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4 Eng Ltd v Harper & Anor

[2007] EWHC 1568 (Ch)

HC06CO1550
Neutral Citation Number: [2007] EWHC 1568 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice

Strand

London WC2A 2LL

Date: Thursday, 3rd May, 2007

BEFORE:

MR JUSTICE BRIGGS

__________

BETWEEN:

4 ENG LTD

Applicant

-v-

(1) ROGER HARPER

(2) BARRY SIMPSON

Respondents

__________

Tape Transcript of Wordwave International, a Merrill Communications Company

PO Box 1336, Kingston-Upon-Thames KT1 1QT

Tel No: 020 8974 7300 Fax No: 020 8974 7301

Email Address: Tape@merrillcorp.com

(Official Shorthand Writers to the Court)

__________

Mr I Smith (instructed by Reid Minty LLP) appeared on behalf of the Applicant.

Mr A Gledhill (instructed by Blaser Mills) appeared on behalf of the First Respondent.

Ms J Pollard (instructed by Bond Pearce) appeared on behalf of the Second Respondent.

__________

JUDGMENT

1.

MR JUSTICE BRIGGS: On 29th June 2001 the claimant in these proceedings, 4 Eng Ltd, agreed to purchase from the defendants, Roger Harper and Barry Simpson, all the shares of Ironfirm Limited, a company trading as Excel Engineering (“Excel”) for £1.2 million, of which £550,000 was to be paid in cash on completion, which was to take place on the same day, and the balance was to be paid in instalments over three years. Part of the consideration for those payments was the giving by the defendants of extensive warranties in a fairly typical modern form as to the affairs and financial position of the company.

2.

On 8th December 2005 at the Reading Crown Court each of the defendants was convicted of two charges of conspiracy to corrupt and conspiracy to defraud in relation to the affairs of Excel and its principal customer Mars UK Limited, and since that date the defendants have both been serving periods of imprisonment.

3.

These proceedings arise out of the matters in respect of which the defendants were convicted. In paragraph 14 of the Particulars of Claim the claimant describes a corrupt scheme, defined as such:

“Involving the Defendants in relation to the affairs of Excel and Mars as follows:

between at least 1st July 1997 and 20th June 2001 the Defendants corruptly induced payments from and defrauded Mars by the following means.

(1)

A corrupt Mars’ employee would raise a false order or an inflated order for the purchase of work and/or goods to be carried out/supplied by Excel in an arrangement with the Second Defendant;

(2)

the Mars’ employee raised a Mars’ purchase order which falsely described the work and/or goods (or in the case of an inflated order the extent of the work) to be carried out/supplied by Excel;

(3)

the Second Defendant would raise a job number in Excel’s job control system and the false or inflated order was booked out as completed;

(4)

the First Defendant would raise and submit a sales invoice to Mars in respect of the false or inflated order;

(5)

Mars would pay Excel in respect of the false or inflated order;

(6)

the Defendants would make a payment to the corrupt Mars’ employee either as a wage or an expense or as a payment to a fictitious or real business organisation controlled by the Mars’ employee or his or her spouse (each organisation is referred to in the annexes as a ‘ghost’ company) or as a payment to another nominated person despite the fact that neither the Mars’ employee nor any other person had provided any lawful and genuine services to Excel in respect of the payments received;

(7)

the corruption and payments to the Mars’ employees and other persons associated with them was implemented by the use of specially devised internal bookkeeping and accounting procedures including [I summarise] (i) the use of an entirely fraudulent series of internal works order numbers used only in relation to false orders from Mars called the ’70,000 orders’ and (ii) the use of internal accounts to internally record the amounts of money received from Mars in relation to false and inflated orders and to be paid to corrupt Mars’ employees and their associates and/or to be retained by the Defendants for their own benefit.”

4.

The pleading goes on to provide detailed particulars in various annexes of the extent, monetary amount and nature of operation of the scheme, and it is alleged that the aggregate sum of money received by Excel from Mars in respect of either non-existent orders or by way of corrupt inflation of existing orders amounted to a sum slightly in excess of £1.8 million during the specified period.

5.

It is apparent from those allegations that the defendants are alleged both to have known about and to have been personally involved in the corrupt scheme and to have benefited substantially from it.

6.

The claimant claims that the existence of the corrupt scheme as at the time of the sale agreement rendered false a large number of the warranties contained in it and meant that Excel was in truth, both as at the time of purchase and at all times thereafter, of no value for two reasons: first, because Excel’s liability to Mars to repay the £1.8 million-odd as a constructive trustee rendered its balance sheet insolvent, although of course that liability was not shown in the balance sheet and, secondly, because the corrupt scheme was bound in time, and later did, destroy Excel’s goodwill with Mars, its major customer. The claimant further alleges that after struggling to make a go of Excel’s business, notwithstanding the slow emergence of the corrupt scheme after June 2001, Excel went into insolvent administration in January 2006 after business with Mars finally dried up late in 2005 at or about the time of the criminal trial, after a long decline.

7.

