Land scout employed by developers on commission basis purchases through shell company site in which developers known to be interested–Secret profit on sale to be disgorged–Commissions on separate transactions lost, developers being entitled to avoid the commission contract for fraud
This was a
claim by Headway Construction Co Ltd, property developers, of Welwyn Garden
City, Hertfordshire, against Mr Geoffrey Downham and his company, Bardcrest
Properties Ltd, for damages for breach of contract, damages and other relief
for misrepresentation, fraud and deceit, and recovery of a secret profit made
upon the sale of land at Stansted, Essex. The defendants counterclaimed
commission pursuant to an agreement of July 14 1971.
Mr E A Machin
QC and Mr G W Cheyne (instructed by Adam Burn & Metson, agents for Crane
& Staples, of Welwyn Garden City) appeared for the plaintiffs, and Mr T S G
Baker (instructed by Doyle, Devonshire, Box & Co) represented the
defendants.
Giving
judgment, NIELD J said: The plaintiff company carried on the business of
property developers at Welwyn; the managing director was a Mr Cottrell and
another director a Mr Drysdale. The first defendant, Mr Downham, on April 7
1970 took employment with the plaintiffs as a construction manager; he lived then
at 33 King’s Road, Berkhamsted. The terms of the service agreement appear in a
letter of April 3 1970. This agreement was replaced by a commission agreement,
the terms of which appear in a letter dated July 14 1971, and under it Downham
(and in parenthesis I say the parties will, I know, understand if I omit
designation for the sake of brevity) agreed to undertake the task of acquiring
land for the plaintiffs on commission and on a part-time basis. The second
defendants are a company which was purchased by Downham on June 4 1971. The
company has no assets, and in effect Downham and the company are one and the
same entity. In the action now before the court, the plaintiffs claim damages,
saying that Downham was in breach of his contract of service; that he made a
secret profit of £15,500 in relation to the sale of certain land at Stansted,
and that he was guilty of misrepresentation, fraud and deceit. In the defence,
all these allegations were denied, but at the end of Mr Machin’s opening for
the plaintiffs, Mr Baker for the defendants told the court that they (the
defendants) no longer denied making a secret profit, and said it was admitted
that the plaintiffs were entitled to £15,500 less expenses, reducing the figure
to £14,369. The defendants, he said, denied any fraud and asserted that the
course taken in regard to the purchase of the Stansted land was taken upon the
advice of counsel. It was conceded that for all practical purposes the second
defendants were in truth the first defendants. There is then a counterclaim in
which the defendants claim to be entitled to commission under the second
agreement and seek a declaration to that effect and a specified sum of
commission of £13,475 in respect of one transaction relating to land at
Roundswood Park, Harpenden.
I begin by
considering the service agreement of 1970. On March 6 of that year Downham
applied for the post of construction manager with the plaintiffs. The terms of
the agreement offered to him are set out in their letter of April 3 1970. These
terms included a salary of £3,350 and the right to terminate by three months’
notice but did not specify Downham’s duties. In fact they were generally to
supervise building contracts. The terms, it is to be noticed, did not include
the finding of sites for the plaintiffs by Downham. Soon after Downham’s
appointment, the plaintiffs decided upon a change in their operations so as to
undertake the private development of land, which would involve the finding of
suitable sites, either with already-existing planning permission or without.
For this the plaintiffs needed a manager, and Cottrell took the view that
Downham was well qualified for the post. At the end of May or early in June
1970 the parties came to fresh arrangements which, as I find, constituted a
variation of the first agreement. It was agreed that Downham should search for
sites which the plaintiffs might develop privately as building sites. It was
further agreed that Downham should report any such sites coming to his notice,
that the suitability of the sites should be discussed between Downham and
Cottrell, and that it would be for Cottrell to give authority for a bid to be
made.
I turn now to
the land which is the subject of the claim for recovery of a secret profit. In
June 1970 the plaintiffs were engaged upon the development of land in
Pennington Lane, Stansted, a project for which Downham had full responsibility.
