Challenging Private Law: Lord Sumption on the Supreme Court 9781509934874, 9781509934904, 9781509934898

Citation preview

CHALLENGING PRIVATE LAW Lord Sumption has been one of the most influential judges of his generation. This book critically reflects on the important and controversial issues raised by his jurisprudence. Using Lord Sumption’s judgments and extra-judicial lectures as a starting point, the book contains a selection of essays that consider ‘where next’ in relation to topics such as: – – – – – – –

contract variation, damages and penalties; economic loss and personal injury in tort law; knowing receipt and proprietary restitution; illegality in private law; agency and attribution; piercing the corporate veil; foreign law in the English courts.

The book covers a broad range of areas in private law including contract, tort, unjust enrichment, equity, company and commercial law, as well as private international law and civil procedure.

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Challenging Private Law Lord Sumption on the Supreme Court

Edited by

William Day and

Sarah Worthington

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2020 Copyright © The editors and contributors severally 2020 The editors and contributors have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2020. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication data Names: Day, William (Editor of Challenging private law), editor.  |  Worthington, Sarah, editor. Title: Challenging private law : Lord Sumption on the Supreme Court / edited by William Day and Sarah Worthington Description: Oxford, UK ; New York, NY : Hart Publishing, an imprint of Bloomsbury Publishing, 2020.  |  Includes bibliographical references and index. Identifiers: LCCN 2020026413 (print)  |  LCCN 2020026414 (ebook)  |  ISBN 9781509934874 (hardback)  | ISBN 9781509934898 (ePDF)  |  ISBN 9781509934881 (Epub) Subjects: LCSH: Civil law—England.  |  Conflict of laws—England.  |  Great Britain. Supreme Court. | Sumption, Jonathan. | Judicial opinions—England. | Great Britain. Supreme Court—Officials and employees. Classification: LCC KD720 .C43 2020 (print)  |  LCC KD720 (ebook)  |  DDC 346.42—dc23 LC record available at https://lccn.loc.gov/2020026413 LC ebook record available at https://lccn.loc.gov/2020026414 ISBN: HB: 978-1-50993-487-4 ePDF: 978-1-50993-489-8 ePub: 978-1-50993-488-1 Typeset by Compuscript Ltd, Shannon

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Foreword

J

onathan Sumption was a Justice of the UK Supreme Court between 2012 and 2018. The pity is that under the prevailing rules, having achieved the age of 70, he was obliged to retire in 2018. Jonathan’s years on our highest court were the culmination of a splendid career, initially as an academic medieval historian and subsequently as a distinguished barrister. This book of essays is the product of a two-day legal conference held under the auspices of the Cambridge Private Law Centre in October 2019. The contributors are well-known academics or practitioners, and each essay is devoted to the contributions made to English law by Jonathan in a variety of contexts in his capacity as a Supreme Court Judge. Professor Sarah Worthington and William Day, both of the Cambridge Law Faculty, are to be congratulated for their joint initiative and enthusiasm in organising the conference and bringing this worthy exercise to fruition. Having started his grown-up life as an historian and a Fellow of Magdalen College, Oxford, Jonathan decided to go to the Bar. He took Silk in 1986, after just 11 years as a junior barrister, and then enjoyed 26 years practising as a QC, principally in the commercial law field. Most unusually, he was appointed from the Bar directly to the Supreme Court without having previously sat as a full-time judge. Notwithstanding the pressures of practice, Jonathan was able, concurrently, to produce four of his five planned volumes on The Hundred Years’ War. The final volume is expected shortly. His research is impeccable and, combined with his pithy and elegant written style, makes this history a highly readable modern masterpiece. This book is primarily intended for the legal reader, but for those non-lawyers interested in the modern process of legal reasoning, including the relationship between law and history, these essays will provide an unusual and novel insight into legal analysis at the highest level. The book is a fitting tribute to Jonathan Sumption’s work and his contribution to the law. LORD GRABINER QC The Master’s Lodge Clare College Cambridge

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Preface

L

ord Sumption sat on the bench of the Supreme Court between 11 January 2012 and 9 December 2018. He succeeded Lord Collins and was succeeded, in turn, by Lord Sales. Lord Sumption took office under the presidency of Lord Phillips, served principally under the presidency of Lord Neuberger and retired under the presidency of Baroness Hale. Lord Sumption’s appointment attracted particular attention because he was appointed directly from the bar rather than taking the traditional route through judicial appointments in the High Court and the Court of Appeal. This was the first time that had happened in the case of the Supreme Court; it had happened only a couple of times in the House of Lords, with the last occasions being Lord Reid in 1948 and Lord Radcliffe in 1949. It may be that appointments outside of the ranks of the senior judiciary now become more common. It if does, it will be in no small part because Lord Sumption’s tenure on the Supreme Court is widely viewed as having been a great success. At the bar, Jonathan Sumption QC established a reputation that was amongst the foremost of his generation of lawyers. As many of the contributions in this book acknowledge, his significant judgments on the bench followed previous cases in which he had appeared as leading counsel, including Investors Compensation Scheme Ltd v West Bromwich Building Society on interpretation,1 South Australia Asset Management Corp (SAAMCO) v York Montague Ltd on the scope of the duty of care,2 Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) on illegality and a­ ttribution,3 Westdeutsche Landesbank Girozentrale v Islington London Borough Council on restitution4 and Three Rivers District Council v Governor and Company of the Bank of England (No 6) on legal professional privilege.5 However, he was one of those relatively rare practitioners equally proficient in both the public law and private law spheres. That dexterity has no doubt served Lord Sumption well in the Supreme Court, which hears the most complex and significant cases from both branches of the law.

1 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL). See ch 2. 2 South Australia Asset Management Corp (SAAMCO) v York Montague Ltd [1997] AC 191 (HL). See ch 7. 3 Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39, [2009] 1 AC 1391. See ch 15. 4 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (HL). See chs 10 and 11. 5 Three Rivers District Council v Governor and Company of the Bank of England (No 6) [2004] UKHL 48, [2005] 1 AC 610. See ch 22.

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Lord Sumption’s jurisprudence on public law resulted in a collection of essays by Oxford academics.6 It was also the subject of his Reith Lectures, which he delivered shortly after his retirement from the Supreme Court.7 In contrast, this collection of essays organised by the Cambridge Private Law Centre has focused on the judicial and extra-judicial contributions Lord Sumption has made to private law. The book is entitled Challenging Private Law because we consider that Lord Sumption’s judicial and extrajudicial contributions have been ‘challenging’ in both the active and descriptive sense of the word: not only has the subject matter of his judgments involved some of the more difficult aspects of private law, but Lord Sumption has consistently articulated a distinctive approach to private law, challenging it to develop and better itself.8 We consider that distinctive approach has five facets, and it is helpful to explore these briefly in this preface.9 First, for Lord Sumption, private law should be structured, wherever possible, by way of rules rather than discretion or judicial value judgement. This has marked Lord Sumption out from many of his judicial contemporaries, most obviously in the illegality saga. A trio of cases exposed a schism in the Supreme Court between those favouring a rules-based approach to illegality to which principled exception could be made and those favouring a more flexible approach.10 In the third of that trilogy, the Court sat as a bench of seven but avoided resolving the issue, with Lord Neuberger calling for ‘the proper approach to the defence of illegality … to be addressed by this court (certainly with a panel of seven and conceivably with a panel of nine Justices) as soon as appropriately possible’.11 That opportunity came along in a fourth case, Patel v Mirza.12 The majority led by Lord Toulson adopted a new approach to illegality, requiring a balancing of a trio of considerations;13 Lord Sumption wrote a powerful dissent, arguing that the new approach was ‘unprincipled and uncertain’, and ‘converts a legal principle into an exercise of judicial discretion, in the process exhibiting all the vices of “complexity, uncertainty, arbitrariness and lack of transparency” which Lord Toulson attributes to the present law’.14 There is no academic consensus as to which is the right approach.15 In these pages, Graham Virgo endorses Lord Sumption’s dissent, while Charlie Webb prefers Lord  Toulson’s approach.16 Lord Sumption himself maintains that Patel v  Mirza

6 R Ekins, P Yowell and N Barber (ed), Lord Sumption and the Limits of the Law (Oxford, Hart Publishing, 2016). 7 Now published as J Sumption, Trials of the State: Law and the Decline of Politics (London, Profile Books, 2019). However, the Reith Lectures also said some things pertinent to his approach to private law, which we explore in this preface. 8 See also J Lee, ‘The Judicial Individuality of Lord Sumption’ (2017) 40 University of New South Wales Law Journal 862. 9 Lord Sumption himself has distilled his jurisprudence into ‘three main themes’ or ‘instincts’: see ch 1. 10 Hounga v Allen [2014] UKSC 47, [2014] 1 WLR 2889; Les Laboratoires Servier v Apotex Inc [2014] UKSC 55, [2015] AC 430; Bilta (UK) Ltd (in liquidation) v Nazir (No 2) [2015] UKSC 23, [2016] AC 1. 11 Bilta (n 10) [15]. 12 Patel v Mirza [2016] UKSC 42, [2017] AC 467. 13 ibid [101] and [120]. 14 ibid [263]–[265]. 15 See especially A Bogg and S Green (ed), Illegality after Patel v Mirza (Oxford, Hart Publishing, 2018). 16 See chs 10 and 13.

Preface  ix is ‘the worst decision of the Supreme Court in the realm of private law for a ­generation’.17 Another instance of Lord Sumption’s inclination for rules over discretion is his judgment in Four Seasons Holdings Inc v Brownlie.18 As Louise Merrett explains in her contribution to this collection, there is a debate about the proper balance between rules and forum conveniens discretion in the context of the common law’s jurisdiction rules. Obiter remarks by Lord Sumption in Abela v Baadarani were used as a springboard by leading commentators to argue for a shift in the balance further towards discretion by jettisoning the gateways for service out.19 Lord Sumption firmly rejected this in Four Seasons, arguing that the gateways played a distinct role from forum conveniens discretion in service out cases. Merrett endorses Lord Sumption’s approach in Brownlie, noting that the discretion is unpredictable and uncertain for defendants, that a greater emphasis on forum conveniens would give claimants a powerful tactical advantage and that the forum conveniens process itself has inherent shortcomings. In this regard, an outlier in Lord Sumption’s judicial output may be Coventry v Lawrence,20 where Lord Sumption proposed a more discretionary approach to injunctions as a remedy for the tort of nuisance.21 In this book, Donal Nolan considers the various factors which might inform that discretion, including the public interest, the impact that the availability of damages may have on the defendant’s conduct (ie will the lack of an injunction only encourage continuing nuisance), the claimant’s interest in the relief and the ease of assessing damages on the facts of a particular case. Nolan welcomes greater remedial flexibility, but has his doubts about an openended discretion – although it is not clear that Lord Sumption was going that far in Coventry v Lawrence – and argues that there should still be a heavy presumption in favour of an injunction. The certainty provided by a rules-based system is particularly important in contract law, as Lord Sumption emphasised at the conference held to discuss the draft chapters in this collection. But we suggest it applies across private law generally. As Lord Sumption said in Patel v Mirza:22 ‘The equities of a particular case are important. But there are pragmatic limits to what law can achieve without becoming arbitrary, incoherent and unpredictable even to the best advised citizen, and without inviting unforeseen and undesirable collateral consequences.’ The preference for rules over discretion can be characterised as a rule of law issue. As Lord Bingham explained in his seminal book, The Rule of Law:23 ‘Questions of legal right and liability should ordinarily be resolved by application of the law and not the exercise of discretion.’

17 See ch 1. 18 Four Seasons Holdings Inc v Brownlie [2017] UKSC 80, [2018] 1 WLR 192. 19 Abela v Baadarani [2013] UKSC 44, [2013] 1 WLR 2043. See A Briggs, ‘Service Out in a Shrinking World’ [2013] Lloyd’s Maritime and Commercial Law Quarterly 415; A Briggs, ‘Service Out: communis error frangit ius’ [2019] Lloyd’s Maritime and Commercial Law Quarterly 195. 20 Coventry v Lawrence [2014] UKSC 13, [2014] AC 822. 21 Lord Sumption declares himself to be more relaxed about discretion at the remedies stage: see ch 1. 22 Patel v Mirza (n 12) [226]. 23 T Bingham, The Rule of Law (London, Penguin, 2011) ch 4.

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In his Reith Lectures, Lord Sumption took a slightly different approach to the rule of law. There, he said:24 The rule of law is one of those clichés of modern of life which tends to be invoked, even by lawyers, without much reflection on what it actually means. The essence of it can be summed up in three points. First, public authorities have no power to coerce us, other than what the law gives them. Second, people must have a minimum of basic rights … Third, there must be access to independent judges to vindicate these rights.

We consider that Lord Sumption’s second point about the rule of law is pertinent to the structure of private law. There would be no ‘basic rights’ of personal integrity or property or contract if the courts took a largely discretionary approach to recognising and enforcing those interests. Lord Sumption’s introduction to this collection (which we only saw after writing this preface) suggests that he agrees.25 The second facet of Lord Sumption’s approach has been an emphasis on the need for legal rules to be, where possible, clear and certain rather than context sensitive. Parties should appreciate what their legal position will be in advance rather than receiving advice that ‘it all depends’ on the circumstances. Corporate attribution is one example. Certainty is important here because a transaction or dispute involving a company will often be predicated on the rules of corporate attribution. A contextdependent approach, varying from case to case, brings with it a degree of uncertainty. In Bilta (UK) Ltd (in liquidation) v Nazir (No 2),26 Lord Sumption adopted a different approach to the majority of the Supreme Court and argued for the retention of primary and secondary rules of attribution rather than a wholesale move to a contextual approach. While he did not persuade his brethren, on one view, Lord Sumption’s approach could have provided welcome guidance for those operating and interacting with corporate bodies.27 In his chapter, Ernest Lim takes up the challenge of bringing certainty to the law of attribution and proposes a new two-step approach to attribution which can both explain the authorities and provide clarity, certainty and predictability to commercial parties.28 At the same time, applying a legal rule mechanically and without regard to context can be dangerous. In Four Seasons Holdings Inc v Brownlie, Lord Sumption resolved some of the uncertainty as to what is meant by a ‘good arguable case’ in the jurisdictional enquiry.29 In their contribution to this collection, Joshua Folkard and Ian Bergson trace the line of authorities which preceded Brownlie and those which have followed in its wake.30 They advocate a context-specific approach to ‘good arguable case’, which means that different thresholds may be applied to different issues of law and different issues of fact. Ultimately, the exercise ought to be guided by the fact that jurisdictional challenges are meant to be relatively short and simple affairs.

24 Sumption (n 7) 6. 25 See ch 1. 26 Bilta (n 10). 27 This is something on which we take slightly different views: see W Day, ‘Attributing Illegalities’ (2015) 74 CLJ 409, 411; S Worthington, ‘Corporate Attribution and Agency: Back to Basics’ (2017) 133 LQR 118. 28 See ch 15. 29 Brownlie (n 18) [7]. 30 See ch 18.

Preface  xi Mini-trials are to be avoided. At the conference, Lord Leggatt suggested that there were only two standards of proof in private law: the balance of probabilities at trial and a real prospect of success before trial. That is an attractive simplification of the current law which, if right, would see even greater synergy between the learning on service out cases and the learning on summary judgment and strike out applications. The debate about context is particularly fierce in respect of contractual interpretation. In his 2017 Harris Society Lecture at Oxford,31 Lord Sumption welcomed the fact that the law had ‘begun to withdraw’ from the full extent of the contextual approach to interpretation advocated by Lord Hoffmann.32 Lord Sumption’s lecture prompted a robust response from Lord Hoffmann in the Law Quarterly Review.33 In this book,34 Ewan McKendrick referees this judicial joust. He concludes that, while Lord Sumption’s emphasis on language is important and right, his criticism that Lord Hoffmann advocated overriding text to achieve commercially reasonable outcomes is overstated. In fact, Lord Hoffmann’s contextual approach contained some important and inherent constraints which largely meet the concerns articulated in the Harris Society Lecture. Elsewhere, Lord Sumption has built on rather than challenged Lord Hoffmann’s legacy.35 Janet O’Sullivan deals with one such example on the contract/tort borderline in Hughes-Holland v BPE,36 which clarified certain aspects of Lord Hoffmann’s famous principle in SAAMCO.37 Despite both cases involving claims in tort, O’Sullivan suggests that the concept makes more sense in contractual terms. Her reasoning, we suggest, is compelling: the enquiry focuses on the express and implied terms between the parties to determine whether there has been a relevant assumption of responsibility. Some observers have suggested Lord Sumption was the intellectual successor to Lord Hoffmann on the bench.38 We doubt whether that sort of comparison does full justice to the individuality of either man’s approach. One thing that marks Lord Sumption out, including from Lord Hoffmann, is his emphasis on law as history.39 This is the third of the five facets we wish to highlight in this preface. As Lord Grabiner QC mentions in the foreword to this collection, it should not be forgotten that Lord Sumption is first and last a medieval historian. Further, as Lord Sumption himself noted in the Reith Lectures, private law has deep foundations in history:40 Until the nineteenth century … The law dealt with a very narrow range of problems. It regulated title to property. It enforced contracts. It protected people’s lives, their persons, their liberty and their property against arbitrary injury. But that was about all.

31 Lord Sumption, ‘A Question of Taste: The UK Supreme Court and the Interpretation of Contracts’ in D Clarry (ed), The UK Supreme Court Yearbook Volume 8 (2016–2017) (London, Appellate Press, 2018). 32 ibid 75. 33 Lord Hoffmann, ‘Language and Lawyers’ (2018) 134 LQR 553. 34 See ch 3. 35 The number of issues in private law on which Lord Hoffmann gave judgment which resurfaced during Lord Sumption’s judicial tenure is striking. See chs 3, 5, 7, 13 and 15. 36 Hughes-Holland v BPE Solicitors [2017] UKSC 21, [2018] AC 599. 37 SAAMCO (n 2). 38 A Paterson, Final Judgment: The Last Law Lords and the Supreme Court (Oxford, Hart Publishing, 2013) 205. 39 cf the conclusion reached by Graham Virgo in ch 10. 40 Sumption (n 7) 4.

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Lord Sumption has publicly extolled the virtues of studying history as a training to practise law,41 but his judgments on matters of private law also show an historian at work. At the conference which preceded this collection, Stelios Tofaris presented a paper inspired by the invocation of history in Lord Sumption’s dissents in Crawford Adjusters Ltd v Sagicor Insurance Ltd42 and Willers v Joyce (No 1).43 In those cases, the majority, led by Lord Wilson and then Lord Toulson, extended the tort of malicious prosecution to civil proceedings. Lord Sumption disagreed. He returned to these cases in a later lecture entitled ‘The Historian as Judge’:44 The point that I want to make about these cases is that it was necessary for us to ask ourselves, among other things, why does there appear to be, in the existing authorities, a distinction between civil and criminal litigation. Is such a distinction justifiable today? These are difficult questions to answer without going back into some rather arcane aspects of English social history: the use of the law courts as a tool of oppression and an instrument of vendetta in the late middle ages, which led to the invention of the tort of conspiracy; and the problems of public order in seventeenth and eighteenth century England, a society with no organised police force or system of public prosecution, which led to the recognition of a tort of malicious criminal prosecution. Now, of course, a simpler way of approaching a question like that would have been to forget the history and proceed straight to the last stage of the inquiry. Never mind what happened in the fifteenth or the eighteenth century. What does justice require now? Ultimately, of course, that is the question that one asks. But in a customary system of law like ours, it cannot be answered without reference to what earlier generations of judges have thought and said about it. The baggage of the past is always with us. Courts cannot ignore authority by which they are bound. Even the Supreme Court cannot approach the law of tort as if Britain were an uninhabited island awaiting its lawgiver, instead of a complex society shaped by a long past. What this example illustrates is that it may be necessary to understand the historical background against which past cases were decided in order the ascertain what the law is.

Tofaris traced the vigorous nineteenth-century debate on the role of malice in the law of civil wrongs, and considered the influence of individuals, ideologies and external factors on the development of modern torts. Tofaris had the ill fortune of being examinations secretary at the Faculty of Law in Cambridge as the coronavirus crisis struck, meaning that he was not able to finalise his excellent paper for this collection, but we very much look forward to seeing it elsewhere. As his dissents in Crawford and Willers demonstrate, law as history for Lord Sumption means a healthy respect for precedent. He emphasised this again in Patel v Mirza:45 The common law is not an uninhabited island on which judges are at liberty to plant whatever suits their personal tastes. It is a body of instincts and principles which, barring 41 See, eg ‘In Conversation With … Lord Sumption’, Counsel Magazine (October 2018), repeating remarks first reported in the press in 2012. In February 2013, the Cambridge Law Faculty hosted a debate between Graham Virgo and Lord Sumption on the motion ‘Those who wish to practise law should not study law at university’. In a victory for the home team (and no doubt with a home team advantage), the motion was defeated, albeit by a narrow margin. 42 Crawford Adjusters Ltd v Sagicor Insurance Ltd [2013] UKPC 17, [2014] AC 366. 43 Willers v Joyce (No 1) [2016] UKSC 43, [2018] AC 779. 44 Lord Sumption, ‘The Historian as Judge’, Lecture to the Immigration and Asylum Chamber and Administrative Appeals Chamber (6 October 2016) 6. 45 Patel v Mirza (n 12) [226].

Preface  xiii some radical change in the values of our society, is developed organically, building on what was there before.

Indeed, at the conference which preceded this book, Lord Sumption on more than one occasion remarked that he did not necessarily like the justice of the conclusion he had reached in a particular case, but he felt compelled to reach that conclusion by the state of the authorities. It was an important reminder that even the highest appellate court is not free to strike out in an entirely new direction, as much as commentators may want it to do so. That judicial conservatism is evident in a number of Lord Sumption’s decisions. They include Cavendish Square Holding BV v El Makdessi,46 analysed in this collection by Edwin Peel, who was part of the successful counsel team in the case – albeit unsuccessful in persuading Lord Sumption and his brethren to abolish the penalties rule altogether. Looking back at the case, he suggests that Makdessi has not so much narrowed the test for penalties as broadened the recognition of what constitutes loss.47 On the other hand, law is not a slave to precedent, but evolves with it. In MWB Business Exchange Ltd v Rock Advertising Ltd,48 discussed by one of us in these pages,49 Lord Sumption called for a ‘re-examination’ of the rules of consideration on the variation of contracts. Had he had the opportunity, one wonders how radical his ‘re-examination’ would have been, and whether he would have overruled the principle in Foakes v Beer.50 Taking MWB as his starting point, William Day speculates on how the Supreme Court might resolve the consideration issue in the future. Lord Sumption was also not afraid on the bench to challenge received wisdom. In particular, in his dissenting judgment in Société General v Geys,51 he took aim at the generally accepted theory of elective termination in contract law. As Sir David Foxton explains in this book,52 Lord Sumption did not confine this challenge to employment contracts, but argued for automatic termination of contracts in all cases where the innocent party’s own ability to perform the core obligations of contract requires the co-operation of the repudiating party and the court is not willing to order specific performance by the repudiation party. Foxton prefers the approach of the majority in Geys, but argues that the legitimate interest fetter in White & Carter is better understood as a fetter on the right to affirm than a fetter on the remedies available to the innocent party, and suggests that Lord Sumption’s distinction between core and collateral obligations is relevant to that enquiry.53 A rather radical side to Lord Sumption was also revealed in his lecture to the Personal Injuries Bar Association 2017 Annual Lecture, where he advocated the abolition of personal injuries law on the basis that it was bad value for money.54 In this collection, Nicholas McBride mounts a vigorous defence of tort law.55 For present 46 Cavendish Square Holding BV v El Makdessi [2015] UKSC 67, [2016] AC 1172. 47 See ch 6. 48 MWB Business Exchange Ltd v Rock Advertising Ltd [2018] UKSC 24, [2019] AC 119. 49 See ch 3. 50 Foakes v Beer (1884) 9 App Cas 605 (HL). 51 Société General v Geys [2012] UKSC 63, [2013] AC 523. 52 See ch 4. We congratulate Sir David Foxton on his elevation to the bench between the date of the conference and the date of the book’s publication. 53 White and Carter (Councils) Ltd v McGregor [1962] AC 413 (HL) 429–31 (Lord Reid). 54 Lord Sumption, ‘Abolishing Personal Injuries Law – A Project’ (2018) 34 Professional Negligence 113. 55 See ch 8.

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purposes, we note that Lord Sumption considered radical reform of this nature to be a job for Parliament and the political process rather than for the common law and the courts. That is to be compared with Lord Goff’s approach, when the House of Lords was asked in the Woolwich case to recognise a general right of recovery against the revenue for overpaid tax. Lord Goff noted and dismissed the objection that:56 for your Lordships’ House to recognise such a principle would overstep the boundary which we traditionally set for ourselves, separating the legitimate development of the law by the judges from legislation. It was strongly urged … that we would indeed be trespassing beyond that boundary if we were to accept the argument of Woolwich. I feel bound however to say that, although I am well aware of the existence of the boundary, I am never quite sure where to find it. Its position seems to vary from case to case. Indeed, if it were to be as firmly and clearly drawn as some of our mentors would wish, I cannot help feeling that a number of leading cases in your Lordships’ House would never have been decided the way they were.

In contrast, Lord Sumption appears to have considered the ‘boundary’ of the common law’s power to break new ground to be much more restrictive than did the great reforming judges of the twentieth century, such as Lord Atkin, Lord Denning and Lord Goff himself. The fourth facet of Lord Sumption’s challenge to private law is that it should aim for conceptual clarity. This theme emerged in several of Lord Sumption’s judgments. In Eclairs Group Ltd v JKX Oil & Gas plc,57 Lord Sumption addressed the vexed issue of directors acting for improper purposes, making two crucial conceptual claims. The first is that the source of the relevant legal constraints is external to the contract, found in the equitable rules imposed on all such power holders. The second, only obiter, was that, if equity decried the abuse of powers in this way, the only logical rule to apply where a director had mixed motives for acting was to ask if the decision would have been made ‘but for’ the offending purpose. Sarah Worthington, in her chapter on powers,58 builds out from this decision to address the wider context of misuse of powers. She proposes a simple conceptual framework that works across contractual and equitable regimes, dividing abuses into three broad but analytically distinct varieties and showing that the remedial framework cannot be delivered by the easy labelling of flawed decisions as ‘void’ or ‘voidable’. Conceptual clarity was also emphasised in two further important judgments given by Lord Sumption. In Virgin Atlantic Airways Ltd v Premium Aircraft Interiors UK Ltd,59 Lord Sumption characterised res judicata as a ‘portmanteau term which is used to describe a number of different legal principles with different juridical origins. As with other such expressions, the label tends to distract attention from the contents of the bottle.’ In Prest v Petrodel Resources Ltd,60 he said that the phrase ‘piercing the 56 Woolwich Equitable BS v Inland Revenue Commissioners [1993] AC 70 (HL) 173. One of the examples that Lord Goff went on to cite in Woolwich was the recognition in Donoghue v Stevenson [1932] AC 562 (HL) of the duty of care in tort, the very thing at which Lord Sumption was taking aim in his lecture to the Personal Injuries Bar Association. 57 Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71, [2016] 3 All ER 641. 58 See ch 16. 59 Virgin Atlantic Airways Ltd v Premium Aircraft Interiors UK Ltd [2013] UKSC 46, [2014] AC 160 [17]. 60 Prest v Petrodel Resources Ltd [2013] UKSC 34, 2 AC 415 [16].

Preface  xv corporate veil’ was ‘an expression rather indiscriminately used to describe a number of different things. Properly speaking, it means disregarding the separate personality of the company.’ He added: ‘when we speak of piercing the corporate veil’, that meant only ‘those cases which are true exceptions to the rule in Salomon v A Salomon & Co Ltd’. In this collection, the Hon KR Handley and Christian Witting tackle this theme in different ways.61 Addressing Virgin Atlantic, Handley argues that it was unnecessary for Lord Sumption to identify six rather than the traditional four forms of res judicata and that the umbrella latinate term serves a useful purpose, given these four doctrines have a great deal in common. As for Prest, Christian Witting agrees with Lord Sumption that the language of the corporate veil is unhelpful and that there is a need to distinguish private law methods of reaching shareholders and directors from some distinct company law rule. However, Witting parts company with Lord Sumption as to the nature of the ‘rule’ in Salomon: he argues that this pocket of the law should be reoriented from thinking in terms of exceptions to legal personality (the dominant approach in the UK) to thinking in terms of exceptions to limited liability (the approach taken in US literature). Concepts in law matter because they provide the premise on which legal questions are asked and answered. One example of this appears in the chapter on knowing receipt.62 Jamie Glister tests the fit of doctrinal aspects of knowing receipt with concepts of unjust enrichment, true trusts and equitable wrongdoing. He argues that comparison with true trusts may be useful, but warns against treating knowing recipients as true fiduciaries. Another example of conceptual analysis appears in the chapter on applicable law. Richard Fentiman argues for what he describes as ‘orthodoxy’: an English court’s task in establishing the content of foreign law is to determine how a foreign court would answer the relevant question of law were it to arise in proceedings before it. In the important but understudied Iraqi Civilians v Ministry of Defence case,63 Lord Sumption revealed a different conceptualisation of foreign law: ‘the English court is concerned only with what the foreign court would decide to be the relevant foreign law. It is the function of the English court to apply that law to the relevant facts.’64 The factual context of the actual English proceedings was different to that of the hypothetical Iraqi proceedings, leading to a different outcome on the limitation of the claims of Iraqi civilians for alleged mistreatment and unlawful detention by British troops in Iraq between 2003 and 2009. Fentiman argues that the decision must be wrong on the conventional understanding of choice of law.65 The fifth and final facet of Lord Sumption’s judgments is the emphasis on consistency between rules and their rationales. Take contract damages. For Adam Kramer,66 contract damages can be summed up in three words – ‘compensation, 61 See chs 17 and 21. 62 See ch 12. 63 Iraqi Civilians v Ministry of Defence [2016] UKSC 25, [2016] 1 WLR 2001. 64 ibid [14]. 65 Interestingly, at the conference, Lord Leggatt, who was the overturned first instance judge in Iraqi Civilians and had applied Fentiman’s preferred approach to foreign law, said that he had been entirely convinced by the way that Lord Sumption had reframed the issue and therefore decided the appeal. 66 See ch 5.

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compensation, compensation’67 – and he therefore welcomes Lord Sumption’s significant judgments in this area, which reinforce the alignment between the various rules of the law on damages and the underlying rationale for damages. Conversely, the editors of The Law of Privilege disagree with Lord Sumption’s dissent in Prudential,68 where he argued that the rationale underpinning legal advice privilege meant that the rule ought equally to extend to an accountant offering tax advice. They question whether this would have been right in principle and whether that extension would have been workable in practice.69 Proprietary restitution is an area particularly in need of rationalisation. In these pages,70 we argue that proprietary restitution ought to be available for those claims in unjust enrichment where the claimant’s autonomy to deal with their property is impinged at the moment that title is transferred to the defendant. This captures what we call the ‘defective intention’ class of claims (eg misrepresentation, duress, undue influence) and also the subclass of ‘conditional intention’ claims where the conditions attached to the claimant’s transfer of property to the defendant were not satisfied from the outset and never could have been (ie no contractual obligation to provide counter-performance, mistaken payment of a non-existent debt). Conversely, the larger subclass of conditional intention claims (ie no delivery of counter-performance contractually due) does not involve an impingement of the claimant’s autonomy at the time of transfer, and, accordingly, only a personal claim should be available. Of course, as a matter of authority, Westdeutsche Landesbank Girozentrale v Islington London Borough Council71 stands in the way of our argument, but we identify in Lord Sumption’s judgment in Angove’s Pty Ltd v Bailey the kernel of an idea which might one day be used to revisit the reasoning of Westdeutsche.72 As our chapter shows, there is something of a tension between rationalising law (the fifth facet) and law as history (the third facet). Respect for precedent means that some rules survive despite the lack of an obvious rationale. Peter Watts identifies one in his chapter on agency:73 the ‘old and anomalous’ undisclosed principals doctrine. A clue as to its survival in the modern law, as Watts suggests, lies in the fact that the doctrine is readily excluded by the terms of a contract. Nonetheless, where possible, rules ought to be rationalised. So, to keep with the example of agency, self-­authorising agents are inconsistent with rationale of agency as a product of consent; yet, as Lord Sumption recognised in Kelly v Fraser,74 it is possible to explain some situations that look like self-authorised agency on the basis that principals can authorise agents to communicate decisions even if those agents do not have the authority to make those decisions themselves. 67 As Foxton pithily put it when presenting on Kramer’s paper at the conference. 68 R (on the application of Prudential plc) v Special Commissioner of Income Tax [2013] UKSC 1, [2013] 2 AC 185. 69 Bankim Thanki QC, Chloe Carpenter QC, Nik Yeo and Rebecca Loveridge. See ch 22. We congratulate Chloe Carpenter QC on taking silk between the date of the conference and the date of this book’s publication. 70 See ch 11. 71 Westdeutsche (n 4). 72 Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179. 73 See ch 14. 74 Kelly v Fraser [2012] UKPC 25 [15], [2013] 1 AC 450.

Preface  xvii This book arose out of a conference held at Trinity College, Cambridge on 3 and 4 October 2019 by the Cambridge Private Law Centre. Many of the contributions in this book are from academics at Cambridge associated with the Centre, but we also invited leading commentators from other universities to make contributions, as well as lawyers who find time to write on private law topics alongside practice. We should not end this preface without some important acknowledgements. We must thank South Square and Freshfields Bruckhaus Deringer, who generously continue to sponsor the Centre. We are grateful to Isobel Williams for allowing us to use one of her wonderful sketches from the Supreme Court for the cover artwork.75 We are indebted to the authors themselves for their hard work, resulting in the excellent essays contained in this book. We thank Lord Grabiner QC, who gave the speech from the bar at Lord Sumption’s valedictory ceremony in the Supreme Court, both for opening the conference at Trinity College and for providing the foreword to this collection. We are grateful to Charles Béar QC, Professor Paul S Davies, Robin Dicker QC, Astron Douglas, Amy Goymour, Julius Grower, Professor Louise Gullifer, MarieLouise Kinsler QC, Sir George Leggatt (Lord Leggatt, by the time of publication),76 the Hon Mark Leeming, Oliver Marsden, Dr Jonathan Morgan, Dr Pippa Rogerson and Sir Marcus Smith, who came to the conference and participated in the discussion of the papers. We are also grateful to Hart Publishing, particularly Sinead Moloney and Sasha Jawed, for supporting this collection from its initial conception. William would also like to thank his wife Susie for her inexhaustible support and patience in his pursuing of this project soon after the arrival of their son, Henry. Sarah would like to express her deep gratitude to William for carrying almost the entire burden of this endeavour, and her enormous admiration for every aspect of the manner in which he has done that. Lastly, and most importantly, we would like to thank Lord Sumption for allowing us to use his judicial legacy as a springboard for critical reflection about the current direction of travel for English private law; for his enthusiastic attendance and contributions at the conference at Trinity College last year; and for generously writing the first chapter to this collection. It is a privilege and a pleasure to present this book in his honour. William Day Sarah Worthington 31 March 2020

75 The sketch is of the hearing in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] UKSC 45, [2017] AC 1. The bench (left to right) comprised Lord Hughes, Lord Clarke, Lord Mance, Lord Sumption and Lord Toulson. Insurance was one of two major areas of Lord Sumption’s contribution to private law that we could not accommodate in the volume (the other one being insolvency). For that reason, we were very glad to acknowledge it on the cover. 76 We offer our warmest congratulations on his well-deserved elevation to the Supreme Court.

xviii

Contents Foreword�������������������������������������������������������������������������������������������������������������� v Preface���������������������������������������������������������������������������������������������������������������� vii Contributors������������������������������������������������������������������������������������������������������ xxi Table of Cases������������������������������������������������������������������������������������������������� xxiii Table of Legislation����������������������������������������������������������������������������������������� xlvii 1. Introduction��������������������������������������������������������������������������������������������������� 1 Lord Sumption 2. Interpretation������������������������������������������������������������������������������������������������� 3 Ewan McKendrick 3. Variation and Waiver�������������������������������������������������������������������������������������25 William Day 4. Termination��������������������������������������������������������������������������������������������������49 Sir David Foxton 5. Contract Damages�����������������������������������������������������������������������������������������73 Adam Kramer 6. Penalties��������������������������������������������������������������������������������������������������������95 Edwin Peel 7. The Contract/Tort Borderline�����������������������������������������������������������������������115 Janet O’Sullivan 8. Personal Injury���������������������������������������������������������������������������������������������141 Nicholas J McBride 9. Injunctions��������������������������������������������������������������������������������������������������155 Donal Nolan 10. Unjust Enrichment���������������������������������������������������������������������������������������173 Graham Virgo 11. Proprietary Restitution��������������������������������������������������������������������������������193 William Day and Sarah Worthington 12. Knowing Receipt�����������������������������������������������������������������������������������������217 Jamie Glister 13. Illegality������������������������������������������������������������������������������������������������������237 Charlie Webb

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14. Agency��������������������������������������������������������������������������������������������������������257 Peter Watts 15. Attribution��������������������������������������������������������������������������������������������������273 Ernest Lim 16. Powers���������������������������������������������������������������������������������������������������������297 Sarah Worthington 17. Piercing the Corporate Veil���������������������������������������������������������������������������325 Christian Witting 18. Good Arguable Case������������������������������������������������������������������������������������347 Joshua Folkard and Ian Bergson 19. Forum Conveniens���������������������������������������������������������������������������������������367 Louise Merrett 20. Foreign Law������������������������������������������������������������������������������������������������387 Richard Fentiman 21. Res Judicata������������������������������������������������������������������������������������������������399 The Hon KR Handley QC 22. Privilege������������������������������������������������������������������������������������������������������411 Bankim Thanki QC, Chloe Carpenter QC, Nik Yeo and Rebecca Loveridge Index�����������������������������������������������������������������������������������������������������������������427

Contributors IAN BERGSON is a barrister at Fountain Court Chambers, London and has published widely on private international law CHLOE CARPENTER QC is a barrister at Fountain Court Chambers, London and a contributor to Thanki (ed) The Law of Privilege WILLIAM DAY is a barrister at 3 Verulam Buildings, London and Fellow of Downing College, Cambridge RICHARD FENTIMAN QC (Hon) is Professor of private international law and a Fellow of Queens’ College, Cambridge JOSHUA FOLKARD is a barrister at 4 New Square, London, Teaching Fellow, University College London, and author of a number of articles on private international law SIR DAVID FOXTON is a High Court Judge assigned to the Commercial Court in the Queen’s Bench Division JAMIE GLISTER is an Associate Professor at the University of Sydney and has published widely on equity and the law of trusts THE HON KR HANDLEY QC is a former judge of the New South Wales Court of Appeal and editor of numerous books, including Spencer Bower and Handley: Res Judicata ADAM KRAMER is a barrister at 3 Verulam Buildings, London and author of The Law of Contract Damages ERNEST LIM is an Associate Professor at the National University of Singapore and has published widely on company law, corporate governance and private law REBECCA LOVERIDGE is a barrister at Fountain Court Chambers, London and a contributor to Thanki (ed) The Law of Privilege NICHOLAS J McBRIDE is a Fellow of Pembroke College, Cambridge and author of numerous books including The Humanity of Private Law EWAN McKENDRICK QC (Hon) is Professor of English private law, a Fellow of Lady Margaret Hall, Oxford and a barrister at 3 Verulam Buildings, London LOUISE MERRETT is a Reader in international commercial law, a Fellow of Trinity College, Cambridge and a barrister at Fountain Court Chambers, London DONAL NOLAN is Professor of private law and a Fellow of Worcester College, Oxford

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JANET O’SULLIVAN is a Senior Lecturer and Vice-Master of Selwyn College, Cambridge EDWIN PEEL is a Professor and Fellow of Keble College, Oxford and a barrister at One Essex Court, London BANKIM THANKI QC is a barrister at Fountain Court Chambers, London and editor of The Law of Privilege GRAHAM VIRGO QC (Hon) is Professor of English private law, a Fellow of Downing College, Cambridge and Senior Pro-Vice-Chancellor of the University of Cambridge CHARLIE WEBB is Professor of law at the London School of Economics PETER WATTS QC is a barrister, a Professor at the University of Auckland, a Senior Research Fellow of Harris Manchester College, Oxford and the editor of Bowstead & Reynolds on Agency CHRISTIAN WITTING is Professor of private law at the National University of Singapore and has published widely on company and tort law SARAH WORTHINGTON QC (Hon) is Downing Professor of the Laws of England and a Fellow of Trinity College, Cambridge NIK YEO is a barrister at Fountain Court Chambers, London and a contributor to Thanki (ed) The Law of Privilege

Table of Cases UK A v Bottrill [2002] UKPC 44, [2003] 1 AC 449�����������������������������������������������������152 Abbey National Building Society v Cann [1991] 1 AC 56 (HL)������������������������������������������������������������������������������������������������210 Abela v Baadarani [2013] UKSC 44, [2013] 1 WLR 2043��������������������������������������������������������������� ix, 368–9, 371, 377–8, 385 Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56, 2012 SCLR 114��������������������������������������������������������������������������� 7, 24 Abu Dhabi National Tanker Co v Product Star Shipping Ltd (No 2) [1993] 1 Lloyd’s Rep 397 (CA)���������������������������������������������������������300–301, 311 Adams v Cape Industries Ltd [1990] Ch 433 (CA)�����������������������������333, 335, 341–2 Agip (Africa) Ltd v Jackson [1990] Ch 265 (Ch)��������������������������������������������������233 Ahmed v Ingram [2018] EWCA Civ 519��������������������������������������������������������������225 AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503������������������������������������������������������� 225, 298, 319, 321 Airbus SAS v Generali Italia SpA [2019] EWCA Civ 805, [2019] 4 All ER 745������������������������������������������������������������������������������������������� 357–62 AK Investment CJSC v Kyrgyz Mobil [2011] UKPC 7, [2012] 1 WLR 1804���������������������������������������������������������������������������������� 348, 351, 361 Akers v Samba Financial Group [2017] UKSC 6, [2017] AC 424���������������� 217, 227–8 Akita Holdings Ltd v A-G (Turks and Caicos Islands) [2017] UKPC 7, [2017] AC 590����������������������������������������������������������� 221, 224, 227, 235 Al Jaber v Al Ibrahim [2016] EWHC 1989 (Comm)���������������������������������������������371 Alcoa Minerals of Jamaica Inc v Herbert Broderick Appeal [2002] 1 AC 371 (PC)�������������������������������������������������������������������������������������������������79 Alexander v Rayson [1936] 1 KB 169 (CA)����������������������������������������������������������253 Aleyn v Belchier (1758) 1 Eden 132, 28 ER 634����������������������������������������������������307 Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL)�����������133 Allcard v Skinner (1887) 36 Ch D 145 (CA)���������������������������������������������������������199 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)��������������������������� 306–7 Amalgamated Investment & Property Co Ltd (in liquidation) v Texas Commerce International Bank Ltd [1982] 1 AC 84 (QB)�������������������������46 Amin Rasheed Shipping Corp v Kuwait Insurance Co [1984] 1 AC 50 (HL)������������������������������������������������������������������������������������������������382 Ampthill Peerage [1977] AC 547 (HL)�����������������������������������������������������������������408 Anderson v Bank of British Columbia (1876) 2 Ch D 644 (CA)���������������������������416 Aneco Reinsurance Underwriting Ltd (in liquidation) v Johnson & Higgins Ltd [2001] UKHL 51, [2001] 2 All ER (Comm) 929��������������������122, 127

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Table of Cases

Anglo Petroleum Ltd v TFB (Mortgages) Ltd [2007] EWCA Civ 456, [2007] BCC 407��������������������������������������������������������������������������������������������253 Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179��������������xvi, 179–80, 191, 193–4, 205, 213–16, 264–5, 405, 407 Antaios Compania Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191 (HL)����������������������������������������������������������������������������������������10 Antonio Gramsci Shipping Corp v Recoletos Ltd [2013] EWCA Civ 730, [2014] Bus LR 239�������������������������������������������������������������������������� 327, 357, 360 Arklow Investments Ltd v Maclean [2000] 1 WLR 594 (PC)��������������������������������282 Armagas Ltd v Mundogas SA [1986] AC 717 (CA and HL)���������������259, 261–2, 272 Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2013] Ch 156����������������������������������������������������������������������233 Arnold v Britton [2015] UKSC 36, [2015] AC 1619��������������������������������� 3, 11–12, 23 Arnold v National Westminster Bank plc [1991] 2 AC 93 (HL)����������������� 402–3, 408 Arthur v A-G (Turks and Caicos Islands) [2017] UKPC 7������������������������������������221 A/S Tallina Laevauhisus A/S v Estonian State Steamship Line (1947) 80 Lloyd’s Rep 99 (CA)���������������������������������������������������������������������������������390 Aspden v Webbs Poultry and Meat Group (Holdings) Ltd [1996] IRLR 521 (QB)�����������������������������������������������������������������������������������������������68 Aspen Underwriting Limited v Credit Europe Bank NV [2018] EWCA Civ 2590, [2019] 1 Lloyd’s Rep 221�����������������������������������354–5, 359, 362 Associated Electric and Gas Insurance Services Ltd v European Reinsurance Co of Zurich [2003] UKPC 11, [2003] 1 WLR 1041��������������������400 Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223 (CA)���������������������������������������������������������������������������������������300–301 Astex Therapeutics Ltd v Astrazeneca AB [2017] EWHC 1442 (Ch)����������������������24 Attica Sea Carriers Corp v Ferrostaal Poseidon Bulk Reederei GmbH [1976] 1 Lloyd’s Rep 250 (CA)��������������������������������������������������������������58, 61, 99 Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988������������������������������������������������������������������������������������ 4, 10, 12, 22 Attorney General of Hong Kong v Reid [1994] 1 AC 324 (PC)�����������������������������197 Attorney General v Birmingham (1858) 4 K & J 528, 70 ER 220����������� 157, 159, 169 Attorney General v Blake [2001] 1 AC 268 (HL)����������������������������������� 86, 88–9, 100 Avery v Bowden (1855) 5 El & Bl 714, (1856) 6 El & Bl 953, 119 ER 647 (QB)���������������������������������������������������������������������������������������������50 Avon County Council v Howlett [1983] 1 WLR 605 (CA)������������������������������������263 Axis Fleet Management Ltd v Rygor Group Services Ltd [2018] EWHC 2276 (QB)��������������������������������������������������������������������������������������� 31–2 B v Auckland District Law Society [2003] UKPC 38, [2003] 2 AC 736�������������������424 Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274, [2001] CLC 999���������������������������������������������������������������������������������46 Balabel v Air India [1988] Ch 317 (CA)��������������������������������������������������������416, 423 Balfour v Balfour [1919] 2 KB 571�����������������������������������������������������������������������132 Bamford v Bamford [1970] 1 Ch 212 (CA)�����������������������������������������������������������305 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 427 (CA)���������������������������������������������������������������������������� 213, 232–5

Table of Cases  xxv Bank of Credit and Commercial International v Ali [2001] UKHL 8, [2002] 1 AC 251����������������������������������������������������������������������������������������������12 Banning v Wright [1972] 1 WLR 972 (HL)������������������������������������������������������������37 Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 (HL)����������������������������������������������������������������������������174–5, 177, 179 Barclays Bank Ltd v Simms [1980] QB 677 (Com Ct)�������������������������������������������180 Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363 (QB)�����������������������������285 Barclays Bank Plc v Various Claimants [2018] EWCA Civ 1670���������������������������258 Barr v Biffa Waste Services Ltd [2012] EWCA Civ 312, [2013] QB 455�����������������163 Barrett Bros (Taxis) Ltd v Davies [1966] 1 WLR 1334 (CA)�����������������������������������40 Barrett v Enfield London Borough Council [2001] 2 AC 550 (HL)������������������������362 Baylis v Bishop of London [1913] 1 Ch 127 (CA)������������������������������������������������212 Beaumont Business Centres Ltd v Florala Properties Ltd [2020] EWHC 550 (Ch)�������������������������������������������������������������������������������������������172 Belmont Finance Corp v Williams Furniture (No 2) [1980] 1 All ER 393 (CA)������������������������������������������������������������������������������������� 231–3 Bem Dis a Turk Ticaret S/A TR v International Agri Trade Co Ltd (The Selda) [1998] 1 Lloyd’s Rep 416 (Com Ct), [1999] 1 Lloyd’s Rep 729 (CA)�����������������������������������������������������������������������������������84 Benedetti v Sawiris [2013] UKSC 50, [2014] AC 938��������������������������������������174, 190 Bennett v Flower (1840) 2 Beav 302, 48 ER 1197 ���������������������������������������������������40 Berg, Sons & Co Ltd v Mervyn Hampton Adams [1992] BCC 661, [2002] Lloyd’s Rep PN 41 (Com Ct)�����������������������������������������������294 Beswick v Beswick [1968] AC 58 (HL)�����������������������������������������������������������������100 BGC Capital Markets (Switzerland) LLC v Rees [2011] EWHC 2009 (QB)�������������������������������������������������������������������������������������������86 Bilta (UK) Ltd (in liquidation) v Nazir (No 2) [2015] UKSC 23, [2016] AC 1����������������������������������������������������������viii, x, 217, 241, 256–7, 273–9, 284–6, 288, 290–2 Birmingham and District Land Co v London and North West Railway Co (1888) 40 Ch D 268 (CA)��������������������������������������������������������������45 Blindley Heath Investments Ltd v Bass [2015] EWCA Civ 1023, [2017] Ch 389��������������������������������������������������������������������������������������������� 45–6 Blue Sky One Limited v Mahan Air [2010] EWHC 631 (Comm)�������������������391, 394 Blue v Ashley [2017] EWHC 1928 (Comm)���������������������������������������������������������132 BNY Mellon Corporate Trustee Services Ltd v LBG Capital No 1 plc [2016] UKSC 29, [2017] 1 All ER 497�������������������������������������������������������������4, 8 Boardman v Phipps [1967] 1 AC 46 (HL)������������������������������������������������������������212 Bols Distilleries BV v Superior Yacht Services Ltd [2006] UKPC 45, [2007] 1 WLR 12�������������������������������������������������������������������������348, 351, 363–4 Booth v Phillips [2004] EWHC 1427 (Comm), [2004] 1 WLR 3292���������������375, 379 Bottiglieri di Navigazione SpA v Cosco Qingdao Ocean Shipping Company [2005] EWHC 244 (Comm)�������������������������������������������������������������39 Boulton v Jones (1857) 157 ER 232���������������������������������������������������������������������138 Bou-Simon v BGC Brokers LP [2018] EWCA Civ 1525, [2019] 1 All ER (Comm) 955��������������������������������������������������������������������������������������22

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Boyo v Lambeth LBC [1994] ICR 727 (CA)�����������������������������������������������������������57 BP Exploration (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783 (QB)�����������������������46 Braganza v BP Shipping Limited [2015] UKSC 17, [2015] 1 WLR 1661��������������������������������������������������������������������������������������������� 301–3 Brent LBC v Davies [2018] EWHC 2214 (Ch)������������������������������������������������������233 Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 582 (Ch)�����������������������������������������������������������������������������������������119 Bristol & West Building Society v Mothew [1998] Ch 1 (CA)������������������������������282 British Bank of the Middle East v Sun Life Assurance Co of Canada [1983] 2 Lloyd’s Rep 9 (HL)��������������������������������������������������������������260 Broderip v Salomon [1895] 2 Ch 323 (Ch and CA)����������������������������������������������329 Brownlie v Four Seasons Holdings Inc [2014] EWHC 273 (QB), [2015] EWCA Civ 665, [2016] 1 WLR 1814����������������������������������������������������352 Bugle Press Ltd, Re [1961] Ch 270 (CA)��������������������������������������������������������������314 Bunge SA v Nidera BV [2015] UKSC 43, [2015] 3 All ER 1082�������������������������������������������������������������� 73, 75, 78–85, 90, 93, 103 C Spencer Ltd v MW High Tech Projects UK Ltd [2019] EWHC 2547 (TCC)����������������������������������������������������������������������������������������47 Calvert v William Hill Credit Ltd [2008] EWCA Civ 1427, [2009] Ch 330����������������������������������������������������������������������������������������� 129–30 Cambridge Gas Transport Corp v Official Committee of Unsecured Creditors of Navigator Holdings plc [2006] UKPC 26, [2007] 1 AC 508��������������������������������������������������������������������������������������������400 Canada Trust Co v Stolzenberg (No 2) [1998] 1 WLR 547 (CA)�������������������������������������������������������������� 347–8, 350–3, 356, 360 Candler v Crane, Christmas & Co [1951] 2 KB 164 (CA)����������������������������������������������������������������������������������������������135 Caparo Industries plc v Dickman [1990] 2 AC 605 (HL)������������������������������������������������������ 122, 131–2, 135, 255, 267, 344 Carillion Construction Ltd v Emcor Engineering Services Ltd [2017] EWCA Civ 65, [2017] BLR 203�������������������������������������������������������������24 Carradine Properties Ltd v DJ Freeman & Co [1999] Lloyd’s Rep PN 483 (CA)������������������������������������������������������������������������������������������125 CAS (Nominees) Ltd v Nottingham Forest Football Club plc [2002] 1 BCLC 613 (Ch)������������������������������������������������������������������������������������������313 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (KB)��������������������������������������������������������������������������������������������� 38, 45 Cerberus Software Ltd v Rowley [2001] EWCA Civ 78, [2001] ICR 376����������������������������������������������������������������������������������������������������������50 Chandler v Cape plc [2012] EWCA Civ 525, [2012] 1 WLR 3111�������������������������������������������������������������������������������335, 338, 344–5 Chaney v Maclow [1929] 1 Ch 461 (CA)�������������������������������������������������������������265 Charles Rickards LD v Oppenhaim [1950] 1 KB 616 (CA)�������������������������������������45 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101�����������������������������������������������������������������10, 12, 14, 18–21, 23

Table of Cases  xxvii Charter Reinsurance Co Ltd (in liquidation) v Fagan [1997] AC 313 (HL)���������������������������������������������������������������������������������������������������10 Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105 (Ch)���������������������������������������������������������������������������� 205–7, 210 Chaudhry v Prabhakar [1989] 1 WLR 29 (CA)����������������������������������������������������132 Cheltenham and Gloucester plc v Appleyard [2004] EWCA Civ 291��������������������175 Cherney v Deripaska [2009] EWCA Civ 849, [2010] 2 All ER (Comm) 456�������������������������������������������������������������������������������������������������380 Civil Aviation Authority v R (on the application of Jet2.Com) [2020] EWCA Civ 35, [2020] 2 WLR 1215 ��������������������������������������������������������� 419–20 Clark Boyce v Mouat [1994] 1 AC 428 (PC)���������������������������������������������������������125 Clarke v Shee and Johnson (1744) 1 Cowp 197, 98 ER 1041���������������������������������196 Clea Shipping Corp v Bulk Oil International Ltd (The Alaskan Trader (No 2)) [1982] 2 Lloyd’s Rep 645 (Com Ct)�����������58–60, 99 Cloutte v Storey [1911] 1 Ch 18 (CA)�����������������������������������������������������������314, 320 Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 (HL)������������������������������������������������������111 Coflexip SA v Stolt Offshore MS Ltd (No 2) [2004] EWCA Civ 213, [2004] FSR 708���������������������������������������������������������������������������������������������399 Cohen, Brookes v Cohen, Re [1911] 1 Ch 37 (Ch)������������������������������������������� 305–6 Cointat v Myham & Son [1913] 2 KB 220 (KB)�����������������������������������������������������99 Colls v Home & Colonial Stores Ltd [1904] AC 179 (HL)���������������������� 159–60, 171 Combe v Combe [1951] 2 KB 215 (CA)����������������������������������������������������������� 37, 46 Commerzbank AG v IMB Morgan plc [2004] EWHC 2771 (Ch), [2005] 2 All ER (Comm) 564�������������������������������������������������������������������������213 Conductive Inkjet Technology Ltd v Uni-Pixel Displays Inc [2013] EWHC 2968 (Ch), [2014] 1 All ER (Comm) 654��������������������������������������������383 Connelly v RTZ Corporation plc [1998] AC 854 (HL)�����������������������������������������381 Cooley v Ramsey [2008] EWHC 129 (QB), [2008] ILPr 27����������������������������375, 379 Cooper v Cooper (1896) LR 8 Eq 312�����������������������������������������������������������������317 Cory v Thames Ironworks (1867–68) LR 3 QB 181 (QB)�������������������������������������136 Courtwood Holdings SA v Woodley Properties Ltd [2017] EWHC 3514 (Ch)����������������������������������������������������������������������������������224, 235 Courtwood Holdings SA v Woodley Properties Ltd [2018] EWHC 2163 (Ch)����������������������������������������������������������������������������������224, 235 Coventry v Lawrence [2014] UKSC 13, [2014] AC 822�����������������������������������������������������������������������������ix, 155–6, 165, 167–72 Coventry v Lawrence (No 2) [2014] UKSC 46, [2015] AC 106������������������������������164 Cowan v Scargill [1985] Ch 270 (Ch)�������������������������������������������������������������� 305–6 Cowper v Laidler [1903] 2 Ch 337 (Ch)���������������������������������������������������������������171 C&P Haulage Co Ltd v Middleton [1983] 1 WLR 1461 (CA)��������������������������������86 Craven-Ellis v Canons Ltd [1936] 2 KB 403 (CA)�������������������������������������������������176 Criterion Properties plc v Stratford UK Properties LLC [2002] EWHC 496 (Ch), [2002] 2 BCLC 151, [2002] EWCA Civ 1883, [2003] 1 WLR 2108, [2004] UKHL 28, [2004] 1 WLR 1846��������������������������������221, 313

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Table of Cases

Cross v Kirkby [2000] All ER (D) 212 (CA)���������������������������������������������������������239 Cuff v Penn (1813) 1 M&S 21, 105 ER 8 (KB)��������������������������������������������������� 38–9 Cundy v Lindsay (1878) 3 App Cas 459 (HL)������������������������������������������� 208–9, 215 Customs and Excise Commissioners v Barclays Bank plc [2006] UKHL 28, [2007] 1 AC 181����������������������������������������������������������������������������132 Dadourian Group International and others v Simms [2008] EWHC 1784 (Ch)�����������������������������������������������������������������������������������������424 Dampskibsselskabet ‘Norden’ A/S v Andre & Compagnie SA [2003] 1 Lloyd’s Rep 287��������������������������������������������������������������������������������������������78 Darby, Re; ex p Brougham [1911] 1 KB 95 (KB)���������������������������������������������������334 Davies v Davies [2016] EWCA Civ 463, [2016] 2 P&CR 10����������������������������������263 DD Growth Premium 2X Fund (in liq) v RMF Market Neutral Strategies (Master) Ltd [2017] UKPC 36, [2018] Bus LR 1595��������������������������������������������������������������������������� 217, 220, 228, 234 De Buscche v Alt (1878) 8 Ch D 286 (Ch and CA)�������������������������������������������������48 Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 (CA)���������������������������������������������������������������������������� 52, 59 Denmark Productions Ltd v Boscobel Productions Ltd [1969] 1 QB 699 (CA)������������������������������������������������������������������������������������������������51 Dennis v Ministry of Defence [2003] EWHC 793 (QB), [2003] Env LR 34������������������������������������������������������������������������������������������������ 162–3 Derry v Peek (1889) 14 Cas App 337 (HL)����������������������������������������������������334, 408 Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2006] UKHL 49, [2007] 1 AC 558�����������������������������������������181 Dextra Bank and Trust Co v Bank of Jamaica [2002] 1 All ER (Comm) 193 (PC)����������������������������������������������������������������������������178 Dimbleby & Sons Ltd v National Union of Journalists [1984] 1 WLR 427 (HL)�������������������������������������������������������������������������������������������341 Diplock, Re [1951] AC 251 (HL)������������������������������������������������������������ 310, 318–19 Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [2018] EWCA Civ 2006, [2019] 1 WLR 791������������� 419–21, 425 Doe d Foster v Earl of Derby (1834) 1 Ad & El 783���������������������������������������������405 Donoghue v Stevenson [1932] AC 562 (HL)��������������������������������������������������xiv, 151 Dormeuil Trade Mark [1983] RPC 131 (Ch)�������������������������������������������������������422 Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 2 AC 366������������������������������������������������������������������������������������������������220, 271 Duchess di Sora v Phillipps 11 ER 1168 (HL)�����������������������������������������������389, 391 Duke of Portland v Topham (1864) 11 HLC 32 (HL)�������������������������������� 299, 305–6 Duke of Wellington, Re [1947] 1 Ch 506 (Ch)�����������������������������������������������������391 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (HL)���������������������������������������������������������������101, 104–6, 111, 113 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] 1 AC 847 (HL)������������������������������������������������������������������������������������������������33 Durham Tees Valley Airport Ltd v Bmibaby Ltd [2010] EWCA Civ 485, [2011] 1 All ER (Comm)��������������������������������������������������������������������63 East Asia Co Lt v PT Satria Tirtatama Energindo [2019] UKPC 30��������������261, 271

Table of Cases  xxix Eastleigh BC v Town Quay Developments Ltd [2009] EWCA Civ 1391����������������302 Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71, [2016] 3 All ER 641������������������������������������������������������������� xiv, 297–9, 303, 305–6, 309, 311–12, 315–20 Edge v Pensions Ombudsman [2000] Ch 602 (CA)����������������������������������������������306 Edgworth Capital (Luxembourg) Sarl v Ramblas Investments BV [2015] EWHC 150 (Comm)���������������������������������������������������������������������������������������16 Edwards v Chesterfield Royal Hospital NHS Foundation Trust [2011] UKSC 58, [2012] AC 22�����������������������������������������������������������������������������������57 Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd (The Raffaella) [1985] 2 Lloyd’s Rep 36 (CA)�����������������������������262 Ehrentreu v IG Index Ltd [2018] EWCA Civ 79�����������������������������������������������������75 Ehrman v Bartholomew [1898] 1 Ch 671 (Ch)�������������������������������������������������������55 El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 (Ch), [1994] 1 BCLC 464 (CA)��������������������������������������������������������������������������� 199, 231, 293 ENE Kos 1 Ltd v Petroleo Brasileiro SA (No 2) (The Kos) [2012] UKSC 17, [2012] 2 AC 164����������������������������������������������������������������������������183 Enrico Furst & Co v WE Fischer Ltd [1960] 2 Lloyd’s Rep 340 (Com Ct)�������������������������������������������������������������������������������������������37 Equitable Life Assurance Co Ltd v Hyman [2002] 1 AC 408 (HL)������������� 302, 306–7 Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (HL)�����������������334 Erste Group Bank AG (London Branch) v JSC (VMZ Red October) [2015] EWCA Civ 379, [2015] 1 CLC 706������������������������������������������������375, 379 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 (HL)���������������������������������������������������������������������������������������������������54 Esso Petroleum Co Ltd v Mardon [1976] QB 801 (CA)����������������������������������������120 Etihad Airways PJSC v Flöther [2019] EWHC 3107 (Comm)�������������������������������364 Euro London Appointments Ltd v Claessens International Ltd [2006] EWCA Civ 385, [2006] 2 Lloyd’s Rep 437�������������������������������������������������������107 Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830��������������������������������������������88, 90, 92, 101 Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22, [2003] 1 AC 32������������������������������������������������������������������������������������������������74 Fairfield Sentry Ltd v Migani [2014] UKPC 9, [2014] 1 CLC 611�������������������4, 8, 182 Farah v British Airways (Court of Appeal, The Times, 26 January 2000)�������������������������������������������������������������������������������������������362 Federal Republic of Nigeria v JP Morgan Chase Bank NA [2019] EWHC 347 (Comm)���������������������������������������������������������������������������������������24 Fern Computer Consultancy Ltd v Intergraph Cardworx & Analysis Solutions Inc [2014] EWHC 2908 (Ch), [2014] Bus LR 1397�������������384 FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250������������������������������������������������������������������������197, 317 FHSC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361, [2020] 2 WLR 429����������������������������������������������������������������21 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 (HL)����������������������������������������������������������������������������������������202

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FII Group Litigation v Revenue and Customs Commissioners [2012] UKSC 19, [2012] AC 337������������������������������������������������������������������������182, 184 First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] BCC 533 (CA)����������������������������������������������������������������������������������������������259 First Nationwide v Revenue and Customs Commissioners [2011] UKUT 174 (TCC)�����������������������������������������������������������������������������������������391 Fish & Fish Ltd v Sea Shepherd UK (The Steve Irwin) [2015] UKSC 10, [2015] AC 1229����������������������������������������������������������������������217, 345 Fishenden v Higgs and Hill Ltd (1935) 153 LT 128 (CA)��������������������������������������160 Flota Petrolera Ecuatoriana v Petroleos de Venezuala SA [2017] EWHC 3630 (Comm)������������������������������������������������������������������������������� 362–3 FM Capital Partners Ltd v Marino [2018] EWHC 1768 (Comm)�������������������������222 Foakes v Beer (1884) 9 App Cas 605 (HL)��������������������������������������������������� xiii, 36–7 Foley v Hill (1848) 2 HLC 28, 9 ER 1002 (HL)����������������������������������������������������209 Foskett v McKeown [2001] 1 AC 102 (HL)����������������������173, 175–6, 179, 197–8, 211 Four Seasons Holdings Inc v Brownlie [2017] UKSC 80, [2018] 1 WLR 192��������������������������������������������������ix–x, 347–57, 359–65, 367–8, 372–6, 378–9, 381, 384–5 Fraser v Whalley (1864) 2 HCM & M 10������������������������������������������������������������319 Frederick v Positive Solutions (Financial Services) Ltd [2018] EWCA Civ 431���������������������������������������������������������������������������������������������271 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964) 2 QB 480 (CA)������������������������������������������������������������������������������������322 Fulton Shipping Inc of Panama v Globalia Business Travel SAU (The New Flamenco) [2017] UKSC 43, [2017] 1 WLR 2581���������������������76–7, 80 Gabriel v Little [2012] EWHC 1193 (Ch), [2013] EWCA Civ 1513����������������� 116–17 Gaiman v National Association for Mental Health [1971] Ch 317 (Ch)���������������315 Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 1047, [2001] 2 All ER (Comm) 299������������������������������������������� 301–2 Gany Holdings (PTC) SA v Khan [2018] UKPC 21����������������������������������������������221 Gard Shipping AS v Clearlake Shipping Pte Ltd [2017] EWHC 1091 (Comm), [2017] 2 Lloyd’s Rep�������������������������������������������������������������������������24 Gator Shipping Corp v Trans-Asiatic Oil Ltd SA (The Odenfeld) [1978] 2 Lloyd’s Rep 357 (Com Ct)�����������������������������������������������������������������58, 61, 65 Gencor ACP Ltd v Dalby [2000] 2 BCLC 734 (Ch)����������������������������������������������338 Generali Italia S.p.A. v Pelagic Fisheries Corporation [2020] EWHC 1228 (Comm)�����������������������������������������������������������������������������������������������364 Geys v Société General, London Branch [2012] UKSC 63, [2013] AC 523����������������������������������������������� xiii, 49–54, 56–7, 59–60, 62–5, 67–8, 70–1 Giedo van de Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB)����������������������������������������������������������������������������������� 91, 177 Gilford Motor Co Ltd v Horne [1933] Ch 935 (Ch and CA)���������������������������� 330–3 Gillingham Borough Council v Medway (Chatham) Dock Co Ltd [1993] QB 343 (QB)��������������������������������������������������������������������������������������165 Glaxo Wellcome UK Ltd v Sandoz Group [2017] EWCA Civ 227, [2017] FSR 32����������������������������������������������������������������������������������������338, 345

Table of Cases  xxxi Gleeson v J Wippell & Co Ltd [1977] 1 WLR 510 (Ch)������������������������������������ 404–5 Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396, [2017] 1 All ER (Comm) 601��������������������������������������������������28 Goldcorp Exchange Ltd (in receivership), Re [1995] 1 AC 74 (PC)����������������206, 212 Golden Strait Corp v Nippon Yusen Kubishka Kaisha (The Golden Victory)�������������������������������������������������������������� 62, 77, 79–85, 103 Goldman Sachs International v Novo Banco SA [2018] UKSC 24, [2018] 1 WLR 3683�������������������������������������������������������������������������������������� 348, 354–5 Goodman v Pocock (1850) 15 QB 576 (QB)�����������������������������������������������������������50 Gorris v Scott (1874) LR 9 Ex 125�����������������������������������������������������������������������122 GPP Big Field LLP, GPP Langstone LLP v Solar EPC Solutions SL (formerly known as Prosolia Siglio XXI) [2018] EWHC 2866 (Comm)�������������27 Gray v Hurley [2019] EWHC 1636����������������������������������������������������������������������359 Gray v Lewis (1873) LR 8 Ch App 1035 (CA)������������������������������������������������������405 Gray v Thames Trains Ltd [2009] UKHL 33, [2009] AC 1339�������������������������������������������������������������������������� 239, 242, 246–7, 252–3 Great Dunmow Estates Limited v Crest Nicholson Operations Limited [2019] EWCA Civ 1683����������������������������������������������������47 Great Northern Railway Co v Swaffield (1874) LR 9 Ex 132��������������������������������������������������������������������������������������������������183 Greenhalgh v Mallard [1947] 2 All ER 255 (CA)�������������������������������������������������403 Greenough v Gaskell (1833) 39 ER 618���������������������������������������������������������������415 Griffin Underwriting v Varouxakis [2018] EWHC 3259 (Comm), [2019] 1 WLR 2529���������������������������������������������������������������������������������������363 Grimston v Cuningham [1894] 1 QB 125 (QB)������������������������������������������������������55 Group Seven Ltd v Nasir [2017] EWHC 2466 (Ch)����������������������������������������������233 Group Seven Ltd v Notable Services LLP [2019] EWCA Civ 614, [2019] 3 WLR 1011��������������������������������������������������������������������������229 Grupo Toras SA v Al-Sabah [1999] CLC 1469 (Com Ct)��������������������������������������397 Guinness Mahon & Co Ltd v Kensington and Chelsea Royal London Borough Council [1999] QB 215 (CA)�����������������������������������������������186 Gunton v Richmond-upon-Thames LBC [1981] Ch 448 (CA)�������������������������� 51, 64 Halsall v Champion Consulting Ltd [2017] EWHC 1079 (QB)����������������������������127 Hampshire Land Company, In re [1896] 2 Ch 743�����������������������������������������������285 Harlequin Property (SUG) Ltd v Wilkins Kennedy (a firm) [2016] EWHC 3188 (TCC)��������������������������������������������������������������������������������������185 Hartley v Hymans [1920] 3 KB 475 (KB)���������������������������������������������������������������37 Haugesund Kommune v Depfa ACS Bank [2011] EWCA Civ 33, [2011] EWCA Civ 33������������������������������������������������������������������������������122, 189 Hawksley v Outram [1892] 3 Ch 359 (Ch and CA)������������������������������������������������40 Hayes v Willoughby [2013] UKSC 17, [2013] 1 WLR 935�������������������������������������301 Hayward v Zurich Insurance Co plc [2016] UKSC 48, [2017] AC 142�������������������198 Haywood v Newcastle upon Tyne Hospitals NHS Foundation Trust [2018] UKSC 22, [2018] 1 WLR 2073������������������������������������������������������49 Hazell v Hammersmith and Fulham London Borough Council [1992] 1 AC 1 (HL)���������������������������������������������������������������������������������������207

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Table of Cases

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL)������������������������������������������������������������������ 116, 120, 129–37, 267–8 Henderson v Dorset Healthcare University NHS Foundation Trust [2016] EWHC 3275 (QB), [2017] 1 WLR 2673��������������������������������������254 Henderson v Henderson (1843) 3 Hare 100����������������������������������������������������� 402–4 Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (HL)������������������ 116, 121, 132 Hickman v Haynes (1874–75) LR 10 CP 598���������������������������������������������������������39 Hill v CA Parsons & Co Ltd [1972] Ch 305 (CA)���������������������������������������������� 67–8 Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862 (QB)������������������������������������������������������������������������������������� 305–6 Hindle v John Cotton Ltd (1919) 56 SLT 625 (HL)����������������������������������������������316 Hip Fong Hong v H Neotia & Co [1918] AC 888 (PC)����������������������������������������406 Hirsche v Sims [1894] AC 654 (PC)���������������������������������������������������������������������316 HMRC v Benchdollar Ltd [2009] EWHC 1310 (Ch)����������������������������������������������46 HMRC v Investment Trust Companies [2017] UKSC 29, [2018] AC 275�����������������������������������������������������������������������������������������������190 Hogg v Cramphorn Ltd [1967] Ch 254 (Ch)��������������������������������������������������������319 Hole v Garnsey [1930] AC 472 (HL)�������������������������������������������������������������������304 Holiday v Sigil (1826) 2 C&P 176 Assizes, 172 ER 81������������������������������������������196 Holliday v Lockwood [1917] 2 Ch 47 (Ch)������������������������������������������������������������66 Holman v Johnson (1775) 1 Cowp 341 (KB)�������������������������������������������������238, 246 Hopkinson v Towergate Financial (Group) Ltd [2018] EWCA Civ 2744���������������������������������������������������������������������������������������������24 Hoskin v Apax Partners LLP [2016] EWHC 558 (Ch)�����������������������������������������371 Hounga v Allen [2014] UKSC 47, [2014] 1 WLR 2889��������������������������� viii, 241, 288 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC)�������������������������������������������������������������������� 304–5, 311–13, 316–19 Howard v Pickford Tool Co Ltd [1951] 1 KB 417 (CA)������������������������������������������62 Hoystead v Commissioner of Taxation (1921) 29 CLR 537 (HCA), [1926] AC 155 (PC)���������������������������������������������������������������������������������������403 HP Bulmer Ltd v J Bollinger SA [1977] 2 CMLR 625 (CA)������������������������������������48 Hughes v Metropolitan Railway Co (1877) 2 App Cas 429 (HL)���������������������������������������������������������������������������������������������� 44–5 Hughes-Holland v BPE Solicitors [2017] UKSC 21, [2018] AC 599�������������������������������������������������������������� xi, 73, 75, 116–19, 121–2, 124–8, 132, 134, 139 Hunter v Chief Constable of the West Midlands Police [1982] AC 529 (HL)�������������������������������������������������������������������������������������������������401 Hunter v Senate Support Services Ltd [2004] EWHC 1085 (Ch)���������������������������306 Hurlingham Estates Ltd v Wilde & Partners [1997] 1 Lloyd’s Rep 525 (Ch)������������������������������������������������������������������������������������������������124 ICICI Bank UK plc v Assam Oil Co Ltd [2019] EWHC 750 (Comm)�������������������182 Idemia France v Decatur Europe [2019] EWHC 946, [2019] 2 All ER (Comm) 1020�����������������������������������������������������������������������������������������������359 Imam-Sadeque v Bluebay Asset Management Ltd [2012] EWHC 3511 (QB), [2013] IRLR 344���������������������������������������������������������������������������� 54, 107

Table of Cases  xxxiii Imperial Gas Light and Coke Co v Broadbent (1859) 7 HLC 600, 11 ER 239 (HL)���������������������������������������������������������������������������������������������157 Independent Trustee Services Ltd v GP Noble Trustees Ltd [2012] EWCA Civ 195, [2013] Ch 91������������������������������������������������������������������������223 Indian Airlines Limited v GIA International Limited [2002] EWHC 2361 (Comm)�������������������������������������������������������������������������������������61 International Energy Group Ltd v Zurich Insurance plc UK Branch [2015] UKSC 33, [2016] AC 509���������������������������������������������������������182 Internet Trading Club Ltd v Freeserve Investments Ltd [2001] EBLR 142 (QB)�����������������������������������������������������������������������������������������������67 Investment Trust Companies (in liquidation) v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275���������������������������� 173–4, 177–8, 212, 220 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL)���������������������������������������������������3, 10–12, 14, 19 Irani v Southampton and South West Hampshire Health Authority [1980] ICR 590 (Ch)����������������������������������������������������������������������������������������56 Iraqi Civilians v Ministry of Defence [2016] UKSC 25, [2016] 1 WLR 2001����������������������������������������������������������������������������xv, 387–92, 394–8 Irwin v Wilson [2011] EWHC 326 (Ch)�����������������������������������������������������������������40 Isabella Shipowners SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] EWHC 1077 (Comm), [2012] 1 CLC 899������������������������������������58, 61, 99 Ivey v Genting Casinos (UK) Ltd (t/a Crockfords Club) [2017] UKSC 67, [2018] AC 391�������������������������������������������������������������������������������137 Jackson v Dear [2012] EWHC 2060 (Ch)������������������������������������������������������������302 Jaffray v Marshall [1993] 1 WLR 1285 (Ch)��������������������������������������������������������223 Jaggard v Sawyer [1995] 1 WLR 269 (CA)����������������������������������������������������161, 172 Japan Leasing (Europe) plc, Re [1999] BPIR 911 (Ch)����������������������������� 202, 213–14 JC Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 (HCA)�����������������������������������������������������������������������������������������66 JKX Oil & Gas Plc v Eclairs Group Ltd [2014] EWCA Civ 640��������������������299, 311 JM Finn & Co Ltd v Holliday [2013] EWHC 3450 (QB)���������������������������������������54 Johnson v Gore-Wood & Co [2002] 2 AC 1 (HL)�������������������������������������������� 405–7 Jones v Lee [1980] ICR 310 (CA)��������������������������������������������������������������������������56 Jones v Lipman [1962] 1 WLR 832 (Ch)���������������������������������������������������������� 330–1 Jonesco v Beard [1930] AC 298 (HL)�������������������������������������������������������������������406 JSC BTA Bank v Ablyazov and another (No 14) [2018] UKSC 19, [2018] 2 WLR 1125��������������������������������������������������������������������������������� 115–16 Julien v Evolving Tecknologies and Enterprise Development Co Ltd [2018] UKPC 2, [2018] BCC 376������������������������������ 273, 275, 277, 279–83, 290–2 Kabab-JL SAL (Lebanon) and Kout Food Group (Kuwait) [2020] EWCA Civ 6����������������������������������������������������������������������������������������47 Kaefer Aislamientos SA v AMS Drilling SA [2019] EWCA Civ 10, [2019] 1 WLR 3514���������������������������������������������������354–7, 359, 362–3, 365, 378 Kaupthing Singer & Friedlander Ltd (in administration) v UBS AG [2014] EWHC 2450 (Comm)�������������������������������������������������������������������������263

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Kelly v Fraser [2012] UKPC 25 [15], [2013] 1 AC 450������������������ xvi, 257, 260, 262–4 Kennaway v Thompson [1981] QB 88 (CA)���������������������������������������������� 161–2, 170 Kine v Jolly [1905] 1 Ch 480 (CA)�����������������������������������������������������������������������160 King v Brandywine Reinsurance Co UK Ltd [2005] EWCA Civ 235, [2005] 1 Lloyd’s Rep 655��������������������������������������������������������������������������������391 King’s Norton Metal Co Ltd v Edridge, Merrett & Co Ltd (1897) 14 TLR 98����������������������������������������������������������������������������������������������������138 Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (HL)����������������������������������������������������������������������������������������������178 Koch Marine Inc v d’Amica Societa di Navigasione arl (The Elena d’Amico) [1980] 1 Lloyd’s Rep 75 (Com Ct)�����������������������������������80 Konkola Copper Mines plc v Coromin [2006] EWCA Civ 5, [2006] 1 Lloyd’s Rep 410������������������������������������������������������������������������������������������365 Krys v KBC Partners LP [2015] UKPC 46����������������������������������������������� 4–10, 17, 21 Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187 (PC)����������������������������������������������������������������������������������������307, 315 Lakatamia Shipping v Morimoto [2019] EWCA Civ 2203������������������������������� 355–6 Lansat Shipping Co Ltd v Glencore Grain BV (The Paragon) [2009] EWHC 551 (Comm), [2009] 1 Lloyd’s Rep 658, [2009] EWCA Civ 555, [2009] 2 Lloyd’s Rep 688������������������������������������������������������������������104 Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 (CA)���������������������������������260 Lazard Bros & Co Ltd v Fairfield Properties Co (Mayfair) Ltd (1977) 121 SJ 793�������������������������������������������������������������������������������������������������������48 Lee Panavision Ltd v Lee Lighting Ltd [1992] BCLC 22 (CA)�������������������������������313 Lee v Lee’s Air Farming Ltd [1961] AC 12 (PC)���������������������������������������������������336 Lehman Brothers International (Europe) (in administration) v ExxonMobil Financial Services BV [2016] EWHC 2699 (Comm)�����������������301 Lehman Brothers Special Financing Inc v Carlton Communications Ltd [2011] EWHC 718 (Ch)���������������������������������������������������������������������������107 Les Laboratoires Servier v Apotex Inc [2014] UKSC 55, [2015] AC 430������������������������������������������������������������������������������������������� viii, 241, 275 Levey & Co v Goldberg [1922] 1 KB 688 (KB)�������������������������������������������������������39 Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728 (Com Ct)������������������������������������������������������������������������������������������209 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL)�������������������������� 173, 220, 255 Lissack v Manhattan Loft Corporation [2013] EWHC 128 (Ch)��������������������������177 Littler v Holland (1790) 3 TR 590, 100 ER 749������������������������������������������������������38 Littlewoods Mail Order Stores Ltd v IRC [1969] 1 WLR 1241 (CA)���������������������331 Lloyd v Google LLC [2018] EWHC 2599 (QB), [2019] 1 WLR 1265���������������������361 Lomas v JFB Firth Rixson Inc [2010] EWHC 3372 (Ch)����������������������������������������26 Lonrho plc v Al-Fayed (No 2) [1992] 1 WLR 1 (Ch)��������������������������������������������199 Lordsvale Finance v Bank of Zambia [1996] QB 752 (QB)�����������������������������������107 Lowry v Bourdieu (1780) 2 Doug KB 468 �����������������������������������������������������������187 LSREF III Wight Ltd v Millvalley Ltd [2016] EWHC 466 (Comm), 165 Con LR 58������������������������������������������������������������������������������������������������21 Lubbe v Cape [2000] 1 WLR 1545 (HL)��������������������������������������������������������������381

Table of Cases  xxxv Lukoil Asia Pacific Pte Ltd v Ocean Tankers (Pte) Ltd (The Ocean Neptune) [2018] EWHC 163 (Comm), [2018] 1 Lloyd’s Rep 654����������������������������������������������������������������������������������24 Lumley v Wagner (1852) 1 De G M & G 604, 607; 42 ER 687, 689 ����������������������������������������������������������������������������������������� 53, 55 Lungowe v Vedanta Resources plc [2019] UKSC 20, [2019] 2 WLR 1051������������������������������������������������������������������������335, 338, 344–5, 348 Lymington Marina Ltd v MacNamara [2007] EWCA Civ 151, [2007] 1 All ER (Comm) 825������������������������������������������������������������������������������������302 Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978 (Ch) 1000�����������������������������������������������������������������������������������234 McNicholas Construction Co Ltd v Customs and Excise Commissioners [2000] EWHC Admin 357, [2000] STC 553����������������������������������������������������293 Maharanee of Baroda v Wildenstein [1972] 2 QB 283 (CA)���������������������������������382 Mahony v East Holyford Mining Co (1875) LR 7 HL 869 (HL)���������������������������259 Makdessi v Cavendish Square Holdings BV [2015] UKSC 67, [2016] AC 1172���������������������������������������������xiii, 92, 95–6, 100, 102, 104–14, 199 Manchester Building Society v Grant Thornton UK LLP [2019] EWCA Civ 40, [2019] 1 WLR 4610��������������������������������������������������������������������123, 127 Manchester Diocesan Council for Education v Commercial and General Investments Ltd [1970] 1 WLR 241 (Ch) 246����������������������������������������������������30 Marathon Asset Management LLP v Seddon [2017] EWHC 300 (Comm)���������������������������������������������������������������������������������������������������87 Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia [1977] AC 850 (HL)���������������������������������������������������������������������������������������������������39 Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742��������������������������������������������������������3, 12, 22 Marquess of Salisbury v Gilmore [1942] 2 KB 38 (CA)������������������������������������������45 Marriott v East Grinstead Gas and Water Co [1909] 1 Ch 70 (Ch)�����������������������171 May and Butcher v The King [1934] 2 KB 17 (HL)������������������������������������������������34 Medforth v Blake [2000] Ch 86 (CA)������������������������������������������������������������������306 Menelaou v Bank of Cyprus plc [2015] UKSC 66, [2016] AC 176������������������178, 200 Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 (PC)�������������������274–6, 278–81, 283–4, 286, 294–5 Meyer v Scottish Cooperative Wholesale Society Ltd [1959] AC 324 (HL)������������307 Midland Bank Trust Co Ltd v Hett Stubbs & Kemp [1979] Ch 384 (Ch)��������������121 Miller v Jackson [1977] QB 966 (CA)�������������������������������������������������161–2, 169–70 Milward v Earl Thanet (1801) 5 Ves 720n��������������������������������������������������������������48 Ministry of Sound (Ireland) Ltd v World Online Ltd [2003] EWHC 2178 (Ch), [2003] 2 All ER (Comm) 823�������������������������������������65–7, 69 Minkin v Landsberg [2015] EWCA Civ 1152, [2016] 1 WLR 1489������������������������125 Mohamud v Wm Morrison Supermarkets plc [2016] UKSC 11, [2016] AC 677����338 Montagu’s Settlement Trusts, Re [1987] Ch 264 (Ch)��������������������������������������� 231–4 Morris v Baron & Co [1918] AC 1 (HL) �������������������������������������������������������� 31, 38 Morris-Garner v One Step (Support Ltd) [2018] UKSC 20, [2019] AC 649��������������������������������73, 80, 85–91, 93, 100–101, 109, 171, 173, 191

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Table of Cases

Mortimer v Beckett [1920] 1 Ch 571 (Ch)�������������������������������������������������������������55 Moschi v LEP Air Services Ltd [1973] AC 331 (HL)�����������������������������������������������57 Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep 391 (HL)��������������������������������37, 41–2 Motortrak Ltd v FCA Australia Pty Ltd [2018] EWHC 990 (Comm)���������������������65 MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789, [2017] 1 All ER (Comm)��������������������������������������������������� 58–61, 63, 70 Multi-Link Leisure Developments v North Lanarkshire Council [2010] UKSC 47, [2011] 1 All ER 175�������������������������������������������������������������������������24 Multinational Gas & Petrochemical Co v Multinational Gas & Petrochemical Services Ltd [1983] Ch 258 (CA)����������������������������������������������281 Murray v Leisureplay plc [2005] EWCA Civ 963, [2005] IRLR 946����������������103, 106 Mutual Life and Citizens Assurance Co Ltd v Evatt [1971] 2 WLR 23 (HL)���������������������������������������������������������������������������������������������133 MWB Business Exchange Ltd v Rock Advertising Ltd [2018] UKSC 24, [2019] AC 119������������������������������������������������������������������������������������ xiii, 25–48 Neate v Harding (1851) 6 Ex 349, 155 ER 577�����������������������������������������������������196 Neste Oy v Lloyd’s Bank plc [1983] 2 Lloyd’s Rep 658 (Com Ct)����������������������������������������������������������������������� 180, 202, 205–7, 213–15 Neushul v Mellish Harkavy (1967) 2013 EG 67 (CA)�������������������������������������������125 New Brunswick Railway Co v British and French Trust Corp Ltd [1939] AC 1 (HL)������������������������������������������������������������������������������������������405 North v Loomes [1918] 1 Ch 378 (Ch)������������������������������������������������������������������40 North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 (HL)�����������329 Norwegian American Cruises AS v Paul Mundy Ltd (The Vistafjord) [1988] 2 Lloyd’s Rep 343 (CA)�����������������������������������������������������������������������������������46 Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, [2015] QB 499������������������������������������������������������������������������������������������ 224, 228, 235 NYK Logistics (UK) Ltd v Ibrend Estates BV [2011] EWCA Civ 683�����������������������������������������������������������������������������������������������39 Nykredit Mortgage plc v Edward Erdman Group Ltd [1997] 1 WLR 1627 (HL)�������������������������������������������������������������������������������������������74 Ocean Marine Navigation Ltd v Koch Carbon Inc (The Dynamic) [2003] EWHC 1936 (Comm)��������������������������������������������������������������������� 58, 61 Oceanbulk Shipping and Trading SA v TMT Asia Ltd [2010] UKSC 44, [2011] 1 AC 662����������������������������������������������������������������������������������������������20 Ogle v Earl Vane (1867–68) LR 3 QB 272���������������������������������������������������������� 38–9 OJSC Oil Company Yugraneft v Abramovich [2008] EWHC 2613 (Comm)�����������������������������������������������������������������������������������220 Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm)�������������������������������������������������������������������������������������86 Orexim Trading Ltd v Mahavir Port and Terminal Private Ltd [2018] EWCA Civ 1660, [2018] 1 WLR 4847�����������������������������������������������������378, 383 Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm)�������������������������������������������������������������������������������������230 Owens Bank Ltd v Bracco [1992] 2 AC 443 (CA and HL)������������������������������������406

Table of Cases  xxxvii Owens Bank Ltd v Etoile Commerciale SA [1995] 1 WLR 44 (PC)�����������������������406 P v Q [2017] EWHC 148 (Comm), [2017] 1 WLR 3800����������������������������������������360 Padfield v Minister of Agriculture, Fisheries and Food [1968] AC 997 (HL)�������������������������������������������������������������������������������������������������300 Page One Records Ltd v Britton [1968] 1 WLR 157 (Ch)���������������������������������������55 Panchaud Freres SA v Etablissements General Grain Co [1970] 1 Lloyd’s Rep 53 (CA)������������������������������������������������������������������������������� 41, 44 Panoutsos v Raymond Hadley Corp of New York [1917] 2 KB 473 (CA)���������������40 Papadimitriou v Crédit Agricole Corpn and Investment Bank [2015] UKPC 13, [2015] 1 WLR 4265����������������������������������������������� 217, 229–31, 233–4 Paragon Finance plc v Nash [2001] EWCA Civ 1466, [2002] 1 WLR 685�������������������������������������������������������������������������������������� 29, 302, 307 ParkingEye Ltd v Beavis see Makdessi v Cavendish Square Holdings BV [2015] UKSC 67, [2016] AC 1172 Parkinson v College of Ambulance [1925] 2 KB 1 (KDB)�������������������������������������186 Patchett v Swimming Pool and Allied Trades Association Ltd [2009] EWCA Civ 717, [2010] 2 All ER (Comm) 138������������������������������������������������132 Patel v Mirza [2016] UKSC 42, [2017] AC 467�������������������������������������������������������� viii–ix, xii, 2, 168, 175, 182, 184–91, 241–2, 244,248–9, 251, 253–6, 288, 405, 407 Paycheck Services 3 Ltd, Re; Revenue and Customs Commissioners v Holland [2010] UKSC 51, [2010] 1 WLR 2793�����������������������������������������������337 Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ 386, [2006] 2 Lloyd’s Rep 511���������������������������������������������������������42 Pennington v Brinsop Hall Coal Co (1877) 5 Ch D 769 (Ch)�������������������������159, 171 Persad v Singh [2017] UKPC 32, [2017] BCC 779�������������������������������������������������336 Peskin v Anderson [2000] 1 BCLC 372 (CA)��������������������������������������������������������282 Petroleum Investment Co Ltd v Kantupan Holdings Co Ltd [2002] 1 All ER (Comm) 124 (Com Ct)���������������������������������������������������������������������������359, 361 Piercy v S Mills & Co Ltd [1920] 1 Ch 77 (Ch)����������������������������������������������������319 Pike v Indian Hotels Co Ltd [2013] EWHC 4096 (QB)����������������������������������������375 Pillans v van Mierop (1765) 3 Burr 1663 (KB)��������������������������������������������������������33 Pinnel’s Case (1602) 5 Co Rep 117a�����������������������������������������������������������������������36 Pitt v Asset Management Ltd [1994] 1 WLR 327 (CA)�������������������������������������������30 Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108����������������������������178, 190, 298, 305–6, 310, 318–20 Platform Homes Loan Ltd v Oyston Shipways Ltd [2000] 2 AC 190 (HL)����������������������������������������������������������������������������������������������122 Playboy Club London Ltd v Banca Nazionale del Lavoro SpA [2018] UKSC 43, [2018] 1 WLR 4041����������������������������������������������� 116, 130–9, 265–71 Plevin v Paragon Personal Finance Ltd [2014] UKSC 61, [2014] 1 WLR 4222�������������������������������������������������������������������������������������������������257 Plevins v Downing (1876) 1 CPD 220��������������������������������������������������������������������38 Portman Building Society v Bevan Ashford (a firm) [2000] PNLR 344 (CA)����������119 Poulton v Adjustable Cover & Boiler Plate Co [1908] 2 Ch 430 (CA)����������������������������������������������������������������������������������������������399

xxxviii Table of Cases Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415���������������������������������������������������xiv–xv, 217, 281, 289, 294, 325–7, 330, 332–8, 340, 343–4, 406–7 Pride of Derby and Derbyshire Angling Associations Ltd v British Celanese Ltd [1953] 1 Ch 149 (CA)����������������������������������������������������� 160–1, 168 Prime Sight Ltd v Lavarello [2013] UKPC 22, [2014] AC 426����������������������������������45 Print Factory (London) 1991 Ltd v Millam [2007] EWCA Civ 322, [2007] ICR 1331������������������������������������������������������������������������������������������������������340 Priyanka Shipping Ltd v Glory Bulk Carriers Pte Ltd [2019] EWHC 2804 (Comm), [2019] 1 WLR 6677�������������������������������������������������������91–2, 101 Prudential Assurance Co Ltd v Revenue and Customs Commissioners [2018] UKSC 39, [2018] AC 929�������������������������������������������������������������������������������190 Punt v Symons & Co Ltd [1903] 2 Ch 506 (Ch)���������������������������������������������������319 Quadrant Visual Communications Limited v Hutchinson Telephone (UK) Limited (Court of Appeal, unreported, 28 November 1991)�����������������������������������������������������������������������������������������48 R (FDA) v Secretary of State for Work and Pensions [2012] EWCA Civ 332, [2013] 1 WLR 444����������������������������������������������������������������316 R (on the application of Bancoult) v Secretary of State for Foreign and Commonwealth Affairs [2008] UKHL 61, [2009] 1 AC 453�����������������������������408 R (on the application of Bancoult) v Secretary of State for Foreign and Commonwealth Affairs [2016] UKSC 35, [2017] AC 300���������������������������� 408–9 R (on the application of Miller) v Prime Minister; Cherry v Advocate General for Scotland (2019) [2019] UKSC 41, [2019] 3 WLR 589�������������300, 304 R (on the application of Morgan Grenfell Co Ltd) v Special Commissioner of Income Tax [2002] UKHL 21, [2003] 1 AC 563�������������������415 R (on the application of Prudential plc) v Special Commissioner of Income Tax [2013] UKSC 1, [2013] 2 AC 185��������������������������� xvi, 411, 421–5 R v Bow Street Metropolitan Stipendiary Magistrate Ex p Pinochet Ugarte (No 2) [2000] 1 AC 119 (HL)���������������������������������������������������������� 408–9 R v Derby Magistrates’ Court ex parte B [1996] 1 AC 487 (HL)���������������������������424 R v Manchester Crown Court, ex p Rogers [1999] 1 WLR 832 (QB)��������������������423 R v Paulson [1921] 1 AC 271 (PC)��������������������������������������������������������������������� 43–4 R v Preddy [1996] AC 815 (HL)��������������������������������������������������������������������������209 Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900����������������������������������������������������������������������������������������10, 14–19 Ram Kirpal Shukul v Mussumat Rup Kuari (1883) LR 11 Ind App 37 (PC)��������������������������������������������������������������������������������������������������405 Rann v Hughes (1778) 4 Bro Parl Cas 27, 2 ER 18 (HL)�����������������������������������������33 Redland Bricks v Morris [1970] AC 652 (HL)������������������������������������������������������160 Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703 (Ch), [2006] 1 BCLC 149�������������������������������������������������������������������������������307 Reeves v Commissioner of Police of the Metropolis [2000] 1 AC 360 (HL)����������������������������������������������������������������������������������� 287–8, 292 Reeves v Thrings & Long [1996] PNLR 265 (CA)������������������������������������������������125

Table of Cases  xxxix Regan v Paul Properties Ltd [2006] EWCA Civ 1391, [2007] Ch 135�������������������������������������������������������������������������������� 162, 165, 171 Reichman v Beveridge [2006] EWCA Civ 1659, [2007] Bus LR 412��������������58, 61, 70 Rel-a-Bell Burglar & Fire Alarm Co Ltd v Eisler [1926] Ch 609 (Ch)����������������������������������������������������������������������������������������������������55 Rendall v Combined Insurance Company of America [2005] EWHC 678 (Comm), [2006] Lloyd’s Rep IR 732���������������������������������������������391 Reveille Independent LLC v Anotech International (UK) Ltd [2016] EWCA Civ 443�����������������������������������������������������������������������������������������������30 Richardson v Smith (1870) LR 5 Ch 648����������������������������������������������������������������67 Rigby v Connol (1880) 14 Ch 482 (CA) 487�����������������������������������������������������������50 Rigby v Ferodo Ltd [1988] ICR 29 (HL)����������������������������������������������������������������64 Robb v Hammersmith and Fulham LBC [1991] ICR 514 (QB)�������������������������������56 Robinson v Briggs (1853) 1 Sm & G 188, 65 ER 81����������������������������������������������305 Robinson v Chief Constable of West Yorkshire [2018] UKSC 4, [2018] AC 736��������������������������������������������������������������������������255, 344 Robophone Facilities Ltd v Blank [1966] 1 WLR 1428�����������������������������������������104 Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246 (CA)�������������������������������������������������������������������307 Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60 (HL)�������� 27, 37 Rossendale BC v Hurstwood Properties Ltd [2019] EWCA Civ 364, [2019] 1 WLR 4567��������������������������������������������������������������������������339 Rotam Agrochemical Company Limited, Rotam Agrochem International Company Limited v Gat Microencapsulation GMBH [2018] EWHC 2765 (Comm)�������������������������������������������������������������������������������������30 Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44, [2002] 2 AC 773�������������������������������������������������������������������������������������������������������199 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC)���������������������������284, 294 Royscot Trust Ltd v Rogerson [1991] 2 QB 297 (CA)�������������������������������������������120 RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14, [2010] 1 WLR 753�����������������������������������������������������������������29 Rubin v Eurofinance SA [2012] UKSC 46, [2013] 1 AC 236����������������������������������401 Ryan v Mutual Tontine Westminster Chambers Association [1893] 1 Ch 116 (CA)������������������������������������������������������������������������������������������������66 Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472, [2011] 2 All ER 841�������������������������������������������������������������������� 275, 277–9, 283, 290–1 Salomon v A Salomon & Co Ltd [1897] AC 22 (HL)�������������������������������������������������xv, 325–30, 332–4, 336–7, 339, 341–2 Samuel Tak Lee v Chou Wen Hsien [1984] 1 WLR 1202 (PC)������������������������������314 Sanders v Ernest A Neale Ltd [1974] ICR 565 (NIRC)�������������������������������������������51 Scott v Seymour (1862) 1 H & C 219������������������������������������������������������������������397 Scullion v Bank of Scotland plc (t/a Colleys) [2011] EWCA Civ 693, [2011] 1 WLR 3212�������������������������������������������������������������������� 129–30 Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438 (HL)���������������������������������������������������������������������������������������350, 365

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Table of Cases

Selangor United Rubber Estates Ltd v Cradock (No 4) [1969] 1 WLR 1773 (Ch)������������������������������������������������������������������������������������������289 Selectmove Ltd, Re [1995] 1 WLR 474 (CA)����������������������������������������������������������36 Sharab v Prince Al-Waleed Bin Tala Bin Abdal-Aziz-Al-Saud [2009] EWCA Civ 353, [2009] 2 Lloyd’s Rep 160��������������������������������������������������� 382–3 Shelfer v City of London Electric Lighting Co [1895] 1 Ch 287 (CA)�������������������������������������������������������������������155–6, 158–68, 171–2 Shindler v Northern Raincoat Co Ltd [1960] 1 WLR 1038 (Manchester Assizes)������������������������������������������������������������������������������64 Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] UKHL 1 AC 919������������������������������������������������������������������������������������138, 199 Showlag v Mansour [1995] 1 AC 431 (PC)����������������������������������������������������������399 Siemens Building Technologies FE Ltd v Supershield Ltd [2010] EWCA Civ 7, [2010] 2 All ER (Comm) 1185��������������������������������������������������127 Sigma Finance Corp (in administration), Re [2009] UKSC 2, [2010] 1 All ER 571���������������������������������������������������������������������������������������������������� 7 Silverburn Shipping (IoM) Ltd v Ark Shipping Company LLC [2019] EWHC 376 (Comm)���������������������������������������������������������������������������������������24 Simpson v The London and North Western Railway Co (1876) 1 QBD 274 (QB)�������������������������������������������������������������������������������������������102 Sinclair v Brougham [1915] AC 398 (HL)��������������������������������������������� 202, 207, 209 Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, [2019] 3 WLR 997���������������������������273–5, 277, 285–8, 292, 295 Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 (PC)����������������������������������������������������������������������������������������132, 269 Smeaton v Equifax plc [2013] EWCA Civ 108, [2013] 2 All ER 959�������������������������������������������������������������������������������������������������132 Smith & Fawcett, Re [1942] Ch 304 (CA)��������������������������������������������� 306, 312, 315 Smith New Court Securities Ltd v Citibank NA [1997] AC 254 (HL)�������������������������������������������������������������������������������������������������120 Smith v Eric S Bush (a firm) [1990] 1 AC 831 (HL)���������������������������������������129, 132 So v HSBC Bank plc [2009] EWCA Civ 296, [2009] 1 CLC 503����������������������������271 Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, [2008] 1 Lloyd’s Rep 558��������������������������������������������������� 301–2 Sorrell v Finch [1977] AC 728 (HL)���������������������������������������������������������������������272 South Australia Asset Management Corp v York Montague Ltd (SAAMCO) [1997] AC 191 (HL)������������������������������� xi, 117, 119–30, 134, 137–8 Southwark and Vauxhall Water Co v Quick (1878) 3 QBD 315 (CA)�������������������������������������������������������������������������������������������416 Spackman v Evans (1868) LR 3 HL 171 (HL)������������������������������������������������������305 Spiliada Maritime Corpn v Cansulex Ltd [1987] AC 460 (HL)�������������������������������������������������������������������� 348, 370, 374, 378, 380 Spooner v Browning [1898] 1 QB 528 (CA)���������������������������������������������������������264 Springwell Navigation Corp v JP Morgan Chase Bank [2010] EWCA Civ 1221, [2010] 2 CLC 705�����������������������������������������������������������������42 Standard Chartered Bank (Hong Kong) Ltd v Independent Power Tanzania Ltd [2015] EWHC 1640 (Comm), [2015] 2 Lloyd’s Rep 183�������������406

Table of Cases  xli Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2002] UKHL 43, [2003] 1 AC 959�����������������������������������������������������������������338 Stavrinides v Bank of Cyprus Public Co Ltd [2019] EWHC 1328 (Ch)�����������������262 Stead v Dawber (1839) 10 Ad & El 57, 113 ER 22 (QB)�����������������������������������������39 Stilk v Myrick (1809) 6 Espinasse 129 (Assizes)�����������������������������������������������������36 Stobart Group Ltd v Tinkler [2019] EWHC 258 (QB)����������������������������������309, 320 Stocznia Gdanska SA v Latvian Shipping Co [1995] 2 Lloyd’s Rep 592 (Com Ct), [1996] 2 Lloyd’s Rep 132 (CA)����������������������������������������������58, 61, 64 Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, [2010] QB 27��������������������������������������������������������������������������������������������������43 Stoffel & Co v Grondona [2018] EWCA Civ 2031�����������������������������������������������139 Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39, [2009] 1 AC 1391�������������������������������265, 275, 277, 281, 284–9, 292–5 Stylianou v Toyoshima [2013] EWHC 2188 (QB)������������������������������������������������375 Sumitomo Mitsui Banking Corporation Europe Ltd v Euler Hermes Europe SA [2019] EWHC 2250 (Comm)����������������������������������������������������������27 Sunrise Brokers LLP v Rogers [2014] EWHC 2633 (QB), [2014] IRLR 780��������������������������������������������������������������������������������������������������������55 Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7, [2010] 1 Lloyd’s Rep 349���������������������������������������������������104, 128 Surrey Health BC v Lovell Construction Ltd (1990) 48 Build LR 113 (CA)�������������� 8 Swynson Ltd v Lowick Rose LLP (in liquidation) [2017] UKSC 32, [2018] AC 313�����������������������������������������������������������������������75–6, 173–8, 180, 182, 191 Takhar v Gracefield Developments Ltd [2019] UKSC 13, [2019] 2 WLR 984�����������������������������������������������������������������������231, 403, 406–7 Tang Man Sit v Capacious Investments [1996] 2 WLR 192 (PC)����������������������������41 Target Holdings Ltd v Redferns [1996] 1 AC 421 (HL)������������������ 137, 223, 225, 229 Tartsinis v Navona Management Co [2015] EWHC 57 (Comm)����������������������������21 Taylor v Lawrence [2003] QB 528 (CA)����������������������������������������������������������� 408–9 Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545 (CA)�����������269 Tele2 International Card Co SA v Post Office Ltd [2009] EWCA Civ 9��������������� 42–4 Telephone Rentals Plc v Burgess Salmon (Court of Appeal, unreported, 9 April 1987)���������������������������������������������������������������������������������������������������61 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 (HL)��������������������������������������276 Thomas Marshall (Exports) Ltd v Guinle [1979] Ch 227 (Ch)��������������������������� 53–4 Three Rivers District Council v Governor and Company of the Bank of England (No 5) [2003] EWCA Civ 474, [2003] QB 1556��������������������������������������������������������������������412–15, 417–21, 425 Three Rivers District Council v Governor and Company of the Bank of England (No 6) [2004] UKHL 48, [2005] 1 AC 610, [2004] EWCA Civ 218, [2004] QB 916�����������������������������������������������������������������411–18, 421–4 Times Travel (UK) Ltd v Pakistan International Airlines Corp [2019] EWCA Civ 828, [2019] 3 WLR 445����������������������������������������������������������������198 Tinsley v Milligan [1994] 1 AC 340 (HL)����������������������������������������������� 239, 249–53 Tiuta International Ltd v De Villiers Surveyors Ltd [2016] EWCA Civ 661, [2016] PNLR 34����������������������������������������������������������������������������������������������74 Tomlinson v Congleton BC [2003] UKHL 47, [2004] 1 AC 46������������������������������146

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Table of Cases

Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48, [2009] 1 AC 61 [36]�����������������������������������104, 121, 125–7, 258 Tribe v Tribe [1996] Ch 107 (CA)�����������������������������������������������������������������186, 250 Trump International Golf Club Scotland Ltd v Scottish Ministers [2015] UKSC 74, [2016] 1 WLR 85�����������������������������������������������������������������������������22 Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177 (Ch)������������������������������������338 Tugushev v Orlov [2019] EWHC 645 (Comm)������������������������������������� 348, 359, 362 Turner’s Settled Estates, Re (1884) 28 Ch D 205, 52 LT 70 (CA)���������������������������317 Twinsectra Ltd v Lloyds Bank plc [2018] EWHC 672 (Ch)�������������������������������������41 Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164��������������������������������220 Twycross v Grant (1877) 2 CPD 469 (CA)�����������������������������������������������������������120 Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch)�����������������������������220, 224 Unilever plc v Gillette (UK) Ltd [1989] RPC 583 (CA)�����������������������������������������345 Unilin Beheer BV v Berry Floor NV [2007] EWCA Civ 364, [2008] 1 All ER 156���������������������������������������������������������������������������������������399 United Dominion Trust (Commercial) Ltd v Ennis [1968] QB 54 (CA)�������������������42 Vandervell’s Trusts, Re [1974] 1 All ER 47 (Ch)���������������������������������������������������199 Vantage Navigation Corp v Suhail & Saud Bahwan Building Materials LLC [1989] 1 Lloyd’s Rep 138 (Com Ct)����������������������������������������������������������34 Various Claimants v Catholic Child Welfare Society [2012] UKSC 56, [2013] 2 AC 1������������������������������������������������������������������������������������������������338 Various Claimants v Giambrone & Law [2017] EWCA Civ 1193, [2018] PNLR 2��������������������������������������������������������������������������������������������������������123 Vatcher v Paul [1915] AC 372 (PC)����������������������������������������������������������������������305 Vedanta Resources plc v Lungowe [2019] UKSC 20, [2019] 2 WLR 1051�������������������������������������������������������������������������������335, 338, 344–5 VGM Holdings Ltd, In re [1942] Ch 235 (CA)�����������������������������������������������������289 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 (CA)����������������������������������������������������������������������������������������������136 Virgin Atlantic Airways Ltd v Premium Aircraft Interiors UK Ltd [2013] UKSC 46, [2014] AC 160������������������������������������������������������������ xiv–xv, 399–409 Vitkovice Horni a Hutni Tezirstvo v Korner [1951] AC 869 (HL)������������������������������������������������������������������������������������ 347, 349–51 Vitol E&P Ltd v New Age (African Global Energy) Ltd [2018] EWHC 1580 (Comm)�������������������������������������������������������������������������������������24 Vivienne Westwood Ltd v Conduit Street Development Ltd [2017] EWHC 350 (Ch)������������������������������������������������������������������������������������104, 106 VTB Capital plc v Nutritek International Corp [2013] UKSC 5, [2013] 2 AC 337���������������������������������������������������� 333–4, 339, 348, 361, 370, 380 Wagon Mound (No 1), The [1961] AC 388 (PC)��������������������������������������������������122 Walford v Miles [1992] 2 AC 128 (HL)������������������������������������������������������������������30 Walker v Stones [2001] QB 902 (CA)�������������������������������������������������������������� 305–6 Warner Bros Pictures Inc v Nelson [1936] 1 KB 209 (KB)��������������������������������� 48, 53 Warren v Mendy [1989] ICR 525 (CA)������������������������������������������������������������������55

Table of Cases  xliii Warren v Stagg (Assizes, unreported, 1709)������������������������������������������������������� 38–9 Watson, Laidlaw & Co Ltd v Pott, Cassels & Williamson 1914 SC (HL) 18�������������������������������������������������������������������������������������������102 Watson v Croft Promosport Ltd [2009] EWCA Civ 15, [2009] 3 All ER 249���������������������������������������������������������������������������������� 162, 165, 170 Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146, [2016] Ch 529�������������������������������������������������������������������������������� 121, 126, 136 Wessex Dairies Ltd v Smith [1935] 2 KB 80 (CA)���������������������������������������������������54 West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 (CA)��������������������������������295 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (HL)��������������������������xvi, 179, 193–5, 205–7, 209–16, 321 WestLB AG v Nomura Bank International Plc [2012] EWCA Civ 495������������������303 Wheeler v JJ Saunders Ltd [1996] Ch 19 (CA)�����������������������������������������������������163 Wheeler v Le Marchant (1881) 17 Ch D 675 (CA)�����������������������������������������������416 White and Carter (Councils) Ltd v McGregor [1962] AC 413 (HL)���������������������������������������������������� xiii, 52, 57, 60–1, 65, 69–70, 98–9 White Arrow Express Ltd v Lamey’s Distribution Ltd [1995] CLC 1251 (CA)��������91 Wilden Pump Engineering Co v Fusfield [1985] FSR 159 (CA)�����������������������������422 Wilkinson v Clements (1872) LR 8 Ch 96 (CA)�����������������������������������������������������66 William Robinson & Co Ltd v Heuer [1898] 2 Ch 451 (CA)������������������������������ 53–4 Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189������������������������������������������������������������������217–19, 221, 224, 228 Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 (HL)����������������������338 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 (CA)�������������36 Wilson v Rastall (1792) 100 ER 1283 (KB)�����������������������������������������������������������422 Wink v Croatia Osiguranje DD [2013] EWHC 1118 (QB)�����������������������������������375 Winter v Hockley Mint Ltd [2018] EWCA Civ 2480, [2019] 1 WLR 1617�������������271 WJ Alan & Co Ltd v El Nasr Export & Import Co [1972] 2 QB 189 (CA)�������������44 Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173�������������������������������������������������������������������������������������������� 4, 11, 23–4 Woodland v Swimming Teachers Association [2013] UKSC 66, [2014] AC 537������������������������������������������������������������������������������������������� 257–8 Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 (HL)����������������������������������������������������������xiv, 184 World Online Telecom Ltd v I Way Ltd [2002] EWCA Civ 413������������������������������28 WPP Holdings Italy srl v Benatti [2007] EWCA Civ 263, [2007] 1 WLR 2316�������357 Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 (Ch)����������������������������������������������������������������������������������85–6, 101 Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), [2013] 1 All ER (Comm) 1321�����������������������������������������������������������������������120 Yat Tung Investment Co Ltd v Dao Heng Bank Ltd [1975] AC 581 (PC)���������������403 Yeo v Stewart [1947] 2 All ER 2 (KDB)�����������������������������������������������������������������29 Yorkshire Bank v Hall [1999] 1 WLR 1713 (CA)��������������������������������������������������307 Ziggurat (Claremont Place) LLP v HCC International Insurance Company plc [2017] EWHC 3286 (TCC), [2018] BLR 98�������������������������������������������������24

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Table of Cases

EU Bier v Mines de Potasse d’Alsace, Case C-21/76 [1978] 1 QB 702��������������������� 373–4 Coreck Maritime GmbH v Handelsveem BV, Case C-387/98 [2000] ECR I-9337���������������������������������������������������������������������������������������������������364 Estasis Salotti v RÜWA Polstereimaschinen GmbH, Case C-24/76 [1976] ECR 1831�����������������������������������������������������������������������������������������������������364 Marinari v Lloyds Bank plc, Case C-364/94 [1995] ECR I-2715���������������������������373 Owusu v Jackson, Case C-281/02 [2005] ILPr 25�������������������������������������������������380 Tilly Russ, Case C-71/83 [1985] QB 931��������������������������������������������������������������364 Commonwealth & US 3264638 Manitoba Ltd v Bruni [2005] MBQB 283�����������������������������������������������223 Achem Products Inc v Workers Compensation Board (1993) 102 DLR (4th) 96 (SCC)��������������������������������������������������������������������������������381 Agar v Hyde (2000) 173 ALR 665 (HCA)������������������������������������������������������������369 Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 6) (1996) 64 FCR 79 (FCA)����������������������������������������������������392 Ancient Order of Foresters in Victoria Friendly Soc Ltd v Lifeplan Australia Friendly Soc Ltd [2018] HCA 43�����������������������������������������������������225 Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205�������������������������������������������������������������������������������������������������113 Anton Trawling Co Ltd v Smith [2003] NZLR 23 (NZCA)������������������������������������35 Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2015] VSCA 9, (2015) 318 ALR 302��������������������������������������������������������������231 Baker v Campbell [1983] HCA 39, (1983) 153 CLR 52�����������������������������������������425 Bofinger v Kingsway Group Ltd [2009] HCA 44, 239 CLR 269����������������������������179 British Columbia v Zastowny [2008] 1 SCR 27 (SCC)�����������������������������������������242 Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 (SCC)���������������������229 Challenor v Douglas [1983] 2 NSWLR 405���������������������������������������������������������375 Christine DeJong Medicine Professional Corp v DBDC Spadina Ltd [2019] SCC 30�����������������������������������������������������������������������������������������������273 Citadel General Assurance Co v Lloyds Bank Canada [1997] 3 SCR 805 (SCC)������������������������������������������������������������������������������������������220 Citic Pacific Ltd v Secretary of State for Justice [2016] 1 HKC 157�����������������������418 Clarke v Macourt [2013] HCA 56�������������������������������������������������������������������������91 Coleman v Myers [1977] 2 NZLR 225 (NZCA)��������������������������������������������������282 Cornerstone Property & Development Pty Ltd v Suellen Properties Pty Ltd [2014] QSC 265, [2015] 1 Qd R 75�����������������������������������������������������������������224 Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30 (NZHC)���������������������338 Edwards Karwacki Smith & Co Pt Ltd v Jacka Nominees Pty Ltd (1994) 15 ACSR 502������������������������������������������������������������������������������������������������294 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89��������������������������������������������������������������������������������������������������231

Table of Cases  xlv Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81, (2016) 91 NSWLR 732����������������������������������������������������������������������������������227 Flaherty v Girgis [1984] 1 NSWLR 56, [1985] 4 NSWLR 248�������������������������������375 Frame v Smith [1987] 2 SCR 99 (SCC)����������������������������������������������������������������282 Gay Choon Ing v Loh Sze Ti Terence Peter [2009] SGCA 3, [2009] 2 SLR 332�������������������������������������������������������������������������������������������������������35 Globex Foreign Exchange Corp v Kelcher (2011) 48 Alta LR (5th) 215 (Alberta Court of Appeal)������������������������������������������������������������������������35 Grant v John Grant & Sons Ltd (1950) 82 CLR 1 (HCA)������������������������������������317 Great Investments Ltd v Warner [2016] FCAFC 85, (2016) 243 FCR 516��������������������������������������������������������������������������� 221, 225, 228, 233 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR 296����������������������������������������������������������������������224 Grundt v The Great Boulder Proprietary Gold Mines Ltd (1938) 59 CLR 641 (HCA)�����������������������������������������������������������������������������������������46 Hall v Hebert [1993] 2 SCR 159 (SCC)����������������������������������������� 241, 244, 246, 288 Ho Kang Peng v Scintronix Corp Ltd [2014] SGCA 22����������������������������������������273 Hoystead v Commissioner of Taxation (1921) 29 CLR 537 (HCA), [1926] AC 155 (PC)���������������������������������������������������������������������������������������403 Inner City Businessmen’s Club v James Kirkpatrick [1975] 2 NZLR 636 (CA)�������������������������������������������������������������������������������������������44 Kennedy v Wallace [2004] FCA 332, (2004) 142 FCR 185�������������������������������������419 Libertarian Investments Ltd v Hall [2013] HKCFA 93, (2013) 16 HKCFAR 681�������������������������������������������������������������������������������������������223 McDonald v McDonald (1965) 113 CLR 529 (HCA)�������������������������������������������406 McGuire v Ralph McKay Ltd (1987) 5 ACLC 891�����������������������������������������������317 McLaren Transport Ltd v Somerville [1996] 3 NZLR 424 (NZCA)����������������������152 McNeil v Fultz (1906) 38 SCR 198 (SCC)������������������������������������������������������������223 Mills v Mills (1938) 60 CLR 150 (HCA)�������������������������������������������������������� 316–17 Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue [2014] HKCFA 22, 17 HKCFAR 218�������������������������������������������������273 NAV Canada v Greater Frederiction Airport Authority Inc (2008) 290 DLR (4th) 405 (New Brunswick Court of Appeal)�������������������������������������35 Neilson v Overseas Projects Corp of Victoria Ltd (2005) 223 CLR 331 (HCA)��������������������������������������������������������������������������������� 393–4 Nelson v Nelson [1995] HCA 25, (1995) 184 CLR 538�����������������������������������������249 Ngurli v McCann (1954) 90 CLR 425 (HCA)������������������������������������������������������319 Noza Holdings Pty Ltd v Commissioner of Taxation [2010] FCA 990, (2011) 273 ALR 621��������������������������������������������������������������������������������������392 Ochroid Trading Ltd v Chua Siok Lui [2018] SGCA 5, [2018] 1 SLR 363��������� 188–9 Owendale Pty Ltd v Anthony [1967] HCA 52, (1967) 117 CLR 539������������������������44 Permanent Building Society v Wheeler (1994) 14 ACSR 109���������������������������������317 Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84�����������������259 Peters’ American Delicacy Co v Heath [1939] HCA 2, (1939) 61 CLR 457�����������300 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 (HCA)�������������������������������������������������������������������������������������������407

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Pratt Holdings Pty Ltd v Commissioner of Taxation [2003] FCA 6, (2004) 136 FCR 357��������������������������������������������������������������������������������������419 Quince v Varga [2008] QCA 376, [2009] 1 Qd R 359�������������������������������������������220 Red Star Marine Consultants Pte Ltd v Personal Representatives of Satwant Kaur d/o Sardara Singh, deceased [2019] SGCA 76�����������������������273 Schumann v Abbott and Davis [1961] SASR 149�������������������������������������������������345 Sidhu v Van Dyke [2014] HCA 19, (2014) 251 CLR 505���������������������������������������263 Simpson v Attorney-General (Baigent’s Case) [1994] 3 NZLR 667 (NZCA)���������151 Skandinaviska Enskilda Banken AB v Asia Pacific Breweries (Singapore) Pte Ltd [2007] SGCA 9, [2007] 2 SLR 367������������������������������������������������������418 Skyrotors Ltd v Carrière Technical Industries (1979) 102 DLR (3d) 323 (Ont)������375 Teck Corporation Ltd v Millar (1973) 33 DLR (3d) 288���������������������������������������319 Thanakharn Kasikhorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) [2010] HKCFA 63, (2010) 13 HKCFAR 479������������������������������������������������������������������221, 225–6, 229, 298 Toronto General Trusts Corp v Roman (1962) 37 DLR (2d) 16 (aff’d [1963] SCR vi)���������������������������������������������������������������������������������223 Toubia v Schwenke (2002) 54 NSWLR 46 (NSWCA)�������������������������������������������407 Turf Club Auto Emporium Pte Ltd v Hua [2018] SGCA 44������������������������������� 86–7 Upjohn Company v United States 449 US 383 (1981)������������������������������������415, 419 Vile v Von Wendt (1979) 103 DLR (3d) 356 (Ont CA)������������������������������������������375 Wee Chiaw Sek Anna v Ng Li-Ann Genevieve [2013] SGCA 36����������������������������219 Westpac Banking Corpn v Savin [1985] 2 NZLR 41��������������������������������������������234 Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11, (1987) 162 CLR 285, (1987) 61 ACLR 715 (HCA)����������������������������������������������316, 317 Wilson Parking Ltd v Fanshawe 136 Ltd [2014] NZCA 407, [2014] 3 NZLR 567�������������������������������������������������������������������������������������������������263 Ying Ho Co Ltd v Secretary for Justice [2004] HKCFA 51�����������������������������307, 314

Table of Legislation UK legislation Administration of Justice Act 1985, s 33�������������������������������������������������������������422 Chancery Amendment Act 1858�������������������������������������������������������������������������158 Communications Act 2003, s 96�������������������������������������������������������������������������278 Companies Act 1862, s 18����������������������������������������������������������������������������������329 Companies Act 2006�����������������������������������������������������������������������������������311, 322 s 16��������������������������������������������������������������������������������������������������������������339 s 168�������������������������������������������������������������������������������������������������������������314 s 171(b)��������������������������������������������������������������������������������������������� 305–6, 316 Consumer Rights Act 2015 s 49��������������������������������������������������������������������������������������������������������������121 s 62A������������������������������������������������������������������������������������������������������������132 s 64(1)(b)������������������������������������������������������������������������������������������������������111 Contracts (Rights of Third Parties) Act 1999, s 1(3)��������������������������������������������133 Copyright, Designs and Patents Act 1988������������������������������������������������������ 56, 422 Courts and Legal Services Act 1990, s 63������������������������������������������������������������422 Crown Proceedings Act 1947, s 51����������������������������������������������������������������������162 Electricity Act 1989, s 27A����������������������������������������������������������������������������������278 Fatal Accidents Act 1976������������������������������������������������������������������������������������372 Financial Services and Markets Act 2000, s 206���������������������������������������������������278 Foreign Limitation Periods Act 1984������������������������������������������� 387, 389–90, 395–8 s 1(1)������������������������������������������������������������������������������������������������������������388 s 1(1)(a)��������������������������������������������������������������������������������������������������������395 s 1(4)������������������������������������������������������������������������������������������������������������396 s 4(1)�����������������������������������������������������������������������������������������������������389, 396 Gas Act 1986, s 30A�������������������������������������������������������������������������������������������278 Insolvency Act 1986 s 74(2)(d)������������������������������������������������������������������������������������������������������341 s 127�������������������������������������������������������������������������������������������������������������227 s 214�������������������������������������������������������������������������������������������������������������338 s 423�������������������������������������������������������������������������������������������������������������383 Judicature Act 1873, s 25(11)������������������������������������������������������������������������������226 Law Reform (Miscellaneous Provisions) Act 1934�����������������������������������������������372 Legal Services Act 2007���������������������������������������������������������������������������������� 422–3 Limitation Act 1980�����������������������������������������������������������217–19, 279–81, 283, 291 s 21(1)���������������������������������������������������������������������������������������������������194, 218 s 21(1)(a)������������������������������������������������������������������������������������������������������218

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Table of Legislation

s 21(3)����������������������������������������������������������������������������������������������������������218 s 38(1)����������������������������������������������������������������������������������������������������������218 Limited Liability Act 1855����������������������������������������������������������������������������������342 Matrimonial Causes Act 1973���������������������������������������������������������������������326, 333 Misrepresentation Act 1967�������������������������������������������������������������������������116, 120 Moneylenders Act 1985��������������������������������������������������������������������������������������188 Patents Act 1977, ss 39–43������������������������������������������������������������������������������������56 Sale of Goods Act 1893���������������������������������������������������������������������������������� 31, 39 Sale of Goods Act 1979 s 11(2)������������������������������������������������������������������������������������������������������������39 s 50�����������������������������������������������������������������������������������������������������73, 77, 81 s 50(3)����������������������������������������������������������������������������������������������������������103 s 51�����������������������������������������������������������������������������������������������������73, 77, 81 s 51(3)���������������������������������������������������������������������������������������������������100, 103 Senior Courts Act 1981 s 40����������������������������������������������������������������������������������������������������������������92 s 50��������������������������������������������������������������������������������������������������������������158 Supply of Goods and Services Act 1982, s 13������������������������������������������������������121 Trustee Act 1925, s 68(17)�����������������������������������������������������������������������������������218 Unfair Contract Terms Act 1977�������������������������������������������������������������������������132 UK statutory instruments Civil Procedure Rules (CPR)���������������������������������������������� 347, 367, 372, 374–5, 383 6.36��������������������������������������������������������������������������������������������������������������378 6.37(3)����������������������������������������������������������������������������������������������������������348 52.17������������������������������������������������������������������������������������������������������������408 Company, Limited Liability and Business (Names and Trading Disclosures) Regulations 2015������������������������������������������������������������������������������������������138 Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083)����������������111 European legislation and conventions Brussels convention on jurisdiction and the enforcement of judgments in civil and commercial matters (1968)����������������������350, 369, 371, 374, 376, 382 Commercial Agents (Council Directive) Regulations 2003�����������������������������������384 Directive 2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage�������������������������������������343 Lugano convention on jurisdiction and the enforcement of judgments in civil and commercial matters (2007)���������������������������������������������������350, 369 Regulation (EC) No 864/2007 on the law applicable to non-contractual obligations (Rome II)������������������������������������������������������������������373–4, 376, 392 Art 15�����������������������������������������������������������������������������������������������������������394 Art 17�����������������������������������������������������������������������������������������������������������392

Table of Legislation  xlix Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I)�������������������������������������������������������������������������������������������������������394 Regulation (EU) No 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I recast)������������������������������������������������� 347, 350, 354, 358, 360, 363–4, 367, 369, 374, 376, 382, 384 Art 4�����������������������������������������������������������������������������������������������������362, 364 Art 6(1)��������������������������������������������������������������������������������������������������������347 Art 7(2)�������������������������������������������������������������������������������������������������362, 373 Art 23(1)������������������������������������������������������������������������������������������������������364 Art 25�������������������������������������������������������������������������������������������� 358–9, 361–3 Art 25(1)������������������������������������������������������������������������������������������������������364 Arts 29–31����������������������������������������������������������������������������������������������������362 Other legislation Accident Compensation Act 1972 (NZ)��������������������������������������������������������������143 Accident Compensation Act 2001 (NZ)��������������������������������������������������������������143 s 319�������������������������������������������������������������������������������������������������������������152 Coalition Provisional Authority Order 17 (Iraq)����������������������������������� 388–9, 391–7 Indian Contract Act 1871, s 62�����������������������������������������������������������������������������35 Iraqi Civil Code������������������������������������������������������������������������������������������388, 394 Art 232���������������������������������������������������������������������������������������������������������388 Art 435(1)����������������������������������������������������������������������������388–9, 391–2, 395–7 Uniform Commercial Code (USA), § 2-209(1)�������������������������������������������������������35 Workers’ Compensation for Accidents Act 1900 (NZ)�����������������������������������������145

l

1 Introduction LORD SUMPTION

T

he output of a single judge is rarely consistent and never definitive. Even in the highest appellate court, opinions about legal issues are necessarily provisional. They are liable to be overtaken by further thought. Other cases on different facts turn up to puncture the larger generalisations. The changing composition of an intensely deliberative court like the Supreme Court may require different compromises between its members. The process does not stop with retirement. It is the fate of even the most influential judges to find their confident statements of the law revised or undone by their successors (‘explained’ is the usual euphemism). We sit to serve the public, not to refashion the law according to our own prejudices or to perfect some overarching legal philosophy of our own. These are some of the reasons why I have never asked myself whether I had a personal legal philosophy, let alone worked out what it might be. Until, that is, the seminar at Trinity College Cambridge at which the papers published in this volume were first presented and discussed. Rereading them, and looking back over the rather large number of judgments that I seem to have written during my seven years on the Court, I think that it is possible to identify three main themes on which I believe that I have been consistent. To call them a personal philosophy would be absurdly grandiose. But they are certainly instincts which have informed my approach to most legal issues. The first is a strong belief in legal certainty. There is a school of thought which holds that rules of law get in the way of justice, and should either be avoided altogether or qualified so as to leave the field clear for idiosyncratic solutions to hard cases. However, the Supreme Court does not exist to do justice in particular cases, but to sort out the law. It is fundamental to any just scheme of law that it should be as predictable in its application as the infinite variety of human experience and the changing values of our community permit. An absence of settled principle or, worse, a propensity to depart from settled principle to accommodate a judge’s personal feelings about the facts is a form of retrospective judicial legislation which is almost always unjust. Judges have a higher duty than just satisfying their own emotional needs. A system of customary law such as the common law, based mainly on precedent, is bound to be more flexible than a code. That is one of its strengths. But the common law is a body of legal principles, not a licence constantly to reinvent the legal wheel.

2  Lord Sumption Secondly, the law should be coherent. This means that the way that it deals with a particular subject or factual situation should be logically consistent. But it means more than that. It means that the law’s approach to one subject should be consistent with its approach to other subjects which raise comparable problems. Specialisation enables practitioners to provide a better service to their clients. But most specialisations are bogus. They impede an understanding of the underlying legal principles. It is important to be able to look into the next-door room to see how they do things there. We should not, if we can help it, construct self-contained islands of law which proceed on assumptions peculiar to themselves. The Supreme Court ought to be able to survey the whole field of law when considering what may originally have seemed to be an obscure corner governed by its own rules. The fact that most members of a panel of five will usually be strangers to the field has advantages which are not always appreciated by specialist practitioners. The third theme is really a reflection of the first two. I have always been profoundly suspicious of judicial discretion. Discretion has its place in the law of remedies and in the court’s regulation of its procedures. Its place in private law should be very limited. Private law is not concerned with mere expectations. It is concerned with legal rights vested in people. Rights should not be subject to judicial value judgements. The relevant value judgement had already been made when the law recognised the right. General rules of law which intervene to qualify rights, such as the rules which avoid certain transactions for illegality, should be as clear and as principled in their operation as the rights themselves, so far as the complexity of human affairs allows. These thoughts may explain why I regard Patel v Mirza as the worst decision of the Supreme Court in the realm of private law for a generation. Legal scholarship occupies a smaller place in the work of the courts than it once did, among advocates and judges alike. A freer approach to authority by judges, especially appellate judges, is probably the main reason for this. The resulting gap has been largely filled by academic scholarship, which, as a result, has contributed more to the development of the law over the past half-century than it ever did before. This has been an immensely fertile process. The present collection of studies does much to explain why. I do not emerge unscathed from it, which is as it should be. I think that if I had had the advantage of these criticisms before my judgments were delivered, I would probably have modified parts of my reasoning. That would have made them better judgments. But I suspect that the basic line would have remained unchanged. Appellate judges have to compromise with awkward facts as well as with each other. And repentance is not their style.

2 Interpretation EWAN McKENDRICK

The Supreme Court has begun to withdraw from the more advanced positions seized during the Hoffmann offensive, to what I see as a more defensible position … Just as ICS changed the judicial mood about language and tended to encourage the view that it was basically unimportant, so the more recent cases may in due course be seen to have changed it back again, at least to some degree. – ‘A Question of Taste: the UK Supreme Court and the Interpretation of Contracts’1

T

he best-known contribution made by Lord Sumption to the law relating to the interpretation of contracts is to be found not in his judgments while a member of the Supreme Court, but in his extra-judicial 2017 Harris Society Lecture given at Keble College, Oxford entitled ‘A Question of Taste: The UK Supreme Court and the Interpretation of Contracts’, from which the quotation at the beginning of this chapter is taken. A large part of the lecture is devoted to a critical analysis of modern developments in the law relating to the interpretation of contracts, with a particular focus on the judgments of Lord Hoffmann, who was the dominant judicial voice on the interpretation of contracts during his term as a member of the House of Lords between 1995 and 2009. Lord Hoffmann has himself responded in vigorous terms to Lord Sumption’s critique,2 and it is a principal aim of this chapter critically to evaluate the debate between Lord Sumption and Lord Hoffmann. Before doing so, it is important to consider the contribution made by Lord Sumption in his judicial capacity. During his tenure as a Justice of the Supreme Court, Lord Sumption sat on three of the leading modern cases concerned with the interpretation of contracts. In none of these cases did he write his own judgment. In Arnold v Britton3 and Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd,4 1 Lord Sumption, ‘A Question of Taste: The UK Supreme Court and the Interpretation of Contracts’ in D Clarry (ed), The UK Supreme Court Yearbook Volume 8 (2016–2017) (London, Appellate Press, 2018) 75 and 87. A text of the speech can also be found on the UK Supreme Court website. 2 Lord Hoffmann, ‘Language and Lawyers’ (2018) 134 LQR 553. 3 Arnold v Britton [2015] UKSC 36, [2015] AC 1619. 4 Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742. The case is principally concerned with the implication of terms into a contract, but is included

4  Ewan McKendrick he expressed his agreement with the judgment of Lord Neuberger, while, in Wood v Capita Insurance Services Ltd,5 he agreed with the judgment of Lord Hodge. Lord Sumption also sat in three less well-known cases. He delivered a dissenting judgment in BNY Mellon Corporate Trustee Services Ltd v LBG Capital No 1 plc6 and gave the judgment of the Privy Council in Fairfield Sentry Ltd v Migani.7 His most significant judicial contribution, however, is to be found in the rather neglected decision of the Privy Council in Krys v KBC Partners LP,8 where he gave the majority judgment. It is with this case that we shall begin. I.  KRYS v KBC PARTNERS LP

Krys v KBC Partners LP was a case concerned with the interpretation of the articles of a limited partnership following a dispute concerning the distribution of the partnership assets upon its dissolution. There were four partners. The first was the Principal Limited Partner, a company whose ultimate beneficial owners were Boris Berezovsky and Arkady Patarkatsishvili. It contributed assets valued at US$320 million to the partnership. The second partner was the General Partner, a company controlled by a professional fund manager, Mr Jaffe, and which was entitled to a management fee of 2% of the aggregate capital contributions of the limited partners. The third and fourth partners were two Special Limited Partners, both of which made nominal capital contributions of $100 each and whose role was to represent the interests of the General Partner and others involved in the management of the partnership. The principal purpose of the partnership was to sell, realise, exchange or distribute the investments contributed by the Principal Limited Partner within the term of the partnership ‘with the principal objective of providing the Limited Partners with a high overall rate of return’.9 It was expected that the sale of the assets would prove to be a challenge, given the ‘notoriously difficult’10 business conditions in the Balkans and former CIS states where the assets were located and the fact that ‘their sale value was likely to be undermined’11 if it became known that the assets were connected to Messrs Berezovsky and Patarkatsishvili. In the event, none of the assets of the partnership were sold prior to the end of the partnership term on 1 July 2012, although the partnership appeared to have been ‘highly successful in terms of increasing the overall value of its Investments’.12 In the liquidation of the partnership, an issue arose

here because of the consideration given by the Supreme Court to the relationship between interpretation and implication and in particular to the judgment of Lord Hoffmann in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988. 5 Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173. 6 BNY Mellon Corporate Trustee Services Ltd v LBG Capital No 1 plc [2016] UKSC 29, [2017] 1 All ER 497. 7 Fairfield Sentry Ltd v Migani [2014] UKPC 9, [2014] 1 CLC 611, a case which is considered further in ch 10 for what it says about unjust enrichment. 8 Krys v KBC Partners LP [2015] UKPC 46. 9 Clause 1.2 of the Agreement, cited at ibid [2]. 10 ibid [4]. 11 ibid [4]. 12 ibid [19.22].

Interpretation  5 as to the entitlement, if any, of the Special Limited Partners to a success fee, referred to in the articles as ‘Carried Interest’, which could amount to 30% of any profits or gains made on the sale of the investments. The entitlement to share in the distribution of the assets of the partnership was governed by the complex terms of clauses 7 and 8 of the articles. These clauses made clear provision for the payment of Carried Interest to the Special Limited Partners in two circumstances. The first was on the sale of investments within the term of the partnership where an interim payment of Carried Interest could be made provided that certain conditions were met. The second was after all of the investments had been sold. The requirements of neither of these circumstances had been satisfied on the facts, so it was submitted on behalf of the Principal Limited Partner that the Special Limited Partners were only entitled to the return of their nominal capital contributions of US$100 each and were not entitled to a further share in the distribution of the assets of the partnership. The Special Partners sought to avoid this conclusion and relied upon what Lord Sumption termed ‘a variety of ingenious arguments’.13 These submissions took two principal forms. The first focused on the wording of clauses 7 and 8 of the articles, whereas the second was based on a wider appeal to considerations of commercial good sense and the commercial consequences of an interpretation which confined the Special Limited Partners to the recovery of their nominal capital contributions. A.  The Wording of Clauses 7 and 8 In relation to the wording of clauses 7 and 8, there were two principal points of dispute. The first concerned the meaning of the word ‘sale’ as used in clause 7 to refer to ‘the sale of all Investments of the Partnership’. The Special Limited Partners sought to give the word ‘sale’ an extended meaning to embrace any disposal of the investments, including their distribution in specie to the Principal Limited Partner. Lord Sumption dismissed the latter submission on the ground that the word ‘sale’ has ‘a well understood meaning’ as ‘a transfer of property to another party for a money consideration’.14 This was held to exclude a distribution in specie. Further, a number of clauses in the articles distinguished between a sale and a distribution so that the two could not be equated. The proposition that a sale could include a distribution in specie to the Principal Limited Partner ran into the further difficulty that it was the ‘ultimate object of the partnership’15 to realise the investments for the benefit of the Principal Limited Partner who contributed them and the return of these investments could not ‘sensibly’ be said to constitute a sale.16 The second point of dispute concerned clause 8.2, which dealt with the timing of distributions and provided that they should take place ‘at the end of the term of the Partnership’. It was argued on behalf of the Special Limited Partners that this should be understood as a distribution which took place ‘at or after’ the end of the partnership

13 ibid

[13]. [13]. 15 ibid [13]. 16 ibid [13]. 14 ibid

6  Ewan McKendrick term. This submission was also rejected by the majority on the ground that the clause envisaged a distribution in the course of the liquidation ‘by reference to the state of affairs at its commencement’17 so that the provision assumed that a ‘sale’ had already occurred before the end of the partnership term. B.  Commercial Common Sense The second submission advanced on behalf of the Special Limited Partners focused on the consequences of the conclusion that they were not entitled to any Carried Interest. They submitted that such a result was ‘extraordinary’18 or ‘absurd’,19 in that it left them with ‘nothing more than their nominal capital contributions’20 in the event that they failed to sell all the investments within the term of the partnership. It was, in their submission, extraordinary that they should not be entitled to Carried Interest no matter how valuable the investments which remained in their hands, however much they had succeeded in selling the investments and however much the liquidator or the Principal Limited Partner realised after the termination of the partnership. This exclusion of the Special Limited Partners from participation in the returns could not, they submitted, have been what the parties had intended. Lord Sumption dismissed this attempt to rely on such considerations in order to persuade the Privy Council to depart from what the majority perceived to be ‘the clear language of the articles’.21 He stated that ‘the information available to the Board discloses no reason for regarding the terms appearing from the language of the articles as commercially unwise, let alone “absurd”’.22 This was held to be an ‘unusual partnership’ entered into against ‘an unusual background’, where it was ‘far from clear by what standards of commercial normality any particular provisions are to be measured’.23 Further, Lord Sumption stated that there was ‘little to be gained by imagining more or less far-fetched examples of cases in which the articles of partnership would operate harshly if construed according to the ordinary meaning of the words’.24 Nor was the result held to be surprising or uncommercial, given that substantially all of the assets of the partnership had been contributed by the Principal Limited Partner and given that Carried Interest was ‘in effect a success fee earned by the Special Limited Partners by selling the investments’25 and these investments had not been sold. There was thus held to be nothing uncommercial about leaving the Special Limited Partners to the recovery of their original nominal capital contribution.



17 ibid

[14]. [15]. 19 ibid [16]. 20 ibid [15]. 21 ibid [15]. 22 ibid [16]. 23 ibid [16]. 24 ibid [16]. 25 ibid [16]. 18 ibid

Interpretation  7 C.  The Dissent of Lord Mance Lord Mance dissented, and he did so in rather robust terms. He stated that the approach of the majority was ‘inconsistent with the principle that contracts should be construed as a whole, with their principal objective in mind and without excessive reliance on a literal reading of individual words or phrases’.26 He concluded that the construction adopted by the majority was ‘both capricious and unfair’27 to the Special Limited Partners and ‘irrationally favourable’28 to the Principal Limited Partner. Citing the decision of the Supreme Court in Sigma Finance,29 Lord Mance claimed that the majority had not applied ‘the lessons illustrated’30 by cases such as Aberdeen City Council v Stewart Milne Group Ltd,31 and had attached too much weight to what was perceived to be the natural meaning of the words and too little to the context and the scheme as a whole. It is important to note that Lord Mance took issue both with the interpretation adopted by the majority of clauses 7 and 8 (where his analysis of the terms of the partnership agreement was more detailed than that adopted by the majority) and their reluctance to place much weight on considerations of commercial common sense. In relation to the interpretation of clauses 7 and 8, Lord Mance held that the majority’s narrow legal interpretation of the word ‘sale’ ignored the nature of the investment strategy and the range of investments involved, not all of which would necessarily be realised in exchange for a monetary payment (for example, they could be realised by an exchange of investments or a leveraged recapitalisation).32 As to the timing of the distribution, Lord Mance stated that the reliance placed upon the words ‘at the end of the terms of the Partnership’ in order to exclude everything that happened after the term of the partnership involved ‘a literalism’33 which he could not accept. Lord Mance also spent more time seeking to analyse the disputed clauses in the context of the partnership agreement as a whole and focused to a greater extent on the relationship between the different clauses and the impact this relationship had on the meaning to be given to words such as ‘sale’ and ‘at the end of the term of the Partnership’. Turning to broader commercial considerations, Lord Mance could see ‘no sensible commercial reason why the sale in a strict legal sense of all investments should be made a pre-condition to the intended rewards which the Special Limited Partners were to receive’.34 Further, he observed that the construction adopted by the majority created ‘perverse conflicts of interest’,35 in particular to ensure that all sales were completed

26 ibid [18]. 27 ibid [18]. 28 ibid [18]. 29 Re Sigma Finance Corp (in administration) [2009] UKSC 2, [2010] 1 All ER 571 [12] (Lord Mance). 30 Krys (n 8) [18]. 31 Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56, 2012 SCLR 114, a case which has generated some controversy because of the willingness of the Supreme Court to depart from the ordinary meaning of the words in order to advance what the court perceived to be the intent of the parties in including the disputed term in their contract. 32 Krys (n 8) [24.3]. 33 ibid [25.1]. 34 ibid [24.2]. 35 ibid [24.4].

8  Ewan McKendrick within the partnership term even if the sales were not on the best terms possible so that the Special Limited Partners could claim their entitlement to Carried Interest. His analysis was also influenced by his broader interpretation of the principal purpose of the partnership, which he stated was ‘to achieve a high overall rate of return, for the benefit of all concerned’.36 The word ‘all’ is important here in that Lord Mance placed more weight on the need to incentivise the General Partner and the Special Limited Partners to achieve the high rate of return which would benefit the Principal Limited Partner.37 Given the object of seeking to benefit all of the partners, Lord Mance looked for ‘clear’ words before reaching the conclusion that the intention of the parties had been to benefit the Principal Limited Partner to the total exclusion of the Special Limited Partners.38 He found no clear words which entitled the Principal Limited Partner to retain the entirety of the net profitability of the firm, whatever the size of the profit, simply because all of the investments had not been sold within the partnership term. He therefore concluded that the Special Limited Partners were intended to receive profit shares totalling 30% of any Annual Rate of Return on termination of the partnership and liquidation of its assets even though not all of the partnership assets were sold ‘in a strict legal sense or realised at all and some or all were as a result distributed in specie’.39 D. Assessment Returning to the judgment of Lord Sumption, three points are worthy of note before we turn to his Harris Society lecture. First, his judgment contains no reference to the authorities on the interpretation of contracts.40 This is, perhaps, not surprising, given the limited role that precedent plays in the interpretation of contracts.41 The focus of the judgment was quite properly on the words of the partnership agreement. No attempt was made to engage with the leading decisions of the House of Lords or the Supreme Court, or the controversies associated with them. Second, Lord Sumption engaged in a careful examination of the words used by the parties. Thus, the word ‘sale’ was interpreted in its traditional legal sense and he declined to read the words ‘at the end’ of the term of the Partnership as if they read ‘at or after’ that time. The criticism advanced by Lord Mance that the latter approach was unduly literal is difficult to justify, given that what Lord Sumption declined to do was to read words into the clause which were not in fact there. Third, Lord Sumption was not impressed by attempts to invoke considerations of commercial common sense in order to avoid what he held to be ‘the clear language of the articles’.42 In particular, he was unwilling to speculate as to what was, or what 36 ibid [23]. 37 ibid [19.7]. 38 ibid [24.6(c)]. 39 ibid [26]. 40 The same is true of his judgment in Fairfield (n 7) and his dissenting judgment in BNY Mellon ­Corporate Trustee Services (n 6). 41 Surrey Health BC v Lovell Construction Ltd (1990) 48 Build LR 113 (CA) 118. 42 Krys (n 8) [15].

Interpretation  9 was not, commercially sensible. While the deal as it turned out may be said with some justification to be a hard one for the Special Limited Partners, it is not easy to see how commercial common sense can reliably tell us whether or not the parties did intend that the Special Limited Partners should benefit on the facts of the case. The answer to that question is more likely to depend upon the bargaining power and skill of the parties, and their ability to foresee the circumstances in which a claim to Carried Interest might be made by the Special Limited Partners. In any event, this speculation was not a matter for Lord Sumption. The language of the articles was clear and he was not willing to permit the invocation of commercial common sense to displace that clear meaning. The clarity for which Lord Mance was looking was of a different character. He was looking for clear words to displace his finding that the parties did intend the Special Limited Partners to benefit and, not finding any such clear words nor any sensible commercial reason for depriving them of that benefit, he dissented. II.  THE HARRIS SOCIETY LECTURE

The themes in Lord Sumption’s Harris Society lecture are similar to those to be found in his judgment in Krys. The first is the importance which he attached to language and the elucidation of the meaning of words. His aim was to ‘reassert the primacy of language in the interpretation of contracts’,43 given that ‘the language that the parties have agreed [provides] the one sure foundation for a hypothetical reconstruction of their intentions’44 and that the language of their agreement, taken as a whole, is ‘the only direct evidence of their intentions which is admissible’.45 Thus, he decried what he perceived to be the ‘flight from language’,46 the ‘belittling of dictionaries and grammars’47 and ‘the loose approach to the construction of commercial documents’.48 Lord Sumption’s claim that ‘most language and all properly drafted language has an autonomous meaning’49 is not to be equated with ‘literalism’, an approach which he expressly stated that he did not advocate.50 While he recognised that ‘language is a flexible instrument’,51 Lord Sumption also stated that that flexibility should not be overstated.52 Although the common law has recognised that ‘language is imprecise, that context may modify its meaning, and that words may be used in a special sense’,53 it has not gone so far as to relegate the language used by the parties to ‘no more than a rebuttable presumption that people mean what they say in formal documents’.54

43 Sumption 44 ibid

75. 45 ibid 82. 46 ibid 76. 47 ibid 82. 48 ibid 87. 49 ibid 82. 50 ibid 82. 51 ibid 82. 52 ibid 82. 53 ibid 77. 54 ibid 80.

(n 1) 82.

10  Ewan McKendrick Second, Lord Sumption attacked the role accorded to ‘surrounding circumstances’ and considerations of ‘commercial common sense’ in some of the leading judgments, in particular where these were relied upon as an ‘alternative’55 or ‘independent’56 way of discovering the parties’ intentions. In relation to the role of commercial common sense, he observed that ‘judges are not necessarily well-placed to determine what commercial sense requires’57 and that their ‘notions of commercial common sense tend to be moulded by their idea of fairness’.58 Third, he objected to the modern approach to interpretation insofar as it ‘modifies or contradicts the words in pursuit of what appears to a judge to be a reasonable result’.59 It has been noted that Lord Sumption did not engage with the leading authorities on the interpretation of contracts in his judgment in Krys. The same cannot be said of his Harris Society lecture, where a number of judgments were the subject of sweeping criticisms. These included the judgments of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society,60 Charter Reinsurance Co Ltd v Fagan61 and Attorney General of Belize v Belize Telecom Ltd;62 the judgment of Lord Diplock in Antaios Compania Naviera SA v Salen Rederierna AB (The Antaios);63 and the decisions of the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd64 and the Supreme Court in Rainy Sky SA v Kookmin Bank.65 The inclusion of Belize is important insofar as Lord Sumption’s assault extended to the significance for the law relating to implied terms and the doctrine of rectification of the modern approach to the interpretation of contracts, where he asserted that ‘it is hard to see any need for either of these doctrines if the parties can have an intention attributed to them which is not reflected in the language of the agreement’.66 The criticisms which Lord Sumption makes of these developments in the case law relate both to their tone and to their substance. Both matter. We shall first consider tone, before proceeding to substance. A. Tone Lord Sumption’s concern would appear to be as much with the tone of some modern judgments as with their substance. So, for example, in relation to The Antaios, he 55 ibid 76 and 81 ‘as an alternative guide to the parties’ intentions instead of a means of interpreting their language’. 56 ibid 82. 57 ibid 84. 58 ibid 84. 59 ibid 77. 60 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) (ICS). See also Lord Hoffmann’s Schreiner Memorial Lecture, delivered some three months after his judgment in ICS, which develops some of the propositions to be found in his judgment in ICS: ‘The Intolerable Wrestle with Words and Meanings’ (1997) 114 South African Law Journal 656. 61 Charter Reinsurance Co Ltd (in liquidation) v Fagan [1997] AC 313 (HL). 62 Belize (n 4). 63 Antaios Compania Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191 (HL). 64 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101. 65 Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900. 66 Sumption (n 1) 11.

Interpretation  11 observed that the problem was not ‘the result, which seems fair enough, but with the extravagant language’ used by Lord Diplock.67 Similarly, he observed that it was perhaps the ‘tone’68 of Lord Hoffmann’s approach in ICS that was more radical than its substance and that ‘some, perhaps most’ of the cases which he analysed in critical terms ‘might have been decided the same way on more traditional principles of construction’.69 Lord Sumption’s point here is that ‘instinct and mood play an important role in judicial analysis’70 and that the effect of Lord Hoffmann’s judgment in ICS was to change ‘the mood’ among judges dealing with the interpretation of commercial contracts in ways that were ‘fundamental’.71 Support for the proposition that ‘tone’ and ‘mood’ matter can be gleaned from the structure of some of the leading judgments in cases concerned with the interpretation of contracts. In Arnold v Britton,72 for example, Lord Neuberger set out seven factors which are taken into account by courts when seeking to interpret a contract.73 In Wood v Capita Insurance Services Ltd,74 Lord Hodge similarly sought to summarise the approach of the courts to the interpretation of contracts,75 before turning to consider how these principles should be applied to the facts of the case before the court. The same approach was adopted by Lord Hoffmann in ICS when setting out his five principles. It seems clear that, when seeking to formulate these principles, Lords Neuberger, Hodge and Hoffmann were looking beyond the parties to the litigation before them and were seeking to provide guidance to, and set the tone for, the wider legal and business community. A feature of these ‘restatements’ is that they tend to be made at a rather high level of abstraction and it is not always entirely easy to reconcile their individual components in the sense that they seek to strike a balance between the competing considerations which the courts must take into account when seeking to interpret a contract. The general nature of this guidance can be abused by counsel, who, in an attempt to win their case, place emphasis on a particular sentence or phrase of the chosen restatement that best suits their case even if that sentence or phrase is taken out of context of the judgment as a whole. But a focus on the particular may miss the point. What matters is the overall guidance which the senior courts are seeking to give to lower courts and the ‘tone’ in which that guidance is expressed. What was the ‘mood’ or ‘tone’ of the judgment of Lord Hoffmann in ICS? On one view, it was to downplay the significance of the natural and ordinary meaning of the words used by the parties and to give greater emphasis to the surrounding circumstances or ‘matrix of fact’ and to considerations of business common sense so that a court can, potentially in a wide range of cases, conclude that the parties, as reasonable people, could not have meant what they had said and then substitute an alternative



67 ibid

76. 79. 69 ibid 82. 70 ibid 79. 71 ibid 79. Also 87. 72 Arnold v Britton (n 3). 73 ibid [16]–[23]. 74 Wood v Capita (n 5). 75 ibid [8]–[16]. 68 ibid

12  Ewan McKendrick which it believes gives effect to what the parties had reasonably intended. Arnold v Britton, by contrast, is understood by many as an attempt to redress the balance and to put greater emphasis back on the language used by the parties, and warns against too great a readiness to depart from the ordinary meaning of words in order to give effect to what is thought to be a commercially sensible conclusion. Further, Lord Hoffmann’s judgment in Belize was understood by some to have liberalised the rules in relation to the implication of terms into a contract so that it was no longer necessary to show that the implication was a necessary one before the court could make the implication. But the effect of Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd was to emphasise the strict requirements which must be satisfied before a term will be implied into a contract, particularly a written contract of some length which has been negotiated with the benefit of legal advice.76 There are, however, difficulties in placing too much reliance on ‘tone’ or ‘mood’. One danger is that it tends to lead to exaggeration and to the creation of caricatures which do not accurately capture the views which have in fact been expressed. That said, Lord Hoffmann’s judgments in both ICS and Chartbrook are cast in expansive terms, both as to the scope of the factual matrix77 and in relation to the lack of any limit on the ability of a court to use red ink or to engage in ‘verbal rearrangement’ of the terms of the contract.78 Given the way in which aspects of these judgments are expressed, it may be said with some justification that there is no element of exaggeration in the criticisms which have been levelled against the approach adopted by Lord Hoffmann. Nevertheless, it may be going too far to say, as Lord Sumption has said, that Lord Hoffmann ‘belittled’ dictionaries and that his judgments in ICS and Belize were ‘tantamount to allowing terms to be implied on the ground that they are commercially reasonable and must therefore have been intended’.79 Lord Hoffmann has responded to these claims by stating that he ‘never suggested’80 that the courts should abandon dictionaries and grammars as the basic tools of construction and, in relation to Belize, far from liberalising the test for the implication of terms in a contract, he stated that his judgment emphasised ‘the reluctance of courts to accept that something has been left out of a legal document’.81 Further, Lord ­Hoffmann has also stated that he agreed with Lord Sumption that the courts ‘should not depart from the conventional meaning of the language of a contract merely because, either at the time or in the light of the events which have happened,

76 Marks & Spencer v BNP (n 4). See, for example, Impact Funding Solutions Ltd v Barrington Support Services Ltd (AIG Europe Ltd, Third Party) [2016] UKSC 57, [2017] AC 73 [31]. 77 Which was stated to encompass ‘absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man’: ICS (n 60) 912. Lord Hoffmann subsequently qualified this statement, in a minor respect, in Bank of Credit and Commercial International v Ali [2001] UKHL 8, [2002] 1 AC 251 [39], when he stated that what he meant was ‘anything which a reasonable man would have regarded as relevant’. 78 Chartbrook (n 64) [25]: ‘there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed’. 79 Sumption (n 1) 85. 80 Hoffmann (n 2) 573. 81 ibid 572.

Interpretation  13 that would have been more fair or reasonable’.82 To this extent, there would appear to be a significant measure of agreement between Lords Sumption and Hoffmann. However, it would be a mistake to treat the differences between them as simply matters of ‘tone’ or ‘mood’. There are important differences of substance, and it is to these that we must now turn. B. Substance (i)  Autonomous Meaning, Word Meaning and Speaker Meaning One difference of substance between Lord Hoffmann and Lord Sumption is that Lord Sumption believes that all properly drafted language has ‘an autonomous meaning’,83 a proposition characterised by Lord Hoffmann as a ‘fallacy’.84 While Lord Hoffmann accepts that words have ‘conventional meanings’, such as dictionary meanings, he claims that we can only understand what words are used to mean if we know ‘the context (ie background against which) they were used’,85 and he maintains that the object of interpretation is ‘speaker meaning’ rather than ‘word meaning’. ‘Speaker meaning’ is ‘what a speaker or writer means (or is understood to mean) by using those words’, whereas ‘word meaning’ is a reference to the conventional rules or meanings to be found in dictionaries and grammars.86 Here we see the difference in focus between the two, with Lord Sumption focusing on word meaning and Lord Hoffmann on speaker meaning.87 This appears to open up a sharp divide between Lords Sumption and Hoffmann. But, on closer examination, the divide is not as stark as it may appear at first sight. On the one hand, Lord Sumption recognises that context may modify the meaning of language and that contracting parties may use words in a special sense,88 and so Lord Hoffmann would appear to be incorrect to claim that Lord Sumption is seeking to resurrect an ‘irrebuttable presumption that the author of a document has used language in its strict and primary sense, irrespective of the strength of background evidence which shows that this could not have been the case’.89 However, Lord ­Sumption’s concession appears to weaken his claim that all properly drafted language has an ‘autonomous’ meaning, unless an ‘autonomous’ meaning is understood to be synonymous with a conventional meaning. On the other hand, Lord Hoffmann’s presumption that people mean what they say in formal documents would seem not to be as weak as Lord Sumption appears to imply (and as it might appear

82 ibid 573. 83 Sumption (n 1) 82. 84 Hoffmann (n 2) 570. 85 ibid 570. 86 ibid 557. 87 Although audience meaning may be a preferable term to speaker meaning, given that, as Lord ­Hoffmann acknowledges, when considering the meaning which a reasonable person would have understood the parties to have intended, the reasonable person is ‘the notional audience’: Hoffmann (n 2) 569. 88 Sumption (n 1) 77. 89 Hoffmann (n 2) 568.

14  Ewan McKendrick from Lord  Hoffmann’s judgments in ICS and Chartbrook). As Lord Hoffmann observed in his response to Lord Sumption’s Harris Society lecture:90 lawyers are paid to draft documents without ambiguity, use words in their dictionary ­meanings, adhere to conventional syntax and not leave anything important out. Even if they have not been drafted by lawyers, people who enter into legal obligations would be expected to take the matter seriously. So the reasonable man interpreting a legal document starts with a strong presumption, based on this background, that the document does not contain any linguistic mistakes or leave important things out.

