Mandrake Holdings Ltd. v Mandrake Associates Ltd.

J U D G M E N T

1. LORD JUSTICE RIX: This is an adjourned application on notice for permission to appeal from the judgment of Lightman J given on 8 March 2005 in proceedings between Mandrake Holdings Limited (formerly known as Plusnet Limited) and Mandrake Associates Limited (first and second claimants) and, as defendant, Countrywide Assured Group plc. The proceedings arise out of the pension mis-selling review which the Securities and Investment Board ("SIB") launched in October 1994. That review was carried out in two stages. Phase 1 related to the obvious and more important cases which had to be prioritised, and phase 2, which commenced in 1998, concerned a number of further categories which needed to be taken next.

2. It was in the course of that review that an agreement, dated 1 March 1996, was made between the three parties to these proceedings, under which Countrywide sold the issued share capital of Mandrake Associates to Mandrake Holdings. Because it was appreciated at the time of that agreement that Mandrake Associates might be liable to pay compensation to investment clients in consequence of pension advice which it had been their business to give, a Deed, also dated 1 March 1996 ("the Deed") contained a covenant by Countrywide with Mandrake Holdings to pay either to Mandrake Associates or to the relevant investor any pension liability as there defined, essentially a concept of liability for pension mis-selling.

3. The primary dispute which then arose between the parties with respect to that covenant (clause 2 in the Deed) was whether such pension liability extended to liabilities incurred by Mandrake Associates under phase 2. In these proceedings, which the claimants commenced on 18 June 2003, the claimants sought a declaration that the covenant did so extend to phase 2 liabilities and, in the alternative, rectification of the Deed to make it so extend.

4. The claimants say that even before these proceedings commenced in June 2003, they were actively considering the phase 2 claim and had told Countrywide about it at a meeting in January 2002, and again in a meeting in November 2002. This is disputed, but it is referred to in a letter from the claimants' solicitors dated December 2004. It is said that this claim goes beyond the actual cost of pension liabilities in respect of phase 2, and extends to an argument that, as a result of Countrywide's failure to make the payments covered by the covenant in question, the strategy of selling the Mandrake Associates' business, which it had been contemplated, so the allegation goes, as a turn-around situation which could be prepared for profitable sale, was not only disappointed but completely destroyed. This head of claim, although, as I said, allegedly notified to Countrywide in January 2002 -- some 18 before the commencement of proceedings -- was not included in the particulars of claim when proceedings got under way, and did not surface again until December 2004 when a draft amendment was served and an application was made to amend the pleadings to include it.

5. In the meantime -- in fact just one week before the draft amendment surfaced -- on 25 November 2004, this action was set down for hearing in a trial window starting on 11 July 2005 with a time estimate of ten days. At that time, that is to say either the time the trial window was fixed, or a week later when the draft amendment appeared, this action, although it had been on foot then for very nearly 18 months, had not made very great progress. We have been informed in the course of submissions today that the position was that pleadings had gone ahead but had not yet been completed. There had been no disclosure. There had been no mutual service of witness statements or expert reports or anything of that kind.

6. Mr Thomas Lowe, who appears on behalf of the claimants and, in this court, the applicants, submits that, in effect, there had been very little investment in the proceedings as a whole: and as for trial (then being anticipated in July 2005), no investment at all. It was in these circumstances that the application for permission to amend the particulars of claim, to include the new claim for damages consequential on the loss of the business opportunity of selling a turn-around enterprise, was brought before Lightman J. He initially took the view that the new claim, as he called it and as I shall call it, was not sufficiently pleaded, and that in its then present form, he would on that ground alone be unwilling to contemplate permission to amend. But that situation was rectified by further particulars given in between the two hearing days on which the matter came before the judge in March 2005.

7. When the matter then finally came before the judge with what he considered to be an adequately pleaded new claim, there was nevertheless continued opposition to permission to amend from Countrywide, which took essentially the following form. It was submitted that the relevant covenant under consideration was a contract of indemnity akin to the form of obligation to be found in a liability insurance policy. The effect, in other words, was to impose upon Countrywide a contractual obligation to indemnify Mandrake Associates against pension liability as there defined, and by reason of dicta or reasoning contained in cases in the House of Lords such as The Fanti [1991] 2 AC 1, and President of India v Lips Maritime Corporation [1988] AC 395 at 425A, applied as a matter of ratio in The Italia Express (No 2 ) [1992] 2 Lloyd's Rep 281, and Sprung v Royal Insurance [1999] 1 Lloyd's Rep IR 111, the new claim was, in essence, a claim for the payment of damages as damages for the late or non-payment of damages, that being the analysis of a situation applying to a contract of indemnity, or indeed any contract of insurance.

