MASTER SHUMAN:
- This is an application by the defendant to strike out paragraph 9 of the reply in which the claimant has made an allegation of dishonesty against the defendant. Mr Reynolds QC, on behalf of the claimant, accepts that the allegation is one of dishonesty and must be pleaded properly setting out the facts, matters and circumstances relied on to show that the defendant was dishonest.
- The defendant's application is made by application notice dated 7 February 2018. It includes an application for specific disclosure. There is also an application by the claimant for specific disclosure dated 3 March 2017. The claimant has additionally made a recent application to amend its reply and defence. There is a raft of witness statements before me. Many of these relate to the claimant's application for specific disclosure but touch upon issues raised in the defendant's application to strike out. The evidence before me comprises the following:
(i) On behalf of the defendant: 4 witness statements from David Stevens, a partner at the defendant's solicitors Norton Rose Fulbright LLP, dated 13 February 2017, 21 March 2017, 7 February 2018 and 2 March 2018; 1 witness statement from Anne-Ceris Graham, a director of the defendant, dated 9 March 2017; 1 witness statement from Paul Rands, vice president of Development of Bridge Street Accommodations London Ltd, dated 21 March 2017; and 1 witness statement from Michael Hughes, chartered surveyor of Residential Land Limited, dated 2 March 2018.
(ii) On behalf of the claimant: 2 witness statements from David Marsden, a partner at the claimant's solicitors Trowers & Hamlins LLP, dated 3 March 2017 and 14 March 2017; 2 witness statements from Chris Christou, an-in-house solicitor at the claimant, dated 8 February 2018 and 2 March 2018. In addition, Trowers & Hamlins have sent me a letter dated 15 May 2018 attaching correspondence between the parties' solicitors between 14 and 15 May 2018.
- There was an initial issue between the parties as to the running order of the applications and whether I should deal with all applications together. I determined that logically the application to strike out should be dealt with first and separately but that if counsel, Mr Reynolds QC, needed to refer to any evidence filed in respect of the specific disclosure application in response to that application he should do so.
THE FACTUAL BACKGROUND
- The claimant is the landlord and the defendant is the tenant under a lease dated 26 July 2000 made between (1) Canary Riverside Development PTE Limited and (2) Quinn Properties PTE Limited ("the Lease") for a term of 999 years less three days from 28 May 1997. The Lease demised the property known as the rear part of Eaton House which comprises 45 residential flats and a ground floor reception and parking spaces 82 91 and 100 109, West Ferry Circus, Canary Wharf, London E14 ("the Property").
- The defendant sublet the Property to Bridge Street Accommodations London Limited ("Bridgestreet") pursuant to an underlease, the licence for which was granted by the claimant on 23 June 2010 ("the Underlease"). There was a previous underlease granted in 2005.
- The claimant issued a claim against the defendant alleging three main breaches of the Lease and seeks declaratory relief. The claimant alleges that the defendant has breached the permitted user clause by using the ground floor part of the ground floor of the Property as a business centre and not as a reception area. The claimant alleges that the defendant has breached the Lease by using the ground floor as a business centre which is in breach of the current planning consent. Finally the claimant alleges that the defendant has breached the alienation clause in the Lease by granting 43 separate three-year underleases to Bridgestreet which contain an option to renew and/or that there is a side agreement by which the defendant has confirmed that Bridgestreet can stay in excess of three years, such side agreement being designed to avoid the terms of the alienation clause in the Lease. It is the latter breach that is relevant to this application. This claim is, I am told, a necessary precursor to the claimant bringing forfeiture proceedings.
- The defendant has denied all of the breaches and issued a part 20 counterclaim seeking declaratory relief in respect of the claimant allegedly withholding consent in relation to the following transactions:
(1) consent to an assignment of the Property to Circus Apartments Guernsey Ltd, now known as CA Investments Ltd ("CA"); and
(2) consent to an assignment of the Property to CA and the underletting of the Property to Bridgestreet for a 10-year term.
