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 CENTRAL LONDON COUNTY COURT
HIS HONOUR JUDGE COLLINS CBE

		Royal Courts of Justice Strand London, WC2
		3rd April 2006

1. LORD JUSTICE LLOYD: Morshead Mansions is a block of flats in Maida Vale. It comprises 104 flats. Morshead Mansions Limited, the respondent, owns the freehold, which it acquired in December 1992, and manages the block on behalf of the leaseholders. It has no other business and no assets other than those derived from that business. It seems that there are 100 issued shares in the company ("MML") because when it was set up, four leaseholders declined to take up the shares that would have otherwise been allocated to their flats. Otherwise, one share goes with each flat and its lease. Mactra Properties Limited, the appellant ("MPL"), owns 23 flats and used to own two more, and is the holder of 25 shares. The transfer of the two shares referable to the two flats with which it has parted has not yet been registered.
2. There have been many problems with the management of the block, and in relations between MML and (a) the leaseholders and (b) its shareholders. This has given rise to several sets of proceedings. At the summary judgment stage of this claim at first instance, it was called a bloodbath of litigation. In particular, in 1995 MML brought forfeiture proceedings against MPL in respect of each of its then 25 leases, on the grounds of failure to pay interim service charges. Already by then MPL was aggrieved at the manner in which the block was being managed and, until matters were resolved by agreement in 1999 in circumstances to which I shall come, it seems to have paid nothing towards ground rent or service charge after March 1994.
3. In late 1997 discussions took place with a view to the settlement of the forfeiture proceedings. Part of the context of those discussions was a report by Mr Michael Crowther, the then chairman of MML, to its members in advance of an Extraordinary General Meeting held on 12 September 1997 with a view to saving the company from problems resulting from the previous management of its affairs. As HHJ Collins CBE said in his judgment, from which this appeal is brought, at paragraph 4:

"Between September and December 1997 Mr David Wismayer acting for this purpose on behalf of the Claimants and Mr Brian O'Boyle, the alter ego of the Defendants, agreed settlement figures between themselves. For present purposes all that is relevant is that the Defendants' share of the disputed service charges in Appendix 1 (referred to as the Discretionary Allowance) was deducted from the gross figure the Defendants would otherwise have been expected to pay. This remained the position under the consent order. The informal agreement between Mr Wismayer and Mr O'Boyle did not mature into a final agreement. One reason is that the Defendants' solicitor had serious reservations about it."

4. Eventually, the forfeiture proceedings were disposed of by a consent order in Tomlin form on 20 July 1999. This appeal turns on the effect of that order and I will return to it. There had also been proceedings between the present parties concerning what was called the 1997 Recovery Fund, in which HHJ Rich QC held that MML was entitled under Article 16 of its Articles of Association to pass resolutions in general meetings obliging shareholders to make financial contributions to the company even if those contributions could not have been levied against leaseholders under the terms of the leases. Judgment to the same effect was given in some other proceedings by HHJ Cooke in June 2000. Article 16 is in the following terms:

"Expenses

The directors may establish and maintain capital reserves, management funds and any form of sinking fund in order to pay or contribute towards all fees, costs and other expenses incurred in the implementation of the Company's objects, may require the Members to contribute towards such reserves or funds at such time, in such amounts and in such manner as the Members shall approve by ordinary resolution passed in general meeting, and may invest and deal in and with such monies not immediately required in such manner as they shall from time to time determine."

5. Again I quote from the judgment of HHJ Collins, paragraph 7:

"The rationale is clear and discussed in the judgment of Judge Cooke. The Claimants have no assets but the reversions and the right to claim service charges and ground rents. To the extent that these assets are unrealisable or offset by unusual liabilities, e.g. as in the present case, the costs of litigation, the Claimants risk insolvency. But the tenants need a landlord to manage the building; the major works needed have been very substantial. Their options are limited. Baling the Claimants out to the extent of the funds required is the object of the series of recovery funds and was the option approved by the shareholders in each case. This device successfully bypassed the absence of liability to pay the sums qua tenants and has had the effect of putting the Claimants on a relatively sound basis, to the benefit of all tenants and shareholders."

