Downtex Plc v Flatley

On 2 October 2003 the Court of Appeal gave judgment ([2003] EWCA Civ 1282) for the First Claimant (‘Downtex’) in respect of its claims in libel on two letters, with damages to be assessed by a judge sitting without a jury, and directed that the same judge should determine any other application under sections 8 and 9 of the Defamation Act 1996 for an apology or declaration of falsity and shall assess damages for breach of contract.

As is also recorded in that judgment, the Downtex had a separate but related claim in contract for the publication complained of in the libel action. On that claim, on 28 November 2002, Gray J made an order which provided inter alia that:

“3.

the Defendants shall not do or say anything which alleges or might reasonably be taken to infer:

(a)

that the first defendant [sic] is or might be in financial difficulties or might be unable to pay its creditors or that its directors have been guilty of misconduct in the management of its affairs or anything else to the like effect; or

(b)

any other similar words harmful to the reputation of the first claimant and/or which might lead a person to cease to deal with the first claimant on substantially equivalent terms to those previously offered or at all.”

The reference in para 3(a) to the first defendant is clearly an error and should be a reference to Downtex. So far as the question of damages was concerned, Gray J held that in the light of the debate about damages for injury to reputation in contract, the assessment of damages should be adjourned to be heard by the trial judge dealing with the libel aspect.

For the background to this matter I gratefully adopt the summary of Potter LJ. Downtex carries on business as a wholesale distributor of household accessories and flatpack furniture accessories. The second and third Claimants (“the directors”) are brothers who are directors of Downtex. The first defendant (“Mr Flatley”) is the sole director of the second defendant company which bears his name. In April 2000, Downtex bought a business from the second defendant, the terms of which included clause 13.1.4 and which need not be otherwise rehearsed. Later, the parties made allegations and counter-allegations of each other’s failure to comply with the agreement and their relationship deteriorated. Both defendants asserted that they were owed moneys wrongfully withheld by the claimants. In that context, Mr Flatley, on the writing paper of the second defendant circulated to the Claimants’ suppliers letters, which it is alleged were defamatory of each of the Claimants as well as constituting a breach of clause 13.1.4.

The two letters containing the words complained of in respect of which the Court of Appeal entered judgment are as follows. The letter of 17 June referred to (but did not further identify the contents of) an anonymous letter. Its contents were as follows:

“I do not know if you are dealing with Downtex Plc of 48 George Street, Manchester.

I received an anonymous letter recently and after some days of research I have decided that it would be appropriate to call a creditors’ meeting.

I suggest that this meeting should be held in Manchester or Chester which ever is more suitable and that we engage a solicitor to monitor it, and the possibility of engaging a receiver to keep the company running.

This letter has been sent to the following companies, if you know of any suppliers outside of these please inform me.”

There then followed a list of the names of twenty suppliers of Downtex.

The letter of 18 June also referred again to receipt of the anonymous letter, without further reference to its contents. It stated:

“Since receiving an anonymous letter regarding Downtex Plc and being sent a credit report on Downtex from another creditor who impelled me to take some action, I have spent professionally assisted hours looking into the affairs of Downtex Plc and believe …

The bank must take all the responsibility for the situation in which the company is in.

If they had left the directors personal guarantees in place I believe that these same directors would have behaved more responsibly.

They have allowed themselves to take impossible risks with other people’s money at the same time as they have taken out of the company more than 10 times their original investment discounting their introduction initially of tangible assets.

I am of the opinion that the bank are in a sueable position but clearly a suitable compromise must be sought in preference to a law suit.

The main points are can this business be salvaged and can we get our money?

…

Enclosed is a copy of a creditor’s report sent to me by another creditor who does not wish to be named as he is still struggling for his payment.

The Mond brothers have already informed me of my interest so we need to act quickly.”

Despite their admissions that the letters of 17 and 18 June were defamatory, the defendants had disputed that the case was appropriate for summary relief for two reasons. First, they submitted that the letters were published in circumstances which attracted the defence of qualified privilege and second they did not admit that either of the letters made clear or explicit reference to the directors, submitting that it would be necessary for the Claimants to adduce evidence at trial to demonstrate that the words complained of had been understood by third parties as referring to the directors. They had succeeded on both points at first instance. They failed on the first point on appeal, but their point in respect of the second and third Claimants prevailed so far a summary judgment was concerned.

