Interleasing (UK) Ltd v Morris

LORD JUSTICE PETER GIBSON: The defendant and Part 20 claimant, Nicholas Morris, appeals with the permission of this court (Sir Martin Nourse) from the order of Lightman J on 30th^_ May 2002 deciding adversely to Mr Morris various points arising on interlocutory applications made by Mr Morris and the claimant, Interleasing (UK) Ltd, respectively.

By an Agreement dated 8th July 2000 Mr Morris and his wife ("the Sellers") agreed to sell to the claimant all the issued shares in Concept Automotive Services Ltd ("the Company"). The consideration for the sale was (1) £39,773,505 payable immediately, and (2) as much of a retention sum of £4,500,000 as should be released to the Sellers pursuant to Schedule 9 to the Agreement. Completion was to take place that day. Mr Morris gave the claimant a number of warranties. They included, in paragraph 6.2 of Schedule 5 to the Agreement, a warranty that the net asset value ("the NAV") of the Company at 31st May 2000 was not less than £8,815,000. There were some qualifications but they are not material. By paragraph 1 of Schedule 6 to the Agreement the claimant had to give written notice containing reasonable details of the specific circumstances giving rise to a warranty claim. That had to be done by 8th January 2002. Paragraph 3.1 of that Schedule provided that a warranty claim should not be enforceable against Mr Morris and should be deemed to have been withdrawn unless any legal proceedings in connection with it were commenced within six months after written notice of it was first served on Mr Morris. By Schedule 8, paragraph 10, provision was made for a reference to an independent firm of experts in relation to matters specified in that paragraph.

Schedule 9 contained details of the arrangements relating to the retention sum. That sum was to be retained in an interest bearing deposit account in the names of the solicitors for the Sellers and the claimants respectively. It was to meet claims by the claimant for breach of warranty and could only be released in accordance with the terms of the Schedule. In the Schedule the claimant is called "the Buyer". In paragraph 1 of that Schedule the terms "Credit Balance", being the credit balance on the deposit account, and "Payment Date", being in the event 30th June 2001, were defined. Other relevant paragraphs of the Schedule were the following:

On 28th June 2001 the solicitors to the claimant by letter notified Mr Morris of a NAV warranty claim. They referred to paragraph 6.2 of Schedule 5 and to itemised summaries of total fixed assets of the Company at 31st May and 30th^_ June 2000 as showing that those assets included goodwill figures of £3,022,578 and £3,162,261 respectively for the business ("the N&M Business") which had previously been carried on by Mr Morris as sole trader but had been transferred to the Company on 28th April 2000. They also referred to goodwill for the N&M Business of £3,162,261 as being written off by the company's auditors because the N&M Business was not profitable and had no prospect of becoming profitable. They referred to paragraph 10.4 of Schedule 9 and said that, in compliance with that provision, they enclosed a written Opinion of counsel, Sandra Bristoll, as expressing the opinion that the first two criteria of paragraph 10.4 had been fulfilled and as estimating the quantum of the claim as £3,269,000. They said that their estimate of costs in regard to the claim was £100,000 and they expressed the view that the amount to be released on the Payment Date should be reduced by £3,369,000.

Counsel was of more than 10 years call. She expressed herself in the Opinion in this form:

In paragraphs 7 and 8 she dealt with the construction of the contract. In paragraph 9 she said:

On 20th^_ December 2001 the claimant commenced proceedings against Mr Morris. The claimant claimed damages for breach of warranty. In paragraph 8 of the particulars of claim it was pleaded that neither a warranty called "the assets warranty" nor the NAV warranty was true, and then particulars are given of that averment:

It will be noted that the figure given for goodwill for the N&M Business at 31st May 2000, and not the higher figure at 30th^_ June 2000 which had been relied on by counsel, was the figure used by the claimant in its pleaded case.

