Estate agents — Unpaid commission — Whether vendor’s debenture holder liable for interference with contract — Whether implied term that commission payable by vendor’s solicitors from receipts at completion
The second
defendant was a director and major shareholder of Greenbrook Ltd, a company
which prior to 1986 entered into a joint venture with a third party to develop
property at 76-78 Cadogan Place, London SW1, as flats. The plaintiff estate
agents sold three flats in 1989 and received their commission in each case from
Lloyd Mills & Co, solicitors for the vendors, out of the purchase moneys.
In 1990 the second defendant took control of Greenbrook Ltd and in January 1991
lent the company £1.4m secured by a debenture. In 1991 the plaintiffs sold a
further flat and rendered an invoice for £31,500 on March 22 1991 to Lloyd
Mills & Co. The invoice was not paid, Lloyd Mills & Co informing the
plaintiffs that they were instructed by the second defendant not to pay them
out of the proceeds of sale of the flat. Greenbrook Ltd then went into
liquidation. The plaintiffs claimed the commission against the second defendant
on the basis of: (1) unlawful interference of contract whereby the plaintiffs
were to be paid commission directly by the vendors’ solicitors out of the
receipts on completion as originally agreed or as further agreed on February 26
1991; (2) the second defendant held the disputed commission fees as trustee;
alternatively, (3) negligent misrepresentation.
plaintiffs were to be paid by the vendors’ solicitors out of the receipts on
completion nor a further contract to that effect. Although the second defendant
had knowledge of the contract of February 26 1991, he did not have knowledge of
the earlier contract. Had there been an implied term in the contract of
February 26 1991 this would have acted as a postponement of the debenture as
against the rights of the plaintiffs and the defendant would not have been
justified in interfering with the contract. The second defendant did not hold
the disputed fees by way of a trust. No duty of care was owed by the second
defendant and therefore no negligent misrepresentation.
The following
cases are referred to in this report.
Boots v Christopher (E) & Co [1952] 1 KB 89; [1951] 2 All ER
1045; (1951) 2 TLR 1169, CA
Georgiades v Wolfe (Edward) & Co Ltd [1965] Ch 487; [1964] 3 WLR
653; [1964] 3 All ER 433, CA
Hill
(Edwin) & Partners v First National Finance
Corporation [1988] 3 All ER 801, CA
Latham v Greenwich Ferry (1989) 72 LT 790
Luxor
(Eastbourne) Ltd v Cooper [1941] AC 108;
[1941] 1 All ER 33, HL
Reed
(Dennis) v Goody [1950] 2 KB 277; [1950] 1
All ER 919; (1950) 66 TLR (Pt 1) 918, CA
This was a
claim by the plaintiffs, W A Ellis Services Ltd, for unpaid commission fees
against the second defendant, Rt Hon Charles Anthony Pearson.
Andrew Lydiard
(instructed by Baileys Shaw & Gillett) appeared for the plaintiffs; Richard
Fawls (instructed by Harkavys) represented the second defendant; the first
defendant, Stuart Wood, did not appear and was not represented.
Giving
judgment, MR ANTONY WATSON QC said: In this case the plaintiffs, W A
Ellis Services Ltd, seek damages from the second defendant, the Hon Charles Pearson,
arising out of the sale of certain properties which they arranged on behalf of
a company controlled by the second defendant. The action originally was also
brought against the first defendant, a Mr Stuart Wood, but this has been
settled and references in this judgment to the defendant refer to the second
defendant.
Save for one
crucial area there is little dispute on the facts which may be summarised as
follows: the defendant was a director and major shareholder in a property
company known as Greenbrook Ltd. Prior to 1986 Greenbrook entered into a joint
venture with a third party to develop some property at 76-78 Cadogan Place,
London SW1. In 1986 as part of that joint venture certain parts of the Cadogan
Place development were put on the market and the agents used were the
plaintiffs. The original agreement was with their predecessors in title, the
unincorporated firm W A Ellis. The plaintiffs were incorporated in January 1987
and took over the business of W A Ellis from that date.
