Jersey Unreported Judgments

Companies:- breach of agreement.

[2018]JRC076

Royal Court

(Samedi)

24 April 2018

Before     :		Sir William Bailhache, Bailiff, and Jurats Blampied and Christensen.
Between	Graham John Foster		Plaintiff
And	Robert Craig Holt		Defendant

Advocate O. A. Blakeley for the Plaintiff.

Advocate S. B. Wauchope for the Defendant.

judgment

the bailiff:

1.        The plaintiff claims the sum of £15,000 ("the Loan") which he asserts he advanced to the defendant on 29^th September, 2015.  The plaintiff claims that by agreement with the defendant, the monies were paid on the defendant's behalf to the company Atam Holdings Limited ("the Company") in which both the plaintiff and the defendant were at the material times shareholders.  They were both also directors of the company.  The agreement was an oral agreement and not evidenced in writing but the essential terms were that the loan would not bear interest, and would be repaid to the plaintiff by the defendant on demand. 

2.        The circumstances which gave rise to the loan contract, according to the plaintiff, were these.  At a board meeting of the Company held on 17^th September, 2015, the directors discussed a number of items of Company business, but in particular the Company's financial position.  The board had noted that there were cash flow problems which caused or threatened to cause financial liquidity issues for the Company and the board discussed the possibility of the Company's shareholders, including the plaintiff and the defendant, making loans to the Company in the sum of £10,000 each.  The board discussed the question of a call on shareholders for unpaid share capital, but the relevant provisions in relation to shareholder loans were these:-

"8. It was agreed by the board that Shareholders are instructed to make payment of all outstanding share capital immediately to assist in AHL's [the Company] cash position.

9. It was further agreed, that each Shareholder would make a further payment (shareholder loan) of UK£ sterling 10K, should NP money remain unpaid at September month."

3.        The plaintiff asserts that within an hour of the meeting, the chairman of the board, Mr Andrew Crossland, informed the plaintiff and the defendant, who were in a meeting with a Mr Richard Miller, then a director of the Company, employed as Chief Executive Officer, but not a shareholder, that having discussed the matter with the Company's accountant, each shareholder would need to advance the sum of £15,000 rather than £10,000 by way of loan to the Company.  The plaintiff asserts that after Mr Crossland had left them the defendant made it plain that he did not have the cash to advance to the Company of £15,000 loan as requested, and that those were the circumstances in which the plaintiff agreed to make not only his own loan of £15,000 to the Company but also the loan of £15,000 on behalf of the defendant.  Following that agreement, the plaintiff did indeed advance £30,000 to the Company on 29^th September, 2015, and he claims that a valid contract was formed consistent with the guideline case of Selby v Romeril [1996] JLR 210.  In that case the Royal Court had held that there were four requirements for the creation of a valid contract in Jersey:-

(i)        the consent of the party undertaking an obligation

(ii)       his legal capacity to enter into a contract.

(iii)      an "objet," or subject-matter of the contract; and

(iv)      a legitimate "cause," or reason for the obligation to be performed.  

4.        As the Royal Court said in Incat Equatorial Guinea Limited and others v Luba Freeport Limited [2010] JLR 287:-

"21 Pausing there, it is noteworthy that these requirements for the creation of a valid contract go some way to explaining the ancient maxim: la convention fait la loi des parties, which reflects art. 1134 of the French Code Civil, ...

22 At the heart of this provision in the French Code Civil and behind the maxim to which we are so accustomed in Jersey is the concept that the basis of the law of contract is that each of the contracting parties has a volonté, or will, which binds them together and requires that the mutual obligations which they have agreed be given effect by the courts. The notion of volonté as the foundation of the contract is sometimes thought to result from the political liberalism of the age of reason and of the economic liberalism of the 19th century, where obligations imposed from outside should be as few as possible. A man is bound only by his will, and because he is the best judge of his own interests the best rules are those freely agreed by free men. However, it is to be noted that rather earlier the same rationale appears in the commentaries of Berault, Godefroy and d'Aviron on La Coutume Reformée de Normandie, Vol. 1,at 74, this edition being published in 1684, where the authors say this: "Car la volonté est le principal fondement de tous contrats, laquelle doit avoir deux conditions, la puissance & la liberté-‰.-‰.-‰." before going on to consider the restrictions which the law imposes on the making of contracts which are contrary to good morals or otherwise unlawful, notwithstanding the volonté which existed in the contracting parties.

