|Judgments - Johnson (A.P.) (Original Appellant and Cross-Respondent) v. Gore Wood & Co. (A Firm) (Original Respondents and Cross-Appellants)
If, contrary to my view, GW is not estopped by convention from seeking to strike out Mr. Johnson's action, its failure to take action to strike out over a long period of time is potent evidence not only that the action was not seen as abusive at the time but also that, on the facts, it was not abusive. The indicia of true abuse are not so obscure that an experienced professional party, advised by leading counsel (not, at that stage, Mr. Steinfeld), will fail to recognise them. It is accepted that Mr. Johnson had reasons which he regarded as compelling to defer prosecution of his personal claim. If, as he contended, the urgency of obtaining an early and favourable decision in the company's action was itself a result of GW's breach of duty to the company and to him, it would seem to me wrong to stigmatise as abusive what was, in practical terms, unavoidable. I agree with GW that it would certainly have been preferable if the judge who tried the company's action, and thereby became familiar with much of the relevant detail and evidence, had been able at the same time or shortly thereafter to rule on the personal claim. That would have been efficient and economical. But there were reasons accepted at least implicitly by both parties at the time for not proceeding in that way, and GW could, if it wishes, limit the extent to which issues extensively canvassed in the earlier action are to be reopened. It is far-fetched to suggest that this action involves a collateral attack on GW's non-admission of liability in the first action when that action was settled by insurers on terms quite inconsistent with any realistic expectation that GW would not be found liable.
In my opinion, based on the facts of this case, the bringing of this action was not an abuse of process. The Court of Appeal adopted too mechanical an approach, giving little or no weight to the considerations which led Mr. Johnson to act as he did and failing to weigh the overall balance of justice. I would allow Mr. Johnson's appeal.
The recoverability of the damages claimed by Mr. Johnson
By its notice of cross-appeal GW challenged the Court of Appeal's ruling that all the heads of damage pleaded on behalf of Mr. Johnson (with one exception) were or might be recoverable in principle if the pleaded facts were fully proved.
GW's first argument before the House, applicable to all save two of the pleaded heads of damage, was in principle very simple. It was that this damage, if suffered at all, had been suffered by WWH and Mr. Johnson, being for this purpose no more than a shareholder in the company, could not sue to recover its loss. As the Court of Appeal pointed out in Prudential Assurance Co. Ltd. v. Newman Industries Ltd. and others (No. 2)  Ch. 204 at 210:
Here, it was argued, Mr. Johnson was seeking to recover damage which had been suffered by WWH.
Mr. Johnson's response was equally simple. It was accepted, for purposes of the application to strike out the damages claim, that GW owed a duty to him personally and was in breach of that duty. Therefore, subject to showing that the damage complained of was caused by GW's breach of duty and was not too remote, which depended on the facts established at trial and could not be determined on the pleadings, he was entitled in principle to recover any damage which he had himself suffered as a personal loss separate and distinct from any loss suffered by the company.
On this issue we were referred to a number of authorities which included Lee v. Sheard  1 QB 192; Prudential Assurance v. Newman, above; Heron International Ltd. and Others v. Lord Grade, Associated Communications Corp. Plc. and Others  BCLC 244; R. P. Howard Ltd. & Richard Alan Witchell v. Woodman Matthews and Co. (a firm)  BCLC 117; George Fischer (Great Britain) Ltd. v. Multi Construction Ltd., Dexion Ltd. (third party)  1 BCLC 260; Christensen v. Scott  1 NZLR 273; Barings plc. (in administration) and another v. Coopers & Lybrand (a firm) and others  1 BCLC 427; Gerber Garment Technology Inc. v. Lectra Systems Ltd. and another  RPC 443; Stein v. Blake and Others  1 All ER 724; and Watson and Another v. Dutton Forshaw Motor Group Ltd. and others, Court of Appeal, unreported, 22 July 1998.
These authorities support the following propositions:
1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential, particularly at pages 222-3, Heron International, particularly at pages 261-2, George Fischer, particularly at pages 266 and 270-271, Gerber and Stein v. Blake, particularly at pages 726-729.
2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v. Sheard, at pages 195-6, George Fischer and Gerber.
