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Cite as: [2002] EWCA Civ 143

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Cigna Insurance Company of Europe SA NV & Ors v Vural Ltd. & Anor [2002] EWCA Civ 143 (15th February, 2002)

		Neutral Citation Number: [2002] EWCA Civ 143
		No: A3/2001/1157 QBCMI

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
COMMERCIAL COURT
Master Miller

Royal Courts of Justice
Strand,
London, WC2A 2LL

15th February 2002

B e f o r e :

LORD JUSTICE BROOKE
LORD JUSTICE MANCE
and
MR JUSTICE PARK
____________________

	CIGNA INSURANCE COMPANY OF EUROPE SA NV AND OTHERS	Claimants/ Respondents
	- and -
	(1) VURAL LIMITED (2) KENAN VURAL AKYUZ	First Defendant Second Defendant/Appellant

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

Michael Ashe QC & John Robson (instructed by Arbeid, Golstein & Oshry) for the Appellant
Tim Lamb QC (instructed by Clyde & Co) for the Respondents
____________________

HTML VERSION OF JUDGMENT
AS APPROVED BY THE COURT
____________________

Lord Justice Brooke :

This is an appeal by the second defendant Kenan Vural Akyuz (“Kenan”) against an order of Master Miller dated 15th February 2001 on an assessment of damages whereby he ordered that Kenan was only entitled to nominal damages not to be assessed.

The dispute between the parties arose in this way. The claimants were the insurers of a company called Reg Ellis Warehousing Ltd at the time that that company’s warehouse premises were damaged in a serious fire on 4th May 1991 The various owners of the stored goods made claims in respect of their alleged losses, and the claimants dealt directly with them in settling their claims. In particular, they paid Kenan’s company Vural Ltd (“Vural”), who are the first defendants, Ł406,637.41 in respect of clothes stored at the warehouse at the time of the fire.

Police inquiries then led to the arrest of Mr Reg Ellis, and on 6th August 1997 he was convicted at the Central Criminal Court of conspiracy to commit arson. The master said that he believed that a dishonest loss adjuster, who had been concerned with 14 fire damage claims (but not Vural’s), was convicted of an offence or offences of dishonesty on the same occasion. The claimants then came into possession of the documentation on which the prosecution had relied in the criminal proceedings, and in their proceedings against Vural and Kenan they alleged that they had paid Vural about Ł260,000 in consequence of frauds which they particularised in their pleadings, and about Ł147,000 in relation to a claim in respect of what they now said were non-existent garments from Turkey. The claimants made their claims, for restitution of the money paid and/or damages, against both Vural and Kenan jointly and severally.

On 6th October 1997 Mance J granted an ex parte Mareva injunction in favour of the claimants, and the master’s inquiry into damages arose out of undertakings given by the claimants to the court on that occasion, and also on a later occasion when the terms of the original order were varied by consent on 5th January 1998. These undertakings were in the following terms:

“(i) If the court later finds that this order has caused loss to the defendants or either of them and decides that the defendants or either of them should be compensated for that loss, the plaintiffs will comply with any order the court may make” (6th October 1997);

(ii) … to pay any loss or damage occasioned by the making of this order in the event that the court later finds that this order had caused loss to the defendants or either of them, and decides that they should be compensated for that loss by the plaintiffs” (5th January 1998).”

In March 1999 the claimants were given leave to discontinue their action. This discontinuance gave rise to the inquiry into damages which followed.

It is now necessary to say something about the defendants and their affairs. Kenan is Turkish. His evidence was given through an interpreter. At all material times prior to 31st October 1997 he was the sole director of Vural, in which he owned nearly all the issued shares.

Vural carried on a business of making up and finishing clothing. The company’s factory was at 143 Broad Lane, which was described by a valuer in 1998 as a “somewhat obsolete industrial building in a secondary/tertiary location in Tottenham”. Kenan bought these premises in 1991 for Ł700,000 and originally rented them to Vural at a rent of Ł120,000 a year for a three-year term, after which Vural held over as tenants without any new lease coming into existence.

