A L Barnes Ltd. v Time Talk (UK) Ltd.

This appeal from His Honour Judge Langan sitting in Leeds is a consequence of the downturn in the mobile telephone market. The appellants, Time Talk (UK) Ltd, who were the defendants to a claim for the balance of unpaid invoices, were and are part of the Time Group which is well known for the retail sale of computers and other electronic goods. In 2000 they became Time Group’s chosen vehicle for retailing mobile telephones and they needed to organise outlets for that purpose in various parts of the country; they engaged shop fitting contractors who agreed to set up and fit out, under the supervision of a project manager, shops or areas in larger stores where mobile telephones could be displayed and purchased. The respondents (“Barnes”) were one such contractor. Edwin Dyson & Sons Ltd were another. During a previous course of trading with Time Group, quotations were asked for and accepted. In relation to what became known as the Time Talk Project there was merely an agreement that work would be done at a particular site; since there was no agreement as to price, any claim by the contractor had to be for reasonable remuneration on a quantum meruit basis. The claims in the proceedings that have led to this appeal all related to the Time Talk Project and were, therefore, quantum meruit claims.

After some months, Time Talk decided that the venture had been a failure and employed a firm of Quantity Surveyors, Building Cost Services (“BCS”), to look into the costings and claims for payments made by three of the contractors engaged by Time Talk. They unearthed the fact that the contractors were charging Time Talk for sums which the project manager was claiming for his services, although the project manager was engaged and (BCS assumed correctly) paid by Time Talk. The judge held that this arrangement had been initiated by an agreement made in Leicester in 1997 between a Barnes director (Robert Gibson), a Time Talk director (John Colbert) and the project manager (Andrew Craft, trading as Craftwork). This agreement was that Barnes was to go on Time Talk’s list of contractors who would be invited to tender for work and, if work was done, Mr Craft was to raise an invoice against Barnes for his supposed services and Barnes would then incorporate the sum so invoiced in the invoices they raised against Time Talk. Those Barnes invoices would then be passed for payment by Mr Colbert and once Barnes had received payment, they would pass a sum of £2,500 or so to Mr Craft for services rendered; the Defendants further alleged that, to the extent that any such services might be rendered by Mr Craft, they might include selection of Barnes for future projects and a not too exacting scrutiny of the bills and invoices rendered by Barnes to Time Talk. The judge, however, made no finding to that effect.

The case for Time Talk was presented at trial by Mr Booth QC, first as a broad conspiracy between Barnes, Mr Colbert and Mr Craft to obtain the work and charge artificially high prices and secondly on the basis that Time Talk’s relationship with both their employee/director Mr Colbert and the project manager Mr Craft was a fiduciary one, that their actions in enabling Mr Craft to be paid twice for the same work constituted a breach of that fiduciary relationship and that Mr Gibson had dishonestly assisted in that breach of trust. This was supported by reference to Royal Brunei Airlines Sdn Bhd v Tan [1995] 2AC 378, 389 per Lord Nicholls. The judge rejected the conspiracy allegations but accepted the second contention and decided that Mr Gibson had, indeed, dishonestly assisted in Mr Craft’s and Mr Colbert’s breach of trust. He held that Mr Gibson realised that the arrangement with Mr Colbert was of a discreditable nature and in paragraphs 79-80 of his judgment said this:-

“79.

After much thought, and bearing in mind that a judge should never lightly make a finding of dishonesty, I have come to the conclusion that the defendant has established a failure to ask questions which an honest person in Mr Gibson’s position would have asked. As I have already said, what was proposed by Mr Colbert was a procedure of a kind of which no one (including Mr Gibson) had ever heard, and it was something for which there was no conceivable commercial explanation. Further, for the agent for one party to a contract to be dependent for payment of part of his fees on the other (even though that other is put in funds by the first) is potentially subversive of the agent’s duty of good faith to his principal and of his independence of the other party. To the limited extent to which it may be permissible to take subjective matters into consideration, it must be relevant that [Mr Gibson] had by late 1997 been working for the claimant for fourteen years, and was a long way beyond the novitiate of the construction industry. In my judgment, the situation called at the very least for the asking of the single question ‘That’s so unusual, I’ve never come across it before; what’s the point?’ I conclude that the failure on Mr Gibson’s part to ask the question was deliberate, and that the underlying reason was that he knew that no legitimate explanation would be produced.