The difference between Lord Sumption and Lord Hoffmann would therefore appear to lie in the strength of the presumption that contracting parties have used words with the intention that they be given their conventional meaning. For Lord Sumption, that presumption would appear to be extremely strong, bordering on the irrebuttable, whereas for Lord Hoffmann, it is weaker and its strength would appear to depend on the context. So, for example, that presumption may be at its strongest where lawyers are heavily involved on both sides in drawing up the contract documentation. But, even in that context, the presumption for Lord Hoffmann never achieves the status of an ‘irrebuttable’ presumption, given his view that ‘background will always play some part in determining what the speaker or notional author used the words to mean’.91 On this view, the background can displace the conventional meaning of the words used by the parties, even when the document has been drawn up with the assistance of professional legal advice. (ii) The Rainy Sky Case The difference of substance is also apparent when we turn to Lord Sumption’s analysis of some of the leading cases. A case singled out for particular criticism by Lord ­Sumption, albeit not one in which Lord Hoffmann was involved, is the decision of the Supreme Court in Rainy Sky SA v Kookmin Bank.92 The claimant buyers brought a claim against the defendant bank for payment pursuant to the terms of an ‘advanced payment bond’. The bond had been issued in connection with six shipbuilding contracts which the claimants had entered into with shipbuilders. Subsequently, the shipbuilders got themselves into financial difficulties and were subject to a debt work-out procedure in South Korea. It was these events which led the claimants to seek to recover from the defendant bank the instalments which they had paid to the shipbuilders. The defendant denied that it was liable to make the repayment. The focus of the court’s attention was on two paragraphs in the bond, referred to as paragraphs 2 and 3.93 Paragraph 2 entitled the claimants to the repayment of pre-delivery instalments of the contract price paid prior to the termination, cancellation or rescission of the contract or on a total loss 90 ibid 559–60. 91 ibid 560. 92 Rainy Sky (n 65). 93 The bond was to be found in a letter which did not contain numbered paragraphs and the numbering was inserted by the court for convenience of reference. This was not a case in which the obligations were contained in separate numbered clauses which had been agreed by the parties. The fact that the numbers were inserted by the court for reasons of convenience may suggest that we should be less concerned about a construction which has the effect of rendering para 2 a mere preamble to para 3 (see text to n 96 below).

Interpretation  15 of the vessel, but did not include within its scope the insolvency of the shipbuilders. Paragraph 3, which was the focus of the dispute between the parties, provided, ‘in consideration of your [ie, the buyer’s] agreement to make the pre-delivery instalments … we [the bank] hereby, as primary obligor, promise to pay to you … on your first written demand, all such sums due to you under the contract’. For the claimants, it was argued that the words ‘all such sums’ referred back to ‘the pre-delivery instalments’ in the first line of paragraph 3, whereas the bank submitted that they were a reference back to the sums referred to in paragraph 2, so that the claimants’ entitlement to repayment was confined to the circumstances described in paragraph 2, which did not extend to the financial difficulties experienced by the shipbuilders. It is important to note that both constructions were held to be arguable.94 In other words, this was not a case where the meaning of the words was clear and obvious. Indeed, Lord Clarke’s inclination, based only on the language of the document, was to prefer the claimants’ construction to that advanced on behalf of the bank.95 The strength of the claimants’ case lay in paragraph 3, which, had it stood alone, would have entitled the claimants to recover from the bank. The problem for the claimants was that ­paragraph 3 had to be construed in its context and that context included ­paragraph 2. Here the claimants encountered the difficulty that their construction deprived ­paragraph 2 of any effect other than to act as ‘a preamble to the operative provision in paragraph  3’.96 But the fact that the claimants’ construction effectively deprived paragraph 2 of any substantive effect is not conclusive in favour of the bank’s construction, given that, as Leggatt LJ subsequently observed in Merthyr (South Wales) Ltd v Merthyr Tydfil County Borough Council,97 it is ‘by no means uncommon, including in professionally drafted contracts, to find provisions which are unnecessary and could, without disadvantage to either party, have been omitted’ from the contract.98 Two particular criticisms were levelled by Lord Sumption against the decision of the Supreme Court, although his criticisms have been stated to be ‘quite unfair’.99 The first was the readiness of Lord Clarke to employ considerations of commercial common sense in order to in effect ‘override the language’100 used by the parties. Although his analysis is extremely brief, Lord Sumption stated that the language of the bond pointed in the direction of the claimants being given a ‘partial’ guarantee, whereas the court ‘thought it objectively more reasonable that there should be a full guarantee rather than a partial one’.101 Further, Lord Sumption stated that the

94 Rainy Sky (n 65) [31]. 95 ibid [40] on the basis that the scope of para 2 appeared to extend beyond a refund of the pre-delivery instalments of the price so that it did not set out the sums due under the bond. He also added that the bank’s construction appeared to be ‘something of an afterthought’, given that it was advanced relatively late in the day. A similar view was taken at first instance [2009] EWHC 2624 (Comm) [18] by Simon J, who attached importance to the word ‘all’, which was ‘clear and unqualified’. 96 Rainy Sky (n 65) [34]. This was also the construction adopted by Simon J at first instance (n 95). 97 Merthyr (South Wales) Ltd v Merthyr Tydfil County Borough Council [2019] EWCA Civ 526. 98 ibid [39] (Leggatt LJ). 99 D McLauchlan, ‘Some Fallacies Concerning the Law of Contract Interpretation’ [2017] Lloyd’s ­Maritime and Commercial Law Quarterly 506, 511. 100 Sumption (n 1) 82. 101 ibid 82.

16  Ewan McKendrick decision ‘may have done a disservice to commercial parties by depriving them of the only effective means of making their intentions known’.102 There are two responses to these criticisms. First, the words ‘all such sums’ in paragraph 3 did not necessarily point in favour of a partial guarantee, for the reasons given by Lord Clarke. This was not a case in which the meaning of the disputed paragraph was clear103 and, had it been clear, Lord Clarke expressly accepted that ‘where the parties have used unambiguous language, the court must apply it’.104 Second, it is an overstatement to conclude that Lord Clarke ‘overrode’ the language of paragraph 3 on the sole ground that his preferred construction produced what he perceived to be a more reasonable result. A particular focus of Lord Sumption’s criticism was the willingness of the Supreme Court to attach importance to considerations of commercial common sense when deciding the meaning of ‘all such sums’ in paragraph 3. Lord Sumption referred with approval to the judgment in the Court of Appeal of Patten LJ, who confined resort to considerations of commercial common sense to cases where ‘the most natural meaning of the words produces a result which is so extreme as to suggest that it was unintended’.105 Lord Clarke took a different view. In his judgment, it was ambiguity or lack of clarity, not extremity, that entitled a court to have regard to these broader considerations. As he put it, ‘if there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other’.106 Thus, in the case of ambiguity or lack of clarity, the court is not confined to dictionaries, grammars and syntax when seeking to resolve the ambiguity or lack of clarity, but can range more widely when deciding which of the available possible meanings of the words in dispute is the correct one. Given that Lord Clarke is stating no more than that courts are entitled, but not obliged,107 to have regard in such cases to evidence of the ‘surrounding circumstances’ or the demands of ‘commercial common sense’, it is difficult to see why resort to such evidence should be thought to be objectionable. The claim that it will generate excessive uncertainty is difficult to defend, given that, on the view of the bond adopted by the Supreme Court, the meaning of paragraph 3 was itself unclear. Far from seeking to generate uncertainty, the evidence was being weighed in the scales by the court in an attempt to resolve an uncertainty which had already arisen. Lord Sumption is on stronger grounds when pointing to the risks, also identified by Patten LJ, of the court engaging in ‘no more than guesswork’108 when seeking to ascertain what is required by commercial common sense and substituting ‘its own judgment of the commerciality of the transaction for the view of those who were actually party to it’. On the facts of Rainy Sky, there is no doubt that a guarantee which does not extend to the insolvency of one’s counterparty is less valuable than

102 ibid 88. 103 Thus, Lord Clarke, in Rainy Sky (n 65) [34], rejected the submission that the bank’s construction was ‘the natural and ordinary meaning of the bonds’. 104 ibid [23]. 105 Rainy Sky SA v Kookmin Bank [2010] EWCA Civ 582, [2011] 1 All ER (Comm) 18 [42] (Patten LJ). 106 ibid [21]. 107 As acknowledged in Edgworth Capital (Luxembourg) Sarl v Ramblas Investments BV [2015] EWHC 150 (Comm) [34] (Hamblen J). 108 Rainy Sky (n 105) [42] (Patten LJ).

Interpretation  17 one that does so extend. But the question whether it does so extend may be a matter of bargaining strength or skill rather than a question of what is commercially sensible, given that what is commercially sensible for the defendant bank is not necessarily the same as an outcome that is commercially sensible for the claimant buyers.109 As Lord Sumption put it, ‘the surrounding circumstances may well enable us to discover what the objective was, but not how far it has been achieved’,110 and so it cannot tell us how far the claimants succeeded in their endeavour ‘to get as much as [they] could’111 out of the defendant bank. This leads us on to Lord Sumption’s second criticism of Rainy Sky, which con­cerned Lord Clarke’s observation that the defendant bank had failed to provide ‘a credible reason for excluding repayments in the event of the builder’s insolvency’112 from the scope of the guarantee. Lord Sumption believed this observation to be misplaced, given that it is not permissible for contracting parties to lead evidence of their own belief as to the effect of the disputed clause or the reasons for its restricted scope. As Lord Sumption put it, ‘it seems extraordinarily unfair to the guarantor bank that it should have been prevented by law from answering the question which turned out to be decisive of the issue of construction, namely “Why did you agree this?”’113 The point is a fair one, but, once again, it would appear to be overstated. It is far from clear that this was the ‘decisive’ question for the court, given that Lord Clarke preferred the claimants’ construction as a matter of the interpretation of the words of the contract. Rainy Sky is an extremely difficult case and that is probably why it reached the level of the Supreme Court. But it does not deserve all of the criticisms levelled against it by Lord Sumption. Once it is accepted that the meaning of the disputed term was not clear,114 the Supreme Court was entitled to have regard to the surrounding circumstances and to considerations of commercial common sense when seeking to choose between the competing possible meanings. Although the Supreme Court was entitled to have regard to such circumstances, the conclusion that commercial common sense favoured a full rather than a partial guarantee may well have been moulded by Lord Clarke’s ‘idea of fairness’.115 To this extent, the decision may highlight the dangers, pointed out by Lord Sumption, in placing too much weight on the dictates of commercial common sense when the issue in dispute relates to the scope of an obligation which one party to the contract was willing to assume towards the other. As Lord Sumption’s judgment in Krys demonstrates, he is far less willing to speculate as to what is, and what is not, commercially sensible in such cases, preferring to place more weight on the words which have been used by the parties. The Supreme Court took a different view 109 A point made by Patten LJ in the Court of Appeal, where he noted that ‘there may be any number of reasons why the Builder was unable or unwilling to provide bank cover in the event of its insolvency and why the Buyer was prepared to take the risk’: ibid [51]. 110 Sumption (n 1) 82–83. 111 ibid 83. 112 Rainy Sky (n 65) [44], referring to the judgment of Patten LJ in Rainy Sky (n 105) [51]. 113 Sumption (n 1) 83. 114 A point which was accepted by all of the judges in Rainy Sky. This point may not be accepted by all readers of the case, but, for this purpose, the view of any such reader is not a relevant consideration. 115 Consistently with Lord Sumption’s claim that ‘judges’ notions of common sense tend to be moulded by their idea of fairness’: Sumption (n 1) 84.

18  Ewan McKendrick in Rainy Sky and, attaching considerable weight to the finding of Simon J, described as ‘an experienced judge of the Commercial Court’,116 held that the construction adopted by the claimants was to be preferred because it was ‘consistent with the commercial purpose of the bonds’117 in a way which the defendant bank’s construction was not. (iii) The Chartbrook Case A second case which is the subject of substantial criticism by Lord Sumption is the decision of the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd.118 It is, however, important to identify the precise source of the difference of view. While they agree on the proposition, accepted by the House of Lords in Chartbrook, that evidence of pre-contractual negotiations is generally inadmissible when seeking to interpret a contract, they appear to part company on the question of whether the House of Lords was entitled to reach the conclusion which it did as a matter of interpretation of the words in dispute.119 A strong House of Lords had no such doubts. Lord Walker applied what he termed ‘a traditional approach’120 to the construction of the documents and concluded that, once the ‘general structure’121 of the relevant clauses was grasped, the construction adopted by the court was ‘not merely linguistically possible, but [was] linguistically (as well as commercially) compelling’.122 Lord Hoffmann adopted a different approach. He did not seek to interpret the disputed definition ‘in accordance with ordinary rules of syntax’ because to do so made ‘no commercial sense’.123 But he did not so conclude simply because the result obtained by the application of the ordinary rules of syntax favoured one party to the transaction or, as Lord Sumption suggested, on the assumption that the market would move in a particular direction.124 Lord Hoffmann’s point was not that the rejected construction was ‘unfavourable’ to one party, but rather that it was ‘arbitrary and irrational’,125 or, in the words of Lord Walker, ‘totally incredible’126 or ‘commercial nonsense’.127 Lord Hoffmann’s approach should not produce an excessive amount of uncertainty, given that he stated that not only must it be ‘clear that something has 116 Rainy Sky (n 65) [41]. To similar effect, see the judgment of Sir Simon Tuckey in the Court of Appeal: Rainy Sky (n 105) [30]. 117 Rainy Sky (n 65) [45]. 118 Chartbrook (n 64). 119 They may not have disagreed on the outcome of the case, given that Lord Sumption conceded that ‘the result may well have been just’: Sumption (n 1) 81. The objection of Lord Sumption on this occasion is one not of tone, but of the means used to achieve the end, ie by interpretation rather than rectification. 120 Chartbrook (n 64) [72]. 121 Chartbrook (n 64) [79]. Lord Rodger of Earlsferry at [68] agreed with Lord Walker on this particular point. Baroness Hale also expressed her agreement with the judgment of Lord Walker at [98], although she might not have reached the same conclusion had she not been made aware of the pre-contractual negotiations: see [99]. Lord Hope referred to the judgment of Lord Walker but expressed his agreement with Lord Hoffmann at [1], as did Lord Rodger at [68] and Baroness Hale at [98]. Lord Walker similarly expressed his agreement with Lord Hoffmann at [96], while noting his own ‘more pedestrian route to the conclusion’. 122 ibid [95]. 123 ibid [16]. 124 Sumption (n 1) 81. 125 Chartbrook (n 64) [20]. 126 ibid [88]. 127 ibid [89].

Interpretation  19 gone wrong with the language’ but it must also be ‘clear what a reasonable person would have understood the parties to have meant’.128 In this context, it is also important to recall Lord Hoffmann’s statement that the courts ‘do not easily accept that people have made linguistic mistakes, particularly in formal documents’.129 Provided that these requirements are adhered to, the approach of Lord Hoffmann should not be productive of too much uncertainty but should enable the court, in an appropriate case, to avoid giving to the words used by the parties an interpretation which does not give effect to their clear objective intention. There seem to be two particular points of difference between Lords Sumption and Hoffmann in this respect. The first relates to Lord Hoffmann’s requirement that it must be clear that ‘something has gone wrong with the language’ used by the parties. Lord Sumption notes that the disputed term in Chartbrook was not ‘garbled’ and that there was ‘no apparent error of drafting’.130 Lord Hoffmann responded that the fact that the text was not garbled was ‘neither here nor there’.131 The issue, as he saw it, was how the disputed term would be understood by a reasonable person who had access to the admissible background circumstances. In his view, that reasonable person would have rejected the literal meaning of the disputed term as irrational and inconsistent with other clear provisions of the contract,132 and in these circumstances Lord Hoffmann adopted an interpretation which gave effect to what the parties ‘must actually have meant’.133 Lord Sumption, for his part, objected to this use of these wider considerations ‘to show that the parties cannot as reasonable people have meant what they said’.134 This brings us back to the difference between ‘word meaning’ and ‘speaker’ or ‘audience’ meaning. If Lord Sumption is correct and the law’s focus is exclusively on ‘word meaning’, then Chartbrook is difficult, although not impossible,135 to defend. On the other hand, if Lord Hoffmann is correct and the focus is on what the speaker would be understood to have meant by the reasonable person with access to the relevant admissible evidence, Chartbrook seems less difficult. It is, however, important to be clear as to the nature of the step that is being taken here by Lord Hoffmann. This reliance upon background circumstances is not confined to cases, such as Rainy Sky, where the term in dispute is ambiguous or lacking in clarity. It can be invoked even where the conventional meaning of the words used by the parties is clear. That this is so becomes abundantly clear when account is taken of Lord ­Hoffmann’s criticisms of what he terms the ‘system of irrebuttable presumptions’136 that was employed by the courts in the nineteenth century and whose main 128 ibid [25]. 129 ICS (n 60) 913. 130 Sumption (n 1) 81. 131 Hoffmann (n 2) 570. 132 ibid 570. 133 ibid 570. The word ‘actually’ might suggest that Lord Hoffmann was looking at the subjective intentions of the parties, but this seems unlikely, given the emphasis throughout his judgment on the objective meaning of the words used by the parties. 134 Sumption (n 1) 80. 135 It is not impossible, given that Lord Walker reached the same conclusion by the application of what he termed the ‘traditional approach’ to the interpretation of the disputed term: see n 121 above. 136 Hoffmann (n 2) 565.

20  Ewan McKendrick protagonist was Sir James Wigram. The nineteenth-century authorities accepted that extrinsic evidence was admissible where the words were capable of being understood in more than one sense. It was where the meaning was clear that such evidence was excluded and the courts applied the strict and primary sense of the words used by the parties. Lord Hoffmann describes this approach as an ‘atrocity’137 on the ground that a court should not be required to give the words used by the parties their primary meaning when it is obvious to the court that this was not the meaning which the parties had intended. It is to avoid such ‘atrocities’ that Lord Hoffmann would permit a court to give effect to the meaning that was objectively intended by the parties, even if that is not the conventional meaning of the words used. One difficulty with this approach is that it creates uncertainty if parties cannot rely with confidence on the natural and ordinary meaning of the words they have used. But at this point it is important to keep clearly in mind the constraints which Lord Hoffmann built into his approach, namely: (i) acceptance of the proposition that parties to contracts can be expected to have chosen their words with care and not to have left things out; (ii) the requirement that it be both clear that something has gone wrong with the language and clear what the parties intended the words in dispute to mean; (iii) recognition that the courts should not depart from the conventional meaning of the language of the contract simply because to do so would produce a result which is fairer or more reasonable; and (iv) acknowledgement of the vital distinction between linguistic errors, which can be corrected, and errors about the effect which the agreement might have, which will not be corrected by the courts.138 Provided that the courts adhere to these four constraints, Lord Sumption’s concerns would appear to be largely addressed. Once it is accepted that words do not have an autonomous meaning, the courts should not be required to give a meaning to a contract term when it is clear to the reasonable person that the parties had not intended the words to be understood in their conventional sense and it is also clear in what sense they had intended the words to be read. The second point of difference between Lords Sumption and Hoffmann relates to the relationship between interpretation and rectification. Lord Sumption expresses the concern that Lord Hoffmann’s broader approach to interpretation is ‘difficult to reconcile’ with the doctrine of rectification and that it is ‘hard to see any need’ for rectification ‘if the parties can have an intention attributed to them which is not reflected in the language of the agreement’.139 It is, however, important to note that Lord Sumption does not go so far as to insist that all corrections are carried out pursuant to the doctrine of rectification. Thus, he recognises that ‘where it is obvious that a word has been omitted and what the word is, the courts have long recognised that it may be reinserted as a matter of construction in order to avoid incoherence or absurdity’.140 Acceptance of the latter proposition entails a degree of overlap or recognises a ‘close relationship’141 between interpretation and rectification.

137 ibid 566. 138 ibid 569, 571 and 573. 139 Sumption (n 1) 85. 140 ibid 85. 141 Oceanbulk Shipping and Trading SA v TMT Asia Ltd [2010] UKSC 44, [2011] 1 AC 662 [45] (Lord Clarke).

Interpretation  21 However, it does not follow from this that the two doctrines are identical. Interpretation is the process of ascribing a meaning to a term of the contract which the parties have agreed, whereas rectification is the process whereby a document, the meaning of which has already been ascertained, is rectified so that it gives effect to the intention of the parties.142 Lord Hoffmann is therefore correct to state that ‘construction is anterior to rectification’.143 And reports of the imminent demise of rectification are greatly exaggerated. On the contrary, the scope of the doctrine is the subject of vigorous academic and judicial debate.144 Further, the admissibility of evidence of pre-contractual negotiations in a rectification claim when such evidence is not admissible when seeking to interpret the contract will ensure that rectification will continue to play an important role in practice because it enables counsel to draw on a broader range of materials when seeking to persuade a court that something has gone wrong with the language used by the parties.145 The principal criticism made by Lord Sumption here appears not to relate to the existence of an overlap between interpretation and rectification, but rather arises out of a concern that the requirements for rectification are ‘extremely exacting’,146 whereas the same cannot be said of Lord Hoffmann’s broader approach to interpretation, with the consequence that rectification is ‘largely circumvented’.147 But this is to ignore the constraints, which I have noted in this chapter, that Lord Hoffmann set out which do not appear to be significantly less exacting than the criteria for rectifying a contract. Once these are taken into account, the force of Lord Sumption’s criticism is substantially diminished. III. CONCLUSION

Three important messages emerge from the judgment of Lord Sumption in Krys and his Harris Society lecture. First, the language used by the parties is important and the courts must pay careful attention to it when seeking to elucidate its meaning. Second, courts must be careful when taking into account what is, or is not, said to be a commercially sensible construction of the words in dispute. In particular, the courts should be careful not to engage in speculation which lacks a firm basis in the admissible evidence and commercial good sense is not to be equated with the court’s perception of a fair and reasonable outcome. Third, the tone in which judgments are expressed in the senior courts is important in terms of the signal that is being sent to the lower courts as to the approach that is to be adopted towards the interpretation of contracts. However, some of the criticisms levelled by Lord Sumption against the approach of Lord Hoffmann in his Harris Society lecture appear somewhat overstated. 142 Tartsinis v Navona Management Co [2015] EWHC 57 (Comm) [13] (Leggatt J). 143 Hoffmann (n 2) 572. 144 Best illustrated by the recent decision of the Court of Appeal in FHSC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361, [2020] 2 WLR 429. 145 Hoffmann (n 2) 572–73. For illustrations in practice, see Tartsinis (n 142); LSREF III Wight Ltd v ­Millvalley Ltd [2016] EWHC 466 (Comm), 165 Con LR 58. 146 Sumption (n 1) 86. 147 ibid 86.

22  Ewan McKendrick Thus, Lord Hoffmann is correct to state that he did not advocate the throwing away of dictionaries, nor did he suggest that the courts should depart from the conventional meaning of the language of the contract simply because to do so would produce a result which was fairer to the parties or more reasonable. The same overstatement is apparent in Lord Sumption’s claim that Lord Hoffmann’s analysis in Attorney General of Belize v Belize Telecom Ltd148 is ‘tantamount to allowing terms to be implied on the ground that they are commercially reasonable and must therefore have been intended’.149 The judgment of Lord Hoffmann in Belize is controversial insofar as he advanced the claim that the implication of a term into a contract is an exercise in the construction of the contract as a whole.150 But he did not say that the court could imply a term into a contract simply because it was reasonable to do so. On the contrary, he stated that the court cannot insert a term into a contract ‘to make it fairer or more reasonable’151 and that ‘the most usual inference’ to be drawn from an apparent gap in the contract is that ‘nothing is to happen’ because if the parties had intended something to happen they would have said so.152 It is, however, true that the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd deemed it necessary to restate the traditional rule that a term must be necessary before it will be implied and to assert that the reasonableness of the term is not a sufficient basis to make the implication.153 But the principal reason for this reassertion of orthodoxy was that some had read into Lord Hoffmann’s judgment in Belize a liberalisation of the law relating to the implication of terms into a contract which was not a fair and accurate reading of his judgment. The difference between Marks and Spencer and Belize would seem to be more one of tone rather than substance, although the tone here is important. A controversial aspect of Lord Sumption’s analysis in his Harris Society lecture is to be found in his claim that ‘all properly drafted language has an autonomous meaning’.154 Much here turns on the meaning to be given in this context to the word ‘autonomous’. If Lord Sumption’s claim is that language has a conventional meaning and that the conventional meaning of the language used by the parties is a matter of substantial, if not critical, importance when seeking to interpret a contract, it is likely to be met with almost universal assent. But, were the claim to be understood as being that the language of a contract has an independent meaning that can always be identified irrespective of context, then that would be to go too far. Contracting parties do occasionally use the wrong language or the wrong syntax, and in such cases the courts should not be compelled, unless the claim is one for rectification, to give to the words used by the parties a meaning which the admissible background evidence clearly demonstrates was not consistent with their intention. However, once the conclusion is reached that the 148 Belize (n 4). 149 Sumption (n 1) 85. 150 Just as interpretation is anterior to rectification, so it is suggested that interpretation is anterior to implication. See Trump International Golf Club Scotland Ltd v Scottish Ministers [2015] UKSC 74, [2016] 1 WLR 85 [35] (Lord Hodge); Bou-Simon v BGC Brokers LP [2018] EWCA Civ 1525, [2019] 1 All ER (Comm) 955 [13] (Asplin LJ). 151 Belize (n 4) [16]. 152 ibid [17]. 153 Marks & Spencer v BNP (n 4). 154 Sumption (n 1) 82.

Interpretation  23 courts do have the freedom to depart from the conventional meaning of the language used by the parties so that the door is open to the submission that the parties could not have meant what the words of the contract plainly state, the risk is that counsel will seek to rush through the door on behalf of contracting parties who have done no more than enter into a bad bargain. But this risk does not demand that the door is firmly shut to the admissibility of evidence that aims to demonstrate that the parties have not used language in its conventional sense. Rather, it requires that the risk be managed carefully and, as is the case in so many areas of the law, this is to be found by striking a balance between the competing interests. The latest attempts by the Supreme Court in Arnold v Britton155 and Wood v Capita Insurance Services Ltd156 to strike that balance was done in what was for Lord Sumption ‘rather muffled tones’.157 However, it seems nevertheless to have brought a greater degree of stability to this area of law. One of the difficulties with which the courts have had to grapple is that the principles which they develop must be applied to a vast range of contracts, from the informal contract concluded between longstanding business parties who have dealt with each other for years through to the professionally drawn and negotiated contract of substantial value where both sides have access to highly skilled, professional advice. These problems are compounded by the fact, acknowledged by Lord Hoffmann, that ‘the subtleties of language are such that no judicial guidelines or statements of principle’158 can prevent judicial disagreement from sometimes happening. Given these difficulties, the aim has to be to articulate a workable set of principles, neither too rigid nor too vague, which can be applied consistently and without undue difficulty by the courts. An important step forward was taken in this regard by the Supreme Court in Wood v Capita Insurance Services,159 when it was recognised that it is important to have regard to the circumstances of the particular agreement that is before the court. In the case of professionally drawn agreements, they should be interpreted ‘principally’, but not exclusively, by textual analysis.160 But this textual analysis does not demand that the words used by the parties be given their conventional meaning, since Lord Hodge recognised that even in a professionally drawn agreement the text may not be ‘logical and coherent’ and may ‘lack clarity’.161 However, the courts are likely to be slow to reach the latter conclusion where the quality of the drafting of the agreement is high and Lord Hodge also acknowledged that the courts must be ‘alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest’.162 At the other end of the spectrum is the agreement that is marked by its ‘informality, brevity or the absence of skilled professional assistance’,163

155 Arnold v Britton (n 3). 156 Wood v Capita (n 5). 157 Sumption (n 1) 86. Lord Sumption describes what he believed was taking place in these two cases in rather more colourful terms, as the sounding of the retreat. 158 Chartbrook (n 64) [15]. 159 Wood v Capita (n 5). 160 ibid [13]. 161 ibid [13]. 162 ibid [12]. 163 ibid [12].

24  Ewan McKendrick where greater weight may be given by the court to the matrix of fact or the background circumstances. It is a feature of a number of recent cases in the lower courts that counsel for both sides do not contest the principles that are to be applied to the interpretation of their contract,164 and the focus of the dispute is then on the application of these principles to the particular clause in dispute. This does not remove all of the difficulties, but it does reduce them in the sense that the courts now have an agreed framework within which to resolve issues relating to the interpretation of contracts.165 The outcome of these cases may not meet with the complete approval of Lord Sumption, given that the law continues to recognise that a court, when interpreting a contract, may conclude that the parties have used the wrong language or syntax and, in such a case, the court can depart from the conventional meaning of the language they have used.166 But the circumstances in which a court can do so are carefully limited.167 The renewed emphasis by the courts on the importance of textual analysis in the case of professionally drawn agreements is a significant step in the direction advocated by Lord Sumption in his Harris Society lecture. The balance thus struck may not receive universal approbation, but it has hopefully created a framework of principle which can be securely applied by the courts (and by practitioners out of court) to the interpretation of commercial contracts.

164 See, eg Ziggurat (Claremont Place) LLP v HCC International Insurance Company plc [2017] EWHC 3286 (TCC), [2018] BLR 98 [22] (Coulson J), Gard Shipping AS v Clearlake Shipping Pte Ltd [2017] EWHC 1091 (Comm), [2017] 2 Lloyd’s Rep [14] (Sir Jeremy Cooke); Astex Therapeutics Ltd v Astrazeneca AB [2017] EWHC 1442 (Ch) [87] (Arnold J). 165 This can be seen in the similarities that exist between different recent judicial summaries of the applicable principles. See, eg Lukoil Asia Pacific Pte Ltd v Ocean Tankers (Pte) Ltd (The Ocean Neptune) [2018] EWHC 163 (Comm), [2018] 1 Lloyd’s Rep 654 [8] (Popplewell J); The Federal Republic of Nigeria v JP Morgan Chase Bank NA [2019] EWHC 347 (Comm) [32] (Andrew Burrows QC sitting as a Judge of the High Court); Silverburn Shipping (IoM) Ltd v Ark Shipping Company LLC [2019] EWHC 376 (Comm) [25] (Carr J). 166 Thus, cases can be found in which the courts have accepted that the ‘punctuation has gone awry’ (Vitol E&P Ltd v New Age (African Global Energy) Ltd [2018] EWHC 1580 (Comm) [28] (Moulder J)), as where it is satisfied that the person responsible for drafting the contract did not know how to use a comma (Wood v Capita (n 5) [37] (Lord Hodge): ‘there are no set rules for the use of commas and in any event the draftsman’s use of commas in this clause is erratic’). However, where the courts are satisfied that the normal rules of grammar or syntax have been satisfied, eg in relation to the use of capital letters, it will follow and give effect to these rules: see, eg Hopkinson v Towergate Financial (Group) Ltd [2018] EWCA Civ 2744. 167 Examples of cases in which the courts have done so include Multi-Link Leisure Developments v North Lanarkshire Council [2010] UKSC 47, [2011] 1 All ER 175 and Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56, 2012 SCLR 114. But it is ‘only in exceptional cases’ that commercial common sense can ‘drive the court to depart from the natural meaning of contractual provisions’: Carillion Construction Ltd v Emcor Engineering Services Ltd [2017] EWCA Civ 65, [2017] BLR 203 [46] (Jackson LJ).

3 Variation and Waiver WILLIAM DAY

Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy. – MWB Business Exchange Ltd v Rock Advertising Ltd1

I. INTRODUCTION

‘M

odern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional. It raises two of them.’2 So began Lord Sumption’s judgment in MWB. The two questions raised in MWB were, first, whether a contractual term limiting the parties’ power to agree to vary the contract was effective according to its terms and, second, the requirements for consideration in the context of contractual variations. Lord Sumption led the Supreme Court in answering the first question ‘yes’, so that the second question did not need to be addressed. There has already been significant academic commentary on whether Lord Sumption’s judgment on the first issue was correct,3 and even before MWB there was a voluminous literature on the second, unresolved, issue.4

1 MWB Business Exchange Ltd v Rock Advertising Ltd [2018] UKSC 24, [2019] AC 119 [11] (Lord Sumption). 2 ibid [1] (Lord Sumption). 3 See, eg A Burrows, ‘Anti-Oral Variation Clauses: Rock-Solid or Rocky?’ in PS Davies and M Raczynska (eds), The Contents of Commercial Contracts: Terms Affecting Freedoms (Oxford, Hart Publishing, 2020); R Calnan, ‘Contractual Variation Clauses’ (2018) 8 Journal of International Banking and Financial Law 487; JC Fisher, ‘Contract variation in the common law: a critical response to Rock Advertising v MWB Business Exchange’ (2018) 47 Common Law World Review 196; E McKendrick ‘Two “Truly Fundamental Issues in the Law of Contract”: An Analysis of MWB Business Exchange Ltd v Rock Advertising Ltd’ in D Clarry (ed), The UK Supreme Court Yearbook Volume 9 (2017–2018) (London, Appellate Press, 2019); J O’Sullivan, ‘Party-Agreed Formalities for Contractual Variation – a Rock of Sense in the Supreme Court’ (2019) 135 LQR 1; PS Davies, ‘Varying Contracts in the Supreme Court’ (2018) 77 CLJ 464; R Harris, ‘Modifications, Wrangles and Bypassing’ [2018] Lloyd’s Maritime and Commercial Law Quarterly 441. 4 Quite aside from the enormous literature on consideration generally, on consideration in the context of a contractual variation, see, eg M Chen-Wishart, ‘A Bird in Hand: Consideration and Contract

26  William Day Like MWB, this chapter considers two issues. First, it offers a contribution to the debate on the questions of contractual variation raised by MWB. It argues that the heart of the decision on MWB was to confirm that common law rules on the variation of contractual terms are not mandatory rules of contract law but instead are default rules capable of modification by the terms of the parties’ agreement. It follows that there is a conceptual distinction between contract formation and contract variation. That is because, unlike the rules on variation, rules on formation are mandatory rules, out of which the parties cannot contract. That distinction creates the space to challenge the received wisdom that fresh consideration must be necessary at the variation stage simply because it is required to make an agreement enforceable at the formation stage. It is suggested that the rules of consideration in the variation of contracts, said to be ‘ripe for re-examination’ by Lord Sumption in MWB,5 should be reformed: further consideration should not be required on variation, although a variation which purports to remove the consideration present in the original agreement should not be effective. Second, this chapter considers the implication of MWB on the effectiveness of clauses that purport to limit a defaulting party’s ability to contend that the claimant has waived his ability to enforce his rights under the original contract. This has received much less attention in the past,6 but has practical significance. A contract breaker will often advance a defence of waiver in the alternative to a defence of variation. That is because they can achieve the same thing, which is to relieve a defendant of the liability that would otherwise exist for not abiding by the terms of the original contract. Indeed, because of the doctrines’ functional equivalence, it is standard for the boilerplate of a contract to purport to restrict both in the same provision. A typical clause reads:7 An amendment or waiver in respect of this agreement will only be effective if in writing and signed by each of the parties.

We now know from MWB that this clause will work to prevent a party claiming that a variation of the contract took place in a conversation or by the parties’ behaviour. But what about the effectiveness of this clause in precluding an argument about oral waiver or waiver by conduct? That important question has been put to the courts

Modifications’ in A Burrows and E Peel (eds), Contract Formation and Parties (Oxford, Oxford University Press, 2010); F Reynolds and G Treitel, ‘Consideration for the Modification of Contracts’ (1965) 7 Malaya Law Review 1; J O’Sullivan, ‘In Defence of Foakes v Beer’ (1996) 55 CLJ 219; J Swann, ‘Consideration and the Reasons for Enforcing Contracts’ (1976) 15 University of Western Ontario Law Review 83, 84–98; CH Tan, ‘Contract Modifications, Consideration and Moral Hazard’ (2005) 17 Singapore Academy of Law Journal 566. 5 MWB (n 1) [18] (Lord Sumption). 6 Though the difficulties have been noted in reaction to MWB (see, eg Burrows (n 3) 43–45; Davies (n 3) 465), the question of contracting to exclude waiver last appears to have been explored properly over 100 years ago: see JS Ewart, Waiver Distributed (Cambridge, MA, Harvard University Press, 1917) ch 16, focusing on the law in the USA at that time. 7 Adapted from the ISDA Master Agreement 2002, which is ‘one of the most widely used forms of agreement in the world’ and ‘probably the most important standard market agreement used in the financial world’: Lomas v JFB Firth Rixson Inc [2010] EWHC 3372 (Ch) [53] (Briggs J).

Variation and Waiver  27 several times since MWB. In GPP Big Field LLP v Solar EPC Solutions SL, the following conclusion was reached:8 By analogy with the decision of the Supreme Court in Rock Advertising Ltd v MWB Business Exchange Centres Ltd that ‘no oral variation’ clauses are enforceable and effective, it seems to me that this ‘no oral waiver or waiver by conduct’ provision is also enforceable and effective according to its terms.

However, in Sumitomo Mitsui Banking Corporation Europe Ltd v Euler Hermes Europe SA, a slightly different line was adopted:9 it would appear to me to be inconsistent with the recognition in Rock Advertising that party autonomy operates up to the conclusion of the contract and thereafter only to the extent that the contract allows to find that any conduct which would amount to a waiver of the original right also amounts to a waiver of the non-waiver clause. In my judgment there would have to be something which showed that there was not only a waiver but a waiver of the non-waiver clause … Applying [Lord Sumption’s] reasoning and language [regarding estoppel]10 to an alleged waiver, it appears to me that if it is said that waiver prevents reliance on a no waiver clause there would have to be something which indicated that the waiver was effective notwithstanding its noncompliance with the non-waiver clause and something more would be required for this purpose than what might otherwise simply constitute a waiver of the original right itself.

This chapter argues that both answers are too simplistic. ‘Waiver’ is an amorphous label that covers a number of distinct doctrines. As Lord Wright said in Ross T Smyth & Co Ltd v T D Bailey Son & Co:11 ‘The word “waiver” is a vague term used in many senses. It is always necessary to ascertain in what sense and with what restrictions it is used in any particular case.’ Each of the various doctrines that can be described as waiver has a different juridical basis. While some forms of waiver might by their nature be capable of preclusion or restriction by contractual terms, others should not be so susceptible to the prior agreement of the parties. The result is that, even after MWB, a no oral waiver clause will often not be able to prevent the defaulting party from raising a defence in waiver. II. VARIATION

A.  Contracting to Restrict Variation MWB itself was concerned with a straightforward no oral variation clause:12 ‘All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.’

8 GPP Big Field LLP, GPP Langstone LLP v Solar EPC Solutions SL (formerly known as Prosolia Siglio XXI) [2018] EWHC 2866 (Comm) [203.3] (Richard Salter QC sitting as a Judge of the High Court). See also J Morgan, ‘Contracting for Self-Denial: On Enforcing “No Oral Modification” Clauses’ (2017) 76 CLJ 589 (n 3) 611–12; H Beale (ed), Chitty on Contracts, 33rd edn (London, Sweet & Maxwell, 2018) para 22.045. 9 Sumitomo Mitsui Banking Corporation Europe Ltd v Euler Hermes Europe SA [2019] EWHC 2250 (Comm) [64] (Butcher J). 10 See further text to n 175 below. 11 Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60 (HL) 70 (Lord Wright). 12 MWB (n 1) [2] (Lord Sumption).

28  William Day The claimant landlord sued the defendant for arrears due under a licence for office space. The defendant claimed that the licence had been varied and the fee had been reduced by oral agreement. That oral agreement had been reached (somewhat improbably) in a telephone call with a representative of the claimant when on a bus on Oxford Street. But the variation had not been written down and was not signed, so it did not satisfy the formalities which the parties had agreed would govern changes to the contractual terms. The question for the court was whether the variation was effective despite not complying with these agreed formalities. Before MWB, there had been little authority of the effectiveness of no oral variation clauses. The Court of Appeal in World Online Telecom Ltd v I-Way Ltd recognised that there was ‘room for debate and movement on the question’.13 The matter was considered in more detail by Beatson LJ in obiter dicta in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd.14 He held that an oral variation could be effective notwithstanding non-compliance with agreed formalities because the ‘general principle’ in contract law was that:15 parties have the freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth or by conduct. The consequence in this context is that in principle a [no oral variation clause] does not prevent them from later making a new contract varying the contract by oral agreement or by conduct.

Beatson LJ’s obiter reasoning in Globe Motors was then adopted by the Court of Appeal in MWB itself,16 to reach the conclusion that (subject to the question of consideration) the oral variation reducing the licence fee was in principle effective notwithstanding not complying with the agreed formalities. However, when the case reached the Supreme Court, Lord Sumption rejected the approach previously taken by Beatson LJ, and ruled the variation ineffective for failure to comply with the no oral modification clause.17 He reasoned that, as a matter of principle, freedom of contract applied at the time the parties originally contracted, but sanctity of contract thereafter restricted the parties’ autonomy.18 It followed that, if the parties provided for formalities on variation, they should therefore be respected. Moreover, parties have good pragmatic reasons for imposing formalities on variations: upholding written contracts over (often spurious) allegations of informal variations; maintaining clarity as to the terms of what has been agreed; and stopping those without actual authority binding a company to a variation.19 The law of contract should not obstruct these legitimate concerns unless reasons of public policy are engaged – which, in MWB, they were not. Implicitly underpinning the decision in MWB is the recognition that common law rules for contractual variation are default rules rather than mandatory rules of 13 World Online Telecom Ltd v I Way Ltd [2002] EWCA Civ 413 [12] (Sedley LJ). 14 Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396, [2017] 1 All ER (Comm) 601. 15 ibid [100] and [113] (Beatson LJ). 16 MWB Business Exchange Ltd v Rock Advertising Ltd [2016] EWCA Civ 553, [2017] QB 605 [19]–[36] (Kitchin LJ). 17 Baroness Hale, Lord Wilson and Lord Lloyd-Jones agreed with Lord Sumption. 18 MWB (n 1) [11] (Lord Sumption); see also [15]. 19 ibid [12] (Lord Sumption).

Variation and Waiver  29 contract law, and therefore capable of modification by the parties. MWB was not the first time that the courts have reached this conclusion. It has long been established that a clause relaxing the common law requirements for a variation will be effective according to its terms, so long as such a clause does not undermine the basic certainty of terms required by contract law.20 For example, a bank usually has the unilateral power to change the rate of interest paid to deposit holders or payable by borrowers, dispensing with the common law requirement for the variation to be agreed.21 Similarly, contracts often incorporate by reference a party’s standard terms and conditions as varied from time to time, and it is well established that the contract will incorporate variations of those standard terms without further agreement.22 Parties have good pragmatic reasons for building in this sort of flexibility into a contract. In long-term contracts, in particular, the parties can appreciate that it may be difficult to predict at the outset the circumstances in which performance is to be rendered in the future and will want to facilitate adjustments during the life of the contract.23 Although the authorities on relaxing the requirements for variation were not considered in his judgment, Lord Sumption’s decision in MWB was entirely consistent with these cases. Just as the default rules of variation can be relaxed by prior party agreement, so too can they be restricted. Lord Sumption’s judgment in MWB confirms that there a conceptual distinction between the original formation of a contract and the later variation to that contract.24 There is a clear contrast, for example, between the effect of a no oral variation clause and the effect of marking documents marked ‘subject to contract’. Sometimes ‘subject to contract’ markings are not removed before the parties begin to render performance. RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG was such a case.25 There, the Supreme Court recognised that such a marking would weigh against the existence of a contract, but that it was not determinative, and on the facts of RTS concluded that there was indeed a contract between the parties. Lord Clarke said that the question in each case was ‘whether the parties have nevertheless agreed to enter into contractual relations on particular terms notwithstanding their earlier understanding or agreement’.26 This is obviously different to a no oral modification clause, which, after MWB, will preclude the subsequent variation of the parties from taking effect. That difference of approach might be explained on the basis that, in the latter context, the term usually has no contractual force, whereas in the former context it does. But the parties could choose to give the ‘subject to contract’ commitment contractual force: in other words, they could purport to contract not to contract unless certain formalities were observed. Nonetheless, there is still a good reason for not giving that conclusive effect. The rules governing contractual formation are, in essence, the foundational rules of recognition for contract law. 20 See further Chitty on Contracts (n 8) paras 2.148–2.156. 21 See, eg Paragon Finance plc v Nash [2001] EWCA Civ 1466, [2002] 1 WLR 685. 22 See, eg Yeo v Stewart [1947] 2 All ER 2 (KDB). 23 E McKendrick, ‘The Regulation of Long-Term Contracts in English Law’ in J Beatson and D ­Friedmann (eds), Good Faith and Fault in Contract Law (Oxford, Clarendon Press, 1995) 310–11, 316–22. 24 cf Burrows (n 3) 44 fn 22. 25 RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14, [2010] 1 WLR 753. 26 ibid [55] (Lord Clarke).

30  William Day They mark the ­boundaries of the court’s jurisdiction to enforce bargains between private parties. It should not be possible for parties to agree to outlaw themselves from these first principles of contract law.27 Indeed, the courts have been careful not to allow parties to trespass on these formation rules in the past. For example, parties cannot escape the basic certainty required of a concluded contract by entering into an agreement to agree.28 Nor can the formalities stipulated by one party on the other party’s acceptance of an offer (such as by signature) override a subsequent clear acceptance of that offer by another means (for instance, by starting to render performance without signing the contract).29 In short, whereas after MWB rules of contract variation are clearly default rules in contract law that can be modified by the parties,30 rules of contract formation are mandatory propositions of contract law out of which the parties cannot contract. In the chorus of academic commentary that accompanied MWB, two principal themes have emerged. The first theme focuses on the question of principle: when the parties reach two conflicting agreements at different points in time, which should override the other? Those critical of the decision in MWB argue that ‘the most recent agreement of the parties should be enforced’ as a matter of individual autonomy.31 But in the context of contract variation rather than formation, it is not obvious why the later agreement should be preferred. Indeed, the law of contract itself provides a good reason for preferring the original bargain struck between the parties. As Morgan has put it, ‘The basis of contract law is to confer the freedom to curb subsequent freedom of action’. It follows that ‘contracting parties should also be free to give up their freedom to make informal variations’.32 McKendrick has similarly argued that ‘effect should be given to the terms of the original agreement. The reason for this is that the parties voluntarily agreed to the anti-oral variation clause, a clause which is valid and binding.’33 No good answer appears to have been given to this point beyond an assertion that the later agreement should carry greater weight. The second theme in the post-MWB literature has questioned the decision’s implication for clauses that go beyond basic and reasonable formalities, such as writing 27 cf Rotam Agrochemical Company Limited, Rotam Agrochem International Company Limited v Gat Microencapsulation GMBH [2018] EWHC 2765 (Comm) [137], where Butcher J ‘assume[d], without deciding, that appropriately drafted “stipulations as to formalities” for a future agreement should be treated as similar in effect to the “no oral variation” provision in MWB v Rock Advertising’. 28 See, eg Walford v Miles [1992] 2 AC 128 (HL) 136–38 (Lord Ackner). A lock-out agreement is valid (ibid 139), but sounds in damages. It does not mean that a contract entered into in breach of a lock-out agreement is void: Pitt v Asset Management Ltd [1994] 1 WLR 327 (CA). 29 See, eg Manchester Diocesan Council for Education v Commercial and General Investments Ltd [1970] 1 WLR 241 (Ch) 246 (Buckley J); Reveille Independent LLC v Anotech International (UK) Ltd [2016] EWCA Civ 443 [40]–[41] (Cranston J). 30 cf J Morgan, Contract Law Minimalism: A Formalist Restatement of Commercial Contract Law (Cambridge, Cambridge University Press, 2013) 218–28, who suggests that formation rules should be capable of party modification. 31 Davies (n 3) 466. See also Calnan (n 3) 489. Both Burrows (n 3) 43 and J Cartwright, Formation and Variation of Contracts, 2nd edn (London, Sweet & Maxwell, 2018) para 5.41 claim this to be the ‘principled approach’ without further explanation. 32 Morgan (n 8) 614. See also J O’Sullivan, ‘Unconsidered Modifications’ (2017) 133 LQR 191, 196: ‘There is something paradoxical about freedom of contract being invoked to deny effect to a sensible contractual clause. The unfettered sovereignty argument is … not ultimately compelling, since contracting paradigmatically involves agreeing to limit one’s freedom of action in the future.’ 33 E McKendrick, ‘The Legal Effect of an Anti-Oral Variation Clause’ (2017) 32 Journal of International Banking Law and Regulation 439, 445.

Variation and Waiver  31 and signature. Some of the examples given in support of this second criticism are obvious straw men. A requirement that variations be signed in blood, for instance, would clearly be contrary to public policy and unenforceable.34 Nonetheless, it is true that after MWB the parties may in some cases find themselves unable to vary a contract when they genuinely want to do so. There are some slightly silly examples – ‘must be signed in invisible ink in a boat in the mid-Atlantic’35 – but it is not difficult to think of more realistic ones. For instance, a long-term contract might identify the individuals within an organisation with the power and authority to approve a variation, but, by the time a variation is required, all those individuals may have left the organisation. A contract signed by a start-up company may require unanimous shareholder consent to agree to a variation, but securing that unanimity may well be impossible after the company has been listed on the London Stock Exchange. Or the contract may simply prohibit any variations of the contract altogether. Public policy may well not be directly engaged in these examples.36 Yet it does not follow that the parties will always be trapped in an unamendable contract. They can usually expressly agree to discharge the original contract and enter into a new contract.37 This is an accepted solution for escaping statutory formality requirements and there is no reason why the same should not be true for party agreed formalities for modification after MWB.38 After all, discharge is different to modification: ‘one means the complete ending, the other the continuing of a contract in an amended form’.39 In Morris v Baron,40 for example, the House of Lords was concerned with (the now repealed) section 4 of the Sale of Goods Act 1893, which provided that a contract for the sale of goods of more than £10 in value was not enforceable unless: the buyer shall accept part of the goods so sold, and actually receive the same, or give something in earnest to bind the contract, or in part payment, or unless some note or memorandum in writing of the contract be made and signed by the party to be charged or his agent in that behalf.

The parties entered into a contract for the sale of goods evidenced by a memorandum in writing satisfying the requirements of section 4. The seller later sued the buyer for the price, and the buyer counterclaimed for damages for non-delivery of the goods. Shortly before trial, they reached a settlement which included provision for any future performance. The buyer later defaulted on the settlement. He sought to escape it by claiming that this amounted to a variation of the original contract and was invalid because the settlement did not record the agreement in a way which met the requirements of section 4. The House of Lords rejected this characterisation and found that 34 Harris (n 3) 445. This was an example put by counsel for the respondent to the Supreme Court when hearing the MWB appeal. 35 Burrows (n 3) 44 fn 22. 36 Harris (n 3) 445. 37 Of course, on a practical level, allegations of discharge and contracting again de novo without credible evidence are unlikely to successful: Axis Fleet Management Ltd v Rygor Group Services Ltd [2018] EWHC 2276 (QB) [43]–[45] (Martin Griffiths QC sitting as a Judge of the High Court). See also Morris v Baron & Co [1918] AC 1 (HL) (Viscount Haldane). 38 cf Cartwright (n 31) paras 9.03–9.05, who treats discharge and novation as a form of variation. 39 SJ Stoljar, ‘The Modification of Contracts’ (1957) 35 Canadian Bar Review 485, 487. 40 Morris v Baron (n 37). For criticism of the decision, see Stoljar (n 39) 507–08.

32  William Day the ‘parties intended not merely to vary the original contract but to set it aside and substitute another for it’.41 This was valid despite the lack of formality because, while section 4’s formality requirements applied to the creation and modification of sale of good contracts valued at over £10, it did not also apply to their discharge.42 This solution may appear to bear some similarity to that proposed by Lord Briggs in MWB itself. Lord Briggs agreed with the outcome of the appeal, but for different reasons to Lord Sumption. Lord Briggs considered that party autonomy extended beyond freedom at the time of contracting to freedom for the parties to ‘unbind themselves’ after contracting.43 Nonetheless, he held that a no oral variation clause would be effective in preventing an oral variation unless the parties had ‘expressly (or by strictly necessary implication) agreed to do away with it’.44 Discharging one set of contract terms in full and adopting a new set would be consistent with Lord Briggs’s approach: by bringing the original contract to a complete end, the parties will have by necessary implication agreed that the no oral modification clause should cease to have effect. But ultimately this solution does not bridge the conceptual divide between Lord Briggs and the rest of the court led by Lord Sumption. That is because, contrary to Lord Briggs’s conclusion, if the contract purports to restrict not only the circumstances in which a contract can be varied but also the circumstances in which a contract can be discharged by agreement, the parties’ later agreement to discharge the contract by consent cannot override that earlier agreement restricting their ability to discharge by consent. Rules on contractual discharge, like rules on contractual variation, are default rules that are capable of modification by the parties.45 The safety value to any injustice or unfairness caused by a clause that restricts contractual variation is waiver – or, rather, the various doctrines that fall under the umbrella of waiver. But an informal waiver is often purportedly excluded by the very same clause that deals with informal variation.46 Whether that clause is effective in ruling out a waiver defence is considered further in section III below. B.  Consideration in Variation In MWB, Lord Sumption said that the common law’s rule that a variation requires fresh consideration to be valid and enforceable is probably ripe for re-examination. But if it is to be overruled or its effect substantially modified, it should be before an enlarged panel of the court and in a case where the decision would be more than obiter dictum.47 41 ibid 12 (Lord Finlay LC); see also 21 (Viscount Haldane), 28 (Lord Dunedin), 33 (Lord Atkinson) and 38 (Lord Parmoor). 42 ibid 13 (Lord Finlay LC); see also 18–19 (Viscount Haldane), 25–26 (Lord Dunedin), 30 (Lord ­Atkinson) and 36–37 (Lord Parmoor). 43 MWB (n 1) [23] and [25]–[26] (Lord Briggs). 44 ibid [31] (Lord Briggs). 45 So, for example, express rights of termination can be understood to exclude common law rights of termination: see further Chitty on Contracts (n 8) para 22.049. See also Axis Fleet (n 37) [43]–[45] (Martin Griffiths QC sitting as a Judge of the High Court). 46 See text to n 7 above. 47 MWB (n 1) [18] (Lord Sumption).

Variation and Waiver  33 Nothing further was said in MWB on the matter. Nevertheless, it is suggested that the decision in MWB may point the way towards a new approach to consideration in variation. The current role for consideration in contractual variation arises from an elision of rules on formation and rules on variation.48 That assumption should be challenged because formation and variation are two different things.49 As Cartwright has remarked: ‘We should not assume that the rules set by the law for the creation or acquisition of rights must always be the same as the rules set out for the variation or loss of those same rights.’50 MWB creates the conceptual space to challenge that assumption because it puts beyond doubt the proposition that rules of formation and rules of variation are juridically distinct from one another.51 Accordingly, if consideration is to have a role in the variation of contracts, it has to be justified by reference to issues arising in the context of variation, not formation. That, in turn, raises the question of the purpose of consideration, and whether it is a formal or a substantive requirement of contract law. Some view consideration as a formality requirement acting as an alternative to the greater formality of a deed.52 But formality is not an end in itself. Fuller famously argued over 70 years ago that formality has three purposes in private law:53 first, an evidentiary function, providing evidence of the existence of the contract; second, a cautionary function, encouraging parties to stop and think before binding themselves; and third, a channelling function, a ‘a simple and external test of enforceability’.54 Fuller argued that consideration can fulfil all of these functions to an extent.55 There is some support in authority for this approach. In Pillans v van Mierop, for example,56 Lord Mansfield concluded that consideration was ‘for the sake of evidence only’57 and Wilmot J reasoned that consideration was ‘intended as a guard against rash inconsiderate declarations’.58 While Lord Mansfield’s conclusion in Pillans that consideration was not required for a contract recorded in writing was overturned a few years later,59 the idea that consideration is a formality has stuck.

48 See, eg S Wilken and K Ghaly, The Law of Waiver, Variation and Estoppel, 3rd edn (Oxford, Oxford University Press, 2012) para 2.15; M Arden, ‘Should Consideration Be Required for the Consensual Discharge of an Agreement by Part Payment?’ in A Dyson et al (ed), Defences in Contract (Oxford, Hart Publishing, 2017) 111. 49 See, eg K Lewellyn, ‘What Price Contract? – An Essay in Perspective’ (1931) 40 Yale Law Journal 404, 742. cf M Roberts, ‘Variation Contracts in Australia and New Zealand: Whither Consideration’ (2017) 17 Oxford University Commonwealth Law Journal 238, 257. 50 Cartwright (n 31) para 9.24. 51 See text to nn 24–30 above. See also Cartwright (n 31) para 9.24. 52 See, eg Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] 1 AC 847 (HL) 853 (Viscount Haldane). 53 LL Fuller, ‘Consideration and Form’ (1941) 41 Columbia Law Review 799. 54 ibid 801. 55 ibid 814–24. 56 Pillans v van Mierop (1765) 3 Burr 1663 (KB). 57 ibid 1038 (Lord Mansfield). 58 ibid 1039 (Wilmot J). 59 Rann v Hughes (1778) 4 Bro Parl Cas 27, 2 ER 18 (HL). See further J Baker, An Introduction to English Legal History, 5th edn (Oxford, Oxford University Press, 2019) 374–75, noting that Rann v Hughes thereby ‘practically ensured the survival into modern times of the Tudor doctrine of consideration’, given the propensity of written contracts in commerce.

34  William Day At the turn of the twentieth century, for instance, Lord Wright concluded that consideration was ‘merely a piece of evidence … which go[es] to establish and corroborate the contractual intention’.60 More recently still, Hobhouse J similarly reasoned that ‘ultimately the question of consideration is a formality as in the use of a seal or the agreement to give a peppercorn’.61 But if consideration is a formality, it poorly serves these objectives. An oral bargain is no easier to prove that an oral promise. Nor does consideration have a cautionary effect: bargains can be made as quickly and as rashly as promises.62 And the rules for consideration on the formation of a contract are anything but a ‘simple … test of enforcement’.63 Even if consideration were a necessary formality for the formation of contracts, it makes less sense as a formality for the variation of contracts. The evidential issue arising on a variation is not the existence of the contract, but rather the content of its adjusted terms; consideration cannot assist with that issue. Nor does consideration provide a useful cautionary function on variation; the parties may have carefully agreed changes to the terms of their agreement, only to find that the rules of consideration provide an insuperable obstacle to implementing that agreement or at least cause unhelpful uncertainty. For that reason, the standard practice of solicitors is to draw up deeds of variation rather than contracts of variation.64 And the complex and contradictory case law on consideration in variation cases stands in the way of any serious argument that consideration performs the type of channelling function envisaged by Fuller.65 The better explanation for consideration is a substantive one. Put another way, consideration provides part of the definition of what constitutes a contract. Contracts are not promises; they are agreements.66 And not all agreements are contracts; only those involving a reciprocity of action can become legally enforceable.67 The rules of consideration sort between those agreements which are reciprocal and those which are not. There is a good deal of doctrinal support for this approach. Reciprocity was a ‘linchpin’ of English contract law from the mid-sixteenth century onwards;68 it appears to have been the influence of Pothier’s ‘will theory’ of contract in the nineteenth century that led to the rather unsatisfactory attempts to reimagine 60 Lord Wright, ‘Ought the Doctrine of Consideration to Be Abolished from the Common Law?’ (1936) 49 Harvard Law Review 1225, 1251–52. 61 Vantage Navigation Corp v Suhail & Saud Bahwan Building Materials LLC [1989] 1 Lloyd’s Rep 138 (Com Ct) 147 (Hobhouse J). 62 M Chen-Wishart, ‘In Defence of Consideration’ (2013) 13 Oxford University Commonwealth Law Journal 209, 212; A Kull, ‘Reconsidering Gratuitous Promises’ (1992) 21 Journal of Legal Studies 39, 53–55. 63 Fuller (n 53) 801. See generally Cartwright (n 311) ch 8. 64 Cartwright (n 31) para 9.26. 65 See text to nn 51–55 above. 66 May and Butcher v The King [1934] 2 KB 17 (HL) 21 (Lord Dunedin). See also, eg J Penner, ‘Promises, Agreements and Contracts’ in G Klass, G Letsas and P Saprai (eds), Philosophical Foundations of Contract Law (Oxford, Oxford University Press, 2014) 117–19; R Stevens, ‘Binding Our Future Selves’ in PS Davies and M Raczynska (eds), The Contents of Commercial Contracts: Terms Affecting Freedoms (Oxford, Hart Publishing, 2020). 67 The shorthand for this idea often given to students is that contract law is about ‘bargains’: see, eg N Andrews, Contract Law, 2nd edn (Cambridge, Cambridge University Press, 2015) 114–15; J O’Sullivan, O’Sullivan and Hilliard’s The Law of Contract, 8th edn (Oxford, Oxford University Press, 2018) 2, 89. 68 D Ibbetson, A Historical Introduction to the Law of Obligations (Oxford, Oxford University Press, 1999) 141–45 and 236–41.

Variation and Waiver  35 consideration as evidence of an intention to be bound.69 Of course, there is a choice about which promises or agreements to enforce, and it might be argued that the law ought to be reformed to remove or dilute the requirement of reciprocity as tested through the rules of consideration. But that would be a reform of something that is not really causing a problem. There is very little indication that consideration is posing particular difficulties at the contract formation stage;70 the problem cases all arise at the variation stage.71 In any event, there is much to be said for reciprocity as marking the dividing line between enforceable and non-enforceable agreements. Chen-Wishart has explained how reciprocity reflects not only a number of features of contract law, but also societal values: reciprocity is a ‘generalised norm, a deep intuition, and the foundation of human interactions’.72 Further, as Weinrib has explained, consideration provides a normative link between the parties in a contractual relationship:73 The principal function of this doctrine is to capture bipolarity of the contractual relationship by affirming the promisee’s participation in creating the right to the promisor’s performance. The doctrine also reflects the unity of the parties’ relationship: promise and consideration are not bounties unilaterally volunteered to each other; rather, the consideration is something that the parties understand to be given in return for the promise.

It has often been argued that there is no need for consideration to play any substantive role in the variation of a contract.74 The case law of a number of common law jurisdictions may be moving in that direction, including New Zealand and some provinces of Canada.75 Scepticism about consideration has been expressed by the Singapore Court of Appeal.76 In India and some of the United States, the requirement for consideration for contract variation has been removed by statutory reform.77 England looked to be going the same way in the early twentieth century, but the recommendations of the Law Revision Committee were never implemented.78 It is suggested that such a reform would go too far. A more limited, but principled, reform would recognise that the reciprocity principle in contract formation demands a role for consideration when it comes to contract variation, but not in the same way as for formation. Fresh consideration should not be a positive requirement for variation. Rather, consideration should only be relevant in a negative sense: the variation should be effective so long as it does

69 ibid 237. 70 O’Sullivan (n 4) 226. 71 See the cases cited in the text to nn 81–91 below. 72 Chen-Wishart (n 62) 219; see also 229–35. 73 E Weinrib, The Idea of Private Law (Oxford, Oxford University Press, 2012) 137–38. 74 See, eg Reynolds and Treitel (n 4) 21; Swann (n 4) 88–89; Tan (n 4) 576–81. 75 New Zealand: Anton Trawling Co Ltd v Smith [2003] NZLR 23 (NZCA) [93] (Baragwanath J), but see Teat v Willocks [2013] NZCA 162, [2014] 3 NZLR 129 [54], where the matter was said by Arnold J to be ‘not yet settled’. Canada: NAV Canada v Greater Frederiction Airport Authority Inc (2008) 290 (4th) 405 (New Brunswick Court of Appeal) [31] (Robertson JA). cf Globex Foreign Exchange Corp v Kelcher (2011) 48 Alta LR (5th) 215 (Alberta Court of Appeal) [91] (Hunt J). 76 Gay Choon Ing v Loh Sze Ti Terence Peter [2009] SGCA 3, [2009] 2 SLR 332 [92]–[118] (Andrew Phang Boon Leong JA). 77 India: Indian Contract Act 1871, s 62. USA: Uniform Commercial Code, § 2-209(1). 78 Law Revision Committee, Sixth Interim Report, Statute of Frauds and the Doctrine of Consideration (Cmd 5449, 1937) para 35.

36  William Day not remove the consideration from the original bargain. That is because variation cannot take away from the contract what it means to be a contract in the first place. As we have seen,79 rules of contract formation are mandatory, and that should mean that they cannot be circumvented using the rules of contract variation. What would be the implications of this reform on the leading authorities? In practical terms, the role for consideration would be considerably lessened in contract variation,80 but not removed altogether. In particular, consideration would never stand in the way of increasing pacts. While this new approach would run contrary to Lord Ellenborough’s judgment in Stilk v Myrick, as reported by Campbell,81 it would not be contrary to the reasoning in Stilk as reported by Espinasse, which would be understood today as a case about duress.82 In any event, the clash of the reports of Stilk is of historical interest only. Since the Court of Appeal’s decision in Williams v Roffey Bros & Nicholls (Contractors) Ltd,83 the courts are prepared to resort to fictitious fresh consideration in the form of a ‘practical benefit’ to render the contract enforceable.84 In modern contract law, therefore, the reform proposed in this chapter would simply remove that fiction without changing the outcome in future cases. As for decreasing pacts, this change to the rules of consideration would mean that Foakes v Beer would be overturned,85 and so too would Re Selectmove,86 but not the Court of Appeal’s conclusion on the issue of consideration in MWB itself, which adopted the practical benefit analysis.87 On the new approach proposed in this chapter, consideration would only ever prevent an effective variation of a contractual promise to pay money where the variation removed any obligation to pay money for goods or services rendered or to repay the money advanced by way of loan – in other words, where the variation purported to turn the contract into a gift. The transformation from contract to gift would have to be implemented by way of a deed. While this change of approach may seem radical, it should be recalled that in the leading authority, Foakes v Beer itself, the House of Lords was not enthusiastic about applying the rules of consideration to prevent a reduction by variation of the amount owed from being effective. The Law Lords reluctantly concluded that Pinnel’s Case,88 which stood for that proposition, was too established to be disturbed.89 Nowadays the Supreme Court is not so constrained by authority, as explored in other chapters in this collection.90 In any event, the outcome in Foakes v Beer can be explained just as well on the basis that variation was about the timing of payment rather than the amount 79 See text to nn 24–30 above. 80 Leaving economic duress as the main check on contractual variations, as to which see PS Davies and W Day, ‘“Lawful” Act Duress (Again)’ (2020) 136 LQR 7. 81 Stilk v Myrick (1809) 2 Camp 317 (Assizes). 82 Stilk v Myrick (1809) 6 Espinasse 129 (Assizes). 83 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 (CA). 84 cf Chen-Wishart (n 4) 96–98, who draws a distinction between a right to performance and actual performance, and argues that the variation takes effect by way of a collateral unilateral contract. 85 Foakes v Beer (1884) 9 App Cas 605 (HL). 86 Re Selectmove Ltd [1995] 1 WLR 474 (CA). 87 MWB (n 166) [47]–[49] (Kitchin LJ). 88 Pinnel’s Case (1602) 5 Co Rep 117a. 89 See, eg Foakes (n 855) 612–13 (Earl of Selbourne LC) and 622–23 (Lord Blackburn); see also 628–30 (Lord Fitzgerald). 90 For example, with the recent change in the law on illegality: see ch 13 of this book.

Variation and Waiver  37 to be paid.91 When the time comes to re-examine Foakes v Beer, it is suggested that the Supreme Court should not allow that decision to stand in the way of reforming the rules of consideration for the variation of contracts. III. WAIVER

The broad conceptual difference between a variation and a waiver is that a variation changes a party’s primary contractual rights whereas a waiver changes a party’s contractual remedies.92 As Lord Hailsham recognised in Banning v Wright, in cases of waiver, what ‘in each case he waives is the right to rely on the term for the purpose of enforcing his remedy to the breach’.93 This conceptual difference explains a key functional difference between variation and waiver: the effect of a variation can be to require a party to do something new, as well as not do something previously required; whereas waiver can only do the latter. In familiar (but perhaps not entirely accurate) shorthand, variation can be a sword or a shield; but only waiver works as a shield.94 Understood in this way, waiver captures a multitude of different doctrines.95 This has led to criticism. Waiver has been described as a ‘word used indefinitely as a cover for vague, uncertain thought’,96 and this has led to an ‘unhappy confusion of authority and … embarrassing ambiguity of principle’.97 But confusion is avoidable so long as the doctrines covered by the term are clearly separated. In The Kanchenjunga, Lord Goff brought some welcome clarity to the concept of waiver by explaining that it covered three entirely different doctrines: forbearance, election and estoppel.98 To this list, acquiescence and laches ought to be added.99 Each of these can preclude a contractual remedy without affecting contractual rights. 91 Reynolds and Treitel (n 4) 6–7. This was in fact how two of the four Law Lords decided the issue: Foakes (n 85) 623–24 (Lord Watson) and 624–27 (Lord Fitzgerald). Alternatively, it could be argued that Foakes v Beer is not a contractual variation case properly understood, since the original debt was a judgment debt rather than a contractual debt, and (for the reasons given in this chapter) it should no longer be extended to variation cases. 92 EL Rubin, ‘Toward a General Theory of Waiver’ (1981) 28 University of California Law Review 478, 484–85: ‘Waiver should therefore be defined as a judicial finding that an action taken with respect to a particular right represents a decision not to assert that right.’ A right is asserted by seeking a remedy on its infringement. When other writers talk about waivers of rights, it may be that they really mean waivers of remedies for infringement of those rights: cf T Dugdale and D Yates, ‘Variation, Waiver and Estoppel – a Re-appraisal’ (1976) 39 MLR 680, 681–83; Stoljar (n 399) 489–505; R Stevens, ‘Not Waiving but Drowning’ in A Dyson et al (ed), Defences in Contract (Oxford, Hart Publishing, 2017) 125–32. 93 Banning v Wright [1972] 1 WLR 972 (HL) 980 (Lord Hailsham); see also 990 (Lord Simon). See also Enrico Furst & Co v WE Fischer Ltd [1960] 2 Lloyd’s Rep 340 (Com Ct) 349–50 (Diplock J). 94 The language is particularly associated with promissory estoppel: see, eg Combe v Combe [1951] 2 KB 215 (CA) 224 (Birkett LJ). 95 M Barnes, The Law of Estoppel (Oxford, Hart Publishing, 2020) paras 2.9 and 2.200. 96 Ewart (n 6) 5. 97 Hartley v Hymans [1920] 3 KB 475 (KB) 494 (McCardie J). The decision is almost certainly wrong, as McCardie J used waiver to augment the obligations of the contracting parties. 98 Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep 391 (HL) 397–99 (Lord Goff). cf Barnes (n 95) para 2.204. 99 Ross T Smyth (n 10) 70 (Lord Wright). In tort law, one might also include the doctrine of volenti non fit injuria: Stevens (n 92) 125.

38  William Day The central question considered in this section, in light of Lord Sumption’s decision in MWB, is whether a contractual term can preclude the operation of any of these doctrines. That, in turn, requires some consideration as to the nature of each of them. A. Forbearance Forbearance has the longest association with the notion of waiver but is now the least invoked in practice. In his restatement of contract law, for example, Burrows describes it as ‘a somewhat obscure common law doctrine’ that is ‘in practice largely, if not entirely, subsumed by promissory estoppel’ and does not address it any further.100 The doctrine was historically invoked to avoid the formalities for contractual variations required by the Statute of Frauds before it was largely repealed;101 it may enjoy a renaissance now that parties can set their own formalities after MWB. The distinction between forbearance and variation is often said to turn on a difference between promises and performance of promises. So, for instance, in Cuff v Penn, Lord Ellenborough CJ held that ‘an agreement once made in writing cannot be varied by parol’, but such an oral agreement could be effective as forbearance because ‘here what has been done is only in performance of the original contract’.102 Similarly, in Morris v Baron, Lord Atkinson said that in the case of forbearance, ‘the contract is not varied at all, but the mode and manner of its performance is … altered’.103 The distinction is a difficult one,104 but best understood on the basis of the difference between rights and remedies.105 Forbearance involves an agreement not to sue for breach of contract – ‘forbearing to sue’106 – as opposed to an agreement to vary the contractual obligations themselves. Forbearance therefore only affects the availability or quantification of remedies that would otherwise arise on breach of contract.107 Variations and forbearances are therefore similar in that they are products of agreement. This is important to emphasise. Despite suggestions that forbearance involves a unilateral act,108 a forbearance still involves an agreement. As Stoljar explained, this came from a ‘tendency to isolate the waiver as something by itself; and apparently forgotten was the prior fact that, the waiver being a concession, the waivee

100 A Burrows, A Restatement of the English Law of Contract (Oxford, Oxford University Press, 2016) 77. 101 Stoljar (n 39) 494–505. AJ Phipps, ‘Resurrecting the Doctrine of Common Law Forbearance’ (2007) 123 LQR 286, 289–90. 102 Cuff v Penn (1813) 1 M&S 21, 105 ER 8 (KB) 10 (Lord Ellenborough CJ). 103 Morris v Baron (n 37) 31 (Lord Atkinson). The earliest example this distinction appears to be Warren v Stagg (Assizes, unreported, 1709), recorded in Littler v Holland (1790) 3 TR 590, 100 ER 749. 104 ‘The law certainly abounds in nice distinctions, but this particular one passes all understanding. It means precisely nothing. It is merely a play on words’: GC Cheshire and CHS Fifoot, ‘Central London Property Trust Ltd v High Trees House Ltd’ (1947) 63 LQR 288, 292. 105 cf Phipps (n 101) 300–04, who suggest it turns on a difference between core and peripheral obligations. 106 Ogle v Earl Vane (1867–68) LR 3 QB 272, 278 (Kelly CB). 107 An excellent summary can be found in E Peel, Treitel: The Law of Contract, 14th edn (London, Sweet & Maxwell, 2015) paras 3.071–3.072. 108 See, eg Plevins v Downing (1876) 1 CPD 220. For discussion, see Phipps (n 101) 305–07.

Variation and Waiver  39 had first to ask for it’.109 A typical scenario would be where goods were not going to be delivered by a specified date. On the buyer’s request, the seller would agree to forbear to sue for non-delivery of goods for a short period of time and not to sue for late delivery of goods if the goods were delivered within that period of time.110 The functional effect is the same as variation of the obligation to deliver by a certain date, but without having to meet (now repealed) formality and consideration requirements for such a variation. Some confusion has been created by Wilken and Ghaly, who eschew the language of forbearance altogether in favour of the label ‘waiver’,111 and then subdivide so-called waiver into three. First, there is ‘pure waiver’, which is defined as the abandonment of the right to claim future performance before the time that performance is required.112 Second, there is ‘total waiver’, where, on breach, the innocent party forgoes all remedies that might arise.113 This is contemplated, for example, in section  11(2) of the Sale of Goods Act 1979.114 This distinction between pure waiver and total waiver is an unnecessary complication, but fortunately it has gained little traction in the case law.115 There are only two differences between them, both of which are factual rather than juridical. The first is simply one of timing: parties may reach a consensus that a remedy will not be enforced for a breach either before the breach has occurred or after it.116 The second is the scope of the waiver. As a consensual act, its scope is what the parties intend it to be. The forbearance may be a ‘complete excusing of the breach … and the forfeiting of any right which would accompany that breach’;117 or it may relate only to a particular remedy; and, of course, if it relates to the underlying contractual rights, rather than the ability to sue for breach, it is not a forbearance at all but a variation and (on the current law) must be supported by consideration to be valid.118 The extent of a waiver should be determined in the usual way by asking how a reasonable person in the position of the parties would understand the parties’ agreement bearing in mind the language and conduct of the parties and the factual matrix of the case.119 Pure waiver and total waiver are simply different applications of the same doctrine of forbearance. 109 Stoljar (n 399) 490. The need for an express consensus is emphasised in Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia [1977] AC 850 (HL) 871 (Lord Wilberforce), 879–80 (Lord Salmon), 886 (Lord Fraser) and 887–89 (Lord Russell). 110 See, eg Warren v Stagg (n 103); Ogle v Earl Vane (1866–67) LR 2 QB 275 (QB) affirmed Ogle v Earl Vane (n 1066). Sometimes the forbearance would be initiated by the buyer who was not yet ready to take delivery: see, eg Cuff v Penn (n 102); Levey & Co v Goldberg [1922] 1 KB 688 (KB). 111 Save in respect of promissory estoppel, which they call equitable forbearance. 112 Wilken and Ghaly (n 48) 52–53. 113 ibid 54–55. 114 ‘Where a contract of sale is subject to a condition to be fulfilled by the seller, the buyer may waive the condition, or may elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated’ (emphasis added). This may not have been what Chalmers intended when drafting the Sale of Goods Act 1893: see Ewart (n 6) 148–50. 115 See, eg NYK Logistics (UK) Ltd v Ibrend Estates BV [2011] EWCA Civ 683 [55] (Rimer LJ). 116 Hickman v Haynes (1874–75) LR 10 CP 598, 608 (Lindley J). 117 Bottiglieri di Navigazione SpA v Cosco Qingdao Ocean Shipping Company [2005] EWHC 244 (Comm) [32] (Gloster J). 118 Stead v Dawber (1839) 10 Ad & El 57, 113 ER 22 (QB) 25 (Lord Denman CJ). 119 Ogle v Earl Vane (n 110) 282 (Blackburn J). Where the agreement is reached before a breach, it is more likely to be construed as a variation rather than as a waiver: Dugdale and Yates (n 92) 696.

40  William Day The most significant challenge to the agreement or bilateral analysis of forbearance comes with Wilken and Ghaly’s third type of waiver, called ‘unilateral waiver’. This, however, has nothing to do with forbearance at all. It arises where one party alone has the benefit of a particular clause in a contract and chooses to ‘forgo the benefit’ of that clause.120 The leading case is Hawksley v Outram, where an action was brought for the specific performance of a contract of sale of a business.121 Under the contract, the sellers entered into restrictive covenants and agreed to allow the purchaser to carry on the business under their name. The sellers entered into the agreement by one of their number holding a power of attorney. A question was raised as to whether the power of attorney permitted that seller to agree these two clauses on behalf of all of the sellers. To avoid an argument, the purchaser purported to ‘waive’ those clauses; the vendors did not accept this waiver. ­Lindley LJ held that:122 it is quite obvious that those two clauses are inserted simply and purely for the benefit of the purchaser; and if there is any doubt whether they are binding on the vendors, and the purchaser waives them, what the vendors to complaint of? What conceivable difficulty remains if that is done? I can see none.

Hawksley v Outram itself might be understood as specific performance on the terms that the clauses containing the trading name and the restrictive covenant were severable and should not be enforced. However, it has been followed in a few cases where one party was allowed to ‘waive’ a condition precedent inserted into an agreement solely for their benefit and seek to enforce performance.123 Lord Denning MR appeared to consider this to be better explained as an example of promissory estoppel,124 although it is difficult to see how the reliance requirement is met. The better view is that this is not a form of waiver at all because it seems to affect primary contractual rights rather than remedies.125 It is instead an anomalous exception to the usual rules of contractual variation that require amendment to be supported by consideration. Because forbearance is a consensual act, arising out of an agreement, there is a strong analogy to be drawn with Lord Sumption’s approach in MWB. MWB decides that the prior contractual agreement of the parties trumps a later contractual agreement. If anything, the position is a fortiori for a later non-contractual agreement to forbear from suing for a breach of contract, affecting only secondary rights. It is therefore suggested that a clause purporting to restrict waiver would be effective according to its terms insofar as it concerns the common law doctrine of forbearance. However, as we shall see, the same should not be true for the other three types of waiver.

120 Wilken and Ghaly (n 48) 55–56. 121 Hawksley v Outram [1892] 3 Ch 359 (Ch and CA). 122 ibid 376 (Lindley LJ). 123 See, eg Bennett v Flower (1840) 2 Beav 302, 48 ER 1197; Panoutsos v Raymond Hadley Corp of New York [1917] 2 KB 473 (CA); North v Loomes [1918] 1 Ch 378 (Ch); Barrett Bros (Taxis) Ltd v Davies [1966] 1 WLR 1334 (CA); Irwin v Wilson [2011] EWHC 326 (Ch). 124 Barrett Bros (n 123) 1339 (Lord Denning MR). 125 cf Barnes (n 95) paras 2.215–2.217.

Variation and Waiver  41 B. Election Election is a rule of law. It arises where the law presents a claimant with two mutually exclusive options. In the face of repudiatory breach, a contract can be affirmed or terminated; in the face of a vitiating factor such as misrepresentation, duress or undue influence, a contract can be affirmed or rescinded.126 When a judgment is given, the party may be required to make a choice between, for example, seeking compensation and restitution.127 The first two examples of election are often said to involve elections between rightsm whereas the third election involves election between remedies.128 The dichotomy is better articulated as being between election between self-help remedies such as termination and rescission and election between judicial remedies such as compensatory and restitutionary damages. Election arises because contracts do not automatically terminate on breach129 and are not automatically rescinded on misrepresentation, duress or undue influence, and because a party is allowed to litigate for inconsistent remedies and make a choice about which remedy to enforce only when judgment is handed down. The innocent party thus has a choice – in Hofeldian terms, a power130 – though the timing of when that choice has to be made will differ between self-help remedies and judicial remedies. When the party makes its choice, that choice is final; it loses the alternative by logical necessity. That is readily apparent in cases of termination and rescission: it is obvious that a contract cannot be both discharged or treated as though it never existed, yet still be capable of performance. As Watterson has pointed out,131 the same is not true for the current election required between compensatory and restitutionary remedies for the same wrong; the true mischief is double recovery,132 and that can be avoided through recognising that each £1 discharged of one remedy reduces the other remedy by the same amount.133 The idea of election as waiver is not universally accepted. Whereas Lord Denning MR insisted that election was wavier ‘used in its legal sense’,134 Ewart was critical of election being described as waiver:135 If you had a choice between a horse and a mule, and you chose the horse, you would not say that you ‘waived’ the mule. You did not. You had an election, and, electing to take one, you could do nothing with reference to the other. 126 The Kanchenjunga (n 98) 398 (Lord Goff). 127 Tang Man Sit v Capacious Investments [1996] 2 WLR 192 (PC) 521–22 (Lord Nicholls). 128 For a recent discussion, see Twinsectra Ltd v Lloyds Bank plc [2018] EWHC 672 (Ch) [45]–[72] (Jeremy Cousins QC sitting as a Judge of the High Court). This distinction first seems to have been made in Ewart (n 6) 69–72. 129 See further ch 4 of this book. 130 KR Handley, Estoppel by Conduct and Election, 2nd edn (London, Sweet & Maxwell, 2016) paras 14.002–14.003. 131 S Watterson, ‘Alternative and Cumulative Remedies: What is the Difference?’ [2003] Restitution Law Review 7. See also P Birks, ‘Inconsistency between Compensation and Restitution’ (1996) 112 LQR 375, 378. 132 Although Watterson deprecates the term: Watterson (n 131) 19. 133 ibid 22–24. 134 Panchaud Freres SA v Etablissements General Grain Co [1970] 1 Lloyd’s Rep 53 (CA) 57 (Lord Denning MR). 135 Ewart (n 6) 7; see also 25–27. Similarly Stoljar (n 399) 515.

42  William Day Another difficulty with describing election as waiver, at least as defined in this chapter, is that in the case of election between rights, the impact of election is on rights as well as of remedies: on an election to terminate or rescind, primary contractual rights may be discharged or treated as having never existed. This reflects the difficulty of clearly distinguishing between rights and remedies; indeed, remedies are often conceptualised as secondary rights.136 Nonetheless, the use of the word ‘waiver’ is not without foundation; it is used because of the particular context in which questions of election tend to be litigated. The issue before the court is usually whether the innocent party took too long in making its decision,137 or did some act inconsistent with treating the contract as being at an end,138 such that they lost their remedy of choosing to terminate or rescind the contract. In these circumstances, describing election as waiver is readily understandable. Can waiver by election be excluded or restricted by the terms of the contract? This issue arises in election between self-help remedies rather than election between judicial remedies. It is well established that a contract can limit the circumstances in which the election arises in the first place. For example, the provisions of the contract can restrict parties’ rights to terminate for breach at common law,139 and require valid notice of any exercise of an agreed power to terminate to comply with certain formalities. Similarly, ‘contractual estoppel’ can exclude an election to rescind for innocent misrepresentation.140 However, if a right to terminate or rescind does arise at common law and an election must be made by the innocent party, it is submitted that a contractual clause cannot be used to exclude the rules for election. In Tele2 International Card Co SA v Post Office Ltd, a contract for the provision of telecommunications products and services contained the following provision:141 In no event shall any delay, neglect or forbearance on the part of any party in enforcing (in whole or in part) any provision of this Agreement be or be deemed to be a waiver thereof or a waiver of any other provision or shall in any way prejudice any right of that party under this Agreement.

In December 2004, the Post Office purported to exercise an agreed right to terminate the contract for various breaches which had taken place by December 2003 at the latest; Tele2 contested the Post Office’s right to do so on the basis of delay. The Court of Appeal concluded that the Post Office’s continued performance under the agreement between December 2003 and December 2004 constituted an affirmation of the contract, 136 For recent discussion, see D Foxton, ‘How Useful Is Lord Diplock’s Distinction between Primary and Secondary Obligations in Contract?’ (2019) 135 LQR 249. 137 See, eg The Kanchenjunga (n 98) 395 (Lord Goff). Again, Ewart (n 6) 120 has a colourful analogy: ‘If I am speechless when offered an apple or an orange, which have I chosen? Neither, no doubt. But if I have an apple, and am offered an orange in exchange for it, and I remain mute, I am displaying an election to retain my own. And the question in law, usually arises in similar form. There is a present situation which may be altered by election; and silence naturally indicates continuation, and not termination, of that situation.’ 138 See, eg United Dominion Trust (Commercial) Ltd v Ennis [1968] QB 54 (CA) 65–66 (Lord Denning MR). 139 See n 45 above. 140 Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ 386, [2006] 2 Lloyd’s Rep 511 [56] (Moore-Bick LJ); Springwell Navigation Corp v JP Morgan Chase Bank [2010] EWCA Civ 1221, [2010] 2 CLC 705 [169] (Aikens LJ). 141 Tele2 International Card Co SA v Post Office Ltd [2009] EWCA Civ 9 [18] (Aikens LJ).

Variation and Waiver  43 and therefore a waiver of the remedy of termination.142 Aikens LJ indicated that the anti-waiver clause in the terms quoted above might not extend to election,143 but, even if it did, it could not change the analysis at common law. Two reasons were given for this: first, it could not ‘prevent the fact of an election to abandon the right to terminate from existing’; and second, ‘the general law demands that a party which has a contractual right to terminate a contract must elect whether or not to do so’.144 Lord Sumption’s judgment in MWB may lead some to challenge Aikens LJ’s conclusion as to the (non-)effect of such a clause on an election arising at common law. But there is a ready answer: election prevents parties from taking contradictory positions in respect of a contract. As Moore-Bick LJ said in Stocznia Gdynia SA v Gearbulk Holdings Ltd:145 it is impossible for a party to terminate a contract, in the sense of discharging both parties from further performance … and at the same time treat it as continuing, since the two are inconsistent. Either the primary obligations remain for performance, or they do not.

That should mean that, at common law, the parties cannot contract to allow themselves to ride the two horses of performance and discharge until it becomes clear which is more advantageous. However, on the facts, it is suggested that Tele2 was incorrectly decided. The cause for error was an elision of the principles for contractual termination with termination at common law.146 Tele2 itself was a case about when the right to terminate that was purportedly exercised was an agreed power to discharge further performance;147 that power should have been exercisable according to the terms of the contract, which included the provision that the contract could be terminated even if there was delay between the power arising and it being exercised. It is less clear whether MWB should lead to a change of approach towards clauses which do not purport to detract from the common law rules for election but instead add formalities to the communication of an election. In R v Paulson,148 the Crown entered into a long-term lease to allow a mining business to extract coal from underneath land set aside to build schools in Canada. The lease contained the following term: ‘no waiver on behalf of His Majesty, His Successors or Assigns, of any such breach shall take effect or be binding upon him or them unless the same be expressed in writing under the authority of the Minister’. In breach of the terms of the lease, the mining business did not develop its operations. However, the Crown continued to accept the rent paid half-yearly in advance in respect of the land. The Privy Council concluded that receipt of rent amounted to ‘a definite intention to treat the lease or contract as subsisting’,149 and refused to allow the Crown to enforce the forfeiture provisions by hiding behind the non-compliance with

142 ibid [57] (Aikens LJ). 143 ibid [56] (Aikens LJ). 144 ibid [56] (Aikens LJ). 145 Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, [2010] QB 27 [34] (Moore-Bick LJ). 146 See generally E Peel, ‘The Termination Paradox’ [2013] Lloyd’s Maritime and Commercial Law ­Quarterly 519. 147 Tele2 (n 141) [7] and [17] (Aikens LJ). 148 R v Paulson [1921] 1 AC 271 (PC). 149 ibid [24] (Lord Atkinson).

44  William Day the parties’ agreed formalities. Lord Atkinson, who delivered the advice, appeared to have been concerned about the potential prejudice to the tenant who had paid the rent but would be deprived of his rights to the land. The Crown could not say ‘I had no right to more than half the rent you paid, but I’ll keep the whole of it’.150 R v Paulson appears to be, to coin a phrase, ‘ripe for re-examination’ in light of Lord Sumption’s judgment in MWB. The risk of prejudice to the tenant in paying rent in advance but not having the benefit of the land due to subsequent forfeiture was one which had been allocated to the tenant by the terms of the lease; the Privy Council thus was trying to rescue the mining business from a bad bargain. ­Moreover, Paulson was concerned not with common law election, but the landlord’s agreed right to re-enter the land on breach. As with Tele2, the clause prohibiting informal waiver should therefore have taken effect according to its terms. Finally, Lord Atkinson himself said that ‘It may well be that many cases may occur to which the clause as to waiver would be applicable; what their Lordships think is that it is not applicable in the present case under all its circumstances’.151 Rather unsatisfactorily, Lord ­Atkinson did not explain what he meant by this, but this statement has been used to confine Paulson to its facts elsewhere in the Commonwealth.152 C. Estoppel There is a litany of doctrines loosely united around the idea that their effect is, in Coke’s words, to ‘stoppeth or closet up [a person’s] mouth to allege or plead the truth’.153 Describing estoppel as waiver is not entirely accepted. In Panchaud Freres SA v Etablissements General Grain Co, Lord Denning MR insisted that the two should be distinguished.154 But three years later, in WJ Alan & Co Ltd v El Nasr Export & Import Co, he had changed his mind: while estoppel ‘is much wider than waiver itself … waiver is a good instance of its application’.155 Lord Denning MR’s later view is to be preferred. Estoppel can function as waiver because it prevents a claimant from seeking a remedy for breach of its contractual rights. In the context of waiver, two particular forms of estoppel are especially relevant: promissory estoppel (sometimes called equitable forbearance)156 and estoppel by convention.157 After election, promissory estoppel is now probably the most prominent doctrine that might today be described as waiver. As is well known, the doctrine can be traced back to Hughes v Metropolitan Railway Co, in which the language of equitable 150 ibid [25] (Lord Atkinson). 151 ibid [32] (Lord Atkinson). 152 Owendale Pty Ltd v Anthony [1967] HCA 52, (1967) 117 CLR 539. In that case, effect was given to a clause which stated that receipt of rent ‘shall not prevent or impede the exercise by the Commonwealth or the Minister on behalf of the Commonwealth of the powers conferred upon it’ under the lease to re-enter the property. See also Inner City Businessmen’s Club v James Kirkpatrick [1975] 2 NZLR 636 (CA). 153 Co Litt 252a. 154 Panchaud Freres SA v Etablissements General Grain Co (n 134) 56–57 (Lord Denning MR). 155 WJ Alan & Co Ltd v El Nasr Export & Import Co [1972] 2 QB 189 (CA) 212 (Lord Denning MR). 156 See, eg Wilken and Ghaly (n 48) ch 8. 157 Space precludes discussion of estoppel by representation and estoppel by acquiescence, although these are also types of estoppel that can function as waiver. See also Barnes (n 95) paras 2.209–2.210.

Variation and Waiver  45 waiver rather than estoppel was used.158 Denning J rescued the doctrine from obscurity in obiter dicta in Central London Property Trust Ltd v High Trees House Ltd, rationalising it as following from the binding nature of a promise:159 The courts have not gone so far as to give a cause of action in damages for the breach of such a promise, but they have refused to allow the party making it to act inconsistently with it. It is in that sense, and that sense only, that such a promise gives rise to an estoppel.

While rarely successfully invoked, the instant effect of the recognition of promissory estoppel in High Trees has been to occupy much of the ground formerly taken by forbearance. As Phipps has noted, the ‘development has led to the almost complete disappearance of the doctrine of forbearance from the law reports and its marginalisation in the textbooks’.160 Denning LJ himself later indicated that his formulation in High Trees should be taken to incorporate forbearance.161 Lord Denning’s promissory approach to this doctrine has been influential in the case law.162 It is also evident in theories of promissory estoppel that hold that (like forbearance) it enforces promises, albeit the reason for enforcing the promise arises not from reciprocal agreement but from the reliance on that promise.163 If this is right, then, after MWB, one would expect the effect of a clause restricting waiver to have the same effect on promissory estoppel as it would on forbearance. However, the preferable view is that the juridical basis for promissory estoppel is different to forbearance. Promissory estoppel prevents the enforcement of promises where do so would cause harm because of the contract breaker’s reliance on an assurance from the innocent party that it would not insist on its strict contractual rights.164 The role of the assurance or representation is to make the innocent party responsible for the harm that would otherwise befall the contract breaker if the contractual rights were enforced. It is suggested that the same rationale underlies estoppel by convention. There is some suggestion that estoppel by convention evolved out of estoppel by deed,165 and the Privy Council recently indicated that estoppel by convention was underpinned by promissory-based principles.166 But the better view is that the modern doctrine

158 Hughes v Metropolitan Railway Co (1877) 2 App Cas 429 (HL), although the most cited passage, at 448 (Lord Cairns), does not use the language of waiver. Similarly, in Birmingham and District Land Co v London and North West Railway Co (1888) 40 Ch D 268 (CA) there was no reference to estoppel. The language of estoppel was first used in Marquess of Salisbury v Gilmore [1942] 2 KB 38 (CA), in which AT Denning QC appeared as counsel. 159 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (KB) 134 (Denning J). 160 Phipps (n 101) 298. 161 Charles Rickards LD v Oppenhaim [1950] 1 KB 616 (CA) 623 (Denning LJ). 162 Chitty on Contracts (n 8) para 4.105, esp fn 610. 163 See, eg PS Atiyah, ‘Consideration: A Restatement’ in PS Atiyah, Essays on Contract (Oxford, ­Clarendon Press, 1986); P Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 University of Western Australia Law Review 1, 60–64. 164 See, eg A Robertson, ‘Situating Equitable Estoppel within the Law of Obligations’ (1997) 32 Sydney Law Review 32, 55–63; NJ McBride, ‘A Fifth Common Law Obligation’ (1994) 14 Legal Studies 35, 45–50. See also A Robertson, ‘Estoppels and Rights-Creating Events: Beyond Wrongs and Promises’ in J Neyers et al (eds), Exploring Contract Law (Oxford, Hart Publishing, 2009), which adjusts the author’s previous argument in the Sydney Law Review somewhat. 165 Blindley Heath Investments Ltd v Bass [2015] EWCA Civ 1023, [2017] Ch 389 [72] (Hildyard J). See also P Feltham et al (eds), Spencer Bower: Reliance-Based Estoppel (London, Bloomsbury, 2017) para 8.1. 166 Prime Sight Ltd v Lavarello [2013] UKPC 22, [2014] AC 426 [47] (Lord Toulson).

46  William Day ­ eveloped by the High Court of Australia in Grundt v The Great Boulder Proprietary d Gold Mines Ltd167 and then adopted by the Court of Appeal in Amalgamated Investment & Property Co Ltd (in liquidation) v Texas Commerce International Bank Ltd168 is concerned with the same harm-based principle as promissory estoppel. It arises out of the concern that the contract breaker will suffer harm if the contract is enforced, and that, in the circumstances, the innocent party should not be allowed to do this. This can be traced back to Grundt, where Dixon J insisted that:169 ‘Before anyone can be estopped, he must have played such a part in the adoption of the assumption that it would be unfair or unjust if he were left free to ignore it.’ Thus, in the modern law, the crucial requirement for estoppel by convention to be made out is that some detriment must thereby have been suffered by the person alleging the estoppel, or benefit thereby have been conferred upon the person alleged to be estopped, sufficient to make it unjust or unconscionable for the latter to assert the true legal (or factual) position.170

The mere fact of a conventional agreement between the parties is not enough to invoke the estoppel. Understanding promissory estoppel and estoppel by convention as concerned with preventing the enforcement of an agreement is consistent with the orthodox understanding of estoppel as an evidential tool, preventing a party from putting forward a case that it would otherwise be entitled to make. It also justifies why these estoppels should only operate within an existing legal relationship,171 should not themselves be causes of action,172 and should only have a suspensive effect on primary rights.173 All of these features can be explained on the basis that, like other forms of waiver, promissory estoppel and estoppel by convention affect remedies, not rights. On this view, an analogy between clauses restricting variation and clauses restricting estoppel is not a strong one. Unlike contractual variation, promissory and conventional estoppel do not arise from agreement; rather, they arise from the harm that may be caused by requiring the parties to stick to that agreement, in circumstances where the party seeking to enforce its strict contractual rights is in some way responsible for the other party diverging from what had been agreed. As a matter of principle, therefore, these types of estoppel should not be capable of preclusion or restriction by the prior terms of a contract. This analysis is supported by Lord Sumption’s decision in MWB itself. First, he indicated that an entire agreement clause should not preclude estoppels; if that is 167 Grundt v The Great Boulder Proprietary Gold Mines Ltd (1938) 59 CLR 641 (HCA) 675–77 (Dixon J). 168 Amalgamated Investment & Property Co Ltd (in liquidation) v Texas Commerce International Bank Ltd [1982] 1 AC 84 (QB) 120–22 (Lord Denning MR). 169 Grundt (n 167) 675. 170 Blindley Heath (n 165) [91] (Hildyard J), quoting HMRC v Benchdollar Ltd [2009] EWHC 1310 (Ch) [52(v)] (Briggs J). 171 BP Exploration (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783 (QB) 810 (Robert Goff J). See also Chitty on Contracts (n 8) para 4.089. 172 Combe v Combe (n 94) 219–21 (Denning LJ), 224 (Birkett LJ) and 225 (Asquith LJ); Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274, [2001] CLC 999 [38] (Sir Andrew Morritt VC) [91]–[92] (Mance LJ); cf [52]–[56] (Judge LJ). 173 MWB (n 16) [56]–[61] (Kitchin LJ). Norwegian American Cruises AS v Paul Mundy Ltd (The Vistafjord) [1988] 2 Lloyd’s Rep 343 (CA) 352 (Bingham LJ). Suspensive should not be understood as being the same as revocable; in some circumstances, the estoppel may be irrevocable.

Variation and Waiver  47 true for entire agreement clauses, the same should be true for no estoppel clauses.174 Moreover, having concluded that the no oral modification clause should take effect according to its terms, he added that:175 the safeguard against injustice [from such a clause] lies in the various doctrines of estoppel. This is not the place to explore the circumstances in which a person can be estopped from relying on a contractual provision laying down conditions for the formal validity of a variation. The courts below rightly held that the minimal steps taken by Rock Advertising were not enough to support any estoppel defences. I would merely point out that the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself.

Estoppel would be a poor ‘safeguard against injustice’ if it could be as easily excluded by contract as an oral modification. Judgments handed down in the aftermath of MWB have indicated, albeit without determining the point, that promissory estoppel or estoppel by convention may well be a safety value for unjust results otherwise eventuating from the operation of no oral modification clauses.176 Burrows has criticised the passage from MWB quoted above on the basis that Lord Sumption appeared to be trying to achieve a177 narrowing of the normal doctrine so that it applies only where the promisor makes clear that it is not merely waiving its substantive rights under the contract but is also waiving its procedural rights (ie the right to insist on a written modification) under the no oral modification clause.

A careful reading of the passage reveals nothing of the sort. Lord Sumption’s suggestion here was that a party could be estopped from denying the validity of a purported contractual variation; in that context, it is entirely orthodox that there would have to be a representation or conventional understanding that the right not be bound under the no oral modification clause should not apply. There is nothing in Lord ­Sumption’s judgment to suggest that he was proposing changes to the operation of estoppel outside of that narrow context.178 D.  Laches and Acquiescence Laches and acquiescence are also forms of waiver. These arise in the context of equity’s discretionary remedies to specifically enforce positive and negative contractual rights, 174 MWB (n 1) [14] (Lord Sumption). 175 ibid [16] (Lord Sumption). 176 See Great Dunmow Estates Limited v Crest Nicholson Operations Limited [2019] EWCA Civ 1683 [26] (Patten LJ), where the matter was left to the defendant as to whether to apply to amend its case to include an estoppel defence; see also C Spencer Ltd v MW High Tech Projects UK Ltd [2019] EWHC 2547 (TCC) [69] (O’Farrell J), citing MWB and concluding: ‘as a matter of principle, estoppel by convention could operate … despite the existence of the NOM clause’. 177 Burrows (n 3) 45. 178 This narrow interpretation of Lord Sumption’s estoppel exception is supported by the Court of Appeal’s recent decision in Kabab-JL SAL (Lebanon) and Kout Food Group (Kuwait) [2020] EWCA Civ 6 esp [80] (Flaux LJ).

48  William Day namely specific performance and injunctions. Laches traditionally operated on the basis that, to deserve the court’s assistance, the claimant must appear to be ‘ready, desirous, prompt and eager’.179 But now, as Snell’s Equity observes, ‘the courts show some flexibility in assessing the extent, impact of and reasons for the delay’.180 The question in each case is whether it would be just to award the remedy given the delay.181 Acquiescence goes beyond mere delay. It applies when the court judges that, before seeking the specific remedy, the claimant encouraged the defendant to believe that it would not rely on its right such that it would be unconscionable now to grant that relief.182 Notwithstanding Lord Sumption’s judgment in MWB, the operation of laches and acquiescence should not be restricted by contractual terms. These are principles that form part of the court’s discretionary jurisdiction to award an injunction or specific performance, and the parties cannot contract to remove that jurisdiction. As Stocker LJ held in Quadrant Visual Communications Limited v Hutchinson Telephone (UK) Limited, the court cannot be reduced to a ‘rubber stamp’ in the exercise of its discretion.183 But a term proposing some requirements of formalities for acquiescence would not be left without any effect. It should be a factor in the balance. As Branson J put it in Warner Bros v Nelson, when considering the effect of a clause stating that damages would be an inadequate remedy, while the ‘parties cannot contract themselves out of the law’, such a clause will ‘assist’ the party seeking injunctive relief.184 IV. CONCLUSION

MWB Business Exchange Ltd v Rock Advertising Ltd is significant not only because of what it decided, but also because of what it left to be decided. Lord Sumption’s judgment confirms that there is a distinction between contract formation and contract variation. It has been suggested that this should create the conceptual space for the Supreme Court in a future case to reform radically the common law’s approach to consideration in the context of contract variation. At the same time, however, the post-MWB assumption that Lord Sumption’s decision applies to clauses restricting waivers as much as clauses restricting variations is clearly wrong.185 It is similarly dangerous to generalise from one type of waiver to another.186 While formalities agreed by the parties should be applicable to forbearance and the exercise of agreed remedies such as contractual rights of termination, they should not affect elections that arise at common law between self-help remedies, nor should they affect the operation of estoppels, laches and acquiescence. 179 Milward v Earl Thanet (1801) 5 Ves 720n (Sir Richard Arden MR). 180 J McGhee (ed), Snell’s Equity, 33rd edn (London, Sweet & Maxwell, 2017) para 17.044. 181 Lazard Bros & Co Ltd v Fairfield Properties Co (Mayfair) Ltd (1977) 121 SJ 793. 182 De Buscche v Alt (1878) 8 Ch D 286 (Ch and CA) 314 (Thesiger LJ); HP Bulmer Ltd v J Bollinger SA [1977] 2 CMLR 625 (CA) [177] (Goff LJ). 183 Quadrant Visual Communications Limited v Hutchinson Telephone (UK) Limited (Court of Appeal, unreported, 28 November 1991). 184 Warner Bros Pictures Inc v Nelson [1936] 1 KB 209 (KB) 221 (Branson J). 185 See n 8 above. 186 See n 9 above, where Butcher J appeared to be treating what Lord Sumption said in MWB about estoppel as applying also to forbearance.

4 Termination SIR DAVID FOXTON

What does it mean to say that the contract continues, if the status and relationship which are its entire subject matter have come to an end together with all of the core obligations which go with that status? – Société General v Geys1

I. INTRODUCTION

G

Société Générale, London Branch would have been described by Sir Alan Ward as a case about warring bankers, accompanied by a reminder not to fall into Dr Spooner’s error. As Lord Sumption noted at the outset of his dissent, Mr Geys enjoyed a highly paid job which, for as long as it continued, entitled him to participate in a profit-sharing bonus scheme dependent on the performance of his division.2 However, his employer – Société Générale (SG) – was entitled to terminate that employment either on three months’ notice or immediately by making payment in lieu of notice (PILON). Fortunately for Mr Geys, it did neither, terminating his employment immediately but without making the required payment for three weeks, with the result that it was in repudiatory breach of contract when it escorted him from its office on 27 November 2007. With the happy serendipity beloved of the setters of moot problems, between that date and 6 January 2008 (the date when the majority found that SG successfully implemented the PILON process it had so ineptly commenced),3 a significant date occurred and if Mr Geys’s employment ended after that date, he was entitled to a substantial bonus. So it was eys v

1 Geys v Société General, London Branch [2012] UKSC 63, [2013] AC 523 [138] (Lord Sumption). 2 ibid [108]–[109]. 3 The majority held that for the PILON process to be completed, it was necessary for SG to communicate to Mr Geys in clear and unambiguous terms that it was making such a payment: ibid [21] (Lord Hope), [58] (Baroness Hale), [62] (Lord Wilson) and [103] (Lord Carnwarth). Lord Sumption dissented on this issue as well: [143]. There was express provision in Mr Geys’s employment contract for when notice given took effect. For the position when this issue is not expressly addressed, see now Haywood v Newcastle upon Tyne Hospitals NHS Foundation Trust [2018] UKSC 22, [2018] 1 WLR 2073.

50  Sir David Foxton that the Supreme Court found itself deciding whether Mr Geys’s employment had terminated as a matter of law on the date when he left the building or, because he had never accepted SG’s repudiation as bringing his contract to an end, only with the completion of the PILON process on 6 January 2008. The majority of the Supreme Court – Lord Hope, Baroness Hale, Lord Wilson and Lord Carnwath – held in favour of that latter date. Lord Sumption in his dissent favoured the former. Who was right?4 II.  AUTOMATIC OR ELECTIVE TERMINATION?

A.  Automatic and Elective Theories of Termination in Employment Contracts The issue in Geys was argued by SG on the basis that ‘employment contracts differ from ordinary commercial contracts and should be approached differently’ so far as termination was concerned,5 an argument resisted by Mr Geys, among other reasons, because ‘generally applicable principles should be preferred to one-off exceptions applicable to particular areas of law’.6 Although, as Lord Sumption noted,7 the issue in Geys raised a more general controversy of the law of contract, it is helpful to explore that controversy in the employment context in which it has most frequently arisen. As a matter of the general law of contract, a repudiatory breach does not automatically terminate a contract, but gives the innocent party a right of election between termination and affirmation.8 However, courts of equity would not make an order for the specific performance of a contract of employment because of the ‘strictly personal’ nature of the contract in question.9 Further, it is conventional legal wisdom that an employee is not ordinarily entitled to the payment of wages merely because the contract of employment continues and she is willing to work.10 The right to payment is conditional upon actually doing the work the employer requires of her, and if the employer refuses to allow the employee to work, no right to wages accrues.11 It has 4 The commentary has been almost universally supportive of the majority view. See D Cabrelli and R Zahn, ‘The Elective and Automatic Theories of Termination in the Common Law Contract of Employment: Conundrum Resolved?’ (2013) 76 MLR 1094; A Burrows, ‘What is the Effect of a Repudiatory Breach of a Contract of Employment?’ (2013) 42 Industrial Law Journal 281; L Aitken, ‘“Elective” or “Automatic” Termination of a Contract of Employment’ 129 (2013) 129 LQR 335; A Blackham ‘Uncertain Juncture Between Employment and Contract Law’ (2013) 72 CLJ 269; A Summers, ‘Termination and the Agreed Sum’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Oxford, Hart Publishing, 2017) 75. 5 Geys (n 1) 528. 6 ibid 530. 7 ibid [130]. 8 Avery v Bowden (1855) 5 El & Bl 714, (1856) 6 El & Bl 953, 119 ER 647 (QB). 9 See, eg Rigby v Connol (1880) 14 Ch 482 (CA) 487 (Jessel MR). 10 It is not clear, as matter of doctrine rather than policy, why this should be so, and why it is not possible to treat the employer’s failure to give instructions for work as, in effect, a form of gardening leave, or creating room for the operation of the prevention principle or the principle that no one can take advantage of their own wrong. However, while the rule has its critics (eg Sedley LJ in Cerberus Software Ltd v Rowley [2001] EWCA Civ 78, [2001] ICR 376 [31]), it was treated as settled law in Geys. Lord Sumption at [131] rejected any suggestion that there is scope to apply the principle that ‘a party who is prevented by the nonco-operation of the counterparty from satisfying a condition precedent to his right to receive remuneration may be deemed to have earned it notwithstanding the condition’. 11 Goodman v Pocock (1850) 15 QB 576 (QB) 583–84 (Erle J).

Termination  51 been said that an employee whose contract has been wrongfully terminated ‘cannot sit in the sun’ and collect her wages.12 The combination of those two features of employment contracts led some to the view that there was no room for the innocent victim of the repudiatory breach of an employment contract to keep the contract alive: if an innocent employer did so, the employee could not be forced to work, and if an innocent employee did so, they could not accrue a right to wages. This came to be described as the ‘automatic’ theory of termination of employment contracts, in contrast to the ‘elective theory’, which required a choice by the innocent party to terminate. There was disagreement between the majority and Lord Sumption in Geys as to whether the automatic theory was a comparatively recent innovation or historical orthodoxy. It had acquired a sufficient legal pedigree to be endorsed by Sir John Donaldson as ‘the obvious, and indeed the only’ explanation of the innocent employee’s inability to sue for wages in ­Sanders v Ernest A Neale Ltd,13 but the majority of the Court of Appeal favoured the elective theory in Gunton v Richmond-upon-Thames LBC.14 If the dispute in Geys is to be characterised as a battle between the automatic and elective theories of termination of employment contracts, then the majority judgment confirmed the triumph of the latter. B.  Automatic and Elective Theories of Termination in the General Law of Contract At the end of his speech, Lord Wilson suggested that endorsing the automatic termination theory would require the law ‘to set sail, unaccompanied, upon a journey for which I can discern no just purpose and can identify no final destination’.15 However, an alternative nautical metaphor suggests itself, as Geys appears to be one of those cases in which the majority and minority judgments were ships passing in the night. The majority identified the issue at hand as whether the general contractual principle that the termination of a contract after a repudiatory breach should depend upon the choice of the innocent party was inapplicable to a particular class of contract (employment contracts),16 or at least to a particular type of repudiatory breach of contracts of this class (viz ‘outright’ dismissals or wrongful resignations).17 The editors of Chitty explain the significance of the case on precisely that basis:18 At one time there was a question whether the wrongful dismissal of an employee from his or her contract of employment constituted an exception to the general rule but the Supreme Court has now resolved the question and concluded that contracts of employment do not constitute an exception. 12 Denmark Productions Ltd v Boscobel Productions Ltd [1969] 1 QB 699 (CA) 726 (Salmon LJ). By contrast, the employer might choose to require the employee to ‘sit in the sun’ through a period of garden leave. 13 Sanders v Ernest A Neale Ltd [1974] ICR 565 (NIRC) 570–71. 14 Gunton v Richmond-upon-Thames LBC [1981] Ch 448 (CA). Buckley and Brightman LJJ favoured the elective theory, Shaw LJ the automatic theory. 15 Geys (n 1) [97]. 16 ibid [15] (Lord Hope) [63] (Lord Wilson) and [99] (Lord Carnwath). 17 ibid [42] (Baroness Hale) and [63] (Lord Wilson). 18 H Beale (ed), Chitty on Contracts, 33rd edn (London, Sweet & Maxwell, 2018) para 24.007 fn 1.

52  Sir David Foxton Lord Sumption, by contrast, saw his dissent not as an argument for an exception, but as equally involving the application of a general contractual principle governing termination of contracts,19 viz that when the innocent party’s own ability to perform the contract requires the co-operation of the repudiating party, he can only elect to keep the contract alive if the court is willing to require that co-operation by an order for specific performance, which, in contracts for the provision of personal services such as employment contracts, it is not willing to do. In his view, the case was resolved by an application of the law as set out in White and Carter (Councils) Ltd v McGregor.20 III.  THE POSITION WHERE SOME OBLIGATIONS ARE PERFORMABLE WITHOUT CO-OPERATION AND OTHERS ARE NOT

This chapter suggests that the issue which actually divided the Supreme Court does not emerge with complete clarity from the judgments in Geys. White and Carter (Councils) Ltd benefited from only one promise from Mr McGregor: to pay money in return for displaying advertisements for his garage. It was able to take the steps necessary to accrue that debt claim without Mr McGregor’s co-operation and did so. However, Mr Geys benefited from more than one payment obligation from SG. While he could only accrue the obligation to pay his wages with SG’s co-operation, which the court would not compel if SG was otherwise unwilling to provide it, nothing more than the continuation of the contract of employment up to a certain point in time was necessary for Mr Geys to accrue another of those payment obligations, namely the ‘compensation payment’ by reference to the 2006 and 2007 bonus awards. How should the law of contract approach the innocent party’s right to elect to keep the contract alive in these circumstances? A.  Core and Collateral Obligations Lord Sumption endorses the view that an innocent party’s ability to keep a contract alive is dependent upon that party being able to perform the core obligations owed under the contract, either because they can be performed without the co-operation of the party in breach or because such co-operation can be procured by an order for specific performance, otherwise the contract will automatically come to an end.21 Lord Sumption suggested that only the termination of the contract following the wrongful dismissal of an employee could explain the inability of the wrongfully dismissed employee to recover her wages.22 Unless the ability to earn wages is regarded as dependent upon the co-operation of the employer, that is right. As Lord Sumption pointed out, the analysis that it is so dependent is not wholly persuasive, 19 Geys (n 1) [130]. 20 White and Carter (Councils) Ltd v McGregor [1962] AC 413 (HL) 429 (Lord Reid). 21 See in particular his discussion of Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 (CA) at Geys (n 1) [133]: ‘the distributor therefore had no obligations which required the manufacturer’s co-operation’. 22 Geys (n 1) [131].

Termination  53 but it does represent the conventional legal understanding. Further, if the explanation of the wrongfully dismissed employee’s inability to sue for wages is that the contract of employment has terminated, then all the other primary obligations arising under the contract should be similarly unenforceable, save for those which on their proper construction survive termination. However, there are a number of cases in which obligations arising under a contract of employment other than the obligation to pay wages for work done have been specifically enforced by the courts after a wrongful termination or resignation which the innocent party has not accepted. The most significant obligation of this kind is where the contract imposes an express obligation on the employee not to work for someone else during the period of her contract of employment, which has been enforced by injunction in a number of cases.23 Lord Wilson was surely correct to say that the courts granting such injunctions had rationalised them on the basis that the employee’s wrongful resignation had not terminated the employment contract, with the result that the employee’s duty not to work for another employer subsisted and could be enforced.24 Lord Sumption’s answer to these authorities was to draw a distinction between core contractual obligations – in the case of an employment contract, the employee’s obligation to work and the employer’s obligation to pay him for that work – and what ‘for want of a better word’ he described as ‘collateral’ obligations.25 The uncertainty as to the appropriate term to describe obligations of this kind is matched by a similar uncertainty as to how to identify them. Lord­ ­Sumption explained the distinction as follows:26 The core obligations are those which are fundamental to the continued existence of the employment relationship, essentially the obligation of the employee to work and the concomitant obligation of the employer to pay him … The present appeal is about the core obligations under Mr Geys’s contract of employment. We are concerned with the question whether, in any legally meaningful sense, it can be said that Mr Geys had an obligation to work after 29 November 2007 or SG had an obligation to pay him in respect of the period after that date.

The last point is a controversial characterisation of the issue in the case. Mr Geys’s entitlement to the bonus in issue was conditional not upon his continuing to do work for SG, but upon his being party to a contract of employment and therefore obliged to do work for SG if called upon to do so. It was not possible, therefore, to say that SG’s ability to refuse to allow Mr Geys to work had the same effect on his entitlement to claim the bonus as it was accepted it had on his entitlement to claim his 23 Lumley v Wagner (1852) 1 De G M & G 604, 607; 42 ER 687, 689; William Robinson & Co Ltd v Heuer [1898] 2 Ch 451 (CA) 458; Warner Bros Pictures Inc v Nelson [1937] 1 KB 209 (KB) 222; Thomas Marshall (Exports) Ltd v Guinle [1979] Ch 227 (Ch). 24 Lumley v Wagner (n 23) 619 (Lord St Leonards LC): ‘it will not suffer them to depart from their contracts at their pleasure, leaving the party with whom they have contracted to the mere chance of any damages which a jury may give’; William Robinson & Co Ltd v Heuer [1898] 2 Ch 451 (CA) 458 (Chitty LJ): ‘I think that the engagement is still a continuing engagement, and that the plaintiffs, therefore, are right’; Thomas Marshall v Guinle (n 23) 243, in which Megarry V-C rejected the suggestion that ‘the court’s inability to make a servant work for his employer [should] mean that as soon as the servant refuses to do so the court is forthwith disabled from restraining him from committing any breach, however flagrant, of his other obligations during the period of his contract’ (emphasis added). 25 Geys (n 1) [120]. 26 ibid [121].

54  Sir David Foxton wages. Nor could it be said that Mr Geys owed no obligations at all for as long as the contract of employment continued but SG refused to allow him to work. In particular, Mr Geys owed the negative obligation not to work for someone else, at least where inconsistent with his duties to SG as work for a competitor bank would have been,27 an obligation which continued whether he was performing work for SG or not.28 B.  The Employee’s Obligation not to Work for Someone Else Lord Sumption’s distinction between core and collateral obligations does not explain why an express obligation by an employee not to work for someone else can survive a wrongful, but unaccepted, resignation. Such an obligation would seem to be a core obligation, reflecting the concepts of loyalty and fidelity to the employer’s interests which pervade many of the characteristic obligations of the employment contract. It is difficult to see how the employee’s obligation to work for the employer can be a core obligation, but not the corelative obligation not to work for someone else. Lord  ­Sumption distinguished one of the cases in which an injunction had been granted to enforce that obligation, Thomas Marshall (Exports) Ltd v Guinle,29 as a case in which ‘the covenant expressly bound the employee both during and after his employment’, with the result that ‘it was therefore irrelevant when the employment relationship or the contract embodying it ended’.30 However, as noted above,31 this was not the basis on which the case was reasoned, and it cannot explain the decision in William Robinson & Co Ltd v Heuer, in which the pre-termination covenants restricting the employee’s right to do other work were more restrictive than those applicable post-termination.32 When the employee refused the employer’s offer to dismiss him there and then if the employee would consent to an injunction in the terms of the ‘less onerous’ post-discharge covenant,33 the court granted an injunction to enforce the pre-termination restraints. Further, the doctrine of restraint of trade treats covenants restraining the employee’s ability to work for others during the period of employment more benevolently than post-discharge restrictions,34 so the issue of whether the court is enforcing a restriction which applies during the currency of the contract or a ­post-termination covenant might well be a matter of some legal moment. These factors make it very difficult to explain the court’s readiness to enforce the negative obligation of an employee who wrongfully purports to resign as the enforcement of either a post-termination covenant or an accrued obligation which 27 Chitty on Contracts (n 18) paras 40.062–40.063, but cf the limitations on the remedies available for breach of an implied, as opposed to express, obligation of this kind discussed below. 28 Imam-Sadeque v Bluebay Asset Management Ltd [2012] EWHC 3511 (QB), [2013] IRLR 344 [144]–[145] (Popplewell J). 29 Thomas Marshall v Guinle (n 23). 30 Geys (n 1) [134]. 31 See n 24 above. 32 William Robinson v Heuer (n 24). 33 ibid 458 (Chitty LJ). 34 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 (HL) 307 (Lord Morris), 328 (Lord Pearce) and 336 (Lord Wilberforce) (HL); JM Finn & Co Ltd v Holliday [2013] EWHC 3450 (QB) [57] (Simler J); Wessex Dairies Ltd v Smith [1935] 2 KB 80 (CA).

Termination  55 survives termination. Indeed, one of the acknowledged benefits of an injunction restraining the recalcitrant employee from working for someone else is that it may serve to encourage the employee to resume the service she has wrongfully withheld – the injunction ‘may tend to the fulfilment of [the] engagement’, as it was put by the Lord Chancellor in Lumley v Wagner35 – which state of affairs is inconsistent with the suggestion that the contract of employment has terminated. Certainly, if such an injunction is granted, and the recalcitrant employee chooses to return to work, it does not seem likely that the employer could refuse to provide her with work on the basis that the employment relationship, or contract of employment, had come to an end. As the deputy judge in Sunrise Brokers LLP v Rogers noted of the injunction he had made preventing the employee from working for a competitor when the employer had refused to accept his wrongful resignation:36 It is, however, implicit in my Order that, should Mr Rodgers (contrary to his settled and stated intention) in fact choose to return to work out his notice with Sunrise, Sunrise must keep its promise to pay him in accordance with the Contract terms.

However, an injunction to restrain an employee who has resigned in breach of contract from working for another employer will only be granted when this involves a breach of an express obligation, not the obligation usually implied to this effect.37 The reason given for the distinction – that where the implied obligation arises simply as concomitant of the employee’s obligation to work for his employer, enforcing the negative aspect of that covenant would come close to ordering specific performance of the obligation to work – is not particularly convincing. It is difficult to see why existence of two rather than one covenants to the same effect should make a practical difference in this respect. However, it might be said to reflect a concern that it would not be appropriate to enforce an obligation inextricably bound up with the employee’s obligation to work when that obligation is not itself enforceable. Further, an injunction to enforce an express negative covenant will not be granted where its effect would be to force the employee to resume the employment she unlawfully resigned from and thereby indirectly specifically enforce an obligation which could not be directly enforced,38 or otherwise deprive her of any reasonable means of earning her living.39 As a result, it became common for employers seeking to obtain such an injunction to offer to pay the employee during the remainder of the term, whether the employee works or not, although this is only necessary in those cases where, in the absence of such an offer, the injunction would have the prohibited coercive effect.40

35 Lumley v Wagner (n 23) 620 (Lord St Leonards LC). However, the court will not grant such a negative injunction if the effect would be to force the employee to return to work, thereby in effect specifically enforcing the obligation to provide personal services indirectly which cannot be ordered directly: Sunrise Brokers LLP v Rogers [2014] EWCA Civ 1373, [2015] ICR 272. 36 Sunrise Brokers LLP v Rogers [2014] EWHC 2633 (QB), [2014] IRLR 780 [71] (Richard Salter QC sitting as a Deputy Judge of the Queen’s Bench Division). 37 Whitwood Chemical Co v Hardman [1891] 2 Ch 416 (CA) 426–27; Grimston v Cuningham [1894] 1 QB 125 (QB); Mortimer v Beckett [1920] 1 Ch 571 (Ch) 581. 38 Rel-a-Bell Burglar & Fire Alarm Co Ltd v Eisler [1926] Ch 609 (Ch) 616; Warren v Mendy [1989] ICR 525 (CA). 39 Ehrman v Bartholomew [1898] 1 Ch 671 (Ch); Page One Records Ltd v Britton [1968] 1 WLR 157 (Ch). 40 Sunrise Brokers v Rogers (n 35) [28] (Longmore LJ).

56  Sir David Foxton These peculiarities suggest caution in treating the cases concerned with the employee’s obligation not to work elsewhere as authority for any wider principle as to the effect of the wrongful repudiation of an employment contract, but there is the further difficulty as to what is to happen in those cases in which such an injunction will not be forthcoming – because the negative covenant is implied and not express, or because the practical effect will be to force the employee to carry on working for her existing employer. On the majority’s analysis in Geys, even if an injunction was refused and the employee began working elsewhere, it would be open to the employer to refuse to accept the repudiation and treat the contract of employment as continuing. On that basis, could it be said that the employee is in continuing breach of the first contract of employment and the new employer is assisting or procuring that breach? If, as a result of the terms of the first contract of employment, or by reason of copyright or other intellectual property rights, the work of the employee during the currency of the contract of employment belongs to the employer,41 can the original employer lay claim to the intellectual fruits of the work done by the employee for the second employer? These difficulties suggest that, here too, there is a need for some constraint on the continuation of the contract of employment in these circumstances beyond the practical possibility that the original employer will tire of the process and accept the repudiation, or the contract will expire on its own terms, a constraint which the majority judgments in Geys do not provide. C.  The Enforcement of Contractual Disciplinary Processes The second class of cases relied upon by the majority as establishing that a repudiatory breach of an employment contract does not automatically bring it to an end are cases in which injunctions were granted to require an employer to complete the contractual disciplinary process before terminating an employee’s employment. It is suggested that Lord Sumption was on surer ground in treating those cases as concerned with the enforcement of collateral obligations. In Jones v Lee, an interim injunction was granted to prevent the employer from proceeding with the employee’s dismissal until the contractual disciplinary process had been completed,42 albeit without any discussion of the appropriateness of injunctive relief in that context. That issue was considered by Warner J when granting an injunction to similar effect in Irani v Southampton and South West Hampshire Health Authority,43 holding that on the facts of that case there had been no loss of trust and confidence by the employer in the employee. In Robb v Hammersmith and Fulham LBC,44 Morland J was prepared to grant an interim injunction even though the employer claimed to have lost trust in

41 Patents Act 1977, ss 39–43. Copyright, Designs and Patents Act 1988, pt 1. See also J Phillips and M Houlihan, Employees’ Inventions in the United Kingdom, Law and Practice (Oxford, ESC Publishing, 1982). 42 Jones v Lee [1980] ICR 310 (CA). 43 Irani v Southampton and South West Hampshire Health Authority [1980] ICR 590 (Ch) 598. 44 Robb v Hammersmith and Fulham LBC [1991] ICR 514 (QB) 522–23.

Termination  57 the employee, because such trust was not necessary for the proper ­operation of the ­disciplinary procedure.45 With respect, Morland J was right in concluding that a disciplinary process does not presuppose the continued existence of trust and confidence between employer and employee, but that their relationship is antagonistic and their interests antithetical. It involves a mediated interaction before a quasi-judicial fact finder and, to that extent at least, bears similarity with dispute resolution agreements which are collateral – or in Lord Diplock’s terminology, a­ ncillary – in the sense that they survive termination of a contract.46 Further, the absence of any right to recover damages for breach of the duty to follow the disciplinary process itself militates in favour of the availability of injunctive relief.47 However, Lord Sumption’s explanation of the practical utility of enforcing the operation of such procedures by injunction – ‘because of the possibility that an internal disciplinary procedure may result in the employer’s reinstatement’48 – suggests that, at least in some circumstances, the employee who is a victim of a wrongful dismissal, and perhaps an employer who is the victim of a wrongful resignation, has a legitimate interest in keeping the contract alive to allow for a change of mind. This issue is considered below. IV.  MUST THE INNOCENT PARTY HAVE A LEGITIMATE INTEREST IN AFFIRMING THE CONTRACT?

Lord Sumption, in Geys, referred to one limitation on the ability of an innocent party to affirm a contract after a repudiatory breach and sue for an agreed sum, namely when the co-operation of the repudiating party was required before the innocent party could satisfy the preconditions to payment.49 However, even when an innocent party is in the happy position of being able to perform its own contractual obligations without the co-operation of the repudiating party, it may nonetheless be precluded from keeping the contract alive in order to recover future amounts as they accrue if it is adjudged to have no legitimate interest in doing so. This limitation – precisely what it limits will be considered shortly – was first articulated by Lord Reid in White & Carter (Councils) v McGregor.50 A.  White & Carter (Councils) v McGregor White & Carter concerned a firm of advertising contractors who agreed to display advertisements on their own site for a local garage at a weekly charge per plate for a period of 156 weeks, with a clause providing that the entire amount payable over 45 It is suggested that Ralph Gibson LJ was making the same point in Boyo v Lambeth LBC [1994] ICR 727 (CA) 743 when stating that the operation of such procedures does ‘not of necessity depend on the existence of the relationship of master and servant’. 46 Moschi v LEP Air Services Ltd [1973] AC 331 (HL) 350. 47 Edwards v Chesterfield Royal Hospital NHS Foundation Trust [2011] UKSC 58, [2012] AC 22. 48 Geys (n 1) [129]. 49 ibid [114]. 50 White & Carter v McGregor (n 20).

58  Sir David Foxton that period would become immediately due in the event of default. The defender repudiated the contract on the day it was concluded, but the pursuers displayed the advertisements anyway and sued for the price. The House of Lords held by a majority of 3:2 that they were entitled to do so. Lord Reid, in the majority, referred to the well-established principle that the innocent party has the option whether to accept a repudiatory breach and sue for damages or continue the contract.51 He noted that if the pursuers had been dependent on some act of the defender in order to complete the contract, the court would not have compelled performance of that act by order of specific implement, and the pursuers would have been confined to their remedy in damages. However, ‘the peculiarity’ of the case was ‘that the pursuers could completely fulfil the contract without any co-operation of the defender’. In an oft-quoted passage, he noted: It may well be that if it can be shown that a person has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages, he ought not to be allowed to saddle the other party with an additional burden with no benefit to himself.

No such reference appears in the judgments of the other members of the majority, Lords Hodson and Tucker.52 Nonetheless, the ‘legitimate interest’ principle has been applied in a number of subsequent cases,53 despite a substantial volume of academic criticism.54 As subsequently formulated, it has been held that the burden is on the party in breach to establish two things in order to show that the innocent party lacks the requisite legitimate interest.55 The first is that damages will constitute an adequate remedy56 – a requirement with obvious similarities to the threshold requirement for an order for specific performance expressed in the same terms.57 The second is that the choice of the innocent party to keep the contract alive and perform it must be ‘wholly unreasonable’, ‘extremely unreasonable’ or, perhaps, ‘perverse’.58

51 ibid 427, 429–30. 52 ibid 444–45. 53 Attica Sea Carriers Corp v Ferrostaal Poseidon Bulk Reederei GmbH [1976] 1 Lloyd’s Rep 250 (CA) 255; Gator Shipping Corp v Trans-Asiatic Oil Ltd SA (The Odenfeld) [1978] 2 Lloyd’s Rep 357 (Com Ct) 372–74; Clea Shipping Corp v Bulk Oil International Ltd (The Alaskan Trader (No 2)) [1982] 2 Lloyd’s Rep 645 (Com Ct); Stocznia Gdanska SA v Latvian Shipping Co [1995] 2 Lloyd’s Rep 592 (Com Ct) 600–02, [1996] 2 Lloyd’s Rep 132 (CA); MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789, [2017] 1 All ER (Comm) 483. 54 See, eg J O’Sullivan, ‘Repudiation: Keeping the Contract Alive’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge, Cambridge University Press, 2017) 51. 55 The burden lies on the party in breach: Chitty on Contracts (n 18) para 27.007. 56 Isabella Shipowners SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] EWHC 1077 (Comm), [2012] 1 CLC 899 [44]; The Odenfeld (n 53) 374; Ocean Marine Navigation Ltd v Koch Carbon Inc (The Dynamic [2003] EWHC 1936 (Comm) [23]; Reichman v Beveridge [2006] EWCA Civ 1659, [2007] Bus LR 412 [17]. 57 Chitty on Contracts (n 18) paras 27.15–27.034; J McGhee (ed), Snell’s Equity, 33rd edn (London, Sweet & Maxwell, 2017) paras 17.007–17.012. On this, see also ch 6 of this book, noting the use of the concept of ‘legitimate interest’ both in determining when an action for the price will be available and as a justification for an order for specific performance. 58 The Aquafaith (n 56) [44], where Cooke J collects the epithets from the authorities, the last being his own contribution.

Termination  59 B.  Is the Legitimate Interest Doctrine a Fetter on the Right to Affirm, or Merely on the Availability of Certain Remedies after Affirmation? The suggestion that the concept of legitimate interest might be relevant to the issue of whether termination of a contract must always be the result of the innocent party’s election faces the obstacle of a body of judicial statements which suggest that the concept is not relevant to the right to elect to keep a contract alive, but to the right of the innocent party to sue for an agreed sum if she elects to keep the contract alive. The Court of Appeal decision in Decro-Wall International SA v Practitioners in Marketing Ltd is usually identified as the origin of this analysis.59 There are passages in the judgments of Salmon and Buckley LLJ which reject the suggestion that Lord Reid’s judgment contemplated automatic termination in cases where there was no legitimate interest in keeping the contract alive, but without explaining, on this hypothesis, whether the legitimate interest test was concerned with the right of election or the right to recover the agreed sum.60 Sachs LJ, in a rather Delphic passage relied upon by Lord Wilson in Geys, suggested ‘in such cases it is the range of remedies that is limited, not the right to elect’. However, he appears to be addressing the scenario in which the range of remedies was limited not by the concept of legitimate interest, but by the inability to accrue a debt claim without the co-operation of the defaulting party,61 the reference to ‘such cases’ being a reference back to the ‘great many cases [where] … unless the repudiating party can be persuaded or impelled to change his mind and withdraw his repudiation, the only remedy available to the innocent party will lie in damages’. There is much to be said for Tomlinson LJ’s response to this part of Sachs LJ’s judgment:62 Left to my own devices, I think that I would have concluded that Sachs LJ was there doing no more than to point out that ‘the reality is that deadlocked situations of this kind are usually resolved by the practicalities’ … Thus I think that there is a danger in taking the last sentence of what Sachs LJ said out of context. I think that Sachs LJ was saying that because the range of remedies is for practical purposes limited, usually the situation will be resolved by reference to those practicalities. I am not sure that he was saying that there are circumstances in which the range of remedies available to the innocent party is by operation of law limited so as to prevent the exercise of one or more of those remedies otherwise theoretically available.

However, Lloyd J, in The Alaskan Trader (No 2), interpreted Sachs LJ as saying something rather more significant:63 I think it is more accurate to say that it is the Court which, on equitable grounds, refuses to allow the innocent party to enforce his full contractual rights. It is, as Lord Justice Sachs said in Decro-Wall the range of remedies which is limited, not the right to elect. The Court is not exercising a dispensing power; nor is it re-writing an improvident contract. It is simply refusing a certain kind of relief.

59 Decro-Wall

International v Practitioners in Marketing (n 21). 370 (Salmon LJ) and 381 (Buckley LJ). 61 ibid 375, cited in Geys (n 1) [86] by Lord Wilson. 62 MSC Mediterranean Shipping v Cottonex Anstalt (n 53) [54]. 63 The Alaskan Trader (No 2) (n 53) 651 (Lloyd J). 60 ibid

60  Sir David Foxton It was this interpretation which found favour with Lord Wilson in Geys.64 Following Geys, in MSC Mediterranean Shipping Co SA v Cottonex Anstalt,65 Moore-Bick LJ noted: It may be that the implications of Lord Reid’s observation in White & Carter and the principles of law which underpin it have yet to be fully identified, but the existence of the broad principle towards which he pointed has been accepted in a number of cases, of which The Puerto Buitrago is but one example. In Clea Shipping Corp v Bulk Oil International Ltd (The Alaskan Trader) … Lloyd J upheld the decision of a commercial arbitrator that the owner of a vessel let under a time charter could not recover hire because it had no legitimate interest in affirming the charter following its repudiation by the charterer. The judge in that case described the principle as being that the court on equitable grounds refuses to allow the innocent party to enforce his full contractual rights, but I am inclined to think that the observations of Lord Reid himself in White & Carter and of Lord Wilson in Geys v Société Générale suggest that the true explanation may be that in an appropriate case the court in the exercise of its general equitable jurisdiction will decline to grant the innocent party the remedy to which he would normally be entitled. This may appear to be a distinction without a difference and in most cases that may be so, but in some cases, of which Geys v Société Générale is an example, it is a distinction of importance.

The suggestion that the concept of legitimate interest is concerned with the availability of remedies, or the ability to enforce particular rights, under the continuing contract, as opposed to the election to maintain the contract at all, is challenging. If the innocent party has an accrued claim for a sum of money, the suggestion that the court has a general equitable jurisdiction to refuse relief for that claim in debt does not fit happily with the traditional classification of debt as a non-discretionary entitlement.66 There is no similar discretion to refuse to give judgments on debt claims which accrue before a repudiatory breach, which would suggest it is the election to continue the contract which is the legally significant event in this context. If the legitimate interest concept is not concerned with election, it would suggest that, for the purposes of the continuing contract, the legitimate interest requirement may preclude some types of relief for some breaches, but not for others, with the issue to be addressed on a case-by-case basis (as opposed to the single test of whether the election itself involved keeping the contract alive when there was no legitimate interest in doing so). The continuation of the employment contract is not only relevant to the employee’s ability to sue for an agreed sum or the employer’s ability to prevent the employee from working elsewhere, but potentially to issues such as the employee’s right to reside in a property linked to her employment (the lock-keeper’s cottage, the nature warden’s lodge), or the employer’s property rights in the employee’s inventions – are these to be subject to individualised legitimate interest assessments? Further, the argument that the legitimate interest is concerned with particular remedies would seem to contemplate the position changing over time during the life of the continuing contract – with a legitimate interest being acquired or lost as circumstances change, and rights or 64 Geys (n 1) [86]. 65 MSC Mediterranean Shipping v Cottonex Anstalt (n 53) [80] (citation omitted, emphasis added), on which see J Morgan, ‘Repudiatory Breach: Inability, Election and Discharge’ (2017) 76 CLJ 11. 66 D Friedmann, ‘The Performance Interest in Contract Damages’ (1995) 111 LQR 628, 630; White & Carter v McGregor (n 20) 445 (Lord Hodson).

Termination  61 remedies becoming or ceasing to be enforceable – as opposed to a one-time analysis at the date of election. There are other difficulties with the analysis. The legitimate interest which it is frequently said the innocent party must have is often described as a legitimate interest ‘in performance’ or in ‘completing the contract’, or affirming it. Lord Reid used the first two descriptions in White & Carter and also spoke of an interest in performing or ‘carrying out the work’.67 Clarke J, in Stocznia Gdanksa SA v Latvian Shipping Co, asked whether it was reasonable ‘to continue to perform’,68 and, drawing on other authorities, framed the issue as to whether the innocent party should ‘in all reason’ accept the repudiation or whether it would be ‘wholly unreasonable’ to keep the contract alive. Tomlinson J, in Indian Airlines Limited v GIA International Limited, framed the question as being whether the innocent party had ‘no legitimate interest in continuing to perform the contract’ or ‘no legitimate interest in keeping the contract on foot’.69 In Reichman v Beveridge,70 Rix LJ referred to the doctrine as a constraint on the innocent party’s ability ‘to maintain the contract in force’ and asked whether ‘an election to keep the contract alive would be wholly unreasonable’. Further, in cases where the contract is one which involves continuing payments, the effect of the absence of a legitimate interest appears to be not simply to limit the innocent party to a claim in damages, but to limit it to a single award assessed on one occasion for the present day value of the loss of the benefit of the obligations which would have accrued in the future, with a duty to mitigate that loss. For example, in Telephone Rentals Plc v Burgess Salmon,71 Dillon LJ observed of the White & Carter argument as used in that case: It does not appear that he was asked any questions in cross-examination to lay a foundation for a submission that the Plaintiffs had no legitimate interest in claiming the instalments as they fell due, instead of claiming damages once and for all for the repudiation of the contract.

Similarly, in Attica Sea Carriers Corporation,72 Lord Denning MR identified the issue as whether the owner had a legitimate interest in keeping the contract alive so as to recover instalments as they fell due, while in MSC Mediterranean Shipping Co SA v Cottonex Anstalt the issue was not whether the claimant was precluded from claiming in debt, but whether it could claim damages – admittedly liquidated damages  – accruing day by day or was confined to a one-off award by reference to the value of the containers.73 The ability to recover a present day value in damages for the lost

67 White & Carte v McGregor (n 20) 431. 68 Stocznia Gdanksa v Latvian Shipping (n 53) 602. 69 Indian Airlines Limited v GIA International Limited [2002] EWHC 2361 (Comm) [75] and [78]. There are numerous other examples: see, eg The Odenfeld (n 53) 374; The Dynamic (n 56) [23], in which Simon J noted the rule applied ‘where an election to keep the contract alive would be unreasonable’; The Aquafaith (n 56) [42], in which Cooke J referred to ‘whether or not the owners had a legitimate interest in maintaining the charter for the balance of 94 days and claiming hire, as opposed to accepting the repudiatory breach of the charterers as bringing the charter to an end’. 70 Reichman v Beveridge (n 56) [17]. 71 Telephone Rentals Plc v Burgess Salmon (Court of Appeal, unreported, 9 April 1987). 72 Attica Sea Carriers v Ferrostaal Poseidon Bulk Redeerei (n 53) 255 (CA). 73 MSC Mediterranean Shipping v Cottonex Anstalt (n 53).

62  Sir David Foxton benefit of future performance the right to which has yet to accrue is a characteristic of terminated contracts. As Lord Mustill noted,74 it is ‘“acceptance” of the repudiation [which] meant that an actionable breach then sprang into existence’, ‘“actionable” in the sense … [of] a vested right of suit [which] … could immediately be enforced by action for damages’ even before the time for performance had arisen or the condition precedents to such performance had been satisfied. That the innocent party without the requisite legitimate interest is not only confined to a claim in damages, but also benefits from a ‘vested’ right of suit in respect of what Lord Mustill would describe as a fictional breach and which, absent acceptance, is famously a ‘thing writ in water’75 would strongly suggest that it is the right to affirm that the absence of a legitimate interest destroys, putting the innocent party in the same position as if he had accepted the repudiation. Those who suggest it will usually be impractical for an employee to keep a contract alive because the inability to accrue the right to wages would render the contract ‘valueless’ fail to address the fact that the affirming employee has a continuing cause of action for breach of the employer’s obligation to provide work,76 so that affirmation will not be devoid of ‘practical utility’, but merely involve the expense and waste of a series of actions and damages assessments which a ‘once and for all’ assessment of the type which follows termination avoids. For all these reasons, it is suggested that Lord Sumption’s dissenting view – that the legitimate interest test is concerned with the right of election, not with the availability of particular rights or remedies once the contract has been kept alive – is compelling.77 V.  DID MR GEYS HAVE A LEGITIMATE INTEREST IN KEEPING HIS EMPLOYMENT CONTRACT ALIVE?

The issue of whether Mr Geys had a ‘legitimate interest’ – whether in keeping the contract alive or in his claim for the agreed sum of his bonus – is not expressly discussed in Geys. Nor is the answer to that question self-evident. Mr Geys wanted to keep the contract alive for a relatively short period in order to accrue a significant debt in his favour, but to do so even though he was unable, following the repudiation, to perform his only positive primary obligation under the employment contract. It is possible to identify a number of features of the case which point both in favour and against the existence of such a legitimate interest. A.  The Significance of the PILON Clause The PILON clause was a significant feature of the dispute in Geys. It provided a ­temporal limitation on the period for which Mr Geys was able to keep the contract



74 Lord

Mustill, ‘The Golden Victory: Some Reflections’ (2008) 124 LQR 569, 571. v Pickford Tool Co Ltd [1951] 1 KB 417 (CA) 422 (Asquith LJ). 76 See, eg Summers (n 4) 93. 77 Geys (n 1) [114] and [116]–[117]. 75 Howard

Termination  63 alive, which made the recognition of his right to affirm the contract a much less momentous decision than in a contract with a longer duration.78 It also provided the basis for the argument that damages would not be an adequate remedy for Mr Geys, such inadequacy being a necessary (albeit not sufficient) requirement for the ‘no legitimate interest’ rule to apply. Lord Wilson saw the limitation on the adequacy of damages as arising from the doctrine of minimum performance, under which damages would be assessed on the ‘least burthensome principle’ and on the assumption that SG would have terminated the contract lawfully as soon as it was able to do so.79 When considering the closely analogous issue of whether damages are an adequate remedy so as to preclude an order for specific performance, legal limitations on the recovery of loss such as a limitation or exclusion clause or the inability to recover particular heads of damages have been held to constitute inadequacy.80 However, the authors of Snell’s Equity note:81 Damages will generally be considered an adequate remedy, even though the claimant regards specific performance as preferable to an award of damages, for example because some of his loss is not recoverable in an award of damages or is too remote, or because of his obligation to mitigate his loss. In other words, the court will not, without more, order specific performance merely because its rules on the quantification of damages mean that the claimant’s interest in performance is not fully protected.

It seems unlikely that the minimum performance rule would have the effect that damages were inadequate for the purposes of determining whether to order specific performance, because it is a rule reflecting a limitation in the primary rights arising under the contract rather than a limitation on the secondary right to damages. Where a contract provides the contract-breaker with alternative means of performance, that choice may itself render the required performance too uncertain to be the subject of specific enforcement, or the order for specific performance may itself be limited to the minimum performance entitlement.82 It is for that reason that specific performance will not ordinarily be granted for a contract which is terminable by the respondent on immediate notice.83 The fact that a calculation of damages would have reflected SG’s ability to terminate under the PILON provision, and thereby precluded a damages claim for the significant bonus, might itself suggest that Mr Geys did not have a legitimate performance interest in keeping the contract alive for the purpose of accruing the bonus. Lord Hope suggested that a strong argument in favour of the elective theory was to prevent an employer taking advantage of its own wrong by repudiating a contract of employment before the employee accrued a right to a benefit such as higher pay, health care and holiday.84 If proper operation of the PILON procedure would have caused the employer to accrue that right before dismissal, then one can see the force of this argument (albeit, in those circumstances, the benefits of the lost bonus will be recoverable in damages). However, in Geys, the proper operation 78 Compare the ‘frustrating delay’ in MSC Mediterranean Shipping v Cottonex Anstalt (n 53) [61]. 79 Geys (n 1) [64]. On the principle, sometimes referred to as the rule of minimum performance, see Chitty on Contracts (n 18) paras 26.083–26.084. 80 Chitty on Contracts (n 18) para 27.019. 81 Snell’s Equity (n 57) para 17-007. 82 Durham Tees Valley Airport Ltd v Bmibaby Ltd [2010] EWCA Civ 485, [2011] 1 All ER (Comm) 731 [90]. 83 Chitty on Contracts (n 18) para 27.058. 84 Geys (n 1) [15] and [18].

64  Sir David Foxton of the PILON process would have led to Mr Geys’s termination before his right to the bonus accrued. While Lord Hope suggested that SG was seeking to take advantage of its own wrong, its breach was, as Lord Sumption noted, of ‘the most technical kind’.85 At the time he was escorted from the building, Mr Geys had neither accrued his right to a bonus nor did he enjoy a contractual right to work for long enough to do so. In the particular circumstances of Geys, his ability to affirm the contract was not about securing his performance interest, but enlarging its scope. B.  A Legitimate Interest in ‘Waiting and Seeing’? An employee or employer may also have a legitimate interest in keeping the employment contract alive for the purpose of determining, in effect, whether the repudiating party ‘really means it’. One of the interesting features of the argument that Mr Geys’s contract had come to an end independently of his election was that it was limited to certain kinds of repudiatory breach, namely ‘express’ or ‘outright’ dismissals or resignations. This argument had received some support in Gunton v Richmond-uponThames LBC.86 It received short shrift in Geys, Lord Wilson being critical of the suggestion that the automatic theory applied to ‘express and immediate’ or ‘outright’ wrongful dismissals and resignations, but not other kinds, because of the difficulty of determining the ‘contours of its application’.87 It was not enough, in his view, that ‘like elephants and post boxes, one can recognise an outright dismissal when one sees it’. A possible reason for the distinction would be the essentially unequivocal and final nature of these acts, reflected in Lord Sumption’s observation of Mr Geys that ‘there could not have been the slightest doubt that his employment relationship with SG was at an end’.88 By contrast, in Stocznia Gdanska SA v Latvian Shipping Co,89 it was held that the yard had a material interest in keeping ‘at least’ the first two contracts alive because ‘it was not at the time plain beyond all argument that the owners were repudiating the contracts’. However, even the perpetrator of an express or outright renunciation may be susceptible to second thoughts, and for that reason, it might be argued that the innocent party is entitled to a least some ‘waiting period’ for clarity or the expiration of a locus poenitentiae before the contract terminates or any legitimate interest in affirming it expires, albeit the clarity and apparent finality of the renunciatory act might influence how long that period would be. In Shindler v Northern Raincoat Co Ltd,90 Diplock J referred to a company who had dismissed a managing 85 ibid [109]. 86 Gunton v Richmond-upon-Thames LBC [1981] Ch 448 (CA) 459 (Shaw LJ): ‘there may conceivably be a different legal result where the repudiation is oblique and arises indirectly as, for example, where the employer seeks to change the nature of the work required to be done or the times of the employment’. The suggestion seems to have originated in an observation in Rigby v Ferodo Ltd [1988] ICR 29 (HL) 34, where Lord Oliver rejected the automatic theory in a case of unilateral change of an employee’s pay ‘whatever may be the position under a contract of service where the repudiation takes the form either of a walk-out by the employee or of a refusal by the employer any longer to regard the employee as his servant’. 87 Geys (n 1) [42] (Baroness Hale) and [63] (Lord Wilson). 88 ibid [108]. 89 Stocznia Gdanska v Latvian Shipping (n 53) 139 (Rix LJ). See also Clarke J at first instance (n 53) 604. 90 Shindler v Northern Raincoat Co Ltd [1960] 1 WLR 1038 (Manchester Assizes) 1048 (Diplock J).

Termination  65 director as having ‘a locus poenitentiae in which they could have changed their minds and decided to go on employing him’ until he was dismissed by the company as a director. Similarly, Andrew Burrows has suggested:91 If an employer repudiates a contract of employment, which is not accepted by the employee, and the employer then changes its mind and wishes the contract to continue, is the employer entitled to insist on that? The answer is surely ‘yes’.

However, that possibility cannot of itself justify the continuation of the contract for its natural duration. The existing case law supports the view that the extent of one party’s legitimate interest in keeping a contract alive may be time-limited.92 C.  No Legitimate Interest in Keeping a Contract Alive When the Principal Obligation Cannot be Performed? While Lord Sumption’s dissent is not reasoned by reference to the concept of legitimate interest, it appears in part to have been animated by the view that it should not be open to Mr Geys to keep the contract alive for the purpose of enforcing one primary right – his right to a bonus – in circumstances in which Mr Geys was unable to perform his principal primary obligation – to work. At least in White & Carter, the party keeping the contract alive was able to and did perform its sole positive primary obligation of displaying the advertisements and appears to have been able to render all of the contractual performance required from it. Mr Geys, by contrast, was seeking to keep the employment contract alive in circumstances in which he was unable to render any positive performance at all. It might be said that the continuation of the contract in these circumstances would amount to imposing a contractual relationship on the parties which was fundamentally different from the contract they had agreed. One possible answer to this problem would be to hold that it is not open to the innocent party to affirm the contract and enforce the counterparty’s primary obligations unless it is able to perform all of its contractual obligations, either because the co-operation of the repudiating party is not required or, to the extent that it is, the court will compel it. In White & Carter,93 Lord Reid referred to the case as one where ‘the pursuers could completely fulfil the contract without any cooperation of the defender’, a statement which led Moulder J, in Motortrak Ltd v FCA Australia Pty Ltd,94 to conclude that it was only possible to affirm the contract where all of the innocent party’s obligations could be performed without the co-operation of the party in breach.95 However, the difficulty with interpreting Lord Reid’s dictum in this way is that he was addressing a contract with a single obligation on each side, which could be performed in its entirety. There is considerable force in 91 Burrows (n 4) 288. 92 The Odenfeld (n 53) 375, where Kerr J noted that ‘the passage of time might in itself alter the legal position of the parties, because an insistence to treat the contract as still in being might in time become quite unrealistic, unreasonable and untenable’. See also Ministry of Sound (Ireland) Ltd v World Oneline Ltd [2003] EWHC 2178 (Ch), [2003] 2 All ER (Comm) 823 [46] (Nicholas Strauss QC). 93 Above n 20 (emphasis added). 94 Motortrak Ltd v FCA Australia Pty Ltd [2018] EWHC 990 (Comm). 95 ibid [106]–[107].

66  Sir David Foxton ­ icholas Strauss QC’s observations upon this issue in Ministry of Sound (Ireland) N Ltd v World Online Ltd:96 With reference to the passages in Lord Reid’s speech relied on, it would in my view be surprising if a party to a contract of this kind could not sue in debt whenever anything remained to be done to complete the contract which could not be done without the co-operation of the other party. Lord Reid’s choice of words suggests strongly that he was referring to contracts containing entire obligations of the kind which he was considering. In a contract such as the present one, even if the contractor has in some way failed to perform the contract due to his own fault, he remains able to recover in debt, subject to a reduction in respect of the non-performance or a set-off in respect of the other party’s claim for damages: see Hoenig v Isaacs; Hanak v Green. The contracting party cannot be in a worse position because his inability to perform is due, not to his own fault, but to the other party’s breach of contract.

It was once thought that the inability to order specific performance of some obligations arising under a contract precluded an order for specific performance of other obligations. In Ryan v Mutual Tontine Westminster Chambers Association, the Court of Appeal refused to order specific performance of the landlord’s obligation under a lease to employ a porter who would provide services to the tenants.97 The argument that the court should at least order specific performance of the obligation to employ the porter was rejected because ‘when the Court cannot compel specific performance of the contract as a whole, it will not interfere to compel specific performance of part of a contract’,98 or, as Lopes LJ expressed it, ‘the Court will only interfere by way of compelling specific performance, where it can give specific performance of the contract as a whole; and … it will not interfere to compel specific performance of part of an entire contract’.99 Equity came to adopt a more flexible approach, ordering specific performance of part of a contract provided that ‘special considerations such as hardship do not render this course unjust’.100 One circumstance in which such an order would be unjust is if the court cannot secure to the defendant against whom the order for specific performance of an obligation is sought ‘the performance by the other contracting party of the conditions upon which those obligations depended’.101 However, that issue was approached more flexibly in equity than at law, as recognised by Sir George Mellish in Wilkinson v Clements:102 I can also conceive that a Court of Equity might treat an agreement as entire even in cases where a Court of Law would say that the performance of one part is not a condition precedent to the performance of the other part, because the Court might see that those rules as to conditions precedent, which to a certain extent are technical, might not meet the real justice of the case.

96 Ministry of Sound (Ireland) v World Online (n 92) [54] (citations omitted). 97 Ryan v Mutual Tontine Westminster Chambers Association [1893] 1 Ch 116 (CA). 98 ibid 124 (Lord Esher MR). 99 ibid 125. 100 ICF Spry, The Principles of Equitable Remedies, 9th edn (London, Sweet & Maxwell, 2014) 113, citing Holliday v Lockwood [1917] 2 Ch 47 (Ch). 101 JC Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 (HCA) 298. 102 Wilkinson v Clements (1872) LR 8 Ch 96 (CA) 110.

Termination  67 That might be particularly important because of the difficulty in some contexts of linking the obligations of one contracting party to any particular counter-performance by the other, even though, in a general sense, both parties’ obligations are given in consideration of performance by the other party.103 A similar concern is articulated in Internet Trading Club Ltd v Freeserve Investments Ltd,104 where Tomlinson J noted that ‘to grant specific performance of part only of a contract must be unusual in circumstances where it is accepted that the balance of the contractual obligations do not lend themselves to enforcement in that manner’, particularly where the obligation in question was ‘part of a more complex set of mutual obligations designed to bring about a successful joint venture’. He concluded that: it is not the function of the court to impose upon the parties a contract which they did not make in circumstances where the contract which they did make has broken down and cannot be specifically enforced in its entirety.

In this context, courts of equity have distinguished between the inability specifically to enforce other ‘essential’ terms, and ‘minor’ or ‘subsidiary’ terms,105 a distinction with echoes of Lord Sumption’s distinction between ‘core’ and ‘collateral’ terms. It might fairly be said that SG’s obligation to pay the bonus, even if not legally conditioned by Mr Geys’s obligation to work, was one which assumed the continued operation of the contract of employment in a real rather than wholly notional sense, and was sufficiently bound up with the work it was anticipated Mr Geys would provide to make it inappropriate for it to survive when that work was no longer being performed. As Lord Sumption noted, ‘for all practical purposes from 29 November … Mr Geys contributed nothing to SG’s fortunes’.106 This sentiment appears to underlie Lord Sumption’s observation that ‘it is difficult to see why the law should recognise such a right [viz a right to treat a repudiated contract as subsisting] where the contract cannot be either performed or specifically enforced’.107 The discretionary nature of the decree of specific performance allows a court to adjust the relief it orders for considerations of this kind. The apparently binary choice between elective and automatic theories of termination cannot so readily accommodate such issues, but can the requirement for a legitimate interest in affirming the contract perform a similar function? It is suggested that there will not be a single answer to that question for all contracts of a particular class, but that everything will depend on the facts of each case. If Mr Geys had needed to continue the contract of employment for another two years in order to accrue the right to the substantial bonus on departure, it seems unlikely that the majority would have allowed the claim to succeed (whether on the basis that there was no legitimate interest in keeping the contract alive or no legitimate interest in the debt claim in those circumstances). In Hill v CA Parsons & Co Ltd,

103 See, eg Nicholas Strauss QC in Ministry of Sound (Ireland) v World Online (n 92) [45], noting the ‘nebulous’ relationship between the payments one party was required to make and the services required from the other, even though ‘the payments represent the price payable for the performance of the ongoing contractual obligations’. 104 Internet Trading Club Ltd v Freeserve Investments Ltd [2001] EBLR 142 (QB) [32]. 105 Richardson v Smith (1870) LR 5 Ch 648; Spry (n 100) 116. 106 Geys (n 1) [110]. 107 ibid [116].

68  Sir David Foxton Lord  Denning  MR justified the application of the election theory to employment contracts by the following example:108 Suppose that a senior servant has a service agreement with a company under which he is employed for five years certain – and, in return, so long as he is in the service, he is entitled to a free house and coal – and at the end to a pension from a pension fund to which he and his employers have contributed. Now, suppose that, when there is only six months to go, the company, without any justification or excuse, gives him notice to terminate his service at the end of three months. I think it plain that the court would grant an injunction restraining the company from treating the notice as terminating his service. If the company did not want him to come to work, the court would not order the company to give him work. But, so long as he was ready and willing to serve the company, whenever they required his services, the court would order the company to do their part of the agreement, that is, allow him his free house and coal, and enable him to qualify for the pension fund.

What of the position, however, where the senior servant was wrongfully dismissed in the first year and the job was awarded to someone else? Is it really the case that the dismissed servant could maintain the contract for its full five-year term and carry on occupying the house, such that it could not be offered to the replacement employee? By contrast, consider the position if Mr Geys’s contract had offered an income replacement insurance scheme, like the contract in Aspden v Webbs Poultry and Meat Group (Holdings) Ltd,109 the benefits of which were conditional upon the continuance of his contract of employment. If the failed attempt to invoke the PILON procedure had occurred when Mr Geys was claiming the benefits of the scheme, the argument that SG’s repudiation had automatically determined the employment contract, and thereby the ability to claim under the scheme, would have been particularly unattractive. If these had been the facts, it seems probable that Mr Geys would have a legitimate interest either in keeping the contract alive or, if that is the relevant question, in enforcing the entitlement to the insurance scheme. Approached as a matter of first principle, it is suggested that there is much to be said for the view that the employee’s ability to affirm the employment contract in the face of the employer’s repudiatory breach should be subject to the requirement of a legitimate interest, and that the fact that the employment contract would continue in these circumstances without the employee rendering her principal or characteristic performance under the contract should be an important, although not decisive, consideration in determining whether such an interest exists. It is in the performance of a contract’s principal or defining obligations that a legitimate interest should most obviously be found.110 In effect, in considering the entitlement of the employee (or, indeed, the employer) to affirm, the court would be able to consider the ‘fairness’ of the partial continuation of the contract in the way in which it does when considering whether to make a partial order for specific performance, and whether the

108 Hill v CA Parsons & Co Ltd [1972] Ch 305 (CA) 314–15. 109 Aspden v Webbs Poultry and Meat Group (Holdings) Ltd [1996] IRLR 521 (QB). 110 cf the argument of Solene Rowan that the existence of a legitimate interest in performance for the purpose of vindicating what might otherwise be a penalty will more readily be found in the performance of essential rather than other obligations: S Rowan, ‘The “Legitimate Interest in Performance” in the Law on Penalties’ (2019) 78 CLJ 148, 167–68; see also ch 6’s discussion of legitimate interest.