The defendant also complained that the claimant has unreasonably delayed in responding to the application for consent. The defendant wishes to proceed with the assignment to CA and the underletting to Bridgestreet. It is submitted by Mr Rainey QC, on behalf of the defendant, that the defendant is also entitled to a declaration that the claimant has waived any right to forfeit. The defendant also seeks loss and damages caused by the claimant refusing consent, the difference between the yearly rent payable under the current underleases of £1.731 million and the rent that would be payable on an underlease to Bridge Street of £1.9 million, together with exemplary damages.
- The claimant both denies the delay and that it has withheld consent unreasonably. The claimant has raised specific concerns about the strength of the covenant of CA and the fact that it is a Guernsey company. The claimant also has concerns that the proposed assignment would negatively affect the residual value of the claimant's reversion. There was an issue between the parties about expert evidence but that has been resolved. On 27 January 2017 Deputy Master Nurse ordered that the parties have permission to each rely on expert evidence from a lawyer qualified in Guernsey law in respect of the issue of the enforceability of English judgments in Guernsey and a valuer with expertise in the field of valuation of mixed use properties in respect of the issue of the impact of the proposed dispositions on the claimant's reversion.
- In the claimant's reply it is also alleged that contrary to the defendant's case that it has granted 45 separate underleases to Bridgestreet each for a term of 3 years and each containing a landlord "put option" only the defendant has entered into an unconditional agreement with Bridgestreet to underlet the Property for a term of 10 years. This is squarely an allegation of dishonesty.
LAW
- Pursuant to CPR 3.4(2) the court may strike out a statement of case if it appears to the court:
"(a) that the statements of case discloses no reasonable grounds for bringing or defending the claim;
(c) is that there has been a failure to comply with a rule, practice direction or court order."
- The defendant mounts its attack on paragraph 9 of the reply under CPR 3.4(2)(a) on the basis that it discloses no cause of action as it constitutes an allegation of dishonesty in that "the sole fact pleaded as the basis of the allegation does not justify an inference of dishonesty and/or because, even if the defendant had in fact bound itself to underlet the property to Bridgestreet for a 10 year term, that would not have constituted a breach of clause 11 of the Lease". In the alternative the defendant argues, I extrapolate, under CPR 3.4(2)(c) that if paragraph 9 does disclose a reasonable cause of action it was a breach of PD 16 paragraph 9.2 to plead that cause of action in the reply as it contains a fresh allegation of breach which ought to have been pleaded if at all in the particulars of claim. CPR 16 PD 9.2 provides that,
"a subsequent statement of case must not contradict or be inconsistent with an earlier one; for example a reply to a defence must not bring in a new claim. When you matters come to light the appropriate course may be to seek the court's permission to amend the statement of case."
- Statements of case specifically include a reply to defence. In the notes to the White Book 2018 at 3.4.1 ground (a) is described in quite wide terms to include cases which are unreasonably vague, incoherent, vexatious, scurrilous or obviously ill-founded and other cases which do not amount to a legally recognisable claim. In respect of (c) it covers cases where the abuse lies not in the statement of case itself but in the way the claim has been conducted.
- A strike out application should be made as soon as possible. Although the claim was issued on 29 March 2016, in the County Court sitting at Central London, it was then transferred to the High Court. Thereafter case management directions have been given and much of the focus of the disagreement between the parties has been in respect of disclosure. Further the parties have sought and been granted various adjournments as they have explored settlement of the claim and part 20 claim by alternative dispute resolution. Given that background the defendant cannot be criticised for bringing the application now, and indeed the claimant takes no point on timing.
- One area of agreement between counsel is the evidential test that I should consider when a party makes an allegation of dishonesty in their statement of case. In Three Rivers District Council v Bank of England [2001] UKHL 16 the House of Lords restated the principles on when fraud can be pleaded.
