Mistake
Cases
Smith v Hughes
(1871) LR 6 QB 597
Cockburn CJ gave the first judgment.
“I take the true rule to be, that where a specific article is offered for sale, without express warranty, or without circumstances from which the law will imply a warranty—as where, for instance, an article is ordered for a specific purpose—and the buyer has full opportunity of inspecting and forming his own judgment, if he chooses to act on his own judgment, the rule caveat emptor applies. If he gets the article he contracted to buy, and that article corresponds with what it was sold as, he gets all he is entitled to, and is bound by the contract. Here the defendant agreed to buy a specific parcel of oats. The oats were what they were sold as, namely, good oats according to the sample. The buyer persuaded himself they were old oats, when they were not so; but the seller neither said nor did anything to contribute to his deception. He has himself to blame. The question is not what a man of scrupulous morality or nice honour would do under such circumstances. The case put of the purchase of an estate, in which there is a mine under the surface, but the fact is unknown to the seller, is one in which a man of tender conscience or high honour would be unwilling to take advantage of the ignorance of the seller; but there can be no doubt that the contract for the sale of the estate would be binding.
It only remains to deal with an argument which was pressed upon us, that the defendant in the present case intended to buy old oats, and the plaintiff to sell new, so the two minds were not ad idem; and that consequently there was no contract. This argument proceeds on the fallacy of confounding what was merely a motive operating on the buyer to induce him to buy with one of the essential conditions of the contract. Both parties were agreed as to the sale and purchase of this particular parcel of oats. The defendant believed the oats to be old, and was thus induced to agree to buy them, but he omitted to make their age a condition of the contract. All that can be said is, that the two minds were not ad idem as to the age of the oats; they certainly were ad idem as to the sale and purchase of them. Suppose a person to buy a horse without a warranty, believing him to be sound, and the horse turns out unsound, could it be contended that it would be open to him to say that, as he had intended to buy a sound horse, and the seller to sell an unsound one, the contract was void, because the seller must have known from the price the buyer was willing to give, or from his general habits as a buyer of horses, that he thought the horse was sound? The cases are exactly parallel.”
Blackburn J,
In this case I agree that on the sale of a specific article, unless there be a warranty making it part of the bargain that it possesses some particular quality, the purchaser must take the article he has bought though it does not possess that quality. And I agree that even if the vendor was aware that the purchaser thought that the article possessed that quality, and would not have entered into the contract unless he had so thought, still the purchaser is bound, unless the vendor was guilty of some fraud or deceit upon him, and that a mere abstinence from disabusing the purchaser of that impression is not fraud or deceit; for, whatever may be the case in a court of morals, there is no legal obligation on the vendor to inform the purchaser that he is under a mistake, not induced by the act of the vendor. And I also agree that where a specific lot of goods are sold by a sample, which the purchaser inspects instead of the bulk, the law is exactly the same, if the sample truly represents the bulk; though, as it is more probable that the purchaser in such a case would ask for some further warranty, slighter evidence would suffice to prove that, in fact, it was intended there should be such a warranty. On this part of the case I have nothing to add to what the Lord Chief Justice has stated.
But I have more difficulty about the second point raised in the case. I apprehend that if one of the parties intends to make a contract on one set of terms, and the other intends to make a contract on another set of terms, or, as it is sometimes expressed, if the parties are not ad idem, there is no contract, unless the circumstances are such as to preclude one of the parties from denying that he has agreed to the terms of the other. The rule of law is that stated in Freeman v Cooke.[5] If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.
The jury were directed that, if they believed the word “old” was used, they should find for the defendant—and this was right; for if that was the case, it is obvious that neither did the defendant intend to enter into a contract on the plaintiff’s terms, that is, to buy this parcel of oats without any stipulation as to their quality; nor could the plaintiff have been led to believe he was intending to do so.
But the second direction raises the difficulty. I think that, if from that direction the jury would understand that they were first to consider whether they were satisfied that the defendant intended to buy this parcel of oats on the terms that it was part of his contract with the plaintiff that they were old oats, so as to have the warranty of the plaintiff to that effect, they were properly told that, if that was so, the defendant could not be bound to a contract without any such warranty unless the plaintiff was misled. But I doubt whether the direction would bring to the minds of the jury the distinction between agreeing to take the oats under the belief that they were old, and agreeing to take the oats under the belief that the plaintiff contracted that they were old.
The difference is the same as that between buying a horse believed to be sound, and buying one believed to be warranted sound; but I doubt if it was made obvious to the jury, and I doubt this the more because I do not see much evidence to justify a finding for the defendant on this latter ground if the word “old” was not used. There may have been more evidence than is stated in the case; and the demeanour of the witnesses may have strengthened the impression produced by the evidence there was; but it does not seem a very satisfactory verdict if it proceeded on this latter ground. I agree, therefore, in the result that there should be a new trial.
Hartog v Colin & Shields
[1939] 3 All ER 566
Singleton J.
“In this case, the plaintiff, a Belgian subject, claims damages against the defendants because he says they broke a contract into which they entered with him for the sale of Argentine hare skins. The defendants’ answer to that claim is:
“There really was no contract, because you knew that the document which went forward to you, in the form of an offer, contained a material mistake. You realised that, and you sought to take advantage of it.”
Counsel for the defendants took upon himself the onus of satisfying me that the plaintiff knew that there was a mistake and sought to take advantage of that mistake. In other words, realising that there was a mistake, the plaintiff did that which James LJ, in Tamplin v James, at p 221, described as “snapping up the offer.” It is important, I think, to realise that in the verbal negotiations which took place in this country, and in all the discussions there had ever been, the prices of Argentine hare skins had been discussed per piece, and later, when correspondence took place, the matter was always discussed at the price per piece, and never at a price per pound. Those witnesses who were called on behalf of the plaintiff have had comparatively little experience of dealing in Argentine hare skins. Even the expert witness who was called had had very little. One witness, Mr Caytan, I think, had had no dealings in them for some years, though before that he had had some, no doubt. On the whole, I think that the evidence of Mr Wilcox, on behalf of the defendants, is the more likely to be right–namely, that the way in which Argentine hare skins are bought and sold is generally per piece. That is shown by the discussions which took place between the parties in this country, and by the correspondence. Then on 23 November came the offer upon which the plaintiff relies. It was an offer of 10,000 Argentine hares, winters (100 skins equalling 16 kilos), at 10d per lb; 10,000 half hares at 6d per lb; 10,000 summer hares at 5d per lb. Those prices correspond, roughly, in the case of the winter hares, to 3d per piece, half hares 2d per piece, and summer hares 1d per piece. The last offer prior to this, in which prices were mentioned, was on 3 November from the defendants, and the price then quoted for winter hares was 10d per piece. Even allowing that the market was bound to fall a little, I find it difficult to believe that anyone could receive an offer for a large quantity of Argentine hares at a price so low as 3d per piece without having the gravest doubts of it.
I mention merely the price of the winter hares, because Mr Wilcox told me and I accept his evidence, that at some time the price of Argentine winter hares fell to 9d. I am satisfied, however, from the evidence given to me, that the plaintiff must have realised, and did in fact know, that a mistake had occurred. What did he do? Mr Hartog put it forward as being a bona fide act on his part that he at once went to Mr Caytan and entered into a contract with him. I am not sure that it points to a bona fide act at all. Mr Caytan, who was called before me, apparently entered into an arrangement with him on that same day, 23 November, to buy Argentine winter hares at 11d per lb, so that the price, if there had been a contract at 10d per lb, has risen on the sale of the goods to Mr Caytan to 11d per lb. That is 11/2d up, which is a considerable increase, and much greater than that which he had been offering to pay in the letters which passed earlier. It is a much greater increase.
I cannot help thinking that, when this quotation in pence per pound reached Mr Hartog, the plaintiff, he must have realised, and that Mr Caytan, too, must have realised, that there was a mistake. Otherwise I cannot understand the quotation. There was an absolute difference from anything which had gone before–a difference in the manner of quotation, in that the skins are offered per pound instead of per piece.
I am satisfied that it was a mistake on the part of the defendants or their servants which caused the offer to go forward in that way, and I am satisfied that anyone with any knowledge of the trade must have realised that there was a mistake. I find it difficult to understand why, when Mr Caytan bought in this way at 11d per lb, he could not tell me what the total purchase price was, and I cannot help thinking that there was an arrangement of some sort, amounting rather to a division of the spoil. That is the view I formed, having heard the witnesses. I do not form it lightly. I have seen the witnesses and heard them, and in this case can form no other view than that there was an accident. The offer was wrongly expressed, and the defendants by their evidence, and by the correspondence, have satisfied me that the plaintiff could not reasonably have supposed that that offer contained the offerers’ real intention. Indeed, I am satisfied to the contrary. That means that there must be judgment for the defendants.”
Intrum Justitia BV v. Legal and Trade Financial Services Ltd.
[2005] IEHC 190
O’Sullivan J
Mistake
On reflection I have to say that I have doubts as to whether this is a case of true mistake as known to the law of contract at all.
The parties entered into an agreement which contains warranties by the defendant as vendor as to the accuracy and reliability of the financial information known to the parties at the time. These warranties are numerous and comprehensive and it is clear that they are wide enough to cover the situation that has arisen in the present case. Both parties clearly thought at the time that the accounts and financial information presented a true picture, and in that sense, of course, were mistaken as to the actual situation, but they also included by agreement warranties from the defendant intended to deal with a situation where their view of the account might not turn out to be the case. They acknowledged, in other words, that their current state of knowledge might be incomplete or inaccurate and came to an agreement as to which of them should bear the consequences if such should prove to be the case. Mistake in contract law concerns a situation where the parties think they know the true facts and proceed upon the basis of their erroneous assumption without even suspecting that their assumptions might be wrong, quite a different thing from the situation of the parties in the present case who thought they knew the true financial circumstances of the company but contemplated at the same time that their information may be misleading and proceeded to agree what was to happen if that should prove to be the case. No body suggests a contract of insurance is based on a mistake just because the parties cannot identify the event which it is intended to deal with.
Furthermore if, contrary to the above, it is correct to subject the circumstances of the present case to an analysis driven by the traditional law of mistake in contract cases, and that this analysis could, therefore, result in a conclusion that the plaintiff company is entitled to rescission, by reason of the fact that the parties did not appreciate the true financial picture, then in my view such a result would be anomalous given the situation that the same parties have addressed the possibility that the accounts might not present a true picture and in arranging what is to happen in such an event have agreed that rescission would not be available to the plaintiff. This latter position arises because the contract provides at Schedule 6, Clause 7 that:-
“No breach or breaches of any of the warranties, specific warranties or the deed of indemnity shall give rise to any right on the part of the purchaser to rescind this agreement after completion.”
The case was argued, notwithstanding the above, by counsel for both parties upon the basis that there had been a mutual mistake, namely that both parties at the time of entering the agreement made the mistake of thinking that there had been no embezzlement, and in deference to the submissions of counsel I will deal with their arguments in what follows.
In doing so however, and particularly in the context of a submission that the purchaser did not get substantially what he bargained for, it is necessary that I reach some view as to the extent of the embezzlement.
……
Having considered such evidence as is available in my opinion the effect of the fraud does not mean that the subject matter of the share purchase agreement is essentially different from the one contracted for. Accordingly the plaintiff would not be entitled on the basis of mistake to rescission under common law as identified in Bell v. Lever Bros [1932] AC 161. Nor is this a case where the misapprehension (to the effect that there had been no embezzlement) was fundamental to the agreement (which included the wide ranging warranties already discussed and an agreement that their breach would not give rise to rescission). Accordingly the plaintiff would not be entitled to rescission in equity as identified in Solle v. Butcher [1950] 1 K.B. 671 and as applied in this country by Costello J. (as he then was) in O’Neill v. Ryan [1992] 1 I.R. 166 672 at p. 185.
Of course I acknowledge that the plaintiff company’s witnesses said that if they had known in advance of the embezzlement, they would not have entered the agreement. This does not prove, however, that therefore the effect of the embezzlement was fundamental, anymore than an insured driver’s assertion that he would not have driven on the day of the accident had he known of it beforehand means that he did not need insurance. This was an agreement to buy shares in a company with specific objectives in mind and the plaintiff company’s evidence referred to has to be seen in context.
The evidence is that the “drivers” for the purchase of these shares were the plaintiff company’s desire to acquire the very good client base including some blue chip clients of the defendant, and its good employees and in particular, John Cahill the Managing Director, to improve the company’s position in the Irish market and to receive the disclosed revenue stream, enhanced by the synergies that would become operative when the two companies were merged together.
It is also clear from the evidence that the merging process has been put on hold since the discovery of Colin Thorpe’s embezzlement but that notwithstanding this the revenue stream has remained as predicted, and that John Cahill remains employed at the Ashtown Gate premises albeit not as Managing Director. One or two clients have transferred from the Ashtown Gate (erstwhile defendant) company’s business to the plaintiff’s own English subsidiary business at Park West and that the one or two clients who have ceased doing business have done so for reasons other than those related to the embezzlement. Of course it is true that the embezzlement has not become public knowledge and that when it does many clients may become concerned as has happened apparently in England to a subsidiary of the plaintiff company’s where a non-fraudulent discrepancy was discovered and which caused considerable upset and loss to that company.
There was further evidence that the clients, particularly the blue chip clients such as banks, of a company engaged in debt collection on behalf of those clients will be particularly sensitive to the publication of financial impropriety within the debt collecting company. They can only be reassured, it is said, by a full forensic audit which establishes that none of their own monies were taken, that none of their clients had complained about being asked to discharge bills already paid and that there was a clear and reliable identification of the extent of the embezzlement. Nobody suggested that such an exercise is impossible but there has been widely divergent views as to the cost of such an audit and indeed the specific scope involved.
Once again in this context I am left in the situation where no such audit has taken place and accordingly I must deal with the evidence produced without speculating beyond it.
Given, therefore, that the likelihood is that the extent of the audit is limited to some four hundred and fifty seven thousand euro and that a forensic exercise can be done which will establish with reasonable certainty such extent and can satisfy clients including blue chip clients of the defendant company, and bearing in mind the “drivers” which motivated the plaintiff in acquiring the defendant’s company shares, I do not think that what the plaintiff got in their share purchase agreement was so different from what they contracted for as to qualify for the descriptions in the authorities which justify an entitlement to rescission either at common law or in equity. In other words this is not one of those exceptional circumstances which are extremely limited where rescission as distinct from damages will be granted by a court as identified by Costello J. (as he then was) in O’Neill v. Ryan.
Couturier & Ors v Hastie & Anor
[1856] UKHL J3
Sir F. Thesiger and Mr. James Wilde for the Plaintiffs in Error: The purchase here was not of the cargo absolutely as a thing assumed to be in existence, but merely of the benefit of the expectation of its arrival, and of the securities against the contingency of its loss. The purchaser bought in fact the shipping documents, the rights and interests of the vendor. A contract of such a kind is valid, Paine v. Meller (6 Ves. 349); Cass v. Rudele (2 Vern. 280). The language of the contract implies all this. The representation that the corn was shipped free on board at Salonica, means that the cargo, was the property of, and at the risk of the shipper, Cowasjee v. Thompson (5 Moo. P.C. 165). The Court of Exchequer proceeded on the words of this contract, and gave the correct meaning to them. Mr. Baron Parke (8 Exch. 54) said, ” There is an express engagement that the cargo was of average quality when shipped, so that it is clear that the purchaser was to run the risk of all subsequent deterioration by sea damage or otherwise, for which he was to be indemnified by having the cargo fully insured; for the 27s. per quarter were to cover not merely the price, but all expenses of shipment, freight, and insurance.” In a contract for the sale of goods afloat, there are two periods which are important to be regarded, the time of sale and the time of arrival. If at the time of the sale there is anything on which the contract can attach it is valid, and the vendee bound, Barr v. Gibson (3 Mee. and Wels. 390). The goods are either shipped, as here, “free on board,” when it is clear that they are thenceforward at the risk of the vendee, or they are shipped “to arrive,” which saves the vendee from all risk till they are safely brought to port, Johnson v. Macdonald (9 Mee. and Wels. 600). The intention of the parties is understood to be declared by different terms of expression, and the judgment of the Exchequer Chamber here really violates that intention. The case of Strickland v. Turner (7 Exch. 208), which was referred to by the Lord Chief Baron (8 Exch. 49), is not in point, for there the annuity, which was the subject of the sale, had actually ceased to exist when the sale took place; there was nothing whatever on which the contract could attach; and the principles therefore on which all contracts of sale must proceed, as explained and illustrated by Pothier,[1] whose definitions of a sale are literally adopted by Mr. Chancellor Kent (2 Kent’s Com. 468), applied there, but they do not apply here, for here the parties were dealing with an expectation, namely, the expectation of the arrival of the cargo. As Lord Chief Baron Richards said, in Hitchcock v. Giddings (4 Price, 135), ” If a man will make a purchase of a chance, he must abide by the consequences.” Here, however, the chance was only that of the arrival of the cargo, and that chance was covered by the policy, for the cargo, itself, as stated in the contract, had been actually shipped. Had the cargo been damaged at the time of this contract, the loss thereby arising must have been borne by the purchaser. Suppose the corn had been landed at Tunis, and had remained in the warehouse there, it would have ceased to be a cargo in the strict and literal meaning of the word, but the purchaser would still have been bound by his contract.
