The House of Lords has had some important things to say about receivers’ liability in tort, and the law of conversion.
In the recent case of OBG Ltd v Allan, the House of Lords has ruled on key aspects of economic torts and the law of conversion (that is to say, the wrongful dealing with property in a way that is inconsistent with the owner’s rights). The law lords decided that the receivers should not be held liable for the damage which a company may have suffered as a result of the loss or underrealisation of business contracts.
The case was heard alongside Douglas v Hello Magazine and Mainstream v Young, since all three appeals concerned claims in tort for economic loss caused by intentional acts.
OBG v Allan: the Background Mr Allan and Mr Stevenson of Smith & Williamson were appointed as receivers in June 1992 under a floating charge and took over OBG’s business (including its assets and undertakings). It rapidly became clear that the business was insolvent and could not be saved. OBG ceased trading. A liquidator was appointed a month later and assumed control of OBG.
The receivers, who acted in good faith throughout, had been advised by solicitors that their appointment was valid. No one at the time suspected that this advice was wrong. Long after the receivership ended, the liquidator of OBG sued the receivers for damages for conversion. In turn, the receivers sought an indemnity from the solicitors who had advised on their appointment. In 2001, the trial judge concluded that the receivers were clearly liable to the claimants for damages for conversion. However, the level of damages was left to be assessed at a later date. Resolution of the issue of who should pay those damages – the receivers or the solicitors who advised on their appointment – was also for a later date.
OBG argued that the receivers were responsible for the loss of several of their contracts or (in other cases) had failed to realise the full value of contracts. Such contractual or proprietary rights qualify as ‘intangible’ assets and, in law, receivers can only be liable for the conversion of ‘tangible’ assets such as buildings, plant and machinery. However, the judge ultimately held at trial that the claimants could recover some of the damages claimed in relation to the value of the contracts, as well as the tangible assets. On that basis, the claimants were awarded approximately £1.8m, plus interest.
Subsequently, and by a majority of 2:1, the Court of Appeal overturned the trial judge’s decision regarding conversion of the business contracts. The damages were reduced significantly. The case then went to the House of Lords, where the claimants argued that the receivers were liable for the value of the contractual claims because they had committed either an ‘economic’ tort or conversion.
The allegations that the receivers had committed one of the economic torts – inducing breach of contract, unlawful interference in contractual relations or causing loss by unlawful means – were considered at length by Lord Hoffman, who gave the leading judgment. “Unlawful interference” or “causing loss by unlawful means” requires the use of means which are unlawful. The person who has committed the tort (known as ‘the tortfeasor’) must also have intended to cause damage to the other party. Lord Hoffman confirmed that the tort of inducing breach of contract arises where someone not party to the original contract procures one of the contracting parties to act so as to breach the agreement. Again, the tortfeasor must intend one of the contracting parties to breach the contract.
Applying those requirements to the present case, Lord Hoffman said that the simple fact that the receivers had been invalidly appointed (a fact of which they had been unaware following poor advice from solicitors), did not constitute unlawful means or interference in OBG’s contracts. Neither did the receivers, who acted entirely in good faith, intend to cause loss to OBG. Consequently, they did not have the requisite mental element to commit any of the economic torts.
The other four law lords (Lord Nicholls, Lord Walker, Baroness Hale and Lord Brown) agreed with Lord Hoffman and OBG’s appeal on this ground was dismissed. The decision is significant therefore in clarifying and reaffirming the law as regards the necessary ingredients for economic torts – not an area previously benefiting from the clearest of judicial pronouncements and the law lords approved the Court of Appeal decisions not only in OBG v Allan but also in Douglas v Hello Magazine and Mainstream Properties v Young.
In addition, the decision clarifies the law relating to economic torts by confirming there are essentially only two such torts, namely causing loss by unlawful means and inducing breach of contract. Any attempt to blur the distinction between the two, or to create some type of unified or hybrid economic tort, was considered likely to confuse and therefore discouraged.
The law lords’ comments on this subject reveal a sharp divergence of opinion and are perhaps the most interesting part of the decision. When it comes to the tort of conversion, UK law has always been clear that a tortfeasor can be strictly liable for converting tangible assets but cannot be liable for the conversion of intangible assets.
The claimants referred to the law of two Commonwealth jurisdictions (Canada and Australia) and certain North American states, which allow the recovery of damages for the conversion of intangible assets. They argued that English law was effectively out of step with these jurisdictions and had not moved with the times in that, nowadays, the distinction between tangible and intangible assets makes no commercial sense. The claimants pointed to the illogical distinction between shares which, if evidenced by paper certificates, would qualify as tangible assets but, if not evidenced on paper and dealt with purely electronically, would count as intangible assets.
This argument found favour with two of the law lords – Lord Nicholls and Baroness Hale – who agreed that the distinction between tangible and intangible assets was illogical and could see no basis for a distinction between documents on paper and non-paper rights. Lord Nicholls, who gave a lengthy judgment, considered the long-standing distinction should be discarded and that the tort of conversion should apply to contractual rights regardless of whether they are represented or recorded in writing. He was careful, though, to state that such an extension should not apply to intellectual property rights.
However, the majority of the law lords agreed with Lord Hoffman in considering it a step too far, and potentially confusing, to contemplate such an extension of the law, particularly since parliament had not chosen to do so. It was up to the legislature to change the law in this area if, for policy reasons, such a reform was considered appropriate. It is clear that Lord Hoffman was not overly impressed with the Commonwealth or US authorities and, more importantly, he did not sympathise with the claimant’s position in this case. In his concluding remarks, he said: “[This] is not a case in which a wrongful appointment of receivers caused damage to a solvent company. The judge found that the company was inevitably headed for insolvent liquidation.”
The law lords’ speeches represent an interesting debate and divergence of opinion in this area. If damages had been awarded for conversion of intangible assets, it would have represented a very significant change in the law and had far-reaching implications both for those acting as receivers and for numerous other agent/principal relationships.
Given the generally conservative instinct of the law lords, it is not surprising that the majority were reluctant to take this step without at least an indication from parliament that such a reform was on the legislature’s agenda. Since Lords Hoffman, Walker and Brown clearly considered change undesirable for public policy reasons, it is perhaps surprising that Lord Nicholls and Baroness Hale were willing to contemplate such a reform. It may be that parliament will now examine this area of the law, given the views expressed by the Nicholls/Hale minority. Practitioners will wait with interest to see whether parliament will in fact review and revise the law of conversion.