QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
ANDREW SMITH J
22nd March 2001
Royal Court of Justice, Strand
Between:
Defendants
-and-
Claimants
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A Boswood QC, B Thanki and H King (instructed
by Linklaters) for the Claimants
J Martin QC and J Seitler (instructed by Barlow Lyde and Gilbert) for the Defendants
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1. Smith and Williamson (“S and W”), a firm of chartered accountants, apply to have struck out under Pt 3.4 of the Civil Procedure Rules 1998 (“CPR”) proceedings brought against them by Lindsey Morden Group Inc (“LMG”). Mr Martin QC, who appears for them, puts the application on the basis that the proceedings disclose no reasonable grounds for bringing the claim or are an abuse of the court’s process. They apply in the alternative to have the proceedings against them summarily dismissed under Pt 24 of the CPR on the basis the LMG have no real prospects of succeeding in their claim.
2. The claim made by LMG against s.and W is by way of a Pt 20 claim in an action brought against LMG by Eastgate Group Limited (“Eastgate”). The particulars of claim pleaded by Eastgate run to 69 paragraphs, and LMG’s defence to no fewer than 231 paragraphs. Nevertheless, for the purposes of this application I can summarise the dispute between Eastgate and LMG as follows. Under a share purchase agreement dated 30 November 1998 Eastgate agreed to purchase and LMG agreed to sell the whole of the share capital of Hambro Legal Protection Limited (“HLP”) for a consideration of £51 million. The agreement contained warranties by LMG that the annual accounts showed a true and fair view of the state of affairs of HLP as at 31 March 1998; that the management accounts from April 1997 to September 1998 (inclusive) were prepared with due care and attention in accordance with substantially the same accounting policies as the annual accounts; and that since 31 March 1998 there had been no material alteration in the nature, scope or manner of business of HLP, nor any material deterioration in their financial position or turnover.
3. Eastgate contend that LMG were in breach of each of those warranties because HLP’s accounts were inaccurate and misleading and did not present a true and fair view of the state of affairs of the company; the accounts failed to disclose both the extensive use of estimates in calculating HLP’s income and turnover and the extent to which those estimates were inaccurate or left uncorrected; and there had been a material deterioration in the turnover and financial position of HLP between 31 March 1998 and 30 November 1998.
4. Eastgate claim damages from LMG in the following terms:
a. As damages for breach of warranty Eastgate claims the difference between the value of the business as warranted (being the price paid by Eastgate) and the value of the business in fact.
b. The price paid by Eastgate for the business was £51 million ...
5. In further particulars of their loss Eastgate repeat their case that “the value of the business of HLP as warranted was the price paid”, and explain that they assessed the value of HLP by estimating the “core” pre-tax profits for the calendar year 1999 at £11.3 million and their purchase price represented a price earnings multiple of 4.5 times the prospective pre-taxprofits.
6. LMG deny that they were in breach of any of the warranties. They deny that HLP’s accounts failed to present a true and fair view of the state of affairs of the company. They say that in any event, prior to purchasing HLP, Eastgate and their advisors s.and W conducted extensive due diligence and Eastgate either were or were contractually deemed to have been well aware of the matters of which they now complain.
7. The Pt 20 claim against s.and W is made by LMG under the Civil Liability (Contribution) Act 1978 (“the 1978 Act”), and is for an indemnity against Eastgate’s claim and costs, or for a contribution to the claim and costs in their full amount or to such extent as shall be just. LMG’s allegation is that S and W were engaged to act as Eastgate’s accountants in their due diligence investigations before the purchase of HLP, and owed Eastgate duties as such; that S and W acted in breach of their duties; and that had s.and W acted with due care and in accordance with their duties Eastgate would have been better informed about HLP’s business.
8. LMG do not plead against S & W what damage resulted to Eastgate from any negligence or want of due care on the part of S and W However, Mr Martin does not rely upon any pleading point in support of the applications. The submission of Mr Boswood QC, who represents LMG, is that but for S and W’s fault Eastgate either would not have entered into the acquisition agreement, and so would not have paid the consideration of £51 million, or would have paid less for the business.
9. S and W cannot succeed in their application by showing that the claim against them is improbable of success. The procedures invoked by s.and W are designed to deal with plain and obvious cases, and the burden on S and W is to show that this is such a case.
