England and Wales High Court (Chancery Division) Decisions

First Roodhill Leasing Ltd [2001] EWHC Ch 397 (5th July, 2001)

Case No: HC 0001445

IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 5th July 2001

B e f o r e :

THE HONOURABLE MR JUSTICE LIGHTMAN

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Mr Richard B. Mawrey QC and Mr Adrian Cooper (instructed by Nabarro Nathanson, Lacon House, 84 Theobald's Road, London WC1X 8RW for the Claimant)

Mr Richard Southwell QC and Mr Nicholas Lavender (instructed by Eversheds, Cloth Hall Court, Infirmary Street, Leeds LS1 2JB for the Second Defendant)

The First and Third Defendants took no part on the application.

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APPROVED JUDGMENT  

    Mr Justice Lightman:

1. Gillingham Borough Council ("GBC") in 1988 owned certain land in the borough ("the Land") on which it wanted built a public swimming pool now known as The Splashes Leisure Pool ("the Pool"). Because of restrictions on borrowing and capital spending imposed on local authorities in the 1980s (and most particularly the provisions of Part VIII of the Local Government, Planning and Land Act 1980 and section 172 of and schedule 13 to the Local Government Act 1972), GBC was party to a complicated series of agreements designed to by-pass these restrictions ("the Scheme").
2. On the 8th August 1988 there were entered into:

(1) a Development Agreement ("the Development Agreement"), made between (a) GBC (b) Rainham Developments Ltd ("Rainham") and (c) Clifford Barnett Group Limited ("CBG"), Rainham's parent company. By clause 5 of the Development Agreement it was provided that Rainham should enter into a building contract for the Pool with Costain Construction Limited ("Costain") and that Rainham would construct and complete or procure the construction and completion of the Pool. Clause 17 provided that CBG guaranteed to GBC the performance by Rainham of Rainham's obligations and liabilities under the Development Agreement. Clause 12.1 provided that within five days of practical completion in consideration of payment of a premium of £29,000 GBC should grant to Rainham a Headlease of the Land for the term of 22 years at an annual rent of £1.

(2) a Loan Agreement ("the Loan Agreement") made between (a) Rainham (b) the Co-operative Bank Plc ("the Bank") and (c) GBC under which the Bank agreed to lend to Rainham the funds necessary to build the Pool ("the Loan"), and GBC agreed to provide a guarantee of all money due from Rainham to the Bank;

(3) a Loan Guarantee ("the Loan Guarantee") made between (a) GBC and (b) the Bank under which GBC gave such guarantee;

(4) a Supervision Agreement ("the Supervision Agreement") made between (a) the Bank and (b) GBC which provided that GBC should supervise the building of the Pool and (by clause 4.2) that as soon as possible after practical completion of the Pool GBC should procure that Hambro Linsandro Limited ("HL") should produce a revised cash flow forecast from which HL would prepare the final details of the rent reserved under the Sub-Underlease of the Pool;

(5) an Underlease Agreement ("the Underlease Agreement") made between (a) Rainham and (b) the claimant First Roodhill Leasing Limited, a wholly owned subsidiary of the Bank, under which, in consideration of the payment by the claimant by way of premium of a sum equal to the Loan, Rainham agreed to grant and the claimant agreed to accept an underlease of the Pool ("the Underlease") for the term of 22 years less 2 days at the annual rent of £1 conditional upon the completion immediately thereafter of the grant of a subunderlease ("the Sub-Underlease") by the claimant to the First Defendant Gillingham Operating Company Limited ("GOC"), a company now owned by GBC;

(7) a Sub-Underlease Agreement ("the Sub-Underlease Agreement") made between (a) the claimant and (b) GOC which provided that 5 days after practical completion of the Pool the claimant should grant and GOC should accept the Sub-Underlease, conditional upon the delivery by GBC to the claimant of the Rent Guarantee. The Sub-Underlease was for a term of 22 years less four days at a premium of £1 with an annual rent of £1 and an additional rent, subject to adjustment, of 6.89% of £3,774,762.51 in the first year, increasing thereafter by 5% per annum compounded;

(8) a Management Agreement ("the Management Agreement") made between (a) GBC and (b) GOC which provided that GOC should manage and operate the Pool in accordance with the directions of GBC;

(9) an Option Agreement ("the Option Agreement") made between (a) GOC (b) GBC and (c) the shareholders in GOC which provided for the grant by the shareholders in GOC to GBC of an option to buy all the shares in GOC.