The claimant’s case is, firstly, that all the warranties were also fraudulent misrepresentations which induced the claimant to buy Excel, giving rise therefore to a claim in deceit; secondly, that all the warranties were, regardless of deceit, misrepresentations under the Misrepresentation Act, giving rise to a claim of the type identified in Section 2(1) of that Act; thirdly, that the breaches of warranties all gave rise to contractual claims of breach of warranty under the agreement; and, fourthly, that although the claimant has recouped £650,000 of its total loss by exercising a contractual right of set-off against its liability to pay the balance of the purchase price, its true loss was nonetheless greatly in excess of £650,000 whether measured on tort principles based upon the misrepresentation claims or upon a contractual basis based upon the breach of warranty claims. Its loss is pleaded as being £2,665,549-odd after allowing for the set-off.

8.

I can summarise the loss as follows. It consists of the purchase price of £550,000 paid in cash, leaving aside the balance in relation to which there is a set-off; expenses connected with the purchase amounting to slightly more than £94,000; it gives credit for certain transfers made by Excel to the claimant; it asserts the loss of what would otherwise have been a valuable investment opportunity to acquire shares in Tarvale which the claimant says it would have proceeded with but for the matters complained of, the loss there being slightly in excess of £2.1 million; it alleges that the claimant made available the services of a Mr Shepherd and a Mr Tapper as directors of Excel at a total cost to the claimant of £275,000 for which Excel did not pay; and there is a small amount claimed in addition by way of employer’s national insurance on unpaid remuneration which Excel had to pay in connection with the services of those two gentlemen.

9.

By an application dated 21st January 2007 the claimant sought summary judgment for damages to be assessed in relation to its claims. By an amendment on 27th April 2007 the claimant sought an interim payment but sought and obtained an adjournment of its interim payment application after argument at the beginning of the hearing, due to having received evidence recently from the defendants including a valuation report from the second defendant which the claimant seeks time to answer.

10.

I now summarise the defendants’ cases, starting with the second defendant.

11.

The second defendant admits the corrupt scheme as pleaded in the form which I have described, save as to certain aspects of it including, in particular, the amounts of money involved. Secondly, he admits that this involved his having made some of the warranties relied upon by the claimant in the sale agreement both falsely and knowingly falsely, in other words deceitfully, but he either does not admit or denies breaches of some of the other warranties. Thirdly, he puts materiality of the warranties and detrimental reliance and loss in excess of £650,000 in issue. Fourthly, basing himself on clause 5.1 of the sale agreement, he relies upon a contractual defence consisting of a notice condition in the sale agreement requiring notification of any warranty claim within two years of the agreement. He relies upon that as a defence to all the contract claims based upon breach of the general warranties rather than tax warranties in the agreement (for which there was a separate notice period) and as a defence to any related claim under the Misrepresentation Act arising from treating the same warranties as misrepresentations, as indeed the contract provided that they should be. All those points and admissions appear from a Draft Defence lodged on behalf of the second defendant and from counsel’s submissions.

12.

Furthermore, the second defendant seeks reverse summary judgment in relation to the contractual claims based on the general warranties and the Misrepresentation Act claim to the extent that it is based on the general warranties, relying on what he says is an unanswerable case under clause 5.1 of the sale agreement.

13.

I turn to the first defendant. He makes no admissions as such and has not lodged any draft Defence, but Mr Gledhill, who appeared for him, submitted that, although he could make no admissions, he was not going to invite the court to conclude that, in relation to the participation of the first defendant in the corrupt scheme or the claims based in deceit or breach of warranty, his client could persuade the court that there was a real prospect within the meaning of Part 24 of the CPR that the first defendant would do better at a trial than is reflected in the admissions made on behalf of the second defendant.

14.

I should explain that the first defendant was, but the second defendant was not, Excel’s accounts manager and that this has given rise to certain issues as between them as to the extent to which the second defendant was aware of the falsity of the warranties when made. Apart from that, the first defendant generally adopts the same position as I have described as having been taken by the second defendant and he also cross-applies for reverse summary judgment based upon clause 5.1 of the sale agreement.

15.

In response the claimant says, in summary, as follows. Firstly, he invites the court to specify which alleged deceitful misrepresentations and breaches of warranty, including the tax warranties, are established to the standard required by CPR Part 24 beyond those that are admitted or not contested, since Mr Gourgey QC, who appears on the claimant’s behalf, submits that the extent of the breach of warranty may in due course be of some relevance to the quantification of any loss arising under the contractual claim if pursued. The claimant accepts that the defendants have an arguable defence under clause 5 of the sale agreement to the contractual or Misrepresentation Act claims based upon the general warranties, but not a defence of the standard sufficient to enable either of the defendants to obtain reverse summary judgment under Part 24. In that context the claimant submits, first, that clause 5.1, as a matter of construction, arguably does not apply to warranties known to be false at the time when they are given, and, secondly, the claimant relies upon correspondence passing between the parties within the two-year period following the making of the sale agreement as constituting, at least arguably sufficient to give rise to a triable issue, compliance with clause 5.1 if it applies.

16.

Finally, the claimant submits that detrimental reliance and loss for the purpose of establishing a cause of action in deceit is sufficiently established by demonstration (as is obviously the case) that the claimant entered into the sale agreement regardless of the question whether it had or had not fully set off its loss by declining to pay the £650,000 balance of the purchase price by the time it issued its proceedings.

17.

Those being the issues before me, I turn to deal first with the claimant’s summary judgment application and take the deceit claim first.

18.