10. I first set out the relevant provisions of the 1978 Act. Section 1(1):
Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)
Section 1(6):
References in this section to a person’s liability in respect of any damage are references to any such liability which has been or could be established in an action brought against him in England and Wales by or on behalf of the person who suffered the damage; but it is immaterial whether any issue arising in any such action was or would be determined (in accordance with the rules of private international law) by reference to the law of a country outside England and Wales.
Section 2(1):
... in any proceedings for contribution under s.1 above the amount of the contribution recoverable from any person shall be such as may be found by the Court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question.
Section 2(2):
... the Court shall have power in any such proceedings to exempt any person from liability to make contribution, or to direct that the contribution to be recovered from any person shall amount to a complete indemnity.”
Section 2(3):
Where the amount of the damages which have or might have been awarded in respect of the damage in question in any action brought in England and Wales by or on behalf of the person who suffered it against the person from whom the contribution is sought was or would have been subject to:
(a) any limit imposed by or under any enactment or by any agreement made before the damage occurred;
(b) any reduction by virtue of s.1 of the Law Reform (Contributory Negligence) Act 1945 or s.5 of the Fatal Accidents Act 1976; or
(c) any corresponding limit or reduction under the law of a country outside England and Wales;
the person from whom the contribution is sought shall not by virtue of any contribution awarded under s.1 above be required to pay in respect to the damage a greater amount than the amount of those damages as so limited or reduced.
Section 6(1):
A person is liable in respect of any damage for the purpose of this Act if the person who suffered it ... is entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise).
11. In considering the arguments about the application of the Act to this case, I must assume that both LMG and s.and W are liable to Eastgate as alleged against them in the particulars of claim and the Pt 20 claim respectively. It goes without saying that this is only a matter of assumption, and the liability of either or both has yet to be established.
12. S and W submit that this case falls outside the 1978 Act because the damage suffered by Eastgate in respect of which LMG are alleged to be liable is not “the same damage” within the meaning of s.1(1) of the Act as that in respect of which S and W are alleged to be liable.
13. The claim by Eastgate against LMG is in respect of the damage suffered as a result of LMG’s warranties not being satisfied, and, if successful, would entitle them to be put in the financial position in which they would have been had the warranties been satisfied. The price that they paid for HLP is irrelevant to their claim except in so far as it evidences the value of HLP as warranted. Eastgate do not claim against LMG that they should recover the price that they paid or any part of it, and the payment of the price is not damage in respect of which LMG are said to be liable or could be liable.
14. If Eastgate made a claim against s.and W it would be on the basis that they entered into a disadvantageous agreement to acquire HLP because they were unaware of matters of which s.and W ought to have made them aware; and had S and W advised them properly, they would have paid a lower price for the business or not have bought it at all. The starting point for assessing s.and W’s liability for damages is the price paid by Eastgate. This would be reduced either (on the hypothesis that they would have acquired the business at a lower price) by the price which Eastgate would have paid for HLP, or (on the hypothesis that they would not have acquired the business at all) by the value of what Eastgate in fact acquired under the acquisition agreement.
15. There is a difference between the parties as to whether in calculating the damages which would be recoverable by Eastgate from S & W on the latter hypothesis, account must be taken of the value of the warranties given by LMG to Eastgate under the acquisition agreement or whether account is to be taken only of HLP’s business acquired under the agreement leaving aside the warranties. S and W submit that the former is the proper approach and LMG argue for the latter. However, even if S and W’s submission is correct, it is one thing to bring into account the value of the business and the warranties, and another thing to value the business as warranted. For example, in the former case the value to be attributed to the warranties depends upon the financial ability of the warrantor to fulfil his warranties or pay damages for their breach. On no view is the value of the business as warranted an ingredient in an assessment of the damages which might be payable by s.and W to Eastgate.
16. The question that arises under s.1(1) of the 1978 Act is not whether LMG and s.and W would be liable for the same damages, but whether they would be liable in respect of the same damage. The fact that, on the one hand, the price paid by Eastgate is not an ingredient in the assessment of damages payable by LMG for breach of warranty but is the starting point of an assessment of damages payable by s.and W, and that, on the other hand, the value of the business as warranted is not an ingredient in the assessment of damages payable by S and W but is the starting point of the assessment of damages payable by LMG, reflects the difference between damage suffered by Eastgate in respect of which LMG are potentially liable and that in respect of which S and W are potentially liable. LMG’s liability would be in respect of damage suffered by Eastgate in that they do not enjoy the benefit of the matters warranted by LMG, and S and W would be liable in respect of damage suffered by Eastgate in that they entered into a disadvantageous acquisition agreement.