The Court of Exchequer Chamber, admitting that the vendee might have recovered an average loss under the policy on this cargo, said that he could not have recovered if a total loss had occurred, and referred to, an admission to that effect supposed to have been made by the present Baron Martin when arguing Sutherland v. Pratt (11 Mee. and Wels. 296). That admission does not mean what is thus supposed; and after the case of Roux v. Salvador (3 Bing. N.C. 266), where there was a total loss, and the Plaintiff recovered on the policy, it is difficult to understand how such an opinion could be entertained. A technical objection arising on the form of the policy would not affect this question. The purchaser’s right on this policy would have been complete, Phillips (1 Phill. Ins. 438), Marshall (1 Marsh. Ins. 333), and March v. Pigott (5 Burr. 2802). By what has happened here, the purchaser has been saved the payment of freight, Vlierboom v. Chapman (13 Mee. and Wels. 230); and Owens v. Dunbar (12 Ir. Law. Rep. 304) shows that he would have been bound to accept the cargo. The contract here was, that the cargo was shipped “free on board.” To that extent the vendor was bound, but he was not bound by any farther and implied warranty, Dickson v. Zizinia (10 Corn. Ben. 602). Mr. Butt and Mr. Bovill for the Defendants in Error were not called on.
The Lord Chancellor: My Lords, this case has been very fully and ably argued on the part of the Plaintiffs in Error, but I understand from an intimation which I have received, that all the learned Judges who are present, including the learned Judge who was of a different opinion in the Court of Exchequer, before the case came to the Exchequer Chamber, are of opinion that the judgment of the Court of Exchequer Chamber sought to be reversed by this writ of error was a correct judgment, and they come to that opinion without the necessity of hearing the counsel for the Defendants in Error. If I am correct in this belief, I will not trouble the learned counsel for the Defendants in Error to address your Lordships, because I confess, though I should endeavour to, keep my mind suspended till the case had been fully argued, that my strong impression in the course of the argument has been, that the judgment of the Court of Exchequer Chamber is right. I should therefore simply propose to ask the learned Judges, whether they agree in thinking that that judgment was right.
Mr. Baron Alderson said: My Lords, Her Majesty’s Judges are unanimously of opinion that the judgment of the Exchequer Chamber was right, and that the judgment of the Court of Exchequer was wrong; and I am also of that opinion myself now, having been one of the Judges before whom the case came to be heard in the Court of Exchequer.
The Lord Chancellor: My Lords, that being so, I have no hesitation in advising your Lordships, and at once moving that the judgment of the Court below should be affirmed. It is hardly necessary, and it has not ordinarily been usual for your Lordships to go much into the merits of a judgment which is thus unanimously affirmed by the Judges who are called in to consider it, and to assist the House in forming its judgment. But I may state shortly that the whole question turns upon the construction of the contract which was entered into, between the parties. I do not mean to deny that many plausible and ingenious arguments have been pressed by both the learned counsel who have addressed your Lordships, showing that there might have been a meaning attached to that contract different from that which the words themselves impart. If this had depended not merely upon the construction of the contract but upon evidence, which, if I recollect rightly, was rejected at the trial, of what mercantile usage had been, I should not have been prepared to say that a long continued mercantile usage interpreting such contracts might not have been sufficient to warrant, or even to compel your Lordships to adopt a different construction. But in the absence of any such evidence, looking to the contract itself alone, it appears to me clearly that what the parties contemplated, those who bought and those who sold, was that there was an existing something to be sold and bought, and if sold and bought, then the benefit of insurance should go with it. I do not feel pressed by the latter argument, which has been brought forward very ably by Mr. Wilde, derived from the subject of insurance. I think the full benefit of the insurance was meant to go as well to losses and damage that occurred previously to the 15th of May, as to losses and damage that occurred subsequently, always assuming that something passed by the contract of the 15th of May. If the contract of the 15th of May had been an operating contract, and there had been a valid sale of a cargo at that time existing, I think the purchaser would have had the benefit of insurance in respect of all damage previously occurring. The contract plainly imports that there was something which was to, be sold at the time of the contract, and something to be purchased. No such thing existing, I think the Court of Exchequer Chamber has come to the only reasonable conclusion upon it, and consequently that there must be judgment given by your Lordships for the Defendants in Error.
Judgment for the Defendants in Error, with costs. Lords’ Journals, 27 June 1856.
Saunders v Anglia Building Soc (sub nom Gallie v Lee)
[1970] UKHL 5 [1971] AC 1004, [1970] UKHL 5
Lord Pearson
The Master of the Rolls decided the case on a broad principle to which
I will refer later.
Russell, L.J., carefully examined the facts of the case and made two
comments on the plaintiff’s evidence, and these were in effect his grounds
of decision. He said—(1) “It is inadequate to establish the minimum facts
” necessary to establish the plea of non est factum, assuming that it would
” be sufficient for that plea to show that the plaintiff was induced wholly
” by Lee’s falsehood to think that she was signing a deed of gift to
” Parkin whereas she executed an assignment in terms for value to Lee. I
” think that the plaintiff’s evidence in this regard was unsatisfactory, and
” was inadequate to discharge the burden of proof that is laid by law
” on this plea, which requires strong and clear evidence for its discharge….”
(2) ” At first sight, of course, it is easy to see the difference between a
” voluntary assignment of a leasehold property to A and an assignment
” for value of that property to B. But what upon the plaintiff’s own evidence
” was the essential character of the document she was intending to execute?
” It was a document intended by her to divest herself of her leasehold
” property by transferring it to another, not as mere trustee for her, but
” so that the transferee should be in a position to deal with the property
” and in particular by borrowing money on the security of the property. Her
” evidence in my view makes it plain that she understood that Lee and Parkin
” were jointly concerned in a project of raising money on security of the
” property and this was her intention. In those circumstances I do not
” consider that it is correct to say that, for the purposes of the plea of
” non est factum. a transfer by her to Lee is to be regarded as of a totally
” different character or nature from a transfer to Parkin. The learned judge
” relied on the identity of the transferee as constituting the essential nature
” or character of the instrument. In so doing I think that he paid insufficient
” regard to what I may call the object of the exercise. Suppose that Lee
” had carried through the arrangement that Parkin had understood was
” made—had in fact paid Parkin. This would have fulfilled the plaintiff’s
” purpose in executing the document put before her.”
I respectfully agree with the reasoning of Russell L.J. and in particular
with the principle that importance should be attached to the ” object of the
” exercise”. when dissimilar legal documents may have similar practical
effects. Another example of this will be found in Mercantile Credit Com-
pany Limited v Hamblin [1965] 1 Q.B. 242, 267. In that case the defendant
had signed hire purchase documents, and there was some evidence that she
intended to raise money by means of a mortgage of her car, and she had
pleaded non est factum. It became plain, however, that the object of the
proposed hire purchase transaction was to produce the same practical effect
as a mortgage of the car would have produced (if it had been lawful). She
would sell the car through a dealer to a finance company, and take it back
from the finance company on hire purchase, with the results that she would
receive a lump sum down and would repay it with additions by instalments
over a period, so that she would for practical purposes be in much the same
position as if she had mortgaged the car. The plea of non est factum
failed.
I think Salmon L.J.’s view of the facts in the present case was consistent
with that of Russell L.J.. but his main conclusion on the facts was this:
” In the present case it seems plain from Mrs. Gallic’s evidence, which was
” given before an examiner and which we are therefore in just as good a
” position to evaluate as was the learned judge, that Mrs. Gallie would have
” executed the conveyance even if its true character and class and the nature
” of the transaction had been properly explained to her and she had under-
” stood the explanation. Certainly she was not induced to sign by any
” false representation made to her by Lee.” In a later passage Salmon L.J.
said: ” If Parkin had taken the trouble to explain the true nature of the
” document to her and told her that the solicitors had advised that it should
” be in that form and asked her to sign it, there can in my view be no real
” doubt but that she would have done so.”
I think that conclusion of Salmon L.J. is probably right but there may
be an element of doubt as to what the plaintiff would have done if she
had been given a full explanation of the document. I would dismiss the
appeal for the reasons given by Russell L.J. because they seem to me
free from doubt.
In the judgments of the Court of Appeal in this case there was an elaborate
and, if I may respectfully say so, illuminating and valuable discussion of the
law relating to the plea of non est factum. It is not practicable in this
opinion to examine what they have said at length and in detail, dealing
with every point. It seems to me that the right course here is to examine
the law on this subject with the aid of the judgments in the Court of Appeal
and to endeavour to arrive at clear general propositions for the future on
the basis of the earlier law which I think has become distorted in some
respects.
I must, however, deal specifically with the broad principle stated by the
Master of the Rolls as his conclusion from his investigation of the law. It
was this: ” Whenever a man of full age and understanding, who can read
” and write, signs a legal document which is put before him for signature—
” by which I mean a document which, it is apparent on the face of it, is
” intended to have legal consequences—then, if he does not take the trouble
” to read it, but signs it as it is, relying on the word of another as to its
” character or contents or effect, he cannot be heard to say that it is not
” his document. By his conduct in signing it he has represented, to all
” those into whose hands it may come, that it is his document; and once
” they act upon it as being his document, he cannot go back on it, and say
” it was a nullity from the beginning.” In applying the principle to the
present case, the Master of the Rolls said: ” Mrs. Gallie cannot in this
” case say that the deed of assignment was not her deed. She signed it
” without reading it, relying on the assurance of Lee that it was a deed of
” gift to Wally. It turned out to be a deed of assignment to Lee. But it
” was obviously a legal document. She signed it: and the building society
” advanced money on the faith of it being her document. She cannot now
” be allowed to disavow her signature.”
There can be no doubt that this statement of principle by the Master of the
Rolls is not only a clear and concise formulation but also a valuable guide
to the right decision to be given by a Court in any ordinary case. The
danger of giving an undue extension to the plea of non est factum has been
pointed out in a number of cases. For instance in Muskham Finance Ltd.
v. Howard [1963] 1 Q.B. 904 at page 912 Donovan L.J. delivering the
judgment of the Court said:—” The plea of non est factum is a plea which
” must necessarily be kept within narrow limits. Much confusion and
” uncertainty would result in the field of contract and elsewhere if a man
” were permitted to try to disown his signature simply by assertaing that
” he did not understand that which he had signed.” In Hunter v. Walters
(1871) L.R. 7 Ch. App. 75 at page 87, Mellish L.J. said:—”Now, in my
” opinion, it is still a doubtful question at law, on which I do not wish to
” give any decisive opinion, whether, if there be a false representation
” respecting the contents of a deed, a person who is an educated person.
” and who might, by very simple means, have satisfied himself as to what
” the contents of the deed really were, may not, by executing it negligently
” be estopped as between himself and a person who innocently acts upon
” the faith of the deed being valid, and who accepts an estate under it.”
This passage was referred to by Farwell L.J. in Howatson v. Webb [1908]
1 Ch. 1 at page 3, where he said: ” I think myself that the question suggested,
” but not decided, by Mellish L.J. in that case will some day have to be
” determined, viz., whether the old cases on misrepresentation as to the con-
” tents of a deed were not based upon the illiterate character of the person
” to whom the deed was read over, and on the fact that an illiterate man was
” treated as being in the same position as a blind man: see Thorough good’s
” case and Sheppard’s Touchstone page 56 ; and whether at the present
” time an educated person, who is not blind, is not estopped from availing
” himself of the plea of non est factum against a person who innocently acts
” upon the faith of the deed being valid.”
The principle stated by the Master of the Rolls can and should be
applied so as to confine the scope of the plea of non est factum within narrow
limits. It rightly prevents the plea from being successful in the normal
case of a man who. however much he may have been misinformed about the
nature of a deed or document, could easily have ascertained its true nature
by reading it and has taken upon himself the risk of not reading it.
I think, however, that, unless the doctrine of non est factum, as it has
been understood for at least a hundred years, is to be radically transformed,
the statement of principle by the Master of the Rolls, taken just as it
stands, is too absolute and rigid and needs some amplification and quali-
fication. Doubts can be raised as to the meaning of the phrase ” a man of
” full age and understanding, who can read and write “. There are degrees
of understanding and a person who is a great expert in some subjects may be
like a child in relation to other subjects. Does the phrase refer to under-
standing of things in general, or does it refer to capacity for understanding
(not necessarily in more than a general and elementary way) legal docu-
ments and property transactions and business transactions?
In my opinion, the plea of non est factum ought to be available in a proper
case for the relief of a person who for permanent or temporary reasons (not
limited to blindness or illiteracy) is not capable of both reading and
sufficiently understanding the deed or other document to be signed. By
” sufficiently understanding ” I mean understanding at least to the point of
detecting a fundamental difference between the actual document and the
document as the signer had believed it to be. There must be a proper case
for such relief. There would not be a proper case if (a) the signature of the
document was brought about by negligence of the signer in failing to take
precautions which he ought to have taken, or (b) the actual document was
not fundamentally different from the document as the signer believed it to
be. I will say something later about negligence and about fundamental
difference.
In the present case (he plaintiff was not at the material time a person who
could read, because on the facts found she had broken her spectacles and
could not effectively read without them. In any case her evidence (unless it
was deliberately false, which has not been argued) shows that she had very
little capacity for understanding legal documents and property transactions,
and I do not think a reasonable jury would have found that she was
negligent. In my opinion, it would not be right to dismiss the plaintiff’s
appeal on the ground that the principle stated by the Master of the Rolls
is applicable to her case. I do not think it is.
The principle as stated is limited to a case in which it is apparent on the
face of the document that it is intended to have legal consequences. That
allows for possible success of the plea in a case such as Lewis v. Clay [1897]
67 L.J. Q.B. 224. where Clay had been induced to sign promissory notes
by the cunning deception of a false friend, who caused him to believe
that he was merely witnessing the friend’s signature on several private and
highly confidential documents, the material parts of which had been
covered up.
I wish to reserve the question whether the plea of non est factum would
ever be rightly successful in a case where (1) it is apparent on the face of the
document that it is intended to have legal consequences; (2) the signer of
the document is able to read and sufficiently understand the document;
the document is fundamentally different from what he supposes it to be;
he is induced to sign it without reading it. It seems unlikely that the
plea ought ever to succeed in such a case, but it is inadvisable to rule out
the wholly exceptional and unpredictable case.
I have said above that the statement of principle by the Master of the
Rolls needs to be amplified and qualified unless the doctrine of non est
factum, as it has been understood for at least a hundred years, is to be
radically transformed. What is the doctrine, and should it be radically
transformed?
As to the early history, the authorities referred to in the judgment of
Byles J. in Foster v. Mackinnon (1869) L.R. 4 C.P. 704 at pages 711-12
(and also referred to in Holdsworth’s History of English Law, vol. 8 at
pages 50-51) were cited in the argument of this appeal. Having considered
them I think they show that the law relating to the plea of non est factum
remained in an undeveloped state until the judgment in Foster v. Mackinnon,
and the modern development began with that judgment. It was the
judgment of the Court (Bovill C.J., Byles, Keating and Montague Smith JJ.)
delivered by Byles, J. He said at page 711: “It seems plain, on principle
and on authority, that, if a blind man, or a man who cannot read, or
” who for some reason (not implying negligence) forbears to read, has a
” written contract falsely read over to him, the reader misreading to such a
” degree that the written contract is of a nature altogether different from
” the contract pretended to be read from the paper which the blind or
” illiterate man afterwards signs; then, at least if there be no negligence, the
” signature so obtained is of no force. And it is invalid not merely on the
” ground of fraud, where fraud exists, but on the ground that the mind of the
” signer did not accompany the signature ; in other words, that he never
” intended to sign, and therefore in contemplation of law never did sign,
” the contract to which his name is appended.”
In my opinion, the essential features of the doctrine are contained in
that passage and the doctrine does not need any radical transformation. A
minor comment is that the phrase ” who for some reason (not implying
negligence) forbears to ” read ” is (to use a currently fashionable word)
too ” permissive ” in its tone. If a person forbears to read the document,
he nearly always should be reckoned as negligent or otherwise debarred
from succeeding on the plea of non est factum.
The passage which I have set out from Byle’s J’s judgement, though I
think it contains the essential features, was only a brief summary in an
leading judgment, and there are further developments which need to be considered.
Ascertainment of the intention: I think the doctrine of non
est factum inevitably involves applying the subjective rather than the objec-
tive test to ascertain the intention. It takes the intention which a man has
in his own mind rather than the intention which he manifests to others
(the intention which as reasonable men they would infer from his words
and conduct).
There are, however, some cases in which the subjective test of intention
can be applied so as to produce the same result as would be produced by
the objective test. Suppose a man signs a deed without knowing or enquiring
or having any positive belief or formed opinion, as to its nature or effect:
he signs it because his solicitor or other trusted adviser advises him to do so.
Then his intention is to sign the deed that is placed before him, whatever
it may be or do. That is the intention in his own mind as well as the
intention which by signing he manifests to others. Examples of this will
be found in Hunter v. Walters [1871] 7 Ch. App. 75; National Provincial
Bank v Jackson (1886) 33 Ch. D. 1; King v. Smith [1900] 2 Ch. 425.