The law as to deceit is that it contains the following requirements. Firstly, the making of a false statement; secondly, knowledge of the falsity of the statement when made by the maker of the statement; thirdly, that the false elements in the statement constituted a material inducement; and, fourthly, that that inducement caused the claimant to incur loss or to act in detrimental reliance upon the false statement.

19.

I propose to take the first of those two elements and the second together, i.e. falsity and knowledge of falsity, and to do so by reference to the Particulars of Claim, but first I must summarise the relevant provisions of the sale agreement.

20.

In clause 1.1, which contains a number of definitions, the warranties are defined as:

“The warranties, undertakings and representations contained in Schedule 3.”

In clause 4.1;

“The sellers undertake, represent and warrant to the purchaser that

(1)

save as fully and fairly disclosed in the disclosure letter each of the warranties and each of the statements set out in the disclosure letter and all of the accompanying documents is at the date of the sale agreement true and accurate in all material respects.”

Clause 4.2 provides that the purchaser is entering into the agreement in reliance upon each of the warranties as the sellers acknowledge.

21.

The warranties are then set out in detail in Schedule 3, to which I will come (to the extent necessary) when addressing each of the warranty claims in the Particulars of Claim. They are set out in paragraph 16 of the Particulars of Claim and the first is reliant upon paragraph 5.1 of the general warranties which provides as follows:

“Since the balance sheet date the company has carried on its business in the ordinary and usual course without any interruption or alteration in the nature, scope or manner of its business and without entering into any transaction assuming any liability or making any payment which is not provided for in the accounts or is not in the ordinary course of its business.”

22.

The evidence as to the corrupt scheme shows that it continued between the balance sheet date and the making of the sale agreement with the consequence that, upon the making by Mars to Excel of any of the impugned payments, Excel incurred a corresponding restitutionary liability or liability based on constructive trust to repay that sum to Mars. None of those corrupt transactions were in the ordinary course of business of Excel and involved Excel in incurring liabilities. In those circumstances, although this breach of warranty was not admitted by the first defendant or by the second defendant, it seems to me that the evidence establishes beyond any doubt or uncertainty that this warranty was false when given. Furthermore, since the defendants were each participants in the corrupt scheme, it seems to me clear that the defendants knew it was false when given. Accordingly, a deceit case is established in relation to paragraph 16.1.

23.

Paragraph 16.2 relies on paragraph 5.19 of the general warranties, which is as follows:

“The company is not engaged in any litigation or arbitration proceedings and no litigation or arbitration proceedings are pending or threatened by or against the company nor, so far as the sellers are aware, are there any facts or circumstances which, with or without the giving of notice or lapse of time, are likely to give rise to any litigation or arbitration proceedings being commenced by or against the company.”

24.

The facts are that, at the time of the giving of the warranties, the first and second defendants were participants in a corrupt scheme designed to defraud its principal customer, Mars UK Limited, in circumstances where Mars UK Limited was not at that time aware of the fraud. It seems to me that those are facts or matters making it likely that at some stage in the future, upon the discovery of the fraud, litigation would ensue by Mars as against Excel. It is true, as counsel for the defendants have pointed out, that no such litigation has in fact ensued for reasons which cannot finally be determined on a summary judgment application, but the question for me is whether, viewing the matter as at the date of the sale agreement, such litigation ought to be regarded as objectively likely. In my judgment, it clearly is or rather was at that time so to be regarded. It follows that that warranty was false when given by the defendants. And, furthermore, since they knew of the relevant facts and have adduced no specific evidence as to their state of mind at this hearing, it seems to me to follow as a natural and inevitable inference that they must have been so aware.

25.

Accordingly, the case is established against the defendants in deceit under paragraph 16.2.

26.

Paragraph 16.3, 16.4 and 16.5 need not be looked at in detail because they are the subject of admissions made on behalf of the second defendant and, as I have indicated, the first defendant did not suggest a real prospect of doing better than the second defendant at any trial in this respect. I need merely summarise them.

27.

Firstly, contrary to paragraph 5.22 of the general warranties there were circumstances which were likely to give rise to Excel or its officers being the subject of investigations or other proceedings, and of course criminal proceedings did in fact ensue. As to 16.4, which is based upon paragraphs 5.17 and 5.23 of the general warranties, payments had indeed been made to Mars’ employees in violation of Section 1 of the Prevention of Corruption Act 1906, and in relation to paragraph 16.5, which is based upon paragraph 7.7.14 of the general warranties, the corrupt scheme involved Excel entering into transactions and receiving payments from Mars which were not at arm’s length contrary to those warranties. I turn therefore to paragraph 16.6, which is based upon paragraph 7.7.15 of the general warranties, which is as follows:

“The company is not a party to any agreement or arrangement where the sellers or the company is aware of any invalidity thereof or of any grounds for determination, rescission, avoidance or repudiation thereof by any party thereto or in respect of which any party thereto is in breach.”

28.

The corrupt scheme involved a large number of potentially avoidable, determinable or rescindable transactions with Mars, and it also involved unlawful and therefore avoidable agreements between Excel and the corrupt Mars’ employees who were participants in the scheme.

29.

It was submitted on behalf of the defendants that although I might therefore conclude that this warranty was plainly false when given, the fact that neither of the defendants was a lawyer meant that the court could not conclude at this stage that they knew that the warranty was false when given, being unversed in the legal technicalities arising from corrupt and unlawful agreements concerning their invalidity. I reject that submission. It seems to me plain to any businessman involved knowingly in a corrupt scheme of the type which is here described that the agreements and transactions lying at the heart of it are liable, once discovered, to be set aside or undone.

