England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE BRISTOL COUNTY COURT
(His Honour Anthony Tibber)

		Royal Courts of Justice Strand London WC2 Tuesday, 9th October 2001

1. LORD JUSTICE RIX: I will ask Sir Martin Nourse to deliver the first judgment.
2. SIR MARTIN NOURSE:There are before the court two appeals arising out of a hearing at Salisbury before His Honour Anthony Tibber of proceedings commenced in the Bristol County Court, the hearing having taken place on 25th, 26th and 27th October 2000.
3. From the papers before us it has not been altogether easy to elucidate the basic facts. However, relying in large part on the skeleton argument of Mr David Fletcher, as supplemented by information given to us during the course of argument, I believe that they can be summarised as follows.
4. Immediately before 28th June 1990 the defendants, Victor Paul Francis and his brother, Philip George Francis, were the freehold owners of land in Somerset known as the Faulkland Estate, which included a house known as Lower Farm House, a large barn and land which was intended to become the site of a roadway. On that date the defendants conveyed the large barn and the site of the roadway to Mr Eric Moody, the first Part 20 defendant, who in clause 2(a) of the conveyance entered into a covenant with the defendants and "their respective heirs and assigns" in the following terms:

"at his own expense to construct within NINE MONTHS of the date hereof in accordance with the requirements of the Local Highway Authority the road over the land shown edged Brown on the plan in the approximate position shown on the plan or in such other positions as the Local Planning Authority may from time to time approve and shall following construction maintain the same in good repair and condition until such time as the said road shall be adopted by the said Highway Authority as a Highway maintained at Public Expense and the Purchaser further covenants with the Vendors their respective heirs and assigns to indemnify the Vendors and their respective estates and effects from all actions costs claims and demands arising from any breach or non observance of the covenants hereinbefore contained."

5. On the following day, 29th June 1990, the defendants transferred the farmhouse (that being registered land) to the claimants, Alan David Kingston and his wife, Jacqueline Edith Jeannette Kingston. One of the rights transferred with the property was a right of way over the road to be constructed by Mr Moody and by clause 2 of the transfer the property was expressed to be transferred with the benefit of Mr Moody's covenant to construct and maintain the road until such time as it should be adopted by the local highway authority.
6. By a transfer made on 20th November 1992, by which date it appears that the road had been partially constructed, Mr Moody transferred the large barn and the site of the roadway to the second Part 20 defendants, James John McLay and his wife, Maria Immacollata McLay. By clause 3 of the transfer Mr and Mrs McLay entered into a covenant with Mr Moody in the following terms:

"The Transferees hereby covenant with the Transferor their respective heirs and assigns at their own expense to construct within nine months of the date hereof in accordance with the Local Highway Authority a road over the land edged blue on the plan annexed hereto. Following construction to maintain the same in good repair and condition until adoption by the Highway Department as a highway maintained at public expense."