8. The Italia Express (No 2) and Sprung are cases in which, in the former instance, Hirst J (as he then was), and in the latter this court, held that damages were not available for late payment of recovery under a property insurance policy, (a concept, it is submitted, to be derived from the House of Lords cases in question), and that the only remedy available for late payment of damages under a contract of insurance or a contract of indemnity, such as is said to be contained in clause 2 of the Deed in this case, was discretionary interest.

9. It seems it is common ground that the position is otherwise where the claim is for non or late payment of debt, and also appears to be otherwise in respect of a contract of indemnity in Scotland: see Strachan v The Scottish Boat Owners' Mutual Insurance Association [2001] Scot CS 138.

10. In these circumstances, Lightman J held that he was bound in particular by the decision of this court in Sprung to hold that the new claim could not succeed as a matter of law. For that reason, and also because of the decision of this court in Baird Textiles Holdings Limited v Marks & Spencer plc [2001] 1 All ER 737, to which I will refer in greater detail below, he was obliged to refuse the application to amend. In Baird , this court held that where there was authority binding on a first instance judge which prevented a plea from having any prospect of success as the law then stood, and therefore rendered it amenable to strike out under, for instance, CPR Part 24, it was the duty of the first instance judge to act on the law as it stood even if, as was submitted in Baird , the law was controversial and was subject to reconsideration and perhaps change in the House of Lords.

11. Therefore, for two separate legal reasons, one because of the decision of this court in Sprung as to the effect of the nature of a contract of indemnity upon a claim for damages consequential on a failure to indemnify, and also because of the decision of this court in Baird relating to the duty of a trial judge in circumstances where he is faced by authority binding on him making a pleaded claim an impossible one, Lightman J held that he was bound to refuse permission to amend.

12. In this court, Mr Lowe now accepts, although the matter was debated in his skeleton argument and notice of appeal, that the judge was right to come to that conclusion. The judge nevertheless went on to consider how he might or would have exercised his discretion upon the hypothesis that he was wrong in his view of the legal position of the new claim, and if it had been open to him therefore to grant permission to amend. He said as a secondary alternative ground on that hypothesis that, even if it had been open to him to give permission to amend, he would in his discretion have refused to do so, principally for two reasons. One was the long delay between January 2002 when the claim for consequential loss was (allegedly) first put to Countrywide, and December 2004 when it was raised as a draft amendment, even though he could not point to any particular prejudice other than that which was inherent in that sort of delay. Secondly, however, that delay combined with what was the more serious matter in his judgment, that if he gave permission to amend, or indeed if permission were granted by this court, the trial date would be lost. At the very beginning of his consideration of the effect on the trial date of the situation before him he said as follows:

"It is common ground that if the proposed amendment is made pursuant to permission granted by the Court of Appeal, the trial date will be lost. The timetable for trial is already tight and there is no prospect that the parties can prepare to trial on the New Claim in time or that the present time estimate can be kept to."

13. He considered that the loss of the trial date was a serious prejudice to Countrywide, as well as being prejudice to other litigants awaiting trials of their action. He considered that that fact, combined with the totally unexplained delay between January 2002 and December 2004, made it only just that, independently of his first and indeed decisive ground that the proposed amendment was bad in law, the application should in any event be refused.

14. On this application, which the court has heard in full -- and perhaps I should say now, if I have omitted to say earlier in this judgment, we give leave to appeal and treat the hearing as an appeal -- Mr Lowe confines his submissions, in effect, to these two points. He accepts that this court, as well as the judge below, is bound by Sprung . He nevertheless submits that this whole area is a controversial area of law and should, and therefore in prospect can, and he submits therefore may very well, be reviewed by the House of Lords. He draws attention to the distinction, which he submits is ultimately unprincipled, between the position in debt and in damages. He draws attention to the difference in relation to contracts of indemnity between the law in England and in Scotland. He submits that, even if it be the case, as Lord Goff said in The Fanti , that the primary obligation under a contract of indemnity is to hold the indemnified party harmless, as distinct from, as Mr Michael Soole QC on behalf of Countrywide submits, the secondary obligation to pay damages as a remedy for that failure to hold harmless, nevertheless, a contract of indemnity is a contract to make a payment in certain circumstances. He submits, therefore, that the matter is ripe for review, albeit he accepts that that can only be done in their Lordships' House.

