Scottish Widows Plc v Stewart

This is an appeal from the judgment of His Honour Judge Eccles QC sitting as Deputy High Court Judge handed down on 22^nd June 2005. He awarded the respondent (RS) as assignee of a company, Chandler Stewart Limited, damages for breaches by Scottish Widows plc (Scottish Widows) of covenants in a lease. The damages, which RS as assignee claimed, reflected loss of profits from a business of repairing high performance motor cars caused by the installation of speed bumps in the roadway by Scottish Widows. The speed bumps prevented safe access to the business by the owners of the low slung motor cars.

Chandler Stewart Limited was 100% owned by the respondent (RS) and the judge held that until June 2001 it carried on the business. He held however that from June 2001 a different company Chandler Stewart (Croydon) Limited carried on the business at the premises, the business having been assigned by Chandler Stewart Limited (to which I shall now refer as the first company), to Chandler Stewart (Croydon) (Limited), (the second company), by that date. Since the speed bumps were installed in October 2001, the judge recognised that any damage to the business was damage suffered by the second company. However the judge held that at some date in 2002, the second company had assigned the business back to the first company (the company changing its name to that of the second company), alternatively that there existed a contract under which the second company had agreed to assign the business back, and that in the result there was an equitable assignment of the second company’s cause of action to the first company enabling (as the judge found) RS to have title to sue as assignee from the first company.

By their appeal Scottish Widows attack the judge’s finding that there was any reassignment or any contract to reassign.

RS seeks to uphold the judge’s finding on reassignment or contract to reassign. RS’ stance at the trial had been primarily that there had been no effective assignment from the first company to the second company in June 2001; it was the judge who suggested the reassignment point. Indeed there is still no pleading asserting reassignment or a contract to reassign. By his respondent’s notice RS sought again to attack the original assignment but this time on grounds which had not been pleaded or argued before the judge, i.e. that the assignment was ultra vires the first company. By an amendment to that respondent’s notice RS sought to take a further point in the alternative, again not pleaded or argued in the court below, to the effect that the first company was entitled as the lessee to sue for the losses suffered by the member of the same group of companies that happened to run the business, the second company.

Further points were taken in the respondents notice by way of cross appeal. Two of the points sought to increase the award of damages and would only arise if RS upheld in the Court of Appeal an entitlement to an award of damages. A third related to the judge’s decision to award RS only two thirds of his costs which again would only arise if the award of damages was upheld. A fourth related to a claim made by Scottish Widows under the lease against RS personally (the re-letting point) which would arise in any event, and is the subject of the separate judgment of Lloyd LJ..

Although Lord Justice Jacob had granted permission to cross appeal, and to amend the respondent’s notice by permission dated 25^th January 2006, it was common ground that Scottish Widows were entitled to take objection to RS being entitled to raise in the Court of Appeal points not raised in the court below. Accordingly Mr Jonathan Seitler QC having opened Scottish Widows appeal seeking to overturn the judge’s reassignment finding, Mr Crampin QC took as his first task the onus of persuading us that RS should be entitled to take points not argued in the court below. We completed argument on that aspect first. We ruled that it could not be open to RS to take the new points stating that we would give our full reasons when giving our final judgment in writing.

It then seemed sensible to complete Scottish Widows’ appeal, and if possible announce a decision because if Scottish Widows were successful certain points in the respondent’s notice would no longer be live. This we did and announced our decision that the appeal succeeded for reasons which would be given in writing.

This left the fourth point in the respondent’s notice, the re-letting point, which was argued and on which we did not rule reserving our decision to be communicated in writing.

This judgment accordingly provides (1) my reasons for not allowing points to be taken in the Court of Appeal which were not taken in the court below; and (2) my reasons for allowing Scottish Widows’ appeal; and (3) my agreement with the decision of Lloyd LJ on the re-letting point. In order to deal with all points it is necessary to set out in more detail the facts. They are set out very fully in the judge’s judgment. There is no challenge to his findings, and on important issues I shall quote from his judgment; otherwise a summary will suffice.

Following an apprenticeship, and working with a company specialising in the body repair of cars, RS became an expert in repairing high performance cars. He decided to set up his own business. A company called Chandler Stewart Limited, the first company, was set up. He was controller and a director of that company. It started trading on 8^th October 1998 from premises known as Unit 2 on the Beddington Cross Industrial Estate, owned at that time by Croydon Land (No 2) Limited; a lease was formally executed on 10^th November 1998. On the same date a supplemental rent deposit deed was executed.

