Nationwide Building Society v Dunlop Haywards (DHL) Ltd (t/a Dunlop Heywood Lorenz) & Anor [2009] EWHC 254 (Comm)

[2009] EWHC 254 (Comm)Case No 2007-717
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 18/02/2009
Before
MR JUSTICE CHRISTOPHER CLARKE
Between
NATIONWIDE BUILDING SOCIETYClaimant(1) DUNLOP HAYWARDS (DHL) LIMITEDDefendant(2) COBBETTS (A FIRM)Defendant
Mr Ben Elkington (instructed by Addleshaw Goddard LLP) for ClaimantMr William Flenley (instructed by Barlow Lyde & Gilbert LLP) for Second DefendantHearing Hearing dates: 2nd February 2009
Judgment
[1]In April and September 2005 the Cheshire Building Society (“CBS”) made two advances of £ 10.5 million and £ 1 million (less fees) to Goldgrade Properties Limited (“Goldgrade”) on the security of commercial property in Priory Road, Ashton, Birmingham, which Goldgrade was to purchase. The property had been valued by the first defendants - Dunlop Haywards (DHL) Limited (“DHL”). Mr Ian McGarry of DHL fraudulently overstated the value of the security, claiming that it was worth £ 16 million on the assumption that 3 occupational leases with favourable terms into which Goldgrade was said to be about to enter were completed. Without the leases he valued the property at £ 10.5 million. Both valuations were grossly excessive, the true value being about £ 1.3 - 1.5 million.[2]Since the events in question CBS has merged with the Nationwide Building Society which is now the claimant. I shall, however, continue to refer to the claimant as “CBS”.[3]In this action CBS claims damages against DHL and Cobbetts, the solicitors who acted on its behalf in relation to the two secured loans of April and September 2005.[4]The issues that remain for determination are(i) the assessment of the quantum of CBS’ claim against DHL; and(ii) Cobbetts’ contribution claim against DHL. The determination of those issues may prove to be an academic exercise. DHL is in liquidation and has no assets other than certain causes of action, the value of which is uncertain, and, according to its insurers, no remaining cover. The liquidator of DHL has declined to agree the quantum of CBS’ claim against DHL; but neither he nor Cobbetts have put in any evidence challenging the amounts claimed. DHL has not been represented before me.[5]I have had written evidence from witnesses from CBS and Cobbetts (the latter dealing with the contribution issue). CBS has also presented a detailed report from Mr Tim Taylor of KPMG in support of its claim. The history of the proceedings.[6]CBS issued proceedings in May 2007. Both DHL and Cobbetts filed defences. DHL admitted breach of duty and causation, but did not admit deceit. Cobbetts served a contribution notice on DHL.[7]On 18th January 2008 Steel J gave CBS summary judgment in deceit against DHL, with damages to be assessed. He did so because he concluded that there was no realistic prospect of DHL resisting a finding that Mr McGarry had been dishonest. He ordered DHL to make an interim payment of £ 10 million on account of damages and £ 250,000 on account of costs by 25th January 2008. DHL failed to make any payment to CBS. On 12th May 2008 a winding-up order was made against DHL, which is now in liquidation.[8]The claim against Cobbetts progressed. Disclosure took place and witness statements were exchanged. On 17th October 2008 CBS accepted a part 36 offer made by Cobbetts in the sum of £5,585,001. CBS later accepted an offer made by Cobbetts in respect of its costs in the sum of £555,000. As a result CBS’ claim against Cobbetts came to an end.[9]In November 2008 CBS obtained an order in the insolvency proceedings giving it permission to continue its action against DHL for the final assessment of damages. Cobbetts has obtained an equivalent order in relation to its contribution claim against DHL. CBS’ claimed loss[10]CBS claims: a) The net amount of its advance to Goldgrade, plus lost interest on alternative advances, plus the cost of managerial and staff time, plus consequential losses; less: b) The current value of the Property.[11]CBS’ total claimed loss is as follows: a) Losses: i) The net amount advanced to Goldgrade £ 11,413,750 ii) Lost interest on alternative advances £ 2,411,429 iii) Cost of managerial and staff time £ 50,701 iv) Consequential losses, namely:(1) Additional funding costs (loss of retail deposits) £ 86,355(2) Additional funding costs (wholesale funding) £ 12,864(3) Loss of opportunity to make more mortgage loans £ 7,557,600(4) Loss of opportunity to reduce back stop facilities £ 74,455(5) Loss on a 12 month retail bond £ 119,366 b) Less: i) Current Value of the Property £ 625,000 c) TOTAL LOSS: £ 21,101,520 d) Less ii) Recovery from Cobbetts £ 5,585,001 TOTAL CLAIM £ 15,516,519

The measure of CBS’ loss in respect of its claim against DHL

[12]The amount that CBS is entitled to recover against DHL in deceit is to be assessed on the following basis (see Clerk & Lindsell on Torts (19th ed.) at 18-36 to 18-45 ): a) CBS is entitled to recover its losses directly flowing from CBS’ reliance on DHL’s fraudulent statement as to the value of the property, including consequential losses and loss of profits. CBS is entitled to recover damages to put it in the position it would have been in had the statement not been made. b) CBS’ losses must have been caused by the fraudulent statement but there is no requirement that the losses be foreseeable. c) The defence of contributory negligence is not available to DHL. The net amount advanced to Goldgrade[13]The initial advance was for £10,500,000 less an arrangement fee of £ 78,750 making a net advance of £10,421,250.The further advance was for £1,000,000 less an arrangement fee of £7,500 making a net advance of £992,500. The total net advance is, therefore, £11,413,750 as claimed. Lost interest on alternative advances[14]If CBS had not lent £11.5 million to Goldgrade, it would have advanced the money to another commercial customer. CBS’ typical margin on a commercial loan at the time was LIBOR plus 1.4%. Accordingly, CBS’ lost interest on the amount of the advances from their date down to 12th January 2009 is £2,908,428. Against that CBS must give credit for the total amount of interest received in respect of the initial and the further advance which totals £ 496,999.29. CBS is, therefore, entitled under this head to the £2,411,429 claimed. Cost of managerial and staff time[15]CBS is entitled to recover damages for the cost of wasted staff time spent on an investigation of DHL’s fraud or in mitigation of its consequences provided that it can demonstrate that the time relied on was spent on that activity. It is not necessary to show some additional expenditure or loss of revenue or profit: R+V Versicherung AG v Risk Insurance and Reinsurance Solutions SA [2006] EWHC 42 (Comm) at para 77.