Respondent solicitor compromising action by company for negligence in connection with land transaction – Appellant effectively sole owner of company – Appellant issuing proceedings for personal loss caused by same events – Application to strike out – Whether respondent estopped from claiming action amounting to abuse of process – Whether heads of damage claimed irrecoverable – Court of Appeal striking out action – Appeal allowed
The appellant held 998 out of 1,000 shares in a housebuilding company, which, in 1991, commenced proceedings for professional negligence against the respondent firm of solicitors (the company action). The claim alleged a failure to advise upon, and implement, an option to purchase certain land, and subsequent dilatory prosecution of litigation against the vendor and others.
In 1992, by a settlement agreement, to which the appellant was also a party, the company action was compromised upon terms that the respondent, while not admitting liability, would pay £1.8m to the company in satisfaction of its claim. By clause 3 of the agreement, the appellant undertook, without limiting any other rights against the respondent, to limit any claim he would make personally, in respect of losses sustained as a shareholder, to £250,000.
In 1993 the appellant commenced his own proceedings (the personal action). These repeated the earlier allegations and claimed, inter alia, that the difficulties experienced by the company, arising from the respondent’s conduct, had deprived the appellant of the financial resources he was expecting to apply to his other business interests, thus causing personal losses over and above those sustained by the company. The respondent applied to have the action struck out on the ground that, by raising issues that should have been litigated in the company action, it amounted to an abuse of process. The court also considered, by way of preliminary issues whether: (i) the respondent had owed the appellant a duty of care; and (ii) any of the heads of damage pleaded were irrecoverable as a matter of law.
The judge held that: (a) it was arguable that the respondent had owed the appellant a duty of care; (b) the heads of damage claimed were not irrecoverable; but (c) the respondent was estopped by convention from contending that the action was an abuse of process, because the company action had been settled upon the common assumption that a personal claim would be made by the appellant.
The Court of Appeal allowed the respondent’s appeal. The court agreed with the judge upon (a) and (b), but held upon (c) that there had been an abuse by the appellant of the rule in Henderson v Henderson (1843) 3 Hare 100, since there was no excuse for his failure to launch his own claims when the company brought its action. The appellant appealed, and the respondent cross-appealed agains the decision that the heads of damage claimed were not irrecoverable.
Held: The appeal was allowed and the cross-appeal dismissed.
1. The appellant’s submission that Henderson v Henderson did not apply was rejected. Although the appellant had not been the claimant in the first action, there was a sufficient degree of identification between him and the company to make it just to hold that a decision to which one was a party should be binding in proceedings to which the other was a party: see Gleeson v J Wippell & Co Ltd [1977] 1 WLR 510. Furthermore, an important purpose of the rule was to protect a defendant against the harassment necessarily involved in repeated actions concerning the same subject matter, and, therefore, it was irrelevant that the first action had culminated in a compromise and not a judgment.
2. The Court of Appeal had erred in concluding that the action had been an abuse of process. The question was whether the parties to the settlement of the company’s action proceeded upon the basis of an underlying assumption that a further proceeding by the appellant would not be an abuse of process, and, if they did, whether it would be unfair or unjust to allow the respondent to go back on that assumption. Both those conditions were met on the facts. The appellant had been willing, in principle, to try to negotiate an overall settlement of his and the company’s claims, but it had not been possible in the time available. The terms of the settlement agreement and the exchanges that preceded it pointed strongly towards acceptance by both parties that it was open to the appellant to issue personal proceedings. It would be unjust to permit the respondent to resile from that assumption: Amalgamated Investment & Property Co Ltd (in liquidation) v Texas Commerce International Bank Ltd [1982] QB 84 applied.
3. Where a court had to decide, upon a strike-out application, whether a shareholder’s claim was sustainable in principle on the facts pleaded, it was necessary to closely scrutinise the pleadings in order to ascertain whether the loss claimed appeared to be, or was, one that would have been made good had the company enforced its full rights against the party responsible, and whether the loss claimed was merely a reflection of the loss suffered by the company.
On the one hand, the court had to respect the principles of company autonomy and ensure that the company’s creditors were not prejudiced by the action of individual shareholders and that a party did not recover compensation for a loss that another party had suffered. On the other hand, the court had to be astute to ensure that the party who had in fact suffered loss was not arbitrarily denied fair compensation. Any reasonable doubt had to be resolved in favour of the claimant. Upon that basis, it could be concluded that the heads of damage claimed were not irrecoverable. However, the claim for mental distress was struck out, under the general rule that such a claim should not be included in a claim for damages for breach of contract. The claims for loss of pension and loss to the value of the appellant’s shareholding were also struck out, as they were merely a reflection of the company’s loss: Addis v Gramophone Co Ltd [1909] AC 488 applied; Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344 considered.
Roger Ter Haar QC and Simon Howarth (instructed by Shoosmith & Harrison, of Fareham) appeared for the appellant; Alan Steinfeld QC and Elizabeth Ovey (instructed by Beachcroft Wansbroughs) appeared for the respondent.
Thomas Elliott, barrister