The permitted user under the lease was as “a vehicle bodywork repair centre for the repair of high performance and/or prestige cars . . . .” (clause 1); the first company had the “right at all times to enter and exit from [Unit 2] over the road and footpaths on the common parts” i.e. the road on the Beddington Estate outside Unit 2. Scottish Widows acquired the reversion to the lease in October 1999.

The first company had a succession of book keepers, the first of whom prepared a VAT return for the first quarter resulting in £8,586.14 being reclaimed from Customs and Excise. No further VAT return was ever put in, and ultimately a firm of accountants, Chantrey Vellacott, who were engaged in 2002, had to attempt to regularise that position.

At this early stage RS engaged Messrs Dyer & Co to act as the first company’s accountants. Mr Neil Dyer dealt with the affairs of the first company and Mr Simon Dyer his brother in fact became General Manager of the first company itself. Accounts for the year ending 31^st October 1999 were prepared and filed at Companies House, but no further statutory accounts were ever filed.

Substantial sums in VAT became outstanding; PAYE payments fell substantially into arrears, and the judge records “it is far from clear that proper PAYE returns were sent in”.

In 2000 RS arranged with Porsche to start a separate business in Tonbridge. For that purpose a company called Chandler Stewart (Tonbridge) Limited (CSTL) was set up. RS’ case at trial was that his intention was to incorporate CSTL to run the business in Tonbridge and simply to change the name of the first company to Chandler Stewart (Croydon). On any view on 19^th December 2000 two companies in addition to the first company were incorporated, CSTL is the second company. It is furthermore not in dispute before the Court of Appeal that as from 1^st June 2001 CSTL and the second company carried on business. CSTL carried on business in Tonbridge. The second company carried on the business previously carried on by the first company, with the first company dormant, but owing money to Customs and Excise. The steps taken to transfer the assets and the business from the first to the second company are set out in a memorandum dated 1^st June 2001 from Mrs Orla Morris, and the books of the respective companies reflected those steps.

The agents for Scottish Widows asked Simon Dyer whether the change from Chandler Stewart to Chandler Stewart (Croydon) was simply a name change, or whether what was being requested was an assignment, and despite pressing for an answer never received one.

Over the weekend of 6^th/7^th October 2001, the speed bumps were installed. Protests were immediate from solicitors writing on behalf of the “lessee”. Correspondence as to whether Scottish Widows were in breach of covenant ensued. Solicitors acting for the first company, the lessee, maintained that serious loss of business was being caused by the speed bumps; no indication was given that it was other than the lessee that was suffering the losses. The dispute was ultimately to lead to rent being withheld.

In December 2001 there was change of accountants, and on 6^th December 2001 Chantrey Vellacott wrote to (it seems) the second company with their formal letter of engagement. Kay Grimes, who became Mrs O’Reilly, dealt with RS on behalf of Chantrey Vellacott. She and her audit team soon discovered that as the judge put it “there were significant problems to be addressed, quite apart from compiling the accounts and adjusting entries in the company’s books and computerised records”. I continue to quote from the judgment at this stage:-

Mrs O’Reilly asked Mr Stewart why he had set up a new company instead of opting for a name change, but according to her evidence he did not seem to understand, but said that he thought he had only two companies in all, one trading in Croydon, the other in Tonbridge. Mrs O’Reilly advised him that there was no purpose in having two companies involved at Unit 2 and Mr Stewart instructed her to put it right. She then approached the Inland Revenue and Customs and Excise and asked them whether they would agree that CSL could be deemed to have traded throughout the relevant periods, ignoring whatever otherwise might be the consequence of the incorporation of CSCL and the journal entries between the two companies, and Customs and Excise were asked if CSCL could then de-register. I will have to return to this topic in more detail, but it was Mrs O’Reilly’s evidence that she had agreement in principle from the Inland Revenue to her proposal to “unscramble” the relationship between CSL and CSCL, and that Customs and Excise were not particularly concerned provided that the outstanding VAT was paid.

Believing that there would be no formal opposition from the Crown or other creditors Mrs O’Reilly then arranged for the names of CSL and CSCL to be changed, so that the former could continue to trade with a “Croydon” name and the latter could become dormant. To this end resolutions were passed on the 23^rd September 2002, supported by the appropriate certificates, for CSL to become CS(C)L . . . and for CSCL to become Cathedral Cleaning Limited. This was simply a “shelf” name used to enable the reference to Croydon to be removed, and thereafter Cathedral Cleaning Limited dropped out of the picture until it was wound up.