Adjoining the site was an area of land in which the plaintiffs were interested,
since, if it could be acquired, it would make an obvious extension to their
existing site. The adjoining land was 1.2 acres in extent, and belonged to the
Trustees of the Mary Macarthur Holiday Homes for Working Women. It is
convenient to call the adjoining land ‘the trust land.’ In July 1970 there was a meeting between
Cottrell, Drysdale and Downham at which it was pointed out by Cottrell that the
acquisition of the trust land would be highly advantageous, and that steps
should be taken to discover who the owners of the trust land were. Downham was
asked to undertake this task. During the next 18 months, Cottrell asked Downham
repeatedly if he had discovered the identity of the owners of the trust land,
and Downham said that he had not. Cottrell had asked Downham to make inquiries
from the appropriate local authorities. Downham, it is said, did write to the
Essex County Council, but not until November 16 1970, and no reply to those
inquiries has
Essex County Council, but no reply to that letter had been found. Towards the
end of 1970, Cottrell began to be dissatisfied with Downham’s work as
construction manager, and particularly with the state of things at Stansted.
About May 19 1971, Cottrell and Downham, and probably Drysdale, went together to
inspect the trust land. Downham was again asked if he had discovered the
owners, and he said no. Cottrell soon after concluded that he must relieve
Downham of his post, and on May 28 1971 he said so to Downham, who at once
produced from his pocket a letter of resignation. This reads, ‘Dear Mr
Cottrell, With some regret I hereby tender my notice of resigning my post with
Headway Construction Company Limited, the resignation to become effective at
the end of August 1971.’ That period was
extended to the end of September 1971. Cottrell was not certain of the date,
but I am satisfied that in June 1971 Cottrell once again asked Downham if he
knew the owners of the trust land, and was told he did not.
Although
dissatisfied with Downham’s work as a construction manager, Cottrell was of the
view that Downham had a flair for discovering building sites, and by June or
July 1971 the question of a new agreement arose. Cottrell wrote on July 14 1971
a letter setting out the terms of the commission agreement, and in part that
letter reads:
‘You to spend
three days per week in the search for building land. This land to be acquired
on an option to purchase, subject to planning permission, including, if
necessary, an appeal following the rejection of planning permission. You
undertake not to seek or accept full-time employment during the course of this
agreement. We undertake to pay you a retaining fee of £2,000 per annum, payable
quarterly. This fee to include all personal and travelling expenses. Charges
associated with the land will of course be borne by Headway. The acquisition of
land will be paid for on a commission basis, and will be payable in each and
every case at the completion of sale. The following is the agreed commission
scale which will be used as the minimum basis of remuneration, but which may be
varied by agreement between us if the circumstances of any one acquisition are
particularly favourable to Headway. The commission will apply in two parts: (a)
the number of houses contained in the planning permission of each scheme, at a
fee of £50 each where under £10,000 of sale value, £75 each where over £10,000
of sale value; (b) the difference in value between the amount paid by Headway
and the open market value of the land, to be assessed and agreed, and a fee of
10 per cent of this difference in value to be paid on completion of sale, up to
a maximum of £5,000.’
Downham’s
acceptance of these terms is dated July 17 1971. It was agreed that the service
agreement, as varied, should remain operative until September 30 1971 and that
the commission agreement should be operative as from October 1 1971. Mr Baker
has submitted that the commission agreement contemplates merely options and not
sales, but as it seems to me, both parties have throughout regarded it as
dealing with sales or purchases, and Downham himself bases his counterclaim on
such a premise.