80.

My conclusion on the first issue is therefore that Mr Gibson was dishonest within the test prescribed in Tan and that he knowingly assisted Messrs Colbert and Craft in breach of the duties of good faith which they owed to the defendant.”

Nothing in these paragraphs was challenged by Mr Glover on behalf of Barnes on the present appeal, save that he submitted that the word “suspected” was more appropriate than the work “knew” in the last sentence of paragraph 79. He agreed that that made no difference to the finding of dishonesty.

Mr Booth then submitted that, as a consequence of this dishonesty, Barnes could not recover any part of their claim. As I have said, this claim consisted of unpaid invoices for work done in the setting up and fitting out of the mobile telephone outlets and, since no price had ever been agreed for the work, was a quantum meruit claim for the reasonable cost of goods and services provided. It was submitted by Mr Booth that the claim must fail because the arrangement for Mr Craft to be doubly paid was an integral part of the contractual relationship between Barnes and Time Talk and the whole claim must fail because it was tainted with that illegality. Judge Langan decided that the quantum meruit claim for work actually done and accepted by Time Talk succeeded but that Barnes could not recover that part of their quantum meruit claim which included any project management fees element (£15,250); he also decided that Time Talk’s counterclaim to recover the project management fees previously paid by them (or any associated company) to Barnes should succeed in the sum of £87,003.72. (In the light of the judge’s findings that Mr Gibson was dishonest, there is now no challenge to the counterclaim.) The judge then assessed the quantum meruit claim in the sum of £216,968.11, deducted the counterclaim of £87,003.72 and entered judgment in Barnes’ favour for the balance.

Time Talk now appeal against the judge’s decision that Barnes were entitled to be paid for work actually done, repeating their argument that Mr Gibson’s dishonest assistance in Mr Craft’s and Mr Colbert’s breach of trust prevents recovery.

Mr Booth relies in particular on the decision of this court in Taylor v Bhail [1996] CLC 377 in which the court refused to enforce a corrupt bargain between a building contractor and a headmaster of a private school made after storms had damaged a wall in the school playground. The cost of the repairs was recoverable from the school’s insurers and the agreement made between the claimant contractor and the defendant headmaster was that the contractor would do the work for £13,480.00 plus VAT and pay the headmaster £1,000 out of the insurance proceeds as a return for obtaining the contract. The estimate delivered to the insurers included, with the connivance of both parties, the additional £1,000. The contractor did the work and sued on the contract for his remuneration. The headmaster claimed that the contract was a contract made to defraud a third party viz. the insurers and was, therefore, unenforceable. The contractor replied that the “bribe” of £1,000 could be severed from the agreement to undertake the work for £13,480 plus VAT and that he should be paid the balance since he had actually done the work. That appealed to Judge Marcus Edwards at Brentford County Court but his decision was reversed by the Court of Appeal. Sir Stephen Brown P said (pages 380-1):

“The important feature of this case is that the contract was, in substance, an agreement between the appellant and the respondent to defraud a third party, the insurance company. This, in my judgment is not capable of severance . . . . the message should be sent out loud and clear that, if parties conspire to defraud a insurance company, as in this case, they cannot expect the courts to assist them in implementing their agreement.”

Millett LJ said (pages 382-4):-

“. . . . illegality is a question of substance, not form. Whether the arrangements between the plaintiff and the defendant comprised a single contract or two separate contracts is , in my judgment, immaterial; they constituted a single, indivisible arrangement tainted by fraud, neither component of which was ancillary or subsidiary to the other, and neither of which is severable so as to leave the other enforceable.

It is important to bear in mind that the law refuses to enforce not only contracts which are in themselves illegal, but also contracts which are ex facie legal but which, to the knowledge of the parties, have an illegal purpose or are intended to be performed in an illegal manner . . . .it is time that a clear message was sent to the commercial community. Let it be clearly understood if a builder or a garage or other supplier agrees to provide a false estimate for work in order to enable its customer to obtain payment from his insurers to which he is not entitled, then it will be unable to recover payment from its customer and the customer will be unable to claim on his insurers even if he has paid for the work.”

