England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
BIRMINGHAM COUNTY COURT
(HHJ MCKENNA)

		Royal Courts of Justice Strand London, WC2
		11 December 2002

1. LORD PHILLIPS, MR: This is an appeal from the decision of His Honour Judge McKenna, delivered in the Birmingham County Court on 25 October 2002, in Part 20 proceedings in a running down case. All that is at stake is the respondent's unrecovered costs in those proceedings, but the facts are unusual and raise interesting questions of legal analysis. While I am in no doubt as to the result that flows from the facts found by the judge, the precise route to that result is less certain. This case well exemplifies the proposition that the common law is a maze and not a motorway.

THE FACTS

2. In October 1994 the appellant, Dr Khan, and the respondent, Dr Grocutt went to Turkey for a medical conference. Dr Khan was accompanied by his mother, Mrs Khan. Dr Grocutt was accompanied by the lady who is now his wife. The conference had a rest day, 7 October. On the day before, Dr Grocutt and Dr Khan agreed that they would take advantage of this rest day to hire a car and go with their companions on an excursion. Dr Khan made the arrangements for hiring the car through a local agent. He paid for it with his credit card. When it was delivered at the hotel, both Dr Grocutt and Dr Khan had to sign the necessary documentation, no doubt because they were to be co-drivers. The documentation included an insurance document ("the policy") Dr Grocutt was concerned that this should be on comprehensive terms. Dr Khan reassured him that this was indeed the case. After the documents had been signed, Dr Khan retained the hirers' copies.
3. Unhappily, the expedition ended in disaster. At about 11.30 at night, when they were nearly back at their hotel and Dr Grocutt was at the wheel, they collided with a lorry. Their car was forced off the road down an embankment. Dr Grocutt was knocked out, but did not sustain serious injury. Dr Khan sustained cuts and bruises but, again, these injuries were relatively minor. Mrs Khan sustained more serious injuries including a fractured cheek bone and several fractured ribs. The fracture to the cheek bone required surgery and Mrs Khan was in hospital in Turkey for nearly two weeks.
4. The day after the accident Dr Grocutt and Dr Khan were interviewed at their hotel by the police. When the party had returned to England Dr Khan and his mother consulted solicitors. It seems that they were advised that a claim might lie against Dr Grocutt, but the decision was taken that the first in the firing line should be the Turkish lorry driver. Without informing Dr Grocutt of the possibility of a claim against him, Dr Khan persuaded Dr Grocutt to assist in bringing a claim against the Turkish lorry driver. To this end Dr Khan's solicitors obtained a statement about the accident from Dr Grocutt.
5. The claim against the Turkish lorry driver ran into difficulties. On 6 October 1997, three years less one day after the accident, Dr and Mrs Khan commenced proceedings in the Guildford County Court against Dr Grocutt. They alleged the accident had been caused by his negligent driving. Mrs Khan obtained legal aid to bring her claim. Dr Khan was funding his own claim. After a while he decided to discontinue this, leaving his mother as the sole claimant. Dr Grocutt, faced unexpectedly with this claim, wished to avail himself of the insurance cover that Dr Khan had procured on their joint behalf. His solicitors wrote to the solicitors, who were by now acting for Mrs Khan alone, requesting sight of the policy. Those solicitors wrote back saying that Dr Khan had carried out extensive searches but had failed to find the document. Attempts to obtain copies or information about the insurance cover in Turkey were unsuccessful.
6. In these circumstances, on 12 May 2000, Dr Grocutt issued a Part 20 claim against Dr Khan. The relevant part of the particulars of claim read as follows:

"2. By an oral agreement made between the Part 20 Claimant and the Part 20 Defendant, on or about the 6th day of October 1994, the Part 20 Claimant agreed to pay one half of the hire charges (including insurance covering, inter alia, Third Party personal injury claims) of a hire car for the 7th day of October 1994 in respect of which both the Part 20 Claimant and the Part 20 Defendant were to be named drivers.

3. In pursuance of the said agreement the Part 20 Claimant paid the Part 20 Defendant the sum which the Part 20 Defendant indicated was one half of the charges for the said car.