Termination  69 continuation of the contract in those circumstances would involve a fundamentally different relationship to that for which the parties had contracted. The answer to that question should not turn simply on whether the legal preconditions to the right to a particular payment are capable of being accrued. This approach would come very close to that adopted in Lord Sumption’s judgment, and could pray in aid the analogy between the doctrine of legitimate interest and the availability of specific performance which is drawn in many of the authorities and commentaries. However, the argument faces a number of obstacles. The first of those is the extremely high bar necessary to establish the absence of a legitimate interest – the ‘wholly unreasonable’ or ‘perverse’ choice referred to above. Absent a case when an employee or employer is intent on keeping the contract alive without performance for a prolonged period, that bar will be very difficult to meet. It is this very difficulty in satisfying the existing test which has led a number of commentators to argue for a lower ‘reasonableness’ threshold to apply to the decision to affirm, effectively subsuming it within the doctrine of mitigation,111 or to suggest that the adequacy of damages should be the dominant part of the legitimate interest enquiry.112 The second difficulty is that there is no supporting authority for this approach, and the decision in the only case which has considered the issue, Ministry of Sound (Ireland) Ltd v World Online Ltd,113 tends against it. In that case, the claimant was able to perform a small part of the contract without the defendant’s co-operation, rendering only what was described as ‘rather minimal services’.114 The contract provided for the defendant to make a series of payments on specific dates in return for the overall package of services the claimant was to provide, but none of the triggers for the accrual of the right to receive any particular instalment required any particular level of performance. Nicholas Strauss QC, the deputy judge, rejected the suggestion that the claimant had no legitimate interest in keeping the contract alive to recover the final instalment, holding that as the contract did not require any particular provision of services in order to accrue the instalment, the legitimate interest doctrine did not apply. He regarded that doctrine as being concerned with ‘wastefulness involved in the innocent party’s insistence on providing the unwanted performance of the contract’,115 suggesting that ‘here, in the main, Ministry of Sound’s case is that it is entitled to payment irrespective of performance, which was impossible without co-operation. No waste was involved’. However, ‘waste’ consists not simply in the rendering of performance which the counterparty has made clear it no longer wants, but in the failure to mitigate which follows when an employee keeps an employment contract alive and sues for damages for the ongoing loss caused by the employer’s failure to permit him to work, and the sterilisation of the employee’s productive capacity inherent in that situation. In

111 See, eg A Burrows, Remedies for Torts, Breach of Contracts and Equitable Wrongs, 4th edn (Oxford, Oxford University Press, 2019) 132; J Morgan, ‘Smuggling Mitigation into White & Carter v McGregor: Time to Come Clean?’ [2015] Lloyd’s Maritime and Commercial Law Quarterly 575. O’Sullivan (n 54) 67 has noted that, in many contexts in which the legitimate interest test is applied, it involves ‘an unusual form of mitigation, which generally requires the claimant to keep his own loss to a minimum, not the defendant’s’. 112 See, eg Burrows (n 111) 387. 113 Ministry of Sound (Ireland) v World Online (n 92). 114 ibid [28]. 115 ibid [66].

70  Sir David Foxton Reichman v Beveridge, the Court of Appeal rejected the argument that the legitimate interest test was confined to cases where the innocent party still had some acts to perform which could be performed without the co-operation of the party in breach,116 Lloyd LJ noting: ‘It is not clear to me why the principle should be affected by that distinction. In White & Carter the innocent party did have more to do, but in the charterparty cases this may not have been so.’ If the White & Carter principle can apply where the claimant has completed its performance, it ought also to apply when the claimant is incapable of rendering any further positive performance without the co-operation of the defendant, and such co-operation cannot be required and will not be forthcoming. Further support for the view that the doctrine might be available when the affirmation of the contract would, in effect, subject the parties to a fundamentally different contractual relationship from that originally assumed can be found in Tomlinson LJ’s judgment in MSC Mediterranean Shipping Co SA v Cottonex Anstalt, in which he held that to allow the claimant to affirm the contract in order to collect demurrage would involve performance ‘radically different from that agreed’ and that performance by the defendant in the prevailing circumstances ‘would be an act radically different in kind from redelivery of the containers in accordance with the contractually agreed time-scale’.117 It is noteworthy that Tomlinson LJ expressly relied on Lord Sumption’s dissent in Geys in support of this analysis.118 VI. CONCLUSION

It is now time to pull some of these threads together, and to draw some tentative conclusions. First, the majority in Geys were correct in their view that there is no automatic termination of an employment contract following a repudiatory breach by the employer or employee. There is much in Keith Ewing’s description of the automatic theory as ‘a bastard doctrine, which it is difficult to reconcile with the general principles of contract law’.119 It is clear that an employment contract can be kept alive in the face of a repudiatory breach in some circumstances, for example on occasions so that the employer can enforce an express obligation not to work elsewhere, and it is suggested it could similarly be kept alive on appropriate facts by the employee in order to maintain insured status under a health or insurance scheme or the like. Lord Sumption’s distinction between core and collateral obligations does not provide a satisfactory explanation of those cases where the courts recognise the continuation of the contract notwithstanding the fact that the employee is neither working nor accruing wages, and does not provide a sufficiently clear working test for a binary distinction between cases of elective and automatic termination. Nor does the approach allow for a brief period of reconsideration, or locus poenitentiae, following a repudiation which authority, and practicality, would support.

116 Reichman

v Beveridge (n 56) [29]. Mediterranean Shipping v Cottonex Anstalt (n 53) [61]–[62]. 118 ibid [62]. 119 K Ewing, ‘Remedies for Breach of the Contract of Employment’ (1993) 52 CLJ 405, 410–11. 117 MSC

Termination  71 Second, the concerns reflected in Lord Sumption’s judgment at the continuation of the ‘husk’ or ‘shell’ of the employment contract in these circumstances are legitimate concerns,120 which the law governing repudiatory breach of contract should be capable of accommodating. This essay suggests that Lord Reid’s concept of legitimate interest – best viewed as a fetter on the right to affirm rather than on the availability of any particular remedy following affirmation – is one means by which these concerns could be addressed, and the distinction between core and collateral obligations which Lord Sumption draws is relevant to, albeit not determinative of, this enquiry. However, the exacting test for establishing the absence of a legitimate interest in affirmation currently stands in the way of the satisfactory use of this doctrine for this purpose. Third, building on the legal and academic trend to analogise between the approach to allowing the affirmation of a contract for the purposes of recovery of an agreed sum and the principles governing the availability of specific performance,121 the principles which govern the granting of partial specific performance even though there are other obligations which are not susceptible to specific enforcement provide a useful analogy when considering how far it should be open to a party to affirm a contract for the purpose of recovering an agreed sum when performance of the innocent party’s principal obligation is no longer possible.

120 Geys (n 1) [110], [139]. 121 See, eg Chitty on Contracts (n 18) ch 27, in which the action for an agreed sum and the legitimate interest principle are now discussed in a chapter alongside specific performance and injunctions; see also Burrows (n 111) 387.

72

5 Contract Damages ADAM KRAMER

Sections 50 and 51 of the Sale of Goods Act, like the corresponding principles of the common law, are concerned with the price of the goods or services which would have been delivered under the contract. They are not concerned with the value of the contract as an article of commerce in itself. – Bunge SA v Nidera BV1

I. INTRODUCTION

T

he UK’s Supreme Court has traversed the law of contract damages quite a number of times in the decade since that Court opened. In a few of those trips, but especially Bunge v Nidera2 and Morris-Garner3 (and Hughes-Holland v BPE, considered in a separate chapter4), Lord Sumption has left his imprint, managing to combine his characteristically original analysis with an upholding of orthodox principles. I here explore those decisions, that orthodoxy and the challenges to it, which are touched upon explicitly or implicitly in these decisions, and which come from those who argue for a breach date or market rule, including the substitutive damages theorists. II.  LOSS AND THE ‘BUT FOR’ TEST

Beginning at the beginning for contract damages: the ‘but for’ test is embedded in the Robinson v Harman formulation of the compensatory principle. It is fundamental

1 Bunge SA v Nidera BV [2015] UKSC 43, [2015] 3 All ER 1082 [21] (Lord Sumption). I would like to thank Katy Barnett, William Day, Edwin Peel and David Winterton for their comments on drafts, and to thank the attendees at the conference, especially Jonathan Sumption and George Leggatt, for their contributions during discussions. 2 Bunge (n 1). 3 Morris-Garner v One Step (Support Ltd) [2018] UKSC 20, [2019] AC 649. 4 Hughes-Holland v BPE Solicitors [2017] UKSC 21, [2018] AC 599, discussed in ch 7.

74  Adam Kramer to the comparison between (as I have previously labelled them)5 the ‘breach position’ (the actual position post-breach) and the ‘non-breach position’ (the position the claimant would have been in if the defendant had performed). Save for exceptional situations in which the but for test is inadequate,6 this simple test is the first step in any compensation enquiry. It should not, at this mature stage in private law’s development, need much discussion. But the majority of the Court of Appeal (Moore-Bick and King LJJ) made heavy weather of it in Tiuta International Ltd v De Villiers Surveyors Ltd.7 This author was more unreservedly critical of that Court of Appeal decision than is usual even for him.8 And it only took a 15-paragraph judgment for Lord Sumption, supported by a unanimous Supreme Court, to cut through the issues and come to the right answer.9 The facts were common and simple. A bank lends under a mortgage. The bank is later induced by a negligent valuation to lend under a second mortgage. The lending is structured such that the second mortgage, which is larger than the first, discharges and replaces the first mortgage (rather than simply being a top-up addition to it). In applying the ‘but for’ test, which in scope-of-duty cases has been described and was described by Lord Sumption in Tiuta as the ‘basic measure of damages’ (in contrast with the second, scope-of-duty, stage of the analysis),10 Lord Sumption gave the answer:11 If the valuers had not been negligent in reporting the value of the property for the purpose of the second facility, the lenders would not have entered into the second facility, but they would still have entered into the first. On that hypothesis, therefore, the lenders would have been better off in two respects. First, they would not have lost the new money lent under the second facility, but would still have lost the original loans made under the first. Secondly, the loans made under the first facility would not have been discharged with the money advanced under the second facility, so that if the valuation prepared for the first facility had been negligent, the irrecoverable loans made under that facility would in principle have been recoverable as damages. There being no allegation of negligence in relation to the first facility, this last point does not arise. Accordingly, the lenders’ loss is limited to the new money advanced under the second facility.

This leaves no room for counterargument. Those arguments that were advanced (that the valuer had contemplated that it might be liable for the full amount of the loan;12 or that discharge of the first loan was a collateral benefit that should be disregarded, leaving an assumption that the second advance was all additional lending)13 rightly did not prevail. 5 A Kramer, The Law of Contract Damages, 2nd edn (Oxford, Hart Publishing, 2017) paras 1.43–1.48. 6 See, eg Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22, [2003] 1 AC 32, or two hunters shooting the same person. 7 Tiuta International Ltd v De Villiers Surveyors Ltd [2016] EWCA Civ 661, [2016] PNLR 34. 8 Kramer (n 5) para 16.163. 9 Tiuta International Ltd v De Villiers Surveyors Ltd [2017] UKSC 77, [2017] 1 WLR 4627. 10 ibid [6], following Nykredit Mortgage plc v Edward Erdman Group Ltd [1997] 1 WLR 1627 (HL) 1631 (Lord Nicholls). 11 Tiuta (n 9) [7]. 12 The argument which persuaded the majority of the Court of Appeal, summarised at [9]–[10] in the Supreme Court. 13 Counsel’s argument in the Supreme Court, summarised at [11]–[13].

Contract Damages  75 III.  LOSS AND LEGAL CAUSATION

After the ‘but for’ enquiry of factual causation comes legal causation. This is not about what would have happened but for the breach, but about what events or actions of third parties or the claimant partially exculpate the defendant such that the breach position should be edited to exclude their effect (positive or negative) before working out the compensable loss.14 Or, to put it slightly simplistically: which actual gains or losses should be disregarded when calculating damages? The Supreme Court has engaged with the principle of legal causation surprisingly often in recent years. The orthodoxy as to that principle has been settled, or confirmed, by these decisions, especially in three Supreme Court decisions of 2017, in two of which Lord Sumption gave the lead judgment on these issues. A.  Hughes-Holland v BPE First, in Hughes-Holland v BPE,15 Lord Sumption confirmed that, in addition to the law of ‘Effective or substantial causation’, the law of mitigation (the irrecoverability of avoidable losses) is also ‘an aspect of legal causation’. This repeated something that Lord Toulson said in Bunge SA v Nidera BV,16 and was immanent in the judgments of both Lords Sumption and Toulson in that latter case.17 I return to the topic of mitigation later. B.  Swynson Ltd v Lowick Rose LLP Second, in Swynson Ltd v Lowick Rose LLP,18 orthodox principles of collateral benefits, another part of legal causation, were applied. Swynson lent to EMSL in reliance on negligent advice from Lowick Rose. Mr Hunt, the owner of Swynson and majority owner of EMSL, lent to EMSL and it then repaid Swynson, discharging Swynson’s debt. This let Lowick Rose off the hook on any claim against it by Swynson, because Swynson had suffered no loss on the loan to EMSL, it having been ultimately repaid in full by the debtor EMSL. The only principle that could disturb this result19 is the principle of res inter alios acta, or collateral benefits. Swynson had to argue that the repayment of the loan by EMSL was a receipt that should be left out of account when assessing Swynson’s loss, like the collateral benefits of gifts, insurance payouts and the like. The Court of Appeal accepted this argument. 14 Kramer (n 5) paras 15.04–15.05. 15 BPE (n 4) [20]. 16 Bunge (n 1) [81]. 17 See more recently Ehrentreu v IG Index Ltd [2018] EWCA Civ 79 [52] (Flaux LJ). 18 Swynson Ltd v Lowick Rose LLP (in liquidation) [2017] UKSC 32, [2018] AC 313. The unjust enrichment aspect of the decision is discussed in ch 10. 19 Once it was accepted that no duty was owed to Mr Hunt directly, as was found at first instance and not appealed.

76  Adam Kramer The collateral benefits principle itself is an established part of the rule of legal causation. Lord Sumption explained that principle as follows: ‘a gift received by the claimant, even if occasioned by his loss, is regarded as independent of the loss because its gratuitous character means that there is no causal relationship between them’.20 The law therefore ignores the payment when considering the breach position (ie the position the claimant is actually in) for the purposes of calculating how much worse off the claimant is than it would otherwise have been. Legal causation is all about this: adjusting the breach position before calculating loss. The breach position is deemed to be not merely the world as it is, but that world adjusted as if the claimant had not received the collateral benefit (which is independent of and so not legally caused by the breach), or, for example, as if the claimant had taken the reasonable mitigatory steps (the failure to do so being independent of and so not legally caused by the breach). But the repayment of the loan by the borrower was not collateral to or independent of the loss, which consisted until then of the advancement of the loan to that borrower. The fact that EMSL sourced the money from Mr Hunt did not change that.21 And the rules of legal causation were not a licence to exercise a discretion to do whatever the court thought just based on broad commercial merits.22 The appeal from the Court of Appeal was therefore allowed. C.  The New Flamenco The third Supreme Court decision on causation deserving comment here was Fulton Shipping Inc of Panama v Globalia Business Travel SAU (The New Flamenco).23 Lord Clarke gave the judgment of the Court, the remainder of the Court (including Lord Sumption) agreeing.24 In this case, the defendant repudiated a time charter two years before term. The claimant shipowner sold the vessel on its early redelivery in 2007 for US$23.8m. Had the charter been performed and the vessel not sold, the vessel would only have been worth US$7m at the end of the term in 2009, after earning two years’ of profits totalling US$7.6m. In other words, at first blush, the owner had suffered no loss and the repudiation had done the owner a favour. The Supreme Court, agreeing with the first instance judge Popplewell J but disagreeing with the Court of Appeal and the arbitrator, found that the sale of the vessel was not legally caused by the breach and did not need to be taken into account. Damages should be assessed as the difference between the non-breach 20 Swynson (n 18) [11]. 21 ibid [11]. 22 ibid [11]; see also [98] (Lord Neuberger). 23 Fulton Shipping Inc of Panama v Globalia Business Travel SAU (The New Flamenco) [2017] UKSC 43, [2017] 1 WLR 2581. 24 This was not, therefore, a decision driven by Lord Sumption, although it is worth noting that in an interesting and potentially controversial case such as this, the value of a unanimously supported single reasoned judgment in the Supreme Court is considerable.

Contract Damages  77 ­ osition (no sale, charter performed to 2009) and the breach position (2007 repudiap tion, sale), but with the latter adjusted to ignore the sale (so: 2007 repudiation, no sale, spot charters to third parties instead). The underlying principles of causation applied are orthodox and correct. Popplewell J had held that the sale was not legally caused by the breach, and the sale price was a collateral benefit (see Lord Clarke’s summary).25 Lord Clarke confirmed that there was not a sufficiently close causal link between the breach and the sale,26 and ‘for the same reasons’ (indeed, this is the same question) the sale was not an act of mitigation which must be taken into account.27 The New Flamenco decision may seem hard on the defendant, but it cuts both ways. One could bet the defendant would not have been happy if the boot had been on the other foot, ie if the claimant had sold in 2007 and the value of the vessel had then risen, and the claimant sought to recover its huge ‘loss’ resulting from the difference between the capital value it obtained on the sale in 2007 and the value the vessel would have had at the end of the contractual life of the charter in 2009. In the particular case, the decision that the sale was independent turned on the fact that the vessel could have been sold at any time whether or not the charterer had returned the vessel early,28 and was not a direct response to or replacement for the loss of an income stream.29 The important point is not so much the decision on the facts, but the confirmation and application of the legal principles. IV.  LOSS, DATE RULES AND PRIMA FACIE MEASURES

It is trite that in sale of goods cases in particular there are ‘normal measures’ of loss – as provided in the Sale of Goods Act 1979, sections 50 and 51, although these are derived from and also applicable at common law – by which, where there is an available market, the loss is usually measured by the difference in value between the contract price and market value at the date of breach. These ‘normal measures’ are presumptive only, but their normalcy can mislead the unwary into thinking that they are actually legal rules with an independent vitality, and therefore losses are awarded under them irrespective of subsequent events, and irrespective of the principles of mitigation and remoteness. Professor Bridge is a leading advocate of this thesis,30 which is a cousin of the thesis that contract damages often do not compensate for loss but instead substitute for the value of the right infringed, a theory discussed in the next section of this chapter. It is not the job of this chapter to consider the difficulties with justifying substitutive

25 The New Flamenco (n 23) [22]–[23]. 26 ibid [30], [32] and [33]. 27 ibid [34]. 28 ibid [32]. 29 ibid [34]. 30 See especially M Bridge, ‘Markets and Damages in Sale of Goods Cases’ (2016) 132 LQR 405; see also F Reynolds, ‘The Golden Victory – A Misguided Decision’ (2008) 38 Hong Kong Law Journal 333, 339.

78  Adam Kramer damages as a matter of theory,31 but instead to consider whether the cases support such an approach. In Bunge SA v Nidera BV, the Supreme Court confirmed what has already been made clear in numerous lower decisions, namely that the normal measures of loss do not justify any of these conclusions. They are not rules applicable irrespective of what the principles of mitigation and remoteness have to say, but are only ever applied where those principles so dictate.32 (Although Bunge itself was a factual ‘but for’ causation case: but for the repudiation by the seller, the seller would have lawfully cancelled and so the repudiation in fact caused no loss.) The ‘normal measure’33 applies because any decision by an innocent party not to obtain a replacement on an available market is an independent decision that breaks the chain of causation, such that damages will be awarded as if the innocent party resorted to the market even if it did not. Per Lord Toulson (with whom Lords Neuberger, Mance and Clarke agreed):34 The option to re-enter or stay out of the market arises from the breach, but it does not follow that there is a causal connection between the breach and his decision whether to re-enter or to stay out of the market, so as to make the guilty party responsible for that decision and its consequences. The guilty party is not liable to the innocent party for the adverse effect of market changes after the innocent party has had a free choice whether to re-enter the market, nor is the innocent party required to give credit to the guilty party for any subsequent market movement in favour of the innocent party. The speculation which way the market will go is the speculation of the claimant … … the so-called duty to mitigate … is an aspect of the principle of causation that the contract breaker will not be held to have caused loss which the claimant could reasonably have avoided.

Thus, as Lord Toulson and Sumption have confirmed in separate decisions of the Supreme Court,35 the law of mitigation is an aspect of legal causation. The description of conduct as ‘failure to mitigate’ describes behaviour by commission or (more typically) omission that breaks the chain of causation. And in many cases, such as deciding not to mitigate on an available market, the failure breaks the chain of causation because it is speculation. So, per Lord Sumption, the loss under the normal measure is assessed not at the date of breach, but at the date on which the innocent party could have been reasonably expected to go into the available market.36 This could be a date prior to breach

31 For such broader criticisms see, eg C Webb, ‘Justifying Damages’ in JW Neyers et al (eds), Exploring Contract Law (Oxford, Hart Publishing, 2009); A Burrows, Remedies for Torts, Breach of Contract and Equitable Wrongs, 4th edn (Oxford, Oxford University Press, 2019) 46–50. 32 The issue here is mitigation, but where there is a latent defect or no available market, or for other reasons, mitigation may not provide the answer, in which case remoteness may still lead to a similar answer (sub-sales typically being too remote). See further Kramer (n 5) ch 4. 33 Bunge (n 1) [77] and [80]. 34 ibid [80]–[81], repeating something he said 12 years earlier as Toulson J in Dampskibsselskabet ‘Norden’ A/S v Andre & Compagnie SA [2003] 1 Lloyd’s Rep 287 [42] (which case he cited in Bunge (n 1) [75], although without quoting the particular statement). 35 Text to nn 15 and 16. 36 Bunge (n 1) [17], also [68] (Lord Toulson).

Contract Damages  79 where appropriate, in cases of termination for anticipatory repudiation, or a date post-breach, but always governed by the ‘principles of mitigation’.37 It follows that where there is no available market, the actual loss will be recoverable, measured at the date of trial, subject to any other breaks in the chain of causation, such as through failure to take other reasonable mitigatory steps, and subject to remoteness.38 Where the need to replace is not known (eg because damage to goods is latent), an available market is neither here nor there, and the loss will not crystallise until such date as the defect is discovered, at which point (and not before) a failure to access the market for a replacement would be a failure to mitigate.39 Other circumstances, where a claimant may be locked in or otherwise not expected to access an available market immediately or at all, are considered elsewhere.40 What this all means is that the ‘so-called breach-date rule’ (as Lord Sumption put it),41 where it applies at all, is merely the application of the mitigation principle to the available market at the date of breach. As Lord Sumption explained, ‘it is not so much a rule as a technique which is prima facie to be treated as’ identifying the loss.42 Professor Dawson, in Benjamin’s Sale of Goods, comments that The Golden Victory43 and Bunge ‘appear to have undermined the market rule in that they do not permit substantial damages to be recovered where none have in fact been suffered’,44 but this understates what they have done: the cases confirm that there is in fact no market rule at all. Thus, as Lord Leggatt of the Supreme Court observed extrajudicially, the Supreme Court’s decision in Bunge (and especially the comments of Lord Sumption) ‘has given the “breach date” rule its quietus’.45 And, as Lord Burrows of the Supreme Court observed extrajudicially, ‘a rigid “date of breach” or “date of tort” rule for the date of assessment of damages has been replaced by a more flexible approach that seeks to ensure true compensation while not undermining the duty to mitigate’.46 Further, the reference in Lord Toulson’s judgment to ‘speculation’47 – the claimant making a knowing decision akin to a gamble for its own commercial reasons (eg that the market will fall, thus choosing to wait before buying a replacement) – is important. It follows the language used in the celebrated decision of Robert Goff J (as he was) in the charterparty case of The Elena D’Amico, which provided an early crystal clear exposition of the normal measure and how it and the date of assessment are 37 ibid [17]. 38 Kramer (n 5) paras 15.41 and 17.17; see also A Dyson and A Kramer, ‘There Is No “Breach Date Rule”: Mitigation, Difference in Value and Date of Assessment’ (2014) 130 LQR 259. 39 Kramer (n 5) paras 17.31, 4.56 and 4.100; Dyson and Kramer (n 38) 273–75. 40 Kramer (n 5) paras 17.25 to 17.34; Dyson and Kramer (n 38) 276–80. 41 Bunge (n 1) [21]. This description was also used by Lord Slynn in Alcoa Minerals of Jamaica Inc v Herbert Broderick Appeal [2002] 1 AC 371 (PC) 377. 42 Bunge (n 1) [16] and [21]. 43 Golden Strait Corp v Nippon Yusen Kubishka Kaisha (The Golden Victory) [2007] UKHL 12, [2007] 2 AC 353. 44 M Bridge (ed), Benjamin’s Sale of Goods, 10th edn (London, Sweet & Maxwell, 2017) para 16-078. 45 G Leggatt, ‘A Restatement of the English Law of Contract’ (2017) 133 LQR 521, 523. 46 A Burrows, ‘Damages and Rights’ in D Nolan and A Robertson (eds), Rights and Private Law (Oxford, Hart Publishing, 2012) 279. 47 See the quotation in the text to n 34 above.

80  Adam Kramer dictated by the mitigation principle.48 This language of speculation was echoed by Lord Brown in The Golden Victory,49 and speculation is a key factor explaining when a decision will break the chain of causation.50 This is exactly the principle at work in The New Flamenco, discussed in the previous section, where the decision to sell the vessel was held to break the chain of causation as it was ‘a commercial decision at [the owner’s] own risk’.51 As to the central point in Golden Victory and Bunge: even where a substitute is available (per the normal measure), and even where there is resort to an available market under the mitigation principle, it is still necessary to quantify the loss suffered by reference to what would have happened under the substitute contract, not merely to value the losses at the date of breach – hence taking into account subsequent events in both The Golden Victory and Bunge. The purpose of the exercise is ‘to measure the extent to which the claimant is (or would be) financially worse off under the substitute contract than under the original contract’.52 As Lord Sumption explained in Bunge, the mitigation principle ‘crystallises losses’ only in the sense that the market price for the substitute contract is fixed, not in the sense that subsequent events are disregarded, and in the latter context ‘the concept of “crystallising” the assessment of damages at that price is unhelpful’.53 The improvement in the clarity of these core principles – mitigation, the normal measure, the lack of a breach date ‘rule’ – is a major contribution to the law by Lords Sumption and Toulson in Bunge and the related Supreme Court decisions referred to above. The award of the ‘normal measure’ is not made irrespective of actual loss and the mitigation principle; it is made because of the operation of the mitigation principle on the (otherwise recoverable) actual loss, and only when that principle so provides. V.  LOSS OR SUBSTITUTIVE DAMAGES: BUNGE v NIDERA

In two recent cases – Bunge, discussed in this section, and Morris-Garner, discussed later – the Supreme Court has touched upon, and perhaps even toyed with, a heresy popularised by Professor Stevens and Dr Winterton, although without citing them and perhaps unaware of their underlying thesis. This heresy is the idea that contract law, in awarding damages, is primarily not compensating for loss (including the cost of replacement performance) but rather awarding a substitution for performance itself, or for the contractual right of performance that was infringed. This award, it is said, disregards the amount of loss suffered, and remoteness and mitigation principles, and is valued at the date of 48 Koch Marine Inc v d’Amica Societa di Navigasione arl (The Elena d’Amico) [1980] 1 Lloyd’s Rep 75 (Com Ct). 49 The Golden Victory (n 43) [79]. 50 See further Kramer (n 5) paras 16.48–16.61; D McLauchlan and A Summers, ‘Mitigation and Causation of Benefits’ [2018] Lloyd’s Maritime and Commercial Law Quarterly 171, and the cases cited in both. 51 The New Flamenco (n 23) [32]. 52 Bunge (n 1) [82] (Lord Toulson). 53 ibid [22].

Contract Damages  81 breach, ­disregarding subsequent events. (However, its proponents say, an award by reference to consequential loss and subject to remoteness and mitigation can be made in addition to the substitutive award.54) A version of this idea was rejected by Lord Sumption in Bunge, when explaining the split decision in Golden Victory and approving the majority view in that case:55 The real difference between the majority and the minority turned on the question what was being valued for the purpose of assessing damages. The majority were valuing the chartered service that would actually have been performed if the charterparty had not been wrongfully brought to a premature end. On that footing, the notional substitute contract, whenever it was made and at whatever market rate, would have made no difference because it would have been subject to the same war clause as the original contract: see Lord Scott of Foscote at para [37], and Lord Brown of Eaton-underHeywood at paras [76]–[78] and [82]. The minority on the other hand considered that one should value not the chartered service which would actually have been performed, but the charterparty itself, assessed at the time that it was terminated, by reference to the terms of a notional substitute concluded as soon as possible after the termination of the original. That would vary, not according to the actual outcome, but according to the outcomes which were perceived as possible or probable at the time that the notional substitute contract was made. The possibility or probability of war would then be factored into the price agreed in the substitute contract: see Lord Bingham of Cornhill at paras [22] and Lord Walker of Gestingthorpe at paras [45]–[46]. I think that the majority’s view on this point was correct. Sections 50 and 51 of the Sale of Goods Act, like the corresponding principles of the common law, are concerned with the price of the goods or services which would have been delivered under the contract. They are not concerned with the value of the contract as an article of commerce in itself. As Lord Brown observed at paras [82]–[83], even if the charterparty rights could have been sold for a capital sum, this was not a proper basis for assessing loss, and an assessment which proceeded as if it were would ‘extend the effect of the available market rule well beyond its proper scope’.

Professor Goldberg also advocates quantifying a contract as an asset and awarding the change in value of that contract at the date of breach,56 ie (as Lord Sumption put it when rejecting it) valuing ‘the contract as an article of commerce in itself’. This is independent of, but shares similarities with, the substitutive damages theses of Stevens and Winterton. However, this approach is rejected in Bunge. As the quotation from Lord Sumption above explains, the Supreme Court decisions in Bunge and Golden Victory affirm the basic principle that damages are ‘assessing loss’57 and ‘determin[ing] the value of 54 R Stevens, Torts and Rights (Oxford, Oxford University Press, 2007) 60–61, 70–72; R Stevens, ‘Damages and the Right to Performance: A Golden Victory or Not?’ in Neyers (n 31); D Winterton, ‘Money Awards Substituting for Performance’ [2012] Lloyd’s Maritime and Commercial Law Quarterly 446; D Winterton, Money Awards in Contract Law (Oxford, Hart Publishing, 2015). See also Reynolds (n 30) 341–43; D Winterton, ‘Claims for the Value of the Lost Contractual Performance’ (2019) 45 University of Western Australia Law Review 75. 55 Bunge (n 1) [21]. 56 VP Goldberg, ‘Reckoning Contract Damages: Valuation of the Contract as an Asset’ and ‘After The Golden Victory: Still Lost At Sea’ in VP Goldberg, Rethinking the Law of Contract Damages (Cheltenham, Edward Elgar, 2019). 57 Bunge (n 1) [21].

82  Adam Kramer contractual performance’,58 not substituting for the value of a right irrespective of subsequent events or principles of remoteness and mitigation.59 This reflects what Professor Corbin observed in 1908, namely that damages for loss on repudiation are assessed as at the date of performance, not at the date of breach. Yes, he says, ‘all contract rights to a future performance have a present value’ and some such rights (in commodity cases) are even quoted on a futures exchange, but  the law provides that damages measure the value of the non-delivered performance on the date of performance (or, if trial is earlier, predict at the date of trial such value at the future performance date).60 Thus, in Bunge, Lord Sumption’s judgment, echoing that of the majority in The Golden Victory,61 asserts the primacy of the ‘compensatory principle’ and rejects arguments that subsequent events should be disregarded for reasons of commercial certainty or otherwise, as that would ‘offend’ that principle.62 With that, it is confirmed that there is no special measure of loss assessed at the date of breach for certainty reasons,63 with independent vitality beyond the ordinary principles of causation and remoteness. Given the 3:2 split in The Golden Victory, the importance of the unanimous decision of the Supreme Court in Bunge in asserting the primacy of principled compensation for loss suffered, over the policy of a market measure at the date of breach for its own sake, is considerable. Dr Winterton, a substitutive damages proponent, has sought to explain The Golden Victory on the basis that on termination a right to substitution only arises for unconditional rights to future performance, whereas in that case the rights to payment of hire were conditional upon the claimant supplying the vessel at the relevant dates, which it had not done and never (now) would do. Accordingly, he says, there was no right to substitutive damages in The Golden Victory for the same reason that there was no right to claim the hire by way of an action for debt, and the shipowner could only claim damages compensating for loss.64 For Winterton, substitutive damages are an equivalent to the action for debt (to which mitigation and remoteness do not apply) but applied to non-debt obligations, and so apply in cases of actual failure (not anticipatory breach of future obligations) to provide goods and services (not money).65 That explanation of substitutive damages as equivalent to an action for debt and so only applicable to present rights is coherent, but means that, like the action for debt, such damages are never available for damages relating to future performance on a termination. It would explain the lack of such an award in The Golden Victory and Bunge, but means the former decision is correct for a more fundamental reason than 58 ibid [23]. 59 ibid [21]. See the previous section of this chapter. 60 A Corbin, ‘Damages upon Repudiation of a Contract’ (1907–1908) 17 Yale Law Journal 611. 61 See especially The Golden Victory (n 43) [35] and [38] (Lord Scott), referring to ‘the compensatory principle’, and [63] (Lord Carswell), referring to ‘the loss actually incurred’. See also [83] (Lord Brown). 62 Bunge (n 1) [22]. 63 Such as those advocated by GH Treitel, ‘Assessment of Damages for Wrongful Repudiation’ (2007) 123 LQR 9. 64 Winterton, Money Awards in Contract Law (n 54) 144, 292 and 300–02. 65 I am here attempting to report unpublished discussions with Winterton; any misreporting of his views remains my fault.

Contract Damages  83 Winterton has given in print: the right to payment of hire was not a present right but a right to future performance, so one does not need Winterton’s more specific published reason that it was a conditional, not unconditional, right to future performance.66 And this explanation (equivalence to an action for debt) also makes little sense of the substitution exercise, as one can always give a present value for future performance (allowing for conditionalities and for counter-performance that will become due, such as payment of the price), including in The Golden Victory and Bunge, so the substitution exercise would logically seem to require damages even for repudiation of rights future performance. Professor Stevens agrees with the result in The Golden Victory (and, presumably, Bunge) on the basis not that substitutive damages are unavailable for rights to future performance, but because the right to a future performance can only be valued (whether under a substitutive or compensatory damages regime) at the date on which the right accrues, by which time, after the second Gulf War broke out, 14 months after the repudiation, the rights were known to be valueless.67 This qualification to the substitutive damages thesis does accommodate The Golden Victory and Bunge, but again makes little sense of the substitution exercise: the right to future performance accrues as a binding and valuable right when the contract is entered into, not at the time for performance, although there can be no breach until performance. On termination, why (if the substitutive damages thesis was right) would the right to future performance not be substituted by damages immediately? Also, this qualification makes it difficult to see how to assess substitutive damages where the trial pre-dates the date for performance: with compensation, one can assess at trial the loss more likely than not to result in the future, but on Stevens’s substitutive damages thesis one cannot assess the value until the right would have accrued, possibly many years later than the date of trial. In any event, the Supreme Court’s confirmation that normal measure of loss is an application of the principle of mitigation – as to when that normal measure applies, at what date it is taken and why – disproves and is inconsistent with any hard principle of substitutive damages as advocated by Stevens and Winterton.68 The taking of the market price at the date of breach in myriad sale of goods cases is always because of mitigation and remoteness, eradicating a plank of the substitutive damages path through the field of case law. Goods cases can no longer provide support for such a thesis. VI.  DEFAULT CLAUSES

Before leaving Bunge, and by way of something of an aside to this piece, it is worth noting that that case was primarily about an express damages clause, clause 20 of 66 Although I also have difficulties with that further reason: the obligations in The Golden Victory and Bunge were conditional in a further sense, ie the war clause is a condition subsequent, but Winterton does not think that this disqualifies the owner from damages. 67 Stevens (n 54) 196. 68 See further K Barnett, ‘Substitutive Damages and Mitigation in Contract Law’ (2016) 28 Singapore Academy of Law Journal 795, 805 and passim; K Barnett, ‘A Critical Consideration of Substitutive Awards in Contract Law’ (2018) 81 MLR 1064, 1075–78; Burrows (n 46) 279; Burrows (n 31) 46.

84  Adam Kramer GAFTA. The detail of the clause is beyond the scope of this chapter. However, its treatment by the Supreme Court, and by Lord Sumption in particular, deserves mention. By way of introduction, Lord Sumption noted sensibly but significantly that the very purpose of express damages clauses is frequently to depart from the common law measure, including for reasons of certainty: ‘The mere fact that in some cases its application will over- or under-estimate the injured party’s loss is nothing to the point. Such clauses necessarily assume that the parties are willing to take the rough with the smooth.’69 However, when construing such clauses, he accepted that it was inherently improbable that such a clause be intended to operate ‘arbitrarily, for example by producing a result unrelated to anything which the parties can reasonably have expected to approximate to the true loss’.70 Lord Sumption then considered the extent to which the clause could be understood to be a complete code for the assessment of damages. He found that the clause was a complete code as to the market price or value of the goods, which code by its terms excluded the application of the doctrine of mitigation to the purchase of a replacement on the market, although did take the market price into account.71 But he also found it was not a complete code for all issues in the assessment of damages, in particular the effect of subsequent events that would have led to the contract not being performed in any event, especially because the clause only said that damages should be ‘based on’ the calculation provided for, rather than should exhaustively comprise that calculation.72 The basic common law ‘but for’ test as to what would have happened, and therefore the Golden Victory principle, and the general principle of mitigation (outside the context of market replacement) are not excluded and apply.73 Lord Toulson agreed in his own reasoned judgment. This is a difficult decision on a particular clause. Suggesting that the clause only resolves the questions of ‘the relevant market price or value of the goods’74 but not other damages question is problematic. Suggesting that the clause saying that the award ‘shall be based on … the difference between the contract price and … the default price [the market price if the innocent party chooses to go to the market] … or … the actual or estimated value of the goods on the date of default’ (both established under the clause) does not prevent an award of zero if the goods would not have been supplied seems an odd reading, although it follows earlier authority on the words ‘based on’75 (to which the drafters of GAFTA can be assume to have been aware). Suggesting that the clause is not a complete code is surprising given its comprehensiveness, including an express version of the remoteness rule for additional expenses and losses on sub-contracts. Indeed, the fact that there is no breach date rule at the common law but there clearly is one prescribed in GAFTA, clause 20 suggests to me that the parties have

69 Bunge (n 1) [26]. 70 ibid [26]. 71 ibid [27]–[31]. 72 ibid [31]–[32]. 73 ibid [32]. 74 ibid [32]. 75 Bem Dis a Turk Ticaret S/A TR v International Agri Trade Co Ltd, (The Selda) [1998] 1 Lloyd’s Rep 416 (Com Ct) 420 (Clarke J), [1999] 1 Lloyd’s Rep 729 (CA). See Bunge (n 1) [33] (Lord Sumption) and [61] (Lord Toulson).

Contract Damages  85 contracted out of the ordinary principles of causation and compensation and into a form of substitutive damages (complete with a close-to-ordinary measure of compensation for additional expenses and losses on sub-contracts), by which the Golden Victory principle is excluded.76 It might be conjectured that the unmeritoriousness of the outcome that such a construction would have had in Bunge – the sellers repudiated a few days early, but no loss was in fact suffered – played a part in the construction of GAFTA, clause 20. But I have sympathy with the view that the clause was intended as a complete code but simply omitted to deal with the Golden Victory/Bunge situation, although had the parties thought about it, they probably would have intended there to be no compensation in such a situation. One would, however, need an implied term to cure that problem. The Supreme Court took a rather more direct route. VII.  LOSS OR SUBSTITUTIVE DAMAGES: MORRIS-GARNER

A version of the substitutive damages idea also arises when one considers the 2018 decision of the Supreme Court in Morris-Garner v One Step (Support Ltd).77 This arose in one of the last remaining areas of contract damages that until then was shrouded in mystery, the area formerly known as the ‘Wrotham Park’ measure and that is now called ‘negotiating damages’.78 Many intrepid explorers have sought to explain what is going on in that mysterious land, but in Morris-Garner the Supreme Court finally faced this task head on, formulating the circumstances in which such awards can be made for breach of a contract (outside cases of breach of property rights or damages in lieu of an injunction79). Spoiler alert: it is still shrouded in mystery, even after the decision. The basic facts are that the defendant sold her shares in a Thames Valley home care support business for £3.15m and the defendants entered into three-year restrictive non-compete, non-solicitation and confidentiality covenants. The defendants breached the covenants by setting up a rival business within a year, which they sold for £12.8m a year after the three-year covenants expired. The decision has been heavily discussed, and the reasoning of both the majority (the reasoned judgment of Lord Reed, supported by a reasoned judgment of Lord Carnwath, and the agreement of Baroness Hale and Lord Wilson) and of the minority (Lord Sumption) have attracted praise and criticism. The majority judgment has at its heart a respect and application for the core principles of compensation for loss confirmed in Bunge and discussed above. There is a lot to like about it. It affirmed that damages awards are about quantifying 76 I do not have any problem with the parties contracting out of causation in this way and therefore providing for payment well beyond what would have been recoverable at common law. But see ch 6, which puts forward the view that to do so risks the clause being held a penalty. 77 Morris-Garner (n 3). 78 ibid [3]. 79 The latter, in particular, raises difficult questions, such as whether damages in lieu of an injunction are awarded on a different basis to ordinary contract damages (Lord Reed said yes: ibid [47]) and whether an injunction must have been sought for them to be awarded (Lord Reed thought yes: ibid [45]). I dodge those questions here, focusing (as ultimately the Supreme Court did) on when negotiating damages are available for ordinary breach of contract.

86  Adam Kramer ‘loss’ or ‘damage’,80 ie the ‘effect’ of the breach on the claimant’s situation,81 be it economic or (increasingly and importantly) non-economic;82 that the law has developed evidential techniques for doing so;83 and that, where loss cannot be proven, no award should be made because there is no loss and so nothing to compensate.84 (This is to be contrasted with invasion of property rights, where the value of the right is awarded whether or not the claimant could or would have used the property itself.) Further, contract damages awards are not discretionary, and do not depend upon whether the breach was deliberate or self-interested.85 Accordingly, comments in Lord Reed’s majority judgment limited the award of an account of profits/restitutionary damages for breach of contract almost to the facts of Attorney General v Blake,86 such awards being inconsistent with the compensatory basis of contract damages.87 Wrotham Park itself was explained by Lord Reed as an award of user damages for breach of a property right,88 or an award under Lord Cairns’ Act, which it was said need not be on the same basis as a normal contract damages award.89 And even the claimant’s counsel had not argued for any valuation of the contract right as an independent measure, but rather had argued that negotiating damages was a method of quantifying loss where the conventional method was difficult,90 conceding that where ‘the court is satisfied that there has been no adverse consequence at all, no damages are recoverable’.91 The scene was therefore set for a recharacterisation of the negotiating damages/ hypothetical bargain concept as no more than a proxy for measuring what is commonly called loss (ie the consequences of the breach). A similar recharacterisation of so-called ‘reliance damages’ as merely an award of expectation damages (ie loss in the ordinary contract sense), in circumstances in which a presumption that the claimant would have broken even is unrebutted, was put beyond serious doubt only in the last decade.92 The key step enabling such a recharacterisation was the confirmation that reliance damages could not exceed expectation damages and so were not a true alternative or independent measure.93 There were similar dicta in relation to negotiation damages in the case of BGC Capital Markets (Switzerland) LLC v Rees,94 cited to the Supreme Court in Morris-Garner although not commented upon in any judgments. As Leggatt J (as he was) observed:

80 ibid [36] and [40]. 81 ibid [95(6)]. 82 ibid [39]–[40] and [78]. 83 ibid [37]–[38] and [95(8)]. 84 ibid [90], [93], [95(9)] and [96]–[97]. 85 ibid [35], [81], [90], [95(12)] and [97]. 86 Attorney General v Blake [2001] 1 AC 268 (HL). 87 Morris-Garner (n 3) [73], [82] and [95(11)]. 88 ibid [53] and [77]. 89 ibid [47], [54]–[57], [62]–[63] and [77]. 90 ibid 657H–658D and 659D–E. 91 ibid 658D and 660G. 92 Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm) (Teare J); Kramer (n 5) paras 18.64–18.79; Burrows (n 31) 80–81; Turf Club Auto Emporium Pte Ltd v Hua [2018] SGCA 44 [127]–[128]. 93 C& P Haulage Co Ltd v Middleton [1983] 1 WLR 1461 (CA). 94 BGC Capital Markets (Switzerland) LLC v Rees [2011] EWHC 2009 (QB) [97] (Sir Raymond Jack).

Contract Damages  87 where … the claimant is unable to prove any loss, just as where the claimant is unable to prove any other element of its claim, the logical consequence is that the claim should fail, not that the claimant should be awarded a sum of money which does not correspond to any damage done to it.95

A rebuttable presumption that the claimant would have made at least as much benefit from an obligation as a claimant was willing to pay to be released from it is perfectly legitimate, especially where the interest protected is non-pecuniary: the benefit lost by breach is measurable financially by the amount of money by which the claimant values it.96 This explains the use of a hypothetical bargain measure in contract cases where it is difficult to prove the value lost either way. In this vein, Lord Reed focused both on the broadening of interests protected by contractual obligations, so damages awards beyond the purely financial, and on the flexibility of the courts in applying various techniques to enable the proving of loss where otherwise difficult. He even noted that the hypothetical bargain could be used as evidence of difficult-to-quantify losses resulting from breach (including at the subsequent damages hearing in MorrisGarner itself).97 Lord Sumption essentially adopted this view in his minority judgment, noting that ‘the notional price of release may none the less be relevant, not as an alternative measure of damages but as an evidential technique for estimating what the claimant can reasonably be supposed to have lost’.98 Indeed, at the conference where this chapter was presented, he summarised Morris-Garner as being about a pure question of fact, of quantifying damages, and not a question of law at all. In his judgment, with characteristic elegance of exposition, Lord Sumption sought to summarise the diverse range of negotiating damages cases as falling into three categories. The first is where such an award is a measure of non-pecuniary loss. The second is where the award comprises damages in lieu of an injunction. The third is where the award is a measure of pecuniary loss. We can disregard the second for present purposes.99 Dealing first with Lord Sumption’s third category, pecuniary loss, Lord Sumption explains why the value the parties would put on performance of the obligation, and hence its breach, is useful evidence (not infallible, sometimes inaccurate, but 95 Marathon Asset Management LLP v Seddon [2017] EWHC 300 (Comm) [214] (Leggat J). 96 Kramer (n 5) paras 22.19 and 22.23; see also paras 10.04 and 19.67; A Kramer, ‘Proving Contract Damages’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Oxford, Hart Publishing, 2017) 245. See also Webb (n 31) 163–64. cf E Peel, ‘Negotiating Damages after One Step’ (2019) 35 Journal of Contract Law 1. The Singaporean decision in Turf Club (n 92) esp [217] and [220], with its decision (departing from Morris-Garner) that negotiating damages are only available where there is breach of a negative covenant and there has been no financial loss and non-pecuniary loss is irrecoverable, is in some ways the right conclusion on the wrong premise: if, as this author advocates, non-pecuniary loss should be more easily identified and then quantified, there is no lacuna and no justification for a noncompensatory negotiating damages award. This echoes the general resort to inadequacy of compensation to justify non-compensatory remedies: usually the effort should be expended on developing the adequacy of compensation by expanding non-pecuniary loss beyond outdated concepts of personal mental distress to encompass non-pecuniary contemplated interests in performance (whether commercial, about benefiting a third party or whatever). 97 Morris-Garner (n 3) [94] and [100]. 98 ibid [106]. 99 See n 79 above.

88  Adam Kramer often useful) of the ‘additional profit’ that the claimant would have made from the performance.100 As explained above, I would agree that negotiating damages awards in such cases can and should be explained on that basis. Further, this use of negotiating damages is endorsed by Lord Reed (with concurring support), so commands majority support.101 This does not mean negotiating damages will often be a good proxy, or very helpful. In particular, negotiating damages are measured at the date of contracting, and therefore do not take into account the particular harm suffered.102 As to Lord Sumption’s first category, non-pecuniary loss, he explained that there are contractual cases in which a party has an interest that goes beyond the pecuniary, and so the claimant is entitled to recover more than his or her pecuniary loss, giving the secrecy obligations of Blake as an example.103 I would agree with this too. The courts should be more willing to find that the defendant impliedly assumed responsibility for a non-pecuniary interest, and to award compensatory damages for such an interest.104 Given the difficulties with quantifying non-pecuniary losses, proxies such as the presumption of breaking even (the reliance measure: that the claimant valued the performance at no less than it cost him or her) or, more relevantly to negotiating damages, a release fee presumption (that the claimant valued the performance at no less than the defendant would have to pay to convince the claimant to release it) are justified, useful and often necessary.105 Thus, in Experience Hendrix,106 the key negotiating damages case that requires explanation, the claimant (a company controlled by Jimi Hendrix’s father, the beneficiary of the Hendrix estate) had reached a settlement with the defendant (Hendrix’s music producer) under which the defendant could exploit certain master recordings, paying a royalty to the claimant, and could not exploit any other master recordings (beyond existing licences that had been granted). The claimant therefore valued the defendant’s promise not to exploit the other master recordings (by licensing them to third parties) because it wanted to remove them from the market107 to protect the value of the claimant’s own property,108 described in the first instance decision as the ‘Hendrix Featured Recordings’.109 The claimant considered that the exploited recordings were of poor quality and ‘confused the buying public’110 because Hendrix was only a sideman in them, and they might alienate potential buyers who would expect Hendrix recordings proper or take up space that should be devoted to such recordings.111 100 Especially Morris-Garner (n 3) [115]–[116] and [112]. 101 ibid [94] and [100]. 102 But it is probably unrealistic to think that it will ever be possible to quantify the hypothetical release amount at the date of breach for historic loss, at least in any circumstances in which that loss cannot be quantified in any other, more conventional, way. 103 ibid [111]. 104 Including where the claimant contracted for a pure service involving education or lifestyle, for something benefiting a third party or for a safety mechanism (which was important for piece of mind, not merely when called on). 105 Kramer (n 5) paras 19.59–19.72. 106 Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830. 107 ibid [42]. 108 ibid [36]. cf Morris-Garner (n 3) [87]. 109 Experience Hendrix (n 106) [49]. 110 ibid [50]. 111 ibid [14], also [42].

Contract Damages  89 But the claimant said it could not ‘show or quantify’ financial loss,112 which would be lost album sales or diminution in the value of the Hendrix Featured Recordings.113 This is therefore a prime case in which pecuniary loss seems likely to have been suffered but is hard to prove, although I have no doubt that there are experts who could make a good attempt and the claimant’s decision not to try seems odd. It is also a prime case in which non-pecuniary loss – the value placed on the Hendrix reputation, on the legacy of his body of work and on the goodwill of his fans – is also likely to have been suffered.114 But how to quantify it? Absent any other method, the hypothetical release fee is a perfectly sensible method, which neither party could displace by proving that the actual loss is higher (as the claimant might contend) or lower (as the defendant might contend). The decision can, and should, be justified on that basis.115 Returning to Lord Sumption’s analysis, it has difficulties. Although the first and third categories could be justified on an orthodox basis within contract law, as above, Lord Sumption chose to engage with the ‘historic categorisation of legal rules’ more broadly,116 seeking to run property cases together with contract law, thereby introducing huge controversy.117 He contends, against orthodoxy, that the award of user damages in the invasion of property rights is about compensation for non-pecuniary loss and not about vindication or substitution of the property right, which requires an unnecessary stretching of the concept of ‘non-pecuniary loss’. Further, he argues that royalty awards in patent infringement cases must be justified by his third category as they are not cases of invasion of property rights, or at least are not dependent upon the proprietary nature of the patent rights. Lord Carnwath takes some time to dispute these propositions in a judgment that otherwise concurs with Lord Reed. They are difficult issues that obscure Lord Sumption’s valuable explanation of negotiating damages awards as an evidential technique for measuring pecuniary or non-pecuniary loss in breach of contract cases.118 And that value in Lord Sumption’s explanation arises because of the approach of the majority, through the judgment of Lord Reed. This is a difficult judgment. Despite reaffirming conventional principle and severely limiting the scope of negotiating damages (which, for example, will not be awarded in cases of breach of non-compete clauses119), and affirming their use as an evidential technique,120 Lord Reed and the majority appear to have held back from abolishing them as an independent principle. This is regrettable. 112 ibid [14]. 113 ibid [49]. 114 Although the blanket rule against damages for non-pecuniary loss on injury to reputation currently prevents part of this non-pecuniary loss award. Blake is another case where there is an obvious nonpecuniary interest in performance that would have been within the parties’ contemplation (ie the defendant’s assumption of responsibility), as noted in Morris-Garner (n 3) by Lord Sumption at [111]. 115 Kramer (2017) paras 10.05 fn 10 and 22.23; see also paras 19.67–19.68. 116 Morris-Garner (n 3) [103]. 117 See further W Day, ‘Restitution for Wrongs: One Step Forwards, Two Steps Back?’ [2018] Restitution Law Review 60. 118 Indeed, if one strips out the property law references and cases from Morris-Garner (n 3) [110]–[125], one ends up with a persuasive and orthodox explanation of the use of the hypothetical release fee as evidence of quantification of loss caused by contract breach. 119 ibid [94]. 120 ibid [94] and [100].

90  Adam Kramer Although Lord Reed quoted with approval Lord Sumption’s comment in Bunge (quoted above) that contract damages ‘are not concerned with the value of the contract as an article of commerce in itself’,121 he went on to say that ‘There are certain circumstances in which the loss for which compensation is due is the economic value of the right which has been breached, considered as an asset’,122 ‘even in the absence of any pecuniary losses which are measurable in the ordinary way’.123 I for one cannot reconcile these two. The circumstances identified where such an award was to be made were that the claimant has in substance lost a valuable asset (property; distinct from the contract right itself) created or protected by the contract right.124 In such a case, it is said that the loss can be measured by the economic value of the asset.125 The central intended case is breach of a contract right restricting the defendant’s exercise of its property right, as in Experience Hendrix.126 This is puzzling, unnecessary and unjustified. An award of these user damages makes sense where the claimant has a property right, for the reasons explained by the majority in relation to tort claims for invasion of property rights. But a contract right to control the defendant’s property is just a contract right (otherwise Lord Reed would not need to set out this additional principle at all). If the claimant has been deprived of the property (which Lord Reed suggests may the case),127 then the value of the property would be the measure of its loss. But the hypothetical bargain values not the property that the contract right protects, but the contract right itself. Why value that asset? Why apply the user principle to the contract right? And why do so in cases where the contract protects a piece of property held by the defendant but not in other cases (eg where the contract is to develop the value of the claimant’s own property, such as a construction service contract)?128 Of course, as noted above and in keeping with comments of Lord Sumption, the best answer to ‘why value the contract right itself’ is: because the release fee is a useful proxy for measuring the pecuniary and non-pecuniary benefit the claimant would have received from performance. This is inoffensive to the ordinary principle, as such a proxy would have to give way in cases where, for whatever reason, the claimant would not have obtained such value from the performance. Rather than limiting negotiating damages to an almost vanishingly small category of contract cases, the Supreme Court should have abolished them altogether, confining the hypothetical bargain (in pure contract cases) to a quantification technique. Applying it independently of loss (eg if it is greater than the loss) is, as the defendants contended, simply inconsistent with ordinary contract principles, which award damages by measuring the consequences of breach.129



121 ibid

[76]. [91]. 123 ibid [93]. 124 ibid [95(10)]. 125 ibid [92]. 126 ibid [89]. 127 ibid [92]. 128 See further A Burrows, ‘One Step Forward?’ (2018) 134 LQR 515, 521. 129 Appellants’ written submissions, paras 97–100; Morris-Garner (n 3) 653E–G and 657B–E. 122 ibid

Contract Damages  91 So where does this leave contract law and the substitutive damages thesis? A general negotiating damages measure independent of the measurement of loss is an important piece of support for the substitutive damages thesis. Winterton, for example, relies on such cases as a key plank in his argument, set out in his monograph, that the law makes substitutive damages awards, contending that where replacement performance is unavailable the lost performance can be substituted by the award of its release price as its objective value.130 However, while Morris-Garner did confirm negotiating damages as an independent measure, which is disappointing to those, like me, who see compensation for loss (what Winterton calls the ‘balance sheet’ position) as the guiding principle of all contract awards,131 the severe limits placed upon the negotiating damages measure in Morris-Garner rob it of any substantial value as support for an argument that substitution is a primary and independent general measure of contract damages. Moreover, the rather irrational limiting rationale for negotiating damages advanced in Morris-Garner does not provide support for a substitutive thesis. As Burrows notes, in its overall conclusions, Morris-Garner implicitly rejects the substitutive damages analysis.132 Winterton therefore accepts that Morris-Garner disqualifies negotiating damages from being prime evidence for the substitutive damages thesis, and that he must rely on other cases in different areas of contract damages to support such a thesis.133 While goods cases are now beyond the reach of substitutive damages theorists, a few service and related cases remain that provide some support, though these are beyond the scope of this chapter.134 There is also nothing in Lord Reed’s judgment to prevent the use of negotiating damages as evidence of pecuniary loss (rather than as an exceptional award independent of loss), as he mentioned and Lord Sumption emphasised. In this respect, perhaps, as Professor Peel has noted, Lord Sumption’s speech may prove to be the more influential.135 The recent decision in Priyanka Shipping Ltd v Glory Bulk Carriers Pte Ltd provides a useful test for negotiating damages principles post-Morris-Garner.136 To my mind, the law fails the test. A sale contract of a bulk carrier vessel specified that the vessel had to be demolished (and not traded). This was due to the seller’s policy of scrapping older 130 Winterton, Money Awards in Contract Law (n 54) 60–68, 201–14 and 283. See also Winterton, ‘Money Awards’ (n 54) 466–67; D Winterton, ‘Contract Theory and Gain-Based Recovery’ (2013) 76 MLR 1129, 1137–38; R Stevens, ‘Rights and Other Things’ in Nolan and Robertson (n 46) 123–25. 131 Professor Barnett puts it well when she says that the decision ‘leans towards’ a substitutive compensatory analysis: K Barnett, ‘Gain-Based Damages’ in R Halson and D Campbell (eds), Research Handbook on Remedies in Private Law (Cheltenham, Edward Elgar, 2019) 319. 132 Burrows (n 31) 324. 133 Winterton, ‘Claims for the Value’ (n 54) 85. 134 In fact, the best support for the substitutive damages thesis in Morris-Garner (n 3) may come from the throwaway comment of Lord Reed at [80] that compensation could include an award for skimped performance, ie the difference in (market) value between the goods or services promised and those provided. This raises a much broader question as to whether such a valuation is ever permissible, save as a proxy for measuring the pecuniary or non-pecuniary loss that was suffered as a result of the skimped performance. The poster cases for substitutive damages remain White Arrow Express Ltd v Lamey’s Distribution Ltd [1995] CLC 1251 (CA), Giedo van de Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB) and Clarke v Macourt [2013] HCA 56. As to that separate debate, see Kramer (n 5) paras 2.35–2.53 and 4.214. 135 Peel (n 96) 26. 136 Priyanka Shipping Ltd v Glory Bulk Carriers Pte Ltd [2019] EWHC 2804 (Comm), [2019] 1 WLR 6677.

92  Adam Kramer vessels to reduce the oversupply of tonnage in the market which was depressing charter rates.137 The buyer nevertheless traded the vessel. The negative covenant was enforced by injunction, and the question arose as to what damages should be awarded for the pre-injunction breaches of contract.138 Negotiating damages were claimed for the value of the contractual right to restrain or permit trading up to the date of the injunction, but no other measure of or basis for damages was advanced.139 Despite this at first sight seeming to be a strong case for such damages by Lord Reed’s rationale, given that the sale contract gave the seller a right to control the use of the vessel once it became the buyer’s (just like a restrictive covenant imposed when selling land), David Richards QC, sitting in the High Court, refused negotiating damages and awarded only nominal damages on the grounds that the seller no longer had a proprietary interest in the vessel. This is surely a misreading of Lord Reed, who required for a negotiating damages award that there be a contractual right restricting a defendant’s use of its property, not of the claimant’s property, and it therefore left this judge unable to explain the Experience Hendrix case.140 But equally, and like in Experience Hendrix, this invites that question as to whether the seller had suffered loss on a conventional basis, even though such damages were not claimed. Unlike in that case,141 there was no evident pecuniary loss here.142 In particular, the seller did not own any other vessels the charter rates of which could have been affected.143 Yet there must have been non-pecuniary loss: plainly the seller put some value on the vessel being scrapped, and the buyer must have known that when it made its promise. Whether that value relates to an indirect incentive to protect the charter rates of TCC (the former operator of the vessel)144 or was decided on a whim does not fundamentally matter. That the seller ascribed value to the promise was within the scope of responsibility implicitly assumed by the buyer, and damages should be awardable for such non-pecuniary loss.145 Again, as in Experience Hendrix,146 the hypothetical release fee is a sensible method for assessing such loss in a difficult situation.

137 ibid [13]–[16], [128(ii)] and [164]. 138 Damages were claimed both at common law and in equity as an adjunct to the injunction under s 40 of the Senior Courts Act 1981, but the parties agreed that the approach to damages for past breaches was the same: ibid [136]–[137] and [141]. 139 Priyanka (n 136) [43]–[44], [143]–[145], [166], [176], [188] and [200]. See also [26] and [30] as to the Indian Claim. 140 See esp ibid [198(iii)]. 141 See the text to n 113 above. 142 As noted at Priyanka (n 136) [188]; see also ibid [198(iii)]. 143 ibid [163(1)] and [165]. 144 ibid [163(1)] and [165]. 145 cf the ParkingEye decision, reported in Makdessi v Cavendish Square Holdings BV [2015] UKSC 67, [2016] AC 1172, discussed in ch 6. There the car park operator extracted a promise that the customer would leave within two hours, not because if it did not that would harm the operator, but because it would harm the third-party car park owner, who wanted (for itself and its retailers) to ensure a reasonable turnover of parking spaces to encourage shopper footfall at the shopping centre. The case was about a liquidated damages clause, but, absent such a clause, why should the operator not recover damages for non-pecuniary loss, given the customer must have known that the operator put a value on the turnover of car park users? Indeed, as a final thought, might negotiating damages possibly have been awarded in ParkingEye on Lord Reed’s basis, the promise to leave the car park being a contractual right to control the defendant’s use of a third party’s property? 146 See the text to n 114 above.

Contract Damages  93 VIII. CONCLUSION

Lord Sumption has, through his majority decision in Bunge and his minority decision in Morris-Garner, helped to shepherd the law towards a coherent and principled award of compensation for loss on breach of contract. This is an award of damages for actual loss whenever it is suffered, measured at trial and subject to the rules of legal causation (including mitigation) and remoteness. There is no room for artificial unyielding recourse to the market or awards at the date of breach, although both are frequently the right answer under the orthodox principles of mitigation and remoteness. The law does not substitute the contract or performance as an asset. And there is no room for a non-compensatory negotiating damages measure (contra the small residual role preserved by Lord Reed and the majority in Morris-Garner), although it is a useful and justifiable proxy where it is difficult to quantify pecuniary or nonpecuniary loss. It is to be hoped that these judgments of Lord Sumption have decontroversialised what was previously thought by some to be controversial.

94

6 Penalties EDWIN PEEL

A damages clause may properly be justified by some other consideration than the desire to recover compensation for a breach. This must depend on whether the innocent party has a legitimate interest in performance extending beyond the prospect of pecuniary compensation flowing directly from the breach in question. – Cavendish Square Holding BV v El Makdessi1

W

hile I had no hesitation in accepting an invitation to participate in the conference to mark the retirement of Lord Sumption from the Supreme Court, I admit to some reservation about revisiting the rule against penalties. This is an area about which a great deal has been written, especially of late,2 and it is difficult to find something fresh or original to say (though it is never easy). It is also the case that, on the previous occasions when I have commented on the rule in writing, I have advocated its abolition.3 Since that submission was rejected by Lord Sumption and all six of his colleagues in the Supreme Court in Cavendish Square Holding BV v El Makdessi, where I was (a small) part of the counsel team making it, anything further I might have to say in this respect risks sounding like sour grapes. That risk is therefore avoided (in this chapter)4 by accepting that the rule is 1 Cavendish Square Holding v El Makdessi [2015] UKSC 67, [2016] AC 1172 [28] (Lord Neuberger and Lord Sumption). I am grateful to the conference participants for comments on an earlier draft of this chapter and for the further comments of Adam Kramer, Adrian Briggs and Carmine Conte. The customary assumption of responsibility on my part applies. 2 See, eg S Rowan, ‘For the Recognition of Remedial Terms Agreed Inter Partes’ (2010) 126 LQR 448; S Worthington, ‘Common Law Values: the Role of Party Autonomy in Private Law’ in A Robertson and M Tilbury (eds), The Common Law of Obligations: Divergence and Unity (Oxford, Hart Publishing, 2016); J Fisher, ‘Rearticulating the Rule against Penalties’ [2016] Lloyd’s Maritime and Commercial Law Quarterly 169; F Dawson, ‘Determining Penalties as a Matter of Construction’ [2016] Lloyd’s Maritime and Commercial Law Quarterly 207; J Morgan, ‘The Penalty Clause Doctrine: Unlovable but Untouchable’ (2016) 75 CLJ 11; C Conte, ‘The Penalty Rule Revisited’ (2016) 132 LQR 382; A Summers, ‘Unresolved Issues in the Law on Penalties’ [2017] Lloyd’s Maritime and Commercial Law Quarterly 95. 3 E Peel, ‘The Rule against Penalties’ (2013) 129 LQR 152; E Peel, ‘Unjustified Penalties or an Unjustified Rule against Penalties’ (2014) 130 LQR 365. 4 I do not resile from the view that, in some respects at least, the rule is an anomaly; a view which, I think, is shared by Lord Sumption. At least, that is my interpretation of his comment that it is ‘a haphazardly constructed edifice which has not weathered well’: Makdessi (n 1) [3].

96  Edwin Peel here to stay and instead attempting to identify what might be thought to offer the best rationalisation of it. The principal focus is on the test for whether a term is a penalty, but very brief consideration is also given to the scope of the rule, ie when it should be applied. Some of what was said in Makdessi and in the conjoined appeal in ParkingEye Ltd v Beavis will come under close examination, focusing in particular on the joint speech of Lord Neuberger and Lord Sumption,5 given the occasion. The central argument of this chapter is that while contracting parties are afforded a ‘generous margin’ when they agree the remedy to which they are entitled to deal with the consequences of breach, the test for a penalty is any agreed remedy which goes ‘beyond’ what could conceivably have been awarded by the courts. As Burrows has commented: ‘The further the clause strays from what the courts would themselves award, the more likely it is that the agreed remedy will be regarded as penal.’6 This is not therefore a new,7 or entirely radical, idea, but an attempt is made in this chapter to demonstrate that it offers the best interpretation of what emerges from Makdessi, as well as the best ‘fit’ with the decided cases, and that it is consistent with the concept of ‘legitimate interest’ when used to determine the availability of judicial remedies.8 It does, however, lead one to question some of the reasoning for the decisions reached in both Makdessi and ParkingEye, and the proposition in the opening dictum referred to above that a clause may be justified even where it goes ‘beyond the prospect of pecuniary compensation’. I. TEST

In Makdessi, Lord Sumption formulated the test for determining whether a contractual provision is a penalty in the following terms:9 The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach, and we therefore expect that Lord Dunedin’s four tests would usually be perfectly adequate to determine its validity. But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter’s primary obligations.

5 I trust that Lord Neuberger will not be offended if I refer hereafter just to Lord Sumption when citing from their joint speech. 6 A Burrows, Remedies for Torts, Breach of Contract and Equitable Wrongs, 4th edn (Oxford, Oxford University Press, 2019) 392. 7 See also W Day, ‘Disproportionate Penalties in Commercial Contracts’ in P Davies and M Raczynska (eds), The Contents of Commercial Contracts (Oxford, Hart Publishing, 2020); R Stevens, ‘Rights Restricting Remedies’ in A Robertson and M Tilbury (eds), Divergences in Private Law (Oxford, Hart Publishing, 2016) 175–176. 8 cf S Rowan, ‘“The Legitimate Interest in Performance” in the Law on Penalties’ (2019) 78 CLJ 148, who explores in greater detail the role of ‘legitimate interest’ in other areas of the law of remedies and how that might inform our understanding of the rule against penalties after Makdessi. 9 Makdessi (n 1) [32].

Penalties  97 For present purposes, a ‘secondary obligation’ is a provision which is triggered by, and intended to deal with the consequences of, a prior breach of contract, ie it provides ‘a contractual alternative to damages at law’.10 This jurisdictional requirement will be considered briefly later. It is often the case that only the first sentence of the passage above is cited, but it is important to set it out in full in order to begin with a number of propositions which form the basis of this chapter.11 There has been considerable focus on what is meant by the reference to ‘legitimate interest’. It takes its meaning from the two sentences which immediately follow. The injured party has no legitimate interest (or ‘proper interest’) in punishing the defaulting party, but this simply begs the question of when a provision, if enforced, would amount to punishment. The answer is provided by the third sentence: no punishment is involved if the remedy agreed is not out of all proportion to the injured party’s interest ‘in performance or in some appropriate alternative to performance’. In other words, ‘legitimate interest’ and what may be referred to as ‘performance interest’ are one and the same thing. If one pauses there, one might make the following propositions. The law recognises that a contracting party has an interest in performance or some appropriate alternative to performance. In the absence of any agreed remedy, the appropriate alternative is the remedy which the courts provide for any failure to perform which amounts to a breach, and the normal remedy is ‘compensation’, most commonly in the form of damages. The parties are free to agree their own remedy and the courts will enforce it provided it is not out of all proportion to the remedy, or ‘compensation’, which would otherwise be recoverable, this being the limit of the injured party’s legitimate (performance) interest. The fact that there has to be some sufficient correlation between the agreed remedy and the remedy that would otherwise be available explains the jurisdictional requirement that the parties’ agreement must amount to a ‘secondary obligation’. What the test of proportionality allows for is what has been referred to as a ‘generous margin’ in the parties’ agreement on the appropriate level of compensation,12 but not a departure from the underlying compensatory aim. It is at the point when the parties have agreed a remedy which cannot conceivably be regarded as ‘compensation’ that it amounts to unenforceable punishment. However, Lord Sumption also refers to the injured party having an interest which goes ‘beyond compensation’. Unless one is meant to countenance a departure from orthodoxy, this might look like a non sequitur: the rule against penalties applies to terms which respond to breach; the injured party’s legitimate interest upon breach is in some appropriate alternative to performance; the appropriate alternative is some form of compensation, being the remedial equivalent of performance; but can the injured party agree a remedy which goes ‘beyond compensation’ and still claim to be protecting a legitimate interest? One 10 ibid [14]. 11 Given the confines of this chapter, I make no reference to the tests of ‘extravagance’ or ‘unconscionability’, which appear elsewhere in the speech of Lord Sumption and in the speech of the other Supreme Court Justices, nor to the relevance of ‘deterrence’, other than to say that extravagance or unconscionability is reached when the parties have agreed a remedy out of all proportion to the performance interest, and the Supreme Court was entirely correct to rule that an enquiry into whether a provision acts as a deterrent is not a useful guide to whether or not it is a penalty: ibid [31]. 12 See n 42 below.

98  Edwin Peel possible response is to say that this is just a question of terminology and what is really meant by Lord Sumption’s reference to ‘beyond compensation’ is that the injured party may have an interest in performance which is not easily or readily measured as pecuniary compensation.13 If this is correct, and it has to be for the thesis in this chapter to prevail, that leaves intact the submission that an agreed remedy which goes ‘beyond’ what could conceivably have been awarded by the courts as a compensatory award intended to protect the performance interest of the injured party is a penalty. The questions raised by this interpretation of Lord Sumption’s test for a penalty are whether there is a real and workable distinction between an agreement which amounts to a ‘generous margin’ in determining compensation for loss of the performance interest and an agreement which goes ‘beyond’ this; and whether this distinction alone should be the key to whether an agreed remedy is an unenforceable penalty. These questions are addressed primarily by analysing the decisions in some of the leading cases on penalties, but it is helpful to begin by first considering the role of ‘legitimate interest’ in relation to judicial remedies. A.  ‘Legitimate Interest’ and Judicial Remedies The concept of a ‘legitimate interest’ of the injured party, or something like it (if not by name), has been resorted to in regulating the availability and scope of judicial remedies. It is used to justify awarding to the injured party a particular remedy on the basis that it is, in the circumstances, the appropriate compensatory award (‘an appropriate alternative to performance’). (i)  Action for the Price Perhaps the leading example of a judicial remedy, the availability of which is determined by whether the injured party had a ‘legitimate interest’ in its award, is the action for the price. In White & Carter (Councils) Ltd v McGregor,14 C agreed to advertise D’s business for three years on plates attached to litterbins. D repudiated the contract on the day it was made, but instead of accepting D’s repudiation and suing for damages, C prepared the plates and displayed them, and claimed the price due under the contract. This action is only available if C is able to complete performance so that the price is due, but in the White & Carter case Lord Reid suggested a further restriction in a passage which is often cited in truncated form, but which merits being set out in full:15 It may well be that, if it can be shown that a person has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages, he ought not to be allowed to saddle the other party with an additional burden with no benefit to himself. If a party has no interest to enforce a stipulation, he cannot in general enforce it: so it might be said that, if a party has no interest to insist on a particular remedy, he ought not to be

13 See

the dictum at n 24 below. & Carter (Councils) Ltd v McGregor [1962] AC 413 (HL). Also discussed in ch 4. & Carter (n 14) 431.

14 White 15 White

Penalties  99 allowed to insist on it. And, just as a party is not allowed to enforce a penalty, so he ought not to be allowed to penalise the other party by taking one course when another is equally advantageous to him.

This passage – and, in particular, Lord Reid’s reference to ‘legitimate interest’ – has been criticised for being uncharacteristically vague,16 but this does, to some extent, seem to overlook the illustration which immediately followed:17 If I may revert to the example which I gave of a company engaging an expert to prepare an elaborate report and then repudiating before anything was done, it might be that the company could show that the expert had no substantial or legitimate interest in carrying out the work rather than accepting damages: I would think that the de minimis principle would apply in determining whether his interest was substantial, and that he might have a legitimate interest other than an immediate financial interest. But if the expert had no such interest then that might be regarded as a proper case for the exercise of the general equitable jurisdiction of the court.

What appears to be acknowledged is that, if the injured party has a ‘legitimate interest’ in performance, some margin is allowed in determining the most appropriate remedy to give effect to it. Thus, in the example given, had the expert sued for damages, his interest ‘other than an immediate financial interest’ might, even at the time, have extended to financial loss consequent upon loss of reputation,18 but such loss would not be easy to prove with any certainty, hence justifying the action for the price. However, if it is clear that the expert had no interest at all of the sort which might merit a compensatory award, the action would not be available (in the same way, as Lord Reid observes, that any agreement to pay a sum due on breach, rather than the price, would be a penalty). In White & Carter, the action for the price also provided some margin in relation to mitigation in that, by claiming the price, rather than accepting the repudiation and claiming damages, C avoided the duty to mitigate. But, as Lord Reid pointed out,19 there was ‘nothing in the findings of fact’ to support a case that C had unjustifiably passed up a straightforward opportunity to mitigate and, where this is the case, the action is not available.20 That the injured party is only afforded some margin as far as the mitigation rules are concerned, and cannot evade them altogether, is captured in Cooke J’s observation that the effect of the authorities since White & Carter is that ‘an innocent party will have no legitimate interest in maintaining the contract if damages are an adequate remedy and his insistence on maintaining the contract can be described as “wholly unreasonable”, “extremely unreasonable” or, perhaps, in my words, “perverse”’.21 To allow behaviour of this sort would result in a remedy going beyond C’s ‘legitimate interest’.

16 J Carter, ‘White and Carter v McGregor – How Unreasonable’ (2012) 128 LQR 490, 491. 17 White & Carter (n 14) 431. 18 See, eg Cointat v Myham & Son [1913] 2 KB 220 (KB). 19 White & Carter (n 14) 431. 20 See, eg Attica Sea Carriers Corp v Ferrostaal Poseidon Bulk Reederei GmbH [1976] 1 Lloyd’s Rep 250 (CA); Clea Shipping Corp v Bulk Oil International Ltd (The Alaskan Trader (No 2)) [1982] 2 Lloyd’s Rep 645 (Com Ct). 21 The Aquafaith [2012] EWHC 1077 (Comm), [2012] 2 Lloyd’s Rep 61 [44].

100  Edwin Peel (ii)  Specific Performance In Attorney General v Blake, Lord Nicholls described the award of specific performance in Beswick v Beswick22 as being based on the recognition that ‘the innocent party to the breach of contract had a legitimate interest in having the contract performed even though he himself would suffer no financial loss from its breach’.23 And, in Makdessi, Lord Sumption referred to the remedy in the following terms:24 specific performance of contractual obligations should ordinarily be refused where damages would be an adequate remedy. This is because the minimum condition for an order of specific performance is that the innocent party should have a legitimate interest extending beyond pecuniary compensation for the breach. The paradigm case is the purchase of land or certain chattels such as ships, which the law recognises as unique.

Here we see the concept of an interest extending ‘beyond pecuniary compensation’,25 but when it is awarded, specific performance is not a remedy which goes beyond a compensatory award. Rather, it is the only form of remedy which assures that there is adequate compensation, eg no amount of money can enable the replacement of something which is regarded as ‘unique’, and to have awarded only nominal damages in Beswick would have defeated the purpose of the contract, which was to provide an annuity to the deceased claimant’s widow. (iii)  Account of Profits In Blake, the House of Lords acknowledged that an account of profits may exceptionally be available as a remedy for breach of contract, and Lord Nicholls suggested as a ‘useful general guide … whether the plaintiff had a legitimate interest in preventing the defendant’s profit-making activity and, hence, in depriving him of his profit’.26 In Morris-Garner v One Step (Support) Ltd, Lord Sumption suggested that Blake should be seen as another case where the claimant’s interest in performance ‘extended beyond pecuniary loss’,27 on which basis the remedy of an account is awarded when necessary to give effect to the performance interest.28 It is not available where it would amount to a remedy going beyond the performance interest. For example, if D, in breach of a contract for the sale of goods where there is an available market, fails to deliver the goods to C, C is entitled to no more than the difference between the contract price and the market price.29 This fully protects his performance interest and he has no claim to any profit which D may have made by selling the goods to a third party after paying damages, if any, to C.

22 Beswick v Beswick [1968] AC 58 (HL). 23 Attorney General v Blake [2001] 1 AC 268 (HL) 282. 24 Makdessi (n 1) [30]. 25 See the text to n 13 above. 26 Blake (n 23) 285. 27 Morris-Garner v One Step (Support) Ltd [2018] UKSC 20, [2019] AC 649 [111]. 28 The recognition of a non-pecuniary interest in the government is one thing, but it is nonetheless difficult to describe an account as a compensatory award, given that the award is dictated by what the defendant has gained. A further reason why it should only be available in exceptional circumstances? 29 Sale of Goods Act 1979, s 51(3). The market rule for damages is discussed further in ch 5.

Penalties  101 (iv)  Negotiating Damages In the three examples just considered, the recognition of the injured party’s ‘legitimate interest’ justified the award of a remedy other than damages: the price, specific performance or an account of profits. In this final example, it has led the courts to award damages on an unconventional basis.30 In One Step, the Supreme Court acknowledged that damages representing the sum which might hypothetically and reasonably have been negotiated by the parties to release the defendant from the contractual obligation which has been breached may be awarded in two circumstances: first, ‘where the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed’31 and that right has an ‘economic value … even in the absence of any pecuniary losses’;32 and secondly, where it is clear that the claimant will have suffered pecuniary loss, but a hypothetical negotiation is the only, or the most reliable, method of assessing that loss. In the former, damages are awarded for loss which is not ‘of a conventional kind’;33 in the latter, damages are awarded for conventional loss, but assessed in an unconventional way. This is not the place to examine in detail the concept of ‘asset-creating’ or ‘asset-protecting’ contractual rights;34 rather, the point to be made is that, in both circumstances, the court recognises the interest of the claimant in performance and attempts to put a value on that performance interest: ‘the imaginary negotiation is merely a tool for arriving at that value’.35 In the One Step case, where the defendant breached restrictive covenants entered into on the sale of her interest in a business, it was held that the claimant had not been deprived of a valuable ‘asset’, although it was, in Lord Sumption’s words, ‘inconceivable’ that it had not suffered pecuniary loss, and the case was remitted to the trial judge with a direction that evidence of a hypothetical release fee might be resorted to as an ‘evidential technique for estimating the claimant’s loss’.36 B.  The Test of Proportionality: ‘A Generous Margin’ From the brief survey of judicial remedies just carried out, it is possible to conclude that a guiding principle for the courts, sometimes captured by reference to a ‘legitimate 30 In One Step (n 27), the utility of any reference to the ‘legitimate interest’ of the injured party was, if anything, deprecated at [90] (Lord Reed), but, as submitted above, on closer examination it is just another way of referring to the injured party’s performance interest. 31 ibid [92] (Lord Reed). 32 ibid [93] (Lord Reed). 33 ibid [30] (Lord Reed). 34 See ch 5, which focuses on these issues. In Priyanka Shipping Ltd v Glory Bulk Carriers Pte Ltd [2019] EWHC 2804 (Comm), C sold a vessel to D on condition that it was to be scrapped, but D traded the vessel before C obtained an injunction to enforce the obligation to scrap. C’s contractual right of control over D’s property (ie the vessel, after the sale) was analogous to other cases where C has been awarded ‘negotiating damages’, eg Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 (Ch) (restrictive covenant over D’s land); Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830 (restriction over the commercial exploitation of D’s intellectual property). The decision not to award negotiating damages in relation to the trading done before the injunction is therefore open to doubt, but quaere the validity of any agreement the parties might have made in advance about the sums to be paid by D to C; cf Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (HL). 35 One Step (n 27) [91] (Lord Reed). 36 ibid [106] (Lord Sumption); cf [100] (Lord Reed).

102  Edwin Peel interest’, is the need to ensure a remedy which best protects, but does not go beyond, the ‘performance interest’ of the injured party. This is, or should be, the same principle which determines whether an agreed remedy of the parties is enforceable: the parties are permitted to contract out of the uncertainty which may exist in relying on the judicial remedies otherwise available, but not go beyond what the courts would regard as the limit of their performance interest. A few leading examples are considered, before concluding with an assessment of the decisions in Makdessi and ParkingEye. (i)  Actual Loss and Legally Recoverable Loss For the purpose of the rationalisation of the test for a penalty advocated in this chapter, it is necessary to draw a preliminary distinction between what has been referred to as ‘actual loss’ and ‘legally recoverable loss’.37 ‘Actual loss’ refers to all loss in fact caused by the defaulting party’s breach of contract, but, as is well established, the level of damages which may be legally recovered is not simply a matter of ‘but for’ causation.38 Even in relation to that requirement, it is necessary for the injured party to prove the loss, or level of loss, in fact suffered, so that, notwithstanding the willingness of the courts to indulge in a degree of speculation,39 damages may not be recovered for lack of certainty of proof. Such proven actual loss may nonetheless still not be awarded as damages because of other limitations on recovery, such as mitigation and remoteness, eg where C incurs a loss on a further contract as a consequence of D’s breach, but such loss is too remote to be recovered as damages because D was unaware of the risk of this type of loss at the time of her contract with C. The significance of this distinction is that recovery of C’s actual loss, where this is agreed by the parties, may still be regarded as a compensatory award. Thus, in the example just given, if C and D had agreed that, in the event of a breach by D, she should pay a sum which represented (or was intended to represent) C’s loss on the further contract, the agreed remedy is still a compensatory award based on C’s actual loss, notwithstanding that the full extent of the loss might not otherwise have been recoverable as damages because of remoteness.40 The question which follows is to what extent can the parties contract out of the potential limitations on recoverable damages which is what, in effect, C and D would have done, before their agreement amounts to a penalty? In the examples that follow, it will be seen that the parties are afforded a degree of ‘margin’ in contracting out of the strict requirements of mitigation, remoteness and proof of loss in order to ensure recovery of what may have been their actual loss. In all of them, it is a question of the limits of contracting out of uncertainty.

37 See Burrows (n 6) 392. 38 See ch 5. 39 Simpson v The London and North Western Railway Co (1876) 1 QBD 274 (QB) 277 (Cockburn CJ); Watson, Laidlaw & Co Ltd v Pott, Cassels & Williamson 1914 SC (HL) 18, 29–30 (‘sound imagination and the practice of the broad axe’). 40 See the discussion of the Robophone case below.

Penalties  103 (ii)  Mitigation Uncertainty So far as mitigation is concerned, one might point to the decision of the Court of Appeal in Murray v Leisureplay plc,41 in which no penalty was found to have been created by a clause which entitled a director to the payment of 12 months’ gross salary and pension contributions for unlawful termination of his service contract. This is the case in which Arden LJ observed that a contractual provision is not a penalty simply because it may result in ‘overpayment’, ie a sum greater than the legally recoverable damages, because ‘The parties are allowed a generous margin’.42 Though not an observation made by Arden LJ, such margin may be justified on the basis that the parties have to legislate for the consequences of breach at the time of the contract. The judge had found that the clause was a penalty because it failed to take any account of the requirement of mitigation which would have applied to an assessment of damages. Buxton LJ did not regard this as decisive on the basis that it would have been difficult to say with confidence at the time of entering into the contract what might happen to the director, were he to be dismissed, and ‘such a clause would directly invite disputes about the reasonableness of [the director’s] behaviour after termination, of the kind that clauses stipulating the amount of compensation are precisely designed to avoid’.43 In sum, while operating within the confines of what may still be described as the director’s performance interest (ie what he may actually have lost), the parties were allowed some margin to contract around the uncertainty associated with mitigation. This might be contrasted with the sort of case where any question of mitigation would be clear and straightforward even at the time of the contract. For example, in a contract for the sale of goods where there is an available market, the normal measure of damages for breach by either the seller or the buyer is the difference between the contract price and the market price.44 This simply reflects the fact that, upon breach, either party is expected to mitigate by selling the goods, or buying a substitute, at the market price. This is the limit of the parties’ performance interest. If the parties to such a contract agreed in advance a liquidated sum to deal with breach, it seems very likely, in contrast to Murray v Leisureplay, that it would be regarded as a penalty to the extent that it failed to take account of the requirement of mitigation.45

41 Murray v Leisureplay plc [2005] EWCA Civ 963, [2005] IRLR 946. 42 ibid [43]. 43 ibid [115]. 44 Sale of Goods Act 1979, ss 50(3) and 51(3). 45 One imagines that such a provision would be very unusual, if it is used at all; more likely is a provision which attempts, by agreement, to ‘crystallise’ the damages recoverable as the difference between the contract price and the market price: see, eg clause 20 of GAFTA 49: Bunge SA v Nidera BV [2015] UKSC 43, [2015] 2 Lloyd’s Rep 469, discussed in ch 5. The decision in that case was that clause 20 did not, as a matter of construction, exclude any consideration of the effect of post-breach events on the claim for damages. As a result, the defendant sellers, who were guilty of an anticipatory breach, were able to defeat the claim by relying on the fact that post-breach events showed that they would have had a lawful excuse for their failure to perform when performance was due: cf The Golden Victory [2007] UKHL 12, [2007] 2 AC 353. At the conference, Adam Kramer asked whether, if the clause had excluded this consideration, it would have amounted to a penalty. My view is that it would not, precisely because the parties should be permitted to contract out of the uncertainty inherent in the willingness of the courts to take account of post-breach events known by the time of the hearing, which is the principal criticism of the decision in The Golden Victory (see the dissenting judgments of Lord Bingham and Lord Walker).

104  Edwin Peel (iii)  Remoteness Uncertainty A similar point can be made in relation to remoteness, the effect of which, in determining whether a clause amounts to a penalty, is dealt with by Diplock LJ in Robophone Facilities Ltd v Blank.46 A key passage in his analysis is as follows:47 If the contract contained an express undertaking by the defendant to be responsible for all actual loss to the plaintiff occasioned by the defendant’s breach, whatever that loss might turn out to be, it would not affect the defendant’s liability for the loss actually sustained by the plaintiff that the defendant did not know of the special circumstances which were likely to cause any enhancement of the plaintiff’s loss. And so if at the time of the contract the plaintiff informs the defendant that his loss in the event of a particular breach is likely to be £X by describing this sum as liquidated damages in the terms of his offer to contract, and the defendant expressly undertakes to pay £X to the plaintiff in the event of such breach, the clause which contains the stipulation is not a “penalty clause” unless £X is not a genuine and reasonable estimate by the plaintiff of the loss which he will in fact be likely to obtain.

What appears to be said is that a reasonable estimate of the ‘actual loss’ occasioned by the breach represents the limit of what may be recoverable by the injured party, but such sum is recoverable notwithstanding the fact that, in the absence of the agreed sum, the full extent of the claimant’s actual loss might not be recoverable on grounds of remoteness.48 (iv)  Proof of Loss Uncertainty The distinction between an agreement which amounts to a ‘generous margin’ in determining the remedy intended to protect the performance interest and an agreement which goes ‘beyond’ what could conceivably be awarded as a remedy by the courts to achieve the same aim is perhaps most difficult to draw in the type of case where uncertainty lies, not in the application of limitations like mitigation or remoteness, but in simply proving any actual loss occasioned by the breach. This may be illustrated by the analysis of four cases: Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co, Vivienne Westwood Ltd v Conduit Street Development Ltd, Makdessi and ParkingEye. In Dunlop, a contract for the supply of tyres, covers and tubes contained a resale price maintenance clause49 which was breached by the purchaser, and a further clause 46 Robophone Facilities Ltd v Blank [1966] 1 WLR 1428. 47 ibid 1448 (emphasis added). 48 While Diplock LJ concludes that the injured party’s actual loss would be recoverable notwithstanding that the requirements of the remoteness test have not been met, the way that test is rationalised by Lord Hoffmann in The Achilleas [2008] UKHL 48, [2009] 1 AC 61 and the Court of Appeal in Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7, [2010] 1 Lloyd’s Rep 349 (namely, that remoteness is determined by whether the defendant assumed responsibility for the type of loss incurred, regardless of foresight or contemplation by the defendant) opens up an alternative analysis under which it is because of the agreed remedy that the test of remoteness has been met. In this respect, the finding of a penalty by Blair J in Lansat Shipping Co Ltd v Glencore Grain BV (The Paragon) [2009] EWHC 551 (Comm), [2009] 1 Lloyd’s Rep 658, [2009] EWCA Civ 555, is open to doubt (affirmed [2009] EWCA Civ 555, [2009] 2 Lloyd’s Rep 688 without explicit reference to this point, but see [36]). 49 This would now be unlawful, but was a legitimate restriction of competition at the time.

Penalties  105 which provided for the payment of £5 for every tyre, cover or tube sold in breach of any provision of the agreement. Prior to the decision in Makdessi, the case was most well known for the speech of Lord Dunedin and his formulation of four tests which ‘may prove helpful’ in determining whether a clause is a penalty. I gratefully adopt Lord Sumption’s summary of them in Makdessi:50 (a) that the provision would be penal if ‘the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach’; (b) that the provision would be penal if the breach consisted only in the non-payment of money and it provided for the payment of a larger sum; (c) that there was ‘a presumption (but no more)’ that it would be penal if it was payable in a number of events of varying gravity; and (d) that it would not be treated as penal by reason only of the impossibility of precisely pre-estimating the true loss.

The decision that the provision for payment of £5 per item was not a penalty rested heavily on the last of the ‘tests’ set out above, but, as Lord Sumption observed in Makdessi, it seems clear that this result was strongly influenced by Lord ­Atkinson’s reasoning.51 He emphasised the importance to Dunlop of the protection of their brand, reputation and goodwill, and their authorised distribution network. The provisions of the contract, including the resale price maintenance clause, were intended to ‘prevent the disorganisation of their trading system and the consequent injury to their trade in many directions’.52 In that context, ‘they had an obvious interest to prevent … undercutting’, and it was ‘impossible to say that that interest was incommensurate with the sum agreed to be paid’.53 In other words, while the cumulative effect of each individual breach damaged Dunlop’s trading system and therefore its goodwill, the uncertainty, not to say impossibility, of attributing actual loss to each and every breach if Dunlop was confined to a claim for damages justified the payment of a fixed sum per breach which was not out of all proportion to Dunlop’s performance interest, ie what the court acknowledged Dunlop may have actually lost. In the passage from Lord Sumption’s speech with which this part began,54 he referred to ‘a straightforward damages clause’, in relation to which Lord ­Dunedin’s four tests would usually be ‘perfectly adequate to determine its validity’. One assumes that he would regard the clause in the Dunlop case as meeting the description of ‘a straightforward damages clause’, but Lord Dunedin’s tests can only explain that decision on the basis of a broad interpretation of them, in line with the underlying reasoning of Lord Atkinson. In this respect, it is notable that in Lord Sumption’s own summary of the tests, there is no mention of the concept also referred to by Lord Dunedin – that the agreed sum should be a ‘genuine preestimate of damage’ – perhaps on the basis that it is this concept which runs the risk of too readily concluding that a clause amounts to a penalty to the extent that it departs from what would be legally recoverable as damages, thus depriving the parties of any sort of margin. This can be met, of course, by emphasising that what

50 Makdessi

(n 1) [24]. [24]. 52 Dunlop (n 34) 91–92 (emphasis added). 53 ibid 91–92. 54 See n 9 above. 51 ibid

106  Edwin Peel is required is a ‘genuine’ pre-estimate, not a precise one,55 of ‘damage’, and not of damages. The decision in Dunlop may be contrasted with the decision in Westwood,56 in which the clause in question was found to be a penalty even after the decision in favour of a broader approach to, or understanding of, the test for a penalty in Makdessi. In the Westwood case, C and D entered into a lease, accompanied by a side letter, the effect of which was to reduce the rent reserved under the lease. The parties agreed that this arrangement could be terminated by C if D breached any of the terms of the side letter or the lease, in which case the side letter was to be treated as if it ‘never existed’ and C would have to pay the rent under the lease, with retrospective effect.57 Timothy Fancourt QC, sitting as a Deputy High Court Judge, rejected a submission that the clause allowing for this was a ‘primary obligation’ under which D had a conditional right to a discounted rent. D’s ‘primary obligation’ was to pay the lower rent and when it committed a breach by failing to make a rental payment on time, some six years into the lease, it came under the secondary obligation to pay the increased rent. That secondary obligation was a penalty because:58 [C] cannot argue that it had a legitimate interest as such in seeing the rent revert to what it calls the market rental level. That would be a legitimate interest in non-performance of [D’s] obligations, not a legitimate interest in their performance. [C] must establish that it had a greater interest in seeing [D] perform all its obligations promptly than would be compensated by interest, damages and costs otherwise recoverable for a breach of covenant.

In the terms in which the test for a penalty is rationalised in this chapter, it is the interpretation of the last sentence in this passage which is significant. It amounts to the conclusion that there was no reason to believe that damages would not adequately protect C’s performance interest in the form of any actual loss which it may have incurred; unlike Dunlop, this was not a case of an uncertain actual loss for which C was simply being afforded a ‘generous margin’ and enforcement of the clause would therefore amount to a penalty.59 In light of the proposed rationalisation of the test for a penalty, one can now turn to the decisions in Makdessi and ParkingEye. In Makdessi, the defendant sold a business to the claimant by way of the sale of shares representing a controlling interest, at a price which included a very significant premium for goodwill. Part of the price was guaranteed, but the balance was payable in instalments, which depended on the future 55 Murray v Leisureplay plc (n 41) [111] (Buxton LJ): ‘the expression merely underlines the requirement that the clause should be compensatory rather than deterrent’. After Makdessi, it is necessary to substitute ‘punitive’ for ‘deterrent’. 56 Vivienne Westwood Ltd v Conduit Street Development Ltd [2017] EWHC 350 (Ch). 57 The court held that it would have been possible to sever the words which led to this effect so that the reversion to the market rent would only apply prospectively. The judge would still have found that this amounted to a penalty, but acknowledged that it would not have been so clear cut. 58 n 56 [52]. 59 For the purpose of this chapter, what matters is the perception of the judge that C’s performance interest, in terms of what it may actually have lost, was fully protected by an award of damages. That conclusion is, however, open to challenge. For example, it seems to be based on an assessment carried out at the time of the breach, which was relatively minor, whereas the test for a penalty is applied at the date of the contract. It is necessary to resort to this decision, as a contrast to Dunlop, simply because the finding of a penalty is very rare.

Penalties  107 performance of the business. Under the share purchase agreement, if the defendant became a ‘Defaulting Shareholder’ he was no longer entitled to the last two instalments of the price that would otherwise be due (clause 5.1) and the claimant could exercise a call option for the purchase of the defendant’s remaining shareholding at a price calculated by net asset value (clause 5.6), ie excluding any premium for goodwill. The defendant breached certain restrictive covenants in connection with his participation in other businesses and his soliciting of clients of the business sold, which made him a Defaulting Shareholder. The claimant sought to enforce both clauses. The estimate of the sums on which the defendant would lose out were inevitably a matter of speculation and dispute, but it was acknowledged that it could be up to about US$45m under clause 5.1 and up to about US$67m under clause 5.6. While the Supreme Court decided unanimously that neither clause was a penalty, they did not do so for the same reasons. According to Lords Neuberger, Sumption and Carnwath, the rule against penalties did not apply to either provision because they both amounted to primary obligations, while the rest of their Lordships concluded that they did not amount to a penalty under the applicable test, or at least they did not amount to a penalty even on the basis that they were secondary obligations.60 Lord Sumption described clause 5.1 as ‘in reality a price adjustment clause’,61 and this analysis is to be preferred.62 At the risk of oversimplification, in substance the parties had agreed to the sale and purchase of the shares on one of two bases, either with the goodwill intact or without – the former at the full price, the latter at a reduced price. The only reason to doubt this analysis is that the event which determined upon which of the two bases the sale would be completed amounted to a breach of the restrictive covenants, but the involvement of a breach, in context, was incidental.63 This finding avoided the obvious difficulty which the Court of Appeal faced in its decision to apply the test and find that the clause was a penalty: namely, had compliance with the restrictive covenants not been made the subject of any obligation on the part of the defendant, but had instead been drafted as a condition precedent to his entitlement to the further payments, the rule would not have been engaged because there would have been no breach involved at all.64 Under the approach advocated by Lord Sumption, for the rule against penalties to apply, it is necessary not only for a breach to have been committed, but also for the clause in question to have been intended to provide a remedial response to the breach. What is a little curious is that one might have expected that, if the correct analysis of clause 5.1 is that it was a primary obligation, and therefore the rule against penalties did not apply, that should have been that and there should have been no need to discuss

60 This acknowledges what is a degree of ambiguity in the speech of Lord Mance. 61 Makdessi (n 1) [74]. 62 Contrast Day (n 7) 220. It is also the preferred analysis for ‘default interest’ provisions in loan agreements which prospectively adjust the rate payable by a borrower in default by way of a revaluation of the credit risk for the lender: Lordsvale Finance v Bank of Zambia [1996] QB 752 (QB). 63 cf Euro London Appointments Ltd v Claessens International Ltd [2006] EWCA Civ 385, [2006] 2 Lloyd’s Rep 437. 64 cf Lehman Brothers Special Financing Inc v Carlton Communications Ltd [2011] EWHC 718 (Ch) [47] (Briggs J); Imam-Sadeque v Bluebay Asset Management (Services) Ltd [2012] EWHC 3511 (QB), [2013] IRLR 344 [221] (Popplewell J).

108  Edwin Peel Cavendish’s ‘legitimate interest’, which is part of the test for a penalty if the rule applies. To put it another way, Lord Sumption’s test begins by asking ‘whether the impugned provision is a secondary obligation’ and clause 5.1 was not a secondary obligation. And yet, having reached this conclusion, Lord Sumption goes on to discuss the claimant’s ‘legitimate interest’, which he described as ‘measuring the price of the business to its value’ and therefore a matter ‘for negotiation, not forensic assessment’.65 It is understood that what is intended by this is simply to reinforce that, precisely because 5.1 was a price clause, the price was solely for the parties to determine without any room for review by the courts. In this context, there is no difficulty in Lord Sumption’s observation that the claimant had a ‘legitimate interest … which extended beyond the recovery’ of the loss which might flow from the breach of the restrictive covenants,66 for while it is argued in this chapter that recovery beyond any conceivable actual loss should be the hallmark of a penalty, this is only on the basis that the rule against penalties applies. This is the sense in which the questions of jurisdiction and validity go hand in hand. If the clause is intended to deal with the consequences of breach, it is a penalty if it goes beyond protection of the performance interest in the form of any conceivable actual loss, even after allowing a generous margin in its assessment. If it is a price clause, or a primary obligation, it only determines what the parties’ performance interest is in the first place, and this is for the parties alone to determine. This, of course, brings into sharp relief the distinction between a primary obligation and a secondary obligation for the purpose of the rule, which is considered briefly below. If the decision in Makdessi, in relation to clause 5.1, can be explained on the basis that it was in reality a price clause, so that the question of having agreed a remedy which goes beyond the performance interest simply did not arise, what is one to make of the reasoning of the other members of the Court? While Lord Hodge conceded that there was a ‘strong argument’ that, in substance, clause 5.1 was a primary obligation,67 he formed the view that, even if it were correct to analyse it as a ‘secondary provision’, it was not an unenforceable penalty. The explanation cannot lie in the fact that he adopted a different test,68 but can such a conclusion be reached on the basis of the rationalisation of the test for a penalty advanced herein: namely, that clause 5.1 did not go beyond the performance interest of the claimant in the form of any conceivable actual loss? Lord Hodge gave six reasons for his conclusion that clause 5.1 was not a penalty, but the essence of his reasoning is much the same as that which led Lord Sumption to conclude that clause 5.1 was in reality a price clause: namely, that the restrictive covenants were intended to protect the value of the company’s goodwill. What was lost by any breach, whether minor or major, was the value of that goodwill: clause 5.1 was ‘addressing the disloyalty of a seller who was prepared in any way to attack the company’s goodwill’.69 While this perhaps leads more obviously to the conclusion that clause 5.1 was a price clause, it is possible to regard the enforcement of



65 Makdessi

(n 1) [75]. [75]. 67 ibid [270]. 68 ibid [293]; cf [152] (Lord Mance). 69 ibid [275] (emphasis added). 66 ibid

Penalties  109 clause 5.1 as affording the parties a generous margin in agreeing the remedy to protect their performance interest, without going beyond it. As Burton J observed at first instance,70 once the restrictive covenants are breached, the ‘wolf is in the fold’. What is meant by that observation is that the goodwill of the company would undoubtedly have been damaged, but by how much and to what extent, particularly in a case like Makdessi, where the defendant himself was so closely identified with, and integral to, the business? As Lord Sumption observed: ‘there are no juridical standards by which to answer that question satisfactorily’.71 But, as we have seen, it is precisely where there may be no juridical standards or no prospect of ‘forensic assessment’, or where the outcome of applying such standards and assessment is uncertain, that there is room for a generous margin. One might, in this respect, refer back to the One Step case, which was also concerned with the breach of restrictive covenants designed to protect the goodwill of the business acquired from the defendant. As acknowledged by Lord Sumption in that case, it is notoriously difficult to value loss of goodwill (‘the economic effect of the breaches is inherently incapable of being precisely estimated, and may be incapable of even imprecise measurement’72), but it was precisely because it was ‘inconceivable’ that the claimant had not suffered significant loss (ie that it had a performance interest to which it was entitled to protection) that the case was remitted on the basis that a hypothetical release fee might provide an appropriate technique for assessing the claimant’s loss. In Makdessi, the ‘release fee’ was not a matter of hypothesis; it had already been agreed by the parties, so that the only issue to be decided was whether it was unreasonable. It is clear from the decision in Makdessi that it was not, largely because it was a matter for the parties to agree. It is therefore possible to see how Lord Sumption and Lord Hodge may have arrived at the conclusion that clause 5.1 was not a penalty by two different routes and, indeed, one wonders how different they really are. At the risk of oversimplification,73 the price which is paid for the goodwill of a business is usually intended to reflect the value of what may roughly be described as its ‘earning power’, expressed as a capital sum on the date of acquisition. In Makdessi, the full price (x) was intended to reflect the value of the goodwill with the defendant’s continued loyalty and service; the reduced price payable in the event of withholding the last two instalments (n) was intended to reflect the value of the goodwill without the defendant’s loyalty and service. Whether n is viewed as an attempt to capture the potential loss of earnings on the basis of payment of the full price (x) or is viewed as an adjustment to the price (x – n) because the business will not generate those earnings really makes no difference. This may explain why Lord Sumption74 and Lord Hodge75 both made the point that, on the basis that clause 5.1 was enforceable, any additional damages would amount 70 Makdessi v Cavendish Square Holdings BV [2012] EWHC 3582 (Comm), [2013] 1 All ER 787 [43]. 71 Makdessi (n 1) [75]. 72 One Step (n 27) [105]. 73 Or of error. I am no economist. 74 Makdessi (n 1) [76]: ‘The real question is whether any damages have been suffered on account of the breach in circumstances where the price has been adjusted downwards on account of the same breach.’ 75 ibid [277]: ‘If an award of damages together with the price reduction which clause 5.1 effects involved double counting, I would expect the price reduction to be credited against the claim for damages.’

110  Edwin Peel to double recovery.76 It may also explain why Lord Sumption discussed clause 5.1 in terms of the claimant’s ‘legitimate interest’, notwithstanding his decision that it was a price clause. If n appears to exceed the performance interest, ie payment of x – n for the business without the defendant’s loyalty and service is not a proportionate or ‘appropriate alternative to performance’ to payment of x with the defendant’s loyalty and service, this is an indication not only that the clause is not really a price adjustment clause, so that the rule against penalties applies, but also that it is a penalty.77 Clause 5.6 may be dealt with more briefly. Again, it is discussed by Lord Sumption in terms of the claimant’s legitimate interest, but ultimately it is regarded as a primary obligation with an obvious commercial rationale, given the need to sever the connection between the claimant and the defendant in light of the defendant’s conduct, and to do so at a price which reflected the fact that the claimant would no longer have the benefit of the goodwill associated with the defendant’s loyalty and service. And again, it is just about possible, on the assumption that it is a secondary obligation subject to the rule against penalties, to conclude, as Lord Hodge does, that, while ‘harsh’, it was not ‘exorbitant’. In the terms in which the test has been interpreted in this chapter, it did not exceed the generous margin afforded to the injured party to determine in advance the extent of its potential loss and therefore extend beyond its performance interest. Of course, one has to acknowledge that passages in the speeches of their Lordships in the Makdessi case suggest that the ‘broader approach’ advocated therein goes even further than allowing for a generous margin in the protection of the performance interest, conceived of in terms of ‘loss’. In addition to Lord Sumption’s reference to an interest which extends ‘beyond compensation’,78 Lord Mance also observed that ‘commercial interests may justify the imposition upon a breach of contract of a financial burden which cannot either be related directly to loss caused by the breach or justified by reference to the impossibility of assessing such loss’.79 However, the difficulty with divorcing the test for a penalty from any conception of what the claimant may have lost is that it is not obvious what is being compared when asking if the agreed remedy is ‘out of all proportion’ or ‘exorbitant’; nor why the test should only be applied to clauses responding to a breach. What one is left with is what Lord Hodge described as a ‘value judgment’.80 That may be the only basis upon which one can explain the ParkingEye case, which concerned a fine of £85 imposed on a motorist who exceeded the limit of two hours’ free parking in a retail centre car park operated by the defendant but owned by a third party. The decision of the whole Supreme Court was that the rule against 76 There is also the question of the relevance of any injunctive relief to restrain any further breach; cf Day (n 7). The conclusion that the claimant was doing no more than protecting its ‘legitimate interest’, whether by way of a price adjustment (Lord Sumption) or a proportionate remedy (Lord Hodge), is based on the assumption that, the restrictive covenants having been breached, the claimant no longer had the benefit of any loyalty from the defendant: hence Lord Sumption’s reference to the fact that such loyalty is ‘indivisible’. Also, of course, the effect of clause 5.6 was to bring about ‘the severance of the connection between the Defaulting Shareholder and the Company’: Makdessi (n 1) [81] (emphasis added). 77 Summers (n 2) 108. 78 See the text to n 9 above. 79 Makdessi (n 1) [145]. 80 ibid [249], [259] and [287].

Penalties  111 penalties applied to the charge, but that it was not a penalty.81 One difficulty with this conclusion is that the defendant suffered no financial loss if the claimant breached the obligation to vacate the space within two hours; indeed, its business model required some motorists to breach this obligation in order to provide the income stream which allowed it to cover the costs of operating the car park and make a profit from its services. Lord Sumption concluded that the defendant had a ‘legitimate interest … which extended beyond the recovery of any loss’,82 but again it may be more accurate to say that it had an interest which extended beyond any pecuniary loss. In this regard, he referred to the interest of the third-party landowner who received a fee from the defendant for the right to operate the scheme and the interest of the retailers and their customers in ensuring a reasonable turnover of parking spaces, and rejected the submission that such third-party interest was irrelevant.83 This is, however, an approach to the relevant performance interest which appears to go beyond any previous case.84 For example, in both the Dunlop case and the Makdessi case, it was possible to identify a ‘loss’, albeit one which ‘does not admit of precise proof or calculation’.85 But what loss of any sort was caused to the defendant by the breach in ParkingEye? The decision that the charge did not amount to a penalty can, it seems, only be explained on the basis of the court’s willingness to recognise new forms of performance interest, as much as anything to uphold the parties’ agreement. That might be thought a case of the tail wagging the dog, or indicate that the real significance of the case is not what it decided in relation to the test for a penalty, but its recognition of new forms of non-pecuniary loss which might legitimately be regarded as the subject of judicial remedy.86 It may have been preferable to find that the rule against penalties did not apply on the basis that the charge was not payable on breach, but represented the price payable for parking in excess of two hours. That would avoid the obvious difficulty associated with a breach from which a party is intended to gain, but Lord Sumption concluded that, ‘on reflection’, it was not the correct analysis.87 One concern may have been that to characterise the charge as a ‘price’ clause would not only have prevented any application of the rule against penalties, but also the test of fairness under the Consumer Rights Act 2015,88 in any future case where the charge was found to be ‘out of all proportion’ and therefore extravagant and unconscionable.89 81 Lord Toulson observed that the argument that the clause was a penalty was ‘questionable’, but, having decided it was unenforceable as an unfair term under the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) (a dissenting judgment), he chose not to discuss the matter further: Makdessi (n 1) [316]. 82 ibid [99]. 83 ibid [99]. 84 As far as any third-party interest is concerned, while there are circumstances in which a contracting party may recover for a third party’s loss, it is far from clear that those circumstances were present in the ParkingEye case: see E Peel, Treitel: The Law of Contract, 15th edn (London, Sweet & Maxwell, 2020) paras 14.025–14.044. 85 Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 (HL) 20 (Lord Robertson). 86 cf Rowan (n 8) 170–71; Day (n 7) 226–27. 87 Makdessi (n 1) [94]. 88 See s 64(1)(b). 89 The answer to this concern may be to accept that neither the rule against penalties nor the 2015 Act applies, and to control the levying, and level, of the charge under such parking schemes by some other form of regulation.

112  Edwin Peel II. SCOPE

It was stated earlier that the test for a penalty advanced herein is consistent with the jurisdictional requirement that the parties’ agreement must amount to a ‘secondary obligation’, ie a clause which is triggered by, and intended to address the consequences of, the breach of a primary obligation. But this does not explain the jurisdictional requirement itself. Why should the courts review the parties’ bargain about the scope and extent of their secondary obligations, but not their primary obligations? In Makdessi, Lord Sumption justified the retention of the rule against penalties, in part, on the need to protect small businesses who fall outside the scope of the legislation designed to protect consumers,90 but that is an argument in favour of a more general power of review and does not explain why it should be confined to ‘secondary obligations’. The only member of the Court to address directly, and seek to defend, the distinction between a primary and a secondary obligation91 is Lord Mance, when he observed that:92 in most cases parties know and reflect in their contracts a real distinction, legal and psychological, between what, on the one hand, a party can permissibly do and what, on the other hand, constitutes a breach and may attract a liability to damages for … the breach.

It is not clear what exactly is meant by the reference to a ‘psychological’ distinction, but this chapter concludes with one suggestion. It is in the very nature of a secondary obligation that it is a contingent obligation which a contracting party may not be required to perform, whereas it is in the nature of a primary obligation that a contracting party will ordinarily expect to have to fulfil it. To give a very simple example: if D agrees to buy a widget from C which has a market value of £1 for £100, there is no contingency in D’s obligation to perform, and this may explain why freedom of contract is applied without qualification, save in cases where C’s consent has been vitiated in some way; if, however, D agrees to buy the widget for £1, but agrees that she will pay damages of £100 if she fails to accept and pay on the date agreed, her obligation is a contingent one and she may have agreed to it on the basis that she (optimistically) assumes that she will not be required to perform. Does this justify giving the court a power of review under which it can ensure that D has not agreed to an alternative performance which is ‘out of all proportion’ to the performance she will, primarily, have been expecting to provide?93 Even if it does, what then of the contract in which D has accepted a contingent primary obligation? This is a well-known problem for the scope of the rule against penalties. Again, to give a simple example: if D promises to complete a building by 1 January for C at a price of £10m, but also promises that for each week that completion is late she will pay C the sum of £100k, the rule against penalties may be applied to the latter promise because it amounts to a secondary obligation triggered by the 90 Makdessi (n 1) [38]. 91 It was largely addressed by Lord Sumption when discussing the decision of the High Court of Australia in the Andrews case: see below. 92 Makdessi (n 1) [130]. 93 cf the debate about the power to review ‘exception clauses’: B Coote, Exception Clauses (London, Sweet & Maxwell, 1964).

Penalties  113 breach of the promise to complete by 1 January; if, however, D promises only to construct the building for a price which depends upon the date of completion, eg £10m if completed by 1 January, £9.9m if completed by 8 January, and so on, the rule against penalties does not apply because D is only ever required to perform the primary obligation to construct the building. And yet, in both cases, D has promised to forfeit £100k per week on a contingent basis, ie depending on the date of ­completion. This problem was not lost on the Court in Makdessi. Having decided that clause 5.1 was a price adjustment clause, Lord Sumption observed:94 We do not doubt that price adjustment clauses are open to abuse, and if clause 5.1 were a disguised punishment for the Sellers’ breach, it would make no difference that it was expressed as part of the formula for determining the consideration. But before a court can reach that conclusion, it must have some reason to do so.

This passage is not free from difficulty. For example, how can the question posed of whether the clause is ‘a disguised punishment for the Seller’s breach’ even arise? The solution to this apparent circularity may lie in a point which has already been considered above. We saw that, notwithstanding the finding that clause 5.1 was a primary obligation, Lord Sumption went on to discuss the claimant’s ‘legitimate interest’ in the observance of the restrictive covenants, when this appears only to be relevant if the rule applies and it is necessary to apply the test. This led to the suggestion that this was done to inform the decision whether clause 5.1 should be regarded as a primary obligation. In other words, on the hypothesis that the test applies, if the alternative (contingent) performance would be regarded as out of all proportion to the primary performance (a ‘disguised punishment’), the clause would be subject to the rule against penalties and would, by definition, amount to a penalty.95 This solution is itself not free from difficulty. It too suffers from a degree of circularity in that the test for a penalty is used to determine the scope of the rule which leads to the application of the test. It also leads to the conclusion that any contingent primary obligation may be assessed to see if it amounts to a penalty,96 but that possibility already exists by virtue of the Court’s recognition that the scope of the rule cannot be determined solely by the drafting of the parties and must be a question of substance over form.97 III. CONCLUSION

With a rather neat symmetry, the two leading decisions on the power to strike down penalties, Dunlop and Makdessi, were decided exactly 100 years apart. The latter 94 Makdessi (n 1) [77]. 95 See the text to n 77 above. 96 This was said by the Court (n 1) [42] to be one of the difficulties with the decision of the High Court of Australia in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205, in which the jurisdictional requirement of a prior breach was rejected. 97 This, in turn, means that, in practice, there may not be that much difference between the approach to jurisdiction of the Supreme Court in Makdessi and of the High Court of Australia in Andrews: see Summers (n 2) 102.

114  Edwin Peel has been welcomed for making it ‘less likely that that power will be exercised in the context of commercial contracts’.98 This chapter submits that this has been achieved by adopting a broader understanding of the test, which is still fundamentally the same: the parties can agree a remedy which allows them a generous margin when compared to the limitations which might be imposed on any judicial remedy, but they cannot impose a remedy beyond that which could conceivably be awarded by the courts. On this basis, it may be more accurate to say that what really explains the decisions in Makdessi and ParkingEye is less a broader understanding of the test for a penalty and more a broader recognition of what constitutes loss.



98 Burrows

(n 6) 390.

7 The Contract/Tort Borderline JANET O’SULLIVAN

[T]he general rule [is] that there is no duty in tort to avoid causing a purely economic loss unless it is parasitic upon some injury to person or property. The reason for the general rule is that, contract apart, common law duties to avoid causing pure economic loss tend to cut across the ordinary incidents of competitive business, one of which is that one man’s gain may be another man’s loss. The successful pursuit of commercial self-interest necessarily entails the risk of damaging the commercial interests of others. Identifying the point at which it transgresses legitimate bounds is therefore a task of exceptional delicacy. – JSC BTA Bank v Ablyazov and another (No 14)1

I. INTRODUCTION

In his first Reith Lecture, Lord Sumption said: public expectations are a powerful motor of legal development. Judges do not decide cases in accordance with the state of public opinion. But it is their duty to take account of the values of society which they serve. Risk-aversion has become one of the most powerful of those values.2

He was referring to the risks of physical harm, but the same might be said about negligence claims for pure financial loss. Claims against advisers, and other professionals who provide input to inform claimants’ financial decisions, are growing, in volume and value.3 Traditionally, the chance of benefit and the risk of loss on a financial transaction were allocated by making contracts. Tort protected person and property; in the purely

1 JSC BTA Bank v Ablyazov and another (No 14) [2018] UKSC 19, [2018] 2 WLR 1125 [6] (Lord Sumption). 2 Now published as J Sumption, Trials of the State: Law and the Decline of Politics (London, Profile Books, 2019) 17. 3 The website professionalindemnity.co.uk discusses the growth of the sector, and cites a negligence claim of £1.6 billion filed in 2013 against a major accountancy firm, based on the auditing of a sub-prime lender, which was settled on confidential terms just before its scheduled hearing.

116  Janet O’Sullivan financial realm, only deceit was actionable. Then came the seminal decision in Hedley Byrne & Co Ltd v Heller & Partners Ltd recognising the possibility of a tortious duty of care for pure financial loss in limited commercial or professional circumstances.4 This is tort operating close to the contract borderline – the parties’ relations must be ‘akin’ or ‘equivalent’ to contract – indeed, there can be concurrent liability in tort where there is an appropriate contract between the parties.5 In these cases, the courts must decide when the financial risks inherent in a transaction can be shifted to a defendant, whose input was negligent, and when the claimant must retain those risks itself. Does the answer differ in ‘concurrent’ and ‘equivalent to contract’ cases? This chapter started by quoting Lord Sumption’s statement of general principle about the contract/tort borderline in Ablyazov, but these issues are raised most acutely in two seminal negligence decisions of Lord Sumption on pure financial loss: one involving concurrent liability in contract, the other purely tortious.6 The facts were very different, but there are similarities. Both claimants were attempting to shift their financial loss on a risky transaction to a defendant who had some input into its decision to proceed; both claimants failed. This chapter addresses each case in turn. II.  HUGHES-HOLLAND v BPE SOLICITORS

A. Facts Peter Little was a builder and developer who operated through a company, High Tech; Richard Gabriel was his old friend and, though in semi-retirement, an ‘astute businessman’ and property investor. In 2007, the two men met in a pub. Little informed Gabriel that he wanted to borrow £200,000 in connection with redeveloping a disused heating tower called Building 428. Gabriel assumed that the £200,000 would be used to finance the development project. When Gabriel visited the site, he formed the view that Building 428 was worth about £150,000 and once developed would be worth more than £400,000. Taking Little’s estimate of development costs at face value, he decided to lend the £200,000. Little’s intentions differed from Gabriel’s assumptions.7 In fact, Building 428 was owned by High Tech and was subject to a charge securing a bank loan of £150,000; Little intended to use the £200,000 to fund the sale of the building to a special purpose vehicle, enabling High Tech to repay the bank loan and discharge the charge, while the balance was to be used to meet High Tech’s VAT liability.

4 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL), followed shortly afterwards by the Misrepresentation Act 1967. 5 Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (HL). 6 Hughes-Holland v BPE Solicitors [2017] UKSC 21, [2018] AC 599; Playboy Club London Ltd v Banca Nazionale del Lavoro SpA [2018] UKSC 43, [2018] 1 WLR 4041. 7 At first instance, Gabriel also sued Little in, inter alia, deceit, but this claim failed on the basis that dishonesty was not established: see Gabriel v Little [2012] EWHC 1193 (Ch) [76]–[78] (Robert Englehart QC sitting as a Deputy High Court Judge). The Court of Appeal dismissed his appeal in Gabriel v Little [2013] EWCA Civ 1513. There was no appeal to the Supreme Court.

The Contract/Tort Borderline  117 The defendant solicitors (BPE) represented Gabriel in connection with the loan.8 Little told BPE what was actually proposed to be done with the money, but at no time did BPE confirm or clarify with Gabriel whether this represented his instructions.9 By an unfortunate coincidence, BPE used an inappropriate standard form facility letter that stated that the loan moneys would be made available as a contribution to the costs of the development and that this was the purpose of the loan, thereby reinforcing Gabriel’s incorrect understanding of the deal. The transaction completed in December 2007, but the project was a total failure. No construction work or development was ever carried out and no repayments were made under the facility agreement. In 2009, Gabriel took steps to exercise his power of sale, but, as Lord Sumption explained:10 Building 428 was on any view an unattractive investment prospect. It was an old and run-down disused heating tower. The ground was contaminated by hydrocarbons, and to comply with the conditions of the two planning permissions, it would have been necessary to spend about £30,000 on decontamination before any development could start. The Judge recorded the view of the auctioneers … that it would be a difficult lot to sell … In their opinion, the building was in an unattractive location for a developer, likely to have high development costs and unlikely to attract much interest.

The auctioneers’ opinion was borne out by the result of the auction: the property was sold in July 2010 at auction for only £13,000, which was consumed by the expenses of sale. Gabriel recovered no part of the loan, and was subsequently declared bankrupt. Gabriel sued (inter alia) BPE for negligence. The trial judge awarded substantial damages,11 but the Court of Appeal reduced the damages to nil, on the basis that, even if the £200,000 had been spent redeveloping the property, the project would not have been viable and Gabriel would still have lost all his money.12 Gabriel’s trustee in bankruptcy appealed to the Supreme Court. B. Decision The Supreme Court dismissed the appeal, with the sole judgment given by Lord Sumption. Lord Sumption relied on the famous principle set out by Lord Hoffmann in South Australia Asset Management Corp v York Montague Ltd (SAAMCO):13 8 The circumstances surrounding the instruction were not a model of best practice. The judge found that the initial contact with BPE came via a voicemail from Little. No written record existed of the terms of Gabriel’s instructions, nor did Mr Spencer (the solicitor acting at BPE) ever send Gabriel a ‘client care’ letter or any other communication referring to his instructions. 9 The judge held that Mr Spencer ‘simply assumed that what he had been told in Mr Little’s voicemail, and was shortly thereafter told in writing by [High Tech’s solicitor] was what all parties, including Mr Gabriel, wanted’. In the Court of Appeal, Gloster LJ said she had ‘considerable difficulty’ accepting the judge’s finding of primary fact that Gabriel did not know the intended purpose of his loan, but there was no challenge to the judge’s finding by BPE: Gabriel v Little (n 7) [69]. 10 BPE (n 6) [18]. 11 He awarded damages ‘subject to contributory negligence and mitigation’, but seems to have considered that Gabriel acted reasonably and that neither applied. 12 Gloster LJ further suggested, obiter, that if any loss at all had flowed from BPE’s breach of duty, Gabriel’s own negligence was responsible for at least 75% of it. 13 South Australia Asset Management Corp v York Montague Ltd (SAAMCO) [1997] AC 191 (HL) 214. Jonathan Sumption QC appeared for York Montague. The House of Lords famously held that a negligent

118  Janet O’Sullivan I think that one can to some extent generalise the principle upon which this response[14] depends. It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them. The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong.

Lord Sumption clarified this distinction. Although the labels ‘information’ and ‘advice’ are not descriptively adequate, the nature of the distinction is clear and principled:15 In cases falling within Lord Hoffmann’s ‘advice’ category, it is left to the adviser to consider what matters should be taken into account in deciding whether to enter into the transaction. His duty is to consider all relevant matters and not only specific factors in the decision … the adviser is responsible for guiding the whole decision-making process … If the adviser has a duty to protect his client (so far as due care can do it) against the full range of risks associated with a potential transaction, the client will not have retained responsibility for any of them … By comparison, in the information category, a professional adviser contributes a limited part of the material on which his client will rely in deciding whether to enter a prospective transaction, but the process of identifying the other relevant considerations and the overall assessment of the commercial merits of the transaction are exclusively matters for the client … It follows that even if the material which the defendant supplied is known to be critical to the decision to enter into the transaction, he is liable only for the financial consequences of it being wrong.

Following this reasoning, Lord Sumption overruled two High Court decisions which had been categorised as advice cases and in which solicitors were held liable for all

valuer who had overvalued property for security, which then fell in value when the market crashed, was not liable for all the losses suffered by the bank which relied on that valuation, since some would have been incurred even if the valuation had been correct (with the extent of the overvaluation operating de facto as a cap). 14 The intuitive response to Lord Hoffmann’s famous mountaineer’s knee example, that the negligent doctor should not be liable for an injury incurred mountaineering which had nothing to do with the knee, because that harm would have been incurred even if the information provided by the doctor had been correct. ‘The doctor was asked for information on only one of the considerations which might affect the safety of the mountaineer on the expedition. There seems no reason of policy which requires that the negligence of the doctor should require the transfer to him of all the foreseeable risks of the expedition.’ 15 BPE (n 6) [40].

The Contract/Tort Borderline  119 foreseeable losses.16 Although their negligence involved a matter of critical significance to the lender,17 the solicitors were still not assuming responsibility ‘for identifying all the matters relevant to the lender’s decision or advising them whether to proceed’, so the cases fell within the information category. This overruling is welcome,18 removing a problematic source of litigation in professional negligence cases and endorsing the autonomy and thus responsibility of commercial clients for their own financial decisions. On the facts of BPE, it was similarly irrelevant that Gabriel would not have entered into the transaction ‘if he had known the use which Little proposed to make of the loan moneys’.19 It was an ‘information’ case; BPE were not legally responsible for Gabriel’s commercial decision to lend money to Little, only for ‘confirming his assumption about one of the factors in his assessment of the project’, and were therefore only liable for loss attributable to that assumption being wrong. If his assumption had been right (that the £200,000 was going towards funding the development project), Gabriel would still have lost all his money, so his claim failed entirely:20 the expenditure of £200,000 would not have enhanced the value of the property. The development would have been left incomplete,[21] the loan unpaid and the property substantially worthless when it came to be sold into a depressed market under the chargee’s power of sale. None of the loss … was within the scope of BPE’s duty. None of it was loss against which BPE was duty bound to take reasonable care to protect him. It arose from commercial misjudgements which were no concern of theirs.

When decided, SAAMCO was heavily criticised by Jane Stapleton as adopting an incorrect approach to determining the scope of the defendant’s duty: ‘What makes the valuation wrongful is that it is careless, not that it is not true.’22 Two decades on, this criticism remains as compelling as ever, but in practice SAAMCO seems to operate with tolerable stability and certainty. This will certainly be assisted by Lord Sumption’s commercially focused, clear judgment in BPE, which also clarifies the financial operation of the SAAMCO ‘tool’23 and the burden of proof, holding that it is for the claimant to prove that his loss fell within the scope of the duty he was owed: ‘It is an essential part of the claimant’s case that he was owed a relevant duty.’24 Rather than consider these issues further, this chapter will take a broad look at BPE and SAAMCO from the perspective of the contract/tort borderline.

16 Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 582 (Ch); Portman Building Society v Bevan Ashford (a firm) [2000] PNLR 344 (CA). 17 That would have revealed that the borrower was dishonest. 18 Though, as Evans points out, the question remains how to value ‘information’ that would have revealed dishonesty in cases like Fancy & Jackson: H Evans, ‘Solicitors and the Scope of Duty in the Supreme Court’ (2017) Professional Negligence 193. 19 BPE (n 6) [7]. 20 ibid [55]. 21 Lord Sumption noted, for example, that even Gabriel’s own expert quantity surveyor estimated the costs of the development at £667,804.73, not including fees. All the figures given at trial ‘implied a large loss’ had the project been completed. 22 J Stapleton, ‘Negligent Valuers and Falls in the Property Market’ (1997) 113 LQR 1, 3. 23 Evans (n 18) explores a number of remaining difficulties – in particular, how the test works where no representation or advice was given. 24 BPE (n 6) [53].

120  Janet O’Sullivan C.  An Aside: Pre-contractual Misrepresentation The first point to note, in passing, is that the definition of an ‘information’ case (the defendant providing a limited part of the material on which the claimant relies) might be said to be more apposite to representations made by a potential counterparty in arms’ length pre-contractual negotiations than advice given by a professional adviser. Yet, the SAAMCO principle does not apply to an action for damages for fraud or for negligent misrepresentation under section 2(1) of the Misrepresentation Act. In the fraud case of Twycross v Grant,25 Cockburn CJ gives an example, which today we would recognise as following the SAAMCO ‘information’ pattern, in which the loss would have been incurred even if the representation had been true: If a man buys a horse, as a racehorse, on the false representation that it has won some great race, while in reality it is a horse of very inferior speed, and he pays ten or twenty times as much as the horse is worth, and after the buyer has got the animal home it dies of some latent disease inherent in its system at the time he bought it …

Lord Steyn cited this example in Smith New Court Securities Ltd v Citibank NA when awarding full damages where, as a result of the defendant’s fraud, the claimant was locked into a position and later incurred further loss for a reason unrelated to the fraud.26 Although justifiable for fraud, this allocation of risk is indefensible under section 2(1), where the defendant may not even have been negligent when making the misrepresentation, merely unable to discharge the section’s reversed burden of proof, yet this is the effect of the ‘fiction of fraud’ embedded in the section.27 Leggatt J pointed this out in Yam Seng Pte Ltd v International Trade Corp Ltd, where the defendant represented in contractual negotiations that it had licence agreements in place, when in fact they were not obtained until later; the delay did not cause the claimant any prejudice, but if it had known the true position it would not have contracted:28 In a case of negligent misrepresentation at common law, ITC could in these circumstances rely as a defence on the principle which limits damages to the loss attributable to the representation being untrue: see SAAMCO … That limitation does not apply, however, where the misrepresentation is fraudulent … On the authority of Royscot Trust, therefore, the limitation also does not apply where damages are awarded under s 2(1).

A pre-contractual misrepresentation claim might be pleaded in common law negligence, where a Hedley Byrne duty of care is owed,29 but (unlike concurrent contract and tort claims) the claimant will invariably prefer to take advantage of the more favourable statutory claim. The anomalous fiction of fraud should be revisited by the Supreme Court.

25 Twycross v Grant (1877) 2 CPD 469 (CA). 26 Smith New Court Securities Ltd v Citibank NA [1997] AC 254 (HL). 27 Royscot Trust Ltd v Rogerson [1991] 2 QB 297 (CA). 28 Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), [2013] 1 All ER (Comm) 1321 [207]. 29 Esso Petroleum Co Ltd v Mardon [1976] QB 801 (CA).

The Contract/Tort Borderline  121 D.  Contract or Tort? Returning to the main issue, one oddity of BPE is that the claim was brought ‘in negligence’. Although the evidence was unsatisfactory,30 the case proceeded on the assumption that BPE acted as Gabriel’s solicitor pursuant to an implied contract, yet breach of contract was not pleaded, even though the contractual limitation period had not expired. There is nothing improper about this pleading, given concurrent liability, but it made me reflect on the juridical basis of SAAMCO, as applied in BPE. The SAAMCO enquiry about the ‘scope’ of the defendant’s duty is paradigmatically a feature of professional negligence cases. Professional negligence cases involve concurrent liability in contract and tort, but the tortious duty of care is derived from and coterminous with the contractual obligation of reasonable care that is invariably part of the professional retainer.31 For Lord Browne-Wilkinson in Henderson: the nature and terms of the contractual relationship between the parties will be determinative of the scope of the responsibility assumed and can, in some cases, exclude any assumption of legal responsibility to the plaintiff for whom the defendant has assumed to act.32

It is the retainer that determines what the professional is obliged to do, and the implied term that requires him to do it with reasonable care.33 The SAAMCO principle was similarly derived from the parties’ retainer:34 The relationship between the parties also gives rise to a concurrent duty in tort … But the scope of the duty in tort is the same as in contract … The contractual duty to provide a valuation and the known purpose of that valuation compel the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.

Yet SAAMCO is still regularly described as a tort principle. For example, Floyd LJ said in Wellesley Partners LLP v Withers LLP:35 although there are clear parallels between the contractual ‘assumption of responsibility’ analysis of Lord Hoffmann and Lord Hope in The Achilleas and the ‘scope of duty’ analysis in the SAAMCO case … they cannot be regarded as the same for all purposes, not least because the first depends on the individual circumstances surrounding the making of a contract and the second on the purpose of the rule imposing the tortious duty.

30 See nn 8–9 above. 31 At common law and by statute: Supply of Goods and Services Act 1982, s 13; Consumer Rights Act 2015, s 49. 32 Henderson (n 5) 206. 33 ‘The extent of his duties depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do’: Midland Bank Trust Co Ltd v Hett Stubbs & Kemp [1979] Ch 384 (Ch) 402 (Oliver J). 34 SAAMCO (n 13) 211–12. 35 Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146, [2016] Ch 529 [74].

122  Janet O’Sullivan In my view, despite its tortious language, SAAMCO makes sense as a contractual principle, based on the agreed ambit of the retainer. It is concerned with a particular contractual pattern, as Lord Sumption’s reasoning makes clear: where the defendant has undertaken to provide input, to enable the claimant to make an autonomous, informed decision. Despite Lord Hoffmann’s reliance on tort authorities and suggestion in SAAMCO that ‘in the case of tort, it will similarly depend upon the purpose of the rule imposing the duty’,36 mainstream tort authorities are not analogous to the SAAMCO autonomous decision-making issue. In mainstream tort cases, the parties are strangers, and there is no agreement or exchange containing the obligations undertaken by the defendant for the court to construe.37 So, when the courts consider the ‘scope’ of a proposed duty of care in such cases, they are generally considering whether any duty of care is owed to this particular claimant at all, or merely rebranding remoteness value judgements in the language of scope of the duty.38 The SAAMCO enquiry is materially different. This is clear in BPE and other recent SAAMCO authorities. Tort reasoning rarely features; the contract determines what the defendant has and has not undertaken responsibility for, and therefore what the implied obligation of reasonable care attaches to. E.  Focus on Retainer and Implied Terms First, the enquiry focuses principally on the express contractual terms in a single document, or from correspondence or discussions between the parties. A general retainer to advise on the all aspects of a transaction is rare,39 but occasionally it is the appropriate interpretation of what has been agreed. One example was Aneco Reinsurance Underwriting Ltd (in liquidation) v Johnson & Higgins Ltd,40 concerning the obligations undertaken by insurance brokers. Lord Lloyd said:41 After reviewing the letters and telexes passing between the parties, and the oral evidence of … the brokers and … the insurers, Evans LJ [in the Court of Appeal] concluded that the duty went wider than a simple duty to inform; it included a duty to advise … In the course

36 SAAMCO (n 13) 212. 37 NHS medical cases are, of course, tortious, but closely resemble contractual cases in the giving of professional advice to a claimant, as per the mountaineer/doctor example. The application of SAAMCO here is outside the scope of this chapter. 38 cf the discussion of The Wagon Mound (No 1) [1961] AC 388 (PC) by Lord Hobhouse in Platform Homes Loan Ltd v Oyston Shipways Ltd [2000] 2 AC 190 (HL). The question is more meaningful when the tort claim depends on an underlying statutory duty owed by the defendant, because there is at least an external text whose scope and purpose can be interpreted, though, again, this often concerns the different issue of whether the defendant owes a duty at all to the claimant, as in Caparo Industries plc v Dickman [1990] 2 AC 605 (HL). It is ironic that the seminal case usually cited as the leading authority about the scope of a statutory duty, Gorris v Scott (1874) LR 9 Ex 125, is a contractual dispute, viz Gorris’s unsuccessful attempt to argue that Scott had breached an implied term to comply with the contagious diseases statutory duty, in the face of an express term in their contract that the sheep were on board at Gorris’s risk. 39 See Haugesund Kommune v Depfa ACS Bank [2011] EWCA Civ 33, [2011] EWCA Civ 33. 40 Aneco Reinsurance Underwriting Ltd (in liquidation) v Johnson & Higgins Ltd [2001] UKHL 51, [2001] 2 All ER (Comm) 929. 41 ibid [17].

The Contract/Tort Borderline  123 of his cross-examination [the broker] agreed that he was advising [the insurers] as to the state of the market. In the light of these and other passages Evans LJ said that it would be ‘highly artificial’ to derive from the evidence any suggestion that [the broker] was not advising [the insurer] what course to take. I agree.

In contrast, Ward LJ’s reliance in the Court of Appeal on tort reasoning to determine the scope of the broker’s duty was rejected.42 Similarly, in Various Claimants v Giambrone & Law,43 an Italian lawyer registered as a UK solicitor represented UK clients buying off-plan apartments in southern Italy. Amongst other breaches, he negligently failed to secure compliant guarantees for their deposits before paying them out to the developers (with whom he was connected). The development was never completed and was eventually seized by Italian authorities, who suspected it was a front for mafia and IRA money laundering (a suspicion that has never in fact been proven); the clients lost their deposits. On a SAAMCO point, Jackson LJ reviewed the retainer letter and documentation passing between lawyer and clients, and relied explicitly on their terms to conclude that the transaction was unlike a ‘conventional conveyancing situation’. In his view, the ‘documents which I have referred to … show that Giambrone were (albeit imperfectly) guiding the whole decision-making process’.44 Secondly, the contractual language of implied terms helps to determine whether or not a professional has assumed responsibility for a particular aspect of a transaction. In Manchester Building Society v Grant Thornton UK LLP,45 the defendant firm of accountants (GT) negligently advised the claimant building society (MBS) that swap transactions could benefit from favourable accounting treatment. If MBS had received accurate advice, it would not have entered into the swaps. Some years later, the error came to light and MBS disposed of the swaps at their market value, incurring large losses. The Court of Appeal held that this was an ‘information’ case: GT was not liable for all of MBS’s losses from having entered the swaps, merely for the financial consequences of its advice on the accountancy treatment being wrong.46 In so deciding, Hamblen LJ expressly adopted the judge’s language: I do not consider that the objective bystander, or indeed the parties themselves, viewing the matter in 2006 would have concluded that the Defendant had assumed responsibility for the Claimant ‘being out of the money’ on the swaps in the event of a sustained fall in interest rates.47 42 ibid [41]: ‘Ward LJ considered that the correct approach is to ask “for what consequences it is just, fair and reasonable between the parties that the brokers should be held responsible”. I would prefer not to adopt this approach. It is a deus ex machina; it will tend to lead to formulaic reasoning. It is best avoided. On the other hand, the reasoning of Evans LJ is entirely consistent with principle’ (Lord Steyn). 43 Various Claimants v Giambrone & Law [2017] EWCA Civ 1193, [2018] PNLR 2. 44 ibid [82]. It is not immediately clear why the claimants would not have succeeded in recovering the amount of their deposits in damages, even if the case was not categorised as an advice case, though there is a hint that even compliant guarantees might not have paid out in the circumstances that arose. The conclusion is controversial: see PS Davies, ‘Equitable Compensation and the SAAMCO Principle’ (2018) 134 LQR 165, discussed further below. 45 Manchester Building Society v Grant Thornton UK LLP [2019] EWCA Civ 40, [2019] 1 WLR 4610. Permission to appeal to the Supreme Court has been granted. 46 Which on the facts was nil, because MBS had not proved that the losses would not have been suffered if the advice had been correct; the swaps would then have been retained, not sold (the sale realised their market value on that date, but it did not cause loss). 47 Manchester Building Society (n 45) [37].

124  Janet O’Sullivan F.  Analogous Authorities One of the criticisms levied by Stapleton at SAAMCO was that it adopts a formulaic, mechanical test, when the court should be making ‘a judgment about the extent of legal responsibility, a judgment which one hopes will explicitly evaluate the often complex concerns which go to produce the boundaries placed on civil obligations’.48 She further argues that, as a result of the retreat behind a mechanical test, there was: no discussion of the profoundly important and difficult policy decisions raised by the case. No consideration was given by Lord Hoffmann, for example, to the question of whether it would be appropriate to apply his cap to the losses incurred by a consumer lured into the housing market for the first time as a result of relying on a valuation the carelessness of which is only discovered once the property market starts to collapse and the consumer seeks to sell the property.

It remains true that the ‘information’ conclusion that a valuer is liable only to the extent of the overvaluation operates as an almost invariable rule,49 though in theory the valuer could undertake a broader role under the contract.50 In solicitors’ SAAMCO cases such as BPE, however, the focus on the express and implied terms of the retainer helps resolve one aspect of the policy issues referred to by Stapleton,51 because equivalent questions regularly arise in the simpler context of a solicitor who has failed to give a particular sort of advice, which would have prevented the client from suffering loss. The solicitor will only be in breach of duty for not doing so if, as a matter of its express or implied terms, the retainer required him to: the implied term of reasonable care follows the contract. Conversely, a court may have to determine whether a solicitor was obliged to carry out particular work if, having done so, the client declines to pay the bill. The significance of these simpler pattern cases to the SAAMCO issue is apparent. In Hurlingham Estates Ltd v Wilde & Partners,52 a commercial property partner advised on and structured a property transaction in a manner that triggered tax liability, which could have been avoided by a competent tax lawyer, causing loss to his client. His defence was that he had not been instructed to give tax advice, an area of which he was entirely ignorant, but that the client had agreed a limited retainer excluding tax advice. Lightman J emphatically disagreed.53 He held that there was no 48 One observation was that Lord Hoffmann provided no rationale for why loss caused by the market fall was recoverable, in cases where it was less than the difference between the ‘accurate’ valuation and the negligent valuation. There is an interesting link here to Robertson’s discussion in ‘The Basis of the Remoteness Rule in Contract’ (2008) 28 Legal Studies 172, 192 that the degree of the defendant’s culpability should affect whether loss is considered too remote. 49 BPE (n 6) [44] (Lord Sumption). 50 See J Powell (ed), Jackson & Powell on Professional Liability, 8th edn incorporating 3rd supplement (London, Sweet & Maxwell, 2016 and 2019) para 10.200: ‘In the absence of express contractual terms most, if not all, negligent valuation cases will be classified as negligent information cases.’ 51 Though the technical problem of how to translate the ‘information’ conclusion into a mathematical tool remains. 52 Hurlingham Estates Ltd v Wilde & Partners [1997] 1 Lloyd’s Rep 525 (Ch). 53 In the most excoriating terms, including ‘I find it difficult to comprehend how a solicitor possessed of no real knowledge of tax law can be allowed to occupy such a position, at any rate in a case such as the present where he does not have the necessary tax law back-up; certainly it must be questionable whether he should be allowed to do so if any regard is to be paid to the safety of the public’: ibid 526.

The Contract/Tort Borderline  125 agreement limiting the solicitor’s retainer. He further concluded that, having regard to the terms of his retainer in all the circumstances,54 an obligation to give tax advice should be implied. The question of whether a solicitor is obliged to advise on the broader commercial wisdom of a transaction has arisen regularly,55 mirroring the SAAMCO information/ advice enquiry. To determine whether a solicitor is, unusually,56 required to give commercial advice, the focus is on the retainer and the precise instructions, but construed more or less broadly depending on the sophistication of the client.57 Jackson LJ gave general guidance in Minkin v Landsberg that, in determining what advice is reasonably incidental to the work agreed in the retainer, it is necessary to have regard to all the circumstances of the case, including the character and experience of the client:58 An experienced businessman will not wish to pay for being told that which he/she already knows. An impoverished client will not wish to pay for advice which he/she cannot afford. An inexperienced client will expect to be warned of risks which are (or should be) apparent to the solicitor but not to the client.

This line of cases does not make the SAAMCO value judgement about whether a professional is held wholly responsible for the claimant’s decision to enter a transaction uncontroversial; there is often room to argue about the conclusion in unusual cases.59 But it does provide useful, analogous guidance. G.  Relationship with Transfield Returning to BPE itself, Lord Sumption’s conclusion that BPE did not assume overall responsibility for Gabriel’s decision to lend the money to Little was based, as ever, on the underlying retainer:60 ‘Their instructions were to draw up the facility agreement and the charge, nothing more.’61 His conclusion was reinforced by the fact that the solicitor:62 54 ‘There was no reason or justification for Mr Rowe assuming that Hurlingham would be seeking any taxation advice on the transaction from its accountants or auditors or anyone else and Mr Rowe had no reason to believe that Hurlingham was possessed of any expertise in matters of taxation: everything was placed in Mr Rowe’s (apparently safe) hands’: ibid 530. 55 See, eg Clark Boyce v Mouat [1994] 1 AC 428 (PC); Reeves v Thrings & Long [1996] PNLR 265 (CA). 56 See, eg Neushul v Mellish Harkavy (1967) 2013 EG 67 (CA). 57 ‘An inexperienced client will need and will be entitled to expect the solicitor to take a much broader view of the scope of his retainer and of his duties than will be the case with an experienced client’: Carradine Properties Ltd v DJ Freeman & Co [1999] Lloyd’s Rep PN 483 (CA) 487 (Donaldson LJ). 58 Minkin v Landsberg [2015] EWCA Civ 1152, [2016] 1 WLR 1489. 59 For example, Davies (n 44) is critical of the ‘advice’ conclusion in Giambrone (n 43) as inconsistent with the thrust of Lord Sumption’s reasoning in BPE. He regards the conclusion as flimsy: ‘Jackson LJ pointed out that the claimants were buying properties in Italy with no knowledge of Italian law, but even if the properties had been in England it is not evident that many claimants would have much knowledge of English property law either.’ Davies is perhaps right that the conclusion was influenced by the merits, since the Solicitors’ Disciplinary Tribunal subsequently found Giambrone implicated in misconduct. 60 Despite the inadequacy of the instruction process (see n 8), the trial judge was able to conclude what the terms of BPE’s instructions were, and that they did not include advising on the commercial merits of the transaction. 61 BPE (n 6) [54]. 62 ibid [54].

126  Janet O’Sullivan did not know and did not need to know what had passed between Mr Gabriel and Mr Little, except that they had agreed upon a loan of £200,000 secured by a charge on Building 428. He knew nothing about the nature of the proposed development, its likely cost, the financial capacity of Mr Little to fund it without Mr Gabriel’s loan or the value of the property in its developed or undeveloped state.

It is interesting that this justification resembles the majority reasoning in Transfield for holding that the charterer was not liable for the shipowner’s losses on the following fixture, even though they were but for caused by the charterer’s breach, and were the natural and probable result of it. In Lord Hope’s words, ‘a party cannot be expected to assume responsibility for something that he cannot control and, because he does not know anything about it, cannot quantify’.63 If, as I have argued, SAAMCO as explained in BPE is a contractual principle, with the contract providing the content to which the implied obligation of reasonable care (and its concurrent tortious duty) attaches, what is the relationship between SAAMCO and Transfield? In the latter, Lord Hoffmann consciously adopted SAAMCO reasoning that, to determine the extent of the defendant’s liability, the starting point is to ask what he assumed responsibility for. Also in Transfield, Baroness Hale criticised this as an unacceptable generalisation of SAAMCO into mainstream contractual disputes:64 To incorporate it generally would be to introduce into ordinary contractual liability the principle adopted in the context of liability for professional negligence in SAAMCO … I am not immediately attracted to the idea of introducing into the law of contract the concept of the scope of duty which has perforce had to be developed in the law of negligence. The rule in Hadley v Baxendale asks what the parties must be taken to have had in their contemplation, rather than what they actually had in their contemplation, but the criterion by which this is judged is a factual one. Questions of assumption of risk depend upon a wider range of factors and value judgments … Although its result in this case may be to bring about certainty and clarity in this particular market, such an imposed limit on liability could easily be at the expense of justice in some future case. It could also introduce much room for argument in other contractual contexts.

Whether or not Baroness Hale’s concerns are justified, I think she is right to see Transfield as a generalisation from SAAMCO. This is not because SAAMCO is being imported from the law of tort. It is because it arises only in a very specific fact pattern, where the defendant has undertaken to provide some input, to enable the claimant to make an autonomous, informed decision. The normative issue is likewise specific: the need for (clear) rules to resolve whether and to what extent the claimant can allocate to the defendant the risks in its decision, depending on whether the defendant has undertaken any relevant obligation in relation to such risks (such as the tax implications of a transaction, its commercial merits or the likely trajectory of market movements). The relationship with Transfield raises another question. SAAMCO operates to rule out losses that would otherwise be recoverable because they are foreseeable.65 63 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48, [2009] 1 AC 61 [36]. 64 ibid [93]. 65 In the contractual sense under Hadley v Baxendale, which is the applicable remoteness test in a concurrent liability case, per Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146, [2016] Ch 529.

The Contract/Tort Borderline  127 Its raison d’être was to avoid saddling valuers with losses attributable to the fall in the property market, which were treated as foreseeable and thus not too remote on traditional reasoning.66 In information cases, losses which have been subjected to the SAAMCO analysis have all been of a foreseeable type, some or all of which are nonetheless excluded because they would have been incurred if the information or advice had been accurate.67 BPE follows this pattern, the trial judge having held that any loss resulting from the transaction was foreseeable.68 Lord Hoffmann suggested in SAAMCO that the normal remoteness rule applies in advice cases too:69 If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken.

This dictum has been followed in subsequent advice cases.70 A recent example is Halsall v Champion Consulting Ltd,71 where a tax adviser negligently advised the claimants to enter into a tax avoidance scheme that was later rejected by Her Majesty’s Revenue & Customs. The court held that the defendant had undertaken to guide the claimants through the decision-making process generally – and then applied the normal principles of causation and remoteness, concluding that the losses were foreseeable and not too remote.72 But is this exclusionary pattern conceptually essential? Lord Hoffmann’s dictum would suggest so, though it was uttered in a case where the relevant losses were foreseeable. There is little guidance elsewhere.73 The question is of significance if we recall our explanation of SAAMCO as a specific application of the contractual principle that was later generalised in Transfield. This is because Transfield might, exceptionally, operate in an inclusionary rather than an exclusionary way, as the Court of Appeal held in Siemens Building Technologies FE Ltd v Supershield Ltd:74 However, SAAMCO and Transfield are authority that there may be cases where the court, on examining the contract and the commercial background, decides that the standard approach would not reflect the expectation or intention reasonably to be imputed to the 66 In both authorities, the ‘scope of duty’ reasoning was employed in part because the relevant loss was greatly increased by dramatic market movements, exposing the inadequacy and bluntness of type/extent distinction. 67 Or, more correctly, had been given carefully. 68 BPE (n 6) [13]. 69 SAAMCO (n 13) 214 (emphasis added). 70 See, eg Aneco (n 40) [6]: ‘the question in this case is whether the brokers … are liable in negligence for the whole of the foreseeable loss suffered … as a consequence of entering into a treaty of reinsurance with an underwriter at Lloyds, or whether the recoverable loss is limited by the principle stated SAAMCO’. 71 Halsall v Champion Consulting Ltd [2017] EWHC 1079 (QB). 72 The defendant’s limitation defence ultimately succeeded. 73 There is some inconsistency between the first and second sentence of Hamblen LJ’s dictum in Manchester Building Society (n 45) [50]: ‘The SAAMCO principle provides such a filter in cases where foreseeable losses are suffered as a result of entering into a transaction in reliance on negligent advice and/ or information. Such losses will often satisfy the filters of effective causation and remoteness, but to be recoverable they must also satisfy the filter provided by the SAAMCO principle’ (emphasis added). 74 Siemens Building Technologies FE Ltd v Supershield Ltd [2010] EWCA Civ 7, [2010] 2 All ER (Comm) 1185 [43] (Toulson LJ).

128  Janet O’Sullivan parties. In those two instances the effect was exclusionary; the contract breaker was held not to be liable for loss which resulted from its breach although some loss of the kind was not unlikely. But logically the same principle may have an inclusionary effect. If, on the proper analysis of the contract against its commercial background, the loss was within the scope of the duty, it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances.

On the facts, the defendant, who had failed to ensure a functioning safety device when installing a sprinkler system, was held liable for unforeseeable losses:75 If those responsible fail [to ensure functioning safety device], and the unlikely happens, it should be no answer for one of them to say that the occurrence was unlikely, when it was that party’s responsibility to see that it did not occur.

Might the same logic apply to a professional adviser in an advice case who is ‘guiding the whole decision-making process’? Is the protective nature of that role an equivalent justification for disapplying the normal SAAMCO approach and holding the adviser liable for unforeseeable losses? In favour, one might argue that the ‘advice’ conclusion is extreme and involves the defendant assuming fully the claimant’s decision-making autonomy. As Lord Sumption put it in BPE:76 If the adviser has a duty to protect his client (so far as due care can do it) against the full range of risks associated with a potential transaction, the client will not have retained responsibility for any of them. The adviser’s responsibility extends to the decision.

If the client has not retained any responsibility for the transaction, this might suggest that unforeseeable as well as foreseeable risks should shift to the defendant. On the other hand, the defendant in Supershield undertook a strict contractual obligation, the very purpose of which was to protect the claimant from unforeseeable risks. A simpler example might be a defendant paid to install a lightning conductor whose breach of contract leaves the claimant unprotected when lightning strikes. The rationale of Supershield is that it would render the contractual obligation otiose if there was no liability if the relevant unforeseeable risk materialised. In contrast, for the professional adviser who assumes responsibility for ‘guiding the decision’, it is not true to say that the contractual obligation would be otiose if it did not extend to unforeseeable losses. Secondly, Lord Sumption properly qualifies his reference to the adviser’s duty to protect his client against the full range of risks by adding ‘so far as due care can do it’. Even in an advice case, the defendant will only be liable for the consequences of having breached the contractual implied term to take reasonable care. The defendant will not be in breach for failing to advise about unforeseeable risks, and so should not have to bear them if they materialise. On balance, then, it seems that the Supershield inclusionary logic should not apply in SAAMCO cases.



75 ibid

76 BPE

[44]. (n 6) [40].

The Contract/Tort Borderline  129 H.  Purely Tortious Cases Finally, having categorised SAAMCO as a contractual principle, where does that leave purely tortious Hedley Byrne cases?77 One conclusion would be that SAAMCO has no application to such cases.78 I do not think this is correct, not least because that would expose a defendant who gave gratuitous information or advice to greater liability than a defendant who charged for it. I would, however, expect to find that SAAMCO features only in tortious cases that are most closely ‘akin’ or ‘equivalent’ to contract, and that it is the ‘equivalent to contract’ aspects that feature when the court interrogates the scope of the duty. A trawl of reported authorities reveals that it is rare for the SAAMCO principle to arise in a purely tortious Hedley Byrne case. There are two significant examples, in both of which the relationship between the claimant and defendant is indeed very closely akin to contract. First, in Scullion v Bank of Scotland plc (t/a Colleys),79 the claimant wanted to invest in a residential ‘buy to let’ property. His mortgagee commissioned the defendant to value the property, and the claimant relied on that valuation. The defendant negligently overestimated the monthly rental value of the property as £2000, when the correct figure was £1050. The claimant bought the property in reliance, but could not make as much in rent as he was expecting and thus could not meet his mortgage repayments, eventually selling the property at a loss. The trial judge held the defendant valuer owed a duty of care to the claimant and, purporting to apply SAAMCO, awarded all the claimant’s losses on the transaction. The Court of Appeal allowed the defendant’s appeal, on the basis that he owed no duty of care to the sophisticated investor claimant, distinguishing Smith v Eric S Bush.80 But, obiter, it also criticised the judge’s application of SAAMCO. Only losses which flowed from the overvaluation of the rent should have been recovered, and not losses which would have been incurred if the rental figure was correct, such as void periods after one tenant vacated but before another moved in. They were risks retained by the claimant. Secondly, in Calvert v William Hill Credit Ltd,81 a compulsive gambler asked the defendant bookmaker to block his telephone betting account by requesting a self-exclusion agreement; the defendant agreed, but then failed to implement this agreement through its internal systems. The claimant continued to gamble and incurred vast losses with the defendant, and elsewhere. The trial judge dismissed the claim, even though he found that the defendant owed a duty of care to the claimant which it had breached, and that the claimant incurred losses that he would not have incurred but for the breach. Nonetheless, the judge asserted that, as a matter of common sense, the claimant would have continued to gamble with other ­book­makers, 77 In other words, where there is no concurrent contractual liability. 78 Stapleton (n 22) 5 seems to have made this assumption when SAAMCO was decided. 79 Scullion v Bank of Scotland plc (t/a Colleys) [2011] EWCA Civ 693, [2011] 1 WLR 3212. 80 Smith v Eric S Bush (a firm) [1990] 1 AC 831 (HL), where the claimant was purchasing a modest house at the bottom end of the housing market, so could not have afforded to commission a separate survey, as the valuer would have known. 81 Calvert v William Hill Credit Ltd [2008] EWCA Civ 1427, [2009] Ch 330.

130  Janet O’Sullivan and so would have sustained the loss in any event.82 The Court of Appeal agreed with the result, but not the judge’s reliance on common-sense reasoning. Since the defendant had only undertaken to block telephone betting, not protect the claimant from gambling generally, it was appropriate to apply SAAMCO. This led to precisely the same result as the trial judge had reached: the defendant should not be liable for losses that would probably have been incurred if it had done what it agreed to do and blocked the telephone betting.83 Both examples are very closely akin to contract. In Scullion, the defendant was actually subject to a professional retainer, but one made with the mortgagee, not the claimant (albeit for which the claimant indirectly paid). In Calvert, the conversation in which the defendant agreed to block the claimant’s account was regarded ‘as tantamount to a contract except for the absence of consideration’.84 There was an objective source, the documentation and procedures relating to self-exclusion agreements, from which to work out what the defendant had and had not assumed responsibility for. In Hedley Byrne scenarios more generally, the absence of a contractual source would not be fatal, but would, it is suggested, make the SAAMCO enquiry more difficult. The focus would still be on the exchanges that crossed the line between the parties. But SAAMCO suggests that, in a tort case, what the defendant has assumed responsibility for, and whether he is proffering information or advice, turns on ‘the purpose of the rule imposing the tortious duty’. What is the purpose of the rule in Hedley Byrne? This brings us to the second of Lord Sumption’s seminal decisions on pure financial loss on the tort/contract borderline. III.  PLAYBOY CLUB LONDON LTD v BANCA NAZIONALE DEL LAVORO SPA

A. Facts Hassan Barakat, a Lebanese resident, wished to gamble at the Playboy Club (the Club), a casino in London, and applied for a cheque-cashing facility for up to £800,000, naming his bankers as Banca Nazionale del Lavoro (BNL). The Club’s policy was to obtain a credit reference from a potential gambler’s bank for twice the amount of the facility requested. To preserve customer confidentiality, the Club arranged for an associated company, Burlington Services Ltd (Burlington), to send a ‘status enquiry request’ to BNL, on Burlington’s headed notepaper, without disclosing to BNL the purpose of the inquiry or that the reference was required for the Club’s

82 The unhelpful language of common sense obscures the fact that this reasoning is perfectly legitimate. It is just the counterfactual part of the factual causation enquiry – comparing what happened with what would have happened (in this case, what the claimant would have done) if the defendant had not been in breach. 83 On the counterfactual explanation, the SAAMCO issue does not arise. SAAMCO itself could have been decided in that way – if the bank had not lent the money on the particular overvalued property, it would inevitably have lent on another property that would have been subject to the same market fall. See J O’Sullivan ‘Negligent professional advice and market movements’ (1997) 56 CLJ 19. Surprisingly, the SAAMCO defendants did not plead this point. 84 Calvert (n 81) [26].

