Nationwide Building Society v Dunlop Haywards (DHL) Ltd (t/a Dunlop Heywood Lorenz) & Anor

In April and September 2005 the Cheshire Building Society (“CBS”) made two advances of £ 10.5 million and £ 1 million (less fees) to Goldgrade Properties Limited (“Goldgrade”) on the security of commercial property in Priory Road, Ashton, Birmingham, which Goldgrade was to purchase. The property had been valued by the first defendants - Dunlop Haywards (DHL) Limited (“DHL”). Mr Ian McGarry of DHL fraudulently overstated the value of the security, claiming that it was worth £ 16 million on the assumption that 3 occupational leases with favourable terms into which Goldgrade was said to be about to enter were completed. Without the leases he valued the property at £ 10.5 million. Both valuations were grossly excessive, the true value being about £ 1.3 - 1.5 million.

Since the events in question CBS has merged with the Nationwide Building Society which is now the claimant. I shall, however, continue to refer to the claimant as “CBS”.

In this action CBS claims damages against DHL and Cobbetts, the solicitors who acted on its behalf in relation to the two secured loans of April and September 2005.

The issues that remain for determination are (i) the assessment of the quantum of CBS’ claim against DHL; and (ii) Cobbetts’ contribution claim against DHL. The determination of those issues may prove to be an academic exercise. DHL is in liquidation and has no assets other than certain causes of action, the value of which is uncertain, and, according to its insurers, no remaining cover. The liquidator of DHL has declined to agree the quantum of CBS’ claim against DHL; but neither he nor Cobbetts have put in any evidence challenging the amounts claimed. DHL has not been represented before me.

I have had written evidence from witnesses from CBS and Cobbetts (the latter dealing with the contribution issue). CBS has also presented a detailed report from Mr Tim Taylor of KPMG in support of its claim.

CBS issued proceedings in May 2007. Both DHL and Cobbetts filed defences. DHL admitted breach of duty and causation, but did not admit deceit. Cobbetts served a contribution notice on DHL.

On 18^th January 2008 Steel J gave CBS summary judgment in deceit against DHL, with damages to be assessed. He did so because he concluded that there was no realistic prospect of DHL resisting a finding that Mr McGarry had been dishonest. He ordered DHL to make an interim payment of £ 10 million on account of damages and £ 250,000 on account of costs by 25^th January 2008. DHL failed to make any payment to CBS. On 12^th May 2008 a winding-up order was made against DHL, which is now in liquidation.

The claim against Cobbetts progressed. Disclosure took place and witness statements were exchanged. On 17^th October 2008 CBS accepted a part 36 offer made by Cobbetts in the sum of £5,585,001. CBS later accepted an offer made by Cobbetts in respect of its costs in the sum of £555,000. As a result CBS’ claim against Cobbetts came to an end.

In November 2008 CBS obtained an order in the insolvency proceedings giving it permission to continue its action against DHL for the final assessment of damages. Cobbetts has obtained an equivalent order in relation to its contribution claim against DHL.

CBS claims:

The net amount of its advance to Goldgrade, plus lost interest on alternative advances, plus the cost of managerial and staff time, plus consequential losses; less:

The current value of the Property.

CBS’ total claimed loss is as follows:

Losses:

The net amount advanced to Goldgrade £ 11,413,750

Lost interest on alternative advances £ 2,411,429

Cost of managerial and staff time £ 50,701

Consequential losses, namely:

Additional funding costs (loss of retail deposits)

Additional funding costs (wholesale funding)

Loss of opportunity to make more mortgage loans

Loss of opportunity to reduce back stop facilities

Loss on a 12 month retail bond

Less:

Current Value of the Property

TOTAL LOSS: £ 21,101,520

Less

The amount that CBS is entitled to recover against DHL in deceit is to be assessed on the following basis (see Clerk & Lindsell on Torts (19^th ed.) at 18-36 to 18-45 ):

CBS is entitled to recover its losses directly flowing from CBS’ reliance on DHL’s fraudulent statement as to the value of the property, including consequential losses and loss of profits. CBS is entitled to recover damages to put it in the position it would have been in had the statement not been made.