23 It is because the concept of volonté is so important to the making of contractual arrangements that the grounds of nullity which exist for erreur, dol, déception d'outre moitié and lésion become so comprehensible. The principles which are encapsulated in these objections to the formation of a valid contract go to whether or not it can truly be said that there was a common will of the contracting parties to make the contract which comes under consideration. These grounds of nullity go directly to the reality of the consent of the parties to make the contract (see also Marett v Marett [2008] JLR 384 at paras 58-60)."

The defence

5.        The defendant admits many of these circumstances which led up to the payment of £30,000 by the plaintiff to the Company.  It is agreed that the parties were both directors and members of the Company, and agreed that a board meeting took place on 17^th September, 2015, at which the Company's liquidity problems were discussed.  It is agreed that the board of directors investigated various funding options that included director or shareholder loans and indeed it is agreed that on 17^th September, 2015, the board of directors, led by the chairman Mr Crossland, discussed requesting loans to the Company by the Company's shareholders to obtain emergency funding.  It is admitted that the amount per shareholder as first discussed was £10,000 and that this was subsequently revised to £15,000.  Despite the minutes of the Company which suggested that all the directors agreed the shareholders be instructed to make the loans in question, the defendant denies that the board reached that agreement, and in particular denies that shareholders agreed to make these loans.  He admits that he stated at the meeting which took place with the plaintiff and Mr Miller after the board meeting that he could not raise £15,000 to advance to the Company, and his case is that the plaintiff agreed to advance the full £30,000 himself and that there was no loan between them. 

The question of consent

6.        In his skeleton argument on behalf of the defendant, Advocate Wauchope conceded that capacity and cause were not in dispute, but he contended that the defendant had not consented to the contract asserted by the plaintiff.  Advocate Wauchope contended that the defendant never intended to borrow £15,000 or any sum from the plaintiff, and that as Jersey customary law requires a meeting of minds between the parties for a valid contract to be formed, an essential pre-requisite of the contract was missing.  Although he referred to the judgment of this Court in Calligo Limited v Professional Business Systems CI Limited [2017] JRC 159 where the Court applied an objective test to the question of consent in the formation of contracts, he did not expand upon the arguments in this case where such a modest sum is in dispute, merely asserting that the defendant contended that Jersey customary law required a meeting of minds between the parties to a contract. 

7.        In Calligo, the Royal Court was faced with resolving whether two documents constituted an agreement between Calligo and the defendant PBS.  The defendant asserted that no agreement had been entered into, and that the two documents were not intended to have legal effect.  The defendant asserted it had no intention to enter into a legally binding arrangement with Calligo at that point, and that therefore the fundamental element of a valid contract in Jersey law, namely the requirement for consent, was absent.  The nature of this dispute led the Royal Court to examine the law relating to the formation of a contract and what was meant by consent. 

8.        Correctly, the Royal Court noted that the authorities in Jersey are not consistent.  Reference was made to four cases in the Royal Court - Leach v Leach [1969] JJ 1107, Mobil Sales v Transoil (Jersey) Limited [1981] JJ 143, La Motte Garages Limited v Morgan [1989] JLR 312 and Daisy Hill Real Estates Limited v Rent Control Tribunal [1995] JLR 176, where in every case it was said that the Royal Court appeared to have approached the question of consent on the basis of an objective assessment - namely what the reasonable man would from the circumstances have taken the parties to have agreed to, as opposed to the subjective approach of looking what the parties actually did have in their minds at the time they purported to enter into a contract. 

9.        The Royal Court referred to Marett v Marett and O'Brien [2008] JLR 384, a decision of the Court of Appeal which plainly overruled Mobil Sales and Supply Corporation v Transoil (Jersey) Limited and La Motte Garages Limited v Morgan, in concluding that the law of Jersey determines consent by use of the subjective theory of contract.  The Court of Appeal referred to Pothier's Treatise on the Law of Obligations or Contracts, and Selby v Romeril and at paragraph 58 of its judgment, the Court of Appeal went on to say:-

"It follows that, 'for a contractual theory based on the subjective intention of the parties, a mistake is the principal obstacle to a valid contract."