I now look at
the position of the second defendants, Bardcrest. This company was incorporated
on May 21 1971. It was a ready-made company, and was acquired by Downham on
June 4 1971, that is to say, a week after Downham had given notice to the
plaintiffs, and, as I find, shortly before Downham once again told Cottrell
that he had not discovered the owners of the trust land. The registered office
of this company, Bardcrest, was 33 Kings Road, Berkhamsted. The company’s file
shows a director to be a Mr Howson, said to be a cousin of Downham, and
Downham’s wife as secretary. On May 15 1972 Mr Howson resigned and Downham was
appointed as a director, and the registered office of the company was changed
from 33 Kings Road, Berkhamsted to 30 Baker Street, London W1, an accommodation
address. Downham told the court that at the end of June 1971 in a public house
he heard some discussions about the ownership of the trust land, and after
talking to the landlord and others he traced the owners through the Charity
Commissioners. In June 1971 Bardcrest got in touch with Kershaw & Co,
solicitors for the owners, who on July 1 1971 sent Bardcrest a plan of the
trust land. On July 13 1971 Bardcrest wrote to the owners. The address given is
Suite 5, 29-30 Warwick Street, London W1, but there is a note beneath that:
‘During July, please reply to 33 Kings Road, Berkhamsted.’ That letter is signed by B. Howson, and
beneath his signature there appear what purport to be the names of the
directors: B Howson, J A Greenway and R C Edwards. J A Greenway and R C
Edwards, as is admitted by the defendant Downham, were entirely fictitious. So
Bardcrest wrote to the owners of the trust land, saying ‘We have pleasure in
submitting our formal offer for the purchase of the above land. We are prepared
to offer £20,500 subject to contract, and trust that you will be able to accept
our offer at an early date.’ On November
8 1971 Kershaw & Co, on behalf of the owners, wrote to Bardcrest, saying
among other things: ‘Since your offer was made, it is felt that an offer of
£24,000 would be an offer which the trustees should accept, subject to the
approval of the Charity Commissioners. Perhaps you will kindly let us know by
return whether your company would be interested.’ Then on November 12 1971 the solicitors for
Bardcrest wrote to Kershaw & Co saying: ‘We confirm that our client is most
certainly interested in pursuing this matter at the price of £24,000, and await
hearing from you with a draft contract as soon as possible.’ On December 7 Kershaw & Co wrote to the
solicitors, Masons, acting for Bardcrest, saying: ‘We are pleased to be able to
say that we have heard from the Charity Commissioners that they are prepared to
authorise the proposed sale, subject to the result of the publication in the
locality, and by advertisement, of preliminary notices. The commissioners
require that the notice should be placed on a suitable public notice-board at
Stansted, and also advertised in a local paper and the Financial Times
or the ESTATES GAZETTE.’
In the
meantime, namely in November of 1971, Cottrell was told that the owners of the
trust land had been traced, and Downham mentioned a price to the plaintiffs of
£42,000. Downham was instructed to pursue the offer. On January 1 1972 the Financial
Times carried an advertisement headed, ‘Charity Commission; property for
sale. (Higher offers invited) building land,’ and the text included these
passages: ‘Approximately 1.2 acres, Pennington Lane, Stansted, Essex. . . . The
Trustees of the Mary Macarthur Holiday Home for Working Women propose to sell
the above-mentioned property for £24,000. . . . Higher offers are
invited.’ This advertisement came to the
notice of Cottrell, who called Downham in and asked him if it was the trust
land which was referred to. Downham became ill at ease, and said he would look
into it. A week later Downham told Cottrell it was not the land in question,
and that the advertisement had been inserted without authority. That was
untrue. On February 2 1972 Kershaw & Co wrote to Bardcrest saying that the
Charity Commissioners were being asked to approve the sale to Bardcrest at
£42,000. Downham told Cottrell that the price had gone up to £44,000, and then
to £48,000, and that there was a counteroffer of £56,000. Thereupon the
plaintiffs agreed to pay for the trust land the sum of £57,500. On February 3
1972 the plaintiffs’ solicitors sent a contract to Bardcrest’s solicitors
agreeing that the plaintiffs would pay £57,500 for the trust land.