6. By the present proceedings, MML sought payment from MPL of sums exceeding £550,000, pursuant to resolutions passed under Article 16, on 10 October 2000, 29 January 2003 and 30 October 2003, referred to as contributions to MML's recovery funds. The 2000 recovery fund was to be £740,000 odd. After certain adjustments, the sum claimed from MPL for this was £170,522.49. The 2002 recovery fund was to amount to £1 million, £250,000 being due from MPL. The 2003 recovery fund was to be £350,000 with £87,500 due from MPL subject to some small credits.
7. These proceedings were issued on 6 February 2004. MML applied for judgment under Part 24. It succeeded after a two day hearing, save to the extent of £179,870 in respect of which the issues were to proceed to trial. This is the issue that fell to be decided by HHJ Collins. It was argued on several bases. The judge decided it against MPL, and gave permission to appeal in respect of only one ground of defence. No application was made to the Court of Appeal to widen the scope of the appeal. Accordingly, the appeal is concerned only with a single point dealt with by the judge at paragraphs 19 to 20 of his judgment, namely whether the recovery of this amount is barred by the consent order of 20 July 1999.
8. For this purpose, it is necessary to consider the consent order and something of its background. Part of that background is the proceedings which were settled by the order. By these claims, MML claimed unpaid ground rent and service charge amounts, including payments on account and payments for major works and an excess service charge for one year. The defendant took issue as to whether the sums to which a contribution was claimed were fair and reasonable, and contended that some had been levied outwith the power of the company under its Articles so as to be ultra vires and not due. It also took points about lack of consultation under the Landlord and Tenant Act 1987. It counterclaimed on the basis that MML's predecessor in title, Firstborough Limited, had obtained payment from MPL's predecessor, Londonstates Limited, of contributions to major works which were not carried out or to which the monies paid were not applied, and claimed credit for those sums.
9. Those were among the issues arising at that stage, some of which feature in Mr Crowther's report of 1 September 1997. He described the position in relation to those proceedings and his proposals for an agreed settlement at pages 33 to 35 of his report. His report also discussed specifically the disputed service charge expenditure for 1994 to 1996, amounting to £748,259, which was described as the discretionary allowance. On page 7 of his report an approximate sum of £7,000 per leaseholder was described as "disputed service charge costs set aside pro tem". This was deducted from service charge otherwise due of approximately £20,000, but to the resulting £13,000 was added £5,000 towards a recovery fund, giving a cost of £18,000 per lessee less anything already paid by way of service charge since April 1994. In the text on page 7 of the report he also said this:

"All costs which are included in the service charge accounts but which have been disputed in the forfeiture proceedings with Mactra and the former Directors will be set aside so that pro tem, while they will remain due, they will not be demanded as payable. This policy will be applied to every leaseholder (with certain limited exceptions, three in number, which I shall explain later in this Report.) Subject to payment of their outstanding balances, after adjustment, every leaseholder will be in exactly the same position as any other. No leaseholder will be able to complain on any basis of their being treated unfairly either because they are being asked to pay for something that another leaseholder has been forgiven or because they are being asked to pay for something to which they object as being unreasonable.

As at today's date, the best estimate which I have available of the amounts in dispute are set out in Appendix I to this Report and total some £748,259. You will be advised of the amount which you may withhold from the total demanded by the company as service charges. In each case, this will be calculated by reference to the total in dispute and to your service charge percentage and should be about £7,000 for each leaseholder."

