Mr Justice Simon:
The Application
- In this case the Claimant ('Nationwide') claims approximately £27m as damages for deceit against the First and Second Defendants ('DH') in relation to three valuation reports which dealt with: (1) Units 7 & 8, Saltley Industrial Estate, Adderley Road, Birmingham ('Adderley Road'), (2) St Ivel Works, Llansteffan Road, Johnstown, Carmarthen ('Carmarthen'), and (3) BIP Offices, Popes Lance, Oldbury, Birmingham ('Oldbury').
- In the present applications Nationwide applies for summary judgment, pursuant to CPR 24.2, for damages (to be assessed) and an interim payment in respect of such damages, against the Second Defendant ('DHL') in relation to Adderley Road and Carmarthen, and against the First Defendant ('Limited') in relation to Oldbury.
The issues: an overview
- At the core of Nationwide's case is the contention that three valuation reports: dated 27 September 2005 (in respect of Adderley Road), 30 November 2005 (in respect of Carmarthen) and 7 January 2006 (in respect of Oldbury) contained false statements which DH knew to be untrue, or in respect of which it was reckless as to their truth, with the intention that Nationwide should rely on those statements, as it did.
- Nationwide focus in particular on the statements by DH.
i) That it had inspected the properties;
ii) That on completion each property was to be let to a tenant or tenants of substantial covenant strength on full repairing and insuring leases at high rents;
iii) That refurbishment work and/or repairs either had been or were being carried out to each property;
iv) About the Open Market value of each property on the basis of rents at which it stated the properties were to be let; and
v) About the Vacant Possession value of each property.
- In broad summary DH resists the application on the basis that:
i) While accepting that there was a fraud practiced on Nationwide (albeit facilitated by, at least, the carelessness of Nationwide's own employees and professional advisors), there are real questions as to whether those for whose acts DH is liable (a director, Mr McGarry, and his subordinate, Mr McNabb) were parties to the frauds, as distinct from themselves being careless victims of the frauds practised on Nationwide.
ii) The granting of summary judgment is inappropriate in circumstances where serious allegations of deceit are made, and the person who is said to have made the fraudulent representations (Mr McGarry), is unwilling to assist the defence.
iii) In the light of the general uncertainty at this stage as to Mr McGarry's involvement and as to what caused the Claimant to make the loans in question, the Court should allow the case to go to trial for the proper investigation of the facts.
iv) There are a number of particular features of the claim which make it inappropriate to enter a Part 24 judgment.
The Court's approach to the applications
- Before considering the Court's general approach to summary judgment under the CPR, it is right to note that this is not a case in which a claimant is in a position to contend that the application for summary judgment involves a short point which can be easily disposed of by the consideration of a few contemporary documents. On the contrary, in the present case Nationwide has deployed a considerable amount of evidence. There are 14 lever-arch files of documents, Nationwide has adduced the evidence of 16 factual witnesses, and expert evidence is put before the Court by each side.
- CPR Part 24.2 provides:
The court may give summary judgment against a claimant or defendant on the whole of a claim or on a particular issue if -
(a) it considers that -
(ii) that defendant has no real prospect of successfully defending the claim or issue; and
(b) there is no other compelling reason why the case or issue should be disposed of at trial.
- There is little issue between the parties as to the relevant test. It is common ground that the test of 'no real prospect of successfully defending the claim' requires a respondent to the claim to show some real (rather than illusory or forensically fanciful) chance of success at trial. The actual or likely defence must be better that merely arguable; see International Finance Corp v Utexafrica Sprl [2001] CLC 1361 and ED & F Man Liquid Products Ltd v Patel [2003] EWCA Civ 472; but does not have to meet a more rigorous test of being likely to succeed at trial, see also the White Book 2007. Vol.1 at 24.2.3.
- The test of 'no other compelling reason for trial' is not confined. The fact that a claim may involve allegations of bad faith (or dishonesty) is not by itself a compelling reason for trial. Findings of bad faith (or dishonesty) can be reached in a summary judgment application if, in the circumstances of the case, such issues can be determined without a trial: Wrexham Association Football Club Ltd v Crucialmove Ltd [2006] EWCA Civ 237. However, as Dyson LJ noted at §§57-58.
I do not underestimate the importance of a finding adverse to the integrity of one of the parties. In itself, the risk of such a finding may provide a compelling reason for allowing a case to proceed to full oral hearing, notwithstanding the apparent strength of the claim on paper, and the confident expectation, based on the papers, that the defendant lacks any real prospect of success. Experience teaches us that on occasion apparently overwhelming cases of fraud and dishonesty somehow inexplicably disintegrate. In short, oral testimony may show that some such cases are only tissue paper strong. As Lord Steyn observed in Medcalf v Weatherill [2003] 2 AC 120 at paragraph 42, when considering wasted costs orders:
The law reports are replete with cases which were thought to be hopeless before investigation but were decided the other way after the Court allowed the matter to be tried."
And that is why I commented in Esprit Telecoms UK Ltd and others v Fashion Gossip Ltd, unreported, 27 July 2000 that I was troubled about entering summary judgment in a case in which the success of the claimant's case involves, as this one does, establishing allegations of dishonesty and fraud, which are strongly denied, and which cannot be conclusively proved by, for example, a conviction before a criminal court.
This collective judicial experience does not always, or inevitably, provide a compelling reason for allowing the case to proceed to trial, nor for that matter require the judge considering the application to reject the conclusion that there is no real prospect of the successful defence of the claim if he is satisfied that there is none. That is not what the Rules provide, and if that had been intended, express provision would have been made. It is however a factor constantly to be borne in mind, if and when, as here, the reasons for concluding summary judgment is appropriate is consequent on a disputed finding, adverse to the integrity of the unsuccessful party.
- On a Part 24 application, it may also be prudent for the Court to have in mind the observations of Mummery LJ in Doncaster Pharmaceuticals Group Ltd. v Bolton Pharmaceutical Company [2007] FSR 63, §§ 10-18.