In King v. Smith Farwell, J. at page 430 cited and relied upon a passage in
the judgment of Mellish L. J. in Hunter v. Walters, where he said: ” When a
” man knows that he is conveying or doing something with his estate, but
” does not ask what is the precise effect of the deed, because he is told it
” is a mere form, and has such confidence in his solicitor as to execute the
” deed in ignorance, then, in my opinion, a deed so executed, although it
” may be voidable upon the ground of fraud, is not a void deed.” Farwell
J. said at page 430 that Mr. King ” had absolute confidence in his solicitor,
” and executed any deed relating to his property that Eldred put before him.”
I think this principle affords a solution to a problem that was raised
in the course of the argument. Suppose that the very busy managing director
of a large company has a pile of documents to be signed in a few minutes
before his next meeting, and his secretary has arranged them for maximum
speed with only the spaces for signature exposed, and he ” signs them blind “,
as the saying is, not reading them or even looking at them. He may be
exercising a wise economy of his time and energy. There is the possibility
of some extraneous document, involving him in unexpected personal liability,
having been fraudulently inserted in the pile, but this possibility is so
improbable that a reasonable man would disregard it. Bolton v. Stone [1951]
A.C. 850, 858. Such conduct is not negligence in any ordinary sense of the
word. But the person who signs documents in this way ought to be held
bound by them, and ought not to be entitled to avoid liability so as to shift
the burden of loss on to an innocent third party. The whole object of having
documents signed by him is that he makes them his documents and takes
responsibility for them. He takes the chance of a fraudulent substitution. I
think the right view of such a case is that the person who signs intends to sign
the documents placed before him, whatever they may be, and so there is no
basis on which he could successfully plead non est factum.
Negligence: It is clear that by the law as it was laid down in Foster v. Mackinnon a person
who had signed a document differing fundamentally from what he believed
it to be would be disentitled from successfully pleading non est factum if his
signing of the document was due to his own negligence. The word
” negligence ” in this connection had no special, technical meaning. It meant
carelessness, and in each case it was a question of fact for the jury to decide
whether the person relying on the plea had been negligent or not. In Foster
v. Mackinnon (supra) the Lord Chief Justice had told the jury that, if the
indorsement was not the defendant’s signature, or if, being his signature,
it was obtained upon a fraudulent representation that it was a guarantee, and
the defendant signed it without knowing that it was a bill, and under the
belief that it was a guarantee and if the defendant was not guilty of any
negligence in so signing the paper, the defendant was entitled to the verdict.
On appeal this direction was he’d to be correct. In Vorley v. Cooke (1857)
as reported in 1 Gifford at page 230 Stuart V.C. said: ” It cannot be said
” that Cooke’s conduct was careless or rash. He was deceived as anyone with
” the ordinary amount of intelligence and caution would have been deceived,
” and he is therefore entitled to be relieved.” Whatever may be thought of
the merits of the decision in that case, this passage illustrates the simple
approach to the question whether the signer of the deed had been negligent
or not. Similarly, in Lewis v. Clay (supra) Lord Russell of Killowen. C.J.,
left to the jury the question: ” Was the defendant, in signing his name as he
” did recklessly careless and did he thereby enable Lord William Nevill to
” perpetrate the fraud?
Unfortunately this simple and satisfactory view as to the meaning and
effect of negligence in relation to the plea of non est factum became distorted
in the case of Carlisle and Cumberland Banking Co. v Bragg [1911] 1 K.B.
489. The defendant was induced to sign the document by fraud, and did
not know that it was a guarantee, but thought that it was a mere proposal
for insurance. The jury found that he had been negligent. Pickford J.
considered that the finding of negligence was immaterial, and on appeal his
view was upheld. Vaughan Williams L.J. said at page 494: “I do not
” know whether the jury understood that there could be no material
” negligence unless there was a duty on the defendant towards the plaintiffs
” Even if they did understand that, in my opinion, in the case of this
” instrument, the signature to which was obtained by fraud, and which was
” not a negotiable instrument, Pickford J. was right in saying that the finding
” of negligence was immaterial. I wish to add for myself that in my
” judgment there is no evidence whatsoever to show that the proximate cause
” of the plaintiffs’ advancing money on this document was the mere signature
” of it by the defendant. In my opinion, the proximate cause of the plaintiffs’
” making the advance was that Rigg fraudulently took the document to the
” bank, having fraudulently altered it by adding the forged signature of an
” attesting witness, and but for Rigg having done those things the plaintiffs
” would never have advanced the money at all.”
The reasoning of the Court of Appeal in Carlisle and Cumberland Banking
Co. v. Bragg has been criticised, e.g., by Sir William Anson in the year 1912
in 28 Law Quarterly Review 190, and by Professor Guest in the year 1963
in 79 Law Quarterly Review 246. Also doubts as to the correctness of the
reasoning were expressed by Donovan L.J. delivering the judgment of the
Court of Appeal in Muskham Finance Ltd. v. Howard [1963] 1 Q.B. 904.
913 and by Gavan Duffy J. in Carlton and United Breweries Ltd. v. Elliot’t
[1960] Victoria Law Reports 320.
In my opinion, Carlisle and Cumberland Banking Company v. Bragg was
wrong in the reasoning and the decision.
I think it is not right to say that in relation to the plea of non est factum
negligence operates by way of estoppel. The phrase ” estoppel by negligence “
tends, in this connection at any rate, to be misleading in several ways:
The phrase is inaccurate in itself, as has been pointed out in Spencer
Bower and Turner on Estoppel by Representation at page 69 and in
the judgments of the Court of Appeal in this case. Estoppel in the
normal sense of the word does not arise from negligence: it arises
from a representation made by words or conduct.
The phrase tends to bring in the technicalities of estoppel, and the
requirement that the representation must be intended to be acted
upon may cause difficulties.
The phrase tends to bring in the technicalities of negligence as they
have been developed in the tort of negligence. This is what happened
in Carlisle and Cumberland Banking Co. v. Bragg, as shown by the
passage cited above. The innocent third party who has paid or lent
money on the faith of a negligently signed document should not have
to prove the signer owed a duty to him, nor that the signer’s negligence
was the proximate cause of the money being paid or lent.
An estoppel must be pleaded and proved by the party relying on
it. In relation to the plea of non est factum, this could put the
burden of proof on the wrong party. The person who has signed
the document knows with what knowledge or lack of knowledge and
with what intention he signed the document, and how he was induced
or came to sign it. He should have the burden of proving that his
signature was not brought about by negligence on his part.
Salmon, L.J., has said in his judgment in this case ([1969] 2 Ch. at
page 48)—” If … a person does sign a document because he negligently
” failed to read it, I think he is precluded from relying on his own negligent
” act for the purpose of escaping from the ordinary consequences of his
” signature. In such circumstances he cannot succeed on a plea of non est
” factum. This is not in my view a true estoppel, but an illustration of the
” principle that no man may take advantage of his own wrong.”. I agree.
The degree of difference required: The judgments in the older cases used
a variety of expressions to signify the degree or kind of difference that, for
the purposes of the plea of non est factum, must be shown to exist between
the document as it was and the document as it was believed to be. More
recently there has been a tendency to draw a firm distinction between (a) a
difference in character or class, which is sufficient for the purposes of the
plea, and (b) a difference only in contents, which is not sufficient. This
distinction has been helpful in some cases, but, as the judgments of the
Court of Appeal have shown, it would produce wrong results if it were
applied as a rigid rule for all cases. In my opinion, one has to use a more
general phrase, such us ” fundamentally different ” or ” radically different “
or ” totally different “.
I would dismiss the appeal.
AIB PLC v Higgins & Ors
[2010] IEHC 219
Non Est Factum
Whilst Mr. Mansfield accepts that he has a liability to the bank in respect of one sixth of the loan extended for the land purchase, he says it is no more than that. He contends that the signatures which he put on the letters of sanction were put there by him believing the documents to be something else.
This plea is in large part based upon an alleged disability from which Mr. Mansfield suffers. He said that he could not read the final facility letter which he signed and thought that he was extending the term of the monies which he had borrowed to purchase the lands. He said he did not understand that by signing the letter he was taking on any additional borrowing. He said that as far as he was concerned he was obtaining an extension on the first loan account and the other defendants were getting an extension on their borrowings. He knew that to be more significant and a larger amount but did not think that it related to him.
In support of this plea, he relies heavily upon his alleged inability to read. He has put in evidence an assessment which was carried out upon him by the National Assessment Agency Limited. The purpose of the assessment was to investigate whether he suffered from dyslexia or not.
The report demonstrates that Mr. Mansfield has had very little schooling. He attended Rathcoole National School but on his own admission was a poor student and was often absent. Following primary school, he attended a technical school in Naas but again was a regular absentee. He left that school after two years without taking any exams.
His reading fluency was assessed as that of a seven year old child. He fared no better in a passage comprehension test. His scores on a verbal comprehension index demonstrated him to be substantially below average and less than 3% of people of his age would score so low.
He did better on the perceptual organisation index which is a measure of non-verbal and “in the moment” reasoning. There he scored as being at least average and possibly above average.
Mr. Mansfield’s working memory index was such that less than 2% of his age peers would be expected to score so low.
The summary of these tests which were carried out by an educational psychologist records that Mr. Mansfield has a very severe reading difficulty. He cannot read any more than very basic sentences like “the cat sat on the rug”. Even then he would be very slow, might make mistakes and would be unlikely to comprehend or remember what he has read.
The psychologist was, however, unable to say with certainty if Mr. Mansfield is dyslexic or whether his reading difficulties are the result of missing school or inadequate teaching. He exhibits many characteristics of a person with dyslexia but intellectually is of at least average intelligence when non-verbal reasoning is required.
Given these difficulties of Mr. Mansfield, it is surprising to find that he recounted to the psychologist carrying out the test that he could fly a helicopter even though he would be unable to obtain a license to do so because that involves taking a written examination.
It is even more surprising to discover that despite his alleged disability, he is a director of some 25 companies. The range of the activities of these companies is very wide. They include animal husbandry services, maintenance and repair of motor vehicles, financial intermediation, real estate agencies, agricultural activities and management activities of holding companies. One of the companies has its name in Irish whilst two are registered in the Isle of Man. Mr. Mansfield is, in addition, the signatory on the annual returns in respect of a number of these companies. There he has certified that all of the information provided in the return is correct. Whilst this is no proof of his literacy, it does suggest that he has a good deal of experience in understanding commercial and financial matters.
All of these are family companies. He explained that documents are read and explained to him by his fellow directors who are members of the family. All of this suggests that his family members repose considerable trust in him to be able to understand and participate in the management of all of these family companies.
Despite this curious situation, I have for the purpose of this exercise to accept as I do that Mr. Mansfield is indeed under the considerable disability of having the reading age of a seven year old.
The defence of non est factum is one which has been considered in the context of an application for summary judgment by Morris J. (as he then was) in Tedcastle McCormack & Company Limited v. McCrystal (15th March, 1999). There that judge considered the decision of the House of Lords in Saunders v. Anglia Building Society [1971] AC 1004 which is the authoritative modern authority on the topic. He said:-
“I am satisfied that a person seeking to raise the defence of non est factum must prove:
(a) That there was a radical or fundamental difference between what he signed and what he thought he was signing;
(b) That the mistake was as to the general character of the document as opposed to the legal effect; and
(c) That there was a lack of negligence i.e. that he took all reasonable precautions in the circumstances to find out what the document was.”
In the course of his speech in Saunder’s case, Lord Reid having pointed out that there is a heavy burden of proof on the person who seeks to invoke this remedy went on to say:-
“The plea cannot be available to anyone who was content to sign without taking the trouble to try to find out at least the general effect of the document. Many people do frequently sign documents put before them for signature by their solicitor or other trusted advisers without making any inquiry as to their purpose or effect. But the essence of the plea non est factum is that the person signing believed that the document he signed had one character or one effect whereas in fact its character or effect was quite different. He could not have such a belief unless he had taken steps or been given information which gave him some grounds for his belief…”
Lord Hodson in the same case said:-
“Want of care on the part of the person who signs a document which he afterwards seeks to disown is relevant. The burden of proving non est factum is on the party disowning his signature; this includes proof that he or she took care. There is no burden on the opposite party to prove want of care.”
AIB contend that they knew nothing of Mr. Mansfield’s reading difficulties until they met Mr. Sutcliffe in August 2009. Mr. Sutcliffe informed them of the difficulties of his client Mr. Mansfield.
Mr. Mansfield himself did not tell AIB about his difficulties. He said in his affidavits that he was not aware as to whether the plaintiff was specifically made aware of these difficulties. He said it may have been known to them at the local branch where he had dealings. He went on:-
“Certainly no member of the plaintiff’s staff ever spoke to me about it in relation to the borrowing. I have never emphasised my difficulties with strangers and there was no reason, as far as I was concerned, to notify the AIB.”
Mr. Mansfield has wide business experience given his company directorships. He is of at least average intelligence where non-verbal reasoning is concerned.
He ought to have taken steps to find out what the letter of 19th January, 2009 was or told the bank of his problems. He did neither. He cannot be said to have taken any, still less “all reasonable precautions to find out what the document was” (per Morris J.)
Thus, one of the three ingredients required for a defence of non est factum is absent.
In these circumstances, I conclude that he has not demonstrated an arguable defence of non est factum.
Irish Bank Resolution Corporation Ltd -v- Quinn & Anor
[2011] IEHC 470
JUDGMENT of Mr. Justice Kelly delivered on the 16th day of December, 2011
Introduction
1. This is an application for summary judgment against the second defendant (Mrs. Quinn) for a sum in excess of €3m. The claim is made on foot of a facility letter of 17th November, 2006, a credit agreement of the same date and the then prevailing general conditions for personal loans of the plaintiff (the bank).
2. The amount of the facility was €3m and the purpose was identified as being to provide the borrowers with a personal loan facility. The defendants were the borrowers and judgment has already been recovered against the first defendant, Seán Quinn. The facility was repayable on demand and no issue has been raised in these proceedings concerning the demand which was made.
Terms
3. Under the heading “Borrowers Acceptance” on the letter of facility, Mrs. Quinn appended her signature no fewer than five times. The first and second time related to consent being given to written and telephonic communications being had between the borrowers and the bank.
4. The third signature was appended under the legend “contracts negotiated away from the business premises of the bank”. I am satisfied that a signature was not in fact required at that point, but I will return to this later.
5. The fourth signature was an acknowledgement that Mrs. Quinn was waiving a right to a ten day period to reconsider her commitment to the agreement.
6. The final signature was an acknowledgement that she had read the conditions set out in the letter of facility and the general conditions of the credit agreement which formed part of the overall agreement and that she agreed to be bound by the provisions of the agreement.
7. Mrs. Quinn acknowledged that she was:-
“fully aware of, and understood the nature of the agreement and had been advised to take and had been given the opportunity to take separate independent legal advice on the effect of the agreement”.
She did not, however, indicate whether she had taken or waived that opportunity.
8. The credit agreement of the same date indicated to her that she might withdraw from the agreement at any time within ten days of receiving it and advised her to take legal advice before it was signed.
9. A number of the general conditions of the bank are of relevance having regard to the lines of defence which have been outlined.
10. This borrowing was a joint borrowing by the defendants, who are husband and wife. Under clause 16 of the general conditions dealing with personal loans, it is expressly provided that:-
“Where there are two or more parties to the agreement as borrowers, their liabilities hereunder shall be joint and several and references to the borrower shall be deemed to be references to any one or more of such persons”.
11. General condition 1(4) provided that the borrower instructed the bank that:-
“In connection with the operation of any account in the name of the borrower, the bank is authorised to act on instructions given by the borrower by telephone, telex, facsimile or email or by electronic, microwave, magnetic or digital means”.
12. The following clause provided that in consideration of the bank agreeing, at the request of the borrower, to act on instructions received by those methods, the borrower agreed and covenanted with the bank that the bank might act on such instruction. Such instructions could include instructions to pay money or otherwise to debit or credit any account of the borrower with any amount or relate to the disposition of any money or purport to bind the borrower to any agreement with the bank or with any other person. Furthermore, the borrowers accepted that they should at all times accept the debit or the credit by the bank of any of the borrowers’ accounts in respect of any such transaction as conclusive evidence of any such instruction sent by telephone or any of the other methods described.
13. Under clause 9, bearing the heading “Representations and Warranties”, the borrower represented that he or she had made full disclosure of all facts in relation to the financial affairs of the borrower which would have a material effect on the ability of the borrower to meet the obligations undertaken.
14. Under clause 14, the borrower indemnified and agreed to keep indemnified the bank against all claims, demands, liabilities, losses etc. as provided for in that clause.
15. Finally, the general conditions provided that a certificate by any director of the bank as to the amount due from the borrower was to be conclusive evidence of what was stated save for any manifest error.
The Test
16. Three lines of defence are advanced by Mrs. Quinn which I will consider in turn. Before doing so, I ought to identify the test which I have to apply on this application.
17. There is now a wealth of jurisprudence, both in this Court and in the Supreme Court as to the approach to be taken on an application for summary judgment.
18. The threshold of proof which has to be achieved by a defendant is low. The test as identified by Hardiman J. in Aer Rianta v. Ryanair [2001] 4 IR 607, is this:-
“Is it ‘very clear’ that the defendant has no case? Is there either no issue to be tried or only issues which are simple and easily determined? Do the defendant’s affidavits fail to disclose even an arguable defence?”
