Mir Steel UK Ltd v Morris & Ors

This appeal, brought with the permission of Lewison LJ, is against an order dated 15 December 2011 made by David Richards J in the Chancery Division in proceedings in which Lictor Anstalt (a Liechtenstein anstalt, ‘Lictor’) is the claimant and Mir Steel UK Limited, the appellant (‘Mir Steel’), is the first defendant. The judge had two applications before him, but the only one that is the subject of the appeal was Mir Steel’s application to join as defendants to its proposed CPR Part 20 claim the four respondents to the appeal, namely, Christopher Morris, Mark Fry, David Hudson and Alphasteel Limited, a company in liquidation (‘Alphasteeel’). Joint administrators of Alphasteel were appointed by a court order of 20 December 2007 and, following a replacement of one them on 6 May 2008, the first three respondents were the joint administrators. Alphasteel went into creditors’ voluntary liquidation on 18 December 2008, and the three joint administrators became its joint liquidators. Of the three, Mr Morris and Mr Fry remain joint liquidators.

The judge dismissed Mir Steel’s application. Mir Steel’s appeal is against that order. Of the judge’s 75-paragraph judgment dealing with the applications before him, only three paragraphs related to that part of the dismissed Part 20 application that is the subject of the appeal. To understand the basis of that application, and of Mir Steel’s appeal, I must set out the background. In doing so, I have gratefully drawn from the judge’s judgment, in part verbatim.

Alphasteel was a steel manufacturer operating from premises in Newport, South Wales. In about 1991, it engaged Lictor to purchase the parts required to assemble a hot strip mill, to be used for the production of hot rolled steel products. Lictor sourced the parts from various manufacturers and shipped them to Alphasteel’s Newport site in about 1997. The equipment for the hot strip mill was assembled over the following two or three years and was installed at the site and joined to other plant, machinery and equipment. By April 2000, the equipment had been fully installed and commissioned and was ready to start production. It was a large item, some 300 metres long, bolted to concrete plinths and connected to gas, water and electricity supplies.

The arrangements between Alphasteel and Lictor relating to the equipment were set out in a letter of 3 April 2000 signed on their respective behalves. Whilst in the proceedings Mir Steel challenges the validity of the agreement contained in that letter, for the purposes of the applications before the judge, Mir Steel accepted that it constituted an enforceable contract between Alphasteel and Lictor. It recorded their agreement that the equipment was movable, that it was and would remain the property of Lictor and that Alphasteel had no property or other rights in it save for the right to use it to roll steel and produce the resulting products. It also provided that Lictor was entitled at any time, upon giving Alphasteel reasonable notice, to enter its premises and dismantle and remove the equipment at its expense; and that Alphasteel ‘will not sell or purport to sell, mortgage, hypothecate or charge [Lictor’s] interest as owners in the Equipment or create or knowingly suffer to exist any lien over all or any of the Equipment’.

Between April 2000 and the end of 2007, Alphasteel carried on business as a producer of rolled steel products using the equipment. Following its entry into administration in December 2007, the administrators instructed Edward Symmons LLP to prepare particulars of sale in relation to Alphasteel’s business and assets and to carry out a marketing exercise. Particulars were circulated to possible buyers in January 2008. The covering letter invited offers for the freehold property, plant, equipment, motor vehicles, other assets and the goodwill of Alphasteel’s business; and the particulars treated the equipment that was being offered for sale as including the hot strip mill. The judge said there was no evidence that, by that stage, the administrators had been alerted by Lictor or anyone else to the possibility of a claim by Lictor to ownership of the equipment. The conditions in the particulars made it clear that the information in them had been provided by Alphasteel’s directors and staff, that no warranty was being given by Edward Symmons LLP or the administrators and that intending purchasers must satisfy themselves as to its correctness.

In February 2008, however, the 3 April 2000 letter referred to in paragraph 4 above (and perhaps other documentation) was provided to the administrators. Their solicitors, Withers LLP, made enquiries and, on 10 April 2008, Alphasteel’s former accountants informed them by email of their recollection that Lictor had retained ownership of the equipment, which had not been shown as an asset of Alphasteel in its accounts.