10. Everyone would agree that the summary disposal of rubbishy defences is in the interests of justice. The court has to be alert to the defendant, who seeks to avoid summary judgment by making a case look more complicated than it really is.
11. The court also has to guard against the cocky claimant, who, having decided to go for summary judgment, confidently presents the factual and legal issues as simpler and easier than they really are and urges the court to be "efficient" i.e. produce a rapid result in the claimant's favour.
12. In handling all applications for summary judgment the court's duty is to keep considerations of procedural justice in proper perspective. Appropriate procedures must be used for the disposal of cases. Otherwise there is a serious risk of injustice ...
17. It is well settled by the authorities that the court should exercise caution in granting summary judgment in certain kinds of case. The classic instance is where there are conflicts of fact on relevant issues, which have to be resolved before a judgment can be given (see White Book Vol 1 24.2.5). A mini-trial on the facts conducted under CPR Part 24 without having gone through the normal pre-trial procedures must be avoided, as it runs a real risk of producing summary injustice.
18. In my judgment, the court should also hesitate about making a final decision without trial where, even though there is no obvious conflict of fact at the time of the application, reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case".
The Law of Deceit
- The parties agreed that the elements of the tort of deceit are, so far as material to the present case, as follows. A claimant must prove that (1) the defendant made a false and material representation, either knowing it to be untrue or being reckless as to whether it is true, (2) the defendant intended that the claimant should act in reliance on it, (3) the claimant relied on and suffered loss thereby, see Clerk & Lindsell on Torts 19th Ed §18-01.
- A statement honestly believed by its maker to be true, however implausible it may be, is not capable of being fraudulent. The defendant's motive is irrelevant: if the required degree of knowledge or recklessness is shown, a defendant's motive in making the representation is immaterial, see Clerk & Lindsell §18-18.
- A claimant must show both that he relied upon the untrue statement and that it was intended by the defendant that he would rely upon it. Where a claimant was partly influenced by some other fact or matter, the claimant must show that he was nonetheless also substantially influenced by the untrue statement, see Clerk & Lindsell at §18-32, and Edgington v Fitzmaurice (1885) 29 Ch 459, at 483 and 485.
- On the present state of the law, short of the House of Lords, no defence of contributory negligence is available to the defendant, see Clerk & Lindsell §18-47 and the cases cited.
Adderley Road: the facts
- On 16 September 2005 Mr McGarry (a director of DH) sent an email to Kamal Malik (of Money Trees Financial Services) with a 'desk-top' valuation of £8.75m for Adderley Road. The valuation was said to have been requested by Mr Malik; and it was given on the basis that the property was to be let to St-Gobian (sic) Distribution Ltd and Nicholl Food Packaging Ltd on 25 year terms at annual rents of £350,000 and £300,000 respectively.
- In a letter of 26 September 2005, Nationwide instructed Mr McGarry (then at DHL) to provide it with a valuation of Adderley Road. A feature of this letter of instruction (which was common to each of the letters of instruction) was that it required both a Market Value and a Market Value on the assumption that the Property was vacant (a 'Market Valuation with Vacant Possession'). In Appendix II of the letter Nationwide asked for DH's opinion on the effects on value of the quality and terms of the lease (2.c.i.); its view of the market's opinion of the actual tenants' covenants bearing in mind the user class, general nature and location of the property (2.d.); and its opinion (supported by comparable evidence) of the demand for lettings of a similar nature for the subject property (2.e.).
- DH provided its valuation report, dated 27 September, ('the Adderley Road Report'). The Adderley Road Report contained the following statements.
i) The property had been inspected on 27 September by Mr McNabb, who had prepared the report and valuation.
ii) Unit 1 was let to St Gobian (sic) Building Distribution on a 25 year FRI lease with 5 yearly upwards-only rent reviews at an initial rent of £350,000 pa.
iii) Unit 2 was let to Nicholl Food Packaging Limited subject to a lease on the same terms at £300,000 pa.
iv) Market Value: £8.75m.
v) Market Value with Vacant Possession: £7.35m
vi) The condition of the property was 'below average but in the course of refurbishment', with the tenants to fit out to their required specification.
vii) Externally, the property had had 'a recent overhaul to windows' (earlier described as 'Crittal type').
viii) Internally, the property was
in the course of refurbishment at the time of our inspection, such works to include complete redecoration, refurbishment of the floors as necessary and modernisation of office areas, with services also to be overhauled.
ix) Simultaneously with the completion of the acquisition of the property by the borrower, it was understood that, while copies of the leases had not been supplied, the property was to be let on the two new Full Repairing and Insuring leases, with both tenants having substantive covenant strength, providing high security of income.
x) The 'best evidence of the marketability of the property was provided by the two current lettings to two quality tenants.'
- On 3 October 2005, Nationwide's Property Finance Manager, Mr David Phillips, prepared a Commercial Loan Application for submission to the Risk Management Division. This was accompanied by the Adderley Road Report. The borrower was described as 'Saleem Arshid (via NewCo)'; and the Commercial Loan Application included the following information:
i) The advance was £6.125m and the maximum loan to value ratio (LTV) was 70% of Market Value.
ii) The Adderley Road Report confirmed the values required, the leases (although these would need to be checked by Nationwide's solicitors), the strength of tenant covenant and good local demand should the property need to be a re-let.
More controversially the Commercial Loan Application described the borrower as a 'well-established existing customer' and the property as 'in a good location in the centre of Birmingham.'
- On 7 October 2005, Mr Northern (a member of Nationwide's Risk Management Division) approved a loan of £6.5625m on condition that DH re-visited the property prior to drawdown, so as to confirm completion of the works to its satisfaction. In his Witness Statement Mr Northern states:
Other than on the very rare occasions referred to below, the existence of a valuation in a form satisfactory to Nationwide is a fundamental part of any decision to lend and no loan would be made without a satisfactory valuation
The vacant possession value is also very important, because (among other reasons) it allows Nationwide to quantify whether its potential exposure is acceptable should the tenant default or the property cease to become income generating, and the borrower no longer be willing/able to meet their loan commitments. It is therefore essential to know the value of the relevant roperty.
