England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON COUNTY COURT
(Her Honour Judge Uziell Hamilton)

		Royal Courts of Justice Strand London WC2
		Wednesday, 3rd October 2001

1. LORD JUSTICE POTTER: Sir Martin Nourse will deliver the first judgment.
2. SIR MARTIN NOURSE: By orders made on 13th March and 25th August 2000 in proceedings in the Central London County Court Her Honour Judge Uziell Hamilton entered judgment for the claimant, Gerald Peter McCunn, against the third defendant, Francesco Riola, for negligent misstatement in the sum of £20,000, together with interest of £8,665.21 and costs. She gave Mr Riola permission to appeal and his appeal has now come before us.
3. Shortly stated, the background to the dispute between the parties is as follows. Mr McCunn is a sheet metal worker, who in 1984 entered into a joint venture with Mr Riola whereby they agreed that they would jointly try to secure a contract for the production of bus seats from a German national called Vogel. In pursuance of the agreement Mr McCunn and Mr Riola expended at least £10,000 between them. However, Vogel withdrew from the proposed arrangement and Mr McCunn and Mr Riola then decided that they would try to make money from the production of bus seats without him. They needed premises from which to operate and Unit 6, Roman Way Industrial Park, Godmanchester, was available. Mr McCunn, either personally or through his company, McCunn Engineering Limited ("MEL"), already had leases of Units 1 and 2. Since he was known to the landlord, the simple course was for MEL to take a lease of Unit 6.
4. Accordingly, with the knowledge of Mr Riola, on 1st June 1985 MEL took a lease of Unit 6 so as to provide a manufacturing base for the joint venture. Mr McCunn joined in the lease as guarantor for MEL's obligations under it. It was always intended that Unit 6 would be occupied by an entity to be established by Mr McCunn and Mr Riola to produce the bus seats and that it would not be occupied by MEL. On 29th July 1985 Mr McCunn and Mr Riola purchased an off-the-shelf company which became the second defendant, Abacus Tubular Products Limited ("Abacus"). At all times until September 1987 Mr McCunn and Mr Riola each owned either 40% or 50% of the shares in Abacus, of which they were the two directors running it together. Abacus was granted a licence to occupy Unit 6 by MEL, and Abacus thenceforth paid the rent and all the other outgoings of it. It is also material to state at the outset that, as well as being business partners, Mr McCunn and Mr Riola were friends who often enjoyed social occasions together.
5. In September 1987 Mr McCunn and Mr Riola entered into the oral agreement out of which the dispute between them has arisen. I will read what the learned judge had to say about it in her judgment of 13th March 2000. Having observed that in 1987 Abacus was no longer doing as well as it had done and that it was agreed that the business could no longer support Mr McCunn, Mr Riola and a third person who had joined it, a Mr Brown, the judge continued:

"There came a time when, as I find it, there was an agreement between Mr McCunn and Mr Riola that Mr Riola would buy Mr McCunn's shares, Mr McCunn would transfer his shares in Abacus ... to Mr Riola, Abacus ... would take over the lease and Mr Riola would take over Mr McCunn's position as guarantor; the idea being that there should be a complete severance of Mr McCunn's liabilities with regard to Abacus and Unit 6 with - I think the phrase was in the evidence - `no hang-overs'. To this end, Mr Riola said he would see his solicitor about the lease and I find that that meant he was in agreement with and would take all necessary steps to make sure that the lease would be taken over by Abacus ... and that he would take over Mr McCunn's liability as guarantor for the lease. Various letters in the correspondence have been brought to my attention and it seems to me that they make it quite clear that Mr Riola knew and accepted the situation as I have set it out."

6. Following that agreement, Mr McCunn transferred his shares in Abacus to Mr Riola. However, the lease of Unit 6 was not assigned by MEL to Abacus. Nor did Mr Riola replace Mr McCunn as the guarantor of MEL's obligations to the landlord. Abacus continued to pay the rent and the other outgoings in respect of Unit 6 and it appears that from that time, if not before, the rent was paid direct to the landlord and not via MEL. Meanwhile Mr McCunn or MEL continued to occupy Units 1 and 2 for the purposes of their own businesses.
7. Pausing there, I would observe that it appears clear, on the facts as agreed or found by the judge, that there was a partly performed agreement between Mr McCunn and Mr Riola, which either party could have had completed by a decree of specific performance, one of whose results would have been that Mr Riola replaced Mr McCunn as the guarantor of MEL's obligations to the landlord under the lease of Unit 6. Equally, as between Mr McCunn and Mr Riola, the latter was contractually bound to become the guarantor and thus to indemnify Mr McCunn against any liability under his guarantee of MEL's obligations to the landlord.
8. To anyone coming fresh to the case, as we have done, it seems very surprising that it was not fought and decided on that straightforward basis in the court below. We have spent some considerable time in discussion with counsel on each side in an attempt to understand how that came about, the judge having said towards the end of her judgment:

"Of course the claimant's case was pleaded also under contract and by way of restitution. I have already indicated to Mr Kelly for the claimant that I did not think that he could succeed on the contractual point or on the claim for restitution, but in my judgment he does succeed on the negligent misstatement aspect."