10. In the detailed calculations annexed to that report the typical amount in respect of the discretionary allowance was shown as £7,194.80. The amount of £179,870 for which MML's claim proceeded to trial was exactly 25 times this sum. The fundamental point in MPL's position is that this was its proportion of the amount misapplied by the previous management of MML, to which it refused to contribute and which was, under the label of discretionary allowance, excluded from the calculations at the time of the consent order. MPL therefore objects to being asked to pay the same sum under another guise.
11. In 1997, the position was that no attempt was made for the time being to claim any contribution to this disputed amount from any tenant. It seems from the judgment that an attempt was made to recover it as service charge in 2000. This was resisted and abandoned. The question is whether contributions to the same amount can be claimed from the defendant as shareholder under Article 16. If not, the result will be an unequal contribution as between the defendant and the other shareholders because the sum of, in effect, £750,000 has gone out of the company's funds and will need to be made good if the company is to remain financially sound. It is not an impossible conclusion that a different treatment was to be afforded to one shareholder from that applied to others under Article 16, but it has to be recognised that this is the consequence of MPL's contention. Article 16 does not, it seems to me, authorise the company to levy unequal amounts from its respective shareholders, and accordingly the position would have to be that the levy would have to be, as it were, grossed up to take account of the fact that MPL claims not to be liable to make any contribution. Accordingly, in effect, the other 75 shareholders would have to pay a third as much again as they otherwise would.
12. The consent order provided for the stay of all the forfeiture proceedings and the dismissal of MML's claim to forfeit all 25 leases, with no order as to costs. The substance of the matter is dealt with in the schedule. By paragraph 1 the continuing subsistence of the 25 leases was acknowledged. By paragraph 2 MML was to pay to MPL by 16 August 1999 £77,000 in respect of counterclaims and costs, with simple interest at 6% from 1 January 1999 to payment. We were told that that sum is calculated as £52,000 towards costs and £1,000 for each of the 25 leases. By paragraph 3 MPL was to pay to MML by the same date £781,521.88 "representing ground rent and service charge payable under the leases as set out in the annex hereto", and interest as specified in the paragraph.
13. Paragraph 4 is as follows:

"The payment referred to in paragraph 3(a) above shall neither preclude the rights under the leases of the Defendant to a credit in respect of interim charges overpaid in relation to any financial year nor the right of the Claimant to make a balancing service charge in respect of any such period but neither the Defendant nor any successor in title of the Defendant shall hereafter challenge, dispute or otherwise raise any objection with respect to any item referred to in the said annexe on the ground that such item may not have been demanded or credited either at all or validly under and in accordance with the terms of the leases or any of them PROVIDED THAT this paragraph shall not preclude the Defendant's right to dispute any such aforesaid item or head of expenditure (whether estimated or actually incurred) included therein on grounds of reasonableness".

14. Under paragraph 5, upon payment under paragraph 3 MPL was to become entitled to inspection of MML's accounts books and records relating to service charge, reserve fund, recovery fund and other accounts, subject to various terms and conditions. A second paragraph numbered 5 limited MML's right to disclose the terms of the consent order to its members and to its leaseholders. Paragraph 6 excluded any recovery by either party from the other of costs herein except insofar as MML's payment under paragraph 2 included a provision for costs. Paragraph 7, the last paragraph, is as follows:

"The terms hereof are to be in full and final satisfaction of the parties' respective claims herein".

15. The annexe, which is referred to in paragraph 3 and elsewhere, is headed, "Mactra Properties Limited/MML Service Charge and GR History 1993/1999". It shows in tabular form the history of the account between the two parties for ground rent and service charge from 1993 through to 1999, and in that way shows how the calculation of £781,000 odd is reached. It is the result of all the debit and credit entries in the seven year history subject to a number of adjustments. The major item of adjustment, and the one important on this appeal, is the deduction of the £179,870 discretionary allowance. There is no entry in the table for any recovery fund contribution.
16. In October 2000 an EGM was held at which a recovery fund for 2000 was resolved to be established, under Article 16, of £740,167 due from shareholders pro rata to their shareholdings by two instalments. The resolution was passed by 35 to 28 votes. The claim by MML is therefore that MPL is bound to contribute its proportion of the 2000 recovery fund under Article 16 by virtue of the resolution so passed. The relevant part of the defence and counterclaim refers to the 1995 proceedings and the consent order and the discretionary allowance as an element to the settlement, being:

"in respect of disputed or unlawful expenditure incurred by MML purportedly as service charges since 1994."