There are a number of difficulties about Mr Booth’s reliance on this authority. These difficulties are:-

The reason why this court refused to enforce the contract in Taylor v Bhail was that it was a contract to commit a crime and no court will lend its aid to the enforcement of such a contract. If such a contract is intended to be alleged by the party who resists enforcement it is incumbent on that party to plead what crime was committed. Time Talk did, indeed, allege that Mr Gibson (and thus Barnes) were a party to a conspiracy to injure Time Talk as the judge put it “by cornering the work which was on offer and by charging artificially high prices”. Insofar as a person agrees with another to bribe the agent or employee of a third person and to induce that third person to pay the cost of that bribery, that would be a conspiracy to obtain by deception and thus a crime. I am not convinced that the matter was put like that to the judge but, whether it was or not, the judge dismissed the allegation of conspiracy and no other crime was alleged at trial.

Mr Booth tried to rescue the position in this court by asserting (A) that when Mr Colbert signed the cheque by which Time Talk paid Barnes’ invoices he was either stealing or obtaining by deception that part of the money which was in due course passed on by Barnes to Mr Craft and (B) that Mr Gibson, by virtue of his deliberate failure to ask what the point of the arrangement was, agreed to aid and abet (and thus committed) the crime of theft or obtaining by deception as the case might be. This is a case which was neither pleaded nor investigated at trial and cannot be raised for the first time on appeal. Mr Gibson (who gave evidence) was entitled to know what case he had to meet. If it could be said he agreed to participate in the commission of an offence, that would make him a conspirator, which the judge expressly negatived. It would, in any event, be highly debatable whether Mr Gibson’s conduct made Barnes a party to an agreement to commit a crime, which is what Mr Booth would have to show.

For these reasons Taylor v Bhail is not in point and if Mr Booth is to succeed it would have to be by an alternative argument.

This is a second category of contract which the court will refuse to enforce, see per Millett LJ in Taylor v Bhail at page 382. The famous case is Pearce v Brooks (1866) LR 1 Ex. 213 in which both parties to a contract for the hire-purchase of a brougham knew that the defendant prostitute was going to use the brougham in the course of plying her trade. The claimant could not sue for the hire. The contracts for supply and fitting out in the present case were not, however, contracts with an illegal purpose. Nothing in the judgment suggests that the contracts were made with the purpose of causing either Mr Colbert or Mr Craft to act in breach of their fiduciary duty towards Time Talk. It so happened that the mode of performing the contracts entailed such breach of fiduciary duty; but illegality in performance is not, in itself, enough to render the contract unenforceable unless the contract was made with the purpose of doing an unlawful act or an act contrary to public purpose, see St John Shipping Corporation v Joseph Rank Ltd [1957] 1QB 267. Mr Booth submitted that the judge should have found that the purpose of the arrangement was to ensure that Barnes were awarded contracts with Time Talk and that the contracts so awarded were thus contracts made for (or tainted by) that illegal purpose; he relied on answers given by Mr Gibson in re-examination. But the judge heard and took into account the totality of the evidence and I do not think we should make a finding to that effect which the judge did not make.

Moreover, even if the judge had found that Mr Gibson did intend to perform the contract in an illegal manner or had the purpose that it be so performed, it would still be a major question whether such intention or purpose was to be attributed to Barnes. That would be a question of mixed fact and law and was never addressed by the judge. It cannot be addressed by us for the first time. The question of Time Talk’s intention or purpose would be even more problematic since Mr Colbert’s conduct in relation to the secret agreement could hardly be imputed to them.

Mr Booth forcefully submitted that the arrangement about the project management fees was an integral part of the contracts between Barnes and Time Talk and was an illegal arrangement which infected the whole of the contracts. But, in my judgment, this submission does not justify the conclusion that the contracts are unenforceable. Unless, as Millett LJ put it, the contracts themselves had an illegal purpose or were intended to be performed in an illegal manner, there is no reason for them not to be enforceable. The private arrangement between Mr Craft and Mr Colbert to which Mr Gibson dishonestly lent his assistance, was not an integral (or, indeed, any) part of the contract made between their principals. That contract was for reasonable remuneration for work done.