The directors are brothers, David and Jonathan Mond. They were the Company Secretary and Director, and the Managing Director, respectively. They had sued personally. Although not named in the first letter, they had claimed that the readers would have understood the letters to refer to them.

The meaning which the Claimant pleaded that the words complained of bore was a natural and ordinary meaning that Downtex ‘is trading whilst it is insolvent and/or may not be able to pay its creditors’.

Potter LJ, with whom Chadwick LJ and Cresswell J agreed, described the position as follows, para [43].

‘It is plain that the two letters which are admitted to be defamatory carry the meaning that Downtex was insolvent or close to insolvency and that the directors had distorted and manipulated the financial figures of Downtex and/or taken “impossible risks with other peoples’ money”. Neither Miss Addy below, nor Mr Flatley before us, argued to the contrary and it is plain from Mr Flatley’s submissions to us that he remains of that opinion. At the same time Miss Addy admitted that insolvency could not be demonstrated and, indeed, that it was not alleged in the sense that Downtex was unable to pay its debts or that circumstances existed which in fact justified the calling of a creditors’ meeting. Nor, finally, was it argued that an inference of insolvency or near insolvency arose on the basis of the particular matters pleaded as founding Mr Flatley’s ‘concern’. All that was done was to assert cause for that concern on a basis which was not precisely specified but broadly asserted to be an unhealthy financial position.’

Potter LJ goes on to mention that in his witness statement Mr Flatley said he had had ‘minimal reaction’ to his letters and had decided not to go on with the suggestion that the creditors should call a creditors’ meeting.

Potter LJ also summarised the factual position on the Claimant’s finances as follows, para [46]:

‘Mr Flatley’s witness statement …. did not contradict those parts of Mr Mond’s witness statement which dealt in detail with the financial situation of Downtex. In that statement, Mr Mond disputed the assertion in the anonymous letter that the profits had dropped from £216,000 to losses of £39,000 in 2001 and pointed out the profits before tax fell from £257,871 in 2000 to £10,046 in 2001. As at 31 December 2001 Downtex had total net assets of £1,437,243, the director’s emoluments totalling £151,309. Although the anonymous letter made reference to the value of stock being worth less than £300,000, the figures certified by PriceWaterhouseCoopers in the Annual Report 2001 were £1,632,450. Finally, Mr Mond exhibited a bundle of suppliers’ status reports in respect of all the suppliers referred to in the letter of 17 June. These demonstrated that the majority of those suppliers were owed no money at all and that, where there was money due to suppliers, the sums outstanding fell within the credit period agreed and within the ‘Creditor Payment Policy’ referred to in the Directors’ Report, and accounts for 2001’.

This application first came before Eady J on 15 January 2004. He adjourned the application because Mr Flatley had recently suffered a stroke. Although the Defendants had been represented by solicitors and counsel at the first instance hearing of the application for summary judgment, Mr Flatley had represented himself and the Second Defendant before the Court of Appeal. A similar application to adjourn was made by letter to me in respect of this hearing on 23 February 2004. For reasons given my judgment of that date I dismissed that application. The defendants were not represented. I proceeded to hear the assessment of damages application as advanced by Mr Boggis-Rolfe. No witnesses were called and the Defendants were not represented.

Mr Boggis-Rolfe asked me to assess damages for libel in respect of the two letters set out above in respect of which the Downtex had been given summary judgment. So far as the contractual claim is concerned, in order to avoid any possibility of double counting Mr Boggis-Rolfe asked me to assess those damages in a nominal sum only, since they are in respect of publication of the same two letters. Mr Boggis-Rolfe also made clear that the Downtex does not now ask the Court to make a declaration of falsity or to order an apology under s.8 of the Defamation Act 1996. Downtex submit that the position is sufficiently covered by the order of Gray J cited above. The Court of Appeal had entered judgment under CPR Part 53, which provides for summary disposal in accordance with the Defamation Act 1996. Accordingly, pursuant to s.8(1)(c) of that Act, the only relief that the court can grant is now damages not exceeding £10,000.

Mr Boggis-Rolfe asks me to assess damages on the basis of the following facts which, I accept, are either admitted or established.