In 1989 during
the course of the joint venture the plaintiffs sold one flat (flat 3) to a
third party on behalf of the joint venture. Nothing turns on the commission
payable in this instance, but what is material for present purposes is that on
this occasion on exchange of contracts the plaintiffs rendered their bill to a
firm of solicitors then called David Mills & Co, now called Lloyd Mills
& Co. On completion of the transaction the solicitors, before passing the
sale proceeds to Greenbrook, deducted the plaintiffs’ fees and remitted them
directly to the plaintiffs.
In about
August 1989 the joint venture terminated. The details of this are not relevant,
but as a result of this termination Greenbrook were left as sole owners of
three unsold flats in the Cadogan Place development and a garage.
The plaintiffs
continued to act as estate agents to sell these properties. However, they were
now acting on behalf of Greenbrook alone. The director carrying out the day to
day running of Greenbrook at this time was Mr Wood, the original first
defendant. There does not appear to have been any form of appointment of the
plaintiffs to act as agent, simply that they continued to try to sell the flats
belonging to Greenbrook, which had previously belonged to the joint venture.
Following the
termination of the joint venture and during the currency of Mr Wood’s
involvement, the plaintiffs sold two flats on behalf of Greenbrook, namely
flats 2 and 7. On these occasions, as before, on exchange of contracts the
plaintiffs rendered the bill for their commission to David Mills & Co and
on completion David Mills & Co remitted their commission direct to the
plaintiffs having deducted it from the purchase money along with their fees.
During this
period, as can be seen from the accounts put in evidence, the financial
position of Greenbrook was deteriorating rapidly and by October 1989 the
deficit on the profit and loss account amounted to some £3.6m. It appears that
at some stage in the first half of 1990 the defendant, who up till now had been
playing no day to day role in running Greenbrook, took control of the company
and Mr Wood’s involvement with the company ceased. From approximately August
1990 the defendant was running the company so far as all matters material to
this action are concerned.
The defendant
met with the member of the plaintiffs involved in selling the remaining
properties at the Cadogan Place development, Mr MacKenzie Charrington and on
two occasions, namely November 8 1990 and the December 20 1990, Mr MacKenzie
Charrington wrote to the defendant stating that the commission payable would be
3%. The defendant did not reply to these letters or in any other way indicate
that he did not accept this rate of commission. There is no mention in these
letters or any other correspondence as to whether the previously practised
arrangement of the plaintiffs’ fees being discharged directly by Greenbrook’s
solicitors out of the purchase money was to continue.
The financial
state of Greenbrook continued to deteriorate and in January 1991 the defendant
lent £1.4m to the company to enable it to continue trading. This loan was
secured by a debenture dated January 4 1991 to which I will revert.
In about 1991
a buyer was found for the remaining properties in the Cadogan Place
development, namely flats 5, 8 and the garage and it appears that the
plaintiffs were actively involved in the sale and in liaising with the
defendant as to the price. On exchange of contracts, as had been the practice
with the one sale for the joint venture and the case of the two sales made on
behalf of Greenbrook alone, the plaintiffs rendered their invoice directly to
David Mills & Co. A copy of the invoice was also sent to the defendant.
The defendant
apparently objected to the level of commission although it is to be noted that
on the evidence before me he had clear notice that 3% was required but had not
previously complained; and there was a telephone conversation on February 26
1991 during which Mr MacKenzie Charrington on behalf of the plaintiffs agreed
that he would reduce the commission from the commission of £36,225 which was
calculated at a rate of 3% plus VAT, to a commission of approximately 2%
(£31,500) which would result in the fees, including VAT, being the same as the
original base commission excluding VAT.
There is a
dispute on the evidence as to whether anything further was agreed in this
conversation and I will revert to this. To complete the history, the plaintiffs
rendered a fresh invoice for £31,500, but on completion of the sale on March 22
1991 the plaintiffs did not receive their commission direct from David Mills
& Co. On April 16 Mr MacKenzie Charrington inquired why the plaintiffs had
not been paid and was told by a member of David Mills & Co that the
defendant had instructed that firm not to pay the commission direct to the
plaintiffs and that he, the defendant, would deal directly with the plaintiffs.
