England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE No QBENF 97/0393/1

IN THE COURT OF APPEAL (CIVIL DIVISION )

Royal Courts of Justice

Strand

London WC2

Wednesday, 20th May 1998

B e f o r e:

LORD JUSTICE HOBHOUSE

LORD JUSTICE WALLER

LORD JUSTICE ROBERT WALKER

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I M PROPERTIES plc

Appellant

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CAPE & DALGLEISH (a firm)

Respondent

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(Handed down judgment

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

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MR CHARLES HOLLANDER (Instructed by Cameron Marksby Hewitt of London) appeared on behalf of the Appellant

MR NIGEL TOZZI (Instructed by Frere Cholmeley Bischoff of London) appeared on behalf of the Respondent

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J U D G M E N T

(As Approved by the Court )

(Crown Copyright)

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LORD JUSTICE WALLER:

This appeal raises an important point on section 35A of the Supreme Court Act 1981.

The defendants are accountants and auditors who acted for the plaintiffs. By a writ issued on 12 August 1994 the plaintiffs claimed damages for breach of contract, breach of statutory duty and negligence in respect of audits carried out by the defendants between 1988 and 1992.

What was alleged against the defendants was that their negligence had enabled a fraud to be committed by the former chief executive of the plaintiffs, Mr David Fitzgerald. The defendants ultimately accepted liability in negligence and the judge found that the true extent of the fraud for which the plaintiffs were entitled to be compensated was as follows:-

(a) £536,684.27 for goods and services fraudulently misposted by Fitzgerald during the years 1988 up to the discovery of the fraud in early 1993;

(b) £70,773.03 for a debt irregularly written off by Fitzgerald; and

(c) £97,110.99 for costs necessarily incurred in investigating the fraud and clearing up its aftermath.

The grand total was thus £704,568.29.

Judgment however was not entered for the above sum by virtue of the fact that on 18 June 1993 (prior to the commencement of the proceedings), Fitzgerald had entered into a settlement agreement with the plaintiffs (and others) pursuant to which he transferred his 10% shareholding in the plaintiffs’ holding company, I M Properties Investments Limited to the other 90% shareholder of the plaintiff, I M Group Limited, in consideration of which the I M Parties (which included the plaintiff) waived and released all claims which they had against him. The plaintiffs accepted that its claim against the defendants was “diminished” by the value of those shares. The judge found that the value of the shares was £430,000 with the result that he held that the plaintiffs were entitled to judgment for £274,568.29 and that is indeed the sum recorded in the order of the court as the sum for which the plaintiffs were entitled to judgment.

Following entry of the judgment there was a dispute as to the correct basis on which the judge should award interest. Although the calculations of the parties followed a rather more sophisticated form, the respective contentions can be expressed simply as follows. It was the defendants’ submission that since judgment had been entered for only £274,568.29, the power of the court under section 35A was limited to awarding interest on that sum. It was the plaintiffs’ contention that the power of the court was not so limited. In the result the plaintiffs claimed that the judge had power to award interest on the sum of £704,568.29 being the grand total of the loss ultimately suffered by the plaintiffs up until 18 June 1993 being the date of the settlement with Fitzgerald. Only thereafter it was submitted by the plaintiffs should the interest be awarded simply on £274,568.29. As I have said the calculations of the respective parties were more sophisticated. The plaintiffs, not unnaturally, accepted that they were not entitled to interest on the total loss from 1988 having regard to the fact that the fraud only gradually developed. Accordingly their calculation claimed interest on the sums that could be shown to have been the subject of the fraud as at the dates when the said sums were lost by the plaintiffs. The defendants’ calculation involved giving credit for the recovery from Fitzgerald as a percentage of each sum that Fitzgerald had taken over the period 1988 to 1993. The difference between the two calculations led to the plaintiffs claiming £249,876.01 and the defendants suggesting that the interest to be awarded should be £138,500.81.

It is unnecessary to consider the precise basis of calculation of interest because it has been agreed, and indeed was agreed before the judge, that the sums to be awarded for interest were the figures put forward by each of the parties depending only on the resolution by the judge of the point of principle i.e. whether the court had power under section 35A to award interest on any sum other than the sum for which judgment was entered of £274,568.29.