[16]CBS was tipped off about the possibility of fraud in January 2006. In mid February and early March 2006 CBS carried out an internal investigation (called the “Silver” investigation) in which a number of CBS staff reviewed all CBS’ files relating to the advances made to Goldgrade. This involved recovering and reviewing the e-mails of those who had been involved in the advances, reviewing other transactions that had been introduced to CBS by the broker (Mutual Finance) which had introduced the Goldgrade transaction to CBS, and liaising with the West Midlands Police. I am satisfied that CBS is entitled to recover the cost of this activity which was necessitated by the fraud. Faced by a fraud of this magnitude it was practically inevitable that CBS would have to inquire how many other Goldgrade or Mutual Finance transactions were also fraudulent.[17]In addition CBS carried out “the 2006 review” which lasted between March and July 2006, and involved reviewing over 70 commercial lending files in order to determine whether CBS had been the victim of other frauds. The review was prompted by the Goldgrade fraud and would not have been carried out if the Goldgrade fraud had not occurred because a similar review had been carried out in 2005. Even though this review was not concerned with either Goldgrade or Mutual Finance transactions I am satisfied that the cost of it is also recoverable from DHL. CBS could not be sure that any fraud was limited to such transactions, especially if some member of CBS’ staff was involved (in fact none was).[18]Staff working on both investigations recorded the time they spent on them on time recording systems. Mr Taylor has calculated the cost of the time spent by CBS staff, based on those timesheets and actual salary information, as being £ 47,889 and the costs of the internal overheads relating to such staff as £ 2,812. I am satisfied that these calculations are reliable and the costs reasonable. In my judgment CBS is entitled to recover £ 50,701 under this head.[19]When the fraud was discovered it became public relatively soon. The effect of the fraud was that CBS had to make a provision of £ 10 million in its accounts for the year ending 31st December 2005 leading to a highly unusual and unexpected loss of £ 1.3 million for the year. CBS’ 2005 results were announced on 10th March 2006 and the provision was described as relating to a suspected external fraud. There was then wide publicity about the fraud. Representatives of CBS had to make public statements of reassurance. Moody’s, the rating agency, changed its outlook on CBS from “stable” to “negative”. CBS has a series of claims in respect of losses which it claims to have suffered because of the effect of the fraud on confidence in CBS. Additional funding costs (loss of retail deposits)[20]CBS obtains the money which it lends to borrowers from two sources:(a) savings deposited by its members (“retail funding”);(b) lending by institutional lenders (“wholesale funding”). Wholesale funding is more expensive than retail funding. As a result, if the amount of retail funding available to CBS reduces and is replaced by wholesale funding CBS will suffer a loss.[21]During March and April 2006 there were significant withdrawals of retail deposits. In those months retail funding was reduced by £ 25.8 and £ 6.2 million respectively, a total net outflow of £ 32 million. In the same two months in 2005 and 2007 there was a net inflow of retail funds. However, the difference between the total actual net outflow and the total expected net outflow for those two months was £ 15.7 million. There is no factor other than the publication of the fraud which would convincingly explain why the net outflow should be markedly more than anticipated. I am satisfied that £ 15.7 million may properly be taken as the best estimate of the reduction in retail funding attributable to the fraud. The next question is what figure should be taken as the differential funding cost as between wholesale and retail funding. I am satisfied that the figure of 0.44% taken by Mr Taylor, being an average difference in funding cost for the two months, is a fair figure to take. If figures of £ 15.7 million and 0.44% are taken, the loss per month is £ 5,757.[22]The remaining component of the calculation of loss is the period over which the retail funding would have been replaced. CBS has claimed that the Court should proceed on the basis that the withdrawn retail funding would not have been recovered at all for 6 months after March 2006 and that from September 2006 until March 2008 the funds would have been recovered on a straight line basis (Taylor, para 4.2.4). I am not persuaded that this is appropriate. It appears to me to be too gloomy a view. Mr Taylor has performed a number of calculations on a variety of different assumptions. I propose to take a variant of his calculation at para 4.3.51, i.e. to calculate CBS’ entitlement on the basis that there would be no recovery of the deposits for March and April (2 months) and that there would then be a full recovery from May to December (8 months) on a straight line basis. If so, the appropriate multiplier is 6 (2 + 8/2). The resulting figure is £ 34,542. Additional funding costs (wholesale funding)[23]CBS claims that the effect of its downgrading by Moody’s was to make it a marginally less attractive proposition for investors. Mr Philip Shepherd, the Treasurer and Financial Controller of CBS, estimates, in the light of discussions with CBS’ dealers and others such as money brokers, that 10% of CBS’ new wholesale funding in 2006 and 5% of such funding in 2007 was affected and that that 10% and 5% of funding became 0.01% more expensive. On that basis CBS’ loss was £ 12,864. The figures are so small that it could be argued that they are unproveable, particularly in a market where rates were rising. How can one tell that funding overall was 0.001% more expensive because of the impact of the fraud? I have, however, come to the conclusion that the fraud and the consequent Moody downgrading are intrinsically likely to have had and did have some adverse effect on the price of wholesale funding and that the modest calculation put forward is a reasonable assessment of CBS’ loss in this respect. Loss of opportunity to make more mortgage loans[24]CBS’ claim under this head is that because of the fraud it failed to attract sufficient new retail deposits to provide the funds which it needed in order to be able to make new mortgage loans. Quite apart from questions of prudence, it is not open to CBS to borrow on the wholesale market whatever it lacks from retail lending, because it is required by the FSA to have only 40% of its funds derived from that source. By March 2006 CBS’ mortgage lending was £ 63 million ahead of CBS’ target. Further its pipeline and pending lending (the loans which were in the course of being applied for or granted) of £ 230 million was about £ 100 million ahead of target. But by December 2006 CBS’ lending was £ 125 million behind target.