Midco Holdings Ltd & Anor v Piper

J U D G M E N T

1. LORD JUSTICE PETER GIBSON: I will ask Lord Justice Tuckey to give the first judgment.

2. LORD JUSTICE TUCKEY: This is an appeal with the permission of Longmore LJ from a judgment of the late His Honour Judge Poulton given in the Canterbury County Court in which he awarded the first claimant, Midco Holdings Ltd, damages for deceit against the defendant Mr Piper. There is no appeal against the judge's finding of liability or his assessment of the losses which resulted from the fraud. The defendant however contends that the judge should have set off against those losses, benefits which Midco received as a result of its association with him.

3. Midco is a Jersey company beneficially owned by the second claimant, Mr Middleton, and his wife. Mr Middleton lives most of the time in Bahrain where he is involved in a successful publishing business. The defendant has a background in the building trade. The two men met through their children.

4. In early 1995 the defendant persuaded Mr Middleton to participate in a joint venture to purchase Jesse Holness, an estate agency with offices in several Kent towns. At the end of January 1995 Jesse Holdings Ltd ("JHL"), a company owned by the defendant and his wife, purchased the estate agency, after which Midco acquired a 50% interest in JHL for £44,500 by means of a rights issue. Midco also provided working capital for JHL of £29,500. The loan was interest free.

5. The judge found that Midco was induced to acquire its interest in and provide working capital for JHL by the defendant's fraudulent misrepresentations that the purchase price of the agency was £74,000 and that he was to and did pay £30,000 of this price in cash and £15,000 for legal and setting up costs. In fact the agency cost £44,000 and the defendant contributed nothing towards its purchase and paid little if any of the costs.

6. The defendant maintained his deceit for the following 18 months during which time Midco made further loans to JHL totalling £109,345. The defendant was employed by JHL at a salary of £25,000 a year but its business was never profitable. It went into liquidation in November 1997. None of Midco's loans were repaid and its shares were valueless.

7. The judge awarded Midco the entirety of its investment in and loans to JHL, a total of £183,345. He also gave judgment for repayment of loans totalling £34,300 which Mr Middleton had made to the defendant personally.

8. So much is clear from the judgment. The judge did not however make any detailed findings of fact relating to the defendant's contention that he was entitled to credit for benefits received by Midco. The facts however do not appear to be substantially in dispute.

9. In his witness statement Mr Middleton explains that he was interested in Jesse Holness because its business would not only be estate agency, but also property acquisition and development (paragraph 10). In fact properties for development were not acquired through JHL but through an English company, Woodbarn Properties Ltd. The name of this company was an amalgam of the names of Mr Middleton's and the defendant's houses in England. The defendant and his wife were its directors. In his witness statement Mr Middleton also says:

"I ought to explain that, as part of the business partnership between Mr Piper and myself, it was agreed that we would buy properties and develop them for profit. Woodbarn Properties Ltd ('Woodbarn') is a company incorporated in England on 20th September 1995 which is 100% owned by a company called Keron Overseas Limited, a company incorporated in Jersey on 29 September 1995, which in turn is wholly owned by Midco." (paragraph 39)

Keron was an amalgam of the defendant's and Mr Middleton's first names.

10. Two properties were purchased by Woodbarn under the arrangement referred to by Mr Middleton. The first, a property in Hawley Square, Margate was purchased in October 1995 for £45,000 with money loaned by Midco through Keron. It was sold in 1997 at a net loss of £9,000 and so Midco derived no benefit from this transaction and it is not necessary to consider it further.

11. The other property was the disused Princess Mary hospital at Cliftonville near Margate. This property was purchased with a view to redevelopment for £191,500 in February 1996. Again the purchase price came from Midco.

12. On 10th April 1996 Mr Middleton and the defendant signed a letter of understanding. It recorded the loans which Midco had made to Keron and JHL and the personal loans to the defendant and said:

"It is agreed that once all the above loans together with outstanding interest have been repaid to MIDCO a transfer of 50 per cent of the shares in Keron Overseas Limited will be made to Keith Piper, the shares being given on a gratis basis."

It appears from the statements of Mr Middleton and the defendant and earlier documents that this had always been the intention of the parties. Mr Middleton also agreed at trial that he anticipated that the assets of Keron/Woodbarn could in due course be realised to repay the loans and so qualify the defendant for his 50% shareholding.

13. Relations between the two men deteriorated soon after 10th April although Midco's last loan to JHL of £50,000 was made the following month. By July however the parties were looking at ways to disengage. Various proposals were considered but nothing was agreed. I do not think anything of relevance to this appeal can be derived from these negotiations. In September the defendant and his wife resigned as directors of Woodbarn.

