On 2 May 2007 the House of Lords ruled that the mere appointment of a receiver was not enough for a company to recover damages for business contracts that were allegedly lost as a result of that appointment.
Rosemary Gare and Jonathan Wyles of the Lawyers’ Liability Group of Reynolds Porter Chamberlain LLP (RPC) advised the receivers, Mr Allan and Mr Stevenson, and Penningtons LLP, solicitors, who, on 2 May 2007 were successful in resisting the appeal by the Liquidators of OBG Ltd in OBG v Allan & Others in the House of Lords. This case was heard with Douglas v Hello and Mainstream v Young.
Background to OBG V Allan
The receivers were purportedly appointed in June 1992 under a floating charge and took over control of the claimants’ business. The receivers tried to continue trading but it became clear very quickly that the business was “doomed to fail” and it ceased trading almost immediately. On 29 July 1992 a liquidator was appointed who took over control of the claimants.
The claimants sued the receivers for damages for conversion and the receivers sought an indemnity from Penningtons, who had advised the floating charge holder upon the receivers’ appointment. RPC was originally instructed on Penningtons’ behalf.
Acting in good faith the receivers took control of the claimants’ assets and undertakings. It transpired that the appointment of the receivers was invalid. In January 2001 Maddocks J held the receivers liable to the claimants for damages for conversion and trespass, such damages to be assessed.
The claimants had a number of contracts which they alleged they lost due to the appointment of the receivers. These were valued at in excess of £2m. These proprietary rights are intangible assets. As a matter of law, the receivers can only convert tangible assets. However, at the quantum trial in 2003 Maddocks J held that the claimants could recover damages in relation to the value of the business contracts in addition to the loss of the tangible assets. The claimants were awarded approximately £1.8m plus interest. RPC took over conduct of the receivers’ defence and pursued this matter successfully to the Court of Appeal.
The Court of Appeal overturned Maddocks J’s decision by a majority of two to one, in relation to the business contracts. The damages were reduced to £244k plus interest.
Issues before the House of Lords
There are essentially two issues before the House of Lords in this case.
- Whether the receivers are liable to the claimants for damages for the value of the contractual claims under the law of economic torts, which is strict liability
- Whether the receivers are liable to the claimants for the same damages in conversion.
The decision of the House of Lords
All five law Lords (Lord Hoffman, Lord Nicholls, Lord Walker, Baroness Hale and Lord Brown) agreed that the claim in the law of economic torts failed.
The law of economic torts is a littleknown, esoteric area of the law which has developed on an “ad hoc” basis.
The House of Lords consider that there are three distinct and potentially relevant torts:
- Inducing breach of contract
- Causing loss by unlawful means
- A hybrid of items 1 and 2.
The House of Lords were critical of judicial attempts to create a hybrid economic tort, which only led to confusion as to what was, and what was not, permissible in certain commercial situations.
In giving the leading judgment, Lord Hoffman, with whom the other Law Lords agreed, said that the two laws of economic tort should be kept separate and distinct and all attempts to seek a unified approach should be discouraged. “Inducing breach of contract” arises where a third party, who is not party to the original contract, procures one of the parties to that contract to breach it. The third party is liable as accessory to the liability of the contracting party. The ambit of this tort is clear from its description.
“Causing loss by unlawful means”, sometimes referred to as “unlawful interference with contracts”, is different. A wrongful act by a third party is not required. However, it does require the use of means which are unlawful, which is not necessarily the case in the tort of inducing breach of contract. Moreover, liability for unlawful means does not depend upon the existence of contractual relations, and the contract-breaker must have intended to cause damage to the other contracting party.
Lord Hoffman helpfully defined “unlawful means” as consisting “of acts intended to cause loss to the claimant by interfering with the freedom of a third party in a way which is unlawful as against that third party and which is intended to cause loss to the claimant. It does not include acts which may be unlawful against a third party but which do not affect his freedom to deal with the claimant.”
Therefore, one now has a sharp distinction between two economic torts. One tort imposes primary liability for intentional and unlawful interference with economic interests. The other tort imposes accessory liability for inducing a third party to commit an actionable wrong, such as a breach of contract.
The law of conversion The law of conversion is clear and well-established: a receiver/liquidator can convert tangible assets but he cannot convert intangible assets. As proprietary rights such as contractual claims are intangible assets they cannot be converted and so the claimants are unable to recover damages for them.
The claimants sought to persuade the House of Lords that recovery of damages for conversion of intangible assets was recognised elsewhere under Commonwealth jurisdiction (Canada, Australia) and in USA and so should apply in England and Wales. The claimants argued that, if the House of Lords considered that it was necessary to change the law in this area (which it was), then the law should be so extended because the distinction between tangible and intangible assets made no commercial sense.
Three of their Lordships (Lords Hoffman, Walker and Brown) concluded that it would be necessary for a change of the law for the claimants to recover damages, Parliament had had the opportunity to amend the law in recent years which it had chosen not to do, and for policy reasons it was inappropriate for the House of Lords to change the law now. If Parliament wished to change the law, it was for them to do so. Lord Hoffman said that no guidance was available from the Commonwealth and US authorities. In his view, the arguments submitted by the claimants were “an insecure base on which to erect a comprehensive system of strict liability for interference with [intangible assets].”
By contrast, Lord Nicholls, with whom Baroness Hale agreed, considered that the distinction between tangible and intangible assets was illogical, based as it was upon the distinction between documents on paper and nonpaper rights. For example, shares for which there are paper certificates are tangible assets but shares that are dealt with purely electronically are intangible assets. Lord Nicholls considered that this distinction should be discarded and that the tort of conversion should apply to contractual rights irrespective of whether they are embodied or recorded in writing. He did not think it was necessary for this to be left to Parliament.
Lord Nicholls said that this was not an “open-ended” extension of the law. It would not, for example, apply to intellectual property rights. However, Lords Hoffman, Walker and Brown were concerned that any extension would “open the floodgates”, causing confusion in the commercial world, which is why they considered it best left to Parliament.
Judgment in OBG v Allan
As Lord Hoffman so eloquently put it, the claimants’ attempt to recover damages in relation to the contractual claims failed because “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 [Claimants] sought immediate advice on the legality of the appointment of the Receivers and then stood back for over three years, leaving the Receivers to negotiate with NWW [the Claimants’ main customer]. The Receivers acted in good faith throughout and the Claimants concurred in the settlement they reached [with NWW]. The [Claimants] then put [their] case on the basis of an allegation of strict liability which precluded any investigation into [their] own conduct or whether [they] could have produced a better result. I can see no reason why such a claim should have succeeded”.