The point raised involves a question of construction of section 35A of the 1981 Act. That section must however be construed in its historical context. The historical context is set out in detail in the seminal speech of Lord Brandon of Oakbrook in President of India v La Pintada Compania 1985 AC 104 at 113. The important aspects of that history, as it seems to, me for the purpose of answering the question posed by the instant appeal, are as follows.

First as regards the common law it was decided by the House of Lords in The London, Chatham and Dover Railway Company v The South Eastern Railway Company [1893] AC 429 “that at common law, in the absence of any agreement or statutory provisions for the payment of interest, a court had no power to award interest, simple or compound, by way of damages for the detention (i.e., the late payment) of a debt. That decision was regarded as applying to any form of damages, and it was not until long afterwards, in cases to which I shall refer later [e.g. Wadsworth v Lydall [1981] 1 WLR 598] that the question whether it applied to special, as well as general damages, came to be considered.”

Second, different rules applied in the courts of Admiralty and the courts of Chancery, but “neither the Admiralty court, nor courts of Chancery, awarded interest, except in respect of moneys for which they were giving judgment.”

Third, prior to section 35A, the statutory power to award interest was provided by section 3(1) of the Law Reform (Miscellaneous Provisions) Act 1934. That section did not provide power to award interest other than on a sum for which the court was giving judgment. In other words it did not provide power to award interest simpliciter in a case where there was a late payment of a debt, whether that payment occurred before the proceedings were commenced or after they were commenced. That was indeed recognised by all three members of the Court of Appeal in Tehno - Impex [1981] QB 648 as noted by Lord Brandon at 118G.

Thus, if the Deputy High Court judge was to have power to award interest on any sum other than the £274,568.29 that power must be provided by section 35A of the 1981 Act. Furthermore, as it seems to me, the onus must be on a plaintiff to establish that section 35A has indeed provided the power.

In the La Pintada case the House of Lords were concerned with interest on a “debt” rather than interest on “damages”. However, clearly the reasoning relating to the views expressed on the construction of section 35A will be relevant in a case concerned with damages. Lord Brandon identified three areas in which the absence of any common law remedy for damage or loss caused by the late payment of a debt might arise. He called them for convenience case 1, case 2 and case 3. “Case 1 is where a debt is paid late, before any proceedings for its recovery have been begun. Case 2 is where a debt is paid late, after proceedings for its recovery have been begun, but before they have been concluded. Case 3 is where a debt remains unpaid until, as a result of proceedings for its recovery being brought and prosecuted to a conclusion, a money judgment is given in which the original debt becomes merged.” In relation to the enactment of section 35A of the 1981 Act (and section 19A of the Arbitration Act 1950) Lord Brandon said as follows at 128:-

"When one compares these provisions of the Act of 1982 with the corresponding provisions of section 3 of the Act of 1934, which by section 15(5)(a) they repeal and replace, the following points become apparent. First, whereas section 3 of the Act of 1934 covered only the award of interest in case 3 (debts not paid before judgment in proceedings for their recovery has been given), .... a new section 35A .... covers both case 3 and case 2 (late payments of debts after proceedings have been begun but before they have been concluded)."

Lord Brandon emphasised that the new provisions covering both case 3 and case 2 did not extend so far as to cover case 1 (late payment of debts before any proceedings for their recovery have been begun).

It is right that he was considering these matters in the context of a submission which had been made that the House of Lords should depart from the decision in London, Chatham and Dover Railway [1893] AC 429. Nevertheless, it has not been suggested that at least so far as debts were concerned La Pintada does other than provide clear authority that the court has no power under section 35A or otherwise to award interest simpliciter in a case where the debt has been paid late but prior to the commencement of any proceedings.

It was Mr Tozzi’s submission that it was possible simply to replace the phrase in Lord Brandon’s speech, “debts not paid”, with the phrase “debts or damages not paid”. That may in the result be right, but it is necessary to analyse how section 35A operates in relation to debt and then see what conclusion must be drawn so far as damages are concerned. The relevant provisions of section 35A of the 1981 Act provide as follows:-

"(1) Subject to rules of court, in proceedings (whenever instituted) before the High Court for the recovery of a debt or damages there may be included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on all or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment, for all or any part of the period between the date when the cause of action arose and -

(a) in the case of any sum paid before judgment, the date of the payment; and

(b) in the case of the sum for which judgment is given, the date of the judgment.

...