Mr Mills, the
partner of David Mills & Co concerned with the transactions in issue, was
called as a witness by the plaintiffs under a subpoena both ad
testificandum and duces tecum. Mr Mills duly attended to give
evidence and provided the required documents. The most relevant document is a
draft letter dated February 26 1991 which was written by David Mills & Co
in anticipation of completion and on its face is a letter to the plaintiffs
promising to pay the plaintiffs’ commission direct. This document is crossed
through and was not sent and there is an attendance note written by Mr Mills
which recorded that the defendant had contacted the former and ordered him not
to pay the commission to the plaintiffs. The minute also records that the
defendant would sort the matter out directly with the plaintiffs. Mr Mills
confirmed that the note accurately recorded what he was instructed to do by the
defendant and that the defendant had stated that he would sort the matter out
directly with the plaintiffs.
Following
these instructions, David Mills & Co paid out the purchase money received
for the flats, less their expenses and costs, direct to the defendant. It
appears that at this time the defendant apparently had decided to exercise his
debenture and wished to receive the purchase money for the flats direct. That
this is the case can be seen from two letters dated the March 15 and March 19
respectively.
Following the
conversation with Mr Mills, Mr MacKenzie Charrington made attempts to contact
the defendant and finally made contact with him on April 25 when Mr MacKenzie
Charrington was told that Greenbrook had no money and was unable to pay the
plaintiffs’ commission. The unchallenged evidence of Mr MacKenzie Charrington
was that the defendant denied that he had instructed Mr Mills not to pay the
commission, but asserted that the balance of the sale had been paid to a third
party who had a charge over Greenbrooks’ assets. Again, according to the
unchallenged evidence of Mr MacKenzie Charrington, when the latter complained
the response of the defendant was to the effect, ‘We are both in commerce and
that is a risk we all take’. It is now accepted by the defendant that the
balance of money did go to the defendant or at least into an account controlled
by him and for his benefit.
Shortly
thereafter Greenbrook was put into liquidation and the background to this is
set out in a letter from the liquidators, Stoy Hayward, dated June 6 1991.
The position,
therefore, is that undoubtedly Greenbrook were in breach of contract with the
plaintiffs in the sum agreed of £31,500. However, this is in practice an
academic consideration since it is common ground that although the liquidation
is still in process, there is no possibility of any money being recovered from
Greenbrook. Thus far I do not believe there is any dispute on the facts.
I find it an
inevitable inference from what occurred that the reason the defendant
instructed David Mills & Co not to pay the commission was because he was
anxious to obtain as much as possible under his debenture and those
instructions were given in the knowledge that it was highly unlikely that the
plaintiffs would ever be paid. In short, the defendant gained the £31,500 which
otherwise would have gone to the plaintiffs.
By this action
the plaintiffs seek to recover from the defendant their fees of £31,500. There
is of course no contract between the defendant and the plaintiffs and the
plaintiffs’ claim is therefore based in tort and in a claim that a trust was
created. There are three bases upon which the claim is founded.
1.
Unlawful interference with contract
The essence of
this allegation is that the defendant knowing of at least one of two possible
alleged contracts between the plaintiffs and Greenbrook as to the payment of
commission knowingly interfered with that contract by procuring the payment of
the moneys due to the plaintiffs direct to himself. Alternatively, it is
alleged that the first contract in time was interfered with by reason of the
taking of the debenture.
2. Trust
By reason of
the defendant’s knowledge of at least one of the two possible alleged contracts
and by reason of the circumstances surrounding the same, a trust was created
whereby the defendant holds the disputed fees which he received as trustee for
the plaintiffs. The plaintiffs also relied on the decision in Lathom v Greenwich
Ferry (1895) 72 LT 790 and say the position in this case is closely
analogous.