3. On the 31st March 1989 there were executed agreements supplementary to the Development Agreement, the Building Contract, the Loan Agreement and the Loan Guarantee.

4. On the 31st March 1990:

(1) GBC granted the Headlease to Rainham;

(2) Rainham granted the Underlease to the claimant;

(3) the claimant granted the Sub-Underlease to GOC;

(4) GBC granted a Rent Guarantee to the claimant; and

(5) GBC executed an Indemnity Agreement in favour of the claimant indemnifying the claimant in respect of any loss of rent receivable by the claimant pursuant to the Sub-Underlease between the 31st March 1990 and practical completion of the Pool.

5. In summary the scheme is to the following effect:

(1) Rainham was to build the Pool on the Land;

(2) the Bank in the form of the Loan was to lend Rainham the funds needed to build the Pool, the repayment of which would be guaranteed by GBC;

(3) in return for building the Pool and the premium, Rainham was to receive from GBC a grant of the Headlease;

(4) Rainham was then to grant the Underlease to the claimant and to receive in consideration therefor from the claimant a substantial premium (apparently £3,774,762.51), which was earmarked to repay the Loan;

(5) the claimant was to grant the Sub-Underlease to GOC and recover the amount of the premium which it paid for the Underlease (together with interest thereon) in the form of the rent ("the Rent") payable by GOC and guaranteed by GBC under the Sub-Underlease.

6. The scheme was implemented exactly as planned until 1998. The Pool was built; the Lease, Underlease and Sub-Underlease were granted; the Loan was made by the Bank to Rainham; Rainham used the Loan to pay Costain; and the Loan was repaid with the premium paid by the claimant for the Underlease. GOC opened and operated the Pool. Since 1990 the Pool has operated at a loss and GOC has only been able to pay the Rent out of grants made by GBC.

7. On the 7th January 1992 Rainham was struck off the register of companies under section 652(5) of the Companies Act 1985 and dissolved by notice in the London Gazette dated the 14th January 1992. On the 14th June 1992 the Lease vested in the Crown as bona vacantia under section 654(1) of the same Act. This event appears to have passed unnoticed until about the time these proceedings commenced. By notice dated the 8th June 2000 the Treasury Solicitor disclaimed the Lease. By an Originating Application dated the 6th September 2000 issued in the Companies Court the claimant is seeking an order for the vesting of the Lease in the claimant. By a consent order dated the 26th September 2000 the proceedings were transferred from the Companies Court in order to be dealt with at the same time as the present proceedings.

8. On the 1st April 1998 the second defendant Medway Council ("Medway") succeeded GBC as local authority pursuant to the Kent (Borough of Gillingham and City of Rochester upon Medway) (Structural Change) Order 1996 (SI 1996/1876) and all the property, rights and liabilities of GBC vested in Medway pursuant to regulation 6(2) of the Local Government Changes for England (Property Transfer and Transitional Payments) Regulations 1995 (SI 1995/402). Medway immediately took professional advice on the legality of the Scheme and that advice was to the effect that the Scheme was unlawful. By reason of this advice, whilst it has kept the Pool open, Medway has refused to make any further payments of the Rent, and most particularly in respect of the years commencing 1st April 1998 and 1st April 1999 totalling £708,304.70 ("the Arrears").

9. On the 28th March 2000 the claimant commenced these proceedings against (as tenant) GOC and (as guarantor) Medway claiming in the Particulars of Claim the Arrears, together with interest. GOC did not acknowledge service and on the 27th April 2000 the claimant obtained a judgment by default against GOC for £830,719.24. GOC however had no assets and was on the 10th October 2000 struck off the Register of Companies and on the 17th October 2000 dissolved. Medway served a defence maintaining that the Rent Guarantee and related documents were ultra vires and void and counterclaimed seeking a declaration that the Headlease, Underlease, Sub-Underlease and Rent Guarantee were void and of no effect and consequential orders for rectification of the land register. By its Reply and Defence to Counterclaim served on the 11th May 2000 the claimant denied that the Scheme was a legally objectionable scheme or ultra vires.