CBS’ losses must have been caused by the fraudulent statement but there is no requirement that the losses be foreseeable.

The defence of contributory negligence is not available to DHL.

The initial advance was for £10,500,000 less an arrangement fee of £ 78,750 making a net advance of £10,421,250.The further advance was for £1,000,000 less an arrangement fee of £7,500 making a net advance of £992,500. The total net advance is, therefore, £11,413,750 as claimed.

If CBS had not lent £11.5 million to Goldgrade, it would have advanced the money to another commercial customer. CBS’ typical margin on a commercial loan at the time was LIBOR plus 1.4%. Accordingly, CBS’ lost interest on the amount of the advances from their date down to 12^th January 2009 is £2,908,428. Against that CBS must give credit for the total amount of interest received in respect of the initial and the further advance which totals £ 496,999.29. CBS is, therefore, entitled under this head to the £2,411,429 claimed.

CBS is entitled to recover damages for the cost of wasted staff time spent on an investigation of DHL’s fraud or in mitigation of its consequences provided that it can demonstrate that the time relied on was spent on that activity. It is not necessary to show some additional expenditure or loss of revenue or profit: R+V Versicherung AG v Risk Insurance and Reinsurance Solutions SA[2006] EWHC 42 (Comm) at para 77.

CBS was tipped off about the possibility of fraud in January 2006. In mid February and early March 2006 CBS carried out an internal investigation (called the “Silver” investigation) in which a number of CBS staff reviewed all CBS’ files relating to the advances made to Goldgrade. This involved recovering and reviewing the e-mails of those who had been involved in the advances, reviewing other transactions that had been introduced to CBS by the broker (Mutual Finance) which had introduced the Goldgrade transaction to CBS, and liaising with the West Midlands Police. I am satisfied that CBS is entitled to recover the cost of this activity which was necessitated by the fraud. Faced by a fraud of this magnitude it was practically inevitable that CBS would have to inquire how many other Goldgrade or Mutual Finance transactions were also fraudulent.

In addition CBS carried out “the 2006 review” which lasted between March and July 2006, and involved reviewing over 70 commercial lending files in order to determine whether CBS had been the victim of other frauds. The review was prompted by the Goldgrade fraud and would not have been carried out if the Goldgrade fraud had not occurred because a similar review had been carried out in 2005. Even though this review was not concerned with either Goldgrade or Mutual Finance transactions I am satisfied that the cost of it is also recoverable from DHL. CBS could not be sure that any fraud was limited to such transactions, especially if some member of CBS’ staff was involved (in fact none was).

Staff working on both investigations recorded the time they spent on them on time recording systems. Mr Taylor has calculated the cost of the time spent by CBS staff, based on those timesheets and actual salary information, as being £ 47,889 and the costs of the internal overheads relating to such staff as £ 2,812. I am satisfied that these calculations are reliable and the costs reasonable. In my judgment CBS is entitled to recover £ 50,701 under this head.

When the fraud was discovered it became public relatively soon. The effect of the fraud was that CBS had to make a provision of £ 10 million in its accounts for the year ending 31^st December 2005 leading to a highly unusual and unexpected loss of £ 1.3 million for the year. CBS’ 2005 results were announced on 10^th March 2006 and the provision was described as relating to a suspected external fraud. There was then wide publicity about the fraud. Representatives of CBS had to make public statements of reassurance. Moody’s, the rating agency, changed its outlook on CBS from “stable” to “negative”. CBS has a series of claims in respect of losses which it claims to have suffered because of the effect of the fraud on confidence in CBS.

