourg, which is a party to the European Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters to which this country gave effect by the Civil Jurisdiction and Judgments Act 1982, to which the convention is scheduled. This certainly is deserving of examination but, in the context of the grant of the Mareva injunction, I think that a sufficient sanction exists in the fact that, in the event of disobedience, the court could bar the defendants’ right to defend. This is not a consequence which they could contemplate lightly as they would become fugitives from a final judgment given against them without their explanations having been heard and which might well be enforced against them by other courts. It may be that CMI is inherently law-abiding or that some such consideration has occured to it, but it is certainly the fact that it has co-operated fully with the receiver appointed by Sir Nicolas Browne-Wilkinson V-C, has made some disclosure of its assets and began to do so before the Luxembourg court made an order enforcing that of the Vice-Chancellor.
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When it came to Milco, which is incorporated in Panama, but no doubt like most Panamanian companies has its base of operations elsewhere, Sir Nicolas Browne-Wilkinson V-C said that ‘there is no evidence before me that either a Mareva order or any eventual judgment can be enforced against Milco in Panama even if it has any assets’. This involves two considerations: lack of assets and Panamanian enforcement.
So far as lack of assets is concerned, there was evidence that, until recently Milco had very considerable assets. Whether they have indeed gone elsewhere and how and why they have disappeared will be a matter of some interest to the plaintiffs if they become judgment creditors of Milco, and I do not think that any alleged and unproved lack of assets should be regarded as a bar to the making of the order.
So far as enforcement is concerned, I have already indicated that the ordinary sanction of being debarred from defending should suffice, but in any event I think that it is a mistake to spend time considering whether English orders and judgments can be enforced against Panamanian companies in Panama. Whilst that is not perhaps the last forum to be considered in the context of such enforcement, it is certainly not the first. If in due time the plaintiffs are concerned to enforce a judgment against Milco, they will be resorting to the jurisdiction where its assets, if any, happen to be.
In the event Sir Nicolas Browne-Wilkinson V-C refused to make any order against Milco, but made an order against CMI calling for the disclosure of assets of its subsidiary Domaine and subsidiaries of that subsidiary, which includes Milco.
For my part, for the reasons which I have given, I would make no distinction between CMI and Milco in relation to the grant of a Mareva injunction.
THE IMPACT OF INTERNATIONAL LAW
The third requirement examined by Sir Nicolas Browne-Wilkinson V-C was that the Mareva injunction, and indeed any other order of the court, should not conflict with the ordinary principles of international law. This has two aspects. The first is the nature or content of the order itself. The second is its effect on third parties.
The nature and content of the order
Considerations of comity require the courts of this country to refrain from making orders which infringe the exclusive jurisdiction of the courts of other countries. For present purposes it suffices to refer to s 5, art 16 of the convention set out in the schedule to the Civil Jurisdiction and Judgments Act 1982, under the heading of ‘Exclusive Jurisdiction’, as indicating the scope of this impediment.
A Mareva injunction operates solely in personam and does not normally offend this principle in any way. I will revert to this aspect when considering the appointment of a receiver.
The effect on third parties
Here there is a real problem. Court orders only bind those to whom they are addressed. However, it is a serious contempt of court, punishable as such, for anyone to interfere with or impede the administration of justice. This occurs if someone, knowing of the terms of the court order, assists in the breach of that order by the person to whom it is addressed. All this is common sense and works well so long as the ‘aider and abettor’ is wholly within the jurisdiction of the court or wholly outside it. If he is wholly within the jurisdiction of the court there is no problem whatsoever. If he is wholly outside the jurisdiction of the court, he is either not to be regarded as being in contempt or it would involve an excess of jurisdiction to seek to punish him for that contempt. Unfortunately, juridical persons, notably banks, operate across frontiers. A foreign bank may have a branch within the jurisdiction and so be subject to the English courts. An English bank may have branches abroad and be asked by a defendant to take action at such a branch which will constitute a breach by the defendant of the court’s order. Is action by the
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foreign bank to be regarded as contempt, although it would not be so regarded but for the probably irrelevant fact that it happens to have an English branch? Is action by the foreign branch of an English bank to be regarded as contempt, when other banks in the area are free to comply with the defendant’s instructions?
All this was considered in the Babanaft appeal and gave rise to what is known as the ‘Babanaft proviso’ which was included in the order made by Sir Nicolas Browne-Wilkinson V-C. That is not in fact the proviso adopted by the Court of Appeal in the Babanaft case itself, but was its preferred solution. As applied by Sir Nicolas Browne-Wilkinson V-C to the circumstances of the application before him, it read:
‘(a) No person other than Rea Bros plc, Walsa Nominees Ltd and the fourth defendant and any officer and any agent appointed by power of attorney of the fourth defendant and any individual resident in England and Wales who has notice of this paragraph shall as regards acts done or to be done outside England and Wales be affected by the terms of this paragraph or concerned to inquire whether any instruction given by or on behalf of the fourth defendant or anyone else, whether acting on behalf of the fourth defendant or otherwise, is or may be a breach of this paragraph save to the extent that this paragraph is delcared enforceable by or is otherwise enforced by an order of a court outside England and Wales and then only within the jurisdiction of that other court … ’
The express reason for including such a proviso was that Mareva injunctions ‘have an in rem effect on third parties’ and that ‘Mareva injunctions have a direct effect on third parties who are notified of them and hold assets comprised in the order’ (per Kerr LJ in the Babanaft case [1989] 1 All ER 433 at 438, [1989] 2 WLR 232 at 240). I know what was meant, but I am not sure that it is possible to have an ‘in rem effect’ on persons whether natural or juridical and a Mareva injunction does not have any in rem effect on the assets themselves or the defendant’s title to them. Nor does such an injunction have a direct effect on third parties. The injunction (a) restrains those to whom it is directed from exercising what would otherwise be their rights and (b) indirectly affects the rights of some, but not all, third parties to give effect to instructions from those directly bound by the order to do or concur in the doing of acts which are prohibited by the order. Whether any particular third party is indirectly affected, depends on whether that person is subject to the jurisdiction of the English courts.
I have no doubt of the practical need for some proviso, because in its absence banks operating abroad do not know where they stand and foreign banks without any branch in England who are thus outside the jurisdiction of the English courts may take, and have indeed taken, offence at being, as they see it, ‘ordered about’ by the English courts. All this is recorded in the judgment of Kerr LJ in the Babanaft case [1989] 1 All ER 433 at 438–439, [1989] 2 WLR 232 at 240–241. However, I am not sure that the Babanaft proviso is the right answer to this dilemma.
The first objection is that it treats natural persons differently from juridical persons. Why should an English merchant bank which is a partnership, if such there still be, and carries on business abroad as well as in this country be treated differently from a company, yet the proviso does not apply to ‘any individual resident in England’.
The second objection is that it places an English corporate bank in a very difficult position. It may know of the injunction and wish to support the court in its efforts to prevent the defendant from frustrating the due course of justice, but the proviso deprives it of the one justification which it would otherwise have for refusing to comply with his instructions.
The third objection I record without expressing any view on its validity. It is that an order which includes this proviso has ex facie no extra-territorial effect and so is not of a character enabling it to be recognised under the European Judgments Convention and enforced abroad thereunder. In other words, the proviso has a circular effect. This is apparently being argued in the Luxembourg Court of Appeal following an order for the
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recognition and enforcement of Sir Nicolas Browne-Wilkinson V-C’s order by the Luxembourg Court of first instance.
What should be done? I should prefer a proviso on the following lines:
‘PROVIDED THAT, in so far as this order purports to have any extra-territorial effect, no person shall be affected thereby or concerned with the terms thereof until it shall be declared enforceable or be enforced by a foreign court and then it shall only affect them to the extent of such declaration or enforcement UNLESS they are (a) a person to whom this order is addressed or an officer of or an agent appointed by a power of attorney of such a person or (b) persons who are subject to the jurisdiction of this court and (i) have been given written notice of this order at their residence or place of business within the jurisdiction, and (ii) are able to prevent acts or omissions outside the jurisdiction of this court which assist in the breach of the terms of this order.’
This seems to me to meet any charge that the court is seeking to exercise an exorbitant jurisdiction, to be even-handed as between natural and juridical persons and to avoid any argument based on circularity.
THE RECEIVERSHIP
By an order made on 7 November 1988 as amended by a further order made on 11 November, Sir Nicolas Browne-Wilkinson V-C appointed a receiver of the assets of CMI and ordered the two individual defendants and CMI to do all in their power to vest these assets in the receiver. This order was subject to a Babanaft proviso covering the position of third parties and to a special proviso that no steps should be taken to enforce the vesting of the assets until after the courts of Luxembourg should have declared his order enforceable or otherwise enforced it. Finally, the receiver was instructed to allow CMI to defend this action independently of him.
EXTRA-TERRITORIALITY
Sir Nicolas Browne-Wilkinson V-C posed the question of whether it was right for the court to appoint a receiver of assets outside the jursdiction belonging to a company which had no residence in this country. He answered it by saying:
‘I have grave doubts whether, in the absence of proper evidence of Luxembourg law, I would have been prepared to appoint a receiver. It seems to me that the court should not appoint receivers over non-residents in relation to assets which are not within the jurisdiction of this court, unless satisfied that the local court either of residence or of the situation of the assets will act in aid of the English court in enforcing it. That is why the evidence of Luxembourg law is, to my mind, important in this case. The evidence of Luxembourg law is not in any way full at this stage but, broadly, it appears to be this. Under the 1968 European Judgments Convention which is incorporated in English law in the Civil Jurisdiction and Judgments Act 1982, art 24 provides under the rubric “Provisional, including protective, measures” as follows: “Application may be made to the courts of a Contracting State for such provisional, including protective, measures as may be available under the law of that State, even if, under this Convention, the courts of another Contracting State have jurisdiction as to the substance of the matter.” Under art 24, therefore, it is proper for this court to make protective orders of the kind such as in Mareva relief or in aid of Mareva relief, which can be enforced under the convention in the other convention countries including Luxembourg. The evidence before me suggests that the Luxembourg court will probably enforce any order that I make for the appointment of a receiver. The exact working out of such order and the manner in which the effect of the English order is reproduced under Luxembourg law may give rise to trouble. But the basic position, as I understand
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the evidence before me, is that if the order properly falls within art 24 (as it does), the Luxembourg court will enforce it. I am not seeking by this order in any way to make an order encroaching on the jurisdiction of the Luxembourg court. I will require the insertion in the order of a proviso modelled on the proviso in the Babanaft case … Accordingly, the order I propose to make today will not be directly enforceable within Luxembourg save to the extent that the Luxembourg court itself thinks it proper so to do in a case falling within art 24.’
I think that there may have been some confusion between the objects and effect of art 24 on the one hand and arts 25 to 45 on the other.
The convention in no way affects the powers of the courts of state A which is properly seised of the substance of the dispute. However, it provides for the courts of another contracting state, state B, to assist in two quite different ways. First, in arts 25 to 45 it provides a code for the recognition and enforcement of the orders of the courts of state A by the courts of state B. Second, in art 24, it authorises the courts of state B to entertain a direct application for protective orders in support of the primary proceedings before the courts of state A. In the instant case Sir Nicolas Browne-Wilkinson V-C seems, rightly as events have shown, to have contemplated that the Luxembourg courts would be invited to recognise and enforce his orders, ie would act under arts 25 to 45 and not under art 24.
In this situation I do not understand why the order that the assets vest in the receiver should only take effect if and when the order was recognised by the Luxembourg courts. True it is that CMI is a Luxembourg company, but it is a party to the action and can properly be ordered to deal with its assets in accordance with the orders of this court, regardless of whether the order is recognised and enforced in Luxembourg. The only effect of non-recognition would be to remove one of the potential sanctions for disobedience.
CMI
I would affirm the orders of Sir Nicolas Browne-Wilkinson V-C in relation to the receivership of the assets of CMI, subject only to (a) amending the Babanaft proviso in the terms which I have already indicated and (b) deleting the proviso that the order requiring CMI and the two individual defendants to vest the assets in the receiver should only take effect if the order was recognised by the Luxembourg courts.
MILCO
Panama is not a party to the European Judgments Convention or to any agreement to which effect would be given under the Foreign Judgments (Reciprocal Enforcement) Act 1933. There would therefore be problems in enforcing the orders of the English courts in Panama. However, I do not think that this should be regarded as an absolute bar to the appointment of a receiver of its assets. What really matters is the extent to which the receiver could effectively carry out his task, whatever that might be. In the instant case it would be to preserve any assets of Milco. He would be assisted by the sanction that, absent co-operation, Milco would not be allowed to defend the action. He would also be able to make use of the European Judgments Convention if, as seems not unlikely, any assets of Milco were situated in countries which were parties to that convention. In the circumstances I see no reason why Milco should be treated differently from CMI.
DISCLOSURE OF ASSETS
Once it is decided that a receiver should be appointed of all Milco’s assets, it follows that Milco should be required to reveal the nature, value and whereabouts of those assets. It is not therefore necessary to consider whether it would be right to order such disclosure if no other relief were to be granted against Milco.
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CONCLUSION
I would vary the orders in relation to CMI by deleting the proviso in the Mareva injunction (order of 4 November) and the proviso in para (2) of the receivership order (order of 7 November) substituting in each case the following proviso:
‘PROVIDED THAT, in so far as this order purports to have any effect outside England and Wales, no person shall be affected by it or concerned with the terms of it until it shall have been declared enforceable or shall have been recognised or registered or enforced by a foreign court (and then it shall only affect such person to the extent of such declaration or recognition or registration or enforcement) UNLESS that person is (a) a person to whom this order is addressed or an officer or an agent appointed by power of attorney of such a person or (b) a person who is subject to the jurisdiction of this court and who (i) has been given written notice of this order at his or its residence or place of business within the jurisdiction and (ii) is able to prevent acts or omissions outside the jurisdiction of this court which assist in the breach of the terms of this order.’
I would make orders in relation to Milco in the same terms mutatis mutandis as those in relation to CMI.
NEILL LJ. I have had the advantage of reading in draft the judgment of Lord Donaldson MR. I agree with it and with the orders which Lord Donaldson MR proposes. Nevertheless I think it right to deal with some of the issues which arise in this appeal in my own words. In particular, I intend to consider the questions whether the court has power to grant a Mareva injunction in respect of assets overseas or in cases where the defendant has no assets within the jurisdiction.
THE MAREVA INJUNCTION
By his order dated 4 November 1988 Sir Nicolas Browne-Wilkinson V-C granted an injunction against the fourth defendant CML Holding SA of Luxembourg (CMI), restraining CMI until after judgment in the action—
‘from disposing of or transferring charging or diminishing or in any way howsoever dealing with any of its assets wheresoever the same might be situate save insofar as the value of such assets exceeds the sum of [£25m].’
CMI has appealed against this order. It was argued in support of the appeal (a) that the court was precluded by binding authority from granting a Mareva injunction against a foreign defendant who had no assets within the jurisdiction and (b) that, even if the court had such jurisdiction in an exceptional case, the judge erred in principle in granting an injunction in the present case.
In order to consider these arguments it is necessary to examine the history of the Mareva jurisdiction and to try to discover the basis on which it is founded.
Before the decisions of the Court of Appeal in 1975 in Nippon Yusen Kaisha v Karageorgis [1975] 3 All ER 282, [1975] 1 WLR 1093 and in Mareva Cia Naviera SA v International Bulkcarriers Ltd, The Mareva (1975) [1980] 1 All ER 213 it was generally thought that any order preventing a defendant from dealing freely with his assets would infringe the principle recognised by the Court of Appeal in Lister & Co v Stubbs (1890) 45 Ch D 1, [1886–90] All ER Rep 797.
Indeed, in the Mareva case [1980] 1 All ER 213 at 215, which came before the Court of Appeal ex parte, Roskill LJ drew attention to the fact that in the Commercial Court an injunction of the kind sought had from time to time been asked for but had been consistently refused.
In Lister & Co v Stubbs the defendant was employed by the plaintiffs to buy materials on their behalf. It was alleged that by a corrupt bargain Stubbs had obtained commissions
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or bribes from a firm who supplied goods to the plaintiffs and that he had used the money in purchasing houses and property and in making deposits in banks. Before the judge the plaintiffs sought an interlocutory injunction to restrain Stubbs from dealing with the real estate on which part of the money had been spent and an order directing him to bring the other investments and the cash into court. The judge rejected the argument that the plaintiffs could follow the money as trust money and refused any relief. The plaintiffs appealed.
It seems clear, however, that in the Court of Appeal the plaintiffs’ argument was to the effect that, if the money could not be followed as trust money, at any rate the money in cash, or in investments which could be so dealt with, should be paid or brought into court. This argument was rejected. Cotton LJ pointed out that it was not a case where payment in was asked for as a term of the grant of leave to defend under RSC Ord 14. He said (45 Ch D 1 at 13, [1886–90] All ER 797 at 799):
‘I know of no case where, because it was highly probable that if the action were brought to a hearing the plaintiff could establish that a debt was due to him from the defendant, the defendant has been ordered to give security until that has been established by the judgment or decree.’
In the light of the argument advanced in the Court of Appeal in Lister & Co v Stubbs it can be said that the Mareva cases are distinguishable because a Mareva injunction does not constitute the plaintiff a secured creditor. That may be a valid point of distinction as far as Lister & Co v Stubbs itself is concerned, but it seems to me that, in order to determine how far the Mareva decision represented a departure from the pre-1975 practice, it is helpful to look shortly at some of the other earlier authorities.
These earlier authorities were considered by the Court of Appeal when the new phenomenon of the Mareva injunction was examined inter partes in Rasu Maritima SA v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) and Government of Indonesia (as interveners) [1977] 3 All ER 324, [1978] QB 644. Lord Denning MR drew attention to the old process of foreign attachment, which had fallen into desuetude in England though it had survived in the United States (Ownbey v Morgan (1921) 256 US 94) (see [1977] 3 All ER 324 at 331, [1978] QB 644 at 657–658). Lord Denning MR stated what he believed to be the practice at that time relating to defendants who were within the jurisdiction and who had assets here. He said ([1977] 3 All ER 324 at 332, [1978] QB 644 at 659):
‘So far as concerns defendants who are within the jurisdiction of the court and have assets here, it is well established that the court should not, in advance of any order or judgment, allow the creditor to seize any of the money or goods of the debtor or to use any legal process to do so.’
Lord Denning MR then referred to earlier dicta. It is sufficient to take three examples. (a) In Robinson v Pickering (1881) 16 Ch D 660 at 661 James LJ said in the course of argument: ‘You cannot get an injunction to restrain a man who is alleged to be a debtor from parting with his property.’ (b) In Newton v Newton (1885) 11 PD 11 at 13 Hannen P said: ‘… it is not competent for a Court, merely quia timet, to restrain a respondent from dealing with his property.’ (c) In Jagger v Jagger [1926] P 93 at 102, [1926] All ER Rep 613 at 618 Scrutton LJ said: ‘I am not aware of any statutory or other power in the court to restrain a person from dealing with his property … ’
Pausing there, it seems to me to be clear that 30 years ago an injunction on the lines of a Mareva injunction would not have been available in any division of the High Court.
In 1973, however, the court was given a statutory power to grant injunctions to stop transactions intended to prevent or reduce financial relief in matrimonial proceedings. Section 37(2) of the Matrimonial Causes Act 1973 is in these terms:
‘Where proceedings for financial relief are brought by one person against another,
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the court may, on the application of the first-mentioned person—(a) if it is satisfied that the other party to the proceedings is, with the intention of defeating the claim for financial relief, about to make any disposition or to transfer out of the jurisdiction or otherwise deal with any property, make such order as it thinks fit for restraining the other party from so doing or otherwise for protecting the claim … ’
It is not necessary for the purpose of the present judgment to make any further detailed reference to the 1973 Act. It may be observed, however, that in Hamlin v Hamlin [1985] 2 All ER 1037, [1986] Fam 11 the Court of Appeal held that the court had power under s 37(2) of the 1973 Act to restrain the respondent from disposing of a house in Spain.
The early Mareva injunctions had three limiting characteristics: (a) they were only granted against persons resident outside the jurisdiction; (b) they were only granted against persons who had property within the jurisdiction; and (c) they were only granted to restrain the removal of property from the jurisdiction. In order to obtain an injunction all these elements had to be shown to be present.
In the course of time a number of developments took place. I should refer to some of these.
In Chartered Bank v Daklouche [1980] 1 All ER 205, [1980] 1 WLR 107, and in other cases decided at about the same time, it was held that Mareva injunctions could be granted whether the defendant was resident inside or outside the jurisdiction and whatever his domicile or nationality might be.
Next, in Prince Abdul Rahman Bin Turki Al Sudairy v Abu-Taha [1980] 3 All ER 409 at 412, [1980] 1 WLR 1268 at 1273 Lord Denning MR expressed the opinion obiter that a Mareva injunction could be obtained if the plaintiff established that there was a danger that the defendant would dispose of his assets within the jurisdiction. This dictum of Lord Denning MR was doubted by some other members of the Court of Appeal in Faith Panton Property Plan Ltd v Hodgetts [1981] 2 All ER 877, [1981] 1 WLR 927 and in A J Bekhor & Co Ltd v Bilton [1981] 2 All ER 565, [1981] QB 923. But later authorities, including Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft mbH & Co KG, The Niedersachsen [1984] 1 All ER 398, [1983] 1 WLR 1412, have clearly established that a Mareva injunction may be granted if it is shown that there is a risk that the defendant may dispose of his assets within the jurisdiction.
It is to be noted, however, that in reaching this conclusion the courts have placed some reliance on the wording of s 37(3) of the Supreme Court Act 1981. That subsection provides as follows:
‘The power of the High Court under subsection (1) to grant an interlocutory injunction restraining a party to any proceedings from removing from the jurisdiction of the High Court, or otherwise dealing with, assets located within that jurisdiction shall be exercisable in cases where that party is, as well as in cases where he is not, domiciled, resident or present within that jurisdiction.’
Finally, in the summer of 1988, the previous practice in regard to Mareva injunctions was extended in three cases which reached the Court of Appeal by the grant of an injunction relating to the assets of the defendant wherever they might be situated: see Babanaft International Co SA v Bassatne [1989] 1 All ER 433, [1989] 2 WLR 232, Republic of Haiti v Duvalier [1989] 1 All ER 456, [1989] 2 WLR 261 and Derby & Co Ltd v Weldon (No 1) [1989] 1 All ER 469, [1989] 2 WLR 276.
In support of the present appeal it was submitted: (a) that the worldwide injunction granted in Babanaft could be explained and justified on the basis that it was granted post-judgment by which time the defendants had become judgment debtors; (b) that Duvalier and Derby (No 1), which were pre-judgment cases, involved an impermissible extension of the Mareva jurisdiction and of the recognised practice which had become established over the past 13 years; (c) that in any event the injunction which was granted in the present case could not be supported because it involved the grant of an injunction against
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a defendant who had no assets within the jurisdiction and was therefore contrary to the decision of the Court of Appeal in Intraco Shipping Corp v Notis Shipping Corp, The Bhoja Trader [1981] 2 Lloyd’s Rep 256.
In the course of his careful and persuasive argument counsel referred us to a number of the earlier authorities, and to the words of Jessel MR in Beddow v Beddow (1878) 9 Ch D 89 at 93 where, having drawn attention to the width of the discretion given by s 25(8) of the Supreme Court of Judicature Act 1873 (now s 37(1) of the Supreme Court Act 1981), he emphasised that the discretion had to be exercised ‘according to sufficient legal reasons and on settled legal principles’.
He also referred us to the speech of Lord Brandon in South Carolina Insurance Co v Assurantie Maatschappij ‘de Zeven Provincien’ NV [1986] 3 All ER 487 at 495–496, [1987] AC 24 at 39–40, where he set out the basic principles governing the grant of injunctions under the statutory powers contained in s 37 of the 1981 Act. Counsel placed particular emphasis on the following passages in Lord Brandon’s speech, where he said:
‘The second basic principle is that, although the terms of s 37(1) of the 1981 Act and its predecessors are very wide, the power conferred by them has been circumscribed by judicial authority dating back many years. The nature of the limitations to which the power is subject has been considered in a number of recent cases in your Lordships’ House … The effect of these authorities, so far as material to the present case, can be summarised by saying that the power of the High Court to grant injunctions is, subject to two exceptions to which I shall refer shortly, limited to two situations. Situation (1) is when one party to an action can show that the other party has either invaded, or threatens to invade, a legal or equitable right of the former for the enforcement of which the latter is amenable to the jurisdiction of the court. Situation (2) is where one party to an action has behaved, or threatens to behave, in a manner which is unconscionable … The power of the court to grant Mareva injunctions may also, before it was statutorily recognised, have been a further exception to the second basic principle stated above. That power, however, has now been expressly recognised by s 37(3) of the Supreme Court Act 1981, and again the present case is in no way concerned with it.’
In addition, counsel drew our attention to the decision of the Court of Appeal in Ashtiani v Kashi [1986] 2 All ER 970, [1987] QB 888, in which it was recognised that it was the established practice of the courts not to grant Mareva injunctions over assets which were situated outside the jurisdiction.
I do not find it necessary for the purpose of the present appeal to come to a final conclusion whether the decision in the Intraco case can be relied on as authority for the proposition that a Mareva injunction can only be granted where there is clear evidence that there are assets within the jurisdiction. The matter is academic because, as Lord Donaldson MR has already pointed out, in MBPXL Corp v International Continental Banking Corp Ltd [1975] CA Transcript 411 the Court of Appeal held in terms that a Mareva injunction could only be granted if there was evidence that there were movable assets in the possession of the defendant within the jurisdiction of the court.
In these circumstances it is necessary to consider two questions: (a) whether the court is prevented by binding authority from granting a Mareva injunction in the circumstances of the present case and on a worldwide basis; (b) whether the grant of such an injunction can be reconciled with the basic principles enunciated by Lord Brandon in the South Carolina case.
I have come to the conclusion that the court is entitled to grant an injunction in the circumstances of the present case against CMI and to grant such an injunction on a worldwide basis. I can state the reasons for my conclusion as follows.
(1) One starts with the wording of s 37(1) of the 1981 Act, which provides as follows:
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‘The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so.’
(2) In Blunt v Blunt [1943] 2 All ER 76 at 78, [1943] AC 517 at 525 Viscount Simon LC adopted the view of the Court of Appeal in Wickins v Wickins (Goode, party cited) [1918] P 265 at 272:
‘… where Parliament has invested the court with a discretion which has to be exercised in an almost inexhaustible variety of delicate and difficult circumstances, and where Parliament has not thought fit to define or specify any cases or classes of cases fit for its application, this court ought not to limit or restrict that discretion by laying down rules within which alone the discretion is to be exercised … ’
This principle was applied by the Court of Appeal in Ward v James [1965] 1 All ER 563 at 571, [1966] 1 QB 273 at 295, where Lord Denning MR gave his guidance as to the way in which a discretion is to be exercised:
‘… the courts can lay down the considerations which should be borne in mind in exercising the discretion … From time to time the considerations may change as public policy changes, and so the pattern of decision may change. This is all part of the evolutionary process.’
The principle was further considered by the Court of Appeal in the context of Mareva injunctions in the Rasu Maritima case.
(3) As I ventured to suggest in the course of my judgment in the Babanaft case, the practice as to the grant of Mareva injunctions is still in the course of development. Having regard to the changes in the practice which have already taken place since 1975, I see no good reason for saying that a practice which has so recently come into existence has already become ossified. Circumstances change. It is to be remembered that exchange control was withdrawn in the United Kingdom as recently as 1979. The transfer of funds from one jurisdiction to another grows ever more speedy and the methods of transfer more sophisticated.
(4) The true basis for the grant of a Mareva injunction is that which was stated in the Mareva case (1975) [1980] 1 All ER 213 at 215 itself by Lord Denning MR in these words:
‘If it appears that the debt is due and owing, and there is a danger that the debtor may dispose of his assets so as to defeat it before judgment, the court has jurisdiction in a proper case to grant an interlocutory judgment so as to prevent him from disposing of those assets.’
To the same effect were the words used by Kerr LJ in The Niedersachsen [1984] 1 All ER 398 at 419, [1983] 1 WLR 1412 at 1422 where he said:
‘In our view the test is whether, on the assumption that the plaintiff has shown at least “a good arguable case”, the court concludes, on the whole of the evidence then before it, that the refusal of a Mareva injunction would involve a real risk that a judgment or award in favour of the plaintiff would remain unsatisfied.’
(5) It is to be noted that in the Mareva case [1980] 1 All ER 213 at 214 Lord Denning MR referred to a passage in 21 Halsbury’s Laws (3rd edn) para 729 (now 24 Halsbury’s Laws (4th edn) para 918) to the effect that—
‘whenever a right, which can be asserted either at law or in equity, does exist, then, whatever the previous practice may have been, the Court is enabled by virtue of this provision, in a proper case, to grant an injunction to protect that right.’
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The plaintiff has to show a good arguable case that money is due to him and that he needs the protection of an injunction to ensure that any judgment which he obtains from the court is not rendered nugatory by the actions of the defendant. Lord Denning MR applied the principle which he had cited from Halsbury’s Laws to the case of a creditor who was seeking judgment for payment of a debt and who wanted to protect the right to enforce that judgment. On this analysis it seems to me possible to fit the grant of Mareva injunctions within the first of the two situations considered by Lord Brandon in his examination of the basic principles in the South Carolina case. The injunction is an ancillary power which is required for the enforcement of the plaintiff’s right.
(6) It seems to me that the time has come to state unequivocally that in an appropriate case the court has power to grant an interlocutory injunction even on a worldwide basis against any person who is properly before the court, so as to prevent that person by the transfer of his property frustrating a future judgment of the court. The jurisdiction to grant such injunctions is one which the court requires and it seems to me that it is consistent with the wide words of s 37(1) of the 1981 Act.
In matters of this kind it is essential that the court should adapt the guidelines for the exercise of a discretion to meet changing circumstances and new conditions, provided always the court does not exceed the jurisdiction which is conferred on it by Parliament or by subordinate legislation. It remains true, of course, that the jurisdiction must be exercised with care.
The legitimate interests of the defendant must be respected and he must be allowed to continue his normal business and to have funds to meet his reasonable living expenses. I anticipate that orders against a defendant’s foreign assets or in cases where the defendant has no assets within the jurisdiction will be unusual. In such cases it will be necessary to safeguard the position of third parties outside this country. But I see no reason in principle to reject the existence of the jurisdiction to grant a Mareva injunction in these cases or why fetters should be placed on the exercise of the wide discretion given by statute if the purpose of the injunction is to enable the court to protect the effectiveness of its own procedures. Moreover, it seems to me that this approach is consistent with the policy underlying s 37(2)(a) of the Matrimonial Causes Act 1973 which is designed to protect the rights of those seeking financial relief in matrimonial proceedings from being defeated by deliberate transfers of property by the other party.
I can turn now to consider some of the other matters which have been argued in the course of this appeal.
THE BABANAFT PROVISO
I have already drawn attention to the fact that, where an injunction is granted which affects the transfer or other disposition of property which is situated outside the jurisdiction of the court, steps must be taken to safeguard the position of third parties who are themselves outside the jurisdiction. This question arose for consideration in the Babanaft case and led to the incorporation in the order in that case of a proviso designed to protect overseas banks and other persons over whom the court was not seeking to assert any direct control.
I have now been able to read that part of the judgment of Lord Donaldson MR in which he deals in some detail with this aspect of the case. I agree with the revised form of proviso which he suggests. It may be that in some future case a further refinement may be developed, but at this stage it seems to me that the wording proposed by Lord Donaldson MR gives the right degree of protection to the third parties whom it is intended to assist.
THE APPOINTMENT OF A RECEIVER
Section 37(1) of the 1981 Act gives the High Court a similar jurisdiction to appoint a receiver to that conferred for the grant of an injunction. The remedies are of course
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separate remedies and in some cases it may be appropriate to grant only one of these remedies rather than both. I am quite satisfied, however, that in this case the judge was right to appoint a receiver of the assets of CMI as well as granting an injunction.
I agree with Lord Donaldson MR that the precise form of order should be modified in the manner which he proposes.
THE DISCOVERY OF ASSETS
It may be open to argument in some future case that in certain circumstances a discovery order can be made with a wider ambit than the Mareva injunction to which it is ancillary. As at present advised, however, I remain of the opinion which I expressed in Ashtiani v Kashi [1986] 2 All ER 970 at 980, [1987] QB 888 at 905 that the discovery order, if made at all, should not go further than the injunction. The basis of the jurisdiction to make an order for discovery was examined by this court in A J Bekhor & Co Ltd v Bilton [1981] 2 All ER 565, [1981] QB 923.
It was there held by the majority of the court that the order for discovery, being ancillary to the Mareva injunction, should not go beyond the ambit of the injunction. I do not find it necessary in this case to consider further whether, and, if so, in what circumstances, there may be exceptions to this general rule. I would only urge that in this field the court should scrutinise very carefully any submission that its powers are circumscribed more narrowly than the justice of the case demands.
In the course of this appeal some reference was made to the fact that assets, like the Cheshire cat, may disappear unexpectedly. It is also to be remembered that modern technology and the ingenuity of its beneficiaries may enable assets to depart at a speed which can make any feline powers of evanescence appear to be sluggish by comparison.
To return to the facts of the present case.
I am satisfied that Sir Nicolas Browne-Wilkinson V-C was fully justified in making the order for discovery against CMI which he made in this case.
THE RELEVANCE OF ENFORCEABILITY
It was argued on behalf of CMI that one of the strongest reasons against the grant of worldwide Mareva injunctions was the difficulty of enforcement. We were referred to a number of authorities including Locabail International Finance Ltd v Agroexport [1986] 1 All ER 901, [1986] 1 WLR 657 in support of the proposition that it is a general principle of the law relating to injunctions not to make orders which cannot be enforced.
This aspect of the matter has, however, already been dealt with by Lord Donaldson MR in the section of his judgment headed ‘Enforceability of the injunctions’.
I agree with his analysis of the position. I also agree that there is no adequate reason to make any distinction between CMI and Milco. The same relief should be granted against both companies.
THE RELEVANCE OF THE EUROPEAN JUDGMENTS CONVENTION
The main action is proceeding in this country. We are therefore not concerned with the powers referred to in art 24 of the European Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (Brussels, 27 September 1968; EC 46(1978); Cmnd 7395) which enable the courts in one convention country to make interlocutory orders in aid of actions which are proceeding in another convention country.
At a later stage of the action, however, it may be necessary to look further at the way the present orders are enforced by registration or otherwise both in convention countries and elsewhere. It is to be remembered that a Mareva injunction is a remedy which takes effect in personam and may have characteristics which are unfamiliar in some jurisdictions overseas.
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CONCLUSION
I too would dismiss the appeal by CMI and allow the cross-appeal by the plaintiffs against Milco on the terms proposed by Lord Donaldson MR.
BUTLER-SLOSS LJ. I agree with the judgments of Lord Donaldson MR and Neill LJ.
I would venture to summarise the present position. The jurisdiction to grant Mareva injunctions is now to be found in the Supreme Court Act 1981, s 37(1). The practice has considerably developed since Roskill LJ in Mareva Cia Naviera SA v International Bulkcarriers SA, The Mareva (1975) [1980] 1 All ER 213 at 215 said:
‘Indeed it is right to say that, as far as my own experience in the Commercial Court is concerned, an injunction in this form has in the past from time to time been applied for but has been consistently refused.’
It is adapting to meet changing circumstances and the increased mobility of assets and interchangeability of international companies. The developing practice was referred to by Kerr LJ in Babanaft International Co SA v Bassatne [1989] 1 All ER 433 at 440, [1989] 2 WLR 232 at 242 and by Nicholls LJ in Derby & Co Ltd v Weldon (No 1) [1989] 1 All ER 469 at 476, [1989] 2 WLR 276 at 284. Neill LJ in the Babanaft case [1989] 1 All ER 433 at 448, [1989] 2 WLR 232 at 251 said:
‘We are concerned in this appeal with a branch of the law which is in a stage of development and where the court will be asked to exercise its discretion to grant injunctive relief in many differing sets of circumstances. It seems to me therefore that any guidelines which are laid down by this court should be expressed in general terms.’
The Mareva injunction is an equitable remedy which operates ‘in personam’, in circumstances in which the plaintiffs show a good arguable case and that it is likely that the defendants will dissipate their assets so as not to be available to satisfy a judgment against them. It may be granted either pre-judgment or post-judgment. If there are insufficient or no assets within the jurisdiction the relief may be granted against assets held outside the jurisdiction, either within the countries which are party to the European Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (Brussels, 27 September 1968; EC 46(1978); Cmnd 7395) or worldwide. It has been granted to support an action brought in another convention country (see Republic of Haiti v Duvalier [1989] 1 All ER 456, [1989] 2 WLR 261). In analogous proceedings for an injunction under the provisions of s 37(2)(a) of the Matrimonial Causes Act 1973 relief has been granted to restrain a husband from disposing of real property owned by him in Spain (see Hamlin v Hamlin [1985] 2 All ER 1037, [1986] Fam 11).
It is a matter of discretion for the judge whether in the circumstances it appears to be just and convenient to grant the relief sought. The court may be more willing to restrain a defendant from dealing with his assets after than before judgment has been given against him. It is only in an unusual case that the court will make a worldwide pre-judgment Mareva order. Factors such as the impossibility of compliance with or enforcement of the equitable remedy are relevant considerations in the exercise of discretion.
To assist the effectiveness of the pre-judgment Mareva an order for disclosure of assets may within the ambit of the injunction be granted. An order for a receiver may either be made independently under s 37(1) or in support of the Mareva.
The grant of such remedies against defendants must not be oppressive in its outcome. Specific terms or undertakings should therefore generally be part of any worldwide pre-judgment Mareva. The conditions imposed in the wording of the order must balance on the one side the need to freeze the assets in question and gain the information required against restrictions to protect the defendants, inter alia, from unjustified results in other jurisdictions, a misuse of the information gained or an unwarranted invasion of privacy
Page 1023 of [1989] 1 All ER 1002
and to permit them to have funds to continue business and to meet reasonable living expenses. They should also contain qualifications to safeguard the position of third parties under the English order, leaving it open for orders to be sought in the courts of the country asked to enforce the English order. I would therefore respectfully indorse the form of order set out in the judgment of Lord Donaldson MR.
Turning to this appeal, in Derby & Co Ltd v Weldon (No 1) the Court of Appeal was satisfied that the first and second defendants were ‘well used to moving funds worldwide’. May LJ said in respect of the first two defendants [1989] 1 All ER 469 at 473, [1989] 2 WLR 276 at 280):
‘… for my part I think that this case also is one which cries out for a worldwide Mareva injunction even though it is being sought before judgment.’
Lord Donaldson MR has set out in his judgment the concessions of the plaintiffs in their skeleton argument on behalf of CMI (the holding company) which include that the first and second defendants ‘are to be assumed to exercise a high degree of control over CMI’ and the likelihood of dissipation of the assets of CMI. In the circumstances of this case the relief granted was entirely justified. I would dismiss the appeal.
In considering the cross-appeal in respect of Milco, this company is to be deemed a creature of the first and second defendants against whom Mareva injunctions have been granted outside the jursidiction. It is a Panamanian company with no assets within the jurisdiction. If, as I consider it is, it is proper to grant a Mareva injunction outside the jurisdiction against the holding company, I cannot see in principle why such an order should not be made against the subsidiary. It had at one time in the recent past very substantial assets. We are now told it has no assets anywhere. The companies of the group have now been restructured so that Milco is now a subsidiary of Domaine, itself a subsidiary of CMI. The ability of CMI as the holding company to control Milco under the existing order is therefore at one remove. There are separate claims in the pleadings against Milco in addition to joint and several claims with the other three defendants.
Sir Nicolas Browne-Wilkinson V-C declined to make an order against Milco on the ground that—
‘there is no evidence before me that either a Mareva order or any eventual judgment in this action can be enforced against Milco in Panama even if it has any assets. On that basis, I decline to make an order directly against Milco.’
I, for my part, would prefer to turn the proposition round. Although Milco is registered in Panama there is no evidence of assets held in Panama. On the contrary, the assets at one time held by Milco were likely to have been held elsewhere. If there are assets there is at present no evidence that the order would be unenforceable and the granting of an order for a receiver may greatly assist in understanding the position of Milco. Sir Nicolas Browne-Wilkinson V-C may have been unduly pessimistic as to the effect of an order which subject to unenforceability it appears he would have been prepared to make. To make or refuse to make the order against Milco is a matter of discretion, not of jurisdiction. I would allow the cross-appeal and grant the relief sought in the terms set out by Lord Donaldson MR.
Appeal dismissed and cross-appeal allowed. Leave to appeal to the House of Lords refused.
Solicitors: Theodore Goddard (for CMI and Milco); Lovell White Durrant (for the plaintiffs); Cameron Markby (for the receiver).
Mary Rose Plummer Barrister.
Practice Note
(judicial review)
[1989] 1 All ER 1024
Categories: PRACTICE DIRECTIONS
Court: QUEEN’S BENCH DIVISION
Lord(s): WATKINS LJ AND PHILLIPS J
Hearing Date(s): 7 MARCH 1989
Judicial review – Leave to apply for judicial review – Practice – Affidavit in reply – Time for filing affidavit – Increase in time for filing – Extension of time only to be granted in exceptional circumstances – Hearing applications for extension of time – Abridgment of time where expedited hearing ordered – RSC Ord 3, r 5, Ord 53, r 6(1)(4) – RSC (Amendment) 1989.
7 March 1989. The following judgment was delivered.
WATKINS LJ gave the following direction at the sitting of the court. With effect from 7 March 1989 and by virtue of RSC (Amendment) 1989, SI 1989/177, the period allowed to a respondent in judicial review proceedings for filing an affidavit in reply under RSC Ord 53, r 6(4) will be increased from 21 days to 56 days.
This follows a general acceptance that the period of 21 days was unrealistically short and therefore, in many cases, unenforceable. The period substituted cannot be so characterised. It has been set realistically, having regard to the interests of both applicants and respondents, and as such must be strictly adhered to. Although there is provision for extending this period (see Ord 3, r 5) it must be clearly understood that extensions of time will be granted only in circumstances which are wholly exceptional and for the most compelling reasons. For all practical purposes respondents would be well advised to treat the period of 56 days as absolute.
Thus, in any case in which the notice of motion and other documents referred to in Ord 53, r 6(1) are served on a respondent on or after 7 March, that respondent has 56 days in which to file in the Crown Office any affidavit in reply.
The Crown Office will not accept respondents’ affidavits outside the 56-day period unless an extension of time has first been obtained.
Applications for extension of time will be considered in the first instance by the Master of the Crown Office. An appeal against his decision will lie to a judge hearing cases in the Crown Office list.
Where a judge directs an expedited hearing by entering a case in Part D of the Crown Office list (see the Lord Chief Justice’s practice direction of 3 February 1987 (Practice Note [1987] 1 All ER 368, [1987] 1 WLR 232)) applicants should have in mind the need to invite the judge to abridge the 56-day period where the circumstances of the case so require.
Delays in lodging respondents’ affidavits have hitherto caused severe prejudice to applicants and consequent damage to the administration of justice. The amendment to Ord 53, r 6(4) and the procedure set out in this practice note will prevent the continuance of this difficulty.
Raina Levy Barrister.
Calveley and others v Chief Constable of the Merseyside Police and other appeals
[1989] 1 All ER 1025
Categories: CRIMINAL; Police
Court: HOUSE OF LORDS
Lord(s): LORD BRIDGE OF HARWICH, LORD ACKNER, LORD OLIVER OF AYLMERTON, LORD GOFF OF CHIEVELEY AND LORD LOWRY
Hearing Date(s): 6, 7, 8 FEBRUARY, 16 MARCH 1989
Police – Discipline – Disciplinary proceedings – Investigation – Conduct of proceedings – Duty of care – Police officer under investigation alleging that investigation carried out in breach of statutory duty and negligently – Whether chief constable and investigating officer owing common law duty of care to police officer under investigation – Whether police officer having right of action for damages for breach of duty of care – Whether breach of statutory duty under Police Acts and regulations giving rise to right of action – Whether investigating officer guilty of misfeasance in public office – Police Act 1964 – Police (Discipline) Regulations 1977, reg 7.
Public office – Abuse of – Misfeasance by a public officer – Ingredients of tort – Whether necessary to prove that public officer acted in bad faith or without reasonable excuse in exercise of official power – Whether suspect in criminal or disciplinary proceedings having cause of action in tort for misfeasance in public office where investigating police officer making false and defamatory report to superior officer.
The plaintiffs in three actions were police officers who had been the subject of police disciplinary proceedings under the Police (Discipline) Regulations 1977. They had been suspended on full pay and allowances pending the outcome of the investigation into the complaints made against them. The complaints had either been dismissed, quashed on appeal or discontinued because the officer concerned was discharged on medical grounds, but the plaintiffs alleged that the disciplinary proceedings had been misconducted and that they had thereby suffered loss. The plaintiffs brought actions against their chief constables claiming special damages for lost overtime pay and general damages for anxiety, vexation and injury to reputation. In the first two actions the plaintiffs alleged that the chief constable and other officers for whom he was vicariously liable had been in breach of statutory duty and/or negligent in failing to proceed expeditiously with the investigation, in failing to give the officers written notice of the complaints made against them as soon as practicable as required by reg 7a of the 1977 regulations and in misconducting the investigation. A similar allegation of misconduct was the basis of the complaint in the third action. The judge struck out the claims, holding that no action lay for damages against the police for the way in which they conducted a disciplinary inquiry and that the plaintiffs’ remedy was confined to seeking damages in proceedings for judicial review. The plaintiffs appealed, contending that the investigating officer owed a duty of care at common law to conduct the investigation properly and expeditiously and that they had a right of action for breach of that duty and for breach of statutory duty under the Police Act 1964 and the 1977 regulations. The Court of Appeal rejected those contentions and dismissed their appeals. The plaintiffs appealed to the House of Lords. At the hearing of the appeal one of the plaintiffs raised for the first time an allegation that the investigating officer had been guilty of misfeasance in public office.
Held – The appeals would be dismissed for the following reasons—
(1) A police officer whose conduct had been the subject of a disciplinary investigation and who alleged that those proceedings had been misconducted had no cause of action
Page 1026 of [1989] 1 All ER 1025
against his chief constable or the investigating officer for breach of statutory duty arising out of the 1964 Act or the 1977 regulations since the duty under reg 7 of the 1977 regulations to give notice of the matters alleged to the police officer under investigation as soon as practicable was a procedural step designed to protect the officer’s position in relation to proceedings which might be brought against him and was not intended to protect him from injury of a kind for which he would be entitled to compensation. If he was prejudiced by any failure to perform that duty the appropriate remedy was to seek judicial review to quash any conviction and nullify its consequences (see p 1029 g to j p 1030 a b and p 1032 f to j, post).
(2) Similarly, a police officer who alleged that disciplinary proceedings brought against him had been misconducted had no cause of action against his chief constable or the investigating officer in negligence since the suspension from duty while the disciplinary investigation was carried out was not in itself, and did not involve, any foreseeable injury of a kind capable of sustaining a cause of action in negligence (see p 1030 a to j, p 1031 b and p 1032 f to j, post).
(3) For the tort of misfeasance in public office to be proved it had to be shown at least that a public officer had done in bad faith or, possibly, without reasonable cause an act in the exercise or purported exercise of some power or authority with which he was clothed by virtue of the office he held. Since no such act was identified by the pleading the allegation in the third action that the investigating officer had been guilty of misfeasance in public office could not be substantiated (see p 1031 e j to p 1032 b f to j, post).
Per curiam. If a police officer investigating suspected criminal or disciplinary offences maliciously makes a false report to his superior officer which is defamatory of the suspect so that the report loses its status of qualified privilege, the suspect has a cause of action in tort against the author of the report in defamation, not misfeasance in public office (see p 1032 e to j, post).
Decision of the Court of Appeal [1988] 3 All ER 385 affirmed.
Notes
For negligence in relation to statutory functions, see 34 Halsbury’s Laws (4th edn) para 4.
For judicial review generally, see 37 ibid paras 567–583.
For the Police Act 1964, see 33 Halsbury’s Statutes (4th edn) 597.
For the Police (Discipline) Regulations 1977, see 17 Halsbury’s Statutory Instruments (4th reissue) 254.
Cases referred to in opinions
Donoghue (or M’Alister) v Stevenson [1932] AC 562, [1932] All ER Rep 1, HL.
R v Chief Constable of the Merseyside Police, ex p Calveley [1986] 1 All ER 257, [1986] QB 424, [1986] 2 WLR 144, CA.
Consolidated appeals
The plaintiffs, (1) William Kenneth Calveley and others, (2) Terence Richard Worrall and others and (3) John Bernard Park, in three actions appealed with leave of the Court of Appeal against the decision of that court (Lord Donaldson of Lymington MR, Glidewell and Staughton LJJ) ([1988] 3 All ER 385, [1989] QB 136) on 7 July 1988 dismissing appeals by the plaintiffs against orders of Sir Neil Lawson sitting as a judge of the High Court in chambers dated 2 June 1987 striking out the plaintiffs’ claims against the defendants, the Chief Constable of the Merseyside Police in the first two actions, and the Chief Constable of the Greater Manchester Police in the third action, for damages for negligence and breach of statutory duty in the conduct of police disciplinary proceedings. The facts are set out in the opinion of Lord Bridge.
The appeals were consolidated by order of the House of Lords dated 8 November 1988.
John E A Samuels QC, Charles Pugh and Benedict Patten for the plaintiffs.
Alan Rawley QC and Frederick James Maugham Marr-Johnson for the defendants.
Page 1027 of [1989] 1 All ER 1025
Their Lordships took time for consideration
16 March 1989. The following opinions were delivered.
LORD BRIDGE OF HARWICH. My Lords, the three actions in which these appeals arise are brought by police officers or former police officers against the chief constables of their respective forces. I shall refer to them as ‘the Calveley action’, ‘the Worrall action’ and ‘the Park action’. Save for certain paragraphs of the statement of claim in the Park action which assert a claim to damages for malicious procurement of a search warrant, the plaintiffs’ claims have been struck out as disclosing no reasonable cause of action. The order to strike out in the Park action was made by Master Hodgson. An appeal from that order came before Sir Neil Lawson, sitting as judge of the High Court in the Queen’s Bench Division, and was heard together with applications by the defendant to strike out in the other two actions. Sir Neil Lawson dismissed the Park appeal and ordered that the writs and statements of claim be struck out in the Calveley and Worrall actions. Appeals in all three cases were heard together by the Court of Appeal (Lord Donaldson MR, Glidewell and Staughton LJJ) ([1988] 3 All ER 385, [1989] QB 136), which affirmed Sir Neil Lawson but gave leave to appeal to your Lordships’ House.
The appeals now brought raise issues whether certain provisions of the Police Act 1964 and the Police (Discipline) Regulations 1977, SI 1977/580, create a civil cause of action for breach of statutory duty and whether officers performing certain functions under the Act and regulations owe a duty of care at common law to those in the position of the plaintiffs which founds a cause of action in negligence. These issues arise in all three appeals. In the Park action a separate issue arises whether the facts pleaded are capable of founding the tort of misfeasance in public office.
It will be convenient, before referring to the facts, to set out the provisions of the 1964 Act and 1977 regulations which are primarily in question. Sections 48(1) and 49(1) of the 1964 Act provide as follows:
‘48.—(1) The chief officer of police for any police area shall be liable in respect of torts committed by constables under his direction and control in the performance or purported performance of their functions in like manner as a master is liable in respect of torts committed by his servants in the course of their employment, and accordingly shall in respect of any such tort be treated for all purposes as a joint tortfeasor.
49.—(1) Where the chief officer of police for any police area receives a complaint from a member of the public against a member of the police force for that area he shall (unless the complaint alleges an offence with which the member of the police force has then been charged) forthwith record the complaint and cause it to be investigated and for that purpose may, and shall if directed by the Secretary of State, request the chief officer of police for any other police area to provide an officer of the police force for that area to carry out the investigation.’
The 1977 regulations, which were in force at the material time, but have now been superseded by the Police (Discipline) Regulations 1985, SI 1985/518, set out in Sch 2 the provisions of the discipline code to which members of police forces are subject and provide for the formulation, hearing and determination of charges alleging offences against discipline under that code and punishment of such offences. Regulations 6, 7 and 24 provide, so far as material, as follows:
‘6.—(1) Where a report, allegation or complaint is received from which it appears that an offence may have been committed by a member of a police force (hereinafter referred to as “the member subject to investigation”), the matter shall be referred to an investigating officer who shall cause it to be investigated …
7. The investigating officer shall, as soon as is practicable (without prejudicing
Page 1028 of [1989] 1 All ER 1025
his or any other investigation of the matter), in writing inform the member subject to investigation of the report, allegation or complaint and give him a written notice—(a) informing him that he is not obliged to say anything concerning the matter, but that he may, if he so desires, make a written or oral statement concerning the matter to the investigating officer or to the chief officer concerned, and (b) warning him that if he makes such a statement it may be used in any subsequent disciplinary proceedings.
24.—(1) Where a report, allegation or complaint is received from which it appears that a member of a police force may have committed a disciplinary or criminal offence the chief officer concerned may suspend that member from membership of the force and from his office as constable, whether or not the matter has then been investigated, and in such case he shall be suspended until—(a) the chief officer decides otherwise; (b) it is decided that the member shall not be charged with a disciplinary offence; or (c) the member has been so charged and either all the charges have been dismissed or … punishments have been imposed, whichever first occurs … ’
We must, of course, assume the facts as pleaded to be true. But it is unnecessary for the purpose of resolving the issue in the appeals to set out more than a very brief summary of the facts in each action on which the claims for damages for breach of statutory duty and negligence depend.
The Calveley action
On 21 June 1981 the five plaintiffs in this action were concerned in the arrest of five men. The men arrested made complaints about the conduct of the plaintiffs. The complainants were prosecuted and tried by the magistrates’ court. The plaintiffs gave evidence for the prosecution. The complainants were acquitted on 23 December 1981. The formal notices to the plaintiffs, required to be given by reg 7 of the 1977 regulations, of the original complaints and of other matters alleged against them arising from the incident on 21 June 1981 and the subsequent prosecution and trial of the complainants were not given until dates between 28 November and 12 December 1983. The plaintiffs were later charged with offences against the discipline code of abuse of authority, falsehood and prevarication. On 26 September 1984 they were found guilty at a hearing before the chief constable and dismissed from the force. They instituted proceedings for judicial review of the chief constable’s decision. They succeeded before the Court of Appeal (Sir John Donaldson MR, May and Glidewell LJJ) who, in judgments delivered on 27 November 1985, quashed the decision of the chief constable on the ground that the plaintiffs had been irremediably prejudiced by the delay in giving them notice of the matters alleged against them: see R v Chief Constable of the Merseyside Police, ex p Calveley [1986] 1 All ER 257, [1986] QB 424. On 2 December 1985 the plaintiffs were reinstated and received their back pay and allowances for the period since their dismissal. The plaintiffs now claim damages for ‘anxiety, vexation and injury to reputation’ and special damages for loss of overtime earnings in the period from dismissal to reinstatement on the basis that these were caused by breaches of statutory duty under the Act and regulations or negligent conduct of the investigation.
The Worrall action
The three plaintiffs in this action were concerned in an incident on 12 September 1981 in which a man named Forwood was arrested. Forwood and other members of the public made complaints about the conduct of the plaintiffs. On 19 July 1982 Forwood was tried and convicted by the magistrates’ court of assaulting the plaintiff Worrall. On 10 January 1983 this conviction was affirmed by the Crown Court. The plaintiffs gave evidence for the prosecution in these proceedings. On 7 July 1983 Forwood’s conviction was quashed by the Divisional Court on the ground that he had not been informed of the relevant complaints made about the plaintiffs’ conduct by other members of the public or given
Page 1029 of [1989] 1 All ER 1025
the names and addresses of those complainants. On 25 November 1983 the plaintiffs were suspended from duty under reg 24. Pursuant to regs 35 and 69 and para 2 of Sch 6 to the Police Regulations 1979, SI 1979/1470, they received their pay and certain allowances whilst suspended. Following an investigation the plaintiff Worrall was charged with assaulting Forwood and all three plaintiffs were charged with conspiracy to pervert the course of justice and perjury. They were tried and acquitted of all charges by the Crown Court on 3 December 1984 and returned to duty on the following day. On return to duty they were entitled under para 3 of Sch 6 to the 1979 regulations to receive any relevant allowances which had been withheld during the period of their suspension. The plaintiffs in this action also claimed damages for ‘anxiety, vexation and injury to reputation’ and special damages for loss of overtime earnings during the period of suspension on the basis that these were caused by breaches of statutory duty under the Act and regulations or by negligent conduct of the investigation.
The Park action
The plaintiff in this action was the subject of an investigation into complaints by certain members of the public that he was guilty of corruption. On 22 June 1983 he was suspended from duty. On 7 June 1984 the plaintiff was given notice pursuant to reg 7 of the 1977 regulations of 41 charges against him. The nature of these charges is not specified in the statement of claim. In the event he was not prosecuted. On 11 January 1985, before any disciplinary proceedings had been commenced, the plaintiff was discharged from the force on medical grounds. He claims to have suffered injury, particularised as ‘depressive illness and anxiety state’ which is attributed in the pleading to breaches of statutory duty or negligence in the conduct of the investigation. He further claims special damages for loss of overtime earnings from the date of his suspension to the date of his discharge on medical grounds and loss of earnings and promotion prospects thereafter. The same damages are claimed on the basis of misfeasance in public office, but this issue will require separate consideration.
Breach of statutory duty
It has not been, nor could it be, seriously argued that the duty imposed by s 49 of the 1964 Act and reg 6 of the 1977 regulations to investigate a complaint by a member of the public against a member of a police force was intended to give a cause of action in damages to the member of the police force who is the subject of the complaint if the duty is not performed. Whether the officer conducting the investigation owes a duty of care at common law to the person under investigation is quite a different question. It was, however, submitted that the duty under reg 7 to give notice to the member subject to investigation as soon as is practicable of the matters alleged against him was intended to give the member a cause of action in damages if not performed. That the duty is imposed for the benefit of the police officer subject to investigation is plain. But it seems to me equally plain that the legislature cannot have contemplated that the object of the duty was to protect the officer from any injury of a kind attracting compensation and cannot therefore have been intended to give him a right to damages for breach of the duty. The duty is imposed as a procedural step to protect the position of the officer subject to investigation in relation to any proceedings which may be brought against him. If he is not prejudiced in any such proceedings by failure to perform the duty, he has no ground of complaint. If, as in the case of the plaintiffs in the Calveley action, the delay in giving notice under reg 7 coupled with other factors causes irremediable prejudice to the officer in disciplinary proceedings which result in his conviction of an offence against the discipline code, he has his remedy by way of judicial review to quash that conviction and nullify its consequences. The proposition that the legislature should have intended to give a cause of action in contemplation of the remoter economic consequences of any delay in giving notice under reg 7 is really too fanciful to call for serious consideration. I shall examine the question what, if any, foreseeable damage may
Page 1030 of [1989] 1 All ER 1025
result from delay in the conduct of an investigation in connection with the alleged common law duty of care.
It was also submitted that reg 24 of the 1977 regulations imposes a duty, once a member of a police force has been suspended, to review that suspension ‘periodically’. I can find nothing, express or implied, in the language of reg 24 which points to the existence of such a duty, let alone to an intention to give an action for damages for its breach.
Negligence
Leading counsel for the plaintiffs submitted that a police officer investigating any crime suspected to have been committed, whether by a civilian or by a member of a police force, owes to the suspect a duty of care at common law. It follows, he submits, that the like duty is owed by an officer investigating a suspected offence against discipline by a fellow officer. It seems to me that this startling proposition founders on the rocks of elementary principle. The first question that arises is: what injury to the suspect ought reasonably to be foreseen by the investigator as likely to be suffered by the suspect if the investigation is not conducted with due care which is sufficient to establish the relationship of legal neighbourhood or proximity in the sense explained by Lord Atkin in Donoghue (or M’Alister) v Stevenson [1932] AC 562 at 580–582, [1932] All ER Rep 1 at 11–12 as the essential foundation of the tort of negligence? The submission that anxiety, vexation and injury to reputation may constitute such an injury needs only to be stated to be seen to be unsustainable. Likewise, it is not reasonably foreseeable that the negligent conduct of a criminal investigation would cause injury to the health of the suspect, whether in the form of depressive illness or otherwise. If the allegedly negligent investigation is followed by the suspect’s conviction, it is obvious that an indirect challenge to that conviction by an action for damages for negligent conduct of the investigation cannot be permitted. One must therefore ask the question whether foreseeable injury to the suspect may be caused on the hypothesis either that he has never been charged or, if charged, that he has been acquitted at trial or on appeal, or that his conviction has been quashed on an application for judicial review. It is, I accept, foreseeable that in these situations the suspect may be put to expense, or may conceivably suffer some other economic loss, which might have been avoided had a more careful investigation established his innocence at some earlier stage. However, any suggestion that there should be liability in negligence in such circumstances runs up against the formidable obstacles in the way of liability in negligence for purely economic loss. Where no action for malicious prosecution would lie, it would be strange indeed if an acquitted defendant could recover damages for negligent investigation. Finally, all other considerations apart, it would plainly be contrary to public policy, in my opinion, to prejudice the fearless and efficient discharge by police officers of their vitally important public duty of investigating crime by requiring them to act under the shadow of a potential action for damages for negligence by the suspect.
If no duty of care is owed by a police officer investigating a suspected crime to a civilian suspect, it is difficult to see any conceivable reason why a police officer who is subject to investigation under the 1977 regulations should be in any better position. Junior counsel for the plaintiffs, following, put the case in negligence on a very much narrower basis. He submitted that in the case of a police officer subject to investigation a specific duty of care is owed to him to avoid any unnecessary delay in the investigation precisely because the officer is, or is liable to be, suspended from duty until the investigation is concluded. The short answer to this submission is that suspension from duty is not in itself and does not involve any foreseeable injury of a kind capable of sustaining a cause of action in negligence. The effect of regs 35 and 69 of and Sch 6 to the 1979 regulations is that an officer who is suspended, unless either he has been convicted of a criminal offence and is held in custody or he has absented himself and his whereabouts are unknown, is entitled during suspension to receive his full pay and rent allowance, supplementary rent allowance or compensatory grant. On return to duty he receives any other appropriate
Page 1031 of [1989] 1 All ER 1025
allowances to which he would have been entitled during the period of suspension. It is true that while suspended he cannot earn overtime as a police officer. As against this, the effect of reg 12 of the 1979 regulations is that, subject to giving notice to the chief constable, the suspended officer is at liberty during the suspension to engage in any gainful employment which is not incompatible with his membership of the police force. The question of compatibility is determined in the first instance by the chief constable with a right in the officer to appeal from an adverse decision to the police authority and, if they affirm the decision, to require a reference to the Secretary of State. In the light of these considerations, suspension is not a foreseeable cause of even economic loss.
Misfeasance in public office
It is contended that paras 22 and 24 of the statement of claim in the Park action disclose a reasonable cause of action in that they allege, in effect, the essential ingredients of the tort of misfeasance in public office. The Court of Appeal did not address this point, and there is some difference in recollection between counsel as to how far it was canvassed in argument.
The investigation of the matters alleged against the plaintiff Park was carried out by an officer named Grant. Paragraphs 22 and 24 of the statement of claim read as follows:
‘22. In carrying out the said investigation pursuant to Regulation 6 the Defendant through his sevant or agent, Grant, and other investigating officers, acted maliciously and/or negligently …
24. Further, the decision to suspend the Plaintiff, alternatively the failure to make a decision to reinstate the Plaintiff between June, 1983 and November, 1984, amounted to a malicious abuse of power, alternatively negligence on the Defendant’s part … ’
The particulars given under para 22 do not, it is now rightly conceded, contain any allegation of an act done by Grant or any other officer concerned in the investigation which could itself amount to the tort of misfeasance in public office. What the pleader has done is to summarise under the heading ‘Particulars of Malice and/or Negligence’ the matters proposed to be proved as to the manner in which Grant conducted the investigation, as to various omissions in its conduct and as to Grant’s state of mind, from all of which it is alleged that malice, in the sense of an improper motive on the part of Grant, is to be inferred.
The particulars given under para 24 are headed ‘Particulars of Malicious Abuse of Power/Negligence’ and read as follows:
‘(a) The suspension, and the continuance of the same, amounts to the procuring of the execution of a ministerial act. (b) There was absence of reasonable and probable cause: Grant and other members of the investigating team knew or believed from an early stage that the corruption allegations were probably unfounded and that other disciplinary complaints were of relatively minor importance. (c) Malice: The plaintiff will rely upon the matters hereinbefore set out in paragraph 22 above. (d) As to damage, the plaintiff has suffered damage to his fame since the matter whereof the plaintiff was accused was scandalous and the suspension, and the continuance of the suspension for 18 months, damaged the plaintiff’s standing both within and without the force by tending to imply that there was a good prima facie case of corruption, when the contrary was true. Accordingly, by reason of the suspension and continuation of it the plaintiff was injured in his calling.’
I do not regard this as an occasion where it is necessary to explore, still less to attempt to define, the precise limits of the tort of misfeasance in public office. It suffices for present purposes to say that it must at least involve an act done in the exercise or purported exercise by the public officer of some power or authority with which he is clothed by virtue of the office he holds and which is done in bad faith or (possibly) without reasonable cause. The decision to suspend the plaintiff Park under reg 24 was
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taken by the deputy chief constable. If this had been done maliciously in the sense indicated, this would certainly be capable of constituting the tort of misfeasance in public office. But it was conceded that no malice is alleged against the deputy chief constable and that malice on the part of Grant cannot be imputed to him. The pleaded case must therefore stand or fall according as to whether it identifies any act done by Grant in the exercise or purported exercise of a power or authority vested in him as investigating officer which was infected by the malice pleaded against him. I can find no such act identified by the pleading.
No formal application to amend the pleading was made in the course of the argument, but at a late stage a document was placed before your Lordships indicating a pleading of additional particulars under paras 22 and 24 which the plaintiff might seek leave to add by way of amendment if those two paragraphs in the statement of claim were allowed to stand. The particulars which it is suggested might be added under para 24 would read as follows:
‘From an early stage (the date whereof the plaintiff cannot further particularise until after discovery and/or interrogatories herein) Grant knew or believed that there were no proper grounds for suspending the plaintiff yet procured the imposition of and/or the continuation of the suspension by continuing the investigation and giving misleading and/or incomplete reports concerning the same.’
It is evident that if a police officer investigating suspected criminal or disciplinary offences makes a false report to his superior officer which is defamatory of the suspect and that report is made maliciously so as to lose its status of qualified privilege, the suspect has a cause of action in tort against the author of the report. But the tort is defamation not misfeasance in public office, since the mere making of a report is not a relevant exercise of power or authority by the investigating officer. I express no opinion whether in those circumstances the chief constable would be vicariously liable under s 48(1) of the 1964 Act. However that may be, the suggested additional particulars under para 24 of the statement of claim would do nothing to validate the pleading of misfeasance in public office and obviously fall far short of disclosing a reasonable cause of action in defamation.
I would accordingly dismiss the appeals.
LORD ACKNER. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Bridge. I agree with it and would accordingly dismiss all three appeals for the reasons which he has given.
LORD OLIVER OF AYLMERTON. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Bridge. I agree with it and would accordingly dismiss all three appeals for the reasons which he has given.
LORD GOFF OF CHIEVELEY. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Bridge. I agree with it and would dismiss all three appeals for the reasons which he has given.
LORD LOWRY. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend Lord Bridge. I agree with it and would accordingly dismiss all three appeals for the reasons which he has given.
Appeals dismissed.
Solicitors: Russell Jones & Walker (for the plaintiffs); Sharpe Pritchard agents for Helen M Mercer, Kirkby and Roger C Rees, Swinton (for the defendants).
Mary Rose Plummer Barrister.
R v Commissioner for Local Administration, ex parte Croydon London Borough Council and another
[1989] 1 All ER 1033
Categories: LOCAL GOVERNMENT
Court: QUEEN’S BENCH DIVISION
Lord(s): WOOLF LJ AND HUTCHISON J
Hearing Date(s): 3, 4, 27 MAY 1988
Local government – Maladministration – Complaint to local commissioner – Jurisdiction of commissioner – Exclusion of jurisdiction – Action taken in exercise of administrative functions – Action in respect of which aggrieved person has remedy by way of proceedings in any court of law – Decision of education appeal committee – Complaint to local commissioner regarding committee’s decision – Finding of injustice by reason of maladministration – Whether committee’s decision administrative or judicial function – Whether persons aggrieved having legal remedy by way of judicial review of committee’s decision – Whether commissioner having jurisdiction to investigate complaint – Whether findings of maladministration justified – Local Government Act 1974, s 26(1)(6).