10. On the 6th July 2000 the claimant issued the application before me for leave to amend the Particulars of Claim to plead, in the alternative to the claim for the Arrears and to cover the eventuality that the Court might for the reasons maintained by Medway strike down the Scheme (and most particularly the Sub-Underlease and Rent Guarantee), a claim in restitution in respect of the payment of £3,774,762.51 and by way of a constructive trust an equitable interest in the Land.

11. I do not have to decide or express any view on the validity or strength of Medway's challenge to the validity of the Sub-Underlease and Rent Guarantee. Medway has not applied to strike out the action on the ground that the claim must fail and the claimant has not applied to strike out the Defence and Counterclaim on the ground that it is hopeless. I must proceed on the basis that the question of the legality of the Scheme is well arguable both ways. I am concerned only with the merits of the application to amend.

12. The amendments proposed consist of the addition of some 14 new paragraphs to the Particulars of Claim and the addition of some 6 additional heads of relief. They read as follows:

"Roodhill's alternative case against Medway

19. It is Roodhill's primary case in this action that the lease, the underlease, the sub-underlease and the guarantee were and are valid and enforceable against Medway and Gillingham.

20. In its defence and counterclaim, however, Medway seeks to contend that these transactions formed part of a larger series of transactions involving (among others) the council, the bank, Rainham, Clifford Barnett Group Limited ("the contractor"), Roodhill and Gillingham. Medway relies on the transactions set out in sub-paragraphs (1) to (8) of paragraph 4 of the defence and alleges that these transactions, together with the underlease and the sub-underlease, formed part of a 'scheme' the objective of which was to cause the council to avoid statutory controls on borrowing and expenditure.

21. In consequence, Medway alleges that each of the transactions in the 'scheme' was unlawful and therefore void and of no effect. In particular, Medway asserts that the lease, the underlease, the sub-underlease and the guarantee are all void and of no effect.

22. As is set out in more detail in the reply and defence to counterclaim, Roodhill denies these allegations and asserts that none of the impugned transactions was outside the powers of the council and that none of them was illegal, void or of no effect.

Outline of the alleged 'scheme'

23. Roodhill accepts that there was a series of agreements the purpose of which was to procure the construction of Splashes on land owned by the council and for the benefit of the council and the population of its local government area.

24. It is further admitted and averred that all parties to each of the transactions in the series (including the council, its members and officers) believed that, insofar as the council was party to any transaction, that transaction was lawful and within the powers of the council.

25. Roodhill's primary case is that the said belief was correct. If, however, contrary to that case, the belief was not correct, then all parties acted in good faith and under a mistake of fact and/or a mistake of law.

26. The essential features of the 'scheme' were:

(a) by the Development Agreement of 8th August 1988, the council, Rainham and the contractor agreed that

(i) Rainham would develop the land and contract for the construction of Splashes by the contractor;

(ii) on completion of the development, the council would grant Rainham the lease;

(b) by the Loan Agreement of 8th August 1988, the bank agreed to lend Rainham the money needed to pay for the construction of Splashes;

(c) by the Loan Guarantee of 8th August 1988 (amended on 31st March 1999), the council guaranteed the indebtedness of Rainham to the bank;

(d) by an agreement for an underlease of 8th August 1988 (not appearing in the list in paragraph 4 of the defence), Rainham agreed to grant the underlease to Roodhill at a premium defined as such amount as would be equal to the loan under the Loan Agreement;

(e) in pursuance of these agreements, Rainham went into possession of the Land, engaged the contractor to construct Splashes, borrowed the necessary money from the bank and paid the contractor;

(f) following the construction of Splashes and in pursuance of the Development Agreement, the council granted the lease to Rainham and Rainham paid the council the premium due under the lease of £29,000;

(g) following the construction of Splashes and in pursuance of the agreement for the underlease, Rainham granted the underlease to Roodhill on 31st March 1990 and Roodhill paid to Rainham the premium due under the underlease, being the amount of the loan, namely £3,774,762.51;

(h) the said payment operated to discharge Rainham from all liability to the bank under the Loan Agreement and hence all liability of the council to the bank under the Loan guarantee;

(i) Roodhill then granted the sub-underlease to Gillingham on terms whereby the rent reserved by the lease was designed to provide such sums as would be necessary to repay Roodhill for the amount of the said premium together with interest;

(j) by the guarantee, the council guaranteed the performance by Gillingham of its obligations under the sub-underlease.