- Lord Hope of Craighead at paragraph 55 said,
"The principle to which those remarks were directed is a rule of pleading. As the Earl of Halsbury LC said in Bullivant v Attorney General for Victoria [1901] AC 196, 202, where it is intended that there be an allegation that a fraud has been committed, you must allege it and you must prove it. We are concerned at this stage with what must be alleged. A party is not entitled to a finding of fraud if the pleader does not allege fraud directly and the facts on which he relies are equivocal. So too with dishonesty. If there is no specific allegation of dishonesty, it is not open to the court to make a finding to that effect if the facts pleaded are consistent with conduct which is not dishonest such as negligence. As Millett LJ said in Armitage v Nurse [1998] Ch 241, 256G , it is not necessary to use the word "fraud" or "dishonesty" if the facts which make the conduct fraudulent are pleaded. But this will not do if language used is equivocal: Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, 268 per Buckley LJ. In that case it was unclear from the pleadings whether dishonesty was being alleged. As the facts referred to might have inferred dishonesty but were consistent with innocence, it was not to be presumed that the defendant had been dishonest. Of course, the allegation of fraud, dishonesty or bad faith must be supported by particulars. The other party is entitled to notice of the particulars on which the allegation is based. If they are not capable of supporting the allegation, the allegation itself may be struck out. But it is not a proper ground for striking out the allegation that the particulars may be found, after trial, to amount not to fraud, dishonesty or bad faith but to negligence."
- At paragraph 160 Lord Hobhouse of Woodborough,
"
Where an allegation of dishonesty is being made as part of the cause of action of the plaintiff, there is no reason why the rule should not apply that the plaintiff must have a proper basis for making an allegation of dishonesty in his pleading. The hope that something may turn up during the cross-examination of a witness at the trial does not suffice. It is of course different if the admissible material available discloses a reasonable prima facie case which the other party will have to answer at the trial."
- Lord Millett at paragraphs 184 to 186,
"184. It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake 7th ed (1952), p 644; Davy v Garrett (1878) 7 Ch D 473, 489; Bullivant v Attorney Genera; for Victoria [1901] AC 196; Armitage v Nurse [1998] Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.
185. It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means "dishonestly" or "fraudulently", it may not be enough to say "wilfully" or "recklessly". Such language is equivocal. A similar requirement applies, in my opinion, in a case like the present, but the requirement is satisfied by the present pleadings. It is perfectly clear that the depositors are alleging an intentional tort.
186. The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved. Can ship There is a wide range of cases that fall within ground (a), disclosing no reasonable grounds for bringing or defending the claim."
- These principles were reviewed by Mr Justice Flaux in Jsc Bank of Moscow v Vladimir Abramovich Kekhman & ors [2015] EWHC 3073. The claim originally made was of an unlawful means conspiracy on the part of the first defendant with a number of companies in the group which the claimant alleges that he controlled to defraud the claimant bank. It was alleged that the conspiracy caused the claimant loss and damage consisting of an unpaid judgment debt of some US $144 million and 328 million Roubles. In both the original conspiracy plea and the proposed plea of fraudulent misrepresentation fraud is alleged. At paragraph 20 he stated,
"The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. As Lord Millett put it, there must be some fact "which tilts the balance and justifies an inference of dishonesty". At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge."
- From these statements of principle Mr Rainey QC, for the defendant, asks me to have particular regard to the following points:
(1) The hope that something may turn up during cross-examination of a witness at trial does not suffice.
(2) The allegation of fraud must not be equivocal.
(3) There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.
(4) At an interim stage the court is only considering whether the facts as pleaded would justify the plea of fraud.