10.      In Calligo, the Royal Court then referred the postscript in the Court of Appeal judgment in Home Farm Developments Limited and others v Le Sueur and others [2015] JCA 242 which suggested that there were potentially powerful arguments against the adoption of a subjective test, and that Marett should not be treated as authoritative without further argument.  Adopting that approach, the Royal Court in Calligo then reached the conclusion that the law of contract in Jersey should be developed to suit the needs of a modern community which is a sophisticated international finance centre and that applying that reasoning, the objective approach was more likely to provide legal certainty for commercial transactions than a subjective approach.  That the Court's decision was very much policy based is shown by the following extract:-

"27. There is also the public policy consideration that English law is used regularly as the preferred system of law in international commercial contracts because of its clarity and legal certainty.  It seems to us that it would be to the advantage of Jersey to develop its law, where it is permissible for it to do so, in those directions, namely clarity and certainty, as well.  In short it seems to us that a subjective approach will lead to greater uncertainty than will the approach that has traditionally been adopted by the Courts of Jersey, namely the objective approach."

11.      We note that the authorities provided to the Royal Court in Calligo were unfortunately limited, which cannot have been of great assistance to that Court. It is not clear from the reported judgment what extracts from Pothier were produced. In particular, the Court might have been interested to read the article in the Jersey and Guernsey Law Review under the heading "Subjectivity in the formation of a contract - a puzzling postscript" authored by Sir Philip Bailhache, former Bailiff, in which there is a respectful but forceful critique of the postscript in Home Farm Developments .  Nor was the Court shown many of the recent cases in the Royal Court involving consent in the law of contract - Incat Equatorial Guinea [supra], Sutton v Insurance Corp of the Channel Islands Limited [2011] JLR 80, Flynn v Reid [2012] (1) JLR 370 among them.  

12.      Courts of commensurate jurisdiction are not to depart from each other on the law unless the second court considers that the earlier court was plainly wrong.  With the greatest respect to the Royal Court in Calligo, we cannot agree with the conclusion that the objective test is the right test to apply in determining the issue of consent to the formation of a contract under the law of Jersey.  Public policy, so often described as an unruly horse, is in our judgment not a proper basis on which to remove a central plank in the law of contract.  It is only legitimate to take the law in a new direction if there is some authoritative principle on which one can rely which has previously been adopted by the Courts of this Island and there is no contrary authority which is binding upon us.  In our judgment, there are at least four relevant points therefore to be made in this connection:-

(i)        We too are puzzled by the postscript in Home Farm Developments Limited which appears to have been added to the Court's judgment without any argument as to what is the appropriate law on the subject.  We do not understand why the postscript should have been so added, especially so because the conclusion in Marett to which we have referred earlier in this judgment, namely that Jersey law has a contractual theory based on the subjective intention of the parties, was not obiter to the decision in Marett but an integral part of the rationale which was adopted in analysing the law of erreur.  By contrast the postscript in Home Farm Developments Limited was clearly not germane to the decision and was therefore obiter. In our judgment, it was not open to the Royal Court in Calligo to disregard the authority of the Court of Appeal in Marett which was binding upon it. 

(ii)       What is wholly absent from the reasoning of the Court in Calligo is any reference to the other principles of the Jersey law of contract which have grown out of the requirement for subjective consent to the formation of a contact - there is no reference to the maxim of la convention fait la loi des parties, nor to erreur, nor to déception d'outre moitié, nor volonté, nor dol.  To hold that the test for whether a party consented to a particular contract is objective and not subjective is to remove the cornerstone on which all these principles are built.  The law of contract ought to be - and used to be - a cohesive whole, and while it is most unfortunate that the Jersey law of contract, which was certain for centuries and rested on the writings of the commentators expounding the customary law - Terrien, Basnage, Berault, Pothier, Poingdestre, Le Geyt and Le Gros, among others - it is only a series of judgments from the mid-1960s until Selby v Romeril that have substantially caused the problem.  In our judgment, it is not open to the courts of Jersey simply to move away from centuries of Jersey contract law simply because most if not all advocates and judges were trained in English rather than French law or because it is no longer considered convenient to stay with it.  That would have been a matter for the legislature, if it were ever considered appropriate to follow that course.  Absent some conclusive cases decided at Court of Appeal level or in the Privy Council, the more sensible way forward now in our judgment would be a formal Restatement of the Law of Contract. 