The parents of a child who was due to start her secondary education indicated to the local education authority their preference for three particular schools. The authority instead allocated the child to a fourth school. The parents appealed to the authority’s education appeal committee against the authority’s refusal to allow the child to attend the school of the parents’ choice. The committee decided that the child’s allocation to the fourth school should stand. The parents made a complaint to the commissioner for local administration, who conducted an inquiry into the complaint and concluded that there had been maladministration in the way the committee had dealt with the appeal. In particular, the commissioner found that the committee had not properly determined (i) whether there would be prejudice to efficient education if the child was admitted to the school of the parents’ choice, but had instead accepted the council’s policy that any increase above a given number of places would cause prejudice, or (ii) whether if there was prejudice it outweighed parental considerations. The authority applied for judicial review of the commissioner’s decision, contending that the commissioner’s jurisdiction to investigate the complaint was excluded either by s 26(1)a of the Local Government Act 1974, because the committee had not been exercising ‘administrative functions’ but a judicial function, or by s 26(6) of that Act, because the persons aggrieved, viz the parents, had a remedy by way of legal proceedings, in that they could have applied for judicial review of the committee’s decision.
Held – (1) The commissioner’s findings that the committee had acted on inadequate evidence and had reached its decision by applying the council’s policy without considering the merits of the particular case related to the manner in which the committee had reached its decision and therefore the commissioner had jurisdiction under s 26(1) of the 1974 Act to investigate the complaint (see p 1043 h to p 1044 a and p 1046 j, post).
(2) In deciding whether his jurisdiction to investigate a complaint was excluded by s 26(1) of the 1974 Act on the grounds that the person aggrieved had a remedy by way of legal proceedings, the commissioner had to determine whether that person might be entitled to obtain some form of remedy if he commenced proceedings within the time limit laid down and his complaint was justified. In declining to investigate on the ground that the person aggrieved had a remedy by way of legal proceedings the commissioner merely had to be satisfied that the courts were the appropriate forum for investigating
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the subject matter of the complaint and not whether in fact the legal proceedings would succeed. Moreover, having regard to the commissioner’s discretion to discontinue an investigation at any stage, he was under a continuing duty to consider whether he should carry on with an investigation if it became apparent during the course of the investigation that the issues were appropriate to be resolved in the courts. Although the commissioner could still investigate a complaint where the courts had jurisdiction, he ought to have regard to the fact that if there was a specialist tribunal set up to deal specifically with the issue raised in the complaint and if the relief recommended by him was the same as could be provided by judicial review his jurisdiction was not subject to the same safeguards and protection for public bodies. On the facts, there had been ample material before the committee from which it could conclude that the admission of the child to the school of the parents’ choice would be prejudicial to efficient education and, furthermore, the commissioner’s criticism of the committee’s reasoning was not justified since it had not decided the matter on policy grounds alone. It followed that there was no foundation for the commissioner’s finding of maladministration. The authority accordingly be granted a declaration that his report was void and of no effect (see p 1044 e to p 1045 d g j and p 1046 b h j, post).
Notes
For the investigation of complaints by a commissioner for local administration, see 28 Halsbury’s Laws (4th edn) paras 1394–1400.
For the Local Government Act 1974, s 26, see 25 Halsbury’s Statutes (4th edn) 519.
Cases referred to in judgments
Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223, CA.
R v Comr for Local Administration, ex p Eastleigh BC [1988] 3 All ER 151, [1988] QB 855, [1988] 3 WLR 113, CA.
R v Local Comr for Administration for the North and East Area of England, ex p Bradford Metropolitan City Council [1979] 2 All ER 881, [1979] QB 287, [1979] 2 WLR 1, CA.
R v South Glamorgan Appeals Committee, ex p Evans (10 May 1984, unreported), QBD.
Cases also cited
Malloch v Aberdeen Corp [1971] 2 All ER 1278, [1971] 1 WLR 1578, HL.
Maxwell v Dept of Trade and Industry [1974] 2 All ER 122, [1974] QB 523, CA.
R v Stratford-on-Avon DC, ex p Jackson [1985] 3 All ER 769, [1985] 1 WLR 1319, CA.
Application for judicial review
Croydon London Borough Council and an education appeal committee set up by the council pursuant of s 7 of and Sch 2 to the Education Act 1980 to consider an appeal by the parents of a child living in the London borough of Sutton applied, with leave of Webster J given on 17 February 1987, for judicial review of a report made on 27 October 1986 by the chairman of the Commission for Local Administration (the commissioner) on an investigation into a complaint in which he found that the complainant had suffered injustice by reason of maladministration by the education committee. The relief sought by the council was (1) an order of certiorari to quash the report of the commissioner and (2) a declaration that the report and/or the findings of maladministration made therein were void and/or of no effect and/or made without jurisdiction. The facts are set out in the judgment of Woolf LJ.
Elizabeth Appleby QC and G Caws for Croydon.
Michael Beloff QC and John Hobson for the commissioner.
Cur adv vult
Page 1035 of [1989] 1 All ER 1033
27 May 1988. The following judgments were delivered.
WOOLF LJ. This is an application for judicial review by Croydon London Borough Council (Croydon) in respect of a report which was made by Dr Yardley (the commissioner), who is chairman of the Commission for Local Administration in England. In the report the commissioner concluded that there had been maladministration by an education appeal committee (the committee) set up by Croydon in the course of considering an appeal by parents who lived in the adjoining borough of Sutton against the refusal of Croydon to allow their daughter to attend a secondary school in Croydon in accordance with the preference which they had expressed. The application raises a general issue as to the extent of the jurisdiction of a local commissioner and education appeal committees. In addition it raises specific issues as to the manner in which the committee came to its decision to dismiss the appeal and the basis for the commissioner’s conclusion that there had been maladministration by the committee.
The facts
For the purposes of the application the facts can be briefly summarised. In October 1984 the parents indicated that they would prefer their daughter to commence her secondary education the following year at one of three schools which they named. One of those schools, the school with which this application is concerned, was Woodcote High School, which was the school which the daughter’s elder sister attended. The daughter was in fact allocated to none of the schools for which the parents had expressed a preference and instead she was allocated to a fourth school. On 6 June 1985 the parents appealed against the decision of Croydon in relation to the Woodcote High School. The appeal was heard by the committee and the appeal was dismissed. On 20 June 1985 a complaint was referred by a councillor to the commissioner in relation to dismissal of that appeal and the other appeals which were heard as a result of the refusal to admit the daughter to any of the preferred schools. In October 1985 the commissioner wrote to Croydon notifying them of the complaint and asking for certain information so that the commissioner could decide the extent to which there should be further investigation of the complaint.
In due course the information was supplied, but it did not satisfy the commissioner. He decided to embark on an inquiry during which his investigating officer interviewed members of the committee and Croydon’s officers and on 27 October 1986, having completed his investigation, the commissioner made a report.
In that report the commissioner set out the results of his inquiries, and his reasons for coming to the conclusion that there was maladministration in the way the committee dealt with the appeal and the injustice which he concluded had occurred as a result. He also expressed the opinion that the only fair way to remedy the maladministration was for the appeal to be reheard by a fresh committee with all the available evidence before them. He also made certain general recommendations as to how appeal committees should perform their functions in the future. There was then a meeting between officers of the council and the commissioner and subsequently the commissioner wrote a letter on 20 November 1986 clarifying his conclusions and recommendations.
On 16 January 1987 Croydon authorised the institution of these proceedings and on 26 January 1987 the application was lodged and leave was granted by Webster J on 17 February 1987.
Notwithstanding Croydon’s criticisms of the commissioner’s conduct made in these proceedings, Croydon did in fact offer the parents a fresh appeal but this was not accepted by the parents because their daughter had started her secondary education at the allocated school where she was making satisfactory progress.
In order to consider the issues raised on the application, it will be necessary to examine the commissioner’s report in some detail but before doing this, it is necessary to refer to the relevant legislation and a decision of Forbes J in R v South Glamorgan Appeals Committee, ex p Evans (10 May 1984, unreported).
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The legislation
I refer first of all to the Education Act 1980, which deals with the right of parents to express a preference, the obligations on an education authority to comply with the parents’ preference and the parents’ right of appeal against admission decisions to which they object. Section 6 of the 1980 Act deals with parental preference. It provides:
‘(1) Every local education authority shall make arrangements for enabling the parent of a child in the area of the authority to express a preference as to the school at which he wishes education to be provided for his child in the exercise of the authority’s functions and to give reasons for his preference.
(2) Subject to subsection (3) below, it shall be the duty of a local education authority and of the governors of a county or voluntary school to comply with any preference expressed in accordance with the arrangements.
(3) The duty imposed by subsection (2) above does not apply—(a) if compliance with the preference would prejudice the provision of efficient education or the efficient use of resources … ’
The right of appeal is contained in s 7 of the 1980 Act. That section provides:
‘(1) Every local education authority shall make arrangements for enabling the parent of a child to appeal against—(a) any decision made by or on behalf of the authority as to the school at which education is to be provided for the child in the exercise of the authority’s functions …
(4) Any appeal by virtue of this section shall be to an appeal committee constituted in accordance with Part I of Schedule 2 to this Act and Part II of that Schedule shall have effect in relation to the procedure on any such appeal.
(5) The decision of an appeal committee on any such appeal shall be binding on the local education authority or governors by or on whose behalf the decision under appeal was made and, in the case of a decision made by or on behalf of a local education authority, on the governors of any county or controlled school at which the committee determines that a place should be offered to the child in question … ’
Section 7 also amended the Tribunals and Inquiries Act 1971 and the Local Government Act 1974 so as to make appeal committees subject to the Council on Tribunals and subject to investigation by the local commissioner.
The relevant provisions of Sch 2 referred to in s 7(4) are important since they indicate the nature of appeal committees and the procedure which they are required to follow. Those provisions of the schedule are as follows:
‘PART I
CONSTITUTION OF APPEAL COMMITTEES
1.—(1) An appeal pursuant to arrangements made by a local education authority under section 7(1) of this Act shall be to an appeal committee constituted in accordance with this paragraph.
(2) An appeal committee shall consist of three, five or seven members nominated by the authority from among persons appointed by the authority under this paragraph; and sufficient persons may be appointed to enable two or more appeal committees to sit at the same time.
(3) The persons appointed shall comprise—(a) members of the authority or of any education committee of the authority; and (b) persons who are not members of the authority or of any education committee of the authority but who have experience in education, are acquainted with the educational conditions in the area of the authority or are parents of registered pupils at a school …
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PART II
PROCEDURE
5. An appeal shall be by notice in writing setting out the grounds on which it is made.
6. An appeal committee shall afford the appellant an opportunity of appearing and making oral representations and may allow the appellant to be accompanied by a friend or to be represented.
7. The matters to be taken into account by an appeal committee in considering an appeal shall include—(a) any preference expressed by the appellant in respect of the child as mentioned in section 6 of this Act; and (b) the arrangements for the admission of pupils published by the local education authority or the governors under section 8 of this Act …
10. Appeals pursuant to arrangements made under section 7 of this Act shall be heard in private except when otherwise directed by the authority or governors by whom the arrangements are made but, without prejudice to paragraph 6 above, a member of the local education authority may attend as an observer any hearing of an appeal by an appeal committee constituted in accordance with paragraph 1 above and a member of the Council on Tribunals may attend as an observer any meeting of any appeal committee at which an appeal is considered.
11. Subject to paragraphs 5 to 10 above, all matters relating to the procedure on appeals pursuant to arrangements made under section 7 of this Act, including the time within which they are to be brought, shall be determined by the authority or governors by whom the arrangements are made and neither section 106 of the Local Government Act 1972 nor paragraph 44 of Schedule 12 to that Act (procedure of committees of local authorities) shall apply to an appeal committee constituted in accordance with paragraph 1 above.’
Paragraph 7 refers to s 8 of the Act. That section provides:
‘(1) Every local education authority shall, for each school year, publish particulars of—(a) the arrangements for the admission of pupils to schools maintained by the authority, other than aided or special agreement schools … (c) the arrangements made by the authority under sections 6(1) and 7(1) above …
(3) The particulars to be published under subsections (1)(a) and (2)(a) above shall include particulars of—(a) the number of pupils that it is intended to admit in each school year to each school to which the arrangements relate, being pupils in the age group in which pupils are normally admitted or, if there is more than one such group, in each such group; (b) the respective admission functions of the local education authority and the governors; (c) the policy followed in deciding admissions; (d) the arrangements made in respect of pupils not belonging to the area of the local education authority … ’
The powers of the commissioner are contained in the Local Government Act 1974. As already indicated that Act, as amended, expressly includes education appeal committees as being among the authorities subject to investigation (see s 25(5)). Section 26 of the 1974 Act is important because it deals with the jurisdiction of the commissioner. It provides:
‘(1) Subject to the provisions of this Part of this Act where a written complaint is made by or on behalf of a member of the public who claims to have sustained injustice in consequence of maladministration in connection with action taken by or on behalf of an authority to which this Part of this Act applies, being action taken in the exercise of administrative functions of that authority, a Local Commissioner may investigate that complaint … ’
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I draw attention to the requirement in this subsection of a claim to have sustained injustice ‘in consequence of maladministration’ with a reference to the exercise of an ‘administrative function’. Section 26 continues:
‘(2) A complaint shall not be entertained under this Part of this Act unless—(a) it is made in writing to a member of the authority, or of any other authority concerned, specifying the action alleged to constitute maladministration, and (b) it is referred to the Local Commissioner, with the consent of the person aggrieved, or of a person acting on his behalf, by that member, or by any other person who is a member of any authority concerned, with a request to investigate the complaint …
(6) A Local Commissioner shall not conduct an investigation under this Part of this Act in respect of any of the following matters, that is to say,—(a) any action in respect of which the person aggrieved has or had a right of appeal, reference or review to or before a tribunal constituted by or under any enactment; (b) any action in respect of which the person aggrieved has or had a right of appeal to a Minister of the Crown; or (c) any action in respect of which the person aggrieved has or had a remedy by way of proceedings in any court of law: Provided that a Local Commissioner may conduct an investigation notwithstanding the existence of such a right or remedy if satisfied that in the particular circumstances it is not reasonable to expect the person aggrieved to resort or have resorted to it …
(10) In determining whether to initiate, continue or discontinue an investigation, a Local Commissioner shall, subject to the preceding provisions of this section, act at discretion and any question whether a complaint is duly made under this Part of this Act shall be determined by the Local Commissioner … ’
Section 26(6) is important because it indicates the limits that Parliament intended should apply to the jurisdiction of the commissioner subject to his exercising his discretion under the proviso to that subsection. In particular it makes clear that the general rule is that, inter alia, in relation to a complaint in respect of which the parents have or had a remedy in the courts by way of an application for judicial review they should resort to that remedy rather than apply to the commissioner and the commissioner should only exercise his discretion to investigate such a complaint ‘in the particular circumstances’.
Where the commissioner decides to conduct an investigation, he has wide powers as indicated by s 29(1) and (2), which provides as follows:
‘(1) For the purposes of an investigation under this Part of this Act a Local Commissioner may require any member or officer of the authority concerned, or any other person who in his opinion is able to furnish information or produce documents relevant to the investigation, to furnish any such information or produce any such documents.
(2) For the purposes of any such investigation a Local Commissioner shall have the same powers as the High Court in respect of the attendance and examination of witnesses, and in respect of the production of documents.’
The final provision to which I should refer is s 34(3), which again deals with the extent of the commissioner’s jurisdiction and states as follows:
‘It is hereby declared that nothing in this Part of this Act authorises or requires a Local Commissioner to question the merits of a decision taken without maladministration by an authority in the exercise of a discretion vested in that authority.’
It is not necessary for me to refer to s 31(8) of the London Government Act 1963 since, while Croydon initially thought that the commissioner was alleging that Croydon were improperly discriminating against parents from Sutton who wanted to send their children to Croydon schools, this was not in fact the case and there has been no suggestion
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on the hearing of this application that Croydon have contravened the provisions of that subsection.
Many of the statutory provisions dealing with the local government commissioner are mirrored by the provisions of the Parliamentary Commissioner Act 1967. I do not propose to make express reference to the relevant provisions of that Act. However, I have well in mind that our decision on this application could have implications in respect of the important jurisdiction exercised by the Parliamentary Commissioner.
Although the decision of Forbes J in R v South Glamorgan Appeals Committee, ex p Evans (10 May 1984) is unreported, it is regarded as being of considerable significance by those concerned with pupil admissions. In particular the guidance which he gave as to the application of s 6 of the 1980 Act resulted in the Association of County Councils, in consultation with other local authority associations and the Council on Tribunals, issuing a revised code of practice in February 1985 which has been followed by appeal committees up and down the country including the appeal committee constituted by Croydon. It has also resulted in guidance being given from time to time to education authorities by the commissioner. However, counsel on behalf of Croydon explained how that decision, particularly as it has been interpreted by the commissioner, has given rise to difficulties for large education authorities such as Croydon.
It is not necessary to refer to the facts of the Glamorgan case: it is sufficient to refer to those passages of Forbes J’s judgment in which he gave general guidance as to the application of the 1980 Act:
‘In practical terms it seems to me that, because the appeal is only by a parent, appeals are only likely to arise because parental choice has not been followed and, therefore, the necessary background is that the education authority has decided to reject the parental choice on the grounds that one of the matters set out in s 6(3) [of the 1980 Act] applies. The only one with which we are concerned, of course, is under para (a), that is, prejudice to efficient education … So the question of the efficient use of resources does not really arise. That is the necessary factual background, it seems to me, to the appeal. Against that, if an appeal committee were not satisfied that there had been prejudice, it seems to me they would be bound to allow the appeal because of the existence of the statutory duty under s 6(2). It follows inevitably, it seems to me, that the first task of an appeal committee under this statute is to decide whether the case of prejudice is made out. Paragraph 7 of Sch 2 makes clear that that is not an end of the matter because the committee must have regard to parental preference in the arrangements for the admission of pupils. Curiously enough, the paragraph does not mention the question of prejudice but it seems clear to me that in embarking on an appeal the appeal committee has not merely to decide whether there would be prejudice; it has to embark, if it decides there is prejudice, on the balancing exercise of whether the degree of prejudice is sufficient to outweigh what I will call the parental considerations, including such matters as the priority factors set out in the passage in the arrangements I have read and those arrangements themselves. The procedure adopted by these committees is one agreed with the Council on Tribunals as applicable to all county educational authorities … It might be helpful, therefore, if the procedure were looked at again, particularly to indicate to these committees that it is indeed a two-stage exercise on which they embark: the first being to decide what is really a question of fact, is there or would there be prejudice to the efficient education etc if this child were admitted and the second, the question of discretion, balancing between the degree of prejudice and the extent of applicability of the parental factors. The onus seems to me to be clearly on the education authority in stage 1. As the Act can be read as indicating that its primary object is to support parental choice, it may be that it should be considered that the onus remains on the education authority to demonstrate that the prejudice is of sufficiently serious degree to outweigh the parental factor, and
Page 1040 of [1989] 1 All ER 1033
that therefore the procedure at present adopted should be reversed so that the education authority should make its case to the committee first rather than after the parent as at present. I merely throw this suggestion out. What I am really suggesting is that the procedure should be looked at again in order to offer more assistance to the appeal committees in the discharge of their functions and to give some guidance as to the order in which the parties should be heard … Turning to the remaining points, [counsel for the applicant’s] first submission was that in the circumstances and on the evidence before it no reasonable committee, addressing itself to the relevant considerations, could have come to the conclusion that the admission of this child would have prejudiced the provision of efficient education at that school. That is a plea to that part of the well-known case of Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223, which is often referred to as being ”Wednesbury perverse“. It seems to me that there was clear evidence in this case that the presence of six children over the maximum of 30 did in fact prejudice efficient education. If you look at the evidence of Mr Pearce and Mrs Jones, who were the two witnesses called before the appeal committee by the education authority, the effect of their evidence was to show, and seems to have been designed to show, that 36 was a figure which already prejudiced efficient education. The point to which the committee should address itself, it seems to me, is not whether there already was prejudice but whether compliance with parental preference would prejudice the provision of efficient education. Compliance with parental preference in this case would be limited to the one child under consideration; in other words, the question before the appeal committee would be whether the addition of this one child would aggravate an existing prejudiced situation. There was no evidence called to justify that assertion at all. The evidence which was called was merely to show that with a class of 36 prejudice existed. If that were all, it might, it seems to me, be possible to say that this was a perverse decision under the doctrine of Wednesbury because there was no adequate evidence led before the committee to indicate that the addition of this one child would itself aggravate an already prejudiced situation. But, and I think it is a big but, one must look at the composition of this committee. I find it impossible to say that a tribunal whose members were chosen, and quite clearly chosen, for their connection, with and presumably their knowledge of, educational matters would be perverse if they took the view that, despite the absence of any direct evidence, the addition of one child might well aggravate an already prejudiced situation. That seems to me to be a matter which, if I can use a compendious expression, an especially knowledgeable committee might be prepared and entitled to take into account of their own knowledge and not necessarily on the evidence before them. The evidence, of course, would give them the picture that here were 36 children in a class in which the maximum should have been 30 and so on. Without any evidence of that kind, of course, it might be different; but once they had got the basic facts it seems to me it is impossible to say that they had been Wednesbury perverse, if with their knowledge of these matters, they took the view that an addition of one child might well prejudice or aggravate what was already a prejudiced situation.’
I have no doubt that Forbes J was perfectly right to take the view that there should be a two-stage exercise. Unless an appeal committee comes to the conclusion that compliance with the parents’ preference would prejudice the provision of efficient education or the efficient use of resources, the local education authority remains under a duty to comply with the expressed preference and if they fail to do so they are in breach of duty. Accordingly, an appeal will automatically be allowed if an appeal committee do not consider that to give effect to the preference would result in such prejudice. If, however, an appeal committee comes to the conclusion that efficiency would be prejudiced by complying with the preference, then the appeal committee will have to proceed to the
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second stage and decide how to exercise its discretion, by weighing up the advantages which would be achieved by complying with the preference as against the prejudice this would cause. In general therefore I indorse Forbes J’s approach.
Counsel on behalf of Croydon also criticises the views expressed by Forbes J as to the onus resting on the education authority ‘to demonstrate that the prejudice is of sufficiently serious degree to outweigh the parental factor’ (that is on the second stage). Clearly in so far as it is appropriate to talk of onus, the onus is on the education authority at stage one. With regard to stage two the position is not as clear but as the education authority are relying on the prejudice, in the normal way it is only from the education authority that the appeal committee is going to obtain evidence which is relevant as to prejudice. However, as Hutchison J pointed out in the course of argument, it is really not helpful in the case of proceedings of this sort to talk about onus. It has been the practice since the Glamorgan case for the education authority to present its case first and this is clearly sensible. However, once all the material is before the committee, particularly on stage two, when the committee is going to have to perform a balancing act, the decision in practice will not depend on the onus of proof. The committee has to come to its decision on the basis of all the material which it has available and by applying its expertise to that material it should decide where the balance lies.
The only other procedural issue to which I should draw attention is the difference in view between the commissioner and Croydon whether all the appeals in relation to the admissions to a particular school should be heard before the committee reaches its decision on any of those appeals. There is clearly an advantage in adopting this course if it is practical because children whose appeals are heard last could otherwise be prejudiced because of decisions which had been reached already by an appeal committee to send children to a particular school. However, Croydon points out that because they are one of the largest, if not the largest, education authority, they have to conduct a great many appeals. During June and July 1985, for example, Croydon were involved in appeals in respect of decisions made in 158 cases, of which 30 were in respect of the school with which we are concerned. Mr Hemmings, the controller of administration and solicitor to Croydon, in his affidavit sums up the position as follows:
‘In fact, it is quite impractical for Croydon (and I believe many other authorities) in view of the number of appeals, the constraints on the time of individual members of Appeal Committees, the need to arrange appeals at times and on dates to suit parental convenience, the need to notify the decisions as quickly as possible and the staggered nature of appeals that I have explained, to so group appeals that all appeals in relation to one particular school are heard at the same time by the same members of the Appeal Committee.’
The answer to this situation is provided by the fact that an appeal committee like any other administrative tribunal (in the absence, as here, of statutory constraints) is the master of its own procedure and having regard to the evidence of Mr Hemmings it is not possible to criticise the committee for coming to a decision not to adopt the course preferred by the local commissioner.
The commissioner’s report
The commissioner is an academic lawyer of great distinction who personally has considerable experience of administrative tribunals and is the author of a well-known book on administrative law. It is not surprising therefore that his report sets out the legal and administrative background to the investigation and the information which was obtained during the course of the investigation with admirable clarity. The criticisms which are made of the report are based on his conclusions and so far as relevant these are as follows:
‘42. The judgement in the South Glamorgan case held that the Appeal Committee’s
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task is in two stages. First they must decide whether the local education authority have proved (and in his judgement Forbes J states that the onus of proof is clearly on the authority) that compliance with parental preference by admitting one particular child would prejudice the provision of efficient education or the efficient use of resources. If they find against the authority on this issue the Appeal must succeed, but if they conclude that the case of prejudice has been made out, then they must embark on the second stage of considering the merits of the case before them in order to determine whether the degree of prejudice is outweighed by the “parental considerations“.
43. This investigation has been concerned not with the way the Council presented their case but with the way the Appeal Committee Members considered the evidence before them. It would appear that the Members did not ask for further information to support the statement made by the education officer. Certainly from the outset they simply accepted that it would follow from the Council’s decision on the number of first year places at the School that an increase above the 210 figure would cause prejudice. In the circumstances I cannot see that the Appeal Committee Members were in any position objectively to decide whether the admission of Victoria to the School would be prejudicial.
44. In short, the Appeal Committee Members would appear to me virtually to have missed out the first required stage of their deliberations; and I am not satisfied that the majority of the Members properly approached the second stage. I accept that the Council are entitled to make a policy that priority should be given to children from the Council’s area, just as they are entitled to decide what the planned admissions limits should be, but I do not consider that Appeal Committee Members should regard that policy as constituting a good reason for failing to consider an appeal from an out-borough child on his/her merits. Yet that is what three of the five Members considering Victoria’s appeal appear to have done.
45. For the reasons given in paragraphs 43 and 44, I find that there was maladministration in the way the Appeal Committee dealt with this Appeal, and it is inevitable that injustice to Mrs Brown has flowed from it. The only fair way to remedy this is for the Appeal to be reheard by a fresh Committee with all the available evidence before them, and by making sure that the two-stage procedure is properly followed. The Council should also ensure that future Appeal Committee Members are clear about their procedures and functions. The Chairman’s Aide-Memoire could usefully be more explicit about the two-stage process required. The Notes of Guidance for appellants make only a brief mention of the concept of “prejudice”, and I feel it would be helpful for appellants if this were strengthened (although I note that Mr Jones did raise the point on Mrs Brown’s behalf).’
There is a further paragraph of conclusions, para 46, but this deals with the preferred procedure with regard to announcing the outcome of appeals to which I have already made reference and as this is only a recommendation by the commissioner which does not go to the substance of this application, I need not make any further reference to it.
So far as para 45 is concerned, apart from repeating that in practice there is no necessity to lay stress on the onus of proof, I need make no further comment.
The jurisdiction issue
It is on para 43 that counsel for Croydon bases her submissions that the commissioner had no jurisdiction. She submits that the committee when considering the evidence and deliberating on its decision is performing a quasi-judicial or a judicial function and in these circumstances is not subject to the scrutiny of the commissioner. She submits that the committee is not exercising ‘administrative functions’ within the meaning of that term in s 26(1) and that you cannot have ‘maladministration’ in connection with activities of this sort. Furthermore, she relies on the terms of s 34(3) as supporting her contentions.
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In her submission administrative functions have to be contrasted with judicial or legislative functions and here, having regard to the statutory provisions, the functions were judicial.
There is only limited previous judicial authority as to what is meant by maladministration and administrative functions. Their meaning was considered in R v Local Comr for Administration for the North and East Area of England, ex p Bradford Metropolitan City Council [1979] 2 All ER 881, [1979] QB 287 and recently has again been considered by the Court of Appeal in R v Comr for Local Administration, ex p Eastleigh BC [1988] 3 All ER 151, [1988] QB 855. As the words ‘administrative functions’ also appear in the Parliamentary Commissioner Act 1957, s 51, their interpretation is important. In the Eastleigh case [1988] 3 All ER 151 at 155, [1988] QB 855 at 863 Lord Donaldson MR, having referred to the Bradford case, said:
‘All three judges (Lord Denning MR, Eveleigh LJ and Sir David Cairns) expressed themselves differently, but in substance each was saying the same thing, namely that administration and maladministration, in the context of the work of a local authority, is concerned with the manner in which decisions by the authority are reached and the manner in which they are or are not implemented (see [1979] 2 All ER 881 at 897–898, 900, 903, [1979] QB 287 at 311, 314, 318). Administration and maladministration have nothing to do with the nature, quality or reasonableness of the decision itself.’ (Lord Donaldson MR’s emphasis.)
Parker LJ in the Eastleigh case [1988] 3 All ER 151 at 158, [1988] QB 855 at 868 cited with approval a passage from the judgment of Eveleigh LJ in the Bradford case ([1979] 2 All ER 881 at 902, [1979] QB 287 at 316) in which Eveleigh LJ said:
‘If the local commissioner carries out his investigation and in the course of it comes personally to the conclusion that a decision was wrongly taken, but is unable to point to any maladministration other than the decision itself, he is prevented by s 34(3) from questioning the decision.’
Counsel for the commissioner, on the other hand, submits that an administrative function in the context of s 26(1) is only to be contrasted with a legislative function. He submits that, as the appeal committees are expressly made subject to the jurisdiction of the commissioner, he must be entitled to carry out investigations and it cannot have been intended that his investigations should be confined to activities such as the arranging of the listing of cases and peripheral matters of that nature. He points out that when the education authority deals with admissions it is clearly exercising an administrative function and this being so he questions why the position should be different merely because the decision is taken by an appeal committee.
On this issue I find s 34(3) of the 1974 Act of negligible assistance since that subsection only applies to the merits of a decision where it is ‘taken without maladministration’, and to ascertain whether or not there is maladministration is the very object of an investigation.
However, in relation to s 26(1), while I obtain assistance from the guidance given by Lord Donaldson MR, I accept also that there is force in the submissions of counsel for the commissioner and I do not find it at all easy to define precisely the limits of the commissioner’s jurisdiction. I do not therefore propose to do more than express a conclusion as to jurisdiction in relation to the particular matters of which the commissioner has made complaint in paras 43 and 44 of his report. In so far as it is possible to categorise the complaints I regard them as relating to the manner in which the decision was reached although I recognise that this can also affect the quality of the decision. In short, the specific criticisms are, first, that the committee acted on inadequate evidence and did not seek, as it should have done, further evidence and, second, that the committee in reaching its decision applied its policy to the exclusion of the merits of the
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particular case which was before it. These are matters of complaint which I regard the commissioner as having jurisdiction to consider within the terms of s 26(1).
Counsel for Croydon next argued that the subject of the investigation related to action in respect of which ‘the person aggrieved has or had a remedy by way of proceedings in any court of law’, and that prima facie the jurisdiction of the commissioner was excluded by s 26(6). The commissioner in his evidence indicates that when the complaint was referred to him, on the facts available to him at that time, there was no basis on which any view could be taken as to whether a remedy was then, or would at an earlier time have been, available to the complainant by way of judicial review. He adds that at the time when he decided to proceed with the investigation in detail the possibility that there might be, or might have been, a remedy to the complainant in law was so remote as to be more theoretical than real. He also points out that by the time he had completed his investigation the normal time limits for making an application for judicial review had long since expired and there was no more than a remote possibility that the facts provided a foundation for an application for judicial review and that leave to pursue such an application out of time would be granted. He therefore did not consider at any material time whether the proviso to s 26(6) of the 1974 Act should be applied.
However, in his second affidavit he makes it clear that if he had considered whether to operate the proviso, he would have regarded it as unreasonable to expect the complainant to take on the burden of litigation and would not have discontinued his involvement.
In considering this issue, it is first necessary to decide in what sense the words ‘remedy by way of proceedings in any court of law’ are used in s 26(6). Counsel for the commissioner submits that what is meant is that if proceedings are brought they will succeed and result in a remedy being granted. Counsel for Croydon on the other hand submits that all that is required is that the issue is one which could be the subject of proceedings in a court of law irrespective of whether or not those proceedings would be successful. In my view, when sub-s (6) is looked at as a whole, it is reasonably clear that what is being dealt with is a situation where if the complaint was justified the person concerned might be entitled to obtain some form of remedy in respect of the subject matter of the complaint if he had commenced proceedings within the appropriate time limits. The commissioner is not concerned to consider whether in fact the proceedings would succeed. He merely has to be satisfied that the court of law is an appropriate forum for investigating the subject matter of the complaint.
The other important feature to observe with regard to s 26(6) is that it is not clear from its language whether it is only a threshold requirement or whether it applies at any stage of an investigation. Counsel for the commissioner submits that it only applies at the stage when the commissioner is deciding whether or not to conduct an investigation and once he has embarked on an investigation it has no application. On balance I agree that s 26(6) is directed to the threshold requirement. However, I do not regard this as being significant, because the commissioner has a continuing discretion not to continue, and to discontinue an investigation. Therefore, even if s 26(6) does not expressly deal with the subsequent stages after the commencement of an investigation, in exercising his discretion under s 26(10) whether to discontinue an investigation the commissioner should approach the matter very much in the same way as he would if s 26(6) did apply. If it becomes apparent during the course of an investigation that the issues being investigated are appropriate to be resolved in a court of law, then giving effect to the general intent of s 26, the commissioner is required to consider whether, notwithstanding this, it is appropriate to continue with the investigation broadly on the lines indicated in the proviso to s 26(6). When performing this exercise the extent to which the investigation has proceeded is a relevant consideration for the commissioner to take into account in deciding whether or not to discontinue the investigation.
Section 26(6) makes it clear that where there is a remedy in the sense which I have indicated, inter alia, in a court of law, the courts do not have the sole jurisdiction and the commissioner may still intervene. On the other hand the general tenor of s 26(6) is that,
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if there is a tribunal (whether it be an appeal tribunal, a minister of the Crown or a court of law) which is specifically designed to deal with the issue, that is the body to whom the complainant should normally resort.
I suggest this approach is particularly important in the case of issues which are capable of being resolved on judicial review. Parliament, by s 31(6) of the Supreme Court Act 1981 and by the Rules of the Supreme Court, made it clear that in respect of applications for judicial review there should be protection for public bodies and if, as in this case, the commissioner is going to recommend the very same relief as could be provided on judicial review he should take into account before doing so the fact that his jurisdiction is not subject to the same safeguards.
The commissioner should also have well in mind, even when the holder of the office is a distinguished lawyer as is the case here, that his expertise is not the same as that of a court of law. Issues whether an administrative tribunal has properly understood the relevant law and the legal obligations which it is under when conducting an inquiry are more appropriate for resolution by the High Court than by a commissioner, however eminent.
On the facts of this case, having regard to his evidence, I am not prepared to find that the commissioner should have appreciated at the outset that the investigation was one in relation to which the complainant had a remedy by way of judicial review. However, in the course of the investigation it should have been appreciated that the complainant had had such a remedy, particularly bearing in mind the nature of the conclusions to which the commissioner came.
Counsel for the commissioner contends that this approach cannot be right because it has the effect, in practice, of preventing the commissioner from ever being able to investigate the activities of an education appeal committee (in relation to which he has express statutory jurisdiction) unless he applies the proviso, since any matter of maladministration by such a body would be the subject of judicial review. If this is the result, then I am not convinced that it is unsatisfactory. The commissioner retains his discretion whether to apply the proviso and unless he exercises this discretion unlawfully the courts will not and cannot interfere with his decision.
The problem in this case is that the commissioner apparently never appreciated that there was a conflict between his jurisdiction and that of the court. In my view he should have done so at least before he concluded his investigation and then he should have exercised his discretion whether to discontinue his investigation. However, as he indicates that if he had considered the question of discretion he would undoubtedly have decided to proceed, I would not be prepared to grant relief solely on this basis.
However, counsel for Croydon also complains about the two grounds on which the commissioner found maladministration. She says that his own report makes it clear that there was no justification for either finding. I accept that this submission is well founded.
The commissioner apparently has taken the view in para 43 that the committee was not entitled, on the basis that the daughter’s admission would result in an increase above the 210 figure which was the planned admission limit for the school, to conclude that to allow the appeal of the parents would cause prejudice. However, as the report makes clear, this limit was part of Croydon’s transitional arrangements to establish a new sixth form entry under a reorganisation scheme approved in December 1982 by the Secretary of State. The committee had the statement of Croydon which explained the circumstances in which that limit had been determined. The committee was aware that it was Croydon’s policy that apart from 30 pupils from a specific area in Sutton, all the places at the school had to be offered to children who, unlike the daughter, were resident in Croydon. 272 children living in Croydon had in fact given the school as a first preference and in consequence 97 parents from Croydon still had their names on the school’s waiting list. In these circumstances there was ample material available which entitled the committee to come to the conclusion that admission of the daughter would be prejudicial.
The substance of the second criticism made by the commissioner was that the
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committee not only took into account the policy but in the case of three out of five of the members regarded that policy as constituting good cause for not considering the appeal at all. However, the commissioner in his report carefully sets out the reasoning of the five members and the contents of his own report make it clear that this criticism is just not justified. The members of the committee, as they were entitled to, took different views of the importance of the policy, but in no case did any member decide the case on policy considerations alone. It follows that as criticisms are unjustified there is no foundation for the commissioner’s finding of maladministration.
I am also concerned about the recommendation which the commissioner made, which Croydon honoured, that the parents should be offered a further appeal. The commissioner made his report a year after the complainants’ daughter would have been admitted to the school if her appeal had been successful. By then she was established in another school. If at that time she was to consider moving, it would not be sensible for the merits of the case to be dealt with on a fresh appeal relating to the previous year. The commissioner was proposing that the previous decision of the committee should be treated as a nullity and that there should be a rehearing of the appeal a year after the proper date for admission. I have some reservations as to the legal status of such an appeal, but quite apart from this it does create problems in practice. Fortunately, however, Croydon’s offer of a fresh appeal was not taken up by the parents.
Delay
Counsel for the commissioner vehemently submitted that if Croydon were otherwise entitled to relief, they should not obtain relief on the grounds of delay. He submits that instead of waiting until the report became available, Croydon should have applied to the court as soon as the commissioner’s jurisdiction to conduct an investigation was disputed in December 1985. While I fully recognise the importance of applications for judicial review being made promptly, I would not criticise in any way Croydon’s decision in this case. If Croydon had applied at the time the commissioner was embarking on his investigation, I have little doubt that they would have been faced with an argument that their application was premature. Certainly the application could at that stage have proved to be wholly unnecessary and at best would have merely resulted in the commissioner having the opportunity to decide whether to exercise his discretion under the proviso to s 26(6). It would then still have been necessary for a second application to be made to challenge the commissioner’s findings of maladministration. Such a duplication of proceedings would not have been in anyone’s interests.
While in the public law field, it is essential that the courts should scrutinise with care any delay in making an application and a litigant who does delay in making an application is always at risk, the provisions of RSC Ord 53, r 4 and s 31(6) of the Supreme Court Act 1981 are not intended to be applied in a technical manner. As long as no prejudice is caused, which is my view of the position here, the courts will not rely on those provisions to deprive a litigant who has behaved sensibly and reasonably of relief to which he is otherwise entitled.
My conclusion therefore is that the applicants are entitled to declaratory relief in respect of this report by the commissioner.
HUTCHISON J. I agree that this application succeeds for the reasons which Woolf LJ has given.
Declaration accordingly.
Solicitors: Sharpe Pritchard agents for R G Hemmings, Croydon (for Croydon); Thornton Lynne & Lawson agents for J J Bash (for the commissioner).
Sophie Craven Barrister.
R v Secretary of State for Social Services and another, ex parte Child Poverty Action Group and others
[1989] 1 All ER 1047
Categories: CIVIL PROCEDURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): BALCOMBE, WOOLF AND RUSSELL LJJ
Hearing Date(s): 13, 14 SEPTEMBER, 7 OCTOBER 1988
Social security – Supplementary benefit – Administration of claims – Statutory requirements for administration – Delay in determination of claims – Duties of adjudication officers – Time limit for consideration and determination of claims – Duty of Secretary of State to submit claims to adjudication officers ‘forthwith’ – Forthwith – Duty of adjudication officer to consider claim and so far as practicable dispose of it within 14 days – Whether Secretary of State under duty to ensure claims considered immediately on receipt – Social Security Act 1975, ss 98, 99(1).
Practice – Parties – Locus standi – Locus standi going to jurisdiction of court – Whether parties can consent to court hearing party with no locus standi.
The Secretary of State’s duty under s 98a of the Social Security Act 1975 to ensure that any claim for income support, contributory benefit, industrial injury benefit or family credit ‘shall be submitted forthwith to an adjudication officer for determination’ is a duty to submit the claim to an adjudication officer as soon as reasonably possible once the Department of Health and Social Security is satisfied that it is in possession of the basic information required to enable the claim to be determined, but until that information is received the duty does not arise. Furthermore, although it might be reasonable for there to be verification of that information, the need for verification does not of itself justify delay in submitting the claim. Accordingly, there is no duty on the Secretary of State to have an adjudication officer available to consider a claim immediately it is received. Moreover, the requirement in s 99(1)b that an adjudication officer ‘take [the claim] into consideration and, so far as practicable, dispose of it … within 14 days’ does not impose a duty on the Secretary of State to ensure that all claims be considered within 14 days and then disposed of within that time or as soon as practicable thereafter; instead, since the length of time available for determination of a claim sets the length of time available for its consideration it is sufficient if consideration of the claim enables it to be disposed of within 14 days or as soon as reasonably practicable thereafter and, accordingly, matters independent of the claim, such as the volume of claims awaiting determination or the number of investigating officers available to deal with claims, can be relevant in determining whether a claim has been disposed of within 14 days or as soon as reasonably practicable thereafter (see p 1053 a b e to j and p 1054 d to f, post); dictum of Diplock LJ in R v Deputy Industrial Comr, ex p Moore [1965] 1 All ER 81 at 93 applied.
The question of locus standi of parties to proceedings goes to the jurisdiction of the court, and where the court has no such jurisdiction the parties are not entitled to confer such jurisdiction on the court by consent (see p 1056 b, post).
Notes
For the meaning of ‘forthwith’, see 10 Halsbury’s Laws (4th edn) para 410 and 26 ibid para 542.
For the Social Security Act 1975, ss 98, 99, see 45 Halsbury’s Statutes (3rd edn) 1196.
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Cases referred to in judgment
Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223, CA.
R v Deputy Industrial Injuries Comr, ex p Moore [1965] 1 All ER 81, [1965] 1 QB 456, [1965] 2 WLR 89, CA.
Scottish Old Peoples Welfare Council 1987 SLT 179, Outer House.
Cases also cited
Hillingdon London Borough v Cutler [1967] 2 All ER 361, [1968] 1 QB 124, CA.
Knight v Demolition and Construction Co Ltd [1953] 2 All ER 508, [1953] 1 WLR 981 affd [1954] 1 All ER 711, [1954] 1 WLR 563, CA.
Appeal
The Child Poverty Action Group, Islington London Borough Council, Hackney London Borough Council and the National Association of Citizens Advice Bureaux appealed against the decision of Schiemann J, hearing the Crown Office list on 5 February 1988, whereby he dismissed their application for judicial review by way of, inter alia, a declaration that the duties imposed on the Secretary of State by ss 98 and 99 of the Social Security Act 1975 involved (i) that the duty to refer a claim to an adjudication officer arose as soon as a claim for benefit was received by the Secretary of State, (ii) that the duty was to refer the claim for determination in accordance with s 99 and involved referring the claim to an adjudication officer who was in a position to take the claim into consideration and (iii) that the adjudication officer to whom a case had been validly submitted had to dispose of it within 14 days if practicable and that in deciding what was practicable regard could be had to matters internal to the claim but not to extrinsic factors. The respondents to the appeal were the Secretary of State for Social Services and the chief adjudication officer. The facts are set out in the judgment of the court.
Richard Drabble for the appellants.
Michael Beloff QC, Duncan Ouseley and Jonathan McManus for the respondents.
Cur adv vult
7 October 1988. The following judgment was delivered.
WOOLF LJ. This appeal is from a decision of Schiemann J dismissing the appellants’ application for judicial review. The appeal raises issues as to the proper construction of ss 98 and 99 of the Social Security Act 1975 as amended. The appellants contend that those statutory provisions have been wrongly interpreted by the Secretary of State and the chief adjudication officer and in consequence claims for supplementary benefit, particularly in London, have not been administered in accordance with the duties placed on the Secretary of State and the chief adjudication officer.
If the appellants’ contentions are correct, it is the individual claimants for supplementary benefit whose claims have been delayed who were directly affected as a result of the Secretary of State and the chief adjudication officer misinterpreting their responsibilities. However, the application for judicial review has been made by the appellants because the issues raised are agreed to be important in the field of social welfare and not ones which individual claimants for supplementary benefit could be expected to raise. Furthermore, the Child Poverty Action Group and the National Association of Citizens Advice Bureaux play a prominent role in giving advice, guidance and assistance to such claimants. In addition, many claimants live within the boroughs of Islington and Hackney and those boroughs contend that the way the supplementary benefit scheme has been administered has adversely affected the boroughs in their carrying out of their responsibilities as well as adversely affecting their residents who are individual claimants for benefit.
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Since the date of Schiemann J’s judgment supplementary benefit has been replaced by income support but the outcome of this appeal is still a matter of importance since ss 98 and 99 of the Social Security Act 1975 apply to income support as well as to contributory benefits, industrial injury benefits and family credit.
On the application for judicial review declarations were sought also as to the proper interpretation of two paragraphs, namely paras 13002 and 13052, of the Supplementary Benefits Manual (the ‘S’ Manual). The purpose of the manual is to provide detailed guidance to adjudication officers on the determination of questions and entitlement to supplementary benefit and to the staff of the department on the administration of the supplementary benefit scheme. The way in which the manual is printed distinguishes between advice given by the chief adjudication officer and procedural instructions of the Secretary of State. However, on the introduction of income support, the paragraphs of the ‘S’ Manual in respect of which declaratory relief was sought ceased to have effect and accordingly, when opening this appeal, counsel for the appellants abandoned any claim for the first two declarations set out in his application for judicial review. It is not necessary, therefore, for us to refer to those declarations, but we should refer to the third declaration since that sets out clearly the manner in which the appellants contend claims both under the previous regime and the new regime should be dealt with if the Secretary of State and the adjudication officers are to comply with the law. The declaration reads as follows:
‘A declaration that the duties imposed by ss. 98 and 99 of the Social Security Act 1975 involve on the true construction of the relevant provisions the following propositions (i) The duty to refer a claim to an Adjudication Officer arises as soon as a claim for benefit is received by the Secretary of State (ii) That duty is to refer the claim for determination in accordance with s. 99 and involves referring the claim to an Adjudication Officer who is in a position to take the claim into consideration (iii) That the Adjudication Officer to whom a case has been validly submitted must dispose of it within 14 days if practicable and that in deciding what is practicable regard can be had to matters internal to the claim but not to extrinsic factors.’
The Secretary of State and the chief adjudication officer do not accept that this declaration accurately sets out their statutory duties. They contend the Secretary of State is entitled, in accordance with the practice which he adopted previously in respect of claims for supplementary benefit or single payments, to carry out certain administrative tasks before a claim is referred to an adjudication officer, that there is no duty to have an adjudication officer available immediately to consider the claim and that a decision can be lawfully reached after 14 days if it is not practicable for a decision to be reached earlier, for example because of a sudden influx of claims or because of the non-availability of adjudication officers because of sickness or some other reason.
As to the handling of claims for supplementary benefit, the practice adopted by the department appears clearly in para 10 of the affidavit sworn on the department’s behalf by Brian Taylor. Mr Taylor explains that most claims for supplementary benefit are made by post. The claimant is asked to provide on the claim form detailed information about his circumstances which is relevant to the assessment of his claim. When the claim form is received in the office it is associated with any existing papers of the claimant (the case papers) and passed for action to an administrative officer, acting on behalf of the Secretary of State. Some of the information on the form needs to be checked for accuracy and sometimes further information has to be sought either from the claimant or, for example, from his former employer before the claim can be determined. Most of these further inquiries are handled by post or on the telephone but occasionally an office interview or a home visit is required.
Mr Platt, the chief adjudication officer, confirms this evidence from Mr Taylor and in para 7 of his affidavit Mr Platt summarises the position in this way:
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‘The adjudication function is quite separate from the receipt and preliminary investigation of claims which is for the Secretary of State. Adjudication Officers can call for more evidence and can review their own decisions if new evidence comes to light.’
The paragraphs of the ‘S’ Manual to which we have referred were in terms which reflected the approach of the Secretary of State and the chief adjudication officer.
Schiemann J accepted the Secretary of State’s and the chief adjudication officer’s view of their statutory requirements. He rejected the appellants’ submissions and he refused to grant any declaratory relief and dismissed the application for judicial review.
Having outlined the rival contentions of the parties it is convenient to turn to the relevant statutory provisions and we begin with the Supplementary Benefits Act 1976 in its finally amended form.
Section 2(1) provides:
‘The question whether any person is entitled to supplementary benefit and the amount of any such benefit and any other question relating to supplementary benefit which arises under this Act or section 6 of the Social Security (No. 2) Act 1980 shall be determined by an adjudication officer appointed under section 97 of the Social Security Act 1975 … in accordance with regulations made for the purposes of this section … ’
The power to make the regulations is contained in s 14, which provides:
‘(1) Regulations may make provision for carrying into effect this Part of this Act … and nothing in any other provision of this Act shall be construed as prejudicing the generality of this subsection.
(2) Regulations may make provision—(a) for requiring claims for supplementary benefit to be made in such manner and within such time as may be specified in the regulations … (c) for prescribing the evidence which is to be provided in support of claims for supplementary benefit … ’
Regulations were made under s 14 and these were the Supplementary Benefits (Claims and Payments) Regulations 1981, SI 1981/1525, as amended. Regulations 3 and 4 are relevant. Regulation 3 provides:
‘(1) Subject to the following provisions of this regulation, every claim for benefit shall be made in writing to the Secretary of State either—(a) in the case of a claim for a pension or allowance, on a form approved for the purpose by him and supplied without charge by such persons as he may appoint or authorise for the purpose; or (b) in the case of any claim, in such manner as he may accept as sufficient in the circumstances of any particular case or class of cases.
(2) A claim for benefit—(a) in the case of a claim for an allowance by a claimant required to … be available for employment pursuant to section 5, shall be delivered or sent (for forwarding to an office of the Department) to the relevant unemployment benefit office, unless in any case or class of cases the Secretary of State directs that sub-paragraph (b) shall apply (b) in any other case, shall be delivered or sent to an office of the Department.
(3) The date on which a claim for benefit is made shall be—(a) in a case to which paragraph (2)(a) applies, the date on which it is received at the relevant unemployment benefit office; (b) in any other case, the date on which it is received at an office of the Department.
(4) Where—(a) a claim for benefit made in writing is defective on the day on which it is received, but is subsequently amended; or (b) a claim for a pension or allowance is made other than in writing, but is subsequently made in writing, the Secretary of State may treat the claim as if it had been duly made in the first instance.
(5) The Secretary of State may in any particular case or class of cases accept—(a) a
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claim for benefit under section 3(single payment to meet an exceptional need) other than in writing … ’
Regulation 4 provides:
‘Every person who makes a claim for benefit shall furnish such certificates, documents, information and evidence for the purpose of determining the claim or of determining the question which partner of a married or unmarried couple satisfies the conditions of regulation 1A of the Aggregation Regulations as may be required by the Secretary of State and, if reasonably so required, shall for that purpose attend at any office or place as the Secretary of State may direct.’
It will be observed that for the purpose of the regulations a claim for benefit is ‘made’ on the date it is received at the relevant office and in the normal circumstances consists of the document submitted by the claimant.
Turning to the sections of the 1975 Act which are relevant:
‘97.—(1) Adjudication officers shall be appointed by the Secretary of State, subject to the consent of the Treasury as to number, and may include officers of the Department of Employment appointed with the concurrence of the Secretary of State in charge of that Department …
(1C) It shall be the duty of the Chief Adjudication Officer to advise adjudication officers on the performance of their functions under this or any other Act.
(1D) The Chief Adjudication Officer shall keep under review the operation of the system of adjudication by adjudication officers under this and any other Act and matters connected with the operation of that system …
98.—(1) There shall be submitted forthwith to an adjudication officer for determination in accordance with sections 99 to 104 below—(a) any claim for benefit; (b) subject to subsection (2) below, any question arising in connection with a claim for, or award of, benefit; and (c) any question whether a person would by reason of the provisions of, or of any regulations under, section 20(1) or (2) of this Act have been disqualified for receiving unemployment benefit, sickness benefit or invalidity benefit if he had otherwise had a right thereto …
(3) Different aspects of the same claim or question may be submitted to different adjudication officers under the foregoing provisions of this section; and for that purpose those provisions and the other provisions of this Part of this Act with respect to the determination of claims and questions shall apply with any necessary modifications.’
It is also necessary to refer to s 99(1), which provides:
‘An adjudication officer to whom a claim or question is submitted under section 98 shall take it into consideration and, so far as practicable, dispose of it in accordance with this section, and with procedure regulations under section 115, within 14 days of its submission to him.’
The subsequent provisions of the 1975 Act deal with appeals to social security appeal tribunals and appeals from the tribunals to commissioners. It is not necessary to refer to those provisions but, before turning to consider the three issues which counsel for the appellants identifies as dividing the parties, it is relevant to point out that, although an adjudication officer is under statutory duty to dispose of claims, he is acting administratively when doing so. It is therefore not surprising that the evidence discloses that most adjudication officers do not spend all their time on adjudicating functions but are also engaged on other departmental duties including supervising other staff, paying benefits and interviewing and visiting claimants. However, when acting as adjudication officers, they are acting independently of the department and, while they will no doubt take into account advice offered by the chief adjudication officer and any relevant
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decisions of the social security commissioners, they are required to come to their independent decision as to the merits of any particular claim and, once they have come to a decision, that decision is binding on the Secretary of State subject to the statutory provisions as to appeal etc. Furthermore, like immigration officers, they are under an obligation to carry out their adjudicating role fairly.
In R v Deputy Industrial Injuries Comr, ex parte Moore [1965] 1 All ER 81 at 93, [1965] 1 QB 456 at 486 Diplock LJ accurately described the adjudicator’s role when dealing with his statutory predecessor, who was called an insurance officer. Diplock LJ said:
‘His duties are administrative only; he exercises no quasi-judicial functions for there is, at this stage, no other person between whose contentions and those of the claimant he can adjudicate. He must form his own opinion as to the validity of the claim, and for this purpose he may make whatever inquiries he thinks fit.’
We will deal with the three issues identified by counsel for the appellants.
Issue 1: when a claim should be submitted to an adjudication officer
The language of ss 98(1) and 99(1) of the 1975 Act makes it clear that it was intended by Parliament that claims for benefits should be dealt with expeditiously. Counsel for the appellants submits, with force, that the time limit contained in s 99(1) of 14 days would be less effective if the department was entitled to carry out extensive investigations before the claim was submitted since it is only from the claim being submitted that the 14-day period starts to run. Counsel for the respondents, on the other hand, submits (and this submission was accepted by the judge) that whether the investigations are carried out before the claim is submitted or thereafter in practice makes no difference. If the investigations are necessary they will need to be carried out in any event and the time required for a decision will certainly be no longer and could be shorter if they are carried out at the outset since this avoids the adjudication officer having to refer the papers back to those responsible for the investigation. While this may be true in many cases, we do not regard it as being a complete answer to counsel’s contention for the appellants. If the investigations are carried out after submission then the adjudication officer will decide on what investigations are necessary and this, in some cases at any rate, will avoid successive investigations (investigations directed by the department followed by investigations directed by an adjudication officer). More importantly, once the claim is submitted to the adjudication officer, and the 14-day period begins to run, there will be a breach of duty unless the decision is reached within the 14-day period unless it is shown that it was not practicable to reach a decision within that period. If, however, the investigations take place before submission, they are not the subject of the time limit.
However, the answer to the first issue has to be decided primarily on the language used in the relevant sections and not by asking which result will produce the best administrative solution. As to the language counsel for the appellants relies on the distinction drawn in the statutory scheme and the regulations made thereunder between the making of a claim and ‘the evidence which is to be provided in support of claims for supplementary benefit’ (see s 14 of the 1976 Act and regs 3 and 4 of the 1981 regulations). It is to be noted that the regulations could have specified a later time for identifying when claims are to be treated as having been made but they do not do so.
However, as counsel for the appellants is prepared to concede, before submission to the adjudication officer some administrative tasks may have to be performed by the staff of the department. For example, it is not in dispute that, if a claim form was inadequately completed so that it could not be regarded as a claim at all, the claimant could be required to provide additional information. In addition, as there is a power contained in s 98(3) to refer different aspects of the claim to different officers, the claim would have to be considered to ascertain whether this would be appropriate. What counsel really complains about is the department investigating a claim before it is submitted.
In deciding what, if any, investigation is permitted, we would stress that s 98 provides
Page 1053 of [1989] 1 All ER 1047
that the claim is to be submitted forthwith to an adjudication officer for ‘determination’. As was pointed out by Russell LJ in the course of argument, those words provide the key to the resolution of this question. In our view, they indicate that what the department is required to do is to submit the claim when it is in a fit state for determination albeit this is after the date on which it is treated as being made for the purpose of the regulations. The fact that a claim is to be submitted ‘forthwith’ does not require a claim to be submitted for determination when it is incapable of being determined. To ascertain whether it is in a fit state for determination will often require no more than an examination of the claim form completed by the applicant and the attaching to that form of the necessary file so that the two can be transmitted together to the adjudication officer. However, in the course of argument there was put before us a sample of the claim form for supplementary benefit and the claim form for income support and, on examination of those forms, it is apparent that there could be cases, perhaps a minority of cases, where, although a claim form was properly filled in, because of the circumstances of the claimant or the specific benefit being claimed it would not be possible to start on the process of determining whether a claimant is entitled to benefit on the basis of the information contained in the claim form and the file. We draw attention to the fact that the form used for claiming supplementary benefit invites the claimant, at the beginning of the form, to write down ‘don’t know’ if the claimant is not sure of the answer to a question and goes on to state ‘we may visit you later or ask you to call to see us at the Social Security Office’. There is also the example, cited by Balcombe LJ in the course of argument, of the complicated position of a person affected by a trade dispute which is dealt with in s 8 of the Supplementary Benefits Act 1976. It could well be impossible on the basis of the information contained in a claim form to start on the determination of a claim by such a person.
We conclude that the duty to submit the claim ‘forthwith’ does not arise until the department is in possession of not only the claim form but the basic information which is required to enable a claim to be determined, and it is therefore in order for the department to take the steps which are necessary to obtain that information before submitting the claim. The department is not, however, entitled to delay submitting a claim once that information is available. In particular, in the course of argument, counsel for the respondents drew attention to the need in some cases to verify information. While it might be reasonable for there to be verification, the need for verification by itself does not justify delay in the submission of the claim. If verification is to delay the determination, it is the responsibility of the adjudication officer to put in motion such further inquiries as are required for that purpose.
The distinction between the basic material required for a claim to be determined and verification would have been particularly important in claims for single payments since claims were advanced by claimants in an informal manner. Single payments do not, however, exist under the new regime.
So far we have not separately considered the sense in which the word ‘forthwith’ is used in s 98(1). It can have many meanings according to the context. However, as already pointed out, none of those meanings in the present context could require the department to submit to the adjudication officer a claim form which did not provide the material needed for a determination. In the context of s 98 the presence of the word ‘forthwith’ indicates that the department is required, once that material is available, to submit the claim to the adjudicator as soon as reasonably possible. Because of the requirement to deliver the claim forthwith the department, in deciding what steps it should take in order to make the claim suitable for submission and in carrying out those steps, is under an obligation to bear in mind the need for expedition.
Issue 2: the construction of s 99
Counsel for the appellants contended that the statutory scheme involved there being two stages after a claim was submitted to the adjudication officer, the first being the
Page 1054 of [1989] 1 All ER 1047
consideration of the claim and then the disposal of the claim. He was anxious to maintain the distinction between these two stages because he submitted that the words ‘so far as practicable’ only governed the disposal stage and accordingly the consideration stage should have taken place before it was necessary to decide whether it was a situation where there should be any extension of the 14 days for reasons of practicability. He submitted that, once the claim had been taken into consideration, the only matters which could render it impracticable to dispose of the claim in 14 days are internal matters arising from the process of consideration. For example, there could be a need for further investigation or supporting evidence. He argued that the need for an extension of time could not depend on matters which had nothing to do with the consideration stage since, once the consideration stage was completed, the adjudication officer should be in a position to make a decision and therefore there could not be circumstances making it impracticable for the decision to be taken.
That it is possible to identify counsel’s two stages we do not doubt. In this connection we noted with interest that the National Insurance (Industrial Injuries) Act 1965 (s 44) and its predecessor, the National Insurance (Industrial Injuries) Act 1946 (s 45), both specifically require both the submission of the claim and the consideration of the claim to take place forthwith. However, we do not accept that the two stages produce the results for which counsel for the appellants contends. The length of time available for determination, in practice, sets the limit on the time available for consideration. Because the decision is required to be taken within 14 days where this is practicable, the consideration stage must also be completed within 14 days where this is practicable. However, as long as the consideration stage enables disposal to take place within 14 days or, where disposal is not practicable within 14 days, as early as is reasonably practicable thereafter, the time requirements of s 99(1) are complied with. The fact that there are two stages, only one of which is expressly made subject to the time limit, does not alter the factors which can be taken into account in deciding what is practicable. There is nothing in the language of s 99(1) which means that it is not permissible to look at factors other than those involved in an individual claim in deciding whether it was practicable to come to a decision within 14 days. Section 99(1) does not require matters independent of the claim to be ignored in deciding what is practical. The volume of claims awaiting determination and the number of investigating officers available to deal with the claims are examples of matters which can be relevant to the decision whether or not it was practicable to come to a determination within the 14-day period. Counsel for the appellants argues that this construction makes the statutory code meaningless. He points out that, if there was a drastic shortage in the number of officers available, the officers would be unable to process claims no matter how simple and urgent they were within 14 days. The answer to this argument is to be found from considering the answer to the third issue, to which we must now turn and which is closely related to the second issue.
Issue 3: the Secretary of State’s duty under s 98
Counsel’s argument for the appellants here, as we understand it, is that, because the claim has to be submitted for determination forthwith to an adjudication officer and he has to take the claim into consideration so that it can be determined within 14 days, the Secretary of State is under a duty to appoint such number of adjudication officers as will enable an officer to be available to consider a claim promptly as soon as it is submitted.
The power of the Secretary of State to appoint adjudication officers under s 97(1) is expressly made subject to the consent of the Treasury as to numbers. This requirement of consent is wholly inconsistent with the Secretary of State being under some open-ended commitment to ensure that there is always an adjudication officer available to deal immediately with any claim submitted. However, quite apart from this requirement of the consent of the Treasury, we would not regard the statutory scheme as creating the duty for which counsel contends. It would clearly lead to an absurd situation if the number of adjudication officers who had to be appointed was to be dictated by the largest
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conceivable number of difficult claims which could arise for consideration at any one time. For no good reason Parliament would have placed a duty on the Secretary of State which would inevitably in practice be breached if there was some emergency which could not be anticipated.
The fact that we have rejected counsel’s submission does not mean that the Secretary of State is under no obligation as to numbers of adjudication officers whom he should appoint and this is a discretion to be exercised reasonably, taking into account the legislative scheme requiring the expeditious disposal of claims within 14 days where this is practicable. If, for reasons other than the refusal of the Treasury to give its consent, the Secretary of State were to exercise this discretion unreasonably or, to use another word, irrationally, then a Wednesbury challenge could be mounted (see Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223). There is, however, nothing in the evidence which is before the court to indicate that the Secretary of State has acted or is acting in a way which would justify an application for judicial review on this basis. Indeed, the evidence is that the Secretary of State is concerned about the present position and steps have been taken and further steps are to be taken to improve the position.
We would, therefore, reject the appellants’ argument on the third issue as well. However, the fact that we have not accepted counsel’s argument does not mean that we do not recognise that the appellants had cause for concern about the time which was being taken to dispose of claims for supplementary benefit and in particular single payments. There have clearly been difficulties in disposing of these claims as quickly as the department would like and this difficulty has been particularly acute in the London area. The degree of difficulty is not in issue on this appeal and it is not necessary for this court to come to any conclusion about it. The object of the proceedings from the appellants’ point of view was to require the Secretary of State to approach the complex question as to the proportion of the available resources which should be allocated to the administration of social security in accordance with the requirements of the legislation. If the decision of this court assists in clarifying what those requirements are it will have served a useful purpose. With regard to the first issue in particular the requirements were far from clear and, while we have rejected counsel’s argument on this issue, we do not accept the argument of counsel for the respondents in so far as he was contending that it was open to the department to delay submitting a claim to the adjudication officer to enable the claim to be verified by the department’s staff. Although we have sought to clarify this issue, we emphasise that it is not possible to draw a precise line as to what is permissible and what is not permissible. This makes it difficult, if not impossible, to frame declaratory relief satisfactorily except in relation to what occurred in the handling of a particular claim. However, the appellants accepted that, whatever the outcome of this appeal, it is not necessary for there to be declaratory relief and the judgments of this court are all that is required.
This concession on the part of the appellants makes it unnecessary for us to deal with the argument of counsel for the respondents as to why the court should, in any event, reject the declaratory relief in its discretion, particularly having regard to the change which has taken place in the legislation. We would, however, indicate that, were it not for the difficulty with regard to framing the declaration, we would not have regarded this case as being one in which declaratory relief should be refused if the appellants were otherwise entitled to such a relief. There is clearly an issue between the parties as to the proper interpretation of the law and that issue is only likely to be decided in declaratory proceedings of this sort.
The fact that the court is not required to give declaratory relief also means that it is unnecessary for the court to deal with the question of the appellants’ locus standi to make their application for judicial review. In the court below Schiemann J’s judgment records that, because of the importance of the issue, the respondents did not dispute the issue of locus standi while making it plain that they reserved their right to argue the point of
Page 1056 of [1989] 1 All ER 1047
locus standi in analogous cases in the future. Before this court the respondents wished to adopt the same position but indicated that, if this court required argument, they were prepared to advance the argument. Counsel indicated that he would have relied on the decision in the Scottish case of Scottish Old People’s Welfare Council 1987 SLT 179. This court did not require counsel to advance the argument which he wished to reserve. However, we make it clear that in our view the question of locus standi goes to jurisdiction of the court and therefore the approach adopted by the department in this case, while understandable, is not appropriate. The parties are not entitled to confer jurisdiction, which the court does not have, on the court by consent and, if this court had been minded to grant declaratory relief, the respondents would have had to advance any arguments which were available to them or to accept the consequences of not doing so. Having regard to the outcome of this appeal we can content ourselves by indicating that, on the evidence but without the advantage of argument, we have no doubt that it was in order for this court and Schiemann J to treat the application for judicial review as being one which the court had jurisdiction to hear.
We dismiss this appeal.
Appeal dismissed. Leave to appeal to the House of Lords refused.
Solicitors: Penny Wood (for the appellants); Solicitor to the Department of Health and Social Security.
Carolyn Toulmin Barrister.
Shearson Lehman Hutton Inc and another v Maclaine Watson & Co Ltd and others
[1989] 1 All ER 1056
Categories: CIVIL PROCEDURE
Court: QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
Lord(s): WEBSTER J
Hearing Date(s): 8 JUNE 1988
Discovery – Privilege – Confidential documents – Documents obtained for purposes of legal proceedings – Arbitration proceedings – Documents obtained for purposes of arbitration proceedings between defendant and third party – Plaintiff bringing action against defendant – Plaintiff applying for disclosure of arbitration documents in defendant’s possession – Whether arbitration documents privileged from disclosure in subsequent public litigation between different parties.