30.

Paragraph 16.7 I need only mention because this is also not contested. It relies upon paragraph 7.11 of the warranties which provides that:

“The sellers are not aware of any reason which would cause Mars Confectionary Limited to reduce or terminate its requirements for products of the company or transfer its operations to another location.”

It will be apparent that the corrupt scheme plainly constituted a reason why Mars might in due course, when it discovered the scheme, do precisely that, such that that warranty is clearly both false and known to have been false at the time when it was given.

31.

I turn to paragraph 16.8 of the Particulars of Claim which is based upon paragraph 4.1 of the general warranties, which is that:

“The accounts have been prepared in accordance with the requirements of all relevant statutes and on a consistent basis in accordance with generally accepted accountancy principles, policies, standards and practices in the United Kingdom were true and accurate in all material respects and show a true and fair view of the affairs, assets and liabilities of the company at the balance sheet date and of the profits of the company’s financial period ended on the balance sheet date.”

The breach here alleged is that both Excel’s turnover and its profits were falsely stated in its accounts by reason of the corrupt scheme. On its summary judgment application Mr Gourgey QC pursued the allegation of a false inflation of turnover but did not, for reasons which I need not go into, pursue, as satisfied to the Part 24 standard, the allegation of a false inflation of profits.

32.

In my judgment, again this alleged breach of warranty is clearly made out. Excel included within its accounts as part of its turnover all the payments received under the corrupt scheme from Mars. In my judgment it is clear that such payments did not properly form part of the company’s turnover and its turnover was thereby inflated. Furthermore, again, as it seems to me, that is a matter of which it is clear that both the defendants were aware at the time when the warranties were given.

33.

I turn now to paragraph 16.9 which is based upon paragraphs 1.1, 4.1, 4.4, 5.1 and 5.3 of the general warranties. I need not describe those in full. The allegation is that there was breach of warranty in relation to the true net asset value of the company as disclosed by its accounts, the allegation being that as at 30th June 2000 its true net asset value was nil rather than £963,700, as warranted in the accounts up to the end of June 2002, and less than the £750,000 net asset value as warranted in the disclosure letter.

34.

It is not challenged before me that the effect of the inclusion in the balance sheet of the turnover in relation to the corrupt scheme and the exclusion from the accounts of the contingent liability to Mars arising from the receipts from Mars pursuant to the corrupt scheme was that the company’s net asset value was overstated in its accounts as alleged in paragraph 16.9 of the Particulars of Claim. As to the question of knowledge of falsity, it seems to me that any businessman knowing and participating in the corrupt scheme and knowing that no recognition of Excel’s liabilities arising from the corrupt scheme were included in its accounts must be taken to have known that any assertion as to the company’s net asset value based upon its accounts must have been false. Accordingly the claimant’s case is established under paragraph 16.9.

35.

Paragraph 16.10 of the Particulars of Claim relies upon paragraph 4.7 of the general warranties, which is that:

“All proper and necessary books of accounts, registers and records have been maintained by the company on a consistent basis are in its possession or under control made up to the date and contain complete and accurate information in accordance with generally accepted principles relating to all transactions to which the company has been a party and give a true and fair view of the matters which ought to appear therein.

36.

The allegation of breach is here based upon the fact that it is alleged that Mr Harper destroyed records relating to the 70,000 series of transactions and that payroll records identifying employees who were in fact participants in the corrupt scheme were destroyed. This allegation is pursued only against Mr Harper and only in relation to the destruction of the 70,000 series records. In my judgment the case is sufficiently made out against Mr Harper only, it being sufficiently demonstrated by the evidence that he, as the accounts manager for the company and indeed of course one of its directors, was responsible for the destruction of those records, and in the absence of any evidence from him which would suggest that he has a real prospect of establishing the contrary at any trial.

37.

I need only mention paragraph 16.11 which alleges that:

“Contrary to paragraph 1.1 of the general warranties Excel have registered Georgina Welcher and Mrs E Welcher as employees of Excel, but failed to disclose to the claimant the fact that those persons were registered and paid as Excel employees or that the payments they received represented amounts of money extracted from Mars pursuant to the corrupt scheme.”

This breach is admitted by the second defendant and, as I have indicated, no submission was made by the first defendant that there was any prospect that he would do better than the second defendant at any trial in relation to that allegation.

38.

I turn therefore to the taxation warranties which are the subject matter of paragraph 16.12 of the Particulars of Claim. They are set out in Schedule 3 Part 4 of the sale agreement, and two of them are relied upon. The first is paragraph 2.1 of Part 4, which is that:

“All returns, computations and payments which should be or should have been made by the company for any physical purpose have been prepared on a proper basis and submitted within the prescribed time limits and are up to date and correct and none of them is now the subject or likely to be the subject of any dispute with the Inland Revenue or HM Customs & Excise or other authority concerned and will not give rise to any disallowance of relief, forfeiture, loss of allowance or credit, assessment, adjustment or set off, including any claim for interest on unpaid tax by the Revenue.”

Secondly, that:

“The company is not the subject of any back duty, investigation or in-depth enquiry by any physical authority and there are no known facts which may give rise to the same.”