In my opinion
the only sensible inference to be drawn is that Downham acquired the ready-made
Bardcrest company for the express purpose of perpetrating this fraud upon the
plaintiffs. Mention was made of two other ventures dealt with through
Bardcrest, but these it was said came to nought. Downham deliberately hid from
the trust his connection with the plaintiffs, and he deliberately hid from the
plaintiffs his interest in Bardcrest. This is admitted to be a case of secret
profit. In my judgment it is moreover a case of fraud. A well-recognised
definition of the phrase ‘to defraud’ is ‘to deprive by deceit,’ and that is
exactly what Downham did. When cross-examined by Mr Machin, Downham gave
evidence to this effect: ‘It was my duty to find the owner of the land, and
having done so to tell Headway who it was. I broke this duty quite deliberately
for my personal gain. In November I told Cottrell it was Bardcrest, but I did
not say that was me. When I told Cottrell about the Financial Times,
what I told him about the Financial Times advertisement was untrue. If I
told the truth, the deal would be off. It was a lie to secure profit.’ Part of the defendants’ case is that Downham
consulted counsel as to the legality of Bardcrest selling the trust land to the
plaintiffs. The opinion is not in writing, but a solicitor’s note has been
mentioned, though not put in. I accept that Downham, with a solicitor, did
consult counsel, and that counsel may have given some advice which Downham
thought helpful to him. I am also satisfied that counsel did not have the full
true facts before him. Again, Downham’s evidence was to this effect: ‘I did not
tell counsel it was my duty to tell the plaintiffs if I found out the identity
of the owners. I did not say the two names on the Bardcrest notepaper were
fictitious. I did not say that if it got out that the company and I were the
same the whole deal would be off.’ I
have not heard counsel or solicitor in regard to this part of the history
called as a witness.
Before I
consider the counterclaim, two points arise on the claim, (1) whether expenses
of the sale should be deducted from the £15,500 profit, and (2) whether the
plaintiffs are entitled to something more than the figure of £15,500, or the
figure reduced by reason of deducting expenses, upon the ground that Cottrell,
had he known of the owners and personally conducted the negotiations with
proper expedition, would have obtained the trust land for a sum less than the
£42,000 which Bardcrest paid for it. These questions must be considered in the
light of my findings, which are: (1) Downham was in breach, and this is
admitted, of the implied terms in the service agreement that he would serve the
plaintiffs with good faith and fidelity: in the case of Sanders v Parry
[1967] 2 All ER 803, which was cited, Havers J reviewed the authorities; (2)
Downham was in breach of the express terms in the service agreement, as varied,
that he would search for the owners of the trust land and make known their
identity to the plaintiffs; and (3) Downham was guilty of fraud, deceit, and
the making of a secret profit.
As to the
first issue, namely whether expenses can be deducted by Downham, it is a
significant feature of the history here that–and it is quite unusual–there were
two separate conveyances, one of the land from the trust to Bardcrest, and a
second from Bardcrest to the plaintiffs. This, it is said, would involve a
double stamp duty. It seems to me on the material I have that had the
plaintiffs negotiated directly with the trust, expenses would not have been
incurred, so that on this aspect the damages would be £15,500. On the second
issue, namely whether Cottrell could have bought the trust land at less than
£42,000, I have this evidence. Mr Cottrell was experienced in land valuation;
although he held no professional qualifications he had great experience, and
according to him, had he heard in June or July 1971 who the owners were of the
trust land, he would have instructed Downham to negotiate a purchase as soon as
possible, and there would have been an advantage in that the plaintiff company
had the resources to pay, as he put it, ‘on the nail.’ At the time land values were rising sharply,
and he said: ‘I am sure we could have got the land for less than £42,000.’ Two main reasons were advanced, one of which
I have mentioned, namely that the resources of the company were sufficient to
enable a cash payment to be made; and secondly, that land values were
increasing and with proper expedition he (Cottrell) thought he could have
secured this property perhaps for as little as £30,000. I have noted that this
particular point is not specifically pleaded, but Mr Machin said he had
informed Mr Baker of it before the case started. Mr Baker contends that to find
a figure here would be mere conjecture. I cannot agree, and I note the case of Chaplin
v Hicks [1911] 2 KB 786. The proper approach to this problem, I think,
is to reach (if the evidence warrants it, of course) a fair and reasonable
figure for the loss of the chance to obtain the trust land at less than
£42,000. On the evidence, I value that lost chance at £3,000. It follows that
on the claim, the plaintiffs are entitled to judgment for the sum of £18,500.