4. In purported pursuance of the said agreement, the Part 20 Defendant hired a car on the 7th day of October 1994.

5. On the 7th day of October 1994, whilst driving the said hire car, the Claimant was involved in a road traffic accident wherein the Claimant claims she sustained personal injuries.

6. The Part 20 Claimant ought to be indemnified in respect of the Claimant's claim, by the insurance company providing the cover, which the Part 20 Defendant purported to obtain for the said hire car.

7. It was an implied term of the said agreement that the Part 20 Defendant would preserve and make available to the Part 20 Claimant all documents relating to the insurance on the said car in the event that there was a claim arising out of the Part 20 Claimant's driving of the said car.

8. In breach of the said implied term, the Part 20 Defendant has failed to preserve and/or make available to the Part 20 Claimant the necessary documents for the Part 20 Claimant to claim an indemnity in respect of the Claimant's claim herein, from the insurance company with whom the Part 20 Defendant purported to obtain cover for the said vehicle."

7. Particulars of loss and damage alleged to flow from this breach were as follows:

"The claimant herein has made a claim against him in respect of which the Part 20 Claimant has been unable to notify, hand over to, and be indemnified by, an insurance company because the Part 20 Defendant has not supplied the details necessary to register a claim for indemnity. The Part 20 Claimant will suffer loss and damage to the extent, if any, that the Claimant is successful in her claim, and in respect of irrecoverable costs of the action brought by the Claimant who now has the benefit of a Legal Aid Certificate."

8. On 3 November 2000 in a witness statement in the Part 20 proceedings, Dr Khan for the first time stated that he had handed the insurance documents over to the Turkish police when they came to interview him and Dr Grocutt after the accident and had not thereafter recovered them. Unhappily, the Turkish police have a practice of destroying documents after they have held them for five years. Attempts to obtain the policy from the police were unsuccessful. They did not even disclose whether the police had been left in possession of the policy.

THE ISSUES AND THE JUDGE'S FINDINGS

9. At the trial, the judge absolved Dr Grocutt of all liability for the accident. This left Dr Grocutt facing the prospect of being unable to recover some or all his legal costs from Mrs Khan. It is in relation to these unrecovered costs that his Part 20 claim remains relevant. The issues with which we are concerned relate to the Part 20 claim.
10. In relation to the Part 20 claim, the judge identified four issues:

1. Did Dr Grocutt and Dr Khan intend to enter into legal relations so as to conclude a contract binding in law; if so

2. Was it an implied term of that contract that Dr Khan would preserve and make available to Dr Grocutt all documents relating to the insurance of the car in the event that a claim arose out of Dr Grocutt's driving of the car; if so

3. Was there a breach of that term; if so

4. Will the costs unrecovered by Dr Grocutt represent damage caused by that breach?

THE JUDGE'S FINDINGS

The first issue - was there a contract?

11. Dr Khan contended that the agreement to hire a car was a social arrangement which was not intended to give rise to legal relations. When giving evidence, Dr Grocutt conceded that had Dr Khan failed to hire a car he, Dr Grocutt, while upset, would have had no legal claim against Dr Khan. The judge found:

"I am satisfied, on the balance of probabilities, that Drs Khan and Grocutt did, in fact, intend to enter into legal relations and did, in fact, do so. It does not seem to me to matter that had Dr Khan simply failed to procure insurance or a car that Dr Grocutt accepted in those circumstances, whilst he might be upset, he would not have any claim against Dr Grocutt. The distinction is that having procured the car and insurance, and having entered into relations with third parties, it is clear, in my judgment, that they were intent upon entering into legal relations as between themselves."

The second issue - was there an implied term?

As to this, the judge found as follows:

"The Part 20 claimant argues for an implied term along the lines I have set out. The Part 20 defendant says that such a term is too broad and the obligation imposes too high a duty. At best the only duty that can arise is a duty to take reasonable care of the documents. As it seems to me, it is common ground that Dr Khan was to have custody, for want of a better word, of the documents and on the morning of the hiring he retained those documents. It is equally common ground that the intention was that both Dr Khan and Dr Grocutt would drive the car at some point during that day since otherwise there was no reason for them to sign the documents and for Dr Grocutt to be named as a second driver.