Mr Morris in his particulars of defence denied the claim and he counterclaimed for the balance of the retention sum. It was averred in paragraph 27 as amended (the amendment being underlined):

It was further averred that the Opinion did not establish a good claim, as it was based on apparently erroneous and incomplete instructions and did not fulfil the requirements of paragraph 10.4. Nine paragraphs of particulars are then given, most of which were repeated in the arguments presented to the judge and also repeated in this court. Although there is reference to the instructions provided to counsel, the claimant has not disclosed those instructions, for which it claimed privilege. Mr Morris averred that accordingly the claimant had no good claim, alternatively the Opinion was obtained in breach of the pleaded implied term. He therefore sought to be paid the £3,369,000 which had been retained, plus interest.

Four applications were heard by the judge in April 2002: (1) Mr Morris applied on 22nd March 2002 under CPR 31.12 for specific disclosure of the instructions to counsel and/or under CPR 31.19 for an order that the claimants' claim that it was entitled to withhold inspection of those instructions on the ground of privilege be rejected because privilege had been waived by the provision of the Opinion.

The judge in his judgment dealt first with the status of the Opinion. He referred in paragraphs 13 and 14 of the judgment to the rival arguments of the parties. For the claimant it had been argued that the role of the Opinion was as a certificate certifying the existence of a good claim and that, so long as the conditions specified in paragraph 10.4 were complied with, the consequence was that the amount estimated by counsel as the quantum of the warranty claim, plus a reasonable estimate of costs, would be retained until trial. It was further argued that it was not open to Mr Morris or the court to investigate the cogency of the reasoning or the factual or legal basis for the view expressed by counsel in her opinion. For Mr Morris it was contended that by reason of the alleged implied term, or on the true construction of Schedule 9, any opinion of counsel had to be given on the basis of the true facts and proper instructions. It was also contended that Mr Morris was entitled to disclosure of the instructions.

The judge then said this in paragraphs 15 and 16 of judgment:

The judge accordingly struck out the pleaded implied term and the other averments in the counterclaim which related to that implied term. He also refused to order disclosure of the instructions. He indicated that, if he had accepted the implication of the term, as argued by Mr Morris, he would have held that there had been a waiver of privilege in respect of the Opinion and that it would not be fair to allow such waiver without the waiver of privilege in respect of the instructions. The judge then dealt with four challenges by Mr Morris to the sufficiency of the Opinion, all of which the judge rejected.

On this appeal Mr Richard Morgan for Mr Morris submits that the judge erred on six grounds. Those grounds of appeal are in an order different from that in which the points are dealt with by the judge in his judgment. Miss Catherine Otton-Goulden QC, appearing with Ms Lester for the claimant, supports the judge's judgment on all those six points. She has also sought by way of a Respondent's Notice to support the judge's conclusion in relation to the application for disclosure of the instructions on the further ground that there was no waiver of privilege in the instructions.

I find it convenient to deal with the grounds in the same order as the judge deals with the points which are thereby raised. I will start with the sixth ground, relating to the alleged implied term, and deal with that before the fifth ground, relating to the disclosure of the instructions. As the judge said, if Mr Morris is right on the implied term, then that will bear on whether the instructions should be disclosed. I will then deal with grounds one to four, relating to whether the Opinion complied with the requirements of paragraph 10.4.

Mr Morgan submits that the judge was wrong to strike out the implied term. He describes the judge's decision as startling. He says that it could not have been the intention of the parties to the Agreement that the claimant could properly rely on an Opinion which is based on an allegation which was not in fact true or on instructions which sought to limit counsel's consideration to confirming a line of reasoning set out in their assertions in the instructions. If Mr Morgan is right, Mr Morris is given by the Agreement full scope to challenge the Opinion by reference to those of the contents of the instructions with which he disagrees. As the judge recognised, the correctness of such submissions turns on what can be seen to be the function of the Opinion.

I agree with the judge that the Opinion was intended to be a form of certificate so as to give Mr Morris some protection in relation to claims which the claimant chose to assert. Counsel had to be reasonably experienced, hence the requirement that counsel be of more than ten years call. Counsel had to express a view as to the prospects of success for the claim and as to the quantum of that claim. I, of course, accept that such counsel might give wrong advice on incorrect instructions, but I find it impossible to believe that the parties intended at the stage when the Opinion was given, that is to say almost certainly before proceedings were commenced and before trial and before Mr Morris's response to the claim was known, that Mr Morris should be able to challenge the facts presented to counsel or the propriety of the instructions. The validity of the claim vouched for by counsel is a matter which will be determined at the trial and the provision of the Agreement requiring that proceedings be commenced within six months of the notification of the claim is an indication that the parties expected that resolution of the dispute would not be long delayed. If Mr Morris succeeded in resisting the claim and was able to call for the retention, then he would have the benefit of the interest payable on the amount retained in the deposit account. We are told by Mr Morgan that Mr Morris would like to invest the money at a higher rate, but he is stuck with the contractual terms as to the deposit account.