[25]CBS’ claim under this heading was originally put at £ 792,450. Its current claim is £ 7,557,600. Mr Taylor has assessed CBS’ claim in this way. First he has calculated the amount by which the variance between(i) CBS’ actual lending, together with 80% of its lending in the pipeline, and(ii) its target for those figures reduced between the 2nd and the 4th quarters of 2006. He took the 80% figure because that is the percentage of pending applications that usually complete. The reduction was £ 321.6 million: see Table 28. That calculation assumes that the variance at the beginning of the period, where lending (actual and in the pipeline) was £ 143 million in excess of target, would also have applied at December 2006. I consider this assumption reasonable in the light of the fact that, generally in the market, loans issued from March 2006 to the end of March 2007 were at a higher level than that achieved in the first three months of 2006.[26]He then assessed CBS’ average profit margin on its mortgage lending at approximately 0.5%. He did this by taking the weighted average rate of return on retail and wholesale funds obtained by CBS. This calculation was made by taking the net interest income (not including income on free reserves) as a percentage of average net assets. On the basis of those figures he calculated a total loss of £ 5,628,000. This was derived by taking the variances for the three quarters and applying the 0.50% rate on the basis that the loss would last for 3.5 years, that being the average retention for any CBS mortgage product. Alternatively he assumed that the loss suffered as a result of the lost mortgage business continued for 4.7 years, that being the average retention for all borrowers i.e. the average time that borrowers remained with the society (either with the original or a substitute product). On this assumption CBS’ loss was £ 7,557,000.[27]Despite the very great difference between the original claim and the £ 7,557,000 figure I am satisfied, on the evidence presently before me, that CBS is entitled to recover £ 7,557,000 under this head. The likelihood is that as a result of the fraud there was a decrease in the amount of new deposits which restricted CBS’ ability to earn profit. The contemporaneous documents reveal that CBS had concerns about the size of the lending being made but this was not because of any desire to restrict lending to target figures but because of the net outflow of the retail funding necessary to support lending. The calculation made by Mr Taylor is an appropriate measure.[28]The earlier figure of £ 792,450 is much less than the figure claimed because(a) it takes no account of the loss of pending business;(b) it takes an inappropriate differential of 0.18% which is based on the difference between residential lending rates and 3 month LIBOR; and(c) it assumes an artificially short period (down to March 2008) over which the loss is felt. Loss of opportunity to reduce back stop facilities[29]A back stop agreement is a commitment by a bank to give CBS wholesale funding if called upon to do so. For this facility the bank will charge a fee. CBS had a range of different back-stop facilities with different banks to allow it to manage its liquidity. These all terminated between August and December 2006 and CBS was planning not to renew them. In the event as a result of the fraud CBS put its plans on hold and entered into new back-stop facilities providing for funding of £ 140,500,000.[30]CBS claims damages based on the fees of £108,175 payable under the new back stop facilities less the costs it would have incurred if it had increased the level of short term liquidity in place. That cost Mr Taylor estimates at £33,720. He gets to that sum by taking 40% of the £ 140,500,000 and applying to it a margin of 6 basis points. He chose 40% because that is the percentage of CBS’ potential inflows from standby facilities on which, according to Discussion Paper 24 of the FSA, it can expect to draw when under liquidity stress. For the purpose of meeting FSA liquidity standards back stop agreements are valued at 40% of their principal value. He took 6 basis points as reflecting the difference between the borrowing at wholesale rates and lending at investment rates.[31]I am satisfied that these calculations are reasonable and that CBS is entitled to recover £74,455under this head. Loss on a 12 month retail bond[32]Because of the loss of retail funding in consequence of the Goldgrade fraud, CBS needed to attract additional funding. In order to do so it decided to increase the interest on its 12 month fixed retail bond from a planned rate of 5% to a “best buy” rate of 5.11%. So small a difference in rate is of importance because of the position in which it places the product compared with those of other providers. Thus CBS had to pay 0.11% more interest on the total amount invested in that product, which was £108,515,000, than it would otherwise have had to have done. Accordingly it is entitled to claim its losses under this head of £ 119,366.[33]The conclusions I have reached in relation to the recoverability of CBS’ knowledge are reached without reference to any question of foreseeability. On that basis CBS is entitled to recover the following: 1. Net amount advanced to Goldgrade £ 11,413,750 2. Lost interest on alternate advances £ 2,411,429 3. Cost of managerial and staff time £ 50,701 4. Loss of retail deposits £ 34,542 5. Additional wholesale funding costs £ 12,864 6 .Loss of opportunity to make mortgage loans £ 7,557,000 7. Loss of opportunity to reduce backstops £ 74,455 8. Loss on 12 month retail bond £ 119,366 Sub- total £ 21,674,107 Less: Value of property (£ 625,000) The mid-point of Mr Peter Clarke’s valuations as at the date of trial TOTAL for which DHL is liable £ 21,049,107 Less: Recovery from Cobbetts (£ 5,585,001) TOTAL £ 15,464,106[34]Accordingly CBS is entitled to judgment against DHL for £ 15,464,106.[35]Since Cobbetts have settled with CBS it is not necessary to decide the amount for which they would have been liable for the purposes of any judgment against them. As will, however, become apparent it is necessary to do so for the purposes of the contribution claim. Mr Flenley for Cobbetts accepts that Cobbetts would (subject to questions of contributory negligence and contractual limitation of liability) have been liable for items 1 and 2 in paragraph 33. I am not satisfied that item 3 would have been recoverable against Cobbetts. They were at fault in not alerting CBS to the indicia of fraud, which they should have spotted. But, had they done so, CBS would be likely to have carried out, albeit somewhat earlier, exactly the same sort of investigations into the extent of the fraud that they carried out later.