It is alleged to have been exclusive to MPL. Then it is said that MPL was given a credit in that sum against service charges for 1993 to 1999, and that accordingly if any part of the 2000 recovery fund is to make good shortfalls in the service charges for that period, it should be disallowed as against MPL. In the reply and defence to counterclaim, MML dealt with these contentions. It was accepted that there had been a potential dispute as to the reasonableness of incurring the £748,000 odd which had been incurred between 1994 and 1997, and that in September 1997 MML had forborne from claiming a service charge contribution towards that expenditure. It was said that by the consent order MPL was put in the same position as other leaseholders in this respect, paragraph 4 of the schedule being relied on as preserving both MPL's liability and its right to dispute the reasonableness of the expenditure. Thus, this was said not to be exclusive to the defendant. It was denied that the claimant was given a credit against this sum. The claim was under Article 16 so as to enable MML to make good a shortfall arising from its inability to recover expenditure by way of service charge.

17. The case came to trial before HHJ Collins. He had before him very substantial documentary evidence, and oral evidence from David Wismayer on behalf of MML and Mr Brian O'Boyle for MPL. He referred to the witnesses in paragraph 10 in terms which I need not quote, and also to the attitude of the parties' solicitors and their conduct of the dispute. At paragraph 14 he started to consider the scope of the words, "all claims herein". He said in that paragraph:

"But the consent order was clearly designed, as all agree, to settle the service charge position to date, so far as could be done, and also gave an allowance to the Defendants of £1,000 per flat as damages, even though no damages had been claimed".

18. At paragraph 15 he referred to the well-known principles of construction of an agreement such as this, and to the evidence, in general terms, that he had heard and read of the parties' intentions during the negotiations and their beliefs as to the meaning and effect of the consent order, which he said that he would disregard save in so far as there was material which assisted in identifying the subject matter of the agreement.
19. At paragraph 16, he said this:

"For the purposes of the present case it is sufficient to state the conclusion in the light of all the relevant material and not effectively in dispute between the parties, that the purpose of the consent order was to settle the state of account between the parties as landlord and tenant up until the date of the order, making an allowance of 'damages' to the Defendants as a recognition of the injustice to them in bringing the forfeiture proceedings in the first place which had been publicly acknowledged by Mr Crowther in the 1997 report and lifting what was by then the empty threat of forfeiture".

20. At paragraph 17, he noted that the preservation of the parties' positions with regard to the service charge years which were not yet final, namely 1998 and 1999, pointed away from other points being left open by the terms of the compromise.
21. In paragraph 18, he held that MML was wrong in its contention that the consent order did not extinguish any possible claim against MPL as lessee by way of service charge to contribute to the amount of the discretionary allowance. That is not challenged. Moreover, it seems to be accepted that no such claim could succeed against any other lessee either. The judge said that MPL was not treated alike with other tenants because it had been unfairly treated at the earlier stage, and that gave rise to the payment of damages which was due to the defendant.
22. Then he said this:

"On an objective reading, the consent order was intended to deal conclusively with whatever could be dealt with conclusively in the areas which it covered. It would have limited point otherwise. In my judgment clause 7 must be read, in this context, as an unequivocal extinction of the outstanding claim to the [Discretionary Allowance], which by that date was enfeebled almost to the point of extinction in any event".