The Contract/Tort Borderline  131 benefit. BNL confirmed in writing, and confidentially, to Burlington that Barakat had an account with them and was trustworthy up to £1.6m in any one week. In fact, as was conceded, they had no reasonable basis for giving this reference: there were no funds in Barakat’s account; indeed, BNL held no account at all in his name until two days after reference was sent, which had a nil balance.85 Barakat gambled with chips acquired with cheques,86 drawn on BNL, but then returned to Lebanon and the cheques bounced. The Club suffered a total net loss of just over £800,000. It brought proceedings for damages in negligence against BNL, alleging that BNL owed a duty of care to the Club when providing its reference. The claim succeeded at trial,87 but BNL’s appeal to the Court of Appeal succeeded.88 The Club appealed to the Supreme Court. The leading judgment was given by Lord Sumption (with whom Lady Hale, Lord Reed and Lord Briggs agreed); Lord Mance gave a short concurring judgment. Lord Sumption’s judgment began:89 This case is about a credit reference negligently supplied by a bank for a person who subsequently defaulted. The facts are to that extent similar to those of Hedley Byrne … But there is a critical difference. The reference was relied upon not by the party to whom it was addressed but by that party’s undisclosed principal. The question at issue on this appeal is whether the bank is liable to the latter.

In summary, the appeal was unanimously dismissed. The ‘critical difference’ meant that BNL owed no duty of care to the Club, even though the Club relied on its reference: liability under Hedley Byrne is founded on the defendant’s voluntary assumption of responsibility to an identifiable (not necessarily identified) claimant.90 Indeed, that fundamental principle was conceded by counsel for the Club, who accepted that there was no evidence that BNL knew that its reference would be communicated to or relied on by anyone other than Burlington. Instead, the Club sought to distinguish the general principle on the basis that the Club was Burlington’s undisclosed principal,91 and that ‘the relationship was therefore “equivalent to contract”, because in contract the Club would have been entitled to declare itself and assume the benefit of the contract’.92 85 Predictably, evidence at the trial revealed fraud by the official who signed the reference, and who was subsequently dismissed for an identical fraud on another casino. The Club therefore commenced a separate action in deceit against BNL, pursuant to permission given by the Court of Appeal: Playboy Club London Ltd v Banca Nazionale Del Lavoro SpA [2018] EWCA Civ 2025. This must be ignored, with difficulty, when considering the negligence action in Playboy. 86 Which were counterfeit, but this is not mentioned in the Supreme Court’s presentation of the facts. 87 Playboy Club London Ltd v Banca Nazionale del Lavoro SpA [2014] EWHC 2613 (QB), with a 15% reduction for the Club’s contributory negligence. The trial judge rejected the Bank’s submission that the official lacked authority to give the reference and that it should not bear vicarious liability for it. Regrettably, this issue was not appealed: see further ch 14 of this book. 88 Playboy Club London Ltd v Banca Nazionale del Lavoro SpA [2016] EWCA Civ 457, [2016] 1 WLR 3169, with the Court of Appeal holding that no duty of care was owed to the Club, only to Burlington, to whom the reference was addressed (but who suffered no loss). 89 Playboy (n 6) [1]. 90 Applying Lord Oliver in Caparo (n 38) that the adviser must know ‘actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class’. 91 This point formed part of the Club’s submissions to the Court of Appeal, but in passing, with no citation of authority, so was not dealt with in detail by the court. 92 Playboy (n 6) [11].

132  Janet O’Sullivan Lord Sumption’s forensic annihilation of this argument is the core of the decision.93 It provides insight into the ‘equivalent to contract’ concept, which:94 serves (i) as an allegory of proximity, to describe a case where a service is performed for a person pursuant to a relationship which would be contractual if there were consideration passing from that person; and (ii) as an explanation of why it is appropriate to award a purely economic loss as damages for negligence in the course of such a relationship. But it does not follow from the fact that a non-contractual relationship between two parties is as proximate as a contractual relationship, that it is legally the same as a contractual relationship or involves all of the same legal incidents.

B.  Contractual Ideas Dominant When Hedley Byrne was decided, many thought it presaged the triumph of tort over contract, a prophecy that seemed to be borne out when Henderson recognised concurrent liability in contractual versions of Hedley Byrne. In fact, the case law suggests the opposite: the courts remain wedded to contractual concepts when setting the rules for a Hedley Byrne duty of care.95 BPE is no exception. Putting aside the undisclosed principal issue, all the essential contractual elements of Hedley Byrne are present. The Bank acted voluntarily.96 It was free to disclaim responsibility, but (perhaps surprisingly)97 did not do so, which would have been effective at common law to prevent a duty of care,98 as on the precise facts of Hedley Byrne itself. The reference was given in response to a specific request, a contract-like ‘special relationship’.99 It was given in a commercial setting, not a domestic or social one, where Hedley Byrne liability would be presumptively ruled out as not ‘equivalent to contract’,100 responding to the same concerns as the contractual presumption against an intention to create legal relations.101 93 For more detailed consideration of this issue, and further arguments that the undisclosed principal doctrine as explained in Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 (PC) was inapplicable on these facts, see ch 14 of this book. 94 Playboy (n 6) [13]. 95 The more generous limitation rules for tortious over contractual negligence are a statutory anomaly beyond the control of the courts but explain the development of concurrent liability. 96 In Customs and Excise Commissioners v Barclays Bank plc [2006] UKHL 28, [2007] 1 AC 181, the relationship between the Commissioners and the bank with regard to the freezing order was not ‘equivalent to contract’, since, according Lord Bingham at 195, ‘the essence of any contract is voluntariness, and the bank’s position was wholly involuntary’. 97 Perhaps because BNL’s official was engaged in fraud and not therefore following normal procedure. 98 In consumer situations, a disclaimer might fall foul of the Consumer Rights Act 2015, s 62A, previously the Unfair Contract Terms Act 1977 test of reasonableness under ss 2(2), 11 and 13(1), which invalidated the disclaimer in Smith v Eric S Bush (n 80). 99 cf numerous examples, such as Caparo (n 38); Patchett v Swimming Pool and Allied Trades Association Ltd [2009] EWCA Civ 717, [2010] 2 All ER (Comm) 138; Smeaton v Equifax plc [2013] EWCA Civ 108, [2013] 2 All ER 959. 100 Hedley Bryne (n 4): ‘Quite careful people often express definite opinions on social or informal occasions, even when they see that others are likely to be influenced by them; and they often do that without taking that care which they would take if asked for their opinion professionally, or in a business connexion’ (Lord Reid). Defendant counsel’s concession of a duty of care in Chaudhry v Prabhakar [1989] 1 WLR 29 (CA) was surely wrong. 101 Balfour v Balfour [1919] 2 KB 571, applied recently in Blue v Ashley [2017] EWHC 1928 (Comm).

The Contract/Tort Borderline  133 Again, putting to one side the undisclosed principal argument, the ratio of Playboy that BNL did not owe a tortious duty of care to the Club because ‘it had not reason to suppose that Burlington was acting for someone else and they knew nothing of the Playboy Club’ is consistent with analogous contractual principles.102 To obtain enforceable rights under the Contracts (Rights of Third Parties) Act 1999 Act, a third-party beneficiary ‘must be expressly identified in the contract by name, as a member of a class or as answering a particular description’.103 This mirrors the difference in outcome in tort between Playboy and Hedley Byrne,104 where the defendant bank knew the enquiry was being made by the plaintiff’s bank on behalf of one of its customers; it did not matter that the plaintiff was not individually identified.105 Tortious conclusions fall into line with contractual requirements. C.  The Significant Difference The one obvious respect in which ‘equivalent to’ differs from ‘actual’ contract is that, in Lord Sumption’s words, ‘equivalent to contract’ describes ‘a case where a service is performed for a person pursuant to a relationship which would be contractual if there were consideration passing from that person’.106 Surprisingly, given the significance of this departure in Hedley Byrne, only Lord Devlin drew attention to it: ‘As a problem it is a by-product of the doctrine of consideration. If the respondents had made a nominal charge for the reference, the problem would not exist.’107 Although Lord Devlin revealed impatience with the technicalities of the doctrine of consideration, he was not departing very far from its essence. While there was technically no consideration in Hedley Byrne, in substance the bank was getting something of value in return for its reference:108 It may often be material to consider whether the adviser is acting purely out of good nature or whether he is getting his reward in some indirect form. The service that a bank performs in giving a reference is not done simply out of a desire to assist commerce. It would discourage the customers of the bank if their deals fell through because the bank had refused to testify to their credit when it was good. 102 Playboy (n 6) [16]. 103 Contracts (Rights of Third Parties) Act 1999, s 1(3). An equivalent limitation seems to be built into the common law ‘Albazero exception’, allowing a promisee to recover damages for a third party’s losses, as subsequently applied in building contract case law. Despite dicta to the contrary in Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL), the exception is rooted in the fact that the promisor would have contemplated, at the time of making the contract, that the loss might be suffered by a third party. 104 Strictly, what the outcome would have been in the absence of the disclaimer. 105 Although, in Hedley Byrne, Lord Pearce would have adopted a slightly narrower test and Lord Morris a broader one. 106 Playboy (n 6) [13]. 107 Hedley Bryne (n 4) 525. 108 ibid 529. See also Lord Reid and Morris in dissent in Mutual Life and Citizens Assurance Co Ltd v Evatt [1971] 2 WLR 23 (HL) 37: ‘It appears to be quite common practice for businesses to perform gratuitous services for their customers with the object of retaining or acquiring their goodwill.’

134  Janet O’Sullivan For some contemporary commentators on Hedley Byrne, the possibility of negligence liability for misstatement outside the straitjacket of a requirement of consideration was welcome. As Stevens put it: The man in the street may have an action if he has relied, even if he has not bargained. In achieving this Hedley Byrne will, without in any weakening privity or consideration doctrinally within contract, appreciably weaken their practical importance as far as a potential litigant is concerned.109

Others disagreed, in particular Tony Weir, who described the plaintiffs as follows: They made bad business deals, having taken only a free opinion before hazarding their wealth in the hope of profit, no part of which, had it eventuated, would they have transferred to the honest person whom they now seek to saddle with their loss.110

More than half a century later, it would be intriguing to know if Lord Sumption’s sympathies lie with Stevens or Weir! I think his judgment in BPE suggests a halfway house. Non-contractual claimants have an important remedy in Hedley Byrne. The requirements are ‘equivalent’ to contract, not identical, and the principal difference is that in tort the assumption of responsibility is one-sided, the defendant receiving nothing in return. When deciding on the appropriate allocation of risk, this difference will occasionally mean tort outcomes should diverge from contractual ones. We will consider this point in relation to Lord Sumption’s treatment of the Club’s undisclosed principal argument and by speculating about another aspect of the case that Lord Sumption did not consider expressly, which can in turn be linked to SAAMCO. D.  A Perspective on the Undisclosed Principal Issue Foxton has argued that ‘Playboy may be significant in signalling a reversal of the judicial trend of viewing tortious liability for pure economic loss incurred pursuant to ‘assumptions of responsibility’ through a contractual lens’.111 I do not think Lord Sumption’s rejection of the Club’s undisclosed principal argument supports this view. He first categorised the argument as a non sequitur: ‘it assumes that because a relationship “equivalent to contract” is generally sufficiently proximate to found a duty of care, it must follow that the legal incidents of a contractual relationship are imported into it’.112 Other incidents are applicable only to bargains: a Hedley Byrne defendant is not liable to pay expectation damages if it ‘undertakes’ to give a credit reference, then fails to do so. This does nothing to deny that Hedley Byrne liability reflects contractual requirements. The same applies to Lord Sumption’s second justification, that the relationship between an undisclosed principal and someone dealing with his agent does not give rise to a duty of care, precisely because it does not resemble the Hedley Byrne contract-like 109 R Stevens, ‘Hedley Byrne v Heller: Judicial Creativity and Doctrinal Possibility’ (1964) 27 MLR 121, 160. 110 T Weir, ‘Liability for Syntax’ (1963) 21 CLJ 216, 218. 111 T Foxton, ‘Second Degree Byrne’ (2019) 78 CLJ 18, 21 112 Playboy (n 6) [13].

The Contract/Tort Borderline  135 paradigm: ‘Such a relationship is by definition not proximate. Nor is it in any relevant sense voluntary or consensual so as to give rise to an assumption of responsibility.’113 Lord Sumption’s third justification references the difference in pattern, that the Hedley Byrne defendant receives nothing in return for its assumption of responsibility:114 Thirdly, the appellant’s submission would require one to import into the law of tort just one aspect of the law relating to undisclosed principals. But in fact the law in this area is a complex bundle of interrelated rights and liabilities most of which are entirely inapposite to the law of tort. The relationship between A and B’s undisclosed principal may not be consensual, but it is at least mutual. The undisclosed principal may not only sue but be sued on the contract. A may elect to sue the agent. If A is sued by the undisclosed principal, he may take any defences which would have been available to him as against B. But in the absence of a true contract there would be no corresponding mutuality in tort.

This is an illuminating observation, albeit in a very specific context. We tend to think, as Weir did, of Hedley Byrne as a broad, claimant-friendly regime, allocating the risks of the claimant’s transaction to a defendant who received nothing in return. Lord Sumption has shown that the absence of mutuality may be a reason to make the Hedley Byrne requirements tougher than in contract. E.  Purpose of Transaction BNL argued the Club’s claim must fail for two reasons – the identity issue which formed its eventual ratio, and also because the Club’s purpose in requiring the reference was unknown to it.115 Lord Mance emphatically disagreed:116 I do not consider that this claim should fail for want of communication of the purpose or kind of purpose for which an assessment of trustworthiness was required. Had Burlington been the operator of the gambling club and suffered the loss, it should have succeeded. On the face of it, BNL was prepared, without further enquiry, to take the open risk of exposure to the tune of up to £1.6m in any one week whatever ‘financial commitment’ or ‘business’ to that tune was intended. There is no reason in principle why a duty of care should not arise in relation to so unspecific a purpose, provided (as is here clear) that the representation was requested and given in terms showing that it was intended to be and would be relied on.

Lord Sumption did not spell out explicitly whether this was his view; some passages suggest that he disagreed,117 but, as Foxton observes, he did not dissent from

113 ibid [14]. Grower and Sherman disagree with Lord Sumption’s reasoning on this issue: JAW Grower and OF Sherman, ‘Equivalent to Contract? Confronting the Nature of the Duty Arising under Hedley Byrne v Heller’ (2019) 135 LQR 177. 114 Playboy (n 6) [15]. 115 Following the approach of Longmore LJ in the Court of Appeal (n 88). 116 Playboy (n 6) [22]. 117 In ibid [8], he cited Lord Oliver’s identification in Caparo (n 38) 638 of the circumstances in which a duty of care may typically be held to exist as including ‘the advice is required for a purpose, whether particularly specified or generally described, which is made known, actually or inferentially to the adviser at the time when the advice is given’, and a dictum of Denning LJ in Candler v Crane, Christmas & Co [1951] 2 KB 164 (CA) 182–83: ‘To what transactions does the duty of care extend? It extends, I think, only to those transactions for which the accountants knew their accounts were required …’

136  Janet O’Sullivan Lord Mance’s analysis.118 His view was nuanced; he considered the question of the defendant’s knowledge of the transaction in the context of the identity issue, suggesting that its significance119 will vary according to what is known about the person or group expected to rely on the statement. Thus in Hedley Byrne itself, the defendant understood that the statement would be relied on by the unidentified, but readily identifiable, client on whose behalf National Provincial Bank was known to be making the inquiry. It was enough that the proposed transaction was said to be an advertising contract for £8,000 to £9,000. It would probably have been enough even if the transaction had not been identified as an advertising contract but simply as some kind of business transaction.

It remains unclear whether, if Burlington had been the operator of the casino, Lord  Sumption would have regarded its activities as ‘some kind of business transaction’. Lord Mance’s approach is certainly intuitively attractive, since it avoids the perverse conclusion that a defendant who does not ask the purpose of the enquiry would be immune from liability; in other words, the more blasé the defendant is willing to be, the less likely his conduct is to attract liability.120 But is it consistent with the equivalent contractual position? F.  Consistent with Contract? Let us imagine that Burlington was the operator of the casino, but did not disclose that its purpose in seeking the reference was for gambling transactions. Further imagine that BNL charged a fee for the credit reference. The question of whether Burlington could recover its losses incurred in reliance on BNL’s negligent reference in these circumstances would be analysed pursuant to the contractual rules of remoteness of damage. Moreover, the contractual remoteness rules should apply to purely tortious Hedley Byrne cases too.121 At first glance, once might argue that, although trading losses from relying on a credit reference are a natural and probable consequence of the defendant’s breach under the first limb of Hadley v Baxendale, gambling is both unusual and riskier, so does not count as such. The gambling purpose should therefore have been disclosed in order to fall under the second limb of Hadley v Baxendale, but was not. On this analysis, the casino’s loss is either not recoverable at all, or is capped at the level of hypothetical ordinary trading losses.122 This conclusion is not consistent with 118 Foxton (n 111) 19. 119 Playboy (n 6) [10]. 120 On the other hand, Peter Watts in ch 14 of this book argues strongly to the contrary: ‘Why should it be up to the provider of free advice to ask questions about the unobvious purposes for which the inquirer wants the information, and be liable for any losses should it fail to do so?’ 121 Floyd LJ in Wellesley (n 35) [163] said obiter ‘I incline to the view that where there is such a relationship “equivalent to contract” (to adopt the expression used by Lord Devlin in Hedley Byrne …) the contractual test should apply, as suggested by Professor Burrows; but this will require separate consideration’, referring to A Burrows, ‘Limitations on Compensation’ in A Burrows and E Peel (ed), Commercial Remedies: Current Issues and Problems (Oxford, Oxford University Press, 2003). 122 Cory v Thames Ironworks (1867–68) LR 3 QB 181 (QB); Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 (CA), discussed in M Stiggelbout, ‘Contractual Remoteness, “Scope of Duty” and Intention’ [2012] Lloyd’s Maritime and Commercial Law Quarterly 97.

The Contract/Tort Borderline  137 Lord Mance’s view in Playboy, while Lord Sumption’s observation linking purpose to identity might suggest a different conclusion only if the claimant’s name revealed that it was a casino (which was precisely what it did not wish to do). On reflection, however, the foregoing analysis is incorrect. The obligation assumed (whether contractually or under Hedley Byrne) is to take reasonable care in giving the creditworthiness information that was requested. The precise language of the exchange between Burlington and BNL is crucial. Burlington requested BNL’s ‘opinion as to the means and standing of Barakat and his trustworthiness to meet a financial commitment to the extent of £1.6m at any one time’, which BNL gave in identical terms. Even if a loss of up to £1.6m at any one time is highly unusual (which may be the case in ordinary trading), this possibility was specifically anticipated in advance, in the very terms on which the defendant assumed responsibility. Lord Mance’s view is consistent with a contractual analysis. G.  SAAMCO Permutation Recalling our earlier discussion of how SAAMCO might operate in a purely Hedley Byrne case, let us consider a further modification to the facts of Playboy. Once again, assume Burlington operated the casino. Now imagine that, although BNL was negligent when it gave its reference because there were no funds in Barakat’s account at the time, shortly afterwards Barakat credited his account with £1.6m.123 He then cheated at the casino and disappeared, having won a very large sum.124 This is a classic SAAMCO pattern. But for the bank’s negligence, the casino would not have allowed Barakat to gamble and would not have suffered loss, but its loss does not have anything to do with Barakat’s creditworthiness or lack thereof. The loss would still have occurred if the reference had been accurate. Since the terms of the bank’s assumption of responsibility are confined to Barakat’s financial ability to meet a financial commitment, this is a clear information case. It is unthinkable that a court would treat a bank giving a credit reference as ‘guiding the whole decision-making process’, in particular the risk of cheating by a punter, which is paradigmatically a risk assumed by anyone running a casino. Consider instead a defendant who gave an employment reference to the claimant, a potential new employer, which negligently described the employee as competent, when in fact he had been incompetent while working for the defendant (though never dishonest). The claimant employed the employee in reliance, then suffered loss when the employee did something dishonest. SAAMCO would be difficult to apply here, not because an employment referee takes overall responsibility for guiding the claimant’s recruitment decisions, but because it is hard to draw a sharp distinction between competence and honesty.

123 A pattern inspired by Target Holdings Ltd v Redferns [1996] 1 AC 421 (HL), where the mortgagee’s solicitor paid out mortgage monies to the borrower before the property was purchased and charged, but it was duly charged a short time later. 124 Perhaps employing the card-counting skills on display in Ivey v Genting Casinos (UK) Ltd (t/a Crockfords Club) [2017] UKSC 67, [2018] AC 391.

138  Janet O’Sullivan Moreover, reflecting on these non-contractual examples of the SAAMCO issue prompts the question why it would ever be appropriate to treat a purely tortious defendant as guiding the claimant’s decision-making and thus responsible for all the foreseeable consequences of the claimant’s reliance. Perhaps this is another instance where the fact that the defendant’s assumption of responsibility was gratuitous warrants a modification of the normal contractual approach.125 H.  Afterword on Identity A final observation from the contract/tort borderline: on reading Playboy, I was reminded of the mistaken identity cases in contract and of the (misleadingly simplistic) dictum of Pollock CB in Boulton v Jones: ‘It is a rule of law, that if a person intends to contract with A, B cannot give himself any right under it.’126 Of course, the context is entirely different. In mistaken identity cases, the issue is the nemo dat rule, and the mistaken party is the claimant, who wants to assert ‘no contract’ – ie that its apparent contract with a rogue was in fact void – in order to recover goods from a bona fide purchaser. In contrast, in Playboy, the mistaken party is the defendant, who wants to assert ‘no assumption of responsibility’ in order to avoid paying damages. It is nonetheless telling that the outcome in Playboy is consistent with the usual treatment of mistaken identity in written dealings, adopted by the majority of the House of Lords in Shogun Finance Ltd v Hudson.127 Interestingly, the result in Playboy is also susceptible to the familiar criticism of Shogun, that the ‘no contract’ outcome can only be justified where the counterparty’s identity was intrinsically significant to the other party: it is impossible to regard Burlington’s identity as being of this level of importance to BNL. This led me to wonder whether a different result would have been reached in ­Playboy if the Club had used an alias, rather than a real associated company, in order to seek the reference, as in the contractual mistaken identity cases.128 Eventually, however, I decided against making too much of this line of enquiry, partly because the nemo dat context is so obviously critical and of no relevance to Playboy, but also because if the Club had requested the reference using an alias or business name without disclosing its registered company name, it would have been committing a criminal offence.129 Any attempt to sue BNL would presumably then have been met

125 E Peel and J Goudkamp (eds), Winfield & Jolowicz on Tort, 19th edn (London, Sweet & Maxwell, 2014) para 7.061 makes a similar, but qualified, point: ‘It is not wholly obvious why responsibility for risks like market forces should be imposed on the defendant even where his function is to advise the claimant as to the wisdom of a transaction, at least where those risks are as apparent to the claimant as to the defendant.’ 126 Boulton v Jones (1857) 157 ER 232. 127 Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] UKHL 1 AC 919. 128 King’s Norton Metal Co Ltd v Edridge, Merrett & Co Ltd (1897) 14 TLR 98 suggests a contract is formed if the counterparty contracts using an alias, a conclusion approved by the majority and minority judges in Shogun (n 127). Per Lord Millett [73]: ‘A person is free to adopt whatever name suits his fancy, and may validly contract under an alias. Even if he has assumed a false name for the sole purpose of deceiving the counterparty, there is a contract so long, at least, as there is no real person of that name.’ 129 Company, Limited Liability and Business (Names and Trading Disclosures) Regulations 2015, reg 24.

The Contract/Tort Borderline  139 with the illegality defence,130 so I concluded that the issue would be unlikely to arise commercially. But the academic question of whether a duty of care would be owed to a sole trader using an alias is still intriguing. Would the contract position prevail or would tort set a more exacting standard for a duty of care because the defendant was receiving no consideration or rights in return? IV. CONCLUSION

Lord Sumption’s judgments in BPE and Playboy are significant in delineating when, and to what extent, a claimant who has entered into a risky transaction can, in Tony Weir’s phrase, ‘saddle’ someone else, who had some input into their decision to transact, with losses that result. Much is unresolved, and the contract/tort borderline remains a most intriguing place to explore.



130 Though

it might not succeed, on the reasoning of Stoffel & Co v Grondona [2018] EWCA Civ 2031.

140

8 Personal Injury NICHOLAS J McBRIDE

[T]he law of tort is an extraordinarily clumsy and inefficient way of dealing with serious cases of personal injury. It often misses the target, or hits the wrong target. It makes us no safer, while producing undesirable side effects. What is more, it does all of these things at disproportionate cost and with altogether excessive delay. – ‘Abolishing Personal Injuries Law – A Project’1

W

hile most of the chapters in this book are concerned with Lord Sumption’s judicial contributions to private law in his role as a Justice of the UK Supreme Court, I have been asked to discuss Lord Sumption’s extrajudicial attack on personal injury law, launched at the Personal Injuries Bar Association Annual Lecture on 16 November 2017 and from which the above quotation is taken. In short, Lord Sumption criticised the law on personal injury (PI law) on the basis that it achieves little of value and does so at extraordinary cost. I think this claim is misconceived. In order to see why, let us take the two prongs of Lord Sumption’s condemnation of PI law in reverse order. I. COST

Lord Sumption’s critique of PI law observes that:2 The cost of meeting claims for negligently caused personal injury was estimated by Pearson at about 1% of the gross national product of the United Kingdom. There is a measure of uncertainty about all such estimates, but whatever the true proportion, it is a significant figure, and it represents a substantial social cost.

And it is a cost we all pay. Lord Sumption instances Patrick Atiyah as observing in his book The Damages Lottery3 that ‘almost all personal injury claims [are] brought

1 Lord Sumption, ‘Abolishing Personal Injuries Law – A Project’ (2018) 34 Professional Negligence 113, 118.

2 ibid 3 PS

115. Atiyah, The Damages Lottery (Oxford, Hart Publishing, 1997).

142  Nicholas J McBride against insured parties or public bodies’,4 with the result that ‘We all, or almost all, pay for [such claims] in the form of higher insurance premiums or taxes’.5 Lord ­Sumption goes on to observe that:6 the cost is not limited to the amount of the damages. Perhaps the most remarkable figure in the statistical annexes to the Pearson Report was the Committee’s estimates of the cost of making and processing claims for personal injury. They concluded that legal and administrative costs amounted to 47% of the total cost of settling personal injury claims. This figure … is broadly consistent with other evidence. According to the Young Report, published in 2010, legal costs of resolving claims against the National Health Service … accounted for 36% of the total cost of settling personal injury claims in the previous year … There is no reason to think that the insurers’ costs of processing claims against non-state bodies is any different.

In his reflections on Lord Sumption’s criticisms of PI law, Jonathan Morgan acknowledges that tort is clearly more expensive to operate than a state-run or private first-party insurance scheme. The expense is inherent. Tort requires complex inquiries about responsibility – the defendant’s fault and causal connexion with the accident (and the victim’s responsibility too, under contributory negligence). Tort tailors compensation to each individual claimant’s needs, calculating such future imponderables as earnings foregone, medical care required, the value of the ‘amenities of life’ lost, etc. Lawyers present the case on both sides. None of this comes cheap, and the expense is duplicated. Most defendants are insured, and there are also costs associated with liability insurance and claims-handling … Even those who struggle to accept government bureaucracy as a paragon of efficiency would have to accept that state support for the injured and disabled is provided at much lower cost than the equivalent tort compensation. That flows not from greater efficiency per se, but because the inquiry is so much simpler (no need to establish cause or fault, no need for precise quantification of loss). Nor is the social security process adversarial. The Pearson Commission provided telling figures. For £1.00 spent on social security, 90p was paid to claimants and 10p on administrative costs. But for tort, the sum was divided 54p in compensation and 46p in administration.

Morgan concludes that ‘Lord Sumption is surely correct, therefore, to identify the high administrative costs of tort compensation as a signal drawback’.7 I would like to dissent from this cosy consensus. I think that when we are considering the cost of PI law, both Lord Sumption and Jonathan Morgan are looking in the wrong direction. In order to clarify our thoughts on this issue, let us consider Senator Chuck Grassley’s July 2018 revelation that the Pentagon paid $10,000 each for the lid on the toilet in three of its C-5 Galaxy cargo planes8 and ask ourselves: what is the cost of a $10,000 toilet seat lid? I think most people – including Chuck Grassley and, I suspect, Lord Sumption and Jonathan Morgan – would say ‘$10,000’. But that is a mistake. Immediately after 4 Sumption (n 1) 114. 5 ibid 115. 6 ibid 115. 7 J Morgan, ‘Abolishing Personal Injuries Law? A Response to Lord Sumption’ (2018) 34 Professional Negligence 122, 124–125. 8 www.grassley.senate.gov/news/news-releases/grassley-10000-toilet-seat-cover-doesnt-pass-smell-testdod-flushing-taxpayer.

Personal Injury  143 observing that ‘Any American can tell you $10,000 for a toilet seat cover is ridiculous’, Grassley thundered, ‘Americans work too hard to see their precious tax dollars flushed down the toilet’. But the $10,000 the Pentagon paid for a toilet seat cover were not flushed down the toilet at all. They were handed over to the manufacturer of the toilet seat cover. So the cost of a $10,000 toilet seat cover is not $10,000: the $10,000 paid for each toilet seat cover was not lost or used up, but merely transferred to whoever was lucky enough to be in the business of manufacturing toilet seat covers that suited planes used by the US Air Force. So what is the real cost of a $10,000 toilet seat cover? The cost is – as Henry Hazlitt points out in the first few pages of his Economics in One Lesson9 – the opportunity cost of spending $10,000 on a toilet seat cover: that is, all the goods and services that could have been produced/rendered had a more reasonable sum been spent on the toilet seat cover. So, in judging the cost of PI law, it is a mistake to look at all the money that flies back and forth as a result of the existence of PI law and tot up all that money and say ‘that’s the cost we pay for having a system of PI law’. No: the cost of having a system of PI law is the opportunity cost of having such a system – all the goods and services that we would enjoy but do not because of the existence of PI law. So what is the opportunity cost of having a system of PI law? The question is very difficult to answer, because it involves us imagining what our world would be like if there were no PI law. Of course, New Zealand has done us the service of abolishing PI law in its jurisdiction in 1975,10 but even looking at New Zealand does not provide us with a clear idea as to what the opportunity cost of having a system of PI law in the UK is. Some potential opportunity costs are as follows. A.  Gains from Economic Growth There is no evidence that our system of PI law is a drag on the economy, retarding its rate of growth. Between 1975 and 2017, New Zealand’s average rate of growth was 2.24%. In the same period, Australia’s average rate of growth was 3.07%.11 The longterm trend rate of economic growth in modern Western economies tends to be about 2%, so New Zealand’s economic performance is no better and no worse than we would expect. The fact that it does not have a system of PI law seems to be irrelevant to its rate of growth. B.  Gains from Lower Insurance Premiums Lord Sumption suggests that one of the prices we pay for a system of PI law is higher insurance premiums, and in extreme cases, where liability in a particular area gets 9 H Hazlitt, Economics in One Lesson (New York, Harper, 1946). 10 Accident Compensation Act 1972 (NZ). See now the Accident Compensation Act 2001 (NZ). 11 The difference of 0.83% in their average growth rates means that, starting from a baseline of 100, New Zealand’s GDP would have risen to 227 over the 43 years between 1975 and 2017, while Australia’s would have risen to 367 – a difference of 62%.

144  Nicholas J McBride out of control, ‘a contraction of insurance capacity [where] insurers simply withdraw from the more exposed sectors of the liability market’.12 I have found it difficult to find evidence that New Zealand’s abolition of PI law has resulted in a gain to people living in New Zealand in the form of lower insurance premiums than are paid elsewhere in the common law world. This difficulty may speak volumes: if such gains had been realised, they would be constantly remarked upon as one of the advantages of New Zealand’s abolishing PI law. So there is no evidence that one of the opportunity costs of having a system of PI law is higher insurance premiums. In fact, it is possible to make the case that if one sector of the insurance market suddenly collapsed – providing third-party insurance in respect of personal injury claims – the knock-on effects could be very serious and result in an overall rise in insurance premiums, for example in respect of first-party insurance, as insurance companies seek to recover on the swings what they have just lost on the roundabouts. This is speculation, of course – but that is part of my point: when it comes to assessing the opportunity cost of PI law, it is very difficult to be certain as to what it is. C.  A No-Fault Compensation Scheme The major opportunity cost of our having a system of PI law is, of course, often said to be the fact that we do not have a system for compensating people on a no-fault basis for personal injuries that they have suffered. We can have a system of PI law or we can have a no-fault compensation scheme, but we cannot have both. But why can’t we? Lewis Klar suggests that ‘The link between tort law and no-fault is made only because of finances. It is the funds presently being channelled into the tort process which must be used to finance the no-fault proposal.’13 Sir Geoffrey Palmer – one of the moving forces behind the Woodhouse report that recommended the abolition of PI law in New Zealand and its replacement with a no-fault compensation scheme – agrees:14 The common law was excoriated in the [Woodhouse] Report for a strategic reason. The common law had to go in order to capture the compulsory insurance money with which to fuel the new system. New money would not be available for a reform of this sort, the fact that you could do the reform without using any new money was one of the scheme’s major selling points. Your reform would never get off the ground unless you killed the common law.

Taking Klar’s point first, it is hard to see how ‘the funds presently being channelled into the tort process’ can be redirected to fund a no-fault compensation scheme. As we have seen, a lot of those funds derive from the insurance industry, but those funds only flow back and forth because of the existence of PI law. If PI law were abolished, those flows of wealth would automatically disappear – they cannot be redirected into a different channel.

12 Sumption (n 1) 115. 13 Various Authors, ‘Comments: The New Zealand Experience’ (1993) 15 University of Hawaii Law Review 621, 635. 14 ibid 648.

Personal Injury  145 Similarly, it is hard to understand Palmer’s point. His reference to ‘compulsory insurance money’ is to monies that employers were required to pay to insure themselves against the risk of being held liable under the New Zealand Workers’ Compensation for Accidents Act 1900. That Act allowed workers to sue on a no-fault basis for personal injuries suffered in the course of employment. So it was the abolition of the 1900 Act, and not PI law, that ‘capture[d] the compulsory insurance money [that] fuel[led] the new system’. And the administration of the New Zealand Accident Compensation Scheme has involved ‘new money’ being pumped into the scheme, through levies on income and petrol, as well as monies derived from general taxation. Given these points, it is hard to avoid the impression that either PI law was killed off by the Woodhouse Report because (i) those behind the report independently disliked PI law and the Woodhouse Report gave them a chance to kill two birds with one stone,15 or (ii) something had to be killed off in order to persuade everyone that the Woodhouse Report’s recommendations were cost neutral, and PI law was the most obvious target. In sum, I think we are being sold a pup whenever it is suggested that we can either have a no-fault compensation scheme or a system of PI law, but we cannot have both. No such choice has to be made. For example, the UK government – a­ ssuming it had a decent majority – could at any point legislate to introduce a system of no-fault compensation for those who suffer injury as a result of the way they have been treated (or not treated) in a National Health Service (NHS) hospital, and this system of no-fault compensation could sit perfectly well alongside the current remedies for medical negligence provided by PI law. If the critics of PI law are correct, we would expect such a reform to have two consequences. First, claims for medical negligence in the public sector would wither away as claimants took advantage of the faster procedures afforded by the no-fault compensation scheme. Second, overall government expenditure would not rise (and might actually fall) because the greater payouts under the no-fault compensation scheme would be offset by administrative savings through its no longer having to determine whether the NHS was negligent in a particular case where a claim for compensation was made. The fact that no UK government would be willing to introduce such a reform indicates, to my mind at least, that it knows full well that the second consequence would not materialise: the expense involved in administering a no-fault compensation scheme for injuries suffered by NHS patients would far exceed any administrative savings from the withering away of claims in negligence against the NHS. So what is holding back the introduction of such a no-fault compensation scheme in relation to injuries suffered by NHS patients is not the existence of PI law, but the fact that a

15 This was certainly the case with Sir Geoffrey Palmer: see ibid 640 (‘[the] attempt to kill the common law action … was made because the common law action was regarded by the policy makers as a positive social evil of its own. It wasted a lot of resources that did not need to be wasted. It achieved no positive public good; that whatever sound objectives it had, they were not being achieved’), 648–49 (‘Your reform would never get off the ground unless you killed the common law. You didn’t like it anyway. You thought it was capricious for personal injury cases. You thought there were a lot of delays. You thought it was very expensive’). Palmer’s accusation that the common law action wastes ‘a lot of resources’ or is ‘very expensive’ is guilty of the same fallacy I am attempting to expose in this section of my paper – of identifying cost with expenditure, rather than recognising that all costs are opportunity costs.

146  Nicholas J McBride no-fault compensation scheme for such patients is simply something for which the UK cannot afford to pay.16 Generalising this point, whatever the opportunity costs of PI law, they do not include the fact that we do not currently have a no-fault compensation scheme for personal injuries. The fact that we do not have such a system is not the fault of PI law, but the state of the UK government’s finances.17 D.  Gains in Freedom to Engage in Valuable Activities The final opportunity cost of having a system of PI law that we might consider is the possibility that PI law discourages people from engaging in valuable activities for fear that doing so might result in their being sued under such law. This is a potential cost that figures large in Lord Sumption’s critique of PI law. Lord Sumption observes that the existence of a ‘compensation culture’ can have the effect of tending ‘to influence behaviour in ways that are over-defensive and not necessarily in the public interest’.18 He gives as examples: (i) the withdrawal of the morning sickness drug Bendectin in 1983 ‘because the cost of defending class actions made it unprofitable, even though none of those actions succeeded’, as a result of which drug companies were subsequently ‘deterred … from developing any drugs specifically designed for pregnant patients’;19 and (ii) the actions of the council in Tomlinson v Congleton BC,20 in destroying the beaches around a lake in a park maintained by the council by turning the beaches into swampland because the council feared that it would be sued by someone who was injured swimming in the lake.21 Undoubtedly, the existence of PI law provided the occasion for these anti-social acts to occur, but were they really the fault of PI law? Lord Sumption calls the actions of the council in Tomlinson ‘a perfectly rational response to a real problem posed by the current state of the law’.22 ‘Craven and cowardly’ might be another way to characterise the council’s actions. Such epithets might be too strong for the manufacturers of Bendectin. However, they were certainly guilty of overly short-term thinking (a common fault in the business world) – any immediate improvement to their balance sheet that was brought about by taking Bendectin off the market was surely dwarfed by 30 years of no sales of Bendectin or any other drugs seeking to treat morning sickness. Moreover, it is not clear that getting rid of PI law would allow people to enjoy significantly greater freedoms to engage in valuable activities. The abolition of PI law would result 16 The New Zealand Compensation Scheme is only itself made affordable by virtue of its restricted coverage: it does not cover diseases, makes no awards for general loss of earning capacity, and claims for loss of income under the scheme are capped. Even with these restrictions, the scheme runs at a deficit, with a projected deficit of NZ$777 million for 2018–19, rising to NZ$1.37 billion in 2021–22 (see the Accident Compensation Corporation’s ‘Financial Condition Report 2018’, available at www.acc.co.nz/assets/ corporate-documents/cff6e7ca8a/financial-condition-report-2018.pdf). 17 Lord Sumption seems to accept this point, predicting that the current system of PI law will survive, in part because ‘the additional coverage involved in dispensing with fault would enormously increase the overall cost’: Sumption (n 1) 120. 18 ibid 117. 19 ibid 118. 20 Tomlinson v Congleton BC [2003] UKHL 47, [2004] 1 AC 46. 21 Sumption (n 1) 118. 22 ibid 118.

Personal Injury  147 in the government shouldering much more of the cost of looking after accident victims, one way or another, and it is likely that the government would seek to lighten that increased burden through all sorts of regulations and precautions designed to minimise the number of accidents occurring in society. Lord Sumption notes that ‘the US Food and Drugs Administration … has recently reauthorised the marketing of the active ingredient of Bendectin under a different brand name’.23 However, it is doubtful that the FDA would be so willing to do this if it knew that it was the government that would have to pick up the bill should that active ingredient prove harmful. So the problem of over-defensiveness that Lord Sumption sees as the fault of PI law is a more entrenched feature of our society, and one that would simply appear in a different form should PI law be abolished. E.  Conclusion on Cost It follows that none of the four most plausible opportunity costs that we incur as a result of the existence of PI law seem to be made out. Obviously, I am not suggesting that there are no opportunity costs that arise out of the existence of PI law, and that whatever benefits we reap from the existence of PI law are literally free. But what I am saying is that those who propose that we should abolish PI law because of its ‘cost’ have to take on the challenge of identifying the opportunity cost of having a system of PI law, and that this is something they have so far signally failed to do. They have failed to do this because, in talking about the ‘cost’ of PI law, they have tended to focus on the flows of wealth triggered by the existence of PI law. But those flows of wealth are, by definition, not costs. If PI law is to be attacked for the flows of wealth it triggers, it has to be attacked on distributive grounds – that it triggers flows of wealth into the wrong pockets – rather than on grounds of cost. But consideration of whether the existence of PI law has unacceptable distributive effects takes us on to our second topic, which is the value of PI law. II. VALUE

Unlike the opportunity costs of PI law, it is relatively easy to identify a number of benefits arising out of the existence of PI law. (i) It provides generous compensation to those who are able to bring a claim for compensation under PI law, and does so without causing any obvious damage to society. (ii) The prospect of being held liable (or one’s insurer or one’s employer being held liable) under PI law provides some incentive to take precautions against injuring another in circumstances where liability for injury will arise under PI law.24 (iii) Cases brought against defendants under PI law 23 ibid 118. 24 See Morgan (n 7) 127–33. See also Richard Miller’s observation in ‘Comments: The New Zealand Experience’ (n 13) 629: ‘I’m morally certain that New Zealand is a much more unsafe place than it ought to be and that its population has a right to expect. I wish I could show you the slides I took while casually walking around the streets of Wellington in 1987. They depicted an unusual number of obvious hazards that in my opinion would never be tolerated in modern cities in other advanced nations. I believe the reason is the moral hazard produced by the virtual absence of any external economic incentive to avoid accidents.’

148  Nicholas J McBride are not necessarily concerned with obtaining compensation, but have the purpose of bringing the defendant’s conduct to light in a public forum, and making the defendant publicly accountable for what he did.25 (iv) The existence of PI law has various ‘cross-subsidy’ effects within the legal system, supplying lawyers and supporting the existence of courts that are needed to operate other areas of law.26 (v) It provides employment for thousands of people – PI lawyers, insurance brokers and claims adjusters, expert witnesses, medical professionals, tort law academics, and so on – whose livelihoods have been built around the existence of PI law. However, no one would argue that any of these benefits account for why PI law exists; they are incidental side effects of the existence of PI law. So if PI law serves some rational function, there must exist some other value that PI law exists to realise. Lord Sumption considers two possibilities: that PI law is ‘ultimately … founded … on social utility or on collective moral values’.27 Lord Sumption’s reflections on the cost of PI law lead him to dismiss the possibility of explaining PI law as serving some kind of social good. Instead, he sees PI law as based on ‘profound cultural instincts’28 that mean ‘people are no longer disposed to accept the wheel of fortune as an ordinary incident of human existence. They regard physical security not just as the normal state of affairs but as an entitlement.’29 This view gives rise to two simple moral judgments. One is that he who causes physical injury must make it good financially. The other is that it is a proper function of the courts to find facts and distribute blame, simply as a satisfaction for victims or their relatives.30

The judges have sought to follow ‘the collective instincts and values of the public at large’ by expanding ‘the scope of duties of care over the past half-century, as well as the range of consequences for which a wrongdoer may be liable’.31 Lord Sumption confesses that he ‘would question whether there really is a moral case for imposing liability in damages on the ground of negligence’ with a possible ‘exception for professional failures where the Defendant has undertaken to exercise an appropriate measure of care and the relationship with the victim … is equivalent to contract’.32 Lord Sumption’s doubts are based on the fact that outside a situation ‘equivalent to contract’ ‘negligence is not morally culpable. It is a normal feature of human behaviour.’33 This is because ‘liability for negligence … depends on [a  person’s] falling below some objective standard of conduct to which he has not usually assented but which the law imposes on him’.34 The law’s doing that cannot be justified on moral grounds, which throws us back to seeking to explain the law on

25 See Morgan (n 7) 133–38. 26 On the effect that the abolition of PI law in New Zealand has had on legal representation there, see EK Solender, ‘New Zealand’s No-Fault Accident Compensation Scheme Has Some Unintended ­Consequences: A Caution to US Reformers’ (1993) 27 International Lawyer 91, 101–03. 27 Sumption (n 1) 114. 28 ibid 119. 29 ibid 116. 30 ibid 119. 31 ibid 117. 32 ibid 119. 33 ibid 119. 34 ibid 119.

Personal Injury  149 grounds of social utility – but such an explanation is not available to us because of the ‘arbitrary results and incomplete coverage of a fault-based system, combined with its prodigious cost and unwelcome side-effects’.35 As someone who does not believe there exists more than a handful of moral duties,36 I agree that ‘morality’ cannot be invoked to explain PI law.37 However, Lord Sumption is too quick to dismiss the possibility that PI law can be seen as existing to serve an intelligible social good (G). In order to understand what G is, we need to grasp that tort law is, in a term coined by Peter Birks, two-tiered and not one-tiered.38 This is a point that I do not think Patrick Atiyah – on whose shoulders Lord Sumption stands in launching his attack on PI law – ever appreciated. Under Atiyah’s way of looking at tort law, tort law is one-tiered. Tort law simply consists in a set of rules and doctrines that impose liabilities on a defendant to pay compensation to a claimant for losses suffered by the claimant in circumstances that give rise to such liabilities to pay compensation. So, in a negligence case, to ‘say that a person owes a duty of care in a particular situation means (and means only) that the person will be liable for causing damage by negligence in that situation’.39 The real basis of liability in negligence is thus not that the defendant owed the claimant a duty of care and breached that duty, but that the defendant was at fault for the fact that the claimant suffered various losses in circumstances where the law is willing to hold the defendant liable to compensate the claimant for suffering those losses. This view of tort law has gradually fallen out of fashion over the last 20 years. What has replaced it is a two-tiered view of tort law.40 On this view, tort law recognises us as owing each other various legal duties (or, to put it another way, as having various legal rights against other people), and responds to the breach of those duties (or violation of those rights) in a variety of ways, principally by imposing a legal duty/ liability41 on the person breaching that duty (or violating that right) to pay compensation to the victim of that breach of duty (or rights violation). So, in a negligence case, ‘to say that a person owes a duty of care in a particular situation’ means that the law actually does require that person to take care to act or not to act in a particular way,42 and that person will commit a legal wrong (a tort) if they fail to take such care. 35 ibid 119. 36 For reasons explained in NJ McBride, The Humanity of Private Law, Part I: Explanation (Oxford, Hart Publishing, 2019) 21–26. 37 For the polar opposite view, see J Gardner, From Personal Life to Private Law (Oxford, Oxford University Press, 2018), arguing that private law generally – and tort law in particular – exists to help us comply with the moral duties that we are subject to, especially the moral duties of repair and apology that we come under when we breach some other moral duty that we are subject to. 38 PBH Birks, ‘Obligations: One Tier or Two?’ in P Stein and ADE Lewis (eds), Studies in Justinian’s Institutes in Honour of JAC Thomas (London, Sweet & Maxwell, 1983). 39 This sentence repeatedly appears in the various editions of Atiyah’s Accidents, Compensation and the Law. 40 cf Birks, ‘The Concept of a Civil Wrong’ in D Owen (ed), Philosophical Foundations of Tort Law (Oxford, Oxford University Press, 1995); NJ McBride, ‘Duties of Care – Do They Really Exist?’ (2004) 24 OJLS 417; R Stevens, Torts and Rights (Oxford, Oxford University Press, 2007). 41 On the question of whether it is a duty or liability, see SA Smith, ‘Duties, Liabilities, and Damages’ (2012) 125 Harvard Law Review 1727; McBride (n 36) 58–60. 42 Others would prefer to say ‘the law actually does require that person not to injure another by acting carelessly’. I explain why this position is difficult to reconcile with the law in NJ McBride, ‘Review of Plunkett, The Duty of Care in Negligence’ (2018) 34 Professional Negligence 216, 217–18.

150  Nicholas J McBride Lord Sumption’s attack on PI law can be seen as being caught between these two different analyses of tort law – understandably so, as there is little reason why the judiciary should be aware of the battle royale between these two different analyses that has been waged in the halls of legal academia over the last 20 years, and which has seen the two-tiered analysis win out decisively. When Lord Sumption speaks of liability to pay compensation under PI law as being based on ‘fault’ (rather than the defendant’s wrong),43 he is adopting an Atiyah-like one-tiered view of tort law. However, at the same time, Lord Sumption speaks of a ‘duty of care to avoid injuring our fellow men’, a ‘right to bodily integrity’, a ‘duty not negligently to injure other people [that] is imposed by law’44 and a ‘legal right to bodily integrity … [that is] founded on profound cultural instincts’.45 These are all statements that only make sense within a two-tiered view of tort law. Adopting the two-tiered view of tort law allows us to see what G is, the social good that PI law exists to serve. On the two-tiered view of tort law, the first tier of PI law recognises that if you take any two individuals, A and B, A will normally owe B a duty to take care not to physically injure B and B will likewise normally owe A a duty to take care not to physically injure A.46 The second tier of PI law sets out how the law will normally respond to the breach of those duties, with the principal response being that the person committing the breach will be held to have a duty or be liable to pay compensation to the victim of that breach. So, there are in fact two ways of abolishing PI law. The first way is to get rid of the first tier – to say that if you take any two individuals, A and B, it is no longer the case that they will each owe the other a duty to take care not to injure the other. If you do this, the second tier automatically collapses, as there no longer exists a first tier to prop the second tier up – no remedies can be made available for breaches of duties that no longer exist. However, the second way of abolishing PI law is to keep the first tier in place but remove the second tier. That is: continue to acknowledge that if you take any two individuals, A and B, they will each normally owe the other a duty to take care not to injure the other, but specify that if one of those duties is breached, the victim of that breach will not be entitled to sue the person committing that breach for compensatory damages. Now let us see what happens if you attempt to adopt either of these methods of abolishing PI law. Lord Sumption seems to suggest that he is in favour of the first method of abolishing PI law: ‘if we want to influence the number and incidence of personal injury claims, the only way to do it is to alter peoples’ legal rights, instead of going around lamenting the 43 See, eg Sumption (n 1) 115: ‘A system which makes compensation dependent on fault makes little sense if the damages are being paid not by the persons at fault, but by society as a whole’; and ibid 117: ‘One [criticism] is directed against the use of fault as the touchstone of liability … if the object of the exercise is to address the problem of personal injury, there is no obvious reason to give special treatment to those victims who have had the good fortune to discover that their injuries were someone else’s fault.’ 44 ibid 114. 45 ibid 119. 46 It is different when we are concerned with duties of care to save someone from suffering physical harm. When it comes to such duties, B may owe A a duty of care to save A from suffering physical harm, while A owes no corresponding duty of care to B. (This will be the case where B is an occupier of premises that A is visiting.) However, this is a complication that does not affect the discussion, so, for the sake of simplicity and clarity, I will focus on duties of care not to physically injure another through a positive act.

Personal Injury  151 enforcement of what legal rights we have’.47 However, I would suggest that this method of abolishing PI law is a complete non-starter. The law could not possibly say that if you take any two individuals, A and B, neither will owe the other a duty to take care not to injure that other while at the same time saying that each will owe the other duties such as a duty to take care not to damage or destroy the other’s assets, a duty not to walk on the other’s land, a duty not to interfere unreasonably with the amenity value of the other’s land or a duty not to defame the other’s reputation. Taking this stand would seem to suggest that the law values protecting people’s assets, their land or their reputation more than it does protecting people’s bodies. People would be entitled to think very ‘ill of our jurisprudence [and] to suppose that its principles are [very] remote from the ordinary needs of civilized society’48 were the law to say any such thing. Moreover, untuning that particular string of the common law will set off discord in other areas of law – in particular, the criminal law, where the law on gross negligence manslaughter would be thrown into utter confusion by the suggestion that there is no such thing anymore as a duty to take care not to injure another. So the only practical way of abolishing PI law is to adopt the second method, which is to keep PI law’s first tier in place and remove the second tier. And when we ask ‘What is the G that PI law exists to serve?’ we are really asking ‘What is the G that the second tier of PI law seeks to serve and which would be damaged if that second tier were taken away?’ I have suggested elsewhere49 that G is ‘preserving the legitimacy of private law’, where private law is legitimate if it is generally respected by its subjects,50 and preserving respect for private law among its subjects is important if private law is to be effective.51 Were PI law to recognise in its first tier that A owes B a duty to take care not to injure B, and then take no action at all should A breach that duty, then B would be entitled to think that the first tier of PI law counted for n ­ othing – that the first tier was ‘little more than a sounding brass or tinkling cymbal’.52 As a result, the first tier of PI law would be thrown into disrepute, with knock-on effects for private law’s general capacity to motivate people generally to heed and act on its requirements. So PI law cannot do nothing in the case where A breaches a duty owed to B to take care not to injure B – it has to do something to show that the duty of care it imposed on A for B’s benefit counts for something. And what it does is place A under a duty/liability to pay damages to B, which is designed to compensate B for the kind of losses that the duty of care that A owed B sought to protect B from suffering. The fact that someone else may end up picking up the tab for A’s negligence – A’s insurer, A’s employer or, in the case where A is a public body or works for a public body, the state – is irrelevant: what is crucial is that there was a tab and it would have had to have been picked up by A if nobody else paid.53 In this way, PI law shows that

47 ibid 117. 48 Donoghue v Stevenson [1932] AC 562 (HL) 583 (Lord Atkin). 49 See McBride (n 36) 204–12. 50 ibid 31, 199. 51 ibid 199. 52 Simpson v Attorney-General (Baigent’s Case) [1994] 3 NZLR 667 (NZCA) 693 (Hardie Boys J, referring to 1 Corinthians 13:1). 53 To the same effect, see A Burrows, Understanding the Law of Obligations (Oxford, Hart Publishing, 1998) 123.

152  Nicholas J McBride the duty of care that its first tier imposed on A for B’s benefit was not an empty aspiration, but had real force. It follows that abolishing the second tier of PI law would do real damage to the general effectiveness of private law to achieve its goals. Now, the question that has to be answered by those who would get rid of the second tier of PI law is ‘Could this damage be avoided if there existed a no-fault compensation scheme that would make B whole (so far as money could do it) in the event of B’s being injured as a result of A’s breaching the duty of care that the first tier of PI law imposed on A for the benefit of B?’ Or, to put it another way, ‘Would the replacement of the second tier of PI law with a no-fault compensation scheme avoid B’s getting the impression that the duty of care A owed B is just a cipher, and does not really count for anything?’ I think the answer has to be ‘no’. The problem is that B’s ability to access the no-fault compensation has everything to do with the fact that B has been injured and nothing to do with the fact of how that injury came about – that it came about as a result of B’s being the victim of a breach of a duty of care. So, the fact of B’s being made whole through a no-fault compensation scheme cannot convey the message that the duty of care A owed B counts for something – in fact, the opposite message is conveyed: the existence and breach of the duty of care counts for nothing as its existence and breach gives B no advantage at all in terms of being made whole.54 And the answer is still ‘no’ even if it is the case – as it is under New Zealand law55 – that A will be liable to pay B punitive, or exemplary, damages if A’s breach of the duty of care he owed B evinced ‘an outrageous and flagrant disregard’ for B’s safety.56 The availability of such an award will mean that the duty of care A owes B counts for something so long as it is breached in an outrageous way. But that means, effectively, that the only duty owed by A to B that will count for something is a duty not to injure B in a way that shows ‘an outrageous and flagrant disregard’ for B’s safety. That duty is very different from the duty of care that A is supposed to owe B, and B will be entitled to think that the latter duty of care counts for nothing in the eyes of the law even if the law is prepared to punish some egregious violations of that duty. To sum up this section, then: PI law – like the rest of tort law – is made up of two tiers, where the first tier recognises us as owing each other certain legal duties or

54 cf Richard Miller’s observation (in ‘Comments: The New Zealand Experience’ (n 13) 632) that New Zealand’s no-fault compensation scheme ‘leaves victims with little sense of justice, particularly in cases of serious, fault-caused injury. The victim may very well feel a sense of deep injustice, especially if it’s a serious accident and a serious injury, like paraplegia, where the person who caused the act was a drunk driver or clearly wrong in some other way but does not have to pay a nickel to the victim.’ Janet O’Sullivan also pointed out, in discussion of this chapter at the conference, that a no-fault compensation scheme works very unjustly where, of three babies born with disabilities, the first baby’s disabilities were due to a doctor’s carelessness in delivering the baby, the second baby’s disabilities were due to non-careless actions performed by a doctor (such as triggering early delivery in order to save the mother’s life) and the third baby’s disabilities were congenital. Under a no-fault compensation scheme, the first and second babies will receive compensation for their disabilities while the third baby gets nothing. This is much more indefensible than the current position under PI law in the UK, where the first baby is able to sue in tort for compensation because he did not get the treatment that was due to him while the second and third babies get nothing because they did get the treatment that was due to them. 55 Accident Compensation Act 2001 (NZ), s 319. 56 McLaren Transport Ltd v Somerville [1996] 3 NZLR 424 (NZCA) 434 (per Tipping J). See also A v Bottrill [2002] UKPC 44, [2003] 1 AC 449 [40] (Lord Nicholls).

Personal Injury  153 enjoying certain legal rights against each other, and the second tier specifies how the law will respond to the breach of those duties or violation of those rights. The second tier of PI law serves the social good of preserving the legitimacy of private law, or the respect that the subjects of private law have for private law. This counts as a social good, as private law’s legitimacy has to be preserved if private law is to be effective in guiding the conduct of its subjects. That social good will be damaged if the second tier of PI law is removed, and putting in its stead a no-fault compensation scheme will do nothing to avoid the damage done by removing the second tier of PI law. III. CONCLUSION

Lord Sumption concludes his attack on PI law by observing that he has ‘no doubt that it will survive’, because: (i) a no-fault compensation scheme will be too expensive to implement; (ii) the costs of PI law are too diffuse to be noticeable and are therefore unlikely to give rise to public pressure on politicians to do something about PI law; and (iii) PI law ‘responds to widespread public notions about personal responsibility and the proper function of law’.57 My conclusion is that if PI law does survive, that should be a matter of relief, not commiseration. As I have sought to show, the cost of PI law is extremely difficult to identify. In contrast, the value of PI law should now be clear, even if we disregard its equally clear incidental benefits. The first tier of PI law – which recognises that we all owe each other duties to take care not to injure others  – cannot be dispensed with in a civilised society. The second tier of PI law cannot be removed without damaging the respect the subjects of private law have for private law, thereby endangering private law’s capacity to influence the conduct of those subjects. When the Church of England proposed to update its forms of service, abandoning the traditional Book of Common Prayer, WH Auden asked, ‘Why should we spit on our luck?’58 We would, I suggest, be guilty of the same were PI law to be dispensed with in this country.

57 Sumption (n 1) 120. 58 Mendelson (ed), The Complete Works of WH Auden: Prose: Volume VI 1969–1973 (Princeton, NJ, Princeton University Press, 2015) 172.

154

9 Injunctions DONAL NOLAN

There is much to be said for the view that damages are ordinarily an adequate remedy for nuisance and that an injunction should not usually be granted in a case where it is likely that conflicting interests are engaged other than the parties’ interests. – Coventry v Lawrence1

I. INTRODUCTION

I

n his short but characteristically forceful judgment in Coventry v Lawrence, Lord Sumption launched a stinging attack on the orthodox position governing the availability of injunctions in nuisance cases – indeed, the most radical such questioning of that orthodoxy by any English judge in the history of the issue. According to Lord Sumption:2 In my view, the decision in [Shelfer v City of London Electric Lighting Co] is out of date, and it is unfortunate that it has been followed so recently and so slavishly. It was devised for a time in which England was much less crowded, when comparatively few people owned property, when conservation was only beginning to be a public issue, and when there was no general system of statutory development control. The whole jurisprudence in this area will need one day to be reviewed in this court. There is much to be said for the view that damages are ordinarily an adequate remedy for nuisance and that an injunction should not usually be granted in a case where it is likely that conflicting interests are engaged other than the parties’ interests. In particular, it may well be that an injunction should as a matter of principle not be granted in a case where a use of land to which objection is taken requires and has received planning permission.

In this chapter, I seek to place Lord Sumption’s comments in perspective, by considering the previous case law and academic writing on the question, as well as the arguments for and against a radical reappraisal of the role of the injunction as a tort remedy. I also ask whether the more general shift away from the Shelfer criteria

1 Coventry 2 ibid

v Lawrence [2014] UKSC 13, [2014] AC 822 [161] (Lord Sumption). [161].

156  Donal Nolan towards a broader discretion in the light of the Coventry decision is to be welcomed, and which factors should be taken into account when that discretion is exercised. It is worth emphasising at the outset that the discussion of remedies in Coventry was sometimes tentative, and that although Lord Sumption expressed clear disapproval of the continued application of Shelfer, he was careful to frame his broader observations in terms of a possible future decision following fuller argument and consideration of the authorities. Hence, in the sentence immediately following those reproduced above, he said: ‘However, at this stage, in the absence of argument on these points, I can do no more than identify them as calling for consideration in a case in which they arise.’3 In that same spirit, my aim in this chapter is not to subject Lord Sumption’s observations on injunctions to sustained critical analysis, but rather to take them as a stepping-off point for a more general survey of the issue. II.  THE EARLIER AUTHORITIES

A.  Before Lord Cairns’ Act It will be helpful to begin that survey with a review of the key authorities on the issue of injunctions preceding the Coventry decision. The deep history of the injunction as a tort remedy is obscure,4 but it is clear that from around the turn of the nineteenth century the Court of Chancery began to issue injunctions in nuisance cases with some degree of regularity. However, in the decades that followed, according to John McLaren, the remedy was employed ‘with some circumspection’:5 The Court was clearly not interested in granting an injunction upon mere proof of the existence of a nuisance. Rather it set down a series of rules governing the circumstances in which it would not grant this form of relief. The initial premise seems to have been that the injunction was an extraordinary remedy which should only be available where the injury was not capable of being adequately compensated by damages or where the interference was continuous or at least sufficiently frequent to represent a recurring grievance.

Furthermore, when deciding whether to grant injunctive relief, the courts at this time took account of the impact of doing so on the defendant’s commercial undertaking, with the result that there ‘was a tendency on the part of the courts to try and balance the interests of the parties, by considering the relative importance of each in the circumstances and of the impact of enjoining or not enjoining the defendant’s operation’.6 Then again, many of these early cases in which the courts adopted a balance of convenience approach concerned interlocutory relief or merely apprehended interference, and by the middle of the nineteenth century a tougher line is in evidence, at least where the court was being asked to grant a perpetual prohibitory injunction. 3 ibid [161]. 4 See R Palmer, ‘Modern Nuisance Law from a Historical Perspective’ (PhD thesis, University of the West of England, 2015) 204–13. 5 JPS McLaren, ‘Nuisance Law and the Industrial Revolution: Some Lessons from Social History’ (1983) 3 OJLS 155, 186. 6 ibid 187.

Injunctions  157 Two cases can be highlighted. The first is Attorney General v Birmingham,7 where specific relief was granted with a view to controlling the discharge by the defendant local authority of raw sewage into the River Tame,8 even though its counsel told the court that the effect of granting an injunction would be to turn Birmingham into ‘one vast cesspool’ and hence to bring about ‘a national calamity’. Sir William Page Wood VC was unimpressed:9 There are cases at law in which it has been held, that where the question arises between two portions of the community, the convenience of one may be counterbalanced by the inconvenience to the other, where the latter are far more numerous. But in the case of an individual claiming certain private rights, and seeking to have those rights protected against an infraction of the law, the question is simply whether he has those rights, and, if so, whether the Court, looking to the precedents by which it must be governed in the exercise of its judicial discretion, can interfere to protect them.

It followed that when considering whether to issue an injunction, it was a matter of ‘almost absolute indifference’ to the court whether the decision would affect ‘a population of 250,000, or a single individual carrying on a manufactory for his own benefit’.10 Although it is tempting to portray the Vice-Chancellor’s strident rejection of public benefit arguments as symptomatic of an individualistic common law ethos which puts private property rights above the interests of the masses – in this instance, the riparian rights of an aristocratic landowner above the health of those living in one of England’s biggest towns11 – this oversimplifies his position.12 In particular, he was not saying that public benefit considerations did not matter, but only that they did not matter in this court,13 and that the appropriate forum in which to raise such concerns was Parliament. The court’s function was ‘only to interpret what the Legislature (the proper body to which all such arguments should be addressed)’ had considered necessary for the protection of Birmingham.14 Furthermore, he was clearly alive to the possibility that the grant of injunctive relief would encourage the defendant to take steps to address the pollution problem. And if in the end it proved impossible to ‘drain Birmingham without invading the Plaintiff’s private rights’, then it must apply to Parliament for power to do so.15 The other telling case from this period is Imperial Gas Light and Coke Co v Broadbent,16 where a market gardener sought an injunction against a gas manufacturer whose new retort house was emitting noxious fumes that were killing his flowers, fruit and vegetables. According to Lord Campbell LC, provided the court was persuaded that the nuisance was a continuing one, then ‘unless there is something peculiar in the case, it 7 Attorney General v Birmingham (1858) 4 K & J 528, 70 ER 220. 8 For the precise orders made by the court, see L Rosenthal, The River Pollution Dilemma in Victorian England: Nuisance Law versus Economic Efficiency (Farnham, Ashgate, 2014) 65. 9 Birmingham (n 7) 539, 225. 10 ibid 539, 225. 11 See, eg HE Read, ‘Equity and Public Wrongs’ (1933) 11 Canadian Bar Review 73, 85. 12 See also B Pontin, Nuisance Law and Environmental Protection: A Study of Nuisance Injunctions in Practice (Witney, Lawtext, 2013) 41–44. 13 See, eg Birmingham (n 7) 536, 224 (‘We cannot talk of that in this Court’). 14 ibid 539, 225. 15 ibid 541, 226. 16 Imperial Gas Light and Coke Co v Broadbent (1859) 7 HLC 600, 11 ER 239 (HL).

158  Donal Nolan would be a matter of course to grant an injunction’.17 In response to the objection that an injunction would cause great inconvenience by disrupting the supply of gas to the local district, the Lord Chancellor questioned the assumption behind the objection, and speculated that the defendants might be able to ‘discover some chemical ingredients by the use of which the noxious effects of the gas … may be neutralised’.18 If not, then they must limit the quantity of gas to that which they produced before the new retort house was built. Either way, it was unlikely that the public would suffer any inconvenience. B.  Shelfer and After These two cases were decided on the basis that the Court of Chancery had no power to award damages, but in 1858 Parliament passed the Chancery Amendment Act (Lord Cairns’ Act), section 2 of which allowed the court, where an injunction was sought, ‘to award damages to the party injured, either in addition to or in substitution for such injunction’.19 The principal purpose of this provision was to streamline procedure: a plaintiff would no longer be forced to seek an injunction in a court of equity and bring a separate claim for damages in the common law courts. But the inclusion of the words ‘or in substitution for’ also gave the courts the power to award damages in lieu of an injunction for the future interference that was likely to result from the denial of specific relief. The fact that a monetary award could now be made instead of an injunction raised the possibility that the discretion to refuse such relief would be exercised more freely. It was some time before definitive guidance was provided on this possibility by the Court of Appeal in Shelfer v City of London Electric Lighting Co.20 The most influential judgment in Shelfer was that of AL Smith LJ, who began his analysis by reiterating that the general rule remained that if the plaintiff’s legal rights had been invaded, then he was ‘prima facie entitled to an injunction’.21 There were, however, circumstances in which this general rule could be relaxed, and damages awarded in substitution for an injunction as permitted by the 1858 Act. Those circumstances included not only cases where the plaintiff had ‘by his acts or laches … disentitled himself to an injunction’,22 but also cases where damages in lieu were simply a more ‘appropriate remedy’ than either a mandatory or prohibitory injunction. Furthermore, it could be stated as a ‘good working rule’ that:23 (1) (2) (3) (4)



17 ibid

If the injury to the plaintiff’s legal rights is small, And is one which is capable of being estimated in money, And is one which can be adequately compensated by a small money payment, And the case is one in which it would be oppressive to the defendant to grant an injunction: – then damages in substitution for an injunction may be given.

610, 243. See similarly Lord Kingsdown at 612, 244. 611, 244. successor provision to s 2 is the Senior Courts Act 1981, s 50. 20 Shelfer v City of London Electric Lighting Co [1895] 1 Ch 287 (CA). 21 ibid 322. 22 ibid 322. 23 ibid 322–23. 18 ibid

19 The

Injunctions  159 Although the application of these criteria on the facts of particular cases must ‘be left to the good sense of the tribunal which deals with each case’, to escape the rule the case must be ‘brought within the exception’.24 A similarly tough line was taken in Shelfer by Lindley LJ, who stated that where there was a continuing actionable nuisance the jurisdiction to award damages instead of an injunction should not be exercised ‘except under very exceptional circumstances’.25 Though wary of specifying what those circumstances were, Lindley LJ gave some examples of cases where damages were really an adequate remedy, including ‘trivial and occasional nuisances’, cases where a plaintiff had shown that ‘he only wants money’ and ‘vexatious and oppressive cases’.26 By contrast, public benefit had never been considered sufficient reason for denying an injunction. In an echo of Page Wood VC’s judgment in the Birmingham case, Lindley LJ commented that:27 Expropriation, even for a money consideration, is only justifiable when Parliament has sanctioned it. Courts of Justice are not like Parliament, which considers whether proposed works will be so beneficial to the public as to justify exceptional legislation, and the deprivation of people of their rights with or without compensation.

There is no reason to suppose that the Court of Appeal’s approach to damages in lieu of an injunction in Shelfer was out of keeping with earlier authority on Lord Cairns’ Act.28 An instructive decision from the 1870s is Pennington v Brinsop Hall Coal Co.29 In this case, the defendant colliery owners were polluting a stream which the plaintiffs used to power their mill, with the result that the plaintiffs’ machinery rapidly corroded. An injunction was granted (though suspended for three months) despite warnings by the defendants that this would cause the closure of the colliery. While Fry J accepted that the courts had awarded damages in lieu of an injunction in right to light cases, in riparian rights cases very different considerations applied. Interference with light was almost always caused by a permanent structural obstruction, ‘whereas the injury to water in the present case proceeds from a cause which varies from day to day, and may cease or increase at any time’.30 Furthermore, the plaintiffs’ riparian rights were ‘not limited to their present modes of enjoyment’, and it was impossible to foresee what modes of enjoyment they or their successors ‘may resort to, or the extent of damages which would be a compensation for the injury which the continued pollution might cause’ to them.31 As is apparent from Pennington, the relative ease of assessing damages in lieu where the nuisance consisted of an interference with ancient lights, coupled with the potentially draconian consequences of specific relief, led the courts to adopt a more flexible approach in that context. This remained the case after Shelfer. In Colls v 24 ibid 323. 25 ibid 316. 26 ibid 317. 27 ibid 316. 28 Though for a more critical view, see ML Wilde, ‘Nuisance Law and Damages in Lieu of an Injunction: Challenging the Orthodoxy of the Shelfer Criteria’ in S Pitel et al (eds), Tort Law: Challenging Orthodoxy (Oxford, Hart Publishing, 2013) 365–66. 29 Pennington v Brinsop Hall Coal Co (1877) 5 Ch D 769 (Ch). 30 ibid 773. 31 ibid 773.

160  Donal Nolan Home & Colonial Stores Ltd,32 for example, had the House of Lords found that the defendant was developing his property in such a way as to infringe the plaintiff’s right to light it would have refused to uphold the grant of an injunction. According to Lord Lindley, the case was ‘eminently one in which damages would be an adequate remedy’.33 Similarly, the Court of Appeal awarded damages in lieu of an injunction in Fishenden v Higgs and Hill Ltd even though the trial judge had held that the facts did not fall within the Shelfer criteria for refusing specific relief.34 According to Maugham LJ, Smith LJ’s working rule was ‘not a universal or even a sound rule in all cases of injury to light’.35 However, outside the light context, Shelfer was understood to mean that a plaintiff should be denied a prohibitory injunction against a continuing nuisance only if all four of Smith LJ’s criteria were met. In such cases, Lord Morris commented in 1969, the plaintiff was entitled to an injunction ‘as of course’, and the most that the defendant could hope for was a suspension, which might give it time to negotiate a settlement or to take ameliorative measures enabling the lawful continuation of its operations.36 According to McLaren, writing three years later, there had been ‘no enthusiasm for going outside’ the Shelfer criteria ‘and seeking to balance the equities, or to worry over hardship to the defendant or the possible injury to the local community’.37 A mid-twentieth-century case that bears out these observations is Pride of Derby and Derbyshire Angling Associations Ltd v British Celanese Ltd,38 where the Court of Appeal granted an injunction (suspended for several months) against the Derby Corporation to restrain it from discharging inadequately treated sewage into the River Derwent. Lord Evershed MR specifically denied that in such cases the decision as to the appropriate remedy rested on the balance of convenience as between the parties. On the contrary:39 It is, I think, well settled that if A proves that his proprietary rights are being wrongfully interfered with by B, and that B intends to continue his wrong, then A is prima facie entitled to an injunction, and he will be deprived of that remedy only if special circumstances exist, including the circumstance that damages are an adequate remedy for the wrong suffered.

Denning LJ agreed that while there were good reasons for suspending the injunction, there was no reason not to grant it. And in an echo of the nineteenth-century focus on the ability of an injunction to trigger alleviating measures, he remarked that ‘The power of the courts to issue an injunction for nuisance has proved itself to be best method so far devised of securing the cleanliness of our rivers’.40 32 Colls v Home & Colonial Stores Ltd [1904] AC 179 (HL). 33 ibid 212. 34 Fishenden v Higgs and Hill Ltd (1935) 153 LT 128 (CA). See also Kine v Jolly [1905] 1 Ch 480 (CA). For discussion of right to light cases where damages in lieu were awarded prior to Shelfer, see JA Jolowicz, ‘Damages in Equity – A Study of Lord Cairns’ Act’ (1975) 34 CLJ 224, 234–36. 35 Fishenden (n 34) 144. 36 Redland Bricks v Morris [1970] AC 652 (HL) 664. 37 JPS McLaren, ‘The Common Law Nuisance Actions and the Environmental Battle: Well-Tempered Swords or Broken Reeds?’ (1972) 10 Osgoode Hall Law Journal 505, 550–51. 38 Pride of Derby and Derbyshire Angling Associations Ltd v British Celanese Ltd [1953] 1 Ch 149 (CA). 39 ibid 181. 40 ibid 192.

Injunctions  161 C.  The 1970s Onwards Over two decades later, however, it was Lord Denning MR who was instrumental in the first significant judicial challenge to the Shelfer orthodoxy. In Miller v Jackson,41 cricket balls were occasionally hit from the defendants’ village cricket ground into the adjacent garden of the plaintiffs. These stray balls sometimes caused physical damage to the plaintiffs’ house, and the plaintiffs themselves were forced to remain indoors during matches for fear of being struck. The defendants had taken a number of measures to try to deal with the problem, but these had not been wholly effective, and ultimately it was accepted by them that as long as cricket was played on the ground it was inevitable that occasional balls would enter the plaintiffs’ premises and potentially cause damage. Although Lord Denning’s evident sympathy for the cricket club caused him to conclude that no nuisance had been committed by them, in that respect he failed to carry the day, and the majority of the Court of Appeal imposed liability. However, when it came to the question of remedies, Lord Denning and Cumming-Bruce LJ agreed that the injunction granted by the trial judge should be discharged and damages for future injury awarded instead. They reasoned that in deciding whether to issue an injunction the court must weigh the interests of the public at large against those of the plaintiffs, and on balance the interest of the inhabitants of the village in the continuation of cricket ought to prevail over the private interest of the plaintiffs, who had bought their house knowing of its close proximity to the ground. However, as Geoffrey Lane LJ pointed out, dissenting on the remedy issue, this was not a case where damages were an adequate remedy, and nor were there – despite Cumming-Bruce LJ’s assertion to the contrary – any other ‘special circumstances’ of the kind that had been mentioned in the Pride of Derby case as justifying a refusal of injunctive relief. Furthermore, the heavy reliance the majority placed on public interest considerations directly contradicted a consistent line of authority which we have seen dated back to the middle of the nineteenth century. It was therefore unsurprising that Miller v Jackson was not followed in Kennaway v Thompson,42 where the authority of Shelfer was reaffirmed. In Kennaway, which concerned a noise nuisance caused by motorboat racing on an artificial lake in the Cotswolds, the first instance judge had refused to grant an injunction on public interest grounds, citing the large numbers of people who attended the races. However, the Court of Appeal overturned that decision, and issued an injunction that was carefully tailored to limit the noise caused by the racing to legal levels. Lawton LJ, who gave the only judgment, considered that the court was bound to follow Shelfer, which had been ‘applied time and time again during the past 85 years’.43 The emphasis in Miller on public interest considerations ran counter to the principles set out in Shelfer, he argued, and there was nothing in that case which was binding on the court in Kennaway and which qualified the Shelfer approach. Following on from the Kennaway decision, the Court of Appeal continued consistently to apply Shelfer across all types of case. In Jaggard v Sawyer,44 which concerned

41 Miller

v Jackson [1977] QB 966 (CA). v Thompson [1981] QB 88 (CA). 43 ibid 93. 44 Jaggard v Sawyer [1995] 1 WLR 269 (CA). 42 Kennaway

162  Donal Nolan trespass and breach of covenant, the court refused to issue an injunction that would have had the effect of landlocking the plaintiffs’ house, but Sir Thomas Bingham MR arrived at this outcome by holding that on the facts all four of AL Smith LJ’s criteria were satisfied, and warned against the courts sliding ‘into application of a general balance of convenience test’.45 Millett LJ commented that those criteria ‘had stood the test of time’, while cautioning that the checklist was ‘only a working rule’ and did ‘not purport to be an exhaustive statement of the circumstances in which damages may be awarded instead of an injunction’.46 In Watson v Croft Promosport Ltd,47 the same court mimicked the Kennaway ruling by granting an injunction to restrain activities at a motor sports circuit, while allowing the defendant to continue some racing and associated activities at a level which would not amount to a nuisance. The judge in the case had refused to grant any injunction, taking into account (inter alia) the fact that the circuit provided employment and an opportunity for those who wished to race cars at speed to do so legally and in relative safety. However, according to Sir Andrew Morritt C, while public interest considerations could tip the balance in a ‘marginal case where the damage to the claimant is minimal’,48 this was not such a case and the existence of a public benefit from the defendant’s activity could not alone negate the requirement of exceptional circumstances and oppression of the defendant required by Shelfer and later authorities. More surprisingly, a strict approach was also taken in the right to light case of Regan v Paul Properties Ltd,49 despite an abundance of earlier case law demonstrating greater flexibility in that context.50 According to Mummery LJ in Regan, the Shelfer criteria applied with equal force in light cases, and the burden remained on the defendant to show that there were exceptional circumstances justifying refusal of what was in that case a mandatory injunction requiring it to pull down part of a development under construction because of its impact on the light in the plaintiff’s living room. Despite the consistency of the Court of Appeal’s approach, Miller v Jackson undoubtedly raised doubts in the minds of judges as to the suitability of the Shelfer criteria for modern conditions. In a first instance decision from 2003, Dennis v Ministry of Defence,51 an award of damages in lieu was made even though the requirement that the injury to the claimant’s rights must be small was clearly not met. Noise from military aircraft carrying out training exercises in the vicinity of the claimant’s stately home was held to amount to a nuisance, which had reduced the market value of the estate by some £4m, and destroyed any possibility of using it for commercial entertaining. However, even though Buckley J accepted that the noise was ‘a very serious interference with the ordinary enjoyment of the property’,52 he refused to issue a declaration53 in the light of the strong public interest in permitting the training to



45 ibid

283. 287. 47 Watson v Croft Promosport Ltd [2009] EWCA Civ 15, [2009] 3 All ER 249. 48 ibid [51]. 49 Regan v Paul Properties Ltd [2006] EWCA Civ 1391, [2007] Ch 135. 50 See the text to n 31 above. 51 Dennis v Ministry of Defence [2003] EWHC 793 (QB), [2003] Env LR 34. 52 ibid [23]. 53 As the action was against the Crown, no injunction could be issued: Crown Proceedings Act 1947, s 51. 46 ibid

Injunctions  163 continue at the RAF base in question. On the question of authority, he commented that the facts of the case were ‘extreme’, and not analogous to others to which he had been referred.54 There were also obiter dicta in two Court of Appeal decisions that cast doubt on the Shelfer approach. In Wheeler v JJ Saunders Ltd, Peter Gibson LJ commented that in the case of a major development with wide consequential effects for which planning permission had been given, he could well see that ‘the public interest must be allowed to prevail and that it would be inappropriate to grant an injunction’.55 And in Barr v Biffa Waste Services Ltd, Carnwath LJ said that he did not regard the Watson approach to the granting of an injunction in nuisance cases as ‘the last word on the scope of the discretion as a matter of law’, and suggested that the trade-off for the preservation of common law rights in the light of the enactment of parallel systems of regulatory control could be a more flexible approach at the remedies stage.56 D.  Academic Criticism Carnwath LJ’s suggestion of a link between injunctive relief and regulatory compliance drew on an article by Maria Lee,57 and she was not the only academic whose work questioned the Shelfer principles. In an early critique, a Canadian commentator maintained that the English courts had shown insufficient flexibility in refusing to consider public and social interests when exercising the discretion afforded by Lord Cairns’ Act,58 while JA Jolowicz later argued in an article on that Act that the very idea of exhaustive criteria was incompatible with a general equitable discretion.59 However, the most sustained attack on Shelfer came in an article by Stephen Tromans entitled ‘Nuisance–Prevention or Payment?’, in which he set out his stall as follows:60 It will be suggested that the law on remedies is unduly strict and narrow as to the factors which a court may take into account in deciding what remedy to give; that this approach has had, and continues to have, serious and undesirable side-effects on the substantive law of nuisance; that while the courts are coming to achieve a measure of flexibility in this area they are doing so by regrettably roundabout means; and that the time is long overdue for a judicial re-appraisal of this important corner of the law.

Tromans criticised the Shelfer criteria for being too restrictive of the discretion to refuse an injunction, and noted that three of the four criteria were concerned with the plaintiff’s rights and only one with the position of the defendant, and also that there was nothing requiring or permitting a court to consider the effect of the order on the 54 Dennis (n 51) [48]. 55 Wheeler v JJ Saunders Ltd [1996] Ch 19 (CA) 35. 56 Barr v Biffa Waste Services Ltd [2012] EWCA Civ 312, [2013] QB 455 [124]. 57 See M Lee, ‘Tort Law and Regulation: Planning and Nuisance’ [2011] Journal of Planning and ­ nvironment Law 986, 990. E 58 Read (n 11). 59 Jolowicz (n 34) 250. See also RA Buckley, ‘Injunctions and the Public Interest’ (1981) 44 MLR 212, 214 (Shelfer conditions not a comprehensive statement of the circumstances in which the jurisdiction to award damages under Lord Cairns’ Act could be exercised). 60 S Tromans, ‘Nuisance—Prevention or Payment?’ (1982) 41 CLJ 87, 88.

164  Donal Nolan public at large. It was ‘the refusal of the judges to look into the effect of the order made on the defendant and on the public’ which had made the discretion so inflexible.61 He concluded that, in the light of changing attitudes to private property rights, the time was now ‘ripe for a fundamental review of the rule in Shelfer’s case’, with damages being ‘regarded as a genuine alternative to the injunction as a remedy, at the genuine discretion of the court’.62 More recently, in a book chapter published shortly before the decision in the Coventry case, Mark Wilde echoed many of Tromans’s points, arguing that the Shelfer criteria ‘should not be applied in a dogmatic and inflexible manner’63 and that there was no historical or doctrinal reason for a bright-line rule excluding public utility arguments from consideration when a court was deciding whether to exercise its discretion to award damages in lieu of an injunction.64 III. THE COVENTRY DECISION

The claimants in Coventry v Lawrence had bought a bungalow in an isolated location in the Suffolk fenland a few hundred metres from a complex consisting of a stadium and track used for motor sports. The house was surrounded by fields and there were no other residential properties within a half-mile radius. Permanent planning permission had been granted for speedway racing at the stadium some 20 years earlier, and stock car and banger racing were covered by a certificate of lawful use. Permanent planning permission had also been granted four years previously for motocross events at the track, albeit with detailed conditions as to the frequency and timing of these events, and the level of noise they generated. The claimants were upset by the noise from the stadium and track, and sued a number of defendants associated with the facilities in private nuisance. Their claim was successful at first instance, where the judge awarded injunctive relief imposing decibel limits and operating restrictions. Although the Court of Appeal reversed that decision on liability, on further appeal the Supreme Court restored the order of the judge. The defendants had not argued against specific relief in the lower courts, and since the Supreme Court considered it inappropriate to decide such a fact-sensitive issue ab initio, the order given at first instance was restored, with the caveat that the defendants could apply to have the injunction discharged, and damages awarded in lieu.65 The bulk of the discussion in Coventry concerned liability issues, including the locality principle, the relevance of the fact that the claimants had ‘come to the nuisance’ and the defence of prescription. By and large, these questions were quite independent of the discussion of remedies, but an exception was the relationship between planning permission and nuisance.66 On that issue, the Supreme Court 61 ibid 90. 62 ibid 108–09 (original emphasis). 63 Wilde (n 28) 356. 64 ibid 384. 65 It was subsequently decided to suspend the injunction until the rebuilding of the bungalow, which had been severely damaged in a fire prior to the first instance hearing: Coventry v Lawrence (No 2) [2014] UKSC 46, [2015] AC 106. 66 See Coventry (n 1) [155] (Lord Sumption).

Injunctions  165 considered the extent to which (if at all) planning permission could be relied on as a defence to the nuisance claim, and also whether a grant of such permission could be argued to have changed the character of the locality for the purposes of applying the locality principle, as had been held in an earlier decision at first instance, Gillingham Borough Council v Medway (Chatham) Dock Co Ltd.67 The Supreme Court reiterated that, unlike statutory authority, planning permission was not a defence to nuisance liability, and for the most part rejected the Gillingham principle, although Lord Carnwath expressed support for a narrow version of that principle, on the basis that in ‘exceptional cases’ a grant of planning permission that was the result of a considered assessment of the appropriate balance between public and private interests and which led to a ‘fundamental change in the pattern of uses’ could not sensibly be ignored in assessing the character of the area.68 Turning to the question of remedies, it seems appropriate (given the focus of this book) to begin with a closer analysis of Lord Sumption’s remarks on that issue. In those remarks, Lord Sumption emphasised the effect that an injunction could have on third parties, and the possible public interest implications of this. Restraint of a use by injunction prevented the activity in question being carried on, even though it might be ‘in the interest of very many other people who derive enjoyment or economic benefits from it of precisely the kind with which the planning system is concerned’. In practice, the effect of injunctive relief was the same as a refusal of planning permission, ‘but without regard to the factors which a planning authority would be bound to take into account’. The ‘obvious solution’ to this problem was to permit the activity to continue but to compensate the claimant for the losses he would suffer as a result. And where planning permission had in fact been granted for the use in question, there were ‘particularly strong reasons for adopting this solution’.69 Furthermore, the general principle was that an injunction would not be granted where damages would be an adequate remedy, and yet this principle had never been consistently followed in the nuisance context. After referring to the relevant authorities, Lord Sumption commented that:70 the Shelfer principle was based mainly on the court’s objection to sanctioning a wrong by allowing the defendant to pay for the right to go on doing it. This seems an unduly moralistic approach to disputes, and if taken at face value would justify the grant of an injunction in all cases, which is plainly not the law …

There then followed the conclusion to his analysis, as set out at the beginning of this chapter. In Lord Neuberger’s judgment in Coventry, he also addressed at some length ‘the proper approach for a court to adopt on the question whether to award damages instead of an injunction’.71 The general message conveyed by his analysis was that of flexibility. In particular, he criticised the approach taken by the Court of Appeal in the Regan and Watson cases as ‘an almost mechanical application’ of the Shelfer criteria, and deprecated an approach under which damages were awarded only in ‘very

67 Gillingham

Borough Council v Medway (Chatham) Dock Co Ltd [1993] QB 343 (QB). (n 1) [223]. 69 ibid [157]. 70 ibid [160]. 71 ibid [102]. 68 Coventry

166  Donal Nolan exceptional circumstances’.72 As a matter of principle, the court’s discretion to award damages in lieu of an injunction should not be fettered, while, ‘as a matter of practical fairness’, each case was likely to be so fact-sensitive that any firm guidance was likely to do more harm than good,73 although it was legitimate for the courts to set out factors which could, and could not, be taken into account in the exercise of that discretion. At the same time, however, Lord Neuberger reiterated the traditional rule that prima facie the claimant is entitled to an injunction, so that the legal burden lies on the defendant to show why one should not be granted. As for the Shelfer criteria, Lord Neuberger considered that while it would generally be right to refuse an injunction if AL Smith LJ’s four tests were all satisfied, it did not follow from the fact that they were not that specific relief should be given. On the question of public interest considerations, Lord Neuberger’s judgment also represented something of a departure from previous authority. He found it hard to see how the public interest could not, as a matter of law, be a relevant factor in an appropriate case, though he made clear that this might militate both against and in favour of specific relief. Furthermore, there might be cases where the grant of planning permission for a particular activity (again, either at the defendant’s or the claimant’s premises) supported the contention that that activity was of benefit to the public, which would then be relevant to the question of whether or not to grant an injunction. Lord Neuberger also suggested that in some instances the fact that an injunction ‘would involve a loss to the public or a waste of resources’, or that ‘the financial implications of an injunction for the defendant would be disproportionate to the damage done to the claimant if she was left to her claim in damages’, might tip the balance in favour of the latter remedy.74 As for Lord Sumption’s suggestions as to how the law might develop, Lord Neuberger could see ‘much merit’ in them, but considered that it would be inappropriate to go further than he had indicated in his own judgment at this stage, in the light of the arguments that had been put to the court.75 Lord Mance expressed his broad agreement with Lord Neuberger’s analysis of the remedy issue, while specifically denying that the grant of planning permission should raise a presumption against injunctive relief. However, he clearly disassociated himself from Lord Sumption’s more radical approach. In particular, he was not persuaded that damages were ordinarily an adequate remedy for nuisance, nor that an injunction ought generally to be refused where conflicting interests other than those of the parties were likely to be engaged. ‘[T]he right to enjoy one’s home without disturbance’, he argued, was not ‘one which I would believe that many, indeed most, people value for reasons largely if not entirely independent of money’.76 By contrast, Lord Clarke appeared more sympathetic to Lord Sumption’s take on the remedy issue, and expressed his agreement with the latter’s observations on the Shelfer case, while choosing to leave the burden of proof question open.77 Finally, in the absence of relevant findings at first instance, Lord Carnwath considered that the Supreme Court should approach the remedy issue

72 ibid

[119]. [120]. 74 ibid [126]. 75 ibid [127]. 76 ibid [168]. 77 ibid [170]–[171]. 73 ibid

Injunctions  167 with caution, but nevertheless agreed that ‘the opportunity should be taken to signal a move away from’ the Shelfer criteria, and that this was particularly relevant where an injunction would have serious consequences for third parties, ‘such as employees of the defendant’s business, or, in this case, members of the public using or enjoying the stadium’.78 However, he agreed with Lord Mance that special importance should attach to the right to enjoy one’s home without disturbance, and also distanced himself from the more radical aspects of Lord Sumption’s judgment, in particular insisting that the burden of proof should be on the defendant to argue against injunctive relief, even if planning permission had been granted for the defendant’s activity. IV. ANALYSIS

Although at times hesitant, the Supreme Court’s discussion of the remedy issue in Coventry is manifestly of great significance – indeed, Lord Clarke considered it to be the most important aspect of the decision.79 While the precise ramifications of that discussion will only become apparent with time, it seems clear that the decision introduces greater flexibility into the exercise of the discretion to award damages in lieu of an injunction, weakens the presumption in favour of specific relief, and significantly degrades80 Shelfer and the criteria set out by AL Smith LJ in that case. Then again, the degree to which the decision changes the law on injunctions should not be overstated. After all, the Shelfer principles were not completely disavowed, only reduced in importance, and most of the Justices accepted that there should still be a presumption in favour of a prohibitory injunction in the case of a continuing nuisance. With respect, that seems right, and the powerful criticism provoked by Lord Sumption’s suggestion that damages are normally an adequate remedy for a nuisance seems justified.81 Contrary to that suggestion, there were perfectly good reasons for the working assumption in the earlier authorities that the claimant’s interest in the peaceful use and enjoyment of his or her land was not one that could be adequately captured in monetary terms.82 That still leaves the broader question of the extent to which the Supreme Court in Coventry was right to signal a more flexible approach to the exercise of the discretion to refuse an injunction, and the relevance to that discretion of public interest considerations and planning permission. Discussion of that broader question can usefully start with the view forcibly expressed by some property lawyers in the aftermath of Coventry that the remedial approach adopted in that case paves the way for the forced sale of the claimant’s proprietary rights, and that only Parliament has the authority to expropriate private rights in this way.83 The difficulty with this hardline view – 78 ibid [239]. 79 ibid [171]. 80 See M Dixon, ‘The Sound of Silence’ [2014] Conveyancer & Property Lawyer 79, 84. 81 See, eg D Howarth, ‘Noise and Nuisance’ (2014) 73 CLJ 247, 250; C Rotherham, ‘Property and Power: The Judicial Redistribution of Proprietary Rights’ in K Barker et al (eds), Private Law and Power (Oxford, Hart Publishing, 2017) 131. 82 This point is well made by J Murphy, ‘Rethinking Injunctions in Tort Law’ (2007) 27 OJLS 509, 512. 83 See, eg PS Davies, ‘Injunctions in Tort and Contract’ in GJ Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge, Cambridge University Press, 2017). See also Dixon (n 80) 84: ‘For an unrepentant property lawyer [the shift away from an injunction towards damages] is hard to swallow: the whole point of proprietary rights … is that they are about land use, not land value.’

168  Donal Nolan which Lord Sumption characterised as ‘overly moralistic’ – is that, as he pointed out, it seems to be incompatible with any discretion being exercised at all in injunction cases. This is because in a property tort context any award of damages in lieu of an injunction amounts to a forced sale of the claimant’s property rights, even where the wrong in question is admittedly a trivial one. Hence, once it is accepted that there are circumstances in which a court can legitimately employ this remedial response, the pass has been sold, and the question becomes not whether, but when, such a forced sale should be countenanced.84 And since I do not read the property hardliners as objecting to the award of damages in lieu in at least some cases, this objection to remedial flexibility quickly collapses at the level of principle, even if, as John Fleming cautioned, the fact that the discretion to award such damages amounts to a judicial power of expropriation does suggest that it should be administered ‘very cautiously’, so as not to become ‘an instrument for legalizing the commission of a tort by any defendant able and willing to pay for it’.85 Even if we set aside the hardline property view, however, the remedial flexibility introduced by Coventry has not been universally welcomed. For example, Ben Pontin, who has studied nuisance injunctions and their aftermath in great depth,86 has criticised the move away from the Shelfer criteria, commenting that:87 the Supreme Court has arguably lost sight of what nuisance law is when it comes to the critically important question of remedies. It has purported to signal a liberalisation of the law of damages in lieu of an injunction that may limit the availability of the law’s primary remedy (an injunction), without any clear justification in principle, and with gaps in the precedents cited.

One obvious objection to the Coventry approach to remedies is that it will make it more difficult for parties to reach a negotiated settlement. To some extent, this concern may be allayed by subsequent clarificatory case law, but, as Lord Sumption reminded us in Patel v Mirza, the use of a multifactorial test on a case-by-case basis ‘leaves a great deal to a judge’s visceral reaction to particular facts’ and the resultant uncertainty ‘is likely to generate a great deal of wasteful and unnecessary litigation’.88 By contrast, as Davies points out, ‘one of the great virtues of Shelfer was its relative predictability’.89 On the other hand, a criticism sometimes made of Shelfer was that the inability of courts to award damages in lieu except in a very narrow range of cases risked judges feeling constrained to bend the rules on liability to avoid curtailing beneficial activities.90 Although it is difficult to assess the validity of that criticism, the broadening of the discretion ushered in by Coventry should serve to obviate any danger that 84 See also Rotherham (n 81) 122–23. Indeed, the absolutist property position is even inconsistent with the established practice of suspending an injunction to give a defendant time to get their house in order. After all, does this not amount to a forced lease of property rights, albeit not a forced sale? 85 JG Fleming, The Law of Torts, 8th edn (Sydney, LBC Information Services, 1998) 496. 86 See especially Pontin (n 12). 87 B Pontin, ‘Private Nuisance in the Balance: Coventry v Lawrence (No 1) and (No 2)’ (2015) 27 Journal of Environmental Law 119, 120. One important authority which Pontin points out was not cited to the Court was the Pride of Derby case, discussed in the text to n 38 above. 88 Patel v Mirza [2016] UKSC 42, [2017] AC 467 [263]. 89 Davies (n 83) 138. 90 This argument was made by Tromans (n 60) 105–08, though in my view not all his examples are convincing. The same point is made by Wilde (n 28) 356.

Injunctions  169 in practice a strict remedial approach may result in claimants being left uncompensated for interferences that ought rightfully to have been treated as actionable.91 Turning to the public interest question, there is considerable force in the argument that it may be difficult for a judge to determine where that interest lies,92 and that for this and other reasons such concerns are best dealt with by elected politicians and the administrators accountable to them. As we have seen, the view that public interest arguments were a matter for Parliament rather than the courts underlay the judicial dismissal of such arguments in the nineteenth-century case law, and while the Supreme Court may have been right to question the suitability of that orthodoxy for modern conditions, it would be wrong to dismiss it out of hand. The polycentric nature of determinations of the public interest renders them ill-suited to adversarial litigation, and whereas in, say, compulsory purchase proceedings, third-party interveners such as environmental groups would have standing, that is not the case in a private law nuisance action.93 It should, of course, also be remembered that, as Lord Neuberger emphasised, public interest arguments may cut both ways in this context,94 even if it is clearly difficult to measure the social costs of amenity harms caused by pollution and the like. Assessment of public interest arguments against specific relief in nuisance cases is also complicated by the fact that these are often predicated on the false assumption that granting an injunction will necessarily result in the closing down of the defendant’s operations. On the contrary, in practice, the grant of an injunction will frequently lead either to a negotiated settlement between the parties underpinned by the threat of the injunction’s enforcement or other, less drastic, solutions than closure, such as the relocation of the defendant’s enterprise to a more suitable area or the taking of measures to reduce the interference it causes.95 Solutions of this kind can be facilitated by the suspension of the injunction or the use of other techniques exploiting the flexibility inherent in specific remedies96 (a flexibility to which, it must be said, the Supreme Court in Coventry paid scant regard). Furthermore, these workarounds may themselves bring with them considerable public benefits. In the Birmingham case, for example, recent research shows that the decision to award an injunction triggered a spate of similar actions against other local authorities, which had the ultimate effect of bringing about much needed municipal investment in modern systems of sewage purification.97

91 Though a broader discretion does give rise to a different risk, namely, that the discretion is used to deny claimants an effective remedy in cases where the court finds the effect of a well-established liability rule unpalatable. Clearly this was the case in Miller v Jackson (n 41), where Lord Denning MR and CummingBruce LJ did little to hide their disapproval of the principle that ‘coming to the nuisance is no defence’. 92 See Coventry (n 1) [158] (Lord Sumption). 93 PS Davies, ‘Lighting the Way Ahead: The Use and Abuse of Property Rights’ in S Bright (ed), Modern Studies in Property Law, Volume 6 (Oxford, Hart Publishing, 2012) 57–58. 94 See also McLaren (n 37) 556 (observing that in pollution cases, ‘two apparently opposing community interests must be balanced against each other’). 95 See generally Pontin (n 12), who points out (167) that in none of his case studies was the defendant enterprise closed down as the result of an injunction being awarded against it. 96 See McLaren (n 37) 557–59. By contrast, there is little flexibility in the damages remedy, and in particular ‘no legal device for easing the impact on the defendant’ of a sizeable award (ibid 560). For discussion of some of the ‘other techniques’ mentioned in the text, see Rosenthal (n 8) 52–54. 97 See Pontin (n 12) ch 2, who describes this (at 26) as ‘a remarkable example of nuisance law facilitating technological innovation’. Rosenthal (n 8) is admittedly less sanguine about the aftermath of the Birmingham litigation, but does accept (at 231) that ‘the intervention of the courts was sometimes able to harry

170  Donal Nolan Overall, then, while the Supreme Court may well have been right to reserve to the courts the power to take account of public interest considerations when exercising their remedial discretion, the traditional judicial circumspection in this regard was grounded in good sense and invocation of such considerations ought perhaps therefore to be limited to the most clear-cut of cases.98 Regarding the suggestion that planning permission or regulatory assessments may be a useful guide as to where the public interest lies, much will depend on the precise circumstances,99 and the oft-expressed concern that private rights ought not to be cut down by administrative decisions in respect of which the right-holder lacked standing retains much of its force even when the focus has shifted from liability to remedy.100 As for what else the courts should take into account when exercising their broader discretion, at least three factors can be highlighted in addition to well-established considerations such as the triviality of the injury, delay or acquiescence by the claimant and high-handed behaviour on the part of the defendant.101 The first of those three factors is the possibility that injunctive relief will incentivise the defendant actively to seek out innovative ways of reducing or eliminating the interference caused by its activity. This consideration highlights a general advantage of the injunction remedy as compared to damages in lieu, which McLaren memorably described as a ‘license for lethargy’.102 In his words:103 It is to be questioned whether the substitution of damages [for injunctive relief] is so attractive as it sounds on the surface … it may inspire a form of corporate irresponsibility which is the reverse of beneficial to the community. It is unlikely that the industrialist, who is given latitude to carry on his business as before … will worry about finding newer and safer means for carrying out his operation.

The possibility of beneficial ameliorative measures should weigh in favour of specific relief in cases where it is plausible to suppose that such measures are possible, as in many industrial pollution scenarios. By contrast, this consideration loses its force in cases where no such measures seem possible – or have already been taken104 – with the result that the nuisance can apparently only be brought to an end by either the complete cessation of the activity or a reduction in its level.105 and cajole and threaten Victorian local authorities into setting up and improving sanitary arrangements and sewage treatment works’. 98 See Rotherham (n 81) 130. 99 As was emphasised in Coventry (n 1) [246] by Lord Carnwath, the Justice with the most planning expertise on the Supreme Court. 100 For general discussion of the relevance of planning permission and regulatory compliance in the nuisance context, see D Nolan, ‘Nuisance, Regulation and Planning: The Limits of Statutory Authority’ in A Dyson et al (eds), The Limits of Liability: Defences in Tort Law (Oxford, Hart Publishing, 2014). 101 Another factor which it has been argued should be taken into account is whether the claimant has an enduring proprietary interest in the land affected by the nuisance, such that there is a realistic prospect of an injunction being enforced over the longer term: see Pontin (n 12) 169–170. 102 JPS McLaren, ‘Nuisance in Canada’ in AM Linden (ed), Studies in Canadian Tort Law (Toronto, Butterworths, 1968) 354. 103 ibid 354. 104 Which appears to have been the case in Miller v Jackson (n 41). 105 This is likely to be true in right to light cases, for example, and where noise is caused by a recreational activity: see, eg Kennaway (n 42); Watson (n 47); Coventry (n 1).

Injunctions  171 A second consideration which should be borne in mind is whether, in the court’s view, the claimant’s motivation in litigating is primarily financial.106 Where this is so, the choice between granting an injunction and awarding damages in lieu boils down to the question of whether the value of the property right in question should be agreed by the parties or instead set by the court. The obvious danger of the former solution is that, armed with an injunction, a claimant driven by financial considerations will be able to hold the defendant to ransom and demand an extortionate release fee.107 Again, therefore, it is suggested that there is much good sense in the view (supported by authority108) that where there is evidence that the claimant’s interest is principally pecuniary in nature, damages are an adequate remedy and an injunction ought not to be granted. Finally, the third consideration which it is suggested the courts should take into account is the ease of assessing damages in lieu of an injunction on the facts. In a typical right to light case, for example, this factor will militate in favour of damages. The effect of the deprivation of light caused by the defendant’s building on the market and amenity value of the claimant’s property is relatively easily ascertained. Furthermore, in such a case, the extent of the interference is not only relatively determinate, it is also fixed and unchanging. For as long as the two premises remain in their current state, no variation in the level of the interference will occur. By contrast, in a pollution or noise case, it may be much more difficult for the court to monetise the interference,109 and the assessment of damages for future interference is complicated both by the fact that the level of that interference may change and by the fact that its impact may vary according to the uses to which the claimant’s property is put.110 This suggests that the courts were justified in taking a more flexible approach to their discretion in light cases such as Colls v Home & Colonial Stores Ltd, and that the stricter line adopted in Regan v Paul Properties was, with respect, misguided, even setting aside the general question of the suitability of the Shelfer criteria for modern conditions. Nor are light cases the only ones where the relative ease of assessing damages in lieu weighs in favour of such an award. Similar considerations apply where the claim relates to obstruction of air or a permanent trespass, and in many breach of covenant scenarios. At the same time, however, it is worth remembering that even in these more straightforward cases the quantification of damages in lieu still gives rise to many difficulties at a more conceptual level,111 and 106 This seems clearly to have been the case in eg Cowper v Laidler [1903] 2 Ch 337 (Ch) and Marriott v East Grinstead Gas and Water Co [1909] 1 Ch 70 (Ch), both cited in S Deakin and Z Adams, Markesinis and Deakin’s Tort Law, 8th edn (Oxford, Oxford University Press, 2019) 436. 107 See Tromans (n 60) 105 (the effect of an injunction is to tie ‘one of the defendant’s hands behind his back before negotiations begin’). The Law Commission’s recent project on rights to light was partly motivated by concern that in that context this kind of ‘hold-out’ behaviour was hampering beneficial development: see Law Commission, Rights to Light (Law Com No 356, 2014) paras 1.7–1.8, cited by Davies (n 83) 131. Nor was this a new concern: in Colls (n 32), Lord Macnaghten warned (at 193) that the courts needed to be ‘very careful not to allow an action for the protection of ancient lights to be used as a means of extorting money’. 108 See, eg Shelfer (n 20) 317 (Lindley LJ); Senior v Pawson (1866) LR 3 Eq 330 (Ch Ct). 109 See Coventry (n 1) [248] (Lord Carnwath). 110 As we have seen, this point was made by Fry J in the Pennington river pollution decision, where it was used to distinguish the right to light cases: see n 29 above. 111 Some of which were discussed in Coventry (n 1): see [128]–[132] (Lord Neuberger), [172]–[173] (Lord Clarke) and [248] (Lord Carnwath). For the latest word from the Supreme Court on the assessment of damages in lieu, see One Step (Support) Ltd v Morris-Garner [2018] UKSC 20, [2019] AC 649. Ch 5 of this book discusses other aspects of that case.

172  Donal Nolan that these represent a further advantage of specific relief, at least until such time as the courts have resolved them in a satisfactory manner.112 V. CONCLUSION

The long-term consequences of Lord Sumption’s discussion of injunctions and damages in lieu in Coventry are as yet uncertain. However, it is already clear that, in the absence of a further steer from the Supreme Court, the lower courts will not adopt the more radical aspects of his analysis. Instead, they are following the more conservative guidance given by Lord Neuberger.113 With respect, that is to my mind for the best, since we have seen that there are in fact good reasons why injunctions should continue to be the default remedy in the case of a continuing wrong. At the same time, the greater remedial flexibility ushered in by the Coventry decision is to be welcomed. It is doubtful whether the Court of Appeal in Shelfer intended to lay down hard-and-fast rules as to the circumstances in which damages could be substituted for an injunction,114 and in any case AL Smith LJ’s ‘working rule’ proved both too narrow and too rigid. While he identified in that rule a number of factors which should indeed be taken into account when the remedial discretion is exercised, treating those factors as requirements, all of which needed to be satisfied, was overly restrictive and at times reduced the discretion to little more than a box-ticking exercise. The downgrading of Shelfer opens the way to a more open and more sophisticated approach, and a return to the greater flexibility observable in some of the other nineteenth-century case law. A completely open-ended discretion is, however, a recipe for an unacceptable degree of uncertainty, and the courts now face the difficult task of replacing the Shelfer criteria with a structured discretion which achieves an appropriate balance between predictability and flexibility. When determining precisely where that balance lies, the strength of the presumption in favour of injunctive relief will be of critical importance. In the case of permanent prohibitory injunctions, there are good reasons for continuing to insist that a defendant arguing for damages in lieu should generally bear a heavy burden of persuasion, even if, as the right to light cases demonstrate, those reasons carry more weight in some contexts than in others. Though critical of the inflexibility of Shelfer, commentators with a deep knowledge of nuisance law have also warned against the dangers of the courts being ‘too eager’ to award such damages,115 while the case for injunctions has been strengthened by recent research into the aftermath of the award of that remedy in the nuisance setting.116 Finally, while there are arguments for allowing the courts to take into account their perception of the public interest when exercising their new, broader, discretion, it is also important to bear in mind in that connection Lord Sumption’s telling observations in other contexts as to the appropriate limits of the judicial role.117 112 As argued by Davies (n 83) 144. 113 See Beaumont Business Centres Ltd v Florala Properties Ltd [2020] EWHC 550 (Ch) at [330]. 114 See the remarks of Millett LJ in Jaggard v Sawyer (n 44), as set out in the text to n 46 above and Wilde (n 28) 367. 115 Wilde (n 28) 388. See also McLaren (n 37) 556–60. 116 See Pontin (n 12). 117 See generally NW Barber et al (eds), Lord Sumption and the Limits of Law (Oxford, Hart Publishing, 2016).

10 Unjust Enrichment GRAHAM VIRGO

English law does not have a universal theory to explain all the cases in which restitution is available. It recognises a number of discrete factual situations in which enrichment is treated as vitiated by some unjust factor. These factual situations are not, however, random illustrations of the court’s indulgence to litigants. They have the common feature that some legal norm or some legally recognised expectation of the claimant falling short of a legal right has been disrupted or disappointed. – Swynson Ltd v Lowick Rose LLP (in liquidation)1

I.  THE STATE OF UNJUST ENRICHMENT

T

he law of unjust enrichment in England was first formally recognised by the House of Lords 29 years ago in Lipkin Gorman v Karpnale Ltd.2 It had existed for many years before, but this was the first time this disparate body of law had been judicially consolidated to form a coherent law of unjust enrichment, for which restitutionary remedies are awarded to reverse a defective transfer.3 From before its recognition and subsequently, the function of unjust enrichment has proved to be controversial, notably as to whether it is the only explanation for the award of restitutionary remedies. In England, it is not. Restitutionary remedies can also be awarded where the defendant has profited from a wrong, where the wrong is the underlying cause of action,4 or where the defendant has received the claimant’s property in which the claimant has retained a proprietary right,5 without needing to establish unjust enrichment.

1 Swynson Ltd v Lowick Rose LLP (in liquidation) [2017] UKSC 32, [2018] AC 313 [22] (Lord Sumption). 2 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL). 3 Investment Trust Companies (in liquidation) v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275 [59] (Lord Reed). 4 See G Virgo, The Principles of the Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2015) pt III. In Morris-Garner v One Step (Support) Ltd [2018] UKSC 20, [2019] AC 649 [111], Lord Sumption recognised that account of profits is a restitutionary remedy. 5 Foskett v McKeown [2001] 1 AC 102 (HL).

174  Graham Virgo But it is certainly the case that unjust enrichment is the most significant trigger of restitutionary remedies. The definition of unjust enrichment has itself proved to be controversial. The orthodox position is that the unjust enrichment formula has a number of elements which need to be established: enrichment, at the expense of the claimant, a recognised ground of restitution and no defence.6 In Benedetti v Sawiris,7 Lord Reed recognised that the law of unjust enrichment is ‘at an early stage in its development and … it remains to be seen whether we have yet found the most suitable analytical scheme’. It is this issue which has become the focus recently of some members of the academy in particular,8 who consider that unjust enrichment is doctrinally incoherent.9 For example, Hedley has said:10 Considered in the round ‘unjust enrichment’ talk contributes little of value, and … the supposedly logical process of stating it at a high level of abstraction, and then seeking to deduce the law from that abstraction, merely distracts us from the equities of the case we consider.

Even more significant, perhaps, is a challenge to the very existence of unjust enrichment by virtue of a perceived absence of a coherent rationale as to why liability to make restitution should be imposed when fault need not be proved.11 A common response to this concern is that unjust enrichment exists to correct an injustice. This was recognised by Lord Reed in Investment Trust Companies,12 who said that the purpose of unjust enrichment is to ‘correct normatively defective transfers of value’, typically by restoring the parties to their pre-transfer positions. Lord Sumption has sat in a number of Supreme Court cases over the last decade where issues about the interpretation and application of the law of unjust enrichment has arisen. His contribution over that time to the development of the law of unjust enrichment can be characterised as one of principled exposition and clarification of the law. Not for him the vagueness of result by moral judgement as to what is perceived to be equitable or fair. In Lowick Rose LLP v Swynson Ltd,13 he affirmed that the recognition of liability in unjust enrichment is not a matter for the exercise of judicial discretion. He has generally not engaged with the big theoretical discussions about unjust enrichment, other than to affirm what might now be considered to be the orthodox analysis of the law of unjust enrichment, especially the correction of normatively defective transfers which ‘reflects Aristotelian conception of justice as the restoration of a balance or equilibrium which has been disrupted’.14 His principled clarification of the law has provided 6 Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 (HL) 227 (Lord Steyn). 7 Benedetti v Sawiris [2013] UKSC 50, [2014] AC 938 [119]. 8 See, eg P Watts, ‘“Unjust Enrichment” – the Potion that Induces Well-Meaning Sloppiness of Thought’ (2016) 69 Current Legal Problems 289; R Stevens, ‘The Unjust Enrichment Disaster’ (2018) 134 LQR 574; L Smith, ‘Restitution: A New Start?’ in P Devonshire and R Havelock (eds), The Impact of Equity and Restitution in Commerce (Oxford, Hart Publishing, 2018). 9 Others, however, argue that it is doctrinally coherent. See especially A Burrows, ‘In Defence of Unjust Enrichment’ (2019) 78 CLJ 521. 10 S Hedley, ‘Farewell to Unjustified Enrichment – A Common Law Response’ (March 2016) https://www. academia.edu/24383241. 11 See, eg Stevens (n 8). 12 Investment Trust Companies (in liquidation) v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275 [42]–[43]. 13 Swynson (n 1) [22]. 14 ibid [22], citing Investment Trust Companies (n 12) [42] (Lord Reed).

Unjust Enrichment  175 much needed stability in some areas, although in others the opportunity could have been taken to rationalise the underlying doctrines and principles. II.  THE REACH OF UNJUST ENRICHMENT

In Swynson Ltd v Lowick Rose LLP,15 Lord Sumption affirmed that the law of unjust enrichment is part of the law of obligations. In the same case,16 he acknowledged that there is no universal theory in English law to explain all the cases where restitution is available, which provides welcome support for the view that restitution does not correspond completely with the law of unjust enrichment. But his justification for this statement might be interpreted as undermining this conclusion, since he emphasised that English law recognises ‘a number of discrete factual situations in which enrichment is treated as vitiated by some unjust factor’.17 This still appears to be an explanation of the award of restitution with reference to unjust enrichment, albeit that there are a number of separate causes of action distinguished by different unjust factors, which ‘have the common feature that some legal norm or some legally recognised expectation of the claimant falling short of a legal right has been disrupted or disappointed’, and that the award of restitution is justified by reference to the claimant’s consent to the defendant’s enrichment having been ‘impaired, qualified or absent’.18 This is consequently consistent with orthodox analysis of the law of unjust enrichment. But Lord Sumption’s judgments in two cases, one of which is Lowick Rose itself, suggest that he does not consider that the award of restitutionary remedies can only be explained with reference to unjust enrichment, or at least an orthodox interpretation of unjust enrichment. A. Subrogation In Lowick Rose LLP v Swynson Ltd, Lord Sumption (with whom Lords Neuberger, Clarke and Hodge agreed) recognised that the remedy of equitable subrogation can operate to reverse or prevent the defendant’s unjust enrichment,19 which is consistent with the decision of the House of Lords in Banque Financière de la Cité v Parc (Battersea) Ltd.20 Bearing in mind the proprietary significance of subrogation typically,21 in that it can give the claimant priority over the defendant’s creditors through subrogation to a security,22 this appears to undermine the decision in Foskett v McKeown that 15 Swynson (n 1) [22]. The contract damages aspect of the decision is discussed in ch 5 of this book. 16 ibid [22]. See also Patel v Mirza [2016] UKSC 42, [2017] AC 467 [246] (Lord Sumption). 17 Swynson (n 1) [22]. 18 Citing A Burrows, A Restatement of the English Law of Unjust Enrichment (Oxford, Oxford University Press, 2012) s 3(2)(a). 19 Swynson (n 1) [29]. 20 Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 (HL) 231 (Lord Hoffmann). 21 Although subrogation in Banque Financière operated as a personal remedy since the claimant only obtained priority over the defendant and not as regards any of the other creditors of the debtor company. 22 Acknowledged as proprietary in effect by Neuberger J in Cheltenham and Gloucester plc v Appleyard [2004] EWCA Civ 291.

176  Graham Virgo proprietary remedies are not triggered by unjust enrichment.23 But Lord Sumption’s analysis was more subtle. He recognised that equitable, as opposed to contractual, subrogation is a remedy which can give effect either to a proprietary right or ‘to a cause of action’,24 and that unjust enrichment might be such a cause of action. He warned against trying to fit subrogation into ‘any broader category of unjust enrichment’25 and characterised the remedy as sui generis. He identified various differences between unjust enrichment generally and unjust enrichment triggering subrogation, including that subrogation is not a restitutionary remedy as such, since it does not restore the parties to their pre-transfer position but enforces a defeated expectation, such as that the claimant would obtain a security. Lord Sumption considered Lowick to be a case where the award of subrogation gave effect to a cause of action rather than to a proprietary right. The underlying cause of action was the claimant’s discharge of ‘the defendant’s debt on the basis of some agreement or expectation of benefit which fails’. This appears, therefore, to constitute the typical unjust enrichment cause of action, where the enrichment is the discharge of a debt and the ground of restitution is total failure of basis. Indeed, the reason why the claim for subrogation failed in Lowick was because there had not been a total failure of basis. The claimant had intentionally discharged a debt which was owed by EMSL to Swynson, a company which the claimant controlled, in part in order to reduce Swynson’s tax liability. The loan which had been made by Swynson to EMSL followed a negligent assessment of EMSL’s subsidiary by a firm of accountants, and consequently Swynson had a claim against the firm. The effect of the discharge of the debt by the claimant was that Swynson no longer suffered any loss as a result of the firm’s negligence but the claimant had, so he sought to be subrogated to Swynson’s claim against the firm of accountants on the ground that the firm had been enriched as a result of the claimant’s actions, since its liability to Swynson had been extinguished. This claim failed, however, because there had been no defect in the transaction involving the discharge of the debt, so that there was no failure of the basis on which the payment had been made. Before concluding that the claim failed, Lord Sumption first needed to consider whether the cause of action could be established. But his analysis of the cause of action as being unjust enrichment was somewhat half-hearted. He said that he was willing to assume that the defendant had been enriched, but he considered this to be unconvincing because it was contrived to treat the defendant as having been enriched simply because they had suffered no loss arising from their breach of duty.26 This should not have been a particular cause of concern, however, because negative benefits are recognised as enrichments within the law of unjust enrichment.27 Lord Sumption was also willing to assume that the firm’s enrichment had been at the expense of the claimant, but he acknowledged that this was odd on the facts of the case because, whilst the claimant had paid money which was used to pay off EMSL’s



23 Foskett

(n 5). (n 1) [18]. 25 ibid [29]. 26 ibid [20]. 27 See, eg Craven-Ellis v Canons Ltd [1936] 2 KB 403 (CA). 24 Swynson

Unjust Enrichment  177 debt, the claimant’s loss could not be attributed to the benefit which was conferred on the firm of accountants. Lord Sumption described this as an incidental benefit, in the sense that the claimant intended to act out of self-interest rather than to benefit the defendant, which had been held not to be recoverable within a claim in unjust enrichment in a decision of the Supreme Court which was handed down the same day as Lowick.28 Despite his doubts, Lord Sumption said that he was willing to assume that the defendant was enriched at the claimant’s expense because he considered that the critical question was whether the enrichment was unjust, and, if so, whether subrogation was an appropriate remedy to address this. But the enrichment and at the expense of requirements are vital elements of unjust enrichment, and if they cannot be established, then the claim must fail, regardless of whether a ground of restitution can be identified. Even so, the identification of a ground of restitution was not straightforward. Lord Sumption recognised that the cases of equitable subrogation operating to prevent or reverse an unjust enrichment are all cases of defective transactions where money was paid on ‘the basis of an expectation which failed’.29 In many cases, such as Banque Financière, the basis will be that a security for a transfer of money would be obtained. Although this looks like the ground of a total failure of basis, it does not accord with the usual interpretation of that ground, which requires the expectation to be shared by the defendant,30 in the sense that the defendant at least was aware of the expectation and had the opportunity to object to it, but this is not a requirement for most subrogation cases. Lord Sumption considered that subrogation cases are different because the ‘windfall character of the benefit conferred on the defendant means that it is not unjust to give effect to the unilateral expectation of the claimant’.31 But if the law of unjust enrichment simply turned on reversing a windfall, liability would be much more extensive than is actually the case. Further, Lord Sumption’s analysis begs the question as to when a benefit can be considered to have a ‘windfall character’. He asserted on a number of occasions that it was because of the disruption of the claimant’s relevant expectation about the transaction, but is this a sufficient reason? If it is, why should it not apply to all cases of unjust enrichment where there is a total failure of basis? It is appropriate to conclude that a benefit is a windfall if the salient elements of the unjust enrichment claim have been established. But referring to ‘windfall’ without more does not provide a satisfactory justification for adopting a different interpretation of the ground of total failure of basis in cases where subrogation is sought. Whilst a form of total failure of basis constitutes the ground of restitution in most cases where equitable subrogation is sought, Lord Sumption acknowledged that many of the cases involve a mistake on the part of the claimant as well, such as where the claimant wrongly assumes that there would be security for a payment when the security is not forthcoming. But significantly, Lord Sumption went on to say that it 28 Investment Trust Companies (n 12). 29 Swynson (n 1) [30]. 30 As recognised by Lord Sumption in Swynson (n 1) [30]. See also Giedo van der Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB) [286] (Stadlen J); Lissack v Manhattan Loft Corporation [2013] EWHC 128 (Ch) [87] (Roth J). 31 Swynson (n 1) [30].

178  Graham Virgo would ‘be unwise to draw too close an analogy with the role of mistake in other legal contexts’.32 It is unclear what this means. It is certainly the case that in many cases where equitable subrogation was awarded the claimant appears to have made a misprediction rather than a mistake, and this does not constitute a ground of restitution in the law of unjust enrichment because the claimant is considered to have taken the risk that the future event might not occur.33 But this does not appear to be what Lord Sumption meant. He went on to say that ‘except in the case of voluntary dispositions, the law does not normally attach legal consequences to a unilateral mistake unless it is known to or was induced by the other party. But it does so in the subrogation cases.’34 But this is incorrect as regards the general law of unjust enrichment. If, for example, the claimant makes a payment to the defendant assuming incorrectly that the claimant owed money to the defendant and so was discharging a debt, restitution will lie on the ground of mistake even if the defendant was unaware of the mistake. The focus is on whether the mistake vitiated the claimant’s intention to benefit the defendant such that, but for the mistake, the benefit would not have been transferred.35 The fact that the defendant honestly believed that they were entitled to receive the benefit has been specifically rejected as a bar to an unjust enrichment claim grounded on mistake.36 To compound the unsatisfactory nature of this analysis of unjust enrichment, Lord Sumption commended the approach of the Supreme Court in Menelaou v Bank of Cyprus plc,37 another case where subrogation was awarded explicitly to reverse the defendant’s unjust enrichment. In Menelaou, the claimant bank had agreed to release its charge on a property on condition that a charge would be created over another property. This did not occur. The owner of that other property, Menelaou, therefore obtained it without the charge which the Bank had expected. A majority of the Supreme Court held that Menelaou was enriched by acquiring the property without a charge; that this was at the bank’s expense, even though the property had been purchased by Menelaou’s parents, because, in substance, the bank’s money had been used to purchase the property;38 and that the enrichment was unjust because, as Lord Sumption said in Lowick,39 the bank’s consent to the arrangement was conditional on it obtaining a charge and this condition had failed. To reverse this enrichment, the bank was subrogated to the vendor’s lien. But, again, the ground of total failure of basis should not have been established because Menelaou was unaware that the bank expected the property to be subject to a charge. This case is better analysed as falling within Lord Sumption’s first category of giving effect to a proprietary right rather than to ‘a cause of action’, an analysis which was adopted by Lord Carnwath and with which Lord Neuberger had a 32 ibid [30]. 33 Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108 [104] (Lord Walker). See also Dextra Bank and Trust Co v Bank of Jamaica [2002] 1 All ER (Comm) 193 (PC). 34 Swynson (n 1) [30]. 35 Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (HL) 358 (Lord Browne-Wilkinson), 371 (Lord Goff) and 399 (Lord Hoffmann). 36 ibid 358 (Lord Browne-Wilkinson), 371 (Lord Goff) and 399 (Lord Hoffmann). 37 Menelaou v Bank of Cyprus plc [2015] UKSC 66, [2016] AC 176. 38 This is dubious after the decision of the Supreme Court in Investment Trust Companies (n 12), which adopted a test that usually requires there to have been a direct transfer of benefit. 39 Swynson (n 1) [29].

Unjust Enrichment  179 lot of sympathy, with the former considering that subrogation could only be justified as a proprietary remedy to vindicate property rights and the latter, whilst acknowledging the legitimacy of subrogation being awarded to reverse the defendant’s unjust enrichment, preferring the vindication of property rights analysis. It does not follow that the rejection of subrogation in Lowick Rose was incorrect, but it does follow that subrogation with reference to unjust enrichment is fraught with difficulty. The better approach is to recognise that where subrogation operates as a proprietary remedy it is a remedy to vindicate the claimant’s equitable property rights.40 Such an approach has been endorsed by the High Court of Australia.41 As Lord Sumption correctly acknowledged, subrogation is relevant as remedy where a ‘cause of action’ can be established. An appropriate cause of action is unjust enrichment, for which subrogation might sometimes be an appropriate remedy, but only in its non-proprietary form to reverse a defective transfer of value.42 Where the claimant seeks a proprietary form of subrogation, which gives the claimant a security interest in respect of the claim against the defendant, it is not appropriate to adopt a different interpretation of unjust enrichment; a different cause of action needs to be engaged, namely one which is founded on the vindication of property rights. B.  Constructive Trust The constructive trust has a significant role in English law in creating proprietary rights which can then be vindicated by a proprietary restitutionary claim, but even here unjust enrichment may have a significant role to play. One context in which the constructive trust will be recognised is where the defendant’s receipt of an enrichment can be considered to be unconscionable. This was recognised in Westdeutsche Landesbank Girozentrale v Islington LBC,43 which held that where, for example, money has been paid to the defendant by mistake and the defendant is aware of the mistake but fails to repay the money, the defendant’s retention of the money will be unconscionable. In Angove’s Pty Ltd v Bailey,44 Lord Sumption, who gave the only judgment, provided an important clarification about the operation of the constructive trust to a ‘restitutionary proprietary claim’, as he called it,45 in the context of the defendant’s unconscionable retention of a benefit. Whilst the language of ‘good conscience’ is often used to justify the recognition of the trust, and this was affirmed by Lord ­Sumption as a general proposition, he also recognised that it was not a sufficient statement of the test because it begs the question as to what good conscience requires.46

40 An approach which is consistent with the decision of the House of Lords in Foskett (n 5). 41 Bofinger v Kingsway Group Ltd [2009] HCA 44, 239 CLR 269. 42 As in Banque Financière (n 20). 43 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (HL). See also ch 11 of this book, which takes a different view on proprietary restitution. 44 Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179. The agency aspects of the case are discussed in ch 14 of this book. 45 ibid [30]. 46 ibid [28].

180  Graham Virgo He said: ‘Property rights are fixed and ascertainable rights. Whether they exist in a given case depends on settled principles, even in equity. Good conscience therefore involves more than a judgment of the relative moral merits of the parties.’ This is an important articulation of orthodox equity, but the identification and application of the relevant principles proved to be more difficult. Lord Sumption did not accept that the defendant’s retention of money would be unconscionable where money had been paid to the defendant pursuant to a contract and, at the time of payment, the defendant knew that imminent insolvency would prevent them from performing any of their obligations under the contract. In reaching this conclusion, the reasoning in Nesté Oy v Lloyd’s Bank plc was rejected, namely, that a constructive trust would be triggered because a reasonable and honest person would have repaid the money which had been received after the directors of the recipient company had concluded that the company was insolvent.47 The justification for Lord Sumption’s decision turns on what good conscience is considered to require and that, just because a reasonable person would have returned a payment, it does not follow that it necessarily should have been returned by the defendant. But this misses the point about the basis for recognising the constructive trust on the ground of unconscionable retention. The prior question is whether the defendant is liable to make restitution to the claimant by virtue of a claim in unjust enrichment, which will be the case if money has been paid on a basis which is not fulfilled in any way. If there is such a restitutionary liability and the defendant is aware of the circumstances which establish the claim, then the retention of the money should be considered to be unconscionable, so triggering a constructive trust. That is why money paid by mistake may be held on constructive trust, as was acknowledged by Lord Sumption, although he considered that this will only occur where the mistake was ‘fundamental’, without explaining what this means. Lord Sumption suggested that only where the claimant had made such a mistake would their intention to benefit the defendant have been vitiated completely. That is why he concluded that, in a case where the claimant had paid money to the defendant expecting something in return which was not forthcoming, a constructive trust would not be recognised because this would not have ‘vitiated the intention of the [claimant] to part with its entire interest in the money’.48 But this is confusing rules about intention to pass title, where the test of fundamental mistake does apply,49 with the very different question as to whether the defendant’s retention of the money was unconscionable in the light of the defendant’s knowledge of the circumstances of the transfer which grounds a claim in unjust enrichment. Anyway, if money has been transferred on a basis which has failed, whilst it is correct that at the point of transfer the claimant’s intention is not vitiated, matters are different once the basis has failed. It is preferable to treat the claimant’s intention as qualified, since it is dependent on the basis continuing.50 If the defendant was aware that the claimant had transferred money expecting to receive something in return which was not forthcoming and the defendant failed to pay the money back,

47 Neste

Oy v Lloyd’s Bank plc [1983] 2 Lloyd’s Rep 658 (Com Ct). (n 44) [30]. 49 Barclays Bank Ltd v Simms [1980] QB 677 (Com Ct) 689 (Robert Goff J). 50 The language of qualified ‘consent’ was adopted by Lord Sumption in Swynson (n 1) [22]. 48 Angove’s

Unjust Enrichment  181 the defendant’s retention of the money should be treated as unconscionable; although this should only be the case where the basis for the payment has actually failed and not where it might potentially fail in the future. This is not, however, what Lord Sumption held in Bailey. He asserted that neither an actual nor a potential total failure of basis will give rise to a proprietary restitutionary claim, but that this is instead to be treated simply as a matter of contractual readjustment which gives rise to purely personal obligations.51 This decision creates significant inconsistency in the law. Lord Sumption’s analysis in Lowick can usefully be contrasted with that in Bailey. In the former case, a form of total failure of basis, dependent only on the claimant’s expectation and without regard to the defendant’s expectations, was considered to be sufficient to justify the award of a subrogation remedy, and this was loosely linked to unjust enrichment as a cause of action. In the latter case, total failure of basis was not sufficient to establish a restitutionary proprietary claim through a constructive trust, even if the defendant was aware of the failure of basis such that the defendant’s conscience can be considered to be affected, and this appears to have nothing to do with unjust enrichment. No justification was offered for this difference of analysis, a difference which cannot be defended. III.  GROUNDS OF RESTITUTION

In a number of different decisions, Lord Sumption has considered the requirements of different grounds of restitution within the law of unjust enrichment. A.  Absence of Basis The orthodox analysis of the law of unjust enrichment in England is that there is no general action for the recovery of money on the ground that it was simply not due, a condictio indebiti, but rather the claimant must establish that one of the recognised grounds of restitution applies. This orthodoxy had been challenged by Birks,52 who argued that there is a single reason for the reversal of unjust enrichment, namely the absence of legal justification or basis for receipt of a benefit (such as a contract, gift or statutory obligation), and that it was not necessary to establish specific grounds of restitution. In Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners,53 Lord Walker had tentatively welcomed 51 A practical distinction between mistakes and failures of bases is, however, likely where the enrichment is money. This is because a failure of basis is likely to arise sometime after the receipt of the enrichment, by which time the money may have been irretrievably mixed and so will not be sufficiently identifiable as the subject matter for a constructive trust. For mistake, the claimant will need to have been mistaken at the time of receipt of the money by the defendant, so, if the defendant was aware of the mistake, the constructive trust will operate immediately at the point of receipt before there is any possibility of mixing. This was not, however, the reason why Lord Sumption distinguished between mistake and failure of basis, which turned on his interpretation of doctrine rather than fact. 52 P Birks, Unjust Enrichment, 2nd edn (Oxford, Oxford University Press, 2005). 53 Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2006] UKHL 49, [2007] 1 AC 558 [158] (Lord Walker); see also [21] (Lord Hoffmann).

182  Graham Virgo this absence of basis analysis of unjust enrichment, although he did not adopt the absence of basis approach. In Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners,54 Lord Sumption confirmed the orthodox position, so that, where a sum has been paid which is not due but the payer cannot establish a ground for recovery, it is not recoverable. It follows that it remains necessary for the claimant to establish that the claim falls within one of the recognised grounds of restitution. If, however, there is a valid legal basis underpinning the transfer of value to the defendant, this will operate as a bar to the restitutionary claim. This has been recognised by Lord Sumption in a number of contexts. For example, in International Energy Group Ltd v Zurich Insurance plc UK Branch,55 he recognised that a claim in unjust enrichment will fail if money has been transferred pursuant to a contract which ‘is valid, lawful and effective’. This is a significant assertion of orthodoxy which serves to keep the law of unjust enrichment within principled boundaries. Even more significant is Lord Sumption’s analysis in Fairfield Sentry Ltd v Migani,56 where he recognised that a mistaken payment cannot be recovered ‘to the extent [it] discharges a contractual debt of the payee’,57 again because there will have been a valid legal basis for the payment. But he went on to recognise that, ‘So far as the payment exceeds the debt properly due, then the payer is in principle entitled to recover the excess’. In that case, restitution was not awarded where the claimant was contractually bound to make the payments which it sought to recover because, where the payment discharges a valid debt, the defendant will be considered to have provided ‘good consideration’, which operates to defeat the claim. B.  Failure of Basis In Lowick Rose LLP v Swynson Ltd,58 despite the unorthodox interpretation of failure of basis where the claimant seeks equitable subrogation, Lord Sumption usefully recognised that in all other cases within the law of unjust enrichment the ground requires that the basis had to be mutually shared by the claimant and the defendant. Presumably this requires, at the very least, awareness of the basis by the defendant so that they had the opportunity to object to it.59 This is of real practical significance. If, for example, I transfer money to you expecting to receive something in return but I do not communicate this to you or give you any indication that I had such a basis in mind, it is not appropriate that I should obtain restitution 54 Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2012] UKSC 19, [2012] AC 337 [162]. See also Patel v Mirza (n 16) [246] (Lord Sumption). 55 International Energy Group Ltd v Zurich Insurance plc UK Branch [2015] UKSC 33, [2016] AC 509 [185]. 56 Fairfield Sentry Ltd v Migani [2014] UKPC 9, [2014] 1 CLC 611 [18]. 57 This should be interpreted as referring to a contractual debt owed to the payee: ICICI Bank UK plc v Assam Oil Co Ltd [2019] EWHC 750 (Comm) [38] (Andrew Burrows QC sitting as a Judge of the High Court). 58 Swynson (n 1) [30]. 59 See Virgo (n 4) 309.

Unjust Enrichment  183 if the basis fails. It might be considered that this creates an inconsistency in the law since the ground of mistake can be established without requiring the defendant to be aware of the mistake. This distinction can, however, be justified by virtue of the impact on the claimant’s mental processes. Where the claimant transfers a benefit and has been mistaken about the facts or the law, that mistake must operate at the time of the transfer in order to vitiate the claimant’s intention to benefit the defendant. If it relates to the future, it is a misprediction and the claimant takes the risk as to what will happen in the future. This is in fact what happens when a payment is transferred on a particular basis which may or may not occur or exist in the future. The claimant takes the risk that the basis will fail and this is sufficient to defeat the claim, save where that basis has been communicated to the defendant, for then the risk can be considered to be borne by the defendant such that, if the basis fails, restitution should be awarded. C. Necessity There is a doctrine of agency of necessity which means that where there is a preexisting relationship between the claimant and the defendant and the claimant intervenes in an emergency to benefit the defendant, the defendant may be liable to the claimant.60 The doctrinal basis for such a liability has proved controversial. It may turn on an implied contract or form part of the law of bailment.61 But Lord Sumption, in The Kos,62 recognised that liability might instead arise within the law of unjust enrichment and acknowledged that the measure of recovery, being restitutionary, could be different from that in contract or bailment. The Kos concerned liability in bailment and, being a dispute about carriage by sea, Lord Sumption considered that liability in unjust enrichment for necessitous intervention raised larger issues which were better left to a more appropriate case. Whilst Lord Sumption’s willingness to recognise possible liability in unjust enrichment in cases of necessitous intervention is to be welcomed, it is important to determine how such liability might be established. Certainly, if liability could be established in contract or bailment, there is no scope for an additional claim in unjust enrichment because there will be an alternative legal basis for the defendant’s liability. If such liability cannot be established and the claimant can show that the defendant has been enriched as a direct result of the claimant’s intervention, it would be appropriate to impose liability to make restitution if it can be shown that the claimant’s intervention is reasonable. Where, however, there is a prior legal relationship between the parties, it is likely that liability will arise with respect to that relationship such that there is little, if any, scope for a claim in unjust enrichment.63

60 See, eg The Great Northern Railway Co v Swaffield (1874) LR 9 Ex 132. 61 Which is how Lord Sumption rationalised liability in Swaffield in ENE Kos 1 Ltd v Petroleo Brasileiro SA (No 2) (The Kos) [2012] UKSC 17, [2012] 2 AC 164 [24], where the claimant railway company paid for the stabling of the defendant’s horse. 62 ibid [30]. 63 See further W Day, ‘Against Necessity as a Ground of Restitution’ [2016] Restituion Law Review 26.

184  Graham Virgo D.  Ultra Vires Receipt by Public Authorities In Woolwich Equitable Building Society v Inland Revenue Commissioners,64 the House of Lords recognised a new public law ground of restitution where money has been given to a public authority in circumstances where the public authority was not authorised to receive it. In FII,65 Lord Sumption made a significant contribution to the exposition of the law relating to restitution of payments made to public authorities. He recognised that a claim founded on the Woolwich ground does not require the payment to have been made in response to any demand.66 This is because the core rationale of the Woolwich ground of restitution is that the payment had been required by a public authority without lawful authority and nothing turns on how this requirement was communicated to the taxpayer,67 it being sufficient that the payment was made in response to legislation in the knowledge that the Revenue would enforce the statutory obligation if payment had not been made. The essence of the Woolwich ground was authoritatively defined by Lord Sumption as follows:68 the principle … applies generally in all cases where tax has been charged unlawfully, whether by the legislature or by the tax authorities, whether by overt threats or demands or simply by the taxpayers’ appreciation of the consequences of not paying, and whether the taxpayer was mistaken or not.

It follows that the Woolwich ground is available where a taxpayer has self-assessed their tax liability incorrectly or where tax has been incorrectly deducted from an employee’s salary by an employer who has accounted for it to the Revenue. IV.  THE LOGIC OF RESTITUTION: ILLEGALITY

At the heart of a claim for restitution grounded on unjust enrichment is a simple logic, that where the defendant has been inappropriately enriched, it is appropriate to reverse the transaction and restore the status quo. This logic was recognised by Lord Sumption in the illegality case of Patel v Mirza69 and taken as far as it could possibly be stretched, and possibly too far. This was an unjust enrichment case where a payment had been made on a basis which had failed completely. The respondent had transferred £620,000 to the appellant, who said he would use the money to bet on share price movements based on inside information. Such insider dealing is a crime under Part V of the Criminal Justice Act 1993. The inside information was not forthcoming and so the agreement was not carried out. The respondent



64 Woolwich

Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 (HL). (n 54) [186]. 66 ibid [174]. 67 ibid [174] 68 ibid [186]. 69 Patel v Mirza (n 16). See also ch 13 of this book, which focuses on the illegality issue. 65 FII

Unjust Enrichment  185 sought restitution of the money paid on the ground that the appellant had been unjustly enriched at his expense, the ground of restitution being that the basis for the transfer had failed totally. Because the parties had committed a conspiracy to commit insider dealing and so were tainted by illegality, the appellant refused to make restitution. In the Supreme Court, the nine Justices unanimously held that the respondent should recover the money he had paid to the appellant. The logic of restitution prevailed despite the taint of illegality, such that all the Justices recognised that it was appropriate to restore the status quo rather than to allow the appellant to profit from his participation in the illegal transaction. As Lord Sumption recognised,70 ‘an order for restitution would not give effect to the illegal act or to any right derived from it’. It follows that there is very little role for the defence of illegality in respect of unjust enrichment claims,71 since the courts will typically be willing to unwind the transaction because, by restoring the status quo, the claimant will not profit from it. This was explicitly recognised by Lord Toulson:72 a person who satisfies the ordinary requirements of a claim in unjust enrichment will not prima facie be debarred from recovering money paid or property transferred by reason of the fact that the consideration which has failed was an unlawful consideration.

Lord Toulson acknowledged that the denial of restitution by virtue of the illegality defence would be rare, but that it would encompass cases of gross immorality, such as where the illegality relates to drug trafficking or where the claimant seeks repayment of money paid to hire the defendant to murder somebody. The wider significance of Patel v Mirza relates to the operation of the illegality defence, which had proved to be controversial. The Justices split six to three, with the majority preferring a discretionary ‘range of factors’ approach to that of a strict rule, which was preferred by Lord Sumption. The adoption by the majority of a discretionary, context-dependent approach to the illegality defence was focused on Lord  Toulson’s trio of considerations,73 having regard to: (i) the reasons why the conduct was made illegal; (ii) the policies which would be affected by denying the claim; and (iii) whether it would be proportional to deny relief, which was to be assessed with reference to factors such as the seriousness of the conduct, whether it was intentional, its centrality to the contract and whether there was a marked disparity in the parties’ respective culpability. Although the majority accepted that these considerations pointed in favour of awarding restitution, it is unclear how they applied on the facts, since there was no attempt to consider each factor in turn. For example, as regards the first consideration, why is conspiracy to commit insider dealing a crime? Further, as regards the second consideration, it is unclear what policies would be affected if restitution was denied, other than that this would mean that the

70 ibid [268]. 71 See also Harlequin Property (SUG) Ltd v Wilkins Kennedy (a firm) [2016] EWHC 3188 (TCC) [11] (Coulson J). 72 Patel v Mirza (n 16) [116]. 73 ibid [101].

186  Graham Virgo appellant would be allowed to profit from the crime. Lord Sumption considered the approach of the majority to be:74 far too vague and potentially far too wide to serve as the basis on which a person may be denied his legal rights. It converts a legal principle into an exercise of judicial discretion, in the process exhibiting all the vices of ‘complexity, uncertainty, arbitrariness and lack of transparency’ which Lord Toulson attributes to the present law.

Lord Sumption’s analysis is correct. Whilst the trio of considerations purport to be principled, there is a significant danger that when applied by a judge they will not provide the guidance to judicial decision-making that is required of a legal principle. The approach of Lord Sumption to the illegality defence was much more consistent with a classical model of illegality.75 He focused on illegality as a rule of law which is subject to principled exceptions, where the parties were not on an equal legal footing or where the policy of the statute required a remedy to be available. Lord Sumption paid particular attention to the ground of failure of basis and how that ground is interpreted in the illegality context. He acknowledged the decision of the Court of Appeal in Guinness Mahon & Co Ltd v Kensington and Chelsea Royal London Borough Council,76 which held that the ineffectiveness of a transaction was a ground of restitution independent of total failure of basis, even if the contract had been partly performed, because the claimant had not got what it expected from its performance, namely the benefit of the contractual obligation. This reasoning could logically be extended to transactions which are ineffective by reason of illegality, but Lord Sumption acknowledged that a different approach had been adopted by the courts with reference to the doctrine of locus poenitentiae, which traditionally only applies where the claimant has repented from the illegality before any part of the illegal transaction had been performed. As Lord Sumption correctly observed:77 ‘This approach is not consistent with the recognition of a general right to the restitution of money paid under an illegal contract, in spite of the close analogy with other cases of ineffective contracts.’ Lord Sumption carefully analysed the locus poenitentiae doctrine and concluded that it was unsatisfactory, because of the focus on the moral quality of the claimant’s decision to withdraw, with a particular focus on ‘penitence’,78 which requires an inquiry into a party’s state of mind.79 Lord Sumption commended Millett LJ’s rejection of the need for penitence in Tribe v Tribe,80 but then criticised his requirement that the withdrawal had to be voluntary because it puts ‘a moral gloss on a principle that depends simply on the right to restitution that in principle follows from the legal ineffectiveness of the contract’.81

74 ibid [265]. 75 ibid [264]. 76 Guinness Mahon & Co Ltd v Kensington and Chelsea Royal London Borough Council [1999] QB 215 (CA). 77 Patel v Mirza (n 16) [248]. 78 Parkinson v College of Ambulance [1925] 2 KB 1 (KDB) 16 (Lush J). 79 Patel v Mirza (n 16) [252]. 80 Tribe v Tribe [1996] Ch 107 (CA) 135. 81 Patel v Mirza (n 16) [252].

Unjust Enrichment  187 The question, then, is whether restitution should lie where the illegal transaction has been performed in part. Lord Sumption considered that the original reason for the requirement that the contract must not have been executed in any way if restitution is to be awarded is because the right to restitution was considered to derive from a principle which is analogous to rescission for mistake or misrepresentation, where rescission was barred if the contract had been executed save for fraud.82 Since the rule against rescinding executed contracts has gone and because the limitation of restitution to where the unlawful purpose has not been carried out was never sound, Lord Sumption rejected the locus poenitentiae doctrine and concluded that the rational rule is simply that ‘restitution is available for so long as mutual restitution of benefits remains possible’.83 Even though Lord Sumption was in the minority as regards his analysis of the illegality defence, his treatment of the underpinning ground of restitution should be considered to reflect the law. The judges in the majority assumed that a ground of restitution applied, without any analysis. Lord Sumption’s detailed consideration of the underlying principles reveals that there is a distinct ground of restitution in cases of illegality. He recognised that the locus poenitentiae doctrine ‘depends simply on the right to restitution that in principle follows from the legal ineffectiveness of the contract under or in anticipation of which the money was paid’.84 Crucially, however, this is distinct from the orthodox analysis of total failure of consideration, since recovery will be permitted even though the time of performance of the contractual obligation by the defendant has not yet arrived, so the ‘question of failure of consideration’ had not arisen.85 It follows that it is not possible to treat the old locus poenitentiae doctrine as simply having been assimilated into the orthodox ground of restitution of total failure of consideration. Rather, the ground of restitution is preferably described as ‘failure of legal basis’ for the defendant’s receipt, since there never can be a valid legal basis for receipt where the enrichment is transferred pursuant to an illegal transaction. This was recognised explicitly by Lord Sumption, who said:86 ‘The ground of restitution in these circumstances can only be that the contract was illegal and that the basis for the payment had failed.’ Analysed in this way, it appears that what was an independent principle that justifies the award of a restitutionary remedy despite the taint of illegality has been assimilated into the unjust enrichment claim so as to operate as a ground of restitution. As Lord Sumption recognised, relying on such a ground of restitution does require the claimant to disclose the illegality, but he was not concerned by that, because the claimant was not seeking to enforce the illegal transaction. Thus, the logic of restitution enables illegality to be pleaded. As Lord Sumption acutely observed:87 the courts will not give effect to an illegal transaction or to a right derived from it. But restitution does not do that. It merely recognises the ineffectiveness of the transaction and gives effect to the ordinary legal consequences of that state of affairs. The effect is to put the parties in the



82 ibid

[253]. See further Lowry v Bourdieu (1780) 2 Doug KB 468, 471 (Buller J). v Mirza (n 16) [253]. 84 ibid [252]. 85 ibid [249]. 86 ibid [249]. 87 ibid [250]. 83 Patel

188  Graham Virgo position in which they would have been if they had never entered into the illegal transaction, which in the eyes of the law is the position which they should always have been in.

Lord Sumption was willing to contemplate preserving the pure logic of restitution in all cases despite the nature of the taint of illegality. He accepted that if, for example, the claimant had paid money to the defendant to murder a third party, the claimant should be able to obtain restitution of the money if the murder was not committed, because the defendant would have no legal or moral entitlement to keep the money, and, even if the murder was committed, the same argument applies.88 Denying restitution on the basis that the crime was particularly heinous was considered to be unprincipled89 and should anyway be rejected because there are difficulties in distinguishing between different degrees of illegality on a purely subjective basis. Awarding restitution even where murder has been committed is at least consistent with the principle that an illegal basis is never a valid basis such that, even if the defendant has done what the claimant wanted them to do, this should not be regarded as a valid performance of the contractual obligation because there never was a lawful obligation in the first place. Lord Sumption acknowledged that, in reality, in such a case, both parties would be subject to confiscation order under the Proceeds of Crime Act 2002. He referred to St Thomas Aquinas, who considered that confiscation to a charity in this type of case would be the most appropriate solution to the difficult conundrum as to what should happen to the money which had been paid.90 But confiscation aside, according to Lord Sumption, the logic of restitution should prevail even if the defendant had committed murder. Lord Toulson, and those concurring with his judgment, would presumably have balked at such a conclusion, which they might well have considered to be disproportionate in the light of the very serious nature of the illegality. Lord Sumption’s approach to the illegality defence specifically in a restitutionary context has recently been preferred to the approach of the majority by the Court of Appeal in Singapore. Ochroid Trading Ltd v Chua Siok Lui91 concerned a claim for recovery of money paid pursuant to illegal moneylending contracts.92 Andrew Phang Boon Leong JA specifically characterised the decision in Patel v Mirza as ‘dramatically’ shifting the law ‘by replacing the traditional rule-based approach towards the doctrine of illegality with a discretionary policy-based test’.93 In Ochroid, over 740 agreements had been made to lend more than $58 million. The borrower had failed to repay over $10 million, and the lender sued for breach of contract for the entire outstanding sum and in unjust enrichment for the unpaid principal sum. It was found that the contract was a moneylending transaction and was illegal because the claimants were unlicensed moneylenders. It was held that, because it was illegal, the contract could not be enforced. The claim for unjust enrichment did not succeed either.

88 ibid

[254]. [254]. 90 Summa Theologica II.2, Q 62, para 5. 91 Ochroid Trading Ltd v Chua Siok Lui [2018] SGCA 5, [2018] 1 SLR 363. 92 Contrary to the Moneylenders Act 1985. 93 Ochroid (n 91) [3]. 89 ibid

Unjust Enrichment  189 The Singapore Court of Appeal specifically rejected the balancing exercise adopted by the majority in Patel on the basis that ‘such a wide or broad application of the discretionary balancing process would not be principled’,94 an approach which is consistent with that adopted by Lord Sumption. In Singapore, where a contract is unenforceable for illegality, a restitutionary claim might succeed either where the parties are not in pari delicto or where the claimant relies on an independent cause of action without needing to rely on an illegal contract, such as unjust enrichment. This is consistent with Lord Sumption’s analysis, although the Court of Appeal rejected the view that restitution would be available even in extreme cases such as a contract to commit murder, since awarding the remedy would bring the court into disrepute and would undermine the integrity of the law.95 How did these principles apply in Ochroid? The contract was illegal by statute, being loans disguised as joint venture investments. The loan contract could not be enforced, but restitution was considered. It was clear that the defendant had been enriched at the claimant’s expense. The ground of restitution was total failure of consideration and the parties were not in pari delicto. Even if the defendant had repaid some of the loan, it would be possible to conclude that the consideration had failed totally because, as a matter of law, the claimant never obtained any rights under the contract.96 This is consistent with Lord Sumption’s analysis. The key question, then, for the Singapore Court of Appeal was whether the award of restitution would stultify the law relating to moneylending contracts. It was held that it would, indeed, stultify the fundamental social and public policy against unlicensed moneylending, so restitution was not awarded. Would Ochroid be decided the same way in England? The elements of a claim in unjust enrichment could be established as in Ochroid. Everything then turns on whether restitution should be awarded where the effect of doing so is actually to result in the repayment of the loan, so this looks like enforcement of an illegal contract. In Patel, the Justices were all clear that it is much more difficult to justify enforcing an illegal transaction than it is to unwind an illegal transaction by awarding a restitutionary remedy. Lord Neuberger acknowledged that the fact that awarding restitution might involve enforcement of the transaction as well should not necessarily bar the claim because:97 ‘If a particular outcome is correct, then the mere fact that the same outcome could have been arrived at on a wrong basis does not make it the wrong outcome’. This is consistent with other areas of the law of unjust enrichment where a loan contract has been void for reasons other than illegality, but it has still been possible to award a restitutionary remedy.98 Lord Sumption left this issue open, although he did indicate that the traditional view that the law would never enforce an illegal transaction was sound and so it is likely that he would agree with the Singaporean analysis and conclusion.



94 ibid

[120]. [146]. 96 ibid [141]. 97 ibid [141]. 98 See, eg Haugesund Kommune v Depfa ACS Bank [2010] EWCA Civ 579, [2012] QB 549. 95 ibid

190  Graham Virgo V.  LORD SUMPTION’S CONTRIBUTION TO THE LAW OF UNJUST ENRICHMENT

Even though Lord Sumption did not sit in many of the leading Supreme Court decisions on unjust enrichment in the last decade,99 those cases in which he did sit which involve unjust enrichment issues and in which he contributed substantive judgments have been important in stabilising the law of unjust enrichment. For him, there has been no revolutionary development of the law, but a maintenance of orthodoxy grounded on identification of principle and doctrine in the long common law tradition of organic development. His approach to judging, especially in the private law context, is reflected especially well in the following dictum from Patel v Mirza:100 The common law is not an uninhabited island on which judges are at liberty to plant whatever suits their personal tastes. It is a body of instincts and principles which, barring some radical change in the values of our society, is developed organically, building on what was there before. It has a greater inherent flexibility and capacity to develop independently of legislation than codified systems do. But there is a price to be paid for this advantage in terms of certainty and accessibility to those who are not professional lawyers. The equities of a particular case are important. But there are pragmatic limits to what law can achieve without becoming arbitrary, incoherent and unpredictable even to the best advised citizen, and without inviting unforeseen and undesirable collateral consequences.

This reflects Lord Sumption’s approach to the interpretation and operation of the illegality defence, but also to unjust enrichment itself. He is clearly conscious of the need to ensure that the law of unjust enrichment is as clear as possible and that its development builds consistently on what came before. Lord Sumption has not been unduly suspicious of the role of unjust enrichment in contemporary English private law. He has accepted the core structure of the claim and the underlying rationale behind it, notably that it is founded on correcting injustice through the restoration of the status quo, and has been willing to acknowledge that it may have a functional role in new areas, such as necessity. His reliance on principle and clarity might, however, be considered to be taken too far. For example, his assertion that restitution should be awarded where money has been paid to a hitman who has committed murder, whilst defensible in terms of unjust enrichment doctrine and theory, does not chime with what common sense might appear to require. True, Lord Sumption qualified his analysis with reference to reality that in such a case the statutory confiscation scheme would kick in, but it did not in Patel v Mirza. Reviewing Lord Sumption’s contribution to the development of the law of unjust enrichment whilst he has been sitting in the Supreme Court does reveal one key theme. In each of his three most significant decisions, in Lowick Rose LLP v ­Swynson Ltd

99 The most significant unjust enrichment decisions from this period are Benedetti v Sawiris [2013] UKSC 50, [2014] AC 938 and HMRC v Investment Trust Companies [2017] UKSC 29, [2018] AC 275. Lord  Sumption also sat in without contributing substantive judgments to Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108 and Prudential Assurance Co Ltd v Revenue and Customs Commissioners [2018] UKSC 39, [2018] AC 929. 100 Patel v Mirza (n 16) [226].

Unjust Enrichment  191 on equitable subrogation,101 in Angove’s Pty Ltd v Bailey on the recognition of the constructive trust102 and in Patel v Mirza on illegality,103 the establishment of unjust enrichment depended on the identification of the ground of total failure of basis. Whilst some of Lord Sumption’s analysis of this ground of restitution leaves significant questions unanswered, notably as to why total failure of basis is interpreted differently where equitable subrogation is sought, the clarification of this ground can be considered to be Lord Sumption’s most significant contribution to unjust enrichment. In Morris-Garner v One Step (Support) Ltd,104 Lord Sumption quoted Oliver Wendell Holmes’s advocacy of economic analysis of law,105 but this can also be used to light the path towards the future development of the law of unjust enrichment: I look forward to a time when the part played by history in the explanation of dogma shall be very small, and instead of ingenious research we shall spend our energy on a study of the ends sought to be attained and the reasons for desiring them.

Whilst the historical origins of the law of unjust enrichment remain important, for the reasons identified by Lord Sumption in Patel v Mirza, his focus in developing the law of unjust enrichment has been on the ends sought to be attained. The focus now for judges and commentators needs to be on the reasons for desiring them, whether it be as regards the rationalisation of subrogation within unjust enrichment or justifying why we have a law of unjust enrichment in the first place.



101 Swynson

(n 1). (n 44). 103 Patel v Mirza (n 16). 104 Morris-Garner v One Step (Support) Ltd [2018] UKSC 20, [2019] AC 649 [103]. 105 O Wendell Holmes, ‘The Path of the Law’ (1897) 10 Harvard Law Review 457, 474. 102 Angove’s

192

11 Proprietary Restitution WILLIAM DAY AND SARAH WORTHINGTON

The right to the restitution of money paid on a consideration which has wholly failed is simply a process of contractual readjustment, giving rise like the contract itself to purely personal obligations. If an actual total failure of consideration does not give rise to a proprietary restitutionary right, I do not see how a prospective one can do so. – Angove’s Pty Ltd v Bailey1

I. INTRODUCTION

F

ew areas of private law are as vexed as proprietary restitution. That is partly because of the difficult, and often contradictory, nature of the authorities. It is also because of fundamental disagreements about the structure and categorisation of the case law. An authority relied upon by one person to construct a theory for proprietary restitution in the law of unjust enrichment might be said by another not to belong to the law of unjust enrichment at all, while a third commentator would say that the case was wrongly decided or wrongly reasoned. In the face of this ‘considerable body of judicial comment and academic literature’,2 it is not surprising that in Angove’s Pty Ltd v Bailey Lord Sumption steered clear from attempting to set down any categorical rules for the availability of proprietary restitution, save to rule out the availability of proprietary restitution in failure of consideration claims. His circumspection might, however, be contrasted with the bold and expansive approach to proprietary restitution as a remedy for failure of consideration that Jonathan Sumption QC took as leading counsel for the bank in Westdeutsche Landesbank Girozentrale v Islington London Borough Council.3 This chapter considers Lord Sumption’s contribution to this difficult area of the law. On one level, both Angove’s and Westdeutsche involved a particular type of claim

1 Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179 [30] (Lord Sumption). 2 ibid [30]. 3 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1994] 4 All ER 890 (Com Ct and CA); Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (HL).