19. The most recent statement of the law from the Supreme Court is contained in Danske Bank v. Durkan New Homes [2010] IESC 22. There Denham J. (as she then was) cited with approval the views of Ackner L.J. where he said:-
“It is of course trite law that O.14 proceedings are not decided by weighing the two affidavits. It is also trite that the mere assertion in an affidavit of a given situation which is to be the basis of a defence does not, ipso facto, provide leave to defend; the Court must look at the whole situation and ask itself whether the defendant has satisfied the Court that there is a fair or reasonable probability of the defendants having a real or bona fide defence.”
My Approach
20. For the purpose of this exercise, I propose to take the affidavit evidence sworn by Mrs. Quinn entirely at face value. Both in replying affidavits and in submissions, substantial criticism was made as to the credibility of a number of sworn statements made by Mrs. Quinn. For example, she took issue at being described as a “business lady”. She said that she is, in fact, a homemaker and has been such for the past 36 years or more. She says that her only role since the time of her marriage at 21 years of age was as a wife and mother, rearing her family and taking care of her husband and children. She said that she was never involved in any business or financial dealings beyond deciding upon the weekly groceries and providing for household expenses. She said that the description of her as a business lady is wholly incorrect.
21. In response, the plaintiff adduced evidence that Mrs. Quinn held directorships of in excess of 60 Irish companies. She was also company secretary of more than ten companies. She also held directorships in 28 companies registered in the United Kingdom and Northern Ireland.
22. Mrs. Quinn says that although she was appointed a company director, she did not possess any sophistication or even basic knowledge on business matters. She said she was never involved in any of the day-to-day decision making processes and was not employed by the Quinn Group of companies.
23. I leave to one side all questions of credibility concerning this and indeed other areas of dispute. I will deal with Mrs. Quinn’s sworn defence at its high watermark. I accept for the purpose of this application that everything said by Mrs. Quinn, pertinent to the lines of defence sought to be advanced on her behalf are accurate and true.
Non Est Factum
24. The first line of defence is that of non est factum. This is a defence which is only rarely invoked successfully. The law, both in England and in this jurisdiction on the topic is clear.
25. The leading case is that of Saunders v. Anglia Building Society [1971] AC 1004, which was followed by Morris J. (as he then was) in this country in Tedcastle McCormick and Company Limited v. McCrystal (15th March, 1999) and by me in Allied Irish Banks Plc v. Higgins & Ors. [2010] IEHC 219.
26. Morris J. said as follows:-
“I am satisfied that a person seeking to raise the defence of non est factum must prove:-
(a) That there was a radical or fundamental difference between what he signed and what he thought he was signing;
(b) That the mistake was as to the general character of the document as opposed to the legal effect;
and
(c) That there was a lack of negligence i.e. that he took all reasonable precautions in the circumstances to find out what the document was.”
27. In his speech in the Saunders case, Lord Reid, having pointed out that there is a heavy burden of proof on the person who seeks to invoke this remedy, went on to say:-
“The plea cannot be available to anyone who was content to sign without taking the trouble to try to find out at least the general effect of the document. Many people do frequently sign documents put before them for signature by their solicitor or other trusted advisors without making any inquiry as to their purpose or effect. But the essence of the plea non est factum is that the person signing believed that the document he signed had one character or one effect, whereas in fact, its character or effect was quite different. He could not have such a belief, unless he had taken steps or been given information which gave him some grounds for his belief.”
28. Lord Hodson in his speech in the same case said:-
“Want of care on the part of the person who signs a document which he afterwards seeks to disown is relevant. The burden of proving non est factum is on the party disowning his signature; this includes proof that he or she took care. There is no burden on the opposite party to prove want of care.”
29. I have already pointed out what is said by Mrs. Quinn concerning what she describes as her lack of basic knowledge in business matters. She went on to say in her affidavit:-
“I do accept that over the course of very many years, my practice has been to sign documents when requested to do so by my husband, Seán Quinn Snr., the first named defendant, or by his former colleagues within the Quinn Group. However, I say that these documents were never explained to me nor was I ever consulted or provided with any explanations or legal advice informing me as to the nature or impact of the documents I was being asked to sign. This is embarrassing to admit, but it is the truth.”
30. She told me in the affidavits that she had no recollection of ever seeing the facility letter or of actually signing it. However, she does accept that it is her signature which appears on the facility letter. She said that she first became aware of the existence of a personal loan facility only after these proceedings were instituted. Up until then she said that she has no appreciation of even the letter of demand which was sent to her and her husband at their home at Ballyconnell, Co. Cavan.
31. Mrs. Quinn’s practice when any bank statements or documents generally to do with Quinn companies arrived at her home was to simply put them in a forwarding envelop to the Quinn Headquarters at Derrylin or to give them to her husband. She said that she had no appreciation of the existence of the facility, the provision of funds, or whether they had been purportedly lodged. She said that she did not even know that she was a customer of Anglo Irish Bank, the plaintiff bank as it then was.
32. Mrs. Quinn says that she had no recollection of signing the document or the contents or nature of the document ever being brought to her attention. She went on to say in her affidavits that prior to the receipt of the demands from the bank she did not believe that she had received any direct communication or contact from the bank or any official acting on its behalf.
33. On 19th December, 2006, Mrs. Quinn executed a further document, namely a joint account mandate by signing it on two occasions. She also provided a copy of her passport to the bank and that copy passport has been exhibited in affidavit evidence before me.
34. Even the most cursory of glances at the documents which bear her signature would alert any but the illiterate to the fact that this was some form or borrowing transaction. But it would appear that even such information was lost on Mrs. Quinn because she apparently simply signed documents as part of a course of conduct without giving the matter a second thought. That is the height of the case which she makes. I am satisfied that it is one which falls far short of providing even a statable defence on the basis of non est factum.
35. Mrs. Quinn has been unable to demonstrate even arguably the existence of the first of the three ingredients said forth by Morris J. in the Tedcastle McCormick case. She has to be able to demonstrate an argument that there was a radical or fundamental difference between what she signed and what she thought she was signing. The truth is, she gave no thought to what she was signing and, therefore, could not know whether there was any difference between what she was signing and what she thought she was signing. To use the words of Lord Reid, “she could not have such a belief unless she had taken steps or being given information which gave some grounds for that belief”.
36. Second, in order to establish an entitlement to rely on this defence, there has to be a lack of negligence on the part of the person seeking to set it up. What could more negligent than willy-nilly signing formal legal documents without giving any thought as to their effect? Mrs. Quinn has failed to provide any evidence of the existence of the third ingredient identified by Morris J. On this topic, I agree fully with the observations made by Clarke J. in ACC Bank v. Kelly, where he said:-
“By signing a commercial banking arrangement, a borrower agrees to be bound by the terms of that arrangement and if the borrower has not taken the trouble to adequately read the document or be adequately informed as to its meaning then the borrower must accept the consequences of having signed a commercially binding agreement in those circumstances.”
37. I am satisfied that under this line of defence of non est factum that it is very clear that Mrs. Quinn has no case. She has failed to adduce any evidence which would satisfy the existence of an arguable case in respect of two of the three ingredients of the defence of non est factum as demonstrated in the case law.
Undue Influence
38. The second line of defence is an attempt to say that everything which Mrs. Quinn did occurred under the undue influence of her husband.
39. It was argued during the course of the hearing that there is at law a presumption of undue influence between husband and wife. There is not. That much is clear from case law going back to the middle of the eighteenth century. In Halbury’s Laws of England (4th Ed.) para. 40, vol. 18, one finds on this topic the following under the heading “No presumption between husband and wife” – ‘it is noticeable that the relation of husband and wife is not one which gives rise to the presumption that undue influence was exercised’”.
40. In support of that statement, there is a line of cases which begins with that of Rigby v. Cox in 1750 going right through the nineteenth century and up until the twentieth century. So it is a principle that has been well established in law. Its effect was eloquently articulated in this jurisdiction by Carroll J. in In Re Hunting Lodges Limited [1985] ILRM 85. Now admittedly, Carroll J. was dealing with a different situation to what I am dealing with here. In her case, a wife sought to avoid personal liability for the debts of a miscreant company in circumstances where she acted as a director of that company. As part of her defence, she alleged that she was in fact a housewife and mother and that she really took no part in the running of the company and therefore should be able to avoid liability. This is what Carroll J. had to say:-
“In relation to Mrs. Porrit, the case has been made on her behalf that she played no part in the running of the company. The day has long since passed since married women were classified with infants and persons of unsound mind as suffering from a disability so far as responsibility for their acts was concerned, or since a married woman could escape criminal responsibility on the grounds that she acted under the influence of her husband. Mrs. Porrit cannot evade liability by claiming that she was only concerned with minding her house and looking after her children. If that was the limit of the responsibilities she wanted, she should not have become a director of the company, or having become one she should have resigned.”
41. Whilst the circumstances are different, it seems to me that that is an accurate articulation of the legal position.
42. I am satisfied that there is no presumption of undue influence at law arising simply because of the relationship of husband and wife. That has been clear since at least 1750.
43. The lack of any presumption of undue influence is not, however, the end of the matter. The absence of the presumption does not mean that there could not be actual undue influence. But if there was such actual undue influence, there would have to be, at least, some evidence demonstrative of such impropriety. There is no evidence of any sort to support such a contention. There is no suggestion of Mrs. Quinn suffering from any intellectual disability, mental illness, feebleness of mind or cognitive impairment. Neither is there any evidence of any threats of bullying or such behaviour towards her by Mr. Quinn. There is not the slightest evidence to suggest any allegation of actual undue influence could be sustained. Accordingly, I am of the view that there is here neither a presumption of undue influence or evidence of any undue influence to make such an argument possible. Accordingly, this line of defence fails.
Total Failure of Consideration
44. The last line of defence is on the basis that there was in the present case, a total failure of consideration. The gist of this argument is that the monies in question did not benefit Mrs. Quinn.
45. It is quite clear on the documentary evidence that the monies were, at the direction of her husband, transferred into one of the Quinn companies. But it is equally clear that Mr. and Mrs. Quinn were joint borrowers. Under the terms and conditions, which I have already alluded to, Mr. Quinn was entitled to give the direction which he did which is binding upon Mrs. Quinn. The bank was entitled to act on foot of that direction. It was no concern of the banks as to what happened to the monies thereafter. The monies were described as a personal loan facility. Whether the €3m was used to complete the decoration of the Quinn dwelling house or for some other purpose was a matter for the borrowers.
46. The plain fact in this case is that the loan was drawn down at the direction of Mr. Quinn and was utilised. It is also clear from the material that has been adduced before me that interest on the loan was serviced on a number of occasions, the loan being held in the joint names of the defendants.
47. Joint borrowings always give rise to the possibility that one of the borrowers may utilise the funds with no appreciable value being seen by the other borrower. That is the case with joint borrowings which are governed by terms and conditions such as apply here. If Mrs. Quinn does not consider that she got value for the borrowings then her complaint is against Mr. Quinn and not the bank.
48. I am satisfied that that no arguable defence has been demonstrated under this heading either.
Final Comment
49. I should finally deal with the criticism which was made, late in the day, concerning one of the signatures which were appended by Mrs. Quinn to the facility letter. It is that one which was appended under the heading “Contracts negotiated away from the business premises of the bank”. What is said is that there should be a signature and a witness to the signature where the contract is negotiated away from the business premises of the bank. What is actually said in the letter is that there should be a signature and a witness to the signature, where the contract is negotiated away from the business premises of the bank and where this is done in the presence of a representative of the bank.
50. I am satisfied that there was no necessity for Mrs. Quinn to sign that part of the letter at all because this agreement was not signed in the presence of a representative of the bank. That is what is sought to be addressed by this provision. I am also satisfied that this provision is contained in the facility letter so as to comply with obligations imposed under Statutory Instrument 224/1989 entitled European Communities (Cancellation of Contracts Negotiated Away From Business Premises) Regulations. As there was no representative of the bank present, there was no necessity for this to be signed. It was in fact signed by Mrs. Quinn and witnessed. I am satisfied that there is no point by way of defence which can be raised in respect of this matter which arose only late yesterday afternoon when Mr. Shipsey was on his feet.
Conclusion
51. The view I take, therefore, is that putting aside all of the criticisms that were made of Mrs. Quinn’s evidence and taking them at face value as being accurate and truthful in every respect, she has failed to demonstrate an arguable defence under any of the three headings which were identified by counsel on her behalf. That being so, the plaintiff is entitled to summary judgment against her for the amount outstanding.
Allied Irish Banks Plc -v- Smith
[2012] IEHC 381
JUDGMENT of Mr. Justice Sean Ryan delivered the 5th October 2012
This is a claim for summary judgment. The bank’s claim is first for €230,000 on foot of a guarantee and secondly for sums due on personal accounts of the defendant amounting to €78,479 at the date of the summons. The total less credits amounts to over €300,000 and continuing interest is also claimed.
The background to the claim is set out in the grounding affidavit of Mr Tom O’Reilly, who describes how the defendant personally and his company, Harmark Developments Ltd, now in liquidation had accounts at the bank’s Rathgar branch. Mr Smith executed a guarantee of the company’s liability to the bank. He also had personal accounts at the same branch.
The proposed defence is that (a) the defendant did not execute the guarantee; (b) the bank was in breach of the Consumer Credit Act, 1979 and the consumer code and (c) the personal accounts were to the bank’s knowledge operated for the purposes of the limited company and not for Mr Smith’s benefit.
The guarantee document is headed “guarantee” and is dated the 9th July 2007 and it covers debts up to €230,000. Clause 22 is a certificate that the guarantor has read the document and has received a copy for his own use. It appears to be signed by Mark Smith and witnessed.
The defendant’s first replying affidavit is dated 3rd February 2011. He says that in or around July 2007 the bank contacted him by phone requesting that he enter into a personal guarantee for the credit facilities afforded to the company. He was preoccupied at the time due to illness of his wife and son but he agreed to discuss the matter with the bank as he wished to continue the company’s credit line. On or around the 9th July 2007 he was requested by phone to attend the Main Street, Bray branch of the bank to sign some banking documents relating to the proposed personal guarantee for the company. He usually dealt for his personal banking and that of the company with the Rathgar branch.
Mr Smith says that he was presented with a single page for signing and he duly did so. It was not attached to any other document or pages. He says that he did not believe that he was entering into a finalised personal guarantee for the company because he had not yet been presented with the terms and conditions or the limit and had not been given an opportunity to obtain legal advice. Also, he did not get a copy of the guarantee. Mr Smith says that when he finally got to see the guarantee, on the 20th March 2009, he noted that it did not have the mandatory warning to seek independent legal advice, as he says is required by the consumer protection code of 2006.
As to the claim for €78,000 the defendant says that he never received those monies and that the loan was not a personal loan but was paid to the company and not him personally and that no original loan agreement exists that is signed by him.
The bank’s response is in an affidavit sworn on the 25th November 2011 by Mr Kieran Walsh, lending manager who was formerly a branch manager at the plaintiffs branch. He says that Mr Smith was acting as owner and director of the company and not as a consumer for the purpose of the 2006 consumer protection code. Referring to the guarantee, he says that the reason it was signed by the defendant at the Bray branch was to facilitate Mr Smith who lives in Wicklow. It would have been easier for the bank to have done it at Rathgar. On the 2nd July, a week before the guarantee was executed, the bank wrote a letter of sanction to the company offering loan facilities subject to security that included a guarantee by Mr Smith, who signed the company’s acceptance and the company’s resolution on the 5th July 2007. The sanction letter made clear that security in the form of a personal guarantee from Mr Smith was required.
As to the balance of the money claimed, Mr Walsh gives particulars of the transfer of funds between Mr Smith’s personal accounts and exhibits signed debit and lodgment dockets and extracts from the bank statements for the relevant personal accounts.
Another affidavit in support of the bank’s claim is sworn by Ms Jennifer Smith, a bank official employed at the Bray branch. She says that she witnessed Mr Smith’s execution of the guarantee. She says that Mr Smith was not and could not have been presented with a single sheet which was subsequently attached to other documents to make up the guarantee document. The guarantee form comes from the printers in the form of pages which are stapled prior to delivery and it would be obvious if there had been any interference. The original document was produced in court and this statement appears to be correct and counsel for Mr Smith did not suggest the contrary. Ms Smith goes on to say that the bank’s guarantees are light yellow in colour and each one has a white copy which is given to the customer and that is what happened in this instance. On the reverse of the page signed by the defendant it is stated in bold print: “1/we certify that I/we have read the within guarantee and have received a copy/copies thereof for my/our use”. She says that the only reason Mr Smith called at that branch was to execute the guarantee and it was done there to facilitate him.
The defendant Mr Smith replies in another affidavit dated February 23rd, 2012. He repeats his claims about the execution of the guarantee. In regard to the point Ms Jennifer Smith makes about the form of the document, namely, that it was stapled together by the printers who supplied it to the bank and that it would have been obvious if it had been interfered with, Mr Smith says that if the alleged guarantee was complete when he executed it, “only the signatory page was presented to me and I was not shown, nor was I afforded an opportunity to examine, the other folios of the document.” This is a different assertion to paragraph 7 of the previous affidavit where he says that he was presented with a single page for signing which was not attached to any other document or pages.