23. Then he came to the one question which is now live, namely whether the consent order also precluded a future claim against MPL to recover an equivalent contribution under Article 16. Mr Higginson relies on the judge's finding that the outstanding claim to the discretionary allowance was unequivocally extinguished, and that the state of the account was to be settled finally, subject only to the express reservation as regards outstanding service charge issues for 1998 and 1999. He submits that there is no real distinction between the relationship between MML and MPL as landlord and tenant on the one hand, and that between them as company and shareholder on the other. The consent order, he submitted, sought to draw a line under the account between the two parties on all scores as at 1999, and it could not be right, absent an express reservation, to construe it as permitting MML to turn round the next year and seek to recover the written off discretionary allowance from MPL under Article 16.
24. Further, he submitted that the annexe to the consent order showed that the aim of the transaction was to bring into account and settle once and for all, so far as possible, all items of liability between the parties. He pointed to the text relating to the discretionary allowances referring only to the figures annexed to Mr Crowther's report, not to the text. He contended that the order did put MPL in a different and better position as compared with other leaseholders and shareholders, in that the discretionary allowance was written off finally as against MPL and would have to be recovered, if it could be, from the holders of the other 75 shares if it could not be recovered as service charge. This, he said, was justified because MPL had been picked on unjustly in the previous litigation.
25. I cannot accept Mr Higginson's submission that there is no difference between the relationship of landlord and tenant and that of company and shareholder. Clearly there is an overlap in relation to a single purpose management company, but there is a real difference which is illustrated by Article 16 itself, introduced in 1994 at the first stage of troubles in the management. Correspondingly, I do not accept that the consent order, and in particular the annexe, deal with both aspects of the relationship. In my judgment the judge was right, at paragraph 16, to speak of the consent order as settling the account between the parties as landlord and tenant. There is no mention in the consent order, expressly or by implication, of any sums payable or already paid under Article 16 except for the reference in the first of the two paragraphs numbered 5 to the right to inspect the material relating to the recovery fund. Already one recovery fund had been established for 1997, and reference was made in Mr Crowther's report to the need and to the figures that would be necessary in respect of the recovery fund. MML's right to establish such a fund and to make calls on shareholders had been upheld by HHJ Rich in 1998.
26. The idea and possibility of recovery under Article 16 was not foreign to the parties. On the face of the schedule and the annexe, recovery funds were not being dealt with. The proceedings were between landlord and tenant, not between company and member. It would not have been strange if any negotiated settlement had covered matters relevant to both relationships. Expressly, however, this did not, with the sole and very limited exception of the right of access to records and so on in relation to recovery funds in the first paragraph 5. If as a matter of construction the consent order barred any claim by MML against MPL to contribute an equivalent of the £179,780 under Article 16, it can only be as a result of paragraph 7, which is that part of the schedule which does bar claims except as preserved by or arising under the consent order itself.
27. What, then, is the meaning and extent of "the parties' respective claims herein"? At first sight, that refers to the claims each way in the proceedings that were being compromised. Those were strictly claims under the leases and do not have anything to do with Article 16. Nor, of course, had the claim which is now made yet arisen. As HHJ Collins said at paragraph 14, the consent order appears to have been designed to settle liabilities in respect of some other matters than those expressly raised in the proceedings, in particular by bringing up to date the liabilities in respect of ground rent and service charge, subject always to the effect of paragraphs 4 and 5, and the unformulated claim by MPL for compensation by way of damages. I agree with the judge in his holding that, subject to the limited preservation of the position by paragraphs 4 and 5, the consent order was intended to be, and was, binding as to the parties' rights and obligations, not only in relation to the claims advanced in the 1995 proceedings, but also as regards all other matters dealt with in the annexe. That is the basis for his decision, which was not challenged, that MML had not managed to keep open its ability to claim anything towards the discretionary allowance by way of service charge.
28. However, it is a different matter to say that the agreement excluded the possibility of a future claim under a resolution yet to be passed under Article 16, even if that were designed to make good to MML the shortfall between its assets and its expenditure represented by its having spent the sums to which the discretionary allowance related, but being unable to recover that expenditure by way of service charge. Mr Higginson submitted that paragraph 7 of the schedule put the sum of £179,870 out of account altogether between these parties, in whatever way it might be claimed.
29. Mr Crawford submits that this is an impossible construction of paragraph 7 and that that paragraph cannot be construed as barring "any claims of whatsoever nature by either of the parties against the other, whether now in existence or arising in the future, save as expressly preserved in or arising under the order", which he says would have been a formula that might have covered the point. Indeed, Mr Higginson does not go quite as far as that. Mr Crawford says that Mr Higginson's point could only be achieved by specific wording referring to the £179,870 and the disputed sums in respect of which it arose, a wording such as to the following effect, "by virtue of the agreement MML shall not be entitled to claim any contribution from MPL towards the disputed sums by way of service charge, or in any other way, directly or indirectly whatsoever".
30. Reference was made in counsel's skeleton arguments to a number of decided cases concerning the construction of compromise agreements. The most useful, even though it is not directly in point, is one of the very many cases of litigation arising from the collapse of the Bank of Credit & Commerce International, BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251. This was concerned with settlement agreements entered into before the collapse of the bank between redundant employees and the bank in 1990 "in full and final settlement of all or any claims of whatsoever nature that exist or may exist against the bank". Upon the failure of the bank in 1991 and its exposure as a fraudulent business, some employees claimed damages against the bank for breach of an implied duty to them, broken by the carrying on of a dishonest and corrupt business giving rise to a stigma against ex-employees damaging them by association in the employment market.
31. The legal viability of such a claim was first established in the House of Lords in Mahmud v BCCI [1998] AC 20. Then the question arose whether such a claim was excluded by the settlement agreement. The House of Lords, Lord Hoffman dissenting, held that it was not, despite the words used. A critical factor in the decision was that the employee would have known nothing of the facts giving rise to the claim at the time of the settlement and that neither party would have contemplated that such a claim was legally viable, because it was not until the earlier decision of the House of Lords in 1998 that it was legally viable. Here, by contrast, the possibility of a future claim under Article 16 was known to the parties from the fact of the 1997 recovery fund being established and the proceedings which settled that it was a valid process. There is even, as I say, the passing reference to a recovery fund in paragraph 5 of the schedule. The words of release in the present case are much less clear and comprehensive than the very full and extensive words used by BCCI in relation to its redundant employees. No attempt has been made in the present case to provide any particularly extended ambit for the release. To refer to "claims herein" is not a very satisfactory technique, as HHJ Collins said, but at least it seems to indicate that the matters released are matters within the parameters of the document itself.
32. The House of Lords in BCCI v Ali addressed the question of the general approach of the court to the construction of agreements by way of compromise, which they considered in relation of course to the particular and very broad words used in that case, and to the highly unusual fact that the claim which the bank sought to say was compromised was a claim which, as I say, neither party would have recognised to have existed at the time of the agreement. The majority in the House of Lords pointed out that despite the generality of the words used in that case, they could not be taken as being altogether all embracing. For example, although they were apparently general, the bank accepted that they did not extend to rights or liabilities in respect of any bank account that the ex-employee had with the bank. So even those comprehensive words were held not to be as absolute and general as they appeared to be, and that enabled the court to hold that the words of release did not extend to a future claim in respect of a liability based on facts of which the employee was wholly unaware and legal propositions of which both parties were unaware.
33. As Mr Higginson submits, there is a practical distinction between that case and the present one in that, whether or not they consciously did, the parties could have had in mind the Article 16 procedure and the possibility of future recovery funds being established. Nevertheless, it seems to me that, without citing from any of the speeches, there is assistance to be got, particularly from Lord Bingham and Lord Nicholls, in that case. Coming back to the present case, the limits of the transaction which the consent order represents appear from the terms of the pleadings, the terms of the schedule, and the terms of the annexe. Nothing in any of that suggests that the parties were addressing liabilities of the past, still less the future, under Article 16 or that they were concerned with rights and obligations between the parties outside their relationship as landlord and tenant, with the sole exception of the mention of recovery funds as regards documents in paragraph 5 of the schedule. Mr Higginson submitted that it would have been for MML to put into the annexe or the schedule a note or reservation if it wished to keep open the possibility of claiming a contribution to the discretionary allowance in the future under Article 16.
34. Mr Crawford, to the contrary, submitted that this was simply a question of construction of the document on normal principles. It may be that the parties did not address consciously the question of Article 16, but the possibility of using that method of raising funds to cover expenses was known to the parties. In my judgment Mr Crawford is right on this. There was no special burden on MML in this respect, and the question depends on ordinary processes of construction of the consent order as a contract between the parties. For the reasons that I have stated, it seems to me not possible to construe the order, and in particular paragraph 7, as extending to the exclusion of a claim under Article 16 following a resolution not yet proposed or passed. Despite Mr Higginson's clear and able submissions, it seems to me that in essence the judge was right on this for the reasons that he gave in paragraphs 19 and 20 of his judgment. I would accordingly dismiss this appeal.
35. LORD JUSTICE WARD: I agree.
36. LORD JUSTICE LATHAM: I also agree.

Order: Appeal dismissed.