Kenan suffered from diabetes and high blood pressure, and for all practical purposes Vural’s business was managed between 1992 and 1997 by his son Yildrim Akyuz (“Yildrim”). Yildrim also gave evidence to the master, who said that he was obviously an erudite and well-educated young man who had large business ideas and who had already achieved considerable financial success.

Eventually Kenan decided that he wished to move to Turkey, dispose of all his UK assets, and retire from his business. To this end arrangements were made whereby Vural would cease to trade as at 31st October 1997, and its assets would be transferred to a new company called Vural (1997) Limited. The two companies would then swap their names, so that the company now carrying on the business would have the benefit of its predecessor’s name and goodwill. We are not concerned with the fortunes of the new company. As part of these arrangements it was decided that Kenan would sell all his interest in the factory at 143 Broad Lane to the new company. The master found that before the end of 1997 father and son had agreed a price of Ł1 million for the purposes of this sale (even though this agreement would not have been legally enforceable). He also found that the open market value of these premises on a transaction conducted at arms’ length would have been Ł600,000.

The order obtained by the claimants in the first week of October 1997 put the family’s plans in some jeopardy. Although there was over Ł500,000 in Vural’s bank account at that time, Ł250,000 was earmarked for Kenan’s pension fund, and it was said that there would be untoward tax consequences if these pension arrangements could not go ahead. The master set out in some detail the correspondence which passed between the parties’ solicitors after the injunction came to the defendants’ attention. He found that Kenan was generally aware of the effect of the court order, but that Vildirim, although not actually a party to the action, was in effect the person who masterminded the defendants’ attempted resistance to the order and their efforts to alter its terms. I refer to their “attempted resistance” because although they contended through their solicitors that the order should never have been made, and issued a summons to this effect on 27th October 1997, they did not pursue this form of relief after Toulson J had varied Mance J’s order by consent on 5th January 1998 at a hearing when there was insufficient time for him to hear the defendants’ application, which was resisted by the claimants.

By this time the defendants had made disclosure of their assets, and the claimants were satisfied that the property at 143 Broad Lane would provide them with adequate security. The consent order, which contained the undertaking numbered (ii) in paragraph 1 above, was in these terms, so far as is material:

“Upon the parties agreeing that the inhibition entered in the plaintiff’s favour against the freehold title of the property situated at 143 Broad Lane, N15 registered in HM Registry … do remain in place until trial or further order but not so as to take precedence or priority over any charge securing any pre-existing liability …

it is ordered that

(i) the order made herein on the 6th October be discharged as against both defendants but without prejudice to the defendants’ rights to enforce the undertaking as to damages given by the plaintiffs in that order if the court later finds that the order caused loss to the defendants or either of them and decides that the plaintiffs should make compensation for that loss.”

In due course the order made on 7th April 1999, which gave the claimants leave to discontinue the proceedings and removed the inhibition against the title of the Broad Lane property, was made expressly:

“without prejudice to the rights of the first and second defendants to enforce the undertaking as to damages given by the plaintiffs in the order dated 6th October 1997 as modified by the order dated 5th January 1998.”

The Broad Lane property was eventually sold to Vildirim’s new company in July 1999 for Ł711,000. In these proceedings Kenan claimed that he had lost about Ł625,000 as a consequence of the orders obtained by the claimants in October 1997 and January 1998 which had had the effect of inhibiting his sale of the property at that time at a much higher price. He conceded, however, that he would have to give credit for the rental payments he would not otherwise have continued to receive. His claim was made up as to about Ł252,000 as a net loss of capital which would have been achieved by the thwarted sale, about Ł56,000 for mortgage interest payments which he had to go on making, and as to about Ł316,000 being the interest he would have achieved by investing the sale proceeds of Ł1 million in a Turkish bank called Esbank between December 1997 and July 1999 at a net annual interest rate of 20%. The master recorded that although the defendants’ solicitors had said they were carrying out inquiries to determine the amount of tax, if any, that Kenan would have had to pay in Turkey on that interest, there was no detailed evidence provided to him as to Kenan’s tax affairs in Turkey.

