Hodgson & Anor v Lipson

This is an appeal brought by the Defendant in the action, Mr. Ellard Lipson, against the Order of 6 June 2009, whereby District Judge Smith in effect summarily struck out certain paragraphs of the prayer to the amended Particulars of Claim dated 13 July 2008, but allowed the following claim to stand for trial:

“(1)

that the terms of the loan agreement applying interest to the principal sum have been varied, waived by estoppel or are unenforceable by reason of equitable forbearance and that, accordingly, the total sum due to the defendant is either the negotiable cost of the works completed by Basdring Ltd…… or the total sum paid by Forward Finance to Basdring Ltd to finance Basdring Ltd’s work on the property.”

On this appeal Mr. Christopher Nugee QC, who appeared with Mr. Pepin Aslett for the Defendant, contended that the District Judge should have struck out the claim in its entirety. Mr. Maurice Hodgson, now approaching retirement, appeared on his own behalf and on behalf of his mother, Mrs. Miriam Hodgson, now aged 83, to support the Order made by the court below.

In 1985 Mr. and Mrs. Hodgson bought adjoining properties at 24 Stanley Road and 26 Alness Road in Whalley Range, Manchester, with a view to converting them into one property (now known as Holyrood House) comprising six flats. Their intention was to let the flats and earn rental income. Building conversion began in 1986, aided by local authority grants and financed by a mortgage on Mrs. Hodgson’s home at 15 Stanley Road, Manchester. The project, however, ran into problems in 1987 and further finance was required. Mr. Hodgson was unable to borrow funds from a recognised bank. He, therefore, approached Peter Nolan, a non-status lender, with an office at 69 Singleton Road, Salford, who agreed to broker a loan from another lender, Forward Finance, of 28 Old Hall Road, Salford, which was in fact the trading name of Mr. Lipson, the Defendant in this action.

According to the witness statement of Mr. Hodgson, he was advised by his quantity surveyor that the conversion project could at that time (about mid-1987) be completed well within six months. Mr. Hodgson states further than on completion of the conversion it was intended that the flats would be let, a reliable stream of rental income could be secured, and it was contemplated that the temporary financing obtained through Peter Nolan would be replaced by a mortgage loan from a recognised bank or other financial institution.

Accordingly, the Claimants entered into a loan agreement, signed by them respectively on 8 October and 3 November 1987, with Forward Finance for an advance of £33,000, £3,000 of which was to be credited immediately as a fee to Mr. Nolan for his brokerage services. The loan was to be repaid at any time within two years. It was secured by a contemporaneous legal charge on the properties at 26 Alness Road and 24 Stanley Road, properties that were, as far as I can see, otherwise unencumbered and that had a value greatly exceeding the amount of the loan. The interest on this secured, relatively short term facility was three per cent per month, compounded at monthly rests. That would be equivalent to an annual rate of about 43 per cent. Looked at another way the outstanding balance on the loan (if interest remained unpaid) would double about every two years.

Mr. Hodgson also states that it was a condition of the loan that Peter Nolan’s building firm (Basdring Ltd) should complete the conversion project. It was also agreed that any advance under the loan should not be paid to the borrowers directly, but should be paid to Basdring Ltd to fund the building work. Mr. Hodgson says that the surrounding circumstances strongly suggest that Mr. Lipson/Forward Finance and Peter Nolan had close business connections and that in substance the loan and associated building work represented a joint enterprise between them. No written contract was apparently drawn up for the building work, although Mr. Hodgson says that he pressed for a written agreement. In the absence of such an agreement, I apprehend that the parties would say that the work was to be completed in a reasonable time and that a reasonable price should be paid for the work, if and when completed.

The building work did not take six months to complete. According to Mr. Hodgson, it took 28 months, and in his witness statement he recounts and comments upon, what he sees as the lamentable failure of Basdring Ltd to carry out the conversion efficiently and expeditiously. This very substantial delay put the claimants in a precarious financial position. The flats being uncompleted, there was no rental income and no basis for re-financing the loan with a recognised lender. Meanwhile the balance on the loan was escalating at an alarming rate. By the beginning of September 1988, that is, about 11 months after the claimants had entered into the loan agreement, the balance, including accrued interest, stood at over £44,000, an increase of over 33 per cent on the original balance.