14. For some time Mr Middleton had been pressing for accounts of JHL. The first accounts for the year ending 31st October 1995 were not signed off until 6th December 1996. Mr Middleton's evidence, which the judge accepted, was that he first knew for certain that a fraud had been committed when he saw these accounts because they did not show any payment by the defendant of £30,000.

15. The trial lasted three days and was mainly concerned with issues which do not arise on this appeal. The defendant, however, contended that the hospital project had been profitable and that Midco should give credit for this profit against its losses. The judge said:

"The basis of this argument is that there was in fact a partnership between the parties and the partnership gains exceeded the losses. Therefore, it is said, the claimants have suffered no loss.

...

In fact there was no partnership. The most that can be said is that if the claimant had never met the defendant he might not have heard of the hospital site and Midco or Woodbarn would not have bought it and Woodbarn would not have developed it. The 'but for' test is, therefore, on that basis satisfied. This argument has a spurious attraction; but I am satisfied that it is spurious."

A little later he continued:

"Whatever may have been the consequence of the introduction of the Princess Mary site, that is a separate matter from the Jesse Holness transaction and it is not a matter in respect of which any profit that may have been made by Woodbarn, Midco or by anyone has to be brought into account. The transaction in which these parties were engaged and with which this case is concerned is the transaction as to the acquisition of Jesse Holness."

16. Having rejected the defendant's argument in this way the judge did not have to decide whether the hospital project was in fact profitable. There was a fair amount of evidence before him about this. First there was a report dated 13th January from an independent surveyor who visited the hospital site with a view to putting it up for auction. He advised that its true market value could be "as much as £150,000 - if not a little more". This compares with the purchase price of £191,500 to which I have referred. The property was not however sold at auction. Instead it was developed to provide 29 houses and self-contained flats between 1997 and 2000. The development was carried out by Woodbarn with monies advanced by Midco. The completed development was then sold by Woodbarn to Midco at its notional open market value as at 1st December 1996. This value was determined on 22nd January 1998 by an independent valuer at £1,198,400. The evidence of the Midco companies' auditor was that the development, including the cost of purchasing the site to which I have referred, was £1.48 million exclusive of any interest charged which would have added about £200,000 to the cost. From these figures it is self-evident that at December 1996 values Woodbarn/Midco had made a loss on the project.

17. At trial the defendant disputed the site valuation which he wrongly believed only related to part of the site. He also put forward his own 1996 valuation of the completed development which did not differ greatly from Midco's valuation, although his own estimate of the cost of the development was substantially less than the actual cost. The development is apparently still owned by Midco. At trial the defendant produced a valuation which showed that it was worth £2,142,000 in 2002.

18. There is no issue about the principles which apply to the assessment of damages for deceit. The leading case is now Smith New Court Securities v Citibank [1997] AC 254. At pages 266 to 267 Lord Browne-Wilkinson said:

"In sum, in my judgment the following principles apply in assessing the damages payable where the plaintiff has been induced by a fraudulent misrepresentation to buy property: (1) the defendant is bound to make reparation for all the damage directly flowing from the transaction; (2) although such damage need not have been foreseeable, it must have been directly caused by the transaction; (3) in assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction; (4) as a general rule, the benefits received by him include the market value of the property acquired as at the date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered; (5) although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property. (6) In addition, the plaintiff is entitled to recover consequential losses caused by the transaction; (7) the plaintiff must take all reasonable steps to mitigate his loss once he has discovered the fraud."

19. The first question on this appeal is to identify the transaction with which the court is concerned. Is it simply the investment and involvement in the estate agency, as the judge held, or the whole business venture including property development, as the defendant contends?

20. Mr Tamlin for Midco submits that the judge was right. The property transactions were separate. They took place after Midco had invested in the estate agency and the properties were wholly owned by Midco through Woodbarn. Whilst there may have been an intention to acquire properties from the outset, there was no agreement as to the terms upon which this would happen. On the other hand Mr Middleton's generous offer to give the defendant 50% of Keron once the loans were repaid was induced by the fraud and should be disregarded. Looked at as a matter of causation the fraudulent misrepresentation did not induce the property transactions. This court should not disturb the judge's finding of fact about this. The most that can be said, as the judge recognised, was that the defendant gave Woodbarn/Midco the opportunity to acquire the development properties but he was not the cause of it doing so. The cause was Midco's decision to take up the opportunity and invest.