I turn, then,
to consider the counterclaim. Downham claims to be entitled to commission in
relation to four lots of property: (1) Roundswood Park, Harpenden; (2) Burnham
Green, Tewin; (3) Manor Farm, Hurst Cottage and Eastleigh at Bishop’s
Stortford, and (4) Bishop’s Stortford Golf Club. Included in the counterclaim
at the outset was a claim for a commission on the purchase of the trust land.
Not surprisingly, it is now withdrawn. On the four lots of property which I
have mentioned, the commission claimed is quantified only in the case of
Roundswood Park. As to the other three, the claim is for a declaration that
commission is payable. I consider first the Roundswood Park claim. This site
was found in July 1971; there were four owners involved, and on March 10 1972
planning permission was obtained. The plaintiffs agree that Downham dealt with
the transaction and carried it through, so that apart from any question of
avoiding the contract, Downham would be entitled to commission. That would be
based on the term appearing in the letter of July 14 1971, and Downham’s
entitlement, the plaintiffs say, would be £5,000 and £75 per house–12 houses,
£900. That figure, £5,900, was the sum originally claimed, but the defendants,
by amendment, now claim £13,475. The difference arises in this way. The first
defendant, Downham, contends that the commission agreement should be
interpreted as meaning that he was to have £5,000 in respect of each
transaction, and not in respect of the site as a whole. Cottrell in evidence
said that he had never heard it suggested that the agreement was a parcels
agreement until three weeks before the case started, and contends that what the
plaintiffs are concerned about is the site and not each acquisition separately.
It is pointed out that planning permission is given for the site. The
defendants’ solicitors’ letter of May 8 1972 supports the plaintiffs’
contention as to this, and I find that the appropriate figure is £5,900.
However, the next question, which is now to be considered, is whether the
commission contract is voidable. Mr Baker submits, on the authority of Nitedals
Taendstikfabrik v Bruster [1906] 2 Ch 671, that where transactions
are severable, the fact that some are dishonest does not taint others which are
not. With this principle, the court is in agreement. The plaintiffs indeed do
not contend that the trust land fraud taints the other transactions: they say
that the commission agreement itself is to be set aside for fraud.
Before the
court can uphold this contention, it must be shown that there was
misrepresentation by Downham before July 17 1971, the date when he agreed to
the commission agreement. It must also be shown that such misrepresentation
induced, and was intended to induce, the plaintiffs to enter into the contract.
Downham maintained, as I have already pointed out, that he first discovered who
the owners of the trust land were at the end of June 1971. I do not accept this
evidence. As I have said, it seems to me clear that Bardcrest was acquired for
the purpose of carrying out this fraud in relation to the trust land, and it
follows that by then Downham knew who the owners of the trust land were. Mr
Machin points out that by July 13 1971 Bardcrest notepaper had been printed,
and he further asked the court to observe that no one was called by the
defendants, apart from Downham, to deal with the purpose for which Bardcrest
was acquired. I am satisfied that about three weeks before July 1 1971 Downham
found out who the owners of the trust land were, and that between then and July
17 he falsely told Cottrell that he had not. I further find that this specific
misrepresentation was dishonest and was made in order to induce the plaintiffs
to enter into the second agreement, that is to say, the commission agreement.