- On 10 October 2005, Nationwide issued its facility letter to the Borrower. It was a condition of this loan (as with the other two properties) that it would not exceed 75% of the LTV.
- On 11 November 2005, there was a telephone conversation between Mr McGarry and Ms Gowen (an Assistant Property Finance Manager at Nationwide). In her Witness Statement Ms Gowen says that in this conversation, Mr McGarry led her to understand that the refurbishment works were ongoing at Adderley Road and that the tenants were in occupation. In relation to the second point there is an issue as to whether this was what she was told or what she assumed it. In any event, the conversation was followed by an e-mail from Mr McGarry to Ms Gowen at 12.25pm on 11 November in the following terms:
I can confirm that whilst I did not re-inspect the property, I was in the area last Wednesday 2nd November while undertaking a valuation for an alternative lender and passed this property. It appeared that refurbishment works were being undertaken and there was a cherry picker outside of the property replacing the windows to the front elevation.
- Ms Gowen passed this information on to Mr Northern and invited him to reconsider his condition of approval for the loan. Mr Northern replied that he would confirm the approval provided the valuer confirmed that the full valuation figure could be relied on for Adderley Road in its current condition. This express confirmation was sought from Mr McGarry on 14 November 2005. He replied:
I can confirm that the Market Value figure reported was for the property as existing with the benefit of the full repairing and insuring leases.
As a consequence of these exchanges, sanction for the drawdown was given; and on 14 November 2005 the advance of £6.5625m was made.
- In fact the purported tenants knew nothing about the leases, which were wholly fraudulent.
Adderley Road: Nationwide's case on fraud, materiality and inducement
- Nationwide rely on 3 categories of fraudulent representation: (a) the inspections, (b) the condition of the properties and (c) the valuations.
(a) Inspections:
- It is now clear and accepted by DH that the statement in the Adderley Road Report that Mr McNabb had inspected Adderley Road and had provided the valuation report was untrue. Mr McNabb has provided a signed statement to DH saying that he had no input whatsoever in the Adderley Road Report.
- Nationwide argues that the statement (on 11 November) that on 2 November the tenants were in occupation, that refurbishment was ongoing and that there was a cherry-picker present at Adderley Road were all untrue. The tenants were not in occupation and were unaware of the properties or the sham leases in relation to them. Nationwide relies on the Witness Statement of Derek Cutler of Shard End Glass who states that his company's fitters were only on site from early October to 14 October 2005: in other words neither on the date of the first (27 September) nor the second (2 November) inspections. A scissor-lift had been hired from 7 to 13 October 2005; but no other work was being undertaken at the property whilst the fitters were on site.
(b) Condition.
- Nationwide contends that it is plain from incontrovertible evidence that Adderley Road had not had a recent overhaul to its windows on 27 September 2005. Shard End Glass fitters did not attend until early October 2005; and even then only replaced glazing. Similarly it submits that the property was plainly not in the course of internal refurbishment on either 27 September 2005 or 2 November. It relies on the evidence from Shard End Glass that during the period in which they attended in the first half of October 2005, no other work was being undertaken.
- In addition Nationwide relies on the Witness Statement and photographs of Ms Mary Stockton of Smith-Hodgkinson who inspected the property on Nationwide's behalf on 14 June 2006. At §5 she says:
Generally the building was in very poor condition and dilapidated. It showed the signs of long-term neglect
I saw no evidence of refurbishment of the property at the time of my inspection.
Her description of Adderley Road is said to be inconsistent with the statement that refurbishment works were being undertaken six months earlier. She describes the building as being in very poor condition.
- Nationwide also relies on the views of Mr Farr (DH's valuation expert) who inspected the property on 1 August 2006 and who commented at §7.14 of his report:
I note from the [DH] report that the property was 'in the course of refurbishment at the time of our inspection, such works to include complete redecoration, refurbishment of the floors as necessary, modernisations of the office areas'. The premises are also to be overhauled including the 'reinstallation of new lighting throughout and heating to the office areas'. During my inspection, I found no evidence that any such programme of works had been undertaken.
It also draws attention to §7.22 of his report:
In my opinion the only possible use would have been for long-term storage purposes
Excepting the degree of exterior vandalism which appears to have occurred to this building since the valuation date, the property would have still required some overhaul and basic refurbishment in order to bring it into reasonable condition for some form of long-term storage use.
(c) Valuations
- Nationwide contends that the valuations put forward by DH for Adderley Road could not have been honestly believed. Simply as a matter of impression Nationwide contrasts DH's valuations (Market Price £8.75m and Market Price with Vacant Possession £7.35m) with the views of the experts: Mr Farr for DH (Market Price £4.45m and Market Price with Vacant Possession £700,000) and Mr Martin for Nationwide (Market Price £1.6m and Market Price with Vacant Possession £650,000).
- For the purposes of the present application Nationwide focuses on the evidence of Mr Farr and submitted that both DH's and Mr Farr's valuations proceeded on the assumption that the proposed leases were genuine. Mr Fenwick QC (for Nationwide) observes that Mr Farr had not considered whether any valuer could honestly have assumed the existence of the purported leases on the terms proposed: FRI leases which, on Mr Farr's evidence, provided for the tenant to carry out very substantial refurbishment works at rents which were 400% higher than market.
- Although the Adderley Road valuation (as with the other two valuations) stated that the solicitors should confirm the accuracy of the information in relation to the two leases, Nationwide submits that no honest valuer could have taken the leases at face value without checking whether there was a plausible reason to explain their extravagant terms and without drawing to Nationwide's attention the disparity between the market rental value and that the rent suggested by the leases.