194  William Day and Sarah Worthington in unjust enrichment: a trust claim arising out of failure of consideration. On another level, the two claims are rather different. In the line of authorities culminating with Angove’s, the condition that has failed is counter-performance contractually due. The failed conditionality in Westdeutsche is different: the money was never due, and nor was any counter-performance, and as a result the claim in unjust enrichment is really based on a lack of intention by both parties to enter into such a non-contractual transaction at all. The latter case thus raises issues about party autonomy when dealing with assets in a way not raised by the former case. Both cases are to be distinguished again from claims based on wrongdoing or claims in unjust enrichment based on defective intention. As we seek to explain in this chapter, the availability and form of proprietary restitution in each category differs, and rightly so. II.  WHY DOES IT MATTER?

Before we turn to the doctrinal details, it is worth recalling why the availability and form of proprietary restitution – versus personal restitutionary remedies – can have significant consequences in practice. First, in a case like Angove’s, a proprietary claim protects the claimant on the defendant’s insolvency. The proprietary restitution claim can be used to fish the relevant asset out of the defendant’s estate, whereas if the claimant is limited to a personal restitutionary claim, he must prove as an unsecured creditor in the insolvency proceedings, and is likely to receive only pence in the pound. Equally, as Roy Goode pointed out, if the claimant is given a proprietary claim, that will in turn reduce the estate available to other unsecured creditors.4 It follows that if unjust enrichment creditors are to be preferred in this way, there needs to be some justification for that priority over (for example) tort creditors.5 Some commentators, such as William Swadling, argue that the common law should not take such policy considerations into account.6 That formalist approach is not obviously right in principle and is contrary to the practice of common law reasoning, which tests propositions by reference to their real-world consequences.7 Both Lord Browne-Wilkinson’s leading judgment in Westdeutsche and Lord Sumption’s judgment in Angove’s are cases in point. Second, in addition to a better outcome in insolvency, a proprietary restitution claim – particularly in the form of a beneficial interest under a trust – confers other advantages on claimants. In a claim in unjust enrichment, it may avoid the application of any change of position defence.8 It would also sidestep limitation issues.9 It can allow the claimant to seek interest calculated on a compound rather than a simple

4 RM Goode, ‘Ownership and Obligation in Commercial Transactions’ (1987) 103 LQR 433, 444. 5 For one answer, see C Mitchell et al, Goff & Jones: The Law of Unjust Enrichment, 9th edn (London, Sweet & Maxwell, 2016) paras 37.16–37.17. 6 W Swadling, ‘Policy Arguments for Proprietary Restitution’ (2008) 28 Legal Studies 506. 7 See generally C Rotherham, ‘Policy and Proprietary Remedies: Are We All Formalists Now?’ (2012) 65 Current Legal Problems 529. 8 The analysis is not straightforward: see, eg R Chambers, ‘Proprietary Restitution and Change of ­Position’ in A Dyson et al (eds), Defences in Unjust Enrichment (Oxford, Hart Publishing, 2016). 9 Limitation Act 1980, s 21(1).

Proprietary Restitution  195 basis: indeed, that was the motivation for the claim in Westdeustche itself. Most importantly, perhaps, proprietary restitution in the form of a trust can allow a claimant to obtain consequential gains. For example, say X pays Y £100 in circumstances giving rise to a claim for restitution, Y buys a lottery ticket with some of that money and wins £1 million. In a pecuniary restitutionary claim, X would be limited to the £100. But, with the benefit of a trust, X could trace into the full winnings. In cases of disgorgement for wrongdoing, this might be justified by reference to the underlying wrong,10 but where the claim is for restitution to reverse an unjust enrichment, the proprietary remedy goes far beyond what is necessary to undo the transaction. X is not restored to the status quo ante, but rather put in a considerably better position. Third, the more widely available proprietary remedies become, the greater the potential disruption to commercial transactions and arrangements. In Westdeutsche, Lord-Browne Wilkinson put this concern in the following way:11 a businessman who has entered into transactions relating to or dependent upon property rights could find that assets which apparently belong to one person in fact belong to another; that there are ‘off balance sheet’ liabilities of which he cannot be aware; that these property rights and liabilities arise from circumstances unknown not only to himself but also to anyone else who has been involved in the transactions. A new area of unmanageable risk will be introduced into commercial dealings.

This concern might be said to be overstated, given that the bona fide purchase rule will operate in many cases to clear property of any beneficial interest under a trust. But the bona fide purchase rule is not a complete answer. For example, business dealings in many modern commercial assets (such as intermediated shares and bonds) are now in equitable interests rather than legal title to those assets. Equity’s darling cannot protect those transactions, even when conducted with unimpeachable good faith. III.  WHAT TRIGGERS PROPRIETARY RESTITUTION?

For an area as contentious as proprietary restitution, clear definitions are important. The first edition of Goff & Jones defined proprietary restitutionary claims as those where property ‘rights [were] granted or preserved to prevent unjust enrichment’, as opposed to other occasions on which proprietary rights can be asserted, which belong to other parts of the law.12 This focus on the event creating the property right has proved enduring and stable.13 It has an important analytical consequence: before the question of liability for wrongdoing or unjust enrichment can arise, the ‘property questions’ must first be answered.14 In other words, one must first look 10 For instance, stripping all unauthorised profit from the fiduciary. 11 Westdeutsche (n 3) 705. 12 R Goff and GH Jones, The Law of Restitution (London, Sweet & Maxwell, 1966) 38. 13 See also, eg P Birks, An Introduction to the Law of Restitution, rev edn (Oxford, Clarendon Press, 1988) 13–15 and 50–51; A Burrows, The Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2011) 168–69. 14 S Worthington, ‘The Commercial Triple Helix: Contract, Property and Unjust Enrichment’ in P Devonshire and R Havelock (eds), The Impact of Equity and Restitution in Commerce (Oxford, Hart Publishing, 2018) 40–47.

196  William Day and Sarah Worthington to identify what interests exist in respect of an asset and when they arose. Failure to order the analysis in this way leads to the incorrect assumption that certain property entitlements have arisen as a remedy for the cause of action in question. That assumption may be sound in some cases, but not always. In many cases, the property right precedes liability rather than following from it. What has not survived the test of time is Goff & Jones’s definition of the relevant event triggering proprietary restitution as simply as ‘unjust enrichment’. It is now orthodoxy that there is no perfect ‘quadration’ between unjust enrichment and restitution.15 Gain-based remedies can arise in response to wrongdoing as well as to reverse unjust enrichments. It is also increasingly orthodox to recognise that unjust enrichment is not a monolithic cause of action: it is ‘more like tort than contract’ in its internal diversity.16 When considering the availability and form of proprietary restitution, it makes sense to distinguish between different branches of unjust enrichment claims. We consider those branches next. We suggest that proprietary restitution should only be triggered where a claimant did not properly exercise their autonomy when transferring an asset that forms the enrichment in question. A. Wrongs Starting with wrongs, these can trigger gain-based responses, including of a proprietary nature.17 But we doubt whether it is right to characterise these as proprietary restitutionary claims. Say A brings possession proceedings to force B to vacate A’s house after the end of B’s tenancy, or issues a conversion claim to require B to return a laptop belonging to A or else compensate A. These are claims in wrongdoing, not in unjust enrichment: the claim is based on the claimant’s existing right to property held by the defendant. The correlative to that right is a duty on the defendant not to interfere with the claimant’s entitlement. A breach of that duty is a wrong.18 The remedy requiring ‘giving back’ might be described, loosely, as restitution, but the property right in question was created before the event of B refusing to return the house or laptop to A. As a matter of definition, it is not correct to describe these claims as involving proprietary restitution. No new property right is created in the claimant by the relevant event.19 In contrast, the constructive trust which bites on a bribe received by a fiduciary is created in response to the commission of a wrong. This was once understood as restitution to reverse an unjust enrichment, but now most would understand 15 See esp P Birks, ‘Misnomer’ in W Cornish et al (eds), Restitution Past, Present and Future (Oxford, Hart Publishing, 1998) 7. 16 A Burrows, ‘In Defence of Unjust Enrichment’ (2019) 78 CLJ 521, 530. 17 Birks, ‘Misnomer’ (n 15) 10–18. Birks also claimed that consent and other events could trigger restitution: ibid 19–26. 18 There has been an attempt to place old money had and received cases fitting this fact pattern, such as Clarke v Shee and Johnson (1744) 1 Cowp 197, 98 ER 1041, Holiday v Sigil (1826) 2 C&P 176 Assizes, 172 ER 81 and Neate v Harding (1851) 6 Ex 349, 155 ER 577, into unjust enrichment, but this is ultimately unconvincing and these cases are better seen as turning on the commission of wrongs: see, eg W Swadling, ‘Ignorance and Unjust Enrichment: The Problem of Title’ (2008) 28 OJLS 627 esp 634–37. 19 See text to n 12.

Proprietary Restitution  197 it as restitution for a wrong.20 The event – namely, receiving the bribe – creates a property right where before there was none. However, we doubt whether it is useful to describe this as proprietary restitution. The remedy does not give the claimant back something it previously had before the wrong. Instead, the defendant is giving up something received from someone else. This is better described as disgorgement.21 B.  Further Wrongs: Claims Which Arise after Tracing A more difficult group of claims to classify are those which arise after a tracing exercise. The leading authority is Foskett v McKeown,22 where Lord Millett said: The transmission of a claimant’s property rights from one asset to its traceable proceeds is part of our law of property, not our law of unjust enrichment. There is no ‘unjust factor’ (unless ‘want of title’ be one, which makes the point). The claimant succeeds if at all by virtue of his own title, not to reverse unjust enrichment.

Put another way, the idea is that a property right detaches from the original assets and reattaches to its substitute. Foskett v McKeown did not seek to justify this beyond repeating, as in the quotation above, that this is simply an aspect of what it means to have a property right in the first place. Since the right which arises is ‘part of the law of property’, it is not a remedy delivered by unjust enrichment. That said, there are obvious difficulties with the idea that the proprietary right at the end of the tracing process is the same transmitted right as the claimant had at the beginning. It looks artificial and fictious. The more principled view is that tracing in this way involves the creation of new proprietary rights, not the persistence of original proprietary rights.23 As such, these rights might at one level be said to comply conceptually with the original Goff & Jones definition of proprietary restitution, being property rights that did not exist before the relevant event but rights that were created in response to it. But that stills leaves the question of classifying the event to which these rights are created in response. It is not easy to fit these claims into the law of unjust enrichment without manufacturing a new and unwieldly unjust factor based on ‘ignorance’24 or ‘lack of consent and want of authority’.25 Graham Virgo has put these claims into a third category: vindication of property rights.26 That label aligns with the assertions

20 Birks, ‘Misnomer’ (n 15) 16–17, citing Attorney General of Hong Kong v Reid [1994] 1 AC 324 (PC). See now FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250. 21 J Edelman, Gain-Based Damages: Contract, Tort, Equity and Intellectual Property (Oxford, Hart Publishing, 2002) ch 3. 22 Foskett v McKeown [2001] 1 AC 102 (HL) 127; see also 108 and 110 (Lord Browne-Wilkinson), 115 (Lord Hoffmann) and 129 (Lord Millett). 23 A Burrows, ‘Proprietary Restitution: Unmasking Unjust Enrichment’ (2001) 117 LQR 412, 417–19. 24 cf Birks, Introduction (n 13) 140–46; Burrows, The Law of Restitution (n 13) ch 16; J Edelman and E Bant, Unjust Enrichment, 2nd edn (Oxford, Hart Publishing, 2016) 281–91. 25 Goff & Jones (n 5) ch 8. 26 G Virgo, ‘What is the Law of Restitution About?’ in Cornish et al (n 15) 309–18.

198  William Day and Sarah Worthington made in Foskett v McKeown, but has come under sustained attack,27 as a result of which Virgo himself has clarified the centrality of ‘interference’ to his scheme:28 the crucial feature of the vindication of property rights principle is that the defendant has interfered with the claimant’s property rights by not allowing the claimant the exclusive benefit of his or her rights. It is this interference which justifies the award of restitutionary remedies and which can be analysed as the appropriate event.

We doubt whether this focus on interference with property rights as ‘the appropriate event’ is analytically distinct from wrongdoing. In this context, the tracing exercise itself might best be understood as the process by which the benefits derived from wrongdoing are identified. The claims made at the end of a tracing exercise are proprietary disgorgement claims, akin to the claims based on wrongdoing set out in the previous section. Regardless of whether these cases are classified as a remedy for a wrong or to vindicate property rights, Virgo’s conclusion about the implications of this move for unjust enrichment is most certainly valid. Once the analysis no longer has to be forced into the structure of an unjust enrichment claim, it becomes unnecessary to manufacture an unjust factor based on ‘ignorance’ or ‘lack of consent and want of authority’. As Virgo puts it:29 such artifice is completely unnecessary. The reported cases do not use such reasoning and they have no need to do so, simply because it is sufficient to establish that the defendant has received property in which the plaintiff has a proprietary interest.

That leaves proprietary claims in unjust enrichment based on defective intention and conditional intention.30 We turn to these next. C.  Defective Intention Claims in unjust enrichment based on defective intention arise where something has gone wrong in the dealings between the parties leading up to the relevant transaction. The typical cases involve defendants precipitating the transaction by inducing a mistake in the claimant,31 making an unlawful threat to the claimant,32 or ­abusing 27 See, eg Burrows, ‘Proprietary Restitution’ (n 23); P Birks, ‘Property, Unjust Enrichment and Tracing’ (2001) 54 Current Legal Problems 231; S Worthington, ‘Justifying Claims to Secondary Profits’ in EJH Schrage (ed), Unjust Enrichment and the Law of Contract (The Hague, Kluwer, 2001). 28 G Virgo, The Principles of the Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2015) 15. 29 Virgo, ‘What is the Law of Restitution About?’ (n 26) 313. 30 A further branch of the law of unjust enrichment is where the claim is based on a policy ground for restitution. We suggest that the availability and form of proprietary restitution in these areas ought to be consistent with the policy underpinning the ground for restitution. Space precludes further discussion in this chapter. Subrogation, in particular, is prominent in this third category (as well as elsewhere) and, again for reasons of space, we do not discuss that remedy in this chapter. 31 cf Hayward v Zurich Insurance Co plc [2016] UKSC 48, [2017] AC 142, criticised in PS Davies and W Day, ‘A Mistaken Turn in the Law of Misrepresentation’ [2019] Lloyd’s Maritime and Commercial Law Quarterly 390. 32 cf lawful act duress as recognised most recently in Times Travel (UK) Ltd v Pakistan International Airlines Corp [2019] EWCA Civ 828, [2019] 3 WLR 445, criticised in PS Davies and W Day ‘“Lawful Act” Duress (Again)’ (2020) 136 LQR 7.

Proprietary Restitution  199 their influence over the claimant.33 In those circumstances, while there may be the appearance of objective intention to effect the transaction, the law considers ­claimants’ actual intentions to have been impaired and will not hold them to these transactions if they seek to undo them.34 In these circumstances, defendants cannot seek to take advantage of the objective appearance, given their responsibility for the defective nature of the claimant’s intention. In cases of defective intention, subject to certain well-defined limits,35 an asset so transferred can be claimed back in specie. The principles are best known in contract law. After A establishes that property was transferred to B by reason of a misrepresentation, duress or undue influence, the contract can be set aside and B holds the property on bare trust (sometimes called constructive, sometimes resulting),36 pursuant to which A can then demand the return of that property in specie.37 Before the contract is set aside and the trust springs up, a power in rem (a ‘mere equity’, in language more familiar to some) is created in the hands of A as an inchoate remedy to reverse the unjust enrichment.38 With gifts, the intermediate ‘power in rem’ is unnecessary: in most cases,39 equity initially presumes a gift was not intended,40 giving rising to a ‘presumed resulting trust’.41 The burden then shifts to the defendant to show that the gift truly was intended. That cannot be done if something has gone wrong in the process leading to the decision to transfer the property and the defendant was the cause of that defect. 33 cf Allcard v Skinner (1887) 36 Ch D 145 (CA), where it is difficult to identify any abuse having taken place. Some commentators take Allcard v Skinner as their starting point to argue that undue influence is about excessive influence, not the wrongful abuse of influence: see, eg P Birks and NY Chin, ‘On the Nature of Undue Influence’ in J Beatson and D Friedman (eds), Good Faith and Fault in Contract Law (Oxford, Clarendon Press, 1997); W Swadling, ‘Undue Influence’ in C Mitchell and W Swadling (eds), The Restatement Third: Restitution and Unjust Enrichment: Critical and Comparative Essays (Oxford, Hart Publishing, 2013). This non-wrongful account of undue influence is not consistent with the modern authorities on undue influence: see Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44, [2002] 2 AC 773. 34 See, eg Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919 [6]–[7]; Cavendish Square Holding BV v Makdessi [2015] UKSC 67, [2016] AC 1172 [13] (Lord Neuberger and Lord Sumption). 35 Such as the bars on rescission, like affirmation, lapse of time, third party rights and impossibility of restitutio in integrum. 36 Compare Lonrho plc v Al-Fayed (No 2) [1992] 1 WLR 1 (Ch) 12 (Millett J) and El Ajou v Dollar Land Holdings plc (No 1) [1993] 3 All ER 717 (Ch) 734 (Millett J). 37 When rescinding at common law (eg for fraudulent misrepresentation), this power in rem analysis is absent from many of the old cases. But these older cases typically concern goods, and the courts have simply asserted that legal title revests in the claimant on rescission. That approach is not possible where legal title is, for example, determined by registration. In those cases, too, rescission grounded in common law reasons ought to deliver restitution in specie (subject to any contrary provisions in the statutes requiring registration). The power in rem analysis provides the tool. This is because these are voidable contracts, not void contracts, so the initial transfer is perfectly effective at law at the outset, and in equity too, but subject to the mere equity recognising the claimant’s beneficial entitlement to recover the property if the transaction is unwound. William Swadling argues against the proprietary consequences at all in these circumstances as a matter of principle (W Swadling, ‘Rescission, Property, and the Common Law’ (2005) 121 LQR 123), but that is contrary to well-established law. 38 See esp B Häcker, Consequences of Impaired Consent Transfers (Oxford, Hart Publishing, 2013). 39 Other than when the presumption of advancement is engaged. 40 Precisely what is presumed is controversial and beyond the scope of this chapter. Contrast W Swadling, ‘Explaining Resulting Trusts’ (2008) 124 LQR 72 and R Chambers, Resulting Trusts (Oxford, Clarendon Press, 1997) ch 1. Suffice it to say that, if the presumption is of an express trust, then not only would this contradict the proprietary outcomes in cases concerning flawed gifts, but it would also contradict the outcomes in contract cases, where both claimant and defendant can assert a proprietary claims: see S Worthington, ‘The Proprietary Consequences of Rescission’ [2002] Restitution Law Review 28, 47–49. 41 Re Vandervell’s Trusts [1974] 1 All ER 47 (Ch) 64 (Megarry J).

200  William Day and Sarah Worthington For these reasons, we suggest that, in defective intention unjust enrichment claims, whenever property has been transferred in the defective transaction, proprietary restitution to recover that property in specie is available as a matter of doctrinal analysis. This also seems right as a matter of principle. The deficiency in the claimant’s intention, and the defendant’s responsibility for that defect, provides a good reason for why the transfer should be seen as ineffective and the property ought to be returned. In those circumstances, the law recognises that claimants’ autonomy to deal with their assets as they wish has been infringed and it follows that they ought to be able to reclaim those assets. If the property is not returned, then the claimant is being held to a transaction which the law has decided that he or she did not intend and ought not to be bound by. The proprietary remedy thus fits the rationale for the liability in unjust enrichment arising in the first place. D.  Why Is Personal Restitution Seen as the ‘Standard’ or ‘Only’ Response? Pausing there, given the account of the law in the last section, it is worth asking why the prevailing view is that personal restitution is the ‘standard’ response to unjust enrichment.42 This erroneous description of the law can be traced back to the first edition of Goff & Jones, which argued that ‘most’ restitutionary claims were personal rather than proprietary.43 The cause of this mistake may have been that Goff and Jones began their synthesis of the law with four common law forms of action (money had and received, money paid, quantum valebat and quantum meruit) which had only in personam consequences. That starting point skewed their explanation of the law. This was more than just a descriptive mistake. It forms the basis for many of the analytical missteps of the last 50 years: if the starting point is that pecuniary restitution is the norm, proprietary restitution becomes an exception (or even ‘exceptional’). As the last section demonstrates, that is simply not an accurate reflection of the law for claims in unjust enrichment based on defective intention. Had Goff & Jones begun with equity rather than the common law, the last 50 years of scholarship may have looked rather different: in equity, the standard remedy has always been proprietary restitution.44 Virgo and Swadling have gone one stage further than Goff & Jones to argue that proprietary restitution should never be available as a remedy to reverse an unjust enrichment. Virgo’s claim is principally on the basis of doctrinal analysis. He claims that there is ‘simply no empirical evidence to support the assertion that property rights can derive from the defendant’s unjust enrichment’.45 With respect, this is incorrect, as the last section demonstrates. The proprietary nature of rescission is particularly difficult to square with Virgo’s approach. Virgo characterises the claim made to property after rescission as vindication of property rights.46 But he does not



42 Menelaou

v Bank of Cyprus plc [2015] UKSC 66, [2016] AC 176 [80] (Lord Neuberger). & Jones (n 12) 34. 44 S Worthington, Equity, 2nd edn (Oxford, Oxford University Press, 2006) 289–90. 45 Virgo, Principles (n 28) 16. 46 ibid 24. 43 Goff

Proprietary Restitution  201 address the prior existence of an effective transfer subject to the claimant’s power in rem. In our view, that earlier stage in the sequence means the outcome can only be explained as a proprietary remedy arising to reverse an unjust enrichment.47 Swadling also contends that there should be no proprietary restitution to reverse an unjust enrichment. But rather than claiming that case law is on his side, as Virgo does, Swadling claims that the case law is wrong and ought to be overturned on principle. For example, he contends that constructive trusts are not true trusts, but instead simply court orders to convey specific rights.48 That is flatly inconsistent with how constructive trusts operate as a matter of principle:49 they provide the proprietary base for a tracing exercise, they afford priority in insolvency and they allow the recovery of consequential gains. None of those features makes sense if a constructive trust is not a true trust. Similar difficulties are found in his attack on the proprietary consequences of rescission. His argument (which focuses on rescission at common law, but presumably also applies to equitable rescission)50 is that title to property can pass by delivery at the same time as under a contract, and that delivery cannot be undone by rescission.51 The problem with this claim, aside from the lack of doctrinal support, is that there is no inherent reason why the fact of delivery alongside contract should trump the law’s ability to reverse the proprietary consequences of a contract after it is set aside. Ultimately, this part of Swadling’s argument amounts to little more than an assertion about the overriding effect of delivery that has limited support in authority. E.  Conditional Intention Resuming our classificatory exercise, the second branch of claims within unjust enrichment is based on conditional intention.52 While this is not how this class of case is typically described – references are more typically to ‘failure of consideration’ or, more recently, ‘failure of basis’53 – nonetheless we suggest that this description better captures the idea motivating restitution in these cases. Put another way, the problem being addressed in these cases is not that the claimant did not properly intend the impugned transfer (that was the issue addressed in the defective intention cases we have already discussed); it is not even that the claimant did not receive consideration for a transfer; it is that the claimant intended the transfer only under certain conditions, and those conditions have not materialised. If the transfer is not reversed, the

47 See too Goff & Jones (n 5) para 40.17. 48 W Swadling, ‘The Fiction of the Constructive Trust’ (2011) 64 Current Legal Problems 399. 49 C Mitchell and B McFarlane, Hayton and Mitchell on the Law of Trusts and Equitable Remedies, 14th edn (London, Sweet & Maxwell, 2015) paras 15.004–15.005. See also, eg L Tucker et al, Lewin on Trusts, 19th edn (London, Sweet & Maxwell, 2014) para 7.0011; J McGhee (ed), Snell’s Equity, 34th edn (London, Sweet & Maxwell, 2019) chs 24 and 26, esp para 26.014. 50 Swadling, ‘Rescission, Property, and the Common Law’ (n 37). 51 Swadling would go further and say that case law establishing that delivery can be undone if there is a mistake of identity, or if the subject matter and quantity are also wrong and ought to be overturned: W Swadling, ‘Unjust Delivery’ in A Burrows and A Rodger (eds), Mapping the Law: Essays in Memory of Peter Birks (Oxford, Oxford University Press, 2006). cf Häcker (n 38) 141–42. 52 One of us has written about this, using different terminology, in Equity (n 44) ch 9. 53 Goff & Jones (n 5) paras 12.10–12.15.

202  William Day and Sarah Worthington defendant would be unjustly enriched.54 ‘Conditional intention’ captures this idea in a way that the orthodox ‘failure of consideration’ or ‘failure of basis’ labels do not. Moreover, analyses based on the orthodox classification have then run into seemingly insurmountable difficulties. Most relevantly for present purposes, some cases in this class have delivered proprietary remedies,55 whereas the vast majority have not. Unjust enrichment scholars have struggled to rationalise the availability of proprietary restitution for failure of consideration, and to achieve consistency between this class and the defective intention cases. Peter Birks began with the idea of a ‘proprietary base’,56 ie that if the claimant owned the asset in the status quo ante, then reversal of the status quo through restitution would require proprietary restitution, but plainly that could not accommodate the personal remedy usually awarded for failures of consideration. Birks later moved towards advocating reform of the law to make proprietary restitution more widely available for failure of consideration. Writing ‘in a spirit of experiment’ for a conference in Jerusalem five years after first publishing his Introduction, Birks posited that the resulting trust should be the main form of proprietary restitution to reverse an unjust enrichment.57 He – and later Robert Chambers – argued that the presumed resulting trust was a presumption of a ‘non-beneficial transfer or, in other words, a presumption that the transferor did not intend the transferee to receive for his own benefit’.58 Birks and Chambers argued that a similar ‘nonbeneficial transfer’ analysis explained automatic resulting trusts and Quistclose trusts.59 As a matter of consistency, they argued, the law should recognise that a case of failure of consideration should also trigger a resulting trust where the transfer was non-beneficial at the outset, ie when the failure of the condition occurred immediately. A case in point was Sinclair v Brougham.60 In that case, money was deposited at a building society acting ultra vires. The fact that the building society was acting ultra vires meant that the depositors were entitled to trace their funds into those held by the building society. According to Birks, this was because there had been a non-beneficial transfer to the building society. This was to be contrasted with failure of consideration arising from a lack of counter-performance for which the benefit had been conferred (eg the delivery of goods or the provision of services in return for money paid). In those cases, unless there has been some restriction on

54 See, eg Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 (HL) esp 61–64 (Lord Wright). 55 Including Sinclair v Brougham [1915] AC 398 (HL), Neste Oy v Lloyd’s Bank plc [1983] 2 Lloyd’s Rep 658 (Com Ct) and Re Japan Leasing (Europe) plc [1999] BPIR 911 (Ch), all now overruled, as discussed in the next section. 56 Birks, Introduction (n 13) 378–79. See also A Burrows, The Law of Restitution (London, Butterworths, 1993) 43–44 and 373. 57 P Birks, ‘Restitution and Resulting Trusts’ in SR Goldstein (ed), Equity and Contemporary Legal Developments (Jerusalem, Humaccabi Press, 1992) 339. Birks’s final elaboration of this theory came in P Birks, Unjust Enrichment, 2nd edn (Oxford, Clarendon, 2005) ch 8, which maintained it in broad terms notwithstanding having shifted to a monocausal ‘absence of basis’ approach to unjust enrichment. Space precludes further discussion here. 58 Birks, ‘Restitution and Resulting Trusts’ (n 57) 346. See too Chambers, Resulting Trusts (n 40) 19–27. 59 Birks, ‘Restitution and Resulting Trusts’ (n 57) 350; Chambers, Resulting Trusts (n 40) chs 2 and 3. 60 Sinclair (n 55).

Proprietary Restitution  203 ownership pending satisfaction of the consideration,61 there was a beneficial transfer, and only a personal remedy in unjust enrichment should be available.62 In contrast, under the editorship of its original authors, Goff & Jones went in the opposite direction. It increasingly drew a distinction (albeit not in this language) between defective intention claims, where the claimant had not taken the risk of the defendant’s insolvency, and conditional intention claims, where the claimant was in a position analogous to an unsecured creditor. This description was seen as apt in the latter case because the parties had an opportunity to agree the condition or basis in advance, and did not take that opportunity to bargain for security.63 From this perspective, those few cases which recognised a proprietary response to claims for failure of consideration were open to question. Both sides of the argument make attractive points. We suggest that viewing this class of case though a slightly different lens might incorporate the best of each. In particular, we suggest that there are two fundamentally different ways in which a condition might fail: the claimant may transfer property only to find that the defendant is not actually obliged to provide counter-performance, or alternatively only to find that the claimant does not in fact provide the obligatory counter-performance. Each subclass should, in principle,64 lead to a different remedial response: (i)  No Contractual Obligation to Provide Counter-Performance In the first subclass, the claimant has rendered performance conditioned on the belief that he is obliged to render it, and in the expectation that the defendant will be obliged to provide counter-performance in return. This turns out to be false. The contract between the parties is void. There is no obligation on either party to render any performance. This leads to a failure of condition: the claimant has provided the defendant with an unintended gift, in circumstances where what was intended was a transfer only where counter-performance was owed. That conditionality is of the essence of a contractual engagement. The practical ability of the defendant to deliver counter-performance is not to the point, nor is its actual delivery; the sole reason for the claim in unjust enrichment is that performance and counter-performance are not legally required. Crucially, in these circumstances, the conditions attached to the claimant’s transfer of property to the defendant were not satisfied from the outset and never could have been satisfied. In those circumstances, the claimant had no relevant intention to part with their property at all at the time of the transfer. The claimant’s exercise of autonomy at the time of transfer to deal with their assets as they wished points towards them being able to reclaim those assets in specie. Indeed, if defective intention cases permit proprietary restitution claims, then it would be odd that this ‘no relevant intention at all’ case 61 Chambers, Resulting Trusts (n 40) 148–51; Birks, Unjust Enrichment (n 57) 194–98. 62 Birks, ‘Restitution and Resulting Trusts’ (n 57) 359–62. See too Chambers, Resulting Trusts (n 40) ch 6. 63 R Goff and GH Jones, The Law of Restitution, 2nd edn (London, Sweet & Maxwell, 1978) 36; R Goff and GH Jones, The Law of Restitution, 3rd edn (London, Sweet & Maxwell, 1986) 115; GH Jones, Goff & Jones: The Law of Restitution, 4th edn (London, Sweet & Maxwell, 1993) 95–101. This was not a hard and fast rule, but instead a factor to be taken into account on the merits of considering whether to fashion proprietary relief for the claimant. 64 We deal with doctrine in the next section.

204  William Day and Sarah Worthington (where the party autonomy argument is, if anything, a fortiori) was not similarly protective of claimants. In both classes, the courts have been alert to protect claimants from dispositions they did not intend to make. The only difference between the two classes of case is that, in the defective intention class, the claimant’s intention to transfer is flawed; in this class, it is conditional, and the condition turns out to be legally absent from the outset. In both these cases, the claimant’s intention was flawed at the time the transfer was made; in both, the claimant’s autonomy in disposing of his or her assets ought then to be protected by a proprietary restitutionary claim to enable their recovery. (ii)  No Delivery of Counter-Performance Contractually Due The second subclass is different. The failure is that the defendant did not actually – factually – deliver the legally required counter-performance. There has been a breach of contract. Normally, the claimant’s claim will sound in damages or another contractual remedy. It would be perfectly rational for the law not to provide an alternative claim in unjust enrichment. As it happens, the law does allow a conditional intention claim, but limited by a requirement that the failure of condition be ‘total’. This is controversial, but space precludes further discussion here.65 For present purposes, the important point is this: there is nothing in this scenario to question the integrity of the claimant’s exercise of autonomy over their assets when transferring property to the defendant. The claimant’s intention was not defective, nor was the condition unsatisfied and legally impossible of satisfaction at the time of transfer. In fact, quite the opposite: the claimant has secured an entitlement to counter-performance, and damages if counterperformance is not forthcoming. In all relevant senses, therefore, the claimant intended the defendant to have the property when transacting. In those circumstances, a proprietary remedy is not required to protect the claimant’s autonomy. The claimant should be limited to personal remedies in contract or unjust enrichment. Of course, it would be open to the claimant to agree an arrangement with the defendant whereby title would be retained pending counter-performance, or that the property would be transferred back in specie on failure of counter-performance or to create some limited interest in the property to secure counter-performance. But the very fact that these alternative arrangements are open to a claimant at the transfer stage simply underlines the fact that, in the absence of such an arrangement, the claimant’s actions can only be understood as an intention to transfer the asset outright to the defendant. And if such an arrangement is adopted, there is then no need to try to fashion a proprietary restitution claim to avoid the effects of insolvency. IV.  LORD SUMPTION, FAILURE OF CONSIDERATION AND PROPRIETARY RESTITUTION

All this is, perhaps, a long introduction to the line of cases on failure of consideration and proprietary restitution on which Lord Sumption has left a significant mark. Those 65 See further, eg Goff & Jones (n 5) paras 12.16–12.32; Burrows, The Law of Restitution (n 13) 330–34; Virgo, Principles (n 28) 313–66.

Proprietary Restitution  205 cases are conveniently divided into three groups: pre-Westdeutsche, W ­ estdeutsche and Angove’s. A. Pre-Westdeutsche It is convenient to start with Neste Oy v Lloyd’s Bank plc.66 In that case, Bingham J held that a constructive trust arose where money was paid to a recipient (PSL) in exchange for future counter-performance by a third party, but the recipient knew that the money would not be paid on because of its own imminent insolvency, such that a failure of consideration claim was bound to accrue.67 Bingham J adopted a broad merits-based approach to the issue:68 Given the situation of PSL when the last payment was received, any reasonable and honest directors of that company (or the actual directors had they known of it) would, I feel sure, have arranged for the repayment of that sum to the plaintiffs without hesitation or delay. It would have seemed little short of sharp practice for PSL to take any benefit from the payment, and it would have seemed contrary to any ordinary notion of fairness that the general body of creditors should profit from the accident of a payment made at a time when there was bound to be a total failure of consideration. Of course it is true that insolvency always causes loss and perfect fairness is unattainable. The bank, and other creditors, have their legitimate claims. It nonetheless seems to me that at the time of its receipt PSL could not in good conscience retain this payment and that accordingly a constructive trust is to be inferred.

This approach was reminiscent of that taken in Goff & Jones at the time, albeit ­Bingham J did not cite that text.69 However, Bingham J expressly relied upon the ­decision of Goulding J in Chase Manhattan.70 In that earlier case, by reason of a clerical error, the claimant bank mistakenly transferred the same sum twice to the defendant bank on 3 July 1974. The defendant bank was aware of the error by 5 July 1974. The defendant bank then went into liquidation. The claimant bank’s claim for restitution in personam was essentially worthless, so it pursued a proprietary claim instead. Goulding J held that the fact that the payment was mistaken meant that equitable title to the money ‘remained’, or ‘continued’, with the payor.71 Commenting on the decision in Chase Manhattan, the third edition of Goff & Jones regretted that Goulding J did not directly ask ‘the critical question’ as to whether ‘it was just, in the circumstances of the case before him, to impose a constructive trust’.72 But the authors considered that the merits of that case were indeed ‘appealing’ because the claimant bank had not taken ‘the risk of the defendants’ insolvency’73 – a point

66 Neste Oy (n 55). 67 ibid 666. 68 ibid 666. 69 See n 65. 70 Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105 (Ch) 115. 71 ibid 120 and 128. 72 Goff and Jones, The Law of Restitution, 3rd edn (n 63). cf Chase Manhattan (n 81) 117, where Goulding J cited a well-known passage from Story’s Commentaries on Equity Jurisprudence which identifies the ‘governing principle’ of constructive trusts as conscience. 73 ibid 115.

206  William Day and Sarah Worthington which could be made for certain mistake-based claims, but is not equally true for failure of consideration claims like Neste Oy, where the condition or basis for the transfer has been agreed in advance. We consider that Bingham J was wrong in both his analysis and his conclusion for reasons which follow from the previous section of this chapter.74 The first error in the analysis was to assume that the availability of proprietary restitution in a case like Chase Manhattan should track across to a case like Neste Oy. Chase Manhattan was argued and decided as a mistake case, but we suggest it is better understood as a conditional intention case, where the unfulfilled condition was that the second payment would discharge a liability. That was legally impossible, since the first payment had already discharged the liability in question. In those circumstances, the paying bank had no relevant intention to make a transfer at the time of the transfer, and that justified the proprietary remedy ordered by Goulding J. In contrast, Neste Oy was in a different subclass. The conditions attaching to the intention of the payor were not unsatisfied nor incapable of satisfaction at the relevant time. The fact that the payee knew that counter-performance was ‘bound’ not to be rendered is simply not relevant to the question of whether the payor was validly exercising its autonomy when giving the payment instruction. For that reason, only personal restitution should have been available.75 The other significant case on proprietary restitution for failure of consideration before Westdeutsche was Re Goldcorp Exchange Ltd.76 The company dealt in precious metal bullion. It falsely told customers that they would obtain title to ‘their’ bullion and that it had enough stock to meet demands. The company fell into financial difficulty and its receivers applied to court for directions as to what to do with the remaining bullion. Since the company’s bankers had large claims and a floating charge over all the company’s assets, the customers would only recover if their remedies were proprietary, not personal. All their arguments failed. Of particular interest here are their arguments asserting a proprietary interest in the purchase moneys paid over to the company. Lord Mustill divided these into five categories, two of which are material here.77 The first was that the investors had paid their funds over by mistake. 74 cf S Worthington, Proprietary Interests in Commercial Transactions (Oxford, Clarendon Press, 1996) 156–57, which offered a tentative justification for the outcome on the basis of two unspoken assumptions in the judgment: (i) the payments were severable and (ii) the agent was incapable of promising counterperformance once it had resolved to cease trading (and certainly once in liquidation) and therefore those promises were a legal nullity. As noted (at 157), both assumptions are ‘perhaps questionable’ on the facts. 75 Note that the outcome would have been different if the payor had perhaps been alert to the impending insolvency and paid the money on the clear condition that it would be used only to make the onward payment, giving rise to a Quistclose trust. But the proprietary outcome would then be one delivered by virtue of consent, not unjust enrichment. 76 Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74 (PC). 77 The others were: (i) that the payment was from the outset held by the company on trust for the purchasers (ibid 100–01), denied on the basis that there was no Quistclose trust or fiduciary duty that might deliver such an outcome; (ii) that the contract was voidable for misrepresentation (ibid 101), denied on the basis that the contract had not been rescinded, and, in any event, the contract would have been valid and effective at the outset, at which stage the bank’s charge would have bitten on the funds paid over; and (iii) that a remedial constructive trust (though not described in those terms) could be delivered by the court in order to respond appropriately to the unjust enrichment claims (ibid 104), denied on the basis that ‘No case cited has gone anywhere near to this, and the Board would do no service to the nascent doctrine by stretching it past breaking point’.

Proprietary Restitution  207 Lord Mustill dismissed this justification for a proprietary remedy in short order, pointing out that the customers’ complaint in these circumstances is ‘not that they paid the money, but that the goods which they ordered and paid for have not been delivered’.78 Similarly, and in equally short order, he dismissed their claim for a proprietary remedy on the basis of a total failure of consideration. In answer to that, he had this to say:79 It is, of course, obvious that in the end the consideration did fail, when delivery was demanded and not made. But until that time the claimants had the benefit of what they had bargained for, a contract for the sale of unascertained goods. Quite plainly a customer could not on the day after a sale have claimed to recover the price for a total failure of consideration, and this at once puts paid to any question of a residuary proprietary interest and distinguishes the case from those such as Sinclair v Brougham … where the transactions under which the moneys were paid were from the start ineffectual; and Neste Oy v Lloyds Bank Plc … where to the knowledge of the payee no performance at all could take place under the contract for which the payment formed the consideration.

We agree. This reflects precisely the crucial distinction we articulated earlier between ‘no obligation to provide counter-performance’ and ‘no delivery of counterperformance contractually due’. We would go further, and suggest that, for the reasons given by Lord Mustill, only cases in the former class should deliver proprietary restitution; cases in the latter class should be confined to a personal claim in unjust enrichment. To the extent that Lord Mustill may have suggested that this boundary might in the future be crossed, we disagree. B.  Westdeutsche The litigation in Westdeutsche Landesbank Girozentrale arose out of the decision of the House of Lords in Hazell v Hammersmith and Fulham London Borough Council.80 Jonathan Sumption QC appeared as leading counsel in both sets of proceedings. In Hazell, the House of Lords held that interest rate swap transactions entered into by the council with various banks were ultra vires and therefore void. However, Lord Templeman (giving the leading judgment) emphasised that the consequences of the contracts being void would depend on the facts of each case.81 After Hazell, over 200 claims were commenced, mainly by banks seeking to recover sums paid under the swaps to local authority councils. Two test cases were selected and tried together: Westdeutsche Landesbank Girozentrale and Kleinwort Benson Ltd v Sandwell Borough Council. The banks advanced both proprietary and pecuniary restitutionary claims. The claims for many of the swaps risked failure on a conventional approach: there had not been a ‘total’ failure of counter-performance for those swaps where payments had been made both ways.82 Jonathan Sumption QC, for Westdeutsche, sidestepped this with the following move:83

78 ibid

103, also noting – as we do – that this situation was ‘entirely different’ from Chase Manhattan. 103–04. 80 Hazell v Hammersmith and Fulham London Borough Council [1992] 1 AC 1 (HL). 81 ibid 36. 82 Westdeutsche (n 3) 925. 83 ibid 928, quoting from Jonathan Sumption QC’s submissions. 79 ibid

208  William Day and Sarah Worthington What the bank bargained for was payments which would discharge a legal obligation and which the bank was lawfully entitled to receive. What it obtained were payments made under a void agreement which Islington was prima facie entitled to recover back.

The proprietary restitutionary claim was put by the banks on the basis that it was unconscionable for the councils to retain the funds, leading them to hold such monies in a fiduciary capacity.84 That was recognised at first instance, and compound interest was therefore ordered by Hobhouse J.85 This was upheld by the Court of Appeal (with differing reasoning),86 but was then rejected in the House of Lords. (i)  Argument and Judgment in the House of Lords In the House of Lords, Jonathan Sumption QC’s submissions came down to five beguilingly simple propositions about the proprietary consequences of void contracts.87 They repay close study. First: (1) … If [the claimant’s] only intention is to pass title under a contract and there is no contract, then there is no relevant intention to pass title at all …

This submission hinges on the key element of conditionality in contract cases: parties agree – and intend – to transfer their assets because there is obligatory counterperformance; they do not intend to make gifts to each other in the absence of a binding deal. True enough, the parties will typically have performed what was agreed (at least in part), even though the agreement was not binding, and executed transfers of their assets to each other, whether by delivery or otherwise. But the issue is that they were not obliged to render that performance, and they only intended to act in this way if contractually obliged to do so. In these circumstances, there will invariably be a remedy to undo what need not have been done. The real question is whether that remedy is proprietary or personal. Jonathan Sumption QC dealt with this next: (2) … This is (it is submitted) the principle on which title does not pass where money (or other property) is transferred under a void contract … The position is the same where the contract is voidable and has been avoided ab initio; property revests in the transferor as if it had never passed …

This second proposition requires unpacking. First, in advancing the principle that ‘title does not pass where money (or other property) is transferred under a void contract’, the bank relied upon (among other authorities) Cundy v Lindsay.88 In Cundy, the consequence of mistaken identity was that there was no contract between the claimant and the defendant, nor any valid delivery,89 such that the claimant could maintain a conversion claim against the defendant. However, there will often be cases where the contract is void but there 84 ibid 916. 85 ibid 929 and 955. 86 ibid 960–62 (Dillon LJ) and 969 (Leggatt LJ). Kennedy LJ rather unhelpfully agreed with both Dillon and Leggatt LJJ. 87 Respondent’s printed case, para 12. Available at Lincoln’s Inn Library in London. 88 Cundy v Lindsay (1878) 3 App Cas 459 (HL). 89 cf Swadling, ‘Unjust Delivery’ (n 51).

Proprietary Restitution  209 is valid delivery of the property. In those circumstances, title will pass at common law, and the proprietary consequences of the nullity of the contract will have to be expressed in equity by way of a trust. The former case (ie the Cundy scenario) does not involve proprietary restitution, strictly speaking, since no new property interest is created in response to the event. Conversely, the latter does involve proprietary restitution because a new property interest is created in response to the event.90 Second, and with that caveat, the analogy between voidable contracts and contracts void ab initio is an attractive one (albeit to be handled carefully). In defective intention cases, as we have already explored, it is well established that when a contract is avoided, a trust arises in respect of the property transferred under that contract. It is entirely consistent to say that where a contract was void all along for being ultra vires, but legal title passed by reason of delivery, a trust might arise from the outset. That proposition also had the support of Sinclair v Brougham. Unfortunately, in W ­ estdeutsche itself, Sinclair v Brougham was considered bad law. Lord Browne-Wilkinson considered that, on the same facts today, the claim would be treated straightforwardly as a claim for total failure of consideration at common law. Moreover, he held that the reasons given by Lord Haldane LC in Sinclair v Brougham for recognising ‘a resulting trust, not of an active character’ did not fit the conventional principles for resulting trusts and contradicted the ‘conscience’ and ‘property’ requirements at the heart of the law of trusts (to which we return below).91 Lord Browne-Wilkinson was therefore prepared to overrule Sinclair v Brougham. Third, notwithstanding the foregoing, money transfers are not the same as transfers of title to other forms of property. This was partly acknowledged in Jonathan Sumption QC’s third submission: (3) Where (as happened in this case) the money is paid into a bank account in which it is mixed with the recipient’s own money, the legal ownership of the money is lost by the payer.

In fact, this proposition is not quite accurate. The metaphor of handing physical coins and bank notes over the counter at a bank and then them mixing with other coins and notes is misleading. In Westdeutsche, as in most modern commercial transactions, the transfer took place between bank accounts. No mixing occurred. Instead, the value of the chose in action represented by Westdeutsche’s bank account would have been reduced and that represented by the council’s bank account correspondingly increased.92 Value, not title, was transferred. However, it is undoubtedly correct to say that the payor has no interest at common law in the account balance of the payee. A bank account is a contract between a bank and its customer, and the customer holds the relevant rights and obligations in respect of it.93 Any interest held by the payor in the council’s chose in action will therefore necessarily be in equity. This was Jonathan Sumption QC’s fourth submission: (4) In equity, however, it remains the property of the payer …

90 See text to nn 12 and 13. 91 Westdeutsche (n 3) 712. 92 R v Preddy [1996] AC 815 (HL) 834 (Lord Goff); Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728 (Com Ct) 750–56 (Staughton J). 93 Foley v Hill (1848) 2 HLC 28, 9 ER 1002 (HL).

210  William Day and Sarah Worthington There are two ways of reading this fourth submission. The uncontroversial reading is that there is no scintilla temporis94 where the payor is left with no proprietary interest in the money or its substitute because, concurrent with the transfer, an equitable proprietary interest arises in response to the nullity of the contract. A more controversial reading is that the payor has both legal and equitable title to property before transfer and ‘keeps’ the equitable title when transferring the legal title. This description may be apt with chattels, but not with bank transfers, yet it appears to be how Lord Browne-Wilkinson understood the submission. Criticising the language of retention in earlier cases like Chase Manhattan, he held that Westdeutsche was wrong to argue that title could ‘remain’ with the payor in equity.95 The same person could not hold both legal and equitable title to the same property; rights in equity under a trust only arose when there was a separation of the legal title from the beneficial or economic interest in the property. This ‘split title requirement’ is established orthodoxy.96 It is picked up in Jonathan Sumption QC’s fifth submission, building on his fourth: (5) The separation of the legal from the equitable necessarily imports a trust [adding in a footnote: ‘sometimes referred to as a charge … [t]his terminology treats a charge as the means of giving effect to a trust’].

For Westdeutsche, Jonathan Sumption QC added that this trust was not of the same character, and did not import the same obligations, as an express trust. This was a bare trust, much like a resulting trust. To reinforce that submission, Birks’s ‘experimental’ paper on resulting trusts from the Jerusalem conference was sent to the Law Lords after the completion of oral argument. This did not persuade Lord Browne-Wilkinson. First, he held that equity ‘operates on the conscience’ of the owner of the legal interest, either because the owner agrees to hold the legal interest on trust or because of the owner’s unconscionable conduct. It followed that the legal owner could not be an express, constructive or resulting trustee whilst still ignorant of the relevant factors that would affect his conscience.97 In this chapter, we call this the ‘conscience requirement’. Lord Browne-Wilkinson held that Birks’s proposed expanded role for resulting trusts was ‘incompatible with [this] basic premise on which all trust law is built’.98 Second, a trust could only arise where there was identifiable trust property.99 This is the ‘property requirement’. Combined with the conscience requirement, it disposed of the appeal in short order: Islington had no knowledge that the interest rate swap transactions were ultra vires and therefore void when it received payments from Westdeutsche. By the time that it became aware of those facts, the money had been mixed with other funds in the 94 See, by analogy, Abbey National Building Society v Cann [1991] 1 AC 56 (HL). 95 Westdeutsche (n 3) 706. 96 Too much can be made of the ‘retention’ point. It is uncontroversial that an absolute legal owner has legal title to an asset, a beneficial interest in it and even the right to possession of it if the asset is tangible, but we would never describe such an absolute owner as having either ‘equitable title’ or a ‘lease’ of the asset. Both equitable title and a lease interest are derivative interests which arise where there is ‘split title’ between the legal owner and some other party. 97 Westdeutsche (n 3) 705, principles (i) and (ii). 98 ibid 709. 99 ibid 705, principle (iii).

Proprietary Restitution  211 council’s bank accounts and had ceased to be identifiable.100 For good measure, Lord Browne-Wilkinson added that a further problem with Birks’s theory was that it elided property rights with ‘the value transferred’: a trust could only bite on ‘defined trust property’ and not on value in a more general sense.101 Lord Goff also briefly addressed the ‘most interesting and challenging paper’ written by Birks on resulting trusts, remarking that, if it had been written ‘to test the temperature of the water … I feel bound to respond that the temperature of the water must be regarded as decidedly cold’.102 Lord Goff agreed that (i) Birks’s theory was contrary to the conscience and property requirements in the law of trusts articulated by Lord Browne-Wilkinson, (ii) it would cause serious ‘practical problems’103 and (iii) there is no ‘general rule that the property in money paid under a void contract does not pass to the payee; and it is difficult to escape the conclusion that, as a general rule, the beneficial interest in the money likewise passes to the payee’.104 On that last point, while we most certainly agree with the first part, concerning legal title, we do not agree with the second, for reasons already given. In the light of all this, we need to say a little more about the conscience r­ equirement. (ii)  The Conscience Requirement The conscience requirement is the most significant and most difficult aspect of Westdeutsche. We consider that this requirement is inconsistent with orthodoxy in the law of trusts, and also is an unsatisfactory basis on which to develop proprietary restitution as a response to a claim in unjust enrichment. Starting with the former – ie that the conscience requirement is inconsistent with orthodoxy in the law of trusts – the well-established and preferable view is that a trust arises wherever there is a separation of legal and beneficial ownership. The cause of that separation, and the consequent duties owed by trustee to beneficiary, can vary depending on the ‘conscience’ or knowledge of the trustee, but the fact of separation (and therefore of the existence of the trust) does not depend on unconscionability or knowledge. Put another way, trustees will not have personal obligations of trusteeship imposed on them without their knowledge; but they may well find themselves holding assets in which others are able to assert beneficial interests. The falsity of Lord Browne-Wilkinson’s claim is demonstrated by unentitled donees of trust property who are not equity’s darling,105 by presumed resulting trusts and by automatic resulting trusts. In all these cases, the legal owners hold assets on trust even though they do not appreciate that fact. Presumed resulting trusts arise when the claimant transfers property to the defendant or purchases property in the defendant’s name. They arise at the moment of receipt. Suppose the defendant does

100 ibid 706. 101 ibid 709. 102 ibid 689–90. 103 Citing with approval A Burrows, ‘Swaps and the Friction between Common Law and Equity’ [1995] Restitution Law Review 15, 27–28. We touch on many of these issues in the first section of this chapter. 104 Westdeutsche (n 3) 689–90. 105 Foskett v McKeown (n 22).

212  William Day and Sarah Worthington not know about the transaction, and then goes into insolvency before discovering it; that does not make the defendant any less a resulting trustee, nor the claimant any less able to recover the property on the defendant’s insolvency.106 Even in constructive trust cases, knowledge is not invariably an essential element. The constructive trust that arises on entry into a contract for the sale of land cannot be explained by reference to any principle of unconscionability: knowledge is irrelevant. Knowledge is also irrelevant to the constructive trust which captures unauthorised gains received by a fiduciary. The constructive trust follows from the duties of loyalty owed by fiduciary to principal, which are strictly applied regardless of fault. The fiduciary will be a trustee even if not aware that the benefit received was in breach of fiduciary duty.107 As for the latter – ie that conscience is an unsatisfactory basis on which to develop proprietary restitution as a response to a claim in unjust enrichment – it is not obvious why knowledge (of whatever degree) of a claim in unjust enrichment at a time when the benefit is still specifically identifiable should elevate a pecuniary restitutionary claim into a proprietary claim. It looks out of place with the approach to other claims in private law. For example, if A knowingly breaches a contract to deliver property to B, he does not then hold the undelivered property on constructive trust for B. Nor does it obviously fit with principles of equity. Unconscionable behaviour alone does not automatically create a trust.108 Nor does it fit with any of the rationales for claims in unjust enrichment, be that defective intention, conditional intention or (as regards Islington Borough Council in Westdeutsche) no relevant intention at all. Liability is not determined by reference to general notions of equity, conscience or fairness.109 Westdeutsche’s approach to proprietary restitution at the remedies stage is thus inconsistent with those principles applicable to the liability stage of a claim in unjust enrichment. That is to be regretted. A remedy should undo the particular injustice recognised by the cause of action: it should be coherent and consistent with the cause of action. To achieve that, we suggest a return to the core notion that unjust enrichment claims are strict liability claims and their goal is to rectify flawed transfers.110 If only some of these claims are to merit proprietary restitution, then the underlying rationale for that should reflect and be consistent with the particular reason advanced for why the transfer is flawed. We suggest that a proprietary remedy is appropriate when the claimant’s intention to transfer its assets was flawed from the outset, and in particular flawed at the time the transfer was made, either because of defects in intention induced by the defendant or because the intention was to transfer pursuant to a contract and no contract exists. In both those contexts, a proprietary remedy to reverse the defendant’s unjust enrichment would recognise the claimant’s autonomy in disposing of its assets.

106 Chambers, Resulting Trusts (n 40) 35. 107 Most famously seen in the case of Boardman v Phipps [1967] 1 AC 46 (HL). 108 cf the conduct of the company in Re Goldcorp Exchange (n 86). 109 One reason for the earlier hostility to unjust enrichment was the perception that this was the case. See, eg Baylis v Bishop of London [1913] 1 Ch 127 (CA) 140 (Hamilton LJ): ‘Judges are not now free in the twentieth century to administer that vague jurisprudence which is sometimes attractively styled “justice as between man and man”.’ 110 Investment Trust Companies v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275 [42]–[43] (Lord Reed), making the same point albeit in the language of ‘normatively defective transfers’.

Proprietary Restitution  213 Conscience, by contrast, would seem to be relevant only where the claim is for wrongdoing, not for unjust enrichment. Indeed, what Westdeutsche appears to do is to recognise a new claim to property, distinct from but derived from the claim in unjust enrichment. As Birks later noted, this is actually a ‘wrongs-based trust superimposed on an unjust enrichment. The wrong is knowingly withholding.’111 For all these reasons, we maintain fundamental misgivings about Westdeutsche as a foundation for the future development of proprietary restitution claims to reverse unjust enrichments. As we will see, in Angove’s Pty Ltd v Bailey, Lord Sumption shared these reservations. C. Angove’s Angove’s was an Australian winemaker and appointed an English company called D&D Wines to act as its agent in the UK. D&D Wines went into liquidation. ­Angove’s purported to terminate D&D Wines’ authority as agent and to sue UK retailers directly on invoices that had not been paid. The termination aspect of the case is discussed elsewhere in this volume.112 The liquidators objected to this course: they argued that D&D Wines should recover the sums itself and deduct commission due; Angove’s could then prove in D&D Wines’ insolvency as an unsecured creditor. Angove’s argued that, even if it could not terminate the arrangement, D&D Wines would hold the sums collected on trust for Angove’s. Lord Sumption upheld Angove’s on the termination point, so the trust point did not need to be decided. Nonetheless, he dealt with it in obiter dicta, given its importance. The precise question was whether D&D Wines (on this hypothesis, continuing as Angove’s agent) would hold the sums collected on constructive trust for Angove’s following Neste Oy v Lloyd’s Bank plc113 and Re Japan Leasing (Europe) plc.114 This was a different type of conditionality to Westdeutsche: the failed condition was performance, not the existence of an underlying contract. In Neste Oy, as we have seen, Bingham J held that a constructive trust arose when money was paid by a principal to an agent to pay on to a third party in circumstances where the agent knew that there was ‘bound’ to be a total failure of consideration because of its own 111 Birks, Unjust Enrichment (n 68) 193. It is worth noting that the extent of the knowledge requirement is not clear. The conflicting subsequent case law has interpreted Westdeutsche as requiring subjective knowledge or objective knowledge: contrast Papamichael v National Westminster Bank plc [2002] 1 Lloyd’s Rep 332 [230] (Judge Chambers QC) with Fitzlan-Howard (Norfolk) Ltd v Hibbert [2009] EWHC 2855 (QB) [49] (Tomlinson J). The debate has echoes of the ‘Baden scale’ of knowledge in knowing receipt, which resulted in the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 427 (CA) 455 concluding that the ‘state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt’ (Nourse LJ). This is a conclusory and circular approach: there must be knowledge for unconscionability, but unconscionability will determine the level of knowledge required in any case. Unfortunately, but perhaps inevitably, given the terms of Lord Browne-Wilkinson’s judgment in Westdeutsche, it has now been applied to the ‘unconscionable retention’ constructive trust as well: Commerzbank AG v IMB Morgan plc [2004] EWHC 2771 (Ch), [2005] 2 All ER (Comm) 564 [36] (Lawrence Collins J). 112 See ch 14. 113 Neste Oy (n 55). 114 Re Japan Leasing (Europe) plc [1999] BPIR 911 (Ch).

214  William Day and Sarah Worthington imminent insolvency. That reasoning was then followed in Re Japan Leasing (Europe) plc, where sums received by the agent from third parties after the agent went into administration were held on constructive trust for its principals. Angove’s sought to apply that reasoning. We consider that to be wrong as a matter of principle: unlike Westdeutsche, all three of these cases (Neste Oy, Re Japan Leasing (Europe) plc and Angove’s) involved failed conditionality in the form of failure to render contractually due counter-performance rather than absence of any obligation to render counterperformance. In these three cases, therefore, there was no factor that could call into question the payor’s exercise of autonomy to transfer property to the payee. Happily, Lord Sumption reached the same conclusion. Overruling Re Japan Leasing (Europe) plc and rejecting Bingham J’s reasoning in Neste Oy,115 Lord Sumption considered there to be ‘fundamental objections’ to the recognition of a constructive trust in Angove’s.116 His starting point, similar to Lord Browne-Wilkinson in Westdeutsche,117 was concern with the priority which the claimant would enjoy at the expense of the general body of unsecured creditors if there was a constructive trust.118 He noted that in the face of competing insolvency claims from innocent parties, English courts would not resort to discretionary remedial constructive trusts to determine which class of claimants should be advantaged over the other.119 In English law, ‘Property rights are fixed and ascertainable rights’.120 Against that backdrop, Neste Oy was problematic, since Bingham J’s conclusion that a recipient could not in ‘good conscience’ keep a payment in the knowledge of a future failure of consideration simply:121 beg[ged] the essential question whether he should have returned it. It cannot be a sufficient answer to that question to say that it would be ‘contrary to any ordinary notion of fairness’ … Reasoning of this kind might be relevant to the existence of a remedial constructive trust, but not an institutional one.

We consider this an important dictum and it provides a springboard to challenge the most difficult parts of Westdeutsche in a future case. Certainly, it is difficult to square this with the ‘conscience requirement’ articulated by Lord Browne-Wilkinson in Westdeutsche. Lord Sumption then ventured to offer some wider observations about proprietary restitution:122 The exact circumstances in which a restitutionary proprietary claim may exist is a controversial question which has given rise to a considerable body of judicial comment and academic literature. For present purposes it is enough to point out that where money is paid with the intention of transferring the entire beneficial interest to the payee, the least that must be shown in order to establish a constructive trust is (i) that that intention was vitiated, for example because the money was paid as a result of a fundamental mistake or



115 Lord

Sumption left open when Neste Oy could be re-explained on other grounds: Angove’s (n 1) [32]. [24]. 117 Westdeutsche (n 3) 704–05 and 716. 118 Angove’s (n 1) [25]–[26]. 119 ibid [27]. 120 ibid [28]. 121 ibid [29] (original emphasis). 122 ibid [30]. 116 ibid

Proprietary Restitution  215 pursuant to a contract which has been rescinded, or (ii) that irrespective of the intentions of the payer, in the eyes of equity the money has come into the wrong hands, as where it represents the fruits of a fraud, theft or breach of trust or fiduciary duty against a third party. One or other of these is a necessary condition, although it may not be a sufficient one.

This covers a lot of ground, even as a statement of merely necessary conditions, and because it generalises broadly and illustrates selectively, it may require careful unpacking. Within each broad category are different phenomena. Take (i). This focus on intention repeats Jonathan Sumption QC’s concerns in Westdeutsche that there should be proprietary restitution for transfers that were unintended from the outset. We agree with this. He provides two illustrations, each slightly different. The effect of ‘fundamental mistake’ can vary: it can prevent title from passing at all (as in Cundy v Lindsay),123 but in other cases legal title will have been transferred in any event and the law then provides remedies – proprietary remedies, normally in the form of a trust – to reverse what has gone wrong. By contrast, proprietary restitution following rescission is always predicated on a power in rem which, only when exercised, creates a trust that allows the claimant to demand the property back. That timing difference can be important in practice, especially when third party rights intervene. In addition, each of these three illustrations has a different analytical base. Their categories should be kept distinct. Likewise in (ii), where Lord Sumption turns from the payor’s defective intention to the recipient’s wrongdoing. Here, his illustrations are not simply different illustrations of the same type of wrongdoing, but illustrations of different types of wrongdoing: contrast, for example, the liability of a thief with the liability of a disloyal fiduciary. With all wrongdoing, the nature and extent of the defendant’s liability depends crucially on the nature of the particular wrong. And liability is not necessarily ­‘restitutionary’, even in pattern, nor is it based on unjust enrichment. Repeating a point we made earlier, it would aid conceptual clarity if we discarded the commonplace habit of referring to both category (i) and (ii) claims as ‘restitutionary proprietary claims’, and instead distinguished unjust enrichment claims from wrongdoing claims and labelled their respective proprietary remedies – when such remedies are available – as proprietary restitution and proprietary disgorgement. Finally, and bringing this chapter full circle, Lord Sumption continued with the passage we quoted at the start of this chapter, here with the addition of one important sentence that now has its necessary context:124 the prospect of a total failure of consideration, however inevitable, is not a circumstance which could have vitiated the intention of the shipowner [in Neste Oy] to part with its entire interest in the money. The right to the restitution of money paid on a consideration which has wholly failed is simply a process of contractual readjustment, giving rise like the contract itself to purely personal obligations. If an actual total failure of consideration does not give rise to a proprietary restitutionary right, I do not see how a prospective one can do so.

This short passage packs in a number of different ideas. Again, they need to be addressed carefully. First, the assertion in the first sentence cannot be ­generalised



123 Cundy

v Lindsay (n 88). (n 1) [30].

124 Angove’s

216  William Day and Sarah Worthington beyond its intended context. Lord Sumption uses the language of total failure of consideration, but what he is considering here is solely what we have labelled conditional intention cases in the second class, where the failed condition is the nondelivery of the counter-performance contractually due. As Lord Sumption notes, this type of failure is ‘not a circumstance which could have vitiated the intention’ of the payor. We agree. But it is then crucial to distinguish these cases from the first class of conditional intention cases, where the failure is that there is no contract all. In these circumstances, by contrast, the relevant intention of the payor is vitiated, and the remedy should be proprietary. Secondly, and returning to the cases where the failed condition is the non-delivery of the counter-performance contractually due, Lord Sumption indicates that the ‘right to the restitution of money paid … is simply a process of contractual readjustment, giving rise like the contract itself to purely personal obligations’. The straightforward point is that the unjust enrichment claim (the right to restitution) is personal, not proprietary. We would agree, for reasons given earlier. The more difficult point is that the right to restitution ‘is simply a process of contractual readjustment’. That can be read in a number of ways, but it could be taken as suggesting, contrary to the point just made, that this right to restitution is a contractual remedy, not a remedy for unjust enrichment, and is thus merely restitutionary in pattern, not in substance. Space does not permit elaboration, but we noted earlier that in these ‘failed performance’ cases it would be perfectly rational for the law to confine the claimant to contractual remedies and not to provide an alternative claim in unjust enrichment. Precedent indicates these ‘restitutionary’ claims are limited by a requirement that the failure of consideration be ‘total’. This is controversial. Unjust enrichment scholars have argued for a broader base for such claims. But perhaps Lord Sumption is here suggesting a narrower base, with no unjust enrichment claims at all in this class of case, only contract claims. In closing this quotation, and ending on a simple note, Lord Sumption makes the uncontroversial point that remedies in contract or in unjust enrichment cannot be awarded prior to the breach or the event that justifies them. We agree. It need only be put in that way to seem obvious. V. CONCLUSION

The relationship between Westdeutsche and Angove’s is a complicated one. Lord Sumption’s reasoning in Angove’s contains the kernel of an idea which might one day be used to challenge the ‘conscience requirement’ articulated by Lord BrowneWilkinson in Westdeutsche. That would be a welcome development. On the other hand, properly analysed, Westdeutsche and Angove’s involved different kinds of claims for proprietary restitution. At its core, the proprietary aspect of Westdeutsche was argued and answered (wrongly, we suggest) on the effect of void contracts. In contrast, Angove’s involved a valid contract and the claim sought to respond to a different type of failed conditionality. Both types of claim are to be distinguished from proprietary disgorgement arising from wrongdoing and claims in unjust enrichment based on defective intention, where the availability and form of relief in rem will differ again. Maintaining these distinctions may provide a degree of welcome consistency between the rules, their rationales and their remedies.

12 Knowing Receipt JAMIE GLISTER

[There is a] difference between the liability of a true trustee, and the liability which a stranger incurs solely by reason of his participation in the very misapplication of trust assets which the claimant seeks to impeach. – Williams v Central Bank of Nigeria1

I. INTRODUCTION

L

ord Sumption’s most important contribution to the area of knowing receipt can be found in Williams v Central Bank of Nigeria.2 That case involved the correct construction of the Limitation Act 1980, but the analysis has wider implications for the nature of knowing receipt and the remedies available. Lord Sumption also made brief comments on the nature of knowing receipt in two other cases, Akers v Samba Financial Group3 and DD Growth Premium 2X Fund v RMF Market Neutral Strategies.4 In a fourth case, Papadimitriou v Crédit Agricole Corpn and Investment Bank,5 he commented on the fault requirement necessary for liability in knowing receipt.6 This chapter begins in section II by outlining the decision and reasoning in Williams. In section III, it discusses three different models of knowing receipt – the unjust enrichment, true trust and equitable wrong analyses – and assesses each theory against the current law. Section IV comments on the test of knowledge in knowing

1 Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189 [30] (Lord Sumption). 2 Williams (n 1). 3 Akers v Samba Financial Group [2017] UKSC 6, [2017] AC 424. 4 DD Growth Premium 2X Fund (in liq) v RMF Market Neutral Strategies (Master) Ltd [2017] UKPC 36, [2018] Bus LR 1595. 5 Papadimitriou v Crédit Agricole Corpn and Investment Bank [2015] UKPC 13, [2015] 1 WLR 4265. 6 Lord Sumption also discussed knowing receipt cases in Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 and Bilta (UK) Ltd (in liquidation) v Nazir (No 2) [2015] UKSC 23, [2016] AC 1, and made a brief comment on knowing assistance in Fish & Fish Ltd v Sea Shepherd UK (The Steve Irwin) [2015] UKSC 10, [2015] AC 1229 [39].

218  Jamie Glister receipt and considers the extent to which questions of notice and knowledge can be assimilated. Section V has some concluding remarks. II.  WILLIAMS v CENTRAL BANK OF NIGERIA

Dr Williams alleged that his trustee had wrongly paid $6,000,000 of trust funds to the Central Bank of Nigeria. He claimed that the bank was liable as both a dishonest assistant and knowing recipient in respect of the payment. The problem was that the payment had been made in 1986 and Dr Williams did not begin his action until 2010. The question for the Supreme Court was whether actions in knowing receipt and dishonest assistance were covered by a general six-year limitation period7 or whether they fell within an exception. Section 21(1) of the Limitation Act 1980 provides that the general six-year period does not apply to actions ‘in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy’.8 If Dr Williams’s claims fell within that section 21(1) exception, no period of limitation would be imposed by the Act and his action would not be time-barred. By majority, the Supreme Court held that knowing recipients were not trustees within the meaning of the section 21(1) exception. Although the word ‘trustee’ in the Limitation Act relevantly includes constructive trustees,9 the majority interpreted this to mean only certain types of constructive trustees, such as de facto trustees. In contrasting these people with knowing recipients and dishonest ­assistants, Lord Sumption said:10 [Knowing recipients and dishonest assistants] never assumed and never intended to assume the status of a trustee, whether formally or informally, but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. Either they have dishonestly assisted in a misapplication of the funds by the trustee, or they have received trust assets knowing that the transfer to them was a breach of trust. In either case, they may be required by equity to account as if they were trustees or fiduciaries, although they are not. These can conveniently be called cases of ancillary liability. The intervention of equity in such cases does not reflect any pre-existing obligation but comes about solely because of the misapplication of the assets. It is purely remedial.

And later, in response to a submission that knowing recipients may fall within the section 21(1) exception even if dishonest assistants do not:11 the principle does not depend on the difference between assistance and receipt, dishonesty or innocence. It depends on the difference between the liability of a true trustee, and the liability which a stranger incurs solely by reason of his participation in the very misapplication of trust assets which the claimant seeks to impeach. The essence of a liability to account on the footing of knowing receipt is that the defendant has accepted trust assets knowing that they were transferred to him in breach of trust

7 Limitation

Act 1980, s 21(3). Act 1980, s 21(1)(a). 9 See Limitation Act 1980, s 38(1), referring to the Trustee Act 1925, s 68(17). 10 Williams (n 1) [9]. 11 Williams (n 1) [30]–[31]. 8 Limitation

Knowing Receipt  219 and that he had no right to receive them. His possession is therefore at all times wrongful and adverse to the rights of both the true trustees and the beneficiaries. No trust has been reposed in him. He does not have the powers or duties of a trustee, for example with regard to investment or management. His sole obligation of any practical significance is to restore the assets immediately. It is true that he may be accountable for any profit that would have been made or any loss that would have been avoided if the assets had remained in the hands of the true trustees and been dealt with according to the trust. There may also, in some circumstances, be a proprietary claim. But all this is simply the measure of the remedy. It does not make him a trustee or bring him within the provisions of the Limitation Act relating to trustees.

The Supreme Court held that knowing recipients are not trustees for the purposes of the Limitation Act because no trust or confidence is ever reposed in the knowing recipient,12 and because knowing recipients do not have the powers and duties of trustees.13 III.  THE NATURE OF KNOWING RECEIPT

It is common to divide models of knowing receipt liability into three categories, which can be called: the unjust enrichment analysis; the true trust analysis; and the equitable wrong analysis.14 As will be discussed below, the reasoning in Williams suggests that the true trust analysis is incorrect, or at least requires modification. Williams does not say anything at all about the unjust enrichment analysis. This is understandable, since the focus was on the proper meaning of ‘trustee’ in the Limitation Act 1980. The statutes used the language of constructive trustee, so that was the language used in the judgments. Even so, it is interesting to note the complete absence in Williams of any reference to unjust enrichment as the possible basis for liability in knowing receipt. A.  Unjust Enrichment The unjust enrichment model of knowing receipt has fallen out of favour in recent years. At first, Peter Birks argued that knowing receipt was grounded in unjust enrichment.15 He later modified that position, arguing that the law should recognise ‘two very different kinds of liability, one wrong-based and the other based on unjust enrichment’.16 Lord Nicholls proposed a similar model,17 and both Lord Millett and 12 This point is mentioned by Lord Sumption at [31], Lord Neuberger at [64] and Lord Clarke at [165]. 13 This point is only specifically mentioned by Lord Sumption at [31], but Lord Neuberger thought that his own reasons were ‘much the same’ as Lord Sumption’s, and Lord Hughes agreed with them both. 14 See, eg L Tucker et al, Lewin on Trusts, 19th edn (London, Sweet & Maxwell, 2015) para 42.028, which uses (i) proprietary basis, (ii) fault basis and (iii) unjust enrichment basis. 15 P Birks, ‘Misdirected Funds: Restitution from the Recipient’ [1989] Lloyd’s Maritime and Commercial Law Quarterly 296; P Birks, Restitution – The Future (Sydney, Federation Press, 1992) ch 2. 16 P Birks, ‘Receipt’ in P Birks and A Pretto (eds), Breach of Trust (Oxford, Hart Publishing, 2002) 224. 17 D Nicholls, ‘Knowing Receipt: The Need for a New Landmark’ in W Cornish et al (eds), Restitution Past, Present and Future (Oxford, Hart Publishing, 1998) 231. See also the analysis of the Singapore Court of Appeal in Wee Chiaw Sek Anna v Ng Li-Ann Genevieve [2013] SGCA 36 [140]–[146].

220  Jamie Glister Charles Harpum argued that a strict liability claim for the value at receipt could safely develop, given the law’s recognition of change of position in Lipkin Gorman v Karpnale Ltd.18 Lord Millett also attempted to push the law in that direction judicially.19 This is not the path the law has taken. The objection that, in classic trust cases, the enrichment comes from the trustee and not the beneficiary might now be put to one side.20 But recipient fault remains a well-settled requirement of liability even in cases that are concerned only with the value at receipt and do not involve secondary gains or consequential losses.21 The cases also show that knowing receipt depends on the receipt of property rather than on the recipient being enriched. This is demonstrated by Quince v Varga,22 where Ms Varga was liable for knowing receipt of property received from her husband in breach of trust. She was liable for money paid directly into her bank account, a car and some electrical goods. Ms Varga was not, however, a knowing recipient in respect of other funds that her husband had used to pay off debts that she owed (utility bills and school fees). Ms Varga had certainly been enriched by those payments made on her behalf,23 and she was even liable for those amounts on the footing of knowing assistance, but she was not liable in knowing receipt. The significance of property can also be seen when a recipient spends the received money before acquiring knowledge, but in such a way as not to amount to a change of position – for example, on rent that would be owed anyway.24 There is no liability in knowing receipt if property is dissipated before knowledge is acquired, yet the recipient would remain enriched and with no change of position defence. DD Growth Premium 2X Fund v RMF Market Neutral Strategies concerned the liability of an investor who had withdrawn money from an investment fund shortly after the Lehman Brothers collapse.25 The fund had made the redemption payment to the investor in circumstances where the fund was insolvent, and the question was whether the fund’s liquidator could recover the payment from the investor. The liquidator advanced alternative claims based on unjust enrichment and knowing receipt. The Privy Council held there could be no liability in unjust enrichment because the defendant had not been enriched (this because the payment, while illegal, was made 18 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL); P Millett, ‘Tracing the Proceeds of Fraud’ (1991) 107 LQR 71; C Harpum, ‘The Basis of Equitable Liability’ in P Birks (ed), The Frontiers of Liability, vol 1 (Oxford, Oxford University Press, 1994) 24–25. 19 Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164 [105]; Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 2 AC 366 [87]. 20 See Investment Trust Companies (in liquidation) v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275 [48] (Lord Reed); cf L Smith, ‘Unjust Enrichment, Property and the Structure of Trusts’ (2000) 116 LQR 412, 428–29. 21 A fault requirement is not easy to square with liability based on unjust enrichment, but the connection is accepted in Canada: Citadel General Assurance Co v Lloyds Bank Canada [1997] 3 SCR 805 (SCC) [51]–[52]. See further G Virgo, ‘The Role of Fault in the Law of Restitution’ in A Burrows and A Rodger (eds), Mapping the Law: Essays in Memory of Peter Birks (Oxford, Oxford University Press, 2006). 22 Quince v Varga [2008] QCA 376, [2009] 1 Qd R 359. See also Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) [1891] (infringing a design right is not receiving property) (Lewison J); OJSC Oil Company Yugraneft v Abramovich [2008] EWHC 2613 (Comm) [365], [372] (increase in value of existing shareholding is not receipt) (Christopher Clarke J). 23 See Investment Trust Companies (n 20) [49] (Lord Reed). 24 The example in D Whayman, ‘Remodelling Knowing Receipt as a Gains-Based Wrong’ [2016] Journal of Business Law 565, 577. 25 DD Growth Premium (n 4).

Knowing Receipt  221 for full consideration). However, the Privy Council also held that knowing receipt would lie if knowledge were proved. Lord Sumption and Lord Briggs, in a joint judgment, with the agreement of all members of the Board on the point, said:26 The liquidators’ primary case is that they are recoverable at common law on the ground of unjust enrichment. Alternatively they submit that they are recoverable in equity on the ground that the redeeming shareholder is accountable as a constructive trustee on the footing of knowing receipt. Conceptually these two proposed bases of recovery are very different. A common law liability in restitution depends on the defendant having been unjustly enriched by the receipt. The liability of a constructive trustee is essentially a custodial liability comparable to that of an express trustee, which is imposed on him because he has sufficient knowledge to affect his conscience.

For these reasons, it is difficult to see the current law of knowing receipt as grounded in unjust enrichment. Fact patterns that ought to give rise to liability do not actually do so. However, there is a little more to be said before leaving the point. A strict liability claim will lie when property is transferred away from a company in a manner not binding on the company, and this has been described as a claim in unjust enrichment.27 The interaction of this claim and knowing receipt is not entirely clear because of the uncertain place of rescission in the analysis.28 As the cases currently stand, it appears that the company can either rely on the strict liability claim or can proceed in knowing receipt to seek a better remedy.29 While this strict liability claim appears to be an alternative to knowing receipt, in some cases the lack of authority may mean nothing is received that could ground knowing receipt. Jonathan Sumption QC made this argument in the Akai Holdings case,30 where shares owned by a company were pledged to a bank pursuant to a loan transaction. The loan transaction was held void because the bank had notice of the company director’s lack of authority. The question was whether the bank received property for the purposes of knowing receipt when the shares were initially pledged. Arguably it did not, if legal title to the shares remained with the company and if the ‘pledge’ only purported to secure obligations under a transaction that did not bind the company.31 Ultimately the receipt point was not decided, as the Hong Kong Court 26 ibid [58] (emphasis added). Lord Carnwath agreed with Lord Sumption and Lord Briggs. Lord Hodge and Lord Mance disagreed that the payments were illegal, but, assuming they were, agreed on the recovery point: [66]. On the consistency of this analysis of knowing receipt and that advanced in Williams, see the text following n 65. 27 Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28, [2004] 1 WLR 1846 [4] (Lord Nicholls); Great Investments Ltd v Warner [2016] FCAFC 85, (2016) 243 FCR 516 [59], [69]. See also M Yip, ‘Third Parties’ Liability for Receipt of Misapplied Corporate Assets: The Relevance of Knowing Receipt?’ (2017) 11 Journal of Equity 293. 28 The question is whether rescission is necessary, as until then the contract provides a basis for the transfer: see Great Investments (n 27) [56]–[68]; Gany Holdings (PTC) SA v Khan [2018] UKPC 21 [60] (Lord Briggs); M Conaglen and R Nolan, ‘Contracts and Knowing Receipt: Principles and Application’ (2013) 129 LQR 359. On principle, it should be necessary to set aside a voidable transaction, but the cases do not always require this. 29 See, eg Akita Holdings Ltd v A-G (Turks and Caicos Islands) [2017] UKPC 7, [2017] AC 590; Great Investments (n 27) [53]. Given the similarity to Arthur v A-G (Turks and Caicos Islands) [2017] UKPC 7, it is understandable that Akita proceeded on knowing receipt grounds. 30 Thanakharn Kasikhorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) [2010] HKCFA 63, (2010) 13 HKCFAR 479. 31 On the facts, it seems the pledge was actually an equitable mortgage.

222  Jamie Glister of Final Appeal held that recovery would be the same under either knowing receipt or conversion. Finally, it is possible to take the view that liability in knowing receipt is restitutionary without also saying that it is based on unjust enrichment. This is the view taken in Snell’s Equity, which rejects the unjust enrichment analysis but says that the liability is ‘restitutionary’ and is ‘fixed at value of property when [the defendant] first received it’.32 This position is certainly possible, although it is not clear that liability truly is restitutionary in this sense. First, it may be that recovery of the value at receipt is not automatically available, regardless of any change of position issue. Secondly, liability will not be restitutionary to the extent consequential losses are recoverable. Both points are considered below.33 B.  Knowing Recipients as True Trustees According to this model, a knowing recipient becomes a true trustee of the received property in the sense that the recipient is subjected to at least some of the duties of express trustees. The analysis has been advanced in similar terms by several writers. For example, early editions of Jacobs’ Law of Trusts explain that knowing receipt involves ‘an existing trust continued and kept on foot [rather] than a new trust arising by operation of law’.34 Sarah Worthington has written that knowing recipients ‘incur the same sort of liabilities as express trustees once it is shown that they have voluntarily and knowingly placed themselves in the same sort of role’, adding that they must ‘carry out these functions in a fiduciary manner’.35 Charles Mitchell and Stephen Watterson put it as follows:36 Liability for knowing receipt is a distinctive, primary, custodial liability, which closely resembles the liability of express trustees to account for the trust property … Equity fixes [knowing recipients] with custodial duties which are the same as some of the duties which are voluntarily assumed by express trustees. The accounting mechanisms through with a knowing recipient can be made liable for the performance of these duties, or their breach, are the same as those through which trust beneficiaries can take action against express trustees.

Mitchell and Watterson argue that the knowing recipient’s main duty is to restore the trust property, normally to the trustees. The duty is to restore the property immediately,

32 J McGhee (ed), Snell’s Equity, 33rd edn (London, Sweet & Maxwell 2015) paras 30.071 and 30.074; adopted in FM Capital Partners Ltd v Marino [2018] EWHC 1768 (Comm) [89] (Cockerill J). A slightly softer line is taken in G Virgo, The Principles of the Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2015) 645: ‘assessed by reference to the value [at] receipt’, although at 651 it is envisaged that the judgment value may alternatively be appropriate. 33 See the text following n 52 (consequential loss) and n 55 (value at receipt). 34 RP Meagher and PF Trevorah, Jacobs’ Law of Trusts in New South Wales, 2nd edn (Sydney, Butterworths, 1967) 328. This explanation was thought to be ‘correct in principle’: C Harpum, ‘The Stranger as Constructive Trustee (Part II)’ 102 LQR 267, 267. cf the current position: JD Heydon and MJ Leeming, Jacobs’ Law of Trusts in Australia, 8th edn (Sydney, LexisNexis 2016) para 13.34: ‘subject to a constructive trust of a proprietary kind’. 35 S Worthington, Equity, 2nd edn (Oxford, Oxford University Press, 2006) 180–88. 36 C Mitchell and S Watterson, ‘Remedies for Knowing Receipt’ in C Mitchell (ed), Constructive and Resulting Trusts (Oxford, Hart Publishing, 2010) 129–30. See also R Chambers, ‘The End of Knowing Receipt’ (2016) 2 Canadian Journal of Comparative and Contemporary Law 1, 7.

Knowing Receipt  223 rather than on demand.37 Put like this, it would seem that the duty to restore is continuing, and that a knowing recipient would occupy a similar position to the trustee of a bare trust when a valid demand by the beneficiaries had already been made. In such cases, there is some authority for making the trustee liable for the highest interim price of the property,38 although this has not been followed in England and Australia.39 Yet, if recovery is not based on the highest interim price, then references to the recipient’s ‘immediate’ duty to restore, given her ‘unauthorised and illegitimate’ continuing retention, may seem rather toothless.40 While the core of the thesis is essentially the same, there are minor differences between its advocates. The duties of the recipient might be seen as a continuation of the initial trust, as a continuation of only some of those duties or as merely replicating some of the same obligations as the initial trust. But, on any view of the true trust thesis, the duties owed by knowing recipients are of the same nature as those owed by express trustees. There are at least two ways to test the correctness of this: by considering the liability to disgorge gains and by considering the availability of recovery for consequential losses. It is also useful to ask whether recovery according to the value at receipt is always available. These questions will be considered in turn. (i) Profits It is easy to find judicial statements to the effect that an account of profits is an available response to knowing receipt. It is harder to work out exactly what these mean. Sometimes they mean the value of the received property has risen; sometimes they mean accretions have been made to the received property; sometimes they mean the recipient has made discrete gains that are linked to the impugned receipt but are not traceable to the received property. The first two are unproblematic, while the third is more difficult. Yet the third meaning is the most important because it is the only one that allows us to test whether knowing recipients owe the same duties as normal trustees. The true trust thesis holds that knowing recipients are liable to disgorge discrete profits because they owe fiduciary obligations not to profit from their position as trustees.41 37 Mitchell and Watterson (n 36) 132–33. cf C Harpum, ‘The Stranger as Constructive Trustee (Part I)’ (1986) 102 LQR 114, 140, noting the recipient must see to the proper application of the trust money if he or she wishes to be discharged from liability; to the same effect, see Independent Trustee Services Ltd v GP Noble Trustees Ltd [2012] EWCA Civ 195, [2013] Ch 91 [81] (Lloyd LJ). This is not quite the same as saying there is a core restorative duty. 38 McNeil v Fultz (1906) 38 SCR 198; Toronto General Trusts Corp v Roman (1962) 37 DLR (2d) 16 (aff’d [1963] SCR vi); 3264638 Manitoba Ltd v Bruni [2005] MBQB 283; D Waters, M Gillen and L Smith, Waters’ Law of Trusts in Canada, 4th edn (Toronto, Carswell, 2012) 1289. See also Libertarian Investments Ltd v Hall [2013] HKCFA 93, (2013) 16 HKCFAR 681 [171] (Lord Millett NPJ); J Glister, ‘Breach of Trust and Conversion in a Falling Market’ [2014] Lloyd’s Maritime and Commercial Law Quarterly 511, 529–34. 39 This is essentially because a presumption of highest interim price was wrongly applied in Jaffray v Marshall [1993] 1 WLR 1285 (Ch), and that case was then overruled in Target Holdings Ltd v Redferns [1996] AC 421 (HL) 440 (Lord Browne-Wilkinson), thus throwing the baby out with the bathwater. See Glister (n 38) 532–34. 40 This is not to say beneficiaries must claim on the basis of highest interim price; merely that they ought to be able to. Mitchell and Watterson argue that a beneficiary does not have to allege a breach of duty against the recipient before he or she will be entitled to an account in common form. 41 S Worthington, ‘Exposing Third-Party Liability in Equity: Lessons from the Limitation Rules’ in PS Davies and J Penner (eds), Equity, Trusts and Commerce (Oxford, Hart Publishing, 2017) 346–49;

224  Jamie Glister There are cases that support this view, but they do not provide strong authority. In Akita,42 for example, the Crown successfully sought an account of the discrete profits that the knowing recipient had made by using the wrongly transferred land to raise finance. The case is not strong authority, however, because the point was not the subject of dispute before the Privy Council.43 In Ultraframe,44 Lewison J clearly thought an account of profits was available, but in the event the knowing recipients only had to account for overcharged management fees – that is, they had to give back what they received. In the Australian case of Grimaldi, accounts of profits were awarded against two corporate defendants, Murchison and Winterfall, for knowing receipt. These were personal gain-based awards, but it seems they were made in respect of traceable profits, with the court exercising a discretion to grant personal rather than proprietary relief.45 This cannot be stated with certainty: the facts are very complicated, and the distinction between traceable and discrete profits was not in sharp focus because of the different attitudes of English and Australian courts to proprietary relief. At most, the case is weak authority for an award of discrete profits against a knowing recipient. Other cases have questioned whether an account of profits is available against a knowing recipient.46 Indeed, different judges have taken different views in the same litigation. In Courtwood Holdings v Woodley Properties,47 Nugee J said that ‘knowing receipt is not, as I understand it, a claim which is designed to strip people who have behaved badly of profits’. He thought dishonest assistance was the appropriate vehicle for stripping gains from third parties. A few months earlier, in another judgment in the same proceedings, Norris J had said ‘This is a case, itself not out of the ordinary, of a claim for an account against a knowing recipient of property … The remedy against him is that of an account of profits’.48 The current position in England and Wales is that a knowing recipient is liable to an account of profits, but this is not because the knowing recipient is a fiduciary. This is the result of Novoship,49 where the Court of Appeal held that the account will be taken differently against an assistant than against a fiduciary. Unlike fiduciary gains, profits made by third parties will not be ordered to be disgorgeable if the

Worthington (n 35) 180–89; Mitchell and Watterson (n 36) 142–44, citing inter alia King’s Wharf Coldstone Ltd (in rec and liq) v Wilson [2005] NZHC 283 [126]–[127], which can be interpreted as merely giving back what was received, and Bank of China v Kwong Wa Po [2005] HKCFI 422 [90], which does seem to concern discrete profits. 42 Akita (n 29). 43 ibid [12] (Lord Carnwath). 44 Ultraframe (n 22) [1577] (Lewison J). For the outcome, see [1789]–[1805]. Lewison J thought the account against a third party would be fashioned in the same way as against a fiduciary. This cannot stand following Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, [2015] QB 499; see the text following n 49 below. 45 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR 296 [680]–[681], [727] and [740]. It is doubtful that an English court would do this. 46 See, eg Cornerstone Property & Development Pty Ltd v Suellen Properties Pty Ltd [2014] QSC 265, [2015] 1 Qd R 75 [79]. 47 Courtwood Holdings SA v Woodley Properties Ltd [2018] EWHC 2163 (Ch) [201]. 48 Courtwood Holdings SA v Woodley Properties Ltd [2017] EWHC 3514 (Ch) [32], citing Akita (n 29). 49 Novoship (n 44). It is difficult to assess how much Williams influenced Novoship. Williams is cited several times and it clearly reinforces the conclusion. My own reading of Novoship is that it would have been decided the same way without Williams, so, even without Williams, knowing recipients would not be fiduciaries.

Knowing Receipt  225 assistance or receipt was not the ‘real or effective cause’50 of the profit. The conclusion that dishonest assistants are not fiduciaries was clearly part of the ratio of the case, and the Court thought the same principles would apply to knowing recipients.51 The result is that an account of profits is an available remedy for knowing receipt, but this is because it may be considered an appropriate remedial response and not because knowing recipients are fiduciaries. Of course, if knowing recipients are not fiduciaries, doubt is cast on whether they are truly trustees. (ii)  Consequential Losses At least on a conventional analysis, consequential losses are not recoverable for breach of trust.52 This is because a trustee’s duties are limited to the protection and management of the trust fund: the trustee does not undertake to protect the wider economic interest of the beneficiaries (or does not do so qua trustee). If it is true that consequential losses are available for knowing receipt, this would mark a further difference between knowing recipients and true trustees.53 The Full Court of the Federal Court of Australia said that consequential losses were recoverable for knowing receipt in Great Investments Ltd v Warner,54 although the comment was obiter dicta. I am not aware of any cases where consequential recovery has actually been awarded, but to the extent that those cases exist – either now or in future – they will be inconsistent with the true trust thesis of knowing receipt. (iii)  Value at Receipt It is useful to ask whether the value at receipt is always recoverable. This has obvious implications for the unjust enrichment model, but it also has consequences for the true trust analysis. In a great many cases, the point is obscured because the defendant has received money. This means it is easy to find examples where liability was assessed by reference to the value at receipt, but the important question is whether recovery based on that amount is always available, subject to defences. The Akai Holdings case suggests that recovery of the value at receipt is not always available.55 The case involved shares being pledged to secure a loan and later being sold by the pledgee bank. The value of the shares when pledged was higher than when

50 ibid [114] (Longmore LJ). 51 ibid [68], [86] and [107] (Longmore LJ). For criticism, see Worthington (n 41) 342–46; W Gummow, ‘Dishonest Assistance and Account of Profits’ [2015] CLJ 405. cf Ancient Order of Foresters in Victoria Friendly Soc Ltd v Lifeplan Australia Friendly Soc Ltd [2018] HCA 43. 52 Comments can be found that appear to doubt this (see, eg the discussion in Ahmed v Ingram [2018] EWCA Civ 519 [34]–[37] (Gloster LJ)), but they are made in the context of denying trustee liability for loss that would have been suffered anyway, not increasing trustee liability to include consequential loss. See generally J Glister, ‘Breach of Trust and Consequential Loss’ (2014) 8 Journal of Equity 235. 53 It could be argued that express trustees ought to be liable for consequential loss following a breach of trust, and that Target Holdings (n 39) and AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503 presage a move away from a traditional accounting analysis. There would then be no difference in treatment. That question is too large to be discussed here. 54 Great Investments (n 27) [53]. 55 Akai Holdings (n 30).

226  Jamie Glister they were sold, but the Hong Kong Court of Final Appeal refused to allow recovery of the higher amount. Akai Holdings is not a direct authority because the facts gave rise to a difficult question about when exactly the shares were received for the purposes of knowing receipt – when they were pledged or when they were sold – and matters were complicated further by the underlying loan being void. Nonetheless, Lord Neuberger clearly thought there was no rule that recovery must be based on the value at receipt. In assessing equitable compensation, he commented on the need for a causal connection between breach and loss, and considered what Akai would have done with the shares if they had been returned. In the end, both common law damages and equitable compensation would have led to judgment in the same amount. Lord Neuberger even went so far as to say that, if the liability in knowing receipt had been greater, he ‘would have been very sympathetic to the notion that the equitable remedy would have to be refashioned so as to equate the amount of such compensation with the common law damages’.56 C.  Equitable Wrong Courts now commonly talk of knowing receipt as a wrong that can be remedied, whereas the language was once all about accounting as a constructive trustee. Seeing knowing receipt as a wrong has the effect of allowing particular remedial rules to develop unaffected by the link to the liability of trustees, and we have seen that this may be happening with accounts of profits and consequential losses. While the unjust enrichment and true trust models can be tested by assessing them against current doctrine, this is not the case for the equitable wrong analysis. It is essentially a residual, catch-all category: if knowing receipt is not properly explained by the other models, it must be an equitable wrong. Of course, that alone does not tell us anything about the contours of that equitable wrong. William Swadling has gone further and argued that knowing receipt is best seen as a species of inconsistent dealing.57 The essence of the liability is not receipt but, rather, the subsequent dissipation of the received property with knowledge. This would have several consequences, including there being no liability on the recipient if the property were lost without fault on his or her part. Swadling’s argument does not necessarily deny that receiving property for the purposes of hiding it may still ground liability in dishonest assistance: receipt can be, but is not always, a form of assistance.58 This means a recipient might still be liable before dissipating the property, but that would not be in knowing receipt.

56 ibid [155]. Pace Judicature Act 1873, s 25(11)? 57 W Swadling, ‘The Nature of “Knowing Receipt”’ in PS Davies and J Penner (eds), Equity, Trusts and Commerce (Oxford, Hart Publishing, 2017) 328–30. cf his earlier views, more supportive of the unjust enrichment thesis: W Swadling, ‘Some Lessons from the Law of Torts’ in Birks, The Frontiers of Liability (n 18) 41. 58 cf Swadling, ‘The Nature of “Knowing Receipt”’ (n 57) 327, but here he was addressing the question of whether knowing receipt is always a form of assistance (or participation).

Knowing Receipt  227 Swadling was writing before the Privy Council decision in Akita, and certain aspects of his argument may require modification. He writes: ‘Given the availability of a strict liability claim for the specific return of the rights, a claimant will only bring a knowing receipt claim where the rights have been dissipated.’59 That is not what happened in Akita, where the land was not dissipated. The Crown simply did not ask for the land back, although it did ask for – and receive – an account of the profits the recipient had made from the use of the land. Lord Carnwath said:60 ‘The Court of Appeal was clearly right to reject the suggestion that the government had somehow precluded itself from seeking an account of profits by “electing” not to pursue a proprietary remedy.’ The claimant obtained an account of profits even though the property had not been dissipated, so it would seem that dissipation cannot be the essence of the wrong. This point might be addressed by widening ‘dissipating’ to ‘wrongfully using’ (or just ‘inconsistently dealing’) so as to recognise that the property can be misused in other ways while still denying that receipt itself is the essence of the liability. In that case, though, it may be easier to keep the language of receipt. After all, if a defendant’s receipt really has been wholly passive, in the sense that he or she did not even know about it, the property can always be disclaimed. Perhaps the better term would be knowing ‘acceptance’, with its connotation of some choice being made by the recipient. But knowing ‘receipt’ is well-settled. D. Discussion For the reasons given above,61 unjust enrichment as an explanation for knowing receipt is probably dead. The debate has moved to the availability of cognate strict liability claims that are not called knowing receipt but that apply on similar facts.62 It is also difficult to maintain the argument that a knowing recipient is a true trustee of the property received, although the positions of the two remain sufficiently similar to make comparisons useful. In Akers v Samba Financial Group,63 a trustee wrongly sold shares that he held on trust for a company. The purchaser of the shares gave value and had no notice of the breach (at least, the case proceeded on this basis), meaning the company’s equitable interest in the shares was extinguished. The question for the Supreme Court was whether the wrongful sale amounted to a ‘disposition’ of the company’s property within the meaning of section 127 of the Insolvency Act 1986. The Court was unanimous in holding that a disposition had not occurred because the trustee’s wrongful transfer of legal title did not extinguish the beneficiary’s interest in the shares. 59 ibid 328. He also takes a strict view of the position of companies, arguing that the point turns solely on the issue of authority. This is analytically pure, but it may not be what the cases currently say: see n 28. 60 Akita (n 29) [14]. 61 See the text following n 20. 62 See Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81, (2016) 91 NSWLR 732; E Bant and M Bryan, ‘Outflanking Barnes v Addy? The Persistence of Strict Recipient Liability’ (2017) 11 Journal of Equity 271. 63 Akers (n 3).

228  Jamie Glister Instead, that interest was extinguished by the operation of the bona fide purchase doctrine. Lord Mance, with whom all the other members of the Court agreed, gave the leading judgment. Lord Sumption also gave a short concurring judgment in which he discussed the position of recipients of property in breach of trust:64 The disposition of the legal interest did not itself extinguish any equitable interest of [the beneficiary company] in the shares. It only meant that that interest fell to be asserted against [the recipient], subject to the usual equitable defences. [The recipient’s] position in law was that it took the shares on a bare trust to restore them to the beneficial owner, unless it was a bona fide purchaser for value without notice.

This passage makes the point that an equitable interest survives a transfer of legal title unless the transfer is competent to overreach the equitable interest or the interest is extinguished by the operation of the bona fide purchase defence. That analysis is plainly correct. In making the point, Lord Sumption referred to the recipient taking ‘on a bare trust to restore them to the beneficial owner’. At first glance this may seem inconsistent with Williams, especially since the recipient in Akers was assumed to be innocent and not even a knowing recipient. But that would be to ignore the context. Lord Sumption was not making a point about a duty to restore, or about the nature of knowing receipt; he was explaining when equitable interests survive and when they are lost, and he found the language of trusts helpful. A slightly more difficult case to defend is DD Growth Premium 2X Fund v RMF Market Neutral Strategies, where Lord Sumption and Lord Briggs said that knowing receipt is ‘essentially a custodial liability comparable to that of an express trustee’.65 This does not seem consistent with Lord Sumption’s analysis of knowing receipt in Williams. The particular problem is the reference to a ‘custodial’ liability, which does rather suggest that a knowing recipient will owe certain trust duties. Again, though, the context is important. The point was to distinguish knowing receipt and strict liability by pointing to the knowledge requirement in the former; it was not to expound the nature of knowing receipt. Ultimately, the matter was remitted to the Cayman Islands Grand Court to decide the knowledge point. As for Williams itself, the case certainly appears inconsistent with the true trust thesis. The comments to the effect that knowing recipients and dishonest assistants are not trustees (or fiduciaries) seem devastating. It may be that the reasoning can be confined to its context: knowing recipients are not trustees for the purposes of limitation, but may still be for other purposes.66 In truth, though, Williams does not present the greatest challenge to the true trust thesis. This is because the analysis in that case is at too high a level of abstraction to mandate the results of subsequent cases. Authorities like Novoship, where the clear ratio is that dishonest assistants are not fiduciaries, and Great Investments v Warner, where the Court said consequential loss was recoverable in knowing receipt, are more directly at odds with the true trust model.

64 ibid [88]. 65 DD Growth Premium (n 4) [58]. A longer extract is included in the text to n 26 above. 66 See B McFarlane and C Mitchell, Hayton and Mitchell: Text, Cases and Materials on the Law of Trusts and Equitable Remedies, 14th edn (London, Sweet & Maxwell, 2015) para 1.079; cf Worthington (n 41) 331.

Knowing Receipt  229 The real question is not whether knowing recipients are to be treated in exactly the same way as express trustees. Rather, the question is to what extent the comparison with express trustees holds. We have already seen examples where the comparison appears to fail,67 but sometimes it will remain useful. For example, in Akai,68 Lord Neuberger cited Target Holdings and Canson Enterprises during his assessment of Akai’s loss. His Lordship clearly thought that equitable compensation for knowing receipt ought to be calculated in the same way as for breach of trust. The Court of Appeal recently took the same view in a case involving dishonest assistance.69 IV.  NOTICE, KNOWLEDGE AND LIABILITY

A.  Papadimitriou v Crédit Agricole Corp and Investment Bank Papadimitriou v Crédit Agricole Corp and Investment Bank concerned the fraudulent sale by an art dealer of the claimant’s art deco furniture collection.70 The dealer paid the proceeds of that wrongful sale into an account opened by a BVI company linked to the dealer at Credit Agricole’s Gibraltar branch. This Gibraltar deposit enabled another of the dealer’s companies to open an account and borrow money from Credit Agricole’s London Branch. The London loan was then repaid with the money from the Gibraltar account. The claimant brought proceedings against the bank on the grounds of knowing receipt, dishonest assistance and proprietary liability. Only proprietary liability was in issue before the Privy Council, the claims for receipt and assistance having been abandoned.71 The specific point concerned the money used to repay the London loan.72 As the bank gave value for that receipt, the question was whether it had notice of the claimant’s property right in the money. If the bank did have notice, it would not be able to raise the bona fide purchase defence to the proprietary claim. Lord Clarke, giving the leading judgment, stated the test of notice:73 The bank must make inquiries if there is a serious possibility of a third party having [a proprietary right] or, put in another way, if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the propriety of the transaction.

Having stated the test, the Privy Council agreed with the Court of Appeal of ­Gibraltar that notice was present on the facts. The bank ought to have considered the commercial purpose of the transaction, but failed to do so. Crucially, the Court 67 See the text following n 34, esp liability for profits and consequential losses. 68 Akai Holdings (n 30) [151]–[155], citing Target Holdings (n 39) and Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 (SCC). 69 Group Seven Ltd v Notable Services LLP [2019] EWCA Civ 614, [2019] 3 WLR 1011 [110]. 70 Papadimitriou (n 5). 71 The Chief Justice at trial dismissed all three claims: [2013–14] Gib LR 55. The Court of Appeal allowed an appeal in respect of the proprietary claim: [2013–14] Gib LR 260. 72 Most, but not all, of the Gibraltar deposit was used to repay the London loan; the remaining Gibraltar funds were paid away. The proprietary claim was limited to the money used to repay the London loan, whereas the abandoned claim in dishonest assistance had been for the full amount of the initial Gibraltar deposit. 73 Papadimitriou (n 5) [20]. Lord Clarke went on to note that it was for the bank to show a lack of notice: [21].

230  Jamie Glister of Appeal found that if the bank had considered the commercial purpose, it would have realised that the arrangement was improper. The Privy Council agreed. This was sufficient notice to prevent the bank raising the defence of bona fide purchase. The bank could not defeat the proprietary claim to the money used to repay the London loan. B.  Notice and Knowledge Papadimitriou is interesting because it is a rare example of a bank having notice. It is also interesting for present purposes because of a short, single-paragraph concurring judgment by Lord Sumption. The important passage is:74 Whether a person claims to be a bona fide purchaser of assets without notice of a prior interest in them, or disputes a claim to make him accountable as a constructive trustee on the footing of knowing receipt, the question what constitutes notice or knowledge is the same … The principle is, I think clear. We are in the realm of property rights, and are not concerned with an actionable duty to investigate. The hypothesis is that the claimant has established a proprietary interest in the asset, and the question is whether the defendant has established such absence of notice as entitles him to assume that there are no adverse interests. The mere possibility that such interests exist cannot be enough to warrant inquiries. There must be something which the defendant actually knows (or would actually know if he had a reasonable appreciation of the meaning of the information in his hands) which calls for inquiry … If even without inquiry or explanation the transaction appears to be a proper one, then there is no justification for requiring the defendant to make inquiries. He is without notice.

The status of this passage is unclear because Privy Council reports do not routinely specify what each judge thought. It is common for Privy Council advice to be delivered by a single member without reference to that being ‘whole Board’ advice or to it being advice written by one that all other members agree with. There is no ‘Lord X, with whom Lady Y and Lord Z agree’. The Privy Council practice is fine when there is only one judgment or in the rare cases where there is an obvious dissenting judgment. However, while we can assume that Lord Neuberger, Lord Mance and Lord Toulson agreed with Lord Clarke in Papadimitriou, and we know that Lord Sumption agreed with Lord Clarke because he said so, we do not know what the other judges thought about Lord Sumption’s additional comments. The comments have had a mixed reception among observers. This may be because they can be interpreted in different ways. If Lord Sumption meant only that liability for knowing receipt and an absence of notice would often stand or fall together, this would be unobjectionable.75 That point can be made while still recognising that the burden of proving knowledge and the burden of proving an absence of notice fall on different parties, and it can be made without necessarily merging the tests of knowledge and notice. However, it seems that his Lordship’s words are stronger than 74 ibid [33]. 75 See the earlier Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm) [83] (Eder J): ‘both the proprietary claim and the (personal) knowing receipt claim are likely to stand or fall together’.

Knowing Receipt  231 that: ‘the question what constitutes notice or knowledge is the same’. This appears to merge the tests for each. David Hayton has taken the view that, aside from conveyancing and other special transactions, ‘the concept of a purchaser without notice has become the concept of a purchaser without knowledge’.76 Apart from land and other special cases, the notice test has been turned into a knowledge test. That being so, the facts that would disentitle the bona fide purchase defence would also show liability in knowing receipt. Hayton comments that this alignment ‘has the advantage of resolving the position of a purchaser at the time of purchase’.77 That is, there would be no gap whereby a purchaser might have sufficient notice to disentitle the bona fide purchase defence, yet insufficient knowledge for personal liability in knowing receipt. In contrast, William Swadling interprets the comments as lowering the knowledge threshold rather than raising the notice threshold.78 He sees Lord Sumption as ‘incorporating even imputed notice’ into the test for knowing receipt. He criticises Lord Sumption’s comments on the grounds that ‘the facts which disqualify a defence of equity’s darling and the level of knowledge required for liability for receipt have nothing whatever to do with each other’. The former is about whether a purchaser takes subject to a prior equitable interest; the latter is about personal liability. It is true that taking property subject to a prior interest is different from owing personal liability in respect of the property. As Megarry V-C famously put it, ‘there is more to being made a trustee than merely taking property subject to an equity’.79 But the problem is how to apply the concept of notice to transactions where there is no standard process that a purchaser ought to follow to establish the quality of the vendor’s title.80 How does notice work when there is nothing akin to land registry searches but where there are still common business practices, usual orders of events and departures therefrom? Although the starting point is that people are entitled to assume honesty,81 facts may quickly appear that require an explanation. In Papadimitriou itself, there was no obvious commercial reason for the Gibraltar–London transaction. The transaction did not appear to be honest on its face. This meant the bank should have investigated what the true purpose was. Had it done so, the bank would have discovered that the arrangement was improper. On the question of imputation, it is clear that knowledge for the purposes of knowing receipt can be acquired through an agent. This is the foundation of all such claims against companies.82 As for human beings, in Farah Constructions,83 76 D Hayton, ‘Third-Party Liability of Recipients of Trust Property’ in P Devonshire and R Havelock (eds), The Impact of Equity and Restitution in Commerce (Oxford, Hart Publishing, 2019) 236. 77 ibid 239. 78 Swadling, ‘The Nature of “Knowing Receipt”’ (n 57) 312–13. 79 Re Montagu’s Settlement Trusts [1987] Ch 264 (Ch) 278. 80 See P Millett, ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214, 214; Harpum (n 37) 125. 81 Papadimitriou (n 5) [17] (Lord Clarke) and [33] (Lord Sumption). See also Takhar v Gracefield Developments Ltd [2019] UKSC 13, [2019] 2 WLR 984 [63] (Lord Sumption) on setting aside judgments procured by fraud: ‘A reasonable person is entitled to assume honesty in those with whom he deals. He is not expected to conduct himself or his affairs on the footing that other persons are dishonest unless he knows that they are.’ See further ch 21 of this book. 82 See, eg Belmont Finance Corp v Williams Furniture (No 2) [1980] 1 All ER 393 (CA); El Ajou v Dollar Land Holdings plc [1994] 1 BCLC 464 (CA); Papadimitriou (n 5). 83 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89 [124]–[129]. There was also no agency (and so no imputation) in Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund

232  Jamie Glister the High Court of Australia decided that imputation was not present on the facts because there was no relevant agency relationship. However, it was implicit that imputation could have operated to ground knowledge on different facts. In Re Montagu, Megarry V-C gave an example where he did not think imputation would be appropriate: where trustees of a testamentary discretionary trust wrongly distribute funds to a recipient who is not an object, and where that recipient has employed a solicitor to act for him in respect of the will.84 Even then, the problem is not imputation, but is the general issue of identifying the need for inquiries, either because inquiries are commonly made or because there is something special in the facts that requires them. As Megarry V-C went on to note, ‘it is unusual for a volunteer to employ solicitors when about to receive bounty. Even if he does, he is unlikely to employ them in order to investigate the right of the donor to make the gift.’85 C.  Knowledge and Liability Putting aside the relationship between notice and knowledge, there is the linked question of the level of awareness that a recipient must have to be liable for knowing receipt. The current test in England, from Nourse LJ’s judgment in Akindele,86 requires the recipient’s state of knowledge to be ‘such as to make it unconscionable for him to retain the benefit of the receipt’. It is worth setting out the passage in full:87 What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge? It can only be to enable the court to determine whether, in the words of Buckley LJ in Belmont Finance Corpn Ltd v Williams Furniture Ltd (No 2) … the recipient can ‘conscientiously retain [the] funds against the company’ or, in the words of Sir Robert Megarry V-C in In re Montagu’s Settlement Trusts … ‘[the recipient’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee’. But, if that is the purpose, there is no need for categorisation. All that is necessary is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.

This test has been very widely discussed and only a few points will be made here. First, and despite criticism, it seems that the test has generally been successful in that judges have been able to employ it. The test seems able to accommodate the

Pty Ltd [2015] VSCA 9, (2015) 318 ALR 302. Note Peter Watts’s tentative suggestion that the rules of imputation could apply outside agency: ‘familial relationships, natural and corporate, may provide a separate basis for imputation where the transaction is not, in substance, one at arm’s length’: P Watts, ‘Imputed Knowledge in Restitutionary Claims: Rationales and Rationes’ in S Degeling and J Edelman (eds), Unjust Enrichment in Commercial Law (Sydney, Thomson Reuters, 2008) 436. 84 Re Montagu (n 79) 271. 85 ibid 277–78. cf Snell’s Equity (n 32) para 30.072: ‘in gratuitous transactions, where the defendant has no reasonable justification to rely unquestioningly on the trustee’s authority to transfer the property to him, it may be reasonable to impose a duty of inquiry’. 86 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 (CA). 87 ibid 455. Nourse LJ then restated the test as ‘must be such’ rather than ‘should be such’.

Knowing Receipt  233 considerations of commercial practicality referred to above, and to allow judges to reach the conclusions they want to reach.88 That said, Rohan Havelock has argued that the ‘unconscionable’ requirement has become decoupled from the specific question of the defendant’s state of knowledge at the time of receipt. He says it has led to a broader analysis of the defendant’s conduct and has developed into a broader question of whether it would be unconscionable in the circumstances for the defendant to retain the benefit of the receipt.89 To the extent that that is true, the flexibility of the Akindele test will have come at the price of at least some analytical clarity. Secondly, the Baden Delvaux scale of knowledge is still discussed.90 Indeed, cases after Akindele indicate that the fourth and fifth levels of Baden can sometimes ground knowing receipt (which may be thought surprising, since Nourse LJ made it clear that he thought only the first three levels would count).91 But again, the real question in those cases is when the recipient ought to have drawn the inferences or made the inquiries that a reasonable person would have. The particular factual point that means the recipient ought to have asked questions is necessarily very context-specific. Thirdly, it is important to realise that the Akindele case was only concerned with the defendant’s liability to return the value of what he received. The same is true of the Belmont Finance and Montagu cases to which Nourse LJ referred. The claims were restitutionary in the sense of returning value. This is important because while Nourse LJ stated the test in wide terms – retain the benefit of the receipt – he did not have in mind a claim for discrete profits. In other words, Nourse LJ’s test is not necessarily the right one to apply where the claimant seeks an account of profits against a knowing recipient. D. Discussion Lord Sumption’s comments in Papadimitriou have prompted some disagreement. On a first reading they might seem to ignore the distinction between taking subject to prior equities and owing a personal liability to account, although in fact this is not the case. Lord Sumption compared a defendant who ‘claims’ to be a bona fide purchaser with one who ‘disputes a claim’ that he is personally liable, thereby recognising that

88 Whether a recipient or assistant has the requisite level of fault has been called a ‘jury question’ that is not easily susceptible of legal analysis or categorisation: see Agip (Africa) Ltd v Jackson [1990] Ch 265 (Ch) 293 (Millett J); WMC Gummow, ‘Knowing Assistance’ (2013) 87 Australian Law Journal 311, 319. One of Nourse LJ’s aims for his test was that it would avoid difficulties of definition and allocation, even if not difficulties of application. 89 R Havelock, ‘The Transformation of Knowing Receipt’ [2014] Restitution Law Review 1. 90 See, eg Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2013] Ch 156 [131]–[132] (Stephen Morris QC sitting as a Deputy High Court Judge); Group Seven Ltd v Nasir [2017] EWHC 2466 (Ch) [475]–[478] (Morgan J). The appeal on dishonest assistance was allowed (n 69), but the knowing receipt analysis was unchallenged: [87]–[94]. See further Brent LBC v Davies [2018] EWHC 2214 (Ch) [558]–[563] (Zacaroli J); Great Investments (n 27) [118]. 91 Akindele (n 86) 450–55. More generally, Nourse LJ thought the Baden scale was useful in determining questions of dishonest assistance. He had ‘grave doubts about its utility in cases of knowing receipt’.

234  Jamie Glister the burden falls on different people. Lord Clarke, with whom Lord Sumption agreed, also recognised the distinction in his own judgment. There is no doubt that the distinction between taking subject to equities and owing personal liability exists; the question is whether that distinction has any real effect in cases (unlike Re Montagu) where the recipient has given value for the property received. On this point, Lord Sumption simply echoed what others have already said. These include Lord Millett extrajudicially,92 Charles Harpum in his very influential Law Quarterly Review articles93 and Nourse LJ in Akindele.94 In Westpac Banking Corpn v Savin, a decision of the New Zealand Court of Appeal, Richardson J said:95 Clearly Courts would not readily import a duty to inquire in the case of commercial transactions where they must be conscious of the seriously inhibiting effects of a wide application of the doctrine. Nevertheless there must be cases where there is no justification on the known facts for allowing a commercial man who has received funds paid to him in breach of trust to plead the shelter of the exigencies of commercial life.

Lord Sumption made the same point in Papadimitriou: outside land, recipients do not owe a free-standing duty to investigate. There must be something on the facts that calls for inquiry. If that something is there – which is the central and difficult question – it will both disentitle the bona fide purchase defence and ground personal liability in knowing receipt. V. CONCLUSION

It seems clear that the current English law of knowing receipt is not based on unjust enrichment. The two bases of liability were described as ‘conceptually very different’ by Lord Sumption and Lord Briggs in DD Growth Premium,96 and, for the reasons given in section III, I think that is correct. The relationship between knowing recipients and express trustees is, on the other hand, undoubtedly close. But this chapter has sought to explore the outer edges of the relationship and to explain how the analysis can be tested by considering the areas of accounts of profits and consequential loss. If it is true that knowing recipients are fiduciaries, it suggests a severe result might follow a rather low level of fault. It is one thing to give back the value of something you should not have had; it is another to disgorge gains that you might – or even would – have made anyway. This was the point made by Lord Nicholls and others when they suggested a strict liability claim based on receipt and a fault-based claim for further recovery. Whether liability to return value received ought to be strict or

92 Millett (n 80); see also Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978 (Ch) 1000 (Millett J). 93 Harpum (n 37) 125. 94 Akindele (n 86) 455. 95 Westpac Banking Corpn v Savin [1985] 2 NZLR 41, 53; cited in Akindele (n 86) 455 (Nourse LJ). 96 DD Growth Premium (n 4) [58]; see also n 26 above.

Knowing Receipt  235 not, it seems doubtful that the test should be the same as the test for disgorgement of discrete gains. Consider the following example:97 A trustee pays money to a third party in breach of trust. The recipient is a little suspicious of the gift, so places the money in a separate interest-bearing account and does not make any withdrawals. Because of the presence of those funds, the recipient’s bank lends money to the recipient at a more advantageous interest rate than would otherwise have been offered. This enables the recipient to buy a nicer house, which appreciates more rapidly. Throughout, the trust money is still sitting in the separate account, earning interest. Is the recipient liable to account for the gain made by borrowing money at the lower rate? Is she liable for the increased gain made by buying a house that has appreciated more rapidly than others she could have bought? Is she liable for the entire increase in value of her house?

One response might be to say the example does not raise the issue: the beneficiary in the example can claim the money (and interest) so does not need to rely on a personal claim. Yet, while claims in knowing receipt are often made because the received property has been dissipated, we have seen that dissipation is not a prerequisite of liability in knowing receipt.98 Perhaps an account of profits should not be available for knowing receipt. The facts that justified a recipient being liable to disgorge discrete profits would, if they existed in a given case, render that recipient liable as a dishonest assistant or even a de facto trustee. We have seen that Nugee J took a similar view in the Courtwood Holdings case,99 and Paul Finn put the point like this in 1993:100 [An account of profits] should only be imposed on a third party who properly can be said to be a wrongdoer either because that person knowingly participated in the fiduciary’s wrong or because, after the receipt, and not being a bona fide purchaser, he became so appraised of the fiduciary’s wrong as would make him an accessory in that wrong if he continued to retain the property as his own.

This is not the current law in England, although there may still be enough wriggle room to allow the position to be adopted. This is because the debate over the availability of an account of profits has been conducted in the realm of dishonest assistance rather than knowing receipt (albeit that the Court of Appeal in Novoship thought that the same principles would apply to knowing receipt).101 On the other hand, the same result can probably be achieved through less dramatic means. First, an account can be refused on discretionary grounds.102 Secondly, courts can make judicious use of the ‘real or effective cause’ test in determining what profits must be disgorged. Thirdly, courts may read the Akindele test in wide terms so that the state of knowledge would have to be higher in order for it to be unconscionable for the recipient to retain these discrete benefits. All of this does, however, tell against knowing recipients being true fiduciaries. 97 I use the same example in J Glister, ‘Accounts of Profits and Third Parties’ in S Degeling and J Varuhas (eds), Equitable Compensation and Disgorgement of Profit (Oxford, Hart Publishing, 2017) 178 and in J Glister and J Lee, Hanbury and Martin: Modern Equity, 21st edn (London, Sweet & Maxwell, 2018) para 25.015. 98 Akita (n 29) [14] (Lord Carnwath). 99 Courtwood Holdings (n 47). 100 PD Finn, ‘The Liability of Third Parties for Knowing Receipt or Assistance’ in DWM Waters (ed), Equity Fiduciaries and Trusts 1993 (Carswell 1993) 211. 101 Novoship (n 44) [71] and [86] (Longmore LJ). 102 ibid [119] (Longmore LJ).

236

13 Illegality CHARLIE WEBB

[T]he law of illegality is an area is which there are few propositions, however contradictory or counter-intuitive, that cannot be supported by respectable authorities at the highest levels. For as long as I can remember, the English courts have been endeavouring to rationalise it. The proposition itself is straightforward enough. Ex turpi causa oritur non actio. Like many of the Latin phrases which we are now discouraged from using, this one is useful in cramming the maximum of meaning into the minimum of words. But like other apparently straightforward propositions of law, it begs many more questions than it answers. What is turpitude? What sort connection with it will bar the enforcement of a legal obligation? And with what consequences? The answers to these questions are to be found in two centuries of English case-law, which the Law Commission characterised a decade ago as complex, uncertain and unjust, but which it has recently proposed to leave more or less intact. – ‘Reflections on the Law of Illegality’1

I.  THE PROBLEM

T

his was Lord Sumption’s diagnosis of the condition of the law of illegality, offered in a speech to the Chancery Bar Association shortly after he joined the Supreme Court in 2012. Criticism of the illegality case law was nothing new; the law had few defenders. However, while most agreed that the law was unsatisfactory, there was no consensus as to what should be done about it. The Law Commission had initially supported wholesale legislative reform of the illegality doctrine, proposing that the courts be given discretion over its operation, to be exercised by reference to a list of ‘guiding factors’.2 But it backed away, in part because it came to question whether these proposals would just create fresh problems of their own.3

1 Lecture to the Chancery Bar Association on 23 April 2012, later published as J Sumption, ‘Reflections on the Law of Illegality’ [2012] Restitution Law Review 1, 1. 2 Law Commission, Illegal Transactions: The Effects of Illegality on Contracts and Trusts (Law Com CP No 154, 1999); Law Commission, The Illegality Defence in Tort (Law Com CP No 160, 2001). 3 Law Commission, The Illegality Defence (Law Com CP No 189, 2009).

238  Charlie Webb More important, however, was the Commission’s realisation that its proposed solution did not in fact meet the criticisms of the case law. As the Law Commission saw it, the real problems with the illegality doctrine lay not in the decisions the courts had been reaching so much as in the jumble of rules they had developed in their attempts to explain and reconcile those decisions. And so, though it was true that giving courts greater discretion over the operation of the illegality defence would bring its own uncertainty, the main argument against reforming the law in this way was that greater discretion was in any case unnecessary. If the decisions the courts were reaching were the decisions we would want them to reach, it was not necessary to give them greater freedom in coming to their decisions. They had all the freedom they needed. Rather, the problem with the law as it stood was that the rules the courts had formulated in framing their decisions succeeded neither in making the law clear and predictable – ‘there are few propositions, however contradictory or counter-intuitive, that cannot be supported by respectable authorities at the highest levels’ – nor in adequately explaining why the defence operated the way it did. On this basis, what was needed was, in the first instance, for the courts to do a better job of explaining themselves, which meant showing how the considerations which ground and shape the illegality defence play out on the facts of the case at hand. Of course, some might disagree with the Law Commission’s assessment that the courts had gone astray only in the framing of their decisions and not also, on occasion, in the decisions themselves. But this objection could be backed up only by showing how some of these decisions were out of line with the considerations which support the defence. Either way, the starting point must be a closer examination of those considerations. II. RATIONALES

Early statements of the illegality doctrine reveal only so much about its rationale:4 No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff’s own standing or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff.

Where the defence applies, the claimant does not lose because his own unlawful conduct mitigates the injustice to which his claim is directed: where the claim is in tort, the claimant’s illegality does not make the defendant’s injurious conduct more reasonable; where he claims in unjust enrichment, it does not provide a reason for viewing the enrichment as justified. Rather, the defence rests on a broader ‘public policy’, concerned with the propriety of the court offering its assistance to him. But what is this policy? At one point, it was common to say that the illegality doctrine was needed to preserve the dignity of the court. How the claimant’s wrongdoing impugned the court’s dignity and why this mattered tended, however, to be

4 Holman

v Johnson (1775) 1 Cowp 341 (KB) 343 (Lord Mansfield).

Illegality  239 assumed rather than explained. Here is one way of understanding the concern. Law’s ability to advance any community good or goal is dependent on it changing how people act. If everyone carries on as they would have done absent law, the law contributes nothing. The law is, therefore, concerned not just with setting out norms of conduct, but also with seeing that we conform to them. One way it does this is through sanctions, threatening unwanted consequences on those who do not do as the law directs. Yet no legal system can hope to sanction all transgressors, and those moved only by these threats will see sanctions merely as costs attached for engaging in such conduct, open to so acting if they consider this price worth paying. Accordingly, the law’s practical effectiveness is in large part a function of its ability to persuade us that doing as the law says is, in any case, the right thing to do. We are more likely to conclude this if we believe that the law’s rules and rulings are well intentioned and substantively sound. By contrast, we are that much less likely to give the law this benefit of the doubt if it looks to us as though its values are not our values, that others who flout the law’s prohibitions are left no worse for it or that it is simply getting its priorities wrong. It should be clear that the law’s assisting those engaged in criminality may sometimes risk just this. But there is little trace of this line of thinking in the modern authorities. Instead, references to the dignity of the court have been thought to betray a sort of crude moralism, the claimant losing out for no better reason than that the court ‘did not like the cut of his jib’.5 The public conscience test, through which this idea found its last and most direct expression, was rejected by a majority of the House of Lords in Tinsley v Milligan.6 And while the Law Commission was prepared to accept this idea – now expressed in terms of maintaining the integrity of the legal system – as a possible basis for the defence, they saw it as just one of five overlapping ‘policy rationales’, each of which plays a role in grounding some applications of the defence but none sufficient to explain them all.7 We see something similar in Gray v Thames Trains Ltd.8 Gray was involved in a rail accident caused by the defendant’s negligence. He suffered only minor physical injuries, but developed post-traumatic stress disorder. This resulted in a significant personality change. A little under two years later, he stabbed a man to death. He pleaded guilty to manslaughter on the grounds of diminished responsibility and was detained in a hospital under section 37 of the Mental Health Act 1983. Gray sought damages from the defendant under various heads, including for earnings he lost as a result of his imprisonment, to indemnify him against any claims brought by relatives of the man he killed, and for his feelings of guilt and remorse. The House of Lords held that illegality barred all these claims, although for different reasons. The lost earnings claim fell foul of what Lord Hoffmann referred to as the narrow rule: you cannot recover for loss which is the consequence of a sentence imposed on 5 The phrase used by Sumption (n 1) 6 to describe the Court of Appeal’s decision in Cross v Kirkby [2000] All ER (D) 212 (CA). 6 Tinsley v Milligan [1994] 1 AC 340 (HL). 7 Law Commission (n 3). The others are: (i) furthering the purpose of the rule which the claimant’s illegal behaviour has infringed; (ii) consistency; (iii) the need to prevent the claimant profiting from his or her own wrong; and (iv) deterrence. 8 Gray v Thames Trains Ltd [2009] UKHL 33, [2009] AC 1339.

240  Charlie Webb you for a criminal act.9 The narrow rule had, so Lord Hoffmann thought, its own distinct rationale, which he identified as consistency. It would be inconsistent for the law to impose a particular criminal sanction on a claimant and then effectively to undo or reverse that sanction by allowing the claimant a remedy in tort.10 So if, as a result of your negligence, I end up committing and being convicted of a criminal offence, I will not be able to recover damages for the loss of liberty entailed by any prison sentence I must serve or for any fine I must pay. As Gray confirms, the same goes for claims for compensation for earnings lost as a result of the claimant’s imprisonment. This reasoning did not apply to Gray’s claims for indemnity or for his feelings of guilt and remorse, since these losses were not the consequence of the claimant’s criminal sentence. The court nonetheless concluded that the claimant’s illegality defeated these claims too, this time on the basis of a wider rule: you cannot recover for damage which is the consequence of your own criminal act. This wider rule is, in turn, supported by a wider public policy; in Lord Hoffmann’s view, ‘it is offensive to public notions of the fair distribution of resources that a claimant should be compensated (usually out of public funds) for the consequences of his own criminal conduct’.11 Claims in contract and unjust enrichment and assertions of property rights raise other considerations besides these.12 If we adopt this line of thinking, we have a ready explanation for the mess the law has found itself in. If the defence does indeed channel a range of different ­rationales – rationales which different courts at different times have found more or less persuasive – it is unsurprising if the resulting case law is complex and disjointed. Once these diverse rationales are brought into the open, some of this complexity and disjointedness may be revealed as justifiably different responses to materially different cases, where the common element of illegality nonetheless raises distinct concerns. But it is also possible to see how we may easily end up with a body of case law which is not just disjointed but, at times, confused and contradictory. For, without attending to this diversity of rationales, solutions reasonably adopted in one case may be extended too readily to cases where the balance of reasons calls for a different approach, with later cases then torn between adherence to the ‘rules’ and doing justice on the facts. What this, in turn, suggests is that the way forward is to acknowledge that the illegality defence must be, to a significant extent, open-textured, giving the courts greater scope to tailor its operation to the differing combination and balance of concerns raised in differing contexts, and to encourage courts to attend more closely to those considerations when determining their operation. III. CONSISTENCY

This was, near enough, the approach adopted in Gray, and this encouraged the Law Commission to suggest that the illegality defence could be recast in this way without

9 ibid

[32]. [37] and [39]. See also [77] and [79] (Lord Rodger), [93] (Lord Brown). 11 ibid [51]. 12 ibid [30]–[31]. 10 ibid

Illegality  241 legislation. But while some judges were happy to adopt this course, others were more wary. So, in Hounga v Allen,13 and then in Les Laboratoires Servier v Apotex Inc14 and Bilta (UK) Ltd v Nazir,15 what Lord Sumption later described as a ‘schism’ emerged within the Supreme Court over the approach that should be taken to the defence. At first, or at first glance, the division we see in these cases concerned means, not ends: the principal argument levelled against those ready to develop the defence along these lines was not that this change was unnecessary or unreasonable, but rather that it was unlicensed by the authorities.16 However, by the time we get to Patel v Mirza, this is no longer true and the disagreement is squarely on the merits of this approach.17 What changed? As I have suggested, the sort of open-textured, more explicitly rationale-driven approach to the defence may be thought the law’s necessary end point, once it is accepted that the defence does indeed rest on a range of different and contextsensitive rationales. But we see in these cases a pushback against this idea and, in Patel, the two sides appear to be aligned in its rejection. Early in Lord Toulson’s lead judgment for the majority, he notes without qualification the five policy rationales identified by the Law Commission.18 However, he subsequently goes on to propose two ‘broad discernible policy reasons’ for the illegality defence: ‘a person should not be allowed to profit from his own wrongdoing’ and ‘the law should be coherent and not self-defeating, condoning illegality by giving with the left hand what it takes with the right hand’.19 By the end of his judgment, he is down to one: ‘The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system.’20 What reason is this? The suggestion that the illegality defence may serve to maintain the integrity of the legal system is one which, as we have seen, was endorsed by the Law Commission. By this, they meant that the defence may be justified where it would be improper for the court to lend its assistance to a wrongdoing claimant, either to preserve the dignity of the court or to avoid damage to public confidence in the legal system. But this is not Lord Toulson’s reasoning. In referring to the need to uphold the integrity of the legal system, he was drawing on the very different use of this expression by McLachlin J in Hall v Hebert:21 there is a need in the law of tort for a principle which permits judges to deny recovery to a plaintiff on the ground that to do so would undermine the integrity of the justice system. 13 Hounga v Allen [2014] UKSC 47, [2014] 1 WLR 2889. 14 Les Laboratoires Servier v Apotex Inc [2014] UKSC 55, [2015] AC 430. 15 Bilta (UK) Ltd (in liquidation) v Nazir (No 2) [2015] UKSC 23, [2016] AC 1. Discussed further in ch 15 of this book. 16 See, eg Hounga (n 13) [55] (Lord Hughes); Les Laboratoires Servier (n 14) [20] (Lord Sumption). 17 Patel v Mirza [2016] UKSC 42, [2017] AC 467. 18 ibid [22]. 19 ibid [99]. 20 ibid [120]. 21 Hall v Hebert [1993] 2 SCR 159 (SCC), 179–80. See also 169: ‘courts should be allowed to bar recovery in tort on the ground of the plaintiff’s immoral or illegal conduct only in very limited circumstances. The basis of this power, as I see it, lies in duty of the courts to preserve the integrity of the legal system, and is exercisable only where this concern is in issue. This concern is in issue where a damage award in a civil suit would, in effect, allow a person to profit from illegal or wrongful conduct, or would permit an evasion or rebate of a penalty prescribed by the criminal law. The idea common to these instances is that the law refuses to give by its right hand what it takes away by its left hand.’

242  Charlie Webb The power is a limited one. Its use is justified where allowing the plaintiff’s claim would introduce inconsistency into the fabric of the law, either by permitting the plaintiff to profit from an illegal or wrongful act, or to evade a penalty prescribed by criminal law.

So the policy of maintaining integrity of the legal system as presented here is what the Law Commission more straightforwardly referred to as consistency.22 Much the same conclusion is reached more quickly and expressed more clearly in Lord Sumption’s minority judgment. Starting with the five rationales offered by the Law Commission, he rejected the policy of integrity as they had framed it. (This rationale is simply ignored in the majority judgments. In this way, Patel confirms the move away from the historic basis for the defence.) The remaining four, he considered, are all subsumed within the principle of consistency.23 The suggestion that consistency might expand to do the work done by other rationales had been foreshadowed in Gray. As we have seen, the House of Lords there took the view that consistency accounted for some, but not all, applications of the defence. Nonetheless, elsewhere in the judgments, we can see how the idea of consistency might be taken further than the narrow rule identified by Lord Hoffmann. Discussing British Columbia v Zastowny,24 where the Supreme Court of Canada had similarly denied a claim for loss of earnings suffered by a claimant as a result of his imprisonment, Lord Rodger had this to say:25 In the circumstances of that case the application of the ex turpi causa doctrine helped to promote the more fundamental policy of preventing inconsistency in the law. That such a policy exists is beyond question. In Zastowny and the preceding cases, the need was to ensure that the civil and the criminal courts were consistent in their handling of the plaintiff’s criminal conduct and its consequences. But that is simply one manifestation of a desirable attribute of any developed legal system … One of the hallmarks of a good modern code is that its provisions should interrelate and interact so as to achieve a consistent application of its overall policy objectives. Complete harmony may well be harder to achieve in an uncodified system … But the gradual drawing together of law and equity in English law illustrates the same pursuit of harmony and consistency. And, certainly, the courts are conscious that inconsistencies should be avoided where possible. So, for instance, a court should not award damages in tort if a contractual claim based on the same events would be excluded by some term in the contract between the parties. Similarly, a court should not give a remedy on the ground of unjust enrichment if this would be tantamount to enforcing a contract which the law would treat as void in the circumstances. Likewise, in the present case, when considering a claim for loss of earning, a civil court should bear in mind that it is desirable for the criminal and civil courts to be consistent in the way that they regard what the claimant did.

Here, the policy of ensuring that the civil law does not contradict or reverse a sanction imposed by the criminal law is just one application of the wider goal of ensuring that the criminal law and civil law are consistent, which is just one application of the goal of ensuring consistency throughout the law.26 Moreover, as the language of 22 As Lord Toulson recognised: Patel (n 17) [57] and [100]. 23 ibid [230]. 24 British Columbia v Zastowny [2008] 1 SCR 27 (SCC). 25 Gray (n 8) [77]. 26 See also Patel (n 17) [23] (Lord Sumption): ‘the law is a unified institution. At the most fundamental level of policy, its internal coherence requires that contract, tort and criminal law should be in harmony.’

Illegality  243 ‘harmony’ brings out, this consistency is not just the avoidance of contradiction, but a broader consistency of principle and policy, which is to say that the various parts of the law should work together in coordinated pursuit of a set of common aims, embracing common values and priorities. So understood, consistency entails not simply that the law does not give with one hand what it takes away with the other, but that it speaks with one voice. IV. MULTIPLICITY

Once drawn out in this way, we can see why consistency might be thought to subsume some of the other policy rationales which have been offered for the illegality defence. This sort of consistency requires that we attend to the rationale or purpose of the rule of criminal law which the claimant infringed, to see whether its policy would be undermined by allowing him to recover. It explains why courts should, all else equal, do what they can to deter rather than encourage others to commit similar wrongs. And this, in turn, provides one explanation for why the law should be concerned to see that wrongdoers do not profit from their wrongdoing. This reduction, or aggregation, of what were previously seen as distinct policies may be thought significant. In place of multiple, overlapping rationale, we would have just one. With a single rationale, the proper operation of the defence turns on the answer to a single question: would it introduce an inconsistency into the law were the claimant to recover? If this is right, we might hope that this would make things significantly simpler for the courts where the defence is raised. Is it right? Yes and no. For a particular decision to be consistent with some other decision or some body of law is for that first decision to accord – be in harmony  – with the principles and policies which ground the other decision or body of law. Consistency of decisions and decision-making is not simply consistency of outcome, but ­consistency of reasoning, consistency in the principles and policies which support those decisions. So, when it is said that the policy of consistency requires a particular decision, what this means is that consistency with the policy grounding some other decision or body of law requires this decision or, more simply, that the policy grounding that earlier decision or body of law supports this decision today. It is this that makes it possible to see the other rationales put forward for the illegality defence as just particular applications or implications of a concern for consistency, for that concern just is to see that the law does indeed work to advance its chosen goals and policies, whatever they are. But, as this then brings out, this broader goal of ensuring consistency across the law is no less than the goal of seeing that the law does indeed adopt and carry through a coordinated and coherent scheme of principles and policies, with consistency not, in truth, an independent policy of the law, but rather the consequence of the law’s successful pursuit of such a scheme of principles and policies. Is there anything to be gained by references to consistency? One of law’s most basic functions is to answer, authoritatively and conclusively, questions on which the members of a community differ. What should be the ground rules by which members of our community live and interact? How should we respond to violations of those

244  Charlie Webb rules? And, more fundamentally, how, within this community, are questions like these to be answered? For some questions, there will be no single right or best answer; rather, there will be a range of reasonable answers, sometimes because the arguments for different answers are evenly matched, sometimes because there is no reason at all for preferring one answer over another (‘is it better if everyone drives on the left or on the right?’). In all such cases, there is nothing for a legal system to do but pick one from this set of reasonable answers and move on. For, while there may be no reason to pick one of these answers over another, each is better than providing no answer at all (‘we just can’t decide what side or the road would be better!’). By the same token, once one answer has been picked, the benefits of having resolved this practical problem – whatever the solution adopted – are threatened if that answer is repeatedly reopened. So there is, in these cases, a value in consistency: a value in following prior decisions and maintaining existing practices even if there were, at the outset, just as strong reasons for reaching differing decisions and adopting different practices. Indeed, that there is a value in following prior decisions may be true even where those decisions are less than fully reasonable and so could have been not only different, but better. Here, too, the gains of the law’s ability to resolve practical problems may be reduced where the answers it gives are treated as only provisional, open to review. This does not mean that laws, once made, should never be changed. It does, however, mean that change often comes at a cost, and that this cost must be weighed against the benefits of a better rule when deciding whether to make such a change. Nonetheless, the fact that there is a value in consistency does not mean that we should see consistency as the value served by following past decisions and practices. Instead, the values thereby served are whatever values grounded those initial decisions. The good of having a safe system of roads requires that we have a rule that everyone drive on the same side of the road. That good does not tell us which side to choose, but it does give us reason to stick to that decision once made, since revisiting that choice is only likely to cause uncertainty and danger. Similarly, where it is thought that allowing the claimant to recover in tort would be inconsistent with a particular rule of criminal law, the reason for denying that claim is found in the goods and goals advanced by that rule, that is, by the principle or policy which justifies the relevant criminal prohibition or sanction. In this way, attempts to reduce the various rationales which have been offered for the illegality defence to the single idea of consistency go in the end only to confirm the genuine multiplicity of principles and policies which may ground such a defence. V. SCOPE

While both the majority and minority in Patel endorsed the consistency rationale identified by McLachlin J in Hall v Hebert, this led them in very different directions. The majority considered that it required the court to weigh up the diverse principles and policies at stake in order to determine whether allowing the claimant to recover would be inconsistent with what the law is seeking to achieve elsewhere. For the minority, by contrast, as for McLachlin J, it meant a narrower, more tightly circumscribed

Illegality  245 defence.27 As we have seen, McLachlin J took the view that illegality should bar recovery in tort only where it would enable the claimant to evade a criminal penalty or to profit from an illegal act, the latter seemingly limited to cases where the claimant would be seeking damages for loss of illegal earnings. Why draw the line there? For some, any broader role for the illegality defence leads us into questions and concerns which have no place in private law and private law litigation. Many academic private lawyers are taken by the idea that private law is not a means for the pursuit of collective goals but is instead concerned only with recognising and upholding basic rights we have against one another, with what are sometimes described as matters of corrective or interpersonal justice. So, not only do we need no appeal to any community goal or public interest to explain why I must not punch you in the face, no amount of public gain is going to license me to do so. Since, so the argument goes, broader versions of the illegality defence respond to concerns which go beyond the narrow question of what justice requires between the parties, they are out of place in private law. Now, that there are some private law rights and duties which are, in this sense, isolated from and unaffected by broader social concerns does not make it true of all of them.28 In any event, even where this is true, things change when the question shifts from ‘How should I act in my dealings with you?’ to ‘What should a court do when a dispute arises out of those dealings?’ Even if the first question is aptly described as a question of interpersonal rights or justice, the second is not. At the core of private law are a series of directives, addressed to each of us as members of the community: perform your contracts, pay your debts, take care not to cause injury, etc. When a dispute arises between us, it is often thought that the job of the court is to enforce the duties spelled out in its directives to us. This is often what the court does, but not always. So, while the law tells us to perform our contracts, outside obligations to pay money, the courts rarely compel this. Some see this as inconsistent. How can we say there is a duty to perform if the courts do not in fact compel performance? If there really is a duty to perform, does it not follow that the courts ought to demand performance where performance remains possible? But in truth there is nothing confused or incoherent in the law telling contracting parties that they should perform their contracts while telling the courts that it would often be unreasonable to use the state’s coercive machinery to compel that performance. Similar reasoning accounts for the distinction the law reasonably draws between obligations which are void and those which are merely unenforceable.29 So the question for the court when considering the effect of the claimant’s illegality on the claim he now brings is not simply, and indeed not primarily, ‘How does this illegality affect what the parties could reasonably demand of one another?’ but rather ‘How does this illegality affect what we, the court, should do when called on 27 ibid [192] (Lord Mance), [214] (Lord Clarke), [239] and [261] (Lord Sumption). 28 The idea that the rights and duties which obtain between you and me are unaffected by our social setting or the impact our actions have on others looks, in any case, naive. For example, what I can demand of you/what you owe me when you are driving in my vicinity is different if you are transporting a badly injured passenger to hospital than if you are merely late for work. 29 See further C Webb, ‘Performance Damages’ in G Virgo and S Worthington (eds), Commercial Remedies: Resolving Controversies (Cambridge, Cambridge University Press, 2017) 205–10.

246  Charlie Webb to resolve this dispute?’ This latter question is not a question of interpersonal justice at all.30 We might put the point another way: the question of what justice requires as between the parties arises only once we have determined that there is good reason for the court to intervene to secure that justice. And this intervention does indeed require justification. Securing justice is intrusive, sometimes heavy-handed, it carries the risk of error and state-sponsored injustice, and, in all events, comes at a cost. It is, therefore, always reasonable, always right, to ask whether the state should intervene in the parties’ affairs to see justice done. Sometimes we cannot do justice as between the parties without doing injustice elsewhere. Indeed, even where remedying the injustice suffered by the claimant would cause no such harms, the question remains whether the state’s resources – resources which are, of course, far from unlimited – should be devoted to this social problem rather than to others. In any event, the suggestion is not that the illegality defence be abolished, only that its operation be limited. All agree, for instance, that recovery should be barred in cases falling squarely within Lord Hoffmann’s narrow rule. Yet the argument that recovery should be denied where it would allow the claimant to escape or reverse the consequences of a sanction imposed on him for his wrongdoing is not an argument of interpersonal justice. Still, it might be said that cases falling within the narrow rule are different. The law cannot consistently impose a penalty and reverse it. This is not so much a matter of policy as a matter of logic. If, as a result of your negligence, I end up committing and being convicted of a criminal offence, and I was to recover damages from you for the loss of liberty, the law would be saying both (through the sentence) that I should bear those consequences and (through the damages award) that I should not. Any claim for damages must be denied for the simple reason that recovery would ‘create an intolerable fissure in the law’s conceptually seamless web’.31 But, in truth, the reasons which ground the defence in these cases are no different from those which justify the defence in the broader range of cases which this approach would exclude. If Gray had recovered for his lost earnings, this would not have restored the years he spent in detention. That sentence was served and no claim in tort could make it unserved. This is no less true if his claim had been not only for loss of earnings, but also for loss of liberty. Accordingly, in such cases, when it is said that allowing the claimant to recover in tort would be inconsistent with the criminal sanction, this is not because recovery would contradict or undo that sanction. Rather, recovery would be inconsistent with the sanction in the sense that it would be inconsistent with – that is, would run counter to – the reasons, or policies, which support that sanction. So, it is right to deny a claimant who has been imprisoned for his criminal wrongdoing compensation for his deprivation of liberty where and because the various policies which are served by the criminal law and state punishment determine that this is a loss which the claimant should properly suffer. It would therefore undermine the law’s advancement of those policies were the claimant permitted to have this loss offset. 30 That the illegality defence is not concerned with securing justice as between the parties has been clear from its earliest judicial statements: see, eg Holman v Johnson (n 4) 343 (Lord Mansfield). 31 E Weinrib, ‘Illegality as a Tort Defence’ (1976) 26 University of Toronto Law Journal 28, quoted by McLachlin J in Hall v Hebert (n 21) 176.

Illegality  247 On this basis, it matters why a particular sanction was imposed. If the reasons for the sanction do not demand that a particular loss fall on the claimant such that that loss may instead be seen as a side effect of the sanction, then allowing the claimant to recover will not undermine the policy choice reflected in that sanction. A majority of the House of Lords in Gray was therefore right in thinking that illegality should not be a bar where it can be established that the claimant’s detention was intended not as a penalty for his wrong but solely as a means of social protection. There can be no detention without a deprivation of liberty, yet the policy of protecting the public, which detention serves, is not compromised if the detainee receives damages to offset the loss this causes. Nor would such an award imply that the detention was unjust or undeserved. Rather, the combination of detention and damages can be seen as a fitting reconciliation of distinct policies: ensuring that the public is protected from those who are a danger to them while minimising the harm to those who are not responsible for the threat they pose. For those doubtful of this conclusion, compare the following: you negligently infect me with some highly contagious disease. To avoid the disease spreading, I am put into quarantine. The quarantine is reasonable, but I should be able to demand that you compensate me for my loss of liberty and any lost earnings. No doubt criminal sanctions are often imposed for multiple reasons. Even if these reasons are apparent, there will ordinarily be no basis on which we might attribute different parts of the sanction to different policies.32 It will, therefore, be rare for a claimant to be able to establish that the considerations which grounded his sanction would not be undermined were he to be compensated for particular consequences of his sanction. Against this backdrop, a rule which presumptively bars claims to recover losses imposed by way of a criminal sanction is sound. Yet the application of this rule requires that we differentiate losses imposed as part of the sanction and those which are mere side effects. (Compare once more the quarantine example, where the aim is to protect the public, not to do harm to the patient. While the deprivation of liberty is justified, there is reason to see that the patient receives compensation to offset the loss this causes.) The rule endorsed in Gray, framed simply in terms of causation, is insufficiently attentive to this distinction. In any event, the important point for now is that the justification for the illegality defence in cases falling within the narrow rule is not limited to those cases, but extends to a broader range of circumstances in which recovery would undermine the policies which ground the relevant criminal prohibition or sanction. Accordingly, if these policies legitimately bar a claim in the first group of cases – and they do – they may legitimately bar a claim in the broader group of cases too. VI.  TWO APPROACHES

A valid cause of action identifies a reason for recovery. Where the cause of action arises out of the commission of a crime or otherwise in connection with some criminal



32 Gray

(n 8) [41] (Lord Hoffmann).

248  Charlie Webb a­ ctivity or purpose, allowing the claimant to recover may undermine principles and policies the criminal law seeks to advance. In such cases, these principles and policies provide reasons against recovery. The illegality defence rightly bars the claimant from recovering where the reasons against allowing his claim outweigh the reasons in favour. What these reasons are and how they balance out will vary from case to case. Different causes of action are supported by different principles and policies, as are different criminal prohibitions and sanctions. The circumstances in which any given offence is committed or cause of action arises will differ, and the same principles and policies may carry more weight in some cases than in others. It is therefore correct to say:33 one cannot judge whether allowing a claim which is in some way tainted by illegality would be contrary to the public interest, because it would be harmful to the integrity of the legal system [by introducing inconsistency into the law], without (a) considering the underlying purpose of the prohibition which has been transgressed, (b) considering conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and (c) keeping in mind the possibility of overkill unless the law is applied with a due sense of proportionality.

Some argue that the diverse policies which, on this view, bear on the operation of the illegality defence are ‘incommensurable’. If so, the ‘range of factors’ approach Lord Toulson endorses here sets courts an impossible task. There is no point – indeed, no sense – looking for an optimal balance between such disparate goods and policies because they cannot, in truth, be balanced at all. So, for one commentator, ‘Requiring judges to compare the [policy] factors in play is akin to asking whether five litres is greater than two metres’.34 But while we do not go around asking whether this or that book is as dense as it is long or whether this building is as old as it is tall, we routinely ask and answer practical questions which raise diverse considerations, and we do so by conscious, if largely impressionistic, weighing and balancing of aims and values. One might wonder how those who reckon such weighing is truly nonsensical manage such basic tasks as choosing what to have for breakfast. But while we should reject the suggestion that the task is impossible, let alone senseless, it is true that attempts to balance the relevant principles and policies will often be impressionistic and imprecise, and that courts will often have to resort to guesswork. It is true too that, on occasion, different judges will balance these considerations differently. Does this matter? The law cannot always hope to do perfect justice. Sometimes it is better not to try. Where the fully just, fully reasonable outcome turns on a fact-sensitive interplay of diverse considerations, attempts to do full justice will typically come at a significant cost to rule of law values such as transparency and predictability. In such cases, it may be better for the law to forego this aim, instead choosing rules which it knows to be under- and/or overinclusive with regard to their justifications, but which are more easily applied and clear in their operation. Whether the law should adopt this alternative strategy depends on how great these rule of law costs are and on whether we can formulate a brighter-line rule which avoids those costs without doing significant injustice. The majority in Patel doubted

33 Patel

(n 17) [101] (Lord Toulson). an Era? Illegality in Private Law in the Supreme Court’ (2017) 133 LQR 14, 18.

34 J Goudkamp, ‘The End of

Illegality  249 that the uncertainty that would be caused by asking courts to balance the relevant policies counted significantly against that approach. As Lord Kerr put it:35 ‘Certainty or predictability of outcome may be a laudable aim for those who seek the law’s resolution of genuine, honest disputes. It is not a premium to which those engaged in disreputable conduct can claim automatic entitlement.’ When the law identifies certain conduct as criminal, setting a penalty for transgression, it does not set that penalty as the price which transgressors must pay for the privilege. Instead, the message of the criminal law is simple: don’t do it. Accordingly, uncertainty as to the consequences which will attend transgression does not affect any choices the law leaves open to us. Or, to put it another way, if would-be transgressors want certainty, don’t transgress.36 However, the majority also doubted whether there really was any alternative approach which avoided such uncertainty, or at least one which did so while producing defensible results. Prior to Patel, diverse tests and approaches had been employed. The test with perhaps the widest support asked whether the claimant had to rely on his unlawful conduct to found his claim. Only if he did, would his illegality bar his claim. That approach was often criticised for being arbitrary, since it made the defence’s operation turn on a procedural question unconnected to any of the considerations which might justify the defence.37 But on the view that the sole rationale for the defence is to prevent inconsistency, the reliance rule has a sort of logic: we know that the claim is inconsistent with some rule of criminal law or criminal sanction if the claimant must plead his breach of that rule or the imposition of that sanction to make out his claim. The complaints that the reliance rule could work arbitrarily are true, but they are also a distraction from deeper problems with the rule. Take Tinsley v Milligan, the leading authority for the reliance rule.38 The case involved a dispute over the beneficial ownership of the home in which the parties had been living. Legal title was in Tinsley’s name alone. However, both had contributed to the purchase price and they had agreed that Milligan’s name would be left off the title to assist her in making fraudulent claims to social security benefits. The parties fell out, Tinsley demanded possession of the property as sole owner and Milligan counterclaimed, seeking a declaration that Tinsley held the house on trust for them both in equal shares. The House of Lords held, by majority, that Milligan’s counterclaim would succeed if she could make out her beneficial interest in the property without relying on her illegality. By virtue of the presumption of resulting trust, she could: her contribution to the purchase price was sufficient to raise a presumption that the parties intended

35 Patel (n 17) [137]. See also [113] (Lord Toulson); cf [158] (Lord Neuberger) and [261] (Lord Sumption). 36 This is where Burrows goes wrong in thinking that the majority’s lack of concern about uncertainty ‘would appear to contradict our standard approach to … the criminal law needing to be certain’: A Burrows, ‘A New Dawn for the Law of Illegality’ in S Green and A Bogg (eds), Illegality after Patel v Mirza (Oxford, Hart Publishing, 2018) 29. The way the criminal law seeks to guide our choices is by telling us what our options are. Once we know an option is shut off by the law criminalising the relevant conduct, there is no further information we need. 37 See, eg Law Commission, The Illegality Defence (Law Com No 320, 2010) para 2.13; Nelson v Nelson [1995] HCA 25, (1995) 184 CLR 538, 592–93 (Toohey J). 38 Tinsley (n 6).

250  Charlie Webb that she take a beneficial interest in the property, without having to say anything about the plan to defraud the Department of Social Security (DSS). But the presumption of resulting trust does not always apply. If the parties had instead been husband and wife, the applicable presumption would have been of advancement, not resulting trust. The result would have been different and so the law looks arbitrary. But this application of the reliance rule might be questioned. The presumption of resulting trust will give way if there is evidence that the parties intended something different. It appears to have been assumed that there was no way Tinsley could rebut the presumption. After all, the parties did intend a trust, so the full facts did not rebut but rather supported the presumption. However, in Tribe v Tribe, Millett LJ suggested a different view:39 A resulting trust, like the presumption of advancement, rests on a presumption which is rebuttable by evidence … The transferor does not need to allege or prove the purpose for which property was transferred into the name of the transferee; in equity he can rely on the presumption that no gift was intended. But the transferee cannot be prevented from rebutting the presumption by leading evidence of the transferor’s subsequent conduct to show that it was inconsistent with any intention to retain a beneficial interest. Suppose, for example, that a man transfers property to his nephew in order to conceal it from his creditors, and suppose that he afterwards settles with his creditors on the footing that he has no interest in the property. Is it seriously suggested that he can recover the property? I think not. The transferor’s own conduct would be inconsistent with the retention of any beneficial interest in the property. I can see no reason why the nephew should not give evidence of the transferor’s dealings with his creditors to rebut the presumption of a resulting trust and show that a gift was intended. He would not be relying on any illegal arrangement but implicitly denying it. The transferor would have to give positive evidence of his intention to retain a beneficial interest and dishonestly conceal it from his creditors, evidence which he would not be allowed to give once the illegal purpose had been carried out.

Though Millett LJ did not question the decision in Tinsley, the argument identified here can be applied there.40 While Milligan’s contribution to the purchase price of the house raised a presumption of a resulting trust, Tinsley could have pointed to Milligan’s denial of any interest in the property when dealing with the DSS – evidence inconsistent with Milligan having a beneficial share – to rebut the presumption. This, in turn, would have thrown the onus back on to Milligan, who could not have established that the parties did intend her to have such an interest without revealing her fraud. However, this may be too quick. What if Milligan had replied that she and Tinsley had talked about beneficial ownership of the home – as presumably they had – and that they had agreed that Milligan was to have an interest in the property? This would no doubt prompt the question of why she had told the DSS that she had no such ­interest. Of course, Milligan could not offer the true explanation (the fraud), so imagine that she offers no explanation. Let us also imagine, however, that Tinsley does not dispute these conversations. Presumably, this would be sufficient evidence of the common intention needed to establish Milligan’s beneficial interest, notwithstanding Milligan’s denial of any interest to the DSS. But what if Tinsley did dispute

39 Tribe 40 As

v Tribe [1996] Ch 107 (CA) 128–29. has been noted elsewhere: see, eg Law Commission (n 3) para 6.31.

Illegality  251 that these conversations took place? Now we would simply have Milligan’s assertion that she was intended to have a share of the property, which she could back up only by bringing in evidence of the fraud.41 So, if this is right, the success of Milligan’s claim would depend on whether Tinsley admitted that they had expressly agreed to share the property beneficially. If she did, Milligan could indeed succeed without having to rely on her fraud. But if she did not, Tinsley could use Milligan’s denial of any such interest to the DSS to rebut the presumption of resulting trust. So, in short, Tinsley loses if she tells the truth and wins if she does not. If this looks bad, it looks even worse once we see that the court will typically be fully aware of the illegality and so will know that the conversations Tinsley is disputing must in fact have taken place. For the parties, the reliance rule turns the case into a high-stakes parlour game, asking them to make the best case they can without revealing a key piece of information – information which the court will nonetheless almost inevitably have. For the court, the rule requires them to feign ignorance, directing them to resolve that claim like any other, but on facts they know to be incomplete and on arguments they know to be misleading, or even wrong. In Patel v Mirza, Lord Sumption offered a very different interpretation of the reliance rule and of its operation on the facts of Tinsley:42 In property cases, as the House held in Tinsley v Milligan, title is not vitiated by an antecedent illegal arrangement. An equitable interest in property may accordingly arise from a tainted scheme. Whether an equitable interest exists depends on the intentions of the parties. The true principle is that the application of the illegality principle depends on what facts the court must be satisfied about in order to find an intention giving rise to an equitable interest. It does not depend on how those facts are established. Ms Milligan was entitled to the interest which she claimed in the property because she paid half of the price and there was no intention to make a gift. That was all that the court needed to be satisfied about.

So, for Lord Sumption, Milligan’s claim should have succeeded even if there had been no presumption of resulting trust. She contributed to the purchase of the house and did not intend to make a gift of her contribution to Tinsley. This was all that was needed for her to acquire an interest in the property. In this way, and in this sense, Milligan was not (and, even absent the presumption of resulting trust, would not have been) relying on her illegality to make out her claim. And this remains true even if she needed to bring evidence of her fraud in order to prove that she did indeed lack the intention of making a gift to Tinsley.43 On this understanding of the reliance rule, what matters are ‘the facts the court must be satisfied about’ for the claim to succeed, not how those facts are proved or the evidence the parties must adduce. If the illegality is not revealed through those facts, it will be no bar to the claim even if the claimant relies on it in evidence. Conversely, if those facts do reveal the claimant’s illegality, then the claim fails even if the claimant is able to make his case without mentioning it. 41 This is the implication of the judgments in Collier v Collier [2002] EWCA Civ 1095, [2002] BPIR 1057. 42 Patel (n 17) [238]. 43 cf Sumption (n 1) 10: ‘The mere fact that the claimant can formulate his claim without relying on his own illegal act, does not mean that his claim is not founded on it. This, as it seems to me, is the problem about the reasoning of the majority in Tinsley v Milligan. On any view, Miss Milligan’s claim to an interest in the property depended on the dishonest deal that she had made with Miss Tinsley.’