3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other. I take this to be the effect of Lee v. Sheard, at pages 195-6, Heron International, particularly at page 262, R. P. Howard, particularly at page 123, Gerber and Stein v. Blake, particularly at page 726. I do not think the observations of Leggatt L.J. in Barings at p. 435B and of the Court of Appeal of New Zealand in Christensen v. Scott at page 280, lines 25-35, can be reconciled with this statement of principle.
These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder's claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder's claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company's creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential at page 223) the loss claimed is "merely a reflection of the loss suffered by the company." In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company's assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.
I turn to consider the heads of claim now pleaded by Mr. Johnson.1)
CPV and Adfocus. The claim is for sums which Mr. Johnson, acting on GW's advice, invested in these companies and lost. This claim is unobjectionable in principle, as Mr. Steinfeld came close to accepting.2)
Cost of personal borrowings: loan capital and interest. The claim is for sums which Mr. Johnson claims he was obliged to borrow at punitive rates of interest to fund his personal outgoings and those of his businesses. Both the ingredients and the quantum of this claim will call for close examination, among other things to be sure that it is not a disguised claim for loss of dividend, but it cannot at this stage be struck out as bad on its face. The same is true of Mr. Johnson's claims for bank interest and charges and mortgage charges and interest (which will raise obvious questions of remoteness).3)
Diminution in value of Mr. Johnson's pension and majority shareholding in WWH. In part this claim relates to payments which the company would have made into a pension fund for Mr. Johnson: I think it plain that this claim is merely a reflection of the company's loss and I would strike it out. In part the claim relates to enhancement of the value of Mr. Johnson's pension if the payments had been duly made. I do not regard this part of the claim as objectionable in principle. An alternative claim, based on the supposition that the company would not have made the pension payments, that its assets would thereby have been increased and that the value of Mr. Johnson's shareholding would thereby have been enhanced, is also a reflection of the company's loss and I would strike it out.4)
Loss of 12.5 per cent. of Mr. Johnson's shareholding in WWH. Mr. Johnson claims that he transferred these shares to a lender as security for a loan and that because of his lack of funds, caused by GW's breach of duty, he was unable to buy them back. This claim is not in my view objectionable in principle.5)
Additional tax liability. If proved, this is a personal loss and I would not strike it out.
The second limb of GW's argument on the cross-appeal was directed to Mr. Johnson's claim for damages for mental distress and anxiety. This is a claim for general damages for "the mental distress and anxiety which he has suffered as a result of the protracted litigation process to which he has been subjected, the extreme financial embarrassment in which he and his family have found themselves, and the deterioration in his family relationships, particularly with his wife and son, as a result of the matters complained of in the Re-Amended Statement of Claim." Closely allied to this was a claim, pleaded at length, for aggravated damages "by reason of the fact that the manner of the commission of [GW's] tort was such as to injure his pride and dignity." GW contended that damages for mental distress and anxiety did not lie for breach of a commercial contract such as the present and that this was not a class of case in which aggravated damages were in principle recoverable. Mr. ter Haar took issue with both these points.
The general rule laid down in Addis v. Gramophone Company Ltd.  A.C. 488 was that damages for breach of contract could not include damages for mental distress. Cases decided over the last century established some inroads into that general rule (see, generally, McGregor on Damages, 16th ed. (1997) at paras. 98-104). But the inroads have been limited and McGregor describes as a useful summary a passage in Watts v. Morrow  1 W.L.R. 1421 at 1445:
Your Lordships' House had occasion to touch on this question in Ruxley Electronics and Construction Ltd. v. Forsyth  A.C. 344, an unusual case in which the issue concerned the measure of compensation recoverable by a building owner against a contractor who had built a swimming pool which was 18 inches shallower at the deep end than the contract specified. At page 374, Lord Lloyd of Berwick said:
I do not regard this observation as throwing doubt on the applicability of Addis in a case such as the present. It is undoubtedly true that many breaches of contract, cause intense frustration and anxiety to the innocent party. I am not, however, persuaded on the argument presented on this appeal that the general applicability of Addis should be further restricted.
I would strike out Mr. Johnson's claim for damages for mental distress and anxiety. I would also strike out his claim for aggravated damages: I see nothing in the pleaded facts which would justify any award beyond the basic compensatory measure of damages.