In 1985 the plaintiffs sold large quantities of tin to the defendant company under contracts which incorporated the rules of the London Metal Exchange. Following the collapse of the International Tin Council (the ITC) and the consequent ruling by the exchange that outstanding tin contracts, including that between the plaintiffs and the defendant, be settled at a fixed price, which was substantially lower than the contract price at which the plaintiffs had sold to the defendants, the plaintiffs brought an action against the defendants claiming either the full contract price or damages. In the course of the litigation the plaintiffs issued a summons against the defendant for an order that the defendant disclose to the plaintiffs all documents in its possession, custody or power relating proceedings in which a claim by the defendant against the ITC had been referred to arbitration. The documents in issue included the pleadings in the arbitration, any documents produced by way of evidence in the course of the arbitration, a transcript of the evidence and the award. The judge granted the order. The defendant then claimed privilege for all the documents on the ground that documents used in a private arbitration
Page 1057 of [1989] 1 All ER 1056
were privileged from production in subsequent proceedings between different parties. On the hearing of the defendant’s claim for privilege,
Held – Documents produced voluntarily in a private arbitration were not privileged from disclosure in subsequent public litigation between different parties, since, in view of the fact that such documents had been disclosed voluntarily and not compulsorily pursuant to a court order, there was no significant risk that parties to an arbitration would, contrary to the interests of justice, be discouraged from making full and frank disclosure of confidential documents used in the arbitration by their possible use in subsequent litigation between different parties. Accordingly, there was no policy reason which would justify the court in protecting the documents from further disclosure. The defendant’s claim to privilege therefore failed (see p 1059 b d g h, post).
Distillers Co (Biochemicals) Ltd v Times Newspapers Ltd [1975] 1 All ER 41 and Crest Homes plc v Marks [1987] 2 All ER 1074 considered.
Notes
For documents protected from production, see 13 Halsbury’s Laws (4th edn) para 69.
Cases referred to in judgment
Buccleuch (Duke) v Metropolitan Board of Works (1872) LR 5 HL 418, [1861–73] All ER Rep 654.
Crest Homes plc v Marks [1987] 2 All ER 1074, [1987] AC 829, [1987] 3 WLR 293, HL.
D v National Society for the Prevention of Cruelty to Children [1977] 1 All ER 589, [1978] AC 171, [1977] 2 WLR 201, HL.
Distillers Co (Biochemicals) Ltd v Times Newspapers Ltd [1975] 1 All ER 41, [1975] QB 613, [1974] 3 WLR 728.
Home Office v Harman [1982] 1 All ER 532, [1983] 1 AC 280, [1982] 2 WLR 338, HL.
Rawstone v Preston Corp (1885) 30 Ch D 116.
Riddick v Thames Board Mills Ltd [1977] 3 All ER 677, [1977] QB 881, [1977] 3 WLR 63, CA.
Wheeler v Le Marchant (1881) 17 Ch D 675, CA.
Application
The plaintiffs, Shearson Lehman Hutton Inc and Shearson Lehman Hutton Commodities Ltd, issued a summons on 9 May 1988 against the first defendant, Maclaine Watson & Co Ltd, against whom they were conducting litigation arising out of the collapse of the International Tin Council (the ITC), seeking, inter alia, an order requiring the first defendant to disclose to the plaintiffs all documents in its possession, custody or power relating to its arbitration proceedings against the ITC. On 12 May 1988 Webster J ordered the first defendant to disclose to the plaintiffs by list all such documents and verify on affidavit the documents which it claimed were privileged and the nature of the privilege relied on. The first defendant, by an affidavit sworn on 26 May 1988, claimed privilege in respect of all the documents in issue on the ground that they were produced during confidential arbitration proceedings between different parties. The first defendant’s claim of privilege was then heard inter partes. The facts are set out in the judgment.
Ian Glick QC for the plaintiffs;.
Richard Aikens QC and Adrian Hughes for the first defendant.
8 June 1988. The following judgment was delivered.
WEBSTER J. On 9 May 1988 the plaintiffs issued a summons against the first defendant in which, inter alia, they applied for an order that:
‘The defendants do forthwith disclose to the plaintiffs all the documents in their possession, custody or power which relate to those arbitration proceedings.’
Page 1058 of [1989] 1 All ER 1056
On 12 May 1988 I made orders in this action which included an order that:
‘The first defendants do disclose to the plaintiffs by list all the documents which are or have been in their possession, custody or power relating to their arbitration proceedings against the ITC and verify on affidavit which documents they claim are privileged and the nature of the privilege relied on.’
Miss George, on behalf of the first defendant, swore an affidavit on 26 May. She deposed to the fact, inter alia, that she was advised that privilege had been claimed in respect of the documents which are the subject matter of this application on the ground that documents used in proceedings with different parties are privileged from production in other proceedings, particularly where the documents of which discovery is sought were produced for or during confidential arbitration proceedings and any one party to the current proceedings was a party to the previous arbitration proceedings.
The documents which are in those circumstances in issue on this application are (and I am perhaps not being exhaustive when I list them) the pleadings in the arbitration, any documents produced by way of evidence in the course of the arbitration, evidence given, as shown in the transcript of the proceedings, and the award itself.
Counsel for the plaintiffs does not pursue any claim for the discovery of any of the documents disclosed to the first defendants by the International Tin Council in the arbitration. There is no issue about the relevance to this action of the documents which I have listed, and nor is there any issue relating to legal professional privilege, that is to say counsel for the first defendant accepts that documents which were once protected by legal professional privilege but which have subsequently lost their privilege are no longer protected by that privilege.
Counsel for the plaintiffs on his part concedes, for the purpose of this application at least, that the privacy of arbitration proceedings confers confidentiality on those proceedings. But he relies on the decisions of the court in Wheeler v Le Marchant (1881) 17 Ch D 675 and of the House of Lords in D v National Society for the Prevention of Cruelty to Children [1977] 1 All ER 589, [1978] AC 171. Those decisions clearly establish in my view that there is no principle that every confidential communication is protected from discovery. The decision of the House of Lords in D v NSPCC also establishes, first, that the principle involved in a question such as this is one which extends not only to discovery but also to the admissibility of evidence and, second, that documents or evidence are protected if the public interest in protecting them overrides the public interest that at a trial in this country the truth will out.
It is not necessary for me for present purposes to decide whether that is a clear-cut question of law which has to be decided in the light of authority, or whether it involves carrying out a balancing exercise as between the one interest and the other. For present purposes, I will assume that I am not fettered by authority and that I can and should carry out the balancing exercise. I accept in principle, and for the purposes of argument at this stage, that the categories of documents protected for this reason are not closed, and that the question is, therefore, whether the court should as a matter of policy hold that documents produced in the course of a private arbitration cannot be inspected in subsequent public litigation between different parties in the absence of the consent of the parties to the arbitration.
It is common ground that there is no authority directly in point. Counsel for the first defendant relies, however, on the principle to be derived, he submits, from Distillers Co (Biochemicals) Ltd v Times Newspapers Ltd [1975] 1 All ER 41, [1975] QB 613, Riddick v Thames Board Mills Ltd [1977] 3 All ER 677, [1977] QB 881, Home Office v Harman [1982] 1 All ER 532, [1983] 1 AC 280 and Crest Homes plc v Marks [1987] 2 All ER 1074, [1987] AC 829. But in all those cases the document or information which the court held should be protected was a document which had been disclosed, and which had to be disclosed, in the process of discovery or of complying with an Anton Piller order or was information derived from such a document. The clear reasoning, sometimes expressed and sometimes
Page 1059 of [1989] 1 All ER 1056
implicit, in the judgments and speeches in those decisions was that it would be contrary to the interests of justice if parties were to be discouraged from making full and frank discovery in an action because of their apprehension that documents disclosed might be used by or for the purposes of persons not parties to the litigation in question.
Counsel’s submission therefore, as I understand it (and I am sure I understand it right), is that the same principle should be applied so as to protect the privacy and confidentiality of an arbitration. But in my view the considerations are very different. Discovery is a process of involuntary disclosure. Parties to litigation are obliged to give discovery of relevant documents in their possession. But documents adduced or evidence given in an arbitration are in no sense adduced or given involuntarily, and I see no significant risk that parties to arbitrations would be inhibited in their conduct of them by apprehension about the possible subsequent use of documents or evidence relied on by them in those arbitrations by other parties.
In coming to that conclusion, I take into account what I have no doubt is the case, that these courts would not wish to do anything which might discourage parties from overseas using our English arbitration procedure. All discovery represents an invasion of privacy. Sometimes it requires the production of a private and possibly confidential file of correspondence, and sometimes of a memorandum of a private and possibly confidential meeting. Arbitrations are also private and confidential, but I can find no special privacy or confidentiality in them which entitles parties to them to the protection which counsel on behalf of the first defendant seeks to assert.
I would come to the same conclusion in the absence of the two principal authorities on which counsel for the plaintiffs relies as being closest, he submits, to the facts of the present case. I refer to Duke of Buccleuch v Metropolitan Board of Works (1872) LR 5 HL 418, [1861–73] All ER Rep 654, and the opinions of the judges summoned to advise their Lordships’ House in their decision on that case, and the decision in Rawstone v Preston Corp (1885) 30 Ch D 116. Neither of those decisions deter me from the conclusion that I have already reached, and I think I can say that they are more consistent with that conclusion than inconsistent with it.
I recognise that neither of those cases are by any means on all fours with the circumstances of the present case. The question that arose in the first of them was whether an arbitrator could be called to give evidence in an action to enforce an award. In the second case both the action and arbitration were between the same parties, although the issues were not the same. So neither of those cases in any sense bind me, nor are they in any sense determinant of the decision which I have reached. But for the reasons that I have expressed I conclude that the plaintiffs are entitled to the discovery which they seek.
If I have a discretion in the matter, which I very much doubt, it would only be a discretion to examine the documents in order to assess their probative value and to balance that against the two public interest considerations which I have mentioned. But at this stage in a complicated action of this kind I would not exercise my discretion and examine the documents even if I had such a discretion which, as I have said, I very much doubt if I have.
Consequently, I grant this application for discovery.
Order accordingly.
Solicitors: Simmons & Simmons (for the plaintiffs); Allen & Overy (for the first defendant).
K Mydeen Esq Barrister.
Director of Public Prosecutions v Hutchinson and another
R v Secretary of State for Defence, ex parte Parker
R v Secretary of State for Defence, ex parte Hayman
[1989] 1 All ER 1060
Categories: ADMINISTRATIVE
Court: QUEEN’S BENCH DIVISION
Lord(s): MANN LJ AND SCHIEMANN J
Hearing Date(s): 19, 20, 21, 25, 26 JULY, 21 OCTOBER 1988
Byelaw – Validity – Byelaw wider than authorised by statute – Prohibited action within scope of byelaw if byelaw properly made – Military land byelaws prejudicially affecting rights of common – Statute authorising Secretary of State to make byelaws regulating use of military land providing they did not take away or prejudicially affect rights of common – Secretary of State making byelaws which prejudicially affected rights of common – Applicants entering prohibited area – Applicants not exercising rights of common – Applicants convicted under byelaws – Whether convictions lawful – Military Lands Act 1892, s 14(1).
In two separate cases the question arose whether a person could be lawfully convicted under byelaws which appeared on their face to be wider than authorised by the enabling Act. The byelaws had been made in 1985 and 1987 under s 14(1)a of the Military Lands Act 1892, which authorised the Secretary of State for Defence to make byelaws regulating the use of land appropriated for military purposes provided that such byelaws did not ‘take away or prejudicially affect any right of common’. In the first case, H and S were convicted of entering a protected area without authority or permission contrary to the 1985 byelaws. H and S appealed to the Crown Court, contending that, although they had entered the protected area, which was an act forbidden by the byelaws, the convictions should be quashed on the ground that the byelaws were invalid since they prejudicially affected rights of common. Their appeals were allowed and the Director of Public Prosecutions appealed. In the second case, P was arrested and charged with contravening the 1987 byelaws, which provided inter alia that ‘No person shall remain in the Controlled Area after having been directed to leave … ' P did not dispute that he had been in the relevant controlled area and that he had been asked to leave by a constable but he applied for judicial review to challenge the validity of the byelaws on the ground that they prejudicially affected rights of common and were therefore ultra vires. H, S and P did not claim that they themselves had any rights of common, nor did they claim to have been attempting to exercise such rights on behalf of anyone else.
Held – Where an administrative decision had a wider ambit than was permitted by the enabling Act the court would, in certain circumstances, reduce the ambit of the decision so as to preserve those parts of it which were intra vires. That would only be done where the court was sure that the altered decision represented that which the decision-maker would have made had he appreciated the limitation on his powers. Therefore, a person could be lawfully convicted of an offence against a byelaw which was wider than was permitted by the enabling statute where, had the byelaws been drawn only as widely as the enabling Act authorised, the person charged would still have been properly convicted. Accordingly, although the 1985 and 1987 byelaws prejudicially affected rights of common contrary to the proviso to s 14(1) of the 1892 Act, H, S and P had been lawfully convicted of offences against the byelaws since they had not been exercising rights of
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common when they entered onto the land in question and would therefore have been properly convicted if the byelaws had not prejudicially affected rights of common. The appeal in the first case would, therefore be allowed and the application for judicial review in the second case dismissed (see p 1064 c d, p 1070 g h, p 1072 f g, p 1073 h and p 1074 c, post).
Dunkley v Evans [1981] 3 All ER 285 and Thames Water Authority v Elmbridge BC [1983] 1 All ER 836 applied.
Notes
For the severance of partly invalid instruments, see 1 Halsbury’s Laws (4th edn) para 26.
For the Military Lands Act 1892, s 14, see 3 Halsbury’s Statutes (4th edn) 1140.
Cases referred to in judgments
A-G (ex rel Thornbury RDC) v Brock Bros Ltd [1972] CA Transcript 30.
Alexander v Alexander (1755) 2 Ves Sen 640, 28 ER 408.
Associated Provincial Picture Houses v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223, CA.
Dunkley v Evans [1981] 3 All ER 285, [1981] 1 WLR 1522, DC.
Dyson v A-G [1912] 1 Ch 158, CA.
Dyson v London and North Western Rly Co (1881) 7 QBD 32, DC.
Kruse v Johnson [1898] 2 QB 91, [1895–9] All ER Rep 105, DC.
Olsen v Camberwell City Corp [1926] VLR 58, Vict SC.
R v North Hertfordshire DC, ex p Cobbold [1985] 3 All ER 486.
Sydney Municipal Council, v A-G for New South Wales [1894] AC 444, PC.
Thames Water Authority v Elmbridge BC [1983] 1 All ER 836, [1983] QB 570, [1983] 2 WLR 743, CA.
Turner, Re, Hudson v Turner [1932] 1 Ch 31, [1931] All ER Rep 782.
United City Merchants (Investments) Ltd v Royal Bank of Canada [1982] 2 All ER 720, [1983] AC 168, [1982] 2 WLR 1039, HL.
Cases also cited
Agricultural Horticultural and Forestry Industry Training Board v Aylesbury Mushrooms Ltd [1972] 1 All ER 280, [1972] 1 WLR 190.
Alty v Farrell [1896] 1 QB 636, DC.
Champlin Refining Co v Corporation Commission of Oklahoma (1931) 286 US 210, US SC.
Cinnamond v British Airports Authority [1980] 2 All ER 368, [1980] 1 WLR 582, CA.
Daganayasi v Minister of Immigration [1980] 2 NZLR 130, NZ CA.
Dunlop v Woollahra Municipal Council [1981] 1 All ER 1202, [1982] AC 158, PC.
Findlay v Secretary of State for the Home Dept [1984] 3 All ER 801, [1985] AC 318, HL.
MacFisheries (Wholesale and Retail) Ltd v Coventry Corp [1957] 3 All ER 299, [1957] 1 WLR 1066, DC.
Mixnam’s Properties Ltd v Chertsey UDC [1964] 2 All ER 627, [1965] AC 735, HL.
Newbury DC v Secretary of State for the Environment [1980] 1 All ER 731, [1981] AC 578, HL.
Powell v May [1946] 1 All ER 444, [1946] KB 330, DC.
R v Hillingdon Health Authority, ex p Goodwin [1984] ICR 800.
R v London Residuary Body, ex p Inner London Education Authority (1987) Times, 24 July, DC.
R v Secretary of State for the Home Dept, ex p Khan [1985] 1 All ER 40, [1984] 1 WLR 1337, CA.
Baird (Robert) Ltd v Glasgow Corp [1936] AC 32, HL.
Rossi v Edinburgh Corp [1905] AC 21, HL.
Secretary of State for Education and Science v Tameside Metropolitan Borough [1976] 3 All ER 665, [1977] AC 1014, HL.
Strickland v Hayes [1896] 1 QB 290, [1985–9] All ER Rep 201, DC.
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Case stated and applications for judicial review
DPP v Hutchinson and anor
The Director of Public Prosecutions appealed by way of a case stated by the Crown Court at Reading (his Honour Judge Lait and two lay justices) in respect of its decision on 25 February 1988 to all appeals by Jean Emily Hutchinson and Georgina Smith against their conviction by the Newbury justices who on 23 July 1986 of entering a protected area without authority or permission, contrary to para 2(b) of the Royal Air Force Greenham Common Byelaws 1985, SI 1985/485, and s 17(2) of the Military Lands Act 1892. The question for the opinion of the High Court was whether the Crown Court was correct in law in holding (i) that byelaws 2(a), (b), (c), (d), (g), (h) and (l) were ultra vires and invalid on the grounds that they took away all rights of common and prejudicially affected such rights and/or that, in making the said byelaws, the Secretary of State had failed to take account of the existing rights of common and (ii) that the byelaws were not invalid on any of the other grounds relied on by Hutchinson and Smith. The facts are set out in the judgment of Schiemann J.
R v Secretary of State for Defence, ex p Parker
Jonathan Parker applied, with leave of Mann J given on 7 October 1987, for judicial review of the Royal Air Force Fylingdales Byelaws 1987, SI 1987/1069, made by the Secretary of State for Defence on 18 June 1987 in exercise of his powers under Pt II of the Military Lands Act 1892, seeking a declaration that byelaw 3(k) was ultra vires and of no legal effect on the ground, inter alia, that the byelaw had prejudicially affected rights of common contrary to the proviso to s 14(1) of the 1892 Act. The facts are set out in the judgment of Schiemann J.
R v Secretary of State for Defence, ex p Hayman
Margaret Hayman applied, with the leave of Mann J given on 7 October 1987, for judicial review of the Royal Air Force Fylindales Byelaws 1987, SI 1987/1069, made by the Secretary of State for Defence on 18 June 1987 in exercise of his powers under Pt II of the Military Lands Act 1892, seeking declarations that byelaws 3(a), (k) and 4 were ultra vires and of no legal effect on the ground that they prejudicially affected rights of common contrary to the proviso to s 14(1) of the 1892 Act. The facts are set out in the judgment of Schiemann J.
John Laws and David Pannick for the Director of Public Prosecutions.
Miss Hutchinson appeared in person.
Beverley Lang for Miss Smith.
Stephen Sedley QC and Beverley Lang for Mr Parker and Miss Hayman.
David Pannick for the Secretary of State.
Cur adv vult
21 October 1988. The following judgments were delivered.
SCHIEMANN J (giving the first judgment at the invitation of Mann LJ). There are before the court two applications for judicial review and one case stated from the Crown Court. The cases have been heard together because they appeared to raise a common point: the efficacy of certain byelaws made under the Military Lands Act 1892 and, in particular, the question whether if those byelaws go beyond the powers in the enabling Act they may nevertheless be enforced in so far as they do not go beyond the enabling Act. During the course of the hearing it became clear that the issues raised in one of them, the Hayman case, were no longer live and therefore the court indicated that it would as a matter of discretion not grant the relief sought. I deal with that case at the end this judgment.
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The Hutchinson case concerned the Royal Air Force Greenham Common Byelaws 1985, SI 1985/485. The Parker and Hayman cases both concern the Royal Air Force Fylingdales Byelaws 1987, SI 1987/1069. Each set of byelaws was made in purported exercise of powers contained in s 14 of the 1892 Act. That section reads as follows:
‘(1) Where any land belonging to a Secretary of State or to a volunteer corps is for the time being appropriated by or with the consent of a Secretary of State for any military purpose, a Secretary of State may make byelaws for regulating the use of the land for the purposes to which it is appropriated, and for securing the public against danger arising from that use, with power to prohibit all intrusion on the land and all obstruction of the use thereof. Provided that no byelaws promulgated under this section shall authorise the Secretary of State to take away or prejudicially affect any right of common.
(2) Where any such byelaws permit the public to use the land for any purpose when not used for the military purpose to which it is appropriated, those byelaws may also provide for the government of the land when so used by the public, and the preservation of order and good conduct thereon … and for the prevention of anything interfering with the orderly use thereof by the public for the purpose permitted by the byelaws … ’
RAF Greenham Common belongs to the Secretary of State for Defence. It is subject to the 1985 byelaws made under the Military Land Act 1892. The area so subject is defined in the byelaws as ‘the Protected Area’. The byelaws contain the following:
‘2. No person shall … (b) enter, pass through or over or remain in or over the Protected Area without authority or permission given by or on behalf of one of the persons mentioned in byelaw 5(1) …
3. Subject to the provisions of byelaw 5 any person contravening byelaw 2 in any way thereby commits an offence …
5.(1) Nothing done by a person acting under and in accordance with any authority or permission given by or on behalf of the Secretary of State, the Air Officer Commanding-in-Chief RAF Support Command, or the RAF commander RAF Greenham Common shall be an offence against any of these byelaws … ’
On 18 June 1986 the Misses Hutchinson and Smith entered the protected area without authority. They were charged with the offence and found guilty by the magistrates. They appealed to the Crown Court. They admitted that they had done that which, on the face of it, was forbidden by the byelaws but contended that the byelaws were ultra vires and that therefore they ought to be acquitted. That contention found favour with the Crown Court. The Director of Public Prosecution appeals by way of case stated to this court.
The argument which succeeded in the court below went as follows: (1) the byelaws were made under s 14(1) of the 1892 Act; (2) the byelaw under which they were charged prejudicially affects rights of common; (3) therefore it is ultra vires; (4) therefore the ladies ought to be acquitted.
The 1987 byelaws also on their face prejudicially affect rights of common. They apply to what is described therein as ‘the Controlled Area’, which comprises the air force establishment known as RAF Fylingdales. The byelaws also provide in byelaw 3(k) that:
‘No person shall … (k) remain in the Controlled Area after having been directed to leave by any of the persons mentioned in byelaw 6.’
Byelaw 6 provides:
‘The following persons are hereby authorised to remove from the Controlled Area and to take into custody without warrant any person committing an offence against any of the preceding byelaws … (a) The Air Officer Commanding in Chief RAF Strike Command; (b) The Air Officer Commanding No 11 Group; (c) The Officer
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Commanding RAF Fylingdales; (d) Any officer, any warrant officer, or non-commissioned officer in uniform and being for the time being under the command of any of the officers mentioned in sub-paragraphs (a) to (c) of this byelaw; (e) Any public officer being a Crown servant authorised in writing by or on behalf of any of the officers mentioned in sub-paragraphs (a) to (c) of this byelaw; (f) Any constable.’
On 4 July 1987 Mr Parker was arrested and charged with contravening byelaw 3(k) of the 1987 byelaws and s 17(2) of the 1892 Act 1892. It was alleged that he remained in the controlled area after being directed to leave by a constable. He does not dispute that he was in the controlled area as defined in the byelaws and that he was asked to leave by a constable and failed to do so. However, he challenges the validity of byelaw 3(k) both on the basis that it is invalid in itself and on the basis that the byelaws in their entirety are invalid in that some of them prejudicially affect rights of common and that therefore all the byelaws, including byelaw 3(k), are invalid.
I pause to note that neither of the ladies nor Mr Parker claims that they themselves had any rights of common nor do they claim to have been attempting to exercise them on behalf of anyone else. It follows that had the byelaws been drafted more narrowly so as not prejudicially to effect any rights of common then the ladies and Mr Parker would have been unable to run this argument. However, they were not so drafted.
I look, firstly, at the various points which arose in relation to the failure of the byelaws to make provision for commoners’ rights.
The first question I address is: what is meant by ‘any right of common’ in s 14(1) of the 1892 Act? Counsel for Mr Parker and Miss Hayman submitted that this phrase as used in the 1892 Act was not confined to rights of common properly so called but was wide enough to embrace any general practice of taking air and exercise over common land. Clearly, if that submission be right, then the restriction on the byelaw-making power contained in the proviso to the subsection is greater than at first sight would appear.
In support of this submission, he pointed to the following factors.
1. The statutory forerunner of s 14 of the 1892 Act was s 2 of the Artillery and Rifle Ranges Act 1885. That section contained no equivalent to the proviso to s 14(1) of the 1892 Act.
2. The 1885 Act, however, did, by s 3, in relation to land by the seaside, enact that byelaws under the Act ‘shall not injuriously affect any public right within the meaning of this section’. Subsection (3) of the section goes on to provide: ‘For the purposes of this section “Public right” means any right of navigation, anchoring, grounding, fishing, bathing, walking or recreation.’
3. This provision was re-enacted in s 2(4) of the Military Lands Act 1900.
4. The concept of public rights there referred to is wider than rights enforceable as between individuals in the courts.
5. Similarly, in Sydney Municipal Council v A-G for New South Wales [1894] AC 444 the Privy Council construed the words ‘permanent common’ in a dedication made by the Crown of certain land as being wide enough to comprise a dedication of that land for public enjoyment notwithstanding the technical meaning of the word ‘common’ in normal legal parlance.
6. A similar desire in the legislature to recognise the de facto public usage of commons is evidenced in s 93 of the Law of Property Act 1925, which gives the public certain ‘rights of access for air and exercise’ on various commons.
In my judgment, while these factors do indicate that in certain circumstances Parliament and the courts have taken cognisance of the widespread public habit of walking over commons, they do not lead to the conclusion that in s 14(1) of the 1892 Act the phrase ‘right of common’ has any other than its ordinary meaning. To construe the proviso as covering more than legal rights would make it impossible in practice for the
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Secretary of State to use for military purposes any common land; even if he reaches an accommodation with those with rights of common, or removes their rights through the statutory procedures on paying compensation, the freedom of the public to pass over the land would still exist. If s 14(1) meant that no common land might be used for military purposes it would have said so.
The next question which I address is: what is the proper construction of the proviso to s 14 of the 1892 Act? There are a number of possible constructions of the proviso to s 14. First, that it provides (a) that byelaws should not authorise the Secretary of State to take away rights of common and (b) that byelaws should not prejudicially affect rights of common.
This construction has a lot of grammatical merit but it involves what seems to me to be an absurdity, namely that Parliament, while enacting the foregoing limitations of the Secretary of State’s power in making byelaws, left him free to make byelaws which might authorise him prejudically to affect rights of common, albeit that they could not authorise him to take such rights away. If that were permissible, the Secretary of State could do indirectly what he could not do directly by byelaw and moreover could indirectly deprive commoners of rights without compensation. I am conscious that one could argue that a byelaw containing such a provision for authorising the Secretary of State to direct matters which would prejudicially affect common rights could itself be regarded as prejudicially affecting the rights of commoners albeit only indirectly. However, while that argument, if successful, would meet the absurdity point, it would leave the byelaw as one directly infringing the proviso and so would not avail the Secretary of State.
A second possible construction is that it provides that no byelaw shall authorise the Secretary of State to (a) take away a right of common or (b) prejudicially affect a right of common, but that the byelaws can do so directly. That was the submission of counsel for the Secretary of State. That would permit the Secretary of State to do directly by making a byelaw what he could not do indirectly and again would involve taking away rights without compensation. In my judgment, in circumstances where there is no provision for laying the byelaws before Parliament, such a distinction would serve no purpose and if that were the effect of the proviso the result would again be an absurdity.
A third possible construction is that Parliament’s intention was to secure that the Secretary of State should not by the use of the byelaw-making power given to him take away or prejudicially affect rights of common. This accords with my instinctive grasp of the purpose of the proviso and in my judgment is its correct construction.
Counsel for the Secretary of State recognised that, if this be the proper approach to the meaning of the proviso, the byelaws as made do on the face of them prejudicially affect rights of common. He also recognised that this was not permitted by the legislation. I deal later in this judgment with a submission by counsel that where a byelaw covers a large area than is permitted by statute it may none the less have force within the smaller area which is permitted by statute, provided that the smaller area is within the larger area. I shall refer to this as the Dunkley submission: see Dunkley v Evans [1981] 3 All ER 285, [1981] 1 WLR 1522. Counsel made, however, a further submission, namely that the byelaws must be read so that their only field of application is consistent with the proviso because the proviso forbids any other field of application. This latter submission, in so far as it is separate from the Dunkley submission, I reject. Of course I accept that in cases of doubtful meaning in a byelaw one can look at the enabling statute in order to clarify the doubt left by the wording of the byelaw. However, that is not this case. The instant byelaws are perfectly clear and in my judgment go further than the enabling Act permits.
In the light of the foregoing findings, the position in relation to the byelaws is essentially as follows. (1) The byelaws on their face prejudicially affect rights of common. (2) This is not authorised by the empowering Act. (3) The ladies and Mr Parker have no
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right to exercise any right of common. (4) What they did is on the fact of it prohibited by or under the byelaws.
The essential and important questions before the court are: (1) whether, and if so in what circumstances, a person can lawfully be convicted of an offence against a byelaw when the byelaw on the face of it is wider in its field of application than is permitted by the empowering Act and yet had the byelaw been drawn only as widely as the empowering Act authorises the person convicted would undoubtedly have been rightly convicted; (2) whether, and if so in what circumstances, a person can be convicted of an offence against a byelaw when the byelaw-maker must have failed to take into account a relevant consideration, namely that he had no power to make a byelaw of the breadth of application which the relevant byelaw had.
The court is thus faced with subordinate legislation which covers more than is permitted by the empowering legislation. In such circumstances, the courts could adopt a number of possible approaches: (1) never to enforce any part of the subordinate legislation; (2) always to enforce those parts of the subordinate legislation which are permitted by the empowering legislation; or (3) in some but not all circumstances to enforce those parts of the subordinate legislation which are permitted by the empowering legislation.
The first of these courses has the merit of simplicity and of encouraging the subordinate legislator to keep within his powers. The disadvantage of such a course is that much to which no objection can be taken is then unenforceable. In any event, whatever the theoretical merits of such a course, it is clear that it does not represent the law as it has been developed: see Dunkley v Evans [1981] 3 All ER 285, [1981] 1 WLR 1522 and Thames Water Authority v Elmbridge BC [1983] 1 All ER 836, [1983] QB 570.
It is equally clear that on occasions the court will strike down the whole of the instrument under attack, even though all of it is not outwith the empowering legislation: see Dyson v London and North Western Rly Co (1881) 7 QBD 32, Dyson v A-G [1912] 1 Ch 158 and R v North Hertfordshire DC, ex p Cobbold [1985] 3 All ER 486.
So much is common ground between the parties, who all agree that in some circumstances the courts will enforce an instrument which is bad in parts. Where they differ is the formulation of the test to be applied to identify the circumstances in which the court will enforce such an instrument.
There are two recent cases in which the English courts have considered similar questions: the Dunkley case and the Thames Water Authority case just referred to.
The background to the former case was that under the Seafish (Conservation) Act 1967 ministers concerned might make orders prohibiting fishing within a certain area as defined in the Act. They made an order which covered the area referred to in the 1967 Act but also covered an area in respect of which the Act did not permit them to make an order. Mr Evans was fishing inside the area referred to in the Act. The prosecutor submitted that the fact that the order was ultra vires in so far as a small area was concerned did not render the whole order ultra vires. The defence contended that the whole order was rendered invalid by including this area of the sea. Ormrod LJ, reading the judgment of the court, stated as follows ([1981] 3 All ER 285 at 287, [1981] 1 WLR 1522 at 1524):
‘The offending area represents 0·8% of the area covered by the order. The only question, therefore, is whether it is possible to sever the invalid part from the valid part of the order, or whether the whole order is invalidated by the inclusion of this small area. The general principle is stated in 1 Halsbury’s Laws (4th Edn) para 26 thus: “Unless the invalid part is inextricably interconnected with the valid, a court is entitled to set aside or disregard the invalid part, leaving the rest intact.” The principle is more fully formulated in the judgment of Cussen J in the Supreme Court of Victoria in Olsen v City of Camberwell Corpn [1926] VLR 58 at 68, where he said: “If the enactment with the invalid portion omitted is so radically or substantially different a law as to the subject matter dealt with by what remains from what it
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would be with the omitted portions forming part of it as to warrant the belief that the legislative body intended it as a whole only, or in order words, to warrant belief that it all could not be carried into effect, the legislative body would not have enacted the remainder independently, then the whole must fail.” We respectfully agree with and adopt this statement of the law. It would be difficult to imagine a clearer example than the present case of a law which the legislative body would have enacted independently of the offending portion and which is so little affected by eliminating the invalid portion. This is clearly, therefore, an order which the court should not strive officiously to kill to any greater extent than it is compelled to do.’
Ormrod LJ then indicated that the defendant’s main point was that the court could not sever the invalid portion of this order from the remainder because it was not possible to exercise from the text of the order the words which rendered part of it invalid. He rejected this submission, saying ([1981] 3 All ER 285 at 288, [1981] 1 WLR 1522 at 1525):
‘We can see no reason why the powers of the court to sever the invalid portion of a piece of subordinate legislation from the valid should be restricted to cases where the text of the legislation lends itself to judicial surgery, or textual emendation by excision. It would have been competent for the court in an action for a declaration that the provisions of the order in this case did not apply to the area of the sea off Northern Ireland … to make the declaration sought, without in any way affecting the validity of the order in relation to the remaining 99·2% of the area referred to in the schedule to the order.’
The court certified the following points of law of general public importance namely ([1981] 3 All ER 285 at 288, [1981] 1 WLR 1522 at 1526):
‘1. Whether where a statutory instrument (on the true construction of which criminal liability depends) has been made partly ultra vires, the court can construe it and give effect to it in so far as it would probably have applied had it been made intra vires; 2. if so, in what circumstances and on what principles should the court act in deciding whether so to construe and give effect to it? In particular, is the doctrine of severance applicable? If so, should the court apply the “blue pencil test” or some other, and if so what, test?’
However, the case went no further.
In the Thames Water Authority case an urban district council prior to its dissolution had passed resolutions appropriating some land, ‘the blue land’, for planning purposes. Within the blue land was a small area shown edged green, ‘the green land’. There was no power to appropriate the green land, although there was power to appropriate the rest of the blue land. The reason there was no power to appropriate the green land was because at the appropriate date its use for sewerage purposes had not ceased. The water authority contended that, since the appropriation was bad in part, the whole appropriation was invalid. The borough council submitted that the appropriation was valid save and in so far as it included the green land. Dunn LJ said ([1983] 1 All ER 836 at 841, [1983] QB 570 at 576):
‘Counsel for the water authority submitted that the court can only sever when the authors of the document have themselves so framed the document that the part to be discarded is already segregated on the face of the document. The question of severance only arises if there is something which, on a perusal of the document itself, is capable of severance; and the court is not entitled to look at the factual situation on the ground, but is confined to the four corners of the document. He submitted that there was no case, whether concerned with contracts in restraint of trade, statutory orders, byelaws or planning permission subject to conditions, in which the court has severed the bad provisions from the good unless the bad
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provisions appear in the documents themselves. He said that the court would not consider severance until the severable or exciseable part had been identified in the document itself. This is known as the “blue pencil test“.’
Dunn LJ then referred to Dunkley’s case and said that it was not possible to distinguish it from the instant case ([1983] 1 All ER 836 at 843, [1983] QB 570 at 579):
‘In Dunkley v Evans, in order to find the invalidity, the court had to look outside the order at the principal Act. So here; in order to find the invalidity, the court has to look outside the resolution at the factual situation on the ground, namely that the green land is still being used for sewage disposal.’
After having cited United City Merchants (Investments) Ltd v Royal Bank of Canada [1982] 2 All ER 720, [1983] AC 168, where the courts were concerned with enforcing part of a contract but not the remainder on the basis that the remainder was illegal as being contrary to exchange control regulations, he went on to say ([1983] 1 All ER 836 at 844, [1983] QB 570 at 580–581):
‘That was admittedly a contract case but the principle seems to me to apply a fortiori to public law. The question in the instant case is not as to the true construction of the resolution but whether, and to what extent, the urban district council had power to give effect to it. For that purpose the court is entitled, and indeed bound, to look outside the document itself to see whether the urban district council, in fact and in law, had power to do what the resolution on the face of it purports to authorise. In this case it finds an easily identifiable part, namely the green land, which the urban district council had no power to appropriate. There is no more difficulty in deciding whether the resolution was invalid in respect of that part and valid in respect of the remainder than if the green land had been identified in the resolution itself, and no difficulty in the court declaring that the resolution is invalid in respect of the green land and valid in respect of the remainder. It does not seem to me to matter whether one calls that process severance or whether one calls it modification of the resolution, or whether one uses some other word, or expression, to describe it. In the realm of judicial review it could be dealt with by declarations that the purported appropriation of the green land was ultra vires and the remainder intra vires … I would echo the words of Ormrod LJ in Dunkley v Evans [1981] 3 All ER 285 at 287, [1981] 1 WLR 1522 at 1524, that the court should not strive officiously to kill to any extent greater than it is compelled to do. If, as here, it is perfectly plain that the urban district council had no power to do what it purported to do in respect of an easily identifiable parcel of land, it would not be conducive to good public administration for the court officiously to hold that the whole document, including that part which was within the power of the council, was invalid.’
Dillon LJ said ([1983] 1 All ER 836 at 846–847, [1983] QB 570 at 583–584):
‘It is apparent, therefore, that the council’s resolution represents an excessive exercise of the council’s power of appropriation. But examination of the underlying facts shows also that there is no difficulty at all in identifying the extent of the excess … In private law the effect of excessive exercise of a power is not in doubt. As Maugham J said in Re Turner, Hudson v Turner [1932] 1 Ch 31 at 37, [1931] All ER Rep 782 at 785: “When the donee of a power of appointment has purported to exercise the power for an amount greater than that over which it was given, the appointment is good with regard to the correct amount.” Nearly two hundred years before, Clarke MR had adopted much the same approach when he said in Alexander v Alexander (1755) 2 Ves Sen 640 to 644, 28 ER 408 at 411: “If the court can see the boundaries it will be good for the execution of the power, and void as to the excess.” This is the sensible approach and I see no reason why there should not be a similar
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approach in public law. None the less, counsel for the water authority submits that there is in public law, though not in private law, an overriding requirement that an excessive exercise of a power will be wholly void, and not merely void as to the excess, unless the document exercising the power is so worded as to include words describing the permitted exercise of the power as well as further words describing the excess in such a way that the excess can be excised by the use of a blue pencil, leaving unaltered the wording in the document expressly covering the permitted exercise of the power. I fail to see the sense or logic of such a requirement. Any excessive exercise of a power, whether in public or private law, is likely to be the result of a mistake on the part of the person exercising the power, ie an erroneous belief that the power extends further than it in truth does. But it is in the highest degree unlikely that that person will realise that he is making such a mistake and yet will not correct it. Therefore it is unlikely to happen, and if it does happen it will be purely fortuitous, that the wording of the exercise of the power will describe in express terms the extent of the permitted exercise of the power as part of the wording used to achieve a wider, and in truth excessive, execution of it. Therefore, if counsel for the water authority’s overriding blue pencil requirements is in truth a requirement of public law, it would depend on chance, and not on any actual or presumed intention of the person exercising the power, or on any rational process of construction of the relevant document, whether the purported exercise of the power is wholly void or pro tanto valid.’
Stephenson LJ started his judgment as follows ([1983] 1 All ER 836 at 847–848, [1983] QB 570 at 585–586):
‘For some centuries our courts have been applying to the benevolent interpretation of written instruments of all kinds, including statutes, the commonsense principle preserved in latin as ut res magis valeat quam pereat: Co Litt 36A; Broom’s Select Legal Maxims (10th edn, 1939) p 361. By applying that principle they have been able not only to make sense of near nonsense but also to give effect to what is good and enforce what is valid, while refusing to enforce what is bad and giving no effect to what is invalid. This latter exercise can be carried out, and can, of course, be carried out only, where the good and bad parts are clearly identifiable and the bad part can be separated from the good and rejected without affecting the validity of the remaining part. But this ought to be done whenever the good and bad parts can be so identified and separated and what remains is clearly valid in the sense that there is nothing inherently unenforceable about it and all the surrounding circumstances indicate that common sense and the intention of the maker of any document which includes both good and bad parts would give effect to it. There will be cases where no such identification and separation of good from bad is possible and the invalidity of one part will taint and invalidate the whole. (The curate’s egg was such a tainted whole, whatever its deferential consumer may have intended to hint to the contrary.) But I cannot see why this should be so in every case where the document which confronts the court does not itself identify the invalid part. To treat every such document as the egg of the curate would disable the court, by a matter of form only, from dividing what is clearly divisible into its component parts … where what is alleged to be invalid and unenforceable can be isolated and identified with precision, the court should not refuse to enforce the rest … That is so when there is nothing in the document to isolate and identify the unenforceable, but outside circumstances supply the identification and reveal the true nature of the transaction … Though it may be easier to apply the principle where the contract or resolution intrinsically identifies the illegal or ultra vires matter, it is in my judgment equally applicable where, as here, the thing is extrinsic and identifiable by looking outside. There may also be cases where the court cannot be certain what the author of a written contract, for example, would have intended if he had known the facts which made part
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performance impossible, or the law which made part performance unlawful or beyond his powers. Then the court cannot enforce what remains.’
Counsel on behalf of those challenging the validity of the byelaws made the following submissions. 1. The court’s power of modification or of severance can only be used (i) negatively and (ii) restrictively. This means that the court is confined to (a) finding a discreet element in an instrument to be ultra vires and (b) then reducing the ambit of the instrument to correspond with the power. He described this process as one of subtraction.
2. Even so, the power of subtraction cannot be used (a) if when the exercise is performed what is left would probably not have been enacted or it cannot be shown that what is left would have been enacted and (b) if the severance alters the character of what is left (see R v North Hertfordshire DC, ex p Cobbold [1985] 3 All ER 486).
3. The underlying reason for these close restrictions is not pedantry; it is that to go any further would breach the separation of powers and would thrust the court into the role of lawmaker.
4. For these reasons one particular application of the restriction on the process of modification is that there must be no feasible alternative for the modification for which the rule-maker contends. The modification must be uniquely appropriate. If there is more than one possible modification then the court has to cast itself into the role of legislator in order to make the choice.
5. Independently of the statutory vires question the omission of any saving or exception for rights of common is consistent only with the Secretary of State having failed, in making the byelaws, to pay regard to a matter made expressly relevant by statute, namely the preservation of rights of common. The byelaws are consequently unlawful and void on Wednesbury grounds (see Associated Provincial Picture Houses v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223).
I accept that in such a modification exercise the court, as a matter of substance, can only cut down the ambit of the decision so as to reflect the limitations of the empowering statute. The court cannot make the decision cover cases which, although within the ambit of the empowering statute, were not in fact covered by the decision under review. However, it is in my judgment clear that the drafting technique used by the court in modifying the decision (striking out words, altering a plan to which reference is made, adding words or making a declaration that the decision does not cover certain cases) is in itself not of importance.
For my part, I accept that, when the court is performing an exercise which is essentially the alteration of a decision made by another under statutory powers given to that other and not to the court, the court should only do so when sure that the altered decision represents that which the decision-maker would have enacted had he appreciated the limitation on his powers. For the court to go further would be to assume the function of the decision-maker. If, however, the court thus restricts itself in performing the modification exercise than it also overcomes the difficulty that the decision-maker failed to take into account the fact that he did not have such wide powers as he thought he had or was labouring under some mistake of fact. If the court is in any doubt then in my judgment it should quash the decision and leave the decision-maker to decide afresh.
It is arguable that the legal approach which I have adopted is stricter, as against the byelaw-maker, than that warranted by some of the words in the Dunkley case and the Thames Water Authority case and that we are bound by authority to adopt a laxer approach to modification. Since such a laxer approach would only weaken the position of those challenging the byelaws I need not trouble to consider it further. If I have erred, I have erred in their favour.
I accept that there are several techniques, whether of byelaw drafting or of buying out, which the Secretary of State might have adopted for dealing with any commoners, but this uncertainty does not matter in the present case for we are not dealing with commoners. What we must be certain of is not what would have happened to the commoners
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but what would have happened to the rest of the world. Applying the approach which I have indicated, it seems to me abundantly clear that the byelaw-maker, if he had appreciated the limitation on his powers, would both at Greenham Common and at Fylingdales nevertheless have gone on to make the byelaws in such a way that the proviso to s 14(1) was given effect but that all the world save commoners would still have been within their ambit.
Before disposing of the Greenham case I return to consider some submissions made by Miss Hutchinson.
Miss Hutchinson, at the beginning of the hearing before us, withdrew her instructions from counsel and thereafter appeared in person. She made three submissions not made by counsel.
First, there is an overlap between the matters covered by the byelaws and matters covered by the Official Secrets Act 1911 in that the latter makes it a crime to be in the neighbourhood of or enter any prohibited place within the meaning of that Act. She submitted that in consequence the byelaws were necessarily invalid. Assuming that the area covered by the byelaws included a prohibited place, in my judgment there is no necessary invalidity in a byelaw creating a summary offence punishable by a fine when there is in existence a statute under which proof of the same facts will render the offender liable to a much greater penalty. It is to be noted that prosecutions under the Official Secrets Act 1911 cannot be instituted except by or with the consent of the Attorney General, but it does not follow that prosecutions for offences under the byelaws cannot be instituted by others. Such byelaws are commonplace.
Second, she raises points on procedural impropriety as to which I need say no more than to adopt the following passage of the judgment of his Honour Judge Lait in the court below as my own:
‘… it was submitted by the appellants [Miss Hutchinson and Miss Smith] that there had been insufficient time for consideration by the Secretary of State of objections to the proposed byelaws. Section 17 of the enabling Act provides, inter alia, that “A Secretary of State, before making any byelaws under this Act … shall receive and consider all objections made … ” The last date for receipt of objections, it is agreed, was 18 March 1985. The byelaws were made on 22 March 1985. The appellants expressed themselves as “astonished at such undue haste“. We consider that there was, albeit a short period, a none the less adequate period of time for consideration of objections … it was submitted by the appellants that the Secretary of State had not considered all the objections which had been made. In support of this submission they relied on the contents of a letter which was handed in to us. The letter is on Ministry of Defence notepaper from AM Boardman and is dated 25 March 1985. At the start of the body of the letter is typed the heading “Proposed Byelaws RAF Greenham Common“. It then continues: “Thank you for your letter dated 18 March 1985 addressed to the Secretary of State for Defence. The points you raise will be brought to the attention of the Secretary of State, who will consider them before he decides whether to make the byelaws. I have been asked however to respond to the matters you have raised.” The writer then goes on to refer to various matters. The point taken by the appellants is that, three days after the byelaws were made, this letter is stating that the points raised will be considered by the Secretary of State. Assuming that the objections in the letter were received in time, that is not later than 18 March, it is none the less our view that the highly probable explanation is that a letter dictated by AM Boardman was duly typed, and on the following Monday (as 25 March would have been) was then signed and dated. We are of that view because the letter is typed, but the addressee’s name is written in, as is the 25 March date, and as is the signature followed by “pp AM Boardman“. Suffice it to say that on the evidence of that letter we are very far from satisfied that the Secretary
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of State did not consider the matters raised by the person being written to before deciding to make the byelaws.’
I note that the heading of the letter refers to ‘proposed’ byelaws.
Third, Miss Hutchinson drew our attention to byelaw 1 of the 1985 byelaws, which provides:
‘(1) The area to which these byelaws apply consists of land … the boundary of which is marked by, and includes, the outer perimeter fence and gates of RAF Greenham Common … ’
She also drew our attention to s 194 of the Law of Property Act 1925, which reads:
‘(1) The erection of any building or fence … whereby access to land to which this section applies is prevented or impeded, shall not be lawful unless the consent of the Minister thereto is obtained …
(2) Where any building or fence is erected … without such consent as is required by this section, the county court within whose jurisdiction the land is situated, shall, on an application being made by the council of any county or district concerned, or by the lord of the manor or any other person interested in the common, have power to make an order for the removal of the work … ’
While there may be an argument for maintaining that fences and buildings erected at Greenham Common have been erected in contravention of s 194 of the 1925 Act, and I make no finding on this point, that would not affect in itself the validity of the byelaws. I note that no one has made application under s 194(2) for an order for the removal of the allegedly illegal erections which have been up for many years. It is to say the least doubtful whether such an order would now be made on the application of anyone let alone Miss Hutchinson: see A-G (ex rel Thornbury RDC) v Brock Bros Ltd [1972] CA Transcript 30.
In the light of the foregoing, in my judgment the magistrates’ court were right in convicting the ladies. The Crown Court, rightly in my judgment, concluded that the byelaws went beyond the powers of the enabling Act but no sustained argument was addressed to the Crown Court such as we have had over a number of days to the effect that it is possible to have a valid conviction under a byelaw, even if the byelaw is wider in its application than permitted by the enabling Act. In those circumstances, it is not surprising that the Crown Court came to the judgment to which it came.
The foregoing disposes of the Hutchinson (Greenham Common) case and of the commons side of the Parker (Fylingdales) case. There remains the question of byelaw 3(k) of the 1987 byelaws.
Counsel for Mr Parker and Miss Hayman submitted that the powers of the Secretary of State under s 14, in addition to the general byelaw-making power, are of two sorts: (a) a power vested in the Secretary of State directly to prohibit all intrusion on the land and all obstruction of the use of it (s 14(1)); and (b) a secondary or conditional power, where advantage is not being taken of the first power of blanket exclusion, to make provision in the byelaws to regulate public use of the land (s 14(2)). He submitted that byelaw 3(k) was ultra vires (a) because it purports to permit the exercise by others of a power which can only be exercised by the Secretary of State and (b) because the only point at which the Secretary of State can exercise it is at the time of making the byelaws, at which time the Secretary of State elected not to exercise it but instead to permit the public to use the land subject to provisions regulating its use.
In reply to this, counsel for the Secretary of State submitted that s 14(1) empowered the Secretary of State to make byelaws for two purposes, for regulating the use of the land for the purposes to which it is appropriated and for securing the public against dangers arising from that use, and in furtherance of either of those objectives it gives a very broad ‘power to prohibit all intrusion on the land and all obstruction of the use
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thereof’. He submitted that if, as the language used by Parliament states, byelaws may prohibit all intrusion then there is no reason why they should not empower an authorised person to direct persons to leave on pain of criminal sanctions for disobedience. There is nothing in s 14(1) to suggest that Parliament intended to confine the very broad powers conferred to the Secretary of State himself or to the time when he originally made the byelaws. In my judgment, counsel’s submission is manifestly correct.
Further, counsel for Mr Parker and Miss Hayman submitted that there was no limitation in the byelaw on the ground on which a direction to leave might be given. Thus it might be given (a) without any reason at all, (b) without any reason lying within the purposes of the statute, (c) therefore without the possibility of any subsequent examination of the validity of the direction and (d) without conveying the supposed reason to the person affected and therefore affording that person an opportunity to say why he or she should not be directed to leave the controlled area. He submitted that it followed that byelaw 3(k)(a) permits arbitrary, capricious or mistaken directions to cut down elementary civil rights on pain of criminal sanctions, (b) offends against elementary fairness by giving no opportunity to disabuse an official of whatever reason he may have for contemplating giving a direction to leave, (c) exceeds the purposes described by s 14(2) inasmuch as it allows on its face any exclusion for any purpose and (d) goes beyond the general law in restricting individual rights to an extent which is both intrinsically unreasonable and not fairly or reasonably related to the purpose either of the statute or of the byelaws themselves.
Counsel for the Secretary of State submitted as follows.
1. The military purpose for which the land is being used strongly suggests that Parliament intended to give a very broad discretion to the Secretary of State to decide what byelaws were appropriate. In the military context, it should not be assumed in the absence of express words that Parliament intended to confer power to make directions only if reasons were given and the person concerned is offered an opportunity to debate the matter. Parliament did not so confine the power because in the military context it considered that it might be appropriate to make byelaws requiring persons to leave after receiving a direction from an authorised person as a matter of urgency without debate. Parliament intended to give a broad discretion to the Secretary of State as to the removal of persons on the land in the special circumstances of dealing with land used for military purposes.
2. In so far as counsel for Mr Parker and Miss Hayman asserted that the broad scope of byelaw 3(k) allowed for arbitrary direction, counsel for the Secretary of State submitted that it was not the law that any delegated power is bad in law if its terms are sufficiently wide to allow as a matter of construction for arbitrary application. Judicial review would lie if there was an arbitrary exercise of the power. In any event, it was difficult to see the scope for arbitrariness in the context of the present case given that Mr Parker was where he was prohibited from going under byelaw 2 and where he had no right to be anyhow.
3. He relied on the general principle as stated in Kruse v Johnson [1898] 2 QB 91 at 99–100, [1895–9] All ER Rep 105 at 110: a court should be slow to find unreasonable a byelaw made by a public representative body.
For my part, I accept these submissions by counsel for the Secretary of State and do not find byelaw 3(k) to be invalid. I would therefore refuse any relief to Mr Parker, who asks the court to declare that byelaw 3(k) is ultra vires.
I turn, lastly, to the Hayman case. This case also concerns the Fylingdales byelaws. The applicant is not threatened with prosecution, still less has she been prosecuted. She does, however, regularly walk along a path known as Lyke Wake Walk, which runs along the northern boundary of the controlled area. A notice was put up stating ‘Walkers on the Lyke Wake Walk are not to leave the track’. She saw no reason for this notice and had some fear that some military policeman would inhibit her from walking along the public right of way. However, early in these proceedings the following was made clear on behalf of the Secretary of State: 1. with regard to the Lyke Wake Walk (i) it is accepted
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that the Lyke Wake Walk is a public right of way, (ii) it is accepted that by reason of byelaw 8 of the 1987 byelaws nothing in the byelaws affects the lawful exercise by any person of a public right of way, (iii) it is therefore accepted that nothing in or done under the byelaws prevents the applicant from exercising her lawful right to pass and repass along the Lyke Wake Walk. 2. With regard to the notice prohibiting access to the land to the north of Lyke Wake Walk (i) that notice has been removed, (ii) there is no other notice prohibiting access on foot to the land to the north of the Lyke Wake Walk (iii) the Secretary of State has no present intention to prohibit access on foot to the land to the north of Lyke Wake Walk.
In view of that statement, and its acceptance on behalf of Miss Hayman, the court indicated that we were not minded to make any declaration and so we heard no prolonged argument on the point.
MANN LJ. I agree.
Appeal in DPP v Hutchinson allowed. Case remitted to Crown Court with direction to dismiss appeals from conviction. Applications for judicial review refused. The court refused leave to appeal to the House of Lords but certified, under s 1(2) of the Administration of Justice Act 1960, that the following points of law of general public importance were involved in the decision: (1) whether, and if so in what circumstances, a person could lawfully be convicted of an offence against a byelaw when the byelaw on the face of it was wider in its field of application than was permitted by the empowering Act and yet, had the byelaw been drawn only as widely as the empowering Act authorised, the person convicted would undoubtedly have been rightly convicted; (2) whether, and if so in what circumstances, a person could be convicted of an offence against a byelaw when the byelaw-maker must have failed to take into account a relevant consideration, namely that he had no power to make a byelaw of the breadth of application which the relevant byelaws had.
27 February 1989. The Appeal Committee of the House of Lords gave leave to appeal.
Solicitors: Crown Prosecution Service; Hodge Jones & Allen (for Miss Smith); Paul Hunt (for the Mr Parker and Miss Hayman); Treasury Solicitor.
Dilys Tausz Barrister.
Department of the Environment v Thomas Bates & Son Ltd (New Towns Commission, third party)
[1989] 1 All ER 1075
Categories: TORTS; Negligence
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): O’CONNOR, NICHOLLS, TAYLOR LJJ
Hearing Date(s): 1, 2, 3, 24 NOVEMBER 1988
Negligence – Duty to take care – Economic loss – Building – Defect in building – Cost of repair – Building unfit for intended use – No imminent threat of physical injury to occupants – Remedial works required to render building fit for intended use – Whether builder liable for cost of repair.
The plaintiffs were the underlessees of an 11-storey office building constructed by the defendant builders in 1970 and 1971. For seven years the plaintiffs used the building without trouble but in 1981 and 1982, while other remedial works were being carried out by the plaintiffs, it was discovered that low strength concrete had been used by the defendants in pillars supporting the various floors of the building and, on expert advice, the plaintiffs carried out remedial work to strengthen nine pillars, which, although sufficient to support the existing load, were insufficient to support the design load. The plaintiffs were warned not to increase the loading of the building until the pillars were strengthened, but the weakness in the concrete did not give rise to any imminent danger to the health or safety of persons using the building provided the existing loading was not exceeded. After carrying out the remedial work to strengthen the pillars the plaintiffs claimed the cost of the work from the defendants. The judge accepted the need to strengthen eight of the pillars but dismissed the claim on the ground that the weakness of the concrete in the pillars was not physical damage which gave rise to imminent danger to the health or safety of either the plaintiffs’ employees or the public but a defect which restricted the plaintiffs’ full use of the building. The plaintiffs appealed, contending that an occupier was entitled to recover the cost of remedial work undertaken in order to avert imminent risk of physical injury to persons.
Held – A builder was not liable in tort for the cost of remedying defects in a building constructed by him if the defects did not pose an imminent threat of physical injury to the building’s occupants and the only purpose of the remedial works was to render the building fit for its intended use. Since on the judge’s findings of fact the remedial works had been carried out to restore the building to the full capacity for which the plaintiffs had bargained in taking their underlease and not to avert an otherwise inevitable danger, the appeal would be dismissed (see p 1085 b to d j, p 1086 d e h and p 1088 e g, post).
D & F Estates Ltd v Church Comrs for England [1988] 2 All ER 992 applied
Notes
For liability of builders and contractors, see 34 Halsbury’s Laws (4th edn) paras 31, 33.
For the duty of care and standard of care, see 34 ibid paras 5-12, and for cases on the subject, see 36(1) Digest (Reissue) 17–55, 34–177.
Cases referred to in judgments
Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728, [1977] 2 WLR 1024, HL.
Batty v Metropolitan Property Realizations Ltd [1978] 2 All ER 445, [1978] QB 554, [1978] 2 WLR 500, CA.
Bottomley v Bannister [1932] 1 KB 458, [1931] All ER Rep 99, CA.
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Bowen v Paramount Builders (Hamilton) Ltd [1977] 1 NZLR 394, NZ CA.
Clay v A J Crump & Sons Ltd [1963] 3 All ER 687, [1964] 1 QB 533, [1963] 3 WLR 866, CA.
Clayton v Woodman & Son (Builders) Ltd [1962] 2 All ER 33, [1962] 1 WLR 585, CA.
D & F Estates Ltd v Church Comrs for England [1988] 2 All ER 992, [1988] 3 WLR 368, HL.
Donoghue (or M’Alister) v Stevenson [1932] AC 562, [1932] All ER Rep 1, HL.
Dutton v Bognor Regis United Building Co Ltd [1972] 1 All ER 462, [1972] 1 QB 373, [1972] 2 WLR 299, CA.
Gallagher v N McDowell Ltd [1961] NI 26, NI CA.
Greater Nottingham Co-op Society Ltd v Cementation Piling and Foundations Ltd [1988] 2 All ER 971, [1988] 3 WLR 396, CA.
Hedley Byrne & Co v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465, [1963] 3 WLR 101, HL.
Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201, [1983] 1 AC 520, [1982] 3 WLR 477, HL.
Ketteman v Hansel Properties Ltd [1988] 1 All ER 38, [1987] AC 189, [1987] 2 WLR 312, HL; affg [1985] 1 All ER 352, [1984] 1 WLR 1274, CA.
London Congregational Union Inc v Harriss & Harriss (a firm) [1988] 1 All ER 15, CA.
Pirelli General Cable Works Ltd v Oscar Faber & Partners (a firm) [1983] 1 All ER 65, [1983] 2 AC 1, [1983] 2 WLR 6, HL.
Rivtow Marine Ltd v Washington Iron Works [1974] SCR 1189, Can SC.
Robbins v Jones (1863) 15 CBNS 221, [1861–73] All ER Rep 544, 143 ER 768.
Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 All ER 791, [1988] QB 758, [1988] 2 WLR 761, CA.
Sparham-Souter v Town and Country Developments (Essex) Ltd [1976] 2 All ER 65, [1976] QB 858, [1976] 2 WLR 493, CA.
Ultramares Corp v Touche (1931) 255 NY 170, NY Ct of Apps.
Voli v Inglewood Shire Council (1963) 110 CLR 74, Aust HC.
Cases also cited
Aswan Engineering Establishment Co v Lupdine Ltd (Thurgar Bolle Ltd, third party) [1987] 1 All ER 135, [1987] 1 WLR 1, CA.
Peabody Donation Fund (Governors) v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529, [1985] AC 210, HL.
Tozer Kemsley & Milbourn (Holdings) Ltd v J Jarvis & Sons Ltd (1983) 1 Const LJ 79.
Appeal
The plaintiffs, the Department of the Environment, appealed against that part of the order made on 28 April 1987 by his Honour Judge David Smout QC, hearing official referees’ business, whereby he ordered that the plaintiffs had no cause of action against the defendants, Thomas Bates & Son Ltd, for damages for repairs undertaken to strengthen supporting pillars in the tower block at Great Oaks House, Basildon, Essex. The defendants issued a respondent’s notice in which they contended that, if the plaintiffs did have a cause of action, it was statute-barred. The third party, the New Towns Commission (as successor to the Basildon Department Corp), took no part in the appeal. The facts are set out in the judgment of Taylor LJ.
John Laws and Michael Lerego for the plaintiffs.
David Hunt QC and Terence Mowschenson for the defendants.
Cur adv vult
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24 November 1988. The following judgments were delivered.
TAYLOR LJ (giving the first judgment at the invitation of O’Connor LJ). This case raises yet another variant of a vexed question: what is the liability of a builder in tort for economic loss? The plaintiffs are underlessees of parts of a building complex. They sued the defendants who built the complex alleging negligence. Two separate complaints were made. The first related to leakage through a defective flat roof; the second concerned weakness of the concrete used to construct supporting pillars. The action was tried by his Honour Judge David Smout QC as official referee. After a lengthy hearing, the judge gave his judgment on 26 January 1987. He found for the plaintiffs, although not to the full extent of their claim, in respect of the flat roof. There is no appeal against that part of his judgment. However, he found for the defendants in respect of the defective pillars, ruling that the plaintiffs had no cause of action. They now appeal against that finding. There is a cross-appeal by which the builders contend that, if the plaintiffs did have a cause of action, it was statute-barred.
The building complex is known as Great Oaks House at Basildon in Essex. The freeholder, Basildon Corporation, granted a lease to EMI Development Holdings Ltd (EMI). EMI engaged the defendants as builders, under a JCT contract, to contruct the building complex. This they did during 1970 and 1971. On 15 October 1971, prior to the completion of the works, EMI agreed to grant the plaintiffs an underlease of part of the complex. The plaintiffs went into occupation on 30 December 1971 in accordance with the terms of the underlease, which was for 42 years and was dated 6 March 1972. EMI’s reversion in the property, less a day, was acquired by the Church Commissioners on 14 April 1972. At the centre of the complex was a low-rise, two-storey building with a flat roof consisting of offices, a job centre and a supermarket with ancillary accommodation. One end of this low-rise building abuts on an eleven-storey tower block, the upper nine storeys of which comprise offices. There are other buildings in the complex not concerned in these proceedings. By their underlease the plaintiffs occupied parts of the low-rise building but the reversioner retained the main structure of the building including the roof. The plaintiffs also occupy the upper nine storeys of the tower block.
For over seven years, the plaintiffs occupied and used the premises without trouble. But in March 1979 water began to drip through the ceiling of the job centre from the flat roof. Leakages continued in 1980 and 1981. Alternative accommodation for the plaintiffs’ staff had to be found. Eventually, remedial work was done between September 1981 and August 1982. In 1982 and 1983 there was litigation about these matters. The cases were settled, but in the present proceedings the plaintiffs sought to recover from the defendants what they had paid towards the remedial works, together with the costs of the alternative accommodation. The judge found that the condition of the roof—
‘presented imminent danger to the health of the plaintiffs’ employees and was likely if not remedied to cause further damage to the plaintiffs’ premises.’
After reviewing the authorities the judge held that the plaintiffs were entitled to recover the cost of remedying the defects of the roof, ie averting the danger, but they were not entitled to recover any other loss, eg the cost of alternative accommodation.
I turn now to the defective pillars, the subject of the finding under appeal. While the defective roof was being remedied it was discovered that some of the concrete beams there were soft. This led to a wider investigation which revealed that low strength concrete had been used by the defendants in pillars supporting the various floors in the eleven-storey tower block. The plaintiffs’ expert concluded that nine of those pillars, while sufficient to support the existing load, were insufficient to support the design load. Accordingly in 1985, on his advice, the pillars were strengthened. Again, the plaintiffs sought to recover in tort from the defendant builders what they had paid in respect of the remedial works in accordance with their underlease. Although the judge accepted the need to strengthen eight of the nine pillars, he held that the plaintiffs had no cause of action against the defendant builders. It will be necessary to examine closely his findings
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of fact and the reasons for his decision. First, however, it is convenient to consider the law presently applicable in this field.
The problems facing the courts have been threefold. Firstly, liability in tort for negligence on the principles of Donoghue (or M’Alister) v Stevenson [1932] AC 562, [1932] All ER Rep 1 required proof of physical injury to persons or their property. How, if at all, can such liability attach in respect of a defective building which has not yet caused injury to persons or damaged other property? Secondly, if such liability can exist, what is its touchstone, short of equating tortious liability to a breach of warranty of fitness appropriate only in contract? Thirdly, what damages are to be recoverable having regard to the courts’ reluctance to allow claims for pure economic loss which might lead, in the words of Cardozo CJ in Ultramares Corp v Touche (1931) 255 NY 170 at 179—
‘to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.’
Counsel on both sides have helpfully referred to the relevant authorities, English Commonwealth and American. They begin with Dutton v Bognor Regis United Building Co Ltd [1972] 1 All ER 462, [1972] 1 QB 373 in which, for the first time, Donoghue (or M’Alister) v Stevenson was applied to real property. There followed a long series of cases, including the landmark decision of the House of Lords in Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728 and culminating in the most recent House of Lords authority, D & Estates Ltd v Church Comrs for England [1988] 2 All ER 992, [1988] 3 WLR 368. I propose to refer only to those two decisions of the House of Lords, since the authorities cited by counsel were fully reviewed and considered in the latter case by Lord Bridge and Lord Oliver.
Anns v Merton London Borough was a case in which the foundations of a block of maisonettes were too shallow, so that some eight years after they were built, structural damage was caused. The appellant council was alleged to have passed the plans negligently and in breach of building byelaws made under statute and to have failed to make proper inspections. The case was argued on a preliminary issue as to whether on assumed facts any action lay against the council and if so whether it was statute-barred. The case did not therefore directly concern the tortious liability of the builder. However Lord Wilberforce said ([1977] 2 All ER 492 at 504–505, [1978] AC 728 at 758–760):
‘The position of the builder. I agree with the majority in the Court of Appeal in thinking that it would be unreasonable to impose liability in respect of defective foundations on the council, if the builder, whose primary fault it was, should be immune from liability. So it is necessary to consider this point, although it does not directly arise in the present appeal. If there was at one time a supposed rule that the doctrine of Donoghue v Stevenson did not apply to realty, there is no doubt under modern authority that a builder of defective premises may be liable in negligence to persons who thereby suffer injury: see Gallagher v N McDowell Ltd [1961] NI 26, per Lord MacDermott CJ, a case of personal injury. Similar decisions have been given in regard to architects (Clayton v Woodman & Son (Builders) Ltd [1962] 2 All ER 33, [1962] 1 WLR 585, Clay v A J Crump & Sons Ltd [1963] 3 All ER 687, [1964] 1 QB 533. Gallagher’s case expressly leaves open the question whether the immunity against action of builder-owners, establish by older authorities (eg Bottomley v Bannister [1932] 1 KB 458, [1931] All ER Rep 99) still survives. That immunity, as I understand it, rests partly on a distinction being made between chattels and real property, partly on the principle of “caveat emptor” or, in the case where the owner leases the property, on the proposition that (fraud apart) there is no law against letting a “tumbledown house” (Robbins v Jones (1863) 15 CBNS 221 at 240, [1861–73] All ER Rep 544 at 547, per Erle CJ). But leaving aside such cases as arise between contracting parties, when the terms of the contract have to be considered (see Voli v Inglewood Shire Council (1963) 110 CLR 74 at 85, per Windeyer J), I am unable to
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understand why this principle or proposition should prevent recovery in a suitable case by a person, who has subsequently acquired the house, on the principle of Donoghue v Stevenson: the same rules should apply to all careless acts of a builder: whether he happens also to own the land or not. I agree generally with the conclusions of Lord Denning MR on this point (Dutton’s case [1972] 1 All ER 462 at 471–472, [1972] 1 QB 373 at 392–394). In the alternative, since it is the duty of the builder (owner or not) to comply with the byelaws, I would be of opinion that an action could be brought against him, in effect, for breach of statutory duty by any person for whose benefit or protection the byelaw was made. So I do not think that there is any basis here for arguing from a supposed immunity of the builder to immunity of the council.