3.
Negligent misrepresentation
This
allegation is that in instructing the plaintiffs to sell the property at
Cadogan Place, the defendant, although acting as a director of Greenbrook, owed
a personal duty of care to the plaintiffs. It is alleged that by failing to
disclose the state of Greenbrook’s affairs he caused the plaintiffs to enter
into the contract without arranging some form of security for payment of their
fees. The third ground is distinct and alternative to the first two grounds and
it will be convenient, therefore, to consider this at the end.
I turn,
therefore, to the first two grounds which both depend upon a critical finding
as to the nature of the contract between the plaintiffs and Greenbrook.
The essence of
the wrongful interference argument is that at a certain point (as stated two
dates are canvassed) there was in existence a contract between the plaintiffs
and Greenbrook whereby, first, for a commission Greenbrook would attempt to
procure the sale of the property in question, second, the plaintiffs would be
paid only upon successful sale of those properties and, third, and central to
this case, it was a term of the contract that the plaintiffs’ commission would
be paid out of the moneys received for the sale of the property and the
plaintiffs therefore would be paid by Greenbrook’s solicitors. If such a term
were agreed, it is argued that the effect would be that there would be an
equitable charge upon the purchase money.
Assuming such
a contract existed, the next stage in the argument is that the defendant was
aware of the terms of such a contract. On the assumption that this is
established the argument then continues that in the knowledge that the receipts
for the sale of the property included the £31,500 owing to the plaintiffs, the
defendant procured that the receipts, including the agent’s fees, were paid
direct to him. Before analysing these questions in greater detail there is a
further complication, namely that it is accepted and, indeed, well-established
law that it is an answer to the tort of interference with contractual relations
to show that the actions which cause the interference were justified. In this
case, as I have mentioned, the defendant had a charge under his debenture over
all the assets of Greenbrook and, therefore, in seeking to take the
full-purchase receipts it is argued by the defendant that he was merely
exercising his rights under his debenture and this in law provides
justification for any interference with the plaintiffs’ contractual rights.
A number of
difficult questions of fact and law emerge from this statement of the issues
and it is clear that for the plaintiffs to succeed they have to overcome a
number of factual and legal obstacles. It was accepted by counsel for the
plaintiffs that to succeed on his first two heads of claim (excluding the
separate argument based on the Lathom case) he must be able to prove
that it was a term of the contract of engagement, or as a result of a later
agreement, that the plaintiffs would be paid out of the receipts rather than a
mere contract between the plaintiffs and Greenbrook that they be paid, but out
of no specified fund. If the contract merely provided payment, but out of no
specific fund, then the defendant could not have induced a breach of that
contract by obtaining what was due to him under his debenture.
Therefore, the
first question I must decide, which is a mixture of fact and law, is whether
there was ever a contract between the plaintiffs and Greenbrook which included
a term that the former’s commission would be paid by the solicitors out of the
receipts received on completion.
As stated, two
alleged contracts are relied on by the plaintiffs. The first is the contract
existing since September 1989 when Greenbrook became the sole principal and the
second a specific contract formed as a result of the conversation between Mr
MacKenzie Charrington and the defendant on February 26 1991. 1 turn, therefore,
to the first alleged contract.
There is no
evidence that a term as to the manner of payment was expressly agreed between
the joint venture and the plaintiffs or subsequently between the plaintiffs and
Greenbrook. It follows that if such a term was included in the contract it has
to be implied. The general principles as to the implication of terms, are well
settled and I have in mind the note of caution sounded in the particular field
of estate agents’ contracts in the speech of Viscount Simon in Luxor
(Eastbourne) Ltd v Cooper [1941] AC 108 where he stated at p119:
There is, I
think, considerable difficulty, and no little danger, in trying to formulate
general propositions on such a subject, for contracts with commission agents do
not follow a single pattern and the primary necessity in each instance is to
ascertain with precision what are the express terms of the particular contract
under discussion, and then to consider whether these express terms necessitate
the addition, by implication, of other terms. There are some classes of
contract in which an implied term is introduced by the requirements of a
statute (for example, under the Sale of Goods Act or the Marine Insurance Act);
there are other contracts where an implied term is introduced by the force of
established custom (for example, the necessity of a month’s notice in the case
of hiring a domestic servant); but in contracts made with commission agents
there is no justification for introducing an implied term unless it is
necessary to do so for the purpose of giving to the contract the business
effect which both parties to it intended it should have.