39.

The evidence sufficiently discloses that in relation to payments received under the corrupt scheme from Mars these were included as part of the company’s receipts and that payments made by the company or to ghost companies of the Mars’ employees who were participants in the scheme and payments made to the defendants themselves as participants in the scheme were the subject of expense claims in the company’s tax computations. There is, in my judgment, an arguable case whether the consequence of those two improper aspects of the company’s preparation of its tax returns, computations and disclosures gave rise to any net higher tax liability of the company than it actually declared and paid. Nonetheless, it seems to me quite plain that the inclusion of the receipts and payments arising under the corrupt scheme as an ordinary aspect of the company’s business affairs and in respect of which expenses claims were made in its tax computations necessarily involved a breach of the taxation warranties in paragraph 2.1 of Part 4 of the schedule for the simple reason that those tax computations were not prepared on a proper basis. It is equally clear in my judgment that Mr Harper, being responsible for the company’s accounts and tax affairs, must have known that, but in my judgment the same can be said to the necessary standard predicated by Part 24 in relation to the second defendant as well. One does not need to be a tax expert to know or to be reckless as to whether the tax affairs of a company of which you are a director are likely to be improperly presented if you are a participant in a secret and corrupt scheme of the type in which the second defendant admits to having participated.

40.

It follows, therefore, that, subject to the small number of reservations which I have identified, the claimant’s case in paragraph 16 of the Particulars of Claim that there have been breaches of the warranties and, by the same token, false representations and representations known to have been false when made, is made out to the standard required for the purposes of summary judgment.

41.

I turn therefore to the next question, namely whether the false representations were material for the purposes of founding a claim in deceit.

42.

I am satisfied that both collectively and in many respects individually those false representations contained in the warranties identified in paragraph 16 of the Particulars of Claim were material. Indeed, for the avoidance of doubt I wish to make it clear that, even if one aggregates those warranties in respect of which the second defendant makes admissions and in respect of which the first defendant advances no submission as to a reasonable prospect of doing better than the second defendant’s admissions, those amount collectively to material warranties. The point may be tested in this way. If these vendors, the defendants, were to sell the shares in Excel without expressly disclosing the corrupt scheme to their purchaser, it would have been in practice impossible to make any significant warranties of the modern type as are found in this agreement at all without such warranties involving a falsehood. If one imagines either the disclosure of the scheme to the claimant or the offer of Excel’s shares on terms that no warranties at all were given, it is in my judgment obviously inconceivable that the claimant would have proceeded with the purchase on either basis.

43.

I turn therefore to questions of inducement and reliance. It is well established that if a misrepresentation is shown to have been material, then the court may infer, in the absence of any further evidence, that it was relied upon by the representee. Here reliance is also proved by evidence from one of the directors of the claimant at the time, Mr Shepherd. The defendants submitted, nonetheless, that there was a real prospect that cross-examination at trial would show that, even if none of the impugned warranties had been made, the claimant would still have purchased the company. The defendants relied upon two matters: firstly, the decision of the claimant as the corrupt scheme unravelled and became apparent during the months and years following the making of the agreement not to rescind the contract for the purchase of the company; and, secondly, upon the absence at this stage in the proceedings of full disclosure.

44.

As to the first point, it is in my judgment a non sequitur to submit that because a purchaser who has acquired an asset in reliance upon a false representation has not, upon becoming suspicious or much later aware of the full nature of the falsity, rescinded the contract, that therefore he did not rely in the first place. As it seems to me, there are all sorts of possible reasons for a decision not to rescind, and in the case of a purchase of a private company the affairs of the company are likely to change so quickly after the purchase as to make rescission generally impracticable fairly shortly after the purchase if only because it becomes difficult to make restitution in integrum, i.e. to restore back to the seller the subject matter of the contract in the form in which it was sold.

45.

More generally, the proposition that cross-examination might show that the claimant did not purchase Excel in reliance upon the false warranties seems to me, largely for the reasons I have already given, to involve a combination of pure Micawberism and a fanciful approach to the realities. As I have already said, it seems to me completely fanciful that the claimant would have purchased Excel if either the defendants had refused to make any of the relevant warranties at all, or if they had told the claimant the truth about the corrupt scheme.

46.

I turn therefore to the question of detriment and loss. It is not seriously disputed that even if viewed strictly as at the date of purchase Excel was worth less than the £1.2 million paid for it by the claimant. The defendants’ recent expert evidence does not assert that the company was at that date worth more than £1 million. It is clear therefore that, viewed as at the date of the purchase, the claimant acted in detrimental reliance on the false representations. But the defendants say that there is a triable issue whether, after setting off £650,000 of its loss pursuant to the contractual set off provided for in the sale agreement, the claimant had fully recouped its loss by the time it issued its claim in these proceedings, and therefore the defendants submit, there being arguably no continuing loss suffered by the claimant at the time of its issue of the proceedings, it has no cause of action against the defendants in deceit.

47.

This first raises a legal issue arising from the principle summarised in the 19th Edition of Clark & Lindsell on Torts at paragraph 18.36 that “Damage, in other words, is of the gist of the action”. That statement is based upon two authorities: Smith v Chadwick (1884) 9 AC 187 in which Lord Blackburn said at page 195:

“In  Pasley v. Freeman Buller J. says: ‘The foundation of this action is fraud and deceit in the defendant and damage to the plaintiffs. And the question is whether an action thus founded can be sustained in a court of law. Fraud without damage, or damage without fraud, gives no cause of action, but where these two concur an action lies, per Croke J.’