[36]In relation to items 4 -8 Mr Flenley submits that they are irrecoverable against Cobbetts because they are too remote. The chain of causation by which DHL is liable is that, in consequence of the discovery of the fraud, CBS had to make a provision in their accounts, which caused CBS to make an unusual loss. Widespread publicity about that (e.g. in the Mail on Sunday) caused a loss of confidence and a downgrading by Moody’s, with consequential loss as a result of the withdrawal of retail funds, the extra cost of wholesale funding etc. Mr Flenley submits that it has not been established that Cobbetts had or ought to have had in their contemplation or reasonably to have foreseen that their failure to report indicia of fraud would have these types of consequences, some of which, such as the loss on backstops and the 12 months bond, are somewhat recherché. Mr Brown of Cobbetts had acted for CBS in transactions worth many millions of pounds. I have no evidence as to the state of his knowledge about CBS’ profits or of the likely impact of it being found that the valuation was fraudulent. Whilst loss in the form of items 1 and 2 was a natural and foreseeable consequence of Cobbett’s breach I am not persuaded on the evidence that I have been shown that items 4 -8 are consequences that Cobbetts should reasonably have had in contemplation or should reasonably have foreseen as possible results of their breach. Accordingly, as it seems to me, the amount for which Cobbetts would have been responsible, subject to defences of contributory negligence and contractual limitation, is: 1. Net amount advanced to Goldgrade £11,413,750 2. Lost interest on alternate advances £ 2,411,429 Sub- total £ 13,825,179 Less: Value of property (£ 625,000) I do not propose to adopt the suggestion made on behalf of Cobbetts that, as between them and DHL, I should adopt the higher value of the property at the time (October 2008) when Cobbetts settled with CBS. To take the valuation at the date of trial properly reflects CBS’ loss to which DHL and Cobbetts are to contribute. I am not persuaded that the fact that Cobbetts’ settlement assumed a higher value of the property ought to mean that the contribution percentages should be applied to a figure which assumes a value for the property higher than the value which is to be taken in the assessment of CBS’ loss. TOTAL £ 13,200,179 Contribution The Civil Liability (Contribution) Act 1978[37]Sections 1 and 2 of the Civil Liability (Contribution) Act 1978 (“the Act”) provide as follows (emphasis added):
“ 1. Entitlement to contribution. (1) Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise). ……… (4) A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established. (1) Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise). ……… (4) A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established. 2. Assessment of contribution.— (1) Subject to subsection (3) below, in any proceedings for contribution under section 1 above the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person’ s responsibility for the damage in question.”
[38]What for these purposes is “the damage in question”? There are at least two possibilities. The first is that the damage in question is the claimant’s loss i.e. the £ 21,049,107. The second is that it is the amount in respect of which Cobbetts claim contribution i.e. the settlement figure of £ 5, 585,001.[39]These two alternatives produce markedly different outcomes. Assume, for ease of reference, that the figures were £ 20 million and £ 5 million respectively, that Cobbetts had paid £ 5 million to CBS, and that the court apportions liability between DHL and Cobbetts in the ratio 75%/25%. If the “damage in question” is CBS’ total loss it will be in the interests of Cobbetts to argue that it should be as low as possible. If the loss is £ 20 million Cobbetts would be liable for 25% of that sum, namely £ 5 million. Having paid £ 5 million in settlement, it would recover no contribution at all. If the loss is reduced to £ 15 million Cobbetts is responsible for 25% i.e. £ 3.75 million and would recover £ 5 million - £ 3.75 million i.e. £ 1.25 million.[40]If “the damage in question” is the amount in respect of which contribution is claimed i.e. £ 5 million (in the example) then the contribution would be 75% of that figure namely £ 3,750,000.[41]CBS’ claim for £ 7,557,000 is a nearly tenfold increase on the figure of £ 792,450 which appeared in its Voluntary Further Particulars of Loss. Cobbetts did not at the time of the hearing have the evidence it needed to challenge this claim, and, if it was to be pursued and if the court were to regard the first construction as correct, Cobbetts would have sought an adjournment at CBS’ expense.[42]In order to avoid any need for an adjournment, CBS agreed that, if the Court preferred the first construction, or any other construction which made it relevant, for contribution purposes, that the larger figure was recoverable, then it would limit its claim to the lower amount.[43]Cobbetts, with the support of CBS, contend that the second construction is correct. If it were otherwise the result, they submit, would be most unfair. Two defendants may be liable on very different bases. In the present case DHL is liable in deceit where issues of remoteness and contributory negligence do not arise. Cobbetts is liable only in negligence, so that it can advance a defence of contributory negligence. Moreover Cobbetts’ liability was potentially reduced because of a clause in its retainer limiting its liability to £ 5 million per retainer. If the liability of DHL is of the order of £ 20 million and that of Cobbetts of the order of £ 5 million they should, it is submitted, share in the liability for the £ 5 million for which they are both liable, and not for the additional £ 15 million for which only one of them is liable. If it were otherwise a defendant would find himself in a worse position so far as contribution was concerned if his co-defendant was fraudulent than he would if he was negligent.[44]The inequity of any other result is also apparent, when one considers the position if the claimant is contributorily negligent. Assume a case (unusual but not impossible) in which the claimant is 75% contributorily negligent and there are two defendants, both negligent but neither fraudulent. On that assumption what would have been an entitlement to £ 20 million (in the example given) produces an award in favour of the claimant of 25% of that i.e. £ 5 million. The two defendants will then share liability for £ 5 million: Fitzgerald v Lane [1989] AC 328. If no fraud is involved, that share may well be 50/50 in which case each defendant is responsible for £ 2.5 million. Assume however that D1 is fraudulent but D2 is not. If what falls to be apportioned is the £ 20 million, for which D1, who is unable to rely on contributory negligence, is liable, then, even assuming (say) a 75/25% split to reflect D2’s lesser moral blameworthiness, D2 is responsible for 25% of £ 20 million i.e. £ 5 million. In effect D2 is required to share responsibility for an amount which is only recoverable by the claimant because D1 was fraudulent.