With regard to the outstanding VAT and PAYE liabilities Mrs O’Reilly entered into negotiations with the Inland Revenue and Customs and Excise. Chantrey Vellacott were in a difficult position here because the accounts had not been audited, but unless a deal could be agreed enabling CS(C)L and CSTL to repay the Crown debts in instalments, Chantrey Vellacott were reluctant to incur the expense of a full audit, given the high risk of corporate insolvency. In the event no deal was agreed before liquidation supervened, and so the statutory accounts for the years ended 31^st October 2001 and 2002 were never prepared.”

Problems with the speed bumps continued through 2002 and rent continued to be withheld. Scottish Widows commenced their action for the rent and service charges in June 2002. It was in that action that the first company, as lessee, put in a defence and counterclaim. It was amended later (in December 2003) when (following an assignment to his father and then to him of the first company’s counterclaim) it became RS’ counterclaim against Scottish Widows. It was this counterclaim that was tried by the judge and is the subject of this appeal.

The speed bumps were then removed on 2^nd October 2002.

Ultimately Scottish Widows obtained summary judgment against the first company in the sum of £68,629 on 30^th October 2002 on the basis that the lease did not allow any set off. That left the counterclaim to be tried. The judgment was not paid and ultimately Scottish Widows made a further demand or demands for further rent, they drew down on the rent deposit and demanded that it be replenished (which it was not). This all led to the lease being forfeited on 22^nd January 2003. It further led to the further action (the second action) against RS as guarantor of the first company’s obligations under the lease. The details of the claim in that action are unimportant so far as the issues on this appeal are concerned save in one respect: the action included a claim for one year’s rent under clause 21.7.6.

Clause 21.7.6 of the lease provided as follows :-

RS does not dispute that one year’s rent would be due under this clause subject to one point. For a period of eight days starting on 17^th October 2003 Unit 2 was occupied by Midnight Design pursuant to the terms of a letter dated 16 October 2003 RS maintains that despite the wording of the letter for those eight days Unit 2 was “re-let”, and rent is only due up to 17^th October 2003; Scottish Widows say that the letter provided a licence and no more and that thus a full year’s rent is due. It is this point which is dealt with in the judgment of Lloyd LJ.

These are spelt out in detail in paragraph 43 of the judgment. Most of the issues are irrelevant to the appeal, there being no challenge to the judge’s decision on them. Two – the taxation issue and the indemnity issue numbers (vii) and (viii) were not argued because of our decision that Scottish Widows appeal should be allowed, and I do not thus set them out or say anything more about them. The re-letting issue, number (xi), just identified in the preceding paragraphs, I can leave, save to say that I agree with the judgment of Lloyd LJ. It is only the assignment issue which needs spelling out. The judge put it this way:-

The issue had two aspects - (1) was there an assignment from the first company to the second company in June 2001? (2) If there was, was that assignment “reversed” in 2002? The first aspect is relevant to the issue whether new points should be allowed to be taken in the Court of Appeal, and it is for that reason I deal with it.

RS at the trial had to accept under cross examination that accounting entries were made as per Orla Morris’ memo of 1^st June 2001, and the judge unsurprisingly found thus that they had been made. He further found that the effect of the transfer at the valuations given to the assets at the time was that the second company owed the first company the sum of £558,785.24, entered in the books as an inter-company transfer. Perhaps most importantly of all, the judge found as a fact that the second company was carrying on the business from 1^st June 2001, while the first company had become dormant.

RS’ case at the trial was that he neither knew of, nor authorised the accounting entries and that an unauthorised series of accounting entries could not bind the first company to the alleged assignment. His case was that Mr Neil Dyer and Mr Simon Dyer were alone responsible for initiating the acts relied on by Scottish Widows as evidencing a transfer of business to the second company. His case was that he thought that Chandler Stewart (Croydon) was just a change of name. That case was rejected by the judge. As he put it “I simply cannot accept his [RS’] evidence that Neil and Simon Dyer took steps to transfer the business from [the first company] to [the second company] without his authority or knowledge.” [para 69] He spells out in six sub-paragraphs why he had formed the view he had, “apart from finding Mr Stewart to be a less than convincing witness”. These findings by the judge are not challenged on the appeal. They could not be. The judge’s finding that the second company carried on the business for the period from 1^st June 2001 was a finding on overwhelming evidence. For example in a report to the Customs and Excise made on 10^th June 2003 [bundle G page 1759.3], the position was spelt out with absolute clarity. The report included the contention that there should simply have been a name change, but set out in detail the trading figures for the first and second companies showing by the figures as confirmed by notes, [bundle G page 1759.10 and 1759.13] that the first company ceased trading from 31^st May 2001 and the second company traded from 31^st May 2001 to November 2002.