Whatever difficulties there may be as to defining what is fraud and deceit, I think no one will venture to dispute that the plaintiff cannot recover unless he proves damage. In an ordinary action of deceit the plaintiff alleges that false and fraudulent representations were made by the defendant to the plaintiff in order to induce him, the plaintiff, to act upon them. I think that if he did act upon these representations, he shews damage; if he did not, he shews none.”

48.

The second authority is Diamond v The Bank of London & Montreal [1979] QB 333 where Stephenson LJ says at page 349:

“But it is settled law that A's misrepresentation, however fraudulent and morally wrong, does not become tortious until B not merely receives it but acts upon it: see Briess v Wooley  [1954] A.C. 333, per Lord Tucker at p. 353; and the passage which was cited by Aikins J. in the  Original Blouse  case, 42 D.L.R. (2d) 174 from Salmond on Torts, 13th ed. (1961), p. 655, and which I think is exactly reproduced in the current edition (17th ed. (1977)) at p. 387 of that learned work. The damage may be suffered when and where B acts or begins to act upon the representation, but it may be suffered at a later time and at a different place. Although A's part of the tort is committed when and where he speaks or telexes or writes the misrepresentation, B's part is needed to complete the tort by acting upon the representation, and the tort is committed, in my judgment, when and where he does so act..”

49.

To that I would add the short summary in Downs v Chappell [1997] 1 WLR 426 at 433 where Hobhouse LJ said:

“I will take the tort of deceit first. For a plaintiff to succeed in the tort of deceit it is necessary for him to prove that (1) the representation was fraudulent, (2) it was material and (3) it induced the plaintiff to act (to his detriment).”

50.

Here the tort of deceit was complete, in my judgment, when the claimant entered into the agreement to buy Excel. The question is whether it matters that there may be an arguable case that the claimant had fully recouped its loss by the time of its claim in relation to an application for summary judgment for damages to be assessed. In my judgment, it does not matter. That question only goes to the assessment of damages. In my judgment, it is sufficiently clear that there is a completed cause of action in deceit at the time of the sale agreement and the question whether or not loss has been fully recouped or mitigated by whatever means is a matter of quantification only, not going to a cause of action.

51.

In case another court were to conclude that I am wrong on that matter of legal analysis, I would add that I am not persuaded that there is a real prospect that the defendants will show that Excel’s loss was fully recouped by its set off in relation to £650,000. The claimant’s case, verified by detailed evidence, is, first, that the company was valueless from the outset; next, that it never made a profit and went into insolvent administration in January 2006 after Mars ceased to do business with it when the criminal trial revealed to Mars the full extent of the fraud. But the claimant submits that in this case the loss should not be valued as at the date of the contract because of the continuing effect of the misrepresentation on the claimant and because the claimant was locked into the purchase as soon as, shortly after the purchase, the fraud began to emerge. For a long time it was uncertain in extent and until the criminal trial it was denied by the defendants. It was only fully proved at the criminal trial in late 2005, by which time Excel was insolvent.

52.

The leading case on the time at which it is appropriate to value a loss caused by deceit is Smith New Court Securities v Scrimgeour Vickers [1997] AC 254. At page 266 Lord Browne-Wilkinson referred to Bingham J’s dictum in County Personnel (Employment Agency) Ltd v Alan Pulver & Co (A Firm) [1987] 1 WLR 916 at 925 as follows:

“‘While the general rule undoubtedly is that damages for tort or breach of contract are assessed at the date of the breach … this rule also should not be mechanistically applied in circumstances where assessment at another date may more accurately reflect the overriding compensatory rule.’”

Lord Browne-Wilkinson continued:

“In the light of these authorities the old 19th century cases can no longer be treated as laying down a strict and inflexible rule. In many cases, even in deceit, it will be appropriate to value the asset acquired as at the transaction date if that truly reflects the value of what the plaintiff has obtained. Thus, if the asset acquired is a readily marketable asset and there is no special feature (such as a continuing misrepresentation or the purchaser being locked into a business that he has acquired) the transaction date rule may well produce a fair result. The plaintiff has acquired the asset and what he does with it thereafter is entirely up to him, freed from any continuing adverse impact of the defendant's wrongful act. The transaction date rule has one manifest advantage, namely that it avoids any question of causation. One of the difficulties of either valuing the asset at a later date or treating the actual receipt on realisation as being the value obtained is that difficult questions of causation are bound to arise. In the period between the transaction date and the date of valuation or resale other factors will have influenced the value or resale price of the asset. It was the desire to avoid these difficulties of causation which led to the adoption of the transaction date rule. But in cases where property has been acquired in reliance on a fraudulent misrepresentation there are likely to be many cases where the general rule has to be departed from in order to give adequate compensation for the wrong done to the plaintiff, in particular where the fraud continues to influences the conduct of the plaintiff after the transaction is complete or where the result of the transaction induced by fraud is to lock the plaintiff into continuing to hold the asset acquired.”

I then omit a paragraph. Lord Browne-Wilkinson then continued:

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

He then refers to two other principles not material for present purposes.