CBS obtains the money which it lends to borrowers from two sources: (a) savings deposited by its members (“retail funding”); (b) lending by institutional lenders (“wholesale funding”). Wholesale funding is more expensive than retail funding. As a result, if the amount of retail funding available to CBS reduces and is replaced by wholesale funding CBS will suffer a loss.

During March and April 2006 there were significant withdrawals of retail deposits. In those months retail funding was reduced by £ 25.8 and £ 6.2 million respectively, a total net outflow of £ 32 million. In the same two months in 2005 and 2007 there was a net inflow of retail funds. However, the difference between the total actual net outflow and the total expected net outflow for those two months was £ 15.7 million. There is no factor other than the publication of the fraud which would convincingly explain why the net outflow should be markedly more than anticipated. I am satisfied that £ 15.7 million may properly be taken as the best estimate of the reduction in retail funding attributable to the fraud. The next question is what figure should be taken as the differential funding cost as between wholesale and retail funding. I am satisfied that the figure of 0.44% taken by Mr Taylor, being an average difference in funding cost for the two months, is a fair figure to take. If figures of £ 15.7 million and 0.44% are taken, the loss per month is £ 5,757.

The remaining component of the calculation of loss is the period over which the retail funding would have been replaced. CBS has claimed that the Court should proceed on the basis that the withdrawn retail funding would not have been recovered at all for 6 months after March 2006 and that from September 2006 until March 2008 the funds would have been recovered on a straight line basis (Taylor, para 4.2.4). I am not persuaded that this is appropriate. It appears to me to be too gloomy a view. Mr Taylor has performed a number of calculations on a variety of different assumptions. I propose to take a variant of his calculation at para 4.3.51, i.e. to calculate CBS’ entitlement on the basis that there would be no recovery of the deposits for March and April (2 months) and that there would then be a full recovery from May to December (8 months) on a straight line basis. If so, the appropriate multiplier is 6 (2 + 8/2). The resulting figure is £ 34,542.

CBS claims that the effect of its downgrading by Moody’s was to make it a marginally less attractive proposition for investors. Mr Philip Shepherd, the Treasurer and Financial Controller of CBS, estimates, in the light of discussions with CBS’ dealers and others such as money brokers, that 10% of CBS’ new wholesale funding in 2006 and 5% of such funding in 2007 was affected and that that 10% and 5% of funding became 0.01% more expensive. On that basis CBS’ loss was £ 12,864. The figures are so small that it could be argued that they are unproveable, particularly in a market where rates were rising. How can one tell that funding overall was 0.001% more expensive because of the impact of the fraud? I have, however, come to the conclusion that the fraud and the consequent Moody downgrading are intrinsically likely to have had and did have some adverse effect on the price of wholesale funding and that the modest calculation put forward is a reasonable assessment of CBS’ loss in this respect.

CBS’ claim under this head is that because of the fraud it failed to attract sufficient new retail deposits to provide the funds which it needed in order to be able to make new mortgage loans. Quite apart from questions of prudence, it is not open to CBS to borrow on the wholesale market whatever it lacks from retail lending, because it is required by the FSA to have only 40% of its funds derived from that source. By March 2006 CBS’ mortgage lending was £ 63 million ahead of CBS’ target. Further its pipeline and pending lending (the loans which were in the course of being applied for or granted) of £ 230 million was about £ 100 million ahead of target. But by December 2006 CBS’ lending was £ 125 million behind target.

CBS’ claim under this heading was originally put at £ 792,450. Its current claim is £ 7,557,600. Mr Taylor has assessed CBS’ claim in this way. First he has calculated the amount by which the variance between (i) CBS’ actual lending, together with 80% of its lending in the pipeline, and (ii) its target for those figures reduced between the 2^nd and the 4^th quarters of 2006. He took the 80% figure because that is the percentage of pending applications that usually complete. The reduction was £ 321.6 million: see Table 28. That calculation assumes that the variance at the beginning of the period, where lending (actual and in the pipeline) was £ 143 million in excess of target, would also have applied at December 2006. I consider this assumption reasonable in the light of the fact that, generally in the market, loans issued from March 2006 to the end of March 2007 were at a higher level than that achieved in the first three months of 2006.