Not surprisingly, Mr. Hodgson states that he was deeply concerned at this unexpected turn of events. He says that two steps were taken to address the situation. First, Mrs. Hodgson sold her home at 15 Stanley Road, Whalley Range, Manchester at a sale price of £54,300. After redeeming a building society mortgage and paying transaction costs, Mrs. Hodgson paid the entire balance of the proceeds of sale, namely, £25,000, to Basdring Ltd. This left Mrs. Hodgson temporarily without a home. At the hearing Mr. Hodgson told me that she stayed with relatives until one of the flats was completed at Holyrood House, which then became (and remains) her residence.

The second step forms the subject matter of the present claim.

Mr. Hodgson states that in discussions at this time with Mr. Nolan the latter acknowledged that “charging interest on the original loans would be unfair”; and that he agreed, in substitution for the original bargain, to receive an amount representing “what the job [that is, the buildings works if and when completed] was worth”. The £25,000 already received by Basdring Ltd would be credited against the amount due under this substitute bargain.

The learned District Judge considered that this putative substitute bargain reached between Mr. Nolan, acting on his own behalf and for Forward Finance/Mr. Lipson, was not sufficiently definite or certain to be enforceable. With respect to the learned Judge I disagree.

No authorities appear to have been cited on this issue to the court below. However, the policy of the common law has always been to seek to give effect to the parties’ intentions where they believe a bargain has been concluded, particularly, as here, where the context is a commercial one; and the courts have been prepared to go a long way indeed in supplying provisions in order to render agreements sufficiently definite to be binding, and to avoid the unacceptable alternative of frustrating what was the common intention of the parties at the inception of the bargain: see Chitty on Contracts 30^th Edition, Volume 1, Chapter 2, Section 6, particularly at 2-128.

Mr. Hodgson’s case, which he explained in his own words at the hearing before me, is that both he and Mr. Nolan were well-versed in the building trade, and both understood clearly what Mr. Nolan meant when he said that Mr. Hodgson should pay “what the job was worth”, namely, a reasonable price for the completed work, taking account of the cost of labour and materials, and the financial carrying cost of work in progress until completion, and allowing a reasonable mark-up for profit. In the first instance the parties could be expected to enter discussions with a view to reaching an agreed figure. I take it that this is what the pleading (which was settled by Mr. Hodgson) refers to when it mentions a “negotiated” figure (see paragraph 1 above). But no insuperable difficulty would arise if they did not reach agreement. The construction industry is competitive, the particular job in this case appeared to be standard with no unusual features, and a reasonable price for the completed work could be objectively established, given, in particular, the reasonable assumption that Mr. Nolan had made and retained appropriate accounts and also the ready availability of independent expert opinion if such opinion proved in the event to be necessary.

For my part I have no difficulty in accepting that, if Mr. Hodgson’s evidence were believed at trial, he would have a realistic prospect of showing that the bargain struck with Mr. Nolan was sufficiently definite and certain as to be enforceable. Mr. Nugee QC contended that there was at most no more than an unenforceable agreement to negotiate a price for the completed work. That is one possible interpretation of the relevant discussions between Mr. Nolan and Mr. Hodgson. But it is not the only one. Much will turn on the evidence given at trial, including evidence concerning the background to the discussions; and it seems to me to be wrong, and seriously unjust to the Claimants, to hold at this stage that they have no realistic prospect of succeeding on their claim.

The learned District Judge also considered that the Claimants gave no consideration for the putative substitute bargain. Again I do not agree. According to Mr. Hodgson’s evidence, the situation at the relevant time was as follows. The conversion work remained uncompleted, and such a long delay in completing a project of this nature had not been in contemplation at the outset. Mr. Hodgson submitted that there was a genuine issue as to whether he was justified in dismissing Mr. Nolan/Basdring Ltd as the contractor, or at least in claiming substantial damages for the delay. Again, if this evidence were believed at trial, it appears to me that the Claimants would have a realistic prospect of showing that there were real advantages to Mr. Nolan/Basdring Ltd in being allowed to complete the work and in receiving a reasonable price for the completed job, and that good consideration was given for the substitute bargain. Of course, Mr. Nolan/Basdring Ltd may dispute the factual substratum upon which the Claimants rely. But that is a matter for evidence at trial, and cannot properly justify a conclusion at this stage that the claim has no realistic prospect of success.