15. Although he therefore now accepts that, in these circumstances, the judge was right and bound to refuse permission to amend, he nevertheless says that the proper case management which the judge should then have applied to that situation was to contemplate that the issue of law would rise to this court and, if the House of Lords gave permission, to their Lordships' House for review, and that in the meantime there would be no decisive prejudice if the litigation on the existing pleadings proceeded to trial as contemplated in July of this year, even if, depending upon the position in their Lordship's House, that trial was not necessarily the end of the question. He points out that a number of possibilities have to be canvassed. If at trial on the existing pleadings no liability at all is imposed upon Countrywide, then the position ends there, subject of course to any appeal, and it is unnecessary to go on to consider whether a further head of damages arises under the new claim.

16. Alternatively, if the House of Lords is unwilling to accept an appeal on the underlying issue of whether Hadley v Baxendale damages are available in respect of breach of a contract of indemnity, then again the matter will end at that stage with whatever might be the result at trial, and that is so whether or not liability is imposed on Countrywide. If, however, their Lordships' House should be willing to revisit these important and difficult issues, and should upon review alter the law so as to make the new claim one that can be put forward in law, then he submits that it is only just that the position should have been kept open in these proceedings to enable the new claim to go forward.

17. He therefore addressed the matter of discretion in these terms. He accepts that there was no explanation and no excuse for delay between January 2002 and December 2004, but he submits that there had been no investment in the trial in July 2005 at the time when the new claim came forward as a draft amendment. He submits that, if that draft amendment had come forward only one week earlier before the parties had agreed on a trial date of July 2005, then it is highly probable that that trial date would not have been agreed; and the fact that that agreement of one week's standing had been made was essentially of no materiality in circumstances where the pleadings had not even been closed, and all the further preparations for trial still lay in the future.

18. In response, Mr Soole, on behalf of Countrywide, has submitted that the House of Lords is unlikely to lend any assistance to the claimants in this case. He submits that, since the analysis in the past has been that the primary obligation under a contract of indemnity is to hold harmless, then it follows that the consequential losses claimed under the new claim do not arise, either as a matter of law or as a matter of simple causation, from the primary breach, but only from the failure to remedy that breach by the payment of damages. He also relies on the underlying rule that only interest is available for late payment of damages.

19. As for discretion, he accepts that the exercise of Lightman J's discretion does not arise on this appeal. Lightman J was hypothetically contemplating, for the purpose of the question of the exercise of his discretion, that it was open to him to allow the amendment. But he submits that this court should nevertheless have very much in mind the considerations which appealed to the judge in the exercise of his discretion, and that if a claimant in this situation needs to have the law clarified in the House of Lords to enable it to carry a claim forward, then its obligation is to identify the point at the earliest possible moment so that the matter can be taken to the Lords in time not to delay the ordinary process to trial. In this connection he relies on some observations in the judgment of Cumming-Bruce LJ in Williams v Home Office (No 2) [1982] 2 All ER 564, in particular at page 568 and 569. That, however, was a case in which, following trial, the unsuccessful claimant sought leave from the Court of Appeal to go to the House of Lords in order to canvass a reformulation of the law so as to permit him to gain leave to amend a pleading brought forward for the first time after he had lost at trial, and for good measure covering the same ground as had been reviewed at trial. In those circumstances, I can see every reason why Cumming-Bruce LJ should have observed as he did in the passage referred to by Mr Soole, but it seems to me that the facts of that case are a very long way from that.

20. Much more relevant in these circumstances is what was said in Baird . There, in paragraph 56 of the judgment of Judge LJ and in paragraph 99 of the judgment of Mance LJ, those Lords Justice contemplated that it would be perfectly proper, in a case where the existing law compelled a claim to be struck out, for the question of the review of that law to be taken forward on appeal ultimately to the House of Lords so that if the position was altered in the House of Lords, the matter could still be debated in those proceedings itself. It seems to me that those observations are applicable in this case. In effect, if the House of Lords was interested in the principles of law canvassed by the new claim in this case, and if the House of Lords therefore gave permission to appeal in this case, and if as a result the law as expressed in Sprung , which now lies in the path of a new claim, were to be changed so as to permit the new claim to go forward as one open to the claimants in law, then it seems to me that, on the facts of this case, the possibility of allowing the claimants to take the matter to the House of Lords, if they can, is one that has to be given very serious consideration.

21. I have referred to Mr Soole's submissions on discretion. He submits that a further difficulty is that there may be evidence that might overlap on the issue of rectification which would be coming up for trial this July, and in the possible future on the question of foreseeability. That is a submission that he makes, but it is not at all easy for me to give much weight to that submission. It is not obvious to me how evidence on rectification and evidence on foreseeability in respect of the new claim would overlap. In my judgment, that is not a serious or weighty matter for me to take into account on the issue of discretion. It seems to me, and I think that Mr Soole ultimately accepts this, that the judge's own exercise of discretion lay in a different area. He did not contemplate the third possibility that, while refusing permission to appeal himself, and while permitting the trial to go ahead on the issues then pleaded, it might be possible, subject to the views of the House of Lords on any possible appeal, for the proceedings as a whole to be kept open so that if in due course the House of Lords did amend the law, what would effectively be a second phase to the trial limited to the new claim could take place.