It is true that for a long time Downham was in ignorance as to the ownership of
the trust land, but when he discovered who the owners were it was his duty to
tell the plaintiffs, and if a specific falsehood were not proved (and I find it
was proved), silence on the part of Downham would, in my view, amount to
misrepresentation inducing the making of the commission agreement. I refer to With
v O’Flanagan [1936] Ch 575, and Cavendish-Bentinck v Fenn
(1887) 12 App Cas 652. The findings which I have reached on this part of the
case are in large measure admitted by Downham, who in the course of
cross-examination said: ‘It was beneficial to have the commission agreement. I
would have made £30,000 over three years, and in July 1971 I anticipated
securing commission of that order. If Cottrell had known or had any idea about
Bardcrest there would be no question of any commission. By early 1971 I had
conceived the scheme to buy the land through Bardcrest, and a commission
contract came soon after. It was vital that Cottrell should not be told. One
reason I did not tell Cottrell was so that the commission contract could go
on.’ It is the evidence of Cottrell, and
the opinion of Downham in evidence, that the commission agreement would not
have been entered into by the plaintiffs had they known that Downham had discovered
the owners of the trust land and was in negotiation with them for his own gain.
Mr Baker submitted that Downham should succeed in his claim on the counterclaim
on grounds of equity, but I cannot but feel that Downham, by his dishonesty,
had rendered himself disentitled to invoke a remedy in equity.
Turning, then,
to the claim based on the Burnham Green, Tewin, land, this site was found by
Downham, but in July 1971, that is, during the currency of the service
agreement. It involved six acquisitions. Of the three properties Manor Farm,
Hurst Cottage and Eastleigh, all at Bishop’s Stortford, the first two were
found not by Downham but by Strutt & Parker, estate agents, of Chelmsford.
All three were found during the currency of the service agreement. Mr Baker
points out that although that is so, they were brought within the purview of
the commission agreement, as was the Burnham Green site at Tewin, by the
plaintiffs’ letter of March 13. In regard to these transactions, the plaintiffs
assert that not only are they voidable in the circumstances before referred to,
but that for their inclusion in the commission agreement there was no
consideration moving from the defendants. As to voidability, again, when
cross-examined, Downham said that if Cottrell had had any idea about Barncrest,
he would not have thrown Tewin or Harpenden or Hurst Cottage into the
commission agreement. If Cottrell had known about Bardcrest, he would not have
written the letter throwing in the Bishop’s Stortford Golf Club. It seems to be
the situation that Downham did nothing as a result of the plaintiffs’ inclusion
of these transactions within the commission agreement which he was not already
bound to do under the service agreement. In other words, there was no quid
pro quo. Then as to the golf club transaction, Downham was responsible for
the idea that part of the golf course might be acquired for building purposes,
and this was during the currency of the commission agreement. He played no
part, however, in the obtaining of planning permission, but in the
correspondence it is correct, as Mr Baker points out, that on March 13 1972
Downham suggested to Cottrell that he should have, in respect of the golf club,
a fixed fee of £1,000 and a house fee of £200 a house over £10,000 in value,
and £250 over £20,000 in value. To that the plaintiffs replied rejecting the
suggestion, and saying: ‘I also agree that Bishop’s Stortford Golf Club is a
special case, but I am reluctant to change the format of our agreement too
much. I confirm that the golf course will be treated as one acquisition within
the meaning of our agreement, but I suggest the following modifications: The
maximum payment of £5,000 referred to in our agreement be raised to £7,500,
£2,000 or £3,000 to be payable immediately,’ and that was accepted by Downham,
and indeed the fee, the special fee of £1,000, was paid by the plaintiffs to
Downham, and that is recorded. In this instance, therefore, as in all these
other instances, the plaintiffs rely upon Downham’s misrepresentation as
rendering the commission agreement voidable. The court accepts that contention,
and the counterclaim fails.
Judgment was
entered for the plaintiffs against the first defendant for £18,500, with costs
of both claim and counterclaim. Interest was awarded at 8 1/2 per cent from the
date of the conveyance of the Stansted land, March 27 1972. Counsel being in no
position to offer undertakings with regard to disposal of assets, the
defendants were awarded a stay limited to the excess of the amount of the
judgment over £5,000, with liberty to apply should they prefer to offer
undertakings in respect of the whole.