The judge also dealt with the way in which the inter-company transfer was dealt with. He said this:-

As regards the reassignment, the judge expanded on his previous findings of fact in paragraphs 63, 64, 65 and 66. He refers there to what became the key to Mr Crampin’s submissions – the instruction by RS “to put things right” in March 2002 and continued:-

Mrs O’Reilly therefore wrote to HM Inspector of Taxes on the 19^th March 2002 enclosing forms on behalf of CSL, CSCL and CSTL, and Chandler Stewart (Holdings) Limited disclosing that “no tax returns have ever been filed in respect of any of the companies . . .The whole structure of these companies needs reviewing.”. A similar letter was written to Customs and Excise. Mrs O’Reilly’s evidence, which I accept, was that the advice she gave Mr Steward was that it was unnecessary for Dyer and Co to have procured the incorporation of a separate company to trade from Unit 2 in Croydon and that, if possible, the structure should in effect be unscrambled. She would then suggest to the Inland Revenue and Customs and Excise, as she did in subsequent negotiations, that the new company formation be put aside and that CSL be deemed to have continued trading throughout the entire trading period.

On the same day, the 19^th March 2002, Mr Webb became company secretary for both CSL and CSCL and Mr Stewart countersigned the relevant appointment forms. Despite the evidence of his having signed two separate appointment forms for two separate companies on the same day, Mr Stewart still maintained in evidence that he did not realise when signing the forms that CSL and CSCL were in fact two different entities. Although Mr Stewart appeared up to a point to be confused as to the date when this occurred, it was made plain to him that it was March 2002, long after CSCL and CSTL had been trading, and after Chantrey Vellacott had been brought in, yet he was still unwilling, it seems to admit that his signature denoted any knowledge on his part of the existence of two Croydon companies.

In accordance with her advice Mrs O’Reilly arranged to meet representatives of the Inland Revenue and Customs and Excise in August 2002. I will have to consider the implications of these meetings later on in connection with the risks of insolvency faced by CSL/CS(C)L, but at this stage it is sufficient to note that Mrs O’Reilly believed that in principle the Inland Revenue were prepared to agree that CSL should be deemed to have traded throughout, and Customs and Excise were not concerned either way, provided that the VAT was paid. The difference in approach between the two departments (as they were then) was due to the fact that for corporation tax purposes the liabilities were to be determined by public documents filed at Companies House, whereas VAT returns were not for public disclosure. The Inland Revenue would therefore have to endorse changes in public documents, but Customs and Excise were more relaxed, since returns and assessments were not intended for public inspection. Mrs O’Reilly therefore arranged on the 23^rd September 2002 for the name of CSL to be changed to CS(C)L and for CSCL to become Cathedral Cleaning Limited. After that, what was intended, she said, was that accounts for CS(C) and Cathedral Cleaning Limited would have been prepared. The second company would have been dormant, with no transactions, and the first company would have reflected all the trade. The accounts would then have been sent to the Inland Revenue with a reminder that they had been prepared in accordance with what had been agreed at the meeting, and if the Revenue did not respond by issuing an enquiry notice the accounts would have been accepted.”

Based on his findings of fact the judge then held in relation to the reassignment issue as follows:-

Mr Holland submits that no sufficient acts were done to show that a “reverse” assignment had taken place. In my judgment three significant acts were carried out pursuant to the agreement that Mrs O’Reilly should “put things right”:

In these circumstances I am satisfied that there was an equitable assignment of the assets, including the right to damages for Scottish Widows’ breach of covenant, from CSCL/Cathedral Cleaning Limited to CSL/CS(C)L. I do have in mind the evidence of Mrs O’Reilly that it would require the consent of the Inland Revenue, Customs and Excise, Barclays Bank and the creditors to effect a complete novation of the former company’s liabilities to the latter, but again it is my judgment that as between the two companies there was an equitable assignment which was irrevocable, whatever may have been the ultimate position with the outside world had insolvency not supervened.

Even if I am wrong in this analysis, there was in my judgment a contract between the two companies for the business to be transferred back to CSL/CS(C)L made in about March 2002 when Mr Stewart instructed Mrs O’Reilly to “put things right”. That was not in my judgment a contract conditional on obtaining all the consents to which Mrs O’Reilly referred in her evidence, but a contract between the two companies with an implied condition subsequent that if the Inland Revenue refused consent then trading would have to revert to CSCL/Cathedral Cleaning Limited.”

In the written skeleton argument the points sought to be taken are as follows and in the following order.