Mr Smith says that the terms and conditions of the guarantee had not been negotiated and that he had not had the opportunity to obtain legal advice. He was of course aware that the bank required the guarantee and he had prepared and signed and returned to the bank the company documentation agreeing to the terms. And he agrees that his visit to the bank was to sign some banking documents relating to the proposed personal guarantee for Harmak Developments Ltd.
He accepts that he received and signed the letter of sanction of the advance to the company but claims that he did not believe it to be a finalised negotiation. He does not, however, say what remained to be discussed or in what way he was misled or was mistaken as to the nature and effect of the guarantee.
He argues that he was acting as a consumer within the meaning of the Consumer Credit Act, 1995 and the consumer protection code and that the bank was in breach of both of those protection schemes.
In response to the information provided by Mr Walshe about Mr Smith’s personal accounts, he says that he used those accounts for the purpose of the business of the company and that the bank knew this. He says that the bank set up an account “without proper discussion beforehand” and he believed that money credited to the personal accounts was to settle the debts of the company.
The law on summary judgment
The Law
In Aer Rianta v Ryanair [2001] 4 IR 607, the Supreme Court endorsed two tests from the English jurisprudence that the Court had previously adopted in First National Commercial Bank v. Anglin [1996] 1 IR 75. In the latter case, Murphy J delivering the judgment of the Court said:
“For the court to grant summary judgment to a plaintiff and to refuse leave to defend it is not sufficient that the court should have reason to doubt the bona fides of the defendant or to doubt whether the defendant has a genuine cause of action (see Irish Dunlop Co. Ltd. v. Ralph (1958) 95 I.L.T.R. 70).
“In my view the test to be applied is that laid down in Banque de Paris v. de Naray [1984] 1 Lloyd’s Law Rep. 21, which was referred to in the judgment of the President of the High Court and reaffirmed in National Westminster Bank Plc v. Daniel [1993] 1 W.L.R. 1453. The principle laid down in the Banque de Paris case is summarised in the headnote thereto in the following terms:-
‘The mere assertion in an affidavit of a given situation which was to be the basis of a defence did not of itself provide leave to defend; the Court had to look at the whole situation to see whether the defendant had satisfied the Court that there was a fair or reasonable probability of the defendants having a real or bona fide defence.’
“In the National Westminster Bank case, Glidewell L.J. identified two questions to be posed in determining whether leave to defend should be given. He expressed the matter as follows:-
‘I think it right to ask, using the words of Ackner L.J. in the Banque de Paris case, at p. 23, ‘Is there a fair or reasonable probability of the defendants having a real or bona fide defence?’ The test posed by Lloyd L.J. in the Standard Chartered Bank case, Court of Appeal (Civil Division), Transcript No. 699 of 1990 ‘Is what the defendant says credible?’, amounts to much the same thing as I see it. If it is not credible, then there is no fair or reasonable probability of the defendant having a defence.”‘
In Aer Rianta, McGuinness J. identified the issue “whether the proposed defence is so far fetched or so self contradictory as not to be credible.” Hardiman J asked: “Is it ‘very clear’ that the defendant has no case? Is there either no issue to be tried or only issues which are simple and easily determined? Do the defendant’s affidavits fail to disclose even an arguable defence?” The Court took the nature and context of the dispute into account. Hardiman J referred to the facts of the cases in the authorities cited and observed that in First National Commercial Bank v. Anglin [1996] 1 IR 75, “the indisputable documentation of a commercial transaction rendered the alternative chronology proposed by the defendant quite untenable.”
I adopt the helpful summary by McKechnie J in Harrisrange Ltd v Duncan [2003] 4 IR 1 of the Courts’ approach to summary judgment. Among the points highlighted by the judge are the following:
• the court should assess not only the defendant’s response, but also in the context of that response, the cogency of the evidence adduced on behalf of the plaintiff, being mindful at all times of the unavoidable limitations which are inherent on any conflicting affidavit evidence;
• leave should not be granted where the only relevant averment in the totality of the evidence, is a mere assertion of a given situation which is to form the basis of a defence and finally;
• the overriding determinative factor, bearing in mind the constitutional basis of a person’s right of access to justice either to assert or respond to litigation, is the achievement of a just result whether that be liberty to enter judgment or leave to defend, as the case may be.
The Court’s task is not simply to examine the affidavits and exhibits to discover whether there is a conflict of fact on a decisive point. Neither is it to weigh conflicting depositions in the balance to decide which is more probable. It has to apply the above credibility test to the proposed defence. That is what the Courts did in First National Commercial Bank v. Anglin, Aer Rianta v Ryanair and the other Irish and English authorities. In Banque de Paris v. de Naray Lord Ackner said:
“It is of course trite law that O. 14 proceedings are not decided by weighing the two affidavits. It is also trite that the mere assertion in an affidavit of a given situation which is to be the basis of the defence does not, ipso facto, provide leave to defend; the Court must look at the whole situation and ask itself whether the defendant has satisfied the Court that there is a fair or reasonable probability of the defendants’ having a real or bona fide defence.”
The guarantee
Morris J., as he then was, in Tedcastle McCormack and Company Limited v. McCrystle (unreported, 15th March, 1999) and Kelly J. in AIB v. Higgins and Others (unreported 3rd June, 2010) applied “the authoritative modem authority on the topic” of non est factum, namely, the decision at the House of Lords in Saunders v. Anglia Building Society [1971] AC 1004. A person seeking to raise the defence of non est factum must prove: (a) that there was a radical or fundamental difference between what he signed and what he thought he was signing; (b) that the mistake was as to the general character of the document as opposed to the legal effect; and (c) that there was lack of negligence ie. that he took all reasonable precautions in the circumstances to find out what the document was. Lord Reid said that “the plea cannot be available to anyone who was content to sign without taking the trouble to try to find out at least the general effect of the document.” Lord Hodson said that the burden of proving non est factum is on the party disowning his signature; this includes proof that he or she took care. There is no burden on the opposite party to prove want of care.
The guarantee was produced in court and it is all of a piece and does not consist of single separate sheets. It specifies the amount of money representing the limit and it certifies that the guarantor has received a copy. The circumstance of Mr Smith’s attending the Bray branch was for the purpose of signing documents relating to the guarantee, according to his own affidavit. He knew from an earlier conversation that the bank wanted him to enter into a personal guarantee to cover the liability of his company. It is impossible for a person in business not to be aware that banks look for personal guarantees to cover limited liability company borrowings. He knew that. The letter of sanction made clear what was required in the way of security for the credit that was being offered to the company and Mr Smith was satisfied to agree to that.
It is not credible that Mr Smith signed sanction documents specifying security in the form of a personal guarantee by him and attended a different branch of the bank for the purpose of signing documents relating to the guarantee without knowing what he was doing. And a businessman would know what it meant to be asked to sign a guarantee on behalf of a limited company of which he was a director. He would not need to be told what the implications were.
It is also not credible that Mr Smith would have gone into another branch of the bank for a specific purpose and would have been satisfied to sign a document or rather a single page of a document without seeing the complete document. He had expressly agreed to execute a guarantee. That was a condition of giving credit to his company.
What possible point would there be in the bank presenting him with only one page of a multi-page agreement when there was no issue or question as to his willingness to sign the full guarantee?
The guarantee is clear in its terms, it is not an unusual transaction, it is signed by the defendant and he has not established a basis for a plea of non est factum.
Consumer Credit Act 1995
The next matter to be considered is the application of the Consumer Credit Act 1995. The defendant argues that there was breach of this legislation which rendered the guarantee that he signed, if he signed it as a guarantee, invalid. His case is that s. 38 applies, which provides that a creditor is not entitled to enforce a credit agreement or a contract of guarantee relating thereto unless the requirements of Part III of the Act have been complied with and in particular section 30. The defendant says that there was breach of section 30. His case is that he was not given a copy of the contract of guarantee and that means that the agreement is unenforceable. Although this allegation is denied by Ms Jennifer Smith in her affidavit, there is an issue of fact if the Act is applicable.
Section 30(1) of the Act applies to a credit agreement and any contract of guarantee relating thereto. This is clearly a contract of guarantee so the question is whether it relates to a credit agreement within the meaning of the Consumer Credit Act 1995. “Credit agreement” is defined in the Act to mean “an agreement whereby a creditor grants or promises to grant to a consumer a credit in the form of a deferred payment, a cash loan or other similar financial accommodation”. This is a loan or similar financial accommodation granted to the company, so the question then becomes whether the accommodation was granted to a consumer. In a word, was the company that got the facility from the plaintiff bank a consumer? “Consumer” “means a natural person acting outside his trade, business or profession”. This company is not a natural person and was not acting outside his trade, business or profession. Accordingly, the company that got the financial accommodation was not a consumer within the meaning of the Act. That is the fundamental point which means that the contract of guarantee is not within the statutory definition. These definitions are contained in s. 2 of the Act and in the result it is clear and irresistible in my view that s. 30 does not apply.
In respect of the defendant’s own personal accounts, it seems obvious that a person who has a bank account and gets loans from the bank or overdraft facilities is not acting outside his trade, business or profession. That means that he is not a consumer within the meaning of the 1995 legislation.
I am also of the view that Mr. Smith was indeed acting within his trade, business or profession in running, operating and managing the company and he was also doing so when he guaranteed the loan facilities that were advanced to the company by the bank.
It is clear that the company cannot be considered a consumer because it is not an natural person and it was not acting outside its trade, business or profession when it borrowed money.
In Allied Irish Banks Plc v. Higgins, Kavanagh, Mansfield and O’Callaghan (Unreported, High Court 3rd June, 2010), Kelly J. reviewed the law concerning consumers in the 1995 Act and the Council directive that the legislation was implementing and I adopt the reasoning of Kelly J. in that case.
The defendant also cites the Consumer Protection Code 2006. Because I do not think that the defendant is a consumer, the code does not apply. Moreover, if the code did apply and if there was a breach of it, that would not of itself invalidate the contract of guarantee.
Defendant’s personal debt
In regard to the defendant’s claim about his personal debt, the affidavit of Kieran Walsh of the 25th November, 2011 exhibits the debit docket signed by the defendant and the signed lodgment docket by which he transferred the money from one account to another. There is nothing in fact to support the proposition that Mr Smith operated his personal accounts and allowed the bank to reorganise them so as to facilitate company activity in a manner that would not involve liability on his part but without any shred of documentation to support that. Not only that, the illogical proposition is that the bank was advancing this money to Mr Smith for company purposes without imposing any liability on him and was doing so at a time when it was demanding a personal guarantee for the company’s borrowings. And ifMr Smith used his money to finance the company’s operations, that was his choice and does not extinguish his personal liability.
Conclusion
In the result, the defendant has not made out an arguable defence on any of the bases put forward by him or on his behalf. The bank is accordingly entitled to judgment.
Intrum Justitia BV v. Legal and Trade Financial Services Ltd.
[2005] IEHC 190 (10 June 2005)
JUDGMENT of O’Sullivan J. delivered the 10th of June, 2005
Introduction
The plaintiff is a Dutch Company located at the Hague and carries on the business of credit management and debt collection.
The defendant is an English Company located in Lancashire and carries on a similar business.
By agreement dated 11th October, 2004, the plaintiff agreed to purchase the entire issued share capital of an Irish subsidiary of the defendant (Legal and Trade Collections (Ireland) Limited) for a purchase price of €2.15 million of which 90% was paid on closing. Prior to entering into the agreement the plaintiff had conducted a comprehensive due diligence process.
The agreement provided for delivery of Completion Accounts not later than four weeks following the completion date, that was not later than Monday 8th November, 2004. These accounts were to comprise the un-audited balance sheet and un-audited profit and loss account for the period from the last accounts date to
1st October, 2004. This exercise would have included a reconciliation of the defendant’s client’s accounts which was of significance to the plaintiff because these had come under particular scrutiny in the course of the due diligence process and some concern had been raised in relation to them.
Embezzlement comes to light
The financial director of the defendant was Mr. Colin Thorpe and he worked from the defendant’s Ashtown Gate premises in Dublin. The chief accountant of the defendant was Mr. Ronald Whitehead and he was based in the United Kingdom. At the end of October and the beginning of November, 2004, he was in Dublin working on the Completion Accounts. In particular he was working on the provision of a reconciliation between the client account balance in the nominal ledger and the balance in the CUBS, which was a computerised system operated by the defendant to administer the debts on behalf of the companies’ clients. In the early afternoon of Tuesday 2nd November, 2004, Ronald Whitehead had made a comparison between the nominal ledger and the control account and found a discrepancy in the order of €457,000. He had a subsequent discussion with Colin Thorpe who at that point confessed that he had been embezzling money from the defendant for a period of almost three years from the beginning of 2002 to feed a gambling habit.
Following his confession Colin Thorpe was emotionally upset and Ronald Whitehead took some time to quiet him down and to persuade him to contact Price Waterhouse Cooper, the company’s auditors, in an attempt to clarify the method and extent of the embezzlement. Mr. Whitehead also contacted his superiors in the United Kingdom and it was agreed that Paul Anslow, the Chief Financial Officer would come from England to Dublin the following day, which he did. That following day, Wednesday 3rd November was spent checking references and the system with the result that a figure of €453,000 approximately appeared to be the extent of the embezzlement. That exercise took all of Wednesday 3rd November, 2004, and on the morning of Thursday 4th November, Mr. Anslow contacted Mr. Biggam of the plaintiff who had been made a Director of the Ashtown Gate Company after completion of the agreement. Mr. Biggam immediately informed Mr. John Easdon who was Regional Managing Director of the plaintiff for the UK and Ireland and who was just returning from Zurich Airport. He arranged to come over to Dublin the next morning, Friday 5th November. He did so and having contacted his solicitors, Mr. Biggam and Mr. Easdon interviewed Colin Thorpe on the morning of Friday 5th November.
At that time they were concerned at the delay which had elapsed between Colin Thorpe’s confession in the early afternoon of the previous Tuesday and their being informed only on the morning of Thursday 4th. At the interview Colin Thorpe told Messrs. Easdon and Biggam what he had been doing since his confession and that he had wanted to go to the police. After meeting Mr. Thorpe, Mr. Easdon suspended him pending an investigation. He then contacted Mr. Anslow and Ronald Whitehead at around lunchtime on Friday 5th November. The big concern in Mr. Easdon’s mind at that point was why there had been a delay between Colin Thorpe’s confession and his being informed. He therefore asked Mr. Anslow and Mr. Whitehead to give their account of what had happened since Colin Thorpe’s confession.
At this time the defendant’s auditors, Price Waterhouse Coopers, were busy working on the finalisation of the Completion Accounts which were due to be delivered not later than the following Monday 8th November. Mr. Easdon asked that this activity cease for the duration of his conversation with Mr. Anslow and Mr. Whitehead and this was done. At the end of that conversation they had confirmed the account given by Colin Thorpe. Mr. Easdon said that he was “somewhat reassured” and that he was happy to let the auditors back in to complete their work and said so. In fact as transpired in evidence that Price Waterhouse Coopers were contacted on that Friday afternoon but had redeployed their personnel and did not have them available to continue work that Friday or indeed the following Monday.
The early correspondence
It will be recalled that Clause 4.5 of the agreement required furnishing by the defendant of Completion Accounts (as defined) on or before Monday 8th November, 2004. On that date a document was sent by Mr. Anslow, Chief Financial Officer of the defendant, which stated that “…we and our professional advisors need access to the premises at Ashtown Gate in order to access the records and have further discussions with senior management to carry out the investigation to the fullest extent possible. Until we are allowed to carry out fully our investigation, you will appreciate that the Completion Accounts can only be regarded as provisional.”
The letter went on to say that the writer was not able to present at that time the full reconciliation between the client account balance in the nominal ledger and the balance in CUBS.
On the same day, Monday 8th November, the plaintiff wrote to Geoffrey Ognall, Chairman of the defendant, saying that the disclosures were serious and had a fundamental impact on the share purchase agreement and that the integrity of all financial information provided to date was now open to question and that the magnitude of the problem was at that time unclear. The letter went on the say that it was of the utmost importance that the defendant immediately provide a complete account of all information known to the defendants them concerning deficiencies and financial irregularities in the accounts of the defendant. All rights were reserved.
On the next day, Tuesday 9th, Mr. Ognall wrote to the plaintiff stating that the plaintiff’s approval of further access with professional advisors was required to the records of the company and to senior management. The letter asked as a matter of urgency to be told how the defendant would be allowed to conduct the further investigations in relation to embezzlement. On the next day, Wednesday 10th, the plaintiff wrote asserting that the documents provided did not constitute Completion Accounts as defined by the contract and that the information did not fully identify the extent of the embezzlement, and therefore the defendant had not complied with the share purchase agreement. The letter stated that the plaintiff was currently considering the implication of the defendant’s failure and would respond to the points raised in early course. All rights were reserved.