In those circumstances the parties must have known that had there been an accident documents would have to be produced. I conclude it must have been in the contemplation of Dr Khan and Dr Grocutt that in such circumstances if the accident happened when Dr Grocutt was driving, Dr Khan would be obliged to have preserved the documents and to produce them at Dr Grocutt's request. In my judgment, the implication of such a term is both necessary to give business efficacy to the agreement between the two doctors and represents the obvious, if unexpressed, intention of the parties."

The Third issue - was there a breach?

12. The judge made no express finding as to whether or not Dr Khan had recovered the policy from the Turkish police. Such findings as he did make left this question in doubt. The judge rejected Dr Khan's evidence that he had informed the solicitors that he had left the policy with the Turkish police. The judge found it impossible to reconcile this evidence with the letter written by those solicitors saying that he had carried out an intensive search for the documents. On the judge's analysis it did not matter whether or not Dr Khan had recovered the policy from the police. The judge held that the effect of the implied term had been that Dr Khan had to recover the policy from the police and produce it when requested by Dr Grocutt. That term had plainly been breached.

The fourth issue - will unrecovered costs constitute damage flowing from the breach?

13. The judge dealt with this shortly in the following passage:

"I accept the submission of counsel for Dr Grocutt that both parties were under the impression that the policy of insurance obtained was fully comprehensive. There is no evidence which as has been adduced to suggest that there were any restrictions on the policy whether in respect of the recovery of legal costs or otherwise and in the circumstances it seems to me I am entitled to infer that the policy means what it says and has the same meaning as it would under English law.

It follows that Dr Grocutt is entitled to indemnity which includes any costs not recoverable from the claimant as a result of the claimant's having the benefit of public funding."

THE RESPONDENT'S NOTICE

14. When considering the papers in advance of this appeal, it occurred to us that the facts found by the judge might engage the law of bailment. We invited counsel to give consideration to that question. This led Mr Taylor, on behalf of Dr Khan, to submit a helpful additional skeleton argument. It also led Mr Hall, on behalf of Mr Grocutt, to submit, with our permission, a respondent's notice. This complained that by failing to disclose that the policy was, or was alleged to be, in the possession of the Turkish police until July 2000, Dr Khan denied Dr Grocutt all possibility of retrieving the policy. The respondent's notice ends as follows:

"In the circumstances the appellant was a gratuitous bailee of the said documents and failed to take reasonable steps to enable possession of the said document to be transferred to the respondent. The appellant failed to take reasonable care of the said documents by failing to seek their return before their destruction when the documents had been requested from him by the respondent.

15. I shall deal with the issues in the same order as did the judge.

(2) Was there a contract?

16. The implication of contractual agreements out of everyday transactions is a somewhat artificial exercise. It does not occur to the average traveller who buys a ticket for a train or bus that he or she is entering into a binding contractual agreement. When Mrs Sayers put a penny in the slot it seems unlikely that she intended to conclude a binding contractual agreement with Harlow Urban District Council (see 1958 1 WLR 623). It is often equally unrealistic to ask the question, when two individuals concluded an agreement that has some social and some commercial elements, whether they intended their agreement to give rise to binding legal obligations. The answer will usually be that they did not give it a thought.
17. The test as to whether an agreement gives rise to a contract is an objective one. In all the circumstances, would the parties reasonably expect their agreement to create legal obligations? In rare cases the parties may expressly make their intention plain but, usually, it falls to be implied from the material facts.
18. The leading case on this topic is one where the parties did expressly agree that their agreement, which would otherwise have had the appearance of a binding contractual agreement, should not give rise to legal obligations. That case was Rose and Frank Co v J R Crompton and Bros Ltd and Others [1923] 2 KB 261. It is a leading case because of the statements of principle made by two eminent members of the court. Scrutton LJ, at page 288, said:

"Now it is quite possible for parties to come to an agreement by accepting a proposal with the result that the agreement concluded does not give rise to legal relations. The reason of this is that the parties do not intend that their agreement shall give rise to legal relations. This intention may be implied from the subject matter of the agreement, but it may also be expressed by the parties. In social and family relations such an intention is readily implied, while in business matters the opposite result would ordinarily follow."