[45]The potential inequity of the first construction may be further exemplified if one assumes that CBS’ losses were not £ 20 million but £ 30 million. In that case, Cobbetts would, prima facie (but see para 59 below), be required to contribute £ 7,500,000, (£ 30 million x 25%) and, having paid £ 5,000,000 would be liable to pay the excess of £ 2,500,000. Discussion[46]In order for Cobbetts to be able to claim contribution at all it is necessary that they should be liable in respect of the same damage as DHL. “Damage” in the Act is to be distinguished from “damages” and there is authority that it is to be widely interpreted.[47]I am satisfied that DHL and Cobbetts are, at least to some extent, liable/responsible for the same damage. CBS would not have made either of the two advances but for the deceit of DHL and the negligence of Cobbetts and have suffered loss in consequence. It is, however, necessary to consider what exactly is “the same damage” for which they are both liable/responsible. The damage for which they are both liable is set out in para 36 above. I do not, however, accept that they are both liable to CBS, within the meaning of section 1 (1) of the Act, for the whole of the damage in para 33 or responsible for it, within the meaning of section 2 (1) thereof. I see no reason why the Court cannot distinguish between one category of economic loss for which DHL was responsible but Cobbetts were not, viz loss not reasonably foreseeable which is only recoverable because DHL was fraudulent, and the foreseeable loss for which both were liable. On the contrary there seems to me good reason to make that distinction. If I am wrong on that I would regard the court as entitled, when assessing what amount of contribution was just and equitable, to ignore any loss which was only recoverable from D1, but not D2, because D1 was fraudulent; and not to require any of such loss to be shared.[48]Cobbetts have made a payment in bona fide settlement of CBS’ claim against it. Provided that they would have been liable to CBS assuming that the factual basis of the claim made against them could be established they are entitled to recover contribution from any other person liable in respect of the same damage. I am satisfied that Cobbetts would have been liable to CBS if the factual basis pleaded against them was established. I am also satisfied that the settlement which Cobbetts made with CBS was reasonable. It represented about half of CBS’ basic claim. Unsurprisingly neither CBS nor Cobbetts suggest it was unreasonable, nor does DHL.[49]“The same damage” in section 1 (1) means the damage, suffered by another person, for which both the person seeking contribution and the person from whom contribution is sought are liable. When section 2 (1) speaks of “the damage in question” it must be referring to the “same damage”, as specified in section 1 (1), in respect of which rights of contribution arises. The draftsman cannot have intended the word “damage” to have a different meaning in section 2 to that which it has in section 1. Further it is only section 1 (1) which puts “the damage in question” at all The matter is made even clearer by reference to the Law Commission’s draft Bill in which section 3 (1) is in the form of section 1 (1) of the Act and section 3 (4) is in the same form as section 2 (1) save that it refers to “that person’s responsibility for the damage” without the words “in question”. These were, presumably, added to section 2 (1) of the Act because that subsection was no longer part of the section containing the words in section 1(1) of the Act/section 3(1) of the Bill. .[50]It is, however, necessary to distinguish between three different circumstances viz:(a) D1 and D2 are not liable for the same damage because they are responsible for different things;(b) D1 and D2 are both liable for the same damage and in the same amount;(c) D1 and D2 are liable for the same damage but D2 is liable for less than D1 e.g. because he has available to him defences which reduce what would otherwise be his liability for the damage in question e.g. contributory negligence and contractual or statutory limitation.[51]Royal Brompton NHS Trust v Hammond [2002] UKHL 14, [2002] 1 WLR 1397 falls within category (a). In that case an architect failed in his claim for contribution against the contractor because the two of them were not responsible for the same damage. The claims against the contractor were for delay and the claims against the architect were for the impairment of the employers’ ability to proceed against the contractor because of the grant of extension certificates. Many, perhaps most, contribution cases fall within category (b). A claim brought by an injured passenger against two negligent drivers is a paradigm example.[52]The present case falls partly within category (a) and partly within category (c). DHL and Cobbetts are, to some extent (see paras 33 and 36 above) liable for the same damage. To the extent that they are (see para 36) Cobbetts have available to them (but Goldgrade do not) defences of contributory negligence and contractual limitation. As a result any damages awarded against them in respect of that damage will be less than those awarded against DHL. Does that mean that “the damage in question” means the amount of their shared liability?[53]Cobbetts rely on the following passage in the speech of Lord Bingham in Royal Brompton:
“… B’s right to contribution by C depends on the damage, loss or harm for which B is liable to A corresponding (even if in part only) with the damage, loss or harm for which C is liable to A. This seems to me to accord with the underlying equity of the situation: it is obviously fair that C contributes to B a fair share of what both B and C owe in law to A, but obviously unfair that C should contribute to B any share of what B may owe in law to A but C does not.”
Cobbetts submits that, in the present case, on the assumption that the settlement of £ 5.585 million reflects their liability to CBS, the “damage, loss or harm for which C (Cobbetts) is liable to A (CBS)” and that which “both B and C owe in law to A” is £ 5.585 million.[54]In the course of his speech Lord Steyn referred to an example of the sale of shares in a company:
“An accountant had negligently valued the shares at £7.5m. The vendor warranted that the shares were worth the price of £10m. In truth the shares were worth only £5m. The vendor was liable for damages in the sum of £5m. Counsel for the contractor said that the accountant could only be liable to the extent of the common liability i.e. £2.5m. Counsel for the architect accepted this analysis as correct. Again, the architect is in difficulties because the example demonstrates the unavailability of a right of contribution to the extent that there is no common liability.”