On the following day, Thursday 11th November, the defendant wrote reiterating that the company and its advisors no longer had access to the records of the company and the company was therefore unable to produce the Completion Accounts. The defendant went on to suggest that the parties work together with an expert as defined in the agreement to assist in investigating the embezzlement and finalising the Completion Accounts. A letter of the same date from the plaintiff reasserts the question mark over all financial information and states that the plaintiff is unable to take any formal or contractual steps in relation to the target company but suggests without prejudice cooperation between the parties in relation to the governance thereof. It requested that the defendant countersign a letter in acknowledgement of their agreement. A further letter of the same day and in reply states the defendant was not in a position to countersign the correspondence but did undertake to cooperate fully in all investigations necessary to resolve the matter including to cooperate fully in assisting and preparing the completion accounts with the assistance of a duly designated independent expert.
On the following day, Friday 12th November, the plaintiff responded asserting that the defendant’s position appeared designed to advance the defendant company’s interest rather than resolving the matter in a way satisfactory to the plaintiff, complaining that the defendant’s position appears not to take into account the interest of third parties, pointing out that the implementation of Clause 4.5 was only of historical interest since no Completion Accounts had been provided and asserting that the defendant’s proposal would not be appropriate and further that the impact of the misappropriation of funds could not be considered to be limited to the question of the amount of money missing. It concluded with a statement that the plaintiff was prepared to consider any proposal the defendant might have to make but not one which was limited to the financial question of the misappropriated funds but, rather, one which would have to be accompanied by offers of indemnity to the appropriate extent.
On Tuesday 16th November, the defendant replied, refuting the allegations of self-interest and enclosing a report, admittedly incomplete because of the limited time available to investigate, and reasserting that they no longer had access to Colin Thorpe who had been suspended and that its accountants had been asked to no longer access the records. The report in turn was furnished under cover of a front page stating that it was incomplete by virtue of the fact that the defendant was not able to continue its investigation due to the suspension of Mr. Thorpe and the plaintiff company’s permitting no further access by the defendant to the records of the company. The defendant did not accept any responsibility for the accuracy of the information contained therein.
The report is clearly largely based on information which had been supplied by Colin Thorpe and is therefore based on information supplied approximately two weeks before the date of the report itself. The report includes also the reconciliation between the CUBS reports showing the actual amount of cash due to clients and the client funds creditor balance in the nominal ledger. The total amount of embezzlement is shown at €453,415.55.
On the next day, Wednesday 17th November, the defendant wrote in response, apparently, to telephone conversations on the previous day stating that the defendant was in full agreement with the plaintiff’s proposal to appoint KPMG as an independent expert within the terms of the Chairperson’s agreement in order to agree the Completion Accounts and that their decision would be final and binding. If there was to be a reduction in the purchase price the defendant stated it would comply with the mechanism set out in the agreement. The defendant stated it could give an indemnification and undertaking to compensate outside the terms of the share purchase agreement “when we do not know the possible extent of such an undertaking”. Surprise is expressed at the request for “a blanket indemnity, given that there has been an inconclusive and insufficient investigation into the matter” and the letter points out that the defendant cannot be responsible for transactions during the ownership of the plaintiff or for acts of third parties.
The response to this letter was a long letter on Friday 18th November, accusing the defendant of an opportunistic distortion of the proposal which was misrepresented in the defendant’s letter. The letter went on to reiterate the defendant’s misrepresentation of its financial position and to assert that the value of the transaction was entirely undermined and that the true financial position was unknown. Completion Accounts had not been furnished or other appropriate information which would enable the plaintiff to assess the full impact of the defendant’s misrepresentation. KPMG’s initial advice was that the defendant company would require a full forensic audit before any view could be taken on the true position of the accounts. The plaintiff did not know whether the defendant was solvent. The defendant is accused of not responding to the opportunity to cooperate in the interests of the company or to make a proposal. Accordingly the plaintiff rescinded the contract of 11th October, 2004, on the grounds that the defendant had very substantially misrepresented to the plaintiff the financial position of the company.
They say that had they known of the embezzlement beforehand they would under no circumstances have concluded the agreement and that the misrepresentation goes to the very heart of the deal. It is added “the ease with which you appear to have discovered this matter after completion is a cause for serious concern”. The consequences of rescission are then spelled out in relation to an interim continuation of the plaintiff’s directors pending replacement by the defendant and an assertion that the directors will report to the defendant as owner of the company and run it to the defendant’s account. The defendant must pass a resolution changing the name of the company from the plaintiff’s name to the defendant’s name. The entire purchase price must be returned.
Comment on this correspondence
The impression given by this correspondence is that each of the parties was adopting somewhat confusing if not self-contradictory positions. For example, the defendant was offering to cooperate but when faced with an indemnity which was too wide simply refused rather than returning with an appropriately by narrow indemnity; again, the defendant is seeking to operate the contract provisions in relation to an independent expert at a time when those provisions had no application. More fundamentally the defendant asserted more than once that the plaintiff had withdrawn permission to the defendant’s accountants to access the books of the defendant company when the true position was that such withdrawal had operated only for a short period of some hours on the afternoon of Friday 5th November. Thereafter on that day and on Monday 8th, the defendant’s accountants were asked by the defendant to assist in the finalisation of the Completion Accounts but had not the personnel to do it.
On the plaintiff’s side, as well however, the correspondence is initiated with a question raised over the integrity of all the financial information but notwithstanding this their letter of 8th November, states that it is of the utmost importance that the defendant immediately provide a complete account of all information known to the defendant concerning the deficiencies and irregularities in question. Again, at no stage does the correspondence point out that the defendant’s assertion that neither they nor their accountants have access to the books and records of the defendant company is incorrect. It is not clear what purpose the information requested as of the utmost importance in the plaintiff’s letter of 8th November, (the date for furnishing the Completion Accounts) would serve given that the deadline would have passed when same was furnished and indeed given that there was a serious question mark over all information that could be given. There were telephone calls between the principals before the defendant’s letter of 17th November, apparently in the context of some kind of agreed accountancy exercise but the defendant’s letter of that date was met with complete rejection on the basis that the defendant had apparently deliberately misunderstood those conversations. This was accompanied by the decision to rescind.
There seems to have been no real meeting of minds in this early, pre-solicitor, correspondence and indeed a certain amount of protecting of self-interest on both sides. There may well have been a lack of communication between the individuals on the defendant’s side in relation to access to the books and, quite possibly, the same on the side of the plaintiff.
The correspondence passed thereafter into the hands of the solicitor and the pleadings were initiated on 19th November, 2004.
The pleadings and submissions
In the pleadings the plaintiff claimed rescission of contract based on (a) fraudulent misrepresentation, (b) misrepresentation whether negligent or otherwise, (c) mistake and, (d) in addition damages for breach of contract. Before dealing with the latter three, I note that the allegation of fraudulent misrepresentation was withdrawn, but only when the plaintiff submitted its written legal submissions in mid April, 2005. This allegation was presumably first alluded to in the plaintiff’s letter of 18th November, 2004, which said “the ease with which you appear to have discovered this matter after completion is a cause for serious concern”.
Insofar as it is appropriate to refer to the remainder of the evidence, I propose to do so in the context of considering the submissions made in relation to the issues of misrepresentation, mistake and breach of contract and, finally, the question of damages.
The defendant counterclaims for specific performance of the agreement with an appropriate adjustment to the purchase price.
Misrepresentation
The plaintiff’s claim in this regard is founded on an e-mail sent by Geoffrey Ognall, Chairman of the defendant, to Ken Hanson Financial Director of the plaintiff on 14th May, 2004, before the commencement of the due diligence process which referred to the fact that the defendant had “no skeletons in the cupboard” and a further e-mail sent on 22nd June, 2004, in the middle of the due diligence process which indicated that all the key financial factors had been showed by the defendant. In evidence Mr. Easdon said that there was a difference between the parties in relation to the need to have what he described as “quite a rigorous and thorough due diligence” and the defendant’s anxiety to complete the transaction by the end of June. He said “the comment was that such an extensive due diligence is not necessary because there is nothing wrong with this company, you won’t find anything wrong with this company etc.”
In cross-examination it was put to Mr. Easdon that the representation about no skeletons in the cupboard and from Mr. Ognall in May of 2004, did not make any difference in how sparing or how thorough he was going to be in the due diligence process that ensued and he agreed. He said “No, that is right”. The second e-mail, which was on 22nd June, was in the course of the due diligence process. It was put to him again that nothing changed in the way that the due diligence was being carried out as a result of those words in the e-mail, and again Mr. Easdon said, “That’s right, yes.”
The evidence from Mr. Ognall was that he made the representations and intended them to be acted upon but in light of the foregoing evidence in my opinion the probability is that the defendant did not rely on those representations at all. Mr. Ognall explained that he was somewhat impatient and wanted to get the contract signed soon and was impatient with the thorough going due diligence process and made the representations in that context. It had no effect clearly from the replies of Mr. Easdon. The plaintiff went ahead with the thorough due diligence process and in my opinion on the balance of probabilities relied upon the information provided from that process which continued on unchanged despite the making of these representations.
I accept that in this context the representations do not have to be the main or paramount consideration in the mind of the representee but it is also true that they must be part of the underlying basis upon which the representee proceeds. There is no real sense, in my opinion, in which those representations were relied on or formed part of the underlying basis on which the plaintiff proceeded given that the due diligence process continued on in exactly the same way after they were made as before. The plaintiff relied on Gahan v. Boland (Unreported, High Court, Murphy J., 21st January, 1983) which establishes that an innocent representation made in good faith and with no intention to mislead can nonetheless entitle the representee to a rescission of the contract. In that case, however, the representation to the effect that a proposed major road would not affect the representee’s purchase of his home and paddock was not, as I understand the judgment, overtaken or replaced by any other specific representation or information on the same point. In the present case it is clear that the plaintiff relied on the financial information thrown up by its own thorough and rigorous due diligence process for the purpose of informing itself as to the financial situation of the defendant company. I would therefore hold that the plaintiff is not entitled to rescission or indeed to any relief in the context of the misrepresentations because it did not rely on them.
Mistake
On reflection I have to say that I have doubts as to whether this is a case of true mistake as known to the law of contract at all.
The parties entered into an agreement which contains warranties by the defendant as vendor as to the accuracy and reliability of the financial information known to the parties at the time. These warranties are numerous and comprehensive and it is clear that they are wide enough to cover the situation that has arisen in the present case. Both parties clearly thought at the time that the accounts and financial information presented a true picture, and in that sense, of course, were mistaken as to the actual situation, but they also included by agreement warranties from the defendant intended to deal with a situation where their view of the account might not turn out to be the case. They acknowledged, in other words, that their current state of knowledge might be incomplete or inaccurate and came to an agreement as to which of them should bear the consequences if such should prove to be the case. Mistake in contract law concerns a situation where the parties think they know the true facts and proceed upon the basis of their erroneous assumption without even suspecting that their assumptions might be wrong, quite a different thing from the situation of the parties in the present case who thought they knew the true financial circumstances of the company but contemplated at the same time that their information may be misleading and proceeded to agree what was to happen if that should prove to be the case. No body suggests a contract of insurance is based on a mistake just because the parties cannot identify the event which it is intended to deal with.
Furthermore if, contrary to the above, it is correct to subject the circumstances of the present case to an analysis driven by the traditional law of mistake in contract cases, and that this analysis could, therefore, result in a conclusion that the plaintiff company is entitled to rescission, by reason of the fact that the parties did not appreciate the true financial picture, then in my view such a result would be anomalous given the situation that the same parties have addressed the possibility that the accounts might not present a true picture and in arranging what is to happen in such an event have agreed that rescission would not be available to the plaintiff. This latter position arises because the contract provides at Schedule 6, Clause 7 that:-
“No breach or breaches of any of the warranties, specific warranties or the deed of indemnity shall give rise to any right on the part of the purchaser to rescind this agreement after completion.”
The case was argued, notwithstanding the above, by counsel for both parties upon the basis that there had been a mutual mistake, namely that both parties at the time of entering the agreement made the mistake of thinking that there had been no embezzlement, and in deference to the submissions of counsel I will deal with their arguments in what follows.
In doing so however, and particularly in the context of a submission that the purchaser did not get substantially what he bargained for, it is necessary that I reach some view as to the extent of the embezzlement.
The extent of the embezzlement
The evidence is that just before Colin Thorpe confessed to embezzlement, Ronald Whitehead had identified a “discrepancy” in the order of €457,000 when he was doing the reconciliation of the client accounts. This figure was shown subsequently to have been substantially correct when with Colin Thorpe’s assistance the matter was gone into in detail and a discrepancy of €453,415.55 was identified, which was reassuringly close to Mr. Whitehead’s own calculation.
It was further established in evidence that the method of fraud, which briefly involved Colin Thorpe forging the signature of John Cahill, the Financial Director of the defendant company, on cheques which required two signatures namely his own and that of John Cahill and presenting them as bona fide cheques payable to clients, cashing them, and subsequently manipulating the books and records of the company to disguise the fraudulent transaction.
In particular, Colin Thorpe was able to identify the cheques in the fraudulent category by reference to secret and otherwise meaningless annotations in the IT software recording these transactions and which are all referenced in the report furnished by the defendant to the plaintiff on 16th November, 2004.
A further point was made in the hearing before me that given that the life of a cheque in this country is six months, if there were any further fraudulent transactions they would have “come out in the wash” in the intervening six months and that it is unlikely now that further fraudulent transactions will emerge.
As a matter of probability and on the basis of the information proved in court in my view the extent of Colin Thorpe’s fraud is likely to be in the order of €457,000. There are three aspects which seem to me relevant in reaching this conclusion: in the first place that was the estimate of the discrepancy reached independently by Ronald Whitehead; secondly, Colin Thorpe had his own secret way of identifying the fraudulent cheques and using this identification his estimate of the extent of the fraud is strikingly close to Ronald Whitehead’s estimate and thirdly, for what it is worth, there has been no evidence of further discrepancies other than those disclosed by Colin Thorpe in the intervening six months.
In reaching the foregoing conclusion, I am of course conscious that no forensic audit had been done. The company has been under the control of the plaintiff since the fraud was discovered. By its letter of 11th November, the plaintiff wrote to Geoffrey Ognall “…until we have clarified the true financial position of the company, we are unable to take any formal or contractual steps in relation to it.”
The un-contradicted evidence of all relevant witnesses has been that once there is evidence of embezzlement such as in the present case it is essential that the company must do an appropriate audit. There may be issues as to how far such an audit should go, and I will return to this aspect later in my judgment, but in my opinion this was a case where the good management of the company required some level of forensic audit and indeed it is clear that the plaintiff was advised by KPMG initially that the defendant would require “a full forensic audit” before any view could be taken on the impact of (the defendant company’s failure to disclose) the true financial position of the company (See the company’s letter of 18th November).
Such an audit was not undertaken nor was any exercise done so far as I am aware by the plaintiff company whether by way of a sampling audit as suggested by Mr. Derek Donohue or otherwise.
I think it is necessary to reach some view of the extent of the embezzlement in order to consider the submissions of the parties in the context of mistake, and in particular in the context of an issue as to whether the purchaser did or did not get substantially what he bargained for. I must, however, reach my conclusion as to the extent of the embezzlement in the absence of definitive information.
Having considered such evidence as is available in my opinion the effect of the fraud does not mean that the subject matter of the share purchase agreement is essentially different from the one contracted for. Accordingly the plaintiff would not be entitled on the basis of mistake to rescission under common law as identified in Bell v. Lever Bros [1932] AC 161. Nor is this a case where the misapprehension (to the effect that there had been no embezzlement) was fundamental to the agreement (which included the wide ranging warranties already discussed and an agreement that their breach would not give rise to rescission). Accordingly the plaintiff would not be entitled to rescission in equity as identified in Solle v. Butcher [1950] 1 K.B. 671 and as applied in this country by Costello J. (as he then was) in O’Neill v. Ryan [1992] 1 I.R. 166 672 at p. 185.
Of course I acknowledge that the plaintiff company’s witnesses said that if they had known in advance of the embezzlement, they would not have entered the agreement. This does not prove, however, that therefore the effect of the embezzlement was fundamental, anymore than an insured driver’s assertion that he would not have driven on the day of the accident had he known of it beforehand means that he did not need insurance. This was an agreement to buy shares in a company with specific objectives in mind and the plaintiff company’s evidence referred to has to be seen in context.
The evidence is that the “drivers” for the purchase of these shares were the plaintiff company’s desire to acquire the very good client base including some blue chip clients of the defendant, and its good employees and in particular, John Cahill the Managing Director, to improve the company’s position in the Irish market and to receive the disclosed revenue stream, enhanced by the synergies that would become operative when the two companies were merged together.
It is also clear from the evidence that the merging process has been put on hold since the discovery of Colin Thorpe’s embezzlement but that notwithstanding this the revenue stream has remained as predicted, and that John Cahill remains employed at the Ashtown Gate premises albeit not as Managing Director. One or two clients have transferred from the Ashtown Gate (erstwhile defendant) company’s business to the plaintiff’s own English subsidiary business at Park West and that the one or two clients who have ceased doing business have done so for reasons other than those related to the embezzlement. Of course it is true that the embezzlement has not become public knowledge and that when it does many clients may become concerned as has happened apparently in England to a subsidiary of the plaintiff company’s where a non-fraudulent discrepancy was discovered and which caused considerable upset and loss to that company.