In this context Mr. Nugee QC had a further point. Even assuming that some consideration moved from Mr. Hodgson to Mr. Nolan/Basdring Ltd, he asks rhetorically what consideration was Forward Finance/Mr. Lipson receiving under the putative substitute bargain for giving up his rights under the original loan agreement? I approach that issue under two different scenarios.

I assume first that Forward Finance/Mr. Lipson did, at some time before the putative substitute bargain, advance some or all of the designated £33,000 to Mr. Nolan/Basdring Ltd in connection with building work carried out for the claimants in 1987/1988. The relevant question is then whether Forward Finance/Mr. Lipson could be sure at that time that he would be able to recover from the Claimants the full amount of the sum advanced and the contractual interest accruing on any such advances. It must be remembered in this context that the loan at the outset was expected to be short term to enable the conversion work to be completed. On Mr. Hodgson’s case, there had been, without any fault on the part of the Claimants, very substantial delays, and in the event the accrued and accruing contractual interest had become exorbitant (see paragraph 7 above).

Again if the evidence at trial were to establish these facts, it would appear that there were real commercial advantages to Forward Finance/Mr. Lipson in the substitute bargain. Instead of having a claim that may well have in the circumstances become vulnerable under Section 139 of the Consumer Credit Act 1974 (as an extortionate credit bargain), Mr. Lipson had the Claimants’ undertaking to pay a reasonable price for the completed job, which would include an implicit amount for the financial carrying costs of work in progress until completion. If Mr. Nolan/Basdring Ltd had in fact been funded, in whole or part, by Forward Finance/Mr. Lipson, Mr. Nolan/Basdring, having been paid in full for the work by the Claimants, would be in a position to repay to Mr. Lipson any such advances together with a commercial rate of interest on the amount of any such advances.

The alternative scenario is that Forward Finance/Mr. Lipson had made no advances to Mr. Nolan/Basdring Ltd by the time the substitute bargain was concluded (or indeed at any subsequent time). This possibility cannot be ruled out. At the hearing I asked Mr. Nugee QC if either he or his instructing solicitor had seen any documents (such as, in particular, bank statements) evidencing any movement of funds, at any time, from Forward Finance/Mr. Lipson to Mr. Nolan/Basdring Ltd. Neither had had sight of any such documents. If in fact Forward Finance/Mr. Lipson had advanced nothing to Mr. Nolan/Basdring Ltd it would seem to me that Mr. Nugee’s rhetorical question becomes empty. Without any such advances, it is difficult to see on what basis Forward Finance/Mr. Lipson could claim repayment of loans and payment of interest, for no such loans had been made and no such interest had accrued. At least in that event the substitute bargain might enable Forward Finance/Mr. Lipson to persuade Mr. Nolan/Basdring Ltd to let him share in the profit from the building works as a reward for having stood ready to advance funds that were in the event not called for.

The fact that in 1988 the Claimants paid £25,000 to Basdring Ltd, and not to Forward Finance (see paragraph 8 above), does of course tend to suggest that Basdring Ltd was bearing the carrying cost of the building works and had not called for any advance from Forward Finance/Mr. Lipson.

For these reasons, I conclude that the claim does have a realistic prospect of success. I do also note that there are certain unattractive features in the Defendant’s position. The Claimants say that from the time that, on their case, the substitute bargain was concluded in 1988, they have repeatedly and over a very long period sought to engage the Defendant and Mr. Nolan. They have had no meaningful response, and the uncertainty has clouded their lives. On the other hand the Defendant treats the loan as continuing to subsist, notwithstanding that the Defendant has at no time claimed repayment of any loan with accrued interest. Accordingly, on the Defendant’s case, as at September 2006 the indebtedness of the Claimants stood at over £12 million. At today’s date (27 November 2009), that amount would have doubled about twice, to stand at over £36 million (see paragraph 5 above).

Mr. Nugee QC said at the hearing that the Defendant was interested only in enforcing its charge over Holyrood House. The documents refer to Holyrood House having a market value of £500,000. At the hearing Mr. Hodgson said that would now be closer to £400,000. In any event, on the Defendant’s case, the loan with accrued interest would already have exhausted the whole value of Holyrood House by March 1997. The Defendant no doubt would say that he made a remarkably good investment, advancing (if that were the case) £33,000 in October 1987 and, by March 1997, having the legal right, through the charge, to an asset with a value of at least £400,000. However, Holyrood House is the only asset of Mr. and Mrs. Hodgson. They claim that their liability was limited by the substitute bargain that was struck in 1988 to pay a reasonable price for the work that was carried out for them in connection with Holyrood House. In my judgment, for the reasons given, this issue between the parties must be resolved at trial.