17. In these circumstances, it seems to me that as a matter of ordinary language LMG’s liability and s.and W’s liability are not in respect of the same damage. The matter was put at its most simple by Nourse LJ in Birse Construction Ltd v Haiste Ltd [1996] 1 WLR 675 at p 682H:
The first requirement is that there should be a person, A, who is liable in respect of damage suffered by another person, B. The second requirement is that there should be a third person, C, who is liable in respect of the same damage (whether jointly with A or otherwise). If those two requirements are satisfied, A may recover contribution from C.
The question is what is meant by the words ‘the same damage’. The only synonym for ‘same’ being ‘identical’, the words, in their natural and ordinary sense, can only mean ‘the damage suffered by that other person’, ie B. No verbal addition or subtraction is necessary in order to arrive at this interpretation. The meaning of the words, as they stand, is plain.
18. Mr Boswood emphasised that it is Eastgate’s pleaded case that there was no difference between the value of HLP’s business as warranted and the price paid. I do not consider that this assists LMG’s argument.
(1) First, as I read Eastgate’s pleading, they are saying no more than that they will rely upon the price negotiated between LMG and themselves as evidence of the value of the business as warranted. LMG do not admit that the value of the business as warranted was £51 million, and I cannot assume that it was.
(2) Secondly, the point about Eastgate’s pleading goes to the question whether LMG and s.and W would be liable to Eastgate for the same damages, not whether they would be liable in respect of the same damage. The latter, as I have observed, is the relevant question: see Birse Construction Ltd v Haiste Ltd (loc cit) at p 682C per Roch LJ:
The word ‘damage’ in the phrase ‘the same damage’ in s.1(1) does not mean “damages”. This is demonstrated by other sections of the Act, for example s.2(3). By s.6(1) ‘damage’ is the harm suffered by the ‘another person,’ to use the phrase in s.1(1), for which that person is entitled to recover compensation: it is not the compensation which is recoverable although in cases of purely financial loss it may be commensurate with it
(See too Auld LJ Jameson v CEGB [1998] QB 323 at p 353C, who observed that the scheme of the Act clearly distinguishes “damage” from “damages” in its normal sense of compensation.)
19. Both LMG and s.and W refer me to the test whether damage is the same propounded by Sir Richard Scott V-C in Howkins & Harrison v Tyler [2001] Lloyd’s Rep PN 1 at p 4 para 17:
But it seems to me that a simple test should be applied to identify a claim capable of being one to which the 1978 Act can apply. That test is this: Suppose that A and B are the two parties who are said each to be liable to C in respect to “the same damage” that has been suffered by C. So C must have a right of action of some sort against A and a right of action of some sort against B. There are two questions that should then be asked. If A pays C a sum of money in satisfaction, or on account, of A’s liability to C, will that sum operate to reduce or extinguish, depending upon the amount, B’s liability to C? Secondly, if B pays C a sum of money in satisfaction or on account of B’s liability to C, would that operate to reduce or extinguish A’s liability to C? It seems to me that unless both of those questions can be given an affirmative answer, the case is not one to which the 1978 Act can be applied. If the payment by A or B to C does not pro tanto relieve the other of his obligations to C, there cannot, it seems to me, possibly be a case for contending that the non-paying party, whose liability to C remains un-reduced, will also have an obligation under section 1(1) to contribute to the payment made by the paying party.
20. LMG submit that the test is satisfied in this case; S and W submit that it is not. I accept S and W’s submission for reasons that I shall explain. However, first I observe that the language used by Sir Richard Scott VC suggests that he is laying down a necessary condition but not a sufficient condition for s.1(1) of the 1978 Act to be satisfied (“identify a claim capable of being one to which the 1978 Act can apply”; “unless both of those questions can be given an affirmative answer, the case is not one to which the 1978 Act can be applied”). Even if this case did satisfy the test of Sir Richard Scott V-C, I would still not be persuaded that it falls within the 1978 Act.
21. There is no dispute between the parties that in assessing S and W’s liability to Eastgate there must be brought into account to reduce or extinguish it any recovery from LMG in satisfaction or on account of LMG’s liability to Eastgate for the breach of warranty claim. For S and W to dispute this would be inconsistent with their contention that if Eastgate would not have acquired the business had they had proper advice, the measure of damages is the difference between the price paid by Eastgate and the value of the business acquired together with the value of LMG’s warranties.