The first submission is that the transaction which Mr Dyer attempted to arrange in June 2001 was ultra vires the first company. It was ultra vires because it was not a genuine sale; it was not carried out with a view to benefiting the first company; it was a fraud on the first company’s creditors; it involved an unlawful distribution of the first company’s assets to RS.

In the alternative, the transfer was so precarious that in reality the second company merely had a licence to issue bills and invoices, accordingly the business remained at all time with the first company;

In the further alternative, the judge was right for the reasons he gave to conclude that in March 2002 there was a reassignment of the business to the first company by the second company alternatively a contract to re-assign;

In any event, whether or not the June 2001 transaction and or the March 2002 transaction were of any effect, Scottish Widows should not be entitled to escape liability, and the court should hold that the first company (and thus RS as assignee of the first company) are entitled to bring the claim to recover losses suffered by the second company to avoid the disappearance of a claim into a legal black hole, the entitlements to those losses as between the first company (or RS, its assignee) and the second company being left to be sorted out between them, and being of no concern to Scottish Widows, (the black hole point).

(i) (ii) and (iv) were points which had never been pleaded or run at the trial. Mr Crampin did not seek to pursue (ii) at least in the terms expressed in the skeleton argument. He relied on the precarious nature more as support for his argument that the transaction would be easily reversible and indeed more likely to be reversed.

We ruled that he should not be allowed to pursue (i) or (iv). As regards the ultra vires point, the reasons were cumulative. The argument as explained to us involved charging Mr Dyer with dishonesty; if that had been raised at the trial consideration might have had to be given either to joining Mr Dyer or at least calling him to deal with the points. It is unclear whether Mr Dyer would have implicated RS, but not unlikely on the papers we have seen that he would have tried to do so. Questions might have arisen as to the extent to which it was right to allow a person to rely on his own wrongdoing. In any event if the factors relied on by Mr Crampin as making the transaction ultra vires had convinced the court that it was ultra vires (and we had doubts as to whether that would ever have been the case), we could not see the answer to the point that the second company as shown by its books actually did carry on the relevant business as found by the judge, and it was that business which was damaged.

As to point (iv), we have received since the hearing an email dated 30 June 2006 seeking to persuade us to reconsider our ruling. I remain of the view that it would be wrong to allow this point to be taken for the first time in the Court of Appeal. A legal black hole could exist only if the result of ruling that A may not bring a claim where B has suffered the damage, is that no one, even B, has any cause of action against the wrongdoer. If this point had been taken in the court below Scottish Widows would have had the opportunity of giving notice to, or joining, the liquidator of the second company to discover whether the liquidator did make a claim and on what basis. If the liquidator did not make a claim, Scottish Widows could at least be clear about that and argue the black hole point on that basis. If the liquidator did decide to make the claim and succeeded in it that would not have benefited RS, who did not have any assignment of such a claim from that liquidator.

If the point was only taken in the Court of Appeal where it was not suggested that the liquidator of the second company could be joined, Scottish Widows would be left in the position of either wishing to concede that the liquidator did not have a claim (so as not to prejudice their position in the event that the liquidator ultimately brought such a claim, but prejudicing the black hole argument in the Court of Appeal and remaining exposed to a claim by the liquidator), or having to argue that the liquidator of the second company did have a claim (possibly winning thereby on the black hole argument but prejudicing their position vis à vis the liquidator of the second company).

In any event the question whether A should be entitled to recover the losses suffered by B must be fact-sensitive. It may in particular depend on the surrounding circumstances when the contract relied on by A was entered into. What was in the contemplation of the parties as to who might suffer loss as a result of the breach of contract? In this case the original lease was not between the first company and Scottish Widows, and the surrounding circumstances relevant to the question whether the first company should be entitled to recover losses suffered by some other company were certainly not explored.

Mr Crampin recognised some of the difficulties there were in seeking to uphold the judge’s decision on this aspect. He ultimately submitted that his strongest argument was that in reliance on the instruction to put things right given by RS to Mrs O’Reilly in March 2002, the court should hold that RS, acting on behalf of the first company, had made a contract with RS acting on behalf of the second company, under which the business of the second company was agreed to be transferred, and that it should be held that the business would include such claim as the second company had against Scottish Widows. The judge held there to be such an agreement which was either effective to reverse the previous assignment, or was valid as a contract that the business be transferred back, and thus valid as an equitable assignment. He held (as far as I can see by implication, since there was no evidence of any express agreement) that it was part of the agreement that two debts would be left with the second company – the claim by Mr Simon Dyer and the debt due to the Customs and Excise recorded in the Statement of Affairs of the Second Company prepared by the Liquidator and attested to by RS in December 2002 [see bundle F page 826].