THE APPLICATION
- As to the first ground relied on by the defendant, that the fact relied upon as the basis for the allegation of dishonesty does not justify that inference, I must trace through the statements of case to see how paragraph 9 of the reply came to be pleaded. It is the allegation concerning the breach of the alienation clause that is relevant for these purposes. Under clause 11.4 of the Lease the defendant covenanted,
"11.4 not to under let share or part with possession of part only of the premises and parking space (as distinct from the whole) in any way whatsoever except by way of under letting or licence for occupation for a period of not more than three years of
11.4.1 a flat forming part of the premises
11.4.2 any parking space to a licensee or under lessee of a flat forming part of the premises."
- The root can be found in paragraph 16 of the particulars of claim which pleads that,
"In breach of clause 11.4 of the lease, the defendant has granted 43 separate three-year underleases to Bridge Street Accommodations London Ltd which contain an option to renew."
- In answer the defendant pleaded at paragraph 12 of the defence that,
"the allegation of breach and the unqualified allegation of the existence of an option to renew in clause 16 are both denied. Each separate underlease of a flat at the Property is lawfully granted within clause 11.4.1, and the so-called option to renew is a put option entitling the claimant to require Bridgestreet to take a further lease, which is not of the effect that the term thereby granted exceeds three years. The defendant notified the claimant of the grant of the underleases on 9 July 2015 by a letter dated 13 July 2015."
- Mr Reynolds QC in his skeleton argument at paragraph 3.5 submits that on the basis of information emanating from Bridgestreet the claimant formed the belief and still believes that there must be some side agreement or arrangement binding upon both the defendant and Bridgestreet that Bridgestreet will be allowed to stay in the property for the term of 10 years as originally negotiated but in respect of which the claimant's consent had not been obtained.
- The evidence that the claimant relies on is an email from Stewart Wallace who in July 2015 was a representative of Bridgestreet with the job title "Brand Ambassador and Sales Manager". On 27 July 2015 a Camilla von Ejdel emailed Mr Wallace with queries about the Bridge Street Serviced Apartments Canary Wharf. At point 5 she asked, "can we sign a three-year contract with Bridge Street you thought they had just signed a five-year contract with the owners and were going to check". No one has been able to tell me who this lady is other than she was or was said to be acting for a potential client for Bridgestreet. Mr Wallace replied by email on 29 July 2015, his response to point 5 was, "can we sign a three-year contract with Bridge Street. Yes - we have the building for another 10 years."
- The claimant at paragraph 9 of the reply pleaded as follows,
"9. As to paragraph 12:
9.1 while the defendant has on the face of it granted 45 separate underleases to Bridgestreet each for a term of three years and containing what is said to be a "put option", the claimant believes that that arrangement does not reflect the true nature of the agreement reached between the defendant and Bridgestreet.
9.2 in an email dated 29th of July 2015 responding to an enquiry from a potential client, Stuart Wallace, Brand Ambassador and Sales Manager of Bridgestreet, stated (1) "We have the building for another 10 years" and (2) as a result Bridgestreet was able to sign a three-year contract for the provision of serviced apartments.
9.3 accordingly the claimant believes that the defendant has in fact bound itself to under let the property to Bridgestreet for a 10 year term, in breach of the alienation provisions in the Lease."
- It would be fair to categorise the claimant as deeply suspicious of the manner in which the defendant has approached its obligation of disclosure. Mr Reynolds QC in his skeleton argument describes how the defendant has resisted disclosure of documents which are obviously relevant. Mr Marsden in his first witness statement sets out at some length his concerns about the defendant's compliance with their disclosure obligations and draws inferences from the manner in which the defendant's solicitors have responded to the issues that he has raised. He describes some of the responses as evasive. I do not need to determine that issue for the purposes of this application although I will need to deal with this after I have heard argument from both counsel on the outstanding disclosure cross-applications.
- Mr Marsden, again in his first statement exhibits an attendance note of a telephone call between him and Louise Foy with Mr Wallace on 22 August 2016. That conversation postdates the reply. In Mr Marsden's statement at paragraph 25 he summarises the import of that conversation as, "Mr Wallace confirmed to me that he had been told either by Peter Rands or John Beck, both directors of Bridgestreet, that contracts have been signed such that Bridgestreet could remain in the property for 10 years but he should avoid putting it in any emails going forward."