22.. The dispute is whether upon an assessment of damages payable by LMG account should be taken of any money paid by S and W in satisfaction or on account of their liability to Eastgate. Mr Boswood submits that it must be in order to avoid the danger of Eastgate being overcompensated. He also submits that this case is analogous to that of a builder and an architect who are both responsible for a defective building, the one because he put a damp-course in the wrong place and the other because he failed to see that the error was put right – a “paradigm case” for when contribution is available modelled on McConnell v Lynch-Robinson [1957] NI 70 and used by the Law Commission in their Working Paper on Contribution to prepare their report Law of Contract, Report on Contribution, Law Commission No 79, 9 March 1977.
23. Mr Martin submits that the present case cannot properly be distinguished from Howkins & Harrison v Tyler (loc cit). In that case, a building society lent money on the basis of a negligent over-valuation of security. The borrowers having defaulted, the lender realised the security but was left with a shortfall. It claimed this from the valuers, who settled the claim. The valuers brought proceedings under the 1978 Act for a contribution or an indemnity from the borrowers. The Judge struck out the proceedings and the Court of Appeal upheld the decision on the grounds that the valuers and the borrowers were not liable to the lender in respect of the same damage. Sir Richard Scott V-C said this (at p 4, para 14):
The “damage” for which the [borrowers] are liable is that the [lender] has not been paid the sum of money contractually due. The damage for which the [valuers] were liable was the damage to the [lender] in lending money that the [lender] would not otherwise have lent. The respective formulations of the “damage”, it seems to me, carry the case outside the scope of s.1(1) of the 1978 Act.
(It is to be observed that, although in the Howkins & Harrison case there was an issue whether a claim in debt could ever be said to be within the Act, the case was not decided on that basis.)
24. With regard to the “paradigm case” relied upon by Mr Boswood, Mr Martin replies that this case is distinguishable because here the complaint against S and W is that they should have prevented Eastgate from entering into the unfavourable acquisition agreement in ignorance of the true position of the business. The analogy would be with a case of an architect whose brief was such that he should have supervised the building plans and prevented the employer contracting for a defective building. In these circumstances, Mr Martin submits, the 1978 Act does not apply. The essential point is that, the complaint being that the contract made by the claimant was unfavourable, the measure of damages necessarily involves assessing the value of the contract that was made. Mr Martin refers me to what was said Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627, a valuer’s negligence case, by Lord Nicholls (at p 1631E/F):
Frequently, but not always, the plaintiff would not have entered into the relevant transaction had the defendant fulfilled his duty of care and advised the plaintiff, for instance, of the true value of the property. When this is so, a professional negligence claim calls for a comparison between the plaintiff’s position had he not entered into the transaction in question and his position under the transaction. That is the basic comparison. Thus, typically in the case of a negligent valuation of an intended loan security, the basic comparison called for is between (a) the amount of money lent by the plaintiff, which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower’s covenant and the true value of the overvalued property.
25. It is of course the case that in such valuer cases, the lender enters into a transaction to acquire a chose in action against the borrower and there can be no room for argument but that the damage depends upon the value of the chose in action. In this case, there is the distinction that Eastgate’s purpose in entering into the acquisition agreement was not to acquire a chose in action against LMG but to acquire a business of the warranted description. Nevertheless, it seems to me that Mr Martin is right in his submission that in assessing the damages to which S and W would be liable, it would be wrong to ignore the value of the warranties, which were part of the “package” that Eastgate obtained under the acquisition agreement. The corollary of this conclusion is that any sum paid by S and W in respect of their liability to Eastgate does not go to extinguish or to reduce the damages payable by LMG. It would be irrational that it should. The compensation paid by S and W is by way of reimbursement of the excessive price paid by Eastgate for the business. But it is irrelevant to Eastgate’s claim against LMG what price was paid for the business.
26. I should refer to the argument that the result of this analysis is that Eastgate might be overcompensated by recovering damages first from S and W and then from LMG. One answer to this might be that any excess recovery, taking into account Eastgate’s costs of recovery, would be held on trust for S and W: see Howkins & Harrison (loc cit) at p 5 para 20. I recognise that it might be easier to impose such a trust upon receipts by way of recovery of a debt than by way of damages. However, even if the trust analysis does not apply so that the payment by S and W is by way of a collateral benefit to Eastgate, it does not seem to me that this would mean that the measure of the damages paid by LMG is wrong.