Nature of the damages recoverable and arising out of the cause of action. There are many questions here which do not directly arise at this stage and which may never arise if the actions are tried. But some conclusions are necessary if we are to deal with the issue as to limitation. The damages recoverable include all those which foreseeably arise from the breach of the duty of care which, as regards the council, I have held to be a duty to take reasonable care to secure compliance with the byelaws. Subject always to adequate proof of causation, these damages may include damages for personal injury and damage to property. In my opinion they may also include damage to the dwelling-house itself; for the whole purpose of the byelaws in requiring foundations to be of certain standard is to prevent damage arising from weakness of the foundations which is certain to endanger the health or safety of occupants. To allow recovery for such damage to the house follows, in my opinion, from normal principle. If classification is required, the relevant damage is in my opinion material, physical damage, and what is recoverable is the amount of expenditure necessary to restore the dwelling to a condition in which it is no longer a danger to the health or safety of persons occupying and possibly (depending on the circumstances) expenses arising from necessary displacement. On the question of damages generally I have derived much assistance from the judgment (dissenting on this point, but of strong persuasive force) of Laskin J in the Canadian Supreme Court case of Rivtow Marine Ltd v Washington Iron Works [1974] SCR 1189 at 1220–1222 and from the judgments of the New Zealand Court of Appeal (furnished by courtesy of that court) in Bowen v Paramount Builders (Hamilton) Ltd [1977] 1 NZLR 394.
When does the cause of action arise? We can leave aside cases of personal injury or damage to other property as presenting no difficulty. It is only the damage for the house which required consideration. In my respectful opinion the Court of Appeal was right when, in Sparham-Souter v Town and Country Developments (Essex) Ltd [1976] 2 All ER 65, [1976] QB 858, it abjured the view that the cause of action arose immediately on delivery, ie conveyance of the defective house. It can only arise when the state of the building is such that there is present or imminent danger to the health or safety of persons occupying it. We are not concerned at this stage with any issue relating to remedial action nor are we called on to decide on what the measure of the damages should be; such questions, possibly very difficult in some cases, will be for the court to decide. It is sufficient to say that a cause of action arises at the point I have indicated.’
In D & F Estates Ltd v Church Comrs for England the third defendants, a building company, were the main contractors for the construction of a block of flats owned by the first defendant. The builders engaged a sub-contractor for the plasterwork reasonably believing him to be skilled and competent. In fact the sub-contractor carried out the work negligently. The plaintiffs were the lessees and occupiers of a flat in the block. Some 15 years after the flats were built and again some three years later, the plaintiffs found that plaster in their flat was loose. They brought an action against, inter alia, the
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builders claiming the cost of remedial work already done and the estimated cost of future remedial work. The plaintiffs succeeded at first instance, but the Court of Appeal reversed the decision on two grounds. Firstly, the builders owed no further duty of care to the plaintiffs having employed a competent sub-contractor; and secondly, the cost of replacing the defective plaster was not recoverable in tort because it was pure economic loss. The House of Lords unanimously upheld that decision on both grounds. It is necessary to refer in some detail to the speeches of Lord Bridge and Lord Oliver with which all their Lordships agreed. After considering the provisions of the Defective Premises Act 1972, which was based on the recommendations of a Law Commission report on Civil Liability of Vendors and Lessors for Defective Premises (Law Com no 40), Lord Bridge reviewed the authorities prior to Anns’s case. He then set out the passage from Lord Wilberforce’s speech, quoted above, with which Lord Diplock, Lord Simon and Lord Russell had agreed. He said ([1988] 2 All ER 992 at 1002, [1988] 3 WLR 368 at 380–381):
‘It is particularly to be noted that Lord Wilberforce founded his view of the builder’s liability on the alternative grounds of negligence and breach of statutory duty and that his opinion as to the nature of the damages recoverable is strictly applicable to the liability of the local authority, and perhaps also to the liability of the builder for breach of duty under the byelaws, but is obiter in relation to the builder’s liability for the common law tort of negligence. It is, moreover, difficult to understand how a builder’s liability, whatever its scope, in respect of a dangerous defect in a building can arise only when there is imminent danger to the health and safety of occupiers. In any event, the last sentence in the passage quoted leaves open the critical question as to the measure of damages in relation to remedial action.’
Lord Bridge went on to consider later authorities and summarised the principles applicable first to chattels and then to real property as follows ([1988] 2 All ER 992 at 1006, [1988] 3 WLR 368 at 385–386):
‘… if the hidden defect is discovered before any such damage is caused, there is no longer any room for the application of the Donoghue v Stevenson principle. The chattel is now defective in quality, but is no longer dangerous. It may be valueless or it may be capable of economic repair. In either case the economic loss is recoverable in contract by a buyer or hirer of the chattel entitled to the benefit of a relevant warranty of quality, but is not recoverable in tort by a remote buyer or hirer of the chattel. If the same principle applies in the field of real property to the liability of the builder of a permanent structure which is dangerously defective, that liability can only arise if the defect remains hidden until the defective structure causes personal injury or damage to property other than the structure itself. If the defect is discovered before any damage is done, the loss sustained by the owner of the structure, who has to repair or demolish it to avoid a potential source of danger to third parties, would seem to be purely economic. Thus, if I acquire a property with a dangerously defective garden wall which is attributable to the bad workmanship of the original builder, it is difficult to see any basis in principle on which I can sustain an action in tort against the builder for the cost of either repairing or demolishing the wall. No physical damage has been caused. All that has happened is that the defect in the wall has been discovered in time to prevent damage occurring. I do not find it necessary for the purpose of deciding the present appeal to express any concluded view as to how far, if at all, the ratio decidendi of Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728 involves a departure from this principle establishing a new cause of action in negligence against a builder when the only damage alleged to have been suffered by the plaintiff is the discovery of a defect in the very structure which the builder erected.’
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Lord Bridge then considered the argument that in a complex structure, a defect in one part causing damage in another might be said to have caused damage to ‘other property’, but he held that could not apply to the defective plaster on the ceiling in that case. The relevant part of the speech concluded with these words ([1988] 2 All ER 992 at 1007, [1988] 3 WLR 368 at 386–387):
‘It seems to me clear that the cost of replacing the defective plaster itself, either as carried out in 1980 or as intended to be carried out in future, was not an item of damage for which the builder of Chelwood House could possibly be made liable in negligence under the principle of Donoghue v Stevenson or any legitimate development of that principle. To make him so liable would be to impose on him for the benefit of those with whom he had no contractual relationship the obligation of one who warranted the quality of the plaster as regards materials, workmanship and fitness for purpose. I am glad to reach the conclusion that this is not the law, if only for the reason that a conclusion to the opposite effect would mean that the courts, in developing the common law, had gone much further than the legislature were prepared to go in 1972, after comprehensive examination of the subject by the Law Commission, in making builders liable for defects in the quality of their work to all who subsequently acquire interests in buildings they have erected. The statutory duty imposed by the 1972 Act was confined to dwelling houses and limited to defects appearing within six years. The common law duty, if it existed, could not be so confined or so limited. I cannot help feeling that consumer protection is an area of law where legislation is much better left to the legislators.’
Lord Oliver began with the quoted passage from Lord Wilberforce’s speech in Anns’s case from which he distilled a number of points. He continued ([1988] 2 All ER 992 at 1010, [1988] 3 WLR 368 at 390):
‘These propositions involve a number of entirely novel concepts. In the first place, in no other context has it previously been suggested that a cause of action in tort arises in English law for the defective manufacture of an article which causes no injury other than injury to the defective article itself.’
Lord Oliver drew attention to a number of anomalies arising from these propositions, pointing out more than once that they involved an entirely new concept of the law of negligence in relation to building cases. He said ([1988] 2 All ER 992 at 1011–1012, [1988] 3 WLR 368 at 392):
‘Moreover, it is, I think now entirely clear that the vendor of a defective building who is also the builder enjoys no immunity from the ordinary consequences of his negligence in the course of constructing the building, but beyond this and so far as the case was concerned with the extent of or limitations on his liability for common law negligence divorced from statutory duty, Lord Wilberforce’s observations were, I think, strictly obiter. My Lords, so far as they concern such liability in respect of damage which has actually been caused by the defective structure other than by direct physical damage to persons or to other property, I am bound to say that, with the greatest respect to their source, I find them difficult to reconcile with any conventional analysis of the underlying basis of liability in tort for negligence. A cause of action in negligence at common law which arises only when the sole damage is the mere existing of the defect giving rise to the possibility of damage in the future, which crystallises only when that damage is imminent, and the damages for which are measured, not by the full amount of the loss attributable to the defect but by the cost of remedying it only to the extent necessary to avert a risk of physical injury, is a novel concept … For my part, therefore, I think the correct analysis, in principle, to be simply that, in a case where no question of breach of statutory duty arises, the builder of a house or other structure is liable at common
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law for negligence only where actual damage, either to a person or to property, results from carelessness on his part in the course of construction.’
Lord Oliver concluded ([1988] 2 All ER 992 at 1014, [1988] 3 WLR 368 at 395):
‘My Lords, I have to confess that the underlying logical basis for and the boundaries of the doctrine emerging from Anns v Merton London Borough are not entirely clear to me and it is in any event unnecessary for the purposes of the instant appeal to attempt a definitive exposition. This much at least seems clear: that in so far as the case is authority for the proposition that a builder responsible for the construction of the building is liable in tort at common law for damage occurring through his negligence to the very thing which he had constructed, such liability is limited directly to cases where the defect is one which threatens the health or safety of occupants or of third parties and (possibly) other property. In such a case, however, the damages recoverable are limited to expenses necessarily incurred in averting that danger.’
In summary, the effect of their Lordships’ speeches in the D & F Estates case can be stated thus: (1) the propositions as to the tortious liability of a builder contained in Lord Wilberforce’s speech represent a departure from the established principles of the law of tort; (2) they were obiter; (3) (per Lord Oliver) in so far as they are authoritative, such liability is limited directly to the cost of averting danger where the defect in the building imminently threatens the health or safety of occupants or of third parties and (possibly) other property.
I now return to the judge’s findings of fact which he set out very clearly in his judgment. He heard evidence from experts from both sides; Mr Heggie for the plaintiffs and Mr Ham for the defendants. He quoted two paragraphs from Mr Heggie’s report as follows:
‘6.02. Although this structure shows no signs of distress in the critically loaded members, the compressive failure mode of a reinforced concrete column is sudden and not progressive. No noticeable increasing deformation would be expected as a failure approached. It is clear that existing factors of safety in the eight members noted above are much lower than those provided in any properly designed structure. As a result the probability of collapse is at an unacceptable level. 6.03. Since the situation has persisted for a number of years, we do not consider evacuation to be essential. It is important that alterations in internal layout are minimized and any potential build-up of loading prevented (eg, new filing room). Remedial works should be carried out as soon as practicable so that the building can be used without restriction and its occupants can enjoy the level of safety normally expected.’
The judge then commented as follows:
‘Taking the evidence as a whole I do not accept, nor do I think Heggie intended to convey, that the probability of collapse was at an unacceptable level on the actual loading then imposed on the tower block. Nor do I accept that the occupants had not at all times enjoyed a satisfactory level of safety. Had it been otherwise Heggie would have ordered immediate evacuation. But it was Heggie’s view that in due course danger would arise if, as might be expected in an office building, the actual load were to increase over the years and were to approach the design load. That view was challenged by Ham and must be examined.’
He then considered the rival arguments and, for the reasons given by Mr Heggie, accepted the need to strengthen all eight pillars. He summarised his findings of fact as follows:
‘(1) Until late 1982 or thereabouts, the plaintiff had no knowledge of any need for any limitation on use of the tower block. Until that time the plaintiff had used
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the tower block as freely as it wished but had not in fact loaded to design capacity. (2) In or about late 1982 the plaintiff was warned by the consultants not to increase the then loading on the tower block. The warning was heeded. No other restriction was placed on its use. (3) The offices in the tower block included that of the Department of Health and Social Security to which the public had regular access. (4) At no time did the weakness of the concrete in the pillars of the tower block give rise to imminent danger to health or safety of either the plaintiff’s employees or of the public. However, had the tower block been loaded to design capacity at any time prior to strengthening of the pillars in January 1985 imminent danger would have resulted. (5) There is no evidence that there was at any time cracking of the tower block occasioned by the weakness of the concrete. (6) The strengthening of the pillars by the plaintiff was not with the intention of averting imminent danger to health or safety for it was recognised that there was no such imminent danger. The purpose was to cure a defect which otherwise prevented the plaintiff from making full use of the building to the extent for which it was designed.’
On these findings there was in the judge’s words ‘no injury threatened by the mere use of the tower block: rather there was a restriction on the full extent of future use’. The judge did not have the advantage of reading the decision in the D & F Estates case which was given 18 months later. He relied, in rejecting the plaintiffs’ claim, on the decision of the House of Lords in Pirelli General Cable Works Ltd v Oscar Faber & Partners (a firm) [1983] 1 All ER 65, [1983] 2 AC 1. The issue in that case was when a cause of action arose in tort against engineers in respect of a defective building. A factory chimney had been lined with unsuitable material when built in 1969. Cracks developed by April 1970. The plaintiff occupiers could not have discovered the damage until October 1972 and did not do so until November 1977. Extensive remedial work was carried out. In October 1978, the plaintiffs issued their writ against the defendant engineers who had designed the chimney. It was held that the cause of action in tort arose when the damage came into existence, not when it was discovered or ought to have been discovered. The claim was therefore barred. In the present case the judge relied on the Pirelli case as showing that the cause of action was only complete when physical damage occurred, not when the defect causing the damage (ie the use of the unsuitable lining) occurred or was discovered. He said:
‘In the instant case the constitution of the concrete was likewise the defect: no cracks occurred because on discovery of the defect sensible precautions were taken to ensure that the concrete was not loaded beyond its bearing capacity. The subsequent remedial work has enabled the concrete pillars to be reconstructed so as to be capable of bearing the intended load as designed. There has thus been no physical damage in the sense of cracks of any significance at any time. Nor has there been any other form of physical damage. The weak concrete was not physical damage, that was the defect. The discovery of the defect cannot convert the defect into physical damage for physical damage is objective not subjective.’
Anticipating the decision of the House of Lords in the D & F Estates case, the judge referred to a dictum of Ralph Gibson LJ in London Congregation Union Inc v Harriss & Harriss (a firm) [1988] 1 All ER 15. That case also concerned limitation and the court again drew a distinction between a defect and resultant physical damage, only the latter of which gave a cause of action. Ralph Gibson LJ said (at 24):
‘For my part, I am not impressed by the prophecy of unjust denial of relief to plaintiffs who have discovered a negligent defect but are not entitled to relief in contract and are faced by the prospect of physical damage which has not yet been caused but is likely to result from the defect. Firstly, of course, the concept of negligence is not intended to afford to owners of buildings rights equivalent to contractual rights. Justice does not require that a defendant pay damages in tort for
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a defect in design which, in Lord Fraser’s words, “may never lead to any damage at all to the building” (see the Pirelli case [1983] 1 All ER 65 at 70, [1983] 2 AC 1 at 16). Secondly, if a negligent defect is discovered and the building owner can prove an immediate duty or clear need, in protection of himself or of others or of the building, to carry out repairs to remove the defect so as to avoid physical damage which is shown to be impending, ie likely to occur in the immediate future, it seems to me that the law would accept such a situation as proof of damage … ’
The judge considered that the second of these observations was irreconcilable with the ratio of the Pirelli case. This conflict is essentially the same as that with which the House of Lords wrestled in the D & F Estates case when considering the impact of Anns’s case on the established principles of the law of negligence.
Counsel for the plaintiffs submits that the judge was wrong to regard this case as governed by the Pirelli case, a limitation case not specifically concerned with the problem of a present defect and only anticipated damage. He submits that an occupier can recover against a negligent builder in tort the cost of remedial work undertaken in advance of any physical damage to the building in order to avert imminent risk of physical injury to persons. That proposition is, he says, supported by the dictum of Ralph Gibson LJ in the London Congregational Union case, by Anns’s case and by the dissenting speech of Lord Brandon in Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201 at 215–218, [1983] 1 AC 520 at 549–552, approved in D & F Estates. It is even supported he submits by Lord Oliver in D & F Estates itself, although, as already demonstrated, that support might be described as at most lukewarm. Even assuming counsel’s proposition is right and supported by authority, however, the question remains as to whether, on the judge’s findings, the plaintiffs can succeed here. Crucially, the question is whether the remedial works were ‘to avert imminent risk of physical injury to persons’. The judge found that there had been no danger. Danger would have arisen only if the loading in the tower block had increased towards the design load. Once the warning was given there was no question of that happening. So, the remedial works were not to avert imminent danger; they were to enable the building to be used to the full extent of the design load.
Counsel for the plaintiffs says this was to avert imminent danger because (a) the word ‘imminent’ should not be interpreted too restrictively as to time and (b) there would be danger if the building were to be used as it was intended or might be expected to be used.
As to (a) he submitted that ‘imminent’ means no more in this context than soon. The danger does not have to be immediate. In support of this, he cited a passage from the judgment of Lawton LJ in Ketteman v Hansel Properties Ltd [1985] 1 All ER 352 at 364–365, [1984] 1 WLR 1274 at 1290. That was a case in which faulty foundations caused cracks in the walls of five houses. In an action against the builders, the local authority and the architects, the test of ‘imminent danger to health and safety of the plaintiffs’ derived from Anns was applied. Lawton LJ said:
‘An absurd situation, said counsel for the plaintiffs, would arise if the occupiers of a building which was structurally unsound due to a local authority’s negligence and which was likely to become a danger to health or safety unless remedial action were taken had to wait until it was about to collapse before his right of action against the local authority was accrued. Counsel for the second defendants submitted that the occupier did have to wait until there was a present or imminent danger to health or safety because that is what Lord Wilberforce had said … Having regard to the absurdity to which counsel for the plaintiffs invited our attention, it seems to me that Lord Wilberforce’s use of the word “imminent” should be understood to mean a danger which was likely to arise soon, and how long soon was in any case would depend on the facts and would be a matter of degree … Having regard to the nature and extent of the cracks and the likelihood that the damage would be progressive, I
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would adjudge that there was an imminent danger to the safety of the occupiers of all five houses.’
In that case there was no doubt that damage was going to occur at some stage unless remedial underpinning was done. Here, once the weakness was detected in the eight pillars and warning was given, the danger was eliminated. It was not going to occur immediately, soon or at all.
As to (b), the building could continue to be used as it had been in safety providing the load was not increased. The remedial works were done, therefore, not to avert otherwise inevitable danger, but to restore to the plaintiffs the full capacity of the building for which they bargained by their underlease. To allow recovery in tort if defective building makes remedial work necessary to avoid injury, but not if it is necessary only to render the building fit for its intended use, may seem a dismal distinction to an aggrieved occupier. But it is a necessary distinction if, as at present, the law declines to allow an action in tort equivalent to the enforcement in contract of a warranty of fitness.
In my judgment therefore, on the facts of this case, counsel for the plaintiffs is unable to bring his claim within the proposition on which he relies. For these reasons, which differ slightly from those of the trial judge, I would agree with him that the plaintiffs have failed to establish a cause of action in tort against the defendants.
Counsel for the defendants, to whose lucid argument I pay tribute, submitted in support of his cross-appeal that even if there were a cause of action it was statute-barred. In view of the conclusion I have reached on the main issue, it is unnecessary to consider this issue raised by the defendants’ notice. I would dismiss this appeal.
NICHOLLS LJ. This appeal is concerned with an area of the law which is currently in a state of considerable uncertainty. In D & F Estates Ltd v Church Comrs for England [1988] 2 All ER 992 at 1002, 1011, [1988] 3 WLR 368 at 380, 392 both Lord Bridge and Lord Oliver noted that the observations made in Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728 regarding the liability of the builder for the common law tort of negligence were obiter. Both of them evinced concern, for reasons stated by them and which I would respectfully echo, regarding the rationale and ambit of this head of liability. Neither of them, however, expressed any concluded view. Furthermore both Lord Bridge and Lord Oliver doubted the correctness of the decision of this court in Batty v Metropolitan Property Realizations Ltd [1978] 2 All ER 445, [1978] QB 554 so far as it related to the liability of the builder (see [1988] 2 All ER 992 at 1002, 1006, 1014, [1988] 3 WLR 368 at 381, 386, 395). The House of Lords, however, did not overrule that decision.
For my part I have difficulty in distinguishing the present case from Batty’s case. There, the builder’s negligence consisted of failing to appreciate the unsuitability of the site. At the time the action was heard the house, as distinct from the garden, had not yet suffered any physical damage such as cracking. Likewise in the present case, no physical damage was sustained by the building as a result of the defectively-prepared cement used in the structural pillars. If, therefore, Batty’s case was wrongly decided as to the builder, and the builder was under no liability in negligence in that case even though the house was doomed, it must surely follow that the builders were under no liability in negligence in the present case. I cannot see that the different form which the builders’ negligence took in the two cases represents an acceptable ground of distinction.
In my view, however, this court is not required to decide what is the present status of the decision in Batty’s case, for the following reason. Let it be assumed, in favour of the plaintiffs in the present action, that Batty’s case was correctly decided against the builder. Even so, in order to succeed the plaintiffs must, at the very least, show that the weakness in the concrete threatened the safety of occupants or uses of the building. That is a question of fact. On that question the judge found that at no time did the weakness of the pillars give rise to ‘imminent danger’ to the health or safety either of the plaintiffs’ employees or of the public. The occupants at all times enjoyed a satisfactory level of
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safety. He also found that the plaintiffs’ purpose in strengthening the pillars early in 1985 was to cure a defect which otherwise prevented the plaintiffs from making use of the building to the full extent for which it was designed.
In my view the effect of these findings is tolerably clear. Those who used the building were never in danger. Nor would users have been in danger if the existing manner of use of the tower block had continued without any strengthening of the pillars. Danger would have arisen if, but only if, the loading of the building had been increased up to its design capacity. If there were any doubt that this is what the judge meant, the doubt would be removed by a later passage in his judgment where the judge said that ‘there was no injury threatened by the mere use of the tower block: rather there was a restriction on the full extent of future use’.
In fact, as the judge also found, the plaintiffs always enjoyed substantial and effective use of the tower block after taking occupation in 1972. Precisely what were the activities likely to be undertaken in this office block in the future which could not have been pursued safely without strengthening of the pillars was not a matter explored by the judge, beyond a reference by him to a passage in the report of Mr Heggie, the plaintiffs’ expert, which mentions the ‘build-up of loading … (eg) new filing room)’. Given the extent to which the plaintiffs enjoyed and, more importantly, could have continued to enjoy this office block without danger, I do not think that the defective pillars can be said to have given rise to a danger, imminent or otherwise, to the safety of the occupants. True, the pillars could not safely support the design load. But the claim in this action against the contractors is in negligence, not in contract. If, despite inability to support the design load, the building was fit for the purpose for which it would normally be used, viz as offices, then the claim in negligence must fail. In my view the judge’s findings of fact are fatal to the plaintiffs’ claim. Apart from any other difficulties confronting the plaintiffs in this action, their claim must fail on this narrow point.
I add only one further comment. One of the arguments advanced by counsel for the defendants concerned limitation. He submitted that if the plaintiffs had a cause of action in this case it arose when the building was handed over, in which event the plaintiffs’ claim was time-barred long before the writ was issued in October 1982. He pointed out that there was no physical damage to the building. He submitted that the cause of action could not have accrued when the plaintiffs discovered the defect, because that would be contrary to the decision in Pirelli General Cable Works Ltd v Oscar Faber & Partners (a firm) [1983] 1 All ER 65, [1983] 2 AC 1. Nor, he further submitted, could the cause of action have accrued when the plaintiffs incurred expenditure in remedying the defect in the pillars, because that would enable a plaintiff to postpone the actual accrual of the cause of action until such time as he might choose to carry out remedial works. This conundrum does not need to be solved on this appeal; but it is another difficulty which will need to be faced when the correctness of the decision in Batty’s case as against the builder falls to be decided.
O’CONNOR LJ. I have had the advantage of reading the judgment prepared by Taylor LJ and I agree that this appeal should be dismissed for the reasons given by him. I add a few words of my own out of deference to the arguments addressed to us by counsel for the plaintiffs.
The facts have been set out in the judgment of Taylor LJ and I need not repeat them.
There is a formidable body of judicial opinion that no cause of action in tort arises against a party as a result of whose negligence a latent defect is present in a building, unless and until the building suffers some physical damage. As I pointed out in London Congregational Union Inc v Harris & Harris (a firm) [1988] All ER 15 at 35–37, numerous attempts have been made to produce a cause of action before damage founding on the speech of Lord Fraser in Pirelli General Cable Works v Oscar Faber & Partners (a firm) [1983] All ER 65 at 70, [1983] 2 AC 1 at 16:
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‘There may perhaps be cases where the defect is so gross that the building is doomed from the start, and where the owner’s cause of action will accrue as soon as it is built, but it seems unlikely that such a defect would not be discovered within the limitation period. Such cases, if they exist, would be exceptional.’
In Ketteman v Hansel Properties Ltd [1988] 1 All ER 38 at 50–51, [1987] AC 189 at 205–206 Lord Keith finally disposed of the doomed from the start argument. He said:
‘The architects’ presentation of this argument involved two aspects. In the first place it was maintained that the plaintiffs’ respective causes of action accrued, not when the physical damage to their houses occurred, but when they became owners of houses with defective foundations. It was argued that they then suffered economic loss because the houses were less valuable than they would have been if the foundations had been sound. The proposition that a cause of action in tort accrued out of negligence resulting in pure economic loss was sought to be vouched by reference to Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201, [1983] 1 AC 520. That case was also cited in the Pirelli case [1983] 1 All ER 65, [1983] 2 AC 1 in support of the argument that, since in that case there was economic loss when the chimney was built, the cause of action arose then. The argument was clearly rejected in the speech of Lord Fraser concurred in by all the others of their Lordships who participated in the decision. He expressed the opinion that a latent defect in a building does not give rise to a cause of action until damage occurs (see [1983] 1 All ER 65 at 70, [1983] 2 AC 1 at 16). In the present case, there can be no doubt that the defects in the houses were latent. No one knew of their existence until damage occurred in the summer of 1976. This branch of the argument for the architects is, in my opinion, inconsistent with the decision of the Pirelli case, and must be rejected. In the second branch of the argument it was maintained that a distinction fell to be drawn between the case where the defect in a building was such that the damage must inevitably eventuate at some time and the case of a defect such that damage might or might not eventuate. The former case was that of a building ‘doomed from the start’ such as was in the contemplation of Lord Fraser, when he made reference to that concept in his dicta in the Pirelli case. In the present case the houses were doomed from the start because the event showed that damage was bound to occur eventually. My Lords, whatever Lord Fraser may have had in mind in uttering the dicta in question, it cannot, in my opinion, have been a building with a latent defect which must eventually result in damage at some stage. That is precisely the kind of building that the Pirelli case was concerned with, and in relation to which it was held that the cause of action accrued when the damage occurred. This case is indistinguishable from the Pirelli case and must be decided similarly. The second branch of the architects’ argument fails. I understand that all your Lordships agree.’
Alongside this line of authority there has been a stream of authority where attempts have been made to recover economic loss arising from negligence in the construction of a building: Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 All ER 791, [1988] QB 758, Greater Nottingham Co-op Society Ltd v Cementation Piling and Foundations Ltd [1988] 2 All ER 971, [1988] 3 WLR 396 and finally D & F Estates Ltd v Church Comrs for England [1988] 2 All ER 992, [1988] 3 WLR 368 in the House of Lords.
Counsel for the plaintiffs attempted a Houdini escape from the chains by which they were bound. Armed with the approval given to it by Lord Bridge in the D & F Estates case he turned to two passages in the speech of Lord Brandon in Junior Books Ltd v Veitch Co Ltd [1982] 3 All ER 201 at 216–218, [1983] 1 AC 520 at 550–551:
‘My Lords, a good deal of the argument presented to your Lordships during the hearing of the appeal was directed to the question whether a person can recover, in an action founded on delict alone, purely pecuniary loss which is independent of
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any physical damage to persons or their property. If that were the question to be decided in the present case, I should have no hesitation in holding that, in principle and depending on the facts of a particular case, purely pecuniary loss may be recoverable in an action founded on delict alone. Two examples can be given of such case. First, there is the type of a case where a person suffers purely pecuniary loss as a result of relying on another person’s negligent misstatements: see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465. Second, there may be a type of case where a person who has a cause of action based on Donoghue v Stevenson, reasonably incurs pecuniary loss in order to prevent or mitigate imminent danger of damage to the persons or property exposed to that danger: see the dissenting judgment of Laskin J in the Canadian Supreme Court case of Rivtow Marine Ltd v Washington Iron Works [1974] SCR 1189, referred to with approval in the speech of Lord Wilberforce in Anns v Merton London Borough [1977] 2 All ER 492 at 505, [1978] AC 728 at 760 … The first consideration is that, in Donoghue v Stevenson itself and in all the numerous cases in which the principle of that decision has been applied to different but analogous factual situations, it has always been either stated expressly, or taken for granted, that an essential ingredient in the cause of action relied on was the existence of danger, or the threat of danger, of physical damage to persons or their property, excluding for this purpose the very piece of property from the defective condition of which such danger, or threat of danger, arises. To dispense with that essential ingredient in a cause of action of the kind concerned in the present case would, in my view, involve a radical departure from long-established authority.’
Counsel for the plaintiffs submitted that as soon as the defect in the pillars was discovered there was a ‘threat’ of danger of physical damage to persons sufficient to produce ‘an imminent danger’ which justified the incurring of pecuniary loss.
I would reject this argument on two grounds: firstly, on the facts I do not think it right to say that there was any imminent danger of damage to persons; secondly, the eight pillars were ‘the very piece of property from the defective condition of which’ any threat of danger arose and were thus excluded by Lord Brandon.
Counsel for the plaintiffs submitted that to allow this claim would not be to transfer a warranty of fitness from the sphere of contract to the sphere of tort, but properly be looked at as a warranty of safety which public policy might dictate as having a proper place in tort. This is an attractive argument, but I do not think that it can prevail in the face of the authorities.
I too would dismiss this appeal.
Appeal dismissed. Leave to appeal to the House of Lords granted.
Solicitors: Treasury Solicitor; Tolhurst & Fisher, Southend-on-Sea (for the defendants).
Raina Levy Barrister.
W v Egdell and others
[1989] 1 All ER 1089
Categories: PROFESSIONS; Medical
Court: CHANCERY DIVISION
Lord(s): SCOTT J SITTING AS VICE-CHANCELLOR OF THE COUNTY PALATINE OF LANCASTER
Hearing Date(s): 22, 23, 24, 25, 28 NOVEMBER, 9 DECEMBER 1988
Medical practitioner – Doctor and patient – Disclosure of confidential information – Public interest – Doctor’s duty to patient and to public – Disclosure of report on patient in public interest – Psychiatrist instructed by patient detained in secure hospital to prepare independent report on patient’s mental condition – Psychiatrist disclosing report to hospital charged with patient’s care and encouraging hospital to disclose report to public authorities responsible for making decisions about patient’s future – Whether psychiatrist barred by duty of confidence owed to patient from disclosing contents of report – Whether duty of confidence subordinate to duty owed to public – Whether doctor’s public duty requiring him to disclose report to public authorities responsible for patient’s treatment and future – Mental Health Act 1983, s 71(2).
W, who had shot and killed five people and wounded two others, was detained as a patient in a secure hospital without limit of time as a potential threat to public safety. Ten years after he had been detained he applied to a mental health review tribunal to be discharged or transferred to a regional secure unit with a view to his eventual discharge. His solicitors instructed a consultant psychiatrist, E, to examine W and report on his mental condition with a view to using the report to support W’s application to the tribunal. In his report E opposed W’s transfer and recommended that further tests and treatment of W would be advisable, and drew attention to W’s long-standing interest in firearms and explosives and the possibility that W might have a ‘psychopathic deviant personality’. E sent the report to W’s solicitors in the belief that it would be placed before the tribunal, but, in view of the contents of the report, W’s solicitors withdrew his application. When E learnt that the application had been withdrawn and that neither the tribunal nor the hospital charged with W’s clinical management had received a copy of his report he contacted the medical director of the hospital, who, having discussed the W’s case with E, agreed that the hospital should receive a copy of the report in the interests of W’s further treatment. As E had also stressed the importance of sending a copy of his report to the Home Secretary because of its relevance to the exercise of his discretionary power to refer W’s case to a mental health review tribunal under s 71a of the Mental Health Act 1983, the hospital forwarded a copy to the Home Office and another copy to the Department of Health and Social Security. The Home Secretary, in turn, forwarded the report to the tribunal when referring W’s case to them for consideration, as he was required to do every three years under s 71(2). When W discovered that the report had been disclosed he issued writs against E and also against the Secretary of State for Health, the Home Secretary, the hospital board and the mental health review tribunal seeking (i) an injunction to restrain the respective defendants from using or disclosing the report, (ii) delivery up of all copies of the report and (iii) damages against W, the Home Secretary and the hospital board for breach of the duty of confidence.
Held – The duty of confidence owed by a doctor to a patient detained in a secure hospital in the interest of public safety who had instructed him to prepare a report for the patient was subordinate to his public duty to disclose the results of his examination to the authorities responsible for the patient if, in his opinion, such disclosure was necessary to ensure that the authorities were fully informed about the patient’s condition. Accordingly, the duty of confidence owed by E to W did not bar E from disclosing his report on W’s mental condition to the hospital charged with W’s clinical care, since it was relevant to his treatment, or to the Home Secretary and the mental health review tribunal, since
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needed to be fully informed about W’s mental condition when making decisions concerning his future. It followed that W’s claims against E and the other defendants failed and would be dismissed (see p 1104 d e h j, p 1105 b to g, p 1108 b, p 1109 c and p 1110 c to g, post).
Notes
For a medical practitioner’s obligation to give evidence, see 30 Halsbury’s Laws (4th edn) para 19, and for cases on the subject, see 33 Digest (Reissue) 256, 2109–2111.
For the Mental Health Act 1983, s 71, see 28 Halsbury’s Statutes (4th edn) 711.
Cases referred to in judgment
A-G v Guardian Newspapers Ltd (No 2) [1988] 3 All ER 545, [1988] 3 WLR 776, HL affg [1988] 3 All ER 545, [1988] 2 WLR 805, CA.
Addis v Gramophone Co Ltd [1909] AC 488, [1908–10] All ER Rep 1, HL.
Bliss v South East Thames Regional Health Authority [1987] ICR 700, CA.
Cox v Philips Industries Ltd [1976] 3 All ER 161, [1976] 1 WLR 638.
Harmony Shipping Co SA v Davis [1979] 3 All ER 177, sub nom Harmony Shipping Co SA v Saudi Europe Line Ltd [1979] 1 WLR 1380, CA.
Heywood v Wellers [1976] 1 All ER 300, [1976] QB 446, [1976] 2 WLR 101, CA.
Hunter v Mann [1974] 2 All ER 414, [1974] QB 767, [1974] 2 WLR 742, DC.
Jarvis v Swans Tours Ltd [1973] 1 All ER 71, [1973] QB 233, [1973] 3 WLR 954, CA.
Parry-Jones v Law Society [1968] 1 All ER 177, [1969] 1 Ch 1, [1968] 2 WLR 397, CA.
R v King [1983] 1 All ER 929, [1983] 1 WLR 411, CA.
X v Y [1988] 2 All ER 648.
Cases also cited
AB v CD (1851) 14 D 177, Ct of Sess.
A-G v Associated Newspapers Group plc [1989] 1 All ER 604, DC.
Albert (Prince) v Strange (1849) 1 Mac & G 25, 41 ER 1171, LC.
Archer v Brown [1984] 2 All ER 267, [1985] QB 401.
Argyll (Margaret), Duchess of v Duke of Argyll [1965] 1 All ER 611, [1967] Ch 302.
Ashburton (Lord) v Pape [1913] 2 Ch 469, [1911–13] All ER Rep 708, CA.
Ashingdane v Secretary of State for Social Services [1980] CA Transcript 47.
Calcraft v Guest [1898] 1 QB 759, [1895–9] All ER Rep 346, CA.
Comfort Hotels Ltd v Wembley Stadium Ltd [1988] 3 All ER 53, [1988] 1 WLR 872.
D v National Society for the Prevention of Cruelty to Children [1977] 1 All ER 589, [1978] AC 171, HL.
Distillers Co (Biochmicals) Ltd v Times Newspapers Ltd [1975] 1 All ER 41, [1975] QB 613.
Francome v Mirror Group Newspapers Ltd [1984] 2 All ER 408, [1984] 1 WLR 892, CA.
Fraser v Evans [1969] 1 All ER 8, [1969] 1 QB 349, CA.
Gartside v Outram (1856) 26 LJ Ch 113.
Hubbard v Vosper [1972] 1 All ER 1023, [1972] 2 QB 84, CA.
ITC Film Distributors Ltd v Video Exchange Ltd [1982] 2 All ER 241, [1982] Ch 431.
Lion Laboratories Ltd v Evans [1984] 2 All ER 417, [1985] QB 526, CA.
R v Board of Inland Revenue, ex p Goldberg [1988] 3 All ER 248, [1988] 3 WLR 522, DC.
R v Bracknell Justices, ex p Griffiths [1975] 2 All ER 881, [1976] AC 314, HL.
R v Licensing Authority, ex p Smith Kline & French Laboratories Ltd (Generics (UK) Ltd intervening) [1989] 1 All ER 175, [1988] 3 WLR 896, CA.
R v Statutory Visitors to St Lawrence’s Hospital, Caterham, ex p Pritchard [1953] 2 All ER 766, [1953] 1 WLR 1158, DC.
R v Tompkins (1977) 67 Cr App R 181, CA.
R v Uljee [1982] 1 NZLR 561, NZ CA.
Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) [1963] 3 All ER 413, CA.
Schering Chemicals Ltd v Falkman Ltd [1981] 2 All ER 321, [1982] QB 1, CA.
Tarasoff v Regents of the University of California (1976) 17 Cal 3d 358, Cal SC.
W, Re [1970] 2 All ER 502, [1971] Ch 123.
Page 1091 of [1989] 1 All ER 1089
Waldron, Ex p [1986] QB 824, CA.
Waugh v British Rlys Board [1979] 2 All ER 1169, [1980] AC 521, HL.
Weld-Blundell v Stephens [1919] 1 KB 520, CA affd [1920] AC 956, [1920] All ER Rep 32, HL.
White v Wilson (1806) 13 Ves 87, 33 ER 227, LC.
Winch v Jones [1985] 3 All ER 97, [1986] QB 296, CA.
X v UK (1981) 4 EHRR 188, E Ct HR.
Consolidated actions
W, a patient who had been detained in a secure hospital as a potential danger to public safety, issued a writ on 22 December 1987 against Dr Henry George Egdell, an independent psychiatrist whom W’s solicitors had instructed to report on his mental condition, seeking, inter alia, an injunction restraining Dr Egdell from disclosing the contents of his report on W dated 29 July 1987, delivery up of all copies of the report and damages for breach of the duty of confidentiality arising out of Dr Egdell’s disclosure of the report to the hospital charged with W’s clinical management, copies of which were then sent by the hospital to the Home Office and the Department of Health and Social Security. On the same day as the writ was issued his Honour Judge O’Donoghue sitting as a judge of the High Court granted an ex parte injunction restraining Dr Egdell from any further disclosure of his report, which, by consent, was continued until trial. W issued a second writ on 19 July 1988 against the Secretary of State for Social Services, the Home Secretary, Moss Side and Park Lane Hospitals Board and the Mersey Mental Health Review Tribunal, who had received a copy of the report when the Home Secretary referred W’s case to them for consideration under s 71(2) of the Mental Health Act 1983, seeking an injunction to restrain the respective defendants from disclosing the contents of Dr Egdell’s report, delivery up of all copies of the report and, as against the Home Secretary and the hospital board, damages for breach of the duty of confidentiality. W’s case against each defendant was based on the confidential nature of his interview with Dr Egdell and of the report. On 27 July 1988 Scott J consolidated the actions and at the beginning of the trial made an order under s 11 of the Contempt of Court Act 1981 prohibiting the publication of W’s name. On 28 November 1988 the relevant functions and liabilities of the Secretary of State for Social Services were transferred to the Secretary of State for Health. The writs in the actions were issued out of the Liverpool District Registry but the actions were heard and judgment was given in London. The facts are set out in the judgment.
Geoffrey Robertson QC and Nicholas Orr for W.
Kieran Coonan for Dr Egdell.
John Laws and Philip Havers for the Secretary of State for Health, the Home Secretary and the hospital board.
Nigel Pleming for the tribunal.
Cur adv vult
9 December 1988. The following judgment was delivered.
SCOTT J. This case has required an examination in an unusual context of the breadth of the duty of confidentiality owed by a doctor to his patient. The patient is the plaintiff, to whom I will refer as W. The first defendant, Dr Egdell, is the doctor. At the beginning of the trial I made an order under s 11 of the Contempt of Court Act 1981 prohibiting the publication of the name of the plaintiff. I propose to continue that order. It may be that the details given in this judgment of the background to the case will enable those who are minded to do so to identify the plaintiff. That possibility is unfortunate but, in my view, unavoidable if this judgment is to be made public. No one has suggested it should not be made public.
About ten years ago W shot the four members of a neighbouring family. He shot another neighbour who had come to investigate the shooting. He then drove off in his
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car, throwing handmade bombs as he did so. Later the same day he shot two more people, not neighbours, but strangers to him. Five of his victims died of their injuries. The other two needed major surgery for serious bullet wounds. W was diagnosed as suffering from paranoid schizophrenia. It was believed by the doctors who examined him that he had been suffering from this illness for about two years before the offences. The illness involved delusions that he was being persecuted by his neighbours. In the circumstances W’s plea of guilty to manslaughter on the grounds of diminished responsibility was accepted by the Crown and he was convicted accordingly. Orders were made under ss 60 and 65 of the Mental Health Act 1959, now ss 37 and 41 of the Mental Health Act 1983, providing for his detention without limit of time. He was at first detained at Broadmoor Hospital. In 1981 he was transferred, in accordance with a transfer direction given by the Home Secretary, to a secure hospital in the north of England. References hereafter in this judgment to ‘the hospital’ will be references to this hospital where W is still detained.
I must describe in some detail the statutory scheme under which W, and persons like him, are detained. Section 37 of the 1983 Act enables a hospital order to be made if, inter alia, ‘the court is satisfied … that the offender is suffering from mental illness, psychopathic disorder, severe mental impairment or mental impairment’ (see s 37(2)(a)). Section 41(1) provides:
‘Where a hospital order is made in respect of an offender by the Crown Court, and it appears to the court, having regard to the nature of the offence, the antecedents of the offender and the risk of his committing further offences if set at large, that it is necessary for the protection of the public from serious harm so to do, the court may, subject to the provisions of this section, further order that the offender shall be subject to the special restrictions set out in this section, either without limit of time or during such period as may be specified in the order; and an order under this section shall be known as “a restriction order“.’
Section 41(3) sets out the restrictions that apply to a person subject to a restriction order. These include the requirement that the transfer of the patient to another hospital can only be carried out with the consent of the Home Secretary (see sub-s (3)(c)(ii)). W is subject to a hospital order and a restriction order both orders were made by the Crown Court on his conviction. Section 41(6) provides:
‘While a person is subject to a restriction order the responsible medical officer shall at such intervals (not exceeding one year) as the Secretary of State may direct examine and report to the Secretary of State on that person and every report shall contain such particulars as the Secretary of State may require.’
The responsible medical officer is the registered medical practitioner in charge of the patient (see s 55(1)). The Secretary of State referred to in sub-s (6) is the Home Secretary.
From March 1984 to January 1988 W’s responsible medical officer was Dr Ghosh. Dr Ghosh was transferred to Broadmoor Hospital in January 1988. Since then W’s responsible medical officer has been Dr Coorey. Both Dr Ghosh and Dr Coorey are consultant psychiatrists.
The Home Secretary has extensive powers over, and in connection with, persons subject to restriction orders. These powers are set out in s 42 of the 1983 Act. There is power under sub-s (1) to direct that the special restrictions set out in s 41(3) shall cease to apply to the patient. The power is exercisable if the Home Secretary ‘is satisfied that … a restriction order is no longer required for the protection of the public from serious harm’. Under sub-s (2) the Home Secretary may, either absolutely or subject to conditions, discharge the patient from the secure hospital where he is held. And sub-s (3) gives power to the Home Secretary to recall a patient who has been conditionally discharged under sub-s (2).
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These statutory powers are discretionary powers and the Home Secretary is, in the exercise of his discretion, the guardian of the public interest. It is easy to conclude that the safety and protection of members of the public will be in the forefront of the Home Secretary’s mind when contemplating the exercise of any of these discretions. And it may reasonably be expected that the Home Secretary will expect to be kept informed of all relevant matters and views concerning the patient in question. The contents of the patient’s hospital file, including the reports from time to time submitted pursuant to s 41(6) and also the patient’s case notes, will be available to the Home Secretary.
A patient subject to a restriction order has an alternative avenue by means of which to seek to be relieved from the restrictions imposed by the order. The Mental Health Act 1959 provided for the setting up of mental health review tribunals to review the cases of patients detained under the provisions of the Act. The system was continued by the 1983 Act (see s 65). Four such tribunals have been established. The Mersey Mental Health Review Tribunal covers the area in which the hospital is situated. The constitution of mental health review tribunals is provided for in Sch 2 to the 1983 Act. The members nominated by the Lord Chancellor, who also appoints a chairman. The members who constitute the tribunal for the purposes of a particular case will usually be three in number and will be nominated by the chairman. One will be a lawyer, another will have a medical, usually a psychiatric, qualification. The procedure of tribunals is provided for in the Mental Health Review Tribunal Rules 1983, SI 1983/942, made pursuant to s 78 of the 1983 Act.
I must read some of the provisions of the 1983 Act that relate to applications by or in respect of patients subject to restriction orders. Section 70 provides:
‘A patient who is a restricted patient … and is detained in a hospital may apply to a Mental Health Review Tribunal—(a) in the period between the expiration of six months and the expiration of 12 months beginning with the date of the relevant hospital order or transfer direction and (b) in any subsequent period of 12 months.’
Section 71 provides, so far as material:
‘(1) The Secretary of State may at any time refer the case of a restricted patient to a Mental Health Review Tribunal.
(2) The Secretary of State shall refer to a Mental Health Review Tribunal the case of any restricted patient detained in a hospital whose case has not been considered by such a tribunal, whether on his own application or otherwise, within the last three years …
(6) For the purposes of subsection (5) above a person who applies to a tribunal but subsequently withdraws his application shall be treated as not having exercised his right to apply, and where a patient withdraws his application on a date after the expiration of the period there mentioned the Secretary ofState shall refer his case as soon as possible after that date.’
Section 72(1) provides:
‘Where application is made to a Mental Health Review Tribunal by or in respect of a patient who is liable to be detained under this Act, the tribunal may in any case direct that the patient be discharged, and … (b) the tribunal shall direct the discharge of a patient liable to be detained … if they are satisfied—(i) that he is not then suffering from mental illness, psychopathic disorder, severe mental impairment or mental impairment or from any of those forms of disorder of a nature or degree which makes it appropriate for him to be liable to be detained in a hospital for medical treatment; or (ii) that it is not necessary for the health or safety of the patient or for the protection of other persons that he should receive such treatment … ’
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Section 73 provides:
‘(1) Where an application to a Mental Health Review Tribunal is made by a restricted patient who is subject to a restriction order, or where the case of such a patient is referred to such a tribunal, the tribunal shall direct the absolute discharge of the patient if satisfied—(a) as to the matters mentioned in paragraph (b)(i) or (ii) of section 72(1) above; and (b) that it is not appropriate for the patient to remain liable to be recalled to hospital for further treatment.
(2) Where in the case of any such patient as is mentioned in subsection (1) above the tribunal are satisfied as to the matters referred to in paragraph (a) of that subsection but not as to the matter referred to in paragraph (b) of that subsection the tribunal shall direct the conditional discharge of the patient.
(3) Where a patient is absolutely discharged under this section he shall thereupon cease to be liable to be detained by virtue of the relevant hospital order, and the restriction order shall cease to have effect accordingly … ’
The effect of these statutory provisions in relation to a patient subject to a restriction order is that a tribunal has, strictly, three courses open to it on a review of the patient’s case. The tribunal can make no order. It can direct the absolute discharge of the patient. Or it can direct the conditional discharge of the patient. The tribunal is obliged to direct the discharge of the patient, absolutely or conditionally as the case may be, if it is satisfied that the statutory criteria have been established. In cases where a tribunal is not so satisfied and, therefore, does not direct the discharge of the patient, it has become a common practice for the tribunal to make recommendations in relation to the patient. These recommendations do not have binding force.
I should refer also to s 76. Subsection (1) provides as follows:
‘For the purpose of advising whether an application to a Mental Health Review Tribunal should be made by or in respect of a patient who is liable to be detained … or of furnishing information as to the condition of a patient for the purposes of such an application, any registered medical practitioner authorised by or on behalf of the patient or other person who is entitled to make or has made the application—(a) may at any reasonable time visit the patient and examine him in private, and (b) may require the production of and inspect any records relating to the detention or treatment of the patient in any hospital.’
Rule 6 of the 1983 rules provides as follows:
‘(1) The responsible authority shall send a statement to the tribunal and, in the case of a restricted patient, the Secretary of State, as soon as practicable and in any case within 3 weeks of its receipt of the notice of application; and such statement shall contain—(a) the information specified in Part A of Schedule 1 to these Rules, in so far as it is within the knowledge of the responsible authority; and (b) the report specified in paragraph 1 of Part B of that Schedule; and (c) the other reports specified in Part B of that Schedule, in so far as it is reasonably practicable to provide them.
(2) Where the patient is a restricted patient, the Secretary of State shall send to the tribunal, as soon as practicable and in any case within 3 weeks of receipt by him of the authority’s statement, a statement of such further information relevant to the application as may be available to him …
(4) Any part of the authority’s statement or the Secretary of State’s statement which, in the opinion of—(a) (in the case of the authority’s statement) the responsible authority; or (b) (in the case of the Secretary of State’s statement) the Secretary of State, should be withheld from the applicant or (where he is not the applicant) the patient on the ground that its disclosure would adversely affect the health or welfare of the patient or others, shall be made in a separate document in which shall be set out the reasons for believing that its disclosure would have that effect.
(5) On receipt of any statement provided in accordance with paragraph (1), (2) or (3), the tribunal shall send a copy to the applicant and (where he is not the applicant)
Page 1095 of [1989] 1 All ER 1089
the patient, excluding any part of any statement which is contained in a separate document in accordance with paragraph (4).’
I need not read the rest of r 6. The reference in r 6 to the ‘responsible authority’ is a reference to the Secretary of State for Health (see r 2, s 145 of the 1983 Act and s 4 of the National Health Service Act 1977). The reference to the Secretary of State is in the rules, as in the 1983 Act, a reference to the Home Secretary.
Under Pt A of Sch 1 to the 1983 rules basic information regarding the patient and his history must be given. Under Pt B the following information is required to be given:
‘1. An up-to-date medical report, prepared for the tribunal, including the relevant medical history and a full report on the patient’s mental condition.
2. An up-to-date social circumstances report prepared for the tribunal including reports on the following—(a) the patient’s home and family circumstances, including the attitude of the patient’s nearest relative or the person so acting; (b) the opportunities for employment or occupation and the housing facilities which would be available to the patient if discharged; (c) the availability of community support and relevant medical facilities; (d) the financial circumstances of the patient.
3. The views of the authority on the suitability of the patient for discharge.
4. Any other information or observations on the application which the authority wishes to make.’
It is to be noted that the obligations imposed on the Secretary of State for Health under r 6(1) and on the Home Secretary under r 6(2) to provide the tribunal with information are mandatory statutory obligations.
It is important also to notice that the nature of a hearing before a mental health review tribunal is inquisitorial, not adversarial. This appears particularly from the following rules in the 1983 rules:
‘Medical examination
11. At any time before the hearing of the application, the medical member or, where the tribunal includes more than one, at least one of them shall examine the patient and take such other steps as he considers necessary to form an opinion of the patient’s mental condition; and for this purpose the patient may be seen in private and all his medical records may be examined by the medical member, who may take such notes and copies of them as he may require, for use in connection with the application …
Evidence
14.—(1) For the purpose of obtaining information, the tribunal may take evidence on oath and subpoena any witness to appear before it or to produce documents, and the president of the tribunal shall have the powers of an arbitrator under section 12(3) of the Arbitration Act 1950 … but no person shall be compelled to give any evidence or produce any document which he could not be compelled to give or produce on the trial of an action.
(2) The tribunal may receive in evidence any document or information notwithstanding that such document or information would be inadmissible in a court of law.
Further information
15.—(1) Before or during any hearing the tribunal may call for such further information or reports as it may think desirable, and may give directions as to the manner in which and the persons by whom such material is to be furnished …
Hearing procedure
22 … (2) At any time before the application is determined, the tribunal or any one or more of its members may interview the patient, and shall interview him if
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he so requests, and the interview may, and shall if the patient so requests, take place in the absence of any other person … ’
There are therefore, two avenues by means of which a patient subject to a restriction order may seek to be discharged. He can apply to the Home Secretary and rely on the Home Secretary’s discretionary powers. Or he may apply to a tribunal and endeavour to satisfy the statutory criteria which, if satisfied, will oblige the tribunal to order his discharge, either absolutely or conditionally.
Having described the statutory scheme regulating the detention of persons such as W, I must now turn to outline the history of W’s detention at the hospital.
[His Lordship then described the history of W’s detention at the hospital and stated that in 1987 the Home Secretary had refused to accept a recommendation by Dr Ghosh that W be transferred to a regional secure unit. His Lordship continued:] In the face of the Home Secretary’s unwillingness to accept Dr Ghosh’s recommendation for a transfer to a regional secure unit, W decided to pursue the alternative avenue, namely, to make an application to the mental health review tribunal. The gist of Dr Ghosh’s reports had been that W’s offences were attributable to the paranoid schizophrenia from which he had been suffering at the time, that he had been cured of that illness and that, provided he remained on suitable medication, he no longer represented a danger to the public. In the light of these reports W was hoping to obtain from the tribunal a conditional discharge. So, on 1 April 1987, W’s then solicitors, Messrs E Rex Makin & Co, sent to the tribunal W’s application for a review of his case. The tribunal notified the Department of Health and Social Security (the DHSS) and the Home Office of the application (see r 4 of the 1983 rules).
On 2 April 1987 W was granted legal aid for the purposes of his application. The legal aid certificate authorised ‘an application to the Mental Health Review Tribunal under the Mental Health Act 1983 and to include an independent Psychiatric Report … ’
The statement required by r 6(1) to be sent by the Secretary of State for Health to the tribunal was made by Dr Ghosh and dated 19 May 1987. The statement said:
‘[W] has been diagnosed as suffering from schizophrenia. His mental illness is now controlled by medication and he has been stable for the past 5 years. He has considerable insight into his mental state and accepts the need for continuing on medication. He also realises that he requires close and careful monitoring of his mental state. It is my opinion that [W] requires to move gradually through graded security with maximum and intermediate supervision being available in the early stages. [W] was recommended for transfer on 20 March 1985. He has been accepted by Doctor R Cope for the Birmingham Secure Unit at Barnsley Hall Hospital on 20 June 1986. His previous Mental Health Review Tribunal supported a recommendation of transfer to a Regional Secure Unit. We are still awaiting Home Office permission for such a move.’
A copy of this statement was provided to W and his solicitors.
The Home Office’s statement, made pursuant to r 6(2), was dated June 1987. It, too, was disclosed to W and his solicitors. The statement set out the circumstances of W’s offences, referred to Dr Ghosh’s statement of 19 May 1987 and reiterated the Home Secretary’s refusal to consent to W’s transfer to a regional secure unit. The penultimate sentence of the Home Office statement said:
‘Furthermore, [the Home Secretary] would feel more confident towards [W’s] removal from conditions of maximum security when his interest in weapons has been more fully explored and explained and he would be prepared to consider the case for [W] to move to a secure unit in perhaps 18 months’ time in the light of these findings.’
Notwithstanding that authority for an independent psychiatric report had been given by the legal aid certificate of 2 April 1987, the report was not bespoken until after W and
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his solicitors had seen both Dr Ghosh’s statement of 19 May 1987 and the Home Office’s statement of June 1987.
The independent psychiatrist instructed to give the report was Dr Egdell. He is a distinguished consultant psychiatrist and a member of the Mersey Mental Health Review Tribunal. His instructions were contained in a letter dated 2 July 1987 from E Rex Makin & Co The first paragraph of the letter asked Dr Egdell to ‘attend upon our client and complete a report for use at his forthcoming Mental Health Review Tribunal’. For the purposes of the report Dr Egdell reviewed the case records held at the hospital. These included the reports to which I have already referred and no doubt others as well. He had discussions about the case with Dr Ghosh. He had brief interviews with some of the nurses at the hospital. And on 23 July he had a long interview with W himself. Based on this material he made a ten-page report dated 29 July 1987. The report contained two main sections. The first section summarised the information about W that Dr Egdell had obtained from the sources I have mentioned. The contents are set out under various subheadings: personal background; work and interests; interest in guns; interest in ‘fireworks’; alcohol history; attitude to medication; attitude to the victims and relatives in the index offence; reports of nursing staff attitude to future problems. The subheading ‘Interest in “fireworks” ‘ is of particular importance partly because the preparation and use by W of homemade bombs had been part of the index offence and also because, although some reference to W’s interest in explosives is to be found in the records on file at the hospital, Dr Ghosh had not dealt with this aspect of W’s history in any of her reports. The information given by W to Dr Egdell and recorded under this subheading seems, at least in its detail, not to have been previously disclosed. The references in previous reports to W’s interests in bombs and explosives had been cursory, lacking in detail and had not indicated anything unusual that predated the onset of the mental illness from which W was suffering when the index offences were committed. Dr Egdell’s report on the other hand, records a long-standing interest by W in making what W seems euphemistically to have described as ‘fireworks’. These so-called fireworks included sections of steel piping packed with explosive chemicals. The subsection under the heading ‘Interest in Guns’ contains considerable detail of W’s long-standing interest in guns. This interest had, unlike W’s interest in explosives, been well documented in previous reports on W made by others.
The second section of Dr Egdell’s report is headed ‘Psychiatric Opinion and Recommendation’. This too is divided into subsections. Under the subheading ‘Illness’ Dr Egdell agreed that at the time of the index offences W was suffering from a mental illness, but Dr Egdell referred to the possibility, first raised by Dr Boyd, an independent psychiatrist engaged by W, in a report dated 30 July 1984, that the illness might be a paranoid psychosis rather than paranoid schizophrenia. The relevance of the distinction, according to Dr Egdell, was that medication would be less effective in the former case than in the latter in protecting against a relapse. In the second paragraph under this subheading Dr Egdell said: ‘I was not convinced that he really had insight into his illness … ' This paragraph is in disagreement with the first paragraph of Dr Ghosh’s statement of 19 May 1987.
Under the subheading ‘Personality’ Dr Egdell said:
‘He has difficulty accepting or even listening to the views of others and would not even consider psychological treatment to explore or influence his former interest in fire-arms and explosives.’
This conclusion is obviously relevant to the recommendation in the report of 18 April 1986 prepared by Dr Tulloch, who wrote his report after having seven sessions with W at the request of Dr Cope, the consultant forensic psychiatrist at Barnsley Hall Hospital. Later under the same subheading Dr Egdell said:
‘My overall opinion would be that [W] has a clearly abnormal personality, particularly in regard to his relationships, to the management of his feelings and
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dealing with frustration and an unwillingness to look at his own personal problems in the past and in the future and to review the motivation lying behind the killings. I am reluctant at this stage to say that [W] suffers from a psychopathic personality, as my contacts with him were confined to one interview, and [there is] also the of the clinical psychologist, Mr. R Tulloch of 18th April 1986. There does seem to be a serious conflict between the findings of Mr. Tulloch and my overall impression culled from various sources. I think it would be important for this conflict to be resolved before a decision is made on [W’s] departure from [the hospital].’
This passage seems to me important. It reflects the possibility that underlying the mental illness from which W was suffering at the time of the index offences, there might be a psychopathic deviant personality.
Under the subheading ‘Attitude to fire-arms’ Dr Egdell expressed this opinion:
‘… his interests in guns was profound, very prolonged and, in the last years before the offence, clearly abnormal. In discussions with him of his current interests I found him totally unconvincing that he had in the past a passing interest in guns which has no relevance for the future.’
Under the subheading ‘Home made bombs’ Dr Egdell said:
‘My view would be that this all points to a seriously abnormal interest in the making of home made bombs. He euphemistically calls them “fireworks“. They are clearly much more dangerous than that.’
Finally, under the subheading ‘Fitness for transfer to a Regional Secure Unit’ Dr Egdell said:
‘In my view this should be considered after there has been clarification of [W’s] personality as recommended above, as well as further exploration of [W’s] interests in guns and explosives … In summary, I would strongly recommend that [W] is not considered for transfer to an RSU until the above recommendations are fulfilled. Even when these are completed there may be indications for further prolonged stay under the present secure conditions.’
In the first paragraph under the last subheading Dr Egdell expressed views about regional secure units that Dr Kay, an experienced forensic psychiatrist, in his affidavit, sworn on 16 November 1988, has disputed. Dr Kay has considerable experience of regional secure units and Dr Egdell, having read Dr Kay’s affidavit, has deferred to that experience. Dr Egdell’s misgivings about the suitability of the transfer of W to a regional secure unit have, therefore, to some extent been shown to be unfounded.
There are several important features of Dr Egdell’s report for present purposes. First, it opposed Dr Ghosh’s recommendation for a transfer to a regional secure unit. Second, it expressed reservations about, if not disagreement with, Dr Ghosh’s opinion that W, now that his schizophrenic illness was cured or undercontrol, was no longer a danger to the public. Third, it explored in greater detail than any other report the significance of W’s interests in explosives.
Dr Egdell sent his report to W’s solicitors. It was his belief when he did so that the report would be placed before the tribunal at the forthcoming hearing. That belief was justified by the opening paragraph of the letter of 7 July 1987, as well as by a letter dated 6 July 1987 from W’s solicitors advising Dr Egdell that the tribunal would sit on 25 1987 and adding: ‘We shall be pleased to see your report not less than two weeks before that date.’
Counsel for W argued that Dr Egdell was not entitled to have assumed that his report would be placed before the tribunal. The report was, he suggested, intended simply for the assistance of W and his solicitors. I agree that it was open to W and his solicitors,
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having received the report, to decide not to use it. But Dr Egdell was, in my view, when he examined W, wrote his report and sent it to W’s solicitors, reasonable in assuming that the report would be placed before the tribunal. It was, according to his letter of instructions, for that purpose that the report had been bespoken.
By a letter dated 18 August 1987, received by the tribunal on 19 August, W’s solicitors withdrew his application to the tribunal. This was done in view of the contents of Dr Egdell’s report. On the same day, 19 August, Dr Egdell telephoned the tribunal to ask whether the tribunal had received a copy of his report. Dr Egdell was informed by the tribunal that a copy of his report had not been received and that W’s application had been withdrawn.
Dr Egdell knew from a telephone conversation he had had with Dr Ghosh on a date between 24 and 27 July 1987, ie after his interview with W on 23 July, that his views regarding W were not accepted by Dr Ghosh (see para 4 of Dr Egdell’s fourth affidavit). So, after learning that W’s application to the tribunal had been withdrawn and that a copy of his report was not on W’s file at the hospital, Dr Egdell telephoned Dr Hunter, the acting medical director at the hospital.
I can best explain how matters proceeded by reference to passages from the evidence. In para 4 of his affidavit sworn on 1 October 1988 Dr Egdell said:
‘On learning that my report was not available to the Mental Health Review Tribunal I telephoned Dr Hunter at [the hospital] for advice in this matter. This was the first occasion on which I spoke to Dr Hunter about this patient. I explained my concern that my views were so different from those expressed by Dr Ghosh (W’s Responsible Medical Officer) and also my belief that two important matters relating to W’s interests in firearms and explosives had not been properly explored or even appreciated. Dr Hunter indicated that additional information about his patient was always helpful and indeed welcome. He asked me to contact W’s solicitors as a matter of courtesy to see if they would agree to disclosure of my report of 29th July to Dr Hunter. They declined to agree.’
Dr Egdell’s terse ‘They declined to agree’ is amplified by para 9 of the affidavit of Mr Ronald, W’s solicitor, sworn on 5 September 1988. Mr Ronald said:
‘Following the 19th August and prior to the 24th August the First Defendant [that is Dr Egdell] telephoned Mr Brian Canavan to discuss the Plaintiff’s case. In the course of this conversation he was advised that the tribunal application had been withdrawn and he queried what would happen to his report. It was explained to him by Mr Canavan that his reports would be on their files and would not be drawn to anyone’s attention. The First Defendant expressed a wish that the reports be forwarded to [the hospital] so that they were aware of his findings, however, Mr Canavan declined to do this in view of the clear instructions that he had received from the Plaintiff.’
What passed between Dr Egdell and Dr Hunter in their telephone conversation on 24 August 1987 is set outin a letter dated 25 April 1988 written by Dr Hunter to Messrs Irwin Mitchell, W’s present solicitors. The letter said:
‘Dr Egdell expressed the view that the material which he felt had been revealed from his examination cast a new light upon the patient’s dangerousness and ought to be known to those responsible for his care and for the formulation of any recommendations for discharge. During this conversation I asked Dr Egdell to forward to me a report in writing of his concerns about the patient and this report to me, dated 25 August 1987, was received in the hospital shortly thereafter.’
Following that telephone conversation and in accordance with Dr Hunter’s request, recorded by Dr Hunter in his letter, Dr Egdell sent Dr Hunter a report dated 25 August 1987. Dr Egdell substituted the name and address of Dr Hunter for the name and address
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of E Rex Makin & Co, and he altered the opening paragraph so as to read: ‘The following report is provided at your formal verbal request to me on the 24 August 1987.' That apart, the report sent to Dr Hunter was identical with that dated 19 July 1987 that had been sent to W’s solicitors.
It was Dr Egdell’s opinion that a copy of his report ought also to be supplied to the Home Office. Dr Egdell pressed this opinion on Dr Hunter and on 18 November 1987 wrote to Dr Hunter in these terms:
‘I am sorry I have not yet received formal confirmation from you that the report prepared on [W] dated the 29th July 1987 has been made available in his case notes. I regret to have to say this but without this I shall feel obliged to send a copy directly to the Home Office. I would prefer to avoid this.’
By letter dated 20 November 1987, signed by Dr Ghosh, Dr Egdell was informed that ‘a copy of your report on the above patient was forwarded to the Home Office and a further copy is on our case notes’.
Consistently with that a copy of the report was received by the Home Office on 25 November 1987. On the same day a copy was received at the DHSS. There seems to be some mystery as to by whom, or on whose authority, these copies were sent. I do not, however, think that the mystery is one that needs to be solved. There is no doubt that the Home Office and the DHSS did receive copies, nor that the copies were sent by someone at the hospital, nor that this was in accordance, at least so far as the Home Office is concerned (and nothing turns on the fact that a copy was sent to the DHSS), with Dr Egdell’s expressed wishes.
Another significant event took place on 25 November 1987. The Home Secretary referred W’s case to the Mersey Mental Health Review Tribunal under s 71(2) of the 1983 Act. He was obliged to do so because W’s case had not been before the tribunal within the last three years.