In addition, Mr Boggis-Rolfe directs my attention to the change in the Downtex’s circumstances that has recently occurred. In para 4 of his order of 15 January 2004 Eady J gave permission to the Downtex to serve a supplementary witness statement dealing with its present situation within seven days and to the Defendants to respond to this within fourteen days thereafter. By fax dated 21 January 2004 the Downtex did serve the second witness statement of David Mond. No evidence in response has been served by the Defendants.

The second witness statement of David Mond contains the following information, which I accept:

David Mond adds that he is a qualified chartered accountant with professional experience of situations of the kind described and that he has been careful to ensure that everything has been done lawfully and that no shareholder or creditor has been prejudiced in any way.

I interpose to remark that it must follow that an appropriate consideration passed to the Downtex, now Carrwood plc, for the hiving down of its assets. I have no information as to what that was or how it was calculated.

David Mond goes on to say in his statement that he remains certain that in June 2002 the Downtex, now Carrwood plc, was seriously damaged by the libel and did suffer real commercial injury, albeit that he has always recognised that it would be impossible to calculate. He states his belief that the defendants’ conduct contributed to the company’s problems. But he accepts that he cannot prove this and that trading conditions were difficult anyway and might well have led sooner or later to what has occurred.

In assessing the damages I have to consider what, if any, consequences flow from the restructuring of December 2003.

The words complained of bear the meaning pleaded by Downtex, namely, in relation to itself, that it was insolvent or close to insolvency. A statement that a company is trading whilst insolvent and may not be able to pay its creditors is a very serious libel of a trading corporation. Such statements will be the more damaging where, as here, the Chairman has included in his Statement (dated 26 February 2002) with the Annual Report and Accounts for 2001 that at the half year stage trading had been ‘extremely difficult’. Moreover, the letter of 17 June 2002 states that it is the product of ‘some days research’ which adds weight to the allegations made in it.

In cases of libel claimants, whether they be an individuals or a corporations, need not prove actual damage. The law presumes that claimants must have suffered damage and it is not necessary for claimants to adduce evidence showing actual pecuniary loss. Where there has been a serious libel they are entitled to substantial damages. See: English and Scottish Co-operative Properties Mortgage and Investment Society Limited v Odhams Press Limited [1940] 1 KB 440, 456, 458, 461-2.

One factor relevant to the assessment of damages is the extent of publication. Another is the seriousness of the libel. A related factor is the relationship of the publishees to the claimant.

Publication to a relatively small number of persons who are already in a business or professional relationship with a claimant may be as serious or worse than a wider publication to persons who are not, and are unlikely to contemplate being, in such a relationship. In Houston v Smith unreported December 16 1993 (Gatley on Libel and Slander 10^th ed para A3.3) the Court of Appeal reduced an award to £50,000. The case was one of slander alleging sexual harassment. But the important point for present purposes is that the publishees were a small number of individuals with whom there was an existing professional relationship. They were the patients in the claimant doctor’s waiting room. While those damages must have included a substantial sum in respect of injury to feeling, the figure also has to be viewed in the light of inflation in the last ten years.

The purpose of general damages such as are awarded in libel actions is to compensate the claimant for the damage suffered as a result of the defamatory publication. This generally includes reparation to the harm to the claimant’s reputation. Damages must be sufficient to vindicate the claimant’s reputation. A symbolic award will not achieve this. Damages for libel take into account that it is impossible for a claimant to know how extensively the libel as spread. Vindication includes the ability at some future date, if the libel resurfaces, to show by reference to a substantial award that it has been decisively rejected by the court.

Where the assessment of damages differs depending on whether the claimant is an individual or a corporation is that individuals may also recover injury to feelings, notwithstanding that such injury is not a constituent of the cause of action. Corporations, having no feelings, cannot recover damages for humiliation or distress or other injury to feelings.

Mr Boggis-Rolfe submits that when a court is assessing damages under s.8 of the 1996, the proper course is to approach the matter as if there were not £10,000 cap, and then, if the figure arrived at exceeds £10,000, award that sum. That appears to me to be correct in principle.

There is very little guidance from decisions of the Court of Appeal as to the measure of damages for corporate claimants. One case where the libel bore a similar meaning to that complained of her is Kiam v Neill (No 2) [1996] EMLR 493. The award upheld in that case was £45,000. There are substantial differences. The main differences are that the claimant was an individual, the circulation was in a newspaper and there had been an apology. Nevertheless, the words of Beldam LJ appear to apply as much to corporations. He said at p.509:

In my view the law has always taken a grave view of an allegation of insolvency in a businessman. It is an allegation in which loss and damage are presumed without further proof in an action for slander. As it was put in Jones v. Littler 7 M & W 423 at page 426 by Parke B.:

"Here the imputation is that of insolvency, which must be injurious; for if a tradesman be incapable of paying all his debts, whether in or out of trade, his credit as a tradesman, which depends on his general solvency, must be injured."