He then assessed CBS’ average profit margin on its mortgage lending at approximately 0.5%. He did this by taking the weighted average rate of return on retail and wholesale funds obtained by CBS. This calculation was made by taking the net interest income (not including income on free reserves) as a percentage of average net assets. On the basis of those figures he calculated a total loss of £ 5,628,000. This was derived by taking the variances for the three quarters and applying the 0.50% rate on the basis that the loss would last for 3.5 years, that being the average retention for any CBS mortgage product. Alternatively he assumed that the loss suffered as a result of the lost mortgage business continued for 4.7 years, that being the average retention for all borrowers i.e. the average time that borrowers remained with the society (either with the original or a substitute product). On this assumption CBS’ loss was £ 7,557,000.

Despite the very great difference between the original claim and the £ 7,557,000 figure I am satisfied, on the evidence presently before me, that CBS is entitled to recover £ 7,557,000 under this head. The likelihood is that as a result of the fraud there was a decrease in the amount of new deposits which restricted CBS’ ability to earn profit. The contemporaneous documents reveal that CBS had concerns about the size of the lending being made but this was not because of any desire to restrict lending to target figures but because of the net outflow of the retail funding necessary to support lending. The calculation made by Mr Taylor is an appropriate measure.

The earlier figure of £ 792,450 is much less than the figure claimed because (a) it takes no account of the loss of pending business; (b) it takes an inappropriate differential of 0.18% which is based on the difference between residential lending rates and 3 month LIBOR; and (c) it assumes an artificially short period (down to March 2008) over which the loss is felt.

A back stop agreement is a commitment by a bank to give CBS wholesale funding if called upon to do so. For this facility the bank will charge a fee. CBS had a range of different back-stop facilities with different banks to allow it to manage its liquidity. These all terminated between August and December 2006 and CBS was planning not to renew them. In the event as a result of the fraud CBS put its plans on hold and entered into new back-stop facilities providing for funding of £ 140,500,000.

CBS claims damages based on the fees of £108,175 payable under the new back stop facilities less the costs it would have incurred if it had increased the level of short term liquidity in place. That cost Mr Taylor estimates at £33,720. He gets to that sum by taking 40% of the £ 140,500,000 and applying to it a margin of 6 basis points. He chose 40% because that is the percentage of CBS’ potential inflows from standby facilities on which, according to Discussion Paper 24 of the FSA, it can expect to draw when under liquidity stress. For the purpose of meeting FSA liquidity standards back stop agreements are valued at 40% of their principal value. He took 6 basis points as reflecting the difference between the borrowing at wholesale rates and lending at investment rates.

I am satisfied that these calculations are reasonable and that CBS is entitled to recover £74,455under this head.

Because of the loss of retail funding in consequence of the Goldgrade fraud, CBS needed to attract additional funding. In order to do so it decided to increase the interest on its 12 month fixed retail bond from a planned rate of 5% to a “best buy” rate of 5.11%. So small a difference in rate is of importance because of the position in which it places the product compared with those of other providers. Thus CBS had to pay 0.11% more interest on the total amount invested in that product, which was £108,515,000, than it would otherwise have had to have done. Accordingly it is entitled to claim its losses under this head of £ 119,366.

The conclusions I have reached in relation to the recoverability of CBS’ knowledge are reached without reference to any question of foreseeability. On that basis CBS is entitled to recover the following:

Accordingly CBS is entitled to judgment against DHL for £ 15,464,106.

Since Cobbetts have settled with CBS it is not necessary to decide the amount for which they would have been liable for the purposes of any judgment against them. As will, however, become apparent it is necessary to do so for the purposes of the contribution claim. Mr Flenley for Cobbetts accepts that Cobbetts would (subject to questions of contributory negligence and contractual limitation of liability) have been liable for items 1 and 2 in paragraph 33. I am not satisfied that item 3 would have been recoverable against Cobbetts. They were at fault in not alerting CBS to the indicia of fraud, which they should have spotted. But, had they done so, CBS would be likely to have carried out, albeit somewhat earlier, exactly the same sort of investigations into the extent of the fraud that they carried out later.