By a letter of 25 April 2008, agents for Libala Limited, a Cypriot company (and second defendant to Lictor’s claim), made a ‘subject to contract’ offer to purchase the assets being marketed by Alphasteel’s administrators. They noted their understanding that there might be some doubt about the ownership of the hot strip mill equipment and made two offers. The first, at £50.1m, was on the basis that Libala received a clean title to all assets, including that equipment. The second, at £40.1m, was on the basis that Libala received a clean title to all the assets ‘with the exception of the hot strip mill for which the buyer will take the risk that there may be a dispute about ownership’. On 12 May 2008 Libala increased its two offers to £60m and £50m respectively but otherwise on the same terms.

Shortly afterwards, the administrators received formal notification on behalf of Lictor of its claim to ownership of the hot strip mill equipment. They were so notified by a letter of 19 May 2008 from Ernst & Young AG, of Basel, Switzerland, which explained that Ernst & Young were assisting in the administration of Satico Limited, which was said to own Lictor. The letter relayed Ernst & Young’s opinion that the equipment was Lictor’s property and included that ‘Therefore and for the sake of good order, we would like to emphasise that you are not entitled to sell nor to dispose of assets belonging to Lictor’ without its consent. They asked for the administrators’ confirmation that they would comply with the letter, but received none. The administrators proceeded with the proposed sale to Libala.

Draft heads of terms, subject to contract, were agreed between the administrators and Libala and were contained in a letter of 2 June 2008 signed on behalf of Libala and the administrators. Paragraph 1.1 provided that either Libala or its nominee would acquire the entire business and assets of Alphasteel (save for immaterial exceptions) ‘either directly or by way of the purchase of a wholly owned subsidiary of Alphasteel (“SPV”) to which Alphasteel’s entire business and assets [save as aforesaid] would be hived down…’. The price was to be £60m. In paragraph 1.3, Libala said it would not seek warranties etc in relation to Alphasteel’s business, assets or title thereto. Paragraph 1.4 provided, so far as relevant:

On 11 July 2008 Mir Steel was incorporated as the company to which the business and assets to be sold to Libala were to be hived down. Its sole shareholder was Alphasteel. As the judge noted, it was to be inferred that Libala had exercised the second option referred to in paragraph 1.1 of the heads of terms. The hive down agreement, also made on 11 July 2008, was between (1) Alphasteel (the vendor), (2) the administrators and (3) Mir Steel (the purchaser, then known as Alpha (Realisations) Limited, but its name was later changed). The agreement proceeded on the basis that the hot strip mill equipment was a fixture and it was expressly included in the list of ‘Fixed Assets and Moveable Plant and Equipment’ listed in Schedule 2 to the agreement. Clause 2.1 of the agreement provided:

Clause 3 provided for the consideration to be (in round terms) £58.03m, of which £14m was apportioned to the fixed assets (the figures were amended on 14 July 2008, with the total consideration being restated as £57.35m, of which £42.55m was so apportioned). Clause 3.1 provided for the consideration to be left outstanding on an intra-group loan account, to be payable by Mir Steel on demand by Alphasteel. Clause 7, ‘Passing of property and risk’, provided:

Clause 9, ‘Third party claims’, in particular clause 9.5, is of direct relevance to the issue raised by the appeal. It provides, so far as material:

Clause 16, ‘Administrators’, provided so far as material:

Finally, clause 17.4 provided, so far as material:

The transfer documents required by the agreement were executed on behalf of Alphasteel and delivered to Mir Steel on 11 July 2008. On the same day, Mir Steel acknowledged its indebtedness under the agreement. On 14 July 2008, the single issued share in Mir Steel held by Alphasteel was sold and transferred for £1 to Libala, which guaranteed payment of the purchase price owed by Mir Steel under the hive down agreement. On the same day, Libala advanced to Mir Steel the funds required to pay what was due under that agreement, which was onward paid to Alphasteel or the administrators. Thus completion of the hive down agreed occurred, as the judge put it, on a combination of 11 and 14 July 2008. The parties agreed before the judge that a substantial part, perhaps the majority, of the consideration paid for the Alphasteel assets was attributable to the hot strip mill, although the evidence did not disclose the precise amount so attributable.