On 10 December 1987 the tribunal informed W and the hospital of this referral of W’s case. A statement pursuant to r 6(1) was requested of the hospital.
The news of the referral of W’s case to the tribunal seems to have prompted Dr Ghosh to communicate with W’s solicitors and express misgivings about the use that might be made of Dr Egdell’s report. But the solicitors were not told by Dr Ghosh that the Home Office already had a copy of the report. They were told that a copy was held by the hospital and that Dr Egdell was pressing for a copy to be sent to the Home Office. This information prompted the issue of a writ against Dr Egdell. The writ sought an injunction in these terms:
‘An injunction restraining the Defendant whether by himself, his servants or agents or otherwise from communicating the contents of a report dated 29th July 1987, made by the Defendant concerning the Plaintiff or any other further report whether written or oral, prepared by the Defendant concerning the Plaintiff, to any person or persons and further from expressing any opinion whether written or oral concerning the Plaintiff to any person or persons.’
Paragraph 2 of the prayer sought delivery up of any copies of the report held by Dr Egdell and para 3 claimed damages for breach by Dr Egdell of his duty of confidentiality. On the same day his Honour Judge O’Donoghue sitting as a judge of the High Court granted an ex parte injunction restraining Dr Egdell from communicating to anyone the contents of the report. The ex parte injunction was by consent continued until trial.
[His Lordship described the events which followed the referral of W’s case to the tribunal and continued:] There is a reference in the minutes of a case conference on W, which was held at the hospital on 23 June 1988, to the possibility that a court order requiring copies of Dr Egdell’s report to be removed from W’s file might be sought by W against, presumably, the hospital. This possibility became a reality with the issue, on 19 July 1988, of a second writ, this time accompanied by a statement of claim. W was
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again the plaintiff. The defendants were the Secretary of State for Health, the Home Secretary, Moss Side and Park Lane Hospitals Board and the Mersey Mental Health Review Tribunal. The main relief sought was an injunction to restrain the respective defendants from using or disclosing to anyone Dr Egdell’s report. Delivery up of all copies of the report was sought. Damages, including aggravated damages, for breach of the duty of confidentiality were sought against the Home Secretary and the hospital board.
On 19 July 1988 the statement of claim in the first action, the action against Dr Egdell, was served. On 27 July 1988 I made an order consolidating the two actions. It was at some stage, perhaps on 27 July, agreed that further pleadings would be dispensed with and that evidence would be given by affidavit. There have been a number of deponents. No cross-examination has been requested. These steps have enabled the action to come on for trial very quickly. The pending review by the tribunal of W’s case has been adjourned sine die until the conclusion of the litigation.
The basis of W’s case is that his interview with Dr Egdell on 23 July 1987 and the report written by Dr Egdell on the basis of that interview is, or ought to have been, protected from disclosure by the duty of confidence resting on Dr Egdell as W’s doctor. It is claimed that Dr Egdell was in breach of his duty of confidence in telling Dr Hunter about the report, in sending a copy of the report to Dr Hunter and in urging the despatch of a copy to the Home Office. The hospital, represented by the hospital board (the fourth defendant), ought, it is contended, to have recognised the confidential character of the report, that it came under a duty not to disclose it and that it broke that duty by sending a copy to the Home Office. The Home Office likewise came under a duty to respect the confidential character of the report and broke that duty by sending a copy thereof to the tribunal. The claim against the Secretary of State for Health and against the tribunal is for an order that each be required to deliver up or destroy the copies of the report that each holds.
The case against each defendant is therefore based on the confidential character, first, of the communication between W and Dr Egdell on 23 July 1987 and, second, of Dr Egdell’s report. The doctor/patient relationship is relied on. The cases against the respective defendants are not, however, identical. The breadth and nature of the duty of confidence, if any, that affects each defendant must be separately assessed. In A-G v Guardian Newspapers Ltd (No 2) [1988] 3 All ER 545 at 600, [1988] 2 WLR 805 at 873 (the Spycatcher case) in the Court of Appeal Sir John Donaldson MR said:
‘In an earlier passage in his judgment Scott J had considered whether the duty to maintain confidentiality was in all circumstances the same in relation to third parties who became possessed of confidential information as it was in relation to the primary confidant … His conclusion was that it was not necessarily the same. I agree. The reason is that the third party recipient may be subject to some additional and conflicting duty which does not affect the primary confidant or may not be subject to some special duty which does affect that confidant. In such situations the equation is not the same in the case of the confidant and that of the third party and accordingly the result may be different.’
No disagreement with this statement of principle is to be found in the judgments in the House of Lords ([1988] 3 All ER 545, [1988] 3 WLR 776).
I propose therefore to start with the case against Dr Egdell.
Counsel for W relies on two sources for the obligation of confidence or of non-disclosure on which W’s action against Dr Egdell is based. One source is implied contract, the other is equity. The two sources will in most cases cover the same ground.
It is convenient for me first to ask myself what duty of confidence a court of equity ought to regard as imposed on Dr Egdell by the circumstances in which he obtained information from and about W and prepared his report. It is in my judgment plain, and the contrary has not been suggested, that the circumstances did impose on Dr Egdell a
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duty of confidence. If, for instance Dr Egdell had sold the contents of his report to a newspaper, I do not think any court of equity would hesitate for a moment before concluding that his conduct had been a breach of his duty of confidence. The question in the present case is not whether Dr Egdell was under a duty of confidence; he plainly was. The question is as to the breadth of that duty. Did the duty extend so as to bar disclosure of the report to the medical director of the hospital? Did it bar disclosure to the Home Office? In the Spycatcher case [1988] 3 All ER 545 at 658–659, [1988] 3 WLR 776 at 805, 807 in the House of Lords Lord Goff, after accepting ‘the broad general principle … that a duty of confidence arises when confidential information comes to the knowledge of a person (the confidant) in circumstances where he has notice, or is held to have agreed, that the information is confidential, with the effect that it would be just in all the circumstances that he should be precluded from disclosing the information to others’, formulated three limiting principles. He said:
‘The third limiting principle is of far greater importance. It is that, although the basis of the law’s protection of confidence is that there is a public interest that confidences should be preserved and protected by the law, nevertheless that public interest may be outweighed by some other countervailing public interest which favours disclosure. This limitation may apply, as the learned judge pointed out, to all types of confidential information. It is this limiting principle which may require a court to carry out a balancing operation, weighing the public interest in maintaining confidence against a countervailing public interest favouring disclosure.’
In X v Y [1988] 2 All ER 648 at 653, a case which concerned doctors who were believed to be continuing to practise despite having contracted AIDS, Rose J said:
‘In the long run, preservation of confidentiality is the only way of securing public health; otherwise doctors will be discredited as a source of education, for future individual patients “will not come forward if doctors are going to squeal on them“. Consequently, confidentiality is vital to secure public as well as private health, for unless those infected come forward they cannot be counselled and self-treatment does not provide the best care … ’
The question in a particular case whether a duty of confidentiality extends to bar particular disclosures that the confidant has made or wants to make requires the court to balance the interest to be served by non-disclosure against the interest served by disclosure. Rose J struck that balance. It came down, he held, in favour of non-disclosure. In the Spycatcher case that balance too was struck. In that case the balance did not come down in favour of non-disclosure. I must endeavour to strike the balance in the present case.
A convenient starting point is the guidance given to doctors by the General Medical Council. The council publishes rules entitled ‘Advice on Standards of Professional Conduct and of Medical Ethics’. Rules 79 and 80 provide as follows:
‘79. The following guidance is given on the principles which should govern the confidentiality of information relating to patients.
80. It is the doctor’s duty, except in the cases mentioned below, strictly to observe the rule of professional secrecy by refraining from disclosing voluntarily to any third party information about the patient which he has learnt directly or indirectly in his professional capacity as a registered medical practitioner. The death of the patient does not absolve the doctor from this obligation.’
Rule 81 sets out circumstances where exceptions to r 80 may be permitted. The exceptions include the following:
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‘(a) If the patient or his legal adviser gives written and valid consent, information to which the consent refers may be disclosed.
(b) Confidential information may be shared with other registered medical practitioners who participate in or assume responsibility for clinical management of the patient …
(f) If the doctor is directed to disclose information by a judge or other presiding officer of a court before whom he is appearing to give evidence, information may at that stage be disclosed … But where litigation is in prospect, unless the patient has consented to disclosure or a formal court order has been made for disclosure, information should not be disclosed merely in response to demands from other persons, such as another party’s solicitor or an official of the court.
(g) Rarely, disclosure may be justified on the ground that it is in the public interest which, in certain circumstances such as, for example, investigation by the police of a grave or very serious crime, will override the doctor’s duty to maintain his patient’s confidence.’
These rules do not provide a definitive answer to the question raised in the present case as to the breadth of the duty of confidence owed by Dr Egdell. They seem to me valuable, however, in showing the approach of the General Medical Council to the breadth of the doctor/patient duty of confidence. Rule 80 underlines the importance attached by the council to that duty. Rule 81 shows that the duty is not absolute. Paragraphs (b) and (g) of r 81 seem to me particularly relevant for present purposes. The duty of confidence does not prevent a doctor from disclosing confidential information to other doctors charged with the care or treatment of the patient (para (b)). And para (g) preserves the propriety of a doctor disclosing confidential information in the rare cases where the public interest overrides this duty to his patient.
The duty of confidence owed by Dr Egdell to W in the present case was both created and circumscribed by the particular circumstances of the case. So what were those particular circumstances as at June 1987? They were, in my view, these. W was a person who had killed five people and seriously wounded two others. He had been diagnosed as suffering from mental illness and, not as a punishment, but for the public safety, had been ordered to be detained without limit of time. He was subject to a restriction order. Dr Ghosh, the psychiatrist who, from 1984 to 1987 had been responsible for W’s treatment, regarded him as no longer a danger to the public provided he remained on suitable medication. She regarded the index offences as having been occasioned by mental illness from which he had been cured. W was being detained at the hospital. While he remained there the authorities at the hospital were responsible for his treatment and care, for his ‘clinical management’ to borrow the expression used in r 81(b). A proposal was on foot for W’s transfer to a regional secure unit. The Home Secretary had a discretion whether or not to allow the transfer. Public safety would be a paramount consideration for the Home Secretary in deciding how to exercise his discretion. W had applied for his case to be reviewed by a tribunal. The tribunal had power to discharge him absolutely or conditionally. The tribunal could not discharge him unless satisfied that it was ‘not necessary for the health or safety of the patient or for the protection of other persons that he should receive medical treatment’ (see s 72(1)(b)(ii) of the 1983 Act). But if the tribunal was so satisfied it would be bound to discharge him. Dr Egdell was instructed to examine W and to make a report ‘for use at the forthcoming Mental Health Review Tribunal’. Facilities were provided at the hospital for Dr Egdell to examine W in private and to peruse W’s hospital file (see s 76(1) of the 1983 Act). Dr Egdell discussed W with Dr Ghosh before making his report. So the facts of Dr Egdell’s examination and that he was making a report were known to the hospital authorities.
These, in summary, seem to me to be the relevant circumstances pertaining at the time when Dr Egdell examined W and made his report.
Having examined W, Dr Egdell formed the opinion that there was a possibility that W had a psychopathic personality. He formed the opinion that insufficient significance
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might have been attached to W’s interests in guns and explosives. He formed the opinion that further tests on and treatment of W were advisable before a decision was taken to transfer W to a regional secure unit, let alone to discharge him, conditionally or otherwise. Then, having formed these opinions and having written his report, Dr Egdell learnt that the application to the tribunal had been withdrawn, that his report was not on file at the hospital, and that W and W’s solicitors proposed to suppress it.
Did these circumstances impose on Dr Egdell a duty not to disclose his opinions and his report to Dr Hunter, the medical director at the hospital? In my judgment they did not. Dr Egdell was expressing opinions which were relevant to the nature of the treatment and care to be accorded to W at the hospital. Dr Egdell was, in effect, recommending a change from the approach to treatment and care that Dr Ghosh was following. He was expressing reservations about Dr Ghosh’s diagnosis. The case seems to me to fall squarely within para (b) of r 81.
But I would base my conclusion on broader considerations than that. I decline to overlook the background to Dr Egdell’s examination of W. True it is that Dr Egdell was engaged by W. He was the doctor of W’s choice. None the less, in my opinion, the duty he owed to W was not his only duty. W was not an ordinary member of the public. He was, consequent on the killings he had perpetrated, held in a secure hospital subject to a regime whereby decisions concerning his future were to be taken by public authorities, the Home Secretary or the tribunal. W’s own interests would not be the only nor the main criterion in the taking of those decisions. The safety of the public would be the main criterion. In my view, a doctor called on, as Dr Edgell was, to examine a patient such as W owes a duty not only to his patient but also a duty to the public. His duty to the public would require him, in my opinion, to place before the proper authorities the result of his examination if, in his opinion, the public interest so required. This would be so, in my opinion, whether nor not the patient instructed him not to do so.
Counsel for W argued that the dominant public interest was the public interest in patients being able to make full and frank disclosure to their doctors, and in particular to their psychiatrists, without fear that the doctors would disclose information to others. I accept the general importance in the public interest that this should be so. It justifies the General Medical Council’s r 80.
But counsel’s route from the general to the particular was not, to my mind, convincing. W was not short of psychiatrists. A succession of them had attended him since the time when he committed the index offences. He had disclosed confidential information about himself to each of them. Each of them owed him a duty of confidence. None would have been entitled to sell the information to a newspaper or to make general disclosure of it. But the reports of each of these psychiatrists had been placed in W’s file and were available to his responsible medical officer and to the Home Office. It was not suggested that this feature had inhibited W in his dealings with these psychiatrists. Why should W’s relationship with Dr Egdell and the report of Dr Egdell be differently treated? Counsel’s answer would be, I think, that Dr Egdell, (like Dr Boyd in 1984) was an independent psychiatrist employed by W for the purpose of the examination in private referred to in s 76(1). The other psychiatrists were psychiatrists within the hospital regime. So Dr Egdell owed a duty of confidence more extensive than that owed by the hospital psychiatrists. But this answer, in my opinion, confuses private interest with public interest. I readily accept that W had a strong private interest in barring disclosure of the Egdell report to the Home Office and, probably, to the hospital authorities as well. But what public interest is served by imposing on Dr Egdell a duty of confidence more extensive than that owed by the hospital psychiatrists? Counsel’s answer to that question was this. Independent psychiatric reports were, he said, of great assistance to tribunals. In about 80% of the cases reviewed by mental health review tribunals independent psychiatric reports were submitted. If patients were held to be unable to suppress unfavourable reports, they would in future be unwilling to take the chance of commissioning such reports; alternatively they might not be wholly frank when being
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examined and the value of the independent reports would be reduced. I do not think that this answer has much weight. The possibility of a lack of frankness must always be present when a psychiatric examination takes place. An experienced psychiatrist would, I think, expect to be able to detect it. And the lack of frankness itself would constitute material of interest to the psychiatrist. As to the suggestion that the commissioning of independent reports will be reduced unless unfavourable ones can be suppressed, that likelihood does not seem to me in the least self-evident.
In truth, as it seems to me, the interest to be served by the duty of confidence for which counsel for W contends is the private interest of W and not any broader public interest. If I set the private interest of W in the balance against the public interest served by disclosure of the report to Dr Hunter and the Home Office, I find the weight of the public interest prevails.
I do not reach this conclusion in reliance on the importance of the information about W’s interest in explosives, nor on the extent to which Dr Egdell’s fears about W’s personality reveal some relevant risk to public safety, nor on any other specific part of the contents of the Egdell report. Rather, I base my conclusion on the particular circumstances in which the report was commissioned. If a patient in the position of W commissions an independent psychiatrist’s report, the duty of confidence that undoubtedly lies on the doctor who makes the report does not, in my judgment, bar the doctor from disclosing the report to the hospital that is charged with the care of the patient if the doctor judges the report to be relevant to the care and treatment of the patient, nor from disclosing the report to the Home Secretary if the doctor judges the report to be relevant to the exercise of the Home Secretarys’ discretionary powers in relation to that patient.
I accept that this conclusion places W and persons like him in a position in which the duty of confidence owed by their psychiatrists is less extensive than the duty that would be owed by psychiatrists to ordinary members of the public. But this, in my view, is an inevitable result of the circumstances that have led to W being subjected to a restriction order under the 1983 Act. This limitation of W’s rights is, in my judgment, justified by the need that, first, the hospital in charge of his clinical management, second, the Home Secretary, in whom very important discretionary powers are reposed and, third, the tribunal on whom the obligation in certain circumstances to order his discharge is placed should be fully informed about W.
In my judgment, therefore, the circumstances of this case did not impose on Dr Egdell an obligation of conscience, an equitable obligation, to refrain from disclosing his report to Dr Hunter, or to refrain from encouraging its disclosure to the Home Office. It follows also that that obligation cannot be imposed on Dr Egdell by implied contract. If the officious bystander had asked the usual question, Dr Egdell’s answer would not have the testy ‘Of course’. He would, I believe, have said that the question required very careful consideration. And after consideration he would, I think, have said that he would regard himself as entitled to disclose his report to the relevant authorities if, in his judgment, the public interest so required. If he had given that answer he would, in my judgment, have been right.
Counsel for W had an alternative to the equitable or contractual duty of confidence on which to base the obligation of non-disclosure for which he contended. He relied on legal privilege. The report was obtained for the purposes of the forthcoming tribunal hearing, that is to say for forthcoming legal proceedings. Accordingly, he submitted, it was covered by legal professional privilege.
There are two authorities to which I should refer in dealing with this submission. Harmony Shipping Co SA v Davis [1979] 3 All ER 177, [1979] 1 WLR 1380 concerned a handwriting expert who had given the plaintiff his opinion on the genuineness of a certain document. Subsequently he was asked by the defendant’s solicitors to advise on the same point. He inadvertently forgot that he had already advised the plaintiff and gave an opinion to the defendant. His opinion must have been favourable to the defendant, for the defendant sought to call him as a witness at the trial and the plaintiff
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objected. Lord Denning MR said ([1979] 3 All ER 177 at 180–181, [1979] 1 WLR 1380 at 1384–1385):
‘So far as witnesses of fact are concerned, the law is as plain as can be. There is no property in a witness. The reason is because the court has a right to every man’s evidence. Its primary duty is to ascertain the truth. Neither one side nor the other can debar the court from ascertaining the truth either by seeing a witness beforehand or by purchasing his evidence or by making communication to him. In no way can one side prohibit the other side from seeing a witness of fact, from getting the facts from him and from calling him to give evidence or from issuing him with a subpoena … The question in this case is whether or not that principle applies to expert witnesses. They may have been told the substance of a party’s case. They may have been given a great deal of confidential information. On it they may have given advice to the party. Does the rule apply to such a case? Many of the communications between the solicitor and the expert witness will be privileged. They are protected by legal professional privilege. They cannot be communicated to the court except with the consent of the party concerned. That means that a great deal of the communications between the expert witness and the lawyer cannot be given in evidence to the court. If questions were asked about it, then it would be the duty of the judge to protect the witness (and he would) by disallowing any questions which infringed the rule about legal professional privilege or the rule protecting information given in confidence, unless, of course, it was one of those rare cases which come before the courts from time to time where in spite of privilege or confidence the court does order a witness to give further evidence. Subject to that qualification, it seems to me that an expert witness falls into the same position as a witness of fact. The court is entitled, in order to ascertain the truth, to have the actual facts which he has observed adduced before it and to have his independent opinion on those facts.’
The other case to which I would refer is R v King [1983] 1 All ER 929, [1983] 1 WLR 411. In that case the defendant was charged with conspiracy to defraud. His solicitors sent to a handwriting expert certain documents for examination. The prosecution desired to put in evidence the expert’s opinion on these documents and served subpoenas on the expert for that purpose. It was contended for the defendant that the expert’s opinion on these documents was protected by privilege. Dunn LJ, who gave the judgment of the court, said ([1983] 1 All ER 929 at 930–931, [1983] 1 WLR 411 at 413–414):
‘Counsel on behalf of the [defendant] submitted in this court that any communication passing between a solicitor and a third party for the purpose of taking advice was privileged. He relied on a passage in Cross on Evidence (5th edn, 1979) p 286 in the following terms: “The rationale of the head of legal professional privilege under consideration was succinctly stated by the Law Reform Committee to be “to facilitate the obtaining and preparation of evidence by a party to an action in support of his case“. The privilege is essential to the adversary system of procedure which would be unworkable if parties were obliged to disclose communications with prospective witnesses.” While accepting that there is no property in a witness, counsel for the [defendant] submitted that at common law an expert who had been consulted by solicitors for one party should not be called as a witness by the other party to give evidence as to any communication sent to him by the solicitors. Counsel submitted that exhibit 257 formed part of the communication from the defendant’s solicitors to the expert [exhibit 257 was the document sent for examination] … Dealing first with the general position, the rule is that in the case of expert witnesses legal professional privilege attaches to confidential communications between the solicitor and the expert, but it does not attach to the chattels or documents on which the expert based his opinion, or to the independent opinion of
Page 1107 of [1989] 1 All ER 1089
the expert himself: see Harmony Shipping Co v Davis [1979] 3 All ER 177 at 181, [1979] 1 WLR 1380 at 1385 per Lord Denning MR. The reasons for that are that there is no property in an expert witness any more than in any other witness and the court is entitled, in order to ascertain the truth, to have the actual facts which the expert has observed adduced before it in considering his opinion. In general then no privilege will attach to exhibit 257. It was one of the documents examined by [the expert], on which he based his opinion, and the court was entitled to have it adduced in evidence. Is there any difference because the document was examined in criminal proceedings rather than in civil proceedings? On principle we can see no reason why that should be so.’
Exhibit 257 in that case was a document which was in existence before proceedings commenced. It had not been brought into existence for the purpose of the proceedings themselves. So the question arises whether that would have made any difference to the result. Suppose the genuineness of a cheque is in question. If the cheque is submitted by one side to a handwriting expert for his opinion on the signature, the other side can call the expert to give evidence of that opinion. The Harmony Shipping case and R v King establish that that is so. If a document already in existence before proceedings were contemplated had been, for purposes of comparison, submitted to the expert together with the cheque, the other side could put in evidence the expert’s opinion not simply on the cheque but also on the other document, the ‘control’ document: see R v King [1983] 1 All ER 929 at 930, [1983] 1 WLR 411 at 412. But suppose the control document had been brought into existence, after proceedings had commenced, for the purpose of being submitted with the cheque to the handwriting expert. Counsel for W submitted that the other side could not call the expert to give opinion evidence on the comparision between the cheque and that control document. The reason, he said, is that that control document had been brought into existence for the purposes of the proceedings and so would be covered by legal privilege.
I do not accept that this distinction is a sound one. If a document is submitted to an expert witness for examination and if the opinion of the expert is relevant to an issue in the case, the expert is, in my judgment, in civil cases at least, a competent and compellable witness to give evidence of what has been put before him and of his opinion on it. Legal professional privilege attaches to documents brought into existence for the purpose of legal proceedings; but, if such a document is placed before an expert witness for his opinion, it becomes, in my judgment, part of the facts on which the opinion is based. The expert cannot be barred when giving evidence of his opinion from referring to the facts on which the opinion is based, including, if it be the case, documents which, in the hands of solicitors, would be covered by legal professional privilege.
There is, in my judgment, a clear and important distinction to be drawn between, on the one hand, instructions given to an expert witness and, on the other hand, the expert’s opinion given pursuant to those instructions. The instructions are covered by legal professional privilege. The opinion is not. This distinction I take to be established by, in particular, the passage in Dunn LJ’s judgment in R v King [1983] 1 All ER 929 at 931, [1983] 1 WLR 411 at 414.
In the present case the letter of instructions dated 2 July 1987 was covered by legal privilege. But Dr Egdell did not disclose that letter. So far as I know neither the hospital nor the Home Office has ever had a copy of it.
For the purposes of the examination itself, Dr Egdell no doubt encouraged W to be forthcoming about himself. W communicated a great deal of information to Dr Egdell, some of it information that does not seem previously to have been revealed. Counsel for W categorised all this information as information given for the purpose of legal proceedings, ie the tribunal hearing. The information was, he said, tantamount to instructions being given to Dr Egdell by W. The information was therefore covered by legal professional privilege. I disagree. The more accurate analysis, in my judgment, is
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that the information acquired from W formed part of the facts on which Dr Egdell’s opinion expressed in the report was based. Neither the opinion, nor the facts on which it was based, whether obtained from W or from Dr Egdell’s perusal of the records, were, in my judgment, protected by legal professional privilege.
There is also, I think, a further answer to counsel’s reliance on legal professional privilege. The function of privilege is to protect material from being produced on discovery or being placed in evidence in legal proceedings. What is complained of in the present case is that Dr Egdell supplied a copy of his report to the hospital and, indirectly, to the Home Secretary. Legal professional privilege is not a basis on which this complaint can be constructed.
In the result, in my judgment, the case against Dr Egdell fails.
If I had found Dr Egdell liable for breach of his duty of confidentiality I would have had to consider the issue on damages. It has, rightly in my opinion, not been argued by counsel that W’s continued detention subject to a restriction order, or continued detention at the hospital rather than at a regional secure unit, whether or not those things are to any extent attributable to the disclosure of the report, can sound in damages. It has been argued, however, that W was caused shock and distress by Dr Egdell’s disclosure of the report and that that shock and distress should be reflected in an award of damages. An enquiry as to the amount of the damages is suggested.
The evidence that W was caused shock or distress by Dr Egdell’s disclosure of the report is unconvincing. The affidavit sworn on 5 September 1988 by Mr Ronald refers, at para 8 to W’s ‘shock that the First Defendant did not support his application for discharge or transfer’. A note of an interview that Mr Ronald had with W on 18 August 1987 records that W ‘was absolutely shocked to find that Dr Egdell did not back up his Application for discharge or transfer’. The absence of any evidence that W was caused shock by the disclosure of the report, as opposed to shock by its contents, was the subject of comment in the course of counsel’s submission for Dr Egdell. The comment led to counsel for W seeking leave to file an affidavit sworn by W on 24 November 1988, the third day of the hearing. In para 4 W says: ‘I was extremely upset that this report had been disclosed because I thought it was factually wrong in a number of ways.' In para 5 W says: ‘I now feel very shocked and upset at what has happened, and I feel my record has been unfairly damaged by disclosure of this inaccurate report on me.’
I gave leave for this affidavit to be filed but the circumstances of its late arrival deprived it of much cogency.
Further, it is, I think, open to question whether shock and distress caused by the unauthorised disclosure of confidential information can, in any event, properly be reflected in an award of damages.
In Bliss v South East Thames Regional Health Authority [1987] ICR 700 at 717–718 Dillon LJ said:
‘The general rule laid down by the House of Lords in Addis v. Gramophone Co. Ltd. ([1909] AC 488, [1908–10] All ER Rep 1) is that where damages fall to be assessed for breach of contract rather than in tort it is not permissible to award general damages for frustration, mental distress, injured feelings or annoyance occasioned by the breach. Modern thinking tends to be that the amount of damages recoverable for a wrong should be the same whether the cause of action is laid in contract or in tort. But in the Addis case Lord Loreburn regarded the rule that damages for injured feelings cannot be recovered in contract for wrongful dismissal as too inveterate to be altered, and Lord James of Hereford supported his concurrence in the speech of Lord Loreburn by reference to his own experience at the Bar. There are exceptions now recognised where the contract which has been broken was itself a contract to provide peace of mind or freedom from distress: see Jarvis v. Swans Tours Ltd ([1973] 1 All ER 71, [1973] QB 233) and Heywood v. Wellers ([1976] 1 All ER 300, [1976] QB 446). Those decisions, do not however cover this present case. In Cox v. Philips
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Industries Ltd ([1976] 3 All ER 161, [1976] 1 WLR 638) Lawson J. took the view that damages for distress, vexation and frustration, including consequent ill-health, could be recovered for breach of a contract of employment if it could be said to have been in the contemplation of the parties that the breach would cause such distress etc. For my part, I do not think that that general approach is open to this court unless and until the House of Lords has reconsidered its decision in the Addis case.’
This Court of Appeal authority seems to me to preclude W from recovering damages (save nominal damages) to the extent that his claim is based on breach of an implied contractual term. I do not see any reason, on this point, why equity should not follow the law.
Accordingly, in my judgment, W would not, even if I had found Dr Egdell to be liable, have been entitled to damages. He would have had to be content with a declaration and an injunction.
I must now consider the position of the other defendants. If I am right in concluding that the case against Dr Egdell fails, the case against the other defendants must also fail. But this case may go further and I ought, I think, to consider the position of the other defendants incase it should subsequently be held that Dr Egdell was in breach of duty in disclosing his report to Dr Hunter.
The hospital, acting by an unidentified person or persons, sent a copy of the report to the Home Office. The Home Office still holds a copy of the report and sent a copy to the tribunal. I must consider these matters on the hypothesis that the disclosure of the report to the hospital was a breach by Dr Egdell of the duty of confidence he owed to W.
There are two authorities which seem to me to be relevant. The first is Parry-Jones v Law Society [1968] 1 All ER 177, [1969] 1 Ch 1. The plaintiff was a solicitor on whom the Law Society had served a notice to produce for inspection his books of account and other documents. The notice was served pursuant to the rules made by the Law Society under s 29 of the Solicitors Act 1957. The rules have statutory force. The plaintiff objected on the ground that the documents to be produced contained confidential information about his clients and that he owed his clients a duty not to disclose this information to others. Lord Denning MR said ([1968] 1 All ER 177 at 179, [1969] 1 Ch 1 at 8):
‘In my opinion that rule is a valid rule which overrides any privilege or confidence which otherwise might subsist between solicitor and client. It enables the Law Society for the public good to hold an investigation, even if it involves getting information as to clients’ affairs but they and their accountant must themselves respect the obligation of confidence. They must not use it for any purpose except the investigation, and any consequential proceedings.’
Diplock LJ said ([1968] 1 All ER 177 at 180, [1969] 1 Ch 1 at 9):
‘What we are concerned with here is the contractual duty of confidence, generally implied though sometimes expressed, between a solicitor and client. Such a duty exists not only between solicitor and client, but, for example, between banker and customer, doctor and patient and accountant and client. Such a duty of confidence is subject to, and overriden by, the duty of any party to that contract to comply with the law of the land. If it is the duty of such a party to a contract, whether at common law or under statute, to disclose in defined circumstances confidential information, then he must do so … ’
The other case is Hunter v Mann [1974] 2 All ER 414, [1974] QB 767, which concerned the statutory obligation imposed by s 168 of the Road Traffic Act 1972. A doctor was asked by a police officer to divulge the identity of the driver of a vehicle that had been involved in an accident. The doctor refused on the ground that he had obtained the information from a patient, namely the driver, and that to divulge his identity would be in breach of his obligation of professional confidence. The doctor was convicted of
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contravening s 168(3). He appealed. The Divisional Court dismissed his appeal. The statutory duty to disclose the information overrode the doctor’s duty of confidence to his patient.
The scheme set up by the 1983 Act for dealing with patients subject to restriction orders requires co-operation between the hospitals in which patients are held and the Home Secretary. The Home Secretary when deciding whether or not to exercise any of his discretionary powers under s 41(3) is dependent on information from the hospital in which the patient in question is held to supply him with relevant information about that patient. It could not, in my view, ever be right for the authorities of such a hospital to withhold from the Home Secretary relevant information about a patient subject to a restriction order. The importance for public safety that the Home Secretary should be fully informed requires that that be so. Accordingly, even if Dr Egdell were in breach of duty in disclosing his report to Dr Hunter, the decision, by whoever took it, to send a copy of the report to the Home Secretary was not, in my judgment, a breach of any duty lying on the hospital. On the contrary, in my opinion, the hospital had a duty to send a copy to the Home Secretary. A fortiori, the Home Secretary was under a duty to send a copy of the report to the tribunal. Rule 6(2) of the 1983 rules places a statutory obligation on the Home Secretary to send to the tribunal for the purpose of cases being reviewed by the tribunal ‘a statement of such further information relevant to the application as may be available to him’. The Egdell report was further information available to the Home Secretary. The Home Secretary’s statutory duty under r 6(2) overrode, in my judgment, any confidentiality attaching to the report.
Finally, I must consider the position of the tribunal. The tribunal holds copies of the Egdell report. It is, in my judgment, entitled to retain these copies and to make such use of them as it thinks fit on the hearing or the adjourned review of W’s case. Both the public interest in the tribunal being fully informed and the inquisitorial nature of the tribunal’s proceedings override any confidentiality attaching to the report.
In the result W’s action fails, in my judgment, against each of the defendants. It does not fail because Dr Egdell’s conclusions are necessarily to be preferred to those of Dr Ghosh, or of Dr Coorey, or of Dr Kay. I must emphasise that I have formed no opinion in favour of Dr Egdell’s views as opposed to those of the others. The action fails because Dr Egdell’s report is, in my view, relevant material to be taken into account by the hospital, by the Home Office and by the tribunal in the discharge of their respective functions regarding W and because in the very special circumstances of this case the duty of confidence owed by Dr Egdell to his patient W does not bar disclosure of the report to those recipients. It is for those recipients of the report to attribute to it such weight as they think it merits. The consolidated action is therefore dismissed.
Actions dismissed.
Solicitors: Irwin Mitchell, Sheffield (for W); Hempsons (for Dr Egdell); Treasury Solicitor.
Jacqueline Metcalfe Barrister.
Lester and another v Ridd
[1989] 1 All ER 1111
Categories: LANDLORD & TENANT; Leases: AGRICULTURE
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): SLADE, DILLON AND STAUGHTON LJJ
Hearing Date(s): 5, 20 DECEMBER 1988
Landlord and tenant – Leasehold enfranchisement – House – Lease of house comprised in agricultural holding – Partition and severance of leasehold interest of agricultural holding between several assignees – Partition of house from agricultural land – Landlord’s consent to partition and severance not obtained – Assignee of house applying to purchase freehold – Whether partition creating two separate tenancies of two separate holdings in absence of landlord’s consent – Whether house still comprised in agricultural holding – Whether assignee having right of leasehold enfranchisement – Leasehold Reform Act 1967, s 1(3)(b).
By a lease dated 17 January 1902 the landlord’s predecessor in title demised a house (the glebe house) and some 23 acres of land to L for a term of 99 years from 25 December 1901 at a yearly rent of £9. In 1955 all the lands and premises comprised in the lease were assigned for the full unexpired residue of the term of the lease to a father and son who carried on farming in partnership together until 1963. It was common ground that until 1963 the demised premises were used for agriculture by way of trade or business. By a deed of partition dated 16 December 1963 the lease of the glebe house and two acres of surrounding land (the glebe house property) was assigned to the father for the unexpired residue at a yearly rent of £5 while the rest of the land comprised in the lease was assigned to the son for the unexpired residue of the term at a yearly rent of £4. On 13 December 1982 the appellants purchased the leasehold interest in the glebe house property. However, it was not until after the assignment to the appellants that the landlord learnt of the deed of partition. On 23 December 1985 the appellants gave notice of their desire to purchase the freehold of the glebe house property and when the landlord refused to sell they sought a declaration that they were entitled to acquire the freehold under the Leasehold Reform Act 1967. The judge found that no part of the property assigned to the appellants had been used as agricultural land since December 1982 but that the remainder of the land comprised in the 1901 lease had continued to be used as agricultural land. The judge dismissed the application on the ground that the appellants were not entitled to acquire the freehold because the house was ‘comprised in an agricultural holding’ and therefore excluded by s 1(3)(b)a of the 1967 Act from the provisions relating to leasehold enfranchisement contained in that Act. The appellants appealed.
Held – Partition of a leasehold interest without the landlord’s consent and the subsequent severance of the leasehold interest between several assignees did not create two separate holdings with separate tenants for each holding. Furthermore, since an ‘agricultural holding’ was defined as meaning the aggregate of the land (whether agricultural or not) comprised in a contract of tenancy which was a contract for an agricultural tenancy, it followed that when considering whether a leasehold tenant’s house was comprised in an agricultural holding the land comprised in the original contract of tenancy had to be looked at as a whole. Accordingly, the glebe house property was still comprised in an agricultural holding (consisting of the whole of the premises demised by the 1902 lease) when the appellants gave notice of their desire to purchase the freehold on 23 December 1985. It followed that s 1(3)(b) of the 1967 Act deprived the appellants of any right of enfranchisement which they might otherwise have enjoyed. The appeal would therefore be dismissed (see p 1115 d e, p 1116 j to p 1117 a e f and p 1118 j to p 1119 a e to h, post).
Jelley v Buckman [1973] 3 All ER 853 applied.
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Notes
For what constitutes an agricultural holding, see 1 Halsbury’s Laws (4th edn) paras 1001–1002, and for cases on the subject, see 2 Digest (Reissue) 4–6, 3–10.
For the Leasehold Reform Act 1967, s 1, see 23 Halsbury’s Statutes (4th edn) 198.
Cases referred to in judgments
Curtis v Spitty (1835) 1 Bing NC 756, 131 ER 1309.
Gamon v Vernon (1678) 2 Lev 231, 83 ER 532.
Hare v Cator (1778) 2 Cowp 766, 98 ER 1350.
Howkins v Jardine [1951] 1 All ER 320, [1951] 1 KB 614, CA.
Jelley v Buckman [1973] 3 All ER 853, [1974] QB 488, [1973] 3 WLR 585, CA.
Stevenson v Lambard (1802) 2 East 575, 102 ER 490.
Wetherall v Smith [1980] 2 All ER 530, [1980] 1 WLR 1290, CA.
Whitham v Bullock [1939] 2 All ER 310, [1939] 2 KB 81, CA.
Case also cited
Blackmore v Butler [1954] 2 All ER 403, [1954] 2 QB 171, CA.
Appeal
Ronald Arthur Lester and Gloria Ann Lester appealed against the decision of Mr L P Laity, sitting as an assistant recorder in the Taunton County Court on 7 December 1987, whereby he dismissed their application for a declaration under s 20(2) of the Leasehold Reform Act 1967 that they were entitled to acquire the freehold of the house and premises known as Glebe House, Oare, Somerset owned by the respondent, John Ridd. The facts are set out in the judgment of Dillon LJ.
Sir Ashley Bramall for the appellants.
Stephen Lowry for the respondent.
Cur adv vult
20 December 1988. The following judgments were delivered.
DILLON LJ (giving the first judgment at the invitation of Slade LJ). This appeal from a decision of Mr L P Laity sitting as an assistant recorder, given in the Taunton County Court on 7 December 1987, raises a novel point which, despite the admirably clear reserved judgment of the recorder, I have found very difficult.
On 13 December 1982 the appellants, Mr and Mrs Lester, purchased the leasehold interest in a house now known as Glebe House at Oare in Somerset, and two acres of surrounding land. From the date of purchase they occupied the house as their residence, and by the originating application in these proceedings issued on 25 February 1986 they claimed a declaration that they were entitled to acquire the freehold of the house and land thus assigned to them, under the Leasehold Reform Act 1967, as amended. The requisite notice of their desire to have the freehold had been given on 23 December 1985 to the respondent, Mr John Ridd, who is the owner of the freehold.
Section 1(1) of the 1967 Act, as amended, confers the right to acquire the freehold, subject to certain conditions which are not in issue in the present case, when at the time he gives notice of his desire to have the freehold the tenant has been ‘occupying the house as his residence’ for the last three years. That is qualified, however, by s 1(3), which provides, so far as material:
‘This Part of this Act shall not confer on the tenant of a house any right by reference to his occupation of it as his residence (but shall apply as if he were not so occupying it) at any time when … (b) it is comprised in an agricultural holding within the meaning of the Agricultural Holdings Act 1948.’
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The question, therefore, in the present case is whether, during the time from the assignment of the leasehold interest in it to the appellants to the time when they gave their notice of their desire to have the freehold, Glebe House was comprised in an agricultural holding. The recorder held that it was so comprised, and that the appellants were therefore not entitled to acquire the freehold (because as a result of s 1(3) they were to be treated as not having occupied Glebe House as their residence for the three years’ qualifying period; that is the decision against which the appellants now appeal.
The Agricultural Holdings Act 1948, which is referred to in s 1(3)(b) of the 1967 Act, was amended by the Agricultural Holdings Act 1984, and both have since been repealed by the present Act, the Agricultural Holdings Act 1986, which is a consolidating Act, but was only enacted after these proceedings had been commenced. Counsel were agreed, however, and we accept, that it is convenient to look at the provisions of the 1986 Act since in relation to what is ‘comprised in an agricultural holding’ these provisions concisely set out the effect of the corresponding provisions of the 1948 Act as interpreted by the courts. Before I turn, however, to the provisions of the 1986 Act, it is convenient to set out the facts.
By a lease of 17 January 1902 Glebe House and the two acres subsequently assigned to the appellants were demised as part of a larger area of some 23 acres of former glebe land by the then owner Thomas Ridd (a lineal ancestor of the present respondent) to one Lethaby for a term of 99 years from 25 December 1901 at a yearly rent of £9 payable quarterly. Glebe House is described as a house in the course of erection on the land. The lease seems to have been a building lease, and, not surprisingly in the case of a lease for a long term at a ground rent (though contrary to the modern practice with agricultural tenancies), it did not contain any restriction on assignment. It merely contained a covenant that, on any assignment of the demised premises or any part thereof, notice of the assignment would be given to the lessor.
The lease also includes a covenant by the lessee not without the consent in writing of the lessor to carry on any trade or business on any part of the demised premises. It is, however, common ground that, notwithstanding this covenant, the demised premises were for very many years up to at least 1963 used for agriculture by way of trade or business.
It is sufficient to pick up the devolution of the leasehold title under the lease in 1955, when by a deed of 7 December 1955 all the lands and premises comprised in the lease were assigned for the full unexpired residue of the term of the lease to Alfred John Burge and William John Burge. They were father and son, and both were farmers; they carried on farming in partnership together under the style of A J Burge & Son, and the lands and premises so assigned to them were to be held as part of their partnership property. Their partnership was dissolved, however, on 16 December 1963, with effect from 5 April 1962, and by a deed of partition of 16 December 1963 Glebe House and the two acres subsequently assigned to the appellants were assigned to A J Burge for the unexpired residue of the term of the lease at a yearly rent of £5 while the rest of the land comprised in the lease, viz approximately 18 acres, was assigned to W J Burge for the unexpired residue of the term at the yearly rent of £4. The assignment to the appellants on 13 December 1982 of Glebe House and the two acres was made by the executors of A J Burge, who had died on 1 August 1981.
In fact it was not until after the assignment to the appellants that the respondent learnt of the partition effected between A J Burge and W J Burge in December 1963. The ground rent had presumably continued to be paid by some member of the Burge family without anyone particularly worrying which. It seems that A J Burge occupied Glebe House from 1955 or thereabouts until soon after 1963, when he moved elsewhere. Glebe House and the two acres were then let to a Mr Stevens, who farmed other lands; at this stage Glebe House was known as Glebe Farm. Mr Stevens died in May 1979, and Glebe House and the two acres were then let to Philip Burge, a grandson of A J Burge and one of the two sons of W J Burge. Philip Burge was also a farmer and, like his brother, in partnership with W J Burge in farming various Burge farming lands.
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Against this background, the relevant provisions of the Agricultural Holdings Act 1986, which are all contained in s 1, are as follows:
‘(1) In this Act “agricultural holding” means the aggregate of the land (whether agricultural land or not) comprised in a contract of tenancy which is a contract for an agricultural tenancy …
(2) For the purposes of this section, a contract of tenancy relating to any land is a contract for an agricultural tenancy if, having regard to—(a) the terms of the tenancy, (b) the actual or contemplated use of the land at the time of the conclusion of the contract and subsequently, and (c) any other relevant circumstances, the whole of the land comprised in the contract, subject to such exceptions only as do not substantially affect the character of the tenancy, is let for use as agricultural land.
(3) A change in user of the land concerned subsequent to the conclusion of a contract of tenancy which involves any breach of the terms of the tenancy shall be disregarded for the purpose of determining whether a contract which was not originally a contract for an agricultural tenancy has subsequently become one unless it is effected with the landlord’s permission, consent or acquiescence.
(4) In this Act “agricultural land” means—(a) land used for agriculture which is so used for the purposes of a trade or business …
(5) In this Act “contract of tenancy” means a letting of land, or agreement for letting land, for a term of years or from year to year … ’
Since, despite the covenant against trade or business use in the 1902 lease, the use of the land comprised in that lease as ‘agricultural land’ as defined in sub-s (4) was plainly acquiesced in by the landlord, it must follow, in the light of sub-s (3), that, even if the letting of the land under the 1902 lease was not originally a contract for an agricultural tenancy, it had become one well before the 1963 partition.
The wording used in sub-s (2), ‘… if … the whole of the land comprised in the contract, subject to such exceptions only as do not substantially affect the character of the tenancy, is let for use as agricultural land’, reflects the interpretation put on the wording of the 1948 Act by this court in Howkins v Jardine [1951] 1 All ER 320 at 329, [1951] 1 KB 614 at 628, where Jenkins LJ said:
‘… the substance of the matter must be looked at to see whether as a matter of substance the land comprised in the tenancy, taken as a whole, is an agricultural holding. If it is, then the whole of it is entitled to the protection of the Act. If it is not, then none of it is so entitled.’
In that case there had been an agricultural tenancy of some land and three cottages but the cottages were subsequently sublet to persons not engaged in agriculture. It was argued that for the purposes of the 1948 Act there must be deemed to have been a partition of the tenancy as between agricultural and non-agricultural property, so that the protection of the tenant under the 1948 Act would only apply to the agricultural land, and not the cottages as the cottages were not used for agriculture. That argument was, however, rejected by this court, because there was no relevant provision in the Act for the partition or severance of an agricultural tenancy. Somervell LJ commented ([1951] 1 All ER 320 at 326, [1951] 1 KB 614 at 623):
‘A cottage … may at any time change hands. An agricultural worker may succeed to someone not engaged in agriculture. To treat such cottages, covered in what is in substance an agricultural tenancy, as coming within and going out of the Act according to the occupation of the tenants at the moment would be a result so absurd that only the clearest words would make me come to such a conclusion.’
It is established law that the protection of the Agricultural Holdings Act will be lost if agricultural activity is wholly or substantially abandoned during the course of the tenancy: see Wetherall v Smith [1980] 2 All ER 530, [1980] 1 WLR 1290. That would
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apply, for instance, if the use of the land was changed to business activities which do not fall within statutory definition of ‘agriculture’ (now in s 96 of the 1986 Act). If part only of the land comprised in an agricultural tenancy ceases to be used for agriculture and is used instead for some other business, then on the Howkins v Jardine approach the court would have to consider the land comprised in the tenancy, taken as a whole, to see whether, as a matter of substance, the land as a whole is an agricultural holding. The correctness of that approach is underlined by the wording used in s 1 of the 1986 Act, since the term ‘agricultural holding’ (which is the term used in s 1(3)(b) of the Leasehold Reform Act 1967 and therefore the term which is crucial to this case) is defined as meaning the aggregate of the land (whether agricultural land or not) comprised in a contract of tenancy which is a contract for an agricultural tenancy and the key to determining whether a contract of tenancy is a contract for an agricultural tenancy is whether the whole of the land comprised in the contract, subject to such exceptions only as do not substantially affect the character of the tenancy, is let as agricultural land.
In the present case the recorder has found as a fact that no part of the property assigned to the appellants has been used as agricultural land since the assignment to the appellants in December 1982. But the rest of the land comprised in the 1902 lease, viz the land assigned to W J Burge on the 1963 partition, has continued to be used as agricultural land.
One question to be considered is whether the effect of the partition, or of the partition and the subsequent assignment to the appellants of their part of the land, is to create two separate tenancies of two separate holdings, each of which has to be looked at on its own. But, if that is not the effect, it is still necessary, despite the partition, to look at the land comprised in the 1902 lease as a whole. If the land is looked at as a whole, the answer, in my judgment, must be, as on its own facts was the case in Howkins v Jardine, that the whole of the land, with an exception only which does not substantially affect the character of the tenancy, is still let for use as agricultural land. If the land comprised in the 1902 lease has to be looked at as a whole the appellants must fail because, on that approach, the house and the land assigned to them, of which they desire to have the freehold, is still comprised in an agricultural holding. If it were to be held, on looking at the land as a whole, that the house and land assigned to the appellants is not comprised in an agricultural tenancy, it would necessarily have to be held as a corollary that the 18 acres allocated to W J Burge on the partition and still used as agricultural land are also not comprised in any agricultural tenancy, and do not constitute or form part of an agricultural holding.
Is it, then, possible to conclude that, as a result, direct or indirect, of the partition two separate tenancies have been created of two separate holdings, each of which has to be looked at on its own?
The effect in law of the partition of the demised premises in 1963 by the assignment of part to A J Burge and the remainder to W J Burge for the residue then unexpired, in each case, of the term of the 1902 lease was, notwithstanding that the landlord did not concur in the partition, to sever the covenants of the lease so as to follow the land. Thus after comparable assignments of parts to separate assignees an action on the covenant would lie against each assignee of part for not repairing his part: see Stevenson v Lambard (1802) 2 East 575 at 580, 102 ER 490 at 492 per Lord Ellenborough CJ. Moreover, established authority shows that under the covenant for payment of rent the landlord could only sue an assignee of part only of the premises for an apportioned part of the rent: see Gamon v Vernon (1678) 2 Lev 231, 83 ER 532, Hare v Cator (1778) 2 Cowp 766, 98 ER 1350, a decision of Lord Mansfield CJ, and Stevenson v Lambard. Some doubts as to these authorities were expressed by Tindal CJ in Curtis v Spitty (1835) 1 Bing NC 756, 131 ER 1309, but he none the less followed the earlier authorities; his doubts are recorded in the judgment of this court in Whitham v Bullock [1939] 2 All ER 310, [1939] 2 KB 81, but it was not necessary to resolve them. The law has continued to be stated in the textbooks on the subject as being that an assignee of part of the land cannot be sued for the whole
Page 1116 of [1989] 1 All ER 1111
of the rent, but only for a proportionate part thereof. However, the proportionate part which the landlord could recover from an assignee of part only of the land would be the part of the whole rent which the court thought fairly attributable to the part of the land in question, and not necessarily the part of the rent which the several assignees had agreed among themselves, without the concurrence of the landlord, to be attributable to that part of the land. More importantly, however, it is clear and undoubted law that, after assignments of separate parts of the land demised to separate assignees, the landlord can still distrain on any part for the rent which accrues due for the whole, because the rent for the whole is considered to become due out of each and every part of the land: see Curtis v Spitty and Whitham v Bullock.
Is that enough to achieve the position that as a result of the partition two separate tenancies have been created of two separate holdings, each of which has to be looked at on its own?
In Jelley v Buckman [1973] 3 All ER 853, [1974] QB 488 this court had to consider the converse position where there had been a severance of the reversion. In that case the common owner had granted a weekly tenancy of a dwelling house and land. A successor in title of the original landlord sold to a third party the reversion on the land, but not the reversion on the dwelling house, and the rent payable by the tenant had consequently to be apportioned between the two reversioners. The reversioner on the land claimed that the original tenancy had thereby been divided into two separate tenancies, one of the dwelling house and one of the land and that consequently the tenant no longer enjoyed the protection of the Rent Acts in respect of the land. But this court rejected that contention. Stamp LJ in giving the judgment of the court said, after setting out the terms of s 140 of the Law of Property Act 1925 which is concerned with the severance of the reversionary estate in any land composed in a lease ([1973] 3 All ER 853 at 856–857, [1974] QB 488 at 497–498):
‘Now it is no doubt correct that the effect of the legislation is that each reversioner has rights and remedies similar to those which he would have if he had granted a separate tenancy of the land in respect of which he is the owner. But it is one thing to say that each reversioner has rights and remedies similar to or even indistinguishable from the rights and remedies which he would have had if there had been two separate tenancies and quite another thing to say that this operates against the tenant and that he therefore has two tenancies; and we cannot read s 140 as producing the latter result. We can find nothing in the section to suggest for a moment that the legislature intended that following a severance to which the lessee was not a party, he should find himself holding part of his land under one tenancy and part under another. In relation to a lease for years as opposed to a weekly tenancy the change in the law would be dramatic and had the legislature intended to create that result one would expect to find some clear expression of that intention.’
Where, as in the present case, there has been severance of the leasehold interest between several assignees, rather than a severance of the reversion, there is no relevant statutory provision comparable to s 140. The reasoning of Stamp LJ is, however, none the less cogent. The injustice that there would have been to the tenant in Jelley v Buckman if by a transaction to which he was not a party he had thrust on him the two tenancies, one of the dwelling house and the other of the land, of which the latter would not carry Rent Act protection, would be parallelled by injustice to the landlord in the present case if by a transaction to which he was not a party he had thrust on him a separate tenancy of Glebe House and the two acres since assigned to the appellants which carried with it the potential right to enfranchisement under the Leasehold Reform Act 1967 as amended. Moreover, the notion that two separate tenancies were created by the partition of the leasehold interest between two separate assignees is wholly inconsistent with the recognised position in law that the whole of the rent under the original 1902 lease can, despite the separate assignments, be recovered by distress levied on any part of the land originally comprised in that lease.
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I am therefore constrained to reject the argument that what has happened here is that a separate contract of tenancy has come about in relation to Glebe House and the two acres assigned to the appellants, which is not a contract for an agricultural tenancy or a tenancy of an agricultural holding.
It follows for the reasons given that I would, albeit with some reluctance, dismiss this appeal.
Counsel for the appellants has urged, with his accustomed skill, an alternative argument that a conclusion that there is a single contract for an agricultural tenancy when one part of the land is vested in one assignee of the term and the rest is vested in a separate assignee for the remainder of the term is wholly inconsistent with the scheme of the Agricultural Holdings Act. He refers to the provisions of ss 8, 12, 13 and 28 of the 1986 Act, and submits that these do not fit at all where separate parts of the land are held by separate assignees for the residue of the tenancy unless each such separate assignee is to be treated, at any rate for the purposes of the Act, as holding under a separate tenancy agreement relating to a separate holding. I see the force of this, but am unable to find enough in the point to get over the appellants’ other difficulties, to which I have already referred. An assignment of separate parts of leasehold property to separate assignees for the residue of the term is nowadays tolerably rare, and it would not surprise me if this possibility had been overlooked by the draftsmen of the successive Agricultural Holdings Acts, including the 1986 Act.
Counsel for the appellants is, of course, right in saying that on the facts Howkins v Jardine [1951] 1 All ER 320, [1951] 1 KB 614 is distinguishable in that the cottages in that case had been sublet and not assigned for the residue of the tenancy. But I am concerned with the principle of the decision, which I find reflected in the wording of s 1 of the 1986 Act.
As indicated, I would dismiss this appeal.
STAUGHTON LJ. I agree with both judgments.
SLADE LJ. I too have found this case very difficult, but I agree that the appeal must fail for the reasons given by Dillon LJ. I will add something of my own out of deference to the argument of counsel for the appellants, particularly having regard to his submission that a number of the sections of the Agricultural Holdings Act 1986 are not intended or apt to deal with a situation where there are two or more separate tenants of a single holding.
In the present case all the affirmative conditions which have to be satisfied, if the right to enfranchisement conferred by s 1 of the Leasehold Reform Act 1967 (as amended) is to be exercisable by the appellants in respect of Glebe House and the two acres of surrounding land (the Glebe House property), are satisfied. The only question is whether the negative condition imposed by s 1(3)(b) is also satisfied, so as to deprive them of this right. At the time when they gave notice of their desire to purchase the freehold of the Glebe House property on 23 December 1985, were the premises ‘comprised in an agricultural holding within the meaning of the Agricultural Holdings Act 1948’? If so, s 1 of the 1967 Act does not avail them.
It is indisputable (and common ground) that immediately before the execution of the deed of partition of 16 December 1963 the Glebe House property was comprised in one ‘agricultural holding’, consisting of the aggregate of the land comprised in the ‘contract for an agricultural tenancy’ embodied in the lease of 17 January 1902.
By the deed of partition the lease of the Glebe House property was assigned to Alfred Burge and the lease of the rest of the premises comprised in the 1902 lease was assigned to William Burge. Clause 3 provided that the yearly rent of £9 reserved by that lease should be apportioned, so that the yearly rent of £5 should be exclusively payable in respect of the Glebe House property, in exoneration of the rest of the premises comprised in the lease, and the yearly rent of £4 should be exclusively payable in respect of the rest of the premises, in exoneration of the Glebe House property.
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If the landlord had concurred in the apportionment of rent provided for by the 1963 deed of partition, this might well have given rise to the emergence of two new ‘contracts of tenancy’, by way of novation, to each of which the landlord was a party, the first contract relating to the Glebe House property and providing for the payment of £5 annual rent to the landlord, the second contract relating to the rest of the premises comprised in the 1902 lease and providing for the payment of £4 annual rent. Whether or not the landlord’s concurrence had this effect would have depended on the manner and terms of his concurrence. If two new contracts of tenancy had emerged, so too would two new and separate ‘agricultural holdings’. (At that stage, it would appear, the contemplated use of both units was still for the purpose of the trade or business of agriculture.)
However, the parties to the 1963 deed of partition did not obtain the landlord’s consent to any apportionment of the rent. The evidence of Mr Henry John Ridd, who became the landlord after the death of his father in 1960, was that Mr A J Burge paid him the full rent of £9 per annum and that after his death (which occurred in 1981) his widow paid this entire rent. A letter dated 27 April 1983 from the landlord’s solicitors to the appellants’ solicitors records the rejection by the landlord of a tender by the appellants of an apportioned £5 rent.
Section 190(3) of the Law of Property Act 1925 (so far as material) provides:
‘Where in a conveyance for valuable consideration, other than a mortgage, of part of land comprised in a lease, for the residue of the term or interest created by the lease, the rent reserved by such lease or a part thereof is, without the consent of the lessor, expressed to be … (c) apportioned between the land conveyed or any part thereof and the land retained by the assignor or any part thereof; then, without prejudice to the rights of the lessor, such … apportionment shall be binding as between the assignor and the assignee under the conveyance and their respective successors in title’.
Section 190(6) provides that the section applies only if and so far as a contrary intention is not expressed in the conveyance. Section 190(7) provides, inter alia, that the remedies conferred by the section do not apply where ‘the rent is … legally apportioned with the consent of the owner or lessor’.
As the words ‘without prejudice to the rights of the lessor’ in s 190(3) implicitly recognise, an apportionment of rent effected without the landlord’s consent on an assignment of part of the demised premises is not, at least in all respects, binding on the lessor. It does not affect the landlord’s right to distrain on that part for the rent of the whole: see Witham v Bullock [1939] 2 All ER 310 at 315, [1939] 2 KB 81 at 86 per Clauson LJ. On the authorities it is not entirely clear whether the landlord ceases to be in a position to sue any one except the original lessee (whom he can sue in contract) for the whole rent and can only sue the tenants of the severed parts in respect of a proportion of the rent. This court expressly left this question open in Whitham v Bullock. Nevertheless, I think it is clear that if the landlord can only sue the tenants of the severed parts in respect of a proportion of the rent, such proportion is a fair proportion to be determined by the court. It is not necessarily the proportion which the assignor and assignee may have agreed between themselves. The proportion thus agreed is not as such binding on the landlord.
Throughout, it has to be remembered that the definition of a ‘contract for an agricultural tenancy’ in s 1(2) of the 1986 Act directs attention to ‘the whole of the land comprised in the contract’. In the circumstances of this case there has been only one relevant ‘contract of tenancy’, that is to say the contract embodied in the 1902 lease. So far as the landlord is concerned, a second contract has never been made and no part of the premises comprised in the original contract has ever been removed from it.
With all these points in mind, I cannot accept the submission that the execution of the 1963 deed of partition, without the landlord’s consent, had the effect of imposing on him
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the creation of two new and distinct ‘agricultural holdings’ with separate tenants of each holding and with all the other consequences attendant on the creation of two new distinct holdings. In my judgment, if he had known about the execution of the deed of partition, he would have been entitled to say that, so far as he was concerned, the relevant ‘agricultural holding’ was the same as it always had been, namely the whole of the premises comprised in the 1902 lease.
I recognise that, as counsel for the appellants cogently pointed out, this view of the matter gives rise to potential problems in applying certain provisions of the 1986 Act, for example ss 8, 12, 13 and 14, which do not appear to contemplate or cater adequately for the case where there are separate tenants of separate parts of one agricultural holding. Nevertheless, the existence of such problems does not, in my judgment, compel or justify the acceptance of the submission referred to in the immediately preceding paragraph.
I would add these observations. Section 6 of the 1986 Act now contains provisions which, if invoked, may effectively enable the landlord of an agricultural holding to prevent future assignments of all or part of the tenancy without his written consent, even though the original tenancy agreement contains no such restriction: see particularly s 6(1) and (5) of and para 9 of Sch 1 to the 1986 Act. Having regard to para 9, I do not think the legislature in the 1986 Act entirely overlooked the possibility of assignments of separate parts of leasehold property to separate assignees for the residue of the term. However, it may well have considered that such assignments would be rare in practice. Equally, in drafting ss 8, 12, 13 and 14, it may well have overlooked the possibility of such assignments taking place without the landlord’s consent. For the reasons given above, assignments of parts of the demised premises with the landlord’s consent are much less likely to raise problems in practice.
Be this as it may, I am satisfied that after the execution of the 1963 deed of partition the entirety of the premises demised by the 1902 lease remained one single ‘agricultural holding’ for the purpose of the Agricultural Holdings Acts. The assignment of 13 December 1982 relating to the Glebe House property made by the executors of Alfred Burge in favour of the appellants, again without the landlord’s consent, did not, in my judgment, alter the situation. Thereafter, the Glebe House property, which up to that time, on the recorder’s findings of fact, had been used for the purposes of a trade or business of agriculture, ceased to be so used. In my judgment, however, also on the recorder’s findings of fact, if the land comprised in the 1902 lease is looked at as a whole (which I think it must be), that land, with an exception which does not substantially affect the character of the tenancy (viz the Glebe House property), has still continued to be ‘let for use as agricultural land’ within the meaning of s 1(2) of the 1986 Act.
It follows that, in my judgment, on 23 December 1985, (1) the Glebe House property was still comprised in an agricultural holding within the meaning of the 1948 Act, consisting of the whole of the premises demised by the 1902 lease, (2) s 1(3)(b) of the 1967 Act accordingly operated so as to deprive the appellants of any right of enfranchisement which they might otherwise have enjoyed.
For these reasons, and the other reasons given by Dillon LJ I too would dismiss this appeal.
Appeal dismissed.
Solicitors: Clarke Willmott & Clarke, Taunton (for the appellants); Hole & Pugsley, Tiverton (for the respondent).
Celia Fox Barrister.
Practice Note
(chambers: Queen’s Bench Division)
[1989] 1 All ER 1120
Categories: PRACTICE DIRECTIONS
Court: QUEEN’S BENCH DIVISION
Lord(s): LORD LANE CJ, KENNEDY AND HUTCHISON JJ
Hearing Date(s): 10 MARCH 1989
Practice – Chambers proceedings – Queen’s Bench Division – Chambers applications and appeals – Inter partes applications and appeals – Listing – General list – Chambers appeals list – Special appointments – Estimate of length of hearing – Papers for perusal by judge – Skeleton argument or chronology.
10 March 1989. The following judgment was delivered.
LORD LANE CJ gave the following direction at the sitting of the court. In order to expedite the hearing of work listed to be heard by the Queen’s Bench judge in chambers the inter partes procedure has been reorganised. Part A of the existing Practice Direction (see Practice Note [1983] 1 All ER 1119, [1983] 1 WLR 433) is replaced by the following.
Queen’s Bench judge in chambers: inter partes applications and appeals.
1. All inter partes applications and appeals to the Queen’s Bench judge in chambers will initially be entered in a general list. They will be listed for hearing in room 98 or some other room at the Royal Courts of Justice on Tuesdays or Thursdays.
Whenever it appears or is agreed that any application or appeal is likely to last more than 30 minutes it will immediately and automatically be transferred to either (1) the chambers appeals list or (2) for all cases other than appeals to the special appointments list.
2. Cases in the special appointments list will usually be heard on a date fixed after application to fix has been made by the parties. The application to fix must be accompanied by an estimate of the length of the hearing signed by the applicant’s counsel or solicitor who is to appear on the application.
3. Cases in the chambers appeals list will be listed in the Daily Cause List. This will be done by the clerk of the lists when he prepares the following day’s list at 2 pm. They may be listed on any day of the week but particularly on Fridays, when there is often a need for short cases. They may be listed as floaters when, because no experts or other witnesses are involved, they seem particularly well suited as such. Fixtures will only be given in exceptional circumstances.
4. In order to ensure that a complete set of papers in proper order is available for perusal by the judge before hearing such applications and appeals, the parties must in advance of the hearing lodge in room 119 a bundle properly paged in order of date and indexed, containing copies of the following documents: (i) the notice of appeal or, as the case may be, the application; (ii) the pleadings (if any); (iii) copies of all affidavits (together with exhibits thereto) on which any party intends to rely; and (iv) any relevant order made in the action. The bundle should be agreed. The originals of all affidavits intended to be relied on should be bespoken or produced at the hearing and all exhibits thereto should be available.
Where a date for the hearing has been fixed (which will normally be the case for special appointments) the bundle must be lodged not later than five clear days before the fixed date.
For appeals and other cases where there is no fixed date for hearing the bundle must be lodged not later than 48 hours after the parties have been notified that the case is to appear in the warned list.
Except with leave of the judge, no document may be adduced in evidence or relied on unless a copy of it has been lodged and the original bespoken as aforesaid.
In cases of complexity a skeleton argument or, where that would be helpful, a chronology should be lodged in room 119 at the same time as the bundle.
N P Metcalfe Esq Barrister.
J v J (C intervening)
[1989] 1 All ER 1121
Categories: FAMILY; Ancillary Finance & Property
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): O’CONNOR LJ AND BOOTH J
Hearing Date(s): 13 DECEMBER 1988, 25 JANUARY 1989
Divorce – Financial provision – Child – Maintenance – Matters to be considered by court when making order – Financial resources – Interest under discretionary will trust – Father ordered to pay maintenance for children of marriage following divorce – Mother subsequently dying and leaving estate to children – Discretionary will trust established for benefit of children – Whether children’s interest under discretionary will trust a ‘financial resource’ – Whether children’s interest under will trust to be taken into account in determining amount of maintenance payable by father – Matrimonial Causes Act 1973, s 25(3)(b).
Following the divorce of the parents, custody of the two children of the marriage was given to the mother in 1978 and the father was ordered to make periodical payments to the mother and the children. In 1982 the periodical payments were increased to £45 per week for the mother and £15 and £12 per week for each child respectively. In 1986 the father transferred his half share in the former matrimonial home to the mother in satisfaction of her claim for arrears of maintenance. In 1987 the mother died leaving an estate of £17,525 to the two children. The trustees were empowered in their discretion to pay the whole or any part of the income or capital from the trust for the benefit of either of the children until they reached the age of 18, when they would become entitled to the trust fund absolutely, but the trustees’ stated aim was to preserve the fund until the children reached the age of 18 and not to advance funds for their maintenance unless they were compelled to do so. Following their mother’s death the children went to live with their maternal grandmother, who applied for an increase in the maintenance paid by the father. The registrar and, on appeal, the judge refused to order any increase on the ground that the children’s interest in the trust fund was a ‘financial resource’ within s 25(3)(b)a of the Matrimonial Causes Act 1973 and that taking that interest into account there was no reason to vary the father’s maintenance payments. The grandmother appealed to the Court of Appeal.
Held – The children’s interest under the discretionary trust was a ‘financial resource’ within s 25(3)(b) of the 1973 Act and had correctly been taken into account by the judge when determining the amount of maintenance payable by the father in respect of the children, but in assessing the value of their interest under the trust the court had to balance the necessity to ensure that the children’s needs were properly met without the father being required to pay more than he could properly afford against placing improper pressure on the trustees to exercise their discretion to make payments for the children which they would not otherwise make. In particular, the court had to have regard to the trustees’ intentions, the nature of the trust fund and the father’s duty to maintain the children in accordance with his means. Since the judge had assumed the trust fund was available for the maintenance of the children without considering the father’s duty to maintain them the appeal would be allowed and the case remitted to the judge for further consideration (see p 1123 j, p 1124 c d h j and p 1125 c e to h, post).
B v B (financial provision) (1982) 3 FLR 298 followed.
Howard v Howard [1945] 1 All ER 91 applied.
Lord Lilford v Glynn [1979] 1 All ER 441 distinguished.