In relation to items 4 -8 Mr Flenley submits that they are irrecoverable against Cobbetts because they are too remote. The chain of causation by which DHL is liable is that, in consequence of the discovery of the fraud, CBS had to make a provision in their accounts, which caused CBS to make an unusual loss. Widespread publicity about that (e.g. in the Mail on Sunday) caused a loss of confidence and a downgrading by Moody’s, with consequential loss as a result of the withdrawal of retail funds, the extra cost of wholesale funding etc. Mr Flenley submits that it has not been established that Cobbetts had or ought to have had in their contemplation or reasonably to have foreseen that their failure to report indicia of fraud would have these types of consequences, some of which, such as the loss on backstops and the 12 months bond, are somewhat recherché. Mr Brown of Cobbetts had acted for CBS in transactions worth many millions of pounds. I have no evidence as to the state of his knowledge about CBS’ profits or of the likely impact of it being found that the valuation was fraudulent. Whilst loss in the form of items 1 and 2 was a natural and foreseeable consequence of Cobbett’s breach I am not persuaded on the evidence that I have been shown that items 4 -8 are consequences that Cobbetts should reasonably have had in contemplation or should reasonably have foreseen as possible results of their breach. Accordingly, as it seems to me, the amount for which Cobbetts would have been responsible, subject to defences of contributory negligence and contractual limitation, is:

Sections 1 and 2 of the Civil Liability (Contribution) Act 1978(“the Act”) provide as follows (emphasis added):

What for these purposes is “the damage in question”? There are at least two possibilities. The first is that the damage in question is the claimant’s loss i.e. the £ 21,049,107. The second is that it is the amount in respect of which Cobbetts claim contribution i.e. the settlement figure of £ 5, 585,001.

These two alternatives produce markedly different outcomes. Assume, for ease of reference, that the figures were £ 20 million and £ 5 million respectively, that Cobbetts had paid £ 5 million to CBS, and that the court apportions liability between DHL and Cobbetts in the ratio 75%/25%. If the “damage in question” is CBS’ total loss it will be in the interests of Cobbetts to argue that it should be as low as possible. If the loss is £ 20 million Cobbetts would be liable for 25% of that sum, namely £ 5 million. Having paid £ 5 million in settlement, it would recover no contribution at all. If the loss is reduced to £ 15 million Cobbetts is responsible for 25% i.e. £ 3.75 million and would recover £ 5 million - £ 3.75 million i.e. £ 1.25 million.

If “the damage in question” is the amount in respect of which contribution is claimed i.e. £ 5 million (in the example) then the contribution would be 75% of that figure namely £ 3,750,000.

CBS’ claim for £ 7,557,000 is a nearly tenfold increase on the figure of £ 792,450 which appeared in its Voluntary Further Particulars of Loss. Cobbetts did not at the time of the hearing have the evidence it needed to challenge this claim, and, if it was to be pursued and if the court were to regard the first construction as correct, Cobbetts would have sought an adjournment at CBS’ expense.

In order to avoid any need for an adjournment, CBS agreed that, if the Court preferred the first construction, or any other construction which made it relevant, for contribution purposes, that the larger figure was recoverable, then it would limit its claim to the lower amount.

Cobbetts, with the support of CBS, contend that the second construction is correct. If it were otherwise the result, they submit, would be most unfair. Two defendants may be liable on very different bases. In the present case DHL is liable in deceit where issues of remoteness and contributory negligence do not arise. Cobbetts is liable only in negligence, so that it can advance a defence of contributory negligence. Moreover Cobbetts’ liability was potentially reduced because of a clause in its retainer limiting its liability to £ 5 million per retainer. If the liability of DHL is of the order of £ 20 million and that of Cobbetts of the order of £ 5 million they should, it is submitted, share in the liability for the £ 5 million for which they are both liable, and not for the additional £ 15 million for which only one of them is liable. If it were otherwise a defendant would find himself in a worse position so far as contribution was concerned if his co-defendant was fraudulent than he would if he was negligent.