Atkin LJ at page 293 added:

"To create a contract there must be a common intention of the parties to enter into legal obligations, mutually communicated expressly or impliedly. Such an intention ordinarily will be inferred when parties enter into an agreement which in other respects confirms to the rules of law as to the formation of contracts. It may be negatived impliedly by the nature of the agreed promise or promises, as in the case of offer and acceptance of hospitality, or of some agreements made in the course of family life between members of a family."

19. The implications of a contractual agreement is but one of the routes by which the development of our common law has resulted in the imposition of obligations on defendants where the reasonable person would expect such an obligation to arise.
20. Another route that can lead to the imposition of a duty is the application of the principles of the law of bailment. Where a bailment arises out of a social agreement, it may be both difficult and unnecessary to attempt to answer the question of whether the bailment is a gratuitous bailment or a contractual bailment. The duty on the bailee is likely to be the same.
21. With these observations I turn to the facts of this case.

Dr Grocutt's pleaded case was that the contract was concluded on 6 October, the day before the hiring of the car. That case is not made out, in my judgment. The agreement on the 6th was the paradigm example of a social agreement that no reasonable person would understand to give rise to legal obligations. Dr Grocutt's reaction that, if Dr Khan had reneged on the agreement no legal claim would lie, would have been the reaction of any reasonable person in his place. But the judge did not find that a binding contract was concluded on the 6th, he found that a contract was concluded consequent upon the conclusion, on 7 October, by the two doctors of what were plainly binding contracts with third parties (i) the hire contract; and (ii) the contract of insurance.

22. I consider that the judge's analysis was correct. Where an informal or social agreement is acted upon, it may well give rise to binding legal obligations founded upon the prior informal agreement. Thus, it seems to me, that once Dr Khan had paid for the hire car, Dr Grocutt came under a legal obligation to reimburse him 50 per cent of the payment. A reasonable person would so conclude and, if asked why, would be likely to say, "We agreed to go 50/50". A claim on that basis in the small claims court would not seem unreasonable.
23. Thus, at the very least, I consider that the hiring of the car, on 7 October, in the light of the previous informal agreement, gave rise to a contractual obligation on Dr Grocutt to pay his share. Perhaps the principles of the law of restitution might achieve the same result. That is not a matter that has been explored.

(2) How about the implied term in relation to the insurance documents? In my judgment, this is more readily analysed if the insurance of the car is considered as a separate transaction. When, pursuant to the informal agreement, the two doctors took out joint comprehensive insurance and Dr Khan paid for this, Dr Grocutt come under a contractual duty to pay his share for the reason already explained. So far as the policy is concerned, this was a valuable contractual document in which both doctors had an interest. In keeping that document, Dr Khan was I think a gratuitous bailee. I believe that this is the better solution than to postulate that he was a contractual bailee, although that is a possible analysis. On whichever basis he retained the policy, I consider that he was under a duty to take reasonable care of it and, subject to that duty, to produce it so as to enable Dr Grocutt to take the benefit of it if so required.

24. The industry of Mr Taylor disclosed one case of bailment of property jointly owned, that of Nyberg v Handelaar [1892] 2 QB 202. In that case the plaintiff, who was the owner of a gold enamel box, sold a half share to Mr Frankenheim. It was agreed between the plaintiff and Frankenheim that the plaintiff should retain possession of the box until it was sold. Later, the plaintiff entrusted the box to Frankenheim for the purpose of delivering it to Christie's auction rooms where it was to be sold. Frankenheim owed the defendant money, but delivered the box to the defendant by way of security for the debt. The plaintiff brought proceedings against the defendant to recover the box. Lopes LJ, at page 206, approached the problem in this way:

"What happened was that the plaintiff entrusted Frankenheim with the box to take it to Christie's, where it was to have been sold. This Frankenheim did not do, but handed the box to the defendant as security for a debt of his own. This transaction amounted to a bailment to Frankenheim for a special purpose, which he did not carry out, and on failure of the trust the plaintiff's right to immediate possession accrued at once."