7. By the summer of 1994 the road itself had been constructed but, by reason of lack of lighting and mains drainage, it had not been constructed to a standard enabling it to be adopted by the local highway authority. On 4th August 1994 the claimants commenced this action in the County Court. But instead of suing Mr Moody for breach of his covenant with the defendants, the benefit of which had been assigned to the claimants by the transfer of 29th June 1990, they sued the defendants direct. I will explain later how that came about. However, faced with a claim by the claimants, the defendants then joined Mr Moody, who in turned joined Mr and Mrs McLay.
8. Here I should state that the price payable by the claimants to the defendants for the farmhouse was £67,000. However, notwithstanding that the transfer of 29th June 1990 imposed no obligation on the defendants to construct and maintain the road, £2,000 was retained out of the £67,000 and held by the claimants' solicitors as stakeholders in a separate account pending completion of the road and its adoption by the local highway authority. The judge described that as a mysterious aspect of the matter.
9. In joining Mr Moody as a third party, the defendants claimed against him, first, an indemnity in respect of the claimants' claim against them, including all costs of defending it (the claimants being on legal aid) and, secondly, the loss they had suffered by reason of the retention of the £2,000. The basis of the indemnity claim was Mr Moody's covenant, in the second part of clause 2(a) of the conveyance of 28th June 1990, to indemnify the defendants "from all actions costs claims and demands arising from any breach or non observance of the covenants hereinbefore contained", that is to say the covenants by Mr Moody, in the first part of clause 2(a), to construct and maintain the road.
10. In joining Mr and Mrs McLay as fourth party, Mr Moody claimed damages for breach of their covenant in clause 3 of the transfer dated 20th November 1992 to construct a road within nine months thereafter and to maintain it in good repair and condition until adoption by the local highway authority. Mr Moody claimed that it was a reasonably foreseeable consequence of the McLays' breach of their covenant that Mr Moody would be liable under his covenant for indemnity with the defendants.
11. When the matter came on for hearing the judge dealt first with the claim of the claimants against the defendants. The background to that claim, in greater detail, was that the defendants had originally intended to sell the farmhouse to the claimants, to retain the site of the roadway and to covenant with the claimants that they would construct and maintain the road. That was the format adopted in the contract between the claimants and the defendants, the material provision of that contract being clause 10(a). However, once the defendants had sold off the large barn and the site of the roadway to Mr Moody on 28th June the transfer by the defendants to the claimants on 29th June had to take a different form, and did take a different form, in the circumstances I have already stated.
12. In giving judgment on the claimants' claim on 26th October, the learned judge said at the outset that he did not understand how the claim ever got on its feet. Having explained how the defendants' original intention was modified by the sale off first of the large barn and the site of the roadway to Mr Moody, he said that it seemed to him absolutely hopeless to say that the defendants were in any way obligated to the claimants so far as the road was concerned. He also rejected the claimants' case, so far as it was based on an alleged collateral contract or fraud, in a peremptory manner. He ended his judgment by saying:

"The Kingstons may have a claim but not against these Defendants. The claim is therefore dismissed."

13. There has been no appeal by the claimants against the judge's dismissal of their claim.
14. As an additional part of the background, I should state that it appears clear that the real motivation of the claimants in suing the defendants and not Mr Moody was that Mr Moody was perceived as someone who had little or no means, whereas the defendants were regarded as being able to satisfy any judgment which might be obtained against them.
15. After dismissing the claimants' claim, the judge turned to consider the defendants' claim against Mr Moody and Mr Moody's claim against Mr and Mrs McLay. As I have said, the substantial claim by the defendants was for an indemnity under the covenant contained in the second part of clause 2(a) of the conveyance dated 28th June 1990.
16. The position at the trial was that Mr Moody had been advised that the defendants' claim against him for an indemnity was a good one, on the basis that he had been in breach of his covenant to construct the road and that the claimants' claim against the defendants had arisen from that breach. The claim was therefore conceded. The defendants and Mr Moody appeared by the same counsel at the hearing, Mr Fletcher, as they have today, who focused his attention on Mr Moody's claim for an indemnity against the McLays.
17. The judge took a different view. While holding that the McLays were in breach of their covenant with Mr Moody and, further, that they were clearly aware of his liability to the defendants and would therefore be liable to compensate him in respect of that liability, he decided, first, that Mr Moody was not, on the true construction of his covenant with the defendants, liable to indemnify them and, secondly, that the McLays, not being affected by Mr Moody's concession, could not be held liable under their covenant with Mr Moody.
18. Having recited the material words of Mr Moody's covenant with the defendants, the judge said:

"The claimant's case was brought against the defendants because in effect Mr Moody, and subsequently Mr McLay, were in breach of covenant to build the road to the adoptive standard. The claim failed because there was no covenant by the defendants in favour of the claimant. The transfer was simply made with the benefit of Moody's covenant. I do not think the defendants' costs, claims and demands arose from any breach of covenant. They arose because the claimant mistakenly alleged the defendants to be in breach of a covenant which did not exist. True it is that had the road been built by Moody there would not have been, or may not have been any action by the claimant, but the claim was based on allegations of fraud and breach of collateral contracts, and of clause 10(a) of the agreement for sale."