252  Charlie Webb Does this distinction hold up? The discussion of Tinsley may suggest something like the following. To succeed, the claimant must make out a cause of action. That cause of action can be represented in an equation of the kind ‘[Facts] A + B + C … = [Legal consequence] X’. The claimant makes out a cause of action by proving these elements, which he does through evidence, which is to say by establishing other facts which support a finding that those elements are present: so fact A may be proved by supporting facts a1, a2, a3 etc. We might then identify facts A, B, C … as ‘the facts the court must be satisfied about’ for the claim to succeed, and facts a, b, c as those which merely go to ‘how those facts are established’. So, in Tinsley, the equation would be (roughly): [A] contribution to purchase of property + [B] lack of intention to make a gift of that contribution to the legal title holder = [X] beneficial share of the property. Since there is nothing unlawful in contributing to property put in another’s name without an intention of making a gift to that other, Milligan was not relying on her illegality in making this claim. Her fraud was, at most, a piece of evidence (b) in support of her lack of intention to make a gift to Tinsley [B]. But this cannot be right. For one thing, no cause of action is inherently unlawful, so, if the reliance rule looked only to the abstract factual elements of causes of action, no action would ever be barred for illegality. For the rule to bite, it must go to how those elements are fleshed out by the claimant. But if we say this, the line between ‘the facts the court must be satisfied about’ and those facts which instead go only to ‘how those [former] facts are established’ becomes a lot harder to draw. Some cases remain clear. A cause of action in negligence might be said to have the following elements: [A] duty of care + [B] breach of that duty + [C] loss caused by that breach = [X] claim. But, while there is nothing unlawful in these bare elements, any negligence claimant must specify what his loss is, and this may reveal illegality. If I claim that your negligence brought a premature end to my lucrative career as a bank robber, we can see how my cause of action reveals and relies on conduct which is unlawful. However, few negligence claims are like this. Take the loss of earnings claim in Gray. There was nothing unlawful in these lost earnings. To succeed, the claimant needed to connect this loss to the defendant’s breach of duty. No doubt he needed to tell the story of his crime and subsequent detention to prove this connection. But could we not say that what matters is the fact of the connection, not how this connection is established? After all, we could compare the claimant’s earnings before and after the accident and the difference would be plain. Of course, to prove that this difference is indeed attributable to the accident rather than mere coincidence, we would need more information, more evidence. But Lord Sumption’s account of the reliance rule depends on a distinction between what needs to be proved and how it is proved, so, once more, it is no answer to say that the claim could not be made out without evidence of the claimant’s illegality. For another example of difficulties posed by this reimagining of the reliance rule, consider illegal contracts. With respect to property transfers, the rule seems to say that since property transfers depend simply on intention (or intention plus formality), all a transferee needs to do to satisfy the court in order to make out an interest in the property is to show that the transferor did indeed intend to transfer that property to him. The fact that the transfer was made pursuant to some unlawful scheme is no bar, even if the transferee needs to bring evidence of that scheme to prove the transferor’s

Illegality  253 intention. Illegal contracts might be approached in a similar light. To obtain a right to contractual performance, a claimant will need to satisfy the court that there was an offer, acceptance, consideration and an intent to create legal relations. Like the bank robber’s claims to lost earnings, we might still rule out cases where the contract is unlawful on its terms. But, such cases aside, if the claimant can satisfy the court of these elements, it would not then matter that the contract was entered into for some unlawful purpose. This is not the law, however.44 Nor does it seem to be Lord Sumption’s view:45 the [reliance] test may apply in different ways, depending on what it is that the law regards as illegal. In a tort case or a property case it is generally enough to identify the illegal act and demonstrate the dependence of the cause of action upon the facts making it illegal. In a contract case, the position is less straightforward. A contract may be affected by illegality because terms lawful in themselves are intended to be performed in an illegal way or for an illegal purpose not apparent from the contract itself. This does not mean that contracts vitiated by this circumstance can be enforced simply by putting the case without reference to the illegal purpose or proposed mode of performance. It is enough to give rise to the defence that the claimant must rely on a contract which is in fact illegal, whether that is apparent from the terms or not.

This looks question-begging. Whether illegality bars a claim depends, on Lord ­Sumption’s view, on the reliance rule. To know whether the claim is barred, we need to know what counts as reliance on the relevant illegality. Here, we are told that a contract claimant will be relying on his illegality wherever the contract is itself illegal: if the contract is illegal, any claim on that contract will be one which relies on that illegality. But the question of whether a contract is illegal cannot both answer and be answered by the reliance rule. Once we have come to the conclusion that contracts formed for illegal purposes cannot be enforced, we might say that any claim on such a contract is a claim which relies on the claimant’s illegality. But the reliance rule cannot get us to this conclusion in the first place. VII. RULES

There are therefore significant problems with both versions of the reliance rule, and it is no surprise to find the case law following Tinsley marked by uncertainty and inconsistency. If the reliance rule provides no greater certainty than a direct, transparent assessment of the reasons for and against recovery, it really has nothing going for it. In any event, it may be that the uncertainty resulting from the range of factors approach endorsed by the majority in Patel is overstated. To see why, consider again a case such as Gray. A claimant, injured as a result of the defendant’s negligence, undergoes a serious personality change. As a result, he commits a crime which it is clear he would not have committed had he not suffered the injury. He is convicted and imprisoned, and now seeks damages from 44 See, eg Alexander v Rayson [1936] 1 KB 169 (CA); Anglo Petroleum Ltd v TFB (Mortgages) Ltd [2007] EWCA Civ 456, [2007] BCC 407. 45 Patel (n 17) [235].

254  Charlie Webb the defendant to compensate him for his loss of liberty and earnings. Might he now succeed?46 Of course not. This is an easy case, and it is easy precisely because the reasons against recovery are so plainly overwhelming. An approach which asks the court to weigh up the arguments for and against allowing the claim hardly threatens this conclusion. Nor will a court now need to identify in each case the principle or policy upon which the claimant’s cause of action is grounded, then the principles and policies which support the criminal prohibition and sanction. It is not possible to reverse or undo any part of that sanction without undermining its policy – whatever that policy is – or, indeed, without undermining the decision to impose it. So Lord ­Hoffmann’s narrow rule survives. Similarly, in designating certain conduct criminal, the law makes the judgement that there are conclusive reasons against so acting. It follows from this that, save where statute provides otherwise, it will be unreasonable for a court to uphold contracts to perform criminal acts. In other circumstances, it seems likely that we will be able to formulate rules which provide general presumptions. Both sides believed this to be true for the question raised in Patel itself. Property is transferred, or money paid, for an unlawful purpose. For one reason or another, that purpose is not carried out and the transferor seeks its return. In such cases, the policy grounding the relevant prohibition – again, whatever that policy – will, so all members of the court appeared to agree, ordinarily be better served by undoing rather than upholding that transfer.47 On this view, the policy of the prohibition and the principle underlying the claimant’s case for restitution will, typically, align. Accordingly: a person who satisfies the ordinary requirements of a claim in unjust enrichment will not prima facie be debarred from recovering money paid or property transferred by reason of the fact that the consideration which has failed was an unlawful consideration.48

To repeat, we should see these rules not as exceptions to the range of factors approach, but as applications of that approach, for they are generalisations of situations in which the balance of factors does or does not justify the defence. In this way, the range of factors approach might be viewed as broadly akin to the way the courts establish duties of care in the tort of negligence. There, the courts have now accepted that there is no test which can determine when a duty of care will arise; the considerations which bear on the question of whether the law should recognise such a duty are too

46 cf Henderson v Dorset Healthcare University NHS Foundation Trust [2016] EWHC 3275 (QB), [2017] 1 WLR 2673. 47 And so, contrary to Virgo’s suggestion in ch 10 of this book, there is no mystery in how the majority’s approach got them to this conclusion on the facts, nothing surprising in their not seeking to expose the underlying policy of the prohibition of insider dealing. Indeed, the majority’s reasons for allowing Patel’s claim are, in substance, the very same as the minority’s. The major difference between them is that the majority’s approach does a better job of explaining that result than the minority’s, the minority seeing claims for restitution of benefits conferred for unlawful purposes as exceptions to the ordinary rule barring claims grounded in one’s illegality. What is the reason for this exception? If the law prohibits a certain sort of transaction, the ‘principle’ that transactions of that kind should not be given effect is not undermined – indeed, it is advanced – if that transaction is undone: Patel (n 17) [250] (Lord Sumption). The relevance of that sort of concern is plain under the majority’s approach; under a reliance framework, it looks ad hoc. 48 Patel (n 17) [116] (Lord Toulson). See also [146] (Lord Neuberger).

Illegality  255 diverse, and their application too variable, to be reducible to any workable formula. The general approach that has instead been adopted directs the court to find a duty of care only where it is ‘fair, just and reasonable’ to do so.49 A court looking to apply this ‘test’ has no option but to weigh up the reasons for and against recognising a duty of care and form its own judgement as to which are stronger. Here too, then, we have what is, in effect, a range of factors approach. But this does not mean that courts have to engage in this sort of balancing exercise every time they are faced with a claim in negligence. In many cases and in many contexts, it will be clear that a duty of care does or does not arise. This is not because some other approach applies instead, but because what the balance of reasons requires has already been settled.50 VIII. CHANGE The common law is not an uninhabited island on which judges are at liberty to plant whatever suits their personal tastes. It is a body of instincts and principles which, barring some radical change in the values of our society, is developed organically, building on what was there before. It has a greater inherent flexibility and capacity to develop independently of legislation than codified systems do. But there is a price to be paid for this advantage in terms of certainty and accessibility to those who are not professional lawyers. The equities of a particular case are important. But there are pragmatic limits to what law can achieve without becoming arbitrary, incoherent and unpredictable even to the best advised citizen, and without inviting unforeseen and undesirable collateral consequences.51

Whether this challenge stings the majority’s approach in Patel depends on how much that approach really changes things. The Law Commission’s view, as we have seen, was that the problems with the law of illegality lay, in the main, not in the decisions the courts were coming to, but in the way those decisions were presented. Its recommendation was that the courts be more transparent, that they show their working, identifying the considerations (policies) which guide their reasoning and justify their decisions. But a change in the way the law is presented – in the concepts to which the courts appeal, in the doctrinal apparatus through which legal rules and rulings are expressed – is not a change in the law, still less when the change is merely to make explicit the reasoning which has been guiding the law’s development and application all along.52 If this is all the majority’s approach amounts to, the criticism it has faced is overblown, and much of it is simply mistaken. Is this all it amounts to? The idea that the courts were already reaching the right results may be thought to be undermined by Patel’s own route to the Supreme Court. Patel’s claim was rejected at trial, but his appeal was successful. Whatever view one takes of the merits, someone must have 49 Caparo Industries Plc v Dickman [1990] 2 AC 605 (HL). 50 This is spelled out by Lord Reed in Robinson v Chief Constable of West Yorkshire [2018] UKSC 4, [2018] AC 736, [26]. 51 Patel (n 17) [226] (Lord Sumption). 52 Compare the House of Lords’ endorsement of unjust enrichment as the true basis for a body of claims that had previously been analysed and presented in different terms in Lipkin Gorman v Karpnale Ltd [1990] 2 AC 548 (HL).

256  Charlie Webb got it wrong. Nonetheless, there is nothing in the majority judgments to suggest that they consider the range of factors approach to be needed to lead the courts from error. At most, the existing law made it harder for courts to get to the right results, since they had to navigate their way around rules which, if applied without exception, would lead to arbitrary or unjust outcomes. Like the Law Commission, however, the majority appeared to think that this was something the courts had, by and large, been managing to do. This is one reason the majority were right to resist the minority’s attempt to paint the range of factors approach as essentially discretionary: the primary aim of the approach is not to free up the courts to decide differently. In any event, to the extent that there is a discretion here, it is no more than the sort of discretion one finds wherever the court must balance out diverse considerations and, as such, is no different in kind to the ‘discretion’ courts exercise when identifying novel duties of care or, indeed, when determining whether such duties have been breached. The better argument against the majority’s approach in Patel is not that it changes the law for the worse, still less that it effects a change which went beyond the limits of the court’s law-making powers, but that it will be destabilising. Though there is nothing in the new approach which requires the courts to decide any case differently, its open texture is more than enough to encourage litigants to think that they might. There is the risk, too, that courts see that approach as an invitation not just to do a better job of explaining themselves, but to reconsider the decisions they have been reaching, reopening questions long and well settled. Against this, if a case as simple as Bilta (UK) Ltd v Nazir made it all the way up to the Supreme Court before Patel, we might wonder how much worse things can get.53 In any case, what is the alternative? The minority’s proposed alternative was to give the reliance rule another go, insisting that the problems courts had encountered came not from the rule itself, but from their misunderstanding and misapplication of it. But the reliance rule carries only the illusion of certainty, the new and improved version offered by Lord Sumption no less question-begging than its predecessors, not least because it is no closer to identifying why, and hence when, illegality should suffice to deny a claim. The range of factors approach is not a cure-all. Its success, or not, will depend on how it is understood and applied in the cases to come. There is, as I have suggested, a way to understand that approach which both avoids many of the objections that have been levelled at it and is truer to the concerns which led the majority to endorse it. In any event, as illustrated as much by the minority judgments as by the majority, no better approach has yet presented itself. Perhaps one day it will. Until then, all that critics of the range of factors approach have are arguments made and rejected in Patel. Law’s principal function is to settle practical questions on which members of the community reasonably disagree. There is reasonable disagreement here. But the law has spoken, and we would do better to move on.



53 Bilta

(n 15).

14 Agency PETER WATTS

An agent cannot be said to have authority solely on the basis that he has held himself out as having it. It is, however, perfectly possible … that subordinates who would not have authority to approve a transaction are nevertheless held out by those authorities as the persons who are to communicate to outsiders the fact that it has been approved by those who are authorised to approve it … – Kelly v Fraser1

I. INTRODUCTION

I

n his seven years as a Justice of the Supreme Court, Lord Sumption had on a number of occasions to address points of law arising out of the deployment in modern life of intermediaries. The word ‘intermediary’ is intended here to capture more than that of ‘agent’, the core of the latter expression denoting a person whose engagement is calculated, and usually intended, to result in an alteration in the engager’s legal position with one or more third parties. This essay focuses on only three cases, all of them agency cases. One should not omit to mention, however, three other significant cases: first, Plevin v Paragon Personal Finance Ltd contains an influential, albeit brief, discussion of the core concept of ‘the agent’, triggered by the phrase ‘on behalf of’ in a statutory provision;2 second, Bilta (UK) Ltd v Nazir (No 2) is now the leading modern case on the attribution to corporations of the acts and states of knowledge of intermediaries.3 It is discussed elsewhere in this book;4 and third, and perhaps auguring the most, is Woodland v Swimming Teachers Association.5



1 Kelly

v Fraser [2012] UKPC 25 [15], [2013] 1 AC 450 [15] (Lord Sumption). v Paragon Personal Finance Ltd [2014] UKSC 61, [2014] 1 WLR 4222. 3 Bilta (UK) Ltd v Nazir (No2) [2015] UKSC 23, [2016] AC 1. 4 See ch 15 of this book. 5 Woodland v Swimming Teachers Association [2013] UKSC 66, [2014] AC 537. 2 Plevin

258  Peter Watts Lord Sumption’s judgment in Woodland is significant for two, contrasting, reasons. First, it contains the following dictum:6 ‘The boundaries of vicarious liability have been expanded by recent decisions … But it has never extended to the negligence of those who are truly independent contractors.’ Of the five or so cases on vicarious liability that reached the Supreme Court during Lord Sumption’s term of office, Woodland is the only one in which he sat. This short dictum signals that Lord Sumption saw the employment/independent contractor dichotomy as remaining the key to vicarious liability. Subsequent cases have put pressure on this restraint.7 At least two vicarious-liability appeals are pending before the Supreme Court, and it is to be hoped that Lord Sumption’s dictum retains its resonance following them. Secondly, the heart of Lord Sumption’s judgment is an exposition of the circumstances in which it might be concluded that a party, usually an organisation, has warranted the safety of relevant individuals in its carrying out of prescribed tasks, whether or not it engages employees or independent contractors, or anyone else for that matter, to perform those tasks. The relevant undertaking might be voluntary or imposed by statute. This line of thought, although not novel, has been less invoked in the UK than in some other jurisdictions. It will need careful development, but, one suggests, it holds more promise than knocking down the walls of vicarious liability. II.  COMMUNICATING AGENTS AND SELF-AUTHORISING AGENTS

The strongest, some might say only, basis for liability in contract is that the defendant has undertaken to the claimant that something will be done or not done. Voluntary undertaking also provides the strongest guide to the compensation which should be paid for breach of contract.8 The scope of these undertakings is, however, judged objectively. That course is not meant to undermine the voluntary nature of contractual liability but to reflect that, in the abstract at least, it is mutually beneficial to both parties that their respective undertakings be so judged. Parties in their dealings with counterparties frequently make misjudgements about what is in their present interests and mispredictions about how things will turn out. Such accidents do not usually vitiate the legal effect of their undertakings, notwithstanding that their counterparties may be enriched by the deal. This thinking flows through to the circumstances in which a party can be liable in contract for promises made on that party’s behalf by an intermediary. One should be liable only if one actually consented to the undertaking given by the intermediary on one’s behalf or reasonably appeared to be so consenting.9 A consent-based principle 6 ibid [3]. 7 See, in particular, Barclays Bank Plc v Various Claimants [2018] EWCA Civ 1670, noted by P Watts, ‘The Travails of Vicarious Liability’ (2019) 135 LQR 7. 8 See Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48, [2009] AC 61 [11]– [12] (Lord Hoffmann). cf A Burrows, ‘Lord Hoffmann and Remoteness in Contract’ in PS Davies and J Pila (eds), The Jurisprudence of Lord Hoffmann (Oxford, Hart Publishing, 2015); B Coote, ‘Contract Damages, Ruxley, and the Performance Interest’ in R Bigwood (ed), Contract as Assumption (Oxford, Hart Publishing, 2010). 9 See, eg T Krebs, ‘Agency Law for Muggles: Why There is No Magic in Agency’ in A Burrows and E Peel (eds), Contract Formation and Parties (Oxford, Oxford University Press, 2010).

Agency  259 requires that the principal have at least manifested a willingness to be bound, and that absent that manifestation the principal cannot be liable for the unauthorised undertakings of an intermediary. This idea is often encapsulated in the saying that a principal cannot be bound to contract by a self-authorising agent. Self-authorising agents may well be taken to be giving their own undertakings as to the mandate their would-be principal has given them, but that creates a promissory liability only in them, not in their principals. The law accepts that a principal’s manifestation of assent can be circumstantial. If one goes into premises owned by the principal and makes a contract there with a person who reasonably appears to have authority to make a contract of a usual type and scope, that may be enough.10 But it can be difficult to demonstrate a manifestation of assent away from the principal’s business premises. The advent of remote communication, first by telephone, then through telex, facsimile, email and online click-purchasing, has increased the proportion of trading that is effected at a distance. These developments have, in turn, had the potential to increase the obstacles to proving that a principal has manifested approval to a transaction. This is not just an issue for agency law. Who, for instance, bears the risk when a person who lacks mental capacity makes an online order, or perhaps multiple online orders?11 At the same time, just as the law tends to assume that a trader has control of its business premises, so too the law might assume that a trader has control of its website content and systems, and that therefore some electronic signals can be a sufficient manifestation to bind the trader.12 Contracts with variable terms are likely to cause more problems than those that are structured on a take-it-or-leave-it basis. The fact is, even with one-off contracts, we regularly deal with agents and trust to little else than what they themselves tell us as to their authority or as to what their principal has agreed. In many such circumstances, it will be reasonable to expect that the agent is honest and accurate. But should that be enough to entitle us to enforce a contract against a principal, with whom we have never communicated, where the agent, while having some connection to the principal, has exceeded his or her authority, or has inaccurately reported the principal’s decisions? An affirmative answer to the question just posed was suggested by Steyn LJ in First Energy (UK) Ltd v Hungarian International Bank Ltd,13 in a dictum that may have had no pretension to longevity but has become much cited. He stated: ‘a theme that runs through our law of contract is that the reasonable expectations of honest men must be protected’.14 The judge went on to say that counsel’s inferences as to the legal sterility of the self-authorising agent derived from the leading case, Armagas Ltd v Mundogas SA,15 would ‘frustrate the reasonable expectations of the parties’. Against

10 See, eg Mahony v East Holyford Mining Co (1875) LR 7 HL 869 (HL) 898 (Lord Hatherley). 11 For a brief discussion, see P Watts, ‘Contracts Made by Agents on Behalf of Principals with Latent Mental Incapacity’ (2015) 74 CLJ 140. 12 See, eg Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84. 13 First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] BCC 533 (CA). 14 ibid 196. 15 Armagas Ltd v Mundogas SA [1986] AC 717 (CA and HL).

260  Peter Watts those dicta one can place, however, the equally well-known dictum of Diplock LJ in Lavarack v Woods of Colchester Ltd:16 The law is concerned with legal obligations only and the law of contract only with legal obligations created by mutual agreement between contractors – not with the expectations, however reasonable, of one contractor that the other will do something that he has assumed no obligation to do.

Lavarack concerned face-to-face contracting, not contracting through agents, but its reasoning is not inconsistent with Diplock LJ’s classic analysis of intermediated contracting in Freeman & Lockyer, nor with his concurrence in Lord Brandon’s judgment in British Bank of the Middle East v Sun Life Assurance Co of Canada,17 another case where the actions of a self-authorising agent were held ineffective. All this is by way of a long introduction to Lord Sumption’s judgment for the Privy Council in Kelly v Fraser.18 Privy Council decisions tend to have an unheralded arrival, but if, at the time, anyone was hoping for a reaffirmation of Diplock LJ’s dictum in Lavarack, they would have been disappointed. The facts were quite straightforward. Less routine was the fact that the effective claimant, Mr Fraser, was a relative insider of the promisor. He was also an experienced commercial person, albeit contracting for himself. He had been the president and chief executive of a Jamaican insurance company that had a pension scheme of which the defendants were the pension trustees. Shortly after his appointment, he spoke to the vice-president in charge of the company’s employee-benefits division, Mr Masters, about transferring his pension entitlements from his former employer to the company’s scheme. The rules of the scheme required any such transfers to be approved by the trustees, who could not delegate the power. No such approval was ever sought or obtained. However, Mr Masters wrote to Mr Fraser informing him that the transfer had taken place. The letter included a sentence saying: ‘our commitment to you and other pension plan clients is to maximise the returns on the contributions received while preserving the invested capital’. Mr Fraser’s capital from his past scheme was paid over to the trustees, but without the trustees’ awareness. For the next two years, Mr Fraser received periodical statements from the company (but not the trustees) showing his entitlements. At that stage, however, the company was the subject of a merger with the company for which Mr Fraser had formerly worked and it was resolved to wind up the pension scheme. The trustees wished to disown any entitlement in Mr Fraser to participate in the resulting surpluses based on his previous employment. Mr Fraser asserted that the trustees were estopped from denying his entitlement to participate. This was in essence a contract claim. The judge at first instance, Mangatal J, held that the company had usual authority, as agent of the trustees, to administer the pension scheme and to communicate that the trustees had accepted Mr Fraser’s transfer to the scheme. She held, however, that the claimant had not shown any detriment that would sustain an estoppel. The latter finding was reversed on appeal and these holdings were then upheld by the

16 Lavarack

v Woods of Colchester Ltd [1967] 1 QB 278 (CA) 294. Bank of the Middle East v Sun Life Assurance Co of Canada [1983] 2 Lloyd’s Rep 9 (HL). v Fraser (n 1).

17 British 18 Kelly

Agency  261 Privy Council. Lord Sumption added to Mangatal J’s findings by stating: ‘pension fund trustees hardly ever communicate personally with contributories and beneficiaries. They make decisions which are then communicated and applied by professional managers, often in the pensions department of the sponsoring employer.’19 On the one hand, Lord Sumption affirmed Armagas v Mundogas and the general principle against self-authorisation. His Lordship stated:20 ‘Lord Keith’s speech remains the classic statement of the relevant legal principles. An agent cannot be said to have authority solely on the basis that he has held himself out as having it.’ On the other hand, earlier in his judgment, one could be forgiven for thinking that Lord Sumption was deprecating Armagas v Mundogas, when he stated:21 The question [ie whether the trustees were bound] could hardly have arisen in this form but for certain observations of Goff LJ in the Court of Appeal in Armagas Ltd v Mundogas SA (The Ocean Frost) … and of Lord Keith of Kinkel delivering the leading speech in the House of Lords in the same case. The Ocean Frost was a decision on complex and extraordinary facts.

It is certainly true that, reported together as they are, the combined length of the Court of Appeal judgments and Lord Keith’s speech in the House in Armagas v Mundogas make formidable reading. One reason for this was that the judge at first instance, Staughton J, had made findings of corruption against an executive of the would-be principal, Mundogas, which the Court of Appeal felt compelled to examine at great length (leading the Court ultimately to exonerate the executive). Another complexity was that, unknown to the senior personnel of Armagas, a more junior member of staff had bribed an agent of Mundogas, which gave Mundogas a second ground (additional to the lack-of-authority ground) for attacking the putative contract. The tribunals were also obliged to consider a pleading in deceit used by Armagas as a fallback against failure of its contract action. But the essential question in Armagas was, with respect, not that unusual or extraordinary. Nor was it treated by the judges who decided it as engaging, at least on the issue of contractual liability, anything other than routine principle. A middle-ranking agent for the putative principal, Mundogas, whose usual authority did not extend to making the one-off transaction at issue, pretended to go away to telephone his company’s senior management and then returned with the lie that he had obtained authorisation for the deal. Did the contract bind? Held, ‘no’. An agent without apparent authority could not construct apparent authority by pretending that he had obtained approval from on high. Would a reasonable person have believed the agent? Very possibly, ‘yes’. Should the law view such belief, reasonable as it might be, as involving anything other than voluntary risk-taking? The tribunals in Armagas did not directly answer this question, but a positive answer can be presumed.22 What was underemphasised in Armagas is that, for some agents, it is an integral part of their authority, both actual and apparent, to communicate the decisions of other 19 ibid [16]. 20 ibid [15]. 21 ibid [12]. 22 See the recent affirmation of Armagas v Mundogas in East Asia Co Lt v PT Satria Tirtatama Energindo [2019] UKPC 30 [61] (Lord Kitchin).

262  Peter Watts agents. Kelly v Fraser was a good case for bringing this out, since if, as appears, the trustees had a policy of not dealing directly with their counterparties, how else were employees to obtain confirmation of their pension rights? Lord Sumption’s judgment did not elaborate on what makes up an estoppel in a case such as this, but one can infer that, on the facts, the claimant, as chief executive, would have inquired as to who normally dealt with the confirmation of pension-fund status and learned that it was the relevant vice-president of the company. There may have been an element too of estoppel by standing by on the part of the trustees.23 Such an estoppel can even cover unusual dealings when it can be shown that the principal was aware of the agent’s errant conduct but did not intervene. In Armagas, not only was it not part of the role of the relevant agents to report the decisions of others, but the transaction itself was not a standard one.24 Less helpful, with respect, was Lord Sumption’s apparent endorsement of the following remark of Browne-Wilkinson LJ’s in The Raffaella:25 ‘why should a representation made by A as to his authority not be capable of being relied on as one of the acts of holding out?’ It is difficult to see any useful function for self-authorisation, even for what we might call ‘communicating agents’. Such agents either have usual authority to communicate the decisions of others or they do not, and self-authorisation should make no difference either way. Lord Browne-Wilkinson’s judgment in The Raffaella in fact contains some important and enduring insights about the concept of apparent authority, but this is not one of them. Lord Sumption’s discussion of the position of communicating agents in Kelly v Fraser has led to one interesting development, which it is not at all clear Lord Sumption would have anticipated or endorsed. Following Kelly v Fraser, Professor Worthington suggested that the estoppel that arises out of a holding out of someone as having authority only to communicate the decisions of others might warrant a remedy less extensive than that arising out of a holding out of an agent as having authority actually to enter into a contract. The suggestion is that compensation for the actions of communicating agents should be confined to recovery of reliance losses.26 The standard approach of the law of agency of giving full effect to the contract the third party had been encouraged to believe it had procured, including the receipt of expectation damages upon a breach, would, on this view, be confined to cases of agents who purported to have authority to make a contract on the principal’s behalf. Professor Worthington’s argument has recently been adopted in the Chancery Division of the High Court in Stavrinides v Bank of Cyprus Public Co Ltd.27 Mr  Kimbell QC, sitting as a Deputy Judge of the High Court, attached the label ‘conduit authority’ to the authority of a typical communicating agent and stated:28 It is important to distinguish between representations of transactional authority and conduit authority because the remedy may be very different (assuming reliance can be 23 For discussion, see P Watts (ed), Bowstead & Reynolds on Agency, 21st edn (London, Sweet & Maxwell, 2018) paras 2.103 and 2.105. 24 Kelly v Fraser (n 1) [12]. 25 Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd (The Raffaella) [1985] 2 Lloyd’s Rep 36 (CA) 43 (Kerr LJ). 26 S Worthington, ‘Corporate Attribution and Agency: Back to Basics’ (2017) 133 LQR 118, 139–40. 27 Stavrinides v Bank of Cyprus Public Co Ltd [2019] EWHC 1328 (Ch). 28 ibid [100] (John Kimbell QC sitting as a Deputy Judge of the High Court).

Agency  263 proved). A person who relies on a representation of a transactional authority will prima facie be able to enforce the contract against the principal or claim expectation losses for breach. A person who relies on a representation of conduit authority will generally be limited to claiming reliance losses only.

This is sensitive territory. At trial in Kelly v Fraser, the claimant, having based himself on estoppel and not contract, fell at the fence of detrimental reliance. In the Privy Council, in an analysis that has featured extensively in the books Spencer Bower: Reliance-Based Estoppel29 and Estoppel by Conduct and Election,30 Lord Sumption had little doubt that there had been detrimental reliance. But his Lordship appears to have considered that the appropriate remedy once reliance was found was one giving effect to the relevant representation of entitlement; that is to say, an expectation remedy. He cited with apparent approval the well-known authority, Avon County Council v Howlett,31 which holds that estoppel by representation operates as a rule of evidence precluding any denial of the truth of the representation. Lord Sumption proceeded to note that:32 ‘the ordinary rule is that the detriment is not the measure of the representee’s relief, and need not be commensurate with the loss that he would suffer if the representor did resile’. Avon County Council v Howlett is consistent with a long line of authority, but the latest edition of Spencer Bower takes the view that there should be remedial flexibility in all types of estoppel.33 So, Spencer Bower rejects the argument that a rigid line should be drawn between representations as to present fact, where expectation remedies have been the norm, and estoppel arising out of non-contractual promises of future action, where it is clear that there is remedial flexibility and perhaps a presumption that favours only reliance-based remedies.34 Handley is more cautious, accepting that the prima facie position with estoppel by representation is that the representor is estopped from resiling from the facts as represented.35 That text accepts the principle recognised in Avon County Council, but doubts whether the principle should apply where all that is at issue is an overpayment of money, the facts of Avon County Council itself. Within the law of agency, a representation that the principal has agreed to be bound to a contract, or to a type of contract with which the present conforms, has 29 P Feltham et al, Spencer Bower: Reliance-Based Estoppel, 4th edn (London, Bloomsbury Professional, 2017) para 1.102. 30 KR Handley, Estoppel by Conduct and Election, 2nd edn (London, Sweet & Maxwell, 2016). See also Kaupthing Singer & Friedlander Ltd (in administration) v UBS AG [2014] EWHC 2450 (Comm) [107]–[109] (Andrew Smith J). 31 Avon County Council v Howlett [1983] 1 WLR 605 (CA). 32 Kelly v Fraser (n 1) [17]. 33 Spencer Bower (n 29) paras 1.42–1.59 and 1.108. 34 As to the remedies for promissory and proprietary estoppel, see B McFarlane and P Sales, ‘Promises, Detriment, and Liability: Lessons from Proprietary Estoppel’ (2015) 131 LQR 610, which takes the view that promissory cases are better seen as not based on estoppel at all. Subsequently, see Davies v Davies [2016] EWCA Civ 463, [2016] 2 P&CR 10; Wilson Parking Ltd v Fanshawe 136 Ltd [2014] NZCA 407, [2014] 3 NZLR 567; Sidhu v Van Dyke [2014] HCA 19, (2014) 251 CLR 505. 35 Estoppel (n 30) paras 1.009–1.010 and 5.029. See also McFarlane and Sales (n 34) 617. For a vigorous defence of the traditional all-or-nothing approach to estoppel by representation, see J Hudson, ‘The True Purpose of Estoppel by Representation’ (2015) 32 Journal of Contract Law 275; J Hudson, ‘The Price of Coherence in Estoppels’ (2017) 39 Sydney Law Review 1.

264  Peter Watts generally been treated, where effective, as estopping the principal from denying the existence of the contract, in all its glory.36 It seems unlikely that there would be much appetite for change on this, since remedial flexibility would come at the expense of commercial certainty. It is not clear that the position should be any different where the agent is purporting only to be communicating that the principal has itself made the decision to enter into the relevant contract. There is still a representation of the existence of a binding undertaking.37 In this regard, it is probable that the types of communicating agent whose actions are likely to estop a principal will prove to be quite narrow. The fact, for instance, that a courier-driver has delivered contractual documents on numerous occasions is unlikely to permit the driver to bind the principal by falsifying a document and putting it in a courier envelope.38 In all events, Lord Sumption’s judgment in Kelly v Fraser is an unsafe foundation for, and is perhaps even hostile to, remedial flexibility in this area. III.  TERMINATION OF AUTHORITY

Angove’s Pty Ltd v Bailey,39 a case noted here on the subject of termination of authority, is more important for its dicta than its holdings. Its actual result turned on the construction of an agency contract between the appellant Australian wine manufacturer and its UK introducing agent, the respondent. The respondent went into administration and the appellant terminated its agency. The Supreme Court, reversing the Court of Appeal, held that there was no implied term that permitted the respondent to continue to collect in the proceeds of wine sales after its appointment had been terminated. Having reached that conclusion, the Court was not required to decide what the position would have been had the respondent had a contractual right to collect in the proceeds of sale. But since this issue had been fully argued, Lord Sumption, who gave the only judgment, did address the point. He confirmed the long-standing precept that a principal has at any time the power to withdraw authority in an agent to act for it, even if doing so puts the principal in breach of contract. In such cases, the agent may have a claim for damages but cannot just ignore the termination and continue to act. This power stems from the personal and confidential nature of the agency relationship, which also imports a duty of loyalty.40 It could also be said that the right to control who can speak or act for one is part of any person’s autonomy. We can label this the peremptory-termination principle. Bowstead & Reynolds on Agency has long taken the view that the only exceptions to the peremptory-termination principle are cases where there is no relationship of confidence between the parties, and the powers conferred are purely instrumental, designed solely to further the position of the grantee of authority. One example is 36 See Bowstead & Reynolds (n 23) paras 8.024, 8.026 and 8.028. 37 cf Worthington (n 26) 140, who argues that the representation in such cases is a narrower one. 38 See Spooner v Browning [1898] 1 QB 528 (CA), but note the dissenting judgment of Collins LJ. 39 Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179. For a fuller treatment, see P Watts, ‘The Insolvency of Agents’ (2017) 133 LQR 11. 40 Angove’s (n 39) [6] (Lord Sumption).

Agency  265 the mortgagee that takes a power of attorney from the mortgagor solely to be able to perfect the realisation of the securities should that become necessary. Another is the auctioneer that insists that each registering bidder gives it an irrevocable power to complete a contract of purchase should the bidder be successful, lest the bidder get cold feet.41 There, the auctioneer will usually be a true agent for the vendor, but in relation to the bidder merely an enforcer. In Angove’s, Lord Sumption thought that to confine the exceptions to the peremptory-termination principle to non-fiduciary agencies was too restrictive, expressly criticising the approach in Bowstead & Reynolds.42 However, his Lordship did not identify what alternative principle or principles might be more satisfactory. He did accept that authority could not be made irrevocable merely to enable an agent to earn future commission, but he was not sure that authority could not be made irrevocable in order to secure to an agent payment of outstanding commissions. One should not deny that the analysis in Bowstead & Reynolds could be improved, but it is humbly submitted that the stance there taken is sound in its essentials. This does not mean that agents will be left to the mercy of their principals for payment of their commissions. There is nothing to stop an agency contract giving an agent a security interest in property owned by the principal, including over assets that the agent has been employed to sell or buy. What cannot be done is to give an agent a power to continue to act as agent in the face of a prohibition by the principal. Angove’s is also a very interesting case on the circumstances in which an agent is a trustee of monies sourced from the principal or from the principal’s business. This aspect of the case is addressed elsewhere in this book.43 IV.  UNDISCLOSED PRINCIPALS AND NEGLIGENT MISSTATEMENT

It is not uncommon for cases to reach appellate courts on narrow premises, leaving the reader with an incomplete understanding of the facts or the issues of law implicated by the facts, or both. This may be because the proceedings have gone up on a strike out,44 or because of the way the parties have chosen to plead or argue the case. Playboy Club London Ltd v Banca Nazionale del Lavoro SpA is a case in point.45 In the following account, the seemingly simple, and striking, facts available in the Supreme Court judgments have been supplemented with material from the judgments below, and from subsequent reported litigation between the parties. The undisclosedprincipals doctrine features in the Supreme Court, but a fuller study of the facts than was necessary in that Court reveals that other issues of agency law were in play. The claimant Club was suing the defendant Bank for producing a negligently written reference as to the financial worth of one of the Bank’s customers, Mr Barakat. 41 See, eg Chaney v Maclow [1929] 1 Ch 461 (CA). 42 Angove’s (n 39) [9]. 43 See chs 11 and 12. 44 A good example is one of Mr Sumption QC’s triumphs, Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39, [2009] 1 AC 1391. 45 Playboy Club London Ltd v Banca Nazionale del Lavoro SpA [2018] UKSC 43, [2018] 1 WLR 4041. This case is also discussed in ch 7 of this book.

266  Peter Watts The reference was not requested by the Club itself, but by an associated company called Burlington Street Services Ltd (Burlington), which passed it on to the Club. The evidence was that the Club usually used associated companies to obtain credit references about parties who wished to commence gambling at the Club. The judge at first instance, Judge Mackie QC, found that the Club did not seek references directly, in order ‘to preserve the confidentiality for customers preferring to keep their gaming activities private’.46 Burlington had no employees or business of its own.47 Burlington’s request was couched as follows:48 ‘We request your opinion as to the means and standing of Hassan Barakat … and his/her trustworthiness to meet a financial commitment to the extent of £1,600,000 at any one time.’ The request was addressed to the manager of the Reggio Emilia branch of the Bank in Italy, but marked for the attention of a Ms Guidetti. Ms Guidetti’s business card, which described her as working in ‘Sviluppo Business’ for the Bank (‘sviluppo’ being an Italian word for ‘development’), had been handed over to the Club in London by Mr Barakat. The reply provided by Ms Guidetti was addressed to Burlington, and stated that Mr Barakat was indeed ‘trustworthy up to the extent of £1.6 million … in any one week. This information is given in strict confidential [sic]’.49 On the face of things, this was an astonishingly negligent reference to have given, because at no time did Mr Barakat, a resident of Lebanon, have any money in the relevant account, and indeed the formalities for opening the account had not been completed at the time the reference was supplied in October 2010. No cheque book was ever issued on the account, but Mr Barakat created his own cheques, which he commenced to use at the Club two days after the reference was supplied. Four days later, the Club was left some £803,000 the poorer, with the dishonest Mr Barakat having promptly departed from the UK with the cheques unmet. So, what was Ms Guidetti thinking when furnishing such a generous reference? She was not called as a witness, but there was a strong suspicion that she was dishonest, with some personal connection to Mr Barakat. The Bank admitted that she had since been dismissed for her part in an unrelated matter but involving conduct ‘similar in kind’.50 Late in the trial, further evidence of her dishonesty emerged, which was reinforced the following year by the claimant’s discovery that Ms Guidetti had participated in an unrelated fraud on a different casino. This evidence led the Club to bring fresh proceedings in deceit against the Bank. These proceedings are ongoing, after an appeal to the Court of Appeal on the issue whether the new claim was caught by the doctrine of res judicata resulted in the Court sanctioning the case’s proceeding to trial.51 This new claim is addressed below. As to the cause of action in negligent misstatement, the Club succeeded at first instance, but that decision was reversed in the Court of Appeal, and that reversal was, in turn, upheld in the Supreme Court. Given that there could be no doubt as to the 46 Playboy Club London Ltd v Banca Nazionale del Lavoro SpA [2014] EWHC 2613 (QB) [8]. 47 ibid [8]. 48 ibid [6]. 49 ibid [10]. 50 ibid [26]. 51 Playboy Club London Ltd v Banca Nazionale Del Lavoro SpA [2018] EWCA Civ 2025; Playboy Club London Ltd v Banca Nazionale Del Lavoro SpA [2019] EWHC 303 (Comm).

Agency  267 negligence of the relevant statement, the focus of the case was on which parties were entitled to rely on the statement.52 The lead judgment was given by Lord Sumption. He affirmed that the basis of liability in negligent misstatement is an assumption of responsibility by the speaker which creates a duty of care owed to ‘an identifiable (although not necessarily identified) person or group of persons, and not to the world at large or to a wholly indeterminate group’.53 In this, the judge added his voice to those who have seen Lord Devlin’s analysis in Hedley Byrne & Co Ltd v Heller & Partners Ltd,54 as the most convincing of the five, somewhat individual, judgments in that leading case. Lord Sumption gave a taut ruling in the following terms:55 [Counsel for the claimant] also accepted that in the ordinary course where a statement is relied upon by B to whom A has passed it on, the representor owes no duty to B unless he knew that the statement was likely to be communicated to B. That concession was plainly justified. I would go further and say that the representor must not only know that the statement is likely to be communicated to and relied upon by B. It must also be part of the statement’s known purpose that it should be communicated and relied upon by B, if the representor is to be taken to assume responsibility to B.

It is obvious enough that Lord Sumption was right to add his second limb to counsel’s concession. So, it is both foreseeable and reasonable that the buyer of shares in a company might rely on the company’s audited accounts, but it does not follow that the buyer ought to have a cause of action against the auditor that makes a bad job of its task. That is the message of Caparo Industries Plc v Dickman.56 At the same time, one needs to treat ‘B’ in Lord Sumption’s formulation as including members of an identifiable group in order to fit his other passage quoted above. In the instant case, there was no identifiable group of persons, just Burlington. While, as things have subsequently turned out, Ms Guidetti probably knew that the reference would be passed on to the Club, or some other gambling house, the claimant accepted that the case fell to be decided on the basis that the Bank did not know that the reference was going to be relied upon by anyone other than Burlington.57 On the other hand, it was accepted by the Bank that it had made no inquiries about the business of Burlington or the purpose for which the reference was being sought. Faced with these hurdles, counsel for the Club, Mr Salzedo QC, turned to the law of agency and argued that the Club was the undisclosed principal of Burlington. On that basis, he submitted that the Bank owed the Club the same duty of care as it owed Burlington. If consideration, however modest, had been paid for the reference, the Club, counsel argued, would have been entitled to intervene on the resulting 52 It may have been arguable that it was the deceit of Mr Barakat, not the negligence of the Bank, that was the cause of the Club’s loss. The Club had asked the Bank about Mr Barakat’s trustworthiness, but the Bank had no information to supply on that question. An argument along these lines was made in the Court of Appeal, but was rejected: see Playboy Club London Ltd v Banca Nazionale Del Lavoro SpA [2016] EWCA Civ 457, [2016] 1 WLR 3169 [28] (Longmore LJ). 53 Playboy (n 45) [7]. 54 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL). 55 Playboy (n 45) [11]. 56 Caparo Industries Plc v Dickman [1990] 2 AC 605 (HL). 57 Playboy (n 45) [11] (Lord Sumption).

268  Peter Watts contract.58 Liability for negligent misstatement is akin to contract and the same result should follow. Both Lord Sumption and Lord Mance called this an ingenious argument, which can be taken as a concession to its having some traction. But it was not permitted to run. Lord Sumption raised a number of objections to it. First, he observed that the ability of an unknown party to intervene on a contract using the law of agency is ‘an anomalous legacy of eighteenth and nineteenth century jurisprudence, which survived in the modern law on account of its antiquity rather than its coherence’.59 Secondly, while liability for negligent misstatement is often said to be ‘akin to contract’, that does not mean it actually is contractual. The phrase serves as ‘an allegory of proximity’, and ‘it does not follow from the fact that a non-contractual relationship between two parties is as proximate as a contractual relationship, that it is legally the same as a contractual relationship or involves all of the same legal incidents’.60 The concept of the undisclosed principal does not turn on proximity: ‘the whole point about the law relating to undisclosed principals is that a person may be brought into contractual relations with some one with whom he has no factual relationship at all’.61 ‘Such a relationship is by definition not proximate. Nor is it in any relevant sense voluntary or consensual so as to give rise to an assumption of responsibility.’62 Thirdly, to import the undisclosed-principals doctrine into tort would be to allow the doctrine to work in a one-sided way, whereas in contract it gives rise to mutual rights and obligations.63 This reasoning of Lord Sumption has attracted some academic criticism.64 It is suggested that there are indeed more convincing reasons for rejecting Mr Salzedo’s argument. First, it is arguable that courts have been too willing to find an assumption of responsibility in contexts such as that in Playboy Club. There are few clearer signals of a willingness to undertake responsibility than the taking of payment for doing so. In Hedley Byrne, the Law Lords did not think the absence of consideration there was fatal to the referee’s being prima facie liable for furnishing a negligent credit reference, although an express disclaimer of liability was. Nonetheless, there remains great force in Tony Weir’s contemporary criticism of that conclusion:65 They [the plaintiff] made bad business deals, having taken only a free opinion before hazarding their wealth in the hope of profit, no part of which, had it eventuated, would they have transferred to the honest person whom they now seek to saddle with their loss.

It is not an answer, it is suggested, to Weir’s point that banks, in giving references, might draw benefit from keeping their customers happy. Such incidental benefits do not by themselves provide a reason for undertaking a legal responsibility to a stranger. Secondly, the undisclosed-principals doctrine is not only very old and anomalous, but its boundaries have yet to be worked out. It is likely that the doctrine is not as 58 ibid [26] (Lord Mance). 59 ibid [12]. 60 ibid [13]. 61 ibid [14]. 62 ibid [14]. 63 ibid [15]. 64 See J Grower and P Sherman, ‘Equivalent to Contract? Confronting the Nature of the Duty Arising under Hedley Byrne v Heller’ (2019) 135 LQR 177. See also ch 7 of this book. 65 JA Weir, ‘Liability for Syntax’ (1963) 21 CLJ 216, 218.

Agency  269 far-reaching, even in contract, as Mr Salzedo’s argument assumes. In particular, while the doctrine can spring a surprise on a third party as to the existence of a counterparty, it is strongly arguable that the doctrine normally applies only where it makes little difference to the scope and weight of the obligations of the promisor who is being sued on the contract. That is why the doctrine can be used by someone with whom the promisor had no factual connection at all. Lord Sumption, it is suggested, may have overstated the involuntary nature of the doctrine. It is true that in the leading modern case, Siu Yin Kwan v Eastern Insurance Co Ltd,66 Lord Lloyd of Berwick, himself following Diplock LJ in Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd,67 referred to the law’s ‘beneficial assumption’ that an undisclosed principal can intervene on ‘an ordinary commercial contract’. These dicta are reflected in the treatment to be found in the current edition of Bowstead & Reynolds.68 Lord Lloyd’s dicta have not, however, really been tested. Take Siu Yin itself. In this case, at issue was a claim under a contract of insurance in respect of injuries suffered by some crew members of a ship. The named insured was only the shipping agent, which neither owned the vessel nor employed the crew. But the terms of the policy incontrovertibly applied only to the very vessel and its crew, whose exact numbers and total annual labour cost were accurately filled out in the policy. Lord Lloyd placed emphasis too on the fact that the managing director of the insurer had known the managing director of the agent for many years, and the former actually signed for the insurer knowing that the agent was only an agent, and certainly did not own the vessel. In all but one respect, therefore, the relevant principal was disclosed even if unnamed, rather than undisclosed. The insurer knew exactly what it was letting itself in for. The only thing the insurer was found not to be certain of was whether or not the agent was technically the crew’s employer. It was not, in fact, the employer, and it would have been unusual for it to have been so. In short, there was no question of the insurer taking on an unknown risk in respect of an unknown insured. That could not be said of the facts in Playboy Club, even if the Bank’s exposure as referee had a weekly upper limit. Against the foregoing, one should note that in Siu Yin Lord Lloyd also concluded that the mere fact that a contract was expressed to be non-assignable did not preclude the intervention of an undisclosed principal.69 But it is reasonably clear from the insurance examples that Lord Lloyd discussed that he also perceived that sometimes, perhaps often, the correct conclusion on the facts will be that assignability and the undisclosed principals doctrine will stand and fall together. In other words, Lord Lloyd was far from saying that the reasons that a contract has been made nonassignable can have no bearing on whether an undisclosed principal can intervene. Returning to Playboy Club itself, both Lord Sumption and Lord Mance, who gave a concurring judgment, expressed some regret at where their reasoning had led them.70 For Lord Sumption, this appears to have rested on the fact that Ms Guidetti’s



66 Siu

Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 (PC) 208 and 209. Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545 (CA). 68 Bowstead & Reynolds (n 23) para 8.079. 69 Siu Yin (n 66) 210. 70 Playboy (n 45) [16] and [18], respectively. 67 Teheran-Europe

270  Peter Watts conduct was on any basis grossly negligent. Lord Mance’s sympathies for the Club appear to have been more broadly based. Even if one did not share Tony Weir’s reservations about those who seek free advice and then sue on it, there is more than one reason for arguing that their Lordships’ qualms were misplaced. First, the Club deliberately hid behind a curtain in obtaining the credit reference. Judge Mackie spoke euphemistically when he said that the Club hid its existence in order to preserve its customers’ ‘confidentiality’. The hidden information was directly relevant to the undertaking that was being invited from the Bank. The doctrine of caveat emptor may be an admirable part of the law of contract, but it does not follow that one should feel sympathy for those who exploit it. So, putting aside for the moment the subsequent focus on Ms Guidetti’s dishonesty, if anything might have shocked the Bank out of its inattention, it was that its customer was engaging, or proposing to engage, in large-scale gambling. Lord Mance considered that if, in fact, Burlington had been running the gambling business, there would have been tortious liability, since the Bank was willing to give the credit reference ‘without further inquiry’.71 Gambling, his Lordship thought, was little different from other high-risk activities. With respect, both these conclusions are open to doubt. Why should it be up to the provider of free advice to ask questions about the unobvious purposes for which the inquirer wants the information, and be liable for any loss should it fail to do so? It is quite possible that those acting for Burlington and the Club (Burlington had no employees of its own) were delighted that the Bank asked so few questions. More convincing, it is respectfully suggested, is Longmore LJ’s reaction in the Court of Appeal, hinting at the cheek of the claim:72 The Club concealed its own interest in the matter ‘to preserve confidentiality for’ their customers. If the Club wishes to remain anonymous it is hardly just and reasonable for it to assert that a duty of care is owed to it when it deliberately conceals its existence.

It can, of course, be legitimate to employ the undisclosed-principals doctrine in order to avoid a counterparty knowing of the principal’s existence, such as where a purchaser of property does not wish the vendor to know that the purchaser has also acquired adjoining properties, but in such cases the suppression is not causing the counterparty to take on unknown risks. It is one thing to miss out on a bonus, another to go backwards. Secondly, even on the basis that Ms Guidetti was dishonest, it is also far from obvious that the Bank should have been, or to the extent the litigation is ongoing should be, liable for her statements. In particular, what was Ms Guidetti’s apparent authority to bind the Bank by providing the reference? This, of course, is an agency question. A number of things are pertinent to this. (i) Ms Guidetti’s name and business card were supplied to the Club by Mr Barakat. In not seeking out someone independent of Mr Barakat, the Club was plainly running a risk. In that respect, the dishonest Mr Barakat was as much the Club’s customer as the Bank’s. (ii) The department description on Ms Guidetti’s card, ‘development business’, was not self-evidently relevant to providing credit references. The fact that many bank employees will have

71 Playboy 72 Playboy

(n 45) [19]. (n 52) [24]. cf T Foxton, ‘Second Degree Byrne’ (2019) 78 CLJ 18, 19.

Agency  271 access to customers’ account details would not seem to furnish usual authority for handing out credit references. In particular, considerable skill will often be needed by the provider of a bank credit reference in judging the headroom to be retained by the bank after assessing the balances in the customer’s account and the customer’s history of operating the account. (iii) The sums being warranted were large for a personal customer. How much freeboard would an account need to have before one could warrant £1.6 million ‘at any one time’ or ‘in any one week’? It would have to be arguable that if the Club was not prepared to insist on Mr Barakat paying cash for his gambling, it should have been looking to someone fairly senior in the branch to be giving the reference. Thirdly, there is a question whether Mr Barakat’s handmade cheques should have put the Club on inquiry as to whether it was wise to rely on Ms Guidetti’s reference. Judge Mackie reduced the Bank’s liability in negligence by 15% to take account of what he concluded was the Club’s contributory negligence in this regard.73 A plea of contributory negligence is not available where a defendant is liable in deceit, even when that liability is merely vicarious.74 But the question whether one should, in law, be entitled to sue someone other than the utterer for one’s reliance on a statement is capable of integrating signals of unreliability. Admittedly, the mechanisms of this part of the law have been somewhat unsettled, in part owing to successful arguments of Mr Sumption QC in a Hong Kong case.75 However, in East Asia Co Lt v PT Satria Tirtatama Energindo,76 the Privy Council has recently reaffirmed that whether a third party is entitled to rely on a holding out of authority in an agent turns on the reasonableness of that reliance in the light of all the facts known to that party. This part of Lord Kitchin’s judgment was obiter, but was fully reasoned following extensive argument. The Supreme Court was not asked to address the foregoing points. At first instance, the Bank had run an argument that Ms Guidetti lacked apparent authority and that otherwise the Bank should not be vicariously liable for her conduct. Judge Mackie rejected these arguments, in essence accepting the submission of the Club that outsiders should not be expected to question the authority of bank employees. Surprisingly, perhaps, appeals from these findings were dropped in the Court of Appeal.77 Insofar as Judge Mackie applied only a course-of-employment test, or considered that the concept of authority tracked that test, he was in error. In fairness, he could derive support for that approach from So v HSBC Bank plc.78 But the subsequent decision of the Court of Appeal in Winter v Hockley Mint Ltd,79 albeit a deceit not a negligence case, has affirmed the older position that liability for the misstatements of others turns not on an employment relationship between that other and the defendant, or a relationship akin thereto, but on the defendant’s having authorised, or apparently authorised, the other to be making the relevant statement on the defendant’s behalf. 73 Playboy (n 46) [74]. 74 Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 2 AC 366 [48]–[49] (Lord Nicholls). 75 See the relevant discussion in Bowstead & Reynolds (n 23) paras 8.048–8.050. 76 East Asia (n 22) [75] and [89] (Lord Kitchin). 77 Playboy (n 52) [10] (Longmore LJ). 78 So v HSBC Bank plc [2009] EWCA Civ 296, [2009] 1 CLC 503. 79 Winter v Hockley Mint Ltd [2018] EWCA Civ 2480, [2019] 1 WLR 1617 [48]. See also Frederick v ­Positive Solutions (Financial Services) Ltd [2018] EWCA Civ 431 [76]–[77] (Rafferty LJ).

272  Peter Watts These issues are, however, likely to surface in the ongoing litigation. Given that that litigation is now focused on deceit, the requirement in Armagas v Mundogas that before a claimant can look to a principal in relying on an agent’s statement (whether one as to authority or otherwise) the claimant must demonstrate an adequate holding out seems to be a central plank in the case.80 The effect of the authorities is that employers are not taken automatically to stand behind any and every statement made by an employee in the workplace. Unlike the victims of most torts, parties who rely on statements choose to rely. While it is often said that the employer should bear the risk of having engaged a fallible employee or other agent, the principal will almost never be present at the events which the third party is asserting gave rise to rights, and may have difficulty countering the self-serving evidence of the third party who was present.81 Hence, the common law’s requirement that, to make the principal liable, the provider of the inaccurate information has to be someone who has sufficient standing to be making the statement on the principal’s behalf. And the more curious the information being received, the more senior one would expect the person to be vouching for it. At the same time, if a business owner does hold out someone as the reliable provider on its behalf of the information being sought, it will not matter whether that person is or is not an employee, or even akin to one. Because these issues did not surface before the Supreme Court, we were deprived of Lord Sumption’s wisdom as to their resolution.

80 For a fuller discussion, see P Watts, ‘Some Wear and Tear on Armagas v Mundogas: the Tension between Having and Wanting in the Law of Agency’ [2016] Lloyd’s Maritime and Commercial Law ­Quarterly 36. 81 Armagas (n 15) 735 (Robert Goff LJ) and 780 (Lord Keith). Sorrell v Finch [1977] AC 728 (HL) 754 (Lord Russell). Other dicta on this topic can be found in Watts (n 80) 37–38.

15 Attribution ERNEST LIM

The fundamental point … is that, while the basic rules of attribution may apply regardless of the nature of the claim or the parties involved, the breach of duty exception does not. I agree with this. It reflects the fact that the rules of attribution are derived from the law of agency, whereas the fraud exception, like the illegality defence which it qualifies, is a rule of public policy. Viewed as a question of public policy, there is a fundamental difference between the case of an agent relying on his own dishonest performance of his agency to defeat a claim by his principal for his breach of duty; and that of a third party who is not privy to the fraud but is sued for negligently failing to prevent the principal from committing it. – Bilta (UK) Ltd v Nazir (No 2)1

I. INTRODUCTION

N

o area of company law seems to have generated greater controversy and uncertainty in recent times than corporate attribution. There have been at least seven decisions handed down in the last 10 years from the highest appellate courts around the common law world, including the UK Supreme Court,2 the Singapore Court of Appeal,3 the Hong Kong Court of Final Appeal,4 the Privy Council5 and the Canadian Supreme Court.6 Most judges and commentators have

1 Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23, [2016] AC 1 [86] (Lord Sumption). Note that Lord Sumption made a subsequent qualification at [90] that the technique of applying the general rules of agency and then an exception is ‘a valuable tool of analysis, but it is no more than that’. 2 Bilta (n 1); Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, [2019] 3 WLR 997. 3 Ho Kang Peng v Scintronix Corp Ltd [2014] SGCA 22; Red Star Marine Consultants Pte Ltd v Personal Representatives of Satwant Kaur d/o Sardara Singh, deceased [2019] SGCA 76. 4 Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue [2014] HKCFA 22, 17 HKCFAR 218. 5 Julien v Evolving Tecknologies and Enterprise Development Co Ltd [2018] UKPC 2, [2018] BCC 376; R Leow, ‘Attributing Shareholders’ Knowledge: Corporate Attribution One Step Further?’ [2018] Lloyd’s Maritime and Commercial Law Quarterly 316. 6 Christine DeJong Medicine Professional Corp v DBDC Spadina Ltd [2019] SCC 30.

274  Ernest Lim essentially endorsed and adopted the contextual and purposive approach espoused by Lord Hoffmann in Meridian Global Funds Management Asia Ltd v Securities Commission.7 While this approach has its merits, it is vulnerable to the criticism that it yields unpredictability and uncertainty. Although the Meridian approach could deliver justice on a case-by-case basis, it does not engender a coherent account of the law that provides sufficient guidance to judges and litigants. This partly explains why the number of appellate lawsuits in this area of law has not diminished. Thus, Lord Sumption’s approach to attribution under which the rules of attribution should operate regardless of the context unless the breach of duty exception is applicable is not devoid of attractiveness as it could provide more certainty and predictability.8 However, as will be shown in this chapter, it is no less questionable than Meridian’s contextual approach. But this does mean that the latter approach – endorsed once more by the UK Supreme Court in the latest decision on attribution, Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd – should have the last word.9 While strong arguments in favour of a context-sensitive, policy-based approach to corporate attribution and the illegality defence have been made,10 this approach, upon further reflection, does not yield sufficiently clear and predictable guidance to lawyers and litigants. It has been shown, for example, that the range of factors approach to the illegality defence is open to the criticisms of indeterminacy, incommensurability and rights-based reasoning.11 As for corporate attribution, this collection of essays in honour of Lord Sumption presents an opportune moment to reconsider whether we should move away from a context-based to a rule-based approach. This chapter proposes a rule-based approach to attribution comprising a twostep framework that consists of asking, first, whether the purpose and scope of the defendant’s duties cover the losses sustained by the claimant, subject to any clear statutory restrictions or exceptions. If the answer to this question is ‘yes’, we move on to the second step and ask whether allowing the claimant to sue will result in a wrongdoer (who may or may not be the same person as the defendant) profiting from its own wrongdoing. If, however, the answer to the first step of the framework is ‘no’, there is no need to move on to the second step. If the answer to the first question is ‘yes’ and the second question ‘no’, then the claimant should not be barred from suing the defendant on attribution grounds. In other words, the state of mind or acts of the company’s insiders should not be attributed to the company so as to preclude the company from suing either its insiders or third parties for breach of duties,12 where

7 Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 (PC). 8 Bilta (n 1) [86]. 9 Singularis (n 2). 10 See, eg S Worthington, ‘Corporate Attribution and Agency: Back to Basics’ (2017) 133 LQR 118; E Lim, ‘Ex Turpi Causa: Reformation not Revolution’ (2017) 80 MLR 927; E Lim, ‘Attribution and the Illegality Defence’ (2016) 79 MLR 476; E Lim, ‘Attribution in Company Law’ (2014) 77 MLR 794; E Lim, ‘A Critique of Corporate Attribution: “Directing Mind and Will” and Corporate Objectives’ [2013] ­Journal of Business Law 333. 11 E Lim and F Urbina, ‘Understanding Proportionality in the Illegality Defence’ (2020) 136 LQR (forthcoming). The topic of illegality defence is examined separately in ch 13. 12 But where the defendant is a company that is being sued for breach of duties, the defendant company cannot simply escape liability by arguing that the wrongful acts or state of mind of its delinquent insiders should not be attributed to itself. To hold otherwise would mean that a company can never be held liable.

Attribution  275 the illegality defence is raised by the defendant.13 However, if the answer is ‘yes’ to both the first and second questions, then unless there is a mechanism that can prevent the wrongdoer from profiting from its own wrongdoing under the second step of the framework, courts should hesitate in allowing the claimant to sue the defendant. It is argued that this two-step framework is supported by authorities and is able to explain the reasoning and outcome of important cases including Bilta, and is also able to provide a clearer framework for analysing difficult cases such as Safeway Stores Ltd v Twigger14 and Julien v Evolving Tecknologies and Enterprise Development Company Ltd,15 as well as controversial ones like Stone & Rolls Ltd v Moore Stephens.16 Equally importantly, it is submitted that the proposed framework provides a more coherent and principled basis for the law of corporate attribution, thereby improving clarity, certainty and predictability. Section II of this chapter critically analyses Lord Sumption’s rule-based approach to attribution and Meridian’s contextual approach. Section III explains the proposed two-step framework. Section IV concludes. II.  RULE-BASED APPROACH AND CONTEXTUAL APPROACH

To understand Lord Sumption’s approach to attribution, we need to first understand how he interpreted the leading decision of Meridian in Bilta. As compared to Lords Mance, Toulson and Hodge, as well as the academic commentators, Lord Sumption seemed to place no emphasis on the contextual nature of the special rule of attribution. Instead, he ascribed significance to the rule-like nature of the special rule of attribution by highlighting the directing mind and will doctrine and agency law.17 Consider Lord Hoffmann’s widely cited dictum in Meridian:18 This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc of the company? One finds the answer to this

13 The relationship between the illegality defence and attribution is stated concisely by Lord Sumption in Les Laboratoires Servier v Apotex Inc [2014] UKSC 55, [2014] 3 WLR [22], where he said that the illegality defence usually raises three questions, the third of which concerns attribution: ‘on what principles should the turpitude of an agent be attributed to his principal, especially when the principal is a corporation?’ The most contentious aspect of the law on attribution concerns the situation of a company suing either its delinquent insiders or third parties for breach of duties, and in either of these two situations, the illegality defence would be raised by the defendant, such as in Bilta, Safeway, Stone & Rolls and Singularis. However, to be clear, there is no necessary connection between attribution and illegality defence: the facts in Meridian are a clear example of where the illegality defence was not invoked. There, because the company is an artificial legal entity that can only act through its agents, the question was whose acts or state of mind should be attributed to the company in order to render the company liable under the specific statute. 14 Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472, [2011] 2 All ER 841. 15 Julien (n 5). 16 Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39, [2009] 1 AC 1391. 17 The topic of agency law is examined separately in ch 14. 18 Meridian (n 7) [12].

276  Ernest Lim question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.

It is instructive to see how the Justices in Bilta interpreted this dictum. To Lord Mance, ‘the key to any question of attribution is ultimately always to be found in considerations of context and purpose’.19 To Lords Toulson and Hodge:20 The relevance of the context in which the question is asked – ‘Is X’s conduct or state of mind to be treated as the conduct or state of mind of the company for the purpose in hand?’ – is not limited to Lord Hoffmann’s third category. The legal context, ie the nature and subject matter of the relevant rule and duty, is always relevant to that question.

However, Lord Sumption interpreted Lord Hoffmann’s dictum differently. Lord Sumption construed the special rule of attribution as not requiring attention to be paid to the context of the claim but as an application of the directing mind and will metaphor. He interpreted the first rule (or category) of attribution, which Lord Hoffmann called ‘primary rules’, as decisions made by the ‘directing organ’.21 As for the second category of attribution rules consisting of agency and vicarious liability, termed by Lord Hoffmann as ‘general rules’, Lord Sumption characterised it ‘as the directing organ of the company may expressly or implicitly have delegated the entire conduct of its business to the relevant agent, who is actually although not constitutionally its “directing mind and will” for all purposes’.22 As for the third category of attribution, known as the ‘special rule’ in Meridian, Lord Sumption had this to say:23 The special insight of Lord Hoffmann … was to perceive that the attribution of the state of mind of an agent to a corporate principal may also be appropriate where the agent is the directing mind and will of the company for the purpose of performing the particular function in question, without necessarily being its directing mind and will for other purposes.

Thus, Lord Sumption interpreted the special rule of attribution as a subset of agency. However, this is inconsistent with what Lord Hoffmann and the rest of the Justices in Bilta understood the special rule of attribution to be. Precisely because the primary rules (the decisions of the board and the general meeting) and the general rules of attribution (agency law and vicarious liability) are not applicable, a special rule has to be fashioned in view of the specific facts of the case. The special rule is this: given that the company is subject to liability under a rule (usually, but not necessarily, found in a statute),24 the question is whose acts or state of mind should be attributed to the company, for the purpose of giving effect to the purpose and policy of that rule.25 In other words, under the special rule of attribution, a person need not be the agent, yet his or her acts or state of mind will be attributed to the company if it is so required by a proper construction of the relevant law (which is often, but need not be, a statute) in question.

19 Bilta

(n 1) [41]. [191]. [67]. 22 ibid [67]. 23 ibid [67]. 24 See, eg Tesco Supermarkets Ltd v Nattrass [1972] AC 153 (HL), discussed in Meridian (n 7) [13]–[15]. 25 Meridian (n 7). 20 ibid 21 ibid

Attribution  277 More problematically, Lord Sumption’s interpretation of Lord Hoffmann’s special rule of attribution renders it redundant. Lord Sumption took the view that the attribution rules apply regardless of the nature of the claim or the parties involved unless the breach of duty exception applies.26 If this is correct, only the primary and general rules of attribution are relevant. The special rule of attribution is otiose. Moreover, if the agent’s acts or knowledge will be attributed to the company unless the breach of duty exception applies, it is unnecessary to resort to the directing mind and will metaphor. Lord Sumption asserted that the agent’s state of mind will be attributed to the company where the agent is the directing mind and will for the purpose of performing the function in question but not for other purposes.27 This suggests that the fact that a person is an agent does not mean that his or her state of mind will be automatically attributed to the company, as it depends on whether the agent is the directing mind and will. If that is the case, this is inconsistent with Lord Sumption’s statement ‘that the basic rules of attribution’ that are ‘derived from the rules of agency’ ‘may apply regardless of the nature of the claim or the parties involved’.28 A more fundamental objection has been levelled by Lord Mance,29 as well as by Lords Toulson and Hodge.30 According to these Justices, a principal cannot be deemed to have the knowledge of its agents at all times and for all purposes, contrary to Lord Sumption’s assertion. This is because ‘the rules of imputation do not exist in a state of nature, such that some reason has to be found to disapply them. Whether knowledge is imputed in law turns on the question to be addressed.’31 Putting aside these conceptual objections, the real test for the validity and utility of Lord Sumption’s approach to attribution – the basic agency rules should apply unless the breach of duty exception applies – is whether it is able to provide satisfactory solutions to two critical, outstanding issues in the law. The first concerns a company’s claim against directors for breach of duties, as in Safeway and Julien. The second concerns the company suing a third party for breach of duties, as in Singularis and Stone & Rolls. Concerning the first issue, it is trite law, in light of Bilta, that where a company sues its directors and officers for breach of duties, the wrongdoing of the directors or officers cannot be attributed to the company so as to bar the company from suing them under the illegality doctrine. This is clear and straightforward if we apply Lord Sumption’s attribution approach because of the breach of duty exception. His approach should also provide a clear answer where the company sues its directors for breach of duty in order to recoup the losses imposed on the company as a result of the company violating a law that imposes liability on the company. Such is the case of Safeway,32 where the company was held liable for breaching the Competition Act 1998, which imposes liability only on the company and not on its directors or officers. 26 Bilta (n 1). 27 ibid [67]. 28 ibid [86]. 29 ibid [44]. 30 ibid [191]. 31 ibid [44] and [191], citing P Watts and F Reynolds (eds), Bowstead & Reynolds on Agency, 20th edn (London, Sweet & Maxwell, 2014) para 8.213. 32 Safeway (n 14).

278  Ernest Lim However, Lord Sumption agreed with the Court of Appeal that the breach of duty exception did not apply because this would be inconsistent with the statute.33 It is not obvious why this is the case. It was a missed opportunity to bring coherence to the law. It should have been held that Safeway was wrongly decided based on the breach of duty exception rather than to explain it away by stating that Safeway should be confined to its facts and has no wider precedential value. Of course, it could be said, as Lord Neuberger did, that it was unnecessary for the Supreme Court in Bilta to make a definitive pronouncement on whether Safeway’s reasoning and result were correct because no arguments were made by the counsel on this issue.34 This is true, but it is highly unsatisfactory. It engenders uncertainty and unpredictability in the law, particularly because there are a number of regulations that impose direct liability on the company,35 similar to that in the Competition Act. Unsurprisingly, commentators that have endorsed Meridian’s contextual approach are not sure what to make of Safeway beyond treating it as an exception to the rule that the acts or knowledge of the delinquent directors will not be attributed to the company where it sues them for breach of duties.36 Inasmuch as a contextual and purposive approach to attribution is flexible and may be nuanced enough to address the numerous fact patterns that may arise in the future, its strength can be a source of weakness: it is not able to provide a clear and predictable answer to facts that do fit into the standard fact pattern of a company suing directors for breach of duties (such as in the case of Bilta). It is not necessary to defer an assessment of Safeway to the future. After all, strong arguments have already been canvassed by both judges and scholars that cast doubt on the reasoning and result in Safeway. For example, as stated by Lords Toulson and Hodge in Bilta, nothing in the Competition Act deprives the company’s common law right and statutory right under the Companies Act to sue directors for breach of duties.37 In other words, to say that the breach of duty exception does not apply to the facts of Safeway flouts well-established common law (agency) and equitable principles and statutory rules under company law. Nevertheless, Lords Toulson and Hodge did concede that Safeway might be justified on the ground that the deterrence policy of the Competition Act would be undermined if the company were allowed to sue its delinquent directors.38 However, it has been argued that the justification based on the need to ensure the effectiveness of the deterrence policy is not convincing. The main reason is that courts do not have the competence to determine whether barring the company from suing the directors will achieve the deterrent policy of the Competition Act in the sense of optimal deterrence. This is because courts are not equipped to know whether the cost arising from the company’s implementation of compliance measures (in order 33 Bilta (n 1) [83]. 34 ibid [31]. 35 See, eg Gas Act 1986, s 30A; Electricity Act 1989, s 27A; Financial Services and Markets Act 2000, s 206; Communications Act 2003, s 96. 36 PL Davies and S Worthington, Gower’s Principles of Modern Company Law, 10th edn (London, Sweet & Maxwell, 2016) paras 7.42 and 16.4. 37 Bilta (n 1) [159]–[161]. 38 ibid [162].

Attribution  279 to enhance deterrence) is outweighed by the benefit of increased consumer welfare due to reduced corporate competition violations.39 In other words, it is not clear at all that increasing the effect of the penalty by preventing the company from suing its delinquent directors will actually enhance or undermine the deterrence policy, in the sense of moving closer or further away from the optimal level of penalty. A secondary reason is that barring the company from suing the directors might risk undermining the deterrence policy because this will mean that directors can engage in price-fixing activities and yet will not be held liable for breaching their duties. Safeway is not the only decision in which the construction of a statute has added a layer of complexity to an otherwise relatively straightforward case of a company suing its directors for breach of duties. Consider another recent case, the Privy Council decision in Julien,40 on appeal from Trinidad and Tobago, which also involved the company suing its directors for alleged breach of duties. The facts are straightforward. The claimant company made an investment in another company and subsequently lost all the money. The decision to make the investment was taken by the company’s then directors, who were alleged to have been negligent as they failed to carry out proper diligence on the investee company. The new directors caused the claimant company to sue the former directors. The defendant directors said that the action was time-barred under the Limitation Act. The claimant company said that the breach was deliberate and could not have been discovered for some time. But the defendants said that the alleged breach was known to, or discoverable by, the claimant company’s sole shareholder, the Minister of Finance, and that such knowledge or its discoverability was attributable to the claimant company, so as to prevent any postponement of the running of time under the Limitation Act for a claim brought against them by the claimant. So, the key question was whether, in a company’s claim against its directors for breach of duties, the sole shareholder’s knowledge of the directors’ alleged breach or its ability to discover the alleged breach should be attributed to the company in order to bar the company’s claim under the Limitation Act. Lord Briggs, who delivered the advice for the Privy Council, said that, given that the company law and the Limitation Act of Trinidad and Tobago are not dissimilar from those in England and the main common law jurisdictions, the issue raised in this appeal has far-reaching implications because companies often have sole shareholders, particularly in group structures. Lord Briggs held that the knowledge of the sole shareholder could not be attributed to the company because the breach was not discoverable by the sole shareholder, the Minister of Finance. Nevertheless, Lord Briggs considered, obiter, the arguments for and against whether the knowledge of shareholders ought to be attributed to the company. Lord Briggs correctly said, without citing Bilta, that the acts or state of mind of the miscreant directors should not be attributed to the company in order to bar the company from suing them.41 This is Lord Sumption’s breach of duty exception. But, as a matter of legal principle, do Meridian’s context-purposive approach 39 K Kwok and E Lim, ‘Optimal Deterrence, Corporate Attribution and the Illegality Defence’ (2020) 21 European Business Organization Law Review (forthcoming). 40 Julien (n 5). 41 ibid [48].

280  Ernest Lim and Lord Sumption’s rule-based approach to attribution and the breach of duty exception provide a satisfactory answer to the question of whether the knowledge of the sole shareholder ought to be attributed to the company so as to bar the company from suing the directors under the Limitation Act? Parts of the answer could be found in Lord Briggs’s analysis of the arguments for and against attribution. Lord Briggs considered four arguments that were in favour.42 First, under Meridian’s primary rules of attribution, the decision of all the shareholders is regarded as the decision of the solvent company. Thus, because there was only one shareholder, the Minister of Finance, his knowledge has to be equated with that of the company. Second, applying Meridian’s special rule of attribution, the scope of the Limitation Act was intended to cover companies and the policy of the legislation was to prevent the bringing of stale claims by companies who have the knowledge of or the ability to discover the alleged breach of duties. Because the acts or state of mind of the directors cannot be attributed to the company in a claim by the company against the directors, the knowledge of all its shareholders has to be attributed to the company; otherwise, the policy of the statute will be undermined because the company can never be precluded from bringing a stale claim. Third, if the company can be bound by the ratification of shareholders, it follows that the company can be bound by the knowledge of shareholders where they have the power not only to bring a derivative action but also to procure (through the appointment of new directors) the company to take proceedings to vindicate its rights against the delinquent directors. Finally, if the unanimous act of shareholders is treated as the company’s act, then the knowledge of a sole shareholder can be treated as the company’s where attribution is disapplied when the company sues its directors for breach of duties. Lord Briggs then considered five arguments against attribution.43 First, under the primary rules of attribution, the basis for treating the unanimous decision of the shareholders as that of the company is that a unanimous decision has been taken by all the shareholders at a general meeting; it is not because of the presence of a sole shareholder. Second, a distinction has to be drawn between attributing to the company the intent or acts of all the shareholders in a unanimous meeting on the one hand, and attributing to the company the intent or acts of shareholders who may or may not be unanimous if they were to make a decision at a general meeting. In the latter case, there is a practical difficulty with attributing because different shareholders will have different states of mind. But surely this difficulty will be moot if there is only one shareholder, as is the case in Julien? Nonetheless, Lord Briggs was not persuaded, and he raised the most important objection against attribution, which is the third argument against attribution: even where there is only one shareholder, there should still be no attribution because, unlike the directors or agents, who owe a duty to the company to report relevant knowledge about its affairs, and hence their knowledge is attributed to the company, shareholders owe no such duty. They owe no duty to exercise reasonable diligence to inform themselves about facts which might give rise to a lawsuit by the company against its wrongdoers, let alone its directors. Fourth, in response to the argument that failure to attribute will undermine the policy

42 ibid 43 ibid

[48]–[50]. [51]–[57].

Attribution  281 of the Limitation Act, Lord Briggs said that to attribute would fail to respect the separate identities of the company and its sole shareholder. Finally, Lord Briggs rejected the argument that a special rule of attribution should be fashioned to attribute the knowledge of the sole shareholder to the company for the purpose of giving effect to the policy of the Limitation Act. This is because it is not clear why attribution should be limited to a sole shareholder rather than any single shareholder who can command the requisite majority to cause the company to bring proceedings against the directors, or even a minority capable of bringing a derivative action. Lord Briggs’s view that there should not be a general rule of attributing the knowledge of shareholders to the company is open to doubt. He gave three reasons.44 First, attribution will disregard the separate legal personality of the company. Second, the knowledge of directors or agents is attributed to the company because they owe a duty to the company to report relevant knowledge about its affairs, whereas shareholders owe no such duty. Finally, it is not clear why only the knowledge of the sole shareholder is attributable, but not that of a controlling shareholder, a body of shareholders that is the majority or a minority shareholder. The first reason is not persuasive. If it were, then the point made by the dissenting Justices, Lords Scott45 and Mance,46 in Stone & Rolls, that attributing the fraud of the sole director and shareholder to the company violated the separate legal personality rule, would have carried the day, but the majority gave no weight to this point. Further, if Lord Briggs’s reason is convincing, then the decision of the sole shareholder in a general meeting can never be attributed to the company under the primary rules of attribution. But this is incorrect because, under Meridian’s primary rules of attribution, the unanimous decision of the general meeting (whether consisting of one shareholder or several others) will be automatically attributed to the company.47 But this in no way violates the separate legal personality doctrine. This is because to disregard the separate legal personality is to pierce the corporate veil for the purpose of preventing abuse of corporate legal personality, the consequence being that liability is imposed on the shareholder.48 However, the purpose of attributing the shareholder’s knowledge of, or ability to discover, the alleged breach to the company is not to prevent abuse of the corporate form; nor is the effect of attribution to render the sole shareholder liable. Rather, the objective and effect are to preclude the company from suing the directors under the Limitation Act. The second reason is similarly unpersuasive. Lord Briggs asserted that the basis for attributing the knowledge (or acts) of the directors to the company is that they have a duty to report their knowledge to the company.49 This is questionable. No authority has been cited by Lord Briggs for this proposition. It is possible for directors to be required to report their relevant knowledge to the company, but this is because such conduct 44 ibid [55], [54] and [57]. 45 Stone & Rolls (n 16) [118]. 46 ibid [249], [255] and [270]. 47 Meridian (n 7) [8]; Multinational Gas & Petrochemical Co v Multinational Gas & Petrochemical Services Ltd [1983] Ch 258 (CA). 48 Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 [16] and [34]–[35] (Lord Sumption). The topic of piercing the corporate veil is analysed in greater detail in ch 17. 49 Julien (n 5) [54].

282  Ernest Lim is required by either applicable statutory provisions or the application to the specific facts of the case of the well-established directorial duties, such as the duty to exercise reasonable care, skill and diligence, the duty to promote the success of the company, or the duty to avoid unauthorised conflicts of interests and unauthorised receipt of profits. But even if there is such a stand-alone directorial duty, it does not follow that shareholders do not or should not owe such a duty to the company. Consider two analogies. It is trite law that directors only owe duties to the company but not to shareholders. But directors can owe a fiduciary duty of full disclosure to shareholders in certain circumstances, such as when there is information asymmetry between directors and shareholders in closely held companies and there has been prior reliance by shareholders on directors for information.50 The other analogy is this. It is trite law that directors owe fiduciary duties to the company; shareholders do not. However, in certain situations, fiduciary duties can be imposed on parties who are not ordinarily subject to them, such as where a party has expressly or impliedly undertaken to act on behalf of another;51 where there is a legitimate expectation that one party will act in the interests of the other;52 or where one party exercises discretionary power over another and there is an element of dependence, inequality and vulnerability.53 The point of these two analogies is that a legal principle can be developed to subject shareholders to a duty to report or discover the relevant knowledge. It does not matter whether there is one sole shareholder, a controlling shareholder or even a body of shareholders who is in the majority. Thus, attribution need not be restricted to the knowledge of a sole shareholder. Accordingly, applying this principle, the Privy Council should have asked whether, on the specific facts of the case, there was or ought to be a duty on the sole shareholder, the Minister of Finance, to either report the relevant knowledge to the company or to discover the relevant facts. For example, was there an undertaking on the part of the sole shareholder? Was there a legitimate expectation on the part of the sole shareholder to report the relevant knowledge or to discover the alleged breach? Did the sole shareholder exercise discretionary power over the affairs of the company such that there was inequality and vulnerability (but whose action does not amount to that exercised pursuant to a de facto or shadow directorship)? In any event, even if there is no general rule of attributing the knowledge of shareholders to the company, Lord Briggs said that a special rule of attribution could be fashioned on the facts of the case. He said that:54 a sole active shareholder, who habitually controls the affairs of the company might have his knowledge, or ability to discover the facts attributed to the company, but a sleeping sole shareholder content to leave the company to be managed by its directors, would not.

50 Coleman v Myers [1977] 2 NZLR 225 (NZCA), approved in Peskin v Anderson [2000] 1 BCLC 372 (CA) 397 (Mummery LJ). 51 Bristol & West Building Society v Mothew [1998] Ch 1 (CA) 18 (Millett LJ). 52 Arklow Investments Ltd v Maclean [2000] 1 WLR 594 (PC) 598 (Henry J); Law Commission, Fiduciary Duties of Investment Intermediaries (Law Com No 350, 2014) para 3.24. 53 PB Miller, ‘The Fiduciary Relationship’ in AS Gold and PB Miller (eds), Philosophical Foundations of Fiduciary Law (Oxford, Oxford University Press, 2014) paras 69 and 72–73; Frame v Smith [1987] 2 SCR 99 (SCC) 136. 54 Julien (n 5) [59].

Attribution  283 However, he declined to set out a special rule because it would require a full trial. To conclude, Lord Briggs recognised that the Limitation Act was intended to cover companies and that its policy was to prevent the prosecution of stale claims. But, in response to the defendants’ argument that failure to attribute would undermine the policy of the Act, Lord Briggs said that attributing the knowledge of the sole shareholder would disregard the separate legal personality, which I have demonstrated to be mistaken, and he said that there was no principle that shareholders have to report their knowledge to the company, which I have shown to be doubtful. Would Lord Sumption’s rule-based approach of applying the general rules of agency coupled with the breach of duty exception yield a different reasoning and result if it is applied to the facts in Julien? It would, if, as Lord Sumption put it, the knowledge of the agent who is the directing mind and will of the company for all purposes, or only for a particular purpose, is attributed to the company, and the shareholders are considered to be such agents. However, this raises the question of whether shareholders are agents of the company. On one view (which has been endorsed and elaborated on elsewhere),55 the general meeting (like the board of directors) is a co-agent of the company where the general meeting makes decisions on behalf of the company with a view to altering the latter’s legal position.56 On another view, the board and the general meeting are not agents of the company; rather, they are organs who act as the company.57 Even if we take the view that the general meeting is the company’s agent, the knowledge of the general meeting of shareholders will not be attributed to the company unless it meets (whether formally or informally) and passes a resolution. In the case of a sole shareholder, no meeting is necessary, but there must be evidence that he has applied his mind to the matter and has made a decision. In Julien, the sole shareholder, the Minister of Finance, did not make the decision to bring proceedings against the directors for breach of duties; the decision was made by the new directors; nor did the Minister of Finance make the decision to invest in the company.58 Therefore, it was not an agent and there could be no attribution. An alternative analysis consistent with Lord Sumption’s rule-based agency approach is to ask whether the sole shareholder was the directing mind and will either for all purposes or only for the purpose of discovering the alleged breach. If the answer is yes in either situation, then there should be attribution. But the facts in Julien did not establish that the Minister of Finance was the directing mind and will for either purpose. Having shown the problems arising from the application of Lord Sumption’s rulebased agency approach and Meridian’s contextual approach to the situation of a company suing directors for breach of duties, specifically to the facts in Safeway and Julien, this chapter now turns to a critique of the application of those two approaches

55 E Lim, A Case for Shareholders’ Fiduciary Duties in Common Law Asia (Cambridge, Cambridge University Press, 2019) 138–53. 56 P Watts and F Reynolds (eds), Bowstead & Reynolds on Agency, 21st edn (London, Sweet & Maxwell, 2018) para 1.028. The general meeting’s authority is derived from the company’s constitution and the incorporation statute. 57 Gower Principles of Modern Company Law (n 36) para 7.4; S Worthington, Sealy & Worthington’s Text, Cases & Materials in Company Law, 11th edn (Oxford, Oxford University Press, 2016) 188. 58 Julien (n 5) [21] and [36].

284  Ernest Lim to the situation of a company suing a third party for breach of duties, specifically in Stone & Rolls. In Bilta, the majority agreed that Stone & Rolls is authority for two propositions: first, the illegality defence is not available where there are innocent shareholders or directors; and second, the defence is available in some circumstances where there are no innocent shareholders or directors.59 It is interesting to note how Lord Sumption in Bilta justified the result in Stone & Rolls. He said that where a company sues a third party for breach of duties, there is no reason not to equate the company with its directing mind. This is because:60 for a person, whether natural or corporate, who is culpable of fraud to say to an innocent but negligent outsider that he should have stopped him in his dishonest enterprise is as clear a case for the application of the illegality defence as one could have.

This was a straightforward application of his rule-based approach of agency law – the knowledge of the agent who was the directing mind and will of the company for all purposes was attributed to it. Earlier on, he cited the example of Royal Brunei Airlines Sdn Bhd v Tan,61 also a one-man company like Stone & Rolls, in which it was stated that ‘Mr Tan was the company and his state of mind is to be imputed to the company’.62 Lord Sumption seemed to have put the cart before the horse. He assumed that the company in Stone & Rolls was culpable of fraud, which required him to first attribute the fraud of the sole director and shareholder to the company, even before he addressed the question of the scope of the auditor’s duty, which he considered important but nevertheless chose to leave it aside.63 But the question of the scope of the auditor’s duty in Stone & Rolls was of fundamental importance and should be addressed first. This is because if the scope of the auditor’s duty was intended to cover the losses sustained by the company, then the fraud of the sole director and shareholder should not be attributed to the company so as to bar the company from suing the auditor under the illegality defence. This has been recognised by Lord Mance,64 and by a number of distinguished scholars.65 Furthermore, Lord Neuberger (with whom Lords Clarke and Carnwath agreed) noted that where the company was in or near insolvency, and where there are no innocent shareholders or directors, the illegality defence does not necessarily apply.66 If Lord Sumption’s rule-based approach to attribution does not provide a satisfactory solution to the situation of the company suing a third party for breach of duties, Meridian’s contextual purposive approach fares no better. The problem with emphasising context is that different people see the context differently. To the dissenter Lord Mance in Stone & Rolls, the context lies in the fact that the company was insolvent at



59 Bilta

(n 1) [26] and [50]. [91]. 61 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC). 62 ibid 392–93 (Lord Nicholls). 63 Bilta (n 1) [91]. 64 ibid [46]. 65 See, eg E Ferran, ‘Corporate Attribution and the Directing Mind and Will’ (2011) 127 LQR 239, 251. 66 Bilta (n 1) [28]. 60 ibid

Attribution  285 the relevant audit dates, and thus the interests of shareholders should yield to those of creditors.67 Given that directors have a duty to have regard to creditors’ interests in that situation, so should the auditors, who are officers of the company. But to Lords Walker and Brown in Stone & Rolls, the context is that it is a one-man company, ie the sole shareholder has perpetrated fraud on the company, and because there are no innocent participators, there is no room for the application of the Hampshire Land principle.68 To Lord Phillips, the context is that auditors owe duties to the company for the benefit of shareholders and not creditors, and, because there was only one shareholder, who was the fraudster and who ran the company, the illegality defence barred the company from suing the auditors.69 How should Stone & Rolls be decided then? As will be demonstrated in the next section, the two-step framework could provide the answer. But before I turn to that, one lingering question post-Bilta is the significance of Stone & Rolls. This is not an unimportant issue because the majority in Bilta held that Stone & Rolls stands only for two propositions and nothing more, as mentioned earlier. In Singularis, Lady Hale, who delivered the only judgment for the Supreme Court, noted that there was much argument in the Court of Appeal concerning the second proposition.70 The facts in Singularis are simple. The company (through its liquidator) sued the bank and broker for breach of the Quincecare71 duty of care. Pursuant to an implied term of the contract between a bank and its customer, the bank owes a duty to the customer not to execute the customer’s order if the bank knows that the order was dishonestly given, shuts its eyes to obvious dishonesty or acts recklessly in failing to make inquiries. The issue was whether the company’s claim against the bank was defeated if the fraudulent payment instructions were given by the company’s chairman and sole shareholder, who exercised dominating influence over the company’s affairs.72 In other words, the bank raised the illegality defence and argued that the fraud of the board chair and sole shareholder should be attributed to the company so as to bar the company’s lawsuit. There were six other directors, but they did not exercise any influence over the company’s management. Given that Stone & Rolls held that the illegality defence applies under certain situations where there are no innocent shareholders or directors, there was much argument brought before the Court of Appeal as to what was meant by ‘innocent’ directors and whether this referred to innocent but inactive directors. The Court of Appeal, with which the Supreme Court agreed, found that the directors were innocent as they were neither aware of nor involved in the sole shareholder’s wrongdoing.73 Importantly, the Supreme Court agreed with the Court of Appeal in rejecting the second proposition in Stone & Rolls as amounting to a legal principle.74 Lady Hale reiterated the importance of context by stating that Bilta is

67 Stone

& Rolls (n 16) [206] and [265]. re Hampshire Land Company [1896] 2 Ch 743; Stone & Rolls (n 16) [168] and [197]–[199]. 69 ibid [19] and [67]. 70 Singularis (n 2) [33]. 71 Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363 (QB). 72 ibid; Singularis (n 2) [1]. 73 Singularis (n 2) [33]. 74 ibid [34]. 68 In

286  Ernest Lim authority for the principle that whether to attribute the wrongdoing of the delinquent director always depends on the context and the purpose of attribution.75 She added, ‘if that is the guiding principle, then Stone & Rolls can finally be laid to rest’.76 It is, of course, an affirmation of Meridian’s contextual purposive approach. The question is whether Stone & Rolls still has any precedential value. One can interpret Singularis as suggesting the demise of the second proposition of Stone & Rolls, with the result that what survives, if anything, is the first proposition. An alternative interpretation is that the first and second propositions are not free-standing propositions that have a universal application; rather, they must be interpreted and applied in light of the context and purpose of attribution. If Singularis is a ringing endorsement of Meridian, it can be interpreted as an implicit rejection of Lord Sumption’s rule-based approach to attribution consisting of general rules of agency and breach of duty exception. If one were to apply Lord Sumption’s attribution approach to Singularis, it is arguably certain that the fraudster who was the sole shareholder and board chair would have his fraud attributed to the company as the breach of duty exception is inapplicable. This is because he exemplifies the quintessential case of the ‘attribution of the knowledge to a company on the basis that its agent was the directing mind and will for all purposes’.77 Lord Sumption might have gone on to assert, as he did in Bilta in relation to his analysis of a claim brought by a company against a third party, that if the illegality defence had not applied, it would be because the company was wrongly treated as a mindless automaton and the defence is wrongly interpreted to preclude application to companies where it could apply to natural persons.78 However, such reasoning is susceptible to the objection that it neglects a fundamental question that has to be raised and answered at the outset: whether the scope of the defendant’s duty covers the losses sustained by the claimant. While Lord Sumption recognised this to be an important question, he did not address it. However, as discussed earlier, Lords Phillip and Mance in Stone & Rolls, and the majority in Bilta, recognised that a critical question was the scope of the auditors’ duty. If the scope of the defendant bank’s duty was intended to cover the losses suffered by the claimant company in Singularis, then there could be no attribution of the fraud of the sole shareholder so as to allow the defendant to succeed in its illegality defence. The Supreme Court in Singularis recognised that the nature, purpose and scope of the bank’s duty were to protect the company from becoming a victim of the wrongdoing by its directors and officers, particularly where the wrongdoing was so obvious.79 Thus, ascertaining the purpose and scope of the duty owed by the defendant to the claimant is critical in order to determine whether there should be attribution. This brings me to the first step of the two-step framework for attribution.



75 ibid

[34]. [34]. 77 Bilta (n 1) [68]. 78 ibid [91]. 79 Singularis (n 2) [16] and [35]. 76 ibid

Attribution  287 III.  TWO-STEP FRAMEWORK

To recap, the framework consists of two steps. The first is to ask whether the purpose and scope of the duty owed by the defendant to the claimant cover or ought to cover the losses sustained by the claimant, subject to any clear and countervailing statutory restrictions or exceptions. The second is to ask whether a wrongdoer (who may or may not be the same person as the defendant) will profit from its wrongdoing by benefiting (derivatively) from the compensation provided by the defendant to the claimant. This section begins by explaining the two steps of the framework, then applies the framework to existing cases and finally to the special situation of one-man companies. A.  First Step of the Framework Support for the first step of the framework can be found in the ‘very thing’ argument, also understood as a principle of causation.80 This was discussed in Stone & Rolls and implicitly approved of in Singularis. In short, if a company sues directors, agents or third parties for breach of duties, and if the defendant owes a duty to the claimant either to prevent harm (caused by someone other than the defendant) or to bring about a state of affairs, then there should be no attribution of the wrongdoer’s state of mind or acts to the claimant so as to bar the latter from suing the defendant.81 To attribute will render the defendant’s duty otiose. The authority for the very thing argument is Reeves v Commissioner of Police of the Metropolis,82 cited with approval in Singularis.83 It was held in Reeves that, assuming that suicide was illegal, an illegality defence could not be used to preclude a claim against the defendant police for negligently allowing the prisoner to commit suicide. This was because suicide was the very thing that the police had a duty to prevent. In Stone & Rolls, Lords Phillips and Walker were not persuaded by the very thing argument as a justification for not attributing.84 But the dissenting Justices Lords Scott and Mance accepted it.85 To be clear, Lord Phillips did not reject the very thing argument. Rather, his reason for attributing the wrongdoing of the company’s directing mind and will to the company in a claim by the company against the directing mind and will or a third party for breach of duties is that where there are shareholders who are complicit in the wrongdoing, there is no proper legal mechanism for ensuring that they will not profit from their wrongdoing.86 However, where all the shareholders are innocent, he will disallow the attribution.87 The concern lies in ensuring that wrongdoers do not benefit from their own wrongdoing (which is one of the key rationales underlying the illegality defence). Lord Walker (with whom Lord Brown

80 Stone

& Rolls (n 16) [178] (Lord Walker). [177] (Lord Walker). 82 Reeves v Commissioner of Police of the Metropolis [2000] 1 AC 360 (HL). 83 Singularis (n 2) [22]. 84 Stone & Rolls (n 16) [57]–[63] and [179]. 85 ibid [33], [111]–[112], [263] and [241]. 86 ibid [61]. 87 ibid [61]. 81 ibid

288  Ernest Lim agreed) doubted not the very thing argument per se, but its application to the facts. He said that checking for fraud forms only a small part of the auditor’s duty, and the discovery of an apparently respectable company whose directing mind and will was engaging in fraud was an extreme case in which the very thing argument should have no application.88 By contrast, Lord Mance firmly rejected the majority’s reasoning. He said that because the very thing that the auditor undertakes is the exercise of reasonable care in detecting and reporting financial impropriety at the highest level, it is impossible to attribute the fraud of the directing mind and will to the company so as to bar the company from suing the auditor.89 In response to the claim that the facts in Stone & Rolls are extreme and unusual, he said that ‘deception of auditors is the necessary stock-in-trade of fraudulent top management, as auditors and those responsible for auditing standards are and have long been very well aware’.90 In Singularis, the Supreme Court endorsed and applied Reeves and held that the purpose of the Quincecare duty imposed on the defendant bank is to protect the bank’s customer (the claimant) from the harm caused by people (a wrongdoer) for whom the customer is responsible.91 The court said that the loss suffered by the claimant company was caused by the breach of duty of care of the bank in not exercising reasonable care when it gave effect to the fraudulent instructions of the board chair and sole shareholder. B.  Second Step of the Framework Support for the second step of the framework is that it will be inconsistent with a central, well-established and widely accepted policy rationale of the illegality defence92 and that it will be an affront to justice and fairness if, by allowing the claimant company to sue the defendant, the wrongdoer (who may or may not be the same person as the defendant) will profit from its own wrongdoing, in the sense that the wrongdoer who is also a shareholder will benefit derivatively (ie indirectly) from the compensation awarded to the claimant company. This derivative benefit can take the form of subsequent distribution of dividends or an increase in share price. However, where a company sues a director for breach of duties, if the director is not a shareholder and if all the shareholders are innocent (because they are not complicit in the director’s wrongdoing), there will be no concern that the defendant director will profit from his own wrongdoing because he is not a shareholder. In a different situation, where an insolvent company (through its liquidator) sues a director and he is also the sole shareholder, such as the case in Bilta, the directorshareholder will also not be able to profit from his own wrongdoing because the compensation that goes to the company will benefit the creditors. 88 ibid [193]. 89 ibid [241]. 90 ibid [241]. 91 Singularis (n 2) [22]–[23]. 92 Patel v Mirza [2016] UKSC 42, [2017] AC 467 [22] and [99] (Lord Toulson) and [143] (Lord Kerr); Hounga v Allen [2014] UKSC 47, [2014] 1 WLR 2889 [43] (Lord Wilson); Hall v Hebert [1993] 2 SCR 159 (SCC), 175–76, 179–80 (McLachlin J).

Attribution  289 Note that the wrongdoer need not be the same person as the defendant, although it often is. For example, where a company sues a third party (such as an auditor or a bank), the defendant third party may argue that the company should not be allowed to bring a claim against it because the wrongdoer who is a shareholder will profit from its own wrongdoing. This is because that shareholder may be complicit in the misconduct of the defendant. Lord Phillip raises such a concern in Stone & Rolls.93 In response to Lords Mance and Scott’s point that a (solvent) company should be allowed to bring a claim against its fraudulent director for breach of duties, Lord Phillips said that the company should not be barred from suing the director if all the shareholders are innocent, but if there are shareholders who are complicit in the director’s wrongdoing, it is unclear if the company should still be allowed to sue the director.94 This is because the shareholders will profit from their wrongdoing as the shareholders will stand to gain, albeit derivatively, from the damages the court awards to the company. This problem can be addressed, as suggested by Lord Mance, by impounding the shareholder’s share of dividends if and when the company decides to distribute them.95 But Lord Phillips said that this would amount to piercing the corporate veil and that there is no precedent for this.96 There are two counterarguments. First, Lord Phillips seemed to have misunderstood what it means to pierce the corporate veil. In a standard veilpiercing situation, the court disregards the separate legal personality of the company in order to prevent the abuse of corporate form by depriving the shareholder of the benefit which he might have otherwise obtained from the separate legal personality.97 But when the court impounds the shareholder’s share of distribution, the purpose is not to prevent abuse of corporate form; nor does impounding have the consequence of depriving the shareholder of the advantages arising from having a separate legal personality, arguably the most important of which is that the shareholder is not liable for the debts and obligations of the company. Second, where there are both innocent and culpable shareholders, although barring the company from suing the defendant will prevent the delinquent shareholder from profiting from its own wrongdoing, it will have an adverse impact on the innocent investors. The law must be able to fashion a practicable mechanism that can strike a fair balance between these two competing interests: the need to protect the interests of innocent shareholders and the need to prevent the delinquent shareholder from profiting from its own wrongdoing. C.  Application of the Framework to Existing Cases The proposed framework is able to explain the situation of a company suing either its insiders (such as directors or officers) or third parties (who could be individuals or companies) for breach of duties. In either situation, as long as the losses suffered by the claimant company are consistent with the purpose and fall within the scope of 93 Stone & Rolls (n 16) [61]–[62]. 94 ibid [61]. 95 ibid [254], citing In re VGM Holdings Ltd [1942] Ch 235 (CA) and Selangor United Rubber Estates Ltd v Cradock (No 4) [1969] 1 WLR 1773 (Ch). 96 ibid [61]. 97 Prest (n 48) [34]–[35].

290  Ernest Lim the duty that is owed by the defendant (first step), and provided that the wrongdoer (who may or may not be the defendant) is not a shareholder who is able to benefit from his wrongdoing (second step), there should be no attribution of the acts or state of mind of the delinquent corporate insiders so as to bar the company’s claim against the directors or third parties under the illegality defence. However, where the defendant is a company that is being sued for breach of duties, the state of mind or acts of the corporate insiders should be attributed to the defendant company so as to allow the claimant’s lawsuit against the company. It would be absurd for the defendant company to disclaim liability on the basis that the wrongful acts or knowledge of its corporate insiders are not attributable to itself. To hold otherwise would mean that defendant companies can escape liability with impunity. Let us begin by considering the first situation, namely, the company suing its directors (or agents) for breach of duties. There are three recent important cases that fall within this situation: Bilta, Safeway and Julien. In Bilta, the defendant directors caused the company to enter into transactions to defraud HM Revenue & Customs. To state the obvious, directors owe a statutory duty to promote the success of the company for the benefit of its members as a whole (and they are subject to the equitable duty to avoid unauthorised conflicts of interest, among other duties). They are also required to have regard to the interests of the creditors when a company is nearly or actually insolvent. The purpose of these duties is not only to ensure at the most basic level that directors avoid deliberately harming the company such as through fraudulent acts, but also to affirmatively protect and advance corporate interest for the benefit of shareholders when a company is solvent and for creditors’ benefit when it is nearly or actually insolvent. For these reasons, the fraud of the defendants cannot be attributed to the company so as to preclude the company from suing them. To hold otherwise would completely frustrate the purpose of these directorial duties, as the protection accorded to the creditors would be completely denuded. This reasoning is consistent with that of Lords Toulson and Hodge,98 with which Lords Neuberger, Clarke and Carnwath agreed.99 As for the second step of the framework, because the company in Bilta was insolvent, the compensation that the court awarded to it would benefit the creditors, and not the sole shareholder. In short, the answer to the first step of the framework is ‘yes’ and to the second step ‘no’, and thus the wrongdoing of the defendants should not be attributed to the company to bar its claim against them. Safeway is also concerned with the company suing its directors. There was no dispute that the directors have breached their equitable and statutory duties under the Companies Act by deliberately engaging in price-fixing activities. There was also no dispute in that decision that the purpose of the duties owed by the defendants was to deter such deliberate wrongdoing. Applying the first step of the framework, the question is whether the scope of the director’s duties covers the losses suffered by the company – as a result of the hefty penalty imposed on the company for violating the Competition Act that subjects only the company to direct liability – which the company was seeking to recoup from the directors by suing them. There was

98 Bilta 99 ibid

(n 1) [123]–[131]. [18]–[19].

Attribution  291 no contention in Safeway or Bilta that the breach of the directors’ duties caused the company to be liable under the Competition Act. Before we can conclude that the scope of the directors’ duties covers or ought to cover the losses suffered by the company, the point about the statute imposing direct liability on the company has to be addressed. Lords Toulson and Hodge recognised that the attribution and the illegality defence could be justified as giving effect to the deterrence policy of the Competition Act.100 However, both Justices also conceded that nothing in the purpose and wording of the Competition Act deprives the company of its well-established rights under common law (agency), equity (fiduciary duties) and particularly statute (Companies Act) to bring proceedings against its directors and agents for breach of duties.101 In other words, the proviso in the first step of the framework is not triggered, ie there was no clear and countervailing exceptions or restrictions in the Competition Act that have the effect of denying the company’s rights. Moreover, as I have argued earlier, barring the company from suing its delinquent directors would perversely have the effect of undermining deterrence because directors would be able to engage in price-fixing activities with impunity and yet not be held liable. Further, as Lords Toulson and Hodge held, barring the company from suing the directors would make the innocent shareholders of the company suffer twice: once when the penalty was imposed on the company, and again when the company was barred from suing the directors to recoup the penalty.102 Finally, because there was nothing on the facts to suggest that the miscreant directors were also shareholders who could profit from the wrongdoing should the company succeed in recouping its losses, the answer to the second step is ‘no’. Accordingly, the directors’ wrongdoing should not be attributed to the company so as to bar its claim against them. Similar to, but distinct from, Bilta and Safeway, Julien was a case involving the company suing its directors for alleged breach of duties. But the question in Julien, unlike in Bilta and Safeway, was not whether the wrongdoing of the delinquent directors should be attributed to the company so as to bar the company’s claim against them. Rather, the issue was whether the sole shareholder’s knowledge of, or ability to discover, the alleged breach was attributable to the company so as to bar its claim against the directors for being time-barred under the Limitation Act. Applying the first step of the framework, the question is whether the purpose and scope of the directors’ duties cover the losses sustained by the company where the company knows or could have known the alleged breach and yet did not bring proceedings against the directors in a timely fashion in contravention of the Limitation Act. But because the replacement (new) directors who brought the lawsuit had no knowledge of the former delinquent directors’ wrongdoing, should the knowledge of the shareholder, particularly a sole shareholder, be attributed to the company? This depends, as I have argued earlier, on the role played by the shareholder and the actions taken by it. For example, was there an undertaking on the part of the sole shareholder? Was there a legitimate expectation on the part of the sole shareholder to report the relevant knowledge or to discover the alleged breach? Did the sole shareholder exercise discretionary power

100 Bilta 101 ibid 102 ibid

(n 1) [162]. [160]. [161].

292  Ernest Lim over the affairs of the company? If the answer is ‘yes’ to one of these questions, it could be argued that the shareholder’s knowledge is attributable to the company. On the facts in Julien, the Privy Council agreed with the Court of Appeal’s finding that the sole shareholder, the Minister of Finance, did not know and could not have discovered the alleged breach within the relevant time, and thus there was no attribution. Therefore, the company’s claim against the directors was not time-barred under the statute. Finally, because the allegedly delinquent directors were not shareholders, and there was only one shareholder who was found to be innocent, the wrongdoers will not benefit from their wrongdoing under the second step of the framework. Next, let us analyse how the proposed framework will apply to the situation of the company suing a third party for breach of duties. There are two important cases here: Singularis and Stone & Rolls. In Singularis, as examined earlier, the Supreme Court endorsed and applied Reeves, which has been considered an authority for the very thing argument, also known as a principle of causation. The defendant invoked Reeves and said that the company’s loss was caused by its own fraud, not by the defendant’s. The defendant relied on Lord Hoffmann’s distinction in Reeves between protecting people from harm (i) that they inflict on themselves and (ii) that is caused by a third party, and they claimed that the company’s losses were caused by its directing mind and will. But in Singularis, the Supreme Court said that Lord Hoffmann in Reeves then went on to say that it is very rare to impose a duty on the defendant to prevent the claimant who is a person of full understanding from causing harm to himself. But once such a duty is established, it is incoherent for the defendant to say that the harm was caused by the claimant himself. The Supreme Court said that Singularis was an example of such a rare case. The Supreme Court’s reasoning is identical to the first step of the framework. The Court said that the purpose of the Quincecare duty is to protect a bank’s customer (ie the company in this instance) from the harm caused by the customer’s officers. Because the bank breached its duty of care by giving effect to the fraudulent instructions of the sole shareholder who was the also the board chair, the company suffered losses. In short, it was established that the purpose and scope of the defendant’s duty cover the losses sustained by the claimant – an affirmative answer to the first step of the framework. Because the company was insolvent, the damages awarded to the company will benefit the creditors, and not the sole shareholder. Therefore, the answer to the second step of the framework is in the negative. Thus, the fraud of the sole shareholder and board chair should not be attributed to the company, which should be allowed to sue the defendant bank. In Bilta, the Justices agreed that the pivotal issue in Stone & Rolls was whether the scope of the defendant auditor’s duty covered the losses sustained by the claimant company. It has been argued that the reasoning of the dissenters in Stone & Rolls, Lords Mance and Scott, is much more persuasive that that of the majority, particularly Lords Phillips and Walker.103 In short, the dissenting Justices said that because directors owe duties to the company to take into account the interests of creditors when the company is insolvent or approaching insolvency, the duties of auditors who



103 See,

eg Lim, ‘A Critique of Corporate Attribution’ (n 10).

Attribution  293 are statutorily treated as officers of the company – to detect and report fraud and to report on the accounts, amongst others – which are owed to the solvent company for the benefit of shareholders should be extended to include the interests of creditors when the company is actually or close to being insolvent. Thus, applying the first step of the framework, the scope of the auditor’s duties in Stone & Rolls should have been held to cover the losses suffered by the insolvent company. Hence, the fraud of the sole director and shareholder should not have been attributed to the company to preclude it from suing the auditors. But Lords Walker, Brown and Phillips disagreed. In essence, they took the view that, firstly, the authorities do not support the proposition for an extension of the auditor’s duty to protect creditors’ interests, and secondly, it could not be shown that anyone who owned shares or held a management position in the company was misled by the auditor’s negligence because the fraudster was the sole shareholder and director who knew everything. With respect to the second step of the framework, because the company was insolvent, there was no prospect of the fraudster who was the sole shareholder profiting from its own wrongdoing because had the court awarded compensation to the company, only the creditors would have benefited. Having discussed how the two-step framework can be applied to the situation of the company suing its directors or third parties for breach of duties, the final situation, involving a third party suing the company for breach of duties, is now considered. As long as the purpose and scope of the duties of the defendant company either cover the losses suffered by the claimant third party or fall within the jurisdiction of the third party who has the power to take action against the company for its breach, the acts or intent of the relevant insiders should be attributed to the company so as to render the defendant company liable. For example, the Court of Appeal in El Ajou v Dollar Land Holdings plc attributed the knowledge of its chairman, the directing mind and will, to the company in order to impose liability on the defendant company for receiving money that it knew came from fraudulent transactions.104 In McNicholas Construction Co Ltd v Customs and Excise Commissioners, the court held that the fraud of the site managers of the company should be attributed to it, such that it was liable to the Customs and Excise Commissioners for VAT fraud.105 Where a third party brings a claim against the company for breach of duties, the wrongdoer will not profit from its own wrongdoing because it is the company that is being sued, unlike the situation of the company suing its directors or third parties. Thus, the second step of the framework is not implicated. D.  Application of the Framework to One-Man Companies One issue that has yet to be fully analysed is how the two-step framework will address problems arising from one-man companies. There are several cases which the judges have characterised as involving such companies and have ascribed significance to 104 El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 (CA). 105 McNicholas Construction Co Ltd v Customs and Excise Commissioners [2000] EWHC Admin 357, [2000] STC 553.

294  Ernest Lim them.106 And because there may be future cases involving one-man companies, it is important to deal with this issue. A persistent and problematic assumption that underpins the analysis of such companies is that the intent or acts of the sole director and shareholder are often automatically equated with those of the company.107 Against this assumption, it has been argued that one has to be pay attention to the separate legal personality of the company: to attribute the fraud of the sole director and shareholder to the company is to disregard the separate legal personality.108 Another argument relies on Meridian’s context-sensitive approach: whether the wrongdoing of the sole director and shareholder should be attributed to the company depends on the context and purpose of attribution. But neither argument is satisfactory. Regarding the first argument, to disregard the separate legal personality is to pierce the corporate veil, such that the person who owns and controls the company is identified with it.109 The purpose of piercing the veil is to prevent abuse of the corporate legal personality110 and the effect of piercing is to deprive the controller or the company of the benefit that they would otherwise have obtained from the company’s separate legal personality.111 But in those cases112 in which the one-man companies sued third parties, the third parties were not asking the court to pierce the corporate veil for the purpose of imposing liability on the sole director and shareholder. Rather, the third party was seeking to equate the intent and acts of the one man with those of the company, so as to preclude the company from suing it under the illegality defence. However, to equate the state of mind or acts of the sole director and shareholder with those of the company cannot in itself amount to disregarding the separate legal personality rule. Otherwise, Meridian’s primary rules of attribution under which the decisions of the board and those of unanimous shareholders are treated as those of the company will be regarded as instances of disregarding the separate legal personality, ie piercing the corporate veil. But this is fallacious. It confuses piercing the corporate veil with the fact that the company is an artificial legal entity and thus must act through someone, and therefore the intent or acts of that person or a body of persons have to be imputed to the company. As for the second argument, ie Meridian’s contextual approach, the problem lies with its uncertainty and unpredictability. It is suggested that the proposed framework can provide a better solution to the problem of one-man companies. Under the first step of the framework, the question is whether the purpose and scope of the duties owed by the defendant cover the losses sustained by the company. Let us first consider the situation of a solvent oneman company suing the director for breach of duties. When the one-man company is solvent, it is impossible that the sole director and shareholder will cause the company

106 See, eg Stone & Rolls (n 16); Royal Brunei Airlines (n 61); Berg, Sons & Co Ltd v Mervyn Hampton Adams [1992] BCC 661, [2002] Lloyd’s Rep PN 41 (Com Ct); Edwards Karwacki Smith & Co Pt Ltd v Jacka Nominees Pty Ltd (1994) 15 ACSR 502. cf Worthington (n 10) 121, 128–29. 107 See, eg Royal Brunei Airlines (n 61) 392–93; Berg, Sons & Co Ltd (n 106) 53. 108 See, eg Stone & Rolls (n 16) [118] (Lord Scott), [206], [238] and [255] (Lord Mance). 109 Prest (n 48) [16] (Lord Sumption). 110 ibid [34]. 111 ibid [35]. 112 See, eg Stone & Rolls (n 16); Berg, Sons & Co Ltd (n 106).

Attribution  295 to sue himself for breach of director’s duties. But when it is insolvent, the liquidator acting on the company’s behalf may sue the sole director for breach of director’s duties. Applying the first step of the framework, because the purpose and scope of the director’s duties cover the losses sustained by the company – directors owe a duty to the company to take into account the interests of creditors when a company is actually or nearly insolvent113 – the wrongdoing of the sole director should not be attributed to the company to bar the latter from suing the former. Applying the framework to a different situation: when a one-man company that is solvent sues a third party for breach of duties, the question is whether the scope of the third party’s duties covers the losses suffered by the claimant. If it does, the wrongdoing of the sole director and shareholder should not be attributed to the company, and the company should be allowed to sue the third party. If it does not, it should be attributed. For example, where a solvent one-man company sues an auditor for breach of duties, it has been said that the scope of the auditor’s duties does not cover the losses suffered by the sole director and shareholder because the auditor cannot be said to have breached its duty in failing to draw the attention of the owner to his own fraud.114 Indeed, the sole shareholder cannot allege that he has been misled by or was unaware of the fraud that was perpetuated by himself. In any event, assuming that the defendant third party is not an auditor but a different person, and even if the latter’s duties cover the losses suffered by the claimant company, the second step of the framework has to be dealt with. If the sole shareholder will profit from its own wrongdoing because he will benefit derivatively from the damages awarded by the court to the company, the court should hesitate in allowing the one-man solvent company to sue the third party. Where a one-man insolvent company sues a third party for breach of duties, applying the first step of the framework, as long as the purpose and scope of the third party’s duties cover the losses suffered by the one-man company that was actually or nearly insolvent, then the wrongdoing of the one man should not be attributed to the company so as to bar the latter from suing the third party. Given that any damages that the court awards will go to the insolvent company for the creditors’ benefit, the sole shareholder will not profit from its own wrongdoing. In other words, even if the company in Singularis were a one-man company (it was not on the facts), the fraud of the sole director and shareholder would not be attributed to the company to bar it from suing the bank. The reason is not that the second proposition in Stone & Rolls is not a legal principle; nor is it because of Meridian’s context-sensitive approach. Rather, the true justification is that the answer to the first step of the framework is ‘yes’ because the purpose and scope of the Quincecare duty cover the losses suffered by the claimant company, and the answer to the second step is ‘no’, as the company was insolvent. IV. CONCLUSION

Given the problems with a context-specific approach to corporate attribution law, this chapter proposes a rule-oriented two-step framework. This framework is different

113 West

Mercia Safetywear Ltd v Dodd [1988] BCLC 250 (CA). & Rolls (n 16) [256] (Lord Mance).

114 Stone

296  Ernest Lim from the existing rule-based approaches to attribution, namely, the directing mind and will test and the agency law approach, neither of which is sufficiently nuanced to address the difficulties and intricacies arising from corporate attribution. The framework does not claim to be able to address all the specific issues related to attribution. Rather, it is suggested that the framework provides a valuable analytic tool for understanding and evaluating attribution issues, particularly those that arise from the company suing either an insider or outsider for breach of duties and where the illegality defence is raised by the defendant. It has been argued that this framework is based on legal principles and can provide a clearer and more predictable answer than the context-based approach to attribution. But it does not follow that the latter approach should be replaced by the two-step framework. There is room for the application of the context-based approach if the framework is inapplicable or unhelpful in resolving disputes.

16 Powers SARAH WORTHINGTON

The important point for present purposes is that the proper purpose rule is not concerned with excess of power by doing an act which is beyond the scope of the instrument creating it as a matter of construction or implication. It is concerned with abuse of power, by doing acts which are within its scope but done for an improper reason. It follows that the test is necessarily subjective. – Eclairs Group Ltd v JKX Oil & Gas plc1

I. INTRODUCTION

M

isuse of power is an issue of increasing concern in both public and private law. Here the focus is on private law. The issues themselves are far from new: parties in commercial and private life have habitually delegated discretions to others to exercise. But the modern environment means that intermediaries are now a fixture in an escalating range of circumstances. As a result, there is far greater interest in the extent to which the exercise of these discretions is reviewable by the courts. More interestingly, but less predictably, the landscape is changing: contractual doctrines are increasingly competing with their equitable counterparts to establish a dominant and workable framework for the modern regulatory regime. For the moment, the issues are in a state of engrossing flux.2 Some of the framework issues are clear. The risk of exposure to misuse of power can be minimised in two ways. The first is by limiting the scope – or existence – of the power, but, taken too far, that often limits the usefulness of the power holder. The second is by allowing a broad discretion but imposing constraints on the manner of exercise of the power. These two strategies mark the divide between ‘excess’ and 1 Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71, [2016] 3 All ER 641 [15] (Lord Sumption). 2 Beyond the commentary discussed in this chapter, see especially G Newey, ‘Constraints on the Exercise of Trustees’ Powers’ in PG Turner (ed), Equity and Administration (Cambridge, Cambridge University Press, 2016) ch 2; J Morgan, ‘Against Judicial Review of Discretionary Contractual Powers’ [2008] Lloyd’s Maritime and Commercial Law Quarterly 230; H Collins, ‘Discretionary Powers in Contracts’ in D ­Campbell, H Collins and J Wightman (eds), Implicit Dimensions of Contracts: Discrete, Relational and Network Contracts (Oxford, Hart Publishing, 2003) 219; PD Finn, Fiduciary Obligations (Sydney, LBC, 1977); HG Hanbury, ‘Frauds on a Power – An Opportunity for Stocktaking’ (1948) 64 LQR 221.

298  Sarah Worthington ‘abuse’ noted by Lord Sumption in the initial quotation. His terms (excess/abuse) focus on the wrong3 committed by the power holder; the alternative terms (existence/ manner of exercise) focus on the legal issue in the sightlines. Whatever its analytical usefulness, the legal distinction between these two categories of wrongs in the exercise of powers would be less important if the consequences of breach were the same, as is usually alleged in public law (where the acts are routinely described as ‘void’). But in private law a distinction has long been drawn between acts of power holders which are in excess of power, which are void, and acts which are an abuse of power, which are voidable. This labelling has a distinguished pedigree.4 If apt, it should have obvious remedial consequences. Yet, to the contrary, it is hard to see that this void/voidable distinction carries any practical clout, or offers any analytical lever. In short, its truth and usefulness are doubted, for reasons explored later.5 The difficulties do not stop there. Having identified a divide between the scope or existence of a power and the manner of its exercise, it would not seem difficult to allocate wrongs committed by the power holder to one or other category. Being able to do that is clearly crucial if the remedial consequences do indeed differ. In Eclairs, Lord Sumption classified a director’s breach of the duty to act for proper purposes (or, using the terminology more common to trusts, acting in ‘fraud on the power’) as an abuse of power, not an excess of it.6 That seems plainly right, yet the contrary is often asserted7 and accepted.8 This classificatory exercise might be less contested if the relevant rules and their rationales were clearer. The modern law has favoured increasing resort to rules of construction, implied terms and common law duties of good faith. In addressing the role of these sources of jurisdiction so far as proper purposes are concerned, Lord Sumption (with the rest of the court agreeing) denied that proper purpose restrictions are only discovered by seeking evidence of common law implied terms in the contract; they are, instead, sourced in very much broader equitable constraints applicable to the 3 There is a debate about whether these are ‘wrongs’ or ‘disabilities’, a debate in which I once participated. There are some shared characteristics, including in the remedies awarded, but those remedies do include compensation: amongst many examples, see AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503. For that reason and for brevity, a ‘wrongs’ descriptor alone is used here. 4 Pitt v Holt; Futter v Futter [2013] UKSC 26, [2013] 2 AC 108. Lord Walker at [60] identified ‘the very important distinction between an error by trustees in going beyond the scope of a power (for which I shall use the traditional term “excessive execution”) and an error in failing to give proper consideration to relevant matters in making a decision which is within the scope of the relevant power (which I shall term “inadequate deliberation”)’. He went on, at [93], to express as ‘plainly right’ the conclusion that the former were void and the latter merely voidable. In reaching these conclusions, he expressed agreement with the judgment of Lloyd LJ: see especially Pitt v Holt; Futter v Futter [2011] EWCA Civ 197, [2012] Ch 132 [94]–[101]. 5 See section IV. 6 Eclairs (n 1) [15]. 7 See, eg R Nolan, ‘Controlling Fiduciary Power’ (2009) 68 CLJ 293, 294, who includes good faith and fraud on the power (or proper purposes) as issues going to scope, but self-dealing and irrelevant considerations as matters going to abuse; P Watts, ‘Actual Authority: The Requirement for an Agent Honestly to Believe That an Exercise of Power Is in the Principal’s Interests’ [2017] Journal of Business Law 269, who defends the proposition that the scope of an agent’s authority is limited to acts that are in good faith for the benefit of the principal and for proper purposes. 8 See, eg Thanakharn Kasikorn Thai Chamkat v Akai Holdings Ltd [2010] HKCFA 63, (2010) 13 HKCFAR 479 and the authorities cited in the judgment of Lord Hoffmann NPJ. This is criticised in S Worthington, ‘Corporate Attribution and Agency: Back to Basics’ (2017) 133 LQR 118.

Powers  299 exercise of powers generally.9 In making this uncontroversial point, at least so far as duties of company directors and trustees are concerned, he cited from Duke of Portland v Topham, where Lord Westbury LC stated the equitable rules in these terms:10 the donee, the appointor under the power, shall, at the time of the exercise of that power [ie looking to scope], and for any purpose for which it is used, act with good faith and sincerity [ie looking to good faith], and with an entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (I mean sinister in the sense of its being beyond the purpose and intent of the power) which he may desire to effect in the exercise of the power [ie looking to proper purposes].

This encapsulates in one sentence the distinct issues of scope, good faith and proper purposes typically seen as constraining the (equitable) exercise of powers by trustees and directors. The modern concern is whether these same constraints apply more broadly to other power holders. In Eclairs Group Ltd v JKX Oil & Gas plc,11 the Supreme Court had a rare opportunity to analyse these rules on directors’ exercise of power for improper purposes in a context which raised more subtleties than earlier authorities. An English listed oil and gas company, JKX, suspected that it was the target of a hostile raid by two of its shareholders, Eclairs and Glengary. These were BVI companies with alleged Ukrainian backers. JKX, through its directors, had the power to require individual shareholders to disclose details of those with interests in the shareholding, and then to disenfranchise shareholders if it considered their response inadequate. This JKX did with both Eclairs and Glengary. It was not disputed that the power to disenfranchise had been exercised so as to disentitle these shareholders from voting at JKX’s AGM, thus ensuring the passage of certain resolutions, including resolutions to appoint the next round of directors, rather than for the purpose of enforcing the company’s demand for information. Future control of JKX thus hung on the validity of the directors’ actions. This may be a very specific illustration of a potential abuse of power, but it exposes a number of important general issues. To that end, this chapter builds out from this case to explore three interrelated issues. The first is the wider landscape of the legal regulation of private law powers. A simple framework is suggested that may aid conceptual clarity in addressing the important scope and manner (or excess and abuse) aspects of the current regime, and also accommodate both common law and equitable incursions into this territory. Secondly, the proper purposes rule itself is considered, especially the contested process of assessing whether purposes are ‘proper’ or ‘improper’ and, further, whether a particular decision has been taken for proper or improper purposes. Finally, comment is made on the important issue of remedies should the power holder be found to have acted in breach of these various legal restrictions.

9 Eclairs (n 1) [30]. To the same effect, see Briggs LJ in JKX Oil & Gas Plc v Eclairs Group Ltd [2014] EWCA Civ 640 [95]–[99]. 10 Duke of Portland v Topham (1864) 11 HLC 32 (HL) 54. 11 Eclairs (n 1) [15].

300  Sarah Worthington II.  A FRAMEWORK FOR THE REVIEW OF POWERS

A. Strategies Although the landscape for the regulation of powers is becoming increasingly messy, some things are clear. First, both courts and disappointed parties see the need for some controls. Moreover, these controls are seen as needed even when the power is, on its face, unconstrained: both the private and public law arenas are now united in the clear sense that there is no such thing as a completely unconstrained power that one person may exercise over another. This has been slower arriving in the private law domain, but, given all the other constraints the courts exercise over parties in respect of the terms of their agreements, exclusion, termination, forfeiture and damages clauses, and so on, it should be no surprise. The mechanisms by which this control is achieved are varied. Three very distinct strands of legal analysis are typically applied as non-overlapping alternatives: public law controls, contractual controls and equitable controls. Nevertheless, each is absolutely consistent in distinguishing between the limits of a power – or its scope – and the manner of its exercise. The latter is needed so that an apparently regular exercise of power is not used in bad faith, or used to secure some personal or other particular gain which is outside the subject or objects of the power.12 If some sense is to be made of this whole area, then each approach warrants brief introduction. B.  The Public Law Approach This broad and difficult area of the law is not the subject matter of this chapter, and the mechanisms public law now adopts in judicial review are increasingly nuanced. Nevertheless, public law analogies are increasingly relied upon in the private law arena, so some comment is warranted. Although public/private law analogies could be taken much further, most private law cases call only on the early foundational public law ‘Wednesbury principles’, and so, for present purposes, nothing further is set out here.13 In public law judicial review, there is again a fundamental divide between scope and abuse.14 So far as abuse is concerned, a two-limbed test of the reasonableness of an administrative decision was adopted by Lord Greene MR in Associated Provincial Picture Houses Ltd v Wednesbury Corpn:15 The court is entitled to investigate the action of the local authority with a view to seeing whether they have taken into account matters which they ought not to take into account,

12 Padfield v Minister of Agriculture, Fisheries and Food [1968] AC 997 (HL); Abu Dhabi National Tanker Co v Product Star Shipping Ltd (No 2) [1993] 1 Lloyd’s Rep 397 (CA) 404 (Leggatt LJ); Peters’ American Delicacy Co v Heath [1939] HCA 2, (1939) 61 CLR 457. 13 For an early perceptive and detailed discussion, see T Daintith, ‘Contractual Discretion and Administrative Discretion: A Unified Analysis’ (2005) 68 MLR 554. 14 See R (on the application of Miller) v Prime Minister; Cherry v Advocate General for Scotland (2019) [2019] UKSC 41, [2019] 3 WLR 589, where the judgment of the Supreme Court was based on an assessment of scope, not abuse. 15 Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223 (CA) 233–34.

Powers  301 or conversely, have refused to take into account or neglected to take into account matters which they ought to take into account. Once that question is answered in favour of the local authority, it may still be possible to say that, although the local authority have kept within the four corners of the matters which they ought to consider, they have nevertheless come to a conclusion so unreasonable that no reasonable authority could ever have come to it.

The first limb focuses on the decision-making process: whether the right matters have been taken into account in reaching the decision. The second focuses on its outcome: whether, even though the right things have been taken into account, the result is so outrageous that no reasonable (ie rational) decision-maker could have reached it. The second limb is often used as shorthand for the entire Wednesbury principle, without intending to exclude the first limb,16 but the second limb alone is what is captured by ‘Wednesbury unreasonableness’, or ‘irrationality’ in the modern terminology. C.  The Contractual Approach In the modern private law context, judicial oversight of the exercise of powers is increasingly sought to be managed by contractual means. Again, there is a fundamental divide between scope and abuse. The scope of the power is determined by the express terms of the grant.17 But, reaching beyond that, the earliest mechanism by which English courts have sought to exert still further control over the exercise of contractual discretion is through the use of contractual terms implied in fact.18 As Rix LJ put it in Socimer International Bank Ltd v Standard Bank London Ltd:19 a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused.

There are numerous examples. The terms that are typically implied are reminiscent of the public law constraints: power holders must not exercise their powers unreasonably, ‘in the sense of conduct or a decision to which no reasonable person having the relevant discretion could have subscribed’;20 or ‘dishonestly, for an improper purpose, 16 See Lady Hale’s discussion and use of this case in the private law arena in Braganza v BP Shipping Limited [2015] UKSC 17, [2015] 1 WLR 1661, discussed later in this chapter. 17 Subject, of course, to the possibility that constraints on the ‘manner’ of the exercise of the power, including the ends to which it is used, are seen as going to scope, not abuse. This is, it seems, the approach advocated in P Sales, ‘Fraud on a Power: The Interface between Contract and Equity’, Lecture for the Chancery Bar Association (Lincoln’s Inn, 2 April 2019) www.supremecourt.uk/docs/speech-190402.pdf. 18 See R Hooley, ‘Controlling Contractual Discretion’ (2013) 72 CLJ 65. 19 Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, [2008] 1 Lloyd’s Rep 558 [66] (Rix LJ). See also Abu Dhabi National Tanker Co (n 12) 404 (Leggatt LJ); Lehman Brothers International (Europe) (in administration) v ExxonMobil Financial Services BV [2016] EWHC 2699 (Comm) [272] (Blair J). 20 Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 1047, [2001] 2 All ER (Comm) 299 [64] (Mance LJ). See also Hayes v Willoughby [2013] UKSC 17, [2013] 1 WLR 935 [14], where, in a different context, Lord Sumption explained the fundamental and crucial distinction between ‘rationality’ and ‘reasonableness’: ‘Rationality is not the same as reasonableness. Reasonableness is an external, objective standard applied to the outcome of a person’s thoughts or intentions. The question is whether a notional hypothetically reasonable person in his position would have engaged in the relevant

302  Sarah Worthington capriciously or arbitrarily’;21 or for wholly unreasonable, capricious, arbitrary or bad faith reasons;22 or in a manner which does not reflect the need for ‘honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality’.23 These public law analogies are explicitly to the fore in the leading modern case on contractual discretions: see Braganza v BP Shipping Limited.24 In that case, the contractual terms gave one party to a contract the power to exercise a discretion or form an opinion as to the cause of death of an employee. The Supreme Court held that although the court could not exercise that discretion itself (by simply deciding what an objectively ‘reasonable’ outcome might be), it would ensure that the power was not abused by implying a term25 in appropriate cases that the power should be exercised not only in good faith, but also without being arbitrary, capricious or irrational in the sense in which that term was used when reviewing the decisions of public authorities; and that, adopting both limbs of the public law test,26 it followed that such a decision could be impugned not only where it was one that no reasonable decision-maker could have reached, but also where the decision-making process had failed to exclude irrelevant considerations or to take account relevant ones.27 The one niggling doubt with these conclusions is the principle that terms are usually not implied in fact unless ‘necessary’, and indeed in Gan Insurance Mance LJ warned that ‘the authorities do not justify any automatic implication, whenever a contractual provision exists putting one party at the mercy of another’s exercise of discretion’.28 Yet there are increasing references to the parties’ ‘reasonable expectations’ as legitimately driving the search for an implied term.29 This suggests that the approach is merging into a process of interpretation of the contract itself by finding that an implied term is needed to ensure the contract delivers what a reasonable person would understand the contract to mean.30 Further, with this as the test, it is surely inevitable that the types of constraints described in the previous paragraph will invariably be seen as the ‘reasonable expectations’ of any contracting party: who would not expect that their contract will protect them from the power holder’s dishonest, capricious, arbitrary, perverse, irrational or wholly unreasonable exercises of power, and ensure such powers are exercised in good faith and for proper purposes? conduct for the purpose of preventing or detecting crime. A test of rationality, by comparison, applies a minimum objective standard to the relevant person’s mental processes. It imports a requirement of good faith, a requirement that there should be some logical connection between the evidence and the ostensible reasons for the decision, and (which will usually amount to the same thing) an absence of arbitrariness, of capriciousness or of reasoning so outrageous in its defiance of logic as to be perverse.’ 21 Paragon Finance plc v Nash [2001] EWCA Civ 1466, [2002] 1 WLR 685 [32] (Dyson LJ). 22 Lymington Marina Ltd v MacNamara [2007] EWCA Civ 151, [2007] 1 All ER (Comm) 825 [42]–[44] (Arden LJ). 23 Socimer International Bank Ltd v Standard Bank London Ltd (n 19) [66] (Rix LJ). 24 Braganza (n 16). 25 ibid [18] (Lady Hale). 26 ibid [29] (Lady Hale). 27 ibid [18], [19], [24], [29]–[30], [52]–[53] and [102]–[103]. 28 Gan Insurance (n 20) [62] (Mance LJ). 29 Paragon Finance plc v Nash (n 21) [36] and [42] (Dyson LJ); Equitable Life Assurance Co Ltd v Hyman [2002] 1 AC 408 (HL) 459 (Lord Steyn). 30 Jackson v Dear [2012] EWHC 2060 (Ch) [40] (Briggs J); Eastleigh BC v Town Quay Developments Ltd [2009] EWCA Civ 1391 [31] (Arden LJ).

Powers  303 Once that point is reached, then even powers described as ‘absolute’ will be constrained in this manner.31 Taking that still further, and even though terms are said only to be implied in law into standard legal relationships, this approach to constraints on the exercise of powers looks to be delivering the general implication (ie at law) of terms into all contracts giving one party a power to decide a matter which affects the interests of another.32 One might then suggest that, rather than reinvent the wheel, the contractual approach should either adopt wholesale the far better developed public law approach to review,33 or the still better developed and longstanding equitable approach. The latter is commonly deployed in the modern world in the context of contractual arrangements between fiduciary power holders and their principals, be they trustees, directors, partners, solicitors, or agents, or, beyond the fiduciary realm, to shareholders, bondholders and others. It seems to be the worst of all worlds to have three models defining the approaches to abuses of power. Two might be accommodated, given the common divide between public and private law, although even those differences can be exaggerated.34 Despite this, the approach based on contractual interpretation, not implied terms at all, has powerful advocates. Lord Sales, in his 2019 Chancery Bar Lecture, conceded some of the strengths of the equitable approach, but advocated that on a proper approach to contractual interpretation it was not only unnecessary but also unprincipled to overlay the distinct equitable principle of ‘fraud on a power’: ‘if exercise of a power is within the contemplation of the parties to the contract, what business has equity in intervening to defeat their expectations?’35 In reaching this conclusion, he took issue with Lord Sumption’s contrary finding in Eclairs.36 To that end, Lord Sales suggested:37 Might it not be said that the matters referred to by Lord Sumption as relevant to the identification of the proper purposes for which the power might be exercised – inferring the mischief or object at which the power is directed from the express terms, business context and the practical effects which its exercise in a given context will bring about – are precisely the matters to which one would have regard when interpreting the limits inherent in the power in the contractual setting in which it appears?

31 As seems to be the case. See, eg WestLB AG v Nomura Bank International Plc [2012] EWCA Civ 495, where a fund was to be valued by the calculation agent ‘in its sole and absolute discretion’ and the valuation was to be ‘final and binding … in the absence of manifest error’. However, even this language did not exclude the implication of the limitation. That suggests the implication is inevitable, not a matter of particular contractual interpretation. 32 Hooley (n 18) 69–70. The alternative is to find such terms implied as a matter of law only in more limited contexts, with the growing claim being that such contexts are captured by a class of contracts described as ‘relational contracts’, with the implied term then being that the parties owe obligations of ‘good faith’ and ‘fidelity to the purpose of the endeavour’: Sir George Leggatt, ‘Relational Contracts’, Lecture to the Business & Property Court Judges (3 February 2020). Although the obligations of good faith are worded here as imperative, the illustrations are of more negative constraints on bad faith, as is common with power holders. However, the problem then is that the class is too narrow: constraints on power holder are seen as legally necessary in a far wider context that ‘relational contracts’. 33 As in Braganza (n 16). 34 See Daintith (n 13). 35 Sales (n 17). 36 Eclairs (n 1) [30]. 37 Sales (n 17).

304  Sarah Worthington However, the focus here is on using the contract to identify the particular proper purposes for which an identified power might be exercised. There can be no complaint with that. This is indeed how it might be discerned that shares can be issued for a variety of good reasons, but not for the bad reason of upsetting voting majorities.38 But the real issue is the step before that: what is the source of the legal constraint on the grant of power that insists that a broadly worded power to issue shares can only be exercised for these limited ‘proper’ purposes? If the answer is that the parties to a contract would inevitably expect their grants of power to be so constrained, then we seem not to be in the realm of ‘interpreting’ individual contracts between parties, and should instead concede that there is a source of constraint external to the contract. That external source – ie that legal rule – is the mechanism adopted in both public law and equity. By contrast, the typical and, it is suggested, proper use of contractual interpretation is to settle questions of scope, not limitations on the manner in which a power may be exercised. Lord Sales uses the decision of the House of Lords in Hole v Garnsey,39 a decision arrived at without reference to equity or any distinct doctrine of fraud on a power, as an example of what he is after. But the judges in that case seem very clearly to have regarded the case as one on scope, not abuse: the House of Lords decided that the power did not exist, not that it existed but had been used to deliver unacceptable ends. Admittedly, this is one of the rare categories of case where ‘purpose’ appears to affect ‘scope’. That can be confusing, but should not be allowed to upset analysis. In Hole v Garnsey, the constitutional rules of an industrial and provident society contained a general discretionary power enabling amendment of the rules provided this was agreed by a super-majority of the voting members. This power to amend was exercised so as to force all members to subscribe for additional shares as a way of raising funds for the society. This amendment was held to be outwith the power of amendment, according to its proper interpretation. This conclusion did indeed rely on an implied term (in the proper legal sense of that expression, if the judgments are read) restricting the generality of the power so as to exclude from its ambit the power to compel members to invest capital in its business against their will, or (though this was not in issue) to remain bound into an association committed to new and different purposes. In both these regards, even if not in any other, the power of alteration by majority – a power accepted by members on their entry into the society – did not go so far as to enable the society to compel the dissenting minority to accept those particular changes to their rules.40 To make the contract point more strongly, the issue here is that the ‘paper deal’ effected by the purported exercise of this power is beyond the scope of the power; it is not that this particular ‘paper deal’ is generally allowed, but cannot be used to deliver a particular collateral outcome.41 The same form of purpose-related scope limitation is seen in assessing the scope of powers that can be exercised by charitable companies and their directors;42 it is also seen in public law.43 38 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC). 39 Hole v Garnsey [1930] AC 472 (HL). 40 ibid 490 (Lord Dunedin), 491 (Viscount Sumner), 493–94 (Lord Atkin) and 500–01 (Lord Tomlin). 41 Contrast this with the share issue in Howard Smith v Ampol (n 38). 42 And, similarly, old-style private companies with limited objects, where issues of ultra vires were common limiters of scope. 43 Miller (n 14), where the Supreme Court’s conclusion was clearly based on scope, not abuse.

Powers  305 D.  The Equitable Approach Equity, too, has rules constraining the exercise of power. Again, these rules evince a fundamental divide between scope and abuse. The rules themselves are most familiar in the context of the exercise of power by fiduciaries, especially trustees and directors, but they are also frequently applied in analogous ways in decision-making by shareholders, whether in general meetings or in class meetings, and in decision-making by bondholders, and increasingly in circumstances extending beyond these categories.44 In its broad outlines, equity’s general approach is remarkably similar to the public law and contractual approaches not only in its divide between scope and abuse, but also in its subdivision of abuse into good faith and proper purposes subcategories (or relevant considerations, as the public lawyers would put it). In all these respects, the general equitable rules remain consistently as stated by Lord Westbury LC in Duke of Portland v Topham, cited at the start of this chapter.45 The equitable good faith constraint is itself, like the public law constraint, also subject to an irrationality test: ie that no reasonable (rational) person could have thought the decision proper.46 Little more need be said at this stage about the good faith constraint. On its own, it was never going to provide the necessary protection from abuse of power.47 As Bowen LJ put it in Hutton v West Cork Rly Co, in a judgment dealing with implied powers which appears to embrace both directors’ and shareholders’ decisions:48 What would be the natural limit of their power …? Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational.

The last phrase on irrationality may now be doubted, but nevertheless the sentiment remains true: it is well accepted that protection from irrationality sets such a low bar that it provides little real comfort from abuses by power holders. Leaving the good faith constraint at that for the moment, it is the proper purposes rules that contain greater subtleties and have caused correspondingly greater concern in their application, as Eclairs demonstrates. The orthodox rules in this area are traditionally labelled as the doctrine of ‘proper purposes’ in company law49 and ‘fraud on the power’ in trusts.50 The classic description of fraud on the power was provided by Lord Parker almost 100 years ago in Vatcher v Paull:51 44 See the cases cited in S Worthington, ‘Abuse of Power in Commercial Relationships’ in M Cheng and J Jen (eds), Law Lectures for Practitioners 2011 (Hong Kong, Hong Kong Law Journal Ltd, 2013) 67. 45 See the text to n 10. 46 For a recent discussion, see Newey (n 2) 41–49. 47 Vatcher v Paul [1915] AC 372 (PC); Howard Smith v Ampol (n 38); Bamford v Bamford [1970] 1 Ch 212 (CA). All these cases also consider proper purposes. 48 Hutton v West Cork Rly Co (1883) 23 ChD 654 (CA) 671 (Bowen LJ). 49 Now given statutory force in the Companies Act 2006, s 171(b). Perhaps predictably, given the history, ‘fraud on the power’ was sometimes used in older company law cases: see, eg Spackman v Evans (1868) LR 3 HL 171 (HL) 187 (Lord Cranworth). 50 See eg Robinson v Briggs (1853) 1 Sm & G 188, 65 ER 81; Duke of Portland v Lady Topham (n 10) 54 (Lord Westbury LC); Re Cohen, Brookes v Cohen [1911] 1 Ch 37 (Ch) 40–41 (Joyce J); Cowan v Scargill [1985] Ch 270 (Ch) 288 (Sir Robert Megarry VC); Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862 (QB) 883 (Knox J); Walker v Stones [2001] QB 902 (CA) 934 (Sir Christopher Slade); Pitt v Holt (n 4) generally. 51 Vatcher v Paull [1915] AC 372 (HL) 378.

306  Sarah Worthington The term [fraud] in connection with frauds on a power does not necessarily denote any conduct on the part of the appointor amounting to fraud in the common law meaning of the term or any conduct which could properly be termed dishonest or immoral. It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power.

Later cases have stressed this point that the equitable doctrine of ‘fraud on the power’ has little if anything to do with fraud.52 Power holders can be acting entirely in good faith and in what they perceive as the best interests of their beneficiaries or principals, and yet still be in breach of this constraint if their decision is ostensibly within the scope of a power, but made for an improper purpose.53 In this way, the constraint allows for far greater judicial intervention than a mere good faith constraint. The same proper purposes rule is more famously, and perhaps more clearly, articulated by Lord Lindley MR in Allen v Gold Reefs of West Africa Ltd, in the context of a shareholder vote to change the company’s articles:54 Wide, however, as the language of [the Companies Act provision for changing the articles] is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded.

By contrast, the positive formulation of the proper purposes obligation now contained in the Companies Act 2006, section 171(b) (a director ‘must … exercise powers for … [proper] purposes’), as opposed to the negative version in Re Smith & Fawcett55 (must not act for any collateral purpose), aligns the duty more closely with the common law version that is familiar in public and administrative law. This alignment has been advocated in certain recent cases.56 Here, however, it is doubted that the revised formulation entails a material difference in the constraint. Given these various equitable constraints on the exercise of powers, the logical analytical approach seems self-evidently to ask, first, whether the power holder has the power to do what has been done, and only then to ask whether the power has been exercised properly, in good faith and for proper purposes. With respect, the failure to approach the problem in this way explains a good deal of the confusion in interpreting the House of Lords decision in Equitable Life Assurance Society v Hyman,57 and 52 Medforth v Blake [2000] Ch 86 (CA) 103 (Sir Richard Scott VC); Eclairs (n 1) [15] (Lord Sumption): ‘The principle has nothing to do with fraud.’ 53 Duke of Portland v Lady Topham (n 10) 54 (Lord Westbury LC); Re Cohen, Brookes v Cohen (n 50) 40–41 (Joyce J); Cowan v Scargill (n 50) 288 (Sir Robert Megarry VC); Walker v Stones (n 50) 934 (Sir Christopher Slade); Hillsdown Holdings plc v Pensions Ombudsman (n 50) 883 (Knox J); Pitt v Holt (n 4) [61] (Lord Walker); Eclairs (SC) (n 1) [14]–[24]. 54 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA) 671 (emphasis added). 55 Re Smith & Fawcett [1942] Ch 304 (CA). 56 Hunter v Senate Support Services Ltd [2004] EWHC 1085 (Ch); Edge v Pensions Ombudsman [2000] Ch 602 (CA) 627–28 (Chadwick LJ). 57 Equitable Life v Hyman (n 29) 457–60, where Lord Steyn looks to whether the power exists, and 460–62, where Lord Cooke agrees that this is one approach, but holds that the same result may be reached by finding that the power does exist but has been abused by being exercised for purposes not permitted by the terms of the parties’ agreements. Given that the power was expressly at ‘the absolute discretion of the directors, whose decision thereon shall be final and conclusive’, any conclusion that the directors did not have the power

Powers  307 is also evident in the different judgments of the Court of Final Appeal in Ying Ho Co Ltd v Secretary for Justice.58 In closing this section on the various strategies deployed to constrain misuse of power, a comment can be made on the breadth of coverage delivered by these rules. The early equity cases typically concerned trustees and directors,59 including nominee directors using their powers improperly to advance the interests of their nominator and not the interests of the company itself.60 Over time, these rules were extended to other power holders, such as mortgagees, liquidators and insurers.61 The reasons for the expansion are readily apparent. If absolute power is not to lie with directors or trustees, with dominant voting blocs or with other such agents, then the law must provide rules which limit how far a dissenting minority can be compelled to accept the decisions of the majority, or their agents, when these people are exercising delegated discretionary power. Indeed, as the contract cases demonstrate, the problem is equally relevant with any discretionary exercise of power, whether exercised by majorities or by individuals, and whatever the particular context. If the law is to deliver remedies to all these people in a way that is defensible and coherent, and to treat like cases alike, then work needs to be done on integrating and aligning, or dismissing, some of these mechanisms where they are competing for the same territory. E.  Proposed Framework When the court holds that an exercise of power is invalid, it may use a variety of explanations for its ruling, at least some of which are interchangeable.62 This does not aid analysis. Here the focus is on private law, but the issues range more widely. Three suggestions are advanced, each building on the detail just outlined. First, it is essential to separate scope and abuse issues. This divide, if addressed rigorously, marks a substantive difference in the issues in the sightlines. ‘Scope’ concerns the existence of the power, and thus its central focus is on the words in the documentation (typically) embodying the grant of the power to the power holder. is tantamount to saying directors do not have the power to do things for improper purposes, an approach decried in Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246 (CA). 58 Ying Ho Co Ltd v Secretary for Justice [2004] HKCFA 51. See especially [98]–[110] (Ribeiro PJ), preferring Lord Steyn’s approach in Equitable Life (n 29), and, it seems, confining proper purposes to exercises of discretion by fiduciaries. Contrast [8]–[9] (Bokhary PJ), which, on one reading at least, seems to accept the proper purposes approach in this wider context, but finds that the decision was quite legitimately made for purposes contemplated within the parties’ agreement – a view which seems undoubtedly correct on the facts as presented in the judgment. 59 See the cases cited below. 60 See, eg Meyer v Scottish Cooperative Wholesale Society Ltd [1959] AC 324 (HL); Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187 (PC). 61 See, eg Aleyn v Belchier (1758) 1 Eden 132, 138; 28 ER 634, 637 (Lord Northington); Allen v Gold Reefs (n 54) (shareholders’ power to alter a company’s articles of association); Yorkshire Bank v Hall [1999] 1 WLR 1713 (CA) (mortgagee’s power of sale); Paragon Finance plc v Nash [2001] EWCA Civ 1466, [2002] 1 WLR 685 (mortgagee’s power to set interest rates under the mortgage); Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703 (Ch), [2006] 1 BCLC 149 (lender’s power to alter the terms of a loan syndication). 62 LS Sealy, ‘Bona Fides and Proper Purposes in Corporate Decisions’ (1989) 15 Monash University Law Review 265, 268.

308  Sarah Worthington This is a question of law, assessed objectively, where issues of construction, interpretation and implied terms are central. Often, the scope of the power is apparent on the face of the grant: transfer to X, buy only FTSE 100 equities, pay dividends to shareholders in specified conditions. This is not to say the power is necessarily narrow. The board of directors of a company typically has power to commit the company to any act within the limits of the company’s very broad capacity. Sometimes, however, as indicated earlier, defining the scope of a given power is more difficult. This is typically the case in those limited contexts where the scope issues appear to have resort to ‘purposes’. The examples I give later in this chapter are of societies, charitable companies and certain executive powers.63 But notice the critical distinction between purposes in this context and purposes in the abuse context. In this context, the ‘purpose’ issues are being used to limit the very act which the power holder can undertake; in the abuse context, ‘purpose’ is being used to describe the reason why the power holder actually decided to act, where the act itself was within scope, but the collateral ambitions sought to be delivered are not permitted at law. This, as amplified below, is the foundational distinction between ‘scope’ and ‘abuse’. Abuse cases are all invariably focused on the power holder. The precondition is that the power holder does indeed have the power to act in the way they have. What is in issue is how and why they decided to act in that way: what collateral ends were they seeking to deliver? This makes it obvious that issues of construction, interpretation and implied terms in the grant of power are immaterial other than to provide the context in which a court can establish whether the manner in which the power has been exercised is legally appropriate. Some of the intuitive reservations that may be felt about accepting such a hard line between scope and abuse may diminish once it is realised that this is simply a line between the existence of a power and the processes which must be adopted for its proper exercise. Both aspects are subject to legal input, including inputs delivered as a matter of law, not mere construction of agreements. For example, shareholders have the power to amend class rights. The scope of that power is constrained; so too is the process and manner in which effective change can be achieved. A failure in either aspect will render the change in class rights ‘ineffective’. As outlined later, it is not right to say one failure renders the exercise void and a different failure renders it only voidable. But separating scope and process issues does assist in working out the detail and determining the practical impact of any failure on all parties concerned. It is also material in considering who, if anyone, might forgive or ratify such breaches. And, of course, at the very outset, it assists in identifying whether or not there has been any failure at all in the exercise of the power. Secondly, some form of categorisation has to be adopted with ‘abuse’ cases. Where the issue is the manner in which the power holder has exercised the power, it does not assist legal analysis to have quite so many labels describing the different forms of behaviour that are impermissible. Here it is suggested that there are only two distinctive classes of such behaviour. First, there is the requirement that the power holder act honestly, delivering a genuine attempt to exercise the power. This is



63 See

the text to n 122 below.

Powers  309 commonly ­abbreviated as a requirement to act in good faith (where that requirement does not demand a positive obligation, but merely an absence of bad faith). This category embraces the common descriptors demanding the absence of capriciousness, arbitrariness and irrationality.64 All these characteristics are grouped together as they all relate to the subjective endeavours of power holders to make a genuine effort to exercise the power in their hands. The only objective qualification to the ground for interference is if the decision actually taken by the power holder is one that no reasonable powerholder would consider a genuine effort. This does not mean that the power holder’s own decision has to be ‘reasonable’; far from it. Indeed, the ‘no reasonable power holder’ test sets such a low standard that it effectively amounts to a baseline where the court feels able to say that, whatever the power holder’s assertions of honesty and genuineness, the court is not persuaded they are credible. The other distinctive sub-category of ‘abuse’ cases is captured by the label ‘improper purposes’, or, less informatively, ‘fraud on the power’. It is equally captured by ‘irrelevant considerations’.65 With these cases, the focus is on the ends desired to be achieved by the power holder through the exercise of a power which is undeniably held. This category is illustrated by Eclairs itself, where powers were exercised for the purpose of preventing certain shareholders voting at a general meeting. This class is distinctive because the range of purposes or considerations deemed ‘improper’ or ‘irrelevant’ in the context of any given power is a question of law.66 True, the purposes actually pursued by the power holder is a question of fact, but since the initial step is a question of law, it is perfectly possible for power holders to be in breach of this restriction in ignorance, in good faith, and in the face of careful and genuine efforts to do the right thing. As an aside, certain power holders must not only exercise their powers in good faith and for proper purposes; they must also exercise them carefully. Fiduciaries are invariably in this category, as are most commercial intermediaries. But this requirement is sourced in contract or tort, and is not one of the special strategies the law has developed specifically to constrain abuse of power. The remedies for breach of these contract or tort duties are also different from the remedies arising when powers are abused in other ways. Returning to the central issues, and making a third point: the familiar labels of ‘void’ and ‘voidable’ should be dropped. For reasons explained later, these descriptors are unhelpful, or worse. What the scope/abuse divide does mark, however, is a divide between strict liability for breach and a liability that requires careful proof of the particular manner in which the power holder has exercised the power. In particular, in order to determine whether a power exists, the focus is on the text of the delegation of power. Further, if the power has been exercised beyond its scope (ie the power holder has acted in excess of power), then the power holder is in breach notwithstanding good faith, genuine intention to benefit the claimant, due

64 As to which, see the definition at n 20 above. 65 Occasionally the ‘considerations’ are so irrelevant that the power holder is seen as failing to exercise the power genuinely, or in good faith. 66 See HHJ Russen QC in Stobart Group Ltd v Tinkler [2019] EWHC 258 (QB) 446, separating good faith and proper purposes in this way.

310  Sarah Worthington care, proper ambitions in exercise of the power, and so on.67 By contrast, where the issue is the manner in which the power has been exercised, the focus in determining breach is on the power holder, and here the power holder may not be in breach even though the consequences for the claimant have been disastrous. This is typically seen where the power holder acts in good faith, but delivers damaging ends; or acts for proper purposes, but the advice which has been taken in support of that ambition is incorrect;68 or – if care is needed –that proper care has been taken, but to no avail in securing a successful outcome. This distinction between scope and abuse is common in both public and private law regulation of power, and is common to public, equitable and contractual discretions. So too is the division into two types of abuse of power (or three, if negligence is included). These parallel structures are supported by remarkably similar approaches to addressing the issues in play, as the earlier discussion demonstrates. Of course, context matters, and in that sense different outcomes may be delivered if powers are exercised by government agencies, trustees or contracting parties. But one point made earlier is worth repeating: it is suggested here that issues of construction, interpretation and implied terms are relevant to scope. Indeed, they are determinative of scope. They are also relevant in identifying the relevant proper and improper purposes or relevant and irrelevant considerations, on the assumption that an otherwise broad power will be constrained in that way. But the source of the constraint on the manner of the exercise of powers is external to the contract, otherwise the grant of an absolute power would operate according to its term, but it never does, either in public law, or in contract, or in equity. In short, if analysis in these areas is to be robust and deliver predictable results, it seems important to do three things. First, issues of scope should be separated from issues of abuse, and the analysis of scope issues should be confined to matters delivered by contractual interpretation, including interpretation of terms delivered by implication, whether of fact or law. Secondly, the relevant abuses that are constrained by law should be categorised into two classes: abuses reflecting absence of good faith or genuineness in the power holder’s decision-making, with this judged subjectively; and abuses reflecting use of the power for improper purposes or ends, with the decision as to whether the ends actually desired by the power holder were indeed improper determined as a matter of law. Finally, remedies should be assessed with a careful eye as to what, precisely, has gone wrong in the given context, not simply by applying the labels ‘void’ and ‘voidable’ and expecting that to deliver sensible outcomes. This final issue is addressed later in this chapter. In closing this section, a further comment about the scope of these rules is warranted. It is surely obvious from what has gone before that every exercise of power is subject to these constraints, and every power holder holding a power that will affect the rights or interests of another is subject to these constraints. It is now too late to say otherwise. Even in equity, the rules are not confined to fiduciaries; in public law, it is widely recognised that there is no such thing as absolute power no matter how wide the terms of the grant; and in contract law, it was put pithily by Leggatt LJ that where

67 See

68 Pitt

the familiar example of Re Diplock [1951] AC 251 (HL). v Holt (n 4) is itself an illustration of this.