There was further evidence that the clients, particularly the blue chip clients such as banks, of a company engaged in debt collection on behalf of those clients will be particularly sensitive to the publication of financial impropriety within the debt collecting company. They can only be reassured, it is said, by a full forensic audit which establishes that none of their own monies were taken, that none of their clients had complained about being asked to discharge bills already paid and that there was a clear and reliable identification of the extent of the embezzlement. Nobody suggested that such an exercise is impossible but there has been widely divergent views as to the cost of such an audit and indeed the specific scope involved.
Once again in this context I am left in the situation where no such audit has taken place and accordingly I must deal with the evidence produced without speculating beyond it.
Given, therefore, that the likelihood is that the extent of the audit is limited to some four hundred and fifty seven thousand euro and that a forensic exercise can be done which will establish with reasonable certainty such extent and can satisfy clients including blue chip clients of the defendant company, and bearing in mind the “drivers” which motivated the plaintiff in acquiring the defendant’s company shares, I do not think that what the plaintiff got in their share purchase agreement was so different from what they contracted for as to qualify for the descriptions in the authorities which justify an entitlement to rescission either at common law or in equity. In other words this is not one of those exceptional circumstances which are extremely limited where rescission as distinct from damages will be granted by a court as identified by Costello J. (as he then was) in O’Neill v. Ryan.
Breach of contract
The plaintiff in its written submission refers to twelve warranties all of which it claims were breached. I will refer to one or two only as follows:-
1. All written information given by or on behalf of the vendor or the company to the purchaser or any shareholder, accountant, lawyer or agent thereof in the course of the due diligence exercise carried out by the purchaser and his professional advisors was, when given and is at the date hereof, true, accurate and complete in all respects.
2. There is no fact or matter which has not been disclosed in writing to the purchaser which rendered the information referred to in paragraph 1 onto or misleading at the date of this agreement.
3. None of the representations or warranties made by the vendor in this agreement or in any document to be delivered by and pursuant hereto or in connection with the transactions contemplated hereby contains any untrue statement of a fact, or omits to state a fact necessary to make any statement or fact contained herein or therein not misleading.
4. All the accounts, books, ledgers, financial and other records of whatsoever kind of the company;
(a) have been fully, properly and accurately kept,
(b) do not contain any material, inaccuracies or discrepancies of any kind,
(c) give a true and fair view of its trading transactions and its financial, contractual and trading position,
(d) the principal accounts are true, complete and accurate in all respects…
It is beyond reasonable argument, as the plaintiff puts it, that there was a breach of these warranties. It is also agreed, however, that no breach or breaches of any of the warranties, shall give rise to any right on the part of the purchaser to rescind the agreement.
Accordingly, the relief to which the plaintiff is entitled, in the absence as I hold, to an order rescinding a contract or to an order declaring it void ab initio, is damages.
The measure of damages
There is a considerable divergence between the parties as to the measure of damages to which the plaintiff is entitled.
It is common case that the plaintiff is entitled to have the amount taken put back into the company.
The defendant in correspondence and argument contended that it was liable also to pay half the costs of whatever audit exercise is necessary to identify the extent of the embezzlement. This proposition seems to have originated from a misunderstanding of the effect of clause 4.5 of the agreement which deals with Completion Accounts. These were to be provided on or before the 8th November. Once Completion Accounts were furnished under the contract, the vendor and purchaser were required to agreement same on or before 15th December, or in default of agreement the purchaser was entitled to serve notice to dispute the Completion Accounts and refer the matter to an independent accountant known as “the expert” to determine the matter at issue and whose determination was agreed to be binding and final. The costs of the expert were to be borne 50% by the vendor and 50% by the purchaser.
None of the foregoing applied, however, because completion accounts were not furnished in accordance with the contract on or before Monday 8th November, or indeed on any date subsequently.
Insofar as the defendant company seeks to rely on the contention put forward in the early correspondence that it was effectively frustrated from doing this by the refusal of the plaintiff company to grant them and their accountants access to the books and records of the company, I hold on the evidence that this is not correct. They were refused access only for a matter of hours on Friday 5th November and thereafter (despite those contentions) had access albeit that that position was not clarified by the plaintiff in its correspondence in response to those contentions.
Accordingly in my view the defendant company will have to pay damages to cover the cost of an appropriate forensic audit. I will return to the question of this at a later point.
The value of the shares
Evidence was given on behalf of the plaintiff by Desmond Peelo the well-known accountant to the effect that on the date of the transaction the value of the shares was nil. He based this on his view that no properly informed purchaser would have bought the shares on that date. This conclusion and opinion was agreed with by Mr. Derek Donohue who was called on behalf of the defendant.
Mr. Peelo went on to say that if the money taken was restored to the company and if a full forensic audit showed that no further monies other than those restored to the company were taken and assuming the cost of the accounting exercise were reimbursed, the entire shareholding in the defendant company might at this point in time have a value approaching the net asset value which was some €600,000.
Evidence was also given by Derek Donohue on behalf of the defendant. In the first place he agreed that at the date of the contract no properly advised purchaser would have bought the shares. He took issue with the conclusion from that fact, however, that the shares were on that date of nil value. He said that they had an unascertained value and went on to say that if an appropriate accounting rectification exercise were conducted and the company was reimbursed the costs thereof and whatever had been taken from the company were restored to it then the value of the company remained unaltered namely at 2.15 million euros. He clarified this by stating that this was the value to the plaintiff as objectively determined by reference to the drivers which motivated its acquisition of the defendant’s shares. It seems to me that Mr. Donohue was talking about “value to the plaintiff” as distinct from “market value” which was what Mr. Peelo was referring to. Indeed in the latter context, Mr. Peelo went on to say further to his opinion referred to above, that his view that the company might have a value approaching it its asset value of €600,000, in the circumstances already identified, meant that there was no value for goodwill. However, he added, things get forgotten “but it takes time and I would certainly think the time is at least a year, if not two years, away”, by which I understand him to mean that the value on the open market in a year or two would be restored to the price paid by the plaintiff.
The plaintiff relied on the Privy Council decision in Lion Nathan Limited v.
C-C Bottlers Limited [1996] 1 WLR 1438. That was a case about the sale of shares in a soft drinks company. The whole of the share capital was sold with a warranty that forecast profits for a number of months into the future had been calculated with all due care – as distinct from a warranty that those profits would be a specified figure. The latter had it been given would have been what Lord Hoffman described as a warranty of quality and if it had been a warranty of quality then “the damages would prima facie have been the difference between what the shares would have been worth if the earnings had been in accordance with the warranty and what they were actually worth”. However in Lion Nathan the breach of warranty was only in relation to the forecast (to the effect that it had been done with all due care) and therefore the damages were the difference between the price agreed on the basis of the forecast as made and the price it would have been had the forecast been properly made.
In the present case the plaintiff submits that the warranties, for example, the warranty that “all written information given by or on behalf of the vendor… was, when given, and is at the date hereof, true, accurate and complete in all respects”, were warranties of quality in Lord Hoffman’s termination so that the measure of damages should be the difference between what the shares would have been worth if those warranties had been adhered to by the defendant and what they were actually worth which the plaintiff contends was nil on the day of the execution of the agreement. Lion Nathan is dealt with in McGregor, McGregor on Damages, 17th Ed. (London, 2003) at para. 24-007.
In my opinion the plaintiff’s contention is correct in principle: the warranties given, and I have cited one example, were warranties of quality in that they warranted that the relevant figures were accurate and true as distinct from the other kind of warranty to the effect that the calculation had been made with all due care. In those circumstances following the Privy Council in Lion Nathan, the measure of damages is prima facie the difference between what the goods as warranted would have been worth and what they were actually worth.
Mr. Connolly S.C. for the defendant has reminded me in the course of hearing, however, that the plaintiff company in this case was under an obligation to mitigate its loss. The company came to court, six months later, claiming that on the day of the contract the shares were worth nil because no one properly advised and aware of the embezzlement would have purchased them on that day. There is evidence also, however, that if a forensic audit were conducted and if whatever sums taken were reimbursed to the company together with the costs of that audit then in time (Mr. Peelo says that this would certainly take at least a year if not two years) then the goodwill might be recovered so that the value as intended would be restored. Mr. Donohue says that the value to the purchaser (based on his objective criteria approach) would be restored on these assumptions without delay. Is it realistic or fair, therefore, to ignore the fact that the plaintiff has not conducted any forensic audit (and the jurisprudence on mitigation of loss establishes that a plaintiff is entitled to the costs of mitigating its loss even if those steps are unsuccessful provided they were reasonable) and simply accept that the plaintiff is entitled to sit idly by in reliance upon its claimed right to rescind the agreement and come to court six months later in unqualified reliance upon a nil valuation as of the date of the agreement itself and no other date regardless of how unfavourable such a stance might be to the defendant?
I do not think so.
Equally, it is difficult to assess damages given the state of the evidence as I have described it. There is a letter but no more than that from KPMG estimating that the cost of a full forensic audit would be of the order of €250,000 to €500,000 and may be more. That is not evidence at all. On the other end of the scale Mr. Donohue says that a sample audit might well establish with sufficient certainty to satisfy clients of the company that the extent of the embezzlement had been determined and that such an audit would cost in the order of €25,000. He expressed strong disagreement with the KPMG estimate referred to above. Furthermore, it seems from a reading of Lion Nathan although it is nowhere stated, that the purchase of the shares in that case was as an investment. If correct, that would distinguish Lion Nathan from the present case where the purpose of the purchase by the plaintiff was driven by the specific commercial considerations referred to above. Insofar as those were the drivers of the agreement there is no indication that any of them has not been delivered although clearly there is a risk that clients may be lost when the circumstances of Colin Thorpe’s embezzlement become common knowledge. That is a risk and no more. There has been no audit and therefore that particular issue has not been tested. It is not even clear whether an audit could have been conducted in time for the hearing. This is therefore a case where it is uncertain whether a loss will be incurred. The plaintiff has not established in evidence whether any audit could have been done prior to the hearing or even whether such an audit as could have been done could have satisfied the appropriate criteria for reassuring clients. I am simply left in the dark on these matters.
The same edition of McGregor on Damages para. 8.015 says that this category (i.e. where it is uncertain whether a loss will be incurred) covers a wide field ranging from gains prevented by the defendant’s wrong to expenses made necessary by that wrong. The uncertainty in the present case relates to the former category namely “gains prevented by the defendant’s wrong”, that is fees earned from clients of the defendant company in the future who by reason of the defendant company’s breach of contract may (when the embezzlement comes to light) make a decision to cease employing the defendant. That is a potential wrong dependant on the activity of the third party, namely the client in question. How do I approach the risk? There is evidence that something similar has happened to a subsidiary company of the plaintiff in the United Kingdom in reasonably comparable circumstances. To some extent the more that is spent on the forensic audit, the more the risk will be reduced that clients will decide to leave.
I do not think the evidence on this aspect of the case, such as it is, establishes as a matter of probability that loss of clients is the natural and direct result of the defendant’s wrong (as distinct from a risk that such might happen). That was the test established in Ratcliffe v. Evans [1892] 2 Q.B. 524, a Court of Appeal case dealing with slander. Rather the present is closer to another early case Chaplin v. Hicks [1911] 2 K.B. 786, also a Court of Appeal case where the plaintiff was one of fifty finalists among six thousand entrants in a competition where the defendant offered engagements as actresses to twelve out of those fifty finalists. The plaintiff was not offered a fair chance of being interviewed in accordance with the advertised rules and twelve prize winners were chosen from amongst the other forty nine. A jury awarded £100 for loss of the chance to the plaintiff. Vaughan Williams L.J. in upholding that award said at p. 792, (having discussed remoteness in a case where the contingencies are too numerous and difficult to deal with):- “I only wish to deny with emphasis that, because precision cannot be arrived at, the jury has no function in the assessment of damages.”
The evidence as presented by the plaintiff in this case leaves me with nothing but the most rudimentary information as to the chance of the loss of customers when Colin Thorpe’s embezzlement is finally published. It is obvious that the more conclusive the forensic audit, the smaller the risk of loss of custom. In those circumstances I would assess by way of general damages under this heading a figure of 5% of the net annual post tax profits of the defendant company as shown in the last fully audited accounts of the company (duly corrected for Colin Thorpe’s embezzlement for that twelve month period) to compensate the plaintiff for the risk that when the embezzlement is made common knowledge some clients may quit the plaintiff. In doing so, I have borne in mind the character of the audit to be provided so far as I know it and also Mr. Peelo’s estimate of the time needed for the recovery of the goodwill of the company.
In regard to the necessary expenditure on the audit I would measure the figure of €25,000 given in evidence by Mr. Donohue as being the only admissible evidence in relation to this cost.
Accordingly the plaintiff is entitled to:
(a) €457,000 to be put back into the company to make up for its direct loss due to the embezzlement of Colin Thorpe,
(b) €25,000 to pay for the necessary audit to identify the extent of that embezzlement,
(c) 5% of the post tax profits of the company for the last duly audited twelve-month period adjusted for the effect during that period of Colin Thorpe’s embezzlement, and
(d) in the event that the forensic audit to be carried out discloses further losses directly due to Colin Thorpe’s embezzlement in excess of €457,000 such further sum to be payable when ascertained.
The defendant is entitled to an order directing specific performance of the agreement with an appropriate adjustment to the purchase price.
Approved: O’Sullivan J.
J. L. Smallman Ltd. v. O’Moore and Another.
Davitt P. [1959] IR. 221
DAVITT P. :
21. Nov.
The facts in this case are briefly these. The defendants for some years prior to 1954 were partners carrying on business as building contractors under the firm name of O’Moore and Newman. The plaintiffs are a company
describing themselves as “plumbers’ merchants” and they supply building contractors with sanitary and other plumbing fittings. The defendants dealt with the plaintiffs and bought goods on credit from them, keeping a running account with them. In July, 1954, they decided to turn their business into a limited company. According to the evidence of Mr. Hennessy and Mr. Newman they informed Mr. Black, the plaintiffs’ manager, since deceased, of their intention and circularised all their suppliers, including the plaintiffs informing them of the fact that the company was being formed and was taking over the business of the partnership, its assets and liabilities. The company was formed in due course and was registered as O’Moore and Newman and Company Limited on the 15th September, 1954. Notice of formation of the company was published in Stubbs’ Weekly Gazette in the issue of the 29th September, and in theMerchants’ Gazette in the issue of the 22nd September. Each notice contains the usual particulars as to nominal and subscribed capital and the objects of the company. The nominal capital was stated to be £5,000 divided into 5,000 one pound shares, and each defendant was stated to have subscribed one share making the subscribed capital £2. The objects of the company were stated to be the provision of dwelling-houses and other buildings and structures and to carry on the business of builders, contractors and decorators, and estate agents. The objects were not stated to include the acquisition of the business of the firm of O’Moore and Newman with its assets, and liabilities.
After the formation of the company the defendants appear to have carried on business very much as before. The company’s minute book contains minutes of three meetings only, in none of which is any reference made to the acquisition of the partnership business. The defendants produced in evidence two ledgers showing their account with the plaintiffs. The earliest entry is of date the 1st March, 1953, and the last is of the 1st April, 1956, though no goods were supplied after the 24th February, 1956. There is nothing in the account to indicate any change occurring in September of 1954, and no reference anywhere to the formation of the company or the acquisition of the partnership business. Goods continued to be supplied by the plaintiffs in accordance with orders written on bill-heads under the partnership name as no new stationery was purchased. Delivery dockets were made out by the plaintiffs in the partnership name and were duly signed by the defendants’ foreman acknowledging receipt. The goods were invoiced to the partnership and statements of account made out and receipted in the partnership name. Before the formation of the company payments were made to the plaintiffs by cheques signed by the two partners. After it was formed the cheques were signed, “Terence O’Moore, Director” and “Martin Hennessy, Secretary”; and, when the company acquired a new cheque book the name,”O’Moore and Newman & Co., Ltd.,” was prominently displayed on each cheque.
Notwithstanding the fact that the plaintiffs take bothStubbs’ Gazette and the Merchants’ Gazette, the notices of the formation of the company escaped the attention of the plaintiffs’ book-keeper, Mrs. Greene; nor did she notice the alteration in the cheques received. She has no recollection of receiving any circular nor could she find any on the appropriate file. No change was recorded in the plaintiffs’ ledger account which continued in the partnership name. Mr. Black did not tell her of any change, nor instruct her to make any alteration in the account. Letters pressing for settlement of amounts due on the account were addressed to the partnership at 151 Griffith Avenue on six occasions between the 17th August, 1955, and the 3rd March, 1956. The only written reply is a letter of the latter date asking for time and stating that “the firm” were owed a considerable amount of money for work done which would be coming to hand shortly. This letter is on the partnership notepaper with “& Co., Ltd.” added in manuscript and is signed,”Martin Hennessy, Secretary, O’Moore and Newman & Co., Ltd.” It was about this time apparently that Mrs. Greene and the plaintiffs’ manager, Mr. Woodman, first became aware of the fact that the partnership had become a limited company.
The plaintiffs failed to get a settlement of their account on which a balance of £984 11s. 0d. was due; and on the 23rd August, 1956, they issued the summary summons in these proceedings to recover this amount. There has since been a payment of £350 without prejudice to the position of the parties and the amount now claimed is £634 11s. 0d. The plaintiffs claim this from the defendants as the balance of the price of goods sold and delivered; and the defendants each deny that they bought the goods and plead that the goods were supplied to the company and not to them. The sole issue in the case is whether the goods were sold and delivered to the defendants.
