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City Lawyer January 2016
 
 
 
 
 

Welcome to this month’s edition of The City Lawyer, the business law update from 3 Hare Court.

In this month’s issue Olivia Wybraniec discusses:

 

  • a Supreme Court case on relief from sanctions in which 3 Hare Court members appeared
  • a 3 Hare Court case raising the topical question of when illegality is a defence
  • sales of fast cars, future goods and collateral contracts
 
 

Olivia Wybraniec
 
 
 

THIS MONTH'S CONTRIBUTOR

Contact 

Email  Olivia or call 0207 415 7800
 
 
 
 
 

No Material Change, No Relief 

Thevarajah v Riordan [2015] UKSC 78

3 Hare Court's Paul Letman and Miranda Butler appeared before the Supreme Court in this case considering the circumstances in which an applicant can be granted relief from sanctions on a second application for relief. The Supreme Court made it clear that a material change of the applicant's circumstances is required. 

In the main action, Mr Thevarajah sought specific performance by Mr Riordan for the sale of £1.5m worth of shares in a property development company. Mr Thevarajah had obtained a freezing order requiring Mr Riordan to give disclosure relating to his assets. Finding that Mr Riordan's disclosure was "seriously inadequate", in June 2013 Henderson J then made an order that unless Mr Riordan gave disclosure within ten days, he would be debarred from defending the claim. Mr Riordan did not comply fully with the order but applied for relief from sanctions. On 9 August 2013 this was refused by Hildyard J who ordered that he was debarred from defending the claim. This order was not appealed.

In October 2013, Mr Riordan made a second application for relief from sanctions, supported by evidence of compliance with the disclosure requirements of the freezing order. This time, Andrew Sutcliffe Q.C. (sitting as a Deputy Judge) accepted that there had been substantial compliance with the order, granted relief, and allowed him to defend the claim. Addressing Mr Thevarajah's objection that CPR 3.1(7) applied (the power to vary or revoke an order) and that consequently the applicant had to establish a material change of circumstances, the judge accepted that substantial compliance with the disclosure order met this requirement.  

On appeal the Court of Appeal overturned the decision to grant relief, finding that CPR 3.1(7) 
 
 

applied to the application, and that there had been no requisite material change in circumstances.

Mr Riordan appealed and invited the Supreme Court to accept that (1) 3.9 applied and no material change of circumstances was required for relief to be granted, or alternatively that (2) the late compliance constituted a material change.  

The judgment, given by Lord Neuberger, began by affirming the two Court of Appeal cases on relief from sanctions, Mitchell v News Group Newspapers Ltd [2014] 1 WLR 795 and Denton v TH White Ltd [2014] 1 WLR 3926, as authoritative as to the approach to applications on relief from sanctions. The Supreme Court upheld the decision of the Court of Appeal below that the second relief application was, in practice, an application to vary or revoke the order of Hildyard J; that CPR 3.1(7) therefore applied; and that an applicant was required to show some material change in circumstances between the first and second applications. Further, irrespective of whether CPR 3.1(7) applied, a party seeking relief which effectively required an interlocutory order to be varied or rescinded would normally have to show a material change in circumstances since the order was made. 

The Appellant's second point that late compliance provided the material change of circumstances for the second relief application was also rejected. The judgment recognised that in some circumstances late compliance could give rise to a successful second application for relief from sanctions - for example if payment of a sum of money had been ordered, which the applicant had been unable to pay at the first application but been able to raise by the second. In this case though, no explanation was given which would justify mere compliance representing a material change in the Appellant's circumstances, nor was any reason given for the significant delay in making the second application relief.
 
 
 
 
 

When is illegality not a defence? The ex turpi causa principle in Chancery litigation 

Re Bennet Invest Ltd; Hniazdzilau v Vajgel, Enriquez and Bronovets [2016] EWHC 15 (Ch)

Thomas Roe Q.C. and Alexander Halban of 3 Hare Court appeared in this long-running commercial dispute between two Belarusian nationals. The judgment contains a detailed discussion of the illegality defence, which reconciles conflicting authorities at the highest level.

The dispute concerned the beneficial ownership of an English company, Bennet Invest Limited, which was incorporated in 2005 and which in 2009 acquired valuable commercial property in Minsk. The legal shareholder was a nominee and each of the claimant and third defendant claimed to be beneficial owner.

In his judgment, Jeremy Cousins Q.C. (sitting as a Deputy Judge) found that neither party had given reliable evidence but on balance the company has been intended to be established for the claimant beneficially and that the third defendant had been his lawyer, and was thus in breach of duty by claiming the company for himself.