Evans LJ said at p.515: ‘£45,000 is not a large sum even if the sole object of the award is to vindicate his reputation, which it is not’.

The only recent case where damages for a corporate claimant have been upheld by the Court of Appeal is Steel v McDonald’s Corporation unreported 31 March 1999 (Price on Defamation 3^rd ed p569). In June 1997 the Court of Appeal made an award of £40,000. The facts of McLibel are well known, and were far removed from the present. The full transcript gives little guidance as to how that figure was arrived at.

While in the present case the defendants have not apologised and have advanced their case as described above, I can have only limited regard to that for the purposes of assessing damages. The absence of an apology means that there is no record of the allegation being withdrawn (that is to say there is nothing to mitigate the damage on this account) and it can also aggravate the injury to feelings. In the present case it is relevant only in so far as it shows that respect there is no mitigation.

In the present case, absent the cap of £10,000, I would assess the damages at a figure which is not less than £30,000. That seems to me to be a modest figure where the libel alleges a corporation (that is one which conducted business on the scale that Downtex conducted its business) is trading while insolvent and unable to pay its debts, and the circulation is to some twenty of those in a trading relationship with it. It is the least which is required to compensate for the damage done. Whether the figure should be higher to take into account other matters which can be included in damages for libel is not something that I have to consider, because it exceeds the £10,000.

I turn then to consider what effect, if any, the restructuring of December 2003. Since I am approaching the matter on the basis that no evidence of damage has to be, or has been adduced, it does not seem to me to matter that I have no detailed information as to the consideration which moved to the Downtex for the hiving down of its business and assets.

The question is one of principle. Does it matter that the corporation ceased to trade many months after the publication of the words complained of, although it remains capable of trading. Similarly, does it matter that it has changed its name?

Mr Boggis-Rolfe submits that neither of these things prevent there being a claim for damages at all. He refers to Multigroup Bulgaria Holding Ad v Oxford Analytica Ltd [2001] 1 EMLR 737 para 24. There Eady J contemplated that damages might be awarded to a trader (individual or corporate) would have a cause of action whether or not he or it had been mentioned in England before the publication complained of. That case seems to me to relate to the existence of the cause of action rather than the amount of any damages. A similar point is made by reference to Elite Model Management v BBC unreported 24 May 2001 at para 25. The same comment applies, namely that the case seems to me to relate to the existence of the cause of action rather than the amount of any damages. Mr Boggis-Rolfe has found no other case, in spite of his evident care in looking.

The general rule in damages is that they are assessed at the date of the wrong. But there are cases in which subsequent events are relevant to the assessment of damages. There is no doubt that in a libel case, damages can be, and often are, aggravated by the conduct of the defendant in defending the claim. I have not been directed to, and cannot recall, any case where it has been argued that damages should be reduced by any circumstance of the kind which occurred in this case in December 2003. Mr Boggis-Rolfe submits, as a matter of principle, that the element of vindication will be different in cases such as the present. The damage that has occurred between the publication and December 2003 is damage that has been suffered and is not undone. But in so far as damages are assessed with a view to the claimant being able to demonstrate at some future date that there is no substance in the libel, that is no longer relevant to this case. Downtex has changed its name, and is no longer carrying on the business in referred to in the libel. This is a concession properly made by Mr Boggis-Rolfe, and made in pursuance of his professional duty to draw to the court’s attention points which might have been advanced by the defendant, had they been present. I have taken the point into account.

In the end, disregarding any element of injury to feeling and any element of vindication for the future, and having regard to damage suffered between the publications in June 2002 and the events of December 2003, I am satisfied that the damages for libel should be assessed at the maximum figure of £10,000 allowed under s.8 of the Defamation Act 1996, and that the damages for breach of contract should be assessed at £10.

Mr Boggis-Rolfe included detailed submissions on the costs of the action in his skeleton argument. Because the defendants were unrepresented at the hearing, I shall hear any arguments as to costs when this judgment has been handed down.