Powers  311 ‘A and B contract with each other to confer a discretion on A, that does not render B subject to A’s uninhibited whim’.69 III.  PROPER PURPOSES

A. Introduction For directors, the proper purpose rule is now enshrined in statute: the Companies Act 2006, section 171(b) provides that directors must ‘only exercise powers for the purposes for which they are conferred’, and section170(4) adds that the rule is to be interpreted and applied with regard to the corresponding common law rules and equitable principles. This seems terribly simple, but the devil is in the detail. In any proper purposes case, the court typically proceeds in steps: first, analysing the particular power in issue to determine as a matter of law the boundary between its proper and improper exercise; secondly, assessing as a matter of fact the reason(s) for the exercise of the power in the case before them, and applying some appropriate legal test if the directors acted for mixed purposes, as typically they do; and, finally, deciding the appropriate consequences. Regrettably for legal certainty, the Supreme Court in Eclairs was required to deal only with the first step. In Eclairs, that step alone was difficult enough. Until JKX, most proper purposes cases concerned the issue of shares, often to defeat hostile takeover bids.70 A power to issue shares can clearly be exercised for a variety of reasons, some potentially proper and others improper. By contrast, the JKX-style conditional power to disenfranchise shareholders can only be exercised when the conditions are met. Suggesting that it might be improper to exercise the power to disenfranchise in those very circumstances could seem contrary to the very essence of the power. JKX put this fundamental ‘no proper purpose limitation’ argument in three different ways, but none persuaded the Supreme Court. The Court denied that the proper purpose rule frustrated the purpose or utility of the disenfranchising provisions in the company’s articles. This must be right: the duty is general, applicable to all directors’ powers, and will only frustrate illegitimate purposes, not legitimate ones. The Court also denied that proper purpose restrictions are only discovered by seeking technical common law implied terms in the contract. They are, instead, sourced in very much broader equitable constraints applicable to the exercise of powers generally. Finally, the Court denied that the jurisdiction depended on whether the power was ‘unilateral’ or conditional, even though the latter might appear to put the consequences of its exercise entirely in the hands of the shareholders. This conclusion too must be right. Even in this context, the company is both the initiator of the request and the final arbiter of the potentially draconian consequences. 69 Abu Dhabi National Tanker Co (n 12) 404. 70 Prior to Eclairs, the long-standing leading authority was Howard Smith v Ampol (n 38). This case will remain important, especially given the limited extent to which the Supreme Court in Eclairs could settle all the legal issues.

312  Sarah Worthington B.  Which Purposes are Improper? Accepting that the power does indeed have to be exercised for proper purposes, the difficult issue is to determine which purposes are proper and which are not. Lord  ­Sumption held that ‘it is usually obvious from its context and effect why a power has been conferred’.71 But, however ‘obvious’, reasonable minds are very likely to differ, and it is this which makes the proper purposes jurisdiction so fraught. In Eclairs, Lord Sumption determined that there were three proper purposes: to incentivise supply of the required information, to protect the other shareholders from having to make decisions in ignorance of hidden vested interests and to punish noncompliance. By contrast, it was not proper to prevent shareholders from participating in corporate governance, even though that was equally an incident of a proper exercise of the power. All this may seem eminently compelling, but it leaves a very difficult issue of fact. Lord Sumption’s three purposes surely collapse into one, that being to protect the shareholders from taking decisions in ignorance of vested interests, and doing that by means of incentives and punishments. Moreover, the more crucial the decision, the more crucial the protection. Indeed, it is difficult to see this power being exercised in anything other than such important voting circumstances. The threat of disenfranchisement may be precisely the directors’ intention in order to provide the desired protection – as, indeed, is contemplated by the express terms of the power. This, then, seems on all fours with Eclairs, so if the directors had worded their motives in this more appropriate longhand, might all have been well? Instead, Eclairs’s appeal was allowed on the basis that the directors had indeed exercised their power for the improper and primary purpose of disenfranchising Eclairs at the AGM. Consider the issue more generally. The ‘proper purposes’ approach, whatever its advantages, makes it necessary to define legitimate and illegitimate purposes and considerations. This is not easy. It is generally stated to be a matter of construction of the articles of association.72 That is all very well if the articles are prescriptive, but this is rarely the case. In Howard Smith v Ampol,73 for example, the clause giving the directors power to issue shares was drawn in the widest terms. The ‘purposes’ limitation which the Privy Council read into the directors’ powers derived not from a narrow analysis of that clause, but from placing the share issue power within the company’s constitutional arrangements as a whole, as demonstrated in particular by the terms of its articles of association. In essence, to do what the directors did in that case was regarded as undermining the division of powers between shareholders and the board which the articles had created.74 And, in that context, the case comes close to deciding that it is always a breach of the directors’ duties to exercise their powers 71 Eclairs (n 1) [31]. 72 Re Smith and Fawcett Ltd (n 55) 306. 73 Howard Smith v Ampol (n 38). 74 ibid 837. In full: ‘The constitution of a limited company normally provides for directors, with powers of management, and shareholders, with defined voting powers having to appoint the directors, and to take, in general meeting, by majority vote, decisions on matters not reserved for management. Just as it is established that directors, within their management powers, may take decisions against the wishes of majority shareholders, and indeed that the majority of shareholders cannot control them in the exercise of

Powers  313 to promote or defeat a takeover offer, which decision should be left to the existing body of shareholders. This is certainly the proposition upon which the City Code on Takeovers and Mergers (the Takeover Code) is based, which provisions will prevail once a bid for a listed company is imminent. In Criterion Properties Plc v Stratford UK Properties LLC,75 however, neither Hart J nor the Court of Appeal ruled out the possibility that in some cases it might indeed be a proper purpose in the exercise of directors’ powers for them to be used to block or discourage a takeover. However, the issue could not be presented in such a sharp fashion in that case, since both courts were agreed that the ‘poison pill’ adopted by the directors in that case was disproportionate to the threat faced by the company. It follows from this approach, however, that in a different type of company with a different constitution, a broader view might be taken of the directors’ powers under the articles. For example, the Howard Smith approach was distinguished in the 2002 case of CAS (Nominees) Ltd v Nottingham Forest Football Club plc.76 This was an unfair prejudice claim, but at root the issue was proper purposes. The disputed agreement involved an injection of cash by a new investor in return for control of the football club. The deal was arranged by way of a share issue in the club, rather than in the club’s holding company. This was done to avoid opposition from dissenting shareholders in the holding company, who held almost 25% of the issued share capital and could therefore block the necessary special resolution required to override the statutory pre-emption rights. The deal also included an eventual flip-up provision which would in due course give the investor control of the holding company. Hart J held that the directors had the authority and the power to undertake the transaction in either way; that they acted in good faith; and that it could not be said that the powers to reconstitute the board of the club and increase and allot share capital in the club were being exercised for an improper purpose. The purpose was proper – it was working towards the success of the club.77 That may all sound fine and proper as a matter of legal analysis. But perhaps here the proper purposes rule also shows its possible link to issues of form and substance, these powers while they remain in office so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element in the company’s constitution which is separate from and set against their powers.’ This principle was applied by the Court of Appeal in Lee Panavision Ltd v Lee Lighting Ltd [1992] BCLC 22 (CA), where the incumbent directors entered into a long-term management agreement with a third party knowing that the shareholders were proposing to exercise their rights to appoint new directors. 75 Criterion Properties Plc v Stratford UK Properties LLC [2002] EWHC 496 (Ch), [2002] 2 BCLC 151 and [2002] EWCA Civ 1883, [2003] 1 WLR 2108. The issue was not analysed by the House of Lords, which focused on the logically prior question of the director’s authority (actual or apparent) to enter into the contract on behalf of the company: Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28, [2004] 1 WLR 1846. The ‘poison pill’ arrangement entitled the joint venture partner of the potential target company (Criterion) to require Criterion to buy out its interest in the venture on terms which were very favourable to the partner and thus very damaging economically to Criterion. However, this arrangement was capable of being triggered not only by a takeover, but also by any departure of the existing management of Criterion, even in circumstances, which in fact arose, which were wholly unconnected with a takeover. 76 CAS (Nominees) Ltd v Nottingham Forest Football Club plc [2002] 1 BCLC 613 (Ch). 77 ibid 632–33.

314  Sarah Worthington and the distinction between sham and proper deals. In this case the transaction had been judged to fall on the right side of the line. The power existed and the purposes were proper. And yet there is a 1960s case, Re Bugle Press Ltd,78 where the majority shareholders, having tried and failed to buy out the minority, used a corporate intermediary and a formal takeover offer to avail themselves of the statutory squeeze out powers to acquire the renegade minority compulsorily. The English Court of Appeal refused to allow the exercise of the compulsory powers in this way, essentially because the court considered the whole scheme to be a device, a hollow sham and not a genuine exercise of the statutory powers for their intended purpose.79 Of course, it is true that powers come in vastly different shapes and sizes, implicitly designed to achieve different purposes. Courts must therefore consider each case in its own context: they must examine the terms of the delegation of power – this is perhaps of primary significance; but the cases suggest they also consider the individual or body exercising the power, the individuals who are subject to the power, the type of power and the legitimate expectations80 of all who are affected by its exercise. The strategy has proved surprisingly useful, even if the law in this area would benefit enormously from clarification. The doctrinal limits of the rule need to be emphasised, however. Legal intervention is directed solely at the question of whether the power has been used for improper purposes. To take a simple, but important, practical illustration: company shareholders have a statutory right to dismiss directors by simple majority vote at a general meeting.81 Boards of directors are sometimes themselves given an equally broad power to request resignations of their co-directors. Directors may feel indignant if this power is used to dismiss them when their performance is perfectly satisfactory. Nevertheless, it is unlikely that the shareholders (or directors) will be found to have acted for improper purposes merely because they wish, for their own personal reasons, to change the company’s management team.82 But even this has its limits – or it ought to. Samuel Tak Lee v Chou Wen Hsien is a case where a clearer analysis might have helped.83 There, the facts suggested that a director’s dismissal by a notice from 78 Re Bugle Press Ltd [1961] Ch 270 (CA). 79 ibid 287. At first instance, Buckley J, while also refusing to allow the compulsory acquisition of the minority shareholder, did so on the basis that the price on offer was not fair; the Court of Appeal declined to adopt this approach: ibid 287, where Lord Evershed MR noted that ‘the section has been used not for the purpose of any scheme or contract properly so called or contemplated by the section, but for the quite different purpose of enabling majority shareholders to expropriate or evict the minority; and that, as it seems to me, is something for the purposes of which prima facie the court ought not to allow the section to be invoked – unless at any rate it were shown that there was some good reason in the interests of the company for so doing, eg, that the minority shareholder was in some way acting in a manner destructive or highly damaging to the interests of the company from some motives entirely of his own’. In the same vein, but in a very different non-corporate context, see Cloutte v Storey [1911] 1 Ch 18 (CA). 80 To the contrary Ribeiro PJ in Ying Ho (n 58) [98]. 81 The Companies Act 2006, s 168. 82 Context is important in all these cases, and small changes in the facts may radically affect the outcome. To take another example: the trustee of a discretionary trust has a discretion whether to benefit his or her beneficiaries. If the trustee suddenly and unexpectedly decides to withdraw support from a long-standing recipient of benefits, the court may intervene. This is because the overriding purpose of all trustees’ powers is to act in the interests of the beneficiaries. Termination of benefit is possible – it is within the scope of the power – but perhaps its implementation requires reasonable notice to the beneficiary. 83 Samuel Tak Lee v Chou Wen Hsien [1984] 1 WLR 1202 (PC).

Powers  315 all his co-directors (as permitted by the articles) was motivated by a desire to prevent him uncovering and publicising unsavoury dealing and transactions at an undervalue by the company with some of its directors. In these circumstances, even if the actual dismissal is upheld (as it was, and as seems correct for the reasons footnoted), it seems the dismissed director should not have been left without a remedy (as he was).84 In that context, note that actions which adversely affect individuals are not, for that reason, indicative of abuse of power. Consider a power to refuse to register a transfer of shares in a quasi-partnership company, where it has been held proper for the directors to consider the fact that ‘the transferee would obtain too great a weight in the councils of the company or might even perhaps obtain control’.85 Similarly, it has been held proper for the council of management of a non-profit-making company formed to promote certain views to exercise a power to require the resignation of certain members of the association who held antithetical views and who were about to make a bid to secure control of it.86 And the statutory power of shareholders to dismiss their directors without cause has already been mentioned. By contrast, and taking the cases together, perhaps two broad categories of ‘improper purpose’ can be identified as operating quite generally, even when powers are expressed in the widest possible terms: use of a power for the purpose of ‘feathering the director’s nest’ (these are the easy cases) or for influencing the outcome of existing constitutional balances of power in the company (the harder cases) will typically be regarded as improper.87 These two categories or their equivalents seem to apply with other power holders where the analogies are apt. Note that it is not the incidental, or even inevitable, delivery of these ends which is outlawed: many perfectly proper actions by directors will deliver such results. Rather, it is this being the motivation for the exercise of the power, where that motivation has been deemed improper. Returning to Eclairs, the view that Lord Sumption took of the power in issue in that case was that it was a power of disenfranchisement, with its proper use being to protect the shareholders from taking decisions in ignorance of vested interests, and ensuring that end by means of incentives and punishments. Here, by contrast, 84 The Privy Council held (at 1207) that, although the power was fiduciary: ‘In order to give business sense to article 73(d), it is necessary to construe the article strictly in accordance with its terms without any qualification, and to treat the office of director as vacated if the specified event occurs. If this were not the case, and the expelled director challenged the bona fides of all or any of his co-directors, the management of the company’s business might be at a standstill pending the resolution of the dispute by one means or another, in consequence of the doubt whether the expelled director ought or ought not properly to be treated as a member of the board.’ Further, the Privy Council declined to allow the dismissed director to advance late arguments for remedies other than reinstatement. Had the approach advocated here been adopted, the Privy Council might have held the power to dismiss to exist (as they did), but its exercise to be in bad faith or for improper purposes (both seemed likely on the facts). In those circumstances, the dismissal would not be void, but voidable (as other similarly infected decisions might be), but, for the commercial reasons which the Privy Council gave, especially the necessary reliance of third parties on the clear knowledge of the company’s management team, rescission might not be permitted but other compensatory remedies might be enforced. 85 Re Smith & Fawcett (n 55) 308 (Lord Greene MR). 86 Gaiman v National Association for Mental Health [1971] Ch 317 (Ch). 87 In the same vein, it would be improper for a director to act for the purpose of favouring his or her nominator, with the cases again suggesting, if only by inference, that a ‘but for’ test is appropriate: see, eg Kuwait Asia Bank (n 60).

316  Sarah Worthington the directors were not motivated by the need to acquire the information that would protect them in their decision-making, but by the wish to conduct their decisionmaking unhampered by the influence of the corporate raiders. That, he said, was improper. That conclusion seems unassailable, though I confess to early doubts when the judgment first emerged. But, putting Lord Sumption’s point another way, it might be said that the protection explicitly delivered by the power did not extend to protection by disenfranchisement; that was merely the means to acquire the protection of knowing who was behind the voting blocs. So it follows that to use the power to acquire the protection of disenfranchisement was improper. But even this is not the end of the analysis; it merely raises the next question. C.  When is a Power Exercised for Improper Purposes? Directors are rarely actuated by a single purpose. This was true in the Howard Smith case, where the company did have a genuine need for fresh capital. If the directors are motivated by a variety of purposes, some proper and some improper, how should the courts determine whether the exercise of power is tainted? Section 171(b) indicates that a director must ‘only exercise powers for the purposes for which they are conferred’. This might seem to suggest that any improper motivating purpose will constitute a flaw. Lord Sumption noted that in the public law arena an improper purpose of any magnitude is regarded as tainting the decision.88 The terms of the Companies Act 2006, section 171(b) suggest the same rigid approach. Nevertheless, and perhaps for very pragmatic reasons, that has never been the rule applied in the corporate context except where the exercise of power is motivated by the director’s dishonesty or self-interest.89 Otherwise, the courts across common law jurisdictions have typically suggested that a decision will be considered flawed only if the proven improper purpose is the ‘primary’ or dominant purpose for the decision90 or if the decision would not have been taken ‘but for’ the improper purpose (even if the improper purpose was not the dominant purpose),91 or perhaps an either/or version of these two tests92 if it is thought that they are likely to lead to different answers on the facts. Each alternative poses enormous forensic difficulties, since all require proof of matters peculiarly within the minds of the directors and in relation to which the directors’ evidence is ‘likely to be both artificial and defensive’.93

88 Although note R (FDA) v Secretary of State for Work and Pensions [2012] EWCA Civ 332, [2013] 1 WLR 444. 89 Eclairs (n 1), citing Mills v Mills (1938) 60 CLR 150 (HCA) 185–86, where Dixon J indicated the difficulties. 90 Howard Smith v Ampol (n 38) 832 (Lord Wilberforce). 91 Mills v Mills (n 89); Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 (HCA) 294, although this interpretation, supported in Eclairs (n 1) [21]–[22] by Lord Sumption, was doubted by Lords Mance and Neuberger at [53]. See also Hirsche v Sims [1894] AC 654 (PC); Hindle v John Cotton Ltd (1919) 56 SLT 625 (HL). 92 Eclairs (n 1) [49]. 93 ibid [20] (on the ‘primary’ purpose test), and see too [54] (on both).

Powers  317 In England, when multiple purposes exist, the purpose that weighed the heaviest in directors’ minds when they exercised the power appears to be regarded as the principal purpose.94 However, this test has been criticised as giving the courts too much power to make value judgements and to second-guess directors’ business decisions.95 It has also been argued that the uncertainty that this test creates for company directors outweighs the flexibility that it affords to the courts.96 Finally, ranking decisionmaking purposes in order of intensity poses phenomenal obstacles.97 In many cases where multiple purposes exist, not even the decision-maker is able to identify which purpose was the most influential in his mind. A court’s determination of the dominant motive in such cases risks being artificial or arbitrary.98 The causal ‘but for’ test avoids some of these difficulties by eliminating the need to evaluate and compare the intensities of all concurrent purposes. Further, in Eclairs, Lord Sumption put forward a principled preference for the ‘but for’ test. It merits citing at length:99 The fundamental point [in selecting the right test], however, is one of principle. The statutory duty of the directors is to exercise their powers ‘only’ for the purposes for which they are conferred … If equity nevertheless allows the decision to stand in some cases, it is not because it condones a minor improper purpose where it would condemn a major one … The only rational basis for such a distinction is that some improprieties may not have resulted in an injustice to the interests which equity seeks to protect. Here, we are necessarily in the realm of causation … One has to focus on the improper purpose and ask whether the decision would have been made if the directors had not been moved by it. If the answer is that without the improper purpose(s) the decision impugned would never have been made, then it would be irrational to allow it to stand simply because the directors had other, proper considerations in mind as well, to which perhaps they attached greater importance … Correspondingly, if there were proper reasons for exercising the power and it would still have been exercised for those reasons even in the absence of improper ones, it is difficult to see why justice should require the decision to be set aside.

Lord Sumption relied on Whitehouse v Carlton Hotel Pty Ltd100 as support for the causal test. Although the ‘but for’ test analysis was obiter in Whitehouse, numerous other Australian courts have applied this test.101 Adopting ‘common’ legal rules in Commonwealth jurisdictions has been seen to have some weight in other contexts where a choice between alternatives seems difficult.102 The test has also been applied by British courts, mostly in the context of trustees’ powers of appointment.103 Finally, after reviewing a significant number of authorities on the application of the proper 94 ibid [19]; Howard Smith v Ampol (n 38). 95 Sealy (n 62) 276–77. 96 JH Farrar, ‘Abuse of Powers by Directors’ (1974) 33 CLJ 221, 223. 97 Grant v John Grant & Sons Ltd (1950) 82 CLR 1 (HCA) 46; Mills v Mills (n 89) 185. 98 D Bennett, ‘The Ascertainment of Purpose when Bona Fides Are in Issue: Some Logical Problems’ (1989) 12 Sydney Law Review 5, 7. 99 Eclairs (n 1) [21], but see generally [21]–[23]. 100 Whitehouse v Carlton Hotel Pty Ltd (1987) 61 ACLR 715 (HCA) 721. 101 See, eg McGuire v Ralph McKay Ltd (1987) 5 ACLC 891; Permanent Building Society v Wheeler (1994) 14 ACSR 109. 102 FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250. 103 See Re Turner’s Settled Estates (1884) 28 Ch D 205, 52 LT 70 (CA); Cooper v Cooper (1896) LR 8 Eq 312.

318  Sarah Worthington purposes rule, one of the leading treatises on legal powers concludes that the ‘but for’ test seems more appropriate and more consistent with the reported cases.104 However persuasive that might seem, and whatever the practical advantages of a single simple test, the majority of the Supreme Court declined to commit themselves to this as a statement of the law, given that the issues surrounding mixed purposes had not been argued before the Court.105 The matter thus remains unsettled. But it is hard to fault the logic that a decision should be held improper only if it would not in fact have been taken in the way it was but for the improper consideration. If that test is not met, then – as Lord Sumption put it – no injustice has been done, and the decision should stand. The only potentially troubling element is the hypothetical rider aired by the court. The problem raised was this: assume the directors in fact decided the way they did only because of the presence of an improper purpose, but they might still have decided the same way had that improper purpose not been present. Should their decision then be allowed to stand?106 The answer, surely, is no, it should not stand. Principle suggests that the court’s task is simply to determine whether the decision actually taken by the directors should stand. It is not to hypothesise about what the directors might have done for exclusively ‘proper’ motivating purposes. The focus of the court’s intervention is not on judging the practical outcome reached, but on judging the directors’ motivations in reaching it. And in any event, in practice, the question would seem impossible to contemplate sensibly on most facts before the court. Eclairs and Howard Smith are surely illustrative of that: the directors could insist they would have taken the same decisions if acting only for proper purposes, but their targets and timing make that seem unlikely. Despite this, in the early stages of the Eclairs litigation, Mann J raised this question himself, and also held that the facts supported the conclusion that the JKX directors would indeed have taken the same decision if they were acting for exclusively proper purposes, but he declined to let the company take the argument at that late stage in the litigation.107 D.  The Role of Advice Some aspects of the peripheral issues concerning an abuse of power are well understood, others are not. In the former camp is the protective role of advice taken by the power holder in providing a defence to a claim that an exercise of power was improper. Where the issue is one of scope, the power holder remains strictly liable for acts outside the scope of the power, even if fully competent legal advice has been taken on the very issue in question.108 As a consequence, the beneficiaries of the power will be able to sue 104 G Thomas, Thomas on Powers (Oxford, Oxford University Press, 2012) 454. 105 Eclairs (n 1) [51]–[54], where Lord Mance (with whom Lord Neuberger agreed) set out his doubts. 106 Note that this theoretical problem is not the same as the easier problem posed and answered by Lord Sumption himself in the long quotation cited here: there were mixed reasons, including the improper reasons, but the same decision would have been taken despite the improper purposes. 107 Eclairs (n 1) [42]–[43]. 108 Pitt v Holt (n 4); Re Diplock (n 67).

Powers  319 the power holder for the losses caused by the wrongful exercise.109 It might be thought that a similar approach would be adopted if the power holder took advice on the limits of the proper purposes that might be pursued in exercising the power, since this too is a question of law. For example, what would the outcome have been if the directors in Eclairs had sought competent legal advice on the ends they might pursue in the exercise of their powers: would the exercise then have been valid, even if the same ends were pursued, but this time on advice? Logic suggests not, for the same reasons that advice will not save an out-of-scope exercise of power. Indeed, logic suggests that in the many cases on proper purposes that come before the courts, the parties would indeed have been well advised.110 This outcome is delivered because the proper purposes restriction is a limitation on the power imposed as a matter of law, not a matter of best efforts. This is despite the concern expressed by Lord Walker in Pitt v Holt that:111 it would be contrary to principle and authority to impose a form of strict liability on Trustees who conscientiously obtain and follow, in making a decision which is within the scope of their powers, apparently competent professional advice which turns out to be wrong.

The easier question, and the question which faced the court in Pitt v Holt, was whether a well-advised power holder will be in breach of the proper purposes rule where the purposes motivating the power holder are proper, but the legal advice on how to deliver those ends effectively is wrong. Then the answer is clear: the advice provides the power holder with grounds for denying any breach of duty; the right purposes or considerations were to the forefront of the power holder’s mind in making the determination, and due care was taken in delivering those ends. Finally, advice is generally not relevant in the same way in the good faith restriction, although it may go to indicating the genuineness of the efforts taken in determination. E.  Subjective or Objective Decision on Purposes? The issue of whether the proper purposes rule imposes a subjective or objective test has been raised on various occasions. The answer appears straightforward. The improper purposes test, like the requirement to act in accordance with the company’s constitution, is an objective test.112 Or, more precisely, the question of whether a particular purpose is proper or not is a question of law, decided objectively, while the question of which purposes actually motivated the particular director in question is, of course, subjective.113 109 AIB Group v Mark Redler & Co (n 3). Of course, the power holders may themselves be able to sue their advisers if the advice was negligent; but incorrect advice is not necessarily negligent, all the more so where the subject of the advice is difficult: see Re Diplock (n 67). 110 And similarly the directors in Howard Smith v Ampol (n 38). 111 Pitt v Holt (n 4) [80]. 112 See Howard Smith v Ampol (n 38) 834 (Lord Wilberforce), citing Fraser v Whalley (1864) 2 HCM & M 10; Punt v Symons & Co Ltd [1903] 2 Ch 506 (Ch); Piercy v S Mills & Co Ltd [1920] 1 Ch 77 (Ch); Ngurli v McCann (1954) 90 CLR 425 (HCA); Hogg v Cramphorn Ltd [1967] Ch 254 (Ch) 267 (Buckley J). The ‘improper purpose’ test, as a requirement distinct from good faith, has been rejected, however, in British Columbia: Teck Corporation Ltd v Millar (1973) 33 DLR (3d) 288. 113 But see Eclairs (n 1) [15], although it seems Lord Sumption was confining himself to the latter point.

320  Sarah Worthington IV.  REMEDIES: VOID AND VOIDABLE

Tricky problems are often revealed at the remedial stage. So it is with powers. The only issue I want to comment on in this context as part of this chapter is the orthodox view that exercises of power beyond scope are void, and those within scope but in abuse of power, whether for good faith reasons or improper purpose reasons, are merely voidable.114 This seemingly simple assertion is the source of endless confusion and uncertainty.115 It is also further complicated by the old case of Cloutte v Storey,116 a case of fraud on the power (so equity’s equivalent of the proper purposes rule). In that case, an appointment was made within the formal scope of the father’s power, by the father to his son, but on the understanding with the son that the father would reap the benefit, not the son. Unsurprisingly, this was held to be a fraud on the power. It was also held to be void. In determining the consequences of this, Farwell LJ noted that the power was equitable only, in that the power did not have any direct operation on the legal interest, and in such a case ‘the difference between void and voidable is of little, if any, importance’.117 Lord Walker considered that the conclusion that an exercise of power in fraud on the power was void ‘may have to be revisited one day’.118 Nevertheless, the case has stood the test of time, despite the criticisms levelled at it. If accepted, it is often assumed to indicate that the scope/abuse divide does not map so easily onto void/ voidable outcomes, and that all cases of improper purposes and frauds on the power may be void. Alternatively, however, and given the very specific facts in issue in Cloutte itself, it is suggested that maybe this case does not touch the general proposition, but suggests only that where the exercise of a power is a fraud or a sham intended to defeat the ‘scope’ limitation, it will be treated in the same way as any other breach of the scope limitations. This may provide a defensible distinction in these types of cases. Here, however, I do not want to engage with that debate, but to avoid it. Instead, I want to suggest that the words ‘void’ and ‘voidable’ in this context are meaningless in conveying any distinctive information, either about the power holder’s liability or about the underlying transaction which has been executed by the power holder. These words simply overshadow and derail the real analysis that is needed in working out the remedial consequences of these flawed exercises of power. The important point about these defective exercises of power, whatever their type, is that they each constitute a wrong by the power holder entitling those affected by the exercise to a judicial remedy directed at the power holder. That remedy may range from seeking an injunction to prevent the as yet unexecuted exercise of power,119 undoing the executed transaction if it is in fact void or void 114 Pitt v Holt (n 4) [93] (Lord Walker). 115 Stobart Group Ltd v Tinkler (n 66) esp [453]–[488]. 116 Cloutte v Storey (n 79). 117 ibid 30. 118 Pitt v Holt (n 4) [62]. 119 This is effectively what happened in Eclairs, with a court order allowing the disenfranchised shareholders to attend and vote at the extraordinary general meeting, but deferring determination of the outcome of that vote for the company until the issues had been settled in court.

Powers  321 able and can be avoided (as to which, see below), or suing the power holder for the losses suffered.120 In determining which of these is appropriate, and the quantum of any compensation that might be awarded, the labels ‘void’ and ‘voidable’ are completely irrelevant. Apart from cases where an injunction is possible, the exercise of power has taken place and has delivered practical consequences. The problem is that it should not have taken place, and now the law must determine a remedy. The compensation remedies that may be appropriate in these circumstances depend only on the fact that what has been done should not have been done by the power holder and on an assessment of the position that would have been delivered absent the breach.121 That assessment is made in the same way regardless of the scope/abuse categorisation. Still less is it necessary to label the particular exercise of power void or voidable. But suing the power holder is not the only concern. The critical issue is more often the status of the transaction effected by the power holder in his exercise of power. This is typically a transaction with some third party in whose favour the power has been exercised improperly, often by way of transfer of assets or benefits to that party. Those adversely affected will want these deals undone. It is here that ‘void’ and ‘voidable’ would seem to carry the answer. But here, again, they do no work, despite expectations. Consider the simplest case of an exercise of power beyond its scope: a trustee buys shares in X when the trust deed permits only the purchase of shares in Y. The trustee is clearly in breach, and liable to compensate the disaffected beneficiaries. But the transaction with the vendor of the X shares is not ‘void’: nothing about it is void. It will have effectively transferred not only legal, but also beneficial title in the original trust assets to this person. This makes the point very simply that assessing the consequences for the third party in any of these flawed transactions requires us to know far more about the nature of the limitation on the power and the particular circumstances of the third party. One thing is certain, however: the exercise of power will not simply be void or of no effect except in the rarest coincidences of factual circumstances. The illustrations are readily provided. First, assume the scope limitation arises because the director’s company is a charitable company, so its objects are limited to charitable purposes. This means that acts outside those purposes are ultra vires. Accordingly, if the director, as power holder and agent of the company, exercises her powers outside that scope, the exercise will be void.122 This is one rare occasion of such coincidence with the ‘void’ label, but it emerges because of the coincidence of two essential facts: the director’s company, as principal, has limited capacity; and the director is that company’s agent in effecting a transaction intended to operate not between the power holder and the third party, but between the charitable company and the third party.

120 See eg AIB Group v Mark Redler & Co (n 3), noting the critical importance of the nature of the underlying obligation and the significance of that to the remedy ordered. 121 And that assessment itself may require delivering parties to the pre-breach position so that all can be done again properly, or delivering the ends that should have been delivered if those are clear. 122 See the analogous case of Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL), where the Council had limited capacity. I consider that case with William Day in ch 11 of this book.

322  Sarah Worthington The same outcome does not materialise if the director’s company is a familiar commercial company incorporated under the Companies Act 2006 with wide powers of operation. In those circumstances, if the director’s power is of limited scope, for example, the director cannot enter into sales of over £100,000 without board approval, but the director nevertheless does so, then the status of the transaction effected by the director between the company, as principal, and the third party depends on the normal rules of agency. The director will not have ‘actual authority’ to do what has been done, but the company will nevertheless be bound to the contract, both at law and in equity, if and only if the third party can rely on the ostensible authority of the director, an authority based on estoppel and arising by virtue of a representation found to have been made by the company to the third party that the agent has the necessary authority.123 This same argument cannot be run, however, if the director’s wrong is not an engagement beyond scope, but simply one which abuses that power. Then the agent is acting within authority, and the transaction will be binding on the director’s company. The abuse flaw will not of itself, and automatically, render the transaction ‘voidable’. The transaction will only be voidable if the third party has notice of the company’s ‘prior equities’: this requires consideration of the third party’s dealings, not the director’s, and consideration of whether the third party has notice or other involvement in the agent’s wrongdoing. This is a common technique of equity, one not restricted to scope/ abuse issues in the exercise of powers. The same rules as these apply in every case of agency: it is not a necessary part of the preceding analysis that the principal is a company. These illustrations, too, indicate that the ‘void’ and ‘voidable’ labels do no work in the analysis. What is crucial, as ever, is the nature of the wrongdoing and the context in which it takes place. What this analysis does indicate, however, is the sharp divide in outcome in agency cases depending on whether the flaw in the agent’s exercise of power is one of ‘scope’ or ‘abuse’: that is why there is such debate over whether actions in bad faith or for improper purposes are actions which go to scope.124 And if the power holder is a trustee, then the status of the transaction effected by the trustee outside the scope of his power, or in abuse of it, depends entirely on whether the third party is a bona fide purchaser for value. If she is, then the transaction will be binding both at law and in equity, regardless of whether the trustee’s breach is one of scope or abuse. If she is not, but is a donee or a purchaser on notice, then she will take subject to the prior equities, again regardless of whether the trustee’s breach is one of scope or abuse. Here, too, the labels ‘void’ and ‘voidable’ do no work; worse, they are positively misleading. This should suffice to support the plea made here to drop the labels ‘void’ and voidable’ as descriptors of the effect of an exercise of power outside its scope or in abuse of its mandate. They do not assist. What is needed is a careful assessment of the transaction in play, in the context that it should not have happened, but has taken place only because of the power holder’s wrongdoing. 123 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964) 2 QB 480 (CA). 124 As examples of commentators favouring this expansive view of scope limitations, see Nolan (n 7); Watts (n 7). Contrast the narrower approach in Worthington (n 8), reiterated here.

Powers  323 V. CONCLUSION

This chapter has traversed a lot of ground, but the issues it addresses are of vital importance and still under development. Here a number of suggestions are made about our approach to the problems of misuse of delegated power in private law. A simple framework is suggested that may aid conceptual clarity in addressing the important scope and manner of exercise – or excess and abuse – aspects of the current regime for regulating powers, and also accommodate both common law and equitable incursions into this territory. Secondly, the proper purposes rule itself is considered, especially the contested process of assessing whether purposes are ‘proper’ or ‘improper’ and, further, whether a particular decision has been taken for proper or improper purposes. Finally, comment is made on the important issue of remedies should the power holder be found to have acted in breach of these various legal restrictions.

324

17 Piercing the Corporate Veil CHRISTIAN WITTING

‘Piercing the corporate veil’ is an expression rather indiscriminately used to describe a number of different things. Properly speaking, it means disregarding the separate personality of the company … when we speak of piercing the corporate veil, we [are speaking] … only of those cases which are true exceptions to the rule in Salomon v A Salomon & Co Ltd. – Prest v Petrodel Resources Ltd1

I. INTRODUCTION

P

Petrodel Resources Ltd is the most important case on veil-piercing decided by a UK court. It has reoriented jurisprudence on the doctrine, in part by drawing a distinction between concealment and evasion cases. Veil-piercing jurisdiction now concentrates upon the extension of liability when a wrongdoer has used a company in order to evade an existing legal obligation. This is a positive development insofar as it limits the applicability of an otherwise questionable doctrine, but a series of important questions remain about what the ‘corporate veil’ is, what Salomon v A Salomon & Co Ltd stands for and whether that case remains defensible today. This chapter will argue that: ‘the corporate veil’ is a dubious legal construct which has obfuscated thinking in this area of law; the decision in the Salomon case turned upon matters of corporate capacity and limited liability rather than separate legal personality; and that veil-piercing, if it is coherent at all, is best conceived of as an exception to the limited liability of shareholders. Finally, given that the Supreme Court in Prest viewed veil-piercing as a remedy of last resort, the chapter provides examples of how private law might develop in order to resolve problems that otherwise would fall within the domain of veil-piercing.



rest v

1 Prest

v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 [16] (Lord Sumption).

326  Christian Witting II.  PREST v PETRODEL RESOURCES LTD

In Prest v Petrodel, Michael Prest controlled the companies PRL and Vermont, which between them owned seven residential properties.2 Mr Prest had treated the companies’ assets as his own and drew on them as he saw fit.3 The companies had no independent directors, each appointee having taken directions from Mr Prest in fulfilling their roles.4 Upon their divorce, Mrs Prest sought an order that the residential properties be declared to be her husband’s beneficial property so that they could be transferred to her under the Matrimonial Causes Act 1973. The issue was whether the Supreme Court had power to order the transfer.5 One of the grounds for arguing that Mr Prest beneficially owned the properties was a veil-piercing argument, which the Court rejected. Despite the denial of veil-piercing liability, much of importance was said about the doctrine. First, Lord Sumption stated that veil-piercing is concerned with ‘true exceptions to the rule in Salomon v A Salomon & Co Ltd, ie where a person who owns and controls a company is said in certain circumstances to be identified with it by virtue of that ownership and control’.6 Second, cases formerly treated indifferently could be divided into two categories involving concealment and evasion. Lord Sumption asserted that, in concealment cases, courts look behind the company’s separate legal person status in order to discover the true actors and the true facts being concealed.7 Third, evasion is a true ground for veil-piercing applicable ‘when a person is under an existing legal obligation or … legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control’. When these circumstances arise, Lord Sumption considered that a court has the power to ‘pierce the corporate veil for the purpose … of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality’.8 Lord Sumption would allow for a temporary ‘suspension’ of the separate legal personality of the company, but not its complete abnegation.9 Fourth, the Supreme Court determined that veil-piercing represents no wide avenue of redress. The doctrine is designed to catch rare cases that cannot be decided on the basis of conventional legal reasoning – that is, under a statutory exception or through contract, equity, torts or any residuum of concealment cases.10 The reasons given for this include: a reluctance to ‘step in and undo transactions, save where there 2 ibid [4] and [13] (Lord Sumption). 3 ibid [15] (Lord Sumption). 4 ibid [12] (Lord Sumption). 5 ibid [2] (Lord Sumption). 6 ibid [16]. 7 ibid [28]. The concealment principle might cover cases of under-capitalisation or of intermingling between the assets of the company and its controller: CH Tan, ‘Veil Piercing – a Fresh Start’ [2015] Journal of Business Law 20, 25. 8 Prest (n 1) [35]. 9 G Allen, ‘To Pierce or Not to Pierce? A Doctrinal Reappraisal of Judicial Responses to Improper Exploitation of the Corporate Form’ [2018] Journal of Business Law 559, 561. 10 Prest (n 1) [103] (Lord Clarke).

Piercing the Corporate Veil  327 is a well-established and principled ground for doing so’;11 the need to protect creditors of companies potentially subject to veil-piercing actions (which would deplete company resources);12 and concern about elevating claimants to the status of secured creditors when they have not bargained for such status.13 Other Supreme Court justices agreed with Lord Sumption that veil-piercing could be undertaken on the ground of evasion, but were cautious about holding this to be the only available ground.14 Nevertheless, the Court of Appeal noted later in Antonio Gramsci Shipping Corp v Recoletos Ltd that the decision in Prest leaves little scope for judicial development of the doctrine.15 On the facts, Lord Sumption held that Mr Prest had behaved badly, but had not taken part in concealment or evasion. As far as evasion was concerned, titles to the properties were ‘vested in the companies long before the marriage broke up. Whatever the husband’s reasons for organising things in that way, there [was] no evidence that he was seeking to avoid’ his existing legal obligations.16 III.  ISSUES OF PRECEDENT

This chapter begins its critical consideration of Prest v Petrodel and the restated veilpiercing doctrine by considering: the meaning of ‘the Salomon principle’, which is seen as central to UK company law; the use of veil-piercing precedents in the Prest case; the direction in which veil-piercing properly so called occurs; and the relationship of the evasion ground for veil-piercing to the former fraud ground and to the law of deceit. The result of the analysis is to expose several fissures running through the restated law. The presence of these fissures impacts, in turn, upon the normative questions of whether veil-piercing should be retained and, if so, in what form. A. The Salomon Principle In Prest v Petrodel, the Supreme Court sought to preserve the sanctity of the ‘principle in Salomon v A Salomon & Co Ltd’. Lord Sumption said:17 Subject to very limited exceptions, most of which are statutory, a company is a legal entity distinct from its shareholders. It has rights and liabilities of its own which are distinct from those of its shareholders. Its property is its own, and not that of its shareholders. In Salomon v A Salomon & Co Ltd, the House of Lords held that these principles applied as much to a company that was wholly owned and controlled by one man as to any other company …

11 ibid [83] (Lord Neuberger). 12 ibid [41] (Lord Sumption). 13 ibid [41] (Lord Sumption). 14 ibid [59]–[62] and [81] (Lord Neuberger), [92] (Baroness Hale) and [91] and [100] (Lord Mance). 15 Antonio Gramsci Shipping Corp v Recoletos Ltd [2013] EWCA Civ 730, [2014] Bus LR 239 [66] (­ Beatson LJ). 16 Prest (n 1) [36]. 17 ibid [8] and [16].

328  Christian Witting … when we speak of piercing the corporate veil, we … should … be speaking … only of those cases which are true exceptions to the rule in Salomon v A Salomon & Co Ltd, ie where a person who owns and controls a company is said in certain circumstances to be identified with it in law by virtue of that ownership and control

Lord Neuberger described the key issue in similar terms, stating that any discussion of veil-piercing doctrine must begin with Salomon,18 which represents ‘a substantial obstacle in the way of an argument that the veil of incorporation can be pierced’.19 For several reasons, their Lordships’ ‘orthodox’ account of Salomon is perplexing, and provides a first difficulty about veil-piercing jurisprudence. One would think, for a start, that the Salomon principle would have concerned a legal matter that had been in dispute between the parties. Yet the questions of law before the House of Lords concerned two different issues:20 (i) the validity of an agreement of 20 July 1892 by the trustee for the future company with Mr Salomon that, when incorporated, the company would purchase the assets of Mr Salomon’s business (to be part paid through the issue of debentures) and the company’s subsequent adoption of the agreement on 2 August 1892; and (ii) whether the company had been formed merely in order to allow Mr Salomon to take advantage of limited liability in circumstances where it could be seen to be his agent or trustee in holding the assets of the business, so that, when the company incurred liabilities, Mr Salomon’s personal assets became amenable to an extended liability claim. (i)  The First Issue The first claim by the liquidator was for rescission of both the agreement of 20 July 1892 and the company’s decision to adopt it, and for consequential orders based on fraud on the company.21 Fraud was argued on the basis that, in reality, transactions had been procured in favour of the one man behind a ‘one-man company’ and had not been agreed to by either a validly constituted board or by the shareholders collectively, the six minority shareholders having been mere nominees. The claim of fraud was rejected, in part because the liquidator could point to no one who had been misled in the execution of the transactions.22 In emphasising both their commonplace nature and ultimate validity, Lord Macnaghten stated:23 The company attains maturity on its birth. There is no period of minority – no interval of incapacity. I cannot understand how a body corporate thus made ‘capable’ by statute can lose its individuality by issuing the bulk of its capital to one person.

This appears to be the clearest statement in resolution of the first issue. The focus is upon the capacity of the company, which was to be treated as capable of doing things with legal effect from the date of registration even though under the control of a 18 ibid [66]. 19 ibid [67]. 20 Salomon v A Salomon & Co Ltd [1897] AC 22 (HL) 24–26. 21 ibid 24–25, 50 (Lord Macnaghten) and 57 (Lord Davey). 22 Salomon (n 20) 33 (Lord Halsbury LC), 35–39 (Lord Watson), 43 and 47 (Lord Herscell), 54 (Lord Macnaghten) and 57 (Lord Davey). 23 ibid 51 (Lord Macnaghten).

Piercing the Corporate Veil  329 majority shareholder and entering into transactions with that person. Having said as much, Lord Davey pointed to North-West Transportation Co Ltd v Beatty24 as an existing precedent for these propositions, so that the House of Lords could not be said to have established anything new on this point in Salomon.25 (ii)  The Second Issue The second issue had not originated from the liquidator but had been suggested at first instance by Vaughan Williams J. His Lordship had opined that, in reality, there had been no sale of the business at all because six of the shareholders had been mere nominees and that what had occurred ‘was a sale by a man to an agent for his own profit’.26 In the Court of Appeal, the argument metamorphosed from agency to trust. Lindley LJ held that Mr Salomon had sought illegitimately to obtain the advantage of limited liability through the use of the names of other persons as shareholders, thus rendering the company a trustee for him.27 Lords Justices Lopes and Kay were of similar opinions,28 and the liquidator adopted their argument on the further appeal to the House of Lords.29 In this way, the argument came to focus on the enjoyment of limited liability rather than separate legal personality. In the House of Lords, Lord Halsbury LC’s characterisation of the issues as concerning ‘whether the respondent was a company at all’30 rings hollow.31 He was the only Law Lord who made discussion of separate legal personality a central theme of his speech. No doubt this is because counsel for the liquidator had accepted the lawfulness of the incorporation and the pointlessness of arguing against it.32 Consistent with this, Lords Herschell and Davey both observed that the status of A Salomon & Co Ltd as a validly incorporated company had never been questioned in the litigation.33 Although three other Law Lords (aside from Lord Halsbury) made reference to the company’s separate legal personality,34 they all purported to be doing no more than applying the statute then in force to the facts of the case.35 So the question becomes why Salomon should be thought of as such an important case on separate legal personality when the underlying law was, and continues to be, set out definitively in statute.

24 North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 (HL). 25 Salomon (n 20) 58 (Lord Davey). 26 Broderip v Salomon [1895] 2 Ch 323 (Ch and CA) 330–31. 27 ibid 338–39. 28 ibid 341 (Lopes LJ) and 345 and 347 (Kay LJ). 29 Salomon (n 20) 26. 30 Salomon (n 20) 29. 31 See also E Lim, ‘Of “Landmark” or “Leading” Cases: Salomon’s Challenge’ (2014) Journal of Law & Society 523, 533 onwards noting that a ‘misleading account’ of the case has been given, but for reasons which overlap only partially with those developed here. 32 Broderip (n 26) 334. 33 Salomon (n 20) 42 (Lord Herschell) and 55 (Lord Davey). See also Broderip (n 26) 337–38 (Lindley LJ, citing Companies Act 1862, s 18), 340 (Lopes LJ) and 342–43 (Kay LJ). 34 Salomon (n 20) 30–31 and 33 (Lord Halsbury LC), 42–43 (Lord Herschell), 51 (Lord Macnaghten) and 56 (Lord Davey). 35 ibid 29–30 and 34 (Lord Halsbury LC), 39 (Lord Watson), 45 (Lord Herschell) and 54 (Lord Macnaghten).

330  Christian Witting In fact, both the parties and the courts had had little choice but to accept the reality of the company’s incorporation as a result of section 18 of the Companies Act 1862, which pronounced upon the effects of incorporation: Upon the registration of the Memorandum of Association and of the Articles of A ­ ssociation … the Registrar shall certify under his hand that the company is incorporated … The subscribers of the Memorandum of Association, together with such other persons as may from time to time become members of the company, shall thereupon be a body corporate … capable forthwith of exercising all the functions of an incorporated company, and having perpetual succession and a common seal, with power to hold lands … A certificate of the incorporation of any company given by the Registrar shall be conclusive evidence that all the requisitions of this Act in respect of registration have been complied with.

All of this goes to demonstrate that the orthodox account of the ‘Salomon principle’ is a curious construct. Separate legal personality had not been in dispute, and only Lord Halsbury focused on it; for all the other Law Lords, it was but a side issue. The statutory position had been clear. For these reasons, it is not surprising to find that there is no trace of the orthodox account of ‘the Salomon principle’ in the Appeal Cases headnote to that very case. Despite this, if the orthodox account does anything, it does emphasise that there can be no exceptions to the separate legal personality of the company. The Salomon case underlined the pre-eminence of statute in this area and is wholly inconsistent with courts having power to ignore the separate legal personality of the company. In Lord Halsbury’s words, the company is to be treated as ‘a real thing’.36 B.  Precedent for Veil-Piercing Despite this, in Prest v Petrodel, the Supreme Court clung to the idea that veil-piercing is an exception to separate legal personality and treated Gilford Motor Co Ltd v Horne and Jones v Lipman as the leading precedents on the issue. Their use as precedents is significant because they both feature a certain claim structure, which turns out to be very different from that in Salomon v A Salomon & Co Ltd. One struggles to see how the former three cases can be considered as ‘exceptions’ to the latter. I will now show why. In the Gilford case,37 Mr Horne worked for Gilford Motor Co Ltd as a mechanic and contractually agreed not to entice customers away after his period of service ended. Horne’s employment was terminated and he set up JM Horne & Co Ltd with family members and a friend as shareholders and directors. Horne was not a shareholder or director himself, but he was the main employee and the intended beneficiary of company profits, so we can treat him as having been its beneficial shareholder. The allegation was that, through its deployment, Horne sought out Gilford Motor’s clients by use of promotional material. Gilford Motor sought to restrain both Horne and JM Horne & Co Ltd by injunction. Horne argued that the injunction could not



36 ibid

33.

37 Gilford

Motor Co Ltd v Horne [1933] Ch 935 (Ch and CA).

Piercing the Corporate Veil  331 go against the company because it was a separate legal entity. In the Court of Appeal, Lord Hanworth MR held that the company had been formed simply as a device ‘to mask the effective carrying on of a business by Horne’.38 If no injunction were granted, it could be used to commit breaches of a contractual agreement with impunity. Thus, the injunction would go against both defendants. Two important points about the case are as follows. First, there was no discussion of either a ‘corporate veil’ or of ‘veil-piercing’, but only of the company being a mask to hide Mr Horne or being a cloak around him.39 Second, its facts featured a pre-existing obligation (the non-compete clause), the incorporation of a new company and its deployment by the beneficial shareholder in order to avoid the effect of that obligation. In Jones v Lipman,40 Lipman agreed by contract to sell land to Jones, but changed his mind about the wisdom of this transaction. In order to avoid the obligation to sell, in particular by making specific performance impossible, Lipman incorporated a new company, with both Lipman himself and an associate as shareholders and directors. Subsequently, Lipman sold the land to the company. In a case in which the claimant sought specific performance, Russell J held that the ‘defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition in the eye of equity’.41 Because Lipman had been in control of the company, he could be ordered to compel it to convey the land to Jones. An order for specific performance was made. The same observations that we made about the Gilford case can be made with respect to the Jones case. First, there was no discussion of either a ‘corporate veil’ or of ‘veil-piercing’, but only of the company being a mask to hide Lipman. Second, its facts featured the same structure, namely a pre-existing obligation (the contract of sale), the incorporation of a company and the deployment of that company by the shareholder in order to avoid the prior ­obligation. Let us now reflect on these observations. The first set of observations reveals that neither precedent invoked the language of ‘veil-piercing’. Indeed, seven years after Jones v Lipman was decided, in 1968, MA Pickering observed that English courts were yet to invoke this language.42 Only in the following year was it invoked, when, in Littlewoods Mail Order Stores Ltd v IRC, Lord Denning MR referred to the notion of a ‘veil cast over the personality of a limited company’ (which is something quite different from a mask hiding a controlling shareholder), while at the same time treating it not as creating a barrier against extensions of liability, but as something of nominal importance in ascertaining the limits of corporate groups and their liability to tax.43 The point is that neither Gilford nor Jones concerned the explicit language of veil-piercing doctrine insofar as the veil is understood today as something which surrounds the company and protects it. The companies in question were interposed as protections for their respective controllers and, in that way, appear to have been engaged in ‘concealment’ activities.

38 ibid

956 (Lord Hanworth MR). 956 (Lord Hanworth MR), 965 (Lawrence LJ) and 969 (Romer LJ). 40 Jones v Lipman [1962] 1 WLR 832 (Ch). 41 ibid 836. 42 MA Pickering, ‘The Company as a Separate Legal Entity’ (1968) 31 MLR 481, 482. 43 Littlewoods Mail Order Stores Ltd v IRC [1969] 1 WLR 1241 (CA). 39 ibid

332  Christian Witting The second set of observations, about the structure of the two cases, reveals that the enforcement of existing personal obligations has precious little to do with company law. Indeed, a well-known criticism of treating either Gilford or Lipman as having concerned company law problems is that both could have been decided by use of conventional, private law rules. Thus, with respect to Gilford, it has been suggested that the case is better seen as having involved an agency relationship between Gilford and the company,44 which is especially cogent given that the non-compete clause was directed (in part) against Mr Horne acting through agents.45 And with respect to Lipman, it has been suggested that the case is better seen as having involved either an agency relationship of the same type46 or notice of fraud so that the defendants were subject to the claimant’s prior equity.47 Again, this would mean they have more in common with concealment cases. As such, Lord Neuberger was correct, in Prest, in thinking that the cases provide little support for veil-piercing,48 as was Baroness Hale in stating that, in cases where ‘it is sought to convert the personal liability of the owner or controller into a liability of the company, it is usually more appropriate to rely on concepts of agency and/or the “directing mind”’.49 The underlying problem with the precedents, taken together with Prest v Petrodel itself, is that they concerned personal obligations of individuals arising in contract (Gilford and Lipman) or as a result of holding or being entitled to property (Prest) in which the involvement of the companies was significant only with respect to matters of enforcement. The enforcement of the contractual provisions in both Gilford and Lipman, and the subsequent court order about division of the marital estate in Prest, might have been undertaken in a more logical manner by orders either directly to transfer to the claimants the defendants’ shareholdings in the companies (or the rights to those shares) or else for the sale of shares to the requisite value. Indeed, the respondents in Prest argued that the only property that could be subject to the court’s jurisdiction was that of the shares in the property-owning companies. In principle, Lord Sumption thought that the making of orders for their transfer would have been feasible.50 This would have avoided the need to argue for veil-piercing and the consequent distortions that it entails. C.  Veil-Piercing Direction The Salomon case concerned a claim structure that was the opposite of those in Gilford, Lipman and Prest. The significance of this is that the claim in Salomon, unlike the claims in the other cases, involved a then-recognised ‘veil’ – that

44 Prest (n 1) [71] (Lord Neuberger). 45 Gilford (n 37) 953 (Lord Hanworth MR). 46 MF Khimji and CC Nicholls, ‘Piercing the Corporate Veil Reframed as Evasion and Concealment (2015) 48 University of British Columbia Law Review 401, 428. 47 E Lim, ‘Salomon Reigns’ (2013) 129 LQR 480, 483; CH Tan, ‘Piercing the Separate Personality of the Company: A Matter of Policy?’ [1999] Singapore Journal of Legal Studies 531, 549. 48 Prest (n 1) [69] (Lord Neuberger). 49 ibid [92] (Baroness Hale). 50 ibid [40].

Piercing the Corporate Veil  333 which is created by the rule of limited liability and which protected Mr Salomon from personal liability. The Salomon case can be seen to have affirmed the limited liability of shareholders (as two of their Lordships noted,51 although this, too, was a matter of statute law) because, had the liquidator’s claims been good, liability for the debts of the company would have been extended to Mr Salomon personally. The same type of claim structure also featured in some of the best-known cases on veil-piercing, such as Adams v Cape Industries Ltd52 and VTB Capital plc v Nutritek International Corp,53 claims having been made to extend liability from companies to shareholders. Lord Sumption’s judgment in Prest, modelled on the Gilford structure, appears to exclude veil-piercing arguments in precisely those cases which involve the existence of an actual ‘veil’. In Prest v Petrodel, Lord Sumption stated that the case was about whether to appropriate company assets in order to satisfy a personal liability of its shareholder to his wife.54 The sequence of events began with the shareholder’s liability to his soon-to-be ex-wife. The argument was that Mr Prest had put properties beyond reach by having them held by certain companies controlled by him. Let us assume (contrary to fact) that this had been done in order to evade liabilities to his wife. Why argue for veil-piercing in order to recover? There was no need to consider the ownership of the properties in question, but simply the ownership of shares in the companies that owned the properties. These formed part of Mr Prest’s estate and were the proper subject of the Matrimonial Causes Act 1973. If Mrs Prest obtained some or all of the shares, she would have had decision-making power with respect to the residential properties and could have sold them. In an enlightening article on this topic, Mujih considers the direction in which veil-piercing occurs.55 He notes that claims against shareholders involve ‘forward veil-piercing’, while claims the other way, against the company, involve ‘reverse veilpiercing’. As to forward veil-piercing, this is ‘real veil-piercing’, which involves ‘the courts upsetting the principle in Salomon and the low rate of piercing in such cases shows a reluctance … to violate this fundamental principle’.56 Mujih is correct about this, which is different from the issue in Prest, noted by Mujih to be unique in ‘the sense that it was the first case in which the Supreme Court expressly [sought] “to convert the personal liability of the owner … into a liability of the company” (reverse piercing)’, while not acknowledging the difference between this exercise and that undertaken in the course of forward veil-piercing.57 The Court failed to recognise that reverse veil-piercing does not impinge upon the Salomon principle at all.58 Reverse veil-piercing cases ‘are not determined by reference to company law rules’.59



51 Salomon

(n 20) 44–45 and 47 (Lord Herschell) and 52 (Lord Macnaughten). v Cape Industries Ltd [1990] Ch 433 (CA). 53 VTB Capital plc v Nutritek International Corp [2013] UKSC 5, [2013] 2 AC 337. 54 Prest (n 1) [2]. 55 EC Mujih, ‘Piercing the Corporate Veil: Where Is the Reverse Gear?’ (2017) 133 LQR 322. 56 ibid 323. 57 ibid 323. 58 ibid 326–27. See also Khimji and Nicholls (n 46) 430. 59 Mujih (n 55) 328. 52 Adams

334  Christian Witting D.  Relationship to Deceit/Fraud In Prest v Petrodel, Lord Sumption stated that veil-piercing on the ground of evasion is available ‘when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control’.60 In those circumstances, the court can pierce the corporate veil ‘for the purpose … of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality’.61 This might be viewed as good a reason as any for intervening in relations between a corporate controller and the controlled company and extending a liability from one to the other (to put it in terms which are neutral as to the direction in which veil-piercing occurs). However, a further issue arises because the modern evasion ground for veil-piercing looks like a watered-down version of both the tort of deceit and an authority often treated as the seminal case on veil-piercing on the ground of fraud. The evasion ground for veil-piercing is a ‘watered-down’ version of deceit because there appears to be no need for either a misrepresentation or intention to induce by way of misrepresentation, which are established elements of the tort.62 These factors were present in the well-known case of Re Darby; ex p Brougham,63 and assumed to be important also in extending liability to shareholders in Salomon v A Salomon & Co Ltd,64 but they have not been insisted upon in most subsequent discussions of veil-piercing on the ground of fraud.65 One assumes that, in this context, the modern ground for veil-piercing has superseded earlier fraud-based actions. However, in Prest v Petrodel, Lord Neuberger did not appear entirely happy about this development:66 if the formulation is intended to go wider than the application of ‘fraud unravels everything’, it seems to me questionable whether it would be right for the court to take the course of arrogating to itself the right to step in and undo transactions, save where there is a well established and principled ground for doing so. Such a course is … at least normally, a matter for the legislature.

(Even though the evasion ground for veil-piercing represents a liberalising of the law involving ‘fraud’ in the use of a company, it is now the only recognised ground of veil-piercing. Given the way that the argument in this paper develops, it might be best to think of the evasion ground as not a company law doctrine, but as a tort offshoot 60 Prest (n 1) [35]. 61 ibid [35]. 62 Derry v Peek (1889) 14 Cas App 337 (HL). 63 Re Darby; ex p Brougham [1911] 1 KB 95 (KB). 64 Salomon (n 20) 37, where Lord Watson dealt with the pleadings based on Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (HL) and noted the requirements of a misleading statement/conduct. 65 C Witting, Liability of Corporate Groups and Networks (Cambridge, Cambridge University Press, 2018) 329; S Griffin, ‘Disturbing Corporate Personality to Remedy a Fraudulent Incorporation: An Analysis of the Piercing Principle’ (2015) 66 Northern Ireland Law Quarterly 321 (identifying a ‘fraudulent incorporation concept’). 66 Prest (n 1) [83]. See also VTB Capital (n 53) [139] and [146] (Lord Neuberger). Nevertheless, the doctrine remains narrow in scope. Its ‘singular focus’ ‘on the avoidance of a pre-existing legal obligation owed by a company’s controller would exclude even egregious wrongdoing’: PW Lee, ‘The Enigma of VeilPiercing’ (2015) 26 International Company and Commercial Law Review 28, 30.

Piercing the Corporate Veil  335 that replaces deceit in certain company law contexts. The arguments for thinking of the doctrine as a tort are that: first, it stands alone as the only doctrine of its type, no longer being seen as a species of a wider veil-piercing genus; and, second, it appears to be a derivation of fraud in tort law that looks and acts like a tort rather than any other type of civil obligation.) There is a further question about what counts as an ‘existing obligation’ under the evasion ground for veil-piercing. Lo has argued that we ought not interpret that ground in a narrow way.67 His argument is that ‘existing obligations’ logically extend beyond obligations to respect causes of action that have arisen in individuals so as to include the underlying tort obligations upon breach of which causes of action arise.68 Lo gives the example of a company involved in the manufacture and distribution of a toxic substance without taking precautions to reduce risks of harm. His point is that obligations of care arising in negligence would mean nothing if they are not recognised to exist before persons are injured. If the parent incorporates a subsidiary for manufacturing and distribution purposes, this cannot negate the parent’s own existing obligations (for example, in assessing foreseeable risks of producing a certain drug or chemical and taking adequate precautions). Thus, Lo states that, if the company establishes a subsidiary at that time in order ‘to engage in the activities with a view to minimising any potential liabilities it may have by continuing with the activities, there is arguably an evasion of existing legal obligations giving rise to the possibility of piercing of the corporate veil’.69 This would be on the basis of the impropriety arising in the parent company/controlling shareholder’s ‘intention to minimise the opportunity of potential victims … being able to seek compensation for injuries arising from inherently hazardous activities which they initiate’.70 While this argument seems entirely sensible from a tort perspective, the problem is that the Court of Appeal in Adams v Cape Industries Ltd was sanguine about parent companies deflecting what would otherwise be their own obligations onto other companies in the group.71 The Court did:72 not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group … will fall on another member of the group rather than the defendant company.

The key point of the Adams case is that obligations can be deflected before causes of action arise in specific individuals. Indeed, it is this (rather miserable) legal proposition that permits ‘judgment-proofing’ to occur in corporate groups.73 However, Lo’s 67 SHC Lo, ‘Piercing of the Corporate Veil for Evasion of Tort Obligations’ (2017) 46 Common World Law Review 42. 68 See Vedanta Resources plc v Lungowe [2019] UKSC 20, [2019] 2 WLR 1051; Chandler v Cape plc [2012] EWCA Civ 525, [2012] 1 WLR 3111. 69 Lo (n 67) 53. 70 ibid 55. 71 See also Prest (n 1) [34] (Lord Sumption); C Arvidsson, ‘The Piercing Doctrine: Re-examining Evasion’ (2019) 40 Company Lawyer 320. 72 Adams (n 52) 544 (Slade LJ). 73 LM LoPucki, ‘The Essential Structure of Judgment Proofing’ (1998) 51 Stanford Law Review 147.

336  Christian Witting conception of what constitutes existing obligations becomes irresistible when risks of harm are not simply foreseeable in nature but have a high probability of arising and causing injury. In such cases, only the identity of the victims is unknown. In such circumstances, Lo argues that the corporate veil should be pierced so as to impose the company’s liabilities on its controlling shareholder if it had ‘procured the use of the company to undertake activities of an inherently hazardous nature with the intention of minimising the opportunity of potential victims from being able to seek compensation for injuries caused by those hazards’.74 If we are to retain veil-piercing, this looks to be a good argument. IV.  TWO MODELS OF VEIL-PIERCING

We have now reconnoitred the law on veil-piercing after Prest v Petrodel and considered some of the ways in which it remains unsatisfactory. It has been argued: that the Salomon case, insofar as separate legal personality was even discussed, affirms the primacy of the statutory provisions on the matter and does not support judicial exceptions to it; that veil-piercing, as a company law doctrine, is concerned most sensibly with extensions of liability from the company to the shareholder; and that ‘existing obligations’ should encompass recognised obligations to take care arising in the law of negligence – so that these mean something in the face of judgment-proofing practices. Given these findings, it would seem advisable properly to reconsider our conceptualisation (or working model) of veil-piercing as a company law doctrine. Here we might focus on the point that veil-piercing always has been conceived of as an ‘exception’ to something. In most UK cases, this exception has been described as one regarding ‘the separate legal personality of the company’.75 This is in contrast to the conception that is prevalent in the United States and Australia, where veil-piercing is seen as permitting the occasional exception to the enforcement of rules of limited liability.76 The question is: which conception is better? In order to answer it, we need to consider two competing models of veil-piercing. First, the doctrine is modelled as an exception to separate legal personality. Second, it is modelled as an exception to limited liability. It will be argued that veil-piercing is coherent only when viewed as an exception to limited liability. A.  Veil-Piercing as an Exception to Separate Legal Personality The company’s registration brings into existence a legal person that is separate from all other persons associated with it, not only its controlling shareholder,77 but its directors 74 Lo (n 67) 43–44. 75 Prest (n 1) [16] (Lord Sumption). 76 See, eg R Kraakman et al, The Anatomy of Corporate Law, 2nd edn (Oxford, Oxford University Press, 2009) 139; P Oh, ‘Veil Piercing Unbound’ (2013) 93 Boston University Law Review 89, 102; JH Matheson, ‘The Modern Law of Corporate Groups: An Empirical Study of Piercing the Corporate Veil in the Parent–Subsidiary Context’ (2009) 87 North Carolina Law Review 1091, 1098; M Ramsay and DB Noakes, ‘Piercing the Corporate Veil in Australia’ (2001) 19 Company and Securities Law Journal 250, 252. 77 Lee v Lee’s Air Farming Ltd [1961] AC 12 (PC). See also Persad v Singh [2017] UKPC 32, [2017] BCC 779 [20] (Lord Neuberger).

Piercing the Corporate Veil  337 as well.78 Although statute law does not go further than this and provide explicitly for a ‘veil’ between the company and other legal persons, in order to emphasise the separateness of the company from them scholars79 and (in modern times) courts have invoked the language of the ‘corporate veil’.80 While this might be a convenient metaphor for describing separation,81 it creates also the image of a barrier or hurdle that needs to be surmounted in order to extend liability to, or from, the company.82 In a well-developed version of ‘veil-talk’, Hansmann, Kraakman and Squire conceive of different veils that facilitate ‘owner-shielding’ and ‘entity-shielding’.83 The shields help to partition assets, so that creditors and courts know which asset pools are available to satisfy which legal claims.84 Although the rule of limited liability facilitates owner-shielding, in the view of these authors more important is entityshielding, which builds upon the idea of the company as a separate legal person with its own assets available solely in order to meet the debts of the company itself or to be given over as security for company debts.85 Creditors of shareholders cannot access company assets. Orts suggests that the logical consequence of separate legal personality is that every legal person is protected by a veil-cum-limited liability.86 Pursuant to some such idea, the UK Supreme Court has held that because company directors are separate legal persons they are not amenable to the imposition of liabilities that rightly should be treated as those of the company.87 (This is a legal presumption, which can be departed from.) However, Grantham has taken the argument so far as to suggest that the company’s legal separation implies that directors’ own liabilities to contribute to the satisfaction of company debts must be viewed as ‘limited’ in nature.88 In order to overcome the ‘limited liability of directors’, there is an ostensible need to pierce the veil so as to extend company liabilities liability to them.89 This type of veil-talk indicates how a simple metaphor about separation has become like the tail which wags the liability dog. Unlike shareholders, directors are not specifically protected from company liabilities. In fact, their actions are regulated 78 Re Paycheck Services 3 Ltd; Revenue and Customs Commissioners v Holland [2010] UKSC 51, [2010] 1 WLR 2793. 79 The term ‘veil-piercing’ can be traced to IM Wormser, ‘Piercing the Veil of Corporate Entity’ (1912) 12 Columbia Law Review 496. 80 See, eg Prest (n 1) [16] (Lord Sumption); Pickering (n 42) 482. 81 Prest (n 1) [92] (Baroness Hale). 82 ibid [67] (Lord Neuberger referring to an ‘obstacle’ arising from the ‘Salomon principle’). 83 H Hansmann, R Kraakman and R Squire, ‘Law and the Rise of the Firm’ (2006) 119 Harvard Law Review 1335. 84 SM Bainbridge and MT Henderson, Limited Liability: A Legal and Economic Analysis (Cheltenham, Edward Elgar, 2016) 7–8. But the argument is strong that this type of theory of property under corporate control is overly simplistic: see EW Orts, Business Persons: A Legal Theory of the Firm (Oxford, Oxford University Press, 2013) 105. 85 Hansmann et al (n 83) 1337–38. 86 Orts (n 84) 136. 87 Re Paycheck Services 3 Ltd (n 78) [42] (Lord Hope). 88 R Grantham, ‘The Limited Liability of Company Directors’ [2007] Lloyd’s Maritime and Commercial Law Quarterly 362, esp 379 and 386. See also M Macey and J Mitts, ‘Finding Order in the Morass: The Three Real Justifications for Piercing the Corporate Veil’ (2014) 100 Cornell Law Review 99, 104. 89 H Anderson, ‘Piercing the Veil on Corporate Groups in Australia: The Case for Reform’ (2009) 33 Melbourne University Law Review 333, 341 onwards (veil-piercing against both shareholders and directors).

338  Christian Witting heavily, and there is a multitude of ways under statute,90 in tort law91 and in equity by which they can be made personally liable for company debts, although there is a reluctance to permit liability for directors’ negligent misstatements.92 Indeed, even shareholders can be made liable for company debts where they either breach duties of care to third parties affected by investee company acts93 or else are joint tortfeasors,94 the shareholders becoming liable jointly with the company for torts affecting third parties. All of this demonstrates how illusory the corporate veil is when conceived of as a barrier between the company and other participants in its endeavours. Liability can be extended from the company despite the supposed existence of a veil around the company separating it from those other participants. Another illustration of this same proposition is available. The modern history of vicarious liability is testament to the facts that employees might be made liable for torts committed in the ‘field of the [company’s] activities’95 and that courts will not hesitate to extend liability to employer companies.96 Taken together with the fact that vicarious liability is a doctrine of strict liability, so that liability is extended regardless of fault (or ‘automatically’), this does much to undermine the idea of a barrier between the company and other participants.97 One would not expect extensions of liability from primary tortfeasors to employer companies regardless of fault in the company if the company were protected from third-party liabilities by a veil-as-barrier (in the absence, at least, of a defensible theory that makes the company liable as principal). The company is just as liable as any other defendant employer would be for the commission of employee wrongs. We are mistaken in subscribing to the idea that company law has created a veilas-barrier that separates the company from other legal persons who participate in its endeavours. There is no such thing as ‘the corporate veil’ as that term has been used by courts and commentators. For a start, there is no reference to the veil in statute. The veil is the language of metaphor, and the metaphor is a bad one because it speaks of barriers and special protections which do not exist. The Supreme Court in Prest v Petrodel seems to have acknowledged this in part, holding that many cases formerly described as involving veil-piercing had little to do with matters of company law and could be determined according to orthodox private law rules,98 which ordinarily do not respect metaphorical barriers.

90 See, eg Insolvency Act 1986, s 214. See also EC Mujih, ‘Piercing the Corporate Veil as a Remedy of Last Resort after Prest v Petrodel Resources Ltd: Inching towards Abolition?’ (2016) 37 Company Law 39, 48. 91 See, eg Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2002] UKHL 43, [2003] 1 AC 959 (deceit). 92 See, eg Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 (HL). 93 Chandler v Cape plc (n 68). See also Vedanta Resources plc v Lungowe (n 68). 94 Glaxo Wellcome UK Ltd v Sandoz Group [2017] EWCA Civ 227, [2017] FSR 32. 95 Mohamud v Wm Morrison Supermarkets plc [2016] UKSC 11, [2016] AC 677 [44] (Lord Toulson). 96 Various Claimants v Catholic Child Welfare Society [2012] UKSC 56, [2013] 2 AC 1. There are good reasons for this: C Witting, ‘Modelling Organisational Vicarious Liability’ (2019) 39 Legal Studies 694. 97 The one thing that shareholders definitely are protected against is the extension of liability from the company via a doctrine of strict liability: Witting, Liability of Corporate Groups (n 65) 314 and 403. There is no vicarious liability of a parent company for the debts of an insolvent subsidiary: Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30 (NZHC). 98 Prest (n 1) [31]–[33] (Lord Sumption), discussing Gencor ACP Ltd v Dalby [2000] 2 BCLC 734 (Ch) and Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177 (Ch), which were held not to have involved veilpiercing. See also Arvidsson (n 71) 323.

Piercing the Corporate Veil  339 Confusion has arisen about two different things: legal personality, which is a company law issue concerning the existence and capacity of legal persons, and ownership and obligation, which are grounded in private law and apply to all legal persons of sufficient capacity. We would not think of two natural persons as being separated by veils of legal personality. And we need not invoke the veil in order to accept the idea that the company as a legal person has its own assets, just as others who deal with the company have their own assets. Indeed, despite their propagation of veil-talk, Hansmann, Kraakman and Squire accept that the basic rules of law about which they write are not corporate personality rules but actually rules of property law.99 For this reason, it is no surprise that it has become more common to argue that cases that courts have (in the past) described as concerning company law-based rules of veil-piercing instead revolve around generally applicable rules of property, contract, tort, equity and the award of remedies.100 Veil-talk does not advance thinking, but obfuscates it. This has become especially problematic insofar as courts have become unable to distinguish between the metaphorical corporate veil and the statutory rule of limited liability, which undoubtedly does protect shareholders. Given the clarity of the statutory provisions creating companies as separate legal entities with their own rights and obligations,101 there would seem to be no power in the common law to ignore the separate legal personality of the company. Indeed, veil-piercing has been viewed in some quarters as a ‘constitutional challenge’ to the legislatures’ capacity to make statute law, which prevails over judge-made law.102 Certainly, in Rossendale Borough Council v Hurstwood Properties (A) Ltd, David Richards LJ (Henderson LJ agreeing) considered it to be ‘remarkable’ that, by the invocation of a common law power, the courts would permit the disregard of a registered company’s separate legal personality.103 As adumbrated, the impermeability of the rule on separate legal personality is inherent in Salomon v A Salomon & Co Ltd itself because that case acknowledges the inability of courts to add to or subtract from the statutory rules. In terms of pure logic, finally, it cannot be right to say that veil-piercing is a means of disregarding the separate legal personality of the company because it is a means of extending liability, not of substituting it. When a court extends B Co’s liability by piercing the company’s veil to ensnare A, A and B Co become jointly liable.104 This means that the courts have no choice but to acknowledge the continuing existence of both parties (for example, for purposes of determining contribution claims). 99 Hansmann et al (n 83) 1343. 100 See also G Allen, ‘To Pierce or Not to Pierce? A Doctrinal Reappraisal of Judicial Responses to Improper Exploitation of the Corporate Form’ [2018] Journal of Business Law 559, 580. 101 Companies Act 2006, esp s 16. 102 Rossendale BC v Hurstwood Properties Ltd [2019] EWCA Civ 364, [2019] 1 WLR 4567 [48] (Richards LJ); Allen (n 100) 580 and 582; Khimji and Nicholls (n 46) 421–22. 103 Rossendale (n 102) [48] (Richards LJ). 104 VTB Capital plc (n 53) [114]–[115] (Lord Neuberger). See also JE Antunes, Liability of Corporate Groups: Autonomy and Control in Parent–Subsidiary Relationships in US, German and EU Law – An International and Comparative Perspective (Deventer, Kluwer Law and Taxation Publishers, 1994) 264; Griffin (n 65) 321–22.

340  Christian Witting B.  Veil-Piercing as an Exception to Limited Liability The second model of veil-piercing sees it as an exception to the limited liability enjoyed by the shareholders of limited companies.105 As Hansmann, Kraakman and Squire note, the statutory rule of limited liability ‘protects the assets of the company’s owners from the claims of the company’s creditors’.106 Because the personal assets of shareholders are out of reach,107 they are able to invest a defined amount of money in corporate endeavours and displace wider negative financial consequences of business risks onto the company’s own creditors. The rule of limited liability has been justified on economic grounds in enticing risk-averse individuals to invest money in incorporated businesses,108 and there is evidence that limited liability does encourage investment that might not be made otherwise in projects carrying substantial risks of corporate liability.109 Nevertheless, limited liability can have severe consequences for third parties. First, any liability that is limited is not eliminated:110 someone will bear the underlying losses, whether they be directors, employees who lose their jobs on insolvency, company creditors and/or tort claimants. Second, to the extent that limited liability encourages reckless risk-taking and causes losses to productive elements of society, it inhibits economic and social development. Indeed, limited liability gives rise to a well-known moral hazard whereby a company’s controllers ‘go for broke’ when the company’s fortunes are in decline, deploying it for high-risk, high-return ventures.111 In cases where the high-risk gamble does not pay off, more externalisation of losses takes place than would occur were shareholders to have greater responsibility.112 These externalised losses occur on a massive scale. Estimates put the externalised costs of death and injury in the hundreds of billions of dollars each year in the United States alone.113 In the past, scholars (rather hopefully) saw veil-piercing as a remedial doctrine, which could counter the pernicious effects of moral hazard, the judgment-proofing of business activity and the externalisation of losses. However, its use has been modest in most jurisdictions and practically non-existent in the UK.114 There are several reasons for this, including the failure of courts and counsel fully to reflect upon some foundational issues which are at play. Let us consider some of these. 105 See, eg The Print Factory (London) 1991 Ltd v Millam [2007] EWCA Civ 322, [2007] ICR 1331 [7] (Buxton LJ). 106 Hansmann et al (n 83) 1339. 107 Of course, in smaller and many medium-sized companies, company controllers undo the immunising effect of limited liability by extending security over personal assets and/or offering personal guarantees for company debts in order to raise finance or secure credit for their businesses. 108 See, eg A Muscat, The Liability of the Holding Company for the Debts of its Insolvent Subsidiaries (Abingdon, Routledge, 2016) 163; F Easterbrook and D Fischel, ‘Limited Liability and the Corporation’ (1985) 52 University of Chicago Law Review 89. 109 Bainbridge and Henderson (n 84) 302–03. 110 ibid 47. 111 See, eg NA Mendelson, ‘A Control-Based Approach to Shareholder Liability for Corporate Torts’ (2002) 102 Columbia Law Review 1203, 1247 and 1258. 112 TP Glynn, ‘Beyond “Unlimiting” Shareholder Liability: Vicarious Tort Liability for Corporate Officers’ (2004) 57 Vanderbilt Law Review 329, 371. 113 See M Simkovic, ‘Limited Liability and the Known Unknowns’ (2018) 68 Duke Law Journal 275, 277 and 305. 114 Prest (n 1) [74] (Lord Neuberger).

Piercing the Corporate Veil  341 Given that rules of limited liability are statutory,115 a question arises (again) as to whether courts have the power to pierce the ‘veil’ in order to get around them. In Dimbleby & Sons Ltd v National Union of Journalists, Lord Diplock opined that ‘one would expect that any parliamentary intention to pierce the corporate veil would be expressed in clear and unequivocal language’.116 In the absence of such language, Khimji and Nicholls assert that ‘to pierce the corporate veil, courts must essentially ignore or effectively overrule explicit and unambiguous provisions of corporate legislation’.117 However, unlike the overruling of statute that takes place when veilpiercing is used as a corrective to separate legal personality, the argument against the use of veil-piercing in this context does not look so strong. This is because Parliament legislated for limited liability originally in circumstances of (i) debate that focused upon the company’s business debts rather than its tort liability, tort law having been of modest scope in the mid-nineteenth century,118 and (ii) an inability to foresee that companies would purchase shares in other companies, giving rise to the problem of structuring group relations so as to judgment-proof major assets.119 Just as important is the issue of whether courts should be prepared to use their powers to pierce the corporate veil in order to address some of the negative impacts of the rule of limited liability. In considering this, UK courts have cleaved to the statute law and rendered little assistance in shaping a doctrine that could be used in a systematic way to overcome impropriety.120 Perhaps this reluctance to embrace the doctrine as an exception to limited liability reflects a prudence that has been sorely missed in the United States, where the complaint is of a very large number of veilpiercing decisions which appear to be nothing if not disorganised and internally inconsistent.121 Nevertheless, the reluctance of UK courts to embrace the doctrine has been surprising at times, given the meritorious nature of claims in cases such as those involving insolvencies amongst asbestos companies. Not only have UK courts applied the law of limited liability without considering its purposes and limits, they have given their blessing to the structuring of company relations in ways designed to defeat personal injury claims, such as in Adams v Cape Industries Ltd.122 Adams was a signal to groups undertaking risky physical processes that it is alright to structure

115 The Insolvency Act 1986, s 74(2)(d) provides for the limited liability of shareholders. Upon a windingup of the company, the shareholders need contribute no more than the unpaid amounts on their shares. 116 Dimbleby & Sons Ltd v National Union of Journalists [1984] 1 WLR 427 (HL) 435. 117 Khimji and Nicholls (n 46) 401. 118 There was no general tort of negligence. Moreover, ‘torts that could bankrupt a company apparently were unheard of’: B Pettet, ‘Limited Liability – A Principle for the 21st Century?’ (1995) 48 Current Legal Problems 125, 152. 119 Witting, Liability of Corporate Groups (n 65) ch 3; LM LoPucki, ‘The Death of Liability’ (1996) 106 Yale Law Journal 1. 120 P Lipton, ‘The Introduction of Limited Liability into the English and Australian Colonial Companies Acts: Inevitable Progression or Chaotic History?’ (2018) 41 Melbourne University Law Review 1278, 1297–98; S Belenzon, H Lee and A Patacconi, ‘Towards a Legal Theory of the Firm: The Effects of Group Liability on Asset Partitioning, Decentralization and Corporate Group Growth’ (Draft paper, 1 March 2018). 121 See, eg SM Bainbridge, ‘Abolishing Veil Piercing’ (2001) 26 Journal of Corporation Law 479, 481. 122 See A Dignam and P Oh, ‘Disregarding the Salomon Principle: An Empirical Analysis, 1885–2014’ (2019) 39 OJLS 16, 29 (The ‘Adams decision was … widely seen as a poorly reasoned and unfair policy decision …’).

342  Christian Witting group relations so as to ensure operating subsidiaries are undercapitalised and to allow personal injuries claims to be defeated with no recourse to parent companies.123 If there is to be argument about exceptions to shareholder limited liability, it should be easiest to proffer them in cases like Adams. In the view of the author, the law on limited liability was not intended to prevent shareholder liability for personal injuries or to prevent claims against shareholders who have participated in recognised wrongdoing so as to become joint tortfeasors.124 Nothing in the context of the passage of the Limited Liability Act 1855 could be said to be inconsistent with rights of recovery for losses springing from these sources.125 Even if this view is incorrect, as Orts has noted, ‘the principle of limited liability has never been justified merely to protect investors’ because it has a ‘social’ role.126 If the advantages of limited liability to society are outweighed by the disadvantages, then there ought to be change. If the courts are not prepared to provide remedies using a company law action like veil-piercing (and there are many reasons why they should not use this particular doctrine), then they should respond by outlining more appropriate private law mechanisms for doing so. If the courts do not act, they risk further decline in their influence in shaping laws fit for a modern, complex society.127 V.  THE WAY AHEAD

Let us close with some brief thoughts on the way ahead. Here comment will be made on shortcomings with the law of limited liability as it applies to cases involving personal injuries, the environment and corporate groups, and on the private law actions that seem best suited to dealing with these shortcomings. Whereas risk-sharing between shareholders and contract creditors brought about by limited liability is capable of justification,128 that justification disappears substantially when the costs of business failure fall upon tort victims, especially those seeking compensation for personal injuries. Tort victims comprise a vulnerable group of claimants. Most tort claims arise from wrongdoing or ‘accidents’ that are not easily predictable in advance by the victims themselves – such as when they use dangerous drugs or toxic substances marketed to consumers. There can be little informed bargaining about the potential consequences of those types of wrongdoing/

123 See also P Lipton, ‘The Mythology of Salomon’s Case and the Law Dealing with the Tort Liabilities of Corporate Groups: An Historical Perspective’ (2014) 40 Monash University Law Review 452, 479. 124 As to the latter, see Model Business Corporations Act, § 6.22(b) and discussion in Bainbridge and Henderson, Limited Liability (n 84) 282–83; SHC Lo, In Search of Corporate Accountability: Liabilities of Corporate Participants (Newcastle, Cambridge Scholars, 2015) 26–27, 64–65, 104–05 and 116–17. 125 See generally R McQueen, A Critical History of Company Law (Burlington VT, Ashgate, 2009). 126 Orts (n 84) 152. See more generally B Choudhury and M Petrin, Corporate Duties to the Public (Cambridge, Cambridge University Press, 2019) esp 4–5 and 21–36. 127 See TT Arvind, ‘Obligations, Governance and Society: Bringing the State Back In’ in A Robertson and M Tilbury (eds), The Common Law of Obligations: Divergence and Unity (Oxford, Hart Publishing, 2014) 265 (commenting on the withdrawal of the common law from standards setting in many areas of law). See also Tan, ‘Veil Piercing’ (n 7), who argues that veil piercing should be a response to the corporate vehicle being used in a manner not contemplated by legislation. 128 C Witting, ‘Liability for Corporate Wrongs’ (2009) 28 University of Queensland Law Journal 113, 113.

Piercing the Corporate Veil  343 accidents.129 The ability to externalise losses reduces companies’ incentives to take care in the conduct of their activities. More persons are injured than otherwise would be.130 It is clear, therefore, that significant legal protection of tort claimants is required against corporate wrongdoers. In more recent times, matters of environmental protection have become of increasing concern. Companies, whether operating in group form or not, are just as able to engage in risky activities that might result in harms to the environment and large liabilities that the risk-imposing companies cannot satisfy because of judgment-proofing activity. Although statutory measures have been put in place to combat some of the risks of limited liability and limited responsibility,131 there is a question whether common law courts need to do more to respond to pressing environmental and related social concerns. In the context of developed nations where people have attained relative affluence at the same time as a global environmental crisis is becoming clearer, one must ask whether externalisations of losses brought about by adherence to the rule of limited liability should remain impervious to the common law. For environmental reasons alone, there are many kinds of economic growth which should no longer be subsidised in the way that has become traditional and common law doctrines have a role to play in addressing the problems. The vulnerability of involuntary tort creditors and of those who must live in a degraded environment is exacerbated by judgment-proofing within corporate groups.132 This takes place despite it being acknowledged by a great majority of writers that most of the economic reasons for extending limited liability to individual investors do not apply, or apply with considerably less force, to companies which either acquire other incorporated businesses or incorporate them themselves.133 The removal of limited liability for the parent company would not reduce its incentives to monitor its subsidiaries, would not impede its ability to take risks which have attached to them positive net present values and would not reduce their ability to diversify investments. Even hardcore law-and-economics scholars agree on the fairness of removing limited liability for parent companies where insolvent subsidiaries cannot meet tort liabilities.134 What has been said is enough to make clear that, if veil-piercing is to have a role in extending liabilities arising from the operation of companies, that role is most coherent when undertaken as a corrective to limited liability. It has been suggested that the rule of limited liability itself is not unlimited in its application, and that there are important policy objectives behind calls for exceptions to it. But the Supreme Court’s decision in Prest has narrowed the window of opportunity for veil-piercing to play a 129 Muscat (n 108) 176 onwards. 130 Glynn (n 112) 371. 131 Directive 2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage. 132 LoPucki (n 119) 20. 133 Witting, Liability of Corporate Groups (n 65) 74–79. See also R Booth, ‘Limited Liability and the Efficient Allocation of Resources’ (1994) 89 Northwestern University Law Review 147, 153. 134 PI Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality (Oxford, Oxford University Press, 1993) 91, who argues that limited liability is not a barrier to enterprise liability. See also H Hansmann and R Kraakman, ‘Towards Unlimited Shareholder Liability for Corporate Torts’ (1991) 100 Yale Law Journal 1879.

344  Christian Witting part in resolving issues outlined. On balance, the author believes that this is for the best.135 What can we do instead? This is a matter for another paper, but the author’s recommendations are to the following effect. First, there is a need for exceptions to limited liability to be enshrined in statute so as to ensure order and clarity.136 Debate on the reform of statute law would allow a better airing of relevant policy issues and facilitate the tailoring of exceptions to limited liability so that they strike a proper balance between various interests. Unfortunately, at the time of writing, the chances of such reform are low. Second, there is a need to develop existing common law rules in order to be able to extend liability in both the vertical and horizontal relations between insolvent companies and wrongdoers involved in their operation. Veil-piercing claims have succeeded only in cases involving relatively small corporate groups or single companies, so there is a need for rules which would apply more widely to encompass larger corporate groups. Two areas of law of great potential here involve the expanded use of the tort of negligence, based upon a more liberal interpretation of the proximity element of the duty of care, and a less restrictive application of principles of joint tortfeasance in the company realm.137 The tort of negligence is in a transition phase. In Robinson v Chief Constable of West Yorkshire,138 the Supreme Court emphasised the importance of existing authorities and of the incremental approach in duty of care cases so as to avoid sharp changes in the law. Although it appears that there is scope for the application of the Caparo Industries plc v Dickman139 three-stage test in novel cases, there appears to be little enthusiasm for it. This conservative approach is unfortunate because the law of negligence is unlikely to play a great role as a substitute for veil-piercing unless courts are prepared to recognise the multitude of ways in which proximity might arise in relations between controlling shareholders and third-party tort claimants and also to recognise the important policy reasons for imposing a requirement of reasonable care in exercising influence over investee companies as regards their impact upon employees and/or third parties. The decision of the Supreme Court in Vedanta Resources plc v Lungowe holds out some hope in this regard.140 This is evident in Lord Briggs’s dictum that the controlling shareholder (parent company) might owe a duty of care not just when control has been exercised over the management of an investee (subsidiary) company,141 but also in cases where improper policies have been imposed upon, 135 See also W Day, ‘Skirting around the Issue: The Corporate Veil after Prest v Petrodel’ [2014] Lloyd’s Maritime and Commercial Law Quarterly 269, 270. 136 A statutory provision could say something like: ‘shareholders with control or substantial influence over the direction of a company are liable to lose the benefit of limited liability where there has been misuse of the corporate form. In determining whether such misuse has occurred, a court shall take into account: (1) whether the insolvent company was ever capable of conducting operations in a serious and responsible manner, given the capital available to it; (2) whether a parent company, other group company, or such shareholders as already mentioned had the ability to capitalise the company properly for its intended operation; (3) whether potentially liable parties have been guilty of material misstatements about the insolvent company; and (4) and other factors affecting the merits of the claims against shareholders.’ 137 As to the latter, see, eg Lo (n 126) 178–80 and 191–92; Day (n 135) 288–90. 138 Robinson v Chief Constable of West Yorkshire [2018] UKSC 4, [2018] AC 736. 139 Caparo Industries plc v Dickman [1990] 2 AC 605 (HL). 140 Vedanta Resources plc v Lungowe (n 68). 141 ibid [49] and [51]. See also Chandler v Cape plc (n 68).

Piercing the Corporate Veil  345 or erroneous advice has been given to, the latter about hazardous operations and steps have been taken to see that they are implemented.142 But the opportunity for extensions of liability has not yet been taken any further than in the well-known case of Chandler v Cape plc,143 which turned upon peculiar facts evidencing a high level of control over the implementation of health precautions in the former subsidiary company. The doctrine of joint tortfeasance is also in a period of transition following the decision of the Supreme Court in Fish & Fish Ltd v Sea Shepherd UK.144 The law as stated in that case is not entirely helpful in extending liability within corporate groups (the case itself involving a group of sorts), but there is great potential with respect to the doctrine because once a party is declared to be a joint tortfeasor, that party will be liable for all the consequences of a common design even though it has not participated in all relevant acts and ‘even though as to some of the incidents [the defendant might] not have anticipated that they would happen’.145 According to the Sea Shepherd case, liability arises where three elements are satisfied. First, D2 must act to assist D1 in the commission of acts amounting to a tort. D2’s act must be substantial (more than merely facilitative) in nature.146 Second, there must be a ‘common design’ as between D1 and D2 consisting in agreement of some kind (whether explicit or not) that they should work towards a common end.147 Third, the primary wrongdoer must commit the tort regarding which D2’s acts of assistance must be a contributing cause.148 The most difficult aspect of this definition concerns common design. In Sea Shepherd, there were differing opinions on what would suffice. Lord Sumption held that there must be a shared intention to commit the acts which prove to be tortious,149 while Lords Toulson and Neuberger would have accepted knowledge in D2 of D1’s intention to commit a tort,150 which is more consistent with the general law in this area.151 Following on from the Sea Shepherd case, the Court of Appeal, in Glaxo Wellcome UK Ltd v Sandoz Group,152 accepted that four companies in a group each had the common intention and design of selling a certain product with a chosen design and get-up so as to create confusion about its origins, thereby arguably committing the tort of passing off. Each also had a role to play in the development, testing, marketing and sale of the allegedly infringing product. In so holding, Sir Timothy Lloyd stated that ‘if the common design is shared between several parties to a combination, it matters not that some relevant acts are done only by one or some parties 142 Vedanta Resources plc v Lungowe (n 68) [49] and [51]–[53]. 143 Chandler v Cape plc (n 68). 144 Fish & Fish Ltd v Sea Shepherd UK [2015] UKSC 10, [2015] AC 1229. 145 J Dietrich and P Ridge, Accessories in Private Law (Cambridge, Cambridge University Press, 2015) 133, citing Schumann v Abbott and Davis [1961] SASR 149, 155. 146 Fish & Fish (n 144) [21] and [23] (Lord Toulson), [37] and [49] (Lord Sumption) and [57] and [58] (Lord Neuberger). See also PW Lee, ‘Accessory Liability in Tort and Equity’ (2015) 27 Singapore Academy of Law Journal 853, 861. 147 Fish & Fish (n 144) [23] (Lord Toulson), [37] (Lord Sumption) and [55] (Lord Neuberger). See also Unilever plc v Gillette (UK) Ltd [1989] RPC 583 (CA) 609 (Mustill LJ); Dietrich and Ridge (n 145) 117. 148 PS Davies, Accessory Liability (Oxford, Hart Publishing, 2015) 12–13; Dietrich and Ridge (n 145) 38. 149 Fish & Fish (n 144) [44]. See also Lee (n 146) 862–64. 150 Fish & Fish (n 144) [27] and [60], respectively. 151 Dietrich and Ridge (n 145) 4, 12–13, 29, 43–60, 93–94, 116–17 and 127–30. 152 Glaxo Wellcome UK Ltd v Sandoz Group [2017] EWCA Civ 335, [2017] FSR 33.

346  Christian Witting and other relevant acts are done by others’.153 But there would be no joint tort in a case where one company merely sold an infringing product to another company in the same group.154 Still, Glaxo is an encouraging follow-up to the Supreme Court decision, which takes a wider, rather than narrower, view of the requirements. Needless to say, the limits of this doctrine in the group context are still being worked out, and it is to be hoped that courts are not dissuaded from liberalising the law by arguments that limited liability would be undermined or of economic Armageddon.



153 ibid 154 ibid

[31]. [32].

18 Good Arguable Case JOSHUA FOLKARD AND IAN BERGSON

In my opinion [the test set out in Canada Trust Co v Stolzenberg (No 2)] is a serviceable test, provided that it is correctly understood. The reference to ‘a much better argument on the material available’ is not a reversion to the civil burden of proof which the House of Lords had rejected in [Vitkovice Horni a Hutni Tezirstvo v Korner]. What is meant is (i) that the claimant must supply a plausible evidential basis for the application of a relevant jurisdictional gateway; (ii) that if there is an issue of fact about it, or some other reason for doubting whether it applies, the court must take a view on the material available if it can reliably do so; but (iii) the nature of the issue and the limitations of the material available at the interlocutory stage may be such that no reliable assessment can be made, in which case there is a good arguable case for the application of the gateway if there is a plausible (albeit contested) evidential basis for it. I do not believe that anything is gained by the word ‘much’, which suggests a superior standard of conviction that is both uncertain and unwarranted in this context. – Four Seasons Holdings Inc v Brownlie1

I. INTRODUCTION

A

ny court must be able to determine which cases it can and should hear, and which ought properly to be brought elsewhere. The English courts do so at an early stage of proceedings by applying their jurisdictional rules: principally, the Brussels I Regulation (recast) (BIR)2 or the common law and Civil Procedure Rules (CPR). Broadly speaking, the BIR applies in civil and commercial matters to defendants domiciled in the European Union and defendants (regardless of their domicile) who have agreed to jurisdiction of a Member State court. The common law rules apply to matters which are not dealt with by ‘higher-ranking’ rules in the BIR.3 1 Four Seasons Holdings Inc v Brownlie [2017] UKSC 80, [2018] 1 WLR 192 [7] (Lord Sumption). Other aspects of this case are discussed in ch 19 of this book. 2 Regulation (EU) No 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast). 3 BIR, Art 6(1): ‘If the defendant is not domiciled in a Member State, the jurisdiction of the courts of each Member State shall, subject to Article 18(1), Article 21(2) and Articles 24 and 25, be determined by the law of that Member State.’ The common law rules also apply where the BIR does not: eg where the claim is not a civil and commercial matter.

348  Joshua Folkard and Ian Bergson This chapter examines the concept of ‘good arguable case’ that is central to the jurisdictional enquiry. Under the common law rules on jurisdiction, the court needs to be satisfied to that standard in order to conclude that the relevant ‘gateway’ for service out under Practice Direction 6B, paragraph 3.1 has been made out.4 In addition, the court must also consider that there is a serious issue to be tried on the merits and that England is the proper place to bring the claim,5 ie the forum conveniens analysis.6 The ‘good arguable case’ standard has also traditionally been applied by the English courts under the BIR regime: for instance, to determine whether a defendant is domiciled here,7 or whether the parties have chosen English jurisdiction.8 As long ago as 1986, Lord Templeman expressed the hope that submissions on jurisdiction challenges could be ‘measured in hours and not days’.9 This has proved to be something of a forlorn hope. The courts have repeatedly expressed their frustration with ‘the evidence and argument on service out and stay applications’ not being ‘kept within proportionate bounds’ and ‘get[ting] out of hand’,10 and the ‘depressingly vast amount[s] of material’11 adduced on such challenges. Recently, the Supreme Court has gone as far as to say that litigants’ responses to those exhortations have left the court ‘beating its head against a brick wall’.12 At the same time, in recent years, the law on ‘good arguable case’ has been in a state of flux. In the last two and a half years, five appellate cases (two in the Supreme Court and three in the Court of Appeal) have dealt with the meaning of the ‘good arguable case’ standard. A significant contribution to the jurisprudence on this important topic was made by Lord Sumption in those two Supreme Court decisions: Four Seasons Holdings Inc v Brownlie13 and Goldman Sachs International v Novo Banco SA.14 Lord Sumption’s characteristically lucid analysis in Brownlie (quoted at the outset of this chapter) provides guidance to the courts grappling with the difficulties thrown up by this area. It is likely that this dictum will shape the case law in the lower courts for many years to come, even though it is clear from the subsequent authorities that Lord Sumption’s explication is by no means the end of the debate. As is to be expected, his analysis has thrown up further arguments about how the test works in practice which are still being worked out. Underlying the ‘good arguable case’ test are two policy objectives, which can pull in different directions. On the one hand, the court needs to be satisfied that there is a

4 The matter will typically be considered twice: once by the judge ex parte when deciding whether to allow the claimant to serve abroad and again once service has happened, at an inter partes hearing if the defendant challenges jurisdiction. 5 cf CPR 6.37(3). 6 See ch 19 of this book. For a convenient summary of the three requirements at common law, see AK Investment CJSC v Kyrgyz Mobil [2011] UKPC 7, [2012] 1 WLR 1804 [71] (Lord Collins). 7 Canada Trust Co v Stolzenberg (No 2) [1998] 1 WLR 547 (CA). 8 Bols Distilleries BV v Superior Yacht Services Ltd [2006] UKPC 45, [2007] 1 WLR 12. 9 Spiliada Maritime Corpn v Cansulex Ltd [1987] AC 460 (HL) 465G. 10 VTB Capital v Nutritek International Corp [2013] UKSC 5, [2013] 2 AC 337 [89] (Lord Neuberger). 11 Tugushev v Orlov [2019] EWHC 645 (Comm) [8] (Carr J). 12 Lungowe v Vedanta Resources plc [2019] UKSC 20, [2019] 2 WLR 1051 [14] (Lord Briggs). 13 Brownlie (n 1). 14 Goldman Sachs International v Novo Banco SA [2018] UKSC 24, [2018] 1 WLR 3683.

Good Arguable Case  349 proper claim which is sufficiently connected to England (in the relevant sense)15 such that the English court can hear it. On the other hand, the court is limited by the early stage at which these matters arise for the decision. It is understandably reticent to prejudge the case or trespass unnecessarily on the substantive merits, given the facts (if not the applicable legal principles) may still be hotly disputed. The ‘good arguable case’ standard is a pragmatic concept, which enables the court to determine whether or not the requisite connection has been made out. To say that a claimant needs a ‘good arguable case’ is a deceptively simple statement. For example, asking whether a claimant has a ‘good arguable case’ that a contract was made in England or that the claimant suffered damage in England sounds simple enough.16 Upon closer examination, however, much of the simplicity evaporates and problems soon emerge. What does a ‘good arguable case’ actually mean? Is it sufficient that the claimant’s position is merely arguable, or does ‘good’ connote that a higher standard of conviction is required? If so, how high is that standard? How far is the application of the standard sensitive to context, and is the court more willing to ‘grasp the nettle’ for some kinds of questions but not others? We will turn to examine these issues shortly, which are all facets of the wider question of how the court decides at an early stage of proceedings whether it can and should hear a case. II.  GOOD ARGUABLE CASE BEFORE FOUR SEASONS HOLDING INC v BROWNLIE

A.  Vitkovice Horni a Hutni Tezirstvo v Korner The expression ‘good arguable case’ has its origins in the House of Lords’ decision in Vitkovice Horni a Hutni Tezirstvo v Korner in the middle of the twentieth century.17 This concerned the application of the common law rules governing leave to serve out of the jurisdiction under the Rules of the Supreme Court (RSC). The House decisively rejected any notion that the court should apply the civil burden of proof (ie the balance of probabilities) when deciding whether leave should be given. Counsel for the successful respondent (Sir Andrew Clark KC) submitted that it sufficed for his client, the claimant, to have a ‘good arguable case’ that there had been a breach of contract within the jurisdiction. He equated this with a prima facie case.18 Lord Simonds (with whom Lord Normand agreed) approved counsel’s expression ‘good arguable case’ to encapsulate the evidential standard that the claimant must surmount to show that the gateways are engaged (ie on the facts of that case, that there was a contract and that it was made and breached in England). He distinguished this from a mere prima facie case, which was an expression that Lord Simonds ‘did not wholly like’.19 The claimant could satisfy this threshold without making its case 15 This will depend on whether the European or common law rules apply and the basis for the claimant contending that the English courts have jurisdiction. For the common law rules and the requirement that the relevant gateway be satisfied, see the text to n 4. For the European rules, see the text to nn 7 and 8. 16 To take two example ‘gateways’, see Practice Direction 6B, paras 3.1(6) and (9). 17 Vitkovice Horni a Hutni Tezirstvo v Korner [1951] AC 869 (HL). 18 ibid 875. 19 ibid 879–80.

350  Joshua Folkard and Ian Bergson good on the balance of probabilities. Were the position to be otherwise, the court would need to try the action in order to determine a preliminary application on jurisdiction. Lord Radcliffe’s concurring speech said that it was necessary to show a ‘strong argument … that the qualifying conditions are indeed satisfied’,20 which was synonymous with establishing a ‘strong case for argument’.21 His Lordship cautioned against chopping the meaning of the various expressions ‘overfine’. What must be shown was more than a prima facie case but less than the civil burden of proof.22 In Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran,23 the House of Lords considered Vitkovice when deciding what standard of proof applied to the underlying merits of a dispute when giving leave to serve out under the common law rules. The House held that the claimant must have a ‘good arguable case’ that the gateway relied upon was engaged, but the underlying merits of their claim only needed to be established to the (lower) ‘serious issue to be tried’ standard. Lord Goff, giving the sole reasoned judgment on behalf of the House, approved Lord Simonds’s ‘good arguable case’ test in Vitkovice and said that there was no reason to believe this was materially different from Lord Radcliffe’s formulation.24 B.  Canada Trust Co v Stolzenberg (No 2) Prior to Brownlie, the leading modern authority on ‘good arguable case’ was the Court of Appeal’s judgment in Canada Trust Co v Stolzenberg (No 2).25 The context was very different to Vitkovice. The case concerned the application of the European jurisdictional rules and in particular the Lugano Convention. This was in similar terms to the Brussels Convention (which is the origin of what ultimately became the BIR), albeit a number of other countries (including Switzerland and certain other non-Member States) were also parties. The question before the court was whether the first defendant (the anchor defendant) was domiciled in England, such as to allow three Swiss defendants to be sued in England too by virtue of being joined to the same set of proceedings. Waller LJ’s judgment draws together the extensive authority that had by that stage developed on the ‘good arguable case’ test and the relevant standard of proof the court should apply to jurisdictional questions. Four core points stand out. First, the ‘good arguable case’ test was held to apply to the European and common law rules on jurisdiction alike.26 The court drew on domestic authorities (including Vitkovice) to determine the relevant standard of proof that the English Courts should apply when determining whether it had jurisdiction under the European instruments.27 20 ibid 883–84. 21 Lord Tucker also agreed. 22 Vitkovice (n 17) 883–84. 23 Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438 (HL). 24 ibid 453D–G. 25 Canada Trust (n 7). 26 ibid 558G–H and 556G–557B. 27 As Waller LJ explained, per European authorities, the standard of proof required before a national court is entitled to conclude that it has jurisdiction is a matter for national courts, provided that the effectiveness of the instrument in question is not impaired: ibid 556C–G.

Good Arguable Case  351 Second, Waller LJ recognised that it was hard to pin down what ‘good arguable case’ meant. He emphasised that the House of Lords in Vitkovice had been seeking to find a concept that was ‘not capable of very precise definition [but] which reflects that the plaintiff must properly satisfy the court that it is right for the court to take jurisdiction’.28 This hints at a concept that is easier for a judge to apply than to state. Third, the judgment draws attention to the flexibility underlying the concept of ‘good arguable case’, depending on the issue being considered.29 As Waller LJ explained, the court does not want to give the appearance of pre-trying at the jurisdictional stage an issue that is central to the underlying merits (eg whether a contract was concluded). However, it is ‘natural for the court … to scrutinise most jealously that factor which actually provides jurisdiction’, particularly so where the factor in question will not be a live issue at trial if jurisdiction is established (eg in Canada Trust, domicile). This flexibility is something to which we shall return in due course.30 Fourth, importantly, Waller LJ (with whom Pill and Nourse LJJ agreed on this issue) put forward his own exposition as to how the ‘good arguable case’ test should be applied. As he explained:31 ‘Good arguable case’ reflects … that one side has a much better argument on the material available. It is the concept which the phrase reflects on which it is important to concentrate, ie of the court being satisfied or as satisfied as it can be having regard to the limitations which an interlocutory process imposes that factors exist which allow the court to take jurisdiction.

This became known subsequently as the Canada Trust ‘gloss’. It has been frequently cited and has proved influential in the subsequent authorities. When the case reached the House of Lords, Waller LJ’s approach to the standard of proof was endorsed by Lord Steyn, albeit without oral argument.32 Canada Trust was also endorsed subsequently by the Privy Council in two separate cases, one under the European regime33 and the other concerning the common law rules on jurisdiction.34 III.  FOUR SEASONS HOLDING INC v BROWNLIE

A.  Facts and the Decisions Below Sir Ian Brownlie, formerly Chichele Professor of Law at the University of Oxford, and his wife Lady Brownlie were tragically involved in a car accident while on an excursion during a holiday in Egypt. Sir Ian was killed and Lady Brownlie was injured. The excursion was organised by the concierge of the Four Seasons Hotel, Cairo, at which



28 ibid

555C–D. 555H and 558E–F. section V(A) below. 31 Canada Trust (n 7) 555G–H. 32 Canada Trust Co v Stolzenberg (No 2) [2002] 1 AC 1 (HL) 13C–H. 33 Bols Distilleries (n 8) [28] (Lord Rodger). 34 AK Investment (n 6) [71] (Lord Collins). 29 ibid 30 See

352  Joshua Folkard and Ian Bergson they were staying. Upon her return to the UK, Lady Brownlie commenced proceedings in contract and tort against the defendant parent company, a Canadian corporation of the Four Seasons chain of hotels. Four Seasons joined issue with Lady Brownlie inter alia on whether the contract or tort gateways could be satisfied. We do not address the tort gateway in this chapter (which is addressed elsewhere),35 save to note that this raised a question of law as to what ‘damage’ means for the purposes of the rules. Of greater present interest is the contractual claim. The question before the court was whether Lady Brownlie had a ‘good arguable case’ that she had contracted with the defendant for the excursion and that any such contract was made in England. Accordingly, whether Lady Brownlie had a ‘good arguable case’ under the contract ‘gateway’ depended on: (i) whether the defendant was the contractual counterparty; and (ii) where the acceptance was received (and whether this was in England, where Lady Brownlie was when she booked the excursion by telephone, or in Egypt, where the concierge was). Tugendhat J had found, given the paucity of the evidence adduced by the defendant, that Lady Brownlie had a strongly arguable case on point (i).36 On point (ii), he found it ‘difficult to apply the Canada Trust gloss’, but held that ‘either party could be said to have a good arguable case’ as to who uttered the acceptance and he was satisfied that ‘factors exist which allow the court to take jurisdiction’.37 The Court of Appeal allowed other aspects of the defendant’s appeal (on the tort gateway), but upheld Tugendhat J’s conclusion that Lady Brownlie had a good arguable case that the contractual gateway was engaged.38 Arden LJ held that, when applying the Canada Trust gloss, the court was concerned with the question of the relative plausibility of each party’s case, but there was also an absolute standard to be met. The case had to be more than merely arguable: there had to be ‘some substance to it’ and the evidence must ‘achieve an acceptable level of quality and adequacy’.39 She held that:40 On the evidence as it stood, the judge was right to conclude for the purposes of the jurisdictional question before him that her case was the much better argument on the issue of identity of the entity managing the hotel. Lady Brownlie could point to the brochure and the defendant’s plain reticence to disclose details of the contractual relationship it contended it had with a local operator …

B.  The Supreme Court’s Disposal of the Appeal When the case reached the Supreme Court, there was an unexpected development. The court took the exceptional course of inviting counsel for the defendant to take 35 See ch 19. 36 Considering an appeal against the earlier decision of Master Cook (setting aside the permission obtained by Lady Brownlie at the ex parte stage to serve out). 37 Brownlie v Four Seasons Holdings Inc [2014] EWHC 273 (QB) [89]. 38 Brownlie v Four Seasons Holdings Inc [2015] EWCA Civ 665, [2016] 1 WLR 1814, noted by I Bergson, ‘Consequential Damage and the Tort Gateway’ (2016) 132 LQR 42. 39 Brownlie (n 38) [23]. 40 ibid [59].

Good Arguable Case  353 i­nstructions on the precise distribution of corporate responsibility for the Cairo hotel and to serve fuller evidence on the point.41 A detailed witness statement was served, which showed beyond doubt that the defendant was a non-trading holding company which did not own or operate the Cairo hotel. Lord Sumption was nonetheless critical of Tugendhat J’s treatment of the defendant’s evidence at first instance, observing that the judge’s ‘irritation [with the defendant] may have coloured his assessment of the evidence’ and that his reasoning was ‘rather unsatisfactory’.42 The end result was that:43 on the information now available, which substantially corresponds to that given more summarily in [the defendant’s] witness statement before Master Cook, there is no realistic prospect that Lady Brownlie will establish that she contracted with [the defendant], or that [the defendant] will be held vicariously liable for the negligence of the driver of the excursion vehicle. Lady Brownlie’s claim does not satisfy the specific factual requirements of the gateways. A fortiori, it does not satisfy the general requirement that there should be a reasonable prospect of success.

On analysis, the facts of Brownlie did not raise any difficult point of law about whether Lady Brownlie had a ‘good arguable case’ or how to apply the Canada Trust gloss. By the time of the (second) Supreme Court hearing, it was clear beyond peradventure that the incorrect defendant had been sued. Moreover, as Lord Sumption observed, it would not have been in Lady Brownlie’s interests for this only to become apparent at trial: the result would then be that the claim would be dismissed after a great deal of additional delay and expense.44 C.  Lord Sumption’s Explication of the Canada Trust Gloss Even though the ‘wrong defendant’ point was sufficient without more to dispose of the appeal, Lord Sumption’s judgment contains a valuable explication of the Canada Trust gloss, which is of seemingly general application. After citing the leading authorities (detailed above), Lord Sumption made the observations on Waller LJ’s approach in Canada Trust set out at the start of this chapter. No other member of the Supreme Court expressly endorsed Lord Sumption’s dictum. The only other member of the Court who addressed it was Lady Hale, who observed:45 As we agree that this action cannot continue against the current defendant, everything which we say about jurisdiction is obiter dicta and should be treated with appropriate caution. For what it is worth, I agree … that the correct test is ‘a good arguable case’ and glosses should be avoided; I do not read Lord Sumption’s explication in para 7 [ie the dictum quoted at the start of this chapter] as glossing the test …

Following the decision in Brownlie, there was uncertainty as to how far the Supreme Court had approved Lord Sumption’s explication and whether it would nonetheless be influential in the lower courts in future.

41 Brownlie

(n 1) [14]. [12]–[13]. 43 ibid [15]. 44 ibid [13]. 45 ibid [33]. 42 ibid

354  Joshua Folkard and Ian Bergson Notwithstanding this uncertainty, the decision in Brownlie did mean that Waller LJ’s suggestion that the claimant needs to show ‘much the better argument’ (emphasis added) appeared destined for the history books. Lord Sumption specifically disapproved any such requirement46 and, given that Lady Hale said that ‘glosses should be avoided’, the Supreme Court appears to have been unanimous on this point.47 This was a welcome development, given the lack of clarity about what (if anything) the word ‘much’ added to the test. IV.  APPLICATIONS/INTERPRETATION OF LORD SUMPTION’S DICTUM

A.  Goldman Sachs v Novo Banco Any doubt as to whether Lord Sumption’s statements in Brownlie were merely the obiter comments of one Justice of the Supreme Court were dispelled in Goldman Sachs International v Novo Banco SA.48 In one short paragraph (which did not appear to result from any substantial argument on the issue), Lord Sumption repeated the Brownlie formulation and stated that:49 ‘For the purpose of determining an issue about jurisdiction, the traditional test has been whether the claimant had “the better of the argument” on the facts going to jurisdiction. In [Brownlie], this court reformulated the effect of that test.’ All four other Justices (Lord Mance, Lord Hodge, Lady Black and Lord Lloyd-Jones) agreed with Lord Sumption’s judgment. As noted by Green LJ in Kaefer Aislamientos SA v AMS Drilling SA, following Goldman Sachs:50 ‘Any dispute about whether the three-limbed test [set out by Lord Sumption in Brownlie] is obiter has accordingly now vanished. The test has been endorsed by a unanimous Supreme Court.’ Like many of Lord Sumption’s contributions to jurisprudence in different fields during his tenure, the dictum in Brownlie therefore had a very significant impact on the ‘good arguable case’ test. There was no suggestion in Goldman Sachs or Kaefer that that test applied only to a limited class of cases.51 B.  Aspen Underwriting v Credit Europe Prior to the decision in Kaefer, the meaning of the Brownlie formulation was considered by the Court of Appeal in Aspen Underwriting Limited v Credit Europe Bank NV.52 Aspen Underwriting concerned the relevant evidential standard to be adopted by a court in determining whether it had jurisdiction under the BIR.

46 ibid [7]. 47 As noted by I Bergson and J Folkard, ‘Service Out in the Supreme Court’ (2018) 134 LQR 344, 346. See also Kaefer Aislamientos SA v AMS Drilling SA [2019] EWCA Civ 10, [2019] 1 WLR 3514 [77] (Green LJ). 48 Goldman Sachs (n 14). 49 ibid [9]. 50 Kaefer (n 47) [71]. See also [70]: ‘the Supreme Court has now spoken with a single voice and the route forward lies with that reformulation’. 51 This point is explored further in section V(B) below. 52 Aspen Underwriting Limited v Credit Europe Bank NV [2018] EWCA Civ 2590, [2019] 1 Lloyd’s Rep 221.

Good Arguable Case  355 In the first instance judgment, handed down before Brownlie or Goldman Sachs were decided, Teare J had determined that question by reference to a test of whether the underwriters had a ‘good arguable case … in the sense of having the better of the argument’, that test having been common ground between the parties.53 The issue dealt with by the Court of Appeal was whether that approach remained correct following the decision in Brownlie.54 It concluded that nothing said in Brownlie had invalidated the approach adopted by Teare J. Gross LJ stated that:55 As is clear from Brownlie, the test remains that of ‘a good arguable case’. A majority of the Supreme Court deprecated any ‘glossing’ of that test but said, in terms, that Lord Sumption’s ‘explication’, at [7], did not constitute any such impermissible gloss. Accordingly, a good arguable case remains something more than a prima facie case and something less than a case satisfying a balance of probabilities test. Where there is a dispute as to the applicability of a gateway, unless prevented by reason of some consideration relating to the interlocutory stage of the proceedings, the Court ‘must take a view on the material available if it can reliably do so’.

The Court of Appeal concluded that Teare J ‘took a view and made an assessment’, as Brownlie directed courts to do. Gross LJ stated that if any distinction could be drawn between Teare J’s approach and the Brownlie formulation, it was a distinction without a difference.56 Gross LJ would have been ‘content’, however, to go further and say that ‘in asking himself who had the better of the argument on the material available, [Teare J] may be seen to give effect to the test as subsequently formulated in Brownlie’.57 C.  Kaefer v AMS Green LJ opened the main judgment in Kaefer by noting that although Brownlie and Goldman Sachs were ‘intended to put to rest the many arguments that ha[d] surrounded the application of the test for jurisdiction … the attempts at clarification have served to raise a series of new arguments’.58 Despite having stated that he would seek to apply Brownlie and Goldman Sachs ‘eschewing glosses, reformulations and explications’,59 Green LJ named points (i) to (iii) at paragraph 7 of Brownlie (cited at the start of this chapter) ‘limb[s]’ and proceeded to provide a detailed explanation of each.60 He confirmed that it was permissible to ‘wrap … up the three-limbed test under the heading “good arguable case” … provided it is acknowledged that labels do not matter, and form is not allowed to prevail over substance’.61 However, his 53 Aspen Underwriting Limited v Credit Europe Bank NV [2017] EWHC 1904 (Comm), [2017] 2 Lloyd’s Rep 295 [21]. See also the application of that test at [33], [38] and [54]. 54 Aspen Underwriting (n 52) [26]–[27]. 55 ibid [33]. 56 ibid [33]. 57 ibid [33]. 58 Kaefer (n 47) [2]. 59 ibid [60]. 60 Commentary described by a differently constituted Court of Appeal (McCombe LJ, Haddon-Cave LJ and Sir Stephen Richards) in Lakatamia Shipping v Morimoto [2019] EWCA Civ 2203 [38] as a ‘magisterial analysis of the recent authorities’. 61 Kaefer (n 47) [74].

356  Joshua Folkard and Ian Bergson ­ ordship appeared to conclude that those limbs posed a series of questions which L should be taken one-by-one.62 Limb (i): The claimant must supply a plausible evidential basis for the application of a relevant jurisdictional gateway. Limb (i) was held to be ‘the basic test’,63 and construed as ‘a reference to an evidential basis showing that the claimant has the better argument’.64 That was a relative test,65 in the sense that the court should ‘look … to the merits in a relative sense to see whose arguments are stronger’.66 The test is ‘context specific’ and ‘flexible’,67 and the burden of proof remains on the claimant.68 Limb (ii): If there is an issue of fact about [whether the claimant can supply a plausible evidential basis for the application of a relevant jurisdictional gateway] or some other reason for doubting whether it applies, the court must take a view on the material available if it can reliably do so. Green LJ characterised limb (ii) as ‘an instruction to the court to seek to overcome evidential difficulties and arrive at a conclusion if it “reliably” can’ and ‘an instruction to use judicial common sense and pragmatism’.69 Although the court is not ‘compelled to perform the impossible’, given the interlocutory nature of proceedings, his Lordship opined that ‘not every evidential lacuna or dispute is material or cannot be overcome’.70 As Briggs has noted, the consequence may be that ‘if the reason for the negative answer [to limb (i)] is because the defendant’s denial is the more plausible, then it appears that the claimant simply loses’.71 Limb (iii): The nature of the issue and the limitations of the material available at the interlocutory stage may be such that no reliable assessment can be made, in which case there is a good arguable case for the application of the gateway if there is a plausible (albeit contested) evidential basis for it. Limb (iii) appeared to be criticised by Green LJ on the basis that it was difficult to see how it differed from, or could be reconciled with, limb (i). In particular, if the ‘evidential test of plausibility’ in limb (i) had not been met, how could it nonetheless be said that there was ‘a plausible (albeit contested) evidential basis … for application of the gateway’?72 Nevertheless, limb (iii) was said to apply where a court is ‘unable to say who has the better argument’.73 That limb ‘To an extent moves away from a 62 As noted by A Briggs, ‘Service Out: communis error frangit ius’ [2019] Lloyd’s Maritime and Commercial Law Quarterly 195, 196 (ie rather than ‘a single question whose answer may be found with the help of a number of indicia’). 63 Also referred to in Lakatamia (n 60) [38] as ‘The central concept at the heart of the test’. 64 Kaefer (n 47) [73]–[74]. 65 ibid [73]. 66 ibid [61]. 67 Citing in this regard the Court of Appeal decision in Brownlie (n 38), in turn citing Canada Trust (n 7) 555H, referred to in section II(B) above. 68 Kaefer (n 47) [75]. 69 ibid [78]. 70 ibid [78]. 71 Briggs (n 62) 197. 72 Kaefer (n 47) [69]. Briggs has described the ‘distinction’ between ‘plausible’ and ‘plausible (albeit contested)’ as ‘inexplicable’: Briggs (n 62) 197. 73 Kaefer (n 47) [79].

Good Arguable Case  357 relative test’ and imposes ‘a more flexible test which is not necessarily conditional upon relative merits’.74 His Lordship thereby seemed to indicate that limb (iii) was (at least more of) an ‘absolute test’, which meant a test in which the claimant/applicant ‘need[ed] only to surmount a specified evidential threshold’ to be judged ‘by reference to a fixed standard’, ‘which does not involve the Court … assessing the relative merits of the competing arguments’.75 This is not an entirely new phenomenon: there is an echo here of Arden LJ’s recognition in the Court of Appeal in Brownlie that the test imposes an ‘absolute standard to be met’,76 and earlier cases which suggest that a relative test may not always be appropriate.77 As to the content of limb (iii), Green LJ stated in Kaefer that it was one ‘combining good arguable case and ­plausibility of evidence’.78 Limb (iv): Davis LJ’s concurring judgment. Whilst Davis LJ agreed with Green LJ’s judgment (with Asplin LJ agreeing with both),79 his preference appeared to be for a broader-brushed approach. Having lamented that he was ‘in something of a fog as to the difference between an “explication” and a “gloss”’, his Lordship stated that:80 a court may perfectly properly apply the yardstick of ‘having the better of the argument’ (the additional word ‘much’ can now safely be taken as consigned to the outer darkness). That, overall, confers, in my opinion, a desirable degree of flexibility in the evaluation of the court: desirable, just because the standard is, for the purposes of the evidential analysis in each case, between proof on the balance of probabilities (which is not the test) and the mere raising of an issue (which is not the test either).

D.  Airbus v Generali Italia Airbus v Generali Italia arose from the emergency landing of an Airbus A320 at Rome airport.81 The airline’s insurers commenced actions against Airbus in Italy for negligence,82 based on an alleged failure to take preventative action in light of other incidents involving the same class of aircraft (the Italian Action). Airbus then commenced proceedings in England, seeking declarations that it had no liability to the insurance companies because the Italian Action fell within the scope of exclusive jurisdiction clauses agreed by the airline, and the insurers had acted in breach of those clauses by starting the Italian Action.83 74 ibid [80]. 75 ibid [61]. 76 Brownlie (n 38) [23]. 77 See, eg WPP Holdings Italy srl v Benatti [2007] EWCA Civ 263, [2007] 1 WLR 2316 [44] (Toulson LJ); Antonio Gramsci Shipping Corp v Recoletos Ltd [2012] EWHC 1887 (Comm), [2012] 2 Lloyd’s Rep 365 [39] and [45] (Teare J). 78 Kaefer (n 47) [80]. 79 ibid [117]. 80 ibid [119]. 81 Airbus SAS v Generali Italia SpA [2019] EWCA Civ 805, [2019] 4 All ER 745. 82 Initially exercising rights of subrogation in their capacity as insurers of Alitalia, but subsequently as an independent claim not dependent on subrogation: ibid [36] and [41] (Males LJ). 83 See the summary of the relevant facts in Airbus (n 81) [3]–[7].

358  Joshua Folkard and Ian Bergson Insofar as relevant, three key issues were argued:84 (i) the correct construction of a jurisdiction clause in an agreement between Airbus and the airline (the Warranties Agreement); (ii) whether commencement of the Italian Action amounted to a breach of the Warranties Agreement; and (iii) whether the English court could make declaration(s) against the airline’s insurers, who were not a party to that agreement. At first instance, Moulder J determined issues (i) and (ii) by the ‘good arguable case’ standard, concluding that Airbus had the ‘better of the argument’ that the jurisdiction clause in the Warranties Agreement applied to all disputes arising out of or in connection with that agreement;85 and that the Italian Action advanced claims which fell within the scope of that jurisdiction clause.86 As to issue (iii), her Ladyship granted declarations against insurers that the English court had jurisdiction and that the Italian Action had been commenced in breach of the jurisdiction clause.87 Before the Court of Appeal, it was common ground between the parties that issues (i) and (iii) should be ‘finally decided’, whereas the test of ‘good arguable case’ ought to be applied (only) to issue (ii).88 In agreeing with that approach, Males LJ stated that:89 Sometimes … it will be sensible, when a question of law arises on an application to challenge jurisdiction, for the court to decide it rather than merely deciding whether it is sufficiently arguable … Before taking this course the court needs to be confident that it has all the relevant material with which to make such a decision and that doing so will not unfairly prejudice either party. But if this is so, it will often be useful to reach a final decision on the point as this will enable the action to go forward on a firm footing without putting the parties to the trouble and expense of arguing the point all over again … [Issues (i) and (iii)] are questions of law which have been fully argued and neither party has suggested that there is any additional material not presently before us which may bear on the answer. A final decision from this court may also be of assistance to the Italian court in considering whether to stay the proceedings before it.

Applying those approaches, Males LJ held as follows. (i) The jurisdiction clause in the Warranties Agreement applied to all disputes arising out of or in connection with that agreement, including any non-contractual obligations which were so connected with it.90 (ii) There was a ‘good arguable case’ that the Italian Action was sufficiently closely connected to certain warranties to fall within the scope of the Warranties Agreement. Airbus therefore had ‘the better of the argument’ that there had been a breach of that agreement.91 (iii) A declaration as to the correct construction of the jurisdiction clause could be granted against insurers on the basis that bringing the Italian Action infringed 84 Whether these were the correct three key issues is doubtful, since they did not include the questions of whether (i) the English court had jurisdiction over the insurers (domiciled in Italy) under Art 25 of BIR to grant declaratory relief against them and (ii) an Art 25 agreement between the insured and a contractual counterparty could extend to a claim by an insurer that it had a cause of action directly against the counterparty: A Dickinson ‘In Another’s Shoes: Subrogated Parties and the Brussels I Regulation’ [2019] Lloyd’s Maritime and Commercial Law Quarterly 496, 498 and 499. 85 Airbus SAS v Generali Italia SpA [2018] EWHC 2737 (Comm) [54] and [66], as summarised in Airbus (n 81) [44]–[45]. 86 Airbus SAS v Generali Italia SpA (n 85) [61]. 87 ibid [66(iii)]. 88 Airbus (n 81) [53]. 89 ibid [52]–[53]. 90 ibid [76]. 91 ibid [81]–[82].

Good Arguable Case  359 Airbus’s equitable right to enforcement of that clause.92 Moulder J’s further declaration that the Italian Action had been commenced in breach of the jurisdiction clause in the Warranties Agreement could not, however, stand because it was (and should have been) determined only on the basis that Airbus had a ‘good arguable case’ on that issue.93 The Court of Appeal also held (relying on Aspen Underwriting and Kaefer) that ‘the standard of proof to be applied in determining whether the English court has jurisdiction under art 25 of the Brussels Recast Regulation is that of a good arguable case’.94 V.  HOW IS THE TEST CONTEXT DEPENDENT?

A.  Flexibility and the Importance of Context The authorities before Brownlie had repeatedly emphasised the need for, and benefits of, flexibility when applying the ‘good arguable case’ test.95 As noted above,96 postBrownlie, Davis LJ in Kaefer also emphasised the ‘desirable degree of flexibility in the evaluation of the court’.97 Davis LJ’s apparent preference for a broader-brush approach seems to have gained traction among first instance judges. In Tugushev v Orlov,98 for example, having summarised Green LJ’s commentary in Kaefer,99 Carr J stated that:100 I respectfully too would wish to emphasise that it is important not to overcomplicate what should be a straightforward test to be applied sensibly to the particular facts and issues arising in each individual case. Whatever perorations there may be along the way, the ultimate test remains one of ‘good arguable case’. To this end a court may apply the yardstick of ‘having the better of the argument’ which … confers ‘a desirable degree of flexibility in the evaluation of the court’. The test is to be understood by reference to the new, reformulated three-limb test identified in Brownlie.101

A valuable explanation of the importance of context and this flexibility was provided pre-Brownlie by Toulson J (as he then was) in Petroleum Investment Co Ltd v ­Kantupan Holdings Co Ltd:102 92 ibid [97]. For criticism of this as a proposition of English law, see Dickinson (n 84) 497. 93 Airbus (n 81) [47] and [83]. 94 ibid [49]. 95 See, eg the text to n 29 above and n 102 below. 96 See section IV(C). 97 Kaefer (n 47) [119], with which Asplin LJ agreed. 98 Tugushev v Orlov (n 11). 99 A summary described by Lavender J in Gray v Hurley [2019] EWHC 1636 [107] as ‘helpful’, and which Richard Salter QC (sitting as a Deputy High Court Judge) ‘gratefully adopt[ed]’ in Idemia France v ­Decatur Europe [2019] EWHC 946, [2019] 2 All ER (Comm) 1020 [45]. 100 Tugushev v Orlov (n 11) [60]. 101 In applying the ‘good arguable case’ test, however, her Ladyship did state that: (i) ‘limb 1 as identified in Brownlie and Kaefer is made out [and the claimant] also has the better of the argument under limb 2 … limb 3 will in any event be made out: I would consider that [the claimant] has a plausible evidential (albeit contested) case … that [the defendant] resides in England on the evidence’; (ii) ‘I consider [the claimant] to have a plausible (albeit contested) evidential basis’; and (iii) a ‘good arguable case’ could be shown ‘at least partly … through inference’: Tugushev v Orlov (n 11) [184], [227] and [141], respectively. 102 Petroleum Investment Co Ltd v Kantupan Holdings Co Ltd [2002] 1 All ER (Comm) 124 (Com Ct) [35] and [38].

360  Joshua Folkard and Ian Bergson The test is less stringent than the civil burden of proof and contains a flexibility according to the subject matter and the stage at which the test is being applied … The limitations inherent in the interlocutory process may vary from case to case according to the subject matter. Where the subject matter involves questions of fact on which the evidence is incomplete and contradictory, it may be very difficult for a court to form even a preliminary view as to the parties’ rival strengths … However, where the claim depends on the construction of a contractual document on which there is detailed argument at the inter partes stage, a court may well reach a conclusion that one side has a much better argument than the other …

Perhaps because this was a freezing order case (where the court also applies a ‘good arguable case’ standard, albeit generally in a less demanding way),103 Toulson J’s dictum had received comparatively little attention in the subsequent cases.104 Although the authorities do not unpack precisely what this context-specific and flexible approach means, a number of interlinked strands can be discerned. These feed into how the court applies the ‘good arguable case’ test, or the prior question of what test should be applied altogether. Consider the following examples.105 (i)  Law or Fact Despite Lord Sumption’s dictum in Brownlie having been expressed in general terms, it is clear not least from Airbus that a different approach is generally adopted to questions of law than questions of fact on jurisdiction challenges. This is dealt with in section V.B below. (ii)  Nature of Legal Questions Not all disputed questions of law will be treated in the same manner. In particular, difficult legal points or those in controversial or developing areas of law may be treated differently when determining whether there is a good arguable case. This is also dealt with in section V.B below. (iii)  European or Domestic Law Whether a different approach is taken in jurisdiction cases under the BIR is explored in section V.C below. 103 See, eg P v Q [2017] EWHC 148 (Comm), [2017] 1 WLR 3800 [32] (Popplewell J): ‘The test of a good arguable case has also been adopted in other contexts, for example where the claimant applies for a freezing order. Although originally adopted as the same test as for service out of the jurisdiction, the jurisprudence has diverged on what is meant by a good arguable case in the two different contexts. For freezing orders a good arguable case is one which is more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50% chance of success … This is a lower threshold than for the service out gateways, where a good arguable case with the Canada Trust gloss requires much the better of the argument’ (emphasis added). 104 A notable exception is Teare J’s decision in Antonio Gramsci Shipping Corp (n 77), [35] and [46]. 105 These strands should be regarded as indicators of the Court’s context-sensitive approach to jurisdictional questions. They are not a checklist or an exhaustive account of the factors which the Court should or should not take into account when determining any particular case.

Good Arguable Case  361 (iv)  Material Available at the Interlocutory Stage As emphasised by Lord Sumption in Brownlie, a key consideration is whether the court is able to form a view on the question with the material available within the confines of an interlocutory process. What have become ‘limbs’ (ii) and (iii) of Brownlie require the court to ‘take a view’ on the material available, but only ‘if it can reliably do so’ and not where ‘no reliable assessment can be made’.106 (v)  Extent of the Argument Whether the court can act to resolve the disputed question may also depend on whether detailed argument is required and whether this has occurred. For example, Toulson J’s dictum in Petroleum Investment cited immediately above gave the example of a situation in which ‘there is detailed argument at the inter partes stage’ on an issue of contractual construction.107 B.  Questions of law The Court of Appeal in VTB Capital v Nutritek had previously stated that:108 where a question of law arises in connection with a dispute about service out of the jurisdiction and that question of law goes to the existence of the jurisdiction … then the court will normally decide the question of law, as opposed to seeing whether there is a good arguable case on that issue of law.109

Although the Court of Appeal gave as an example ‘whether a claim falls within one of the classes set out in paragraph 3.1 of Practice Direction 6B’,110 that approach is not confined solely to the direct question of the interpretation of the wording of the gateways. In Lloyd v Google, for example, Warby J agreed with Mr Lloyd’s submission that ‘damage’ in ‘gateway 9’ should be given its ‘natural and ordinary meaning’, namely ‘any damage which is properly characterised as such and recoverable in the tort/wrong in question’.111 His Lordship then went on, however, to decide the definition of ‘damage’ within the Data Protection Act 1998.112 The same approach was applied in Airbus to construction of a jurisdiction clause said to engage Article 25 BIR,113 and would presumably have been applied by the 106 Brownlie (n 1) [7]. 107 Petroleum Investment (n 102) [38]. 108 VTB Capital v Nutritek [2012] EWCA Civ 808, [2012] 2 Lloyd’s Rep 313 [99] (Lloyd LJ). 109 The Court of Appeal decision in VTB Capital (ibid) was applied in Lloyd v Google LLC [2018] EWHC 2599 (QB), [2019] 1 WLR 1265 [35] (Warby J) (decided after Brownlie but before Airbus). See also AK Investments (n 6) [81] (Lord Collins): ‘A question of law can arise on an application in connection with service out of the jurisdiction, and, if the question of law goes to the existence of jurisdiction, the court will normally decide it, rather than treating it as a question of whether there is a good arguable case’ (emphasis added). 110 VTB Capital (n 108) [99] (Lloyd LJ). 111 Lloyd v Google (n 109) [48] (Warby J). 112 ibid [49]–[50] (Warby J): ‘These are questions of law. I do not think it would be right merely to consider whether [Mr Lloyd] has the better of the argument on these questions, and leave a final decision until trial. It seems to me that, like the Court of Appeal, I should determine the questions …’ 113 Airbus (n 81) [53] (Males LJ).

362  Joshua Folkard and Ian Bergson Court of Appeal to the legal requirements for a party to be an undisclosed principal in Kaefer (to determine who was a party to the alleged Article 25 agreement), had those principles been in dispute at that stage.114 The Court of Appeal in Airbus did not conclusively set out which questions of law should be determined on a jurisdiction challenge and which should not, but Males LJ said that it would be ‘sensible’ and ‘often … useful’ for the court to decide those questions if ‘it has all the relevant material with which to make such a decision’ and ‘doing so will not unfairly prejudice either party’.115 In particular, it has been said by analogy with summary judgment cases that difficult legal points or those in controversial or developing areas ought not to be decided on jurisdiction challenges.116 This appears to be in line with cases emphasising that developments in the law should be made on the basis of actual facts found at trial.117 In the class of cases where the court concludes that it cannot or should not ‘grasp the nettle’ and determine a legal question, following Brownlie there would appear to be two possible approaches open to the court. The first is for the court to decide who has the better of the argument on the legal issue (ie limb (i) of Lord Sumption’s dictum). As explained in Kaefer, this is a ‘relative’ test which will be decided by weighing the parties’ competing submissions against one another.118 The second approach would be to allow the court to apply limb (iii) of Lord Sumption’s dictum by analogy if it concluded that was appropriate, ie to ask only whether the claimant’s legal argument has a plausible (albeit contested) basis. It seems an open question whether the court can take this second approach to legal (as opposed to factual) questions.119 C.  BIR Cases As noted in section IV above, Aspen Underwriting, Kaefer and Airbus applied Lord Sumption’s dictum in Brownlie to determine whether the English court had jurisdiction under Article 25 BIR.120 Following Brownlie, Carr J in Tugushev v Orlov applied the ‘good arguable case’ test to the question of whether the defendant was domiciled in England (such that the English Courts had jurisdiction under Article 4 BIR).121 Males J (as he then was) also applied ‘Lord Sumption’s observations in Brownlie’ 114 Green LJ in Kaefer (n 47) [55] recorded that there was ‘no material dispute between the parties as to the governing principles’ on that question. 115 Airbus (n 81) [52]–[53] (Green LJ). 116 Flota Petrolera Ecuatoriana v Petroleos de Venezuala SA [2017] EWHC 3630 (Comm) [14] (Leggatt J). 117 See, eg Barrett v Enfield London Borough Council [2001] 2 AC 550 (HL) 557; Farah v British Airways (Court of Appeal, The Times, 26 January 2000) [42]–[43]. 118 Kaefer (n 47) [61] and [73] (Green LJ). 119 The Court may find the second approach more appealing if the determination of the legal issue is potentially sensitive to the factual matrix, for example. 120 Despite Brexit, this point will continue to be relevant at least until the end of the ‘transition period’, not least because the Withdrawal Agreement provides for the BIR’s rules to continue to apply to proceedings: (i) ‘instituted before the end of the transition period’ (Art 67(1)(a)); and (ii) which, although not instituted before the end of the transition period, ‘are related to such proceedings’ pursuant to Arts 29–31 BIR (Art 67(1)(a)). The Withdrawal Agreement provides for the ‘transition period’ to run until 31 ­December 2020 (Art 126), although there is provision for an extension in Art 132. 121 Tugushev v Orlov (n 11) [44], [112], [141] and [184]–[185] (where the applicable test was common ground between the parties).

Good Arguable Case  363 to the question of whether the court had jurisdiction under Article 7(2) BIR122 in Griffin Underwriting v Varouxakis, although his Lordship stated (before Kaefer) that those observations ‘have not varied the evidential standard which the court should apply’.123 There is therefore strong authority for the three-limbed ‘good arguable case’ test to apply to BIR cases generally. Briggs and Dickinson have argued that approaches other than the three-limbed test would be more appropriate in at least some BIR cases. Briggs has argued that:124 Where the basis for jurisdiction is that it is conferred by [BIR], the simple and unelaborated question whether claimant or defendant has the better of the argument is well fitted to the task: it also reflects the requirement of European law that the consent of the defendant to the jurisdiction of the court be clearly and precisely shown. [In Article 25 BIR cases] it makes every sense to ask whether the claimant has the better of the argument on the point. Any other approach risks the court finding that it has jurisdiction when, on balance, it believes that it did not [which] seems bound to impair the operation of the Regulation.

In a similar vein, Dickinson has suggested that:125 A more logical methodological approach would be to treat identification of the evidential standard as part of the process of construction of the rule or set of rules relied on, taking into account both wording and purpose … [T]here is a strong argument that one of the fundamental features within the scheme of the Regulation is substantially impaired if a Member State domiciled defendant is deprived of the privilege of being sued before the courts of its domicile … through the application of a test that assesses the plausibility only of the claimant’s evidence and disregards evidence put forward by the defendant that, equally plausibly, points in the opposite direction.

A similar argument126 was considered obiter (pre-Brownlie) in Flota Petrolera,127 where Leggatt J questioned whether the same ‘good arguable case’ standard should apply in the European and common law contexts. He stated that, in his ‘respectful view’, it was a ‘heretical notion’ that ‘the same interpretation of a good arguable case applies where a court is being asked to give permission for service out of the jurisdiction in a case not governed by the Brussels Regulation’.128 The Flota Petrolera view does not appear to have gained any significant momentum in the case law thus far. In Kaefer, however, Green LJ stated that:129 some regard must be paid to the fact that, as was held in [Bols Distilleries130], the ‘clear and precise’ test must be taken into account as a component of the domestic test and the 122 The rule of special jurisdiction for tort: ‘A person domiciled in a Member State may be sued in another Member State … in matters relating to tort, delict or quasi-delict, in the courts for the place where the harmful event occurred or may occur.’ 123 Griffin Underwriting v Varouxakis [2018] EWHC 3259 (Comm), [2019] 1 WLR 2529 [62] (Males J). 124 Briggs (n 62) 198. 125 A Dickinson, ‘Lax Standards’ (2019) 135 LQR 369, 371 and 373–74. 126 Which appears to have been presented to the Court through: (i) extracts from A Briggs, Civil Jurisdiction and Judgments, 6th edn (London, Informa, 2015); and (ii) ‘a lecture given to the Commercial Bar Association in 2015’: Flota Petrolera (n 116) [12] (Leggatt J). Point (ii) appears to refer to what was later published as A Briggs, ‘The Hidden Depths of the Law of Jurisdiction’ [2016] Lloyd’s Maritime and Commercial Law Quarterly 236. 127 Flota Petrolera (n 116) [11]–[13] (Leggatt J). 128 ibid [11] (Leggatt J). 129 Kaefer (n 47) [83] (Green LJ). 130 Bols Distilleries (n 8).

364  Joshua Folkard and Ian Bergson melding of the two is necessary to ensure that domestic law remains consistent with the Regulation. As with so much of the language used in this context, that which is ‘clear and precise’ is not easy to define with precision. But I would rely upon it as providing at least an indication of the quality of the evidence required. It supports the conclusion that the prima facie test (in limbs (i) and (ii)) is a relative one; and in so far as the court cannot resolve outstanding material disputes (limb (iii)) it affords an indication as to the sort of evidence that a court will seek. I would not go much beyond this though.

The significance of the reference to Bols Distilleries (which concerned Article 23(1) of Brussels I)131 was that the Privy Council had noted there that Court of Justice case law required a jurisdictional consensus of the parties to be ‘clearly and precisely demonstrated’.132 Lord Rodger, however, stated in Bols Distilleries that:133 if the standard of ‘a good arguable case’ is properly understood and applied, there is no risk that the effectiveness of the Regulation will be impaired … In practice, what amounts to a ‘good arguable case’ depends on what requires to be shown in any particular situation in order to establish jurisdiction. In the present case, as the case law of the Court of Justice e­ mphasises … the claimants must demonstrate ‘clearly and precisely’ that the clause conferring jurisdiction on the court was in fact the subject of consensus between the parties. So, applying the ‘good arguable case’ standard, the claimants must show that they have a much better argument than the defendants that, on the material available at present, the requirements of form in article 23(1)[134] are met and that it can be established, clearly and precisely, that the clause conferring jurisdiction on the court was the subject of consensus between the parties.

Thus, the case law following Brownlie suggests that although Lord Sumption’s dictum applies to BIR cases, the ‘quality of the evidence’ required to satisfy the third limb of that approach may well be higher than in cases where the Regulation does not apply.135 That seems appropriate at least in Article 7 and Article 25 cases, where the risk of the court getting the question of jurisdiction ‘wrong’ would generally be that the defendant’s prima facie entitlement to be sued only in his or her place of domicile under Article 4 BIR could be undermined. By contrast, this is a concern which does not apply on application of the common law rules. ‘Flexibility’ in this context therefore appears to go to the ‘quality of evidence’ required, rather than application of a test other than the three-limbed Brownlie approach. D.  Overlap with the Substantive Merits? Finally, we briefly address the interaction of the ‘good arguable case’ test and the substantive merits. 131 ie the predecessor to BIR: Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. 132 Bols Distilleries (n 8) [23] (Lord Rodger) citing, in particular: (i) Case C-24/76 Estasis Salotti v RÜWA Polstereimaschinen GmbH [1976] ECR 1831 [7]; (ii) Case C-71/83 The Tilly Russ [1985] QB 931 [24]; and (iii) Case C-387/98 Coreck Maritime GmbH v Handelsveem BV [2000] ECR I-9337 [13]. 133 Bols Distilleries (n 8) [28] (Lord Rodger). 134 Now Art 25(1) BIR. 135 Cf The very recent observations on this point in Generali Italia S.p.A. v Pelagic Fisheries Corporation [2020] EWHC 1228 (Comm) [11] (Foxton J) which was handed down while this chapter was at a proof stage, citing Etihad Airways PJSC v Flöther [2019] EWHC 3107 (Comm) [55] (Jacobs J).

Good Arguable Case  365 There was some support in the pre-Brownlie case law for the proposition that the application of the test could vary depending on whether the jurisdictional fact was part and parcel of the substantive merits, or whether it is an issue that would not arise again at trial (eg domicile).136 In the former case, there is the potential for the Court’s determination at an interlocutory stage to prejudge issues that will be central at trial. As Rix LJ put it in Konkola Copper Mines plc v Coromin: ‘However important the proper disposition of a jurisdictional challenge is, it is not something which should be allowed to subvert the merits of a potential trial.’137 In Brownlie, Lord Sumption reiterated that, following Bank Markazi, the ‘good arguable case’ standard is ‘the same whether the jurisdictional fact in question would or would not be in issue at a trial on the merits’.138 On this approach, the court will not apply a different standard depending on whether the matter will also be in issue at trial. For this reason, this factor was not included in the list set out in section V.A above. VI. CONCLUSION

Lord Sumption’s dictum in Brownlie has made a significant contribution to the jurisprudence on the ‘good arguable case’ test. It provides useful guidance in analysing the issues which arise on application of the requirement in a way which draws on and develops the earlier authorities. Subsequent appellate cases have, however, shown that the three-limbed test does not necessarily apply to all questions which arise in determining whether a claim has sufficient links to England to be entitled to proceed. In particular, certain questions of law may simply be determined by the court, without applying a ‘better of the argument’ standard at all. Where the three-limbed test is engaged, its practical application will be context specific and may (for example) require higher ‘quality of evidence’ in at least some BIR cases. There is a danger in rigid overanalysis of Lord Sumption’s three-limbed test. At root, the purpose of the ‘good arguable case’ standard is simple: to determine at an early stage whether the claimant has a claim that is sufficiently linked to England for the court to assume jurisdiction. As Green LJ put it in Kaefer, however, a ‘test intended to be straightforward has become befuddled by “glosses”, glosses upon glosses, “explications” and “reformulations”’.139 This call has been emphasised by first instance judges applying the ‘good arguable case’ requirement in the cases set out in section V.A above. Finally, there is an interplay between this concern and Lord Templeman’s aspiration (outlined at the beginning of this chapter) that jurisdiction challenges be relatively short and simple affairs. The complexity of the ‘good arguable case’ test will have a bearing on how much time needs to be devoted to argument about its application. It would be unfortunate if Lord Sumption’s attempt to clarify the law were to be interpreted in a way which made that goal still more elusive.

136 See,

eg Konkola Copper Mines plc v Coromin [2006] EWCA Civ 5, [2006] 1 Lloyd’s Rep 410 [80]–[81]. [81]. 138 Brownlie (n 1) [6] (emphasis added). 139 Kaefer (n 47) [59]. 137 ibid

366

19 Forum Conveniens LOUISE MERRETT

The jurisdictional gateways and the discretion as to forum conveniens serve completely different purposes … The main determining factor in the exercise of the discretion on forum conveniens grounds is not the relationship between the cause of action and England but the practicalities of litigation. The purpose of the discretion is to limit the exercise of the court’s jurisdiction, not to enlarge it and certainly not to displace the criteria in the gateways. – Four Seasons Holdings Inc v Brownlie1

I. INTRODUCTION

T

o achieve certainty and predictability in a set of rules and at the same time have the flexibility to do justice or come to the right result in any individual case are aims which seem inherently contradictory. In the context of rules on jurisdiction, the European regime, in civil and commercial cases most notably the Brussels I Regulation (recast) (BIR),2 favours fixed rules which provide certain and predictable results. A defendant must be sued in the courts of its domicile unless a special ground of jurisdiction exists. The common law rules, and, in particular, the discretion to ensure that each case is ultimately heard in the most appropriate forum embodied in the forum conveniens discretion, favour flexibility. However, the common law regime also includes rules, notably the grounds for service out now found in paragraph 3.1 of Practice Direction 6B of the Civil Procedure Rules (CPR), known as jurisdictional ‘gateways’. At common law, proceedings can be served on a defendant present in the jurisdiction as of right. But a defendant so sued can apply for a stay of those proceedings if there is a clearly more appropriate forum. If the defendant is not present, a claimant must apply for permission to serve out, and must show that there is a ground for jurisdiction and that England is the most appropriate forum for the claim.

1 Four Seasons Holdings Inc v Brownlie [2017] UKSC 80, [2018] 1 WLR 192 [31] (Lord Sumption). 2 Regulation (EU) No 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast).

368  Louise Merrett This chapter focuses on the proper balance between rules and discretion in the context of these common law jurisdiction rules. Lord Sumption’s contribution to this debate arises principally from the cases of Abela v Baadarani and Four Seasons Holdings Inc v Brownlie.3 In the first of these cases, in an obiter paragraph, Lord Sumption appeared to advocate a broader, flexible approach, and certainly many commentators used these remarks to argue for a greater role for discretion. However, in the later decision in Brownlie, Lord Sumption explained that this was not his intention and that he instead favours a narrow approach emphasising the primary importance of the rule-based grounds. II.  ABELA v BAADARANI

In Abela v Baadarani, the underlying claim was for damages for fraud in connection with the purchase of shares in an Italian company. The claim was governed by English law and the contract contained a non-exclusive jurisdiction agreement in favour of England. A claim form was issued on 30 April 2009, and the court gave permission to serve out, extended the time for service and made an order for alternative service. It was accepted that this was a proper case for service out, the question at issue being a procedural one, namely, whether the steps already taken to serve the proceedings in Lebanon could be deemed to amount to good service. On this issue, the Supreme Court overturned the Court of Appeal and held that delivery of the proceedings to a lawyer’s office was capable of constituting proper service.4 While the decision turned on a rather technical procedural issue relating to the process of serving documents, the case has proved to be interesting for the attention given to Lord Sumption’s two-paragraph judgment:5 In his judgment in the Court of Appeal, Longmore LJ described the service of the English Court’s process out of the jurisdiction as an ‘exorbitant’ jurisdiction, which would be made even more exorbitant by retrospectively authorising the mode of service adopted in this case. This characterisation of the jurisdiction to allow service out is traditional, and was originally based on the notion that the service of proceedings abroad was an assertion of sovereign power over the Defendant and a corresponding interference with the sovereignty of the state in which process was served. This is no longer a realistic view of the situation. The adoption in English law of the doctrine of forum non conveniens and the accession by the United Kingdom to a number of conventions regulating the international jurisdiction of national courts, means that in the overwhelming majority of cases where service out is authorised there will have been either a contractual submission to the jurisdiction of the English court or else a substantial connection between the dispute and this country. Moreover, there is now a far greater measure of practical reciprocity than there once was. 3 Abela v Baadarani [2013] UKSC 44, [2013] 1 WLR 2043; Brownlie (n 1). 4 It had been conceded at first instance that the rules could be used retrospectively to count as good service in a service out case. Lord Clarke (with whom Lords Neuberger, Reed and Carnworth agreed) said that for his part that concession was correctly made. Furthermore, their Lordships also agreed that the judge was correct that the power retrospectively to validate alternative service in a service out case involves consideration of whether events in the foreign country in question were capable of constituting proper service ‘in the sense that the court can be satisfied that the proceedings have been properly brought to the attention of the defendant’. 5 Abela (n 3) [53]–[54]. Lord Clarke (with whom Lord Neuberger, Lord Reed and Lord Carnworth agreed) stated at [45] that he did not agree that for the court to make an order under rule 6.15(2) ‘is to make what is already an exorbitant power still more exorbitant’, and endorsed Lord Sumption’s analysis.

Forum Conveniens  369 Litigation between residents of different states is a routine incident of modern commercial life. A jurisdiction similar to that exercised by the English court is now exercised by the courts of many other countries. The basic principles on which the jurisdiction is exercisable by the English courts are similar to those underlying a number of international jurisdictional conventions, notably the Brussels Convention … (and corresponding Regulation …) and the Lugano Convention … The characterisation of the service of process abroad as an assertion of sovereignty may have been superficially plausible under the old form of writ (‘We command you …’). But it is, and probably always was, in reality no more than notice of the commencement of proceedings which was necessary to enable the Defendant to decide whether and if so how to respond in his own interest. It should no longer be necessary to resort to the kind of muscular presumptions against service out which are implicit in adjectives like ‘exorbitant’. The decision is generally a pragmatic one in the interests of the efficient conduct of litigation in an appropriate forum. For these reasons I cannot share the starting point from which the Court of Appeal … approached the present case. I consider that the appeal should be allowed for the reasons given in the judgment of Lord Clarke.

These remarks contain a number of different threads. (i) The traditional view that service out is an interference with the sovereignty of the state in which process is served is no longer realistic. (ii) In the overwhelming majority of cases of service out, there will have been either a contractual submission or a substantial connection between the dispute and this country. That is because of the adoption of the doctrine of forum non conveniens and accession by the UK to a number of conventions regulating international jurisdiction. (iii) There is now a far greater measure of reciprocity. A jurisdiction similar to that exercised by the English court is now exercised by the courts of many other countries, including, for example, the general principles underlying the rules in the BIR. (iv) Litigation between residents of different states is now routine. As has already been described, Abela itself was about service and methods of service. Some of Lord Sumption’s observations (particularly (i) above) seem to relate directly to that issue. One of the reasons service out was traditionally described as ‘exorbitant’ was the notion that service of proceedings was an assertion of sovereign power over the defendant and a corresponding interference with the sovereignty of the country where the process was served. While that characterisation may have been superficially plausible under the old form of writ, claim forms are now simply notice to a defendant of the commencement of proceedings, and accordingly are arguably not even an interference with sovereignty. However, some of the broader threads which can be drawn from this passage go further and appear to make substantive points about the proper scope for and approach to service out, particularly whether or to what extent it is an ‘exorbitant’ exercise of jurisdiction. The debate about whether service out is ‘exorbitant’ has a long history.6 I will only summarise that debate here because, for the reasons explained in detail below, it is

6 And not limited to England. See, eg Agar v Hyde (2000) 173 ALR 665 (HCA), where the High Court of Australia noted that considerations of comity, and consequent restraint, have informed many of the reported decisions about service out of the jurisdiction. The court noted, however, that rules of court, or local statutes, providing for service outside the jurisdiction are now commonplace. Further, contemporary developments in communications and transport make the degree of ‘inconvenience and annoyance’ to which a foreign defendant would be put, if brought into the courts of this jurisdiction, ‘of a qualitatively different order to that which existed in 1885’.

370  Louise Merrett more important to consider what the proper approach should be than to focus on this one word or idea. ‘Exorbitant’ can, rightly, be characterised as a ‘muscular’ adjective, for it means ‘grossly excessive’. In these global times, with generally straightforward and swift international travel, transport and communications, the notion that extraterritorial service (that is to say, service out of the jurisdiction) is ‘exorbitant’ is a dated one. Indeed, one might well characterise the service as of right of a passenger in transit through an English airport based on presence in the jurisdiction as ‘exorbitant’. The dated nature of the term is, I would suggest, simply the result of socio-economic development over the last 100 years. Now, air travel is ubiquitous; then, it was unknown. Now, borders and territoriality take something of a back seat; then, simply in physical terms of transit and transport, to be physically within the borders of another country was noteworthy. It is unsurprising that the common law based the jurisdiction of English courts on physical presence within the jurisdiction and regarded jurisdiction based on other criteria as usurping the territorial prerogatives of other states, so amounting to a jurisdiction that was potentially exorbitant, and therefore to be carefully exercised and policed. Today, whilst the distinction remains, it is far less stark, and I would suggest that the language of service ‘as of right’ and pursuant to the ‘exorbitant jurisdiction’ can only be understood, and appreciated, in the light of their history. As explained recently by Lord Mance in VTB Capital plc v Nutritek International Corp,7 in the Spiliada itself,8 Lord Goff noted that caution was necessary in respect of the word ‘exorbitant’. Such caution might explain his statement that the jurisdiction to serve out ‘may’ be exorbitant. He noted that the circumstances in which permission to serve out may be granted:9 are of great variety, ranging from cases where, one would have thought, the discretion would normally be exercised in favour of granting leave (eg where the relief sought is an injunction ordering the defendant to do or refrain from doing something within the jurisdiction) to cases where the grant of leave is far more problematical. In addition, the importance to be attached to any particular ground invoked by the plaintiff may vary from case to case. For example, the fact that English law is the putative proper law of the contract may be of very great importance … or it may be of little importance as seen in the context of the whole case. In these circumstances, it is, in my judgment, necessary to include both the residence or place of business of the defendant and the relevant ground invoked by the plaintiff as factors to be considered by the court when deciding whether to exercise its discretion to grant leave; but, in so doing, the court should give to such factors the weight which, in all the circumstances of the case, it considers to be appropriate.

Lord Mance accordingly noted that Lord Goff himself made clear that service out will not always be exorbitant. Much will depend on the ground relied on and all



7 VTB

Capital plc v Nutritek International Corp [2013] UKSC 5, [2013] 2 AC 337 [12]–[13]. Maritime Corpn v Cansulex Ltd [1987] AC 460 (HL). 481–82.

8 Spiliada 9 ibid

Forum Conveniens  371 the circumstances of the case. This is a point which has also been made robustly by Lord Collins:10 all the members of the court agreed that the question was whether the exercise of personal jurisdiction was in line with ‘traditional notions of fair play and substantial justice.’ This is close to the notion that the exercise of jurisdiction must not be ‘exorbitant’ in the sense of excessive or outrageous (cf Shorter Oxford English Dictionary). If there is a genuine dispute which has no connection with the forum, then the exercise of jurisdiction may be excessive if the defendant has no opportunity to contest its exercise under a forum non conveniens doctrine … this is perhaps why it is so regarded under the Brussels Convention regime, where forum non conveniens plays no part. But it is regrettable that the transient jurisdiction rule (as it is called in the United States) was branded as exorbitant by the Brussels Convention without regard to the effect of forum non conveniens, and even more regrettable that, under the influence of Lord Diplock, the English courts have come to regard it as established that the jurisdiction exercised under Order 11 is exorbitant … The expression ‘exorbitant jurisdiction’ should be reserved for the exercise of jurisdiction which is truly unreasonable or excessive … and the wholly unjustified categorisation by Lord Diplock of Order 11 as exorbitant and contrary to international comity should be rejected.