- Mr Reynolds QC also emphasised that the defendant's position was that they had disclosed all relevant documents and that no documents exist, apart from the completed underleases themselves, which in any way relate or are relevant to the restructuring of the transaction. He considers that the position was radically altered by the voluntary disclosure of three files of conveyancing documents, disclosed shortly prior to a hearing listed on 24 March 2018. Mr Reynolds QC referred me to an email dated 14 May 2015 from Lindsay Morgan at Norton Rose Fulbright LLP to Fiona Bradley at DWF LLP, on behalf of Bridgestreet, with the subject "Circus Latest position without prejudice". Part of that email is said to have been redacted for legal privilege. The material part records,
" the idea therefore is to have 3+3+3+1 = 10 year term (unless the 10 year lease is not granted in the meantime).
So the idea is to enter into the 45 3 year (less one day) flat leases and management agreement as planned. At the same time, the parties will enter into the agreement for lease relating to the 10 year lease as discussed, on the basis that the flat leases and the management agreement are surrendered/terminated once we get consent to the 10 year lease (which will be for a term of 10 years less any period that your clients have been in occupation under flat leases i.e. a total of 10 years)."
I presume that the reference to "not" in the first line is a mistake. This email is exhibited to Mr Christou's statement dated 8 February 2018.
- I must go back to paragraph 9 of the reply and the facts, matters and circumstances pleaded by the claimant to show that the defendant was dishonest, not merely negligent. I ask myself the question, what is the fact which tilts the balance and justifies an inference of dishonesty? I also remind myself that on this interim application I am not concerned with whether the evidence at trial will or will not establish fraud but only with whether the facts that are pleaded would justify the plea of fraud.
- The claimant's case hangs on the answer that Mr Wallace gave in the email dated 29 July 2015 to an enquiry from or on behalf of a potential client of Bridgestreet enquiring whether they could sign a contract for 3 years. Mr Rainey QC rightly describes the claimant's pleading of fraud "as hanging by this one thread."
- To put this email into its correct time frame on 1 May 2015 and 7 May 2015 the defendant applied to the claimant for a licence to assign the Property to CA and to underlet the Property to Bridgestreet for a term of 10 years. There were various requests for information by the claimant. The defendants pleaded case, paragraph 20(b) of the counterclaim, asserts that consent was unreasonably withheld for the purported reasons set out in a letter dated 8 February 2016. Whilst the reply takes issue with the allegation of delay and that the consent was unreasonably withheld the claimant does not dispute the date of this letter.
- On 9 July 2015 the defendant and Bridgestreet entered into an agreement which provided that the defendant would grant Bridgestreet a new underlease of the whole of the Property for a term expiring on 9 March 2025 at a rent of £1.9 million per annum conditional on obtaining the claimant's consent to that underlease. On the same day, 9 July 2015, the defendant and Bridgestreet entered into 45 short term tenancies in accordance with the agreement. These tenancies provide at clause 14 that the defendant has the right, at its sole discretion, to compel Bridgestreet to enter into successive further leases, each for a term of three years less one day and each including the "put option" up to a maximum overall period of 10 years expiring no later than 9 March 2025.
- All of these documents have been disclosed to the claimant. They are not secretive transactions. As Mr Rainey QC puts it in his skeleton argument at paragraph 26 "the defendant has entered into a not-at-all-secret written agreement with Bridge Street to underlet for 10 years but conditional only on obtaining the claimant's consent which the defendant contends has been unreasonably withheld and in the meantime Bridgestreet takes a series of 3 year underleases with the landlord put -option. As Miss Graham puts it this was the best that could be negotiated given the claimant's stance
The allegation advanced in the reply is that notwithstanding these carefully constructed and disclosed arrangements, there was (at the date of the claim) a binding, unconditional secret agreement to grant a 10 year underlease in breach of covenant."