It follows, therefore, that the claimants do not have to found their cause of action on an illegal or immoral act within the principle of Holman v Johnson (1775) 1 Cowp. 341, 343. Their claim is made pursuant to contracts for supply and fitting out of stores at particular places in return for reasonable remuneration. In the absence of agreement it is for the court to assess the remuneration, as the judge did. In that sense it is a contractual quantum meruit claim and there is nothing illegal about it. That does not, of course, mean that any part of Barnes’ claim which could be attributed to the project management fees could be recovered from Time Talk and the judge held expressly that they could form no part of the quantum meruit claim.

If the claim had been based, as were the contracts in the first phase of the fitting out, on an accepted quotation which included an agreement to pay project management fees, the position might well have been different. In that case it could well be said that the claimants were founding their cause of action on an agreement to do something illegal or immoral viz. that Time Talk would pay Barnes money which Barnes would then use to make improper payments (or bribes as I would prefer to call them) to Mr Craft. The question would then arise as to whether the illegal or immoral agreement was severable from the main agreement. Since, on the documents the court was shown, the accepted quotations itemised the project management fee separately, there would be a plausible argument for severability, but that is an argument which it is unnecessary to pursue.

One thing that Taylor v Bhail does make clear is that if a contract is illegal on its face or the purpose or intention of the parties is that it is to be illegally performed, a claimant cannot normally make an extra-contractual claim for a reasonable fee for services rendered, in order to avoid the unenforceability of the illegal contract. As Millett LJ put it (at page 383 B-C):-

“If . . . the . . . contract is void for illegality, then in my judgment the plaintiff cannot enforce it indirectly by claiming a quantum meruit rather than the contract price.”

The present case is, of course, different because here, as it happens, it is the contract that the claimants be paid a reasonable sum. If the contract were void, then the claim for a reasonable sum would fail in any event not because it would be an indirect enforcement of an illegal contract.

The judge appears to have distinguished Taylor v Bhail on the basis that:-

“the illegality of the original contract does not as a matter of law bar a quantum meruit claim when the parties are not equally culpable and the quantum meruit claim is advanced by the less culpable party”

For this proposition he cited Mohammed v Alaga & Co [2000] 1 WLR 1815 in which an agreement between a firm of solicitors and an interpreter that the firm would pay him a share of fees earned by them in respect of clients introduced by him to the firm was held to be void. This court, nevertheless, decided that it was arguable that the interpreter could recover a reasonable fee for work done. The interpreter was accordingly allowed to amend his particulars of claim to claim (1) reasonable remuneration for professional services rendered, (2) damages in the same amount for negligence (see page 1817 F) on the part of the firm of solicitors in failing to advise him that the agreement was contrary to law. History does not record whether the amended claim succeeded but in granting such leave the Court of Appeal did consider it important that the interpreter was not “equally culpable” (1825 F per Lord Bingham of Cornhill CJ) or was “significantly less culpable” (1827E per Robert Walker LJ).

I would prefer to base my decision in this case on the basis that the contracts in the present case were not unenforceable by reason of illegality. The claims to quantum meruit are not claims that arise because the contracts themselves were void but are contractual claims and recoverable as such. If the contracts were illegal there would be much to be said for the view that a claim can be made by the less culpable party to a reasonable fee for services rendered, as the Court of Appeal thought was arguable in Mohammed v Alaga & Co. There is also something to be said in favour of the view that it would amount to an indirect enforcement of the contract, as disapproved in Taylor v Bhaill where, however, the parties were equally culpable. On the facts of the present case it would, in any event, be excessively contorted to hold that the contractual claim for a quantum meruit was unenforceable for illegality of contract but that an extra-contractual claim for a quantum meruit should succeed because Barnes were less culpable than Time Talk.