That is sufficient to dispose of the appeal and uphold the Order made by the learned District Judge. Subject to any submissions made by the parties, I do not believe that it is necessary for me to make any Order in respect of the paragraphs of the prayer to the Particulars of Claim that the learned Judge struck out.

Finally, for the sake of completion and out of respect for Mr. Nugee’s careful submissions, I should say something about the alternative claim based on equitable forbearance. The learned judge, as I have already mentioned, considered that the terms of the putative substitute bargain were not sufficiently clear and definite to be enforceable. For the reasons that I have given, I do not agree with that conclusion. However, the learned Judge went on to hold that the alleged undertaking given by Mr. Nolan in 1988 was sufficiently clear and precise as arguably to found a promissory estoppel. Mr. Nugee QC submitted that these conclusions were on the authorities inconsistent.

On that issue I accept Mr. Nugee’s submissions. The promise or representation must be clear and unequivocal. No estoppel will arise where the promise or representation is ambiguous or uncertain: see Woodhouse AC Israel Cocoa v Nigerian Produce Marketing Co. [1971] 2 QB 23. There is also a close analogy between a representation giving rise to a promissory estoppel and a representation having contractual effect: see Woodhouse AC Israel Cocoa v Nigerian Produce Marketing Co [1971] AC 741, where Lord Pearson said:

“In a case of this kind the alleged “representation” or promise or assurance ought to be reasonably clear and definite both as to the terms of the contract being waived and as to the duration of the waiver. It may be that the “representation” or promise of assurance has to have at least as much precision as would be needed for a variation of the contract.”

If, therefore, the alleged undertaking in this case were not sufficiently precise or certain to found a contractual variation, it would not be sufficiently precise or certain to found a promissory estoppel.

Furthermore, paragraph 13 of the Particulars of Claim alleges that on 6 December 1995 Mr. Hodgson visited Mr. Nolan, who denied having agreed on behalf of the Defendant to cancel the loan agreement and settle for what the job was worth. The Defendant contended before the District Judge that the effect of this was that any forbearance which might have been granted in 1988 was revoked in 1995.

The District Judge held that Mr. Nolan’s denial of ever having made the alleged representation was not to be treated as a withdrawal of it.

I accept Mr. Nugee’s submission that there is no practical distinction between a withdrawal of an admitted forbearance and a denial that a forbearance was ever granted. What is important is that the statement clearly and unequivocally brings home to the mind of the promisee that it is no longer legitimate for him to rely on the representation, that is, that the promisor once again proposes to enforce his strict legal rights, in so far as it is equitable to do so.

The learned District Judge also held that the effect of a withdrawal would have made interest payable from the date of the withdrawal whereas the Defendant was claiming interest since the date of the loan and “it cannot be right that a party can withdraw a forbearance so as to make the other party retrospectively liable” (paragraph 28 of the judgment).

The Defendant criticises that analysis by the District Judge. In so far as the District Judge might be taken to be saying that a forbearance can never be withdrawn with retrospective effect, I would agree with the criticism. However, it may be that the learned judge was in effect stating that, in the circumstances of this case, the Claimants would have a realistic prospect of showing that it would have been inequitable to withdraw the forbearance with retrospective effect. If so, I would agree, for it would indeed be strongly arguable that it was inequitable to demand the interest that would, in the absence of forbearance, have been payable from the date of the forbearance to its withdrawal. I did not apprehend that at the hearing Mr. Nugee pressed this point.

However, there was nothing to prevent the forbearance being withdrawn for the future. An issue might arise as to the amount of the balance upon which interest could be restarted. Having regard to the terms of the alleged promise, I see a reasonably strong argument that the relevant balance would be the amount of the capital loan (£33,000) less the amount paid to Basdring Ltd in September 1988 (£25,000), that is, £8,000. However, this would all appear quite academic: under the terms of the loan, even if the initial amount were £8,000, and interest began to run only from December 1995, the outstanding balance would have reached the assumed value of Holyrood House (£500,000) in about twelve years, that is, some time in 2007.

In the light of my different conclusions regarding equitable forbearance, the prayer to the amended Particulars of Claim referred to at paragraph 1 above will require suitable amendment.