COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM Queen's Bench Division
Christopher Clarke J
2005 Folio 370
Strand, London, WC2A 2LL
B e f o r e :
Vice-President of the Court of Appeal, Civil Division
LORD JUSTICE SEDLEY
LORD JUSTICE CARNWATH
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Romie Tager QC and Juliette Levy (instructed by Shammah Nicholls, Solicitors) for the Respondent
Hearing dates : 27th/28th February 1997
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Lord Justice Waller:
"Whatever the status of the inheritance disputes identified within paragraph 4 of the Particulars of Claim they fall to be considered exclusively within the sole jurisdiction of the Probate Registry of the High Court of Justice. Without prejudice to the several matters hereinafter pleaded these Defendants contend that this Claim is not sustainable and is contrary to public policy and in effect seeks to oust the jurisdiction of the High Court to determine the rights of the beneficiaries to the Estate of the Deceased and Frieda Halpern."
(i) (A point which no longer needs to concern us) the defence denied that the compromise had been turned into a final award.
(ii) The executor defendants denied that neither Mordecai nor any of them had any authority to act for Aaron or Esther.
(iii) The defence pleaded that it was too uncertain to be enforceable.
(iv) It pleaded that Mordecai (who signed for all) had entered into it under duress. The nature of the duress pleaded was an insistence by Rabbi Schmerler (one of the Rabbis presiding over the Zurich Beth Din) in the presence of Samuel, that each of the defendants would, if the arbitration continued, be forced to swear a Chiyuv Shavah (a ritual oath) or each pay a penalty of £250,000. The oath is asserted by the defendants to be one known to the Rabbi as one which would not be sworn by an observant Jew.
(v) It pleaded the compromise was entered into under a mistake in that Mordecai thought the Rabbi had the power to demand the oath, whereas Mordecai had discovered since that the circumstances under which the Rabbi was suggesting he was acting, i.e. on the basis of rumour and suspicion, did not under Jewish Law empower the Rabbi to extract the oath.
(vi) It pleaded that the compromise was illegal and, contrary to public policy, not on the grounds previously suggested in this judgment but on the grounds that the compromise was "not intended to create rights in personam but rather was intended to divide up the interests of the Estate of the deceased", and was contrary to public policy because it interfered with the rights of the 4th and 5th defendants, it interfered with the rights of Eldermount Limited a "non-party" and of which other members of the family not parties to the litigation were shareholders, and because the dispute resolution was unfair, arbitrary, and irregular so as to offend natural justice.
(vii) The defence then contained the heading "Application of Jewish law". It referred to the submissions to arbitration and pleaded that Jewish law (Halakha) was intended to be the lex causa as well as the lex curia and would regulate procedure. It then pleaded in paragraph 30 as follows:-"Accordingly in addition to the matters identified herein which offend ordinary principles of fairness and natural justice it is further alleged that the Compromise Agreement is ineffectual by reference to Halakha. These Defendants intend to seek permission from the Court to rely upon expert evidence and to serve further particulars of the breaches of Halakha that are relevant to the issues in this claim."
(viii) There then followed a plea which before Christopher Clarke J gave rise to an issue as to "frustration"; the allegation in the defence was that the daughter Esther, on hearing of the compromise, took proceedings before a Beth Din in New York and obtained an award of the whole Estate. Although not pleaded, a statement was put in before the judge from Esther asserting that Esther also obtained injunctions against the executors which were said to prevent them complying with the compromise, and this formed part of the written submissions before the judge (see para 33 page 544). Under Jewish law daughters do not inherit but a parent may execute a form of promise, enforceable against the parent one hour prior to death in a sum in excess of the value of the estate (in this case the promise by Joseph was £10 million and the promise by Frieda was of a further £10 million). The promise is intended to enable the daughter to claim her share or, in default, may enable her to claim the whole estate. Esther in this case demanded her share from the executors, but claimed that since her share had not been granted to her the whole estate should be hers. The claimants allege that these claims by Esther were made pursuant to a collusive arrangement with the executor brothers, but as the judge stated "There is no evidence …to support that suspicion."(see para 13)
(ix) The next plea related to clause 4 of the compromise which required the handing over or the destruction of the documents as a condition precedent. The pleading asserted no document had been handed over and put the claimants to proof that the condition precedent had been performed. Before the judge it seems Mr David Berkley QC developed an argument that on the true construction of Clause 4 the documents (if they were to be destroyed as opposed to handed over) had to have been destroyed before entry into the compromise, and that once the compromise had been entered into the obligation was to hand over the same - destruction was not an option. (See paragraph 108 of the judgment).
(x) The final plea was that by virtue of accepting the repudiation of the compromise, the claimant had discharged all parties and thus it was asserted "each would be free . . . to seek determination of the inheritance disputes by litigation and, in particular, recourse to the High Court."
(i) that duress gave rise to an arguable point: the question whether restitution in integrum was necessary also gave rise to an arguable point and the question whether there had been affirmation was also arguable;
(ii) he did not regard Mr Berkley's construction of clause 4 of the compromise requiring documents undestroyed as at the date of the compromise to be handed over undestroyed as realistic. In the judgment that led him to say the defendants had no realistic prospect of establishing non-compliance with the condition precedent, but it seems when judgment was handed down the judge accepted the question whether there had been compliance with clause 4, as construed by him, must still be a matter for trial.
(iii) He then dealt with mistake. By this stage in addition to a mistake as to the Rabbi's power to demand a shavuah, (mistake (a)), a further alleged mistake was being relied on in argument by Mr Berkley for the executor brothers, i.e. a mistake in thinking that the Estate was not in Jewish law indebted to Esther in a sum which would exhaust it (mistake (b)).The judge dealt with the alleged mistake in these terms :-"110. Mistake (a) is not said in the defence to have been common. Mistake (b) is not pleaded. In any event I find it impossible to accept that it was a fundamental assumption of the claimants in entering into the compromise agreement that either of the facts said to have been mistakenly believed were correct. The claimants' interest was to secure payment of an acceptable sum of money and to put an end to the inheritance dispute. It was not fundamental to their reaching an agreement whether or not Rabbi Schmerler was entitled to require an oath and whether Esther's clam was good or not."111. Further, as to mistake (b), the three brothers knew that Esther had made a claim which, if valid, would, if Esther's evidence (which they do not confirm) as to the value of the estate is right, probably absorb all or most of the estate. Mordechai's statement complains that Rabbi Schmerler ignored Esther's request but is silent as to what assumption he made as to its validity. In any event the compromise agreement was expressed to be entered into by Mordechai on behalf of his brothers (other than Israel) and Esther. In those circumstances, even if the claimants were aware of Esther's claim, a subject on which the pleadings and the evidence are silent, far from there being a common mistaken assumption that Esther had no valid claim, the agreement itself purported to bind Esther and her siblings to transfer assets to Samuel and thus to forego any inconsistent claim that she might have. If there was any mistake on the claimants part it was their mistaken belief (if mistaken it was) that Mordechai had the authority that he claimed. But that is not something that Mordechai can rely on, nor David and Jacob if the compromise agreement was signed by Mordechai with their authority. Further it is impossible to suppose that it was, so far as the claimants were concerned, fundamental to the agreement that Esther had, as a matter of Jewish law, no valid claim. What they sought was a settlement of the inheritance claim which would render moot, so far as Israel was concerned, any further question as to which siblings were entitled to what.Unilateral mistake112. So far as unilateral mistake is concerned, the mistake pleaded – mistake (a) - is a mistake on the part of Mordechai as to Rabbi Schmerler's power to require an oath. It is not pleaded that the claimants knew or contributed to that mistake. But Mr Berkley submitted that Moredchai's mistaken belief was induced by Samuel's representations to Rabbi Schmerler. That may amount to duress; but it is not a ground for avoiding the contract on the ground of mistake. It is not suggested that there was any mistake as to the terms of the compromise agreement and a unilateral mistake "will only operate where the mistake or misunderstanding is about the terms of the contract": Chitty 5 -005; 5-065.113. As to mistake (b), it is not suggested that Samuel knew that Mordechai mistakenly believed that Esther had no claim that would exhaust the estate and mean that the claimants could not be paid. This is not surprising since Mordechai was purporting to bind his sister to a compromise agreement which would ensure that they would be. In any event any such mistake would not be as to the terms of the agreement."
(iv) He then dealt with frustration in these terms:-"120. It was further submitted (but not pleaded) that, if the agreement was not void or voidable for mistake, it was frustrated in that, by virtue of the supervening decision of the Belski Beth Din that Esther was entitled to £ 20,000,000, as a result of which the performance of the compromise agreement became something radically different from that which the parties had contemplated. As Mr Tager pointed out there is some difficulty in treating that decision as a supervening event given that it was delivered in January 2004 and performance of the obligation to transfer the assets was to be done as soon as possible after the compromise agreement with an estimate of six months. But in any event the argument must founder on the fact that the compromise agreement purported to bind Esther, and, thus, to address the question of her entitlement to be paid from the estate in preference to the claimants. The agreement thus catered for the contingency (that Esther might have had a claim which would preclude that of Israel) which is now said to constitute the frustrating event."
(v) As regards the plea of uncertainty he dealt with the points raised by the defendants and concluded that any argument as to uncertainty to render the whole contract unenforceable would fail.
(vi) Finally he dealt with personal liability. He rejected the argument that the three brothers as executors were simply intended to be liable to account for that part of the estate which remained after satisfaction of Esther's claim. He pointed out how the claim in the arbitration had covered assets transferred to the three brothers during Joseph's and Frieda's lifetimes. It was, as the judge put it, not surprising that the obligations were expressed in language which apparently imposed personal obligations on the defendants. What the judge did not however deal with was the point as to whether the obligation was joint and several as between the defendants.
Applicable law of the compromise
What have the parties agreed expressly or by implication as to the applicable law to govern their contract?
"General principles of law, Stabilisation clauses. Article 1(1) of the Rome Convention makes it clear that the reference to the parties' choice of "the law" to govern a contract is a reference to the law of a country. It does not sanction the choice or application of a non-national system of law, such as the lex mercatoria or general principles of law. It is true that in international arbitrations, where a government is a party to a contract, the parties may choose as the governing law the "general principles of law", or even public international law. Prior to the 1990 Act it had been said in England that "contracts are incapable of existing in a legal vacuum. They are mere pieces of paper devoid of all legal effect unless they were made by reference to some system of private law which defines the obligations assumed by the parties to the contract by their use of particular forms of words . . ." [See Lord Diplock in Amin Rasheed Shipping Corp v Kuwait Insurance Co  AC 50 at 65] It is suggested that a choice of lex mercatoria or general principles of law is not an express choice of law under the Rome Convention. So also in Shamil Bank of Bahrain EC v Beximico Pharmaceuticals Ltd the Court of Appeal held that a choice of the principles of Sharia law was not a choice of law of a country for the purposes of the Rome Convention."
"A contract shall be governed by the law chosen by the parties. The choice must be express or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract."
"1. To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a severable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.
2. Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is not closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporated, its central administration. However, if the contract is entered into in the course of that party's trade or profession, that country shall be the country in which the principal place of business is situation or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.
. . .
5. Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3 and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country"
Has Jewish law any relevance?
"49. Mr Hacker thus opts for a construction that the wording is apt, and intended, to incorporate into English law for the purposes of its application to the contract, the "principles of … Sharia". In this respect, and no doubt to avoid the difficulty that the principles of Sharia, generally stated, are of broad nature and application (indeed they are unexplored for the purposes of this litigation), Mr Hacker argues that the clause should be read as incorporating simply those specific rules of Sharia which relate to interest and to the nature of Morabaha and Ijarah contracts, thus qualifying the choice of English law as the governing law only to that extent.
50. In that respect, he seeks to rely upon the passage in Dicey & Morris (supra) at paragraph 32-086, which expounds the distinction between reference to a foreign law as a choice of law to govern the contract (or part of a contract) on the one hand and incorporation of some provisions of a foreign law as a term or terms of the contract in question. While observing that it is sometimes difficult to draw the distinction in practice, it is there stated that:
" … it is open to the parties to an English contract to agree e.g. that the liability of an agent to his principal shall be determined in accordance with the relevant articles of the French Civil Code. In such a case the foreign law becomes a source of law upon which the governing law may draw. The effect is not to make French law the governing law of the contract but rather to incorporate the French articles as contractual terms into an English contract. This is a convenient 'shorthand' alternative to setting out the French articles verbatim. The court will then have to construe the English contract, 'reading into it as if they were written into it the words' of the French statute.
32-087 It often happens that statutes governing the liability of a sea carrier, such as the former Harter Act in the United States, or statutes implementing the Hague Rules … are thus 'incorporated' in a contract governed by a law other than that of which the statute forms part. The statute then operates not as a statute but as a set of contractual terms agreed upon between the parties. The parties may make an express choice of one law (e.g. English law) and then incorporate the terms of a foreign statute. In such a case the incorporation of the foreign statute would only have effect as a matter of contract."
51. It does not seem to me that the passage cited or the authorities referred to in the notes thereto, assist the defendants. The doctrine of incorporation can only sensibly operate where the parties have by the terms of their contract sufficiently identified specific 'black letter' provisions of a foreign law or an international code or set of rules apt to be incorporated as terms of the relevant contract such as a particular article or articles of the French Civil Code or the Hague Rules. By that method, English law is applied as the governing law to a contract into which the foreign rules have been incorporated. In such a case, in construing and applying those rules, where there is ambiguity or doubt as to their ambit or effect, it may be appropriate for the court to have regard to evidence from experts in foreign law as to the way in which the provisions identified have been interpreted and applied in their 'home' jurisdiction. However, that is still only as an end to interpretation by the English court in the course of applying English law and rules of construction to the contract with which it is concerned. . . . "
"It seems to me, in the light of Shamil, that if Jewish law is not available as the applicable law under the Rome Convention, there is no realistic prospect of successfully contending that the parties impliedly incorporated halachah (or such of it as relates to contracts) as a term or terms of the compromise agreement. No terms have been identified, let alone pleaded, as the corpus of terms apt to be implied. Further the effect of the supposed implication would be to substitute halachah law for Swiss or English law. This would be inconsistent with either of those laws being the applicable law. Those laws would only be a shell in which to incorporate a different non national law."
Clause 4 of the Compromise Agreement
"The Defendants contend that Mordecai entered into the Compromise Agreement in the belief that Rabbi Schmerler was empowered to administer a Shavuah obligation. That state of mind was arguably induced by the Second Claimant's representations to Rabbi Schmerler and led to a genuine but mistaken belief on Mordecai's part that because of the doctrine of Raglayim LeDavar, Rabbi Schmerler was in a position to demand that each of the five siblings perform a Shavuah ceremony or be charged a forfeit in default."
"There was raised a further defence of mistake which followed from the evidence provided by Esther. The effect of the Shtar Chazi Zachor and the decision of the Rabbi Belsky Beth Din were to the effect that the Estate was indebted to Esther and was in fact insolvent at the date of the Compromise Agreement. The effect of the Shtar Chazi Zachor was not known (at least by the Defendants) and meant that in reality there was nothing of value to form the subject matter of the Compromise Agreement. The situation is analogous to the perishing of the asset before the date of contract."
Lord Justice Sedley: I agree with both judgments.
Lord Justice Carnwath:
"The act of destruction of the documents is one which has benefited the defendants and prejudiced the claimants. It can neither be undone nor reversed. Nor can any pecuniary relief put the claimants in as good a position as they would have been in if the agreement could have been rescinded and matters restored to the position in which they were before the agreement was made… Accordingly restitutio in integrum would not appear to be possible. It is not however clear that an inability to make restitutio in integrum is a bar to avoidance of a contract on the ground of duress. Avoidance of a contract for duress (as opposed to rescission for undue influence) is a common law remedy. In essence the illegitimate pressure imposed on the victim renders his apparent consent revocable: Anson's Law of Contract, 274. If, after the illegitimate pressure has ceased to operate, the victim treats the contract as valid, he can no longer revoke it. Equity, as a condition of granting rescission where there has been undue influence would require restitutio, at least in substance. It does not however necessarily follow that, if the victim of duress has not affirmed the contract, he loses his right of revocation if he cannot restore the other party to substantially the same position. At any rate I decline on an application for summary judgment to rule that that is so."
"whether a party can avoid a contract procured by duress in circumstances where he cannot offer the other party substantial restitutio in integrum."
That question was answered by the deputy judge in the negative, and his order contains a determination to that effect.
"… a Court of Equity could not give damages, and, unless it can rescind the contract, can give no relief. And, on the other hand, it can take accounts of profits, and make allowance for deterioration. And I think the practice has always been for a Court of Equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract." (emphasis added)
In more modern times, the same approach was adopted and applied by this court in O'Sullivan v Management Agency and Music Limited  1 QB 428 (see p 458 per Dunn LJ).
"Most importantly, it appears that the bar that restitutio in integrum is impossible generally does not apply to rescission for duress. The explanation for that is that it would generally contradict the basis for the claimant's restitution to recognise a counter-claim by the defendant: if it was illegitimate for the defendant to demand a sum of money for a particular consideration, for example, carrying out work, it would be inconsistent then to award the defendant counter-restitution for that work."
"… there is an obvious analogy between setting aside a disposition for duress or undue influence and setting it aside for fraud. In each case -and to quote the words of Holmes J. in Fairbanks v Snow (1887) 13 NE 596, 598 – 'the party has been subjected to an improper motive for action.'"
He also referred to a passage in Duress, Undue Influence and Unconscionable Dealing by Professor Enonchong (2006) at para.28-012:
"The issue of restitutio in integrum has not presented itself in cases of rescission for common law duress. This is probably because in most cases of duress the complainant has simply paid money or agreed to pay money without receiving any benefit that he needs to return upon rescission. Since in such cases the question is only about the repayment of the money by the defendant, there is no issue in restitutio in integrum. The lack of discussion on this issue in case of rescission for duress should not be taken to mean that restitutio in integrum is not a requirement for rescission on the grounds of duress. If A is induced by B's duress to enter into a contract to buy B's car, it is unlikely that the court will allow rescission of the contract so that A can recover the price paid to B without insisting that A should return B's car. It would not be inconsistent with the basis of A's restitution for the court to insist on counter-restitution by A. In any event, restitutio in integrum is clearly a requirement in the case of rescission for other common law vitiating factors such as fraudulent misrepresentation."
"Whereas fraudulent misrepresentation or indeed any misrepresentation is reliant upon a wrong that is extrinsic to the contract itself, as it merely induces a contract, duress by contrast is directly and intimately bound up with the contract formation, that is to say, the improper conduct operates at the point of entry into the contract itself. Effectively the victim's autonomy is threatened. Since mutuality is at the heart of contract an avoided contract cannot be enforced in either direction and no benefits including counter restitution can be sought. Effectively, once the contract is avoided for duress and the victim as an act of self-help takes back that which he parted with and/or is relieved from unperformed obligations, the loss lies where it falls in a manner analogous to illegality."
"…, the modern statement of the law is that, impossibility of restitutio in integrum is no longer a bar to relief when a claimant seeks to avoid/rescind a contract on the grounds of duress or under influence. Instead the Court's approach is to do practical justice between the parties by making orders for counter restitution, even if they cannot restore them to the precise position they were in prior to the contract being rescinded…
The correct approach is that counter-restitution is never in fact impossible: it should always be possible for the party seeking to rescind to pay a Defendant a sum of money to reflect counter-restitution of the value of benefits received by him. There can be no rational reason in a system of fused administration of law and equity why the liberal approach taken in equity cannot also be taken at common law…"
Just as in Erlanger v New Sombrero Phosphate Co the value of depreciation of a phosphate mine could be measured in order to make counter-restitution in equity, so, it is argued, the court can in the present case put an appropriate monetary value on the loss of the documents, even if this is represented by a reduction in the claimant's prospects of success in the arbitration (cf Kitchen v Royal Air Force Association  1 WLR 563).
"Despite this criticism, the decision in O'Sullivan is highly significant for one can strongly argue that, by its willingness to award complex mutual restitution, the Court of Appeal has effectively emptied the traditional 'restitutio in integrum must be possible' bar of any content. What is required is that the rescinding claimant makes counter-restitution, whether specifically or by a monetary equivalent: counter-restitution may be difficult to assess but it is never impossible." (emphasis added)
"… it was the defendant who was anxious that those letters should be destroyed. I cannot in those circumstances treat the letters as so important to him that there can be no rescission because they cannot be brought back into existence."
"The Appellants are now advancing a new argument that the court is invariably obliged by applying the 'practical justice' formula and that the Court will always conclude that the requirement will be satisfied."
"… wherever there is any conflict or variance between the rules of equity and the common law with reference to the same matter, the rules of equity shall prevail."
"Equity identified two forms of unacceptable conduct. The first comprises overt acts of improper pressure or coercion such as unlawful threats. Today there is much overlap with the principle of duress as this principle has subsequently developed."
Professor Enonchong (op cit p 82-3) expands on the same point:
"…. there was a protection gap between the two doctrines, with equity affording wider protection through undue influence than the common law through duress. In the past this protection gap was very wide, but the great expansion in the scope of duress in recent times has resulted in considerable overlap between the two doctrines, since both deal with overt acts of improper pressure such as unlawful threats."
"In the modern law the historical divide between common law and equity should not be allowed to drive a wedge through uniting principle."
He expanded on this theme in his professorial inaugural lecture (published as "We Do This at Common Law But That in Equity", 22 Oxford Journal of Legal Studies Spring 2002, p 1), in which he nailed his banner firmly to the fusionist mast. He commented specifically on the distinction still drawn in the academic literature between duress and undue influence (p 6):
"…nothing here turns on the distinction between common law and equity. One simply has different types of threats or pressure. Duress at common law traditionally comprised merely threats to the person but has since been expanded to include duress of goods and economic duress. Actual undue influence, in so far as concerned with threats or pressure as opposed to influencing another, covers other types of threat or pressure with many of the cases concerning threats to prosecute, sue or publish information about the claimant. The law can be perfectly well described by saying that all these various types of pressure or threat inducing a contract render the contract voidable. There is nothing to be gained by here referring to actual undue influence as opposed to duress or, more generally, there is nothing to be gained by here referring to common law and equity."
"… the essential point is that the representee should not be unjustly enriched at the representor's expense; that the representor should not be prejudiced is a secondary consideration, which is only taken into account when some benefit has been received by the representee" (Treitel, Law of Contract 11th Ed, 2003 p 380, a passage quoted by Burrows at p 178).