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Notes
For the principles of assessment to which the court must have regard when making orders for financial provision, see 13 Halsbury’s Laws (4th edn) paras 1060–1066, and for cases on the subject, see 27(3) Digest (2nd reissue) 167–186, 10243–10293.
For the Matrimonial Causes Act 1973, s 25, see 27 Halsbury’s Statutes (4th edn) 729.
Cases referred to in judgments
B v B (financial provision) (1982) 3 FLR 298, CA.
Howard v Howard [1945] 1 All ER 91, [1945] P 1, CA.
Lilford (Lord) v Glynn [1979] 1 All ER 441, [1979] 1 WLR 78, CA.
Cases also cited
Douglas v Andrews (1849) 12 Beav 310, 50 ER 1080.
Peel, Re, Tattersall v Peel [1936] Ch 161, [1935] All ER Rep 179.
Saunders v Vautier (1841) Cr & Ph 240, [1835–42] All ER Rep 58, 41 ER 482, LC.
Wilson v Turner (1883) 22 Ch D 521 CA.
Interlocutory appeal
The grandmother of two children, having been given leave to intervene in divorce proceedings on the death of her daughter and having had vested in her by consent the custody, care and control of the children with reasonable access to the respondent, the father, appealed against the order of his Honour Judge Kellock QC sitting in chambers at Chesterfield on 5 August 1988, whereby he dismissed her appeal from the order of Mr Registrar Hibbert sitting in chambers at Chesterfield on 25 May 1988 dismissing her application on behalf of the children for an increase in the amount of periodical payments paid by the father. The grandmother sought an order that he pay to the children such sum by way of periodical payments as appeared just. The facts are set out in the judgment of Booth J.
Graham Robinson for the grandmother.
The father did not appear.
Cur adv vult
25 January 1989. The following judgments were delivered.
BOOTH J (giving the first judgment at the invitation of O’Connor LJ). This appeal from an order of his Honour Judge Kellock QC raises an important issue as to what extent, if any, in assessing the quantum of maintenance to be paid by a father for his children the court should have regard to the children’s financial interests under a discretionary will trust.
The material facts can be briefly stated. The two children are A, born on 27 December 1972, and S, born on 29 October 1977. Their father is the respondent to this appeal, although he has not been represented or appeared before us. Their mother died in August 1987. The appellant is the children’s maternal grandmother, who now has the custody of both children.
The parents were married but subsequently divorced. In May 1978 custody of the children was vested in the mother and the father was ordered to make periodical payments for them and for her. Quantum of maintenance was varied on 1 February 1982, when the father was ordered to pay £45 per week for the mother, £15 per week for A and £12 per week for S. On 12 June 1986 a consent order was made by which the father transferred his half interest in the former matrimonial home to the mother subject to the then existing mortgage, her claim for periodical payments for herself was dismissed and arrears of maintenance which had accrued both in respect of her and the children were remitted. The order for the children’s periodical payments continued unchanged.
Following the mother’s sudden death in August 1987 the children went to the home of their maternal grandmother, where they have since remained. Leave was given to her
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to intervene in the divorce proceedings and on 6 April 1988, by consent, the custody, care and control of the children were vested in her with reasonable access to the father. Immediately prior to that, on 29 March 1988, the grandmother had issued an application to vary by increasing the periodical payments for the children. That application was dismissed by Mr Registrar Hibbert and the appeal from that order was in turn dismissed by Judge Kellock on 5 August 1988. It is her further appeal from the order of Judge Kellock which has brought the grandmother to this court.
The grandmother, who is a widow and a housewife, derives her income from her state pension, in addition to which she receives child benefit and the single parent allowance. The father is a coal miner who, when the matter was before Judge Kellock, had an income of approximately £14,200 gross per annum. Although he had remarried and has a son by that marriage, it was common ground between the parties that he could afford to pay more for the two children of his first marriage if he was ordered to do so. The reason why both the registrar and the judge declined to increase the periodical payments for the children was the fact that they are both beneficiaries of their mother’s estate under the terms of her will.
By her will, dated 1 May 1980, the mother appointed two solicitors, John Blakesley and Clifford William Bellamy, to be her joint executors and trustees. She left the whole of her estate to those trustees on trust either to retain or to sell it and, after paying all debts, taxes and executorship expenses, to pay the residue equally to A and S. The will empowered the trustees, in their discretion, to pay the whole or any part of the income or capital for the benefit of either child until each became of age and absolutely entitled to his and her share.
Following the mother’s death, the former matrimonial home, which had been transferred into her sole name, was sold and thereupon her net estate amounted to £17,525. This money has been invested and it is again common ground that, if the whole of the income derived from the trust fund was to be advanced by the trustees for the children’s maintenance, then their needs would be met and it would not be necessary for the father to have to pay more by way of periodical payments.
In concluding that the order against the father should not be varied, the judge held that s 25(3)(b) of the Matrimonial Causes Act 1973, as amended, required him to take into account the trust fund for the benefit of the children and, although the power on the part of the trustees to advance income and capital was discretionary, it was nevertheless a financial resource within the meaning of that section. The judge expressed the view that it was not unfair to take the fund into consideration inasmuch as it was the equivalent of the mother contributing to the children’s upbringing and on that ground he held that there was no case to vary the payments made by the father.
Counsel for the grandmother first submitted that, since the children cannot call for neither the income or the capital of the trust fund until Pmthey come of age, they have no present financial resource within the meaning of s 25(3) of the 1973 Act. He supported that submission by pointing to the difference in wording between s 25(2)(a) and s 25(3)(b). When dealing with the financial position of the parties to a marriage, the court is required to have regard not only to the income, earning capacity, property and other financial resources which each of the parties has, but also to that which he or she is likely to have in the foreseeable future, whereas in the case of a child the court’s attention is directed only to the income, earning capacity (if any), property and other financial resources which the child presently has without being required to have regard to what the future may hold in that respect. Counsel for the grandmother argued that as the children are unable to require the trustees to pay them capital or income from the fund then it must follow that they have no present financial resource in respect of that fund, which will not come under their absolute control until they respectively attain their majorities. Thus, he says, the judge was wrong in holding their present interests to be a financial resource within the meaning of the 1973 Act.
I cannot accept that argument. I do not think that the position of the children in this
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case can be distinguished from that of the wife in B v B (financial provision) (1982) 3 FLR 298. In that case the wife was a beneficiary under two settlements. Under the first, made by her father, the trustees had power in their absolute discretion to vest the whole or any part of the trust capital in the wife absolutely. Under the second, of which she herself was the settlor, she was permitted to withdraw all or any part of the trust fund with the consent of the trustees. The Court of Appeal held that both settlements were potential sources of capital for the wife and were, therefore, ‘other financial resources’ within the meaning of s 25(2)(a) of the 1973 Act although neither fund was under her absolute control. The court further held that, in assessing her means for the purpose of an ancillary relief application by the husband, some assessment must be made of the worth of those potential sources of capital to the wife in terms of the practical realities of life or in terms of reasonable expectations. Similarly, in my view, in this case the mother’s will trust provides a potential source of income for the children at the present time, and, following the decision in B v B, it must constitute a financial resource to which the court must have regard even though neither child is absolutely entitled to the fund. I therefore agree with the approach of the judge when he said that he was compelled to have regard to the children’s interests under their mother’s will. But, that being so, it then becomes necessary for some assessment to be made of the realities of the situation and what each child may reasonably expect to receive by way of income or capital until he or she attains the age of 18.
The means by which the court can make such an assessment is not likely to be easy. Section 31(1)(i) of the Trustee Act 1925 generally empowers trustees in their sole discretion to advance such income from a trust as may be reasonable to a parent or guardian of a minor beneficiary for his maintenance, education or benefit having regard to his age and requirements and generally to all the circumstances of the case. That general power is specifically contained in the trust created by the mother’s will, so that it is clear that the children, during their respective minorities, will receive only such capital or income from the fund as the trustees think fit to advance. Although it is not clear what evidence the judge had as to the policy to be followed by the trustees, counsel for the grandmother has told us that it is not their intention to advance funds for the purpose of maintaining the children unless they are compelled to do so and to date they have only advanced one modest sum of £140 with which to buy gifts for them as a small consolation for the death of their mother. In the light of that stated intention and of the trustees’ absolute discretion under the terms of the trust, counsel for the grandmother submitted that the judge was wrong to assume that the whole of the trust income would nevertheless be available for the children’s maintenance and that assumption led him to overlook the fact that the primary duty to maintain the children continues to rest on the father and to overlook his ability to pay more for them. Counsel for the grandmother concedes, however, that despite their stated intention to preserve the funds the trustees may nevertheless be willing to advance moneys to provide things for the children which could not otherwise be afforded.
When faced with such a situation as this, the court has to perform a careful balancing exercise to ensure that the children’s needs are met without requiring the father to pay more than he can properly afford while at the same time not placing improper pressure on the trustees to exercise their discretion in such a way that they would not otherwise have thought it right to exercise it: see Howard v Howard [1945] 1 All ER 91, [1945] P 1. In performing this exercise, it seems to me to be helpful for the court to consider a number of matters. Any statement made by a trustee as to the future exercise by him of his discretion under the trustees needs to be evaluated, a task which in this case may be made the more difficult since those same solicitors who are the trustees for the children’s fund also act for the grandmother in this application.
It is also necessary for the court to have regard to the nature of the trust under which the child is a beneficiary. In this case, the trust fund represents an inheritance which in the normal course of events the children would not have received until a much later
Page 1125 of [1989] 1 All ER 1121
stage in their lives. The fund was not established for the purpose of providing for the children’s maintenance and education, as was the situation in Lord Lilford v Glynn [1979] 1 All ER 441, [1979] 1 WLR 78. This is a family from a modest financial background and the fund which is now held in trust for the children is likely to be their only major capital asset, which, had the mother lived, would have continued to have been invested in the bricks and mortar of her home, yielding no income, but appreciating in value with the rise in property prices. Had it not been for the mother’s untimely death, there would have been no question of the children deriving any benefit from the property other than the fact that it provided a roof over their heads. Further, the court should not lose sight of the fact that the mother’s death in no way alters the duty of the father to maintain the children in accordance with his means. It would, therefore, be wrong to treat the trust fund which has come about as a result of the mother’s death as representing something of a windfall for the father absolving him to a great extent from the burden he would otherwise have to bear in maintaining the children.
Those are all factors which, in my view, are relevant for the court to consider in assessing how best the needs of the children can be met. No one can imagine that the current order, made as long ago as 1982, of £15 per week for a 16-year-old boy and £12 per week for an 11-year-old girl, could come anywhere near paying for their essential requirements. There is no evidence before us that the children’s needs have in fact been fully quantified, but I venture to think it unlikely that any order which could reasonably be made against this father could do more than contribute towards the maintenance of the children, leaving the grandmother, with or without the assistance of the trust fund, to do the rest.
For the reasons I have given, I have come to the conclusion that the judge correctly decided that he must have regard for the trust fund as a financial resource, but misdirected himself in simply assuming that the whole income should be available for the children without carrying out the balancing exercise to which I have referred. We have been told that the means of the parties have changed since the matter was heard by the judge, so that, in my judgment, it is necessary to remit the matter back to him for further consideration. I would, therefore, allow this appeal.
O’CONNOR LJ. I agree with the judgment of Booth J and I agree that the case must go back to the judge.
I have no doubt, for the reasons given by Booth J, that the interest of the children in their mother’s will is ‘a financial resource’ within the meaning of s 25(3)(b) of the Matrimonial Causes Act 1973. The difficulty comes in assessing its worth when deciding what is fair to order the father to pay. No pressure is to be put on the trustees, but, in my judgment, the court is entitled to assume that they will act reasonably in all the circumstances of the case. Each case must depend on its own facts. The financial position of the father and the size of the trust are quite obviously very important considerations. In this balancing exercise, common sense should prevail so that rich fathers should not expect much relief whereas poor fathers should not have the last drop of money extracted from them.
The appeal must be allowed and the case sent back to the judge.
Appeal allowed. Case remitted to judge for further consideration.
Solicitors: Blakesley & Rooth, Chesterfield (for the grandmother).
Raina Levy Barrister.
Director of Public Prosecutions v Watkins
[1989] 1 All ER 1126
Categories: CRIMINAL; Road Traffic
Court: QUEEN’S BENCH DIVISION
Lord(s): TAYLOR LJ AND HENRY J
Hearing Date(s): 23, 24 JANUARY, 1 MARCH 1989
Road traffic – Being in charge of vehicle when unfit to drive through drink or drugs – In charge – Defendant in car holding ignition key – Defendant’s blood-alcohol level above prescribed limit – Defendant not owner of vehicle – Engine not running – No evidence that ignition key capable of starting car – Whether defendant ‘in charge’ of motor vehicle – Road Traffic Act 1972, ss 5, 6.
The defendant was found by two police officers sitting in a car which he did not own holding a key which bore the name of a different make of car but which could be inserted into the car’s ignition. The car was stationary and the engine was not running. The defendant had a blood-alcohol level above the prescribed limit and he was charged with being in charge of a motor vehicle while unfit to drive, contrary to s 5a of the Road Traffic Act 1972, and being in charge of a motor vehicle while his blood-alcohol level exceeded the prescribed limit, contrary to s 6b of that Act. There was no evidence that the defendant had been in the car with the owner’s permission or that the ignition key which he had been holding was capable of starting the car. The magistrates held that there was no case to answer because the prosecution had not shown that the defendant had been ‘in charge’ of the motor vehicle and they dismissed the charges. The prosecution appealed.
Held – Although there was no hard and fast all-embracing test of what constituted being ‘in charge’ of a motor vehicle for the purposes of drink-driving charges under ss 5 and 6 of the 1972 Act, there had to be a close connection between the defendant and control of the vehicle before the charge could be proved. That connection could be evidenced by the defendant’s position in relation to the car, his actions, possession of a key which fitted the ignition, his intentions as regards control of the vehicle and the position of anyone else in, at or near the vehicle. Proof of the likelihood of the defendant driving the vehicle was not necessary and once a prima facie case of being in charge had been made out against him the burden was on him to prove that there was no likelihood of him driving the vehicle. The question in every case was (i) whether, if the defendant had been in charge of the vehicle by virtue of being the owner, lawful possessor or recent driver of it, he was still in charge or had relinquished charge or (ii) whether, if he was not the owner, lawful possessor or recent driver of it but was sitting in it or was otherwise involved with it at the relevant time, he had assumed charge. Since the defendant’s presence in the driving seat holding an ignition key supported an inference that he intended to take control of the car by starting it, the magistrates had been premature to conclude that he was not in charge of the vehicle. The appeal would therefore be allowed and the case remitted to the magistrates to continue the hearing (see p 1131 e f, p 1132 h to p 1133 c g to p 1134 c, post).
Haines v Roberts [1953] 1 All ER 344 not followed.
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Notes
For being in charge of a motor vehicle while unfit to drive or with a blood-alcohol level which exceeds the prescribed limit, see 40 Halsbury’s Laws (4th edn) paras 482, 487, and for cases on the subject, see 39(1) Digest (Reissue) 490, 3665–3667.
For the Road Traffic Act 1972, s 5, see 42 Halsbury’s Statutes (3rd edn) 1646, and for s 6 of that Act (as substituted by the Transport Act 1981, s 25(3), Sch 8), see 51 ibid 1427.
As from 15 May 1989 ss 5 and 6 of the 1972 Act have been replaced by ss 4 and 5 of the Road Traffic Act 1988.
Cases referred to in judgments
Blayney v Knight (1975) 60 Cr App R 269, DC.
Crichton v Burrell 1951 JC 107, HC of Just.
DPP v Webb [1988] RTR 374, DC.
Fisher v Keaton (1964) 108 SJ 258, DC.
Haines v Roberts [1953] 1 All ER 344, [1953] 1 WLR 309, DC.
Morton v Confer [1963] 2 All ER 765, [1963] 1 WLR 763, DC.
Northfield v Pinder [1968] 3 All ER 854, [1969] 2 QB 7, [1969] 2 WLR 50, DC.
Woodage v Jones (No 2) (1975) 60 Cr App R 260, DC.
Cases also cited
Dawson v Procurator Fiscal (25 February 1976, unreported), HC of Just.
Dean v Wishart 1952 JC 9, HC of Just.
Hooper v Stansfield (1950) 114 JP 368, DC.
Jowett-Shooter v Franklin [1949] 2 All ER 730, DC.
Kelly v Hogan [1982] RTR 352, DC.
R v Hawkes (1931) 22 Cr App R 172, CCA.
Sheldon v Jones [1970] RTR 38, DC.
Walker v Rountree [1963] NI 23, NI CA.
Case stated
The Director of Public Prosecutions appealed by way of case stated by the justices acting in and for the petty sessional division of North Westminster in respect of their adjudication as a magistrates’ court sitting at Wells Street on 25 April 1988 whereby they dismissed an information laid by the appellant charging the respondent, Steven Watkins, with (i) being in charge of a motor vehicle on a road while unfit through drink or drugs, contrary to s 5 of and Sch 4 to the Road Traffic Act 1972, and (ii) being in charge of a motor vehicle on a road or other public place when the proportion of alcohol in his blood exceeded the prescribed limit, contrary to s 6 of and Sch 4 to the 1972 Act. The questions for the opinion of the High Court were (i) whether the magistrates were correct in finding no case to answer at the conclusion of the prosecution case on the grounds that there was insufficient evidence that the defendant was in charge of a motor vehicle, (ii) whether in determining at the conclusion of the prosecution case that there was insufficient evidence that the defendant was in charge of a motor vehicle, the magistrates were right to take into account (a) evidence that the car did not belong to the defendant and (b) doubts whether car keys found in his possession could, in fact, start the car, and (iii) whether the meaning of the phrase ‘in charge’ necessitated a close connection between a defendant and the control of, or likelihood of driving, a motor vehicle. The facts are set out in the judgment of Taylor LJ.
Michael Birnbaum for the appellant.
Nigel Pleming as amicus curiae.
The respondent did not appear.
Cur adv vult
Page 1128 of [1989] 1 All ER 1126
1 March 1989. The following judgments were delivered.
TAYLOR LJ. In this case the Crown Prosecution Service appeal by way of case stated from a decision of the North Westminster magistrates sitting as a magistrates’ court at Wells Street on 25 April 1988.
The justices had before them two informations alleging that the respondent (1) on the 13 February 1988 at Noel Street, London W1, was in charge of a motor vehicle on a road whilst unfit through drink or drugs, contrary to s 5 of and Sch 4 to the Road Traffic Act 1972, as substituted by s 25 of and Sch 8 to the Transport Act 1981, and (2) on the same date at the same place was in charge of a motor vehicle on a road or other public place when the proportion of alcohol in his blood exceeded the prescribed limit, contrary to s 6 of and Sch 4 to the 1972 Act, as substituted by s 25 of and Sch 8 to the 1981 Act.
The justices found the following facts:
‘(i) On 13th February 1988 at 12.10 a.m. two uniformed Police Officers found the defendant seated in the driver’s seat of a Mini motor vehicle registration EKO 539Y. The defendant was drunk.
(ii) The Mini motor vehicle EKO 539Y was not owned by the defendant and there was no evidence that he was in that car with the owner’s permission. The police did not trace or contact the owner of the vehicle.
(iii) The defendant was holding a bunch of keys in his right hand, with one key marked “Honda” held between his thumb and forefinger. The key could be inserted into the ignition of the Mini motor vehicle, but there was no evidence it was capable of starting the engine. The lights of the car were not switched on and the engine was not running.
(iv) The defendant was arrested and taken to West End Central Police Station where he was required to give a specimen of blood which on analysis, was shown to contain not less than 188 milligrammes of alcohol in 100 millilitres of blood.’
On those facts the appellant contended that a prima facie case had been raised in support of the two informations. The appellant relied on the fact that the respondent was seated in the car, he was drunk and he had a key in his possession which fitted the ignition. There was no evidence that the key would not start the car.
The respondent relied on the fact that the car did not belong to him. Although the key fitted the ignition, it bore the name of a different make of car, and the appellant had failed to prove that the key would start the engine. In those circumstances it was argued that there was no likelihood of the respondent driving the car away. Therefore there was no case to answer and the charges should be dismissed.
The justices upheld the respondent’s submission that there was no case to answer. They were of the opinion that the prosecution had failed to establish that the defendant was in charge of the vehicle and accordingly dismissed both charges.
The questions posed by the justices for the opinion of this court are:
‘(i) Whether we were correct in finding no case to answer at the conclusion of the prosecution case on the grounds that there was insufficient evidence that the defendant was in charge of a motor vehicle. (ii) Whether in determining at the conclusion of the prosecution case that there was insufficient evidence that the defendant was in charge of a motor vehicle, we were right to take into account:—(a) evidence that the car did not belong to the defendant and (b) doubts as to whether the car keys found in his possession could in fact start the car. (iii) Whether the meaning of the phrase “in charge” necessitates a close connection between a defendant and the control of, [or a] likelihood of driving, a motor vehicle.’
Those last words are taken verbatim from Wilkinson’s Road Traffic Offences (13th edn, 1987) vol 1, p 1/203.
There were two regrettable omissions by the police. First, they failed to discover from the owner whether the defendant had his permission to be in the car and for what
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purpose. Second, they failed to test whether the key in the defendant’s hand would in fact turn on the engine.
The result is that the facts of this case have the unreality of a student examination problem. They raise in acute form the question: what must the prosecution prove to establish that a defendant is ‘in charge of a motor vehicle’.
That phrase has appeared in successive statutes since the Road Traffic Act 1930. There have been many reported cases in which differing, and often bizarre facts, have been said to fall on one or other side of the line, but no exhaustive definition has been given as to the scope of the phrase. Probably it cannot be. In a number of the cases the court has said that whether a person is ‘in charge’ is a matter of fact and degree (see eg Fisher v Keaton (1964) 108 SJ 258, Woodage v Jones (No 2) (1975) 60 Cr App R 260 at 263 and most recently DPP v Webb [1988] RTR 374 at 379).
Nevertheless, we have been invited to give what guidance we can as to the relevant criteria and considerations on the issue, ‘in charge’ or no. In my judgment it would not be profitable to embark on an exhaustive review of the many decided cases, most of which turn on their special facts. But it may be helpful to examine such principles as have been applied in the light of statutory changes.
Even before the 1930 Act the phrase had been used in the Intoxicating Liquor (Licensing) Act 1872, s 12 of which provided, so far as is relevant, as follows:
‘Every person … who is drunk while in charge on any highway or other public place of any carriage, horse, cattle or steam engine … shall be liable to a penalty … ’
The words ‘drunk while in charge on any highway’, and the application of the phrase to livestock as well as to carriages and steam engines, seems to have required physical proximity of the defendant on the highway sufficient to exercise control.
Section 15(1) of the 1930 Act defined an offence committed by any person who—
‘when in charge of, a motor vehicle on a road or other public place is under the influence of drink or a drug to such an extent as to be incapable of having proper control of the vehicle … ’
Thus the geographical emphasis was put on the position of the vehicle rather than of the defendant (see DPP v Webb).
The effect of that provision was held by the English courts to be that, if a motor vehicle was on a road, he who had put it there was in charge of it unless and until he put it in the charge of someone else. In Haines v Roberts [1953] 1 All ER 344, [1953] 1 WLR 309 a motor cyclist became drunk and incapable. His friends were in process of arranging for someone else to ride the motor cycle and for its drunken owner to be taken home. Nevertheless the owner, who was near the cycle, was held to be in charge.
Lord Goddard CJ said ([1953] 1 All ER 344 at 345, [1953] 1 WLR 309 at 311):
‘How can it be said that in those circumstances the respondent was not in charge of the motor cycle? He had not put it into anybody else’s charge. It may be that, if a man goes to a public house and leaves his car outside or in the car park and, getting drunk, asks a friend to go and look after the car for him or take the car home, he has put it in charge of somebody else, but if he does not put the vehicle in charge of somebody else he is in charge of it until he does so. His car is away from home … and he is in charge.’
That is a simple robust statement of principle but it can hardly be complete. For example, if a stranger were to take and drive the car away without the owner’s consent and were then to stop the car temporarily, remaining in the driving seat, he would doubtless be in charge of it even though the owner had not put him in charge.
In Scotland the approach has been different. In Crichton v Burrell 1951 JC 107 the defendant was arrested while standing beside his motor car under the influence of drink. The driving door of the car was open and the defendant possessed an effective ignition key. He had been driven earlier in the evening by a chauffeur who had a duplicate key
Page 1130 of [1989] 1 All ER 1126
and was waiting for the chauffeur to return to drive him home when arrested. He was convicted under s 15(1) of the 1930 Act and appealed. Allowing the appeal the Lord Justice General (Cooper) said (at 110–111):
‘On these facts the only fair and just inference which I find it possible to draw is that for the whole of that evening and, in particular, at the time when the apprehension was effected, the person truly “in charge of” that car within the meaning of section 15 of the Act was the chauffeur … The appellant cannot be convicted because he might in strict legal theory have taken action which he is not proved to have intended to take, much less to have put into operation, the proved facts pointing plainly to the conclusion that he meant to do nothing of the kind. On a fair consideration of section 15 we know quite well what is meant by referring to a person who is driving or attempting to drive a car, and when the section goes on to refer also to a person “in charge of” a car the reference must be to the person in de facto control, even though he may not be at the time actually driving or attempting to drive. Any other reading and any attempt to include the owner merely because he was present, or because he had possession of a removable ignition key of a car which he had arranged should be driven by a chauffeur, would lead to extravagant results, some of which were instanced in the course of debate.’
Lord Keith said (at 111):
‘In my view, the words “in charge of” in section 15 of the Act mean being responsible for the control or driving of the car. They do not mean necessarily that the person concerned is driving or is attempting to drive. That is specially provided for in the section. A person may be convicted under this section if he is doing neither of these things, if, in fact, he is the person who is for the time being in control of the vehicle.’
These rival views are summarised as follows in Wilkinson’s Road Traffic Offences (13th edn, 1987) vol 1, p 1/203:
‘In general, the Scottish courts have required a close connection between the defendant and the control of, or likelihood of driving, the motor vehicle. The English courts have tended to work from the presumption that someone must be “in charge” of any motor vehicle which is parked on a road or public place, and, prima facie, that person will be the person with the keys.’
Since the 1930 Act there have been a number of statutes affecting this branch of the law. It is not necessary to set out their provisions in detail. For the purposes of this case they may be summarised as follows.
The provisions of s 15(1) of the 1930 Act were in effect repeated in the Road Traffic Act 1956 by s 9. However, for the first time that section provided a defence where the person charged could prove that at the material time the circumstances were such that there was no likelihood of his driving the vehicle so long as he remained unfit to drive. Both the English and Scottish cases cited above were decided when no such defence was available.
Section 6(2) of the Road Traffic Act 1960 re-enacted the provisions as in the 1956 Act. The Road Traffic Act 1962 by s 1 altered the wording as to the test of unfitness through drink. The Road Safety Act 1967 introduced for the first time offences of driving, attempting to drive or being in charge of a motor vehicle with alcohol in the blood above a specified limit.
The present law is contained in the Road Traffic Act 1972, as amended by the Transport Act 1981. Section 5 of that Act deals with driving or being ‘in charge’ when under the influence of drink or drugs. Section 6, re-enacting s 1 of the 1967 Act, deals with offences involving a blood-alcohol level above the prescribed limit.
The relevant terms of s 5 are as follows:
‘(1) A person who, when driving or attempting to drive a motor vehicle on a road
Page 1131 of [1989] 1 All ER 1126
or other public place, is unfit to drive through drink or drugs shall be guilty of an offence.
(2) Without prejudice to subsection (1) above, a person who, when in charge of a motor vehicle which is on a road or other public place, is unfit to drive through drink or drugs shall be guilty of an offence.
(3) For the purposes of subsection (2) above a person shall be deemed not to have been in charge of a motor vehicle if he proves that at the material time the circumstances were such that there was no likelihood of his driving it so long as he remained unfit to drive through drink or drugs but in determining whether there was such a likelihood the court may disregard any injury to him and any damage to the vehicle … ’
In regard to that section two broad propositions are clear. First, the offence of being ‘in charge’ is the lowest in the scale of three charges relating to driving and drink. The two higher in the scale are driving and attempting to drive. Therefore a defendant can be ‘in charge’ although neither driving nor attempting to drive. Clearly, however, the mischief aimed at is to prevent driving when unfit through drink. The offence of being ‘in charge’ must therefore be intended to convict those who are not driving and have not yet done more than a preparatory act towards driving, but who in all the circumstances have already formed or may yet form the intention to drive the vehicle, and may try to drive it whilst still unfit.
Second, Parliament has thought it necessary, by a deeming provision, to provide that proof of no likelihood of driving whilst still unfit negatives being ‘in charge’. It must follow that but for that defence a person could be ‘in charge’ notwithstanding there is no likelihood of his driving. Thus to establish that a person is prima facie ‘in charge’ of a vehicle does not require proof of likelihood to drive it while still unfit. The burden is on him, once there is a prima facie case, to show there was no such likelihood. If he discharges that burden, he is deemed not to have been ‘in charge’.
Accordingly, to raise a prima facie case, the prosecution have to prove some connection, which can be less than attempting to drive, between a person in the proscribed condition and a motor vehicle on a road or public place. The nature of that connection is the elusive element.
The test laid down in Haines v Roberts [1953] 1 All ER 344, [1953] 1 WLR 309 has been criticised as being too strict. In Woodage v Jones (No 2) (1975) 60 Cr App R 260 the defendant had driven erratically, stopped his car and, when told the police were coming, walked away without locking the car. He was arrested at a phone box over half a mile away. He was unfit through drink. The issue in the case was the lawfulness of his arrest and the statutory defence under s 5(3) of the 1972 Act was not raised. James LJ cited the passage already quoted from the judgment of Lord Goddard CJ in Haines v Roberts and continued (at 263):
‘Those words express the view expressed in many cases that once a person takes a vehicle on to the public road he remains in charge of that vehicle until he has taken it off the road again unless some intervening act occurs whereby he puts it in the charge of someone else. [Counsel for the appellant] frankly concedes that in the present day when circumstances are such that persons frequently have no option but to leave their vehicles on the public road parked at night, for example because they have no means of taking it off the road to park it in a garage, some relaxation of the former rigid principle ought to be adopted. But there are limits to the relaxation and in every case it must be a matter of fact and degree as to whether a person is in charge of the vehicle.’
It would seem that the court agreed with counsel’s concession that some relaxation of the rigid rule should be allowed. In my judgment that must be so. Otherwise the owner of a vehicle who parks it on the road near his home, drinks to excess and is later fast asleep in bed for the night would still be ‘in charge’ of the vehicle and prima facie guilty
Page 1132 of [1989] 1 All ER 1126
of an offence. Even more absurdly, he would be ‘in charge’ if he parked it at an airport or railway station, took the keys and was drunk whilst away on holiday. No doubt since the statutory defence became available, he would be able in either of those instances to invoke it. But in my judgment the phrase is not so wide as to import even prima facie liability on those facts.
As to the statutory defence, two decisions should be mentioned. In Morton v Confer [1963] 2 All ER 765, [1963] 1 WLR 763 the defendant was found by a constable at 10.50 pm slumped over the wheel of his car asleep. The constable woke the defendant, who immediately switched on the ignition. He was unfit through drink. In evidence he stated he had drunk a great deal at a club which he left at 10 pm. About a mile from home ‘the drinks hit him’. He immediately stopped and his intention was not to continue until he was fit. The justices accepted his evidence and dismissed the charge. The prosecutor’s appeal was allowed. Lord Parker CJ, said ([1963] 2 All ER 765 at 767, [1963] 1 WLR 763 at 765–766):
‘In my judgment, the justices were not entitled to find that defence proved merely by an acceptance of what the respondent said. They would have to be satisfied further that not only was that his intention, but that there was no likelihood that that intention would be departed from … the fact that the respondent, when awakened, automatically used the ignition key and switched on the ignition showed the danger of the justices accepting the intention … ’
In Northfield v Pinder [1968] 3 All ER 854, [1969] 2 QB 7 justices dismissed an information alleging the defendant was in charge of a motor vehicle having consumed alcohol above the prescribed limit. They found that between 9.10 pm, when he was first seen, and 9.15 pm, when he was arrested, the defendant was so drunk that he could not even find his vehicle or indeed stand up. They held there was therefore no likelihood of his driving while he remained unfit. Allowing the prosecutor’s appeal, Lord Parker CJ said ([1968] 3 All ER 854 at 857, [1969] 2 QB 7 at 12):
‘It seems to me perfectly clear that, if one is judging the likelihood of his driving between 9.10 and 9.15 p.m., quite clearly there was no probability of his driving then because at that time, in that five minutes, he was hopelessly drunk, so incapable that he could not find his own car, get into it or do anything. But, in my judgment, that is not the end of the case, because he has to prove that, at the material time, the circumstances were such that there was no likelihood of his driving it, that is, in the future, so long as there was any probability of his having alcohol in his blood in a proportion exceeding the prescribed limit … The most normal way of proving that would be for him to prove that he had handed over the keys to somebody else, or that he had taken a room for the night realising that he was drunk … but there was really no evidence here from which the justices could say that they were satisfied that, even if the worst effects of the alcohol wore off, he still would not drive it until it had come down to the prescribed limit.’
We have been greatly assisted by counsel for the appellant and counsel who has appeared as amicus curiae. They both accept that no hard and fast all-embracing test can be propounded as to the meaning of the phrase ‘in charge’.
Broadly there are two distinct classes of case. (1) If the defendant is the owner or lawful possessor of the vehicle or has recently driven it, he will have been in charge of it, and the question for the court will be whether he is still in charge or whether he has relinquished his charge. That is the class of case to which the Haines v Roberts rule was directed. Usually such a defendant will be prima facie in charge unless he has put the vehicle in someone else’s charge. However, he would not be so if in all the circumstances he has ceased to be in actual control and there is no realistic possibility of his resuming actual control while unfit, eg if he is at home in bed for the night, if he is a great distance from the car or if it is taken by another. (2) If the defendant is not the owner, the lawful possessor or recent driver but is sitting in the vehicle or is otherwise involved with it, the
Page 1133 of [1989] 1 All ER 1126
question for the court is, as here, whether he has assumed being in charge of it. In this class of case the defendant will be in charge if, whilst unfit, he is voluntarily in de facto control of the vehicle or if, in the circumstances, including his position, his intentions and his actions, he may be expected imminently to assume control. Usually this will involve his having gained entry to the car and evinced an intention to take control of it. But gaining entry may not be necessary if he has manifested that intention some other way, eg by stealing the keys of a car in circumstances which show he means presently to drive it.
The circumstances to be taken into account will vary infinitely, but the following will be relevant: (i) whether and where he is in the vehicle or how far he is from it; (ii) what he is doing at the relevant time; (iii) whether he is in possession of a key that fits the ignition; (iv) whether there is evidence of an intention to take or assert control of the car by driving or otherwise; (v) whether any other person is in, at or near the vehicle and, if so, the like particulars in respect of that person.
It will be for the court to consider all the above factors with any others which may be relevant and reach its decision as a question of fact and degree.
It has been held that a person does not become in charge of a car merely because he sits himself in the driving seat against the will of the owner: see Blayney v Knight (1975) 60 Cr App R 269. That case turned, however, on its very special facts. The defendant was one of three wishing to hire a taxi at a disco. A taxi arrived for someone else and the driver got out leaving his engine running and the driver’s door open. The defendant’s two friends got into the back of the taxi. The defendant tried to join them, but could not open the rear door, so he got into the driver’s seat. The door was still open. The taxi driver returned and sought to eject the defendant. In the struggle the defendant’s foot accidentally operated the accelerator pedal and the car went forward injuring the taxi driver. The justices acquitted the defendant both of driving and of being in charge with excess alcohol. The Divisional Court upheld their decision. Lord Widgery CJ said (at 271):
‘I do not think that a person becomes in charge of a car merely because he seats himself in the driving seat against the will of the owner. Something very much more than that is required before one can properly attribute to an individual all the responsibility which nowadays attaches to someone in charge of a motor car. I think this is an exceptional case, perhaps because the facts are so unusual … ’
Apart from sitting in the driving seat, none of the criteria (i) to (iv) above pointed to the defendant in that case being in charge. Moreover, under (v) the taxi driver was clearly in charge of the vehicle when he stopped it with its engine running and in common sense remained so throughout.
In the present case the respondent was not only in the driving seat: he was holding one of a bunch of keys between his thumb and forefinger. Those facts support an inference that he intended to take control of the car by starting it. There was no evidence of any other person at or near the car. In my judgment there was sufficient to show either he was voluntarily in de facto control of the car or that he could be expected imminently to take such control. In those circumstances it was open to a reasonable bench of justices to conclude that he was in charge.
The justices stated that the appellant had failed to prove the key would start the car. Therefore they held there was no likelihood of the defendant driving and the prosecution had failed to establish a prima facie case.
But there was no burden of proof on the prosecution in regard to the likelihood of the respondent driving. The burden was on him to establish that defence once a prima facie case of being in charge was made out against him. If he were to prove that the key in his hand would not turn on the engine, the justices might conclude he had proved the defence under s 5(3), and should therefore be deemed not to be in charge. So the justices’ approach to the uncertainty regarding the efficacy of the key put the burden of proof on the wrong party and their conclusion was premature.
Page 1134 of [1989] 1 All ER 1126
I would therefore answer the questions posed by the justices as follows. (i) No. (ii) In considering at the conclusion of the prosecution case whether there was sufficient evidence that the defendant was in charge of a motor vehicle, the justices were right to take into account evidence that the car did not belong to the defendant. They would have been right to take into account the presence of the key in the defendant’s hand as that would go to his intention. However, they were wrong to take into account doubts whether the car keys found in his possession could in fact start the car, ie the absence of proof of the likelihood of his driving. (iii) The meaning of the phrase ‘in charge’ does necessitate a close connection between the defendant and the control of a motor vehicle in the way I have endeavoured to indicate in this judgment. It does not necessitate proof of a likelihood of the defendant driving the vehicle.
I would therefore allow the appeal and remit the case to the justices to continue the hearing.
HENRY J. I agree.
Appeal allowed. Case remitted to justices to continue the hearing.
Solicitors: Crown Prosecution Service, Inner London (for the appellant); Treasury Solicitor.
Dilys Tausz Barrister.
Litster and others v Forth Dry Dock and Engineering Co Ltd and another
[1989] 1 All ER 1134
Categories: EMPLOYMENT; other Employment
Court: HOUSE OF LORDS
Lord(s): LORD KEITH OF KINKEL, LORD BRANDON OF OAKBROOK, LORD TEMPLEMAN, LORD OLIVER OF AYLMERTON AND LORD JAUNCEY OF TULLICHETTLE
Hearing Date(s): 1, 2 FEBRUARY, 16 MARCH 1989
Employment – Continuity – Transfer of trade, business or undertaking – Employment by transferor immediately before transfer – Immediately before – Receivers of company dismissing employees at 3.30 pm and selling company to new owners at 4.30 pm – Whether new owners liable to pay compensation for unfair dismissal – Whether employees employed in company’s business ‘immediately before the transfer’ of the business – Transfer of Undertakings (Protection of Employment) Regulations 1981, reg 5(1) (3).
The applicant employees were employed by a ship repairing company (the old owners), which was one of a group of companies which became insolvent and went into receivership. On 6 February 1984 the receivers agreed to sell the assets of the company to another company (the new owners) which wished to replace the workforce with workers from another shipyard who had been made redundant when that yard closed and who were prepared to work for lower wages than the applicants and their fellow employees. At 3.30 pm on 6 February the receivers dismissed the employees with immediate effect stating that there was no money to pay the statutory period of notice or accrued holiday pay. At 4.30 pm the transfer to the new owners took effect. Under reg 5(1)a and (3)b of the Transfer of Undertakings (Protection of Employment) Regulations 1981 the transfer of a business did not operate so as to terminate the contracts of employment of employees who were employed in the business ‘immediately before the transfer’ of the business and, relying on reg 5, the applicants made a complaint to an industrial tribunal that they had
Page 1135 of [1989] 1 All ER 1134
been unfairly dismissed. The tribunal upheld their complaint and held that the new owners were liable to pay compensation to the applicants based on 26 weeks’ loss of employment. On appeal by the new owners the Employment Appeal Tribunal upheld the industrial tribunal’s decision on the complaint of unfair dismissal but a further appeal by the new owners to the Court of Session was allowed on the ground that the applicants and their fellow employees were not employed in the business ‘immediately before the transfer’ of the business, and the new owners were ordered to be dismissed from the proceedings. The applicants appealed to the House of Lords.
Held – Applying a purposive construction to reg 5 of the 1981 regulations, read in conjunction with reg 8(1)c, reg 5 applied not only to employees who were employed in the business immediately before the transfer in point of time but also to employees who would have been so employed but for being unfairly dismissed before the transfer for a reason connected with the transfer. Such a construction was in accordance with art 3d of EC Council Directive 77/187, the object of which was to protect the rights of employees in the event of a change of employer. Accordingly, it was not open to the seller and buyer of a business to arrange for the seller to dismiss the employees of the business shortly before the transfer became operative so that the buyer could avoid the liability in respect of unfair dismissal or redundancy claims which would accrue if the dismissals were made after the transfer. The appeal would accordingly be allowed (see p 1136 c j to p 1137 a, p 1139 g to j, p 1142 g to p 1143 a, p 1147 h j, p 1152 e f, p 1153 c to g and p 1154 b to d, post).
Pickstone v Freemans plc [1988] 2 All ER 803 applied.
Secretary of State for Employment v Spence [1986] 3 All ER 616 distinguished.
Alphafield Ltd v Barratt [1984] 3 All ER 795 disapproved.
Notes
For the protection of employees on the transfer of undertakings, see 52 Halsbury’s Laws (4th edn) para 21–20 and Supplement to 16 ibid para 606A.
Cases referred to in opinions
Alphafield Ltd v Barratt [1984] 3 All ER 795, [1984] 1 WLR 1062, EAT.
Bork (P) International A/S (in liq) v Foreningen af Arbejdsledere i Danmark Case 101/87 [1989] IRLR 41, CJEC.
Foreningen af Arbejdsledere i Danmark v A/S Danmols Inventar (in liq) Case 105/84 [1985] ECR 2369.
Foreningen af Arbejdsledere i Danmark v Daddy’s Dance Hall A/S Case 324/86 [1988] IRLR 315, CJEC.
Landsorganisationen i Danmark v Ny Molle Kro Case 287/86 [1989] IRLR 37, CJEC.
Pickstone v Freemans plc [1988] 2 All ER 803, [1989] AC 66, [1988] 3 WLR 265, HL.
Premier Motors (Medway) Ltd v Total Oil GB Ltd [1984] 1 WLR 377, EAT.
Secretary of State for Employment v Anchor Hotel (Kippford) Ltd [1985] ICR 724, EAT.
Secretary of State for Employment v Spence [1986] 3 All ER 616, [1987] QB 179, [1986] 3 WLR 380, CA.
von Colson v Land Nordrhein-Westfalen Case 14/83 [1984] ECR 1891.
Wendelboe v L J Music ApS (in liq) Case 19/83 [1985] ECR 457.
Appeal
William Forsyth Litster and 11 other appellants, all former employees of the first respondents, Forth Dry Dock and Engineering Co Ltd, appealed against the decision of the Second Division of the Court of Session (the Lord Justice Clerk (Ross), Lord Dunpark and Lord Wyllie) dismissing the second respondents, Forth Estuary Engineering Ltd,
Page 1136 of [1989] 1 All ER 1134
from proceedings brought by the appellants against the respondents for unfair dismissal and allowing the second respondents’ appeal against the decision of the Employment Appeal Tribunal ([1986] IRLR 59) dismissing the second respondents’ appeal against the decision of an industrial tribunal on 27 February 1985 awarding the appellants compensation payable by the second respondents in respect of their unfair dismissal by the first respondents. The facts are set out in the opinion of Lord Oliver.
D A O Edward QC and Paul B Cullen (both of the Scottish Bar) for the applicants.
K H Osborne QC and Ian D Truscott (both of the Scottish Bar) for the second respondents.
Their Lordships took time for consideration
16 March 1989. The following opinions were delivered.
LORD KEITH OF KINKEL. My Lords, I agree with the speeches of my noble and learned friends Lord Oliver and Lord Templeman, which I have had the opportunity of reading in draft, and will add only a few observations of my own.
In Pickstone v Freemans plc [1988] 2 All ER 803, [1989] AC 66 there had been laid before Parliament under para 2(2) of Sch 2 to the European Communities Act 1972 the draft of certain regulations designed, and presented by the responsible ministers as designed, to fill a lacuna in the equal pay legislation of the United Kingdom which had been identified by a decision of the Court of Justice of the European Communities. On a literal reading the regulation particularly relevant did not succeed in completely filling the lacuna. Your Lordships’ House, however, held that in order that the manifest purpose of the regulations might be achieved and effect given to the clear but inadequately expressed intention of Parliament certain words must be read in by necessary implication.
In the present case the Transfer of Undertakings (Protection of Employment) Regulations 1981, SI 1981/1794, were similarly laid before Parliament in draft and approved by resolutions of both Houses. They were so laid as designed to give effect to EC Council Directive 77/187 dated 14 February 1977. It is plain that if the words in reg 5(3) of the 1981 Regulations ‘a person so employed immediately before the transfer’ are read literally, as contended for by the second respondents, Forth Estuary Engineering Ltd, the provisions of reg 5(1) will be capable of ready evasion through the transferee arranging with the transferor for the latter to dismiss its employees a short time before the transfer becomes operative. In the event that the transferor is insolvent, a situation commonly forming the occasion for the transfer of an undertaking, the employees would be left with worthless claims for unfair dismissal against the transferor. In any event, whether or not the transferor is insolvent, the employees would be deprived of the remedy of reinstatement or re-engagement. The transferee would be under no liability towards the employees and a coach and four would have been driven through the provisions of reg 5(1).
A number of decisions of the European Court, in particular P Bork International A/S (in liq) v Foreningen af Arbejdsledere i Danmark Case 101/87 [1989] IRLR 41, have had the result that where employees have been dismissed by the transferor for a reason connected with the transfer, at a time before the transfer takes effect, then for purposes of art 3(1) of EC Council Directive 77/187 (which corresponds to reg 5(1)) the employees are to be treated as still employed by the undertaking at the time of the transfer.
In these circumstances it is the duty of the court to give to reg 5 a construction which accords with the decisions of the European Court on the corresponding provisions of the directive to which the regulation was intended by Parliament to give effect. The precedent established by Pickstone v Freemans plc indicates that this is to be done by implying the words necessary to achieve that result. So there must be implied in reg 5(3) words indicating that where a person has been unfairly dismissed in the circumstances described in reg 8(1) he is to be deemed to have been employed in the undertaking immediately before the transfer or any of a series of transactions whereby it was effected.
My Lords, I would allow the appeal.
Page 1137 of [1989] 1 All ER 1134
LORD BRANDON OF OAKBROOK. My Lords, for the reasons given in the speeches of my noble and learned friends Lord Keith, Lord Templeman and Lord Oliver, I would allow the appeal.
LORD TEMPLEMAN. My Lords, by art 3 of EC Council Directive 77/187 dated 14 February 1977 the Council of the European Communities directed that on the transfer of a business from one employer to another, the benefit and burden of a contract of employment between the transferor (the old owner) and a worker in the business should devolve on the transferee (the new owner). The directive thus imposed on the new owner liability for the workers in the business, although the member states were authorised by art 3 to continue the liability of the old owner to the workers in the business ‘in addition to the transferee’. The object of the directive was expressed to be—
‘to provide for the protection of employees in the event of a change of employer, in particular, to ensure that their rights are safeguarded … ’
Article 4(1) of the directive provided:
‘The transfer of an undertaking, business or part of a business shall not in itself constitute grounds for dismissal by the transferor or the transferee. This provision shall not stand in the way of dismissals that may take place for economic, technical or organisational reasons entailing changes in the workforce … ’
The result of art 4(1) is that the new owner intending to dismiss the workers cannot achieve his purpose by asking the old owner to dismiss the workers immediately prior to the transfer taking place. The new owner cannot dismiss the workers himself after the transfer has taken place. Any such dismissal, whether by the old owner or the new owner, would be inconsistent with the object of protecting the rights of the workers and is prohibited by art 4(1).
The Transfer of Undertakings (Protection of Employment) Regulations 1981, SI 1981/1794, were approved by a resolution of each House of Parliament in pursuance of para 2(2) of Sch 2 to the European Communities Act 1972 for the express purpose of implementing EC Council Directive 77/187. Regulation 5(1) provides, in conformity with art 3 of the directive:
‘A relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee.’
Thus on the transfer of a business from one employer to another the benefit and burden of a contract of employment between the old owner and a worker in the business devolves on the new owner.
Regulation 8 provides, in conformity with art 4:
‘(1) Where either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated … as unfairly dismissed if the transfer or a reason connected with it is the reason or principal reason for his dismissal … ’
The result of reg 8(1) is the same as art 4(1), namely that if the new owner wishes to dismiss the workers he cannot achieve his purpose either by procuring the old owner to dismiss the workers prior to the transfer taking place, or by himself dismissing the workers after the date of the transfer.
In the present case, the old owners agreed with the new owners to dismiss the workers. The old owners were the Forth Dry Dock and Engineering Co Ltd (Forth Dry Dock). Forth Dry Dock was the subsidiary and a member of a group of companies headed by a parent company which defaulted in payments under a debenture issued to Lloyd’s Bank
Page 1138 of [1989] 1 All ER 1134
plc. On 28 September 1983 Lloyd’s Bank appointed receivers to all the companies in the group. The business of Forth Dry Dock, namely the business of ship repairers, was carried on under a lease of the Edinburgh dock at Leith, and this business was continued after the appointment of receivers by 25 workers including 12 who are the present appellants. A consultant to the parent company in the group, on financial and personnel matters, a Mr Brooshooft, was minded to purchase the business of Forth Dry Dock from the receivers. He acted in conjunction with a Mr Hughes, the manager of Forth Dry Dock, and a Mr Paterson who had formerly been a manager of another ship-repairing company, Robb Caledon. The workforce of Robb Caledon had been made redundant and were sufficiently chastened by unemployment to be offered lower wages than the wages of the workers of Forth Dry Dock. Mr Brooshooft formed a new company which became Forth Estuary Engineering Ltd (Forth Estuary). Forth Estuary declined to purchase the lease of the Edinburgh dock vested in Forth Dry Dock but took a new lease from the landlords. Forth Estuary declined to purchase the goodwill of Forth Dry Dock and was only prepared to purchase the tangible assets of Forth Dry Dock but of course possession of these assets, plus possession of a lease replacing the lease to Forth Dry Dock, conferred on Forth Estuary the goodwill of Forth Dry Dock. The object of taking a new lease and of declining to take the goodwill expressly, was to make it appear that the directive and the regulations did not apply because the whole of the business of the Forth Dry Dock company had not been transferred or because a third party, the landlords, were involved. These arguments have rightly been rejected at all stages of this litigation. The workers of Forth Dry Dock were given the impression that their employment would be continued by a new owner. On 6 February 1984 the receivers appointed by Lloyds Bank agreed in writing to sell to Forth Estuary ‘the business assets’ defined as the plant, machinery, equipment, furniture and office equipment detailed in the schedule, ‘as the same shall exist at the close of business’ on 6 February 1984 in consideration of £33,500 paid by Forth Estuary to the receivers when the agreement was executed in the morning or early afternoon of that day. At 3.30 pm the receivers appointed by Lloyds Bank informed the workforce of Forth Dry Dock in writing that ‘no further funds can be made available to pay your wages with effect from the close of business today’ and that no payments would be made for accrued holiday pay or damages for failure to give the statutory period of notice. Thereafter Forth Estuary continued the business of Forth Dry Dock, employed the former dockmaster and two other employees of Forth Dry Dock, but replaced the remainder of the workforce with former employees of Robb Caledon at lower wages. Thus Lloyds Bank, acting for the receiver transferred the business at 4.30 pm on 6 February 1984, that being the time of close of business and one hour after the Forth Dry Dock workers had been dismissed. The assets of Forth Dry Dock were taken by Lloyds Bank as debenture holders so that nothing was available to pay the workers of Forth Dry Dock either their holiday entitlement or damages for dismissal without notice, or damages for unfair dismissal.
It is argued that Forth Estuary, which is solvent, is not liable to the workers because they were dismissed one hour before the transfer of the business. Article 3 of the directive and reg 5(1) of the 1981 Regulations were plainly intended to prevent an insolvent old owner from dismissing a workforce at the behest of a solvent new owner so as to deprive the workforce effectively of their rights. Forth Estuary appear to deny that they are liable to the appellants for compensation for unfair dismissal pursuant to reg 8. The Court of Session found in favour of Forth Estuary.
The appellants were dismissed at 3.30 pm on 6 February by Forth Dry Dock and the business was transferred to Forth Estuary at 4.30 pm on the same day. It is argued on behalf of Forth Estuary that despite the directive and the regulations they are not liable to the appellants in respect of their unfair dismissal because reg 5(3) provides:
‘Any reference in paragraph (1) … above to a person employed in an undertaking or part of one transferred by a relevant transfer is a reference to a person so employed immediately before the transfer, including, where the transfer is effected by a series
Page 1139 of [1989] 1 All ER 1134
of two or more transactions, a person so employed immediately before any of those transactions.’
Thus, it is said, since the workforce of Forth Dry Dock were dismissed at 3.30 pm, they were not employed ‘immediately before the transfer’ at 4.30 pm and therefore reg 5(1) did not transfer any liability for the workforce from Forth Dry Dock to Forth Estuary. The argument is inconsistent with the directive. In P Bork International A/S (in liq) v Foreningen af Arbejdsledere i Danmark Case 101/87 [1989] IRLR 41 at 44 (paras 17–18) the Court of Justice of the European Communities ruled:
‘… the only workers who may invoke Directive 77/187 are those who have current employment relations or a contract of employment at the date of the transfer. The question whether or not a contract of employment or employment relationship exists at that date must be assessed under national law, subject, however, to the observance of the mandatory rules of the Directive concerning the protection of workers against dismissal by reason of the transfer. It follows that the workers employed by the undertaking whose contract of employment or employment relationship has been terminated with effect on a date before that of the transfer, in breach of Article 4(1) of the Directive, must be considered as still employed by the undertaking on the date of the transfer with the consequence, in particular, that the obligations of an employer towards them are fully transferred from the transferor to the transferee, in accordance with Article 3(1) of the Directive … ’
In von Colson v Land Nordrhein-Westfalen Case 14/83 [1984] ECR 1891 at 1909 (para 26) the European Court, dealing with EC Council Directive 76/207 forbidding discrimination on grounds of sex regarding access to employment, ruled:
‘… the Member States’ obligation arising from a directive to achieve the result envisaged by the directive and their duty under Article 5 of the Treaty to take all appropriate measures, whether general or particular, to ensure the fulfilment of that obligation, is binding on all the authorities of Member States including, for matters within their jurisdiction, the courts. It follows that, in applying the national law and in particular the provisions of a national law specifically introduced in order to implement Directive No 76/207, national courts are required to interpret their national law in the light of the wording and the purpose of the directive in order to achieve the result referred to in the third paragraph of Article 189.’
Thus the courts of the United Kingdom are under a duty to follow the practice of the European Court by giving a purposive construction to directives and to regulations issued for the purpose of complying with directives. In Pickstone v Freemans plc [1988] 2 All ER 803, [1989] AC 66 this House implied words in a regulation designed to give effect to EC Council Directive 75/117 dealing with equal pay for women doing work of equal value. If this House had not been able to make the necessary implication the Equal Pay (Amendment) Regulations 1983, SI 1983/1794, would have failed in their object and the United Kingdom would have been in breach of its treaty obligations to give effect to directives. In the present case, in the light of EC Council Directive 77/187 and in the light of the ruling of the European Court in Bork’s case [1989] IRLR 41, it seems to me, following the suggestion of my noble and learned friend Lord Keith, that reg 5(3) of the 1981 Regulations was not intended and ought not to be construed so as to limit the operation of reg 5 to persons employed immediately before the transfer in point of time. Regulation 5(3) must be construed on the footing that it applies to a person employed immediately before the transfer or who would have been so employed if he had not been unfairly dismissed before the transfer for a reason connected with the transfer. It would, of course, still be open for a new owner to show that the employee had been dismissed for an ‘economic, technical or organisational reason entailing changes in the workforce’, but no such reason could be advanced in the present case where there was no complaint against the workers, they were not redundant and there were no relevant reasons
Page 1140 of [1989] 1 All ER 1134
entailing changes in the workforce. I would therefore allow the appeal and make the order proposed by my noble and learned friend Lord Oliver.
LORD OLIVER OF AYLMERTON. My Lords, this appeal raises, not for the first time, the broad question of the approach to be adopted by courts in the United Kingdom to domestic legislation enacted in order to give effect to this country’s obligations under the EEC Treaty. The legislation with which the appeal is concerned is a statutory instrument made on 14 December 1981 pursuant to para 2(2) of Sch 2 to the European Communities Act 1972 and entitled the Transfer of Undertakings (Protection of Employment) Regulations 1981, SI 1981/1794. The regulations were made by the Secretary of State, and this is common ground, in order to give effect to EC Council Directive 77/187 adopted by the Council of the European Communities on 14 February 1977 to provide for the approximation of the laws of the member states relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of businesses. The question which arises is whether it has achieved this object.
The approach to the construction of primary and subordinate legislation enacted to give effect to the United Kingdom’s obligations under the EEC Treaty have been the subject matter of recent authority in this House (see Pickstone v Freemans plc [1988] 2 All ER 803, [1989] AC 66) and is not in doubt. If the legislation can reasonably be construed so as to conform with those obligations, obligations which are to be ascertained not only from the wording of the relevant directive but from the interpretation placed on it by the Court of Justice of the European Communities, such a purposive construction will be applied even though, perhaps, it may involve some departure from the strict and literal application of the words which the legislature has elected to use.
It will, I think, be convenient to consider the terms of the directive and the regulations before outlining the circumstances in which the instant appeal arises. The broad scope of the directive appears from the following two recitals:
‘Whereas economic trends are bringing in their wake, at both national and Community level, changes in the structure of undertakings, through transfers of undertakings, businesses or parts of businesses to other employers as a result of legal transfers or mergers; Whereas it is necessary to provide for the protection of employees in the event of a change of employer, in particular, to ensure that their rights are safeguarded … ’
By art 1 it is provided that the directive shall apply to the transfer of an undertaking, business or part of a business to another employer. Article 2 contains definitions, the relevant ones for present purposes being:
‘(a) “transferor” means any natural or legal person who, by reason of a transfer within the meaning of Article 1(1), ceases to be the employer in respect of the undertaking, business or part of the business; (b) “transferee” means any natural or legal person who, by reason of a transfer within the meaning of Article 1(1), becomes the employer in respect of the undertaking, business or part of the business … ’
Section II is headed ‘Safeguarding of employees’ rights’ and contains three articles of which the relevant ones for present purposes are arts 3 and 4. Article 3 provides (so far as material):
‘1. The transferor’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer within the meaning of Article 1(1) shall, by reason of such transfer, be transferred to the transferee … ’
Paragraph (2) deals with the continuation of collective agreements and para (3) excepts from the preceding paragraphs employees’ rights to old-age, invalidity or survivors’
Page 1141 of [1989] 1 All ER 1134
benefits under company pension schemes outside the member states’ social security schemes. The latter part of the paragraph may, however, have a peripheral relevance in the present context, as indicating that the expressions ‘on the date of the transfer’ and ‘at the time of the transfer’ are used interchangeably in the directive. It provides:
‘Member States shall adopt the measures necessary to protect the interests of employees and of persons no longer employed in the transferor’s business at the time of the transfer within the meaning of Article 1(1) in respect of rights conferring on them … entitlement to old-age benefits … under supplementary schemes referred to in the first subparagraph.’
Article 4 is, so far as material, in the following terms:
‘1. The transfer of an undertaking, business or part of a business shall not in itself constitute grounds for dismissal by the transferor or the transferee. This provision shall not stand in the way of dismissals that may take place for economic, technical or organisational reasons entailing changes in the workforce …
2. If the contract of employment or the employment relationship is terminated because the transfer within the meaning of Article 1(1) involves a substantial change in working conditions to the detriment of the employee, the employer shall be regarded as having been responsible for termination of the contract of employment or of the employment relationship.’
Section III (art 6) contains requirements for providing information to representatives of employees which do not need to be recited in any detail. The provisions of para (1) of art 6, however, ought to be referred to in the context of the overall purpose of the directive of ensuring that the interests of employees are to be safeguarded on any transfer of the undertaking in which they are employed. It provides as follows:
‘The transferor and the transferee shall be required to inform the representatives of their respective employees affected by a transfer within the meaning of Article 1(1) of the following: the reasons for the transfer, the legal, economic and social implications of the transfer for the employees, measures envisaged in relation to the employees. The transferor must give such information to the representatives of his employees in good time before the transfer is carried out.’
Finally, art 7, which provides that the directive shall not affect the rights of member states to apply or introduce measures more favourable to employees, contains the clear implication that the protection envisaged by the directive is the minimum requirement for which the member states are obliged to give effect.
Turning now to the 1981 regulations, which came into operation in 1982 and which represent the British government’s perception at that time of its obligations under the directive, these provide for relevant purposes as follows:
‘2.—(1) In these Regulations … “employee” means any individual who works for another person whether under a contract of service or apprenticeship or otherwise but does not include anyone who provides services under a contract for services and references to a person’s employer shall be construed accordingly … “the 1978 Act” and “the 1976 Order” mean, respectively … the Employment Protection (Consolidation) Act 1978 and the Industrial Relations (Northern Ireland) Order 1976 … “relevant transfer” means a transfer to which these Regulations apply and “transferor” and “transferee” shall be construed accordingly; and “undertaking” includes any trade or business but does not include any undertaking or part of an undertaking which is not in the nature of a commercial venture …
3.—(1) Subject to the provisions of these Regulations, these Regulations apply to a transfer from one person to another of an undertaking situated immediately before the transfer in the United Kingdom or a part of one which is so situated.
(2) Subject as aforesaid, these Regulations so apply whether the transfer is effected by sale or by some other disposition or by operation of law …
Page 1142 of [1989] 1 All ER 1134
(4) It is hereby declared that a transfer of an undertaking or part of one may be effected by a series of two or more transactions between the same parties, but in determining whether or not such a series constitutes a single transfer regard shall be had to the extent to which the undertaking or part was controlled by the transferor and transferee respectively before the last transaction, to the lapse of time between each of the transactions, to the intention of the parties and to all the other circumstances …
5.—(1) A relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee.
(2) Without prejudice to paragraph (1) above, on the completion of a relevant transfer—(a) all the transferor’s rights, powers, duties and liabilities under or in connection with any such contract, shall be transferred by virtue of this Regulation to the transferee; and (b) anything done before the transfer is completed by or in relation to the transferor in respect of that contract or a person employed in that undertaking or part shall be deemed to have been done by or in relation to the transferee.
(3) Any reference in paragraph (1) or (2) above to a person employed in an undertaking or part of one transferred by a relevant transfer is a reference to a person so employed immediately before the transfer, including, where the transfer is effected by a series of two or more transactions, a person so employed immediately before any of those transactions …
8.—(1) Where either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of Part V of the 1978 Act and Articles 20 to 41 of the 1976 Order (unfair dismissal) as unfairly dismissed if the transfer or a reason connected with it is the reason or principal reason for his dismissal.
(2) Where an economic, technical or organisational reason entailing changes in the workforce of either the transferor or the transferee before or after a relevant transfer is the reason or principal reason for dismissing an employee—(a) paragraph (1) above shall not apply to his dismissal …
12. Any provision of any agreement (whether a contract of employment or not) shall be void in so far as it purports to exclude or limit the operation of Regulation 5, 8 or 10 above … ’
It will be seen that, as is to be expected, the scope and purpose of both the directive and the regulations are the same, that is to ensure that on any transfer of an undertaking or part of an undertaking, the employment of the existing workers in the undertaking is preserved or, if their employment terminates solely by reason of the transfer, that their rights arising out of that determination are effectively safeguarded. It may, I think, be assumed that those who drafted both the directive and the regulations were sufficiently acquainted with the realities of life to appreciate that a frequent, indeed, possibly the most frequent, occasion on which a business or part of a business is transferred is when the original employer is involvent, so that an employee whose employment is terminated on the transfer will have no effective remedy for unfair dismissal unless it is capable of being exerted against the transferee. It can hardly have been contemplated that, where the only reason for determination of the employment is the transfer of the undertaking or the relevant part of it, the parties to the transfer would be at liberty to avoid the manifest purpose of the directive by the simple expedient of wrongfully dismissing the workforce a few minutes before the completion of the transfer. The European Court has expressed, in the clearest terms, the opinion that so transparent a device would not avoid the operation of the directive, and if the effect of the regulations is that under the law of
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the United Kingdom it has that effect, then your Lordships are compelled to conclude that the regulations are gravely defective and the government of the United Kingdom has failed to comply with its mandatory obligations under the directive. If your Lordships are in fact compelled to that conclusion, so be it; but it is not, I venture to think, a conclusion which any of your Lordships would willingly embrace in the absence of the most compulsive context rendering any other conclusion impossible.
My Lords, the circumstances in which the question has arisen for decision in the instant case are these. The first respondents, Forth Dry Dock and Engineering Co Ltd, carried on a business of ship repairers at the Edinburgh dry dock, premises which they held under a lease from the Forth Ports Authority. At the material time, the 12 appellants were tradesmen employed in that business. They were part of a permanent workforce of skilled shipworkers of various trades who had been continuously employed by the first respondents since 1981 or 1982. In the year 1983 the group of companies of which the first respondents formed part was in financial difficulties and the receiver of the various companies in the group (including the first respondents) was appointed by the debenture holder, Lloyd’s Bank, on 28 September 1983. The workforce was then told by the receiver’s representative, a Mr Page, that the intention was to sell the business as a going concern and that their jobs would be safe. That belief may have been genuinely entertained at the time, but it was falsified in the event.
On 23 November 1983 the second respondents, Forth Estuary Engineering Ltd (Forth Estuary) was incorporated. A few days before the transfer of the first respondents’ assets, which took place on 6 February 1984, the capital of Forth Estuary was increased from £1,000 to £20,000: 85% of the issued capital became vested in a Mr Brooshooft, who had been a financial adviser to the first respondents’ company, and 10% in a Mr Hughes, who had been a director of and had managed the business of the first respondents. On 6 February 1984 an agreement was entered into between the first respondents, the receivers and Forth Estuary under which (a) all the first respondents’ business assets, consisting of plant, machinery, equipment, furniture and office equipment specified in a schedule, were acquired by Forth Estuary at a price of £33,500 payable on execution of the agreement, (b) the first respondents undertook to cease business at close of business on that day (at which time the sale and purchase was to be carried into effect) and (c) the first respondents undertook forthwith to relinquish their rights under the lease of the dry dock which they held from the ports authority. Before this, it is not clear exactly when, Forth Estuary had obtained from the Forth Ports Authority a new lease of the property previously let to the first respondents (with the exception of one shed). It is interesting to note that under cl 14 of this agreement, its construction, validity and performance were to be governed by English law and the courts of England were given exclusive jurisdiction. As a matter of English law, therefore, the ownership of the assets transferred passed in equity to Forth Estuary on the execution of the agreement and those assets were, assuming, as we must assume, that the consideration was then paid as provided by the agreement, then held by the transferor as a bare trustee for the transferee. Up to this point the appellants had continued to be employed by the first respondents. It had, however, clearly been determined by the receivers, and, one infers, by Forth Estuary, that that situation was not to be permitted to continue and it is difficult, if not impossible, to resist the inference that the reason why it was not to be permitted to continue was that both parties were very well aware of the provisions of the regulations to which I have already referred. It can hardly have been merely a fortunate coincidence that officers from the redundancy payments section of the Department of Employment were already at the dock on that afternoon when Mr Hughes and Mr Page arrived at approximately 3 pm having come straight from the office of Messrs Brodies, where the agreement had been signed. They addressed the workforce and told them that the business was to close down at 4.30 pm that day and that they were dismissed ‘with immediate effect’. Each of the appellants was given a letter from the receivers under the first respondents’ letterhead which was dated 6 February 1984 and was, so far as material, in the following terms:
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‘We would advise you that no further funds can be made available to pay your wages with effect from the close of business today and accordingly we have to inform you that your employment with the company is terminated with immediate effect. No payments will be made in respect of your accrued holiday pay, or the failure to give you your statutory period of notice. Under the Insolvency provisions of the Employment Protection Act, any claim you may have for the above will, subject to certain limitations, be paid to you by the Department of Employment out of the Redundancy Fund … Your wages up to the date of dismissal will be paid in the normal way and you will be issued with a P45 from the company’s head office.’