53.

In the present case the defendants, in my judgment, have no real prospect of showing that the valuation of what the claimant received under the transaction should be carried out as at the date of the agreement. This is because, first, it is evident that the true nature and full extent of the fraud took some considerable time to emerge after the acquisition, even though aspects of it started to manifest themselves immediately; and, secondly, because the very fact that aspects of an unquantifiable and, at the early stage, indefinable fraud did start to emerge immediately rendered the company effectively unsaleable by the claimant at least until the fraud had been fully identified and was capable of accurate disclosure to any purchaser. That did not emerge (in full at any rate) until the hearing of the criminal trial in 2005, by which time, on the evidence, the company was valueless. Furthermore, the defendants have chosen to address the value of the asset acquired, i.e. Excel, in evidence from a valuer solely as at the date of the purchase. Since, in my judgment, there is no real prospect that that will be the correct date the court is without evidence as to the company’s value at any other date sufficient to displace the very clear evidence that, at least by the time when the investigation of the fraud had reached a stage of certainty which would enable the affairs of the company to be properly described to any intending purchaser, the company had become, to all intents and purposes, valueless.

54.

Finally, in case again on appeal a different view as to that question might be formed, it will be sufficient for me to adopt Mr Gourgey’s alternative submission that if there is a relevant issue as to whether there was a continuing loss at the time when the claimant issued its proceedings, I should nonetheless declare as part of my judgment that on all other issues going to the establishment of a complete tort of deceit the claimant has succeeded to the standard necessary to permit summary judgment to be given on those separate and distinct issues. They are, of course, the issues of falsity, knowledge of falsity, materiality and detrimental reliance.

55.

I should mention one other submission made on behalf of the defendants against the conclusion that the claimant sufficiently demonstrates loss for the purpose of a cause of action in deceit, which was that it was alleged that there was a real prospect that at trial it would turn out that the claimant had suffered no loss because it never became the owner of Excel pursuant to the agreement. For that purpose the defendants rely on certain annual returns submitted on behalf of Excel suggesting that its only shareholders were Mr Shepherd and Mr Tapper.

56.

In response, the claimant has produced evidence, including a copy of the company’s register of members, to show that those annual returns were submitted in error and that in truth Excel was wholly owned by the claimant at all times after the completion of the purchase agreement. In my judgment there is no real prospect that the defendants will succeed at trial on that issue.

57.

It follows that, in my judgment, the claimant is entitled to summary judgment for damages to be assessed on the basis of the deceit established in the Particulars of Claim.

58.

I turn next to the contractual warranty claim based upon the tax warranties. Here, for reasons I have already given, in my judgment the breaches of the tax warranties, i.e. the warranty contained in paragraph 2.1 of part 4 of the schedule, is sufficiently made out. Further, in my judgment, it is sufficiently clear that there were facts known to the defendants which “may” give rise to a back duty investigation or in depth enquiry by a fiscal authority. The use of the word “may” in paragraph 2.3 of part 4 of the schedule establishes a relatively low threshold of probability such that I am satisfied that that test is passed. For the present purposes of a contractual warranty claim it matters not whether the defendants were aware at the time of the making of the sale agreement that those tax warranties were false.

59.

I am not satisfied that it is proved to the requisite standard under Part 24 that loss was caused to the claimant by virtue specifically of the breach of the tax warranties, for reasons which I have already given, but since loss is not a constituent part of a cause of action for breach of contract, that uncertainty does not stand in the way of the claimant obtaining a judgment for damages to be assessed for breach of those two specific warranties. Accordingly, the claimant succeeds on that part of its application as well.

60.

I turn now to the defendants’ cross application, namely to strike out or obtain reverse summary judgment in relation to the claimant’s alternative claim under Section 2.1 of the Misrepresentation Act and in relation to the claimant’s contractual claim based upon breach of the general warranties.

61.

As to the first of those two claims based on the Misrepresentation Act, it follows from my conclusion that a case based upon exactly the same representations but in deceit is made out that the alternative claim under Section 2.1 of the Misrepresentation Act necessarily falls away for as long as that judgment stands. Accordingly, I say no more about that aspect of the case and turn to the claimant’s alternative contract-based claim for breach of the general rather than tax warranties.

62.

The defendants’ applications to strike out or obtain reverse summary judgment in relation to that claim depend entirely upon clause 5.1 of the sale agreement which is in the following terms:

“Notwithstanding anything in this agreement to the contrary, the sellers shall not be liable for any claim or claims in respect of a breach of the warranties by the sellers unless:

5.1.1

written particulars thereof with such details as the purchaser may have of the specific matters in respect of which such claim is made shall have been given to the sellers within a period of six years after the date hereof in respect of claims relating to the taxation warranties and within two years after the date hereof in respect of claims relating to the remaining warranties.”

63.

The defendants say that no such written particulars and no such details as are required by clause 5.1.1 were given by the claimant to the defendants in time, i.e. within two years of the making of the sale agreement. Mr Gourgey for the claimant submits that there are three triable issues arising out of that assertion. The first is the question whether clause 5.1 applies at all to a claim based upon warranties given fraudulently so as thereby deliberately to conceal the underlying truth. The second issue is, if clause 5.1.1 applies, as to what are its precise requirements in the relevant circumstances. The third issue is as to whether, if clause 5.1 applies, the claimant complied with those precise requirements.

