Eastgate Group Ltd v Lindsey Morden Group Inc. (Smith & Williamson (A Firm), Part 20 defendant)
| Jurisdiction | England & Wales |
| Judge | Potter,Longmore L JJ |
| Judgment Date | 10 October 2001 |
| Neutral Citation | [2001] EWCA Civ 1446 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: 2001 0787 A3 |
| Date | 10 October 2001 |
[2001] EWCA Civ 1446
Lord Justice Potter and
Lord Justice Longmore
Case No: 2001 0787 A3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
(COMMERCIAL COURT) (Mr Justice Andrew Smith)
Royal Courts of Justice
Strand, London, WC2A 2LL
ANTHONY BOSWOOD Esq QC, BANKIM THANKI Esq and HENRY KING Esq
(instructed by Linklaters for the Defendant/Part 20 Claimant)
JOHN MARTIN Esq QC and JONATHAN SEITLER
(instructed by Barlow Lyde and Gilbert for the Part 20 Defendant)
Lord Justice Longmore:
Introduction
1 The question on this appeal is whether a defendant vendor of shares in a company, who is sued by the purchaser for breach of the warranties in the share sale agreement, can seek a contribution, pursuant to section of the Civil Liability (Contribution) Act 1978, from the purchaser's investigative accountants on the basis that those accountants are also liable to the purchaser in respect of the same damage as the vendor of the shares.
2 The company sold was Hambro Legal Protection Ltd (HLP), which derived its income from the sale and administration of legal expenses insurance (which might itself be part and parcel of larger insurance cover). Policies would be issued to members of the public by institutions such as travel agents and the cost of administering such policies might be incurred by HLP soon after issue. There would from time to time be declarations of bundles of policies made by the institutions and, only on such declaration, would HLP be able to calculate amounts due to them from the institutions (eg. premiums including their own commission) and amounts due from them to underwriters (eg. by way of premium after deduction of commission). As a result of this way of doing business, HLP's monthly management accounts and their audited annual accounts included estimates of amounts due from the institutions as debtors to HLP and due to underwriters as creditors of HLP. One of the issues in the proceedings is whether the Claimant purchasers were aware (or were to be deemed to be aware) of this practice of preparing accounts on an estimated basis. The defendant vendors say that even if the Claimants were not aware themselves, this practice was something of which their accountants (brought in to investigate HLP for the purpose of the purchase and sale transaction) were aware or ought to have been aware.
3 I can take the other underlying facts from the judgment of Andrew Smith J. Under the share purchase agreement of 30th November 1998, Eastgate Group Ltd (“Eastgate”) agreed to purchase and Lindsey Morden Group Inc (“LMG”) agreed to sell the whole of the share capital of HLP for a consideration of £51 million. The agreement contained warranties by LMG (1) that the annual accounts showed a true and fair view of the state of affairs of HLP as at 31st March 1998; (2) that the management accounts from April 1997 to September 1998 (inclusive) were prepared with due care and attention in accordance with substantially the same accounting policies as the annual accounts; and (3) that since 31st March 1998 there had been no material alteration in the nature, scope or manner of business of HLP, nor any material deterioration in their financial position or turnover.
4 Eastgate contend that LMG were in breach of each of those warranties because, in essence, (1) HLP's accounts were inaccurate and misleading and did not present a true and fair view of the state of affairs of the company; (2) the accounts failed to disclose both the extensive use of estimates in calculating HLP's income and turnover and the extent to which those estimates were inaccurate or left uncorrected; and (3) there had been a material deterioration in the turnover and financial position of HLP between 31st March 1998 and 30th November 1998. 5 Eastgate claim damages from LMG in the following terms:
“a.
As damages for breach of warranty Eastgate claims the difference between the value of the business as warranted (being the price paid by Eastgate) and the value of the business in fact.
b.