For these reasons I would allow Mr. Johnson's appeal and dismiss GW's cross-appeal, save that I would strike out his claims (identified in (3) above) for pension payments and the enhanced value of his shareholding, and for damages for mental distress and anxiety and aggravated damages. I would order GW to pay Mr. Johnson's costs before the Court of Appeal and the judge, and the costs of the appeal and the cross-appeal to this House.
LORD GOFF OF CHIEVELEY
Abuse of process
On the question whether there was an abuse of process on the part of the appellant, my noble and learned friend Lord Bingham of Cornhill has reviewed the facts and the relevant authorities in lucid detail. I find myself to be in complete agreement with his analysis of the authorities, and with his conclusion that on the facts there was no abuse of process on the part of the appellant; and I do not propose to burden this opinion with a repetition of his reasoning. I only wish to add a few words on the separate question of estoppel, with regard to the nature of the estoppel on which the appellant could, if necessary, have relied.(b)
The conclusion of the learned judge, and the contention of Mr. ter Haar for the appellant, was that the relevant estoppel was estoppel by convention. Reliance was placed in particular on a well-known passage in the judgment of Lord Denning M.R. in Amalgamated Investment & Property Co. Ltd. v. Texas Commerce International Bank Ltd.  Q.B. 84 at p. 122, where he said:
This broad statement of law is most appealing. I yield to nobody in my admiration for Lord Denning; but it has to be said that his attempt in this passage to identify a common criterion for the existence of various forms of estoppel - he refers in particular to proprietary estoppel, estoppel by representation of fact, estoppel by acquiescence, and promissory estoppel - is characteristically bold; and that the criterion which he chooses, viz. that the parties to a transaction should have proceeded on the basis of an underlying assumption, was previously thought to be relevant only in certain cases (for example, it was adopted by Oliver J. (as he then was) in his important judgment in Taylors Fashions v. Liverpool Victoria Trustees Co. Ltd.) and, in particular, in the case of estoppel by convention, a species of estoppel which Lord Denning does not mention. Furthermore, if he intended that his broad statement of principle should apply in the case of estoppel by convention, a further problem arises in that, in relation to that doctrine, it has been authoritatively stated in Spencer Bower and Turner on Estoppel by Representation, in the scholarly and much admired Third Edition (1977) by Sir Alexander Turner, at pp. 168-9, that:
I myself suspect that this statement may be too categorical; but we cannot ignore the fact that it embodies a fundamental principle of our law of contract. The doctrine of consideration may not be very popular nowadays; but although its progeny, the doctrine of privity, has recently been abolished by statute, the doctrine of consideration still exists as part of our law.
I myself was the judge of first instance in the Amagamated Property Co. v. Texas Bank case. I remember the doctrine of estoppel by convention being urged upon me; but the case was concerned with the scope of a guarantee, which was a matter of law, and, in the light of the passage in Spencer Bower and Turner which I have just quoted, I hesitated to adopt the doctrine. Cautiously, and I still think wisely, I founded my conclusion on a broader basis of unconscionability. In the Court of Appeal, however, both Eveleigh L.J. and Brandon L.J. (as he then was) expressly founded the relevant parts of their judgments on the doctrine of estoppel by convention. They did so relying on the statement of principle from Spencer Bower and Turner which I have already cited, which limits the doctrine to cases where there has been an agreed assumption as to facts, but nevertheless applied that statement to a case where the agreed assumption (as to the scope of the guarantee) was one of law. If Lord Denning's statement of principle is to be read as applying to the case of estoppel by convention, he implicitly rejected the statement of the law in Spencer Bower & Turner, holding that there could be an estoppel whether the common underlying assumption was one of fact or of law.
I accept that in certain circumstances an estoppel may have the effect of enabling a party to enforce a cause of action which, without the estoppel, would not exist. Examples are given in my judgment in Amalgamated Property Co. v. Texas Bank  Q.B. 84 at pp. 105-7. But in my opinion it is not enough for that purpose that the estoppel may be characterised as an estoppel by convention, or that it can be said to be founded upon a common assumption by the parties.
