Property — Valuation – Negligence – Claimants seeking damages for loss resulting from negligent valuation of hotels – Defendant alleging unlawful tax evasion – Claimants seeking to strike out part of defence alleging unlawful tax evasion or order requiring further details – Whether appropriate case for striking out allegation – Applications dismissed
The claimants were special purchase vehicles that a Danish company had set up in 2005 to buy eight hotels in England. They engaged the defendant to value each property, but subsequently claimed that it had been negligent or in breach of contract in carrying out the valuations so that they had paid therefore too much for each hotel.
The damages were calculated in two ways. First, the claimants compared the defendant’s valuation (which for the eight hotels totalled £39.47m) with the non-negligent net valuation of the hotels (totalling £34.35m). That gave rise to a shortfall of £5.12m, to which was added £2,397,805 in respect of wasted purchase costs, making a total damages claim of £7,517,805.
The alternative claim compared the price actually paid for each hotel (totalling £41,039,800) with the non-negligent valuation/true valuation figure (£34.35m), producing total damages of £6,689,800. That claim highlighted the actual price paid by the claimants for the hotels, which was said to consist of two figures, namely: the sum paid to the seller and an additional figure of 8% of the purchase price paid that was paid, not to the seller, but to a property location agent.
In its defence, the defendant argued that the claimants had deliberately added 8% to the true purchase price to disguise the nature of the payment and to circumvent the fact that the professional fees were not tax-deductible. Prima facie, that constituted unlawful tax evasion. It contended that it would investigate the matter and reserved the right to plead further on the point. If the purchase was structured to obtain an unlawful tax saving, the claims failed for illegality.
The claimants applied, pursuant to CPR 3.4, to strike out the part of the defence that contained an allegation of unlawful tax evasion or, alternatively, for an order that the defendant provide further particulars of that allegation.
Held: The applications were dismissed.
Contracts entered into with the intention of committing an illegal act will not generally be enforced although, in exceptional circumstances, the intended illegality might be so remote to the subject matter of the claim as to make the contract enforceable. Where the claimant was not seeking to enforce an unlawful contract but founded its case on collateral rights acquired under that contract, and where illegality did not, of necessity, form part of the claimant’s case, the claim might succeed, although that more generous approach might be confined to property cases: Gray v Thames Trains Ltd [2009] UKHL 33; [2009] 3 WLR 167 and Stone & Rolls Ltd (in liquidation) v Moore Stephens [2009] UKHL 39; [2009] 3 WLR 455 considered.
The court would not generally assist a claimant to recover the benefit of its own wrongdoing, whether or not it had pleaded or expressly relied on the illegality on making the claim. Although the test was no longer to ask whether the public conscience was affronted by the allowance of such a claim, the underlying principle or policy was one of deterrence. The courts would not encourage illegal acts by allowing claims based on such acts: Tinsley v Milligan [1994] 1 AC 340 and 21st Century Logistic Solutions Ltd (in liquidation) v Madysen Ltd [2004] EWHC 231 (QB); [2004] 2 Lloyd’s Rep 92 considered.
This was not a case in which the claimant sought to rely on or enforce a contract based on an illegal or fraudulent intention. The claim against the defendant was founded on the alleged duty of care that it owed as a surveyor and valuer, and a further allegation that there were direct contracts for the provision of such services between the parties. Neither the duty nor the alleged contracts were, on the face of it, tainted by any illegality. Conversely, the contracts that were the subject of the fraud allegation were those for sale of the hotels, to which the defendant was not a party and in respect of which it had no direct involvement.
Prima facie, the alleged fraud that was relevant only to the 8% uplift was too remote from the alleged negligence and breaches of contract at the heart of this case. However, assuming, for present purposes, that the allegation of fraud was made out, the claimants would be unable to persuade the court that their damages claim should be uplifted by the tainted 8%. If the fraud were established at trial, but the alternative calculation of the damages claim was found to be correct, the obvious solution would be for the court to ignore the 8% uplift and to use as the comparator the price actually paid to the sellers, without the uplift. In that way, the court would not be helping a claimant to recover a benefit from its own wrongdoing
On any view, the fraud/illegality allegations raised by the defendant could not be struck out while the 8% uplift at the heart of those allegations formed an express element of the secondary damages claim. However, if the claimants chose not to rely on the 8% discount, their position in respect of the striking-out would be stronger. If the defendant then decided to continue with the fraud/illegality arguments, the court would assess the claimants’ costs of dealing with that aspect of the case and order them to be paid on an interim basis to be repaid were those arguments to be ultimately successful.
Anthony Speaight QC (instructed by Stockler Brunton) appeared for the claimants; Patrick Lawrence QC (instructed by Reynolds Porter Chamberlain LLP) appeared for the defendant.
Eileen O’Grady, barrister