The price paid by Eastgate for the business was £51 million …”
6 LMG now claim that they are entitled to look to Eastgate's accountants, Smith & Williamson (“S&W”), to contribute to whatever damages they (LMG) may have to pay to Eastgate in respect of their liability under the warranties in the share agreement. Before 1978, only joint tortfeasors could claim contribution from one another, but, since then, recommendations of the Law Commission have resulted in the Civil Liability (Contribution) Act 1978; now any person liable to someone who has suffered loss can claim contribution from another person who is also liable to the sufferer of the loss, but it is a requirement of the Act that the liability of that other person must be “in respect of the same damage”. So the first question that arises in this case is whether S&W, on the assumption that they would be liable to Eastgate for negligence in their investigation, are liable in respect of the same damage as are LMG. It has been held that the fact that a defendant's liability is contractual (and thus strict) does not mean for that reason only that it is not liability for the same damage as that of the potential contributor where that liability is a tortious liability in negligence; see eg. The Carnival [1994] 2 Lloyds Rep. 14 where contribution was ordered between the owners of a colliding ship and the charterers of the damaged ship whose liability was the (strict) contractual liability for ordering the ship to an unsafe berth. It has also been held that a party liable in negligence is not prevented from recovering a contribution by the fact that the contributing party is liable in restitution to the person suffering the loss, provided that the damage suffered is, in fact, the same, see Friends' Provident Life Office v. Hillier Parker [1997] QB 85 where Auld LJ (103A) said of the statutory words:
“It is difficult to imagine a broader formulation of an entitlement to contribution … The Act was clearly intended to be given a wide interpretation …”
7 One accepted restriction on the width of the statutory wording is that a person who is liable to a Claimant in debt cannot seek contribution from a person who is liable to the Claimant in damages. That is partly because it is difficult to say that someone who is a mere debtor is liable in respect of damage at all; but if and to the extent that he is liable in respect of damage eg because his failure to pay the debt causes damage to the Claimant, that is different damage (viz the loss arising from non payment of a debt) from damage caused by negligence or breach of duty on the part of eg a valuer or an accountant, see Howkins & Harrison v. Tyler [2001] Lloyds Rep PN 1. Another result of the wording of the Act is that the defendant and the potential contributor must be liable to the same person, otherwise they are not liable for the same damage. So if the defendant is liable to the Claimant, he cannot obtain contribution from a person who is liable to some other party altogether, even if the Claimant could himself have claimed contribution from that other person. The Act thus envisages a tripartite, not a multi-partite, situation, see Birse Construction v. Haiste Ltd [1996] 1 WLR 675.
8 In the present case the judge first decided that S&W are not liable to Eastgate in respect of the same damage as that for which LMG are liable. He arrived at this conclusion essentially because LMG were liable to compensate Eastgate (if at all) for the difference between the value which HLP would have had if the warranties had been correct and the actual value of the company as bought, while S&W were liable (if at all) for the price paid for HLP (if Eastgate would never have entered into the transaction on the giving of prudent advice) or the difference between the price paid and what they would have paid after receipt of prudent advice. He regarded the damage in the one case as different from the damage in the other. This may be described as the “Same Liability Issue”. Secondly the judge decided that, quite apart from his conclusion that the two potential liabilities were not liabilities for the same damage, LMG's claim against S&W was not even capable of being a claim to which the 197Act could apply because it failed a threshold condition for such applications said to have been laid down by this court in Howkins & Harrison v. Tyler. This may be described as the “Mutual Discharge Issue” The judge, for these reasons, struck out or set aside the Part 20 claim to contribution since it was “plain and obvious” that it did not come within the Act and the court had, therefore, no jurisdiction to entertain it. S&W had also argued that it was plain and obvious that, even if the court had (or arguably had) jurisdiction to entertain the application for contribution, LMG would be unjustly enriched, if any such claim were to succeed. It would not, therefore, be “just and equitable” within section 2(1) of the Act for LMG to receive contribution and this was also so “plain and obvious” that the Part 20 claim for contribution should be set aside at this stage. This may be called the “Just and Equitable” issue. The judge said that if he had not decided the two earlier points in favour of S&W, he would not have been in their favour on this point and would have allowed the Part 20 claim to proceed to trial.
9 LMG now appeal on both points which the judge decided against them, while S&W cross-appeal on the latter point....
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