9. I would agree that a claim for restitution would have been misconceived. In relation to the claim in contract, neither counsel was able to help us with the indication said to have been given by the judge to Mr Kelly. Mr Janusz, for Mr Riola, has told us that he raised several objections to the claim, including pleading and limitation points, none of which appears to me to have been of any substance. Mr Kelly, for Mr McCunn, has told us -and this seems to be the most likely explanation - that from the outset the judge clearly thought that Mr McCunn's best, and perhaps simplest, way of putting his case was in negligent misstatement.
10. No attempt having been made to resurrect the contract claim in this court, I proceed to consider the claim in negligent misstatement, for which purpose a recital of further facts is necessary.
11. Although from September 1987 onwards Mr McCunn played no part in the affairs of Abacus, his proximity at Units 1 and 2 and his friendship with Mr Riola led to their meeting regularly at work and no doubt elsewhere as well. The judge found that there were communications between them:

"... when Mr McCunn would ask Mr Riola how things were progressing with regard to the transfer of the lease. Mr Riola would `jog along' and keep things going by saying to him, `Yes, it's all in hand' or `it's in train' or `it's going to be done' or `I'm doing it' or `I'm seeing the solicitors'."

12. On 29th April 1988 Mr J L Durrant, the area surveyor of the managing agents of the landlord of the Roman Way Industrial Park, wrote to Mr Riola at Unit 6 as follows:

"Outstanding assignment - Unit 6 Roman Way Industrial Estate

As you know, the lease of the above unit is still held in the name of McCunn Engineering Limited. Whilst I realise you have been trading from this unit for some time it is now most important that the outstanding Licence to Assign is completed. I am advised by Mr M Sinclair that you have the Licence Document. Would you please arrange for this to be signed and returned to MacFarlanes immediately."

13. It appears that on receipt of that letter Mr Riola wrote to MacFarlanes, the landlord's solicitors, because on 10th June 1988 Mr Durrant wrote to him again:

"Re: Assignment of Unit 6 Roman Way Industrial Estate

I have received a copy of your letter dated 4th May 1988 addressed to MacFarlanes and they have requested me to confirm your instructions.

The lease of Unit 6 was granted to McCunn Engineering Limited on 1st June 1985 and Mr G P McCunn is named as the guarantor to the lease. Upon assignment, a document stating that McCunn Engineering Limited is no longer the tenant and that Abacuss (sic) Tubular Products Limited is the new tenant will be attached to the original lease. You will then be required to act as the guarantor to Abacuss Tubular Products Limited occupation.

Would you please confirm that the above arrangement is acceptable to you.

I look forward to hearing from you."

14. The judge found that Mr Riola had received that letter, but, despite Mr Durrant's request for confirmation, it appears very likely that Mr Riola did not answer it. But whatever the exact position in regard to that matter may have been, it is quite clear, as the judge said, that by the time Mr Riola received the letter of 10th June he knew exactly what was expected of him and what he was supposed to do. The judge also referred to evidence to the effect that at some stage after that Mr Riola told Mr McCunn that there must have been some oversight by the solicitors.
15. It appears that Mr McCunn's or MEL's businesses at Units 1 and 2 did not prosper and in the autumn of 1988 Mr McCunn took steps to divest himself of them. The judge found that Mr Riola knew all about this. On 18th December 1988 there was a meeting between the two men. I take up the story in the words of the judge:

"In December 1988 Mr McCunn goes to say goodbye to his friend, Mr Riola, and he wants, as is perfectly understandable, to be reassured about his continuing commitments and the lease and he asks Mr Riola about it. Mr Riola jollies him along, `not to worry, all taken care of, everything has been seen to', words to that effect. It is not reasonable to expect that after 12 years the exact words spoken should have been recorded and noted down. This was not a formal meeting between business associates, company minutes taken by a company secretary. These were two businessmen, who before the formation of their companies, had no idea what it was to run a limited company. But they knew each other; they had been in business together; there had been an agreement between them and Mr McCunn was leaving Roman Way. Before he left Roman Way he wanted to know, to be reassured that the transfer of the lease and his guarantee was being taken care of. So he asked Mr Riola, as I find it, for that reassurance and Mr Riola, as I find it, gave him that reassurance. Having given him that assurance, because of the way these two men had dealt with each other in the past, because of their friendship - at least on the side of Mr McCunn - because of the trust - at least on the side of Mr McCunn - Mr McCunn trusted Mr Riola and Mr Riola knew that Mr McCunn trusted him."