- I accept Mr Rainey QC's submissions at paragraph 34 of his skeleton argument that, against the background of the 9 July 2015 agreement and the 45 under lettings, the fact that a junior employee of Bridge Street who was in sales said that he understood that position to be that Bridgestreet have the building for another 10 years is wholly insufficient to tilt the balance and to justify an inference that the defendant is dishonestly concealing an unconditional agreement to grant a lease of the whole of the Property to Bridgestreet for a term of 10 years. It does not come close. I accept that the statement by the employee is equivocal and equally consistent with an honest belief that Bridgestreet could remain in the Property for 10 years.
- As to the other evidence relied on by the claimant in the witness statements put before me, this is not pleaded. However for completeness I have considered that evidence. I note that in relation to Mr Wallace he has refused to provide a witness statement to the claimant. In relation to the attendance note I consider that when Mr Wallace said that he had been told by either Mr Beck or Mr Rands that Bridgestreet had the property for 10 years that is explicable on the same basis as the email of 29 July 2015, that Bridgestreet were confident that they would be in the Property for the next 10 years. It was certainly in the defendant's commercial interests for the underleases to be renewed. In relation to the email about the term "3+3+3+ 1 =10" I fail to see how this is evidence supporting the claimant's contention that the defendant is dishonest. It demonstrates the mechanics of the agreement between the defendant and Bridgestreet and specifically refers to the fact that the defendant is awaiting the consent of the claimant which would alter these mechanics and therefore provide a single term of 10 years rather than a multiple of different terms adding up to 10 years.
- So again I go back to paragraph 9 of the reply and that the claimant's pleaded case hinges on the one email from Mr Wallace, a junior employee in sales writing an informal email to a potential client. I do not see how this email can be said to tilt the balance and justify an inference of dishonesty. I accept Mr Rainey QC's submissions that this email is wholly insufficient to tilt the balance and wholly insufficient to mount a case that the defendant is dishonestly concealing a 10 year agreement for lease.
- I therefore make an order striking out paragraph 9 of the reply on the basis that it discloses no reasonable cause of action under CPR 3.4(2)(a) as the pleading is an allegation of dishonesty and the sole fact relied upon does not support a pleading of dishonesty.
- The defendant's first ground was also put in the alternative, that if there was an unconditional agreement under which the defendant had agreed to grant a 10 year underlease of the property to Bridgestreet it could not be a breach of clause 11.2 of the Lease as it was only an agreement to grant an underlease. Therefore and in so far as this was an alleged further breach of the Lease it discloses no reasonable cause of action. It is fair to say that the focus of the parties' submissions was on the former part of the ground. There is one paragraph in Mr Rainey QC's skeleton on this point. It was not developed in argument before me and I do not need to consider this in my judgment.
- It is not necessary for me to deal with the second part of the defendant's strike out application under CPR 3.4(2)(c). However I will comment that had I found that the reply disclosed a reasonable cause of action I would have required the claimant to amend its particulars of claim to plead this allegation in the particulars of claim, where it should have been pleaded in the first place. The allegation of dishonesty was a fresh allegation of breach and as such it should not have been pleaded in the reply.
- After I heard argument in this matter the claimant's solicitors sent me a chain of correspondence concerning the issue of whether the defendant had granted the claimant a further 3 year underlease. The underlease expired on 8 March 2018. Trowers & Hamlins LLP on behalf of the claimant asked Norton Rose Fulbright LLP on behalf of the defendant whether the defendant had exercised the put-option. They replied by in effect stating that the current occupational arrangements with Bridgestreet are of no concern to the claimant. I infer from that answer that probably Bridgestreet have simply held over in occupation of the Property. Whether they have or have not is neutral and does not impact on my determination of the defendant's application to strike out on the basis of the pleaded case of dishonesty. I have therefore not taken that into account.