The inequity of any other result is also apparent, when one considers the position if the claimant is contributorily negligent. Assume a case (unusual but not impossible) in which the claimant is 75% contributorily negligent and there are two defendants, both negligent but neither fraudulent. On that assumption what would have been an entitlement to £ 20 million (in the example given) produces an award in favour of the claimant of 25% of that i.e. £ 5 million. The two defendants will then share liability for £ 5 million: Fitzgerald v Lane[1989] AC 328. If no fraud is involved, that share may well be 50/50 in which case each defendant is responsible for £ 2.5 million. Assume however that D1 is fraudulent but D2 is not. If what falls to be apportioned is the £ 20 million, for which D1, who is unable to rely on contributory negligence, is liable, then, even assuming (say) a 75/25% split to reflect D2’s lesser moral blameworthiness, D2 is responsible for 25% of £ 20 million i.e. £ 5 million. In effect D2 is required to share responsibility for an amount which is only recoverable by the claimant because D1 was fraudulent.

The potential inequity of the first construction may be further exemplified if one assumes that CBS’ losses were not £ 20 million but £ 30 million. In that case, Cobbetts would, prima facie (but see para 59 below), be required to contribute £ 7,500,000, (£ 30 million x 25%) and, having paid £ 5,000,000 would be liable to pay the excess of £ 2,500,000.

In order for Cobbetts to be able to claim contribution at all it is necessary that they should be liable in respect of the same damage as DHL. “Damage” in the Act is to be distinguished from “damages” and there is authority that it is to be widely interpreted.

I am satisfied that DHL and Cobbetts are, at least to some extent, liable/responsible for the same damage. CBS would not have made either of the two advances but for the deceit of DHL and the negligence of Cobbetts and have suffered loss in consequence. It is, however, necessary to consider what exactly is “the same damage” for which they are both liable/responsible. The damage for which they are both liable is set out in para 36 above. I do not, however, accept that they are both liable to CBS, within the meaning of section 1 (1) of the Act, for the whole of the damage in para 33 or responsible for it, within the meaning of section 2 (1) thereof. I see no reason why the Court cannot distinguish between one category of economic loss for which DHL was responsible but Cobbetts were not, viz loss not reasonably foreseeable which is only recoverable because DHL was fraudulent, and the foreseeable loss for which both were liable. On the contrary there seems to me good reason to make that distinction. If I am wrong on that I would regard the court as entitled, when assessing what amount of contribution was just and equitable, to ignore any loss which was only recoverable from D1, but not D2, because D1 was fraudulent; and not to require any of such loss to be shared.

Cobbetts have made a payment in bona fide settlement of CBS’ claim against it. Provided that they would have been liable to CBS assuming that the factual basis of the claim made against them could be established they are entitled to recover contribution from any other person liable in respect of the same damage. I am satisfied that Cobbetts would have been liable to CBS if the factual basis pleaded against them was established. I am also satisfied that the settlement which Cobbetts made with CBS was reasonable. It represented about half of CBS’ basic claim. Unsurprisingly neither CBS nor Cobbetts suggest it was unreasonable, nor does DHL.

“The same damage” in section 1 (1) means the damage, suffered by another person, for which both the person seeking contribution and the person from whom contribution is sought are liable. When section 2 (1) speaks of “the damage in question” it must be referring to the “same damage”, as specified in section 1 (1), in respect of which rights of contribution arises. The draftsman cannot have intended the word “damage” to have a different meaning in section 2 to that which it has in section 1. Further it is only section 1 (1) which puts “the damage in question” at all (Footnote: ³).