27. At all times the freehold of the Land and hence the ownership of Splashes has been vested in the council (now Medway).

28. The effect of the series of transactions summarised above is that Roodhill has in fact paid for the construction of Splashes in the sum of £3,774,762.51 and that sum has been paid for the benefit of the council and to provide an asset for the council.

29. If, therefore, contrary to Roodhill's primary case all of the transactions in the series were void and of no effect with the result that Medway would be entitled to the unencumbered freehold of the Land and the benefit of Splashes, Roodhill will contend as in the following paragraphs.

30. By reason of the matters set out above:

(a) Roodhill paid for the construction of Splashes;

(b) the ownership of Splashes accrued to Medway as the owner of the land on which it was constructed;

(c) at the time of the construction and the payment, it was the common intention of the parties that Roodhill should acquire an interest in the land;

(d) it would be inequitable for Medway to deny Roodhill an interest in the land.

31. In the circumstances, Medway holds the Land on constructive trust for Roodhill as to its value up to the sum of £3,774,762.51 and interest from 1st April 1990 and/or to secure payment of that sum to Roodhill.

32. Further or alternatively, Roodhill is entitled to an equitable charge over the Land to secure repayment to Roodhill of the sum of £3,774,762.51 together with interest from 1st April 1990.

33. Further or alternatively, Roodhill is entitled to recover from Medway the sum of £3,774,762.51 as money paid to or for the benefit of the council under a mistake of fact and/or a mistake of law and is entitled to recover interest on that sum from 1st April 1990.

AND THE CLAIMANT CLAIMS against the Defendants and each of them:

...

IN THE ALTERNATIVE, THE CLAIMANT CLAIMS against the Second Defendant:

(4) A declaration that Medway holds the land on trust for Roodhill as set out in paragraphs 30 and 31.

(5) Further or alternatively a declaration that Roodhill is entitled to an equitable charge over the Land to secure repayment of the sum of £3,774,762.51 together with interest from 1st April 1990.

(6) Further or alternatively payment of £3,774,762.51 as money paid to or for the benefit of the council under a mistake of fact and/or a mistake of law.

(7) Interest pursuant to section 35A of the Supreme Court Act 1981 from 1st April 1990 to the date of judgment herein.

(8) Further or other relief."

13. As I have said, the amendment is designed to cover the possible eventuality that the defence of incapacity proves well founded and seeks to maintain in this eventuality a claim for the repayment of the sum of £3,774,762.51 and interest (giving proper credit in respect of the sums received as "rent") as money paid under a mistake of law or in the alternative a declaration of entitlement to an equitable interest in or an equitable charge upon the Land. Medway opposes this application on two grounds. The first is that the alternative claim is statute barred and the second is that the claim is in any event bound to fail. The claimant responds that the claim is saved from being statute barred by section 32(1)(c) of the Limitation Act 1980 and that, though no such claim on facts such as the present has yet been upheld, that does not mean that such a claim may not be upheld.

14. I turn first to the question whether the claimant is barred from making the proposed amendments because the new claim is statute barred. The approach to be adopted is authoritatively stated by Millet LJ in Paragon Finance v Thakerar [1999] 1 All ER 400 ("Paragon") at p.414:

"PLEADING A NEW CAUSE OF ACTION AFTER EXPIRY OF THE LIMITATION PERIOD

For the purposes of the Limitation Act 1980 any new claim made in the course of existing proceedings which involves the addition or substitution of a new cause of action is treated as a separate action commenced on the same date as the original proceedings: s35(1) and (2) of the 1980 Act. Where the pleadings are amended to add such a claim after an applicable limitation period has expired, the effect is to deprive the defendant of an accrued limitation defence. By the combined effect of s35(3) to (5) of the 1980 Act and RSC Ord 20, r5(2) and (5), however, the court may not allow such an amendment after the expiration of any relevant limitation period unless the new cause of action arises out of the same facts as a cause of action in respect of which relief has already been claimed in the action.