25. As Mr Taylor conceded, it is possible to analyse the transaction between the two doctors as a bailment of the insurance documents to Dr Khan.
26. Mr Taylor submitted, however, that the facts of Nyberg v Handelaar were peculiar in that there was a bailment for a specifically agreed special purpose. In the present case, it seems to me that the object of the insurance was plainly to protect both Dr Grocutt and Dr Khan against possible claims and that, in as much as Dr Khan had custody of the documents arising out of the transaction, he had a duty both to take reasonable care of the policy and to produce it for the purpose for which it had been created. Mr Taylor posed the problem of what his duty would be if he, Dr Khan, himself had a need to use the policy. That is a question that does not arise on the facts of this case. Dr Khan had no personal reason which could have prevented him, had he been in a position to do so, from making the policy available to Dr Grocutt.
27. I find, therefore, that, as bailee, he had a duty to exercise reasonable care and to produce the document, subject to that duty, a lesser duty than the absolute duty pleaded on behalf of Dr Grocutt and found by the judge.

(3) Was there a breach of that duty?

28. I shall proceed on the assumption that Dr Khan did not recover the policy from the police. Did his duty, as bailee, extend to doing so, or was his duty at an end once he had handed it over to the police? The latter is the submission made by Mr Taylor. The standard of care, as I have found, that he, Dr Khan, as bailee had to exercise over the policy, was that of reasonable care. The standard of reasonable care must reflect the value of the property bailed. Once this accident had occurred with its unfortunate consequences, the policy was plainly of great potential value to both doctors. Dr Khan had custody of it. Handing it over to the police did not bring his duty of care to an end. Dr Grocutt assumed that he would recover it from the police. It seems to me that that assumption was a reasonable assumption. Dr Khan did not have an absolute duty to recover it from the police, but he did have a duty to take reasonable steps to recover it.
29. At its very lowest, I would accept Mr Hall's submission that this duty required Dr Khan to inform Dr Grocutt of the whereabouts of the policy when it was first claimed that Dr Grocutt required this, thereby facilitating its recovery. I would put his duty higher; a duty himself to take reasonable steps to recover that document from the police after the accident. On his own case Dr Khan took no such steps.

(4) Damages - Would the policy have protected Dr Grocutt from the liability to costs to which he is now exposed?

30. The judge proceeded on the basis that an English comprehensive policy would do so and that he was entitled, in the absence of evidence to the contrary, to assume that a Turkish comprehensive policy would achieve the same result.
31. Mr Taylor has challenged that finding. He has referred us to a passage in MacGillivray on Insurance Law (Ninth Edition) to which the judge was not referred, at paragraph 28-32 in a chapter dealing with liability insurance. It reads:

"The policy will usually make express provisions for the costs of defending a claim. Thus a column clause provides:

'In respect of a claim for damages to which the indemnity expressed in this policy applies the Company will also indemnify the insured against:

(a) all costs and expenses of litigation recovered by any claimant from the insured,

(b) all costs and expenses of litigation incurred with the written consent of the company'."

32. Such a clause, say the authors:

"...would certainly cover the third party's costs of a successful claim and the insured's costs if incurred with written consent. It would probably not apply to the insured's own costs of meeting an unsuccessful claim, since such a claim would not be a claim to which the indemnity expressed in this policy applies."

That passage was not dealing with a policy of motor insurance and the more recent of the two authorities referred to in support of the proposition, dates back to 1938. No evidence was put before the judge as to the normal terms of a policy of motor insurance, but I have no doubt he is well experienced with the consequences of running down claims in relation to liability for costs. As my Lord, Lord Justice Sedley, observed in the course of argument, the normal situation is that the insurance company takes over the conduct of the action under its rights of subrogation and thereby undertakes responsibility for the costs whatever the result of the action.

33. Once one reaches the conclusion that Dr Khan was responsible for the fact that the policy was no longer available, the onus must be on him to demonstrate that, had the policy been available, the consequences would not have been those which would normally have flowed from the benefit of comprehensive insurance in this country. He has not discharged that onus.
34. Accordingly, I would uphold the judge's conclusions, though not entirely his chain of reasoning, on all four issues and dismiss this appeal.
35. LORD JUSTICE SEDLEY: Although Mr Hall has pitched his case in law higher than I would have regarded as necessary, and although Mr Taylor's careful and cogent argument has deflated most of it, for the reasons given by my Lord, The Master of the Rolls, what remains is sufficient to fix Dr Khan with liability as, in my preferred view, bailee of the policy. I agree, therefore, that this appeal fails.

Order: Appeal dismissed. Appellant to pay 50 per cent of the Respondent's costs to be subject to detailed assessment.