The reference to the accountant only being “liable to the extent of the common liability” must have been a reference to liability in contribution proceedings brought by the vendor.[55]These dicta confirm that the Court should examine the nature and extent of the defendants’ common liability when determining whether two defendants are liable for the same damage. Cobbetts submit that this approach is consistent with the underlying rationale of contribution. It would not be just for D 1 who is liable for £ 20 million of damages (because he has no entitlement to rely on any defence of contributory negligence, limitation or remoteness) to recover contribution in respect of amounts for which D 2 has no liability at all; or for D 2 to recover less contribution for the amounts for which they are both liable on account of the fact that D 1 is liable for much more. As pointed out in para 44 above the contrary approach would have the odd result that an innocent defendant who had the misfortune to have a fraudulent co-defendant would recover less by way of contribution than he would have done if his co-defendant was merely as incompetent as he was. The Law Commission[56]The Law Commission considered this problem in its Report on Contribution Law Com.No.79, 1977, paras 68-79. which led to the 1978 Act. It considered cases where(a) the liability of one contributing party to the claimant was reduced either by an exclusion clause or by a defence of contributory negligence but(b) the other contributing party was not able to rely on such a defence. It thought that the Court should first assess the total amount of loss caused by the contributors; divide that according to what was just and equitable between the contributors, and only then apply, as a cap on the contributor’s liability, the amount for which the contributor would have been responsible to the claimant, taking into account any defences of contributory negligence or limitation of liability (statutory or contractual) which would have been open to him. Ibid., para.79.[57]The Commission gave the example of a car driven by P which P had bought from D1 and which had a latent defect in the electrical system under a contract which had a limit of liability of £ 400. P drives at night. The headlights go out and he runs into an obstruction on the highway negligently left there by D 2. The loss to P is £ 1,000. On the assumption that D 1 and D 2 were held equally to blame it proposed that the loss should be divided equally, subject to a limit on D 1’s obligation to contribute of the amount in which he was liable to P. As a result D 1 would only be responsible for £ 400. The Commission recommended the same approach in circumstances where one contributor could plead contributory negligence and the other could not (e.g. because the claim was in breach of contract Under the law as it was then thought to be and which the Law Commission later recommended should be changed. ). In order to give effect to that approach it proposed wording for a draft bill, which became section 2 (3) of the Act. Section 2 (3)[58]Section 2 (3) of the Act provides:
“(3) Where the amount of the damages which have or might have been awarded in respect of the damagein question in any action brought in England and Wales by or on behalf of the person who suffered it against the person from whom the contribution is sought was or would have been subject to — (a) any limit imposed by or under any enactment or by any agreement made before the damage occurred; (b) any reduction by virtue of section 1 of the Law Reform (Contributory Negligence) Act 1945 or section 5 of the Fatal Accidents Act 1976; or (c) any corresponding limit or reduction under the law of a country outside England and Wales; the person from whom the contribution is sought shall not by virtue of any contribution awarded under section 1 above be required to pay in respect of the damage a greater amount than the amount of those damages as so limited or reduced.”
[59]The effect of this section is that a defendant cannot find himself liable to contribute more than the damages for which he would have been liable limited by any limitation clause or reduced by contributory negligence. This addresses the problem identified at para 45 above.[60]Cobbetts submit that Section 2 (3) is, however, silent as to which of the two methods identified in para 38 above is the correct method to employ in determining the impact of a defence based on a limitation of liability clause or contributory negligence. It cannot, therefore, be supposed that Parliament adopted the Law Commission’s proposal. It seems to me, however, that that section points the way to the correct construction of the Act, and that, in implementing the Commission’s draft bill without amendments material for present purposes, it must be taken to have intended to adopt the policy option favoured by the Commission. Ball v Banner[61]In Ball v Banner [2000] Lloyd’s Rep PN 569the claimants were investors in a scheme arranged by the ninth defendant whereby certain tax advantages were to be obtained by means of an investment in commercial property. The defendants prepared a prospectus which contained an opinion by Healey & Baker that the property could be let within two years at a rent of at least £ 6.50 per square foot. The claimants’ loss in respect of the several misrepresentations in the prospectus for which the defendant was liable was about £ 705,000. The amount for which Healey & Baker was liable was about £ 250,000, their liability, under the SAAMCO South Australia Asset Management Corp v York Montague Ltd [1997] AC 191. principle, being subject to a limit that it should not exceed the amount by which the advance exceeded what the claimant would have advanced if Healey & Baker had given a lesser estimate of the rental that could be achieved. The defendant sought contribution from Healey & Baker.[62]Hart J held that the “damage in question” meant the loss suffered by the investors from entering into the transaction i.e. the £ 705,000, for which both the defendant and Healey & Baker were, for different reasons, liable. It was not merely the amount of that loss for which Healey & Baker was responsible under the SAAMCO principle i.e. the £ 250,000. He drew attention to the fact that section 2 (3) of the Act distinguishes between “damage” and “damages” and pointed out that sections 2 (3) (a) and (b) made it “clear that persons may be liable in respect of the same damage without necessarily being liable in the same amounts”.[63]Cobbetts submit that the decision of Hart J, is, on this point wrong, and has, in any event, been overtaken by the decision of the House of Lords in Royal Brompton.[64]It seems to me that the judgment of Hart J was right provided that the ninth defendant and Healy & Baker were properly to be regarded as liable for the same damage i.e. the £ 705,000 figure, subject to a common law limitation in Healey & Baker’s favour. Hart J rejected the argument that Healey & Baker’s liability for the same loss only extended to the £ 250,000 figure, holding that it was liable for the same damage as the defendant, but to a lesser extent. In the light of the example cited by Lord Steyn in Royal Brompton that decision may be open to question.[65]If the “damage in question” is to mean, as Cobbetts submit, the amount for which, having regard to defences of limitation of liability and contributory negligence Cobbetts is liable, i.e., in the present case, the £ 5,585,001 figure, which I will call “the net amount”, there is no scope for the operation of section 2 (3) (a) or (b) of the Act. The amount of damages which might be awarded in respect of the net amount could not be subject to any limitation of liability or reduction of contributory negligence because the net amount already takes account of such limitation and reduction.[66]In short, taking sections 1 (1) and 2 (1) – 2 (3) of the Act together it appears to me that they produce, perhaps not surprisingly, the result that the Law Commission favoured and are inconsistent with the second construction. Platform Home Loans v Oyston Shipways[67]This conclusion is also consistent with the House of Lords’ decision in Platform Home Loans Ltd v Oyston Shipways Ltd [2000] AC 190. In that case the plaintiffs lent about £ 1 million on the security of property negligently valued at £1.5 million. The property was sold for much less than that and the plaintiffs suffered a loss of £ 680,000. The judge found that the plaintiffs had been contributorily negligent in failing to note that the borrowers had not completed part of their own form which required a statement of the original purchase price, and in lending too high a proportion of the valuation. The judge found that the £ 680,000 figure should have been reduced by 20% making about £ 489,000. Since that figure exceeded the amount of the overvaluation the whole of it was recoverable. The House of Lords rejected the proposition, accepted by the Court of Appeal, that the 80% should be applied to the upper limit of the Defendants’ liability (i.e. £ 500,000, the amount of the overvaluation) so that the damages should be £ 400,000. In so doing they applied section 1 (1) of the Law Reform (Contributory) Negligence Act 1945, which provides:
“1. Apportionment of liability in case of contributory negligence. — (1) Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage.” — (1) Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage.”