It is well established that no term is to be implied into an agreement unless it is necessary to do so. It is suggested that it is so necessary by reason of the use of language in paragraph 10.4, alternatively in order to give business efficacy to the Agreement. In my judgment, the test of necessity is not satisfied. Indeed, it seems to me plain that, so far from being necessary, the implied term would run counter to the efficacy of the provisions of Schedule 9, providing, as they do, for the Opinion to be given at a time when facts which may be disputed and contentions which may be resisted have not been determined but which it was contemplated would be determined by timely proceedings on the claim. I can see no basis for implying the suggested term into the Agreement. I do not accept that on the true construction of the words used in paragraph 10.4 any opinion had to be given on the suggested basis. Such a basis would have been likely to be productive of extensive argument which would not serve any useful purpose.

It follows that I accept the judge's view on the implied term and I would reject the first ground of appeal.

Mr Morgan repeated before us the argument that the instructions should be disclosed. He said that the Opinion and the instructions were, in effect, a single document or transaction and that the instructions were necessary for a fair reading and understanding of the Opinion. He pointed to the fact that, as the judge said, the Opinion made constant reference to the contents of the instructions. We have had our attention drawn to the remarks of Auld LJ, with whom Popplewell J agreed, in the Divisional Court in The Queen v Secretary of State for Transport ex parte Factortame [1997] 9 ALR 591 at pages 598 to 599. There Auld LJ cited what Mustill J had said in Nea Karteria Maritime Co. Ltd v Atlantic & Great Lakes Steamship Corporation (No.2) [1981] Comm.LR 138 and 139. Auld LJ said at page 599:

In Phipson on Evidence, 15th^_ Edition, at paragraph 22, the editors refer to that passage and comment:

As Miss Otton-Goulden submitted in her skeleton argument, the important question is to ask in respect of what issue the Opinion was supplied to Mr Morris. I agree with her that the issue was simply whether there had been compliance with the requirements of paragraph 10.4. The instructions do not seem to me to be relevant to that issue. The mere fact that counsel refers to the instructions does not make them disclosable, because counsel had made plain in the Opinion what were her instructions. I can, of course, conceive of cases where the instructions may be relevant: if the Opinion, for example, simply incorporates the facts stated in the instructions without stating what they were. But this Opinion is not like that. I agree with the judge that the instructions in the present case are not a relevant document. It is not, therefore, necessary to decide the question raised by the Respondent's Notice and we heard no argument on it.

Paragraph 10.4 requires counsel to state in the Opinion that the claim is bona fide. Two questions are raised by Mr Morgan's challenge to the satisfaction of that requirement: (1) Is an express statement to that effect required? (2) If not, was there an implicit statement in the Opinion that the claim was bona fide?

The judge in paragraph 23 of his judgment said that he had been greatly troubled by the absence of an explicit statement. In paragraph 24 the judge said that there was nothing in the language of the Agreement which required an express statement. What was required was that the satisfaction of counsel on that score was to be found in the terms of the Opinion. He added that whilst it was obviously desirable that the satisfaction was stated expressly, that was not essential if the implication was clear and unequivocal.

The judge continued:

Mr Morgan says that an express statement is indeed necessary under the terms of paragraph 10.4. He further argues that the judge wrongly imposed on that paragraph a construction contrary to the express wording of the paragraph which requires such statement if counsel is so satisfied. He contends that the judge's claim was tantamount to a finding that counsel was entitled to depart from the Agreement and that the judge failed to have any proper regard to two decisions.