- Nationwide submits that the contrast between DH's figure (£7.35m) and Mr Farr's figure (£700,000) is even more striking in relation to the Market Price with Vacant Possession; and that Mr McGarry cannot have honestly put forward a valuation on a Vacant Possession basis which was more than 10 times the value assessed by Mr Farr.
- So far as materiality and inducement are concerned, Nationwide relies on the contemporaneous documents and the witness evidence of Mr Phillips, Ms Gowen, Mr Northern and Ms Graham as establishing what it contends is obvious: that the representations were material to and induced the decision to lend.
Carmarthen: the facts
- On 21 September 2005, 5 days before DH were instructed in relation to Adderley Road, Raed Hanna (a mortgage broker) asked Mr McGarry to undertake a 'desk-top' valuation of the Carmarthen site on the basis that the property was let to Spirax-Sarco Ltd and Acco UK Ltd under 20 year leases at annual rents of £650,000 and £750,000 respectively:
Can we achieve MV of £23m? If not, let me know your indicative value.
On 22 September Mr McGarry replied.
We have undertaken a 'desk-top' appraisal based on the information supplied and consider that the property has a current Market Value in the order of £19,000,000 (nineteen million pounds).
The above is obviously subject to an inspection and our undertaking the necessary due diligence and so is provided for indicative purposes only at this stage.
- On 29 September Mr McGarry sent a further communication to Raed Hanna.
As you are aware, I made my inspection
on Monday 26th September and can report as follows:
The subject property is the freehold interest in a refrigerated warehouse and office facility extending to some 6.8 acres
We were not permitted access to all parts of the property but have been provided with details of a referenced survey of the property which we understand was undertaken in accordance with the RICS Code of Measuring Practice.
Mr McGarry concluded by repeating that with the benefit of the leases the property had 'a Market Value in the region of £19,000,000.'
- There is a note on DH's valuation file dated 7 October which appears to record that Mr McNabb contacted the two prospective tenants, Spirax-Sarco and Acco UK Ltd.
Both parties informed me that they had no intentions nor any knowledge of a letting concerning [Carmarthen]
This information appears to have been passed on to Raed Hanna, who informed Mr McNabb that the deal was not proceeding.
- By letter, dated 17 November 2005 (in essentially similar terms to that in relation to Adderley Road), Nationwide instructed DH to provide a valuation report on Carmarthen in respect of a loan of £14.25m against a purchase price of £19m.
- DH's valuation report on Carmarthen ('the Carmarthen Report) is dated 25 November. The borrower is described as Mr Arshid. The Carmarthen Report contained the following statements.
i) Tenancies:
Unit 1 let to Spirax-Sarco on a new 20 year FRI lease with five yearly upwards only rent reviews at an initial rent of £850,000 pa;
Unit 2 was let to Acco UK Ltd on a similar lease with an initial rent of £750,000 pa.
ii) Market Value: £19m.
iii) Market Value with Vacant Possession: £15m.
iv) The property's condition was,
below average upon inspection but in the course of refurbishment. Tenants to fit out to their required specification and take full repairing and insuring liability.
v) The property was inspected by Mr McGarry.
vi) Non-structural changes to the internal layout, modernisation and redecoration were to be undertaken (on DH's understanding) by the ingoing tenants at their expense.
vii) The two tenants were of good covenant strength and would be regarded as providing high security of income.
- On 2 December 2005, Mr Phillips prepared the Commercial Loan Application for Carmarthen for submission to Nationwide's Risk Management Division. As with Adderley Road, the valuation was attached. Section 4 of the report highlighted the Carmarthen valuation and the fact that the Loan to Value criteria of 75% of Market Value was met. Section 5 set out the various aspects of the proposed transaction confirmed by the Camarthen Report including an Market Value of £19m and Market Value with a Vacant Possession of £15m. Section 5.2 stated:
this is a solid valuation with the only material issue being the state of repair at present although this is being dealt with by the tenants. As a Condition Precedent, I will ensure that we receive a side letter from the valuer confirming that the property had been updated in accordance with his expectations and that the value remains valid.
- On 12 December 2005, Mr Quennell (of Nationwide's Risk Management team) reviewed the application and passed on his review to Mr Bunting (the Risk Manager) who sanctioned the loan subject to a condition precedent that all necessary works would be undertaken and confirmed by the valuer prior to draw down.
- On the same date Nationwide wrote offering a loan facility of £14.25m on the basis of a valuation which showed that the facility did not exceed 75% of the market value of the property. The letter also required a confirmation from the valuer that 'refurbishment has been undertaken and value of the property remains as per valuation report.'
- On 16 December 2005 Mr McGarry wrote to Mr Phillips as follows:
I write to confirm that the above-mentioned property was inspected by my colleague Cormac McNabb on Tuesday 13th December and at the time of his inspection contractors were undertaking clearance works and electrical refurbishment ahead of occupation by the two tenants. We are advised that works and electrical refurbishment will be completed in time to permit occupation in early January 2006. I can confirm that the Society may continue to rely on those figures reported as at 25th November 2005
Having checked that a valuer's confirmation had been given in relation to the refurbishment, Nationwide sanctioned the draw down and the advance of £14.25m was made.
Carmarthen: Nationwide's case on fraud, materiality and inducement
- Again Nationwide rely on 3 categories of fraudulent representation: (a) inspections, (b) the condition of the properties and (c) valuations.
(a) Inspections.
- Nationwide contends that neither Mr McGarry (nor anyone else from DH) inspected the property on 25 November 2005, nor on 13 December 2005. It has produced evidence that at the material times, there was a permanent 24-hour security presence on the site; and Daily Occurrence Reports, which have been obtained for the period 1 November to 14 December 2005, establish that the only visitors to Carmarthen during the period in question were occasional visits from the local police force undertaking dog training. There is no evidence from Mr McNabb that he visited Carmarthen on 13 December.
(b) Condition.
- Nationwide submits that the representations in the Carmarthen Report that the condition was 'below average upon inspection but in the course of refurbishment'; and on 13 December 2005, that 'contractors were undertaking clearance works and electrical refurbishment ahead of occupation by the tenants', were plainly false. The Daily Occurrence Reports did not show any contractor attending between 1 November and 14 December 2005.
- Nationwide acknowledges that in §13.8 of Mr Farr's report he says that it is impossible without a full specialist survey to know whether the works referred to Mr McGarry's letter of 16 December, were undertaken; but maintains that the factual evidence is clear. It also relies on the evidence of Ms Stockton who inspected the Carmarthen property on 8 June 2006. Her evidence is that that there was no evidence of recent refurbishment works, and in particular no evidence to suggest that electrical refurbishment was or had been undertaken. This evidence is supported by that of Mr Loosemore (an estate agent who marketed the property in early 2005 and in November 2006) to the effect that the property had not changed significantly between 2005 and January 2007; and, so far as he was aware, there had not been any clearance works or electrical refurbishment.
(c) Valuation.
- Nationwide contends that the valuations put forward by DH for Carmarthen could not have been honestly believed. Again, as a matter of impression, Nationwide contrasts DH's valuations (Market Value £19m and Market Value with Vacant Possession £15m) with the views of the experts: Mr Farr (Market Value £9.6m and Market Value with Vacant Possession £865,000) and Mr Martin (Market Value £4.8m and Market Value with Vacant Possession £900,000).
- Nationwide points to the discrepancy between the Vacant Possession Value advanced by DH on the one hand and that of Mr Farr on the other: the former being 16 times greater than the latter. It draws attention to the fact that Mr Farr's approach is to take the two leases at face value, while arguing that no honest valuer would have proceeded on such a basis. In support of this argument, Nationwide points to the fact that, even on Mr Farr's approach, the market rent is assumed to have been £2.25-£2.50 per square foot, whereas the rents in the lease were of the order of 7 times these rates. It emphasises the significance of the fact that DH appears to have known as at 7 October 2005 that the proposed tenants knew nothing at all about the proposed tenancies.
- So far as materiality and inducement are concerned, Nationwide again relies on the contemporaneous documents and the witness evidence of Mr Phillips, Mr Northern, Mr Quennell and Ms Graham that the representations were material to and induced the decision to lend.
Oldbury: the facts
- In a letter dated 29 December 2005, Nationwide instructed DH to value Oldbury in respect of a proposed advance of approximately £6.5m against a purchase price of £8.5m. As on previous occasions, Nationwide asked for a Market Value and a Market Value with Vacant Possession.
- On 12 January 2006, Mr McGarry e-mailed Mr Phillips:
I have discussed this at length with the borrower and due to other work commitments we will be unable to prepare the report within the timescale required. I have agreed, subject to your further instructions, to provide a 'desk-top' valuation and they will be seeking to appoint an alternative valuer to complete the full report.
On 13 January, Mr Phillips replied:
Given the constraints you are under is there any way you could arrange for any of your colleagues to complete the report early next week so that we can get this transaction away. As I am sure you can understand, it would [be] extremely problematic and time consuming to attempt to get another top tier valuation firm to visit the site and complete a report within the necessary timescales
- In an e-mail dated 17 January, Mr McGarry responded:
Further to our conversation, I understand that a 'desk-top' valuation appraisal will be sufficient for your purposes at this stage.
The enclosed desk-top valuation gave a Market Value of £8.2m and the Market Value with Vacant Possession of £6.9m.
- Subsequently on 20 January, DH produced a valuation report on Oldbury ('the Oldbury Report') in which the borrower was described as Mr S Arshid. The Oldbury Report contained the following statements.
i) The property was inspected on 7 January 2006 by the author of the report, Mr McGarry.
ii) The property was let on a new 15-year FRI lease with five yearly upwards-only rent reviews at an initial rent of £575,000 pa.
iii) Market Value: £8.2m.
iv) Market Value with Vacant Possession: £6.9m.
v) The property had been 'recently been refurbished internally to a good basic standard and [was] in a satisfactory condition externally'.
vi) 'Externally, the windows [had] recently been completely renewed and the property [was] generally in serviceable order'.
vii) 'Internally, the property [had] been the subject of a complete overhaul and [was] generally decorated to a good standard throughout with refurbished sanitary ware to the majority of facilities.' The electrical and heating services had also been predominantly modernised; at the time of inspection the refurbishment work had been completed save for floor coverings and snagging.
viii) The tenant, Unite Group Plc, was of substantive covenant strength and would be considered to provide a high level of security.
- On 23 January 2006, Mr Phillips prepared a Commercial Loan Application in respect of Oldbury, together with the Oldbury Report, for submission to Nationwide's Risk Management Division. Paragraph 4.1 of the Commercial Loan Application stated that an advance of £6.15m represented 75% of the LTV as outlined in the attached Oldbury Report. Paragraph 5.1 summarised the Oldbury report valuations (the Open Market Value of £8.2m and the Vacant Possession Value of £6.9m); and that DH had advised:
Property has recently benefited from a full internal renovation which has substantially enhanced the standard of decoration
The Conclusion at paragraph 9 highlighted, among other matters, 'an excellent long term lease covenant and modest LTV'.
- After reviewing the application and the Oldbury Report, Mr Northern sanctioned the loan on 26 January; and Nationwide issued its facility letter to the Borrower for an advance of £6.15m.
- By an e-mail, dated 9 February, Eversheds (Nationwide's solicitors) raised the point that an earlier transfer of the property on 13 January 2006 from a Mr Parmar to Crowngate Construction Limited had been in consideration of a payment of £475,000. Eversheds provided inter-solicitor correspondence which purported to explain such reduced purchase price: on the basis that Mr Parmar owed the balance of funds separately to Crowngate Construction Limited. Eversheds explained the steps that would need to be taken to ensure that such transaction could not, at a later stage, be set aside as being at an undervalue. Eversheds did not raise any concerns as to whether such earlier transaction called into doubt the transaction with which Nationwide was concerned, nor was any advice rendered as to any potential risk of mortgage fraud. Eversheds identified certain Conditions Precedent to be taken in the form of obtaining indemnity insurance and appropriate statutory declarations.
- By an e-mail, dated 10 February, Mr Phillips sought authority from Mr Dore (Chief Manager, Special Lending Services) to forward funds to Eversheds on their undertaking to hold the funds pending confirmation of satisfaction of the Conditions Precedent. Mr Dore authorised the drawdown on this basis. On 13 February 2006, Mr Northern authorised the drawdown although, in the light of Eversheds' report on title identifying that there was a 10 year break clause in the lease, he noted that '
now we may be reliant on the VP value'. On 15 February, Nationwide made its advance of £6.15m.
Oldbury: Nationwide's case on fraud, materiality and inducement
- Nationwide rely on the same 3 categories of fraudulent representation: (a) inspections, (b) condition of the property and (c) valuations.
(a) Inspection.
- Nationwide points out that one of the oddities in the Oldbury Report is that the total net floor area described in the valuation report (22,157 square feet) is substantially in excess of the net internal floor-space measured by Mr Farr (13,040 square feet) and Mr Martin (12,748 square feet). This it submits very strongly suggests that no physical inspection was in fact carried out.
(b) Condition.
- Nationwide argues that the statement in the Oldbury Report that 'Internally, the property [had] been the subject of a complete overhaul and [was] generally decorated to a good standard throughout, with refurbished sanitary ware to the majority of facilities', was plainly false. Ms Stockton, who inspected the property 5 months later on 14 June 2006, summarised what she observed in §16 of her Witness Statement:
16. By no stretch of the imagination could it be said that as of the date of inspection the property had internally been the subject of a complete overhaul and was of a good standard. I believe that when I was at the premises I inspected all of the toilets/bathroom facilities and if I did not inspect them all I would not have omitted to inspect more than one. None of the facilities which I inspected had been refurbished and all were in a poor state of repair
It is not correct to say that there was refurbished sanitary ware to the majority of the facilities. Rather the sanitary ware was dated and needed refurbishment
"
Mr Farr inspected the property 8 months after the date of DH's valuation. His evidence is to similar effect. At §7.15 of his report he states:
Whilst the property has had the benefit of a very basic upgrade, there is the need for further basic refurbishment in order to make the property even lettable at the lower level of market expectations.
Mr Farr identified that such works would include (i) upgrading of ceilings and installation of wall coverings, (ii) a programme of repairs to the interior and exterior including roof overhaul, (iii) upgrading of services, (iv) installation of a more satisfactory roof over the central atrium, (v) basic repairs and upgrading to toilets, (vi) refitting and improvement to the main receipt area, and (vii) painting/decorating throughout. He accepted that he would not have expected that the condition at the time of DH's inspection would have been very different at the date of his inspection, with the exception 'of some internal damage to ceilings which may have been caused by leaks in the heating services'.
- Nationwide submits that the statement in the Oldbury Report of 'complete overhaul' and 'refurbishment' were plainly false and cannot have been honestly held. There was a need for refurbishment to make the property lettable at all.
(c) Valuation.
- Again, Nationwide contrasts DH's valuation (Market Price £8.2m and Market Value with Vacant Possession £6.9m) with the views of the experts: Mr Farr (Market Price £3.2m and Market Value with Vacant Possession £585,000) and Mr Martin (Market Price £900,000 and Market Value with Vacant Possession £300,000). It submits that the disparity between the figures is particularly striking when one compares the figures for vacant possession, with DH's Market Value with Vacant Possession Value 11 times the value given by DH's own expert.
- Nationwide again draws attention to the fact Mr Farr's approach is to take the lease to Unite Group Plc at face value; and that, as Mr Farr acknowledges 'the proposed rent of £575,000 per annum was approximately 735% higher than the then current market rental value'. Again Nationwide submits that a valuation on such a basis cannot have been honestly believed.
- As far as materiality and inducement are concerned, Nationwide again rely on the contemporaneous documentation and the Statements of Mr Phillips, Mr Northern and Mr Dore as establishing, beyond risk of reasonable contradiction, that the representations were material to and induced the decision to lend. In particular, it relies on the evidence of Mr Dore that, far from concealing the information which it received from Eversheds, as DH have suggested, Mr Phillips provided the information to Mr Dore who took the final decision.
Standard of Proof on the application
- In civil proceedings the standard of proof is the civil standard: the balance of probabilities. However, the more serious the allegation, the more cogent the evidence which is required to overcome the unlikelihood of what is alleged; see for example, Re H [1966] A.C. 563, Lord Nicholls at 586; because the more serious the allegation, the less likely it is that the event or events occurred.
Points taken on behalf of DH
- Mr Stewart QC made a number of points which, he said, made summary judgment inappropriate.
- First, he submitted that DH is at a considerable disadvantage in this application. It is being sued on the basis that it is vicariously liable for the acts of Mr McGarry; but has no access to him and has no indication of what he might say in answer to the allegations, and is therefore inhibited from espousing an argument that he, as much as anyone else, was a victim of the fraud. Mr Stewart submitted that DH should not be deprived of the opportunity of interviewing Mr McGarry and calling him at trial
- Although Mr Fenwick made some telling points in relation to the degree to which DH has informed the Court of its ability to get information from Mr McGarry and as to his whereabouts on the relevant days, I accept for the purposes of this application that DH are disadvantaged in not having full access to Mr McGarry, who has been advised by Leading Counsel not to say anything to DH while the prosecuting authorities consider charges. However that is not, in my view, a comprehensive reason to put off consideration of the merits of this claim. The fact that important witnesses are not available to assist a defendant is not a reason for entirely relieving the defendant from the obligation to defend itself against a legitimate civil claim, see Secretary of State for Health v. Norton Healthcare Ltd [2003] EWHC 1905 (Ch) §§34-40.
- Mr Stewart argued that if the matter was allowed to proceed to trial DH would call Mr McGarry and his evidence would be helpful to DH. Although neither of these propositions is self-evident, I take into account the disadvantages from which DH suffers in not having unconfined access to the one person who could undoubtedly (one way or another) throw light on what occurred.
- Secondly Mr Stewart argued that there are issues as to inducement, in respect of which there has been no, or no sufficient, disclosure of documents.
- On this issue it seems to me that Mr Fenwick's answer is correct. Nationwide's evidence of inducement is extensive, does not depend on the evidence Mr McGarry (or any other witness who might be called by DH) and is very unlikely to be successfully challenged at any trial.
- Nationwide has disclosed the contemporaneous material which shows the processes adopted at Nationwide and the key role that the valuations played in those processes. In addition, there are witness statements from the relevant individuals (Messrs Northern, Quennell and Bunting) which confirm that they saw the valuations and that these formed a fundamental part of the lending process, not least because they formed the figure to which the LTV was applied. I accept Mr Fenwick's submission that the argument that DH's valuations were not, or may not have been, relied upon when making advances totalling in excess of £25m flies in the face of (i) the form of the letters of instruction, (ii) the contents of the Commercial Loan Applications, (iii) the actions of the Risk Management Department, (iv) the form of the facility letters, (v) the various sanctions, approvals and restrictions imposed by the decision makers and (vi) common sense.
- Thirdly Mr Stewart contended that there is an issue as to the extent to which Nationwide's solicitors and Mr Phillips were aware of facts which either did (in the case of Mr Phillips) or should have (in the case of the solicitors) put them on notice that the leases could not be taken at face value. Mr Stewart referred extensively to contemporaneous material and to an interview with Mr Phillips which was conducted by a Nationwide investigative team on 13 April 2006. Mr Stewart submitted that it was very surprising that the solicitors for Nationwide had failed to pick up a number of matters which should have indicated that there was something suspicious about the purchases of the property and the purported leases which underlay the loans. In relation to Mr Phillips, Mr Stewart went further,
there are only two possibilities
that he is a complete fool or he is a knave.
He submitted that both possibilities were equally damaging to Nationwide's case.
- Even if I were to form the view that there are only two possibilities, it does not seem to me that they are as damaging to Nationwide's application as Mr Stewart suggested. It is no defence to a claim in deceit that a claimant could have discovered the truth but failed to do so by reason of his carelessness, see Clerk & Lindsell at §18-34.
A person to whom a representation is made is not deceived if he actually knows the truth. But it is no answer to an action for deceit that the claimant might have discovered the falsity by the exercise of ordinary care: it does not lie in the mouth of a liar to argue that the claimant was foolish to take him at his word.
Furthermore, the fraud of Mr Phillips, if that is what it amounted to, would not constitute a defence to a claim in deceit by Nationwide. Although a principal is normally fixed with the knowledge of his agent this is subject to 'the fraud exception', which is formulated in Bowstead & Reynolds on Agency 18th Ed. (2006) at Article 95(4) as follows:
Knowledge is not attributed to the principal where it is acquired by an agent who is defrauding the principal in the same transaction.
The principle has been recently restated in Re BCCI SA (No 15) [2005] 2 BCLC 328 at §114 (Mummery LJ)
Clearly there are some circumstances in which an individual's knowledge of fraud cannot and should not be attributed to a company. The classic case is where the company is itself the target of an agent's or employee's dishonesty. In general, it would not be sensible or realistic to attribute knowledge to the company concerned, if attribution had the effect of defeating the right of the company to recover from a dishonest agent or employee or from a third party.
- Mr Stewart accepted that this principle applied, at least short of the House of Lords; but argued that the fraud of Mr Phillips, if such it was, would be relevant to the issue of inducement. I do not accept this submission. First, it is inconsistent with clear and binding authority, whose effect would be subverted by an argument expressed in terms of causation. Secondly, it is unarguable on the facts since it was not Mr Phillips who made the decision to lend and to sanction the advances. Even if Mr Phillips were part of the fraud, he was a conduit and not in a position to be the operative cause of the making of the loan.
- I should add that if it were necessary to have formed a view of Mr Phillips's involvement on the basis of his answers in interview, I would have regarded him as having been careless (perhaps to a high degree), rather than a participant in the fraud.
Conclusion
- It is clear that Nationwide was the victim of a fraud, in that it made loans against three properties whose value was grossly inflated on the basis of fictitious and fraudulent leases. That is accepted by DH. The issue is whether DH is a vicarious party to that fraud.
- There is a striking similarity between the key features of all three transactions which are the subject-matter of this action.
- I would not have been satisfied on the present material that Mr McGarry knew that the statements he made were false and material. However, I accept Nationwide's detailed points in relation to the three reports at least to the extent that I am quite satisfied that Mr McGarry made the statements of which complaint is made being reckless as to whether they were true.
- It seems to me that the following matters are clear.
(1) Inspections
i) In relation to Carmarthen Mr McGarry provided a desk-top valuation to Raed Hanna based on the stated lease income. Although Mr McGarry's valuation was less than the borrower had asked for, it is striking that, having purported to have inspected the property, he arrived at the same values. Even if one were to discount entirely the question of the authenticity of the leases, it seems to me unlikely in the extreme that he inspected the property on 25 November or that Mr McNabb inspected it on 13 December 2005. Mr McNabb has said nothing about this; and in the circumstances it seems to me that the Court can reasonably assume that Mr McGarry lied in relation to Mr McNabb's involvement at Carmarthen, just as he did (and is acknowledged to have done) in relation to his involvement at Adderley Road. The letter of 16 December described contractors 'undertaking clearance work and electrical works ahead of occupation by the two tenants'. There were of course no actual tenants; and the letter related to the position on 13 December 2005 and a prospective occupation in early January 2006. On this basis the works would have been well-advanced.
ii) In relation to Adderley Road, the evidence of inspection is equally exiguous. Mr McNabb's express denial of having inspected the property is telling. Again it seems extremely unlikely that anyone from DH inspected the property on either 27 September or 2 November 2005. The description of the tenants in occupation and refurbishment work being carried out is inherently unlikely since there were no actual tenants, and the statement is inconsistent with a formidable body of other evidence.
iii) In relation to Oldbury it is difficult to see why Mr McGarry should have spoken on 17 January about providing a desk-top valuation, if he had inspected the property on 7 January as the Oldbury Report stated. It is also striking that the report so significantly mis-describes the area of the property.
iv) In addition, and in relation to each of the properties, the description of the condition is so strikingly at odds with the other evidence from later inspections that it reinforces the strong impression from other sources that no physical inspection was carried out.
(2) Condition
- It is unnecessary to carry out a full review of the untruthfulness of DH's descriptions of the condition of the properties, since I am quite satisfied that they were not based on a physical inspection by DH. Simply by way of example, although the Adderley Report described the property as being in the course of refurbishment, Mr Farr could find no evidence of the works described in the Adderley Road Report. Likewise, although the Oldbury Report described the property as the subject of a recent 'complete overhaul' and decorated 'to a good standard throughout', Mr Farr described the upgrade as 'very basic' and the property in need of 'further basic refurbishment in order to make the property lettable even at the lower level of market expectations.'
(3) Valuations
- I approach this part of the case on the basis that valuations are susceptible to valid differences of view within a bracket, that it is legitimate to value a property on the basis of an existing or prospective lease and that a valuer is entitled to assume that what appears to be a genuine lease is so.
- I am left with the strong impression that the valuations contained in the three reports were 'desk-top' valuations based simply on the terms of the supposed leases. The difficulty from DH's point of view is, of course, that they were not stated to be 'desk-top' valuations: on the contrary, they purported to be valuations based on a number of factors, including physical inspection of the properties and an assessment of their condition. It is plain that the financial terms of the leases were so much above the current market that a competent valuer would have been bound to identify the basis for such rents; and, in the absence of any explanation, a court would necessarily conclude that the valuer had been negligent. In the present case the evidence, which I have sought to identify earlier in this judgment, in particular the inexplicably high Market Values with Vacant Possession, goes very much further.
- In each of his 3 expert reports Mr Farr uses a similar formula to express his views about the Adderley Road, Carmarthen and Oldbury Reports.
In his expert report on the Oldbury Report, for example, he expresses these conclusions in the Executive Summary:
1.14 In summary, the valuations and conclusions in the [DH] report could not have been reached by a qualified surveyor exercising reasonable skill and care.
1.15 I do not believe that the valuations and conclusions in the [DH] report were so far outside an acceptable range that they could not have been reached by a qualified surveyor acting honestly
In answer to the specific instruction:
To consider whether the conclusions/valuations adopted by [DH], in your opinion, were so far removed from an acceptable range of conclusions and valuations that they could not have been reached by a qualified surveyor acting rationally and honestly;
Mr Farr concluded:
I am of the opinion that, for whatever reason, the substantial over valuations and lack of due diligence in reporting indicate a degree of irrational thinking, but I do not believe it can be viewed as certain that the qualified surveyor had been dishonest.
In all the circumstances, I believe that a report by a qualified surveyor in these terms would have indicated a strong possibility that dishonesty was the motive. However, I am of the opinion that the range of conclusions and valuations could have been reached by a qualified surveyor acting incompetently and/or irrationally and not dishonestly.
He does not specifically deal with the significance of the high Market Values with Vacant Possession, nor with the unlikelihood that Mr McGarry carried out the inspections which DH said that he had carried out.
- Mr Farr can justifiably say that he cannot be 'certain' that Mr McGarry acted dishonestly; but the law does not require certainty. In my view DH reports, and the valuations they contained, cannot properly be viewed simply as the product of irrational thinking or of negligence. They contained false and material representations, in relation to which DH were at least reckless as to their truth. Mr McGarry intended that Nationwide would rely on the representations and, in the event, it did and has suffered significant loss as a consequence. On the present material, I am satisfied that Nationwide has proved its action in deceit against DH.
Should Judgment be entered in favour of Nationwide against DH
- I have considered whether this is a case in which, despite my clear view of the merits, I ought nevertheless to give DH the opportunity of contesting these matters at trial. I take into account that, although the evidence deployed by Nationwide is powerful, it has not been fully tested. As already indicated, one of the bases on which Mr Stewart contended that the proper course was to give DH an opportunity to defend the action was that Mr McGarry might be available to give evidence at trial, even if the trial were held relatively soon. I do not regard this as a realistic possibility; but, even if he were likely to give evidence at trial, I am not persuaded that this would be a reason for giving leave to defend. A defendant's hope (or even expectation) that something favourable may happen in the future is not of itself a reason for refusing to enter summary judgment.
- I should add that Nationwide has made available a wide range of material. DH may complain that this is not the equivalent of disclosure; but it has nevertheless enabled DH's legal advisors to identify matters which it contends give rise to issues which should be tried and provide reasons why summary judgment should not be entered.
- There is in my view no long-term advantage to either side in letting the case go to a full trial.
- On 1 January 2006, Limited purchased all the business assets of DHL and thereafter Messrs McGarry and McNabb became employees of Limited. For these reasons I would have found that Nationwide is entitled to final judgment, with damages to be assessed, against DHL in relation to Adderley Road and Carmarthen, and against Limited in relation to Oldbury.
- Since completing a draft of this Judgment, I have been informed that the parties have settled their differences on confidential terms; and it is therefore unnecessary to say anything further about a judgment based on the above conclusions.