(3) Subject to rules of court, where -

(a) there are proceedings (whenever instituted) before the High Court for the recovery of a debt; and

(b) the defendant pays the whole debt to the plaintiff (otherwise than in pursuance of a judgment in the proceedings),

the defendant shall be liable to pay the plaintiff simple interest at such rate as the court thinks fit or as rules of court may provide on all or any part of the debt for all or any part of the period between the date when the cause of action arose and the date of the payment."

It seems to me that the payment of “the whole debt” is dealt with by sub-section 3 of 35A and the payment of “part of the debt” is dealt with simply by sub-section 1 of 35A. As regards “the whole debt” the wording of sub-section 3 makes it quite clear that proceedings must have been instituted before the payment of the whole debt for the court to be empowered to award simple interest on that whole debt despite the fact that the court cannot give judgment for that debt.

In relation to “part of a debt”, the language of sub-section 1 cannot be said to be quite so clear but it would be surprising if the situation were different. It could be said that even without construing the sub-section as expressly applying only to payments made once proceedings had been commenced, a similar result will in practice be achieved in relation to debt because a part-payment discharges part of the debt. Thus a plaintiff will have no cause of action for that part of the debt. It would follow (so the argument would run) that “the proceedings” will not be for the recovery of that part of the debt and sub-section (1) would simply not apply. But in my view the most natural meaning of the language of the sub-section is that it only applies to proceedings and a power to award interest on any part-payment made during the currency of those proceedings.

What then is the power to award interest on any part of the damages for which judgment has not been given? Sub-section 3 of section 35A has, as it seems to me, no application to a claim for damages. The answer to the question accordingly depends on the proper construction of section 35A(1). As I have indicated, the most natural meaning of the sub-section is that it applies, so far as debt is concerned, to payments made during the currency of proceedings. If that is right, as a matter of construction for “debt”, it must also be right for “damages”. But it is right to explore the matter a little further.

We were referred to Edmunds v Lloyds Italico & L’Ancora Compagnia [1986] 1 WLR 492. That was a case relating to the claim under an insurance policy. Such a claim is not a claim in debt but a claim for damages. In that case a writ had been issued and payment made of the total sums claimed. The plaintiffs had accepted the sums on account claiming to be entitled both to those sums and interest. Leggatt J gave judgment for the full amounts claimed together with interest and his decision was upheld by the Court of Appeal.

There are two points to make about that decision. First, since judgment was given for the full sum claimed, the decision does not actually assist in defining the powers of the court to award interest on any sum for which judgment has not been given. Second, it seems to me that it is a possible construction of section 35A(1) that acceptance of the principal sums in that case would have allowed for judgment to have been entered for interest alone. Since the payment of the sums claimed did not constitute the payment of a debt thereby discharging the same (something to which section 35(3) was directed), it does not seem to me to follow that section 35A(1) would not have applied. It seems, following the wording of section 35A(1), that “in proceedings ... for the recovery of damages ...”, the court does have the power to award simple interest “on all or any part of the ... damages in respect of which .... payment is made before judgment, for all or any part of the period between the date when the cause of action arose and -

(a) in the case of any sum paid before judgment, the date of the payment ; ....”. However, this point also does not assist resolution of this appeal because the payment in that case was made during the currency of the proceedings.

Mr Hollander submitted that in claims for damages it had not been doubted up until now that the court had the power to award interest on sums paid prior to the commencement of proceedings. He cited two authorities which he suggested supported that view. First he relied on Swingcastle v Gibson [1991] 2 AC 223, and the calculation made by Lord Lowry at p.238-239. It seems to me that Lord Lowry was not purporting to make an award of interest under section 35A in that case. He was calculating damages, and that is plain from his use of the phrases “calculation of damages” (at 239D), and “new assessment of damages” (at 239F). Accordingly that authority does not assist Mr Hollander.