One of the less creditable aspects of the matter is that one of the appellants, Mr Walker, who was the union shop steward, asked specifically whether the business was being taken over by Forth Estuary, and was told by Mr Hughes that he knew nothing about a new company taking over, while Mr Page said that he knew nothing about a company called Forth Estuary Engineering. This indicates a calculated disregard for the obligations imposed by reg 10 of the 1981 regulations. Within 48 hours of their dismissal, the appellants learned, at the local job centre, that Forth Estuary was recruiting labour and a group of them went to fill in application forms for employment. None was successful and indeed only three former employees of the first respondents were taken on. Work which was in progress on the vessels on 6 February was subsequently continued and completed by Forth Estuary, which very soon had a workforce of similar size to that of the first repondents, embracing the same trade but recruited at lower rates of pay elsewhere than from the existing employees. The industrial tribunal, in their reasons for decision, commented:
‘The fact that Forth Estuary, apart from the three exceptions, has not retained or employed the former employees of Forth Dry Dock is consistent with Mr Brooshooft’s decision (which he referred to in his evidence) not to employ the existing employees as he wanted to start “with a clean sheet”, although he had no criticism of them.’
It is difficult to resist the inference that Mr Brooshooft was not unmindful of the disadvantages which might flow under the regulations from the continuance of the employment of the existing workforce as compared with the advantages to be derived from the pool of unemployed tradesmen anxious for work on any available terms. Although the industrial tribunal made no finding as to this, the sequence of events and the secrecy with which they were enshrouded are such that they cannot rationally be accounted for otherwise than by the hypothesis that the dismissal of the existing workforce was engineered specifically with a view to preventing any liability for the obligations incidental to their contracts of employment from attaching to Forth Estuary, so as to leave them with nothing but a claim for redundancy on the redundancy fund under s 106 of the Employment Protection Act 1978 and an illusory claim for unfair dismissal against an insolvent company.
The appellants applied to an industrial tribunal complaining that they had been unfairly dismissed and by an order of 28 September 1984 Forth Estuary was sisted as an additional and second-named respondent to that application. On 27 February 1985 the industrial tribunal determined that the appellants had been unfairly dismissed by the first repondents and that Forth Estuary was liable to pay monetary compensation which was assessed on the basis of 26 weeks’ loss of employment. From that decision Forth Estuary appealed to the Employment Appeal Tribunal on the grounds, first that there had been no relevant transfer of the business within the terms of the regulations; second that the appellants were not employees employed in the business immediately before the transfer and that, accordingly, the obligations under their respective contracts of employment were not transferred to Forth Estuary; third that the appellants had not been unfairly dismissed; and, fourth, that in any event there was no justification for the
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assessment of compensation on the basis of 26 weeks’ loss of employment. The appellants cross-appealed against the decision so far as it restricted the compensation to a figure based on 26 weeks’ loss of employment. On 5 December 1985 the Employment Appeal Tribunal ([1986] IRLR 59) affirmed the decision on the industrial tribunal, save that it concluded that the onus of establishing that if the appellants had been employed by Forth Estuary that company would have dismissed them in the future for some proper reason other than for the mere transfer of the business rested with Forth Estuary. There was, on the evidence, no ground for limiting the appellants’ claim to the period assumed by the industrial tribunal. They accordingly remitted the case to the industrial tribunal to reconsider the basis for assessment of compensation.
One of the curiosities of the appeal is that the principal and, substantially, the only question argued before this House on behalf of the respondents, that is to say, that adumbrated in the second ground mentioned in the notice of appeal to the Employment Appeal Tribunal, was not in fact relied on there, the principal arguments being that there had been no relevant transfer so as to enable the appellants to invoke the regulations at all and that, in any event, the appellants had not been unfairly dismissed for the reason specified in reg 8(1). In my view, the latter point is really unarguable on the facts. It was entirely unsupported by any evidence on the part of the first respondent and was rightly rejected both by the industrial tribunal and the Employment Appeal Tribunal. Since, however, counsel for the Forth Estuary has sought, as he did before the Court of Session, to keep the first point alive, it may be convenient to deal with it at this point. It has not been contested, nor could it easily be with any conviction, that the business of the first respondents was not transferred to Forth Estuary; but what is said is that the transfer was not a ‘relevant transfer’ within the regulations, inasmuch as one of the steps involved the concurrence of a third party, that is to say the Forth Ports Authority, which was involved to the extent of accepting the relinquishment of the first respondents’ lease and granting a new lease to Forth Estuary. What is said is that reg 3(4), which declares, ex abundanti cautela, that a transfer may be effected by a series of ‘two or more transactions between the same parties’ rules out, by implication, as a relevant element in the transfer, a transaction between one of the parties and a third party. In fairness to counsel for the Forth Estuary, I should say that he was the first to acknowledge that this argument hardly qualified for the description of the jewel in his crown. In my judgment there is no substance in it. I do not, for a start, consider that any such implication can be legitimately drawn from the words of the regulation, but in any event, reg 3(4) does not purport to be anything more than declaratory and cannot be properly construed as in any sense an exclusive definition of what can constitute a transfer.
To continue with the history, the respondents appealed to the Court of Session ([1988] IRLR 289) which, by an interlocutor of the Second Division of the Inner House dated 18 March 1988, sustained the appeal and ordered that the cases of all the appellants should be remitted to the industrial tribunal with a direction that Forth Estuary should be dismissed from the proceedings and that the industrial tribunal should proceed to consider the cases against the first respondents. It is against that interlocutor that the appellants now appeal to this House.
The ground on which the Second Division of the Inner House sustained the appeal was that although the dismissal occurred on the same day as the transfer, reg 5 did not apply to continue the employment of the appellants by Forth Estuary because the dismissal, having been effected before, albeit only shortly before, the transfer took effect, there was, at that point of time, no longer any contract of employment in existence and the appellants were not therefore employed by the first respondents at the time of the transfer. Accordingly, reg 5(1) and (2) never operated to transfer the appellants to the employment of Forth Estuary or to impose on that company any of the obligations of the first respondents as employers. In so deciding, the Second Division followed the decision of the Court of Appeal in England in Secretary of State for Employment v Spence [1986] 3 All ER 616, [1987] QB 179, which was decided on 15 May 1986, that is to say, after the date of the decision of the Employment Appeal Tribunal. At the date of that
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decision the point was generally thought to be concluded against the respondents by two decisions of the Employment Appeal Tribunal in England in Alphafield Ltd v Barratt [1984] 3 All ER 795, [1984] 1 WLR 1062 and Secretary of State for Employment v Anchor Hotel (Kippford) Ltd [1985] ICR 724. In Spence’s case the Court of Appeal overruled those decisions. Your Lordships are now invited to overrule Spence’s case.
There is, I think, a serious question whether, on the facts of the instant case, the question of the correctness of the decision in Spence’s case arises at all. Having regard both to the terms of the agreement to which I have referred and to those of the letters of dismissal received by the appellants, there appear to be respectable arguments in favour of a contention that the appellants’ employment was not, in fact, determined until after, or eo instante with, the transfer of the business. The point has, however, not been fully argued and your Lordships have been invited to approach the appeal on the footing that the dismissals took effect at about 3.30 pm on 6 February and that the transfer did not take place until 4.30 pm on that day. I therefore make that assumption.
Two questions then arise. First, was the time which elapsed between the dismissals and the transfer of so short a duration that, on the true construction of reg 5, the appellants were ‘employed immediately before’ the transfer, as required by para (3) of that regulation? Second, if the answer to that question is in the negative, what difference (if any) does it make that the reason, or the principal reason, for the dismissals was, as it clearly was, the imminent occurrence of the transfer so that the dismissals were, by reg 8(1), deemed to be unfair dismissals?
The expression ‘immediately before’ is one which takes its meaning from its context, but in its ordinary signification it involves the notion that there is, between two relevant events, no intervening space, lapse of time or event of any significance. If, for instance, the question is whether a deceased person was seized of property immediately before his death, attention is focussed on the very instant at which the death occured. In construing the regulations with which this appeal is concerned, one gets little help from the terms of the directive to which they were intended to give effect. Article 3, as has been seen already, refers to an employment relationship existing ‘on the date of the transfer’, but this expression seems to be used interchangeably with the expression ‘at the time of the transfer’ (in the French text ‘au moment du transfert’) which appears to embrace the notion that what has to be regarded is the status of the employee vis-à-vis his employer at the very instant at which the employer’s business is transferred.
As will already have become apparent, there have been a number of decisions in which the provisions of reg 5 have fallen to be construed and your Lordships’ attention has, in addition, been drawn to a number of decisions in which arts 3 and 4 of the directive have fallen to be interpreted by the European Court. Before referring to these, however, it may be helpful to consider the regulations without the assistance of authority, but bearing in mind their overall purpose of giving effect to the provisions of the directive. To begin with, it is to be noted that the reference in reg 5(1) to a ‘contract which would otherwise have been terminated by the transfer’ is, strictly speaking, a misdescription. The reason why a contract of employment is said to ‘terminate’ on a transfer of the employer’s business is simply that such a transfer operates as a unilateral repudiation by the employer of his obligations under the contract and thus as a dismissal of the employee from his service. Because the relationship between employer and employee is of an essentially personal nature, the repudiation severs the factual relationship resulting from the contract, since the primary obligations on both sides are no longer capable of being performed. The contract itself, however, is not, strictly speaking, terminated but remains in being and undischarged so far as the enforcement of secondary obligations is concerned. This may seem a truism but it has, I believe, an importance in the analysis, in particular in relation to the meaning to be ascribed to the words ‘terminated by the transfer’ in reg 5(1) and the words ‘immediately before the transfer’ in reg 5(3). The necessary assumption in para (1) of the regulation is that the contract of employment to which the consquence stated in the paragraph is to attach, is one which, apart from the transfer,
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would have continued in force and that what ‘terminates’ it, or would, apart from the regulation, have terminated it, is the repudiatory breach constituted by the transfer. That paragraph can, therefore, operate only on a subsisting contract. There is nothing in the terms of para (2), if it stood alone, which necessarily involves the same restriction. It is, however, clearly intended merely to supplement the provisions of para (1), and para (3) supplies the connection by expressly limiting the operation of both paras (1) and (2) to the case where the relevant employee is employed in the undertaking ‘immediately before the transfer’, that is to say, to the circumstances envisaged in para (1) in which, apart from the regulation, the event producing the termination is the transfer. The crucial question, therefore, is what is meant by the reference to a contract being terminated ‘by’ a transfer.
This could embrace a number of different possibilities. If nothing at all occurs to disturb the relationship of master and servant apart from the simple unannounced fact of the transfer of business by the employer, it is the transfer itself which constitutes the repudiatory breach which, apart from reg 5(1) ‘terminates’ the contract. If, however, the employer, contemporaneously with the transfer, announces to his workforce that he is transferring the business and that they are therefore dismissed without notice, it is, strictly, the oral notification which terminates the contract; yet it could not, as a matter of common sense, be denied that the contract has been ‘terminated by the transfer’ of the business, particularly when reference is made to the supplementary provisions of para (2) of reg 5 when read in conjunction with para (3). Similarly, if the employer, a week, or it may be a day, before the actual transfer, hands to each employee a letter announcing that he is proposing to transfer his undertaking at the close of business on the transfer date, at which time the employees are to consider themselves as forthwith dismissed, it could hardly be contended under the regulations that their employment had not been terminated by the transfer, even though, at the date of the notice, the dismissal might be capable of taking effect independently, in the event, for instance, of the actual transfer of the business being postponed to a date or time later than the expiry of the notice. In each hypothetical case the employer’s repudiation of the contract of service is differently communicated but its essential quality of a repudiation by the transfer of the undertaking remains the same and the contract can quite properly be described as having been terminated by the transfer. If, by contrast, the employer announces to his workforce that he is transferring his business to another person at 5 pm on the following Friday and that they are to consider themselves dismissed from his employment at 4.59 pm on that day, it is difficult to see any reason why the interposition of a one-minute interval between the express repudiation becoming effective and the transfer which would, in any event, have operated as a repudiation if nothing had been said, should invest the breach of contract by the employer with some different quality. In each case the effective cause of the dismissal is the transfer of the business, whether it be announced in advance or contemporaneously, or whether it be unannounced, and it would be no misuse of ordinary language in each case to speak of the termination of the contracts of the workforce as having been effected by the transfer. It is absurd to suggest that there is any distinction in substance between any of the hypothetical cases which I have envisaged. Can it then, one asks, possibly have been the intention of the Secretary of State in framing legislation expressly directed to safeguarding the rights of employees when an undertaking is transferred, to make its effectiveness depend on whether the transferor, as a result perhaps of a collusive bargain with the transferee, allows a scintilla temporis to elapse between the operation of a notice dismissing his workforce and the completion of the legal formalities of the transfer which is the true cause of their dismissal, particularly having regard to the provisions of reg 8, which were clearly intended to have the same effect as art 4 of the directive? My Lords, I should be reluctant so to construe the regulations, quite apart from any authority. When, however, they are considered in the light of the interpretation placed by the European Court on the provisions of the directive, it becomes, I think, clear that your Lordships are not compelled to do so.
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In Wendelboe v L J Music ApS (in liq) Case 19/83 [1985] ECR 457 the original employer company was on the brink of insolvency. So far as appears, no transfer of their undertaking was in contemplation when financial stringency compelled closure of the business and the dismissal of the major part of the workforce with immediate effect. That occurred on 28 February 1980. On 4 March 1980 the company was declared insolvent and a little over three weeks later an agreement was concluded transferring the business to a purchaser with effect from 4 March, the court having conduct of the insolvency having authorised the (then prospective) purchaser to use the company’s premises and equipment from 5 March onwards. The three plaintiffs were part of the original workforce and had in fact been engaged by the purchaser on 6 March but on terms that they lost their rights to seniority. They sued the original employer for damages for wrongful dismissal and arrears of holiday pay and were met with the defence that under the Danish legislation, which had been passed to give effect to the directive, all liabilities in respect of their employment had been transferred to the purchaser. The question submitted by the Danish court to the European Court, pursuant to art 177 of the EEC Treaty, was whether the directive required member states to enact provisions under which the transferee of an undertaking became liable in respect of obligations concerning holiday pay and compensation to former employees who were not employed in the undertaking on the date of the transfer. That question was answered in the negative, as might indeed have been surmised purely from a textual interpretation of art 3(1) of the directive. The following extract from the judgment of the court (at 466–467(paras 15–16)) is, however, of interest in relation to the question of the relationship between arts 3 and 4 of the directive (which are reflected substantially in regs 5 and 8 of the regulations):
‘That interpretation of the scope of Article 3(1) is also in conformity with the scheme and the purposes of the directive, which is intended to ensure, as far as possible, that the employment relationship continues unchanged with the transferee, in particular by obliging the transferee to continue to observe the terms and conditions of any collective agreement (Article 3(2)) and by protecting workers against dismissals motivated solely by the fact of the transfer (Article 4(1)). Those provisions relate only to employees in the service of the undertaking on the date of the transfer, to the exclusion of those who have already left the undertaking on that date. The existence or otherwise of a contract of employment or an employment relationship on the date of the transfer within the meaning of Article 3(1) of the directive must be established on the basis of the rules of national law, subject however to observance of the mandatory provisions of the directive and, more particularly, Article 4(1) thereof, concerning the protection of employees against dismissal by the transferor or the transferee by reason of the transfer. It is for the national court to decide, on the basis of those factors, whether or not, on the date of the transfer, the employees in question were linked to the undertaking by virtue of a contract of employment or employment relationship.’
What is of particular interest here in relation to the questions raised by this appeal, is the statement that art 4(1), as well as art 3(1), apply ‘only to employees in the service of the undertaking on the date of the transfer’ and the observation that the determination according to the rules of national law is ‘subject … to observance of the mandatory provisions of … Article 4(1)’. There is clearly scope here for the view that where the employment has been determined by the transferor solely on the ground of the transfer, which art 4(1) states is not to ‘constitute grounds for dismissal by the transferor or the transferee’ (emphasis added) the employee is to be treated as if he had continued to be employed at the date of the transfer. That was a point which did not in fact arise in the Wendelboe case but which is reflected in the following passage from the opinion of the Advocate General, Sir Gordon Slynn (at 460–461):
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‘Whether or not a contract of employment or an employment relationship has terminated at the time of transfer is of course for national law to determine. However, the first sentence of Article 4(1) provides that “the transfer of an undertaking, business or part of a business shall not in itself constitute grounds for dismissal by the transferor or the transferee” … Where employees are dismissed, with a view to and before, a transfer falling within the Directive and are re-engaged immediately by the transferee thereafter, their dismissal must be regarded as contrary to Article 4(1), subject to the exceptions specified in that paragraph. Whether the remedy for such unlawful dismissal consists in a court order declaring that dismissal to be a nullity or the award of damages or some other effective remedy is for the Member States to determine. In any event, the Member States are required to provide for a remedy which is effective and not merely symbolic … If the remedy consists in treating the dismissal as a nullity, then it would follow that the rights and obligations of the employee concerned are transferred to the transferee.’
The proposition that art 4(1) operates, in effect, to prohibit the exclusion of the rights conferred by art 3 by dismissal of the employee immediately before the transfer, except for one of the reasons specified in the second sentence of the article, receives some further support from the opinion of the Advocate General, Sir Gordon Slynn, in the later case of Foreningen af Arbejdsledere i Danmark v A/S Danmols Inventar (in liq) Case 105/84 [1985] ECR 2639 at 2641, in which he commented on the Wendelboe case and observed:
‘In Wendelboe v LJ Music it was held that only persons employed by the transferor at the moment of the transfer fall within the provision; it was also pointed out that Article 4(1) prohibits an employee from being dismissed by reason solely of such a transfer, subject however to certain exceptions. The effect of the Directive, in my opinion, is that an employee of the transferor at the time of transfer is entitled to insist, as against the transferee, on all the rights under his existing employment relationship. By virtue of Article 3, he can thus claim to continue to be employed by the transferee on the same terms as he was employed with the transferor, or if the transferee refuses or fails to observe those terms, he can bring a claim for breach of contract or the relationship, against the transferee. Under Article 4, the transfer does not by itself justify his dismissal by the transferor or the transferee unless such dismissal is for economic, technical or organisational reasons entailing changes in the work force … The employer who dismisses an employee for one of the reasons specified in Article 4(1) can thus justify the dismissal. Otherwise if the dismissal or purported dismissal is based on the transfer of the undertaking or business, the employee can insist on his rights under Article 3.’
The prohibitory nature of art 4 was emphasised again in Foreningen af Arbejdsledere i Danmark v Daddy’s Dance Hall A/S Case 324/86 [1988] IRLR 315 at 317 (para 14), where the court in the course of its judgment observed:
‘… Directive 77/187 aims at ensuring for workers affected by a transfer of undertaking the safeguarding of their rights arising from the employment contract or relationship. As this protection is a matter of public policy and, as such, outside the control of the parties to the employment contract, the provisions of the Directive, in particular those relating to the protection of workers against dismissal because of transfer, must be considered as mandatory, meaning that it is not permissable to derogate from them in a manner detrimental to the workers.’
(See also Landsorganisationen i Denmark v Ny Molle Kro Case 287/86 [1989] IRLR 37.)
In a subsequent case, P Bork International A/S v Foreningen af Arbejdsledere i Danmark Case 101/87 [1989] IRLR 41, the question arose whether the directive applied to a
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situation where the workforce had been dismissed on the termination by the employer of the lease of the premises on which the undertaking was carried on, the assets of the business having been purchased shortly afterwards by the new lessee of the premises, which re-engaged over half the original workforce. The court held that the directive applied and, in relation to the question of whether workers dismissed before the transfer could claim the benefit of the directive as against the transferee, said (at 44 (paras 17–19)):
‘… the only workers who may invoke Directive 77/187 are those who have current employment relations or a contract of employment at the date of the transfer. The question whether or not a contract of employment or employment relationship exists at that date must be assessed under national law, subject, however, to the observance of the mandatory rules of the Directive concerning the protection of workers against dismissal by reason of the transfer. It follows that the workers employed by the undertaking whose contract of employment or employment relationship has been terminated with effect on a date before that of the transfer, in breach of Article 4(1) of the Directive, must be considered as still employed by the undertaking on the date of the transfer with the consequence, in particular, that the obligations of an employer towards them are fully transferred from the transferor to the transferee, in accordance with Article 3(1) of the Directive. In order to determine whether the only reason for dismissal was the transfer itself, account must be taken of the objective circumstances in which the dismissal occurred and, in particular, in a case like the present one, the fact that it took place on a date close to that of the transfer and that the workers concerned were re-engaged by the transferee. The factual assessment needed in order to determine the applicability of the Directive is a matter for the national courts, having regard to the interpretative criteria laid down by the court.’ (My emphasis.)
It does not appear that the impact of art 4 (and thus of reg 8) on the construction and effect of art 3 (or reg 5) in relation to the employee’s rights has previously fallen to be considered in any of the reported cases in the United Kingdom. In Alphafield Ltd v Barratt [1984] 3 All ER 795, [1984] 1 WLR 1062 the receiver of an undertaking, having negotiated a transfer of the undertaking to be completed on Monday, 17 January 1983, dismissed the workforce at the close of business on the previous Friday, 14 January, at the same time requesting them to report for work on the following Monday with a view to re-engagement by the transferee. On the afternoon of 17 January the applicant was told that his services would not be required. He claimed that the effect of reg 5 was that his employment had been continued with the transferee and that he had, therefore, been unfairly dismissed by the transferee as a result of the latter’s refusal to employ him. The principal question argued was whether he had been employed ‘immediately before’ the transfer. Both the industrial tribunal and the Employment Appeal Tribunal held that he was. The decision of the Employment Appeal Tribunal was delivered by Tudor Evans J, who said ([1984] 3 All ER 795 at 799, [1984] 1 WLR 1062 at 1066–1067):
‘… it seems to us to be a question of fact in each case dependent on the particular circumstances whether or not a person was employed “immediately before” the transfer. It seems to us quite impossible, however desirable and helpful it might be, to say what period does and what period does not qualify. It must depend on the circumstances of each particular case whether dismissal is sufficiently proximate to the transfer. We think that, apart from analysis of the words used, it has to be remembered that if the words are construed in the strictest sense, as contended by the employers, it would be very easy for a transferor without funds to agree with a transferee, for reasons convenient to them both, that employees should be dismissed a short time before transfer, thus leaving them with a worthless remedy and so defeating the protection afforded by the Regulations.’
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In Secretary of State for Employment v Anchor Hotel (Kippford) Ltd [1985] ICR 724 the question was whether the original employer, who had given his employees a notice to terminate their employment which expired on the same date as that on which the transfer of the business took effect and who had made redundancy payments to them following the transfer, was entitled to claim a rebate from the redundancy fund pursuant to s 104 of the 1978 Act. The argument on behalf of the Secretary of State, which was accepted by the Employment Appeal Tribunal, was that no rebate was due inasmuch as the claimant was never liable to make the redundancy payments, since his liability had been transfered to the transferee of the business pursuant to reg 5, the employees having been employed ‘immediately before’ the transfer. In giving the decision of the tribunal, Waite J observed that it would serve no purpose to remit the case to the industrial tribunal for a determination of the precise order in which the relevant events took place since that was irrelevant, adding (at 729–730):
‘We hold that when a dismissal notice given by the transferor expires on the same day as the transfer date, then it matters not for the purposes of the Regulations in precisely which order on that day the two events have occurred or whether they have occurred exactly simultaneously. The result will in every case be the same—a substitution of the transferee for the transferor as the party responsible for the dismissal and so liable to make a redundancy payment to the employee.’
The decisions in both the Alphafield and Anchor Hotel cases were, however, disapproved by the Court of Appeal in England in Secretary of State for Employment v Spence [1986] 3 All ER 616, [1987] QB 179, which was followed and applied by the Second Division of the Inner House in the instant case. In that case the transferor company was in receivership and the receivers had been negotiating a transfer of the business under a threat by the company’s major customer to withdraw its work unless a transfer of the business had been agreed by 24 November 1983. No sale had been agreed by that date and although on 28 November 1983 the negotiations were continuing, the receivers had to decide whether it was proper in the interests of the debenture holders to continue to employ the workforce and to continue trading. Since there was no guarantee that the negotiations would be successful, the decision was taken to cease trading immediately and, at 11 am on that morning the employees were notified that they were dismissed with immediate effect. In fact, the negotiations were successful and an agreement for the sale of the undertaking was signed at 2 pm on that day. The employees were in fact re-employed by the transferee but claimed redundancy payments from the Redundancy Fund under s 106 of the 1978 Act. The claim was resisted on the ground that, since the claimants were employed ‘immediately before the transfer’ their employment was continued with the transferee of the business by reg 5(1), following the decision in the Anchor Hotel case [1985] ICR 724. It is worth noting that it was found as a fact by the industrial tribunal first, that the sequence of events was the result of independent action by the receivers and the transferees and that there was no collusion between them and second, that the reason why the receivers decided to dismiss the workforce was that, until a contract could be renegotiated with the company’s principal customer, there was no prospect of any work for the business. It follows from these findings that the reason for the dismissal was not one connected with the transfer but was due to economic considerations, with the result that reg 8(1) did not render the dismissals unfair. The only question for decision, therefore, was whether, having regard to the very short time which in fact elapsed between the dismissals taking effect and the conclusion of the transfer agreement, the workforce was employed ‘immediately before the transfer’. After a careful analysis of the cases, the Court of Appeal rejected the approach of the Employment Appeal Tribunal in Alphafield Ltd v Barratt and Secretary of State for Employment v Anchor Hotel (Kippford) Ltd and held that reg 5(1) can apply only where, at
Page 1152 of [1989] 1 All ER 1134
the very moment of transfer, the contract of employment (in the sense of the existing relationship of employer and employee) is still subsisting. If it is not, then there is nothing on which the regulation can bite, even though the employment has been determined only a matter of minutes (or, it may be, seconds) before the transfer. My Lords, for my part, I can detect no flaw in the reasoning by which Balcombe LJ, who delivered the leading judgment in the Court of Appeal, reached the conclusion on the facts of that case that reg 5(1) did not operate to transfer the obligations of the original employer to the transferee. Where, before the actual transfer takes place, the employment of an employee is terminated for a reason unconnected with the transfer, I agree that the question of whether he was employed ‘immediately’ before the transfer cannot sensibly be made to depend on the degree of temporal proximity between the two events, except possibly in a case where they are so closely connected in point of time that it is, for practical purposes, impossible realistically to say that they are not precisely contemporaneous. Either the contract of employment is subsisting at the moment of the transfer or it is not, and if it is not, then, on the pure textual construction of reg 5, neither para (1) nor para (2) (which is clearly subsidiary to and complementary with para (1)) can have any operation. But Spence’s case was decided, and quite properly decided, entirely without reference to the effect of reg 8(1) and in the context of the two important findings of fact by the industrial tribunal to which I have drawn attention. The Court of Appeal did not consider, and was not called on to consider, a position where, whether under a collusive bargain or otherwise, an employee is dismissed from his employment solely or principally because of the prospective transfer of the undertaking in which he is employed, so that his dismissal is statutorily deemed to be unfair; and, of course, the case was decided without reference to the important Bork case [1989] IRLR 41 already referred to, which had not been decided at the date of the Court of Appeal judgment and which had not been reported at the time when the instant case was argued before the Court of Session.
It is, I think, now clear that under art 4 of the directive, as construed by the European Court, a dismissal effected before the transfer and solely because of the transfer of the business is, in effect, prohibited and is, for the purpose of considering the application of art 3(1), required to be treated as ineffective. The question is whether the regulations are so framed as to be capable of being construed in conformity with that interpretation of the directive.
This cannot, I think, be effected by adopting the flexible construction of the words ‘immediately before’ suggested in Alphafield Ltd v Barratt, for the meaning to be given to those words, taken alone, cannot sensibly be made to depend on whether the reason for the determination of the employment was the transfer or something else. Such an approach would involve the conclusion that the obligations of the transferor would be transferred to the transferee even in the case where, as in Spence’s case, the employment had been terminated for economic, technical or organisational reasons. That cannot, I think, have been intended, and I, for my part, agree with the rejection by the Court of Appeal in Spence’s case of the reasoning of the Employment Appeal Tribunal in Alphafield Ltd v Barratt and Secretary of State for Employment v Anchor Hotel (Kippford) Ltd. Nor do I find a solution in the suggestion canvassed by counsel for the applicants that a dismissal accepted by the transferor solely because of the impending transfer is to be treated as ineffective by some form of estoppel on the ground that the parties to the transfer cannot be permitted to take advantage of their own wrong. A termination for economic reasons, for instance, if effected without proper notice, would be as much a ‘wrong’ as a termination by reason of the transfer and, in any event, a termination effected without the collusion of the transferee could not be a ‘wrong’ on the part of the transferee, to whose benefit the termination of the employment would enure.
The critical question, it seems to me, is whether, even allowing for the greater latitude in construction permissible in the case of legislation introduced to give effect to this country’s Community obligations, it is possible to attribute to reg 8(1), when read in
Page 1153 of [1989] 1 All ER 1134
conjunction with reg 5, the same result as that attributed to art 4 in the Bork case [1989] IRLR 41. Purely as a matter of language, it clearly is not. Regulation 8(1) does not follow literally the wording of art 4(1). It provides only that if the reason for the dismissal of the employee is the transfer of the business, he has to be treated ‘for the purposes of Part V of the 1978 Act’ as unfairly dismissed so as to confer on him the remedies provided by ss 69–79 of the Act (including, where it is considered appropriate, an order for reinstatement or re-engagement). If this provision fell to be construed by reference to the ordinary rules of construction applicable to a purely domestic statute and without reference to treaty obligations, it would, I think, be quite impermissible to regard it as having the same prohibitory effect as that attributed by the European Court to art 4 of the directive. But it has always to be borne in mind that the purpose of the directive and of the regulations was and is to ‘safeguard’ the rights of employees on a transfer and that there is a mandatory obligation to provide remedies which are effective and not merely symbolic to which the regulations were intended to give effect. The remedies provided by the 1978 Act in the case of an insolvent transferor are largely illusory unless they can be exerted against the transferee as the directive contemplates and I do not find it conceivable that, in framing regulations intending to give effect to the directive, the Secretary of State could have envisaged that its purpose should be capable of being avoided by the transparent device to which resort was had in the instant case. Pickstone v Freemans plc [1988] 2 All ER 803, [1989] AC 66 has established that the greater flexibility available to the court in applying a purposive construction to legislation designed to give effect to the United Kingdom’s treaty obligations to the Community enables the court, where necessary, to supply by implication words appropriate to comply with those obligations: see particularly the speech of Lord Templeman ([1988] 2 All ER 803 at 813–814, [1989] AC 66 at 120–121). Having regard to the manifest purpose of the regulations, I do not, for my part, feel inhibited from making such an implication in the instant case. The provision in reg 8(1) that a dismissal by reason of transfer is to be treated as an unfair dismissal, is merely a different way of saying that the transfer is not to ‘constitute a ground for dismissal’ as contemplated by art 4 of the directive and there is no good reason for denying to it the same effect as that attributed to that article. In effect this involves reading reg 5(3) as if there were inserted after the words ‘immediately before the transfer’ the words ‘or would have been so employed if he had not been unfairly dismissed in the circumstances described in reg 8(1)’. For my part, I would make such an implication which is entirely consistent with the general scheme of the regulations and which is necessary if they are effectively to fulfil the purpose for which they were made of giving effect to the provisions of the directive. This does not involve any disapproval of the reasoning of the Court of Appeal in Spence’s case which, on the facts there found by the industrial tribunal, did not involve a dismissal attracting the consequences provided in reg 8(1).
The only reservation that I have with regard to that case is in relation to the approval by the Court of Appeal of a passage from the judgment of the Employment Appeal Tribunal in Premier Motors (Medway) Ltd v Total Oil GB Ltd [1984] 1 WLR 377, in which, after correctly pointing out that where an employee’s contract is continued by virtue of reg 5, the transferee who plans to employ him, will be liable for a redundancy payment, Browne-Wilkinson J observed (at 382):
‘To protect himself, the transferee must agree with the transferor either that the transferor will dismiss the employee before the transfer or will indemnify the transferee against redundancy payments and other employment liabilities.’
It follows from the construction that I attach to reg 5(3) that where an employee is dismissed before and by reason of the transfer the employment is statutorily continued with the transferee by virtue of the regulations and the first of the two options referred
Page 1154 of [1989] 1 All ER 1134
to in the passage quoted above is not, therefore, one which will effectively protect the transferee from the employee’s claim for a redundancy payment. It also follows that both Alphafield Ltd v Barratt and Secretary of State for Employment v Anchor Hotel (Kippford) Ltd, in each of which the employment was clearly terminated by reason of the impending transfer, were correctly decided on their respective facts albeit not for the reasons given.
In the instant case it is quite clear that the reason for the dismissal of the appellants was the transfer of the business which had just been agreed and was going to take place almost at once. The effect of reg 5, construed as I have suggested that it should be, is that their employment continued with Forth Estuary. I would therefore allow the appeal. Counsel for Forth Estuary has submitted that in the event of the appeal being allowed, the order of the Employment Appeal Tribunal should be varied so as to remit back to the industrial tribunal the question whether the receivers had acted reasonably in dismissing the workforce in the context of s 57(3) of the 1978 Act. The respondents had the opportunity before the industrial tribunal of demonstrating, if they could, that there were some economic, technical or organisational reasons for the appellants’ dismissals and it was therefore reasonable. They did not do so and I see no grounds now for allowing that question to be reopened. I would accordingly reverse the interlocutor of the Second Division of the Inner House and restore the order of the Employment Appeal Tribunal.
LORD JAUNCEY OF TULLICHETTLE. My Lords, I have had the advantage of reading in draft the speeches prepared by my noble and learned friends Lord Keith, Lord Templeman and Lord Oliver. I agree with them and for the reasons given therein I would allow the appeal and make the order which they propose.
Appeal allowed.
Solicitors: Robin Thompson & Partners (for the applicants); Simmons & Simmons agents for Brodies WS, Edinburgh (for the new owners).
Mary Rose Plummer Barrister.
Re F (a minor)
[1989] 1 All ER 1155
Categories: FAMILY; Children: IMMIGRATION
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): RALPH GIBSON, BUTLER-SLOSS LJJ AND SIR EDWARD EVELEIGH
Hearing Date(s): 23 JUNE, 1 JULY 1988
Ward of court – Jurisdiction – Child subject to immigration legislation – Child brought to United Kingdom and placed with foster parents – Child overstaying leave to enter – Child liable to removal under immigration legislation – Foster parents applying to make child ward of court – Whether wardship jurisdiction exercisable if it would fetter immigration authorities’ discretion – Whether court having jurisdiction to make child ward of court.
F, a minor, was born in Nigeria on 27 April 1981. His father died in July 1982 and nothing was known for certain about his mother. In August 1982 he was brought to England by his aunt on her passport and they were granted leave to enter as visitors for six months. While in England F was placed with foster parents under an informal fostering arrangement with the knowledge of the local social services department. His uncle sent monthly payments to the foster parents for F’s maintenance. F lived with the foster parents until December 1986, when, on his own passport, he was taken to Nigeria to visit his uncle. When he returned on 21 January 1987 it was discovered that he had overstayed the six months’ leave originally granted. He was granted temporary admission while inquiries were made, and returned to his foster parents, who had been unaware of any restriction on F’s entry into or residence in the United Kingdom. The foster parents issued an originating summons to make F a ward of court but on the application of the Secretary of State the wardship summons was struck out as an abuse of process. The foster parents appealed. Before the hearing of the appeal the Secretary of State agreed not to take any steps to remove the child until adoption proceedings commenced by the foster parents had been determined.
Held – It was an abuse of process to use the wardship jurisdiction to keep within the jurisdiction a child who had overstayed his leave to enter thereby impeding the immigration authorities in exercising their statutory power to remove the child, since if the court were to make the child a ward of court in such circumstances it would be putting a fetter or a clog on the discretion given by Parliament to the immigration authorities and would frustrate the immigration legislation. However, there could be rare and exceptional cases where the use of the wardship jurisdiction could be necessary for the welfare of the child pending consideration of his position. On the facts, and having regard to the Secretary of State’s decision not to take further action pending the outcome of the adoption proceedings, the court would make F a ward of court while he remained in the country or until further order and to that extent the appeal would be allowed (see p 1158 c to g, p 1159 g to j and p 1160 e f, post).
Re A (an infant), Hanif v Secretary of State for Home Affairs [1968] 2 All ER 145 considered.
Notes
For the wardship jurisdiction of the court over a child who is subject to immigration control, see 24 Halsbury’s Laws (4th edn) para 577.
Cases referred to in judgments
A (an infant), Re, Hanif v Secretary of State for Home Affairs [1968] 2 All ER 145, sub nom Re Mohamed Arif (an infant) [1968] Ch 643, [1968] 2 WLR 1290, CA.
H (a minor) (adoption: non-patrial), Re [1982] 3 All ER 84, [1982] Fam 121, [1982] 3 WLR 501.
Page 1156 of [1989] 1 All ER 1155
W (a minor), Re [1985] 3 All ER 449, [1986] Fam 54, [1985] 3 WLR 945, CA.
Appeal
The foster parents of F, a 7-year-old boy, appealed against the order of Hollings J on 22 January 1988 striking out as an abuse of the process of the court an originating summons issued by them on 22 April 1987 to make the child a ward of court. The respondents to the application were the child’s guardian and the Secretary of State for the Home Department. The respondent to the appeal was the Secretary of State. The facts are set out in the judgment of Butler-Sloss LJ.
Charles Howard for the appellants.
Guy Sankey for the Secretary of State.
Cur adv vult
1 July 1988. The following judgments were delivered.
BUTLER-SLOSS LJ (giving the first judgment at the invitation of Ralph Gibson LJ). This is an appeal from the decision of Hollings J whereby on 22 January 1988 he struck out an originating summons in wardship as an abuse of the wardship process and thereby dewarded the child.
The short facts are that the child concerned, F, whom I shall refer to as Tony, is seven, having been born on 27 April 1981 in Lagos, Nigeria. His father died on 7 July 1982. It is uncertain whether his mother is alive or dead. On 28 August 1982 Tony came to England with his aunt, Mrs Farinu, and a friend, Mrs Abedeyo. Tony’s name was included on his aunt’s passport. They were given leave to enter as visitors for six months. Mrs Farinu placed Tony with the appellants in an informal fostering arrangement, with the knowledge of the social services, who had approved informal fostering by this couple on previous occasions.
The appellants were unaware of any restriction on Tony’s entry into, or residence in, the United Kingdom. They received monthly payments from Chief Farinu, who said he was the child’s uncle and guardian. Infrequent visits were made to see the child, but in December 1986 the foster parents were told that Tony was to be returned to Lagos for Christmas. Mrs Abedeyo took him on 20 December to Nigeria and returned with him on 21 January 1987. At that time Tony had acquired his own passport.
Mrs Abedeyo was interviewed by an immigration official on her return and it was discovered that Tony had overstayed his welcome by some three years and ten months. The immigration official gave him temporary admission to the United Kingdom while inquiries were made in Nigeria and he was returned to the care of the foster parents.
The exact circumstances of his parentage, the whereabouts of his mother, if still alive, the exact relationship to Chief Farinu or Mrs Farinu were and remain unclear. From a telegram sent from Nigeria it was said that Chief Farinu was the eldest uncle and guardian of the boy and that he was financially responsible for the boy. It also said that the decision to send the boy to England was a family decision and they intended to bring the child back to Nigeria when he was about ten years old. The senior uncle, Chief Farinu, has his own house in London.
While the matter was under consideration, on 22 April 1987 the appellants issued an originating summons in wardship and made Chief Farinu the first defendant and the Secretary of State was joined as the second defendant on 8 July 1987.
In October 1987 the Secretary of State issued a summons to strike out the originating summons and it was that issue which was heard by Hollings J in January 1988.
The effect of the issue of a wardship originating summons is to make the child a ward of court on the making of the application: see the Supreme Court Act 1981, s 41(2). A child ceases to be a ward of court either, if an application for an appointment for the
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hearing of the summons is not made within 21 days after issue of the summons, at the expiry of that period, or by order of the court to deward: see RSC Ord 90, r 4. A further effect of the wardship is to prevent the removal of the ward from the jurisdiction without the leave of the court.
The consequences of the wardship jurisdiction invoked in respect of a foreign child entering the United Kingdom and subject to the immigration legislation was considered in Re A (an infant), Hanif v Secretary of State for Home Affairs [1968] 2 All ER 145, [1968] Ch 643. In the two cases concerned the immigration officials refused the children admission and the applicants for their entry made them wards of court. During the argument it was conceded by counsel for the Secretary of State that a child of any nationality who is lawfully, albeit temporarily, in England may be made a ward of court. The purpose of the wardship proceedings in those cases, however, was to prevent the removal of the child from the country. Lord Denning MR said ([1968] 2 All ER 145 at 151–152, [1968] Ch 643 at 660–662):
‘First, it is said that once a child has been ordered to be removed, there is no jurisdiction to make him a ward of court. I do not think it necessary to determine that point. I can well see that there may be exceptional cases where such a jurisdiction may be desirable. Second, it is said that at any rate, even if there is jurisdiction, it ought not to be exercised in cases like the present one. I think that this second submission is correct. It seems to me … Parliament laid down a full and complete code to govern the entry or removal of immigrants from the Commonwealth and has entrusted the administration of it to the immigration officers. So much so that the courts ought not to interfere with their decisions save in the most exceptional circumstances … The court will not exercise its jurisdiction so as to interfere with the statutory machinery set up by Parliament. The wardship process is not to be used so as to put a clog on the decisions of the immigration officers or as a means of reviewing them.’
Russell LJ said ([1968] 2 All ER 145 at 153, [1968] Ch 643 at 663):
‘The wardship of the infants, in my judgment, has not, and could not in law have, any effect on the powers and duties of the immigration authorities so as to hamper them in any way in removing the infants from the jurisdiction under the [Commonwealth Immigrants Act 1962].’
At the hearing before Hollings J in January the argument on behalf of the Secretary of State was that the issue of the wardship proceedings was an abuse of the process of the court, and he relied on Re A (an infant). Counsel for the appellants sought to distinguish Re A and pointed to the period that Tony had lived in this country, that the home was the only home he knew, the credentials of the appellants, their desire to adopt the child and their fear that the uncle might move him pending any decision, and there was no way, other than wardship, to prevent him doing so.
The judge found that the main thrust of the submission for the wardship to continue was that, once an adoption application was lodged, different considerations would apply to whether the child should remain in England and he said:
‘But of course such a situation has not yet been created in the present case and I do not consider that it would be a legitimate use of wardship proceedings to hold the status quo until that situation has been potentially created by the institution of adoption proceedings. The court would otherwise indeed be exercising its jurisdiction so as to interfere with the statutory machinery set up by Parliament, and be putting a clog on the decision of immigration officers or on the Secretary of State. I agree that the situation of the ward in the present case is vastly different from what it was in Re A (an infant). If the wardship jurisdiction exists, or should be exercised, then there would be strong grounds for awarding care and control to the
Page 1158 of [1989] 1 All ER 1155
plaintiffs and continuing the wardship. But that begs the question, which is whether such exercise of jurisdiction, however justified in itself, is a clog or fetter on the statutory machinery of immigration control. To that there can only be one answer.’ (Hollings J’s emphasis.)
Counsel for the appellants in his submissions to us relied on distinguishing the present case from Re A (an infant), in particular that since no decision had been made by the Secretary of State there was no interference with any decision made under the Immigration Act 1971, and that the wardship proceedings were not being used to review decisions of immigration officers. He conceded, however, that his main submission to us is that the presence of the child in this country pending any application for adoption and until the determination of any adoption proceedings should be at the direction of the court and not by the grace of the Secretary of State. He did also put before us, as he put before the judge, the need to safeguard the child’s well-being independently of the immigration issue, and that there are good prospects of success in the adoption application.
There can be little doubt, however, that the main purpose of the appellants in invoking the wardship jurisdiction was to impede the Secretary of State from exercising his discretion to remove the child from the jurisdiction and to require the Secretary of State to apply to the court for leave. The court, according to counsel for the appellants, should decide on grounds analogous to those considered in adoption cases, to which I shall refer later. I do not agree with that submission. The use of the wardship jurisdiction to keep the child within the jurisdiction until further proceedings can be initiated and to frustrate the immigration legislation for a short or long period is in my judgment a fetter or clog on the discretion given by Parliament to the immigration officials and to the Secretary of State and is an abuse of the process of the court. Indeed the issue of the originating summons itself with the automatic warding of the child impedes the Secretary of State from removing the child from the jurisdiction.
This is not to say, however, that wardship may never be instituted in cases where the position of the child concerned is being considered or has been considered under the immigration legislation. I do not think that Hollings J was saying that there is no jurisdiction to continue wardship proceedings in any circumstances where immigration officials may wish to act. That position was left open by Lord Denning MR in Re A (an infant) and in my judgment there are cases in which the use of wardship may be necessary for the welfare of the child, bearing always in mind that those occasions are likely to be exceptional and that the jurisdiction must not be invoked or continued in such a manner as to clog the discretion of, or implementation of the decision of, the Secretary of State. It would seem to me desirable that if wardship is to be instituted in the rare cases where it might be appropriate, the plaintiff’s claim should indicate on the face of the originating summons that the purpose of the issue of the wardship is to safeguard the welfare of the child while the Secretary of State is considering the immigration implications. If it is intended to be a challenge to the overriding discretion of the Secretary of State, then that issue should equally be made clear in the originating summons.
Since, however, the primary purpose of invoking wardship in this case was to circumscribe the powers of the Secretary of State, I entirely agree with the conclusions of the judge on the facts before him in January.
We are here considering the problems associated with the arrival in this country of a little boy of seven who, through no fault of his own, overstayed his welcome and whose future is being considered by the Secretary of State. There is no reason to assume, as the judge did not, that the Secretary of State in arriving at his decision will not have regard to the welfare of Tony as well as other considerations.
At the time that this matter came before Hollings J no adoption application had been made and after the issue of the wardship summons could not have been properly made without leave of the court. But subsequent to the hearing in January and after the child was dewarded the foster parents issued the application in adoption on 8 May 1988.
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Different considerations apply in adoption applications. Section 6 of the Adoption Act 1976 requires the court to ‘have regard to all the circumstances, first consideration being given to the need to safeguard and promote the welfare of the child throughout his childhood.' Where the proceedings concern a foreign national the court is required to balance the factors in favour of adoption against the factors relating to immigration and the refusal of admission. In Re H (a minor) (adoption: non-patrial) [1982] 3 All ER 84 at 94, [1982] Fam 121 at 133 Hollings J said that the court—
‘must pay great regard to the “immigration decision” and in particular considerations of public policy and where relevant national security. It must be on its guard against the possibility of abuse but the mere fact that nationality or patriality would result is not conclusive. It must treat welfare as the first consideration, outweighing any one other factor but not all factors.’
The Court of Appeal in Re W (a minor) [1985] 3 All ER 449, [1986] Fam 54 approved the decision in Re H. Balcombe LJ indicated the considerations which should apply and said ([1985] 3 All ER 449 at 454, [1986] Fam 54 at 63):
‘(3) The court should also consider whether the welfare of the child would be better, or as well, promoted by another type of order which does not have the same effect on nationality and immigration as an adoption order, eg a custodianship order … ’
Before the judge counsel for the Secretary of State declined to give an undertaking not to arrive at or implement a decision until the issue of the adoption proceedings. The situation is now different. The Secretary of State, freed from the constraints of pressure from the wardship proceedings, has indicated in correspondence, about which we were told, that he will not take any steps to remove the child until the adoption proceedings have been determined on certain wholly reasonable conditions, including the hearing of the adoption application within a reasonable time.
There will now be no conflict between the child’s status as a ward and the exercise of the discretion of the Secretary of State during the period up to the hearing of the adoption application. The child will, with the agreement of all present, remain in this country and with the appellants. The only matter which remains is whether pending the hearing of the adoption application, a period which with all reasonable diligence may still take months or more, the child should have his position regularised. Counsel for the appellants says with some force that no one within the jurisdiction has any right to take decisions over this child, unless Chief Farinu is present in this country. He has not attended the appeal and has taken no part in these proceedings. Nevertheless, the foster parents fear that he may decide to remove the child. He has not up to now done so, but he has not yet been served with the adoption proceedings. For my part I see some force in the suggestion that for a limited purpose, unconnected with the issue of immigration, the child’s position in England should be regularised and his de facto caretakers should have the right during that period to assume responsibility for him subject to the direction of the court, to provide protection for him in the widest sense against any eventuality, including any disaster which might befall him or his caretakers. This case does seem to me to fall within the category of exceptional cases to which I referred earlier where wardship can properly be invoked.
In the knowledge that this court is now looking at circumstances which had not arisen before the judge, in my view this court should exercise its discretion to ward the child for such period as the child may remain in this country or until further order. The wardship should run to the determination of the adoption application or until the decision of the Secretary of State that the child be not permitted to enter the United Kingdom. I have phrased it in that way since technically the child has only been permitted to enter on a temporary basis. On either of those two eventualities taking place, the child should be dewarded. If the judge hearing the adoption application decides
Page 1160 of [1989] 1 All ER 1155
on some other order, such as custodianship, then no doubt the whole matter would have to be reconsidered before him. In the event that the Secretary of State decides that the child be not permitted to enter the United Kingdom, the child should be dewarded and the originating summons dismissed at the moment that the child leaves the jurisdiction of this court.
There are some other matters on which I should like to make some comments. The point of this appeal and the two elements of the argument before this court were clear to counsel on both sides and did not include any argument as to where the welfare of the child lay. In his judgment Hollings J set out that counsel for the Secretary of State conceded that Tony’s welfare may be better served if he remains in England. For my part I cannot see the need to reproduce at public expense all the affidavits (ten in all), and other evidence as to the suitability of the foster parents’ care long-term for Tony. In my view it is an expensive exercise unnecessary for the decision at which we had to arrive.
It was clearly wrong that the Secretary of State had not been informed of the adoption application until the day of the appeal and that equally no directions hearing in the Principal Registry had been sought. We were told of certain difficulties, but they should not be allowed to impede the involvement as soon as possible of the Official Solicitor, whom I am assuming will be invited in the adoption proceedings to represent the child.
It will be necessary to hear counsel on details of the order to be made. But consideration will have to be given to warding the child immediately, granting care and control to the foster parents and giving leave to continue the adoption proceedings. This might be a case where it would be appropriate to make the child a party to the wardship proceedings as third defendant and to invite the Official Solicitor to act for him and thereby gain the assistance of the Official Solicitor at the earliest possible stage. I would allow the appeal to the limited extent that I have already indicated.
SIR EDWARD EVELEIGH. I agree.
RALPH GIBSON LJ. I also agree.
Appeal allowed in part.
Solicitors: Hilliers, Baldock (for the appellants); Treasury Solicitor.
Sophie Craven Barrister.
Rhodes and another v Allied Dunbar Pension Services Ltd and others
Re Offshore Ventilation Ltd
[1989] 1 All ER 1161
Categories: LANDLORD & TENANT; Rent
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): O’CONNOR, NICHOLLS AND TAYLOR LJJ
Hearing Date(s): 17, 18, 19 OCTOBER, 9 NOVEMBER 1988
Distress – Distress for rent – Competing claims – Claims by landlords and debenture holder – Debenture holder of tenant appointing receivers of tenant’s property – Landlords serving notice on subtenants to pay to landlords rent owing to tenant – Receivers levying distress on subtenants to collect rent owing to tenant – Whether sum raised by distraint on subtenants payable to debenture holder or to landlords – Law of Distress Amendment Act 1908, ss 3, 6.
In 1984 the landlords granted three 20-year leases of parts of a freehold factory to a company. The company sublet parts of the factory to subtenants. In March 1986 the company entered into a deed of debenture in favour of its bank to secure all moneys owed to the bank from time to time. From June neither the company nor the subtenants paid the rent due and in July 1986 the bank, which was owed over £150,000, appointed receivers and managers of the company in accordance with its powers under the debenture. The landlords, who were aware of the receivers’ appointment, served notices on the subtenants under s 6a of the Law of Distress Amendment Act 1908 seeking to obtain from them the rent due from the company. Shortly thereafter the receivers levied distress at the factory in respect of the arrears of rent owing by the subtenants and obtained about £16,000 from them. The receivers applied to the court for directions whether the sum raised by the distraint could be retained by the receivers or was payable to the landlords. The question arose whether the statutory assignment effected by the s 6 notices had priority over the previous equitable assignment effected by the appointment of the receivers. The landlords contended that by virtue of s 3b of the 1908 Act, under which an underlessee was ‘deemed to be the immediate tenant of the superior landlord’ for the purposes of rent payable by an underlessee under a s 6 notice, they were entitled to the rent due from the subtenants after service of the notices. The judge held that the notices were ineffective to assign to the landlords the right to receive the subtenants’ rent because the landlords were aware of the prior assignment to the bank at the time the notices were served, and therefore the receivers were entitled to retain the sum raised by the distraint. The landlords appealed.
Held – On the proper analysis of the deed of debenture it did not have the effect of an equitable assignment to the bank of the right to future payments of rent by the subtenants but merely created a charge by way of a legal mortgage over the company’s leases. Moreover, since the bank had not taken possession of the premises under the debenture by requiring the subtenants to pay their rent direct to the bank but had instead allowed the company to remain in possession and receive the subtenants’ rent and since the receivers were deemed by the debenture to be the company’s agents, the receivers had obtained the sum raised by the distraint as agents of the company and, in the absence of an assignment by the company, they were required to pay it to the landlords when the s 6 notices were served. Accordingly, the question of competing assignments to the landlords and to the bank did not arise. The appeal would therefore be allowed (see p 1166 g, p 1167 b to d j to p 1168 b h, post).
Decision of Harman J [1988] 1 All ER 524 reversed.
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Notes
For the recovery by a superior landlord of rent from an undertenant, see 13 Halsbury’s Laws (4th edn) paras 260–261, and for a case on the subject, see 18 Digest (Reissue) 317, 425.
For the Law of Distress Amendment Act 1908, ss 3, 6, see 13 Halsbury’s Statutes (4th edn) 586, 588.
Cases referred to in judgments
Challoner v Robinson [1908] 1 Ch 49.
Dearle v Hall (1828) 3 Russ 1, [1824–34] All ER Rep 28, 38 ER 475, LC.
Gaskell v Gosling [1897] AC 575, [1895–9] All ER Rep 300, HL rvsg [1896] 1 QB 669, CA.
Ind Coope & Co Ltd, Re [1911] 2 Ch 223.
Knill v Prowse (1884) 33 WR 163.
Ratford v Northavon DC [1986] 3 All ER 193, [1987] QB 357, [1986] 3 WLR 771, CA.
Turner v Walsh [1909] 2 KB 484, CA.
Wallrock v Equity and Law Life Assurance Society [1942] 1 All ER 510, [1942] 2 KB 82, CA.
Cases also cited
Druce & Co Ltd v Beaumont Property Trust Co Ltd [1935] 2 KB 257, [1935] All ER Rep 404.
Fulham v McCarthy (1848) 1 HL Cas 703, 9 ER 937.
Liverpool Corp v Hope [1939] 1 All ER 492, [1938] 1 KB 751, CA.
Nicholl v Cutts [1985] BCLC 322, CA.
Pfeiffer (E) Weinkellerei-Weineinkauf GmbH & Co v Arbuthnott Factors Ltd [1987] BCLC 522, [1988] 1 WLR 150.
Walton, Ex p, re Levy (1881) 17 Ch D 746, [1881–5] All ER Rep 548, CA.
Williams v Hayward (1859) 1 E & E 1040, 120 ER 1200.
Willment (John) (Ashford) Ltd [1979] 2 All ER 615, [1980] 1 WLR 73.
Woolston v Ross [1900] 1 Ch 788.
Appeal
Terence Peter Sims and Stephen Paul Tarrant, who were the trustees of a pension fund known as the ‘OSV (Self-administered) Pension Plan’ and landlords of premises at 44A Gloucester Road, Croydon, Surrey, let to Offshore Ventilation Ltd (the company), appealed against the decision of Harman J ([1988] 1 All ER 524, [1987] 1 WLR 1703) on 19 June 1987 declaring that Geoffrey William Rhodes and Ian David Holland, the receivers of the company appointed by the Royal Bank of Scotland plc under a debenture dated 3 March 1986, were entitled to sums recovered or recoverable from underlessees of the premises in respect of rent owed to the company. The facts are set out in the judgment of Nicholls LJ.
William Goodhart QC for the trustees.
Christopher Pymont for the receivers.
Cur adv vult
9 November 1988. The following judgments were delivered.
NICHOLLS LJ (giving the first judgment at the invitation of O’Connor LJ). This appeal concerns the effectiveness of four notices served by a superior landlord on four undertenants under s 6 of the Law of Distress Amendment Act 1908. Under that section a superior landlord may serve a notice on an undertenant requiring the undertenant to make all future payments of rent directly to him until the arrears of rent due from the intermediate landlord to the superior landlord have been paid.
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The notices were served in the following circumstances. The appellants are the trustees of a pension fund known as the ‘OSV (Self-administered) Pension Plan’. One of the assets of that fund was the freehold of a factory at 44A Gloucester Road, Croydon. On 9 May 1984 the trustees granted three 20-year leases, each of a different part of the factory, to Offshore Ventilation Ltd (the company). The company subsequently sublet parts of the factory to four individual undertenants, by four underleases for periods varying from five years to almost twenty years.
On 3 March 1986 the company entered into a debenture deed in favour of its bankers, the Royal Bank of Scotland plc, to secure all money from time to time owing. By that deed the company granted to the bank a first fixed legal charge over the factory. The deed also created, in the usual way, a fixed charge over all the book debts and other debts of the company, present and future, and a floating charge on all the undertakings and property of the company. Shortly thereafter on 31 July 1986 the bank (which was owed more than £150,000 by the company) appointed the respondents to this appeal to be joint receivers and managers of the company, under a power in that behalf contained in the debenture. The rent due from the company to the superior landlords in June 1986 was not paid, nor did the receivers pay the rents falling due from the company under the headleases in September and December 1986. These rents totalled about £17,200. Furthermore, the undertenants did not pay rents due from them in December 1986 totalling £16,897.
On 2 February 1987 the trustees, who were aware of the appointment of the receivers, served the notices in dispute on the undertenants. Thereupon the receivers, two or three days later, proceeded to levy distress at the factory in respect of the arrears of rent due from the undertenants. The warrants were executed on 9 and 10 February. The outcome was that the bailiffs received from the four undertenants sums amounting in the aggregate to about £16,000.
The receivers then applied to the court for directions regarding that sum. In short, the issue was whether the s 6 notices were, in the circumstances outlined above, effective to assign to the trustees as superior landlords the right to receive the undertenants’ rents. If they were, the receivers were not entitled to recover those rents, the distress authorised by them was unlawful, and the money received by them under that distress ought not to be retained by them but must be paid to the trustees. Conversely, if the notices were ineffective to assign that right to the trustees, then the distraints were lawful and the receivers were entitled to retain the money. On 19 June 1987 Harman J held that the notices were ineffective (see [1988] 1 All ER 524, [1987] 1 WLR 1703). From that decision the trustees have appealed.
Law of Distress Amendment Act 1908
Distress for rent is a remedy which enables landlords to recover arrears of rent, without going to the court, by taking goods from the demised property and selling them. Its origin is the common law, but over the centuries the scope of the remedy has been modified and extended and, more recently, restricted by Parliament. The basic rule of common law is that any goods physically on the property for which rent is due are liable to be taken by the distraining landlord, even though they belong to an undertenant or other third party and even though the distraining landlord knows that the goods are not the property of the tenant (see 13 Halsbury’s Laws (4th edn) para 227). Exceptions were grafted onto this rule, for example in the interests of trade, husbandry and public convenience, and in some circumstances a landlord might be estopped by his own conduct from asserting his right to seize the property of a third party. Nevertheless, the basic rule still stood at the beginning of this century.
In 1907 Challoner v Robinson [1908] 1 Ch 49 came before the court. A superior landlord levied distress on some paintings belonging to various artists which were in the possession of an underlessee for the purposes of exhibition and sale on part of the premises. Neville J, and subsequently the Court of Appeal, held that the pictures did not fall within any of
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the exceptions. Accordingly, the basic common law rule applied and the superior landlord was entitled to seize and sell the pictures.
When giving judgment Neville J delivered himself of a trenchant observation on the state of the law. He said (at 55):
‘Now this is the year 1907, and it seems to me extraordinary that it should be possible in a country which boasts of civilization, which purports to protect the property of the law-abiding citizen, to raise such a question. But so it is. The rule that the landlord is entitled to distrain on the property of third persons upon the premises, subject to certain exceptions, has up to the present day escaped the zeal of the legal reformer, and therefore I have to deal with the law as I find it … ’
In following year, the Law of Distress Amendment Act 1908 was passed. In short, s 1 protects from distress goods of certain undertenants, lodgers and other persons who are not tenants and have no beneficial interest in any tenancy if the person in question makes a declaration that the goods are not the goods of the immediate tenant but are his goods or in his possession and, in the case of an undertenant or lodger, if he undertakes in future to pay his rent directly to the superior landlord until the arrears of rent in respect of which the distress is being levied have been paid. Shorn of words immaterial for present purposes, s 1 provides:
‘If any superior landlord shall levy … a distress on any … goods … of—(a) any under tenant liable to pay … a rent which would return in any whole year the full annual value of the premises or of such part thereof as is comprised in the under tenancy, or (b) any lodger, or (c) any other person whatsoever not being a tenant of the premises or of any part thereof, and not having any beneficial interest in any tenancy of the premises or of any part thereof, for arrears of rent due to such superior landlord by his immediate tenant, such under tenant, lodger, or other person aforesaid may serve such superior landlord … with a declaration in writing made by such under tenant, lodger, or other person aforesaid, setting forth that such immediate tenant has no right of property or beneficial interest in the … goods … so distrained or threatened to be distrained upon, and that such … goods … are the property or in the lawful possession of such … under tenant or lodger, setting forth the amount of rent (if any) then due to his immediate landlord, and the times at which future instalments of rent will become due, and the amount thereof, and containing an undertaking to pay to the superior landlord any rent so due or to become due to his immediate landlord, until the arrears of rent in respect of which the distress was levied or authorised to be levied have been paid off, and to such declaration shall be annexed a correct inventory … of the … goods … referred to in the declaration … ’
Section 2 provides that it is unlawful to proceed with a distress on the goods of the undertenant or lodger or other person after the requirements of s 1 have been met.
Section 3 is a consequential provision. It provides:
‘For the purposes of the recovery of any sums payable by an under tenant or lodger to a superior landlord under such an undertaking as aforesaid, or under a notice served in accordance with section six of this Act, the under tenant or lodger shall be deemed to be the immediate tenant of the superior landlord, and the sums payable shall be deemed to be rent; but, where the under tenant or lodger has, in pursuance of any such undertaking or notice as aforesaid, paid any sums to the superior landlord, he may deduct the amount thereof from any rent due or which may become due from him to his immediate landlord, and any person (other than the tenant for whose rent the distress is levied or authorised to be levied) from whose rent a deduction has been made in respect of such a payment may make the
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like deductions from any rent due or which may become due from him to his immediate landlord.’
It will be noted that the latter part of this section envisages that the undertenant who has paid rent direct to a superior landlord pursuant to a s 1 undertaking or a s 6 notice may not be the immediate tenant of the person in respect of whose rent the superior landlord has levied distress.
Sections 4 and 5 exclude from the Act certain goods, and certain undertenancies, such as those created in breach of covenant. Thus far, the Act operates to restrict superior landlords’ rights to distrain when an undertenant or lodger or other person takes the steps prescribed by s 1. Section 6, however, enables the superior landlord to short-circuit this procedure in the case of undertenants and lodgers. Instead of having first to levy a distress, which is then rendered abortive by the service of the necessary declaration and undertaking, s 6 empowers the superior landlord, where the rent of his immediate tenant is in arrears, to serve a notice on any undertenant or lodger requiring all future payments of rent to be made direct to him. Section 6 provides:
‘In cases where the rent of the immediate tenant of the superior landlord is in arrear it shall be lawful for such superior landlord to serve upon any under tenant or lodger a notice (by registered post addressed to such under tenant or lodger upon the premises) stating the amount of such arrears of rent, and requiring all future payments of rent, whether the same has already accrued due or not, by such under tenant or lodger to be made direct to the superior landlord giving such notice until such arrears shall have been duly paid, and such notice shall operate to transfer to the superior landlord the right to recover, receive, and give a discharge for such rent.’
It was pursuant to this section that the trustees served the notices which are in contention in this case.
Successive assignments
Prima facie these notices fall within s 6. The rent payable by the company, which was the immediate tenant of the trustees, was in arrears. The trustees, as the superior landlord, served notices in due form on the four undertenants. Prima facie, therefore, the consequence prescribed by the section follows: the notices operated to transfer to the trustees the right to recover, receive and give a discharge for all future payments of rent by the undertenants until the arrears of rent due to the trustees had been paid.
Counsel for the receivers contended otherwise. He submitted that the s 6 notices were not effectual against the bank. He developed an argument to the following effect. This is a case of successive assignments of the same chose in action, viz the right to be paid the undertenants’ rents. The s 6 notices, as observed by Lord Greene MR in Wallrock v Equity and Law Life Assurance Society [1942] 1 All ER 510 at 511, [1942] 2 KB 82 at 84, brought about a statutory assignment of that chose in action. But that was not the only assignment of that right in the present case. On the contrary, here there had been a prior assignment of the same right. When the receivers were appointed the floating charge created by the debenture crystallised, and by reason thereof, even if the fixed charge over book debts had not already achieved that result, the right to future payments of rent was assigned in equity to the bank. Priority as between those two successive assignments is governed by the rule in Dearle v Hall (1828) 3 Russ 1, [1824–34] All ER Rep 28. In the instant case, each s 6 notice operated as the assignment itself and also as notice thereof to the debtor, viz the undertenant. But this did not give the trustees priority, because when the assignments to the trustees were made the trustees already knew of the appointment of the receivers and, hence, of the prior assignment to the bank. That knowledge prevented the trustees from acquiring priority, in accordance with the principle and authorities summarised in Snell’s Principles of Equity (28th edn, 1982) pp 65–66.
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Counsel for the receivers next pointed out that the 1908 Act contemplates only the relationships of landlord, tenant, undertenant and lodger. No mention is made of assignees of the rent payable by undertenants, even though in law there can be an assignment of the right to recover rent simpliciter (see eg Knill v Prowse (1884) 33 WR 163). The 1908 Act, it was submitted, cannot have been intended to strip a legal or equitable assignee of the benefit of such an assignment even if he has given valuable consideration for it, and to do so without giving him any compensation. The Act should be construed so as to avoid such an injustice and, therefore, as not overriding the rights of prior assignees who would have priority under the rule in Dearle v Hall.
This argument found favour with the judge. However, it is important to note that before the judge the starting point of the contention of counsel for the receivers seems to have been common ground between the parties. By ‘the starting point,’ I mean counsel’s contention that the crystallisation of the floating charge by the appointment of the receiver had the effect of assigning to the bank in equity the right to future payments of the undertenants’ rent. In this court, counsel for the trustees disputed that this was the proper analysis of the debenture.
I turn, therefore, to the terms of the debenture deed. Clause 4(i) reads:
‘For the purpose of securing all such moneys and/or the discharge of all such liabilities as aforesaid the Company as Beneficial Owner hereby charges its undertaking and all its property and other assets of whatsoever nature both present and future including its uncalled capital for the time being and the charge hereby created shall rank as:—(a) a first fixed charge by way of legal mortgage of all (if any) the freehold and leasehold property now vested in the Company (including land of which the Company is registered as proprietor at H.M. Land Registry details of which are set out in the Schedule hereto) together with all fixtures and fittings (including trade fixtures and fittings) and fixed plant and machinery from time to time therein or thereon; (b) a first fixed charge on all the goodwill and uncalled capital for the time being of the Company and all other (if any) the freehold and leasehold property hereafter vested from time to time in the future in the Company (c) a first fixed charge on all the book debts and other debts of the Company both present and future and (d) a first floating charge on all the undertaking and all the property and assets of the Company both present and future not subject to a fixed charge hereunder.’