It is common ground that although the hive down agreement was between Alphasteel, its administrators and Mir Steel, its terms were negotiated with Libala, through its solicitors, Clyde & Co LLP, who are also Mir Steel’s solicitors in these proceedings. Alphasteel and the administrators were represented in the negotiations by their solicitors, Withers LLP.

Lictor complains about the disposal of the equipment comprising the hot strip mill. It asserts that Alphasteel had no title to it at the time of the hive down agreement and that it retained such title itself. It has brought claims against Mir Steel and Libala. It obtained a default judgment against Libala on 10 March 2011 but Mir Steel is defending itself against all claims.

Lictor sues Mir Steel and Libala for alleged conversion, claiming the delivery up of the equipment and damages. Mir Steel’s defence to the conversion claim is that the equipment became annexed to Alphasteel’s freehold whereupon Lictor ceased to have any title to it. The parties have always been agreed that the conversion claim must proceed to trial.

Lictor also has other claims against Mir Steel and Libala. First, it claims damages for inducing a breach of the contract contained in the letter of 3 April 2000. As to that, Lictor asserts that Mir Steel had knowledge of its terms via the administrators of Alphasteel, who controlled Mir Steel until its sale to Libala on 14 July 2008. The inducement alleged against Mir Steel is, in essence, its entering into the hive down agreement with Alphasteel. Relying on substantially the same facts, Lictor also has an alternative claim that Mir Steel and Libala are answerable to it in conspiracy (to which Alphasteel is said to have been a party, although Lictor has not sued Alphasteel), the conspiracy being said to be an ‘unlawful means’ one. The ‘unlawful means’ is the alleged inducement of breach of contract; the combination alleged is the agreement for the sale and purchase of Alphasteel’s assets.

The first application was one issued on 8 July 2011 by Mir Steel for permission to join Alphasteel and the administrators as Part 20 defendants, the claims sought to be made against them being for (i) damages for breach of warranty under the hive-down agreement, (ii) repayment of sums said to have been paid by mistake of fact and/or law, and (iii) contribution under the Civil Liability (Contribution) Act 1978 to Lictor’s claims against it for inducing a breach of contract and for conspiracy. The second application was one issued on 3 November 2011 by Mir Steel for summary judgment against Lictor on the latter’s claims for inducing a breach of contract and conspiracy.

The judge dealt with the latter application first. For reasons he gave, he refused to grant summary judgment in favour of Mir Steel either on Lictor’s claim for inducing a breach of contract or on its claim for conspiracy. The judge then turned to Mir Steel’s application to join Alphasteel and the administrators as Part 20 defendants. For his reasons in paragraphs 67 to 74 of his judgment, he held that Mir Steel’s proposed claims against the proposed defendants had no real prospect of success on any of the claimed grounds and dismissed the application to join them as Part 20 defendants.

Mir Steel’s proposed Part 20 claim was, as I have said, based on three grounds. The judge dealt first with the claim for contribution in respect of Lictor’s claims against Mir Steel for inducing a breach of contract, alternatively conspiracy. It is only against his refusal to allow Mir Steel’s proposed Part 20 claim in respect of those claims that Mir Steel appeals. The judge disposed of the contribution claim as follows:

The judge’s division of reasoning in paragraphs 68 and 69 can be read as suggesting that clause 9.5 was available to be defensively invoked only by Alphasteel, but not also by the administrators, who had instead to rely on the rule in Said v. Butt [1920] 3 KB 497. It was, however, agreed before us that if clause 9.5 provides Alphasteel with an answer to the contribution claim, it is likewise available to the administrators, who were also parties to the hive down agreement. In advancing the appeal, Mr Downes QC, for Mir Steel, recognised that, in order for the appeal to succeed, he had to satisfy the court both (i) that as a matter of construction, clause 9.5 does not preclude the proposed claim for contribution against Alphasteel and the administrators, and (ii) that, contrary to the judge’s holding, it is not open to the administrators to rely by way of defence on the rule in Said v. Butt, whose essence is summarised in the judge’s paragraph 68 and is derived from McCardie J’s observations at [1920] 3 KB 497, 506:

We heard argument on both the issues upon which Mir Steel has to succeed if its appeal is to be allowed. I deal first with the clause 9.5 issue.