There is, moreover, a particular difficulty when individuals act secretly or in fraud of their principals. In the present case, the agreement between Mr Craft and Mr Colbert (in respect of which Mr Gibson dishonestly asked no questions) was a breach of duty towards Time Talk. It is only if Mr Colbert’s acts are to be imputed to Time Talk that it makes sense to say that Barnes are the less culpable party; but such imputation is not self-evidently right. The judge considered that Mr Gibson was less culpable than Mr Colbert but the correct question must be whether Barnes were less culpable than Time Talk, a question that the judge does not directly address.

These considerations show that there is a certain artificiality in the arguments of illegality in the present case. It is only because Mr Booth is able to point to an agreement between Mr Craft and Mr Colbert to commit a breach of fiduciary duty in which Mr Gibson dishonestly assisted, and because, by virtue of that agreement, Time Talk became committed to pay sums to Barnes who would then pay them to Mr Craft, that an argument of illegality of contract can get off the ground. If this were a straightforward case of a bribe paid by Barnes (or Mr Gibson) out of their own pocket, Time Talk would only be entitled to refuse payment if they could rescind the contracts ab initio. As it is put in Lewin on Trusts (17th ed, 2000) at para. 20-35:-

“. . . it is well established that a principal who discovers that his agent has obtained or arranged to obtain a bribe or secret commission from the other party to the transaction is entitled . . . to elect to rescind the transaction ab initio or, if it is too late to rescind, to bring it to an end for the future.”

See also Bowstead and Reynolds, Agency (17th ed, 2001) para 8-219.

Mr Booth’s next difficulty is that all these matters have been concluded against him by this decision of the Court of Appeal. As already mentioned Edwin Dyson were another contractor. They instituted Part 24 proceedings for sums due to them for the reasonable cost of work done by them pursuant to their contracts. Judge McGonigal gave judgment for the amount of the invoices. In that case Time Talk or Time Group also alleged the existence of an agreement between a Dyson employee, Mr Craft and Mr Colbert of a kind similar to the agreement alleged in this case and they obtained from the Court of Appeal permission to defend the claim as far as it was attributable to sums paid to Mr Craft which Mr Booth for Time then described in terms as “bribes or secret commissions” (see para. 5). The question then arose as to the balance of the invoiced amount. Arden LJ said (para. 30):-

“The question then is whether Time can resist payment of the whole of the outstanding balance to Craft, even if that outstanding balance does not relate to Craft's management fees. There are two ways of putting this point so far as Time is concerned. First, there was an arrangement for the payment of secret commissions and this made the whole of the quantum meruit claim on which Dyson relies unenforceable. As I see it that argument is not correct. If Mr Colbert was involved, then his knowledge of secret commissions would not be imputed to Time and Dyson's claim therefore is not affected by that arrangement for secret commissions. The position is a fortiori if, which is yet to be determined, Mr Colbert was not involved”

Aldous and Sedley LJJ agreed.

Mr Booth sought to distinguish the Dyson case on the basis that the facts had not then been found and it was thus uncertain whether Dyson’s employee had been dishonest and whether the agreement had ante-dated the contracts for fitting out of Time Talk’s stores. But the facts of the case were assumed in favour of Time Talk in the Court of Appeal’s decision on the Part 24 application and the truth is that the earlier decision of this court must bind us to decide this appeal against Time Talk. Arden LJ only relied on the considerations set out in paragraphs 12 and 13 of this judgment and it may be that the appeal before us has been more fully argued in the light of the facts as now found. It is only in deference to these considerations that I have thought it right to deal with the arguments more fully than Arden LJ and her brethren did.

I would, therefore, dismiss this appeal.

Barnes have a cross-appeal on costs, in respect of which they, unusually, obtained permission to appeal. The judge’s order was a surprising one; although Barnes obtained judgment on the quantum meruit claim in the sum of £216,968.11 (against which Time Talk’s successful counterclaim for their loss arising from Mr Gibson’s dishonest assistance in Mr Colbert’s and Mr Craft’s fiduciary duty in the sum of £87,003.72 had to be offset) and although Time Talk made a Part 36 offer (only eleven days before trial) of less than the sum recovered, the judge ordered that Barnes should pay 50% of the general costs of Time Talk. The question is whether this was within the realm of the judge’s discretion on costs or whether it betrayed an error of principle.