When dealing with whether there had been an effective reassignment in paragraph 80, he also recognised that the reassignment and the reversing effectively of the June 2001 transaction would require the consent of the Inland Revenue, Customs and Excise, Barclays Bank and the creditors “to effect a complete novation”, but held that as between the companies there was an equitable assignment which was irrevocable. When considering whether there was in any event a contract to assign, he found that there was one made in March 2002 when RS instructed Mrs O’Reilly to “put things right”. He held that this was not a contract “conditional on obtaining all the consents to which Mrs O’Reilly referred…but a contract between two companies with an implied condition subsequent that if the Inland Revenue refused consent then trading would revert to [the second company]”.

When Mr Crampin was asked in the course of argument how the judge concluded that any implied condition was “subsequent”, Mr Crampin’s first (I accept) light hearted answer was because the judge wished his client to win. That comment, light hearted as it was, is very close to the truth so far as the whole of this aspect of the case is concerned. The judge clearly felt that looking at the matter broadly RS’ business, conducted as it was through corporate entities, had been seriously damaged by the activities of Scottish Widows. But he could see no way round Scottish Widows’ point that when the speed bumps were installed the business was being carried on by the second company. RS had an assignment only from the first company and the judge thus strove to find that somehow any cause of action had reverted to the first company so as to enable RS to succeed. One can see why the judge might form that view of the merits but certain points need to be made :-

If an individual seeks to trade through corporate entities, he obtains the benefit of limited liability and in return he must accept what that entails;

RS sought at trial to suggest flatly contrary to all the contemporary documents that the first company had never ceased to trade and that the second company never traded.

It was no part of his case and no evidence was given by him that he, on behalf of the second company, intended to reassign the business to the first company, and more importantly it was no part of his case that any cause of action, that the second company had, had been assigned to the first company.

The reassignment or contract found by the judge was not therefore part of RS’ pleaded case, and indeed is still unpleaded to this day. Scottish Widows have not sought to take any technical pleading point, but there is a danger in taking too relaxed view as I shall seek to explain.

The counterclaim was brought originally by the first company and was taken over by RS as assignee from the first company. It alleged breaches of covenant and loss of business of the first company, the lessee. The defence of Scottish Widows was that when the speed bumps were installed the business was that of the second company. As I would see it, the question of assignment of the business from the first to the second company in June 2001 was relevant only as a matter of background. If the business was being carried on by the second company and not by the first company at the time when the speed bumps were installed, the only business that could be damaged was that of the second company and in so far as the action was being brought by RS as assignee of the first company’s counterclaim, Scottish Widows had a complete answer.

If RS, as assignee of the first company, is to recover losses suffered by the second company, he must show that the second company had a cause of action for those losses; that that cause of action was assigned to the first company; and indeed that his assignment from the first company included that claim. If those acting for RS had been made to plead out this aspect of the case certain points would or might have become apparent. First the second company’s cause of action was not for breach of a covenant in the lease because the second company was never a lessee. Radical amendment of the counterclaim would have been needed to spell out the second company’s cause of action which would not have been for breach of covenant but in nuisance or negligence. Once spelled out a question would have arisen as to the extent to which the decision in Hunter v Canary Wharf[1997] AC 655 would have been an answer to at least the claim in nuisance since it could have been argued that the second company was not in exclusive possession and thus not entitled to bring a claim in nuisance.

It would then have had to have been pleaded as to how that cause of action or the proceeds thereof were assigned to the first company. It is in this context that I would emphasise that it seems to me that there was little, if any, analysis by the judge of what might or might not be occurring as at March 2002, or thereafter. What would be understood between RS and Mrs O’Reilly and thus between RS acting for one company and also acting for the other, was going to happen by an instruction by RS to Mrs O’Reilly to put things right? A possibility was that investigation would reveal that any business would only be able to be transferred for the future; if so that would not, without some express agreement, carry with it an assignment of causes of action arising prior to March 2002. This possibility, if explored, did not it seems take place because as reported to Customs and Excise in 2003, [see bundle G page 1759.13], the business was in fact carried on by the second company on into November 2002.

A second possibility was that it would be investigated as to whether history could be rewritten and the second company be treated as never having traded. Again if this was explored it did not happen. So far as Customs and Excise were concerned history was not rewritten at all; so far as the Inland Revenue was concerned it was only partly rewritten – the Dyer claim and a VAT claim remaining with the second company. But, of more importance, if history was to be rewritten that could only be, as Mrs O’Reilly and indeed the judge recognised, with the consent of those affected. It certainly could not be rewritten so as to make the first company a claimant under covenants in the lease when the business damaged had been that of the second company without the consent of the alleged wrongdoer Scottish Widows.