19. At the conclusion of the hearing on 27th October 2000 the judge made an order the main provisions of which were as follows. In the main action he dismissed the claimants' claim against the defendants and made no order on the counterclaim. He ordered that the sum of £2,000 then held by the claimants' solicitors as stakeholders, together with interest, should be paid out to the defendants' solicitors. He ordered that the claimants should pay 90 per cent of the defendants' costs of the claim and counterclaim, subject to legal aid assessment, and he refused the claimants permission to appeal. On the Part 20 proceedings he ordered that the defendants were entitled to an indemnity from Mr Moody in respect of the costs of the action and, by way of damages, to the sum of £2,000. He made that order in accordance with the concession which had been made on behalf of Mr Moody. He then dismissed Mr Moody's claim against the McLays. He made no order for the costs of any of the parties to the Part 20 proceedings. He gave Mr Moody leave to appeal in respect of the dismissal of his claim against the McLays. He refused the McLays leave to appeal against his decision to make no order as to costs.
20. On the same day, and after argument heard as an entirely separate matter, the judge ordered the claimants' solicitors (who were not the solicitors who had acted for them at the time of their purchase of the farmhouse) to pay the costs of the defendants and of each of Mr Moody and Mr and Mrs McLay of the Part 20 proceedings on an indemnity basis pursuant to section 51 of the Supreme Court Act 1981. In the separate judgment which the judge delivered in respect of that matter he went into the history at some length and he relied, to some extent at least, on the fact that the solicitors who had acted for the claimants at the time of their purchase of the farmhouse had advised them that, if they wanted to sue anybody, they would have to sue Mr Moody and no one else.
21. I turn to the substance of Mr Moody's appeal against the judge's dismissal of his claim against Mr and Mrs McLay. The essence of Mr Fletcher's argument on this question is that the judge was wrong in taking the view that the claim made by the defendants against Mr Moody did not "arise from" Mr Moody's breaches of covenant in respect of the road. He says that the judge's view that the defendants' claim arose because the claimants mistakenly alleged the defendants to be in breach of a covenant which did not exist was far too narrow a view of the covenant. He says that the covenant was designed to protect, and did protect, the defendants against any claim arising from a breach of the covenant, whether the claim was good or bad. Provided only that the claim can be said to have arisen from or been caused by a breach of the covenant, the defendants are entitled to recover.
22. On the other side, Mr Sahonte, for Mr and Mrs McLay, seeks to support the judge's view. He says that the claims made by the claimants against the defendants were wholly misconceived and fundamentally without merit. The covenant was not widely enough drawn to cover claims of that character. He also takes points on causation, in particular that the true cause of the claim against the defendants was the claimants' belief that they, as opposed to Mr Moody, were people of substance.
23. In my view the submissions of Mr Fletcher are to be preferred to those of Mr Sahonte. The covenant itself is drawn in such a way as to make nothing depend upon the quality or character of the claims or demands which are made. The only requirement is that they should arise from a breach of the covenant. The judge himself said that it was true that had the road been built by Mr Moody there would not have been, or might not have been, any action by the claimants. In my view it is clear that there would not have been any action by the claimants. The whole basis of their claim was that the road had not been constructed in accordance with the terms of the covenant, the benefit of which had been assigned to them by the defendants.
24. It is, I think, possible to conceive of circumstances in which the road was not constructed but it could nevertheless be said that the claim did not arise out of a breach of the covenant. To take an extreme example, if the claim had been brought out of spite or malice, without any real regard for the breach, it might have been possible to say that the claim did not arise from it. But nothing of that sort can be suggested here. The claimants' claim, although it was held, rightly in my view, to have been misconceived, was not caused by anything other than the breach itself. That was the only reasonable view which could be taken in the circumstances and the judge's view of how the claim arose must be rejected.