A motion for summary judgment was unsuccessful. In resisting it the defendant, Patrick Newman, swore an affidavit denying that the goods were supplied to him or Mr. O’Moore and averring that they were supplied, if at all, to the company. The affidavit contained the following:”Since the formation of the said company no goods have been ordered by myself and my co-defendant in any manner which would convey that the said partnership was still in existence. While we were in association in the said company all goods were ordered expressly for and in the name of the said limited company and all payments made by cheque on the company’s account.” Mr. Newman in evidence said that in July, 1954, he called in to the plaintiffs’ office with a cheque in payment of the account as it then stood and that he gave it to Mr. Black, remarking that it was the last cheque he would get from the partnership as they were forming a company. He said that he asked Mr. Black would the formation of the company affect the credit which they had with Smallmans’ and that Mr. Black said it would not, and that they were very wise to form a company.
It is particularly unfortunate that the evidence of Mr. Black is not available, as he could doubtlessly have cleared matters up considerably. I am sorry to say that I do not find the evidence as to conversations with him very convincing. It is hard to believe that if they took place he could have failed to give the proper instructions to Mrs. Greene as to changing the name in the ledger account. As regards Mr. Newman’s evidence, the passage quoted from his affidavit is, with the exception of the averment as to the payments by cheque, clearly not in accordance with the facts; and the omission from the affidavit of any reference to conversations with Mr. Black is significant. In the circumstances, I am not satisfied to act on this evidence.
Counsel for Mr. Newman placed much reliance on the circular and on the payments made by the company’s cheques as constituting effective notice to the plaintiffs of the taking over of the partnership business by the company; and he cited Barfoot v. Goodall (1), and Jenkins and Another v.Blizard and Another (2). In the former case, a change in the form of a bank’s printed cheques from “Dickenson Goodall, and Fisher,” as bankers, to “Dickenson, Goodall, and Co.” and, later, to “Dickenson, Goodall, and Dickenson,”was held to be effective notice to a customer of the bank, who drew many cheques on these forms, that Fisher was no longer a partner in the banking firm. In the latter case, it was held that publication of a notice of dissolution of a partnership in a newspaper taken by the party sought to be affected is evidence of notice sufficient to be left to a jury; but that the more prudent and usual course is to give notice by circular letter. It has to be remembered that the purpose
of a notice of dissolution of partnership is to inform the party sought to be affected that the authority of each partner, to act as agent for the other or others, has been withdrawn. Assuming that the plaintiffs had effective notice of the ending of the partnership in this case the result would be that they must be presumed to know that O’Moore had no authority to act as Newman’s agent and vice versa.This would be nihil ad rem if both of them joined in ordering goods from the plaintiffs.
I was at one time inclined to the view that the issue in this case was whether there was ever any agreement between the parties that the plaintiffs should supply the company with goods on credit, instead of supplying the partnership, as was done previously. On consideration, I am of opinion that that is not the correct view to take. This is an action for the balance of the price of goods sold and delivered. The plaintiffs allege a contract of sale with the defendants. In my opinion they have not established such a contract. Unless I am to assume fraud on the part of the defendants, which has neither been alleged nor proved, it is, I think, reasonably clear that the parties were not ad idem. The plaintiffs believed they were supplying the goods to the partnership while the defendants believed they were being supplied to the company. The only contract which can be spelt out of the circumstances is that the company, which accepted and used the goods, is under the obligation to pay for them.
It may be that the plaintiffs would have an arguable case that the defendants are by their conduct estopped from pleading or proving that they did not order the goods from the plaintiffs and contract to pay for them. The reply in this case is, however, a mere joinder of issue and no estoppel is pleaded.
Having regard to all the circumstances I come regretfully to the conclusion that judgment must be for the defendants.
Gill v M’Dowell
King’s Bench Division.
4 November 1902
[1902] 36 I.L.T.R 191
Lord O’Brien L.C.J., Gibson, Madden, Boyd JJ.
Lord O’Brien, L.C.J.
The facts of this case are clear, but the inferences to be drawn from them are by no means plain. [His Lordship then stated the facts.] The animal was in some respects different from a heifer and in some respects from a bullock, and it is very important to direct our attention to the finding of the Lord Chief Baron, that the plaintiff bought under the belief that he was buying a bullock and two heifers, and the defendant was aware that the plaintiff believed he was buying a bullock and two heifers, or a heifer and two bullocks. He believed that the animal was either a bullock or a heifer, and the Chief Baron finds that the purchaser would not have purchased if he had known of the malformation. Now, does the doctrine laid down in Smith v. Hughes, L. R. 6 Q. B. 597, apply to this case? In that case it was laid down that, in order to relieve the buyer under such circumstances, the jury must find, not merely that the seller believed the buyer to believe that he was buying old oats, but that he believed the buyer to believe that he, the seller, was contracting to sell old oats. I think that the statement of the Chief Baron in the case amounts to such a finding, and that this case is within the rule in Smith v. Hughes. I further think that there was evidence of deceit and misrepresentation sufficient to maintain the action. Cattle are often placed among others so that their defects may escape attention. The defendant, well knowing that the animal was neither a heifer nor a bullock, drove it into a fair where heifers and bullocks were usually sold, and thereby put it into a category to which it did not belong, and made it of a lot with the other animals by associating it with them, thereby making a tacit representation that the animal was what it was not. The plaintiff was deceived, and the defendant knew he was deceived, and there is evidence to show that he was thrown off his guard by the action of the defendant. Judgment for the plaintiff.
Gibson, J.
The plaintiff says, first, that the contract was procured by fraud; and, secondly, that there was no valid contract, the parties never being ad idem. The grounds of deceit are that the beast was sold at an ordinary fair, that it was placed between a bullock and a heifer, and that the defendant knew that the plaintiff was buying under the belief that the animal contracted to be sold was a bullock or a heifer. The animal was bovine, but it was impossible to say whether it was male or female. By reason of the mere selling at the fair the defendant cannot be fixed with a tacit affirmation that the animal was male or female: Ward v. Hobbs, 4 App. Ca. 13. The sale of the hermaphrodite with two natural animals at the same price deserves more consideration. The case does not find dishonest intention, nor that the animal was screened by the other two. But the sale at the same time and place is stated as a relevant fact, and it was calculated to facilitate the purchaser’s oversight, and the defendant should have known that. The animal was misleading, a living lie, and the plaintiff accepted the silent but false affirmation of the beast. It is like the case of a book with a forged title page, or a piece of plate with a forged plate mark. I think there was evidence of contrivance and deceit. Further, where nothing is said on either side, and the vendor knows that the purchaser intends a different contract, he cannot by his silence impose on the purchaser a contract which he knows the purchaser never intended to make. The parties must be ad idem, and this principle does not cease to apply because the buyer is guilty of some oversight or want of care. It does not conflict with the rule of caveat emptor, the legal right of the seller to acquiesce in the silent self-deception of the purchaser. There is evidence of deceit, and, further, I think that there was no effectual contract, so that the plaintiff is at liberty to repudiate the sale.
Madden and Boyd, JJ., concurred.
Western Potato Co-Operative Ltd v Peter Durnan
1983 No. 3708
Circuit Court
27 February 1984
[1985] I.L.R.M. 5
(Judge Clarke)
JUDGE CLARKE
delivered his judgment on 27 February 1984 saying: The first question here is as to the cause of the failure of the defendant’s/counter-claimant’s potato crop, grown from seed potatoes supplied by the plaintiffs, and for which they now claim the price. It does not appear from the evidence that there can be any certain answer to this question. The highest technician to have been called as a witness was Professor Enda Bannon, Ph.D. whose doctorate is in the subject of agricultural science. He saw the defendant’s field when the seed potatoes were still in the ground, or had produced such growth as they were to achieve. He found that those which had produced nothing were lying in contact with fertilizer, whereas where growth or emergence had been achieved, there was no sign of the fertilizer present. He felt that this would justify a conclusion that the laying of the unsuccessful potatoes in contact with the fertilizer had resulted in what is referred to, untechnically, as ‘fertilizer burn’. This, he thought, would be a fair inference. The defendant is unquestionably a practical farmer, and said that he planted the seed potatoes in the way he has always done. The six tons of the seed potatoes supplied by the plaintiffs should have produced, at a moderate estimate, a crop of well over 80 tons, but in fact produced no more than nine tons. He got £50 a ton for these: a total of £450.
Other witnesses appeared for the defendant, including two farmers who purchased seed potatoes from the plaintiff company and who had bad results. They also have claims against them for the price of these, for which they have not paid. Neither of them had the same method of planting as this defendant. One, Mr Jack McGuinness, used a machine that poured the fertilizer into the ground two inches below the level at which it planted the seeds. These potatoes failed except in some few sections. His failure was far more extensive than the defendant’s. While Professor Bannon suggests the possibility that this crop might in some way have also suffered from the same so-called ‘fertilizer burn’, the facts do not seem to lay any solid basis for such an hypothesis. The plants that grew, the Professor thought, showed signs of under-nourishment. No satisfactory explanation seemed to be available to explain the failure of these seeds. The farmer again is a practical, experienced man, and in the same season got perfectly normal potato crops elsewhere out of other seeds. He attributed the failure to the seed. This raised doubts about the quality of the seeds, and about the diagnosis in regard to the defendant’s seed potatoes — this so-called ‘fertilizer burn’. The other farmer, Mr James White, prepared his land for planting in a different way to the previous one and to the defendant’s. He spread the fertilizer on the ground surface and rotavated it into the land, and then made his drills for the seed potatoes. There was no possible question of this so-called ‘fertilizer burn’ in this case, but the cropping was a total failure: not a single plant emerged, and he attributed it to the plaintiff’s seeds. Mr White is an experienced farmer.
Professor Bannon did suggest another cause for all this crop failure, a condition of reduced vitality which can affect some lots of seed-potatoes, and he described it as ‘physiological age’. This would seem to be more consistent with the failure of the crops on all three farms.
Two of the lots of seed potatoes, the defendant’s six tons and one of these farmer’s 15½ tons, came from the supply originally sent to a fourth farmer, Mr Ennis, and which were stored for a short time in his shed, in the sealed bags in which they were sold. He had opened a few of these bags and did not like the look of the potatoes. He thought they looked hard and lacked vitality. It was April, and he would have expected to see some signs of sprouting. Partly for that reason, but also because he did not like the form of contract presented to him for signing, he refused to sign the contract; and so it was that this supply came to be divided by the plaintiffs between the defendant and the other farmers. Mr Ennis makes no claim to be an expert in potato production, but he is clearly a shrewd man, both in the way of farming and business.
In weighing up the evidence, it appears to me that this lack of vitality in the potato seed, which is common to the three farmer-witnesses seems to have destined them to produce poor returns; and, in the defendant’s case, perhaps the failure of his crop was added to by laying the seed potato in contact with the fertilizer; but, it seems to me, on the probabilities of the evidence, that this would be no more than a marginal factor in the failure of this crop of his.
At this stage, it is necessary to consider a second question, which is the terms of the written contract presented by the plaintiffs and signed by the defendant as governing the sale and purchase of the seed potatoes. This contract has two aspects to it, but they are interconnected, and are each part of the mutual considerations. The first half or so of the contract (clauses 1–8 inclusive, pp. 1–6) deals with the obligation of the defendant, who is called ‘the grower’ to produce, and to deliver and sell to the plaintiffs, who are called ‘the buyers’, 80 tons of Kerrs Pinks potatoes: the second half (clauses 9–20, pp. 6–10) deals with the obligation of the grower to produce this tonnage exclusively from seed potatoes to be supplied by the plaintiffs, and to be paid for by the defendant. The seed potatoes are, in the words of clause 9, to be ‘all A Certificate seed potatoes that the buyers deem necessary for the grower to plant in respect of his contractual tonnage’. This was in fact measured and agreed to be 6 tons, which was duly supplied to and accepted by the grower. The seed potatoes supplied are more fully described by clause 9: ‘The buyers will provide to the grower seed potatoes from stocks which have been certified as suitable for seed by the inspectors of the Department of Agriculture, Dublin, under the Agricultural Produce (Potatoes) Act, 1931’; the evidence shows that the six tons of seed potatoes answered to that. Clause 9 adds that ‘said certification shall be conclusive evidence as to their purity and health’ and that ‘the sealing of bags or other containers by inspectors of the Department of Agriculture shall be accepted as proof of the quality, size and health of the potatoes’; and, lastly, that clause provides that ‘the sale of such potatoes by the buyers to the grower shall be without warranty of germination or crop result’. In so far as any part of clause 9 proves to be in effect in conflict with or contradictory of the obligations imposed in the grower, or proves to be ambiguous in its application to the facts of the case, then, under the rules of construction, it is to be construed against the buyers, contra proferentem ; the contract having been prepared on behlaf of the buyers as a standard form in use by them with their *8 growers and couched generally in terms protective of the buyer. The growers position is left uncertain in several respects, and the buyer is made sole and final arbiter in certain cases. On reading the contract form, Mr Ennis, as already mentioned, refused to sign, and a perusal of the document makes his attitude easy to understand.
The contract, as described, provides in the first half for the production by the grower of an amount of potatoes, in this case 80 tons, to be supplied to the buyer; and in the second half provides that these potatoes are to be grown exclusively from the seed potatoes to be supplied by the buyer to the grower and not otherwise. The only form of assurance offered as to the suitability of the seed potatoes to provide the crop necessary for the contract is that they should be A Certificate seeds certified and sealed by the inspectors of the Department of Agriculture, the buyer entering into no commitment in the form of a condition or warranty beyond that, and the contract providing that the potatoes answering to these specific factors of certification and sealing will be conclusively accepted, and assumed as to their ‘purity and health’ and as to their ‘quality, size and health’. If this were meant to amount to a contractual form of estoppel preventing any evidence to establish the opposite qualities of impurity, disease, lact of quality, size and health, such provision might have to be construed as an exemption clause in respect of such matters; but, in view of the fact that the contract taken as a whole primarily relates to the production of 80 tons of potatoes for supply to the buyer, it is necessary to consider the construction of this clause in another light, namely, that A Certificate seed potatoes, supplied in such quantity as ‘the buyers deem necessary for the grower to plant in respect of his contractual tonnage’ are taken as a matter of fact, assumed by both parties, to be sufficient to produce the contract tonnage of 80 tons. But, on the evidence, it appears that the six tons of seed potatoes supplied was not capable of producing the crop; therefore, this basic assumption is shown to be mistaken, a mistake on both parts, due perhaps to a condition in those seed potatoes suggested by Professor Bannon as ‘physiological age’, a factor causing the basic purpose of the contract to collapse, to be frustrated.
Mistake as to the existence of a fact at the root of the contract or on the basis of an assumption which subsequently proves to be false is dealt with in Anson’s Law of Contract , 25th ed., in the light of the House of Lords decision in Bell v Lever Bros. Ltd [1932] AC 161, stated to be the leading case on the subject; and, in interpreting the decision, citing Denning LJ in Solle v Butcher [1950] 1 KB 671, at p. 691:
The correct interpretation of that case, to my mind, is that, once a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless and until it is set aside for failure of some condition on which the existence of the contract depends, or for fraud, or on some equitable ground …
And Anson notes at p. 287, Fn.: ‘Mistake can be regarded as a type of “pre-contractual frustration”’. Pursuing the implications of Bell v Lever Bros. Ltd in *9 the matter of mistake as to the quality of the thing contrcted for, Anson at p. 292 cites from Lord Atkin’s speech [1932] AC 161, at p. 218 that:
Mistake as to quality of the thing contracted for raises more difficult questions. In such a case mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.
And, under the heading of ‘A False and Fundamental assumption’, Anson at p. 296 states:
Where the parties contract under a false and fundamental assumption, going to the root of the contract, and which both of them must be taken to have in mind at the time they entered into it as the basis of their agreement, the contract is void. This should not be regarded as a category separate and distinct from those categories of mistake already mentioned, but rather as a more compendious statement of the type of error required. Adding later that It is not surprising that the strictness of this test has resulted in a dearth of cases on the subject of fundamental mistake.
It seems to me that on the facts of the present case this strict test is fulfilled. And the case of Sheikh Bros. Ltd v Ochsner [1957] AC 136, later cited as an example ( Anson p. 297), has some similarity to the present one. There the contract was declared void, where one party contracted to grant a licence to cut, process and manufacture all sisal grown on a particular estate of which they were lessees, in return for which the party granted the licence deposited a sum of money and undertook to deliver to the first party 50 tons of sisal fibre manufactured by him each month; but where it proved in fact that the estate was not capable of producing such a quantity of sisal as would meet this requirement. This followed principles enunciated in Bell v Lever Bros. Ltd.
Applying this principle to the present case, I would treat this contract as void. Both sides are at some loss as a result. The defendant has, however, received £450 for a quantity of 9 tons of potatoes, out of an anticipated crop of perhaps about 90 tons (the contractual figure of 80 tons was stated to be a very conservative expectation). In other words, about one-tenth of the expected yield was realised; which might call for an equivalent reward to the plaintiffs of one-tenth of the purchase price. The original contract being void, the defendant should be deemed impliedly liable for the fair price of such of the seed potatoes as produced a crop and of which he took the benefit. For the rest of the matter, the parties will have to accept the losses just as they have fallen.