27. I therefore accept S and W’s submission that this case does not come within the scope of the 1978 Act.
28. S and W have a second argument. They submit that even if this case falls within the statute, the facts are such that they could not properly be ordered to pay any contribution to LMG, and that therefore the claim should be summarily dismissed. Mr Martin points out that s.2(2) of the Act shows that there are cases where the liability should be so allocated between the wrongdoers as to be borne entirely by one of them.
29. The starting point of this argument is that the measure of damages for which LMG would be liable if they are in breach of warranty is the sum that would put Eastgate in the position in which they would have been had the warranties been satisfied, and so the measure of damages is the difference between the warranted value of HLP and its actual value. Accordingly, Mr Martin submits, since the warranted value of HLP is what Eastgate paid, the damages are the difference between the price paid and the actual value of HLP, and what LMG will be required to pay by way of damages represents the excess that they received over the true value of HLP. Hence, his argument runs, if S and W were ordered to pay any contribution to LMG, it would mean that they receive for HLP more than its true value, and this would be an enrichment of LMG that on no view could be justified: it could not be “just and equitable” within the meaning of s.2(1) of the Act.
30. Having come to the conclusion that this case falls outside the ambit of the Act, I find it a little unreal to determine how that Act would distribute liability if it did apply. However, I was not convinced by S and W’s second argument and if I had concluded that the Act applies to this case, I would not determine summarily LMG’s claim.
31. First, English law does not look askance at a contract-breaker profiting from his breach of contract. It is elementary that in contract “the object of damages is always to compensate the plaintiff, not to punish the defendant”: per Lord Lloyd in Ruxley v Forsyth [1996] 1 AC 344, 365H. The law does not recognise a compelling argument that profits from breach of contract should be disgourged as it does that profits from fraud should be: cp K v P [1993] Ch 140, 149G/H.
32. Secondly, the statutory requirement is that in assessing what is just and equitable, regard should be had to s.and W’s responsibility for the damage suffered by Eastgate, responsibility covering both causative potency and blameworthiness: Madden v Quirk [1989] 1 WLR 702, 707E. S and W do not argue that the statutory criterion is incapable of application in this case, or that it is difficult to apply. Nor do they argue that I can conclude on a hearing of this kind that they were not guilty of serious professional negligence that was a major cause of Eastgate’s loss. Nevertheless, Mr Martin submits that S and W’s responsibility cannot affect the proper distribution of liability because the statutory criterion is overwhelmed by the unjustified enrichment of LMG. He cited no authority to support his argument that this must be the approach to apportioning liability in a case such as this. It does not seem to me self-evident that because of LMG’s “enrichment” it could not possibly matter whether, for example, at the one extreme, S and W made a negligent slip of the kind that any professional man can make or, at the other extreme, they were disgracefully slipshod and unprofessional in carrying out an engagement for which they charged heavily. I decline to conclude summarily that the statutory criterion is to be ignored.
33. Thirdly, I do not consider that S and W have demonstrated that any damages that LMG might have to pay necessarily represent unwarranted enrichment of this kind. Here two points will suffice. As LMG observe, there is no “objective” value for shares in a business such as HLP’s, but a company is worth to a particular buyer what he is prepared to pay for it at a particular time. The value of the company can be said in that sense to be subjective: Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s LR 423 at p 430 para 32. When damages are measured in such a case as this by reference to the difference between the value of the shares as warranted and as evidenced by the price paid and the actual value of the shares to the purchaser, the second element in the calculation depends upon the subjective value of the shares to the purchaser. It cannot be assumed that their value to Eastgate was the same as their value to LMG. To quote from LMG’s skeleton argument:
Just as the value of HLP to Eastgate depended (for example) on synergies obtainable between the two businesses, so did the value of HLP to LMG depend on subjective factors peculiar to it: for example, the perceived advantages of retaining the business, having regard to the overall group strategy, as opposed to selling it for cash.
34. Moreover, if LMG had not sold the business for the price obtained for it as warranted, but had retained it and continued to operate it, its value might have appreciated. Whether it did cannot be determined upon an application of this kind. However, I see no reason, when assessing an argument of “unwarranted enrichment” such as that advanced by S and W, to assume that LMG would not have benefited from a change in value had they not sold the business or to leave out of account that LMG will not enjoy such a benefit.
35. I conclude that the 1978 Act does not apply to this case, and that S and W’s application succeeds. I shall hear submissions about the precise form of order that I should make.
Judgment for the defendant