In addition to his findings as to the family’s agreed sale price of 143 Broad Lane and its market value in December 1997, the master also made the following further findings:

(i) That the claimants had no knowledge of any sale, and certainly not of the particular sale at the time they gave their undertakings [recorded in paragraph 1], above, and that they did not know that a sale was in the offing at all (and then between two companies (sic)) until April 1998;

(ii) That they had no idea that an investment of the sale proceeds in Esbank was intended;

(iii) That they would not have released the Mareva injunction or the inhibition without an equivalent form of security having been put in place;

(iv) That they would have been quite happy for a sale to have taken place and for the sum of Ł500,000 to have been put on deposit in an escrow account between the two sets of solicitors pending the outcome of the case, and that the court would in default of agreement have permitted the sale to have taken place so long as the claimants had in place an alternative security against their claim;

(v) That the raising of money which would have resulted in the provision of security of Ł500,000 would have presented no difficulty to Vildirim or to the first defendant (sic);

(vi) That for these reasons Kenan had failed to mitigate his damage and could have avoided all his loss if he had done so.

Mr Ashe QC, who appeared with Mr Robson on behalf of Kenan on the appeal, argued that the master had misdirected himself as a matter of law. He submitted that once the court was satisfied that the loss of an agreed sale was the kind of loss the parties to this litigation would have reasonably foreseen when the original undertakings were given, then Kenan was entitled to recover damages based on the lost opportunity of achieving that sale, even if it was at a price higher than the market price, and the claimants did not know of the special price that had been agreed.

In developing his submissions Mr Ashe referred us in particular to Smith v Day (1882) 17 Ch D 421, 425; Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, 539; Wroth v Tyler [1974] Ch 30, 60F-62E; Hoffmann La Roche v Trade Secretary [1975] AC 295, 361E-F; and Brown v KMR Services [1995] 2 Lloyds Rep 513, 543 and 556-7. He argued, in short, that the master was obliged to assess damages on the basis that the claimants had undertaken that they would not prevent the defendants from doing that which they were restrained from doing by the terms of the injunction, and that the loss of a sale at Ł1 million, albeit a price Ł400,000 higher than the market price, was the kind of loss that was undoubtedly foreseeable.

In the event, we did not need to call upon Mr Lamb QC, who appeared for the claimants, because it became clear when we examined the evidence during the course of Mr Ashe’s submissions that in addition to paying Kenan Ł1 million, the new company was to take over from Kenan the obligation to pay the mortgage of Ł350,000, so that the true sale price was Ł1,350,000.

It also became clear during the course of the hearing that the agreed sale consideration for the freehold property also embraced part of the consideration for the value of the first defendants’ net assets, including the value of its goodwill as a going concern and the benefit to the new company of being able to carry on trading at the factory with no break in continuity such as would have occurred if Kenan had sold the factory to a third party. Vildirim explained the make-up of the purchase consideration in paragraph 4 of his second witness statement, in which he explained that it was more tax efficient for Kenan to be paid in this manner, as opposed to being paid more for his interest in the first defendants.

It follows that the price of Ł1,350,000 was not only more than twice the market price of the factory, but that it also contained significant elements which had nothing to do with the value of the factory, but which related to other features of the arrangements by which Kenan was concerned to liquidate all his interests in the country in order to obtain the advantages of tax exile. In those circumstances the master was clearly right to base his judgment on the market price of the factory, and to find that Kenan had suffered no loss.

In these circumstances it was unnecessary for us to consider Mr Ashe’s interesting challenge to the master’s finding on mitigation, or to the likelihood that the sale proceeds would have been invested in Turkey in US dollars at a remarkably high rate of interest.

For these reasons I would dismiss this appeal.

Lord Justice Mance:

I agree.

Mr Justice Park

I also agree.

Order: As drafted by Counsel. (Order does not form part of the approved judgment)