Secondly Mr Hollander relied on Westdeutsche Landesbank v Islington Borough Council [1996] AC 669, and Lord Browne-Wilkinson’s award of interest in the House of Lords at 718C-D. That case was concerned with the entitlement of banks to the return of moneys paid under ultra vires swap transactions. It is true that the effect of Lord Browne-Wilkinson’s assessment was to award interest on sums not the subject of any judgment, and indeed to award interest on sums paid by the Council under the swap arrangements prior to any proceedings being commenced. Hobhouse J had awarded compound interest on the net sum due, and on his decision no interest was payable until after the last payment by the Council. Thus he did not purport to award interest on any sum other than that for which he was giving judgment. The Court of Appeal however did purport to award compound interest from an earlier date in effect on the running total exercising an equitable jurisdiction. Lord Browne-Wilkinson did not accept that the court had the equitable jurisdiction to award compound interest, and he awarded simple interest but by reference to the same dates as those chosen by the Court of Appeal. There appears simply to have been no argument on the question whether there was power under section 35A to award interest on sums for which judgment had not been given. If and insofar as the House of Lords were purporting to decide that the court did have such power, that decision was clearly per incuriam. Accordingly it seems to me that Westdeutsche cannot support Mr Hollander as to the proper construction of section 35A.

Mr Hollander did not refer to any other authorities to attempt to support his broad proposition. Certainly no authority was cited in which the proper construction of section 35A was considered.

In the result in my view the plaintiffs have the difficulty that on any view they could not contend that the proceedings in the instant case had been commenced prior to what they would contend constituted a part payment. In addition however, as it seems to me, on the proper construction of the sub-section their difficulties do not stop there. Even if they could argue that the sub-section did apply to proceedings for damages where payments had been made prior to commencement of the proceedings, there would still remain certain questions.

(1) The first question would be whether following a recovery from Fitzgerald, it could legitimately be argued that the proceedings thereafter commenced were proceedings for the recovery of those sums recovered from Fitzgerald.

(2) Furthermore the question would arise in any event whether the recovery from Fitzgerald constituted a “payment” for the purposes of the sub-section.

As to question (1), it seems to me that the fact that on this construction there might be a distinction between those cases where it was undisputed that a payment or recovery had reduced the damages, (leading to the view that the proceedings could not fairly be said to be for the recovery of those damages); and those cases where the question of the recovery might still be in issue, simply serves to demonstrate that the construction of section 35A(1) already indicated (i.e. that the sub-section only applies to payments during proceedings) is to be preferred.

As to question (2), it seems to me that recovery from a third party by way of mitigation, is not what the sub-section contemplated. What is contemplated is payment by a defendant. Thus in my view, even in the extreme case of recovery only being obtained from a third party some days prior to a hearing date, then if that recovery reduces the sum for which judgment can be obtained, I do not think that the court would have any power to award interest up to the date of recovery. I should emphasise that there may well be cases where two tortfeasors are sued and a plaintiff by recovering against one will not be forced to accept anything but full judgment from the other with an obligation not to execute for the full amount. But where recovery does reduce the sum for which a plaintiff can obtain judgment, then in my view the court would not have power to award interest up to the date of that recovery.

The facts of this appeal, and the fact that in the extreme case just referred to the court does not have the power to award interest, points to section 35A causing an injustice in some cases. That is an injustice in addition to that pointed out by Lord Scarman and Lord Roskill in La Pintada in relation to debts paid late, but prior to proceedings being commenced (see 111D-E and 112 B-D). Despite the injustice, on the wording of section 35A, in my view the Deputy Judge did not have power to award interest on any sum other than that for which he gave judgment.

Thus, I would allow the appeal, and reduce the interest awarded to £138,500.81. In the result, I would reduce the total sum for which the judge gave judgment to £413,069.10.

LORD JUSTICE ROBERT WALKER:

I agree.

LORD JUSTICE HOBHOUSE:

I agree that this appeal should be allowed for the reasons given by Waller LJ. I would add only a few further observations of my own.

The Plaintiffs' claim in the action was for damages for breach of contract and/or negligence. Such a claim has two characteristics. First, the only damages claimed can be the damages which the plaintiff has in fact suffered. Insofar as he has been able to avoid some of his losses, as where he has been able to mitigate his loss, he can only sue for and obtain judgment for his unavoided loss. Mitigation or failure to mitigate gives the defendant a defence to the claim. The writ and the statement of claim cannot properly include any claim in respect of an avoided loss.

The second characteristic is that a claim for damages for breach of contract or in tort cannot be met by a plea of tender on the part of the defendant. The only defence is a defence of accord and satisfaction. A debt can be partly discharged by a part-payment and fully discharged by a tender and continuing willingness to pay; a liability in damages can only be discharged by agreement and the performance of that agreement. Part-payments by a defendant to a plaintiff may arise in relation to a debt but will not normally arise in relation to a damages claim; this no doubt influenced the language of Lord Brandon in President of India v La Pintada [1985] AC 104.