64.

Taking the first issue first, the claimant submitted that clause 5.1 is not, as a matter of construction, apt to impose a condition against the pursuit of a contractual claim for breach of a warranty given fraudulently in circumstances where necessarily the warranty deliberately conceals the true facts. Mr Gourgey relied upon the unreported decision of the Court of Appeal in Granville Oil v Davies Turner [2003] EWCA Civ 570, a decision given on 15th April 2003. The issue in the case was whether a condition in the standard trading conditions of the British International Freight Association in its 1989 edition requiring a 14-day notice of claim and the issue of a claim within nine months as the condition for pursuit of certain claims under the standard terms complied with Section 11 of the Unfair Contract Terms Act, i.e. with the well-known reasonableness test. The trial judge held that the notice conditions did not comply with the reasonableness test. A sub issue arising in the Court of Appeal was whether, as the trial judge thought, the condition, treated as an exclusion clause, applied to a case where a claim had been fraudulently concealed by the defendant. In the leading judgment in the Court of Appeal Tuckey LJ said this at paragraph 15:

“I think it is an inescapable conclusion from what he said that the judge did think that the clause applied to a claim for fraud and to a claim which had been fraudulently concealed by the conduct of the freight forwarder. The judge was not asked to construe the clause so widely and I do not think such a construction was justified. The clause is obviously designed to meet ordinary contractual claims such as those made in this case which a freight forwarder would expect to have to face in the ordinary of course of his business. As Lord Justice Rix put it in HIH Casualty at p. 512:

‘Parties to a contract plainly look to performance rather than non performance or misperformance, but they also contemplate the latter. It seems to me however that fraud is a thing apart. Parties contract with one another in the expectation of honest dealing.’”

65.

In the present case the question is whether clause 5.1 applies to a claim for breach of a warranty given fraudulently where ex hypothesi the truth and therefore the breach of the warranty is deliberately concealed by the warrantor. It is, in my judgment, immaterial that fraud is not a necessary part of the contractual claim. The question is whether a fraudulently given warranty of that type is within the contemplation of the exclusionary provisions of clause 5.1. There is, in my judgment, no room for some implied term by way of postponement for the running of time for the giving of a two-year notice equivalent to the sort of provision one finds in the Limitation Act. Either clause 5.1 applies to a fraudulently given warranty or it does not. Mr Gledhill submitted that the existence of some fraud in or about the conduct of the company’s affairs was expressly contemplated, for example, by general warranty 5.23 in the schedule to the sale agreement, which is that:

“There has been no payment or inducement made or offered whether by way of commission, consultancy, or in any other manner to any person in respect of any contract or proposed contract relating to any goods or services of the company, in particular without prejudice to the generality of the foregoing or in respect of which the Prevention of Corruption Acts 1906 and 1916 apply.”

Plainly, he says, that warranty expressly contemplates the possibility that a fraud of that type might have been committed and therefore warrants that is has not.

66.

I accept that submission, but nonetheless it does not follow, in my judgment, that the parties, in giving and receiving the warranties in the sale agreement and imposing a two-year period for giving notice of warranty claims, must be taken to have contemplated not merely that there might be a fraud but that the fraud would be deliberately concealed by the warrantors. For example, the relevant fraud could be one committed by an employee unknown to and therefore inevitably not disclosed by directors acting honestly and in good faith. It is, in my judgment, well arguable by parity of reasoning with the passage in the Granville Oil case, to which I have referred, that clause 5.1 is not as a matter of construction applicable to warranties fraudulently given in circumstances where the truth and thereby the breach of warranty is deliberately concealed. I would go further and say that, in my judgment, and this is a pure question of construction, if it were necessary to decide the question now I would indeed hold that clause 5.1 does not so extend.

67.

That conclusion is sufficient to present an insuperable obstacle to the defendants’ applications for reverse summary judgment based upon clause 5.1 having regard to the conclusions which I have already reached as to the falsity and dishonesty of the general warranties in question. Nonetheless, again against the possibility that this question of construction might be differently regarded in another court, I would add by way of brief summary that, taking the second and third issues together, it is arguable to the extent of raising a triable issue or real prospect of success that the letters received by the defendants dated respectively 11th October 2001, 9th December 2001 and 7th March 2003 (incorporating as it did by reference the contents of the letter dated 22nd May 2002), were sufficient compliance with clause 5.1, if it applied. I say arguable; it is just arguable sufficiently for Part 24 purposes to prevent the obtaining of a contrary summary judgment. In essence, the first and second of those two letters may arguably have provided the essential particulars of the warranty claim and the third of those two letters incorporating as it did the letter of 22nd May 2002 may arguably have provided sufficient detail. But as I have indicated, my judgment in dismissing the defendants’ cross application is sufficiently based upon my conclusion as to the arguable construction of clause 5.1, which I have already reached.

68.

It follows that the defendants’ cross applications fail and must be dismissed.

69.

The claimant has invited me to stay any further proceedings on either the general warranties contract claim or the tax warranties contract claim pending the completion of the assessment of damages on the tort basis under my judgment on the deceit claim and, in my judgment, that would be a convenient course to follow as a matter of case management.

4 Eng Ltd v Harper & Anor

[2007] EWHC 1568 (Ch)

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