Against this background I am, despite my great admiration for Lord Denning, reluctant to proceed on the basis of estoppel by convention in the present case. The function of the estoppel is here said to be to preclude the respondent firm from contending that Mr. Johnson, by personally advancing a separate claim to damages against the respondent firm instead of doing so at the same time as pursuing his company's claim, was abusing the process of the court. That, as I see it, must relate to a matter of law. It could, however, be appropriate subject matter for an estoppel by representation, whether in the form of promissory estoppel or of acquiescence, on account of which the firm is, by reason of its prior conduct, precluded from enforcing its strict legal rights against Mr. Johnson (to claim that his personal proceedings against the firm constituted an abuse of the process of the court). Such an estoppel is not, as I understand it, based on a common underlying assumption so much as on a representation by the representor that he does not intend to rely upon his strict legal rights against the representee which is so acted on by the representee that it is inequitable for the representor thereafter to enforce those rights against him. This approach, as I see it, is consistent with the conclusion of my noble and learned friend Lord Millett, who considers that the firm would be so precluded by virtue of its acquiescence in the manner in which Mr. Johnson had conducted the litigation hitherto. In the context of the present case, moreover, I can see no material difference between invoking promissory estoppel or acquiescence as the ground on which the respondent firm should be precluded from asserting that the appellant had abused the process of the Court. The truth of the matter is that the respondent firm, by its conduct and in particular by participating in negotiations for settlement of the company's claim against it on the basis that Mr. Johnson would thereafter be free to pursue his own personal claim against it, lulled Mr. Johnson into a sense of security that he was free to pursue such a claim against the firm, without objection, in separate proceedings, with the effect that it became unconscionable for the firm to contend that his personal proceedings constituted an abuse of the process of the court. In the end, I am inclined to think that the many circumstances capable of giving rise to an estoppel cannot be accommodated within a single formula, and that it is unconscionability which provides the link between them.
For these reasons I would, like the remainder of your Lordships, allow the appeal; and I now turn to the cross-appeal of the respondent firm.
(2) The cross-appeal.
Here the question is whether certain heads of claim advanced by the appellant, Mr. Johnson, against the respondent firm, should be struck out. The relevant heads of claim are usefully recorded in the opinion of my noble and learned friend, Lord Bingham of Cornhill. I do not propose to repeat them in this opinion. The Court of Appeal held that each of the heads of damage pleaded in paragraphs 23 and 24 of the Re-Amended Statement of Claim is recoverable as a matter of law by the appellant by way of damages for the breaches of duty pleaded by him, and so should not be struck out. It is against that decision that the respondent firm now cross-appeals to your Lordships' House.
The principal ground on which it is said by the respondent firm that some of these heads of claim should be struck out is derived from the well-known case of Prudential Assurance Co. Ltd v. Newman Industries Ltd  Ch. 204. I agree with the analysis of that case, and of the other cases following upon it, set out in the opinion of my noble and learned friend Lord Millett (which I have had the opportunity of reading in draft). I accordingly agree with his conclusion that:
On that basis I, like Lord Millett, agree with my noble and learned friend Lord Bingham of Cornhill that the heads of damage specified by him as items 1, 2, 4 and 5 are unobjectionable and should not be struck out. Item 3 relates to the diminution in value of the appellant's pension policy set up by the company and accruing to the benefit of the appellant as part of his remuneration in his capacity as director of the company. In so far as the claim relates to payments which the company would have made into a pension fund for the appellant, I agree that the claim is merely a reflection of the company's loss and should therefore be struck out. But in so far as it relates to enhancement of the value of his pension if the payments had been made, it is unobjectionable and should be allowed to stand.
The second ground relates to the appellant's claims for general damages for mental distress, and for aggravated damages based on the fact that the manner of commission of the respondent firm's wrong was "such as to injure his pride and dignity". I agree with my noble and learned friend Lord Bingham of Cornhill that, as a matter of principle, damages on these grounds are not generally recoverable: see Addis v. Gramophone Co.  A.C. 488; Watts v. Morrow  1 W.L.R. 1421, 1445, per Bingham LJ; McGregor on Damages, 16th ed. (1997) paras. 98-104. It is true that there has in recent years been a softening of this principle in certain respects (see McGregor on Damages, ubi sup., and Mahmud v. Bank of Credit and Commerce International S.A.  A.C. 20), but none of these developments has, so far as I can see, gone so far as to allow recovery on the broad grounds here pleaded. I also would therefore strike out these two heads of claim.