It seems that Mr Gibson’s dishonesty did not play a critical part in the judge’s reasoning. It might have been a reason why, if costs were to be awarded against the claimants, the basis of such award should be indemnity rather than the standard basis. The judge declined an invitation to make such an order saying that, while the conduct of Mr Gibson was to be properly stigmatised as dishonest in law, “it is very much at what might be called the least serious end of the spectrum”.

The judge reached the conclusion he did in two stages. He held first that no order for costs should be made in respect of the parties’ costs of experts and the associated costs of instructing and attending upon them. These costs were substantially the costs of proving and challenging the claimants quantum meruit claim and are very far from an insignificant part of the total costs although, because the experts worked hard to eliminate disputes and agree what could reasonably be agreed, the time taken on expert evidence was limited and substantially less than the time taken at trial in showing that Mr Gibson was dishonest. The reason given by the judge for this conclusion was that the parties chose to make their contracts “in a manner which was highly unorthodox”. The lack of orthodoxy was that no agreement was made about the price of what was extensive work or even about the basis on which the price might be fixed, so that once relations broke down a dispute was “inevitable”. He added pithily:-

“It is said on behalf of the claimant, and rightly, that the defendant rushed into this project leaping on board a ship as it was about to leave port. That may be so but the main contractors were not obliged to become part of the crew, they chose to do so.”

Having thus segregated a large proportion of the costs out of the picture, the judge reminded himself of the general rule set out in CPR 44.3(2) that it is the unsuccessful party who should pay the costs of the successful party (although the court can, of course, make a different order). He then said that the great bulk of court time was taken up with the question whether Mr Gibson was dishonest. That was not only an issue on which Time Talk succeeded but it showed very late disclosure on Barnes’ part. This was a reference to the fact that the circumstances relating to the arrangement in which Mr Gibson had dishonestly assisted were not disclosed in any of Mr Gibson’s four witness statements but only emerged in the course of his oral evidence. This “late disclosure” was one of the main reasons why the judge concluded that Mr Gibson realised that whatever was arranged “was of a discreditable nature”. The judge then concluded that because the predominant amount of court time was spent on the dishonesty issue which Barnes lost, Time Talk should be seen as the successful party and were therefore able to recover one half of their general costs.

It does seem to me that the judge has, with the greatest respect, fallen into an error of principle. In what may generally be called commercial litigation (and this case, like Dyson’s was proceeding in the Leeds Mercantile Court), the disputes are ultimately about money. In deciding who is the successful party the most important thing is to identify the party who is to pay money to the other. That is the surest indication of success and failure. It is not irrelevant that it was Time Talk who felt the need to appeal the judge’s judgment. It is not normally right to segregate a large element of the costs and thereafter to decide who the successful party is. It needs to be decided at the outset.

I do not, moreover, consider that the judge was right to segregate the costs associated with instructing experts and thus most of the costs of proving the claim. Litigants are entitled to make contracts and leave the fee payable for the cost of services rendered to be fixed by the court. It is not a justifiable exercise of discretion to castigate this as “highly unorthodox” and refuse to make any order as to costs. The judge’s task was, of course, made more difficult by reason of the fact that the parties had not agreed a price for the claimant’s services but difficulty for the judge is not, of itself, a reason for making no order on the costs. Nor is the fact, if it be true, that once relations break down when no price is fixed, a dispute is inevitable. It is, after all, a judge’s job to resolve disputes whether they are inevitable or not.

For these two reasons the exercise of discretion by the judge was vitiated by an error of principle. If he had asked himself who was the successful party, before segregation of the effective costs of proving the quantum meruit claim, he would in my judgment have had to answer that it was the claimants who recovered more than the defendants had ever offered and thus it must be the claimants who were the successful party. The question would then be what proportion, if any, of their costs should they recover. That question is now for this court. The judge was, of course, correct to be influenced by the fact that most of the time spent in court was spent on an issue on which the claimants failed and that that issue was whether one of the claimants’ employees had acted dishonestly, albeit at “the least serious end of the spectrum”. Bearing that matter in mind, I would hold that the claimants success should be reflected by the recovery of a small proportion of their costs. I would fix that proportion at 25% and would accordingly allow the cross-appeal to that extent.

I agree.

I also agree.