The proper approach to an application for leave to amend in such circumstances was considered by this court in Welsh Development Agency v Redpath Dorman Long Ltd [1994] 4 All ER 10, [1994] 1 WLR 1409. The court observed that a new claim is not made by amendment until the pleading is amended. It follows that the relevant date for the purpose of calculating the limitation period is the date at which the amendment is actually made, which by definition must be no earlier than the date at which leave to make the amendment is granted. The court also held that leave to amend by adding a new cause of action should not be given unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation which will be prejudiced by the new claim or that the new cause of action arises out of the same or substantially the same facts as a cause of action in respect of which he has already claimed relief. By this means the injustice to the defendant of depriving him of an arguable limitation defence is avoided without denying the plaintiff the right to bring a fresh action to which, if he is correct, there is no limitation defence.

THE ISSUES

In each case the judge had to decide (i) whether any proposed amendment introduced a new cause of action, (ii) if so whether any applicable limitation period had expired by the date of the hearing before him, and (iii) if so whether the new cause of action arose out of the same or substantially the same facts as a cause of action already pleaded."

15. The first stage is accordingly to determine whether the proposed amendment introduces a new cause of action. The answer is clearly in the affirmative: it introduces a new claim in restitution and a new claim to a trust or charge.

16. The third stage is likewise clear. The third stage is to determine whether CPR 17.4(2) is complied with. CPR 17.4(2) provides:

"The court may allow an amendment whose effect will be to add or substitute a new claim, but only if the new claim arises out of the same facts or substantially the same facts as a claim in respect of which the party applying for permission has already claimed a remedy in the proceedings."

On a fair reading of the rule the comparison to be made is between the facts pleaded as constituting the original cause of action and the facts sought to be pleaded in the proposed amendment. It is irrelevant whether or not the facts pleaded in the proposed amendment merely reflect facts pleaded in the Defence (see Goode v. Martin 7th November 2000 Colman J). It is quite plain that the proposed amendment goes far outside the facts pleaded in support of the claim for payment of rent.

17. The second stage is to determine whether any applicable period has expired today. The relevant limitation period in respect of the claim in restitution is, as provided in section 5 of the Limitation Act 1980, 6 years from the date of accrual of the cause of action i.e. 1990. The claim to a trust is a claim to a remedial and not an institutional constructive trust and the limitation period is again 6 years. It is clear that section 21(1)(b) of the Limitation Act 1980, excepting from the operation of the Act certain claims against trustees, does not apply in the case of trustees under remedial constructive trusts: see Paragon, p.407-414 and Coulthard v. Disco Mix Club Ltd [1999] 2 All ER 478 at 480 (Mr Jules Sher QC). The later decision of the Court of Appeal in James v. Williams [1999] 3 All ER 309 does not (as submitted by the claimant) in any way derogate from this view. This is so for three reasons: (1) Paragon was not cited; (2) it was conceded that section 20(1)(b) applied if the "executor de son tort" in that case was held to be a constructive trustee; and (3) the executor de son tort in that case had assumed the role of trustee and this was not therefore a case of a remedial constructive trust. The claim (in the alternative) to an equitable charge cannot have any different limitation period. Indeed it was not suggested otherwise.

18. Both the common law and equitable claims accordingly became statute barred in 1996 unless the relevant limitation period was extended by section 32(1)(c) of the Limitation Act 1980 which provides as follows:

"... where in the case of any action for which a period of limitation is prescribed by this Act ...

(c) the action is for relief from the consequences of a mistake, the period of limitation shall not begin to run until the plaintiff has discovered ... the mistake ... or could with reasonable diligence have discovered it."

19. It is now clear that to entitle a party to invoke section 32(1)(c), the mistake may be one of law or fact and the mistake may be on the part of the claimant who made the payment or on the part of the claimant and the defendant who was the recipient. The claimant has however two hurdles to overcome. The first is that the claimant must prove that it made the mistake in 1990. It will not be sufficient to prove that the claimant thought that the Scheme was lawful if at the same time it realised that there was a real risk that it might prove unlawful; Kleinwort Benson Limited v. Lincoln Borough Council [1999] 2 AC 349 ("Kleinwort") at p.410B per Lord Hope. This is in issue and it is an issue which I cannot decide on this application. It requires examination of the relevant contemporary documentation and cross-examination of the representatives of the claimant (and no doubt its alter ego the Bank) as well as a detailed and considered analysis of the law. I think that the defendant is entitled to object to the proposed amendment so far as it depends on section 32(1)(c) on this ground alone. It is unnecessary to proceed further, but for completeness I shall do so.