Somewhat
surprisingly, there appears from the best of counsels’ researches to be no case
directly in print on what one might have thought to be a fundamental question
in estate agents’ contracts as to whether it is normally to be implied into
such a contract that the agent’s fees are recoverable directly out of the
purchase money normally received by the client’s solicitors.
It was
accepted that in practice in both commercial and residential conveyancing the
vendor’s solicitors sometimes do discharge out of the purchase money the
commission due to the agents involved in the sale, but it was not established
before me as to exactly how common this is. Clearly, if such a term is to be
normally implied into estate agents’ contracts this is a matter of potential
importance to all those involved in conveyancing. Lacking any clear authority
to support his proposition that in general the law would imply the term the
plaintiffs seek to introduce, counsel for the plaintiffs relied in particular
upon the judgment of Denning LJ in Dennis Reed v Goody [1950] 2
KB 277 where he stated at p284:
No particular
words are needed to create the relationship. All the familiar expressions
‘please find a purchaser’, ‘find someone to buy my house’, ‘sell my house for
me’, and so on, mean the same thing: they mean that the agent is employed on
the usual terms; but none of them gives any precise guide as to what is the
event on which the agent is to be paid. The common understanding of men is,
however, that the agent’s commission is payable out of the purchase price. The
services rendered by the agent may be merely an introduction. He is entitle to
commission if his introduction is the efficient cause in bringing about the
sale: Nightingale v Parsons . . . But that not does mean that
commission is payable at the moment of the introduction: it is only payable on
completion of the sale. The house-owner wants to find a man who will actually
buy his house and pay for it. He does not want a man who will only make an
offer or sign a contract. He wants a purchaser ‘able to purchase and able to
complete as well’.
What the
learned judge states in this passage could be indicative of the implication of
a term that the agent’s fees be recoverable out of the purchase money, but it
seems to me that this would be taking the judgment out of context. What the
judge was considering was the question, much canvassed about this time as a
matter of history, as to when the obligation to pay the estate agent arose. The
facts of the case concerned the position where a willing purchaser was
introduced but who later withdrew his offer and the agent still claimed his commission.
It is in this context that the words must be viewed and I believe all the
learned judge was saying was that the commission only became payable when there
had been completion and the sale had taken place or where it was the vendor who
defaulted. That this is the case is supported, in my view, by the judgment of
Summerville LJ in a slightly later case, namely Boots v E Christopher
& Co [1952] 1 KB 89 where he stated at p96:
It comes to
this, that where the basis of the contract is that the commission is payable
out of the purchase price, or when the purchase price is paid, then whichever
way you look at it that involves that the purchaser must remain, as my brother
said, both able and willing to complete up to the time of completion. The only
occasion on which the commission is payable if the money is not paid is when
the non-completion is due to the fault of the vendor.
I do not
believe that Dennis Reed v Goody and the other cases cited by the
plaintiffs, including Boots v Christopher, really provide any
foundation for the proposition advanced. Clearly the implication of such a term
is not necessary to give the contract business efficacy. The essence of the
contract is the provision of estate agency services in return for the receipt
of commission. In the normal course of events this is a straightforward
contractual undertaking that a sum of money will be paid on the happening of a
certain event and to give it business efficacy it is not necessary to provide
any particular way in which the debt should be discharged.
It seems to me
that unless the particular circumstances of the engagement of an estate agent
are such to give rise to the implied term, in general if an agent wishes for
such a term to be part of his contract of engagement this should be expressly
agreed, as was the case in Georgiades v Edward Wolfe & Co Ltd
[1965] Ch 487. As Lord Russell said in the Luxor case at p124:
A few
preliminary observations occur to me.