16. The remaining facts can be briefly stated. Unlike those of Mr McCunn and MEL, it appears that the fortunes of Abacus prospered. At about the end of 1990 Mr Riola caused it to vacate Unit 6 and to move to new, specifically designed premises. From that time onwards Abacus ceased to pay the rent and outgoings under the lease of Unit 6. MEL having gone into liquidation and having been dissolved, the landlord then made a demand on Mr McCunn under his guarantee to which he had no answer. He was forced to pay the landlord £20,000 and it is that sum plus interest that the judge has awarded him against Mr Riola on the basis of the negligent misstatement made by the latter on 18th December 1988.
17. The trial took place over four days in February and March 2000. Both Mr McCunn and Mr Riola were extensively examined and cross-examined. Both counsel, especially I think Mr Janusz, made lengthy submissions on both fact and law. Early in her judgment, the judge said this of the evidence of the principal participants:

"There has been considerable discrepancy in the facts given in evidence by the claimant, Mr McCunn, and the third defendant, Mr Riola. I have to say that I did not find the third defendant's evidence reliable and that where there is a conflict, I prefer the evidence of the claimant to that of the third defendant."

Before turning to the argument of Mr Janusz in this court, I must refer to three further important findings made by the judge. First, at p.5H:

"It seems to me, in my judgment, that the assurance given to Mr McCunn at the meeting in December 1988 was such that it was a statement which Mr McCunn could reasonably have been expected to rely upon, that he did rely upon it."

Second, at p.6D:

"As Mr McCunn said in his evidence, `If I had been told that Mr Riola had taken no steps whatsoever, I would have instructed my solicitors to deal with 6 Roman Way in the same way as I instructed them to deal with Units 1 and 2.' But he was led to act to his detriment by the statement of Mr Riola, so he did nothing and he had to pay for it."

Third, at p.7A:

"Since I have decided in my judgment that Mr Riola, despite his assertion in the witness box that he did not know the difference between a lease and a guarantee, at all times knew exactly what a guarantee was, knew at all times that Mr McCunn had a continuing liability and knew at all times that his statement - certainly the final one in December 1988 at that meeting - meant that Mr McCunn would rely upon his statement so as to induce in Mr McCunn the feeling that he was absolved from all liability, I see no reason why the principals enunciated in the cases I have mentioned, dealing with negligent misstatement and its consequences, should not and cannot extend to the business dealings between these two men."

18. Mr Janusz relies on the following four propositions derived from the leading authorities on negligent misstatement, including the dissenting judgment of Denning LJ in Candler v Crane, Christmas & Co [1951] 2 KB 164 at p.179 and the decision of the House of Lords in Hedley Byrne v Heller [1964] AC 539. First, liability will not attach to a statement given in response to a casual or perfunctory enquiry. Second, the circumstances must make it clear to the person making the statement the gravity of the enquiry and the importance and influence to be attached to the answer. Third, the person making the statement must or ought reasonably to realise that he was being trusted as a matter of importance to give his answer because it was likely that the recipient would use the answer as a basis upon which to act. Fourth, it was reasonable for the recipient to act on the statement in the way that he did.
19. I have no difficulty in accepting those propositions as being correct. Nor does Mr Kelly dissent from them. Mr Janusz submits that the judge erred in holding that they were satisfied in this case. Mr Kelly counters by saying that Mr Janusz's submission necessarily seeks to impugn the essential findings of fact which the judge made, and was entitled to make, on the evidence before her. I agree with Mr Kelly. I also agree with him that it is not open to this court to interfere with those findings.
20. Mr Janusz's arguments have been directed mainly to the second and fourth propositions. In regard to the second, he says that the gravity of the enquiry and the importance and influence to be attached to the answer were not made clear by Mr McCunn to Mr Riola. I entirely reject that submission. Had it been just the meeting of 18th December there might possibly have been some force in it. But what was then said was the culmination of everything which had gone before: the agreement of September 1987; the clear intention that Mr McCunn should no longer be involved in the joint venture and that all its liabilities should be borne by Abacus and Mr Riola; the "jogging along" by Mr Riola in answer to Mr McCunn's enquiries; the letters from Mr Durrant which made it quite clear what was expected of Mr Riola; the subsequent statement by Mr Riola that there must have been some oversight by the solicitors. In all the circumstances it is entirely clear to me, as it was to the judge, that the second proposition was satisfied. To suggest the contrary is wholly unrealistic. I should add that both counsel referred to certain passages in the evidence of Mr McCunn, all of which amply demonstrated that there was evidence on which the judge was entitled to make the findings that she did.
21. As for the fourth proposition, Mr Janusz submits that it was unreasonable for Mr McCunn to act on Mr Riola's statement in the way that he did. He relies on what went on in relation to Units 1 and 2 and Mr McCunn's divestment from them, both before and after the meeting of 18th December 1988. In those cases Mr McCunn acted through solicitors who arranged for the leases to be assigned to the incoming tenants in the usual way, albeit after they had been allowed to go into occupation. Mr Janusz submits that in the circumstances Mr McCunn knew or ought reasonably to have known that it was impossible for the matter to be all settled or sorted out in the sense he understood it to be without his taking any part in the transaction.
22. The answer to this submission is to be found in some answers which Mr McCunn gave both to Mr Janusz in cross-examination and subsequently to the learned judge herself. I start with the cross-examination:

"MR JANUSZ: You see, how did you think - if you came away with that firm conviction that the matter was absolutely settled - that Mr Riola was in a position to affix a signature to the assignment of the lease on behalf of your company?

A. I don't know. I don't know the mechanics of legal procedure.

Q. Well, you either knew as a result of what you were told was going to happen in relation to the other leases, or eventually you discovered the mechanics because of what happened in relation to the other leases.

A. I don't think that is necessarily the case, no. I don't fix mechanics of legal proceedings in my head; that is not my occupation.

Q. We know, that certainly within months of this conversation you had gone through the procedures that were necessary to assign the lease of Unit 1 held by your company, and the lease of Unit 2 held by you personally, and both of those transactions required your personal involvement in signing documents and/or affixing Company Seals to documents.

A. Yes, but furthermore they were my exclusive responsibility. I was not taking that responsibility from anybody else or passing it to anybody else. I had no-one to take it or to pass it to. Frank had fully accepted responsibility for that transaction.

Q. Well, I dispute that Mr McCunn, but leaving that dispute between us aside the lease was in your company's name. How on earth did you think a complete stranger to the company could perform an act on behalf of the company? You knew an act on behalf of the company was necessary, didn't you?

A. No, I didn't.

Q. How did you think the company was going to sell something, or dispose of something, without an act on its part?

A. I thought of it in exactly the same way as I think of nuclear physics. I leave it to others and take their word."

23. The exchanges between the learned judge and Mr McCunn were the following:

"Q. I want to make sure that you understand. What is being put to you is this: every time that there has been an assignment or a disposal of any kind of property, witness Units 1 and 2 for example, or the house when you bought or sold, you have had to sign something.

A. Yes.

Q. And what is being put to you is how did you think that Unit 6 could be disposed of without your having to sign something?

A. In my mind, and until this case arose I didn't know otherwise, the lease was to me a liability not an asset, and I had thought that signing to take the liability would be all that was necessary. Frequently ----

Q. Sorry, let me just understand what you mean. In your mind the lease was a liability; which lease are we talking about?

A. Any lease on any premises.

Q. I see, it was a liability and not an asset?

A. Yes.

Q. And you thought that ----

A. I thought that liabilities were signed to be taken on and just handed over, as in for instance the delivery of a parcel. It is signed for collection but not for delivery. The recipient signs. Even - I admit that having signed to hand over other properties I am signing bits of paper that a lawyer puts in front of me. I am sorry to appear stupid before lawyers but it is not my occupation. I do as I am instructed and sign X, do not date, etc. That I just follow."

24. Evidently, the judge was satisfied with the answers given by Mr McCunn to Mr Janusz and herself. In my view, bearing in mind the judge's favourable opinion of Mr McCunn as a witness, she was entitled to be so satisfied and, further, to hold that it was reasonable for him to act on the statement in the way that he did.
25. Mr Janusz has raised a number of further points, in particular that Mr McCunn did not ask specifically about the guarantee and that he could not remember the exact words used by Mr Riola, so that it was not satisfactorily established that a negligent misstatement was made. There is nothing in any of these points which detracts from my view that the judge was entitled to make the findings that she did and that those findings are conclusive in favour of Mr McCunn.
26. I would dismiss this appeal.
27. LORD JUSTICE POTTER: I agree.
Order: appeal dismissed with costs; permission to appeal to the House of Lords refused.