[68]If a claimant suffers loss as a result of entering into a transaction for which both he and the defendant are responsible, the “damage” suffered by him, for the purposes of the 1945 Act, is self-evidently, the whole of the loss that he suffers as a result of entering into the transaction. There ought, as it seems to me, to be prima facie no material difference between the damage suffered by the claimant partly as a result of his fault and partly as a result of that of the defendant, within the meaning of the 1945 Act, and the damage suffered by the claimant partly as a result of the fault of one defendant and partly as the result of the fault of another, within the meaning of the 1978 Act. The whole of the damage suffered by the claimant is the “damage” for the purposes of the 1945 Act; and the “damage suffered by another person” and, (on the assumption that there is no question of fraud) “the damage in question” for the purposes of the 1978 Act. Policy[69]There are policy reasons, which the submissions of CBS and Cobbetts reflect and which the Law Commission considered, as to why the apportionment of contribution should be done on the basis for which Cobbetts argue. In the example given (see para 57 above) they considered, as Solution 2, proposing that the contribution proceedings should be confined to the amount by which the claims against the two defendants overlapped, i.e. the £ 400 amount. They rejected that solution on the ground that it seemed: “unduly favourable to D1 as he has caused £ 1,000 worth of damage for which he was ready to assume liability up to £ 400 but at the end of the day his liability is further reduced to £ 200”.[70]That conclusion is open to the objection that the fact that D1 was ready to assume liability to the claimant for up to £ 400 is no good reason for requiring him to pay up to that sum in contribution proceedings brought by D 2 if D2’s liability is much greater on account of his own deceitful conduct. The Law Commission does not appear to have considered the case of two defendants, one of whom is fraudulent and one of whom is not, and who cannot on that account plead contributory negligence. It plainly did consider the case of two defendants one of whom does and the other of whom does not have such a defence because the claim against the latter is in contract. Conclusion[71]In my judgment the correct approach to contribution in this case is as follows. Firstly “the same damage” for which both defendants are responsible is the loss itemised in para 36 above totalling £ 13,200,179. Prima facie that is the figure to be apportioned. But that figure ought to be reduced to take account of any contributory negligence of the claimant. I take that view because, although the damage in question may be regarded as £ 13,200,179, that can only be so on the footing that any contributory negligence is ignored. Contributory negligence can only be ignored because the claim against DHL is in fraud. It seems to me neither just nor equitable that the amount of contribution which Cobbetts are to be ordered to make should be assessed by treating the damage for which both defendants are responsible as the totality of the claimant’s loss, ignoring contributory negligence, when the only reason for ignoring it is that the claim against DHL is in deceit. To do so would be to visit on Cobbetts the approach taken by the Court, partly for reasons of deterrence, against fraudsters, when Cobbetts are innocent of any fraud.[72]The next question is: what percentage, if any, should be taken for contributory negligence. As between CBS and DHL no such question arose. As between CBS and Cobbetts it was never determined. However, Cobbetts pleaded a very solid claim that CBS were contributorily negligent (see para 94 of the Re-Amended Defence). In calculating the amount for which to settle Cobbetts took a figure of 50%. I regard it as appropriate to take that figure. The effect of doing so is to reduce £ 13,200,179 to £ 6,600,090.[73]Cobbetts settled for less because, in respect of the claim relating to the original advance, they relied on a contractual limit of £5,000,000. (No such reduction was relevant in relation to the claim in respect of the further advance because the limit was not reached). Mr Flenley submits that in determining the figure which should be apportioned in the contribution claim, I should reduce the £6,600,090 so as to take account of the limitation of liability of which Cobbetts could avail themselves but DHL could not. It would not be fair, he submitted, for Cobbetts to have to contribute to an amount for which DHL is liable only because it did not have the limitation clause which Cobbetts had.[74]Suppose, Mr Flenley argued, both DHL and Cobbetts had limitation clauses in their contracts. The fraudulent DHL could not rely on its clause. If so, it would not be just for the innocent Cobbetts to be prejudiced on that account. I agree. But the fact is that DHL had no such clause. It was not disabled from relying on such a clause because of its fraud but because it lacked a clause on which to rely, even if innocent. If one takes a case in which there are two non fraudulent defendants, one of whom has and the other of whom lacks such a clause, the Law Commission plainly contemplated that the defendant with such a clause would have to contribute in respect of the amount which the claimant was entitled to recover, without reference to the limitation clause, subject to the cap contained in section 2 (3). Thus, in the Commission’s example, D2 would prima facie contribute in respect of the £1,000 £ 500, but that would be reduced to the amount of the £ 400 limit. Further, if the amount in respect of which the defendants are to contribute is to be taken as £400, there is no scope for the application of section 2 (3).[75]I have already expressed doubt as to whether the policy behind section 2 (3) is just. There is something to be said for the view that a defendant who has a limitation clause should not be in worse position than he would have been if both defendants had a similar clause. But it seems to me that it would be inconsistent with the scheme of the 1978 Act if, as part of the process of determining what is a just and equitable contribution, I was to proceed on the basis that the amount to be apportioned is to be treated as reduced by the effect of one defendant’s limitation clause. Different considerations apply where one defendant’s responsibility for the damage in question is much greater than that of the other solely because of his own fraud or where one defendant’s inability to rely on a limitation clause arises from such fraud.