20. The second hurdle is that the mistake relied on must be a constituent of the cause of action maintained by the claimant; Phillips-Higgins v. Harper [1954] 1 QB 411. The claim to a constructive trust or equitable charge does not meet this requirement: indeed it was not suggested otherwise.

21. The claim in restitution does meet this requirement and accordingly the limitation period in respect of this claim began to run when the claimant "discovered the mistake or could with reasonable diligence have discovered it". The question raised is what is sufficient to constitute "discovery" for this purpose. The claimant maintains that there can only be such discovery when the court and (if there is an appeal) the appellate court authoritatively holds that the Scheme is ultra vires.

22. The availability of a claim in restitution based on a mistake of law and the possible application to such a claim of section 32(1)(c) was considered by the House of Lords in Kleinwort. But there was no argument on the meaning of "discovery" and only Lord Lloyd in his dissenting judgment expressed any view on what would constitute discovery for this purpose. Lord Lloyd said if there had been a mistake of law by the Bank in that case on which it could rely, it could not have discovered the mistake until the House of Lords gave judgment in the earlier case of Hazell v. Hammersmith and Fulham LBC [1992] 2 AC 1 ("Hazell") and that the Bank was entitled to rely on section 32(1)(c) with the result that time did not begin to run until the date of the judgment in Hazell. I do not think that his speech should be read or treated as establishing that, in a case such as the present, circumstances may not exist where a party may be held to have discovered a mistake without there being an authoritative pronouncement directly on point on the facts of that case by a court, let alone an appellate court. For this purpose it cannot be necessary that the party knows of the mistake as a certainty. There are gradations of knowledge. It may well be sufficient to constitute the necessary discovery when the claimant has good reason to believe that a mistake has been made (consider Earl Beatty v. IRC [1953] 1 WLR 1090) or has been given "a line" on this question (see GL Baker v. Medway [1958] 1 WLR 1216 at 1224). I do not think that I need or should go further on this question. It is sufficient to say that Medway have an arguable case requiring an examination at a trial of the state of mind of the claimant over the whole period between 1990 and the date on which a writ is issued maintaining the alternative claims. It is not possible to say now for certain that the mistake was not or could not have been discovered at any time during that period. Disclosure by the claimant and the Bank may prove informative. For this second reason also I would refuse leave to amend.

23. I must accordingly refuse the application for permission to amend. The proposed new claim to a constructive trust or charge is plainly statute barred, and the claim in restitution may well be statute barred. This depends on a careful examination of the facts at the trial. Accordingly Medway has a reasonably arguable case that the grant of such permission would prejudice its limitation defence to the new alternative case. As a matter of law and as a matter of discretion, I think that justice requires the claimant, if it wishes further to prosecute its new claims, to do so in a fresh action. In the circumstances it is unnecessary for me to say anything on the legal merits of the alternative case assuming (for any reason) that the limitation defences could be overcome. But having regard to the careful submissions made before me I will only say that the claim for repayment of money paid by mistake of law to Rainham as consideration for the Underlease may well in theory be recoverable from Rainham, but the claimant has adduced no authority or text book which suggests that the claim can now be maintainable against Medway if the Scheme is held ultra vires. The payment was made to Rainham for its benefit, not the benefit of GBC, albeit the Scheme was designed to secure, and did secure, the construction of the Pool on the Land. In principle the claim to an equitable charge on the Land under the doctrine of equitable estoppel would appear on the limited argument before me to have some merit. I am not satisfied that, but for problems of limitation, the doctrine of ultra vires would necessarily preclude the court holding the claimant entitled to an equitable charge. It should however be noted that the value of the Land is apparently only £500,000 and the claimant has already recovered a substantial sum by way of Rent, and the sum secured by any such charge may be limited.

24. For the reasons given, I refuse the application for permission to amend.