(1) Commission contracts are subject to no
peculiar rules or principles of their own; the law which governs them is the
law which governs all contracts and all questions of agency.
(2) No general rule can be laid down by which the
rights of the agent or the liability of the principal under commission
contracts are to be determined. In each case these must depend upon the exact
terms of the contract in question, and upon the true construction of those
terms.
And (3)
contracts by which owners of property, desiring to dispose of it, put it in the
hands of agents on commission terms, are not (in default of specific
provisions) contracts of employment in the ordinary meaning of those words. No
obligation is imposed on the agent to do anything. The contracts are merely
promises binding on the principal to pay a sum of money upon the happening of a
specified event, which involves the rendering of some service by the agent.
I turn
therefore to the particular facts of this case to see if there is a basis for
implying the term the plaintiffs seek. When the one flat was sold for the joint
venture the plaintiffs were paid direct by the solicitors out of the purchase
receipts. As far as the evidence goes, on the change of principle from the
joint venture company to Greenbrook alone there was no change in the term of
engagement save in respect of commission arising from the different position of
subagents and in respect of flats 2 and 7, as I have already indicated, the
plaintiffs were paid direct by David Mills & Co. The plaintiffs rendered
their original bill for the fees in issue by the letter of February 25 1991
which stated:
I enclose our
account for settlement out of the completion monies.
Clearly David
Mills & Co thought that this was the agreed procedure, hence the letter of
February 26 1991 which was cancelled following the conversation between Mr
Mills and the defendant. Mr MacKenzie Charrington explained that it is
practically impossible for estate agents to take up credit references from
their clients since this would immediately alienate them and they would go to
other agents. The safeguard for the agent is the arrangement, which is very
common in both commercial and residential property, that the agent receives the
money direct from the solicitors and is not therefore concerned as to the
credit worthiness of the vendor.
These factors
clearly are ones in the plaintiffs’ favour. There are, however, also factors
against them. The first is the onus which is upon a party seeking to add a term
by implication. For a term to be implied it has on well-established authority
to be clear in the sense that both parties, if pointed out the term, would say
‘of course’. As I previously indicated, such a term is not necessary for
business efficacy. Other factors of importance are that the term was not
mentioned in the two letters to which I have referred where the commission was
referred to. Obviously if one is implying a term, the fact that it is not
expressly mentioned is hardly determinative, but it does seem a little odd if
this particular term were to be part of the contract that the plaintiffs did
not draw it to the defendant’s attention when they set out their terms of
engagement. Further, essentially the way the commission demand was rendered by
the plaintiffs was to send it to David Mills & Co for those solicitors to
send on to Greenbrook for their approval (see for example the letter of
February 25 1991) and Greenbrook then authorised the payment. This procedure is
made clear as far as the joint venture is concerned by the letter of September
22 1989. This authorisation procedure is consistent with the arrangement being
administrative rather than contractual. A further factor is that Mr Mills when
instructed by the defendant in his capacity as a director of Greenbrook not to
pay the commission did not demur and certainly did not appear to have raised the
question that this was in breach of agreement.
Finally, there
is the self-evident argument that a convenient administrative practice, namely
that the solicitor received the purchaser’s cheque and then dealt with
disbursements such as his fees and the agent’s fees before passing the money on
to his client, does not create a contractual obligation.
Taking all the
factors together it does not seem to me that it would be correct to hold that
there was such an implied term as part of the original contract of engagement.
As I have stated, terms are not to be lightly implied, certainly in the absence
of necessity to give the contract business efficacy. I am not satisfied that if
an officious bystander had said to the parties words to the effect that they
did realise that this term was part of the contract there would not have been
dissent.