21. I think there is considerable force in these submissions, not least because, if the judge was wrong, it follows that the defendant would have been liable for Midco's losses on the property developments. No such losses were in fact claimed, but instinctively I had reservations about whether such a claim would have succeeded. However, on further consideration it seems to me that Mr Tamlin's submissions do not reflect Mr Middleton's evidence to which I have referred. He is saying that from the outset he saw his joint venture with the defendant as one which would include property development. If this had been done through the estate agency, as he had first contemplated, there can be no real doubt that Midco would have had to give credit for any benefits accruing to it from such activities. If that had happened the reality is that the money to carry out property development would have had to come by way of a loan from Midco to the agency. The mere fact that the parties chose to carry out property development through Keron and Woodbarn (companies named to reflect the fact that this was a joint venture) does not, it seems to me, alter the position. The intention, which seems to have been present from the outset, to give the defendant 50% of the venture once the loans were repaid reflects the reality of the transaction. I do not see this as a question of causation, but one of discerning what the nature of the venture which was induced by the defendant's deceit was. It was not confined to the traditional business of estate agency, but to wider business activity, particularly property development. All the losses directly flowing from the fact that Midco was fraudulently induced to embark on such a venture were recoverable. By the same token Midco was required to give credit for any benefit which it received.

22. So did Midco receive any benefit? The time at which the assessment has to be made is obviously important. Midco's losses were assessed as at December 1996, the time when it finally discovered the fraud. This was in accordance with Lord Browne-Wilkinson's fifth principle because the misrepresentation continued to operate and, as the judge found, was in effect repeated on 19th April 1996 after Midco had acquired its interest in the estate agency and because it was locked into the business. I can see no reason why the assessment of benefit should not be made at the same time. Mr Huckle for the defendant suggested various earlier dates in 1996 but I do not find his reasons for doing so convincing.

23. Is it for the defendant to prove that Midco received a benefit or for Midco to prove that it did not? Mr Huckle submits that the burden was on Midco as it had to prove its loss and it could not do so without giving credit for any benefit which it had received. He relies on the general rule stated at the beginning of Chapter 44 (page 1593) in the 17th Edition of McGregor on Damages which says:

"The claimant has the burden of proving both the fact and the amount of damage before he can recover substantial damages. This follows from the general rule that the burden of proving a fact is upon him who alleges it and not upon him who denies it, so that where a given allegation forms an essential part of a person's case the proof of such allegation falls on him."

24. I do not accept Mr Huckle's submission. McGregor goes on to refer to exceptions to the general rule. Paragraph 44-003 says:

"Other circumstances allied to mitigation where the onus should rest on the defendant used to appear in claims under the Fatal Accidents Act for the benefit of a deceased's dependants. In such cases the prima facie measure of damages is the value of the dependency. This, however, formerly fell to be reduced by reason of benefits resulting to the dependants from the death in order that only the net pecuniary loss was ordered as damages. Translated into terms of onus of proof, the dependants had to prove the value of the dependency which was lost to them, but after this the onus was upon the defendant to cut down this prima facie measure by proof of the receipt by the dependants of benefits resulting from the death which went to reduce the damages. This division of the onus of proof in such cases was adopted by Parker LJ in his judgment in Mead v Clarke Chapman [1956] 1 WLR 76 at 84."

In that case Parker LJ said:

"Once a person ... is shown to be a person who has suffered a loss of dependency, then the onus shifts. It is then for the defendants to show, if they can, that on the facts of the case the dependency originally lost has been reduced or has ceased entirely."

This principle is not confined to fatal accident cases. In this case the defendant was asserting that Midco had received a benefit. Midco's case was that it had not received any such benefit. In a situation like this, wherever the legal onus may lie, the evidential onus shifts to the party who is making the assertion -- in this case the defendant.

25. But irrespective of any question of onus I think the evidence shows that Midco had not received any benefit from the hospital project at the relevant time. The easiest way to show this is by reference to the site valuation. That valuation obviously took account of the development potential of the site. The defendant's challenge to this valuation was unsubstantiated. The report does not say that it relates to only part of the site and there is a Keron board minute of 19th March 1997 which records that the hospital site had been "valued recently by independent professional property developers at £150,000 (£46,500 below costs)". As at December 1996 therefore no benefit from this development had accrued to Woodbarn/Midco. This conclusion is supported by what in fact happened which showed that the cost of the development exceeded its December 1996 value. The fact that by 2002 the value had risen is not relevant.

26. For these reasons, although I think the judge was wrong to exclude consideration of the hospital project in assessing the damages to which Midco was entitled, he reached the right result because in fact Midco received no benefit for which they had to give credit.

27. I would therefore dismiss this appeal.

28. SIR MARTIN NOURSE: I agree.

29. LORD JUSTICE PETER GIBSON: I also agree.

ORDER: Appeal dismissed; the unsuccessful appellant to pay two-thirds of the costs of the successful respondent; costs to be the subject of a detailed assessment if not agreed; permission granted to the respondent to join Mrs Piper as a party for limited to the question of costs; her liability in respect of the costs remitted back to the Canterbury County Court.

(Order not part of approved judgment)