At first sight, one might wonder what the clause 9.5 issue can be. The interpretation of clause 9.5 requires the ascertainment of the meaning that it would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were when the hive down agreement was made on 11 July 2008 (see Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896, at 912, per Lord Hoffmann). As to that, and so far as Mir Steel’s knowledge was concerned, it was not suggested to us that we should proceed otherwise than on the basis that Mir Steel had all the knowledge that Libala had. Libala was a party to the heads of terms and its solicitors negotiated the hive down agreement. It is clear that Libala knew about Lictor’s claim to the ownership of the hot strip mill equipment and, therefore, that Alphasteel’s title to the equipment was in issue. It is also common ground that the administrators had disclosed to Libala all the documents it had relating to that claim, including the letters to which I have referred. With that knowledge, Libala embraced in clause 1.4(a) of the heads of terms the risk of ‘any’ adverse claims against it or Mir Steel ‘in relation thereto’; and in clause 9.5 of the hive down agreement, Mir Steel agreed that ‘it shall be responsible for settling any claim made against it by [Lictor] in respect of the hot strip mill …’. The generality of the words ‘any claim’ would, one think, naturally include the damages claims that Lictor has brought against Mir Steel in relation to the hot strip mill and so preclude Mir Steel’s bid to pass their burden on in part to Alphasteel and the administrators.

Mr Downes does not question - indeed he acknowledged – that, taken at face value, the words ‘any claim’ do cover all Lictor’s claims against Mir Steel. He submitted, however, that that is not enough. Whilst he accepts that the words undoubtedly extend to Lictor’s claim in conversion, and so impose any liability for that exclusively upon Mir Steel, he disputes that they ought to be read as also imposing upon it the exclusive burden of bearing the consequences of torts said to have been committed by the administrators and Alphasteel, being torts which have at their heart intentional wrongdoing: namely, inducing a breach of the 3 April 2000 contract and conspiracy. He said that it is only if clause 9.5 had expressly spelt out that it was intended to have that latter, and wider, effect that it can properly be construed as the judge construed it.

The ultimate source for that submission is the judgment of Lord Morton of Henryton when delivering the advice of the Privy Council in Canada Steamship Lines Ld v. The King [1952] AC 192. The Crown had leased land to the appellant company together with a right to use a shed and a right to construct a loading platform alongside it. The company’s covenants included, in clause 7, that it ‘shall not have any claim or demand against the lessor for detriment, damage or injury of any nature to the said land, the said shed, the said platform …’. By clause 8, the Crown covenanted to maintain the shed. By clause 17, the company covenanted ‘at all times [to] indemnify and save harmless the lessor from and against all claims and demands, loss, costs, damages, actions suits or other proceedings by whomsoever made, brought or prosecuted, occasioned by or attributable to the execution of these presents, or any action taken or things done or maintained by virtue hereof, or the exercise in any manner of rights arising hereunder’. The shed burnt down whilst the Crown’s servants were performing its clause 8 repair obligations. Claims were brought against the Crown in negligence by the company and others. Angers J found that the fire and resulting damage were caused by the gross negligence of such servants whilst acting within their duties or employment. The Crown pleaded that clause 7 provided it with a defence against the company’s claim; and in third party proceedings, it claimed, in reliance on clause 17, an indemnity from the company against the other parties’ claims. The Supreme Court of Canada, reversing Angers J, held by a majority that the Crown’s servants were merely negligent rather than grossly so, that clause 7 gave the Crown its claimed defence and that clause 17 entitled it to its claimed indemnity.