Given the socio-economic and, indeed, technological changes referred to above, it no longer makes sense to equate extraterritorial jurisdiction (asserted when a defendant is not physically present in the jurisdiction) with ‘exorbitant’ jurisdiction. The expression ‘exorbitant jurisdiction’ (meaning excessive or outrageous) should, if helpful at all, be reserved for the exercise of jurisdiction which is truly unreasonable or excessive. Service out cannot in general (or at least cannot always) be characterised in that way. This appears to be the real thrust of Lord Sumption’s comments in Abela: service out is not necessarily or always exorbitant, and for that reason there is no need for a ‘robust’ presumption against service out. However, Lord Sumption’s comments generated considerable attention and many have sought to draw from them a more fundamental shift in favour of service out. For example, in Al Jaber v Al Ibrahim,11 Burton J cited the passage as representing the proper modern approach. Similarly, in Hoskin v Apax Partners LLP,12 Mr Registrar Jones cited the statement as authority that a pragmatic approach is appropriate. The passage has also generated considerable academic controversy.13 As explained further below, perhaps most significantly, Professor Briggs has used these comments to argue for a much greater role for forum non conveniens, possibly

10 L Collins, ‘Temporary Presence, Exorbitant Jurisdiction and the US Supreme Court’ (1991) 107 LQR 10, 13–14. The note discusses a US Supreme Court decision on service based on temporary presence. 11 Al Jaber v Al Ibrahim [2016] EWHC 1989 (Comm). 12 Hoskin v Apax Partners LLP [2016] EWHC 558 (Ch). 13 Andrew Dickinson has suggested that Lord Sumption’s arguments for ‘taking an expansive view’ of the courts’ powers to exercise jurisdiction over foreign defendants are open to several objections: A Dickinson, ‘Service Abroad – an Inconvenient Obstacle? Abela v Baadarani [2013] UKSC 44’ (2014) 130 LQR 197. Lord Collins, on the other hand, argues that all Lord Sumption was really saying was that it was unrealistic to approach the exercise of discretion from the starting point that (i) service abroad is an assertion of sovereign power or (ii) there is a presumption that exercise of the jurisdiction is exorbitant: L Collins, ‘Sovereignty and Exorbitant Jurisdiction’ (2014) 130 LQR 555.

372  Louise Merrett to the extent of replacing grounds for service out. Lord Sumption himself returned to these observations in the second case that forms the basis of this chapter, Four Seasons Holdings Inc v Brownlie. III.  FOUR SEASONS HOLDING INC v BROWNLIE

The case arose from the tragic death of Sir Ian Brownlie QC in a road accident while on an excursion during a holiday in Egypt. Lady Brownlie was also injured in the accident and she brought proceedings against Four Seasons Holding Inc, the holding company of the hotel group where they were staying:14 (i) for her own injuries, (ii) for her loss as a dependent of Sir Ian Brownlie under the Fatal Accidents Act 1976 and (iii) for the loss and damage suffered by Sir Ian in her capacity as executrix of Sir Ian Brownlie’s estate, under the Law Reform (Miscellaneous Provisions) Act 1934. Proceedings were served on Four Seasons in Canada. The grounds for service out relied on by the Lady Brownlie were that the contract in question was made in England; and, in relation to her claims in tort, that damage was ‘sustained’ in this jurisdiction. The Four Seasons appealed against the decision that Lady Brownlie was entitled to bring the claim for breach of contract in the UK. Lady Brownlie cross-appealed against the decision that the UK courts had no jurisdiction to hear the claims in tort. The Supreme Court rejected all the potential grounds of jurisdiction. There was evidence to show that the Four Seasons neither owned nor operated the hotel from which Lady Brownlie had left on the sightseeing excursion. Accordingly, there was no realistic prospect that she would establish that she had contracted with the Four Seasons or that the Four Seasons would be held vicariously liable for the negligence of the driver.15 The Supreme Court accordingly rejected the claims on effectively substantive grounds – in essence, that the claim had been brought against the wrong defendant. Given that, and since the action could not continue against the current defendant, everything said about jurisdiction was obiter dicta. However, their Lordships went on to consider in some detail the proper scope of the tort service out ground and the meaning of damage.16 Broadly, the issue was as follows. One of the grounds for service out under the CPR (specifically paragraph 3.1(9)(a) of PD 6B) is that: (9) A claim is made in tort where – (a) damage was sustained [or will be sustained] within the jurisdiction; or (b) damage [which has been or will be] sustained results from an act committed [or likely to be committed] within the jurisdiction.17

14 And a second company, but the appeal did not relate to its position. 15 Furthermore, in the case of the claim for bereavement and loss of dependency under the Fatal Accidents Act 1976, the Act operates as part of the proper law of the tort, and has no application to a tort which is not governed by English law. 16 There was also a discussion of the good arguable case test, discussed in ch 18 of this book. 17 The square brackets are around the words which were added by amendment with effect from 1 October 2015.

Forum Conveniens  373 The question was the meaning of ‘damage’ within this provision. Specifically, is it limited to direct damage that is the immediate result of the tort, which, on the facts of the case, took place when the injuries were sustained as a result of the accident in Egypt (the narrow interpretation)? Alternatively, is a broader meaning appropriate, encompassing indirect damage, such as continuing physical injury or consequential loss suffered in this jurisdiction when the appellant returned to the UK after the accident (the broad interpretation)? The latter (broad) meaning of damage potentially opens the way to a far greater number of claims being made in England in any case where a victim is resident and accordingly suffering continuing damage in the jurisdiction. In Brownlie itself, the losses claimed were (i) funeral, memorial, repatriation and probate expenses and reimbursement of the cost of the holiday, claimed on behalf of Sir Ian Brownlie’s estate; (ii) medical expenses occasioned by Lady Brownlie’s injuries; and (iii) non-pecuniary damage for Lady Brownlie’s pain, suffering and loss of amenity. The question was whether, when a tortious act results in personal injury or death, ‘damage’ is limited to the direct damage, ie the physical injury or death, or extends to the indirect damage, ie the pecuniary expenditure or loss resulting. On the facts of the case, on the broad view, the English court would have jurisdiction, but on the narrow view, it would not. Another important aspect of the debate involved a comparison with the European rules. The BIR recast rules on jurisdiction did not engage on the facts because the defendant company was domiciled in Canada. However, when the rules do engage, they also provide (in Article 7(2)) for jurisdiction in the case of tort in the country where ‘the harmful event occurred or may occur’. According to the case law of the Court of Justice of the European Union (CJEU), starting with Bier v Mines de Potasse d’Alsace,18 this phrase refers both to the place where the damage occurred and the place of the event giving rise to it, so that the claimant could choose between them. But the CJEU has taken a narrow view and has held that, in respect of the place where the damage occurs, the only damage relevant to found jurisdiction under this provision is the direct damage. For example, in Marinari v Lloyds Bank plc,19 the claimant brought proceedings in Italy alleging financial loss and damage to his reputation caused when the defendant bank reported him to the police in England because promissory notes he had lodged with them appeared suspicious. The court held that what is now Article 7(2) BIR did not cover every place where the adverse consequences of an event which had already caused actual damage elsewhere could be felt. In particular, damage in Article 7(2) did not refer to the place where the victim claimed to have suffered financial loss consequential on actual damage arising and suffered by him in another Member State. A final aspect relates to the possible relevance of the Rome II Regulation.20 The Court of Appeal, in its decision favouring a narrow interpretation, adopted the narrow approach taken in the Rome II Regulation. The general rule in Article 4 of the Rome II Regulation applies to choice of law in the tort law of the country in which damage occurs ‘irrespective of the country or countries in which the indirect consequences of that event occur’. Recital 17 elaborates by explaining that ‘in cases of personal injury or damage to property,



18 Case

C-21/76 Bier v Mines de Potasse d’Alsace [1978] 1 QB 702. C-364/94 Marinari v Lloyds Bank plc [1995] ECR I-2715. 20 Regulation (EC) No 864/2007 on the law applicable to non-contractual obligations. 19 Case

374  Louise Merrett the country in which the damage occurs should be the country where the injury was sustained or the property was damaged respectively’. Accordingly, the question was not just what was the correct interpretation of CPR PD 6B paragraph 3.1 ground 9, but also whether the answer could or should be the same as that adopted under the BIR recast and/or the Rome II Regulation (both of which adopt a narrow interpretation). Baroness Hale (in the majority on this issue), having reviewed the various first instance decisions adopting the broad interpretation, held that the broad approach was correct. First, she rejected the argument based on the Rome II Regulation. Applicable law and jurisdiction are two different matters, and there is no necessary coincidence between the two. She also rejected the argument that the construction should mirror that taken to the Brussels Convention and subsequently the BIR and BIR recast. In particular, she explained that:21 It is also necessary to bear in mind the difference between the two schemes. The European scheme deliberately eschews any discretion in favour of clear and certain rules, in the context of a scheme which governs, not only jurisdiction, but also recognition and enforcement of the resulting judgments. No doubt that is why the Court of Justice was anxious to restrict the scope of the Bier decision by drawing the direct/indirect distinction. That is not a feature of the English scheme, which retains the ‘valuable safety valve’ of discretion, a discretion which need not be limited to the Spiliada principles, but can concentrate on the real question, which is ‘the proper place for the resolution of the dispute’ (as Professor Briggs puts it) … I do, of course, take the point that the claimant should not be in the position of choosing where to bring the claim. But in my view the discretion should be robust enough to prevent that. It is looking for a substantial reason to allow a claim against a foreign defendant to be brought in the courts of this country and the courts have always treated such cases with caution.

Baroness Hale accordingly rejected the approach taken by the Court of Appeal, and instead adopted the broad interpretation for three reasons. First, she rejected the argument that there should be any correlation between jurisdiction and choice of law. Secondly, she also rejected the argument that the interpretation of the CPR should mirror that in the Brussels Convention. Both points must be right: the court was not bound by the approaches in these European instruments to adopt the same approach to the proper construction of the different rules in English national law embodied in the CPR. Finally, and more importantly, she held that a broad interpretation is possible because the forum non conveniens discretion will make sure that there is a real and substantial connection in any individual case. This was a point also made by Lord Wilson,22 who asked: ‘is it possible that proponents of the narrow interpretation fail to invest due confidence in the appropriate forum inquiry? Is not that inquiry sufficiently muscular to exclude claims founded only on a tenuous amount of damage sustained in England?’ This is the point of principle to which this chapter is addressed. In particular, whilst it is possible that forum conveniens can provide protection in cases where there is no real connection with England, that does not necessarily mean that a broad



21 Brownlie 22 ibid

[66].

(n 1) [51] and [54].

Forum Conveniens  375 approach is desirable or correct. To put it another way, the issue goes to the proper balance between the ground and the discretion. Lord Sumption, in the minority (with Lord Hughes agreeing), began by noting that the broad interpretation has been taken in Canada and New South Wales,23 and at first instance in England.24 However, the English cases were all decided at first instance, and were questioned in the appeal in Erste Group Bank AG (London Branch) v JSC ‘VMZ Red October’.25 In that case, the Court of Appeal considered that the broad interpretation gave an ‘extraordinarily wide’ effect to the tort gateway and expressed ‘serious misgivings’ as to whether they were right, but did not decide the point. In the present case, the Court of Appeal effectively overruled them, and Lord Sumption, although for somewhat different reasons, agreed with the Court of Appeal that a narrow approach was appropriate. Lord Sumption, like Baroness Hale, rejected the reasoning of the Court of Appeal in Brownlie, which drew a link between applicable law and jurisdiction. It is undoubtedly convenient for the country of the forum to correspond with that of the proper law. It is also true that both jurisdiction and choice of law can broadly be said to depend on how closely the dispute is connected with a particular country. But there is no necessary correspondence between the two. On this point all the members of the Supreme Court were in agreement. Lord Sumption proceeded to base his reasoning and formulation of the narrow test on the nature of interest protected by tort:26 There is, however, a more fundamental reason for concluding that in the present context ‘damage’ means direct damage. It concerns the nature of the duty broken in a personal injury action and the character of the damage recoverable for the breach. There is a fundamental difference between the damage done to an interest protected by the law, and facts which are merely evidence of the financial value of that damage. Except in limited and carefully circumscribed cases, the law of tort does not protect pecuniary interests as such. It is in general concerned with non-pecuniary interests, such as bodily integrity, physical property and reputation which are inherently entitled to its protection … Where these interests are deliberately or negligently injured, the tort is complete at the time of the injury, notwithstanding that damage is an essential element of it. This is the basis of the rule that all the damage flowing from bodily injury or damage to property must be claimed in one action, which may be brought as soon as the claimant has been injured or his property damaged. And, although damage is an essential element of the cause of action in tort, the limitation period in respect of any damage flowing from the breach will run from that time. I would

23 Rules substantially similar to CPR 6BPD, para 3.1(9)(a) have been interpreted in Canada and New South Wales as extending jurisdiction to the court of the place where the financial consequences of physical damage were experienced. Canada: Skyrotors Ltd v Carrière Technical Industries (1979) 102 DLR (3d) 323 (Ont) and Vile v Von Wendt (1979) 103 DLR (3d) 356 (Ont CA). New South Wales: Challenor v Douglas [1983] 2 NSWLR 405 and Flaherty v Girgis [1984] 1 NSWLR 56, [1985] 4 NSWLR 248. 24 Booth v Phillips [2004] EWHC 1427 (Comm), [2004] 1 WLR 3292, followed by Tugendhat J in Cooley v Ramsey [2008] EWHC 129 (QB), [2008] ILPr 27 and by Haddon-Cave J in Wink v Croatia Osiguranje DD [2013] EWHC 1118 (QB), by Sir Robert Nelson in Stylianou v Toyoshima [2013] EWHC 2188 (QB) and by Stewart J in Pike v Indian Hotels Co Ltd [2013] EWHC 4096 (QB). 25 Erste Group Bank AG (London Branch) v JSC (VMZ Red October) [2015] EWCA Civ 379, [2015] 1 CLC 706 [104]–[105] (Gloster LJ). 26 Brownlie (n 1) [23]–[25].

376  Louise Merrett readily accept that that ‘damage’ as that word is used in the rule is not necessarily limited to the damage which serves to complete a cause of action in tort. But the two concepts are clearly related, even if they are not coterminous. The law protects the claimant’s bodily integrity from deliberately or negligently inflicted harm. The damage to that interest is suffered as soon as the bodily injury has occurred, even if subsequent events are relevant to determine the pecuniary measure of that damage … It follows, as in the case of damage to property, that the damage to the interest protected is sustained in country A where the claimant has been injured or killed. The pecuniary measure of that damage may depend on things that happened elsewhere. For example, medical or care costs may be incurred in country B, or earnings may be lost which would have been earned in country C or paid in country D, but the damage has not been sustained in these places.

Accordingly, for Lord Sumption, in a case involving bodily injury like Brownlie, the interest being protected is bodily integrity, which is damaged where a person is injured.27 It is not clear whether Lord Sumption, in this passage, is rejecting the distinction between ‘direct’ and ‘indirect damage’ or merely elaborating on their meaning or basis. Both tests seem to come to the same result, and certainly do on the facts in Brownlie. A distinction between direct and indirect damage seems more straightforward and is workable in practice. The Rome II Regulation refers to direct damage rather than indirect consequences. This is also the approach under the BIR case law. Baroness Hale doubted the distinction, commenting:28 Nor do I find the distinction between direct and indirect damage easy to draw in all cases. If I am seriously injured in a road accident, the pain, suffering and loss of amenity that I suffer are all part of the same injury and in cases of permanent disability will be with me wherever I am.

However, it is not necessary to draw a line between direct and indirect generally, or for all purposes. All that is necessary is to establish the place where direct damage occurs, which, in those cases, would clearly be where the accident took place. In relation to the broader issue of principle – that is, the appropriateness of the broad or narrow approach – Lord Sumption was strongly in favour of the narrow approach. In particular,29 he emphasised that the purpose of the gateways is to identify some substantial and not merely casual or adventitious link between the cause of action and England. This is a purpose which is better served by locating jurisdiction in the place where the relevant interest of the claimant was damaged than by asking where he or she experienced the effects of the damage. Furthermore:30 In the context of personal injury, a principle which located damage in the place where the pecuniary consequences of the accident were felt or where any continuing pain, suffering

27 As Lord Wilson put it dubitante, ‘the damage’ which violates the interest protected by the law and which completes a cause of action in tort: ibid [64]. 28 ibid [53]. 29 He further relied on a second policy consideration concerning the history of the tort gateway and its relationship with Art 5(3) of the Brussels Convention and Regulations: ibid [29]. 30 ibid [28].

Forum Conveniens  377 or loss of amenity were experienced would in the great majority of cases confer jurisdiction on the country of the claimant’s residence. It would confer on the English courts what amounts to a universal jurisdiction to entertain claims by English residents for the more serious personal injuries suffered anywhere in the world.

While the majority in the Supreme Court accepted that the English court should only take jurisdiction where there is a real connection within England, they advocated allowing the forum conveniens doctrine to do the real work in this regard. The majority accepted that a broad interpretation of the tort gateway could cover claims where that was not the case. But they took the view that the forum non conveniens discretion, or, more specifically, the need in a service out case also to show that England is clearly the most appropriate forum, effectively provides a safety valve to ensure that this is the case. In relation to this argument, Lord Sumption first noted that some commentators had used his own comments in Abela to advocate in favour of this view:31 That view of the matter derives energetic support from Professor Briggs … Indeed, Professor Briggs has gone further, proposing that in the light of my own comments in Abela v Baaderani … the time has come to ‘downgrade’ and eventually abolish the jurisdictional gateways and make forum conveniens (and presumably reasonable prospect of success) the sole criteria for service out: see ‘Service out in a shrinking world’ [2013] LMCLQ 415.

However, Lord Sumption then robustly disagreed: In my opinion, this approach is contrary to principle, and is not warranted by anything that was said in Abela v Baaderani … The jurisdictional gateways and the discretion as to forum conveniens serve completely different purposes. The gateways identify relevant connections with England, which define the maximum extent of the jurisdiction which the English court is permitted to exercise. Their ambit is a question of law. The discretion as to forum conveniens authorises the court to decline a jurisdiction which it possesses as a matter of law, because the dispute, although sufficiently connected with England to permit the exercise of jurisdiction, could be more appropriately resolved elsewhere. The main determining factor in the exercise of the discretion on forum conveniens grounds is not the relationship between the cause of action and England but the practicalities of litigation. The purpose of the discretion is to limit the exercise of the court’s jurisdiction, not to enlarge it and certainly not to displace the criteria in the gateways. English law has never in the past and does not now accept jurisdiction simply on the basis that the English courts are a convenient or appropriate forum if the subject-matter has no relevant jurisdictional connection with England. In Abela v Baaderani, I protested against the importation of an artificial presumption against service out as being inherently ‘exorbitant’, into what ought to be a neutral question of construction or discretion. I had not proposed to substitute an alternative, and equally objectionable, presumption in favour of the widest possible interpretation of the gateways simply because jurisdiction thus conferred by law could be declined as a matter of discretion.



31 ibid

[31].

378  Louise Merrett IV.  WHAT IS THE PROPER APPROACH TO SERVICE OUT?

The debate as to whether or to what extent service out is or is not exorbitant continues, as well as exactly what Lord Sumption meant to say in Abela, particularly in the light of his clarification or reinterpretation in Brownlie. For example, in Orexim Trading Ltd v Mahavir Port and Terminal Private Ltd,32 the Court of Appeal referred to: a change in judicial attitude towards the service of proceedings outside England and Wales. In days gone by the assertion of extra-territorial jurisdiction was described as ‘exorbitant’. But following the globalisation (and digitalisation) of the world economy that attitude can now be seen as out of date.

The Court of Appeal referred to and relied on Lord Sumption’s discussion of this issue first in Abela and then in Brownlie. The Court of Appeal concluded that the key point, for present purposes, is that the question of construction is a ‘neutral one’ and that ‘the court is less cautious than before in contemplating service out’.33 However, the important question remains: what is the proper approach to service out? A.  The Extreme View: Leave Everything to forum non conveniens The most extreme view is that we no longer need grounds for service out because everything can be done with forum non conveniens. As noted by Lord Sumption in Abela, this approach is advocated by Professor Briggs:34 Once one accepts that England must be shown to be the proper place to bring the claim, once the principle in Spiliada has been fully digested and appreciated, it may even be legitimate to ask why a claimant should also have to show that his claim falls within one of the heads of RSC Ord 11, or one of the grounds or gateways set out in the Practice Direction … Lord Sumption was obviously not in a position to strike down CPR r 6.36 and the Practice Direction, but he went as far as it was possible to go to suggest that these limitations on jurisdiction are in line to suffer yet another downgrading.

Professor Briggs continues to advocate this view even after Brownlie. In his case note on Kaefer v AMS Drilling,35 having noted that all an open gateway does is to allow the court to proceed to the next and rather more ‘load-bearing question’, whether England is the proper place to bring the claim, he comments: In Brownlie … Lord Sumption denied in emphatic terms that any support for this way of looking at the structure of the jurisdictional enquiry could be derived from his judgment in Abela … but never mind. Let it be said again: if permission may not be granted unless England is the proper place to bring the claim, that should serve as the main focus of the 32 Orexim Trading Ltd v Mahavir Port and Terminal Private Ltd [2018] EWCA Civ 1660, [2018] 1 WLR 4847 [33]–[35] (Lewison LJ). 33 ibid [47] (Lewison LJ). 34 A Briggs, ‘Service Out in a Shrinking World’ [2013] Lloyd’s Maritime and Commercial Law Quarterly 415, 417. 35 A Briggs, ‘Service Out: communis error frangit ius’ [2019] Lloyd’s Maritime and Commercial Law Quarterly 195, 198.

Forum Conveniens  379 court’s enquiry. If the claimant has to do still more, it should not be much. The door of the court, of the natural forum, for heaven’s sake, should not remain locked unless he can also deliver the moon on a plate.

However, for the time being at least, this is not what the rules say and there are gateways which must be met. Furthermore, as discussed in more detail in the context of the less extreme view below, there are good reasons for the gateways and they perform an important function. B.  A Less Extreme View: Construe the Grounds as Widely as Possible A less extreme view, of which the reasoning of the majority in Brownlie is a good example, is that the grounds can and should be interpreted as widely as possible because of the protection of the forum non conveniens discretion. In other words, the jurisdictional net can and should be cast as widely as possible because the forum non conveniens discretion ultimately ensures a real connection with England in any individual case. The broad meaning given by the majority in Brownlie potentially catches a huge number of cases, as highlighted by the Court of Appeal in the Red October case:36 For example, in Booth v Phillips … it was sufficient that the executrix of the deceased, who had died in an accident in Egypt, had paid funeral expenses in England to enable her to serve out of the jurisdiction on behalf of his estate for the whole of the estate’s loss … In Cooley v Ramsey … it was sufficient that the claimant, who had been left gravely handicapped by an accident in Australia, suffered loss of earnings after repatriation to England six months later. It follows that, subject to issues of forum conveniens, an English domiciled claimant injured anywhere in the world (outside the EU) may serve proceedings out of the jurisdiction for a claim in tort, provided that his injury caused him some loss after his return. The loss may apparently be continuing (eg loss of earnings) or it may be one-off (eg funeral expenses). While we have serious reservations as to whether those first instance cases were right, it is unnecessary to decide on this appeal whether they should be overruled, and we would therefore prefer not to do so.

The answer given by the majority in Brownlie (focusing on the forum conveniens point) is that in such cases, if there is no real connection with England, the claim will not be heard here because it will not be possible to establish that England is the most appropriate forum. So, no harm done. However, even if the forum conveniens discretion does, in theory, ensure that the claim will not in fact be heard unless England is ‘the natural forum’,37 there are a number of arguments as to why this is not a complete answer or a desirable approach. First, the discretion is broad. This means that an exercise of jurisdiction which depends on forum non conveniens is unpredictable and uncertain for defendants. Secondly, the current approach, which means that,

36 Erste Group Bank (n 25) [104]–[105] (Gloster LJ). 37 cp the debate about whether it is really only to do with efficiency: see Lord Wilson in Brownlie (n 1) [66].

380  Louise Merrett in practice, a defendant has to come to England and argue to escape the wide jurisdictional net, gives the claimant a powerful tactical advantage. Thirdly, this approach puts too much emphasis on the forum non conveniens discretion, which has itself been criticised. For example, the Advocate General in Owusu (in a slightly different context) commented:38 ‘the mechanism associated with the forum non conveniens doctrine could be regarded as incompatible with the requirements of Article 6 of the European Convention on the protection of human rights and fundamental freedoms’. In VTB Capital,39 Lord Neuberger reiterated the complaints regularly made about the time and expense involved in forum non conveniens hearings: Whilst the same considerations will not always apply to applications for permission to serve out and applications for stays of proceedings, the argument on this appeal has highlighted three general points in relation to each type of exercise. The first point is that hearings concerning the issue of appropriate forum should not involve masses of documents, long witness statements, detailed analysis of the issues, and long argument. It is self-defeating if, in order to determine whether an action should proceed to trial in this jurisdiction, the parties prepare for and conduct a hearing which approaches the putative trial itself, in terms of effort, time and cost. There is also a real danger that, if the hearing is an expensive and time-consuming exercise, it will be used by a richer party to wear down a poorer party, or by a party with a weak case to prevent, or at least to discourage, a party with a strong case from enforcing its rights. Quite apart from this, it is simply disproportionate for parties to incur costs, often running to hundreds of thousands of pounds each, and to spend many days in court, on such a hearing …[40] In Spiliada … Lord Templeman expressed the hope that in a dispute over jurisdiction, ‘the judge will be allowed to study the evidence and refresh his memory of [the principles] in the quiet of his room without expense to the parties; that he will not be referred to other decisions on other facts; and that submissions will be measured in hours and not days.’ That was a rather optimistic aspiration, not least when one bears in mind the understandable desire of lawyers to do, and to be seen by their clients to be doing, everything they can to advance their clients’ case, especially where the dispute over jurisdiction may well be determinative of the outcome.

Finally, it is important to bear in mind how the two-stage forum non conveniens test operates in the context of service out cases. In service out cases, the claimant has two bites of the cherry. The case will be heard in England if it is clearly the most appropriate forum. But even if England is not the most natural or convenient forum, the case will nonetheless be heard in England if there is a reason of justice why it should be heard here rather than in the natural forum. In such a case, the grounds are crucial in defining a necessary connecting link before the claimant can 38 Case C-281/02 Owusu v Jackson [2005] ILPr 25 [AG270]. 39 VTB Capital (n 7) [82], [83] and [88]. 40 This concern is not new. In Cherney v Deripaska [2009] EWCA Civ 849, [2010] 2 All ER (Comm) 456 [6] and [7], Waller LJ said that whilst he ‘appreciate[d] that litigants do often feel strongly about the place where cases should be tried … disputes as to forum should not become state trials’. He also lamented the ‘mountain of material’ the court faced in that case, and suggested that it ‘would have been better for both parties and better use of court time if they had expended their money and their energy on fighting the merits of the claim’.

Forum Conveniens  381 rely on the advantages of English jurisdiction. A claimant should not be able to rely on factors such as English legal aid or contingency fees41 unless there is some real connection with this jurisdiction. As Lord Hoffmann, dissenting in Connelley, noted:42 The weight to be given to juridical advantage is very much a function of the parties’ connection to the particular jurisdiction in question. If a party seeks out a jurisdiction simply to gain a juridical advantage rather than by reason of a real and substantial connection of the case to the jurisdiction, that is ordinarily condemned as ‘forum shopping’. On the other hand, a party whose case has a real and substantial connection with the forum has a legitimate claim to the advantages that forum provides. The legitimacy of this claim is based on a reasonable expectation that in the event of litigation arising out of the transaction in question, those advantages will be available.

The grounds for service out are crucial in establishing that real and substantial connection so that the claimant has a legitimate reason to engage English jurisdiction. C.  Neutral or Purposive Construction As has been argued above, the ‘gateways’ for service out have an important purpose and should be construed and applied with that purpose in mind. This does not mean that courts should be ‘cautious’.43 Rather, bearing in mind that the burden is properly on the claimant,44 a purposive construction should be adopted and, where there is doubt (for example, as to the proper meaning of damage), the court should adopt a construction which identifies a real and substantial connection with England. The purpose of the grounds is to identify a real factual connection and to protect the defendant by identifying a court which it can foresee as having jurisdiction, and the rules should be construed with that purpose in mind. It is not necessary or appropriate to approach the exercise with a presumption against service out. Focusing on the requirement for a real connection may be a reason to think about the extent to which the current grounds for service out achieve this purpose. In particular, focusing on the purposes of the grounds may lead to a review of the appropriateness of some grounds which do not prima facie appear to be based on a sufficient connection with the jurisdiction. For example, in Brownlie, Lord Sumption highlighted the potential artificiality of the contract made in England gateway and suggested that this ground could be looked at by the rule committee.45 Lord Diplock’s original comments about potentially exorbitant

41 As in Lubbe v Cape [2000] 1 WLR 1545 (HL). 42 Connelly v RTZ Corporation plc [1998] AC 854 (HL) 876, citing Sopinka J in Achem Products Inc v Workers Compensation Board (1993) 102 DLR (4th) 96 (SCC) 110. 43 cf L Collins (ed), Dicey, Morris & Collins: The Conflict of Laws, 15th edn (London, Sweet & Maxwell, 2012) para 11.42. 44 A Briggs, Private International Law in English Courts (Oxford, Oxford University Press, 2014) para 4.435. Even if the defendant applies to set aside permission, it will be the claimant who bears the burden of establishing, all over again, the facts and matter which justified the permission originally obtained. 45 Brownlie (n 1) [16]. See also [34] (Baroness Hale).

382  Louise Merrett jurisdiction were made in the context of the applicable law ground, which does not always signify a strong factual connection.46 Both of these are the grounds of which there is no equivalent special ground of jurisdiction in the BIR recast. Furthermore, there is no reason to start with a presumption against service out because service out is not always exorbitant; indeed, there may well often be a closer connection with England than in cases of service as of right based on temporary presence. A presumption against grounds which depart from the domicile of the defendant makes sense in the BIR recast context because the general rule is that the defendant must be sued in the court of his domicile and exceptions have to be construed narrowly. However, the distinction between service ‘as of right’ and service outside the jurisdiction is different and does not dictate the same approach. For example, a person can be served as of right if temporarily present in the jurisdiction even if the claim has nothing to do with England.47 By contrast, even if a case has a strong factual connection with England and the defendant is domiciled here, proceedings cannot be served as of right unless the defendant is also physically present at the time the claim is commenced. The connections with England in the latter case are much stronger, but it is still a case where permission to serve out is required. The suggested purposive approach might be thought to have a precursor in the suggestion made in some cases that the claimant must show that it comes within the spirit as well as the letter of the rules. However, this principle is usually used to suggest a restrictive rather than purposive interpretation.48 Furthermore, the status of the principle is uncertain. The Court of Appeal, in Sharab v Prince Al-Waleed Bin Tala Bin Abdal-Aziz-Al-Saud, doubted whether this principle applied to the interpretation of the grounds for service out:49 I do not accept Mr Pymont’s submission that in order to get through the gateway a claimant has to bring himself within the ‘spirit’ as well as the letter of the rule. The passage cited from Dicey, Morris and Collins is not directed specifically at the application of the gateways but is a general passage concerning the assumption of jurisdiction. Similarly, the observations of Goulding J in Beck v Value Capital Ltd (No 2) about the spirit of the rules are in my view directed not to whether the claim gets through the gateway but to the exercise of the court’s discretion if it does get through. The judgment of the Court of Appeal in Beck … does not refer expressly to Goulding J’s observations but is wholly consistent with the view I have expressed.

46 Amin Rasheed Shipping Corp v Kuwait Insurance Co [1984] 1 AC 50 (HL) 65, 67 and 68. 47 Most famously Maharanee of Baroda v Wildenstein [1972] 2 QB 283 (CA). Para 86 of the Schlosser Report, which accompanied the original Brussels Convention, branded jurisdiction based on temporary presence itself as exorbitant. 48 See, eg T Hartley, International Commercial Litigation, 2nd edn (Cambridge, Cambridge University Press, 2015) 119, who refers to the supposition that service of a claim form in a foreign country is a serious matter that should not be lightly undertaken. For this reason, the court should refuse permission if the case comes within the letter, but not the spirit, of the relevant provision. 49 Sharab v Prince Al-Waleed Bin Tala Bin Abdal-Aziz-Al-Saud [2009] EWCA Civ 353, [2009] 2 Lloyd’s Rep 160 [35] (Richards LJ).

Forum Conveniens  383 However, the judge in Conductive Inkjet Technology Ltd v Uni-Pixel Displays Inc pointed out that:50 In considering the jurisdictional limbs of what was then RSC Order 11, rule 1, Megarry J noted [in GAF Corp v Amchem Products Inc] that: ‘the Court considers the substance of the matter and not merely whether the case technically falls within the letter of the limb in question. The case must be clearly within both the letter of the rule and the spirit …’ However, more recently, in Sharab v Al-Saud … Richards LJ, with whose judgment Arden and Rimer LJJ agreed, expressly rejected the submission that it was necessary for a claimant to bring himself within the spirit as well as the letter of a gateway. He held that the degree to which a claimant came within the spirit of the rule applied as regards the exercise of the court’s discretion and not as regards whether the claimant got through a gateway at all: … It appears that neither the GAF case nor the earlier authorities relied on by Megarry J were cited to the Court of Appeal on this point. But this particular issue was not the subject of argument on the present application and I shall proceed on the basis that I am bound by the Court of Appeal’s recent holding.

In any event, it is not really clear what falling within the ‘spirit’ of the rules really means, and adopting a purposive construction seems a more constructive and more modern equivalent. D.  Forum necessitatis In some systems, where a court lacks jurisdiction and there is no other available forum, the court can assume a forum of necessity or forum necessitatis. If it were felt that the present grounds for service out do not go far enough, an alternative or variant on the extreme or less extreme approach set out above would be to add a forum necessitatis ground to the gateways which currently exist.51 There is already a limited version of this in CPR PD 6B paragraph 3.1 ground 20, which was discussed in Orexim Trading Ltd v Mahavir Port and Terminal Private Ltd.52 The context in that case was section 423 of the Insolvency Act 1986, which gives the court power to set aside transactions entered into at an undervalue in certain circumstances. The transactions in question related to an Indian-flagged vessel. The Court of Appeal noted that the courts had considered the territorial reach of section 423 on a number of occasions and had held that the provision had no territorial limit and could apply to persons or property outside England and Wales, but that the court had a discretion whether or not to make an order and that it might refuse to exercise that discretion if the defendant had insufficient connection with England and Wales. The relevant defendants were all outside the jurisdiction, so the next question

50 Conductive Inkjet Technology Ltd v Uni-Pixel Displays Inc [2013] EWHC 2968 (Ch), [2014] 1 All ER (Comm) 654 [58]–[59] (Roth J). 51 Another variant would be to enact wider jurisdictional grounds for cases involving those who need special procedural protection, such as consumers and employees. 52 Orexim (n 32).

384  Louise Merrett was whether permission should be granted for service out. As the Court of Appeal noted, given the extent of the court’s power under section 423, it would be expected that procedural rules exist to enable the court to exercise those powers. The gateway relied on was ground (20)(a), which permits service where a claim is made: ‘under an enactment which allows proceedings to be brought and those proceedings are not covered by any of the other grounds referred to in this paragraph’. The Court of Appeal noted that there do not appear to be any limits on this provision and held that it could apply to claims based on section 423.53 Similarly, in the Fern Computer case,54 the question was whether there was a ground for service out in relation to a claim under the Commercial Agents (Council Directive) Regulations 2003. The contract was governed by Texas law, but the Directive provisions applied because they cannot be excluded where an agent works in the EU. The judge held that the claimant could not rely on contract ground for service out, but that the tort ground was a possibility on the basis that breach of statutory duty could be analysed as a tort for these purposes. If not, the judge floated the possibility that ground 20 might provide a gateway if none other was available. Thus, in the context of statutory claims, there is already a ground which allows service if no other ground exists. If, in a case like Brownlie, the court felt that there was an overwhelming reason why the claim should be heard in England, a forum necessitatis gateway would allow for this. In the original Commission proposal for the BIR recast, the rules were extended to third state defendants. However, the Commission recognised that this could lead to gaps, and that proposal therefore included a forum necessitatis provision:55 Article 26 Where no court of a Member State has jurisdiction under this Regulation, the courts of a Member State may, on an exceptional basis, hear the case if the right to a fair trial or the right to access to justice so requires, in particular: (a) if proceedings cannot reasonably be brought or conducted or would be impossible in a third State with which the dispute is closely connected; or (b) if a judgment given on the claim in a third State would not be entitled to recognition and enforcement in the Member State of the court seised under the law of that State and such recognition and enforcement is necessary to ensure that the rights of the claimant are satisfied; and the dispute has a sufficient connection with the Member State of the court seised.

In the event, this proposal was not adopted due to a lack of consensus. However, if wider grounds for service out in the common law were needed, this is a preferable approach to removing the grounds altogether, or reading the grounds in such a

53 ibid [33]–[35] (Lewison LJ). 54 Fern Computer Consultancy Ltd v Intergraph Cardworx & Analysis Solutions Inc [2014] EWHC 2908 (Ch), [2014] Bus LR 1397. 55 European Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Recast)’ COM (2010) 748 final (14 December 2010) 34.

Forum Conveniens  385 broad way as to render them meaningless. A forum necessitatis ground makes it clear and express that jurisdiction should only be taken on an exceptional basis, that there must be a sufficient connection to the jurisdiction and that it should only be used if proceedings could not reasonably be brought in the state with which the dispute is closely connected. V. CONCLUSION

At the moment, the common law jurisdiction rules are residual in that they only apply when the BIR rules are not engaged. They may well become more important after Brexit. Post-Brexit, unless a new reciprocal regime can be agreed, the position will revert to the common law rules which will apply in all civil and commercial cases.56 Establishing what should be the proper approach to these rules and, in particular, the proper balance between the grounds for service out and the forum non conveniens discretion may become even more important. Unfortunately, obiter comments like those in Abela – if made by an adjudicator with sufficient standing and reputation, like Lord Sumption – can be used as a basis for advocating for far-reaching, and in this case unhelpful, change. The grounds for service out serve an important purpose in identifying the necessary connections between a case and this jurisdiction before service should be allowed and accordingly allowing a defendant to know when jurisdiction might be exercised against it. They should be construed with this important purpose in mind, as later clarified by Lord Sumption, albeit in the minority, in Brownlie. The forum non conveniens discretion recognises that, even if that necessary connection is established, there may be cases where there is another, more appropriate, forum. The discretion accordingly provides a useful second stage filter. But it cannot and should not do all the work.

56 The draft Civil Jurisdiction and Judgments (Amendment) EU Exit Regulations 2019, apart from transitional provisions, generally repeal the Brussels regime except for cases brought by and against UK-domiciled consumers and employees.

386

20 Foreign Law RICHARD FENTIMAN

It is sometimes said that the ascertainment of foreign law involves asking what the foreign court would decide. That is of course true, but the English court is concerned only with what the foreign court would decide to be the relevant foreign law. It is the function of the English court to apply that law to the relevant facts. – Iraqi Civilians v Ministry of Defence1

I. INTRODUCTION

J

ust as life imitates art, so cross-border disputes frequently resemble examination questions. A striking example is Iraqi Civilians v The Ministry of Defence, in which Lord Sumption gave the judgment of the Supreme Court. The issue in dispute is simply stated. Were English proceedings time-barred under Iraqi law pursuant to the Foreign Limitation Periods Act 1984 (the 1984 Act)? It is only to be expected that different courts might proffer different answers at each stage of any proceedings, not least where such recondite matters of private international law are involved. But a striking feature of Iraqi Civilians is that each of the courts involved posed very different questions. They did so, moreover, in a fashion which raises fundamental issues about the conflicts process and the role of foreign law. This will only serve to discourage students. But they should be comforted by the knowledge that the principles of private international law are more robust and more consistent than this suggests. There may never be a right answer to a question of law, but in the conflict of laws there should always be a right way to ask it. The proceedings concerned a group action in tort brought by over 600 Iraqi civilians. The claimants alleged mistreatment and unlawful detention by British troops in Iraq between 2003 and 2009. It was common ground that the claims were subject to Iraqi law, but it was disputed whether they were time-barred. Where foreign law 1 Iraqi Civilians v Ministry of Defence [2016] UKSC 25, [2016] 1 WLR 2001 [14] (Lord Sumption). Surprisingly, the decision has attracted little published commentary; for a powerful critique, see H Muir Watt, ‘Comment neutraliser les droits de l’homme au moyen du conflit de lois: du droit applicable aux causes de suspension de la prescription’ [2016] Revue Critique de Droit International Privé 657.

388  Richard Fentiman governs liability in English proceedings, the 1984 Act provides that it also governs the limitation of actions. Section 1(1)(a) states: Subject to the following provisions of this Act, where in any action or proceedings in a court in England and Wales the law of any other country falls (in accordance with rules of private international law applicable by any such court) to be taken into account in the determination of any matter – (a) the law of that other country relating to limitation shall apply in respect of that matter for the purposes of the action or proceedings.

The relevant provision in Iraqi law governing limitation was Article 232 of the Iraqi Civil Code, whereby a claimant must initiate proceedings within three years of becoming aware of the injury and the person who caused it. A substantial number of the claims in Iraqi Civilians were brought outside that period and so were timebarred in Iraqi law for the purposes of the English proceedings. The claimants sought to avoid this obstacle by relying on Article 435(1) of the Civil Code, which has the effect that the time limit is suspended if there is an ‘impediment rendering it impossible for the plaintiff to claim his right’. They argued that such an impediment existed because another provision of Iraqi law, Coalition Provisional Authority Order 17 (Order 17), rendered British and other coalition forces ‘immune from Iraqi legal process’. The three-year limitation rule therefore fell away and they were at liberty to sue in England. This argument prevailed at first instance, but not before the Court of Appeal. The Supreme Court, in turn, unanimously dismissed the appeal and held that the limitation period was not suspended under Article 435(1). II.  THE SUPREME COURT’S DECISION

At the heart of Lord Sumption’s elegantly concise analysis, with which all members of a distinguished court agreed,2 is the arrestingly simple insight that a distinction exists between the facts of a case and the law applicable. The limitation rules of the Iraqi Civil Code were applicable in English proceedings, just as they would have been in any Iraqi proceedings. But the factual basis of the English proceedings was different from the basis on which any Iraqi court would proceed. The Order 17 immunity would have been relevant before an Iraqi court, and would have prevented any claim in that court, but was irrelevant before the English court, in which the defendants had no immunity. The consequence of this analysis was that the correct application of the Civil Code in English proceedings did not require the court to have regard to Order 17, with the effect that the limitation period was not suspended and the claims were out of time. The reasoning underlying this conclusion, which differed markedly from that of the Court of Appeal, is contained in the final three pages of an economical sevenpage judgment. In the absence of any citation of authority or commentary, it is an impressively original exercise in ratiocination founded on a particular perception of the choice of law process and an assumption about the role of foreign law in English proceedings. This approach has a compelling simplicity and an impeccable internal

2 Lord

Neuberger (President), Lady Hale (Deputy President), Lord Mance and Lord Reed.

Foreign Law  389 logic, but the impression of inevitability is misleading. In truth, the reasoning in Iraqi Civilians is as novel and controversial as it is adroit and seductive. For that reason, it divides opinion; for that reason, it deserves the closest scrutiny. III.  THE COURTS BELOW

The radicalism of Lord Sumption’s analysis is evident when contrasted with the more conventional approach in the courts below. Leggatt J, responding to the arguments as framed by the parties, saw the matter very differently.3 The question was whether Order 17 made it impossible for the claimants to proceed in Iraq. This was a straightforward question of expert evidence, and the claimant’s expert was to be preferred. The ­Article 435 limitation period was suspended by Order 17, which prevented the claimants from suing in Iraq. The position in Iraqi law was that the claims were not time-barred, which meant that they were not time-barred in the English proceedings pursuant to the 1984 Act. Far from discounting the existence of Order 17 as a ‘fact’ of relevance only in proceedings in Iraq (which the defendants never suggested in argument), Leggatt J saw it as central to ascertaining whether the limitation period remained in force. In reaching this conclusion, Leggatt J, together with counsel for both parties, merely adopted the approach to foreign law endorsed in numerous cases. An English court’s task in establishing the content of foreign law is to determine how a foreign court would answer the relevant question of law were it to arise in foreign proceedings.4 Here it was to establish how an Iraqi court would have determined the matter had the claimants sued in Iraq. Importantly, however, Leggatt J recognised the awkwardness of this result. The claimants’ ability to sue in England depended on their inability to do so in Iraq. It was the bar imposed by Order 17, a rule of Iraqi law, which suspended Article 435. He clearly recognised, however, that any irrationality derived from Iraqi law. To reach the conclusion he arrived at was simply to give effect to the best evidence of foreign law, whatever the oddity of the result. The claimants failed in the Court of Appeal on grounds which were not raised at trial.5 Order 17 was irrelevant because of the terms of the 1984 Act. Section 4(1) provides that an English court should apply only so much of the relevant foreign law as ‘(in any manner) makes provision with respect to a limitation period’. Order 17 was not, however, an aspect of Iraqi limitation law, but a distinct procedural rule barring litigation in Iraq. Moreover, as a procedural rule, it could not be relied upon in English proceedings because of the principle that English courts do not apply foreign procedural law. These conclusions are not without difficulty. To have regard to a foreign procedural law as a fact for the purposes of applying foreign law is not the same as applying that law. Nor was it relevant to conclude that Order 17 was not a limitation provision.6 Importantly, however, the Court of Appeal, like Leggatt  J, accepted the orthodox approach to foreign law, which requires a court to predict the

3 Iraqi

Civilians v Ministry of Defence [2015] EWHC 116 (QB). di Sora v Phillipps 11 ER 1168 (HL) 638–39 (Lord Cranworth LC). 5 Iraqi Civilians v Ministry of Defence [2015] EWCA Civ 1241, [2016] 1 WLR 1290. 6 A matter considered below. 4 Duchess

390  Richard Fentiman outcome in hypothetical foreign proceedings. As Tomlinson LJ said, the task of the English court, when addressing a question of foreign law, ‘is to ascertain how the courts of that foreign country would apply the law of that country’.7 IV.  A RADICAL DEPARTURE?

At first sight, the decision in Iraqi Civilians may seem surprising. It is perhaps counterintuitive for an English court to apply foreign law in a manner which the evidence suggests is contrary to the approach that a foreign court would adopt to applying its own law. More technically, it might be supposed that the purpose of the Foreign Limitation Periods Act 1984 is to ensure uniformity between the result in an English court and in the court whose law is applicable. Certainly, the Act’s underlying object is to ensure that any substantive foreign rules governing liability are not denatured by reference to English procedural rules concerning limitation. Its underlying purpose is to ensure that a dispute which is essentially foreign is not distorted, and robbed of its context, as a consequence of the fact that the proceedings have occurred in England.8 More significantly, perhaps, the reform introduced by the Act was intended to ensure that substantive rights existing under foreign law are not frustrated in the context of English proceedings, and by the technical distinction between issues of substance (governed by foreign law) and issues of procedure (governed by English law). As Lord Hailsham expressed it when introducing the legislation, such a result ‘is contrary to the spirit of our system of private international law which seeks to enforce foreign rights and not to destroy them’.9 The issues raised by the Supreme Court’s decision are, however, more fundamental. The court’s approach suggests a more radical, distinctive and novel view of the role of foreign law in English courts. In this respect, many will no doubt see in Leggatt J’s careful, pragmatic judgment an unexceptional application of settled principle to a familiar question in cross-border litigation. They will regard the Court of Appeal’s decision, although problematic, as familiar territory. By contrast, the approach of the Supreme Court is arresting, and seemingly at odds with the traditional view endorsed in the courts below. It certainly confounds expectations as to how such matters might be handled. This is for three reasons. First, it appears to require an English court to apply foreign law to the circumstances of English proceedings rather than posit a hypothetical question arising before a foreign court. It requires the court to domesticate the dispute in a way that undermines the application of foreign law. Second, it runs contrary to the fundamental principle of deference to the applicable law, whereby a court should seek to give the applicable law the fullest, most authentic effect. Third, the Supreme Court would appear to have substituted its own intuitive view as to the

7 Iraqi Civilians (n 5) [23], citing A/S Tallina Laevauhisus A/S v Estonian State Steamship Line (1947) 80 Lloyd’s Rep 99 (CA) 108 (Scott LJ). 8 See generally Law Commission, Classification of Limitation in Private International Law (Law Com No 114, 1982); PB Carter, ‘The Foreign Limitation Periods Act 1984’ (1985) 101 LQR 68. 9 HL Deb 27 July 1983, vol 443, 1546.

Foreign Law  391 scope of Iraqi law for the findings of fact concerning its scope accepted in the courts below and uncontested in the Supreme Court proceedings. V.  DOMESTICATING THE DISPUTE

Importantly, Lord Sumption acknowledged that ‘the ascertainment of foreign law involves asking what the foreign court would decide’.10 This outwardly endorses the traditional approach, which is focused on posing a hypothetical question before the foreign court.11 But Lord Sumption understood this principle in a distinctive fashion. His approach assumes that the court’s task was to apply Iraqi limitation law to the facts existing in the English proceedings, without reference to how it might operate in the context of proceedings in Iraq. Two key passages in the judgment crystallise the point:12 It is sometimes said that the ascertainment of foreign law involves asking what the foreign court would decide. That is of course true, but the English court is concerned only with what the foreign court would decide to be the relevant foreign law. It is the function of the English court to apply that law to the relevant facts. It follows that where the Iraqi law of limitation depends for its operation on some fact about the proceedings, the relevant fact is that applicable to the actual proceedings, viz those brought in England, and not some hypothetical proceedings that the claimants have not brought in Iraq, and in this case could not have brought in Iraq.

As this demonstrates, for Lord Sumption and the Supreme Court, the requirement to posit a hypothetical foreign hearing did not mean that the English court was required to apply that law on the basis of the facts applicable to the foreign proceedings. Rather, it was required to apply foreign law to the facts arising in the proceedings in England. The presence of the Order 17 bar was a fact that would arise in any Iraqi proceedings, but was irrelevant in English proceedings because Order 17 was not a bar to any claim in England. Article 435 of the Iraqi Civil Code is suspended if there is an ‘impediment rendering it impossible for the plaintiff to claim his right’. The Order 17 bar was said to be such an impediment. In Lord Sumption’s view, that means ‘an impediment in relation the relevant proceedings, namely those brought in England’, to which Order 17 did not apply, not being part of English law. This approach may be challenged in several ways. It is, of course, true in a trivial sense that facts relevant in foreign proceedings are irrelevant before an English court. There may be facts before a foreign court which are not before an English court and vice versa. It is also clear that a distinction exists between establishing the content of foreign law, which is a matter for expert evidence, and the application of foreign law, which is a matter for the judge.13 It was also the case that the crux of Iraqi Civilians

10 Iraqi Civilians (n 1) [14]. 11 Re Duke of Wellington [1947] 1 Ch 506 (Ch) 515 (Wynn-Parry J); Blue Sky One Limited v Mahan Air [2010] EWHC 631 (Comm) [88] (Beatson J); First Nationwide v Revenue and Customs Commissioners [2011] UKUT 174 (TCC) [62] (Warren J). 12 Iraqi Civilians (n 1) [14]–[15]. 13 Duchess di Sora v Phillipps (n 4) 638–39 (Lord Cranworth LC). See also King v Brandywine Reinsurance Co UK Ltd [2005] EWCA Civ 235, [2005] 1 Lloyd’s Rep 655 [68] (Waller LJ); Rendall v Combined

392  Richard Fentiman was whether an impediment existed to proceedings in Iraq. Although that turned on the operation of Order 17, the effect of that provision was a question of fact. These considerations do not mean, however, that an English court is entitled to ignore facts on which the answer to the relevant question of foreign law depends. In doing so, the Supreme Court approached the matter in a way which is surprising. By doing so, it departs in substance from the principle that an English court should enquire how a foreign court would decide any question of foreign law. At best, it gives only partial effect to that principle by ignoring how an Iraqi court would treat the effect of Order 17. Again, to invoke the distinction between content and application ignores the role of facts in the determination of foreign law and, indeed, confuses determination with application. There are, of course, situations in which the content of a foreign rule of law is clear and an English court is required to apply that rule to a given set of facts. For example, the evidence may establish that certain conditions must be satisfied before a party is in breach of contract in Utopian law. It is for the English court to determine whether the facts exist which meet those conditions. But this is distinct from a case in which determining the content of foreign law itself depends on answering a question of fact. Iraqi Civilians was such a case. There, the question whether the claims were time-barred depended on whether in fact Order 17 was a relevant impediment which suspended the time bar. In such a case the factual question as to the existence of an impediment is integral to answering the question of law. Moreover, in such cases there is a high degree of artificiality in saying that the effect of one rule of foreign law upon another is truly a question of fact. This is the more so where the answer depends on the legal effect of the other rule, as in Iraqi Civilians, where it turned on whether Order 17 was a bar to proceedings. Even if this analysis was open to the Supreme Court, such a narrow, technical approach is at odds with the broader principle that a court should show deference to the applicable law by seeking to apply it holistically in the manner a foreign court would.14 Again, even if the effect of Order 17 on Article 435 is conceptually a question of fact, this does not prevent an English court from recognising that effect. For example, when determining liability under foreign law, it is clear that an English court may take account of a secondary rule of foreign law on which that liability depends. This common-sense principle finds expression in Article 17 of the Rome II regulation on the law applicable to non-contractual obligations.15 This provides: In assessing the conduct of the person claimed to be liable, account shall be taken, as a matter of fact and in so far as is appropriate, of the rules of safety and conduct which were in force at the place and time of the event giving rise to the liability.

The purpose of Article 17 is to ensure, when determining liability in tort under foreign law, that a court has regard to secondary rules affecting that liability, namely Insurance Company of America [2005] EWHC 678 (Comm), [2006] Lloyd’s Rep IR 732 [68] (Cresswell J); Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 6) (1996) 64 FCR 79 (FCA) [82]–[83] (Lindgren J); Noza Holdings Pty Ltd v Commissioner of Taxation [2010] FCA 990, (2011) 273 ALR 621 [13]–[15] (Gordon J). 14 Considered further below. 15 Regulation (EC) No 864/2007 of 11 July 2007 on the law applicable to non-contractual obligations (Rome II).

Foreign Law  393 the ‘rules of safety and conduct’ applicable in the country where the wrong occurred. Suppose, for example, that liability in negligence under Utopian law turns on whether a defendant was driving in breach of the speed limit applicable in Utopia. In such a case, an English court would have regard to the local speed limit when applying foreign law to the facts. The court would not ignore the effect of the Utopian speed limit merely because the speed limit is different in England; it would recognise the factual basis on which the operation of foreign law depends. As this suggests, the position adopted by the Supreme Court is far from orthodox. Order 17 was an instrument of foreign law, which formed part of the foreign legal regime applicable to the question of foreign law before the English court. It was an instrument the effect of which governed the answer to the required hypothetical question. Indeed, if, as Lord Sumption accepted, the question was how the Iraqi court would answer the limitation question, how could it be legitimate to ignore the Iraqi legal instrument on which the answer turned? Such an approach does not endorse orthodoxy, but subverts it. VI.  THE PRINCIPLE OF DEFERENCE

Second, the assumption which underlies the Supreme Court’s approach is that English courts need not show deference to the approach of foreign courts to their own laws. English private international law is founded on pragmatism, not theory. But it rests, nonetheless, on principles that may be discerned from statute and the practice of the courts. English commentators are also participants in a wider, global conversation about the principles of the subject. Against this background, it is accepted that courts, and those who design conflicts rules, should show deference to the applicable law, which entails giving the fullest effect to foreign law where it applies. Although controversially, the principle of deference finds expression in the ‘foreign court theory’ often deployed in support of the concept of renvoi.16 But it has far wider support and greater importance. It is evident in numerous aspects of private international law, in its practice and in the academic literature. It promotes the goal of uniformity, which is often emphasised as an objective of the conflicts process,17 and which requires the courts of one country to strive to apply a foreign law as a foreign court would do. It responds to the concern that rules for choice of law are subverted unless the law they identify is properly (including comprehensively) applied.18 It upholds the principle of comity by ensuring that the putative reasoning of a foreign court is respected. It guards against forum shopping, insofar as the same law is applied whatever the forum in which proceedings occur. It promotes justice by ensuring (so far as possible) that the rights and duties of the parties are the same wherever proceedings occur. It captures the expectations of the parties who may reasonably assume that, say, Utopian law is Utopian law wherever it is applied. More specifically, the imperative to defer to foreign law underlies the trend to characterise matters as substantive (governed by the applicable law) or procedural

16 E

Edinger, ‘Renvoi in Canada – Form and Availability’ (1984–1985) 14 Manitoba Law Journal 35, 38. in the Restatement (Second) Conflict of Laws (St Paul, ALI, 1971) s 6(2)(f). v Overseas Projects Corp of Victoria Ltd (2005) 223 CLR 331 (HCA) [199] (Kirby J).

17 As

18 Neilson

394  Richard Fentiman (governed by the law of the forum) in such a way as to broaden the category of substantive matters.19 The effect is to ensure that application of the law of the forum does not subvert application of the substantive law. It also promotes coherence and justice by ensuring that foreign law is not fragmented and is applied holistically. It avoids the risk that over-classification may denature the application of foreign law by requiring that elements in a foreign regime are excised. Deference to the applicable law has its limits. English lawyers have avoided the more extravagant claims for the goal of uniformity,20 and the courts have shown little enthusiasm for renvoi.21 But there is a discernible trend in favour of deference, in England and elsewhere. Importantly, in especially telling remarks in the present context, a leading judge reflected the principle in his approach to the application of foreign law. As Kirby J said, in proceedings in tort before the High Court of Australia:22 ‘the purpose of ascertaining, and applying, the law of the place of the wrong (lex loci delicti) is to ensure consistency of outcomes, to deny advantages of forum shopping and to fulfil ordinary human expectations’. Against this background, the decision in Iraqi Civilians is bold in its apparent rejection of the concept of deference. By removing Order 17 from consideration by an English court, it excises the central element in any determination of Iraqi law in an Iraqi court. By doing so, it implicitly rejects the arguments of policy and justice which underlie the imperative to apply foreign law as a foreign court would apply it. VII.  THE POSITION IN IRAQI LAW

Third, the Supreme Court’s approach is striking insofar as it is inconsistent with the evidence of Iraqi law. This approach involved taking the relevant articles of the Iraqi Civil Code as the applicable legal regime, but applying its rules to the facts as they existed in the English proceedings. For that reason, Order 17, self-evidently not part of English law, presented no impediment to bringing proceedings in England, with the effect that the limitation period had expired. This is, however, inconsistent with the unchallenged position of the courts below concerning the evidence of Iraqi law. Having considered the evidence of the parties’ experts, Leggatt J had found as fact that the Iraqi rules of limitation were not extraterritorial,23 a finding endorsed by the Court of Appeal.24 As might have been expected of any limitation rules, they contemplated only proceedings in Iraq. If, however, the Iraqi limitation regime applies only to proceedings in Iraq, two consequences would appear to follow. It is impermissible to ask whether Article 435 is suspended in the circumstances obtaining in English proceedings. Conversely, there is a requirement to ask whether it would have been 19 See, eg Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) 6–16; Rome II (n 15) 40–49, Art 15. 20 R Fentiman, ‘Choice of Law in Europe: Uniformity and Integration’ (2007–2008) 82 Tulane Law Review 2021, 2027–36. 21 Blue Sky One Ltd (n 11) [151]–[185] (Beatson J). 22 Neilson (n 18) [199] (Kirby J). 23 Iraqi Civilians (n 3) [23]–[36]. 24 Iraqi Civilians (n 5) [21].

Foreign Law  395 suspended for the purpose of any proceedings in Iraq, the only context in which the question of any impediment could be tested. Possibly, the Supreme Court assumed that Article 435 was applicable by operation of law regardless of the position in Iraqi law. It might have concluded that the 1984 Act had the effect of conferring extraterritorial scope on Article 435, presumably because of the peremptory language of section 1(1)(a): ‘the law of that other country relating to limitation shall apply’. But this reflects a radical view of the effect of conflicts rules in which the scope of foreign rules of law is not a matter of foreign law but of English law. Certainly, principle suggests that a distinction must be drawn between the identity of the applicable law and the application of its rules. It is one thing to say that a given law (shorthand for the laws of a given legal system) is applicable by virtue of the relevant conflicts rule; it is something else to say that the relevant rules of that legal system apply to the facts before the court. Whether those rules apply depends on evidence as to their scope within the system in question. In Iraqi Civilians, the 1984 Act pointed to Iraqi law, but was powerless to make the Iraqi rules of limitation applicable to proceedings in England. That was a matter of evidence and, as Leggatt J and the Court of Appeal concluded, those rules did not apply. The effect of the Supreme Court’s approach to the foreign law evidence is arresting, by giving an effect to Iraqi law that it would not have in Iraqi proceedings under Iraqi law. By doing so, it ignores an unchallenged finding of fact. It also circumvents the relevant conflicts rule by failing to apply Iraqi law, the applicable law.25 More precisely, it denies effect to the choice of law rule in the 1984 Act, which mandated the application of that law. VIII.  AN EXCEPTIONAL CASE?

Is it possible, however, that Iraqi Civilians is less disruptive of orthodoxy than it might appear? Can it be said that, far from challenging the conventional view, the decision merely qualifies accepted practice to meet the facts of an exceptional case? There are several ways to confine its scope, although none in the end is convincing. Was Iraqi Civilians a case in which the fiction of a hypothetical foreign decision was unavailable? There is nothing in Lord Sumption’s judgment to suggest so limited a view. But the Supreme Court was clearly exercised by the reality that Order 17 prevented any proceedings from being brought in Iraq. Lord Sumption did not wish to consider ‘some hypothetical proceedings that the claimants have not brought in Iraq, and in this case could not have brought in Iraq’.26 The implication may be that the traditional approach is inapplicable where the hypothetical proceedings cannot be brought in the foreign court, as was exceptionally the case in Iraqi Civilians. Tempting as such a rationalisation may be, however, it encounters an obstacle: even if the claimants would ultimately have failed in Iraq because of Order 17, it would have been for the Iraqi court to determine its effect on the limitation period. The hypothetical question would still have arisen.

25 The

broader question of principle which this involves is considered below. Civilians (n 1) [15].

26 Iraqi

396  Richard Fentiman Alternatively, Lord Sumption’s judgment suggests that the Foreign Limitation Periods Act 1984 makes the case special.27 It supplies a statutory justification for asking how Iraqi law might be applied in English proceedings. For Lord Sumption, the Act requires a court to ‘ascertain the relevant rules of the foreign law of limitation and then to apply it to proceedings in England’.28 Importantly, that ‘necessarily involves a process of transposition’,29 because there may be facts relevant in foreign proceedings which are irrelevant to proceedings in England. It is unclear, however, why the Act differs from any other statute which calls for the application of foreign law. Lord Sumption rightly draws attention to section 1(4) of the 1984 Act, which concerns cases where the application of a foreign limitation rule requires the exercise of discretion. In such cases, the English court ‘shall so far as practicable exercise that discretion in the manner in which it is exercised in comparable cases by the courts of that other country’. The implication is that the application of foreign limitation rules may be qualified in the interests of practicability. It is unclear, however, why this assists in Iraqi Civilians, where no exercise of discretion was required. Indeed, it could be argued that the explicit terms of section 1(4) of the 1984 Act make ‘practicability’ irrelevant where no discretion is involved. In any event, it is uncertain how any requirement of practicability would have prevented the court from giving effect to Order 17 when applying the Iraqi limitation period. Having regard to Order 17’s legal effect on Article 435 does not require an English court to do anything which is procedurally impossible or even difficult. IX.  AN INEVITABLE OUTCOME?

Even if not an exceptional case, was the outcome in Iraqi Civilians inevitable however the Supreme Court approached it? Would the result have been the same even if the Supreme Court had not taken so radical a path? In particular, what if the court had adopted the position of the Court of Appeal? The Supreme Court distanced itself from the Court of Appeal’s decision. Indeed, the reasoning elaborated in the Court of Appeal was all but ignored. But it cannot be said with conviction that the outcome in Iraqi Civilians would always have been the same on the alternative grounds adopted by the Court of Appeal. Certainly, it was always unlikely that the position of the Court of Appeal would have prevailed, which is no doubt why it was marginalised. The Court of Appeal had concluded that Order 17 was irrelevant because, although it related indirectly to the operation of the limitation period, it was not part of the relevant law of Iraq, and was therefore not within the scope of the applicable law as defined by section 4(1) of the Foreign Limitation Periods Act 1984.30 There is no doubt that the 1984 Act is restrictive in its definition of the applicable foreign rules. It requires that such a rule ‘makes provision with respect to a limitation period’, which Order 17 does not, being concerned to impose an immunity from proceedings.31 The

27 ibid

[14]. [14]. 29 ibid [14]. 30 Iraqi Civilians (n 5) [24] and [31] (Tomlinson LJ). 31 The analysis of Vos LJ is clearest on the point: ibid [50]. 28 ibid

Foreign Law  397 scope of the Act is, however, irrelevant. The relevance of Order 17 does not depend on its status or otherwise as a foreign limitation rule; rather, it derives from its status as a foreign law to which an Iraqi judge would inevitably have regard when applying Iraqi limitation law. Its effect in English proceedings depends not on the 1984 Act, but on the rule that an English court must always ask how a foreign court would answer the relevant question of law (here, the question whether the claims were time-barred). Again, the Court of Appeal concluded that Order 17 was a foreign rule of procedure and was therefore inapplicable in English law on the ground that foreign procedural rules apply only to proceedings abroad. It is certainly true that foreign procedural rules are inapplicable in English proceedings.32 But the point is easily answered. There was no sense in Iraqi Civilians in which the English court was required to apply Order 17. It was instead required to consider the effect of Order 17 on the Iraqi law of limitation. It was required to have regard to Order 17 as a factual element on which the operation of Article 435 depended. Differently expressed, the court was not being asked to apply foreign procedural law to govern proceedings in England, which it cannot do; rather, it was required merely to recognise its effect on proceedings in Iraq, which is permissible. As this suggests, the Court of Appeal’s decision in Iraqi Civilians does not provide an alternative route to the result achieved by the Supreme Court. Certainly, it cannot be said that the claimants would very likely have failed in any event in the Supreme Court. Even if the Supreme Court had not taken a more radical path, it is, at the least, unclear whether the Court of Appeal’s decision would have been upheld. Certainly, it would have flown in the face of principle had it been. X. CONSEQUENCES

As this suggests, the approach in Iraqi Civilians is inventive, impressive in its stilettolike logic and compelling in its internal consistency. It is also both surprising and heterodox. In substance, it departs at least from the spirit of the rule that an English court should ask how a foreign court would answer the relevant question of foreign law should it arise in hypothetical foreign proceedings. It challenges the conventional wisdom that deference should be shown to the applicable law. It gives precedence to an English court’s view of the effect of foreign law over uncontested evidential findings as to its scope. It is unclear what effect the decision might have in future cases. The facts were unusual, but the issues raised were not. Principles, moreover, are autonomous, not fact-specific, and the principles endorsed by the Supreme Court are at odds with the time-honoured methodology of the conflicts process. What, therefore, are the consequences if foreign law is not to be understood as a foreign court would understand it? What if deference to the applicable law is weakened? What if the scope of foreign rules of law no longer depends on evidence? The practical effect might be minimal. The common law has a remarkable tendency to absorb and defuse even the most 32 Scott v Seymour (1862) 1 H & C 219, 230 and 234–37 (Wrightman J); Grupo Toras SA v Al-Sabah [1999] CLC 1469 (Com Ct) 1661–62 (Mance J).

398  Richard Fentiman radical propositions, and courts are well able to restore order by downplaying and distinguishing challenging decisions. But in the complex world of cross-border litigation, where the law is often uncertain, and issues of principle and methodology dominate, Iraqi Civilians may yet provide counsel with new conceptual weapons and give the judges pause for thought. What, though, of the outcome in Iraqi Civilians, in which the claimants were prevented from suing in England? No litigant has a guarantee of victory. But the claimants had won at first instance, benefiting from a decision which most would regard as correct in principle and plausible on the facts. By contrast, the negative decision in the Court of Appeal rested on an application of the Foreign Limitation Periods Act 1984, which, though arguable, was far from unassailable, and a conclusion about the role of foreign procedural law which flies in the face of principle. It is striking that the Supreme Court, although not critical of the Court of Appeal, sidestepped that approach and chose not to adopt it in barring the claims. Had the Court of Appeal’s decision become the battleground in the Supreme Court, however, it is uncertain whether it would have been upheld. In those circumstances, it has to be wondered whether the outcome in Iraqi Civilians might have been different had the Supreme Court adopted a more conventional approach to the treatment of foreign law.

21 Res Judicata THE HON KR HANDLEY QC

Res judicata is a portmanteau term which is used to describe a number of different legal principles with different juridical origins. As with other such expressions, the label tends to distract attention from the contents of the bottle. – Virgin Atlantic Airways Ltd v Premium Aircraft Interiors UK Ltd1

I. INTRODUCTION

R

es judicata is the description applied to the principles which enforce the finality of final judgments of courts and tribunals. It comes in four forms in the civil law: merger in judgment; cause of action estoppel; issue estoppel; and the extended doctrine, which is a form of abuse of process. Lord Sumption’s judgment in Virgin Atlantic was a major contribution to this branch of the law. The claimant’s European patent had been held valid and infringed in proceedings in the UK affirmed by the Court of Appeal, and an enquiry as to damages had been ordered. Before this could be heard, the European Patent Office held that the relevant patent claims were invalid and they had been deleted by amendment. This decision operated in rem with retrospective effect and those claims were deemed never to have existed. In three earlier cases, the Court of Appeal had held that a res judicata estoppel in personam that a patent was valid survived its subsequent revocation in rem in other proceedings.2 These decisions applied the principle adopted in in personam cases: if there are conflicting res judicata estoppels in personam, it was well established that the earlier prevailed.3 However, the Supreme Court held that the cause of action estoppel from the earlier decision did not prevent the defendant proving in the 1 Virgin Atlantic Airways Ltd v Premium Aircraft Interiors UK Ltd [2013] UKSC 46, [2014] AC 160 [17] (Lord Sumption). 2 Poulton v Adjustable Cover & Boiler Plate Co [1908] 2 Ch 430 (CA); Coflexip SA v Stolt Offshore MS Ltd (No 2) [2004] EWCA Civ 213, [2004] FSR 708; Unilin Beheer BV v Berry Floor NV [2007] EWCA Civ 364, [2008] 1 All ER 156. 3 Showlag v Mansour [1995] 1 AC 431 (PC).

400  The Hon KR Handley QC enquiry that the relevant patent claims had been revoked in rem with retrospective effect and the patentee had not suffered any damage. The appeal was allowed and the Court of Appeal decisions were overruled. The relevance of the decision in the present context flows from Lord Sumption’s discussion of the general res judicata doctrine rather than the technicalities of patent law. He gave the leading judgment with which Lady Hale, Lord Clarke and Lord Carnwath agreed. Lord Neuberger gave a separate concurring judgment. The case decided that a later judgment in rem trumped an earlier judgment in personam. The former bound the ‘world’ with no exception for someone with the benefit of an in personam estoppel. Lord Sumption took the opportunity to introduce some important developments. Most strikingly, he described res judicata as a ‘portmanteau term’ that could distract from the requirements of particular doctrines. While there is an element of truth in this, the label serves a useful purpose because the various forms of res judicata have a great deal in common, such as the need for the first court to have had jurisdiction, the need for finality, the parties and privies bound and the affirmative answers, such as fraud. II.  THE NATURE OF RES JUDICATA

In Virgin Atlantic, Lord Sumption said:4 Res judicata and abuse of process are juridically very different. Res judicata is a rule of substantive law, while abuse of process is a concept which informs the exercise of the court’s procedural powers. In my view, they are distinct although overlapping legal principles with the common underlying purpose of limiting abusive and duplicative litigation.

The substantive operation of issue estoppel was not settled until the decision of Lord Hobhouse in Associated Electric and Gas Insurance Services Ltd v European Reinsurance Co of Zurich.5 Lord Hobhouse contrasted the ‘established right concept’ of the res judicata estoppels with the ‘abuse of process concept’ which arises in the case of the extended form of res judicata.6 The implications of this distinction are still being worked out. I consider some aspects of this further in this chapter. Judicial decisions are either in personam or in rem. Those in personam only bind the parties and their privies, while those in rem bind the so-called ‘world’, which at least includes everyone within the jurisdiction of the court. In the Cambridge Gas case,7 the Privy Council identified a third category: judgments in insolvency proceedings. A New York court made an order for the administration of the assets of an insolvent Manx company, but did not have jurisdiction in personam or in rem over the company or its assets. However, the Privy Council held that the order should be recognised and enforced in the Isle of Man. Lord Hoffmann said there was this 4 Virgin Atlantic (n 1) [25]. 5 Associated Electric and Gas Insurance Services Ltd v European Reinsurance Co of Zurich [2003] UKPC 11, [2003] 1 WLR 1041 [15]: ‘The award conferred … a right which is enforced by pleading an issue estoppel … a right given by the award just as much as would be in a cause of action estoppel.’ 6 ibid [16]. 7 Cambridge Gas Transport Corp v Official Committee of Unsecured Creditors of Navigator Holdings plc [2006] UKPC 26, [2007] 1 AC 508.

Res Judicata  401 third category because ‘bankruptcy, whether individual or corporate, is a collective proceeding to enforce rights, not establish them’.8 There was scant support in the case law for the third category, and in Rubin v Eurofinance SA it was promptly repudiated and orthodoxy was restored by a 3:2 majority of the Supreme Court.9 This was led by Lord Collins, with the support of Lord Sumption in a concurring judgment, which was critical. The minority did not find it necessary to decide the point. III.  THE DIFFERENT FORMS OF RES JUDICATA

Merger in judgment occurs when a claimant recovers judgment on his cause of action. The cause of action merges in the judgment and ceases to exist, and cannot support a second action. The bar does not operate by estoppel and it is absolute.10 Cause of action estoppel occurs when a claimant fails to establish his cause of action and judgment is given for the defendant. The estoppel bars a second action by the claimant. The bar is absolute.11 Issue estoppel occurs when, in earlier proceedings on a cause of action, the court decided some question of fact or law which is an element in that cause of action and an element in another cause of action. It prevents that question being revisited in proceedings on that other cause of action. The bar is not absolute, but may be displaced in special circumstances.12 The extended doctrine can apply where the substantive forms of res judicata are not available because, for example, the parties are different, or the causes of action or issues are different.13 It applies if the later proceeding ‘would … be manifestly unfair to a party to litigation … or would otherwise bring the administration of justice into disrepute’.14 Lord Sumption summarised the doctrine in Virgin Atlantic differently:15 The first principle is that once a cause of action has been held to exist or not to exist, that outcome may not be challenged by either party in subsequent proceedings. This is ‘cause of action estoppel’. It is properly described as a form of estoppel precluding a party from challenging the same cause of action in subsequent proceedings. Secondly, there is the principle, which is not easily described as a species of estoppel, that where the claimant succeeded in the first action and does not challenge the outcome, he may not bring a second action on the same cause of action, for example to recover further damages … Third, there is the doctrine of merger, which treats a cause of action as extinguished once judgment has been given on it, and the claimant’s sole right as being a right on the judgment. Although this produces the same effect as the second principle, it is in reality a substantive rule about the legal effect of an English judgment, which is regarded as ‘of a higher nature’ and therefore as superseding the underlying cause of action … Fourth, there is the principle that even where the cause of action is not the same in the later action as it was in the earlier one, some issue which is necessarily common to both was

8 ibid

[15]. v Eurofinance SA [2012] UKSC 46, [2013] 1 AC 236. 10 KR Handley, Spencer Bower and Handley: Res Judicata, 5th edn (London, LexisNexis, 2019) ch 19. 11 ibid ch 7. 12 ibid ch 8. 13 ibid ch 26. 14 Hunter v Chief Constable of the West Midlands Police [1982] AC 529 (HL) 536 (Lord Diplock). 15 Virgin Atlantic (n 1) [17] (subparagraphs added). 9 Rubin

402  The Hon KR Handley QC decided on the earlier occasion and is binding on the parties … ‘Issue estoppel’ was the expression devised to describe this principle … Fifth, there is the principle first formulated by Wigram VC in Henderson v Henderson … which precludes a party from raising in subsequent proceedings matters which were not, but could and should have been raised in the earlier ones. Finally, there is the more general procedural rule against abusive proceedings, which may be regarded as the policy underlying all of the above principles with the possible exception of the doctrine of merger.

This attempt to identify six separate principles instead of the traditional four was unnecessary and is not convincing. The second and third are in fact the same. Further, the rule in Henderson is not a separate principle, but one which undergirds all three forms of res judicata estoppel: it has long been established that these substantive res judicata estoppels cover available points that were not raised and ruled on, but could and should have been. Henderson v Henderson and the extended form of res judicata should not be elided. In Henderson v Henderson, Wigram VC said:16 The plea of res judicata applies, except in special cases, not only to points upon which the court was actually required … to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time.

Similarly, in Arnold v National Westminster Bank plc, Lord Keith, giving the principal speech, said:17 Cause of action estoppel arises where the cause of action in the later proceedings is identical to that in the earlier proceedings, the latter having been between the same parties or their privies and having involved the same subject matter. In such a case the bar is absolute in relation to all points decided unless fraud or collusion is alleged, such as to justify setting aside the earlier judgment. The discovery of new factual matter which could not have been found out by reasonable diligence for use in the earlier proceedings does not, according to the law of England, permit the latter to be re-opened.

In Virgin Atlantic, Lord Sumption recognised that:18 Arnold … is accordingly authority for the following propositions. (1) Cause of action estoppel is absolute in relation to all points which had to be and were decided in order to establish the existence or non-existence of a cause of action. (2) Cause of action estoppel also bars the raising in subsequent proceedings of points essential to the existence or non-existence of a cause of action which were not decided because they were not raised in the earlier proceedings, if they could with reasonable diligence and should in all the circumstances have been raised. (3) Except in special circumstances where this would cause injustice, issue estoppel bars the raising in subsequent proceedings of points which (i) were not raised in the earlier proceedings or (ii) were raised but unsuccessfully. If the relevant point was not raised, the bar will usually be absolute if it could with reasonable diligence and should in all the circumstances have been raised.

16 Henderson

v Henderson (1843) 3 Hare 100, 114–15 (Wigram VC). v National Westminster Bank plc [1991] 2 AC 93 (HL) 104. Atlantic (n 1) [22] (subparagraphs added).

17 Arnold 18 Virgin

Res Judicata  403 The second proposition which Lord Sumption took from Arnold is consistent with the relevance of Henderson v Henderson to the substantive res judicata estoppels. Nonetheless, elsewhere in Virgin Atlantic, Lord Sumption emphasised the distinction between the substantive res judicata estoppels and the extended form associated with abuse of process.19 He returned to the significance of this distinction in Takhar v Gracefield Developments Ltd in the context of an action to set aside a judgment obtained by fraud. He said:20 The rule, originally stated by Wigram VC in Henderson v Henderson … that a party is precluded from raising in subsequent proceedings matters which were not, but could and should have been raised in the earlier ones, is commonly treated as a branch of the law of res judicata. It has the same policy objective and the same preclusive effect. But, it is better analysed as part of the juridically distinct but overlapping principle which empowers the court to restrain abuses of its process.

I question this in the light of the clear statement by Wigram VC and the later history of his principle. Lord Sumption also said that:21 ‘The modern law on the subject really began with the adoption of Wigram VC’s statement of principle by the Privy Council in Yat Tung …’ The history is otherwise.22 Henderson v Henderson was rescued from obscurity by Higgins J in the High Court of Australia in Hoystead v Commissioner of Taxation, in which he also coined the description ‘issue estoppel’ for the second substantive form of res judicata estoppel.23 The case went to the Privy Council, which upheld his dissenting judgment.24 Lord Shaw, who delivered the advice of the Board, quoted the passage from the judgment of Wigram VC in Henderson, stating that it was ‘settled law’.25 After Hoystead, Henderson was introduced by Somervell LJ into the extended doctrine in Greenhalgh v Mallard and the modern law was then complete.26 Henderson v Henderson itself was a cause of action estoppel case,27 and Hoystead was an issue estoppel case. This shows that the rule is an aspect of the substantive res judicata estoppels. However, it also applies to the separate extended, procedural, form of res judicata as a result of Greenhalgh v Mallard. IV.  YAT TUNG

I must question Lord Sumption’s acceptance in Virgin Atlantic,28 without comment, of some of the analysis of the Privy Council in Yat Tung Investment Co Ltd v Dao Heng Bank Ltd.29 In the first action considered in that case, the appellant alleged that the sale by the Bank to it of the subject property was a sham and its mortgage to the Bank was a

19 ibid

[25]. v Gracefield Developments Ltd [2019] UKSC 13, [2019] 2 WLR 984 [62] (Lord Sumption). [19]. 22 KR Handley, ‘A Closer Look at Henderson v Henderson’ (2002) 118 LQR 397. 23 Hoystead v Commissioner of Taxation (1921) 29 CLR 537 (HCA) 561 (Higgins J). 24 Hoystead v Commissioner of Taxation [1926] AC 155 (PC). 25 ibid 170. 26 Greenhalgh v Mallard [1947] 2 All ER 255 (CA). 27 Res Judicata (n 10) para 26.03. 28 Virgin Atlantic (n 1) [19]. 29 Yat Tung Investment Co Ltd v Dao Heng Bank Ltd [1975] AC 581 (PC). 20 Takhar 21 ibid

404  The Hon KR Handley QC nullity. The Bank counterclaimed for the mortgage debt giving credit for the proceeds of its sale of the property as mortgagee. The account was taken summarily at the trial. The appellant lost and the Bank recovered practically the full amount claimed. The judgment assumed the regularity of the Bank’s sale of the mortgaged property. In the second action, the appellant alleged that the sale of the mortgaged property was fraudulent or in breach of duty. This was dismissed as an abuse of process, but there was a cause of action estoppel from the judgment on the counterclaim. The account required both parties to bring forward for adjudication all relevant claims, including, in the case of the appellant, any challenge to the sale of the mortgaged property. There was no such challenge in the first action, and the judgment on the counterclaim created a cause of action estoppel which barred the claim in the second action in accordance with Henderson v Henderson. The Privy Council, in its advice given by Lord Kilbrandon, held, first, that ‘the true doctrine in its narrower sense cannot be discerned in the present series of actions’ because ‘there had not been … any formal repudiation of the plea raised by the appellant’ and, second, the purchaser from the Bank had not been a party to the earlier action.30 Third, he affirmed the finding in the Full Court of Hong Kong that the second action was an abuse of process because it was ‘clearly a matter necessary and proper to be litigated’ in the original action.31 Fourth, ‘there is a wider sense in which the extended doctrine may be appealed to, so that it becomes an abuse of process to raise in subsequent proceedings matters which could and therefore should have been litigated in earlier proceedings’.32 On the first point, a cause of action estoppel bars all matters which could and should have been raised, and there is no need for a ‘formal repudiation’ of any matter that was not raised. The second point was also wrong since the purchaser claimed under the Bank and, as its privy, was entitled to the benefit of the estoppel from the first judgment. Since, as Lord Sumption said,33 a res judicata estoppel is a substantive right, a court should enforce an available estoppel rather than resort to the extended doctrine, as Lord Kilbrandon did with his third and fourth points. Further, the fourth point – which I call the Kilbrandon principle34 – is far too wide. There has since been a retreat from expressing the extended doctrine in those terms.35 V.  PRIVITY OF INTEREST

Res judicata binds the parties to a judgment in personam and their privies. In Gleeson v J Wippell & Co Ltd, Megarry VC proposed a novel test for privity of interest for substantive res judicata cases:36 it does seem to me that, having due regard to the subject matter of the dispute, there must be a sufficient degree of identification between the two to make it just to hold that the



30 ibid

589–90. 589. 589. 33 Virgin Atlantic (n 1) [25]. 34 Res Judicata (n 10) para 26.05. 35 ibid para 26.06. 36 Gleeson v J Wippell & Co Ltd [1977] 1 WLR 510 (Ch) 514–15. 31 ibid 32 ibid

Res Judicata  405 ­ ecision to which one was party should be binding in proceedings to which the other is d party. It is in that sense that I would regard the phrase ‘privity of interest’.

The test is circular, and raises a question of fact and degree. This is not appropriate in the definition of a substantive legal right, as Lord Sumption explained in another context in Patel v Mirza, where he rejected an argument because‘It converts a legal principle into an exercise of judicial discretion exhibiting the vices of complexity, uncertainty, arbitrariness and lack of transparency’.37 Lord Sumption made the same point in the agency case of Angoves Pty Ltd v Bailey, where he said ‘Property rights are defined and ascertainable rights, whether they exist depends on settled principle’.38 The Megarry test for privity of interest in substantive res judicata estoppel encouraged an elision of the legal distinction between a company and those who controlled it. It overlooked the long-established principle that a privy of interest must claim under or through a party to the earlier case.39 This development was further encouraged when the test attracted the approval of Lord Bingham in Johnson v Gore-Wood & Co.40 In that case, a company owned and controlled by the appellant had sued its former solicitors for professional negligence in a conveyancing transaction. The proceedings were settled on terms favourable to the company. The appellant then brought proceedings against the solicitors to recover his personal (not derivative) losses in the same transaction. The Court of Appeal dismissed the proceedings under the extended doctrine, but the House of Lords allowed an appeal for reasons given by Lord Bingham, who said:41 The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all.

Johnson was an abuse of process case where, in Lord Bingham’s words, ‘a broad merits based judgment’ on the facts, rather than a legal relationship, was required.42 The Megarry test may be more appropriate in that context than in a case involving a substantive res judicata estoppel like Gleeson. However, in Virgin Atlantic, Lord Sumption referred to Lord Bingham’s speech in Johnson and said:43 The focus in Johnson v Gore-Wood was inevitably on abuse of process because the parties to the two actions were different, and neither issue estoppel nor cause of action estoppel could therefore run … Mr Johnson’s counsel conceded that he and his company were privies, but Lord Millett seems to have doubted the correctness of the concession … and so do I.

37 Patel v Mirza [2016] UKSC 42, [2017] AC 467 [265]. The case involved a defence of illegality to a claim in restitution. See further chs 11 and 14 in this book. 38 Angove Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179 [28]. See further chs 10, 11 and 14 in this book. 39 Doe d Foster v Earl of Derby (1834) 1 Ad & El 783,790; Gray v Lewis (1873) LR 8 Ch App 1035, 1059–60 (CA); Ram Kirpal Shukul v Mussumat Rup Kuari (1883) LR 11 Ind App 37 (PC) 41; New Brunswick Railway Co v British and French Trust Corp Ltd [1939] AC 1 (HL) 19–20. 40 Johnson v Gore-Wood & Co [2002] 2 AC 1 (HL) 32. 41 ibid 31. 42 ibid 31. 43 Virgin Atlantic (n 1) [25].

406  The Hon KR Handley QC No further exception was identified which would enable a relationship of privity to be recognised between a company and those who controlled it.44 There had been a tendency in substantive res judicata cases, encouraged by Lord Bingham’s speech in Johnson, to elide the distinction between a company and those who controlled it by holding that they were privies bound by and entitled to each other’s substantive in personam estoppels. This was despite the fact, as I have noted, that Johnson involved the extended procedural form, where the facts, rather than legal relationships, are determinative. I collected a number of these cases in the fourth edition of Res Judicata.45 However, as a result of Lord Sumption’s contributions to this branch of the law, I removed these in the fifth edition, saying instead‘It is submitted that since Prest and Virgin Atlantic there are no special privity rules affecting companies and their shareholders’.46 This reversal of approach is evidenced by the judgment of Flaux J in Standard Chartered Bank (Hong Kong) Ltd v Independent Power Tanzania Ltd. He said:47 The corporate relationship [between parent and subsidiary] and financial interest alleged cannot be sufficient to establish privity of interest. The contrary conclusion would effectively drive a coach and horses through the doctrine of separate corporate personality and lead to piercing of the corporate veil, something which is not to be encouraged given the limited scope ascribed to the doctrine of piercing the corporate veil by the Supreme Court in Prest … a mere commercial interest in the outcome is insufficient … to establish privity of interest.

VI.  FRAUD AS AN EXCEPTION TO RES JUDICATA

In Takhar v Gracefield Developments Ltd,48 the Supreme Court sat a bench of seven to consider whether a claimant seeking to have an adverse judgment set aside on the ground that it was obtained by the fraud of the successful party must also prove that he exercised due diligence to discover the fraud before the trial. Lord Sumption’s judgment in this case was his final contribution to this branch of the law. The Court of Appeal had followed dicta from Lord Bridge and Lord Templeman that there was this duty.49 Such a duty had been rejected by the High Court of Australia,50 which followed earlier English authority,51 and the dicta had been rejected 44 See also Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415. Discussed further in ch 17 in this book. 45 KR Handley, Spencer Bower and Handley: Res Judicata, 4th edn (London, LexisNexis, 2009) para 9.47. 46 Res Judicata (n 10) para 9.47. 47 Standard Chartered Bank (Hong Kong) Ltd v Independent Power Tanzania Ltd [2015] EWHC 1640 (Comm), [2015] 2 Lloyd’s Rep 183 [145]. 48 Takhar (n 20). 49 Owens Bank Ltd v Bracco [1992] 2 AC 443 (CA and HL), 459–60 (Parker LJ) and 483–84 (Lord Bridge), who added: ‘I do not find it necessary to examine these authorities. The rule they establish is unquestionable and the principle on which they rest is clear’; Owens Bank Ltd v Etoile Commerciale SA [1995] 1 WLR 44 (PC) 48 (Lord Templeman). 50 McDonald v McDonald (1965) 113 CLR 529 (HCA). 51 Hip Fong Hong v H Neotia & Co [1918] AC 888 (PC); Jonesco v Beard [1930] AC 298 (HL).

Res Judicata  407 by the New South Wales Court of Appeal.52 These authorities had been cited, but the Court of Appeal chose to follow the dicta of Lord Bridge and Lord Templeman. The appeal to the Supreme Court was unanimously allowed. The leading judgment was given by Lord Kerr. Lord Hodge, Lord Lloyd Jones and Lord Kitchin agreed, as did Lord Sumption, who added observations of his own, with which Lord Hodge, Lord Lloyd Jones and Lord Kitchin also agreed. Lord Briggs and Lady Arden, who delivered concurring judgments, adopted somewhat different approaches which need not be considered here. The majority held that there was no requirement for a claimant to prove that he exercised due diligence to discover the fraud before the trial. Lord Kerr held that the earlier cases in the House of Lords and Privy Council supported that conclusion. He endorsed the Australian and Canadian cases which had taken that view, including the writer’s judgment in Toubia v Schwenke, from which Lord Kerr quoted at some length.53 The dicta of Lord Bridge and Lord Templeman were rejected.54 Lord Sumption applied three principles he had previously identified in his earlier judgments to which I have referred. The first was that a res judicata estoppel is a substantive right.55 The second was that ‘the law defines the incidents of most legal relationships between persons … on the fundamental assumption that those dealings are honest’.56 The third was that the minority judgment of Lord Briggs should not be accepted because it ‘would introduce an unacceptable element of discretion into the enforcement of a substantive right’.57 Lord Sumption also said that the appellant’s substantive right to have a judgment obtained by fraud set aside was not to be qualified by a procedural duty of due diligence.58 He added that res judicata from the judgment was no answer either, because the cause of action for fraud was independent of the cause of action in the original proceedings.59 He said that ‘A reasonable person is entitled to assume honesty in those with whom he deals. He is not expected to conduct himself or his affairs on the footing that other persons are dishonest unless he knows that they are.’60 Lord Sumption’s judgment in Takhar is important for another reason. The test for the application of the extended doctrine in Australia is that a new point will be barred if the litigant, acting reasonably, would have raised it in the earlier litigation.61 There was some independent support for this approach in English case law. Lord Sumption adopted it when he said that ‘The “should” [in Lord Bingham’s test for abuse in ­Johnson] refers to something which the law would expect a reasonable person to do in his own interest and in the efficient conduct of litigation’.62 52 Toubia v Schwenke (2002) 54 NSWLR 46 (NSWCA), in which judgment was given by this writer. 53 Takhar (n 20) [49] and [50] (Lord Kerr). 54 ibid [54] (Lord Kerr) and [65] (Lord Sumption). 55 ibid [60]. cf Virgin Atlantic (n 1) [28] (Lord Sumption). 56 Takhar (n 20) [63]; see also [44] (Lord Kerr): ‘the law does not expect people to arrange their affairs on the basis that others may commit fraud’. cf Prest (n 44) [18] (Lord Sumption). 57 Takhar (n 20) [64]. cf Patel (n 37) [265] (Lord Sumption); Angove (n 38) [28] (Lord Sumption). 58 Takhar (n 20) [60]. 59 ibid [61]. 60 ibid [63]. 61 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 (HCA). 62 Takhar (n 20) [63].

408  The Hon KR Handley QC VII.  A NEW EXCEPTION TO RES JUDICATA?

A judgment can be reopened and recalled by the court that pronounced it, but only in the interval before its formal entry. This was once the law on finality for res judicata, but it was bypassed in Taylor v Lawrence.63 There, the Court of Appeal reopened its formally entered judgment some months later on the discovery of fresh evidence that the trial judge may have been biased. The new case failed on the facts. The court also overlooked the principle that the cause of action estoppel created by its earlier decision was absolute. This was contrary to Arnold, which had established that a cause of action estoppel cannot be reopened on the discovery of fresh evidence, except for fraud or collusion.64 Fraud in this context means conscious and deliberate dishonesty.65 Lord Wilberforce explained the rationale for the common law principles in The Ampthill Peerage:66 Any determination of disputable fact may, the law recognises, be imperfect: the law aims at providing the best and safest solution compatible with human fallibility and having reached that solution it closes the book. The law knows, and we all know, that sometimes fresh material may be found, which perhaps might lead to a different result, but, in the interest of peace, certainty and security it prevents further inquiry. It is said that in doing this, the law is preferring justice to truth. That may be so: these values cannot always coincide. The law does its best to reduce the gap. But there are cases where the certainty of justice prevails over the possibility of truth (I do not say that this is such a case), and these are cases where the law insists on finality. For a policy of closure to be compatible with justice, it must be attended with safeguards: so the law allows appeals: so the law, exceptionally, allows appeals out of time: so the law still more exceptionally allows judgments to be attacked on the ground of fraud: so limitation periods may, exceptionally, be extended. But these are exceptions to a general rule of high public importance, and as all the cases show, they are reserved for rare and limited cases, where the facts justifying them can be strictly proved.

Taylor v Lawrence therefore was wrong in principle. There was no room in the earlier law for the exception it recognised. Taylor v Lawrence unleashed a flood of unmeritorious applications that threatened to overwhelm the courts, and Civil Procedure Rule 52.17 had to be introduced to deal with a situation that had been adequately dealt with by the common law.67 Recently, in Bancoult (No 4),68 the Supreme Court endorsed Taylor v Lawrence, and, purporting to apply Pinochet (No 2),69 held that it could reopen a judgment of the House of Lords or the Supreme Court on the discovery of fresh evidence or if the losing party had been subjected to some unfair procedure. On this basis, they reopened the judgment of the House of Lords in Bancoult (No 2),70 but the new 63 Taylor v Lawrence [2003] QB 528 (CA). 64 Arnold (n 17) 104 (Lord Keith). See also Virgin Atlantic (n 1) [22] and [26] (Lord Sumption). 65 Derry v Peek (1889) 14 App Cas 337 (HL) 359 (Lord Herschell). 66 The Ampthill Peerage [1977] AC 547 (HL) 569. 67 R Buxton, ‘How the Common Law Gets Made’ (2009) 125 LQR 60, 78. 68 R (on the application of Bancoult) v Secretary of State for Foreign and Commonwealth Affairs [2016] UKSC 35, [2017] AC 300. 69 R v Bow Street Metropolitan Stipendiary Magistrate Ex p Pinochet Ugarte (No 2) [2000] 1 AC 119 (HL). 70 R (on the application of Bancoult) v Secretary of State for Foreign and Commonwealth Affairs [2008] UKHL 61, [2009] 1 AC 453.

Res Judicata  409 case failed on the facts. It was not suggested that the formal order of the House in Bancoult (No 2) had not been entered during the long interval, and there was no recognition of the fact that Pinochet (No 2) was decided when the order of the House in Pinochet (No 1) had not been entered.71 It appears that the Law Lords were not aware that they were creating another exception to the finality of their decisions and those of the Court of Appeal where there was no fraud or collusion. The Crown may not have wanted to take the point, but it should have been noticed. Lord Sumption did not sit in Bancoult (No 4) and it may be significant that, in Virgin Atlantic, he emphasised the finality of a cause of action estoppel:72 Where the existence or non-existence of a cause of action has been decided in earlier proceedings, to allow a direct challenge to the outcome, even in changed circumstances and with material not available before, offends the core policy against the re-litigation of decided claims.

The contrast, if not conflict, between Virgin Atlantic, on the one hand, and Bancoult (No 4) and Taylor v Lawrence, on the other, created by this emphatic restatement of the principle awaits resolution by the Supreme Court. A possible return to the previously settled law following Virgin Atlantic may evidence yet another contribution by Lord Sumption to the development of the principles of res judicata.



71 Pinochet 72 Virgin

(n 69) 129. Atlantic (n 1) [25] (Lord Sumption).

410

22 Privilege BANKIM THANKI QC, CHLOE CARPENTER QC, NIK YEO AND REBECCA LOVERIDGE

Legal professional privilege is a creation of the common law, whose ordinary incidents are wholly defined by the common law. In principle, therefore, it is for the courts of common law to define the extent of the privilege. The characterisation of privilege as a fundamental human right at common law makes it particularly important that the courts should be able to perform this function. Fundamental rights should not be left to depend on capricious distinctions unrelated to the legal policy which makes them fundamental. – R (on the application of Prudential plc) v Special Commissioner of Income Tax1

S

o said Lord Sumption when, in his first year as a Justice of the Supreme Court, he was one of the seven-member panel which gave judgment in Prudential. The case concerned the proper scope of the doctrine of legal professional privilege: in particular, whether it could extend to communications between clients and professionals other than lawyers. The judges had to grapple with difficult questions as to the underlying rationale of the doctrine and the implications for its boundaries. Whilst Lord Sumption reached a different conclusion to the majority, his dissenting judgment provides a detailed exposition of the history and underlying rationale of legal professional privilege. This was not new territory for Lord Sumption; as leading counsel in Three Rivers District Council v Governor and Company of the Bank of England (No 6), he had made powerful submissions concerning the underlying rationale of legal professional privilege and its implications for the question of who should be treated as the client for the purpose of legal advice privilege.2 The particular issue which arose in Prudential has now been definitively settled: only communications with lawyers,3 or documents evidencing such communications, fall within the scope of legal advice privilege. However, the ‘client’ question, on which 1 R (on the application of Prudential plc) v Special Commissioner of Income Tax [2013] UKSC 1, [2013] 2 AC 185 [131] (Lord Sumption). 2 Three Rivers District Council v Governor and Company of the Bank of England (No 6) [2004] UKHL 48, [2005] 1 AC 610. 3 Or lawyers’ agents, such as secretaries and clerks.

412  Bankim Thanki QC, Chloe Carpenter QC, Nik Yeo and Rebecca Loveridge Mr Sumption QC made submissions as counsel in Three Rivers (No 6), remains a source of difficulty. As discussed further below, most common law jurisdictions have adopted a position which is consistent with Mr Sumption’s submissions in that case, but English law remains out of step. The Court of Appeal has now extended an invitation for the question to be reconsidered when a suitable case reaches the Supreme Court. Until that happens, the underlying rationale for legal advice privilege is not reflected in the boundaries of that doctrine. I. THE THREE RIVERS LITIGATION

The Three Rivers litigation arose out of the Bank of England’s participation in the Bingham Inquiry, which was set up after the collapse of Bank of Credit and Commerce International (BCCI) to examine the supervision of BCCI under the Banking Acts. The principal question at issue in Three Rivers (No 6) was whether a person is entitled to claim privilege in respect of communications with his lawyer about how best to present his position to such an inquiry.4 However, in order fully to appreciate the significance of Three Rivers (No 6), and of Mr Sumption’s arguments before the House of Lords, it is first necessary to understand the implications of the earlier decision of the Court of Appeal in Three Rivers District Council v Governor and Company of the Bank of England (No 5).5 A.  Three Rivers (No 5) Following the establishment of the Bingham Inquiry, the Governor of the Bank of England appointed three Bank officials to deal with all communications between the Bank and the Inquiry. These officials, and other Bank personnel appointed to assist them from time to time, became known as the Bingham Inquiry Unit (BIU). The Bank also retained solicitors, Freshfields, to advise in relation to the Inquiry, and Freshfields gave advice as to the preparation and presentation of the Bank’s evidence to the Inquiry and as to the submissions to be made to the Inquiry on behalf of the Bank. Three Rivers (No 5) concerned internal documents created by employees of the Bank and passed to the BIU for the purpose of enabling the Bank’s lawyers to advise the Bank on how best to present its conduct to the Inquiry. Some, but not all, of these documents were subsequently provided by the BIU to Freshfields. There were also direct communications between Bank employees who were not members of the BIU and Freshfields. The issue was whether such communications constituted lawyer–client communications for the purpose of legal advice privilege. The Court of Appeal, overturning the first instance decision of Tomlinson J,6 held that they did not. Legal advice

4 For a fuller discussion of the Three Rivers litigation, see B Thanki (ed), The Law of Privilege, 3rd edn (Oxford, Oxford University Press, 2018) paras 2.06–2.15. 5 Three Rivers District Council v Governor and Company of the Bank of England (No 5) [2003] EWCA Civ 474, [2003] QB 1556. 6 Three Rivers District Council v Governor and Company of the Bank of England (No 5) [2002] EWHC 2730 (Comm).

Privilege  413 ­ rivilege was confined to communications passing between client and legal adviser p (and secondary evidence of the contents of such communications), and ‘client’ was interpreted narrowly so as to include only members of the BIU and not other employees or representatives of the Bank, even where those individuals communicated with Freshfields directly. Perhaps the most striking feature of Three Rivers (No 5) is the restrictive approach which the Court of Appeal took to the underlying rationale for legal advice privilege. Commenting on the reasoning of Tomlinson J at first instance, Longmore LJ, giving the judgment of the Court, remarked that:7 The judge said that he could see no rational basis on which the principles which protect the confidentiality of the process of obtaining legal advice should differ as between the two distinct situations of contemplated litigation and the absence of contemplated litigation. It is perhaps possible to separate two such bases that appealed to the 19th century judges in the cases by which this court remains bound today. (1) The need for a client to ‘be able to make a clean breast of it to the gentleman whom he consults with a view to the prosecution of his claim, or the substantiating of his defence against the claim of others’ (to use the words of Sir George Jessel MR in Anderson’s case …) is paramount when litigation either exists or is contemplated. It is in the interests of the state which provides the court system and its judges at taxpayers’ expense that legal advisers should be able to encourage strong cases and discourage weak cases … It is by no means so clear that, in the absence of contemplated litigation, there is any temptation for the client not to offer a clean breast to his legal adviser. He wants advice and the prospect of winning or losing a particular case will normally do nothing to cloud his judgment as to what facts he places before his legal adviser. (2) One ought not to lose sight of the public interest that the courts, if possible, should come to correct judgments on the basis of all relevant material. Of course legal advice privilege must prevail over this consideration to the appropriate extent. It is a fundamental human right which can be overridden only by the express words of a statute or by necessary implication … But it is a privilege possessed by the client in relation to no other adviser … In these circumstances it is important that it be confined to its proper limits. The judges of the 19th century thought that it should only apply to communications between client and adviser. That is the proper compass of the privilege. It is not, in our judgment, open to this court to extend the privilege, even if we thought we should.

Thus, the Court of Appeal drew a distinction, for the purpose of legal advice privilege, between situations where litigation is and is not in prospect and appeared to consider that the justification for legal advice privilege was substantially weaker in the latter context. For reasons that will be developed in this chapter, we consider that the Court of Appeal’s restrictive approach to both the underlying rationale of legal advice privilege and the meaning of the ‘client’ in this context was wrong. As explained below, the House of Lords took the opportunity to correct the Court of Appeal’s error as to the underlying rationale of legal advice privilege in Three Rivers (No 6), but the approach to the definition of ‘client’ remains, in our view, wrong and out of step with what has since been confirmed to be the underlying rationale of the privilege.



7 Three

Rivers (No 5) (n 5) [26].

414  Bankim Thanki QC, Chloe Carpenter QC, Nik Yeo and Rebecca Loveridge B.  Three Rivers (No 6) The House of Lords refused permission to appeal from Three Rivers (No 5). However, a further dispute then arose between the same parties which afforded a further opportunity for consideration of legal advice privilege, and particularly its underlying rationale. As noted above, Three Rivers (No 6) concerned the question whether communications between client and lawyer as to how best to present the client’s position before an inquiry were protected by legal advice privilege. At first instance,8 Tomlinson J took as his starting point the reasoning of the Court of Appeal in Three Rivers (No 5) (which had overturned his own judgment in Three Rivers (No 5)) to the effect that the true rationale of legal advice privilege was that it was a privilege in aid of litigation. It therefore covered the seeking or obtaining of advice concerning rights and obligations because it was rights and obligations which formed the subject matter of litigation. Tomlinson J observed that the Court of Appeal had stated that it was important to confine legal advice privilege to its proper limits and that it was not open to the Court of Appeal to extend the ambit of the privilege, even if it thought it should. It was, Tomlinson J reasoned, therefore inherently unlikely that the Court of Appeal could have intended to decide that all communications or documents passing directly between the BIU and Freshfields concerning the Bingham Inquiry attracted legal advice privilege, because the subject matter of such communications and documents was not the rights and obligations of the Bank of England. Rather, the communications amounted to presentational assistance and advice, and could not be categorised as legal advice of the sort which attracted legal advice privilege. Tomlinson J’s judgment was upheld by the Court of Appeal in Three Rivers (No 6).9 In giving the judgment of the Court, Lord Phillips MR reiterated the narrow approach to legal advice privilege (and its underlying rationale) which had been applied in Three Rivers (No 5). He remarked that ‘in circumstances where the traditional role of a solicitor has expanded, it is necessary to keep legal professional privilege within justifiable bounds’.10 Lord Phillips MR concluded that:11 We have found this area of law not merely difficult but unsatisfactory. The justification for litigation privilege is readily understood. Where, however, litigation is not anticipated it is not easy to see why communications with a solicitor should be privileged. Legal advice privilege attaches to matters such as the conveyance of real property or the drawing up of a will. It is not clear why it should. There would seem little reason to fear that, if privilege were not available in such circumstances, communications between solicitor and client would be inhibited. Nearly fifty years have passed since the Law Reform Committee looked at this area. It is perhaps time for it to receive a further review.

The Bank appealed, and it was in this context that Mr Sumption appeared before the House of Lords, as leading counsel for the Bank, challenging the findings of the Court 8 Three Rivers District Council v Governor and Company of the Bank of England (No 6) [2003] EWHC 2565 (Comm). 9 Three Rivers District Council v Governor and Company of the Bank of England (No 6) [2004] EWCA Civ 218, [2004] QB 916. 10 ibid [30]. 11 ibid [39].

Privilege  415 of Appeal below. Whilst the issue was, strictly speaking, confined to the narrow one of whether legal advice privilege applied to lawyer–client communications seeking and providing presentational advice in the context of the Bingham Inquiry, Mr Sumption sought to challenge the foundation of Tomlinson J’s and the Court of Appeal’s reasoning by challenging the correctness of the reasoning and decision in Three Rivers (No 5). In particular, Mr Sumption argued that the intellectual starting point of the Court of Appeal in its judgments in both Three Rivers (No 5) and Three Rivers (No 6), to the effect that legal advice privilege is essentially a privilege in support of litigation, was wrong. In the context of proceedings before either a court or an inquiry, there is no relevant distinction between ‘presentational’ and ‘legal’ advice or between legal advice and other forms of legal assistance, and there is no place for such a distinction in a rational system of law. His submissions may be summarised in six parts.12 First, the privilege attaching to this particular class of documents has been described by the Supreme Court of the United States as ‘the oldest of the privileges for confidential information known to the common law’.13 It is a substantive legal right which has existed in England since at least the sixteenth century, and has its equivalent in most, if not all, developed legal systems. In England, the modern law is based on the practice gradually evolved in the Court of Chancery, which was first placed on a coherent footing by the decisions of nineteenth-century judges. In that form, it has prevailed over the (somewhat different) rules evolved by courts of common law before the Common Law Procedure Acts. Second, the object of the privilege attaching to lawyer–client communications is the encouragement of candour between a client and his lawyer of a kind that will often be inhibited by the prospect of disclosure. Lord Hoffmann had previously made clear that the protection of such communications is a fundamental human right; it is also a necessary one, because legal advice ‘cannot effectively be obtained unless the client is able to put all the facts before his adviser without fear that they may afterwards be disclosed and used to his prejudice’.14 That is a public interest that requires not just that their exchanges should be immune from compulsory disclosure, but also that any rule so protecting them should be absolute in its terms, because there is no other way in which a client can be given the necessary degree of assurance that what he says is between himself and his lawyer. An unclear privilege is as good as no privilege at all.15 Third, the law does not distinguish between lawyer–client communications generated in connection with litigation and other lawyer–client communications. It was established by the decision in the famous case of Greenough v Gaskell that this principle was not dependent on the existence of actual or contemplated litigation.16 The reason, as Lord Brougham observed, was that ‘all human affairs … may by possibility become the subject of judicial inquiry’ even if litigation is not contemplated.17

12 Three Rivers (No 6) (n 2) 613. 13 Upjohn Company v United States 449 US 383 (1981) 389 (Rehnquist J). 14 R (on the application of Morgan Grenfell Co Ltd) v Special Commissioner of Income Tax [2002] UKHL 21, [2003] 1 AC 563 [7]. 15 Upjohn (n 13) 393 (Rehnquist J). 16 Greenough v Gaskell (1833) 39 ER 618. 17 ibid 620.

416  Bankim Thanki QC, Chloe Carpenter QC, Nik Yeo and Rebecca Loveridge This  proposition has been regarded as uncontroversial by the courts at every level since that case was decided. ‘Litigation privilege’ is an expression which should properly be used only to describe a head of privilege which depends on litigation being in progress or contemplated. There is only one class of documents whose privileged status depends on litigation, and that is communications between lawyer or client on the one hand and a third party on the other. It is therefore only in the context of communications with third parties that the prospect of litigation makes any difference. The recognition of such a specific form of litigation privilege dates from the second half of the nineteenth century. It involved an extension of privilege to communications outside the confidential relationship of lawyer and client, which was justified on the ground that their disclosure would have enabled a party to adversarial litigation to see part of his adversary’s brief.18 Fourth, whether in connection with litigation or not, the privilege for lawyer– client communications protects legal advice and legal assistance, which has always been treated as part of legal advice. It therefore extends beyond communications for the purpose of giving or receiving advice about propositions of law or legal rights and obligations. It means advice of a kind that it is part of the proper function of a lawyer to give by virtue of his legal skills. ‘Legal skills’ extend to advocacy, to advice about what to do in the relevant legal context19 and to what Dr Johnson in 1776 called ‘the art and power of arranging evidence’:20 ie points of fact, not just points of law. Fifth, ‘relevant legal context’ need not necessarily be litigation. It extends to any contexts calling for specifically legal expertise, including non-contentious matters such as the drawing up of a legal document: anything requiring legal assistance, whether or not rights and liabilities are involved. The Court of Appeal was wrong to say that the Bingham Inquiry was not a ‘legal context’ because it was not concerned with determining legal rights or obligations. Sixth, and finally, the Court of Appeal’s view has unacceptable practical consequences. Its test is uncertain and involves fine distinctions. It seriously undermines the object of the privilege by making it difficult to predict with any assurance, even with the aid of legal advice, whether a particular sequence of communications will be privileged or not. Mr Sumption’s submissions found favour with the House of Lords, which overturned the decision of the Court of Appeal below and held that communications between the BIU and Freshfields which sought and provided advice as to how best to present the Bank’s position to the Bingham Inquiry so as to avoid criticism of the Bank were privileged. In doing so, the House of Lords rejected the narrow approach that the Court of Appeal had taken to the underlying rationale of legal advice privilege. Lord Scott commented that the narrow approach of the Court of Appeal to ‘legal advice’ in Three Rivers (No 6) had heightened the concerns of many about 18 Anderson v Bank of British Columbia (1876) 2 Ch D 644 (CA) 656 (James LJ): ‘as you have no right to see your adversary’s brief, you have no right to see that which comes into existence merely as materials for the brief’. cf Southwark and Vauxhall Water Co v Quick (1878) 3 QBD 315 (CA); Wheeler v Le Marchant (1881) 17 Ch D 675 (CA). 19 Balabel v Air India [1988] Ch 317 (CA) 330 (Taylor LJ). 20 G Birkbeck and G Hill (eds), Boswell’s Life of Johnson, vol 5 (Oxford, Oxford University Press, 1950) 26.

Privilege  417 the approach to legal advice privilege inherent in Three Rivers (No 5).21 Having set out relevant dicta from English and other common law jurisdictions concerning the importance of legal advice privilege in enabling a person to seek and obtain legal advice in confidence, Lord Scott observed that:22 None of these judicial dicta tie the justification for legal advice privilege to the conduct of litigation. They recognise that in the complex world in which we live there are a multitude of reasons why individuals, whether humble or powerful, or corporations, whether large or small, may need to seek the advice or assistance of lawyers in connection with their affairs; they recognise that the seeking and giving of this advice so that the clients may achieve an orderly arrangement of their affairs is strongly in the public interest; they recognise that in order for the advice to bring about that desirable result it is essential that the full and complete facts are placed before the lawyers who are to give it; and they recognise that unless the clients can be assured that what they tell their lawyers will not be disclosed by the lawyers without their (the clients’) consent, there will be cases in which the requisite candour will be absent. It is obviously true that in very many cases clients would have no inhibitions in providing their lawyers with all the facts and information the lawyers might need whether or not there were the absolute assurance of non-disclosure that the present law of privilege provides. But the dicta to which I have referred all have in common the idea that it is necessary in our society, a society in which the restraining and controlling framework is built upon a belief in the rule of law, that communications between clients and lawyers, whereby the clients are hoping for the assistance of the lawyers’ legal skills in the management of their (the clients’) affairs, should be secure against the possibility of any scrutiny from others, whether the police, the executive, business competitors, inquisitive busybodies or anyone else … I, for my part, subscribe to this idea. It justifies, in my opinion, the retention of legal advice privilege in our law, notwithstanding that as a result cases may sometimes have to be decided in ignorance of relevant probative material.

Lord Rodger also expressly disavowed the doubts about the justification for legal advice privilege which Lord Phillips MR had expressed when giving the judgment of the Court of Appeal.23 Notwithstanding these indications that there had been an error in the underlying reasoning of the Court of Appeal in Three Rivers (No 5), the House of Lords declined the Bank’s invitation to reconsider and express a view on the question which had arisen in that earlier case as to the meaning of the ‘client’ in the context of legal advice privilege. This was because the issue did not directly arise for consideration in Three Rivers (No 6); any view expressed by the House of Lords on this issue would therefore be obiter and not binding on a subsequent court and, in the words of Lord Scott, the issue was ‘a difficult one, with different views, leading to diametrically opposed conclusions, being eminently arguable’.24 The impact of Three Rivers (No 6) was therefore to depart, at least to some extent, from a narrow approach to the underlying justification for, and scope of, legal advice privilege, but to leave untouched the actual decision of the Court of Appeal in Three Rivers (No 5) as to the meaning of ‘client’ in this context.

21 Three

Rivers (No 6) (n 2) [20]. [34]. 23 ibid [55]. 24 ibid [47]. 22 ibid

418  Bankim Thanki QC, Chloe Carpenter QC, Nik Yeo and Rebecca Loveridge As argued further below, this has led to an unsatisfactory position in English law where the approach to the definition of ‘client’ in the context of legal advice privilege is inconsistent with its underlying rationale. It has also left the English common law out of step with the common law world on this ‘client’ issue, where Mr Sumption’s arguments in Three Rivers (No 6) as to the proper scope of legal advice privilege and the definition of ‘client’ have largely prevailed. C.  Reception of Three Rivers in Other Common Law Jurisdictions The Singapore Court of Appeal considered Three Rivers (No 5) in Skandinaviska Enskilda Banken AB v Asia Pacific Breweries (Singapore) Pte Ltd.25 That case concerned draft reports prepared by accountants and lawyers and issued to the defendant. The defendant resisted disclosure of the reports on the ground, among other things, that the reports were subject to legal advice privilege. The claimants disputed this, contending that the reports could not be subject to legal advice privilege because they had been sent not only to individuals who were members of a special committee established by the defendant to oversee the relevant investigation, but also to other employees of the defendant. The claimants argued that, pursuant to Three Rivers (No 5), the other employees were third parties and not the client, and therefore the reports were not protected by legal advice privilege. The Singapore Court of Appeal held that the claimants’ argument was based on a misreading of Three Rivers (No 5). Three Rivers (No 5) did not establish that in every case a corporation must establish a unit of people authorised to communicate with the corporation’s lawyers and that accordingly any communication with any other employee would not attract legal advice privilege. Instead, the implicit finding of the Court of Appeal in Three Rivers (No 5) was that on the facts of that case only the BIU was authorised to communicate with the Bank of England’s lawyers. According to the Singapore Court of Appeal:26 The principle is that if an employee is not authorised to communicate with the company’s solicitors for the purpose of obtaining legal advice, then that communication is not protected by legal advice privilege … since a company can only act through its employees, communications made by employees who are authorised to do so would be communications made ‘on behalf of his client’. The only relevant issue is whether the communication is made for the purpose of obtaining legal advice and, if so, the communication falls within the privilege, provided the other requirements of the privilege are present …

The Court of Appeal of Hong Kong also considered this issue in Citic Pacific Ltd v Secretary of State for Justice.27 In that case, a magistrate had issued search warrants authorising the seizure of documents from the claimant. The claimant resisted production of certain documents on grounds of legal advice privilege. The defendant contested this claim in relation to documents created by employees other than those who worked in the group legal department which had been passed to external lawyers, arguing in reliance on Three Rivers (No 5) that those documents were not 25 Skandinaviska Enskilda Banken AB v Asia Pacific Breweries (Singapore) Pte Ltd [2007] SGCA 9, [2007] 2 SLR 367. 26 ibid [41] (Andrew Phang Boon Leong JA). 27 Citic Pacific Ltd v Secretary of State for Justice [2016] 1 HKC 157.

Privilege  419 privileged because only the employees in the group legal department were properly to be regarded as the client. The Court of Appeal of Hong Kong declined to follow Three Rivers (No 5), holding that the client was the corporation and that the correct principle was that all communications between employees of the corporation who were authorised to act for the company in the process of obtaining legal advice and the external lawyers which were created for the dominant purpose of obtaining legal advice were protected by legal advice privilege. The relevant United States Supreme Court authority on this issue is Upjohn Company v United States.28 That case involved a pharmaceutical company conducting an internal investigation into payments which had been made to foreign government officials. As part of the investigation, the corporation’s lawyers prepared a letter containing a questionnaire which was sent to relevant managers seeking detailed information concerning such payments. Responses were returned directly to the general counsel. General counsel and external counsel also interviewed the recipients of the questionnaire, along with other company officers and employees. The Internal Revenue Service subsequently began an investigation and demanded production of the questionnaires and interview notes. The corporation resisted production on grounds of attorney–client privilege. The Court of Appeals for the Sixth Circuit rejected the claim for privilege to the extent that the communications were made by officers and agents who were not responsible for directing the corporation’s actions in response to legal advice (the ‘control group test’). The Supreme Court overturned that decision, holding that communications by the corporation’s employees were privileged. Justice Rehnquist, delivering the opinion of the Court, emphasised that the control group test overlooked the fact that privilege exists to protect not only the giving of professional advice to those who can act on it, but also the giving of information to the company’s lawyer to enable the lawyer to give sound and informed advice. In the corporate context, it will frequently be employees outside of the control group who will possess the information needed by the corporation’s lawyers. In Australia, the Federal Court of Australia has ruled that third-party communications can in principle be protected by legal advice privilege.29 Section 117(1)(b) of the Evidence Act 1995 (Cwth) deals with lawyer–client privilege and expressly includes within the definition of ‘client’ ‘an employee or agent of a client’. Communications with a lawyer, however, are only protected by legal advice privilege if made for the dominant purpose of seeking or providing legal advice.30 D.  ENRC The issue was given further appellate level consideration by the English Court of Appeal in Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd 28 Upjohn (n 13). 29 Pratt Holdings Pty Ltd v Commissioner of Taxation [2003] FCA 6, (2004) 136 FCR 357. 30 Kennedy v Wallace [2004] FCA 332, (2004) 142 FCR 185. See also Thanki (n 4) paras 2.177–2.186. In Civil Aviation Authority v R (on the application of Jet2.Com) [2020] EWCA Civ 35, [2020] 2 WLR 1215, the English Court of Appeal has held that there is a dominant purpose test for legal advice privilege under English law. Whilst we see scope for a dominant purpose test in cases of multi-addressee communications or communications by an employee of a legal entity (see Thanki (n 4) paras 2.177–2.186), we do not

420  Bankim Thanki QC, Chloe Carpenter QC, Nik Yeo and Rebecca Loveridge (ENRC).31 ENRC concerned the privileged status of interview notes created by lawyers during the course of an internal investigation. The interviewees included both employees and ex-employees of ENRC who had been authorised to communicate with the company’s lawyers for the purpose of providing relevant information but who had not been specifically tasked with obtaining legal advice. The case provided an opportunity for the Court of Appeal to consider what was the true ratio of Three Rivers (No 5) and, if that ratio required a narrow definition of ‘client’, whether it ought to be departed from. The Court of Appeal confirmed that the ratio of Three Rivers (No 5) is that, for the purpose of legal advice privilege where there is a corporate client, the ‘client’ is confined to those individuals within the corporation who are specifically tasked with seeking or receiving the relevant legal advice. The Court of Appeal in ENRC held itself bound to follow this ratio, which meant that it was bound to hold that notes of interviews conducted by lawyers of employees and ex-employees of ENRC who were not specifically tasked with obtaining legal advice were not subject to legal advice privilege. However, and importantly, the Court of Appeal considered the underlying rationale for legal advice privilege and cast doubt on whether the Three Rivers (No 5) approach to the definition of client is consistent with this rationale. Giving the judgment of the Court, Sir Geoffrey Vos C remarked:32 large corporations need, as much as small corporations and individuals, to seek and obtain legal advice without fear of intrusion. If legal advice privilege is confined to communications passing between the lawyer and the ‘client’ (in the sense of the instructing individual or those employees of a company authorised to seek and receive legal advice on its behalf), this presents no problem for individuals and many small businesses, since the information about the case will normally be obtained by the lawyer from the individual or board members of the small corporation. That was the position in most of the 19th century cases. In the modern world, however, we have to cater for legal advice sought by large national corporations and indeed multinational ones. In such cases, the information upon which legal advice is sought is unlikely to be in the hands of the main board or those it appoints to seek and receive legal advice. If a multinational corporation cannot ask its lawyers to obtain the information it needs to advise that corporation from the corporation’s employees with relevant first-hand knowledge under the protection of legal advice privilege, that corporation will be in a less advantageous position than a smaller entity seeking such advice. In our view, at least, whatever the rule is, it should be equally applicable to all clients, whatever their size or reach. Moreover, it is not always an answer to say that the relevant subsidiary can seek the necessary legal advice and, therefore, ask its own lawyers to secure the necessary information with the protection of legal advice privilege. In a case such as the present, there may be issues between group companies that make it desirable for the parent company to be able to procure the information necessary to obtain its own legal advice … English law is out of step with the international common law on this issue. It is undoubtedly desirable for the common law in different countries to remain aligned so far as its

consider that previous English case law provided for a dominant purpose test in all cases of legal advice privilege. However, the Court of Appeal in Jet2.com appears to have held that the dominant purpose test is part of the test for legal advice privilege in all cases. 31 Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [2018] EWCA Civ 2006, [2019] 1 WLR 791. 32 ibid [127]–[130].

Privilege  421 development is not specifically affected by different commercial or cultural environments in those countries. In this regard, legal professional privilege is a classic example of an area where one might expect to see commonality between the laws of common law countries, particularly when so many multinational companies operate across borders and have subsidiaries in numerous common law countries. If, therefore, it had been open to us to depart from Three Rivers (No 5) … we would have been in favour of doing so.

The Court of Appeal thus accepted, as a matter of principle, the thrust of the submissions made by Mr Sumption as counsel in Three Rivers (No 6) to the effect that the underlying rationale of legal advice privilege requires that it should cover all employee–lawyer communications where the relevant employee is authorised by the company to communicate with the company’s lawyer for the purpose of the company obtaining legal advice. The present state of the law is such that a company may be prevented from obtaining sound legal advice because it is unable to put the full facts before the lawyer without the communications created in the course of doing so becoming disclosable in subsequent proceedings. There is a real conflict between this and the public interest in promotion of the rule of law, which depends upon persons being able without inhibition to find out their legal position. As Lord Sumption has commented, ‘the complexity of the modern law and its progressive invasion of the interstices of daily life, have made this a public interest of greater importance than ever before’.33 However, as with the House of Lords in Three Rivers (No 6), the Court of Appeal in ENRC has not disturbed the precedent understood to be set by Three Rivers (No 5). It therefore remains for a future Supreme Court to confront this issue so that the definition of ‘client’ can be made consistent with the underlying rationale for legal advice privilege. II. THE PRUDENTIAL LITIGATION

By contrast, the restriction of legal advice privilege to communications with lawyers (or their agents) or documents evidencing such communications, as confirmed in Prudential, is consistent with the underlying rationale of the doctrine. In that case, Prudential argued that the concept of ‘legal adviser’ was broad enough at common law to encompass a chartered accountant advising on tax law. This was rejected by a majority of the Supreme Court. Lord Neuberger, giving the main judgment for the majority, commented that it was hard to see why, as a matter of pure logic, the privilege should be restricted to communications with legal advisers who happened to be qualified lawyers, but held that the restriction was explicable by reference to history and that any extension beyond lawyers was a matter for Parliament rather than the judiciary. The majority were particularly troubled by the risk that any judicial extension would give rise to an unacceptable degree of uncertainty with the potential for



33 Prudential

(n 1) [120].

422  Bankim Thanki QC, Chloe Carpenter QC, Nik Yeo and Rebecca Loveridge legal advice privilege to encompass communications between clients and a wide range of professionals who might provide legal advice.34 In his dissenting judgment, Lord Sumption opined that legal professional privilege attaches to any communication between a client and his legal adviser which is made (i) for the purpose of enabling the adviser to give or the client to receive legal advice, (ii) in the course of a professional relationship and (iii) in the exercise by the adviser of a profession which has as an ordinary part of its function the giving of skilled legal advice on the subject in question. It would follow that advice on tax law from a chartered accountant would attract the privilege in circumstances where it would have done so had it been given by a barrister or a solicitor because ‘They are performing the same function, to which the same legal incidents attach’.35 Whilst, at first glance, it might appear that the decision of the majority was merely a pragmatic one, to be contrasted with the more principled stance taken in the dissenting judgments of Lords Sumption and Clarke, that conclusion would be too simplistic. Lord Sumption’s dissent in Prudential, proposing that a generous ambit be granted to the scope of legal professional privilege based on an associated and longheld recognition of its practical utility, might be seen as a logical progression of an intellectual journey commenced with his role as an advocate in Three Rivers (No 6). However, it is questionable whether his end point is in fact consistent with the rationale of the privilege or is workable in practice, for three reasons. First, legal advice privilege has long been regarded at common law as restricted to qualified solicitors, barristers or attorneys.36 By statutory extension, legal advice privilege was extended to others who are regulated as lawyers, namely patent agents, trade mark agents, licensed conveyancers and authorised persons (persons authorised by a legal regulator to carry out reserved legal activities).37 As Baroness Hale made clear in Three Rivers (No 6), there is a clear policy justification for singling out communications between lawyers and their clients from other professional communications.38 Lawyer–client communications represent a limited and readily controllable exception to the public interest in disclosure, based on the centrality of the lawyer–client relationship to the administration of justice. This itself allows a ready presumption to be made that communications between client and lawyer are made for the overall purpose of legal advice, even where that encompasses presentational advice, as the House of Lords in Three Rivers (No 6) concluded it could. As Wigmore states,39 by way of generalisation, it can be said that a matter committed to a lawyer is prima facie committed for the purposes of legal advice. To borrow Lord Rodger’s phrase, there is a general expectation that in analysing any issue a professional lawyer will look at it through ‘legal 34 For example, surveyors, architects, independent financial advisers, insolvency practitioners, personnel consultants. 35 Prudential (n 1) [114]. 36 Wilson v Rastall (1792) 100 ER 1283 (KB). It was held in Dormeuil Trade Mark [1983] RPC 131 (Ch) and Wilden Pump Engineering Co v Fusfield [1985] FSR 159 (CA) that patent or trade mark agents did not fall within the scope of legal advice privilege. 37 Copyright, Designs and Patents Act 1988, ss 280 and 284; Administration of Justice Act 1985, s 33; Courts and Legal Services Act 1990, s 63; Legal Services Act 2007, ss 190(1) and (2). 38 Three Rivers (No 6) (n 2) [61]. 39 JH Wigmore, Evidence in Trials at Common Law, vol 8 (rev JT McNaughton, Boston, Little Brown, 1961) para 2296, p 567.

Privilege  423 spectacles’.40 Thus, the courts are able to apply the broad test laid down in Balabel v Air India,41 which asks whether the relevant communication or document was made confidentially for the purposes of legal advice, but construes those purposes broadly so that privilege attaches not only to a document conveying legal advice from solicitor to client and a specific request for such advice, but to the whole continuum of communications between solicitor and client aimed at keeping both informed so that advice may be sought and given as required.42 In doing so, no less an authority than Lord Bingham has ‘discountenanced a narrow or nit-picking approach to documents and has ruled out an approach which takes a record of a communication sentence by sentence and extends the cloak of privilege to one and withholds it from another’.43 Lord Neuberger rightly recognised in Prudential that it is difficult to see how such an approach could be adopted if legal advice privilege was held to extend to other professionals who might provide legal advice on discrete aspects of law in the course of providing other professional services (such as accountants). It could not generally be said that the relationship itself was referable to the request for, and receipt of, legal advice, and there would therefore need to be much greater scrutiny of individual communications to examine whether they were truly made for the purpose of seeking or providing legal advice. The Balabel test, essentially endorsed by the House of Lords in Three Rivers (No 6), is readily applicable to the legal profession, but it is difficult to see how it would be practically workable when applied to other professions. Communications with an accountant (or other non-lawyer professionals) could not realistically be subjected to the presumptive approach in Balabel or Three Rivers (No 6). The application of the test must necessarily involve a stricter approach as to what is specifically ‘legal’, as opposed to, say, accountancy, advice. If the Balabel test could not be applied to professionals other than lawyers, then a twintrack system of legal advice privilege would emerge whereby communications with lawyers were treated differently from those with other professionals for the purpose of applying legal advice privilege; this would be objectionable on the very basis for which legal advice privilege had been extended to those other professionals, namely, that they ought to be treated in the same way as lawyers when providing legal advice. The restriction of legal advice privilege to communications involving lawyers serves an important purpose in allowing for the ready presumption to be made that those communications are privileged. Second, this presumption itself helps to achieve a level of certainty in the application of legal advice privilege which is essential to achieving the objective of that doctrine and 40 Three Rivers (No 6) (n 2) [59]–[60]. 41 Balabel (n 19). 42 ibid 330 (Taylor LJ): ‘legal advice is not confined to telling the client the law; it must include advice as to what should prudently and sensibly be done in the relevant legal context’. 43 R v Manchester Crown Court, ex p Rogers [1999] 1 WLR 832 (QB) 839. The advent in the Legal Services Act 2007 of alternative business structures authorised by a legal regulator means that such entities (acting through lawyer or non-lawyer employees) may well undertake a broader range of non-legal services, which will then necessitate a more granular examination of communications of lawyers or those working at their direction than at present. However, that Act does not support any general extension of legal advice privilege to non-lawyers. On the contrary, the Act recognises that legal advice privilege only applies to communications of lawyers as defined in the Act or those acting at the direction or under the supervision of such lawyers: s 190.

424  Bankim Thanki QC, Chloe Carpenter QC, Nik Yeo and Rebecca Loveridge reflecting its rationale. Uncertainty undermines the rationale of the privilege, which (as stated by Lord Millett in B v Auckland District Law Society, giving the opinion of the Privy Council)44 is that the lawyer is able to give his client an absolute and unqualified assurance that what he tells him will not be disclosed without his consent in any circumstances. Similarly, in the Derby Magistrates’ Court case, Lord Nicholls drew attention to the importance of any development in the area of legal professional privilege taking place in a principled way because ‘Confidence in non-disclosure is essential if the privilege is to achieve its raison d’être’.45 And as Mr Sumption had submitted in Three Rivers (No 6), an unclear privilege is as good as no privilege at all. Unless legal professional privilege is sufficiently certain, it cannot fulfil its objective in guaranteeing fundamental rights pertaining to access to justice. This view was most powerfully expressed by Lloyd LJ in the Court of Appeal in Prudential:46 Moreover, a requirement of human rights law is that the relevant legal position should be appropriately certain. The significance of the rule, and its potentially controversial nature, as a virtually absolute exception to the general rule as to the availability and disclosability of relevant evidence, which does not give rise to any ad hoc balancing of competing interests (as some issues of privilege do) are exemplified by the amount of litigation over the past decades in which issues arising from it have been debated before the courts, up to the highest level. In that context, it seems to me that it is particularly important that the rule should be certain, so that its application can be readily understood. As presently understood, it seems to me that the rule does stand up to that test in practical terms. If it were to be regarded as extending, without statutory help or definition, to the seeking and giving of advice from and by professionals other than lawyers, subject to some criterion as to the status and qualification of the adviser … then it seems to me that the scope of the rule would be lamentably uncertain, and that this in itself might fail to satisfy the human rights test of being ‘in accordance with law’.

Third, and most importantly, it is suggested that the limitation to communications with lawyers is more consistent with the rationale of the privilege. This is for the reasons already set out above, which require a clear and certain privilege applicable in the same manner irrespective of the identity of the legal adviser and, in addition, because the limitation is also consistent with case law on the scope of the privilege, which, even in the case of lawyers, rightly does not take a merely functional approach of applying the privilege to any case in which legal advice or assistance was sought or given. For example, legal advice from a solicitor who had been struck from the roll is not protected by legal advice privilege, unless the client in good faith did not know the solicitor had been struck off.47 It is consistent with the rule of law rationale of legal advice privilege for the legal adviser to be required to be a practising lawyer who owes duties to the court. In 1985, the Australian Law Reform Commission (ALRC) addressed the question of whether privilege should be extended to other professionals.48 It concluded that no 44 B v Auckland District Law Society [2003] UKPC 38, [2003] 2 AC 736 [54]. 45 R v Derby Magistrates’ Court ex parte B [1996] 1 AC 487 (HL) 512. 46 R (on the application of Prudential plc) v Special Commissioner of Income Tax [2010] EWCA Civ 1094, [2011] QB 669 [71]. 47 Dadourian Group International and others v Simms [2008] EWHC 1784 (Ch). 48 ALRC, Report No 26 (Evidence), ch 38.

Privilege  425 new categories of privilege should be created. So far as legal professional privilege is concerned, the ALRC’s clear view, which accords with that of the present authors, was that:49 The policy justifications, including the connection between the privilege and the trial system, are such that it is neither possible nor desirable to abolish the privilege. It is these policy considerations that distinguish the lawyer–client relationship from other professional/ layperson relationships. It is sometimes argued that if the confidential communication between lawyer and client is to be protected then other confidential communications should also be protected – eg the cleric and communicant. The policy justifications, however, go beyond the protection of confidences: the restriction of the privilege to the legal profession serves to emphasize that the relationship between a client and his legal adviser had a special significance because it is part of the functioning of the law itself. Communications which establish and arise out of that relationship are of their very nature of legal significance, something which would be coincidental in the case of other confidential relationships.

III. CONCLUSION

We consider it to be elementary that the scope of legal advice privilege should reflect its underlying rationale. In our view, this has been achieved in relation to the restriction of legal advice privilege to communications with legal advisors (and their agents) following the decision in Prudential. However, the approach to who the ‘client’ is for the purpose of legal advice privilege is, and has been since the decision of the Court of Appeal in Three Rivers (No 5), fundamentally out of step with the underlying rationale of the privilege. The Court of Appeal in ENRC has signalled that it would welcome reconsideration of this issue by the Supreme Court. It is to be hoped that, when a suitable case reaches that level, the Supreme Court will take the opportunity to recast the definition of the client so that it is consistent with the underlying rationale of legal advice privilege and so that English law can be brought into line with the prevailing position in the common law world on this important issue.

49 ibid para 878, citing from the judgment of Dawson J in Baker v Campbell [1983] HCA 39, (1983) 153 CLR 52. At para 877, the ALRC emphasised that the policy arguments advanced in support of this conclusion also include the proper functioning of the trial system, especially the public interest in the settlement of disputes, given that the trial system depends heavily on a high proportion of cases being settled: ‘The lawyer plays a major role in the settlement process and cannot do so effectively without a complete and frank disclosure by the client of the facts of the case.’

426

Index abuse of process: privity of interest test, 405–6 res judicata, 399, 400, 403, 404 acquiescence, see laches and acquiescence account of profits: breach of contract, 86 knowing receipt, 223–25, 227, 233, 235 legitimate interest, 98, 100 action for the price: legitimate interest, 98–99 actual loss, 79 causation, 102, 127 damages, 93 proportionality, 102 remoteness, 104 affirmation of contract, 42–43, 71 legitimate interest doctrine, 59–62 White & Carter (Councils) v McGregor, 57–58, 70 agency, 257–58 attribution, 273, 275–77, 283–84, 286, 295–96 communicating agents, 258–64 knowing receipt, 231–32 misuse of power, 322 negligent misstatement, 265–72 piercing the corporate veil, 332 self-authorising agents, 259–60, 261 termination of authority, 264–65 undisclosed principals, 265–72 agency of necessity, 183 Angove’s Pty Ltd v Bailey: constructive trust, 179, 191 property rights, 405 proprietary restitution, 193–94, 213–16 termination of authority, 264–65 attribution, 273–75, 295–96 agency, 273, 275–77, 283–84, 286, 295–96 causation, 287–88 company suing directors/agents for breach of duties: Bilta case, 290 Julien case, 291–92 Safeway case, 290–91 company suing third parties for breach of duties: Singularis case, 292 Stone & Rolls, 292–93

contextual approach, 275–86 illegality, 288–89 one-man companies, 293–95 rule-based approach, 275–86 Australia: causation: but for test, 317 deference to applicable law, 394 estoppel, 45–46, 403 fraud as an exception to res judicata, 406–7 knowing receipt: account of profits, 224 consequential losses, 225 imputation, 231–32 proprietary relief, 224 legal advice privilege, 419 extension to other professions, 424–25 personal injury law costs, 143 piercing the corporate veil, 336 unjust enrichment: subrogation, 179 bad faith: misuse of power, 300, 301–2, 308–9, 322 bankruptcy: Hughes-Holland v BPR Solicitors, 117 res judicata, 400–1 beneficial ownership, 4, 211, 228, 249–51 Brussels I Regulation (recast): good arguable case, 347–48, 354, 360, 361–62, 362–64, 365 jurisdiction, 367, 369, 373–74, 376, 382, 385 forum necessitates, 384 Canada: consideration, 35 election, 43 forum conveniens, 375 Four Seasons Holdings Inc v Brownlie, 372 good arguable case, 347 loss of earnings, 242 variation of contract, 35 carried interest, 5, 6, 8, 9 causation: actual loss, 102, 127

428  Index attribution: ‘very thing’ argument, 287, 292 but for test, 73–74 Bunge SA v Nidera BV, 78, 82 exercise of powers for improper reasons, 317–18 misuse of power, 317 chain of causation, 78–80 factual causation, 73–74 actual loss, 102 illegality, 247 legal causation, 75, 93 Hughes-Holland v BPE, 75 New Flamenco case, 76–77 Swynson Ltd v Lowick Rose LLP, 75–76 personal injury, 142 see also remoteness cause of action estoppel: res judicata, 399–400, 401–3, 404, 408, 409 Chartbrook Ltd v Persimmon Homes Ltd, 18–21 Civil Procedure Rules: jurisdiction, 347 jurisdictional gateways, 367 service out of jurisdiction, 372, 374, 378, 383 coherence, 2, 20, 23, 93 attribution, 274–75 deference principle, 393–94 illegality, 241, 243–44, 245 piercing the corporate veil, 325 exception to limited liability, as a, 336, 343–44 proprietary restitution, 212 unjust enrichment, 173–74 consequential losses: damages, 81, 373 knowing receipt, 228, 234 true trustees, 223, 225 unjust enrichment, 220, 222 consideration in variation, 32–33, 35–37 formation rules, 33 Playboy Club London Ltd v Banca Nazionale del Lavoro SpA, 133 reciprocity principle, 34–35 will theory, 34–35 constructive trust: knowing receipt, 218, 219 proprietary restitution, 201, 205–6 Angove case, 213–14 conscience requirement, 212 unjust enrichment, 179–81, 191, 221 wrongs, 196 equitable wrong, 226–27 contract damages, 73 Bunge v Nidera, 93 default clauses, 83–85 substitutive damages, 80–83

but for test, 73–74 factual causation, 73–74 legal causation, 75 Hughes-Holland v BPE, 75 New Flamenco case, 76–77 Swynson Ltd v Lowick Rose LLP, 75–76 Morris Garner v One Step (Support Ltd), 93 damages in lieu of injunction, 87 negotiating damages, 85–92 non-pecuniary loss, 87, 88 pecuniary loss, 87–88 sale of goods cases: date rules, 79–80 normal measures, 77–79 substitutive damages: Bunge v Nidera, 80–83 Morris Garner v One Step (Support Ltd), 85–92 contractual obligations, 52–54 collateral obligations compared, 53 contract damages, 87 counter-performance, 203–4 disciplinary processes, 56–57 forbearance compared, 38 negotiating damages, 101 no legitimate interest, 65, 67 obligation not to work for someone else, 54–56 reasonable care, 121, 128 restitution, 186 specific performance, 100, 187–88 contributory negligence, 142, 271 corporate personality, see piercing the corporate veil Coventry v Lawrence, 164, 155–56 locality principle, 164 planning permission and nuisance, 164–67 prescription defence, 164 remedies, 165, 166–67 damages in lieu of injunction, 155, 165–66, 168–69, 171–72 public interest considerations, 155, 166, 167–68, 169–70 damages in lieu of injunction, 165–66, 168–69, 171–72 Coventry v Lawrence, 155, 165–66, 168–69, 171–72 Lord Cairns’ Act, 158 Morris Garner v One Step (Support Ltd), 85, 87 Shelfer criteria, 159–62 deceit, 116 agency, 261, 266, 271–72 piercing the corporate veil, relationship with, 327, 334–36

Index  429 duress: consideration, 36 election, 41 transfer of property, 199 duty of care, 118, 122 bookmakers, 129, 131 contractual obligation of reasonable care, 121 fraudulent misstatement, 285, 288, 292 negligence, 149–50, 151–52, 252, 254–55, 344 negligent misstatement, 267 Playboy Club London Ltd v Banca Nazionale del Lavoro SpA, 130–37 pre-contractual misrepresentation, 120 rule in Hedley Byrne, 116, 120, 132 election: waiver, 41–44 employment contracts: affirmation of contract, 57 remedies after affirmation, 59–60 contractual obligations, 52–54 obligation not to work for someone else, 54–56 disciplinary processes, 56–57 employment and commercial contracts distinguished, 50–51 legitimate interest, 62 payment in lieu of notice, 62–64 performance and legitimate interest, 65, 67–68 wait and see concept, 64 obligations, 53–54 payment in lieu of notice, 49–50, 62–64, 68 termination, 50–51 environmental protection: limited liability, 343 equity controls on misuse of power, 305–7 equitable forbearance, 38, 40, 44–47 equitable wrongs, 226–27 estoppel: Australia, 45–46, 403 cause of action estoppel: res judicata, 399–400, 401–3, 404, 408, 409 estoppel by convention, 44, 45–47 estoppel by deed, 45 issue estoppel: res judicata, 399, 400, 401 promissory estoppel, 38, 40, 44–47 res judicata: cause of action estoppel, 399–400, 401–3, 404, 408, 409 issue estoppel, 399, 400, 401 waiver, 44–47 see also res judicata estoppel by convention, 44, 45–47 estoppel by deed, 45

extended doctrine/abuse of process: privity of interest test, 405–6 res judicata, 399, 400, 403, 404 forbearance: waiver, 38–40 foreign law, 391–93 deference, 393–94 Foreign Limitation Periods Act, 387, 390 Iraqi Civilians v The Ministry of Defence, 387–88, 390–91 consequences, 397–98 exceptional nature, 395–96 inevitability of outcome, 396–97 Iraqi law approach, 394–95 limitation periods, 387–91 lower courts, 389–90 Supreme Court, 388–89 see also jurisdiction foreseeability, 118–19, 126–28, 138, 267, 335–36 forum conveniens, 385 Abela v Baadarani, 368–72 discretion v rules-based approach, 367–68 Four Seasons Holding Inc v Brownlie, 372–78 service out of jurisdiction, grounds for: forum necessitates, 383–85 forum non conveniens, 378–79 neutral/purposive construction, 381–83 wide grounds, 379–81 fraud: exception to res judicata, 406–7 piercing the corporate veil, relationship with, 334–36 pre-contractual misrepresentation, 120 Geys v Société General, London Branch, 70–71 affirmation of contract, 57 remedies after affirmation, 59–60 employment and commercial contracts distinguished, 50–51 legitimate interest, 62 payment in lieu of notice, 62–64 performance and legitimate interest, 65, 67–68 wait and see concept, 64 obligations, 53–54 payment in lieu of notice, 49–50, 62–64, 68 good arguable case, 348, 365 applications: Airbus v Generali Italia, 357–59 Aspen Underwriting v Credit Europe, 354–55 evidential standards, 354–55 failure to take preventative action, 357–58 Goldman Sachs v Novo Banco, 354 jurisdiction, 354

430  Index Kaefer v AMS, 355–57 negligence, 357–59 Canada Trust Co v Stolzenberg (No 2), 350–51 EU or domestic law, 360 Brussels I cases, 362–64 extent of argument, 361 flexibility requirement, 359–60 Four Seasons Holding Inc v Brownlie, 351–34 interlocutory process, 361 origins, 349–50 policy objectives, 348–49 questions of fact, 360 questions of law, 360, 361–62 substantive merits, relationship with, 364–65 Vitkovice Horni a Hutni Tezirstvo v Korner, 349–50 good faith: exercise of power, 298–99, 301–2, 305–6, 308–10, 313, 319, 320 legal advice from solicitor who is struck off, 424 Harris Society Lecture, 9 commercial common sense, 10, 21 language, importance of, 9, 21, 23–24 autonomous meaning, 13–14, 22–23 speaker meaning, 13–14 substance, 13–21 tone, 10–13, 21 word meaning, 13–14 Hedley Byrne principle, 116, 120, 129–30, 131, 132–37 undisclosed principals, 134–35, 267, 268 Hughes-Holland v BPE, 116–17 express terms, 122–23 implied terms, 123 information v advice, 117–19 legal causation, 75 SAAMCO principle, 117–19, 124–25 tort v contract, 121–22 Transfield case, relationship with, 125–28 illegality, 237–38 balancing rule of law costs, 248–49 beneficial ownership, 250–51 causes of action, 247–48 consistency, 240–43 law reform, 255–56 multiplicity, 243–44 rationales, 238–40 reliance rule, 253–55 Patel v Mirza, 251 Tinsley v Milligan, 249–51 restitution grounded on unjust enrichment, 184–90 scope, 244–47 uncertainty, 249

injunctions, 165, 166–67, 172 Coventry v Lawrence, 164–72 damages in lieu of injunction, 165–66, 168–69, 171–72 locality principle, 164 Lord Cairns’ Act, 156–58 post-Shelfer, 161–63 planning permission and nuisance, 164–67 prescription defence, 164 public interest considerations, 166, 167–68, 169–70 regulatory compliance, relationship with, 163 Shelfer criteria, 155–56, 158–60 criticisms, 163–64 interpretation of contracts, 3–4 implied terms, 10, 12, 22 Krys v KBC Partnership, 4–9 precedent, 8 rectification, 10, 20–21 Iraqi Civilians v The Ministry of Defence, 387–88, 390–91 consequences, 397–98 exceptional nature, 395–96 inevitability of outcome, 396–97 Iraqi law approach, 394–95 limitation periods, 387–91 lower courts, 389–90 Supreme Court, 388–89 issue estoppel: res judicata, 399, 400, 401 joint tortfeasance, 338, 342, 344, 345–46 judicial discretion, 2 foreign limitation rule, 396 forum conveniens: rules-based approach compared, 367–68, 377 forum non conveniens, 377, 379–80, 385 illegality, 237–38, 256 injunctions: damages in lieu of injunction, 155–56, 158, 165–66, 167–72 regulatory compliance, 163–64 liability in unjust enrichment, 174, 185–86 Patel v Mirza, 405 personal and proprietary relief, 224 res judicata, 405 specific performance, 67 jurisdiction: good arguable case, 348 policy objectives, 348–49 see also forum conveniens knowing receipt, 217–18, 234–35 account of profits, 223–25 awareness and liability, 232–33

Index  431 consequential losses, 225 models of knowing receipt liability, 227–29 equitable wrong analysis, 226–27 true trust analysis, 222–26 unjust enrichment analysis, 219–22 notice and knowledge, 229–32 Papadimitriou v Crédit Agricole Corp and Investment Bank, 229–30, 233–34 value at receipt, 225–26 Williams v Central Bank of Nigeria, 218–19 Krys v KBC Partnership, 4–5 carried interest, 6 commercial common sense, 7, 8–9, 21 language, 5, 8, 21 sale and distribution, 5, 8 judgments, 5–9 timing of distributions, 5–6 laches and acquiescence: waiver, 37, 47–48 language: Harris Society Lecture, 9, 21, 23–24 autonomous meaning, 13–14, 22–23 speaker meaning, 13–14 substance, 13–21 tone, 10–13, 21 word meaning, 13–14 interpretation of contract: Harris Society Lecture, 9, 10–21 substance, 13–21 tone, 10–13 Krys v KBC Partnership, 5, 8, 21 legal certainty, 1, 16 attribution, 273–74, 278, 294–95 express damages clauses, 84 good arguable case, 353–54 illegality defence, 238, 244, 248–49 reliance rule, 253–54, 256 judicial discretion, 172 jurisdiction, 367 mitigation, 103 obligations, 53 privilege, 421–22, 423–24 proof of loss, 104–5 proper exercise of power, 311, 317, 320 remoteness, 104 legally recoverable loss: proportionality, 102, 105–6 legitimate interest, 97, 98 fetter or remedy on right to affirm, 59–62 judicial remedies, 97 account of profits, 98 action for the price, 97–98 negotiating damages, 101

proportionality, 101–11 specific performance, 98 performance and legitimate interest, 65–70 payment in lieu of notice, 62–64 wait and see concept, 64–65 White & Carter (Councils) v McGregor, 57–58 limited liability: environmental protection, 343 joint tortfeasance, 345–46 negligence and limited liability, 344–45 piercing corporate veil as an exception to, 325, 340–42 Salomon principle, 329–30 tort and limited liability, 342–43 limited partnership: carried interest, 6 distribution of partnership assets, 4–5 loss: actual loss, 79 causation, 102, 127 damages, 93 proportionality, 102 remoteness, 104 Bunge v Nidera, 93 default clauses, 83–85 substitutive damages, 80–83 but for test, 73–74 consequential losses: damages, 81, 373 knowing receipt, 220, 222, 223, 225, 228, 234 true trustees, 223, 225 unjust enrichment, 220, 222 contract damages: non-pecuniary loss, 87, 88 pecuniary loss, 87–88 factual causation, 73–74 knowing receipt, 225 legal causation, 75 Hughes-Holland v BPE, 75 New Flamenco case, 76–77 Swynson Ltd v Lowick Rose LLP, 75–76 Morris Garner v One Step (Support Ltd), 93 damages in lieu of injunction, 87 negotiating damages, 85–92 non-pecuniary loss, 87, 88 pecuniary loss, 87–88 proof of loss uncertainty, 104–11 sale of goods cases: date rules, 79–80 normal measures, 77–79 substitutive damages: Bunge v Nidera, 80–83 Morris Garner v One Step (Support Ltd), 85–92

432  Index merger in judgment: res judicata, 399, 401 misrepresentation: corporate veil, 334 election, 41 innocent misrepresentation, 42 pre-contractual misrepresentation, 120 transfer of property, 199 misstatement, see negligent misstatement mistaken identity, 138–39 misuse of power, 297–99, 323 advice, 318–19 excess v abuse, 297–98, 307–8, 310 honesty requirement, 308–9 improper purposes, 309–10, 312–18 proper purposes: improper purposes, 312–16 regulation of powers: contractual controls, 301–4 equitable controls, 305–7 public law controls, 300–1 remedies: void/voidable, 320–22 subjective/objective test, 319 mitigation: absence of legitimate interest, 69 action for price, 99 loss, 93 default clauses, 84 legal causation, 75, 77–80 recovery of loss, 102, 103 substitutive damages, 80–83 proportionality, 103 negligence: contributory negligence, 142, 271 limited liability and negligence, 344–45 negligent misrepresentation: pre-contractual misrepresentation, 120 negligent misstatement, 134 agency, 265–72 corporate veil, 338 undisclosed principals, 265–72 professional negligence, 118–19, 121, 126, 405 pure financial loss, 115 negligent misstatement, 134 agency: undisclosed principals, 265–72 corporate veil, 338 negotiating damages: legitimate interest, 101 Morris Garner v One Step (Support Ltd), 85–92 New Zealand: consideration, 35 knowing receipt, 234

personal injury law, 143–44, 144–45, 152 variation, 35 nuisance, 161–63 see also damages in lieu of injunctions; injunctions penalties, 95–96, 113–14 legitimate interest of injured party, 97, 98 judicial remedies, 98–101 proportionality, 97–98, 101–2 actual loss, 102 legally recoverable loss, 102 mitigation uncertainty, 103 proof of loss uncertainty, 104–11 remoteness uncertainty, 104 test determining whether contractual provision is a penalty, 96–97 legitimate interest, 97, 98–101 proportionality, 97–98, 101–11 scope, 112–13 personal injury law, 141 abolishing personal injury law, 150–53 benefits of personal injury law: compensation, 147 cross-subsidy effects, 148 employment benefits, 148 incentive to take precautions, 147 public accountability, 147–48 social utility v cultural instinct, 148–49 opportunity costs, 141–42, 147 economic growth, 143 lower insurance premiums, 143–44 no-fault compensation schemes, 144–46 freedom to engage in valuable activities, 146–47 see also tort law physical harm, 115 duty of care, 150 piercing the corporate veil, 325 deceit, relationship with, 334–36 development, 332–33 exception to limited liability, as, 340–42 exception to separate legal personality, as, 336–39 fraud, relationship with, 334–36 importance, 326–27 precedent, 330–32 Prest v Petrodel, 326–27 Salomon principle, 327–28 fraud, 328–29 limited liability, 329–30 separate legal personality, 329–30 planning permission, 163, 164–67, 170 Playboy Club London Ltd v Banca Nazionale del Lavoro SpA, 130–32

Index  433 consideration, 133 contractual elements, 132–33, 136–37 Hedley Byrne principle, 133–34 purpose of transaction, 135–36 SAAMCO principle, 137–38 undisclosed principal, 134–35 precedent: interpretation of contracts, 8 piercing the corporate veil, 327, 330–32 restitutionary claims, 216 Salomon Principle, 327–30 privilege: Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd, 419–21 document privilege, 415 lawyer-client communications, 415–16 legal advice and assistance, 416 legal professional privilege, 411–12 extension to other professions, 421–25 Prudential litigation, 421–25 relevant legal context, 416 Three Rivers litigation, 412 Court of Appeal, 412–13 House of Lords, 414–18 Singapore, 418 Hong Kong, 418–19 United States, 419 Australia, 419 privity of interest: res judicata, 404–6 professional negligence, 118–19, 121, 126, 405 promissory estoppel, 38, 40, 44–47 proof of loss, 104–11 proper purposes rule: advice, 318–19 misuse of power, 309–10, 312–18 proprietary restitution, 193–94 claims arising after tracing, 197–98 conditional intention, 201–3 no contractual obligation for counter-performance, 203–4 no delivery of counter-performance contractually due, 204 defective intention, 198–200 failure of consideration and proprietary restitution, 204 Angrove case, 213–16 pre-Westdeutsche, 205–7 Westdeutsche Landesbank Girozentrale case, 207–13 further wrongs, 197–98 importance, 194–95 personal restitution compared, 200–1 triggers, 195–204

wrongs, 195–96 see also restitution; unjust enrichment public interest: compensation culture, 146 illegality doctrine, 241, 248 privilege, 413, 415, 417, 421 disclosure, 422 remedial discretion, 169–70, 172 nuisance cases, 161–63, 165, 166–67 planning permission cases, 165, 166–67 public law: misuse of power, 300–1 Rainy Sky SA v Kookmin Bank, 14–18 reciprocity principle: consideration in variation, 34–35 reliance rule, 253–55 Patel v Mirza, 251 Tinsley v Milligan, 249–51 remoteness: contract damages, 77–78, 80–83, 93, 136 default clauses, 84 penalties, 104 SAAMCO case, 122, 127 res judicata: bankruptcy, 400–1 categories, 401–3 cause of action estoppel, 399–400, 401–3, 404, 408, 409 discovery of fresh evidence exception, 408–9 extended doctrine/abuse of process, 399, 400, 403, 404 fraud as an exception, 406–7 in personam decisions, 400 in rem decisions, 400 issue estoppel, 399, 400, 401 merger in judgment, 399, 401 negligent misstatement, 266 privity of interest test, 404–6 Yat Tung Investment Co Ltd v Dao Heng Bank Ltd, 403–4 restitution: proprietary restitution, 193–94 claims arising after tracing, 197–98 conditional intention, 201–4 defective intention, 198–200 further wrongs, 197–98 importance, 194–95 triggers, 195–204 wrongs, 195–96 unjust enrichment: absence of basis, 181–82 failure of basis, 182–83 illegality, 184–90

434  Index necessity, 183 ultra vires receipt by public authorities, 184 Rome II Regulation, 373–74, 376, 392 rule of law, 1 election, 41 illegality, 186, 248–49 privilege, 417, 421, 424 sale of goods cases: breach of contract, 100 contract damages, 81 date rules, 79–80, 83 normal measures, 77–79 variation, 31–32 waiver, 39 specific performance, 40, 47–48, 52, 55, 58, 331 legitimate interest, 66–69, 71, 100 payment in lieu of notice, 63 strict liability: knowing receipt, 219–20, 221, 227, 228, 234 misuse of power, 309, 319 unjust enrichment claims, 212, 219–20, 221, 227, 228, 234 vicarious liability, 338 subrogation: unjust enrichment, 175–79 termination, 49–50 employment contracts, 50–51 general law of contract, 51–52 payment in lieu of notice, 49–50, 62–64, 68 tort, 115–16, 130 Calvert v William Hill Credit Ltd, 129–30 contract/tort confusion: Hughes-Holland v BPE, 116–28 Playboy Club London Ltd v Banca Nazionale del Lavoro SpA, 130–39 limited liability and tort, 342–43 personal injury: single-tier approach, 149 two-tier approach, 149–51 Scullion v Bank of Scotland plc (t/a Colleys), 129 see also personal injury

undisclosed principal, 134–35 agency, 265–72 undue influence: election, 41 transfer of property, 199 unjust enrichment: constructive trust, 179–81 law of obligations, as part of, 175 legal development: Lord Sumption’s contribution to, 190–91 legal history, 173–75 restitution grounded on unjust enrichment: absence of basis, 181–82 failure of basis, 182–83 illegality, 184–90 necessity, 183 ultra vires receipt by public authorities, 184 strict liability, 212, 219–20, 221, 227, 228, 234 subrogation, 175–79 variation, 25–26, 48 consideration in variation, 32–37 no oral variation clauses, 27–29, 32 restricting variation, 27–32 waiver distinguished, 37 vicarious liability: agency, 258, 276 company law, 338 waiver, 26–27, 48 acquiescence, 47–48 confusion and uncertainty, 37 election, 41–44 estoppel, 44–47 forbearance, 38–40 laches, 47–48 variation distinguished, 37 Westdeutsche Landesbank Girozentrale: constructive trust, 179 proprietary restitution, 193–94, 207–8 background, 205–7 conscience requirement, 211–13 House of Lords, 208–11