This brings me
to the second contract where it is alleged that even if no such term was
implied in the first contract, an express agreement was made with Greenbrook
that the plaintiffs’ commission would be paid out of the money in the hands of
the plaintiffs’ solicitors. The facts have already been briefly mentioned. On
the February 26 there was a discussion between Mr MacKenzie Charrington and the
defendant in his capacity as director of Greenbrook about the level of
commission. In his witness statement, which was admitted by consent of the
parties as his evidence-in-chief, Mr MacKenzie Charrington stated that the
defendant ‘agreed the proposed figures and also agreed that I should submit the
revised account to David Mills’. Under cross-examination the witness, when
being asked whether in his view as the result of this conversation the
arrangement between the parties had changed, replied that the only thing he
believed had changed was the commission figure. I am not at all sure that the
witness really had in mind the point at issue, namely whether a further term
had been added to the previously existing contract to the effect that payment
would be made out of the purchase money. However, even ignoring that answer I
still am not satisfied that the plaintiffs have established that on February 26
the plaintiffs and Greenbrook agreed a fresh contract containing the term in
question. On Mr MacKenzie Charrington’s evidence all the defendant on behalf of
Greenbrook agreed was that the revised account should be submitted to
Greenbrook’s solicitors. This had been the practice before and on the
assumption, as I have found, that this was administrative rather than part of a
contractual arrangement, I find it difficult to spell out of the mere
continuance of this practice the creation of a new contractual term.
It was argued
for the plaintiffs that the inevitable inference and mutual understanding of
the comment was that the money would be paid out of the purchase receipts by
the solicitor. It seems to me that this is reading far too much into the
statement. I do not believe the contractual term the plaintiffs rely on can be
created by such an equivocal observation. While the comment is consistent with
the existence of such a term, it is also equally consistent with the mere
continuance of the previous administrative arrangement.
I find
therefore that the argument based on the second new contract also fails.
It follows
from my finding that there was never a contract including a term that payment
be made out of the receipts held in the hands of the solicitors, that the first
two grounds relied upon by the plaintiffs must fail, subject to the independent
argument based on the Lathom case. In these circumstances I will deal
only briefly with the other parts of these allegations.
The next issue
is the question of the defendant’s knowledge. Even if the original contract
contained the disputed obligation, I do not find that the plaintiffs have
established that the defendant was aware of that term until February 26. He had
inherited an ongoing contractual situation, it not being suggested that
anything had happened prior to February 26 to change a pre-existing contract
and, since the letters to him make no reference to this term, I do not see on
the facts before me how knowledge can be inferred.
Knowledge with
regard to the second contract is however straightforward. If in the
conversation of February 26 the defendant had created a new contract or
acknowledged the terms of the earlier
Assuming the existence of the contract and the defendant had knowledge of it,
it was inevitable that there would have been a finding that the defendant by at
least taking the purchase moneys, including that due to the agents, had
knowingly interfered in the contract between the agents and Greenbrook.
A more
difficult question is that of justification. In a straightforward situation of
a secured charge as against an unsecured charge, the plaintiffs accept that the
defendant as debenture holder would have been entitled to take in full even
though he knew that this would cause loss to the plaintiffs. This acceptance
was based on the decision of the Court of Appeal in Edwin Hill &
Partners v First National Finance Corporation [1988] 3 All ER 801.
However,
counsel for the plaintiffs argued that the defendant had postponed his
debenture which would have prevented him, as between himself and Greenbrook,
seeking to exercise the debenture in preference to payment to the plaintiffs by
Greenbrook. In the circumstances there would be no justification for the
interference.
The argument
requires a little care in determining the capacity in which the defendant was
acting, that is to say, between himself as the debenture holder and his
capacity as director of Greenbrook. The argument, however, proceeds on the
basis that if the defendant in his capacity as a director had made it a
contractual term of the plaintiffs’ engagement on February 26 that the
plaintiffs were definitely to have their commission out of the purchase money,
he could only have made that promise with the consent of the debenture holder,
which of course was himself. Although physically it is a difficult notion to
accept, legally it seems to me there is no insurmountable problem in the
concept that the defendant was acting in two capacities and he could not have
made the promise as director without him being satisfied, by virtue of his
position as debenture holder, that the debenture was not an obstacle. I would
therefore have held that had there been a contractual term created on February
26 this would have acted as a postponement of the debenture as against the
rights of the plaintiffs and the defendant would not have been justified in
interfering with the contract.