(iii)      We do not doubt that there may be cases where the difference between a subjective test and an objective test will be significant but as Professor Nicholas in his introduction to the Law of Contract, 2nd Ed (1992) at p35 expressed it:-

"It is clear therefore that the analysis of contract in terms of a free agreement of wills (or, in English terms, a meeting of minds) is common to both the French and the English classical theories of contract and remains part of the currency of both systems.

Where the two systems differ, as we shall see, is partly in the intellectual rigour with which the analysis is carried through to detailed consequences, and partly in the way that agreement is understood: as a subjective meeting of two minds or as the objective appearance of agreement.  English law usually favours the latter approach, as being the more practical and the more conducive to the certainty which commercial convenience demands, whereas French law inclines to the former, although sometimes with a corrective which yields much the same practical result as the objective approach." 

(iv)      Applying the subjective test to the question of consent is consistent with the other fundamental principles of the law of contract in Jersey, and applying the objective test is not.  But what does that mean in practice?  It means that in any given case, the Court will look closely at the evidence to see whether a party has in fact established that he had the subjective intention which he asserts.  It is well known that courts assess what was in a person's mind by reference to what he said or did not say and what he did or did not do at the relevant time, measured against all the circumstances of the case.  It may well be the case that, even applying the subjective test to the question of consent, the outcome in many cases will be the same as on the application of the objective test because the party contending for a particular intention is simply not able on the evidence to establish his case.  Indeed, in Calligo, it seems that the same result would have been reached whichever test had been applied. 

13.      It is regrettable that on a number of occasions the Royal Court, as apparently the Court of Appeal, has given contrary indications as to what the law is in such a fundamental area, although for the reason just given, it may not matter so very much in practice, at least in most cases.  It is very much to be hoped that at some point the question of objective or subjective consent in contracts will come to the attention of the Court of Appeal in a contested case which can lead to a fully reasoned decision which will clarify the way for the future.  This is not that case, not just because the value of the loan in dispute does not justify taking the matter forward to the Court of Appeal but because regardless of whether one applies an objective or a subjective test, we find that there was a contract of loan as the plaintiff has claimed.  We have applied the subjective test to the issue of consent as the defendant has requested us to do, and still find against the defendant on the evidence, and now go on to explain why. 

The evidence

14.      The plaintiff's claim was that there was an oral contract for the loan of £15,000 to the defendant, applied at the request of the defendant to the credit of the Company's account.  The minutes of the directors' meeting held on the day that the oral agreement was alleged to have been made are consistent with that oral agreement save that they refer to the sum of £10,000 and not £15,000, but as indicated above, the defendant agrees that the £10,000 figure was substituted by Mr Crossland with a requirement for £15,000.  While the defendant denied that any agreement had been made as alleged or at all, the basis for that denial was that he could not afford at that time to contribute a loan of £15,000 to the Company.  Such a statement is not of course inconsistent with the oral agreement for a loan which the plaintiff told us had been reached.  Furthermore, the oral agreement was made in the presence of Mr Richard Miller, the then Chief Executive Officer of the Company, who gave evidence before us.  In his witness statement, which he confirmed on oath was correct and should be taken as his evidence, he said:-

"I distinctly heard Mr Foster agree to lend Mr Holt £15,000 to enable Mr Holt to make his payment to Atam. Mr Foster appeared relatively relaxed about lending the money to Mr Holt and I heard Mr Holt say he would make every effort to repay Mr Foster as soon as possible. I do not remember any other terms being agreed between the two of them."