The reality is that the instruction to “put things right” was not any evidence of an agreement being made between RS acting for both companies. The judge’s findings of fact show that it was an instruction to Mrs O’Reilly to endeavour to sort things out with the Inland Revenue so far as she could and with Customs and Excise so far as she could, and to put things back to where they were so far as possible getting any necessary consents so to do. This is precisely what she did over a period of months and over that period there was never any attempt to assign to the first company any cause of action that the second company had against Scottish Widows.

There is simply no basis for suggesting that there was any “agreed assignment” of a cause of action by the second company to the first company, and no basis for suggesting that there was any express “contract” to assign such a cause of action.

We did not consider during the course of argument whether such assignment as RS had from the first company would have included the claim of the second company if contrary to what I have said above it had been assigned. But the wording of the assignment might leave room for doubt. What was assigned by the first company to RS’s father and thus ultimately assigned by father to son was “such right title benefit and interest (if any) . . . as the assignor may have in or under the Counterclaim . . .”. The counterclaim was defined as “a counterclaim dated 4 July 2004 for substantial damages in respect of derogation of grant by the Landlord and breach of covenant for quiet enjoyment under Clause 16 of the Lease issued by the assignor in response to the Landlord Claim and all such claims arising from the factual matrix of such counterclaim.” It is only the last words which could arguably be said to include any claim in tort by the second company if that claim had been assigned to the first company.

The final point I would make was again not alluded to in argument, but if it had been alleged in the pleadings that the second company had assigned its cause of action to the first company, (just as if the “black hole” point had been raised in the pleading) consideration should have been given to joining the liquidator of the second company. As it was the liquidator of the second company was not bound by the judge’s decision and Scottish Widows were in fact in double jeopardy. Having been held liable to RS on the basis that there was an assignment of the cause of action of the second company, they were exposed to the possibility of a further claim by that liquidator disputing any assignment. As it is Scottish Widows are exposed to the claim of that liquidator through (it may be said) their own decision to suggest that if anyone has a claim it is the liquidator of that company, and not the first company or that company’s assignee. Scottish Widows would no doubt not put it that way. They would say that if they had not taken the point as against the first company, they might have had to pay out again if the liquidator of the second company brought a claim.

It is for these reasons I was in favour of allowing Scottish Widows appeal.

These proceedings will have been an unhappy experience for RS, and he will think he has been defeated by a technicality. In one sense that is true but a more realistic appraisal by him as to what had occurred in June 2001 might have enabled his advisers to find means by which he, possibly with the help of the liquidator of the second company, could have defeated the technicality. One cannot however rewrite history.

I agree with the reasons set out in the judgment of Waller LJ for the court’s decision at the hearing to refuse to allow the ultra vires point and the black hole point to be argued in opposition to the appeal, and for the decision to allow the appeal.

As he says, one point raised by way of cross-appeal was argued, the re-letting point, which is independent of the fate of the appeal. The point is identified in paragraphs 22 and 23 of his judgment.

Part of Scottish Widows’ claim against Mr Stewart, in claim HQ04X03298, was for £100,851.43, being one year’s rent due under the lease, claimed pursuant to clause 21.7.6 against Mr Stewart as guarantor. Clause 21, headed guarantee and indemnity, includes a variety of obligations on Mr Stewart’s part. In particular, under clause 21.7, if a “Relevant Event” happens, which includes forfeiture of the lease, the guarantor agrees by 21.7.2 to take a new lease of the premises, on a request made within 12 months of the landlord having notice of the event. Alternatively, under 21.7.6, if no such request is made, then:

The lease was forfeited on 22 January 2003. The claim was therefore for the amount that would have been payable under the lease for the following 12 months. No question arises as to that, except under the final words of the clause.

On 16 October 2003 Scottish Widows agreed with a company called Midnight Design Ltd (which had a lease of other premises nearby) to allow it to use Unit 2 for 8 days, in return for payment. The issue is whether that agreement amounted to the premises being re-let, within the meaning of the clause. If it did, then Scottish Widows is only entitled to about three quarters of the sum claimed, namely the amount attributable to the period from 22 January 2003 to 16 or 17 October 2003. Two questions were argued: (1) did the terms of the agreement create a tenancy, or merely a licence, and (2) did they result in the premises being “re-let” in the terms of the clause even if they did not create a tenancy.