One was Jones v Sherwood Services Ltd [1992] 1 WLR 277 at page 287 A, where Dillon LJ said this:

The other decision was Lightman J's own decision in British Shipbuilders v VSEL Consortium Plc [1997] 1 Lloyd's Law Reports 106 at page 109, where the judge said:

Further, Mr Morgan said that the analysis applied by the judge ran directly contrary to the ratio of the decision of this court in Veba Oil v Petrotrade [2002] 1 All ER 703.

I am unable to accept these submissions. A statement may be express or implicit. I see nothing in the Agreement which indicates that an express statement is required, though, of course, it avoids all questions if in fact there is such a statement. It is to my mind a question of construction of the Opinion whether counsel has given a statement to the required effect. It is evident that counsel considered that she was dealing with the question whether or not the claim was bona fide. She says in paragraph 1 of her Opinion that she had to deal with it. She considers the relevant warranty and the matters which led to the conclusion that there had been a breach in that the goodwill for the N&M Business was worth nothing at the date of the Agreement. She refers in paragraph 22 of her Opinion to the provisions of clause 7.6 of the Agreement as to how any warranty claim should be satisfied. She refers to clause 6.6, which provides an express illustration of how a claim may not be bona fide, that is to say where the claimant makes investigation into the affairs of the Company before the Agreement is concluded and by its findings then is actually aware of a fact or matter which could give rise to a warranty claim. But counsel records her instructions that the claimant, whilst aware of the goodwill figure, did not believe that it would be written off by the auditors, as it was only a few months after the date of the Agreement.

Against that background the statement that there is no reason on the information before counsel to question the bona fides of the claimant's claim is, in my opinion, a statement that the claim was bona fide, particularly when one bears in mind that counsel found that the claim had a reasonable prospect of success. It is hard to imagine how a conclusion that there was a reasonable prospect of success could be consistent with a conclusion that the claim was not made bona fide. It may be, as was suggested by Jacob J in the course of the argument, that the required statement that the claim was bona fide and had a reasonable chance of success should be looked at as a composite phrase, each of the two elements in a sense overlapping the other.

As for the three cases to which Mr Morgan referred, none, with respect to him, seems to me to assist on this point. The judge expressly had regard to what he himself said in his own judgment in the British Shipbuilders case. That case dealt with a slightly different question, that is to say whether the expert had answered the question agreed by the parties as the question to be decided by the expert. The present case relates to the question whether the contents of the Opinion fulfilled the requirements laid down in the Agreement. There is no condition in those requirements that there should be an express statement that the claim was bona fide. Nothing in the present case is akin to the substantive mistakes to which Dillon LJ in Jones v Sherwood referred. The Veba Oil case is also, in my view, clearly distinguishable. In that case the contract provided for the quantity and quality of a cargo to be determined by an independent inspector who was required to use a particular test method, D1298. The inspector used a different test method, D4052. This court held that the specified test method, and no other, must be used. In the present case, in my judgment, no test different from that applied by counsel in the Opinion was specified.

I would therefore reject this ground of appeal.

It will be recalled that counsel said in paragraph 6(b) and (d) and paragraph 24(b) and (d) of her Opinion that giving the words "reasonable chance of success" their ordinary meaning as "more than fanciful and capable of reasonable assessment", the claim appeared to her to have a reasonable chance of success.

The judge said on this point at paragraph 19:

Mr Morgan submits that (1) the judge did not consider whether counsel's test was the test required; (2) alternatively, the judge in accepting counsel's test reached a conclusion not open to him; (3) the judge in ascribing to counsel the test of a real prospect of success was not using counsel's language and compounded the error.

I have no hesitation in rejecting these submissions. In my judgment the judge did consider whether counsel's test came within the contractual requirement. He held that the Agreement left it to counsel to use her judgment whether the claim had a reasonable chance of success, and that a real prospect of success (which is what the judge considered a more than fanciful chance of success amounted to) fairly answered the description in paragraph 10.4. I agree with the judge that counsel's test was one open to her. I further agree that the meaning pleaded by Mr Morris, that it is a chance more likely than not to succeed, cannot be right. Indeed, Mr Morgan very fairly acknowledged that that might put it too high. He suggested that the test would be whether a reasonable person would proceed with the claim. I do not see that as substantively differing from the test which counsel applied. In my judgment this ground of appeal also fails.