It is, however, necessary to distinguish between three different circumstances viz:

D1 and D2 are both liable for the same damage and in the same amount;

D1 and D2 are liable for the same damage but D2 is liable for less than D1 e.g. because he has available to him defences which reduce what would otherwise be his liability for the damage in question e.g. contributory negligence and contractual or statutory limitation.

Royal Brompton NHS Trust v Hammond [2002] UKHL 14, [2002] 1 WLR 1397 falls within category (a). In that case an architect failed in his claim for contribution against the contractor because the two of them were not responsible for the same damage. The claims against the contractor were for delay and the claims against the architect were for the impairment of the employers’ ability to proceed against the contractor because of the grant of extension certificates. Many, perhaps most, contribution cases fall within category (b). A claim brought by an injured passenger against two negligent drivers is a paradigm example.

The present case falls partly within category (a) and partly within category (c). DHL and Cobbetts are, to some extent (see paras 33 and 36 above) liable for the same damage. To the extent that they are (see para 36) Cobbetts have available to them (but Goldgrade do not) defences of contributory negligence and contractual limitation. As a result any damages awarded against them in respect of that damage will be less than those awarded against DHL. Does that mean that “the damage in question” means the amount of their shared liability?

Cobbetts rely on the following passage in the speech of Lord Bingham in Royal Brompton:

In the course of his speech Lord Steyn referred to an example of the sale of shares in a company:

These dicta confirm that the Court should examine the nature and extent of the defendants’ common liability when determining whether two defendants are liable for the same damage. Cobbetts submit that this approach is consistent with the underlying rationale of contribution. It would not be just for D 1 who is liable for £ 20 million of damages (because he has no entitlement to rely on any defence of contributory negligence, limitation or remoteness) to recover contribution in respect of amounts for which D 2 has no liability at all; or for D 2 to recover less contribution for the amounts for which they are both liable on account of the fact that D 1 is liable for much more. As pointed out in para 44 above the contrary approach would have the odd result that an innocent defendant who had the misfortune to have a fraudulent co-defendant would recover less by way of contribution than he would have done if his co-defendant was merely as incompetent as he was.

The Law Commission considered this problem in its Report on Contribution (Footnote: ⁴) which led to the 1978 Act. It considered cases where (a) the liability of one contributing party to the claimant was reduced either by an exclusion clause or by a defence of contributory negligence but (b) the other contributing party was not able to rely on such a defence. It thought that the Court should first assess the total amount of loss caused by the contributors; divide that according to what was just and equitable between the contributors, and only then apply, as a cap on the contributor’s liability, the amount for which the contributor would have been responsible to the claimant, taking into account any defences of contributory negligence or limitation of liability (statutory or contractual) which would have been open to him. (Footnote: ⁵)

The Commission gave the example of a car driven by P which P had bought from D1 and which had a latent defect in the electrical system under a contract which had a limit of liability of £ 400. P drives at night. The headlights go out and he runs into an obstruction on the highway negligently left there by D 2. The loss to P is £ 1,000. On the assumption that D 1 and D 2 were held equally to blame it proposed that the loss should be divided equally, subject to a limit on D 1’s obligation to contribute of the amount in which he was liable to P. As a result D 1 would only be responsible for £ 400. The Commission recommended the same approach in circumstances where one contributor could plead contributory negligence and the other could not (e.g. because the claim was in breach of contract (Footnote: ⁶)). In order to give effect to that approach it proposed wording for a draft bill, which became section 2 (3) of the Act.

Section 2 (3) of the Act provides:

The effect of this section is that a defendant cannot find himself liable to contribute more than the damages for which he would have been liable limited by any limitation clause or reduced by contributory negligence. This addresses the problem identified at para 45 above.