The terms of the agreement were set out in a letter dated 16 October 2003 from Midnight Design to Scottish Widows, countersigned for Scottish Widows. The period was from 17 to 24 October; the payment (described as a licence fee) was £1,500 plus VAT, and £750 plus VAT for costs. The terms of the letter were as follows:

Taking first the second of the two points identified in paragraph 54 above, Mr Crampin submitted that a wide interpretation should be given to the word “re-let” in clause 21.7.6, and that it should be read as including the granting of a licence to occupy the premises for value. Otherwise, he said, an unscrupulous reversioner could grant a licence for a long period, or a series of licences, under which, in effect, the premises were put to use by third parties in return for payments which, economically, were indistinguishable from rent under a tenancy or series of tenancies, but the guarantor’s liability under clause 21.7.6 would continue, so that the owner would, in effect, recover the letting value of the property twice over for all or part of the 12 month period.

The clause does leave open the possibility of such an unprincipled approach by the reversioner, if “re-let” is construed as limited to the grant of a tenancy. Nevertheless, it seems to me that, in the context of the Lease, it is not possible to interpret “re-let” as referring to anything other than the grant of a tenancy of the premises. The correct use of the word “letting” is to refer to the grant of a lease or tenancy. Clause 14 of the Lease distinguishes between underletting, parting with possession, and allowing others to occupy and sharing occupation. This suggests that “letting” is being used in its correct sense, not in a broad sense which includes the granting of a licence.

The clearest point in the particular context is that the provision is an alternative to the obligation under clause 21.7.1 under which the guarantor could be required to take a new lease of the premises. If the landlord does not choose to take advantage of that provision, for whatever reason, it is entitled to recover from the guarantor the amount which would have been payable under the lease for 12 months or until a re-letting. The word “letting” in itself, in context with “Lease” earlier in the clause, suggests strongly that what is relevant is the granting of a lease or, in other words, a tenancy. The addition to it, to make “re-letting”, reinforces this, by showing that the premises are, in the circumstances referred to, returned to their previous condition of being subject to a lease or tenancy.

For those reasons, it seems to me that the guarantor’s liability under clause 21.7.6 is only cut short if what the owner has done is to grant a tenancy of the premises within the 12 month period. I agree with the judge’s conclusion on this point, at paragraph 180 of his judgment.

At paragraph 179 the judge had held that the agreement with Midnight Design constituted a licence, not a tenancy. I agree with him on this as well.

Of course, as he said, the court is not bound by the label used by the parties. Neither the reference to a licence fee nor the terms of paragraph 1(a) of the letter is conclusive. The test is whether the agreement gives exclusive possession, that is to say the right to exclude the landlord as well as all others from the premises. It matters not, in principle, that it is a very short-term agreement, though the duration could be a relevant indication.

Mr Crampin submitted that the agreement gave Midnight Design the right to occupy, as well as to use, the whole of the premises, for the stipulated purpose. Consistently with the agreement, it could have filled every cubic centimetre of the unit with lighting apparatus and a theatrical set, not leaving any space for Scottish Widows to use in any way. In that sense, he said, Midnight Design had exclusive possession. He also pointed to the absence of any provision such as is sometimes found in something described as a licence, giving the owner the right to stipulate what part or parts of the premises can be used by the licensee, and the presence of obligations not to cause nuisance, not to make alterations, and not to allow others into or to share occupation. As for the inclusion of these latter provisions, it seems to me that they are neutral as between licence or tenancy, and equally consistent with both.

The real point is whether the effect of the agreement is to give exclusive possession. It does not seem to me that the fact that Midnight Design could possibly have filled the premises completely with a set and lighting apparatus means that they had exclusive possession. There is nothing in the agreement which entitles them to exclude Scottish Widows, unlikely as it may have been in practice that Scottish Widows would have wanted access to the premises themselves during the eight days of the agreement. Occupation is not the same as possession. Residential premises provide a rather different context, both for practical reasons and in terms of the statutory context. As regards commercial use, and especially very short-term use for a specific purpose, while of course the court must be astute to ensure that parties do not avoid the true legal consequences of their acts by giving an agreement the wrong label, it seems to me that there is much force in the attitude articulated by Jonathan Parker LJ in Clear Channel UK Ltd v. Manchester City Council[2005] EWCA Civ 1304 at paragraph 29:

We do not know about the circumstances of Midnight Design, but they were clearly a commercial undertaking, which entered into this agreement for specific commercial needs. Whether they took legal advice on it we do not know, but it can be assumed that they were in a position to do so if they wished. Paragraph 1(a) of the agreement is in very similar terms to clause 14.1 of the agreement which Jonathan Parker LJ had to consider and to which he referred in the passage quoted.

For those reasons I would dismiss the cross-appeal on this, the only point which survives the allowing of the appeal.