The principles for which the case is well-known are contained in Lord Morton’s summary of the correct approach to the interpretation of clauses such as clause 7. He said, so far as material, at [1952] AC 192, 208:

Lord Morton then explained how, applying those principles, the Committee did not regard clause 7 as protecting the Crown from claims for damages resulting from the negligence of its servants. That conclusion was fortified by a consideration of clause 8, which had to be read together with clause 7. So read, it appeared to the Committee to be most unlikely that clause 7 was intended to protect the Crown from claims for the negligence of its servants in the performance of the very obligations imposed upon it by clause 8. The Committee also considered the impact of clause 17 upon the interpretation of clause 7, which I need not discuss. The outcome was that the company’s appeal was allowed and Angers J’s orders restored.

Mr Downes submitted that if clear words are required to exclude claims for negligent wrongdoing, so also must they be required to exclude claims for intentional wrongdoing; and the torts of inducing a breach of contract and conspiracy both require intention on the part of the wrongdoer. Whilst, therefore, clause 9.5 can fairly be read as extending to the conversion claim (and, if it did not at least so extend, it would have no substantive content), Mr Downes submitted that it cannot or should not be read as shifting exclusively to Mir Steel the burden of the claims brought against it by Lictor under the two other torts, being torts in which Alphasteel and the administrators are also alleged tortfeasors.

The principles explained in the Canada Steamship case were the subject of discussion by the House of Lords in HIH Casualty and General Insurance Ltd and Others v. Chase Manhattan Bank and Others [2003] Vol 2 Lloyd’s Law Reports 61. It will not be constructive to take time identifying the particular points that arose for consideration in that case or the way in which the House dealt with them, since a consideration of the facts of one case is rarely of assistance in resolving questions raised by the different facts of another case. What are, however, of assistance are the observations made by their Lordships as to the application of the Canada Steamship principles.

As to that, Lord Bingham of Cornhill said, at paragraph [11].

Lord Steyn agreed with Lord Bingham’s opinion. Lord Hoffmann then provided a valuable discussion of the Canada Steamship guidelines. He said:

Lord Hobhouse of Woodborough delivered an opinion by which he agreed with the orders and answers proposed by Lord Bingham. At paragraph [95], he referred to and rejected an argument based on the Canada Steamship case ‘as giving too restricted an interpretation to this clause in its context’. Lord Scott of Foscote delivered a dissenting opinion, but he too, after referring to the Canada Steamship principles, said in paragraph [116] that:

Those various comments about the Canada Steamship principles show that they should not be applied mechanistically and ought to be regarded as no more than guidelines. They do not provide an automatic solution to any particular case. The court’s function is always to interpret the particular contract in the context in which it was made. It would be surprising if it were otherwise.

The task for the court in the present case is, I consider, therefore to approach the interpretation of clause 9.5 in light of the overall commercial purpose of the hive down agreement; and to determine whether it was ‘inherently improbable’ that clause 9.5 was directed (as between Mir Steel on the one hand and Alphasteel and the administrators on the other) at releasing Alphasteel and the administrators not just from any liability to contribute to any claim in conversion that Lictor might bring against Mir Steel, but also from any liability to contribute to any other claim that Lictor might bring against Mir Steel in respect of the hot strip mill (for example, for inducing a breach of the 3 April 2000 contract or for conspiracy to damage it by unlawfully combining with Alphasteel in a sale of the equipment in breach of that contract).

The commercial purpose of the hive down agreement was obvious. Alphasteel had entered into administration by order of the court and its joint administrators were under a statutory duty to achieve the ‘purpose of administration’ as quickly and efficiently as reasonably practicable (see paragraphs 3 and 4 of Schedule B1 to the Insolvency Act 1986). They resolved to perform that duty by way of a sale of Alphsteel’s business and assets to Mir Steel, their objective being to achieve a prompt realisation and consequential distribution of proceeds to creditors. Mir Steel’s objective, as the purchaser, was to acquire such business and assets with a view to exploiting them for its own commercial advantage.