At the date of this deed the company owned the three leases of the factory at 44A Gloucester Road. Clause 4(i)(a) of the debenture, therefore, created in favour of the bank a charge by way of legal mortgage over those leases. I shall consider first what was the effect of this fixed charge in relation to the undertenants’ rents and, second, whether this position was affected by cl 4(i)(c) or (d) of the debenture.
The charge by way of legal mortgage
As a chargee by way of legal mortgage the bank obtained, by virtue of s 87 of the Law of Property Act 1925, the same protection, powers and remedies, including the right to take proceedings to obtain possession from the occupiers and the persons in receipt of rents and profits, as if a sub-term less by one day than the term vested in the company had been thereby created in favour of the bank. Had such a sub-term been created, the bank would have been entitled to take possession. In this case, where the property was leasehold and was occupied by undertenants under subsisting underleases, possession would have taken the form of requiring the undertenants to pay their rent to the bank. The legal mortgagee of a lease is the reversioner expectant on the underleases (see Re Ind Coope & Co Ltd [1911] 2 Ch 223 at 231–232), and a legal chargee is placed in a similar position by s 87.
However, a mortgagee may permit the mortgagor to remain in possession. If he does so, even though the mortgagor remains in possession only by leave and licence of the
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mortgagee, the mortgagor remains entitled to receive and retain the income of the mortgaged property without any liability to account at law or in equity. That means, where the mortgaged property is leasehold and subject to underleases, that so long as he is so entitled to the income of the mortgaged property, the mortgagor may recover the rent payable by the undertenants despite the existence of the mortgagee’s reversionary interest (see s 141(2) of the Law of Property Act 1925 and the observations of Farwell LJ in Turner v Walsh [1909] 2 KB 484 at 494, [1908–10] All ER Rep 822 at 825). In the present case, the bank never went into possession of the property and thus, in accordance with these established principles, the company remained entitled to receive the rents from the undertenants notwithstanding the charge by way of legal mortgage.
In this regard, in my view, the appointment of the receivers made no material difference. Although the receivers were appointed by the bank they were, pursuant to cl 10 of the debenture, deemed to be the agents of the company. As Slade LJ observed in Ratford v Northavon DC [1986] 3 All ER 193 at 203, [1987] QB 357 at 371, citing passages from the classical exposition of the status of receivers given by Rigby LJ in Gaskell v Gosling [1896] 1 QB 669 at 685, subsequently approved by the House of Lords ([1897] AC 575, [1895–9] All ER Rep 300), this agency of receivers is a real one, even though it has some peculiar incidents. Thus although, after their appointment, it was the receivers who were entitled to payment of the undertenants’ rents, their entitlement was as agents of the company. This was so even though, when they received the rents, they were obliged to deal with the money, as with other money coming to their hands as receivers, in accordance with the terms of the debenture.
The floating charge
I turn next to consider whether the presence in the debenture of paras (c) and (d) of cl 4(i) alters the position regarding the undertenants’ rents in any way. In my view, it does not. The opening words of cl 4(i) create a charge on all the property of the company. The nature of this charge is then further defined: ‘… and the charge hereby created shall rank as … ’. Paragraph (a) deals explicitly and unambiguously with land currently owned by the company. In my view, para (a) was intended to state, and it was effective to state, what was to be the nature of the bank’s charge over such land. It was to be a charge by way of legal mortgage, with all the incidents which would flow from that (save as expressly provided elsewhere in the deed, as, for example, in cl 6). Those incidents, as mentioned above, covered what was to happen to the rents of the undertenants.
Given the existence of that charge by way of legal mortgage, I can see no scope for the operation, in relation to the same property, of the fixed charge created by para (c) or the floating charge created by para (d), nor do I see any reason to think that para (c) or para (d) was intended to apply, in some way or other, to property or rights in property in respect of which a fixed charge by way of legal mortgage had been created. Indeed, in the case of para (d), the closing words make it abundantly plain that the floating charge was intended to be a residual provision, operating only in the absence of a fixed charge.
In my view, the rights of the bank in respect of the receipt of rents from the undertenants were governed by para (a) and those rights were not enlarged or altered by para (c) or para (d).
The s 6 notices
If the debenture is thus construed, the present case does not seem to me to give rise to any particular difficulty. The spectre of successive assignments of the same chose in action vanishes. Instead, the case presents a comparatively straightforward picture. The company, as the undertenants’ immediate landlord, was entitled to their rent payments before the debenture was executed on 3 March 1986 the company continued to be so entitled after the execution of the debenture, the bank not having exercised its right to take possession and the company, in the persons of the receivers who were its agents, continued to be so entitled after the appointment of the receivers on 31 July 1986.
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That remained the position when the s 6 notices were served on 2 February 1987. Thus there is no question of competing assignments; there is no question of some person other than the company having become entitled, in place of the company and by reason of an assignment from the company, to receive the undertenants’ rents which fell due in and after December 1986.
On that short ground, which seems not to have been argued in front of the judge, I would allow this appeal.
I do not find the result surprising or, even less, unconscionable. Quite the contrary. If the company had never executed the debenture but had failed to pay its rent, s 6 plainly would have been available to the trustees.
Conversely, if the bank had gone into possession of the property under the debenture and had not paid rent to the trustees as freeholders, s 6 would have been available to the trustees. Section 6 is as much available where the defaulting tenant is an assignee of the lease as it is available where he is the original lessee. The statutory right of the superior landlord to serve a s 6 notice and divert to himself rent payable by an undertenant, where the intermediate lessor has failed to pay his rent, and also the statutory right of an undertenant to undertake to pay his rent direct to the superior landlord under s 1 and thereby preclude the superior landlord from levying distress on the undertenant’s goods in respect of arrears of rent due to the superior landlord, are now incidents of the superior landlord/intermediate landlord/undertenant relationship. A person who takes an assignment of a headlease does so subject to the possibility that if the rent due to the superior landlord is not paid, the superior landlord may garnishee, so to speak, the rent due from undertenants. He takes, subject to that possibility, in the same way as he takes subject to the possibility that if there is default in payment of the rent under the headlease, the superior landlord may forfeit the headlease, with the consequence that (unless relief is granted) any undertenancies will automatically be brought to an end. Likewise, in my view, in the case of a person, including a mortgagee, who takes not an assignment of a headlease, but a sub-term carved out of the headlease. Such a person acquires an estate which from its inception is subject to the rights conferred on superior landlords and undertenants by ss 6 and 1.
If that is right, and the s 6 notices would have been effectual according to their tenor if no legal charge in favour of the bank had been created, and if also the notices would equally have been effectual if the bank had gone into possession under the legal charge, I think it would be surprising to find that such notices were ineffectual if a receiver were appointed under the legal charge. I can see no rhyme or reason in that.
Other points
In the light of the conclusion stated above, it is not appropriate or necessary for me to express any view on what would be the position under s 6 of the 1908 Act, or under s 1, if there were any assignment of a right to receive rent from an undertenant unaccompanied by an assignment of the reversion. That point can be decided if and when it arises.
TAYLOR LJ. I agree.
O’CONNOR LJ. I also agree.
Appeal allowed. Leave to appeal to the House of Lords refused.
Solicitors: A R Drummond & Co, Epsom (for the trustees); Nabarro Nathanson (for the receivers).
Carolyn Toulmin Barrister.
Bookbinder v Tebbit
[1989] 1 All ER 1169
Categories: TORTS; Defamation
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): RALPH GIBSON AND RUSSELL LJJ
Hearing Date(s): 8 DECEMBER 1988
Libel and slander – Justification – Wider meaning – Justification of wider meaning than that pleaded by plaintiff – Plaintiff pleading particular and general charges of squandering public funds – Defendant pleading justification of specific issue and wider meaning – Plaintiff withdrawing general charge – Whether defendant entitled to continue to rely on general charge to support plea of justification.
In 1984 the Labour-controlled Derbyshire County Council decided to overprint the caption ‘Support Nuclear Free Zones’ on all school stationary in its area. In 1986 at a by-election meeting in the West Derbyshire constituency the defendant, who was chairman of the Conservative Party, stated that the overprinting had cost £50,000 and described it as a ‘damn fool idea’. The plaintiff, who was leader of the county council, issued a writ alleging, inter alia, that the natural and ordinary meaning of the words complained of were that the plaintiff had acted irresponsibly in causing large-scale squandering of public funds. The defendant by his defence pleaded, inter alia, justification relying on (i) the specific issue of the overprinting and (ii) other occasions of alleged squandering of public money by the council under the plaintiff’s leadership. The plaintiff subsequently amended his statement of claim by withdrawing the general charge of squandering public funds and substituting a particular charge of squandering £50,000 on the overprinting and then applied to have the defence of justification based on the general charge of squandering public funds struck out. The judge dismissed the application and the plaintiff appealed to the Court of Appeal.
Held – A defendant was not entitled to rely on a general charge of wrongdoing unless a wider meaning or a more general charge could fairly be gathered from the words used, notwithstanding that the plaintiff had originally alleged in his statement of claim that the words used bore the general charge of wrongdoing and had later amended his statement of claim to withdraw that general charge leaving only an allegation that a particular charge of wrongdoing was defamatory. On the facts, once the plaintiff withdrew the general charge of squandering public funds the wider meaning was not a meaning which a jury could properly apply to the words used by the defendant and accordingly the defamatory charge in the words used was limited to the specific issue of the overprinting. It followed that the appeal would be allowed and the defence of justification based on the general charge of squandering public funds would be struck out (see p 1175 g to j, p 1177 j to p 1178 c e to h and p 1179 d e, post).
London Computer Operators Training Ltd v BBC [1973] 2 All ER 170, Williams v Reason [1988] 1 All ER 262 and Khashoggi v IPC Magazines Ltd [1986] 3 All ER 577 considered.
Notes
For justification in defamation actions, see 28 Halsbury’s Laws (4th edn) paras 185–186, and for cases on the subject, see 32 Digest (Reissue) 201–216, 1722–1839.
Cases referred to in judgments
Bonnard v Perryman [1891] 2 Ch 269, [1891–4] All ER Rep 965, CA.
Davey v Harrow Corp [1957] 2 All ER 305, [1958] 1 QB 60, [1957] 1 WLR 941, CA.
Hollis v Burton [1892] 3 Ch 226, CA.
Khashoggi v IPC Magazines Ltd [1986] 3 All ER 577, [1986] 1 WLR 1412, CA.
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Lewis v Daily Telegraph Ltd [1963] 2 All ER 151 [1964] AC 234, [1963] 2 WLR 1063, HL.
London Computer Operators Training Ltd v BBC [1973] 2 All ER 170, [1973] 1 WLR 424, CA.
Lucas-Box v News Group Newspapers Ltd [1986] 1 All ER 177, [1986] 1 WLR 147, CA.
Maisel v Financial Times (No 1) (1915) 84 LJKB 2145, HL.
Polly Peck (Holdings) plc v Trelford [1986] 2 All ER 84, [1986] QB 1000, [1986] 2 WLR 845, CA.
Speidel v Plato Films Ltd [1961] 1 All ER 876, [1961] AC 1090, [1961] 2 WLR 470, HL.
Warner v Sampson [1959] 1 All ER 120, [1959] 1 QB 297, [1959] 2 WLR 109, CA.
Williams v Reason (1983) [1988] 1 All ER 262, [1988] 1 WLR 96, CA.
Interlocutory appeal
The plaintiff, David Melvyn Bookbinder, appealed against the decision of Caulfield J dated 26 April 1988 whereby he refused the plaintiff’s application to strike out para 6 of the defence in an action for defamation against the defendant, the Rt Hon Norman Tebbit MP. The facts are set out in the judgment of Ralph Gibson LJ.
Alan Newman for the plaintiff.
Geoffrey Shaw and Stephen Suttle for the defendant.
Cur adv vult
8 December 1988. The following judgments were delivered.
RALPH GIBSON LJ. This is an interlocutory appeal in an action for damages for allegedly defamatory words brought by the plaintiff, Mr David Melvin Bookbinder, who at the material time was the leader of the Labour majority which controls the Derbyshire County Council. The defendant is the Rt Hon Norman Tebbit, MP, chairman of the Conservative Party. The plaintiff applied for part of the particulars of justification set out in the defence to be struck out on the ground that the allegations contained in them disclose no reasonable defence and are vexatious and/or are an abuse of the process of the court. Caulfield J on 26 April 1988 dismissed the application and the plaintiff has appealed to this court.
The history of the dispute began in 1984 when the council decided that the caption ‘Support Nuclear Free Zones’ should be printed on its stationery including the stationery of the county’s schools and educational institutions. Existing stationery stocks were overprinted. It seems that there were suggestions that this exercise had cost much money and a sum of £50,000 was mentioned in a newspaper. In May 1986 there was a by-election for the West Derbyshire constituency. On the evening of 6 May 1986, at a public meeting in Matlock Bath, held in support of the Conservative candidate, the defendant referred to the matter. It is common ground between the parties that the defendant, speaking at the public meeting, said the following words:
‘The £50,000 spent on printing anti-nuclear statements on county schools stationery was a damn fool idea. I hope that Councillor David Bookbinder has also told the Russians of Derbyshire’s nuclear free policy. If not, it is arguable that he has lost £50,000 on this damn fool idea on school notepaper.’
It is to be noted that the words he used state as a fact that £50,000 had been spent on printing the anti-nuclear message on the school stationery. The opinion is then expressed that that was a damn fool idea; and there is then what might be thought to be a sarcastic reference to telling the Russians of Derby’s nuclear free policy and the suggestion that, if the Russians had not been told, the £50,000 might have been lost.
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The plaintiff’s action was commenced by writ on 11 March 1987 after the lapse of some eight months available for reflection. The plaintiff’s statement of claim alleged that the task of overprinting stationery was undertaken by the council without the employment of any extra staff, without making any special collections or deliveries, and by using spare printing time at the county’s printing department; so that the cost of that form of advertising of the council’s policy was minimal. The plaintiff thus asserts that the fact alleged in the defendant’s statement was untrue but that assertion is denied by the defendant and the real cost of the overprinting is disputed.
Next the statement of claim alleged that the words, in their natural and ordinary meaning, meant and were understood to mean that the plaintiff, as leader of the Derbyshire County Council, had acted irresponsibly in causing large scale squandering of public funds. Thus, in its first form, the statement of claim alleged a general charge of squandering and did not merely allege that the words meant that the plaintiff had caused a sum of about £50,000 to be squandered on overprinting school stationery.
The defence was served on 29 April 1987. It denied that the words were or were capable of bearing any defamatory meaning. The defendant next relied, in the alternative, on the defence of fair comment on a matter of public interest, namely the expenditure by the council of money collected as rates. The viability of the defence of fair comment, of course, depends on proof of the substantial truth of the facts stated. In addition, the defence pleaded justification: the defendant said that, if the words which he used had the meaning which the plaintiff alleged, that is to say that the plaintiff had been guilty of irresponsible squandering of public funds, then the defendant would show that the charge was true and in para 6 he gave particulars of the facts and matters on which he relied. These particulars fall into two categories: the first part, sub-paras (1) to (6) are directed to the specific issue of overprinting. The second part of the particulars, namely sub-paras (7) to (19) deal with other occasions of alleged squandering of public money by the council under the leadership of the plaintiff. Examples are as follows: in sub-paras (7), (8) and (9), the publication from 1983 by the council of a free quarterly newspaper at an alleged annual cost of £76,000 and containing allegedly political propaganda; in sub-para (10), the employment in 1985 of an advertising agency to launch an advertising campaign on behalf of the council, the cost of the campaign being estimated at £660,000 in sub-para (11), the sending in 1986 of councillors abroad in furtherance of ‘twinning’ arrangements; in sub-para (13), the giving in March 1985 of £33,000 to a college outside Derbyshire; in sub-para (14), the organising in about 1983 of a ‘peace conference’ at Matlock in 1983; in sub-para (15), the cost in 1982 of early retirement of a council surveyor; in sub-para (17), the spending in 1985 of £20,000 on sponsorship of a relay run by young people to the Russian border; in sub-para (18), the allegation that in March 1987 Derbyshire was the highest rated county in England. The last, sub-para (19), reads as follows:
‘By reason of [those] facts and matters … the defendant will contend that the plaintiff as leader of the Derbyshire County Council has indeed acted irresponsibly in causing large scale squandering of public funds.’
The plaintiff, who, it is submitted, wishes to have tried the issue on which he started his action and not all the other issues which the defendant has raised, repented of the form of his pleading and amended it. Paragraph 5 of his statement of claim now reads (with the amendment shown in italics):
‘The said words in their natural and ordinary meaning meant and were understood to mean that the plaintiff as Leader of the Derbyshire County Council had acted irresponsibly in squandering £50,000 of public money on printing statements supportive of nuclear free zones on its stationery.’
The plaintiff invited the defendant to amend his defence accordingly and to delete sub-paras (7) to (19) of para 6 but the defendant declined. Hence the application to strike out those sub-paragraphs.
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Caulfield J dismissed the plaintiff’s application because, in his judgment, the wider meaning was one which a jury might conceivably attach to the words used: the defendant was saying that ‘the plaintiff was irresponsible in squandering public money and was giving an example in the overprinting of the school stationery’. He added:
‘There is a common sting here between the words used by the defendant and complained of by the plaintiff and the point of justification made by the defendant and the common sting is a waste of ratepayers’ money.’
The submission to this court for the plaintiff by counsel for the plaintiff in summary form was as follows. (i) The wider meaning of the words, as first alleged by the plaintiff in the statement of claim settled by counsel, was not a meaning of which the words were reasonably capable and, if the defendant had made application, the court must have struck out the allegation on that ground. (ii) The plaintiff is entitled to correct the error in his pleading. There is no estoppel. Now that the words have been removed by amendment the action proceeds as if they had never been there: Warner v Sampson [1959] 1 All ER 120 at 129, [1959] 1 QB 297 at 321. (iii) The matters alleged in sub-paras (7) to (19) of para 6 of the defence may be regarded as having been relevant and permissible while the plaintiff’s pleading contained the alleged wider meaning. (There are matters of dispute as to the state of the pleading even if the wider meaning should be upheld as a meaning which the jury might reasonably attach to the words but those matters will, if necessary, be left for resolution by requests for particulars.) On amendment of the statement of claim, since the wider meaning is not a conceivable meaning which the jury could properly attach to the words, sub-paras (7) to (19) should be struck out since they allege irrelevant matters which do not justify the charge contained in the words used and therefore constitute allegations designed to reduce the damage and as such are impermissible: Spiedel v Plato Films Ltd [1961] 1 All ER 876, 1090. (iv) The wider meaning is not a reasonably conceivable meaning of the words used because the words allege one specific ‘damn fool idea’ in the spending of a named sum, £50,000 on one particular exercise, namely the overprinting of stationery. (v) The defendant’s attempt to adhere to the wider meaning, and thereby to introduce the other issues into the trial, will greatly prolong the trial and increase the expense of it. The result would be oppressive to the plaintiff.
The contentions in answer put forward by counsel for the defendant went as follows. (i) Where the plaintiff has pleaded a wide meaning, the defendant is entitled to justify that meaning: see Maisel v Financial Times (No 1) (1915) 85 LJKB 2145. The plaintiff ought not to be allowed to circumvent that principle after service of the defence by an amendment. Counsel referred to ‘moving the goal posts’. (ii) Although the plaintiff can by amendment remove his original allegation from his pleading, the fact is that the plaintiff, of whom the words were spoken, considered that, as applied to him, they had the wider meaning the jury may well agree with his first view; and the court should not say that such a view is not reasonably conceivable. (iii) The defendant is entitled to justify any meaning which the words can conceivably bear: London Computer Operators Training Ltd v BBC [1973] 2 All ER 170, [1973] 1 WLR 424; and, for the purposes of an interlocutory application to strike out, the test is whether the wider meaning sought to be justified by the defendant is ‘reasonably arguable’ as the meaning of the words complained of: see Williams v Reason [1988] 1 All ER 262 at 270, [1988] 1 WLR 96 at 102 per Stephenson LJ. (iv) Right-minded persons on hearing the words used would think the worse of the plaintiff not because of any particular frolic on which he has wasted public money but because he wasted public money; and the defendant ought to be allowed to prove, if he can, the fact that the plaintiff had wasted public money by reference to other items of expenditure.
It is first necessary, in my judgment, to decide what effect must be given to the original pleading of the plaintiff. Counsel for the plaintiff has contended that the first form of pleading was a mistake. It was not put forward for any tactical purpose. When the
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consequence of the error was seen there was a prompt attempt to correct it: the statement of claim was served on 11 March 1987; the defence was served on 29 April 1987 and notice of intention to amend the statement of claim was given on 22 July 1987. It has not been argued on behalf of the defendant that, irrespective of the merits of the point as to the proper meaning of the alleged libel, the plaintiff could be prevented from amending the statement of claim by reason of any disadvantage to the defendant, arising from the original form of the pleading, which could not be put right by an order for costs.
A party is normally entitled to correct by amendment a bona fide error in his pleading where the other side is not unfairly disadvantaged if the error is corrected. That principle is plain where, for example, an incorrect admission of fact is made by mistake: see Hollis v Burton [1892] 3 Ch 226 at 231. This case is concerned with a contention as to the meaning of an alleged libel and by it notice is given of what claim will be made by the plaintiff at the trial. It may sometimes be wrong to permit a party to resile from the position adopted and maintained for a considerable period of time in his pleading with reference to some issue in the case: see Davey v Harrow Corp [1957] 2 All ER 305 at 307, [1958] 1 QB 60 at 69 per Lord Goddard CJ. There is nothing, in my judgment, in Maisel v Financial Times cited by counsel for the defendant which establishes any principle which might deny to this plaintiff the right to amend in due time such an allegation made by him in his pleading. According to the construction which the plaintiff in that case had in his pleading placed on the libel the defendants were sued for a general charge that the plaintiff was a dishonest person. It was, therefore, obvious that they were entitled to give particulars showing why they said he was a dishonest person but there was no question there of the plaintiff amending his allegation so as to withdraw the wider charge.
If, in a defamation case, the plaintiff were not free by amendment, made in due time, to correct an error in his pleading the plaintiff might, by such an error, be caused to have to fight a case on issues which the law would otherwise have excluded. In my judgment, the only force of the wider allegation originally made by the plaintiff is, as counsel for the defendant pointed out, that the plaintiff, with the assistance of advice, considered that, as applied to him, the words had that wider meaning.
The question for this court, therefore, is whether the words used could reasonably be regarded by the jury as meaning that the plaintiff was in 1986 a councillor who had acted irresponsibly in causing large scale squandering of public funds generally, and not only that he had squandered £50,000 of public funds on a particular ‘damn fool idea’, namely the overprinting of stationery. That question is, of course, not to be answered by deciding whether the jury could in fact in probability be persuaded to accept that the words had the wider meaning. It is a question of law whether the words are capable of having the wider meaning for which the defendant now contends: see per Lord Reid in Lewis v Daily Telegraph Ltd [1963] 2 All ER 151 at 155, [1964] AC 234 at 260. In that case the jury had found the words to have the wider meaning for which, in that case, the plaintiff contended, but the Court of Appeal set aside the verdict and judgment on the ground of misdirection and the House of Lords, by a majority of four to one, upheld the decision of the Court of Appeal. As to the approach of the court in considering what meaning the jury might properly infer from the words used, Lord Reid in that case said ([1963] 2 All ER 151 at 155, [1964] AC 234 at 259):
‘Ordinary men and women have different temperaments and outlooks. Some are unusually suspicious and some are unusually naïve. One must try to envisage people between these two extremes and see what is the most damaging meaning they would put on the words.’
That passage is cited in Duncan and Neill on Defamation (2nd edn) para 4.15.
The question with reference to these words might have been raised, and in my view can usefully be considered, in a different context, as counsel for the plaintiff pointed out,
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if the case had gone to trial on the issue as first pleaded by the plaintiff and with a plea of justification directed to the sole issue of spending or squandering public funds, to the extent of £50,000, or some smaller amount, on overprinting stationery. If the judge had directed the jury that they could, if they saw fit, find that the words in their natural meaning were not limited to a charge of squandering public funds on publicising the council’s anti-nuclear policy by printing a caption on stationery but extended to a general charge of having caused large scale squandering of public funds while a councillor, and if the jury had found for the plaintiff and awarded damages appropriate to that general charge, would this court have been obliged to uphold the verdict and judgment on the ground that the wider meaning was one which the jury could properly attach to the words?
It has not been, and could not be, suggested that a particular charge of wrongdoing necessarily may be regarded by the jury in all cases as including a general charge of that sort of wrongdoing. Even where a defendant has published two distinct libels about a plaintiff the law permits the plaintiff to complain of one only, and to have that issue decided, and the law does not permit the defendant to justify the one of which complaint is made by proving the truth of the other. Nor does the law permit a defendant to lead evidence of particular acts of misconduct on the part of the plaintiff in mitigation of damages where the defendant has failed to justify the libel complained of (see Speidel v Plato Films Ltd [1961] 1 All ER 876, [1961] AC 1090) but the two libels must be distinctly severable into distinct parts and, if they are not, the plaintiff cannot pick and choose between them: see Polly Peck (Holdings) plc v Trelford [1986] 2 All ER 84 at 97, [1986] QB 1000 at 1025.
The question whether a particular charge of wrongdoing carries a general charge may depend on the context in which the words appear. Where the words are published in written form the writing conveys the context and the defendant is normally entitled to insist that the jury see the whole of the context. In this case the words were spoken in the course of a public meeting. It is common ground that the meaning which the jury might properly attach to the words might be affected by the context, for example by the form of a question to which the words were given in answer, or the general course of a speech in which the words formed a passage; but neither the plaintiff nor the defendant has pleaded reliance on any such context and counsel for the defendant stated in this court that the defendant did not rely on any unpleaded context.
Whether the words complained of were spoken, or were written, a party who alleges that the meaning of the words is affected by the context in which they were written or spoken must, in my judgment, give notice by his pleading of that fact and must state what the relevant context was. Where the words were spoken there may be a conflict of evidence as to what was said before and after the words complained of and, therefore, as to what the context was in which the words were said. The obligation to plead the context, if reliance is to be placed on it for the purposes of supporting a contention as to what the meaning of the words was, is imposed, in my view, by RSC Ord 18, r 7(1):
‘Subject to the provisions of this rule, and rules 7A, 10, 11 and 12, every pleading must contain, and contain only, a statement in a summary form of the material facts on which the party pleading relies for his claim or defence, as the case may be, but not the evidence by which those facts are to be proved, and the statement must be as brief as the nature of the cases admits.’
The requirement is also covered, so far as concerns the defence of a defendant, by the provision in Ord 18, r 8(1):
‘A party must in any pleading subsequent to a statement of claim plead specifically any matter … (b) which, if not specifically pleaded, might take the opposite party by surprise … ’
It therefore seems to me that the court on this application cannot speculate as to what the
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context might be shown to have been in which the words in question were used beyond the matters to which reference is made in the pleading.
Reference, however, should be made to the manner in which this matter of the context arose in the course of this appeal. I did not understand from counsel for the defendant that consideration on behalf of the defendant had been given to the known context in which the words were used or that the defendant was intending expressly to abandon any question of reliance on such context. Indeed, I got the impression that until the matter was raised by Russell LJ in the course of argument direct attention had not been given to the context. It appeared that the parties were not in possession of a transcript of the meeting, if any recording existed from which a transcript might be made. I am not, of course, suggesting that there was some relevant context to which either side could usefully refer but, just as the plaintiff has amended his pleading, so the defendant might on his part, provided the application was made in due time, seek leave to amend his defence in order to allege what the context was if the evidence to justify such an application were available. In other words, the decision which I think this court should make on this appeal is based on the material contained in the pleading as it now stands.
The question as to the width of the conceivably proper meaning of the words used is therefore to be answered on the material before this court by reference to the words themselves spoken at a public meeting in support of a candidate in a by-election and spoken of a councillor, who was the leader of the controlling majority of the council. If the court is to say that these words, by their own force and in that context, may properly be held to contain a general charge of squandering public money, then it seems to me that we would be very close to holding that it is open to a jury, at least with reference to a person holding elective office and of known political views, to find that any specific charge against him of wrongdoing, based on stated specific facts, imports a general charge of preceding similar wrongdoing which may be justified by different specific facts. To take an example from the other side of the political debate, a specific charge of cruel and damaging cuts in public spending, based upon a stated reduction of funds to a particular cause or body, could, without support from the context, and by the force of the particular words alone, be held to contain a charge of other preceding allegedly cruel and damaging cuts, based on other reductions of funds to other causes and bodies.
For my part, I consider that the law should not, and does not, permit such wide discretion to a jury in selecting the meaning of words used. I do not, of course, assume or suggest that in this case any charge or allegation has been made on a false factual basis. The question of the cost of the overprinting is in issue and will be decided by the jury together with the primary question whether the words used were defamatory at all. But if in such a case as this a defamatory charge has been made on a false factual basis then, unless a wider meaning or a more general charge can fairly be gathered from the words used, or from the context, it is important to the even-handed conduct of such trials that it should not be open to a defendant, who has mistakenly charged the plaintiff with some form of alleged misconduct, be it squandering of public money or the making of damaging cuts, when there has been in fact no such squandering or no such cuts in funds, to defend the specific claim in defamation by reference to any other alleged examples of squandering or of cuts, merely on the ground that they are allegedly true examples in the past conduct of the plaintiff of the alleged kind of wrongdoing of which a specific charge has been made. A plaintiff ought to be able, if he can, to prove the untruth of a specific mistaken or false charge without having to face the burden of a trial directed to any number of preceding incidents of expenditure or of cutting expenditure in which he was concerned.
Counsel for the defendant argued that to hold that the words cannot properly bear the wider meaning would be to prevent ventilation at the trial of the real issue, namely whether or not there had been squandering of money left, right and centre by the council under the leadership of the plaintiff. He said that assistance could be found in support of the plaintiff’s contention that the words import a sting of a general nature from the
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decision of the court in Khashoggi v IPC Magazines Ltd [1986] 3 All ER 577, [1986] 1 WLR 1412 and thattwo cases, London Computer Operators Training Ltd v BBC [1973] 2 All ER 170, [1973] 1 WLR 424 and Williams v Reason (1983) [1988] 1 All ER 262, [1988] 1 WLR 96, were ‘on all fours with this case’.
In my view, on the essential question as to the possible meanings of the words used in this case, those cases relied on by counsel for the defendant provide little if any assistance, and that is not surprising because the relevant principle applicable in this case is not in issue between the parties and the application of the principle by the court to one set of facts can rarely be of direct assistance in applying it to different facts. A brief examination of these cases will be sufficient. In Khashoggi’s case the publication contained various express allegations about the sexual behaviour of the plaintiff but she complained in her proceedings of one allegation only of an affair with a named man. It was contended for the defendants that they could properly claim to justify the sting of the libel, for the purposes of the principle in Bonnard v Perryman [1891] 2 Ch 269, [1891–4] All ER Rep 965, so as to prevent the grant of an interlocutory injunction, by proof of conduct showing sexual promiscuity although they could not prove the allegation with reference to the named man. This court upheld that submission and thereby held, as I understand it, that it would be open to the jury on the facts of that case to find that the meaning of the words used in the publication as a whole was that contended for by the defendants. The application of the principle by the court to the facts of that case seems to me to be of no assistance in answering the question in this case. There was here no allegation of wrongdoing, additional to the specific charge in issue, capable of supporting a wider meaning.
Next, as to London Computer Operator’s Training Ltd v BBC, the proprietors of an establishment which claimed to train computer operators claimed damages for libel contained in a radio programme, broadcast by the defendants, which was an expose of the training provided, and included comments that it was a financial racket; that the aptitude test and final certificate were bogus and it referred to the founder of the school, who was not a plaintiff in the action, with the words: ‘Is this the sort of man to run a computer school?' The defendants, who had pleaded justification and fair comment, applied for leave to amend their defence by adding to the particulars of justification details of previous convictions of the founder of the school for offences of dishonesty not connected with the running of the school. The defendants were held by this court to be entitled to plead those convictions on the ground that the programme was capable of being interpreted by a reasonable jury as meaning that the company was being run by people of questionable honesty; and, as that was a conceivable meaning, evidence of the convictions should be before the jury. That case is another example of the application of the principle that any facts may be proved which are relevant to justify the sting of the libel according to any meaning which the jury may properly attach to it but there is, I think, no particular assistance to be derived as to the factors by reference to which the court is to decide whether, in the absence of a relevant context, it is properly open to a jury to hold that a specific allegation of wrongdoing contains for these purposes a general charge of such wrongdoing.
Finally, as to Williams v Reason, which was decided by this court (Stephenson, O’Connor and Purchas LJJ) in November 1983 the libels were published in two articles in the Daily Telegraph in 1979. They alleged that the plaintiff had infringed his amateur status by writing a book for money. One article contained the heading ‘Board should act now to halt Shamateurism’ and, in addition to references to the writing of the book, the article said:
‘I have not met anyone who does not believe that the [plaintiff’s] case has infringed at least three of the intentions of the International Board’s amateur principles. I have no doubt that Rugby Union football in Britain and in at least two other countries in
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Europe is rapidly approaching the state of shamateurism which so disfigured the top level of so-called English soccer for many years.’
The plaintiff by his statement of claim alleged that the words in the article meant that the plaintiff had (i) infringed his amateur status by writing a book, (ii) was guilty of ‘shamateurism’, (iii) had played an international match against England though he knew that he was a professional and (iv) had by his conduct brought disgrace and disrepute on the game of rugby and his country. There was a dispute of fact at the trial as to whether the plaintiff had or had not written the book for money, intending to keep the money which was paid to him, or whether he had always intended to give the money to charity and had not changed his intention about keeping the money after publication of the first article in the Daily Telegraph. The jury held the publications to have been defamatory and awarded damages. The judgment and verdict were set aside and a new trial ordered for reasons not relevant to this case. The defendants were given leave to amend the defence to allege, as particulars of justification, not new facts relevant to the alleged writing of a book for money but facts relevant to the taking of money for wearing the boots of a named boot manufacturer and leave was granted on the grounds set out in a passage in Stephenson LJ’s judgment on which counsel for the defendant placed particular reliance ([1988] 1 All ER 262 at 269, [1988] 1 WLR 96 at 103):
‘… I conclude that [it] is right … that the sting of the libel here is “shamateurism”, the charge, still tied to his book but nevertheless carrying with it a charge of hypocrisy and deviousness, that the plaintiff was a professional while claiming to be an amateur, that the evidence that alleges that the plaintiff regularly took boot money, if accepted, would prove that he had by reason of reg 5 of the board’s regulations no amateur status to infringe or lose at the time when he wrote the book because he had already lost it by taking boot money and that a jury which heard evidence that he had accepted boot money might have been influenced into finding that he had, on any interpretation of the regulations, infringed them by writing a book for money that he never intended to give to charity until the publication of the first of Mr Reason’s articles in the Daily Telegraph.’
Again, in my view, that case was an example of the application of established principle to the widely varying circumstances of particular cases and, again, I can derive little assistance from the case in the decision of the central question to this case. I note, however, that Stephenson LJ, with whose judgment both O’Connor and Purchas LJJ in substance agreed, said ([1988] 1 All ER 262 at 269, [1988] 1 WLR 96 at 103):
‘… I have not found it easy to decide whether the evidence of boot money is relevant to the words that Mr Reason wrote of the plaintiff, understood in any meaning that they are reasonable capable of bearing.’
For my part I regard that case as far stronger than this for the purpose of finding in the words used a general charge, in that case of ‘shamateurism’, by reference to a particular example, namely the writing of a book for money.
As I have said, it is not to be expected that much assistance will be capable of being derived from the decision as to the reasonably possible meaning of one set of words for the purpose of deciding the meaning of another set of words. As Lord Reid said in Lewis v Daily Telegraph Ltd [1963] 2 All ER 151 at 155, [1984] AC 234 at 250:
‘What the ordinary man, not avid for scandal, would read into the words complained of must be a matter of impression.’
I have reached the clear conclusion that the wider meaning, now abandoned by the plaintiff but put forward by the defendant, is not a meaning which the jury could
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properly apply to the words used. I have had very much in mind the view of Caulfield J, who has wide experience in defamation cases, and I have been slow to reach a conclusion different from that expressed by him. But, in the end, I have found myself unable to share his view.
The clear impression which I have formed of these words, in their context as now before us, is that the ordinary man envisaged by Lord Reid would regard the defamatory charge in the words used, if there was any, as limited to the spending of stated sums on the stated project. Next, the defamatory charge, if there was any, was not of a stated crime or of a form of moral turpitude but was, by no means unimportant or trivial but of a different order, in my view, of causing the spending of public money to such an extent and for such a purpose that the spending was wholly unjustified. The fact that a person is by his social judgment moved to cause to be made an unjustified expenditure, if that should be proved, on publicising an anti-nuclear policy does not, in my view, suggest that he has in the past been moved to make unjustified expenditure on different projects or for different social purposes, or is of such a character that he is likely to have so acted.
Further, I have tested the point in the way suggested by counsel for the plaintiff. If it should have been proved that the defendant had incorrectly asserted that £50,000 had been spent on the idea of printing the anti-nuclear caption on council stationery, and if the jury should have found that the words used were defamatory in their context, including therein the assertion that the expenditure was a damn fool idea, it would in my view have been unjust for the jury to have awarded damages on the basis that by the words used the defendant had generally charged the plaintiff with the squandering of public money in the plaintiff’s prior direction of expenditure of public money by the council in all or any part of its functions. The fact that the defendant now asserts the wider meaning, in order to be allowed the opportunity to try to prove other distinct items of public expenditure which he wishes to try to prove to have amounted to squandering of public money, does not, in my judgment, alter the case or widen the possible meaning of the words used.
For my part, therefore, I would allow this appeal and direct that sub-paras (7) to (19) of para 6 of the defence be struck out.
RUSSELL LJ. I agree. As Ralph Gibson LJ has pointed out, I was concerned during the submissions of counsel that the context in which the words were spoken by the defendant might well have a bearing on the conceivable meanings that the words are capable of bearing. On the one hand, the allegation might have been an isolated and self-contained one, confined to the assertion that £50,000 had been spent on the overprinting on school stationery, with the derisive comments about that activity. If such were the reality it is impossible, in my judgment, to give the words a meaning wider than that now contended for by the plaintiff. On the other hand, the offending words might well have formed a part or illustration of a much broader based political attack on alleged maladministration at the expense of ratepayers by the local authority of which the plaintiff was the leader. If this were the true context in which the words were spoken, then I think it is plain that a conceivable meaning of the words used could be as is now contended for by the defendant. This seemed to be the view of Caulfield J when he said in his judgment that a conceivable meaning was ‘that the plaintiff was irresponsible in squandering public money and [the defendant] was giving an example in the over-printing of the school stationery’ (my emphasis).
Unfortunately neither counsel could assist as to the context in which the words were spoken, and we are left with the pleadings. They are silent as to the context.
In these circumstances I am satisfied that, in the absence of a pleaded context, the court should not speculate, where to do so might lead to a defendant being permitted to prolong the hearing and to adduce a welter of evidence not relevant to the real issue for the jury’s determination. Whilst recognising that the striking out of a pleading, or part
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of it, is a draconian step, I do not shrink from it in this case so long as the pleadings do not assist in ascribing to the words a broader meaning than that which they bear when looked at in isolation.
In Lucas-Box v News Group Newspapers Ltd [1986] 1 All ER 177 at 181 [1986] 1 WLR 147 at 161 Ackner LJ said:
‘It is axiomatic that the function of pleadings is to define the issues between the parties, so that both the plaintiff and the defendant know what is the other side’s case, and then everyone, counsel, judge and jury are able to focus on the real nature of the dispute. Although to some it may seem a startling observation, we can see no reason why libel litigation should be immune from the ordinary pleading rules.’
Counsel for the defendant told us that in libel the context was normally pleaded by a reference to the full material passage where a defence of justification and/or fair comment was raised. However, in his wide experience he could not recall the context being pleaded in slander proceedings: certainly not as a matter of practice or convention by those practising extensively in this field.
For my part I can see no reason why slander should be different from libel, and the words of Ackner LJ cited above seem to me to be entirely appropriate to both forms of defamation.
Like Ralph Gibson LJ I must not be taken as suggesting that a context which would permit of a wider meaning than that pleaded by the plaintiff was present, but in my view if such is to be alleged it should be pleaded, and provided that the defendant makes his application to amend timeously in order to allege the appropriate context, the order of this court on this interlocutory appeal should in no way preclude the amendment being made.
I too, therefore, would allow this appeal and make the order proposed by Ralph Gibson LJ.
Appeal allowed. Leave to appeal refused.
Solicitors: Cooper Sons Hartley & Williams, Manchester (for the plaintiff); Peter Carter-Ruck & Partners (for the defendant).
Radhika Edwards Barrister.
Norwich City Council v Harvey and others
[1989] 1 All ER 1180
Categories: CONSTRUCTION
Court: COURT OF APPEAL, CIVIL DIVISION
Lord(s): MAY, CROOM-JOHNSON AND GLIDEWELL LJJ
Hearing Date(s): 15, 16 NOVEMBER, 21 DECEMBER 1988
Building contract – Sub-contractors – Liability for loss or damage – Limitation of liability – Standard form contract between employer and main contractor – Contract providing that damage by fire at sole risk of employer – Fire damage caused by sub-contractor’s employee – Whether sub-contractor protected by exemption clause in main contract – Whether just and reasonable to hold sub-contractor liable – Whether sub-contractor owing duty of care to employer – JCT Standard Form of Building Contract (Local Authorities’ Edition with Quantities, 1963 edn ( July 1977 revision)), cl 20[C].
The plaintiff building owners entered into a contract for the extension of a swimming pool complex under a contract in the JCT standard form of local authority building contract (1963 edition, revised in 1977), cl 20[C] of which provided that ‘The existing structures … owned by him or for which he is responsible and the Works … shall be at the sole risk of the Employer [ie the building owners] as regards loss or damage by fire … and the Employer shall maintain adequate insurance against those risks’. The contractor sub-contracted certain roofing work to the defendant sub-contractors, one of whose employees, while using a blowtorch, set fire to both the existing buildings and the new extension. The building owners brought an action against the sub-contractors and their employee claiming damages for negligence. The trial judge dismissed the action and the building owners appealed to the Court of Appeal.
Held – Where a contract for the erection of a building contained a provision that the building owner was to bear the risk of loss or damage caused to the building by fire thereby reflecting the intention of the building owner and the contractor that the former would accept the risk of damage by fire to his premises, and a sub-contractor had contracted with the contractor on that basis, it would not be just and reasonable to exclude the sub-contractor from the protection of that provision in the main contract if the building was damaged by fire as the result of the negligence of the sub-contractor, even though there was no privity of contract between him and the building owner. Furthermore, in such circumstances there was not such a close and direct relationship between the building owner and the sub-contractor for the latter to owe a duty of care to the former. It followed that the sub-contractors were entitled to the benefit of the exemption from liability contained in cl 20[C] of the main contract in respect of the claim brought against them by the building owners in respect of their employee’s negligence. The appeal would accordingly be dismissed (see p 1184 g, p 1187 b f and p 1188 f g, post).
James Archdale & Co Ltd v Comservices Ltd [1954] 1 All ER 210 and Scottish Special Housing Association v Wimpey Construction UK Ltd [1986] 2 All ER 957 considered.
Notes
For negligence and the duty to take care, see 34 Halsbury’s Laws (4th edn) para 5, and for cases on the subject, see 36(1) Digest (Reissue) 17–55, 34–177.
Cases referred to in judgments
Aberdeen Harbour Board v Heating Enterprises (Aberdeen) Ltd (1988) Times, 25 March, Ct of Sess.
Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728, [1977] 2 WLR 1024, HL.
Page 1181 of [1989] 1 All ER 1180
Archdale (James) & Co Ltd v Comservices Ltd [1954] 1 All ER 210, [1954] 1 WLR 459, CA.
Curran v Northern Ireland Co-ownership Housing Association Ltd (Stewart, third party) [1987] 2 All ER 13, [1987] AC 718, [1987] 2 WLR 1043, HL.
Davis Contractors Ltd v Fareham UDC [1956] 2 All ER 145, [1956] AC 696, [1956] 3 WLR 37, HL.
Donoghue (or M’Alister) v Stevenson [1932] AC 562, [1932] All ER Rep 1, HL.
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465, [1963] 3 WLR 101, HL.
Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294, [1970] AC 1004, [1970] 2 WLR 1140, HL.
Leigh & Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] 2 All ER 145, [1986] AC 785, [1986] 2 WLR 902, HL.
Peabody Donation Fund (Governors) v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529, [1985] AC 210, [1984] 3 WLR 953, HL.
Rowlands (Mark) Ltd v Berni Inns Ltd [1985] 3 All ER 473, [1986] QB 211, [1985] 3 WLR 964, CA.
Rumbelows Ltd v AMK (a firm) (1982) 19 Build LR 25.
SCM (UK) Ltd v W J Whittall & Son Ltd [1970] 3 All ER 245, [1971] 1 QB 337, [1970] 3 WLR 694, CA.
Scottish Special Housing Association v Wimpey Construction UK Ltd [1986] 2 All ER 957, [1986] 1 WLR 995, HL.
Southern Water Authority v Carey [1985] 2 All ER 1077.
Spartan Steel and Alloys Ltd v Martin & Co (Contractors) Ltd [1972] 3 All ER 557, [1973] QB 27, [1972] 3 WLR 502, CA.
Sutherland Shire Council v Heyman (1985) 60 ALR 1, Aust HC.
Twins Transport Ltd v Patrick (1984) 25 Build LR 65.
Weller & Co v Foot and Mouth Disease Research Institute [1965] 3 All ER 560, [1966] 1 QB 569, [1965] 3 WLR 1082.
Welsh Health Technical Services Organisation v Haden Young (IDC, third party) (1987) 37 Build LR 130.
Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175, [1987] 3 WLR 776, PC.
Cases also cited
Johnson Matthey & Co Ltd v Constantine Terminals Ltd [1976] 2 Lloyd’s Rep 215.
Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201, [1983] 1 AC 520, HL affg 1982 SLT 333, Ct of Sess.
New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1974] 1 All ER 1015, [1975] AC 154, PC.
Petrofina (UK) Ltd v Magnaload Ltd [1983] 3 All ER 35, [1984] QB 127.
Raymond v Honey [1982] 1 All ER 756, [1983] 1 AC 1, HL.
Scruttons Ltd v Midland Silicones Ltd [1962] 1 All ER 1, [1962] AC 446, HL.
Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 All ER 791, [1988] QB 758, CA.
Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 2 All ER 947, [1986] AC 80, PC.
Appeal
The plaintiffs, Norwich City Council, appealed from the judgment of Garland J (39 Build LR 75) given on 2 November 1987 dismissing their claim against the first defendant, Paul Clarke Harvey, and the second defendants, Briggs Amasco Ltd, for £56,362·17 being damages for negligence in respect of fire damage caused by the first defendant while employed by the second defendants, who were sub-contractors on the building of
Page 1182 of [1989] 1 All ER 1180
an extension of a swimming pool complex owned by the plaintiffs. The facts are set out in the judgment of May LJ.
Robert Akenhead for the plaintiffs.
Nicholas Dennys for the defendants.
Cur adv vult
21 December 1988. The following judgments were delivered.
MAY LJ. This is an appeal by the plaintiffs from a judgment of Garland J of 2 November 1987(see 39 Build LR 75). The judge then had before him a claim for damages for negligence against both defendants which he dismissed. The plaintiffs now appeal asking that that order should be set aside and that judgment should be entered for them for damages of £56,362.17.
The case concerns a building contract and a sub-contract. I take the facts of the case from the judge’s judgment in which they are clearly set out. The plaintiffs, the building owners, own and operate a swimming pool complex at St Augustines in Norwich. In March 1981 they entered into a contract with main contractors, called Bush Buildings (Norwich) Ltd, for an extension to the complex. The latter sub-contracted certain felt roofing work to the second defendants. Unfortunately one of the latter’s employees, the first defendant, while using a gas blowtorch, set fire to both the existing buildings and the new extension causing damage, which gave rise to the claim in these proceedings.
The judge held that any duty of care which would otherwise have been owed by the defendants to the plaintiffs had been qualified by the terms of the respective contracts between the parties, whereby the plaintiffs accepted the risk of damage by fire and other perils to their property and that consequently it would not be just and reasonable to hold that the defendants owed any duty to the plaintiffs to take reasonable care to avoid such damage. This is the fundamental issue in this case.
The contract between the plaintiffs and Bush Builders, to which I shall refer as the ‘main contract’, was in the familiar JCT Standard Form of Building Contract, Local Authorities’ Edition with Quantities, 1963 edn (July 1977 revision). The material clauses of that contract for present purposes are cll 17, 18, 19 and 20[C] of which the relevant parts are as follows:
‘17 The Contractor shall not without the written consent of the Employer assign this Contract, and shall not without the written consent of the Architect/Supervising Officer (which consent shall not be unreasonably withheld to the prejudice of the Contractor) sub-let any portion of the Works …
18(2) Except for such loss or damage as is at the risk of the Employer under clause 20[B] or clause 20[C] of these Conditions (if applicable) the Contractor shall be liable for, and shall indemnify the Employer against, any expense, liability, loss, claim or proceedings in respect of any injury or damage whatsoever to any property real or personal in so far as such injury or damage arises out of or in the course of or by reason of carrying out of the Works, and provided always that the same is due to any negligence, omission or default of the Contractor, his servants or agents or of any sub-contractor his servants or agents.
19(1)(a) Without prejudice to his liability to indemnify the Employer under clause 18 of these conditions the Contractor shall maintain and shall cause any sub-contractor to maintain such insurances as are necessary to cover the liability of the Contractor or, as the case may be, of such sub-contractor in respect of personal injury or death arising out of or in the course of or caused by the carrying out of the Works not due to any act or neglect of the Employer or of any person for whom the Employer is responsible and in respect of injury or damage to property, real or personal, arising out of or in the course of or by reason of the carrying out of the
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Works and caused by any negligence, omission or default of the Contractor, his servants or agents or, as the case may be, of such sub-contractor, his servants or agents …
20[C] The existing structures together with the contents thereof owned by him or for which he is responsible and the Works and all unfixed materials and goods, delivered to, placed on or adjacent to the Works and intended therefor … shall be at the sole risk of the Employer as regards loss or damage by fire [and other listed risks] and the employer shall maintain adequate insurance against those risks … ’
Clearly therefore, as between the employer and the main contractor, the former was solely liable in respect of any loss or damage to his premises caused by, inter alia, fire.
In so far as the second defendants, as sub-contractors, were concerned, they were invited to tender by the main contractor. The document doing so identified the form of the main contract and in attached extracts from the relevant bill of quantities the main contractor expressly stated that cl 20[C] (employer’s risk) would apply. In their own additional conditions they also provided inter alia:
‘The work is to be carried out in accordance with the contract which exists between Bush Builders (Norwich) Ltd. (hereinafter called the Main Contractor) and the Employer, and the acceptance of this order binds the Sub-contractors and Suppliers to the same terms and conditions as those of the Main Contract. It is not however the intention of the Main Contractor to issue formal Sub-Contract Documents unless specifically required.’
The sub-contractors duly tendered on 20 January 1981. Their tender was accepted on 17 March 1981 by the main contractor by a document containing the following conditions:
‘1. The work is to be carried out in accordance with the contract which exists between Bush Builders (Norwich) Limited (hereinafter called the Main Contractor) and the employer, and the acceptance of this order binds the sub-contractors and suppliers to the same terms and conditions as those of the main contract …
5. No exclusions or limitations of liabilities of suppliers or sub-contractors are accepted unless agreed separately in writing by the Main Contractor and all suppliers and sub-contractors will be held responsible for any increased costs due to their actions together with any consequential loss.
6. The suppliers or sub-contractors shall take out and maintain, to the satisfaction of the Main Contractor, all necessary insurance policies as required by law and the contract and shall produce evidence of the same if required to do so … ’
On the facts of this case it is not disputed that, if the sub-contractors owed any duty to take care to avoid damage to the employers’ property by fire, then they were in breach of that duty and the employers are entitled to recover.
The judge held that there was no privity of contract between the employer and the sub-contractors, and also that there was no question of the main contractor acting either as the agent or trustee for the sub-contractors (see his Honour Judge David Smout QC in Southern Water Authority v Carey [1985] 2 All ER 1077). The judge further declined to act on any analogy with the bailment cases where, as in Leigh & Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] 2 All ER 145, [1986] AC 785, the contractual exemption is in the defendant sub-bailee’s contract with the bailee. Having considered a number of recent authorities relating to the existence and extent of a duty of care he concluded (39 Build LR 75 at 87–88):
‘The matter must be approached as one of principle: is the duty owed by the defendant to the plaintiff qualified by the plaintiffs’ contract with the main contractor, or to put it more broadly, by the plaintiffs propounding a scheme whereby they accepted the risk of damage by fire and other perils to their own
Page 1184 of [1989] 1 All ER 1180
property—existing structures and contents—and some property which does not belong to them—unfixed materials and goods, the value of which has not been included in any certificate—while requiring the contractor to indemnify them against liabilities arising from the omission or default of both the contractor and of any sub-contractor then requiring the contractor to insure and to cause any sub-contractor to insure against the liabilities included in the indemnity? I am left in no doubt that the duty in tort owed by the sub-contractor to the employer is so qualified. This appears to me to follow from the passage to which I have referred in Peabody v Parkinson ([1984] 3 All ER 529 at 534, [1985] AC 210 at 240–241), and to be consistent with the approach, albeit on different facts in Scottish Housing v Wimpey ([1986] 2 All ER 957, [1986] 1 WLR 995) and Mark Rowlands v Berni Inns ([1985] 3 All ER 473, [1986] QB 211) … Each case must turn both on its own facts, and on the authority of Peabody v Parkinson, what is just and reasonable.’
I trust I do no injustice to the plaintiffs argument in this appeal if I put it shortly in this way. There is no dispute between the employer and the main contractor that the former accepted the risk of fire damage: see James Archdale & Co Ltd v Comservices Ltd [1954] 1 All ER 210, [1954] 1 WLR 459 and Scottish Special Housing Association v Wimpey Construction UK Ltd [1986] 2 All ER 957, [1986] 1 WLR 995. However cl 20[C] does not give rise to any obligation on the employer to indemnify the sub-contractor. That clause is primarily concerned to see that the works were completed. It was intended to operate only for the mutual benefit of the employer and the main contractor. If the judge and the sub-contractors are right, the latter obtain protection which the rules of privity do not provide. Undoubtedly the sub-contractors owed duties of care in respect of damage by fire to other persons and in respect of other property (for instance the lawful visitor, employees of the employer or other buildings outside the site) in those circumstances it is impracticable juridically to draw a sensible line between the plaintiffs on the one hand and others on the other to whom a duty of care was owed. The employer had no effective control over the terms on which the relevant sub-contract was let and no direct contractual control over either the sub-contractors or any employee of theirs.
In addition, the plaintiffs pointed to the position of the first defendant, the sub-contractors’ employee. Ex hypothesi he was careless and, even if his employers are held to have owed no duty to the building employers, on what grounds can it be said that the employee himself owed no such duty? In my opinion, however, this particular point does not take the matter very much further. If in principle the sub-contractors owed no specific duty to the building owners in respect of damage by fire, then neither in my opinion can any of their employees have done so.
In reply the defendants contend that the judge was right to hold that in all the circumstances there was no duty of care on the sub-contractors in this case. Alternatively they submit that the employers’ insurers have no right of subrogation to entitle them to maintain this litigation against the sub-contractors.
The law relevant to the question whether or not a duty of care arises in given circumstances has been considered by the House of Lords and the Privy Council in a number of recent decisions. For present purposes one can start with the dictum from the speech of Lord Wilberforce in Anns v Merton London Borough [1977] 2 All ER 492 at 498–499, [1978] AC 728 at 751–752:
‘Through the trilogy of cases in this House, Donoghue v Stevenson [1932] AC 562, [1932] All ER Rep 1, Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465 and Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294, [1970] AC 1004, the position has now been reached that in order to establish that a duty of care arises in a particular situation, it is not necessary to bring the facts of that situation within those of previous situations in which a duty of care has been held to exist. Rather the question has to be approached in two stages. First one has to ask whether, as between the alleged wrongdoer and the person who has suffered damage
Page 1185 of [1989] 1 All ER 1180
there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter, in which case a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may give rise (see the Dorset Yacht case [1970] 2 All ER 294 at 297–298, [1970] AC 1004 at 1027, per Lord Reid). Examples of this are Hedley Byrne & Co Ltd v Heller & Partners Ltd where the class of potential plaintiffs was reduced to those shown to have relied on the correctness of statements made, and Weller & Co v Foot and Mouth Disease Research Institute [1965] 3 All ER 560, [1966] 1 QB 569 and (I cite these merely as illustrations, without discussion) cases about “economic loss” where, a duty having been held to exist, the nature of the recoverable damages was limited (see SCM (United Kingdom) Ltd v W J Whittall & Son Ltd [1970] 3 All ER 245, [1971] 1 QB 337, Spartan Steel and Alloys Ltd v Martin & Co (Contractors) Ltd [1972] 3 All ER 557, [1973] QB 27).’
However, in Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd [1984] 3 All ER 529 at 534, [1985] AC 210 at 240–241 Lord Keith commented on Lord Wilberforce’s dictum in these terms:
‘There has been a tendency in some recent cases to treat these passages as being themselves of a definitive character. This is a temptation which should be resisted. The true question in each case is whether the particular defendant owed to the particular plaintiff a duty of care having the scope which is contended for, and whether he was in breach of that duty with consequent loss to the plaintiff. A relationship of proximity in Lord Atkin’s sense must exist before any duty of care can arise, but the scope of the duty must depend on all the circumstances of the case. In Home Office v Dorset Yacht Co Ltd [1970] 2 All ER 294 at 307–308, [1970] AC 1004 at 1038–1039 Lord Morris, after observing that at the conclusion of his speech in Donoghue v Stevenson [1932] AC 562 at 599, [1932] All ER Rep 1 at 20 Lord Atkin said that it was advantageous if the law “is in accordance with sound common sense” and expressing the view that a special relation existed between the prison officers and the yacht company which give rise to a duty on the former to control their charges so as to prevent them doing damage, continued: “Apart from this I would conclude that in the situation stipulated in the present case it would not only be fair and reasonable that a duty of care should exist but that it would be contrary to the fitness of things were it not so. I doubt whether it is necessary to say, in cases where the court is asked whether in a particular situation a duty existed, that the court is called on to make a decision as to policy. Policy need not be invoked where reasons and good sense will at once point that way. If the test whether in some particular situation a duty of care arises may in some cases have to be whether it is fair and reasonable that it should so arise the court must not shrink from being the arbiter. As Lord Radcliffe said in his speech in Davis Contractors Ltd v Fareham Urban District Council [1956] 2 All ER 145 at 160, [1956] AC 696 at 728, the court is ‘the spokesman of the fair and reasonable man’.” So in determining whether or not a duty of care of particular scope was incumbent on a defendant it is material to take into consideration whether it is just and reasonable that it should be so.’
In Curran v Northern Ireland Co-ownership Housing Association Ltd (Stewart, third party) [1987] 2 All ER 13, [1987] AC 718 the House of Lords held that a statutory authority responsible for the provision of housing accommodation had no powers of control of building operations when paying an improvement grant. Accordingly, it did not owe subsequent occupiers a duty to take care not to make payment in respect of defective work. Lord Bridge said ([1987] 2 All ER 13 at 17, [1987] AC 718 at 724):
Page 1186 of [1989] 1 All ER 1180
‘My Lords, Anns v Merton London Borough may be said to represent the high-water mark of a trend in the development of the law of negligence by your Lordships’ House towards the elevation of the “neighbourhood” principle derived from the speech of Lord Atkin in Donoghue v Stevenson into one of general application from which a duty of care may always be derived unless there are clear countervailing considerations to exclude it.’
Lord Bridge then quoted a longer passage from the speech of Lord Keith in the Peabody case, including the passage which I have already quoted, and went on to consider in particular the extent to which a duty of care should be imposed on a statutory authority exercising a statutory power given to it. Such considerations are of course not directly relevant in the instant case, but Lord Bridge concluded ([1987] 2 All ER 13 at 20, [1987] AC 718 at 729):
‘Here, in my opinion, the dictate of good sense and the consideration of what is fair and reasonable point clearly against the imposition of any duty of care owed by the executive to the plaintiffs and it would be contrary to the fitness of things to hold it to be under any such duty.’
In Yuen Kun-yeu v A-G of Hong Kong [1987] 2 All ER 705, [1988] AC 175, the question arose whether the Commissioner of Deposit-taking Companies owed any duty to persons who deposited moneys with a company which he had registered to take reasonable care to ensure that that company’s affairs were not being conducted fraudulently, speculatively or to the detriment of its depositors. The opinion of the Privy Council was delivered by Lord Keith. He quoted the familiar passage to which I have already referred from the speech of Lord Wilberforce in Anns’s case and after referring to other cases in which the passage had been treated with some reservation, he said ([1987] 2 All ER 705 at 710, [1988] AC 175 at 191):
‘Their Lordships venture to think that the two-stage test formulated by Lord Wilberforce for determining the existence of a duty of care in negligence has been elevated to a degree of importance greater than it merits, and greater perhaps than its author intended.’
He then went on to express the approval of their Lordships of the view favoured by Gibbs CJ in the High Court of Australia in Sutherland Shire Council v Heyman (1985) 60 ALR 1 at 13 that Lord Wilberforce meant the expression ‘proximity or neighbourhood’ to be a composite one importing the whole concept of necessary relationship between the plaintiff and the defendant described by Lord Atkin in Donoghue v Stevenson [1932] AC 562, [1932] All ER Rep 1. Lord Keith pointed out that although the foreseeability of harm is a necessary ingredient of such a relationship, it is not the only one and, having quoted from passages from the speech of Lord Atkin in Donoghue v Stevenson, he said ([1987] 2 All ER 705 at 711, [1988] AC 175 at 192):
‘Lord Atkin clearly had in contemplation that all the circumstances of the case, not only the foreseeability of harm, were appropriate to be taken into account in determining whether a duty of care arose.’
Subsequently he expressed the opinion that the second stage of Lord Wilberforce’s test in Anns v Merton London Borough [1977] 2 All ER 492, [1978] AC 728 was one which would rarely have to be applied. It can arise only in a limited category of cases where, notwithstanding that a case of negligence is made out on a proximity basis, public policy requires that there should be no liability.
In my opinion the present state of the law on the question whether or not a duty of care exists is that, save where there is already good authority that in the circumstances there is such a duty, it will only exist in novel situations where not only is there foreseeability of harm, but also such a close and direct relation between the parties
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concerned, not confined to mere physical proximity, to the extent contemplated by Lord Atkin in his speech in Donoghue v Stevenson [1932] AC 562, [1932] All ER Rep 1. Further, a court should also have regard to what it considers just and reasonable in all the circumstances and facts of the case.
In the instant case it is clear that as between the employer and the main contractor the former accepted the risk of damage by fire to its premises arising out of and in the course of the building works. Further, although there was no privity between the employer and the sub-contractor, it is equally clear from the documents passing between the main contractors and the sub-contractors to which I have already referred that the sub-contractors contracted on a like basis. In Scottish Special Housing Association v Wimpey Construction UK Ltd [1986] 2 All ER 957, [1986] 1 WLR 995 the House of Lords had to consider whether, as between the employer and main contractors under a contract in precisely the same terms as those of the instant case, it was in truth intended that the employer should bear the whole risk of damage by fire, even fire caused by the contractor’s negligence. The position of sub-contractors was not strictly in issue in the Scottish Housing case, which I cannot think the House did not appreciate, but having considered the terms of cll 18, 19 and 20[C] of the same standard form as was used in the instant case Lord Keith, in a speech with which the remainder of their Lordships agreed, said ([1986] 2 All ER 957 at 959, [1986] 1 WLR 995 at 999):
‘I have found it impossible to resist the conclusion that it is intended that the employer shall bear the whole risk of damage by fire, including fire caused by the negligence of the contractor or that of sub-contractors.’
As Lord Keith went on to point out, a similar conclusion was arrived at by the Court of Appeal in England in James Archdale & Co Ltd v Comservices Ltd [1954] 1 All ER 210, [1954] 1 WLR 459 on the construction of similarly but not identically worded corresponding clauses in a predecessor of the standard form used in the Scottish Housing and instant cases. Again the issue only arose in the earlier case as between employer and main contractor, but approaching the question on the basis of what is just and reasonable I do not think that the mere fact that there is no strict privity between the employer and the sub-contractor should prevent the latter from relying on the clear basis on which all the parties contracted in relation to damage to the employer’s building caused by fire, even when due to the negligence of the contractors or sub-contractors.
We were also referred to the decision of Macpherson J in Welsh Health Technical Services Organisation v Haden Young (IDC, third party) (1987) 37 Build LR 130. That again was a case concerning a building contract and damage caused by fire due to the negligence of a plumbing sub-contractor. On the facts of that particular case the judge concluded that there had been a direct contractual relationship between the employer and the sub-contractor which excused the latter from any liability in respect of the negligence of their servants. As he said (at 141):
‘Primarily, I base my decision upon acceptance of the argument that there was indeed here a contract between [the employers] and [the sub-contractors] at the outset and on acceptance of the tender.’
Nevertheless he went on to consider the situation if he were wrong that any such contract had been made. It is true that in considering whether the sub-contractors were under any liability to the employers the judge applied in favour of the latter the second part of Lord Wilberforce’s dictum in Anns v Merton London Borough [1977] 2 All ER 492 at 498, [1978] AC 728 at 752 in a way which the recent decisions of the House of Lords to which I have referred indicate may be impermissible. Nevertheless, he did conclude that in principle the situation comprising the general contractual arrangements between the three parties was a ‘consideration which ought to negative, or to reduce, or limit the scope of the duty … or the damages to which a breach of it may give rise’ (see 37 Build LR 130 at 142). A little later in his judgment he said (at 143):
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‘My conclusion is simply that in the light of all that [the main contractor] put forward and insisted on by way of conditions of tender, and in view of the whole “contractual setting”, it would indeed be right to negative their prima facie right to damages. Such matters being ideally “considerations” within the second part of Lord Wilberforce’s words. I am at least heartened to some extent by the approach of the three official referees whose experience and wisdom in these fields is much greater than mine, even if these cases are not directly parallel to the present case.’
The judge was there referring to Twins Transport Ltd v Patrick (1984) 25 Build LR 65, Rumbelows Ltd v AMK (a firm) (1982) 19 Build LR 25 and the extremely helpful judgment of Judge David Smout in Southern Water Authority v Carey [1985] 2 All ER 1077 to which I have already referred.
Finally, we were also referred to Aberdeen Harbour Board v Heating Enterprises (Aberdeen) Ltd (1988) Times, 25 March, a decision of the Outer House of the Court of Session. Once again the case concerned the same standard form of building contract as is involved in the instant appeal. The claim was by the proprietors of premises in Aberdeen against the sub-contractors of tenants of part of the premises in respect of the negligence of those sub-contractors in the use of blowtorches in the course of their work. Having regard to the terms of the contracts between the building employer, the main contractors and the defendant sub-contractors the latter contended that if they were liable to the owners of the premises they were nevertheless entitled to be indemnified by the building employer tenants. Towards the end of this judgment (a transcript of which was before us), having held that they were entitled to no such indemnity, Lord Clyde added:
‘The problem in the present case appears to have arisen because of the fact that the employer was the occupier of only part of larger premises and indeed was not even the proprietor of that part. When the employer owns and occupies the whole premises the whole interest in the property will be his and the clause [cl 20[C] of the standard form] should operate without difficulty. No question of indemnity would arise. The loss would be that of the employer and he having undertaken the whole risk there is no liability on the contractor or the sub-contractor even for their own negligence.’
In these circumstances the overall burden of the authorities to which our attention was drawn in my opinion supports the view taken by the judge below and, accordingly, I do not think it necessary to consider the question of the insurance position and subrogation rights as between the parties and their respective insurers.
For the reasons that I have given I would dismiss this appeal.
CROOM-JOHNSON LJ. I agree.
GLIDEWELL LJ. I also agree.
Appeal dismissed. Leave to appeal to House of Lords refused.
Solicitors: Daynes Hill & Perks, Norwich (for the plaintiffs); Mills & Reeve Francis, Norwich (for the defendants).
Carolyn Toulmin Barrister.