[76]Accordingly I propose to take the figure to be shared as £6,600,090.[77]The next question is as to the proportion in which the two defendants should contribute. In my judgment the relative proportions should be 80%/20%. The moral blameworthiness of DHL and the causative potency of the fraud of its agent are very much greater than that of Cobbetts. DHL’s deceit was bare-faced fraud, for the reasons set out in paragraph 48 of the judgment of Steel J. It was not the only one of its kind: see para 54. That deceit was the prime reason for CBS making the advances that it did. Cobbetts should have alerted CBS to the indicia of fraud, in particular the fact known to them that the site had been sold for £ 4.7 million in November 2004; and, in relation to the further advance, that none of the leases had been entered at the Land Registry in the 5 months since the original loan. But their failing was not to pick up on the fraudulent scheme rather than to play any part in it.[78]£ 6,600,090 x 20 % = £ 1,320,018. Accordingly Cobbetts is entitled to contribution from DHL of £5,585,001 -£ 1,320,018 = £ 4, 264,983. Costs Cobbetts’ costs[79]Cobbetts are entitled to their costs of the contribution proceedings which they put at £ 46,135 + £ 3,400 (Part 1) + £ 34,643 + £ 6,219 (10% of Part 2) + £12,000 + £ 10,340 (Part 3). From this must be deducted £ 3,200 - the costs of the second day of the hearing, since in the event it only lasted one. Those total £ 109,537. I propose summarily to assess those costs at £ 87,500. CBS’ costs[80]CBS is entitled to its costs of its action against DHL. The costs which it claims are £ 879,959 (a figure which attributed half of the “generic costs” of the action to the claim against DHL), plus the costs of Mr Taylor’s report of £ 64,625 = £ 944,584. From that figure there also needs to be deducted the costs of the second day, which I shall assume to be of the same order of magnitude as Cobbetts’ costs. Although the sum is much larger than Cobbetts’ costs of the contribution proceedings (and of the defence of the action). I am asked to assess those costs summarily, in order to avoid the additional costs of a detailed assessment, which are unlikely in practice to be recovered. I propose to do so, on the basis that I shall err on the side of caution so as to adopt a figure which I can, with some confidence, regard as no more than CBS would recover on a detailed assessment. I propose to assess the costs at £ 700,000. Contribution from DHL in respect of costs paid by Cobbetts to CBS.[81]Cobbetts have paid CBS in respect of their costs in the sum of £ 555,000, which was the amount of Cobbetts’ part 36 offer on costs which CBS accepted. In BICC Ltd v Cumbrian Industrial Ltd [2002] Lloyd’s Rep PN the Court of Appeal expressed its (obiter) “present view” that a party claiming contribution could recover a contribution towards a payment made in respect of the injured party’s costs. It did so on the basis that the words of section 2 and 6 (1) “A person is liable in respect of any damage for the purposes of this Act if the person who suffered it…is entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise)”. of the Act did not necessarily preclude the making of a contribution order in respect of costs. The Court did not adopt the approach of HHJ Lloyd in J Sainsbury plc v Broadway Malyan [1998] 61 Con L.R. 31. Judge Lloyd had held (obiter) that neither “compensation” within section 6 nor “damage” within section 2 (3) included a right to recover or a liability to pay costs, which required a detailed investigation “not consistent with the simplicity envisaged by the 1978 Act”. The Court of Appeal was not persuaded that the words of section 2 or section 6 (1) precluded the making of a contribution order in respect of costs, because section 2 (1) did not expressly limit the amount of contribution to the amount of contribution payable in respect of liability for the damage in question, nor did section 6 (1) limit recovery available to the person claiming contribution to the compensation which he was liable to pay to the injured person.[82]I agree with that approach. The Court of Appeal was not, however concerned with a case in which the claimant had recovered costs from both defendants, as is the position here. There is a yet further complication in that the costs that CBS has been awarded against DHL considerably exceed those which it has been awarded against Cobbetts. This must, at least in part, be because(a) the claim against Cobbetts settled in October 2008, whereas the claim against DHL has not been settled at all;(b) the claim against DHL was a claim in fraud which involved a contested summary judgment hearing involving leading and junior counsel. If the two defendants had both been innocent parties who had both reasonably defended the action to the same stage the appropriate approach might be to aggregate the costs that they had each had to pay the claimant and apply the appropriate proportions to the aggregate figure. Such an approach treats the total costs as if they were an addition to the claimant’s damages; and shares them out in the same proportion as applies to the compensation for the damage.[83]Such an approach is not appropriate in the present case. It would involve Cobbetts sharing in the unsuccessful defence of a fraud claim (the nature of which was sufficiently plain to attract a summary judgment). In my judgment the equitable approach is to use a proportion of the costs that DHL has to pay CBS as the costs that should be added to the apportionment “pot”. I propose to take the same figure as that which Cobbetts agreed to pay CBS by way of costs i.e. £555,000. On that basis the amount to be shared is £ 1,110,000. Of that Cobbetts’ share is 20% i.e. £ 222,000. It has paid £ 555,000. It is accordingly entitled to contribution in the sum of £ 333,000. Accordingly the full amount for which Cobbetts is entitled to contribution from DHL is £ 4,597,983.[84]I am grateful to both counsels for their clear and efficient exposition of their cases. I invite them to draft an order to give effect to these conclusions.

Cited in 6 later judgments