As to the likely intended scope of clause 9.5, there is a crucial feature of the present case, which distinguishes it from most other cases in which there arises an issue as to the interpretation of clauses directed at either (i) the exclusion or limitation of the liability of one contracting party for loss or damage suffered by the other, or (ii) the allocation as between the contracting parties of where any such loss or damage is to lie. Unlike in most such cases, when Alphasteel, the administrators and Mir Steel entered into the hive down agreement they all knew that Lictor had raised and asserted a claim to the ownership of the hot strip mill. In particular, they all knew of the terms of the letter of 3 April 2000. They all knew, therefore, of the factual basis upon which Lictor could or might claim to assert its title. Alphasteel and the administrators were admittedly selling Mir Steel an asset to which the title was flawed or possibly flawed. But Mir Steel knew all about such flaw and was nevertheless prepared to buy the asset, warts and all; and, by clause 9.5, it agreed to assume responsibility ‘for settling any claim made against it by [Lictor] in respect of the hot strip mill’.

Why in those circumstances should ‘any claim’ in clause 9.5 be narrowly construed as extending only to a claim by Lictor against Mir Steel for conversion? As all the parties to the hive down agreement were aware of the terms of the letter of 3 April 2000, it was - or should have been - apparent to them that Lictor might also seek to advance a damages claim against Mir Steel on the basis that the hive down to Mir Steel involved the inducement of a breach of that contract; and any such alternative claim would, I consider, obviously be one ‘in respect of the hot strip mill’. They might or might not have foreseen the possibility of Lictor also seeking to repackage the same factual grounds by way of a claim for conspiracy. But whether they did or did not foresee that, or should have done so, does not matter. The bottom line is (a) that it would have been obvious to all parties to the hive down agreement that the administrators’ objective was to achieve an early sale and prompt consequential distribution of proceeds to creditors; (b) that, as between Alphasteel and themselves on the one hand and Mir Steel on the other hand, the administrators were seeking by clause 9.5 to insulate Alphasteel and themselves from any liability to Mir Steel if a claim was brought against it; and (c) that if Lictor did make claims against Mir Steel in respect of the sale of the hot strip mill, it could not realistically have been the parties’ intention that Mir Steel could (in effect) then be entitled to claw back from Alphasteel and/or the administrators part of the price that it had agreed to pay for the mill, being a price it had agreed in the full knowledge of the possible flaw in the title to the mill and of the risk of claims in respect of the mill by Lictor.

I record that it was part of Mr Downes’s argument that paragraph 1.4 of the draft Heads of Terms was an admissible aid to the construction of clause 9.5 of the hive down agreement. He said that the words ‘in relation to’ in the former referred back exclusively to the ‘title dispute’ there referred to; that therefore the sense of ‘any claims’ in paragraph 1.4 was that they were confined to claims in relation to such a title dispute, and did not range wider; and that such interpretation should similarly limit the scope of the wording in clause 9.5. I respectfully disagree. I do not regard the language of paragraph 1.4 as clearly confining the scope of ‘any claims’ in the way that Mr Downes submitted; and even if such a limitation can arguably be read into paragraph 1.4, I can anyway see no reason to invoke the non-contractual Heads of Terms as requiring what I would regard as an unnatural limitation to be read into the different, and on any basis wider, contractual language of clause 9.5.

Moreover, the assertion advanced by Mir Steel that clause 9.5 could not have been intended to be directed at excluding Mir Steel’s right to claim against Alphasteel and the administrators for their commission of torts of intentional wrongdoing against Mir Steel appears to me to be particularly hollow. If the sale to Mir Steel did involve any wrongdoing, whether of conversion, inducing a breach of contract or conspiracy, the parties to the hive down agreement, including Mir Steel, were all engaged in it together, and Mir Steel could or should have realised that. The deal, however, was plainly that any such claim was exclusively for the account of Mir Steel, which was knowingly buying the relevant asset at a price that it had assessed was the right one to pay for it.

The whole point of clause 9.5 was therefore to shift to Mir Steel the entire risk and burden of any claim that Lictor might in future make against it in respect of the hot strip mill; and its words extend to all the claims that Lictor has so brought. The words ‘any claim made against [Mir Steel] … in respect of the hot strip mill’ mean what they say. I therefore respectfully agree with the judge’s conclusion to that effect. Since I consider that clause 9.5 provides a complete answer to Mir Steel’s wish to claim contribution in Part 20 proceedings against Alphasteeel and the administrators, it is unnecessary also to consider the arguments on the Said v. Butt issue. I would dismiss Mir Steel’s appeal.

I agree.

I also agree.