22. It seems to me that, in these circumstances, this court has ultimately a fresh exercise of discretion to perform. If it be the case that Mr Lowe's submissions on the underlying law were to bear fruit in the House of Lords, then it would be a very great hardship and injustice to the claimants to lose at this stage all possibility of advancing a new claim which they have quantified in the amount of £15.5 million. On the other hand, there is no specific hardship or prejudice that Countrywide can point to to counterbalance the position. There is no reason why the trial need be lost. There is no reason why the trial cannot take place in July on the matters already pleaded, as would have been the position in any event. There is no reason why, while that happens, this application to appeal and appeal could not have been progressed, as it has now been progressed, to this court or why hereafter a petition cannot be made to the House of Lords for their consideration.

23. It does mean that Countrywide may, depending upon the timings of matters, find that, at the end of the July trial and judgment on it, whenever that be given, it will find that, having failed to fight off a finding of liability, it may still have to face a second trial or second phase to the proceedings were the House of Lords to find in favour of the new claim. But it seems to me that that inconvenience and discomfort, or call it even an element of prejudice, inherent in the nature of litigation, does not match the hardship to the claimants on the hypothesis to which I was referring a moment ago.

24. Countrywide no doubt would like these proceedings to be over sooner rather than later. It is perfectly proper, even in the case of commercial enterprises, to consider that the shadow of litigation is a form of hardship and prejudice. Nevertheless, I have to bear in mind that Countrywide is a substantial commercial enterprise and no particular hardship or prejudice other than is simply inherent in the situation has been prayed in aid.

25. It seems to me that, in these circumstances, the opportunity to revisit this area of the law should be granted. If it could not arise in the way in which I am contemplating in this judgment, then it could never arise because every trial judge would be bound to refuse a claim of this kind. Since it seems to me that the controversial issues raised by the new claim may well interest their Lordships' House, and, if it does, may well lead to some clarification and amendment of the law, and since this is the only way of giving the claimants the opportunity to make their case to the House of Lords, there is some other compelling reason why this application should be granted and why this court should hear this appeal.

26. It seems to me, nevertheless, that, because this court is bound, as Mr Lowe accepts, as much as Lightman J was, by the present state of the law, this appeal has to be dismissed. Nor does it seem to me that this court should itself give permission to appeal to the House of Lords. That is a matter for their Lordships. Nevertheless, as a matter of case management or discretion, I consider that what was contemplated in Baird should arise here, and that it should be made plain that, even the completion of a trial on the existing pleadings in July of this year -- or indeed whenever it occurs -- should not in itself be a full conclusion of these proceedings at trial as long as there is pending the possibility of the House of Lords being in a position of saying that permission to amend can and should be granted in this case.

27. Mr Soole has asked the court to mention that there is an amendment which Countrywide has in mind which it has not taken forward in fear of prejudicing the trial date itself, but which if the trial in July is not to be an end of the matter it would wish itself to have the chance to put forward and gain permission in respect of. So I mention that specifically in this judgment.

28. For the reasons that I have sought to explain, I would grant the application to appeal but dismiss the appeal. But upon the basis that depending upon what happens hereafter in response to a petition to their Lordships' House, it should be fully understood that the new claim may yet come into these proceedings.

29. SIR MARTIN NOURSE: I agree with the judgment of my Lord, Rix LJ and with the order proposed by him. I do not wish to add anything of my own.

30. LORD JUSTICE CLARKE: I also agree. In the result, the order will be: permission to appeal granted; appeal against the order refusing permission to amend dismissed; permission to appeal to the House of Lords refused.

31. I would just like to emphasise that, as I see it, the effect of those orders, which are made in the light of Rix LJ's judgment, with which my Lord, Sir Martin Nourse, and I have agreed is this: (1) the trial will proceed in July on the presently pleaded issues; (2) if the claimants fail on those issues, that will be the end of it; (3) if they succeed and permission to appeal to the House of Lords against our dismissal of the present appeal is granted and the appeal succeeds, the House of Lords grants permission to amend the particulars of claim, subject of course to any order made by the House of Lords, the issues raised by those amendments will be tried. At any such trial, the point reserved by Mr Soole on behalf of the defendant will, in principle, be open to the defendant. I simply add these observations as a summary of the position as I see it today.

Order: permission to appeal granted. Appeal against the order refusing permission to amend dismissed. Permission to appeal to the House of Lords refused. Appellant to pay the costs of the respondent in this court, summarily assessed at £16,948.