25. In the circumstances, and since Mr Sahonte has not taken any point on the other matters decided by the judge, in particular that there was a breach of the covenant by Mr Moody and that the liability under his covenant for indemnity was reasonably foreseeable by the McLays (indeed, he said that they were clearly aware of that liability), the appeal of Mr Moody must in my judgment be allowed.
26. I propose that we should discuss the consequences with counsel after judgment. However, it appears to me that Mr Moody is entitled, in particular, to recover against the McLays damages in respect of the £2,000 retention. The position there, as I understand it, was that that £2,000 had to be released to the claimants' solicitors because the covenant was not complied with. That meant that the defendants were £2,000 short on what they received from the claimants for the farmhouse. That was recoverable, along with costs, by the defendants from Mr Moody under his covenant for indemnity with the defendants and is likewise recoverable by Mr Moody from the McLays under their covenant with him.
27. LORD JUSTICE RIX: I agree.
28. On behalf of the McLays, Mr Sahonte has taken essentially two points: a point of construction on Mr Moody's indemnity and a point of causation. The point of construction, as I understand it, is essentially this: that the indemnity "from all actions costs claims and demands arising from any breach" of the relevant covenant is to be confined, despite the use of the word "all", to some more limited category of actions, costs, claims and demands. At his highest, Mr Sahonte submitted that all unsuccessful claims etc fell outside the terms of the indemnity. That, however, it seems to me, is an impossible construction since it cannot have been intended by such an indemnity to make its operation depend merely upon whether a claim just succeeds or just fails. Mr Sahonte therefore made a more limited submission that at any rate a claim of this nature, which the judge had found was sufficiently misconceived to give rise to a wasted costs order against the claimants' solicitors, should fall outside the terms of the indemnity. It seems to me, however, that for similar reasons it is impossible to limit the meaning of the indemnity in that way. The indemnity is taken for the very reason of protecting the party for whose benefit it is given against the dangers of any action etc arising from a breach of the indemnifying person's covenant. It would destroy the value of such an indemnity if the word "all" was to be limited so as to permit the possibility of endless argument about whether the merits of a particular action or claim were sufficiently poor to be castigated as misconceived or worse. The parties to the agreement for such an indemnity could not have intended to limit the meaning of "all" in that way.
29. So far as Mr Sahonte's point of causation is concerned, that is a submission that the costs arising from this claim by the claimants do not arise from the breach of covenant. It is true that the judge said at one point that he did not think that the defendants' costs, claims and demands did arise from any breach of covenant, but he had already said that the claimants' case was brought against the defendants because, in effect, Mr Moody, and subsequently Mr McLay, were in breach of their respective covenants. It seems to me that, for the reasons given by Sir Martin Nourse, it is impossible to say that the costs, claims and demands in this case had not arisen from the breach of covenant, just because the breach of covenant gave rise to proceedings in which the various legal causes of action alleged both went beyond breach of covenant and were devoid of any merit or substance.
30. Turning to the McLays' covenant, that is not supported by any indemnity in similar terms to that of Mr Moody, but nevertheless the judge had found that the McLays were clearly aware of Mr Moody's liability to the defendants and therefore were aware of their own liability to compensate him for his liability to the defendants in the case of a breach of covenant. It has not been submitted, and there is nothing in the judge's findings of fact to justify a submission, that a claim of this kind, misconceived as it may have been, fell outside the reasonable contemplation of the McLays in giving their covenant. There has been no submission that the claimants' claim was a kind of new intervening act such as would break the chain of causation, as might have been argued if it had been said that the claimants had acted, not out of a mistaken view of their legal rights, but out of malice. In my judgment, therefore, it cannot be said that the McLays are not liable for breach of their covenant respectively to Mr Moody.
31. Therefore, this appeal must be allowed in principle. Quite what the consequences are is a matter for further submission.
Order: appeal of first Part 20 defendant allowed; costs cross-appeal by second Part 20 defendant adjourned sine die with liberty to restore; counsel to submit draft minute of order covering all consequential matters decided as a result of post judgment discussion.