In the present case the essence of the relevant duty owed by the Defendants to the Plaintiffs was to protect them against the misappropriation of funds by their officers or employees. They were in breach of that duty and, as a result, an employee Mr Fitzgerald was able to steal or otherwise improperly misappropriate for his own benefit money belonging to the Plaintiffs without prompt detection. Insofar as the Plaintiffs were able to recover that money or its value from Mr Fitzgerald, they had avoided their loss. Indeed, they were clearly under a duty to mitigate their loss and exercise any remedies which they might have against Mr Fitzgerald. The only loss which they were entitled to claim from the Defendants was the loss which they were unable to recoup from Mr Fitzgerald. At the date of the issue of the writ, the Plaintiffs had already succeeded in recouping what the Judge held was the equivalent of £430,000. It was only for the unrecovered balance of £274,568.29 for which the Plaintiffs were entitled to sue the Defendants and recover judgment against them.

The Plaintiffs might have advanced a case that the mitigation had not been as successful as might otherwise appear since the Plaintiffs had been out of their money during the period between the misappropriations and the recovery. Alternatively, they might have sought to include a claim for special damages for loss of the use of their money during that period. ( Wadsworth v Lydall [1981] 1 WLR 598; La Pintada .) They included no such claim. It does not matter whether or not the inclusion of such a claim would have succeeded or failed, they never put their case in that way. If they had, there would have been factual questions which would have had to be considered which were not raised by the simpler way in which they did put their case in their statement of claim and particulars of damage.

The outcome was that the only claim which they made and which they were entitled to make in the action was for their unrecovered loss. The Judge gave them judgment for that sum. The question then arose of the award of interest under s.35A of the Supreme Court Act 1981. It is to be observed that this case does not involve any question arising from a payment made at any stage by the Defendants to the Plaintiffs. It might well be thought that it is that type of payment to which the drafting of s.35A was directed. But it is not necessary to express any view whether the references to payment in that section are to be confined to payments made by the relevant opposite party against whom judgment has been obtained. What is clear in the light of the statutory genesis of this section, including the report of the Law Commission, and from what Lord Brandon said in La Pintada , that the change made by s.35A was to allow the Judge in exercising his discretion to take into account the fact that payments had not been made until after the commencement of the proceedings but Parliament did not fully accept the recommendations of the Law Commission and permit the Judge to take into account the fact that the Defendant had made payments to the Plaintiffs after the cause of action accrued but before the writ was issued. As Lord Brandon put it in La Pintada , the statutory power was extended to cover "Case 2" but not "Case 1".

Accordingly the Judge was wrong in the present case to award interest under s.35A in respect of sums for which he was not giving judgment. He appears to have believed that he was entitled to do so because of the case Swingcastle v Gibson [1991] 2 AC 223. As pointed out by Waller LJ, what occurred in that case was an award of special damages not the exercise of a discretion under s.35A. The case which is inconsistent with the conclusion at which we have arrived is the award of interest under s.35A by the House of Lords in Westdeutsche v Islington [1996] AC 669. In that case what Lord Brandon had said about the right to recover compound interest in equity was clearly considered and was discussed in the speeches of their Lordships. But what appears to have been overlooked was the present question and the extent of the power to award simple interest under s.35A. It does not appear that any argument was addressed to them on that point. If it had been, they would also have had to consider what Lord Brandon had said, with the concurrence of the other members of the House, about s.35A. The conclusion that s.35A gave this wider power would involve disagreeing with what Lord Brandon had said on that topic in parts of his speech in La Pintada to which their Lordships did not refer. The only conclusion at which one can arrive is that this point was overlooked and under those circumstances the fact that the House of Lords in Westdeutsche awarded interest under s.35A on sums for which no claim could have been made in the action (because the cross-payments fell to be offset against each other) and for which judgment had not been given. I agree with Waller LJ that under these circumstances we are not bound by this aspect of the Westdeutsche decision and that we are entitled to determine this appeal upon what we consider is the correct construction of s.35A.

Order: Appeal allowed. Sum below varied substituting £138,500.81 making total of £413,069.10. Repayment of excess already paid with interest. Appellant to have the costs of appeal to include hearing on 14th February 1997. Leave to appeal was refused [Not part of the approved judgment]