The judge dealt with an argument similar to that now advanced to us in paragraph 20 of his judgment, saying this:

Mr Morgan submits that the contractual requirement that counsel should provide an Opinion carries with it the implication that counsel has personally investigated, and reviewed and considered the facts and expressed a view on those facts. He says that it is not enough for counsel to provide an Opinion reciting core assertions taken from the instructions. He argues that it is significant that the Agreement does not mention a certificate. He submits that the judge was wrong to substitute the test which he did in paragraph 20 for what is contained in paragraph 10.4.

I am not persuaded by these submissions. I see no great significance in a requirement that there should be an Opinion rather than a certificate. When counsel are asked to give their views in writing they do so in the form of Opinions or Advices. It seems to me unrealistic to suggest that counsel in supplying an Opinion cannot accept what his solicitors have stated in the instructions to counsel to be the facts, provided that there is no glaring error. It will be appreciated that the subject matter of the Opinion related to matters which are peculiarly within the province of accountants, and the expert advice which was received by the solicitors instructing counsel for the claimant could properly be accepted by counsel. Indeed, it seems to me quite unrealistic to expect counsel to delve into such matters.

But, in any event, it is obvious from the Opinion that counsel personally considered the facts contained in the instructions and in the documents, and she expressed her view on them. True it is that she said from time to time that this was the information presently before her, and it is obvious that she expected that there may be further information revealed at a subsequent time; but I do not see that her expression of opinion in the Opinion fell short of what was required of her in order to produce an Opinion complying with the requirements of paragraph 10.4.

Mr Morgan contended before us, as he did before the judge, that the claim the subject of counsel's Opinion was fundamentally different from that contained in the claimant's particulars of claim. In the Opinion counsel had considered that the claimant had a good claim in respect of the NAV warranty for £3,269,000, being the goodwill written off as the N&M Business was not profitable. The pleaded claim was for £3,022,578, and it was pleaded that the preliminary accounts for the N&M Business showed that it made a profit of only £18,000 in the eleven months to 30th April 2000. Mr Morgan submits that counsel did not vouch the claim now made.

The judge pointed out in paragraph 26 of his judgment that, in view of the fact that up to six months could elapse between the notification by the claimant of the claim and the issue of proceedings, the claimant's knowledge of the facts could change. He said that some allowance for changes must have been intended by the parties without forfeiting the security of the retention. He continued in paragraph 27:

He expressed the view in paragraph 28 that the changes in the particulars of claim were very limited refinements on the facts set out in the Opinion and that the cause of action remained the same. I agree with the judge.

The basis of the claim vouched in the Opinion and of that in the particulars of claim is that the goodwill of the N&M Business should not have been included in the NAV warranted by Mr Morris. In the Opinion it was sought to show that the goodwill of the N&M Business at the date of the sale was valueless by reference to the writing down of the goodwill in December 2000. That does not, of course, preclude the claimant seeking to establish that by any other means. Indeed, on the issue whether the goodwill was valueless at the relevant date the profitability of the Company over a period will inevitably be considered. I do not see that the pleaded claim is substantially different from the claim vouched by counsel. True it is that there is no mention in the pleaded claim that the goodwill had been written off in December and that the only matter relied on as showing that the goodwill had no value is the modest amount of profits that were made in the eleven months up to April 2000. But in substance the claim vouched in the Opinion and the claim asserted in the pleadings are identical, that is to say that it is an NAV warranty claim arising out of the fact, as is alleged, that the goodwill of the N&M Business has no value and should not have been included in the warranted NAV.

For these reasons therefore, despite Mr Morgan's brave attempt to get this appeal on its feet, I would dismiss this appeal.

LORD JUSTICE KEENE: I agree.

MR JUSTICE JACOB: I also agree. I would only add this. The judge to some extent criticised the Opinion of counsel. He said this:

I, for my part, do not see any real material on which the judge based that. Counsel, so far as I can see, based her Opinion on the act of the accountants in writing off the goodwill, which had been paid for only five months earlier. That lies at the core of this case, and I cannot see why her Opinion is subject to any gripe.