Cobbetts submit that Section 2 (3) is, however, silent as to which of the two methods identified in para 38 above is the correct method to employ in determining the impact of a defence based on a limitation of liability clause or contributory negligence. It cannot, therefore, be supposed that Parliament adopted the Law Commission’s proposal. It seems to me, however, that that section points the way to the correct construction of the Act, and that, in implementing the Commission’s draft bill without amendments material for present purposes, it must be taken to have intended to adopt the policy option favoured by the Commission.

In Ball v Banner [2000] Lloyd’s Rep PN 569the claimants were investors in a scheme arranged by the ninth defendant whereby certain tax advantages were to be obtained by means of an investment in commercial property. The defendants prepared a prospectus which contained an opinion by Healey & Baker that the property could be let within two years at a rent of at least £ 6.50 per square foot. The claimants’ loss in respect of the several misrepresentations in the prospectus for which the defendant was liable was about £ 705,000. The amount for which Healey & Baker was liable was about £ 250,000, their liability, under the SAAMCO (Footnote: ⁷)principle, being subject to a limit that it should not exceed the amount by which the advance exceeded what the claimant would have advanced if Healey & Baker had given a lesser estimate of the rental that could be achieved. The defendant sought contribution from Healey & Baker.

Hart J held that the “damage in question” meant the loss suffered by the investors from entering into the transaction i.e. the £ 705,000, for which both the defendant and Healey & Baker were, for different reasons, liable. It was not merely the amount of that loss for which Healey & Baker was responsible under the SAAMCO principle i.e. the £ 250,000. He drew attention to the fact that section 2 (3) of the Act distinguishes between “damage” and “damages” and pointed out that sections 2 (3) (a) and (b) made it “clear that persons may be liable in respect of the same damage without necessarily being liable in the same amounts”.

Cobbetts submit that the decision of Hart J, is, on this point wrong, and has, in any event, been overtaken by the decision of the House of Lords in Royal Brompton.

It seems to me that the judgment of Hart J was right provided that the ninth defendant and Healy & Baker were properly to be regarded as liable for the same damage i.e. the £ 705,000 figure, subject to a common law limitation in Healey & Baker’s favour. Hart J rejected the argument that Healey & Baker’s liability for the same loss only extended to the £ 250,000 figure, holding that it was liable for the same damage as the defendant, but to a lesser extent. In the light of the example cited by Lord Steyn in Royal Brompton that decision may be open to question.

If the “damage in question” is to mean, as Cobbetts submit, the amount for which, having regard to defences of limitation of liability and contributory negligence Cobbetts is liable, i.e., in the present case, the £ 5,585,001 figure, which I will call “the net amount”, there is no scope for the operation of section 2 (3) (a) or (b) of the Act. The amount of damages which might be awarded in respect of the net amount could not be subject to any limitation of liability or reduction of contributory negligence because the net amount already takes account of such limitation and reduction.

In short, taking sections 1 (1) and 2 (1) – 2 (3) of the Act together it appears to me that they produce, perhaps not surprisingly, the result that the Law Commission favoured and are inconsistent with the second construction.

This conclusion is also consistent with the House of Lords’ decision in Platform Home Loans Ltd v Oyston Shipways Ltd[2000] AC 190. In that case the plaintiffs lent about £ 1 million on the security of property negligently valued at £1.5 million. The property was sold for much less than that and the plaintiffs suffered a loss of £ 680,000. The judge found that the plaintiffs had been contributorily negligent in failing to note that the borrowers had not completed part of their own form which required a statement of the original purchase price, and in lending too high a proportion of the valuation. The judge found that the £ 680,000 figure should have been reduced by 20% making about £ 489,000. Since that figure exceeded the amount of the overvaluation the whole of it was recoverable. The House of Lords rejected the proposition, accepted by the Court of Appeal, that the 80% should be applied to the upper limit of the Defendants’ liability (i.e. £ 500,000, the amount of the overvaluation) so that the damages should be £ 400,000. In so doing they applied section 1 (1) of the Law Reform (Contributory) Negligence Act 1945, which provides: