England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE EVANS-LOMBE
HC07C00248

		Royal Courts of Justice Strand, London, WC2A 2LL
		16/04/2008

Lord Justice Mummery :

1. The action is for breach of trust. The point on the appeal is whether the respondent trustees would be entitled to rely in their defences on the clause in the trust deed exempting them from liability for breach of trust, except in the case of "wilful and individual fraud or wrongdoing" on the part of the trustee who is sought to be made liable. Fraud is not alleged. Wilful individual wrongdoing is alleged.
2. On 30 July 2007 Evans-Lombe J struck out claims for breach of trust made by the appellants against the respondent trustees. He refused leave to appeal, which was later granted by Carnwath LJ. The striking out order was made on two grounds: (1) there were no reasonable grounds disclosed for bringing the claims; and (2) the action was an abuse of process of the Henderson v. Henderson (1843) 3 Hare 100 kind, as there was no justification for failing to include the current breach of trust claim in an earlier action brought in 2004 and dismissed in 2006.
3. The respondents and the appellants were successively trustees of a settlement (the Bonham Settlement) made by Toby Bonham (Toby) on 9 November 1989. He settled shares in Montpelier Properties Limited (Montpelier), which owned Bonhams, the well known auction house, and various properties.
4. Clause 17 of the Bonham Settlement contained the exemption clause which the respondents wish to rely on as a defence to the breach of trust claims -

" In the professed execution of the trusts and powers hereof no Trustee shall be liable for any loss to the Trust Fund arising by reason of any improper investments made in good faith or for the negligence or fraud of any agent employed by him in good faith or by reason of any mistake or omission made in good faith by any Trustee hereof or by reason of any other matter or thing whatsoever except wilful and individual fraud or wrongdoing on the part of the Trustee who is sought to be made so liable."

5. The judge held that the respondents were protected by this exemption clause. The pleaded claims did not contain sufficient particulars of "wilful and individual …wrongdoing."
6. There have been two earlier actions. The procedural history and general background to this appeal are detailed in the judgment of Kitchin J on 31 October 2006 and in the judgment under appeal. It is unnecessary to repeat most of the detail in this judgment. A short summary of the essential facts is sufficient for understanding the rival arguments and for resolving the issue.

Background facts

7. The respondents were appointed trustees of the Bonham Settlement. On 10 November 1989 they charged 146,660 trust shares in Montpelier as security for advances to be made to the Bonham Settlement by a Mr Pinhorn. The respondents also granted Mr Pinhorn an option to purchase the shares (the First Option). The First Option was capable of being exercised up to 9 May 1993 or a date 3 months after the date upon which the entirety of the advances made to Toby and to the trustees had been repaid, whichever was the later. The firm of Blake Lapthorn acted as solicitors for Mr Pinhorn in relation to the transaction.
8. On 14 January 1998 the respondents began an action (the 1998 Action) against Toby and his sister Eve for the transfer of a further 32,266 shares in Montpelier to the Bonham Settlement. The action was contested. One of Toby Bonham's defence points was that the First Option was void as a clog on the equity of redemption.
9. On 10 September 1999 junior counsel experienced in trust matters and of long standing at the Chancery Bar was instructed by Blake Lapthorn to advise on the validity of the First Option. He had previously advised in conference. An unusual aspect of the case is that both sides based their rival contentions about breach of trust on the advice in counsel's opinion. On the one hand, the appellants said that the opinion supported their contention that clause 17 of the Bonham Settlement is unavailable to the respondents. On the other hand, the respondents said that the opinion demonstrated that there was no arguable case of wilful wrongdoing against them and that clause 17 was a complete answer to the claim for breach of trust.
10. On 18 July 2000 an agreement was made between Mr Pinhorn, the respondents and Mr Bonham about the shares being held subject to the First Option and for similar agreements if there was a reconstruction of the Bonham Group of companies.
11. On 16 October 2000 a sale of Bonhams was agreed. The sale agreement was preceded by a re-organisation of the business of Bonhams. In summary the auction business was vested in a company called Heri Limited (Heri), and property assets were vested in a company Hodie Limited (Hodie). On 28 September 2000 the respondents had entered into a further option agreement to persuade Mr Pinhorn to consent to the sale of the assets of Montpelier (the Second Option). Mr Pinhorn was granted an option to purchase the shares in Heri and Hodie Limited.
12. The respondents' powers relating to the Second Option necessitate reference to two further clauses in the Bonham Settlement-

"2. The Trustees may from time to time accept from [Mr Bonham] or at his discretion as additions to the Trust Fund any further money or investments or property but in particular they may so accept any shares in Montpelier and may do so upon terms that the Trustees shall forthwith enter into an option or similar agreement with a third party and/or with the Settlor regulating the disposal of such shares and any other matters and in such terms generally as the Settlor may specify"

14. The Trustees may exercise the voting powers conferred upon them as the holders of any shares or debentures of any limited company or other corporation in which any part of the Trust Fund may at any time be invested and may concur in and make any arrangements in connection with any reconstruction amalgamation or winding up of any such company or other corporation as they shall in their absolute discretion think fit to the intent that they shall have the same full and unrestricted powers as the holders of such shares stock or debentures in all respects as if they were absolutely entitled thereto beneficially provided always that the Trustees shall comply with any requirements as to the exercise of such powers contained in any agreement such as is referred to in clause 2 hereof in relation to shares in Montpelier Properties Limited."

13. On 17 October 2000 the respondents received more than £2.5m for their interest in Heri. They repaid Mr Pinhorn's loans. They also paid him £742,392.92 for the value of his option rights under the Second Option.
14. On 7 March 2001 the 1998 Action was discontinued.
15. On 16 June 2004 Toby Bonham began proceedings (the 2004 Action) against the respondents. He alleged that the 1998 action was issued and pursued in breach of trust. He sought to make the respondents personally liable for the costs incurred in pursuing the 1998 Action. He joined the solicitors Blake Lapthorn and later the appellants as parties to the 2004 Action. On 16 October 2006 Kitchin J gave judgment dismissing the 2004 Action with costs.
16. When the respondents retired as trustees on 10 May 2005 they were replaced by new trustees. Since 13 March 2006 the appellants have been the trustees of the Bonham Settlement.
17. On 17 July 2006 the appellants began these proceedings (the 2006 Action) against the respondents. They alleged breach of trust in making the payment to Mr Pinhorn under the Second Option. They contend that, like the First Option, the Second Option was void. They also contend that the respondents committed breaches of trust in acknowledging the First Option, in charging additional shares and in extending the period of the Second Option. The respondents denied breach of trust. They wish to plead clause 17 of the Bonham Settlement in their defences.
18. On the respondents' application to strike out the 2006 Action the dispute centred on the substance of the advice of the respondents' counsel in 1999 on the validity of the First Option and on the impact of that advice on the respondents' power to grant the Second Option to Mr Pinhorn in September 2000.

Judgement below

19. The judge struck the appellants' action out. His principal ground for doing so was that the claim for breach of trust could not be made good in the absence of sufficient particulars of wilful and individual wrongdoing within the meaning of clause 17.
20. In his judgment the judge quoted verbatim several relevant extracts from the opinion. He also set out a letter written by the solicitor with Blake Lapthorn to Mr Pinhorn with copies to the respondents. The letter referred to the opinion. The judge summarised the circumstances in which the respondents granted the Second Option and the parts of the amended pleadings in which "deliberate breaches of trust" were alleged against the respondents.
21. Evans-Lombe J concluded that the main basis for the attack on the validity of the First Option and the Second Option was misconceived for two reasons.
22. First, the appellants pleaded that the advice of counsel and of the solicitor to the respondents was that an option granted at the time of the loan was void as a clog on the equity of redemption by reason of the rule in Samuel v. Jarrah [1904] AC 323 and that the First Option was void unless and until the House of Lords reversed their earlier decision. That advice applied to both the First Option and the Second Option. This, the judge held, was a misapprehension. Counsel's advice was that the First Option was not void. It was enforceable, as the rule in Samuel v. Jarrah no longer represented the present law and would almost certainly be overruled by the House of Lords if the case were taken to the House.
23. Secondly, the appellants pleaded that the advice was that, in the circumstances that existed, no granting of a new option could ever be within the respondents' powers as trustees of the Bonham Settlement and that, notwithstanding the advice, the Respondents granted the Second Option in favour of Mr Pinhorn and made payments to him pursuant to it. This, the judge held, was a misapprehension about both the advice of counsel about the power to grant a fresh option and about the circumstances in which the respondents granted the Second Option. The position was that the Second Option was in pursuance of a "wholly separate arrangement" from that pursuant to which the First Option was granted. The Second Option was granted to Mr Pinhorn in arrangements for the re-organisation of the Bonham companies and the newly created shares in Heri.

Appellants' submissions

24. For the appellants Mr Michael Ashe QC (who did not appear in the court below) submitted that it was the judge, not the appellants, who has misread counsel's opinion. He analysed the content, language and structure of the opinion. He argued that, in granting the Second Option, the respondents had acted against the advice in the opinion that the First Option was void and that the respondents had no power to grant a fresh option. That was wilful wrongdoing. He accepted, however, that, if the judge had read the opinion correctly, this could not be a case of "wilful .. and individual wrongdoing" within the meaning of clause 17 of the Bonham Settlement and the exemption clause would be a complete defence for the respondents.
25. Mr Ashe's principal submissions were that counsel advised that the First Option was not enforceable, stating that, as the law then stood, the rule in Samuel v. Jarrah meant that the option was a clog; that that decision had not been overruled and was still good law unless and until reversed by the House of Lords; that if the respondents had sought the guidance of the High Court on the point, it would have been bound by the decision to rule that the option was a clog; that it was a breach of trust to replace a void option by a valid one; that under clause 2 of the Bonham Settlement the respondents' power to grant options was ancillary to the power to accept additional trust assets and to permit the arrangements entered into in 1989 between the respondents and Mr Pinhorn; that the shares in Heri were by way of substitution and not by way of addition; that the respondents' powers were not sufficient to permit the respondents to grant a new option over the Heri shares; and that the respondents had acted to the disadvantage of the beneficiaries of the Bonham Settlement.

Discussion and conclusion

26. If the respondents did not act against legal advice obtained from their counsel and solicitor they would be entitled to rely on the exemption from liability under clause 17. An allegation of wilful wrongdoing by the respondents would not be arguable if they heeded the legal advice in the opinion and advice letter of September 1999. The appeal turns on what was the legal advice given to and followed by the respondents.
27. Although there were no written instructions to counsel, it is clear from the first paragraph of the opinion that he was instructed to advise on whether the First Option was void as a clog on the equity of redemption in the Montpelier shares. He then stated the rule in Samuel v. Jarrah. He expressed the view that it was "difficult to see the transaction as more of an option than it is a mortgage." After a discussion of the rule he stated that

" I have no doubt that if the matter could be brought before the House of Lords now, the House of Lords would be prepared to overrule Samuel v. Jarrah."

28. He added that, if the shares were sold for a very substantial amount of money, then taking the case to the House of Lords, with a leap frog over the Court of Appeal, was "by no means out of the question" and that he "would expect the option agreement to be upheld ultimately in the House of Lords, but probably not at first instance."
29. In a separate paragraph of the opinion headed "New option" (paragraph 11), on which the appellants placed considerable emphasis, counsel considered "whether a new option could be granted", that is one not linked to the mortgage of the shares. He quoted clause 2 of the Bonham Settlement, which allowed the trustees to grant options immediately after receiving shares as directed by Toby Bonham. Ten years had now passed since the transfer of the shares and Toby Bonham was contesting the grant of the original option. Counsel concluded that the trustees could not "grant any fresh option" and that it would be a "clear beach of trust" to do so, being for the benefit of Mr Pinhorn and not for the benefit of the beneficiaries of the Bonham Settlement.
30. As to advice on the validity of the First Option, I agree with the judge. I am completely satisfied that, on a fair and reasonable reading of the opinion and the solicitor's advice letter, the respondents were advised that, in the opinion of counsel, the First Option was valid and enforceable. The opinion correctly stated the rule in Samuel v. Jarrah, but then stated the very confident view that the rule would be overruled. Counsel was instructed to give an opinion on the validity of the option. He gave it, backed up by reasons. He correctly stated the law as laid down by the House of Lords at the beginning of the last century. He gave reasons for his prediction that the House of Lords would now depart from that decision. The respondents could not possibly be said to be guilty of wilful wrongdoing in accepting and acting on that opinion.
31. As for counsel's advice in 1999 about there being no power to grant a "new option" and about it being a clear breach of trust to grant one, I also agree with the judge. In granting the Second Option in 2000 the respondents were not going against the legal advice obtained in 1999. The appellants' submissions on this part of the opinion are based on a fundamental misunderstanding about the basis on which counsel gave his opinion. As made clear at the outset of his opinion, counsel was advising on the validity of the First Option. Counsel's opinion has to be read in the context in which he was instructed to advise. The "new option" discussed by counsel in paragraph 11 of the opinion was plainly not the Second Option subsequently granted. His advice had no application in any way to the changed circumstances in which the Second Option was granted. The "new option" advice related to the circumstance whether, if the First Option were void, it would be possible to resolve any doubts about the validity of the First Option by granting Mr Pinhorn a new option over the Montpelier shares without a mortgage of the shares. For the reasons given by counsel he considered that this solution was by then legally impossible under the Bonham Settlement.
32. As explained by the judge and as submitted by counsel for the respondents on this appeal, no case for wilful wrongdoing in granting the Second Option could possibly be based on the argument that the respondents had gone against legal advice in the 1999 opinion and letter of advice. Quite simply that advice did not relate to the Second Option or to the changed circumstances in which it was granted.
33. The respondents' power to grant the Second Option was to be found in clause 14 of the Bonham Settlement. Whatever limitations clause 2 placed on the grant of an option under that clause, and I do not need to express a view on that, under clause 14 the respondents, as trustees, could "concur in and make any arrangements in connection with any reconstruction, amalgamation or winding up of any such company … as they in their absolute discretion think fit." It is difficult to imagine wider empowering words, which clearly covered the grant of the Second Option to Mr Pinhorn on the reconstruction of Montpelier over the shares in the reconstructed company. Mr Pinhorn's consent was essential to the reconstruction of the Bonham companies which preceded the sale of the business. The Second Option was granted to him in order to secure his consent to the sale of Heri. This was for the benefit of the Bonham Settlement in that his consent to the reorganisation of the Bonham Group was required for the sale of the auction business for £2.5m.

Result

34. As the 2006 Action was rightly struck out on the ground that clause 17 was available as a complete defence to the respondents where there was no wilful wrongdoing, the estoppel/abuse of process point does not arise for decision and I express no view on it.
35. I would dismiss the appeal.

Lord Justice Keene:

36. I agree.

Lord Justice Rimer:

37. I also agree.