15.      Having listened to the evidence which was given by the plaintiff, Mr Miller and the defendant, the Court prefers the evidence of the plaintiff and Mr Miller and is satisfied on the balance of probability that the plaintiff has therefore proved his case.  Even on the subjective test, language which Mr Miller described to us as something he "distinctly heard" points so clearly to a loan that the Court cannot accept the evidence of the defendant that he did not intend to take a loan. 

16.      Furthermore, we accept the evidence of the plaintiff that while it was in the interests of all shareholders that the Company get through the liquidity difficulties which it faced at that time, that of itself was no reason for the shareholder loans to be advanced disproportionally.  It is true that the shareholders were not asked to make loans to the Company proportionate to their shareholding, but they were all asked to make a loan in the same amount of £15,000.  The plaintiff told us that he would never have agreed to make a loan of £30,000 to the Company while other shareholders (including Mr Crossland) were only making loans of £15,000.  We also have noted that while it was very much in the plaintiff's interest that the Company got through its impending financial liquidity problems, it was also in the defendant's interest that it should do so, and both plaintiff and defendant benefited from a substantial related transaction as a result in September 2016. 

17.      The defendant relied considerably on what was claimed to be inconsistent conduct on the part of the plaintiff when he resigned as a director of the company in February 2017 following a dispute in which legal proceedings were issued by him for unfair dismissal.  In those proceedings and in separate proceedings by action in the Royal Court, the plaintiff actioned the Company for repayment of the loan of £30,000.  Why should the plaintiff follow that course, asserted the defendant, if in fact the loan to the Company was only £15,000 and the loan to the defendant £15,000?  The plaintiff's response to that was that he had brought the claim against the Company because he was aware that the payment of £30,000 which he had made in September 2015 (£15,000 on his own account and £15,000 at the instance of the defendant) had been entered in the Company books as a loan by him to the Company in the sum of £30,000.  The fact that the accountant had so entered the loan did not mean that that represented the true position, but it had seemed appropriate that he bring the claim against the Company for that reason.  However, he was able to point to the settlement agreement which he made with the Company in May 2017.  That agreement was a full and final settlement of all claims which the plaintiff had against the Company, or Mr Crossland, and under the agreement the plaintiff was to receive an amount of £40,384.64, which we were told represented repayment of the loan account of £15,000 and the balance for his claim against the Company by way of unfair dismissal.  That settlement suggests by implication that the Company and the plaintiff agreed that the loan account properly due by the Company to the plaintiff was in the sum of £15,000.  Furthermore, the settlement agreement expressly reserved the right of the plaintiff to bring proceedings against the defendant in respect of any debt alleged to be due.  In our judgment, the arrangements made for settlement of his claims against the Company are entirely consistent with the plaintiff's present claim against the defendant. 

18.      We should not leave the settlement of matters between the plaintiff and the Company without adding that although our decision is not binding on the Company because it is not a party to these proceedings, one consequence would seem to follow, namely that the Company owes the defendant the sum of £15,000, i.e. the loan made by the defendant through the plaintiff to the Company in September 2015.  Reclaiming that sum however is a matter for the defendant and the Company and is not the subject of the present judgment. 

19.      For these reasons, the Court finds in favour of the plaintiff and condemns the defendant to pay him the sum of £15,000. 

Authorities

Selby v Romeril [1996] JLR 210.

Incat Equatorial Guinea Limited and others v Luba Freeport Limited [2010] JLR 287.

Calligo Limited v Professional Business Systems CI Limited [2017] JRC 159.

Leach v Leach [1969] JJ 1107.

Mobil Sales v Transoil (Jersey) Limited [1981] JJ 143.

La Motte Garages Limited v Morgan [1989] JLR 312.

Daisy Hill Real Estates Limited v Rent Control Tribunal [1995] JLR 176.

Marett v Marett and O'Brien [2008] JLR 384.

Home Farm Developments Limited and others v Le Sueur and others [2015] JCA 242.

Jersey and Guernsey Law Review.

Sutton v Insurance Corp of the Channel Islands Limited [2011] JLR 80.

Flynn v Reid [2012] (1) JLR 370.

Law of Contract, 2nd Ed (1992)

Pothier's Treatise on the Law of Obligations or Contracts