The illegality issue arose because the claimant revealed, for the first time in cross-examination, how he claimed to have paid for the property. He said that the money was paid to the company through false invoices created to give the impression that the money was generated from trading activities, rather than paid for investment, in order to ‘optimise’ (as he put it) tax. He also revealed that he had used the company in a loan transaction to disguise the transfer of assets, again with the aim of ‘optimising’ tax, and had misled the Russian court in the process. The judge 
 
 

allowed a defence of illegality to be raised during trial and found that these activities were tax evasion and thus illegal.​

There are conflicting House of Lords/Supreme Court authorities on the principles underlying the illegality defence: the reliance-based test in Tinsley v Milligan [1994] 1 AC 340 and the policy-based test in Hounga v Allen [2014] UKSC 47, [2014] 1 WLR 2889. Tinsley held that a defence of illegality was only made out if the claimant has to rely on the illegality in order to found the claim; this depends on questions of pleadings and evidence. Hounga criticised Tinsley and focused on the underlying policy considerations as to whether the illegality undermines the justice system and whether a claim would appears to reward illegal conduct

The judge found that there were different rules tailored for different situations. Tinsley had not been overruled and it continued to apply in the context of the law of trusts, even if Hounga was relevant in more policy-driven areas such as tort. In this case, the claimant established his beneficial interest in the company based on the parties’ arrangement and intention, some years before the acquisition of the property. He thus did not need to rely on his illegality surrounding the property purchase and the defence failed.

The judgment is also highly topical, since the Supreme Court will seek to resolve this debate in a few weeks, when a panel of nine Justices will consider the illegality defence in the appeal in Patel v Mirza, on 16-18 February.
 
 
 
 
 

Fast Cars and Future Goods 

Hughes v Pendragon Sabre Ltd (t/a Porsche Centre Bolton) [2016] EWCA Civ 18

A contract to buy a limited edition Porsche from a seller which was yet to acquire the car, and which failed stipulate a price, specification or delivery date, was held to be a valid contract under the Sale of Goods Act in this Court of Appeal case. 

Mr Hughes, a self-described Porsche enthusiast, placed a £10,000 deposit with the seller to buy an extremely limited edition Porsche 911. As was known to the parties, there was no guarantee that the seller would be able to obtain the car. Nonetheless the parties signed an order form for the vehicle subject to the seller’s terms and conditions, with price, specification and delivery date filled out with dummy data, because it was not possible to know those details at the time. Clause 2 of the terms and conditions stated that the seller was not obliged to fulfil orders in the sequence they were received. 

A few days later, one of the seller’s sales executives emailed Mr Hughes confirming payment of the deposit for the car, and giving an assurance that Mr Hughes would get the first of any special edition Porsches allocated to the seller. On multiple occasions thereafter Mr Hughes contact the seller asking about the progress of the order, and was told they had not been allocated any of the cars. In fact one had obtained, but the seller had supplied it to another customer.

Mr Hughes sued the seller for specific performance (later abandoned), or damages for breach of contract in the sum of the current value less the list price which he would have paid. At first instance the district judge held that the order form was merely an "agreement to agree", and that in
 
 

the absence of a specified price or delivery date there was no binding contract for sale. Further, the terms and conditions made clear that the seller was not obliged to fulfil orders in the sequence in which they were placed, and the subsequent email to the contrary did not vary that. 

Mr Hughes appealed, relying on the terms of the Sale of Goods Act 1979, and in particular upon section 5(2) which provides "there may be a contract for the sale of goods the acquisition of which by the seller depends on a contingency which may or may not happen" and section 8(2) which provides "where the price is not determined ... the buyer must pay a reasonable price". He also submitted that the email constituted a collateral agreement that if the seller were allocated a vehicle, Mr Hughes would get it. 

The Court of Appeal accepted that in accordance with the provisions of the Sale of Goods Act, the contract was clearly valid despite the multiple contingencies. Cranston J, with whom Macur and Richards LJJ agreed, noted that courts today are increasingly ready to find a contract despite apparent uncertainties. The reference on the order form to the seller’s terms and conditions was a further hallmark of a valid contract for sale. The Court of Appeal held that the assurance by email that Mr Hughes would receive the first car was a collateral contract, the consideration having been entering into the main contract. That collateral contract was a clear commitment by Pendragon and served to vary clause 2 of its terms and conditions. Mr Hughes was awarded damages.
 
 
 
 
 

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