The plaintiffs
also argued that the defendant interfered with the first alleged contract by
taking the debenture which, because of the financial state of Greenbrook,
precluded payment of the commission to the plaintiffs. This is a proposition
which if correct would affect many undertakings taking debentures who are aware
that the company on whose assets the charge was placed owed money to other
unsecured creditors. As a matter of principle it seems to me that taking a
debenture which might result in a contract with a third party being broken, in
general would be too remote from the breach of contract to amount to the tort
of unlawful interference with contract. Certainly it is too remote in this case
since at the date of the debenture it was not even known whether commission
would ever be payable to the plaintiffs. The flats might not have been sold or
Greenbrook could have changed agents. There are other uncertainties, for
example, the selling price of the flats might have been greater than the
debenture. Even if I had found there to have been the alleged contract I would
have rejected the argument based on taking the debenture.
I can deal
with the trust element, excluding Lathom, shortly. This really is another
way of looking at the same question. If the defendant had postponed his
debenture he would have been taking money which he knew he was not entitled to
and in these circumstances it seems reasonable to me that a trust would have
been established.
As I
understand it, the Lathom case is relied on by the plaintiffs as giving
them a cause of action even if, as I have found, there is no contract
containing the disputed term. The case is authority for the proposition that
when a mortgagee or receiver disposes of assets under an order of the court,
the costs of realising those assets has priority over all other claims. There
is looked at in broad terms an analogous situation in this case in that the
defendant did receive sale proceeds under his charge and the plaintiffs are
claiming the costs of realising the assets. However, the defendant did not
himself sell the properties having exercised his charge and he was not in the
position of a mortgagee who had foreclosed or a receiver. Since therefore the
defendant exercised his debenture after the sale and was not himself selling
the properties under a court order it does not seem to me that the Lathom
case applies at all. It would lead to all sorts of problems if debenture
holders seeking to recover from cash as opposed to property or other assets
that needed realising under a court order, had to have in mind how the cash was
generated and possible unpaid bills of realising or generating such cash. I
appreciate that in this case the timing of the sale and exercise of the
debenture was close, but I can see no justification in extending by a
substantial margin the comparatively limited decision in Lathom to the
facts of this case.
I turn
therefore to the independent ground of negligent misrepresentation. The
pleading as to this is highly unsatisfactory and, indeed, the defendant quite
reasonably complained that it appeared to be a claim in contract rather than
tort. Certainly the pleading is far from clear not least because no duty of
care is pleaded. It is unnecessary, however, to decide the case on a pleading
point since it is clear to me that this argument is bound to fail. It is of
course well established that there are a number of situations where a duty of
care arises, but no case was drawn to my attention where a duty of care has
arisen in an arm’s length transaction such as a would-be vendor engaging an
estate agent. It seems to me that it would be wholly unworkable as a matter of
commerce that persons approaching estate agents are regarded as being under a
duty of care to disclose their financial weaknesses.
Further, as I
have already mentioned, Mr MacKenzie Charrington very frankly accepted that in
the estate agency business the last thing one does is make searching inquiries
with a potential client as to his solvency. Mr MacKenzie Charrington therefore
confirmed that he never made such inquiries. Aside from the fundamental problem
of showing that a duty of care existed in such a transaction, it seems
difficult to allege that Mr MacKenzie Charrington, who deliberately refrained
from making inquiries, could have acted upon a misrepresentation in an area
which he was not concerned to inquire about. I find, therefore, that the
allegation of negligent misrepresentation also fails.
In the result
therefore the plaintiffs’ action fails. I have sympathy for the plaintiffs but
there is regrettably a brutal truth in the observation attributed to the
defendant which I quoted above.
Action
dismissed with costs.
